Report No. 6073

Sustainability of ProjectsReview of Experience in the Fertilizer Subsector

February 26,1986

Operations EX[aluation Department

FOR OFFICIAL USE ONLYU

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may riot otherwisebe disclosed without World Bank authorization.

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COMMON ABBREVIATIONS

ANP - Ammonium Nitro-phosphateCAM - Calcium Ammonia NitrateDAP - Diammonium PhosphateERR - Economic Rate of ReturnFERTIMEX - Fertilizantes Mexicanos S.A.FRR - Financial Rate of ReturnIFFCO - Indian Farmers Fertilizer Cooperative Ltd.IGSAS - Istanbul Gubre Sanayii Anonim SirketiMAP - Monoammonium PhosphateNP - Nitro-plosphatePCR - Project Completion ReportPEMEX - Petroleos Mexicanos S.A.PPAM - Project Performance Audit MemorandumPPAR - Project Performance Audit ReportPUSRI - P.T. Pupik SriwidjajaTSP - Triple Super-phosphate

WOR OFFICL MtS ONLYTHE WOIUD BANK

Washington. D.C. 20433US.A.

Olfice of Oiecto'.Gmnsrl

February 26, 1986

MEMWRANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Sustainability of Projects: Review of Experience in theFertilizer Subsector

Attached, for information, is a copy of a report entitled"Sustainability of Projects: Review of Experience in the FertilizerSubsector" prepared by the Operations Evaluation Department.

Attachment

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

FOR oMICUL USE ONLY

SUSTAINABILITY OF PROJECTS

REVIEW OF EXPERIENCE IN THE FERTILIZER SUBSECTOR

TABLE OF CONTENTSPage No.

-EXECUTIVE SUMMARY ,................. I

I.* INTRODUCTION..................... ............ ,. I

II. SECTORAL BCGROU N . * .-. 3

III. REVIEW OF PRODUCTION PERFORMANCE.R OMN........ 8

A. Project Chart c..ri.tl. . 8B. Initiation of Operations and Recent Performancer... 10

IV. FACTORS AFFECTING PRODUCTION PERFORMANCE: TRANSFER OFTECHNOLOGY 13

A. Review of Plant Exe e r i e n c e 13Be Technology I ssues -20

V. OTHER FACTORS AFFECTING PERFORMANCE........................... 22

A. Raw Material and Other Input Problems ..................... 22B. Market Development 24C. Institutional Environment and Managerial Autonomy.nomy.... 25D. Labor Supply 28

VI. SECTORAL STRATEGY AND THE DEVELOPMENT OF HUMAN RESOURCES.ES... 29

A. Sectoral Strategy: A Comparison of India and Indonesia... -29B* Human Resource Development ............................... 32

VII. THE FLOWS OF ECONOMIC AND FINANCIAL BENEFITS ................. 34

A* Financial Be nefits .................... , 34B. The Economic Rates of Return ............................. 40

VIII. PRINCIPAL FINDINGS AND LESSONS TO BE LEARNEDe*##.............. 49

A. Overall Assessment........... 49vB. Technology Transfe. ...................... ..... 50C. Management Effectiveness 53D. Feedstock and Energy Supplies..............................* * 54E, Sectoral Poiy55

This dowment hasa resid dstbuiton and may be usd by rdpients ondy in the peformnce ofthek offin dutes Its ontets may not otherw be dbdosed without WorM Dank authobuon.

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SUSTAINABILITY OF PROJECTSREVIEW OF EXPEIENCE IN THE FERTILIZER SUBSECTOR

EXECUTIVE SUIJARY

This is the second of the series of reviews undertaken by theOperations Evaluation Department (OED) of post-completion project experiencein an attempt to evaluate those faetors which have an important bearing uponthe sustainability of project benefits. The first study, entitled"Sustainability of ProJects: First Review of Experience" (Report No. 5718),issued in June 1985, dealt mainly with agricultural projects; other studiesnow in preparation deal with the power and education sectors.

The basic concepts of sustainability were set out in the firstreport. Briefly, as defined in that study, the termwsustianability"describes the ability of a project to maintain an acceptable level of benefitflows through its economic life. While this may often be expressed inquantitative terms involving the internal economic or financial rates ofreturn, benefits may also be qualitatively assessed. For projects in theproductive sectors such as industry, the principal measure of performance isoutput, generally expressed in terms of capacity utilization, butbank-supported projects normally have other objectives, such as subsectoralpolicies, technology transfer and institution building, which must beassessed qualitatively.

The present study focusses on fourteen fertilizer projects in sevencountries, covering all of the Bank projects in the subsector which had beenapproved in the early 19709 and which had been operating by mid-1985 for atleast four years after project completion. The plants were located in fourof the Bank's six geographic regions and the countries were among the largestand more industrially advanced of the Bank's clients.

The concentration on the fertilizer subsector reflected the concen-tration of industrial lending for these industries during the Indicated peri-od. This has the advantage, however, of permitting a closer examination oftechnological and Industry-specific factors while cross-countr) comparisonshelp to identify country-related issues (paras. 1.01-1.08).

The heavy involvement of the Bank in expanding fertilizer produc-tion arose from the increased attention given at the time to world food pro-duction and agricultural development, as the scientific revolution being ex-perienced in the agricultural sector required not only the new high-yieldingseed varieties but also additional complementary inputs such as fertilizer.This increased demand induced major technological developments in fertilizerproduction, not only with respect to processes but also with respect to econ-omic size of plants; moreover, the energy price shocks after 1973 producedfurther technological adjustments (paras. 2.01-2.02).

Consideration of these and other sectoral factors is essential tounderstanding the performance of plants designed and implemented during this

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period. One also has to take into account the nature of chemical processindustries where there is a very sensitive Interaction among process design,equipment and local conditions. Aside from the normal period ofcommissioning which is needed to assure integrity of process design andequipment, there is a breaking-in period ("the learning curve") for operatingpersonnel to learn to- cope with normal or inflicted mechanical difficulties,as well as undesirable physical or chemical reactions. As a consequence itis generally expected that process plants will need some time to achievenameplate capacity for sustained periods of operation. The fundamentalcatalyst to combine properly all of the elements involved is the humanresource, in particular the application of managerial skills. Thepersistence of technical problems often reflects inadequate managerial inputswhich can be due to inappropriate managerial structure or incentives (pars.2.03-2.11).

- A further factor in evaluating production performance is the con-cept of nameplate capacity which is not unambiguous. For process industriescapacity is defined in terms of a fixed volume of output for a twenty-fourhour period of operations, generally guaranteed by the basic engineering con-tractors; this is specified in the performance contracts to be verified inperformance tests when the project sponsors accept delivery from contrac-tors. Annual capacity design is based normally on 330 days of operation, thebalance representing time spent for scheduled and unscheduled maintenance;some plants requiring additional maintenance periods will measure utilizationrates against a smaller number of operating days.

comparisons of utilization rates are also affected by differencesin design philosophy embodied in process engineering. Equipment may be"overdesigned" to provide higher margins of performance above specificationswhile a plant may be "overdesigned" by providing additional spares to replaceequipment which could encounter difficulties; overdesign permits short peri-ods of operations above nameplate capacity. Tight design, on the other hand,involves smaller margins of equipment performance as well as minimal provi-sion of spares; as a consequence, such plants are not likely to exceed name-plate capacity even for short periods and will generally require more un-scheduled maintenance (paras, 2.12-2.19).

All but one of the projects supported by the Bank represented in-vestment in new production facilities. Nine of the plants involved the inte--grated production of ammonia/urea; a tenth urea plant was based on purchasedammonia from a nearby refinery. With one exception the urea plants werebased on technology which had developed in the mid-1960s involving not onlynew processes but also changes in the economic size of plant. The one excep- -tion was a plant which was based on an earlier process design; in this caseselective investment was undertaken with the expectation that output could beraised at the existing facility at low capital Cost. The other four plantsproduced primarily phosphatic-based fertilizers or fertilizer intermediates;two of these plants involved integration of subprocesses- not previouslyattempted while the other two used conventional processes (paras. 3.01-3.06).

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With the exception of three highly successful plants, most of thereviewed Bank-supported installations had experienced substantial delays incompletion and in initiation of operations which were examined in therelevant PPARs and PCRs. Many of these plants have now been able to increasecapacity utilization rates in accordance with expectations although theyexperienced considerable difficulties before output could be raised; however,there remain a few plants with low production rates (paras. 3.07-3.16).

The major factors which have influenced performance are related totechnological aspects: the adequacy of process and equipment design and ofmeasures taken to ensure technology transfer; -in this connection, managerialperformance was intimately linked to the development of technological capa-bility. In a few instances, raw material or energy problems (inadequate orirregular supplies or poor quality) adversely affected the plants. Otherfactors of lesser importance included unanticipated changes in demand (para.4.01).

Once the economic justification of a project had been examined,technology transfer and adaptation and development of local technologicalcapabilities generally represented the main thrust of the Bank's preparationand appraisal work. To achieve these objectives, the Bank stressed the needfor project authorities to undertake carefully integrated programs combiningboth training of management, technical and operating personnel and the use ofexpert consultants. Among the projects reviewed, extensive provisions fortraining locallly recruited staff were made. These involved formal trainingprograms using modern techniques such as audio-visual presentations and pro-cess simulators; staff were also sent abroad for training at similar plantsin other countries and at special facilities provided by equipment designersand the manufacturers, as well as by process engineering firms.

Less well received were the recommendations dealing with use of ex-patriate consultants at design, construction and implementation stages. In anumber of projects the Bank also pressed, with only -limited success, for theuse of technical assistance from external consultants in the operationalstages until an appropriate management cadre could be developed. The issueis a sensitive one, involving both the conviction of many governments thatthe necessary skills could best be developed through learning-by-doing, aswell as questions of national pride (paras. 8.10-8.14).

The most successful set of projects is associated with extensiveintegrated programs of training and consultant use elaborated by the projectsponsors which were initiated at the time of preparation of the first projectin the series. These programs were further strengthened for the implementa-tion of the larger, second and third projects undertaken by the enterprise.Formal training programs for locally recruited staff were established at sev-eral levels and expatriate assistance was used at all stages of project de-sign, implementation and operation, covering aspects such as legal, marketingas well as technological and managerial. After appropriate training, localcounterpart staff were involved at each of these phases in a process oflearning while doing.

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As a consequence of the approach, the local staff of thisenterprise are currently fully in control of operations and, moreover, thefirm has for-med its own engineering company, a joint venture with aninternational engineering firm. This has permitted dissemination of theenterprise's experience to other companies in the country as well as to othercountries in that region, and also provides the firm with an opportunity tokeep abreast of technical developments in the Industry worldwide. While theapproach involved considerable foreign exchange expenditure for employingconsultants, this was offset by the rapid build-up of operations and theearly achievement of full capacity use which permitted, at -first, reductionin imports and, more recently, substantial export sales (paras. 6.06-6.10).

The less rapid build-up of output in a number of other survey-'pl-ants reflected difficulties at finding solutions to emerging technicalproblems which arose from process design or equipment deficiencies; as noted,the period of the mid-1970s was one of rapid technical advances in the indus-try and limited experience worldwide in several new processes and associatedequipment. Nevertheless, in some instances, slow pace of corrective actionalso reflected weaknesses in plant management, in particular the absence ofan environment in which management is encouraged to maximize efficiency oroutput. Among the elements involved are inadequate incentives and the lackof autonomy for ianagement in decision-making. Some of these issues hademerged at the time of project completion and contributed to the cost over-runs in completion delays which were noted in the relevant PPARs or PCRs.

With one exception all of the projects were in the public sectorand thus were subject to -policies with respect to management of public sectorenterprises. Rece7itly, a number of governments have begun to revise theirpolicies in order to promote greater efficiency in these and similar produc-tive enterprises. Measures have been taken or are under consideration which,inter alia, provide more incentives to managerial and operational personnel,give greater autonomy to management, and liberalize prices of both inputs andoutputs to permit better functioning of the relevant markets. In some in-stances, these policy reviews are associated with-Bank macroeconomic policydialogues, structural adjustment lending, sectoral loans or project assis-tance (paras. 5.12-5.21).

A number of other aspects of technology transfer emerged from thereview. The choice of technology is in the hands of -the borrower and theBank has generally reviewed these matters during project preparationsstages. In considering appropriate technology, there is often a cho4ce be-tween conventional techniques and newer developing processes. Insisting ononly conventional processes in a country may have an impact on its futuretechnological development. A relevant issue is, therefore, the circumstancesunder which the risks associated with newer technology are acceptable and itis necessary to take into account both the stage of development of the bor-rower and the stage of development of technology.

I-n some instances, the Bank had questioned the choice of process orsubprocesses proposed by the borrowers and had engaged in a dialogue withproject sponsors, often with inputs from external consultants. As a conse-quence certain adjustments were made and the usefulness of this approach was

clearly dnmonstrated in a number of the plants reviewed. Among the projectsstudied, the risks in opting for newer methods were generally well understoodby the borrowers, but there were some instances where this was not the case.Moreover, once a decision is made to pursue a certai-n process it may takesome time in operation before it is possible to make a judgement on theappropriateness of the choice, in particular the steps Which may be requiredto obtain satisfactory operations. There is clearly a role forpost-completion supervision or similar Bank activities in these situations(paras. 4.26-4.35).

Implementation of some projects was linked to the development of adomestic industry for producing capital goods as the government concernedinsisted on local procurement for an important portion of the required equip-ment. A few plants experienced some difficulties in interfacing locally pro-duced equipment with imported machinery while others experienced mechanicalfailures in operation, due to the inexperience of the local manufacturers incases where production of these items had been undertaken for the firsttime. While the know-how developed in this early stage is now reflected inan improved capability for equipment production, in the early stages it didresult in shortfalls in fertilizer output. Countries attempting to increaselocal production for capital goods need to weigh carefully the trade-offswhich may be involved when they insist upon using this equipment. In thisconnection a development strategy for the engineering subsector should mini-mize these risks, including such approaches as starting first with assemblyand gradually increasing production of components (paras. 6.04-6.10).

Performance in some of the same plants was also affected by otherelements of the developmental strategy of the particular government to mini-mize capital costs and especially foreign exchange expenditure. Among theseaspects were tight design and the integration of sub-processes which had notbeen tried before in order to use licenses already obtained. As a result,there was a shortfall in output as compared to expectations. Recently, thestrategy has been modified with new projects reflecting more liberal processdesign and more flexibility in implementation arrangements.

The growth of the fertilizer subsector in many of the countriescovered in this review has also been accompanied by the development of alocal engineering capacity which has become increasingly involved in subse-quent projects, Including those financed by the Bank. The ability to imple-ment the second generation of projects is thus one of the best measures ofthe success of the efforts for technology transfer. It is important in theseinstances that the firms maintain adequate contacts with the industry world-wide so as to keep abreast of current technical developments (paras. 6.04,6.19).

In general, the development of technological capabilities which hasaccompanied the implementation and operation of these plants has been impres-sive. In virtually all cases local personnel have taken over full operationof the plants. At the same time, however, certain elements which enter intoindustrial discipline have been inssfficiently appreciated in a few instan-ces. Of particular importance is the need to stress proper safety provisionsand adequate day-to-day maintenance which can have important impact on over-all output performance (paras. 8.15-8.20).

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Some of the plants experienced considerable difficulties inobtaining adequate supplies of raw materials and energy, both quantitativelyand qualitatively, which contributed to the poor production performance.Ensured supplies of these items are essential for proper functioning ofprocess industries where unanticipated shortages or unexpected changes inquality can have a disproportionately negative impact on operations;resulting breakdowns can often inflict substantial damage on processequipment. In an number of countries provisions of these inputs were part ofa broader sectoral or general economic strategy and the requirements ofindividual plants were sometimes overlooked. There is growing recognition ofthe need for governments to evaluate more carefully the adverse effects onthese plants of measures which may change the conditions under which theirinputs are provided (paras. 5.01-5.07, 8.26-8.30).

For projects producing marketable outputs, the most common commer-cial measurement of benefit flows is the financial rate of return (PRR). Anumber of the reviewed plants are part of large fertilizer producing com-plexes with consolidated balance sheets and income statements. In thesecases it is not possible to determine the profitability of the units whichhave received Bank support. Moreover, given that governments have fixedprices for outputs and inputs, financial returns largely reflect the impactof these policies.

Among the countries covered in this review, the prices which gov-ernments pay to the producers bear little relationship to the prices chargedto the consumers which are separately determined. Thus the extent of anypossible subsidy to fertilizer consumption at the farm level is a separateissue which requires special investigation.

In most cases, ex-factory prices are based on a formula whichallows for each plant a specified rate of return for relatively efficientlevels of production, both as regards capacity utilization and input use.Thus, prices can vary from plant to plant within the same country, Where en-terprises have their own distribution systems and the final price is fixedbelow the ex-factory price, the plants receive payments from the governmentfor the difference, plus fixed distribution and marketing costs. In otherinstances, government marketing agencies buy the output of the plant at theformula-based price. In one case the price paid to the producer is deter-mined on the basis of an estimate of the landed costs of competing imports.

As a proxy for financial viability, an analysis has been undertakenof costs of production of the main sales products of the plants, comparingthese with typical international market prices for those goods, In the anal-ysis, account is also taken of the prices charged for inputs which representthe largest component of production costs and which in only a few instancesreflect financial or marginal costs of production of those items.

Relatively low costs of production are generally found among thoseplants which have been able to achieve adequate levels of output and to meetinput norms, Among the other plants, input prices in two instances have beenfixed at extremely low levels, permitting production costs well below theprices charged to farmers. Plants which have not been able to reaeh the

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specified output levels are recording losses but these can be absorbed insome cases by the corporations of which they are part, since profits arebeing generated in other producing units.

tTnder normal commercial conditions, a plant experiencingdeteriorating financial conditions would make its decision on continuingproduction based on its ability to cover operating costs and the possiblitieswhich may exist to improve its performance, in the latter case weighing costsof these improvements agarinst their benefits. The plants reviewed, primarilyin the public sector, de not operate in such an environment; decisions tocontinue operations may not lie completely with the plant or corporateofficials but may rest with related government agencies. In such easesdecisions may be based upon many factors, not only normal commerctal elementsbut aspects such as employment policy and the additional premium which thegovernment may attach to import savings.

