.-- <, h t 29 < - i $ Document of

The World Bank

FOR OFFICIAL IISE ONLY FILE COPY

Report No. 2852-IN

STAFF APPRAISAL REPORT

INDIA

HAZIRA FERTILIZER PROJECT

March 6, 1981

Industrial Projects Department

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

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INDIA

HAZIRA FERTILIZER PROJECT

Currency Equivalents Weights and Measures

Rupees (Rs) 1.0 = US$0.125 1 Metric ton (t) = 1,000 Kilograms (Kg)Rs 8.0 = US$1.0 1 Metric ton (t) = 2,209 Pounds (lb)Rs 1,000,000 = US$125,000 1 Kilometer (km) = 0.62 Miles

1 Hectare (ha) = 2.47 Acres1 Cubic Meter (cm) = 35.32 Cubic Feet (cf)

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BDO Block Development OfficerBTU British Thermal UnitCIF Cost, Insurance and FreightCusecs Cubic feet per secondCWC Central Warehousing CorporationFAI Fertilizer Association of IndiaFEDO FACT Engineering and Design Organization (India)FOB Free on BoardFPDIL Fertilizer Planning and Development India LtdGOI, Government Central Government of IndiaHYVs High Yielding VarietiesIDBI Industrial Development Bank of IndiaIFFCO Indian Farmers Fertilizer Cooperative LtdKRIBHCO Krishak Bharati Cooperative LtdKV KilovoltsKW, MW, MWH Kilowatts, Megawatt, Megawatt-hourK20 (Potash) Potassium Oxide Content in FertilizersN Nitrogen Content in FertilizersNcmd Normal Cubic meters per day (at 0°C, 1 Atm)NPK Nitrogen-Phosphate-PotashODA Overseas Development Administration, UKOECF Overseas Economic Cooperation Fund, JapanP205 Phosphorous Pentoxide Content in FertilizersRBI Reserve Bank of IndiaScf Standard cubic feet (at 600 F = 15.50C, 1 Atm)SWC State Warehousing Corporationstpd, tpy Metric ton per day, per yearT&V Training and Visit SystemVLW Village Level Worker

Indian Fiscal YearJuly 1 to June 30

Indian Fertilizer YearFebruary 1 to January 31

Industrial Projects DepartmentMarch 1981

FOR OFFICIAL USE ONLYINDIA

HAZIRA FERTILIZER PROJECT

TABLE OF CONTENTS

Page No.

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

II. THE INDIAN FERTILIZER INDUSTRY .......................... 2

A. The Fertilizer Industry ............................. 21. Past Production Capacity Growth .... ............. 22. Feedstock for Nitrogenous Fertilizers .... ....... 23. Plant Capacities and Technologies .... ........... 34. Capacity Utilization ............................ 3

B. Strategy for the Future Development of theFertilizer Sector .................................. . 5

C. Bank Group Role ...... ................ . 6

III. PROJECT OWNERS AND SPONSORS ............................. 8

A. KRIBHCO ..... ........................................ 8B. IFFCO's Organization and Management .... ............. 9C. IFFCO's Plants On-Stream and Under Construction ..... 9D. Financial Performance of IFFCO Operations .... ....... 10

IV. FERTILIZER MARKET IN INDIA .............................. 11

A. Fertilizer Use in Agriculture ....................... 11

B. Historical Growth of Fertilizer Consumptionand Production .................................... 12

C. Projected Growth of Nitrogenous Fertilizer Demandand Production .................................... 14

V. MARKETING AND DISTRIBUTION .............................. 15

A. Market for Project's Output ......................... 15B. Fertilizer Distribution System in India .............. 16C. Distribution Infrastructure ......................... 17D. IFFCO's Sales and Marketing Efforts .... ............. 20E. Agricultural Credit ................................. 20F. Agricultural Extension and Research .... ............. 22

G. Fertilizer and Product Prices ....................... 22

This report was prepared by Messrs. E. Segura, D. Caplin, R. Heath,J. Kuroda and P. Larroque of the Industrial Projects Department.Mr. Krogh-Poulsen of the Transportation Division, South Asia ProjectsDepartment, assisted in reviewing transportation requirements.Mr. P. V. John (consultant) assisted in reviewing marketing and distri-bution aspects.

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

- ii. -

Table of Contents (Continued) Page No.

VI. THE PROJECT ............................................. 24

A. Project Location .................................... 24B. Project Scope and Technology ........................ 24C. Gas Supply Arrangements ............................. 25D. Coal Supply ......................................... 26E. Power Supply ........................................ 26F. Water Supply ........................................ 27G. Other Infrastructure ................................ 27H. Environmental Considerations ........................ 28

VII. PROJECT MANAGEMENT AND EXECUTION ........................ 29

A. Project Management .................................. 29B. Engineering and Transfer of Technology .... .......... 31C. Employment and Trai.ning . ............................. 31D. Project Schedule .................................... 32

VIII. CAPITAL COST, FINANCING PLAN, PROCUREMENT ANDDISBURSEMENTS ......................................... 33

A. Project Capital Cost ................................ 33B. Financing Plan ...................................... 34C. Procurement and Disbursement ........................ 36

IX. FINANCIAL ANALYSIS ..... ............... .................. 37

A. Revenues and Operating Costs ........................ 37B. Financial Projections ............................... 39C. Financial Rate of Return and Sensitivity Analysis ... 41D. Financial Covenants ................................. 41E. Major Risks ......................................... 42

X. ECONOMIC ANALYSIS ....................................... 43

A. Economic Costs and Benefits ......................... 43B. Economic Rate of Return ............................. 44C. Other Benefits ...................................... 44

XI. AGREEMENTS ........................ ...................... 45

LIST OF ANNEXES

Annex 2-1 Fertilizer Plants in Operation, Under Construction and inPlanning Stage

2-2 Installed Fertilizer Capacity by Sector2-3 Capacity Utilization of Nitrogenous Fertilizer Plants in

Operation in 19802-4 Expected Nitrogen Production from Operating Units and

Firm Projects

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LIST OF ANNEXES (Continued)

Annex 3-1 Organization Chart of IFFCO3-2 Audited Consolidated Financial Statements of IFFCO3-3 Projected Income and Cash Flow Statements of IFFCO by Plant

4-1 The Development of Indian Agriculture, 1952-804-2 Statewise Fertilizer Usage Statistics4-3 Breakdown of Nitrogen Use by Fertilizer Type, 1961-19874-4 Historical Consumption, Production and Imports of

Fertilizers, 1952-19814-5 Estimates of Future Nitrogen Consumption

5-1 Unitwise Supply Plan from all Sources to Hazira MarketingArea, 1987/88

5-2 Fertilizer Distribution System5-3 Railway Facilities Required for Hazira Project5-4 Organization of Marketing Division of IFFCO5-5 Foodgrain/Nitrogen Price Ratios

7-1 Project Implementation Organization Chart7-2 Project Implementation Schedule

8-1 Capital Cost Estimate8-2 Permanent Working Capital8-3 Allocation of Funds from Colenders to Project Components8-4 Estimated Disbursement Schedule for Bank Loan

9-1 Assumptions Used in the Financial Analysis of the Project9-2 Urea Retention Price Calculation9-3 Financial Production Costs9-4 Projected Financial Statements for KRIBHCO9-5 Debt Service Schedule for KRIBHCO

10-1 Assumptions Used in the Economic Analysis of the Project10-2 Cost and Benefit Streams for Economic Rate of Return Calculation10-3 Sensitivity Analysis for Economic Rate of Return10-4 Foreign Exchange Savings

MAPS

IBRD 14854 India - Hazira Project Location and Infrastructure13340R2 India - Crude and Gas Pipelines, Bombay Offshore Area21236 India - Hazira General Layout Plan13342R1 India - Major Fertilizer Plants in India14853 India - Hazira Marketing Area and Principal Railways

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DOCUMENTS AVAILABLE IN THE PROJECT FILE

Reference A - Projected Demand for Nitrogenous FertilizersPrepared by Indian Organizations

Reference B - Estimate of Potential Level of Nitrogenous FertilizerConsumption in India

Reference C - Report of the Task Force on Siting of IFFCO/NFLFertilizer Plant in Gujarat; Government of India,Department of Science and Technology; August 1978

Reference D - Comparative Analysis of Hazira vs. Interior LocationFor Fertilizer Plant, December 10, 1979

Reference E - Guidelines for Fertilizer Manufacturing Wastes,IBRD Office of Environmental and Health Affairs,October 1978; and Note on Environmental Pollutiondue to Hazira Project; IFFCO, November 1979

Reference F - Hazira Fertilizer Project: Capital Cost Estimates;January 5, 1980

INDIA

APPRAISAL OF HAZIRA FERTILIZER PROJECT

I. INTRODUCTION

1.01 The Government of India (GOI, the Government) has requested IDAfinancing for the Hazira Fertilizer Project (the Project) to be located atHazira, about 15 km west of Surat, in the State of Gujarat (Map IBRD 14854).The Project will be owned and operated by Krishak Bharati Cooperative Ltd(KRIBHCO), a cooperative society established in April 1980, with equityshareholding by the Government (66%), IFFCO (28%), and several domesticcooperative marketing societies (6%). KRIBHCO's By-Laws provide for theeventual transfer of the Government equity shares to the cooperatives. TheProject was originally sponsored by the Indian Farmers Fertilizer CooperativeLtd (IFFCO), a major producer of fertilizers, owning three large fertilizerplants at Kalol (ammonia/urea), Kandla (NPK) and Phulpur (ammonia/urea). ThePhulpur Complex was partly financed by the Bank (Loan No. 1079-IN datedJanuary 24, 1975). Given its successful project implementation and operatingexperience, IFFCO had the primary responsibility for the sponsorship ofKRIBHCO; it nominated, by seconding from IFFCO, KRIBHCO's senior managementofficials, and will handle the sales and marketing of KRIBHCO's output. Theproposed Project is expected to be initiated in April 1981 and mechanicallycompleted by July 1985. It is estimated to cost US$1,277 million equivalent,including about US$476 million in foreign exchange. KRIBHCO's shareholderswill contribute US$437 million equivalent in equity financing; aboutUS$81 million equivalent will be provided from KRIBHCO's internally generatedfunds to finance part of its working capital requirements, bringing totalequity financing to 43% of the estimated long-term financing requirements.The IDA credit would cover approximately 33% of the estimated long termfinancing requirements. The remaining debt financing will be provided by theOverseas Economic Cooperation Fund (OECF - Japan), about US$99 million; theOverseas Development Administration (ODA - UK), about US$105 million; andIndian financing institutions coordinated by the Industrial Development Bankof India (IDBI), about US$93 million equivalent.

1.02 The Project is aimed at producing 1.31 million metric tons peryear (tpy) of urea, for sale to farmers principally in Northern and WesternIndia, and a marginal surplus of 17,820 tpy of ammonia to be shipped toIFFCO's compound fertilizer plant at Kandla, Gujarat, which is being expandedand will require 65,000 tpy of outside ammonia for the production of NPK. Theproposed Project will include two single-train ammonia units each with acapacity of 1,350 metric tons per day (tpd) of ammonia, four urea units eachof 1,100 tpd capacity, related offsite and utilities facilities, and infra-structure requirements. The Project is part of the overall Government plan touse most economically the large off-shore Bombay natural gas deposits discoveredin 1974. At present, these gas deposits are expected to yield approximately3.0 million normal cubic meters per day (Ncmpd), of associated gas (BombayHigh field) at full oil production levels of 9.0 million tpy, and about 18million Ncmpd of non-associated gas (South Bassein field), for a period ofover 20 years. The large gas availability has changed Government policyon fertilizer plant feedstock (formerly emphasizing naphtha and fuel oil);natural gas is technically and economically the preferred feedstock for

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nitrogenous fertilizer production and these offshore reserves can feed--inaddition to present users in Bombay, the Thal Project located at Maharashtra,and the proposed Hazira Project--six ammonia plants of 1,350 tpd each.Additional substantial gas reserves have recently been identified in theArabian Sea.

1.03 The Project was appraised in October/November 1979 by a Bank mis-sion consisting of Messrs. E. Segura (Mission Chief), D. Caplin, R. HeathiJ. Kuroda and P. Larroque, all of the Industrial Projects Department.Mr. Krogh-Poulsen of the Transportation Division, South Asia, assisted inreviewing transportation requirements. The appraisal mission was joined byrepresentatives of OECF, ODA and IDBI, the prospective colenders to theProject. Following delays in the initiation the Project due to delays in theappointment of engineering firms, the Project was reappraised in November1980, by a mission consisting of Messrs. Segura, Heath and Larroque.

II. THE INDIAN FERTILIZER INDUSTRY

A. The Fertilizer Industry

2.01 The Government of India has attached high priority to the develop-ment of the fertilizer industry to ensure efficient and stable supply offertilizers to farmers and to achieve continuous modernization of the agri-cultural sector. Since further possibilities of expanding the area undercultivation are limited, more intensive use of land with modern inputs such asfertilizers is the cornerstone of the Government's agricultural policy.The fertilizer industry, therefore, has received priority in India's investmentplans. As a result, a large number of fertilizer plants have been set upduring the last decade. Due to the substantial capital investment needs andinstitution building requirements associated with these plants, the countryhas received continued Bank Group assistance for the sector since 1967.

1. Past Production Capacity Growth

2.02 In 1980 India had a nitrogenous fertilizer capacity of 3.9 millionnutrient tpy, representing 5% of total world capacity, making it the fourthlargest producer after the USSR, US and China. There are 21 major operatingfertilizer companies in India with a total of 43 plants, of which 25, repre-senting 50% of capacity, are owned by the Government. Including the coopera-tive and joint sector, the public sector directly or indirectly accounts forabout 70% of domestic nitrogen capacity and its share is expected to increasefurther to about 90% by 1984/85. The capacity and location of Indian fertil-izer producers are shown in Annex 2-1 and Map IBRD 13342R1. Past growth ofnitrogenous fertilizer production capacity is shown in Annex 2-2.

2.03 In spite of the high rate of growth in the past (from 738,000tpy of nitrogen in fiscal year 1966/67 to 3,498,000 in 1979/80, or 13% p.a.),domestic demand for nitrogenous fertilizer has continually exceeded domesticproduction, necessitating the importation of between 25% and 30% of theIndian nitrogenous fertilizer consumption requirements.

2. Feedstock for Nitrogenous Fertilizers

2.04 Since major natural gas reserves had not yet been located, emphasisin the 1960s was mainly on the use of naphtha as feedstock for nitrogen

production. Long-term planning in the early 1970s envisaged a change first tofuel oil and subsequently to coal as a means of decreasing dependence onimported hydrocarbon feedstocks. The first four of the seven fuel oil plantsplanned are already in operation (Nangal was commissioned in 1978 and Sindri,Panipat and Bhatinda in 1979), and the two coal-based plants at Talcher andRamagundam were commissioned in late 1980. No further coal-based plants areplanned until sufficient operating experience has been gained from these twoplants and newer technologies are evaluated. With the large quantities ofnatural gas now available off the Bombay coast, the next 2.0 million tpy ofnitrogen production capacity, in addition to the Hazira and Thal projects, isexpected to use this natural gas as feedstock. By the mid-1980s, therefore,natural gas will account for about one-third of nitrogenous fertilizercapacity; naphtha will account for 35%; fuel oil 23%; and coal for most of theremaining 9% of capacity.

3. Plant Capacities and Technologies

2.05 A wide range of plant capacities and ammonia production technologieshave been used in India. Plant capacities range from the small plants installedin the 1960s to the large units of up to 1,100 tpd of ammonia used recently.This evolution reflects mainly the technologies available at the time ofconstruction. Production processes in commercial use include coke gasification,electrolysis of water, coke oven gas cracking, partial oxidation of fuel oil,and steam reforming of gas and naphtha. Following the developments in moreadvanced countries, since the early 1970s, new installations involve largeplant capacities (in the range of 600 to 1,100 tpd of ammonia), which allowfor the use of more economical centrifugal compressors and are based mainly onsteam reforming of naphtha and natural gas. As a result of the past largecapacity expansion programs, India has acquired substantial experience both inbuilding and in operating modern plants with a wide range of plant sizes andtechnologies.

4. Capacity Utilization

2.06 In addition to the plans for expanding fertilizer production capacity,the Government is placing considerable emphasis on measures necessary toincrease capacity utilization of existing plants from the relatively lowoverall rates achieved in the past as well as to ensure reasonable productionlevels from recently completed projects. The Bank Group is participatingin these programs through IDA Credits 481-IN (Trombay IV) and 1079-IN (FertilizerIndustry Credit). A detailed analysis of capacity utilization by sectors forthe period 1971-80 is given in Annex 2-3 and summarized below for the last 4years:

India - Percentage Capacity Utilization of Nitrogenous Industry

Year endingMarch 31 Private Joint Cooperative Public Overall

1976/77 80 69 81 69 731977/78 86 73 88 64 741978/79 77 73 92 62 721979/80 79 79 73 49 66

The average capacity utilization, which was showing perceptible improvement inthe last few years, took an unfavorable turn during 1980. Production suffered

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in several plants because of non-availability of inputs such as naphtha, fueloil, coal and because of power cuts and interruptions. These factors alonewere responsible for loss in production of about 330,000 tons of nitrogen.

Some of the constraints were due to unforeseen external factors, includingoperational difficulties within the railways and political disturbances in theoil producing State of Assam which cut the supply of naphtha and fuel oil tomany parts of the country. In late January 1981, however, the Assam pipelinewas restarted and is now meeting the feedstock needs of plants in eastern andcentral India. In addition, in late 1980, with the introduction of unit-trainoperations, railway movements of coal and fuel oil have significantly improved.These factors have resulted in recent significant improvements in the capacityutilization of fertilizer plants. Together with special measures being adoptedby GOI to ensure sustained and adequate supplies of inputs (para. 2.08),further improvements are expected to be achieved in the future.

2.07 The cooperative sector, i.e. IFFCO, has generally shown the highestlevel of capacity utilization, followed by the private and joint sectors. Theoverall performance of the public sector has been low. These differences,however, cannot be entirely explained as being due to management and ownership.The private sector plants are generally of smaller capacity based on provendesign. As a group they have been in operation longer and have already solvedinitial problems. The public sector plants, on the other hand, are generallyof more recent origin, are larger, use a more varied range of feedstocks andwere built with a much greater involvement of local equipment and engineering.The major problem areas leading to low overall capacity utilization rates are:(i) problems in commissioning and debugging new projects; (ii) equipmentfailures due to difficult raw materials; (iii) continuing operating problemsin several of the older public sector plants comprising about 35% of thepublic sector capacity--resulting partly from severe original design defects;(iv) organizational and administrative problems resulting from the industry'ssubstantial production capacity expansion; (v) problems in obtaining adequatesupply of inputs such as coal, fuel oil, naphtha and power; and (vi) difficultiesresulting from a policy of maximizing the use of local engineering and equipmentwithout a full appreciation of the risks and penalties involved in developingrapidly the country's technological base.

