Document of

The World Bank

FOR OFFICIAL USE ONLY

DC H4 -Report No. 7142-CRA

STAFF APPRAISAL REPORT

CHINA

PHOSPHATE DEVELOPMENT PROJECT

May 23, 1988

Industry, Trade and Finance Operations DivisionCountry Department IIIAsia Regional Office

This document has a resiticted dishibudon and may be used by recXut only in the peromaoce oftheir officld duties. Its contents may not otherwise be disclosed without World Bank authoization.

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CURRENCY EOUIVALENTS(As of February 5, 1988)

Currency name = Renminbi (RMB)Currency unit = Yuan (Y) = 100 FenY 1.00 = US$0.27US$1.00 = Y 3.72

WEIGHTS AND MEASURES

1 hectare (ha) = 2.47 acres1 metric ton (ton) = 1,000 kilograms (kg)1 kilometer (km) = 0.621 miles1 cubic meter (i 3 ) = 35.3147 cubic feet (cf)1 kilocalories (kcal) = 3,968 British thermal units (BTU)1 kilowatt (kW) = 1,000 watts1 megawatt (MW) = 1,000 kilowatts (kW)

FISCAL YEAR

January 1 - December 3!

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

ABC - Afmonium Bicarbonate Mg0 - Magnesium OxideAMPC - Agricultural Means of Production MAP - Monoammonium Phosphate

Corporation MCI - Ministry of Chemical IndustryCIB - China Investment Bank HOC - Ministry of CommerceCIF - Cost, Insurance and Freight MOF - Ministry of FinanceCNCCC - China National Chemical Mtpy - Million Tons per Year

Construction Corporation MWh - Megawatt HourCMP - Calcium Magnesium Phosphate N - Nitrogen Content in FertilizerCMRDI - Chinese Chemical Mines Research NPK - Complex Fertilizers of N,P205

and Design Institute and K20CPI - Chemical Planning Institute p.a. - Per AnnumDAP - Diammonium Phosphate PA - Phosphoric AcidFOB - Free on Board PCBC - People's Construction Bank ofFAO - Food and Agricultural China

Organization of the United P205 - Phosphorous PentoxideNations ppm - Parts per Million

FY - Fiscal Year PRS - Production Responsibility SystemGDP - Gross Domestic Product ROM - Run of MineGOC - Government of China SAA - State Audit AdministrationGPC - Guizhou Phosphate Company SINOPEC - China Petrochemical Corporationha - Hectare SINOCHEM - China Chemical Export and ImportICB - International Competitive BiddiLg CorporationICBC - Industrial and Commercial Bank oi SPB - State Pricing Bureau

China SPC - State Planning CommissionIDC - Interest During Construction SSP - Single SuperphosphateR 0 - Potassium Oxide TSP - Triple SuperphosphatekXh - Kilowatt Hour tpd - Tons per DayMAAF - Ministry of Agriculture, Animal tpyn - Tons per Year of Nutrients

Husbandry and Fishery UNIDO - United Nations IndustrialDevelopment Organization

FOR OMCIL USE ONLY

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: The People's Republic of China

Beneficiaries: Guizhou Phosphate Company (GPC);Ministry of Chemical Industry (MCI)

Loan Amount: US$62.7 million equivalent

Terms of Loan: 20-year repayment, including 5 years of grace, at thestandard variable interest rate

On-lending Terms: The Government will on-lend the loan proceeds to GPC atan on-lending rate equal to 1051 of the IBiD variablerate, with a repayment period of 20 years, including 5years of grace. The commitment charge and foreignexchange risks will be passed on to GPC.

ProjectObjectives: The Project will assist China in achieving its priority

for the fertilizer sector under the Seventh and EighthFive-Year Plans (1986-95), which is to reduce thenutrient imbalance in fertilizer use by expanding theproduction capacity for phosphate fertilizers, particu-larly high-grade products such as triple superphosphate(TSP) and monoaumonium phosphate (MAP), based ondomestic phosphate resources. More specifically theProject will help GOC: (a) devise appropriatestrategies for developing an efficient phosphateindustry, including an optimal investment program tomeet phosphate needs in the least-cost manner;(b) implf'ment the first major mine development of theinvestment program; and (c) strengthen MCI's capabilityto plan the development of the chemical eubsectors,includin- phosphates. Considerable progress has alreadybeen made with objectives (a) and (c) during Projectpreparation through the Phosphate Subsector Study (theStudy), which was carried out jointly by the Bank andMCI and which resulted in a phosphate subsectorinvestment progran to the year 2000. The major invest-ment to be implemented under the Project will provide ademonstration model for the development of domesticphosphate 1eposits using modern mining and beneficiationtechnologies. The Project will increase China's localsupply of phosphate rock by about 251.

This documenthas a nstfcted distribution and may be used by recipients onlyin the perfornEnce||of theirofficial duties. ts contents maynot otherwis be disclosei withiout World Bank authorization.|

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Description: The Project has two components: (a) Wengfu minedevelopment - start-up of an open pit mine at Wengfu inGuizhou with a capacity of 2.5 million tons per year(Mtpy) run of mine (ROM) rock and construction of amodern beneficiation plant to produce phosphate concen-trate at the mine site and an associated slurry pipeline;and (b) technical assistance - consultancy services forProject management and mine workshop maintenance, andprovision of financial and technical assistance for thecomputer-based sector investment optimization model,developed under the Study by the Bank with CPI's assist-ance with the data, to be installed, maintained andfurther developed at MCI to strengthen its subsectorplanning capability.

Project Risk: Virtually no commercial risks are foreseen becausemarkets for Project output are assured. The entireoutput of phosphate concentrate from the Wengfu minewill be supplied to several downstream high-gradefertilizer plants currently under construction andanother fertilizer plant to be established at the minesite. The main technical risks lie in the coordinationof the implementation and commissioning of the mine andthe associated fertilizer plants. In the past, poorcoordination in implementing mine and fertilizerinvestments, executed by separate entities underseparate budgets, haa been a common cause of under-utilization of new mines in China, resulting in asignificant loss of economic benefits. This risk ismitigated by involving internationally experiencedconsultants in the technical assistance component; theywill help MCI and GPC with Project implementation andstaff training. The Government has assured the timelycompletion of all downstream plants, including theWengfu TSP plant to be established at the project minesite. The Government will coordinate all constructionwork and report semi-annually on the progress of alldownstream plants. This risk will be further reducedbecause a new 800,OGO tpy TSP plant to be established atWengfu, which would consume about 60X of the Projectoutput, will be implemented by the Project company.This plant will be constructed and ready for operationin accordance with the scope and timeframe agreed withthe Bank. Assurances have been obtained from theGovernment and GPC to the same effect.

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Project Cost: Local Foreijn Total--- (US$ million)…

W.ngfu mine developmentEngineering & license fee 3.8 0.2 4.0Equipment, materials & spares 22.8 50.1 72.9Civils & erection 70.8 - 70.8Others 12.5 1.3 13.8Sub-Total 109.9 51.6 161.5

Technical assistance - 0.6 0.6Base cost (January 1988 prices) 109.9 52.2 162.1

Physical contingencies 11.0 5.2 16.2Price contingencies 12.8 5.7 18.5

Installed cost 133.7 63.1 196.8

Incremental working capital 4.6 0.0 4.6Interest during construction 9.4 11.0 20.4

Total Financing Required /a 147.7 74.1 221. 8

Financing Plan: Local Foreign Total-: (US$ million)-

IBRD loan - 62.7 62.7Government loan 143.1 11.0 154.1Industrial and Commercial Bank loan 4.6 - 4.6Government funds /b - 0.4 0.4

Total Financing 147.7 74.1 221.8

Estimated Disbursements:

IBRD FY 1989 1990 1991 1992 1993--TUS$ million)- -

Annual 1.2 8.2 25.1 23.8 4.4Cumulative 1.2 9.4 34.5 58.3 62.7

Economic Rate of Return: 261

/a The total cost net of sales taxes on locally purchased equipment andmaterials (US$2.0 million) is US$219.8 million.

/b GOC plans to cover the CPI program to be implemented under the technicalassistance component from the proceeds of the Second Technical CooperationCredit (Credit No. 1664-CHA).

CHINA

PHOSPHATE DEVELOPNENT PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SUMM ARY.......................................iiii

I INTRODUION ........................................................... 1

II. AN OVERVIEW OF THE CHINESE INDUSTRY ............................ 3

A. General Industry Background. ........... ..... * ..............e 3B. The Government Objectives and Strategy for Industrial

Development...s.............. o......o.............o. .o... ... 3C. Bank Support for the Industry............................... 4

III. THE FERTILIZER SECTOR .......................................... 5

A. Agricultural Background.. 0000000..001.0. ......... *..*..***** 5B. Fertilizer Use in griculture............................... 6C. Fertilizer Demand and Supplye................................ 6D. Structure of the Fertilizer Industry........................ 9E. Fertilizer Marketing and Distribution....................... 10F. Fertilizer Pricing and Prices............................... 11C. Government Strategy in the Fertilizer Sector ................ 13

IV* THE PHOSPHATE SUBSECTORo..............................0........ 14

A. World Phosphate Market Background........................... 14B. The Phosphate Industry ............. 15C. Supply of Raw Materials .................................... 16D. The Phosphate Subsector Studye.............................. 17E. Investment Program for the Phosphate Subsector0 * ...000000 o. 18F. Bank Role and Project Justification ......................... 18

V. PROJECT INSTITUTIONS ................. 0 20

A. General Institutional Background............................ 20B. The Guizhou Phosphate Company (GPC) .........................0 21C. The Ministry of Chemical Industry (MCI) ..................... 22

This report has been prepared by Messrs. K. Song (AS3IF), K. Constant (ASTIF),H. Hendriks (ASTEG), and D. Lilaoonwala (CTRMI). Messrs. W. Sheldrick(Consultant) and B. Stone (Consultant) contributed to the fertilizer sectorand phosphate subsector chapters. Ms. D. Christmas provided secretarialsupport in the preparation of this Report.

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Page No.

VI THE PROJECT.................... .........................oo........... 23

A. Objectives............................................................ 23B. Wengfu Phosphate Mine Development Component................. 2ZC. Technical Assistance Component.............................. 24

VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION ................ 25

A. Engineering Arrangementse..................... * **............e 25B. Project Management...... .................................... 25C. Implementation Schedulee..................................... 25D. Training ................. ****............. 26E. Environmental Aspects .......................... 000000 26

VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT.... 27

A. Capital Cost .................... 00 27B. Financing Plan ................. 28C Procurement................................................. 30D. Allocation and Disbursement of the Bank Loan................ 31

IX. FIEANCIAL ANALYSIS. ... ................... 00........0000000000 33

A. Financial Management Practices in China..................... 33B. Financial Performance and Projections....................... 34C. Financial Rate of Return and Sensitivity Analysis..o........ 36D. Financial Covenants......................................... 37E. Auditing and Reporting Requirements......................... 37

X. ECONOMIC ANALYSIS .... o...........o... 0000 38

A. Economic Costs and Benefits................................. 38B. Economic Rate of Return and Sensitivity Analysis............ 38C. Other Benefits............ ......o.........000000000000000.. ** 39D. Project Risks. .****o@@*****@***@*oo0*0 000 000000000 40

XI. AGREEMENTS TO BE REACHED DURING LOAN NEGOTIATIONSAND RECOMM ENDATION.........................o....e.o......... 40

ANNEXES

3.1 Fertilizer Application Rates for Various Countries, 19853.2 Historic Consumption, Production and Imports of Fertilizers, 1976-19863.3 Comparison of Domestic and International Prices of Fertilizers, Main

Energy Inputs and Main Agricultural Products, January 1988

4.1 Trends in Domestic Production of Phosphate Fertilizers, by Product,1970-86

4.2 Domestic Production of Phosphate vertilizers by Products and Provinces,1985

4.3 Consumption of Chemical Fertilizers by Province, 1985

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4.4 Major Phosphate Deposits in China4.5 Major Pyrites Deposits and Mines in China4.6 An Outline of the Phosphate Subsector Investment Optimization Model4.7 Planned Phosphate Investment Projects to the Year 2000

5.1 Organization Chart of GPC

6.1 Sumnary of the Wengfu Pho&phate Mine Development Component6.2 Scope and Timeframe of the Wengfu TSP Plant6.3 Summary of the Technical Assistance Component6.4 Outline of CPI's Work Program under Technical Assistance

7.1 Organization Chart of MCI's Project Coordination Group7.2 Organization Chart of GPC's Project Management Team7.3 Project Implementation Schedule and Key Milestones7.4 Environmental Protection and Standards

8.1 Capital Cost Estimates8.2 Estimated Disbursement Schedule for Bank Loan

9.1 Assumptions Underlying the Financial Analysis9.2 GPC - A Summary of Projected Income Statements9.3 CPC - A Summary of Historical and Projected Flow of Funds Statements9.4 GPC - A Summary of Historical and Projected Balance Sheets9.5 Incremental Cost and Revenue Streams for FRR Calculations

10.1 Assumptions Underlying the Economic Analysis10.2 Incremental Cost and Benefit Streams for ERR Calculations10.3 Net Savings of Foreign Exchange over Project Life

MAP

IBRD 20918 : China - Phosphate Reserves and Production FacilitiesIBRD 20503R: Wengfu Phosphate Mine Development Component

DOCUMENTS AVAILABLE IN PROJECT FILES

Reference

1. Feasibility Studies for the Wengfu Mine Development Components2. A Black Book Containing Details of the Economic and Financial

Analyses3. The Terms of Reference for Consultants for Project Implementation and

Mine Workshop Maintenance

I. INTRODUCTION

1.1 The Government uf the People's Republic of China (the Covernment,cOC) has requested a Bank loan of US$62.7 million equivalent to finance aphosphate development project (the Project). The Project embodies anevolution in the Bank's fertilizer operations in China, geared towardbroadening the impact of Bank support on the development and efficiencj of theentire fertilizer sector. The Fertilizer Rehabilitation and Energy SavingProject (Loan 2541-CHA, FY85), the first Bank fertilizer operation, supportsthe rehabilitation of four large-size and one medium-size nitrogenousfertilizer plants. The subsequent Furtilizer Rationalization Project (Loan2838-CHA, FY87) aims at demonstrating alternatives for improving productionefficiency at medium-size nitrogenous fertilizer plants, which currentlyproduce low-grade fertilizers, by converting products from five such plantsinto high-grade fertilizers. It also aims to strengthen sector-wideinstitutional efficiency by introducing improved management systems at theenterprise level.

1.2 This Project, which would be the third Bank-supported operation inthe fertilizer sector in China, broade;: the Bank's involvement beyond thenitrogenous fertilizer subsector. Through the Phosphate Sector Study carriedout during Project preparation, a subsectoral approach to Bank assistance wasinitiated, with the Bank providing financial and technical support to theMinistry of Chemical Industry (MCI) for the design of subsector-widestrategies.. That effort resulted in the preparation of an optimal investmentprogram that would allow China to meet its rapidly growing demand forphosphate fertilizers in the least-cost manner.

1.3 Based on the above framework and consistent with the overalldevelopment strategies worked out under the Study, the Project will support:(a) development of a modern phosphate mine in Guizhou Province, which willsupply processed phosphate concentrate to six high-grade phosphate fertilizerplants--five under construction and one currently in the design stage(para. 6.5); and (b) provision of technical and training assistance to MCI forthe installation, maintenance and further development of the computer-basedinvestment optimization model developed jointly by the Bank and MCI.

1.4 The Project was initially identified in 1985, and was appraised byMessrs. K. Song, K. Constant, H. Hendriks, D. Lil-oonwala and B. Stone inDecember 1987. The earlier Phosphate Subsector Study was carried out underMr. W. Sheldrick's leadership during 1986-87.

1.5 The Project appraised by the Bank's project team also included thedevelopment of two additional phosphate mines and two high-grade fertilizer(respectively, MAP and TSP) plants at the mine sites in Hubei Province.However, at the request of the Government, these investments will now beprocessed separately. GOC wishes to delay the loan processing for theseinvestments as it has still to complete its own internal reviews. Theseinvestments will now therefore be implemented on a different schedule.Considering the urgency of developing the Guizhou mine in time for thecommissioning of downstream fertilizer plants currently under construction, it

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is important that this investment adhere to the original timetable. Aseparate project consisting of the Hubei investments is expected to beprepared for Bank consideration in late 1988.

1.6 This report recomm.ends a Bank loan of US$62.7 million equivalent,which would cover 28.32 of the total financing required and 84.61 of the totalforeign exchange financing required (equivalent to 100l of the foreigncomponent of the installed cost).

II. AN OVERVIEW OF CHINESE INDUSTRY

A. General Industry Background

2.1 Industry is China's largest productive sector accounting for nearly47Z of its Gross Domestic Product (GDP), and employing 17% of the total laborforce. About 94,000 state enterprises generate 74% of total industrialoutput, the remainder being produced by about 368,000 non-state enterprises,mainly urban and rural collectives. While state enterprises produce mainlyimportant raw materials, capital goods and strategic commodities such asfertilizers, as well as light industrial and coasumer goods, most of non-stateenterprises are involved in the production of downstream consumer products.Gross industrial output amounted to Y 1,119 billion (US$323 billion) in1986. The chemical industry, the main products of which are fertilizers,petrochemicals-and pharmaceuticals, accounted for 102 of the total industrialoutput.

2.2 Gross value of industrial production has grown rapidly at a rate ofover 11% in real terms per year during the period 1980-86, in large partreflecting the high rate of capital accumulation in industry. Until the late1970s when the Government began to view external trade as an important elementof economic development, Chinese industry was oriented mainly toward thedomestic market. Since then, Chinese manufactured exports have grown steadilyfrom around US$8 billion equivalent to over US$20 billion in 1986, althoughthe share of exports in industrial output remains low (6.2%).

2.3 China's industrial development has been constrained by outdatedproduction technologies, poorly coordinated economic planning, and a distortedstructure of industrial prices. The industry structure is biased to basic,heavy industries with all their attendant disadvantages in terms offlexibility for change, lumpiness in investment needs, centralized managementstructure with little incentive for innovation, severe distributionconstraints, low output prices, and major needs for plant rehabilitation andmodernization. About 801 of industrial fixed assets are of pre-1960vintage. The consumption of raw materials and etnergy in factories amounts to85% of manufacturing production costs. Although this high rate is partly dueto the relatively low cost of labor, it also reflects inefficient use ofinputs in the production process. Incentives for more efficient input usehave been impeded by low prices of energy and basic intermediates. Inaddition, past excessive focus on physical output and quantitative targets,compounded with inadequate links with markets, often led enterprises toneglect improvements in product quality and range.

B. The Government Objectives and Strategy for Induistrial Development

2.4 Since 1979, the Chinese Government has shifted the focus ofindustrial levelopment towards light industry and introduced incentives andmarket forces as a means of improving economic efficiency under on-goingeconomic reforms. The development strategy has emphasized modernization ofexisting equipment, development of more efficient light industry and ofmanufactured exports, and material and energy conservation in industry. Pricereforms, which have been perceived by the Government as one of the most

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important elements of the on-going economic reforms, are aimed at reducingprice distortions gradually to enhance allocative economic efficiency,particularly by allowing market forces to play an increasing role in pricedetermination. Since the start of economic reforms, the prices of majorindustrial inputs, including energy, have been raised significantly to thateffect. Reforms adopted in 1984 aim at decentralizing economic decision-making towards provinces and enterprises, and greater use of market signals toprovide production incentives. State enterprise reforms, include inter aliathe introduction of the contract management responsibility system, uniformprofit tax rates (55X) and wage incentives, have provided greater autonomy andmore appropriate incentives for enterprise management. However, significantdistortions in relative prices still remain, and the objective of replacingtie traditionally "soft" enterprise budget constraint has yet to beachieved. The reforms are being implemented at a different pace amfng regionsand subsectors. Because of the nature and structure of the fertilizer sector,the process of decentralization has already progressed to a greater degreethan in some other industrial sectors.

