Document of

The World Bank

FOR OFFICIAL USE ONLY

AM Rt(.P04Report No. 6707-PAK(

STAFF APPRAISAL REPORT

PAKISTAN

CEMENT INDUSTRY MODERNIZATION PROJECT

September 30, 1987

Industry, Trade and Finance DivisionCountry Department IEurope, Middle East and North Africa Regional Office

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

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CURRENCY EQUIVALFNTS(as of April 19R7)

Currency lUnit - Pakistani Rupees (PRs)

US$1 PRs 17.3PRs I m USSOM0578PRs 1,000 a 1SS57.80

FISCAL YEAR

July 1 to June 30

WFIGHTS AND MEASURES

1 metric ton (ton) - 1,000 kilograms (kg) 2,204 pounds1 kilometer (km) = 1,000 meters - 0.621 mile1 meter (mn) 1.0936 yards = 39.37 inchesI cubic meter (m3) " 35.31 cubic feet G 264 US gallons1 square meter (mz) - 1.19% square vards m 10.76 square feet1 MVA 1,000 kVAI MW - 1,n0O kWI kcal 1,000 cal o 0.2519 8TUs

ABBREVIATIONS AND ACRONYMS TISED

ACC - Associated Cement CompanyBEL - Bankers Equity LimitedBIM - Board of Industrial ManagementBMR - Balancing, Modernization and RehabilitatlonCembureau - Association of Furopean Cement ManufacturersCDWP - Central )evelopment Working PartyC&V - Cost and FreightCIF - Cost Insurance and FreightCRt - Cement Research InstituteDRC - Domestic Resource CostEAC - Experts Advisory CellEC - Engineering ConsultantECNEC - Executive Committee for the National Economic CouncilFOB - Free on BoardFOR _ tree on RailGIP - Gross Domestic ProductGNP - Gross National ProductGovernment (GOP) - Government of PakistanHMC - Heavy Mechanical ComplexICf - International Competitive RiddingICP - Investment Corporation of PakistanTDBP - Industrial Developmen. Bank of PakistanLCB - Local Competitive BiddingLIB - Limited International BiddingMD - Managing DirectorMIS - Management Information SystemsMOP - Ministry of Production

mtpy - million tons per yearNDFC - National Development vinance CorporationNWFP - Ncrthwest Frontier ProvinceOPC - Ordinary Portland CementPTC - Pak'stan Insurance CorporationPIDC - Pakistan Industrial Development CorporationPIDE - Pakistan Institute of Development EconomicsPSC - Portland Slag CementPSM - Pakistan Steel MillsSCCP - State Cement Corporation of PakistanSOE - Statement of ExpensesSRC - Sulphur Resistant CementTOR - Terms of Referencetpd - tons per daytpy - tons per year

FOR OMCIAL USE ONLY

PAKISTAN - CEMTNT ITnUSTRY MOD8,RNTZATTON PROJECT

TAILF. OF CONTg.sS

Page No.

LOAN ANM PROJECT SITMMARY ,eeo,se soeee*.e,..e,.,o..eoeee,e, I - i

1.* )NTROnTMCTION *eo.*ee**..§oe*eo*.*.eve*....o..o.oeo,,,,e.*.* 1

II. THE PAYISTAN CEMFNT I)UISTRY *..,.e,,.ee......,.,...,,.. I

A. Ristorlcal Development e...... ....... .o.....*.... IR. Present Structure of thte Industry .... 3C. Costs and Economic Viability .......... ,e.,...e , .

D. Subsectoral Issues: .. *.*...**........ .... ...... e * 71. Pricing and Decontrol 7.....................,....... 72. Import Policy and Tariffs .................. o...... 93. Modernization and Technological Improvement in*.** tO

E. Role of the Bank Croup ........................... .f.... 12

ITT. TRE PAKISTAN CEMENT MAPKV.'r ,..,..,.................... 13

A. General 13B. Consumption and Production ..... ........... ,.. 13C. Supply and Demand Projections 16D. Marketing and Distribution .f 19E. Cement Pricing ........ **v*e*vo§*J** 21

TV4. TR, COMPANV ............................................... 21

A. Ristorical nevelopment of SCCP...., 21R. Corporate Structure and Management Performance 22C. Corporate Strategy and Restructuring Program 25

VI THF. PROJE,CT .........*@aX¢vv*o***^v*v* 26V. TU .2

A. Project Objectives .................... 26B. Project Description 27C. Proiect Management and Implementation....................o 29D. Pollution Control ...... ............ . . . 32

VI. CAPITAL COST, FINANCING PLAN AND PROCURFMENT ................. 32

A. Capital Coat ............ *..... 32

B. Vtnancing Plan ................ . . o, . 34C. Relendlng and Onlending Atrangements .............. *...... 35B. Procurement ............ .f 35

This report was prepared by Messrs. Mogens Wog, Hiran Rerat and Rov Pepperof the IMENA Technical nepartment and Usman Qamar of the Resident Missionin Pakistan.

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

TABLE OF CONTENTS (contd.) Pae No.

E. Allocation of the Loan and Disbursement Procedures ....... 37P. Status of Project ........... ,.............,,,....,. 38

VII. FINANCIAL ANALYSIS ...... ........................... .... 38

A. Methodology ***e........ .o ... ,................. 38B. Assumptions Used and Forecast of Production Costs ........ 39C. Financial Projections 40n. Financial Rate of Return .................. *.,.......... 44E. Financial Covenants, Auditing and Reporting Requirements . 45

VIII. ECONOMIC ANALYSIS ...................... ............ **..... 45

A. Assumptions Used . ...... ..... .......... ..... * 45A. Economlc Rate of Return 46C. )Other Benefits ............... ^.....,.....,.....,. 46

IX. AGREEMENTS ........................................ ....... 48

ANNEXES

2-1 List of Proposed Private Cement Plants 502-2 Details of Operating Cement Plants and Plants under

Construction .. e4***ee*vX*e***** 512-3 Number of Cement Plants and Kilns by Zone and Plant Size 532-4 Nominal Protection, Effective Protection and Domestic

'Resource Cost 542-5 SCCP Manufacturing Cost 1985/86 . ................... 63

3-1 Zone-wise Historical Cement Consumption 1976/77-1985/86 .... 643-2 Zone-wise Projected Cement Capacity 1986-96 ........ ........ 663-3 Projections of Cement Supply and Demand, 1985/86-1995/96 723-4 Projected Cement Demand 1983/86-1995/96 .................... 763-5 Zone-wise Forecast Cement Supply/Demand 1985/86-1995/96 .o.. 773-6 Cement Prices bv Major Cities: Pre-decontrol and 'Recent

Trends . 783-7 F.x-factory and Retention Prices, Excise Duty and

Surcharge, 1976-1986 ........... ........ ,,.,. G.. 79

4-1 SCCP Organization Chart 804-2 Equity (hwnership of SCCP Companies ......................... 814-3 Organization Chart for Zeal Pak Cement Company ... e.... 824-4 TOR: Development and Implementation of a Corporate Strategy 83

5-1 Project Description: Wah Component .................... 0** 0 895-2 Project Description: 'AMR Component ........................ 935-3 Implementation Schedule: Wah Compcnent 965-4 Implementation Schedule: BMR Component .,.......e...... 97

TARtF. ̂F CONTVNTS (contd.) PaLe No.

6-1 ACC - Wah Total Project Cost ........................... 9.6-2 SCCP - Total Proiect Cosr for the RBR Component ***06,*009*, 906-3 LCB Packages for Wah and BMR Components a 1006-4 1.stimated 'Disbursement Schedule ....... @................. 10l

7-1 Maln Assumptions TTsed in the 'Pinancial Analysis **....o..**. 1027-2 Production Cost Analysis (Wah) ..................... 1057-3 Summarized Historical Financial Statements (SCCP, ACC) ..... 1067-4 Consolidated Financial Statements with Project

(ACC and SCCP) .o..*..*..o....e,...oeoeee.o.e 1077-5 Financial Performantce of Plants under Component B (BMR) .... 1137-6 Wah Component - Financial Rate of Return Analysis ...... 119

8 Wah Component - Economic Rate of 'eturn At.alysis 120.......... 1

9 Selected Documents and Data Available in The Project Vile .. 121

MAP

TRRD 20235 - Reglonal Distribution of Cement Production andConsumption in 1985/t6 and 1990/91

PAKISTAN - CEMENT INDuSTRY MODERNIZATION PROJECT

Loan and Project Summary

Borrower: Islamic Republic of Pakistan

Beneficia: State Cement Corporation of Pakistan (SCCP)

Amount: 11S$96 million equivalent

Terms: 20 years, Including 5 years' grace at the Bank's standardvariaole interest rate

Relending Terms: Total loan amount will be relent to SCCP at an interestrate of 14X p.a. which Includes repayment guarantee,interest rate risk and foreign exchange risk coverage by(0OP. Repayment to GOP based on fixed amortizationschedule over 11 years, including grace period of 4vears.

Onlending Terms: SCCP will onlend US$87.9 million equivalent to its sixsubsidiary companies on terms and conditions identical tothose enjoyed by SCCP.

ProjectDescription: The project builds on a successful dialogue between GOP

and the Bank on cemer*t subsector strategy and policy,which started during the preparation of a cementsubsector study in 1982, and supports the GOP policy ofliberalization of key productive subsectors, It willenable the SCCP to modernize its facilities, reduceoperating costs, improve environmental controls, trainoperating personnel and formulate a Corporate Strategy inorder to respond to the new competitive marketenvironment. To this end, the Project will assist SCCPin converting one plant from wet process to dry process,and rehabilitating and modernizing five other SCCP plantsfor Improvement of energy efficiency, productivfity andenvironmental controls. In addition, the Project willimprove SCCP management through the establishment of aCorporate Strategy for SCCP, supported by a modernManagement Information System ard a hume- resourcesdevelopment program for training of personnel. Finallythe project will establish a Cement Research Institutefor sectorwide use.

Benefits andRisks: the ProJect will lower SCCP's production costs by

increasing fuel efficiency and utilization rates in thesix plants covered under the project, leading to anefficient operatlon with significantly improvedenvironmental control. The technical assistancecomponent will assist SCCP to focus on long-rangecorporate planning and improve the company's project

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implementation capability. The typical project riskidentified is possible delays In pro,ect implementation,which should be minimized by the assistance of anexperienced consultant financed under the project. Somerisk may occur through continuing disruptions in powersupply which would be lessened by the installation ofdiesel generators at the corporation's two major plants,Wah and Zeal Pak. There is also some risk that SCCP willbe unable to Implement all of the recommendations of theCorporate Strategy exercise because of GOP's politicaldifficulties. However, the Corporate Strategy aims todevelop options for solving such problems and identifyingtheir costs.

For-Estimated Local a/ eign TotalCost -(USS$ million

Components A & R of the Project:Base Cost (Mar. 1987 Prices) 30.1 73.2 103.3Physical Contingencies 3.8 6.6 10.4Price Contingencies 10.2 8.1 18.3

Installed Cost 44.1 87.9 132.0

Incremental Working Capital 0,8 0.7 1.5Interest during Construction 9.8 8.9 1-8.7Total Financing Required 54.7 97.5 1S.

Components C, D, and E 4.1 8.1 12.2

Grand Total 58.8 105v6 164.4

FinancingPlan: SCCP 39,8 8.9 48.7

Commercial Banks 19.0 0.7 19.7IBRD - 96,0 96.0

Total 58.8 105.6 164e4

Estimated IBRD FY 1988 1989 1990 1991 1992Disbursements: ---- - (US$ million) -----

Annual 0,4 19.0 47,0 28.7 0,9Cumulative 0.4 19.4 66.4 95.1 96.0

Economic Rateof Return: 28% for the Wab subproject (Component A), with an average

rate of return of 56% for the BMR subprojects(Component B). No rate of return calculations were madefor components C, 1, and E.

Staff AppraisalReport: No. 6707-PAK, dated September 30, 1987

Maps: IBRD 20235

F IncY uding a-e estimated US$9.8 million equivalent in dvties and taxes.

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

I. INTRODUCTION

1.01 The Government of Pakistan (GOP) has requested a Bank loan ofUSS46 million equivalent to finance a cement industry modernization projectfor the State Cement Corporation of Pakistan (SCCP)e The major part of theloan (US$87.9 million) will be applied towards process conversion of oneSCCP plant and minor rehabilitation of five other SCCP plants. Theremaining UJS$8.1 million will be applied toward technical assistance andthe establishment of a Cement Research Institute. The project will resultin a capacity increase of 500,000 tons per year (tpy).

1.02 Project financing requirements, including price contingencies,incremental worklng capital and Interest durlng construction, are estimatedat UlS$164.4 million, of which US$105.6 million equivalent would be indirect foreign exchange. The Bank loan of US$96 million, therefore, wouldcover nearly 91% of dlrect foreign exchange and 58% of total financingrequirements. The balance of US$68.4 million will be I-rvided by loansfrom local commercial banks and SCCP's internally generated funds.

1.03 The orlgin of the project may be traced to a study of thecountry's cement Industry, which the Bank commenced in March 1982. Themajor recommendations of this study with resnect to improvements In pricingpolicies, energy conservation and modernization of the industry have beeninstrumental in promoting subsequent policy change In the industry. ThisIn turn enabled the Bank to proceed with the identification of the project.

1I. T'P PAKISTAN CEMFNT INDTSTRY

A. Historical Development

2.01 Cement manufacture is a well-established industry in Pakistan,accountlng for about 5.5% of total industrial production. In 1985/86, thegross value of cement output at market prices was estimated atapproximatelv PRs 7.5 billion, representing about 1.4% of GDP. EmploymentIn the cement sector in 1585/86, including those employed in limestonequarries, amounted to approximately 13,500, or about 0.4% of totalemployment in the Industrial sector.

2.02 Pakistan's first cement plant was established in 1921 at Wah byAssociated Cement Company (ACC), with a capacity of 44,500 tpy, and theindustry grew steadily until independence in 1947, when there were fourplants owned by two private companies with a total capacity of about48O0OOO tpy. During the 1950s and 1960s, expansion of the industryaccelerated, with installed capacity lncreasing at an average annual rateof 9.7%, and six more plants were established, four by the private sector

2

and too (Zealpak and Maple Leaf) by the public-sector Pakistan IndustrialDevelopment Corporation (PIDC). By 1972, Installed capacity had increasedto 3045 million tpy, with 58% owned by the public sector and 42% by theprivate sector.

2.fn On January 2, 1q72, the Government nationallzed 31 majormanufacturing enterprises covering 10 subsectors, Including cement, underthe sconomic Reform Order. A Board of Industrial Management (MTM) wasestablished shortly after to manage all nationallzed enterprises. InSeptember 1q73, while the company structures were left unchanged, theGovernment secured majority shareholdings in the cement enterprises bypurchasing them with saleable bonds at prevailing market prices.Meanwhile, public sector cement companies owned and run by the PakistanDevelopment Corporation (PTDC) and the G,overnment-owned Associated CementCompany (ACC), which had been purchased by Government from its Indianowners in 1960, continued to operate unchanged. In December 1973, theGovernment created the State Cement Corporation of Pakistan (SCCP) as anindependent holdlng company under the negis of the Ministry of Production(MOP) to manage and operate the natlonalized plants on behalf of thestate. In addition to the private sector units, the Corporation was alsogiven control of the plants established by PTDC and those owned byGovernment, and thus had eight enterprises under its wing.

2.04 At the time of nationalization, annual cement production amountedto 2.55 million tons (nominal capacity utilization of 74%) of whichapproximately n.45 million tons were exported, mainly to Middle Eastmarkets. Government withheld approval for new capacity, and for the nextfive years no funds were made available for the type of modernization andenergy conservation investments carried out In many other ̂ountriesfollowing the oil price increases of 1973. As a result of increasingdomestic demand, cement shortages began to appear in 1975/76 and tl.eGovernment banned exportse Wro,r an export peak of 0.7 million tons (23% ofproduction) in 1973/74, Pakistan became a net importer In 1976/77. UntilJuly 1481, when the Government allowed import by the prlvate sector, SCCPwas the sole agency permitted to import cement. During this period, inspite of increases In capacity utilization, there was stbstantialunsatisfied demand because SCCP had insufficient foreign exchange to importenough cement to meet demand at official prices.

2.05 In resoonse to continuing shortages, the Government lifted theban on private investment in cement in 1978, and announced an Incentivepackage for private Investors consisting of a guaranteed rate of return of15-202 and, depending on plant location, reductions in import duties forequipment and corporation tax exemptions. At the same time, SCCP was givenapproval for consttuction of new plants and expansion of existing plants.This offered the first opportunity in almost a decade for the Pakistancement industry to upgrade its technology. Subsequently, SCCP increasedcapacity by 2.1 million tpy, through slx projects comprising two expansionsand four greenfield plants, while some two dozen private investors received

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investment sanctioning approval I/ (Annex 2-1). By the beginning of 19879four private plants, comprising about one quarter of subsector capacity,had started operation, two more were under construction and a number ofplanned projects remained in early stages of development. All the recentprivate and public projects have adopted dry process technology, butbecause of Investors' preference for proximity to Karachi and theguaranteed return policy in force at the time of sanctioning, too manyplants have been located in the Soutn, thereby creating a regionalsupply-demand imbalance. Furthermore, the projects have used kiln sizesconsiderably smaller than those adopted in modern plants in many othercountries, although, in contrast to most of the public sector projects, theprivate plants were designed for a later, cost-effective capacitv increase.

2,06 Since 1980, when the first of the new generation of dry processplants came into operation, subsector capacity has increased atapproximately 13% p.a., and imports, which had risen to a peak of1.3 million tons in 19R1/82, have virtually disappeared. Subsectorproduction has Increased over the 1980-86 period at approximately 10% p.a.,and capacity utilization has fallen from 92% in 1980 to about 80%,reflecting start-up of new units and dlfficulties in maintaining productionat the older wet process plants. The need for modernization of theindustry has been accentuated by radical changes In the policy frameworkintroduced by the Government in May 1985 (see paras 2.19-2.21). Thesechanges have created a competitive market environment which is intensifyingcompetitive pressures upon SCCP and private companies to optimize the scaleand location of production facilities and to rationalize commerclalpractices.

B. Present Structure of the Industry

2.07 At the beginning of the 1986/87 financial year, the Pakistancement industry consisted of 17 operating plants, with a total nominalinstalled cement capacity of 7.7 mtpy (Annex 2-2). Thirteen of the plants,comprising about 6.0 mtpy (78% of total capacity) belong to SCCP;2/9 plants produce only ordinary Portland cement (OPC), two produce both OPCand slag cement, one produces OPC and sulphur resistant cement and oneproduces OPC and white cement. Four plants are owned by the privatesector, and all produce OPC. Four more plants, two private and two public,are being constructed, and another private plant has recently receivedsanctioning approval. These five projects are expected to increasecapacity by 1.3 million tons.

2.08 The location of plants currently in operation and those to becompleted in the near future is shown in the attached map (IBRD 20235).

I/ One side effect of the policy package was that it encouragedapplications from promoters, many of whom did not have any priorexperience in ooerating modern cement plants. As a result, in manycases too little attention was given to technical and locationalfactors.

2/ SCCP also owns and operates a small factory in Karachi producingrefractory materials, mainly alumina bricks.

Cement investments In the past have been made largely in the southern partof the country, around 1(arachl. This occurred because of the pact tolicyof guaranteed returns which provided no penalty for Improper location, andbecauso of political and provlncial considerations prevailing over marketand transport factors, although the lack of Investments in the Punjab isalso explained to some degree by the lack of suitable limestone deposits ineastern Punjab. In a number of cases, plants were located only a few milesfrom each other. Too much capacity Is now located In the south, whilenorthern SJnd and Punjab remain defictt areas.

2.09 Because of the lack of investment during the 1970s, the cementsubsector in Pakletan comprises a high percentage of wet process plants(Annex 2-2). In 1986/87, about 52% of total kiln capacity was based on wetand semi-dry technology (with some kilns datlng back to the 1920s, althoughmost were Installed in the 1950s and 1960s), with the remainder oased uponthe more energy-efficIent dry process. All the private sector plants andSCCP's new plants and expansion projects undertaken since 1978 are basedupon dry process, but nine of SCCP's plants still rely on wet or semi-dryprocesse

2.10 By internatlonal standards, cement plants In Pakistan are small,and average kiln sizes are particularly small (Annex 2-3), About 34% ofsubsector capacity comes from plants of 1,000 tpd (330,000 tpy) capacity orless, and average plant c&Dacity is only 450,000 tpy, compared to aworldwide average plant size of approximately 900G000 tpy. Most plants aremulti-kiln, with kiln sizes rang'ng from 150 tpd to 2,000 tpd. Theexisting 35 kilns (only 10 of which use dry process) have an averagecapacity of 6q5 tpd, and even the largest kilns (2,000 tpd at DG Khan andAttock Cement Company) are considerably smaller than the 2,500-4,000 tpdkilns employed in countries with a more advanced cement Industry. Averageplant size, and in partlcular average kiln size, have, however, beenIncreasing In both public and private projects since 1978, and this processwill continue with the single-kiln 3,000 tpd plant proposed at AC Wah.

2e11 Over the past decade, the cement Industry in Pakistan has alsoexperienced conslierable overmanning. Following nationalization,employment in SCCP grew in response to political pressures to provide jobs,and under Pakistar.'s labor laws, persons once employed cannot bedismissed. As a result, the work force In each plant had increasedconsiderably by the early 1980s,3/ when SCCP secured government approvalto limit severely the growth of employment. In fact, over the past threeyears, there has been, In overall terms, a hlrIng freeze in SCCP, and totalemployment has fallen somewhat due to normal attrition and retirements. Acomparison of dry process plants belonging to SCCP and the private sectorindicates that employment levels are twlce as large in SCCP as in theprivate plants: in the 1,000 tpd plants, private sector plants typicallyemploy between 300 and 400 persons while SCCP plants employ 600-800. As aresult, labor costs in SCCP plants have tended to be 8-10% of total

3/ For example, Gharibwal's labor force, which was 645 persons In 1972,had grown to about 950 persons by the beginnlng of the current decade.

production costs compared to 4-5% in private plants. Rowever, theimprovement in SCCP's abillty to control its manning sltuation in recentyears is shown by the fact that the numbers of personnel at Its newestplant, nO Rhan, are not significantly more than the numbers at a similarprivate plant (Attock).4/ A long-term solution to SCCP's manning andlabor costs is hound up closelv with the provisions of the labor laws andthe future location and scale of productive facilities, and the analysis oflabor issues and development of options will be an Important component ofthe SCCP Corporate Strategy exercise.

2.12 Over the past decade, SCCP's labor force has gained considerableexperience in operating wet and dry process plants, and In general SCCV hasbeen able to secure the quantity and quality of skills required.5/However, the Introduction of larger-scale plants and more complexelectronic operational and control systems has created a need for upgradingand retraining of existing labor and the Introduction of new skills.SCCP's existlng training programs are not considered sufficient or adequatein their present form to meet the demand for new skills, and the companyrecognizes the urgency of upgrading all its managerial and technicalpersonnel and workers. In the private cement plants, the Issue of trainlngis currentlv seen as less urgent since each company appears to have securedadequate training In the process of start-up, but the need for upgradlngand retraining will grow in the future.

2,13 The market for cement in Pakistan has been unsophisticated andnarrow, and to-date little has been done to promote demand for other thanordinary Portland cement (nPC), In 1985/86, OPC comprIsed approxlmately95% of subsector output, with slag cement and sulphur resistant cementcomprising about 2% each of the market and white cement the remainder. Thenarrow market is typlcal of cement industries in which shortages areprevalent and competition is limited, but it is also explained by factorson the demand side. First, per capita consumption is low (58 kg per capitain 1984), in part because In rural areas cement use has yet to make seriousInroads into use of mudbrick for houses. Second, demand for specializedcement has developed slowly, and price has been the predominant determinantof demand. The market for slag cement (produced from slag available fromPakistan Steel Mill (PSM)) has developed because of its low price ratherthan for its technical qualities. However, there are signs that thesituation is begInning to change: for example, some attempts are beingmade through advertising to establish technical distinctions between cementbrands, and private Investors are showing interest in constructing whitecement plants In the belief that a larger market can be created throughjudicious advertising, while SCCP is seeking to Increase sales of

4/ Total personnel at DO 'Khan and Attock are 500 and 400, respectively.Dr. Khan employs more malnly because functions that are done at Attockby contract labor are done by regular employees at DC Khan, which isin a more remote location.

5/ The company has also served as a training ground for the privateplants, Insofar as some SCCP employees have joined the private cemententerprises.

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sulphur-resistant cement, which enjoys a high margin. These developmentsIn the cement market are expected to generate increased interest byproducers and consumers in research into cement products and productiontechniques.

2.14 In parallel with the development of the cement industry, Pakistanhas also developed a domestic capacity to manufacture certain types ofcement plant equipment, as a result of an active Government policy toensure as much local content as possible in both public and private sectorplants. The Heavy Mechanical Complex (RMC), a public engineeringenterprise, has to-date benefitted most from the emphasis on local content,but other public enterprises, Pakistan Shipyards and the Heavy Foundry andForge (HFF), and a private company, Ittefaq, have also developed somemanufacturing capacity. In one case, HMC was the primary contractor for aplant of 1,000 tpd capacity, and it Is now developing licensing,subcontracting and joint venture arrangements with several foreignsuppliers for manufacture and supply of certain parts for 2,000 tpdcapacity plants. However, HMC's performance, particularly in terms ofdelivery times and quality, has not been very satisfactory, and Itsparticipation in the private sector projects, required in the past by theGovernment as a condition of sanctioning approval, has resulted in highercapital costs and significant delays.

C. Costs and Economic Viability

2.15 Over the years, Pakistan has been an economic producer of cement,as demonstrated by calculations of domestic resource cost well below oneand by the fact that industry has generally received nega;4ve effectiveprotection (Annex 2-4), Pakistan is endowed with abundant sources of rawmaterials. Large deposits of limestone are located in most areas, exceptfor Punjab, generally accessible to major demand centers, and clay, shaleand gypsum deposlts are also available, frequently in the same vicinity aslimestone. In the past, Pakistan's plants derlved their cost advantagesfrom cheap natural gas, low wage rates and low financial costs of the oldwet process plants. In recent years, these advantages have been eroded byIncreasing labor and maintenance costs and the substitution of fuel oil forlow-cost natural gas. In addition, although production in Pakistan,especially in the north of ;he country, remains competitive with imports,Pakistan's cost position vis-a-vis imports has deteriorated. On the onehand, import prices have fallen significantly over the past decade in theface of world overcapacity and, on the other, cost-reducing technologicalchanges have "ntil recently largely bypassed the Pakistan cement Industry.

2.16 Despite increasing capital costs of new plants (partly because ofrelatively high costs of locally produced cement equipment), Pakistanretains some capital cost advantage in exploiting its raw materials. The1986 base cost of a single-kiln plant of approximately I million tpycapacity is estimated at about US$135 per aunual ton of cement in Pakistancompared to about IJS$i70 internationally. This lower cost is duepredominantly to louar labor and civil work costs.

2.17 Average production costs(fixed and variable) per ton of cement in1985/86 amounted to IT46.7 for all SCCP plants and 1TSq59.7 for all privateplants (Annex 2-5). Average production costs per ton of Pakistan cementplants have Increased quite sharply in recent years, and are now hlgherthan costs of large-scale, low-cost producers in Spain and Greece (whichrange from 11SS3f to USS4O per ton), but still comparable with costs inother European countrles such as the UK, PRG and France (which range from118535 to IJS$55 per ton). The reason for this Increase is primarily 6/that the recently constructed dry process plants In both public and privatesectors currently have hlgher total production costs than the wet-processplants (the average costs of wet and dry process plants in SCCP in 1985/86were USS44.4 per ton and US$52.7,7/ respectively, with costs ranging froma low of US$37.5 at Gharlbwal to a high of 118557.9 at Kohat). Estimatedproduction costs of the rehabilitated Wah plant will be US$42.7 per tonwhen the plant attalns full production and will decline thereafter asfinancial charges diminish.

2.18 The dry process olants have relatively high financial costsinitially, but once the financial charges diminish within a few vears, theywill be much more competitive because of their significantly lower variablecosts. Variable costs (including labor) of dry process plants in SCCP andthe private sector were US928.4 and US520.9 per ton, respectively, In1985/86, much below costs of UJS$39.7 per ton In SCCP's wet process plants.These cost figures indicate that, with the exception of the two NationalCement plants in Karachi and Dandot, variable costs (and in most casestotal production costs) in both dry process and wet process plant are lowerthan the cost of imports. Thus these plants should be kept operatingpending the creation through the Corporate Strategy exercise of an optlmalInvestment program (para 2.31). Indeed, even If the Corporate Strategy islikely to recommend closure of some existing plants after some years,further selective investments to reduce costs In such plants, as under theproposed project, may be Justifiable if they have rapid payback and highrates of return.

D. Subsectoral Issues

1. Pricing and Decontrol

2.19 Over the past decade, pricing and decontrol have been the majorissues confronting the Pakistan cement Industry. tJntil May 1985, when theGovernment announced radical policy changes designed to affect both public

6/ A secondary reason for the increase in average total production costshas been the increasing difficulties in maintaining production levelsat some of the wet-process plants as their kilns become older andmaintenance costs increase. As a result, SCCP has begun programs ofbalancing, modernization and rehabilitation (BMR) at most plants so asto maintain production levels in a cost-effective way.

7/ SCCP's dry-process plants currently have lower total production coststhan the private plants for several reasons: first, the privateplants opened more recently and thus face start-up costs, and secondtheir debt-equity ratios are considerably higher than SCCP's plants.

and private sector plants, cement prices at both retail and ex-factorylevel had been controlled by rovernment directly or through SCCP. Officialcement prices were set through a cost-plus system, whereby a cost-price wasfixed for each factory to provide a 15-20% return on equity, to which wasadded a development surcharge 8/ or subsidy to create a more or lessuniform "retention price" for all plants. Through this system ofcross-subsidization, each factory and SCCP as a whole were assured a returnon equlty. To this retention price was added an excise tax to arrive at anex-factory price. To avoid wide disparities in retail prices for differentconsumption areas, SCCP operated a freight equalization system whichreduced, but did not completely eliminate, regional pri-e differentials.For major consumption areas, SCCP fixed retail margins for dealers, and inother areas they were set by deputy district commissioners. At the timethe private plants were sanctioned, It had been intended that they shouldoperate under similar arrangements.

2,20 In May 1985, however, the Government, which had previouslyconsidered that liberalization of the cement pricing system shouldproceed gradually, opted for full decontrol, by announcing the removal ofall controls on production and sale of cement. This decision was promptedby Government's acknowledgement of the undesirable features of the existingcost-plus pricing svstem, such as the black market created by widespreadshortages and SCCP's practise of allocating cement to dealers, and the lackof incentives for improved efficiency. Three major factors behind thepolicy changes were: (a) the adt'Lnistrative complications of incorporatingthe new private sector plants in:o the pricing system; (b) the need toIncrease proflts in public sect.r plants to ralse the level ofself-financing for Investments in modernization and rehabilitation; and(c) the realization that SCCP profits could be increased by raising theex-factory price witbout affecting retail prices, because under theexistlng system large profits were accruing to dealers In deficit areasbecause of the black market.

2.21 The policy changes had several important features:

(a) abandonment of cost-plus pricing arrangements for private sectorproducers, and elimination of all price controls on retail sales;

(b) liberalization of licencing requirements for private sectorcement imporrs, subject to pavmert of a tariff, and thewithdrawal of SCCP from the Import trade;

(c) removal of the cement industrv from the list of industriesrequiring prior investment sanctioning by the Government andpassing on the authority for investment approval to the financialinstitutions; and

81 This surcharge, which is paid into the Cement Development Fund, wasIntroduced in 1976 as a means of railsing funds within SCCP for capitalinvestment. In 1982 GOP allowed its use for subsidizing lessefficient, high-cost plants.

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(d) introduction of increased flexibility in ex-factory prices fromSCCP plants and the elimination of the freight equalizationscheme.

2.22 These measures represented a significant improvvment in thepolicy environment for the cement subsector, and have already hadbeneficial effects upon the development of the industry, in tandem with theentry Into production of the private plants. Cement is no longer in shortsupply on a national scale, and in the South excess supply has createdrapldly increasing competition, exemplified by decreases in real retailprices, discounts for quantity purchases and increased advertising andattempts at product diversification. The black market in the North hasdisappeared, and demand Is being met at published market prices as theSouth's surplus production is being diverted towards the Punjab. Becauseof the competitive pressure, SCCP's market sa'are in the South is now muchless secure, and while SCCP remains the price leader in the North with alarge share of the market, it is now having to develop a natiotnal andregional marketing strategy to replace the previous allocative system, andto introduce some flexibility at the plant level in pricing and marketingdecisions.

