for official use only report no. 3037 · azot - azot sanayii t.a.s. bagfas - bandirma gubre...

Document of

The World Bank

FOR OFFICIAL USE ONLY FILE DOPY

Report No. 3037

PROJECT PERFORMANCE AUDIT REPORT

TURKEY--IGSAS FERTILIZER PROJECT(LOANS 845-0-TU and 845-1-TU)

June 17, 1980

Operations Evaluation Department

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

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PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

AZOT - Azot Sanayii T.A.S.BAGFAS - Bandirma Gubre Fabrikalari Anonim SirketiCAN - Calcium ammonium nitrateCIF - Cost, insurance and freightDONATIM - Turkiye Zirai Donatim KurumeFOB - Free on boardIGSAS, Company - Istanbul Gubre Sanayii Anonim SirketiIPRAS - Istanbul Petrol Refinerisi Anonim SirketiN - Nitrogen content in fertilizerSEKER - Turkiye Seker Fabrikalari Anonim SirketiSIB - State Investment BankSPO - State Planning OrganizationTA - Technical AdviserTPAO - Turkiye Petrolleri Anonim OrtakligiTPD - Tons per dayTPY - Tons per yearTCZB - T.C. Ziraat Bankasi (Agricultural Bank of Turkey)

FOR OFFICIAL USE ONLY


rURKEY--IGSAS FERTILIZER PROJECT(LOANS 845-0-TU and 845-1-TU)

TABLE OF CONTENTS

Page No.

Preface ..................... 0........... . . . . . . . . . . . iBasic Data Sheet .......... ................................ iiHighlights ....... o......... ........ .. .. ........ o........ . i

PROJECT PERFORMANCE AUDIT MEMORANDUM

Project Cost and Scheduling ... ............................ 1Rate of Return .... .. .... ........................... 2

Covenants and Bank Role .. ... . .......................... ..... 3

Overall Assessment ........................................... 6

Annex I. Loan Requirements and Understandings .............. 8Annex II. Comments Received from the Borrower (A) ........... 10Annex III. Comments Received from the Borrower (B) ........... 12

ATTACHMENT: PROJECT COMPLETION REPORT

I. Project Background .............. . ..................... . 26

A. Project Preparation, Appraisal, Approvaland Loan Effectiveness ........................... 26

B. Project Description and Objectives................... 29

II. Project Implementation and Management .................... 30

A. Achievement of Project Objectives.................... 30B. Project Scope..................................... . 30

C. Project Management .............................. .. o. 31D. Labor and Training .................................. 32E. Use and Performance of Consultants................... 33F. Implementation Schedule............. ..... ... 34

G. Environmental Aspects ... .o.o........ ............ 34

H. Project Cost......................................... 35

I. Financing Plan and Cost Overrun Financing.......... 36J. Procurement........... ....................... 37

K. Disbursement................ ......... . .......... ..... 38L. Performance of Borrower/Guarantor .................... 38

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

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Table of Contents (Cont'd)

Page No.

III. Project Achievement and Prospects ........................ 39

A. Production, Production Cost and Revenue.............. 391. Trend of Production....... ...................... 39

2. Production Costs.................................. 403. Product Prices................................ 41

B. Financial Results...................... 42C. Financial Rate of Return............................... 43D. Covenants......................... . . ............. 43

IV. Fertilizer Market and Marketing..... .................... 43

A. Demand and Supply. ................... .... ...... 43B. Market Share of Urea................................. 45C. Urea Seeding Program............................. 46

D. Fertilizer Market Study............... ...... 46E. Distribution System...................... . 46

V. Economic Benefits of the Project ................ 47

A. Foreign Exchange Effect................................ 47B. Economic Rate of Return................................ 47C. Transfer of Technology........................... o... 48

D. Employment...................... ................... 48

VI. The Bank's Role.......................................... 48

A. Project Formulation and Execution.................... 48B. Lessons Learned................ o .................... 50

Annexes:

Annex 1: Major Delays and Problems Encountered in theCommissioning Period .............. # ........... 52

Annex 2: Project Implementation Schedule-- 54Estimated vs. Actual................................

Annex 3: Significant Events During Design, Procurementand Construction........ .......................... 55

Annex 4: Sources of Procurement............................... 57

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Table of Contents (Cont'd)Page No.

Annex 5: Disbursement of Bank Loans ....................... 58

Annex 6: Trend of Monthly Production .......... ........ 59

Annex 7: Material Balance and Costs.................. 60

Annex 8: IGSAS Income Statement.... 0.0 .............. 61

Annex 9: Balance Sheet....... ..................... * ........... 62

Annex 10: Cost and Benefit Streams for Financial Analysis...... 63

Annex 11: Cost and Benefic Streams for Economic Analysis....... 64

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TURKEY--IGSAS FERTILIZER PROJECT

(LOANS 845-0-TU and 845-1-TU)

PREFACE

This report is an audit of performance under Loans 845-0-TU and845-1-TU to Istanbul Gubre Sanayii Anonim Sirketi (IGSAS) in Turkey. Thefirst loan, in an amount of US$24 million approved in May 1972, was supple-mented by a second loan of US$18 million (to a total of US$42 million) inApril 1975. The loans were closed, fully disbursed, on October 31, 1977and October 31, 1978 respectively. Amounts repaid under the two loans byDecember 31, 1979 were US$4.51 million and US$3.21 million respectively,leaving outstanding respective amounts of US$19.49 million and US$14.79

million.

As part of a larger study of the industry and DFCs sector in Turkey,

an OED mission visited the project in May 1979. It had discussions withGovernment officials, representatives of banks and industry, as also with the

project officials. Assistance rendered to the mission during its visit isgratefully acknowledged.

The Project Completion Report (PCR) was prepared by the IndustrialProjects Department of the Bank on the basis of data obtained from the bor-rower during a country mission. The audit memorandum is based on the attached

PCR, a review of the files and discussions during the mission and with theBank staff. It provides a revised estimate of the financial rate of return on

the project in the light of new prices of naphtha and urea after the PCR wasprepared and assesses the realization of the Bank's institution-buildingobjectives in relation to the project. Comments received from the borrowerhave been taken into account in finalizing the report and are reproduced asattachments to this memorandum.

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BASIC DATA SHEETAmounts (in US$M)

As of 1/31/80Original Disbursed Cancelled Repaid Outstanding

Loan 845-0-TU 24.0 24.0 - 4.5 19.5845-1-TU 18.0 18.0 - 3.2 14.8

CUMULATIVE LOAN DISBURSEMENT

1972 1973 1974 1975 1976 1977 1978

(i) Planned 1.0 7.0 18.0 24.0 37.7 40.2 42.0(ii) Actual - 0.4 5.1 22.0 34.9 39.7 42.0

(iii) (ii) as % of (i) - 5.7 28.3 91.7 92.6 98.8 100.0

PROJECT DATA

Original Loan Date Actual or Re-estimated(both loans)

Board Approval 5/71 5/16/72 & 4/15/75Loan Agreement 6/30/71 6/30/72 & 4/18/75Effectiveness 7/31/71 10/06/72 & 8/28/75Loan Closing 6/30/76 10/77 & 10/78

Physical Completion 12/75 3/77Total Project Cost (US$M) 130.0 163.7Economic Rate of Return 26.0% 11.2%

MISSION DATA

No. of No. of Date ofMonth, Year Weeks Persons Manweeks Report

Identification June 1970 1 1 1 7/02/70Preparation August 1970 2 2 4 9/02/70Preappraisal December 1970 2 3 6 3/02/70Appraisal November 1971 2 2 4 4/12/72Supervision I July 1972 1 1 1 7/27/72Supervision II September 1972 1 2 2 12/26/72Supervision III March 1973 1 2 2 4/17/73Supervision IV June 1973 1 1 1 7/10/73Supervision V April 1975 1 2 2 5/07/75Supervision VI January 1976 1 2 2 2/16/76Supervision VII August 1976 1 2 2 9/22/76Supervision VIII July 1977 2 2 4 8/17/77Supervison IX June 1978 1 1 1 7/25/78

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HIGHLIGHTS

Loans 845-0-TU and 845-1-TU, intended to enable the borrower toset up an ammonia/urea plant with a capacity of 1,000 tons per day (tpd) ofammonia and 1,550 tpd of urea, were early loans made in Turkey to finance apublic-sector industrial enterprise in the country. The project was completed

with an overrun of 26 Dercent in cost above the estimate made in 1975 and with

a delay of 15 months. In spite of the higher cost, the financial rate ofreturn, though below 1975 estimates, remains satisfactory; the economic rateof return, though much lower, reflecting recent changes in price paritiesbetween fuel oil and naphtha on the one hand and ammonia and urea on theother, is also satisfactory.

Other points of interest are:

- frequent changes in project management (para. 15 of the PPAM andpara 2.06 of the PCR);

- poor relationship with foreign advisers (para. 11(b) of the PPAM

and paras. 2.05, 2.09 to 2.11 of the PCR); and

- breaches of debt:equity and current ratio covenants (para. 11(a)of the PPAM and para. 3.06 of the PCR).

PROJECT PERFORMANCE AUDIT MEMORANDUM


1. Loan 845-TU in an amount of US$24 million was approved by the Bankto Istanbul Gubre Sanayii Anonim Sirketi (IGSAS) in May 1972 to set up aplant at Izmit (about 80 km southeast of Istanbul on the Marmara Sea) with acapacity of 750 tons per day (tpd) of ammonia and 830 tpd of urea. In July

1973, IGSAS Board approved an increase in the capacity of the plant to 1,000tpd of ammonia and 1,550 tpd of urea. In view of higher estimates of demand

for fertilizers and differences about the price for surplus ammonia, the Bankapproved this change in October 1973. Following this, the Bank approved, in

April 1975, a further loan (Loan 845-1-TU) of US$18 million to IGSAS, bringingthe total Bank financing of the project to US$42 million.

Project Cost and Scheduling

2. In May 1972, when the Bank approved the project, the total cost ofthe project was estimated at US$57.8 million. In October 1973, when the Bank

approved the increase in capacity, the Bank, recognizing the economies ofscale inherent in the expansion, had not appraised the revised cost or comple-

tion schedule for the project; the total cost of the project (as estimated bythe borrower at the time) was expected to be US$25 million higher (laterrevised by the borrower to US$40 million higher) (para. 1.11 of the PCR).In April 1975, when the Bank approved additional financing for the largerproject, the total cost was re-estimated at US$130 million, representing anincrease of 57 percent over the 1973 cost estimate made by the borrower. The

final cost is now estimated at US$163.7 million, representing an overrun of 26percent over the 1975 cost estimate.

3. The period over which the project was implemented was marked bystrong inflationary pressures, particularly after the sharp rise in oil prices

in 1973. This necessitated, in the case of some imported equipment, renego-tiation of prices in order to maintain the contracts and delivery schedules.Within Turkey, the wholesale price index rose by 20 percent in 1973, 27 per-cent in 1974, 11 percent in 1975, 17 percent in 1976 and 27 percent in 1977.This had an impact on local costs, particularly construction and wage costs.The substantial delays in project completion in an inflationary situation also

contributed to the increase in project cost. However, the final project cost

remained comparatively low when expressed in terms of per ton of urea capac-ity, being US$268.7 per annual ton capacity (with marginal excess productionof ammonia for sale and service support from IPRAS) against the industry"norm" of US$280 to US$420 at 1977 prices (for a 1,000 tpd of ammonia and1,700 tpd of urea plant based on gas)-!.

1/ More recent estimates suggest still higher costs (at 1979 prices) in therange of US$410 to $1,000 per annual ton of urea capacity, depending upon

the feedstock.

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4. At the time of the appraisal in 1972, the project was expected tostart commercial operations by end-1975. This forecast was maintained as theBank approved, in 1973, the change in the size of the project. In April 1975,when the Bank approved additional financing, physical completion of the plantwas expected in April 1976 and the plant was scheduled to go into commercialproduction in September 1976. In fact, the plant was completed by March 1977,was commissioned by September 1977, and stabilization of production (throughcompletion of performance tests) reached by December 1978.

5. A part of the delay in project completion was due to late plantdeliveries caused by the need to renegotiate prices. However, delays werealso caused by instability in management in the latter half of the imple-mentation period (paras. 2.04 to 2.06 of the PCR). The delay between com-missioning of the plant and stabilization of production (through completion ofperformance tests) was due to design defects, and also financial stringencycaused by the foreign exchange difficulties faced by the country at the timethe plant was completed and afterwards (para. 2.19 of the PCR). Problemsarising out of gaseous, liquid and solid emissions took also some time to dealwith, but were handled satisfactorily without cost to IGSAS (para. 2.13 of thePCR).

6. Disbursement of the first loan was slower than estimated (see Annex5 to the PCR), mainly due to change in project scope which led to delays inengineering and procurement activities. By the third quarter of 1975, whenthe loan was expected to be fully disbursed, actual disbursement was onlyUS$13.5 million (or 56 percent). Disbursement was more rapid in the sub-sequent quarters, and the first loan was fully disbursed by the end of 1976.Full disbursement under the second loan was made by end-1978.

Rate of Return

7. The project completion report, prepared before the devaluation ofthe Turkish currency and subsequent price changes (particularly of naphthaand urea), had estimated the financial rate of return (assuming production tostabilize at 90 percent of capacity) at 10.5 percent (against 26 percent at100 percent capacity utilization estimated in 1975 at the time of approvingthe additional financing) and the economic rate at 13.5 percent (against23 percent estimated in 1975--the estimates being made on 90 percent capacityutilization at the PCR stage and 100 percent at the reappraisal stage).

8. After the devaluation of the lira, the Government announced, in June1979, new prices for many products, including naphtha and urea; these were

revised in November 1979. The main changes in prices were in the case of

naphtha (TL 11,211 against earlier TL 1,811 per ton), ammonia (TL 18,700against TL 5,000) and urea (TL 11,930 against TL 4,300 for bagged urea). The

financial rate of return was recalculated in the light of the new domesticprice structure. This would lead to a financial rate of return of 13.2 per-cent at 90 percent capacity utilization.

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9. A further set of economic reform measures was instituted inJanuary 1980, which would have repercussions on the fertilizer industry and,therefore, on IGSAS. The further devaluation of the Turkish currency has led

to the establishment of a parity of TL 71.40 per U.S. dollar; the rate fixedfor imports of fertilizers and fertilizer raw materials is TL 56.10 per U.S.dollar, about 21.5 percent higher than the general parity rate for the Turkishcurrency. This gives a lower price for urea (estimated at TL 12,100 per tonof bulk urea) than at the regular parity rate.