2.08 Problems affecting the performance of the public sector fertilizerplants were studied by a Government committee in 1978 and several of therecommended remedial measures have been adopted, including those for plantmodifications and better planning of preventive maintenance to minimizeunscheduled losses. The Government has also established a control and monitor-ing system to review performance against unitwise monthly production targetsdeveloped after detailed discussions with plant managements. Weekly productionstatistics are now being received and reviewed by the Ministry of Chemicalsand Fertilizers to monitor progress and identify constraints to better produc-tion and to evolve solutions. Foreign exchange for import of normal maintenanceand emergency spares is now more readily available. Furthermore, to improvethe decision-making process and the performance of public fertilizer companies,the Government restructured the sector in April 1978, regrouping Government-owned production units previously owned by the Fertilizer Corporation of Indiaand National Fertilizers Ltd into four separate geographically-orientedcompanies. The full impact of all these efforts should be gradually reflectedin higher capacity utilization during the next few years with overall industry

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capacity utilization targeted to increase from 66% i.n 1979/80 to a satisfactoryaverage level of about 85% by 1985/86, as shown in Annex 2-4. Sincepublic and private sector plants without technical problems have shown satis-factory capacity utilization and considering that the proposed Project isbased on gas as feedstock, the 90% average capacity utilization rate from thethird operating year assumed for the Project (para. 9.01) is consideredreasonable.

B. Strategy for the Future Development of the Fertilizer Sector

2.09 As mentioned above, in spite of rapid increases in production in thelast two decades, India still imports about one-third of its nitrogen andphosphate fertilizer requirements, principally due to the success of theGovernment measures to promote fertilizer use and agricultural output. Theentire potash requirements are imported as the country has no domestic resources.Even under conservative assumptions for future fertilizer consumption growthrates (Chapter IV) and after taking into consideration the large projectsnow underway and firmly planned, nitrogen and phosphate fertilizer consumptionis expected to exceed domestic output significantly.

2.10 Regarding nitrogenous fertilizers, the gap between domestic consump-tion and production is expected to reach 1.8 million nutrient tpy by 1987/88,and 3.1 million tpy by 1989/90 (para. 4.10). Given the size of this gap overthe next 10 years, the question arises as to whether it should be met throughimports from abroad or through the provision of additional domestic manufac-turing capacity. The GOI strategy incorporates both of these features.Nitrogenous fertilizer plants are capital intensive, and recent internationalinflationary trends have further escalated project costs. Given competingdemands on limited resources, India may not find it easy to allocate in fullthe financing required to build the entire additional capacity requiredto meet its nitrogen needs. Managerial and technical skills essential toimplement efficiently such a very large program might also be a constraint.The Government, therefore, intends to cover part of the future nitrogenousproduction gap by imports from countries in Asia and the Middle East eitherfrom jointly financed new plants or from large fertilizer plants alreadyunder construction aiming at export possibilities.

2.11 Additional local ammonia production capacity in the next few yearswill be based on natural gas from the recently discovered large fields offshoreBombay. On the basis of proven gas reserves off the West Coast, during 1982to 1988 Government intends to set up in the interior of the country, sixammonia units (after the four for Thal and Hazira) of 1,350 tpd each. Forthis purpose, the Government intends to build a 800-1,200 km gas pipeline tothe center of the country, where future fertilizer needs are expected to besubstantial. However, the location and timing of the nitrogenous fertilizerplants to be installed in the center of the country have not yet been established.Additional units may be justified on the basis of possible gas reservesrecently discovered in the area. The Government is also considering the useof coal (which is abundant in India) as feedstock once its technical andeconomic feasibility is confirmed on the basis of initial operating experiencein the coal-based Talcher and Ramagundam plants and when the emerging new coalgasification technology is evaluated.

2.12 Regarding phosphate fertilizers, India may not be able to expandlocal capacity significantly as needed, since rock phosphate reserves (locatedmainly in Rajasthan and Madhya Pradesh) are small and are not expected tocontribute to more than about 200,000 tpy of P205. The Government is, therefore,

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planning the development of phosphatic fertilizer capacity on the basis ofimported rock phosphate and sulfur or imported phosphoric acid. Capacityadditions are being planned at Kandla, Goa and Tuticorin, based mostly onimported phosphoric acid.

C. Bank Group Role

2.13 The Bank Group has so far participated in the financing of tenfertilizer projects in India with a total contribution of US$481.9 million.The most recent operation was an IFC investment of US$8.54 million in DeepakFertilizer Project (IFC/T-287 approved in November 1979). An IBRD loan for theThal Fertilizer project approved by the Board in June 1979, did not becomeeffective. Bank financing has been through IDA for six public sector projects,IFC for three private sector projects, and IBRD for a cooperative sectorproject, as shown on the following page.

2.14 The first three IDA-financed projects at Cochin II, Gorakhpur andNangal suffered physical completion delays of between 16 to 31 months and costoverruns of 35%-45%. While delays in finalizing engineering arrangementspostponed execution of the Gorakhpur project, the Cochin II project sufferedfrom inadequate project engineering and from the company's financial problems.The Nangal project was affected by delayed delivery of equipment and costincreases following the 1973 oil crisis. However, performance has substantiallyimproved in the more recently financed projects. The Sindri and Trombayprojects have been physically completed with three- and six month delays,respectively, and at costs close to appraisal estimates. The IFFCO Phulpurproject was initially delayed by 7 months due to a change from fuel oil tonaphtha as feedstock, which necessitated a complete change in the design andscope of the Project. It suffered a further 12-month delay towards the end ofconstruction due to severe delivery delays of local structural steel and powerinterruptions from the national grid due to temporary drought conditions. Itwas mechanically completed in March 1980, 19 months behind the originialcompletion date. The actual capital costs are about 6% above original estimates.

2.15 The Fertilizer Industry Credit included several sub-projects,principally for improving the utilization of fertilizer production capacityat existing plants; about 11 are in operation. There have been delays in thestart of some of the sub-projects. Sub-projects not taken up for implemen-tation have been replaced by others with similar objectives, which are nowgenerally proceeding satisfactorily. As part of the same Credit, threeimportant studies relating to timely availability of fertilizers to thefarmers were contemplated. The National Council of Applied Economic Researchhas carried out the Fertilizer Demand and Marketing Study which includedconsiderable field survey. The draft report is completed, and preliminarydemand projections have become available. Rail India Technical and EconomicServices Ltd has completed the Fertilizer and Raw Material TransportationStudy, and the findings, after discussions with the industry, are now beingreviewed by the Government for implementation of the recommendations. TheAdministrative Staff College, Hyderabad, carried out the Fertilizer Ware-housing Study.

2.16 Despite implementation difficulties, all the projects so far financedby the Bank Group remain economically justified, with economic rates of returncalculated at project completion in line with the expectations at the time ofappraisal. Currently, the economics of these projects should be even betterdue to substantial increases in actual and projected long-term internationalfertilizer prices in real terms since the projects were originally appraisedand completed. The Bank's major objective in all the above projects has

INDIA - HAZIIA FERTILIZOR PROJECT

IYDIA - pERLIZER PROJECTS FIIlED BY THE BANDK GROtP

techanicel Appraisol Ecoctgoi PicDate Aomunt of Project Retleted Capital Coot Percen.tage Co,wlettoc Date Comletion Ecnoi Expecte

Project of Sitninm Fanin Caacit A raioal Current Overran Orio_'al Current belay ROD 7, Approjool. Proloct Statue(DNyMiiTllin) (000 tpy) (UD$MilllIon) (U3$Million) (lionths)

A. International . aFin-e Corp-rtion

1. T31 - Kanpor Project April 1967 11.5 207 (N) 82 87 _ Mar 1970 Mar 1970 - - - Operating at over 907 of capacity,

2. Zurt - oo Prcject March 1969 18.9 170 (N) 75 75 - Apr 1972 Apr 1972 14 _ St_teng otec oupply ech-eo, woe delayrd.

3. DFPC Depak P-1-t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Operting t about 807. ef c-pacIty.

3. DFFC - Deeps6 Project eo.J 1980 8,54 74 (N) 51.2 51.2 _ lar 1982 Mac 1982 - 15 - In the proceo. of iepl-eectatitn,

B. Ieteo-ti.enal Developnent A..ociitifn

1. FACT - Cochin II Project July 1971 20,0 47 (N) Acid planto operating sat -factorily.115(rF0 5 ) 41.2 59.7 45 Mtr 1974 Oct 1976 31 IS 108 Copmla plnt being enbtilied for

acn grado..

2. FCI - Corakhpor ProJect lan 1972 10.0 51 (N) 16.0 23.0 44 Aug 1974 Dcc 1975 l6 19 75 Connniontod end opereting -etlnfoctrtily

3. FCI - Nange1 Project Fob. 1973 58,0 152 (N) 105.6 142.7 35 ARo 1975 Dec 1977 28 15 67 CooIo.ai .e.ed -cc..efnlly in Joocary1978. coo toohed rtotd capacity.

4. FCI - Tro-tay IV P-oject May 1974 50,0-' 75 (N)75 (P 2 05) 57.0 60.9 7 Jun 1977 D.c 1977 6 16 135 Mchacically coplted end being

5. FCI - Sindri Project Nov 1974 91.0 145 (N) 162.7 155.8 - Nov 1977 Feb 1981 3 16 184 Mechacicoily completed ocd c-ociooio- cd.Produced i-tt area in Marh 1979.

6. "ariac. companlee - Fertili-er Dec. 1975 105.0 222 (N) - - Dec 1978 Mr 1981 1 - 260 Affiectd by doloyo in projectIndostry Credit 31 (F7o5 ) 225.0 160.3 prep-cotioo and approv-l.

C. Enternacinoel Back for Reccoetroction and Devclopnognt

1. IFFCO - Phlpor PrFJect Jac 1975 109.0 228 (N) 220.5 234.3 6d-/ tr I979- I 9b0 12 17 196 C-issio..d and p.-ti.,

l/ Inccude US$17.0 million for Plant Operation Improvement Project.b/ Ecaletad to firit year of cparatioo.c/ Doring firt ypear of operation.d/ beta nd penco-tego ovocr.n -cc baoed On covorolon of rape.e ot Appraloel Report achoange rate of R.. 7.5 - 1 U$.

Uaing cverage of ectool cbhnga ratoo ovar projact lypl-o etatioc period (Rt. 8.5 - 1 U5$) concoct capital coot itus$ ia 220 nilllc or ero overran.

e/ Appraioal Report completion dace are Augoat 1978 (43 eo.the) for * startiog dete of J.no.ry 1975. The eff-ctive *t-rtiog dateeae J.ne 1976 doe to a chango of foodotock leading to a -evined completion deto of March 1979 (33 mnnthe).

f/ Eclaced to firot year of ope-tico. In early 1981, import cr00 price (oif Boeboy) aonnnted to oboct US$275/ion, which lc6ignify-ntly above the oro price- eocinated for 1981 drtiog thb Fr-ece' appreical.

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been to assist India in building up its domestic fertilizer production. TheBank/IDA financed projects have also aimed at improving project managementcapabilities in the public sector, project implementation time and fertilizercapacity utilization. On the whole, these objectives have been satisfactorilyachieved, particularly in the more recent projects. At the same time., continuedBank Group assistance is necessary and justified, considering that during thenext ten years India plans to invest over US$7 billion in new fertilizerproduction and related gas development facilities, and that the next gener-ation of plants--to be based mainly on the newly found offshore naturalgas--would involve new entities and larger and more complex plants than nowexisting in India.

III. PROJECT OWNERS AND SPONSORS

A. Krishak Bharati Cooperative Ltd (KRIBHCO)

3.01 The Project will be owned and operated by KRIBHCO, a new cooperativesociety which was formally established in April 1980. Its shareholdersinclude the Government of India (66%), IFFCO (28%) and several Indian coopera-tive marketing societies (6%). KRIBHCO's authorized capital amounts to Rs5,000 million (US$625 million), of which Rs 3,500 million (US$437 million)will be paid-in over the next five years as required by the Project. Topermit an increasing participation of cooperatives in the operations ofKRIBHCO, its By-Laws provide for the eventual, partial or full transfer of theshares initially held by the GOI and IFFCO to the cooperatives, as may beagreed periodically between KRIBHCO and the concerned shareholders. The Boardof Directors, which determines KRIBHCO's policies, consists of 23 directors,who are nominated and appointed by the Government, after consultation withIFFCO, for a term of ten years. The Board is composed of five members fromIFFCO, five from the GOI, six from the shareholding cooperative societies,three from participating domestic financial institutions, two outside expertsinvited by the Government, and KRIBHCO's Managing Director and Finance Director.After the initial ten-year period, KRIBHCO's Board of Directors will beappointed by its shareholders. KRIBHCO's Managing Director and FinanceDirector, who are ex officio members of the Board of Directors and the mostimportant senior officials responsible for day-to-day operations, can beappointed, suspended or removed only with IFFCO's and the GOI's prior approval.Both IFFCO and GOI also nominate two members each to the 12-member ExecutiveCommittee of KRIBHCO, which is made up of members of the Board to oversee theday-to-day management of KRIBHCO. IFFCO and GOI will thus play a major rolein the management and sponsorship of KRIBHCO and in the implementation of theproposed Project.

3.02 KRIBHCO's staffing is proceeding on schedule with 55 professionalsalready transferred from IFFCO, and the key positions of Managing Director,Project Manager and Finance Director adequately filled. KRIBHCO's ManagingDirector, Mr. Paul Pothen, is a highly competent executive experienced in thefertilizer industry. Much of the successful development of IFFCO, of which hewas previously Managing Director, is attributed to his management capabilities.Mr. Pothen is due to retire in early 1982, but both GOI and KRIBHCO are fullyaware of the need to provide competent and continuous leadership in management--particularly in the next two years when the major decisions for the Haziraproject implementation will be made. KRIBHCO has agreed in the event of avacancy in its senior management positions, prior to making any appointment tosuch positions, that it will furnish to the Association the details of quali-fications and experience of the proposed nominees.

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3.03 IFFCO will play a direct role in the sales and marketing of KRIBHCO's

products. The KRIBHCO By-Laws stipulate that the marketing of all its products

will be handled in close coordination with IFFCO. A joint sales, marketing

and distribution program has been already approved by IFFCO and will be

approved by KRIBHCO Board shortly. KRIBHCO has agreed to sign the sales and

marketing agreement with IFFCO by December 31, 1981. A joint marketing

committee consisting of five members each from IFFCO and KRIBHCO, including

the Chairmen and the Managing Directors of both companies, will be formed to

draw up a marketing strategy and to plan annual Statewise fertilizer allo-

cations and sales terms and conditions; these plans will be submitted for

approval to the Boards of Directors of IFFCO and KRIBHCO. This arrangement

will make maximum use of IFFCO's marketing experience and expertise in order

to ensure the smooth and efficient marketing of KRIBHCO products.

B. IFFCO's Organization and Management

3.04 IFFCO was registered on November 3, 1967, under the Bombay Coopera-

tive Societies Act and, subsequently, as a Central Cooperative Society in

New Delhi. As of September 30, 1980, IFFCO's paid-in share capital stood

at Rs 818 million (US$102 million), of which Rs 502 million (62%) was subscribed

by the Government of India, and Rs 316 million (38%) by member cooperatives.

The Board of Directors of IFFCO consists of 25 members, including 14 membersfrom the shareholding cooperatives, 8 members from the Government and public

institutions, and IFFCO's Managing, Finance and Marketing Directors. IFFCOhas currently about 3,600 staff. Its organization includes three production

plants (Kalol, Kandla and Phulpur), one marketing division and an administra-tion unit at the head office (Annex 3-1). Mr. L. R. Talwar, who replaced Mr.Paul Pothen as Managing Director of IFFCO, is very competent and experiencedin the fertilizer industry.

C. IFFCO's Plants On-Stream and Under Construction

3.05 Two IFFCO plants are already in operation in the State of Gujarat,one at Kalol, near Ahmedabad, and the other about 320 km away, at Kandla.

The Kalol plant, comprising a 910 tpd gas-based ammonia unit and a 1,200 tpd

urea unit, was completed in October 1974 and started commercial productionin February 1975. About 700 tpd of ammonia are transformed to urea and the

remaining balance is transported to the Kandla plant for the manufacture ofcomplex fertilizers. A debottlenecking scheme for the Kalol plant has been

recently completed with the assistance of IDA Credit 598-IN. Under this

credit, an amine guard system for the ammonia plant has been installed andother debottlenecking schemes, such as a purge gas recovery plant and install-

ation of an oil-fired boiler, were completed in late 1980. Over the past two

years, the Kalol plant units have been operating at about 87% capacity utiliza-tion. The Kandla plant is presently operating at 129% of its rated capacityof 1,250 tpd, producing about 1,620 tpd of NPK fertilizers, all on the basis

of imported phosphoric acid and potassium chloride as well as local andimported ammonia. This plant was completed in November 1974 and startedproduction January 1975. A new NPK unit with a capacity of 1,170 tpd of NPK

is presently being constructed to expand production capacity. The contractfor the new unit was signed in January 1979 and orders for major equipmenthave been placed. The work is proceeding ahead of schedule and its completionis now expected for July 1981. The Bank-financed Phulpur project, located

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near Allahabad in the State of Uttar Pradesh, was mechanically completed inMarch 1980 and during commissioning, the ammonia plant reached 76% of ratedcapacity. However, due to difficulties in securing supply of naphtha causedby the closure of the Assam oil pipeline (para. 2.06), it is able to startcommercial production only in March 1981. The project consists of a 900 tpdnaphtha-based ammonia plant and a 1,550 tpd urea plant (para. 2.14).