In the context of the re-evaluation of policies for public sectorfertilizer plants which is now being undertaken by a number of the countriescovered in this review, the conditions of many of the plants which have ex-perienced difficulties are being assessed and consideration is being given tomeasures which could be taken to improve performance or to the complete re-placement or closing down of deficient facilities. Included in the measuresin several instances is financial restructuring. In some cases, the Bank isparticipating in these rehabilitation efforts, or is considering that possi-bility, through further loans to the subsector. Moreover, as noted, thesereviews are also focussing on pricing and other sectoral issues which vitallyaffect the financial condition of the enterprises (paras. 7.01-7.08).

At appraisal, the economic justification of a project is largelybased on the expected economic rate of return (En); if this measure of bene-fit fiows is below a certain minimum level, the Bank may not participate inthe investment. At project completion, the re-estimated ERR would reflectany deviations from project appraisal in actual project costs or the time re-quired for completion, as well as any changes in expected demand and economicprices of both outputs and inputs. -The Bank's methodology for estimating theERR uses as a measure of economic prices for output the prices quoted in in-ternational markets for these commodities, with appropriate adjustments ifthe items are to be exported or to compete with imports; inputs are generallypriced at their opportunity costs, also reflecting world market conditions.Forecasts of future prices reflect in the near term estimated demand-supplybalances but in the longer run are based on long-term supply costs.

Prices for fertilizers in international markets have been extremelyunstable since the mid-1960s. The expected substantial increase in demandled to major fertilizer investment programs in a number of countries; but theless than anticipated increase in demand, the lumpiness of the investments,the long gestation periods, and the sharp swings in hydrocarbon (feedstock)prices have resulted in wide fluctuations in the prices of the major fertili-zers, further accentuated by worldwide inflationary (or deflationary) tenden-cic -e In these circumstances, recalculating the ERRs at the various stagesof preparation, appraisal, completion and post-completion, using the prevail-ing prices and price expectations, can lead to significantly different re-sults.

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Additional investigation is thus warranted of the general aspectsof the use of economic prices at the ex post evaluation stage as compared tothe use at ex ante investment decision stage, as -well as of the specificdemand-supply relationships which have determined the movement of fertilizerprices in the last two decades. On the latter point, there is reason tobelieve that the markets for these items (especially sitrogenoue fertilizers)are imperfect, given the intervention of governments in both supply and de-mand; these price movements may not be adequate measures of real supply-de-mand balances and their economic meaning needs to be carefully examined.

The present study focusses on the ability of each project to main-tain its benefits flows , For the purpose of recalculating the ERRs, the PCRestimates have been adjusted by replacing projected data with actual produc-tion and inputs for the years through 1984 and modifying projections for sub-sequent years on the basis of recent operating experience. No adjustment hasbeen made to economic prices of either inputs or outputs used in the PCR;they are beyond the control of each project.

Except for three outstandingly successful projects, the re-esti-mated ERRs are generally lower as compared to the estimates at the completionstage; reflecting the difficulties experienced In reaching expected capacityutilization; nevertheless, most remain in the acceptable range. Two projectsare found to have negative ERRs. At completion, one of these had alreadyencountered lower than acceptable returns due to the long delays ininitiating production and to the substantial cost overrun; the second projectwas the intended expansion of an existing facility where the project designproved to be deficient. The changes in the ERRs for the other projectslargely reflect the longer period required to build up production rates andthe higher leveAl of inputs which was needed due to the technical problems(paras. 7.19-7.37).

Taking into account the reestimated ERRs and the qualitativefactors discussed in this report, the objective of achieving sustainable andacceptable levels of benefit flows from the given investment has been clearlyachieved by seven of the 14 plants reviewed. For five other plants, thatobjective will be reached if technical problems now being analyzed areresolved (three cases) and raw material supply problems are eliminated (twocases). Finally two plants are considered as having failed to reach thatobjective.

Once the economic justification of a project has been established,the major factor under the control of the enterprise which determine thelonger term subtainability of benefit flows from that oivestment istechnology transfer. The levels of technology transfer and the developmentof technological capabilities which have been achieved in these projects areimpressive. The Bank's emphasis on training and use of external consultantsas a means for achieving that objective has been largely justified (paras.8.08 and 8.09).

Increasing recognition is being given by governments to the impactof effective management on the process of technology absorption and in

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ensuring maximum benefit flows, This requires, inter alia, an adequateincentive structure for raising performance as well as appropriateoperational autoaomy. Obtaining the desired level of management performanceis essential from the very initiation of project construction activitiessince this can set a pattern of success which can strongly influencesubsequent operations of the complete plart (paras. 8.21-8.25).

This study has been primarily concerned with the longer-termsustainability of benefit flows from specific investment projects. In thecontext of an unchanging external environment, the longer-term sustainabilityof the enterprises will depend upon the capacity which has been developedwithin each firm to deal with the multitude of technical, financial and otherproblems it will face. However, responsibiltiy for some of the necessarydecisions may not always lie at the enterprise level but may often fallwithin the domain of sector, finance or planning ministries (pars. 8.07).

The plants reviewed represented the first generation of fertilizerprojects supported by the Bank and emphasis was put in project design on mic-roeconomic aspects. As the Bank has increased its activities in this subser-tor in these and other countries, it has deepened it knowledge of the issuesand problems affecting the industry. It has therefore become increasinglyconcerned with basic macroeconomic and sectoral policies which affect theeconomic and financial viability of these projects, as well as their techni-cal performance. Thus, it has helped to widen the scope of these operationsand has entered into policy dialogues supporting basic adjustments in anumber of countries (paras. 8.31 and 8.32).

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SUSTAINABILITY OF PROJECTSREVIEW OF EXPERIENCE IN THE FERTILIZER SUBSECTOR

I. INTRODUCTION

1.01 The present study is the second of a series und, taken by the oper-ations Evaluation Department examining the performance vf Bank-supportedprojects several years after completion. The focus of the analysis is on thesustainability of the flow of project benefits over the- longer run. Thefirst study in this series, covering mostly agricultural projects, was issuedin mid-1985. 1I In addition to the current review of projects in the fer-tilizer subsector, analyses are underway of projects in the power and educa-tion sectors.

1.02 The main concepts and concerns have been set out in the first re-port and may be briefl7 summarized. As defined in that study, the term sus-tainability describes the ability of a project to maintain an acceptablelevel of net flow of benefits throughout its economic life. This is fre-quently expressed in terms of internal economic or financial rates of return(ERR or FRR) on the project investment but, where quantitative measurementscannot be applied, benefits may be qualitatively expressed. Moreover, evenin cases where the measurements are possible, judgements on qualitative fac-tors may be relevant in determining the extent to which project benefits havebeen maintained.

1.03 For projects in the productive sectors, as is the case with lendingto industry, the principal focus is on a measurable set of output targets,reflected in installed capacity, which are achieved at minimum or efficientinput costs. Nevertheless, the rationale for Bank lending in these instancesgoes beyond that objective. Project scope and design will generally includeone or more qualitative aspects such as subsectoral policy, institutionbuilding, export development, transfer of technology and intra- andintersectoral linkages. While each of these elements will contribute to theperformance of the project, the actions associated with them are expected tohave wider influence-on- the industry, the industrial sector and/or theoverall economy. These factors are not- readily quantified althoughjudgements can be made as to impact.

1.04 The methodology of the present study has differed from that adoptedfor the first report. That analysis had been based on a series of impactevaluations of 31 projects which OED had carried out during 1979-85. Theprojects had been reviewed approximately five years after project completionand performance audit and many had been prepared and/or appraised in thelatter half of the 1960s. The projects had been chosen for impact evaluationon the basis of criteria which had not aimed at representative or randomselection but rather had been concerned with specific developmental problemsin the sector and/or the country concerned.

1/ See Sustainability of Projects: First Review of Experience, Report No.5718, dated June 14, 1985.

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1.05 This review 6f industrial projects, on the other hand, has involveda separate investigation of the plants selected for analysis. It focusses on14 fertilizer projects In seven countries (see Table 1) all of which had beenthe subject of performance audits or project completion reports andrepresented the total universe of fertilizer plants financed by the Bank inthe early 1970s which had been operating for at least four jears. 2/

Table 1: FERTILIZER PROJECTS - LIST OF EVALUATION REPORTS

Project Report No. Date of Issue

IndonesiaPUSRI II 1948 03/03/78PUSRI III and IV 5419 01/28/85

TurkeyIGSAS 3037 06/17/80

EgyptTalkha II 4455/a 04/22/83

IndiaGORAKHPUR 1514 03/11/77SINDRI 3759 12/31/81NANGAL 3760 12/31/81IFFCO (Phulpur) 4559 06/15/83COCHIN 3758 12/31/81TROMBAY IV 3998 06/23/82

NexicoFERTIMEX I (El Bajio) 5382/a 12/28/84

BrazilVALEFERTIL 5717/a 06/20/85

PakistanMULTAN 3582 08/18/81

/a Pass-through Project Completion Report.

2/ The Mexican FERTIMEX urea plant included in this study represents onecomponent of a loan which included a second urea plant and a pesticideproject. It was completed earlier than the other units although it wasalso subject to some delays in implementation, and had been operatingfor at least four years following its completion; it therefore met thecriteria for inclusion in this review.

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1.06 During the course of 1985, an OED mission visited 12 of the 14plants in order to obtain the necessary data for the study; information onthe performance of the two plants which could not be visited (both in India)was obtalaed through interviews with senior officials of the corporationsinvolved. Six of the plants were located in India and three were un4ertakenwith one enterprise in Indonesia; the remaining were located in B.razil,Egypt, Mexico, Pakistan and Turkey. Thus, of the six geographic groupingsfor Bank operations, only the two African regions were not covered. Thecountries in which the plants are located are among the largest and mostindustrialized of the Bank's clients.

1.07 The concentration on fertilizer largely reflects the concentrationof direct industrial lending by the Bank for fertilizer production during theearly 1970s. The fact of this concentration has been used for a closeranalysis of technological and industry-specific factors within the overallconcern with sustainability. Comparative analysis across countries helps toidentify the influence of other sector or country-related issues.

1.08 Due to the relative homogeneity of the projects, as well as theneed to have undertaken special post-evaluation reviews to assess the currentsituation of these plants, this report starts with a brief review of sectoralissuas and summary descriptions of project characteristics and of recentproduction performance. This is followed by analyses of the main issuesaffecting sustainability of flows of benefits. The final chapter presentsthe main conclusitas and the lessons learned appropriate for future projectdesign for both project sponsors and the Bank.

t1. SECTORAL BACKGROUND

2.01 Its heavy involvement in the fertilizer subsector at the beginningof the 1970s arose from the Bank's increasing attention at the time to worldfood production and agricultural expansion as a result of the growth possi-'bilities opened up by the development of high-yielding varieties of seeds.It had become apparent that achieving higher agricultural production wasdependent not only upon the use of improved seeds but equally upon complemen-tary investment in irrigation and fertilizer use. Moreover, while productionof the three crop nutrients (nitrogen, phosphorus and potash) was raw-materi-al intensive and was locked into raw material availabilities, there were atthe time a number of feasible production routes which would permit the utili-zation of domestically available resources in many developing countries.This perspective radically changed, however,-with the oil shocks of 1973 and1979 but it has not been reversed by the recent decline in both nominal andreal prices for petroleum.

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2.02 At the same tive, the period was marked by accelerated technologi-cal change within the fertilizer industry. In part this was induced by theexpected large increase in demand for the products but it also reflected thefact that the industry, highly energy-intensive as it was, had to respond tothe energy crisis of the 1970s. Inflationary pressures on equipment costsfor this capital-intensive industry also generated the need for adopting cap-ital-saving process improvements and economies of scale with larger capacityplants.

2.03 Consideration of these factors is important in understanding theperformance of the plants designed and implemented during this period, Thuscapacities of the projects reviewed, their design, implementation and currentlevels of output have been to a great extent determined by the general envi-ronment of expected demand growth and of the technological changes.

2.04 Evaluation of performance must take into account the nature of pro-cess industries: the interaction of design, equipment and local conditions.The characteristic of process industries is a flow of materials or inputswhich are subject to various physical and/or chemical treatment in order toobtain a desired final product. The critical element in efficiently design-ing each process is to take advantage of the physical/chemical laws whichspecify a reaction to any action. In fertilizers, for example, carbondioxide is produced as a consequence of making ammonia from the basichydrocarbon source and is later used in the production of urea.

2.05 The different phases of processing in the chemical and petrochemi--cal industries are individually identifiable and the desired result can beachieved in different ways. In other words, there are a number of possiblesubprocesses which can be integrated to achieve a given final result. Thechoice of subprocesses is dependent on many factors including local condi-tions, familiarity with the given process, the particular specifications ofthe final product, and the characteristics of the raw materials to be used.Non-technical elements are the economic factors, or the prices of the variousinputs.

2.06 Each piece of equipment performs a specific task within the subpro-cess chosen. Some subprocesses require a fixed selection of machinery, butit is often the case that different pieces of equipment can deliver the sameresult. While each piece of equipment has a standard general design, theactual design, particularly in the case of certain key items in the main pro-cess, will be dependent upon its integration into the entire process.

2.07 Under these circumstances, the proper functioning of a given pieceof equipment, its ability to perform its given task, is problematic; thereis, in other words, a breaking-in period during which time the various unitsare actually integrated into one functioning unit (the commissioningperiod). There is, moreover, a further breaking-in period (the learningcurve) which is required for operating personnel to obtain sufficientexperience to be able to operate the equipment at nameplate capacity for a

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reasonable period of time. A critical element in this operating experienceis the ability to cope quickly with what may be termed normal mechanicalfailures, as well as undesirable chemical or physical reactions. In theprocess industries, unanticipated stoppages can be highly disruptive,imposing a considerable burden on operating equipment, and are not quicklyreversible.

2.08 Since the major pieces of equipment are individually designed andbecause their functioning is dependent upon the functioning of the otherunits in the process, inflicted mechanical failures are quite common. Anessential ingredient of the learning curve is the ability to integrate all ofthe functioning units after the idiosyncracies of each piece have becomeapparent to the operators and the necessary correctiona/modifications havebeen completed. This is the fundamental reason why process plants requiretwo to three years of operation before they can be expected to operate atnameplate capacity for sustained periods of time. Prior experience of theprocess licensors and engineering contractors helps to reduce this period.

2.09 Process designers, equipment designetrk and equipment manufacturersare constantly reviewing the performance of both the processes and themachinery involved, even in the case of "proven technology", to determinewhat improvements can be made to ensure taore reliable functioning of theequipment and of the processes over longer periods of time. This may involveusing better, stronger (usually more expensive and sophisticated)- materialsi-n manufacturing critical equipment parts or some simple modification inlocation of a functioning part which may be replaced to improve performance.Material failures represent a major cause of mechanical breakdowns. Wherethere is a proper environment for dialogue, engineering and equipment firmsstand ready to assist their clients in dealing with their operating problems,making recommendations based upon the accumulated experience in other loca-tioas; this also gives them, the equipment and engineering firms, the oppor-tunity to improve their own products.

2.10 The last element in the equation is the influence of local condi-tions. -These factors include climate (temperature, pressure, humidity andatmospheric salinity) and particularly their variations -during the year,chemical and other characteristics of the local raw or intermediate materialsas well as the water supply. The question of quality of the raw materialsused, the consistency in meeting specifications for the particular processchosen and the presence of impurities, may threaten the viability of the pro-cess. Other critical elements may also be the quality of the available elec-tric energy supply which is used in the process.

2.11 The fundamental catalyst to combine properly these elements is thehuman resource. What is needed is the ability to absorb the technical train-ing which is essential for efficient operation and maintenance of the plantand to relate that training to the solution of problems which emerge in theactual operations of each plant. In this process, a necessary condition forsuccessful performance is the presence of a strong management cadre. In manycases, the persistence of technical problems can be attributed to inadequatemanagement or to the lack of -an appropriate incentive structure in which itfunctionsa -

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2.12 The main measure of physical performance which is used in thisanalysis is the extent of utilization of 'nameplate" capacity. In evaluatingthe relative performance of the plants, it must be recognized, however, thatthis concept, particularly for continuous process industries, is notunambiguous. Plant capacities are basically defined in terms of a fixedvolume of -output for the, entire process for a 24-hour period. Thesequantities are the ones generally guaranteed by the basic engineeringcontractors and are specified in the performance contracts which are verifiedby performance tests undertaken before the project sponsors accept "delivery'from the contractors. Annual capacities are then extrapolated usually on thebasis of 330 operating days, the balance of the year being devoted to bothintermittent and a major scheduled maintenance effort or the annual'turnaround". In some instances where, due to the nature of the process,longer plant maintenance periods may be- required, annual capacity iscalculated on the basis of 300 operating days, leaving additional days formaintenance or repairs which are generally not scheduled but which occur asthe need arises.

2.13 In other cases, however, this difference in approach may reflectadditional elements. The first is the operational capacity of the plantstaff, its ability to ensure proper operation (e.g., raw material and energyflows) and to take quick action where problems arise to prevent stoppages.Where critical inputs are not put under the full control of the enterprise(e.g., purchased electric energy or main inputs of the process), ensuredsupply becomes a major issue.3!

2.14 The second element affecting the computation of annual capacity maybe termed 'design philosophy", This aspect may be best appreciated throughthe following simple example. In each stage of the process flow, the rele-vant piece of equipment is required to perform some function; for example, aboiler must provide a specified volume of steam over a given time period. A"tight" design would ensure the provision of that volume with a small margin;a more liberal or 'over-design" would provide a larger margin over the mini-ium. One of the basic reasons for over-design is that the buili-up of dirtor rust ("fouling") in the pipes of the boiler may gradually eliminate theoperating margin but this would not require a shut-down until the regularmaintenance period. Moreover, over-design permits short periods of opera-tions above nameplate capacity so as to offset periods of lower productionrates in order to achieve the desired average level on an annual basis.

