India - Gorakhpour Fertilizer Expansion Project

RESTRICTED Report No. P-1002 FiLE COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE GORAKHPUR FERTILIZER EXPANSION PROJECT December 2, 1971   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE GORAKHPUR FERTILIZER EXPANSION PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$10 million on standard IDA terms for a fertilizer project. PART I - INTRODUCTION 2. Since 1949 the Hank has made 40 loans amounting to US$1,111 million and the Association 37 development credits amounting to US$1,571 million (both net of cancellations) to India. Of these amounts, US$493 million has been repaid, and US$566 million is still undisbureed. 3. The share of agricultural projects in Bank/IDA operations has increased substantially in the past two years, reflecting the high priority which the Government of India accords to agriculture in the current Fourth Five-Year Plan (1969-74). Agricultural lending is expected to account for a large share of future Bank Group assistance, although finance of infrastructure and industry will continue to be important. Support to education and family planning is also planned, but here the scope for lending is limited. A report and recoimendation on a proposed credit for the Mysore Agricultural Credit project is being distributed on the same date as this report. In the near future I expect to present a railways project, a further agricultural credit project in Maharashtra, a marketing project in Bihar and a shipping project. 4. Past Industrial Imports Credits have provided foreign exchange for imports of raw materials needed for fertilizer manufacture. The proposed credit will be the second IDA operation in direct support of fertilizer production in India, the first being Credit No. 264 for the Cochin II Fertilizer Project. Two other fertilizer projects (Nangal in Punjab and Trombay in Maharashtra) are under active consideration by the Association. IFC has participated in two fertilizer proJects in India (Indian ExpIosives in Uttar Pradesh and Zuari Agrochemicals in Goa) and is currently considering a third (Dharamsi Morarji in Maharashtra). 5. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$3.3 million has been repaid, US$5.9 million sold and IIS$6.3 million cancelled. Of the US$26.8 million held as of October 31, 1971, US$15.6 million represents loans and US$8.2 million equity.  6. A summary statement of Bank loans, IDA credits and IFC investments as of October 31, 1971, is attached as Annex I. Comments on the status of disbursements are given in paragraphs 4-7 of my recent Report and Recommendation on a Loan to the Industrial Credit and Investment Corporation of India Ltd. (P-988), dated October 13, 1971. There have been no significant changes since that report. 7. The proposed project was appraised in May and July of 1971. At negotiations in Washington during the week of November 8, 1971, the Borrower was represented by Mr. V. N. Kasturirangan (Chief Projects Officer, Ministry of Petroleum and Chemicals, Government of India) and Mr. S. Guhan (Special Assistant to the Minister of Planning, Goverrment of India). The Fertilizer Corporation of India was represented by Mr. S. K. Mukherjee (Director of Production) and Mr. S. Venkataraman (Chief Engineer). 8. The economic situation is summarized in my report and recommend- ation on the proposed credit for the Mysore Agricultural Credit Project of the same date. An economic report entitled "Economic Situation and Prospects of India" (SA-25a), dated May 11, 1971, was distributed to the Executive Directors on May 24, 1971, and a memorandum entitled "India : Major Economic Issues"(R71-249, dated November 9, 1971) was distributed to the Executive Directors on November 9, 1971. A country data sheet is attached as Annex II. PART II - THE PROJECT 9. A report entitled "Appraisa] of Gorakhpur Expansion Project, Fertilizer Corporation of India"(RI-12a dated November 22, 1971) will be distributed to Executive Directors separately. A Credit and Project Summary is attached as Annex III. 10. Fertilizer availability is essential to sustained growth of India's agricultural sector. The development of a domestic fertilizer manufactur- ing capacity has received particular attention in Bank economic reports and staff studies. The Bank is currently reviewing again long-range supply and demand forecasts for India, and these data will be available early next year. According to infonration just received, actual nitrogen consumption in 1970/71 is unofficially estimated at 1.6 million nutrient tons, while production was only about half this amount. Even taking into account all the India nitrogenous fertilizer capacity which is now under construction or is likely to be built, domestic production wil] remain below consumption at least through this decade. 