3.06 The Kalol and Kandla plants are operating satisfactorily and, apartfrom last year when the Kalol plant was shut down a month due to an equipmentfailure, have shown consistent production improvement since start-up, as shownbelow:

India - Annual Production of IFFCO Plants(in product tons)

Kalol Plant Kandla PlantYear ending Cap. Util. Cap. Util. Cap. Util.June 30 Ammonia % Urea % N.P.K. %

1975/76 185,077 62 240,989 61 162,057 391976/77 244,057 81 312,110 79 368,400 891977/78 263,218 88 305,007 77 517,000 1251978/79 276,178 92 347,394 88 551,000 1331979/80 264,346 88 313,121 79 532,400 129

D. Financial Performance of IFFCO Operations

3.07 Since 1975, when its Kalol and Kandla plants started commercialoperations, IFFCO has had good financial performances. In 1979/80, its netprofits stood at Rs 216 million (US$27 million). This net profit represents10% of sales and 12% of net worth. As of June 1980, IFFCO's debt/equity ratiostood at 40:60. Actual financial statements of IFFCO are shown in Annex 3-2.

3.08 IFFCO's projected financial statements (excluding its expectedequity participation in KRIBHCO) are summarized in the following page andtheir breakdown by plant is shown in Annex 3-3. For the existing units at theKandla plant, it has been conservatively assumed that the present high levelof capacity utilization will not be sustained in the future, levelling offfrom 129% capacity utilization in 1979/80 to 90% in 1984/85. Feedstock pricesare assumed to remain at their 1980 levels in constant terms, Rs 320 per Ncmfor natural gas and Rs 1,200 per ton for naphtha at Kalol and Rs 1,260 per tonfor naphtha at Phulpur. IFFCO's overall profitability would not be affectedby increasses in real feedstock prices since these would be recovered underGOI's price retention formula (para. 9.02). IFFCO's cash position is expectedto improve significantly now that the Phulpur plant is starting up. Internal]lygenerated cash will amount to about US$46 million in 1980/81. Thereafter whenthe Phulpur project increases its production capacity, IFFCO's cash flow willdouble to about US$90-110 million annually, which is more than adequate tocover IFFCO's debt service and its equity contribution to KRIBHCO. IFFCO isexpected to contribute about US$30 million per year as equity to KRIBHCOduring 1981-84.

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IFFCO - Summary of Consolidated Financial Projections(in Rs million, unless otherwise noted)

(Year ending June 30) 1980/81 1982/83 1983/84 1984/85 1985/86

Kalol plant (000's tpy) 350 350 350 350 350Kandla plant, existing units

(000's tpy) 530 500 470 440 380Kandla plant, new unit (000's tpy) - 347 390 430 430Phulpur plant (000's tpy) 83 396 420 420 420

Sales revenues 2,377 4,841 5,246 5,401 5,448Cost of production 2,061 3,960 4,272 4,457 4,464Interest charges 84 113 99 83 69Income taxes - - - 340 362Net profit after tax 232 768 875 521 553Depreciation 128 268 274 285 291Operating cash flow after interest 360 1,036 1,149 806 844Debt service ,lla/ 273 276 247 239Current Assets 1,175 1,657 2,278 2,521 3,080Net Fixed Assets 2,657 2,370 2,158 2,019 1,794Current liability 743 631 428 428 428Long-term debt 1,217 927 750 586 416Equity and retained earnings 2,068 3,318 4,144 4,616 5,120Total assets 4,028 4,673 5,322 5,360 5,964

Debt service coverage ratio 4.0a/ 4.2 4.5 3.6 3.8Current ratio 1.6 2.6 5.3 5.9 7.2Long-term debt/equity 37:63 22:78 18:82 11:89 8:92Net profit after tax/sales (%) 9.8 15.9 16.7 9.6 10.2Net profit after tax/equity (%) 11.2 23.1 21.1 11.3 10.8

a/ Including withdrawal of loans of Rs 104 million in 1980/81.

IV. FERTILIZER MARKET IN INDIA

A. Fertilizer Use in Agriculture

4.01 The agricultural sector is by far the largest in the Indian economy,and accounts for 72% of the labor force; its productivity, however, is stilllow, with the sector accounting for only 42% of the country's gross domesticproduct. For centuries crop production was wholly dependent on monsoon rains,which failed periodically, as in 1943, when a serious drought aggravated bya breakdown in the foodgrain distribution led to a severe famine. Howeversince 1951, Indian agriculture has been gradually transformed; in the periodfrom 1951 to 1979, foodgrain output increased at an average rate of 2.9% ascompared to a population growth rate of 2.1% per year (Annex 4-1). Part ofthis increase in agricultural output can be attributed to changes in croppatterns, but most of the increase is due to higher productivity achieved withthe introduction of irrigation and fertilizers, an increase in the area undermultiple cropping and the widespread cultivation of high-yielding varieties(HYVs), particularly wheat and rice. As a result of these improvements,India is now almost self-sufficient in foodgrain production. There is still,however, ample room for further increases in agricultural production.

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4.02 India now ranks third in cultivated areas (after the USSR andUS), and has one of the largest irrigated areas; the gross cropped area nowstands at 176 million ha, of which 75% is under foodgrain (Annex 4-1). Sincepossibilities of further increases in cropped areas are limited, furtherincreases in foodgrain production will have to come mainly through moreirrigation, increased use of HYVs, greater intensity of fertilizer use andmultiple cropping. Fertilizer consumption per hectare (all nutrients) hasincreased substantially during the last three decades from 0.5 kg per hectarein 1951/52 to 7.0 kg/ha in 1966/67 and 31.2 kg/ha in 1979/80. However, Indiastill consumes less fertilizer per hectare than many other developing countries;i.e., in 1979 Brazil consumed 79.0 kg/ha; Pakistan 43.3; Mexico 45.5; and thePhilippines 38.5.

4.03 There is wide variation in the intensity of use of fertilizers amongdifferent States in India. While the Punjab recorded a fertilizer usage of108.6 kg/ha in 1980, five other major States (Madhya Pradesh, Rajasthan,Orissa, Bihar and Maharashtra) which account for more than 45% of the croppedarea, used only 12.4 kg/ha. In the States to be served by the Hazira Project,fertilizer usage presently ranges from 8.6 kg/ha in Rajasthan to 108.6 kg/hain the Punjab (Annex 4-2). Part of this variation can be attributed todifferences in irrigation, climatic and topographical conditions, as well asin soil characteristics, but much of it is explained by differences in theactual use of fertilizer and HYVs. Since in several States, such as UttarPradesh, Madhya Pradesh and Rajasthan, the percentage of farmers using anyfertilizer at all is very low, there is a significant potential for increasingfertilizer consumption simply by increasing the number of farmers usingfertilizer, as well as through improvements in farm management practices andfarmer education. While fertilizer companies play a role in propagatingfertilizer use, the main efforts in this area must be carried through theState agricultural extension services. These extension services are beingreorganized in many States with Bank assistance (para. 5.21) and a number ofmeasures are being implemented to improve credit availability (para. 5.18).Furthermore, fertilizer consumption is still concentrated in relatively fewdistricts, often close to railheads. With easier availability, fertilizerconsumption in remote areas can be encouraged (para. 5.05). Therefore, thepotential for considerable increases in fertilizer consumption in India issignificant.

4.04 Nitrogenous fertilizer is available in the form of four main products:urea (46% nitrogen); ammonium sulphate (20.6% N); ammonium sulphate nitrate(26% N); and calcium ammonium nitrate (21%-26% N). The pattern of consumptionhas changed markedly over the years; in 1961 more than half the nitrogenwas consumed in the form of ammonium sulphate, with only 22% being supplied inthe form of urea. Since then, due to cost savings in bagging, storage andtrans port per unit of nutrient, high analysis material such as urea hasbeen dominating the market; 78% of total nitrogenous fertilizers are nowbeing supplied as urea. The other straight nitrogenous fertilizers accountpresently for only 9% of the consumption, with about 13% nitrogen supplied inthe form of NPK complex fertilizers (Annex 4-3).

B. Historical Growth of Fertilizer Consumption and Production

4.05 Historical fertilizer consumption, production and imports are givenin Annex 4-4 and summarized in the following page. In the decade 1962-72,nitrogenous fertilizer consumption grew at an average rate of 21.8% per year.

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For the next three years, consumption remained static due principally toadverse weather conditions and sharp increases in fertilizer prices. In theyear ending January 31, 1976 (i.e. 1975/76), nitrogen consumption againincreases, and this growth was sustained through 1979/80 with the growth ratein the period 1975-80 averaging 14.6% per year. Consumption of phosphatic andpotassic fertilizers followed a similar pattern, but did not begin to recoveruntil 1976/77. By 1979/80, fertilizer consumption stood at 3.5 million tpyof nitrogen, 1.2 million tpy of P205, and 0.6 million tpy of K20. In 1979/80,one of the most severe droughts experienced in the 20th century struck thesummer Kharif crops (when in some non-irrigated areas production dropped 93%),and rainfall during the first months of winter Rabi was below normal, with theresult that fertilizer consumption in 1979/80 increased by only 2.7% over theprevious year. During 1980/81, however, the sector partly recovered, with

India - Fertilizer Consumption, Production and Imports, 1961-78(in thousand tons of nutrients)

Nitrogen Phosphate Potash b/ N-P-KYear a/ Cons. Prod. Imp. Cons. Prod. Imp. Cons. Imp. Ratio

1961/62 250 154 307 60 65 - 28 75 8.9-2.2-1.01971/72 1,798 949 481 558 290 248 300 268 6.0-1.9-1.01972/73 1,839 1,054 665 581 330 204 367 325 5.3-1.7-1.01973/74 1,829 1,050 659 650 324 213 360 370 5.1-1.8-1.01974/75 1,766 1,186 884 471 331 286 336 437 5.3-1.4-1.01975/76 1,990 1,535 996 430 320 361 278 278 7.7-1.7-1.01976/77 2,457 1,857 750 635 478 23 318 278 7.7-2.0-1.01977/78 2,913 2,000 758 867 670 164 506 599 5.8-1.7-1.01978/79 3,420 2,169 1,228 1,106 776 243 592 517 5.8-1.9-1.01979/80 3,498 2,226 1,295 1,051 763 237 606 473 5.8-1.9-1.01980/81 (Est) 3,742 2,645 n.a. 1.172 n.a. n.a. 636 n.a.

Average Annual Growth Rates (%)

1961/62-71/72 21.8 19.9 4.6 25.0 16.1 n.a. 26.8 13.61971/72-79/80 8.7 11.2 13.2 9.5 12.9 (0.6) 9.2 7.41961/62-79/80 15.8 16.0 8.3 17.8 14.7 _ 18.6 10.7

a/ Consumption data run from February of the first year to January of the second;production and import data run from April to March.

b/ All potash requirements are imported since there is no domestic production.

4.06 Although fertilizer production in India has increased at a rapidpace of about 16% per year during the last 18 years, it has generally laggedbehind domestic consumption. Therefore, in the period 1971-80, an average of857,000 tons of N and 220,000 tons of P20 were imported, representing aboutone-third of domestic consumption. India s fertilizer import policy iscentered on supplementing domestic production with imports to ensure adequateavailability on the domestic market; while domestic production is planned toincrease considerably over the next five years, the share of imports isexpected to remain at about 20% of demand.

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4.07 As shown in the previous table, the NPK ratio today stands atapproximately 6-2-1. It has been estimated that from an optimal agronomicalstandpoint the ultimate NPK ratio to be reached in the 1990s should be closeto 4-2-1. Therefore, in order to ensure the optimal benefit from the use ofnitrogenous fertilizers, the use of phosphatic and potassic fertilizers willneed to increase at a faster rate than nitrogen. A committee formed by theMinistry of Chemicals and Fertilizers is examining the desirability of con-structing three major phosphatic fertilizer plants during the next fiveyears.

C. Projected Growth of Nitrogenous Fertilizer Demand and Production

4.08 A number of estimates of the projected demand for nitrogenousfertilizer have been prepared by various Indian organizations (Reference A -Project File). Bank staff has also prepared projections--high, median andlow estimates. While based on Box-Jenkins forecasting techniques, Bankprojections also take into account factors such as distribution losses,build-up of additional stocks in the distribution system and estimated dimin-ishing return levels for nitrogen consumption. The median Bank estimateprojects a growth rate consistent with that achieved over the period 1971 to1979 and includes a cyclical movement superimposed on the main trend, againconsistent with past data. It assumes that recovery from the current depressedlevels due to the 1979 drought will take two or three years to work itselfout. The median estimate results in a growth rate of 10.1% p.a. in the nextfive years, compared to rates of 15.8% in 1961-79 and 10.7% in 1967-79. Thehigh estimate projects a rate of growth of 12.5% p.a. over the next fiveyears, which is a more optimistic growth rate than that experienced in 1971-78,and assumes an immediate recovery from the effects of the drought. The lowprojection of 8.5% p.a. takes a more pessimistic view of these factors. Theprojections for the longer term assume that the estimated potential level ofconsumption of nitrogenous fertilizers of at least 10 million tons of nutrientwill be attained in the early l990s. li These projections are compared withprepared by a number of Indian organizations in Annex 4-5; in general they donot differ substantially from Bank projections.

4.09 Relatively rapid growth of consumption is expected in the futuredue to (i) the determined Government efforts to increase agricultural outputand promote the use of fertilizers, including improving agricultural supportservices; (ii) the current wide disparities in fertilizer use among the Stateswhich provide an opportunity for rapid growth in use by broadening the fer-tilizer demand base; and (iii) the fast growth in fertilizer use in thepast combined with the still relatively low overall level of consumption whichprovides a very large potential demand. It will take at least another decadeof the present high growth rate before the level of consumption approachesoptimum levels. However, the maintenance of rapid rates of growth in demandwill depend on the continuance of key policies concerning the agriculturalsector. The relative financial prosperity of the farming sector since themid-1970s has undoubtedly been a major factor sustaining growth of demand.

1/ A potential level of nitrogenous fertilizer consumption of at least 10million nutrient tons per year was estimated using data on optimalfertilizer usage on different crops, projections of irrigation, HYVdevelopment, crop patterns, etc. (Reference B - Project File).

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At current fertilizer/crop price ratios, fertilizer use remains profitable(para. 5.23), and it is assumed that these favorable ratios will be maintainedin the future. Other Government policies that will have a significant impacton consumption, including agricultural extension, credit and research are

discussed in Chapter V.

4.10 The Bank projections of demand and production of nitrogenousfertilizers are summarized in the table below. The fertilizer productionestimates given there take into account plants already in operation, underconstruction and firmly planned (Annex 2-1 and 2-4). The estimates includeproduction from the major projects now in the planning stage and expected tocome on stream by 1984/85. These newer plants are assumed to operate at 90% oftheir capacity from their third year of operation. For the older and problemplants, past performance and the effect of modification schemes have beentaken into account in estimating the likely production levels. The comparisonof nitrogen production and demand projections shows that, as noted previously,the current shortfall in domestic supply is likely to continue; i.e. antici-pated production will be only 81% of projected demand in 1986. This gap mayeven be higher if existing older production facilities have to be shut down.This indicates that not only the Hazira Project, but also other large plantsnow in the preliminary planning stage will be required.

India - Projected Growth of Nitrogenous FertilizerDemand and Production(million nutrient tpy)

Excess of DemandYear Ending Demand Production over ProductionJan. 31 Low Median High Low Median High

1979/80 a/ 3.59 3.59 3.59 2.22 1.37 1.37 1.371981/82 4.38 4.70 5.04 3.40 0.98 1.30 1.641983/84 4.69 5.15 6.66 4.47 0.22 0.68 2.191985/86 5.87 6.55 7.28 5.51 0.36 1.04 1.771987/88 6.94 7.75 8.60 5.93 1.01 1.82 2.671989/90 8.00 9.00 10.00 5.95 2.05 3.05 4.05

Growth Rates

1961/62-79/80 b/ 15.8 15.8 15.8 16.01979/80-85/86 8.5 10.5 12.5 16.41985/86-89/90 8.0 8.3 8.3 1.9

a/ Actual consumption in 1979/80, after adjustments to allow for distributionlosses (2%), and stock build up.

b/ Unadjusted 1978/79 consumption figure is used in calculation of historicalgrowth rate.

V. MARKETING AND DISTRIBUTION

A. Market for Project's Output

5.01 IFFCO plans to move fertilizers from the project site to the market-ing area in unit trains owned and operated by the Indian Railways, with

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dispatches spread out uniformly throughout the year. A supply plan for the

Hazira marketing area for 1986/87 (Annex 5-1) has been produced by Bank staff

on the basis of estimates of Statewise demand for urea prepared by a working

group constituted by the GOI, and taking into consideration GOI's distribution

principles as stated in para. 5.02. As shown in Annex 5-1 and Map IBRD 14853,

the major markets for the Project's output are expected to be Gujarat, thePunjab and Haryana, each taking approximately 23% of the Project's output

(about 300,000 tpy of urea each), Madhya Pradesh, 16% (about 200,000 tpy) and

Uttar Pradesh, 8% (about 100,000 tpy). While most of the Project's outputsold in Gujarat will move by road, urea marketed in the Punjab, Haryana and

Rajasthan will be moved on the Western Railway system, and urea marketed inMadhya Pradesh and Uttar Pradesh will be transported on the Central Railwaysystem.

B. Fertilizer Distribution System in India

5.02 The Ministry of Agriculture coordinates through six-monthly zonal

conferences the distribution of domestically produced fertilizers to different

States, to ensure that (i) no important production unit relies entirely onthe market in one State and that no State relies on one production unit for

its entire requirements; (ii) market requirements are met from domestic

production as far as possible; (iii) there are no radical changes from yearto year in the marketing areas of individual producers; and (iv) the average

freight distance from individual producing units is minimized. Once the

Statewise allocations are made, plans are coordinated with the railways forthe movements of fertilizer over the next six-month period, eliminating as far

as possible cross-movements of similar fertilizers from different producers.

5.03 Fertilizers are marketed to farmers through the following agencies

(Annex 5-2): (i) cooperatives and other institutional agencies; (ii) privatetrade agencies; and (iii) manufacturers' outlets. In India, the cooperative

system is the most important fertilizer channel, distributing about 60% ofall fertilizers. For all India, there are some 43,000 cooperative selling

points. In almost all States, there is an Apex Cooperative Marketing Federa-tion which coordinates the marketing of fertilizers and other agriculturalinputs in the State and undertakes the marketing of agricultural products.The private trade agencies handle about 40% of all fertilizer sales andinclude (i) wholesale agencies, of which there are three major companies inIndia; and (ii) private dealers which are appointed by any of the public/private sector manufacturers or by the wholesale agencies. Some privatedealers sell part of their material to retailers and the rest directly tofarmers. Fertilizer manufacturers are not significantly involved in distri-bution, though some maintain a few outlets as sales points/service centers.