10. New ex-factory selling prices have not been announced. Atthe current estimates of urea prices (TL 12,100 per ton for bulk urea andTL 12,700 per ton for bagged urea), it is estimated that IGSAS would make aloss of TL 3,204.5 million in 1980 (vide Annex 5 of Attachment B to the PPAM).The loss would be reduced by about 25 per cent if the exchange rate parity istaken at TL 71.40 for the purposes of calculating urea prices for domesticproducers.

11. The urea price allowed to IGSAS (as to other domestic producers)is subject to revision every six months in the light of average landed c.i.f.costs for every six-month period. In addition, under the pricing covenant,IGSAS is entitled to an adequate price to ensure its viability.

12. The price situation in Turkey is in a flux, and the economicreform measures, taken recently, have still to be worked out in full. Thetechnical working of the IGSAS plant is now established and considered satis-factory. It is only after the economic reform measures have worked out fullythat it would be possible to calculate the financial rate of return for IGSASon a satisfactory basis. The economic rate of return on the project wouldvary with the relationship between the international prices of fuel oil andnaphtha on the one hand and ammonia and urea on the other. Based on long-term price assumptions used by the Bank for its projections (naphtha US$217per ton, fuel oil US$141 per ton, ammonia US$210 per ton, and urea US$232 perton at 1977 prices) and using the assumptions given in the PCR (para. 5.02),the economic rate of return on the project works out to 11.2 percent.

Covenants and Bank Role

13. IGSAS was the second direct project loan (the first being Loan817-TU to ERDEMIR Steel) to a public-owned industrial enterprise in Turkey.One of the Bank objectives in lending to Turkey, as enunciated in the Pres-ident's Report on the loan to IGSAS, was "to improve lagging public sectorsaving through financial and management reform of State Economic Enterprises(SEEs) . . . . [To this end] industry (including mining and DFCs) and power,where strengthening of management and financing of SEEs is the big task, willalso receive significant support" (paras. 17 and 19 of the President's Report

on Loan 845-TU: Report No. P-1600-TU, dated April 2, 1975). IGSAS is not aSEE, but in keeping with these broad institution-building objectives, the Banksecured, during the loan negotiations, agreement on a large number of points(reproduced as an annex to this memorandum). These understandings wererecorded in the agreements with the Government and the borrCwer and throughside letters.

14. These understandings reflected only a part of the institution-building effort of the Bank - the Government and the borrower having resistedmany and modified some of the Bank's original suggestions. Thus, the Govern-ment and the borrower refused to seek a foreign equity partner with operatingexperience (paras. 1.03, 1.04 and 1.07 of the PCR); the Bank then suggestedthe introduction of a technical adviser and engineering contractor, which theborrower accepted. Despite considerable pressure to that end, the Governmentalso did not agree to the borrower undertaking its own fertilizer distribu-tion and marketing (para. 1.07 of the PCR) since there already existed anestablished setup for these activitiesl/

15. The role of the covenants and the understandings, related as theywere to the project, and their effectiveness is noted briefly.

(a) IGSAS agreed, after considerable negotiation, to maintain a debt-equity ratio of 60:40 and a current ratio of 2 (later reduced to1.3:1, see para. 3.07 of the PCR). These financial covenants wereaimed at instituting financial discipline on the borrower so as tomaintain financial stability and to ensure proper project implemen-tation and operation. The financial stability of IGSAS, a public-owned enterprise, is a function of the support it enjoys from thetwo institutions which hold the equity and which, in turn, areGovernment-controlled. Except for brief periods, IGSAS was inviolation of both covenants (para. 3.06 of the PCR), and the exis-tence of the covenants did not improve its access to public funds asthe country was going through a financial crisis during 1976 andsubsequent years.

(b) The Bank did not succeed in its efforts to persuade IGSAS to have aforeign equity partner. However, in view of IGSAS being the firsturea plant being built in the country, IGSAS agreed to have anengineering firm to act as its technical adviser and to employ com-petent production personnel, "including temporary use of expatriatesas long as necessary" (para. 9.01, Report No. PI-6a). As the PCR(paras. 2.10 and 2.11) notes, the borrower's relationship with thetechnical adviser and the prime contractors was not always smooth.The PCR finds that "with the passage of time, the original IGSASproject team showed it could function effectively essentially

1/ Based on its experience elsewhere, IPD considers that companies entrustedwith their own marketing are apt to perform their tasks more efficientlythan a separate organization.

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unaided," and the role of the technical adviser was reduced (paras.

2.05 and 6.12 of the PCR). Apparently the Bank underestimfated the

strength of the existing management. The Bank's attempt to provide

stability in technical management through foreign assistance was

justified in the light of changes in project management towards the

latter part of the implementation period.

(c) Four of the points of agreement related to the determination of

demand for, and marketing of, urea.

(i) IGSAS was the first urea plant to be set up in Turkey, and the

Bank, to protect IGSAS's financial viability, had sought con-

sultation on additional urea capacity to ensure "coordination

of expansion of nitrogen fertilizer capacity in Turkey with

projected demand" (para. 9.01, Report No. PI-6a). The sev-

enties marked a major expansion in demand for fertilizers,

mainly nitrogenous, in Turkey, and production capacity has

lagged behind demand. In fact, while the Bank agreed to a

higher capacity for IGSAS to reflect demand, its projections of

demand for nitrogenous fertilizer proved pessimistic by at

least 15 percent (actual demand in 1977 being 666,000 tons N

against projected 565,000 tons N) and of supply proved higher

by 67 percent (actual production in 1977 being 167,000 tons N

against projected 491,000 tons N), the latter due to low

capacity utilization in existing plants and slower start-up of

projects owing to financial difficulties in the country (see

table in para. 4.01 of the PCR).

(ii) The Bank suggested to the Government to entrust IGSAS with theresponsibility to market and distribute urea, which the Govern-

ment did not agree to as it has separate or anizationalarrangements (mainly DONATIM) for the purposely. However,the Bank asked the Government to prepare a urea marketing study

and implement its recommendations, as also to allow import ofurea for a seeding program. Since IGSAS was not charged withthe actual distribution of fertilizers, these requirements hadlittle beneficial impact on IGSAS. It is not possible to saywhat impact these requirements .will have on marketing and

distribution organizations in the country and on their prac-tices in the long run.

(iii) The Bank sought consultation on urea prices. There is a dualpricing system for urea--the price paid to IGSAS (or to othersellers or for imports) and the price (very much lower) atwhich urea is sold to consumers. The Bank has had some impact

1/ See footnote to paragraph 10.

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in respect of the first price (price received by IGSAS) (seepara. 6.04 of the PCR), particularly in respect of the latestprice announcement where the Government has agreed to revise,every six months, the price received by IGSAS in the light ofits costs at efficient levels of operation. While such priceconsultation could help ensure a viable price to the producer(which in this and similar cases elsewhere is of concernto the Bank), its impact is essentially to shift the subsidiza-tion process to the distribution end, without any substantiveimpact on the sources of the subsidy (in Government). In fact,subsidies on fertilizers have helped promote their use, andthus acted as support to the Bank's emphasis on agriculturalprograms in the country.

(iv) The requirement that IGSAS should be represented on the Fertil-izer Committee enabled IGSAS to present to DONATIM and to theGovernment its problems relating to warehousing, stock buildupand prices.

16. As discussed above, the covenants and understandings have had someinfluence in strengthening project management and in determining pricesallowed directly to IGSAS. They helped the project management to seek actionfrom the Government in respect of funds needed by the project (subject to theGovernment's own financial position) and in seeking revisions in prices.However, their immediate impact on the overall management of the industry andon fertilizer sector policy, which were the institution-building objectivesbehind the covenants and the understandings, has, so far, been relativelysmall; what their long-term impact will be remains to be seen.

Overall Assessment

17. The project went through many difficulties during the implementationstage, including change in design, differences with technical advisers,changes in management and financial stringency. IGSAS was also in breach ofsome covenants and understandings, particularly those relating to financialratios (which were rectified for a brief period before devaluation), reachedwith the Bank. In August 1977, the project was listed as a problem project,the problems being those relating to construction work, delays in mechanicalstart-up, management weaknesses, inadequate staffing, financial difficultiesand delayed submissions of progress reports.

18. The project was conceived as an important element in helping thecountry's agricultural development and the Bank succeeded in transferringresources needed for project implementation. The project also brought out thehigh technical and managerial competence of middle-level personnel in thecountry, which the Bank had apparently underestimated.

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19. The Bank, however, did not reach some of its institution-buildingobjectives. The financial ratios through which financial discipline wassought to be instituted were breached except for brief periods during theconstruction period and short period of operation since then. Further,

because of changes in governments, there was neither cohesiveness nor stabil-ity in the top management of the company towards the latter part of the

project implementation period; this was rectified by a change in management in1977; a further change in management was made in May 1978. The impact of thevarious studies, intended to coordinate production with demand and to bringabout efficient marketing and distribution practices, on sector policies canonly be determined in the long run.

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ANNEX I


Loan Requirements and Understandings

During loan negotiations, agreement was reached on the followingprincipal points1 /:

(a) Coordination of expansion of nitrogen fertilizer capacityin Turkey with projected demand.

(b) Consultation with the Bank on IGSAS urea prices.

(c) Preparation of a Urea Marketing Study and implementationof its recommendations.

(d) Implementation of a urea seeding program through importsof adequate quantities of urea during the project constructionperiod.

(e) Appointment of IGSAS to the fertilizer committee.

(f) Long-term contractual arrangements between IGSAS, Azot Sanayiiand PETKIM for sale of ammonia.

(g) Long-term contractual arrangements between IPRAS and IGSASfor the provision by IPRAS of administrative services toIGSAS and for the supply by IPRAS to IGSAS of naphtha, fuel oiland off-gas.

(h) Implementation of measures for adequate pollution control.

(i) Appointment of an engineering firm to act as Technical Advisor.

(j) Employment of competent production personnel, including tempo-rary use of expatriates as long as necessary.

(k) Procurement of goods financed by Turkish funds will be con-ducted with procedures to assure a reasonable degree of competition.

(1) A detailed construction schedule is to be completed by Septem-ber 30, 1972.

1/ Para. 9.01, Report No. PI-6a.

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(m) Guarantee fee of 1-3/4% to be charged by the Government toIGSAS, thus bringing the total cost of Bank financing toIGSAS to 9%.

(n) Commitment by TPAO and IPRAS, with back-up by the Govern-ment, to provide TL 330 million of equity and to providefunds, both foreign and local, to cover any project costoverrun, (including working capital) that might occur.

(o) Joint and several guarantee of the Bank loan by TPAO andIPRAS, in addition to the Guarantee of the Republic of Turkey.

(p) Auditing of IGSAS accounts.

(q) Restrictions of dividends and new capital investment programs.

SELAHATTIN 6ZKANiGSAS, ISTANBUL GOBRE SANAYiH A. 5,GENEL MOORO - 10 - ANNEX 2TOTONCiFTLiK / iZMiT

Feb.9,1980

Mr. SHIV KAPURDirectorOperation Evaluation Dept.

World Bank1818 H Street N.W.Washington D.C.20433

U . S . A .

Dear Mr.Kapur,

Thank you for your letter dated Dec.28,1979 asking myopinion about the draft project performance audit report onthe 1GSAS Fertilizer Project supported by the Loans 845-O-TUand 845-I-TU of 1972 and 1975.

The report seems to be prepared very carefully andthere is no doubt that it serves its objectives perfectly.

Although there are some severe criticism in the report for

!GSA5 and the contractors,we are not in a position to object

strongly to such a criticism.

If you allow me I will not go into a detailed analisesof the report and express my views on the matter.However,I wouldlike to comment on one point which I consider quite imported :

On page 20,the information given inside the paranthesisstarting from the middle of the 7 th line till the middle of the

12th line would be taken out of the report for two simple reasons.

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1. Similar comments on the Management of IGSA has beenexpressed in diferent parts of the report strongly

enaugh and I see no further reason to repeat it in

more details.

2. The goverments will never get involved in a conflict

with a General Manager of a company ; but sometimes

the minesters do so as stated in your report like

the TURGUT OMEN case.However such actions can seldombe substantiated with clear evidence.

Believing my above comment will receive due consideration

by yourselves I would again like to complement you on preparation

of such extensive report and look forward to receiving it in

final form.

Sincerely,

SELAHATTIN dZKAN

General Manager

- 12 - ANNEX 3

February 23, 1980

Mr. Shiv S. Kapur

DirectorOperations Evaluation DepartmentIBRD

1818 H Street, N.W.Washington, D.C. 20433, USA

Re: Project Performance Audit Report

on Loans 845-0-TU and 845-1-TU

Dear Mr. Kapur

Thank you very much for your letter dated December 28,1979 asking my comments on the first draft of tGSA4 ProjectPerformance Audit Report. As an engineer having been involvedin the implementation of this project from the very beginning,I am very much impressed by your report and enclosed ProjectCompletion Report. My involvement in the implementation of theproject covers the periods from October 1969 to May 1971 in the

Haldor Topsoe/TMA.S advisor group during the first appraisal,from August 1972 to December 1976 in tGSAS project team andfrom May 1978 up to now as deputy general manager (technical)of IGSAS.

I found your report and PCR satisfactory in summarizingthe progress of the project implementation in a very accurateway, as well as in assesing the achievement obtained in theproject objectives. However, I would like to clarify a fewpoints in project implementation and especially to draw your

attention on the changes in economical conjuncture occured

after preparation of PCR which are affecting the viabilityof !GSA5 seriously.

My comnents are as follows:

1. Increasing the plant capacities and disbursement ofthe first loan (paras 6 and 1.10 of PCR)

fGSA.S management informed the Bank in December 1972about tGSAS's intention of increasing the plantcapacities of the project from 750 tpd ammonia/ 8 30 tpdurea to 1000 tpd ammonia/1550 tpd urea. The technicalspecifications and tender documents were preparedon the basis of these two alternative capacities andproposals were obtained accordingly.

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The evaluation of the proposals and signing of thecontract with UHDE for the provision of engineering,procurement and construction services were carriedout as scheduled without being delayed due to

increasing of the capacities. Slower disbursement

of the first loan than estimated (Annex 5 to PCR)

would not be attributed to this change in capacities,but to the delays in engineering and procurement

services. Please note that, procurement activitieswere started in the first quarter of 1974 and

accerelated in the second quarter of 1974, althoughthe contract was signed in July 1973.