C. Bank Support for Industry

2.5 The Bank Group's industrial lending operati3ns in China began inDecember 1982 with the approval of a loan of US$70.6 mqillion to finance theFirst China Investment Bank Project (Loan/Credit 2226/1313-CHA, FY83). Threeadditional loans/credits of US$575 million to CIB (Loan/Credit 2434/1491-CHAin FY84; Loan/Credit 2659/1594-CHA in FY86; and Loan/Credit 2783/1763-CHA inFY87) have been approved subsequently. Of the total amount lent to thisinstitution of US$645.6 million, US$294 million was disbursed and outstandingas at January 1, 1988. The main purpose of the CIB operations has been todevelop CIB as the premier financial intermediary providing term financing forsmall- and medium-scale industry. CIB operations to date have supported awide range of subsectors, including: textile, light industry, electronics,food processing, pharmaceuticals, packaging materials, machinery and spareparts, building materials, chemicals and metallurgical, and other, in a numberof provinces, but principally in Jiangsu, Shanghai, Tianjin, Hebei, Beijing,

i Hubei, Liaoning, Anhui and Zhejiang. The wide range of subsectors and thewell-dispersed geographical pattern have allowed CIB and its principalbranches to develop strong institutional ties to small- and medium-scaleindustry in the country. Disbursements of the CIB loans and credits are,apart from some delays in the first operation, ahead of schedule. While CIB'smanpower and systems require further strengthening, the- basis of a sounddevelopment bank in China, particularly with regard to its leading brancheshas been established.

2.6 Besides the four CIB operations, Bank Group involverent in theindustrial sector comprises: (a) two fertilizer loans, totaling US$194.6million (para. 1.1); (b) a loan of US$100 million for the Shanghai MachineTool Project (Loan 2784-CHA, FY87), involving rehabilitation and modernizationof the machine tool sector in Shanghai; (c) a regional development project forGansu Province (Loan 2812-CHA, and Credit 1793-CIiA, FY87), including anindustrial development component of US$20 million, to be used fordiversification and modernization of the predominantly rural industrial basein the province. Physical implementation of the two fertilizer projects is

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proceeding on sched'zle. A Planning Support and Special Studies Project, whichincludes components for supporting long-term planning activities in selectedsubsectors, including petrochemicals, was approved in June 1987. None of theabove projects has to date reached completion.

2.7 The Bank's overall objectives in support of China's industrialdevelopment are to assist the Government in: (a) improving the policy frame-work for the industrial sector as a whole; (b) building sound institutions andpractices for financial intermediation, subsector planning, project approvaland implementation; (c) promoting and implementing technology upgrading, plantrestructuring and rehabilitation and energy and material conservation inselected sectors at the national and provincial levels; and (d) carrying outthe needed reforms in the financial system.

2.8 Specific plans include further support for both CIB and other finan-cial intermediaries, in the context of overall sector reform now underway,assistance to selected major subsectors at the national and provincial levels,namely, fertilizers, pharmaceuticals and machine tools, and the development ofbroad-based industrial lending operations at the provincial Level, involvingrestructuring of major subsectors in the context of overall provincialdevelopment strategies. The increasing devolution of planning and implementa-tion responsibility to the provinces his the potential for a significantimpact on industrial development provided that the provincial authorities caneffectively formulate and carry out their new role. The anticipated series ofprovincial operations is designed to help selected provinces articulate andimplement their new responsibilities. Operations are also planned in ruralindustry initially through support for the Government's SPARK program, whichprovides technical and financial support to selected rural enterprises, manyof which are outside the state sector.

III. THE FERTILIZER SECTOR

A. Agricultural Background

3.1 The agriculture sector in China employs some 190 million farmfamilies and accounts for about 34% of the country's GDP. Despite having ashortage of cultivatable land-of China's 960 million hectares (ha), only 10%is cultivated, compared with 75% in India--China has achieved self-sufficiencyin its basic food requirements. That accomplishment is all the moreremarkable given that China has 22% of the world's population but only 8% ofits cultivated area. The reason for this success is intensive cultivationpractices, with relatively heavy inputs of labor, chemical and organicfertilizers, and water per unit of land. Foodgrains occupy about 70X of thetotal cultivated area. Cotton is the most important industrial crop.

3.2 The agricultural sector has performed exceptionally well since 1979,when the Government introduced a new agricultural incentive program, the"production responsibility system (PRS)." Reflecting these initiatives, thegross value of agricultural production increased by 10% p.a. over the period1980-86, compared to an average of 3% p.a. in the preceding 20 years. Majorchanges that have taken place under the PRS include: (a) an increasing role

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for farm households as the fundamental units of agricultural production andmanagement; (b) replacement of mandatory procurement quota with voluntarycontracts, which gives farmers more flexibility in determining what to growand where to sell; (c) price increases for major farm products; and (d) theintroduction of flexible prices within a certain range for deliveries ofcertain products by collectives and individual producers in excess ofcontracted targets.

B. Fertilizer Use in Agriculture

3.3 While China is the third largest user of chemical fertilizers andthe largest consumer of nitrogen in the world, the level of fertilizer use in1985--167 kg of nutrients per hectare of cultivated land--was still only abouta third of that in neighboring countries such as Japan and Korea (seeAnnex 3.1 for a comparison with other countries). The implication is that thepotential for increased fertilizer use is large. Sine expansion of thecultivated area is not feasible, increasing and more .lanced fertilizer usewill remain central to China's strategy for increased agricultural output.

3.4 At present, there is an imbalance in the use of nitrogen (N),phosphate (P 05) and potash (K 0) fertilizers. China's low application ofphosphate ana potash (para. 3.Z) reduces the synergistic benefits that couldderive from the relatively high level of nitrogen application. This imbalanceis a major constraint on increased application of nitrogenous fertilizers.When compared with the application rates in the other countries given inAnnex 3.1, the low level of application of phosphate and potash fertilizers isevident in China. According to results from surveys by the Ministry ofAgriculture, Animal Husbandry and Fishery (MAAF) during 1981-83, soil through-out 73.4% of the cultivated area was deficient in phosphate, 39.8% beingseriously so.

C. Fertilizer Demand and Supply

3.5 Consumption, production and imports of chemical fertilizers from1974 to 1986 are summarized, together with the projections for 1990 and 1995,in Table 3.A (greater detail can be found in Annex 3.2).

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Table 3.A: CHINA - CHEMICAL FERTILIZER CONSUMPTION, PRODUCTION AND DMPORTS, PAST AND PROJECTED /a('000 tons of nutrlent)

Nitrogen Phosphate (P,O0) Potabh (KRo) Total nutrientsC* _s._a Prod. Imp. Cons./a/b Prod.-Imp. Cons.a/c Prod. Imp. Cons.jA Prod. Imp.

1972 3,168 2,444 1,342 1,038 1.249 11 12 8 2 4,219 3,701 1,3551981 10,363 9,858 1,541 2,735 2,508 499 251 24 250 13,349 12,390 2,2901984 13,378 12,211 2,828 3,686 2,359 1,342 804 31 755 17,868 14,601 4,9251985 13,477 11,438 2,052 3,531 1,760 950 920 24 364 17,898 13,222 3,3661986 13,728 11,592 1,700 4,502 2,340 645 1,075 25 600 19,305 13,957 2,9451990 (proj.) d 14,860 13,150 2,899 5,880 3,000 3,350 1,765 150 1,756 22,505 16,300 8,0051995 (proj.)7d 16,400 15,150 2,562 8,200 4,900 3,956 3,280 150 3,392 27,880 20,200 9,910

Average AnnulGrowth Rt(2)1972-81 14.1 16.8 11.4 8.1 40.2 13.0 13.7 19.11972-86 11.0 11.8 11.0 4.6 37.9 8.5 11.5 9.91981-86 5.8 3.3 10.5 (1.4) 47.7 0.8 7.7 2.41986 8.5 1.3 12.4 33.0 (2.5) 4.2 8.7 5.61986-95 2.0- 3.5 6.9 10.7 13.2 22.0 4.2 -

/a The consumption figures (sales to farmers) do not equal production plus imports because of distributionlosses, stock changes and some unrecorded imports.

Lb Actual phosphate fertilizer consumption figures include phosphate rocks directly applied withoutprocessing.

/c Actual potash consumption figures appear to be overestimated because of statistlcal inconsistency.7d The projected imports for the years 1990, 1995 and 2000 were derived from supply gaps between domestic

production and consumption, taking into account an 8SZ fertilizer loss ln transit, storage and distribu-tion.

Sources: Consumption data-China Agricultural Handbooks 1981-86, Agricultural Yearbook of China 1985 andMAAF; production data-MCI, and Food and Agriculture Organization (FAO); and trade data--GeneralAdministration of Customs end FAO.

3.6 Fertilizer Demand. Consumption of all fertilizers increased from4.2 million tons per year of nutrients (tpyn) in 1975 to 19.3 million tpyn in1986, an average annual growth rate of 14.1Z. Growth in nitrogen consumption,which increased at an average annual rate of 14.1% during 1972-81, has slowedin recent years, mainly because the level of nitrogen application isrelatively high, especially compared to the use of phosphate and potashfertilizers, whose supplies are limited. Consumption of the latter showedaverage growth rates of, respectively, 11.0% and 37.9X - during 1972-86, inline with the Government's continued emphasis on their increased applicationto improve the overall nutrient balance.

3.7 China also has a long history of using organic fertilizer. Thiswill continue to be a valuable source of nutrients and will complement furtherincreases in the use of chemical fertilizer. Total nutrients supplied byorganic fertilizers in 1986 are estimated at about 15 million tons.

1/ Potash consumption has shown a very high rate of growth from a negligiblebase in the early 1970s, but is still very low.

3.8 Based on its agricultural targets, the Government has projected thatthe demand for chemical fertilizer will reach 27.9 million tpyn in 1995, withimplied average annual growth rates of about 2.0% for N, 6.9% for P205 and 13.2%for K20. According to MAAF, the desirable long-term target for the ratio ofthese nutrients is 100:50:20, compared with a current one of 100:33:8. GOCplans to achieve the target by 1995 by rapidly expanding the consumption ofphosphate and potash fertilizers. However, it may be difficult to meet theseneeds owing to domestic raw material constraints for potash and limited financialresources for investment and imports.

3.9 Fertilizer Supply. China, with about 1,900 operating fertilizerplants of varying types and sizes, is the world's third largest producer of

chemical fertilizers after the USSR and the US. Chemical fertilizerproduction increased from 3.7 million tpyn in 1972, peaking in 1984 at 14.6million tpyn, before falling to 13.2 million tpyn in 1985. In 1986, itreached 14.0 million tpyn. During the 1972-86 period, phosphate fertilizerproduction showed a modest average growth rate of 4.6%, while nitrogenousfertilizer production increased at a much faster rate of 11.8% p.a. Forpotash the figure was 8.5Z.

3.10 The decline in domestic production of both nitrogenous and phosphatefertilizers in 1985 was attributable mainly to the Government's decision toclose some 200 small inefficient plants producing low quality, low nutrientfertilizers, such as ammonium bicarbonate (ABC), single superphosphate (SSP)and calcium magnesium phosphate (CMP). The Government took this step inresponse to diminishing demand for these fertilizers. Despite the aggressivebuild-up of capacity for high-grade fertilizers in recent years, a significantportion of the fertilizer production in China is, however, still low grade:in 1985, only 30Z of nitrogen production and 2X of phosphate productioninvolved high-grade products such as urea (46Z N), MAP (52% P205) and TSP (46%

P205).

3.11 China plans to continue expanding the production capacity forchemical fertilizer, particularly high-grade phosphate fertilizer, during theSeventh and Eighth Five-Year Plan periods (1986-95). It also intends torationalize existing low-grade fertilizer production facilities, by convertingtheir products to high-grade fertilizers. New large- and medium-scalefertilizer plants to be completed during the Seventh Five-Year Plan period -

are expected to increase China's high-grade fertilizer production capacity byapproximately 1.2 Mtpy of N, 0.6 Mtpy of P205, and 0.1 Mtpy of K20. Projectsunder the Eighth Five-Year Plan, which is currently being formulated, areexpected to include further expansion in capacity for chemical fertilizers of

2/ Two 1,740 tpd urea plants, three 800 tpd DAP plants, a 400 tpd DAP plant,a 2,970 tpd nitrophosphate plant, a 500 tpd nitrophosphate plant, an1,800 tpd NPK plant, a 500 tpd NPK plant, and a 200,000 tpy potassiumrchloride plant.

2.0 Mtpy of N and 1.9 Mtpy of P205.31 During 1986-95, all medium-size plantscurrently producing low-grade fertilizer will be converted to high-gradeproduction.

3.12 Fertilizer Demand and Supply Balance. Despite the impressive build-up in production capacity during the last decade, and continued expeditiousexpansion of capacity planned under the Seventh and Eighth Five-Year Plans,China will need to continue importing fertilizers to meet expected domesticdemand. In 1986, about 17% of China's apparent total consumption (domesticproduction plus net imports) of chemical fertilizers was met by imports (12%for nitrogen, 24% for phosphate and 96% for potash), at a value of over US$1.1billion p.a., making China the world's largest net importer of fertilizers.As Table 3.A shows, the overall fertilizer deficit is projected to increasefrom 3.4 million tons of nutrients in 1985 to 8.0 million tons in 1990 and9.9 million tons in 1995. The foreign exchange situation permitting, thisdeficit will be met by imports.

D. Structure of the Fertilizer Industry

3.13 Production. Except for 15 large-size urea plants (about 280,000 tpyof ammonia each), most of China's approximately 1,900 fertilizer plants (about1,200 producing nitrogenous and 700 phosphate nutrients) are using outdatedtechnology and do not conform to current international production norms. Thisreflects the fact that most of China's fertilizer plants were built usingindigenous design, technology and equipment, a reflection of a policy in theearly phases of the industry's development of relying on local technology andavailable raw materials to the extent possible. Because of the outdatedtechnology at the majority of these plants, the level of energy consumptionfor fertilizer production has been high.

3.14 This approach was modified in the early 1970s, and during thatdecade and the early 1980s, China built 15 large nitrogenous fertilizer plantsusing imported technology and equipment. Almost all plants currently underconstruction are based on internationally proven imported technologies.

3.15 Feedstock. China uses a variety of locally available feedstocks forfertilizer production. The large-size nitrogenous fertilizer plants usenatural gas, naphtha and fuel oil as feedstocks for ammonia production, whilethe small- and medium-size plants mainly use coal. The small-size phosphaticfertilizer plants use low-grade phosphate rock to produce SSP and-CMP. Thelarge- and medium-size high-grade phosphatic fertilizer plants underconstruction or consideration will be based on both domestic phosphate rockand imported phosphoric acid.

3/ Ten high-grade phosphate fertilizer plants with a capacity of 240,000-480,000 tpy DAP or 400,000-800,000 tpy TSP, and five large-size ureaplants.

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E. Fertilizer Marketing and Distribution

3.16 Fertilizer Allocation. In May 1985, the Government changed itsapproach to fertilizer allocation significantly by introducing a new contractsystem for the procurement of farm output (see para. 3.2). In the past, itessentially allocated fertilizer according to a state allocation plan inexchange for agricultural products acquired through the state procurementsystem. The current contract system gives both farmers and the Governmentmore flexibiiity in allocating fertilizer by reducing the quantities coveredby the state allocation plan. Fertilizer producers are thus able to sell anincreasing portion of their production outside the state plan, sometimesdirectly to farmers and across provincial boundaries. However, the stateprocurement system still accounts for about 60% of total fertilizerconsumption and over 90% of the high-grade fertilizers, including urea andDAP.

3.17 Fertilizer Marketing. About 90% of chemical fertilizer is marketedthrough the Agricultural Means of Production Corporation (AMPC), a state-ownedcompany under the Ministry of Commerce (MOC). AMPC handles all fertilizerunder the state allocation quota as well as a significant portion of theabove-quota production. Producers sell the balance directly to farmers. AMPCprocures fertilizer from the domestic plants and China Chemical Export andImport Corporation (SINOCHEM), an agency under the Ministry of ForeignEconomic Relations and Trade, that is responsible for all imports of chemicalfertilizers. AMPC has some 2,500 offices at the national (accounting forabout 20% of AMPC's total purchases), provincial (28%), and county (52%)levels. The county-level offices sell fertilizers to farmers through: (a)about 64,000 retail cooperative shops (about 50% of AMPC's total sales); (b)some 110,000 retail shops (32%); and (c) direct sales (18%).

3.18 Fertilizer Transportation. So far, the transportation system hasbeen able to move the large and growing quantity of fertilizer, about 94million product tons in 1986. Its transport has been given priority to ensuretimely availability to farmers. Fertilizer is moved, mainly in bagged form,from plants and ports directly to a network of county-level AMPC warehouseslocated close to the consuming areas. While high-grade fertilizers such asurea and DAP are hauled long distances by rail, low-grade fertilizer such asABC and SSP from small plants generally located near the consuming areas istransported mainly by road. About one-third of the total fertilizerdistributed in China moves by rail. River transportation also plays animportant role.

3.19 Fertilizer Storage. Fertilizer storage capacity has not beenadequate in recent years to meet the peak storage requirements, given the risein consumption. The AMPC operates storage facilities for fertilizers atvarious levels. Total capacity at these facilities is equivalent to threemonths of national fertilizer consumption. AMPC warehouses at the national,provincial and county levels account for half the total storage capacity; therest are located in the countryside at AMPC's retail shops. To reduce thestorage burden and its carrying costs, AMPC is currently encouraging farmersto buy fertilizers during the off-season by offering rebates. The shortage ofwarehousing capacity at periods of peak storage demand will be alleviated

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gradually as high-grade fertilizers displace the low-grade ones, since theformer have a lesser volume.

F. Fertilizer Pricing and Prices

3.20 Trends under the Price Reforms. GOC has embarked on a major effortto reform the irrational system of prices, which currently prevails in thecountry (para. 2.4). While the pace of the reform will, given the Governmentconcern on macroeconomic management and the obvious sensitivities involved,inevitably vary from sector to sector and any time, its overall direction hasbeen clearly set. These ongoing economic reforms have involved expansion ofthe role of market forces in fertilizer production and allocation. In thepast, the Government administered fertilizer prices strictly, as it did thoseof other essential commodities. The current strategy assigns a greater roleto market forces in fertilizer pricing and allocation so as to improve theefficiency of production and application. As a result, a two-tier pricingsystem has emerged. The State Pricing Bureau (SPB) and local (province, cityand county) bureaus set the prices for the production subject to the stateplan quotas at both the ex-factory and farm-gate levels. Market-influencedprices negotiated within the limits of guideline retail prices set by stateand loWal pricing authorities prevail for production outside the state planquota.- Fertilizer producers market these products directly.

3.21 At present, about 40Z of total consumption is sold at negotiatedprices, although the percentage varies significantly across products andlocalities and with the financial situation of individual manufacturers. Ingeneral, high-grade fertilizers are subject to stricter state allocation.Over 90Z of these products, including urea and DAP, are currently being soldat controlled prices under the state allocation plan.

3.22 The Government views the two-tier pricing system as an intermediatestep in the evolution of sectoral pricing policy, given its well-recognizedlimitations, including: (a) discrimination across producers and consumers;(b) administrative complexity; and (c) distortions and time lags in theadjustment of the prices of inputs and outputs. Nevertheless, it expects touse this transitional syst-m until it introduces a broader price reformpackage. The reason is in part the close interrelationship between fertilizerand the agricultural sector and the potential for disruption if the allocationand pricing arrangements for fertilizers were to be liberalized inisolation.