2.15 In the case of tight design, fouling may require more periodicshut-downs to clean or replace in order that the equipment can meet the mini-mum operating standard. While theoretically it should be possible to estab-lish a trade-off between the additional costs of the over-designed unit and

3/ See for example the discussion of the Indian fertilizer plants whichgenerally do not have captive power and suffered severely from thecountry's power shortages during this entire period and into the early1980s. In the case of the Mexican plant, main inputs, i.e., ammonia andcarbon dioxide, have been provided by another company in an unstablemanner, causing frequent unexpected shutdowns.

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the costs of the additional shut-downs for the tightly designed units, Infact, only actual operating experience can determine the latter; this -iessentially dependent upon local operating conditions and cannot bedetermined in advance.

2.16 - Moreover, the discipline required by tight design, e.g. quickavailability of spares and of highly specialized maintainance and repair per-sonnel, may be difficult to achieve even in the more industrialized of thedeveloping countries, For example, during the annual turnaround, it is com-mon practice throughout the industry to contract the services of staff of thesuppliers of critical pieces of equipment (normally in the case of thedeveloping countries, expatriates) or of specialized maintainance contractingfirms to inspect and assist in the maintenance process.

2.17 Another aspect of design philosophy which the basic engineeringcontractor may follow is the decision to include stand-by equipment at criti-cal areas or to provide investment spares for major critical equipment inaddition to normal spare inventories. For example, if a plant requires anumber of critical pumps, one or more stand-bys may be installed so that theplant can continue to function even if some should encounter operatingdifficulties.

2.18 Evidence of over-design (presumptive but not conclusive) is thteability to sustain rated capacity over long periods of time. It is, however,also true that such performance is only possible through the development ofhigh operating capability. Evidence of tight design is the inability tomaintain rated capacity for sustained periods of time; again this may not beconclusive since operating capabilities are also critical in determining howclose to rated capacity these plants may be able to reach.

2.19 Projections of capacity utilization, which are used in appraisalreports to calculate both economic and financial viability of fertilizerprojects, are generally in the 90 to 95% range. The industry-wide averagecapacity utilization rate is of the order of 80%, but this includes older andobsolete plants which have been kept in production. A reasonable assumptionis made that the new plants will tend to operate, at least during their"prime" years, at rates above the average. In some of the first projectsappraised by= the Bank, output rates had been projected at 100% of capacityafter the initial operating period but the current practice is to adopt amore conservative approach.

2.20 In summary, the technological characteristics of the fertilizersubsector, a capital intensive process-type industry, must be taken intoaccount in evaluating performance of these plants. Sustainability of projectbenefits will depend heavily upon the extent to which these technical factorshave been captured by the technical staffs and the alertness of plantmanagement to cope with emerging problems.

--

III* REVIEW OF PRODUCTION PERFORMANCE

A.' Project Characteristics

3.01 With one exception, the Bank-supported projects under review repre-sented construction of new production facilities which in most cases wereexpansions of enterprises already producing fertilizers. In the case ofGorakhpur (India), the Bank financed selective investment designed toincrease the capacity of an existing plant. Both the IGSAS (Turkey) andValefertil (Brazil) projects were undertaken with new enterprises which hadbeen specifically organized to undertake those particular projects; however,Valefertil, which was a subsidiary of a government-owned mining company, wastaken over by the government-owned fertilizer holding company during theconstruction of that plant. Basic data on productive capacities and otheroperating characteristics of these projects are contained in Table 2.

3.02 The main nutrient produced by these plants is nitrogenous fertili-zer, primarily through the integrated production of ammonia and urea. PUSRIIII and IV (Indonesia) and Talkha II (Egypt) are similar plants based onnatural gas as a feedstock, using a technology developed during the late1960s. PUSRI II is smaller than these plants but otherwise of the same basicprocess design. The IFFCO (India) and IGSAS plants use naphtha as a feed-stock; the ammonia process has been appropriately modified but the urea tech-nology is of the same recent design. The Gorakhpur plant is also based onnaphtha for ammonia production but its process technology is of an earlierdesign. Nangal and Sindri, both in India, use fuel oil as a feedstock forammonia production with the newer technology for urea production. ThePERTIMEX plant produces urea from purchased ammonia (and associated carbondioxide), using also the recently developed process. In most of the ammo-nia/urea plants, the full amount of the ammonia is converted to urea; in afew instances (e.g., IGSAS, Talkha, Sindri) some of the ammonia produced issold or used by other units within the complex.

3.03 The remaining plants produce phosphatic compounds with the mainprocessing facilities devoted to manufacturing intermediates which are thenmixed to produce the desired final products. Two plants, Cochin II (India)and Valefertil, use conventional technology to produce phosphoric acid bytreating- phosphate rock with sulphuric acid, which is produced by burningsulphur. In the case of Cochin, the final product for sale is a compoundte.tilizer involving the reaction of phosphoric acid with ammonium sulphate;the latter is obtained by mixing some of the sulphuric acid produced in theplant with ammonia produced in a separate unit within the complex (fromCochin I).

3,04 The Valefertil project produces mono-ammonium phosphate (MAP) bythe reaction of phosphoric acid (produced in the plant from phosphate rocksupplied by a captive mine) with purchased ammonia; triple superphosphate(TSP) is also produced by further treating phosphate rock with phosphoric

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TAKE 2: UWC a EERL1 SEW S

Dessiip ' ' Dmelay Ia fIect OktGq.city OapletlO FinRm (Ue miWon)

Plwt Product Feedstock (tpy) (Ibti) (US$ mil1 Apprasal Atual

krilVAt R,IL 11 55.0 294.0 30B.6

Pha. Acid P * 291,000KMAP Amonla 330,OOISP Sphur 340,000

TAU it Urea N. Gas 512,000 31 19.9 173.5 194.7

OAKIRM Urea Nmslwd 314,00D 16 10.0 16.0 2B.0

SXl lcUrea F. 011 300,000 15 91.0 174.5 187.8

NANISL Urea F. Oil 330,000 23 58.0 100.5 140.1

IFD tta Nats 495,000 17 109.0 220.5 246.7

OX IUI 28 20.0 47.2 72.2NPK PlIck 485,000Sulh. Acid Sdlw 330,000F*os. Aeld 115,000-

'-5& IV iWP 355,000 11 50.0 /a 9.7 75.9

R t U Urea N. Gas 380,000 13 35.0 90.8 120D3

PM m I uea N. Gas 570,000 -1 115.0 192.9 178.3

P1? IV UIea N. Gas 570,000 -4 70.0 186.0 -142.5

1QC (El Bajlo) /b 21 13.2 38.3 60.0Urea mwda 330,000

Caton DoiaKdePkistm

J29 35.0 84.4 170.8Aouxa N. Gas 300,000NP lFcP 304,500CAN 450,000

I(XS Urea - Naj 512,00O 16 42.0 130.0 163.7

/a Part of this l1 wan used to finane lqovw as in otbur fertilizer prvo adM units; tbe amomtitully disbrsed for the Trobay plant axmted to U$43.3 millin.

/b Data refer to tlu 1 Baio Ominpit of tIR Project; tle bOtal lOn U S$50 million and tle estteof tlu amnt-f ofank f4so uja for we capocmt is based on its laure In tota fore4p 1Flb

costs.

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acid, While both of these products can be used directly as fertilizers, mostof the output of the plant is actually sold to other mixing plants to producemulti-nutrient compounds. The excess of phosphoric acid produced in theplant which is not required for the production of its intermediates Is alsosold to the mixing plants.

3.05 The disadvantages in the conventional phosphoric acid technologywhich involves sulphuric acid are the uncertain international prices ofsulphur and the large amount of gypsum emerging as a byproduct; 4/ not onlyis there little economic use for this. byproduct but proper disposal maypresent difficult ecological problems. As a consequence there has beenconsiderable interest in developing other technologies for producingphosphate fertilizers which would bypass the production of phosphoric acidusing sulphur.

3.06 The Trombay (India) plant involves production of ammonium nitro-phosphate (ANP) by combining nitric acid (produced from ammonia supplied byanother unit in the complex) with purchased phosphate rock. A similar tech-nology is used in the Multan (Pakistan) plant. The Bank-supported projectincludes a unit for production of ammonia from natural gas, part of which isconverted into nitric acid. Two fertilizer compounds, nitro-phosphate (NP)and calcium ammonium nitrate (CAN), are then produced by applying the acid toimported phosphate rock. Ammonia not needed for acid production is convertedinto urea in a separate unit in the complex.

B. Initiation of Operations and Recent Performance

3.07 Table 3 contains data on production performance of the selectedplants since the initiation of their operations, measured in terms of theircapacity utilization. As examined in the previous chapter, process plantsinherently face a set of technical problems in their initial years of opera-tion which require time for solution and which are reflected in operatingrates during that period well below capacity levels. In the absence of prob-lems not under the control- of the enterprise (e.g., disruption in thesupplies of purchased power and/or raw materials), solutions are generallychosen to the technical problems each plant confronts which will permit it toachieve in the longer run the desired output levels: in other words,sustainable flows of project benefits in accordance with project design andappraisal estimates. In some instances, however, the solutions which havebeen introduced to these problems, as well as the impact of other unforeseenfactors, may lead to a different configuration of project benefits.

3.08 Performance of the three PUSRI plants in Indonesia has beenoutstanding since implementation and initiation of operations and thatperformance has been sustained. Although PUSRI II experienced a slight delayin completion, both PUSRI III and IV were implemented quickly and initiatedoperations earlier than anticipated in the appraisals. Following the

4/ Phosphate rock is primarily calcium phosphate; treating this materialwith sulphuric acid results in calcium sulphate or gypsum and phosphoricacid.

I*Re 3: CAPACf UYfJAfNt SECF FEKlTll;R RMJ, 1978-1984

Capacty grtml Uti-zati o /aPia Product (tpy) 1978 1979 198 1981 19 1983 1984

BrazilVAIW R Pis. Akid 291,000 32 72 76 87 108

MP 3340,000 37 56 42 58 77TSP 340,000 9 43 30 67

TA1 ik Urea 570,000 56 76 67 67

GRA1HPUR Urea 314,000 61 35 41 51 51 56 59

Sim urea 300,000 14 14 72 77 78 78

NAIAL Urea 330,000 44 44 47 81 79 88

bEO : Urea 495,00D 69 71 75 39

OIXiIN U NPK 485,000 21 41 32 37 45 72Sulph. Acid 330,000 46 69 46 60 54 -78Phos. Ac1d 115,000 43 57 40 42 33 37

T14WH LV SW 355,000 55 69 71 64 74 82

PM 11 JUrea 380,00) 90 90 90 88 88 99 88

PM m Urea 570,000 86 87 98 92 99 103 113

PMURIV Urea 570,000 82 86 92 102= 88 105 106-

lEdcoEERTDMEX Urea 330,000 84 63 65 67 31

PakistanMULTWM 300,000 45 57 75 80 81 91

-NP 304,500 40 51 66 70 94 104Can 450,00( 36 49 65 76 79 85

IGSAS Urea 512,000 43 54 84 89 83 84 92

/a Generally refers to calendar yeas. In the case of all Indian projects except TrIboay, refersto fiscal year startirg in April of year indicated; for Egypt fiscal year eaIxg Jnne 30.

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-breaking-in period when operations were below full capacity levels, the staffof the three plants successfully dealt with eterging technical problems andthe projects rapidly achieved high utilization rates. Moreover, the twonewer plants (PUSRI III-and IV) introduced technical modifications which haveresulted in increased effective capacity levels, as well as reductions in in-puts per unit of output. Recent output levels in both of these plants havebeen above the original nameplate capacity.

3.09 Performance of the remaining projects covered in this review hasbeen less satisfactory. -Virtually all the projects experienced substantialdelays in completion as well as in initiation of operations; the relevantPCRs or PPAMs have dealt with those problems in some detail. In the follow-ing discussion of individual plants, references tt those reports are Indica-ted as appropriate. While some plants have subsequently been able to in-crease capacity utilization rates in accordance with appraisal expectations,most have experienced considerable difficulties before output could be raisedto acceptable levels; however, production rates at a small number of plantsremain depressed.

3.10 Performance of the Rgyptian project has been well below designcapacity in recent years. The level reached in the initial year of operationwas in line with appraisal expectations and there have been some shortperiods of high capacity utilization rates, On the average, however, theplant has not yet been able to sustain this performance.

3.11 The two fuel-oil based urea projects in India, Nangal and Sindri,are of similar design and construtction. Both experienced considerable diffi-culties in initial stages of operation which were reflected in iow outputlevels; however, most of the problems have been gradually overcome. Currentoutput rates at Nangal are considered optimum given its tight design and lo-cation; during winter months when climatic conditions are favorable, theplant has achieved full rated capacity of both ammonia and urea. In the caseof Sindri, while considerably improved, capacity utilization remains belowthe level expected at this stage of the plant's development.

3.12 The naphtha-based IFFCO plant which was substantially delayed inimplementation experienced a rapid build up of production after project com-pletion and is currently able to reach nameplate capacity for short periodsof time, with average annual output close to expected. A similar naphtha-based plant at IGSAS experienced a much slower build up of production andonly recently has achieved acceptable capacity use. On the other hand, out-put at the third naphtha-based plant, at Gorakhpur, has been well below ex-pected levels. As noted, this project involved expansion of an existingplant using an older process technology while the others reviewed representedcompletely new production facilities as well as a newer process design. Thecurrent output level at Gorakhpur, although improved as compared to earlieryears, is nevertheless only marginally above the nameplate capacity of theoriginal plant.

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3.13 The FERTIMEX urea plant, dependent upon purchased ammonia, was ableto conclude successfully its acceptance tests at project completion. How-ever, subsequent production levels have been well below capacity. In 1984the plant operated at only one-third of its design; however, some improvementhas been recorded recently.

3.14 As regards the plants producing phosphatic- compounds, theValefertil project experienced a rapid build up of operating capabilityfollowing initiation of production; output rates for the two main interme-diate chemicals (sulphuric and phosphoric acids) have exceeded originaldesign capacity- levels, particularly in the case of the phosphoric' acid.However, output rates of the two fertilizet Intermediates (MAP and TSP)remain well below design capacity.

3.15 Experience with Cochin has been even less salutory with consider-able difficulties being experienced in the first years of operation whichwere reflected in exceptionally low capacity utilization rates. At thepresent time, output rates for the main final product (an NP compound) andone of the main intermediates (sulphuric acid) have increased substantiallyalthough they still remain well below original design levels; output of theintermediate product, phosphoric acid, is less than half of the design level,

3.16 Production levels at the two nitro-phosphate projects, Multin andTrombay, have followed similar paths. During the first years of operation,output rates for the main final products in both cases 'were well belowexpected, and it took some time before acceptable capacity utilization levelswere achieved. At the present time, while Multan has been operating at closeto its nameplate capacity for both its intermediate and final products,Trombay has been able to reach only 75X of design levels for these items.

IV. FACTORS AFFECTING PRODUCTION PERFORMANCE: TRANSFER OF TECHNOLOGY

A. Review of Plant Experience

4.01 The principal factors which have determined production performanceare related to technical aspects: the adequacy of process and equipmentdesign and of measures taken to ensure technology transfer and adaptation.In a few instances, problems of raw material supplies (either inappropriatequality or inadequate quantity) or ernergy supplies (particularly instability)have adversely affected performance. Moreover, because of the sensitivity ofprocess equipment to the quality of raw materials as well unexpectad shut-downs, disruptions in supplies of these inputs in some cases have had adverselonger-term impact on output rates due to the inflicted wear-and-tear onmachinery. Among other factors which have influenced production performanceare unexpected changes in demand for the principal products of these plants,the institutional and policy environment in which they functlon, and theextent of managerial control. The latter is intimately related to technologyabsorption.

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4.02 One of the principal objectives of the entire set of projects underreview was technology transfer and adaptation, Once the economic justifica-tion had been determined, technical issues were dominant in the evaluation ofprospective projects at the time of project appraisal, as well as at comple-tion, and they continue to play a major role in curreat performance. A num-ber of the technical problems currently affecting performanice had emerged atthe time of project completion and the relevant PPAMs/PCRs, as indicatedbelow, had drawn conclusions based on those experiences as guidelines forfuture project design. In other instances, however, the full dimensions ofthese difficulties have only reeently emerged. Moreover, the process oftechnology transfer must be viewed in its dynamic context-the need -to ensurethat a foundation has been established to facilitate the absorption offurther technital change. It is essential that project design be consistentwith and encourage the growth of technological capability.

4.03 The successful performance of the three PUSRI projects is largelyattributed to the entire set of measures taken by the project authorities toachieve the desired transfer of technology. This pattern was establishedwith the preparation of PUSRI Il at the end of the 19609 and its implementa-tion in the early 19709. The authorities organized a strong implementationteam, made extensive use of ixternal consulting firms, organized intensivetraining programs for local personnel and assigned PUSRI staff to the-headoffices of the engineering finms to expedite procurement activities and toparticipate in design engineering, as well as to increase exposure to techno-logical developments.

4.04 In the early 1970s the rapid growth in Indonesian as well as worlddemand for nitrogenous fertilizers and the firming up of knowledge of thecountry's natural gas reserves led to the elaboration of a major fertilizerindustry development program which included requests to the Bank to finance,first, PUSRI III and, within one year, PUSRI TV. The lessons learned in theearlier project were quickly applied to the implementation of these twoprojects. In the light of the expected sectoral development and given itslimited experience in the face of the immediate need to manage effectively asubstantial expansion in productive capacity, PUSRI management embarked on aneven more comprehensive set of programs to mobilize external expertise whileat the same time to train and prepare local personnel to take on technicaland supervisory functions. Among the projects reviewed in this- presentstudy, these projects involved the largest external Input. Moreover, thenumbers of local engineers trained were in excess of actual or foreseeableneeds of the two plants.

