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Document of

The World Bank

FOR OFFICIAL USE ONLY LE CPY

Report No. 3758

PROJECT PERFORMANCE AUDIT REPORT

INDIA--COCHIN II FERTILIZER PROJECT

(CREDIT 264-IN)

December 31, 1981

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

CAN calcium ammonium nitrate

FACT Fertilisers and Chemicals, Travancore Limited

FCI The Fertilizer Corporation of India

FEDO FACT Engineering Design Organization

FPDIL Fertilizer (Planning and Development) India, Ltd.

GOI The Government of IndiaIDC interest during construction

MFL Madras Fertilizer Ltd.

MW megawatt

MWH megawatt hourN nitrogen

NFL National Fertilizers Ltd.

P205 phosphorus pentoxidePPM parts per millionTPD tons per dayTPY tons per year

WC working capital

FOR OFFICIAL USE ONLY


INDIA--COCHIN II FERTILIZER PROJECT(CREDIT 264-IN)

TABLE OF CONTENTSPage No.

Preface ............................................................Basic Data Sheet ...................................................... iiHighlights ............................................. ....... iii

PROJECT PERFORMANCE AUDIT MEMORANDUM

Project Scope ........................... 1Project Implementation .............. ...................... 3Project Operations .............. ......................... 4Financial Performance ....... .................. 7Conclusions ......... ....................... 10

Annexes

1. Production--Unit Costs of Production.............. ..... 132. Cochin II Project--Income Statements ....................... 143. FACT--Income Statements ...... ............................. . 154. FACT--Balance Sheets .. ..... ..................... 16

ATTACHMENT A: COMMENTS RECEIVED FROM BORROWER ..................... 17

ATTACHMENT B: PROJECT COMPLETION REPORT

I. INDIA'S FERTILIZER INDUSTRY ........................... 20A. Bank Group Involvement ............................... 20B. Industry's Development ............................ 20C. Public Sector ....................................... 21

II. PROJECT IDENTIFICATION AND APPRAISAL ..................... 23A. Project History ............................. 23B. Project Scope and Objectives ...................... 23

III. PROJECT MANAGEMENT AND IMPLEMENTATION ................. 24A. Project Management ...................................... 24B. Analysis of Project Schedule ............................ 26C. Analysis of Project Costs ........................... 29D. Financing Plan ....................................... 32E. Procurement and Disbursements .......................... 32F. Performance of Contractors ............................... 34G. Manpower and Training ............................. 35H. Environmental Situation .............................. 35I. Current Status of Project ......................... 36

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (continued)

Page No.

IV. MARKET AND MARKETING ..................................... 37A. Cochin II Product Pattern ............................ 37B. Cochin II NPK Seeding Program .......................... 38C. Assessment of FACT Marketing ......................... 38

V. OPERATING PERFORMANCE AND EVALUATION ..................... 39

A. FACT Operating and Financial Performance ............. 39B. Financial Rate of Return ............................. 41C. Institutional Performance ..................... ..... 41

D. Covenants .............. .. . ................... *.... 42

VI. ECONOMIC BENEFITS OF THE PROJECT ..... ............... 42A. Economic Rate of Return .......... ...... .... .. ... 42

B. Transfer of Technology ................................... 43

C. Employment .................................... 43

D. Foreign Exchange Savings ............................. 43

VII. THE BANK'S ROLE AND PERFORMANCE ...................... 43

A. Overall Assessment ............................... *... 43

B. Achievement of Project Objectives .................... 44

C. Lessons Learned ..................................... 46

Annexes

1. India - Fertilizer Projects Financed by the Bank Group........ 482. Capacity Utilization of Fertilizer Projects in

Operation in India ..... .................... . . 49

3. Project Implementation Schedule - Appraisal vs Actual ........ 504. Permanent Working Capital ....................... ......... 51

5. IDA Credit Disbursement Schedule ............................. 526. FACT - Market and Marketing Organization ................. 53

7. FACT - Financial Statements ................................. 56

8. Cochin II - Production Costs ................................ 58

9. Re-evaluation of Financial Rate of Return .................... 59

10. Assumptions Used in Economic Analysis ..................... 60

11. Assumptions Used to Calculate Economic Price of NPK ......... 6112. Re-evaluation of Economic Rate of Return ..................... 62



PREFACE

This report presents a performance audit of the Cochin II FertilizerProject which the Association supported by a credit (Cr. 264-IN) for US$20million in July 1971. Final disbursements under the credit were made inDecember 1977, two and one-half years after the original closing date.

The Bank's Industrial Projects Department prepared a project comple-tion report (PCR) on the basis of information and data gathered by the bor-rower. This report presents a factual review of the difficulties encounteredduring project implementation and is attached. It is preceded by an auditmemorandum prepared by OED. OED staff visited India in February 1981 todiscuss a number of fertilizer projects supported by the Association. Theproject was discussed with both the Government and the implementing company,Fertilisers and Chemicals, Travancore Limited (FACT), located in the State ofKerala. The memorandum reflects the essence of these discussions; it is alsobased on a review of credit documents, project files and discussions with Bankstaff. Its analysis--as well as that of the PCR--indicates that the projectfaced more problems than anticipated at appraisal with regard to technologyand implementation, and that, in retrospect, a more modest approach tocapacity expansion might have been preferable. Comments received from theborrower have been taken into account in finalizing the report and arereproduced as Attachment A.

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BASIC DATA SHEETAmounts (in US$ Million)

As of 08/31/81Original Disbursed Cancelled Repaid Outstanding

Credit 264-IN 20.00 20.01/a .11 - 20.01

Cumulative Credit Disbursement

FY72 FY73 FY74 FY75 FY76 FY77 FY78

(i) Planned 5.4 12.6 17.6 20.0 20.0 20.0 20.0(ii) Actual .6 1.7 10.1 14.1 17.8 19.4 19.9

(iii) (ii) as % of (i) 11.1 13.5 57.4 71.0 89.0 97.5 99.5

PROJECT DATA

Original Actual orCredit Date Re-estimated

Board Approval 07/01/71Credit Agreement 07/30/71

Effectiveness - 12/07/71Credit Closing 06/30/75 06/30/77

Date of Physical Completion 03/74 07/76

Completion Time (in months) 32 60Time Overrun (%) - 87%

Total Project Cost (US$M) 47.2 72.2

Cost Overrun C) - 53%Economic Rate of Return 14% 14%

MISSION DATA

Mission No. of No. of Man- Date ofType Date Weeks Staff weeks Report

Identification July 1969 - 3 - -

Appraisal December 1970 - 2 - -

Appraisal February 1971 - 2 - May 14, 1971

Supervision I September 1971 0.5 1 0.5 Sept. 13, 1971Supervision II February 1972 0.5 1 0.5 Mar. 22, 1972Supervision III June 1972 2.0 2 4.0 Aug. 7, 1972

Supervision IV September 1972 0.5 3 1.5 Sept. 22, 1972Supervision V December 1972 0.5 1 0.5 Dec. 27, 1972

Supervision VI February 1973 1.0 2 2.0 Mar. 28, 1973

Supervision VII October 1973 1.0 2 2.0 Jan. 10, 1974Supervision VIII July 1974 1.0 2 2.0 Aug. 6, 1974Supervision IX January 1975 0.5 2 1.0 Feb. 5, 1975

Supervision X October 1975 1.0 1 1.0 Nov. 14, 1975

Supervision XI August 1976 1.0 1 1.0 Sept. 14, 1976Supervision XII March 1977 1.0 1 1.0 Apr. 29, 1977

Supervision XIII June 1978 0.5 1 0.5 Jul. 11, 1978

Completion May 1979 2.0 1 2.0 Jul. 15, 1979Completion August 1979 1.0 2 1.0 Dec. 15, 1979

EXCHANGE RATES

Appraisal Year Average (1971) US$1 = Rs 7.50

Investment Period WeightedAverage (1971-79) US$1 = Rs 8.20

Average in 1979 US$1 = Rs 8.20

Fiscal Year of Borrower April 1 to March 31

/a Including a foreign exchange adjustment of US$110,000.

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INDIA---COCHIN II FERTILIZER PROJECT(CREDIT 264-,IN)

HIGHLIGHTS

The project represented an extension of the fertilizer plant thenunder construction at Cochin in the State of Kerala by the Fertilisers andChemicals, Travancore Limited (FACT), a public sector company. The projectwas conceived as an NPK plant intended to produce several grades of highanalysis granulated NPY fertilizers. The project was based on importedphosphate rock, sulfur, potash and ammonia, and included as its main compo-nents a 330,000 tpy sulfuric acid plant, a 115,000 tpy phosphoric acid plant,and a 400,000 tpy NPK granulating plant.

The project was physically completed in July 1976, 28 months behindschedule due to a combination of factors including (i) design difficultiesexperienced by the licensor of the phosphoric acid process; (ii) managementshortcomings within the company; and (iii) ineffective relationship betweenFACT's engineering division and its consultants (PPAM, paras. 7 to 10; PCR,paras. 3.01 to 3.15). Total costs amounted to US$72 million, 53% over theappraisal estimate. ThE Cost overruns reflect the longer than anticipatedimplementation period, an underestimation of base prices, and insufficientallowance for contingencies at appraisal (PCR, paras. 3.16 to 3.20).

FACT experienced difficulties with each of the three units installedunder the project. Rubber lining failures in the phosphoric acid plant havecaused frequent work stoppages and a shortfall in acid concentration, whichhas been detrimental to the operation of the NPK plant (PPAM, para. 13).Production of granulated NPK grades proved much more problem-ridden thananticipated, in part because of their hygroscopic nature and the location ofthe plant in a region where most of the year the climate is humid. However,technical modifications now being implemented and a change in the product mixshould lead to marked increases in output (PPAM, paras. 14 to 16).

Low capacity u-tilization has eroded the project's competitiveness.On the assumption that the company will achieve production levels close tocapacity, the NPK plant should eventually become a profitable venture. On theother hand, domestic production of phosphoric acid, based on imported sulfurand rock phosphate, is now uneconomic because of the increase in freight ratesthat took place since appraisal. Overall, however, because of higher worldfertilizer prices, the project still shows an economic rate of return of 14%--which is satisfactory.

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The major lessons from this experience for future projects are:(a) changes in top management positions mid-stream can be detrimental tothe success of a project; (b) the need to determine in a given socio-politicalenvironment whether (i) expatriate technical assistance would be accepted andeffectively used, and (ii) if so, whether such assistance should be providedby individuals or engineering firms; (c) in selecting technologies, it wouldbe advisable to evaluate their earlier successful application elsewhere forthe specific plant capacities and product ranges planned; and (d) the need fora realistic assessment of the benefits of developing local engineering firmsvis-a-vis the costs in terms of delays and budgets in project implementation.

Other points of interest are:

- the borrower, at IDA's insistence, protected itself againstthe licensor's failure to develop a new phosphoric acid process(PPAM, para. 5); and

- the larger than expected supply of domestically produced equip-ment (PCR, para. 3.17).

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INDIA---COCHIN II FERTILIZER PROJECT(CREDIT 264-IN)

Project Scope

1. In 1969, the Bank indicated its willingness to consider financing

Government-owned companies engaged in the fertilizer industry. The projectunder review was one of the two project proposals submitted by the Governmentof India as a response to this change in policy. The project involved a major

expansion of the production facilities of the Fertilisers and Chemicals,Travancore Limited (FACT), a public sector company located in the State ofKerala.

2. FACT was composed of five operating divisions: (i) Udyogamandal

(UDL), the company's original plant, which consisted of a number of smallunits, some of them dating back to its early days; (ii) the then newly-created

Cochin Division, where an ammonia/urea plant (Cochin I) was under constructionabout 25 kilometers from the site of the old plant; (iii) FACT Engineeringand Design Organization (FEDO), the engineering arm of the company; (iv) FACTEngineering Works (FEW), a small equipment manufacturer; and (v) a MarketingDivision which handled fertilizer sales. The Cochin II project was conceived

as an extension of the Cochin Division; its objectives were defined as aresult of discussions between the Bank, the company and the Government.

FACT's initial project proposal envisaged the manufacture of phosphatic

fertilizers in the form of either triple superphosphate or diammonium phos-phate. After various alternatives had been compared, the project was even-tually conceived as an NPK plant intended to produce six different grades of

high-analysis granulated NPK fertilizers (i.e., fertilizers featuring a

combination of nitrogenous, phosphatic and potash nutrients). NPK fertilizers

were to be produced in an ammoniation-granulation plant where monoammoniumphosphates (MAP) and diammonium phosphates (DAP) (complex N-P fertilizersresulting from the ammoniation of phosphoric acid) would first be produced and

subsequently blended in various proportions with urea (as additional source of

nitrogen) and potash. The inputs of such an ammoniation-granulation plantwere to include ammonia, phosphoric acid, urea and potashlJ.

3. Two routes for the production of phosphoric acid were considered and

evaluated at the time of appraisal (each one being compared to the alternative

of importing phosphoric acid): (i) the electric furnace method whereby

1/ Another proposal was to limit the project to a simple steam granulator

to blend imported MAP (later to be produced in Rajasthan) with potash and

some of the urea produced in the Cochin I project. This alternative,however, was never aeriously considered, partly because of shortages ofMAP in the international market.

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phosphoric acid is derived from elemental phosphorus produced in an electricfurnace; and (ii) a sulfuric acid-based wet process whereby phosphoric acid isproduced by dissolving phosphate rock in sulfuric acid, itself produced on thebasis of elemental sulfur. The Bank opposed alternative (i), FACT's initialproposal, because of the high energy costs involved. After the case forproducing phosphoric acid domestically (rather than importing it) had beenmade to its satisfaction, the Bank agreed to alternative (ii) as a basis forthe project; the Government approved it in May 1970.

4. The project was to be based on imported phosphate rock, sulfur,potash and ammonia, and make use of some of the urea to be produced in theCochin I project then under implementation. It included facilities for theproduction of sulfuric acid and phosphoric acid as intermediate products, andcomprised:

(i) a one-train 330,000 tons per year (tpy) sulfuric acid plant;

(ii) a one-train 115,000 tpy phosphoric acid plant;

(iii) a two-train NPK granulating plant with total capacity of485,000 tpy (equivalent to 40-46 tons per hour.! [tphl andper train depending on product formulation);

(iv) a small by-product plant for the production of 7,500 tpy ofcryolite, a fluorine compound used in the aluminum industry;and

(v) port facilities and other off-sites.

5. After consultation with the Bank, FACT contracted licenses coveringthe design of the sulfuric acid, phosphoric acid and NPK plants. The sulfuricacid process selected by FACT represented commercial and conventional tech-nology. Its choice of phosphoric acid process, however, proved more contro-versial and led to some discussions with the Bank. The "dihydrate/hemi-hydrate" process FACT intended to set up was not commercially proven; itinvolved a complex two-step separation system designed to optimize calciumsulfate recovery.-: calcium sulfate was to be first precipitated in di-hydrate form (similar to natural gypsum) as in more conventional "dihydrate"processes, gypsum crystals being then centrifuged, attacked a second time byconcentrated sulfuric acid and converted into hemihydrate to improve process

1/ The production rate was based on 20 hours per day, 300 days per year.

2/ Briefly, phosphoric acid production via a sulfuric acid-based wet processinvolves the dissolution of rock phosphate in sulfuric acid in attackvessels, which leads to a combination of phosphoric acid and calciumsulfate which has to be removed.

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efficiency. The Bank accepted FACT's choice subject to the condition thatthe critical centrifugal (hemihydrate) step could be by-passed in the eventwhere it later created difficulties--a condition which FACT agreed to. Asfor NPK production, the ammoniation/granulation plant was to be based onthe technology of a company with substantial experience with N-P granulationbut little with respect to granulation of compounds including potash; the samecompany had been chosen earlier by the private company Coromandel FertilisersLtd to provide the technology for an NPK plant then under implementation inAndhra Pradesh.

6. Discussions between FACT and the Bank also dealt with the extent ofresponsibilities the company was to assume in implementing the project, con-sidering it had never executed such a large operation before. Counting on its

long experience in fertilizer manufacturing--it was the oldest fertilizercompany in the country, incorporated as a private company in 1943 and managedby the Government of India since 1963--FACT intended to maximize its involve-ment both in engineering the project and managing its construction. The Bankeventually agreed to the choice of FEDO (FACT's engineering branch) as manag-ing contractor for the project. However, at the insistence of the Bank, FACTreluctantly agreed to employ an Assistant Project Manager and an Engineer toassist FEDO in implementing the project, as well as expatriate technicaladvisors from the licensing companies to supervise the detailed engineeringwork.