3.23 The Government's strategy is to continue gradually reducing itsadministrative control of fertilizer pricing in parallel with the gradualdismantling of annual production planning and allocation, so that the economycan "grow out of the plan." Guidelines for future policy reforms are being

4/ At present, a ceiling for negotiated prices of all high-gradefertilizers, such as urea and MAP, exists at the retail level. Thisceiling is currently set by the SPB, but in the future will be set byprovincial authorities following guidelines to be given by the SPB.

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developed by an inter-agency working group that is carrying out a comprehen-sive review of the fertilizer pricing and allocation policies according to ascope of work discussed with the Bank. Through these reforms, GOC iscommitted to remove irrationalities that exist in price relationships betweeninputs, fertilizers and agricultural products. The group is headed by theDirector of the Department for Heavy Industry and Communication and comprisesrepresentatives from related Government agencies, including the Ministry ofFinance (MOF), MCI, MOC, MAAF and China Petrochemical Corporation (SINOPEC).

3.24 Fertilizer Prices. The ex-factory prices of major high-gradefertilizers and ABC, the delivered prices of the main inputs, and farmers'prices for major grains, together with comparable international border pricesin January 1988, are shown in Annex 3.3. Presently, the controlled ex-factoryprices of urea and DAP are below the border prices, while their negotiatedprices are close to the economic prices. In January 1988, the controlled ureaprice-Y 410 (US$l10)/ton--represented about 73% of the CIF import price ofUS$151/ton, while the ceiling for the negotiated price was set at 94% of theeconomic value. For DAP, the figures are, for plan output, Y 598 (US$161)/ton, or 84% of the import parity price of US$192, and for the negotiatedprice, Y 700 (US$188), or 98%. At present, there is no local production ofTSP and MAP, and controlled ex-factory prices have therefore not beenestablished. The ceilings for negotiated prices for future TSP and MAPproduction are expected to be set in line with that for DAP. The Governmentprovi4es subsidies to make up the difference between the import and saleprices for imported fertilizers. Actual negotiated ex-factory prices haveusually been equal or close to the ceiling; these prices have frequentlyexceeded the. ceiling, with approval from the pricing authorities, at leastduring the peak season.

3.25 An average distribution margin of about Y 100 (US$27/ton of product)is added to the ex-factory price at the farm-gate level to cover AMPC'stransport and storage costs.

3.26 Prices of Fertilizers Relative to Agricultural Products. The pricestructure of agricultural products is similar to that of fertilizers.Agricultural products traded by the state procurement system are subject tocontrolled prices. While some exceptions exist, these are generally belowborder prices, while the market-influenced negotiated prices more closelyapproximate the border prices. For example, as of Janaary 1988, thecontrolled price of rice was Y 632 (US$167)/ton, about 79Z of its export valueof US$212/ton, whereas its negotiated price was Y 840 (US$226)/ton (Annex3.2). The controlled price of wheat was Y 328 (US$119)/ton, about 79Z of theCIF import price of US$150, the negotiated price, Y 500 (US$161)/ton.

3.27 Prices of Fertilizer Inputs and Phosphate Concentrate. The pricestructure of major inputs into fertilizer production is also similar to thatof fertilizers. However, country-wide uniform controlled prices for theseinputs do not exist, and the controlled prices applied to individual suppliersare set by each supplier's respective supervisory pricing authority at thecentral, provincial and county levels. These prices, while varying to a largeextent depending on the quality of product and the location and geologicalcondition of supply sources, are on the whole far below their border prices.

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The controlled price of natural gas under the state allocation quota is around55-65Z of its fuel oil equivalent value based on border prices. Thecontrolled price of coal is 50-60X of its export value. The average ex-minecontrolled price of domestic phosphate rock, the quality of which is usuallytoo low to be tradeable in the international market, is about 50% of theimr,.vt parity price based on nutrient contents. Negotiated prices above thequota are generally higher than the controlled prices by 15-25X; although insorm' cases they have, subject to approval by the pricing authorities,approached border prices.

3.28 During negotiations, an assurance was obtained from the Governmentthat GPC will be allowed to market its entire output (fertilizers from thedownstream Wengfu TSP plant, which will be established at the project minesite, and phosphate concentrate to be sold to other downstream fertilizerplants) outside the state allocation plan at negotiated prices.

C. Government Strategy in the Fertilizer Sector

3.29 In view of its importance to agriculture, the fertilizer sector hasbeen, and will continue to be, a sector of high priority for the allocation ofinvestment resources. The Government reiterated this priority in a statementpublished by the State Council in September 1987.

3.30 The Government's main objectives in the fertilizer sector are to:(a) achieve the desirable nutrient balance of 100(N): 50 (P205): 20 (K20) bythe end of the Eighth Five-Year Plan (1991-95) by rapidly expanding theproduction capacity for phosphate fertilizers, based on domestic phosphaterock and the development of domestic potash resources; and (b) move towardself-sufficiency in fertilizers during the Ninth Five-Year Plan (1996-2000).Other priorities include the rationalization of low-grade fertilizer facili-ties through technical renovation, energy-saving measures and improvement inproduct quality, and greater efficiency in enterprise operations throughimprovements in management efficiency.

3.31 The Government's strategy for sectoral investment during the SeventhFive-Year Plan envisages: (a) bringing on-line the new fertilizer productioncapacity currently under construction (see para. 3.11); (b) converting medium-size low-grade fertilizer plants to high-grade fertilizer production;(c) intensifying the exploitation and development of domestic phosphateresources, including seven large new phosphate mines and the expansion ofpyrites mining capacity; and (d) rationalization of many small-size low-gradefertilizer plants, including their conversion to high-grade operations usingadaptive technologies. At present, the Government does not contemplate anyinvestments in new small-size SSP or ABC plants.

3.32 During the Eighth and Ninth Five-Year Plans (1991-2000), Governmentstrategy will focus on further expansion of phosphate fertilizer productioncapacity, with State resources going mainly for phosphate fertilizer. TheGovernment will not initiate any new nitrogenous fertilizer projects; thesewill be implemented by the provincial authorities as necessary. This strategyis considered appropriate, given the nutrient imbalance in fertilizer use andChina's endowment of phosphate rock.

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IV. THE PHOSPHATE SUBSECTOR

A. World Phosphate Market Background

4.1 Consumption. World phosphate fertilizer consumption grew steadilyin the 1970s and early 1980s except in 1985/86 when a decline of 2.6% from theprevious year's consumption was registered. According to statistics publishedby FAO, world consumption of phosphate fertilizers rose from 19.8 million tonsof P20 to 34.3 million tons during 1969/70 to 1984/35 at an annual averagerate of 3.5%. The decline in 1985/86 reflects the reduced application offertilizers in several countries exporting agricultural products due to therecord-low prices of grains and agricultural products in the internationalmarket. In 1986/87, world phosphate consumption has rebounded to 33.9 milliontons of P205 largely due to a rapid consumption increase in developingcountries. Wc-ld phosphate consumption is projected by the Bank's EconomicAnalysis and Projections Department to increase at an annual average rate of2.7% between 1985 and the year 2000. In 1985/86, major consuming countries ofphosphate fertilizers were USSR (23.0X of the world consumption), U.S.(11.5%), China (8.5%), India (5.7%), France (4.5%), and Brazil (3.9%).

4.2 Production. World production of phosphate fertilizers also grewsteadily from 20.6 million tons of P205 in 1969/70 to a peak of 37.2 milliontons in 1984/85. In response to the trends in demand for phosphate ferti-lizers, world phosphate production decreased to 34.6 million tons in 1986/87,and rebounded in 1986/87. In 1985/86, major producing countries of phosphatefertilizers were U.S. (23.0Z of world production), USSR (22.6%), China (5.3%),India (4.2%), Brazil (3.7%), and France (3.0%). According to supply projec-tions by the FAO/UNIDO/World Bank Fertilizer Group in May 1987, worldphosphate fertilizer supply potential, which is derived from world nominalcapacity in operation and under construction and country specific operationrates, was estimated at 36.8 million tons of P205 in 1986/87, and was expectedto reach 41.8 million tons by 1991/92, representing an annual average growthrate of 2.4%. Major increase in capacity is expected to take place indeveloping countries, particularlv in Morroco, Tunisia, Jordan, China andEgypt. The recent world-wide trend is to locate new production facilitiesnear mine sites.

4.3 International Trade and Market Prices. The international phosphatemarket is competitive, with two main exporting regions of North America andNorthern Africa and all other regions importing. Phosphate fertilizer pricesin the world market, which fell sharply during the 1980-83 world-widerecession and reached the record-low level in 1986, increased recently asworld demand for phosphate fertilizers, particularly in developing countries,recovered. While the world market prices of phosphate fertilizers are notexpected to increase significantly in the short run given the forecastmovement in the agricultural market and the industry's investment behavior,the recovery of these prices is expected to be gradual and steady throughoutthe 1990s. Fertilizer production facilities to be established under theProject are expected to come on stream in early 1993.

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B. The Phosphate Industry

4.4 Although domestic production and the use of phosphate fertilizershas increased steadily over the last two decades, development of the industryin China has been less spectacular than that of the nitrogen industry. Themain constraint has been technical difficulties in processing Cninese rock,which has a high magnesium content, into concentrates suitable for theproduction of high-grade fertilizers. Production of phosphate fertilizer hastherefore been limited to low-grade products such as SSP and CMP at smallprovincial phosphate fertilizer plants. Accordingly, there was littleplanning and coordination of the development of the phosphate fertilizerindustry at the State level. However, several years ago the Governmentshifted the priority in the fertilizer sector from nitrogenous to phosphatefertilizers, in order to correct the significant imbalance in fertilizer use.

4.5 Domestic Phosphate Fertilizer Production. Recent trends in theproduction of phosphate fertilizers are summarized in Table 4.A below (furtherdetails are given in Annex 4.1). As of the end of 1987, almost all phosphatefertilizer production was low-grade, with SSP comprising more than 70X and CMPmost of the balance. Domestic production of other phosphate fertilizers hasbeen insignificant--in 1985, ammonium phosphate production was only 7,000 tonsof P,O5, while the total capacity of phosphoric acid plants was only about50,000 tpy of PRO,. About 400,000 tons of ground phosphate rock were alsobeing applied directly.

Table 4.A: PRODUCTION OF PHOSPHATE FERTILIZERS, 1972-86('000 tons of P205, X)

SSP CMP Others /a TotalVolumae z Volume Z Volume Z Volume X

1972 740 59.2 488 39.1 21 1.7 1,249 100.01981 1,780 71.0 692 27.6 36 1.4 2,508 100.01983 1,920 72.0 715 26.8 30 1.1 2,665 100.01984 1,683 71.3 644 27.3 32 1.4 2,359 100.01985 1,345 76.5 380 21.6 33 1.9 1,758 100.01986 n.a./b n.a. n.a. n.a. n.a. n.a. 2,340 100.0

la Ammonium phosphate production: 5,000 tons in 1984, 7,000 tons in 1985;the 1986 figure is not available.

lb n.a. = not available.

Source: MCI

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4.6 There are about 700 phosphate fertilizer plants in China, scatteredin almost every province (see Annex 4.2). The average output capacity is15,000-30,000 tpy, except for a few SSP plants that have capacities of morethan 100,000 tpy. Most of the production in each province is currentlyconsumed within its boundaries (Annex 4.3).

C. Supply of Raw Materials

4.7 The two main materials required for producing high-grade phosphatefertilizers are phosphate rock and sulfuric acid.

4.8 Phosphate Rock. China is well endowed with more than 3 billion tonsof phosphate rock (see Annex 4.4). The physical nature of the rock is similaracross deposits, usually hard and with a high magnesium oxide (MgO) contentvarying from about 2.5-6.0Z. Until recently, when a new process for benefi-ciating these rocks was developed in China, domestic rocks were not suitablefor the production of high-grade phosphate fertilizers. Now, however, theCovernment is planning several new large undertakings to exploit the majordeposits of rock, particularly in Guizhou, Hubei and Yunnan Provinces. TheProject will support one such effort. Recent exploration also indicates largerock resources in Sichuan Province.

4.9 Relative to the large size of the phosphate rock reserves, thecurrent level of production is small, for the reasons given above. Averageannual production of phosphate rock between 1983-85 amounted to only 11million tons of run of mine (ROM) rock, mainly in five provinces, as shown inTable 4.B. In 1985, most of this rock was used as ROM rock; only about 5X wasbeneficiated before use.

Table 4.8: AVERAGE ANNUAL PHOSPHATE ROCK PRODUCTION BY PROVINCE, 1983-85('000 tons rock)

Yunnan Guizhou Hubei Hunan Sichuan Other Total

Production 2,952 1,829 3,372 1,048 1,314 610 11,125

Source: MCI

4.10 Because the phosphate fertilizer plants are small and scatteredthroughout the country, phosphate rock is transported widely over China.Yunnan Province, for example, sends rock to 24 provinces, Guizhou to 18 andHubei to 19. The major importing provinces are, however, Hubei, Liaoning,Jiangsu, Shandong and Guangxi. China imports a small quantity of rock(varying between 0.2 to 0.3 Mtpy from year to year) for some plants near thecoast. It also exports a small amount of phosphate rock under counter-tradingarrangements with other developing countries.

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4.11 Sulfuric Acid. China's sulfuric acid consumption in 1986 was about8.5 million tons, of which about 5.0 million tons went for phosphate ferti-lizer production. China meets almost the entire demand for sulfuric aciddomestically. About 1.2 million tons of acid comes from smelter gas, andalmost ell the remainder from pyrites; only a small amount comes from elemen-tal sulfur.

4.12 The major deposits and mines of pyrites are located in Guangdong,Shanxi, Anhui, Li.aoning, Hunan and Sichuan Provinces (Annex 4.5). The majorproducers of. smelter acid are in Liaoning, Gansu and Hunan. China hasdiscovered sulfur deposits in Shandong Province, but attempts to exploit themhave not been successful. Little sulfur is recovered from the oil and gasindustry as most gas deposits are sweet.

4.13 The shortage of sulfur could become a constraint on development ofthe phosphate industry unless new deposits of pyrites or sources of by-productsulfuric acid (e.g. phosphogypsum) are developed. GOC is aware of thispossibility and is establishing a pilot plant in Yunnan to develop a processto recover sulfur from phosphogypsum.

D. The Phosphate Subsector Study

4.14 As mentioned earlier (para. 1.2), during Project preparation MCI andthe World Bank carried out a joint Phosphate Subsector Study (the Study) tohelp the Government identify appropriate strategies for the development of anefficient domestic phosphate fertilizer industry. The main objective of theStudy was to prepare an optimal investment program up to the year 2000 thatwould allow China to meet its rapidly growing demand for phosphate fertilizersin the most economic manner, given specified market requirements and transportconstraints.

4.15 The Phosphate Model. As part of the Study, the Bank designed acomputer-based mathematical programming model to facilitate review of theoptions, using data provided by MCI (see Annex 4.6 for the details). Themodel covers optimization of investment at the national level as well as ateach plant in terms of location, scale of operations, and levels of productionin the context of the constraints associated with the transport of rawmaterials, intermediates and final products. Selection of optimal strategieswas based on a comparison of different options and scenarios. The modelenabled the Government to review in a consistent and integrated manner themajor issues involved in developing the fertilizer industry, such as:(a) domestic fertilizer production versus imports; (b) optimal mode oftransport of raw materials and finished products; (c) the location of newfertilizer production facilities; (d) the relative economics of producingdifferent types of phosphate fertilizers; and (e) priorities in developing thedifferent phosphate rock deposits. This model will be installed at MCI'sChemical Planning Institute (CPI) under the Project, and continuously updatedto provide advice to planning and project implementing authorities on relevantsubsector strategies (para. 6.9).

4.16 The results of work with the model provided strong economic justifi-cation for development of China's domestic phosphate fertilizer industry,

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based on domestic raw materials. The analysis suggested that production ofhigh-grade phosphate fertilizers such as TSP, DAP and MAP near the rocksources in Yunnan, Guizhou and Hubei Provinces can be more economic thanreliance on imports. Construction of small DAP plants that use adaptivetechnology and local raw materials will also help China meet its phosphateneeds.

E. Investment Program for the Phosphate Subsector

4.17 To meet its agricultural production targets by the year 2000 withbalanced use of the three main fertilizer nutrients, China will have toincrease its phosphate consumption to about 9.1 million tons of P205 from itscurrent level of 4.5 million tons. If most of the presently known economicdeposits are fully developed by that time, China could increase domesticproduction from the 1986 level of 2.3 million tons of P205 to 9.0 milliontons. This development would necessitate an increase in phosphate rockproduction from about 11 to 35 million tpy of rock and in sulfuric acid fromabout 8 to more than 20 million tons. Total related investment costs for theproduction facilities are estimated at about US$8-10 billion in 1988 prices,exclusive of considerable investment required to upgrade the infrastructureneeded to transport raw materials to the processing units and to distributethe final products to the marketplace.

4.18 During the Seventh Five-Year Plan, five new large phosphate rockmines and many small local mines are to be developed (the Wengfu mine inCuizhou, one mine in Yunnan, and three mines in Hubei). Output at the largepyrites mines in Guangdong, Neimonggol, Hunan and Anhui will be increasedsubstantially to meet the demand for sulfuric acid. These local raw materialswill feed the new high-grade phosphate fertilizer plants to be implementedduring the Seventh and Eighth Five-Year Plan periods. Three DAP plants willbe implemented based on imported phosphoric acid. About 50 small SSP plantswill be revamped to produce DAP using adaptive technology, a move that willallow them to ucilize relatively low-grade phosphate rock. During the Eighthand Ninth Five-Year Plans (1991-2000), the Government intends to fully exploitthe domestic phosphate resources to produce a total of 35 Mtpy of phosphaterock (30% P205 basis) and 9.0 Mtpy of phosphate fertilizers (100 P205) by theyear 2000. Details on specific investments in the phosphate subsector up tothe year 2000, preliminarily prepared on the above basis, are given inAnnex 4.7.

F. Bank Role and Project Justification

4.19 In support of the Government's efforts to implement its strategiesin the fertilizer sector (paras. 3.29-3.32), the Bank's main role is toprovide technical and financial assistance in: (a) strengthening GOC'scapability for investment planning based on modern planning techniques, inorder to optimize investments in the sector, especially those for phosphateand potash fertilizer; (b) assessing specific projects using suitable method-ologies, including the selection of appropriate technologies; (c) building newfertilizer production capacity, as well as renovating existing facilities,particularly for phosphate and potash fertilizers; (d) enterprise-levelrestructuring and upgrading the efficiency of fertilizer distribution so as to

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reduce fertilizer losses during distribution; and (e) improving the managerialefficiency of sector companies through the introduction of modern enterprise-level management systems.

4.20 The two previous Bank-supported fertilizer projects supportedChina's priority objective during the early part of the Seventh Five-Year Plan(1986-90), which has been given to improving the technical and managerialefficiency of existing fertilizer plants. Most of the existing large- andmedium-size fertilizer plants, including the large ones built based on inter-nationally proven technologies in the 1970s, do not use up-to-date technolo-gies and require major investments to improve energy and production efficien-cies. The first project (Fertilizer Rehabilitation and Energy Saving Project,Loan 2541-CHA, FY85) which is expected to be completed in the latter half of1988, provides financial assistance for improvements in efficiency at onemedium-size and four large nitrogenous fertilizer plants. The second project(Fertilizer Rationalization Project, Loan 2838-CHA, FY87), being supported byt~-e Bank provides financial assistance both to upgrade the operations of fivemedium-size nitrogenous fertilizer plants, including conversion of theirproducts to hiah-grade ones, and to introduce modern enterprise-level manage-ment systems in tie fertilizer industry overall. Implementation of theseprojects iE proce-ding well and on schedule. An IDA-financed technical creditwas also provides to support project preparation, including tests of thephosphate rock and feasibility studies for the Project.