5.04 The institutional structure of the cooperatives engaged in fertil-izer marketing varies somewhat from State to State, with a two-tier structure

(State Apex Cooperative Federation and Village Cooperatives) in some States,and a three-tier structure (Apex Cooperative, District-level Cooperatives andVillage Cooperatives) in others. Operating in parallel with Apex Cooperativesare the Apex Cooperative Banks which are the main channels for providingcooperative credit to the farmers (para. 5.18). IFFCO and KRIBHCO productswill be almost entirely marketed through the cooperative system. IFFCO will

deal directly and exclusively with about 20 State Apex Cooperatives for theselling of its products. At present, in accordance with a shipment planagreed upon with the Apex Cooperatives, IFFCO moves its products to about 270

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warehouses located in its marketing area. IFFCO products are then lifted bythe State Apex Cooperatives from these warehouses, which are generally situ-ated at railheads, to their own warehouses, where on average the material isheld for three to four months. In turn, the lower level cooperative societiesnormally draw their products from the Apex warehouses according to theirrequirements. Usually the handling charges, transport cost and point-of-salestorage costs are borne by the lower level societies themselves and must bemet out of the share of the dealer's margin passed on to them by the ApexCooperative; in some cases, however, the Apex Cooperative itself assumesresponsibility for transferring the material to the primary societies' godowns,in which case a larger proportion of the dealer's margin is retained by theApex Cooperative.

5.05 The bulk of fertilizers are moved by rail from manufacturing pointsor import ports. This has led to the concentration, principally by privatedealers, of stocking points as well as sales outlets near the railhead. Thisconcentration away from the final consuming points, in the future could act asa major deterrent to rapid increases in fertilizer consumption. The Governmentof India is aware of the need for the opening of more sales points in areasaway from the railheads and is planning to introduce incentives for privatedealers to operate away from the railheads. With Bank/IDA support, it is alsoimproving the availability of fertilizers near consuming points by expandingcooperative godown facilities.

5.06 Imports of nitrogenous and phosphatic fertilizers are effected bythe Government-owned Minerals and Metals Trading Corporation on behalf of theCentral Fertilizer Pool. They are then distributed by the Food Corporationof India on behalf of the Pool. Potash is distributed by Indian Potash Ltd.These agencies, however, rely heavily on the cooperatives and private dealersfor the actual distribution within the country. In order to make efficientuse of unit trains over long distances and to minimize double loadings andhandling, imported nitrogenous fertilizer is normally destined for distantmarketing in Uttar Pradesh and the Punjab (in addition to the coastal States inthe South), the demand in other States being satisfied from domestic production.

C. Distribution Infrastructure

5.07 By 1986 about 20 million tons of fertilizer products will be movedfrom production sites and importing ports to the farmers. The provision ofadequate distribution infrastructure to handle this quantity of material isof major importance. The major physical facilities utilized are the railways,roads, ports and warehouses.

5.08 Railways. Railways carry about 90% of fertilizers distributedin India, representing about 4% of total rail movements. The transportationand distribution of fertilizers are currently facing difficulties becauseof railway capacity constraints and operational inefficiencies. Regardingcapacity constraints, some rail corridors are already insufficient to copewith traffic. This problem is recognized by the Indian Railways and is beingtackled through an active program of line strengthening. For the Projectitself, during project appraisal, a program of work for line strengthening inthe two principal Project corridors was agreed upon with the Indian Raili(Annex 5-3). In addition, the GOI has agreed to provide required railwayfacilities, so that the transport of all coal and finished products of the Project

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will be timely and expeditiously carried out. A letter confirming theseundertakings has been sent to the Bank by GOI. As shown in Annex 5-3, mostof the required line strengthening works are already included in the RailwayBudget and Work Program. The remaining works in the Project's product andcoal corridors are relatively minor, consisting principally of additionalloops and signalling improvements to increase line capacity, except for thelast segment of the main corridor near Delhi (Bayanato Palwal), where additionaldoubling of tracks may be necessary (Map IBRD 14853).

5.09 In addition to capacity constraints, maintaining an efficient levelof railway operations can be a major problem, since fertilizer traffic isalmost exclusively in one direction and there is often difficulty in findingan adequate number of empty wagons close to the production sites. Also thereis an excessively long turnaround time for empty wagons, due to inadequateterminal handling facilities and deficient telecommunications between marshal-ling points and central control. In order to ensure a more efficient trans-portation of inputs and outputs for the Hazira Project, rail movements will becarried out by rakeloads (unit trains). Under this scheme, urea will be movedonly to a limited number of nodal points in different States, which have beenidentified on the basis of proximity to centers of demand. To ensure a properplanning of unit train operations, the Government of India set up a workinggroup that carried out a "Nodal Points Study." The study included estimationof the likely volume of total fertilizer traffic from the West Coast ports andfertilizer plants, identification of nodal points to which this traffic wouldbe moved, and assessment of the additional facilities that would be needed atthese nodal points for unloading and handling. These facilities will includerailway sidings, secondary road transport and storage. The Government is nowreviewing the results of the study, and has agreed to take appropriate actionson fertilizer distribution and railway operations in the light of the NodalPoints Study recommendations, to ensure the efficient movement as the Project'sinputs and outputs.

5.10 Road Transport. The transportation of fertilizers in Gujarat State(where the Project is located) will be by road. Since the project site isclose to Surat, an important commercial center where a large number of emptytrucks are normally generated, no problem is envisaged in finding the numberof trucks required for moving urea in the State. Road transport will also beutilized for movements of fertilizer from the nodal points in the market areato buffer storage and thence to the primary societies' godowns. In mostStates, private and road transport is coordinated by road transport unionswhich are organizations of the carriers themselves. These unions help inallocating traffic among the different operators and also try to minimizeempty haulage.

5.11 Ports. Currently, over 35% of nitrogenous fertilizers required(2.8 million product tpy) are imported. In 1986/87, unless further productioncapacity is added to that already planned, over 5 million product tons ofnitrogenous fertilizers (or about 28% of total demand) will have to be imported.A major problem of all Indian ports is congestion; in several ports unloading

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berths are not readily available, causing significant delays after shipsarrive. Greater emphasis has been given in recent years to importing fertilizerin bulk, but facilities for bulk handling and port storage are unsatisfactoryin many of the ports and even where they exist, labor disputes often preventtheir full utilization. Bagging is carried out manually, resulting in asignificant proportion of underweight and damaged bags. The Government isaware of the problem and efforts are being made to improve port operations,including permitting some of the domestic fertilizer companies to import thematerial directly and bag it under their control. The products of the proposedProject are not intended to be moved by sea through any port.

5.12 Warehousing. The main agencies engaged in the provision of storagefacilities for agricultural products as well as fertilizers are the CentralWarehousing Corporation (CWC), the State Warehousing Corporations (SWC)and the cooperatives. In addition, a few fertilizer manufacturers, as wellas the Food Corporation of India (which is responsible for holding most ofthe stock of imported fertilizers on behalf of the Central Fertilizer Pool),maintain independent warehousing capacity. In June 1979, the CWC h ad atotal warehousing capacity of 3.2 million tons, the SWC 5.1 million tons, andthe cooperatives 4.3 million tons (2.3 million tons at the district level and2.0 million tons in rural areas), with an additional capacity of 1.2 milliontons under construction, in part with IDA assistance. About 25% of thestorage space in CWC and a higher percentage of that of the other organiza-tions is utilized for fertilizer storage. To effect product distribution byunit trains to nodal points, there will be a need for building significantadditional storage capacity as well as for constructing offloading facilitiesto handle frequent rakehauls, railways sidings with platforms of the requisitelength and covered platform storage. It is understood that the CWC is preparedto erect warehouses with such railway facilities in places where requiredfertilizer storage amounts to at least 25,000 tons and such storage capacityis contracted for a period of at least 10 years. Although no single fertilizermanufacturer would be in a position to guarantee the need for 25,000 tons ofwarehousing capacity at a nodal point, several producers jointly would requireand are expected to contract such storage capacity.

5.13 IFFCO's Storage Requirements. Currently, IFFCO rents storagespace in some 270 warehouses with a total reserved storage capacity of240,000 tons. Most of this space is located at or near railheads at marketcenters from where the cooperative societies can be most conveniently fed.For the Project's output, plant site storage is planned at 90,000 tons forbulk (about 3 weeks production) and 6,000 tons for bagged material. Atfull capacity, in 1986, IFFCO will require 426,000 tons of storage capacity inthe market area; the Statewise warehouse space requirements would be asfollows: 138,000 tons in Haryana; 133,000 tons in Punjab; 93,000 tons inMadhya Pradesh; 49,000 tons in Uttar Pradesh; and 13,000 tons in Rajasthan.No storage is required in Gujarat since the cooperatives will lift the mate-rial directly from the plant. These estimates assume a warehouse turnoverof 2.25 times per year, which is considered reasonable. IFFCO intends torent the required storage space and no problem in securing such space isanticipated; but IFFCO is prepared, should the need arise, to erect andoperate its own warehouse space in the field, principally as buffer storage tocover unexpected needs.

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D. IFFCO's Sales and Marketing Efforts

5.14 IFFCO shareholders include about 27,000 cooperatives which distri-bute IFFCO fertilizer to member farmers. However, because of the pyramidalnature of the cooperative system in India, IFFCO deals only with the 20 ApexCooperatives that form the top echelon of the cooperative system. As discussedin para. 5.04, these Apex Cooperatives lift the material from IFFCO warehouses,rented by IFFCO from the Government-owned Central and State WarehousingCorporations, and distribute it to the lower layers of the cooperative system.Thus, the direct sales effort by IFFCO itself is relatively small and thesales department's main function is to ensure that the material is distributedon time to 270 railhead warehouses in accordance with the shipment plan agreedupon with the Apex Cooperatives. These efforts have been successfully carriedout up to now. IFFCO's marketing division consists of 140 head office staff(about 50 management and professionals) and 711 field employees. It iscurrently adequately staffed and will be strengthened according to the needsof the Project.

5.15 In addition to its sales department, IFFCO, like the other fertil-izer producers, undertakes market development aimed at promoting the company'sproducts. This function contains some elements of extension, such as freesoil testing, seed treatment, insecticide use, agricultural advice, demon-stration plots, farmers' meetings, seminars, etc. However, the manpowerresources which the fertilizer companies can bring to bear on this activityare of necessity very much smaller than those of the State extension services.Nevertheless, the extension work of the companies provides an important cata-lytic effect on consumption, and the response in terms of increased fertilizerconsumption resulting from their activities is significant. IFFCO's marketingdivision consists of a marketing director with five functional managers andfour zonal managers reporting to him (Annex 5-4). Functional managers includethose in charge of cooperative relations, marketing services (including train-ing), marketing accounts, personnel and administration, and distribution andtransportation. In order to improve the control and supervision of fieldactivities, the marketing administration was recently decentralized and fourzonal offices established. These four zonal managers will supervise the 13states marketing managers, who have under their control 32 area offices. Eacharea office has a manager and an agronomist with about 10 field representatives.

E. Agricultural Credit

5.16 Credit for fertilizers plays an important role in determiningfertilizer use. This credit is needed at two stages: (a) distributioncredit required by the marketing cooperatives in order to hold the stock,and (b) farmers' credit required by the farmers in order to enable themto invest in inputs until the harvest is sold.

5.17 Distribution Credit. The sources of distribution credit are theCentral Fertilizer Pool and domestic manufacturers (33%), central cooperativebanks (31%), and commercial banks (36%). At present, distribution creditcovers only about 70% of the country's actual requirements and the maturitiesof the credits are generally shorter than required. By 1986, the value offertilizer trade will be over Rs 31 billion (US$3.9 billion), and the

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distribution credit needs will have risen to almost Rs 15 billion. About 60%of these requirements will be for cooperatives. The Government is aware ofthe need for adequate distribution credit and a number of measures have beentaken to make it more readily available; e.g., the Reserve Bank of India (RBI)is extending credit to the cooperatives that are unable to obtain creditfrom commercial banks, and is now making funds available to Regional RuralBanks which in turn make distribution credit available to cooperative socie-ties (para 5.19).

5.18 Farmers Credits. For the farmer, the main sources of credit arethe cooperative system, commercial banks, regional rural banks and privatemoney lenders. In 1979, 42% of the institutional direct finance for agricul-ture came from Cooperative Primary Agricultural Credit Societies, 28% fromthe Land Development Banks and about 30% from the commercial banks. The farmcredit needs of the cooperatives are met primarily by the RBI routing creditthrough the Apex level and district level cooperative banks. Farm creditrequirements for fertilizers in 1980 were estimated at Rs 15,000 million(US$1,900 million), assuming that 70% of fertilizer sales are made on credit.The Government aims at substantially increasing credit available to theagricultural sector, both for fertilizers and other purposes, by progressivelyinstitutionalizing credit sources and by adopting a multi-agency approach.Some years ago, difficulties arose with the system of crop credit due princi-pally to the small size of many of the primary cooperatives and defaults amongmembers in repaying the loans. The problem was specially serious in theStates of Gujarat, Madhya Pradesh and Bihar. At present in all India, theaverage number of cooperative loans not paid on time is about 43%, althoughmuch of this money is recovered in the long run. Until recently, any societywhich defaulted in loan repayments was not entitled to further advances,resulting in a large number of societies becoming inoperative. In an effortto revive such societies, small primary level societies are being reorganizedby integrating them into large units with a minimum credit activity ofRs 200,000 in short-term loans. At this level of activity each society willbe able to employ a full-time secretary, will cover 2,500 families and belocated not more than 10 km from any farmer. Furthermore, in many States, thecooperative structure is being overhauled by integrating village societiesinto minibanks where a farmer can obtain, in one location, credit, agriculturalinputs and essential consumer goods.

5.19 The Government has for some time been encouraging the commercialbanks to extend their activities into areas where the cooperatives do notoperate, for instance, in extending credit to the larger farm owners whosecredit needs exceed the limit permitted by the cooperatives. Under-bankedareas will receive preference in the establishment of new bank branches.To further strengthen the credit system, in 1975 the GOI set up regionalrural banks, and by early 1980, 48 regional rural banks with 1,400 brancheshad been put into operation. These banks extend loans to small and marginalfarm owners, landless laborers and rural artisans for purchase of fertilizersand other agricultural inputs. Furthermore, the GOI is currently reviewingthe desirability of setting up an Agricultural Development Bank to meetspecific credit needs in different areas. Although the past growth of fertil-izer consumption does not seem to have been constrained by credit availability,the GOI and RBI are aware of the need to strengthen the operations of creditinstitutions and are taking measures with Bank support to ensure the adequateand timely availability of agricultural credit.

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F. Agricultural Extension and Research

5.20 Extension service activities are essential to generate demand for

fertilizer in States that are using less fertilizers. Extension services

are carried out principally by the Agriculture Departments of the States,

with some guidance from the Central Government. The services are executed

through the Block Development Program, which aims at creating suitable condi-

tions and infrastructure for rural development. More than 112,000 people are

employed at the State Government level in extension in India. The extension

organization varies from State to State, but broadly speaking, each of the

5,000 Community Development Blocks in India is under the charge of a Block

Development Officer (BDO), who has under his supervision several Village Level

Workers (VLW), with each one of these VLW serving about 10 villages. In

addition to agricultural extension work, the VLW assists in animal husbandry,

public health, primary education and village saving schemes. Attached to

each Block are Extension Officers who are specialists in crop growing, plant

protection, animal husbandry, education, etc.

5.21 In order to improve the traditional system of extension services,

frequent and continuous follow-up by specialized technicians is necessary.

In the last few years, the Training and Visit System (T&V) has been introduced

in many states with IDA financial assistance. The scheme--which is based on

the provision of know-how at regular intervals from specialists to extension

workers who then transfer the know-how through visits to the farms--is being

expanded gradually since it requires a major reorganization of large numbers

of staff and the systematic development of their technical competence.

Nonetheless, progress in many States is encouraging; the reorganized extension

services in 9 States now cover 13 million farm families, while at full

development these services will cover almost 30 million farm families.

Efforts are under way to extend the system to other States and eventually

to all of India's 70 million farm families.

G. Fertilizer and Product Prices

5.22 The retail and ex-factory prices of urea (and other nitrogenous

fertilizers) are statutorily controlled in India. A comparison of the retail

price to farmers (excluding local sales tax) with the import price of urea--on

the basis of import prices, CIF India, plus an allowance for port handling and

internal distribution but excluding import duties and taxes--is given in the

table in the following page. It shows that broadly domestic retail prices

have been quite close to import prices except during the abnormal conditions

in the international fertilizer market in 1974/75.

5.23 The incentive to the farmer to utilize fertilizer depends not

only on the price of fertilizer but also on the price he obtains for his

crops. Annex 5-5 presents an analysis of the historical movement of the price

of crops and fertilizer in terms of the amount of grain required to buy 1 kg

of nitrogen in the form of urea. It shows that since 1974, when the urea

price reached its peak, the amount of wheat or paddy needed to be sold by the

farmer to buy 1 kg of nitrogen has declined, and currently stands slightly

above 1971 levels. Studies on the yield response to fertilizer application

show that at current price levels, fertilizer use is profitable to farmers,

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and that the economic optimum is reached with very much higher application

rates than are currently achieved, even in the Punjab, which records thehighest fertilizer usage of all Indian States.

India - Comparison of Domestic Retail Prices and Import Prices of Urea(Current Rupees per ton)

Retail Price a/ Import Price b/

March 1972 850 660

October 1973 928 1,164May 1974 1,215 2,820

July 1975 1,365 2,620March 1976 1,400 1,215February 1977 1,400 1,295October 1977 1,311 1,455March 1977 1,311 1,530November 1979 1,311 2,310November 1980 2,000 2,640

a/ Excludes pool equalization surcharge and local taxes.

b/ CIF Bombay (converted at the exchange rate prevailing at thattime) plus allowances for port handling, internal distribution,and distribution margin, but excluding import duties and localtaxes.