2.23 The policy changes have also had an immediate impact upon theassessment of production and investment viability. Two projects forconstruction of private sector plants in the South have been shelved, andseveral other proposals at the sanctioning level are expected to becancelled because both investors and lenders recognize that they are toosmall or wrongly located. Investors are examining locations closer to thedeficit areas. In addition, both SCCP and private producers understand thenecessity of making plants larger to secure economies of scale, and twoexisting private producers are already preparing plant expansions designedto lower unit costs significantly.

2. Imort Policy and Tariffs

2.24 With the 1985 policy changes, Government's import policy forcement became fully based upon a tariff rather than administrative controls(Annex 2-4). Between 1975/76, when Pakistan first began to import, and1981, import tariffs were very low (the nominal tariff rate was 10% andboth nominal and effective rates of protection were negative) and importprices were considerably above domestic prices. Imports were controlledlargely through the amount of foreign exchange allocations madeavailable to SCCP, the only authorized importer. In 1981, when the demandfor imports outran SCCP's ability to obtain sufficient foreign exchange,private importers were authorized to impot. subject to license.

2,25 During the first half of the 1980s, the nominal tariff rate wasgradually increased as domestic costs of production rose and import pricesfell. In May 1985, the Government raised the import tariff to PRs 550 perton 91 plus two across-the-board import surcharges of 5% of cif price.

9/ The specific tariff was Introduced to discourage underinvoicing.

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The tariff was set at a level designed to provide producers with areasonable return on equity, as a quid pro quo for the elimination of theguaranteed return policy. At the same time, the Government lifted alladministrative restrictions on imports by the private sector.

2.26 Based upon a reference c&f price of US$43 per ton,L0/ thespecific tariff and surcharges are equivalent to a gross tariff rate of84%. However, since imported cement does not pay the excise tax of T1Rs 332per ton levied on domestically produced cement, the real or net tariff rateamounts to 39%, while the notional nominal rate of protection amounts toapproximately 36%. The nomlnal rate of protection actually available atthe prevailing ex-factory price of PRs 930 per ton is 14% (Annex 2-4).

2.27 In spite of the increased nominal protection during the 1980s,cement remains one of the least protected industries in Pakistan. Over thepast few years, effective protection has been positive. Currently, thenominal effective rate of protection for cement in tle Karachi m.rket is+40.7%, although at the current ex-factory price the actual effectiveprotection is negative, -3.1% (see Annex 2-4 for details of thecalculations). Effective protection has declined over the past year,largely because domestic energy prices have fallen less rapidly than worldprices. As a result, cement falls in the lowest range of effectiveprotection rates in Pakistan. The most recent comprehensive study ofeffective protection in Pakistan (PIDE, 1980/81) calculated an averageeffective protection rate of 60Z for the industrial sector as a whole, andindicated that almost one half of all industries had effective protectionrates above 80%, with 14% showing negligible or negative value added atworld prices. Since the PIDE study was completed, the Government hasintroduced a number of changes to Pakistan's incentives structure, but notsufficiently to affect the above conclusion about the relative degree ofprotection for cement.

2.28 The generally high levels of protection in Pakistan are a majorconstraint on efficient development of the industrial sector, and theGovernment is ex?ected to initiate a phased program of reform designed tolower protection. Within such a program, cement protection should bemonitored, and any necessary changes in the level of protection should beintroduced within the context of the overall program. In the meantime, theGovernment has denied requests for increases in protection by the newprivate producers to offset their high financial costs, on the grounds thatprotection was set in 1985 at a level consistent with a reasonable returnto an efficient producer. The Bank supports the Government's stance.

3e Modernization and Technological Improvement

2.29 The major policy changes introduced in 1985 established acompetitive market environment in Pakistan, and provided the impetusfor modernization of the cement industry. Government policy and lack of

10/ For a discussion of the rationale for this reference price, seeAnnex 2-4.

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funds in the 1970s prevented Pakistan from taking the energy-efficiencymeasures, such as Introduction of dry-process technology, which many othercountries carrled out in the wake of the oil-price increases, and theguaranteed rate of return policv of the nost-1978 perlod permltted bothprivate and public investments in new capacity of Inadequate size andinanproprlate locatlon. The maior nrioritv for the industry Is now tomodernize and rationalize production facllities.

2.30 The modernization program must be undertaken in a number ofareas. Flrst, scale and locatlon of production facilities need to berationalized, as a basic step to lowering production costs. This willinvolve rehabilitation of some existing Plants, closure of obsoletecapacity and construction of new large-scale, drv-process units indeflcient areas. In the South, greenfield Plants will not be viableinvestments for the foreseeable future compared to capacity increases andcost-reducing Investments In existing plants, and in the North, theinvestment pattern will need to be a mix of new plants and rehabilitationand modernization of existing plants. Already, some of the new privateplants are planning to Increase the scale of facilities to reduce unitcosts, and the most urgent need for rationalization and modernizatlon isnow in SCCP, whlch retains considerable capacity in old, wet processplants. Second, trainlng of plant operators will be needed to improveoperations and malntenance of existing plants and start-up and operationsof new plants based on new technology. Third, cement research will berequired to Improve quality of cement and to introduce new cementproducts. And fourth, the working environment and performance of SCCPmanagement will need to he improved.

2.31 The proposed proiect addresses these issues with a particularemphasis on SCCP (see Chapter V). Parallel with the investment inefficiency improvements at WJah and five wet-process plants, in training andin cement research, the project provides for the preparatlon of a CorporateStrategy and a Management Information System at SCCP to qupport it. Withthe emergence of Drivate sector Droducers and a competitive marketenvironment, SCCP has already begun to respond to the changes In itsposition by developing a marketing strategy. liowever, long-term planningof its business activities and investment Is made difficult by theshort-term perspective of government policies relating to the Corporation'srole and its investment program, and by the political difficulty of dealingwith plant closures and labor rationalization. Currently, It is GOP policythat SCCP should not imolement any greenfield projects or projectsinvolving a substantlal increase in overall capacity. In addition, GOP hasIncluded cement in the list of subsectors in which private shareholdings instate enterprises are to be encouraged. SCCP needs to develop a medium- tolong-term business strategv which represents a rational and economicresponse to private sector competition, and to develop specific plans andprograms for ensuring the commercial and economic viability of theCorporation through appropriate investment, plant closures, training,organizational and managerial improvements, marketlng and distributionarrangements, By assuring that SCCP, as the dominant player in the market,wlll behave in a ratlonal manner, the formulation of its business strategywill also help to create a more stable and predictable envlronment for the

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sector as a whole, and thereby permit the private sector to plan andooerate ratlonally, at the same time as It imposes greater competitivepressure upon private producers. In addition, the private sector will alsobenefit from the tralnlng and research components.

P. Role of the Rank Group

2.32 The 'Rank's strategv in the Industrial sector in Pakistan has beentwo-pronged. Policy-based lending has been supporting: (a) reform of thetrade incentive system; (b) deregulation of government controls, includlngrelaxation of investment controls and cost-nlus pricing; and(c) organizational and policv reform to improve the efficlency of publicmanufacturing industrles. Project-based lending has been financing GOP'sefforts to revitallze the private sector, to Improve financlal servlces andto rehabilitate and modernize public sector enterprlses.

2.33 The Rank's role in the cement industry has been consistent withthese overall industrial sector objectives. The Rank's involvement in theIndustrv began with the 1983 subsector study, wh5ch took as Its primarvfocus the importance of the tolicv environment In promoting operatIonalefficiency, technological change and the rational and economicallyefficient develonment of the industrv. tee study recommended changes inthe policy environment concerning pricing and control of investment, as anecessary step for the modernization and rationalization of the sector andSCCP's plants in particular. Now that these policy changes have beenIntroduced, the proposed Project Is a first step In the long-term processof modernization and rationalization, lnvolving not only the development ofa comprehensive Corporate Strategv and business plans for SCCP, trainingprograms and establishment of cement research activities, but also thefinancing of cost-effective investments in selected SCCP plants.

2.34 In the past, the Rank has also supported cement plants throughlines of credit made available for industrial lending to NDFC, It isanticipated that private producers will continue to have access to Rankfunds channelled through development banks for both greenfield andexpansion proiects. In early 1987, a tTYRR milllon loan for a nrivate plantwhich will produce white cement was anproved under an Tndustrial InvestmentCredit Project.

2.35 TvC has also been active In the cement subsector. It was firstinvolved -In 1965 when it financed expansion of Ismael (now Gharibwal)cement plant. The loan Portion of the assistance was paid off bv thecompany many years ago, but TFC maintains a 6t equity holding. Currently,IFC is assisting the FFeTn group to finance a 2,nO tpd plant beingconstructed near Islamabad. The proiect is to be commissioned in late1987,'wIth start-up scheduled for March 1qRR.

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III. THF PAKISTAN CEMENT MARKET

A. General

3,01 The main objective of the proposed project is to support theprocess already underway to modernize the cement industry and to Improvethe performance of SCCP. The project will not materially alter thecountry's overall cement supply/demand position, nut will contribute toreducing the deficit in the nortnern Punjab area. Converslon of the Wahplant will Increase installed capacity by 0.5 mtpy in Northern Punjab,representing about 5% of the country's total projected capacity by 1992when the Wah plant would go into commercial production. The additionalproduction resulting from the project will easily be absorbed by the marketat remunerative prices, accordlng to the Bank's demand projections(para 3.12).

3.02 Following a period of nominal surplus II/ (1972/73-1975/76),during which cement was exported, Pakistan turned -into a net importer ofcement in 1976/77. Part of the excess demand in the past decade was met byimports (which peaked at 1.3 million tons in 1$81182, representing 28% ofconsumption) but, as shortages developed, particularly in the Northernparts of the country, a black market emerged. Following GOP's decision toencourage private sector investment in the Industry, cement capacitv hasnearly doubled during the last six years, increasing from 4,0 mtpy in1980/81 to 7.7 mtpy in June 1986 (includlng 16 mtpy of new capaclty In theprivate sector), and imports fell to only 18,000 tons In the first half of1986/87, indicatlng that supply/demand has reached a balance. Rowever,because most of the new capacity has been located In the South, a regionalsurplus of cement has developed in the South while the northern parts ofthe country remain In deficit. Recent studies by National DevelopmentFinance Corporation (NDFC) and SCCP consultants forecast a small surplus ofcement over the next few years on an overall country basis, changing Intoan expanding deficit from 1991/92 onwards. These studies, however,forecast a continuing surplus in the South and a shortfall in the Norththroughout this period. The Bank's own analysis generally supports thisview, but it suggests that, on an overall country basis, a deficit maydevelop a little earlier, in 1989/90.

B1 Consumption and Production

Consumption

3.03 Table 3.1 summarizes the historical capacity, production,imports, exports and consumption figures for the last ten years. Theconsumption figures are derived from the detailed data oresented inAnnex 3-1.

11/ Although cement was exported, shortages were experienced In theNorthern areas, indicating that GOP attached higher priority toearning foreign exchange than to meeting domestic demand.

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Table 3.1

Pakistan - Historic Cement Production and Consumption(million tons)

Year-end Capacity Capacity ApparentFiscal b/ Utiliza- Produc- Consump-Year a/ Clinker Cement tion (%) c/ tion d/ Imports Exports tion f/

1975/76 3.44 3.62 88 3.168 - 0.12 3.041976/77 3.44 3.62 85 3,071 0.100 0.02 3.161977/78 3.44 3.62 89 3.223 0.046 - 3.231978/79 3.44 3.62 84 3.023 0.649 - 3.681979/80 3.44 3.62 92 3.343 0.563 - 3.901980/81 3.81 4.01 88 3.538 0.432 - 3.961981/82 4.17 4.39 83 3.657 1.311 - 4.751982!83 4.77 5.02 78e/ 3.937 0.686 - 4.701983/84 5.10 4,37 84e/ 4.502 0.884 - 5.351984/85 5.43 5,72 83e/ 4.749 0.734 - 5.411985/86 7.29 7.67 75e/ 5,744 0.176 - 5,921986/87 7.29 7.67 80 3.085j/ 0.018,1/ - 3.10

Average Annual Growth (%)1975/76 to 1985/86 6.1 6.91975/76 to 1980/81 2.2 5.41980/81 to 1985/86 10.0 8.41975/76 to 1978/79 -1.5 6.61978/79 to 1981/82 6.6 8.91981/82 to 1985/86 11.9 5.6

a/ July 1-June 30.h/ Clinker production capacity based on 300 kiln operation days per year.

Cement production capacity based on addition of gypsum (cement is 95%clinker, 5% gypsum).

c/ Based on 300 working dayslyear and takes into account addition of 5%gypsum by weight of clinker.

d/ Includes production of white cement, slag cement and sulphate resistantcement.

e/ Capacity installed during the fiscal year was operational for only partof the fiscal year.

f/ Adjusted for inventory changes.j/ for the six month period ending December 1986.

Sources: State Cement Corporation of Pak'stan (SCCP) and staff estimates.

3.04 Cement consumption in Pakistan increased from 3.04 mtpy in1975/76 to 5.92 mtpy in 1985/86, representing an average annual growth rateof 6.9%. During these ten years, however, there were three distinctperiods of varying growth, Between 1975/76 ̂nd 1978/79 when imports wererestricted and domestic production remained stagnant, consumption grew by

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606% p.ae During the 1978/79-1981/82 period, as production started toincrease and imports were made, consumption grew at 8.9% p.a., primarily asa result of higher availability. Finally, between 1981!82 and 1985/86,although production increased at 11.9% p.a. and there was no restriction onimports, consumption growth declined to 5.6%, suggesting that demand andlocal production have moved closer to balance.

3.05 After being an exporter in the first half of the 1970s, Pakistanbecame a net importer of cement in 1976/77. Between 1978/79 and 1984/85,when the cement shortage was most acute, imports accounted for between 10%and 28% of annual consumption, peaking in 1981/82 at 1.3 million tons(Table 3.1). Until 1981, SCCP was the sole agency authorized to import,but was not able to meet demand because it received insufficient foreignexchange allocations, and it sustained losses on imports because importprices of bagged cement were generally above local prices. In 1981, theprivate sector was authorized to import under import license, and for acouple of years, a floating bagging plant in Karachi harbor permittedlow-cost bulk cement imports. With increasing domestic production and thesurplus in the South, which has led to some decline in retail prices in theKarachi area, imports have been virtually eliminated. The bagging plantwas closed in 1985, and only small amounts of bagged cement have beenimported recently; in the first half of 1986/87, only 18,000 tons wereimported, mainly through prior commitment under barter deals with the USSRand East European countries.

3.06 Pakistan's per capita consumption of cement was 58 kg in 1984which is relatively low considering its GNP per capita and degree ofindustrialization. Table 3.2 shows GNP and per capita cement consumptionfor selected countries.

Table 3.2

Cement Consumption in Selected Countries, 1984 a/

GNP per Capita Industrial Output Per Capita Cement(US$ equivalent) as % of GDP Consumption (kg)

United States 15,390 32 326Egypt 720 33 290b/Thailand 860 28 161Brazil 1,720 35 146Pakistan 380 29 58Somalia 260 11 40India 260 27 39Tanzania 210 15 17Malawi 180 18 10

a/ Consumption refers to apparent consumption, i.e., production plusimports, less exports.

b/ Estimate, not verified.

Sources: World Development Report, 1986 and Cembureau December 1986.

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3,07 Per capita consumption is low partly because about 70% of thepopulation lives In rural areas, primarily In mud-built dwellings and theircement consumption Is extremely low. Furthermore, there are relatively fewstockists/retailers of cement In the rural areas and cement availability isnot assured, thus preventing some potential consumers from acquiringcement.

Cement Production

3.08 Between 1975/76 and 1985/86, installed cement capacity increasedfrom 3.62 to 7.67 mtpy, and domestic cement production Increased from 3e17to 5.74 mtpy. All this increase, however, took place during the last sixyears. Capacity utilization during 1975/76-1985/86 averaged 86% which,although low,12/ is understandable given the age of some of the olderplants and the technical problems that were encountered during the initialoperation of some of the new plants.

C. Supply and Demand Projections

3e09 Table 3.3 summarlzes projected year-end capacity and productionof cement during 1985/86 to 1994/95. More detailed projections of capacityare given in Annex 3-2. In addition to examining forecasts of productionmade by SCCP and NDFC, the Bank has made its own forecast, which takes intoaccount only new plants or capacity expansions %.hich have been sanctionedand have firm financing arrangements. The details of the assumptionsunderplnning the Bank's production forecast are given in Annex 3-3.

12/ 100% capacity utilization in Pakistan is defined as an annualproduction corresponding to 300 days of kiln operation at ratedcapacity. By internatlonal definition, it would equate to about 82%capacity utilization.

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Table 3.3

Pakistan - Forecast Cement Capacity and Production(Million tons)

Year-end Cspacity a/Public Private Private Production

Fiscal Year Sector Sector % Total Bank bf SCCP cl NDFC d/

1985/86 6,00 1,6? 22 7.67 5.71 5.71 5,711986/87 6.00 1.75 23 7075 6.37 6.55 5.861q87/88 6.1R 2A3R 28 8,56 7,07 6.87 7.261988/89 5.96 2.38 29 8,34 7.35 7.25 7.68198Q/90 5.96 2,R6 32 8.82 7.7n 7.62 8.711990/91 5,96 2.86 32 8.82 7.89 8.00 9.151991/92 6.43 3.40 35 9.92 8.29 8.86 9.151992/93 6.43 3.49 35 9.92 8.86 9.02 9.151993/94 6.43 3.49 35 9.92 9.02 9.13 9.151994/95 6,43 3.49 35 9.92 9.02 9.13 9.151995/96 6.43 3.49 35 9.92 9.06 9.13 9.15

a/ Bank's estimates (see Annex 3-2 for details of capacity buildup).1/ Does not include white cement; capacity utilization for existing plants

is based on past achievements and planned rehabilitation investments;and for new plants is assumed to be 65% in first year, 75% in thesecond, 90% in the third and IO00 in subsequent years.

c/ Consultants' estimates, assuming shorter project implementationperiods and faster production build-up than the Batik estimates.

d/ Assumes 80% capacity utilization in the first year and 95% in thesubsequent years.

Sources: SCCP, NDPC and staff estimates.

3.10 Table 3.4 provides projections of demand for ccment an.d theexpected demand-supply balance during 1985/86 to 1994/95. In addition toshowing figures produced by SCCP and N)VC, the table provides the Bank'sown projection of demand, which is based upon an average growth of 6.5% perannum in constructlon value-added. (For details of the methodology, seeAnnex 3-3). All three forecasts show that, over the next four years,demand and production will be close to balance, with a deficit beginning inthe early 1990s.

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Table 3e4

Pa)dstan - Forecast of &ipply/Deumid a/(Milion tow)

Surplus (+)/Production Demad b/ Deficit (-)

Bai SC mm Rark cJ SOt2 NDC Bak d/ SaM Nl

1985/86 (Actual) 5.71 5e71 5,71 5,92 5,92 5.92 -0.21 -0.21 -0.211986/87 6,37 6.55 5.86 6.31 6.13 6.60 40,06 40.42 -0.741987188 7.07 6.87 7,26 6.6; 6.53 7.04 +0.40 40.34 40t221988/89 7.35 /.25 7.68 7.06 6,96 7.51 40,29 40t29 40.171889/90 7e70 7.62 8.71 7.46 7.42 8e01 40,24 40.20 40.701990/91 7.89 8e00 9.15 7.90 7.91 8e53 -0,01 40t09 40,621991/92 8.29 8.86 9.15 8.36 8.39 9,08 -0,07 40.47 +0.071992/93 8.86 9.02 9.15 8.85 8.90 9.66 40.01 40.12 -0e511993/94 9.02 9,13 9,15 9.37 9.45 10.27 -0.35 -0,32 -1.121994/95 9.02 9e13 9.15 9.93 10,03 1091 -0.91 -0.90 -1.761995/96 9,06 9.13 9.15 10.53 10.65 11.59 -1.47 -1.52 -2.44

a/ Do,es no Include white cemnt.a See Ares 3-3 and 3-4.ci Does not Include cem*nt requiremrns of the proposed Ka1abag Dam.d/ See Anne 3-5 for details.

Sources: SOCP, MM and staf estiutes.

3.11 On a regional basis, the supply-demand picture is more complex.tIDFC have forecast production and demand on the basis of provincialboundaries and indicate that, while Sind and Baluchistan would enjoy asurplus of cement up to 1993/94, Punjab and NWFP would continue toexperience deficits throughout the next ten years. SCCP itself has madeprojections based upon division of the country into ten market areas, andthese, while generally similar to the NDFC results, show a small surplus insome parts of NW P and a small deficit in the northwestern part ofBaluchistan.

3.12 The Bank has also prepared its own regional projections, dividingthe country into four zones delineated according to location of existingand future plants and their natural market areas (see Annexes 3-1 and 3-3for details). Table 3.5 shows the projected capacity, production anddemand in 1985/86 and 1995/96 for each zone (annual details are presentedin Annex 3-5). The projections indicate that the surpluses in zones 1(NWFP and the north of Azad Kashmir) and 4 (southern Sind and southernBaluchistan) would decline by 1995/96 as demand expands, and that thecurrent deflcits in zones 2 (northern Punjab and the south of Azad Kashmir)and 3 (southern Punjab, northern Sind and northern Baluchistan) wouldIncrease considerably. In fact, the deficits are likely to increase lessthan the projections suggest, because investors will respond to marketopportunities by the end of the period and construct new capacity notincluded in the projections.

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Table 3.5

Pakistan - Forecast of Regional Capacity, Production andDemand for 1985/86 and 1995196

(Million tpy)

1985/86 1995/96Capa- Produc- De- Bal- Capa- Produc- De- Bal-

Zone b/ city a/ tion a c d ance

One 1.32 1.189 0.783 0,406 1.770 1.677 1.338 0.339Two 1.67 1.670 2.41R -0.748 3.440 3.403 4.539 -1.136Three 0.87 0.370 1.052 -0.682 0.945 0.930 2.070 -1.140Four 3.43 2,485 1,666 0,819 3,270 3.054 2.583 0,471

Total 7.29 5.714 5.919 -0.206 9.425 9.064 10.530 -1.466

a/ Refers to clinker capacity.hi See Annex 3-5 for demarcation of zoies.

Source: Staff estimates.

D. Marketing and Distributien

3.13 'Before 1981, when the private sector was first allowed to importand market cement, the Government, through SCCP, controlled all sales anddistrlbution of cement in Pakistan. SCCP determined regional quotas,arranged for transporting cement and established allocations for publicsector agencies. Only public sector bodies were authorized to pick upcement directly from the plant; the general public could buy cement onlyfrom those SCCP stockists (commission agents) who were allocated an annualquota and were authorized to pick up cement directly from the plants at thecontrol price. Because of the cement shortage, and the profits to be madefrom selling cement on the black macket, appointment as a stockist becamean important source of political patronage and between 1980 and 1Q85, thenumber of stockists doubled from 3,500 to approximately 7,000. SCCP andthe District Commissioners (local administration) fixed dealers' margins.Because of the regional production and demand imbalance, large quantitiesof cement (up to 0.8 millon tons per annum) had to be transported overconsiderable distances, and SCCP operated a system of freight subsidies toavoid wide disparities in retail prices among different areas. Owing toshortages of railway wagons, only 15Z of the cement dispatches were made byrail, and the remainder was carried by trucks.

3.14 Following commissioning of several private eement plants and theGovernment decision in 1985 to abandon cost-plus pricing, decontrol marketprices and eliminate the freight subsidy,13/ the market envirorment has

13/ While SCCP has eliminated explicit freight subsidies, a decreasingmarket share In the South has forced it to allow discounts to Lahorestockists for purchases from the Zeal Pak plant at 'Hyderabad.

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undergone a qualitative change. It is no longer a "seller's market,"particularly In the South. Because of the surplus situation, prices havedecreased in real terms in the southern region, vlrtually eliminatingimports; the black market in the Northern areas has disappeared; and demandIs being fully met at prevailing market prices as producers in the Southare forced to divert their surplus productlon to the North (Annex 3-6).

3.15 As yet there has been little change in SCCP's distrlbutionsystems; 70% of its total sales are still made througli stockists, 20% ofthe production is earmarked for public sector agencies, and the remainderis sold directly to larger private sector consumers ex-factory. Theproliferation of stockists in the past few years, who generally have hadquotas of only 50 tons per month, has created administrative difficultiesfor both SCCP and plants, and in response SCCP has now abolished quotas forits stockists in the South. As a result, many small stockists no longerorder cement, and most sales are being made to larger stockists who areprofessional cement retailers. A similar situation exists for the privateplants. The quota system remains in the northern part of Pakistan, butSCCP is lnvestigating alternative arrangements as part of Its overallmarketing and distribution planning.

3.16 While SCCP continues to allocate market shares among its plantsand still determines ex-factory prices for its plants, it has recentlytaken several steps in response to the new market environment, for example:(i) ex-factory prices of the Rohri and the Northern plants have beenincreased from PRs 1,262/ton to PRs 1,300/ton;14/ (ii) a larger volume ofcement (50,000 tons per month instead of 30,000) is being shipped by railfrom the South to the North; (iii) quantity discounts for cement shipmentshave been secured from the Pakistan Railways; (iv) marketing staff at theplant level are being reorganized and posted nearer demand centers; (v) anadvertising campaign has been launched on the TV and other media; and(vi) a decision has been taken to adopt a uniform brand name and bag deslgnfor cement produced by all SCCP plants.

3.17 While the above steps are In the right direction, SCCP's futuremarketing strategy will need to evolve, taking into account increasingcompetition, both in the South as the Attock Cement plant attains highercapacity utllization levels and also in the North when the FECTO plant goesinto production. While SCCP's overall market stratesy will be refinedwithin its Corporate Strategy exercise, SCCP is also already considering:(i) increasing the proportion of cement dispatches by rail, to reducetransportation costs, and entering into medium-term contacts with PakistanRailways; (11) diversifying Its product-mix and selecting optimal locationsfor producing each product; (iii) encouraging the private sector to installbulk handling and ready-mix facilities at major consumption centers;(iv) providing micro-computer facilities to the marketing staff tofacilitate data processing and analysis; and (v) delegating further

14/ The individual plants are in theory also permitted to vary ex-factoryprices by +PRs 50/ton. However, in practice, only the Thatta andJavedan plants have so far utilized this flexibility.

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responsibility for marketing and pricing to the plant level. SCCP is nowexamining these proposals in the context of a special program to improvemarketing and distribut.on.

E. Cement Pricing

3.18 Prior to price decontrol in May 1985, when only public sectorplants were in operation, GOP followed a complex pricing system based on acost-plus formula (see para 2,19), Annex 3-7 shows the buildup of, andvariation in, ex-factory prices during the 1976-86 period. During theperiod, retention and ex-factory prices recorded a four-fold increaseagainst a two-fold increase in the general consumer price index.

3.19 Since decontrol of prices In 1985 (see paras 2.19-2.23), SCCP hasincreased its plants' ex-factory prices twice. An increase of PRs 100/tonwas made for all plants in June 1985. Another Increase of PRs 38/ton forthe Northern plants was made in August 1986. These decisions to increaseprices are in line with SCCP's objective of gradually adopting a fullymarket-oriented pricing policy for its individual plants. SCCP has alsomade some changes in the internal pricing arrangements for its plants. Forexample, while it still collects a transportation surcharge from its plantsof PRs 12 per ton of cement, only part of the proceeds is used to improvethe cash flow position of the less profitable units; the remainder is usedfor SCCP's corporate expenses. Moreover, SCCP no longer guarantees aminimum rate of return for its individual plants. The profit-making plantsare permitted to retain a portion of the profits to allow for adequatedividends (minimum of 202 pre-tax return on equity for lOOX SCCP-ownedplants) 15/ and BMR investments. While the market developments willcontinue to press SCCP to rationalize its plant and company pricingpractices, it is also intended that the question of pricing, financing andcompany-plant relationships will be examined within the context of theCorporate Strategy exercise.

IV. THE COMPANY

A. Historical Development of SCCP

4.01 Following the nationalization of privately owned cement plants inJanuary 1972 and their organization under a Board of Industrial Management(RIM), the Government decided in 1973 to form the State Cement Corporationof Pakistan (SCCP) as an independent holding company under the aegis of theMinistry of Production (MOP) to take over the management of all cementplants in Pakistan (para 2.03). The company was formed on August 11, 1973,with an authorized capital of PRs 100 million. Under its charter, SCCP wascharged with the following specific responsibilities:

(a) assure an adequate supply of cement in the country throughdomestic production and, if necessary, imports;

15/ A higher return is normally given to plants with public holdings.

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(b) ensure efflcient capacity utilization, introduce modernizationand balancing within existing cement plants, and plan foradditional capacity to meet Increasing domestic demand;

(c) aevelop a comprehensiva marketing and distribution system; and

(d) carry out training programs to meet the manpower needs of anexpanding and modern industry, and create technical andengineering abilities in the cement and cement machineryindustries.

4.02 Between 1973 and 1978, SCCP's responsibilities were limited tooperating eight plants, since Government did not authorize construction ofnew plants or the rehabilitation and modernization of existing plants. In1975, SCCP began to import cement in the face of increasing demand, and in1978 it was given approval to construct new plants and expand existingplants. Between 1978 and 1985, SCCP implemented an investment programamounting to approximately US$200 million, which financed an increase of2.1 million tons in the Corporation's capacity through six projectscomprising two expansions (1,000 tpd each at Javedan, and Mustehkam), andfour new plants (1,000 tpd each at Thatta, Dandot and Kohat, and 2,000 tpdat DG Rhan). As of early 1987, SCCP had a total capacity of 5.9 mtpydistributed among 13 plants.

B. Corporate Structure and Management Performance

4.03 SCCP is owned by GOP. It is headed by a Board of Directorsconslsting of six persons: the Chairman of SCCP, who is appointed by theMinistry of Production (MOP); a member of the National Assembly; a memberfrom the development banks (currently IDBP); a member from the Mutual FundsOrganizations (currently ICP); a member appointed by GOP; and a memberappointed by the provincial government of Punjab. Some degree of autonomyhas been given to the Board of Directors, which has established a committeeof the Chairman and two directors resident in Lahore to take decisions onurgent matters. However, the Board has frequently chosen not to exerciseits autonomy, and as a matter of course, all but routine decisions havebeen referred to the finistry of Production. As SCCP faces increasingcompetition from the private sector and needs to develop a coherentstrategy for ensuring its commercial survival, the relationship between theCGrporation and GOP will be reviewed under the Corporate Strategy exercise.

4.04 All executive powers are vested in the Chairman, who in turnworks under the general orders of the MOP. An organization chart of SCCP'smanagement structure is shown at Annex 4-1. The eight departments and thesma'l Cement Research Laboratory are each headed by a General Managerreporting directly to the Chairmar. The structure of the Corporation'sheadquarters, which employs approximately 2'0 persons, will be analysedthoroughly, as part of the Corperate Strategy exercise (paras 4.12 etseq.), one of whose objectives wilL be to establish an appropriateorganizational and managerial framework for the Corporatiorn.

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4.05 The 13 plants operated by SCCP are organized Into elevencompanies (Annex 4-2), Assoctated Cement Company (AC) has two plants atWah and Rohri; although incorporated, ACC is currently treated as anoperating division of SCCP, pending GOP approval for the two plants to beformally transferred to It in the near future. Four of the companies arepublic limited companies with a diversified ownership structure (Zealpak,Charibwal, Mustekham and Javedan). These companies are quoted on theKarachi stock exchange. The other seven companies are not quoted on thestock exchange and are fully owned by SCCP as private limited companies(with the exceptlon of the white cement company which is an unquoted publiclimited company managed by Maple Leaf). A typical organization chart for asubsidiary company is shown at Annex 4-3.