4.21 The Project supports China's priority in the fertilizer sectorduring the Seventh and Eighth Five-Year Plans (1986-95), which is to reducethe nutrient imbalance in fertilizer use by rapidly expanding the productioncapacity for high-grade phosphate products. At the same time, the process ofproject preparation has provided an opportunity to introduce modern subsectorplanning techniques and methodologies to the phosphate industry and to helpGOC articulate an optimal strategy for the development of the subsector. Theimplementation and further development of this strategy will be supportedunder the Project. By involving MCI in the joint phosphate sabsector study,its subsector planning capability has been strengthened. The experience andmethodologies learned from the Study can also be applied to other subsectors,an aspect in which the Chinese Government has already expressed an interest.This Project also supports the development of a modern phosphate mine, thefirst such mine development in China in terms of size and configuration. Thiseffort will help China gain the experience necessary for implementing othersimilar investments, which have already been identified in the Study. Thetechnical assistance component is designed to ensure successful transfer ofsubsector planning technologies from the Bank to GOC.

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V. PROJECT INSTITUTIONS

5.1 The Phosphate Development Project involves: (a) Guizhou PhosphateCompany (GPC), Guizhou Province, which will implement the Wengfu mine develop-ment component (paras. 6.3-6.6); and (b) MCI, which will coordinate Projectexecution and implement the technical assistance component (paras. 6.7-6.9). The operational, managerial and organizational aspects of theseinstitutions are reviewed in this chapter, while the financial aspects arereviewed in Chapter IX.

A. General Institutional Background

5.2 Chinese chemical fertilizer companies and phosphate mines are state-owned, but operate as financially and administratively independent entities.They are registered with their respective supervisory authorities--provincial,city or county governments to provide them with the status of legal enti-ties. In the past, the administrative, production, marketing and financialoperations of these companies were under the direct supervision of the super-visory authorities. However, their autonomy in business decisions has beenexpanding, and is expected to continue doing so, under the ongoing economicreforms. Particularly, large-size companies already enjoy wide autonomy inalmost all aspects of operations. GPC is a new comppy which was legallyestablished to carry out the Wengfu mine component. " GPC's charter, whichhas been registered with the Guizhou provincial authority, describes the scopeof its activities, responsibilities and authority in the conduct of business.

5.3 Organization and Management. The organization and managementpractices of Chinese state-owned industrial enterprises reveal strong simila-rities. Their organization is basically flat--there are numerous unit work-shops and departments with their own management layers, all at the sameorganizational level. A general manager, appointed by the supervisory govern-ment, heads each company. Under the general manager are the second-layermanagers, who share functional responsibilities related to procurement andsales, administration, production, maintenance and construction. A chiefengineer, also second-layer, is charged with all technical matters, includingdevelopment and renovation. A chief accountant has a similar position in thearea of financial matters.

5.4 This structure has not promoted contemporary standards of organiza-tional and managerial efficiency, such as adequate scope of control, func-tional distribution of responsibilities among line managers, and adequatemanagerial and financial autonomy. The Government (SPC, MCI and the localGovernments) has been setting annual production targets, allocating inputs,distributing output and allocating funds from budgets. Some managers, parti-cularly those responsible for production, have been overloaded with supervi-

* sory responsibilities. Horizontal coordination among various departments and

5/ GPC currently does not have production operations.

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workshops is not satisfactory. Because of insufficient autonomy, good manage-ment information and cost management systems do not exist.

5.5 Recent Management Reforms. Under the recent economic reforms,Chinese fertilizer companies have received increasing management autonomy.One result, however, is that there is now a two-tier planning and managementsystem. The state plan mandates a basic minimum level of activity, but beyondthat level each company is free to operate in response to market forces underits own flexible plan. Companies can make their own decisions regardingproduction levels, procurement of raw materials, sales of products above thequota, and utilization of funds generated by those sales, within the contextof the flexible plan. Although state planning for the fertilizer sector isexpected to continue in the near future, the scope for flexible planning andmanagement is to expand further, providing still greater autonomy to manage-ment.

5.6 MCI recognizes the strong need to restructure the organization andmanagement of the chemical fertilizer (including phosphate mining) companiesso that they can effectively carry out their mandates for organizationalchange. One means is through the introduction of modern enterprise-levelmanagement systems for information and costs, as well as investment andfinancial planning. MCI, with Bank assistance under the FertilizerRationalization Project (Loan 2838-CHA, FY87), is currently sponsoring amanagement efficiency study, using internationally experienced consultants.The aim is to raise managerial efficiency in fertilizer companies in thecontext of the changing business environment. This study, which is expectedto be completed by the end of 1989, will also provide practicalrecommendations on the introduction of suitable modern systems. MCI plans tointroduce these systems gradually in the entire chemical industry followingsuccessful introduction of them at several companies on a pilot basis.

B. The Guizhou Phosphate Company (GPC)

5.7 Background. GPC, located in Wengan County, about 160 km northeastof Guiyang, the capital city of Guizhou Province, was founded in 1984 toexploit the phosphate deposits in the Wengfu area. The company has completedexploration work.

5.8 Organization and Management. GPC has the basic organizationalstructure described above (para. 5.3). It is headed by a general manager, towhom four second-layer managers report (the director of the mine, the chiefengineer, and the managers of the construction and finance departments).Several third-layer managers have also been appointed. Most managerialpersonnel have relevant experience in phosphate mining from their involvementin Guizhou's Kaiyang phosphate mine and through the recent exploration,project preparation and construction activities for this Project. Neverthe-less, considerable reinforcement of GPC's management capabilities needs totake place during Project implementation. Annex 5.1 shows GPC's existingorganizational structure as well as the one currently envisaged after Projectcompletion.

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5.9 Staffing and Training. CPC staff presently number 90, of whom 20are second- and third-layer managers, 68 are engineers holding college degreesor higher, and 22 are administrative staff and workers. The ratio of upper tolower level staff is relatively high, because GPC is still being set up.After project completion, GPC's total staff is expected to be about 1,000, ofwhom 110 will be managers. The implication is that GPC will need to recruitadditional skilled personnel from other mines.

5.10 Given the requirement of staff experienced in implementing andoperating such a complex Project, consultancy services will be required forsmooth Project implementation. Further, recruitment and training of qualifiedstaff will be essential to the success of the Project. During loan negotia-tions, an assurance was obtained that GPC will prepare, and furnish to theBank for comment by June 30, 1989, a comprehensive program to strengthenmanagement, recruit qualified staff, and provide training, and thereafter willcarry out the agreed program. GPC will obtain assistance from internationallyexperienced consultants and local design institutes in preparing the program.

C. The Ministry of Chemical Industry (MCI)

5.11 Background. The Ministry of Chemical Industry (MCI) has overallsupervisory responsibility at the national Government level for the chemicalfertilizer sector, including phosphate mining, as well as for a number ofrefineries, rubber plants and several other chemical industries. MCI preparesthe five-year plans for those subsectors, works out annual production targets,coordinates the supply of raw materials and sales of output, and monitors theactivities of the chemical industry at the provincial and county levels incoordination with Chemical Industry Bureaus of local governments.

5.12 Organization and Management. MCI is headed by a minister, assistedby four deputy ministers who are responsible, respectively, for: (a) financeand foreign affairs; (b) production; (c) construction projects; and (d) educa-tion and research. MCI maintains a task force known as the "World BankProject Implementation Coordination Group" to coordinate with the Bank. It isheaded by the deputy minister for finance and foreign affairs. The World BankLoan Office, an executive arm of the group headed by a director-levelofficial, maintains project coordination groups for Bank-supported projects,including this Project.

5.13 MCI's Chemical Planning Institute (CPI) is the department-levelresearch and advisory unit of MCI. Established in 1978, CPI provides assis-tance in: (a) drafting subsectoral, regional and enterprise development plansand strategies; (b) advising MCI on strategies for technology development andtechnology selection for new processes and products; and (c) assessing feasi-bility studies for major investments. CPI currently has 250 staff, including47 administrative support staff personnel who are assigned to its eight linedivisions; it also has a computer center. CPI worked closely with the Bank onthe joint Phosphate Subsector Study, including preparing most of the majordata inputs for the model. Three CPI staff members have already receivedintensive training on the fundamentals of the model from Bank staff to iacili-tate future operational transfer of the model.

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VI. THE PROJECT

A. Objectives

6.1 The specific objectives of the Project are to: (a) help Chinaestablish appropriate strategies for developing an efficient phosphate indus-try, including development of an optimal investment program to meet the futuredemand for phosphate fertilizers; (b) provide financial and technical assis-tance in implementing the first major mine development of the investmentprogram, which would provide a model for future such investments; and(c) strengthen MCI's capability for subsectoral planning through transferringthe expertise the Bank obtained in the joint-Phosphate Subsector Study.

6.2 Considerable progress with respect to objectives (a) and (c) hasalready been achieved as a result of the Phosphate Subsector Study undertakenduring Project preparation (paras. 1.2 and 4.14). To achieve the remainingobjectives, the Project comprises two components: (a) Wengfu phosphate minedevelopment component; and (b) technical assistance component.

B. Wengfu Phosphate Mine Development Component

6.3 This component, to be carried out by GPC, involves establishmentof: (a) an open-pit mine to produce 2.5 Mtpy of ROM rock; (b) a beneficiationplant to process the rock into 1.9 million tpy of high-grade phosphate concen-trate (34Z P205); and (c) related on-site and off-site infrastructure, includ-ing a slurry pipeline (see Annex 6.1 for details). Of the phosphate depositsin China, the Wengfu area offers the best conditions for large-scale mining ofphosphate rock with a high P20, content. In addition to the large provenreserves and good quality of phosphate rock, the site benefits from the factthat a major railway line runs 45 km from the proposed mine. The phosphaterock concentrate would be pumped as slurry to a railway loading site, where itwould be dewatered and loaded. This low-cost slurry pipeline technology,currently being used successfully by several modern mines in other countries,will be introduced into China for the first time.

6.4 This Project component was prepared and designed by the ChineseChemical Mines Research and Design Institute (CMRDI), which has considerableexperience in designing large mines and industrial projects, with technicalguidance from Jacobs Engineering, a US company, on the overall layout of theproject, and from Pipeline Engineering Systems, a West German/US company, onthe design and engineering of the slurry pipeline; technical guidance servicesfrom these companies were covered by the IDA-financed Technical CooperationCredits (Credit 1412-CHA, FY84, and Credit 1664-CHA, FY86).

6.5 About 40Z of the concentrate produced at Wengfu would be used tofeed several high-grade phosphate fertilizer plants currently underconstruction outside Guizhou Province including: (a) a 120,000 tpy DAP plantin Tonglin, Anhui Province; (b) a 70,000 tpy nitrophosphate plant in Jinan,Shandong Province; (c) a 90,000 tpy nitrophosphate plant in Kaifeng, HenanProvince; (d) a 480,000 tpy DAP plant in Guixi, Jiangxi Province; and (e) a240,000 tpy DAP plant in Dongting, Hunan Province. The balance would beconverted on-site into TSP at a new 800,000 tpy TSP plant, to be constructedas a separate project.

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6.6 To ensure implementation of all these plants in time for completionof the Wengfu mine, MCI will coordinate all construction and will assuretimely completion of the new TSP plant at Wengfu. During loan negotiations,an assurance was obtained from the Government that it will rieport semi-annually on the progress of all plants and will ensure that GPC completes theWengfu TSP plant by January 31, 1994. A separate assurance was obtained fromGPC that the Wengfu TSP plant will be constructed and ready for operation inaccordance with scope and timeframe agreed with the Bank (see Annex 6.2).

C. Technical Assistance Component

6.7 The technical assistance component, to be carried out by MCI, hastwo elements: (a) services of internationally experienced consultants forMCI's Project coordination team, to support Project implementation and main-tenance of mine equipment; and (b) provision of financial and technicalsupport to MCI for the acquisition of computer hardware and software at CPI tostrengthen MCI's subsector planning capability. This component is summarizedbelow (see Annex 6.3).

6.8 Consultant Services for Project Implementation and Maintenance ofMine Equipment. The Project involves risks associated with the coordinatedimplementation and commissioning of the mine and downstream high-gradephosphate fertilizer plants. In the recent past, new mines and beneficiationplants in Hubei Province have remained idle or underutilized, mainly due todelays in the completion of downstream fertilizer plants. To mitigate thesetechnical risks, the technical assistance subcomponent will provideinternationally experienced consultants for MCI's project coordination team,who will help the team and the Project company with: (a) selection andprocurement of approptiate technologies and equipment; (b) timelyidentification and resolution of problems with Project implementation,particularly in coordinating mine development with the construction ofdownstream fertilizer. plants; (c) training of Project management team staff;(d) preparation of staff recruitment and training programs; and(e) implementation of a preventive mine workshop maintenance system. The

scope of their work was discussed during project preparation, and the terms ofreference were finalized during loan negotiations (see Project File No. 3).

6.9 Financial and Technical Support to Strengthen MCI's SubsectorPlanning Capability. As noted, the Phosphate Subsector Study resulted in thedevelopment of a subsector investment programming model. To strengthen MCI'ssubsector planning capability, this model will be installed, maintained andfurther developed at CPI. Under this subcomponent CPI will: (a) acquirecomputer hardware with adequate capacity; (b) install the model at CPI; and(c) provide local and overseas training of selected MCI staff. Similar workwith models is expected to be done for other subsectors in the future. Theoutline of CPI's program is given in Annex 6.4.

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VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION

A. Engineering Arrangements

7.1 CMRDI, the local design institute that prepared the feasibilitystudy for Wengfu, will carry out the detailed engineering for the mine, bene-ficiation plant and infrastructure. It has extensive experience in thedesign, engineering, construction and start-up of comparable mines and benefi-ciation plants.

7.2 During project preparation, CMRDI received substantive assistancefrom internationally experienced engineering firms on the overall layoit ofthe mine, the beneficiation plant, and infrastructure as well as on the lesignand engineering of the slurry pipeline for which it does not have anyexperience and capability (para. 6.4). The internationally experienced firmwhich will design the slurry pipeline will use technologies that arecommercially proven and acceptable in terms of investment, efficiency, safetyand environment aspects, and will provide design guarantees. Its additionalservices will include assistance in the procurement of critical equipment toensure efficient selection and adequate quality control during manufacturingand prior to shipment.

B. Project Management

7.3 The arrangements for overall Project coordination are similar tothose under the two ongoing Bank-financed fertilizer projects, where they haveproven satisfactory. MCI will have primary responsibility for supervisingProject implementation and for coordinating the construction work with rawmaterials supply and downstream plants. The Project coordination group set upwithin MCI (Annex 7.1) will regularly review progress on Project implementa-tion and procurement and coordinate efforts to remove any constraints. Thecoordination group will also maintain liaison with CPC and the Bank,submitting to the latter quarterly financial and technical progress reports.During negotiations, an assurance was obtained from the Government that thegroup will be maintained during Project implementation.

7.4 CPC has already set up its own Project management team (Annex 7.2),charged with implementing its respective component. The key staff responsiblefor specific aspects of Project implementation have been appointed. BecauseGPC is a new company with no direct experience in managing constructionprojects its Project management team will receive substantial support fromCMRDI that has experience in large mine and chemical projects in China.Internationally experienced consultants to be hired by MCI under the technicalassistance component will also provide assistance (see para 6.8). Duringnegotiations, an assurance was obtained from the GPC that it will maintain itsproject management team during Project implementation.

C. Implementation Schedule

7.5 Implementation of the Project is expected to take 54 months from thedate of loan approval. Construction work for the mine and the beneficiationplant is expected to be complete by December 1992. The mine will be finished

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before the beneficiation plant so that raw rock can build up the necessarystocks for beneficiation operation. The overall Project is scheduled forcompletion by June 30, 1993. The Project implementation schedule, along withkey milestones for project implementation, is shown in Annex 7.3. In light ofexperience with previous Bank-financed fertilizer projects, the Projectschedule is reasonable.

D. Training

7.6 Substantial training is required for GPC to ensure successfulimplementation. GPC has already recruited a nucleus of experienced technicaland managerial staff. However, their skills and experience still do notconform to what is required to ensure smooth start-up and operations.

7.7 MCI and GPC are well aware of the need for training. GPC willprepare a comprehensive recruitment and training program, with assistance frominternationally experienced consultants and local design institutes, and willimplement it (para. 5.10). The training program will include early assignmentof managers and key technical staff during Project implementation to theirpositions prior to start-up so that they can learn from the consultants,licensors and engineering firms. The program also allows for overseas train-ing in new technologies for open-pit mining and beneficiation. On-the-jobtraining in the operation of a modern mine will be provided at existingChinese modern open-pit (mostly coal and iron ore) mines. Over the next twoyears, CMRDI will focus on training for key technical staff and companytrainers.

E. Environmental Aspects

7.8 The mine and the beneficiation plant under the Project will bedesigned and constructed to meet locally and internationally acceptableenvironmental standards. The internationally experienced consultants involvedin Project preparation have paid particular attention to appropriate measuresto ensure the least environmental impact, with a specific focus on theselection of appropriate sites and configurations of the open-pit mine and thebeneficiation plaLt. For example, mining operations will be concentrated inone large open pit; beneficiation tailing ponds will be designed to avoid anyground water pollution; and water treatment plants will be installed toprocess all liquid effluent from the beneficiation plant and the slurrypipeline prior to discharge into public waters. The expected environmentalstandards to be applied to the Project, which are consistent with localstatutory standards and Bank guidelines, are given in Annex 7.4.

7.9 Assurances were obtained from GPC that it will build and operate theProject mine and plant with due regard to safety and ecological and environ-mental factors and will comply with environmental standards satisfactory tothe Bank.

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VIII. CAPITAL COSTS, FINANCING PLAN, PROCURENT AND DISBURSEMENT

A. Capital Cost Estimates

8.1 The total financing required for the Project, including interestduring construction (IDC) and incremental working capital, is estimated atUS$221.8 million equivalent, of which US$74.1 million, or 33.4X, is in foreignexchange. The estimate includes all off-site facilities necessary for theProject, such as water and power supply, facilities for transport, storage andhandling of raw materials and products, and social infrastructure. Thecapital cost estimates (detailed in Annex 8.1) are summarized in Table 8.A.

Table 8.A: PROJECT CAPITAL COSTS

X ofLocal Foreign Total Local Foreign Total Total--- (Y millions) --- ---- (US$ millions) --

Wengfu mine componentEngineering & licensefee 14.1 0.7 14.8 3.8 0.2 4.0 2.4

Equipment, materials& spares 84.8 186.3 271.1 22.8 50.1 72.9 45.0

Civil & erection 263.3 - 263.3 70.8 - 70.8 43.7Others 46.5 4.9 51.4 12.5 1.3 13.8 8.5Sub-Total 408.7 191.9 600.6 109.9 51.6 161.5 99.6

Technical assistance - 2.2 2.2 - 0.6 0.6 0.4

Base Cost /a 408.7 194.1 602.8 109.9 52.2 162.1 100.0(January 1988 prices)

Physical contingencies 40.9 19.2 60.1 11.0 5.2 16.2 10.0Price contingencies 111.7 50.8 162.5 12.8 5.7 18.5 11.4

Installed cost 561.3 264.1 825.4 133.7 63.1 196.8

Incremental workingcapital 20.4 0.0 20.4 4.6 0.0 4.6

Interest during con-struction 40.1 46.4 86.5 9.4 11.0 20.4

Total FinancingRequired 621.8 310.5 932.3 147.7 74.1 221.8

/a Local costs include sales tax on locally purchased equipment and materials amountingto US$2.0 million.