4.05 The choice of technology in the case of PUSRI II derived from acomprehensive investigationv undertaken by project authorities with theassistance of their consultants. In selecting plant size, the final decisionwas for a small installation-which at that time was conventional since therehad not yet been sufficient experience available in operating larger sizeplants. This decision was also supported by a conservative market growthforecast. 5 / Thus, by the time of PUSRI III, the Indonesian market for

5/ See PPAR, Report No. 1978, para. 11.

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fertilizers was growing at an increased rate, faster than originallyexpected, and the new plant sizes had had time to be more fully developed.For design engineering for the new larger plant, as well as for PUSRI IV, theproject sponsors proposed the selection of the ftirms which had participatedin PUSRI II and with which the project sponsors had developed strong workingrelations; in these circumstances the Bank accepted this decision.

4.06 During the implementation phases the expatriate input was main-tained at a high level and intensive on-the-job training was given to localcounterparts which was supplemented by formal training. -Moreover, additionalIndonesian nationals were assigned to the home offices of the contractors.These close working relationships were maintained during the initialoperating periods when the normal breaking-in problems occurred andfacilitated quick solutions and ad hoc modifications which characterize sucha perioe The fact that the implementation of PUSRI IV overlapped with thatof PUSR. III, which led to the continuation on-site of many of the externalexpatriate engineers involved in this kind of work, further contributed tothe rapid build up of operations and development of experience of the localstaff. PUSRI operations are now completely under the control of localstaff.

4.07 The main factor constraining output in the Egyptian Talhkaammonia/urea plant has been equipment failure in the ammonia,section which isattributed to inadequate design and which is now being corrected with theassistance of the basic engineering- contractor. These problems arose fromthe choice of the engineering firm to provide design, detailed engineeringand procurement. Although the selected firm was a subsidiary of an experi-enced, well-known engineering company, its particular experience in ammonia/urea production was rather limited at the time. As a consequence, modifica-tions in design had to be introduced in the course of implementation of theproject. In addition, in the subsequent operation of the complex, a keypiece of equipment for ammonia production did not perform up to specificationwhich limited the plant's output. This equipment is now being redesignedwith the help of the original engineering design firm.

4.08 These modifications are expected to result in considerably improvedcapacity utilization rates in the future. However, the plant has alreadysuffered from exceptional wear-and-tear as a result of the inability of theenterprise to undertake necessary periodic overhauls. The plant was notallowed to shut down production in order that output targets set by theauthorities responsible for sectoral planning could be met.

4.09 The difficulties arising from the choice of the engineering firmfor this project, based on a substantially low bid in international competi-tion, were noted in the PCR6/ and the need to evaluate more fully the actualexperience of such firms, to ensure availability of proper expertise, wasstressed. In subsequent industrial projects, the Bank and the projectsponsors have paid particular attention to this aspect.

6/ See PCR, Report No. 4455, para. 9.02.

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4.10 The main problem affecting output at the FERTIMEX urea plant is thesupply of its ammonia feedstock and carbon dioxide. These issues are dia-cussed below. At the same time, the plant has also suffered some technicalproblems In its equipment which are being rectified. Some of these difficul-ties have been solved through using improved materials in the equipment,others through modifications recommended by process licensors or equipmentsuppliers. The interaction of both external and internal factors has made itdifficult to single out precisely the causes of low production since abruptinterruptions in feedstocks lead to excessive wear-and-tear on process equip-ment. During the first half of 1985, the supply of raw materials improvedconsiderably without a commensurate increase in output, indicating thepersistence of operating problems, the full extent of which cannot be deter-mined until the raw material problems are completely eliminated.

4.11 Among the projects reviewed, the most serious technical deficien-cies are found in the Gorakhpur plant in India. In this case, in retrospect,the basic conception of the project financed by the Bank appears to have beeninappropriate.7/ The Bank project represented an expansion of a plant whichoriginally had been built in the mid-1960s; through selective investment invarious additional pieces of equipment, it was expected to increase thecapacity of the existing ammonia/urea complex by about 60% at a unit costwell below that of a new plant of the same capacity. The original plant wasconsidered over-designed with surplus capacity in certain sections; thus byadding some complementary facilities it was expected that additional outputcould be obtained at considerable savings. The results have proven to beunsatisfactory. The original plant had been designed with an approachrequiring spares or stand-by equipment to maintain output during periods ofmaintenance or equipment failure. Thus the expansion project essentiallyconverted stand-by equipment to on-line operations and, as normal operatingproblems arose, there were no stand-by units which could be utilized.

4.12 This aspect was not recognized at the time of audit when inadequateand irregular electric power supply was the main factor interfering with pro-duction; power supply problems have now been largely solved and have littleadverse effect on production runs. Given the advanced age of the originalplant, the authorities are now considering replacing the plant with a newmodern economically-scaled facility.

4.13 The two fuel-oil based plants at Nangal and Sindri are very similarin design and concept and were part of a group of four such plantsconstructed by the Indian Government in the late 1960s and the early 1970s.The discussions between the Bank/IDA and the Indian authorities as regardsthe Nagal project were rather protracted; in particular, thtere were majorissues on process choice, technology selection, and on use of domesticengineering resources. The process proposed by the Indian authorities wasbased on the use of oxygen from the existing electrolysis plant and involvedintegrating various subprocesses for which it had already purchased the

7/ This finding contrasts with the conclusion of the PPAR which consideredthe project a technical success, See PPAR., Report No. 1514, Highlights.

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know-how licenses but which -had not been used previously -in an integratedform. The Bank considered that there could be high economic costs andengineering risks associated with the proposed design and suggested analternative stand-alone scheme. To evaluate the two alternatives and thetechnology selectiou, external consultants were brought in who concluded thatthe proposal of the -Indian authorities was acceptable -both on economic andtechnical grounds. In the meantime, however, the country's severe energysupply problems began to emerge and, since the original proposal involvedcontinued operation of the energy-intensive electrolysis plant, theauthorities decided to adopt the alternative suggested by the Bank based ontechnologies proposed by them.

4.14 According to the PCR,8/ the slow build up of production and thelow capacity utilization in the early years of production reflected in greatpart the limited experience that was available (even globally) In integrationof the various subprocesses, particularly for producing ammonia based on fueloil. Performance, however, has substantially improved in recent years asoperating personnel have developed their capability to cope with emergingproblems (see para. 3.11).

4.15 The Sindri plant was constructed about one year after Nangal andImplementation of the project benefited from that experience. In this case,however, the Indian authorities insisted on a higher proportion of fullylocally made equipment. Because of its concern over the lack of demonstratedcapacity of the local supplier to manufacture some of the more sophisticatedequipment components, the Bank refused to finance certain items.Ievertheless, it did not cancel the portion of the credit which had been setaside for these purposes but permitted these funds to be used for otherpurchases.

4.16 Labor problems and interruptions in the supply of feedstocks andenergy had severe adverse effects on output in the early years of the Sindriplant. The problems, as identified in the PCR, included the difficultiesexperienced in operating a number of the locally produced pieces ofmachinery.9/ These equipment difficulties have persisted and, while thelocal supplier has improved its servicing capabilities, output continues tobe constrained by mechanical breakdowns.

4.17 The IFFCO (Phulpur) plant was originally planned to be similar toNangal, based on fuel oil, but shortly after Board approval the governmentintroduced a major policy change to switch from fuel oil to naphtha as ferti-lizer feedstock. As a result of increases in petroleum refining capacity, aconsiderable amount of naphtha was expected to be available locally whilefuel oil would be in short supply. After reviewing the economic implicationsof this switch, the Bank accepted the government's decision. The switch hada major impacz, however, on implementation of the project, among other things

8/ See PPAR, Report No. 3760, para. 3.03.

9/ See PPAM, Report No. 3759, pp. 7 and 33.

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requiring fresh contracting for design engineering, which resulted inconsiderable delay in project implementation.lI -

4.18 The plant was able to achieve rapid build up of production capacityonce it was able to begin commercial operations. However, in the earlystages, problems were encountered with some of the process equipment and imrprovements were introduced at that stage. More recently, some problems havedeveloped with the quality of the raw materials (see para. 5.04). As aconsequence the IFFCO plant is able to reach from time to time full nameplatecapacity for ammonia and urea production; some mechanical problems, however,remain with one particular equipment item and this is under review by theequipment manufacturer. This experience is considered typical of investmentin large scale capital intensive process industries.

4.19 The Turkish IGSAS project, an ammonia/urea plant also based onnaphtha, similarly experienced some equipment problems. In the first place,the compressor specifically designed for the ammonia plant did not meet theperformance guarantee and it required time to make the necessary modifica-tions to achieve the desired performance. In the second place, the systemfor treating sea water which was based on experience at other locations didnot perform as expected in this specific location and this also required timein order to obtain a solution. Some of these improvements are being financedunder the Bank's fertilizer rationalization and energy-saving loan which wasapproved in 1981. Additional modifications to permit use of refinery gasesto replace some of the naphtha fuel and feedstock and also purge gas recov-ery, in order to improve the economic performance of the plant, are includedin this project and are expected to result in increased output and improvedcapacity utilization.

4.20 Among the plants producing phosphatic fertilizers, Cochin II hasexperienced the most difficulties. At the time of preparation, the Indianauthorities proposed to use a new unproven technology for phosphoric acidproduction which was expected to improve the quality of the by-product (gyp-sum). Given their prior experience in fertilizers and the available domesticengineering capability, the Indian officials believed that the risk in at-tempting this route was minimal. The Bank, on the other hand, felt that therisks were severe given the stage of development of the process; while final-ly agreeing with the Indian approach, the Bank insisted that the plant in-clude necessary facilities for phosphoric acid production under conventionaltechnology should the new technology fail. During the initial stages of con-struction of the plant, it became apparent that the new technology was notdeveloped enough to function properly and this section of the plant was de-ferred to a future date pending further development of the process.

4.21 As regards the conventional phosphoric acid production, productionat the desired concentrate level has not been achieved due to failures in therubber lining of the concentratioa section. The rubber lining of vessels isdone by local technicians on the site and apparently the required know-how

1O/ In addition, there was a delay due to feedstock unavailability. See-PCR Report No. 4559, paras. 3.04 and 3.d5.

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and skills are not yet available. As a consequence, the plant must purchaseadditional concentrated phosphoric acid from sources outtide the plant.Apart from these technical problems, Cochin faced difficulties Jn producingthe original planned product mix due to local climatic conditicas. After aperiod of experimentation the plant has changed to produce a form of compoundfertilizer (20:20:0) which has been found more suitable to these climaticconditions. For this formulation they use ammonium sulphate which they pro-duce by mixing ammonia from Cochin I with the sulphuric acid produced in theplant. As a consequence the phosphoric acid unit, which requires sulphuricacid, is not able to operate at intended capacity. These particular changesin processes result in an imbalanced plant configuration.11/

4.22 The second conventional phosphatic fertilizer plant included inthis review, Valefertil, has, on the other hand, had a more successful recordin technology transfer and adaptation. Market factors (discussed below) haveconstrained output of the two original final sale products (MAP and TSP) butthere has been a substantial increase in effective capacity of the phosphoricacid unit as a result of significant improvements introduced in that processby the plant's staff. These have included modifications in operating andmaintenance procedures as well as use of better materials in some catalystsinvolved. As a consequence, output of phosphoric acid in some months has ex-ceeded nameplate capacity by as mueh as 50%.

4.23 While the plants and final product mix are not completely similar,the problems faced by Trombay (India) and Multan (Pakistan) had a common ele-ment: the integration of two separately proven subprocess technologies forthe production of nitrophosphates which eliminates the use of sulphuric acidto treat the phosphate rock. The design was provided in both cases by thesame engineering firms. This integration, however, had not been tried be-fore. The problems in achieving rated capacity were recognized in the earlystages of operation at both plants but the parties did not agree on the pre-cise causes. The weaknesses in the design and the need to install additionalequipment to achieve the product specifications did not become apparent intilevaluations were made of actual operating experiences and low output ratesover a longer period.

4.24 In 1980 the Bank promoted a meeting between officials of Trombayand the engineering contractor to discuss the situation; Pakistan officialswere also invited to the meeting. The participants analyzed the results ofthe initial operating periods and agreed upon certain technical solutions tothe design deficiencies. The modifications which are required to meet pro-duct specifications have now been introduced with the original design engi-neering firm contributing to the cost of installation in both instances.

4.25 Both plants have now been able to raise output to acceptablelevels. However, the Trombay plant continues to have some process and equip-ment problems which constrain output. The particular subprocess chosen for

11/ These modifications were introduced after project completion and did notrequire either consultation or agreement with the Bank.

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removal of silica and for crystallizing calcium nitrate used in producing theNP compound has not proven satisfactory under the specific local conditionsof Trombay. Plant engineers are now seeking solutions which could involveeither a change in the subprocess or a change in the raw materials used. Theproduction of CAN at Multan has been adversely affected by caking problems inthe finished product, limiting the possibility of accumulating inventoriesduring periods of the year of slack demand.

B. Technology Issues

4.26 A number of technology issues have arisen in the design, prepara-tion and implementation of these projects. As regards the choice of technol-ogy which is essentially in the hands of the borrower, the Bank has generallyreviewed these matters during project preparation stages. Where it has haddoubts concerning the choices, the Bank has engaged in a dialogue with theborrower involving a thorough vetting of the issues, often with inputs fromexternal consultants. As a consequence, certain compromises have beenreached. The usefulness of this approach has been demonstrated in a numberof the cases reviewed. In the consideration of appropriate technology thereis often a choice between conventional techniques and newer developingmethods. Insisting on only conventional processes in a country may have animpact on its future technological development. The relevant issue is there-fore the circumstances under which the risks associated with newer technologyare acceptable. In this calculus, it is necessary to take into account boththe stage of development of the particular borrower and the stage of develop-ment of the technology.

4.27 Among the projects reviewed, issues of new technology or the choiceof larger scale plants as compared to more commonly used sizes arose in a fewinstances. In the case of PUSRI II, the choice of a conventional size plant,at a time when larger size facilities with significant economies of scalewere being constructed in other locales, was justified on the grounds oflimited worldwide experience with the larger installations,- as well asexpected slow growth in demand. On hindsight the decision which wassupported by the Bank was overly conservativell/ and may have reflectedinadequate appreciation of the extensive efforts which the sponsor made toensure proper transfer of technology, as described earlier.

4.28 On the other hand, in choosing a larger size for both PUSRI III andIV, even though somewhat larger installations had been designed for use else-where, the sponsor was able to obtain certain economies in operating theplants side by side. Thus the selection of twin plants has led to savings inoverhead elements such as spare part inventories; moreover, there are severalother similar ammonia/urea projects in Indonesia and further benefits havebeen obtained through pooling arrangements. These considerations in choosingcommon plant sizes are particularly important for developing countries where-lack of quick access to spare parts and components because of the need toimport such items may represent an important operating constraint.

12/ See PPARB, Report No, 1948, p. 3.

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4.29 Similar new process technologies for the production of nitro-phos-phates were involved in the Multan and Trombay plants although, as noted,.there -were differences in final products. A review of the audit memorandasuggests that, while the Indian authorities recognized the risks involved,this was less so in the case of the Pakistan project. The Pakistan authori-ties felt that the Bank should have been able to guide its borrower towardthe proper choice of process and design, verifying whether there had alreadybeen satisfactory operational experience in using the new process inengineering technology.13

4.30 The willingness of the Indian authorities to accept this riskderived from their prior experience- in fertilizer production. Technicalassessments made by the staff at Trombay provided the basis for thediscussions which were held in early 1980 with the engineering design firm,leading to detailed elaboration of necessary modifications. The Bank wasable to play a role in this process, helping to set up the meeting with thecontractor, convincing it of the soundness of the claims. Moreover, at theBank's initiative, officials of the Multan project were also invited to thismeeting, although the actual arrangements for the necessary modifications ofthat plant were not worked out with its technical staff until the followingyear.

4.31 The Multan NP unit is now working satisfactorily and high capacityutilization rates have been achieved. Moreover, local staff have benefitedconsiderably from their experience in coping with these technical problems.Some equipment difficulties, however, remain at Trombay but derive from adifferent set of problems. There are clear advantages from the processchosen and both project authorities consider that the net benefits are nowsubstantial, offsetting the costs arising from low utilization rates in thefirst few years of operation.

4.32 The experience also suggests that, particularly in cases where newtechnologies are involved, it may not be appropriate for the Bank to ceaseits contacts with the project after final project closing. It was only dueto the extensive involvement in the Indian- fertilizer industry during thisentire period that Bank staff were aware of the particular difficulties beingexperienced at Trombay and of the need for technical modifications.

4.33 In the case of Multan, the Bank also had maintained contact withthe plant in connection with the preparation of a second project dealing withunits not involved in the first one. The Bank's lack of direct interventionin helping to resolve the technical problems for the NP process may havestemmed in part from the financial arrangements for that project which re-ceived parallel financing from the Asian Development Bank. Bank funds wereused to finance the ammonia unit while ADB funds were applied to the NPunit. In these circumstances, the Bank apparently felt that it would not

13/ See PPAR, Report No. 3582, p. 14.

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have been appropriate for it to take action relating to that unit.i 4 1 How-ever, the Pakistan officials considered that the division of financingresponsibilities was a matter of convenience for the financing agencies -andthat the total project had been appproved by both. Thus, in their view, theBank did have the responsibility for mobilizing more effectively its exper-tise to assist in this matter.15/

4.34 The experience with Nangal demonstrates the difficulties in makingjudgements concerning technological choices and the length of time which maybe required before firm conclusions about achievements can be drawn. Asnoted, the choic' of process technology had been the source of considerablecontroversy between the Bank and the Indian authorities concerning both theeconomics and engineering aspects of the proposed design and the Bankformulated an alternative. The Bank invited outside consultants to reviewthe proposals who concluded that there were no significant differencesbetween the two. However, by this time, a severe shortage of electric energybegan to emerge in the particular area chosen for the plant location. Sincethe process alternative favored by the Indian authorities was iore energyintensive, It was necessary to redesign the process, in which case the Bank'scontribution was useful. 6/

4.35 Subsequent events have suggested, however, that there were basicflaws in the original implementation scheme put forward by the Indianauthorities. That scheme was incorporated into two projects (Durgapur andCochin I) with which the Bank was not associated. Since their completion inthe early 1970s, these plants have had a continued history of technicalproblems and have not been able to achieve acceptable capacity utilizationrates, the former reaching on average only about 50 percent. It should benoted that, in its consideration of the Nangal project, the Bank hadoriginally suggested that, prior to the adoption of the proposed process, theexperience with its use at the earlier plants should be evaluated.