5.24 The GOI recognizes that its ex-factory pricing policy determines

to a large extent the success of its fertilizer industry development strategy.In 1976, it set up a committee charged with developing a rational ex-factorypricing system which would (i) ensure the financial viability of the fertil-izer plants; (ii) motivate the industry to invest in new plants; (iii) give

a strong incentive for the producing units to operate efficiently; and (iv)ensure that the Government's subsidy to the farmers for fertilizer would notin time become too large a burden on public finances. The Committee recom-mended a system of "retention prices" which satisfied the above-mentionedobjectives. This system, introduced in November 1977, determines the ex-factory price per ton of fertilizer for each producing unit so that, operatingat 80% capacity utilization, such unit obtains an annual 29% pre-tax returnon capital (para. 9.02). This policy ensures a satisfactory financial situa-tion for the manufacturers and, at the same time, enables the authoritiesto maintain low fertilizer prices for the farmers, at a reduced cost to

the public finances, by what amounts to a cross subsidization from old to new

fertilizer plants. The Government has agreed not to take or cause to be takenany action which would prevent fertilizer manufacturers, under conditions of

efficient operation from meeting all their expenses, servicing their debts,and earning a reasonable return on invested capital.

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VI. THE PROJECT

A. Project Location

6.01 The Project will be constructed on a 770-ha site at Hazira, Gujarat,

on the Northern bank of the River Tapti, about 15 km west of Surat (Map IBRD14854). It is close to the planned port of Hazira, which the State Govern-

ment expects to expand into a major industrial area. The site was selectedfollowing a survey and evaluation of five alternative sites in Gujarat,which was carried out by a technical committee constituted by the Government

(Reference C-Project File), taking into consideration the sites, transporta-

tion, infrastructure and utility advantages, as well as their impact on

pollution and environmental aspects (paras. 6.15 to 6.19). The proposed

site is well located in between the Project's sources of raw materials and themajor fertilizer consuming states, i.e., 300 km north of the South Bassein

offshore gas fields and about 800 km south of the median marketing area. Thesite is connected to the rest of the country by main roads and broad-gauge

railway lines. Its easy access to deep sea water will facilitate the trans-

portation of heavy equipment to the plant. Furthermore, the site is close to

large available water supply resources and power generation facilities. Ithas ample space for expansion. On the basis of site soil investigation workso far carried out by the Fertilizer Planning and Development India Ltd(FPDIL), the soil bearing capacity is adequate for most foundation work,

requiring piling only for some heavy equipment.

6.02 The land required for the Project has been already acquired byKRIBHCO. About one quarter of this land was owned by the Government and theremainder by about 250 farmers. The farmers have been fully compensated.

The land was under limited cultivation and had no permanent structures.Acquisition did not require displacement of any residences.

B. Project Scope and Technology

6.03 The proposed Project will be based on steam-reforming of non-associated natural gas from the South Bassein fields. It will consist of:

(i) two single-train ammonia units with a capacity of 1,350 tpd each;(ii) four urea units of 1,100 tpd each; (iii) three steam plants of 275

metric tons per hour each; (iv) two power units of 15 MW each; (v) ammoniastorage of 20,000 tons; (vi) urea bagging facilities and silos for 90,000 tons

of bulk storage; (vii) a township with 960 housing units; and (viii) offsitefacilities for workshops, gas terminal plant, water treatment plant, adminis-tration building, laboratories and other facilities. The plant layout isshown in Map IBRD 21236. On the basis of 330 days per year of operation, theProject facilities would produce 1,306,800 tpy of urea at 90% of rated capac-ity. The ammonia units would produce 17,820 tpy of ammonia in excess of that

required for urea production, which will be easily absorbed by IFFCO's Kandlaplants for the production of NPK.

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6.04 The ammonia plants will be similar in capacity to the plants beingbuilt for the Thal fertilizer project. They will be the largest steam-reformingunits in India, though similar capacity plants are successfully in operationelsewhere. The ammonia process design will be based on the technology developedby M. W. Kellogg Company of the US. The urea plants will be based on a totalrecycle, ammonia constant pressure stripping process developed by Snamprogetti(Italy).

C. Gas Supply Arrangements

6.05 The discovery since 1974 of large offshore oil and gas fieldsat Bombay High and Bassein represents a significant step in reducing India'sdependence on imported energy. At full production in the mid-1980s theseoffshore fields, together with onshore deposits in Gujarat and Assam, areexpected to meet about 50% of India's petroleum requirements at that time.With the Bank's assistance under Loans 1473-IN of June 1977 and 1925-IN ofDecember 1980, the Oil and Natural Gas Commission (ONGC) has been developingthe Bombay High field, and has completed oil and gas pipelines to the Bombayarea. Associated gas from this field is expected to reach about 2.7 millionNcmpd by 1982, when oil production would reach its planned level of12.0 million tpy. Since the requirements of actual and potential customersfor natural gas in the Bombay area alone already exceed expected associatedgas production, the Government is planning to develop the South Basseinnon-associated gas field. According to ONGC estimates and an independentstudy carried out in 1978 by the consultants Degolyer and McNaughton (US), thenon-associated gas reserves at South Bassein are about 230 billion Ncm, ofwhich 60% is considered recoverable. These reserves are capable of maintaininga production level of 18 million Ncmpd over a 20-year period and are thusadequate to meet the Project's requirements of 2.8 million Ncmpd at fullproduction during its full economic life. A 300 km gas pipeline will be builtfrom South Bassein to Hazira (Map IBRD 13340) to satisfy the requirements ofthe Project and the future needs of the Gujarat gas network (0.8 millionNcpmd). Subsequently, this pipeline would be extended to the country'sinterior to satisfy the requirements of additional fertilizer plants to beinstalled there.

6.06 The Government has also requested Bank assistance for the SouthBassein development and pipeline project. On the basis of available information,the gas project appears economically justified. Preliminary estimates of thegas project indicates that it would cost about US$1,257 million in 1981 pricesand yield an economic rate of return of about 33%. This return is based ona gas price in 1981 dollars of US$207 per thousand Ncm (i.e., US$5.50 permillion BTU)for 1983/84, wh-ch is equivalent to a fuel oil price of US$220 perton. After 1984, gas prices are assumed to increase by 3.5% p.a. in realterms (para. 10.04). On the basis of a return of 10% on investment, thedelivered production and transportation cost of gas to Hazira would be onlyUS$42 per thousand Ncm (or US$1.12 per million BTU). This low delivery costhighlights the potential profitability of the South Bassein project. Theactual gas price to KRIBHCO will be determined by the Government on the basisof parity with delivered local naphtha prices (about US$150/ton) and isexpected to be about US$128 per thousand Ncm (US$3.40 per million BTU), due tothe current relatively low naphtha pric-s in India.

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6.07 The Government has already approved the execution of the South

Bassein gas project, and KRIBHCO has signed a long-term contract with ONGC for

the supply of gas. Further, the Government has agreed to execute the gas

development and pipeline project, as it relates to the Hazira Project, in

accordance with a schedule agreed upon with the Association and complete it

not later than January 31, 1984 unless otherwise agreed with the Association.

For this purpose, the Government will provide or cause to be provided as and

when needed, funds, facilities, services and resources for the timely executionof this gas project.

D. Coal Supply

6.08 The Project will require about 1,800 tpd of Grade I or II coal

(with 19%-27% ash and 0.3-0.7% sulphur content), to generate the process steam

required for the urea plant as well as for captive power generation. This

coal will be supplied from the Korea-Rewa and Pench coal fields in MadhyaPradesh belonging to the Western Coal Fields Ltd, about 900 km from Hazira.

The use of coal-fired steam generation plants is consistent with the Govern-

ment's policy of promoting the use of local coal for power generation, while

encouraging the use of gas mainly as feedstock in fertilizers and petro-

chemicals. In the recent past, however, industrial coal users have experienceddifficulties in obtaining timely coal supplies, principally due to rail

transportation deficiencies and labor unrest at the coal mines. To minimize

this risk, the Project will have the flexibility to use gas as fuel in case of

coal shortages. An adequate coal storage area will be provided near the steam

generation plant. The site will also have a suitable area for ash disposal.KRIBHCO has already signed a long-term contract with Western Coal Fields

Ltd, committing the supply of 540,000 tpy of Grade I or II coal, as requiredby the boiler specifications, from the above-mentioned coal fields. DuringProject appraisal, the Indian Railways confirmed that the transportation of

coal to the Project (about one unit train per day) should not pose majordifficulties, especially after the strengthening of the 300-km section from

Udhna to Jalgaon is completed by March 1984. The Government has agreed that

it will take measures to ensure the timely and adequate provision of railwayfacilities for coal transportation.

E. Power Supply

6.09 At full capacity, the Project will require 30.8 MW of power, which

will be almost entirely generated within the plant in order to permit con-tinuous operations and avoid damage to equipment and catalysts by powervariations and shut-downs in the grid. The Project will include two in-plantpower generation units of 15 MW capacity each, capable of providing an average

of about 27 MW, which are sufficient to maintain the ammonia and urea unitsin operation. The remaining 3.8 MW required by the Project will be provided

from the State grid. The 220-Kv sub-station at Vav, which belongs to the

Gujarat Electricity Board is about 30 km from the site and a double circuit

line of 66-Kv is expected to be laid by December 1981, from this station to

the site. KRIBHCO's share of the cost of this line is included in the project

cost. The Vav sub-station is supplied from both the Tarapur and Ukai powerplants and hence reasonably stable supply is assured. The State grid will be

capable of providing up to 20 MVA (i.e. about 17 MW) as stand-by power, in

case one of the project turbogenerators is not in operation.

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6.10 During construction, the power needs of the Project will peakin May 1983, at about 2.5 MW. This power requirement will be met by theexisting 22-Kv transmission line available in the area, supplemented by two ormore 250 KW diesel generator sets that IFFCO intends to bring from the recentlycompleted Phulpur project. KRIBHCO has made arrangements with State andCentral Government authorities to (i) be able to generate captive powerand (ii) ensure adequate and timely power supplies from the State grid duringconstruction and operation. KRIBHCO has agreed to finalize an adequatecontract for the provision of power by the State, including emergency power,by December 1981.

F. Water Supply

6.11 At full operation, the estimated total water requirements of theProject will be about 90,000 cubic meters per day (cmpd), or about 37 cubicfeet per second (cusecs). Although the Project will be located on the bankof the Tapti River, the water of the river at that point is not suitable forthe Project because of its excessive salinity. Therefore, the Project'swater needs will be supplied by the Gujarat State Government from the irriga-tion canal system based on the Ukai Dam, which taps the Tapti River 90 kmupstream. The Hazira branch of the canal, which passes through the edge ofthe site, takes off from the main Ukai canal at a distance of 35 km from thesite; at that point its present capacity is 780 cusecs. The Hazira branchwill be widened to increase its capacity at the project site from 18 cusecs atpresent to 65 cusecs, to meet the Project's requirements including possiblelosses from the project reservoir. The State Government intends to completethe widening of the Hazira branch in the section needed by the Project byDecember 1983, which is satisfactory for project operations. During construc-tion, the Project will require about 1.5 cusecs, which will be supplied fromthe existing flows of the Hazira branch. The State Government has confirmedthat the widening of the Hazira branch can be undertaken without interruptingthe flow of water to the Project. The Project will also contain a waterreservoir with a capacity of three weeks supply as well as adequate waterfiltration and demineralization treatment facilities. Given the large avail-ability of water resources of the region, water supply to the Project is notanticipated to be a problem. KRIBHCO has already entered agreement withGujarat State to ensure that, the Project will be able to draw its waterrequirements on a continuous basis from the Hazira branch canal systems, oranother satisfactory source.

G. Other Infrastructure

6.12 Other important infrastructure for the Project includes the con-struction of employees housing, a 35 km railway spur track between the siteand the main Western Railways' Bombay-Delhi and Central Railways' Udhna-Jalgaonlines, the strengthening of the existing 15 km road to Surat, and the dredgingof a navigational channel in the Tapti River to bring heavy equipment to thesite. The Project includes construction of a township on the southern bank ofthe Tapti River with 960 housing units which will also contain: a hotel,shops, a school and a clinic. The construction of the railway spur is criticalfor the movement of finished products and raw materials, especially coal.Indian Railways has already completed the feasibility/engineering survey ofthe spur line north of the Tapti River. The railway spur will be

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directly connected at the Udhna junction to the Central Railways, in order to

avoid unnecessary overloading of the Bombay-Delhi line (see Map IBRD 14854).

Construction of the line has already been initiated and will take 24 months

to complete. Its total cost of US$19.8 million is included in the project cost

estimate.

6.13 The existing 15 km road from the site to Surat and the National

Highwav No. 8, is an asphaltic, all-weather road, but it is inadequate to

accommodate the heavy traffic during construction and operation of the

Project. The Gujarat State is, therefore, widening and strengthening this

road to 22 m with a view to complete it in time for the transportation of

equipment to the site, scheduled to start in mid-1982. In connection with

the existing works for a cement factory, a navigational channel is currentlybeing dredged in the Tapti River by the Gujarat State Government. The chan-

nel, which will pass by the project site and will be utilized by the Projectfor the transportation of heavy equipment to the site, is scheduled to be

completely dredged by December 1981. Should the channel not be available by

that time, alternative arrangements will be made by KRIBHCO in time, as needed

for the expeditious transportation of the equipment.

6.14 Since the infrastructure and utilities required for the Project are

substantial and since their execution is critical for the timely and efficient

implementation of the Project, the Government is taking steps to ensure that

the work of the various Central and State Government agencies be closely

coordinated. A high level committee (with the participation of the Ministry

of Chemicals and Fertilizers, IFFCO, the Indian Railways, and the State

Secretaries of Power, Industry, Public Works, Agriculture and Finance) hasbeen formed to coordinate and monitor the execution of the infrastructure

necessary for the Project. The Chairman of the Committee is the Chief Secre-

tary of the Gujarat State.

H. Environmental Considerations

6.15 As mentioned, the proposed site was selected among several alterna-

tive locations in Gujarat State. In early 1978, on the basis of economic,

infrastructure and environmental factors, IFFCO reviewed the desirability of

eleven sites in the State and subsequently recommended five possible sitesfor the location of the Project. These recommendations were submitted tothe Government, which formed a Task Force to consider the proposed sites

from the environmental and pollution aspects. The Task Force consisted ofrepresentatives of the National Committee on Environmental Planning and

Coordination, the National Department of Science and Technology, the GujaratWater Pollution Control Board, the National Environmental Engineering Research

Institute, the Ministry of Chemicals and Fertilizers, the Central Board forthe Prevention and Control of Water Pollution, and the Indian MeteorologicalDepartment. The Task Force gave first preference to the Hazira location

(Reference C-Project File) and the site has been accepted by all concernedparties. The Project will be built and operated in accordance with Stateand local water pollution standards which are rigorous. Since currently

there are no Indian standards relating to air pollution, the Project will be

designed to meet WHO and US standards.

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6.16 The major potential pollutants from the Project are: (i) liquid

effluents from the process plant containing ammonia and urea, and from the

water treatment facilities; (ii) air pollutants consisting of urea dustfrom the prilling towers and fly ash and sulphur dioxide from the coal-fired

boilers; and (iii) solid waste ash from the boilers. Regarding liquid

effluents, the plant will be designed and operated so as to minimize theintroduction of ammonia and urea into the plant's effluent stream. Effluentsfrom the process plant will be hydrolyzed to decompose the urea into carbon

dioxide and ammonia which will be recycled into the plant. The liquid effluent

will be carried out by a submarine pipeline to the open sea away from thecoast where strong currents of 2 to 5 knots will facilitate the easy mixingand dilution of effluents. The effluents from the water treatment plant

and other waste streams will be treated, neutralized and used for pumping theash slurry.

6.17 Regarding air pollution, the major potential pollutants will origi-nate from the burning of 1,800 tpd of coal, containing high ash and 0.3-0.7%sulphur, in the boiler plants. The coal-fired boilers will be fitted withan appropriate stack of about 100 meter height and electrostatic precipitatorsto minimize fly ash dust ejected into the atmosphere. Sulphur dioxide emis-sions are not to exceed Bank guidelines (Reference E-Project File). Theurea dust, which escapes from the urea prilling towers into the atmosphere,will be no more than 40 mg of urea per Ncm through the use of a naturaldraft-prilling tower. Flue gas from the gas reforming furnace and boilers(containing hydrogen, carbon monoxide, methane and ammonia) will be dischargedwithout adverse impacts through stacks of suitable height. Wind direction toSurat is relatively favorable since the annual mean frequency of occurrencesof winds from the site to Surat is about 25%.

6.18 The solid waste from the plant will consist principally of ashfrom the coal-fired boilers and the electrostatic precipitators. The ash willbe disposed of in fallow and impervious areas that are available withinthe project site. The pond area contains clays which provide adequate seepagecontrol. Precautions will be taken to prevent drainage of wastes into watercourses. Safety and fire precautions under the Project will also meet ade-quate local standards which are acceptable to the Association.

6.19 To assist in the design of environmental measures and to ensuretheir proper implementation, KRIBHCO has engaged environmental consultants.KRIBHCO will build and operate the Project in accordance with environmentalstandards satisfactory to the Association and set up adequate monitoringstations to collect relevant information on meteorological conditions (includ-ing wind direction and wind speed) and base pollution levels. KRIBHCO hasalso agreed to employ a competent Environmental Officer to coordinate these

activities.

VII. PROJECT MANAGEMENT AND EXECUTION

A. Project Management

7.01 Since KRIBHCO--the owner of the Project--has only recently beenformed, IFFCO and the Government agreed that IFFCO would be responsible forproject preparation and for ensuring that KRIBHCO is adequately organized and

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staffed for the project implementation period. To fulfill this responsibility,IFFCO has transferred to KRIBHCO about 55 professional staff representing themajor part of the project team that was responsible for the recently completedPhulpur project. Many members of this project team have also worked on theKalol and Kandla projects. The Kalol project (910 tpd ammonia by natural gasreforming and 1,200 tpd urea) was implemented between July 1971 and January1975 with USAID and ODA financing, under lump-sum turn key contracts withforeign engineering firms. The IFFCO project team was assisted in theproject management of the Kalol project by a 10-man team from CooperativeFertilizers International (CFI) of the U.S. The Phulpur project (900 tpdammonia by naphtha reforming, 1,500 tpd urea, 3 x 125 tph coal fired boilersand one 12.5 MW turbo generator) now in production was implemented under fixedprice contracts for engineering and procurement services, with other costsreimbursable. Although the Phulpur project experienced schedule delays andminor cost overruns (para. 2.14), the IFFCO project team acted energeticallyand effectively after identifying problems in order to minimize the ensuingdelays. The project team has considerable experience in project implementationand operation and has performed satisfactorily on previous projects. TheExecutive Director and Project Manager of KRIBHCO worked in those capacitiesin both the Kalol and Phulpur projects and are considered well qualified forthese key positions.