2. Latest change in Management (para 17)

Latest change in IGSA management took place in

May 1978, not in 1977.

3. Revisions to be made (paras 2.11 and 2.13 of PCR)

After making several minor modifications, performanceof the desorption system is still not satisfactory.

UHDE is preparing new proposals for revising thedesorption and recirculating systems of the urea plant.These proposals are scheduled to be discussed inUHDE's and Stamicarbon's offices in March 1980,together with other revisions required for the baggingplant.

4. Changes in Economic Conjucture

The following changes have taken place after Project

Copletion Report was issued.

Devaluation of TL

In June 1979 and in January 1980, TL was devaluatedfrom 25.50 TL = 1 US $ to the following exchange rates:

June 1979 January 1980

TL/JS $ TL/US $

-For imports of oil andpetroleum products 35.70 71.40

-For imports of fertilizersand fertilizer raw materials 35.70 56.10

-For others 47.80 71.40

- 14 -

Increase in Naphtha Prices

In the first half of 1979, unit price of naphthasupplied by IPRA refinery was 1861 TL/ton. In June1979 naphtha was taken out of the scope of "petroleumproducts price stabilization fund" and ex-refineryselling price was allowed to be established accordingto the free market value. The procedure applied incalculating this value is based on lowest postedprice in Arabian Gulf plus freight and insurance.Latest price issued on January 25, 1980 is 25,882 TL(US $ 362.5) per ton of naphtha which is about 14times higher in TL terms and 5 times higher in dollarterms than the price obtained in January 1979.Naphtha cost to IGSAS and price trends in MediteraneanRegion are tabulated in Annex 1 and 2.

Ex-factory Fertilizer Prices

Bky a Government decree issued on January 25, 1980the ex-factory fertilizer pricing system was changed.The new system establishes ex-factory fertilizerselling prices at a level 5 % over the average landedc.i.f. costs for every 6 month periods. For fertilizersproduced from ammonia based on lignite the abovementioned margin is taken as 15 %.

New urea ex-factory selling price has not beenofficially announced yet. According to the latestprice information obtained from DONATIM the ureaex-factory selling prices will be as follows:

f.o.b. c.i.f. ex-factoryprice landed cost priceus $/t us $/t TL/t

-Bulk urea 180 200 12,100 a!

-Bagged urea 190 210 12,700 a!

a/ f.o.b. costs are converted at exchange rate of56.10 TL/US $, freight and insurance costs areconverted at 71.40 TL/US $.

- 15 -

5. Income Statement

Please note that, in Annex 8 of PCR urea productionin 1978 has been shown as 144,600 tons, which shouldbe corrected to 219,300 tons.

I am enclosing to my letter the income statement ofIGSAS as Annex 5. Estimated income statement for 1980are based on budget figures revised according torecent devaluation of TL, changes in naphtha and ureaprices.

As it is seen from Annex 5, the impact of recentdevelopments is estimated to result in a loss of3,204.5 million TL in 1980.

6. Balance Sheet

Balance sheet as of December 31, 1979 is given inAnnex 6. Current ratio remains at 0.9/1.0 Debt/Equity ratio became 72/28 compared to 61/39 asestimated in Annex 9 of PCR. Difference is mainlydue to devaluation of TL and lower capacityutilization than estimated which resulted in asmaller profit.

In case the above mentioned raw material and sellingprices are not changed, an additional financing ofapproximately 4,000 million TL will be requiredtill the end of 1980 in order to maintain theviability of iGSA.$. I am not enclosing the estimatedbalance sheet as end of 1980 for two reasons:

a) Probably some corrective measures will be takenon raw materials and product selling prices indue course, in order to achieve a reasonablecash generation to improve the financial situa-tion of the company.

b) For the time being it is not known what will besource of additional financing if requiredafter such corrective measures are taken.

7. Economical Rate of Return

Financial situation of IGSAS can be improved bytaking some corrective measures, however I wouldlike to give emphasis on the fact that, under theconditions prevailing currently in the world marketit is not economical to produce ammonia and ureabased on naphtha.

- 16 -

In Annex'es 1 and 2, price trends of naphtha andfuel-oil is given for Arabian Gulf and MediterraneanRegions. Apart from the seasonal fluctuations acontinuous and step price increase is observed

reflecting the effects of crude-oil price trends.It is also observed that, in recent years naphthaprices together with other light end petroleumproducts (gasoline, kerosine, diesel oil etc.)

established at a level unusually higher than thecrude oil prices indicating recession of supplyagainst growth in demand of these products.

Shortage of light end products is steming from thelow capacity utilization refineries due toinadequate supply of crude-oil and general tendencyin the world to save energy. Most of the savingof energy is reflected as a decline in fuel-oilconsumption, whereas the demand to light end

products continues to increase. Overall capacityutilization of refineries is about 70 %.In addition, the present structure of refineriesin Eastern Hemisphere, which is characterizedwith low cracking capacities, do not permit toconvert the required amount of crude-oil into lightend products at reduced outputs,although there isample distillation capacity. Other factors especiallyinfluencing the naphtha shortage are increase in therate of naphtha converted into gasoline and increasein naphtha demand by other petrochemical industries.

It seems that, naphtha shortage will continue unlessnew craking capacities are added to existing refine-

ries or existing distillation capacities of therefineries are fully utilized. The first conditionis more likely to be realized, however provided thatprice of the light end products remain high enoughfor economical justification of such investments.

Cn the other hand, ammonia and urea prices are alsoincreasing in parallel to the general inflationarytrend of World economics. However it is known that,there is an exess capacity build-up and most of the

ammonia and urea exports are shifting to the

countries with ample sources of natural gas.

It is very difficult to asses at what level the

naphtha, ammonia and urea prices will be stabilized

in coming years.

Therefore I preferred to determine the range ofthese prices relative to each other to yield accep-table economic rate of return.

- i- -

Data required for this comparison are summarizedin the enclosed Annex'es 3,4 and 7. In order tosimplify the coparison I have assumed the same pricefor ammonia and bagged urea.

In case the naphtha prices are assumed to level outat 300 US $/t and fuel-oil at 150 US $/t, the followingselling prices of ammonia and urea are calculated:

Required sellingPrice for ammonia Economicaland urea Rate of Return

300 US $/t 8.2 %

315 US $/t 10.2 %

345 US $/t 13.7 %

Please note that, the above assumed naphtha and fuel-oil prices are on the low side. If in the long runnaphtha and fuel-oil prices are stabilized at350 US $/t and 180 US $/t respectively, the requiredselling prices to give the above rate of returnswould be 28 US $/t higher.

This comparison shows that, with the existing pricesof naphtha and fuel-oil, the selling prices of ammoniaand urea should be well over 300 US $/t in order tomaintain an acceptable rate of return.

This conclusion is supported by the fact that, inrecent years a large number of ammonia plants basedon naphtha were closed or shifted to other rawmaterials in Europe and Japan.

8. Measures to be taken

In addition to financial measures to be taken onthe raw material and product prices, the followingmeasures shall be considered in order to improvethe economics of the operation.

a) Utilization of refinery gas to replace completelynaphtha firing in primary reformer.

b) Improving the efficiency of the steam systemand energy saving.

c) Providing maximum utilization of capacity.

- 18 -

As I close my letter, I regret to have delayed my

answer to you due to reasons beyond my control. But as Imentioned in my telex I preffered to wait till our financial

department completed the revisions an the 1980 budgetaryfigures. Hoping my letter reaches you not too late, Iremain.

cerely,

E. Sang.9k

Deputy General M ger(Technical)

Attachment

- 19 -

Annex 1

Naphtha Prices since June 1979

Posted a/ Naphtha Cost b/f.o.b. price Freight to IGSAS

Date US $/ton US $/ton TL/ ton

20.6.1979 222.95 18.04 8,907

1.7.1979 271.85 18.75 10,704

1.8.1979 274.91 20.61 10,903

1.9.1979 278.67 20.98 11,057

1.10.1979 281.41 22.12 11,211

1.12.1979 323.91 22.76 12,774

9.12.1979 331.62 22.62 13,045

1.1.1980 322.17 23.74 12,758

15.1.1980 335.28 23.74 13,231

25.1.1980 335.28 23.74 25,881

a/ Lowest posted price in Arabian Gulf.

b/ Till 25.1.1980 f.o.b. naphtha price converted at exchangerate of 35.70 TL/US $, freight at exchange rate of47.80 TL/US $, 0.96 % included as insurance and transportlosses.

- 20 -

Annex 2

Average Naphtha and Fuel-oil f.o.b. Prices at Mediterranean

Naphtha Fuel-oilUS $/ton US $/ton

January 1979 290

February 1979 290

March 1979 225

April 1979 250

May 1979 288 122

June 1979 325 136

July 1979 330 140

August 1979 327 142

September 1979 313 138

October 1979 316 154

November 1979 348 174

December 1979 375 179

January 1980 367 175

Annex 3

Material Balance and Costs

Consumption per MTof product Production Cost

Financial EconomicUnits Quantity price price Financial Economic

US $/unit US $/unit US $/MT US $/MT

I. Armnoni-a Plant

Naphtha (feed & fuel) MT 0.705 362.50 300 255.56 211.50

Fuel-oil MT 0.406 134.70 150 54.69 60.90Power Credit kWh 32.64 0.035 0.04 (1.14) (1.31)LP Steam Inport MT 0.329 10.50 11.70 3.45 3.85HP Steam Export MT 1.743 13.07 14.55 (22.78) (25.36)

BFW Make-up m 3 4.658 0.22 0.22 1.02 1.02

Cooling Water Export m 3 106 0.0105 0.012 (1.11) (1.27)

Sub-Total 289.69 249.33

I-

II. Urea Plant

Anmonia MT 0.575 289.69 249.33 166.57 143.36C02 MT 0.770 - - - -Power kWh 16.9 0.035 0.04 0.59 0.68HP Steam Import MT 1.178 13.07 14.55 15.40 17.14LP Steam Export MT 0.171 10.50 11.70 (1.80) (2.00)

Sub-Total 180.76 159. 8

The above consumption figures are based on performance test results. For calculating the annual costs,approximately 5% margin has to be added to cover losses during shut-downs, start-ups, operational upsetsand lower efficiencies at reduced capacities etc.

- 22 -

Annex 4

Production Cost at Current Prices

(in US $ million)

Capacity utilization : 90 %

Production : Ammonia for sale 32,500 t

Urea 460,000 t

At Economic At Financialprices prices

Raw Material and Utilities 85.4 a! 97.2 a/

Bags 7.8 b 7.8

Labor 4.3 4.3

Maintenance Supplies 3.0 3.0

Chemicals and Catalysts 3.6 3.6

Others 3.3 3.3

107.4 119.2

a! Derived from Annex 3 by including 5 % margin.

b/ Covers bags required for all urea produced.

- 23 -

Annex 5

Income Statement

(in TL million unless otherwise noted)

1977 1978 1979 1980audited audited unaudited estimated

Production ('000 tons)

Ammonia for sale 13.8 23.9 11.5 13Urea 70.2 219.3 276.7 360

Sales Voline ('000 tons)

Amonia 10.5 23.4 12.8 13Urea (bagged) 4.4 193.0 187.7 254Urea (bulk) 0.8 52.7 90.4 126

Sales Price (TL/ton)

Ammonia 4600 5000 9820 a/ 35400Urea (bagged) 2500 4300 7712 a/ 12700Urea (bulk) 2500 4100 8125 a/ 12100

Sales Revenue

Ammonia 48.1 116.4 125.7 460.2Urea (bagged) 11.0 837.9 1447.6 3441.5 b/Urea (bulk) 1.9 204.2 734.5 1664.8 b/

Sub-Total 61.0 1158.5 2307.8 5566.5

Other Income 1.6 33.0 100.1 202.2

TOTAL INCOME 62.6 1191.5 2407.9 5768.7

Operating Costs c/ 233.0 705.3 1824.8 7640.1

Depreciation 224.4 252.1 367.3 554.6

Interest 0.4 265.9 416.8 804.0

Inventory Adjustment (267.5) 129.5 (238.2) (25.5)

TOTAL COSTS 190.3 1352.8 2370.7 8973.2

Profit Before Tax (127.7) (161.3) 37.2 (3204.5)

Notes: a/ weighted average selling prices.

b/ urea sales for industrial use are assumed as 26000 and 27300 TL per tonfor bulk and bagged urea respectively.

c/ includes overhead and marketing expenses.

- 24 -

Annex 6

'Balance Sheet as of December 31, 1979

(Unaudited)

in TL million

Assets

Current Assets

- Cash 43.3

- Receivables 1706.5- Inventory 739.2

Total Current Assets 2489.0

Gross Fixed Assets 3770.8

Less Depreciation (852.8)

Net Fixed Assets 2918.0

Other Assets 2.6

TOTAL ASSETS 5409.6

Liabilities and Equity

Current Liabilities

- Accounts Payable 2169.3

- Maturing portion of LIT Debt 519.8

- Short Term Credits 84.0

Total Current Liabilities 2773.1

Long Term Debt

- SIB 504.7

- IBRD 1388.1

Total Long Term Debt 1892.8

Equity

- Share Capital 1000.0

- Legal Reserves -

- Retained Earnings (Losses) (256.3)

Total Equity 743.7

TOTAL LIABILITIES AND EQUITY 5409.6

Current Ratio 0.9/1

Debt/Equity Ratio 72/28

- 25 -

Annex 7

COST AND BENEFIT STREAIEFOR RATE OF RETURN ANALYSIS

(in 1979 US $ million)

a! BenefitsCapital Operating -

Year Cost Costs Alt.l Alt.2 Alt.3

1972 1.01973 8.01974 40.51975 72.41976 46.31977 28.3 5.4 3.2 3.2 3.21978 7.7 33.0 56.1 56.1 56.11979 6.7 67.3 61.1 61.1 61.11980 87.6 117.9 123.8 135.61981 107.4 147.75 155.1 169.91982 " "1983 " "1984 " "1985 " "1986 " "1987 " "19881989 (9. 4)

a/ Excluding interest during construction and taxes.

b/ Excluding depreciation, financial charges and taxes. Figures foryears 1977 and 1978 are adopted from Annex 11 of PCR. Starting from1979 operating costs are based on 300 US $/t naphtha and 150 US $/tfuel oil prices. Operating costs are based on actual sales volumestill end of 1979. For 1980 sales volume are assumed as 13,000 tons ofammonia and 380,000 tons of urea. From 1981 capacity utilizationtaken as 90%.

c/ Recovery of working capital.