4.06 Each of the companies has Its own Board of Directors. In thecase of the quoted companies, directors are appointed by the shareholders.The presence of non-SCCP directors in the quoted companies and the need topay dividends to shareholders are recognized as having had a veryheneficial effect upon performance and management. The non-quotedcompanies have boards of directors appointed by SCCP. The ManagingDirectors (MT)s) of the plants are appointed by SCCP and report directly toits Chairman. In contrast with past practice, all MDs are now cementprofessionals, whlch has also resulted in improvements in plantperformance. However, the powers of the MDs are generally limited tofactory operations and do not extend to the commercial and financialviability of the plant, responsibility for which rests with SCCP throughits control of pricing and marketing. Within the past year, SCCP has takensteps to increase MDs' responsibility in these areas, by giving them thepower to vary ex-factory prices by plus or minus PRs 50 per ton and bydecentralizing some marketing functions (para 2.19). HRowever, the MDs havenot yet exercised the greater responsibilities. Within the scope of theCorporate Strategy exercise, there is a need for clarifving and redefiningthe powers of plants' Managing Directors and 1Poards of Directors.

4.07 The flnancial performance of SCCP as a whole has been good, giventhe policy environment and pricing arrangements which existed in the past(see paras 7,04 and 7.05 and Annex 7-3 for details of financial performancefor the period 1981/82-1985/86). As a holding company, SCCP has nooperating income of Its own. It derives its income primarily fromdividends of its subsidiaries, of which Associated Cement is one of itsmajor contributors. Although ACC's accounts are said to be consolidatedwith those of SCCP, in practice ACC's net income is treated as a dividendand shown in SCCP's revenue account together with dividends from othersubsidiaries (para 7.06). The development surcharge collected from thesubsidiaries does not form part of SCCP's revenue, but flows into a CementDevelopment Fund, which is maintained as a tax-free reserve availablechiefly' for the construction and rehabilitation of cement plants (seepara 2.19).

4.08 The operational performance of SCCP's plants has in general beengood but has varied widely, primarily because of widely differenttechnologies, varying degrees of overmanning and specific operationaldifficultles at some plants. Over the curent decade, only two plants, the

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Mational Cement plants at Karachi and Dandot, have regularly reportedlosses, resulting from aging equipment, high fuel costs, small scale ofproduction and a relatively large labor force. SCCP has already decided toclose these plants, and is currently exploring with Government how thispolitically sensitive decilsion can be Implemented. One other plant, ThattaCement Company, which produces chiefly slag cement, reported minor lossesduring the past fiscal year because of unavailabllity of slag from PakistanSteel Mills, but Is expected to move back into a profitable position thisyear, assuming adequate efforts to market output. All other plants havedeclared profits each year.

4.09 Over the past few years, significant efforts have been made toimprove the operational, financial and managerial performance of SCCP andIts plants. SCCP's management has begun to respond to the changes In thepolicy environment and the entry of the private sector by paying moreattention to the market. Marketing staff has been decentralized andenlarged and efforts are now being made to rationalize the stocklst systemand to develop marketing expertise at the plant level. By placing cementprofessionals in the management of the subsidiaries, and by generating gnorecomprehensive operational and managerial informatlon for the Corporationand plant managers, a good start has been made in improving SCCP'sorganization.

4.10 SCCP has also been involved in two broader exercises deslgned toimprove management. First, along with all other state enterprises, theCompany has been part of the Public Enterprise Signalling System whichbegan in 1982. This system, implemented with the assistance of consultantsunder the Bank's Technical Assistance Credit No. 1256-PAK, was set up toassist GOP in monitoring and improving the performance and efficiency ofstate enterprises. The system contains a performance informatlon system, aperformance evaluation system which defines objectives and targets and anlncentive system which rewards managers on the basis of performance againstnegotiated targets. The system, which has been in force in SCCP since1984, is seen within the Government as a positive factor in improvedperformance of enterprise particularly since the reviews and discussionsbetween the enterprise, Ministry of Production and the Experts AdvisoryCell (EAC), which is responsible for managing the system, have improved theGovernment's understanding of enterprlses and have encouraged timelyfollow-up of issues and problems. The Bank would generally concur withthis judgement of the system, although it appears that the use of grossproduction as the main index of performance has encouraged some plants tomaintain production to the detriment of proper maintenance. EAC Is awareof these deficiencies, and is currently working on ways of improving andamending the system for all state enterprises.

4.11 Second, SCCP has also served as one of five cases 16/ within astudy (also financed through the Bank's Technical Assistance Credit by EAC

16/ The others are the Heavy Mechanical Complex (HMC), Ravi Rayon,National Motors and the National Fertilizer Corporation.

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with the assistance of A.D. Little and Co.), which is designed to equipstate enterprises with tools and methodologies for corporate planning.Draft plans have been prepared for eaclh of the five enterprises on thebasis of currently available Informatlon and their current objectives andconstraints. These draft plans are now being discussed and wlll providethe base for more comprehensive and detailed plannlng efforts *In future.The experiences of the flve companies In the process will also dictate thefuture generalizatlon of the planning procesa and methodologi-es to allother state enterprises. This planning study has been useful for SCCP Inestablishing a planning capacity, drawing together all relevant material onthe company and identifying the analytical work necessary to extend thecurrent statement of corporate strategy inato a longer-term strategy. Asdetalled below, the proposed Bank project will build upon this initialexercise,

C. Corporate Strategy and Restructurinkg 'Program

4,12 A key objective of the proposed Bank project Is to support themodernization and Improved performance of the cement subsector In generaland of plants owned by SCCP In particular. In addition to supportingInvestment In rehabllitation and 1IMR, training and research activities, theproposed project will produce a medium- to long-term Corporate Strategy forSCCI', detailed business plans for SCCP and each of its plants, includingimplementatlon proposals and programs, and a Management Information System(MIS) required for effective management and planning. The purposetherefore Is to produce a flexible blueprint for SCCP's future development,which will enable It to operate efficiently and profitably in a competitivemarket and to Aeal effectively wit'h Its current and future problems.

4.13 The Corporate Strategy Component is outlined In para 5.07, anddraft terms of reference prepared by SCCP' are attached at 'Annex 4-4. Thisexercise, to be managed by an Internal SCCP task force supported byconsultants, would produce a medium-to long-term strategy for SCCP and itsplants Including the design and implementation of detailed action plans forachieving the Corporation's objectives, and would design and implement acomputerized MIS required for effective management and planning at SCCP andIts plants.

4.14 The core of the exercise would be analysis of the cement marketand SCCP's competitive position vis-a-vis Its competitors over the nextdecade. Based upon these analyses, the task force and c..'-nsultants wouldformulate options for SCCP, which would lead to the preparation of adetailed Corporate Strategy. SCCP has agreed that the exercise shouldexamine all issues relating to Its activities and viability, and 'has alsoagreed that the proposed strategy should be reviewed with the Bank beforefinalization* The exercise will examine the relationship between thevarious agencies of Government and SCCP with a view' to estabolishing aproper environment for SCCP to meet both Its commercial objectives andlegitimate socio-economic objectives. The full support of GOP, both In Its

- 26 -

role as owner of SCCP and also as the originator of sector policy, iscrucial to successful implementation of the strategy. In particular, itwill be essential for Government to clearly specify its general intentionsfor the Corporation's future, especially in the areas of ownership,privatization, and growth of capacity (para 2.31). Purthermore, theexercise will examine product and market opportunities, plant closures andexpansions, labor manning and training and marketing and distribution, aswell as the appropriate relationship between the Corooration and itsplants, including the possible decentralization of functions and thecreation of autonomous subsidiaries. On this basis, the exercise willgenerate an investment program for the Corporation resulting in improvedoperating efficiencv.

4.15 As part of the Corporate Strategy, the exercise will generatespecific business plans for both SCCP and Its plants. The overalloblective is to produce detailed and implementable solutions to thequestions of how the Corporation and its plants should be organized andmanaged, which plants should be closed and where new capacity should bebuilt, and how the competitive position of SCCP can be maintained andimproved. In addition, the Corporate Strriegy exercise will also decign,develop and implement a comprehensive Management Information Systemrequired for effective decision-making at both SCCP and plant level.

4.16 SCCP's management acknowledges the urgency of starting this work,in view of the increasing competition facing SCCP, and has indicated thatit wishes to complete the exercise as soon as possible. SCCP has agreedthat signature of a contract with consultants should be a condition ofeffectiveness of the loan. It was agreed during negotiations that SCCPwill not undertake any major new investments for any of its plants underthe Project prior to completing the formulation of investment criteriaunder the Corporate Strategy exercise.

Iv, TR. PROJECT

A. Project Objectives

5.01 The overall objective of the project is to support the rationaldevelopment of the cement subsector in Pakistan. Recent policy changes andreentry of the private sector have created a more competitive environmentand the opportunity for the cement subsector to become more efficient andinternationally competitive through modernization and rationalization ofproduction facilities, improvement of operatlonal, technical and managerialperformance, and development of new product and market opportunities. Inthe light of the adequacy of the policy framework and the fact that theprivate sector plants are only now attaining full production, theseopportunities can best be secured by focussing upon the largest producer inthe subsector, the State Cement Corporation of Pakistan (SCCP), which facesan urgent need to develop a comprehensive and coherent corporate strategyfor modernization and rationalization of its production facilities and

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Improvement of its managerial and technical performance. In addition, theproject addresses the need for training and research to benefit bothprivate and public cement producers, and also the construction and buildingmaterials industries in Pakistan.

R, Project Description

5.02 The project comprises the following cive components:

A. tWah plant - replacement of five wet process kilne with one large(3,000 tpd) modern dry process production line;

B. BMR program (Balancing, Modernization and Rehabilitation) - minorand medium-scale rehabilitation of five other SCCP plants;

C. Corporate Strategy and Management Information Systems (MIS);

D. 'Human Resources Development; and

E. Cement Research Institute (CRI).

5.03 Component A: Wah Plant. This component finances the conversionfrom wet to dry process operation of the Wah plent, which is located northof Islamabad (see map). The plant currently co-iists of five wet processkilnas, whose ages range from 14 to 64 years, with a total capacity of1,450 tpd of clinker. These kilns are to be replaced by a singlepreheater, precalciner production line with a clinker capacity of3,0nO tpd. A deLailed technical feasibility study carried out in 1986 byDyckerhoff Engineering (FRG) identified conversion to a large scale dryprocess plant as the optimum option for the Wah plant, and SCCPsubsequently determined that the market situation in tbe North justified a3,000 tpd plant. The rehabilitation will increase wah's annual output byapproximately 500,000 tpy and will reduce production costs significantly(para 7.02).

5.04 The conversion comprises the following new equipment: quarryequipment, impact crusher for limestone and clay, covered raw materialstorage and reclaiming facilities, a vertical raw mill, rawmealhomogenization and feeding system, a 3,000 tpd preheater, precalciner kilnsystem, clinker silos, a closed circuit cement mill, cement silos, cementpacking and loading station, Process areas and infrastructure retainedfrom the old plant will be upgraded to permit sustained operation at thehigher production levels. In addition to replacement of the existing powerinput system with modern higher capacitv units, the plant will also beprovided with e 500 kVA diesel generator which will assure continuedoperation of critical process equipment during power cuts. The access roadto the plant will be expanded and paved to accommodate the additionaltrafflc. A detailed project description of the subproject is given inAnnex 5.1.

5.05 Co!monent B: BMR Program (Balancing, Modernization andRehabilitation). This component comprises 22 mediumr-size subprojects infive of SCCP's wet process plants (Gharibwal, Maple Leaf, Mustehkam,

- 28 -

Javedan and Zeal Pak). These plants, whose ages range from 22 to 31 years,face design and operational bottlenecks which prevent them from producingat rated capacity, and experience high maintenance costs brought about bythe need to manufacture in-house many spare parts which can no longer bepurchased. For four of the plants (Charibwal, Maple Leaf, Mustehkam andZeal Pak), technical feasibility studies were carried out in 1986 byDyckerhoff Engineering to Identify BMR subprojects, and for Javedan,subprojects were Identified by SCCP itself. Subsequently the subprojectswere evaluated by SCCP for financial and economic viability, with a view toselecting for financing those subprojects which, with a high rate of returnand a rapid payback, would be viable irrespective of the outcome of theCorporate Strategy exercise.

5.06 The 22 subprojects will eliminate bottlenecks in the plants,replace and strengthen substandard parts critical to major process units,improve efficiency and reduce costs in major process areas and Improveenvironmental standards. Seven subprojects will replace critical parts inmajor process areas, whose failure would result in major productionlosses. These subprojects include the installation of a diesel generatorat Zeal Pak, which would provlde a limited source of power to protect themost critical production units against power cuts. Eight subprojects willconsist of efficlency improvements with high returns, such as new limestonecrushers, belt conveyors, storage and reclaiming facilities in Maple Leafand Zeal Pak and new cement packing machinery at Mustehkam. Ninesubprojects will consist of improvements in environmental standards,comprising electrostatic precipitators at Mustehkam, bag-house dustcollectors at Maple Leaf, Mustehkam, Zeal Pak and Javedan and cementdistribution equipment at Gharibwal and Mustehkam. The subprojects aredescribed in greater detail in Annex 5-2, which also lists the subprojectson which detailed cost-benefit analyses have been carried out.

5.07 Cmonent C: Corporate Strategy and Management InformationSystem. This component comprises the preparation of a comprehensiveCorporate Strategy for SCCP (para 4.12), through which it can analyse andaddress the issues pertaining to Its future development, 'Under thiscomponent, SCCP will hire Internationally selected consultants to assist aninternal task force to prepare a Corporate Strategy based on its long-termobjectives, to design and implement detailed business plans for theCorporation and its subsidiaries, and to design and implement a ManagementInformation System (MIS).

5.A8 Annex 4-4 provides draft terms of reference prepared by SCCP forthe consultants' work. During Phase I of this exercise, to be completed byMarch 1988, the consultants will assist the SCCP task force In developingand refining SCCP's mediumr- to long-term Corporate Strategy. At this time,the Bank and SCCP will carry out a joint review of the strategy anA thetask force's proposals for Phase II of the exercise, During Phases II andIII, which are to be completed by March 1989, the consultants will assistthe task force to prepare detailed business plans for the Corporation andits plants, and to design and implement the MIS, including the procurementof hardware and software systems.

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5,09 Component D: Human Resources Development., Rapid growth ofcement industry capacity, emergence of private sector plants and thechangeover to dry process technology with sophisticated electronic controlsystems are creating a demand for skilled cement industry personnel whichthe country is unable to satisfy. On the basis of a recent analysis ofmanpower needs and available sources for training, SCCP has decided to relyon outside sources for management training, and to establish its own moderntraining facilities for technical and operational personnel. UJnder theproject, an internationally selected consultant specialized in designingcement training facilities and training trainers will review SCCP's twoexisting training facilities (located in two plants) and their trainingstaff, and prepare recommendations for upgrading facilities (includinginstallation of computer-operated simulators) and training trainersaccording to modern methodology. The new facilities would be designed toaccommodate personnel from the private sector as well as SCCP. SelectedSCCP training personnel will receive training abroad, and the consultantwill assist in the implementation of the program. This component,including terms of reference for consultants, Is described in detail inProject File (item B5.2).

5.10 Component E: Cement Research Institute (CRI). This componentcomprises the establishment of a CRI for applied research on cementitiousmaterials, such as cement, concrete and concrete products. On the basis ofa consultant study, SCCP has prepared a propossl for a national CRI to belocated in Lahore, that would consolidate and develop the work of a groupof SCCP technicians currently performing tests on cementitious materialsfor SCCP and private sector clients. SCCP has expressed a desire to limitthe initial scope of CRI activities to applied research on cementitiousmaterials, for which it considers there is an established demand.Initially, the CRI will serve both public and private manufacturers andconsumers of cement, the construction industry and the building materialsindustry by providing accurate analysis and testing of cementitiousmaterials. In addition, it will be responsible for drafting nationalstandards for cement and for cementitious building materials. The projectwill finance the construction of offices and testing facilities for CRI.Initially, operational expenses will be funded by SCCP, but it plans toinvite private sector participation and representation on the CR1 board andto formulate plans for CRI to move gradually towards being funded by fees,in order that its work meets the needs of its sponsors and customers andthat it eventually will be a self-supporting and independent corporation.It was agreed during negotiations that SCCP will take all necessary stepstoward the development of the CRT Into an efficient service-oriented,self-supporting organization with private sector participation. Detailedinformation on the CRI is provided in the Project File (item B5.1).

C. Project Management and Implementation

5.11 The Wah project will be executed by a SCCP project implementationteam acting as its own general contractor. A project implementation teamhas already been assembled of SCCP engineers with considerable experienceof civil and process engineering, construction and project execution,

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largely derived from the commissioning of four greenfield plants since 1980and the installation of dry process kilns at two existing plants. Detailsof the project team and the members' CVs are provided in the Project File(Item B 5.3).

5,12 In view of the scale of the Wah project, the projectimplementation team will be assisted and advised by an experiencedinternationally selected engineering consultant (FC), whoseresponsibilities will be to advise on process selection, plant layout anddesign, tender preparation, bid evaluation, procurement and general Issuesof project management and implementation. The EC will also be responsiblefor designing a critical path program to control and monitor projectprogress and for providlng periodic progress and cost reports. SCCP'sdraft terms of reference for the EC aze shown in the Project File (Item8 5-4), and agreement on these terms of reference has been obtained. Inaddition, the equipment suppliers will be responsible for equipmentperformance, commissioning and supervlsion of erection, and clearallocation of responsibility will be ensured through having bid packagesbased on discrete process arease

5.13 For the BMR component, project implementation teams in each ofthe five plants will be responsible for implementation, under the generalsupervision of the Wah component project implementation team. The latterwill have specific responsibility for procuring the equipment required forthe subprojects under the BMR component.

5,14 SCCP will contract with third parties for design andimplementation of civil works and mechanical and electrical work.Sufficient experienced local contractors are available to ensure acompetitive environment.

5.15 In order to assure timely implementation of the Wah project,invitations to suppliers for prequalification were Issued in May 1987, sothat prequalified bidders can submit bids by June 1988. Similarly,invitation for proposals for the EC assignment were mailed to the fiveshortlisted consultants (already approved by the Bank) in August 1987, sothat the contract can be signed by November 1987. As indicated inTable 5.1 and the more detailed implementation chart in Annex 5-3,evaluation and contracting of equipment packages will take place betweenSeptember-November 1988, and the kiln will be commissioned 36 months laterin November 1991. This time span coincides with world-wide experience forgreenfield cement projects, and can be considered realistic given that thenew Wah production line will be installed on an existing plant site.Implementation of the other components, which will be implementedconcurrently with Wah, are expected to be completed within a span of24-30 months as indicated . More detailed implementation charts are shownin Annexes 5-4 to 5-8.

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Table 5.1

1987 1988 1989 1990 1991compo~---- --- ---- - - --- -

t Activities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

A Wah I --- 12

,~~~~~~~~~~~. , a. -. _ _ _ -

B salancing, Moden4zation 1and ebabilitatimn

1w:~~~~~~~~~~~~~~~~4- -…B-d Ea l o Cracn 4-EupDln

C 5 orporate Strategy 12

4

D thm Resourf Deelopmnt 1Program 2

4

E reaitAg SCPasac Insiuselcpesneataealdaendroieriig1 - Tendler oxownnmts 3 - Civil Wors 5 Erection e seau1staining2 - Bid Evement s & mittracting 4 - oterppeit Deonnvery

5.16 As indicated In para 5.12, SCCP has committed Itself to addressthe long-term needs for training of SCCP and private plant personnelthrougpth component D of this project. SCCP has also made specific plans forthe training of personnel for the Wah plant. To ensure their timelytraining,, SCCP will select personnel at an early date and provide trainingby the following methods: (a) sending selected staff for overseas trainingunder agreements with equipment suppliers; (b) sending other personnel fortraining in the most advanced of SCCP's existing dry process plants; and(c) sending staff to SCCP's existing training facilities, which will beupdated and improved under component D. Moreover, Wah will borrowexperienced operators from other SCCP dry process plants for the start-up

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period. For component B, since no major change in technology is foreseen,SCCP's internal training facilities will be able to provide adequatetraining for the personnel of the five plants. For components C, 1) and E,training will be provided by Internationally selected consultantso

D. Pollutic.i Control

5.17 The major pollutlon problem in SCCP's cement plants would arisefrom particulate emissions from mills and kilns, and the plants do notexperience problems with liquid or poisonous discharges. GOP hasestablished preliminary emission standards and requires the preparation ofenvironmental impact statements for major new developments in order toensure compliance. For the Wah project and for the Mustehkam subproject(under component B), modern and highly efficient electrostatic dustcollectors will be installed for the cement kilns. The proposed equipmentis based on a design efficiency of 150 mg/NM3, which is well below 1oth theexisting Pakistan code of 600 mg/NM3 and the 300 mg/NM3 standard scheduledto be implemented by 1990. In addition, bag-type dust collection deviceswill be installed both in Wah and in selected subprojects under component Bto reduce dust emissions around crushers, cement silos and packing plants.It has been agreed with SCCP that the project will comply withenvironmental standards satisfactory to the Bank.

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT

A. Capital Cost

6.01 Table 6.1 summarizes the total financial requirements of theproject. Total capital cost, excluding IDC and incremental workingcapital, for all components of the project is estimated atPRs 2,495 million (US$144.2 million equivalent), and the total foreignexchange component is esti-4ated at US$96 million equivalent (i.e., 66.6% oftotal cost). Incremental working capital amounts to U1S$1.5 million, ofwhich US$0.7 million equivalent (47%) is in foreign exchange. Interestduring construction amounts to PRa 324 million (US$18.7 millionequivalent), of which US$8.9 million equivalent (48%) is in foreignexchange. The total financing requirements for all the components amountto PRs 2,843 million (US$ 164.4 million equivalent), of whichUS$105.6 million equivalent is in direct foreign exchange.

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Table 6.1

PRa Mill US$ MIlilon ForeipFor- As %of % of

toedl oEi3LW Total Iocal el Total Total Tot(ioent A 8t,d 8

CLvil Works 250.9 0.0 250.9 14.5 0.0 14.5 0.0 8.8EquipnEnt & Spares 177.8 19242.5 1,420.3 11.9 70.2 82.1 85.) 49.9lostallation and Engineerirg 43.3 51.9 95.2 2.5 3.0 5.5 54.5 3.4Start-Mp Expei 20.8 0.0 20.8 1.2 0.0 12 0.0 0.7

Total Base Cost Z2Xr 1i,2%7 1TO7.2 Y. 73v2 103.3 SX

Physical Contingencies 65.7 114.2 179.9 3.8 6.6 10.4 63.5 6e3Price Contingencies a/ 177.3 139.3 316.6 10.2 8.1 18.3 44.0 11.1Total Installed Cost - - -

Coaqxlents A and B 735.8 1,547.9 2,283.7 44.1 87.9 132.0 66.6

(b¢poneit C - Corporate Strategy 15.6 43.3 58.9 0.9 2.5 3.4 73.5 2.1Co3monent D - Training 6.9 46.7 53.6 0.4 2.7 3.1 87.1 1.9Co-vnent E - CRI 48R4 50,2 98.6 2.8 2.9 5.7 50.9 3e5

Total Cost - - - - - -Coq'onerts C. D, awd E 70,9 140.2 21141 4.1 8.1 12.2 66.4

- -67~$6817-44848 -- -442 - 7

Total Cost All Cbnpenent5 806,7 1,688.1 2,494.8 48.2 %.90 1442 66.6 87.7

Working Capital 13.8 11.3 25.1 0.8 0.7 1.5 46.7 09Tnterest During Construction 169.5 154,0 323.5 9.8 8.9 18e7 47.6 11.4

Total FnI equired 990.0 1,853.4 2,843.4 58.8 105.6 164.4 64.2 100.0

Noes:1 Base costs for all cownpents are based on ?hrch 1987 prices.2. Total physical contingenies are about 10% of base cost; loca price es are about 30%

and foreign price i ci about 10% of the respective base costs plus trsicacontingencies.

3. Tans aid duties are about PRM 169.5 miion ( .8 milon euivalen).

a/ For local costs: in FY87 - 5.5%, FY88 - 10%, FM89 - M, FY90 - 7%, FY91 - 5%, and 3.5% annuythereafter; for foreign costs: in F7 - 7.3%, FY88 - 2%, FY89 - 1%, FY90 - 1%, FY91 - .2%,and 3.5% anuamly threafter.

6.02 The base capital cost estimates were prepared from estimates bysuppliers and consultants, and reflect recent costs in Pakistan for civilworke and international prlces for the equipment costs. Calculated on thebasis of capital cost per unit of capacity, base cost estimates comparefavorably with similar projects in most other countires, mostly due to therelatively low cost of construction labor. Summaries of capital costestimates for Wah and the BMR component are shown In Annexes 6-1 and 6-2,

- 34 -

with further details in Project Files. The cost of internationallyrecruited consultants (including consulting fees, travel and subsistenceexpenses) has been estimated on the basis of an average rate of aboutUS$16,0nO per man-month, with an estimated 400 man-months required.

6.03 Despite a high degree of confidence in the base cost estimate,physical contingencies have been set at 102 of base costs for both civilworks and equipment purchases, which allows for possible changes duringdetailed design. The estimates include provision for price escalationusing factors, in accordance with IBTRD guidelines (Table 6.1), applied tothe base cost estimate plus physical contingencies, and take into accountthe expected project lmplementation schedules of subprojects under thevarious components. 'Price escalation amounts to an average of 16% on thebase cost plus physical contingencies, and reflects the mix of projectimplementation schedules.

6.04 Incremental working capital required at start-up Is estimated atUS$1.5 million, and the main elements to be financed would compriseInventories of minor spare parts and consumables. Since most customers payIn advance when placing orders for cement and thus provide plants withresources for use as working capital, the estimated provision forincremental working capital is deemed adequate. Such advances amount toEround eight weeks of sales, and are a major source of financing for ACC'scurrent assets (see para 7.11). Interest during construction ofUS$18.7 million has been estimated on the basis of subprojectimplementation schedules and assumed loan terms as detalled in Annex 7-1.

B. Financing Plan

6.04 The total financing requirements for the project are proposed tobe met as follows:

Table 6.2

Financing Plan

PRs million US$ millionSource Local Foreign Total Local Foreign Total %

LoansIBRD 0.0 1,660.8 1,660.8 0.0 96.0 96.0 58Commercial Banks 328.2 12.4 340.6 19.0 0.7 19.7 12

Total Loans 328.2 1,673.2 2,001.4 19.0 96.7 1157 T5

EquitySCCP 661.R 180.2 842.0 39.8 8.9 48,7 30

TotalFinancing 99n.0 1,853.4 2,843.4 58,8 105.6 164.4 100

6e05 SCCP would provide 30% of the total project cost in the form ofequity from the Cement Development Fund. The Bank loan of US$96 million

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would cover 58% of the total project cost, and the remaining 12% would befunded by local commercial banks. The Bank loan will cover all foreignexchange requirements of the project, excluding IDC and incremental workingcapital. The detailed financing plans for the Wah rehabilitation and theBM4R components are shown in Annexes 6-1 and 6-2. Analysis of the projectedfinancial performance of SCCP and its subsidiaries under components A and Bof the project shows that, under the proposed financing plan, acceptablelevels of debt service coverage and current ratios are maintained bothduring and after project implementation. Agreement has been reached duringnegotiations that all subloan covenants with SCCP will include provisionfor cost overrun financilg to be provided on terms and conditions deemedsatisfactory by the Bank, The Government has confirmed that, in the eventof any cost overrun which SCCP is unable to finance, it will ensure thatsuch additional funds as required will be made available under terms andconditions acceptable to the Bank.

C. Relending and Onlending Arrangements

6.06 The Bank loan of tJS$96 million would be made to the Government ofPakistan. The terms would be in line with recent Bank practice, and wouldhave a ma.urity of 20 years including 5 years of grace and would carry theBank's standard variable interest rate.

6,07 Relending Arrangements. GOP will relend the funds to SCCP on thefollowing terms: repayment over 11 years including a four-year graceperiod and an interest rate of 14% p.a. which is considered adequate tocover IBRD's lending rate, and repayment guarantee, interest rate risk andforeign exchange coverage fees for GOP.

6.08 Onlending Arrangements. SCCP would onlend US$87.9 millionre-uired for Components A and B to its subsidiaries at terms and interesttate identical to those enjoyed by SCC'.

6.09 Effectiveness of the Bank loan to GOP would be, inter alia,subject to the signature of:

(a) a subsidiary loan agreement between GOP and SCCP on terms andconditions satisfactory to the Bank; and

(b) subloan agreements between SCCP and Its subsidiaries on terms andconditions satisfactory to the Bank.

D. Procurement

6.10 Procurement arrangements are summarized in Table 6.3.

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Table 6.3

ee(158$ million) a/

Total WorldCow- Procureient Method Cost Bank

Project Element nent ICe sCB Otber (USS M) Loan

Fquipment & Spares A 68.3/(68.3) 3.6 - 71,9 68.3R 17.0/(13.0) - 3.0/(3.0) 20.0 16.0c 2.1/ (2.1) - - 2.1 2.1

- - 0.6/(0.6) 0.6 n.6F. 2.5/ (2.5) 1.1 - 3-6 2.5

Slbtotal 89,97(85.9) 4,7 3.6/73.6) 8.2 89.5

Civil Works & Buildings A - 19.2 - 19.2 -

' - 1.9 - 1.9 -

D - - 0.2 0.2 -

K: - 1.7 - 1.7 -

Subtotal - 22.8 0.2 23.0 -

Engineering & TechnicalServices A - 3.0 3.6/(3.6) 6.6 3,6

B - 0.6 0.6 -

Subtotal 3.6 3.6/(3.6) 7.2 3.6

(onsultancy & Services C - 0.8 0,4/(0,4) 102 04Y) - - 2.2/(2.1) 2.2 2.1R - _ 0.6/(0.4) 0.6 0,4

S-ubtotal - 0. 3.21(2.9) 4 2.9

Start-up A - - - 1.8 -

RAND TOTAL 89.9/(85.9) 31.9 10.6/(10.1) 134.2 96.0

a/ Excluding duties and taxes (US$9.8 million), interest during construction(US$18.9 million) and incremental working capital (US$1.5 million), butincluding contingencies for each individual item,

Note: Wigures in parentheses indicate amount financed by the proposed Bank loan.

6.11 Bank guidelines will be followed in the procurement of allBank-financed goods and equipment and consulting services. Internationalcompetitive bidding (ICB) will be used for procurement of Benk-financedequipment packages costing approximately US$86 million. The ICB packagesfor Wah have been designed according to process area, while those for theRMR component have been formed by grouping equipment for all of thesubprojects lnto generic machinery groups. Because of their size andcomplexity, some ICR packages are expected to be awarded mostly to foreign

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bidders, Domestic suppliers will be eligible for a preference of 15% orthe amount of customs duties, whichever is lower. Prequalification ofsuppliers will be used for complex packages, and two-stage biddingprocedures will be followed for some packages. The major complex packageswill include erection supervision and commissioning by the supplier.

6.12 Of the US$98.2 million required for equipment, US$89.9 millionwill be procured through ICB, US$4.7 million will be procured through LCBand US$3.6 million will be procured through LIB (Table 6.3). Equipment tobe procured through LIB comprises US$3.0 million for anticipatedproprietary equipment in the BMR component and US$0.6 million for trainingsimulators under component D, where only two qualified suppliers areexpected. No civil works will be financed by the Bank. All local costitems including civil works contracts will be procured according to LCB.Consulting and engineering services (US$6.5 million) will be procured inaccordance with Bank consultants' guidelines. Bidding packages forequipment estimated to cost more than US$1.5 million and all biddingpackages for consulting and engineering services will be subject to theBank's prior review of procurement documentation, resulting in a coverageof 95% of the total estimated value of contracts. The balance of contractswill be subject to ex-post review,

E. Allocation of the Loan and Disbursement Procedures

6.13 The allocation of the proposed Bank loan of US$96.0 million issummarized below:

Table 6.4

Allocation of Bank Loan(US$ million equivalent)

* A&

Category Amount % of Expenditure To Be Financed

Component A - Equipment 68.3 100% of foreign expenditure and 100%of local expenditure (ex-works)

- Engineering &Technical Services 3.6 100% of foreign expenditure

Component B - Equipment 16.0 100% of foreign expenditure

Component C - Equipment 2.1 100% of foreign expenditure

- Technical Assistance 0,4 100% of foreign expenditure

Component D - Equipment 0.6 10U of foreign expenditure

- Technical Assistance 2.1 100% of foreign expenditure

Component E - Equipment 2.5 100% of foreign expenditure

- Technical Assistance 0.4 100% of foreign expenditure

96.0amumc

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6.14 Of the 19 ICB packages for Wah and BMR subprojects, 12 packages,each valued at more than USS1.5 millions account for 96% of the totalvalue (Annex 6-3). Disbursement will be against full prior review of allpackages above TISS1.5 million. For contracts between USS300,000 andUS$1.5 million disbursement will be against ex-post review during projectsupervision. Por contracts of less than US$300,000 and for payments fortraining and overseas visits by local staff of less than US$300,000,payments will be against statements of expenditure (SOE), prepared andretained by SCCP and made available for Bank revlew during projectsupervision. To facilitate disbursements, a special account will beestablished in US dollars at the National Bank of Pakistan, with anauthorized allocation of US$6.5 million for SCCP, corresponding to theaverage disbursement for four months. Applications for replenishment wouldbe submitted on a monthly basis, or when amounts withdrawn are equal to 50%of the US$6.5 million authorized, whichever occurs first. The Bank issatlsfied that, based on past performance, SCCP will be able to furnishaudited accounts on a regular and timely basis.