V. OTHER FACTORS AFFECTING PERFORMANCE

A. Raw Material and Other Input Problems

5.01 Almost all of the plants covered in this review have faced overvarying periods of time major problems in the supply of raw materials or

14/ See PPAR op. cit., Attachment B, The Project Completion Report preparedby the Industry Department, page 46.

15/ See PPAR, op. cit., Attachment A, Comments of the Borrower, page 24.

16/ The Nangal project is one of the cases analyzed in a study preparedunder the supervis. of OED in 1975, entitled Delays in ProjectPreparation, Report ho. 1034, dated February 18, 1976. Based on theevidence at that time, the report was critical of the Bank's actions inthis instance.

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energy inputs, either quantitatively or qualitatively. The PUSRI II projectincluded a component f or building a. natural gas transmission system to pro-vide the basic feedstock for the fertilizer plant. This component experi-enced a long delay in completion and thus adversely affected the operation ofthe complex In its initial years of production. The expansions of the gassystem required to accomodate PUSRI III and IV, not included in those loans,also experienced considerable delays, similarly limiting fertilizer produc-tion, due to slower than expected construction of the necessary pipelines;output from the two plants would have been even higher than nominal capacitybut for the shortages of gas which persisted through 1984.

5.02 The Indian plants have suffered particularly from electric energysupply problems which prevailed in that country during the second half of the1970s and which were identified in several PPAMs/PCRs. At the time of pre-paration of these projects, the policy of the government was not to permitcaptive power generatior and the plants were dependent upon power suppliedfrom local utilities. As already noted, the technical deficiencies of theGorakhpur plant were not observed in the early years of operation as the mainlimitation on capacity utilization at that time arose from interruptions inelectric power supplies. As a result of the difficulties which these plantshave experienced and. the continued inadequacy of power supplies, the govern-ment has modified its policies; existing plants are. permitted to installcaptive power generating facilities while all new plants are required to havethat capability.

5.03 Power difficulties were also indirectly responsible for interrup-tion in feedstock supplies- for a number of Indian plants during the sameperiod. Refineries providing fuel oil or naphtha experienced productionshutdowns and were not able to deliver those items to the fertilizer plants.Moreover, transport bottlenecks, the shortage of rolling stock to handlethese commodities, and the political disturbances affecting refineries inAssam in 1979 and 1980 also contributed to the poor production performance of-several fertilizer units (e.g., Sindri, Phulpur) during the late years of the1970s.

5.04 The Phulpur plant has also suffered from a change in the chemicalcharacteristics of the naphtha which is now being supplied to it. The origi-nal plant specifications were based on naphtha derived from refining petro-leum from Assam. The Bombay High crude which is now being used in Indianrefineries has a different content than that crude. Thus, the chemicalcomposition of the current supply of naphtha is less appropriate for theprocess selected. Consideration is now being given to a project which wouldmodify the naphtha supplied to Phulpur to make it more appropriate to thatplant.

5.05 Several Indian plants with coal-fired boilers (e.g., Nangal, Sindriand Phulpur) have also had to cope with poor quality coal which continues toadversely affect boiler performance. Some plants have had to increase thenumbers and size of boilers to ensure adequate steam generation given thequality of coal they are using.

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5.06 The most serious feedstock problem at the present is being faced bythe Mexican FERTIMEX urea plant. In contrast to other urea plants dealt within this review, this plant is not integrated with an ammonia unit. It de-pends instead on the purchases of ammonia from the nearby producer (PEMEX);it also depends upon this same producer to provide it with carbon dioxidewhich is a by-product of ammonia production but a necessary reacting agentfor urea production. It is this relationship which characterizes modernintegrated ammoniafurea complexes. This arrangement has been dictated by theprevailing official policy which reserves to PEMEX the pro¶uction of all pri-mary petrochemicals (ammonia is so considered) and to PERTIMEX the productionof fertilizers (i.e., urea).

5.07 The PEMEX ammonia unit next to the FERTIMEX plant at Salamanca hasbeen experiencing severe technical problems resulting in sudden breakdownswhich cut off the supply of ammonia and carbon dioxide to the urea plant. Itis estimated that during 1982-84 as much as 90 percent of the loss in outputas compared to full capacity utilization may have been due to the curtailmentin supplies of these inputs. 17/ PEMEX is now undertaking a major overhaulof its installation to correct these technical problems which would permit itto be a stable source of supply for FERTIMEX's inputs and which would permitFERTIMEX to improve substantially its capacity utilization rate. It shouldbe noted that other urea plants operated by FERTIMEX under these samearrangements have not experienced similar supply problems from the adjacentPEMEX ammonia units.

B. Market Development

5.08 In general, market factors have not constrained output in theplants analyzed. Almost all the countries covered in this review are netimporters of fertilizers and changes in local demand are generally reflectedin changes in import volumes, While at times local conditions of transportand distribution may have led to brief periods of unexpected build-up offinished product inventories at the plants, this had limited impact on over-all performance.

5.09 The principal exception to this generalization is the BrazilianValefertil plant. Its location (in the state of Minais Gerais) and productmix were influenced by the expected further expansion of agricultural outputand fertilizer use in the central plains of Brazil, the 'Cerrado". The plantwas also expected to be able to supply fertilizer to the Northeast, having atransport advantage over the traditional plants located in the Sao Paolo areafurther south.

5.10 However, since 1980, the demand for fertilizers in Brazil hasfallen sharply, largely due to major changes in agricultural credit and otherpolicies. In addition, demand for phosphatic fertilizers has been adverselyaffected by the relative growth in output of sugar which uses less of thisparticular nutrient. AS a consequence of reduced demand, Valefertil hascurtailed TSP and MAP production at this complex. But the phosphoric acid

17/ See, however, the discussion of the interrelationship between disrup-tions in feedstock and technical problems (para. 4.10).

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plant bas been operating well above its nameplate capacity (see para. 4.22).The excess of acid output over its own TSP and MAP needs, some 401 of currentproduction, is being sold to mixing plants in the Sao Paolo area which hadpreviously depended upon imports of this acid.

5.11 It should also be noted that the PUSRI plants have recently becomeincreasingly dependent upon exports and the current level of these shipments-Is not sufficient to absorb the surplus (over domestic consumption) now ac-cumulating. At the time the plant was visited, stocks had reached very highlevels. PUSRI has periodically undertaken export efforts although, duringcertain periods, the government has not permitted such shipments due toperceived domestic shortages, Thus, sporadic export efforts have had limitedsuccess and there is need for the authorities to recognize the importance ofdeveloping sustained export marketing strategies.

C. Institutional Environment and Managerial Autonomy

5.12 With the exception of IFFCO in India, all projects covered in thisreview are in the public sector. As a consequence, major issues such as man-agement selection, structure, compensation, and operational autonomy are sub-ject to the policies each of the governments has established to regulate itspublic sector manufacturing enterprises. These policies are critical in de-termining managerial behavior in each plant, in particular in providing in-centives to management to achieve maximum efficiency in production. Inade-quate management performance had been cited in a number of the PPAMs/PCRs ascontributing to delays in project implementation and to difficulties in ini-tiation of operations. Improvements in the institutional and policy environ-ments in those instances were thus considered essential to ensure the long-term viability of the producing units; as noted in para. 2.11, in the absenceof a strong management base, there may be a serious lag in obtainingsolutions to technical and other problems affecting output.

5.13 In the case of PUSRI, the wide operational autonomy provided to en-terprise management and the fundamental support given by government agencieswith overall responsibility for the company have contributed to a significantextent to the impressive performance of these projects. Although major in-vestments are subject to government decisions, the Board of Directors of thePUSRI enterprise, made up of the senior management of the firm, sets the op-erational and production plans including expenditures for on-line improve-ments. In spite of recent staff changes, management continues to demonstratehigh motivation; this reflects in part the system of financial incentives(profit sharing) which is in effect for both managerial and operationalpersonnel, as well as the subtle social pressures to maintain at least ashigh-a performance level as prevailed'previously.

5.14 Major changes have recently been introduced in the framework inwhich public sector enterprises operate in Pakistan and Turkey. In the for-mer case, a comprehensive reform of the overall system for management of pub-lic sector enterprises has been undertaken by the government. Among otherelements, a signaling system has been established providing that productiontargets and performance of these enterprises are reviewed by an independentgroup attached to the Office of the President. The salary system has been

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improved which, combined with the decline in demand from the Middle East forhigh level personnel, has led to sharply reduced turnover at senior levels.Moreover, in the -specific case of the National Fertilizer Corporation whichcontrols the Multan plant, a comprehensive management development program hasbeen developed, partially financed by the Bank under the Fertilizer IndustryRehabilitation Loan approved in 1982.

5.15 In the case of Turkey, the present government has established basicguidelines for public sector enterprise management which are des-igned to pro-mote more efficient operations and has generally reduced political interfer-ence in the operations of these companies. DuriAg the period 1976 through1981, IGS4S experienced considerable instability in its- management and itssenior staff but this situation has now been largely corrected. The Board ofDirectors of the enterprise is composed of representatives of the two share-holders which are the government-owned petroleum companies and has consider-able autonomy in approving the operational program and budgets prepared bythe managing director. Salary levels for the operating staffs of all publicsector enterprises have been fixed independent of the level established forgovernment agencies and remuneration for the senior levels of the individualcorporations (including IGSAS) are established by their boards.

5.16 Considerable improvement in management performance is observedamong the five Indian projects in the public sector as compared to the situa-tions prevailing at project completion. Reflecting in part the normal evolu-tion of managerial skills, this trend also reflects certain structuralchanges which have been introduced by the government. One important step wasthe decentralization of the industry in the mid-1970s, reorganizing the pre-vious holding company which controlled most of the public sector fertilizercompanies into a group of regionally oriented corporations, thus providingmore efficient control spans. Each of the projects supported by the Bank re-presents a producing unit within one of those corporations and generally eachplant has operational autonomy, although limits are placed on such matters ascapital expenditure. The corporations, however, are subject to overall con-trol by- the government which appoints thelr senior. management and controlsinvestment planning. Corporate production targets and budgets, with inputsfrom individual plants, are prepared by the central management of the corpor-ations and are subject to review by the Ministry of Chemicals and Fertili-zers.

5.17 Recently, further attention has been put on measures to increaseincentives for productive efficiency and to improve managerial skills.Experimental systems for production-incentive payments to management andoperating staff have been introduced by the National Fertilizer Company atits plants which includes Nangal. In addition the government has requestedthe Fertilizer Association of India to undertake a su-vey of management re-quirements for the industry with a view to determine long term trainingneeds. Finally, a management performance signaling system, similar to thatprevailing in Pakistan, is being considered for application to all publicsector enterprises.

5.18 The IFFCO plant in India is considered as part of the mixed sec-tor. The government is the majority stock holder with the remaining shares

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held by agricultural cooperatives. However, the cooperatives elect the ma-jority of members to the Board of Directors. Tile Board selects the seniormanagement of the company and, among other responsibilities,, approves theoperating and investment budgets prepared by the managing director. The in-vestment budget, however, must be reconciled with the overall industrial in-vestment swaction system maintained by the government.

5.19 The Bank-supported plants in Mexico and Brazil are both units with-in rather large corporate structures which control a wide variety of fertili-zer and related production facilities. In particular, FERTIMEX in Mexicocomprises 13 petro-chemical and chemical complexes with almost US$1 billionin sales and includes capacity for producing more than 1 million tons offertilizer nutrients. The corporate structure is highly centralized withindividual plants dependent upon headquarters staff for many accounting,technical and service functions. Production targets, as well as marketingstrategy, are established by the corporation with little autonomy for indivi-dual plant management. While a performance bonus system for management levelstaff is applied by FERTIMEX, it is not directly tied to production perfor-mance and efficiency.

5.20 The Valefertil plant in Brazil is now part of a large holdingcompany, Petrofertil. However, this in turn is organized into four operatingcorporations, one of which (Fosfertil) controls the phosphatic fertilizerproducing units including the unit financed by the Bank. While thisstructure provides a more reasonable span of control, there is also limitedoperating autonomy for the individual plants, since production targets andmarketing strategy are determined at the corporate (Fosfertil) level. Whilea profit sharing scheme is in effect for all of these enterprises, Fosfer-tills recent profit levels have not permitted any-distributions. With theincorporation of Valefertil into the government-owned holding company, itsmanagement lost a considerable portion of its autonomy. The dependence ofboth the Valefertil and FERTIMEX units on centralized technical servicestends to reuRove their staffs from contacts within the industry, in particularlimiting their access to technological developments. Where the plants arelocated in relatively remote areas, the sense of isolation is furtherincreased.

5.21 Existing policies severely limit the operational autonomy of themanagement at the Talkha plant in Egypt and do not provide adequate incen-tives for increasing efficiency. Plant operating programs are established bygovernment agencies not directly concerned with the functioning of the plantand there Is limited input from operating personnel of the company in thisprocess. Salary levels for operating and managerial staff are fixed in ac-cordance with overall government standards. The Talkha plant's recent diffi-culties in achieving h.-her output levels were in part associated with theinability of its management to undertake normal annual shut-downs formaintenance (turnaround) which resulted in increased mechanical ';'tures anddisruptions in output. In mid-1985 the plant was able to underta.- -ts firstmajor overhaul in three years which permitted it to deal with the normalmaintenance associated with the turnaround, as well as with the accumulatedwear-and-tear arising from the previous periods of neglect which had beenforced upon the company.

28

D. Labor Supply

5.22 Ia connection with the supply of labor, covering skilled as well asunskilled operating and maintenance personnel, the projects generally report-ed no major difficulties in obtaining adequate numbers of workers who couldbe quickly or, with appropriate training to upgrade basic slills, eventuallyplaced in the-plants. Most of the projects were undertaken by enterpriseswhich were already producing fertilizers so that the cores of the initialstaffs were mainly drawn from those installations. Extensive training pro-grams (described in Chapter VI) were then used to ensure adequate operationalcapability of the initial staffs, to develop the remainder of the requiredworking forces and to help rebuild the staffs of the original plants whichhad been depleted.

5.23 In the case of the newly established enterprises, the core of theoperating (as well as managerial) personnel for IGSAS was selected from thetwo petroleum related companies which were the principal shareholders. Inthe case of Valefertil, originally founded by a mining company, the initialstaff was recruited from other fertilizer-producing companies in the coun-try. In both instances, the selected personnel were then provided withextensive specialized training for their new assignments; in the case ofIGSAS, a number of operating staff were sent abroad for that training.

5.24 Many of the plants are currently characterized by excessive numbersof workers in relation to manpower requirements estimated at appraisal or tothose levels prevailing in similar plants in developed areas. Turnover hasgenerally been very small and, in most cases, existing labor legislation orstrong unions of operating personnel makes it difficult, if not impossible,to discharge redundant staff. Excessive employment is typical of industrialestablishments in the countries concerned, particularly since most of theplants are in the public sector and employment generation had been consideredby the governments as a fundamental objective of industrial investment. Forexample, there appears to have been in some cases a commitment on the part ofthe management of the enterprises to the local authorities to provide ampleemployment opportunities so that many workers, particularly the unskilled who-were involved in construction, have been kept on for the operating stages.,

5.25 Turnover at the level of technicians or engineers has been a prob-lem, however, in a few instances. Instability in managerial, technical andengineering staffs at the time of construction and implementation of theproject was noted in the PPAM in the case of Multan.18/ The migration oflarge numbers of operating and professional personnel to the Middle East, andinadequate salary levels were the main factors but these appear to be nolonger problems as indicated earlier. In the case of IGSAS, political inter-ference led to a major exodus not only of senior management but also of thetop level operational staff during the period of implementation and earlyoperation of the project.

18/ See PPAM, Report No. 3582, paras. 10-12.

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5.26 Side by side with excess labor, there have been some shortages ofhigh-level technical staffs in a few instances (e.g., IGSAS and Valefertil).In these plants, vacancies at those levels are not being filled to complywith current austerity policies of the governments which affect the recruit-ment for public sector enterprises.

5.27 Problems of labor relations, particularly with unions for operatingpersonnel, have on occasion led to curtailment of some production but havegenerally not been highly disruptive. As noted in the PPAM, the Implementa-tion of Cochin suffered serious delays due to these kinds of difficultiesl9/but'they have not carried into the operating period; however, the plant hasrecently had some production shut-downs due to strikes in the local utilitiesand transport systems.

VI, SECTORAL STRATEGY AND THE DEVELOPMENT OF HUMAN RESOURCES

A. Sectoral Strategy: A Comparison of India and Indonesia

6.01 Virtually all of the plants reviewed were components of relativelycomprehensive development strategies formulated by governments for theirfertilizer subsectors. In most of the countries concerned there have beensubsequent additional investments to expand productive capacity, involving inmany cases additional financial support by the Bank. Thus, not only the pro-duct mix but the choice of process technology and of feedstocks, as well asthe approach to human resource development and to the development of localcapacity for producing equipment, all derived from the strategies adopted bythe governments concerned. As a consequence, the ability of each project tomaintain its flow of benefits reflects in great part the appropriateness ofthe strategy upon which its overall design was based and any subsequent modi-fications which may have been introduced. To help identify the major lessonsto be learned, it may be useful to compare the experiences of the Indian andIndonesian projects, given the rather substantial weight in the sectoraldevelopment effort of each country of the projects included in this study andthe opportunity provided to capture the main elements of the strategiesfollowed.