Ammonia and bagged urea Economic RatePrices of Return

US $/ton %Alt. 1 300 8.2

Alt. 2 315 10.2

Alt. 3 345 13.7

In 1979 ammonia and bagged urea prices are taken as US $ 210 per tonfor all alternatives.

- 26 -

PROJECT COMPLETION REPORT

TURKEY

IGSAS FERTILIZER PROJECT

I. PROJECT BACKGROUND

A. Project Preparation, Appraisal, Approval and Loan Effectiveness

1.01 Following a fertilizer and petrochemical industry subsector missionto Turkey in April 1970, a project identification mission in June discusseddetails of a major new ammonia/urea fertilizer project proposed for construc-

tion by Istanbul Petrol Rafinerisi Anonim Sirketi (IPRAS), which at that timewas owned 51% by Turkiye Petrolleri Anonim Ortakligi (TPAO), and 49% byCALTEX. At the same time, a feasibility study for the venture prepared byTUMAS, a Turkish consulting firm, with the assistance of the Danish contrac-ting firm, Haldor Topsoe, was obtained. The Project as envisioned consistedof a 1,200 tons per day (tpd) ammonia unit and 880 tpd urea unit to be locatedat Izmit, about 70 miles from Istanbul, on the Marmara Sea Coast, alongsidethe existing IPRAS refinery, which was to supply the feedstock.

1.02 The feasibility study noted that under a 10-year agreement madewhen IPRAS was formed, CALTEX would sell its entire holdings in IPRAS to TPAOin 1972, at which time IPRAS would become its wholly owned subsidiary. TPAOitself was owned 55% by the Turkish Government, with the remaining 45% beingheld by Turkish commercial banks and private Turkish interests. It was

planned that until IPRAS became 100% Turkish owned and could take over theProject itself, project administration would be handled by a separate groupwithin TPAO. However, TPAO/IPRAS were also contemplating entering into anagreement with a foreign partner, experienced in the fertilizer industry, toimplement the Project. It was also noted that TUMAS, which had prepared thefeasibility study, was 40% owned by Haldor Topsoe, 19% by TPAO and 41% by

private Turkish shareholders. The total project cost as estimated in the

feasibility study was US$53.4 million, including US$21.6 million in foreignexchange. No firm financing plan was included in the study, but the projectsponsors' (TPAO/IPRAS) intentions were to seek foreign loans to cover theforeign exchange cost and to provide local funds through internal cashgeneration of the sponsors or through loans from the State Investment Bank

(SIB). It was planned to sell the Project's output of 290,000 tons per year(tpy) of urea on the domestic market, with 230,000 tons surplus ammonia to besupplied to the planned Gemlik Fertilizer Plant (200,000 tpy) of Azot Sanayii

(AZOT), a leading public sector company producing fertilizers, and to one of

the two proposed caprolactam projects (30,000 tpy) of PETKIM, a public sectorpetrochemical company.

1.03 The Bank's review of the feasibility study found that many of the

items in the project capital estimates appeared to be on the low side andwould need revision. On the market side, the projections of future domestic

nitrogen consumption were based partly on extrapolation of past consumption

trends and partly on optimum agronomic requirements, which resulted in a rapid

growth rate seldom encountered elsewhere. The projections also included no

analysis of future consumption of other major nutrients which would have to

- 27 -

complement increased nitrogen applications. Further, urea was a relativelynew fertilizer in Turkey, with most of the prior nitrogen consumption beingin the form of calcium ammonium nitrate (CAN) and other non-urea fertilizers.Also, very little attention was given in the study to the marketing anddistribution of fertilizer in Turkey with which TPAO/IPRAS had very littleexperience. Finally, the Bank felt that while IPRAS had a successful recordof operations in oil refining and had a competent staff, it lacked experiencein the fertilizer field. Consequently, it was necessary that the projectsponsors should endeavor to find a technical partner knowledgeable in thefertilizer business, and willing to participate in equity, which might be moreconveniently done through the establishment of a new company to implement andoperate the Project. Failing this, an adequate technical assistance agreementshould be arranged with a competent firm. These were the major issues to beaddressed during the Bank's appraisal of the Project.

1.04 Appraisal of the Project took place in the second half of August1970. The mission recommended that a new company be formed for implementingand operating the Project which would allow equity participation by a tech-nical partner. The Bank would then lend directly to the new company with theloan being guaranteed by TPAO/IPRAS and the Government of Turkey. The missionconfirmed to the project sponsors and the Government its belief that a tech-nical equity partner was needed and gained their acceptance of this plan,although it was clear that such an arrangement was not popular with eithergroup. In lieu of a technical partner (if one could not be found), theproject sponsors were willing to enter into a technical assistance agreementwith a suitable firm. Some progress in fact had been made along these lineswith Haldor Topsoe, which had already done considerable preliminary engineer-ing on the Project, and it was believed to be the intention of the projectsponsors to have this firm also do much of the detailed engineering. Anotherissue which concerned the appraisal mission was that of the uncertaintysurrounding the market for the excess ammonia to be produced by the Project.It was noted that some 60% of total ammonia production was intended to serveas raw material for the Gemlik Fertilizer Project which was only in thepreliminary planning stage and that if this outlet did not materialize, theoutside sale of ammonia would pose a serious problem. To overcome thisproblem, the Bank suggested the ammonia plant be built in two trains of 600tpd each, with the second to be erected only after an outlet for its ammoniawas assured. The findings of the appraisal mission were formally communicatedto the Chairman of TPAO in a letter dated September 15, 1970.

1.05 Following communication of the Bank's appraisal mission findings,TPAO further pursued its contractual arrangements with Haldor Topsoe forassuming the role of technical partner in the Project and for taking equityparticipation which appeared likely to be limited to about US$1 million.TPAO also called for unpriced proposals from a number of specialist firmsto provide engineering services for implementing the Project. Subsequently,TPAO proposed a 750 tpd ammonia plant and a larger 1,100 tpd urea plant to befollowed by another 750 tpd ammonia plant at a later stage. The Bank closelymonitored developments during this period and scheduled a post-appraisalmission for December 1970. The main tasks of this mission were to determinethe capital and operating costs of the revised project; to reach agreementwith TPAO on the technical assistance and management contract; and to collect

- 28 -

all other data necessary to complete the appraisal report. This missionreturned in late December 1970 having reached satisfactory understandings onall the issues, leaving only the financial plan to be completed.

1.06 On April 13, 1971, the Bank received from the Turkish Governmentcopies of the "Constitutional Contract" establishing the new c-mpany toimplement the Project, "Istanbul Gubre Sanayii Anonim Sirketi" (IGSAS), andof the protocol between TPAO and DONATIM concerning marketing of urea fromthe new project. The Bank also received a copy of the "General PreliminaryEngineering Services Agreement" between TPAO and TUMAS, which was intended toserve until a full engineering contract with TUMAS could be finalized. OnApril 26, 1971, Loan Documents were submitted to the Loan Committee, whichstated that the financing plan covering the full estimated cost of the Project(US$57 million) would include US$22 million equity from the project sponsors,US$1 million equity from the foreign technical partner (Haldor Topsoe), US$23million from IBRD, US$2 million from the Danish Government and the balance ofUS$9 million from the Turkish Government through the SIB.

1.07 Subsequently, invitation was extended by the Bank to the projectsponsors for loan negotiations. TPAO sent a relatively junior two-man dele-gation to Washington, accompanied by two representatives from the TurkishEmbassy. While this visit had been intended for the purpose of negotiating aloan, the delegation commenced by informing the Bank representatives that thenew Government and new management of TPAO were planning considerable changesin the Project which would require further time to study and prepare. Themajor changes decided were that IGSAS would be 100% Turkish owned and noforeign equity partner would be accepted; the engineering contract withTUMAS would be cancelled and new bids called; existing channels would beused to market urea and no new marketing company would be established (ashad been urged by the Bank); and the plant capacity would be revised toprovide for the possibility of sale of ammonia to AZOT's Samsun FertilizerProject. As a result of this development, the meetings were concludedwith the understanding that the Bank would need to reappraise the Project.

1.08 The reappraisal took place over a two-week period in November1971, and a follow-up mission was mounted in January 1972 to further discusssome outstanding issues. The Project now consisted of single train ammoniaand urea units of 750 tpd and 830 tpd, respectively, estimated to cost US$57.8million and to be financed 40% with equity by TPAO and IPRAS (in the ratioof 60:40) and 60% by long-term loan, including US$24 million from IBRD andUS$10.2 million from SIB. Loan negotiations commenced February 22, 1972 andconcluded on March 10. The loan was ultimately approved on May 16, 1972 andbecame effective four months later on September 29, 1972.

1.09 Following procedures agreed with the Bank, IGSAS appointed inOctober 1972 the joint venture firm of Scientific Design Co. Ltd. (U.K.)and John van der Valk and Associates (U.S.) to act as its technical advisor

- 29 -

during project implementation from a short list of four firms approvedby the Bank. Later, following preparations of technical specificationsand tender documents for the Project by the Company and its technical advisor,proposals were invited in February 1973 from six international firms forthe provision of engineering, procurement and construction services and UHDEwas selected as the engineering contractor in mid-1973.

1.10 Earlier, pursuant to the requirements of Section 3.12 of theLoan Agreement, IGSAS appointed TUMUS to carry out a urea marketing study.Subsequently, the Project authorities informed the Bank that following indi-cations of substantial increases in urea consumption in Turkey, they wereexamining the merits of increasing the output of the Project from 750 tpdammonia/830 tpd urea to 1,000 tpd ammonia/1,550 tpd urea. In July 1973,the IGSAS Board formally approved the increased project scope and a revisedfinancing plan. This decision was based on the market study commissionedunder the Project having established that consumption of urea was increasingconsiderably faster than anticipated and on the technical advisor havingconfirmed that the proposed enlargement would offer considerable technologicaladvantages and economies of scale. Following this decision, additional Bankfinancing was sought by the Government to cover that part of increased costdue to the increase in plant capacity while the inflationary cost increaseswere to be borne by the IGSAS shareholders and SIB.

1.11 Following approval in October 1973 by the Bank Board of the in-creased project scope, the Bank staff reviewed the revised project costestimates with the IGSAS management in Washington. This review determinedthat there would be a cost increase of some US$40 million, including US$24million in foreign exchange of which US$18 million was due to the scopechange. Consequently, pursuant to the Board's prior approval of this scopechange, it was decided to seek the Board's approval for an US$18 millionsupplementary loan for the Project, and an amending Loan Agreement andPresident's Report on the proposed supplementary financing were duly prepared.The Board approved the proposal on April 15, 1975, and the supplementary loanbecame effective immediately afterwards.

B. Project Description and Objectives

1.12 The Project which ultimately emerged involved the annual productionof 330,000 tons ammonia and 511,500 tons urea, which represented increasesin outputs over those originally approved by 33% and 87% for ammonia andurea respectively. Further, due to the projected increased demand for urea

- 30 -

in Turkey, the quantity of ammonia to be produced for external sale wasreduced from 90,000 to 38,000 tpy and was expected to be mainly consumed bythe neighboring PETKIM petrochemical works in the production of caprolactam.The basic objective of the Project was mainly to satisfy the growing domesticdemand for urea by use of modern economic size manufacturing units.

II. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Achievement of Project Objectives

2.01 The Project was mechanically complete March 30, 1977 when IGSASsigned a provisional acceptance certificate with the main engineering con-tractor (UHDE). This was some 12 months later than the anticipated dateof April 1976 in the April 1975 President's Report. Most of the delay occurrednear the end of the construction period due to a deterioration in the perform-ance of the local construction companies and weak construction supervisionby the prime contractor. Stabilization of production, however, cannot be regardedas having been achieved until December 7, 1978 when a protocol was signed betweenIGSAS and the prime contractor following successful completion of plantperformance tests. This prolonged commissioning and production stabiliza-tion period was largely due to major equipment failures (Annex 1) and a topmanagement upheaval (para 2.06). Start of commercial production was thus some25 months later than the anticipated date of September 1976, and this involvedthe Company in serious cash flow problems requiring injection of additionalequity by the shareholders and the raising of short-term loans to cover thecash shortfall. The manufacturing units are now operating satisfactorily withonly minor corrective modifications still required. The Project, therefore,shows good prospects of achieving its objectives.

B. Project Scope

2.02 The size ultimately selected for the two basic units--1,000 tpdammonia and 1,550 tpd urea--were close to the largest of such units beingbuilt at that time and consequently offered benefits from economies of scalewithout causing undue equipment manufacturing and erection problems. Such asize also avoided the use of unproven equipment which would have resultedfrom the choice of larger units. It permitted maximum competition fromengineering firms with experience in designing and building such plants. Inretrospect, the increase in scale of the Project as described earlier was asound decision.

2.03 The choice of ammonia synthesis technology based on the highpressure steam reforming of naphtha, utilizing refinery tail gases for fuel,was an obvious one in view of the shortage of heavy fuel oil and surplus ofnaphtha in Turkey and the location of the Project alongside the IPRAS re-finery. This technology also permitted a lower investment cost and lesscomplex processing scheme than that which would have resulted from the alter-

- 31 -

native choice of partial oxidation of heavy fuel oil. Choice of the Stami-carbon stripping process of urea production in preference to its majorcompetitor (the total recycle process) was based on an economic analysis of

bids received from companies offering these alternative technologies. Al-though there ±s seldom a major difference in investment and operating costsfrom these two technologies, and both are considered reliable, Stamicarbon is

believed to have licensed about 65% of the urea plants built in recent years.

C. Project Management

2.04 The original project management plan agreed between the Bank placedthe Project under the overall direction of a General Manager appointed byand responsible to the IGSAS Board of Directors. Although the project sponsorsdeclined to consult with the Bank on this appointment because it was classifiedas a Government post, the credentials of the appointee, whowas previously Deputy Plant Manager of IPRAS, were examined by the Bank andfound acceptable prior to consideration of the loan by the Bank Board.Primary responsibility for coordination and supervision of project executionwas to rest with a project team appointed by the General Manager and it wasto be assisted by a technical advisor firm experienced in the engineering andconstruction of ammonia/urea plants. Project execution work covering design,procurement, construction supervision and start-up of the Project would beundertaken by an engineering contractor and sub-contractors as appropriate.This plan was promptly put into effect and a competent project team wasformed, recruited mainly from IPRAS personnel having relevant experience inrefinery construction. Subsequently, contracts were signed with firms to actas technical advisor (TA) and as engineering contractor. Under the provisions ofSection 3.01 of the Loan Agreement, the borrower agreed to carry out theProject in accordance with a critical path schedule to be prepared with theassistance of the TA. Such a detailed schedule was later prepared by thecontractor.