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8.2 The base cost estimates, expressed in January 1988 prices, werederived from estimates prepared by the Project entities and MCI in collabora-tion with the domestic design institutes, after checking with internationallyexperienced engineering firms. Physical contingencies are calculated at 1O0of the base cost estimates. In calculating the base cost and phystical contin-gencies, the prevailing ezchange rate of Y 3.72 to US$1 was used. Priceescalation for foreign costs was calculated on the basis of anticipated annualinternational price movements of 3.0Z for 1988-90 and 4.02 thereafter. Priceescalation for costs expressed in local currency was calculated based on pro-jected annual local inflation rates of 8.02 for 1988, 7.O for 1989 and 6.52thereafter. Equipment and materials imported for the Project are exempt fromimport duties. The local companies will pay sales tax on locally procuredequipment and materials.

B. Financing Plan

8.3 The proposed Bank loan of US$62.7 million will meet 84.6Z of thetotal foreign exchange and 28.32 of the total financing required. The remain-ing financing will be met mainly by local lending institutions (71.52), andGOC's own funds (0.22). The proposed financing plan for the Project is sum-marized in Table 8.B.

Table 8.B: FINANCING PLAN

Local Foreign Total Local Foreign Total 25Y million) -- - ($ million) -

A. Wengfu Mine Component (GPC)IBRD loan - 261.9 261.9 - 62.5 62.5 28.2oOC loan la 601.4 46.4 647.8 143.1 11.0 154.1 69.7ICBC loans /b 20.4 - 20.4 4.6 - 4.6 2.1Internal fun-s - - - - - - -

Subtotal 621.8 308.3 930.1 147.7 73.5 221.2 100.0

B. Technical AssistanceIBRD loan - 0.7 0.7 - 0.2 0.2 33.3GOC funds /c - 1.5 1.5 - 0.4 0.4 66.7

Subtotal - 2.2 2.2 - 0.6 0.6 100.0

C. Total ProjectIRD loan - 262.6 262.6 - 62.7 62.7 28.3GOC loan /a 601.4 46.4 647.8 143.1 il.0 154.1 69.4ICBC /b loans 20.4 - 20.4 4.6 - 4.6 2.1cOC funds /c - 1.5 1.5 - 0.4 0.4 0.2

Total 621.8 310.5 932.3 147.7 74.1 221.8 100.0

/a OOC and provincial government loans are channelled through the People's Construction Bankof China (PCBC).

/b Industrial and Commercial Bank of China.7E OCC plans to cover the costs for the CPI program from the proceeds of the Second Technical

Cooperation Credit (Credit No. 1664-CHA).

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8.4 IBRD Loan Financing. The proposed Bank loan will be made availableto GOC at the Bank's standard rate of interest for 20 years, including 5 yearsof grace, with a commitment charge of 0.75%. The total amount of the loanwill be on-lent by GOC to GPC at an on-lending rate equal to 1052 of the Bankvariable loan rate, with a commitment charge of 0.75X and a repayment periodof 20 years, including 5 years of grace. The foreign exchange risk will bepassed on to the company. During negotiations, assurances were obtained fromthe Government that a subsidiary loan agreement would be signed by GOC and CPCon terms and conditions satisfactory to the Bank as a condition of loaneffectiveness.

8.5 Local Financing. GOC, through the Peeple's Construction Bank ofChina (PCBCs, will provide GPC with a construction loan of Y 649.9 million(US$154.4 million equivalent) to cover the local financing requirements forfixed assets at its prevailing rate for similar investments (currently 3.6Zp.a.), with a maturity of 15 years, including a grace period equal to theconstruction period. A portion of loan will be used to cover IDC on theproposed Bank loan. Interest payments on this loan will be deferred duringthe construction period and repaid in installments after completion of theProject. Foreign exchange requirements of US$400,000 equivalent to cover theCPI program to be carried out by MCI as part of the technical assistancecomponent would be met from the proceeds of the Second Technical CooperationCredit (Credit No. 166-CHA, FY86). The remaining local financing needs,including incremental working capital, will be met entirely by short termloans from local banks. During negotiations, confirmation was obtained fromthe Government on all necessary arrangements for the provision of local fundsto finance the Project.

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C. Procurement

8.6 The procurement arrangements are summarized in Table 8.C:

Table 8.C: PROCUREMENT ARRANGEMENTS /a(US$ million)

Procurement method TotalProject element ICs LIB Other cost

Equipment and materials 50.0 8.0 30.7 88.7(50.0) (8.0) (3.0) (61.0)

License, engineering and consultancyservices 4.9 4.9

(0.4) (0.4)Project management and commissioning 15.9 15.9

(1.0) (1.0)Land, civil works and erection 86.0 86.0

(0.0) (0.0)Training 0.9 0.9

(0.3) (0.3)Other /a 25.4 25.4

(0.0) (0.0)

Total Financing 50.0 8.0 163.8 221.8(50.0() (8. (4.7) (62.7)

/a Including incremental working capital and interest during construction.

Note: Figures in parentheses are the amounts to be financedby the Bank.

8.7 A major portion of the equipment and materials (82Z of thosefinanced by the Bank loan) will be procured through international competitivebidding (ICB) in accordance with Bank guidelines. In ICB, domestic manufac-turers will be given a margin of 15Z or the prevailing customs duty, whicheveris lower, for purposes of bid evaluation. International engineering and tech-nical assistance services will be selected according to Bank guidelines forthe use of consultants.

8.8 Specialized items with only a limited number of suppliers, such asspecial pumps for the slurry pipeline will be procured through limited inter-national bidding (LIB). Items for LIB, are expected not to exceed US$8.0 mil-lion in aggregate. All qualified bidders would be invited under LIB.

8.9 Orders for small or miscellaneous items with an estiimated value ofup to US$200,000 each will be procured through international shopping from atleast three qualified and eligible suppliers, up to an aggregate amount ofUS$3.0 million.

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8.10 No procurement through direct contracting is envisaged. Packageswith an estimated value of US$1.0 million or more, expected to number about 7,would be subject to prior Bank review; packages below US$1.0 million eachwould be subject to post-review by the Bank. Contracts with consultants willbe subject to Bank approval prior to signature. International procurementwill be giecuted by the China National Chemical Construction Corporation(CNCCC),-1 in cooperation with MCI's Project coordination group. To avoiddelays in Project execution, the Bank loan will retroactively finance up toUS$0.5 million of eligible expenditures for down payments for engineeringcontracts and technical services, and international travel incurred betweenFebruary 5, 1988 and the date of loan signing.

8.11 Procurement Arrangements for Local Financing. Local procurementwill be carried out by the respective operating companies with assistance fromthe design institutes. Since SPC identifies the Project as a key nationalproject, the supply of local construction materials, plant and equipment isregulated by an allocation system administered by central and provincialGovernment agencies. Applications for annual requirements have to be made inadvance to SPC and the State Materials Supply Bureau. However, under recentprovisions, buyers and suppliers of equipment have some scope for negotiationas to the type of equipment, delivery and price.

8.12 Most of the civil works, erection, a major part of the engineeringwork, and some equipment and materials will be procured locally. Contractsfor civil works and erection will be awarded through assignment to specializedconstruction bureaus or companies under negotiated contracts that specify unitcosts, terms of payment and incentives/penalties for early/late completion/delivery. The capacity and capabilities of local contractors proposed for theProject are satisfactory for timely and efficient execution of the proposedwork.

D. Allocation and Disbursement of the Bank Loan

8.13 The proposed allocation of the Bank loan is summarized inTable 8.D.

6/ CYZCC is responsible for international procurement of the two on-goingBank-supported fertilizer projects.

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Table 8.D: BANK LOAN ALLOCATION

US$ million Bank loan financing

Equipment, materials 61.0 100l of foreign expendi-and spares tures, 100l of local

expenditures (ex-factory), and 75Z of localexpenditures for items procuredlocally

Engineering, licenses 1.2 100% of expendituresand technical services

Training 0.3 1OOX

Project Management /a 0.2 1002

Total 62.7

/a Consultant services for project management will be provided for MCI's ProjectCoordination Group as well as GPC's Project Management Team.

The proposed Bank loan will cover: (a) 100% of the foreign expenditures fordirectly imported goods, 1002 of local expenditures (ex-factory) for domesti-cally manufactured goods, and 752 of local expenditures for items procuredlocally; (b) 1OO2 of the expenditures for licenses, engineering and technicalservices for procurement and training; (c) 100% of the cost for overseastraining; and (d) 1002 of the cost for technical services for Project Manage-ment. To facilitate the disbursement of funds, a special account will beestablished in US dollars at a commercial bank acceptable to the Bank, with anauthorized allocation of US$5.0 million. Disbursement will be against fulldocumentation except for training, overseas travel and contracts valued atless than US$200,000 equivalent each, which would be against statements ofexpenditure. Documentation of statements of expenditure will be maintained byMCI's Project coordination group, to be audited annually by independentauditors acceptable to the Bank, and to be made available for review by theBank during Project supervision.

8.14 The Project completion date would be June 30, 1993; the closing dateis expected to be December 31, 1993. An estimated disbursement schedule forthe Project, which has been prepared based on Bank experience with previouscomparable projects in China, and is generally in line with the Bank'srecommended standard disbursement profile for industrial projects in AsiaRegion, is given in Annex 8.2.

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IX. FINANCIAL ANALYSIS

A. Financial Management Practices in China

9.1 Financial Autonomy. In the past, the Government made all majorfinancial decisions, including approval of new investments. Enterprisesremitted almost all internally generated funds to the Government, and fundsfor new investments were, in turn, provided as grants through budget alloca-tions. Recent reforms have resulted in greater financial autonomy andaccountability for the managers of individual enterprises. Major changesinclude: (a) enterprises can retain lOOZ of their depreciation allowances;(b) enterprises can retain an increasing portion of their profits (thisprovision varies across companies and provinces); (c) new funding require-ments, including those for investments, are to be met out of a company'sinternally retained funds or interest-bearing loans (long-term capital con-struction loans for fixed investments and short-term borrowing for workingcapital); and (d) enterprises may utilize an increasing portion of internallyretained funds without prior Government approval. Given the increasingfinancial autonomy and accountability of companies, there is a growing needand opportunity for these enterprises to engage in longer term financialplanning and to improve on the traditional c.acentration on one-year financialtargets.

9.2 Financing of New Projects. The recent economic reforms have alsochanged dramatically the Government's policy on financing new investments. Inthe past, all new investments were, as noted, financed through budget alloca-tions in the form of grants. Recently, the Government introduced the conceptof interest-bearing loans as an incentive to industrial enterprises to econo-mize on the use of funds. While this was, in principle, a positive step, ithas been carried out to the point that new government-financed investments forstate-owned enterprises must now be financed entirely through debt. As aresult, newly formed companies are entirely debt-based, a financial structurethat conflicts with the basic norm for prudent financial management andaccountability. In particular, many companies have been facing cash flowdifficulties during the initial years of operations because of their excessivedebt service burden, and they have had to enter into negotiations with respectto financing and bail-outs on a case-by-case basis. While, given China'sstructure of state ownership, the companies' existence has not beenthreatened, this situation undermines the autonomy of the enterprises andconflicts with the basic thrust of China's economic reform, which is designedto place greater responsibility on enterprise management.

9.3 The Government recognizes the need to allow for equity-type fundingand is currently moving toward the creation of instruments for such financ-ing. In this context, the Government has announced its intention to createlarge-scale sectoral investment corporations and joint stock companies.However, it will take time for the new instruments of financing to developsufficiently to allow for large-scale equity financing.

9.4 Financial Accounting and Audits. The Chinese accounting system isgoverned by several regulations issued by central and local governments.

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Special features of the system include: (a) maintenance of two separateaccounts--one for production operations, the other for construction projects--that are not consolidated; (b) the inclusion of interest charges in theproduction costs, so that operating income reflects the company's financialstructure; and (c) the matching of funding sources with specific types ofassets--fixed assets with fixed funds, current assets with current funds, andspecial assets with special funds.2./The financial statements of Chinese enter-prises are subject to external audits by the State Audit Administration (SAA),which was established in 1983 to ensure efficient and prudent financialmanagement by enterprises. The Bank has been supporting the Government'sefforts to improve its audit capability through training under a TechnicalCooperation Credit (Cr. 1412-CHA).

B. Financial Performance and Projections

9.5 As a new entity, GPC does not have historical financial records.The financial projections for the company were carried out in current yuanterms, based on relatively conservative assumptions on key parameters such asoutput rates, input consumption and output prices. It's output price isassumed to be lower by 30-40% than projected CIF import prices despite thefact that this price is, as the price reform process deepens, expected toprogressively move towards import parity (para. 3.24 above). The real pricesof inputs and outputs (i.e., after allowing for inflation) were assumed toremain unchanged at their January 1988 levels over the life of the Project.Detailed projected financial data, prepared, after several adjustments for theChinese accounting system, in accordance with conventional accounting conceptsbased upon international accounting standards, are given in Annexes 9.2-9.4.The salient features che projected future finances of the company are shown inTable 9.A.

7/ Strict application of earmarking, or non-fungibility, is gradually beingrelaxed, as enterprises retain increasing portions of their internallygenerated funds as special funds.

- 35 -

Table 9.A: SUMMARY OF SELECTED PROJECTED FINANCIAL DATA(million of current yuan unless otherwise stated)

Construction After start-up1988 1990 1992 1993 1994 1995 1996 1997

Income StatementsGross sales revenue - - - 76.7 212.3 313.0 351.9 374.7Variable cost - - - 15.6 43.2 63.7 71.6 76.2Fixed costs - - - 66.8 76.1 83.0 86.6 89.5Net profit /a - - - (62.5) 29.1 97.7 124.2 139.9

Funds Flow StatementsInternal cash generation - - - 15.7 114.0 186.1 212.0 225.8Debt service paymentstPrincipal repayments - - - 53.1 54.2 85.9 87.2 88.6Interest expenses - - - 45.5 45.0 44.0 42.3 40.2

Balance SheetsCurrent assets - - - 25.6 50.5 112.4 192.7 285.2Net fixed assets /b 28.0 339.4 919.2 895.5 858.7 817.6 775.5 733.6Current liabilities /c - - 53.1 169.4 186.3 167.8 140.0 112.3Long term debt:World Bank Loan 2.3 107.7 261.6 257.1 251.4 244.3 235.5 224.8Domestic loans 25.7 231.7 604.6 561.4 518.2 415.0 431.8 388.6

Equity - - - (66.8) (46.8) 42.8 161.0 293.0

RatiosCapacit? utilization tX) - - - 25.0 65.0 90.0 95.0 95.0Net profit/gross sales (Z) - - - - 13.7 31.2 35.3 37.3Debt service coverage(times) - - - 0.2 1.1 1.4 1.6 1.8

Current ratio (times) - - - 0.2 0.3 0.7 1.4 2.5Long-term debt/equity 100:0 100:0 100;0 lOOsO 100:0 94:6 81:19 68:32

/a Net profit before loan aortization and taxes.7i Including work-in-progress and special fund expenditure.7c Including the current portion of long-term debts, and short-term working

capital loans.

9.6 Financial Projections. While CPC is expected to show negativeprofits in 1993, the first year of operation, it is anticipated to achievesatisfactory profits thereafter. Its net profit margins on sales revenue willremain at relatively high levels-over 30X--once its operation reaches fullcapacity. GPC's first-year losses are mainly a result of low capacityutilization, a normal experience for new mines and fertilizer plants, andpartly a consequence of the Government's current investment financing policieswhich are based entirely on debts (para. 9.2). With the build-up of capacity,

- 36 -

GPC's net profit is expected to increase from a negative Y 62.5 million in1993 to a positive Y 29.1 million in 1994, Y 97.7 million in 1995, and Y 124.2million in 1996.

9.7 In the first year of start-up, GPC will face cash flow difficultiesunless additional external funds are provided. Again, in part the reason isthe current Government practice of entirely debt-based funding for new invest-ments. However, CPC will generate sufficient cash internally from the thirdyear onward to service its debts and to make the necessary investments inmaintenance and replacements. Because of the Government's current fundingpolicy, new companies such as GPC, which do not have significant capital base,will have high financial leverage until they accumulate retained earnings fromoperations. Given this background, the Government intends to take an actionto allow GPC to achieve sound financial positions rapidly in the event that itchanges the funding policy, and a specific financial covenant has beendesigned to ensure that GPC will be able to cope with potential cash flowdifficulties during the start-up years (para. 9.9).

C. Financial Rate of Return and Sensitivity Analysis

9.8 The cost and revenue streams for the incremental financial rate ofreturn (FRR), expressed in January 1988 yuans, are presented in Annex 9.5.The estimated base case FRR (before taxes) is: 12.4X. The FRR is lower thanthe economic rate of return (ERR), mainly because the financial prices forfertilizers are below their economic value. The results of sensitivity testsare shown in Table 9.B.

Table 9.B: SENSITIVITY TEST ON FINANCIAL RATES OF RETURN (BEFORE TAX)

FRR (%)

Base case 12.4Capital cost up 20% 10.3Capital cost down 20% 15.0Sales revenue up 20X 15.8Sales revenue down 20% 8.1Variable cost up 20% 11.6Variable cost down 20% 13.12-year delay in completion 10.2

The FRR for the Project is sensitive to changes in, in descending order, salesrevenue, which is a function of the unit price of output and sales volume,capital cost, and input prices. Given that adverse changes in the variablesby a margin of 20%, particularly for the price of phosphate concentrate, arenot likely, satisfactory levels of FRR over 10-12% are likely to be realized.

- 37 -

D. Financial Covenants

9.9 During negotiations, agreement was reached that GPC will:(a) maintain a debt service coverage ratio of at least 1.2 and not incur anylong-term debt unless their projected internal cash retention for each fiscalyear during the term of the debt will exceed 1.2 times their projected debtservice requirements in that year; (b) maintain a long-term debt/equity ratioof 75:25 or better; and (c) maintain a current ratio of 1.2 or better, oncesuch covenanted ratios are reached. Because of the current Governmentfinancing practice with respect to new investments (para. 9.2), GPC will notbe able to achieve these covenanted ratios in the initial years of operations,particularly the debt/equity ratio, until it builds up capacity utilizationand retained earnings. The timeframe for achieving these ratios is asfollows: 1995 for the debt service coverage ratio; 1997 for the long-termdebt to equity ratio; and 1996 for the current ratio. Therefore, anadditional assurance has been obtained from the Government that it will coverGPC's cash flow deficits during the initial three years of operations,provided such deficits are not the result of inefficient management andoperation. Efficiency criteria were agreed at negotiations. Moreover, if theGovernment adopts an alternative funding policy to allow for equity-typefunding (para. 9.3), it plans to allow GPC to convert a portion of local loansto its own funds so that it can achieve a long-term debt/equity ratio of 75:25or better. An assurance was obtained from GPC that it will prepare andfurnish to. the Bank for review, by October 31 of each year from 1989 to 1997,its rolling five-year financial plans, including production, marketing andinvestment plans, in the form of projected financial statements. Such planswill be supported by. (a) a detailed analysis of production cost trends;(b) analysis of operational and financial budget variances for the currentfiscal year; and (c) financing arrangements for the investments proposed overthe five-year period.

E. Auditing and Reporting Requirements

9.10 An assurance has been obtained that GPC will have its annualfinancial statements and project accounts audited by independent auditorsacceptable to the Bank. It will also submit the audit report for both theproduction and capital construction accounts to the Bank within six monthsafter the close of each fiscal year. Based on Project progress and thefinancial reports submitted by GPC, MCI will provide the Bank a quarterlysulmmary of its Project progress and procurement status, and a semi-annualsummary of its financial statements, within 45 days after the end of eachperiod. An assurance has also been obtained that the Government will haveMCI's Project accounts for the technical assistance component, and theaccounts for the Special Account, audited by independent auditors acceptableto the Bank. It will submit the audit report to the Bank within six monthsafter the end of each fiscal year. Within six months after the closing datefor the Project, GPC and MCI will prepare and provide to the Bank a completionreport for their respective components of the Project, to cover Projectimplementation, initial operation, actual Project costs and projected costsand benefits.

