for official use only - world...

Document of

The World Bank X A.

FOR OFFICIAL USE ONLY

Report No. 75865-PAK

STAFF APPRAISAL REPORT

PAKISTAN

FERTILIZER INDUSTRY REHABILITATION PROJECT

May 12, 1982

Industry 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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PAKISTAN


Currency Equivalents

Currency Unit = Pakistan Rupees (Rs)US Dollar 1.00 = PRs 10.00 1/Rs 1.00 = US$ 0.10

WEIGHTS AND MEASURES

1 Metric ton (t) = 1,000 kilograms (kg)1 Metric ton (t) = 2.209 pounds (lb)1 Kilometer (km) = 0.62 statute miles1 Hectare (ha) 3 2.47 acres1 Cubic Meter (m ) 35.32 Cubic Feet (cu ft)

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ADNOC Abu Dhabi National Oil CompanyANL Ammonium nitrate limestoneAS Ammonium sulphateCAN Calcium ammonium nitratecif Cost, insurance and freightDH Dawood Hercules Chemicals Ltd.Exxon Exxon Chemicals Ltd.FFC Fauji Fertilizer Co. Ltd.fob Free on boardGOP Government of PakistanHUFPL Hazara Urea Fertilizer Plant Ltd.KW, MW Kilowatt, megawattLCFL Lyallpur Chemicals and Fertilizer Ltd.NFC National Fertilizer Corporation of Pakistan Ltd.NLC National Logistics CellNP NitrophosphatePAFL Pak-American Fertilizers Ltd.PFL Pakarab Fertilizers Ltd.PSFL Pak-Saudi Fertilizers Ltd.SGV SGV & Co. (Manila, Philippines)SSP Single superphosphatescfd Standard cubic feet per daytpd Tons per daytpy Tons per year

FISCAL YEAR

Government of Pakistan )NFC and Subsidiaries ) July 1 - June 30

1/ As of January 1982, the Rupee was placed on a floating basis against abasket of currencies, following which the rate for the US$ has rangedfrom the previously fixed Rs 9.90/US$ rate to about Rs 11.70/US$.Since experience with this new rate is so far insufficient, a rate ofRs 10.00/US$ is used throughout this Report.

FOR OFFICIAL USE ONLYPAKISTAN


STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ........................................ 1

II. THE AGRICULTURE SECTOR AND FERTILIZER INDUSTRY ....... 2

A. Agriculture ...... .................. 2B. Fertilizer Industry ..... ............... 3

1. Background ................................... 32. Existing Producers ........................... 43. Fertilizer Production and Capacity .... ....... 5

C. Raw Materials .................................... 7D. Expansion Plans .................................. 7

III. THE NFC GROUP ........................................ 8

A. National Fertilizer Corporation of Pakistan Ltd. 81. Organization and Management .... .............. 82. Financial Performance of the NFC Group ........ 10

B. Pakarab Fertilizers Ltd. ............. ............ 121. History ...................................... 122. Organization and Management .... .............. 123. Production Facilities ........................ 124. Production Performance ....................... 135. Operating Results and Financial Position ..... 14

C. Pak-American Fertilizers Ltd. .......... .......... 141. History .. ... ........... 142. Organization and Management .... ............. 153. Production Facilities ....................... 154. Production Performance ...................... 155. Operating Results and Financial Position .... 16

D. Other NFC Subsidiaries ........................... 16

IV. FERTILIZER MARKETS AND MARKETING .... ............... 17

A. Historical Consumption and Production .... ...... 17B. Forecast Demand and Supply ..................... 19C. Distribution and Marketing ..................... 20D. Pricing and Credit ............................. 22

This report was prepared by Messrs. H. Harald Burmeister and Roger E. 0. Heathof the Industry Department and Mr. T. Ogmen (Consultant).

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

Page No.

V. THE PROJECT ................................................... 24

A. Background and Objective .............. .. ................ 24B. Multan - Ammonia/Urea Rehabilitation and Expansion ..... 26

1. Scope and Objective ................................. 262. Implementation and Schedule ......................... 273. Raw Materials, Utilities and Infrastructure ......... 274. Employment and Productivity ......................... 28

C. Multan - Plant Rationalization Program ........ ......... 281. Scope and Objective ................................. 282. Implementation and Schedule ......................... 29

D. Daud Khel Rehabilitation .............. .. ................ 291. Scope and Objective ................................. 292. Implementation and Schedule ......................... 303. Employment and Productivity ......................... 30

E. Improvements in Operational, Management andTraining Capabilities ................................. 30

1. Hiring of Expatriates ............................... 312. Operational, Management and Training Facilities ..... 313. Technical Training Center ........................... 32

F. Study of Additional Fertilizer Capacity ........ ......... 32

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT .................. 33

A. Capital Cost Summary ................ .. .................. 331. Multan - Ammonia/Urea Rehabilitation and Expansion .. 342. Multan - Plant Rationalization Program .... .......... 343. Daud Khel Rehabilitation ............................ 344. Improvements in Operational, Management and

Training Capabilities ............................ 355. Study of Additional Fertilizer Capacity .... ........ 356. Other Costs ........................................ 36

B. Financing Plan ................... .. .................... 36C. Procurement ...... ................ ...................... 37D. Allocation and Disbursement of Bank Loan ........ ....... 37

VII. FINANCIAL ANALYSIS AND RISKS ................................. 39

A. Summary ....... ................. ........................ 39B. Multan - Ammonia/Urea Rehabilitation and Expansion ..... 39

1. Revenues ........................................... 392. Production Costs ................................... 393. Financial Projections .............................. 40

C. Daud Khel Rehabilitation .............. .. ............... 421. Revenues ........................................... 422. Production Costs ................................... 423. Financial Projections .............................. 42

D. NFC ..................................................... 43E. Financial Rates of Return ............. .. ............... 44F. Financial Covenants ........ ............... I'll ...... 45G. Auditing and Reporting Requirements ........ .. .......... 45H. Risks ........ ................. ......................... 45

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Page No.

VIII. ECONOMIC ANALYSIS ................................................ 46

A. Economic Justification ....................................... 46B. Economic Prices of Fertilizers and Production Inputs ... ...... 46C. Economic Rates of Return ..................................... 47D. Other Economic Benefits ...................................... 49

IX. AGREEMENTS ....................................................... 49

ANNEXES

3-1 NFC Group - Corporate Structure3-2 NFC - Consolidated Income Statements - 1979-1981

3-3 NFC - Consolidated Balance Sheets - 1979-1981

3-4 PFL - Summarized Income Statements - 1978-81

3-5 PFL - Summarized Balance Sheets - 1978-81

3-6 PAFL - Summarized Income Statements - 1979-81

3-7 PAFL - Summarized Balance Sheets - 1979-81

4-1 Historical Offtake, Production and Imports of Fertilizer - 1962-19814-2 Ex-Factory Fertilizer Prices and Distribution Margins

5 Project Implementation Schedule

6-1 Capital Cost Estimate6-2 Repayment Schedule for Bank Loan6-3 Estimated Disbursement Schedule for Bank Loan

7-1 Assumptions Used in Financial Analysis7-2 PFL - Projected Income Statements7-3 PFL - Projected Balance Sheets7-4 PFL - Projected Cash Flow Statements7-5 PAFL - Projected Income Statements7-6 PAFL - Projected Balance Sheets7-7 PAFL - Projected Cash Flow Statements7-8 NFC - Projected Financial Statements

8-1 Assumptions Used in Economic Analysis8-2 Inputs for Economic Rate of Return Computations

Map - IBRD - Pakistan: Fertilizer Plants

I. INTRODUCTION

1.01 The Government of Pakistan has requested a loan of US$38.5 millionto help finance the Fertilizer Industry Rehabilitation Project (the Project),to be undertaken by the National Fertilizer Corporation of Pakistan Ltd.,(NFC), the state-owned holding company of several fertilizer productionand marketing companies (the NFC Group). The Project has several componentsexpected to cost a total of US$49.3 million, including US$38.5 million inforeign exchange. The principal components are (i) rehabilitation andexpansion of the urea and ammonia plants of the fertilizer complex at Multanand rationalization of other facilities at the same site (US$29.6 million);(ii) rehabilitation of the Daud Khel ammonium sulphate plant by replacingsome of its equipment (US$9.7 million); (iii) assistance to the NFC Group indeveloping and improving operations, management and training, includingthrough foreign operating assistance (US$10.0 million); and (iv) study of theviability of additional fertilizer capacity in Pakistan which is to befinanced separately under the proposed Technical Assistance Credit recentlynegotiated. The Bank loan would cover the foreign exchange cost of theProject including the capitalized front-end fee, and 78% of its financingrequirements. The remaining financing would be provided by the NFC Groupthrough inLernal cash generation.

1.02 This Project is considered by the Government of Pakistan (GOP) as apriority project to help assure the continued availability and increasedsupply of domestically produced fertilizer, and to increase the energyefficiency of existing facilities. Growing fertilizer demand and anincreasing burden on the balance of payments make it imperative to reducereliance on imports by taking advantage of any possibilities to economicallyincrease and rationalize domestic fertilizer production.

1.03 By supporting this Project, the Bank Group will continue its criticalinvolvement in Pakistan's fertilizer industry sector. So far, the Bankhas participated in the financing of three of the five modern fertilizerplants in existence or under construction. A first loan (Loan 549-PAK) ofUS$32 million was made in 1968 to Dawood Hercules Chemicals Ltd. (DH) fornew ammonia and urea plants; IFC participated with an equity investment ofUS$2 million. The second loan (Loan 988-PAK of US$35 million) was made in1974 to Pakarab Fertilizer Ltd. (PFL), now part of the NFC Group, to expandfacilities at Multan for the production of ammonia, calcium ammonium nitrateand nitrophosphate. A third operation in 1978 involved an IDA credit(Credit 846-PAK of US$55 million) to the Fauji Fertilizer Company (FFC) forthe establishment of new ammonia and urea plants which are now being commis-sioned. Finally, under an IDA credit (Credit 1066-PAK, US$50 million)granted in 1981 to finance fertilizer imports, a study of the NFC Group'smanagement and organization was undertaken.

1.04 Following preparation of the various project components by NFCand its subsidiaries, the Project was preappraised in April 1981; its appraisalwas carried out in November 1981 by a mission consisting of Messrs. H. HaraldBurmeister (Chief), Roger E. 0. HeaLh and Turgut Ogmen (Consultant) of theIndustry Department. A post-appraisal mission took place in February 1982.

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II. THE AGRICULTURE SECTOR AND FERTILIZER INDUSTRY

A. Agriculture

2.01 Although budgetary and balance of payments problems have persisted,the recent past has witnessed a significant economic recovery in Pakistan.GDP growth during FY78 through FY81 averaged over 6% p.a. and a similar rateis likely to be attained in FY82. This growth has been accompanied by arecovery in agricultural and industrial production well above the rate ofpopulation growth, currently averaging 3% p.a., and by a rapid rise inexports. Exports increased in real terms by 20% in FY79, 22% in FY80 and22% in FY81; during FY82 a further 10% increase is expected. Value addedin agriculture is predicted to rise by 5.1% this year, following an increaseof 4.4% in FY81; in industry it may rise by 9.5% this year compared to9.2% in FY81. This performance contrasts markedly with the economicstagnation of the early and mid-1970s, when the growth of GDP averaged only3-4%, goods production, 1.1% p.a., and export growth was negligible.

2.02 The recovery in the economy since 1977 has been aided by severalfactors, including favorable weather conditions, improved foreign demand forPakistan's exports, and higher domestic consumption associated with better crops,rising rural incomes and workers' remittances from the Middle East. Variouspolicy changes (as discussed in para 2.05 below) introduced by the Governmenthave also contributed to the recovery.

2.03 Agriculture remains the economy's mainstay, accounting directlyfor roughly a third of GDP, employing about 60% of the labor force and,directly or indirectly, providing nearly two-thirds of total exports.Agricultural land, however, is limited. From the total area of the countryof about 79 million hectare (ha), because of the mainly arid climate, only about19 million ha are cultivated. Of this area about 6 million ha, mainly in theNorth and Northeast, are farmed under rainfed farming systems and 13 millionha are irrigated from a 64,000 km network of canals and 179,000 tube wellsaround the Indus River. There are only about 3 million ha of exploitableforest. With a population of about 80 million largely concentrated in theIndus River Irrigation System, Pakistan is one of the poorest countries inthe world with a current annual per capita income estimated at US$270.

2.04 Agricultural growth during the 1960s averaged about 6% per year,mainly due to the introduction of high-yielding varieties of rice and wheat,increased use of fertilizers and increased supply of irrigation water.During the first seven years of the 1970s, agriculture's growth, at about1.5% per annum, failed to keep pace with population growth at 3.0% p.a. Thisslowdown was due to a combination of adverse factors, chiefly among them wereseveral years of bad weather, inadequate price incentives for agriculturalproducts, poor water management, and inadequate agricultural support services,including credit, research, and extension. However, during the last fouryears, production performance was encouraging at an annual growth rate of 5%.In part, this represents a recovery from the depressed production levels for

some crops in the early 1970s, and in part, the effects of recent continuousacreage expansion. There were also some modest improvements in per-hectareyields. The recent policy initiatives taken by the Government, and discussedbelow, are also a major factor in the improved performance.

2.05 Despite the recent recovery in output, a number of fundamentalfactors continue to limit agricultural productivity at levels well below thepotential implied by existing land resources and technologies already available.It is a matter of concern to the Government that the nation is not self-sufficient in food. The Government, therefore, has set as an objective ofits development plan to increase agricultural output by 6% per year in the1980s. In spite of land availability constraints, considerable potentialexists for additional productivity by increased use of fertilizer and othermodern inputs. The importance of increasing yield productivity is now widelyrecognized in the Government which is taking active measures to address thisproblem. Along with increases in fertilizer production, Government supportfor programs to strengthen research, extension, water management, credit andother services in the agriculture and water sectors is being intensified.In effect, in recent years the Government has taken a number of specificinitiatives to increase productivity. Particular attention has been givento improving farmer incentives and input supplies. Support prices for allmajor crops have been raised so that they are now closer to world prices. Atthe same time fertilizer subsidies are being reduced to minimize budgetaryproblems. Efforts have been made to improve the availability of inputs andthe efficiency of the fertilizer distribution system by expanding marketingnetworks and by ensuring adequate supplies and timely delivery of fertilizerimports. A better balance between nutrients has also been attained. A starthas also been made in improving extension services through the adoption ofthe so-called training and visit system. Preliminary reforms have beeninitiated to the agricultural research system. Improvements in irrigatedagriculture and water delivery systems are also being implemented. Theseinitiatives, however, are only at an early stage and major efforts will berequired to achieve a breakthrough from the problems of low agriculturalproductivity. The Bank is assisting the Government in these efforts throughits substantial past and projected lending to the sector,

B. Fertilizer Industry

1. Background

2.06 Industry currently contributes about 15% of GDP and, during much ofthe 1950s and 1960s, provided a major stimulus to growth. Although in the1970s industrial performance almost came to a standstill, in the last fewyears a significant recovery has taken place. Industrial output expanded by8.1% in FY80 and about 10% in FY81. Much of the progress was due to animprovement in the investment climate which seems to have been sustainedduring the last three years as a result of GOP's generally more positiveattitude toward private investment, new incentives being given to privateindustries, and recent major changes made to streamline investment procedures.Together with an expansion of the subsectors opened to investment by theprivate sector, GOP has introduced a number of incentive measures over the

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last three years. These include: exemption from import duty for somemachinery and materials; granting tax holidays especially for less developedareas; direct cash rebates for a large number of export industries; andrestrictions on the export of some materials required for domestic industrialuses. Furthermore, in December 1980, GOP liberalized quantity restrictionson imports. These measures have led to an improvement in private sectorconfidence and to a sharp increase in private investment projects.

2.07 At the same time, the Government has embarked on a comprehensivereview of its overall industrialization strategy. It is beginning toreform the public sector which has been plagued by low efficiency and poorprofits. Following major studies on the management and organization of thepublic sector, and on the performance of individual enterprises, implemen-tation of many of the recommendations of these studies has begun. The Boardof Industrial Management (BIM) was abolished, the number of sector holdingcorporations has been reduced from 11 to 8, and boards of directors havebeen established at the enterprise level. Some public sector units which hadlittle prospect of improved financial performance have been closed down.Public disinvestment is being considered on a case-by-case basis. A mutualfund has been established for the sale of equity holdings in public sectorenterprises to private investors. With regard to the public sector fertilizerproducers in the NFC Group, considerable improvements have been achieved andproduction at the two new facilities completed in 1979/80 is rapidly approachingrated capacity levels. Finally, high staff turnover, which was endemic inthe past, has gradually diminished as a result of more liberal pay policiesadopted by the Government.

2. Existing Producers

2.08 There are currently eight fertilizer producers in Pakistan. Five ofthese form the NFC Group, while the remaining three, Dawood Hercules, Faujiand Exxon Chemicals Ltd. (Exxon) are privately owned.

2.09 The NFC Group comprises two large and three small production units,all of which are operated independently. With the exception of one new plant(Mirpur Mathelo), all originate from the 1950's and 1960's. They are: (i)Pakarab Fertilizers Limited (PFL), located at Multan, Province of Punjab,which has substantial foreign private ownership and operates a complex of plantsdesigned to produce 304,000 metric tons per year (tpy) of prilled nitrophos-phate (NP), 450,000 tpy of calcium ammonium nitrate (CAN) and 59,400 tpy ofurea; 1/ (ii) Pak-Saudi Fertilizers Limited (PSFL), at Mirpur Mathelo,Province of Sind, operating ammonia/urea plants completed in 1980 with aproduction capacity of 557,000 tpy of prilled urea; (iii) Pak-AmericanFertilizer Limited (PAFL), at Daud Khel (Iskanderabad), Punjab Province, withfacilities to produce 90,000 tpy of ammonium sulphate; and (iv) Lyallpur

1/ On the basis of 300 stream days per year for NP and CAN and 330 streamdays per year for urea.

Chemicals and Fertilizers Ltd. (LCFL), which operates two plants with capaci-ties of 71,000 tpy of single superphosphate (SSP) at Jaranwala and 18,000tpy of SSP at Faisalabad. In addition, a urea plant of 96,000 tpy capacityis being constructed by the Hazara Urea Fertilizer Plant Ltd. (HUFPL) atHazara (North West Frontier Province), and is expected to start production inlate 1982. The NFC Group's production capacity currently amounts to about55% of the total capacity installed or under construction in Pakistan.

2.10 The Dawood Hercules plant, built with Bank Group support, isowned privately by the Dawood family of Pakistan (40%), Hercules Inc. ofWilmington, Delaware, USA (40%), IFC (10%) and Pakistani investors (10%).The DH plant has a capacity of 345,000 tpy of urea; since beginning produc-tion in July 1971, it has been a technical and economic success consistentlyoperating above its rated capacity. The company is currently considering todouble production capacity.

2.11 The new Fauji ammonia and urea plants were implemented with IDAfinancial support. With capacities of 330,000 tpy of ammonia and 557,000 tpyof urea, these plants are curently being commissioned and expected to commenceoperations shortly after a 45-month construction period, compared to aninitial schedule of 36 months. The project is estimated to cost US$293million, excluding working capital and interest during construction, anincrease of 29% over the original estimate. Forty-four percent of FFC'scommon stock is owned by the Fauji Foundation, an organization created by theMilitary in the late 1940s to provide retired personnel and their dependentswith medical and education assistance; the Foundation's investment of itsendowment has generated funds which have allowed it to develop into a majorindustrial conglomerate producing sugar, textiles, bottled gas and othergoods. Other shareholders in FFC are local public investment institutionsholding 30% of its common stock, the Government of Pakistan (2%), and investorsfrom Denmark (16%) and Kuwait (16%). The Exxon plant was built in 1970 andhas a rated capacity of 217,000 tpy of urea.

3 . Fertilizer Production and Capacity.

2.12 The following table summarizes the existing fertilizer productioncapacity in Pakistan, current production levels and production forecasts:l/

1/ Assuming the components of the Project are implemented.