Project Implementation

7. The project was physically completed in July 1976, 28 months behindschedule. Total cost amounted to Rs 592.4 (US$72.2 million equivalent), 67percent in rupee terms and 53 percent in dollar terms over appraisal esti-mates. The project got off to a slow start due principally to (i) delays bythe Government in approving contracts with the licensors, which led to afive-month deferral of project start (PCR, para. 3.08); and (ii) designdifficulties experienced by the licensor of the phosphoric acid process (indeveloping the "hemihydrate" section of the plant). Later the project suf-fered from severe management shortcomings within the company, as well as fromFEDO's ineffective relationship with its consultants. The PCR deals withthese aspects at some length (paras. 3.01 to 3.06), pointing to issues oftendiscussed in another context: (i) the difficulty experienced by the Bank inassessing the management capability of long-established companies contem-plating projects somewhat out of proportion to their past operations; (ii) thenecessity for the Bank, whenever technical assistance needs have been identi-fied, to ascertain the receptivity of its borrower to outside support toensure the effectiveness of consultant services. In a sense, the projectepitomized difficulties experienced by others. It was placed on the Bank'slist of problem projects for three years (1973 to 1975) and as such closelyfollowed up. However, there was apparently little the Bank was in a positionto do to reverse the deteriorating trends once they had set in.

8. The expatriate engineers contracted by FEDO at the Bank's requestwere poorly utilized; they were given little responsibility and, partly as aresult, found FACT's organization difficult to work with effectively. On theother hand, FACT considered its consultants not to be technically strong.In retrospect, design defects in the NPK plant, which can be attributed partlyto FEDO and partly to its consultants, suggest that technical support may havebeen at times below par; such impression in any case clearly strengthenedFACT's resistance to use its expatriate consultants more fully.i/

9. While FACT's attitude towards its consultants was negative from thevery start, the management of the company, which the Bank considered adequateat the time of appraisal, deteriorated considerably following the replacementin 1973 of the chairman and managing director by a new administrator, who wasunable to establish an adequate working relationship with the project unitwithin FEDO. An atmosphere of distrust and total lack of delegation ofresponsibilities ensued to the detriment of project management.

10. Other factors contributed to the delays in project implementation.FEDO had initially grouped its equipment orders into about 20 large packagesfor which, however, most suppliers were unable to quote. The limited responseto its bid tenders induced FEDO to break down orders into 80 packages, and inmany instances into even smaller packages, and open a new series of tenders,which caused substantial delays in procurement. The ensuing oil crisis led toa tightening of foreign markets for equipment, which further delayed deliv-eries. On the domestic front, a number of local contractors were unable tomeet their contractual commitments due to high inflation rates and the lack ofprovision for price escalations while FACT, because of Government regulations,had no alternative but to renegotiate the contracts. As a result, the companyentered into new contracts with different companies, which resulted in delaysand probably higher prices.

Project Operations

11. The output levels of both the Cochin I project (which the Bank didnot finance) and the Cochin II project (under review) have remained well belowrated-capacity, as the following table shows:

1/ With reference to the performance of consultants selected for the NPKplant (paras. 5, 6 and 8), FACT asserts that "the basic design packagewas entirely done by the chosen firm of consultants; that the detailedengineering was done under direct supervision of expatriates from theconsultants; and that all design, engineering, procurement and construc-

tion activity on the NPK unit was closely scrutinized by the consultants'representatives both at FEDO as well as by their experts at their head-quarters at Lakeland, USA." In the circumstances, FACT feels "that it isunfair to put the responsibility for non-performance of the plant ondeficiencies arising out of FEDO's contribution to the plant." (For moredetails, see Attachment A).

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Table 1: Capacity Utilization (Percent)

Year EndingMarch 31 1976 1977 1978 1979 1980 1981

Cochin IAmmonia 47 46 46 51 54 63Urea 44 50 49 56 64 74

Cochin II (NPK)In terms of Nitrogen - - 44 64 52 37In terms of P205 - - 25 38 36 44In terms of Tonnage - - 19 22 21 -

12. Though the Cochin I project was physically completed in December1971, commercial production was not achieved for a number of years because ofdesign defects and equipment failures, particularly in the ammonia plant whichwas based on a high pressure steam system designed to minimize the plant'senergy requirements.!/. The output level of the ammonia/urea plant hasimproved recently following the implementation of a debottlenecking programincluded under the Plant Operations Improvement Program (POIP) financed by theAssociation under Credit 481-IN of June 1974. However, a number of designdeficiencies in the ammonia plant have remained, which call for modificationsparticularly difficult to implement. Moreover, frequent equipment failureshave kept actual capacity utilization down (to about 60 percent on the averagein 1980); as a result, the urea plant which has been faring relatively betterhad to be operated partly on the basis of imported ammonia.

13. FACT has experienced difficulties with each of three units installedunder the Cochin II project2 _, most particularly with the phosphoric acidand NPK plants. Because of difficulties experienced by the licensor's inabil-ity to develop the hemihydrate section of the phosphoric acid plant, the unitoperates as a conventional dihydrate one. Its operations, however, have beenfar from problem-free: in particular, a bottleneck has developed in theconcentration section of the plant (where phosphoric acid is brought to theconcentration level required in the NPK plant), where repeated failures ofrubber lining (particularly in the vacuum vessels) have led to frequent workstoppages and a shortfall in acid concentration detrimental to the operatingof the NPK plant. Reasons for the failure of rubber lining are not known.As it appears, domestic rubber technology has not progressed as required tomeet process design specifications3/. FACT is now concentrating its efforts

1/ Defective equipment included the reformed gas boilers and waste-heatrecovery system, beat exchangers and part of the ammonia synthesis unit.

2/ The cryolite plant was dropped from the project (PCR, para. 2.02).

3/ At some point, FACT used imported rubber lining; but this does notseem to have improved the situation, apparently due to installationdifficulties.

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on setting up an in-house repair team specialized in rubber work, and onintensifying its preventive maintenance procedures!/.

14. While a relatively diversified product mix was envisaged at apprais-al, marketing considerations later prompted FACT to reduce the number of NPKgrades it was to manufacture from six to three--18:46:0 (i.e., DAP), 28:28:0(a combination of DAP and urea) and 17:17:17 (a combination of DAP, urea andpotash)--and to give particular emphasis to the latter grade (17:17:17), themost favored among farmers in the South of India (due at least in part, to thestrong promotional efforts of Madras Fertilizer Ltd.), and the only one amongthe three to include potash. Producing this grade has, however, proved muchmore difficult than anticipated; in fact, for about two years, FACT was unableto produce any of it. Many of the difficulties had to do with the hygroscopicnature of this particular grade, a consequence of its containing potash which

makes handling and granulation in the humid climate of the State of Keralaparticularly difficult. Difficulties, however, were not limited to only thisgrade: over the three-year period FY78-FY80, total NPK production averagedonly 32 percent of rated capacity in terms of P2 05 and 20 percent in termsof tonnage (because of the change in product mix), the plant being unableto achieve commercial operation due to a combination of climatic factorsand desin errors attributed by the licensing company to FEDO and its con-sultants.!. However, during the first ten months of FY81, performance interms of P2 05 went up to 41% of capacity utilization and in terms of tonnageto 38%. Though this is an improvement, utilization levels remain very low(see Attachment A).

15. In mid-1979, FACT appointed a new team of consultants for assistancein debottlenecking the NPK plant. The consultants pointed to a number ofdesign defects as well as to the need to improve FACT's operating practicesand general know-how. A number of modifications have been progressivelyimplemented which have helped considerably to improve the plant's productionperformance. Because of the humidity problem, however, it does not seemlikely that FACT will ever be able to produce 17:17:17 all year long. Thecompany will thus have to shift its product mix toward the two other gradeswhich, coincidentally, will be consistent with the Government's presentpolicy..! The two grades which do not include potash will have a higher

1/ Operation of the phosphoric acid plant is not fully satisfactory from anenvironmental point of view. The cryolite plant that was intended tocontribute to the recovery of fluorides was not installed because oftechnical problems. However, fluorine emissions should not be a signif-icant problem provided the phosphoric acid plant is operated efficiently(PCR, para. 3.34).

2/ Following start-up, assistance from the licensor in solving the problemsthat prevented the commissioning of the plant was apparently ineffective.

3/ Following recent increases in the price of imported potash, GOI isdiscouraging the production of NPK grades which include it and is seekingto have potash applied directly to the soil on a selective basis.

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phosphatic content than the 17:17:17 grade and their increased production willresult in a need for more phosphoric acid than can be supplied by the presentplant.l/ FACT intends to meet any shortfall in phosphoric acid throughimports, for which a terminal is to be set up.

16. Humidity has also caused NPKs stored in bulk to be prone to caking,since no storage facility for bagged product was provided under the pro-ject. FACT's consultants indicated that, as long as FACT would not have thefacilities to bag all product directly from the plant without going into bulkstorage-2/, it could not expect to manufacture a consistently acceptable andmarketable product. The company is now considering setting up a godown forbagged product; if approved, however, construction is not expected to becompleted before the end of 1982.

Financial Performance

17. Partly reflecting the low rates of capacity utilization achieved sofar, production costs per unit of output have been very high. Table 2 belowdetails Cochin's average unit costs of production of phosphoric acid over thefirst nine months of FY81. Production costs averaged US$661/MT, far in ex-cess of the landed price of imported phosphoric acid during the same period(US$500-US$520). Low capacity utilization (55 percent) and poor operatingratios explain a large part of the difference. Much, however, is attributableto the high cost of imported rock phosphate and sulfur, which account for morethan 80 percent of total costs and a major portion of which represent freightcharges; cost projections based on improved operating ratios and on the plantoperating at 90 percent capacity indeed suggest a unit production cost stillexceeding the current landed cost of imported phosphoric acid by more than 10percent.

1/ The plant's rated capacity of 480,000 tpy is based on the assumptionthat as much as 77 percent of total production will be in the form of17:17:17.

2/ FACT's current practice is to bag fertilizers whenever trains or trucksare available for shipping.

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Table 2. Unit Costs of Production of Phosphoric Acid

At 90 percentApril-December 1980 Capacity Utilization

(Actual) (Estimate)

Operating Ratios (MT/MT)Rock phosphate 3.57 3.23Sulfur 1.03 0.95

Unit Prices (1980 US$)Rock phosphate 90 90Sulfur 168 168

Unit Costs (1980 Rupees)Rock phosphate 2,528 2,384Sulfur 1,370 1,309Other variable costs 262 262Fixed costs/a 1,263 761

Total 5,423 4,716

(US$ equivalent) (661) (575)

/a Includes depreciation and interest charges.

18. Unit costs of production have also been excessively high in theNPK plant. Aside from the high (internal) cost of phosphoric acid and lowcapacity utilization, production costs of NPKs have been affected by excessive

phosphoric acid consumption in the course of production: while the NPKproduct mix (in 1980) had an average P2 0 5 content of 27 percent and produc-tion standardsl/ suggest an average P2 0 5 consumption in production of 29percent, actual consumption amounted to as much as 37 percent. NPK production

costs should ease substantially as production increases and FACT improves its

operating practices. Table 3 below describes the impact which (i) low capa-city utilization and poor operating ratios, and (ii) high phosphoric acidcosts have had on NPK production costs. The table suggests that, assuming

appropriate operating ratios regarding phosphoric acid consumption are met andphosphoric acid is priced at the landed cost of import, NPK production costs(assuming 90 percent capacity utilization) would drop to 96 percent of the CIF

value of imports on the average.

1/ Set by the Government for each grade as a basis for calculating retention

prices.

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Table 3. NPR Unit (1980 Rs per MT) Costs of Production

18:46:0 28:28:0 17:17:17

Unit Costs of Production

April-December 1980 (actual) (A) 4,214 3,668 2,815Adjusted for cost of phosphoric acid/a (Aa) 3,437 3,140 2,469

At 90% capacity utilization/b (est.) (E) 3,196 2,747 2,057Adjusted for cost of phosphoric acid/a (Ea) 2,879 2,555 1,940

Phosphoric Acid Consumption Ratios

Actual .577 .390 .258Expected at full capacity .495 .301 .183

Unit Cost/Import Price Ratios/c (Percent)Actual (1980) (A/CIF) 144 138 139

Adjusted (Aa/CIF) 118 118 122At 90% capacity utilization (E/CIF) 109 103 101

Adjusted (Ea/CIF) 99 96 94

/a Pricing phosphoric acid at the landed cost of import (US$516 equivalent).

/b Assuming targets set by the Government for phosphoric acid consumptionare met.

/c Assuming the following CIF values of imported NPKs: $368 for 18:46:0;

$335 for 28:28:0 and $256 for 17:17:17.

19. FACT's sales revenue is based on retention prices guaranteed by the

Government and designed to guarantee a minimum return on producers' equity.

They are based on the assumption that the company is operating at 80 percent

of capacity and is meeting a number of operating ratios. Since the project

has so far met with neither of these prerequisites, retention prices have not

covered production costs fully. Losses on account of the project amounted to

Rs 22.6 million in FY80 and to Rs 17.0 million between April and and December1980 (Annex 2 to this memorandum). In comparison, the operations of the

Cochin I project were much more profitable, with surplus on operations amount-ing to Rs 53.5 million and Rs 2.6 million during the same two periods. Asidefrom Cochin I's better operating record in the past, an important factor

behind the difference in financial standing between the two projects is to be

found in the far larger freight charges incurred on account of NPK products

compared to urea. Because FACT was not able to produce the most favored

17:17:17 as easily as it would have liked, it has had to turn to grades whichit has had to sell sometimes at a great distance; freight expenses on NPKs

averaged Rs 177/MT (US$22 equivalent) between April and December 1980, almost

twice as much as those on urea.

- 10 -

20. The PCR discusses FACT's overall financial performance (paras. 5.01

to 5.03). Fiscal year 1980 was the first profitable year for the company,following a long string of losses dating back to before the project and causedby the late commissioning of the Cochin I and II projects and the low rates of

capacity utilization of FACT's existing plants at Udyogamandal; as of March31, 1980, accumulated losses amounted to Rs 553.9 million (US$67.6 millionequivalent), about twice the company's share capital at the time of appraisal.

Thanks to continued inflow of Government funds, FACT's financial structure hasremained satisfactory and the company was able, with the exception of fiscalyears 1976 and 1977, to meet the financial covenants of the loan agreement.FACT's most recent balance sheets and income statements are shown in Annexes 3

and 4 to this memorandum.

Conclusions

21. The product mix originally envisaged for the project consisted ofsix grades covering a wide range of NPK ratios. These reflected recommen-

dations made at that time by the State of Kerala and other surrounding States

for use on various crops; for this reason, they paralleled the composition of

lower analysis (dry) mixtures (of ammonium sulfate, superphosphate and muriateof potash) traditionally used by farmers in the area. In line with specific

soil requirements in the South of India, four out of the six grades initially

identified for production included potash1 '. To introduce and popularizethe new grades and prepare its marketing organization to handle the increased

volume of sales, FACT was expected at appraisal to undertake a comprehensiveseeding program. The program was to cover a period of three years and involvethe marketing of approximately 400,000 tons of fertilizers in various imported

grades conforming as closely as possible to those that had been selected.

22. The grades FACT intended to produce are not commonly manufacturedabroad. In general (e.g., in the US), complex fertilizers include N and Pnutrients only, potash being added at farm site.!/ As a result, FACT wasunable to procure the amount of granulated NPKs that was contemplated atappraisal. The introduction of high-analysis complex fertilizers (to bedistinguished from the widely known dry mixtures with identical NP or NPKratios but lower analysis) is to be credited to the efforts of two firmswhich set up NPK plants before FACT: Coromandel Fertilisers Ltd (CFL),located in Andhra Pradesh, which started producing (mostly) UAP (28:28:0) in

1/ In 1978/79, the average use of potash in the South of India was 7.3kg/ha, compared to 3.4 kg/ha for the country as a whole, the Southregion accounting for 43 percent of national consumption. Reflecting

this regional concentration, the headquarters of the Potash MarketingOrganization are located in Madras.

2/ As noted in paragraph 15, this practice is now being encouraged in India

by GOI.