7.02 The proposed project implementation organization is shown inAnnex 7-1. The overall coordination of the Hazira Project with the processforeign engineering firms, the local engineering consultants and other con-tractors will rest with KRIBHCO's project authorities, who will have directresponsibility for project implementation. Project groups will supervisethe ammonia plants and urea plants under the Project Manager and the steam,power and offsites under the Utilities Manager. Each group will be respon-sible for the management of the respective engineering contracts, includingthe control, monitoring and reporting of cost, schedules and quality. Thesegroups will also coordinate construction with the Engineering Departmentwhich will have responsibility for all construction activities, inspection,spare parts ordering, supply of external utilities (power, water and gas) andtechnical support to the project groups. All arrangements for import andreceipt of equipment and materials will be handled by the Materials Manage-ment Group. Inland transportation and site unloading will be the responsi-bility of the Transportation Manager. Cost control will be exercised by theFinance Group, with inputs from the other departments. A separate monitoringand reporting group will coordinate the reports from the individual depart-ments and report to the Executive Director on the status of the overallproject schedule. KRIBHCO has already issued a detailed Project Implemen-tation Manual in January 1980, and will submit an updated version byJune 30, 1981 for review by IDA. In order to facilitate project control andmonitoring, KRIBHCO has agreed to install or cause to be installed acomputerized control and monitoring system to cover material status, costcontrol and construction scheduling for the Project, such system to beoperative by September 30, 1981.

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B. Engineering and Transfer of Technology

7.03 Engineering agreements have been finalized on a fixed price basisfor the supply of engineering, procurement services, construction supervisionand technical supervision of commissioning for the ammonia, urea , steam,power and offsite plants. The M. W. Kellogg Company (US) has beenselected as engineering contractor for the ammonia plants. Kellogg is aninternational leader in ammonia engineering and construction with some 50% ofcurrent world ammonia capacity in approximately 130 plants in operation basedon Kellogg technology. It has engineered and constructed three 1,350 tpdammonia plants (the size selected for Hazira), of which two in Mexico havebeen in successful, stable operation for some time and the other in Irelandhas recently started production. Kellogg has experience of Indian conditionsthrough the engineering and construction of the IFFCO 900 tpd ammonia plantsat Kalol and Phulpur, completed in October 1974 and March 1980 respectively.It is considered to be an excellent engineering company with a good record forproject cost and schedule control. Kellogg has engaged "Fact Engineering andDesign Organization" (FEDO) of India as a sub-contractor to carry out detailedengineering procurement services for non-critical equipment and constructionsupervision assistance. Although FEDO is not experienced in projects of thissize, and the Project will absorb a major portion of FEDO's manpower, arrange-ments have been made that satisfactorily minimize the risks to the Projectarising from these factors. These arrangements include (i) minimization ofthe FEDO work load in the key area of procurement services, and by substantialduplication of a previous Kellogg plant; (ii) the clear placement in Kelloggof responsibility for FEDO work as regards both quality and schedule, and(iii) a commitment by FEDO to KRIBHCO to ensure adequate manning of the FEDOproject task force. The contract for the urea plant is on a similar basiswith Snamprogetti (Italy) as the foreign contractor and Fertilizer Planningand Development India Ltd. (FPDIL) as the local contractor. In view of theconsiderable experience of FPDIL in similar projects, Snamprogetti and FPDILhave formed a consortium for the work to be carried out in India. Snamprogettiis a highly experienced urea contractor with recent experience in India. Thearrangements are acceptable. The coal-fired boilers have been ordered fromFoster Wheeler Power Products Ltd (UK) on a fixed price basis that covers bothsupply and erection. Development Consultants Ltd (India) have been selectedas contractors responsible for the power plant, coal and ash handling systemand other offsites.

7.04 The contracts between Kellogg and FEDO, and Snamprogetti and FPDILspecify arrangements for the transfer of process design knowledge and suchrelevant information necessary for FEDO and FPDIL to enable them to design andengineer future ammonia and urea plants respectively in India with minimalexpatriate assistance.

C. Employment and Training

7.05 The Project is expected to employ about 5,000 people during construc-tion and 1,400 people on a permanent basis at full operation. Arrangementsfor the supply and training of operating personnel are based on the systemused by IFFCO for the Phulpur project. A number of key operations personnelhave been assigned to fill project execution positions; trainees will then be

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recruited by KRIBHCO and trained in the IFFCO operating plants taking as manyentrants as possible from the project execution area so that skilled operatorsand maintenance technicians with at least one year's training are availablefor the Project. Semi-skilled and unskilled personnel will be locally recruited,with training provided at the project site before project completion. KRIBHCOhas agreed that it will develop, before June 30, 1982, a satisfactory trainingand recruitment plan for its operating staff.

D. Project Schedule

7.06 The overall project schedule is given in Annex 7-2. The firstammonia stream with its two associated urea plants and necessary offsites areplanned to be mechanically completed by July 1984--39 months from the projectzero date of April 1, 1981. Commissioning is expected to take a furtherthree months. The second ammonia plant with the remaining two urea plants andthe remaining offsites are scheduled for mechanical completion 12 months afterthe first phase, giving an overall project schedule of 51 months to mechanicalcompletion and 54 months to the start of normal operations. Considering thework already accomplished, and the considerable implementation experience ofthe KRIBHCO project team, the schedules for the ammonia plants and ureaplants are considered achievable. In fact, these schedules already include acontingency element to take account of local conditions and the complexproject infrastructure. Similar projects in Japan, US and Western Europe arenormally implemented in 24 to 28 months, rather than 39 months. Although theHazira schedules are about one-third longer than comparable schedules in thedeveloped countries, they are realistic in India due to unforeseeable delaysexperienced in other projects in the past. These schedules are more conser-vative than the schedules guaranteed by Kellogg and Snamprogetti/FPDIL in therespective ammonia and urea contracts which also incorporate bonus/penaltyformulae for early or late completion. The guarantee completion dates aresubject, however, to revision in the light of events outside the contractorscontrol--such as late equipment delivery. Problems in coordination andsupervision are not expected to be significant due to the phasing between thetwo streams. The schedule for the power generation and offsites is reasonable.The three-month commissioning period for each stream is considered acceptablein light of the KRIBHCO team's previous success in meeting similar scheduleson other projects and considering that precommissioning activities are scheduledto begin three months prior to mechanical completion.

7.07 The implementation schedule for the Project is reasonable, thedifferent activities on it have been well planned, and the proposed measuresto carry out the Project are satisfactory. However, the Bank's experience inIndia is that unexpected problems and delays are normally encountered. Giventhe complexity of the Project, there will be a need during project executionfor concerted efforts by project authorities and IDA to review project progressclosely to ensure that the plans are properly carried out. In this regard,the Project would require above-normal IDA supervision efforts, particularlyin its initial phases.

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VIII. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENTS

A. Project Capital Cost

8.01 The total financing requirements of the Project, including physicalcontingencies, price escalation, working capital and interest during construc-tion are estimated at US$1,276.9 million equivalent (Rs 10,215 million), ofwhich about US$475.7 million equivalent (Rs 3,805 million) will be in foreignexchange. This estimate includes the infrastructure investments for the railspur to the national railway system, KRIBHCO's share of the cost of accessroads, power supply, and widening of the water supply canal; but excludes thecost of the natural gas pipeline to the plant, which is to be financed andexecuted separately. The capital cost breakdown by project components is givenin Annex 8-1 and summarized below:

Hazira - Capital Cost Estimate

Rs Million US $ Milliona/Local Foreign Total Local Foreign Total %

Equipment and Spares 1,007 2,215 3,222 125.8 276.9 402.7 53.9Freight, Duties and Taxes 835 190 1,025 104.4 23.8 128.2 17.2Engineering Services b/ 284 286 570 35.5 35.7 71.2 9.5Project Management and Ins. 163 7 170 20.4 0.9 21.3 2.8Erection 209 15 224 26.1 1.9 28.0 3.7Civil Works and Land 451 28 479 56.4 3.5 59.9 8.0Commissioning Charges 45 - 45 5.6 - 5.6 0.7Township 78 5 83 9.8 0.6 10.4 1.4Rail Spur 160 10 170 20.0 1.3 21.3 2.8

Base Cost Estimate (BCE) 3,232 2,756 5,988 404.0 344.6 748.6 100.0

Physical Contingencies (10%) 323 275 598 40.4 34.5 74.9Price Escalation (21%) c/ 839 564 1,403 104.8 70.3 175.1

Total Installed Cost 4,394 3,595 7,989 549.2 449.4 998.6

Working Capital 1,093 191 1,284 136.6 23.9 160.5Interest During Construction 923 19 942 115.4 2.4 117.8

Total Financing Required 6,410 3,805 10,215 801.2 475.7 1,276.9

a/ Exchange Rate: Rs 8.0 = US$1.0.

b/ The average cost of consulting services is estimated at US$11,000 per man-month for foreign consultants and US$1,500 per man-month for local consultants,including per diem, travel and other reimbursable costs.

c/ Of base cost estimate plus physical contingencies.

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8.02 The base cost estimate, in January 1981 prices, was prepared byBank staff and is derived from KRIBHCO estimates prepared on the basis ofactual quotations for equipment and materials received for the IFFCO steam-reforming fertilizer plant at Phulpur (Loan 1079-IN) after making suitableadjustments for changes in price levels, foreign exchange rates, processdifferences, and scale of operations (Project File - Reference F). Exceptfor the steam plant and foreign engineering services (which are set at a firmprice), price escalation for all other project items is based on (i) a projectconstruction period of 39 months for the first ammonia-urea train and 51months for the second train from the zero date of April 1, 1981, when theammonia and urea engineering contracts are expected to be effective;(ii) placement of most orders for major equipment and supplies by January1982; and (iii) international and local annual inflation rates in US Dollarterms of 10.5% in 1980, 9% in 1981, and 8% in 1982, 7% per year in 1983-85,and 6% thereafter. Working Capital was estimated at US$160.5 million equivalentusing conservative assumptions on the level of current assets required by theProject during initial operations (Annex 8-2). Interest During Constructionwas estimated assuming (i) capitalization of interest up to June 1985, whenall plant facilities are expected to become fully operational; (ii) Governmentequity paid first and Government loans last; and (iii) loans of US$400 millionfrom the Bank, US$203.2 million from OECF and ODA, and US$93.0 million fromTDBI on terms specified in paras. 8.06-8.07.

8.03 The capital cost estimate for the Hazira Project was cross-checkedby the Bank staff with estimates for similar projects outside India. Thebase cost estimate is slightly higher than for similar projects elsewhereand is considered adequate at the current project stage. A definitive capitalcost estimate will be available by April 1982 when detailed engineeringwork is advanced.

B. Financing Plan

8.04 On the basis of the above capital cost estimate, the financing planfor the Project agreed upon with the Government and IFFCO is shown on thefollowing page. Detailed terms of each financing source are given in Annexes9-1 and 9-5.

8.05 The Project's long term financing needs will be met by externalequity contributions totalling the equivalent of US$437.5 million (36% oftotal), internal cash generation of US$80.6 million (7%)1/, and long-termdebt of US$696.2 million (57%). In addition, short-term debt for workingcapital purposes will amount to US$62.6 million. The Government will con-tribute US$287.5 million in equity funds (66% of the equity). IFFCO willpay-in US$125.0 million in equity (representing 28% ownership), from internalcash flow generated from its ongoing operations at Kandla, Kalol and Phulpur.Several local marketing cooperative societies will contribute the remaining6% of the equity or US$25.0 million. The Government is interested in fosteringas large a participation of the cooperative institutions in KRIBHCO as possible.The By-Laws of KRIBHCO, therefore, provide for the eventual partial or fullretirement of the shares held by the Government

l/ To help finance working capital needs after Project start-up.

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Hazira - Financing Plan(in million)

US Dollars RupeesLocal a/ Foreign Total Total _

EquityGOI contribution 287.5 - 287.5 2,300 24Cooperatives 25.0 - 25.0 200 2IFFCO 125.0 - 125.0 1,000 10

Total External Equity 437.5 - 437.5 3,500 36

Internal Cash Generation 80.6 - 80.6 645 7

Total Equity 518.1 - 518.1 4,145 43

Long-Term DebtIDA 79.7 c/ 320.3 c/ 400.0 3,200 33OECF 10.7 88.0 98.7 790 8ODA 37.1 67.4 104.5 836 9IDBI 93.0 - 93.0 744 7

Total Loans 220.5 475.7 696.2 5,570 57

Total Long-Term Financing 738.6 475.7 1,214.3 9,715 100

Short-Term Debt b/ 62.6 - 62.6 500

Total Financing Required 801.2 475.7 1,276.9 10,215

a/ Based on Exchange Rates of Rs 8.00/US$: ! 203/US$ and E 0.43/US$.b/ May be met by KRIBHCO's internal cash generation.C/ Based on estimates that about 50% of equipment procured under inter-

national competitive bidding will be won by domestic suppliers.

and IFFCO in KRIBHCO as may be agreed periodically between them and theconcerned shareholders. Since the collection of equity funds from thecooperatives may not proceed in step with the Project's requirements,the Government has agreed that it will promptly make available to KRIBHCOadditional equity funds to cover any shortfalls in the contribution from theIFFCO and the cooperatives.

8.06 The proposed IDA credit of US$400 million equivalent will be madedi.rectly to the Government. The Government will relend the funds to KRIBHCOat an annual interest rate of 10.75% with a repayment over 15 years including5 years of grace. The Government will bear the exchange risk. The proposedIDA Credit of US$400 million would cover about 33% of the estimated long termfinancing requirements.

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8.07 The remaining debt financing for the Project will be provided asfollows: The Overseas Economic Cooperation Fund (OECF - Japan), Yen 20billion, equivalent to about US$98.7 million; the Overseas Development Admin-istration (ODA - UK), e 45 million, equivalent to US$104.5 million of whichUS$67.4 million equivalent will be in Pounds Sterling and US$37.1 million inRupees; and a consortium of local financial institutions led by the IndustrialDevelopment Bank of India (IDBI), US$93.0 million equivalent in Rupees. Theloan from IDBI will be made directly to KRIBHCO, with the guarantee of theGovernment, at an interest rate of 11.8% p.a. for 15 years, including 5 yearsof grace. The loans from ODA and OECF will be made to the Government, whichwill make the foreign exchange equivalent of these two loans available to theProject. The Rupee equivalent of this foreign financing of US$203.2 millionequivalent will be channelled to KRIBHCO partly through direct Government generallending (about US$137.5 million at 10.75% p.a.) and partly through additionallending by IDBI (about US$65.7 million). IDBI's total lending in Rupees toKRIBHCO will therefore amount to US$150.7 million equivalent.

8.08 The Project was appraised simultaneously by all colenders and thevarious loans are likely to be considered for approval at about the same time.Given that the Government's budget and foreign exchange reserves are largeenough to cover any gap temporarily caused by a delay in securing the externalloans, the risk of delay in disbursement under the IDA credit, which isinherent in formal conditions of cross-effectiveness with other lenders, isnot warranted. Therefore, the effectiveness of the proposed credit will notbe conditional on the signing of the other loans. Similarly, loans from othercolenders are not expected to be conditional on the effectiveness of theproposed IDA credit. However, the Government has agreed that it will provideor cause to be provided necessary funds and foreign exchange resources tocover any gap in the financing plan as well as any cost overrun.

C. Procurement and Disbursement

8.09 Equipment financed by the IDA credit will be procured by internationalcompetitive bidding (ICB) in accordance with IDA guidelines, except forequipment proprietary to the process design, items whose supply is criticalto efficient project execution, and small items estimated to cost less thanUS$100,000 which may be procured through limited international tendering fromqualified suppliers from at least three IDA member countries, according to ali.st of goods to be agreed upon with the IDA. The aggregate of such con-tracts under the IDA credit procured without ICB procedures will not exceedUS$40 million equivalent. For purposes of bid evaluation under ICB, qualifiedlocal suppliers will enjoy a margin of preference of 15% or the applicableduty, whichever is lower. The IDA credit will also be used to finance thelocal engineering costs for the ammonia, urea, steam and offsite plants. Aspart of the process of developing an agreed vendors list, KRIBHCO has agreedto complete by June 30, 1981--before the issuance of bidding documents andwith the assistance of IFFCO--a survey of the available capacities of localequipment suppliers to determine whether local firms presently expected to bidunder the Project would be able to deliver the goods on time. ODA funds willbe utilized to finance items already ordered from UK and Indian suppliers,i.e., the steam plant and related facilities. OECF funds will be used to

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finance equipment for the ammonia plant procured under OECF's selective

bidding procedures from Japan, India and qualified developing countries.

KRIBHCO's equity and the IDBI loan will be used to cover the cost of civil

works, erection services and minor equipment not suitable for international

procurement which will be procured under local competitive bidding procedures

acceptable to the Association.

8.10 The proposed allocation of funds from the various colenders to

project components is detailed in Annex 8-3, and that from the IDA credit is

summarized below:

Hazira - Allocation of IDA Credit(Us$ million)

US$ millionEquivalent Disbursement

Equipment, Materials and Spares 320.0 100% of foreign ex-

penditures and 100% oflocal expenditures(ex-factory). Alter-natively for small localitems, 70% of expenditures(delivered cost).

Consultant's Services 40.0 100%

Unallocated 40.0

Total 400.0

8.11 Of the US$400 million IDA credit, it is expected that US$161 million

will be used to finance imported equipment, US$45 million for foreign and

local engineering services for the Project and US$194 million (or about 48%

of the IDA credit) for local equipment procured by international competitive

bidding. The IDA credit would retroactively finance up to US$15 million of

eligible expenditures for engineering consulting services incurred after

October 1, 1980. Such retroactive financing is necessary to avoid delays in

project execution and to avoid creating a gap in the financing of direct

foreign exchange cost. The IDA credit is expected to be completely disbursed

by June 30, 1986. A disbursement schedule is given in Annex 8-4.

IX. FINANCIAL ANALYSIS

A. Revenues and Operating Costs

9.01 Key assumptions used in the financial analysis are given in Annex 9-1.

It is assumed that the first stream of ammonia and urea plants will start

commercial production in October 1984, 42 months after effectivness of the

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engineering contract for the ammonia plant in April 1981; the second streamwill begin commercial operations *twelve months later. The plants are expectedto operate at 60% capacity utilization in the first 12 months of operation,80% in the second year and 90% thereafter. At 90% capacity utilization, theProject will produce 801,900 tpy of ammonia, of which 784,080 tpy will beconverted to 1,306,800 tpy of urea, and the remaining 17,820 tpy will be soldto IFFCO's Kandla compound fertilizer plant.