- 38 -

X. ECONOMIC ANALYSIS

10.1 Calculation of the economic rates of return (ERR) was made only forthe investment component because the benefits from the technical assistancecomponent, though significant, are not quantifiable. The key assumptions inthe economic analysis of the Project are detailed in Annex 10.1.

A. Economic Costs and Benefits

10.2 Economic Benefits. The quantifiable economic benefits of theProject, expressed in 1988 US dollars, come mainly from phosphate concentratesto be produced from the mine to be developed. The economic price of phosphateconcentrate was derived from its projected international price by addingunloading, port handling, bagging and mixing charges, and inland freight fromports to the plant sites.

10.3 Economic Costs. The economic value of tradeable inputs was based ontheir estimated international market prices. Non-tradeable inputs wereconverted to their economic value by applying their respective specificconversion factors.

B. Economic Rate of Return and Sensitivity Analysis

10.4 The base-case ERR in constant terms is 26.01 for the Wengfucomponent. (The streams of economic costs and benefits for the ERRcalculations are given in Annex 10.2.) The results of the sensitivity andswitching-value analyses are summarized in Table 1O.A.

- 39 -

Table 1O.A: SENSITIVITY ANALYSIS OF ERR(X)

- Economic rates of return (X)Cases

Base case 26.0Capital cost up 201 23.1Capital cost down 201 29.7Sales benefits up 201 29.8Sales benefits down 20Z 21.5Variable cost up 20Z 25.5Variable cost down 20Z 26.42-year delay in completion 20.3

- Switching values of selected variables (X) /a

Variables

Capital cost +178.9Sales benefits -51.8Variable cost +541.7

/a A 12S discount rate is used.

The results of sensitivity tests indicate that the ERR for the Project issensitive to changes in, in descending order, sales benefits, which areclosely related to the international border prices of phosphate rocks andproduction volume, project capital costs, and variable costs. Even under theassumption of a 20Z reduction in sales benefits, the Project would obtain asatisfactory ERR of 21.51. The switching-value analysis of the majorvariables indicates that the Project would remain economically viable undervarious conceivable advyerse conditions, and confirms that the prices ofphosphate concentrate 8 are the most critical variable determining theeconomic viability of the Project.

C. Other Benefits

10.5 Once full operating capacity is reached, the Project will lead tonet import substitution of 1.8 Mtpy of phosphate concentrate that will resultin gross foreign exchange savings of about US$124 million equivalent p.a. in1988 prices. After netting out the annual service of the foreign debt (bothprincipal repayment and interest payments), the net annual foreign exchange

8/ The international prices of phosphate concentrate are closely related tothose of phosphate fertilizers.

- 40 -

savings, as of 1997, are estimated at about US$112 million equivalent (seeAnnex 10.3 for details).

D. Project Risks

10.6 Virtually no commercial risks are foreseen because markets for GPC'soutput are already assured. The entire output of phosphate concentrate fromthe Wengfu mine will be supplied to several downstream high-grade fertilizerplants currently under construction outside Guizhou Province and anotherfertilizer plant to be established at the project mine s-te. The maintechnical risks lie in the coordination of the implementation andcoumissioning of the mine and the associated fertilizer plants. In the past,poor coordination in implementing mine and fertilizer investments, executed byseparate entities under separate budgets, has been a common cause ofunderutilization of new mines in China, resulting in a significant loss ofeconomic benefits. This risk is mitigated by involving internationallyexperienced consultants in the technical assistance component, who will helpMCI and GPC with Project implementation and staff training. The Governmentwill coordinate construction of all downstream plants and report semi-annuallyon the progress of their implementation (para. 6.6).

10.7 This risk will be further reduced because a new 800,000 tpy TSPplant to be established at Wengfu, which would consume about 40X of theProject output, will be implemented by GPC itself. Although it will not beimplemented as a part of the Project, the Bank's project team has beeninvolved in its preparatory work, including the carrying out of feasibilitystudies. The preparatory work is proceeding well. GPC has provided anassurance that the Wengfu TSP plant will be constructed and ready foroperation in accordance with the scope and timeframe for the implementationagreed with the Bank, and a separate assurance has been obtained from theGovernment to the same effect (para. 6.6).

XI. AGREEMENTS REACHFD DURING LOAN NEGOTIATIONS AND RECOMMENDATION

11.1 During negotiations, confirmation was obtained from the Governmentthat:

(a) all necessary arrangements for the provision of local funds will bemade to finance the local costs of the Project (para. 8.5); and

(b) if the Government adopts an alternative policy to allow for equity-type funding for new investments of state-owned enterprises, itplans to allow GPC to convert a portion of local loans to thecompany's own funds so that GPC can achieve a long-term debt/equityratio of 75:25 or better (para. 9.9).

11.2 During negotiations, assurances were obtained that the Governmentwill:

(a) allow GPC to market its entire output outside the state allocationplan at negotiated prices (para. 3.28);

- 41 -

(b) provide semi-annually a progress report on the construction of thedownstream phosphate fertilizer plants that will consume the Wengfuphosphate concentrate (para. 6.6);

(c) ensure the completion of the Wengfu TSP plant by January 31, 1994(para. 6.6);

(d) maintain MCI's Project coordination group during Project implementa-tion (para. 7.3);

(e) on-lend the proceeds of the Bank loan to GPC under a subsidiary loanagreement that will specify terms and conditions acceptable to theBank, including an on-lending rate equal to 105X of the Bankvariable loan rate, with a commitment charge of 0.75Z p.a. andrepayment over 20 years, including 5 years of grace (para. 8.4);

(f) cover any cash flow deficits of GPC during the initial three yearsof operations, provided such deficits are not the result ofinefficient management and operation (para. 9.9); and

(g) meet the auditing and reporting requirements (para. 9.10).

11.3 During negotiations, assurances were obtained from GPC that it will:

(a) prepare and furnish to the Bank for comments by June 30, 1989, acomprehensive program to strengthen management, recruit qualifiedstaff and provide training, and thereafter carry out the agreedprogram (para. 5.10);

(b) have the Wengfu TSP plant constructed and ready for operations inaccordance with scope and timeframe agreed to with the Bank(para. 6.6);

(c) maintain its Project management team during Project implementation(para. 7.4);

(d) build and operate the Project mine and plant with due regard tosafety, ecological and environmental factors and in accordance withenvironmental standards satisfactory to the Bank (para. 7.9);

(e) maintain a debt service coverage ratio of at least 1.2 once thatratio is reached, but no later than December 31, 1995. It will notincur any long-term debt unless its projected internal cashretention for each fiscal year during the term of the debt to beincurred will exceed 1.2 times its projected debt servicereqjirements in that year (para. 9.9);

(f) maintain a long-term debt to equity ratio of 75:25 or better oncethat ratio is achieved, but no later than December 31, 1997(para. 9.9);

- 42 -

(g) maintain a current ratio of at least 1.2 once such a ratio isachieved, but no later than December 31, 1996 (para. 9.9);

(h) prepare and furnish to the Bank for review, by October 31 of eachyear from 1989 to 1997, its rolling five-year financial plans, tocover production, marketing and investment plans, to be presented inthe form of projected financial statements (para. 9.9); and

(i) comply with the auditing and reporting requirements (para. 9.10).

11.4 Conditions for loan effectiveness are:

(a) signing of the subsidiary loan agreement between the Government andGPC under terms and conditions satisfactory to the Bank (para. 8.4);and

(b) approval of the loan agreement by China's State Council.

11.5 Subject to the above assurances and arrangements, the Project wouldbe suitable for a Bank loan of US$62.7 million equivalent to the People'sRept,lic of China at the Bank's standard variable rate for 20 years, including5 years if grace.

May 23, 1988

- 43 - ANNEX 3.1

CHINA

PHOSPHATE DEVELOPMENT PROJECT

/aFertilizer App!lication Rate*rlor Various Countries. 1985(kg per hectare of arable land)

Country Nitrogen Phosphate Potash Total Ratio

Netherlands 558.0 91.1 134.2 783.3 100:16:41

Japan 145.9 155.7 128.8 430.4 100:107:81

Korea 198.7 91.9 101.7 392.4 100:46:51

France 127.2 77.5 95.2 300.9 100:61:76

China /b 135.6 27.4 4.4 167.4 100:20:3

USSR 47.2 32.8 29.4 109.4 100:69:62

Tndonesia 662.2 23.9 8.5 94.6 100:37:13

US 49.9 19.9 24.0 93.8 100:40:48

India 33.7 11.5 5.1 50.3 100:35:15

Morocco 16.2 13.1 6.3 35.6 100:81:39

Brazil 11.2 17.3 14.0 42.5 100:154:125

la Based on apparent consumption figures obtained by adding net imports offertilizers to domestic consumption.

lb FAO'S apparent consumption figures are not consistent with the acutalconsumption statistics published by MAAP text (Table 3.A) due to a differencein statisitical methods and bases.

Source: PAO Fertiliger Yearbook, 1986, Vol. 36.

China DepartmentFebruary 1988

CHINA

PHOSPHATE DRYELWPMENT PROJECT

Consumption, Production and Imports of Chemical Fertilicers _1972-86 /a(.000 tona of nutrient)

Nitrogen Phosphate Potash All nutrientsYear Consumption Productlon Imports Consumption Productlon Imports Consumption Productaion Iports Consumption Production lmports

1972 3.168 2,444 1,342 1.038 1,249 11 12 8 2 4,219 3,701 1,3551973 3,043 2,996 1,230 4,468 1,589 72 IS 7 IS 6,654 4,592 1,3171974 3,490 2,627 928 1,390 1,390 82 57 5 57 4,915 4,222 1.0671975 4,020 3,709 964 1,531 1,531 34 40 7 39 S,407 5.247 t.0373976 4,468 3,815 928 1,360 1,418 20 16 It 6 5,844 5.244 9541977 5,065 5,509 1,147 1,415 1,708 151 33 21 23 6,513 7,218 1,3211978 7,726 7,639 1,227 1,114 1,033 246 45 21 31 8,885 8,693 1,504 t1979 8,997 8,820 1,451 1,7S8 t,817 190 t08 16 108 10,863 10,653 1,749 41980 10,180 9,993 1,537 2,368 2.307 395 128 20 126 12,676 12,320 2,058 *.-1981 10,363 9,658 1,541 2,7M5 2,508 499 251 24 250 13,349 12.390 2.290 13982 10,433 10,219 1,808 3,448 2,537 631 568 25 489 14.449 12,781 2.9283983 11,923 11,094 2,365 3,945 2,666 1,028 728 29 634 16,596 13,789 4.0271984 13,378 12,211 2,828 3,686 2,359 1,342 804 31 755 17,868 14,601 4.9251985 13,477 11,438 2,052 3,531 1,760 950 920 24 364 17,898 13.222 3.3661986 13,728 11,592 1,700 4,S02 2,340 645 1,075 25 600 19,305 13,957 2,945

/a Nutrient composition of compound fertiltzer is assumed to be 2:3:1 (nitrogen, phosphate and potash).

Sources: Nintstry of Chemical Industry; Mtnistry of Agriculture, Animal Huabandry and Fishery; General Admtnistration of Customs; and StateStattstical Buresu.

China DepartmentFebruary 1988

I!

-45 - ANNEX 3.3

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Comparison of Domestic and International Prices of FertilizersMain Energy Inputs. and Main Agricultural Products. January 1988

(US$/ton /a unless otherwise stated)

Domesticex-factory prices FOB inter-

Ceiling for national Economic Domestic price asControlled Negotiated price price /c _ of economic price

(A) (B) (C) (D) A/D B/D

ProductsUrea lb 110 140 118 151 72.8 93.5DAP 161 188 159 192 83.9 97.9

InputsCoal /d 22 25 42 34 64.7 73,5Natural gas(per mln Btu) 1.7-2.0/e 1.9-4.1/e - 3.1/f 54.8-64.5 61.3-132.3

Phosphate rock 24 31/g 31 51 47.1 56.8

AgriculturalProductsRice 167 226 212 212 78.8 106.6Wheat 119 161 136 170 70.0 94.7

/a US$1 - Y 3.72.Tb Bagged urea.7< For Imported products, CIF China prices, and for exportable inputs, netback value from

exports./d Based on average anthracite price for medium-size plants.

T Average natural gas price for large-size urea plants under MCI.T? Fuel oil equivalent economic value (netback from exports) in calorific terms.T Based on the ceiling price, preliminarily set for the Wengfu concentrate.

China DepartmentApril 1988

ANNEX A,j

CHINA

PEOSPHATE DEVELOPMENT PROJECT

Trends in Domestic Production of Phosphate Fertilizero,b Product, 1970-86( 000 tons of P205)

Single Calcium magnesiumsuperphosphate phosphate Other Total

1970 567 339 1 9071971 646 416 16 1,0781972 740 488 21 1,2491973 1,020 560 9 1,3891974 940 430 20 1,3901975 1,029 476 26 1,53i1976 996 376 46 1,4181977 1,140 470 98 1,7081978 478 524 24 1,0331979 1,243 518 44/a 1,8171980 1,646 615 337a 2,3081981 1,780 692 28 2,5081982 1,799 701 29 2,5371983 1,920 715 23 2,6651984 1,683 644 27/b 2,3591985 1,345 380 247W 1,7581986 - - - 2,340

/a Monoamonium phosphate production was 12,000 tons in 1979 and 13,000 tonsin 1980.

/b Diammonium phosphate production was 5,000 tons in 1984 and 7,000 tons in1985. Triple superphosphate production was 1,000 tons in 1985.

Sources: Data provided by the Shanghai Chemical Research Institute, MCI,STIRI; China Chemical Industry: World Chemical Industry Yearbook,1985-87.

China DepartmentFebruary 1988

- 47 - ANNEX 4.2

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Domestic Production of Phosphate Fertilizers,by Products and Provinces, 1985

t§UU', tons F2 05 )

Single CalciumProvince superphosphate magnesium phosphates Other Subtotal

NorthBel ing 1.1 - - 1.1Tianjin 3.6 - - 3.6Hebei 29.7 - - 29.7Shanxi 18.9 - - 18.9Neimonggol 1.1 - - 1.1

NortheastLiaoning 14.0 - - 14.0Jiloing 4.6 4.6Heilongjiang 7.2 - - 7.2Shanghai 24.3 - - 24.3Jiangsu 190.6 12.5 4.5 207.6Zhejiang 47.1 20.4 0.2 67.7Anhui 119.1 - 7.7 126.8Fujian 36.8 2.0 0.3 39.1

East~~:TGangxi 13.7 40.4 - 54.1Shandong 35.6 7.8 0.1 43.5Henan 26.7 45.9 - 72.6Hubei 161.4 13.8 - 175.2

South CentralHunan 117.0 51.9 - 168.9Guangdong 143.2 - - 143.2Guangxi 55.8 26.3 0.1 82.2

SouthwestIrc1uian 150.1 32.7 4.3 187.1Guizhou 19.1 24.5 - 43.6Yunnan 61.0 102.0 15.6 178.6iTibet - _ -_

NorthwestS~NUhaanxi 26.8 - 0.1 26.9Gansu 28.4 - - 28*4Qinghai 2.9 - - 2.9Ningxia 5.0 - - 5.0Xinjiang 1.3 - - 1.3

Total 1,346.1 380.2 32.9 1,759.2

Source: MCI.

China DepartmentFebruary 1988

- 48 - ANNEX 4.3

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Consumption of Chemical Fertilizers by Province, 1985('000 tons nutrient)

Nitrogen Phosphate Potash Total(N) (P205) (K20) nutrients

NorthMTjing 67 15 0 82Tianjin 37 5 1 43Hebei 838 236 30 1,104Shanxi 302 81 15 398Nelmonggol 143 51 6 199

Northeast: Laoning 551 144 14 709Jilin 425 77 19 521Heilongjiang 293 106 22 421Shanghai 107 18 1 126Jiangsu 1,214 326 40 1,579Zhejiang 586 103 22 711Anhui 810 289 37 1,136Fujian 323 93 75 491

East)TangKi 326 124 90 539Shandong 1,484 319 54 1,857Henan 1,044 351 42 1,436Hubei 672 194 51 917

South CentralHunan 618 167 112 897Guangdong 783 174 147 1,104Guangxi 339 114 68 521

SouthwestSlchunU 1,115 211 21 1,347Guizhou 208 61 11 280Yunnan 277 112 15 404Tibet 6 2 0 8

Northwest369 50 10 429

Gansu 165 40 6 210Qinghai 156 9 4 168Ningxia 46 8 0 55Xingjiang 143 51 9 203

Total 13,447 3,531 920 17,898

Source: Agricultural Yearbook of China, 1985.

China DepartmentFebruary 1988

- 49 - ANNEX 4.4

CHINA

PHOSPHATE DEVELOPMENT PROJECT

MaJor Phosphate Deposits in China

Reserves ore Ratio (ore/Province Deposit (mllion tons) concentrate)

Hubel Dayukou 162 2.14Wangji 90 2.14Fanmasheng n.ea. n.a.Lungwaisheng n.e. n.a.Yichang 1,068 3.33Huangmailing 110 3.33

Guizhou Kaiyang 320 n.a.Wangjayuan SO n.ea.Chuanyondong 280 n.e.Datang 160 n.a.Yuhua n.a. n.e.Xingiao n.e. n.a.Xiaoba 104 n.a.Yingping 110 1.50Wofang 70 1.57Dazhai n.a. n.a.

Jiangsu Jigping 29 4.00

Sichuan Jinhe n.a. n.a.

Shaanxi Han Zhong n.ea. n.ea.

Jiangxi Cao Yang n.a. n.a.

Yunnan Raikou 152 n.a.Kunyang 105 n.e.Jinning 281 n.a.Anning a.a. n.a.Chengjaing n.a. n.a.Longshan n.a. n.a.

Hebei Panshan 91 n.e.

Hunan Liyaing n.a. n.ea.

Source: Various international handbooks.

China DepartmentFebruary 1988

- 50 - ANNEX 4.5

CHINA

PHOSPHATE DEVELOPMENT PROJECT

MaJor Pyrite Deposits and Nines In China /a(million tons)

SulfurProvince Mine name Reserves content (Z)

Guangdong Yunfu 206 32.1Yingde 37 23.2

Neimonggol Tanyaokou 72 23.3

Jiangsu Yuntaishan 9 22.8

Hunan Qibaoshan 6 39.6

Liaoning Zhangjiagon 5 22.2

Anhui Xingjiao 36 29.3Xiangshas 129 14.8

Sichuan Chuan Nan n.a. n.a.

Zhejiang Langyou 5 24.0

Shaanxi Yangguan 71 19.0-24.0

Other provinces /a n.a. n.a. nea.

/a There are additional small pyrite mines in several provinces, usuallyassociated with coal mining.

Source: Various international handbooks.

China DepartmentFebruary 1988

ANNEX 4.6

- 51 - Page 1 of 2

CHINA

PHOSPEATE DEVELOPMENT PROJECT

An Outline of the Phosphate Subsector

Investment Optimization Model

A. The Transport Model

1. Objective. The objective is to optimize the transport of rawmaterials, intermediates and final products in meeting the demand for phos-phate fertilizers.

2. A Mathematical Programming Formulation. To find the "cheapest"route between sets of origins and sets of destinations, a linear-programmingmodel was developed, with four major networks--rail, river, ocean and road-representing the transport system.

3. Results. The cheapest mode of transportation is derived from simul-taneous determination of the location size, timing and process of future fer-tilizer plants and importing ports, and distribution patterns.

S. The Industry Model

4. Objective. The objective is to assess alternative locations, sizes,products and distribution patterns associated with investment projects in thesubsector.