6.15 The expected disbursement schedule for the proposed Bank loan anda comparator profile for industry projects ln the South Asia Region isshown as Annex 6-4. The comparator profile for Industry projects in theSouth Asia Region, calculated as an average of 20 projects, gives anaverage disbursement period of six years. The disbursement profile forthis project is based on the regional profile and past experience of SCCPIn implementing similar projects. The bulk of loan disbursements areexpected to take place during the first four years following loansignature. The loan is expected to be substantially disbursed for the Wahconversion and BMR components by June 30, 1991, and fully disbursed for allcomponents by June 30, 1992.

F. Status of Project

6.16 SCCP has already obtained clearance from the Central DevelopmentWorking Party (CDWP) for the required GOP Project documentation paper,PC-1. The PC-1 document has been submitted to the Executive Committee forthe National Economic Council (ECNEC) for approval and EtVNEC approval ofthe PC-1 will be required as a condition for loan effectiveness. Draftdocumentation has also been prepared for the selection of the EngineeringConsultant (EC) for project implementation (Project File B5.4), consultantsfor the Corporate Strategy exercise (Annex 4-4) and the training consultant(Project File B5.2). In addition, on the basis of the Dyckerhofffeasibility study, SCCP has prepared layouts and process descriptions forthe Wah component and the subprojects under the RMR component. SCCP andits subsidiary companies have already established the projectimplementation teams required for project implementation.

VII. FINANCIAL ANALYSIS

A. Methodology

7.01 Detailed financial analysis for the project has been carried outin three respectso First, SCCP as a whole has been examined to determine

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its ability to provide eauity funds of PRs 842 million to meet its projectfinancing obligations. This has required analysis of subsidiary companiesnot Involved in the project, but whlch contribute to the Cement DevelopmentFund (para 7.07) and upon whose dividends SCCP's profitability depends.Second, the Associated Cement Company (ACC) has been analyzed to determineits abillty to servlce the additlonal debt associated with therehabilitation of the WJah plant. Third, the five plants undertaking theBMR component have heen analyzed to determine their individual abilities toservice the debt associated with the R'Nt subprolects. The analysisdemonstrates that SCCP and its subsidiaries under this project areprofitable entlties, capable of meeting their debt obligations andmaintaining the financial ratios required by the Bank. The followingparagraphs focus chiefly upon the financial analysis carried out on SCCPand ACC, because of the scale of the rehabilitation of the Wah plant andits impact on SCCP as a whole and ACC. Descriptions of the five plantsinvolved In the RMR and projectlons of their financial statements arepresented in Annex 7-5 and are detalled in the Project File (B7.3-B7.5).

,. Assumptions Used and Forecast of Production Costs

7.02 Details of the assumptions used in the financial projections forSCCP and ACC are provided in Annex 7-1. Projectlons have been made through1994/95, when the Wah rehabilitation project wlll have reached fullcapacity utillzation, Current and projected unit costs of cement producedat Wal are shown in Annex 7-2, The project will result in a decline inWiah's total costs of production of PRs 95.4 per ton, and a decline invariable costs of PRs 210.5 per ton. As Table 7.1 indicate;, most of thereduction in variable costs results from fuel savings whlch will amount toPRs 179 per ton of cement. The remainder of the variable cost reductionsis obtained In the areas of raw material, maintenance and labor costs.Labor costs per ton will be lowered because there will be no need toIncrease the size of the current labor force to operate the larger ploit;raw material costs per ton will be reduced because of more efficientprocess technology including high efficlency dust collectors; andmaintenance costs per ton will be lowered because of improved processdesign. At plants assisted under component A, reductions in costs per tonwill be achieved through the elimination of bottlenecks and replacement ofcritical parts in major process areas, which will maintaln or improve theirrates of capacity utilization, and through improvement in power and fuelefficiencies.

Table 7.1

Wah - Projected Fuel Savings (1986 Prices)

Wet Dr Fuel Savings

Kcal/kg 1,850 800 57Rs/ton 314 135 57

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7.03 The production build-up under component A assumes a kiln capacityutilization 17/ of 65%2 75%, 90% and 100%, respectively, in the four yearsafter start-up. Sales revenues for Wah have been projected using thecurrent ex-factory price of cement in Northern Pakistan, currently PRe 956per ton net of excise duties. Although the Wah plant is located in adeficit area and price increases might be expected in the medium term, theprojections do not include Increases in the esisting ex-factory price.Operating cost estimates for all plants under the proposed project havebeen calculated on the basis of detailed evaluations of labor, rawmaterials, fuel, power and overhead costs, and all operating costs areassumed to remain constant in real terms. For the projections of pro-formafinancial statements, inflation factors have been used In acco-dance withRank guidelines (see Annex 7-1)e

C. FincialProections

7.04 Details of SCCP's and ACC's (Wah and Rohri plants, para 7,09)historical financial performance are contained in Annex 7-3 and summarizedIn Table 7.2.

Table 7.2

Summary of Historical Financial Indicators

1981 1982 1983 1984 1485/82 /83 /84 /85 /86

1c.CPProfit Before Tax (PRs million) -25 33 97 78 163Current Ratio 1.2 1.6 1,9 2X0 4,2Debt:Equity Ratio 47:53 45:55 52:4A 44:56 41:59Long-term Debt ServiceCoverage (Times) * * -0.3 1.1 1.5 3,4 6.7

ACCProfit Refore Tax (PRs million) a/ 11 6 7 48 121Profit Before Tax as % of Sales (%) 4 2 2 11 20Current Ratio Excluding Deposlts 1.5 1.3 1,7 1.5 1.6Debt:Equity Ratio 33:67 18:82 17:83 23:77 37:63Long-term Debt Service

Coverage (Times) 2e3 1.3 2.8 7e1 3.7

a/ Fxcludes contribution to the Cement Development Fund.

1. SCCP

7,05 Since SCCP is a holding companv and has no operating Income ofits own, its financial performance is dependent upon the dividends itreceives from its subsidiaries, interest on investments and othermiscellaneous income. Its pretax profit as a percentage of revenuesincreased from 63% in 1982/83 to 832 in 1983/86, largely because ofincreases in dividends received from its subsidiaries, whose profitabilityincreased after the decontrol of cement prices. At the end of the 1985/86

17/ In this context, 100% capacity utilization assumes 300 days'operation.

- 41 -

fiscal year, SCCP's financial position was sound, with a debt/equity ratioof 41:59 and a debt coverage ratio of over 6.

7.06 The projections at Annex 7-4, which are sumarized in Table 7.3,show that SCCP's net profit is forecast to increase by about 200% (13%p.a.), from PRs 161 milllon in 1985/86 to PRe 483 million In 1994/95, whenthe full benefits of the project will be realized. They indicate a strongand profitahle flnancial position for the Corporation throughout the periodof project implementation.

Table 7.3

SCCP - Consolidated Financial Projections(in Current PRs millions TUnless Otherwise Noted)

Actual Forecast85 86 86/87 87/88 91/92 92193 93794 94195

IncomeRevenues 197 249 282 425 560 703 791Profit Before Tax 163 218 252 363 469 612 70Net Profit 161 151 174 251 324 423 483

Cement DevelopmentFund a/ 513 513 562 517 551 594 639

Ralance SheetCurrent Assets 1*572 2,218 2,712 3,568 4,632 5,835 7,091Current Liabilities 372 420 440 462 583 699 761Long-term Debt 2,019 1,776 1,827 2,537 2,355 2,159 1,963Equity 2,941 39592 4,312 6,241 7,097 8,094 9,196Total Net Assets 5,513 5,969 6,760 9,421 10,215 11,131 12,100

'PatiosCurrent Ratio 4.2 5.3 6.2 7.7 7,9 8.3 9.3Long-term Debt/

Equity Ratio 41:59 33:67 30:70 29:71 25:75 21:79 18:82Debt Service

Coverage Times 6.7 2.7 1.8 3.9 3.9 4.2 4.5

a/ Yearly revenues from the sales of the subsidiaries credited directly t3the Cement Development Wund (para 4,07).

7.07 As noted in Chapter VI (para 6.04), SCCP will be contributing inthe form of equity about PRs 842 million towards the total project cost.This amount will come from the Cement 'Development Fund. During the lastfiscal year, PRs 513 million were credited to the fund, and an additionalPRs 513 million are expected at the end of the current fiscal year.

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2. ACC

7,08 Associated Cement Company (ACC), although incorporated, iscurrently treated as an operating division of SCCP, pending the governmentapproval for the two plants (Vah and Rohri) to be transferred to it in thenear future. Currently, its profit/loss is reflected as dividends in theincome statement of SCCP (para 4.07). Audited subsidiary financial reportsare, however, annexed to SCCP's annual financial report. Historically ACChas been a strong financial performer with a sound capital structure; theproJect is expected to enhance even further both ACC's competitiveness andprofitability.

7.09 ACC has two plants, one at Wah (460,000 tpy) and the other atRohri (250,000 tpy), with combined Installed capacity of 71n,000 tpy.Capacity utilization has averaged approximately 76% for the last fouryears, but increased to 89% in 1985/86 mainly because of a continuing BRRprogram at the Rohri plant. As a result of increased capacity utilizationand higher prices derived from sales of sulphur-reststant cement producedat Rohri, the company's operating profit (profit before depreciation andfinancial charges) as a percentage of sales increased from 11% in 1984/85to 21% in 1985/86. In 1985/86, ACC contributed PRa 110 million in the formof cement development surcharge to SCCP, compared to PRs 38 million in1984/85. At the end of the 1985/86 fiscal year, ACC's financial positionremained sound with a good profitability and liquidity position.

7.10 ACC's production is forecast to increase by about 87? from628,000 tons In 1985/86 to 1178,000 tons in 1994/95, when therehabilitated Wah plant is expected to reach full production. ACC willthen be the largest cement manufacturing company in Pakistan, accountingfor 13% of the total production in the country. As a result of benefitsderived from the rehabilitation of Wah (para 7.02) operating profit isexpected to increase from 21% in 1985/86 to 44% by 1994/95.

7.11 ACC's sales are projected to increase about 12,5% annually overthe next nine years (Table 7.4). Beginning in 1991/92, when the new unitcomes onstream, sales revenues will increase rapidly and the company'sprofitability will start to improve in the following year. In 1991/92itself, profitability is expected to be low because of lower projectedcapacity during the initial operations of the plant. However, the companywill remain able to service its projected obligations. In 1985/86, thecompany's current ratio was 1.6 (excluding advances and deposits fromcustomers, which represent a claim on future production rather than a cashliability; such advances amount to around eight weeks' sales, and are amajor source of financing for ACC's current assets.) At the end of1985/86, the total net assets were PRs 359 million, and the debt:equityratio was 37:63. By the time the project reaches full capacity in 1994/95,total net assets will be PRs 3,382 million, and the debt:equity ratio willbe 24:76. Throughout the period, the debt:equity ratio will be sound.

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Table 7,4

ACC - Consolidated Financial Prolections(in Current PRs millions)

Actual Porecast85786 P 7W 88 90/91 91/92 9

Average CapacityUtilization (M) 89 84 84 84 78 83 90 95

IncomeRevenues 619 602 662 804 1,165 1,340 1,594 1,793Profit Before Taxand Dev. Surcharge 121 86 95 124 107 233 407 547Internal CashGeneration 37 54 58 64 448 521 607 634Debt Service- Principal 8 5 5 5 216 212 212 212- Interest 3 2 2 193 163 134 104 74

Balance SheetCurrent Assets 252 285 345 527 816 994 1,312 1,672CurrentLiabilities 225 224 246 297 560 605 675 730OutstandingLong-term Debt 3n 25 26 1,489 1,273 1,061 849 637Equity 52 93 141 936 1,044 1,254 1,580 1,963

RatiosCurrent Ratio 1.1 1.3 1.4 1,8 1,5 1.6 1.9 2.3Current RatioExcl. Depos. 1.6 1.8 1,9 2.5 1.9 2.1 2.6 3.1

Long-term Debt/ ARquity Ratio 37:63 21:79 16:84 61:39 55:45 46:54 35:65 24:76

Long-term DebtCoverage Ratio 6.5 7.9 8.8 10.2 2,2 1,5 1.8 2,0

7,12 Even if the total value of ACC's sales were to drop by 10% as aresult of reduced cement prices, debt service coverage would drop below1*5 times only during the first year of operations. Also, it must be notedthat, although the financial projections assume that the production fromthe wet process units will cease as soon as the dry process unit comesonstream, Wah will, in fact, be able to run some of the old kilnsconcurrently with the new unit until production from the new unit isstabilized, In financial terms, this means that production losses duringthe start-up period will be minimal, and that in all likelihood salesrevenues will be higher than forecast. Because of the sound financialposition, no additional covenants, e=cept those stated in para 7,16, willbe included in the Project Agreement (see para 7.17). Detailed financialprojectlons for ACC and SCCP are given in Annex 7-4.

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3. _R

7,13 The five plants under the 1MR Component (Gharlbwal, Javedan,Maple Leaf, Mustehkam and Zeal Pak), have been profitable, operating atabout 9n-95% of capacity utilization, and the MBMR component will extendtheir productive life and malntain profitability. A brief summary of thehistorical and projected financial statements for the companies under theBMR component can be found in Annex 7-5 , and more detailed statements arefound in the Project File (B?.3-B7. These financial projections reflectthe benefits from the BMR components.

Do Financial Rate of Return

7.14 Details of the financial rate of return calculations for the Wahrehabilitation project are presented In Annex 7-6. The base case pre-taxIRR for Wah is 2M%. The net present value of the cash flow discounted at14%, the assumed cost of capital in Pakistan, is PRs 381 million.Sensitivity tests on key assumptions concerning cement prices, capitalcosts and project implementation periods have been performed, and theresults are summarized in Table 7.5 below. The tests indicate that theconversion subproject remains financially attractive under reasonablevariations from base case conditions. Break-even analysis indicates thatthe project will break even at a capacity ucillzation of 59%.

Table 7.5

Wah - Sensitivity Analysis

NPV of Break-evenFuture Capacity

Pre-tax Cash Flows Switching tJtili-IRR (PRs Value a/ zation() million) (X) (%)

Base Case 20.0 381.0 82 59Capital Cost Increase by 10% 18.2 277,0 86 61Six-Month Delay in Startup 18.9 377.0 84 62Capacity tUtilizatlonDecrease by 10% 17.5 207.0 88 65

at The percentage of the base-case sales price at which the financialrate of return is 14%.

7.15 Details of financial rate of return calculations for the plantsunder the BMR comoDonent are provided in Annex 7-5. With the exception ofthe pollution control subprojects, for which returns have not beencalculated, the average return for the WMR components amounts toapproximately 56%, reflecting the short pay back periods for investments.

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E. Financiai Covenants, Auditlng and RepLn Aguirements

7e16 To ensure the maintenance ef a sound financial position, inaddition to the covenants relating to the financlng of the Project(para 6.05), SCCP and its subsidiaries will: (i) maintain a current ratioof not less than 1.3, and a debt:equity ratio not greater than 67:33; and(Wi) not incur additional debt for further investments if to do so wouldcause the long-term debt:equity ratio to exceed 67:33 and/or the projecteddebt service coverage to fall below 1.5 timese

7,17 Audit of public sector accounts in Pakistan is performed at threeAistinct levels: first, continuous audit by the company's internal auditdenartment; second, year-end audits by statutory auditors; and third,audits by the Auditor General's office. The internal control andaccounting systems employed by all project entities are sound, and providea satisfactory basis for management control and decision making. SCCP hasagreed to have: Mi) all project accounts and financial statements auditedby the subsidiaries' statutory auditors and submitted within six months ofthe end of the Company's fiscal year; and (ii) quarterly project progressreports and semiannual financlal statements submitted on a timely basis.After completion of the Project, SCCP will prepare and furnish acomprehensive report on the Project, Its implementation and Initialoperation, and the costs and benefits derived and expected to be derivedtherefrom.

VIII, ECONOMIC ANALYSIS

A. Assumptions Used

8.01 For the economic analysis, capital and operating costs used inthe financial projections have been adjusted by excluding taxes andduties. Power, which tcresents approximately 25% of the variable costs ofproduction in the rehabilitated Wah plant, has been shadow-priced by afactor of 1.06 18/ from PRs 96 per ton of cement to PRa 102 per ton toreflect its economic costs. All other costs have been adjusted inaccordance with factors shown in Annex 8. The output of the Project isvalued at a reference landed price for imported cement of US$49 per ton.This is based on current FOB prices Mediterranean ports (Spain and Greece)of around US$28/ton for bagged cement, and approximately US$15/tort freightcharges to Pakistan ports, plus port handling and insurance charges ofUS$6/ton (PRa 100/ton), Sensitivity tests have been conducted assumingthat International FOB prices fall to a long-term low of US$15/ton forbagged cement, which, with the same transport, handling and packingcharges, would give a reference landed price of TJS$36/ton. An additionalUS$18.5 (PRs 315) has been added to these prices to take into account thecost of inland transport by rail to the North,

18/ The shadow price of power has been calculated by consultants for theKalabagh Dam project, and is considered a reasonable estimate by theBank.

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B. Economlc Rate of Return

8,02 The economic rate of return for the trah rehabilitation project isestimated to be 28%. Sensitivity tests, as detailed in Annex S andsummarized In Table Ro1, have been carried out to assess the Impact ofdeviatlons from base-case assumptions, including a 10% Increase in capitalcosts and a fall in landed import prices to US$36/ton. In all cases, theeconomic rate of return would remain above 24%. The net present value ofthe cash flows discounted at 14%, the assumed cost of capital In Pakistan,is PRs 1,043 million. The rates of return for the BMR component are muchhigher (ranging from 33-86%) due to the short payback period.

Table 8.1

Wah - Sensitivity Analysis

NPV ofFuture Switching

E.RR Cash Flows Value (X)

Rase Case 27.5 1,043 61Capital Cost Increase by 10% 25.6 952 64Six Months Delay in Start-up 26.1 1,037 62Capacity Utilization Decrease by 10% 24,7 795 66Output Value at TUS$36/ton 24.5 763 68

C. Other Benefits

8,03 Tn addition to the foregoing quantifiable benefits, the chiefimpact of the Project will be to Increase domestic supplies of cement,mainly in north Pakistan, at low incremental cost; the incremental outputof the Project by.1,994/45 is estimated at n.5 million tons or 5% ofprojected domestic demand In that year. Most of the increase will resultfrom the increase In capacity at the Wah plant, but smaller productionincreases will be generated from existing capacity In the flve plants underthe BMR component. The Project will thus contribute to the development ofthe Pakistan economy by reducing future shortages of a basic commodity, theperiodlc unavailability of which in the past has created severe bottlenecksand disruptions to economic activity in user industries. The Project willalso create a marginal increase in employment among domestic equipmentmanufacturers, which are expected to supply about 5-10% of the equipmentrequirements for the Project, and in downstream industries, particularly inthe construction sector.

8,04 The Project will also play a role in Institution building throughthe provision of outside technical assistance to strengthen SCCP'sexpertise in implementation and operation of large-scale projects. TheCorporate Strategy will assist SCCP to respond efficiently to the newmarket environment and emergence of the privat. sector. The HumanResources Development component would benefit the whole cement sector, by

- 47 -

providing facilities for training technical and operatlonal personnel fromboth public and private sector plants. The creation of the Cement ResearchInstltute will assist both manufacturers and c,nsumers of cement and theconstructlon industry by providing testlng on cementitious materials and bydrafting national standards for currently available types of cement and fornew cements when the need arises.

D. Major Risks

8,05 There are a number of risks which could affect the project, andtheir likely impact is evaluated below:

8,06 Delays in Project Completion, Inefficient civil workscontractors, inexperlenced project implementation teams and delays In thesupply of major equipment are factors that can lead to serious delays inproject completion and thus project viability. Constderable steps havebeen taken under the current project to minimize the risk of such delays.SCCP's project team comprises competent staff with recent experience indesign and execution of projects of up to 2,000 tpd capacity. SCCP hasalso agreed to recruit a comretent and experienced consultant/engineer toassist in the critical phases of project implementation. Nelays in thesupply of imported equipment are unlikely because all foreign suppliers arecurrently underbooked and can offer minimum delivery time. In connectionwith the installation of new cement plants during the last few years, theconstruction contractors in Pakistan have mechanized and have become moreefficient, and no unusual delays are expected in this area.

8.07 Power cuts have been a problem for all Industries in r3centyears, largely because of periodic droughts. In spite of continuinginvestments, power generation is expected to remain a problem in Pakistanfor the foreseeable future, Rowever, SCCP is alleviating the problem byInstalling captive generating capacity. Tlnder the proposed project,500 kVA diesel generators will be installed at Vah and Zeal Pak, whichwould enable crltlcal units to keep running and prevent equipment damagefrom unexpected power cuts.

80S Corporate Strategy. A major purpose of the project is toformulate a medium- to long-term Corporate Strategy for SCCP and to prepareoptions for its development, so as to allow the Corporation to respond tothe development of the cement market in a comprehensive and economicallyefficient fashion. The strategy exercise will generate business plans,which will identify plant expansions, closures and efficiency improvements,including rationalization of the labor force. The risk is that thepolitical difficulties of closing plants and reducing the labor force inparticular localities will prevent SCCP from implementing the necessarychanges. While these risks cannot be handled or reduced wichin theproject, the aim of the Corporate Strategy is to identify clearly theeconomic cost of various options and therefore to demonstrate the cost tothe Corporation and to the economy at large of rot carrying out therestructuring of SCCP* Moreover, It is intended that GOP participateactively in the periodic review of the outcome of the various stages of the

- 48 -

Corporate Strategy exercise Including application and implementation of theagreed atrategy. In addition, there exists a risk that SCCP would beaffected by ,-hanges by the Crvernment in the policy framework, whetherdesirable or not. To deal t. th this risk, the Bank has obtained acommitment from GOP that it will review the policy framework periodicallyand maintain policles conducive to the efficlent development of thesubsector.

TX. AGREE.MENTS

9.01 Agreements have been reached with GOP that it will:

(a) participate in the formulation of a Corporate Strategy for SCCPand take all measures for its Implementation (paras 4.14 and8.08);

(b) provlde the necessary funds to SCCP to cover possible projectcost overruns In case SCCP Is unable to provide such funds(pera 6.05);

(c) relend the full loan amount to SCCP on terms and conditionsacceptable to the Bank (para 6.07); and

(d) riintain a policy framework conducive to the efficientdevelopment of the cement subsector (para 8.08).

9.02 Agreements have been reached with SCCP that it will:

(a) prepare and review with the Bank and GOP, prior toImplementation, a Corpofate Strategy and a Management InformationSystem (paras 4.14 and 4.15);

(b) not undertake any major new Investments in its plants beforeinvestment crlteria have been determined under the CorporateStrategy exercise (para 4016);

(c) take steps to develop the Cement Research Institute, Initiallyunder the auspicees of SCCP, but with provision for converting Iteventually into an autonomous organization to be supported byfees from cement producers and consumers (para 5.10);

(d) operate all project facilities in accordance with environmentalstandards satisfactory to the Bank (para 5.17);

- 49 -

(e) ensure timely availability of the necessary funds to cover,ossible project cost overruns (pars 6.05);

(f) onlend US$87.9 million to the six subsidiary cement companiescovered under components A and B on terms and conditionssatisfactory to the Bank (para 6.08);

(g) procure goods and services In accordance with Bank guidelines(para 6.11);

(b) follow agreed reporting and auditing requirements (para 7.16);and

(i) maintain, and cause to be maintained a debt:equity ratio of notmore than 67:33 at all times, a current ratio of at least 1.3 anda debt service coverage of 1.5 (para 7.17).

9.04 The following events are specified as conditions for loaneffectiveness:

(a) signing of a contract between SCCP and the selected consultantfor execution of the Corporate Strategy/MIS exercise (para 4.16);

(b) execution of the subsidiary loan agreement between GOP and SCCP(para 6.09);

(c) execution of the sub-loan agreements between SCCP and thesubsidiaries (para 6.09); and

(d) approval of the PC-1 document by the Executive Committee of theNational 'Economic Council (para 6.16),

9.05 On the basis of the above agreements, the Project is coniaderedsuitable for a Bank loan of US$96 million for 20 years including 5 years ofgrace at the Bank's standard variable interest rate, The establishment ofa special account of US$6.5 million is envisaged under the proposed loan(para 6.14).

EMENA Country Department ISeptember 1987

50 - ANNEX 2-1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

List of Proposed Private Cement Plants atVarious Stages of Sanctioning and Pre paration

Name Proposed LocationPuniab

1. Pioneer Joharabad2. Jabbi Sargodha3. Taraki/Ittefaq Jehlum4. Crescent Khusab5. Thal Thal6e Fateh Jhang Fateh Jhang7, Fauji Jehlum8. Naseer Shah Jehlum9. Noor-Barkat D.G. Khan10. Valika Burhan

Sind11. Khairpur Kot Diji12. United Thatta13. East-West Ongar14e Fakir (Islamic Cement) Karachi15. Sind Larkana16. Sehwan Dadu17. Adam Dadu180 Galadhari Dadu

NWFP19. Qureshi Hattar20. Waziristan Derazinda21. Anwar Bolan

Azad Kashoir22. Kashmir Muzaffarabad

Source: SCCP.

EMENA Technical DepartmentJuly 1987

PAKISTAN - CFME! INDIA?M -N= P BC

Details of Operatin Cement Plants and Plants under CoDntruction

Nominal Nomnal

Noimial Installed Instaled

Kiln Clinker Cemnt

Capacity Commis- Capacity Capacity

plant No. of b/ Process sioning c/ d/

NO. Name of Company location a/ Kilns (tp) Used Date ('000 tpy) ('000 t)

1 e MUStehkam Cement Ltd (Public) Taoila 2 550 Semi-met 19651 1,000 Dry 1981 630 660

2. Associated Cement (Public) Wah 1 150 wet 19221 150 Wet 19281 250 Wet 19371 300 Wet 19511 '00 wet 1971 435 457

3. 1(ohat Cement Co. Ltd. (Public) Kobat 1 1,000 Dry 1983/84 300 315

4. National Cement IndustriesLtd. (Public) Dandot 1 200 wet 1937 60 63

5. Dandot Cement Co. Ltd. (Public) Dandot 1 1,000 Dry 1982/83 300 315

6. Gharibwal Cement Ltd. (Public) Pind Dadan Rhan 2 600 Wet 19641 600 Wet 1968 540 567

7. Maple leaf Cement Factory Daudkhel 1 400 Wet 1956

Ltd. (Public) 1 600 Wet 1962 300 315

8. Associated Cement (Public) Rohri 1 200 Wet 19381 600 'Wet 1971 240 252

9. Zeal-Pak Cemnt Factory Hyderabad 2 400 Wet 1956

Ltd. (Public) 1 400 Wet 19581 400 Wet 19632 1,000 Wet 1969 1,080 1,134

10. Javedan Cemet Ltd. (Public) Karachi 2 500 Semi-dry 1964/651 1,000 Dry 1980 600 630

Nominal NominalNominal Installed Installed

Kiln Clinker CemntCapacity Comuis- Capacity Capacity

Plsnt No. of b/ Process sionitig c/ YNO. Name of Company Location a/ Kilns (tp) Used Date (t000) tp) ('00 tpy)

II* National Cement Industries Karachi 1 250 Semi-dry 1937Ltd. (Public) 1 450 Semi dry 1937 210 220

12. Mtatta Cement CD. Ltd. (Public) Thatta 1 1,000 Dry 1982/83 300 315

13. D.G. Khan Ceumf Co.Ltd. (Public) D.G. Khan 1 2,000 Dry 1985/86 600 630

14. Cherat Cement Co. Ltd. (Private) Cherat 1 1,100 Dry 1984/85 330 347

15. Pakiand Cement Ltd. (Private) Karachi 1 1,000 Dry 1984/85 300 315

16. Dadhaboy Cement Ltd. (Private) Karachi 1 1,000 Dry 1984/85 300 315

170 Fecto Cement Ltd. (Private) e/ Taxila 1 1,100 Dry 1986/87 330 347

18. Attock Cement Project (Private) Karachi 1 2,000 Dry 1986/87 600 630

19. Pak Cement Co. Ltd. (Public) e/ Daudkhel 1 570 Wet 1986/87 171 180

20. Syrala Cement Project (Private) e/ Quetta 1 250 Dry 1987/88 75 79

21. FATA (Public) e/ D.I. Khan 1 300 Dry 1989/90 90 95

a/ See attached map (IBRD 20235) for plant location. Plants are located in or near the listed city.b/ Capacity in tons per day.c/ Information provided by the company. As a rule, companies in Pakistan calculate their total installed cementcapacities by oultiplying the total daily kiln capacity by 300.d/ To calculate cewent capacity, clinker capacity is multiplied by 1.05 to take into account addition of gypsum.e/ Currently under construction.

Sources: SCCP and Bank staff.

ENA Tecbnical DepartmentJuly 1987

- 53 - ANNEX 2-3

PAKISTAN - CEMENT INDUSTfY MDDERNIZATION PROJECT

Number of Cement Plants and Kiltn by Zone Plant Size-985/86 Aid 1990/91)

Plant Size (million TPY)<0.33 0.33-0.66 >0.66 Total

Number of Number of Number of Number ofZone #/ Plants Kilns Plants Klnes Plants KilUs Plants Kilns

1 1985/86 2 2 1 3 0 0 3 5199O/91 2 3 2 3 0 0 4 6

II 1985/96 3 4 2 8 0 0 5 121990/91 3 3 3 4 0 0 6 7

I'L 1985/86 1 2 1 1 0 0 2 3199O/91 2 2 1 1 0 0 3 3

IV 1985/86 4 5 2 4 1 6 7 151990/91 3 3 2 4 1 6 6 13

Total 1985/86 10 13 6 16 1 6 17 351LO/91 10 11 8 12 1 6 19 29

F/ Por definition of zones, refer to attached map (IBRD 20235).

RIN Toebr-chal DepartmentJuly 1987

ANNEX 2-4- 54 - Page 1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Nominal Protection, Effective Protection and Domestic Resource Cost

1. Over the current decade, the Government of Pakistan hasincreasingly moved away from quantitative restriction and towards the useof tariffs as the foundation of its trade policy towards the cementsubsector. With the nationalization of cement plants in 1972, productionand internal and external trade in cement became a state monopoly,organized and managed by SCCP. Between 1976, when Pakistan became a netimporter, and 1981, SCCP was the only importer, and the scale of imports,whose cif price was well above the domestic cement price, was regulatedlargely through the amount of foreign exchange made available to SCCP.During this period, the tariff rate on imports was only 10%, and as Table 1indicates, domestically produced cement, which alone is subject to excisetax, was taxed at a far higher rate than imported cement; in 1980/81, the"net tariff", i.e., customs duty less the excise tax, was PRs -416 (-47% ofcif price).