11. The proposed IDA credit would provide financing in support of an expansion of the Gorakhpur Unit of the Fertilizer Corporation of India (FCI) from its present capacity of 180,000 tons of urea per year to about 314,000 tons per year. The financing required for the project is estimated at US$16 million equivalent (Rs 120 million), incluiing contingencies, working capital requirements and interest during construction. Of this total, the amount of the proposed credit (US$10 million, or Rs 75 million) would be relent to FCI by the Government of India (GOI) in several tranches following the progress of disbursements, each tranche with a maturity of 13 years, including 3 years of grace, at 8.5 percent  -3- interest, the exchange risk remaining with the GOI. The balance of Rs 45 million would be provided by the GOI in equity funds. The GOI would also provide any overrun financing required, at least half as equity. Prospective currency adjustments are not expected to exert more than a minor influence on project costs and the financing plan proposed is considered to be adequate. 12. The Gorakhpur plant, located in Uttar Pradesh in north-eastern India, was conceived in 1962 and started production in 1968. It is one of the best operating divisions of FCI and frequently attains 100 percent of design capacity on a daily basis. In FY 1970, its second year of production, the plant produced an average of 88 percent of capacity, and in 1971 production averaged 82 percent. The shortfall was due largely to factors outside Gorakhpur's control - a shortage of naphtha feedstock resulting from a railroad strike, power loss due to a strike at the Uttar Pradesh State Electricity Board (SEB) and other power interruptions. To minimize the recurrence of these problems in the future, FCI will double naphtha storage capacity at the plant as part of the expansion project, and in separate projects the SEB is increasing generating capacity and plans to complete a new 220 KV transmission line to Gorakhpur in 1973. 13. Financed with a Japanese credit and funds from GOI, the Gorakhpur plant was built by Toyo Engineering Corporation of Japan at a total project cost of Rs 338 million (about US$45 million), about half of which was foreign exchange. The plant was designed very conservatively and contained considerable oversized and spare equipment, a practice not uncommon a decade ago. This fact, together with the lengthy completion time, contributed to the high cost forits size of the original plant. 14. The plant sizes employed at Gorakhpur are small by today's standards, and operating costs are high because the process (partial oxidation of naphtha) requires high power consumption and high-cost feedstock. When the project was planned in 1962, however, it represented the best available proven technology. Installed equipment and other spare capacity form the basis for the expansion project, for which the incre- mental capital requirements are low. Although power and fuel costs will remain relatively high, the expansion should not require any increase in the labor force, and incremental operating costs do not include any labor, overhead or selling costs. As a result, operating costs of the expansion project compare favorably with the costs of other large, modern urea factories in developing countries. 15. The expansion project's profitability is very satisfactory, due to the modest capital costs and the low incremental operating costs in- volved as well as to the high sellirg prices for fertilizer in India. The internal financial rate of return of the expansion is about 30 percent, which improves the overall financial. return of the Gorakhpur unit from 8 percent to 11 percent. The economic return for the project islabout 19 percent, based on estimated future import prices for urea of US$65 per ton. Net annual foreign exchange savings from the expansion project are estimated at $6.5 million at the expected production level of 95 percent of capacty.  -4- 16. FCI has developed a Critical Path Schedule for project implement- ation which calls for its completion by August 1974, allowing several months for contingencies. Engineering and design work will be carried out by the Planning and Development Division of FCI with the assistance of Toyo, who will also provide process guarantees and a guaranteed dai]y production rate. Design conditions require that the proposed project be based on the same technology as is now used at Gorakhpur; therefore, no difficulty is expected in its execution. 17. The India-wide nitrogenous fertilizer production deficit was mentioned above in paragraph 10. Since Gorakhpur's primary marketing region (eastern Uttar Pradesh) is a high fertilizer consumption area and is relatively protected due to high transport costs of other producers, the increased urea production can be easily marketed. 18. FCI, the beneficiary of the proposed credit, is the largest fertilizer producer in India, accounting for 30 percent of the country's nitrogen and 10 percent of its phosphate capacity. It is wholly owned by the GOI and has at present five plants in operation. To help narrow the gap between domestic prod&ction and consumption, FCI is engaged in a large expansion program, with six plants under construction and seven (including this project) under consideration. 19. FCI is managed by a 12-member Board of Directors, designed to function as a policy-making body and as a liaison and coordinating group between FCI and the Gavernment. Each of the five operating units (plants) is managed as a separate cost center and day-to-day production functions are controlled by unit General Managers. FCI has appointed a Project Manager who will have full responsibility for the execution of the project and adequate staff and facilities to fulfill this responsibility. 20. Although the Gorakhpur unit itself is quite profitable and FCI as a whole has made a profit in all recent years but one, the Corporation's earnings have been low, due to low capacity utilization levels and delays in bringing new plants into operation. Principal due on outstanding debt rises sharply in FY 1972 and succeeding years, and increased net profits will be necessary if the company is to service its outstanding debt. During the next two yeaiS three new plants are scheduled to start production; if they operate well, this will lead to increased cash generation. The GOI has given assurances that it will maintain FCI in a satisfactory financial position: all the funds necessary to complete FCI's expansion program will be provided in a way which will result in a debt:equity ratio no greater than 50:50, and FCI will maintain a ratio of current assets to current liabilities of at least 1.2:1.  21. The GOI has indicated that about $0.3 million of equipment would be reserved for domestic suppliers and financed out of GOI funds. The proposed IDA credit of US$10 million would finance two- thirds of the total project cost of US$15.26 million (excluding interest during construction). The credit would be disbursed in major part against US$6.8 million in equipment and materials which will be subject to international competitive bidding, and an estimated US$0.4 million for proprietory items required for standardization with the existing plant. Another US$2.2 million would be disbursed against local and foreign exchange costs for engineering, design, erection and commissioning; US$0.6 million would be unallocated. 22. The foreign exchange component of the proposed credit will depenid on the outcome of the international bidding process, since Indian suppliers are expected to bid on a large nunber of internationally tendered equipment contracts. There will be a 15 percent preference for domestic suppliers; the prevailing duty is now 30 percent. On the basis of a comparison of relative prices, it is expected that Indian suppliers will win about one- fifth of those contracts. In that event, the foreign exchange costs to be financed under the proposed credit would be about US$8.7 million and the local currency costs about U3$1.3 million. PART III - LEGAL INSTRUMENTS ANDAUTHORITY 23. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and FCI, the Recomnmendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement and the text of a Resolution concerning the proposed credit are being distributed to the Executive Directors separately. 24. The draft Development Credit Agreement and the draft Project Agreement follow the pattern of the earlier agreements for the Cochin fertilizer project in India. 25. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART IV - RECOMMENDATION 26. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments.   Annex I INDIA SUMMARY STATEMET OF LOANS AND CREDITS As of October 31, Ii71 (US $ million) Loan or Undis- Credit No. Year Borrower Purpose Bark IDA butsed.- Loans/ Credits fully disbursed 876.4 1040.6 307-IN 1961 IISCO Cal Miriing 19.5 ':2.6 41.4-IN 1965 ICICI Industry DFO VI 50.0 5.7 89-IN 1966 India Beas Equipment 23.0 8.8 515-IN 1967 IICI Industry DFC VII 25.0 7.1 614-IN 1969 India Tarai Seeds 13.0 10,7 615-IN 1969 India Telecommunications III 27.5 24.6 153-IN 1969 India Telecommunications III 27.5 5.5 176-IN 1970 India Kadana Irrigation 35eO 31.5 182-IN 1970 India Sixth Industrial Imports 75.0 13.8 683-IN 1970 ICICI Industry DFC VIII 40.0 27.7 191-IN 1970 India Gujarat Agriculture 35-0 33.6 203-IN 1970 India Punjab Agriculture 27.5 27.5 226-IN 1971 India Andhra Pradesh Agri:culture 24.4 24.4 230-IN 1971 India Agro-Aviation 6.0 6.0 241-IN 1971 India Telecommunications IV 78.0 78.0 242-IN 1971 India Power Transmission 3I 75.0 75.0 249-IN 1971 India Haryana Agriculture 25.0 25.0* 250-IN 1971 India Tamil Nadu Agriculture 35.0 35.0* 264-IN 1971 India Cochin II Fertilizer 20.0 20e0* 267-IN 1971 India Wheat Storage 5.0 5.0* 268-IN 1971 India Pochampad Irrigation 39.0 39.0* 789-IN 1971 ICICI Industry DFC IX 60.o 60.C* Total (less cancellations) 1111.4 1571.0 566.5 of which has been repaid 492.8 .3 Total now outstanding 618.6 1570.7 Amount sold 110.2 of which has been repaid 108.4 1.8 Total now held by Bank and IDA 616.8 1570.7 Total undisbursed 13.4 42W1 566.5 * Not effective as of October 31, 1971 South Asia Department December 1, 1971  Annex I (p a ge 2) SUMMARY STATEtIENT OF IFC OPERATIONS IN INDIA as of October 31, 1971 Amount US Year Company Loan $ Equity Total 1959 Republic Forge Comparer Ltd. 1,500,000 - 1,5()(),000 1959 Kirloskai Oil Engines, Ltd 850,000 850,0,() 1960 Assam SillimanitoLtd 1,365,000 - 1,365,oo0 1961 K.S.B. Pumps Ltd 210,000 - 210,000 1963-1966 Precision Bearings India Ltd. 651,250 378,947 1,030,197 1964 Fort Gloster Industries Ltd 812,000 399,047 1,211,047 1964 Mahindra Ugine Steel Co.Ltd. 2,210,000 986,607 3,296,607 1964 Lakshmni Machine Works Ltd 960,000 352,434 1,312,434 1967 Jayshree Chemicals Ltd. 1,050,000 104,816 1,154,816 1967 Indian Explosives Ltd. 8,600,000 2,862,437 11,462,437 1969-1970 Zuari Agro Chemicals Ltd 15,150,000 3,760,502 18,910,502 Total 33,458,250 8,844,790 42,303,040 Less sold, repaid and cancelled 15,520,351 Now held 26,782,690 Loans 18,597,619 Equity 8,185,070 South Asia Department December 2, 1971  Annex II INDIA BASIC DATA Total Percent in km2 Cultivated Area: 3,268,580 43.0 Dens itr Population: Total vfer1fm (Preliminary 19'1 OCensus estimate) 547 nllion 107 Annual Rate of Growth, current estimate: 2.25 percent Poli.tical Status : Republic Gross National Product at Market Prices, 1970/71 : Rs. 346.7 billion / Rate of growth 1955/56 - 1968/69 : 3.4% p.a. at constarAt 1965/66: 5.2% price s 1966/6 7 : 1.3% 1967/68 : 8&9% 1968/691 2.2% 1969/7C/ 5-5;5% 1970/71Y/ 4.5-5% Per capita, 1970/71: US $90 Gross Domestic Protbct at Cuirren Prices - : Re 349.5 billion __~~~~~~ .- nt Pr_s 194,R. 34_ bilo Percentage breakdown : Agriculture 1t) (for 1968/69) Mining 1 Mariufacturing 19 Commerce and Transport 1S Government anx% Other Services 13 Percent of National Income at MEarket Prios;: 1961/62-/ t965/66 -1 9 6 1967/6&V 1968a2 1969/7OV Net domestic investment 13;3 12.1 11.3 11.3 12.0 Neb domestic saving 10,6 8.2 7.8 8.8 9.9 Curront ac;ount balance -2,7 -3.9 -3.5 -2.5 - .5  Annex II 1966,/67-1979,/71 March 1971 Average Rat3 c.f Money and Credit (Re. billion): JastFi ) Inercase (%) Total money supply 71.38 9.5 Net bank credit to gov't sector 52.36 6.5 Net bank credLt to commercial sector 21-41 15.3 1970/ t Rate of increase ir prices Consumer prices