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Pakistan - Fertilizer Production and Capacity Utilization a/(in '000 tons of nutrient and in %)

Capacity CapacityActual Utiliza- Utiliza-

Plant Capacity Production tion Projected Production tionFY80a/ FY81 FY81 FY82 FY83 FY85 FY85

Nitrogen

NFC - PFL 214 104 132 62 148 171 192 90- PSFL 256 - 151 59 185 218 230 90

- PAFL andOthers 63 21 20 32 30 30 56 89

Dawood Herciles 159 166 166 104 166 166 166 104Exxon 100 106 110 110 110 110 110 110Fauji (not yetin operation) 256 - - - 85 218 230 90

Total N 1,048 397 579 73 724 913 984 94

Phosphorous

NFC - PFL 69 32 40 58 45 55 62 90- LCFL 16 18 18 112 18 17 14 88

Total P 85 50 58 68 63 72 78 89

Total N+P 1,133 447 637 72 787 985 1,062 b/ 94

a/ Fertilizer years from July to June

b/ Production is assumed to stabilize at this level, except for a decline inproduction, beginning in 1987, at two small SSP plants of LCFL due toobsolescence.

2.13 Excluding the Fauji plant which is not yet in operation, the ferti-lizer industry operated at an overall capacity utilization of 72% in 1980/81.This overall rate, however, conceals wide variations among the variouscompanies. Whereas DH and Exxon produced at high levels of capacityutilization, those at the new PFL and PSFL plants were low; at PFL thiswas due to certain design deficiencies and high personnel turnover which arecurrently being overcome (para 3.19). The PSFL plant began operations in1980 and has now reached production levels closer to its rated capacity.After the PFL and PAFL plant modifications contemplated under this Project

are completed and with the appropriate management support provided under theProject, these plants should be able to reach a 90% capacity utiliation by1984/85. Taking into account these factors, and assuming that DH and Exxonwill maintain existing production rates and that both Fauji and PSFL willeventually operate at 90% of their rated plant capacities, Pakistan's ferti-lizer production is expected to increase from a level of 637,000 nutrienttons in 1980/81 to 1,062,000 tons by 1984/85, representing 94% of installedcapacity. In spite of this expected growth in domestic production, Pakistanwill remain deficient in fertilizer supply, with imports accounting for aboutone-third of consumption by 1984/85 and 57% by 1989/90 (para 4.03). If addi-tional capacities are installed by DH, now under study, total production couldrise to about 1,200,000 tons of nutrient by 1986/87.

2.14 Eighty-four percent of Pakistants total nitrogen production capacity(including Fauji) is accounted for, by large, modern, energy-efficient plants.For phosphorous fertilizer the situation is similar, where 81% of totalproduction consists of a high value product made in modern, large-scalefacilities. The Project will assist in improving the capacity utilizationand energy efficiency of the older plants.

C. Raw Materials

2.15 The feedstock for all of Pakistan's existing ammonia plants is naturalgas which is the most efficient and economic raw material for nitrogenous ferti-lizer production. The FFC, PSFL and Exxon plants all of which are located inthe southern Punjab and northern Sind Provinces (see Map), are being suppliedwith natural gas directly from the Mari field located in the same area. Allother plants, located in central and northern Punjab, obtain their naturalgas from the Sui Northern distribution network. The small domestic productionof phosphatic fertilizer is based mostly on imported rock phosphate. A studypartly financed with British Government aid is underway to determinethe viability of greatly expanding exploitation of phosphate rock depositsnear Hazara in the North West Frontier Province. Preliminary data from thestudy, scheduled to be completed by year-end 1982, point to the inferredand indicated availability of some 12-16 million tons of ore averaging about26-27% P 20 at five different locations, which after suitable beneficia-tion, coull be economically and technically suitable for fertilizer produc-tion. However, the need for further drilling tests to firm up availablequantities, as well as processing tests to determine the adequacy of the rockfor fertilizer production, and the need for substantial infrastructureinvestments in the mountainous terrain are likely to delay any domesticphosphate production program there for some years.

D. Expansion Plans

2.16 NFC plans to study alternatives for setting up additional phosphateproduction capacity in Pakistan, to be based either on the Hazara or onimported rock phosphate, and for replacing the existing ammonium sulphateplant at Daud Khel. Such a study, proposed to be financed under the Project(para 5.35), will evaluate the technical, economic and financial meritsof several alternative projects, including a second nitrophosphate plant tobe based on ammonia produced from natural gas.

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2.17 Investigations of natural gas resources, which are being carriedout with Bank financing, are promising. GOP expects to reach a decisionin late 1982 when additional gas resources are expected to be proven, asto the quantities of gas that will be available for increased fertilizerproduction.

2.18 As noted above (para 2.10), the other major expansion Drojectcurrently envisaged in the country is by DH which plans to expand its ammonia/urea production capacity by about 300,000 tpy of urea. However, DH's finaldecision on this project is held in abeyance until a sufficient availabilityof natural gas can be assured, and until agreement with GOP can be reached onconditions for new investments.

III. THE NFC GROUP

A. National Fertilizer Corporation of Pakistan Ltd. (NFC)

1. Organization and Management

3.01 History and Organization. NFC whose offices are located in Lahorewas formed in 1973 as a Government holding company for the four Government-controlled fertilizer plants located at Multan, Daud Khel, Faisalabad (Lyallpur)and Jaranwala, previously under the administration of the West PakistanIndustrial Development Corporation (WPIDC). Apart from overseeing theoperations of these plants, NFC implemented the substantial expansion of theMultan plant, the establishment of the new ammonia/urea plant of PSFL atMirpur Mathelo, and implementation of the smaller ammonia/urea plant of HUFPLat Hazara, which is still under construction. From 1973 to 1981 the NFCGroup's output of fertilizer has grown from 210,000 tons to 1,018,000 tons ofproduct. With combined sales revenues of about US$180 million equivalent inFY1981, the NFC Group is the third largest industrial enterprise in Pakistan.As mentioned before, NFC's principal subsidiaries are PFL, PSFL, PAFL, LCFL,HUFPL, and the National Fertilizer Marketing Ltd. (NFML). They are describedin more detail in the following sections of this Chapter. The Group's corporatestructure is shown on Annex 3-1.

3.02 NFC's role toward its subsidiaries has been mainly that of a holdingcompany and principal shareholder, acting as financial supervisor, channel ofcommunications with Government authorities, and agent for certain bulkpurchases. Based on the recommendations of a study of the NFC Group'sorganization and management which was undertaken by SGV & Co. of Manila (theSGV Study) under IDA's Fertilizer Imports Credit (Credit 1066-PAK), severalorganizational measures (discussed in detail in para 3.07) are being consideredwhich would enlarge NFC's role to that of a central corporate head office ofthe Group.

3.03 Management and Staffing. NFC is headed by a Chairman, Mr. Riaz H. Bokhari,appointed by the Government in 1977, who reports through a Board of Directors tothe Secretary of the Ministry of Production. He is assisted by a small staff ofcapable individuals who have been working within the fertilizer industry

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for many years and who all played key roles in the implementation of thelarge Multan expansion and Mirpur Mathelo projects. The NFC Chairman alsochairs the boards of all the NFC subsidiaries.

3.04 The managerial effectiveness of NFC and its subsidiaries has beengreatly affected by a significant turnover at all levels of its managerialand technical personnel. The impact of this turnover is most pronounced onthe implementation, during 1974 to 1979, of NFC's two major projects mentionedabove. Although the substantial delay in the completion of the PFL plant(para 3.13), and the delay in the completion of the PSFL plant were attributableto many factors, the high personnel turnover at the two companies and NFC,exacerbated by the drain of skilled technicians to the Middle East, was animportant cause.

3.05 The principal reason for the staffing problem is to be found in thelow levels of remuneration granted to NFC's technical and management staff:these levels are tied to Government pay scales and historically have beenwell below those customary in comparable private sector industries. Inconnection with the Multan Expansion Project, the Government had agreed toremove pay limitations to public enterprises as an important measure to allowpublic sector plants using sophisticated technology to attract and maintainthe highly qualified staff needed to operate them. As a result, in 1979 theGovernment began to significantly improve pay conditions in the two major NFCoperating plants by allowing them to raise emoluments for certain categoriesof technical and managerial operating staff; further increases were permittedin 1980 and 1981. These improvements have succeeded in reducing turnover atthe plants and it is expected that they will permit them to hire in the nearfuture the qualified technical and management staff required.

3.06 Since pay limitations were eased only for several of NFC's operatingsubsidiaries but not for its headquarters staff, NFC has an insufficientnumber of adequately qualified technical and managerial staff. The constraintsimposed on NFC's hiring capabilities are being liberalized to allow NFC toretain and attract the staff required to oversee the operations of the NFCGroup's very capital-intensive productive investments, and in general toenable NFC to adequately perform its role, including implementation andsupervision of the various components of this Project and the development ofplans for future new productive capacity. Agreement was reached duringnegotiation that GOP will take promptly all action necessary to enable theNFC Group to attract and retain qualified technical and managerial staff.It was agreed that this will include raising compensation scales to be competi-tive with those of the private sector fertilizer industry, employment of staffon contract, and secondment from subsidiaries. The adequacy of the NFCGroup's managerial and technical staffing will be reviewed with the Bankperiodically.

3.07 The NFC Group currently employs 4,740 people, 904 of which are inmanagerial and technical positions, 2,350 are skilled and 1,496 semi-skilledlaborers. Although staffing is not adequate at all managerial levels,semi-skilled labor is excessive. But since semi-skilled labor is paid lowwages (an annual average US$1,200), the financial impact of the excess laboris not significant.

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3.08 Organization and Management Study. The SGV Study mentioned in para3.02 above, resulted in a number of practical recommendations for changes inthe organizational structure of the NFC Group aimed at helping to facilitateits adaptation to the demands of large manufacturing organizations and of thehigh level of technology with which the large NFC plants are now endowed.The principal recommendations of the SGV Study include:

(i) provision by Government of greater autonomyto the NFC Group on operational matters, particularlyon the setting of compensation;

(ii) delineation of responsibility and delegation ofpowers between NFC and its operating units;

(iii) restructuring of the organization of NFC andits operating units and their alignment with recom-mended plant manning levels;

(iv) development of integrated training programs foremployees, with suitable systems for periodicalappraisal and performance reviews; and

(v) detailed review and revision of current managementinformation systems, accounting manuals, etc.

3.09 Although some of the Study's recommendations, mainly included under(iii) above, have already been implemented, NFC is setting up a program forthose remaining to be implemented. It was agreed that such a program, basedon an exchange of views with the Bank, would be completed promptly.

2. Financial Performance of the NFC Group

3.10 Since NFC is a holding company and has no operating income of itsown, its financial performance has to be seen in combination with that of itsoperating subsidiaries. Annexes 3-2 and 3-3 thus summarize the NFC Group'sconsolidated balance sheets and income statements for the years 1979 to 1981;the following table is a summary and reflects also NFC's and its threeprincipal subsidiaries' financial positions and results for FY81.

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NFC Group - Summarized Financial Statements(in US$ millions equivalent)

NFC Group Consolidated Principal Companies, FY81FY79 FY80 FY81 NFC PFL PSFL PAFL

Sales Revenue (incl.Govt. Compensation) 50.7 131.8 179.6 - 102.2 44.1 13.3

Net Income (Loss) (1.7) 24.0 18.2 (1.0) 9.7 14.7 1.4Total Cash Generation 10.0 47.4 40.7 - 28.8 28.5 2.5

Net Fixed Assets 369.0 421.3 405.5 0.2 146.6 189.6 3.1Current Assets 64.8 128.5 192.8 34.4 121.0 30.0 11.8Current Liabilities 61.3 113.1. 119.0 20.4 58.8 45.9 4.2Long-term Debt 274.7 294.6 295.8 116.8 87.6 78.8 -Equity a/ 94.9 122.4 137.1 81.9 121.3 74.7 10.7

Debt/Equity Ratio 75:25 71:29 69:31 63:37 55:45 51:49 -Current Ratio 1.1 1.1 1.6 1.7 1.8 0.7 2.8

a/ Including minority interest in consolidation.

3.11 Since construction of the PFL and PSFL plants was completedthe financial results of the NFC Group have improved considerably: when FY80revenues, including Government compensation payments to operating subsidiaries(para 4.12), increased to more than two-and-one-half times those of FY79, theGroup became profitable. In FY81, net sales increased further to aboutUS$180 million and internally generated cash flow totalled about US$41million, allowing the Group to service its debt. As a result, the long-termdebt to equity ratio improved from 75:25 in FY79 to 69:31 in FY81. As notedin Chapter VII, further improvements are projected for FY82 and the future.The liquidity situation of the NFC Group is now satisfactory, with a currentratio of 1.6 to 1 as of June 30, 1981.

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B. Pakarab Fertilizers Limited (PFL)

1. History

3.12 PFL was formed in 1973 by incorporating the existing fertilizerplant at Multan, then owned by WPIDC. In 1974, PFL proceeded to develop andimplement the Bank-financed Multan Expansion Project which was completed in1979, thereby substantially increasing the Company's productive capacity.Apart from the Bank loan, financing was also obtained from the Asian DevelopmentBank, the OPEC Fund, local and foreign banks and the Government through NFCto finance that expansion. The Abu Dhabi National Oil Company (ADNOC)provided equity and now holds 48% of PFL's shares.

3.13 The Expansion Project was originally estimated to cost US$84.4million but ended up costing twice as much (US$170.8 million) mainly as aresult of sharp increases in international equipment prices following the1972 oil crisis, higher than anticipated inflation for local plant items, andhigh technical personnel turnover, wiich was a principal cause of delays inprocurement and construction; project implementation took 52 months, substan-tially longer than the 36-45 months usually required to build similar plants(Project Performance Audit Report No. 3582 dated August 18, 1981). Despitethe delay in construction and the large cost overrun, PFL continues to befinancially and economically viable, principally because product prices alsoincreased significantly more than anticipated as a result of world-wideinflation and energy cost increases.

2. Organization and Management

3.14 PFL is headed by a Managing Director who is responsible to a Board ofDirectors; the Board is chaired by the Chairman of NFC and consists of fiverepresentatives of NFC and GOP and four representatives of ADNOC. Reportingto the Managing Director are four General Managers, one each for manufacturing,technical and planning operations, finance and accounting, as well as commercialand corporate affairs. Total staffing at PFL is 1,752 people, 280 of which aremanagers and engineers. PFL maintains purchasing and forwarding offices inLahore and Karachi. PFL's Managing Director, Mr. Zahur Ahmad Khan, has beenworking in Pakistan's fertilizer industry since 1954 and at the Multan plantsince 1973. He is a knowledgeable manager who has proven his capability incarrying responsibility for implementing, start-up and operation of theexpanded Multan plant in the face of considerable constraints and obstacles,most importantly, the shortage of qualified managerial and technical personnel.

3. Production Facilities

3.15 The first production facilities at Multan were built in 1962 toproduce 300 tpd ammonium nitrate-limestone (ANL) and 180 tpd crystallineurea, with intermediate facilities for 200 tpd of ammonia and 200 tpd ofnitric acid. Later, the urea plant, which continues in operation, wasmodified to make prilled urea. The Expansion Project financed by the Bankin 1974 involved installation of new facilities to produce 910 tpd ofammonia, 1,200 tpd of nitric acid, 1,500 tpd of CAN and 1,020 tpd of NP and

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was accompanied by the shutdown of all the old production facilities with theexception of the urea and nitric acid plants; the Expansion Project startedcommercial production in January 1979.

3.16 The old urea plant is based on Inventa (Swiss) design and the oldnitric acid plant was designed by C. I. Girdler (US). Kellogg (UK) was thedesigner and engineering contractor for the new ammonia plant. FriedrichUhde GmbH (FRG) was responsible for design and erection of the nitricacid, CAN and NP plants. Stamicarbon (Netherlands) acted as process licensorfor the NP plant and technical adviser to NFC during the implementationperiod.

4. Production Performance

3.17 Recent performance of the Multan complex is given in the followingtable, clearly reflecting the substantial increase in PFL's output followingcompletion of the Expansion Project:

PFL - Production Performance(in '000 tons)

Urea ANL/CAN NPCapacity Capacity Capacity

Fiscal Utiliza- Utiliza- Utiliza-Years Quantity tion (%) Quantity tion (%) Quantity tion (%)

1976 24.6 42 70.8 79 - -

1977 26.3 44 64.5 72 - -

1978 17.6 30 69.3 77 - -1979 29.4 50 107.9 n.a. 66.9 211980 43.7 74 199.0 44 137.2 441981 47.9 81 272.6 61 171.2 541982 (9 mos.) (37.5) 85 (238.6) 71 (154.2) 66

3.18 Due to restricted ammonia availability prior to 1979, urea produc-tion was consistently low; this was corrected when the new ammonia plantcame on stream, allowing daily urea design capacity to be achieved, and theattainment of a reasonable overall capacity utilization. However, severalsections of the plant and its piping and instrumentation have seriouslydeteriorated (para 5.09). Without the rehabilitation of the urea plantincluded in the Project, it is expected that the plant's performance woulddecline rapidly over the next two to three years.

3.19 The performance of the new CAN and NP plants, both in terms of outputand product quality, is still low due to design deficiencies in the crystalli-zation units which are now in the process of being corrected by the engineeringcontractor. Completion of the necessary modifications is scheduled for late1982. On the basis of pilot tests carried out, it is expected that capacityutilization for the CAN and NP plants can be increased to 90%.

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5. Operating Results and Financial Position.

3.20 Annexes 3-4 and 3-5 provide PFL's summarized income statements andbalance sheets for 1978 through 1981, the period from just before to aftercompletion of the Expansion Project. The improved production performancedescribed above is clearly reflected in PFL's results with profits of US$5.3million equivalent being generated in FY80 and US$9.7 million in FY81. In1981 the company was generating a healthy cash flow of about US$29 millionequivalent, not counting an additional US$19.2 million in taxes deferred overa period of eight years. PFL's current ratio was 1.8 and its long-termdebt-to-equity ratio, 55:45. The company's long-term debt consisted mostly ofloans incurred in connection with the Multan Expansion Project, includingUS$28.5 million outstanding under the IBRD loan for that project. PFL haspaid dividends out of FY80 and FY81 earnings.l/

C. Pak-American Fertilizers Ltd. (PAFL)

1. History.

3.21 The first fertilizer plant in Pakistan, producing ammonium sulphate(AS), was built at Daud Khel (Iskanderabad) between 1953 and 1958 withUS foreign aid assistance. The original fertilizer plant's capacity was50,000 tpy of AS, produced from locally available gypsum and coal; it wasincreased to 90,000 tpy in 1969 by adding new ammonia and AS units with therequired utility facilities. In 1973, associated gas became available fromthe nearby Meyal and Dhullian oil fields and replaced coal as feedstock andfuel. Although the age of different sections of the plant now varies between12 and 24 years, most of the equipment is in good condition and functioningwell due to PAFL's good operating and maintenance practices. However despitecareful maintenance, some items of equipment have reached the end of theiruseful lives and require replacement; other items require major overhauls toensure continued reliable operation. The investments under the Project aredesigned to improve the plant's operation and extend its economic life forat least seven years without which the plant may have to be closed downwithin a year or two. PAFL is wholly owned by NFC.

1/ As described in detail in para 4.12, PFL and other producers, undertheir respective agreements with GOP, receive Government compensation forthe subsidies granted to farmers through fertilizer pricing in Pakistan.Such compensation, which is recorded by PFL as income on an accrualbasis, amounted to the equivalent of US$27 million, US$62 millionand US$46 million respectively, for the last three years. As ofJanuary 1982, a total of US$37 million equivalent of these subsidiesremained to be collected; once this amount is received, which isexpected to occur in 1982, PFL's financial situation will be furtherimproved. To compensate for certain deficiencies in the plant'sdesign, whose rectification is expected to be completed in late1982, the Government agreed, for the purposes of computation ofcompensation payments, to de-rate the PFL plant's capacity,thereby in effect allowing the company to reach its 15% profit-ability target at a production level of 61% for 1980/81.

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2. Organization and Management.

3.22 PAFL is managed by a five-member Board of Directors headed by theChairman of NFC. The General Manager of PAFL, also a member of its Board,has reporting to him six managers, one each for production, gypsum quarrying,safety, internal audit, accounting and administration. Total staffing atPAFL is 1,049 people of which 99 are in the managerial and technical super-visory catagories. PAFL's General Manager, Mr. Chaudry Nazir Ahmed, hasconsiderable experience in the fertilizer industry and was Technical Managerat Multan prior to his appointment to PAFL in 1979. The Daud Khel managementis composed of capable and dedicated individuals who take pride in thecontinued functioning of their plant as is evidenced by the excellentcondition, considering their age, of the various units of equipment.

