Zambia - Fertilizer Industry Restructuring Project

Document of The World Bank FOR OMCIAL USE ONLY Repwrt No. P-4117-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 9.7 MILLION 'TO THE REPUBLIC OF ZAMBIA FOR A FERTILIZER INDUSTRY RESTRUCTURING PROJECT February 4, 1986 TIS doc_men hL8 a resricted dtstrlibtIo ad -y be used by recipients ody in dhe perfonace of their oflicial dud s l nentm may not oahrwise be disclosed withou World Bank ashMorition.  CURRENCY EQUIVALENTS Currency Unit Kwacha (K) USSi K 6.0 US$0.16 = K 1.00 (The US Dollar/Zambian Kwacha exchange rate shown above is the rate that prevailed at the beginning of Januarv 1986.) WEIGHTS AND MEASURES l metric ton (ton, t) = 1,000 kilograms or 2,205 pounds 1 cubic meter (m3) = 35.315 cubic feet (cf) 1 kilometer (km) = 0.621 miles I hectare (ha) = 2.47 acres MAJOR ABBREVIATIONS AND ACRONYMS AN - Ammonium Nitrate BOZ - BanIk of Zambia DAP - Di-ammonium Phosphate FRG - Federal Republic of Germany GRZ - Government of the Republic of Zambia INDECO - Industrial Development Corporation Ltd. K20 - Potassium Oxide Content in Fertilizer K2S04 - Potassium Sulfate KCI - Potassium Chloride kWh - kilowatt hour MAWD - Ministry of Agricultn:re and Water Development M,OF - Ministry of Finance MCL - Maamba Collieries Ltd. N - Nitrogen Content in Fertilizer NAMBOARD - National Agricultural Marketing Board NCZ - Nitrogen Chemicals of Zambia Ltd. NH3 - Ammonia NOx - Nitrogen Oxides OECF - Overseas Economic Cooperation Fund (of Japan) OMF - Operations Management Firm P2105 - Phosphorous Pentoxide Content in Fertilizer ppm - parts per million S - Sulfur Content in Fertilizer SSP - Single Super Phosphate sq km - Square kilometer TSP - Triple Super Phosphate tdp - tons per day IJSAID - United States Agency for International Development ZCcM - Zambia Consolidated Copper Mines Ltd. ZIMCO - Zambia Industrial and Mining Corporation Ltd. FISCAL YEAR NCZ: April 1 - March 31 GRZ: January 1 - December 31  FOR OMCIAL USE ONLY REPUBLIC OF ZAMBIA FERTILIZER INDUSTRY RESTRUCTURING PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Zambia Beneficiary: Nitrogen Chemicals of Zambia Ltd. (NCZ) Amount: SDR 9.7 million (US$10 million equivalent) Terms: Standard On-Lending Terms: The Borrower would onlend the proceeds of the credit to NCZ for 15 years, including 5 years of grace at an interest rate of 9.7 percent per annum; NCZ would bear the foreign exchange risk. Project Description: The Proiect would improve the domestic supply of fertilizers for the development of the agriculture sector. It would support a package of policy, managerial, organizational, technical and financial measures, necessary to rehabilitate NCZ to enable it to operate its facilities efficiently and more economically and would provide Zambia with fertilizer produced from domestic resources at internationally competi'tive prices. Specifically, the Project would consist of: (i) rehabilitation of physical facilities of NCZ, including its offsites, utilities, infrastructure and environmental system; (ii) technical assistance for operation and management of NCZ; and (iii) training of NCZ staff. Benefits and Risks: The Project would help restore the technical efficiency and financial and economical viability of a key industrial enterprise and improve the domestic supply of fertilizers, thereby making Zambia less dependent on uncertain imported supplies of a critical agricultural input. It would support the country's strategy of economic diversification, improve the balance of payments and help develop the agriculture sector. The Project would save Zambia about US$29 million per annum in foreign exchange. The main risks are a) delays or failure to carry out the envisaged policy and institutional reforms and the technical rehabilitation, b) inadequate availability of inputs, especially foreign exchange and c) the technical complexity of the plant to be rehabilitated. Given the high priority assigned to I This document has a resticted distribution and may be used by recipients only in the performance of | their officia! duties Its contents may not otherwise be dicosed without World Bank authorization.  - li - this project by the Government and its demonstrated willingness to implement difficult measures, it is realistic to expect that the reforms and the technical rehabilitation will be carried out. Ongoing efforts to improve the performance of other key public sector enterprises (e.g., Maamba Collieries, Zambia Railways) and the access to foreign exchange through the recently introduced auction system should reduce the likelihood of serious shortage of inputs. Estimated Cost:l/ Local Foreign Total US$ Million Engineering & License 3.04 3.04 Equipment & Materials 0.30 28.14 28.44 Freight & Insurance 0.81 3.29 4.10 Civil Work & Erection 1.26 9.38 10.64 Spare Parts - 8.43 8.43 Technical Assistance 0.64 6.02 6.66 Training 0.10 0.61 0.71 Base Cost Estimates 3.11 58.91 62.02 Physical Contingencies 0.31 4.79 5.10 Price Contingencies 0.35 1.78 2.13 Total Project Cost 3.77 65.48 69.25 Incremental Working Capital 12.07 - 12.07 Interest During Construction - 2.43 2.43 Total Financing Required 15.84 67.91 83.75 Financing Plan: Local Foreign Total --- US$ million- IDA - 10.00 10.00 OECF 26.68 26.68 FRG - 27.20 27.20 NCZ 15.84 4.03 19.87 Total 15.84 67.91 83.75 1/ The Project would be exempt from taxes and duties.  - iii - Estimated Disbursements of IDA Credit: IDA FY 86 87 88 89 90 ---------------US$ Million- Annual 1.0 2.1 2.4 2.5 2.0 Cumulative 1.0 3.1 5.5 8.0 10.0 Rate of Return: 27 percent. Staff Appraisal Report: Report No. 5658-ZA, dated February 4, 1986. Map: No. IBRD 18861.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ZAMBIA FOR A FERTILIZER INDUSTRY RESTRUCTURING PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Zambia of SDR 9.7 million (approximately US$10 million equivalent) on standard terms to help finance a Fertilizer Industry Restructuring Project. The Credit would be on-lent to Nitrogen Chemicals of Zambia Ltd. (NCZ) for 15 years, including five years of grace, at an interest rate of 9.7 percent per annum. NCZ would bear the foreign exchange risk. Cofinancing is being provided by the Overseas Economic Cooperation Fund of Japan (OECF) and the Federal Republic Germany (FRG). PART I -- THE ECONOMY 2. A Country Economic Memorandum on Zambia (Report No. 5000-ZA) was distributed to the Executive Directors on April 24, 1984. This part is based on that report's findings and on subsequent information received from the Zambian authorities. Country data sheets are attached as Annex I. 3. Zambia's economy is heavily dependent on external trade and on government activity. Imports and exports range between 30 and 40 percent of GDP. Government expenditures amount to about 35 percent of GDP, and the Government owns a majority share of mining and most manufacturing enterprises. Copper mining provides over 90 percent of foreign exchange earnings and 15 percent of gross value added. Much economic activity is dependent on expatriate technical, managerial, and administrative skills. Current Economic Situation 4. Zambia is currently in an acute stage of economic and financial crisis. Production has declined steadily for four consecutive years in most sectors due to reductions in import volumes. Due in part to continued declines in the copper price, scheduled external debt service obligations amount to over 70 percent of export earnings. Large arrears have been accumulated on debt servicing and commercial payments to members of the Paris Club and the IMF. (However, all arrears to the IMF were paid in early January 1986). In addition, disbursements of external loans have fallen sharply due to reductions in capital expenditure by both the Government and many public enterprises. As a result, a multi-faceted foreign exchange constraint now grips the country and threatens to override the positive effects of the Government's economic recovery program initiated in 1983. To avoid this, a major coordinated effort of debt restructuring and renewed financial flows is, required for the third time in the last four years -- the previous reschedulings were in 1983 and 1984.  - 2 - 5. Zambia's economic and financial problems were initiated by a sharp decline in the copper price in 1975. Zambia's terms of trade have deteriorated steadily since then, and by 1984, were 70 percent below the average for the early 1970s. Real GDP has been in a general downward trend since 1975, declining on an average by about 1.5 percent per year. With population growing by 3.1 percent per annum, real GDP per capita is 25 percent lower than in 1974. GNP per capita was estimated at US$580 in 1983, using the World Bank Atlas methodology, but is now much lower as a result of major devaluations of the Kwacha in 1984 and after the introduction of the foreign exchange auctionings in October 1985. 6. The balance of payments has been in chronic disequilibriu, since 1975, with current account deficits climbing to an average of 19 percent of GDP in 1980-82. Nevertheless, the volume of imports declined steadily and is now 50 percent below its level in 1980 and 75 percent below its level in 1974. This has resulted in an economy-wide problem of severe under- utilization of capacity and, especially in the mining sector, a large backlog of maintenance and rehabilitation expenditure that has contributed directly to a declining trend in copper production and exports. In 1985, copper exports fell to their lowest level (480,000 tonnes) since Zambia's independence. The current level of imports is now inadequate to sustain copper production and to provide a critical minimum for the rest of the economy to function efficiently. The large current account deficits have also led directly to Zambia's high level of external indebtedness. At the end of 1984, Zambia's total external liabilities stood at US$4.4 billion, including drawings from the IMF (US$740 million) and US$500 million in overdue comunercial payments. By comparison, exports of goods and services amounted to somewhat over US$900 million. 