ANNEX 2-4- 55 - Page 2

Table I

Cement Prices, Fxcise Taxes and Tariffs, 1980-86

Fiscal Year1980/ M9811 1982/ 1983/ 1984/ 1985/81 82 83 84 85 86

(1) Cement Retention Price(PRt/ton) a/ 496 486 498 830 930 930h/

(2) Rate of Excise Duty (PRa/ton) b/ 504 564 664 332 332 332(3) Ex-factory Price (PRs/ton) 1,000 1,050 1,162 1,162 1,262 1,262(4) (2) as % of (1) 102 116 133 40 36 36(5) Excise Duties Collected on

Cement (PRs billion) c/ 1099 2.04 2.08 2.85 1.50 1.63(6) Total Federal Excise Taxes

(PRs billlon) d/ 10.41 11.74 13.12 15.65 15.31 15.25(7) (5) as % of (6T 19 17 16 18 10 9(8) Average cif cement price

(PRs/ton) e/ 882 827 757 630 549 538(9) Average Customs Duty (% of cif

or PRs/ton) f/ 10% 15% 32.5% 62.5% 70% 550PRe(10) Surcharge (rof cif) - - 5 5 5 10(11) Total Customs Duties (9) + (10)

(PRs/ton) 88 124 284 425 412 604(12) "Net" Tariff (PRa/ton) p/ -416 -440 -380 93 80 272

(% of cif) -47 -53 -50 15 15 51

a/ As of end of fiscal year: includes for FY83/84-85/86 PRs 12 fortransportation surcharge.

b/ As of June 30 of fiscal year.5/ Does not include excise duties collected on production of private cement

plants.d/ Source: CEM, February 18, 1986.e/ Source: Monthly Statistical Bulletin, Federal Bureau of Statistics, GOP.f/ Represents average duty rate during fiscal year. See text for details of

changes.I Total custoim duties minus excise tax.

h/ For plant in the south; in the north, retention price is PPs 968 per ton.

2, In July 1981, the private sector was authorized to import,under normal import licensing arrangements, as the shortage of cementexceeded the Government's and SCC'"s capacity to allocate sufficientforeign exchange for import. Sir.ce then, the tariff rate has graduallyincreased; it was raised from 10% to 20% in January 1982 and to 25% in July1982 when a 5% surcharge was also introduced. It was again raised to 40%in January 1983, 55% in June 1983 and 70% in June 1984. The final increasewas made in May 1985, when the tariff rate was changed to a specific tariffof PRs 550 per ton, to discourage underinvoicing, and the surcharge wasraised to 10% of the cif price. Over the same period, the net tariff alsoincreased significantly, not only because of the increase in the tariffrate but also because of the decline in excise taxes (see Table 1). Theincrease in the tariff rate was partly in response to rapidly declining

-56 - ANWI 2-4Page3

world cement prices brought about by excess supply of cement and thepractice of large exporters to sell at or close to variable cost wbiletheir own domestic markets were protected by tariffs. In addition, thetariffs were increased as part of the Government's proposals to reduce widedisparities in the structure of protection between Industries and toprovide necessary financial incentives for private sector producers toinvest in the cement subsector. The level of tariffs set in May 1985 wasestablished to provide a reasonable rate of return for private sectorproducers, in lieu of the cost-plus pricing and guaranteed rate of returnpolicy under which investment sanctions for privately owned cement plantshad been given. In light of this, the Government has refused requests bythe new private producers to Increase protection further.

3e The nominal rate of protection for the cement Industry inPakistan is shown for Karachi and Lahore in Table 2. The calculation ismade on the basis of an estimated long-term c&f import price of U8S43 perton, As Table I indicates, this price is somewhat higher than importprices recorded in Government statistics in the 1985/86 fiscal year.However, a number of factors have led to the conclusion that the observedprices of about US$32 are too low as an estimate of the long-term referenceprice for evaluating the competitiveness of local production. First, theobserved prices have been spot prices for small import volumes, which wouldnot be obtainable for large, longer-term contract amounts. Second, much ofthe low-priced cement has been frov the TJSSR and East Europe, and has beenof lower quality, a feature that has been reflected by imported cementbelng sold in the Karachi market at discounts of PRs 40-60 per ton comparedto domestically produced cement. In addition, much of the cement from theUSSR and Eastern Europe has entered as part of barter trade agreements,which makes price comparisons difficult, and Importers have indicated thatpoor packaging of this cement (recycled paper that is glued rather thanstitched) has led to higher losses, as much as 10% compared to normallosses of about 2%. Third, some cement has been imported in ships whichhave been on their last voyage before being broken for steel scrap onGadani Beach near Karachi. As a result, real transport costs are believedto have been understated.

ANNEX 2-4

- 57 -Page 4

Table 2

Reference Prices and Nominal Protection

Karachi Lahore

1 C & F Price (US$ per ton) 43 43(PRa per ton) 744 744

2. Import Tariff & Surcharge (PRs/ton) a/ 624 6243. Other Importing Costs (PRe/ton) b/ 100 375c/4. Landed & Warehoused Cost to Importer (PRs/ton) 1,468 1,7435. Transport Cost for Domestic Cement from

Manufacturer (PRs/ton) d/ 30 806. Manufacturer's Notional Ex-factory Price

(PRs/ton) e/ 1,438 1,6637. Manufacturer's Notional Ex-factory Price Less

Excise Tax (PRs/ton) f/ 1,106 1,3318. Actual Current Ex-factory Price less excise tax 930 9689. Reference Price A/ 814 1,03910. Gross Tariff Rate (Z) h/ 84 8411. Net Tariff Rate (Z) i/ 39 3912. Notional Nominal Protection (X) i/ 36 2813. Actual Nominal Protection k/ 14 -7

a/ Tariff of PRi 550 per ton plus surcharge of 10% of c&f price (PRe 74per ton).

b/ Other importing costs comprise: PRSInsurance (2% of cif value) ee.......e..,. 1-6L/C Opening Charges (0.5% of cif value) .... 4Wharfage & Stevedoring (PRs 14/ton) ........ 14Wastage & Handling Losses (2% per ton) ..... 15Importer's Margin (5% of cif value) o....... 37Import License Fee (2% of cif value) .... o.. 15

Total 100c/ Includes PRs 275 per ton for rail transport from Karachi to Lahore.d/ Cost of transport of cement from factory to market,e/ Landed cost less transport cost for domestic cement (line 4 minus

line 5).f/ Excise ta) amounts to PRs 332 per ton.L/ Reference price - c&f price plus other importing costs minus transport

costs of domestic cement, i.e., line 1 + (3-5)o Reference price iswhat the domestic manufacturer's ex-factory price could b. in a freetrade situation.

h/ Import tariff and surcharge compared to c&f price.i/ Import tariff and surcharge less excise tax compared to c&f price./ Notional nominal protection is calculated as manufacturers' notional

ex-factory price minus reference price, divided by reference price.k/ Actual nominal protection is calculated as manufacturers' actual

ex-factory price minus reference price, divided by reference price.

ANNM.X 2-4- 58 - WX24-58- ~~~~~Page5

4, On the basis of these factors, discussions with importers inPakistan and the current and projected state of world cement prices, it hasbeen concluded that YIS$43 per ton can be considered a reasonable long-termc&f import price of standard quality cement in Karachi port. This pricecomprises an fob export price from the Mediterranean area (Spain andGreece) of about 1JSS2R per ton of bagged cement, to which should be addedabout USS15 per ton sea transeDort to Karachi. Further attempts to verifythis price projection during the project appraisal were rendered difficultby the recent lack of imports. The decline in -etail prices in the Karachimarket coupled with the continuing devaluation of the rupee has meant thatimports have virtually ceased, with the exception of small amounts fromEastern Europe. Discussions with a large firm that was previously a majorimporter indicated that quotes of up to US$48 per ton cif Karachi had beenobtained over the last six months.

5. Measured against a c&f price of US$43 per ton and a landed priceof US$49 per ton, the notional nominal rate of protection in the Karachimarket is 36%, and in Lahore 28%. In other words, at the reference importprice, local manufacturers would be able to fix an ex-factory price (net ofexcise tax) of up to PRs 1,106 and PRs 1,331 per ton in Karachi and Lahore,respectively, before losing their market to imports. In fact, because ofincreasing competition in a market characterized by excess supply, localmanufacturers are unable to obtain the full benefit of the availablenominal protection. The actual Karachi price is only 14% above thereference import price, and the Lahore price is 7% below. With the currentex-factory price (net of excise tax) of PRs 930 per ton in Karachi andPRs 968 per ton In Lahore, c&f import prices would have to fall to US$34per ton for imported cement to be competitive in the Karachi market, and toUS$24 to be competitive in the Lahore market (given cement duties andexcise taxes).

6. Table 3 ptesents estimates of the effective protection for cementproduction in the Karachi area. T'wo calculations are given. Case A, whichindicates positive effective protection of 40.7%, reflects the degree ofeffective protection permitted to local producers by the nominal protectivestructure and thus estimates the degree of protection that would beavailable if domestic producers sold at an ex-factory price of PRs 1,106per ton. In fact, with the actual ex-factory price of PRa 930 per ton(Case B), actual effective protection amounts to -3.1%, which means thatdomestic value added has to be less than value added in a free tradesituation. Over the past year, effective protection has fallen becausedomestic energy prices have not been reduced as much as international fuelprice, and thus the implicit tariff on fuel imports has increasedsignificantly (see footnote of Table 3).

- 59 - iANX 2-4- ~~~~~Page 6

Table 3

Calculation of Effective Protection for Cement Production in Pakistan

Costs Domestic Costs atExcl. Non- Import Taxes 'Porder

Costs a/ tradeables Duties (% or PricesCost 2oMonents (PRs/ton) (PRe/ton) (7) PRs/ton) (PRs/ton)

Raw Materials b/ 65.56 3.28 - 7 3,08Fuel Oil 181.29 181.29 - - 140.09c/Power 131.7n 131,70 - - 140.11t/Stores & Spares 57077 57.77 60 10% 32.82-Packing 73.43 73.43 70 10% 39,27Other Manufacturing C-osts 9.42 3,Ote/ 10 - 2.73Overheads 14.75 - f/ - - -Depreciation 74.89 59.90&/ 40 20% 35.65Labor 95,59 -- - -

Interest 48.85 - - - -

Transport to Market 30.00 30.00 - - 33,33fI/

Total 783.25h/ 540,37 - - 427.08

Effective Protection Calculation Case A Case BI. Domestic Retention Price 1,106 930

ii. Reference Rorder Price(US$43 + PR8 85) i/ 829 829

iII. Domestic Value Added j/ 565.6 389.6iv. 'World Value Added (829 - 427.1) 401,9 401.9

Effective Protection - 565.6 - 401.9 - +40.7% 389,6 - 401,9 m -3.1%4 1.9

a/ 1985/86 production costs for Javedan.b/ 95% non-tradeable.,cl Fuel oil shadow priced assuming import price at average of last six months,

i.e., US$75 per ton, and domestic price of PRs 1,650 (US$95.4) per ton.d/ Power shadow priced using a conversion factor of 1.06, as recounended by

Kalabagh Dam consultant study.e/ Other manufacturing costs assumed tradeable to the extent of 30%.f/ Overheads assumed non-tradeable.j/ Depreciation assumed to be tradeable to the extent of 80%.h/ Domestic transport costs shadow priced using a conversion factor of 1.1.i/ Shadow price of handling costs (see Table 3 footnote b/).i/ Domestic retention price less tradeable costs (PP8 540.6),

7. With such a level of effective protection, cement productionfalls very much in the lower range of effective protection In Pakistan.,The most recent comprehensive study ol effective protection in Pakistan(PIDE, 1980/81) calculated an effective protection rate of 60% for theIndustrial sector as a whole, and almost half had effective protectionrates above 80%. Although Government has introduced a number of generaland specific changes to Pakistan's incentive structure since then, it is

ANNEX 2-4

- 60 - Page 7

not considered that they materially affect the conclusion that Pakistan' scement industry is relatively under-protected. High protection in industryin general has been Identified as a major constraint upon the efficientdevelopment of Pakistan's industrial structure, and the Government isexpected to introduce over the next few years a phased program of tariffreform to lower effective protection and to rationalize the structure ofprotection in indtustryo Although the Government should continue to monitorlevels of anid chaniges in effective protection in the cement industry,especially since it is sensitive to changes in fixed prices and importprices of cement, the anialysis does indicate that there is no urgent needfor tariff reform in cement.

8. In addition to demotnstrating the net impact of protection upon anindustry, the level of effective protection is also indicative of therelative incentiveG for investment in the industry (the higher the level ofeffective protection, the higher the incentive), and in addition it isfrequently used as a rough indicator of economic efficiency (the lower thelevel of effective protection, the less scope for inefficiency). However,the calculation of domestic resource cost (DRC) is a more accurateindicator of the degree of efficiency. Tables 4 and 5 present DRCcalculations for Javedan and rehabilitated AC Wah plants. Javedan waschosen to represent the average plant in Pakistan, and the calculation forAC Wah is presented to demonstrate the potential for economically efficientcement production in Pakistan, when plants of internationally proven scaleand technology are located correctly in relation to raw materials and themarket.

9. As the tables show, cement production in Pakistan is, at currentcosts, economically efficient both in the Karachi area and in the inlandareas, when compared with imports at a c&f value of US$43 per ton and alanded price of US$49 per ton in Karachi. In order for the DRC for Javedanto increase to unity, the landed price would need to decline by about 10%,and thus the c&f price would have to fall to about US$38 per ton.

ANNEX 2-4- 61- Page 8

Table 4

Domestic Resource Cost, Javedan

Non-Tradeable Tradeable TotalCosts Costs d/jTT T ( PR'000 Ats) ('000 PRs)

Ae Value of Output a/ - 489,880 489,880

B. Value of InputsRaw Materials b/ 32,926 1,733 34,659Fuel 0 82,545 82,545Power 0 82,932 82,932Stores 0 19,429 19,429Packing Material 0 22,315 22,315Labor 56,578 56,578Other Manufacturing Expenses 2,434 1,145 3,579Admin. and Selling 8,379 8,379Other Expenses 1,914 1,914Cost of Capital c/ 45,702 26,382 72,084Transport Cost 19,100 19,100

Total 147,933 255,581 403,513

Domestic Resource Cost CalculationImport Value of Output 489,880Foreign Exchange Cost of Inputs 255,581

Net Foreign Exchange Saving 234,299Domestic Resource Cost 147,933

DRC Coefficlent 00631

Net Economic Benefit 86,366

Benefit Cost Ratio 1.214

a/ Costed at US$43 per ton plus PRe 85 per ton for landing and porthandling costs (see Table 3, footnote if).

b/ Estimated to be 93% tradeable.c/ Depreciation plus interest payments.d/ Tradeable costs shadow priced as in Table 3.

Source: SCCP and Bank calculation.

ANNEX 2-4-62- Page 9

Table 5

Domestic Resource Cost, AC Wah

Non-Tradeable Tradeable TotalCosts Costs d/

(PRO PRs) ('00 fig) (000 PRO)

A. Value of Output a/ - 1,122,312 1,112,312

B. Value of InputsRaw Materials b/ 21,746 1,145 22,891Fuel 0 99,140 99,140Power 0 97,226 97,226Stores 0 20,011 20,011Packing Material 0 38,943 38,943Labor 67,390 67,390Other Manufacturing Expenses 3,114 1,465 4,579Admin. and Selling 10,866 10,866Cost of Fixed Cap. 175,887 105,713 281,600Transport Cost 31,733 31,733

Total 279,002 395,376 674,378

Domestic Resource Cost CalculationImport Value of Output 1,122,312Foreign Exchange Cost of Inputs 395,376

Net Foreign Exchange Saving 726,936Domestic Resource Cost 279,002

DRC Coefficient 0,384

Net Economic Benefit 447,934

Benefit Cost Ratio 1.664

a/ Costed at US$43 per ton, pl.ts PRs 435 per ton for handling costs andtransport from Karachi to Islamabado Handling costs shadow priced atPRs 85 per ton (see Table 3, footnote i/) and transport costs ofPRa 315 per ton shadow priced at 0.9 (see Table 3, footnote h/).

b/ Estimated to be 95X non-tradeable.c/ Depreciation plus interest payments.d/ Tradeable costs shadow priced as in Table 3.

Source: SCCP and Bank estimates.

EMENA Technical DepartmentJuly 1987

- 63 -

PRKISTRN CDIEtIT I Y NDERIZRTIC PROJENT I#K 2-5

SCCP hanufacturing Cost 1965/06....................... , --.- SCCP----

(RS/Ton caent) mrage era awarmuerae All Dry Rll SCU l1 Dry

n/ a8/ / 8/ b/ a/ b/ b/ C/ cl cl a'b Prmces Promess PrivateZealpak Uah Rohri flpleleatfN oal Bribalilstehbw Javedon ihatta Daot Kohat Plants Plants Plants Plants d/

Uariable Cost -..... - ------ .----- . . ..... ............................... .... .. .-_ ... . .

kwulNterial 13.2 is.9 50.3 20.6 72.9 79.7 t2.4 65.6 62.4 3.5 34.9 52.6 46.9 51.0 43.0fuel 292.4 317.9 292.6 281.9 290.1 271.6 203.2 181.3 125.9 150.1 161.0 266.8 1%.? 233.7 261.8Pewr 110.2 83.6 99.0 76.? 169.3 *0.1 102.5 131.7 93.2 89.9 115.1 106.1 9%.1 103.4Stores I Spares 54.2 65.2 72.2 48.5 49.8 43,6 66.0 57.8 57.1 39.0 65.0 57.3 53.7 56.3 33.2Packing Cost 75.9 74.4 75.9 76.0 77.8 76.1 76.0 73.4 78.? 75.8 75.9 75.7 76.9 76.0 113.5

........... ........... .. - - - ----- ------- - - . ------- - - -

Total triable 575.9 592.S 590.0 506.8 656.9 5M11A 192.1 509.8 407.2 391.2 451.8 558.4 119.1 520.1 451.5(In US) 33.9 34.9 31.? 29.6 38.9 31.8 28.9 30.0 24.0 23. 26.6 32.9 24.7 30.6 26.6

Fixed Cost

LdOr 127.3 129.7 166.3 115.7 176.8 48.5 74.3 95.6 54.3 57.2 80.2 116.8 63.9 102.4 32.9Other tlnut.Exp 13.4 10.1 11.9 5.8 5.6 2.1 -0.6 6.1 6.3 9.8 11.9 7.0 9.4 7.6Depreciation 21.1 16. 23.0 16.0 20.2 16.4 74.6 74.9 194.8 215.9 253.5 33.2 221.4 84.5 259.0raicitai Char. 12.3 4.7 .7 0.9 19.3 0.9 43.8 49.9 163.9 152.3 162N8 16.9 159.7 55.9 246.60.6. I NO Exp. 17.4 22.1 22.1 9.9 22.3 18.2 19.8 14.8 20.2 12.4 21.9 18.2 18.2 1 24 3Other Exp. 2.2 0.0 0.0 9.1 2.2 6.0 10.9 3.4 0.7 0.0 1.S U.1 0.? 3.2Deterrd Exp. 0.0 0.0 0.0 0.0 0.0 4.1 0.0 0.0 11.6 0.0 0.0 0.S 3.9 1.4

lotal Fixed 196.7 13.3 228.0 155.9 246.5 96.1 224.1 243.5 451. 447.7 531.9 196.7 477.1 273.2 563.6(In US) 11.6 10.8 13.4 9.1 14.5 5.7 13.2 14.3 26.6 26.3 31.3 116 28.1 16.1 33.2

Total Cust 772.6 776.2 818.0 662.2 905.3 637.5 716.1 753.3 959.0 845.9 983.? 755.1 896.2 793.6 101S.1um.ua 6o0s11"*a nocuo us uuuuu,u nocuouas a"""uq **Reaso3 3333333 333se3 3us3a33 StusSS 3 3 3*3l333 3"am"03

(In US) 45.4 45.? 48.1 39.0 53.3 37.5 42.1 41.3 50.5 49.8 57.9 44.4 52.7 46.7 59.7

Total Cost Excluding kpreciation Iinne Chrges 736.1 755.1 790.3 645.3 965.7 620.2 597.7 629.5 500.1 177.7 567.4 705.0 51.1 653.2 508.7(In USO) 43.3 44.4 46.5 38.0 50.9 36.5 35.2 37.0 29.4 28.1 33.4 41.5 30.3 38.4 29.9

a/ get promss plants6/ Plants vith both dry I wet process kilnscl Estimtedd/ 1r process plantsNotes Exchne rite 1 0* uPRs.17, average for 85/86.

EMENA Technical DepartmentJuly 1987

- 64- ANNEX 3-1Pagie 1 of 2

iOn UIS8 HLst(MICAI, CVEIU CQtoum lnPI 1976177-1965664

(mousue rons) 0 1 o m I A t I19?6/17 I01[ttZ 1902/83 19q3t04 19841/O 19935/6 1917-#S 1902-X 12

10ff I.......... ... .-.............. .... 00.00

PEfNtco 122.90 l 3.9i t9'.t2 2:.76 19.90 S.34 1. 4RNOlAN 3.19 11.02 i.407 .4.87 14.8 9.42 I.ShpalAl 39.2? 60.71 14.02 44.25 44.32 1.52 *9.93'VAX 0.0O 0.00 0.54 7.18 1.69paaU 19.:1 23.05 70.11 24.38 22.02 1.62 -1.514307ttAM 0.00 97.71 103.45 1M.I7 107.44 3.NANSENA 853.0)2 12.09 25.48 34.21 4..37 -.42 20.40OQNI6?A4 0.00 1.54 0.94 2." 2.75 20.11CHI4TRAL 7.49 0.65 1.81 3.48 3.05 -10.42 67.42l0e 0.0 8.11 432 11.11 MA.M l&.

SIfAt 21.72 46.40 42.162 34.42 34.1 4.74 -I."FRE tRI0L AM 0.00 0.81 1.94 1.03 1.64b 31.84AlMANO AGECI M 0.0 18.22 9.39 12.22 11.44 *13.6784JA)iU 0.00 2.11 2.29 4.75 715 . 51.41.K.aifR 0.00 14.67 10.20 7.57 8.24 4I7.3mm" 0.00 4.14 1.97 2.57 3.46 05. nKURRA 0.00 16.f 20.52 17.04 19.58 5.19MAIlRISTAN 0." 4.6 7.71 t7.87 14.19 45.2A4AKZAI 0.00 3.86 .74 3.98 S.ff 0.7No" Am$ 0.0 14.56 12.84 14.46 13.57 '2.34tAIAN 0.00 65.54 61.14 6.17 0.21 45.24NULFFARAI3 0." 15.26 14.99 11.68 24.46 17.01pOONcH 0.0 8.93 9.96 13.44 19.11 26.6?

TOTAL iOnE 1 330.04 b90.01 40.24 693410 674.03 713.39 9.54 -0.76 3.22

in1 2

1.1. KMNA 1.42 32.14 26.62 46.50 65.16 19.28 25.24I4USI0.0 O.0 14.12 1.T90 22.44WAKKM 0.00 0.00 5.00 7.65 8.57L ,hh 376.35 554.9" 34.92 630.96 b82.33 7.72 8.4XWimm . 73.08 129.71 139.91 159.66 160.57 10.34 .47JIAIT 44.17 10.22 129.97 135.58 132.15 14.05 9.64

91143. S1.63 106.34 116.40 134.11 121,23 11.21 4.91lmIW Wm 32.46 69.083 7.94 7.04 87.64 13.21 7.31JNE 42.73 76.53 95,58 104.73 93.74 10.32 7.09S^OO F5.16 77.32 70.00 72.91 12.93 2.84 -1.93RI*IU1 29.98 27.20 20.47 27.22 30.76 0.32 4.06P1t/AUI 365.09 431.65 436.05 494.11 503.44 47 5.24TOM M." 50.20 43.73 52.51 42.15 414 7.4

KITLI 0.00 11.68 S. 4 11.16 14.24 7.0?81W1 0.Of 405,9 41.44 50.2 350.55 7.59

-n.2 [doo 1 1_C *2004 aeec. e1 4 L79

70743.1"12 1154,21 140.12 175.89 2024.&F 2104. 2416 6.84 7.6 9.0"

PAKISTAN CEI4ET INUSTt 1114YRIUSATION FROJECT Age2X 3-1'A ZON lE NISE HISTORICAL CEENT CONSUMPTION 1976/77-1985/06 Page 2 of 2

(THOUSAN TONS) 6 R OW T H R A I E9174,77 1981482 1962193 1993/84 1994/05 1195t%9 19771-5 1992-95 1982-06

ZONE

RAHIN tAR kI4AN 14."0 25.91 24.16 23.52 3;.64 11.58 9.23BANAWALPUR 27.12 35.10 29.96 47.90 47.92 1.38 10.94BARAVALASAR 9.66 16.72 15.50 15.08 16.92 7.26 0.400.6. KHAN 14.73 17.10 11.81 32.64 31.09 10.14 23.09LIEAN n.00 0.00 1.02 7.16 11.12RAJAUR 0.00 0.00 0.15 2.24 4.47NUTAN 65.29 113.14 120.89 145.27 140.93 6.40 7.60VEHARI 1.'4 15.20 17.34 11.47 15.20 29N.8 -0.01NJUZAARBARH 7.10 14.60 12.70 9.20 10.72 5.29 -10.19SAHINAL 32.15 53.70 41.38 31.13 37.36 1.90 -11.39OKRA 0.00 0.00 5.73 23.60 17.37TOBA TEK §IN6N 0.00 0.00 15.7? 21.55 23.01KASJR 14.44 29.73 33.47 39.54 39.07 11.43 9.54FAISAD 122.31 168.N 177.42 197.85 203.65 4.49 6.95JHaN 20.75 39.32 38.54 33.22 42.30 9.38 2.43SUKKUR 54.53 63.94 92.13 117.46 115.40 9.33 11.19KNAIRPUR 9.01 23.97 25.33 27.00 29.17 15.02 6.75LAIKAN 23.34 17.81 13.1, 12.64 10.11 -12.28 -17.19SNIKA0H1 0.00 4.37 6.72 6.94 7.44 20.40JACOSAD 17.43 5.77 4.46 11.10 14.64 -0.43 42.92MTTA 65.94 60.90 56.57 91.17 79.50 2.37 9.29PISHIN 0.00 0.44 1.05 3.13 2.49 57.24sl3 4.49 2.49 3.18 4.63 11.49 12.74 63.13NASIRABAD 0.00 0.37 2.13 3.32 4.46 129.45KALAT 2.5 2.17 2.20 3.14 10.53 19.34 56.04LORMLAI 2.84 2.75 1.28 2.47 3.14 1.17 4.52ZHOP 0.00 1.70 1.83 2.46 7.20 61.02HARI 99T1 0.00 0.83 0.9 3.22 3.35 59.39I.UCHI/KOM.U 2.51 0.45 0.01 0.39 0.37 -21.28 -6.32

OTARt ZON1E 3 541.87 738.16 769.93 920.53 979.67 1052.253 7.68 9.89 9.27

ZONE 4

ARACHI 742.46 1373.7 1243.71 1P39.27 1350.96 7.77 -0.56HNY AA 138.23 142.63 147.29 204.95 183.07 3.57 8.6830tHN 7.19 10.42 10.12 7.10 4.79 -4.96 -22.94THATTA 4.2 15.9" 19.83 20.93 27.41 10.99 19.690AIU 21.74 24.75 24.9" 25.9 23.48 0.97 -1.73NASM 22.31 23.57 20.92 13.97 21.04 -0.99 -3.69TMARPAR 14.19 17. 19 15.03 14.16 12.59 -1.49 -9.34SANB 6.45 13.06 13.53 13.14 14.22 10.38 -1.91LASIELA 11.81 10.41 20.13 9.57 10.70 -1.23 0.29KNUZDAR 0.00 0.22 0.73 1.34 3.96 163.34KHA 0.00 0.01 0.25 0.01 0.29 207.23TURIAT/PANJIUR 0.00 0.00 0.43 2.10 1.195646 0.00 1.06 1.17 1.04 0.92 '4.61CHM;I 0.00 0.23 0.00 0.21 0.04 43.94

TOTAL ION 4 971.70 1463.43 1351.33 1707.49 1454.57 146 .364 488 0.39 0.43

TOTAL PAKIRTAM 2u77-ua AMq1, a7 'A7 sn ttM U 'A1Q Y290.50 7-7A a Ar LAs

cart ,e¢g |er t PZ.l @2?1 Ge�1 0~e Owo9. ao' 9 ml

MOI Dul Mo'1'1t <<1 61 1v Mol MI° MI1" MI1 ml m -.Moo Mo. alm mine. me.l o Mo. iml ml l wo euWO moo ewe woo e_oo ,e c_e _we MO wo weewe esse ewe@ tee' ewe o w ewe eesx o teoe @8+ e IIure @ewe teo ewe ew"e 0e two ewe w* ewe i§ AMoo MO W90 fu0 P 0 N90 6W0e moo cello W0 WOO OWOO mm2

-1 WOO mie WeO WOO mle .e mle ml moo g

&110 01300 0PO, WI'0 011 L '? "0 .110 01P@ Um tehatOf ewe U or ewe ocr. WI I's ocr. WIV woe are moo 01 =WO ' tO1 NlMl m o M1 000 Ole **' al mWll§ No$ "N' o1'§ 0t*0 Y'§1 WOO@ =06"1 al o"a cogo 1I

469 uo asoo Mls oul "* 000* Mob oso all | all 00 cole IN 3ag aol "* ^o OwN aore tro ar ml ult o taswo alv

3rO

art eU;1 art ui* ai91 eu°i art1 ini in, ow; owt I &

*0. NL,@ 6W0 Oi ore @80 W@ tO IV W X@ tWOt 3-EeU WA1_m _e _m _m mme mm e mm .me. _ _

eM sire mooe Mose Meo A*$ 80e "$e no Wo 0re amm4119e lacre Otto$ att 6o eOlee Ol mI w 0 e e 0 l r 0o acre IK1e br w

3-lumo o t O W40 oI4,e "Of 0 WT 6M0 *e*e la*e *ee' ard mma~fhd-- 3 0 _ses mooeeeee eaS. ea-6 e.e me me. woe _

.e"e MO e cre ewe acre tore0 Co. ae'. o0 woo woo 0Sa80133 311ww

1 EW

06ke:* 1 gefl1 Zo#I1etIeo 06ieui 6WN6 @811041 £019161 90-9e81

I OlivEM mm ma vm mu~

0,

9 .o IZ-t xmk 99w

W3*'4 Bt' B'*4 cz'* '4 =s's 1LR t 4 r W1o S'Is o&l s"x Mwsi

919t ' M l it° t Mlg sill 91 1 ml' 3t 9'? £ mV1 WlBU'm Aww

11H9 .1., 01169 0119 *U91 ol9 * S9 Q?5 ON L W'I'S W1S?Wd ml= a

blt-it al' olI Gi 1 41 91 eal gal al't int o'S 01 s gm Va

VISWI 19?' OW) | l OW) OWl OW) W1 not BWI Ml 1 M MAMI ViIem.. mam _-_e a- meMb em me - m. e m

We0 M0 I 0wo WOO solo woo woo woo woo WOO WC O0 team1609W0 wo 0 9 W0 woo *0'0 *00o WOO woo $891 MS, mWNuW90 Woo0 #0"§ *0 We0 0 0 fl90 *CO 0*1 WOO Woo AlMl

ooCo wtlo WV we We ow 0o W* zr. one or so "K0'0 owo *0 *N' O WO Of'0 ft? 0v* oU,O zr VO§ S§ '

*bo,z o6oz 01eo1110Ms *1 owz *101 ;ol*li oi sill fll? oWM mIS 3108 it a.100mem, eHOA w-mm .m. M...O -100Ps d.Me.. WtmPw .me.. somm *... m

Krl W0 aeoe eogr ff'0 We@ gt@ 6ff0 We@ IV0 We'0 1i1iu*0e'l WI *01 "cot wool Olt obl @n0 '1l @80' 600'1 3 TM

009' 0OHIO 890 wo *.o Woo So We0 ooo 9*1'0 W' 9 '0 P

Wa'S 110'S D1' 01104'S 06'0 0 S'S1 I110'0 '10 110.0 s11k' @00's 0 3 Val-

001'S1 MO$ SOS' *also 000, *0'8 000'S O*#o we' 4o MO' O

mis aiwe

SIC'S 6tS'0 OteL' 00' 01.01' 513'S 0t3 ir ste'sll0 aim 31108 w

4099 00940 Wso 'so woo 5W0 W.0 S .0 W90 W.0 wo 509

*@@-e o o,o, #* ne. v*_ eCme me..m se.. m_. m.. SOe *CPC*w SOC550

96/IMI 16C/664; eo,goi gtiiSl Zi/IMI 16it1 011i4 63/804 "8h1 l j5COi 98/5,

'496 lW2949 OilSUNd 5)

133XS88 8011#11 1 w

9 ;o _Z-E XNV -9 -

-68 - ANEX 3-2

P0015100 WSV 1N3STA a iZAiSi Fe(A,, Z pBoJW CMCITY vftLiz*1ltfi 'r Nis

1905160 1906,6? t9U 19 1"ll" 19199191 1 9 92t 1993193 I" IwMiq 1"3

'~~isvmamo *.o em *-e o. o. .0 *.w _.. '9 .. .TPIC c?m

O9. .0 9.6 .00 .06 .. 0. 0 I."0 0.O '"$ L"KWAI 0.t1 .ol 0.8 to"$ $."O Os tow I.0 $090 oo"o 0.