3. Production Facilities.

3.23 PAFL's production facilities consist of an original Lurgi (FRG)coal-based ammonia plant, converted in 1973 to auto-thermal reforming ofnatural gas, and a Koppers (FRG) steam-reforming ammonia plant, with acombined design capacity of 80 tpd of ammonia. Oxygen required for auto-thermalreforming and nitrogen for ammonia synthesis are obtained by low temperaturefractionation of air. 1/ The two gypsum-based ammonium sulphate plants,based on ICI (UK) process design, had an original total design capacity of330 tpd (108,900 tpy). This capacity, however, has been derated to anofficial capacity of 273 tpd (90,000 tpy) due to the quality of gypsum beingpoorer than originally envisaged. It is apparent, however, from productionrecords that the plant can operate at a production level of about 95,000 tpy.The utilities section includes two steam turbine power generation sets with atotal installed capacity of 23 MW. Normally only one is operating at a loadof approximately 7.5 MW, which includes power supply to the adjacent cement,penicillin and dye stuffs plants.

4. Production Performance

3.24 The table below summarizes PAFL's production of ammonium sulphatesince 1970/71 in relation to a design capacity of 90,000 tpy, showing thatfor the last eight years, and as a result of the shift in feedstock from coalto natural gas, the plant has been consistently producing at high capacityutilization rates. Operations over the last two years, however, have beencharacterized by a sharp increase in the number of unscheduled plant shutdownsdue to equipment failure that will significantly reduce future productionlevels, unless the investments proposed under the Project are carried out.

1/ As a by-product, argon gas is obtained and bottled for sale.

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PAFL - Production Performance

(in '000 tpy)

CapacityFiscal Utiliza-Years Production tion (%)

1971 55.9 621972 66.8 741973 58.2 651974 92.6 1031975 95.1 1061976 97.2 1081977 100.4 1121978 95.4 1061979 97.8 1091980 98.9 1101981 96.6 107

5. Operating Results and Financial Position

3.25 Annexes 3-6 and 3-7 provide PAFL's summarized income statements andbalance sheets for the years FY79 to FY81. PAFL is one of the two smallerNFC subsidiaries. In FY81 sales revenue amounted to US$12.3 million andtotal cash generation, to US$2.5 million. The company's financial position issound, with no significant debt. PAFL has been profitable although withsignificant variations from year to year due to its practice of recordingGovernment compensation for farm subsidies as income only when receivedrather than on an accrual basis. Excess cash resulting from the high levelof operations described in para 3.24, has been declared as dividends,at rates of 6%, 43% and 15% on capital, respectively, for the last threeyears.

D. Other NFC Subsidiaries

3.26 Pak-Saudi Fertilizers Limited (PSFL) is the second largest subsi-diary of NFC which operates an ammonia/urea complex at Mirpur Mathelo.The plant which started commercial production in October 1980, has aninstalled capacity of 1,000 t.pd of ammonia and 1,740 tpd of urea. PSFL'sproduction has reached about 80% of capacity and is now operating smoothly.The company is headed by a managing director who reports to a board headedby the Chairman of NFC and consisting of seven directors representing NFC,the sole shareholder. Lyallpur Chemicals and Fertilizer Limited (LCFL) isNFC's remaining producing subsidiary, with plants at Faisalabad and Jaranwala.This company which is also wholly owned by NFC, produces 100,000 tpy ofsingle superphosphate. The facilities of the Hazara Urea Fertilizer PlantLimited (HUFPL) are under construction with assistance from the People'sRepublic of China; they are planned to have a capacity of 56,000 tpy ofammonia and 96,000 tpy of urea and are expected to begin production inlate 1982.

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3.27 National Fertilizer Marketing Ltd. (NFML) was formed in 1978 to beresponsible for sales and distribution of all the NFC Group's products. Thecompany has developed an extensive country-wide marketing network withcurrently 1,248 dealers; it operates 31 warehouses of which two are ownedand the others leased. Partly due the recent difficulties in the fertilizertransportation system described in Chapter IV, NFML has been encounteringgrowing problems in handling the NFC Group's output. The company's capabilityof storing large quantities of product in the market areas has not been welldeveloped since in the past, off-take was never a problem. Total warehousingcapacity is currently 95,000 tons; after additional units currently underconstruction at eight locations will be completed in 1982, the total capacitywill rise to 232,000 tons and thus to a level adequate under normal circum-stances for the NFC Group's envisaged production.

3.28 NFML's income is essentially limited to handling fees charged to theproducers who in turn recover distribution costs from the Government in theform of marketing incidental allowances. Due to the recent increases instocks and corresponding financing requirements, so far not reflected inincreased marketing incidentals allowed by GOP, the company in FY81 incurredoperating losses. Marketing incidentals are discussed in more detail inparas 4.10 and 4.11.

IV. FERTILIZER MARKETS AND MARKETING

A. Historical Consumption and Production

4.01 Annex 4-1 provides data on fertilizer off-take, 1/ production andimports in Pakistan since the 1960s which are summarized on the followingpage. From 1962 to 1981, fertilizer off-take grew at annual rates of18%, 33% and 36% respectively, for the three nutrients, nitrogen, phosphateand potassium, while production increases lagged behind until 1979 when newcapacity began to come onstream. Imports have been increasing sharply,reaching in 1981 a total of 711,000 nutrient tons. This level of imports,however, was excessive and did not take into account the fact that NFC plantswere coming into production. As a result, large fertilizer stocks haveaccumulated. This stock build-up was further accentuated by a reduction inthe rate of growth in fertilizer demand, mainly due to the Government'sdecision to substantially raise fertilizer prices as a first step towardseventually eliminating subsidies. Consumption has begun to grow again in FY82and it is expected that growth will continue, provided GOP increases cropprices to the extent required to offset future fertilizer price increases,and adequate credit is made available to farmers.

1/ Fertilizer statistics do not provide accurate information on actualconsumption by farmers but only on "off-take" from plants and ProvincialGovernment agencies. These can vary significantly from consumption dueto dealer stockage which is subject to significant variation from yearto year.

Pakistan - Historical Offtake, Production and Imports of Fertilizers(000's of tons of nutrients)

YearEnded Nitrogen Phosphate Potash Total Fertilizer

June 80 Offtake Production Imports Offtake Production Imports Offtake Imports Offtake Production Imports

1962 37 14 40 1 - 1 - - 38 14 41

1970 274 129 292 37 4 11 1 - 87 48 3

1975 363 310 106 61 11 26 2 - 426 321 132

1980 806 389 450 229 50 147 10 14 1,045 439 611

1981 843 581 387 227 59 302 10 22 1,080 640 711H

GrowthRates

1962-81 17.9% 21.7% 12.7% 33.0% - 35.1% 36.0% a/ - 19.3% 22.3% 16.2%

1970-81 10.8% 14.7% 2.6% 17.9% 27.7% 35.1% 23.3% - 25.7% 26.6% 64.8%

1975-81 15.1% 11.0% 24.1% 24.5% 32.3% 50.5% 30.7% - 16.8% 12.2% 32.4%

a/ For period 1967-81.

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B. Forecast Demand and Supply

4.02 Despite the strong growth of fertilizer consumption over the lasttwo decades, present application rates of fertilizer in Pakistan are stilllow when compared to world-wide averages. Further increases in fertilizerconsumption are expected as indicated in Chapter II. The mission estimatesthat during the 1980s, demand for nitrogenous fertilizer will grow at annualrates gradually decreasing from 10% to 6%, and for phosphatic and potassiumfertilizers, at rates decreasing from 17% to 7%. These rates of growth areconsistent with estimates of demand made by the Government and by industrialsources. The effect of the projected growth in demand together with currentproduction forecasts are reflected in the following table:

Pakistan - Projected Fertilizer Supply/Demand Balances (1982-1990)('000 nutrient tons)

YearsEnding Nitrogen Phosphate PotassiumJune 30 Demand Production a/ Deficit Demand Production a/ Deficit Demand

1981(actual) 843 581 262 227 59 168 101982 927 724 203 266 63 203 121983 1,010 913 97 308 72 236 141984 1,101 948 153 354 75 279 161985 1,189 984 205 407 78 329 181986 1,284 984 300 464 76 388 211987 1,374 984 390 525 74 451 231988 1,470 984 486 588 72 516 261989 1,558 974 584 646 62 584 281990 1,652 964 688 692 62 630 30

Rates ofGrowth

1981-85 9.0 14.1 - 15.7 7.2 18.3 15.81981-90 7.0 5.2 10.1 11.8 0.6 14.1 11.6

a/ Assumptions as described in para 2.12. No new projects are assumed,except as included under the Project.

4.03 In summary, during the 1980s, consumption of nitrogenous fertilizeris expected to grow from 843,000 nutrient tons in FY81 to 1,652,000 tons byFY90, i.e., at 7.8% p.a., which as noted, is below the rates achieved inthe past. Phosphatic fertilizer consumption is forecast to grow from 227,000nutrient tons in 1981 to 692,000 tons by 1990, or 13.2% p.a. and potassium

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consumption from 10,000 nutrient tons to 30,000 tons which represents anannual rate of growth of 13%. On the production side, assuming that alldomestic fertilizer plants now in existence or under construction, includingthe small expansion of the Multan urea plant to be financed under the proposedProject (para 5.08), will eventually produce at normal industry levels of90% of their rated capacities, the deficit for nitrogenous fertilizer,presently at 31% of demand, will grow to 42% of demand by 1990, representing688,000 nutrient tons. Regarding phosphatic fertilizer, the deficit willgrow over the same period from 74% to 91% of demand or 630,000 nutrient tons.These deficits point to the need for further increasing Pakistan's productivecapacity for both nitrogenous and phosphatic fertilizer, and that thereshould thus be sufficient demand for at least two new plants for each N and Pfertilizer or combinations thereof in the 1980s, even if the expected doublingof capacity of the Dawood Hercules urea plant were to materialize.

4.04 In view of the above, NFC has initiated surveys to determine thetypes of fertilizer the next plants should produce. Products such asnitrophosphate (NP), mono ammonium phosphate (MAP), and diaimmonium phosphate(DAP) are being considered; decisions hinge largely on the availability ofdomestic natural gas for the production of ammonia. Rock phosphate and/orsulfur which, if not adequately available locally, would have to be imported.As mentioned previously, studies concerning the exploitation of new dry orassociated gas resources and phosphate rock deposits as well as the productionof sulfuric acid are underway and should be concluded late in 1982.

4.05 Additional studies will be undertaken under the Project to establishthe technical, economic and financial viability of potential projects, and ifeconomic, to ensure that new fertilizer projects can be implemented withoutundue delay (para 5.35).

C. Distribution and Marketing

4.06 NFML and the three private sector producers each maintain separatemarketing and distribution networks in contractual collaboration with alarge number of private retail dealers. Producers ship fertilizer directlyfrom their plants (or after intermediate storage in warehouses in marketareas, which are either owned or leased by producers). Dealers keep stocksusually at their cost and under their responsibility until final saleto farmers.

4.07 In addition to marketing their own products, manufacturers alsomarket complementing phosphate and potassium fertilizers; these are acquiredfrom the Provincial Governments' agencies responsible for distributingfertilizer imported by the Federal Directorate of Fertilizer Imports. Mostimported fertilizer is marketed by the Provincial Government agencies directlyto farmer cooperatives.

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4.08 Both imported and locally manufactured fertilizer is transported todistribution points by truck or rail. Issues related to economically movingfertilizer from domestic plants to dealers were studied by a FertilizerTransportation Task Force in accordance with understandings reached with theBank in 1978 under the Fauji Fertilizer Project, and again in 1980, under theFertilizer Imports Credit. The Task Force made recommendations concerningrail and road transport, storage in the market areas with the necessaryhandling facilities, and the use of unit or block trains. While transporta-tion of fertilizer within a radius of about 300 km from the plants as wellas from railhead warehouses to consumers is recommended to be undertaken bytruck, delivery from plants to selected warehouses operated by fertilizerproducers beyond that distance would be by block trains. NFC has developedproposals for operating schedules for such block trains from plants tostorage locations through end-1983, which were approved by Pakistan Railways.GOP undertook to cause Pakistan Railways promptly to implement and thereaftermaintain adequate schedules for the operation of such block trains.

4.09 Road transport is handled by Pakistan's private trucking industry,and the National Logistics Cell (NLC), established in 1978 by the Governmentthrough the Army, which is operating a fleet of about 1,200 trucks throughoutthe country. The NLC was very effective in 1978 in clearing the acute conges-tion in the port of Karachi which occurred principally as a result of the wheatcrop failure causing greatly increased import needs in addition to otherincoming bulk shipments such as cement and fertilizer. Port congestion isnow no longer a problem but the NLC fleet continues to be available fornon-military purposes such as for moving fertilizer from domestic plantsto markets.

4.10 As noted before, during the latter half of 1981, substantial quantitiesof fertilizer stocks built up at NFC's and other fertilizer plants. Thisbuild-up was due largely to the over-supply of nitrogenous fertilizer causedby excessive imports, rapidly increasing production at new plants, and atemporary slowdown in demand. Part of the build-up at NFC's plants, however,was caused by the company's inability to attract a sufficient number oftrucks to handle shipments. In late 1981, the availability of trucks fromNLC was constrained and due to seasonal factors, private truckers werealso overstretched and were demanding freight rates in excess of the amountsapproved for reimbursement by GOP as part of the incidentals which eachproducer receives to cover such costs as fertilizer transportation to dealers,warehousing, financial charges on inventories and dealer commissions. Sincethe plants could not pay such freight rates significant amounts of fertilizerwere delayed in their despatch to markets.

4.11 Although adequate trucking transportation is now again available,steps are required to prevent a recurrence of a similar situation in thefuture. Agreement was reached during negotiations that the Government developa system satisfactory to the Bank for adequate compensation to NFC producersfor all costs of fertilizer transportation, maintaining inventories, dealercommissions and other costs related to the marketing of fertilizer.

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D. Pricing and Credit

4.12 Crop prices as well as retail and ex-factory fertilizer prices inPakistan are controlled by the Government. The pricing system makes adistinction between the prices at which all fertilizers, whether imported ormanufactured locally and regardless of the producer, are sold to farmers,and the prices which the different fertilizer producers are allowed toreceive for their output in line with their respective pricing agreementswith GOP. For those producers whose agreed ex-factory price is above theprice farmers have to pay (farmer prices), the difference between the two iscovered by Government compensation payments. Alternatively, this differenceis collected by the Government in the form of a Development Surcharge fromsuch producers whose ex-factory prices are below farmer prices. Ex-factoryprices are usually based on standard operating costs plus a profit tied tothe amount of equity. Such profits, whose levels vary from company tocompany and range between 15% and 20% after tax (equivalent to over 30% to40% before tax), are allowed if production reaches certain levels of capacityutilization. If production falls short of such capacity levels, the priceper ton remains the same and profits are proportionately reduced. In somecases, the unit price remains unchanged also when production exceeds stipulatedlevels, allowing much higher profits and providing the necessary incentive tothe producer to maximize production; the FFC pricing agreement with GOP, themost recently concluded, follows this system, allowing a 20% profit onshare capital and GOP is prepared to allow similar conditions for any newfuture fertilizer project. In other cases, however, profits do not increasewith production above the stipulated levels. Although this mechanism ensuresthe financial viability of a fertilizer producer, it suffers from the disadvan-tages of cost-plus pricing by not providing some producers adequate returnsmaintained in real terms or incentives to operate plants efficiently, orstimulating the reinvestment of internally generated cash in plant productivityimprovements or expansions. This issue is to be addressed under the Study ofAdditional Fertilizer Capacity (para 5.35) and continues to be a topic of theBank's ongoing dialogue with GOP on its structural adjustment program, wherethe issue of farmer prices has already been considered.

4.13 During negotiations, agreement was reached with the Governmentthat as long as it controls fertilizer prices, it will set ex-factory pricesfor the NFC Group in a way that will permit manufacturers, under conditionsof efficient operation, to meet their costs, service their debts, and earn areasonable return on equity which in the case of PFL, includes a reserve toreflect the periodic revaluation of assets. Agreement was also reached that,based on the findings of the Study of Additional Fertilizer Capacity (para5.35), GOP will review with the Bank periodically the evolution of itsfertilizer pricing formula. In the Bank's view this should be designed to(i) motivate fertilizer producers to operate plants efficiently and at highcapacity; (ii) allow them to generate adequate internal funds; and (iii)provide them with adequate real-term incentives, taking into account interna-tional prices, to invest in new plant and to reinvest internally generatedfunds in the improvement of operations and expansion of capacity.

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4.14 Annex 4-2 shows historical ex-factory prices and the marketingmargins obtained by the various producers in Pakistan. Currently, ex-factoryprices for urea, for example, range from Rs 893 to Rs 2,006 per ton andmarketing incidentals, from Rs 116 to Rs 165 per ton. These compare with thecurrent farmer price of Rs 1,860 per ton and the international price of aboutRs 2,500 equivalent per ton (cif Karachi).

4.15 In the past, the Government has traditionally set farmer pricesat levels that would produce acceptable benefit/cost ratios for fertilizeruse by farmers, whose crop prices are similarly controlled. In order tocompensate farmers for increases in the cost of fertilizers, the GOP hascontinued to adjust crop prices, as shown in the following table:

Pakistan - Fertilizer and Agricultural Products Prices

FY77 FY78 FY79 FY80 FY81

Domestic Prices

Fertilizer - urea (Rs/ton) 1,300 1,360 1,280 1,260 1,860Wheat (Rs/maund) 37 37 45 47 54Seed cotton (Rs/maund) 125 138 138 138 149Rice - Basmati (Rs/maund) 90 95 110 110 128Sugarcane (Punjab)(Rs/maund) 5.75 5.75 5.75 7.00 9.00

Domestic Prices as % ofBorder Prices a/

Fertilizer - urea 82 74 65 47 64Wheat 75 77 77 79 75Seed cotton 61 107 100 92 95Rice - Basmati - 56 40 50 61Sugarcane 180 221 160 95 72

Ratio of Domestic CropPrices to Urea Prices

Wheat 0.028 0.027 0.035 0.037 0.029Seed Cotton 0.096 0.101 0.108 0.109 0.080Rice - Basmati 0.069 0.070 0.086 0.087 0.069Sugarcane 0.004 0.004 0.004 0.006 0.005

a/ Border prices are Karachi fob (for export) and cif (for import)adjusted for transport, handling and processing costs between farmgate and port.

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4.16 In general, the crop price adjustments have been substantial forall major crops. However, since domestic crop prices are still generallybelow international prices, in order to maintain an adequate ratio of crop tofertilizer prices, the domestic prices of fertilizers have been set at levelsbelow international prices as shown in the table above. Since most fertilizerconsumed in the country has come from imports, GOP has had to expend increasingamounts on the resulting subsidies (US$225 million equivalent in FY80).Under agreements reached in 1980 in connection with the Fertilizer ImportsCredit (Credit 1066-PAK), GOP is reversing the growth in subsidies tophase them out entirely by 1985, by gradually increasing farmers' fertilizerprices while at the same time adjusting crop prices in order to maintainfarmer incentives. As a first step, GOP increased fertilizer prices substan-tially in 1981 (as shown on the above table), and further increases areexpected in the future.

V. THE PROJECT

A. Background and Objective

5.01 The Project consists of five components designed to rationalize andexpand fertilizer production of the NFC Group. The proposed investmentswill help assure the continued availability and increase the supply ofdomestically produced fertilizers at lowered unit energy consumption, therebycontributing to satisfy a growing demand which otherwise would increasinglyhave to be met by imports. Three of the Project's components, representing80% of the total financing required, aim at rehabilitating, rationalizing andexpanding the NFC Group's physical production facilities and reducing theirunit energy consumption; the remaining two components are designed to helpimprove the NFC Group's capability to operate and manage its facilities,improve their productivity and energy efficiency, and to assist GOP inundertaking a study for the establishment of additional fertilizer productioncapacity. The following is a summary of the project components and theircosts 1/; they are described in greater detail in the following sections ofthis Chapter:

(i) Rehabilitation and expansion of the urea plant and expansionof the ammonia plant at Multan, combined with energy efficiencyimprovements; cost: US$21.4 million;

(ii) Rationalization of the Multan plant complex, including installa-tion of pollution abatement and monitoring equipment; the provi-sion of critical spares; the modernization of plant maintenanceand training facilities; and additional product despatch equip-ment; cost: US$8.2 million;

(iii) Rehabilitation, in combination with energy efficiencyimprovements of the Daud Khel ammonium sulphate plant;cost: US$9.7 million;

1/ Including adequate provisions for contingencies, price escalation,and interest during construction.