- 11 -

1971, and Madras Fertilisers Ltd (MFL), which started producing NPKs (usingimported phosphoric acid) in 1971/72. Like FACT, MFL initially intended toproduce a wide variety of NP grades but, no doubt for a combination of pro-duction and marketing-related factors, quickly decided to concentrate itsproduction on 17:17:17, a 1:1:1 NPK ratio being recommended for basal appli-cation on many of the important crops in the area.

23. When FACT's NPK plant started production in 1977, consumptionpatterns were already well-established; owing to MFL's marketing efforts,17:17:17 had gained favor among farmers in the South of India, while a marketfor 28:28:0 had been developed in Andhra Pradesh by CFL. In the circum-stances, FACT faced strong market constraints in deciding on its product mixand found it impracticable to produce the large number of grades it had listed

at appraisal. Although this was not recognized at the time of appraisal, con-

centrating on a few grades had the advantage of minimizing the productionlosses that result from switching from one grade to another.

24. Producing 17:17:17 became rapidly FACT's major objective, andthe company's inability to do so for a number of years badly affected itsfinancial position as well as the confidence it had in its operational capa-bility. The limited use of NPKs in most countries!/ (where greater relianceis placed on the farmer's ability to identify his particular nutrient require-

ments) partly explains -the absence of any significant development of NPKgranulation technology and the paucity of companies that quoted for thiscomponent of the project. The company chosen to provide the basic design of

the NPK plant had wide experience in N-P granulation abroad, rather thanin India. It was also involved at the time in setting up Coromandel Fer-tilizers' NPK plant; thLs plant, however, has so far produced mostly UAP(28:28:0) with very limited amounts of NPKs (i.e. grades featuring potash).

25. Not all problems in the NPK plant originated from the difficultyof managing the addition of potash to a urea/MAP/DAP mix in a very humidenvironment. Indeed for a number of years, the plant was not running well for

the other two (NP) grades. Errors in process assumptions!/, flaws in thedesign prepared by FEDO and the company's poor operational practices arealso reflected in the project's poor production record. These in turn arerelated to FACT's ineffective use of its consultants in the past, as are alsoto the uneven quality of the services provided. The productive relationshipthe company has developed with its new team of technical advisors suggeststhat its approach to problem solving has undergone substantial changes overthe years.

1/ I.e., NPKs based on DAP technology as in Cochin; most of NPKs producedin Western Europe are based on nitro-phosphates.

2/ The plant was based on a different process from that used for theN-P granutation plant in Coromandel, which seems to be working well.

- 12 -

26. Despite the severe implementation problems and the attendant finan-

cial drain, the project has had a very beneficial impact on FACT as an insti-

tution. A comprehensive management information system has been introduced,which permits an effective monitoring of plant operations. FEDO has also

gained much from its experience as project contractor, even though difficul-

ties with the project testify that the need for specific external assistance

identified at appraisal was real. Modifications to the NPK plant are nowalmost completed and production has already shown signs of picking up. FACT

expects to run one of the two streams of the NPK plant alternatively on

17:17:17 and 28:28:0, and the other one on DAP (which will have to be marketed

at greater distances). The revised product mix results in phosphoric acid

requirements in excess of the Company's own production capacity; the dif-

ference will have to be covered through imports for which a terminal is to be

set up. Domestic production of phosphoric acid has proved the weakest link in

the project; the prohibitive landed cost of imported sulfur and rock phosphatemakes it impossible for FACT to compete with imported phosphoric acid, which

producers at mine site are able to process on the basis of low-grade rock.

This points to the evolving scene of fertilizer trade, where nutrients are

increasingly traded in intermediate form because of rising freight charges(which now accounts for about half the landed cost of rock phosphate). The

appraisal of the project, however, preceded the price explosion in freight

charges that took place after the oil crisis; at the time, the market for

phosphoric acid was also little developed. Given the various adverse develop-

ments already described in this memorandum, such as the various managerial and

technological problems which confronted FACT in implementing the project, it

appears, in retrospect, that a more modest approach to capacity expansion

would have been preferable.

27. Though the frequency of Bank supervision missions was quite high

and the array of issues identified, the nature of the difficulties was such

that the Bank could not exercise any substantial influence on the course of

events. Despite the difficulties encountered, which resulted in higher

capital costs, delays in completion and slow production build-up, the project

still shows a satisfactory economic rate of return of 14 percent, owing mostly

to higher output prices. The lessons learned from the project are appropri-

ately summarized in the PCR (para. 7.12). They relate to (i) the company's

management capability; (ii) its use of consultants; (iii) the selection

of production processes; and (iv) the development of domestic engineeringcapability.

- 13 -

ANNEX 1



PRODUCTION(Thousand Tons)

Apr. 1980-Year Ending March 31, 1976 1977 1978 1979 1980 Jan. 1981

Cochin I

Ammonia 92.4 90.7 91.5 100.1 107.9 98.4Urea 146.6 165.5 161.8 186.0 212.0 195.5

Cochin.II

Sulfuric Acid - - 141.7 171.2 150.3 188.7Phosphoric Acid - - 38.7 52.2 49.5 53.418:46:0 (DAP) - - 40.5 57.7 71.9 28.228:28:0 - - 17.8 42.8 27.5 45.917:17:17 (NPK) - - 31.0 2.7 - 81.1Total P205 - - 28.9 39.0 40.8 39.6

TINIT COSTS OF PRODUCTION IN 1979/80(Rs per MT)

COCHIN I COCHIN IISulfuric Phosphoric DAP NPK

Ammonia Urea Acid Acid 18:46 28:28:0 17:17:17

1979/80

Variable costs 968.0 952.6 384.8 3,506.3 2,460.4 1,960.6 -Fixed costs 673.9 634.1 204.1 1,427.5 1,292.8 1,059.3

Total/a 1,641.9 1,586.7 588.9 4,933.8 3,753.2 3,019.9 -

April-Dec. 1980

Variable costs 1,380.6 1,223.2 465.7 4,159.9 3,125.5 2,815.4 2,130.1Fixed costs 689.4 624.9 155.3 1,263.3 1,088.6 853.0 685.4

Total/a 2,070.0 1,848.0 620.9 5,423.2 4,214.1 3,668.4 2,815.5

/a Ex-factory costs not including excise duty.

- 14 -

ANNEX 2



COCHIN II PROJECT -- INCOME STATEMENTS('000 Rs)

April-Dec.

Year Ending March 31, 1980 1980

Sales revenue (including Government transfers) 329,230 405,462

Other income 1,114 20,101

Total income 330344 425,563

Raw materials 201,750 301,842

Packing materials 9,959 14,343

Others 22,033 18,179

Change in stock (3,309) -

Total variable costs 230,433 334,364

Salaries and wages 9,311 8,379

Other production expenses 7,269 19,325

Repairs and maintenance 20,900 6,957

Administrative expenses 5,273 5,139

Interest charges 34,641 31,471

Deferred revenue expenditures 10,225 7,668

Total fixed costs 87,619 78,939

Total costs 318,052 413,503

Cash surplus 12,292 12,060

Less depreciation 34,887 29,000

Surplus (deficit) (22,595) (16,940)

- 15 -

ANNEX 3



FACT -- INCOME STATEMENTS

('000 Rs)

Year Ending March 31, 1979 1980

Sales revenue 627,998 910,940Subsidy from Government 135,520 431,108Other income 72,963 77,786

Total income 836,481 1,419,834

Raw materials 272,574 525,338Salaries and wages 84,357 101,465Repairs and maintenance 43,529 71,418Power and fuel 89,128 108,327Other manufacturing and sales expenses 194,680 298,222Depreciation 70,852 107,318

Other expenses 73,452 111,333

Operating profit 7,909 96,413

Interest payment 63,325 89,922

Net profit (loss) (55,418) 6,491

- 16 -

ANNEX 4


INDIA--COCHIN II FERTILIZER PROJECT

(CREDIT 264-IN)

FACT -- BALANCE SHEETS('000 Rs)

As of March 31, 1979 1980

Assets

Current assets 668,350 770,486

Fixed assets (net) 499,320 823,024

Plants under construction 525,275 65,817

Investments 3,614 3,600

Capitalized expenditures 1,103 41,743

Total assets 1,697,662 1,704,671

Liabilities

Current liabilities and provisions 207,572 253,798

Long-term loans 828,070 772,363

Share capital 1,222,120 1,232,120

Reserves 264 264

Retained earnings (560,365) (553,874)

Total liabilities 1,697,662 1,704,671

- 17 -

ATTACHMENT A

COMMENTS RECEIVED FROM BORROWER

COAMENTS UN PACJEOT PEdua 3CE AUDIT AuEPu.T oL- COCHI PrASE II (CEDIT 264-IN)

Page 3 para 4 (Item iii):

Changes FACT have suggested am6ndment of the figure of 400,000md in tpy to 465,000'faetric tons per year of N1K product as

para. 4. the figure for the planned capacity of the Cochin Phase 1i

plant. This figure was arrived at on the oasis of 300 streaI, days

per year operation and producticn rates per train varying

from 4,0 metric tons to 46.2 metric tons per hour, depending

upon the product formulation.,

Page 4 para 6:

The year in which IACT was incorporated as a private

company was 1943 and not 1948 as stated in line No,5.

Comments rt. ahoice of consultants for U.PK plant:

Coments in the report on the choice of consultants

for the NPX plant apparently do not follow a consistent

line of arguments. On the one hand, it is stated that

the consultant chosen is the,saiae as the one that supplied

the 1PK plailt to Coromandel fertilizers whose plant appears

to have been working very satisfactorily on production of

&4NFL gradeS based on use of urea and Potash together. At

Incorporated the sa:,q tiae, it is said t?iat the same com,iany while it

in substance had substantial exV erience only on NP granulation, hadin PPAN,paa.8, none on NPX foraulations with urea, and hence their designs,para. 8, ne

footnote 1. in so far as FACT plant is concerned did not work properly.

4hile the.CFL's plant was done under consultants cofplete

responsib-ility, in the o~e in Cochir the consultant shared

the work with FEDG. By inference, it is taken that iuu 's

association is partly responsible for the failings rGted

It is ACT 's ccntention that the basic design package was

entirely done br the chosen firm of ccnsultants; that the

detailed engineering was done unaer direct supervision of

expatriat,'s from the consultants; and that all design,

ergineering, procure:.ent and curstructin activity on the

'PKunit was closel, scrutinised by the consultant's

representatives bc.th at PSu as well as by their experts

at their headquarters at Lakelad, USA. In the circustaiccs

- 18 -

they feel that it is unfair to put the responsibility for

non-performance of the plant on deficiencies arising out of

FEDU's contribution to the plant.

Page 6. para 10:

FACT indicate that even before the project was approved, the

Bank had accepted their suggestion for the equipment supplies

being broken down to 80 packages instead of 20 stipulated

earlier. They stated that even with these smaller packages*t

very few firms responded in full to the enquires; herce, even

these smaller packages had to be further sub-divided while

Changes placing orders.made inpara. 10 As for the local contracts, no provision had been builtof PPM.

o into them for price escalations. When the chosen contractors

failed to proceed on the basis of original terms of contract,

FACT had no option except to terminate the contract and negotiate

and award fresh ones with other parties for completion. It is,

however, admitted that this process did-tuke up additional

ti.-e, though from the point of view of public accountability,

FACT could hot help following such a course of action.

Page 9. para 14:

As supplementary information to the performance figures

Incorpor- given in the report for the FY 197 tQ 19C0, FACT has indicatedated in that during the fiist 10 months of FY 1981, the perfor:aance inPPAM,para. 14. terms of P205 -has gone up to 41% of capacity utilisation and

in terms of tonnage of product to 38. This is an i4provement

over the figures quorpd in the report. It is admitted that

even these figures are low and perhaps could have been improved upon,

but for the fact that during the period, seieral trial runs and

adjustment. had to be done to tune up the plant and improve upon

its previous performance in the light of the new constltant's

recommendations.

Page 13 para 19:

Changes Fror 1.4.1979, onwards, on the basis of a review of thema in pricing calculations, FACT has been allowed a higher subsidy

para. 19. on product pricing. Hence, tine operating loss iagure for Cochin

.Divn Phase II given in the report has to be altered as follows:

1s.22. 6 million in financial year 19bO

;s 16.94 million.from April to Decem; ber 19b0.

- 19 -

Changes A 8lght correction in the report in regard tomade inPPAM, commerce.,ent of production of !PE products is needed withpara. 22." reference to Ma'ras Ferts. Ltd. N2K prcductior there

commenced in the yeat 1971-72 and not in 1979.Annexure I page 19:

There are certain aritlh.etical/typographical errors

which will have to be corrected as follows:

Changes 1979-80 unit cost of production for urea:made in The total cost should be Rs.1566.70 per metric ton.PPAM,AEX 1. For the April-December 19b0 figures, the fixed

cost under sulphuric acid should ue Rs.155.29 per

.netric tor and total cost for 17:17:17 product

shculd 'be Rs.2815.50.

Annexure 1 , Ta-6 20:

The following correcticns/substitutiors iay be

incorporated for the figures given for Cochin II Project:-

inc2-ie jtatements:

Year erdin- Aarch '1, 190 April-Dece-.ber 19L0

Changes sales Revenue 329,230 405,462made inPPAM, Total inco!e 330,344 425,563ANNEX 2.

ut-iers -- 13,179

Cash Surplus 12,292 12,060

Deficit 22,595 16,940

- 20 -ATTACHMENT B

PROJECT COMPLETION REPORT

INDIA

COCHIN II FERTILIZER PROJECT

I. INDIA'S FERTILIZER INDUSTRY 1/

A. Bank Group Involvement

1.01 The Indian fertilizer industry was still in its early stages of

growth when in 1967 the Bank Group first became involved to assist in its

further development. During the last 10 years, there have been significant

developments within the industry and the Government's approach to it and the

Bank Group has been associated with many of them. The first two Bank Group

operations in the industry were in the private sector with an IFC investment

of US$11.5 million in 1967 to the Indian Explosives Company Limited (a sub-sidiary of Imperial Chemical Industries, of the U.K.) to finance a urea

project and another IFC investment of US$18.9 million in 1969 in the Zuari-

Agro Company Limited (an affiliate of U.S. Steel Agrochemicals) to produceurea and complex fertilizers. Since then there have been eight other

operations - six by IDA and two by IBRD. Of them, six financed additions tocapacity of existing plants and one assisted the removal of production bottle-

necks by increasing capacity utilization of eight public, joint and private

sector fertilizer companies (para. 1.07). IBRD's first operation, approved in1974, financed a new urea plant of IFFCO, a company jointly owned by the

farmers' cooperatives and the Government. Bank Group financial support to theIndian fertilizer industry to date totals about US$473 million. Annex 1lists the fertilizer projects financed to date by the Bank Group in Indiaand their current status.

B. Industry's Development

1.02 Chemical fertilizer production in India, as a modern industry,began shortly after independence in 1947 as part of the Government's programto make the country self-sufficient in food supply. Government policies

vigorously promoted expansion of the industry. Initially this was done via

the public, private, joint state and private, and cooperative sectors, but

subsequently, emphasis shifted to the public sector primarily through related

policies such as pricing, allocations of foreign exchange, restrictions on

profits and foreign participations. Although the Government sanctioned many

new projects, actual capacity expansion through the late 1960's was slow and

capacity sizes of plants were relatively small (below 200 tpd on the average).

A philosophy of maximum indigenous input in all phases of the expansion,including engineering and fabrication, often resulted in considerable com-

pletion delays, excessive cost overruns and commissioning difficulties,largely because of the inexperience of the local entities with projects that

were large and complex relative to then available capabilities. Poor per-formance, underutilization of capacity and low nutrient content of product mix

were also major features of the industry.

1/ This chapter is verbatim from the Nangal Fertilizer Project Completion

ReDort (Auzust 31. 1979).