7. The decline in copper prices also severely affected Zambia's fiscal and monetary positions. In the past, mineral taxes provided a large share of government revenue, but they have been negligible since 1976. A new mineral export tax was introduced in 1983, however, which now contributes about 10 percent of Government's revenue. Deficit financing absorbed a large share of net domestic credit and contributed to a sharp rise in consumer prices, averaging 20 percent per annum during 1976-78 and 12 percent per annum in 1979-82. Price increases have acce'lerated in 1983 and 1984 to about 20 percent per annum, reflecting the decontrol of prices in December 1982 and the devaluations of the Kwacha during the past two years. Currently, the inflation is running at an annual rate of about 75 percent while the economy has been adjusting to the sharp increase in the dollar parity of the Kwacha from 2.2 prior to the introduction of the foreign exchange auctioning to 5.7 at present. 8. There is no doubt that external factors have been an important cause of Zambia's present economic difficulties. Apart from low copper prices, severe droughts over three consecutive years have necessitated substantial food imports. Nevertheless, inappropriate policies and shortcomings in economic management have exacerbated the economic difficulties. The main deficiencies in economic policies were that: (i) pricing and subsidy policies favored the urban consumer at the expense of the agricultural producer; also, controlled industrial prices led to low  profitability in the manufacturing sector; (ii) tax incentives and low interest rates led to a pattern of capital intensive investment; (iii) exchange rate and tariff policies encouraged the use of artificially cheap imported raw materials and other inputs As a result, a highly capital ar.d import-intensive productive structure was created that proved to be very vulnerable to prolonged declines in the availability of foreign exchange. Strategy for Economic Restructuring 9. Economically exploitable ore reserves are only sufficient to maintain present levels of copper production for another 15 years or so, after which production can be expected to decline sharply. In the absence of new sources of income, employment and foreign exchange, Zambia may expect a drastic fall in living standards and social well-being by the turn of the century. However, Zambia has the potential to develop alternative sources of income, employment, and exports. The greatest potential is in agriculture, where there are opportunities for import substitution (cotton, oilseeds, livestock, grains, forestry products, and fish) and for exports (beef, cotton, coffee, tobacco, groundnuts, and sugar). Once a good start is made with agricultural development, possibilities will be created for agro-based industries. 10. For any long-term growth strategy to succeed, however, it is of the utmost importance that financial balance be restored in the economy. As the main provider of foreign exchange, the copper industry has a major role to play. For this reason, in 1984, the Bank approved an Export Rehabilitation and Diversification Project which aims to increase the efficiency of the mining industry and make it competitive again by international standards. This project was accompanied by an agreement on changes that would be needed in macro-economic and sector policies in order to restructure and diversify the rest of the economy. 11. The Government, with Bank and Fund assistance, has developed a wide-ranging package of economic restructuring policies that may be summarized as follows: -- Providing a system of incentives to producers and exporters of agricultural and industrial products in which production is responsive to market forces; -- Ensuring the competitiveness of exports through an active exchange rate policy; - Using tariffs and interest rate policies to reverse past trends of import dependence and capital intensity; -- Liberalizing administrative restrictions on foreign trade and the licensing of production, in order to improve the allocation of resources and to encourage investment in productive activities;  -4- -- Reducing the Government's deficit and recourse to domestic bank borrowing by reducing expenditure on personnel costs, subsidies and other non-development related activities; -- Improving planning and budgetary procedures to shif'. resources to productive uses and economic investments; Allowing greater competition in the procurement and selling of food crops. The National Agricultural Marketing Board (NAMBOARD), the Government's agricultural marketing agency, will move towards the role of buyer and seller of last resort, using a system of floor and ceiling prices for agricultural produce and inputs, respectively; -- Strengthening the technical and managerial capacity of Zambia Industrial and Mining Corporation (ZIMCO), which is the holding company of most state-controlled enterprises; -- Restructuring the energy sector to bring about lesser dependence on imported oil. 12. In the past two years, the Government has made significant progress in translating the above policies into tangible action. Stand-by arrangements were agreed with the rMF in 1983 and 1984. Under these programs, the Kwacha was linked to a basket of currencies and was depreciated in a gradual manner by more than 60 percent (in foreign exchange terms) through October 1985 when the foreign exchange auctioning was introduced (paragraph 17). Because the Government has been successful in holding wage increases to considerably less than rises in the cost of living, it has maintained the benefits of devaluation in real terms, which has improved the competitiveness of exports. Debt rescheduling with members of the Paris Club, commercial banks and non-OECD governments was also obtained. 13. In terms of improving conditions for longer-term growth, the most significant of the above financial measures was no doubt the exchange rate adjustments. But other measures with significant long-term impact have been introduced as well. In December 1982, the Government abolished the control of all wholesale and retail prices except for three essential commodities: wheat flour, maize flour and candles. Most recently, the price of wheat flour and bread was also decontroled. Over the last three years, producer prices for most agricultural crops have been increased considerably in real terms. The Government has also improved the incentives affecting foreign trade by introducing a foreign exchange retention scheme and concessional tax rates for non-traditional exports, and by imposing a minimum tariff on many non-dutiable imports which should reduce the high rates of effective protection afforded to import-intensive industries. 14. The Government's efforts over the past two years represent a major reformulation of economic policies and incentives. This progress is currently in danger of being set back, however, due to insufficient foreign  -5- exchange to maintain production (and exports) and to honor external debt obligations. On one hand, the Government wishes to improve the supply of essential consumer goods and thus show some benefits from the considerable sacrifices its policies have required of the population. In particular, a rapid increase in the consumer price of maize (resulting from higher producer prices, drought induced imports and lower subsidies) has heightened the political sensitivity of further reforms that result in higher prices for other goods and services. On the other hand, the Government must allocate considerable foreign exchange to debt service that cannot be rescheduled. 15. In facing this dilemma, the Government has adopted a foreign exchange auction system in recognition of the need for greater efficiency in the allocation of these resources. This should also help mobilize additional foreign exchange into the official market from unrecorded exports and from official development agencies that would be willing to support such a significant policy change with quickly disbursing assistance. However, this strategy risks uprooting a hard-won political concensus that the economic reform program must continue. Against the hope that additional foreign exchange resources will materialize, the Government's decision to adopt an auction system is being taken with the clear expectation that higher prices will inevitably follow further depreciation of the Kwacha. Indeed, petroleum prices doubled following the first auction where the rate jumped from K2.2 to K5.0 per US dollar. It is therefore essential that additional foreign exchange resources be made available for the new system to work and for an increase in production to occur, in order to expand the supply of basic consumer goods and minimize upward pressure on prices. Along with the new system, the Government has introduced a wide range of supporting measures, including decontrol of interest rates, conversion of the import licensing system to one of import registration, and further measures to reduce government expenditure and borrowing from the banking system. Creditworthiness 16. Scheduled service on public avd publicly guaranteed (PPG) external debt will remain over US$400 m lion per annum for the next three years, or about 40 percent of export ear. ngs at today's copper prices. Of this amount, about US$65 million per annum is due to the World Bank Group, including the IFC. (The Bank currently holds USS430 million, or 15 percent of Zambia's US$2.8 billion PPG debt disbursed and outstanding). In addition, about US$200 million per annum in payments is due to the IMF and another USS50-70 million per annum on Zambia's pipeline of commercial psyment arrears and short-term borrowings. In total, then, scheduled debt service will amount to over US$700 million per annum for the next three years, and it will thus be necessary for the Government to continue its financial stabilization policies in cooperation with the IMF and to seek debt relief through further rescheduling. Even with maximum debt relief, however, Zambia will continue to owe over US$400 million per annum in debt service that cannot be rescheduled. The Government should, therefore, avoid as much as possible borrowing on commercial terms, and additional borrowing should carry sufficiently long grace periods and maturities.  - 6 - 17. In the longer term, the restoration of Zambia's creditworthiness depends on the vigor with which the Government continues to pursue its economic restructuring policies. The Government is well underway in adjusting its economic policies and is fully committed to take further steps towards economic reform and the restructuring of Zambia's productive industries. Assuming successful economic policies, careful financial management and adequate external assistance, Zambia could achieve a reasonable measure of export growth and diversification in 10 to 12 years and reduce its ovLrall debt service ratio to 30 percent of exports. PART II. BANK GROUP OPERATIONS IN ZAMBIA 18. Since 1956, the Bank Group has made 28 loans and 14 credits to Zambia, totalling about U$780 million (net of cancellations). Two additional Bank loans were made to Zambia and Zimbabwe jointly to finance shared power facilities on the Zambezi River. Fourteen loans and six credits have financed energy, transportation, communications and rural water supply projects. Four loans and one credit for education have helped expand Zambia's secondary and higher education systems, teacher training, and commercial, agricultural and technical education systems. Two program loans have helped Zambia maintain its development program in periods of severe economic dislocation. In agriculture, forestry and fisheries, six loans and six credits have been for industrial forest plantations, livestock, commercial crops, integrated family farming, coffee production, suallholder dairy development and fisheries development. Agricultural projects in the Eastern and Southern Provinces are assisting smallholder farmers, and an Agricultural Rehabilitation Project is providing inputs to the sector in support of policy reforms. Other loans have assisted Zambia's urban development program, copper mining and, through the Development of Bank of Zambia, its manufacturing, agricultural and industrial sectors. A technical assistance credit is helping the Government improve its planning and project preparation. An engineering credit is supporting a project to assess the rehabilitation requirements of the TANZAMA oil pipeline. 19. The International Finance Corporation (IFC) has invested about US$87 million in 11 projects in Zambia since 1972. Two investments each were in shoe manufacturing, in a packaging materials plant and in textiles and fiber production, and one each in the Development Bank of Zambia, tourism development, food production and processing, cobalt production, and copper production. 20. The implementation of Bank-assisted projects in Zambia has deteriorated significantly in recent years, and serious delays have been experienced in the execution of a number of these projects. There are several reasons for this, the main one being the lack of budgetary resources with which to finance local counterpart expenditures and to prefinance local expenditures which are subsequently to be reimbursed by the Bank loan. Most seriously affected have been the Bank's agricultural  - 7 - projects for which funds, although budgeted, have not been released to the executing agencies for several months. Other reasons for the lagging implementation of projects are ineffective project management and inadequate inter-agency coordination. The Bank-assisted agricultural projects, which require careful management and effective coordination due to their complex design, have suffered from these problems, as has the Third Highway Project. 21. The deterioration of project implementation has, as expected, substantially reduced the rate of disbursements on Bank Group loans and credits. As of September 30, 1985 a total of US$87 million of loans and US$128 million of credits remained undisbursed. To alleviate the problem, provision is being made for technical assistance in projects to strengthen implementing agencies and increased use of the Resident Mission in monitoring project execution. Revolving funds are being established under new and ongoing projects which should ease the Government's financial burden and accelerate disbursements. In Lddition, estimates of counterpart funds required and when the funds should be made available are being prepared by Bank/IDA staff well in advance of their need to allow implementing agencies as much lead time as possible to plan for these expenditures. As of December 1984, IBRD loans disbursed and outstanding were about 12 percent of Zambia's total medium and long-term debt disbursed and outstanding. 22. The Bank Group's strategy in Zambia is to support the country's efforts to diversify and increase economic efficiency. Raising the efficiency of the mining industry through the Export Rehabilitation and Diversification loan so that the industry may contribute resources to diversification programs was the first step in carrying out this strategy. Subsequent operations, such as the Agricultural Rehabilitation Project and the Industrial Reorientation Project are focusing on improving sector policies in agriculture and industry, which are the sectors with the best potential for production and export growth and for employment creation. The Group's strategy also gives priority to programs to increase the use of indigenous energy resources and to raise the efficiency of transportation services. Emphasis will be given to rehabilitation and maintenance, rather than expansion, of infrastructure and Bank Group assistance is expected to include a significant proportion of quick-disbursing resources. Support for addressing the longer term development constraints, e.g., improving economic management, education, population, health, etc., is also part of the strategy. Policy and institutional reform programs in each of the sectors, as well as on the macroeconomic level, are being agreed with the Government. Through organizing and chairing the regular meetings of the Consultative Group for Zambia, the Bank is assisting the Government in coordinating the country's economic rehabilitation program and investment needs with the international donor community. At its last meeting, which was convened on an emergency basis in December 1985, the Consultative Group endorsed the Government's recent economic measures, in particular the foreign exchange auction system, and announced substantial multi- and bilateral financial support for the Government's program.  -8- PART III - THE FERTILIZER SECTOR Africulture 23. Agriculture supports about 60 percent of Zambia's population, but accounts for only about 14 percent of GDP. The mining sector, which has traditionally dominated the Zambian economy, accounting for an overwhelming proportion of Government revenues and foreign exchange earnings, has stagnated in recent years and is facing a long-term decline. Further economic growth therefore needs to be driven by the agricultural sector, which has a large untapped potential; only about 12 million (28%) of the estimated 43 million hectares (ha) of cult-Loble land is cultivated. Despite the country's sizeable resource base for agricultural development (in terms of land, climate, water and human resources), the sector has stagnated in recent years, the result of a combination of factors. Budgetary allocations to agriculture have been inadequate, in particular to support research and extension, sectoral planning (of both policies and programs) has been weak and ill-conceived marketing and pricing policies have caused severe distortions in the sector and reduced producer incentives. The effects of these distortions and inadequate agricultural inputs and services have been compounded by a shortage of agricultural credit and weaknesses in agricultural credit institutions. Lack of timely availability of fertilizer has on many occasions adversely impacted on agricultural productivity. In addition, the country has been subject to periodic drought cycles. As a result, agricultural sector output has risen at an average annual rate of only about 2.4 percent (in the period 1965-83), slower than the population growth rate (3.1%) in the same period. Since 1983, however, the sector has shown some positive tendency toward faster growth as a result of the Government's efforts to promote agriculture development through (i) policy and institutional reforms; and (ii) allocating increased financial resources to the sector. 24. Zambia's agricultural sector is markedly dualistic. On one side, a relatively modern sector of about 24,000 heavily-capitalized medium- and large-scale commercial farmers, representing 4 percent of the estimated 600,000 farm households, produce in value about 40 percent of the maize and 55 percent of the other marketed agricultural products. On the other extreme, there are about 456,000 farm families, or about 76 percent of the farm households, cultivating an average of 2 hectare (ha), using family labor and simple hand tools and producing mostly for subsistence purposes. This dualic, has been slightly mitigated in recent years by the development of a smallholder market-oriented farming sector, numbering about 120,000 or 20 percent of the farm households. These farmers use modest levels of mechanization aad purchased seasonal inputs, especially fertilizers, and together with occasional surpluses from traditional farmers, currently account for 60 percent of the value of marketed maize, 85 percent of the value of sunflower seeds and nearly all sales of domestically produced rice, seed cotton and groundnuts. 25. The major imported agricultural goods have been cereals (mainly wheat and rice), dairy products, and vegetable oil and oilseed cakes. The  - 9 - decline in food self-sufficiency is a reflection of slow growth in agricultural productivity under conditions of rapid population growth. 