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(iv) Improvements in the NFC Group's operational, management andtraining facilities, including a program to employ up to nineexpatriates to assist management of the Multan plant complex, aprogram to institute improved management systems and controls,to study methods to improve productivity and energy efficiency,and to provide management with training at foreign plants andschools, and the establishment of a technical trainingcenter; cost: US$10.0 million; and

(v) Study of additional fertilizer production capacity require-ments in Pakistan. 1/

5.02 As shown below and in Chapter VIII, the Project components aretechnically and economically viable and will contribute to improving NFC'sfertilizer production and assuring its continued availability on a regularbasis while reducing unit energy consumption at two complexes. The Project islimited to the NFC Group since the three other plants in Pakistan currentlyhave no need for investments in rehabilitation beyond what they are financingout of their own resources. Exxon, because of its internal corporate policies,is not interested in capacity expansions. DH's expansion plans, mentionedearlier, are under consideration by GOP but, if approved, would be appropriatefor implementation as a separate project, due to its large size. Both theExxon and DH plants are known to be well managed and have generally operatedat maximum levels of capacity utilization for many years, whereas the third,FFC is just about to start operations.

5.03 By helping in the past in the financing of economically viablefertilizer projects, the Bank Group aimed at alleviating Pakistan's relianceon imports and the resulting burden on its balance of payments. The financingof improvements in existing facilities as proposed in this Project willallow the Bank to continue this role and its dialogue with the Government onpolicies in the sector. Also through the Project, the Bank will help in thestrengthening of the NFC Group's management capabilities.

5.04 NFC and its subsidiaries are capable of handling implementation ofthe various project components which are of a limited size. The proposedinvestments will not require the level of effort that was devoted to theMultan Expansion Project in the 1970s, or the construction, at the sametime, of the new PSFL (Mirpur Mathelo) plant. Despite the outflow of experiencedmanagerial and technical personnel over recent years, the NFC Group has beenable to build up a small body of experienced, capable, and dedicated managersand it is expected that the Group will be able to attract increasing numbersof personnel needed for its growing operations (para 3.06).

5.05 Implementation of the various Project components will proceedin parallel; it is estimated that the Project will be completed by mid-1985,as discussed below and reflected in the Project Implementation Schedule shownin Annex 5.

1/ The cost of this study is to be financed out of the proceeds of therecently negotiated Technical Assistance Credit.

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B. Multan - Ammonia/Urea Rehabilitation and Expansion

1. Scope and Objective

5.06 This component has the objective of increasing the production ofammonia and urea, prolonging the operating life of the urea plant andimproving the energy efficiency of the ammonia plant. Specifically it isdesigned to (i) rehabilitate the existing urea plant and expand its capacityfrom 180 to 280 tons per stream day while improving the unit consumptionrates of ammonia; (ii) provide for adequate spare parts inventories for theexpanded urea unit; and (iii) expand the capacity of the ammonia plant toprovide the extra ammonia for the increased urea production by adding a purgegas recovery system and removing some other bottlenecks, which will alsoreduce unit energy consumption.

5.07 The urea plant, designed by Inventa (Switzerland), was commissionedin 1962 with a design capacity of 180 tpd of crystalline urea. In 1974, thecrystallization section was replaced with larger prilling facilitiesbut since other parts of the plant remained unchanged, the present urea plantcapacity remains at 180 tpd of prilled urea. Recent mechanical inspectionreports show that, despite their long service life, major parts of the plantare in good condition, with many more years of additional life expected.Some parts, however, require replacement and others rehabilitation in orderto assure that the plant as a whole can continue functioning for extendedperiods. Also, the energy efficiency of the plant can be substantiallyimproved by reducing ammonia consumption per ton of urea production.

5.08 The urea plant rehabilitation work which was recommended by the firmCora Engineering (Switzerland), will be concentrated on the plant's oldersections which date from 1962 and will comprise: (a) renewing the instrumenta-tion system completely and the electrical system partially; (b) replacing amajor part of the steam piping and some part of process piping along withsome exchangers and pumps; (c) reconditioning compressors and plunger pumps;and (d) repairing the ammonia stripper.

5.09 Expansion of urea production will be achieved by optimizing theratio and increasing the flow of ammonia and carbon dioxide to the ureaconverters. This will involve the installation of an additional carbondioxide compressor and ammonia feed pump, and increased capacity in theammonia recovery and recycle sections which will also be designed to improvepresent unit consumption rates from 0.69 to 0.60 tons of ammonia per ton ofurea. Comparable modifications have been carried out on a similar urea plantoperating at Chung-Ju, 1! Taiwan, which achieved a capacity increase by morethan 100%.

1/ The Chung-Ju plant, designed by the same Swiss firm (Inventa) whichdesigned the Multan plant, was built in 1955-58 with a capacity of90,000 tpy. In 1962, the capacity was increased to 200,000 tpy, withsimilar modifications (engineered by Stamicarbon - Netherlands)as proposed for Multan.

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5.10 Spare parts inventories for the urea plant are depleted. With theassistance of the engineering contractor to be selected for this component,existing inventories will be reviewed by PFL with a view to their replenish-ment to the level of two years' requirements. Inventory management procedureshave been addressed under the SGV Study (para 3.08) and improvements are beingimplemented.

5.11 Ammonia production and consumption within the Multan complex are atpresent in balance. In order to expand the capacity of the urea unit, anadditional supply of approximately 60 tpd of ammonia is required. Thisquantity will be secured by debottlenecking the existing ammonia unitdesigned by Kellogg (US) and installing purge gas recovery equipment whichwill increase the unit's capacity from 910 to 970 tpd. The addition of apurge gas recovery unit permits production of the incremental ammonia withapproximately 80% of the energy input of the original facilities representingnatural gas savings of about 135 million scf per year (on the basis ofproduction of 910 tpd). Similar alterations were made with the help of IDAfinancing (Credit 598-IN) to a Kellogg ammonia plant of the same capacity atthe Indian IFFCO complex at Kalol (Gujarat) and resulted in a capacityincrease of 10%, or 90 tpd.

2. Implementation and Schedule

5.12 The schedule for implementing this and the other project componentsis shown in Annex 5. It is estimated that the selection of the engineeringcontractor will be completed by October 1982. Equipment procurement activi-ties will commence two months after the start of engineering work. Civil anderection work at site will begin by October 1983. Final tie-ins and overhaulsare expected to be completed during a planned but prolonged plant shutdown inJanuary-March 1985 and final commissioning, by May 1985.

5.13 Implementation of this component will be the responsibility of PFL.PFL has experience from the Multan Expansion Project and the on-going projectto rectify the deficiencies in the NP and CAN units which is scheduled forcompletion by September 1982. This arrangement is acceptable. For engineering,foreign procurement, project supervision and commissioning activities, theservices of a competent international engineering contracting firm will besecured. Due to the nature of the rehabilitation work, vendor's specialistservices will be used extensively for overhauling the compressors and renewingthe instrumentation systems. For civil and erection work, local contractorswill be employed. Temporary skilled workers will supplement PFL's maintenancework force to carry out the overhaul work.

3. Raw Materials, Utilities and Infrastructure

5.14 It is estimated that this project component will result in a 3%increase in maximum daily natural gas requirements, to give a new total of51.5 million scfd. This is within the existing gas contract amount of 55million scfd and Sui Northern, the gas supply agency, has confirmed that theadditional gas is available. Sufficient carbon dioxide is available fromthe ammonia plant for the increased urea production. The additional utilitiesrequired, i.e., electric power, steam, cooling water, treated water andcompressed air, can all be readily supplied from the excess capacity withinthe existing facilities without compromising operation of the other units.Urea bagging and storage facilities are adequate for the expanded production.

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4. Employment and Productivity

5.15 The rehabilitation of the urea plant will ensure the continuedemployment of the 80 workers presently employed in this section. As aresult of the expansion, there will be a need for some five additional peoplein the bagging operation. Although this project component will result insome increased maintenance requirements due to the additional equipmentinstalled, it is expected that the productivity of the maintenance staff canbe increased by training and other measures so that additional staff are notrequired.

C. Multan - Plant Rationalization Program


5.16 This component consists of the following investments aimed atrationalizing and upgrading the operations of the entire Multan plant complex:(i) pollution monitoring and abatement measures; (ii) provision of majorcritical spare parts that have become necessary to ensure the continuousoperation of the plant; (iii) modernization of facilities for maintenanceand training; and (iv) additional equipment necessary for efficient andtimely product despatch.

5.17 The pollution control category includes: (a) chromate removalfacilities for the treatment of cooling tower blowdown which are requiredafter changes made in the corrosion prevention treatment to overcome severecorrosion problems caused by the inadequate phosphate system originallyspecified; (b) nitrogen oxide abatement equipment for the oldest of theexisting nitric acid plants, so that it will conform to modern emissionstandards; and (c) monitoring equipment so that systematic reporting andcontrol of the sources of pollution can be implemented. Spare parts tobe provided for the NP and CAN plants will consist mainly of complete equip-ment assemblies. In line with PFL's current maintenance philosophy, the useof such assemblies for high frequency maintenance units reduces equipmentdown-time at the time of their replacement. The assembly removed can thenbe thoroughly overhauled in the workshop, ready for re-use. Facilities formaintenance and training need to be upgraded to overcome the inadequaciesthat presently exist in workshop equipment, instrument maintenance equipmentand facilities, and training equipment and materials. Equipment for therecently formed inspection department is also needed. In order to minimisethe turn-around time for railroad block trains for product despatch, addi-tional rail shunting and bagged product handling equipment will be installedas part of the Project.

5.18 The above component will substantially assist in strengthening andupgrading plant operations, particularly in the crucial areas of maintenanceand training where the physical changes included in this component will becomplemented by recent and ongoing organizational changes in these departments.The training facilities are for the specialized training demands of theMultan plant and will not duplicate those provided by the Technical TrainingCenter (para 5.32). This project component will be instrumental in ensuringthat the Multan complex will be able to operate at high capacity utilizationlevels.

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5.19 With the exception of the pollution abatement facilities, thiscomponent would be implemented by the relevant Multan plant operating depart-ments, with NFC carrying out procurement of those items suitable for Inter-national Competitive Bidding. It is estimated that these project itemswill be completed by November 1983. For the pollution abatement equipment,a package chromate removal unit will be procured through ICB; the nitrogenoxide abatement equipment will be engineered by Uhde (FRG), the designer ofthe other two nitric acid plants on site. Installation will be covered bythe team responsible for implementation of the Ammonia/Urea Rehabilitationand Expansion component. It is expected that the chromate removal systemwill be in operation by July 1984 and the nitrogen oxide abatement unit, byMay 1985.

D. Daud Khel Rehabilitation


5.20 During the past three years, though not yet fully reflected in theproduction figures given in para 3.23 above, there has been a substantialdecline in the mechanical reliability of certain sections of the Daud Khelplant. This is confined mainly to those units which were commissioned in1958 and 1963. Since the major part of the sections concerned serve theproduction train, the entire plant output is adversely affected and, unlessremedial measures are implemented, it is estimated that production will beginto decrease in the current year and that the plant will have to be shut downby 1985, at the latest. It is proposed that under the Project, these sectionsbe rehabilitated or replaced so that full economic production of the plantcan be maintained for at least a further seven years after project completion,by which time NEFC is expected to have investigated and, if viable, implementedplans for the long-term replacement of the Daud Khel plant. Preliminarystudies by consultants show that a larger ammonium sulphate plant of 244,000tpy capacity would be economically viable.

5.21 Other objectives served by the rehabilitation of the Daud Khelplant are to: (a) improve its energy efficiency; (b) maintain its skilledlabor force ; (c) maintain indigenous supplies of ammonium sulphate to thoseareas of Pakistan - particularly the North West Frontier Province where thealkaline nature of the soils, their sulphur deficiency and type of crops,make AS a far better fertilizer than other types of nitrogenous fertilizers;and (d) assure continued services supplied by the Daud Khel fertilizer plantto the other factories in the area, including power and calcium carbonate forwhite cement production at a nearby cement plant.

5.22 The investments to be financed under this component comprise inter alia:(i) installation of a new boiler and subsequently, the retubing of one of theexisting two boilers; (ii) replacement of the existing boiler feed watertreatment plant; (iii) renewal of the converter and waste heat boilersections of the sulphuric acid plant; (iv) replacement of the three ammoniumsulphate crystal centrifuges in the old sulphate plant; (v) replacement of

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the re'ormer tubes and air fractionation column internals in the Koppersammonia plant; and (vi) rectification of foundation vibration problems withcertain compressors.l/ The new boiler and boiler feed water treatment plantwill result in a 157% reduction (or 428 million sef /year) in the plant'spresent total natural gas consumption. The list of remedial measures hasresulted from a review of present plant operations by consultants to PAFL(IPROCHIM, of Romania) and by Bank staff and is based on minimizing theinvestments required to assure continuity of full production.

5.23 The Daud Khel plant has been well maintained and operated so that,with the exception of equipment to be rehabilitated by the Project, thefacilities are in good condition and are judged to be capable or operationuntil at least 1991. Since no production expansion will result from theproject component, the existing utility and raw material supply arrangements andinfrastructure will remain unchanged. Similarly, the project would have noadverse environmental impact.


5.24 Project implementation will be the responsibility of PAFL wherea task force will be formed to supervise a selected local general contractorwho will be responsible for the installation of all major equipment. NFCwill be responsible for foreign procurement. A similar implementationprocedure is in use at the Hazara urea plant soon to be completed and hasworked well. The major overhauls at Daud Khel will be carried out by theplant maintenance department which is well organized and capable of carryingthe increased workload.

5.25 Project implementation will be carried out in two parallel opera-tions: (i) the installation of major new equipment (boiler, water treatment,gypsum grinder) which will require plant shutdown for equipment tie-insonly; and (ii) the remaining work of overhauling and/or renewing existingoperating equipment that can only be executed during total shutdowls andrequire a carefully planned and executed preparation period. It is estimatedthat by prolonging the scheduled shutdowns of 1982 and 1983 by two months,both operations can be completed by July 1984. The implementation schedulefor this component is included in Annex 5.

3. Employment and Productivity

5.26 Implementation of this component will ensure the employment until1991 of approximately 1,000 direct employees (of which approximately 450are skilled operators or maintenance technicians) in an isolated area whereno other equivalent employment opportunities exist.

E. Improvements in Operational, Management and Training Capabilities

5.27 This component consists of measures to improve the operational,managerial and training capabilities of the NFC Group. It will providefinancing to: (i) hire expatriates for a limited period to ensure thatdespite the heavy losses in personnel experienced in the past, operations at

1/ The foundation problem has, in consultation with the Bank, beenstudied by consultants (Soils Mechanics, of the UK) and found to beamenable to solution by inexpensive established techniques.

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the Multan plant are properly managed while adequate Pakistani managers andtechnicians are trained; (ii) establish improved management informationsystems and controls in a wide range of operational areas, particularly atthe new, technologically highly developed PFL and PSFL plants, study thepotential for improvements in productivity and energy efficiency and theprovision of technical and management training at foreign plants and managementschools; and (iii) establish a Technical Training Center which will help supplythe growing number of skilled manpower demanded by Pakistan's fertilizerindustry. The following paragraphs describe these measures in more detail.

1. Hiring of Expatriates

5.28 Due to the heavy staff turnover experienced at PFL in the past(para 3.04), a program is underway to hire expatriates for periods of oneto two years to assist PFL in day-to-day plant management, to provide thenecessary expertise in setting up new departments for inspection and mainten-ance planning, and to help reorganize workshop and materials handling opera-tions. PFL has been actively selecting internationally individuals tofill such functions as equipment inspection engineer, process engineer, chiefmechanical engineer, NP/CAN production engineer, rotating equipment engineer,instrument engineer and materials handling manager. Five of these positionshave already been or are currently being filled as a result of PFL's recruit-ment drive in Europe and the U.S. in late 1981 and following the Bank'sappraisal of the Project. Candidates for two other positions are still beingsought.

5.29 In addition to managing their respective functions and developingand implementing adequate operating controls and monitoring procedures, theexpatriates will be responsible for training Pakistani counterparts whowill eventually replace .'.em. 1. cz... i .ed that th- .rxpatr; 's will berequired for an average length of 18 months.

2. Operational, Management and Training Facilities

5.30 The SGV Study (para 3.08) identified a number of weaknesses andrecommended measures to strengthen accounting, budgeting and internal controls,to establish electronic data processing and other management informationsystems and procedures, and to set up an effective human resources planningand development system. The NFC Group has developed a program to implementthese recommendations as well as other measures and will undertake studies toimprove productivity and reduce energy consumption and will require theassistance of both local and foreign consultants for the implementation ofthe program.

5.31 In addition, NFC has developed a program to provide, over a periodof three years, 69 of the NFC Group's senior and middle level managers withtraining at foreign fertilizer plants and management schools to familiarizethem with the latest managerial techniques available to run and operate plantsof the high level of technology with which NFC is now endowed; such training isnot available in Pakistan. This program is designed to include: (i) trainingof 27 unit managers and section heads in plant operations, maintenance,process engineering and planning who would participate in courses to be heldat overseas fertilizer plants providing hands-on training; (ii) training of21 middle level managers in fields such as production, technical, marketing,finance and planning to be carried out at international schools and seminars

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organized by international fertilizer agencies; and (iii) training of 21senior executives in international business and management schools. Managerswho are sent to any of these courses will be required to provide a bond toensure their remaining with the NFC Group for between two and four years.

3. Technical Training Center

5.32 As described earlier, one of the major problems experienced by theNFC operating units, particularly PFL and PSFL, has been the drain of skilledtechnicians to more lucrative jobs in Pakistan's private sector and theMiddle East. Since no reservoir of suitably skilled manpower exists inPakistan from which the NFC Group can draw to replace such staff losses,there has been a clear deterioration in plant maintenance and operatingstandards. Measures to train replacement personnel are presently the responsi-bility of the individual production units which have neither the facilitiesnor the qualified instructors necessary to adequately handle the number oftrainees and range of courses required.

5.33 The Project provides for the formation of a Technical TrainingCenter under the direct control of NFC, through a management committee onwhich all operating units will be represented, to serve the basic trainingneeds of all the production units for maintenance and operator trainees. TheCenter would be located at Multan, adjacent to the PFL production facilitiesso that practical demonstrations can be readily arranged. The Center willbe designed to instruct 175 trainees per year in the 20-25 year age group whowould be graduates of the local polytechnic schools or hold equivalentqualifications, and 25 experienced process operators for training up to theforeman level. Since an important aspect of the training courses will beon-the-job training (35% of total course period of about one year), thephysical facilities in the Center will be designed for 130 trainees at anyone time.

5.34 For implementation of the Training Center, NFC plans to employ anexperienced international consulting organization whose responsibilitieswill include recruitment and training of the necessary local instructors,design and provision of course material, specification and procurementof training aids and equipment, screening systems for trainee recruitment,and management of the Center during the initial two years of operation.

F. Study of Additional Fertilizer Capacity

5.35 As described in Chapter IV, forecast increases in fertilizerdemand in Pakistan will necessitate the installation of additional fertilizerproduction capacities both for phosphatic and nitrogenous fertilizers. Todetermine possible options particularly with regard to new phosphaticfertilizer production capacity, GOP has agreed to undertake a study with thehelp of foreign consultants which will assess (i) fertilizer demand prospectsover a period of ten years; (ii) the domestic availability of raw materialsfor fertilizer production, such as natural gas, phosphate rock, and sulfur;(iii) the technical and economic viability of project alternatives,including transportation and storage facilities and other infrastructurerequirements; (iv) the amount and sources of investment required for newproduction facilities; and (v) the current ex-factory pricing policies andthe adequacy of incentives provided thereby for new investment and forefficient plant operation, presenting possible alternative pricing policies

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for consideration by GOP. The study will also focus on the advisability ofeventually establishing a new ammonium sulphate plant to replace the existingone at Daud Khel. Terms of reference for this study which is to be carriedout under the responsibility of GOP, are being developed and will be submittedto the Bank for approval shortly.