- 21 -

1.03 In 1967, when the Bank Group became involved with the industry,total installed capacity of nitrogen (N) and phosphates (P205) was about785,000 tpy. A decade later (1977) it was about 3.7 million, or four times asmuch and is expected to double again to about 7.7 million tpy by 1983, whenall the projects, now under construction or planning are scheduled to becompleted. While low-nutrient products such as ammonium sulphate (20.5% N),calcium ammonium nitrate (20.5% N) and single superphosphate (16% P 0 )formed about three-fourths of the nutrient capacity in 1967, most of the newercapacity has been for the production of urea (46% N) and complex fertilizers.At the same time, Indian plant designs have followed closely developmentselsewhere. Ammonia plant sizes have increased from below 200 tpd in 1967 to900 tpd for plants now being commissioned. A 1,100 tpd naphtha-based ammoniaplant is already in operation and four gas-based plants with capacities of1,350 tpd each are planned. The feedstock pattern for ammonia production,which emphasized the use of naphtha in the late 1960s, has been diversified toinclude fuel oil, natural gas and coal, with the objective of reducing thecountry's petroleum import bill and of more fully reflecting its resourcebase. Present expansion plans are based on natural gas from Assam and therecently-discovered Bombay High Bassein offshore field. In terms of operatingefficiency, average capacity utilization, a major problem in the past, hasincreased to about 73% by 1977 including plants that had recently come onstream and others--mostly of an early vintage--with low utilization. Localcapabilities developed in the fields of design, engineering, construction,equipment fabrication and project implementation have helped to reduce theforeign exchange share of project costs, even though there have been delaysand cost overruns in some earlier projects. With a total employment of over60,000 persons in Indian fertilizer plants, the industry has developed a largepool of trained and experienced manpower especially in the middle managerialand supervisory levels. Pricing policy for nitrogenous fertilizers wasrevised in 1977 to improve ex-factory prices, especially for the more recenthigher cost plants, though these prices are still not adequate to attract muchlocal private sector investment or foreign equity participation.

C. Public Sector

1.04 The public sector has taken an increasing role in fertilizer produc-tion. In 1978/79, about 49% of the total installed nitrogen capacity of 3.3million tons per year (tpy) was in the public sector and about 0.2 million tpyin the cooperative sector. Including the cooperative and joint sector capa-city of 1.03 million tpy, the public sector directly or indirectly accountsfor about 81% of the domestic nitrogen capacity and the share is expected toincrease further to about 90% by 1984/85. The large public sector expansionprogram had mainly been implemented through the Fertilizer Corporation ofIndia (FCI) and the National Fertilizers Ltd. (NFL).

1.05 Four of the 11 public sector plants (Nangal, Trombay, Gorakhpur andNamrup) have generally shown satisfactory capacity utilization rates equal toor better than plants in the private sector, though production at even theseplants has at times suffered due to periodic power supply and transportproblems (Annex 2). The original plant at Sindri also showed satisfactory

- 22 -

performance until the mid-1970's when the age of the facilities and diffi-culties in obtaining continued supplies of quality raw materials combined tolimit production. The overall unsatisfactory capacity utilization in thepublic sector plants, occurring during a period of substantial expansion, canin part be attributed to the managerial limitation of FCI, which has led toits restructuring (para. 1.08). Perhaps, more importantly, there were severetechnical problems during the commissioning of the new plants (e.g., NangalExpansion, Sindri Rationalization, etc.) and continuing operating problems atthe five older plants (Cochin I, Durgapur, Udyogamandal, Rourkels and Neyveli).Design defects have affected certain of these plants and the foreign firms,where involved, have moved in to rectify these deficiencies. Other problems,however, have resulted from a specific policy of using indigenous resourcesleading to maximum employment of local engineering and locally-suppliedequipment in a technologically-difficult industry. Experience has modifiedthis policy but resolving the resulting technical problems through redesign,replacement and "debottlenecking" programs, has taken time, while problemsrelated to raw materials supply, power, etc. have also, in some cases, con-strained operations.

1.06 Problems affecting the performance of the public sector fertilizerplants were studied by a Government committee in 1978 and several remedialmeasures recommended. Its recommendations, including those for plant modi-fications and better planning of preventive maintenance, have been adopted.The full impact of these efforts should be reflected in higher capacityutilization gradually during the next two years.

1.07 The Bank has also assisted the Government efforts to improve fer-tilizer production. As part of the Trombay IV Project (Credit 481-IN) acredit of US$17 million was made available to revamp the Durgapur and Cochin Iplants. Further, the Fertilizer Industry Credit of US$105 million, approvedin 1975, was specifically designed to improve capacity utilization of theIndian fertilizer industry. The Credit covered a large number of sub-projectsinvolving 11 plants. Since none of these IDA-financed facilities wereoperational before 1977/78, their beneficial effect on capacity utilizationhas not yet been fully felt.

1.08 In 1977/78, FCI, the largest public sector fertilizer company, hadan installed capacity of 0.92 million tpy of nitrogen (30% of the total in thecountry) and another 1.25 million tpy was under construction. As a result ofthe rapid expansion of FCI during the 1970's, management capabilities of FCIwere overstretched. During the past few years, the Government and the Bankhave been discussing the need for decentralized decision-making in FCI. As afirst step, to improve the organization of the public sector industry andthereby its performance, in 1975 the Government formed a new public sectorcompany -- National Fertilizers Ltd. (NFL) to implement the Bhatinda andPanipat Projects. This approach was successful and a scheme for furtherrestructing the public sector fertilizer units was evolved during 1976-77 andformally announced in January 1978. This scheme regroups the units earliermanaged by FCI and NFL into four separate geographically-oriented companies.The Nangal Project along with the Bhatinda and Panipat Projects are now underthe NFL. The remaining plants and related marketing activities have beenassigned to the other three regional companies--the Rashtriya Chemicals and

- 23 -

Fertilizers Ltd. (West), Hindustan Chemicals and Fertilizers Ltd. (East), andFCI (Central). The erstwhile Planning and Development Division of FCI hasbecome an independent company -- Fertilizer (Planning and Development) IndiaLtd. (FPDIL). The new companies were legally formed in April 1978. The aboverestructuring is expected to improve delegation of responsibility and authorityto the unit/project level and thus ensure better performance. 1/

II. PROJECT IDENTIFICATION AND APPRAISAL

A. Project History

2.01 A phosphate-based fertilizer project at Cochin was first proposedin 1967, following the Government of India (GOI) approval of the urea complex(Cochin I) of Fertilisers and Chemicals, Travancore, Ltd. (FACT) a publicsector company. The original project idea was based on elemental phosphorus,emphasizing need to conserve use of imported sulfur and based on (at that time)low cost hydroelectric power. However, it was not approved by GOI. FollowingBank fertilizer/sector project identification missions to India in the late1960's, a revised Cochin II phosphate project was again considered. In 1969,in consultation with Bank staff, FACT evaluated alternatives based on (i)elemental phosphorus; (ii) imported phosphoric acid, and (iii) imported phos-phate rock and sulfur; all- cases with a capacity of 115,000 TPY P205 as NPKfertilizer. Under conditions prevailing in 1969/70, case (iii) gave the bestresults and subsequently FACT prepared a detailed feasibility report by late1970. This feasibility report was the basis of Bank appraisal missions toIndia in December 1970 and March 1971. The project was approved for an IDACredit of US$20 million in July 1971.

2.02 Originally, the proposed project included production of ammoniumsulfate from gypsum (150,000 TPY) and cryolite (7,500 TPY). The Bank'sanalysis showed ammonium sulfate to be marginally uneconomic (in 1969/70conditions) and this part was dropped prior to IDA's approval. Cryolite(a fluoride salt recovery from phosphoric acid manufacture) was to be basedon FACT technology. It was later dropped from the project by FACT due toproblems in scaling up the technology.

B. Project Scope and Objectives

2.03 The Cochin II project includes production facilities for:

Sulfuric Acid Unit - 330,000 TPY in one trainPhosphoric Acid Unit - 115,000 TPY in one trainNPK Granulation Unit - 480,000 TPY in two trains 2/

1/ FACT and FEDO were not involved in the FCI restructuring.

2/ NPK production rate is based on 250 days per year operation (para 5.04).

- 24 -

plus raw material storage and handling at Cochin port and at site, productstorage and handling at site, and facilities for required utilities. Rawmaterial requirements (at full production) are: ammonia (46,000 TPY), phos-phate rock (345,000 TPY), sulfur (105,000 TPY) and potash (115,000 TPY), allof which are imported; plus urea (130,000 TPY) from Cochin I.

2.04 The project is located at Ambalamedu, adjacent to FACT's Cochin Iproject (a 600 TPD naphtha-based ammonia and 2,000 TPD urea integrated com-plex) which is about 30 kilometers from Cochin port. The site is also adja-cent to the Cochin refinery, which supplies petroleum feedstock and fuel toFACT. A waterway connects the site with the port and the project includedbarge transport of the imported raw materials to the site (the necessarydredging has not yet been completed). Ambalamedu is about 25 km fromUdyogamandal, the site of FACT's long established fertilizer production unitand its principal offices including FEDO (FACT's engineering division).

2.05 The principal NPK grades to be manufactured in Cochin II include:

17-17-17 370,000 TPY28-28-0 80,000 TPY18-46-0 (DAP) 30,000 TPY

Total 480,000 TPY I/

At appraisal, a total of six grades were proposed (para 4.01). But marketdevelopment by FACT and other producers in South India has led to 17-17-17and 28-28-0, being, by far, the most popular grades. The reduction innumber of grades represents, in general, a slight improvement in productionefficiency since less time is lost in changing grades during production andproduct storage is simplified.

III. PROJECT MANAGEMENT AND IMPLEMENTATION

A. Project Management

3.01 During appraisal, FACT management and the project implementationarrangements appeared adequate. FEDO and the Company were wellstaffed and had a good reputation in the international fertilizer industry.The project had active Central Government support. (The Managing Directorwas a Senior Civil Servant seconded to FACT and the technical advisor in theMinistry of Chemicals and Fertilizers was the former FACT General Manager).FEDO had selected a project scope based on proven technologies, incorporatingeconomic plant sizes within commercially proven limits and from selectedlicensors of excellent reputation and had also (reluctantly) agreed to employ

1/ Total represents a slight change from appraisal (485,000 TPY) due tochange in product grades. Total, expressed in nutrient content, is

unchanged.

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additional, experienced consultants. FACT's Managing Director was an activeand strong (although controversial) manager and was leading a coherent andcompetent management team. Thus, with all these pluses, Bank staff had no

difficulty in giving the project management and implementation arrangements

its endorsement.

3.02 Given the policy of GOI to build up local project management capa-bilities, the Bank's appraisal team accepted FEDO as the managing contractorfor the project, provided that sufficient assistance would be obtained from

the contractors for the three main technology components - Phosphoric acid

unit - Sulfuric acid unit and NPK unit. FEDO selected three internationally

experienced firms to provide the basic engineering process technology packages

for each of these components and agreed to employ three experienced project

engineering consultants. FEDO had never successfully executed such a large

project and the limited experience of FEDO was recognized by the appraisalteam. But with the assistance as envisaged above the arrangements were

thought to be sufficient. The appraisal team recognized the managementlimitations in FACT as well as in FEDO, but clearly did not anticipate themagnitude of the management problems increasingly faced by the company during1971 and later.

3.03 FACT's Managing Director was replaced shortly after appraisal.The replacement, with substantial industrial management experience both in

private and public sector including over 10 years in FCI, had a good record

of achievements and appeared to be competent. But he apparently never enjoyedthe confidence of the management staff and workers at FACT. During 1971,

FEDO also lost key staff including several senior managers due to deaths and

resignations and was unable to replace them with experienced persons from

outside the Company. As a result, FACT could not complete and commission the

on-going Cochin I project until well beyond its target budget and commission-

ing date. 1/ Also, for a number of reasons, including inadequate productpricing and poor production levels, the Company's operations and profitabilitywere poor during most of the 1970's. In addition, the local political situa-tion in Kerala and difficult labor relations resulted in poor morale andincreased inefficiency during the Cochin II project execution period. FEDO

had a strong feeling of its own technical capability, and did not recognizeits deficiencies and the needed remedial measures. As a result the expatriateconsultants were virtually ignored and the licensors/ contractors were not

used fully and effectively. FACT and FEDO were largely uncommunicative withthe Bank. Even during the supervision missions problems and difficulties were

not volunteered until well after the facts were obvious.

1/ Cochin I still operates at only 60% of its capacity.

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3.04 Location of the Corporate Management close to the project site andlack of confidence between the Corporate Management and the project staffresulted in concentration of decision making with the Managing Director whorequired a large volume of details and clarifications before taking decisionswhich caused delays. Also during this period (following the death of theformer FACT manager who was in the Ministry of Chemicals and Fertilizers) theCentral Government as the ultimate owner did not appear to provide any appre-ciable active support to project execution (since apparently GOI was also notfully aware of the project's implementation problems). This situation was insharp contrast to the GOI support to all the other Bank/IDA financed fertilizerprojects that were proceeding simultaneously.

3.05 While the Government did provide funds to FACT there was littleother support and action to resolve the fundamental management changes andcritical decisions facing the project during 1973-75. Physical distance fromDelhi and the limited project technical staff travel to Delhi created a largeinformation gap caused by the inadequate reporting system. During 1972-1976,to our knowledge, the Cochin factory (I and II) was supervised only threetimes by the Ministry of Chemicals and Fertilizer technical staff. 1/

3.06 The expatriate engineering advisors were seen and referred to byFEDO as "World Bank experts", placed there by the Bank as a requirement forthe IDA credit. If Bank staff had conducted larger, more frequent missionsand become intensively involved in the day-to-day work, which is well beyondthe Bank's resources, the Bank could possibly have caused these consultantsto be used more effectively, and may have been able to identify the managementproblems sooner. But it is highly unlikely that increased supervision wouldhave shortened completion time or caused more fertilizer to have been producedsince commissioning. In its internal problem project review system the Bank'smanagement reviewed the situation and on several occasions problems, such asunderutilization of consultants, were brought to the attention of FACT manage-ment and to GOI officials, but with no discernible results. FACT/FEDO wererepeatedly requested to bring out any problems but such attempts usuallybrought only requests for Bank assistance in procurement or expediting oforders already placed.

B. Analysis of Project Schedule

3.07 Thus, in the above described environment, it is not surprisingthat the project schedule slipped badly. IDA's appraisal report indicated aschedule of 33 months from project start in July 1971 to mechanical completionin March 1974. In practice, the official project start date was December

1/ A senior official of the Ministry was on the FACT Board of Directors andattended most of the Board meetings which occurred about 3-4 times a

year. However, this approach apparently did not result in improvedcommunications with the GOI.

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1971 1/ and mechanical completion 2/ was July 1976, an elapsed period of 55months, ignoring the initial 5 months delay in project start. The projectimplementation schedule is shown in Annex 3.

3.08 The initial 5 months' delay in starting as reported by FEDO was dueto an apparent misunderstanding between IDA, GOI and FACT. GOI apparently didnot release sufficient foreign exchange (for all license payments) untilDecember, 1971; after Credit effectiveness. This delay was in spite ofassurances given by GOI during negotiations that the project would start assoon as Credit approval (July, 1971) and by IDA that all expenditures fromMay, 1971 were eligible for IDA disbursements (or reimbursements). Duringthis period FEDO (without consulting IDA) made several minor changes inprocess technology (for the better) in consultation with the sulfuric andphosphoric acid technical licensors, but in doing so delayed project start.

3.09 Assigning causes for delay to individual functions or entities isdifficult due to the complex interaction of the many events in implementingsuch a project, and because some delays tend to overlap. The table below isan estimate of the various delays with the "combined" delays taken from FEDO'sanalysis and the "individual" delays being an approximate assessment made bythe completion mission staff.

FACT - COCHIN II PROJECT DELAYS(months)

DelayActivity Individual Combined

Engineering 6 6Procurement 9-12 6Civil Works 9-12 4Erection 4-6 3Labor Strike 3 3

Total - 22

3.10 Engineering delays were 3 months for NPK design changes and 3 monthsfor delay in receipt of equipment vendor drawings. By closer coordinationwith the NPK process contractor and diligent expediting of procurement withsuppliers these delays would have been reduced by more efficient projectmanagement.

3.11 Procurement delays were due to slow placement of tenders, limitedresponse in international bidding, which in some cases required rebidding.Most of the foreign procurement was initiated prior to the late-1973 oil

1/ Work by the NPK contractor actually started by August 1971, four monthsearlier than FEDO's official date.

2/ Mechanical completion is defined as substantial completion of work onall major units in the project.

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crisis, which adversely affected procurement in other Bank projects. Thus,Cochin II escaped most of the delays and unusual price increases that manyprojects suffered in 1974/75. During 1972/73, most equipment suppliersworldwide were not heavily booked, therefore this factor does not explaindelays. While project management inefficiency was the major cause, an attemptby IDA to persuade FEDO to group equipment into about 20 large packages mayhave also caused problems. For such chemical engineering industries as inthis case, equipment is usually purchased directly from highly specializedfirms, tending to generate many smaller packages. Small size of packagescombined with FEDO's very limited international procurement experience mayhave caused many international equipment suppliers, not to participate. Insubsequent projects, we have opted to permit the project sponsor/engineeringcontractors to group equipment together following sound engineering practiceand this problem has been largely eliminated. We also required FACT toadvertise procurement in 14 foreign journals plus Indian publications. Thislist was excessive, time consuming, and largely unproductive (but did notcontribute to delays). In subsequent projects we have used a smaller list,plus the UN Development Forum and also relied on the engineering contractorplus previous projects, to generate an internationally representative vendorlist. This more recent practice has proved much more satisfactory.