26. The Government has recognized the need of pursuing a long-term strategy which would develop the country's agricultural potential, in particular by promoting small-scale farming, and is evaluating with Bank assistance, appropriate changes in existing agricultural policies and in institutions currently responsible for managing and servicing agriculture. The major objectives of these reforms would be (i) to improve institutional and allocative efficiency in the sector, in particular through better pricing and marketing; and (ii) to improve the farm technological base, including more effective use of fertilizers. Fertilizer Consumption 27. The range of fertilizer products currently in use in Zambia is principally limited to ammonium nitrate. urea and six formulations of NPK compound fertilizers. Concerns that the eurrent fertilizer usage pattern and recommendations may not be fully appropriate in view of the needs of the diverse soil and crop conditions faced by the Zambian farmers are currently under review by the Government. The authorities are aware of the need to develop fertilizer application recommendations based on updated on-field research programs and to make these more specific as to location, climate, soil and cropping patterns. The Bank is currently assisting the Government in the effort to reorganize research and extension services and develop action programs that are more problem and farm-oriented. 28. Fertilizer consumption in Zambia increased at an average annual rate of about 3.4 percent between 1975-1983. Consumption peaked in 1981 at 85,000 tpy of nutrient, of which 68 percent was nitrogen, 25 percent phosphate and 7 percent potash. The current fertilizer application rate in Zambia averages about 16 kg/ha, compared to 65 kg/ha in Zimbabwe, 26 kg/ha in Kenya and 18.4 kg/ha for the whole of Africa. Large disparities exist in fertilizer use among commercial farmers, whose consumption levels range between 100 and 230 kg nutrient/ha, and smallholders, where fertilizer consumption is still very low, partly due to inadequate research and extension services. The Government is taking action to improve its research and extension services in view of the importance of developing the smallholder sector to exploit fully the country's agricultural potential. Fertilizer Supply 29. Zambia obtains its fertilizer supplies both from domestic production at NCZ's facilities (ammonium nitrate, ammonium sulfate and NPK compounds) and from imports of urea, NPK compounds, TSP and SSP. If the NCZ facilities were able to operate at full capacity, they could meet about 90 percent of the country's current nitrogen requirements. At present, however, the company's output is limited for technical and operational reasons and represents only about 25 percent of the country's needs. 30. Imported fertilizers are procured through commercial imports and bilateral aid. In recent years, part of the bilateral assistance has  - 10 - shifted to the Import of phosphate and potash intermediates for use by NCZ. As a result, the amount of finished fertilizers ohtained through bilateral aid programs has declined dramatically from about 96,000 tons In 1979 to 6,000 tons in 1983. Prolected Fertilizer Consumption Growth Rates 31. Under conservative assumptions average annual fertilizer consumption growth rates are projected for nitrogen and phosphate at 0.9 percent p.a. between 1985-1995 and for potash at 0.5 percent between 1985-1995. On this basis, total nutrient annual consumption in Zambia is proiected at About 90,000 tons in 1995, of which 68 percent will be nitrogen, 25 percent phosphate and 7 percent potash. Because of the widening of the gap between consumption and local production, rehabilitated NCZ complex will meet only about 75 percent of nitrogen demand at that time, versus the present 90 percent if the plant were able to operate at full capacity. No future expansion of coal-based nitrogen fertilizer facilities is foreseeable in Zambia, as grass-root investment costs for building such type of plants have become too high to make new operations economically viable. Fertilizer Pricing 32. In Zambia, the producer price of the maize is controlled by the Government and floor prices are set for all other important agricultural products. Consumer prices have been decontrolled recently, with the exception of maize. Fertilizer retail prices are also controlled by the Government. 33. For many years, the Government pursued an agricultural policy whi-h maintained crop prices low through, inter alia, the subsidizing of fertilizer prices. Until 1982, crop producer prices remained substantially below border-price equivalents, and crop retail prices were below the total of production and marketing costs; as a result, subsidies to the consumers mounted. Fertilizer retail prices also remained below their landed costs, i.e., the cost of imported fertilizers cif Lusaka not including distribution costs within Zambia. In 1980, the urea retail price was 58 percent of its landed cost. With increasing economic difficulties, the Government recognized the need to modify its agricultural pricing policy towards the principle of full cost recovery. By November 1984, all crop consumer prices were decontrolled, except that of maize, and fertilizer retail prices have been substantially increased to reflect their landed cost. In both 1983 and 1984, the retail price of urea was pegged at its landed cost equivalent, and the retail prices of NPK compound fertilizers were set at levels about 20 percent higher than their landed cost. 34. NCZ's ex-factory prices have in the past substantially exceeded both their equivalent CIF landed cost and the corresponding retail prices. However, with the increase in retail prices in recent years, the ex-factory prices of NPK compounds, which were about 104 percent higher than the retail prices in 1981, are now only 25 percent higher. While retail prices have been increased faster than ex-factory prices, the gap between NCZ's  - 11 - ex-factory prices and equivalent CIF landed cost has been widening due to: (i) depressed international markets for NPK compounds, resulting in lower prices; and (ii) decline In operating performance of NCZ and as a result the need for price increases to cover at least partially Its increasing production costs, which are currently about 20 percent higher than the ex-factory prices. Thts trend, however, has reversed since 1985, due to the progressive devaluation of the Kwacha. The present NCZ ex-factory as well as retail prices are below equivalent cif landed cost. In January 1986, the ex-factorv price of AN and compounds was increased to ZK 1,300/ton and the retail prices are expected to follow suit to bring them closer to cif cost. The Project would reduce the NCZ's cost of production by more than 30%, making its products competitive with imported fertilizers, while allowing NCZ to earn adequate return on investment. 35. At the present level of retail prices, fertilizer distribution costs are not fully passed on to the farmer. They are borne partly by the Government in the form of contributions to NAMBOARD to meet its distribution and storage costs and to the Cooperatives to cover their fertilizer marketing costs. Both NAMBOARD and the Cooperatives are inefficient in marketing and distributing fertilizer. The Government has recently taken up steps, with Bank support, which will lead to full cost recovery, while improving fertilizer marketing and distribution. 36. Although fertllizers represent the sinzle major input cost for farmers, about 30 percent of the production cost, the past trends in crop and fertilizer prices have not significantly affected the economics of fertilizer application. The ratio of nitrogen to maize prices has remained at reasonably satisfactory levels, though inadequate adjustment to crop prices when fertilizer prices increased, had on occasion discouraged fertilizer application. 37. At present, the transport and handling of imported fertilizers result in heavy losses. In addition, because of improper procurement procedures and foreign exchange shortages, fertilizers have often arrived after the application period has ended. When this happens they have to be stored for the next season resulting in heavy losses, high storage costs, and need for partial rebagging due to caking. Rehabilitation of NCZ will ensure a reliable local source of fertilizer, thereby reducing these risks and costs. Nitrogen Chemicals of Zambia 38. The Nitrogen Chemicals of Zambia Ltd. (NCZ), a direct subsidiary of ZIMCO l/ is the sole fec-tilizer producer in Zambia. The company was established in September 1967 to operate a coal based ammonium nitrate plant at Kafue (some 30 km from Lusaka) mainly to produce explosive grade ammonium nitrate and nitric acid for further processing into blasting I/ As of April 1, 1985. It was previously a subsidiary of the Industrial Development Corporation.  - 12 - agents for the mining industry. As it was clear from the beginning that the production of these items alone would not support an economically sized plant, the scope of the operation was expanded to include the production of ammonium nitrate for use as fertilizer. The facilities were further expanded in 1982 to expand ammonium nitrate production and initiate the production of NPK compounds. The present facility consists of two plants, plus ancillary infrastructure and utilities, with design capacity of 262,000 tpy in total product. 