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT

A. Capital Cost Summary

6.01 The total financing required for the Project is estimated at US$49.3million equivalent, including US$38.5 million in foreign exchange. The costestimates for the various components are detailed in Annex 6-1 and summarizedbelow:

Summary of Total Capital Cost Estimates(US$ million)

Multan Multan Daud Khel OtherRehab.and Rational- Rehabili- Com-Expansion ization tion ponents Total %

Equipment, Materials and Spares 8.0 4.1 4.0 1.0 17.1 34.7Freight, Insurance and Handling 1.3 .7 .7 0.1 2.8 5.7Engineering and Other Services 1.1 .3 .2 4.8 6.4 13.0Erection and Civil Work 3.5 .4 1.9 0.6 6.4 13.0Commissioning .5 - .2 - 0.7 1.4Pre-operational Expenses - - 0.2 0.2 0.4Incremental Working Capital - - - 0.2 0.2 0.4

Base Cost Estimates (BCE) a/ 14.4 5.5 7.0 6.9 33.8 68.6Physical Contingencies(10% of BCE) b/ 1.5 .6 .7 .7 3.5 7.1

Price Escalation(17% of BCE & PC) 3.0 1.1 1.2 1.5 6.8 13.8

Total Installed Cost 18.9 7.2 8.9 9.1 44.1 89.5

Interest During Construction 2.2 .9 .7 .8 4.6 9.1Front End Fee .3 .1 .1 .1 .6 1.4

Total Financing Required 21.4 8.2 9.7 10.0 49.3 100.0

Of Which - Local Currency 4.5 1.2 2.6 2.5 10.8 21.9- Foreign Currency 16.9 7.0 7.1 7.5 38.5 78.1

a/ The Project is exempt from taxes and import duties.b/ Including 15% for ammonia portion of Multan Rehabilitation

and Expansion Component.

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6.02 The base cost estimates (BCE) are made in January 1982 prices based onthe companies' and engineering firms' estimates as detailed in paras 6.03 to6.12 below. Physical contingencies are calculated at 10% of the base costestimate (BCE) except for the expansion of ammonia capacity in the MultanExpansion and Rehabilitation project where 15% has been taken to reflectpossible scope changes. Price escalation rates in dollar terms were assumedas follows: 1982: 8%; 1983: 7.5%; 1984: 7% and 6% per year thereafter.The same international escalation rates have been used for local equipmentand materials, civil works and erection assuming that the difference in thedomestic and international rates will be accounted for by adjustments inthe foreign exchange rate. The cost estimates for the various projectcomponents are considered adequate. The cost estimates of the MultanRehabilitation and Expansion and the Daud Khel Rehabilitation componentsinclude significant amounts related to energy saving investments. Regardingthe former, the ammonia expansion, with an installed cost of US$2.8 million,will directly result in a reduction of natural gas consumption in that plant(para 5.11). A 13% energy-efficiency improvement is achieved by rehabilitatingthe urea plant (para 5.09) representing a significant portion, althoughdifficult to quantify, of the proposed US$16.2 million installed cost.Regarding Daud Khel, investments of US$4.7 million will directly result in a15% reduction in energy consumption (para 5.22). Following is a briefdescription of the principal assumptions underlying the cost estimates forthe various project components.

1. Multan - Ammonia/Urea Rehabilitation and Expansion

6.03 The total installed cost of this component, including physicalcontingencies and price escalation, is estimated at US$19.0 million equivalentof which about US$14.5 million would be in foreign exchange. For the ureaplant rehabilitation and expansion (comprising 86% of total BCE), the BCEwas prepared by PFL and Bank staff on the basis of estimates by consultants(Cora Engineering, of Switzerland) and actual quotations for main equipment.For the ammonia plant expansion (14% of total BCE), the estimate is based onthe completed installed cost of a similar purge gas recovery unit financedby the Bank (Credit 598-IN).

2. Multan - Plant Complex Rationalization Program

6.04 The total installed cost of this component is estimated at US$7.2million (including contingencies and escalation) of which US$5.9 million inforeign exchange. The base cost estimate was prepared by PFL and Bank staffand is derived from data compiled by PFL. The pollution monitoring andabatement equipment (44% of BCE) is based on recent quotations, with theexception of the nitrogen oxide abatement equipment for which firm estimatesare being obtained. The estimate for spare parts (28% of BCE) is also basedon recent quotations. Costs for the modernization of maintenance and trainingfacilities (23% of BCE) are based on a detailed equipment and material listfor which budget type prices have been obtained. The cost of equipment forproduct despatch (5% of BCE) is based on recent quotations.

3. Daud Khel Rehabilitation

6.05 The total financing required for this component is estimated atUS$8.9 million, including US$6.4 million in foreign exchange. The base cost

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estimate was prepared by PAFL and reviewed by Bank staff, and is derivedfrom recent quotations obtained by PAFL for all the major equipment items,and civil and erection cost data available from NFC's Hazara project.

4. Improvements in Operational, Management and Training Capabilities

6.06 The following table summarizes the cost of the various programscomprising this component as described in paras 5.27 to 5.34.

Installed Cost Estimate of this Component(US$ Million)

Local Foreign Total

PFL Expatriate Assistance 0.2 1.1 1.3Management Systems and Training 0.5 2.0 2.5Technical Training Center

(Including Working capital) 1.8 3.4 5.2

Total Installed Cost 2.5 6.5 9.0

6.07 The cost estimate of the expatriate assistance program (para 5.28)for PFL is based on an estimated cost per man-month of US$10,000 tocover salary, local allowances and travel.

6.08 The program to improve operational, management and training facilities(para 5.30) is estimated to cost US$1.1 million, including US$900,000 inforeign exchange. The management training program (para 5.31) is estimated atUS$1.4 million, including US$1.1 million in foreign exchange, on the basis ofproposals obtained from management institutions and training facilities.

6.09 The base cost of the Technical Training Center (paras 5.32 to 5.34)is estimated at US$4.1 million, plus contingency and escalation provi-sions and US$200,000 of working capital. US$3.4 million of the total wouldbe in foreign exchange. The BCE is based on data compiled by NFC frominformation supplied by a number of foreign consulting groups that offertraining services, and NFC in-house estimates of building and pre-operationalexpenses.

5. Study of Additional Fertilizer Capacity

6.10 Assuming it will require 40 man-months of foreign consultants toprepare, this study is estimated to cost US$600,000, of which US$500,000in foreign exchange (at an average rate of US$12,500 per man-month for foreignconsultants). I/

1/ The foreign exchange cost of this study is to be financed under the recentlynegotiated Technical Assistance Credit.

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6. Other Costs

6.11 Interest during construction on the proposed Bank loan was computedin line with the anticipated disbursement schedule for the various projectcomponents, until production start-up of the PFL and PAFL Project components.Foreign exchange interest was assumed at a rate of 11.6% which corresponds tothe current Bank lending rate. It was agreed during negotiations that GOPwould on-lend the proceeds of the Loan to NFC at a rate of interest of 14%,while not passing on the foreign exchange risk. This on-lending rate isconsidered adequate to ensure that Bank funds are made available to NFC atan interest which is positive in real terms. The Bank's front end feeto be capitalized as part of the proposed loan, would also be passed onproportionately to NFC and its subsidiaries.

6.12 Except for US$200,000 for the Technical Training Center no incre-mental working capital will be required by the Project, since (i) at PFL,current high inventory levels are deemed adequate to provide for the increasedinventory requirements resulting from the marginal increase in urea output,and receivables are not carried by PFL but by the NFC Group's marketingcompany, NFML; and (ii) at PAFL, production will not change from currentlevels. The Project is exempt from taxes and import duties.

B. Financing Plan

6.13 The following table summarizes the financing plan for the variousProject components:

Financing Plan(US$ millions)

Category PFL 1/ PAFL NFC Total

DebtIBRD Loan 24.9 7.1 6.5 38.5

EquityInternal Cash Generation 5.8 2.6 2.4 10.8

Total Financing 30.7 9.7 8.9 49.3

1/ Including the Ammonia/Urea Rehabilitation and Expansion, the MultanRationalization and the Expatriate Assistance components.

6.14 The foreign exchange cost of the Project (US$38.5 million) would befinanced with the proposed IBRD loan. This loan would be extended to theGovernment of Pakistan at the prevailing rate of interest for Bank loans. GOPwould on-lend the Loan to NFC which, in turn, would further on-lend por-tions of the loan to PFL and PAFL for their respective Project components

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at the same rate of interest (para 6.11). The PFL portion (US$24.9 million)would cover the foreign exchange cost of the Multan ammonia/urea, rationali-zation and expatriate assistance components and the PAFL portion (US$7.1million), the foreign exchange cost of the Daud Khel rehabilitation component.PFL and PAFL would repay to NFC, and NFC to GOP, their loan portions overperiods of 11 years and 6 years, following 4 and 3 years of grace respectively,and in line with the estimated life expectancies of their respective projectcomponents. The balance of the loan (US$6.5 million) covering the foreignexchange cost of the remaining components, would be repaid by NFC to GOP over11 years after 4 years of grace. The repayment schedules of the PFL and PAFLportions of the loan to NFC, and of the overall loan by NFC to GOP are shownin Annex 6-2. Signing of satisfactory agreements to cover the on-lendingbetween GOP and NFC and between NFC and its subsidiaries, will be a conditionof Bank loan effectiveness.

6.15 It was a greed that the local cost of the respective Project com-ponents (totalling US$10.8 million equivalent) will be financed with internalcash generation by NFC, PFL and PAFL or from other sources as required.GOP agreed to make available, or cause to be made available in the formof equity, all additional funds that may be needed for completion of theProject, whether required for foreign exchange or local expenditures andindependent of whether such additional requirements were caused by anincrease in Project cost or a shortfall in internal cash generation.

C. Procurement

6.16 All equipment, materials and services to be financed by the IBRDloan will be procured in accordance with Bank procurement and consultancyguidelines. International competitive bidding (ICB) will be used for equip-ment and materials purchases, except for US$3.8 million of proprietary andtime- and process-critical items as well as small items costing US$100,000 orless, to be procured under limited international tendering from qualifiedsuppliers from at least three countries eligible to compete for providingsuch goods pursuant to the Bank's Procurement Guidelines. Qualified localsuppliers, for purposes of bid evaluation, will receive a preference of 15%or the amount of the customs duty for a non-exempt importer, whichever islower. Local equipment and services not financed by the Bank will be procuredunder the normal commercial practices of the NFC Group which involve opencompetitive bidding similar to the Bank's and are satisfactory.

6.17 In order to avoid delays in the implementation of the Project, theGovernment and NFC have requested that the Bank consider retroactive financingof foreign exchange costs for certain studies and front-end engineeringwork by foreign consultants and down payments for certain critical equipmentprior to the signing of the loan but after December 1, 1981. An amount ofUS$1.4 million was thus agreed to be financed retroactively.

D. Allocation and Disbursement of Bank Loan

6.18 The Bank Loan will be allocated as indicated in the following table:

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Bank Loan Allocation(US$ Million)

PFL PAFL NFC Total Disbursement

1. Equipment, Materials 17.0 5.5 0.8 23.3 100% of foreignand Spares expenditures and

100% of localexpenditures(ex-factory).

2. Consultants' services 3.5 1.0 5.5 10.0 100% of foreignand Training exepnditures.

3. Front end fee 0.3 0.1 0.2 0.6 Amounts due

4. Interest during 3.3 0.5 0.8 4.6 Amounts due beforeConstruction February 28, 1986

Totals 24.1 7.1 7.3 38.5

6.19 For expenditures eligible for Bank financing, disbursements willcover 100% of (i) foreign cost of equipment, materials and spares; (ii) theex-factory cost of locally procured items; 1/ (iii) the foreign cost ofservices for training and management improvement; (iv) the front end fee;and (v) interest on the loan incurred during construction.

6.20 As shown on Annex 6-3, disbursement is expected to be completed byDecember 31, 1985. Since this Project involves only minor components withshort lead times and for which preparations are already well advanced, theprojected Bank disbursements of this loan would take place over a shorterperiod than is typical for projects in this sector and as reflected in thecorresponding Bank disbursement profiles developed largely on the basis ofnew projects or plant expansions.

1/ Due to the limited capabilities of Pakistani industry, local procurementunder ICB is expected to be negligible.

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VII. FINANCIAL ANALYSIS AND RISKS

A. Summary

7.01 The financial analysis which was prepared in current terms, focusesmainly on the Project's two production components, i.e. the Multan Ammonia/UreaRehabilitation and Expansion and the Daul Khel Rehabilitation; in addition,the impact of the financing of all components on NFC, the holding company,has been assessed. The principal assumptions used in the financial analysesare detailed in Annex 7-1; salient features are described in the followingsections. The financial projections of NFC, PFL and PAFL indicate that thecash generation and financial structures of the companies will continue to besound.

B. Multan - Ammonia/Urea Rehabilitation and Expansion

1. Revenues

7.02 Ex-factory fertilizer prices, as noted earlier, are set by theGovernment. PFL's sales proceeds based on farm prices currently are belowthe levels required to obtain a 15% after tax profit on equity (para 4.12).The difference is made up in the form of compensation payments by the Government.As reflected in agreements reached under the Fertilizer Import Credit (1066-PAK),it is expected that the Government will continue to gradually raise farmfertilizer prices to bring them closer to international levels and until theneed for farm subsidies on domestically produced and imported fertilizeris eliminated; these farm price increases are projected to raise PFL'ssales revenues by 1983 to levels that will generate net profits in excessof 15%; therefore, beginning in 1983, the Company is expected every year topay to GOP development surcharges to absorb this excess.

7.03 It is assumed that without implementation of the Project, ureaproduction at Multan will decrease and eventually cease by 1986, as itcannot be economically sustained. With Project implementation, urea produc-tion and sales are expected to rise from a level of 180 to 280 tons per dayby 1984 at which level they would continue. Production levels at the NP andCAN units will not be affected by the Project; they will, however, increasefollowing completion of the design modifications to the existing NP/CANplants, currently underway (para 3.19).

2. Production Costs

7.04 The unit cost of natural gas, both as feed stock for ammoniaproduction and as principal source of energy for the whole Multan plant,is assumed to increase by 25% per year (in nominal terms) from the 1981level of Rs 8.16 (US$0.816) per mscf. 1/ Without implementation of theProject, maintenance costs at the urea plant are assumed to continueincreasing in line with the trend experienced in the recent past. All otherlocal costs , including labor, are estimated to increase in line with the

1/ This compares with an economic value of gas of US$4.09 per mscf in1981 (para 8.04).

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currently expected local overall rates of inflation, which are projected togradually decrease from an annual rate of 12% in 1982 to 8% in 1985 andtherafter. Project depreciation is calculated on a straight line basis foran assumed ten-year life. The following table illustrates the composition ofPFL's total production cost, summarizing those for FY87, the year when the ureaplant is assumed to have reached its full capacity production:

PFL - FY87 Production Costs(in current prices)

Rs Million % of Total

Variable CostsNatural Gas 186 14Phosphate Rock 277 20Bagging and Other Costs 268 19

Fixed CostNatural Gas 255 18Labor 77 5Depreciation 227 16Maintenance and Other 118 8

Total Production Costs 1,408 100

7.05 The table shows that natural gas, accounting for about 32% of thetotal is the principal cost item. Depreciation, despite the large costoverrun incurred with the previous Expansion Project, only represents 16%,and labor, despite PFL's excess staffing, a marginal 5%.

3. Financial Projections

7.06 Annex 7-2 presents the projected income statements for PFL, both,with and without the Multan Ammonia/Urea Rehabilitation and Expansion component;Annexes 7-3 and 7-4 show PFL's projected Balance Sheets and Cash Flow Statements,including the effect of this component. 1/ The following table highlightsthe principal aspects of the projections:

1/ The Multan Rationalization and the Expatriate Assistance componentsare not reflected in these projections.

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PFL - Multan Ammonia/Urea Rehabilitation and Expansion Project

Summarized Comparative Financial Projections(in current Rs millions)

Actual Without Project With ProjectFY81 FY84 FY86 FY88 FY84 FY86 FY88

Production ('000 tons):Urea 48 32 24 - 16 78 83Other products 443 679 679 679 679 679 679

Total Production 491 711 703 679 695 757 762

Sales Revenue a/ 1,022 1,303 1,503 1,733 1,289 1,567 1,868Net Income 97 97 97 97 97 97 97Total Cash Generation 436 368 335 315 368 377 352

Net Fixed Assets 1,467 1,003 628 256 1,126 806 390Long Term Debt 893 433 186 23 529 338 141

Current Ratio 1.8 2.1 2.2 2.4 2.1 2.1 2.3Long-Term Debt to Equity Ratio 55:45 37:63 20:80 3:97 42:58 31:69 16:84Debt Service Ratio 1.5 1.7 1.4 3.2 1.7 1.7 2.6

a/ Including Government compensation payments and net of surcharges.

7.07 The above table indicates that the Project will have a positiveimpact on PFL's production levels and total cash generation. Total cashgeneration with the Project would amount to US$377 million in FY86, comparedto US$335 million without the Project. This difference is not substantialsince the component's scope is limited in relation to the size of the company.The Project has no impact on net profits, due to the GOP's ex-factory pricingsystem (para 4.12).

7.08 The projections show that following project completion, the financialsituation of PFL will continue to be sound, with the current ratio remainingabove 2.0 and the long-term-debt-to-equity ratio, better than 31:69. Whenincorporating the financial impact on PFL of the Multan Rationalization andExpatriate Assistance components, these ratios would not change significantly:the current ratio would remain unchanged and the long-term-debt-to-equityratio would decrease slightly, to 35:65. The company's cash flow is projectedat levels adequate to finance local project costs for this component.

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C. Daud Khel Rehabilitation

1. Revenues

7.09 It is assumed that without implementation of this Project component,ammonium sulphate production at Daud Khel would gradually decrease andeventually cease by FY85 due to the deterioration of critical sections of theplant. Following implementation of the proposed Project, except during theFY84 construction phase, PAFL's production and sales will be maintainedsubstantially at present levels until FY91 when they will begin to decreasedue to obsolescence of the facilities not rehabilitated under the Project.

2. Production Costs

7.10 Production costs are projected on essentially the same assumptionsused for PFL (para 7.04), except that fixed Project assets are depreciatedover seven years. The following table summarizes the principal productioncosts for PAFL for FY85, the year when the plant will have reached its fullcapacity production:

PAFL - FY85 Production Costs(in current prices)

Rs Million %

Variable CostsNatural Gas 42 33Bagging Charges and Materials 21 16

Fixed CostsLabor 31 24Depreciation 14 11Other 21 16

Total Production Cost 129 100

3. Financial Projections

7.11 Annexes 7-5, 7-6 and 7-7 show PAFL's projected income, balancesheet and cash flow statements with the Project; Annex 7-5 also gives incomeprojections without the Project for the years FY82 through FY85 which isprojected to be PAFL's last year of operation, in case the Project were notimplemented. The following table highlights the principal aspects of theseprojections:

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PAFL - Summarized Financial Projections(in Rs million)

Actual Without Project With ProjectFY81 FY84 FY85 FY84 FY85 FY86 FY87

Production ('000 t of AS) 97 55 35 30 95 95 95

Sales Revenue a/ 123 149 137 107 187 201 222Net Income 14 11 7 6 18 18 18Total Cash Generation 25 20 7 15 32 32 32

Net Working Capital 76 110 115 91 85 87 90Net Fixed Assets 31 9 - 74 84 71 56Long-Term Debt - - - 55 59 47 35

Current Ratio 2.8 3.3 4.9 3.2 2.3 2.2 2.2Long-Term Debt-to-EquityRatio - - - 36:64 38:62 33:67 27:73

Debt Service Ratio - - - - 4.6 2.0 2.1

a/ Including Government compensation payments

7.12 The rehabilitation component would allow PAFL to maintain a healthyfinancial situation, with cash generation at Rs 32 million per year.PAFL currently has no debt of significance, and its fixed assets will befully written off by FY84. The debt to be contracted for the Project willnot overload the financial structure of the Company. Its debt/equity ratiowill be satisfactory, going down to 27:73 by FY87. The current ratio isprojected to remain above 2.0.