5. A Mathematical Programming Model Formulation. A mixed-integerprogramming model was designed to minimize the total costs of investments,production, transportation, and imports such that:

(a) demand for P 05 is satisfied in each province through small-scaleproduction (for SSP, DAP and CMP), production in the modern sectoror imports;

(b) mine and plant production at each location is limited by existingcapacity but can be expanded by new investments;

(c) phosphate rock and pyrites production in each region is limited byavailable domestic reserves;

(d) policies limit the percentage of P205 demand in each province thatcan be satisfied by ce,caln products; and

(e) transport out of certain regions is severely constrained.

6. Results. The desired result is a national optimization giving ateach location:

-52- AMNEX 4.6Page 2 of 2

(a) the production levels of raw materials, intermediates and final fer,tilizer products and the processes employed;

(b) the scale of the mines and production plants;

(c) the investments in the sector under economies of scale;

(d) the shipment patterns of raw materials to plants, of intermediatematerials between plants, and of final products to markets;

(e) the domestic purchase of raw materials, intermediates, labor andmiscellaneous inputs;

(f) the export of products to export regions; and

(g) the import of intermediates to plants and final products to markets.

China DepartmentFebruary 1988

ANNEX 4.7- 53- rage I or 3

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Planned Phosphate Investment Projects to the Year 2000

I. During the Seventh Five-Year Plan (1986-90)

A. Fertilizer Plants

Planned'000 tpy of year of

Project Province Product product (Pq05) completion

Jinchan Gansu SSP 400 (60) Completed

Lucheng Shanxi NP 900 (120) 1987(26:13:0)

Kaifeng Henan NP 150 (20) 1987(26:13:0)

Jinan Shandong NP 150 (20) 1988(26:13:0)

Yicheng Hubei NPK 160 (30) 1992(15:20:15)

Guixi Jiangxi DAP 240 (120) 1990

Tonglin Anhui DAP 160 (80) 1987

; tQinhuangdao Rebei DAP 480 (240)/a 1991

i Dalian Liaoning DAP 240 (120)/a 1989

Nanjing Jiangsu DAP 240 (120)/a 1989

Xuanwei Yunnan DAP 120 (60) 1992

Huangmailing Hubei MAP 180 (60) 1993

Hanghezhou Yunnan DAP 120 (60) -

Zhanjiang Guangdong DAP 60 (30) 1991

Huaxian Shaanxi DAP 60 (30) -

Small-sized MAP/ Various MAP/DAP 1,500 (650) -DAP plants (50) provinces

Dayukou Hubei TSP 560 (200) 1993

Total (1.540)/b

/a Based on imported phosphoric acid.7W Exclusive of imported phosphoric acid.

ANNEX 4.7Page 2 of 3

- 54 -

B. Phosphate Mines

Estimated Planned Productionreserves Mining Rock auality year of ('000 tons/ryear)

Province Name of mine (mln tons) method P 0 M P etion RM Concentrate

Yunnan Jining 110 Open 32 0.4 5.6 n.a. 700 700pit

Guizhou Wengfu 110 Open 29 3.7 1.13 1993 2,500 1,850pit

Hubel Yicheng 1,060 Under- 21 2.6 3.6 n.a. 3,000 1.500ground

Dayukou 90 Open 19 3.9 2.6 1993 1,500 650pit

8uangmailing 110 Open 11 2.3 4.9 1993 1,000 300pit

C. Pyrite Mines

Proposedproduction (000 tons)

Province Mine name Mining method ROM Concentrate

Guangdong Yunfu Open pit 3,000 2,400

Neimounggol /a Tanyaokou Underground 450 190

Hunnan Qibaoshan Underground 250 200

Nelmonggol /b Tanyaokou Underground 1,050 410

/a Expansion.T7- New mine.

ANNEX 4.7Page 3 of 3

- 55-

II. During the Eighth and Ninth Five-Year Plans (1991-2000)

A. Fertilizer Plants

Phosphate fertilizerproduction

Type of fertilizer product (million tpy of PpOc)

Nitrophosphate (NP) 0.5Triple superphosphate (TSP) 2.8Diammonium phosphate (DAP/MAP) 1.7

Total 4.5

B. Phosphate Mines

New capacity Total output la(million tpy) (million tpyT-

Province ROM ore/product ROM ore/product

Yunnan 8.1/6.9 12.4/10.8Guizhou 11.3/9.5 10.8/9.4Hubei 13.9/8.8 15.6/9.6Hunan 0.5/0.3 13./0.8Sichuan 1.5/1.3 3.4/2.9Jiangsu 0.21/0.1 1.0/0.3Hebei 0.41/0.1 1.6/0.5Other provinces -/- 1.5/0.4

Total 35.8/29.0 47.4/34.5

C. Pyrite Mines

New capacity(million tpy) Estimated production

Province crude ore/35Z sulfur (million tpy)

Hebei 0.7/0.3 0.42Shanxi 2.0/1.0 2.07Neimonggol 4.8/2.1 2.45Anhui 4.4/2.0 3.12Guangdong 2.0/1.7 4.54Sichuan 5.0/1.8 2.38Other provinces 2.0/1.0 6.62

Total 20.9/9.9 21.60

/a Including output from existing mines after taking into account depletedmines.

China DepartmentFebruary 1988

ANNEX 5.1- 56 -

CHINA - PHOSPHATE DEVELOPMENT PROJECTOrganization Chart of GPC

A. Existing

General Manages

depty c9ea M | e | Depnty Geeeal Manager aon R||atiooductior A

I Capital I Maknager iConstruction Ad=ni=stration

Deve clopmednt Personne

Pwchaskg 1& Sales

* I Manage~~jrnent

B. After Project Completion

General Manager

Deputy Genrsl Mnagern | Deputy GeneralMana ger Pang & Finance Unon Relations

ProductloL Ad Svics|

Plandg a.Managers uffice_Personnel

H Pibic Relations

seneflcistion C_dWrs_Civil worls

Trarflport _ q Eqipment

IMahntrunc

ANNEX 6.1- 57 - Page I of 2

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Sumary of the Wengfu Mine Development Component

A. Geology

Rock reserves: Over 100 Mt, of which about 90X recoverable by openpit, 56 Mt in 2 initial open pits (Yingpin andMofang), 12 m average thickness of rock layer,4.8 t/t average ratio overburden/ore

Rock quality: 29X P205, 3.7X MgO, 491 CaO average analysis of RONrock

S. Mining

Capacity: 2.5 Mtpy of ore and 12 Ntpy of overburden in 3shifts/day, 6 days/week operation

Sequence of operations: Sequential mining in 2 open pits, first Yingpin for15 years, then Mofang for another 8 years

Mine layout: Open pit equipped with rotary drills, hydraulicexcavators and trucks, primary and secondary crushingat mine site

C. Beneficiation Plant

Capacity: 2.5 Ntpy raw ore feed, 1.8 Mtpy concentrate output

Product specifications: Concentrate, 35% P205, 1.2X KgO

Process: Reverse flotation

D. Concentrate Slurry Pumping

Capacity: 1.8 Mtpy of concentrate, pumped as a slurry with 60Xsolid content

Pipeline: 45 km distance between charge and discharge

- 58 - ANNEX 6.1Page 2 of 2

E. Concentrate Dewatering and Loadins

Location: At Machangping, 45 km southeast of mine

Capecitys 0.9 Mtpy dewatered to -10 moisture for loading intorailcars; 0.9 Mtpy for wet feeding of on-site phos-phoric acid plant

Filtration: Press filters, filtrate water discharged aftertreatment to acceptable standards

F. Infrastructure

Mine site: Workshops and store, equipment service facilities,mine office

Beneficiation site: Workshops and store, laboratory, offices

Dewatering and loadingsite: Workshops, stores, offices

Water supply: From Qingshui river, 20 km west of beneficiationsite, pumping capacity 35,000 m3/d, 600 m differencein elevation

Power supply: 110 kV transmission line connecting with existingsubstation

Social infrastructure: Housing and dormitories, commercial facilities,schools, medical and recreational fscilities.

China DepartmentFebruary 1988

- 59 - ANNEX 6.2

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Scope and Timeframe of the Wengfu TSP Plant

A. Project Description

1. The project is designed to process about 1.2 million tons per year

of phosphate concentrate into high-grade phosphate fertilizer. It comprises

the construction of a triple superphosphate (TSP), plant at Machangping,

Guizhou Province, together with on-site and off-site infrastructure.

B. Project Implementaion

Technical Description: Target Date

Completion of feasibility study Dec. 31, 1988 /aProcess selection and contract awards forforeign engineering of chemical plants Dec. 31, 1989

Commencement of local engineering Oct. 31, 1989Commencement of international procurement Jan. 31, 1990

Site Activities:

Commencement of site preparation Oct. 31, 1989Commencement of equipment installation Jan. 31, 1992Commencement of commissioning Aug. 31, 1993Commencement of commercial production Jan. 31, 1994

Financing Arrangements:

Identification of financing sources forforeign exchange requirement Sep. 30, 1988

/a English version will be delivered to the Bank.

China DepartmentMay 1988

- 60 - ANNEX 6.3

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Summary of the Technical Assistance Component

A. Assistance for Project Management and Mine Workshop Management

1. Internationally experienced consultants w.ll provide advisoryservices to ensure the selection and procurement of appropriate technologiesand equipment, timely identification and resolution of Project implementationproblems, training of Project management team staff, and preparation of staffrecruitment and training programs, with a particular focus on:

(a) project implementation--(i) assistance in technology selection;(ii) advice on the structure of Project teams and execution ofProject implementation for the coordinated commissioning of minesand fertilizer plants; and (iii) counseling on implementation issuesto facilitate timely corrective actions; and

(b) maintenance of mobile mine equipment--(i) review of the design andlayout of workshops; (ii) assistance in the procurement of criticalequipment; (iii) setting-up of a preventive maintenance system;(iv) review of the staff recruitment and training programs; and(v) monitoring of project implementation.

S. Strengthening of CPI's Development Planning Capacity

2. This component consists of:

(a) providing computer equipment and software;

(b) installing, maintaining and further developing of the phosphatesubsector investment optimization model at CPI;

(c) providing domestic training by internationally experienced consult-ants for CPI/MCI's staff in investment planning and computer pro-gramming for the investment optimization model; and

(d) providing overseas training of key staff.

China Departmentmay 1988

- 61 - ANNEX 6.4

CHINA

PHOSPHATE DEVELOPMENT PROJECT

CPI's Work program Under Technical Assistance

Activity Target Date

1. Purchase and installation of hardwareand software Nov. 30, 1988

2. Transfer the Bank's expertise on thePhosphate Subsector Planning Model

a. The Bank will complete documentationof the model and scenario runs for CPI Jun. 30, 1988

b. Training of CPI staff at the Bank Sep./Oct. 1988

3. Strengthen CPI's capacity to apply themodel work to other subsectors

a. Training of CPI staff at CPI by consul-tants on: (i) formulating optimiza-tion models with CAMS for subsectorplanning; and (ii) analysis andapplication of model results. Mar./Apr. 1989

b. Training of CPI's staff for further work on theanalysis, development and applica-tion of modelling. Topics wouldconsist of: (i) operations research;(ii) industrial planning models;(iii) economic and financial analysis;and (iv) management information systemsand data base management Jun.1989-

Jun.1990

CHINA: PHOSPHATE DEVELOPMENT PROJECTOrganization Chart of MCra Project

Coordination Unit

World Bank Project. Implementation Coordnation

Group

. Deputy Minister of Finance

Project General Manager

Chief World Bank LoanOffice

IVice General Manager

Deputy Director. _N_CC_ I 0

Project Officer ]Design Technolooy Construction Procurement Transportation Financing a Cost

Coordinator Coordinator Coordinator Coordinator Coordinator Coordinator Coordinator

*W41305D

- 63 - ANNEX 7.2

CHINAPHOSPHATE DEVELOPMENT PROJECT

Organtzaflon Char of GPC Project Management Team

CIMI

H MnelenI I M O IFi Mc

Monoeragerv

Wodd Baric-41936

- 64 - ANNEX 7.3Page 1 of 2

_ I 1}

iS m-

._ _ _ _ _ _ _ _

(A__ _-

34~~~~~~~~1

ANNEX 7.3Page 2 of 2

- 65 -

CHINA

PHOSPHATE DEVELOPOMENT PROJECT

Key Milestones for Project Implementation

Milestone Target Date

A. Wengfu Mine Development Component

Major Process Related Activities:Slurry pumping and filtration test Mar. 1988Feasibility study for Wengfu TSP plant Apr. 1988Commencement of basic engineering Mar. 1988Completion of basic engineering Aug. 1988Commencement of detailed engineering Sept. 1988Completion of international procurement Jun. 1989Commencement of international procurement Oct. 1988Completion of international procurement Jun. 1990

Site Activities:Commencement of site preparation Jul. 1988Completion of civil work Jun. 1991Commencement of equipment installation Jul. 1990Mechanical completion Dec. 1991Completion of commissioning Jun. 1992Commencement of commercial production Jan. 1993

B. Technical Assistance Component

Consultant Services for Project Implementation:Commencement Jul. 1988Completion Dec. 1992

Consultant Services for Mine EngineeringSelection 2 Maintenance:

Commencement Apr. 1989Completion Dec. 1992

Subsector Planning Support:Commencement Jul. 1988Completion Dec. 1989

Hazard and Operability Seminar Early 1989

China DepartmentApril 1988

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Environmental Protection and Standards

StandardsProject Hazard Measures taken Banksubcomponent or pollutant under project Local guidelines

Open-pit mines Overburden dumps Concentrated in few Must be safe, appropri-areas next to mine, no ate location to beinterference with other selectedinstallations

Beneficiation plants Tailings Pumped into safe ponds Same as overburden dumps 0on wasteland away frommine and other installa-tions

Waste water (from Wengfu Treated to Chinese stan- Solids-100 mg/l 100 mg/lfilter presses) dards for petroleum and BOD-60 mg/lchemical industries COD-200 mg/l

China DepartmentApril 1988

ANNEX 8.1

- 67-

CHINA

PHOSPHATE DEVTELOPMENT PROJECT

Capital Cost Estimates

Local Foreign Total Local Foreign Total-- US$ million -Y million

Phosphate DevelopmentLicense fees 0.0 0.0 0.0 0.0 0.0 0.0Engineering 3.8 0.2 4.0 14.1 0.7 14.8Equipment & materials 19.7 42.6 62.3 73.4 158.4 231.8Spare parts 1.4 4.2 5.6 5.1 15.8 20.9Freight & insurance 1.7 3.3 5.0 6.3 12.1 18.4Civils & erection 70.8 0.0 70.8 263.3 0.0 263.3Project management 12.1 1.0 13.1 44.9 3.9 48.8Training 0.4 0.3 0.7 1.6 1.0 2.6

Base Cost (January 1988) 109.9 51.6 161.5 408.7 191.9 600.6

Physical contingencies 11.0 5.2 16.2 40.9 19.2 60.1Price contingencies 12.8 5.7 18.5 111.7 50.8 162.5

Installed Cost 133.7 62.5 196.2 561.3 261.9 823.2

Incremental working capital 4.6 0.0 4.6 20.4 0.0 20.4Interest during construction /a 9.4 11.0 20.4 40.1 46.4 86.5

Subtotal (A) 147.7 73.5 221.2 621.8 308.3 930.1

Technical AssistanceProject mgmt. & mine maintenance - 0.2 0.2 - 0.7 0.7CPI program - 0.4 0.4 - 1.5 1.5

Subtotal (B) - 0.6 0.6 - 2.2 2.2

Total Financing Required (A+B) 147.7 74.1 221.8 621.8 310.5 932.3

/a Commitment fees are included.

China DepartmentMay 1988

ANNEX 8.2

- 68 -

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Estimated Disbursement Schedule for Bank Loan

DisbursementSemester Annual Cumulative Annual Cumulative

Year (FY) ending - (US$ million)- - (% of total) -

1989 Dec 31, 1988 0.3 0.3 0.5 0.5

Jun 30, 1989 0.9 1.2 1.2 1.9

1990 Dec 31, 1989 1.9 3.1 3.0 5.0

Jun 30, 1990 6.3 9.4 10.0 15.0

1991 Dec 31, 1990 10.7 20.1 17.0 32.0

Jun 30, 1991 14.4 34.5 23.0 55.0

1992 Dec 31, 1991 16.9 51.4 27.0 82.0

Jun 30, 1992 6.9 58.3 11.0 93.0

1993 Dec 31, 1992 2.5 60.8 4.0 97.0

Jun 30, 1993 1.9 62.7 3.0 100.0

China DepartmentMay 1988

ANNEX 9.1

- 69- Page 1

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Assumptions Underlying the Financial Analysis

A. General

1. The financial projections were carried out in current yuan usingprojected domestic inflation rates for local inputs and outputs and interna-tional inflation rates for imported inputs as follows: annual domesticinflation rates--8.OZ for 1988, 7.0% for 1989, and 6.5% thereafter; and annualinternational inflation rates--3.0Z for 1988-90, and 4.0% thereafter. The keyassumptions for financial projections were based on the actual annual perform-ance of companies under Chinese regulations. To provide an overall view ofthe companies' financial performance in accordance with conventional account-ing concepts based on international accounting standards, the followingacjustments were made to the Chinese accounting system: (a) the two sets offinancial statements-production operations and capital construction wereconsolidated; (b) the accounts in the income statements and balance sheetswere reclassified as necessary in accordance with conventional concepts; and(c) the sources and applications of funds statements that do not exist underthe current Chinese accounting system were prepared. For financial rate ofreturn (FRR) calculations, cost and benefit streams in constant yuan wereused. The capacity utilization is assumed at 50% of the design capacity (1.85million tpy of phosphate concentrate) in the first year of operation, 65% inthe second year, 90% in the third year and 95% thereafter. A summary ofproduction costs per ton of product at full capacity is given in Table 1 ofthis Annex.

B. Income Statements

2. Sales Revenue. Sales prices are assumed to be maintained at levelsindicated by MCI and SPB as the expected sales prices for project output--Y 115/ton for phosphate concentrate. Net sales revenue were calculatea afterdeducting the product tax. During Project implementation, GPC will not paythe product taxes under special arrangements; product tax rate for phosphateconcentrate is currently 5%.

3. Variable Production Costs. Annual consumption of i-nputs wasobtained frum the estimated material balance and estimated production levelsafter the commissioning on the mine and the beneficiation plant with andwithout the Project. The materials balance is given in Project FileRef. No. 2.

4. Depreciation. Fixed assets were depreciated using the straight-linemethod at rates agreed on between GPC and its supervisory authorities asfollows: over 20 years for equipment and over 30 years for civils. Inaddition, a mining maintenance fee of Y 7/ton of ore is charged.

ANNEX 9.1Page 2

- 70 -

5. Maintenance Costs. In the Chinese accounting system, maintenancecosts are divided into two categories--annual overhaul and other. Provisionsfor annual overhaul are provided as a percentage of the original acquisitionvalue of the fixed assets and are managed separately within the special fundaccount. Other maintenance costs were covered as operating expenses. Therate of provision for annual overhaul is 6X.

6. Interest Expenses. Interest on foreign exchange-denominated loanswere converted into local currency usini projected foreign exchange rates,assumed to be adjusted to preserve the relative currency values between thetwo currencies.

7. Taxes. Taxable income is derived from net profits after deductingthe amortization of long-term loans, and is taxed at a uniform rate of 55%.CPC will not pay income and adjustment taxes on profits during Projectimplementation and the repayment period of the Bank loan.

C. Balance Sheets

8. Fixed Assets. Fixed assets are shown at historical costs.

9. Equity* The following two items are considered as "equity," giventheir equity nature": (a) enterprise fixed funds allocated from internallygenerated funds; and (b) net special funds (special fund assets minus specialloans) retained by enterprises.