TIOL P19C m11

ma c.8 O."6 OM O."s $m 0.0 OM" ."$ O."i ."O 6"game" L O O . 00 . 10*0 @.= 0S O."o O."s O."s I.= 46

OflL 10 I

m

m: LO 9.969 0 .9 o.9 0. 9.M 0.9 L.9 9.9 0.9 0.9

milt am l.WV 1.0 900 9.000 L.0W LO6 LO6 *.M0 LO L.009 .069UtI3 1.929 9L.$0 .9 L.O9 L.9 9.9 L950 9. L. 9.90 9.

olea @~.9W 1.069 1.10W 1.66 1.00 1.6 1.6 1.061 1.60§ 1.00 1.66NMU S 0.90 906. 9.5 0.3 9." 9. 1. 1.66 1.W 1.0 1.0

tulo 09.00 C*.ei LO L.66 9.009 .06" 9l.6 001 CAO 0690.0 .9.Plow 9.66 L. 0.0 9 L L0 0.06 9.0 .Q 9.0 0.0"

cow. 9.060 9.0O LON LON6 L.40 LO66 9.06 L.0 LON 9.00 9.6MT& LO. 9.0 9.00 0.0 Q 0.000 0L069 0.0 00 0 .90L LO

018. LON PW LON 19 LM LO L0 LO .0 6.0 L1

wi FQtV N

WO@ $005' Moo Ow., #''0 w'o Ws woo moo e" @*00.14,5l 006'0 006'S WeS @06'0 MOOS WOO' WOO' 05u'S W9' 005O0SI

006*' 006Sf "*e a' Nb'S e6'S Pb'S OUT Lle ' " '.O gqA'19uI'I 0s00s1 @w1 0'1 0s';1 OsO' "D1) Mal =1 "0' *1600 swum

ML= 311nm rs

Mot~ M " Ill 0001 00@'1 e"'1 Met met MO ot 00001' Woo "II Won' BOO' wo'o Wooe'. soBoee'mo M*$se'sn 'WIO*$' 0061'S 'l Wo's eu'S 0540 #6'S0 06'0 004' 006S 1X'0 e'mot mo"o Ml# wo "Olt M" W0 wa o Mao 0#0 061 1o %=lf

004 Moo &° Wo 69010 ONI MOO WOO> WOOt° M* WOO ime

aqlla 31um V

oso's sw's woo us's woo u' woo 'ol osos w' wooe'. cr ow';o ; m wn30

Al= 31 t

fwnls3) II M?

e 3litli 019IM 40 OuMd WASNoi69 i 6

ai 3U Wl

we' 1' se9' wes ' 0' s' o' o'~08s e' Ss'

'u iw; an *tt 616* £r sore sore ai'at o coO1'. core , g m t 0

Woro Wcoo ew0 Wore eee' Woo mooe woo saeo' moo iwo0ex vtWO' WO O WOO l0OWO I Wo* Moo 080O0 woo moo re wooS OWO Moo 5Ol cOreo Moo WOre moo moo WO *'olote _toe tr o_e _o _cor _w cor sw eoeo ow"90'4 09'§ Moo moo Moo "go# 010 Woo is0"0 full -woe I&

core ewe ewe tore toe' cor ewe zero "e cw'e e

9. 46 61a 1 01 Oll' 1 P91 itU'? SO'l Wi 1 4W'1 SlY'2l W1 1 v1iOnws coe gso a... .. S.. gamao= S.S.. sea. ease. ame &memo

UT1'O Ot 61i' &UTI 6' W1' oo 19Ul' KIP0 iw0 woo Moo WINtw/dIto tWlO Ito'O ltO tK'O tr Woo itoe tloy fic",O t"o wB'e core oog co'o or " * c cor core ewe cor"#e we'.

0K'Ob wg' set' wr' o t's *g' wz' eo are ow os' aiV Y

eco'o °' m s co' ou' me m's s1's tlr' Slt'O ct'. Shgwftl@ 11'§ tt11 01t'# s"1'101' Owl $610l woo ml § 006 WoAN UYI Atl,' I£919 £Ht1O £li9 £l'it tilc' '*il uon' 0qt6' milli I so VW

Moo' w.'e au'e aWe au's tw us's s :ste sit'o irse ug'o Il 119howta

me0 Mo ase, 40"a 0 WOO .ml Me, WOO mm.0 m4 WOO

se coe'ao ewem loo'se moo', MCore ame'mspme ~ we'so 0000 we's,ono oi' Mooi title Mooi ti*rs gseeo Moo weo 19e' go 'eo

3,., ,** ,** 39*5v 39b5 ia'o, U9'S z,vo sir.0 ut's OC9'

Vol= 31

_e. a. m p as. sbane mwom,4* me.oo.o me __ e e.. ee*

39W* 5g91~ 3bl 'l £9',1 t0 h 1" 1 l £l(bl 55901's1 CZ9'O 11'09l otY'SO

%-%bl a atitnm LUMpi

(1X 11"1 "121 V o 0 tV

g55~5@e 5...... eSmos. ROOCOOS a.a.s o@ e .;-X2IR -OL-

m 6t 6>£r

*906 910.6 904 1 * '0 tsAl W' Welt WL 10'Sl met! btl'S wi 8

0t¢t Ito's to1's "I It 11*°t cul =gt' Wes Ito" Mo 096ow MlSIM au .1 1v

In ts, 1W§ 9*1' ?U'5 cZ'St 93 ASil 1ts; 'at "*b 1X)d s zz

t;os §"': oSpe ol.s t ZoO; *o: " *oc l t zl't o1tri t 0 in0 tSOsJ

ewi Mot oW- u1 agzz; gol s2'i 301t StV1' Mooa IMM uilthw viol

.Me.." .0-.b OCOO 00104 0.m. me840i0. amm 00 .0o..0

"0'00 00""e 01 woo 0011 40-4 Woo Woo $moo We ta ou10

.oo Moe no's no'o Woo no's No*$ Moo'S no' Moo o' IO

WOO PV' usO no "s o us's nO ', se' wt1t sir ws n's

693'so snt's Moo twt* titl DCs cs cs e 01'stio o llt gtl to nows

?ttO f it'S 0 it 0 tir 0 iZ'S LItS tIC'6 tiC'S 1Woo Q 1 W O11t £

sot'. 1m'6 so' s"O' sot'S' 1sore soc's m's soOslsore

&'re123J NAVAISi

milv M't W'I tte'1 ? 31'O 9 105

.. Ome e. em. mo. e. em _e _ _.~.

AWt'S tIOt Lt'S LOt'S ltt'0 lot"$ LKor so lt's O Or 11

66'S We' "s wo' 6s0'0 WO' We' WO's "n' o Wo ats;e un Vr

sirs us§ 'S NO'S *0 sire (' SirS Lt1'S tWO' tOt'S IN"WVI4WIS

MOO' eo&s MOO woo Moo Woo' plea ones NI'O WOO' USwo s z

jXe' ott 96lb sue Woo ot> 611b0 Ot60O ibiti§ t1"o 01t-0 * ml VMo l

ISO'S 11444 U00' ISO'S 1'*0 I101 15,llO W1' 5101 ??0l0o WOO 1S I&I4 'WLOL

_m. me_ _. _.. mem em_. _e me.. a..o - we.. m

mo's 00sir "am"" OW'S SiS ss s1s',0 sos"' we's 0051 Glce

ISO'S 15001 1U10' I1 Its 11's 150'S lO'O IW1 696"' ItWo .0vim

511 631' lU' 431 a'0 M'S 630' 4' S t 131 SB'S fl*(l' 50S1I fl94W bD1

wsoooe 6940 al* 6* oo We _1* wo oo woo oioo NM*I oM o vol

"woom, 0*0`C Os"om .00e. me...s e00.m WOODS e..a. mom., me. W.bCAO

lI? a lo LUo also . mo 10 mo'S Lar' I9 nz I l*ow( 11W '3

ttq" tt9t6 U9. Itro wo tw tno 2N S tew tfq,(. ot I'( @£ 0'l mmi @ 0

ZtIB'o Z?9'St uaJ*I it;', UO 01191 tb i018' 0191 ;ZZ91 0l93o1 at'..I91jJi 3110

~~1,ru,,I~ ~ 4, UD

oeftwooo ~ ~ ~ e aa" 0040 OVSofoeft>*e, wo _*ooeoooo awft. G000

9t696 9112M6 ai 0 la P30X

9 ; 9 . .aZ-E XR

-

-72- ANNEX 3-3Page 1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Projections of Cement Supply and Demand, 1985/86-1995/96

1. Since the policy changes in the cement subsector introduced byGOP in 1985, renewed attention has been given by cement producers andfinancial organizations to the issues of the future growth and location ofdemand for and supply of cement in Pakistan. The existence of regionalsurpluses and deficits and their immediate impact in a free market upon thesales price of cement producers have resulted in studies to determine theperiod during which these surpluses and deficits can be expected topersist. Furthermore, GOP established during 1986 a special committee toassess market trends and to help rationalize future decisions by existingproducers and new investors concerning scale and location of new capacity.

2, The two most significant studies conducted within Pakistan in thepast year or so, which were fed into the GOP committee, were conducted bySCCP and NDFC. In addition to examining these studies during thepreparation and appraisal of the proposed Bank-financed project, the Bankalso prepared its own projections of supply and demand on a national andregional basis. The purpose of this annex is to set out the details of theassumptions and methodology underlying the Bank's projections and toexplain where the results differ significantly from those of the SCCP andNDFC studiese

Forecast of Supply

3. The Bank's forecast of production for the period 1985/86-1995/96is based upon capacity figures which include only new plant or capacityexpansion that have already been sanctioned and have firm financingarrangements. The forecast allows for possible delays in the completion ofnew plants and also assumes the National Cement Company plants in Karachiand Dandot will be phased out by 1988/89. The projections, which arepractically identical to those contained in the SCCP and NDFC studies,indicate annual increases in capacity until 1991/92, at which time totalsubsector cement capacity is expected to amount to 9.9 million tons.Annex 3-1 supplies the plant-level details of annual clinker capacity 1/for the period 1985/86-1995/96.

4. The forecast of production has been based as much as possible onpast performance of plants. For existing plants, capacity utilization isassumed to approximate past levels, but has been adjusted where necessaryto reflect rehabilitation investments. For new plants, production has beenassumed to increase from 65% of rated capacity in the first year ofoperation to 75% in the second year, 90% in the third year and 100% insubsequent years. For plants in the South, capacity utilization rates have

1/ Clinker capacity is converted into cement capacity by dividing by0.95, to take account of the addition of gypsum to clinker in thecement production process.

- 73 - ANNEX 3-3Page 2

been set at lower rates than in the North in view of the cement surplus inthat area. The forecast also assumes that the entire production of theAttock plant would be sold in the domestic market.2/

5. The Bank's production forecast projects that production willincrease from 5.71 million tons in 1985/86 to 9.06 million tons in1995/96. While the Bank projection compares closely with the projectionsproduced by SCCP and NDFC for the end of the period, the intermediate yearprojections involve wider dispersion. This is because both NDFC and SCCPprojections assume faster production build-up than the Bank projections.

Forecast of Demand

6. SCCP has forecast, based on housing statistics and historicalgrowth rates, that cement demand would grow at 6-7% per annum on an overallcountry basis, varying from 4% in the Southern areas to 10% in Baluchistanand Azad Kashmir. Similarly, using the relationship of demand with GNP andtime, the NDFC has forecast an overall growth rate of approximately 6.5%per annum, with 5.5% for Sind, 6% for NWFP, 7% for Azad Kashmir, 16.6% forBaluchistan and 6% for Punjab. The NDEC figures produce a higher absolutelevel of demand than SCCP because the former adopt a larger initial(1986/87) demand level. A Committee set up by the Government specificallyto assess the cement demand/supplrJ situation in the country has endorsedthe NDFC forecast.

7. Less than two years have passed since GOP decontrolled cementprices, and there is not yet sufficient experience of the market's behaviorin the new environment to suggest significant long-term changes in pricesor consumption patterns. Therefore, for its own projections of demand, theBank has relied on regression analysis to forecast cement demand. Sincehistorical data on consumption of cement by sector or in individual marketsare not available, demand projections using multiple regressions are notlikely to be reliable. Moreover, since cement demand is determinedprimarily by the level of construction activities, which in turn areclosely related to the overall level of economic activity in the country,the Bank has used value added in construction and GDP growth rates toforecast cement demand.

8. During the 1975/76-1980/81 period when imports were restricted,there was considerable suppressed demand as evidenced by a jump inconsumption in 1981/82 following liberalization of imports. However,consumption figures from 1981/82 onwards represent a reasonableapproximation of demand, as evidenced by the decreasing volume of imports.In estimating the relationship between cement demand and construction valueadded for the period 1975/76-1985/86, cement consumption during 1975/76 and1981/82 onwards was taken as a proxy for cement demand. However, in

2/ The Attock cement plant (0.6 mtpy) was originally sanctioned by theGovernment on the understanding that up to 70% of its production wouldbe exported; however, this is not feasible given the current worldcement market situationo

- 74 - ANNEX 3-3Page 3

1976/77, suppressed demand equal to 7% of the cement consumption in thatyear was assumed, and unsuppressed demand was estimated at 3.38 milliontons, Projecting this figure at -n annual growth rate of 7% (the averageannual rate for 1974/75 to 1984/85) gives a demand figure of 4.74 milliontons for 1981/82, which is close to the actual consumption in that year.The demand estimates adjusted for suppressed demand give a correlationcoefficient of 0.95 with construction value added. Estimates of elasticityof construction value added with respect to GDP for the period1975/76-1985/86 indicate that a 1% increase in GDP results in a 1.13%increase in construction value added, Based on this relationship, a5.8% D/ annual growth in GDP would result in a 6.5% growth rate inconstruction value added. Annex 3-4 gives three estimates of projectedcement demand based on 5.5% andi 95% and 7.5% growth rates, respectively,in construction value added*

9. It is considered that the demand forecast based on 6.5% annualgrowth in construction value added represents a reasonable estimate, andthis growth rate forms the basis for the demand forecast given in Table 3.4of the main report. This table compares the Bank's, SCCP's and NDFC'sforecasts of domestic production and demand for cement for the1985/86-1995/96 period. All three forecasts show that, over the next fewyear, demand and local production would be close to balance, graduallychanging into a deficit situation from about 1992/93. The Bank forecast,however, shows a deficit beginning in 1990/91.

Regional Supply and Demand Forecast

10, While NDFC made forecasts of cement production and demand on thebasis of provincial boundaries, SCCP has made projections based ondivision of the country into ten market areas. The NDFC projections showthat, while Sind and Baluchistan would have a surplus of cement up to1993/94, Punjab and NWFP would have a deficit throughout the next tenyears. The SCCP projections, while generally similar to the NDFC forecast,show a small surplus in some areas of the NWFP and a small deficit in thenorthwestern part of Baluchistan.

11. Since the natural markets of all plants are not necessarily ivthe province in which they are located,4/ demand/supply projections ofsupply and demand according to political boundaries are likely to give adistorted picture. The Bank has, therefore, prepared its own projections,dividing the country into four zones, delineated according to the locationof the existing and upcoming plants and their expected markets (seeAnnexes 3-3 and 3-5 for composition of each zone). Lack of regionallydisaggregated data on key economic variables (e.g., population growth,contribution to GDP and construction value added) prevents the use ofvariables other than time to forecast regional demand. The Bank has

3/ Bank's forecast for the medium term.4/ For example, although the Attock cement plant is located in

Baluchistan, near its boundary with Sind, its main market is in Sindrather than Baluchistan.

- 75 - ANNEX 3-3

forecast cement demand for each of the four zones based on historicalregional consumption patterns and recent trends.5/ Historical data onregional consumption were derived from SCCP's records of district-wisedispatches of locally produced as well as imported cement. While preciseinformation on the dispatches of private imports is not available, it hasbeen assumed that, because of high transportation cost, most of the privatesector imports were consumed in the southern areas.

5/ The following growth rates have been used: Zone 1 - 5.5% p.a., Zone 2- 6.5% p.a., Zone 3 - 7.0% p.a., Zone 4 - 4.5% p.a.

EMENA Technical DepartmentJuly 1987

-76 - ANNEX 3-4

VA mis> tst1 C-N M VuTVi! n Pe'OJC?pJME f OM fI/1011995/96

tb~~~~~~~~~~~~IOT 7.5 C1tt .'?IV V" an cm VAM m cm? vtut wp ttli

0000" 00000 @4 OO60 0 "oOOSO

i9OUbl L L5 5.2 *rn.w a9 L oa . 3.oe s92

1"W Z43L.1 1.34 S*11.:1 &.i1 4511141 1.41

1tw1 4t1. 111 *7M.1 L1b 4.94 1.83

iW11S 493.t1 .93 left 7.6 5.13 7i.

-JWl. 7.71 Is n 7."1 R1U1.1. " 7.7

3I,l I.6 7. 57A1 I." vastl 3.4

lifti" M1L 7." 1131.32 U.36 U4J 6.03

mbL. Lu, W. us en.33 9.44

19931% NS.7l L6.3 MM 9.37 7849.? 1I.1I

194 .4 9.3 T*&n V." 61.24 1l.11

In% n7.1 9.1 W1.n 10.53- 0.4" i5.-1

Note: oreeasts have been based on historic consumption levels correctedfor suppressd deando Se Annex 3-3 of report.

REM Technial Depa:tmtJuly 19fl

- 77- AX 3-5

.CNI will FORICAS CUII, SWt UP " diS-t? 4/o--e-ee-ee.oe..CSf* O-e-eOOCC-**ew-eonO*fO flo.*e*

'nLL1a0 rMM

Iteillb It>>01 1171111 e9Q" lql ?o/91 91192 92193 93194 949 "

IN I... ~~~~*** e.. eO. e.. OO 0C . 000 0.

OvFauo v.7313 0.920 0.37I 0.920 0.970 1.024 1.060 1.140 I-302 1.218 1.338,FPL1 1.10 . 1. 9 2.210 1.21 1.3511 1.439 1.01? 1.617 1.01? 1.017 10.01

suuujs,06V17 )0.4046 d.372 0.344 0.331 0.541 0.6*5 0".?9 0.53? 4.41 04.40 0.339

KNA 2.418 2.315 2.7 4 2.911 3.111 3.313 3.53 S.118 4.00 4.22 4.539:!1 *Q! 0.0i6 0.0"O .0 0.060 0.00* 0.00 0.0* 6.006 l.ow 0.600 6.i06

toTa Km 2.411 2.3n 2.743 2.921 3.111 3.113 3t. 3M 4.0 4.-22 M4s,# 1.010 1.b19 1.3" 2.119 2.209 2.231 L 2 3.13I L.31 3.351 3403IUR SIWICIT -0.143 4O.91 '4.853 -0. DI -0.902 -1-.32 4.399 -4059 4.404 4.904 -1.131

0t(1aU Al.S 1.124 1.219 1.3 1.319 1.476 1.579 1.* 1.106 I2.93 2.070S11 0.370 . 0.91 0.930 0.939 0.930 0.939 0.930 0.939 0..939 0.93RfLO/IWICST -4.32 4O234 4.231 4.359 4.449 40.54 4.*&4 4 t.14 40.67 -1.005 -1.1*

Km 1.4 1.7U 1Al 1.939 2.00 2.0o 2.172 2413 2.35 .4 2.533SuPPLY 2.40 J I.714 3.0 3.054 3.054 3.054 3.0 3.054 3.0 3.054 3.054

.nUWlUS/UICIT 0.919 0.3 1.19 1.124 1.04 0.1 O)M 0.91 0.09 0-S3 0.411

StOT PM1ST .

0111406 5~.92 6 .310 4.119 7.0#4 7.444 7.90 3,34 3.39 9.370 9.939 10.539WUPPLY 5.714 6.37 7.074 7.5 .70 7.34 0.290 .0.9 9.014 9.11 9.004ALUS/wtelT 0.206 0.003 0.404 0.293 0.243 .00 -4.070 .0-00 4.134 4.914 1.446

0OUlN1tI@ O low, low I (atire NOPiscopt d. 1.KA lrthom Are" .4 wtbwa parts 0 AJ,ae*rf2to 2 lwpus P*,O3.1.U tw ets sO "kOrt3 S (ostbp poij,1wthwr liud ad nstara h1thists)

! O$4Str1 sR a Is thu oalcbistja)u/ Format based sa yufo rate d 0.5K is ceetrwti:m vale ad"01 Theg coca plot is located to 1ZS 2

ElN TeaCbacal DepartmentJuly 1987

- 78 - ANNEX 3-6

PAKISTAN - CEMENT INDUSTRIAL MODERNIZATION PROJECT

Cement Prices by Major Cities: Pre-decontrol and Recent Trends(PRa per 50-kg bag)

% Changeby Dec. 1986

Pre-decontrol Market Price Over JulyPrices a/ 1985 b7 1986 b/ 1985 Price

Southern RegionKarachi 63.55 68.00 67.50 -0.75Hyderabad 63.00 70.00 68.00 -2.90Sukkur 62.00 68.00 67.75 -0.40Quetta 78.00 84.00 81.50 -2.90

Northern RegionMultan 74.80 82.50 76.00 -7.90Bahawalpur 74.50 82.00 76.00 -7.30Sahiwal 76.10 82.00 77*00 -6.40Lahore 70.50 75.25 74.24 -1.30Faisalabad 69.00 73.25 74.00 +1.00Gujranwala 69.00 76.00 77.50 +2.00Islamabad 63.65 71.00 73.50 +3.50Rawalpindi 64.30 72.00 74.50 +3.50Peshawar 67.00 73.00 72.50 -1.30

a/ Official retail prices during FY85, fixed by SCCP in consultation withMinistry of Production and Controller of Prices.

b/ Actual market prices prevailing during the month. Figures are averagesof maximum and minimum retail prices reported by SCCP.

Sources: SCCP and Bank staff estimates*

EMENA Technical DepartmentJuly 1987

- 79 -ANNEX 3-7

PAKISTAN - CEMENT INDUSTR_L MODERNIZATION PROJECT

Ex-factory and Retention Prices, Excise Duty and Surcharge, 1976-86(PRt/ton)

Ex- GeneralEx- factory Consumer

Month/ Retention Excise Development factory Price PriceYear Price b/ Duty Surcharge Price Index Index

03/76 237 43 40 320 100 10006/77 267 133 40 440 137 11206/78 297 253 50 600 187 12006/79 336 504 60 900 281 12806/80 336 504 60 900 281 14204/81 396 504 - 900 281 15506/81 436 564 - 1,000 312 16006/82 486 564 - 1,050 328 17606/83 486 664 12a/ 1,162 363 18406/84 818 332 12a/ 1,162 363 19906/85 918 332 12a/ 1,262 394 21410/86 956c/ 332 12a/ 1,300 406 212

a/ Transportation surcharge./ Applies to SCCP plants.c/ Applies to Rohri and northern SCCP plants only.

Source: SCCP.

EMA Technical DepartmentJuly 1987

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

SCCP: Organization Chart

Board of Directors

EChairman|

Finance Technical Civil Works Operations & Marketing Public RelationsDepartment Department Department Productions Department DepartmentDepartment

Cement Accounting & Projects &Research Personnel Project ExecutionInstitute Department Department

EMENA Technical DepartmentJuly 1987

- 81

Pal dW T.A . m - .w . iafaita SP tiaa P uW fa

ZVI Rbk U 39.60) 16.A 16*3W 0.18 1*71 OA wois1 P:1ktd. 34645 02 27. - - 0Om5 507 1.98

fltk ILL. 92.40 780 7.M 0.12 0.3 o0. 546 -

Javi ilaic td. MM 67.49 12.16 - - 0.06 8m -

V.e ledf a/ tkqxotead 1tlSlcld .OD 300 D30.0 - - - - - -

tbtiQul1/ PdumtetW. 30.0 30.0 - - - -

WRIte (MI t8 Pdiutettd. 3.00 3. - - - --

11tta Prime ltd. 108.0 108.00 - - - --

Danft riwte Ltd. 105.0 108.0 - - ---

Pdtse ILL4 112.8D 112-*) - - - - -

D.G,.lil Pdvatetd. 50.0 500.00 - - - - - -

a/ fe tc amn oMpy t amm sie,, ara tie me o tin Wdiamt Xo*q In owd at by NVAe led./R ?dxkmast 0muW he bw plows, a In rmde ad as In Daot.

EMENA Technical DepartmentMuy 1987

PAKISTIAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Organization Chart for Zeal Pak Cement Co!pany

Board of Directors

General Manager

rDeputy General | I _ | Deputy GeneralManaget Manager: TraiaingProduction & Planning

Manager Manaerger Mnger Manager rProduction & Electricity & Mechanical Minlng Administra- Sales AccountsChemical Power tion

Deputy lepaty | Deputy | | Deputy DeputyMbnaer Man~ager |Mabnager | | Manager Manager

gllva Production | Cheolcal | | Labor Purchase

Source: SCCP

July 1987

ANNEX 4-4

- 83 - Page 1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Terms of Reference for the Design, Development and Implementation of aCorporate Strategy and Management Information System

at the State Cement Corporation of Pakistan

A. Introduction and Objectives

1. The State Cement Corporation of Pakistan (SCCP) was formed in1973 as a holding company to manage the cement subsector following thenationalization of all the country's cement plants. Today the Corporationhas under its control fourteen plants which produced in 1986 about5.0 million tons of cement (about 85% of total subsector production). Theremaining 0.8 million tons were produced by four private sector plants thathave started production in the past two years following a change inGovernment policy that encourages private investment in the subsector. Inthe light of anticipated private sector competition and significant changesin the policy environment in the past two years, the Corporation is nowtaking a wide range of actions to improve its competitive position. Theseactions include investment in modernization and rehabilitation of itsplants and the formulation of business strategies to meet its corporateobjectives.

2. As a major component of these efforts to improve its competitiveposition within the subsector, the SCCP now wishes to hire consultants toassist it in the design, development and implementation of a CorporateStrategy and a Management Information System (MIS) for its headquarters andits constituent plants.

3. The Corporation has established an overall work program andtimetable for the exercise which will be conducted under the overallguidance of a Steering Committee and managed by a Task Force composed ofSCCP and units personnel* The overall exercise will comprise formulationof a corporate strategy and business plans for the Corporation and itsplants and will include the implementation of detailed action plans andprograms for achieving the Corporation's objectives, as well as the design,development and implementation of a MIS.

4. The Corporation intends to recruit consultants to assist the SCCPSteering Committee Task Force to carry out this overall work program. Asdetailed below, the role of the consultants will be to assist SCCP toproduce a revised corporate strategy, and subsequently to assist SCCP inthe formulation and implementation of detailed development and businessplans for the Corporation and its plants, and to design a ManagementInformation System and to assist SCCP to develop and implement the MIS. Inthe process of this exercise an important component of the Consultant'sassistance will be to assist SCCP in improving SCCP's capacity to carry outCorporate Planning.

- 84 - ANNEX 4-4Page 2

B. Scope and Content of the Work

5. It is intended that the work required to meet the overallobjectives of the exercise will be carried out in three phases, in orderthat the client is fully involved in the definition of the work to be doneand in the review of each stage, and that the development andimplementation stages can proceed as smoothly as possible.

1. Phase I: Corporate Strategy Formulation

6. The scope and content of the wurk to be carried out by theconsultant during Phase I should be:

(a) to review the initial statement of Corporate Strategy prepared bySCCP and the action plans already prepared by SCCP on variousareas of its operations, with a view to identifying areas andissues requiring further detaileA examination for the preparationof a comprehensive Corporate Strategy and development plans forthe Corporation and its plants and for the design of MIS;

(b) to analyse the current and prospective position of SCCP and itsplants within the cement subsector. The analysis should includethe following areas:

(i) the constraints and opportunities afforded by the sector andthe policy environment;

(ii) the current and prospective markets for cement by area(including export), producer, product (slag cement, OPC,white cement, etc.), and type of end-user;

(iii) distribution networks and costs in various markets;

(iv) current and prospective business strategies and competitivepositions (sales, product ranges, market shares and coststructures) of SCCP competitors;

(v) evaluation, for SCCP plants and their competitors, of planttechnology, availability, dependability and quality of rawmaterials, production processes and products, and analysisof operating data with comparisons to internationalstandards;

(vi) the evaluation of current and future cost structures andcompetitiveness of individual SCCP plants (and by productfor multi-product plants), including an analysis in relationto international standards. The evaluation should, interalia, analyse cost structures in relation to capacityutilization and break-even points, plants' efficiency interms of energy, labor and material usage, the importance offinancial charges and delivered costs;

- 85 - ANNEX 4-4Page 3

(vii) any other factors considered relevant by the consultant forthe analysis of SCCP's performance and prospects.

(c) On the basis of the above analysis, to formulate key strategicissues and options for SCCP and its plants, includingproduct/market opportunities, plant expansion and shut downoptions, investment and operational improvements (such asmaterial savings, labor saving and productivity improvements),process and fuel savings, financial and managerial andorganizational improvements. The issues and options identifiedshould be evaluated in terms of the long term viability of theCorporation and individual plants, competitive advantages to bemaintained or increased and short-, mediumr and long-termpriorities. Business plans and financial projections should beprepared to help determine the most viable courses of action andtheir probable costs and benefits.

(d) to assist SCCP in the selection of the most viable options and inthe preparation of a revised statement of Corporate Strategy.

2. Phase II: Design of the MIS and Preparation of Corporate andPlant Development Plans

7. During the second phase, the scope and content of the work to becarried out by the consultant should be in two directions: first, thedesign of a MIS, and second, the elaboration of the Corporate strategy inthe form of detailed business development plans for the Corporation and itsplants.

8. For the MIS component, the scope and content of the work to becarried out by the consultant should be:

(a) to establish the Corporation's and its plants' requirements foroperational, cost, financial and other relevant information.These requirements should be derived from the SCCP CorporateStrategy and through interviews with MOP, EAC and SCCP Managersat departmental, divisional and unit levels;

(b) to examine existing information and management systems toestablish their adequacy as a base for the MIS. The consultantsshould examine, inter alia, systems relating to financial andcost accounting, budgeting, pay roll, administration, sales andmarketing, inventory control, maintenance, planning and controland manpowero The examination should also assess the currentstate of SCCP's manpower resources available for theimplementation and operation of MIS, so as to permit an earlyevaluation of the manpower and financing requirements of the MIS.

(c) on the basis of the above reviews, to design a MIS for theCorporation, covering the data inputs, information and reportingoutputs, the data processing system and the costs of the system.

- 86 - ANNEX 4-4Page 4

The consultants should suggest extensions of and modificationsand additions to the existing systems; recommend procedures forensuring consistency of input/output data; recommend performanceindicators in monitoring and operational terms to evaluate costsagainst internationally accepted norms; recommend formats fordata outputs and reports; devclop hardware and software concepts;and estimate manpower and training requirements forimplementation of the system and capital and recurrent costs.The consultant should also develop a detailed proposal for thework to be carried out in the following phase.

9. For the Corporate Strategy component, the scope and the contentof the work to be carried out by the consultant should be:

(a) to assist the SCCP in preparing development plans for theCorporation and the plants, on the basis of the above reviews,evaluations and the chosen Corporate Strategy;

(b) to assist the SCCP in analysing the consequences of the strategyand business plans for the allocation of functions, tasks andresponsibilities within the Corporation, including developingcapabilities within SCCP for the regular updating of strategy andplanning work;

(c) to assist the SCCP in preparing action programs and plansrequired for the implementation of the Corporate and plantdevelopment plans and to identify their costs and implications.

3. Phase III: Development and Implementation of MIS

10. During the third phase, the scope and content of the work to becarried out by the consultant should be:

(a) to finalize the hardware and software concepts;

(b) to prepare software specifications;

(c) to develop, and where necessary and desirable supply, softwarepackages and services, and to prepare software specifications,terms of reference and selection criteria for other packages andservices to be procured by SCCP;

(d) to finalize specificatoons for hardware and to assist SCCP inprocuring hardware;

(e) to assist SCCP in the installation of computers and the runningof the programs;

(f) to assist in designing hardware and software maintenance andservice contracts with suppliers;

- 87 - ANNEX 4-4Page 5

(g) to identify and design training programs required by SCCPpersonnel for both operation of the MIS and its use bymanagement;

(h) to assist SCCP in the preparation of a final implementationprogram, particularly training of personnel involved in systemapplication;

(i) to assist in the modification of standard operating procedures toensure proper application of the managerial system (costaccounting, budgeting, pay roll, etc.) covered by MIS;

(j) to review preparation and quality of managerial informationreports.