3.12 Civil Works delays are not uncommon in Kerala, given the heavymonsoon seasons and often intractable labor unions and practices. An effi-cient project management system attempts to schedule around the monsoon seasonand must cooperate (and compromise) with sub-contractors. Several civil workscontractors apparently underbid (and/or understaffed) their sub-projects.Rather than affecting a compromise with the firms, the then Managing Director,after some delay, cancelled several civil contracts and required new con-tractors to be obtained without regard to consequent completion delays. Laborpractices in Kerala were also a factor. Unemployment is a chronic problem,thus there is a larger than usual tendency to "stretch out" a job.

3.13 Erection delays were not particularly critical and were caused byinsufficient modern construction equipment and inexperienced local contractorsfor the extensive rubber-lining work in the phosphoric acid plant. Thesedelays could have been avoided by the timely purchase or lease of additionalconstruction equipment and the use of an expatriate, experienced rubber-liningcontractor, as well as more efficient construction management on the part ofFEDO.

3.14 Labor problems are not infrequent in Kerala. During construction,there was one long strike which stopped work at the site for a period of threemonths, in addition to the continual inefficiency described above.

3.15 A reasonably efficient and aggressive project management systemwith adequate input from experienced contracting firms would have been ableto attain mechanical completion in 12-18 months less than that achieved. Inretrospect, given the general prevailing conditions in Kerala during this

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period, a more realistic assessment of project schedule would have been about36 months (rather than the appraisal estimate of 33 months which is valid foran expansion site under more normal conditions). Delays in foreign procurementof about 4 months (net) could be attributed to foreign vendors. The balanceof the delay must be attributed to the generally inadequate corporate manage-ment and project management.

C. Analysis of Project Costs

3.16 Total installed cost of the project was estimated during appraisalat Rs 304 million (US$40.5 million) with working capital and interest duringconstruction bringing estimated total financing required to Rs 380 million(US$50.7 million). Appraisal estimates were based on FEDO estimates preparedin collaboration with the project's process engineering firms. The appraisalteam provided 10% contingency to cover both price escalation and physical con-tingencies. 1/ A comparison of the appraisal cost estimates with the actualcosts are shown below:

1/ The appraisal engineer had only recently joined the Bank staff from afertilizer engineering company with 12 years experience in the same tech-nology as in the Cochin II project. The FEDO estimates were higher thanestimates for similar projects from his experience.

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FACT - Cochin II Project

Summary of Capital Costs(In million Rupees)

Appraisal Estimates Actual TotalChange

Local Foreign Total Local Foreign Total %

1. Equipment, Materialsand Freight 50.3 79.7 130.0 168.5 97.9 266.4 + 265

2. Duty Sales Tax 20.2 - 20.2 58.2 - 58.2 + 1883. Design, Erection 39.4 9.9 49.3 29.0 12.7 41.7 - 154. Civil Work, Land,

Offices 63.3 - 63.3 38.9 - 38.9 - 385. Preoperational Expenses 8.8 0.5 9.3 53.0 0.2 53.2 + 4726. Technical Assistance - 3.9 3.9 2.1 1.9 4.0 -

Base Cost Estimate 182.0 94.0 276.0 349.7 112.7 462.4 + 677. Contingency 13.0 15.0 28.0 - - -

Total Installed Cost 195.0 109.0 304.0 349.7 112.7 462.4 + 528. Working Capital 12.0 38.0 50.0 25.0 105.0 130.0 + 160

Total Project Cost 207.0 147.0 354.0 354.7 217.7 592.4 + 679. Interest During

Construction 21.0 - 21.0 85.0 - 85.0 + 30410. Township 5.0 - 5.0 13.1 - 13.1 + 162

Total FinancingRequired 223.0 147.0 380.0 452.8 217.7 690.5 + 82

Totals (in US$ millions)@ Rs. 7.5/US$l 31.1 19.6 50.7 - - -@ Rs. 8.2/US$l - - - 70.5 18.7 84.2

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3.17 Total installed cost of Rs 462 million exceeded the appraisalestimate by 52% with equipment, duty and pre-operational expenses greatly

exceeding appraisal estimates. Equipment costs were underestimated evenallowing for the extended project schedule and greater than anticipatedinflation during 1972-1974 when most equipment was purchased. There was

a larger than expected supply of local equipment (para 3.22) compared toappraisal estimates, which was a contributing factor to the cost increase butcomparative data between Indian and foreign equipment are not available. 1/The duty rate on imported equipment was increased about 20% compared to theappraisal estimate. The Lncrease in pre-operating expenses was due to theextended project implementation schedule as well as the protracted commission-ing period.

3.18 It appears that too much reliance was placed on price data from

contractors (1970 basis). There was insufficient allowance for price escala-tion, since the appraisal team assumed most equipment orders would be placed

by mid-1971, but in practice required about 2 years longer.

3.19 Working capital requirements increased by 160% over the appraisal

estimate. A detailed breakdown of the revised working capital requirements isshown in Annex 4. Nearly two-thirds of this increase are due to raw material

cost increases averaging about 155% 2/ during the period from appraisal(1970/71) to the point of re-evaluation in the second half of 1979. Workingcapital estimates were based on current commodity prices expressed in localcurrency at the time of appraisal. Future price increases in financial termsfor raw materials as well as finished products are difficult to estimatesince most of the important commodities are Government-regulated. However,in the absence of any price escalation, working capital will be often under-estimated particularly in cases where periods of high inflation coincide with

protracted schedules of project implementation.

3.20 The remaining one-third of the working capital increase is theresult of a simplifying assumption--made during appraisal--that 76% of theestimated current assets would be financed with short-term funds, whereas inthe case of Cochin II, today's actual Banking regulations permit short-termborrowing only to the extent of about 68% 3/ of gross working capital.

1/ In theory, the difference should have been less than 15% for interna-tionally bid items. In practice, project management and procurementprocedures and design philosophy led to the high percentage of local

procurement, with few foreign bids for comparison.

2/ The specific cost increases of the major raw materials are phosphate

rock: 127%; sulphur: 196%; and potash: 62%; ammonia: 177% and urea:202%.

3/ Equivalent to a current ratio of 1.45:1, while the former share of

short-term financing would result in the current ratio of 1.32:1.

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D. Financing Plan

3.21 A comparison of appraisal estimate and actual financing of theProject is shown below:

FACT Cochin II - Financing Plan(in Rs millions)

Appraisal Estimate ActualAmount % Amount %

EquityGovernment of India 190.0 50 345.3 50

LoansGovernment of India 40.0 11 182.0 26IDA 150.0 a/ 39 163.2 b/ 24

Sub-total 190.0 50 345.2 50

Total Financing 380.0 100 690.5 100

a/ At the exchange rate at appraisal of US$1=Rs 7.5.b/ At the weighted average exchange rate during project execution of US$1=

Rs 8.2.

The cost overrun of Rs 310 million was mainly financed from Governmentresources, e.g., 50% through equity and 46% through loans. The remainingbalance of 4% was covered by the appreciated IDA loan when expressed inrupees due to exchange rate variations during the period of project exe-cution. The financing plan reflects the Government's agreement to financethe project on the basis of a debt/equity ratio of 50:50.

E. Procurement and Disbursements

3.22 Procurement activity for the project was generally slow. Therewas limited international vendor response, and weak coordination betweenFEDO and vendors to obtain equipment and detailed engineering data. FEDO'sremote location and poor communication system between Ambelamedu and theoutside world were also factors. The appraisal report anticipated that 12% ofequipment (based on value) would be reserved for Indian supply (not to befinanced by IDA) and that about 30% of the internationally bid equipment wouldbe won by Indian suppliers or a total of about 38%. As executed, about 63%of total equipment came from Indian sources, principally due to design phil-osophy and partly due to limited international response. Although the projectwas well advertised the small packages tended to inhibit vendor participation.

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3.23 The disbursement of IDA funds is shown below by country and sizeof orders and by category:

FACT - COCHIN II PROJECT

DISBURSEMENT OF IDA CREDIT

Number of Purchase Orders Total AmountBelow $50,000 50,000-300,000 Above $300,000 US$millions %

1. U.S.A. 26 11 4 3.93 19.82. U.K. 23 9 1 1.44 7.23. F.R.G. 21 13 4 3.79 19.04. JAPAN 12 10 2 2.39 12.05. BELGIUM 6 2 3 1.45 7.36. INDIA 4 11 9 6.63 33.37. OTHER 10 1 - 0.27 1.4

Total 102 57 23 19.89 100.0

DISBURSEMENT BY CATEGORY

(US$million)

Category Appraisal Estimate Actual

I Equipment 15.2 17.3

II Imported Material 0.5 NIL

III Engineering & Erectiona. Foreign 1.3 1.5

b. Local 0.5 0.5

IV Consultants 0.5 0.2

V Unallocated 2.0 --

20.0 19.9 a/

a/ Undisbursed amount of US$107,839.51 has been cancelled.

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3.24 The disbursement by country shows a similar pattern observed in

most industrial projects where equipment purchases tend to concentrate in

the engineering companies' countries; with India, USA, FRG and Belgium (the

location of the engineering/licensors firms), accounting for about 80% of the

internationally won equipment and services. Generally, this is the result of

normal (and usually positive) industrial practice and does not work to the

detriment of the project.

3.25 The disbursement by categories generally followed the patternintended at appraisal. The imported materials category was not used, appar-

ently because Indian suppliers had access to their own sources without relay-

ing on FEDO. The low disbursement under the Consultant category reflects

FEDO's desire to minimize use of outside expertise.

3.26 The actual and appraisal estimate of disbursement schedule of IDA

funds are compared in Annex 5. Obviously, the actual disbursement was wellbehind appraisal expectations due to the delay in project execution. The

project's closing date was originally June 30, 1975, which was postponed

during execution until June 30, 1977. At that time, undisbursed funds

(US$107,839.51) were cancelled.

F. Performance of Contractors

3.27 The main contractors employed were FEDO and the three expatriate

process design firms plus a large number of local and foreign equipmentsuppliers and local erection and civil works contractors. The performance of

the sulfuric acid and phosphoric acid process design firms were satisfactory.At Cochin II, both sulfuric acid and phosphoric acid plants are reasonably

well designed and are capable of full production rates (which were achieved

6-9 months after mechanical completion). Indeed, in these areas, FEDO, who

has since executed several additional smaller projects in sulfuric acid and

phosphoric acid, has learned a great deal and today is capable of undertaking

small projects using this technology.

3.28 The performance of the NPK process engineering firm, because of

split responsibility and the poor design and performance of the NPK plant,is more difficult to evaluate. An experienced contractor in DAP granulation,

the NPK firm was responsible for the successful NP granulation plant in

Coromandel, India, but had no experience with potash grades in Cochin II. On

balange, however, the NPK firm had adequate experience. Many of the problems

in the inability of the NPK plant to reach commercial operation (from late

1976 to the present) are attributable to detail design.errors which were

the responsibility of both FEDO and the NPK contractor. The two companies

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were apparently unable to coordinate responsibility and workload duringproject execution and commissioning. The services of the NPK contractor havebeen terminated and the design changes necessary in NPK are being providedthrough other means (para. 3.36).

3.29 A considerable part of the fault for inability to operate the NPKplant successfully so far, must be attributed to the Cochin II operationsmanagement. The main areas of the plant that are deficient are: poor mechan-ical and instrumentation maintenance as well as individual areas of phosphoricacid neutralizer, NPK granulator, NPK screens, and material handling system

(para 3.36).

G. Manpower and Training

3.30 Staffing and training are not major problems at Cochin II, oncethe management situation is further improved. FACT has a large pool ofexperienced staff and most of the personnel for Cochin II were transferredfrom other FACT operations in NPK and other units. Although Kerala is and hasbeen a long time favorite source of labor for the West Asian countries, thelabor pool is large and educational levels are high. Labor problems appear tobe considerably less in 1979 than earlier in the decade, in part, due to amore responsive management. The company, overall, has surplus labor built upover the past 2-3 decades that labor unions are not likely to permit to bereduced significantly in the near future, but Cochin II operations do notparticularly suffer as a result. FACT has an ongoing training program forstaff development which appears to provide satisfactorily for its needs.

H. Environmental Situation

3.31 The major effluents from the Cochin II project are:

Sulfuric acid plant - SO2 into air.

Phosphoric acid plant - fluorides into air and water;phosphates into water;gypsum into solid disposal system;

NPK plant - nil under proper operation.

3.32 The sulfuric acid plant, at FEDO's initiative, was designed to

employ a modern double absorption and double catalyst system to improve sulfurrecovery to 99.9%. Total sulfur emissions to the air (at full load) areless than 1.0 TPD sulfur, which is well within good industrial environmentalstandards.

3.33 The phosphoric acid plant is not operating as well from an environ-mental point of view.' Originally a cryolite plant was in the project scopebased on FACT/FEDO technology to recover fluorides. During appraisal, a pilotplant was working satisfactorily and the appraisal team qgreed to let FEDOproceed largely because it was a step in the right (environmental) direction,and because the total cost of the cryolite plant was only Rs 10 million, or 3%of estimated Cochin II project cost.

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3.34 FACT encountered technical problems and elected not to proceed withthe installation to recover cryolite. Fluorine gases are adequately scrubbedwith water in the phosphoric acid plant and the waste water is held in thegypsum disposal area and neutralized before discharging into the nearby canalsystem. Overall, fluorine emissions are not a significant problem providedthe phosphoric acid plant is operated efficiently. Installation of thecryolite plant is now under review by FACT.

3.35 Gypsum disposal is a major problem. Overall phosphate recovery islow due to poor operation of the phosphoric acid plant and the gypsum qualityis poor. Normally gypsum is discharged into a holding pond as a slurry whereit settles out and the water overflow is neutralized before dischargingoutside the plant area. In Cochin II, settling does not occur well, retain-ing walls have broken through and gypsum slurry has been discharged into thecanals. The company is working on a solution to this problem but no defini-tive answer is yet available. Consideration is being given to reactivatingthe ammonium sulphate project, which would use a portion of the gypsum.However, this step should not be considered until the basic operation ofthe phosphoric acid plant is satisfactory and the gypsum quality is sufficientfor ammonium sulphate. Even then, ammonium sulfate production may remainuneconomical.

I. Current Status of Project

3.36 By late 1977, it was apparent that the engineering design as well asoperation of the NPK plant was faulty. The principal product, 17-17-17, is agranular mixture of DAP, potash and urea. The mixture is highly hygroscopicand the materials handling section of the plant apparently is not welldesigned to handle the load. In addition there were several other operationalproblems in the reaction and granulation stage that limit production capability.In mid-1979, FACT hired a small consulting group to bring the NPK plant up tocapacity, by the end of 1980. This group, consisting of three engineersexperienced in NPK granulation plant technology has the capability to fulfillthese tasks. This consulting effort plus a continued improvement in plantlevel management, maintenance and operations, should enable the project toachieve full production levels.

3.37 There are encouraging signs that the necessary improvements areunderway. The present senior management has more ability and dedication thanseen before and has more staff support. Process and equipment changes aretaking longer than necessary, but at least changes are being made. The con-sultant's final report was submitted at the end of September 1979. Thechanges involve several equipment replacements and modifications. The capitalexpenditure is not likely to be very large, but equipment fabrication,delivery and installation may take 1-1/2 to 2 years to complete overall.If the changes are successful then production should improve steadily overthe next two years and reach full output by 1982. The completion missionteam has accepted the FACT forecast of production build-up to full productionby 1982, for purposes of evaluating the project's viability.

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3.38 The port facilities have been completed, but have not yet been fullycommissioned, largely because raw material requirements are low due to lowcapacity utilization at Cochin II and the port labor unions require moreunloading to be done in labor intensive methods. (The new facilities arehighly mechanize to handle large volumes of raw material). An ammonia storagetank at the port that had to be rebuilt because of a collapsed foundation, isfully operable and FACT receives imported ammonia for both Cochin I and II.Canal facilities, connecting the port with Cochin II have not been completedand no significant amount of material has not yet been moved by barge. Theexisting canal must be dredged to accommodate the required barges. FACT hasbeen unable to get the responsible state authority to complete the dredging.There is no firm timetable to complete this work, and until then, raw mate-rials must move to Cochin II by road or rail, which can be done, but addsunnecessarily to operating costs.