2.05 The original agreement signed on October 19, 1972 with the TA firmstipulated a sizeable group of specialists in various disciplines to assistthe General Manager's project team. However, it appears that the generalconcept of TA as agreed between the Bank and the project sponsors and coveredin Section 3.02 of the Loan Agreement was not fully accepted by the GeneralManager who was appointed subsequent to this agreement. As the Projectprogressed, conflict developed between TA and the General Manager, who feltthat the former should perform the tasks assigned to it in a line functionrather than operate as an independent advisor. Consequently, by 1975, theGeneral Manager had reduced the strength of the TA group to two people, oneassisting in procurement and the other in cost control. Because of thisdevelopment, the TA contract had to be renegotiated to reduce the responsi-bilities of the firm, and this negated to some extent the intentions ofSection 3.02 of the Loan Agreement. As it turned out, however, managementof the Project was of a high standard under the direction of the GeneralManager.

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2.06 Late in 1975 the IGSAS General Manager was reassigned as GeneralManager of IPRAS; taking a seat on IGSAS Board, he assumed responsibility forliaison with the Government on IGSAS' behalf. However, in June 1376 he re-signed his seat on IGSAS Board and his position of General Manager of IPRAS,following a disagreement with the Turkish Government on the extent to whichit was penetrating the affairs of the two companies. A professional engineer

and previously Managing Director of Mediterranean Fertilizer Industries wasappointed as the new General Manager of IGSAS, but it was several monthsbefore the Bank was officially notified by the Government about the newappointment. It was subsequently learned that the above noted dismissalinstruction was put into effect by the new General Manager and, as a con-sequence, as many as 90 key plant operators either resigned or were fired;many of them had received overseas specialized training financed by the Bank.The departure of the first General Manager was also followed by the resigna-tion of several members from the original project team, and by August 1977a supervision mission reported that the few remaining members were expectedto leave over the next several months. During this period when IGSAS wasencountering severe start-ap difficulties (as described in Annex 1), the newGeneral Manager encouraged resignations of all staff who did not agree withthe new company policy even though many of them were virtually indispensable.There was thus almost a 100% turnover in key management personnel in theCompany at the most critical period of the Project, and many of the individualswho were hired to fill the vacancies had inadequate qualifications and/orexperience. Ultimately, early in 1978, after a turbulent period as GeneralManager, was dismissed from his post by the Government and replaced by acapable and experienced administrator who was formerly General Manager ofTPAO and Chairman of IGSAS. As one of his most pressing tasks, he has beenattempting to rebuild the management team and staff strength and has appointedas Deputy General Manager a key member of the original project team who hadresigned following the departure of the first General Manager.

D. Labor and Training

2.07 The staffing plan for the works when in operation went througha number of revisions which also may have had some political undertones.

The original plan approved by the first General Manager was predicated onthe sharing of site support and maintenance services with the adjoining

IPRAS refinery and, therefore, was based on a minimal staff strength totalling297. Following the departure of the first General Manager, this scheme was

abandoned and a new organization chart was approved by the IGSAS Board in 1977

showing a total staff strength of 638. Later, following the appointment of

the third General Manager, yet another staffing plan was prepared which

indicated a total number of over 800 persons.

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2.08 An extensive program of job training was given to all plant ope-rators and many maintenance tradesmen hired to operate the facilities oncompletion. Training commenced in March 1976 when the future operators joinedthe IPRAS refinery and worked with IPRAS operating personnel until December,1976. Earlier, during December 1975/January 1976, all personne l receivedinstruction in the API (American Petroleum Institute) basic technology manualsfor plant operators which had been translated into the Turkish language byIGSAS. After this initial theoretical training period, a further period ofclassroom training in practical plant operation followed after which theoperational personnel were divided into six groups (urea, laboratory, steamservices, compressors, gasification and ammonia) and selected personnel fromeach group were given practical plant training in Turkish and foreign fertil-izer works as follows:

(i) In May 1976, 13 ammonia plant operators and fiveengineers were given two-week training in Spain atthe Enfersa Ammonia Plant, Portullano;

(ii) In June 1976, the same group received two weeks' trainingat the ammonia works at Chemie Linz A.G. (Austria);

(iii) In June 1976, a further group of 11 steam plant operators,five laboratory technicians and seven compressor attendantsreceived "in-plant" training at the works of AZOT atKutahya (Turkey);

(iv) Also in June 1976, five urea plant operators and fiveengineers received one-month instruction at the ureaplant of Stamicarbon in Geleen (the Netherlands); and

(v) Between May 1975 and November 1978, some 10 additionalmaintenance tradesmen and engineers received training inboth foreign and Turkish equipment manufacturers' workshops.

E. Use and Performance of Consultants

2.09 In addition to the Engineering Contractor and theTechnical Advisor, numerous other specialists, mostly fromforeign equipment manufacturers, participated in the Project either during theconstruction or commissioning periods. At the peak of construction (mid-1976),more than 60 technicians were present, and during the commissioning period1977/78, their number gradually declined. Special mention may be made of thepersonnel supplied by a U.K. firm from April 1977 through July1978 for start-up. They were experienced plant operators who supervised theoperation of the IGSAS plant on rotating shifts at a time when IGSAS' ownoperating staff strength was severely depleted due to the dismissals andresignations referred to previously. They did an excellent job.

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2.10 The performance of the technical advisor firmis difficult to assess. The firm was not able to establishitself in the role originally agreed between the Bank and the Borrower,and with the passage of time, the original IGSAS project team showed itcould function effectively essentially unaided. Consequently, as noted, thetechnical advisor's input diminished to assistance mainly for cost control andprocurement administration. The two specialists provided by the firm tohandle these tasks performed effectively.

2.11 The Borrower was not fully satisfied with the performance of UHDE.While this company has been noted for the quality of its technical work, itreported difficulties in handling procurement both under the constraintsof the Bank's procurement guidelines and the Government's importregulations. It found the local construction conditions difficult and fre-quently complained about the performance of Turkish sub-contractors. TheBorrower felt that the firm showed an inadequate degree of flexibility andadaptability in handling these problems as would be reasonably expected froman international contractor.

F. Implementation Schedule

2.12 There was no precise completion date estimate for the Project in theoriginal Appraisal Report of April 1972, because it was decided to leavethe preparation of a construction schedule to the technical advisor firm tobe later appointed. At the time of the supplementary loan in 1975, the datefor completion of the physical plant facilities was specified as April 1976with commencement of commercial production as September 1976. In February1976, however, a supervision mission reported that the completion date hadslipped by three to four months, and subsequent missions reported furtherslippages. This confirmed the significant slowdown in the construction phaseof the Project mentioned earlier. It cannot be said that the slippages whichoccurred over this phase of the Project were attributable to any particularevent or series of events. The delay was caused simply by slow progress ofthe work due to inadequate management and resources deployed on to the Projectby the Turkish construction contractors and weak overall construction manage-ment and control by the engineering firm. While both IGSAS and UHDE managementwere aware of the problems and realized the measures which needed to be takento improve results, the two parties never seemed to be able to agree on termsfor implementing these measures. The upheaval in IGSAS top management teamwhich occurred at that period further-aggravated the situation. While therewere equipment delivery delays which occurred during the construction periodand some delays occurred due to damage to equipment in transportation to site,most of the slippage in project completion was due to the general constructionand erection delays (Annex 2). A list of significant milestone events overthe whole implementation period is shown in Annex 3.

G. Environmental Aspects

2.13 The IGSAS ammonia/urea plant has been designed to meet modernstandards for gaseous liquid and solid emissions. However, in December 1975,Stamicarbon informed IGSAS that the latest production results from otherStamicarbon plants showed the ammonia concentration of the process condensate

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from the urea absoption column was significantly higher than the maximumallowable 100 ppm. Subsequently, Stamicarbon solved the problem by replacingthe valve trays in the first desorption column with an equal number of GlitschGrid Trays and by supplying a completely new second desorption column havinga greater height and diameter, using the valve trays from the first column.Further, extra plates have been added to the existing exchangers and newplate-type exchangers added. All these new equipment items were suppliedand modifications were carried out at Stamicarbon's own expense. However,the borrower reports that the performance of the desorption system is stillnot satisfactory. New proposals are under preparation for revising thedesorption and recirculating systems of the urea plant.

H. Project Cost

2.14 The total financing required for the Project was US$163.7 million,nearly 26% higher than the 1975 estimate for the expanded project of US$130million. The total foreign exchange cost of the Project was US$80.4 million(about 18% higher than the estimate) and the total local currency cost was

US$83.3 million equivalent (about 35% above the estimate). The followingtable compares the estimate for the expanded project with the actual cost:

Capital Costs -- Actual vs. Estimated

Summary of Project Costs a!(US$ million unless otherwise noted)

Foreign LocalExchange Currency Total

Actual Estimate Actual Estimate Actual Estimate

1. Equipment 50.0 (44.3) 11.6 ( 9.0) 61.6 ( 53.3)2. Civil Works - ( 0.6) 29.0 (17.3) 29.0 ( 17.9)3. Services and License

Fees 14.3 (12.1) 3.0 ( 2.5) 17.3 ( 14.6)4. Plant Erection 5.6 ( 2.7) 13.2 ( 6.6) 18.8 ( 9.3)

5. Taxes - ( - ) 0.5 ( 4.3) 0.5 ( 4.3)6. Preoperational Expenses 1.4 ( 0.2) 8.7 ( 6.2) 10.1 ( 6.4)

Total Project Cost 71.3 (59.9) 66.0 (45.9) 137.3 (105.8)

7. Working Capital 2.2 ( 4.2) 6.7 ( 8.0) 8.9 ( 12.2)8. Interest During

Construction 6.9 ( 4.2) 10.6 ( 7.8) 17.5 ( 12.0)Total Financing

Required (US$m) 80.4 (68.3) 83.3 (61.7) 163.7 (130.0)

Total FinancingRequired (TLm) 1,281.7 (946.0) 1,412.7 (854.5) 2,694.4 (1,800.5)

a/ Figures in brackets are estimates for the enlarged project as presentedin President's Report of April 2, 1975; the contingencies included in

the estimates are distributed among individual cost items to facilitatecomparison with the actual expenditures.

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2.15 The main reasons for the cost increases have been: (a) steepincreases in local costs because of abnormally high domestic inflation;(b) unprecedented increases in the costs of equipment in the aftermath of theoil crisis combined with a very tight equipment market prolonging the deliveryperiod; (c) further minor changes in the project scope; (d) about one-yeardelay in project completion; and (e) international currency realignments. Themajor part of the cost overrun was in civil works. This was largely due tohigh local inflation and a costly design of the bulk storage building,the necessity for constructing a duplicate ammonia storage tank (because thefirst one experienced structural problems) and greater than anticipatedprovision for staff housing and amenities' buildings, together with a newoffice building, a new laboratory, and a maintenance workshop. (According tothe original plan, IGSAS was to share the laboratory and workshop of IPRAS butthis plan was later found not feasible especially because of IPRAS' ownexpansion subsequently undertaken.) The following table shows the costincreases by major expense categories:

Cost Increase by Expense Categories(US $ million unless otherwise mentioned)

% IncreaseLocal Foreign Total (Decrease)

Civil Works 11.7 (0.6) 11.1 32.9Plant Erection 6.6 2.9 9.5 28.2Equipment and Materials 2.6 5.7 8.3 24.6Interest During Construction 2.8 2.7 5.5 16.3Preoperating Expenses 2.5 1.2 3.7 11.0Engineering Services &

License Fees 0.5 2.2 2.7 8.0Working Capital (3.8) -- (3.8) (11.3)Taxes (1.3) (2.0) (3.3) ( 9.7)

TOTAL 21.6 12.1 33.7 100.0

I. Financing Plan and Cost Overrun Financing

2.16 In April 1975, as noted, the Bank provided a supplemental loan ofUS$18 million, raising the total loan to US$42 million to finance the expandedproject. At the same time, the State Investment Bank agreed to increase itsloan by US$10.2 million to US$37.5 million and TPAO/IPRAS agreed to increasethe share capital by US$26.9 million to US$50.5 million equivalent for theexpanded project. Since the financing plan has been agreed for the expandedproject, there has been a cost increase of US$33.7 million (para 2.15) whichwas financed by increasing loans from SIB (US$14.2 million), increased sharecapital (US$8.9 million), short-term loans (US$4.1 million) and internal cashgeneration (US$6.5 million). The following table compares the estimatedfinancing plan for the expanded project with the actual:

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Financing Plan(US $ million)

------ Estimated ------ ------- Actual--------

Local Foreign Total Local Foreign Total

Equity

TPA0 30.3 - 30.3 32.1 3.5 35.6IPRAS 20.2 - 20.2 23.8 - 23.8Internal CashGeneration - - - 2.9 3.6 6.5

Sub-Total 50.5 - 50.5 58.8 7.1 65.9

Loans

IBRD - 42.0 42.0 - 42.0 42.0SIB 11.2 26.3 37.5 20.4 31.3 51.7Other a/ - - - 4.1 - 4.1

Sub-Total 11.2 68.3 79.5 24.5 73.3 97.8

TOTAL 61.7 68.3 130.0 83.3 80.4 163.7

a/ Short-term commercial loan for working capital.

J. Procurement

2.17 Procurement of imported equipment and supplies proceeded withconsiderable difficulty throughout the project implementation period dueto the stringent import licensing requirements of the Turkish Government.As mentioned, preparation of documentary submissions to the Government anddelays in receipt of approvals proved irksome to the engineering contractorand also took up much of the time of the IGSAS General Manager who had tomake weekly visits to Ankara to help smooth out the process.

2.18 Some suppliers experienced delays in receiving payments becauseof delays in the processing and submission of disbursement applicationsfollowing receipt of suppliers' invoices. IGSAS tried to overcome this by station-ing a representative in the Engineering Constructing office in Dortmund who wasauthorized to sign disbursement applications and help clear the backlog ofinvoices. IGSAS did not make use of the Bank Disbursement Procedures V and VIto alleviate this problem because of the Government's stringent regulationsrelating to the opening of Letters of Credit (L/Cs).