6.02 The review of the Indian projects suggests that, in the light ofthe experience accumulated in the industry at the time of preparation of theprojects analyzed, policy decisions were taken to maximize output from agiven level of capital investment (implying tight design), to maximize theuse of domestic natural -resources for feedstocks and energy, and to limitexpenditures of foreign exchange in the implementation of each project. Thelas_ objective was closely linked to a more general objective of industrialpolicy to promote the development of domestic engineering servicesand of the domestic capability to produce capital goods. It also led toattempts to incorporate subprocess technologies, for which license know-howhad already been obtained, into plant design in some circumstances in

19/ See PPAR, Report No. 3758, pares. 3.12 and 3.14.

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combinations which had not been attempted previously. Implicitly assumed insuch a strategy were the adequacy of supporting infrastructure and the accessof domestic engineering services to latest technological developments. Itfurther required high performance by technical and operating staff who wouldlearn "by putting their hands in the fire." It is important to note thatthis strategy was not unique to the fertilizer industry but more or lesstypified the overall approach of the Indian authorities at the time toindustrial development.

6.03 It is beyond the scope of this study to determine whether theactual benefits of this strategy exceeded the costs, given the delays in iii-tiating output and the long periods during which these plants operated belowtheir expected capacities. In the first place, the transport and energy sup-ply bottlenecks which had severe impact on the Indian economy during the late1970s, and to some extent persist, had similar negative effects on the opera-tion of these plants. Moreover, domestic resources which plants were forcedto use, particularly prior to the discovery of natural gas, were not fullyappropriate to the processes selected, leading to operational difficulties,and a few of these problems also continue at the present time, especially inthe case of coal.

6.04 On the other hand, Tit is clear that learning to cope with a multi-tude of operational as well as design problems led to the formation of ahighly skilled cadre of technical and operational staff which currently pro-vides the basis for the rapid expansion of the subsector. There has alsobeen a marked upgrading of capability to produce highly specialized equip-ment, although slow recognition of the concomitant necessity to provideafter-sales servicing. Furthermore, several engineering firms have beenestablished in India since rapid expansion of the subsector has created num-erous opportunities to use these services. While many working arrangementson specific process or design matters have been negotiated with foreignfirms, particularly in connection with the new modern plants under construc-tion, there is need to strengthen interchange with industry worldwide toensure that the constant evolution of technology is fully captured.

6.05 With the recent emergence of natural gas resources as the nitroge-nous fertilizer feedstock, and taking into account the prior experiences,there has been a marked change in the country's fertilizer development strat-egy. In the first place, natural gas represents a much more efficient feed-stock and the magnitude of resources available permits construction of plantsof much larger economic size than was previously the case. At the same time,the design philosophy has been modified. As detailed in the Staff AppraisalReport for the recently approved Madnya Pradesh Fertilizer Project,20/ amore flexible project design has been accepted involving additional designmargins in critical areas so that new ammonia/urea plants will be able toachieve higher levels of stable average operations than was the casepreviously. Moreover, a more flexible approach has been taken to captiveenergy generation, as well as to the use of natural gas as a fuel to replacepoor quality domestic coal.

20/ See Report No. 4657-IN, dated April 18, 1984, page 32.

3'-

6.06 In the case of Indonesia, the sectoral development strategyfollowed a very different path. In the first place, from the very beginningthe relatively abundant supply of natural gas, which had already emerged as apreferred feedstock for nitrogenous fertilizer production, encouraged achoice of process which could take advantage of emerging technological devel-opments. While the approach to plant size which was taken at the time ofiUSRI II was overly conservative, the subsequent changes in both the worldand market situations permitted the elaboration of a more ambitious produc-tion program which led to the selection of more efficient larger- scaleplants.

6.07 As regards the development of human resources, there had been lit-tle experience in the country with fertilizer production through the 1960s.An open approach was taken to PUSRI II based on involvement of external advi-sors and the development of close relations between those consultants andproject management, When the decision was taken in 1973 to embark on PUSRIIII in the context of a massive expansion program for the industry,21/ PUSRImanagement approached this task, as noted in the PPAM, with appropriate careand a clear vision- of its own capabilities in relation to the requirementsfor proper growth and the necessary transfer of technology. While relying inthe initial stages on extensive expatriate assistance, a comprehensive humanresource development program was executed simultaneously and, in quick order,local personnel have taken full control of both management and operations ofthe enterprise. Moreover, the plants were implemented rapidly, operationswere initiated ahead of schedule and full capacity utilization rates wereachieved earlier than expected.22/

6.08 PUSRI has now established a subsidiary which is capable of provid-ing engineering services, a Joint venture with a well-known internationalengineering firm. This arrangement permits PUSRI not only to provide theseservices to other Indonesian projects and other countries in the region butalso serves as a vehicle to further capture new developments in technology.These will then be passed on to existing plants for improving their capacityutilization and energy efficiency.

6.09 Thus, the additional cost of the open approach adopted by the Indo-nesian authorities, in terms of the larger expenditures required at the ini-tiation of implementation to cover the costs of consultants as well as of theless tight project design, have at the least been partially offset by thehigh production rates which have characterized performance of these projects.Moreover, while the expenditure involved relatively scarce foreign exchange

21/ Productive capacity for nitrogenous fertilizers, which in 1972 amountedto some 57,000 nutrient tons, was expected to exceed 1 million tons bythe early 1980s, with consideration being given at that time to con-structing at least three other major plants in addition to PUSRI III andIV.

22/ At the risk of some oversimplification, the Indian approach may becharacterized as 'learning by doing" and the Indonesian approach as"learning while doing".

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resources, the high production rates led both to considerable foreign ex-change savings through reduced import levels and, more recently, to foreignexchange earnings through exports.

6.10 At the same time, sufficient domestic capabilities have been devel-oped to meet the operating needs of the expanding industry as well as topermit PUSRI to provide technical assistance both to other plants inIndonesia and to other countries in the region. It should be noted, however,that, given the stage of development of the Indonesian industrial sector, noattempt was made in the context of these projects to link them to thepromotion of local capital goods producing industries. Recently, domesticsuppliers of spare parts and basic industrial machinery-have emerged to meetsome of the needs of these fertilizer plants, as well as of the otherpetroleum-related industries.

B. Human Resource Development

6.11 Human resource development, both for the long-term operation (sus-tainability) of the specific projects as well as for the efficient growth ofthe domestic fertilizer industry, was a principal element in the sectoral de-velopment strategies of the two countries discussed above and was reflectedin the designs of the different projects supported by the Bank. Similarly,build-up of local technical capacity, particularly as regards the operationsof the plants concerned, was a major objective in each of the other projectsincluded in this review and the extent to which that objective was achievedin these cases was also impressive. This is similarly evidenced in thereplacement of expatriate assistance by trained and skilled nationals whomanage and operate these plants.

6.12 As in the cases of India and Indonesia, 'specific programs todevelop indigenous skills required to manage and operate the plants wereincluded in each of the other projects. The various elements undertakendiffered in each instance in accordance with the prior experience availablein the country in the technology involved, as well as other relatedconditions. There were, however, certain common elements, includingfamiliarization courses on, process technology for operating personnel atexternal training centers maintained by processed licensors or at similarplants outside the country; training centers on site for basic operating,maintenance and related skills; and specialized technical training foroperating and maintenance personnel at offsite installations, including thoseprovided by equipment suppliers. In addition to these formal programs,on-the-job training was provided by personnel frota engineering design andequipment-producing firms and by external technical consultants.

6.13 During the periods of construction and prior to beginning of opera-tions, large numbers of supervisory and operating personnel from the variousprojects received training in special centers established by the principaldesign and/or engineering firms in the fertilizer field. This type of train-ing is usually part of the license arrangements but the extent to which itwas used often depended upon the availability of foreign exchange to projectsponsors. Some plant staff were also provided the opportunity to operateplants similar to the ones they were expected to take over, often in develop-ing countries with comparable operating environments.

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6.14 Extensive on-site training centers, capable of meeting needs beyondthat of the plant's concern, have been established at Talkha, financed byother external sources, and at Multan, partially financed -by the Bank's 1982fertilizer rehabilitation loan. The latter represented a major expansion offacilities which had served the needs of the original Multan project. Inthese cases, as well as in a number of other training centers, well organizedprograms which use advanced audio-visual techniques and such - modern - trainingdevices as process simulators have had particularly high pay-of fs in provid-ing basic background for operational staff. In addition, specialized coursesfor management in fields such as accounting and computer techniques havehelped that staff keep abreast of advances in management techniques. As aresult of the relative stability in the work force of these projects, notedin Chapter V, many of the training centers have shifted emphasis in theirprograms from development of basic techniques to upgrading of skills andfamiliarization with new developments.

6.15 As noted earlier, in virtually all instances the projects wereundertaken by enterprises or groups which had had some experience inproduction of the fertilizers concerned. Nevertheless, since the projectsinvolved substantial upgrading of technology, as well as the construction ofplants more sophisticated than previously found in the countries, the Bankconsidered it essential that additional expertise be mobilized in a number ofcritical areas largely through the employment of expatriate advisors; theareas included implementation of the construction through the subsequentoperations of the productive facilities. Use of such consultancy serviceswas thus visualized as a second, indirect, technique for human resourcedevelopment and technology transfer which would supplement the formaltraining programs through on-the-job training of the national counterparts.While in most cases project sponsors and governments accepted the need forexternal advisory inputs (in addition to that linked to licensing andengineering) in the construction phases, there was less acceptance of theneed for such inputs in the operating stages.

6.16 Based upon their own prior experience, the project authorities atPUSRI themselves had opted for high external inputs which carried throughfrom project implementation to the first years of operation of the plants.In the case of IGSAS, because of the timited fertilizer productionexperience, the Bank insisted on comprehensive advisory arrangements;however, given the experience in large scale industrial (petroleum)operations of the enterprises supplying the original senior management, someof this turned out to be redundant.

6.17 Less comprehensive, basically ad hoc, technical consultancy ar-rangements prevailed in a few of the remaining instances with mixed results.These depended upon the development of close working relationships betweenthe consultants and their national counterparts which required, on the onehand, a sense of adaptability by the expatriates and, on the other, an aware-ness of technical complexities by the national counterparts. Non-technicaladvisory services, particularly in the areas of marketing, accounting andmanagement information systems, were also provided with greater acceptance inthose cases,

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6.18 It must also be noted that use of consultants was constrained insome cases by the limited experience prevailing worldwide at that time insome of the technologies involved. Among other elements, necessary expertisewas only available in a few instances from the process designers orengineering firms which might have posed problems of conflict of interest inusing both the consultancy and the licensing arrangements.

6.19 The Bank has continued its support to fertilizer production in mostof these countries and, in a number of instances, the development of localexpertise (in essence the transfer of technology) has been sufficient to en-courage assigning increasing responsibilities in project design and engineer-ing, implementation and operations to those groups or individuals. The abil-ity to implement the second generation of projects is one of the best mea-sures of the success of the efforts for technology transfer.

VII. -THE FLOWS OF FINANCIAL AND ECONOMIC BENEFITS

A. Financial Benefits

7.01 The most common commercial measure of benefit flows from an invest-ment in a productive sector is the financial rate of return. Most of thereviewed projects were units of large operating companies which have consoli-dated balance sheets and income statements. As a consequence, for theseprojects it has not been possible to.calculate separately.financial ratios orrates of return (FRRs).

7.02 Analysis of financial performance for these projects, moreover, mayhave only limited usefulness. In all the countries covered in this review,the governments have fixed the prices at which the fertilizer plants selltheir products. Not only may- the prices vary from plant to plant butgenerally these prices are different from the prices charged to the finalconsumers, that is to the farmers. In addition, prices for the principalinputs are also fixed. The financial conditions of the plants thus largelyreflect the price policies of the government and to a lesser degree theperformance of the plants.

7.03 In many instances official marketlng agencies buy the fertilizersat prices fixed by the governments based on cost-plus formulas which, underrelatively efficient operating conditions, guarantee adequate levels of prof-its in relation to equity. In other cases, the enterprises sell their prod-ucts directly to consumers (or through authorized distributors) at priceswhich have been fixed by the governments generally at relatively low levelsbut the producers will receive payments equal to the difference. between theselling prices and "retention" prices fixed for each plant based on similarcist-plus formulas. While the flows of financial benefits will therefore re-flect the official pricing policy, enterprises may increase their level ofprofits by operating at rates above the bases -used in determining ex-factoryprices in both instances. At the same time, to the extent that the plantsare not able to meet the operating standards used in the calculations ofcost, they will incur losses. In contrast witn virtually all the other

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countries in this review, the policy of the Turkish government at the presenttime is to fix its buying -price for fertilizers on the basis of costs ofimports.

7.04 The issue of the extent to which governments are subsidizing theproduction of fertilizer must be separated from that of the extent to whichthe use of fertilizers at the farm level may be subsidized. Consumption issubsidized in .the economic sense when the governments sell fertilizer belowtheir economic price which under current Bank methodology, is essentially theprice of these items in international markets adjusted for all importcoets;23/ in some cases, it may also be necessary to take into account theadequacy of the prevailing exchange rate as a measure of the "real' exchangerate. The reasons underlying policies which provide subsidy to fertilizerconsumption are beyond the scope of this study and merit separateinvestigation, particularly the extent to which subsidized prices may lead toinappropriate use of these products. Subsidies to producers arise from twoaspects of price policy. The first source is the -difference between theprices actually paid to the producers and their economic prices. The secondsource is the difference between the prices paid by producing firms for theirprincipal inputs and their respective economic prices.

7.05 As a proxy and to determine the extent of financial viability underprevailing price policies, an analysis has been undertaken of costs of prod-uction (Table 4) and the prices the enterprises pay for their inputs. Pricesfor both outputs and inputs are also compared with prevailing internationalmarket prices or some related indicators of those values. These costs mayalso be compared with the sales prices for the finished products shown inTable 5 but it should be noted that in most instances these do not reflecttotal sales revenue since, under the existing policies, plants may receiveadditional payments from the government.'

7.06 Table 4 contains data on average costs of production of the mainproducts of the selected projects and comparable international market pricesfor those items for which quotations are available. Among the urea plants,the low cost producers are the PUSRI plants and FERTIMEX (Bajio). The priceadvantage for PUSRI reflects its high technical efficiency as well as the lowcost of its natural gas supplies. Through 1985, the gas price was set atUS$1 per 1 million BTUs, based on the costs to PERTAMtNA for production andtransmission. This price is scheduled to rise to US$2 in 1986 which wouldraise the cost of producing urea by about US$30 per ton; nevertheless, itscosts of production would still remain at competitive levels. PUSRI's gas issupplied from widely scattered and relatively small fields in the nearbyarea (the Island of Sumatera) which do not justify LNG development so thatthe alternative uses are for industrial or household heating purposes. Itshould be noted that the net-back cost for natural gas24/ used for LNG hasbeen estimated at around US$2 per million BTUs.

23/ This issue is discussed further below.

24/ This is the net value after allowing for the capital costs of theinstallations required for these exports.

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al 4: AVM a )t (F PHEUCrII /a RRI[PhL REM= OFS3DC1U MM PWRIRCS 1979-1984

plant, - - Prt. 1979 1980 1981 1982 1983 94

VA 1ZFMTh Pho. Aeld 405 347 365 231 2D6MP? 340 254 M85 184 154

248 188 174 99 94

TAWUS U 141 121 119 103

-CNAlWRR - Urea 35J 363 359

Simt Ubea 343 327 332

NAt.L Urea 313 349 277 277 263

tEEf) Urea 245 228 239

QOJGNII Ulrea 256 249 274 303 34017:17:17 308 377 456 40728:28:0 361 438 517 504 49318:46:0 422 529 570 592 5182D3:2D:0 363

T cBWI ANP 236 302 325 318 282

P[ EII, ,

PWR m Urea 58 57 46

PWRIIV Urea 53 56 41

PEYrM Urea 73 70 80 40 53 61

Pakistan Ueea 178 170 148 13D 115LTM NP 178 154 153 119 115

CAN 113- 100 81 67 62

IGSAS uea 298 262 278 249 246

Internatial M1rbt Prices lrea 173 222 216 159 135 171(f.o.b. West 8vopft Port) TSP 142 1M 161 138 135 131

DAP 193 222 195 183 184 189

U.S. Spot Preoe lnxmia 135 165 190 154 150(f.o.b. Oif pori) kho. Acld 312 422 378 334 302

/a Data in natioal awremdie supUsi by projects caxwertei t dollars u. anua weragerdwqe rates from 1MF Statistics. See footnote o Table 1 for details Xn fim periodsS ered.

Sourc: Intiernational. Market prices taha from EPO. -U.S. Spot prime fzua Ntrofertil.

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7.07 The low cost for producing urea at the FERTIMEX project reflects theextremely low price charged by PEMEX fo'r its ammonia which is used by thefertilizer plant. During the 1983-1985 period, this ,price, We in theUS$50/ton range; it should be noted -that peso prices for both inputs andoutputs have generally been fixed for intervals of about one year and, sincethere has been a slide in the dollar exchange rate, actual prices in dollarshave varied over'this time period. The ammonia price which is charged toFERTIMEX may be compared with the export price of this product which has beenin the US$160 to US$180/ton range.

7.08 Similarly, the relatively low costs of production for the Talkhaplant is largely a result of the low price for natural gas inputs which wasfixed by the government at the time the plant began operation and which hasnot been changed. This price, EEO.17 per million BTUs, was equivalent tosome US$0.23 in 1980-81; at the current (1985) exchange rate this would beequivalent to US$0.18; Talkha's selling price for urea has also beenunchanged since 1980, EE122.5 per metric ton; in 1980-81 this was equivalentto US$165 and in 1985 to US$132 (see Table 5).