9.02 For the financial analysis, urea ex-factory prices have been cal-culated according to the price formula established by the Government underthe current fertilizer pricing policy. The price formula sets the ureaex-factory price--i.e., "retention" price--at a level needed to enable pro-ducers, operating efficiently at 80% capacity, to generate sufficient cash tocover production costs and obtain a 29% before tax return on capital(Annex 9-2). Under the formula, capital employed in the business is definedfor a 3-year pricing period as share capital plus retained earnings, minuscapital employed outside the business and accumulated surplus cash. Sinceaccummulated surplus cash may increase faster than retained earnings, theformula could cause retention prices to decrease over time. In order to put afloor to these decreases, the pricing formula establishes that "employedcapital" cannot decrease below share capital. For the Hazira Project, sinceno increases in share capital are scheduled after 1989 and since after 1987accumulated surplus cash is greater than retained earnings, the provision onthe lower limit applies, and the capital employed in business is set at sharecapital. It thus stays constant in current terms, but decreases in constantprices. This reduction in retention prices is to some extent compensated byincreases in production costs due to inflation. For the Hazira Project, theretention price in current terms is projected to grow at an average of 2% peryear over the project life. In real terms, however, the retention price andtherefore project revrenues will decline over the project life. The formula,however, will always allow the Project to cover its costs and earn an annual29% before tax return on capital, provided it is operating efficiently atsatisfactory capacity utilization (80%). Excess ammonia for sale is limitedand its ex-factory price has been assumed at 90% of the urea retention price.The table on the following page compares the calculated urea ex-factory pricein current and constant terms with projected urea economic prices (para. 10.03).

Hazira - Urea Prices

Ex-factory Retention Prices 1985 1988 1991 1994

In current Rupees per ton 3,657 3,756 3,985 4,278In current Dollars per ton 457 470 498 535In constant Jan. 81 Rupees per ton 2,594 2,211 1,972 1,775In constant Jan. 81 Dollars per ton 324 276 247 222

Economic Pricea!

In constant Jan. 81 Rupees per ton 2,720 2,896 3,008 3,008In constant Jan. 81 Dollars per ton 340 362 376 376

a/ These economic prices were derived on the basis of natural gas pricesof US$1.0 to US$3.00 per million BTU in 1981 terms. With the recentpolicy changes in the U.S. regarding gas deregulation, urea economicprices may be higher in the future.

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9.03 The production costs of ammonia and urea are given in Annex 9-3,and summarized below. The costs of inputs have been estimated on the basis ofIFFCO's contracts with its major suppliers. These are public companies andthe input prices have been assumed to keep pace with inflation. Natural gasand depreciation represent about 80% of total operating costs for urea. Theunit cost for natural gas has been estimated on the basis of ONGC's announcedpolicy which relates the gas price to the local price of naphtha on a calorificbasis (para. 6.06). Depreciation has been computed by the straight linemethod, assuming a project economic life of 12 years.

Hazira - Operating Cost SummaryAt 90% Capacity Utilization

(Costs per ton of product - January 1981 prices)

Ammonia UreaRs US$ % Rs US$ %

Gas 1,093.4 136.7 62 - - -Intermediateammonia a/ - - - 1,059.6 132.5 71

Coal and utilities 32.3 4.0 2 89.2 11.2 6Bags and chemicals 43.4 5.4 3 127.2 15.9 8Labor 16.6 2.1 1 11.9 1.5 1Maintenance 146.0 18.3 8 44.0 5.5 3Insurance Sellingand Adm. 42.6 5.3 2 51.7 6.5 3

Depreciation 391.7 49.0 22 118.5 14.8 8

Total 1,766.0 220.8 100 1,502.1 187.9 100

a/ One ton of urea requires 0.6 tons of ammonia.

B. Financial Projections

9.04 Detailed financial projections for the Project in current Rupeesare given in Annex 9-4 and summarized on the following page.

9.05 Due to the combined effects of the retention price formula andthe build-up of capacity utilization, the project revenues are expected toincrease rapidly in current terms during the first four years of operations,from Rs 1,029 million in 1985 (fiscal year ending June 30) to Rs 4,396 millionin 1987 and stabilize thereafter. Operating profit is expected to increasefrom Rs 295 million in 1985 to Rs 1,704 million in 1989, but decline steadilythereafter to Rs 1,309 million in 1994, due to increases in productioncosts associated with inflation. Net profit before tax is also expected toshow a similar trend during the project life, increasing from Rs 267 millionin 1985 to Rs 1,283 million in 1990, and thereafter declining to Rs 1,134million in 1994. As detailed in Annex 9-1, the Project will benefit from

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Hazira - Summary of Financial Projections(in million of current Rupees, unless otherwise noted)

Fiscal Year Ending June 30 1985 1987 1989 1991 1993 1994

Capacity utilization (%) 23 81 90 90 90 90

Ammonia sales ('OOOs tpy) 5 16 18 18 18 18

Urea sales ('0OOs tpy) 277 1,144 1,307 1,307 1,307 1,307

Urea retention price (Rs/t) 3,657 3,795 3,877 3,985 4,268 4,278

Sales revenue 1,029 4,396 5,130 5,273 5,647 5,660

Production costs 835 2,843 3,338 3,660 4,024 4,231

Interest 28 660 474 359 235 175

Net Profit after taxes 267 878 1,230 484 477 370

Internal cash generation 536 1,586 1,938 1,192 1,185 1,085

Current assets (excludingexcess cash) 396 1,200 1,367 1,469 1,583 1,645

Accumulated surplus cash 458 1,492 3,613 4,872 5,358 5,496

Net fixed assets 8,130 7,245 5,829 4,413 2,997 2,289

Current liabilities 336 475 580 595 600 602

Long term debt 4,977 4,549 3,501 2,387 1,273 716

Retained earnings 267 1,413 3,228 4,272 4,565 4,612

Total equity 3,671 4,913 6,728 7,772 8,065 8,112

Ratios

Net profit aftertax/sales (%) 26 20 24 9 8 7

Net profit aftertaxes/equity (%) 7 18 19 6 6 5

Debt service coverage ratio - 2.1 2.5 2.4 2.8 2.8

Current ratio 2.5 5.5 8.4 10.5 11.4 11.7

Long term debt/equity 58/42 48/52 34/66 23/77 14/86 8/92

investment tax credits and tax holidays under the Indian tax laws so that tax

liabilities are expected to be postponed until 1990. Net profit after taxes,

which is expected to increase from Rs 267 million in 1985 to Rs 1,230 million

in 1989, would decrease rapidly after 1989 and reach only Rs 377 million in

1994, the tenth year of operations. Profits and cash flow, however, will

always remain positive.

9.06 The Project is expected to generate a large amount of cash early in

its economic life, with accumulated cash surplus increasing from Rs 458

million in 1985 to Rs 5,496 million in 1994. In our analysis, this cash

surplus is not assumed to be reinvested and generate earnings. In practice,

KRIBHCO is likely to reinvest this cash in new projects, in securities, or

reduce its debt burden. To that extent, the financial projections presented

here are conservative.

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9,07 The pricing formula would enable the Project to generate sufficientrevenues to meet all its operating expenses and debt service obligations(Annex 9-5). The debt service coverage ratio is expected to increase from 2.1in 1985 to 2.5 in 1990, and stabilize thereafter at around 2.8 during theproject life. The current ratio excluding excess cash is expected to remainat about 2.5 after 1985. The debt to equity ratio is expected to peak at58:42 in 1985, decrease steadily thereafter to reach 8/92 in 1994. Therefore,in spite of declining revenues and profits, the Project is expected to remainin a satisfactory financial situation throughout its life and should be able topay yearly dividends of 6% of share capital in 1988 and 10% thereafter. Asmentioned, the objective of the retention price formula--in addition toensuring a satisfactory financial situation of producers--is to motivate theindustry to invest in new plants (para 5.24), by providing adequate returns.This is achieved by cross-subsidization between new and old plants, with theresulting decline in the cash flow and profits of producers in their outeryears.

C. Financial Rate of Return and Sensitivity Analysis

9.08 The base case financial rate of return (before tax), on the basisof the above assumptions, is calculated at 9.1% in constant Rupees. This-low financial rate of return, compared to the economic rate of return of16.6% (para. 10.05) is due to the retention price formula under which theurea ex-factory price decreases over time in constant Rupees. Sensitivitytests have been conducted to determine the effects of variations in capitalcosts, production costs, capacity utilization and delay in project completion.As shown on the following page, the financial return is not sensitive tochanges in capital and operating costs since the retention price formula hasbeen designed to ensure, under efficient operation, that the Project willcover its costs and earn a return on capital.

9.09 The return is most sensitive to a decline in capacity utilization.Indeed, the retention price formula assures that most of the adverse effectsare to a great extent compensated by increases in the retention price,except for capacity utilization. Since the Project will be (i) based oncommercially proven technology, (ii) implemented and operated by personnelwith experience in this field, and (iii) assured of a large enough market forthe plant's products, the Project should operate at relatively high capacityutilization, and therefore it should not encounter major financial difficultiesduring its operation, provided the retention price formula is maintained inthe future.

D. Financial Covenants

9.10 The Government has agreed to provide KRIBHCO adequate funds includingcapital cost overruns, to complete the Project. Agreement has been reachedwith KRIBHCO that it will follow prudent financial practices, and will:(a) maintain at all times a long-term debt to equity ratio of 60:40 or better;(b) maintain a current ratio of at least 1.2 at and after project completion;(c) not to incur additional debt in any fiscal year if by so doing the pro-jected debt service coverage ratio (as agreed with the Association) would fallbelow 1.4; (d) not take any action, such as distribution of dividends, entrv

- 42 -

Hazira - Sensitivity Tests on Before Tax Financial Rate of Return(in percent)

Applicable 1985% Retention Price for

Case Rate of Return Urea (in 1981 US$/ton)

Base Case 9.1 340Capital Cost up 10% 8.7 348Production Costs up 10% 9.0 350Capacity Utilization up 5%, down 10% 10.5, 6.3 340, 340One-year delay in Project Completion 7.5 340

into financial commitments or prepayment of debt, if these actions wouldreduce its current ratio below 1.5; and (e) not to make during implementationof the Project, any investments in fixed assets other than the Project inexcess of US$10 million in any year (except for maintenance purposes) withoutprior approval of the Association. KRIBHCO will submit monthly progressreports on the Project and its annual audited reports within six months ofthe ending of its fiscal year in a form satisfactory to the Association.

E. Major Risks

9.11 The Project faces four major potential risks. First, since it is agreen-field plant, delays or problems in the implementation of the Project andits infrastructure could seriously affect the Project viability. In partic-ular, delays in the execution of the engineering work will affect the implemen-tation schedule. Also, any major delays by the Government in executing theSouth Bassein gas development and pipeline project may place the supply ofgas in the critical path of the project schedule. These ri.sks have beenreduced to satisfactory levels, by securing the necessary Government approvalson the gas project prior to IDA's Board consideration of the Project.Also the signing of the engineering contract for the ammonia plants has nowbeen executed. Risks of delays during project execution are not unduly severe,since the project sponsor has already: (i) acquired the project site;(ii) engineering surveys for the railway sidings have been completed by theIndian Railways and civil work has already started; (iii) work on water andpower supply from the State will be initiated immediately since the contractsare already signed and corresponding payments made; and (iv) with the awardof steam generation plant and engineering contracts, the Project can beexpected to avoid delays in ini.tial implementation stages often faced by otherprojects in India and elsewhere. The establishment of a high level committeeto monitor and coordinate the execution of infrastructure will assist inensuring that the Project infrastructure will be executed in a timely andefficient manner (para. 6.14).

9.12 The second risk facing the Project concerns possible delays inthe commercial start-up of the plant, due to technical problems in the commission-ing of this large fertilizer complex. This risk is reduced by the fact thatthe Project will use commercially proven technologies (supplied by internation-ally recognized engineering firms). Furthermore, KRIBHCO's project staff,who will implement this Project, has been recruited from IFFCO's Phulpurproject team, which is experienced in the erection and start-up of a similar,though somewhat smaller plant. Finally, agreement will be reached withKRIBHCO on the preparation of an appropriate training and recruitment plan foroperating staff.

- 43 -

9.13 The third major risk concerns possible cost overruns. This could becaused by a start-up delay, by problems in the construction and transportationof the large pieces of equipment needed for a plant of this size or by unfore-seen problems in the civil works and erection of the plant. The successfulexperience of IFFCO in implementing its other projects, should lower thisrisk. Furthermore, this risk is reduced by the location of the Project nearthe ocean, where the bulk of equipment can be unloaded and barged through themouth of the Tapti river to the plant site. Finally, considering the complexityand size of the Project and that KRIBHCO is a new organization only now beingset up, the Project could face major management risks. The Government thereforeintends to ensure continuity of efficient senior management of KRIBHCO.Overall, the risks associated with the Project are considered acceptable.

X. ECONOMIC ANALYSIS

A. Economic Costs and Benefits

10.01 The assumptions used in the economic analysis of the Project aregiven in Annex 10-1. All economic costs and benefits for tradeable itemshave been valued at international prices estimated to prevail during theeconomic life of the Project. For non-tradeable items, domestic prices havebeen taken and, where applicable, adjusted to reflect the economic prices oftheir internationally traded components.

10.02 The economic capital cost of the Project was obtained by deflatingthe financial capital cost in current prices to January 1981 prices, usingappropriate currency deflation factors and after deducting import duties andlocal taxes on equipment and other items. Since Hazira is a green-fieldproject, its capital cost includes the cost of required infrastructure,including the township, the railroad siding from Udhna to the project site,power generation and distribution and KRIBHCO's share of the water supplychannel. The only infrastructure facility financed by another agency is thegas pipeline (ONGC). Since the gas prices charged to the Project include thefull cost of their delivery to the project site, no further adjustment forderiving economic capital costs is necessary.

10.03 For calculating economic benefits, the future price of bagged urea,FOB Europe, is assumed to increase from the current level of US$228/tonto US$267/ton in 1984 (fiscal year ending June 30), US$287/ton in 1985 andUS$302/ton in 1990 (all prices in January 1981 constant dollars). Theseprices reflect expected future increases of 3.5% per year in energy costs aswell as a more balanced demand and supply situation for urea in the mid-1980s.Including the international freight to India (estimated at around US$50/ton),unloading, port handling and storage charges (US$5/ton), and inland freightfrom Bombay to the Project site (US$7/ton), the economic ex-factory price (inJanuary 1981 dollars) of bagged urea is calculated at US$318/ton for 1984,rising to US$373/ton by 1990. The FOB Europe price of ammonia in 1984 isassumed to be US$240/ton (90% of bagged urea price) and with marine freight toIndia of US$40/ton, unloading charges of US$5/ton, and inland freight ofUS$7/ton, the economic ammonia price is assumed at US$292/ton (in 1981 dollars).As is the case with urea, this ammonia price is assumed to increase graduallyduring the 1980s reaching US$340/ton by 1990.

- 44 -

10.04 The economic price of non-associatged natural gas is assumed to bethe cost of substituting gas for fuel oil in steam generation and has thusbeen related to the fuel oil price based on its calorific value. On the basisof a CIF fuel oil price in India of US$220/ton in 1984 (in January 1981dollars), the economic price of natural gas in 1984 is calculated at US$207per thousand Ncm, i.e., US$5.50 per thousand standard cubic feet (Scf) (in1981 dollars). Thereafter the economic price of natural gas is assumed toincrease at a real rate of 3.5% per year, reaching, US$250 per thousand Ncm by1990. The sensitivity analysis also includes the case where the gas price isassumed to be at the level that would ensure a reasonable return (10%) oninvestment in the gas project. On this basis, the delivered cost of gas toHazira would be only US$42 per thousand Ncm (US$1.12 per thousand Scf). Allother tradeable and non-tradeable items are valued at their respective domesticprices, after adjusting for local taxes and duties.

B. Economic Rate of Return

10.05 The base case economic rate of return has been calculated at 16.6%The cash flows for the economic rate of return are given in Annex 10-2 andthe results of sensitivity analysis are graphically shown in Annex 10-3 andsummarized below.

Hazira - Economic Rate of Return - Sensitivity Analysis(in percent)

Base Case 16.6Capital Costs up 10% 15.0Operating Costs up 10% 14.2Capacity Utilization down by 10% 13.9Delay of Completion by 1 year 13.7Economic Product Prices down 10% 12.3Economic Product Prices up 10% 20.5Gas Price Increases 20% 12.8Gas Price assumed at US$42/thousand Ncm 27.2

10.06 The economic rate of return is sensitive to changes in productprices and, to a lesser extent, operating costs. The difference betweenthe financial rate of return and economic rate of return is mainly due to thedifference between the financial price for urea, based on the retention priceformula and the forecast international urea price. Although the economic costof gas (US$207-250 per thousand Ncm) is higher than the financial cost of gas(US$128 per thousand Ncm), the international product prices used for calculat-ing the economic returns, compared to the decreasing financial product prices,lead to a higher return for the economic analysis.

C. Other Benefits

10.07 The Project will also generate other substantial benefits to India.The expansion of domestic fertilizer production will directly reduce thecountry's import requirements. The net foreign exchange savings over the12-year life of the Project, after deduction of principal and interest paymentson the foreign loans and deducting foreign exchange components of operating

- 45 -

costs, are estimated at over US$3,440 million (in 1981 dollars) as shownin Annex 10-4. The increased domestic production will also help ensurea continuous and secured supply of fertilizer, thus allowing India to pursueits agricultural growth targets with more certainty. The Government hasput a heavy emphasis on agricultural stability and growth, and stepped-upfertilizer production will play a key role in increasing agricultural outputby improving yields. In fact, by 1988 when the Project reaches full capacityoperation, it alone will provide 10% of the forecast domestic supply and 7%of forecast consumption of nitrogen fertilizers.