IV. MARKET AND MARKETING

A. Cochin II Product Pattern

4.01 The product pattern originally envisaged for Cochin II consistedof six grades of complex fertilizers:

1) 17-17-17 4) 18-36-02) 28-28-0 5) 24-12-123) 14-28-14 6) 11-22-22

Subsequently, the market conditions underwent changes arising out of thenutrient recommendations for major crops gravitating towards high analysisgrades of ratios from 1-1-1 to 1-1-0. Accordingly, the product pattern ofCochin II was changed so as to have the maximum quantities of grades 17-17-17and 28-28-0. In addition, it was also decided to produce certain quantity ofDAP to meet the immediate demand for the product in the western, northern andeastern zones of this country and also to meet the limited requirements ofthis product (as stated by FACT) in the southern states. At full productionlevel, the distribution of these grades would be as follows:

i) 17-17-17 370,000 tonsii) 28-28-0 80,000 tons

iii) 18-46-0 30,000 tons

TOTAL 480,000 tons

The phosphate contribution from the above quantity of products corresponds toa capacity of 115,000 TPY, which is unchanged from the appraisal figure.

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B. Cochin II NPK Seeding Program

4.02 During appraisal, a need for market development was foreseen. Aseeding program was proposed and is compared with the actual development below:

FACT Seeding Program(tons)

Year Appraisal Estimate Actual

1972 25-50,000 25,0001973 100-150,000 45,0001974 200-250,000 20,0001975 supplement production 39,0001976 commercial production 33,000

The seeding program did not develop as projected, due to the slow speed ofproject execution and lack of grade 17-17-17 on world markets. Most of theseeding material was imported 15-15-15. During the period 1974-76, FACTwas optimistic regarding completion and operation of Cochin II, and notaggressive enough regarding increased allocations of imports to be channeledthrough FACT. With only limited availability of materials, it is not sur-prising that FACT lost some of its market share to its competitors.

C. Assessment of FACT Marketing

4.03 The FACT marketing area and organization is described in Annex 6.Overall, FACT appears to be reasonably proficient in marketing, althoughprobably not as aggressive nor innovative as other producers in South India.Market development for the principal NPK products has been done by others -Madras Fertilizers Limited for 17-17-17 and Coromandel for 28-28-0. FACTlost some of its marketing area to other producers, but this loss is, inpart, due to the slow build-up in FACT production when the competitors areproducing at full capacity.

4.04 One of the alternatives for bringing Cochin II to full productionis to produce a non-urea grade (therefore less hygroscopic) 10-26-26 followedby bulk blending with urea to provide specific consumer grades needed. IFFCOhas developed this market elsewhere in India and it appears to be a goodalternative for FACT. However, successful implementation depends on aggressivemarketing campaigns.

4.05 There is likely a larger market for 18-46-0 in South India thanFACT recognizes but the relatively higher marketability of 1-1-1 grades appearto be valid. In addition, the market growth in South India should give FACTan increasingly bigger share of the market in areas closer to Cochin. Thus,in the long run, any production of DAP from the Cochin II project is likelyto be small and, overall, freight costs should decrease as the South Indian

market increases. By 1982 when Cochin II is projected by FACT to reach fullproduction, there will be a supply deficit in South India of about 180,000TPN and 80,000 TPY phosphate. Thus, FACT should have no difficulty selling

its output.

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V. OPERATING PERFORMANCE AND EVALUATION

A. FACT Operating and Financial Performance

5.01 The overall financial performance of FACT during the period from

1972 through 1979 has been disappointing, largely because of numerousoperational problems. The table below shows selected financial data fromincome and balance sheet statements given in Annex 7:

FACT - Selected Financial Data

(in million Rupees)

Fiscal year (ending March 31) 1972 1974 1976 1978 1979unaudited

Net Sales 342.9 262.7 787.0 703.7 837.6Net Profit (38.2) (20.0) (128.4) (86.6) (55.4)Depreciation 17.2 17.3 75.0 68.9 70.9Interest 21.2 19.8 60.4 60.1 63.3Cash Flow before Interest .2 17.1 7.0 42.4 78.8

Current Assets 224.5 352.7 638.5 579.0 644.2Current Liabilities 312.4 368.4 429.1 260.4 282.0Long-term Debt 477.6 478.3 819.6 720.0 753.5Equity 229.5 489.3 462.1 683.4 662.0Debt Service - 82.0 253.0 471.0 137.0

Current Ratio 0.7 1.0 1.5 2.2 2.3Debt/Equity Ratio 68/32 49/51 64/36 51/49 53/47

FACT experienced continued losses during the Project's implementation period.The accumulated loss amounts to Rs 560 million (US$70 million) almost matching

the total Project cost (without interest during construction and workingcapital) or about twice the Company's share capital at the time of appraisal.The permanent drain on FACT's capital resources created a serious financial

problem for the Company. Only the continued inflow of Government funds in theform of both equity and debt prevented complete consumption of FACT's capitalbase. The Government's provision of funds also explains why FACT was able to

meet the financial covenants of the Credit Agreement. 1/ This little encour-

aging financial situation can be seen as a direct consequence of:

(i) prolonged difficulties in completing commissioning the

Cochin I and II Projects, and

(ii) low rates of capacity utilization of the existing plants

at Udyogamandal.

1/ Current ratio of 1.5:1 and Debt/Equity Ratio of 55:45 at Project

Completion.

- 40 -

Both problems are clearly reflected in the rates of capacity utilization ofFACT's major intermediate and finished products documented in the table below:

FACT - Capacity Utilization for Selected Products(1000 tons of product)

a!Installed Capacity Utilization, a-Capacity 1976 1977 1978 1979

Cochin IAmmonia 198 46 46 46 51Urea 330 45 50 49 56

Cochin IINPK 480 - - 19 21

UdyogamandalAmmonia 119 61 58 66 62Sulfuric Acid 234 76 72 79 88Ammonium Sulfate 198 64 59 68 70Ammonium Phosphate 181 54 54 61 62SSP 44 34 53 70 77

a/ Based on installed capacity.

During the last two years operating performance improved somewhat, increasingthe range of on-stream factors of the Udyogamandal plants from 50-75% to60-85%.

5.02 However, the output level of the ammonia/urea project of Cochin Ihas improved only gradually so far, not exceeding 60% capacity utilizationafter four years of operation. Nevertheless, management is optimistic andexpects to achieve production rates in the range of 80% after the installa-tion of a new steam boiler for the ammonia plant, which is expected to becompleted by the end of 1979. As a result of various technical problemsproduction of Cochin II is still at a level of about 20% of installed capacitythree years after mechanical completion. The Government agreed to treat theProject as pre-operational 1/ until the recommendations of the consultant team(para 3.36) are successfully implemented.

1/ During the pre-operating phase FACT receives compensation paymentsfor all operating expenditures not being covered by sales revenues ofCochin II. Only after the commissioning period is officially endedperformance of Cochin II will be measured in terms of commercialyardsticks, since the production costs and financed charges willhave to be recovered only from revenues based on a retention priceassuming 80% capacity utilization.

- 41 -

5.03 After annual losses peaked in 1977, FACT was able to reduce lossesto a level where at least operating costs were covered. FACT appears to bemoving--though slowly--in the right direction. The prospects of achievingprofits in the medium-term future depends completely on management's abilityto improve the company's operating efficiency.

B. Financial Rate of Return

5.04 The main inputs for calculating the financial rate of return (FROR)are shown in Annexes 8 and 9. The FROR for the Project in 1979 terms is 10.3%or about half of the 19.5% return estimated in 1971. This significant differ-ence is due to adverse factors such as project delay, cost overrun, and pro-longed start-up problems. Also, the average cost of raw material, whichaccounts for 80% of the total production costs, increased at a faster speed(about 155%) when compared with the average price increase of NPK output(about 120%). However, the FROR remains still at a financially acceptablelevel since to some degree the forementioned effects are compensated by a10% higher output at full production level than assumed originally in theappraisal report. I/

C. Institutional Performance

5.05 The appraisal team concluded that FACT's cost accounting andreporting systems were unsatisfactory and required improvement. Consequently,in the project agreement, FACT agreed to implement an improved accountingsystem and management information system not later than January 1, 1972. Atthe time of the completion mission, both systems appeared to work smoothlyand meet the company's needs, though they were not fully computerized.Management receives the following reports:

(i) Weekly Operatin:g Statements comparing actual consumptionof raw materials and production rates for each plant withcorresponding target plans. They are issued before closeof business of the first working day of the following week.

(ii) Monthly Report includes operational and financial informationbroken down by operating unit and is issued about the 10thcalendar day of the following month. It covers the company'sperformance in key areas such as: production, raw material,sales, inventories, income statement, analysis of variance,cash flow statement and updated cash flow forecast for thefollowing three months.

1/ This increase in production output is due to a different interpretationduring appraisal. The 485,000 TPY used as installed capacity in theappraisal report was actually the most likely production level of theNPK plant and is based on 250 rather than the normally assumed 300stream days per year, which appears as quite conservative premises.480,000 TPY as output is also in line with production capacity of theintermediate products, i.e., sulfuric acid (330,000 TPY) and phosphoricacid (115,000 TPY) would operate at about 90% stream factor. The totalcapacity is slightly different due to different product mix and analysis.

- 42 -

(iii) Quarterly Financial Review is submitted to the Board ofDirectors between the 15th and 20th of the following month.It not only covers the areas mentioned under (ii) on anaccumulated basis, but also analyzes the recent developmentsin cost of production, general overhead, selling and distri-bution expenses, status of ongoing projects, and financialratios. FACT's balance sheet and separate profit and lossstatement for FEDO and FACT Engineering Works are attached.

5.06 Format, detail and timing of the supplied information appears ade-quate to permit sufficient control on various managerial levels. FACT has

competent financial management, supported by qualified staff which has provedcapable of providing the Completion Mission with the information requestedregarding financial planning in a timely and accurate fashion.

D. Covenants

5.07 The Borrower and the Project sponsor have met most of the covenantsin the legal agreements, although the agreement with respect to projectmanagement (Project Agreement, Section 3.01(b)) was not fully complied with(para. 3.03).

VI. ECONOMIC BENEFITS OF THE PROJECT

A. Economic Rate of Return

6.01 The assumptions used for the calculation of the economic rate ofreturn (EROR) are given in Annexes 10 and 11. Although there have beenunexpected delays in implementation, combined with cost overruns, and currentprojections assume a slower production build-up, the Project still shows aneconomic return of 13.9% (Annex 12), compared with the appraisal estimate of13.5%. This somewhat surprising result is due to the impact of variousfactors on the Project which had compensating effects.

6.02 Adverse effects on the Project's EROR such as increase in capitalcost and delay in completion--which have the most critical impact--werealmost offset by underestimating target output level for finished productsand the steep real-term increase of long-term equilibrium prices of fer-tilizer. Also, the Project's economic replacement value has roughly tripledduring the period considered and so have costs for raw materials as well asprices for finished fertilizer. However, accumulated domestic inflation rateover the same period was 90 to 100% in India. Since equilibrium worldprices tend to reflect higher capital charges to make the installation of newcapacity economically viable, the Project is likely to achieve higher profitmargins (at full production) than similar plants currently under construction.

6.03 A recalculation of the EROR under a scenario which neutralizes thedistortions caused by the aforementioned developments, i.e., Project implemen-tation in line with the appraisal estimate, although recognizing adjustmentsfor higher output level and for real-term price increases of fertilizers,

- 43 -

shows an EROR in the range between 19% and 22%. An EROR in this order ofmagnitude could have been reasonably achieved, if the Project had beencarried out in a more efficient manner.

B. Transfer of Technolo,gy

6.04 Technology transfer was achieved through the project but not tothe extent expected by the appraisal team. FEDO has increased its abilityin the fields of sulfuric acid and phosphoric acid technology. But for NPKand overall project management, FEDO did not achieve the desired levels ofgrowth.

C. Employment

6.05 The Project directly generated about 800 permanent jobs. In addi-tion, it will help to create employment in secondary and tertiary sectors,such as agricultural extension, transport and distribution, retailing andrural credit system. Further, during construction phase the Project employedlocal labor at a rate of 1,000-2,000 people during a four-year period. Thecapital cost per direct employee is about US$105,000 which is relativelylow when compared with similar projects of today and considering the Project'sprominent impact on the fertilizer supply situation in South India.

D. Foreign Exchange Savings

6.06 The savings of foreign exchange 1/ expressed in constant 1979dollars is estimated to amount to US$32.7 million per year at target produc-tion level expected in 1983. Savings will increase even more to about US$39.2million per year if the assumed rise of international fertilizer prices inreal terms materializes reflecting a stabilization in world supply and demandby 1985. The Project's total foreign exchange cost of US$27 million (32% oftotal financing required) would thus be more than offset by the foreignexchange savings during one year of operation at target production level.

VII. THE BANK'S ROLE AND PERFORMANCE

A. Overall Assessment

7.01 The Bank played a significant role in the development of the CochinII project. The project sponsor evaluated several alternatives under Bankstaff guidance. The Government agreed with the Bank's analysis and onlyapproved the project after Bank endorsement and gave approval only to compo-nents recommended in the Bank's appraisal report. The Bank supplied all ofthe project's foreign exchange requirements through the IDA credit.

1/ Calculated on basis of all raw materials, including urea, as importedat the CIF economic prices given in Annex 11 plus 30% of other variableNPK production costs as foreign exchange.

- 44 -

7.02 In the broader context of the Indian fertilizer sector, the Bank'srole is even larger and much more positive. Preceded by three years ofintensive dialogue between Bank staff and Government and industry officials(1968-71) regarding the need to improve performance in the public sector,the Cochin II project was the first of eight Bank Group-supported projectsin India's public sector fertilizer industry 1/, between 1971 and 1979.Over the past few years, the industry has generally adopted the same analy-tical tools used by the Bank in project analysis and evaluation; executionand sector performance has steadily improved. Over the past few years, thedialogue between Bank staff and the concerned Indian officials has beenextensive and very cooperative. While the Cochin II project could have beenimplemented more efficiently, the shortcomings have largely been correctedin subsequent projects, and project management for most Indian fertilizerprojects in the recent past has been generally regarded as good.

7.03 Regarding management shortfalls, the Bank in retrospect should haveinsisted on a stronger more direct role in project management by an experi-enced engineering firm. But during appraisal/negotiations, FACT/FEDO wereless responsive to the Bank's suggestions and resisted strongly any attemptsthe staff made to inject a larger outside engineering role. In the Indiancontext where there is appreciable technical capability, this approach issometimes difficult to achieve. (It is almost impossible to fully definethis management deficiency before the fact.) Also, the Government, as owner,supports the public sector engineering companies, as well as local equipmentsuppliers. IFFCO as well as the joint sector companies, and lately NationalFertilizer Company have been able to incorporate efficient project management,and as a result had very successful projects.

B. Achievement of Project Objectives

7.04 Partly because of the stretched-out implementation schedule and thedesign and operation errors in the NPK plant, it is difficult to state pre-cisely to what degree the project's objectives have been met. (In fact, thecompletion report was held up for two years, in the expectation of achievingfull production prior to now.)

7.05 The principal objectives of the project were to (i) add phosphatefertilizer production to India where phosphate supply is largely met byimports and supply (and price) severely limit consumption; (ii) providepotential outlet for domestic phosphate rock (Rajasthan); (iii) providetechnology transfer and support to FEDO; (iv) provide modernization andgrowth of FACT organization; and (v) diversify FACT's production from lowanalysis to high analysis fertilizer.

1/ Two previous private sector projects - IEL and Zuari Agro were financedby IFC. During 1971-1979 there was no major investment by the Indianfertilizer private sector (despite Bank/IFC attempts to promote such

projects).

- 45 -

7.06 Once the NPK design and operations limitations are overcome, theprincipal objectives will have been met. However, the extended time as wellas cost overrun have considerably eroded some of the economic benefits ofthe project (para 6.03). Phosphate fertilizer remains in deficit and theserious transportation problems India faces dictate that NPK productionfacilities be built at (or near) ports surrounding the country and nearlocal markets. The project's high analysis products meet this need andvirtually all of the capacity can be marketed in Kerala and bordering states.Delay in the Rajasthan phosphate project plus the transport limitations inIndia prevent use of Rajasthan rock in Cochin II.