D. NFC

7.13 The following financial analysis reflects the impact of the Projecton NFC, the parent company. Annex 7-8 shows NFC's financial projectionsin detail. In line with current GOP policy, all debt to be incurred by PFLand PAFL in connection with the Project will, as noted above, be contractedby NFC and on-lent on the same terms and conditions to the subsidiaries. Theimpact of the total amount of the proposed Bank loan is thus reflected in theprojections of NFC, which are summarized in the following table:

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NFC - Summarized Financial Projections(in current Rs million)

FY82 FY84 FY86 FY88 FY90

Income 233 258 223 188 188Expenses and Taxes 178 157 160 143 133Net Income 55 101 63 45 55

Net Working Capital 154 275 383 468 465Long-Term Debt 1,099 1,039 937 791 631Equity 752 936 1,114 1,237 1,387

Current Ratio 1.7 2.6 3.5 4.4 5.7Long-Term Debt-to-Equity Ratio 59:61 53:47 46:54 39:61 31:69

7.14 NFC's income consists of dividends and interest received fromsubsidiaries; expenses are mostly financial charges on its debt to theGovernment and domestic financial institutions fully repayable by 2005.NFC's existing assets consist mainly of investments in and loans to sub-sidiaries, the latter to be repaid fully by 1985. The Company's financialsituation is sound, with the long-term-debt-to-equity ratio projected togradually decrease from the FY81 level of 63:37 to 31:69 by FY90. Theproposed Project would have a positive, though limited, impact on NFC'sfinancial situation. Projections show the potential build-up of excess cashbalances which would be available for the NFC project component or, ifrequired, to finance cost overruns in this or the other components, forfuture new investments, for pre-payment of debt, or for payment of dividendsto the Government.

E. Financial Rates of Return

7.15 The cost and benefit streams used in computing the financialrates of return for the two operational project components are shown onAttachment 3 to Annex 7-1. The real-term incremental financial return for theMultan Ammonia/Urea Rehabilitation and Expansion is 7% and for the Daud KhelRehabilitation component, due to the comparatively low investment require-ments for this component and its strong impact on PAFL's continued operations,18%. These rates which are modest, particularly when compared to the incre-mental economic returns of 54% (urea) and 96% (ammonia) for the Multan, and33% for the Daud Khel components (Chapter VIII), should be seen in thecontext of the controlled pricing environment in which the NFC Group operates.It should be noted, however, that though the financial returns are low, theyare also stable, with minimum posibilities that downward variations will takeplace. This is because the Government's pricing system is designd to compen-sate efficient producers for variations in capital and operating costs.For this reason, no sensitivity tests have been performed for the financialrates of return.

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F. Financial Covenants

7.16 It was agreed that covenants normally applied to Bank loans forindustrial projects will be applied to all three companies, NFC, PFL andPAFL; they will be substantially in line with those agreed between the Bankand PFL under the Multan Fertilizer Expansion Project. Specifically, agreementwas reached that among others, (i) no additional long-term debt shall beincurred if in the case of PFL and PAFL, each company's net revenues for theyear preceding their incurrence shall be less than 1.5 times the maximum debtservice requirements for any succeeding year, and in the case of NFC, 1.2times until FY87 and 1.3 times thereafter on a consolidated basis; (ii) nodividends shall be paid unless the current ratio, after giving effect tosuch action, will be less than 1.5; (iii) a current ratio of at least 1.2 ismaintained at all times; and (iv) the ratio of long-term debt-to-equity doesnot exceed 65:35 after project completion.

7.17 Agreement was furthermore reached that until Project completion,and except for the expenditures in relation to completing the Project, PFLwill not incur capital expenditures exceeding US$4 million equivalent, andthat such expenditures for PAFL be limited to US$2 million equivalent and forthe NFC Group as a whole, to US$25 million equivalent, unless otherwiseagreed with the Bank. Agreement was also reached with the Government thatcompensation payments to NFC's subsidiaries on account of farm subsidies willbe paid promptly.

G. Auditing and Reporting Requirements

7.18 NFC, PFL and PAFL will be required to submit to the Bank annualreports audited by independent auditors acceptable to the Bank, withinsix months of the end of each fiscal year. Companies will be told to giveprompt attention to audit recommendations. 1/ In addition to annual auditreports, companies will submit quarterly financial statements within 45 daysafter the end of each quarter, and monthly progress and procurement statusreports within 30 days of the end of each month during project implementation.NFC will provide annual financial statements on a consolidated basis. Finally,within four months after the Closing Date, NFC will prepare and furnish tothe Bank a Completion Report on the Project, dealing with its implementation,initial operation and the costs and benefits derived and expected to bederived therefrom.

H. Risks

7.19 Risks associated with Project technology, start-up and operationsare not significant as all components are based on commercially proventechnology. Commissioning problems after rehabilitation and difficulties inattaining and maintaining a high operating rate cannot be ruled out. However,considering the involvement of experienced and established engineering firmsin the design, engineering and commissioning of the Project, the risk of abnormalproblems, shut-downs and low operating rates is not considered serious.

1/ Audit reports submitted recently by PFL under the Multan ExpansionProject have been satisfactory and were prepared promptly.

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7.20 The main risk facing the Project is the possibility of delays inimplementation due to management deficiencies. However, this risk will be reducedwith the strengthening of the operational staff and at Multan, the hiring ofexpatriates and the involvement of the engineering firms for project design andimplementation. Management aspects at NFC, PFL and PAFL will require continuousmonitoring by the Bank. Given the sensitivity of the economic rate of returnof PAFL to adverse variations in revenues and cost (para 8.09), there is therisk that the Daud Khel project component may show a low economic rate ofreturn. This risk, however, should be accepted for the reason given in para8.10; to minimize it this component will be closely monitored. No commercialrisk is foreseen. Even on the basis of a conservative market forecast, thecountry will continue to be deficit in fertilizer.

VIII. ECONOMIC ANALYSIS

A. Economic Justification

8.01 As described in Chapter IV, Pakistan's past consumption of ferti-lizer has been growing rapidly. Growth is forecast to continue, albeitat a slower pace, but still resulting in a rapidly increasing shortfallin domestic supply unless existing production is supplemented by additionalcapacities. In the meantime, the need for imports will keep growing, and itis estimated that by 1990, some 688,000 nutrient tons of nitrogen and 630,000nutrient tons of phosphate fertilizer will need to be acquired abroad. Theintroduction of additional production capacity in Pakistan may be facilitatedby the development of new natural gas reserves, and possibly, rock phosphatedeposits and a domestic source of sulphuric acid, all currently underinvestigation.

8.02 The proposed rehabilitation and expansion of the Multan ammonia/urea and the Daud Khel ammonium sulphate plants will start to narrow the gapbetween demand and domestic supply; they are expected to be supplemented infuture years by the installation of new plants, a subject to be addressed bythe Study of Additional Fertilizer Capacity, another component of thisProject. The Project will also lead to substantial improvements in theenergy efficiency of the two fertilizer complexes.

8.03 The NFC Group is the largest fertilizer producer in Pakistanand has the responsibility of assuring that its production facilities areused at maximum capacity levels. In the past, staffing problems have greatlycontributed to jeopardizing the attainment of this goal. Strengtheningmanagement and staffing by implementing the various measures addressed underthe Project is thus of importance if the targeted high capacity utilizationat all NFC plants is to be attained and maintained.

B. Economic Prices of Fertilizers and Production Inputs

8.04 World fertilizer prices have fluctuated widely in the past. Thiswas often caused by over-investment in new production facilities when inter-national prices were high, and the postponement or cancellation of investmentswhen prices were falling. Fertilizer prices peaked in 1974/1975 and subs-equently declined sharply due to reduced imports of fertilizer by countrieswhich had accumulated stocks during the preceding years, as well as the substan-tial investments stimulated by high prices in the early 1970's. Since 1976,prices have been generally rising and are expected by the Bank to continue doingso until 1985 when they are assumed to have reached their long-term equili-brium level; thereafter, price movements would follow changes in energy

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price levels. Current projections 1/ assume that the price for urea (per ton,bagged, fob at exporting countries, in 1980 terms) will rise from the late-1981level of about US$230 to US$268 by 1985 and US$282 by 1990. The price forammonium sulphate is expected to move in a similar pattern, from currentlyUS$114 to US$136 by 1985 and US$147 by 1990. This latter projection for AS isconservative: because of the likely decrease in world AS supplies, pricescould well increase more rapidly than those of urea. Furthermore, base caseprojections for AS prices assume that AS will not enjoy any premium, on anutrient basis, over urea, even though in the past premiums of an average 15%were common. The above fob prices, plus charges for international and localfreight to the main consumption areas, transport insurance and local porthandling, are used in the economic analysis, as detailed in Annex 8-1 whichdescribes basic assumptions used in the economic analysis. Economic pricesfor imported inputs (rock phosphate, sulphur) are calculated in a similarway. Natural gas is shadow-priced on the basis of its value in the productionof urea in Pakistan, assuming urea to be valued at border prices. On thisbasis, natural gas is valued at US$4.09 per million scf in 1981 and projectedto rise to US$5.69 per million scf by 1995 (in constant 1981 terms).

C. Economic Rates of Return

8.05 Annex 8-2 shows the investment, operating cost and revenue streamsused in the incremental economic return calculations for the Multan ureaplant expansion and rehabilitation, the Multan ammonia plant expansion, andthe Daud Khel ammonium sulphate plant rehabilitation, which result inincremental economic rates of return of 54%, 96% and 42%, respectively.These returns indicate that the effect of the implementation, particularly ofthe Multan component on the two affected plants there, is highly positive.Also, implementation of the Daud Khel rehabilitation, despite its relativelyshort-run and temporary benefits of seven years, is economically attractive.

8.06 The following table shows the results of several sensitivity testsprepared on the Project's incremental economic rates of return:

Sensitivity Tests on Economic Rates of Return(in %)

Multan Multan Daud TotalUrea Ammonia Khel Project

Base Case 54 96 42 54

1. Capital Cost - up by 10% 50 88 38 502. Operating Cost - up by 10% 46 85 25 433. Revenue - up by 10% 66 108 60 684. Revenue - down by 10% 42 84 18 385. Production start-up - one-year delay 40 66 30 406. Combination of I and 5 36 64 26 36

1/ According to the December 1981 projections by the Bank's Commodities andExport Projections Division.

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8.07 As shown above, the Multan components are most sensitive to a delayin project completion, whereas in the case of Daud Khel, changes in operatingrevenues and cost have the greatest impact.

8.08 In considering the basic justification for rehabilitating andexpanding the existing PFL and PAFL facilities, the economic viability of thecompanies as a whole, including existing and proposed facilities under theProject, was analyzed (Annex 8-2). The Multan facilities were assumed tohave a remaining life of ten years after the expected 1985 project completion,and those at Daud Khel, of seven years after the 1984 project completion.PFL's continued operation is estimated to have an economic rate of return of19% which is testimony to that company's economic health under currentmarket and operating conditions, in spite of the large cost overrun incurredin the Multan Expansion project completed in 1978 and the design deficienciesas a result of which full capacity utilization of the NP plant has not yetbeen achieved.

8.09 The Project will help to greatly improve the economics of the DaudKhel plant which currently is a high-cost producer. After rehabilitation,its cash cost of production will be below the import cost of AS. Due to theage and the small size of the existing facilities, the plant as a wholewould have an economic return of 13%, lower than the incremental return of42% (para 8.05). The rate of return calculations for Daud Khel are based onprojected international prices for AS, in line with those projected for thenutrient value of urea and which do not include any premium, although his-torically, markets in Europe for example, have paid fob prices for AS whichin terms of nutrient, were an average 15% higher than for urea. If one wereto assume a 10% premium on the fob nutrient value of AS, the economicrate of return for PAFL as a whole would rise to 27% and that of the incre-mental project, to 52%. However, if revenues were to decline below expectedlevels or capital cost were to increase, the overall economic rate of returnof PAFL could be marginal. It is therefore of importance that the implemen-tation of the Daud Khel Project be closely monitored in order to minimize therisk that unexpected developmentsin cost and schedules affect the economicsof this Project component.

8.10 The relatively low rate of return for the Daud Khel plant as a wholeshould also be seen in the light of the desirability of maintaining inoperation a well-kept, albeit old and technologically outdated plant whichprovides a fertilizer in demand for certain crops in Pakistan in a remotepart of the country and whose full substitution by other products, such asurea, is not generally accepted. Furthermore, by enabling the Daud Khelplant to continue functioning, its work force of about 1,000 would be main-tained in an area which otherwise can offer only limited alternative employ-ment. Although this benefit cannot easily be quantified, this is of particularimportance when considering that the existing ammonium sulphate plant isintended to be replaced by a new larger and more economic unit later in the1980s, in case the proposed studies should conclude such a course of actionto be desirable. At that time, the skilled manpower currently available atDaud Khel will be highly valuable.

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D. Other Economic Benefits

8.11 In 1987, when both the PFL urea and the PAFL ammonium sulphateplants are expected to have reached their full production levels, incrementalproduction from these two companies would total 178,000 tons of fertilizerper year, representing an estimated gross import cost (cif Karachi) ofUS$39 million per year in 1981 prices. Thus, net of debt service the twocomponents of the Project would generate foreign exchange annually of aboutUS$29 million by 1987 and a total of US$250 million over their respectivelives; the foreign exchange cost of the productive components (US$31.0million) would be more than covered with the net foreign exchange savingsof about 13 months of full production.

8.12 The managerial and operating capability of NFC would be improvedas a result of the various management development and training programssupported by the Project. The availability of trained operators is criticalin Pakistan in view of the increasing productive capacities and the aim ofmaking the maximum use of the large investments in the sector. Such producti-vity gains would directly help increase total agricultural output and improvefarmers' incomes.

8.13 Through the Project, the Bank would be working closely with theNFC Group and GOP, affording the Bank a continuing opportunity to assistPakistan in reducing its reliance on fertilizer imports and the resultingburden on its balance of payments, to influence the future formulationof Government policy on capacity expansions, both in the private and publicsectors, remuneration in the public industrial sector, and the economic useof national transportation resources and investments. The energy efficiencyrelated investments under the Project are likely to be followed by similarinvestments in other energy-intensive investments in the country.

IX. AGREEMENTS

9.01 The following agreements have been reached:

A. With the Government of Pakistan, that it will:

i) take promptly all action necessary to enable theNFC Group to attract and retain qualified technicaland managerial staff (para 3.06);

ii) cause Pakistan Railways promptly to implement andthereafter maintain, adequate schedules for the operationof block trains in order to ensure the timely and efficienttransportation of fertilizers from production plants tostorage locations in the marketing areas (para 4.08);

iii) implement by March 31, 1983 a system acceptabale to theBank for adequate compensation to NFC producers for allcosts related to the marketing of fertilizers (para 4.11);

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iv) as long as it controls fertilizer prices, set ex-factory prices in a way that would permit NFC manufac-turers under conditions of efficient operations to meettheir costs, service their debts, and earn a reasonablereturn on equity (para 4.13);

v) based on the findings of the Study of AdditionalFertilizer Capacity, review with the Bank periodicallythe evolution of its ex-factory pricing policy(para 4.13);

vi) carry out the Study of Additional Fertilizer Capacity(para 5.35);

vii) provide, or cause to be provided in the form ofequity, any additional funds which may be needed by theNFC Group to complete the Project, beyond the amount ofthe Bank loan and the NFC Group's internal cash generation,(para 6.15); and

viii) promptly reimburse NFC's subsidiaries the difference betweenthe ex-factory price and the controlled retail price offertilizer (para 7.17).

B. With NFC, PFL and PAFL that they will:

i) complete promptly, based on an exchange of views with theBank a program for action on the recommendations made bythe SGV Organization and Management Study (para 3.09).

ii) provide from their own financial resources or fromother sources the amounts required beyond the proceedsof the Bank loan to meet the expectations of the Project(para 6.15);

iii) follow financial covenants and reporting requirementsas outlined in para 7.16; and

iv) limit non-Project investments by PFL and PAFL duringProject implementation to US$4 million and US$2 million,respectively, and for the NFC Group as a whole, toUS$25 million (para 7.17);

9.02 The signing of on-lending agreements satisfactory to the Bankbetween the Government and NFC, between NFC and PFL, and between NFC and PAFLwill be special conditions of loan effectiveness.

9.03 Based on the acceptance of the above agreements reached, the Project isconsidered suitable for a Bank loan of US$38.5 million equivalent.

Industry DepartmentMay 1982

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ANNEX 3-3

PAKISTAN: FERTILIZER INDUSTRY REHABILITATION PROJECT

NFC-CONSOLIDATED BALANCE SHEETS (1979-1981/)

(in PRs million)

1979 1980 1981

ASSETSCurrent Assets

Cash and Banks 205 292 290

Inventories 284 394 727

Govt. ComDensation Receivable 16 419 578

Other Receivables 140 178 332

Other 3 2 1

Total Current Assets 648 1285 1928

Fixed AssetsCapital Assets, net of

Depreciation 1966 1878 3466

Work in Progress 1724 2335 589

Net Fixed Assets 3690 4213 4055

Other Assets 4 3 2

TOTAL ASSETS 4342 5501 5985

LIABILITIESCurrent Liabilities

Accounts Payable 149 189 210

Bank and Other Borrowings 133 176 413

Current Maturities of Long-Term Debt 146 409 438

Interest and Other 185 357 129

Total Current Liabilities 613 1131 1190

Deferred Taxes - i63 356

Long Term LiabilitiesLong Term Debt 2747 2946 2958

Other 33 37 84

Total Long Term Liabilities 2780 2983 3042

Minority Interest 277 467 601

EquityPaid Share Capital 675 700 700

Reserves and RetainedEarnings (3) 57 96

Total Equity 672 757 796

TOTAL LIABILITIES 4342 5501 5985

Current Ratio 1.1 1.1 1.6

Long Term Debt to EquityRatio 81:19 71:29 69:31

1/ Fiscal Years ending June 30, consolidation un-audited

Industry Department

May 1982

- 54 - ANNEX 3-4


PFL-SUMMARIZED INCOME STATEMENTS (1978-1981-/)(in PRs million)

1978 1979 1980 1981

Net Sales 69 103 351 513Govt. Compensation 2/ 43 121 579 509

Gross Revenue 112 224 930 1022

Cost of Goods Sold 96 208 528 561

Gross Profit 16 16 402 461

Administrative affdGeneral Expenses 11 9 19 19

Operating Profit 5 7 383 442

Plus:Other Income 44 3 5 8

Less:Financial and OtherNon-operating Expenses 48 85 172 161

Tax Provisions 0 0 i3 l2Net Profit (Loss) _1 (75) _53 ___

1/ Fiscal years ending June 30; as audited but adjusted for tax deferrals.

2/ Accounted on accrued basis

Industry Department

May 1982

- 55 -

ANNEX 3-5


PFL-SUMMARIZED BALANCE SHEETS (1978-19811!)(in PRs million)

1978 1979 1980 1981ASSETSCurrent AssetsCash and Banks 79 45 65 151Inventories 69 227 293 461Govt. Compensation Receivable - 16 418 548Other Receivables 8 13 25 49Other 1 3 2 1

Total Current Assets 157 304 803 1210Fixed AssetsWork in Progress 1748 6 12 1Capital Assets 60 1997 2111 2010Less: Depreciation 35 135 352 545

Net Fixed Assets 1773 1868 1771 1466Other Assets 0 3 1 1

TOTAL ASSETS _==° 2175 2575 2677

LIABILITIESCurrent LiabilitiesAccounts Payable 64 109 167 108Bank and Other Borrowings 1 137 130 198Current Maturities of Long-Term Debt 191 133 152 149

Interest, Dividends and Other 1 - 49 230Total Current Liabilities 257 379 498 685

Long-Term Debt 1012 1211 1145 893Deferred Taxes _ - 163 356

Eqit yPaid Share Capital 646 646 646 646Reserves and Retained

Earnings 15 _61) 123 97Total Equity 661 585 769 743

TOTAL LIABILITIES 1930 2175 2575 2677

Current Ratio 0.6 1.1 1.6 1.8Long Term Debt to Equity

Ratio 54:66 67:33 60:40 55:45

1/ Fiscal years ending June 30; as audited, but adlusted for deferred taxes.