7.09 Among the Indian plants producing urea, Gorakhpur and Sindri haverecorded the highest unit production costs as a result of low capacityutilization and technical inefficiencies. In spite of payments under theretention price scheme used by the Indian government, both plants haveexperienced substantial losses but the corporation which is the nominal ownerof these two plants has not had financial difficulties since the other unitsunder its control have been profitable. It should be noted that both of theplants under review have recently been paying for their inputs (naphtha andfuel oil, respectively) prices slightly below world market prices, aroundUS$200 per toa for naphtha and around US$130 per ton for fuel oil.

7.10 Ia comparison, lower costs have been recorded by IFFCO and Nangal;except during the periods of highly depressed international market prices,these costs appear to be below comparable landed prices of imports, takinginto account the transport and other CIF costs which are'estimated to totalUS$60-65/ton in the case of India. Feedstock prices for these two plants aregenerally in accordance-with international levels, so that the recent goodcost performance reflects the higher levels of capacity utilization and oftechnical efficiency.

7.11 With the recent improvement in capacity utilization, IGSAS has beenable to reduce substantially its costs of production but these remainrelatively high. One factor has been the price the plant pays for naphtha,its principal feedstock, which in 1984-85 was of the order of US$300 per ton;fuel oil used In the boilers was priced at some US$200 per ton. Underprevailing price policy, the refinery producing these products (from imported^crude oil) charges full costs for all its domestic sales. Internationalquotations for naphtha delivered in western European markets (on an f.o,b.basis) at the end-of 1985 were US$230/ton range while for fuel oil these werein the US$140 range. Under the current policy the sales prices for IGSAS donot cover its production cost and the enterprise has experienced substantiallosses during this period (see Table 5).

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Una 5: /miI NM MlxS RXt PN2bWAL Effus cF- ~xiM sP1u.T pai Ia

PlAi Pradtu± 1978 1979 19 1981 192 19 194

VAtERL lIts. Ald 528 562 510 343 36337 349 344 248 300

TSP 247 262 Zs 179 216

TAIIOI&IUrea 165 150 143 132

T Ha

OA[ Urea . 302 310 307

Simt Ura 29D 323 311

NA Ur 266 296 300 299 287

:;( Urea 231 251 248

O qN II Urea 241 272 294 332 34217:17:17 273 373 365 35928:281.0 333 430 495 484 46818:46:0 340 477 576 545 505ZD:.2D.O Q384

TOM IV AN 280 32D 323 318 296

FWM U 103 128 L34 12D

PU1a w Uea 103 128 134 12D

FEU Ure 168 199 13B 103 114

Nl l Urea 308 256 2)4 172 151-- 367 328 297 217 160Ca 213 212 178 134 104

IGMS A ._ ___. S___Urea 253 362 291 256 232

/a Data in rAtioali owv e pces ap by projects cox)Wto dUlars usin amus averap eazbgrates tak from W stattcs; for rpt, es:tot by Bk stff.

7.12 -Among the producers of phosphatic fertilizers, comparisons aredifficult due to the heterogeneous product mix. Valefertil's productioncosts for- its- original sales products (MAP and TSP), 8S well as phosphoricaeid which it is now selling, appear to be in line with internationallyefficient levels. Selling. prices for these items have been set by thegovernment at levels which, at times, have been below those of competingimports.

7.13 In the case of Multan, improved operating performance has permitteda substantial redu-ction in the unit costs of production for the principal NPproduct and these costs currently appear to be in line with internationallycompetitive levels. As regards input prices, phosphate rock is imported andits full cost is reflected in the production costs; on the other hand,domestic natural gas used to produce ammonia, which in turn is an input forNP, is priced at about US$1 per million BTUs.

7.14 Unit costs of production of ANP at Trombay are at present somewhaton the high side reflecting the continued difficulties in achieving highcapacity use, as well as technical problems which have increased theconsumption of inputs. In addition, prices paid for natural gas reflectedcurrent energy costing policy of the Indian government, approximately US$4per million BTUs for gas used as a feedstock and US$3.20 per million BTUs forgas used as fuel.

7.15 In the case of Cochin, as noted, the plant has produced a varietyof products in order to identify a viable product mix. During most of theperiod under review the costs of the particular items the plant was-producingwere on the high side. The plant is now concentrating on a phosphaticfertilizer which appears most -suitable to its conditions and the unit costsofr production of this item, while it remains rather high, is much closer tointernationally competitive levels. The corporation of which this plant isone unit has accumulated considerable losses in spite of the substantialsubsidy under the retention price formula, which has been equivalent in someyears to as much as one-third of its total sales revenues.

7.16 In a market economy, decisions concerning the continued operationof an already established plant which is facing a deteriorating financialsituation would largely be based upon its ability to cover operating costs.At the same time, the enterprise would consider any further measures whichcould be taken to improve its performance; the expected additional costswould be measured against the expected additional benefits. Only a few ofthese plants currently operate in such an environment. Mainly in the publicsector, enterprise managements or the relevant government agencies whichcontrol these plants will make these decisions based on- many factors, notonly normal commercial elements but also matters such as socialconsiderations (the desire to avoid additional employment), prestige and theadditional premium which is attached to import savings.

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7.17 Price policies, affecting inputs and/or outputs, are under reviewin many of the countries with a view generally to liberalize the relevantmarkets so as to permit -their proper -functioning. These countries includeIndia, -Indonesia, Mexilco, Pakistan and Turkey; in some cases these reviewsare being undertaken in the context of macro-economic or sectoral reformswhich involve Bank assistance or in the context of discussions of furtherBank support to the domestic fertilizer industry.

7.18 As regards individual projects which are facing serious financialdifficulties, specific action is under way or being considered in severalinstances. Some of these have been mentioned in the review of technicalperformance where the origins of the problems have been essentially technicalin nature; these iacluded Gorakhpur, Sindri and Cochin. In the case ofIGSAS, in addition to the technical improvements being introduced to permitthat plant to lower its costs (see para. 4.19), the company is considering afinancial restructuring, converting some of its outstanding loans (whichfinanced purchases of feedstock from the petroleum company which is one ofits share holders) to equity.

B. The Economic Rates Af Return

7.19 At appraisal the economic justification of a project is largelybased on the expected economic rate of return (ERR). If it is not possibleto anticipate a minimum level of flow of economic benefits from a proposedproject, the Bank may not agree to participate in Its financing. Theanalysis in the appraisal will also consider, inter alia, the sensitivity ofthe estimated ERR to changes in capital (project-75costs, to delays ininitiating operations and to changes in the economic prices for both inputsand outputs. Consideration of the first two items, which to a great extentdepend upon the expected efficiency of project implementation, may lead toincorporating into the project design some features to ensure properimplementation.

7.20 Since the last item (economic prices) is determined largely byworld market conditions, it is difficult to take measures which could isolatefully a single project from unforeseen changes. Recent experience in thisarea has basically focused attention in the appraisal analysis on refiningforecasting techniques to permit fuller appreciation of the issues involved.It is nevertheless true that during periods of great uncertainty over prices(basically uncertainty over demand levels) for any particular item, the Bankwould tend to refrain from considering investment in producing thatcommodity.25/

251 In the case of nitrogenous fertilizers, the Bank has recently financedplants in India in spite of the present uncertainty over the market forthese items and current low prices. In part, these investments havebeen justified by the conviction that long-term supply costs are morelikely to determine world market prices in the future (when the plantsare ready to initiate production) than is presently the case. Moreover,the projects are likely to provide substantial foreign exchange savings,given the limited possibilities which apparently exist for similarforeign exchange savings in that country.

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7.21 - The recalculation of the ERR at project completion provides anopportunity to re-assesss the assumptions of the appraisal, in particular asregards project costs and speed- in Initiating and maintaining operations.Similarly, there is the opportunity to evaluate the impact of any changes inbasic economic parameters as reflected in the actual economic prices of theinputs and outputs as well as changes in their expected future values. Atthe same time, the future path of production which is used in the estimatesprepared at that particular time must still be extrapolated; for industrialactivities which are subject to long learning curves (see Chapter II), thtsextrapolation hasically reflects the judgement of the project authorities andthe Bank staff on the length of that curve in each case. The extrapolationwill also reflect the judgements which are made at project completion of thesoundness of the technical processes which have been chosen based on thelimited experience in -peration at that time.

7.22 The re-estimation of ERRs at completion is one element in theaudit process to determine the success or failure of the projects. Among theprojects reviewed in this report, had there been instances where therecalculated ERRs were highly adverse, major rehabilitation efforts wouldhave been required at the time of completion. None of the reviewed projectsdemonstrated such negative aspects at project completion (see Table 6),although the subsequent review undertaken for this study has indicated thatthe Gorakhpur project was seriously deficient.

7.23 The purpose of these special studies on sustainability is to pro-vide further insights into the actual flows of benefits from the projects,and therefore it is necessary to verify the assumptions which were made atproject completion concerning production trends, as well as to analyze thefactors which have contributed to these developments. The calculation of theERR at this stage involves replacing the projected flows of costs andbenefits by the actual and takes into account any additional expenditures bythe enterprise which have been required to deal with technical deficiencieswhich may have emerged during this period.

7.24 The Bank's methodology for ERR estimates requires the use of pricesquoted-in international markets for these commodities, in each case adjustedCIF for output which is for domestic use but FOB for any portion exported.The actual price quotations reflect prevailing demand and supply balances inworld markets at that given time. The present practice of the Bank, whichhas been undergoing considerable refinement in recent years, is to provideshort-term price forecasts which reflect for the near-term expected changesin supply-demand relationships; longer-term price forecasts, however, arebased on long-te)iu supply costs. Because of the lengthy gestation period forfertilizer projects, the near-term may extend as much as five y-ars. For ex-ample, the Bank's recently published projections for fertilizer prices for1990 are based on expected supply-demand balances, but for 1995 they reflectthe long-term costs of production.

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7.25 Prices for fertilizers in international markets have been extremelyunstable since mid-1965 reflecting the lumpiness of investment in productiveunits, the long gestation periods and large fertilizer investment programs ina number of countries, and the sharp swings in prices for the hydrocarbonswhich are used as feedstocks resulting from the two oil shocks of the 1970'sand the most recent period of "oil glut." Graph I provides an indication ofthis variability for urea and DAP for both nomlnal and constant prices; thelatter is estimated by using as a measure of world inflation the Bank's indexfor the unit values of manufactured exports from developed to developingcountries.

7.26 Given this instability, estimating ERRs for any project calculatedat the different stages of preparation, appraisal, implementation and comple-tion can lead to significantly different results. Most of the projectsreviewed in this study were undertaken in the 1970s and experienced sharpcost overruns, substantial delays in initiating operations and slow buildupof capacity utilization; all of these factors would normally have adverselyaffected the ERRs. While the re-estimated ERRs at the time of completionwere generally lower than at appraisal (see Table 6), the rates remained atacceptable levels due largely to the substantial favorable movement in finalproduct prices as compared to the prices expected at appraisal.

7.27 To illustrate the differences between actual and forecasted prices,Graph II presents a comparison of actual (current) nominal price movementsfor urea (July 1985) with nominal price projections made at different times.The line labelled 1974 represents the forecasts of nominal prices prepared inmid-1974. At that time fertilizer prices had reached record high levels butwere expected to decline through 1979 when they would begin to increase oncemore in accordance with expected long-term costs. However, as shown in theline labelled "current", prices actually picked up again after 1978 and werewell above those forecast levels until 1981. The line in the graph labelled1980 represents a forecast of urea prices prepared early that year followingthe second sharp increase in oil prices. The forecasted prices in this casewere well above actual after 1981. Similarly, the line labelled 1978indicates the trend of prices projected in that year; while below the levelof the 1980 forecast, the trend is well above the actual. Part of the wideamplitude in projections of nominal prices made at different times can beattributed to the difficulties in projecting inflationary trends. This canbe seen in Graph III which presents the comparable projections in constantprices (with different bases). The variations are less pronounced but thegraph illustrates the changes in expectations about the future whichcharacterized the period.

7.28 These considerations raise questions which require additional in-vestigation, both on the more general aspects of the use of economic pricesat the ex post evaluation stage as compared to the use at the ex ante invest-ment decision stage for projects in the productive sectors, as well as on thespecific supply-demand relationships which have determined the movement ofinternational fertilizer prices over the last 15 years. On the latter point,the current depressed levels of prices for these items would suggest thefailure of world demand to expand as much as expected at the time when the

GRAPH I: Current and Constant Prices for Fertilizers(in dollars per metric ton)

Urea Current * Diammonium nPhosphat (DAP) ** Curront1983 Constant L1 -983 Constant t$A

600

400

300

200L_

100~~~~~~~~~~~~~~~~~~~~~I

300a~~~. .f~..\

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983

Source: EPD

* F.0.9. Europe, baggedf.O.P. US Gulf Ports

GRAPH II: PROJECTIONS OF UREA PRICES(in current dollars)

600 ..

.00 1980 PROJECTIONS

1982 PROJECTIONS

400 - 1978 PROJECTIONS

. . ,/ /~~- . ,300 ACTUAL CURRENT

"00, .0 ". o -9 -1974 PROJECnONS

200

PROJECTIONclDATED

O- ' ' s s 1 .-- ,_---, " _ ~~~JULY 19850- 1976 * 1978 * 1980 * 1982 1984 1986 4~JLY 19851974 476 1978 198 1912 1984 1986 1988 1990

GRAPH III: PROJECTIONS OF UREA PRICES(in current dollars)

US DOLLARS PER METRIC TON350-

300 X 12 ON 1981 Me)C)

200~~~~~~~~~~~~~~~00

250 0 __,

200~ ~ ~ ~ ~~~~~~~~~~-18 \ \N 19783 PIES)97 RI

100 . _--- 1974 oN 1aW I)

200-~** ,.1 wo(N197P

150

1974 1976 17 1980 1982 1984 1986 1988 1"90 19 1994

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investment decisions were made to increase productive capacity. Neverthe-less, there is reason to believe that these markets, particularly for nitzro-genous fertilizers (urea), are imperfect, given the major roles that govern-ments play in both export sales (supply) and import purchases (demand), aswell as the small share of toeal urea production that enters internationaltrade. The great variability in price movements suggests that these trendsare not adequate measures of supply-demand imbalances and their economicmeaning must be carefully examined. 6 / In particular, it would be useful toanalyze the nature of cyclical patterns and the extent to Which these shouldbe taken into account in preparing price forecasts for use in estimatingERRs.

7.29 On the first point, relating to the calculations of ERRs at differ-ent stages of analysis, the assumption adopted for this study (which focuseson the ability of each project to maintain its benefit flows) is that thecalculation of the ERR at appraisal/completion was based upon the best avail-able projection of international market prices and of the future balancebetween supply and demand. Thus the investment decisions at that time werefully justified.

7.30 Reestimated ERRs for the projects for which it was possible toobtain the required detailed data are shown in Table 6.27/ Using the basicapproach indicated above, the PCR estimates have been adjusted by replacingthe projected data with actual production and inputs for the years through1984. For subsequent years, projections of those variables have been made onthe basis of recent operating experience. No adjustments have been made toeconomic prices of either outputs or inputs.

7.31 The excellent performance of the PUSRI projects is reflected in thecontinued high levels of the reestimated ERRs recorded for those plants. Forthe other projects, the reestimated ERRs have been found to be below thelevels anticipated at project completion but, in most instances, remain inthe acceptable range.

7.32 In the case of Valefertil, the reduction, due to current low outputof the products originally expected to be sold, would have been more seriousbut for the increase in effective capacity to produce phosphoric acid and themarketability of that product. The adjustment required by the enterprise tomeet changing market conditions has thus resulted in a change in theconfiguration of the flow of benefits without significant deterioration.

26/ Substantial price instability is, in fact, a characteristic of the in-ternational markets for many basic products, the production of which isheavily capital-intensive, subject to economies of scale, with long in-vestment gestation periods, and where trade is a small proportion ofproduction.

27/ The calculation of the ERRs for Nangal and Trombay at both appraisal andcompletion included estimates of benefits from other elements in eachproject; comparable data are not available.

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Table 6: Comparison of E,stimates of Economic Rate of Return /a( ..

CurrentProject Appraisal Completion Return

BrasilVALEPERTIL 22 17 15

EgyptTALKHk 19 19 15

IndiaGORAKHPUR 19 19 Neg.SINDRI 16 5 -2IFFCO (Phulpur) 16 11 8COCHIN II 14 14 9

IndonesiaPUSR II 14 25 25PUSRI III 20 32 32PUSRI IV 29 41 42

MexicoFERTIMEX (El Bajio1J 24 19

PakistanMULTAN 34 20 19

TurkeyIGSAS 23 14 11

/a The calculation of the ERRs for Nangal and Trombay at both appraisal andcompletion included estimates of benefits from other elements in eachproject; comparable data are not available.

7.33 Lower reestimated ERRs for the remaining projects reflect theslower than expected build-up in utilization of capacity due to technicalproblems which have now been largely overcome (IGSAS, Multan, IFFCO). In thecase of FERTIMEX the difficulties in obtaining adequate supplies of inputshave caused a reduction, but this is expected to be corrected. Furtherimprovement in raw material supplies are also assumed in the case of IFFCO(see para. 5.04). In the case of Ghorakhpur, as noted in Chapter III, recentproduction levels have been either below or marginally above the nameplatecapacity of the original plant. The additional investment has not led to ameasurable increase in output and consequently the ERR for the expansion isnegative.

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7.34 Under current operating conditions, the reestimated ERR for Sindriis also slightly negative. This reflects the major difficulties experiencedin initiating operations, due to problems in raw material supplies andmechanical breakdowns, as well as a substantial capital cost overrun; atcompletion, the reestimated ERR had fallen below acceptable levels.Equipment failures also led to poor operating efficiency, particularly forammonia where the major difficulties were encountered. Feedstock consumptionper unit of ammonia was 20% to 50% above the design norms; since 1982,however, this has been substantially reduced. On the other hand, fuel inputsper unit of ammonia and per unit of urea have been and continue to be abovethe design norms, reflecting boiler problems partly due to the poor qualityof coal.