39. In the past few years, NCZ has encountered a wide range of problems, such as major design/technical deficiencies in NCZ II plant, shortages of the principal feedstock, coal, due to operational problems at Maamba Collieries and Zambia Railways; shortages of foreign exchange, preventing timely purchase of spare parts, catalysts and chemicals, bags and raw materials; inadequate management; lack of technical expertise; poor operational and maintenance practices; and overstaffing. As a result, capacity utilization at NCZ has declined progressively to the present level of under 30 percent, resulting in production costs substantially higher than internationally competitive levels. Although some of the company's problems have been due to Zambia's difficult economic situation, most of the difficulties began with the construction of the NCZ II plant. The expansion project, which encountered long completion delays and never operated well due to major design problems, strained NCZ's organization and management capabilities, intensified the shortage of technical expertise and drained the company's financial resources. This affected the performance of the NCZ I plant as well, which had otherwise been operating efficiently. Both plants now require major rehabilitation to restore their technical integrity and to enable them to achieve their original design capacities. Financial Performance 40. After initial losses, NCZ made profits during 1976-80. Since then, however, problems associated with the NCZ II plant - heavy debt burden, high fixed costs and low capacity utilization - have affected the company's financial situation and heavy losses have occured. In 1982-84, these losses averaged K 19 million per annum and had reached K 30 million in FY1984/85. 41. The Government made an initial equity contribution to NCZ of K 10 million in 1970, which has been increased over time to K 175.4 million partly through the conversion to equity of company debt taken over by Government and passing on as equity some external assistance. Debt outstanding rose from K 12.5 million at the end of FY1970/71 to K 243.2 million at the end of 1979/80, after which, due to debt relief provided by Government, it fell to K 127.1 million in FY1984/85. 42. Clearly, the measures taken over the past several years to strengthen NCZ's finances have not been adequate, primarily because they have not dealt with the fundamental problems facing the company, i.e., management, technical design deficiencies of NCZ II, etc. The proposed project includes, inter alia, comprehensive measures to restructure NCZ's  - 13 - finances, improve its management and technically redesign and rehabilitate the company's facilities. With these actions taken, NCZ is expected to recover its financial viability. Experience From Past Lending 43. The Bank Group has had no previous involvement in lending to the fertilizer secto-.. However, the Bank has been involved in the related sectors of industry and agriculture. In the industrial sector, the Bank's lending in Zambia has been primarily to the Development Bank of Zambia, a development finance company. The major lessons learnt in this operation relate to the Issues of management, enterprise, and institutional coordination. The proposed project has fully considered these experiences and has incorporated measures to strengthen NCZ's management and improve inter-agency coordination. The main lessons learned from Bank Group lending to the agriculture sector, such as the need for policy and institutional reforms, marketing and distribution problems, economic pricing, and lack of farmer services, have also been taken into account in designing the proposed project. PART IV - THE PROJECT Introduction 44. The Project was identified in August 1983 and appraised in November 1984. Negotiations were held in Washington, D.C., in August 1985 with a Zambian delegation led by Mr. F.M. Siame, Senior Undersecretary, Ministry of Finance. A Staff Appraisal Report (No. 5658-ZA, dated February 4, 1986) is being distributed separately to the Executive Directors. A credit and project summary is presented at the beginning of this report and a supplementary project data sheet is in Annex III. Proiect Obiectives and Description 45. The main obiective of the Project is to improve the domestic production of fertilizer at import parity prices. To accomplish this, the Proiect aims to restore the technical efficiency and economic and financial viability of NCZ's operations through a package of appropriate policy, managerial, organizational, technical and financial measures. Specifically the Project consists of the following components: Physical Support (a) technical rehabilitation of the NCZ I Plant: to be carried out by the Japanese firm that originally built this plant, the rehabilitation includes: (1) the replacement, repair and overhaul of existing equipment, including any design and engineering required; and (ii) an initial supply of spare parts for this plant, and supervision of start-up operations. No major  - 14 - modifications are required to this plant, whtch has operated efficiently in the past, but there Is considerable need for replacement and overhaul of equipment. Most of this work is required in the ammonium unit and tn the nitric acid and ammonia nitrate units. The water treatment plant will be revamped and a pollution abatement system will be instnlled. (b) technical rehabilitation of the NCZ II Plant: to be carried out by the German firm that originally built the plant, the rehabilitation includes: (1) repairs and improvements to the water cooling, steam condensate and power supply systems, (ii) improvements to the nitrogen system and the liquid nitrogen wash unit, (iii) revamping the coal storage and handling section, the instrument air system, the gasification section, the water scrubbing system, the carbon monoxide conversion unit, the ammonia synthests unit, and the air separation unit, (iv) modification to the electrostatic precipitators, (v) replacement of heat exchanges in the rectisol unit, and (vi) connecting the rectisol unit to the sulfuric acid unit. Limited modifications will also be carried out to the nitric acid and ammonium nitrate units. Pollution control equipment will be installed to bring emission levels in the nitric acid plant to international standards. (c) rehabilitation of off-site and infrastructure facilities: including; (i) a new coal-based boiler to balance the steam system; (ii) a closed loop system to recover accidental discharge of AN solution; (iti) rehabilitation of the water treatment plant; (iv) rehabilitation of workshop facilities and upgrading of laboratory facilities; (v) computerization; and (vi) vehicles for internal handling of materials. NCZ would conduct by September 30, 1986 an energy audit study, an environmental study and a full safety study of its operations to Identify energy conservatlon potential and possible environmental/health hazards and recommendations of these studies will be implemented by NCZ in consultation with IDA. Technical Assistance and Training: (d) Operations Management Services: an experienced Operations Management Firm (OMF) has been hired, following Bank/IDA Guidelines, to assist NCZ from October 1985 to December 1989 to (i) operate the complex, (ii) conduct a comprehensive review of NCZ's organizational structure and staffing pattern and recommend and help implement changes, (ii) coordinate and supervise the technical rehabilitation, (iii) introduce modern management techniques, operational and maintenance procedures and a management information system, and (v) provide on-the-job and formal training to NCZ staff to enable them to operate the company efficiently after OMF's departure. OMF will provide the General Manager, Production Manager, Technical Manager,  - 15 - Maintenance Manager, Personnel and Administration Manager, Technical Coordinator and some 12 other middle level experts as required, ahout 423 man-months of services in all. OMF will, by March 31. 1986, carry out an organizational restructuring study to review NCZ organizational structure and constraints and recommend changes necessary to provide NCZ with a dynamic and responsive organizatlon and optimum staffing level . Recommenda- tions of the study will he implemented In consultation with IDA. The core of IDA's involvement in the Project Is the policy and Institutional improvements which are critical to ensure efficient operation of the facilities once their physical integrity ts restored. Consequently, IDA will finance the services of the OMF. The OMF will be delegated full authority to manage the plant and will he responsible to the Managing Director of NCZ. OMF management contract will be subject to annual performance reviews to ensure better performance. IDA component of the Project will also include limited provision of funds for (i) upgrading of workshop, offsites, and environmental and laboratory factlities; (Ii) vehicles for internal handling of matertals; (tii) computer facilittes; and (iv) chemicals and catalysts. Training of NCZ staff will be performed under FRG, OECF and IDA components; FRG and OECF training of selected NCZ staff will be carried out abroad and will be directed towards improving operational and maintenance related skills of NCZ staff. Under the proposed IDA credit, formal and on-the-job training will be performed by OMF at NCZ's plant and will be directed mainly at middle-level managerial and supervisory positions. In addition, the IDA Credit includes provision (80 man-months) for training abroad for selected high and middle level staff in technical, financial and managerlal aspects of the business. As part of the policy and institutional reforms, GRZ and NCZ would: (a) restructure NCZ's management and organization to provide NCZ with a strong and dynamic management with requisite autonomy and authority and a sound organizational structure capable of responding to the company's needs; (b) undertake improvements (technical, managerial, etc.) to reduce NCZ's operating costs by about 30%; (c) adopt a system of economic pricing of NCZ's products based on import parity prices to ensure NCZ's economic viability; (d) carry out financial restructuring of NCZ to restore Its financial integrity; and (e) restructure the logistics sytem to improve movement of NCZ's inputs and fertilizers. NCZ has already completed most of these measures, including its financial restructuring as well as a substantial reduction of Its staff (from 1,580 to 1,270).  - 16 - Project Cost and Financing 46. Total financing required for the Project incluiding physical and price contingencies, incremental working capital and interest during construction amounts to US$83.75 million equivalent, including US$67.91 million equivalent, or 81 percent, in foreign exchange. Fnr the equipment and materials included under the IDA component, phystcal conttngencies are calculated at 10 percent of the base cost estimate, and price escalation for equipment under the IDA component is based on expected international annual inflation rates of 7.2 percent in 1986, 6.8 percent in 1987-88 and 7.0 percent in 1989. Annual price escalat{on of 7 percent based on the terms of OMF contract has heen used for IDA financed technical assistance services. Fir OECF and FRG financed components actual physical and price contingency estimates given In respective contractor proposals have been used. The Project includes foreign consultant services for about 580 man/months for operations management, coordination of and technical assistance for tecnnical rehabilitation, and supervision of training at a total cost of about US$6.3 million. 47. The proposed IDA credit of US$10 million would cover about 15 percent of the total foreign exchange requirement. The remaining foreign exchange needs would be met by NCZ from internal funds (US$4.03 million), by OECF (US$26.68 million equivalent) for the rehabilitation of NCZ I plant, and hy FRG (US$27.20 million equivalent) for the rehabilitation of NCZ II plant. Fulfillment of the conditions of disbursement of the FRG loan would be a condition of effectiveness of the IDA credit. The local cost (US$15.84 million equivalent) will be met by NCZ's own resources. NCZ is capable to meet its financing requirements foillowing its financial restructuring and Its cash flow situatton is expected to become sound from 1987 onwards, the first year of operation of the rehabilitated plant, as a result of the Project. Nevertheless, asssurances have been obtained from GRZ that It would provide NCZ with any additional funds that might be needed during project implementation. On-Lending Arrangements 48. The IDA Credit of US$10 million equivalent will be onlent by the Government to NCZ at an onlending rate of 9.7 percent p.a. 2/ to be repaid over 15 years, including 5 years of grace. The foreign exchange risk will be born by NCZ. The OECF loan has been made to the Government at an interest rate of 3.5 percent p.a. with a maturity of 30 years including 10 years of grace and the Government has passed on these funds to NCZ as equity to strengthen NCZ's equity base. The FRG loan has been made to the Government at 2 percent p.a. interest with 30 years maturity including 10 years of grace, and will be passed on to NCZ at an Interest rate of 10 percent with a maturity of 15 years including 5 years of grace; NCZ will bear the foreign exchange risk. The execution of a Subsidiary Loan 2/ One-tenth above the IBRD lending rate of 8.82 percent prevailing at the time of negotiations.  - 17 - Agreement between the Government and NCZ, under terms and conditions satisfactory to the Association and effectiveness of the FRG loan, will be conditions of Credit Effectiveness. Project Implementation 49. NCZ will have primary responsibility for overall Project manage- ment. Assurances have been obtained from GRZ that it will appoint and retain to the positions of Chairman and members of the Board of Directors of NCZ, and the Managing Director, General Manager, Finance Director, and internal Auditor, only persons with experience and qualifications satisfactory to the Association, and that NCZ will remain a direct subsidiary of ZIMCO. Technical rehabilitation of the NCZ I and NCZ II plants will be the turn-key responsibility, respectively, of the Japanese and German contractors. Signature of the engineering contract for rehabilitation of the NCZ II plant would be a condition of effectiveness of the IDA Credit. Technical Advisors appointed under the OECF and FRG components of the Project will monitor the technical work of NCZ I and NCZ II plants, respectively. NCZ, through OMF's Technical Coordinator, will coordinate and supervise the overall technical rehabilitation work. The engineering, procurement and installation work related ta rehabilitation of off-sites will be carried out directly by NCZ under the direct supervision of the Technical Coordinator. A Project Steering Committee has been established, including representatives of NCZ, ZIDCO and MOF, to facilitate processing of the policy and finance related measures outside NCZ's control and to oversee overall Project implementation . An Inter-Agency Fertilizer Coordination Committee has been established to ensure effective operational coordination among NCZ, Maamba Collieries, Zambia Railways, TAZARA Railways and NAMBOARD to coordinate timely coal and other input delivery in quantity and quality required by NCZ, as well as timely offtake of NCZ's output. Assurances have been obtained from GRZ that it will not alter the composition and functions of the Project Sreering Committee and the Inter-Agency Fertilizer Coordination Committee. Also, GRZ has given assurances that adequate supplies of coal, pyrites and electricity will be made available to enable NCZ to operate its facilities at full capacity. 50. NCZ's management and staff, once strengthened through the presence of the OMF team, are considered capable of implementing the Project efficiently. The physical rehabilitation of NCZ I and NCZ II plants is expected to be completed by July 1986 and December 1987, respectively. The Project is expected to be completed by June 30, 1990. 51. The Project includes provisions for a comprehensive training program for NCZ staff to equip them with necessary skills required to operate the plant efficiently; the program will be developed by NCZ with the help of the OMF by June 30, 1986 for review with IDA and subsequent implementation. Reporting and Auditing 52. NCZ will maintain separate records and accounts for all activities related to the financing of items under the proposed project.  - 18 - The accounts and financial statements will he audited by auditors acceptable to IDA and submitted to IDA not later than six months after the close of each fiscal year. NCZ will also submit to the Association quarterly financial statements and project progress and procurement status reports on the total Project within 60 days after the end of each quarter. NCZ will also provide by December 31 of each year, for review by IDA, an Annual Plan of Action for reducing its fixed and operational costs. Finally, within six months of the closing date of the credit, NCZ will submit to the Association a Project Completion Report on the project implementation, and its costs and expected benefits. Future Financial Performance 53. As a result of the Project, the financial performance of the company is expected to improve significantly and NCZ would generate profits from 1986 onwards. The financial situation of NCZ is expected to remain satisfactory throughout the Project life, and the company is expected to generate cash sufficient to more than meet its debt service requirements. NCZ would, by December 31 of each year, submit to IDA for review and approval a detailed action plan on cost reduction measures. Assurances have been obtained that NCZ will (a) by April 1, 1986 set its ex-factory prices of fertilizers equivalent to CIF landed cost; (b) maintain its debt service coverage ratio of not less than 1.3 beginning 1988/89; (c) maintain a current ratio of at least 1.1 during 1985/86 to 1986/87 and 1.4 thereafter; (d) maintain a debt/equity ratio of not more than 60:40; (e) not declare any dividends on its paid-in capital during the execution of the project; and (f) not undertake any expansion program (over US$2 million annually) without prior consultation with the Association. Procurement and Disbursement 54. Procurement arrangements are summarized in the table below: IDA FRG OECF NCZ Total ICB/LIT Other Equipment & Materials 3.30 0.90 18.73 20.23 3.03 46.19 Civil Works & Erection - - 5.20 4.70 1.50 11.40 Engineering & License - - 1.91 1.35 - 3.26 Technical Assistance 5.30 1.30 0.35 0.74 7.69 Training - 0.50 0.06 0.05 0.10 0.71 TOTAL 3.30 6.70 27.20 26.68 5.37 69.25 IDA's component of the Project consists mainly of provision of operations management services, amounting to US$5.3 million equivalent. A limited supply of equipment and materials (amounting at US$4.2 million equivalent)  - 19 - and training expenses for NCZ staff (US$0.5 million) will also be funded. Consultants for the Operations Management Services to be financed by IDA have been contracted in accordance with IDA guidelines. Procurement of foreign goods and services for the IDA component will be carried out by NCZ under the supervision of the Technical Coordinator of OMF. Equipment and materials totaling US$4.2 million to be financed by IDA will be procured in accordance with IDA procurement guidelines through international competitive bidding (ICB) and limited international tendering (LIT), except for (i) proprietary items which may be procured through direct purchasing; and (ii) orders for small and miscellaneous items under contracts with an estimated value of up to US$100,000 each which may be procured through international shopping with at least three price quotations from three countries. The aggregate of such contracts procured under the above exception to ICB and LIT procedures will not exceed US$600,000 equivalent for direct purchasing and US$300,000 equivalent for international shopping. All contracts for goods procured under ICB totaling about US$2.40 million will be subject to IDA's prior review and approval; LIT contracts will be subject to IDA's post review. 55. To enable the Project to be implemented on schedule, IDA has provided up to US$250,000 under the Project Preparation Facility (PPF) to finance eligible expenditures incurred between the date of completion of appraisal (November 1984) and the date of the credit. Items to be financed under the PPF include the down payment and other expenses related to Initiation of the operations management consultancy services. 