Industry Department

May 1982

- 56 -

ANNEX 3-6


PAFL-SUMMARIZED INCOME STATEMENTS (1979-19811/)(in PRs million)

1979 1980 1981

Net Sales n/a 71 87Govt. Compensation 2/ n/a 150 46

Gross Revenue 103 221 133

Cost of Goods Sold 68 81 86Gross Profit 35 140 47

Administrative, Generaland Marketing Expenses 15 14 15

Operating Protfit 20 126 32

Plus:Other Income 3 4 5

Minus:Financial and OtherNon-operating Expenses 9 14 4

Tax Provisions 8 77 19Net Profit 6 6 __39 __14

1/ Fiscal years ending June 30; audited2/ Accounted on cash basis

Industry Department

May 1982

- 57 -

ANNEX 3-7


PAFL-SUMMARIZED BALANCE SHEETS (1979-1981-/)(in PRs million)

1979 1980 1981

ASSETSCurrent AssetsCash and Banks 20 109 35Inventories 29 35 42Other Receivables 33 29 34Other 1 1 7

Total Current Assets 83 174 118

Fixed AssetsCapital Assets n/a 174 177Less: Depreciation n/a 135 146

Net Fixed Assets 47 39 31

TOTAL ASSETS 130 213 149

LIABILITIESCurrent LiabilitiesAccounts Payable 15 20 15Bank and Other Borrowings 2 9 4Taxes, Dividends and Other 8 78 23

Total Current Liabilities 25 107 42

EquityPaid Share Capital 90 90 90Reserves and Retained

Earnings 15 16 17Total Equity 105 106 107

TOTAL LIABILITIES- 130 213 149

Current Ratio 3.3 1.6 2.8

1/ Fiscal years ending June 30, audited

Industry Department

May 1982


HISTORICAL OFFTAKE, PRODUCTION AND IMPORTS OF FERTILIZER - 1962 - 1981

('000 tons of nutrient)

Nitrogenous (N) Phosphatic (P205) Potassium (K-70) All Fertilizers

Years ending June 30 Offtake 1/ Production 2/ Imports Offtake 1/ Production 3/ Imports Offtake 1/ Imports Offtake 1/ Production Imports

1962 37 14 40 1 - 1 - - 38 14 41

63 40 40 - - - - - - 40 40 -

64 68 44 5 1 - I - - 69 44 6

65 85 47 3 2 1 - - - 87 48 3

66 70 46 36 1 1 - - - 71 47 36

67 113 51 106 4 1 16 1 1 118 52 123

68 176 50 104 12 3 50 - - 188 53 154

69 205 79 118 39 3 33 2 6 246 82 157

1970 274 129 292 37 4 11 1 - 312 133 303

71 251 126 108 30 5 39 1 5 282 131 152

72 344 221 73 37 5 - I - 382 226 73

73 386 272 116 49 8 72 1 - 436 280 188

74 342 303 225 58 4 104 3 6 403 307 335

75 363 310 106 61 11 26 2 - 426 321 132

76 445 316 73 103 11 109 3 - 541 327 182

77 511 309 137 118 12 140 2 3 631 321 280 1

78 550 313 342 156 15 116 6 2 712 328 460 @

79 684 342 463 188 35 211 8 10 880 377 684 X

1980 806 389 450 229 50 147 10 14 1045 439 611

81 843 581 387 227 59 302 10 22 1080 640 711

Growth Rates

1962-1981 18% 22% 38% 33%4/ 36%4/ 19% 22%

1971-1981 13% 17% 22% 28% 23% 14% 17%

1/ Represents shipments to fertilizer dealers

2/ Includes Urea-46% N (produced by PFL, PSFL, DH and Exxon); Ammonium Nitrate 26%N (PFL); Nitrophosphate 227N (PFL) and Ammomium Sulphate 21%N (PAFL)

3/ Includes NP 22% P205 (PFL) and SSP 17% P205 (LC+FL)4/ 1967-1981

Industry Department

May 1982

_ 59 _

ANNEX 4-2


EX-FACTORY FERTILIZER PRICES AND DISTRIBUTION MARGINS

Producer and FertilizerDawood PFL/Hercules Esso PSFL PAFL PFL PFL LCFLUrea Urea Urea AS NP ANL/CAN SSP

(Rupees per product ton)

I. Ex-Factory Prices

As of 1974-75 784 854 850 621 - 519 374As of November 1979 823 1,100 1,874 NA 2,104 1,273 806As of May 1980 893 1,150 2,006 916 2,104 1,292 938

II. Distribution Margin

As of 1974-75 104 129 101 101 - 101 101As of November 1979 116 157 NA NA 178 NA NAAs of May 1980 116 165 119 122 178 102 121

Industry Department

May 1982


PROJECT IMPLEMENTATION SCHEDULE (CALENDAR YEAR)

1982 1983 1984 1985Sub-Prolect ImpletTentation - - -- - - - -…

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

Multan Ammonial Studies

Urea Rehabilitation Engineering

and Expansion Procurement - . - - -

Erection- - - - - -

Cormmissioning

Multan Rationalization Engineering

(a) Chromate Removal Procurement _ - -_ _

Erection

Commissioning

(b) NOX Ahatement Engineering

Procurement _ _ _

Erection

Commissioning

lc) Modernization and Procurement _ _Product Dispatch Equp.

Daud Khel Studies

Rehabilitation Engineering

Procurement _ _

Erection- -

Commissioning

Technical Training Center Consultant Selection

Building Design

Construction _ = -

Training Equip. Procurement - - - -

Instructor Training

Trainee Recruitment

Industry Department World Bank 23711May 1982 X

PAKISTAN - FERTILIZER INDUSTRY REHABILITATION PROJECT

CAPITAL COST ESTIMATE (000 USS)Multan Ammonia/Urea

Rehabilitation and Expansion Multan Rationalization Daud Khel Rehabilitation Other Components Total Project Cost

Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Foreiqn TotalEquipment, Materialsand Spares 65 7,935 8,000 250 3,856 4,106 187 3,840 4,027 359 621 980 861 16,252 17,113

Freiqht, Insurance andInland Handling 568 738 1,306 313 403 716 239 430 669 43 62 105 1,163 1,633 2,796

Engineerinq & ConsuLltancyServices - 1,150 1,150 51 200 251 100 100 200 612 4,164 4,776 763 5,614a/ 6,377

Erection and Civil Works 2,815 700 3,515 328 85 413 1,466 450 1,916 607 - 607 5,216 1,235a/ 6,451

Commissioninq - 490 490 - - - - 200 200 - - - - 690a/ 690

Preoperational Expenses - - - - 130 76 206 130 76a/ 206

Incremental Working Capital - - - _ - - _ - _ 200 - 200 200 _ 200

Base Cost Estimate b/ 3,448 11,013 14,461 942 4,544 5,486 1,992 5,020 7,012 1,951 4,923 6,874 8,333 25,500 33,833

Physical ContinqencyProvisions 370 1,181 1,551 94 454 548 199 502 701 175 492 667 838 2,629 3,467

Price EscalationProvisions c/ 706 2,256 2,962 192 925 1,117 351 884 1,235 385 1,085 1,470 1,634 5,150 6,784

Total Installed Cost 4,524 14,450 18,974 1,228 5,923 7,151 2,542 6,406 8,948 2,511 6,500 9,011 10,805 33,279 44,084

Interest DurinqConstruction - 2,130 2,130 - 920 920 - 660 660 - 930 930 - 4,640 4,640

Front-end Fee on Bank Loan - 300 300 - 100 100 - 100 100 - 100 100 - 600 600

Total Financing Required 4,524 16,880 21,404 1,228 6,943 8,171 2,542 7,166 9,708 2,511 7,530 10,041 10,805 38,519 49,324- = -- z f= = -= = -== ,= _ = = .= ,-=_- =- - - = = == === = === = == = ====

a/ Technical consultants services, includinq vendor servicemen.

b/ January, 1982 prices; the Project is exempt from taxes and imports duties. xc/ Price Escalation is based on expected international inflation rates of 8% In 1982, 7.5% in 1983, 7.0% in 1984 and 6% thereafter. X


_ 62 _

ANNEX 6-2


REPAYMENT SCHEDULE FOR BANK LOAN(US$ million)

NFCLoan Portions onlent to Total

PFL PAFL Repayment

1986 - 1.2 1.2

1987 2.3 1.2 4.1

1988 2.3 1.2 4.1

1989 2.3 1.2 4.1

1990 2.3 1.2 4.1

1991 2.3 1.1 4.0

1992 2.3 - 2.9

1993 2.3 - 2.9

1994 2.2 - 2.8

1995 2.2 - 2.8

1996 2.2 - 2.8

1997 2.2 -_2.7

Totals 24.9 7.1 38.5


- 63 -

ANNEX 6-3


ESTIMATED DISBURSEMENT SCHEDULE FOR BANK LOAN

(US$ million)

Fiscal Yearand Quarter Disbursement Cumulative Undisbursed

1983 I) 2.0 1/11) 1.0III) 2.0IV) 3.0 8.0 30.5

1984 I) 3.0II) 4.0III) 4.0

IV) 4.5 23.5 15.0

1985 I) 4.0II) 4.0

III) 3.0IV) 2.5 37.0 1.5

1986 I) 0.8II) 0.7 38.5 _

1/ Including front end fee


- O64 -

ANNEX 7-1Page 1

PAKISTAN - FERTILIZER INDUSTRY REHABILITATION PROJECT

ASSUMPTIONS USED IN FINANCIAL ANALYSIS

A. Basis for Projections

1. Income, cash flow and balance sheet projections shown in Annexes7-2 to 7-8 are prepared in current PRs, using domestic inflation rates of12% for 1982, 11% for 1983, 10% for 1984, 9% for 1985, and 8% thereafter,except as noted below. For foreign costs, an exchange rate of PR 10 per US$was assumed which approximates the current rate of exchange, Projections wereprepared for PFL (reflecting the effects of the Multan Ammonia/UreaRehabilitation and Expansion component), PAFL, and NFC.

B. Production Build-up and Revenue

2. Income projections for PFL and PAFL were prepared for both cases,without and with project implementation, to derive the inputs for the incre-mental financial return computations. Without project implementation, ureaproduction at PFL was assumed to gradually decrease until 1986 when it wouldcease since the plant would no longer be economical. With the Project, ureaproduction was assumed to be interrupted for most of FY84, with productionassumed to start up again in early FY85, providing three months of productionfor FY85 at an average rate of 52% of capacity, and rates of 85% forFY86 and 90% thereafter.

3. PFL's production of NP and CAN would not be affected by the implemen-tation of the Project; it was assumed that the ongoing plant modificationsnecessitated by design corrections there, would continue on schedule, resultingin a 65% capacity utilization for FY82, 70% for FY83 and 90% thereafter.

4. Regarding Daud Khel, production was assumed to cease by FY85without project implementation. With the Project, production would declineto 55% of capacity during six months in FY84, then by FY85 return to95% of nominal design, but slightly below the levels experienced in pastyears. Production would cease altogether in 1992 due to the anticipatedobsolescence of the equipment not rehabilitated under the Project.

5. Revenue projections are based on sales price assumptions in linewith the Government's commitment to the Bank to eliminate subsidization offertilizer prices by 1986 (para 4.12). The following ex-factory prices(net of marketing incidentals) were assumed for the financial projections(in PRs per ton): 1/

1/ As per Fertilizer Imports Credit (1066-PAK).

- 65 -

ANNEX 7-1Page 2

Projected Ex-Factory Fertilizer Prices

AmmoniumYear Urea NP CAN Sulphate

FY81 (actual) 1,731 1,431 888 728FY82 2,190 2,050 1,272 920FY83 2,650 2,740 1,700 1,113FY84 3,200 3,640 2,260 1,344FY85 3,880 4,830 3,000 1,630FY86 4,730 6,110 3,800 1,987

6. As a result of increasing sales revenues, the need for Governmentcompensation payments to PFL would terminate in FY82. Beginning FY83,the company would thus begin paying Development Surcharges absorbing profitsin excess of their respective return-on-capital targets.

C. Variable Production Costs

7. Attachments I and 2 show production costs at full capacity for theammonia and urea plants at Multan and the Daud Khel plant, respectively. Thecost of natural gas consumed by PFL and PAFL is assumed to increase from thepresently heavily subsidized levels, by an annual 25% until 1988 and at 8%p.a. thereafter. This is based on the Bank's assumption that GOP willcontinue to apply policies of letting energy prices gradually rise to inter-national levels, as evidenced by the 25% price increase announced in January1982.

8. Consumption of rock phosphate is projected to increase with thegrowing NP production; it is costed at internationally projected prices plusinternational and local freight increasing at the respective inflation rates.Bagging and other charges would vary with production volume, at pricesincreasing at domestic inflation rates.

D. Fixed Production Costs

9. The cost of maintenance stores and spares of the PFL urea plant wasprojected to increase from the current FY82 level of PR 6.7 million to alevel of PR 13.9 million in real terms by the time of plant closure in FY86and in line with the rapid increase experienced in this cost in past years;with the Project, this cost would stabilize at the lower level of PRs 4.0million by FY85. At Daud Khel, this cost would similarly rise from the FY82level of PR 12.5 million to PR 22.0 million by FY85 without the Project;with the Project, it would stabilize at PR 8.0 million. Labor costs andother fixed charges and expenses are projected to increase at the domesticinflation rate.

- 66 -

ANNEX 7-1Page 3

E. Other

10. Interest charges on the proposed Bank loan are assumed at 12.8%,on the basis that the foreign exchange risk of the Bank loan would be borneby NFC and its subsidiaries. Provision has been made for the Bank's"front-end" fee.

F. Financial Rates of Return

11. Attachment 3 shows the inputs used in the financial rate of returncomputations for the two productive Project components and the rates ofreturn derived therefrom.


PAKISTAN - FERTILIZER INDUSTRY REHABILITATION PROJFCTMULTAN REHABILITATION AND EXPANSION COMPONENT - PRODUCTION COSTS (1987)

Unit Prices 1/ Annual Costs 1/Units Annual Consumption (PR) (million Rs)

1. Urea Production Costs (at 83,000 tpy in 1987) Economic Financial Economic Financial

Variable - Ammonia Tons 49,800 3,980 1,276 198.2 63.5Steam Tons 99,600 180 67 18.0 6.7Electricity kwh x 1000 11,952 610 472 7.3 5.6Coolinq Water m3 x 1000 5,976 184 190 1.1 1.1Baqqinq and Handlinq Qty x 1000 1,660 8,975 8,975 14.9 14.9

Total Variable Costs 239.5 91.8

Fixed - Labour 2.6 2.6Maintenance 4.0 4.0

Total Fixed Costs 6.6 6.6

Total Production Costs 246.1 98.4

2. Ammonia Production Cost (at 17,820 tpy in 1987)

Variable - Natural Gas Millions SCF 490 58,900 2/ 23,100 3/ 28.9 11.3Electricity kwh x 1000 2,673 610 472 1.6 1.3Others Per ton product 17,820 22 22 _0.4 0.4

Total Variable Costs 30.9 13.0Fixed - Maintenance 0.7 0.7


1/ In 1984 prices. >

2/ See Annex 8-1.

3/ See para. 7.04. m 1


PAKISTAN - FERTILIZER INDUSTRY REHABILITATION PROJECTDAUD KHEL REHABILITATION COMPONENT

PRODUCTION COSTS(at 95,000 tpy AS - 1985)

Unit Prices 1/ Annual Costs 1/(PRs)-- - (million PRs)

Variable Costs Units Annual Consumption Economic Financial Economic Financial

Natural Gas Million SCF 2,394 56,200 2/ 16,000 3/ 135.0 38.3Gypsum tons 144,400 25 25 3.6 3.6Sulphur tons 1,520 2,100 2,100 3.1 3.1Bags Qty x 1,000 1,900 4,900 4,900 9.3 9.3Catalyst & Chemicals - - 1.2 1.2Electricity & Other - - 7.2 7.2

Total Variable Costs 159.4 62.7

Fixed Costs

Labour 20.0 4/ 29.0Maintenance 11.0 11.0

Total Fixed Costs 31.0 40.0


1/ In 1984 Prices.

2/ See Annex 8-1.

3/ See para. 7.04. >

4/ Includes wages of 750 unskilled laborers assumed at opportunity cost of 50% of financial cost.

Industry DepartmentMay 1982 r


INPUTS FOR FIRANCXAL3ATE OF RETTTIN .- )NMPLTATTONR(PRs million in current terms)

Multan Ammonia/Urea Rehabilitation andExpansion ComponeIt Proj ec el Incremental

Project IncrementalICapital Co6t Cash Flow Net Stream Capital Cost Cash Flow Net Stream

1982 11 - (11) -

1983 43 (43) 46 (46)

1984 98 - (98) 46 ( 5) (51)

1985 45 32 (13) 28 25 3

1986 19 52 33 - 53 53

1987 - 51 51 - 51 51

1988 48 48 49 49

1989 - 45 45 - 46 46

1990 - 42 42 - 44 44

1991 39 39 - 541/ 54

1992 36 36 - _ _

1993 33 33 _

1994 49 1/ 49 _ -

Financial Rate of Return before tax- in Current Terms (%) 17X 28% >- in Real Terms (%) 7% 18%

1/ Including 10% residual value of capital costrt

Industry Department

May 1982

PARISIAN -FERTTII2EBR INPOSTRY REHABTILITATION PRAJLCT

PFL, - PROJECTED INCOME STATEMENTS

Years LE~dlnoJunew 39 1981 1982 1903 1984 19A5 198O 1987 1988 19A9 1990 1991(Actual YI S A A A C-N 8 -- t A B C \ BA B C A 8i Cw w rx

Pruductlun Sal-ie ( '000 t)

NP 171 198 213 274 774 - 274 2784 274 7784 274 774 2728 7784 274 2784 274 274 - 74 274 CAR 273 793 315 405 405 - 4AS 809 - 405 805 4085 805 4 05 405 4 05 405 4085 805 4 05 405 -Ure. 4B 80~ 3i6 37 TO (16) 28 27 6 28 78 54 - B 83 - S A - B A - 03 83- N) 8

To-tal 89? SAT 504 711 095 (16) 707 7((V 703 157 SN 073 762 Al 079 702 83 079 762 B) 079 762 81 679 702 83

Sate Revenue 513 ABS 1221 702) 1972 (51) 2057 2072 15 33108 3493 255 481 3909 428 3761 8219 858 8068 8503 4599 4830 4921 535 8737 5315 578

unrnrtCuep. )SurchSaeoe) 509 189 1 95) 1720) 1083) 37 (125 1) (1700) 9 (1835) (2906) 191 (1899) 12201) 1304) (7028) 12351 )(324( (2288) (2081) (357) (2081) (3030)- (389) 1(2902)I (33251 (871

Total Revenu 1077 1023 1120 1303 1709 118) 1800 1412 0 1SO3 1507 64 1582 1702 120 1733 1809 135 1780 1922 142 1785 1891 180 1035 1990 155

Cnst uf Sales,

Sarlable, CostNatural Gas 85 46 53 90 80 (41 110 il1 1 136 185 9 103 1A6 23 708 233 29 770 257 32 238 272 38 257 794 87Phosphate Book 103 130 14) 714 214 - 7493 78) - 701 761 - 277 272 - 300 300 - 318 318 - 382 387 - 360 360 -RaggIng 97 77 91 125 123 (21 180 1)7 1 146 157 11 153 171 IS 165 185 20 170 200 2~2 197 216 28 208 738 26Othe 36 88 59 72 70 (2) 78 70 - 05 90 5 89 97 8 96 105 9 108 113 9 112 127 10 171 132 11

Fined Cost

Natural Gas 70 80 98 121 121 - 150 150 186R 1919 13 227 255 78 788 319 35 307 345 38 337 373 41 359 803 88Labor 85 50 56 02 02 - 60 68 - 73 73 - 79 77 (7) 85 63 (2) 92 90 12) 99 96 13) 107 104 (31Bainte--nce Store and Spa-s 59 65 78 84 78 1 61 96 BS (11) 197 91 (16) 91 96 5 100 107 7 108 110 8 117 175 8 176 135 90Oepr-cIatlun 191 190 200 202 207 - 205 720 15 703 728~ 71 206 727 21 207 228 21 108 189 21 27 42 20 - 21 71Other 11 12 13 18 14 - 10 10 - 18 18 - 20 20 - 72 27 - 24 78 - 77 27 - 30 30 -loventury VarIatIo (56) 284 - - - - - - - - - - - - - -

Total Cost of Sales 501 728 793 988 970 (141 1102 1108 6 1215 1258 83 1307 1808 1(01 1863 1582 119 1515 1683 128 1881 1615 134 1968 1713 145

Gru-ss ProfIt 861 389 3393 319 319 - 308 304 - 788 309 71 275 294 19 270 286 16 265 279 184 768 276 12 267 277 10

Adnlnlstratluu au,d Geneal Fnp-ns 19 22- 78- 27 2-7 - 29 -29 - 31 311 - 38 38 _ 3~7 37 _, _80 40 .. 83 83 - 87 47 -

tonrating PrfIt 882 327 309 292 792 2 75 275 2 57 278 71 281 700 19 733 789 16 275 739 184 271 733 172 220 230 10

Plus: Oth-r ure8 3 3 3 3 - 3 3 4 N - 4 8 - 8 8 - 8 8 - S S - 6 6 -Less: Tt-tret

- Etstlog 140 108 86 09 69 - 52 52 - 35 35 - 19 19 - 11 11 - 3 3 - - - - - --Project - - - - - -2 1 21 18 19 - 10 16 - 14 184 12 12 - I 10

Su,btotal Interest 180 108 86 69 69 - 57 52 3 5 56 21 19 38 19 Il 22 16 3 17 18 - 12 12 - 10 10

WorkerIs PartIcIpatIon 15 11 11 Il 11 - I 11 - 11 11 - 11 11 - 11 11 - 11 11 - II 11 - 11 11 -

Income Tao 102 -118118 11 8 118 - 118 118 -118 118 _1 11 8 11 8 -18 118 -18 118- 118 118 -L8 118 11 8 -

Net -ProfIt _97 97 _97 97 _97 _ 97 97 - 97 97 - 97 97 - 97 97 - 97 97 -97 97 -97 97 -

A Wlthout Prujent

B With -""Inla/Urea On,ablltattlun and Espanslun Componen t.C = 8-0A

Industry DepartmentNay 1987

- 71 -

AN'NEX 7-3


PFL PROJECTED BALANCE SHEETS

(PR million)

1981As of Jine 30 Actual 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

ASSETS

Current Assets

Cash and Banks 151 90 379 313 259 201 208 177 144 88 12Inventories 461 440 420 460 501 541 584 632 682 737 796GOP Ccmpensation Receivable 548 320 - - - - - - - - -

Other 5C 31 _38 _38 41 _45 48 _52 56 61 6.