7.07 By 1979, FEDO has grown into a small and moderately effectiveengineering firm. Most of FEDO's growth occurred after 1976 (after projectmechanical completion) and in any event, if the Cochin II project was alearning exercise for FEDO it was, indeed, a very expensive lesson.

7.08 Overall, FACT has the capability to grow out of this episode intoa relatively efficient company. Recent (1976-1979) management changes,improvement in operations and financial performance indicate that consistent(although slow) progress has been made in this regard.

7.09 However, a third factor - the international phosphate industry (andprices) - has further altered an assessment of the viability of the Cochin IIproject. In 1971, phosphate rock and sulfur - the principal raw materials,were readily available and cheap. Shortly following the 1973 oil crisis,phosphate rock prices were increased by Morocco, 1/ from about US$12/ton toabout US$60/ton and have since levelled off at about US$32/ton. In 1980,sulfur prices are high. Also during the 1970's, phosphoric acid (producednear either the source of rock or sulfur) has emerged as a significant itemof world trade.

7.10 The above combination of events in the world phosphate industryhas made it difficult to justify building a phosphoric acid plant in a countrythat must import both phosphate rock and sulfur. Under today's conditions,India should import phosphoric acid (as is being done by MFL, IFFCO and ZuariAgro) or use nitrophosphate technology (Trombay IV Project) for most ofits phosphate supplies. 2/ The impact on Cochin II would be less if rockimports were available from nearby Jordan. However, minor process problemsremain in the phosphoric acid plant (mainly P205 recovery) and FACT manage-ment is reluctant to change from the standard grade of Moroccan rock. Oncethe problems are solved, a switch to Jordan rock will be made.

1/ Morocco, as the principal world exporter, has been traditionally theprice setter in the international phosphate market.

2/ Cochin II remains viable (at high efficiency and full operation) becauseits capital costs in constant terms are considerably less than for asimilar project under 1979 conditions.

- 46 -

7.11 Some improvement in performance of Cochin II may be achieved throughimporting phosphoric acid to supplement local production. These facilitieswill be added as part of the re-design of the NPK unit now underway.

C. Lessons Learned

7.12 The major lessons learned in the Cochin II Project and applied tosubsequent projects in the Indian Fertilizer Sector are indicated below:

(a) As this was the first public sector fertilizer project financedby the Bank Group considerable time in preparing and appraisingthe project was taken, including to satisfy itself that theenterprise was satisfactorily managed. The Bank, over a periodof many months, had reviewed both FACT and India's much largerand geographically diversified Fertilizer Corporation of India(FCI). The Bank staff found that FACT was satisfactorily managedand the project was much simpler than FCI's in both terms ofproject size and direct corporate relationships. However, itturned out that the subsequent Bank financed FCI projects hadstronger management than FACT despite the larger corporate sizeand its scattered plant locations.

(b) Bank experience with this project clearly indicates again thatchanges in top management positions can have a crucial impact onthe success of projects. Shortly after appraisal of Cochin IIand at the time of negotiations, FACT's Managing Director wasbeing replaced. The new Managing Director was a fertilizerexecutive with long and successful experience in FCI, but it wasnot clear at that time how difficult it would be for the newincumbent from outside the state of Kerala to replace the oldManaging Director who was from within the State. As it turnedout, the management style of the new Managing Director did notfit in with the then existing FACT organization and the localcontractors and the unions and, as a consequence, the Projectsuffered.

(c) During appraisal it was recognized that the project needed to bestrengthened with expatriate technical assistance to bring inexperience in executing similar projects. However, the expatriateassistance was largely rejected, as it turned out, due to FACT'slong and successful earlier associations with the engineering firmsand its confidence that the above associations along with their owncapabilities would be adequate for successful project implementation.The lesson learned is that it must be determined whether or notin the socio-political environment expatriate technical assistance

1/ Cochin II remains viable (at high efficiency and full operation) because

its capital costs in constant terms are considerably less than for asimilar project under 1979 conditions.

- 47 -

would be accepted and effectively used, and if so, whether thiswould be best done with individuals working in line for the

borrower or by hiring a large engineering or operating firmwho would and could replace individuals when it was clear that

they were not effectively used or were not competent.

(d) Another lesson is the importance of using processes which have

the best chance of success. The selection of process technologiesfor the Project were based on process licensing arrangements FEDOalready had with several firms. While the complex fertilizer

technology had been proven in other countries for the granulationof ammonium phosphates and urea, the technology did not have

direct experience in the production of NPK products which

included both uTea and potash - the main NPK products plannedfor the Project. On the other hand, other processes for such

products had been successfully used in India and their adoptionfor the Project could have brought in experience from the other

Indian plants in case of difficulties. In selecting technologiesit would be wise to evaluate their experience for the specificplant capacities and product ranges planned for the project also

keeping in view experience available in the region with theselected technology.

(e) A related lesson is the need for a realistic assessment of the

benefits of developing local engineering firms and the relatedpenalty (in terms of delays and budgets) which transfer of

new technology can bring. In attempting to build up and useFEDO for implementing the project instead of insisting on

experienced outside engineering assistance to the full extent

desirable the Bank did not take into account the potential cost

of delays, possible design changes, the FEDO learning curve andthe isolated location in assessing the contingency needs. Insubsequent projects the Bank and the Indian authorities arrived

at more satisfactory arrangements which utilize experiencedengineering firms in India and outside in a complementary

fashion and more time for project completion and cost contingenciesfor delays have been allowed. In appraising a project, in termsof both budget and schedule, the Bank must consider not only what'should happen" but what is likely to happen in the light of thelocal environment, past events and the risks of institution building.

These shortfalls were largely recognized early in the Cochin II supervision

missions and corrective action has been incorporated into more recent industrialprojects.

Industrial Projects Department

February 1980

INDA - COCHIN TI TIFI TZfR PrtLCT

INDIA FERTILIZER PROJECTS FINANCED BY THE BAWE CROU)P

Amount of mechanical

Date of Bank Group Project Completion Dates Completion

Loan/Credit Financing Capacity Original Current Delay Remarks

(UIS$ Hillion) ('000 nutrient tone (months)

A. International Finance Corgoration

1. IEL - Kanpur Project 4/67 11.5 200 N 3/70 3/70 Operating at over90% of capacity.

2. Zuert - Goa Project 3/69 18.9 171 K 4/72 6/73 14 Operating at about

42 P205 65% of capacity.

B. Internsational Development Association

1. VAUr - Cochin II Project 7/71 20.0 40 N 3/74 10/76 31 Acid plants opera-114 ?205 ting satisfactorily.

Comples plant beingstabilized for theremaining one grade(17-17-17).

2. FCl - Gorakhpur Expansion Project 1/72 10.0 51 N 8/74 12/75 16 Commissioned and

opercting satis-factorily.

3. FCi - Nangal Expansion Project 2/73 58.0 152 H 8/75 7/77 23 Commissioning testsbegan July 77 and escommissioned Jan. 8. 4

4. FCI - Trombey IV Project 5/14 50.04! 75 N 6/77 12/78 13 mechaniceally com-

75 P205 pleted and

5. FC - Sindri Expansion Project 11/74 91.0 129 N 11/77 2/78 a Nelchanically com-plated and beingcommiseioned.

6. Various Companies - Fertilizer Affected by delays

Industry Credit 12/75 105.0 222 N 12/78 3/80 16 in project prepar-31 P205 ation and approvals.

C. Inteinstional Bank for Reconstruction and Development

I. IFFCO - Phulpur Project 1/75 109.0 228 N 10/78 8/79 10 Progressing satis-factority afterinitial delay ofone year caused by

change in feedstock.

/a Inclsidee US$1).0 million for Plant Operation Improvement Project (POIp).

ludlstrial Projects Department

July, 1979

Note; .ANNEX I Ls verbatim from Nangal Completion Report.

- 49 -

ANNEX 2

INDIA - COCHIN I! FERTILIZER PROJECT

1/Capacity Utilization of Fertilizer Projects in Operation in India

(Percent)

Fiscal Year Ending March 31

Unit 71 72 73 74 75 76 77 78 79 83/2

A. Private Sector Est. Proj.

SCI Kota 102 98 116 100 66 72 79 79 76 90IEL Kanpur 54 64 78 58 96 89 94 98 93 95Zuari Goa - - - 37 79 66 72 85 88 95CFL Vizag 76 81 74 68 59 60 80 73 81. 90

Total Private Sector 71 76 86 61 76 74 80 6 77 93

B. Joint Sector

MFL Madras - 51 .64 76 51 88 78 77 92 90GSFC Baroda 69 86 94 '76 74 73 80 81* 77 85SPIC Tuticorin - - - - - 50 66 71 56 90MCFL Mangalore - - - - - - 64 60 76 90

Total Joint Sector 69 76 81 76 64 71 69 73 73 89

C. Cooperative Sector

IFFCO Kalol - - - - 17 54 74 95 108 90

D. Public Sector

FCI Plants (Ave.) 71 79 78 68 67 77 79 63 65 90FCI Sindri 73 81 73 79 77 67 47 10 53 - /3

Nangal 68 70 67 77 51 97 101 69 88 - /3Trombay 64 82 86 80 84 98 126 106 106 95Gorakhpur 85 95 86 80 91 72 85 64 67 90Namrup 64 69 80 82 91 102 104 100 88 100Durgapur - - - 10 10 24 30 34 25 75Barauni - - - - - - 66 50 35 90Namrup Exp. - - - - - - 70 72 49 90

FACT - Udyogamandal 47 49 38 48 46 55 52 61 62 50Cochin I & II - - - 9 26 44 53 49 - 80

SAIL - Rourekela 20 39 41 38 51 64 67 60 57 80NLC - Neyveli 46 29 30 21 24 39 61 59 54 80

Total Public Sector 58 64 62 49 49 61 69 64 52 83

TOTAL INDUSTRY 63 70 74 58 60 70 73 74 72 87

/1 Capacity utilization has been calculated based on available capacity in each yearallowing for commidsioning date, capacity levels of 50% and 75% in the first andsecond year after commissioning, and adjusting for industrial nitrogen products.

/2 Expected capacity utilization level taking into account schemes under implementation.

/3 Plants will be shut down with the cormissioning of the Sindri odernization and NangalExpansion Projects.


July 1979

Note: ANNEX 2 is a verbatim from Nangal Completion Report.

INDIAFACT COCHIN II FERTILIZER PROJECT

PROJECT IMPLEMENTATION SCHEDULE - APPRAISAL VS ACTUAL

1971 1972 1973 1974 1975 1976

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

PROCESS DESIGN AND DETAILEDENGINEERING

mmmmmm-mma-

EQUIPMENT AND MATERIALSPROCUREMENT

EQUIPMENT AND MATERIALSDELIVERY

0

CIVIL WORKS

EQUIPMENT ERECTION

TESTING AND COMMISSIONING

amm

W 1=1111 APPRAISALsma ACTUAL

Industrial Project Department xNovember 1979 World Bank - 21083 1w

-51- ANNEX 4

INDIA - COCHIN II FERTILIZER PROJECT

PERMANENT WORKING CAPITAL

MillionRs

A. Accounts Receivable (30 Days' Output)

NPK (17:17:17): 31,000 Tons at Rs 1,901 58.9

NPK (28:28:28): 7,000.Tons at Rs 2,492 17.4DAP (18:46:0) : 2,500 Tons at Rs 2,825 7.1

Sub-Total 83.4

B. Finished Goods Inventory (75 Days' Output)at Production Costs, Excluding Depreciation

NPK (17:17:17) Fixed Costs 45.5NPK (28:28:28) Variable Costs 696.6DAP (18:46:0) Excise Duty

& Freight 100.8842.9/4.8=175.6 175.6

/1C. Raw Material Inventory (90 Days' Consumption) -

Potash : 28,750 Tons at Rs 687/ton 19.8

Sulfur : 26,250 Tons at Rs 859/ton 22.5

Phos. Rock : 86,000 Tons at Rs 555/ton 47.7Ammonia : 11,500 Tons at Rs 1,345/ton 15.5

Urea : 5,400 Tons at Rs 1,465/ton 7.9Filler : 7,000 Tons at Rs 43/ton .3Coating Agent: 2,400 Tons at Rs 255/ton .6

Furnace Oil : 1,250 Tons at Rs 937/ton 1.2Bags : 40,000 Tons at Rs 87/ton 3.5

Sub-Total 119.0

D. Spare Parts.(2 Years' Consumption) 2 30.0

E. Minimum Cash 10.0

F. Accounts Payable (15 Days' Consumption)

Domestic Raw Materials 10.0Utilities )Short Term Loans

a) 50% of A and D 57.0b) 75% of B and C 221.0

Sub-Total 288.0

G. Working Capital 130.0

/1 Except for urea, furnace oil and bags for which 15, 30 and 30 days'consumption are assumed, since they are procu'red locally.

/2 3% of capital cost per annum.

Industrial Prolects DepartmentFebruary, 1980

- 52 -ANNEX 5


IDA CREDIT DISBURSEMENT SCHEDULE

(US$ million equivalent)

Quarter Ending Appraisal Estimate Actual

1971 September 0.3 0

December 0.7 0

1972 March 2.5 0.33

June 5.4 0.59

September 5.8 0.62

December 6.2 0.65

1973 March 9.4 0.95

June 12.6 1.69

September 15.8 2.80

December 16.2 4.63

1974 March 16.9 7.67

June 17.6 10.1

September 18.8 11.8

December 20.0 12.1

1975 March 13.7

June 14.2

September 14.4

December 16.4

1976 March 17.5

June 17.8

September 18.6

December 19.0

1977 March 19.2

June 19.5

September 19.8

December 19.91/

1/ Undisbursed amount of US$107,839.51 has been cancelled.

Industrial Projects DepartmentFebruary, 1980

-53- ANNEX 6Page 1 of 3


FACT - MARKET AND MARKETING ORGANIZATION

A. Fertilizer Market in South India

Based on the demand/supply projections by the Government of India,estimates have been made by FACT regarding the consumption and supply possi-bilities of South India (FACT's primary marketing area) as shown below:

FACT - COCHIN II PROJECT

FERTILIZER MARKET IN SOUTH INDIA

(1,000 tons)

Nitrogen Phosphate

Year Demand Production Deficit Demand Production Deficit

1979 969 777 192 290 280/L 10

1980 1055 891 164 330 3004 30

1981 1140 936 204 370 331 40

1982 1225 1044 181 420 340 80

1983 1357 1108 249 475 340 135

1984 1482 1143 339 533 375 158

1985 1602 1148 454 597 395 202

1986 1724 1148 576 667 400 267

1987 1867 1148 719 747 400 247

1988 2016 1148 868 833 400 433

The nitrogen market in South India will be deficit all through the 1980'swith a progressively widening gap of demand and supply through the years upto 1988. In the case of phosphates, the southern region shows a slight de-ficit in 1979, but in subsequent years, the phosphate gap increases substan-tially. The forecast clearly shows the need for additional projects, such asCochin II and FACT should have no difficulty marketing all of its productionin South India.

1/ 1979-1981 production figures by FACT have been scaled down to reflectlow production at Cochin II.

- 54 -ANNEX 6Page 2 of 3

B. FACT Marketing Area and System

The primary marketing area of FACT comprises the States of Kerala,Tamil Nadu, Karnataka and Andhra Pradesh. Each State has a FACT marketingoffice. Each area is sub-divided into several marketing regions, each ofwhich consists of a few districts. These regions are further sub-dividedinto small sales territories. There are 120 such sales territories currentlyin the primary marketing area. The secondary marketing area consists of Ma-harashtra, Madhya Pradesh, Rajasthan, Haryana, Uttar Pradesh, Punjab andWest Bengal States. Distribution in the secondary market is mainly throughinstitutional agencies and established fertilizer marketers who already havea sales network in these areas. Since the secondary market is designated asa fall back arrangement, FACT is not attempting to set up any direct marketingorganization, thus avoiding overheads and sales outside South India will gra-dually diminish. The market share enjoyed by FACT in its marketing area anddetails of average freight and selling points are given below:

FACT MARKETING AREA AND SHARE OF MARKET(1979)

AverageShare of Market (%) Rail Sales

Freight Head- SellingPrimary Marl.et N P2 05 K 20 Rs/MT quarters Points

Kerala 65 60 58 38 Trivandrum 3,300

Tamil Nadu 12 15 7 59 Madras 3,600

Karnataka 13 11 1 101 Bangalore 2,000

Andhra Pradesh 11 14 - 126 Hyderabad 1,900

Secondary Market

Maharashtra 6 4 Nil 148 Bangalore 12

Uttar Pradesh - - - - -Nil- - - - - - 178 Cochin -& North India

- 55 - ANNEX 6

Page 3 of 3

The pattern of distribution for FACT products is determined on the

basis of State-wise allocatLon of products made by the Ministry of Agriculture.