D. Funds Flow Statements

10. Depreciation Fund. The current Covernment policy allows companiesto retain 100X of the fund.

11. Expenditures from Special Funds. Provisions for annual overhaulwere used to cover annual overhaul expenses. Annually, 15% of the retaineddepreciation fund and profits are paid to the Energy Conservation Fund. GPCwill be exempt from this contribution during Project implementation. Aportion of internally generated funds (in the special fund account) is usedfor: (a) production technology development; (b) improvement of workers'living condition; (c) cash bonuses; and (d) new product test fund. Thebalance is accumulated within the company as reserve funds.

China DepartmentApril 1988

ANE 9.1

- 71 - Table 1

CHINA

PHOSPHATE DEVELOPMENT PROJECT

GPC - Unit Product Cost at 95X Capacity /a(1988 yuanslton of phosphate concentrate)

Yuans Z

Variable CostDiesel oil 2.81 4.2Electricity 1.58 2.4Flotation agents 2.63 4.0Sulphuric acid 2.46 3.7Explosives 1.75 2.6Tyres 4.09 6.2Other 8.71 13.1

Total variable cost 24.04 36.2

Fixed CostLabor 1.35 2.0Maintenance 10.12 15.2Administration 2.81 4.2Depreciation 24.08 37.2Other 3.39 5.2

Total fixed cost 42.34 63.8

Total Cost 66.38 100.0

/a Production cost is exclusive of interest expenses and product taxes.

CHINA

PHOSPHATE DEVELOPMENT PROJECT

GPC - A Summary of Income Statements(In current yuan millions)

1993 1994 1995 1996 1997 1998 1999 2000

Gross Sales Revenue 76.7 212.3 313.0 351.9 374.7 399.1 425.0 452.7

Leas: Production tax 3.8 10.6 15.7 17.6 18.7 20.0 21.3 22.6Variable cost 15.6 43.2 63.7 71.6 76.2 81.2 86.5 92.1Fixed costs 66.8 76.1 83.0 86.6 89.5 92.5 95.8 99.3Administrative expenses 7.0 7.4 7.9 8.4 9.0 9.5 10.2 10.8

Operating Income (16.5) 74.9 142.7 167.7 181.3 195.9 211.4 227.9

Less: Non-operating expenses 0.5 0.8 1.1 1.2 1.2 1.3 1.4 1.5Financial charges 45.4 45.0 44.0 42.3 40.2 37.8 35.3 32.7

Net Income Before Tax (62.5) 29.1 97.7 124.2 139.9 156.8 174.6 193.7

Less: Loan amortization 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7Taxes & other remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Reserved Profits (115.6) (25.1) 42.4 67.5 81.8 96.9 112.9 130.0

RatiosCapacity utilization (%) 50%/a 65% 90% 95% 95% 95% 95% 95%Net profit/gross sales (%) - 13.7 31.2 35.3 37.3 39.3 41.1 42.8Operating income/averageassets in service (Z) -1.8 8.4 16.6 20.3 23.1 26.2 29.9 34.2

/a Half of this year's production will be used to build up initial inventories.

China DepartmentMay 1988

CHDA

FUOSPUATE D8VBLOPMKET PROJECT

GPC - A S ar_y of Funds Flow Statements(In current yuan millions)

- Actual- Projected-1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Sources of Funds

Funds from operations:Retained profits - - - 0.0 0.0 0*0 0.0 0.0 (115.6) (25.1) 42.4 67.5 81.8 96.9 112.9 130.0Depreciation & amortleation - - - 0.0 0.0 0.0 0.0 0.0 30.2 37.2 41.6 42.5 42.5 42.5 42.5 42.5Interest expenses - - - 0.0 0.0 0.0 0.0 0.0 45.4 45.0 44.0 42.3 40.2 37.8 35.3 32.7Other adjustments - - - 0.0 0.0 0.0 0.0 0.0 55.5 56.8 58.2 59.7 61.4 63.3 65.3 67.6

Internal cash generation - - - 0.0 0.0 0.0 0.0 0.0 15.7 114.0 186.1 212.0 225.8 240.4 256.1 272.7

Funds from outside sourcestWorld Bank loan - - - 2.3 16.3 88.4 126.4 28.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 L.Domestic long-term loan 1.5 0.3 0.3 25.7 69.1 136.9 204.9 211.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Domestic short-tern loan - - - 0.0 0.0 0.0 0.0 0.0 118.0 14.4 9.6 0.6 0.7 0.7 0.8 0.8

Total Outside Sources 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 111.8 14.4 9.6 0.6 0.7 0.7 0.8 0.8

Total Sources of Funds 1.5 0.3. 0.3 28.0 85.5 225.3 331.3 239.7 127.4 128.3 195.7 212.6 226.4 241.1 256.8 273.5

Applications of Funds

Investment in fixed assets 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Principal repayment of long-term loans - - - 0.0 0.0 0.0 0.0 0.0 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7Repayment of short-term loan - - - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30.5 30.5 30.5 0.0 0.0 0.0Interest expenses - - - 0.0 0.0 0.0 0.0 0.0 45.5 45.0 44.0 42.3 40.2 37.8 35.3 32.7Increase in working capital - - - 0.0 0.0 0.0 0.0 0.0 20.4 14.4 9.6 0.6 0.7 0.7 0.8 0.8Special fund expenditure - - - 0.0 0.0 0.0 0.0 0.0 6.5 6.9 7.4 7.8 8.3 8.9 9.5 10.1

Total Applications of Funds 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 125.4 120.4 146.7 137.9 137.8 107.2 107.2 107.3

Increase In Cash - - - 0.0 0.0 0.0 0.0 0.0 2.0 7.9 49.0 74.7 88.7 133.9 149.6 166.2

Ratios

Debt service coverage (times) - - - - - - - - 0.2 1.1 1.4 1.6 1.8 2.5 2.6 2.8 D

China DepartnentMay 1988

ANDl 9.4

CHINA

PEOSPRATE DEVLPENT PROJECT

GPC - A S ry of BDlance Sheets(In current yuan millions)

- Actual- Projected1985 1986 1987 1988 1989 1990 1991 1"2 1993 1994 1995 1996 1997 1998 199 2000

Current assetesCash - - - 0.0 0.0 0.0 0.0 0.0 2.0 9.9 58.9 133.6 222.2 356.1 505.7 671.9Inventories - - - 0.0 0.0 0.0 0.0 0.0 20.5 31.9 40.6 44.7 47.6 50.7 54.0 57.5Accounts receivable - - - 0.0 0.0 0.0 0.0 0.0 3.2 8.7 12.9 14.5 15.4 16.4 17.5 18.6

Total Current Assete - - - 0.0 0.0 0.0 0.0 0.0 25.6 50.5 112.4 192.7 285.2 423.2 517.2 748.0

Fixed aesets:Net fixed assets - - - 0.0 0.0 0.0 0.0 0.0 889.0 851.8 810.2 767.7 725.3 682.8 640.3 597.9Work In progress 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total nied Assets 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 889.0 851.8 810.2 767.7 725.3 682.8 640.3 597.9

Special assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.5 6.9 7.4 7.8 8.3 8.9 9.5 10.1

Total Assets 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 921.1 909.2 9292.9 968.3 1.018.8 1.114.9 1.227.0 1.356.0 1

Current liabilities: >Accounts payable - - - 0.0 0.0 0.0 0.0 0.0 0.6 1.8 2.6 2.9 3.1 3.3 3.6 3.8Other payables - - - 0.0 0.0 0.0 0.0 0.0 2.9 3.1 3.3 3.5 3.7 3.9 4.2 4.5Short-term loan - - - 0.0 0.0 0.0 0.0 0.0 I11.8 126.1 105.2 75.4 45.6 46.3 47.1 47.9Current portion of long-ters loans - - - 0.0 0.0 0.0 0.0 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7 65.9

Total Current Liabilities - - - 0.0 0.0 0.0 0.0 53.1 169.4 186.3 167.8 140.0 112.3 115.3 118.6 122.1

Long-term LiabilitiestWorld Bank lon - - - 2.3 18.6 107.7 237.2 261.6 257.1 251.4 244.3 235.5 224.8 212.1 197.1 179.6PCB A government loans 2.8 3.1 3.3 25.7 94.8 231.7 436.6 604.6 561.4 518.2 475.0 431.8 388.6 345.5 302.3 259.1

Total Long-term Liabilities 2.8 3.1 3.3 28.0 113.4 339.4 673.7 866.1 818.5 769.6 719.3 66.38 613.5 557.6 49.4 438.7

Equity:Enterprise fixed funds - - - 0.0 0.0 0.0 0.0 0.0 53.1 107.2 162.6 219.2 277.4 337.2 398.9 462.6Special fund reserves - - - 0.0 0.0 0.0 0.0 0.0 (119.9) (154.0) (119.7) (58.3) 15.7 104.8 210.1 332.5

Total Equitv _ _ - 0.0 0.0 0.0 0.0 0.0 (66.8) (46.8) 42.8 161.0 293.0 442.0 609.0 795.2

Total Libilities and Equity 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 921.1 909.2 929.9 968.3 1.018.8 1-114.9 1,227.0 1.356.0

ItatiostCurrent ratio (times) - - - 0.0 - - - - 0.2 0.3 0.7 1.4 2.5 3.7 4.9 6.1Long-term debt/equity - - - 100:0 100:0 100:0 100*0 100:0 100:0 100:0 94:6 81s:9 68s32 56:44 45:55 36:64

. .. D~~~~~~~~..

- 75 - ANNEX 9.5

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Incremental Cost and Revenue Streams for FRR Calculations(millions of 1988 yuan)

Capital Working Production Sales Net cashcosts capital costs revenue flow

1988 23.7 - - - (23.7)1989 72.2 - - - ;72.2)1990 178.3 - - - (178.3)1991 238.5 - - - (238.5)1992 147.7 - - - (147.7)1993 - 14.2 41.0 53.2 (2.0)1994 - 9.4 58.3 138.3 70.61995 - 5.9 69.1 191.5 116.51996 - 1.2 71.3 202.1 129.61997 - - 71.3 202.1 130.81998 - - 71.3 202.1 130.81999 - - 71.3 202.1 130.82000 - - 71.3 202.1 130.82001 - - 71.3 202.1 130.82002 - - 71.3 202.1 130.82003 - - 71.3 202.1 130.82004 - - 71.3 202.1 130.82005 -- - 71.3 202.1 130.82006 - - 71.3 202.1 130.82007 - - 71.3 202.1 130.82008 - - 71.3 202.1 130.82009 - - 71.3 202.1 130.82010 - - 71.3 202.1 130.82011 - - 71.3 202.1 130.82012 - (30.7) 71.3 202.1 161.5

Return on Investment = 12.4%

China DepartmentApril 1988

- 76 - ANNEX 10.1Page 1 ofF3

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Assumptions Underlying the Economic Analysis

A. General

1. The economic rates of return (ERRs) were calculated on anincremental basis. Prices were expressed in constant January 1988 USdollars. The economic life of the plant was assumed to be 20 years.The following conversion factors, which were provided by Bank economicwork, were applied to the financial prices of nontradeable goods andservices to derive their economic prices:

Nontradeable items Conversion factor

Unskilled labor 0.25Technical labor 4.00Managerial/administrative labor 1.00Electricity 1.50Local machinery 1.34Construction 1.08

B. Capital Cost

2. The economic capital cost expressed in January 1988 prices wasobtained from the financial base capital cost after: (a) deducting theduties and taxes on equipment and other items; (b) deducting the costsof those spare parts that are to be included in the operating costs; and(c) applying conversion factors to nontradeable goods and services foreconomic valuation.

C. Working Capital

3. Incremental economic working capital requirements were derivedby comparing goods and services employed in production with and withoutthe Project.

D. Economic Benefits

4. Economic benefits of the Project come mainly from the production ofphosphate concentrate. The economic prices of phosphate corcentrate werederived from its latest projected international prices, taking into accountmarine freight from the origin of export to China ports, unloading and porthandling charges, and inland rail freight to plant sites. Marine freight,estimated from the latest statistics, was assumed to change in line with

ANNEX 10.1- 77 - Page 2 of 3

international energy costs. The projections of the economic prices forphosphate concentrate are given in Table 1 of this Annex. The import parityprice of phosphate concentrate is based on the imported price from Morroco,adjusted for marine transport costs.

5. Savings in transportation costs are attributed mainly to the reduc-tion of transportation volume because of the higher nutrient content of MAPand TSP. Potential savings in terms of transportation distances were notconsidered because of difficulties in measuring them.

E. Operating Costs

6. Tradeable Raw Materials. The economic cost of exportable inputs wasderived by adding to the netback prices, from exports at the production sites,the inland transportation costs between the production and the plant sites.The netback value of inputs at the production sites wa;. calculated by deduct-ing inland freight between the sites and exporting ports from the FOB exportprices. The economic cost of importable inputs was based on their projectedinternational prices plus marine freight from the origin of export to ports inChina, plus inland freight to the plant sites. The economic values of dieseloil, the only major tradeable input during the operation stage, are also givenin Table ' of this Annex. Since China is an importer of diesel oil, theeconomic value of diesel oil was derived from the import price from Singapore.plus transportation costs to the plant sites after adjusting for ocean lossesand insurance.

7. Other Nontradeable Items. The economic value of nontradeable inputswas based on their long-term marginal production costs plus inland transporta-tion costs adjusted by specific conversion factors. The economic costs oflocally purchased chemicals, and bagging materials, were derived from theirfinancial costs by applying specific conversion factors.

8. Fixed Costs. The economic costs of various fixed cost items,including labor, maintenance and general selling and administrative costs,were based on financial costs adjusted by specific conversion factors.

China DepartmentApril 1988

ANNEX 10.1- 78 - Table 1

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Economic Prices of Tradeable Inputs and Output for Economic Analysis(1988 US$/ton of product)

Economic Price of Phosphate Concentrate1993 1995 1997 1999 2001

FOB price (Morocco) 40.8 44.5 46.1 47.7 48.4Marine freight to Shanghai 23.5 25.9 28.5 31.4 33.0Add: T-ansport from port to markets 7.0 7.0 7.0 7.0 7.0Less: Transport from marketsto project 11.0 11.0 11.0 11.0 11.0

Economic price at Wengfu 60.3 66.4 70.6 75.1 77.4

Economic Price of Diesel Oil1993 1995 1997 1999 2001

FOB price (Singapore) 169.6 173.0 176.5 180.0 183.6Marine freight to Shanghai 12.7 14.0 15.4 17.0 17.8Ocean loss & Insurance 1.3 1.3 1.3 1.4 1.4Inland transportation 12.8 12.8 12.8 12.8 12.8

Economic price at Wengfu 196.4 201.1 206.0 211.2 215.6

China DepartmentApril 1988

ANNEX 10.2- 79-__

CHINA

PHOSPHATE DEVELOPMENT PROJECT

Incremental Cost and Benefit Streams for ERR Calculations(1988 US$ million)

Capital Working Production Fales Net cashcosts capital costs revenue flow

1988 7.7 - - - (7.7)

1989 22.8 - - - (22.8)1990 54.1 - - - (54.1)

1991 72.7 - - - (72.7)1992 47.2 - - - (47.2)

1993 - 4.8 13.2 27.9 9.9

1994 - 1.9 18.3 76.2 56.01995 - 1.2 21.5 110.5 87.81996 - 0.3 22.1 120.3 97.91997 - - 22.1 124.1 102.01998 - - 22.2 128.0 105.81999 - - 22.2 132.0 109.82000 - - 22.2 136.0 113.82001 - - 22.2 136.0 113.82002 - - 22.3 136.0 113.7

2003 - - 22.3 136.0 113.72004 - - 22.3 136.0 113.72005 - - 22.3 136.0 113.72006 - - 22.4 136.0 113.6

2007 - - 22.4 136.0 113.62008 - - 22.4 136.0 113.62009 - - 22.4 136.0 113.62010 - - 22.4 136.0 113.62011 - - 22.4 136.0 113.62012 - (8.2) 22.5 136.0 121.7

Return on investment - 26.0%

China DepartmentApril 1988

CRDIA

PBOSPUATE DEVULOPWUT PROJECT

Net SaVinhs of PoreisR lachange Over Project llfe(18 WSllton)

1988 1989 1"90 199l 1992 1993 1994 1995 1996 1997 1998 1999 2000-12 Total

A. In 1988 US Dollar.

Inflows:World Bank loan 0.8 3.9 19.6 26.2 5.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1IWport subetitution of fertilizers 0.0 0.0 0.0 0.0 0.0 27.9 76.1 110.5 120.3 124.1 128.0 132.0 1,768.5 2,487.4

Total Inflows 0.8 3.9 19.6 26.2 5.6 27.9 76.1 110.5 120.3 124.1 128.0 132.0 1.768.5 2.543.5

Outflove:Foreign capital ewpenditure 0.8 3.9 19.6 26.2 5.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1Interest during conatruction andco Dtaent fee on World Bank loan 0.5 0.6 1.5 3.0 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.6

Interest paymente on World BDank loan 0.0 0.0 0.0 0.0 0.0 4.1 3.7 3.5 3.2 2.9 2.6 2.3 8.7 31.0World lank loan repayments C.0 0.0 0.0 0.0 0.0 1.8 1.9 2.0 2.0 2.1 2.2 2.3 22.6 36.9Raw material imports 0.0 0.0 0.0 0.0 0.0 1.6 4.3 5.9 6.3 6.3 6.3 6.3 84.4 121.4

Total Outflows 1.3 4.5 21.1 29.2 9.6 7.5 9.9 11.4 11.5 11.3 11.1 10.9 115.7 255.0

Net savings (0.5) (0.6) (1.5) (3.0) (4.0) 20.4 66.2 99.1 108.8 112.8 116.9 121.1 1,652.8 2,288.5

Cuultive Net Savins <O.S) (1.1) (2.6) (5.6) (9.6) 10.8 77.0 176.1 284.9 397.7 514.6 635.7 2.288.5

S. In Current U8 Dollars

Inflov :World Sank loan 0.8 4.1 21.5 29.8 6.5 0.0 0.0 0*0 0.0 0.0 0.0 0.0 0.0 62.7Import subatitutlon of fertilisers 0.0 0.0 0.0 0.0 0.0 34.2 97.3 146.9 166.3 178.4 191.4 205.4 3,475.3 4,495.3

Total Inflowk 0.6 4.1 21.5 29.8 7.3 34.2 97.3 146.9 166.3 178.4 191.4 205.4 3.475.3 4558.0

OutflowstFore gn capital eapenditure 0.8 4.1 21.5 29.8 6.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 62.7Interest during construction and

cousituent fee on World Bank loan 0.5 0.1 1.5 3.5 4.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.0Interest payment on World Bank loan 0.0 0.0 0.0 0.0 0.0 5.0 4.8 4.6 4.4 4.1 3.9 3.6 15.4 45.8World lank loan repayments 0.0 0.0 0.0 0.0 0.0 2.2 2.4 2.6 2.8 3.1 3.3 3.6 42.7 62.7Raw material ievorts 0.0 0.0 0.0 0.0 0.0 1.9 5.4 7.9 8.7 9.0 9.4 10.0 166.0 218.3

Total Outflows 1.3 4.8 23.0 33.3 11.3 9.1 12.6 15.1 15.9 16.2 16.6 17.2 224.1 400.5

Net aaving (0.5) (0.1) (1.5) (3.5) (4.8) 25.1 84.7 131.8 150.4 162.2 174.8 188.3 3,251.2 4,157.5

Cumulative Oet 8avings t0*5 (1.2) (2.7) (6.2) (11.0) 14.1 98.8 230.6 381.0 543.2 118.0 906.3 4,157.5

Chins DepartmentNoy 1988

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APRIL 1988