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2.19 Further, as a substantial part of imports for the Project werefinanced by the State Investment Bank (SIB), periodic shortage in theGovernment's reserves of foreign exchange occasionally caused delays intransfers to foreign suppliers through the Central Bank, thus affectingthe procurement process. This problem became more serious toward the end ofproject implementation when the Government's foreign exchange reserves werevirtually exhausted and there remained some suppliers with unsettled accountstotaling about US$4 million. The Government has assured the Bank that theseoverdue payments would be made as soon as agreement is reached with lenders onrescheduling the country's outstanding debt service payments and foreignmoney transfers are resumed by the Turkish Central Bank, possibly by mid-1979.

2.20 Earlier, IGSAS experienced difficulties in the procurement ofreplacement items for those damaged during shipment and delivery due to theslow settlement of insurance claims. The problem was aggravated by theinsurance claims being based on "replacement value" which could only bedetermined in some cases when the invoices for the replacement items werereceived. IGSAS finally solved this problem by establishing an account witha foreign bank to the extent of US$1.5 million which was used as a revolvingfund to finance replacement of damaged items covered by insurance but forwhich delays were experienced in settling claims. This fund was also usefulfor expediting the procurement of a number of a small value items from abroad.Those items were initially financed by IGSAS from this fund and this valuewas subsequently reimbursed (under Procedure I) by the Bank. This helpedovercome the undue administrative burden experienced by IGSAS in the process-ing of orders for small items which were handled in increasing numbers asthe Project was nearing its end.

2.21 Processing of procurement contracts to be financed by the Bankproceeded very smoothly largely as a result of the orderly introductionof procurement systems by the first IGSAS management team and valuableassistance rendered throughout the course of the Project by the procurementconsultant from the technical advisor firm. An analysis of the nationalitydistribution of the Bank funds (US$42 million) shows that about 71% wasspent for procurement in the Federal Republic of Germany, followed by France,7.0%; Italy, 6.4%; the Netherlands, 5.6%; the U.K., 4.6%; and others, 5.4%(Annex 4).

K. Disbursement

2.22 Originally, the closing date for the loans was June 30, 1976.However, because of the change in the project scope and subsequent projectdelays, the Government requested and the Bank agreed to extend the closingdate to October 31, 1978. The loans have been fully disbursed as of thatdate. Annex 5 shows the progress of Bank loan disbursements.

L. Performance of Borrower/Guarantor

2.23 IGSAS (Borrower) experienced delays in project implementationbecause of a change of management by the Government (Guarantor) mid-way inthe implementation. The new management was not able to retain the good

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staff members recruited and trained by the former General Manager, and wasalso ineffective in its dealings with labor. Considering the problems whichIGSAS experienced with respect to management as well as procurement, it wasfortunate that the Project was mechanically complete in 45 months. Theoriginal schedule fixed (33 months) was also somewhat optimistic compared tothat of similar projects in other countries. The Bank is currently using anorm of about 40 months for completion of a project of the scale of IGSAS indeveloping countries. Further, IGSAS's capital cost is quite competitive withthat of new projects built and/or being built in recent years. This is partlybecause about 50% of the orders for equipment was placed before the oilcrisis of 1973, which subsequently triggered sharp increases in equipmentcosts worldwide.

2.24 The Government has provided equity funds for the Project throughTPAO and IPRAS (two State Economic Enterprises), though with some delays attimes. The Government helped increase the equity contribution of TPAO andIPRAS to IGSAS by TL 200 million to TL 1,000 million to improve the debt/equity ratio.

2.25 The Government also appointed a capable and experienced GeneralManager in 1978, when the Ministry changed and IGSAS was undergoing com-missioning tests. The new General Manager has been able to bring in someof the key staff members who had left IGSAS earlier and also to recruitadequate operators and maintenance personnel to fill vacant positions.

2.26 Delays in payments to suppliers occurred from time to time bythe Government's periodic difficulties to convert TL into foreign exchange.Delays in such transfers started in March/April 1975 and at that time trans-fers ceased for three months, only recommencing in August. Subsequently,this problem reappeared in February/March 1976. Generally, it is believedthat the Government's practice of holding up TL conversion, although nodoubt dictated by severe shortages of foreign exchange, may have had a verybad effect on IGSAS standing with foreign suppliers with predictable effectson future projects.

III. PROJECT ACHIEVEMENT AND PROSPECTS

A. Production, Production Cost and Revenue

1. Trend of Production

3.01 The Project was commissioned in September 1977. During the firstfour months of production, it operated at an annual capacity rate of 41%and increased slightly to 43% in 1978. It might have been possible to achievesomewhat higher production build-up if the Company had paid more attention tothe scheduling as well as training of operating and maintenance staff.However, in this context, it should be noted that the main reason for thelower than expected production build-up was the poor performance of some key

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pieces of equipment. Because of a series of technical problems, it was notpossible to stabilize production at a high level during 1977/78 (Annex 6).However, with the overcoming of those problems, it is expected that IGSASwill achieve 70% 1/ capacity utilization in 1979, rising to 80% in 1980 and 90%in 1981 and onwards. The following table compares the revised capacityutilization rates with those estimated earlier:

Urea Capacity Utilization

1975 Estimate a/ 1979 Estimate

Production ProductionVolume % of Volume % of(Tons) Capacity (Tons) Capacity

1st year (4 months) 102,000 60% 70,224 41% (actual)2nd year 358,000 70% 219,300 43% (actual)3rd year 460,000 90% 347,300 70%4th year 511,500 100% 409,200 80%5th year onwards 511,500 100% 460,350 90%

a! As given in the revised cost estimates prepared by IGSAS and used in thePresident's Report of April 2, 1975.

2. Production Costs

3.02 It is now estimated that the total production costs (includingdepreciation and financial charges) in terms of US$ would be close to theestimates prepared in 1975 for the expanded project. However, in termsof TL they would be higher by about 95% because of the devaluation of theTurkish Lira that has occurred in the meantime. The following table comparesthe latest production cost estimates at full production (see Annex 7 forassumptions) with those prepared in 1975:

1/ In fact in May 1979, the most recent month for which data is available,38,736 tons of urea were produced, equivalent to about 90% of nameplatecapacity.

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Production Costs at Current Prices

(US$ million)

1975 Est. 1979 Est.

Raw Materials and Power 36.0 24.4Bags 3.0 4.0Labor 2.4 3.7Maintenance Supplies 2.1 1.6Others 1.7 7.7

Total Operating Costs 45.2 41.4

Depreciation 9.9 10.3Financial Charges 6.5 7.7

Total Costs 61.6 59.4

3. Product Prices

3.03 The Government established a new ex-factory fertilizer pricingsystem in 1978 under which ex-factory prices are announced every six months ona product-by-product basis. The pricing system allows a 15% margin on totalcosts at 70% operation. Under this system, fertilizer companies submit theirexpected costs of production for every six months and these costs are reviewedby the fertilizer marketing agencies (DONATIM and SEKER) and the FertilizerCommittee of the Ministry of Agriculture before the ex-factory prices areannounced by the Government. The current (early 1979) prices received byIGSAS are: TL 5,000-5,500/ton of ammonia; TL 4,100/ton of bulk urea; and TL4,300/ ton of bagged urea.

3.04 The following table compares the product prices currently receivedby IGSAS with the estimates of 1974 and also the CIF Turkey landed prices:

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Price Comparison(US$ ton)

IGSAS, Ex-Factory 1979 CIF Long-Term1975 Est. a/ 1979 Landed b/ CIF Landed b/

Actual a/ Price Price c/

Urea (Bulk) 163 155 152 198Urea (Bagged) 175 162 167 213Ammonia 175 189-208 155 203

a/ At the prevailing exchange rates in the respective years.b/ Before any import duties.c/ In 1979 terms.

B. Financial Results

3.05 The overall financial performance of IGSAS during 1977-78 hasbeen disappointing because of the numerous teething problems. The followingtable shows the selected financial indicators taken from income and balancesheet statements shown in Annexes 8 and 9:

Selected Financial Data(In TL million unless otherwise noted)

1977 1978 1979 (est.)(Four Months)

Capacity Utilization (%) 41% 43% 70%Sales Revenue 61.0 1,158.5 1,792.5Net Profit (127.7) (161.3) 141.1Depreciation 224.4 251.4 272.6Interest 0.4 265.9 202.8Cash Flow Before Interest 97.1 356.0 616.5

Current Assets 451.7 941.5 392.1Current Liability 396.9 1,078.4 457.7Long-Term Debt 1,358.2 1,451.2 1,329.5Equity 867.8 706.5 847.6Debt Service 0.4 445.4 464.9

Current Ratio 1.1:1 0.9:1 0.9:1Debt/Equity Ratio 61/39 67/33 61/39Debt-Service Coverage - 0.8 1.3

(Times)

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3.06 As noted, because of the prolonged commissioning problems (whichcontinued through October 1978), the Company faced a stringent financialsituation during 1977-78. As of the end of 1978, the current ratio of theCompany was at an unsatisfactory level of 0.9:1; the debt service coveragewas 0.8 times; and the debt/equity ratio was 67/33 (as against the stipulated60/40 ratio) The Company met its debt service obligations in 1978 partlywith short-term commercial loans. The Government is expected to increase theshare capital of the Company by TL 500 million to TL 1,500 million. Thiswould help to increase the current ratio of the Company to 1.3:1 and thedebt/equity ratio to 60/40. The debt service coverage is expected to improveto a level of 1.3 times with the expected increase in capacity utilization in1979 with the overcoming of the start-up problems.

3.07 The Loan Agreement required that at the Completion Date (120consecutive days of operation to achieve a production of ammonia and ureaequivalent to 80% of design capacity), the two main shareholders must provideany funds necessary to give IGSAS a current ratio of 2:1. This requirementwas subsequently considered too stringent in an inflationary economy and theBorrower was informed that the current ratio should be at least 1.3:1.

C. Financial Rate of Return

3.08 The main inputs for calculating the financial rate of return (ROR)are given in Annex 10. The financial ROR for the Project in 1979 terms is10.5%. This is significantly lower than the 1975 estimate (23%) because ofthe project delay, cost overrun, prolonged start-up problems,steep increasesin labor and overhead costs and price controls which have resulted in actualurea prices being about 7% below appraisal expectations.

D. Covenants

3.09 The Borrower and the Guarantor have met most of the covenants in thelegal agreements. However, as mentioned (paras 2.05 and 2.06), agreementswith respect to technical assistance and project management were not fullycomplied with. Further, there were breaches in the agreements with respect tothe current ratio and the debt/equity ratio (para 3.06). This has beenbrought to the attention of the Government and they have agreed to take thenecessary measures to rectify the situation. However, because of the financialstringency of the Government, it is unlikely that those measures would betaken by the end of this year.

IV. FERTILIZER MARKET AND MARKETING

A. Demand and Supply

4.01 The forecast of fertilizer demand and supply in the AppraisalReport was based on a review of all the available forecasts by the TurkishMinistry of Agriculture, the State Planning Organization and TUMAS. TheBank forecasts proved to be conservative in that other than in 1974 and 1975

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following the oil crisis fertilizer demand grew more strongly than had beenexpected while Turkish fertilizer production growth lagged much behind originalforecasts. This is shown in the following table:

Demand/Supply of Nitrogenous Fertilizer in Turkey('000 nutrient tons)

------ Demand ------ ---- Production ----Appraisal Actual a/ Appraisal Actual a/

1972 310 375 176 1461973 319-350 430 253 1351974 400 329 301 1081975 455 368 388 2091976 439-514 591 462 1901977 565 666 491 1671978 N/A 776 N/A 274

1979 N/A 821 b/ N/A 498 b/1980 655-726 911 b/ 513 629 b/

Ave. Growth Rates %

1972-80 11-12% 14.5%

a/ Actual up to 1978b/ Latest estimate

4.02 It was estimated in the Appraisal Report that the demand for fer-tilizers would increase by 11-12% a year. But the consumption has beenincreasing at about 15% annually. This has been happening against severesupply constraints due to lack of adequate foreign exchange to import finishedfertilizers as well as raw materials and spares for local production. TheMinistry of Agriculture has estimated that the N consumption in 1979 couldincrease by 36% to 1.06 million from (as against 821,000 tons assumed) if adequatesupply is ensured. Part of the reason for the faster than anticipated growthin fertilizer consumption is the low retail price of fertilizer compared tointernational prices. As the fertilizer retail price is a politically sen-sitive issue, the Government is going slow in reducing the subsidies onfertilizer sales to farmers. As a matter of fact, retail fertilizer priceshave not been raised since 1975. They continue to be below the ex-factoryprices and CIF landed prices. For example, the urea retail price of TL 2,750(US$104)/ton is about 36% lower than the current ex-factory price and 38%lower than the CIF landed price of urea in Turkey.

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4.03 The fertilizer production projections in the appraisal proved on thehigh side because the existing plants are continuing to operate at low capacitymainly because of technical problems; lack of adequate maintenance; managementand financial problems; raw material and spare parts supply problems; and lackof adequate foreign exchange. In the existing plants, the N capacity util-ization declined to 40% and 43% in 1977 and 1978 respectively. The Governmentis now planning a fertilizer sector rehabilitation program to increase thecapacity utilization in the existing plants. The Bank is considering provisionof technical assistance for implementing the program as part of the proposedfinancing to the IGSAS II Fertilizer Project which is scheduled for FY 1980.UNDP funds are possibly available to prepare the program with the Bank servingas the Executing Agency.

4.04 Three new fertilizer plants were commissioned in 1978. Apartfrom IGSAS I, they included the complex (NPK) fertilizer plants of Ege Gubre(EGESAN) and Gubre Fabrikalari. With the commissioning of those plants,the total capacity for N increased from 364,300 to 696,400 tpy. Moreover,two new Projects--Bandirma (Expansion) of BAGFAS and Gemlik Project ofAZOT--are expected to be commissioned in 1979, raising the total annual Ncapacity to 906,800 tons.