The following table shows the distribution pattern during the last 5 years:

FACT - STATE-WISE DISTRIBUTION OF PRODUCTS

(%)

Year Kerala Tamil Urn&- Maha- OtherNadu taka Andhra rashtra States

1975 36 34 17 13 -

1976 29 31 16 21 31977 29 25 16 23 7 -

1978 29 23 14 21 7 61979 32 23 12 21 5 7

The Company's fertilizer distribution system relies primarily on pri-

vate dealers, cooperatives and other institutional agencies like the State Agro-

Industries Corporations. About 30% of FACT products are distributed through

cooperatives and other institutional agencies while 70% is channelled through pri-

vate trade. The contribution by the cooperatives and other institutional agencies

is likely to go up to 40% in view of the long term supply agreements entered into

with the State Cooperative Marketing Federations and the State Agro-Industries

Corporations by offering them special terms.

The seasonal pattern of consumption and the need for timely supply of

fertilizers to farmers necessitate adequate field warehousing capacity at stra-

tegic locations for advance stocking of products. FACT is at present maintain-

ing about 140 storage points with a total storage capacity of about 130,000 tons.

Most of the warehousing points are managed directly by the Company for offering

effective service facilities to the dealers/customers. The Company also makes

use of the storage facilities of the State and Central Warehousing Corporations

wherever possible. Out of the above mentioned storage points, 14 godowns re-

presenting a capacity of nearly 30,000 MT is owned by the Company and the rest

are hired. The marketing expenditure incurred by FACT on average is about

Rs200/ton which includes freight, storage, interest, marketing overheads and

dealer commission. This level corresponds to about 14% of the selling price.


February, 1980

- 56 -

ANNEX 7Page 1 of 2


FACT - FINANCIAL STATEMENTS

HISTORICAL INCOME STATEMENTS

(in Million Rupees)

FY ending March 31 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79unaudited

Revenues from Net Sales 342.9 223.7 262.7 687.6 787.0 677.4 703.7 837.6

Cost of OperationsPurchased Finished Goods - 58.5 28.8 65.4 67.6 25.4 11.4 11.9Materials Consumed 213.2 55.7 89.8 203.6 250.9 220.7 233.4 260.7Repairs and Maintenance 9.8 9.5 10.9 16.1 25.5 42.4 44.0 43.5Salaries, Wages and Bonus 23.6 23.4 32.6 61.3 .67.2 62.9 74.6 84.4Power and Fuel 8.6 7.8 10.2 35.5 81.5 81.8 80.8 89.1Freight and Handling 12.7 8.6 11.9 19.2 29.1 36.3 48.6 57.6Excise Duty 11.5 13.7 22.9 47.4 68.0 62.0 72.9 79.9Other Expenses (Net) 63.3 40.4 38.1 184.5 190.6 142.0 97.6 131.7Depreciation 17.2 16.1 17.3 51.3 75.0 68.9 68.9 70.9

Cost of Goods Sold 359.9 233.7 262.5 684.3 855.4 746.1 732.2 829.7

Operating Profit (Loss) (17.0) (10.0) .2 3.3 (68.4) (68.7) (28.5) 7.9

Interest (Net) 21.2 13.3 19.8 33.9 60.4 70.9 60.1 63.3

Net Profit (Loss) (38.2) (23.3) (20.0) (30.6) (128.4) (139.6) (86.6) (55.4)

Iadustrial Projects DepartmentFebruary, 1980

- 57 -

ANNEX 7Page 2 of 2


FACT - FINANCIAL STATEMENTS

HISTORICAL BALANCE SHEETS(in Million Rupees)

FY ending March 31 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79unaudited

AssetsOperating Cash 45.1 114.0 22.7 71.2o 60.9 18.1 46.6 29.3Accounts Receivable 45.1 33.2 54.4 49.9 82.3 106.1 122.9 141.2Finished Goods Inventory 28.9 17.8 28.0 102.1 172.2 186.2 140.7 153.8Ray Materials Inventory 37.3 30.3 45.2 52.0 47.1 75.7 67.9 89.7Spare Parts 41.6 47.2 65.7 75.6 84.6 91.9 123.4 154.0Work in Progress 8.0 20.1 56.6 116.2 131.9 3.3 3.4 2.8Advance Payments 18.5 32.7 80.1 65.3 59.5 48.5 74.1 73.4

Total Current Assets 224.5 295.3 352.7 532.3 638.5 529.9 579.0 644.2

Fixed Assets 306.5 382.3 395.8 416.3 946.7 944.3 959.3 965.9Additions (Deletions) Dur. the Year 75.8 13.7 20.5 530.4 (2.4) 15.0 6.6 39.5

Gross Fixed Assets 382.3 395.8 416.3 946.7 944.3 959.3 965.9 1,005.4Less Accumulated Depreciation 137.5 156.5 176.5 227.6 299.9 370.4 438.5 506.1

Net Fixed Assets 244.8 239.3 239.8 719.2 644.4 588.9 527.4 499.3Plants Under Construction 538.3 610.2 694.2 294.1 389.3 489.9 542.1 549.3Investments 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6Capitalized Expenditures 8.3 8.7 45.7 46.5 35.0 23.1 11.7 1.1

T o t a 1 A s a a t s 1,019.5 1,157.1 1,336.0 1,595.7 1,710.8 1.635.3 1,663.8 1,697.3namans ama S=amma =amma m an= ma n~~ nammes mamenm

LiabilitiesAccounts Payable 248.2 229.9 354.9 396.7 359.9 205.4 252.8 207.5Short-term Loans 64.2 23.6 13.5 19.5 69.2 51.2 7.6 74.5

Current Liabilities 312.4 253.5 368.4 416.2 429.1 256.6 260.4 282.0Long-term Debt 477.6 501.5 478.3 636.3 819.6 1,054.6 720.0 753.5

Share Capital 302.4 499.9 606.7 691.2 738.6 740.2 1,188.1 1,222.1Reserve Fund 1.9 .3 .3 .3 .3 .3 .3 .3Retained Earnings (74.8) (98.1) (117.7) (148.3) (276.8) (416.4) (505.0) (560.4)

Total Equity 229.5 402.1 489.3 543.2 462.1 324.1 683.4 662.0

T o t a 1 L i a b. & E q u i t y .,019.5 1,157.1 1,336.0 1,595.7 1,710.8 1,635.3 1,663.8 1,697.5,,umsLa s se.mamme mmme .mme a


February, 1980

- 58 - ANNEX 8


COCHIN II - PRODUCTION COSTS

(At Target Product Mix from 1982 Onward)'/

-----------------------1979 Rup- s-----------------Annual Financial Financial Financial Economic Economic Economic

Unit/Tons Quantities Cost/Ton Cost/Year Cost/Ton Cost/Yearof Product ('000 tons) Price/Unit of Product in MM Ra Price/Unit of Product in MM Ra

A. SULFURIC ACID

Sulfur 0.346 105,000 859.0 279.2 90.1 820.0 283.7 65.0Catalysts & Other - - - 17.9 5.4 - 17.9 4.1

Variable Costa 315._1 95.5 301.6 69.1

Depreciation - - - 50.2 15.2 -- -Others - 45.1 13.7 -45.1 13.7

Fixed Costs 953 28.9 45.1 13.7

Total Cost UM iA 2.8

B. PHOSPHORIC ACID

Sulfuric Acid 2.869 303,100 315.1 904.1 95.5 301.6 865.3 91.4(Variable Costs)

Phosphate Rock 3.26 344,500 555.0 1,809.3 191.2 418.2 1,363.3 144.0Chemicals & Others - - 87.9 9.3 - 87.9 -9.3

Variable Costa 2,80O1.3 296.0 2,316.5 244.7

Depreciation - - 182.2 19.2 - - -Others - - -142.7 15.1 - 142.7 15.1Fixed Costs from Sulf. Acid - - 273.5 28.9 - 129.4 13.7

Fixed Coats 598.4 63.2 2-72.1 28.8

Total Cost 2A32. 259. hah! 2MLZ

C. NPK (19.1; 20.7; 13.1)

Ammonia 0.0958 46,000 1,345.0 128.9 61.9 1,476.0 141.4 67.9Urea 0.2698 329,500 1,465.0 395.3 189.7 1,476.0 398.2 191.2Phos. Acid (Variable Costs) 0.2201 105,700 2,801.3 616.6 296.0 2,316.5 509.9 244.7Potash 0.2405 115,400 687.0 165.2 79.3 738.0 177.5 85.2Coating - - - 7.6 3.6 - 7.6 7.6Others - - - 137.6 66.1 - 137.7 66.1

Variable Costs 1,451.2 696.6 1,372.3 658.7

Depreciation - - - 50.1 24.0 - - -Others - - - 34.9 16.8 - 34.9 16.8Fixed Costs from Phos. Acid - - - 131.7 63.2 - 59.9 28.7Fixed Costs 216.7 104.0 94.8 45.5

Total Costs 1 667/IL006 Li 7 a. 704.2

/a Assumed Product Mix

NPK in '000 tons 1979/80 1980/81 1981/82 19P2/83

17:17:17 75 200 280 37028:28:0 75 80 80 8018:46:0 78 40 30 30Total 728 320 20

Capacity Utilization 40% 56% 67% 83%

Production program is based on Licensor's recommendation of 250 operating days per year comparedto the usual 300 operating days per year, thus signifying a capacity utilization of 83% from 1982/83onward.


- 59 -

ANNEX 9

IlDIA - COCHIN II FERTILIZER PROJECT

Cochin II - Re-evaluation of Financial Rate of Return

C-%--. F-LOW STRF:'.YS FOR FTYA'CTAL : 'ALYSIF(i- millions of conitant 1979 Rupees)/-!

Capital Working Variable Fixed Expenditures Revenues Dur. NetFiscal Year Cost/2 Capital 2pMting Costs Costs/3 During CoMissioning Commissionin Revenues Bene ic

1972 48.1 - - - - - - (48.1)1973 170.6 - - - - - - (170.6)1974 159.2 - - - - - - (172.4)1975 78.1 - - - - - - (78.1)1976 47.0 41.8 - - 55.5 41.8 - (102.5)1977 72.2 58.7 - - 222.9 204.6 - (149.2)1978 7.9 . - - - 280.1 275.3 - (12.7)1979 7.3 10.0 - - 544.2 509.3 - (52.2)1980 19.9 23.8 337.9 45.5 - - 550 82.91981 - - 485.3 45.5 - 683 152.21982 - - 574.9 45.5 - - 796 175.61983 - - 696.6 45.5 - - 958 215.91984 - - 696.6 45.5 - - 948 205.91985 - - 696.6 45.5 - - 938 195.91986 - - 696.6 45.5 - - 928 185.91987 - - 696.6 45.5 - - 918 175.91988 - - 696.6 45.5 - - 908 165.91989 - - 696.6 45.5 - - 898 155.91990 - /3 - 696.6 45.5 - - 892 149.91991 (61.0) -(134.3) 696.6 45.5 - - 892 345.2

Financial Rate of Return = 10.3%

/1 At an exchange rate of US$1.00=Rs 8.2./2 Excluding IDC./ Excluding depreciation./4 10% salvage value.15 Recovery of working capital.


- 60 -

ANNEX 10


ASSUMPTIONS USED IN ECONOMIC ANALYSIS(in constant 1979 US dollars per ton)

1979 1980 1981 1982 1983 1984 1985 & AfterUrea

F03 Price (bulk) 145 140 140 145 160 170 180Ocean Freight & Insurance 30 30 30 3Q2 30 30 30

CIF Price 175 170 170 175 190 200 210

Port Handling, Storage, etc. 5 5 5 5 5 5 5

Economic Urea Cost 180 175 175 180 195 205 215

Armonia

FOB Price /1 125 130 140 145 160 170 180Ocean Freight & Insurance 35 35 35 35 35 35 35

CIF Price/Economic Cost 160 165 175 180 195 205 215

Sulfur

FOB Price 1979 75 75 75 75 75 75 75Ocean Freight & Insurance 25 25 25 25 25 25 ?5


Phosphate Rock

FOB Price /2 32 33 35 36 37 38 40Ocean Freight & Insurance - 15 15 15 15 15 15 15

C:7 rrice/Ecoromic Cost 47 48 50 51 52 53 55

Potash

?0 Pr.ce /3 67 71 74 75 76 78 80Czzan Freight & insurance - 25 25 25 15 15 15 15


l Assu-.g 53% comas from Middle East ($15) and 50% from Vancouver ($35).cra Jordcz, assun.i:. a to 'S$ price preference to Moroccan rock (72% BPL).

f3 Fron Jordan, from 1932 unard.C14 Based on Corz.odity Price Forecasts of Bank's Comodities Division, May 1979.

industrial Projects Department

February, 1980

- 61 -

ANNEX 11


ASSUMPTIONS USED TO CALCULATE ECONOMIC PRICE OF NPK .(in constant 1979 US dollars per ton)

1979 1980 1981 1982 1983 1984 1985 6 After

Urea (bulk) 46% 145 140 140 145 160 170 180TSP (FOB) 46% 120 130 135 140 155 170 180Potash (FOB) 60% 67 71 74 75 76 78 80

Nitrogen 94 61 59 60 66 70 74P2 05 80 66 63 63 70 77 81K20 23 12 15 16 17 17 18

Theoretical FOB Price for NPK 1

Without Premium 197 139 138 139 153 164 173

FOB NPK with 20% Premium 3 236 167 166 167 184 197 208Ocean Freight /2 40 40 40 40 40 40 40

CIF Price 276 207 206 207 224 237 248

Port Handling, Storage, ete. 5 5 5 5 5 5 5Bagging Cost 15 15 15 15 15 15 15

Economic Price 296 227 226 227 244 257 268

/1 The average yearly nutrient contents in accordance with the production plan are the following:1979 - 29.9; 30.5; 20.6, 1980 -- 19.9; 23.4; 10.6, 1981 - 19.3, 21.5; 12.2, 1982 & After - 18.9;20.7; 13.1.

/2 Assuming 50% from Europe ($33) and 50% from U.S.A. ($47)./3 Historically, NPK sells on average from a 20 to 30% premium above its arithmetical nutrient value.

For this analysis the more conservative assumption of a 20% premium was applied./4 Based on Cormodity Price Forecaqts of Bank's Commodities Division, May 1979.

-:ustrial Projects DepartnentFebruary, 1980

- 62 -

ANNEX 12


Cochin It - Re-evaluation of Economic Rate of Return

COST AND BENEFIT STRE.ilS FOR ECONOMIC ANALYSIS(in millions of constant 1979 Rupees)/l

*Capital/ 2 !orking Variable Fixed Expenditures Revenues Eco. Value NetFiscal Year Costs - Capical Operatir. Costs Costs During Co==issioning At Con.missioninz of Caital 3eefit

1972 41.7 - - - * - (41.7)1973 145.0 - - - - - (145.0)

- 136.3 - - - - - (136.3)1q75 57.5 - - - - - - (67.9)1976 35.2 41.8 - - 55.5 41.8 (93.7)1977 69.1 58.7 - - 222.9 204.6 - (146.1)

7.8 - - - 279.8 275.3 - (12.3)7.2 10.0 - - 537.2 509.3 - (45.1)

1980 19.3 23.8 334.6 45.5 - 553.4 130.21981 - - 444.3 45.5 - - 595.6 105.81982 - - 539.3 45.5 - 722.7 137.91583 - - 658.7 45.5 - 893.5 159.31984 - - 683.9 45.5 * 960.4 231.01933 - - 703.2 45.5 - 1,011.6 262.91936 - - 725.0 45.5 - 1,054.8 254.31987 - - 725.0 45.5 - 1,054.8 284.31988 - - 725.0 45.5 - 1,054.8 284.319S9 - - 725.0 45.5 - 1,054.8 234.31990 - - 725.0 45.5 - 1,054.8 284.31991 (53.3) (134.3) 725.0 45.5 - 1,054.8 471.9

Economic Rate of Return = 13.9%

/1 At an exchange rate of US$1.00-Rs 8.2./2 Financial cost less duty and sales tax.


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