C. Output of the Work

11. During Phase I, the consultants will produce:

(a) a brief report summarizing the results of the review of theSCCP's Corporate Strategy document, identifying the areas andissues to be examined in the analytical stage and proposing awork program for the analysis and evaluation. This report willbe discussed with the SCCP and submitted to the World Bank forits review and comments;

(b) a detailed report summarizing the results of the analytical workconcerning SCCP's position and prospects and presenting the keystrategic issues and options facing the company and theirimplications. This report will be the subject of a tripartitereview involving SCCP, the consultants and the World Bank, afterwhich a revised statement of Corporate Strategy will be preparedby the Consultant.

12. During Phase II, the consultants will produce:

(a) a brief report summarizing the review of the existing informationand management Systems and the SCCP's requirements forinformation. This report should also spell out all the steps andrequirements for the design, development and implementation of aMIS, including any necessary steps or activities that may havebeen omitted from these terms of reference. This report will bereviewed by SCCP and as amended by the review, will form thebasis for the subsequent design of the MIS;

(b) a report outlining in detail the design of the proposed MIS. Thereport should describe clearly the details of the preferredsystem and should identify options where relevant. The reportshould specify the information flows, formats for presentation ofinformation, the EDP and hardware required, networkingrequirements and preliminary recommendations for software and

-88 - A _= 44Page 6

computer language. The report should also estimate the capitaland recurrent costs of the MIS and estimate the personnel andskills required for installation and maintenance and a timetableand cost estimates for development, implementation phases. Thisreport will be reviewed by SCCP and the World Bank prior to thebeginning c' detailed work on implementation;

(c) specific business development plans for the Corporation and eachplant, and action plans required for implementation of thnebusiness plans. These plans will be prepared in closecooperation with the Task Force and Plan_i managements.

13. During Phase III, the consultants will produce such documentationand reports as are required by arrangements with the SCCP to sec'ireeffective implementation of the MIS.

D. Schedule and Organization of the Work

14. The SCCP wishes to complete the MIS/Corporate Strategy exerciseas outlined in these terms of reference within a period of 12 months, Insubmitting bids, consultants should indicate how they would propose toaccomplish the exercise within such a period, and taking into account theirassessment of the capacity of SCCP to prepare the counterpart worknecessary, should indicate alternative timing if they consider a one yearperiod not feasible. The consultants should also indicate their assessmentof the duration of each phase.

15. The consultants will work closely with the counterpart TaskForce, and will be expected to carry out a significant part of the work inthe field at Corporate headquarters and at the plants.

EMENA Technical DepartmentJuly 1987

ANNEX 5-1- 89- Page 1

PAKISTAN - CE?ANT INDUSTRY MODERNIZATION PROJECT

Project Description: Wah Component

Project Summary

1. The project comprises the conversion of the Wah plant located atWah, Punjab province, from wet to dry process* The five kilns currently inproduction have a cllnker capacity of 435,000 tpy corresponding to460,000 tpy of cement. The project will replace them with a new four-stagepreheater, precalciner kiln with a rated capacity of 3,000 tpd of clinker,corresponding to 900,000 tpy of clinker and 945,000 tpy of cement. Theproject will generate a 12% reduction in the total production cost per tonof cement (from PRa 809 to PRt 714) and a 36% reduction in variable costsper ton (from PRs 587 to PRs 377) (see Annex 7-2). The major factorleading to reduced costs will be a 57% reduction in fuel costs per ton(from 1,950 kcal/kg to 840 kcal/kg), although some reductions in per-toncost of labor, raw materials and maintenance are also expected.

Options Considered

2* The current kilns range from 14 to 64 years of age and the fouroldest kilns are very small (300 tpd and below) and beyond ,ehabilitation.Conversion of kiln #5 (600 tpd) to either semi-wet or to dry operation wasconsidered and rejected, and three options for a major rehabilitation, allbased on dry process precalciner technology and of differing size(2,000 tpd, 2,600 ptd and 3,000 tpd) were examined. The 3,000 tpd optionwas chosen because of Its higher economic rate of return.

Equipment Requirements

3. Because of their age and obsolete design, it was decided not tomake use of the old equipment. As a result, project layout is highlyefficient as no compromises had to be made for the sake of utilizing oldunits. The main process areas such as rawmill, kiln, clinker cooler,cement mill .nd cement storage, package and dispatch departments will belocated, according to a modern compact and energy-efficient design, in anarea directly adjacent to the existing plant.

4. New equlpment comprises: impact crusher for limestone and clay,rawmlll, kiln, clinker cooler, cement mill, cement storage, packaging anddispatch.

5. Exlsting equipment used or modified: quarries, gypsum crusher,auxiliary buildings, offices and infrastructure.

6. Eguipment to be abandoned: existing rawmills, kilnas and clinkercoolers, cement mills and packing plant.

_ 90 - ANNEX 5-1Page 2

7. The new plant adopts advanced technology including c'mputerizedcontrol equipment, but will also allow optional manual control.Coi'truction and erection will take place with minimum disturbances to theexisting plant.

Raw Materials

8. Limestone. Deposits are located 0.5 km southwest of the plant.Preliminary estimates of reserves indicate approximately 70 million tons,corresponding to 50 years of consumption at the proposed project capacity,and these reserves are being verified. The deposit consists of a gentlysloping mountain, and mining is carried out in four benches, each 12-!5 mhigh. Chemical composition is uniform, except for occasional pockets ofclay (which comprise the second raw mix component), and is ideal for dryprocess operation.

9° Clay. The clay deposit is adjacent to the plant. The presentdeposit will be exhausted within a few years, but the plant has acquired450 acres of land adjacent to the present deposit with reserves of60 million tons, corresponding to 180 years of consumption. The clay (bothpresent and future deposit) is of a favorable chemical composition.

Other Materials

10. Gygsumo Gypsum will be procured through contractors brought bytruck from surrounding areas. It will be stored in an open storage yard.One of the existing crushers will be used for crushing gypsum.

iI. Fuel Oilo Fuel oil, refined from domestic oil with a low sulphurcontent, is trucked in from government-owned oil distribution facilities.

Infrastructure

12. Electric Power. Power is supplied by the government-ownedutility company, WAPDA, at 66,000 volts. Modern receiving equipment willbe installed to permit receipt of 132,000 volts, Under the project, powerdemand will increase from 8 MW to 20 MW. WAPDA has agreed to the higherdemand, but it is expected that, as in the past, the plant will. continue tosuffer occasional power cuts. A 500 kVA diesel generator will be installedas part of the project to provide power to the most critical operatingunits during power cuts.

13. Roads, The plant is located 2 km from the main highway north tothe Khunjerab Pass and China. The plant road is presently of poor quality,but is to be widened and resurfaced.

14. Rail. The plant spur connects with the main railroad line withina distance of 1 km.

15. Water, Water is pumped in from plant wells, and no supplyproblemis are encountered. Total water consumption will be reduced becauseof the conversion to dry process.

91- ANNEX 5-1Page 3

Transport Analysis

16. The transport requirements for the plant are summarized in thetable below:

Distance Volume (TPD)(ki) Rail Road

InputLimestone 0.9 5,600Clay 3.5 1,400Fuel Oil 50.0 450Gypsum 400.0 150

OutputCement 400.0 1,500 1,500

Environmental

17. The plant and equipment will be designed to reduce particulateemissions to less than 150 mg/Nm3, which is in line with internationalstandards. The plant will have io emissions of liquid or poisonouswastes. The plant will easily comply *ith the Government's futurestandards to be implemented by 1990.

Project Management

18. The project will be executed by a SCCP project team acting asgeneral contractor with an experienced foreign consultant to assist in thefollowing areas:

(a) process selection and layout based on completed conceptualengineering;

(bW drafting of tender documents and technical specifications;

(c) evaluation of tenders;

(d) monitoring of implementation and preparation of progress reports.

19. Procurement for Bank-financed equipment packages and hiring ofconsultants will be done under Bank guidelines. The equipment has beengrouped in packages according to process areas; each package includessupervision of erection, performance warranty and commissioningresponsibility. Civil works and erection/installation will be contractedwith experienced local contractors.

Implementation

20. As shown in Annex 5-3, the project is expected to be completed in36 months from the date of signing the major equipment order (scheduled forJuly 1988). Commissioning will take place in July 1991. Because of the

- 92 - ANNEX 5-1Page 4

easy access to the site, availability of infrastructure andnon-interference with the existing plant, the implementation should beaccomplished within the indicated time.

Training and Commilssioning

21. SCCP plans to train future operating personnel partly throughcourses in SCCP's two training institutes and partly by sending selectedpersonnel either overseas or to other SCCP dry process plants fortraining. Experienced operating personnel from SCCP's other dry processplants will assist during start-up and the initial operations period.

EMENA Technical DepartmentJuly 1987

- 93 - ANNEX 5-2Page 1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

BMR CoEponent

1. This project comprises small- to medium-sized rehabilitation infive cement plants belonging to the following SCCP subsidiary companies:Gharibwal, Maple Leaf, Mustehkam, Zeal Pak and Javedan. These plants,ranging in age from 22 to 30 years, were built as wet process plants, andtwo, Mustehkam and Javedan plants, were expanded in the early 1980s by theaddition of a 1,000 tpd dry process preheater kiln to each. Number ofkilne, their age and capacity for the plants are shown in Annex 2-2.

2. Because of age the equipment in these plants require a highdegree of maintenance. In many cases spare parts for the old units are notavailable and the plants are forced to fabricate the parts themselves.Prior to the appraisal SCCP's subsidiary companies had identified a largenumber of subprojects for the BMR components. During appraisal it wasdecided to narrow the scope to the 22 subp:ojects in the five above-listedplants. Approximately 28% of the estimated cost will be spent onenvironmental control improvements and 13% on replacement of parts incritical condition which, in case of failure, would render large importantprocess units inoperable. The remaining subprojects will improve energyefficiency through introduction of modern technology and utilization ratesthrough the elimination of bottlenecks. Although plant capacities remainthe same higher production will be attained because of these projects.

3. Raw Material Reserves and Infrastructure. All the plants haveample raw material reserves. In the case of Zeal Pak the present clayreserves will be exhausted in a few years, but the company has identifiednew reserves, which will be acquired after proper sampling andverification. The chemical composition of the limestone reserves belongingto the northern plants (Mustehkam, Gharibwal and Maple Leaf) is favorable,while the cheiaical composition of the limestone in the South tends to causeproblems with kiln operation. All five plants have good access to road andrail infrastructurz.

4. The below tabulation lists the subprojects by plant.

- 94 - ANNEX 5-2Page 2

Plant Subl roject Description

Gharibwal : Overhead craneRaw mill shell replacementCement silo distribution systemCement silo aeration systems

Maple Leaf: Overhead craneB&g filters for mills anc pack plantLimestone crusher and belt conveyor

Mustehkam : Raw mill shell replacementKiln replacement of tires and rollersNew electrostatic precipitators (2 kilns)Bag filter, cement millCement silo distribution systemCement silo aeration systemPacking machine

Zeal Pak : Crusher, stacker/reclaimer, belt conveyorDC electric motors and diesel generatorCompressors and pumpsBag filters

Javedan : Bag filter for millMotor for ID fanClinker conveyorSeparator for cement mill

Project Manxgement

The subprojects will be executed by a local project team in eachplant. These project teams will report to corporate project management inLahore. Procurement will be done by the corporate project team. Theequipment requirements have been arra,jed in 12 generic machinery groups(Annex 6-3) which will be procured under the Bank's ICB guidelines. Civilworks and erection services will be contracted with third parties.

IMlementation

6. Annexes 5-4 to 5-8 show the implementation schedules for theindividual plants. Because of the relative small size of these projectsimplementation time from signing of contract to commissioning will be36 months.

Cost/Benefit Analysis

7. The following subprojects were subject to detailed cost/benefitanalysis.

- 95 - ANNEX 5-2Page 3

Plant Project Description

Maple Leaf Installation of belt conveyor, 4.5 kmZeal Pak Crusher/belt conveyor/stacker/reclaimer

II Compressors & pumps

EMENA Technical DepartmentJuly 1987

rm - CaMr BREW MY raZcwN IC=r

Qiquwt A: P ckm~u~iw Proxar±

19 19-' 199D 19.

J F M A M J J _ D F M_ J JTS D J I M s N J F M A M J J A S o N D D

Akcvitie; 1 2 3 4 5 6 7 9 10111 12 13114 15 1617 18 19 2 M 223 24 25 267 28293l 332 331 34135 36 37 33940414243444546 4784950 5

Bd T mants

Bid -

tk,vd -h - …

…Of

am1~l1s-

- - -~~~~~~~~~~~~~~~~~~L

PAISTN - aEwN nxr f A PRWXr

jMl_wLian Sdvl

DMR axsems

1988 1989 1990

_ FM A1 _ J A SIO N D J PM A M _ J A S C _ D _A F| M Jm A|O 5 o N D

Activities 1 2 3 4 5 6 7 8 9101112 131415161718192021222324 252627 28293031 3233343536

Preperatim and ?'ilingof Bid Dob,munts --------- --

lid avlnatim and QOntracting

!zectic arld CcmIiassio! - ---

1 L~~~~~~~~~~~~~~~~~~~~U

- 98 -

P1IN(35 - CUll IllT1Y IUZltION Pl WCt 6-1

RCc - lh tot Project Co

187/ 19" M9s I909total lowt Tota lotal

locd foreip local feripe lcal foreip Loca forep Lol forelgn Ct CodtJIIllo -* ---------_i*_v*us 1411

Lnd I Civil IM 7.01 0.00 9.90 0.00 5.06 0.00 0.00 0.00 22.00 0.00 22.00 1.27vi dings 0.00 0.00 67.3 0.00 .69 0.00 43.23 0.00 205.84 0.00 20.84 11.90

flhcfwv,Clpintl ASpire 0.00 0.00 14.00 72.0 22.00 S6W.00 100.24 140.01 136.24 M.01 91.25 52.50frdeght Inwanu 0.00 0.00 2.15 7.20 3.37 56.00 15.3? 14.00 20.89 77.20 98.09 5.671 a i ring 0.00 0.00 3.00 5.00 14.00 20.00 18.00 27.00 35.00 52.00 87.00 5.03Techial sitn i Irai 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Ptioect I_mnet 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.1 0.00Stat Up Eenses 0.00 0.00 1.00 0.00 4.00 0.00 1S.00 0.0o 20.00 o.oo 20.00 1.16taxes a Dti 0.00 0.00 0.00 0.00 70.00 0.00 14.92 0.00 84.92 0.00 4.92 4.91

_ ..... .... __ . ..- o. . .. __- __ ... _.

tul ase Cost 7.04 0.00 97.7 8.20 213.12 636.00 206.7S 181.01 524.89 9111.21 126.10 82.43Physia contingencies 0.70 0.00 9.80 8.42 21.31 63.60 20.68 18.10 52.49 90.12 142.61 8.24Price cntincIes 1.01 0.00 23.78 6.28 71.76 54.90 84.47 20.35 181.03 81.54 262.56 IS.18

Instlled Cot 8.75 0.00 131.55 98.90 306.19 754.S0 311.90 219.46 758.40 1072.87 1631.27 105.5orirg coi:t 13.71 11.02 13.71 11.02 24.74 1.43

Interest During Construction 0.4S 0.0 4.76 8.04 11.91 68.76 24.54 147.75 41.60 224.55 266.23 15.39

Total fincing Rqutnt 9.20 0.00 136.34 106.94 318.10 823.26 350.15 378.23 813.80 1300. 2122.24 122.67

RCC - U Project fitncing Plan

87/88 8889 89/0 909-- - Total Tota

-Hillion Rl-.--- (US8) I Total

l80w 0.00 114.84 752.68 375.81 1243.25 1.86 S9ufimnacial Intatutios 6.44 SS.S 4 6.36 134.06 242.32 14.01 111

CC 2.76 72.98 342.41 218.52 636.67 36.80 30X

Total finang R.lrent 9.20 213.2? 1141.37 728.39 2122.24 122.67 10axt " R.. s8lo amase Iaaa &S. Masu

Debt/ ty btio 70.30 70.30 70.3 70.30 70.30

EMENA Technical DepartmentJuly 1987

- 99 -

PmomU - mmiT IlSW Y 9!0tI PJtC1 1 6d-2

SCw - Toawl Proect Cout fw tha CGM po t

1907/8 1908/9 1983/3 19 1- W/- wt9ot Total Total tOW

loel foreign L erorhreign Lo wl rei local rweign U.cl roro Coat Cot- ..llia--- -U8 9il

LUd a Civil Werls 0.80 0.00 9.42 0.00 13.03 0.00 0.00 0.00 23.25 0.00 23.2S 1.34Buldinps 0.0 o.x 0.og 0.00 0.80 0.00 0.00 0.80 0.80 0.80 0.80 0.00"Ni",'iE pptllt sow, 0.80 0.80 22.02 96.79 23.26 118.58 0.00 0.80 5.2 215.37 260.65 15.0?freight Irerem 0.01 0.01 10.92 8.56 1.15 10.56 0.G0 0.80 22.3? 1942 11.49 2.40lIstlatln I Engintering 0.0 0.00 3.71 0.00 M.01 0.00 0.00 0.80 7.72 O.R 7.72 0.4Tehndcal uince I Train 0.00 0.00 0.00 0.00 0.80 0.80 0.00 0.00 0.0 0.0 0.00 1.00Project H_MMt 0.00 0.Q0 0.00 0.00 0.00 0.10 0.0 0.80 0.0 0.00 0.10 0.00Si I E m 0.00 0.0 0.00 0.00 0.80 .00 0.80 0.8 0.0 0.0 0.00 0.80Taxes" MIs 0.00 0.00 13.09 0.00 14.12 0.80 0.00 0.0 27.21 0.00 27.21 1.57

loa Om Cost 0.00 0.CO S9.17 105.35 66.66 129.14 0.00 0.00 125.0 234.49 360.32 20.03ahdl contingences 0.00 0.80 5.92 10.51 6.67 12.91 0.80 0.80 12.U 23.45 36.03 2.Od

Price wtinpncie 0.00 0.00 1H.36 7.86 22.45 11.15 0.00 0.00 36.81 19.01 55.82 3.23

Installed Coat 0.80 0.01 79.45 123.7S 95.70 153.20 0.80 0.80 17522 276.94 452.17 26.14Verking Caitl 0.80 0.80 0.80 0.80 0.00 0.0 0.00 0.80 0.Q8 0.00 0.00 0.00Interest Oking Comstruction 0.00 0.0 1.83 .66 3.5 18.89 0.00 0.00 5.69 27.55 33.24 1.92

Total fincing R anurment 0.OO 0.80 81.28 132.41 99.63 172.09 0.0 0.0 0 13.91 3.50 465.41 28.06inagga sunaa uauUu UflSas aau ,g USaV= na meauu sam uua .aa ga=

SOCP - 0i Cowet Project rimincng Plan

87/U 98/89 89/90 90/91----- -- Total Tota

;211EnRJ --~~t-- (alS) I Total

1910 0.00 123.74 13.20 0.00 276.94 16.01 S7?inaial Institution 0.00 26.15 37.01 0.80 63.16 3.65 132

SCWP 0.80 63.78 81.52 0.00 14S.30 8.40 30X

Tota financing Requlrent 0.00 213.68 2.72 0.80 15.41 29.061 00Xsasaa ane. gaeaaag mnamnaamm a

Oet/Eqdty atio 0.00 70.30 70.30 0.00 70.30

N Irdvidwl Project Cwpmts

ZeIpa lihriba IsteNia hpeleaf Javs Total

Voreip ferdp fwreign fortign foreign fortinEh lotd Exn Total E Total Ex e Total Ex e Totd Excg Total

u Cost 91.95 138.68 16.28 22.09 60.33 82.00 55.68 90.1? 17.25 27.00 234.49 360.32Phydcal Contineies 8.50 13.87 1.63 2.21 6.03 8.20 5.57 9.05 1.73 2.71 23.15 36.03Price Contingncies 7.13 24.22 1.24 2.71 5.10 12.09 4.15 12.60 1.38 U.2O 19.01 56.82

100.S8 176.76 19.14 27.80 71.46 102.29 65.1^ 112.11 20.36 33.99 276.94 452.17

Intrest Ouring construction 9.83 12.83 3.72 3.99 6.49 6.97 t.S8 5.78 2.93 3.67 27.5S 33.24

tota finacing Reqiregent 110.t1 169.60 M.87 30.99 77.96 109.26 69.98 117.89 23.29 37.66 301.S0 485.41to k"S" 46#44 O". m" MR"U *wS*VU 2A"B" OX= x

D3tD& Technical Departmentjuly 1987

100 -ANNEX 6-3

PAKISTAN - CINI IDSIT!Y MODERNIZATION PROJECT

Bank Financing for MC! ftcka. Somponents A and B..

CEonont A: Wab

US$ Million

1. Quarrying squipmant 5.092. Lime Stone Crusher 4.413. Stacker and Reclaimer 2.594, Main Process Equipmen 41.9t5. Packing and Loading 2.856e Electrical Wotor and Switch Gears 9.757. 132 kV Grid Station 1.66

68.26

ComoDnet D: _Il

1. Crushers 3.202. Belt Conveyors 3.033, Stacker Reclaimers 10644. Electric Motors 0.215. Diesel Generators 0.146. O.H.T. Cranes 1.037. Mill and Kiln Parts 1.758. Bag Dust Collectors 0.789. E.P. Dust Collectors 2,5;i

10. Pneumatic System 1.2511. Packing Equipment 0.4012. Instruments Oe05

16.00

EMA Technical DepartmentJuly 1987

- 11- 6-4

Unerd

Board Presntatiow _ rk"Olk w19871A 8108tra 1X_rm 19

Rffeetimst nw 19

ComparatorProfile for

IrAustrySouth Asia

kLa. 2 Iu In Oatre am* 2 M n im

In I3ID NY sodQuarter ladlup: 1988

30 Soptezr 1967 0.0 0.0 000 0.031 D1oudmr 1987 0.0 0.0 0.0 0.0 0.0 0.031 March 1966 0.2 0.2 0.2 0.230 Jwm 1988 02 0.2 0.4 0.4 4.0 4.0

30 egh s 198 I.8 3.8 4,2 4.431 Decembe1r 8 I5. 5.7 9.9 10.3 6,0 10.031 March 1989 7.6 7.6 17.5 18.230 juns 1989 1.9 1.9 1904 20.2 11.0 21.0

199030 Sepeuir 196 9.2 9.2 26.6 29.831 Doeber 198 1408 148 43.*4 45.2 14.0 35.031 arch 1990 19.4 19.4 62.8 65.430 Jbma 1I90 3.6 3.6 66e4 69.2 16.0 51*0

199130 baptesher I" S1 5.7 72.1 75.13l lboafr 1" s1 o81l 8012 83.5 15.0 66.03 March 1"91 115 11.5 91.7 95e530 June 1991 3e4 3.4 95.1 99.1 13.0 79.0

199230 SptevM 1991 Oe2 0.2 95.3 99.231 Deombr 1991 0.2 0.2 95.5 99.5 9.0 88.031 March 1992 0.3 0.3 95.8 99.830 Jm. 1992 02 0.2 96.0 100.0 600 94.0

199s330 gagpo I M31 _ wcedr I2 4.0 98.031 March 199330 Jme 193 2.0 100.0

Cio.fag 30Da:

bnwry DeptmJitdy 1987

- 102 - ANNEX 7-1Page 1

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Main Assumgtions Used in the Financial Analysis

1. The main assumptions used in financial projections and rate ofreturn calculations for ACC and SCCP are listed below, The assumptionsused for the plants under component B can be found in project files,

2. The financial analysis has been carried out in two parts:

(a) The incremental pre-tax financial rate of return of the Wahconversion subproject has been determined by developingdifferential "with" and "without" cost-benefit streams; and

(b) the projection of financial performances of ACC and SCCP with theproposed conversion investments taking place.

3, The main assumptions in the incremental analysis of Wah are:

(a) All projections have been carried out in constant 1986/87 termsthrough 2005/06;

(b) Production build-up af.er conversion has been estimated at 65% ofcapacity in the first year, 75% in the second year, 90% in thethird year and 100% from the fourth year onward;

Cc) No funds for minor rehabilitation are invested under the "withoutproject" case for Wah. Under this scenario, production isassumed to decline by 5% per annum from 1987/88 onward and stopwhen the breakeven point is reached in 1998/99;

(d) The price of OPC is taken at PRs 956/ton, the current marketprice of cement in the North. This price has been held constantthroughout the period;

(e) Production costs are developed from detailed evaluation ofmaterial, labor, fuel, power, stores and overhead costs providedby the plant for its existing kilns and proposed new facilities(see Annex 7-2)o Prices for raw materials, utilities, etc., areheld constant throughout the period; and

(f) Other basic assumptions used in the incremental analysiscalculations are as follows:

Construction Period: 4 yearsLife of the Project: 15 yearsWorking Capital : fully recovered at end of project lifeScrap Value : 10% of initial value of fixed

assete in 1987 terms

- 103 - ANNEX 7-1Page 2

4. The main assumptions in the financial projections of ACC and SCCPare:

(a) Projections are carried out in the "with" Project case in ,urrentterms through 1994/95 when the project is expected to haveattained steady state operations;

(b) Inflat:ion assumptions are based on the following parameters:

Percent Annual IncreaseFY87 FY88 FY89 FY90 FY91 FY92-95

Foreign Goods &Services 7.3 2.0 1.0 1.0 2.2 3.5

Local Goods & Services 5.5 10.0 8X0 7.0 5.0 3e5

(c) Interest on new long-term debt has been taken as follows:

Foreign Currency Portion of IBRD Loan - 14.0%Other Loans - 14.0%Repayment of loans in maximum of 14 semi-annual installmentsstarting no more than one year after plant commissioning;

I

(d) No asset revaluation has been assumed to take place.

5. The particular assumptions by plant and company are summarizedbelow:

Main Aesumptions - Wah Plant

Existinig Converted(1986/87) (1994/95_)

Clinker Capacity (tpd) 1,418 3,000Cement Production OPC (tpd) 1,500 3,175Kcal/ton of cement 1,850 800Power Consumption/ton of cement 110 120

6. Working Capital assumptions are summarized below and detailed inthe Project Fileso

ACC - Plants

Accounts Receivable - 5% of salesRaw Materials - 3% of variable costStores & Spares - 28% of variable costWork in Process - 3% of variable costFinished Product - 2% of variable costAccounts Payable - 0.1% of variable costDeposits - 10% of salesOther Current Liabilities - 41% of variable cost

- 104 - ANNE 7-1- ~~~~~~Page 3

Percentages are based on past years actual figures.

7. Interest and debt repaymat achedules are also La the ProlectFiles. The consolidated projection of each company's finucial statementsare based on details received fromu the companies ad reviewed by theappraisal mission. They are also found La the Project Files.

EKENA Technical DepartmetJuly 1987

-105 - ANNEX 7-2

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Production Cost AnalysiIa C tat 19T7 PRO

Wah Conversion ProlectExisting ConvertedWet Process Dry Process(1986/87) (19941/95)

Cement Production ('000 tons) 387 952Price per ton 956.0 956.0

Cost per Ton of Cement:Limestone 23.2 18.5Clay 2.1 1.7Gypsum 6.8 6.8Fire Bricks/Stores 22.1 6.4Grinding Media/Stores 6.1 5.0Lining Plates/Stores 2.2 1.0Packing Charges 76.5 76.5Other Stores 40.5 24.6Fuel Oil 313.6 135.4Power 88.8 96.0Other Manufacturing Expenditure 5.2 4.8

Total Variable Cost per ton 587.1 376.6

Total Fixed Cost per ton 221.9 336.9

Total Cost per ton 808.9 713.5

Gross Margin per ton 368.9 579.4Net Profit per ton 147.1 242.5Cash Generation per ton 161.5 390.7

EMA Technical DepartmentJuly 1987

-106 - AANNEX 7-3

PAKISTAM - CEMENT INDUSTRY MODERNIZATION PROJECT

Summarized Historical Financial Statements

MPs million)

1981/82 1982/83 1983/84 1984/85 1985/86

SCCPTotal Revenues -11.4 52.2 148.2 194.1 197.1Profit (LOSe) Before Tax -25.1 32.7 96.9 77.7 161.9Internal Cash Generation -14.8 94.2 190*6 525.9 19640.7Debt Services:Principal 54.0 81.4 107.4 136.7 227,1Interest 1.4 7.6 15,7 18.0 16.2

Current Assets 424.2 759.5 906.0 749.6 1,571.5Current Liabilities 363.8 462.1 489.2 381.3 372.3Total Net Assets 2,950.1 3,042.8 39746.3 4,113.7 59512.6Outstanding Long-term Debt 19205,7 1,173.3 1,689.5 1,582.3 2,018.5Equity 1,380.5 1,405.8 1,565.3 2,013.0 2,941.5Current Ratio 1.2 1.6 1.9 2.0 4.2Long-term Debt/Equity Ratio 47:53 45:55 52:48 44:56 41:59Long-tere. Debt Service Ratio -0,3 1.1 1.5 304 6e7

ACCCement Capacity ('000 tons) 720 720 720 720 720Cement Production ('000 tons 579 530 551 479 628Utilization Rate tX) 80 74 77 67 87Revenues 278 292 390 445 619Profit Before Tax &Development Surcharge 11.2 6.2 6.9 47.8 121*4Internal Cash Generation 25.5 22.1 31.8 31.0 37.1Development Surcharge Paid 0,0 0,0 0.0 38.1 110,4Debt Services:Principal 6.0 12.4 9.0 1,7 7.5Interest 52 4.0 2.5 2.7 2.6

Current Assets 145.9 164.2 199.6 166.8 252.1Current Liabilities 145.3 179,0 195,4 156.6 225.2Outstanding Long-term Debt 24,5 12.1 6.5 12.3 30,3Equity 49.5 55.9 32.5 40.7 52,0Current Ratio 1.0 0.9 1.0 1.1 1.1Current Ratio ExcludingDeposits le5 1.3 1,7 15 1.6Long-term Debt/Equity Ratio 33:67 18:82 17:83 23:77 37:63Long-term Debt Service Ratio 2.3 1.3 2.8 7.1 3.7

Industry DepartmentJuly 1987

- 107 -

PRIStAN - tWft INUDSTRY OERNIZRTION POJECT nnex 7-4Associated Cot Caan Unittd

Projected Profit I Loss Stutwnt Uith Project Pa 1(In Hillion Of Rs.)

85/86 W6V7 87080 89 89/90 90191 91/82 92/93 93/94 W/95....~~~~~~~~~~~~-- ... ....... _ _........................ ..... .....

(Rctual)------------------o--- -- -------- ---Ctent Sales In lillion tons 0.628 0.599 0.599 0.599 0.599 0.5s 0.8s 0.91o 1.083 1.178

Total Nit Sales 619.41 602.12 662.33 715.31 765.38 803.65 1164.90 1339.51 1594.06 1793.13Total Uariable Cost 368.31 371.17 108.29 140.95 4?1.91 495.40 532.3 603.76 706.69 787.87fixed Cost Exc.ep.6 Int 119.08 137.06 150.77 162.83 174.22 182.N 189.31 195.97 202.32 209.92

Operating Profit 132.02 93.89 103.28 111.54 119.35 125.32 13.22 S39.9 684.5 795.34

Other Incoe 1.75 47 .7 45 4. 4.75 US 4.75 415 1.75Depreciation 11.79 10.43 10.60 10.75 5.04 5.10 146.64 146.69 146.73 146.76rinoncial Charges 2.99 2.6 1.86 1.53 1.19 0.86 0.53 0.00 0.00 0.00Finncial ChErges/ Project 0.00 0.00 0.00 0.00 0.00 0.00 193.12 163.41 133.70 103.99lorkers PP Fund 0.S5 0.39 0.4 0.18 0.55 0.59 0.50 1.12 1.96 2.65

Profit kfore Tax 1 Oev.Swch. 121.12 85.55 95.13 103.53 117.32 123.52 107.1? 233.32 406.89 646.690evelopet Surchge 110.40 44.66 49.95 54.60 62.21 65.64 0.00 22.97 80.82 163.38

Profit Before tax 11.02 40.89 45.18 49.94 55.10 57.98 107.17 210.35 326.0? 303.31

Operating Profit as I of Sales 21.31 15.61 15.61 1S.61 15.61 15.61 38.01 40.31 42.95 44.41Profit Before Tax IOeuelopeent Surch. As I Sales 19.601 14.211 11.36? 14.471 15.31 15.371 9.201 17.42? 25.531 30.491

2HEMA Technical DepartmentJuly 1987

- 108 -

PRKISTM - CMCHI IMIJTY III ZRT101 PIOJECT Annx 7-IAssciated Cent Lv Litited - --

Projected rns flou Statent lith Project Pae 2(In ifillios Of hs.)