B. Market Share of Urea

4.05 The IGSAS Project is the first urea production facility in Turkey.Although urea was introduced in Turkey only in 1969, its use has developedrapidly and reached 295,000 tons in 1976 (accounting for 16% of the N fer-tilizer market) but declined slightly in 1977 because of reduced imports dueto severe foreign exchange difficulties. The growth of urea consumption hasbeen close to the appraisal forecast as shown below:

Urea Consumption(in product tons)

Appraisal Urea Consumption as %Est. Actual of Total N Consumption

1971 63,000 88,000 12%1976 179,000 294,700 16%1977 274,000 243,435 18%1978 N/A 359,102 21%1979 N/A 432,000 (est.) 24%

The share of urea in the total N consumption is still below 25% in Turkeycompared to more than 50% in countries such as India, Indonesia and Pakistan.Urea being a concentrated form of fertilizer (46% N), its use is more economicin terms of bagging and transportation costs than the use of low-analysisnitrogenous fertilizers.

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C. Urea Seeding Program

4.06 As part of the effort to build up the urea market in Turkey inanticipation of the Company's urea production (originally expected in mid-1975), a urea seeding program was carried out by the Government as had beenagreed to with the Bank. The Government imported during 1972-75 about 620,000tons of urea for this purpose as against the agreed amount of at least 480,000tons.

D. Fertilizer Market Study

4.07 As agreed, the Government caused a study to be carried out todefine more precisely IGSAS marketing area and marketing strategy; to getinformation on potential competition from other fertilizers in specificareas; the number, location, and requirement of potential consumer coopera-tives and individual farmers; and existing distribution, transportationand storage facilities in the Company's marketing area. This study helpedthe distribution agencies (DONATIM and SEKER) to plan a better marketingstrategy for IGSAS urea. Further, the study showed that the demand for ureawould be considerably higher than anticipated earlier.

E. Distribution System

4.08 Because of the acute fertilizer shortage in Turkey due to inabilityof the Government to provide adequate foreign exchange to meet the supply gapand to avoid black marketing in fertilizers and ensure orderly distribution,fertilizer marketing is currently done through two public sector companies--DONATIM and SEKER. DONATIM is by far the largest fertilizer distributoraccounting for about 90% of the fertilizer--both local and imported--distributed in the country. SEKER accounts for the rest (10%) of the fer-tilizer distribution and is also responsible for the production and marketingin Turkey of sugar (mostly based on sugar beets) and its by-products and forproviding the inputs to sugar beet farmers on credit and for purchasing theirproducts. DONATIM and SEKER are also the only authorized fertilizer importers.

4.09 So far, DONATIM and SEKER have been doing a fairly good job inthe physical distribution of fertilizers, largely imported through the co-operatives. However, as they handle increasing amounts of fertilizer, theyneed to continually appraise their efficiency and effectiveness in servingtheir customers, the Turkish farmers. Particularly, they will need to reviewtheir dealer network with a view to appointing more private dealers andestablishing adequate retail outlets at convenient locations. This will, inturn, require that the warehousing capacity of DONATIM and SEKER be adequatelyexpanded, warehouses be strategically located and stocked with the rightproducts, and these products be made available to farmers in a timely mannerwithout straining the truck industry's capacity to cope with the demand forservices in the peak farming season. Further, they should pay increasedattention to explore methods to reduce transportation and warehousing costsand improve handling efficiency. In this context, as suggested by Bankmissions, the Government should consider introducing competition in fertilizerdistribution by allowing fertilizer producers to distribute part or all oftheir products as the gap between demand and supply narrows with increasinglocal production.

- 47 -

4.10 The main source of both general agricultural credit and credit forfertilizers is T.C. Ziraat Bankasi (TCZB), the Agricultural Bank of Turkey.Fertilizer credit has been growing at over 30% per year since 1970. Theavailability of credit for fertilizers does not at present appear to be aserious constraint to fertilizers consumption in Turkey. However, measureshave to be taken to expand credit facilities in the future so that creditdoes not become a constraint for increased fertilizer consumption.

V. ECONOMIC BENEFITS OF THE PROJECT

A. Foreign Exchange Effect

5.01 Expressed in 1979 dollars, and excluding the expenses related tothe foreign debt servicing, the net savings of foreign exchange are expectedto amount to about US$62 million per year at 90% production expected in 1981;the annual net foreign exchange saving after debt service would be aboutUS$40 million. The total foreign exchange cost of the Project of about US$80million would thus be offset by the net foreign exchange savings from itduring the initial three years of operation.

B. Economic Rate of Return

5.02 On the whole, although there has been considerable delay in imple-mentation, coupled with cost overruns and a slow build-up of production,the Project is still economic and IGSAS is expected to be competitive withimports in view of the increasing international fertilizer prices. Annex 11shows the investment, operating cost and benefit streams used in the economicrate of return calculation. The economic rate of return of the Project isnow estimated at 13.5% compared to 26% expected at the time of appraisal. Thedifference is explained essentially by the capital cost increase, projectdelay, slow production build-up, and sharper increases in the feedstock andfuel prices than in finished product prices. The following table shows thepercentage point drops with respect to different factors:

Reasons for the Decline Percentage Point Decline

1. Slower production build-upand lower capacity useassumptions for the future 5.0

2. Capital cost increase 3.53. Project delay 2.54. Real increase in feedstock

and fuel prices 1.5

12.5

The economic rate of return would increase from 13.5% to about 14% if theCompany is able to produce at 80% of capacity in 1979 (as against 70% assumed)and reach 90% capacity in 1980 (instead of only in 1981). On the basis ofthe more recent price assumptions used by the Bank, the economic rate ofreturn works out to 11.2%.

- 48 -

C. Transfer of Technology

5.03 The IGSAS Project, the first ammonia/urea facility to be establishedin Turkey, helped transfer new technology. This was facilitated with theinvolvement of international firms who also helped to arrange training andpreparation of operating manuals.

D. Employment

5.04 The Project directly generated about 800 permanent jobs. In addi-tion, it has helped create jobs in the tertiary sectors, e.g. agriculturalextension, credit, transport and distribution, retailing, etc. Further,during the construction phase, it required about 5,000 man-years of service.The capital cost per direct employee works out to about US$205,000. Thoughthis is high, the IGSAS Project is critical for boosting food production byincreasing the local availability of fertilizers.

VI. THE BANK'S ROLE

A. Project Formulation and Execution

6.01 The Bank played an important role in establishing the project scope.The feasibility study had recommended a 1,200 tpd ammonia plant and a 880 tpdurea plant. The ammonia plant was to have a 60% surplus to be supplied to thetwo other projects--the Gemlik Fertilizer Project and the PETKIM CaprolactamProject. The Bank did not support the idea of establishing a large ammoniaplant with surplus capacity to feed the Gemlik Fertilizer Project which was inan early stage of planning. The Bank suggested that the ammonia facility bedeveloped in two units of 600 tpd each. The second unit was to be establishedonly if the Gemlik project was implemented. Subsequently, when the Gemlikproject was taken up for implementation, the Government found it more econo-mical to establish an ammonia plant to meet its needs at Gemlik itself.

6.02 The Bank urged that the Government carry out a market study forfertilizer and implement its recommendations. The study was carried out andit indicated that the demand for fertilizers was growing in Turkey at a higherrate than anticipated. As a result, the project scope was changed. Further,urea was a relatively new fertilizer material in Turkey; farmers began usingit in significant quantities only since 1969. Therefore, the Bank recommendedand the Government carried out a seeding program to familiarize farmers withthe use of urea.

6.03 The Bank helped in formulating a framework for project executionwhich was patterned after the arrangement which had proved effective in theimplementation of the PUSRI II Fertilizer Project in Indonesia. It includedthe use of technical advisor and engineering firms. Overall, the arrangementworked satisfactorily but not as well as in Indonesia. The IGSAS managementwas not impressed with the need for services provided by the technical advisorfirm in some areas and subsequently reduced the scope of their work and

ultimately stopped using their service in 1977.

- 49 -

6.04 The Bank has maintained a dialogue with the Government on thefertilizer pricing policy in Turkey through the market study and subsequentadvice. As a result, the ex-factory prices for producers have been increasedsignificantly to provide a reasonable return on investment under efficientoperation, even though the retail prices have not been changed because of thepolitically-sensitive nature of the issue.

6.05 Financial covenants were helpful to persuade the Government to putmore equity into the Company and to increase fertilizer prices at a time whenIGSAS needed this action to overcome a difficult financial situation due tocost increases, start-up problems and shortfall of cash generation.

6.06 When disputes arose between the supplier of the synthesis gascompressor and IGSAS regarding the type of impellers used in the rotorsfollowing repeated failures of the rotors, the Bank provided direct adviceto IGSAS in its efforts to obtain from the supplier a permanent solutionto the technical problems encountered with the equipment.

6.07 As late as the end of 1977, when IGSAS was mechanically complete,IGSAS did not have on board adequate staff; there were many vacancies in theplant operation and maintenance departments. The top management was deficientand most of the capable management staff members had left. At this stage,Turkey was seeking Bank participation in the development of another fertilizerproject. The Bank pointed out to the Government that until the management,financial and technical problems of IGSAS were resolved satisfactorily, theBank could not participate in the second project. Subsequently, the Govern-ment appointed a competent General Manager who then filled most of thevacant positions. The Government has also provided funds for the import ofcritically-needed spare parts to resolve technical problems. These measureshelped improve the situation of IGSAS significantly. IGSAS still needs aboutUS$3.5 million in foreign exchange to replenish the spare parts consumedduring the prolonged start-up period and to install some auxiliary facilities.The Government has agreed to make that amount available to IGSAS during 1979.If these funds are not provided in time, the Company may face additionaloperational problems. Further, should the foreign exchange stringency continuein Turkey, crude oil imports may be curtailed leading to shortage of naphthafeedstock for IGSAS.

6.08 When faced with the foreign exchange problems, the Company requestedthat part of the Bank funds originally allocated for the engineering servicesbe switched to finance the spare parts import in 1978. The Bank agreed tothis in the interest of completing the Project and make it operative asquickly as possible. This was done on the understanding that the finalpayment to the engineering contractor, due the following year after the finalguarantee tests, would be paid by the Government from its own sources. TheGovernment has, however, not made that payment so far because of its continuingforeign exchange stringency. The Bank has been informed by the Government,however, that priority will be given to paying the contractor the final amountas soon as the country's debt rescheduling is completed.

- 50 -

B. Lessons Learned

6.09 As mentioned, the appraisal work carried out for the originalproject turned out to be premature as soon after it had been completed,the project authorities independently embarked upon a revision of the Projectwhich ultimately resulted in a substantial scaling up of the project scope and

necessitated a reappraisal about one year later. Subsequent Bank appraisalsof fertilizer projects have given greater emphasis to the scope and marketingaspects in an endeavor to more closely define project scope and cost before

entering the final appraisal phase.

6.10 As noted (para 2.11), the engineering contractor found it difficultto cope with problems encountered especially during the construction phase.

For subsequent projects in developing countries, particularly where con-struction conditions are known to be difficult, more emphasis has been

placed on the construction capabilities of firms competing for the engineeringcontract before a selection is made. In the IGSAS' case, the contractor was

selected primarily on the basis on its extensive process expertise and headoffice engineering capabilities combined with past records of successfulammonia-urea projects in developed countries. Insufficient attention, however,was paid to the construction and erection capabilities in developing countries

and specifically to the engineering contractor's detailed plans for implement-

ation of such a complex project in a developing country.

6.11 The upheaval in IGSAS management which occurred at the most criticaltime of the Project, namely, near the end of the construction period and

beginning of the commissioning period, had a damaging effect on the start-up

activities. It is hard to say how many of the problems which were encountered

at that period were the result of lax management and technical controls caused

by this disruption and which showed up in mechanical equipment failures. As

this upheaval in IGSAS management stemmed from penetration of politics into

the day-to-day operation of the Company, the Bank has been paying more atten-tion to this potential problem in more recent projects to ensure the integrity

of project management.

6.12 The joint venture firm which was originally appointed to provide

technical assistance to IGSAS pursuant to the Bank's requirements, was not

able to firmly establish itself in this role, and with the passage of time,the original project team showed it could function effectively unaided.

Consequently, the firm's input was reduced to assistance for cost control and

procurement administration. However, in the light of the virtually 100%

turnover in the original project team and the difficulties subsequently

experienced by the new management and its very limited experience, a far

greater input from such a firm was necessary. The Company was not prepared to

continue using the TA firm to any major extent and employed various short-term

consultants from equipment suppliers and other sources instead. If the IGSAS 4

management did not have confidence in the originally selected firm to provide

all the technical assistance required, the Bank could perhaps have insisted

that they get the necessary help from other firms. However, experience in

other projects shows that if Borrowers are made to accept such assistance

against their will, such assistance is often poorly used and largely wasted.

- 51 -

6.13 The training program was not clearly conceived and properly sche-duled by the IGSAS management with the help of the engineering and technicalassistance firms. It is critical for the success of complex projects thatdetailed training programs be prepared and implemented in a systematic mannerand this lesson has been applied in more recent projects.

6.14 IGSAS established with the help of the Turkish Government a US$1.5million Revolving Fund with an international commercial bank in London whichproved very useful for: (i) financing replacement of items covered byinsurance but for which delays were experienced in settling the claims; and(ii) procurement of small value items which had to be increasingly purchasedas the Project was nearing completion. Using the Revolving Fund, IGSASpurchased the small items for cash, avoiding the administrative burden ofprocessing every small value item separately for payment by the Bank. When-ever the expenditure on those small items reached a specific amount, IGSASsubmitted a consolidated application for reimbursement under Procedure I ofBank Disbursement. The Revolving Fund concept could be used in other BankGroup projects to expedite procurement of replacement items for those damagedin delivery and also of small value items.