7.35 The reduced ERR for Cochin reflects the technical problemsdescribed earlier (see para. 4.21), as well as the implementationdifficulties discussed in the PPAR. As noted in that report, the project'sreestimated positive ERR was largely due to the fact that its capital costs,even if revalued, were considerably lower than for a similar plantconstructed under current conditions. £8/ It was also noted, however, thatunder current conditions, it would not be economic to build a similar plantdependent upon importing both rock phosphate and sulphur.

7.36 In the case of Talkha, the ERR has also been somewbat reduced dueto low capacity utilization but it remains at a favorable level. Thisassumes, however, that the technical improvements now being introduced (seepara. 4.08) will permit raising output to the 90% capacity level in theimmediate future. In addition, no adjustment has been made in therecalculated ERR for any changes in input efficiency due to the lack ofdata. It is likely that the main equipment problem encountered (in theprimary reformer of the ammonia plant) has resulted in a lower operatingefficiency as compared to design specifications.

7.37 The appropriateness of ERR as an adequate measure of the flow ofbenefits from a project was discussed in the first report on sustainability;among other things, it was noted that the measurement is biased towardsperformance in the early years of operation of a project and, thus, tends tominimize the contribution from longer term operations. For capital intensiveindustrial projects with long gestation periods this issue is particularlycritical since the calculus results in large negative flows in the firstthree to five years, due to the concentration of capital expenditure at thattime, while revenues do not begin to accrue until the third or fourth year.As a consequence, net -positive benefit flows may not be recorded until thefourth or subsequent years.

28/ See Report No. 3758, p. 45.

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VIII. PRINCIPAL FINDINGS AND LESSONS TO BE LEARNED

A. Overall Assessment

8.01 In summary, taking into account the reestimated ERRs and thequalitative factors discussed in this report, the objective of achievingsustainable and acceptable levels of benefit flow has been clearly achievedby seven of the 14 plants reviewed.. For five other plants, that objectivewill be reached if technical problems now being analyzed are resolved (threecases) and raw material supply problems are eliminated (two cases). Finallytwo plants are considered as having failed to reach that objective.

8.02 The basic goal of sustainable benefit flows has been clearlyachieved in the case of the three PUSRI plants while in the cases of IGSAS,Multan and Nangal, that goal has been met after overcoming initial technicalproblems. For Valefertil, the objective has also been reached but with adifferent configuration of benefits as compared to what was expected atappraisal.

8.03 Raising the flow of benefits to more acceptable and sustainablelevels will require elimination of the remaining process problems at Trombayand of the persistent equipment problems restraining capacity use at Sindri;however, in the latter case, even with such improvements the ERR wouldcontinue to be in a low range due to the long delay in completion and highcost overruns. Similarly, in the case of Talkha, providing an adequateflow of benefits will require eliminating equipment problems remaining fromthe original deficiencies in design, as well as overcoming the impact of theexcessive wear and tear which has been inflicted on the plant.

8.04 Solutions to raw material problems are required to achieve higherand sustainable benefit flows at IFFCO and FERTIMEX (Bajio). In the formercase, the changed composition of its naphtha feedstock will require amodification either at the refinery which is the source or at the ammoniaproducing plant. For the Mexican plant a secure and stable feedstock supplyls required; there is also the possibility of inflicted mechanical problemswhich will only be apparent once the input difficulties are overcome.

8.05 The situation at Cochin needs to be re-assessed in the light of re-visions which have been introduced in its product mix, the equipment problemswhich have emerged and market developments. Finally, the Gorakhpur projecthas proven to be deficient and a major rehabilitation (including replacement)is now being considered by the Government.

8.06 It should be noted that many of the actions required to ensure sus-tainability are under the control of the enterprises concerned. It is there-fore of critical importance that an appropriate management structure be main-tained to provide necessary incentives for management to achieve these goals.

8.07 The main concern of this study has been sustainability in the con-text of the limited economic lives of the investments undertaken: in otherwords the benefit flows -arising from the original investment decisions and

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the operational requirements to achieve that static goal. In practice, how-ever, these plants face dynamic situations and there will be many moments atwhich further decisions will have to be made. These relate to improving per-formance, including such aspects as incorporating technological improvements,modifying product mix, full replacement of process equipment and debottle-necking improvements, or, at the other extreme, closing down the plant in thelight of emerging cost-price and demand developments and/or replacement witha more up-to-date installation. In the context of an unchanging externalenvironment, the longer-term sustainability of these enterprises (in otherwords,-their ability to survive) will depend upon the capacity which has beendeveloped within each entity to identify the- problems it faces, to seeksolutions and to implement the measures required. However, responsibilityfor these decisions will not always lie with the corporate entities but mayoften fall within the domain of government sectoral, planning or financeministries.

B. Technology Transfer

8.08 The main finding of this study which has dealt with a capitalintensive process industry is that adequate technology transfer is the majorelement under the control of the enterprise in determining its longer termsustainability once the investment has been economically justified. Moreover,this is an area in which the Bank can play a major role and, in reviewingthese experiences, special attention will be given to that role. Among thefactors which are not under the control of the enterprise, price policy(related to financial viability) and ensured access to a stable supply of rawmaterial and energy inputs appear to be the most important.

8.09 The objective of adequate technology transfer has been largely metin the projects reviewed. The levels of technical capabitilies of theproject management and operating staffs, which were already relativelyadvanced in the countries concerned, have been significantly raised by theefforts made to implement the construction of and to operate the plantsinvolved. In general the attention to technological aspects has beensalutory. These advances can be seen not only in the replacement ofexpatriate assistance by trained and skilled- nationals who have taken overcompletely the operation of the projects, but also in the increasing rolesfor local institutions and nationals in the development of the secondgeneration of projects. The Bank has assisted in accelerating this processby encouraging the use of local firms in these new projects, at the same timein many instances helping to arrange close ties with more experienced firmsin developed countries.

8.10 As discussed in Chapter V, there has been widespread recognition ofthe need to formulate sound training programs for managerial, operating andmaintenance personnel to develop these national capabilities. Projectauthorities or national institutions generally have put major emphasis onthis aapect and devoted considerable time and energy to establishingappropriate facilities, in many cases using some proceeds from the Bank loansor from other externAl sources. Properly staffed and using a full array ofmodern techniques, the programs have had high pay-offs. -

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8.1-1 Less well received was the emphasis on the use of externalconsultants in ensuring adequate technology transfer at the operating levelas well as for management development. The recognition that use of suchresources is complementary to the use of training programs is not aswidespread as the acceptance of training. The issue in many countries isfrankly a sensitive one, touching on matters of national pride. In someinstances, however, local technical staff are more open to this form ofassistance than are the officials in ministries or agencies. Failure tooperate these production facilities at their potential can result insubstantial real losses, either depriving the agricultural sector of keyinputs or increasing the import bill to make up the shortfall in availablesupply. Thus any additional costs which may arise from prudent use ofexternal consultants to supplement local staff may be well justified by thehigher level of output obtained.

8.12 The shortage of management and technical skills has often beencited as one of the main characteristics of developing countries and as amajor consideration in promoting technology transfer. In urging the use ofexternal consultants at operating stages, the Bank has taken as a fundamentalprinciple the fact that these shortages do not reflect a lack of competenceor ability to undertake such responsibilities but rather that there has notbeen ample opportunity to develop the necessary skills; the process of devel-opment is thus seen as an evolutionary one in which exposure and experiencelead to the emergence of the required skilled personnel within the localenvironment.

8.13 At the same time, as a result of these experiences, the Bank hasalso developed a better understanding of the problems involved, building upits knowledge of the sector as well as its knowledge of the sectoralinstitutions in the borrowing countries. The effective use of externalconsultants requires a special chemistry -among the participants. The Bankmust therefore not only be supportive but flexible in the selection of thatassistance and in helping to establish proper relations among the partiesand, where deemed appropriate, in the replacement of specific externaladvisors. Where the Bank has not reacted -constructively to perceiveddifficulties among national counterparts and external consultants,particularly in those cases in which it has insisted upon consultingarrangements, not only may the operation of the project suffer but theexperience can prejudice the future development of Bank-client relationships.

8.14 Nevertheless, the necessary condition for the success of this ap-proach remains the recognition by project sponsors and by the governmentconcerned of the rationale for consultant assistance and the willingness toobtain consequent benefits.

8.15 While progress in technology transfer has been notable in a numberof Instances, there has been less attention to other elements which enterinto industrial discipline. These factors are obviously not amenable tomeasurement and conclusions concerning them largely reflect subjectiveobservations during the plant visits. Nevertheless, proper plant maintenanceand safety procedures do not appear to have been fully appreciated in somecases. There is full recognition of the need both for periodic maintenance,

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in particular the annual turnaround, and for incorporating safety elements inoperating equipment and appropriate measures have been generally taken inboth of these areas. There are, however, a few instances of inadequateattention to maintenance and safety standards in the context of normal dailyoperating practices.

8.16 The evidence available from other countries which have had longexperience in process industries suggests that more careful attention tothese aspects can have significant positive impact on overall productiveefficiency and many newly industrializing countries, recognizing thepotential benefits, have made major efforts at instilling these elements ofindustrial discipline at all staffing levels. A number of the plantsreviewed in this study reflected these kinds of efforts. However, in oneplant visited, the roads within the plant complex were in such poor shapethat, if it were necessary to move rapidly fire trucks or other emergencyvehicles, it might not have been possible to do so.

8.17 Several measures may be suggested in order to increase attention tomaintenance procedures under normal operating conditions. Exchange of visitsto plants in similar newly-industrializing countries, with similar operatingenvironments, which is desirable for other reasons explored elsewhere in thisreport, may help bring out the differences in the experience and focusattention on these aspects. Another measure which has been used successfullyin a number of countries could be the requirement that, as part of theirnormal training, all technical and supervisory staff spend some timeperforming the different operating tasks to increase their awareness of theproblems associated with maintenance under actual operating conditions.

8.18 Because of the importance of technology transfer in the successfulimplementation and operation of an industrial project, the Bank has properlyemphasized these aspects in project preparation and appraisal and hasattempted to ensure that project design captures all the elements involved.Supervision efforts focus on implementation of the project, essentially itsconstruction and eventual commissioning. At these stages, most operationaland technical problems can be identified, including the adequacy of themeasures taken to develop personnel- selected for operationalresponsibilities. Where gaps are perceived, the Bank can assist informulating any additional steps required.

8.19 Bank involvement generally ceases at the loan closing date and amission to prepare, or help the borrower to prepare, a completion report isundertaken at about that time. This review finds, however, that, for thesekinds of projects, the Bank can continue to play an important and usefulrole even after final closing of the loan. Certainly the experiences ofMultan, Trombay, and Cochin (see Chapter IV) suggest that there remain afterclosing many major problems which need to be solved. While in the past ithas been possible -to maintain contacts in a number of- cases in connectionwith other potential projects in this sector in the countries, the usefulnessof specific post-completion missions in these and similar circumstances andin other countries is clearly indicated.

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8.20 Other activities by the Bank not directly linked to particularloan/credit operations are also suggested. A very useful role in excnange ofexperiences among countries of similar operating environments could be playedif the Bank were to sponsor or assist in arranging plant visits among manage-ment and operating staff for the different projects. While the fertilizerindustry worldwide is well organized with numerous international meetings,special plant visits of the type envisaged would provide a unique opportunityto focus on problems which are common to developing countries,

C. Management Effectiveness

8.21 Consideration of the impact of effective management structure andenvironment on sustaining the net flows of project benefits is fraught withthe difficulties inherent in attempting to observe behavior which may not befully measurable or "identifiable." Nevertheless, the PUSRI experience andthe steps which are now being taken by a number of governments to improvemanagement performance confirm the importance of this factor and theincreased attention which industrializing countries must give to thisproblem. Adequate management performance, moreover, olays a major role inensuring the necessary technology transfer. Of particular significance isthe fact that recent measures adopted in several countries are being taken inthe context of reforms affecting the entire gamut of public sectormanufacturing enterprises. The lessons, therefore, are of generalapplicability.

8.22 A number of governments have instituted production-based or profit-sharing incentives not only for management but also for other operatingstaff. In the absence of market determined profitability, these systems needto be linked to measurements of efficiency and profitability which areobjectively determined. It is particularly important that realistic assess-ments of effective capacity and of operating efficiency of a plant, takinginto account the original design specifications, its overall condition andprior operating experience, be made in consultation with officials who do nothave vested interests in either understating or overstating that capability.In the absence of such an evaluation, there is a tendency for companyexecutives and even ministry officials with overall responsibility formonitoring these enterprises to set minimum achievable levels.

8.23 An important element in appropriate long-term development ofmanagement capability in any particular enterprise is the "initial position."A strong management team for the implementation of a project, with timelyarrangements for building up the management core for actual operations (eachphase requiring substantially different skills), will set a pattern of."success" which could strongly influence subsequent management performance.This was clearly the case with PUSRI and, to some extent, with IGSAS. In thelatter instance, the original management team which initiated projectpreparation and implementation provided strong guidance to those efforts.Due to political influences, however, it was replaced during implementatior.with consequent adverse impact on the development of the project. Followingthe subsequent changes and improvement in the political environment, keymembers of the original team were brought back to the enterprise and are nowproviding effective leadership in coping with the company's problems.

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8.24 Given the dynamics of industrial operations, changing technologyand economic relations, the ability of enterprises to achieve sustainablebenefit flows over time will be influenced by the steps the management cantake to adapt to those changes. In many instances, technical adjustments canbe accommodated within the normal maintenance-replacement cycles; one examplein the fertilizer industry is the periodic replacement of original catalystsby units of either improved design or material composition. Some improve-ments, however, require levels of expenditure which may fall outside therange of the. normal operating budgets of enterprises. Where a particularenterprise has limited autonomy in making decisions regarding such expendi-ture, in other words, where it may be necessary for the Board of Directors ofthe enterprise to seek approval from other levels of government, there may besome reluctance to consider this action.

8.25 Several energy saving measures have been developed in thenitrogenous fertilizer industry in recent years; for example, purge gasrecovery involves installing equipment to make more efficient use of thefeedstocks so as to increase ammonia output from a given plant. Among theammonia/urea enterprises reviewed, three have so far undertaken this invest-ment--IFFCO, PULSRI and IGSAS. The boards of these particular enterpriseshave considerable autonomy in decisions as regards this kind of expenditureand productive performance of the plants has benefited from the improvementsintroduced. The remaining plants appear to have less scope for such action;while it is true that in some cases there may be other technical factorswhich would limit the benefits from this measure, the fact that littleconsideration has been given to it. suggests that the prevailing restrictionshave represented disincentives to positive actions of this type. In general,the limits put on autonomy constrain the ability of enterprises to make majorand timely adjustments which may be required as overall conditions change.

D. - Feedstock and Energy Supplies

8.26 To what extent did project design deal with ensuring adequate andstable feedstock and energy supplies? It must be first noted that processchoice and quantity of necessary feedstock would normally tie a fertilizerplant, particularly for ammonia/urea, to a specific source for its feed-stocks. Project appraisals generally review the sources selected and thearrangements made to ensure availability; at that stage some steps may bepossible if deficiencies are noted.

8.27 Where the required facilities for input supplies have been built atthe same time as the construction of the production units, the Bank'ssupervision missions have generally looked into the progress being made. Ina number of cases, implementation of those facilities was the responsibilityof agencies other than those responsible for implementation of the projects.For example, for the PUSRI projects, the government-owned petroleumcorporation, PERTAMINA, was responsible for the supply of natural gas. Inthese instances, when the delays were recognized, Bank action followingrecommendations of the supervision missions assisted in obtaining appropriatemeasures from the government to reduce these problems.

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8.28 The separation of the FERTIMEX urea plants from their source offeedstocks -stems directly from a policy decision- of the government allocatingproduction responsibilities for downstream production of petroleum and relat-ed products among the different government-owned corporations. This separa-tion of what is essentially an integrated process, which was flagged in theappraisal report, has not worked well in the case of Bajio and the governmentis apparently reviewing the policy in the course of its present re-evaluationof the industry and the country's fertilizer requirements.

8.29 While the advr-rse impact on the Indian projects of the country'sshortage of electric energy in the mid-1970s was elearly observable, giventhe overall severity of the problem, little acrion was possible. The govern-ment did adopt a more flexible policy regarding captive power and the Bank'sProject to Improve Fertilizer Production (POIP), approved in 1975, includedfinancing for installing electric generating facilities in several plants.It should also be noted that in some instances during the 1970s when localfeedstocks were not available (e.g., fuel and naphtha), the Bank urged theauthorities to import these items; in the face of the prevailing balance ofpayments constraints, the government chose not to.

8.30 Thus the supply of raw materials and energy inputs for these pro-Jects have depended to a great extent on official policies tied to broaderdevelopment objectives. These aspects are, furthermore, often within theareas of the responsibility of different agencies which may be more powerfulthan the fertilizer institutions with which the Bank deals, and has tended tolimit the ways in which the project sponsors, working with the Bank, canintervene when difficulties arise.

E. Sectoral Policy

8.31 The projects reviewed in this report represented the firstgeneration of fertilizer projects undertaken by the Bank. Principal focuswas 'put on the micro-economic aspects including in particular economicjustification, technology transfer and raw material supplies. As the Bankhas widened its experience in this area, it has become increasingly concernedwith major sectoral or macro-economic policies which critically affect theeconomic and financial viability of these projects as well as influencingtheir technical performance.

8.32 Thus, in the second generation of projects, particularly incountries where there has already been some lending to the fertilizersub-sector and the Bank has deepened its knowledge of these issues, increasedattention has been given to basic policies in t'e course of projectpreparation. In some cases, agreements have been reached with governments onpolicy directions for such issues as prices and subsidies, autonomy ofenterprise management and long-term growth objectives. In a number ofinstances, portions of loan or credit funds have been set aside to financethe necessary detailed studies which are required to elaborate specificactions or measures. Moreover, commitments have been made by somegovernments in the context of these new operations to adopt policies ormeasures designed to improve the overall efficiency of the sub-sector.