Km 87 9749 U/SI %9990 9/91 91/92 92/93 93/91 94/95

Sources (t..) --- --- rec--------------------

et Inwo 10.69 45.1 1.9. 5$.10 57.89 107.17 10.35 326.0 - 33.31Depreciation 10.13 10.60 10.75 5.04 5.10 146.64 146.69 146.73 146.76Interest On LTD 2.26 1.06 1.53 1.19 0.86 193.65 163.41 133.70 103.99

Intern! fEd 6mntin 53.59 57.63 61.21 61.33 63. 447.7 520.46 606.51 634.0?

External S cs'l@i Loa 0.00 111.81 752.60 375.91Fincial Institution loan 6." 551S 16.36 131.06Equity 2.76 72.98 342.41 218.52

Total Externl Sources 0.00 9.20 213.27 111.3? 729.39 0.00 0.0 0.00 0.00

Total Source 53.59 66.01 301.49 1202.70 79.23 17.1? 520.16 606.51 631.07

Application

bid 31 11.90 12.12 12.12 12.12 12.12 12.12 12.12 12.12 12.12Project Capital Ceot 0.00 9.20 243.27 111.37 729.39 0.00 0.00 0.00 0.00

ore ntOf Ezisting Low 5.95 5.11 5.41 5.1 5.1 S.N1 3.30 0.00 0.00ijet Of Proet Loan 0.00 0.00 0.00 0.00 0.00 0.00 212.22 212.22 212.22

Interest On LTD 2.26 1.1 1.53 1.19 0.O6 193.65 163.41 133.70 103.99Cww in UC (excluding cask) 0.68 -5.56 -4.99 -4.62 -3.53 -20.77 -13.66 -19.94 -15.56

Total Apcation of rFns 20.73 23.03 25?.1 115.4? 713.25 190.42 377.10 338.20 312.77

Surplus / Deficit Cash 32.05 43.91 47.05 V7.2 18.98 257.05 143.06 260.30 321.30ccruwlated Cah 122.05 165.86 212.91 260.15 309.13 566.18 709.21 977.54 1298.94

Debt Service C ag Ti 6.53 7.93 8.93 9.29 10.18 2.25 1.50 1.75 2.01

EMA TQchdiCal DepartmentJuly 1987

- 109 -

PRKIS1M - CEIN INDUSTRY IIOUINZfRITIGN PROJECT h 3RAisiated Cutent Copn Linited

Projected blance Shet Uith Project(In Billions of h.)

95/6 m97 67/9 80/89 89/90 90/91 91/92 92/93 93/95 91/%Assets --- -- - -----Current setst (ctual) -------- foreast---------Cash I §9lan ce E4.20 122.05 165.86 212.91 260.15 309.13 566.18 709.25 977.54 1298.84Accnt Receivables 32.98 32.06 35.27 30.09 40.75 42.79 62.03 71.32 05.97 96.47Inventories 129.95 130.96 154.05 155.58 166.4? 174.79 107.06 213.02 249.34 m.s9

._. .. _. ., .... .. ... . . .... ........ .......... ... ... _..._W........_

Total Current Rssets MA2.13 295.07 345.19 406.58 467.37 S26.71 816.06 993.50 111.76 1672.30

k.ong Tern Lon I hnes 9.22 9.22 9.22 0.22 0.22 9.2 9.2 9.22 8.22 92

6ron fixed oAsts 254.47 266.31 287.63 543.03 1696.52 2537.03 2449.15 2461.27 27.39 255.51Rcclaated depreciation 155.76 166.19 1?6.7 187.54 192.58 197.66 345.32 491.01 637.75 795.51

#et Fixed Iasets 98.71 100.12 l11.05 355.49 1503.94 2239.35 2104.62 197.25 1035.64 1?01.0

Total Rssets 359.06 393.41 4.25 770.29 1979.53 m4.28 2929.11 2972.05 3155.61 331.51

Liabilities I EquitvCrrnt Liabilities:Accounts Piyable 3.30 3.33 3.66 3.95 4.23 4.1 4.77 5.11 6.33 7.06d an Depo sits 64.27 62.48 68.72 7.22 79.42 03.39 120.0 130.99 165.10 106.06

Other Curent Liabilitie 151.64 1S2.82 160.10 161.SS 194.26 203.97 219.21 249.50 290.96 324.38Current Portion O LID 5.95 5.41 5.41 S.41 5.41 5.41 215.52 212.22 212.22 212.22

Total urrent Liabilities 225.16 224.03 245.9 265.13 283.31 297.20 560.39 605.2O 674.92 729.72

Long Term lomns 30.35 24.94 2.9 190.95 96.40 1488.96 1273.34 1061.12 01.89 636.6?Deferred Liabilities 51. 58 1 SI. 51.95 51.95 51.95 51. 51.95 51.95 51.95 51.85

Equity'Ibrws Eqty fund 51.70 92.59 140.53 262.45 659.97 936.36 1043.53 1253.98 1579.96 1963.27

total Equity 51.70 92.59 11O.53 262.45 659.97 936.36 1043.53 1253.09 1579.96 1963.27

Total Liabilities 1 Equity 359.06 393.11 464.25 770.29 1979.53 2774.28 2929.11 2972.05 3155.61 331.51noun" Ross" *onJDs Reason Reaso wma Manson Rasong *ong" 0388I3

Ratios'Current atio 1.12 1.27 1.40 1.53 1.65 1.77 1.16 1.64 1.94 2.29Current Ratio Excluding Gepos. 1.57 1.76 1.9S 2.13 2.29 2.46 1.86 2.13 2.57 3.08Debt/Equity ratio 37.63 21.79 16.84 12.58 60.40 61.39 SS.S 46.54 35.65 25.76

ENEIA Technical DepartmentJuly 1987

- 110 -

On 7-4POKISITA - CMI IUI11Y NOOEilZtiSI PRJT -

State C,nt Corwration Of PismtanProjected Profit & Los Statent Ulth Project

( In Nhllions Of hs.)

rV886 96/87 87/e 88/89 89/90 90/91 91/92 92/93 93194 94/95

Rwe Iwoe (tual) ---------------- --- --- forect- ------------------ *-- --------------- --. ..... ........

Incw Fron Investnts 40.16 78.66 93.10 127.50 136.42 150.71 177.27 187." 107.4 197.44Intrest Incw 93.20 125.30 139.01 124.91 103.33 116.16 136.30 157.98 185.36 215.62Other Iwn 63.15 45.34 50.70 5R.49 59.57 62.26 111.42 214.51 330.34 387.60

otl Incme 197.11 249.30 28.81 305.90 299.33 329.12 4241.99 559.91 73.1t 790.6?

Orating Epes

6enerd I dn. Ees 17.70 17.62 19.92 24.31 31.75 43.54 61.81 90.80 90.80 90.90rditrg' ration 0.02 0.02 0.02 0.02 0.03 0.04 0.05 0.08 0.08 0.08

rFical Expes 16.25 13.48 9.63 S.78 1.93.- i _ - __ ... ... _. ... ...................... .._ .. . ..

Tota Ee 33.97 31.12 29.56 30.11 33.70 U3.51 61.06 90.0 90.i8 90.0

Inu efore lax 163.13 219.19 252.25 25.79 265.62 295.54 363.13 469.06 612.27 699.79

Inu# Tax 1.72 67.64 78.20 85a.5 82.34 88.52 112.57 145.41 189.90 216.93

Net Incu 161.42 150.55 174.05 190.30 18328 197.02 250.56 323.65 422.46 482.85Dividends 12.89 12.89 12.89 16.13 16.13 16.13 19.37 19.37 19.3? 19.37

To enal Reserv 148.52 137.66 161.16 174.16 167.15 180.89 231.19 304.28 403.10 463.49*uUuauu mama=u ss.a#*#= *#%sa. uuinu fhunu u0aa wau *avo*a iua

P81 RAd Of ue 82.9S 87.52 89.51 90.21 8.72 86.81 85.41 83.8 87.11 88.5PAT PA Of Rewven 81.91 60.41 61.9 62.21 61.2 S9.9? 59.01 57.91 60.11 61.11

MEN Technical DepartmentJuly 1987

- lli -

PAKIStA-I -CNt INBUSt?? llOOEIIUZATIO I PliOJECt--Stte Coent Corwrti Of Pdaistan FM

Projected funds rlo Statumt Uith Project( In t1illions Of Es.)

67 87/99 9 99/0 9 0/1 912 9291 99M 94195

Sorces of f ------------- t---

Ket In= 137.66 161.16 171.16 167.15 189.9 231.19 309.28 403.10 463.49Othr SowCes:Cient Ovelouiepnt fwnd 513.29 561.56 M96.28 WM.6 5U7.9" 517.13 550.8 593.78 639.91Recvery Locf loed ans/hits 67.36 209.36 102.90 128.71 132.9 138I9 112.9 104.43 91.62lecovery a Foreigin loalnit 231.41 212.10 236.75 170.66 139.81 119.23 157.77 192.77 1 95.2foreign Loans 289.73 921.66 375.01Recovery 0¢ InterestlOn FL 199.79 171.97 190.43 175.85 196.36 185.66 175.52 161.01 14.32

lota Lo I Interest 488.59 913.16 1443.71 951.10 169.16 "3.88 446.28 1.21 431.86

Total Sources 1139.54 1635.88 2114.19 1512.31 1157.99 1192.20 1301." 1115.09 1S34.26se0"a1 dn " Bna

.... _.......

Inetrents in RC I Pak Cut 109.00 270.00 630.00 720.00 101.00fereipn Low to hits 0.00 299.73 921.66 375.81 0.00 0.00 0.00 0.00 0.00Localo mWs to Units 198.00 104.00 U1.00Re et Of foreign Loan 231.4iS 242.10 238.75 170.66 139.91 119.23 157.7? 182.77 195.92Pyt of Interest n Fl 189.79 171.97 180.43 175.85 196.36 185.66 175.52 161.01 11.32

Total LOa I interest 421.23 891.90 114.91 763.32 336.17 301.89 333.29 33f.78 310.21Adtion In fixed Asets 1.39 0.70 0.80 0.90 0.90 0.60 0.80 0.70 0.70Cng in Iornli Capital 247.76 154.28 114.31 -31.18 111.1 155.03 60.53 679.74 415.13Inesunt In n Project 2.76 159.98 471.52 207.74

Total Ums 778.37 1319.54 2349.96 1924.56 967.15 760.52 974.62 1024.22 756.37suxams. ua,,..sum gal= am,.... oua,.. oznas.. "Msass. san us

Ceb SW us/wicit 361.17 316.35 -235.77 -412.25 290.9 431.68 326.92 420.86 M.9Rcinwlated Cul 956.20 1172.55 936.77 524.53 815.37 1217.05 1573.87 1991.73 2M.62Odebt Service Coverage Rtio 2.71 1.83 1.46 1.99 3.41 3.91 3.90 4.20 4.51

ENENA Tecical DepartmentJuly 1987

- 112 -

Pl1SI - COW IlIUSTRY O0IlZRtION PROJECT --State Caent cvpruton O Pita h6Projected hImlc Sheet Uith Project

( In FdlliUs of Re.)

85/16 86/87 87AN / 89/ /91 91/92 92/3 93/4 91/

Current esets (tl) ----- ---------.. orc t--------

Cash R b 495.03 85.20 1172.5 936.77 524.53 815.3 1247.0 73.87 14.73 72.62Low 6 &nMces 1002.82 1268.10 133. 1556.32 1522.90 16'h.0 2162.5 MS.8 3 .413 42.73Other Curret Rsets 73.63 93.13 105.20 111.27 111.62 122.95 158.76 205.19 262.68 25.37

tot Curt Assets 151.19 2217.73 2711.5 7.37 21S9.24 2612.83 3 .06 .87 583.1 705.?

lgater IWutIm 113.06 1545.06 1815.0 2 .06 3165.06 3346.06 3346.0 336.06 33.06 336.06Lot Lans B nces 2195.63 21%.3 M3.10 20.11 3021. 271.67 2153.5 2M.69 1935.19 1647.95Rt fixed heats 0.42 9.75 10.49 11.29 12.19 12.99 13.55 11.35 15.05 1S.79Total Assets 5512.59 596.41 6760.21 7570.83 8360.9? 8723.55 5421.17 10215.02 11131.1 12100.53

gg,g,gu ggng, gun,,,." agage" gagiug autos" namugg _mg guguai n,wg

Curent LUislities

Advances&Rits 29.68 37.s4 42.43 46.06 45.07 45.56 63.55 84.31 15.II 1159.05ther Lilities 111.21 140.66 IS9.00 172.59 168.18 15.70 239.79 315.93 36.73 "6.11

Current aurity Of LTD 231." 242.10 238.75 170.66 139.81 119.23 157.77 182.77 155.92 195.92

Total urrent Liabilities 372.33 420.30 440.18 389.31 353.t? 351.45 461.55 563.01 698.52 761.88

Lon Loas 2018.51 1776.41 1827.39 2570.39 2814.39 26!5.16 253.39 2351.62 2158.70 152.78ert Odepost 180.29 180.29 180.29 180.29 180.29 10.29 180.29 13.29 18029 180.29

Equity 107 69 107.09 107.89 107.89 107.89 107.8 107?.89 107.89 107.89 107.89Ien Reler 789.26 926.92 1088.08 126.25 1429.10 1610.29 1841.4 2115.76 251.86 3012.34ent O opnent Fund 204.31 257.60 3116.10 3452.70 3475.21 3775.44 1252.57 13. 5437.23 6076.14

lotal Equity 241.46 3552.11 12.37 4822.84 502.53 93.62 6241.54 705.10 8053.98 5196.37

otl liabiliti I Equity S512.59 5569.41 6760.24 7970.83 8360.97 8723.55 421.17 10215.02 1113.49 12100.53gan= a -as gag,," eases" g_wgg *mg agg _a,,, _ ase"

urent Ratio .22 5.28 6.16 6.70 6.10 7.37 7.3 7. 8.35 9.32DUEAqulty Ibtio 41.59 33.67 30.70 35.65 36.64 33.67 25.71 2.75 21.79 18.8

EM1 Technical DepartmentJuly 1987

- 113 - MRA X 7-5Page 1

PAKISTAN - CEMENT INDUSTRY NODERNIZATION I ROJECT

Financial Performance of Plants Under Component B (BMR)

1. This annex provides a brief description of the five plants(Gharibwal, Javedan, Maple Leaf, Mustehkam and Zeal Pak) under the abovecomponent, and their past and projected financial performance.

A. Gharibwal

2. This factory is located in Jhelum district and was set up in 1965by the Ismail A. Shiek family. The initial installed capacity of thefactory was 360,000 tpy, which was further expanded by 180,000 tons in 1969to bring the total installed capacity to 540,000 tpy. After takeover byGOP in 1972, the name was changed from "Ismail Cement" to "GharibwalCement". Currently it is a public limited company with an authorizedc6pital of PRs 150 million and paid-up capital of PRs 34.5 millione Aftertakeover in 1972, urgently needed mechanical repairs/replacements wereundertaken, with the result that capacity utilization improved from 51% in1972/73 to over 100% in 1983/84.

Summary of Past Financial Performance

1981/82 1982/83 1983/84 1984/85 1985/86

Capacity Utilization Rate (Z) 95 98 103 108 108Profit Before Tax and CementDevelopment Fund 54 20 21 136 175

Current Ratios, ExcludingDeposits 2.3 2e3 1.8 2.0 1.4

Debt:Equity Ratio 4:96 2:98 1:99 0:100 0:100

3. Company profits decreased in 1982/83 becasue of increased fuelcosts brought about by conversion of the kiln from gas to oil firing.However, over the last two years profits before tax and deduction of thecement development fund have increased substantially, largely as a resultof increased cement prices following price decontrol, The company has asound capital structure.

- 114 - ANNEX 7-5

Projected Financial Indicators(PRs Million)

1986/87 1987/88 1919/90 1990/91 1991/92

Revenues 516 568 656 689 689Profit Before Tax andCement Development Fund 177 195 225 236 236

Current Ratio, ExcludingDeposits 1.6 1.8 2.1 2.2 2.4

Debt/Equity Ratio 0:100 0:100 10:90 9.92 6:94Debt Coverage Times - - 16.4 8.5 9.3

4. As a result of the BMR program (Annex 5-2), Gharibwal will beable to maintain its level of capacity utilization and increase itsprofitability. The company's projected cash flows are adequate to meet itsdebt obligations.

B. Javedan

5. This plant was established in Karachi in 1964 by the ValikaGroup. It was renamed "Javedan Cement" after its takeover by GOP in 1972.Initial installed capacity was 300,000 tpy, and it was expanded by another300,000 tpy in 1980. It is a public limited company with an authorizedcapital of PRs 150 million and paid up capital of PRs 88 million.

Summary of Historical Financial Performance

1981/82 1982/83 1983/84 1984/85 1985/86

Capacity Utilization Rate (X) 81 71 80 99 96Profit Before Tax and CementDevelopment Fund 4 10 14 53 96

Current Ratios, ExcludingDeposits 1.0 0.9 0.8 1.0 0.9

Debt/Equity Ratio 80:20 75:25 69:31 67:33 65:35

6. Due to heavy financial charges and depreciation associated withthe expansion carried out in 1980, the company's financial performance wasweak between 1981/82 and 1983/84. However, increased prices and improvedcapacity utilization over the last two years have significantly improvedthe company's financial performance.

- 115 - ANNEX 7-5Page 3

Projected Financial Indicators(PRs Million)

1986/87 1987/88 1989/90 1990191 1991/92

Revenues 522 574 663 697 697Profit Before Tax andCement Development Fund 70 89 119 120 123

Current Ratio, ExcludingDeposits 0.9 1.0 1.2 1.3 1.5

Debt/Equity Ratio 51:49 35:65 24:76 15:85 10:90Debt Coverage Times 1.4 1.2 1.9 1.9 3.4

7. As a result of the B94R program, Javedan is projected to maintainits capacity utilization and further improve its financial performance.

C. Maple Leaf

8. This factory is located in Daudkhel, and was set up in 1956 bythe West Pakistan Industrial Development Corporation with the assistance ofthe Canadian Government., Its initial installed capacity was 105,o00 tpy,which was expanded by another 150,000 tons in 1960. The company wastransferred to SCCP in 1974. It is an unquoted public limited company,with an authorized capital of PRs 70 million and paid up capital ofPRs 30 million.

Summary of Historical Financial Performance

1981/82 1982/83 1983/84 1984/85 1985/86

Capacity Utilization Rate (Z) 99 92 86 93 99Profit Before Tax and CementDevelopment Fund 48 16 9 69 83

Current Ratio, ExcludingDeposits 2.1 1.8 1.9 1.4 1.7

Debt/Equity Ratio 0:100 0:100 0:100 0:100 0:100

9. The original kilns were coal-fired, but because of unsatisfactoryperformance they were converted to gas in the 1970s. Company profitsdeclined sharply after 19F1/82 because of increased fuel costs broughtabout by the change from gas to oil firing. However, higher cement priceshave resulted in improved company profitability during the past two years.The company financial performance is good with no outstanding long termdebt.

-116- ANNEX 7-5Page 4

ProJected Financial Indicators(PRs Million)

1986/87 1987/88 1989/90 1990/91 1991/92

Revenues 276 304 351 369 369Profit Before Tax andCement Development Fund 69 75 63 64 67

Current Ratio, ExcludingDeposits 1.9 2.0 2.0 2.1 2.1

Debt/Equity Ratio 0:100 0:100 36:64 30:70 24:76Debt Coverage Times - - 1.5 1.6 1.8

10. As a result of the BMR component, the company is projected tomaintain its capacity utilization and to improve its profitability andfinancial position.

D. Mustehkam

II. This plant was set up at Hattar by the Farooq A. Sheikh family in1967 and subsequently taken over by GOP in 1972. The plant had an initialinstilled capacity of 360,000 tpy, and was expanded by a further300,000 tons in 1981. It is a public limited company with an authorizedcapital of PRs 180 million and paid up capital of PRs 92 million.

Sumary of Historical Financial Performance

1981/82 1982/83 1983/84 1984/85 1985/86

Capacity Utilization Rate (X) 82 9i 88 88 95Profit Before Tax and CementDevelopment Fund 14 10 21 99 142

Current Ratio, ExcludingDeposits 0.9 1.0 1.0 1.9 1.3

Debt/Equity Ratio 70:30 66:34 58:42 60:40 62:38

12. Company profits before tax and cement development fund deductionhave increased from PRs 10 million in 1981/82 to PRs 142 million in1985/86, sfter having fallen in 1981/82 as a result of increased fuel costsassociated with the change from gas to oil firing. The financialperformance of the company over the period under review has beensatisfactory.

ANNEX 7-5- 117 - Page 5

Projected Financial Indicators(PRs Million)

1986/87 1987/88 1989/90 1990/91 1991/92

Revenues 598 658 760 798 798Profit Before Tax andCement Development Fund 177 202 244 242 244

Current Ratio, ExcludingDeposits 1.3 1.A 1.7 1.9 2.1

Debt/Equity Ratio 52:48 40:60 32:68 24:76 15:85Debt Coverage Times 1.4 1.5 2.5 2.3 2.5

13. As a result of the BMR component, the company is projected tomaintain its capacity utilization and to improve its financialperformance. The company will be in a position to satisfy all its debtobligations.

E. Zeal Pak

14. This plant was set up in Hyderabad in 1956 by the West PakistanIndustrial Development Corporation with the assistance of the Government ofNew Zealand. It had an initial installed capacity of 240,000 tpy whichincreased gradually to 1,080,000 tons by 1969, since when its capacity hasbeen unchanged. At present, it is the largest cement factory in Pakistan.Zeal Pak is a public limited company with an authorized capital ofPRe 150 milliLa and paid up capital of PRs 39 million.

Sumary of Historical Financial Performance

1981/82 1982/83 1983/84 19F4/85 1985/86

Capacity Utilization Rate (2) 85 71 78 82 85Profit Before Tax and CementDevelopment Fund 86 13 20 84 130

Current Ratio, ExcludingDeposits 18 1.8 1.5 1.4 1.2

Debt/Equity Ratio 19:81 7:93 15:85 13:87 11:89

15. Before 1981/82 and 1983/84, Zeal Pak's profits declined due toincreased costs of production associated with the change from gas to fueloil. However, the profits of the company have risen since 1984/85 due tocement price decontrol. Its financial performance haa been satisfactory,although its current ratio has declined slightly as a result of increasesin short-term borrowing used to finance minor BMR programs.

- 118 - ANNEX 7-5Page 6

Projected Financial Indicators(PR. Million)

1986187 1987/88 1989/90 1990/91 1991/92

Revenues 833 916 1,059 1,112 1,112Profit Before Tax andCement Development Fund 146 160 185 179 180

Current Ratio, ExcludingDeposits 1.3 1.5 1.7 1.8 1.9

Debt/Equity Ratio 5:95 199 26:74 21:79 17s83Debt Coverage Times 8.8 7.4 6.7 3.4 3.7

16. As a result of the BMR component, Zeal Pak will improve capacityutilization and strengthen its financial position.

70. Financial and Economic Rates of Return. The financial andeconomic rates of return for the five plants under component B are listedbelow. The high rates of return indicate the short pay back periods ofthese investments.

F-R ERR

Gharibwal 65 86Javedan 61 65Maple Leaf 24 33Mustehkam 44 60Zealpak 33 40

RHENA Technical DepartmentJuly 1987

- 119 - ANNEX 7-6

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Wah Comporent - Financial Rate of Return Analysis(In Million of 1987 PRs5

Capital Working Incremental Incremental NetCost Capital Cost Revenues Benefits

1987/88 7,7 -7.71988/89 200.4 -200,41989/90 934.0 -934.01990/91 426.5 20.0 0,0 00 -446.51991/92 14.1 63.5 315.5 237.91992/93 9.0 107.8 420e4 303.61993/94 12.6 169.7 570.1 387.81994/95 9.6 213.2 673.6 450,81995196 220.5 685.4 465.01996/97 227,4 696.7 469.31997/98 234.0 707.4 473.41998/99 436.9 910,5 473.51999/2000 436,9 910.5 473.52000/01 436.9 910.5 473e52001/02 436.9 910.5 473.52002/03 436.9 910.5 473,52003/04 436.9 910.5 473.52004/05 436.9 910.5 473.52005/06 -156.9 -65.3 436.9 910.5 695.7

Financial Rate of Return - 19.8%

Industry DepartmentJuly 1987

- 120 - ANNEX 8

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Wah Component - Economic Rate of Return Analysis(In Millions of 1987 PRs)

Capital Working Incremental Incremental NetCost Capital cost a/ Revenues Benefits

1987/88 7.7 -7.71988/89 200.4 -200.41989/90 864.0 -864.01990/91 411.6 15.5 -427011991/92 5.0 54.4 377.2 317.71992/93 904 89.7 502.6 403,51993/94 13.1 138.9 681.6 529.61994/95 10.0 173.5 805.4 621.91995/96 179,1 819.5 640.41996/97 184.5 833.0 648.51997/98 189.6 845.7 656.11998/99 364.7 1088,6 723.81999/2000 364.7 1,088,6 723.82000/01 364.7 1,088.6 723,82001/02 364.7 1,088.6 723.82002/03 364.7 1,088.6 723.82003/04 364.7 1,088,6 723.82004/05 364.7 1,088.6 723.82005/06 -148.4 -53.0 364.7 1,088.6 925.2

Economic Rate of Return - 27.5%

a/ Financial operating costs have been adjusted in the economic analysisby excluding taxes and duties as follows:

Financial Economic % Change

1. Raw Materials 26.9 21.8 19Fire Bricks 6.4 3.9 39Grinding hedia 500 2.5 50Lining Plate 1.0 0.5 50Other Stores 24.6 13.5 45Packing Material 76.5 47.1 38

2. Power 96.0 102.1 Shadow price of 1.063. Fuel 135.4 104.6 Conversion factor of

0,77

1. Source: SCCP.2. Source: Consultant. Report for the Kalabagh Dam project.3. Fuel oil shadow priced using import price at average of last six

months, (US$75 per ton) and domestic price of PRs 1,650 per ton.

Industry DepartmentJuly 1987

- 121 - ANNEX 9

PAKISTAN - CEMENT INDUSTRY MODERNIZATION PROJECT

Selected Documents and Data Available in the Project File

A. Report on the Cement Subsector

Al. IBRD - Pakistan Cement Subsector Study, January 26, 1983(Report No. 4304-PAK)

B. Reports and Documents on SCCP and Subsidiaries

B5.1 SCCP - Feasibility Study for Establishment of CementResearch Institute

B5.2 SCCP - Human Resources Development ProgramB5.3 SCCP Project TeamB5.4 TOR for Consultant, Project ImplementationB5e5 SCCP - Feasibility Study, Rehabilitation of Six Cement

Plants, Introductory VolumeB5.6 ACC-Wah - Project Reports Including Technical, Geological

and Feasibility StudiesB5.7 ACC-Rohri - Project Reports Including Technical,

Geological and Feasibility Studies35.8 Gharibwal - Project Reports Including Technical,

Geological and Feasibility StudiesB5.9 Maple Leaf - Project Reports Including Technical,

Geological and Feasibility Studies35.10 Zealpak - Project Reports Including Technical, Geological

and Feasibility StudiesB'5011 Mustehkam - Project Reports Including Technical,

Geological and Feasibility StudiesB5.12 ACC-Wah - TOR for Appointment of Consultants To Install a

3,000 tpy Plant

B6.1 ACC-Wah - Cost Estimates of Civil Works - 3,000 tpd36.2 ACC-Wah - Capital Cost - 3,000 tpdB6.3 BMR - Capital Cost - Zealpak, Gharibwal, Mustehkam, Maple

Leaf and Javedan

87 Financial worksheets for: detailed production productioncosts, financial and economic analysis, financial projections,historical financial data and annual reports for 1985/86

B7.1 SCCPB7.2 ACCB7.3 ZealpakB7.4 JavedanB7.5 GharibwalB7.6 MustehkamB7.7 Maple Leaf.8 Main assumptions used in the Financial Analysis of Component B

(BMR)

ENEMA Technical DepartmentJuly 1987

-~~~~~~ ~ ~~~~~~~~~~ i2-|l

PAKISTAN U. S. S. R.

CEMENT INDUSTRY MODERNIZATION PROJECT

Operating Cement Plonts: ; CHINA

A Project Components - N-NCEMENT PLANTS (SCCP) I

36° Pubtic Sector 1. MUSTEHKAM, Hattor (SCCP)

A Prrvote,Sector 2. ACC, Wah tSCCP)3. KOHAT, Kohot (SCCP)

Cement Plants Under Construction 4 NATIONAL, Dondot (SCCPI 36t5. DANDOT, Dandot (SCCP) 1

A Public Sector 6 GHARIBWAL, Ghoabwu' (SCCP)

A Private Sector 7 MAPLE LEAF, Deiud Kk,-I (SCCPt ),8. A.C.C . Robt, (SCCP)/9 ZEAL PAK, Hydfele,bc,d fSCCPI> t Cemert Market Zone., ELPK y.~xiS'~

10. JAVEDAN, Kotoch, iSCP cp

Zone Boundoa-ee II NATIONAI Kmcich. iSCCY)12. THATTA, Tht (SCCPZ NE. 1

Surplu Zr ne 1 3 D.G. KHAN, D.G. Khon 1SCCP) -

t Deficit Zone 14 CHtRAT. Lko,,15 PAKLAND Dhobe1 ) ° AbMcbod *

Road% ~~~~~~~~16 DADABHOY, 1karn Bt-) Xko,",' R7 FECTC, Scvmg K" Pet howo JAMMU

Rc-'lro~d, 18 ATT0CIK HLbCf't) -' 3 ISAMAAOA

P-ovince Boundr dwrp5 1 . PAt' CEMENT, Ood Khel ISCCPI Ki 3 , p BAD". ,NDK|

Internotonol Boundc,"es 21 cATA D I Kh-u,

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~g ntubri-M,-R .. ' J\- t)+, 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~og 2nar

-- .,: ~~~~321> }= \ >} \ / * iroN S ?A;? ½°

I .-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IX~~~~~~~~~~~~~~~~~ <' ./. . , ,.~

/ ~~~~~zOE (N 3;.-_- _ -~ - ,..I, ,-, 1 * : . u/

u J. ~ ~ ~ 2

/~~~~~~U ' . t-.I * ..... -,. , .. :. .,.,f *na- .....l , ,,-1,,rh., ,t..n I ,, , / :U Iv>,_

/ , l ¢,, , ?Ul~. * l,2te f.-. * , .' 0 L -t

\~~~~~~~~~~~~~~~~~~~~~~~~~~~~. Kgin -i~~~ 0Kl~~~~~~~~ .¶ 'B~~~~~~~~ohwalpur

CI

ISLAMIC REP. Z Nkkur

OF IRAN Rohr-

I 4 I >37 ( INDIA

6EILICI~ ~ ~ Nawob,a

jar~i~ ; j S 1 ,, N , OSUPPLY AND DEMAND ¢mty)4ISF c'. '<Hja<i 7 ~~~~~~~~~-985-1986 SURPLUS

'^/ _4~ , +9 \ ZONE DEMAND SUPPLY OR DEF!Ci7

j 1 2 2.418 1.670 0 748 31.052 0.370 0 682

72 BadM 4 1.666 2.485 0.819

24° /7 - Total 5.919 5.714 0 206 24°

'990-199tSURPLUS

ZONE DEMAND SUPPLY OR DEFICIT

1 1.024 1.629 0.6052 3.313 2.281 1 0323 1.476 0.930 0.5464 2.087 3.054 0.967

Total 7.900 7.894 G.006

68° 72°