Industrial Projects DepartmentJune 1979

- 52 -

TURKEY - IGSAS FERTILIZER PROJECT

MAJOR DELAYS AND PROBLEMS ENCOUNTERED IN THE COMMISSIONING PERIOD

Date Occurrence

03/10/1977 Damage of PSV of extraction steam line of syngas turbine

03/11/1977 -Power failure

03/17/1977 Power failure

03/17/1977- Bad performance of methanator catalyst, washing, oxidation03/30/1977 and regeneration of the catalyst


04/08/1977 2nd casing rotor failure of syngas compressor

04/27/1977 Start-up04/28/1977 Thrust bearing failure of 3rd casing of syngas compressor

06/06/1977 Damage of PSC before NT CO converter

05/02/1977 2nd casing rotor failure of syngas compressor

06/08/1977 Syngas compressor 2 casing thrust bearing failure

06/13/1977 Syngas compressor 2 casing thrust bearing failure

06/18-24/1977 Seal-oil and governing speed problems of syngas compressor

06/28/1977 2nd casing rotor failure of 2nd casing of syngas compressor

07/04/1977 Explosion of start-up compressor - All units shut down

09/01/1977 Start-up of NH3 production

09/02/1977 Leakage at the thermovel in NH3 synthesis reactor


09/16/1977 Check-up of 2nd casing of syngas compressor


10/05/1977 Instrument failure - All units shut down

- 53 -

ANNEXPage 2

Date Occurrence

10/16/1977 Start-up of synthesis

11/15/1977 Leakage at the thermovel of synthesis reactor

11/26/1977 Boiler failure

12/04/1977 Instrument failure of naphtha to primary reformer

12/10/1977-12/13/1977 BFP repairs

01/14/1978 Shutdown of urea for annual repair

01/18/1978 Shutdown of NH3 for annual repair


04/17/1978 Failure of pressure reducing valve. All units shut down


04/27/1978 Start-up of urea production

Instrument failure in CO2 removal

05/12/1978 Failure of PSV of urea synthesis

05/27/1978 Failure of PSV of urea synthesis

06/21/1978 Failure of prill scrubber

07/21/1978 Shutdown of all units for repair of steam leakages

08/07/1978 Start-up of NH3 synthesis

08/14/1978 Start-up of urea synthesis

08/15/1978 Failure of HP carbamate scrubber

08/20/1978 Start-up of urea synthesis

10/01/1978 Blockage of synthesis line

10/16/1978 Thurst bearing failure of 2nd casing of syngas compressor

Industiral Project DepartmentApril 1979

IGSASTURKEY: IGSAS FERTILIZER PROJECT

PROJECT IMPLEMENTATION SCHEDULE - ESTIMATED VS ACTUAL*

1973 1974 1975 1976 1977

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

II~ ~~~ II I 1 I I I 1 IT F F 1 11 1 1 1 11 11 ),II 1 1 11 IT1. PROCESS DESIGN AND

DETAILED ENGINEERING o a m m m m mm

2. EQUIPMFNT AND MATERIALS aI

PHOCUREMENT am -mm m -mmmm

3. EQUIPMENT AND MATERIALSDELIVERY a o a =

4 CIVILWORKS a ue m am m am mm am m MMUM=m

5. EQUIPMENT ERECTION 01Nm Emm an a ana mO nam am

6. TESTING AND COMMISSIONING 11

manmXma ESTIMATEDmo N am m ACTUAL

*Based on the revised Feasibility Study of April 1973

1] Based on President's Report of April 2, 1975

Industrial Projects DepartmentApril 1979 World Bank -- 20447

- 55 -

ANNEX 3


SIGNIFICANT EVENTS DURING DESIGN, PROCURENENT AND CONSTRUCTION

1. Prequalification questionnaires sent to 89 process vendors andgeneral contractors October 1972

2. Soil investigation completed December 1972

3. Feasibility studies made for enlarged capacity January 1973

4. Bid documents handed to the authorized representatives of thequalified bidders February 7, 1973

5. Bid evaluation procedure completed and approved by the Bank April 1973

6. All firms submitted their bids May 4 1973

7. Evaluation of bids continued in May, June; finalized committeereport handed to General Management June 27, 1973

8. Contract signed with Uhde July 1973

9. Start of preliminary studies on site August 1973

10. Studies in relation with the plant layout and process designstarted at contracto's office in Dortmund. IGSAS technicalpersonnel joined the studies August 1973

11. Stocking of stabilizing material on site has been completed by theconstruction group August 1973

12. Project procurement procedure has been completed with two-month delay October 1973

13. Plant layout studies completed October 1973

J. Bagged urea building project completed November 1973

16. Detailed grading plan completed November 1973

16. Agreement signed with IBRD on enlarged capacity December 1973

17. Start of sending inquiries to vendors December 1973

18. Evaluation of quotations received for the long delivery steamsystem and pumps have started January 1974

19. Due to an instable market after the petroleum crisis, vendors askfor prolongation of the bidding option and some governmentguarantees also they are reluctant to conform with the require-ments of the inquiry documents which delays the procurement Beginning ofprocess 1974

20. Temporary electric power line to the site completed February 1974

- 56 -

ANNEX 3Page 2

21. Bidding documents for construction works covering major civilitems completed and mailed to local prequalified firms March 1974

22. INTES awarded as subcontractor for civil works Part I May 1974

23. INTES started civil works June 1974

24. Underwater soil survey for the jetty completed June 1974

25. Part II civil works awarded to INTES October 1974

26. Start of shipment of materials to site November 1974

27. Transportation contract awarded to D.B. Deniz Nakliyat A.S. January 1975

28 Equipment erection, piping, prefabrication and erection awarded toINTEX April 1975

29. Piling design completed and awarded April 1975

30. Agreement signed with IBRD for a supplementary loan April 1975

31. Electrical and instrumentation work awarded to SIMKO/ENTES June 1975

32. 99% completion of engineering and procurement July-

August 1975

33. Pipe-rack, BFW treatment unit vessels completed August 1975

34. Bagged storage building and erection of transformers completed November 1975

35. Placement of orders for all main materials and equipment are

complete December 1975

36. Shipment of materials to the site is complete with some exceptions December 1975

37. Erection of heavy equipment (urea reactor, ammonia converter)

completed by a 1,000 ton capacity crane March 1976

38. Underground piping 98% completed March 1976

39. Primary reformer and waste heat system completed June 1976

40. Auxiliary boilers provisionally accepted, almost all theequipment erected July 1976

41. Compressor house, prilling tower, control room, electricsubstation I and II completed August 1976

42. Start-up activities started September 1976

43. Engineering contractor completed erection and civil works, and

the completion is accepted. March 1977

Industiral Projects DepartmentMay 1979

- 57 -

ANTNEX 4


SOURCES OF'PROCUREMENT

Country US$ Equivalent (in 000s) % of Credit Amount

Germany (FR) 29.831 71.0%

France 2.935 7.0%

Italy 2.694 6.4%

Netherlands 2.351 5.6%

United Kingdom 1.938 4.6%

United States 0.091 0.2%

Belgium 0.252 0.6%

Denmark 0.047 0.1%

Sweden 0.043 0.1%

Austria 0.018 0.04%

a/ a/TOTAL 40.200 95.7%

a/ Of the total loan of US$42 million, some US$1.8 million or 4.3% was usedfor payment of interest during construction, leaving 95.7% of loanused for procurement.

Industiral Project DepartmentApril 1979

- 58 - ANNEXS

TURKEY: IGSAS FERTILIZER PROJECT

DISBURSEMENT OF BANK LOANS

(US$ million)

Calendar Yearand Quarter First Loan Second Loan a/ Cumulative

Actual Appraisal Actual Actual

1972 IV 0.012 1.0 - 0.0121973 I 0.023 1.0 - 0.023

II 0.120 1.5 - 0.120III 0.119 1.5 - 0.119IV 0.127 2.0 - 0.127

1974 I 0.019 2.0 - 0.019II 0.413 2.5 - 0.413

III 1.308 3.0 - 1.308IV 2.954 3.5 - 2.954

1975 I 2.237 3.0 - 2.237II 2.540 2.5 - 2.540

III 3.640 0.5 - 3.640IV 7.476 - 0.971 8.447

1976 I 1.312 - 6.329 7.641II 1.300 - 1.700 3.000

III 0.300 - 0.900 1.200IV 0.100 - 0.100 0.200

1977 I - - 2.200 2.200II - - 1.200 1.200

III - - 1.400 1.400IV - - 0.900 0.900

1978 I - - 0.900 0.900II - - 0.700 0.700

III - - 0.640 0.640IV - - 0.060 0.060

24.000 24.0 18.000 42.000

a/ Estimated disbursement schedule was not prepared for the supplementary loan.

Industrial Projects DepartmentApril 1979

- 59 - ANNEY 0


TREND OF MONTHLY PRODUCTION(Tons)

1977 Ammonia Urea

Up to July 14,708 2,420August - -September 253 358October 15,300 9,135November 13,666 26,721December 19,431 31,590

63,358 70,224

1978

January 13,200 17,200February - -MarchApril 4,400 600May 17,300 19,600June 20,800 27,700July 11,900 20,000August 12,600 14,100September 22,400 33,100October 22,800 28,500November 20,600 27,200December 22,400 31,300

168,400 219,300

1979

January 9,840 10,365February 16,047 22,271March 22,054 35,756

April 20,034 29,178

May 22,077 38,736

Industrial Projects DepartmentJune 1979


MATERIAL BALANCE AND COSTS

Units Consumption Financial Price Economic Production CostsPrice Financial Economic

---- -------------------------------- US $-----------------

I. Ammonia PlantNaphtha (Feed and Fuel) MT/MT NH3 0.705 54.45 120 38.39 84.60

Fuel Oil MT/MT NH3 0.406 68.80 70 27.93 28.42

Power Credit KWH/MT NH3 32.640 0.02 0.02 (0.65) (0.65)LP Steam Import MT/MT NH3 0.329 1.95 1.95 0.64 0.64

HP Steam Export M /MT NH3 1.743 2.50 2.50 (4.36) (4.36)

BFW Make-up M /MT NH3 4.658 0.22 0.22 1.03 1.03

Cooling Water Export M3/HT NH3 106 0.0093 0.0093 (0.99) (0.99)

Sub-Total 61.99 108.69 CNCD

II. Urea PlantAmmonia MT/MT Urea 0.575 67.99 108.69 39.09 62.50

CO2 MT/MT Urea 0.770 -- -- -- --

Power KWH/Mr Urea 16.9 0.02 0.02 0.34 0.34

HP Steam Import MT/MT Urea 1.178 2.50 2.50 2.95 2.95

LP Steam Export MT/MT Urea 0.171 1.95 1.95 (0.33) 0.33)

Sub-Total 42.05 65.46


- 61 - ANNEX &


IGSAS INCOME STATEMENT

(in TL million unless otherwise noted)

1977 1978 (unaudited) 1979 (est.)(audited)

----------- Actual -----------Production ('000 tons)

Ammonia for Sale 13.8 23.9 38.0Urea 70.2 219.3 347.3

Sales Volume ('000 tons)

Ammonia 10.5 23.4 38.0Urea (bagged) 4.4 193.0 260.3Urea (bulk) 0.8 52.7 117.0

Sales Price (TL/ton)

Ammonia 4,600 5,000 5,100Urea (bagged) 2,500 4,300 4,300Urea (bulk) 2,500 4,100 4,100

Sales Revenue

Ammonia 48.1 116.4 193.5Urea (bagged) 11.0 837.9 1,119.3Urea (bulk) 1.9 204.2 479.7

Sub-Total: 61.0 1,158.5 1,792.5

Operating Costs 233.0 706.0 1,087.8

Depreciation 224.4 251.4 272.6

Interest 0.4 265.9 202.8

Other Income 1.6 33.0 15.0

Inventory Adjustment (267.5) 129.5 98.0

Profit before Tax (127.7) (161.3) 146.2

Tax 5.1

Net Profit (127.7) TITT.3) 1

Industrial Projects DepartmentMarch 1979

- 62 -

TURKEY: ICSAS FERTILIZER PROJECT ANEX

BALANCE SHEET(in TL million)

1977 1978 1979 (est.)(audited) (unaudited)

Assets

Current Assets

Cash 17.5 40.9 5.1Receivables 42.0 641.4 209.2Inventory 392.2 259.2 177.8

Sub-Total: 451.7 941.5 392.1

Gross Fixed Assets 2,390.6 2,779.0 2,999.9Less: Depreciation 233.4 485.6 758.2Net Fixed Assets 2,157.2 2,293.4 2,241.7Other Assets 14.0 1.1 1.0

TOTAL ASSETS: 2,622.9 3,236.1 2,634.8

Liabilities

Current Liabilities

Payables 162.4 757.8 247.0Current Portion ofL/T debt 179.5 262.1 161.7Short-Term Loans 55.0 58.5 49.0

Sub-Total: 396.9 1,078.4 457.7

Long-Term Debt

SIB 630.9 576.8 784.8IBRD 691.8 874.4 544.7Other 35.5a/ - -

Sub-Total: 1,358.2 1,451.2 1,329.5

Equity

Share Capital 1,000.0 1,000.0 1,000.0Legal Reserves - - -Retained Earnings (132.2) (293.5) (152.4)

Sub-Total: 867.8 706.5 847.6

TOTAL LIABILITIES& EQUITY: 2,622.9 3,236.1 2,634.8

Current Ratio i.1 1 0.9:1 0.9:1Debt/Equity Ratio 61/3) 67/33 61/39

a/ ketentions payable

Industrial Projects reparcn:March 1979

- 63 -

ANNEX 10


COST AND BENEFIT STREAMS FOR FINANCIAL ANALYSIS(In 1979 US $ Million)

Capital Costs- Operating Costb Benefits

Cl1 C2 1

1972 1.0 -- --

1973 8.0 -- --

1974 40.5 -- --

1975 72.9 -- --

1976 46.5 -- --1977 28.3 4.9 3.61978 7.7 24.2 45.41979 6.7 35.0 67.61980 -- 36.6 72.71981 -- 39.2 80.91982 -- 39.2 80.91983 -- 39.2 80.91984 -- 39.2 80.91985 -- 39.2 80.91986 -- 39.2 80.91987 -- 39.2 80.91988 - / 39.2 80.91989 (9.4) 39.2 80.9

Financial Rate of Return 10.5%

a/Excluding interest during construction

b/ Ex1uding depreciation and financial charges. Derived from Annex 7.-S Recovery of working capital


- 64 -ANNEX 11


COST AND BENEFIT STREAMS FOR ECONOMIC ANALYSIS

(In 1979 US $)

Capital Costs a/ Operating Costs ' BenefitsC1 C2 B1

1972 1.0 -- --

1973 8.0 -- --

1974 40.5 -- --

1975 72.4 -- --

1976 46.3 -- --1977 28.3 5.4 3.21978 7.7 33.0 56.11979 6.7 46.3 86.31980 -- 48.7 93.01981 -- 52.6 103.71982 -- 52.6 103.71983 -- 52.6 103.71984 -- 52.6 103.71985 -- 52.6 103.71986 -- 52.6 103.71987 -- 52.6 103.71988 -- 52.6 103.71989 (9.4) 52.6 103.7

Economic Rate of Return 13.5%

/ Excluding interest during construction and taxes

Excluding depreciation, financial charges and taxes. Derived from Annex 7.

Recovery of working capital