56. The proposed IDA credit will be disbursed against (i) 100 percent of expenditures for directly imported goods and 80 percent for locally-procured imported goods; (it) 100 percent of the cost of consultants; and (iii) 100 percent of the cost of training for NCZ staff; and (iv) the amount due for reimbursement, under the PPF advance. Disbursements will be made against full documentation except for reimbursements for overseas training and contract valued less than US$20,000 equivalent, each of which would be made against Statements of Expenditure. A special account (revolving fund) in the amount of SDR 150,000 will be set up to meet expenditures for the purchase of equipment and materials and training. The credit closing date will be December 31, 1990. Environmental Impact 57. The Project will have a major beneficial impact on the environmental situation of the Kafue area as it will provide for (i) control of solid waste disposal; (ii) treatment of liquid effluents before discharge; and (iii) reduction of nitrogen oxides emitted into the atmosphere. Consequently, liquid and gaseous effluents levels compatible with international standards will be achieved. Moreover, assurances have been obtained that NCZ will (i) rehabilitate, operate and maintain the facilities in accordance with environmental and safety standards satisfactory to IDA; (;i) carry out by September 30, 1986, an environmental study to review in detail all aspects related to solid waste and liquid effluent disposal and recommend appropriate measures as required and a  - 20 - safety study to identify major accident hazards that could arise, and indicate existing arrangement and additional measures to be adopted to prevent them or limit their damages. Benefits and Risks 58. The Project meets Zambia's objective of achieving optimal performance of existing industrial facilities through technological upgrading, policy and institutional improvements and training. NCZ being the second largest investment (after mines) in Zambia, the Project will have a demonstration effect for the restructuring of other parastatal enterprises in Zambia. By improving production levels and reliability of fertilizer supply from a domestic source at costs comparable to imported fertilizers, the Project will support the Government's efforts to improve agricultural production and productivity and will generate average net foreign exchange savings to the country estimated at US$28.9 million annually (in 1984 constant dollars) during the economic life of the Project, by reducing the amount of fertilizers which would have to be imported. Direct employment saved by the Project will be about 1,100 permanent jobs. 59. The main economic benefits of the project would derive from: (a) an increase in fertilizer production through technical rehabilitation, improvements in operational efficiency and reliability, and improvements in supply arrangements for inputs; and (b) the decrease in coal consumption, in energy consumption generally and in other operating costs, including fixed costs such as labor and aduinistrative expenses. The Project shows an economic rate of return of 27 percent. Results of the sensitivity analysis indicate that the Project would remain economically viable under any reasonable change in the key parameters. 60. There is no question that the risks associated with this project are substantial, but they can be controlled and are worth taking. Because the Project deals with the rehabilitation of a technically complex plant, the technical risks are quite large . These risks as well as possible delays in project implementation, have been minimized by having turn-key contracts with experienced engineering firms with adequate performance guarantees. The risk of not attaining and maintaining a high capacity utilization level derives mainly from organizational, managerial and foreign exchange problems. These risks have been minimized by (i) organizational and managerial restructuring of the company, including the appointment of a full-time Managing Director, restructuring of NCZ's Board and transferring of NCZ to the ZIMCO Group; (ii) the appointment of an experienced Operations Management Firm to ensure efficient operation of NCZ's facilities while introducing proper maintenance procedures, management information systems and properly training Zambian counterparts to enable the local staff to operate the company after the departure of the OMF; and (iii) engaging the services of a Technical Coordinator to supervise the technical work and to ensure full integration and coordination at each stage of Project implementation.  - 21 - 61. The risk of shortages of feedstocks are being minimized through planned improvements in Maamba Collieries, Zambia Railways and Nampundwe Mines. In addition, the establishment of the Inter-Agency Fertilizer Coordination Committee and introduction of proper scheduling and procurement procedures for domestic as well as imported inputs should help minimize such risks. 62. The risk of foreign exchange not being available to cover NCZ's operating requirements, thereby causing lower capacity utilization and inadequate maintenance is high. Zambia is facing serious balance of payments problem and the situation is not expected to improve significantly in the near future. Therefore, this risk remains although a more organized dialogue between NCZ and BOZ should help in creating a better understanding of the problem and the heavy costs associated with it. The recently introduced auction system for foreign exchange, supported by the international donor community, should enable NCZ to obtain the needed foreign exchange. 63. In the long run, no commercial risk is foreseen as the demand for fertilizers in Zambia is expected to exceed NCZ's production. The risk of inadequate financial performance of the company due to lower capacity utilization and uneconomic prices of output has been minimized by: (i) institutional reforms and the appointment of an expatriate Operating Management Firm to operate the company; (ii) adoption of a proper financial restructuring; (iii) cost reduction measures; and (iv) assurances on ex-factory prices. 64. In addition, there is the overall country risk. Zambia is facing serious balance of payments problems. The country's economic management resources are limited and the level of technical expertise is not always available as needed. The Project calls for many difficult decisions on the part of the Government, e.g. regarding staffing, pricing and foreign exchange allocation. So far the GRZ as well as NCZ have shown a willingness to face up to difficult decisions and it is expected that they will continue to do so. PART V. RECOMMENDATION 65. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachments Washington, D.C. February 4, 1986  -22 - ANNEX I Page 1 of 6 243A - nU8saL lUgcafl sA 31 (MU s"Con cIsAU) a.i 1o0& IS711 ar wzaLt MU" S. 0FWAAA 3. AF31cA & "to brn an CIUAIU, go. 01) TOTAL 751.6 75. 7aL2 ASULInAL 397.4 309.1 u1.s *w wVsIM ML3 .. .. Mm00o . I 1.9 - oUowrmna m mmt tl M Cl O SL i)VAL)f .. 30O O 43.0 31.5 423.9 wOIPMAxM..g-ua CtSOIM) 3141.0 415.0 42510. .0114 VOIWAalO z (0w TOTAL) 27.2 30.1 44J 22.0 49.0 5I 1=S IOlUATIE ('ILL) ". UATIS I W 0 2.0 Mm 30. al. 4.2 5.5 0.3 . 37.5 PM 3 3 AJ. 1A3 7.9 3 10.4 11.1 124.0 470.1 nru&au s Socu (2) 0-14 US 45.0 "4.1 4.3 456 43.5 1544 YU 52.3 51.3 4*.3 51.4 3.0 45 A 9A 2.4 2.5 2.3 2.7 3.3 TOM 2.5 2. 3.1 2.9 2.4 Ono 9.1 3. 4.2 5.1 4. Con ar m 1 CPU 43.1 49.0 50.0 47.0 40.0 clUDE OR= CATE c 1005) 22.A 10.7 14.0 15O 11.5 Cs 0URD0CT RATE 3.2 3.3 3I 3.2 2.5 YA100. VL1A1=30 ACCWT . A1SUS CUM) .. .. SR CZ or N = 21) .. .. 1. 21 -Q - mume 111= Or FWDo ROo., MR CAPITA Ct1909-71-100) 99. 94. 95.0 02.9 gm. 13 CAPITA 31211 01 0*1.051 CZ 0w 33OIMoUT) IO0A 94.0 91.0 90.5 110.z I.MM CRAM M Dmu) 0.0 44.0 54.0 55. 77.3 a VlICV AbIfUL AM V101 14.0 14.0 14.0 IC 16.5 11. 1LD LACS 1-4) OrAn UA 31A 24.2 L9.0 16.0 12.3 Lin EECK. At s32r1 (13435) 41.7 4. 50.5 52.0 57.J P41W 20T. (nE CPL T30U3) 151.3 125.0 100.0 107 4 34. ACCeSS TO 5A1 VATE (2o0) TOML .. 37.0 4.0 Id 42.; 67.2 ugum ~~~~~~70. 170 47.067. 93A RURAL 22.0 4.4 345.4 ACCmS To e03F. 01575*1 CZ OF POMIUATIM) TOTAL 1.0 40.0 2g 45.9 011*3 .. 12.0 *0.0 37.7 DJ.0 31 .. U.0 0.0 7I{ 20.7 20.4 POPUiAZZON PER PU151S013 9370.0 o 140.0 7470.0 to 11791.7 4131.0 ?OF. PER su3c P13som 920.0 It 2430.O 1730.0 240.0 1545.0 Mr. PMUSETL M TOOL 340.0 300.0 210.0 le 951.1 421.5 031*3 UO0A0 Lt .. A 00.0 3J. 53.0 1 470 0 . 240.0, a371.9 M511.] AoUSS2S MM MOS2*TAL .. .. 31.0 Le 27. 25.7 A131eZ SIZR OF 303 L1 TOTAL .. 4.4 urns .. .. . .. ..AL .. .. AVAC M F MMrRKO To 2.* .... TO.A .. 2..4.. URAL .. .. murnm aO MMOS WrN wm. TOaL .. .. . 01327s.5 ...., sum .. .. . ..  -23- ANNE I T A ' " C Page 2 of 6 ZAIHEA - SOCAL INX S 3A_ t, AWss cas:muus:uumsv 1IO1T ("on 1 S0M0 SSTIfhLI k_E b b hITIILb ANticA S. or s846 A. A1A1 1 m I %AsT 19"41- 197oLb esTDimTeL N. .AIC 1[ AWUSTC0 CNIWIJNRIT tATtOS PRDSAEI TOTAL 42.0 89.0 9G.0 9d 53.7 *9.S HALE 31.0 90.0 102.0 I00.0 103.7 rINa 34.0 79.0 90.0 63.2 73Z SECOOIiT TOTAL 2.0 13.0 17.0 id 17.3 42.V MALE 3.0 17.0 2z.0 22O z0. 130. 1.0 6.0 12.0 7 14.6 34.6 VOCATOAL CZ o0 sBcmu) V.6 3.2 2.3 3 .9 10.0 EUPIL-TOACIUI 341T1O wmMARF 50.0 47.0 48.0 id 41.1 29.7 sUcOAT 14.0 22.0 22.0 23.3 16.8 PASS#ZI C1SITUCAaID FM 10.4 14.5 18.7 A Z0. 17.6 3A310 UCEIW3MlToAD70 Po, 4.6 it 16.0 26.5 107.0 175.9 TV snMMUIUOAmP .. 4.1 12.4 2. z1.2 ItNtS") CXSC DAfO PI TI SMAND 1011T71011 5.1 13.7 10.7 1.A 37.2 CUM AML ATEIDACCAPI .. .. 0.3 A 0.4 2.4 TOM LAD w100 (TWO) 1295.0 1MI10 216.0. * 3U*Z (CPT) 33.3 31. 33.0 34.2 11.0 ACIIaLWUES (C1UYT) 79.0 73.0 - 67.0 I 54.5 42.4 ZXlUSTE (13T3) 7.0 9.0 11.0 16.3 27.9 PARIIPATIONI ATA (P3RC23?) TOAL 41.2 39.0 34.6 36.6 26.2 AM 553.3 52.9 47.5 7.1 44.2 roL V2.3 25.2 226 27.2 5.0 ECCOMUSC DS _I 2 IA=I 1.2 1.2 1.5 1.3 1.6 INCOM OF WIz U ICUI 3011_33 RiCo=ST 5S or 10uW 33.7 23L0 1 .. hZIMT 20 OP IDoSWLDS 56.2 63.0 1 3.7* LO-;S 40Z OF O MOUSOL 13.0 104.1 1 7 Fg=TANES 20 C UoUWI5. . EST2KAUD Ao1um Pm9 ZUC LE. (US$ PS& CAPITA) uI .. .. 247.0 390.7 22b.3 WEAL .. .. 