Total Current Assets 1,21D 881 837 811 801 787 8'40 861 862 886 873

Fixed Assets

Project - -- 33 123 205 214 214 214 21L 214 21/.Other 2,012 2,101 2,125 2,140 2,156 2,173 2,182 2,212 2,234 2,258 2,283Less: Depreciation 545 735 935 1,137 1,357 1581 18L8 2,036 2,225 767 2,288

Net Fixed Assets 1,467 1,366 1,223 1,126 0 806 _588 390 223 245 209

Total Assets 2,677 2,247 2 060 1,937 1,805 1,593 1,428 1,251 1,105 1,091 1,282

I ABILITIES

Current Liabilities

Accoulnts Payable 154. }08 81 89 97 105 113 120 128 137 14,Bank and Other Borrowings 198 - - - - - - - - - -

Currenlt Mtaturities ofLong-Term Debt- Existing 149 15. 1.53 152 163 84 88 75 6 - -- Project - IBRD Loan - - - - - 17 17 17 17 17 17DeferrEd Taxes - 13 47 5/ 64 72 79 62 - -

D/ividends 145 97 97 97 97 97 97 97 97 97 97Other 39 19 - - - - - - - - _

Total Current Liabilities 685 391 378 392 421 375 39A 371 248 251 259

Deferred Taxes 360 378 331 277 213 141 62 - - -

Long-Term Debt

Existing Debt and StaffProvisions 893 739 586 433 270 186 98 23 17 17 17

Pro&ect - IBRD Loan _ _ 26 96 162 152 135 118 101 86/ 67

Total Long-Term Debt 893 739 612 529 432 338 233 141 118 101 84

Equ it

Pald Share Capital 646 646 646 646 646 646 646 646 646 646 646Reserves and Retained Earnings 93 _93 93 93 93 93 93 93 93 _93 O

Total Equity 739 739 739 739 739 739 739 739 739 739 739

Total Liabilities 2,677 2,247 2,060 1,937 1,805 1,593 1,428 1,251 1,105 1,091 1,082

Current Ratio 1.8 2.2 2.2 2.1 1.9 2.1 2.1 2.3 3.6 3.5 3./Long-Term Debt-tu-Equity Ratio 55:45 50:50 45:55 42:55 37:63 31:69 24:7k 104RL 14:Rr 17-R n:,,)

1/ Including the effect of the Ammonia/Urea Rehabilitation and Expansion but none of the other coraponients affecting .E.

Jndustry Deportment

May 1982

_ 72_

ANNEX 7-4


PFL - PROJECTED CASH FLOW STATEMENTS!/(PR million)

Years ending June 30 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

SOURCES OF FUNDS

Internal Cash Generation

Net Income 97 97 97 97 97 97 97 97 97 97Depreciation 190 200 202 220 224 227 228 189 42 21Interest 104 86 69 52 56 38 27 17 12 10

Total Internal Cash Generation 391 383 368 369 377 362 352 303 151 128

Capital Funds

Long-Term DebtIBRD Loan - 26 70 66 7 - - - - -

Total Sources of Funds 391 409 438 435 384 362 352 303 151 178

APPLICATION OF FUNDS

Capital Expenditures

Project - 33 90 82 9 - - - - -Other 90 23 15 16 17 19 20 22 24 25

Total Capital Expenditures 90 56 105 98 26 19 20 22 24 25

Working Capital Requirements (31) (321) 25 15 90 27 75 108 57 55

Debt Service

Existing - Principal 149 154 153 152 163 84 89 75 6 -- Interest 104 86 69 52 35 19 11 3 - -

Project - Principal - - - - - 17 17 17 17 17- Interest - - _ - 21 19 16 14 12 10

Total Debt Service 253 240 222 204 219 139 133 109 35 27

Deferred Taxes (31) 13 47 54 64 72 79 62 - -

Dividends 145 97 97 97 97 97 97 97 97 97

Potal Application of Funds 426 85 496 468 496 354 404 398 213 204

Annual Net Cash Surplus!(Deficit) (35) 324 (58) (33) (112) 8 (52) (95) (62) ( 26)

Debt Service Coverage 1.5 1.6 1.7 1.8 1.7 2.6 2.6 2.8 4.3 4.7

2 Including the effect of the Ammonia/Urea Rehabilitation and Expansion Component.



PAFL - PROJECTED INCOME STATEMENTS(PR million)

Years Ending June 30 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991(actual) (a) (a) (a) (b) (c) (a) (b) (c) (b) (b) (b) (b) () b

Production Volume ('000 t) 97 85 70 55 30 (25) 35 95 60 95 95 95 95 95 95

Revenues

Sales - Ammonium Sulphate 71 78 78 74 40 (34) 57 155 98 189 204 220 238 257 278

- Other 6 6 5 5 2( 3) 4 9 5 10 11 11 12 13 14

Government Compensation 46 63 49 53 51 ( 2) 62 19 (43) (3) 2 10 5 (2) ( 9)

Total Revenue 123 147 132 132 93 (33) 123 183 60 196 217 241 255 268 283

Cost of Sales

Natural Gas 23 23 25 27 17 (10) 23 42 19 52 66 83 90 97 104

Sulphate and Chemicals 3 3 3 3 2( 1) 2 5 3 5 6 6 7 7 8

Bagginq and Other Materials 10 10 10 8 5 ( 3) 6 16 10 17 18 20 21 23 25

Direct Labor 22 24 21 23 23 - 31 31 - 33 36 39 42 45 49

Maintenance 13 14 19 25 11 (14) 32 11 (21) 11 12 13 14 15 15

Depreciation 11 11 11 9 9 - - 14 14 14 14 14 14 14 14

Other 4 8 4 3 2 (1) 2 6 4 7 8 8 9 10 11

Total Cost of Sales 86 93 93 98 69 (29) 96 125 29 139 160 183 197 211 226

Gross Profit 37 54 39 34 24 (10) 27 58 31 58 58 58 58 57 57

Admin., Gen., and Other Expenses 9 10 11 12 12 - 13 13 - 14 15 17 18 19 20

Operating Profit 28 44 28 22 12 (10) 14 45 31 44 43 41 40 38 37

Interest - - - - - - - 9 9 8 7 5 4 2 1

Other Income 5 ( 1) - - - - - - - - - - - - -

Income Tax Provision 19 26 14 11 6 ( 5) 7 18 11 18 18 18 18 18 18

Net Profit 14 17 14 11 6 ( 5) 7 18 11 18 18 18 18 18 18

(a) Without Project(b) With Project(c) (b) - (a)

zz1/ Including labour |

VaIndustry DepartmentMay, 1982

- 74 -

ANNEX 7-6


PAFL - PROJECTED BALANCE SHEETS

(PR million)

1981196 18 198 18 190 11As of June 30 Actual 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

ASSETS

Current Assets

Cash and Banks 34 46 55 49 68 72 71 70 68 66 65Inventories 41 46 51 56 61 66 71 77 83 90 97Govt. Compensation Receivable 30 28 14 14 5 - - -Other 13 15 16 18 19 21 23 24 26 28 30

Total Current Assets 118 135 136 137 153 159 165 171 177 184 192

Fixed Assets

Capital Assets 177 177 215 251 275 275 275 275 275 275 275Less:Depreciation 146 157 168 177 191 204 219 233 247 261 275

Net Fixed Assets 31 20 47 74 84 71 56 42 28 14 0

-otal Assets 149 155 183 211 237 230 221 213 205 198 192

IABILITIES

Current Liabilities

Accounts Payable 16 18 20 22 24 26 28 30 32 35 38Current Maturities of Long-Tert Debt (IBRD Loan) - - - - 12 12 12 12 12 11 -

Dividends 14 17 14 11 18 18 18 18 18 18 18Taxes and Other 12 11 12 13 14 16 17 18 20 21 23

-otal Current Liabilities 42 46 46 46 68 72 75 78 82 85 79

_,ong-Term Debt

li3RD Loan - - 28 55 59 47 35 23 11 - -

Provision for Staff Gratuity 11 13 13 14 14 15 15 16 16 17 17

Paid Capital 90 90 90 90 90 90 90 90 90 90 90Reserves 6 6 6 6 6 6 6 6 6 6 6

Total Equity 96 96 96 96 96 96 96 96 96 96 96

Total Liabilities 149 155 183 211 237 230 221 213 205 198 192

Current Ratio 2.8 2.8 3.0 3.0 2.3 2.2 2.2 2.2 2.2 2.2 2.4uongTerm-DebttoEquity Ratio - - 23:67 36:64 38:62 33:67 27:73 19:81 10:90 - -

-ndustry DepartmentWay 1982

- 75 -

ANNEX 7-7


PAFT., - PROJECThD GCASY T!,.07 STATEIENTS(PR million)

Years Ending June 30 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

SOURCES OF FUNDS

Internal Cash Generation

Net Income 17 14 11 18 18 18 18 18 18 18Depreciation 11 11 9 14 14 14 14 14 14 14Interest - - - 9 8 7 5 4 2 1

Total Internal Cash Generation 28 25 20 41 40 39 37 36 34 33

Capital Funds

Long-Term DebtIBRD Loan - 28 27 17 - - - - - -

Total Sources of Funds 28 53 47 58 40 39 37 36 34 33

APPLICATION OF FUNDS

Capital Expenditures - 38 36 24 - - - - - -

Working Capital Requirements 1 (8) 12 (30) (2) 4 3 4 6 15

Gratuity Fund (2) - (1) - (1) - (1) - (1) -

Debt Service

Principal - - - - 12 12 12 12 12 11Interest - - - 9 8 7 5 4 2 1

Dividends 14 17 14 6 18 18 18 18 18 18

Total Application of Funds 13 47 61 9 35 41 37 38 37 45

Annual Net Cash Surplus(Shortage) 6 (14) 49 5 (2) 0 (2) (3) (12)

Debt Service Coverage - - - 4.6 2.0 2.1 2.2 2.3 2.4 2.8

Industry Department

May 1982

- 76 -

ANNEX 7-8


NFC - PROJECTED FINANCIAL STATEMENTS

(PR million)

1981Years Ending June 30 Actual 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Income and Expenses

Interest, Dividends andOther Income 150 233 253 258 240 223 188 188 188 188 188 188 188

Less: Operating Expenses 11 12 14 15 17 18 20 22 24 27 29 32 35Interest Expenses- Project (NFC onlv) - - - 12 12 12 9 7 5 4 13 13 12- Other 149 168 157 129 117 102 95 88 81 76 71 65 60Depreciation - Proj. - - - - - 18 18 18 18 18 18 18 18Income Tax - - 1 11 11 10 7 8 8 8 8 8 8

Net Profit (Loss) (10) 55 81 101 93 63 39 45 52 55 59 62 65

Balance Sheet

Assets

Current Assets

- Cash 93 128 153 216 315 388 459 477 520 569 634 698 764- Receivable from

Subsidiaries- IBRD Loan - - - - 12 36 36 36 36 35 24 24 24- Other 251 235 235 235 240 115 96 92 85 81 75 75 75

Total Current Assets 344 363 388 451 567 539 591 605 641 685 733 797 863

Net Fixed Assets(including Project) I/ 2 2 36 107 172 166 148 130 112 94 76 58 40

Investments in Subsidiaries 1,199 1,229 1,258 1,258 1,258 1,258 1,258 1,258 1,258 1,258 1,258 1,258 1,258

Loans to Subsidiaries

- Project - - 54 160 230 244 208 172 136 101 77 53 29- Other 524 466 322 175 24 - - - - - - - -

Total Assets 2,069 2,060 2,058 2,151 2,251 2,207 2,205 2,165 2,147 2,138 2 144 2,166 2,190

Liabilities

Current Liabilities

Current Maturity of Long-Term Debt - IBPD - - - 10 24 48 48 49 49 37 24 24 24

- Other 158 163 165 120 69 62 57 47 37 37 37 37 37Other Current Liabilities 46 46 46 46 46 46 46 46 46 46 46 46 46

Total Current Liabilities 204 209 211 176 139 156 151 137 132 120 107 107 107

Long-Term Debt

- Project - IBRD Loan - - 80 225 336 303 255 206 157 120 96 72 68- Other 1,168 1,099 934 814 745 634 627 585 548 511 474 437 400

Total Long-Tern Debt 1,168 1,099 1,014 1,039 1,081 937 882 791 705 631 570 509 448

_apital, Reserves andSurplus 697 752 833 936 1,031 1,114 1,172 1,237 1,310 1,387 1,467 1,550 1,635

Total Liabilities 2,069 2,060 2,058 2,151 2,251 2,207 2,205 2,165 2,147 2,138 2,144 2,16 90

Current Ratio 1.7 1.7 1.8 2.6 4.1 3.5 3.9 4.4 4.9 5.7 6.8 7.4 8.1Long-Term Debt-to-Equity7.atio 63:37 59:61 55:45 53:47 51:49 46:54 43:57 39:61 35:65 31:69 28:72 25:75 21:79

/ This includes NFC's existing Net Fixed Assets plus all Project assets except the PFL Ammonia/Urea Rehabilitationand Expansion and the PAFL Rehabilitation components.

industry Department

'Zay 1982

- 77 -

ANNEX 8-1Page 1


ASSUMPTIONS USED IN ECONOMIC ANALYSIS

A. General

1. Economic rates of return have been calculated on an incrementalbasis for the Multan urea rehabilitation and expansion component, the Multanammonia expansion component and the Daud Khel rehabilitation component,and on an overall company basis and incorporating the effect of the Projectfor PFL and PAFL. Calculations are prepared in constant dollars of 1984;project life is assumed at 10 years for the Multan and 7 years for the DaudKhel components, with a 10% terminal value of the investments credited at thetwo PFL plants and a 50% terminal value of the Project equipment at PAFL,assuming that this equipment will, after seven years of operation, becapable of re-use elsewhere, should the plant then be shut down. Duties,taxes, depreciation and interest are excluded from all cost and benefitstreams. The assumptions for increases in production and its cost due tothe Project are explained in Annex 7-1.

B. Benefits

2. Product prices used in the economic analysis to calculate incre-mental revenues are based on the December 1981 projections by the IBRDCommodities and Export Projections Division; they are expressed in 1984terms. The following table shows the economic accounting prices used forbagged fertilizer products for FY84, FY85 and FY90:

Economic Accounting Prices(in 1984 US$ per ton)

Ocean Port HandlingFOB Prices Freight and Economicat Exporting and Incremental Accounting

Products Country) Insurance Local Freight PricesFY84 FY85 FY90 FY84 FY85 FY90

Ammonia 254 277 292 65 50 369 392 407Urea (46%) andNP (22-22%) 294 320 337 60 40 394 420 437

CAN (26%) 250 272 286 60 40 350 372 386AS (21%) 134 146 154 60 40 234 246 254

- 78 -

ANNEX 8-1Page 2

C. Operating Cost

3. Except for natural gas and ammonia, all domestic input costs areassumed at their financial values; the cost of imported rock phosphate andsulphur is based on the Bank's projections. As explained in para 8.04,natural gas is shadow-priced, assuming for this purpose a 1981 price ofUS$4.09/mscf in 1981 terms or US$5.12 in 1984 terms, the latter increasing toUS$5.62 by 1985 and US$6.32 by 1990. Ammonia was assumed to have an inputprice 90% of the corresponding urea border prices. Since closure of the DaudKhel plant would force its labor to seek lower paying employment elsewhere,probably in the region's agriculture, the opportunity cost for unskilled laborwas assumed at a rate of 50% of its financial value. This shadow rate isadequate when considering that current unskilled labor wages at Daud Khelaverage about Rs 15,000 per year, compared to agricultural wages in Pakistanof Rs 4,000 to Rs 6,000 per year.



INPUTS FOR ECONOMIC RATE OF RETURN COMPUTATIONS(US$ million in 1984 constant terms)

Incremental Rates of Return Overall Rates of ReturnPakarab Pak-American

Multan - Urea Multan - Ammonia Daud Khel Fertilizers Ltd. Fertilizers Ltd.A B C A B C A B C A B C A B C

1/ 2/ 2/FY83 2.7 - - .5 - - 3.9 - - 327.8-/ 280.0- 485.0- 3.9 19.1 15.7

FY84 7.1 (5.3) (5.4) 1.3 - _ 3.1 (5.2) (6.1) 8.4 140.5 256.1 3.1 12.0 7.2FY85 5.2 ( .6) 1.7 .9 .8 1.9 4.2 5.7 15.5 6.1 156.8 279.2 2.2 20.2 24.3FY86 .6 12.8 22.8 .1 2.7 6.6 - 20.5 24.4 .7 155.7 300.8 - 20.5 24.4

FY87 - 24.3 35.6 - 2.9 7.1 - 20.8 24.5 - 158.6 305.1 - 20.8 24.5FY88 - 24.6 35.7 - 2.9 7.1 - 21.1 24.6 - 161.5 307.6 - 21.1 24.6

FY89 - 24.7 35.8 - 3.0 7.2 - 21.5 24.7 - 164.5 309.8 - 21.5 24.7FY90 - 25.0 36.0 - 3.1 7.3 - 21.8 24.9 - 167.5 311.7 - 21.8 24.9FY91 - 25.1 36.2 - 3.1 7.3 (5.0) 22.2 25.1 - 170.6 313.7 (5.0) 22.2 25.1FY92 - 25.3 36.5 - 3.2 7.4 - - - - 174.0 315.8 - - -FY93 - 25.4 36.9 - 3.3 7.5 - - - - 177.4 308.4 - - -

FY94 - 25.6 37.4 - 3.4 7.5 - - - - 180.9 321.0 - - -FY95 (1.6) 25.8 37.9 (.3) 3.5 7.6 - - - (51.9) 184.3 324.4 - - -

Economic Rateof Return 54% 96% 42% 19% 13%

A - Capital CostsB - Operating CostsC - Benefits

1/ Includes salvage value of existing plant of US$305 million (installed cost of facilities provided under Multan Expansion Projectcompleted in 1979) plus working capital (US$20 million), all inflated to 1984 price levels.

2/ Includes operating costs and benefits of Multan plant from 1975 to 1983, inflated to 1984 price levels.


IBRD 16234L I74 MARCH 1982

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