165.0 .4 275.3 134.0 tSrOAI 3D 9141T1 109331! INC 11. (UsS PER CAPI) 03343 .. .. 126.0 1 54. 431.3 ismL .. .. 33.0 a 201.1 326.0 33110*1531W. =Tu M PrWOS 10023 11. CZ) O6. .. .. 25.0. WEAL .. .. .. .. D2.O NO. AVAXLAU5 MOT A1PLFCANZ NOTaS I 1e gr. aveags for eamH iufcator me pe,apl tor n twc ed artl tSc mesm. n.v.reg of cweuria nn th1 1i1d.ta. depeds - ave12ab Lty of data . is o act toR. Lb gala. otb.... oo.d. Date for 19W rrefe to a er y ew _. 1939 _d 19611 "Data for 1970" he_-em 19. e.d 1971; . data fce "Het laet bUrtle ebiab 19U1 _ 16. Lc 1977; /d 1960; A 1979; If 1963; IA 1978; A 1976; A 1942;, 1 1973. JI=, 1963  - 24 - *ltAN I Page 3 of 6 DgFNmOIINS OP SOCIAL INDICATORS oue. Albaugh the 1A dai u drma rInOm olren ge ly judpd ihe mast asuthonitv and rimUt is tsold agso be noed that ihmy may sa bg intima lly campurabim becm of Id tak of tanndanrd dnlln.usom and cans mad by dulne coustis in culkcung ite dais. Thc dat am. nomiedle. usful to dienbi oder of miamudce. iimmu and ciatracmtnseri cinri tmI difflamCnA bitum ainlin. Twe refe Kermpop mitr I II taime cuntvn poop at thin ubje canitry ad (21) a country aop wt io umewbat hubsr average camw than ibm country pouop af lhe suba CemIry immpre rir -Hih Incanm OCi Eapaneni poup whrm Mddek Income Noah Afrct and Middle Ea- is chseon ucaim at stranger stis-cudturst afinuteivl In the refmnce eup 4auw te a.enra are popultn weighaid arthreLc itans tar each indiator and shown only wohe nmaiy of lih couie In * r a romp has du for that ndicator Sinwc the coverage ofcasntna among ibme inditor dends on the astaiashihl of dau nd is not umform. caution must be eercneed tn reunt ae-ragns ol aoi indicator io anothr Thm a-craps ar only ustful in comupnan ith 'alue af onc ndicator am a me mng a count and rekficnne pgro ARCA (thousand sq.km.I Crud irAk Rae (per rhlasandj-Number of live births in the year FTed-Total surface area compnsng Land area and inland waterm per thousand of mid-year populauon 1960. 1970. and 19813 daLa. 1960. 1970 and 1913 data Cru Death Rae (per f hp rsndj-Number of deaths in the year Agricukwal-Esutmate of agrcultural arm used temporanly or per thousand of mid-year population: 1960. 1970. and 1913 data. permanently for crops pastures. market and kitchen prdens or to Gro Reprodacioa Rare-Average number of daughter a woman lie fallow. 1960. 1970 and 1912 data. wvil bear in her normal reproducuve penod if she expericnces present age-specific furtiity rates usually five-year averags ending CNP PER CAPITA lUSSl-GNP per capita steimates at current in 1960. 1970. and 1933. market prices, calulated by same converston method as World A r _ Pk. -Awprr. A _d fth_asnduj-Annual nts- Bank Atlas I 1981-33 bamsis) 1933 data. ber of acceptors of birth-control devices under auspices of national ENERGY CONSUMPTION PER CAPITA-Annual apparent family planntng program. coniurnption of commercial pnmary energy Icoal and ligite. . Faly Pf xq- (pecen of-wried - n)-Tbeperen- petroleum. natural gs and hydro- nuclear and geotberma! clec- age of marred women of child-bcanng age who are practicing or trciyl I mkilograms of oil equivalent per capita: 1960. 1970. and whose husbands ar practicing any form of contraception. Women 1912 data of child-bearing age arm generlly women aged 13-49. although for some counies contraceptive usage is measured for other age POPULATION AND VITAL STATISTICS groupL Total P9p11 aduen -id-Yea (rhess1s)-As of July 1 1960. 1970. FOOD AND NLTRmON and 1913 data. Index of Food Froedrien Per Capita f l96. r1- JNj)-ndex or per Urba Pbpopdion (pne. of totora)-Ratio or urban to total capita annual production of all food commodities Production populauion; different definitions of urban arcas may affet compar- excludes animal feed and sed for agriculture. Food commodities ability of data among counmes 1960. 19-0. and 1993 data. include pnmary commodities leg. sugarcane instead of sugpra Ppuin e which are edible and contain nutrients (e.g. coffee and te are JPbopation m yea 2XI000-The projection of population or 2000. eacluded): thy compnse cereals root crops pulxse oil seeds. made for each economy separatelv Starting with informauon on vegetables rruits. nuts. sugarcane and sugar beets livestock, and total populauon by age and sea, ferrility rates. monrtalty rates. and livestock products. Aggmrete production orech country is based iernational migriuon in the base year 1980. these parameters on national averae producer pnce weights: 1%1-65. 1970. and ere projected at five-year intervals on the basis of gneralized 1982 data. assumpuons until the populauon became s5tatoary. Pr Cap& S ly ofC ie qp r r n Conput- Smatmanarv popmaunon-Is onc in which age- and sex-specific mor- ed from caloric cquivalent of net food supplies available in country taity rates have not changed over a long penod. while age-specific per capita per day Available supphis comprise domesttc produc- fertility rates have simultaneously remained at replacement level tion. imports ess exports and changes n stock. Net supplies (net reproduction ratc - I 1 In such a population, the birth rate is exclude animal feed, seeds ror use in agriculture, quantiues used in constant and equal to the death rate, the age structure is also food processing. and losss in distribution. Requirements were constant, and the growth rate is zem The stationary populauon esimated by FAO based on physiological needs for normal activity size was estimated on the basis of the projected characterisucs of and health considering environmental temperatur body vinghts. the population in the year 2000. and the rate of decare of ferulity age and se dist;buuon ofpopulation. and allowing 10 percent for rate to replacement level waste at household level: 1961. 1970 ain 1912 datis Pbpoanaon Mosentmn-ls the tendency for population growth to Phr Capre Sipply of Protin (gram per dlqy-Proteun content of continue beyond the ume that replacement-level ferulity has been per capita net supply of rood per day. Net supply of rood is defined achieved. that is. even after the net reproduction rate has reached as above. Requirments for all countries established by USDA unity The mnomentum of a population in the year r is masured as provide for minimum allowances of 60 grams of total protem per a ratio or the ultimate stauonary popultanon to the population in day and 20 grams of animal and pulse protein, of which 10 grams the year r. given the assumpton that fertiity remains at replace- should be anml protein. These standardsare lower than those of ment kleve from year ronward. 19S5 data. 75 grans of total protein and 23 grams or animal protein as an Pbpulation Drr.fy average for the world proposed by FAO in the Third World Food Per sqkin.-Mid-year populanon per square kilometer 11 00 hec- Supply: 1961. 1970 and 1932 data. tares) of total area; 1960. 1970. and 1913 data. hr Capita PhrereteSpply Frm Aninn and Pr s-Protein iupply hrr sq kmt. agrwrularatl tend-Computed as above for agricutural of food derived from animah and pulses in granms per day: 1961-65. land only. 1960. 1970. and 1982 data. 1970 and 1977 data. Population 4de Sn'ucre (percentrj-Chtildren (0-14 years. work- Chird qres 1-4) Deat Rert (per tehoeandj-Number ordeaths of ing age tl 5-64 years). nd retired 65 rean and overtas perentage children aged 1-4 yeanrs per thousand children in the same age of mid-ycar population; 1960. 1970. and 1983 data. group in a given year For most developing countries data denved Population Growth Rate (percentu-iroral---Annual growth rates of rrom life tables: 1960. 1970 and 1913 data. tol miud-year populaton for 1950-60. 1960-70. and 1970-83. HEALTH Popultion Growth rRe tpercenrj-,rm.h-Annual growth rates L4f EzJe4recjr ar Bre (yeas)u-Nunber of years a net horn of urban populaton for 190-%60. 1960-7-0. and 1970-83 data. infant would live if prevailing patterns of mortalitv for all people  -25- ANNEX I Page 4 of 6 at the th of oits bkith we to stay te same througbout iu life Pup&tracher Rail. pnmy. and scmudry-Total students en- 1960.1970 aid 19U3 date. rolled in pimary and seondary levels divided by numben of Ihip Mme117 Rum (per huendj-Numnber of infants who die teachers in the corresponding evel. before reaching one year of ae per thouand Uve births in a given yew. 1960. 1970 and 1933 daut CONSUMPIION Aess to Sg WSW trpeore .f pwusJl -W4 ima., and P_ or Cars eper ihmsd p.puildolm-Passenger cars com- urw-Number of people (totaL urban and rural) with reaonable prise motor cars seating ess tan eight perons: excludes ambul- ac to wsfe wauer supply (incds tread surfee wates or ances. hearsnes and militay vehiceL untVited but uncntminated water such as that fram proteted Rfao Reenirs (per rhwandpopalelsan)-Al types of receivers borehoes spring nd sanitary wdls) as percentage of their rspee- for radio bradcasts to geal public per thousand of population: tive populatios. In an urban are a public fountan or standpost ciudes uicensed rccvers in counti and in year when klated not more than 200 me frrom a house may be consadered of r-d smcwas m countr rcm yearswhay g itin reanabke ace of that house. In ural a re gist on of adio ets effct dari for reent years may reasonablec accs would imply that the housewife or members of the nobeomablsicmotourisblsedienng housdhold do not have to spend a disproportionacte part of the day TVrRee ppV rivers for bradcast in feting dw family's wateer- p thousand pop o exludo unikensed TV Ars to Ercnresa ms1po pmaof e.-.. M ven in counis and in ye n when registranion of TV se wa ad mwi-Number of people (total urban, and rural) served by excreta dsposa a percent of their repectve populations. l CJime (pa thosindpapUledkisou-hoW the aver- Excret disposl may indcude the collection and disposal. with or ag ciulaton of -dedy general interet newspaper defined as a without teaent. of human era and wast-water by water- persdi publication devoted pnimarily to fecorduig gIeral news. borneasym or the use of pit privies and similar insa tions. It is considerd to be 'daily- if it spears at least four tims a wedek Papuldou pe Ph11sidau-4'bpulation divided by number of prac- Cl