10.08 The local engineering firms involved in project implementation willgain valuable know-how and experience by the proposed transfer of technologyarrangements. Direct employment created by the Project would be about1,400 permanent jobs. The investment cost per permanent direct job isUS$910;000. At the peak period of construction activity, more than 4,000people will be employed, for project implementation. Furthermore, it isexpected conservatively that through secondary and tertiary employmentcreation effects, the Project will generate some 5,000 jobs in the transportand service sectors. Finally, since about 48% of the equipment for theProject is expected to be supplied by local manufacturers, the Project willhave significant backward linkages with the industrial sector, creatingadditional jobs and investments. The local erection and civil work contractswill also have a positive impact on the local economy. Installation of alarge fertilizer complex in the area will help attract small and medium scaleservice industries needed to provide maintenance and other services for thecomplex, and the improved road and rail connections can assist in the industrialdevelopment of Hazira.

XI. AGREEMENTS

11.01 The following major assurances and agreements have been obtainedfrom the Government of India and KRIBHCO:

A. From the Government that it will:

(a) provide railway facilities as needed for the movement of coal andfinished products (para. 5.08);

(b) take adequate measures in fertilizer distribution and railwayoperations to ensure the efficient movement of the Project inputsand outputs (para. 5.09);

(c) not take, or cause to be taken, any action which would preventfertilizer manufacturers, under condition of efficient operation,from meeting all their expenses, servicing their debt and earning areasonable return on invested capital (para. 5.24);

(d) by January 31, 1984, ensure adequate and timely supply of gas forthe Project, and to that end provide, or cause to be provided, thefunds, facilities, services and resources as required for the tim-lyexecution of the gas project in accordance with a schedule agreedwith the Association (para. 6.07);

- 46 -

(e) provide KRIBHCO with an equity contribution of Rs 2,300 million,and make available to KRIBHCO additional equity funds to cover anyshortfall in the equity contributions from IFFCO and other coopera-tives (para. 8.05);

(f) relend the proceeds of the IDA Credit to KRIBHCO in Rupees underterms and conditions acceptable to the Association, including aneffective interest rate of 10.75% per annum, and repayment over15 years, includuing five year of grace (para. 8.06); and

(g) provide or cause to be provided any funds, facilities and resourcesthat may be needed to complete the Project, and cover any possiblecost overrun (para. 8.08).

B. From KRIBHCO that it will:

(a) prior to making any appointment to the position of Managing Director,Finance Director and Project Manager, in the event of a vacancy,furnish to the association the details of qualifications of theproposed nominees (para. 3.02);

(b) enter into a satisfactory agreement with IFFCO by December 31, 1981,for the sale and marketing of KRIBHCO's products (para. 3.03);

(c) make arrangements with appropriate authorities for the use ofcaptive power and the satisfactory and timely supply of naturalgas, coal, power and water (paras. 6.07, 6.08, 6.10 and 6.11);

(d) by December 31, 1981, enter into an agreement with the GujaratElectricity Board for the supply of additional power to the extentof 14 MVA for meeting the emergency requirements of the facilityconstructed under the Project (para. 6.10);

(e) make alternative arrangements on time for the expeditious transpor-tation of project equipment, should the navigation channel in theTapti River not be available by June 30, 1982 (para. 6.13);

(f) build and operate the Project in accordance with environmentalstandards satisfactory to IDA and engage environmental consul-tants, maintain adequate monitoring stations, and hire a competentEnvironmental Officer (para. 6.19);

(g) install or cause to be installed a computerized control and monitor-ing system to cover material status, cost control and constructionscheduling for the Project, such system to be operative by September30, 1981 (para. 7.02);

(h) prepare and submit to the Bank by June 30, 1981, an ImplementationManual (para. 7.02) and by June 30, 1982, a detailed training andrecruitment plan for operational staff (para. 7.05);

- 47 -

(i) complete by June 30, 1981, a survey of the available capacitiesof local equipment suppliers to deliver the goods in time (para.8.09); and

(j) maintain financial covenants described in para. 9.10;

11.02 Subject to satisfactory assurances and agreements being reachedas stated above, the Project is suitable for an IDA Credit of US$400 millionequivalent. The proceeds of the IDA Credit will be relend to KRIBHCO inRupees under terms and conditions acceptable to the Association, including aneffective interest rate of 10.75% per annum and repayment over 15 years,including 5 years of grace. Retroactive financing of up to US$15 million isrecommended under the credit for expenditures incurred after October 1, 1980.

Industrial Projects DepartmentMarch 6, 1981

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- 94 -

INDIA - HAZIRA FERTILIZER PROJECT

INDIA: INSTALLED FERTILIZER CAPACITY BY SECTOR

Nitrogen Fertilizers (000 tpy N) Phosphatic Fertilizers (000 tpy P205)

YearEnding Joint and Private Cooperative Public Joint & Private CooperativeMarch 31 Public Sector Sector Sector Total Sector Sector Sector Total

Actual

1952 85 _ 85 19 44 - 631957 85 4 - 89 19 44 - 631962 228 14 - 242 27 89 - 1161967 526 22 - 548 73 164 _ 2371968 643 206 - 849 105 298 - 4041969 688 336 - 1,024 105 317 - 4221970 688 656 - 1,344 982/ 217 - 3151971 688 656 - 1,344 98 317 - 4151972 688 832 - 1,520 98 402 _ 5001973 652a/ 812a/ - 1,464 98 402 _ 5001974 956 983 - 1,939 98 402 _ 5001975 956 1,025 - 1,981 98 402 _ 5001976 1,011 1,283 215 2,509 111 454 127 6921977 1,331 1,442 215 2,988 111 563 127 8011978 1,371 1,442 215 3,028 230 558 127 9151979 1,598 1,346 215 3,259 547 556 127 1,2301980 2,206 1,470 215 3,891 553 592 127 1.272

a/ The installed capacities of the following plauts were derated as given below in thousand tons:Trombay (9), Sindri (27), Kota (20).

Industrial Projects DepartmentJanuary 1981

ANNEX 2-3

50-

INDIA - HAZIRA FERTILIZER PROJECT

INDIA: CAPACITY UTILIZATION OF NITROGENOUS FERTILIZER PLANTS IN OPERATION IN 1980-/

(Percent)

Production Year Ending Mlarch 31

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

A. Private Sector

SCI Kota 102 98 116 100 66 72 79 79 76 76

IEL Kanpur 54 64 78 58 96 89 94 98 93 77

Zuari Goa - - - 37 79 66 72 85 88 88

CFL Vizag 76 81 74 68 59 60 80 73 81 73

Total Private Sector 71 76 86 61 76 74 80 86 77 79

B. Joint Sector

MFL Madras - 51 64 76 51 88 78 77 92 80

GSFC Baroda 69 86 94 76 74 73 80 81 77 80

SPIC Tuticorin - - - - 50 66 71 56 86

MCFL Mangalore - - - - - - 64 60 76 68

Total Joint Sector 69 76 81 76 64 71 69 73 73 79

C. Cooperative Sector

IFFCO Kalol - - - - - 69 81 88 92 73

D. Public Sector

FCI Sindri 73 81 73 79 77 67 47 16 - 21

Gorakhpur 85 95 86 80 91 72 85 64 67 65

HFC Durgapur - - - 10 10 24 30 34 25 35

Barauni - - - - - - 66 50 35 30

Namrup 64 69 80 82 91 102 104 100 88 62

Namrup Exp. - - - - - - 70 72 49 32

NFL Nangal 68 70 66 78 50 98 101 69 88 56

BhatindaPanipat 54

RCF Trombay 64 82 86 80 84 98 126 106 106 76

FACT - Udyogamandal 47 49 38 48 46 55 52 61 62 62

Cochin I & II - - - 9 26 44 53 49 53 58

SAIL - Rourekela 20 39 41 38 51 64 67 60 57 43

NLC - Neyveli 46 29 30 21 24 39 61 69 54 68

Total Public Sector 58 W2 -o WT 7 TI zw Ev Z Y

TOTAL INDUSTRY 63 70 74 58 60 70 73 74 72 §6_

a/ Capacity utilization has been calculated on the basis of available capacity

during initial years of operation after commissioning.

Industrial Projects Department

January 1981

- 51 - ANNEX 2-4

INDIA - HAZIRA FERTILIZER PROJECT

Expected Nitrogen Production froml Operating Units and Firm Projects

(in 000s of nitrogen tpy)

RatedCapacity

('7ear Ending March 31) by (Year) 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88(Actual)

A. Public SectorSindri ) 219 (1982) 23 130 185 185 185 185 185 185 185

Nangal Expansion) 232 131 160 200 200 200 200 200 200 200Trombay )Trombay IV) 165 127 135 145 145 145 145 145 145 145Trombay V i52 (1984) - 65 95 130 130 130 130 130 130Gorakhpur 131 (1982) 51 85 110 110 110 110 110 110 110Namrup 197 78 120 170 170 170 170 170 170 170Durgapur 152 54 95 125 125 125 125 125 125 125Barauni 152 47 95 130 130 130 130 130 130 130Udyogamandal 82 51 55 55 55 55 55 55 55 55Cochin )Cochin II) 192 112 130 160 160 160 160 160 160 160Rourkela 120 (1982) 53 95 95 95 95 95 95 95Neyveli 70 48 50 55 55 55 55 55 55 55Talcher 228 (1983) - 115 160 170 170 170 170 170 170Ramagundam 228 (1982) - 115 160 170 170 170 170 170 170Haldia 152 (1984) - 20 85 120 130 130 130 130 130Panipat 235 (1983) 65 135 160 200 200 200 200 200 200Bhatinda 235 (1982) 53 135 160 200 200 200 200 200 200tfamrup III 152 (1985) - - - 90 120 135 135 135 135Thal 683 - - - - - 135 380 545 615

By-Products 24 (1987) 20 20 20 20 20 20 20 20 20

Sub-Total 3,801 913 1,675 2,240 2,515 2,570 2,720 2,965 3,130 3,200

B. Cooperative SectorKalol/Kandla 265 (1984) 180 180 210 220 225 225 225 225 225Phulpur 228 (1984) - 50 100 185 205 205 205 205 205Razira 668 (1988) - - - - 135 380 535 600

Sub-Total 1,161 180 230 310 405 430 565 810 965 1,030

C. Private and Joint SectorMadras 176 140 150 150 150 150 150 150 150 150Varanasi 10 1 5 5 5 5 5 5 5 5Ennore b/ 7 - - - - -Baroda 236 174 175 175 175 175 175 175 175 175Vizag 84 61 70 70 70 70 70 70 70 70Goa 171 150 150 150 150 150 150 150 150 150Rota 152 116 130 130 130 130 130 130 130Kanpur 207 154 170 170 170 170 170 170 170 170Tuticorin 258 222 220 220 220 220 220 220 220 220Mangalore 156 106 135 135 135 135 135 135 135 135Broach 273 (1984) - - 135 200 230 230 230 230 230Kanpur Expansion 100 (1984) - - 55 75 85 85 85 85 85Kakinada 228 - - - - 125 170 195 195By-Products 4 (1987) 2 2 2 2 2 2 2 2 2

Sub-Total 2,071 1,133 1,207 1,397 1,482 1,522 1,647 1,692 1,717 1,717

D. Overall Production ShortShortfalls c/ - 467 394 219 - - - - -

E. Total Projected 7,033 d/ 2,226 2,645 3,550 4,182 4,522 4,932 5,467 5,812 5,947(1988)

a/ Expected production figures for individual units exclude production sold to other fertilizer producers and are based onprojections by the Ministry of Chemicals and Fertilizer for production from various units, taking into account the long-termmeasures the Ministry is implementing in order to raise capacity utilization.

b/ To be converted to methanol production.

c/ At present, measures to improve capacity utilization are not fully effective and therefore overall production shortfallsin the next few years can be anticipated. In addition, the fertilizer industry overall is experiencing severe externalconstraints on production due to shortage of raw materials (naphtha, fuel oil and coal) and extensive power supply problems.As examples for 1979-80: Sindri has been supplied with only 25% of its fuel oil requirements. Gorakhpur has lost about12,000 tons (N) of production due to inadequate supply of coal and naphtha and has experienced further losses due to powercuts imposed by the State Government. In projecting future production it is considered that the measures being adoptedto remove both internal and external constraints will not become fully effective until 1985/86.

d/ This capacity will be achieved by 1988.

Industrial Projects DepartmentJanuary 1981

INDIAHAZIRA FERTILIZER PROJECT

I FFCO -ORGANIZATION CHART

REPRESENTATIVE GENERAL BODY

BOARD OFDIRECTORS

|MANAGINGlN DIRECTOR O

S F A HEAD OFFen

| EXECUTIVE ll MARKETING l_S DIRECTOR l BDIRECTOR N A _ 3

| MANAE MANAGEPLANNING (CO.RLTOS

NUMBER OF STAFF

SEPTEMBER 1980 829 745 943 851 187 TOTAL =3,555

Industrial Projects Department

January 1981 World Bank - 22422

- 53 -ANNEX 3-2

INDIA - HAZIRA FERTILIZER PROJECT

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF IFFCO(in Rs million)

(Year ending June 30) 1976/77 1977/78 1978/79 1979/80

Income Statement

Total Revenues 1,181.5 1,666.7 1,864.4 1,862.0Cost of Production 805.9 1,185.3 1,393.4 1,536.2Interest Charges 68.8 54.2 50.6 43.9Depreciation 61.0 61.7 63.3 66.0Profit After Taxes 245.8 365.5 357.1 215.9Internal Cash Generation 306.8 427.2 420.4 281.9

Balance Sheet

Current Assets 903.5 1,212.3 1,313.8 1,131.1Net Fixed Assets 871.0 1,247.6 1,737.2 1,746.1Current Liability 112.6 225.2 261.9 426.9Long-Term Debt 890.3 1,062.3 1,292.9 1,244.1Equity & Retained Earnings 811.5 1,268.1 1,696.0 1,884.6

Total Assets 1,814.4 2,555.6 3,250.8 3,555.6

Ratios

Current Ratio 8.0 5.4 5.3 2.6Long-Term Debt to Equity 52:48 46:54 44:56 40:60

Industrial Projects DepartmentJanuary 1981

INDIA - HAZIRA FERTILIZER PROJECT

IFFCO: PROJECTED INCOME AND CASH FLOW STATEMENTS OF IFFCO BY PLANT

(in Rs million)

- ------- 1980/81 --- - ---- ----- 1984/85 -----------

Kalol Kandla&/ Phulpur Total Kalol Kandlaa/ Phulpur. Total

Capacity Utilization (%) 88 108 17 - 88 97 85 -

Income Statement & Cash Flow

Sales Revenues 575 1587 215 2377 787 3313 1301 5401

Cost of Production 399 1462 200 2061 535 3027 895 4457

Interest Charges 27 9 48 84 11 3 69 83

Profit Before Taxes 149 116 (33) 232 241 283 337 861

Income Tax - - - - 92 113 135 340

Net Profit 149 116 (33) 232 149 170 202 521

Depreciation 55 19 54 128 62 47 176 285

Operating Cash FlowAfter Interest 204 135 21 360 211 217 378 806

Debt Service 82 22 111 215 71 20 156 247

Capital Expenditure b/ - 270 303 573 64 99 43 206

Dividend 32 17 - 49 32 17 - 49

Cash Surplus 117 (165) (345) (393) 55 84 248 387

a/ Jncludes Kandla expansion plants scheduled to start production in 1981/82.

SJ Includes increases in Working Capital, but excludes equity participation in KRIBHCO.

Industrial Projects DepartmentJanuary 1981

INDIA - HAZIRA FERTILIZER PROJECT

THE DEVELOPMENT OF INDIAN AGRICULTURE, 1952-1980a/

Average Annual Growth Rates1952 1962 1967 1972 1980 1952-1980 1952-1967 1967-1980

Gross Area Sown (million ha) 133.2 156.2 157.4 165.1 175.5 1.0 1.1 0.8

Net Area Sown (million ha) 119.4 135.4 137.2 140.2 146.0i / 0.7 0.9 0.5

Area under Multiple Cropping(million ha) 13.8 20.8 20.1 24.9 29.0k./ 2.7 2.5 2.9

Gross Irrigated Area (million ha) 23.2 28.5 32.7 38.4 54.3 3.1 2.3 4.0

Gross Irrigated Area as % ofGross Sown Area 17.4 18.2 20.8 23.3 30.9 2.1 1.2 3.1

Gross Area Under HYV - - 1.9 18.2 35.2 NA NA 29.4

Gross Area under HYV as % ofGross Sown Area - - 1.2 11.0 20.1 NA Na 28.4

Fertilizer Consumption(000 tons nutrient) 65.6 383.3 1,100.6 2,656.3 5,255.0 16.9 20.7 12.8

Weather Conditions forAgricultural Production NA Good V. Poor Average V. Poor - - -

Foodgrain Production (million tons) 52.0 82.7 74.2 105.2 115.0 2.9 2.4 3.4

Total Population (million) 361.0 442.4 493.2 550.8 648 .02/ 2.1 2.1 2.1

a/ Most of the data correspond to a year ending March 31 of the year indicated. Consumption data, however,relates to a year ending January 31 or the year indicated.

b/ Estimated. IIndustrial Projects DepartmentJanuary 1981

INDIA - HAZIRIA FERTILIZER PROJECT

STAT,IISE FERTILIZERI USAGE STATISTICS

Stoteise- Coneumption of Plant Nutrientsa8 7. Net Irrigatedper Unit of Groas Cropoed Ae(h/ab/Area to Nat

1979/80pdAr (kg/ha) Estiaate- of Fertili-er Co-n-eptioo fro- 1975-76 Field Survey. / Atl.ivatd Area1979/80 . Ii- dA-

E of 7. of For Winter Poddy (kg/ha) For Wheat (kR/ho)Faroiro Tortl hYV Troditional hYV Tr-ditional

N P205 K,0 Total Using Cropped Area Non- NOD- Non- No-State _ - - Fertili.er Fertilired Irrigated Irrigated Irrigated 1rrigoted Irrigated Irrigated irrigated Irrigated 1975-76

Andhra Pradesh 27.9 9.8 7.4 45.1 61.8 41.7 110.5 19.8 97.4 68.1 - - 132.4 51.3 30.8Bihar 13.0 2.2 1.1 16.3 42.3 35.3 54.0 35.4 43.9 25.9 77.9 47.5 47.0 38.4 31.7GoJarat 22.1 10.7 4.1 37.0 62.3 43.1 107,7 53.7 65.5 37.4 58.9 179.1 59.3 11.7 14.6Haryana 32.4 6.3 2.1 40.8 69.2 48.7 102.0 29.6 69.8 57.3 77.9 47.9 51.6 51.5 48.3Korn toka 2i.0 8.4 7.7 37.1 49.9 33.4 161.7 - 160.9 48.3 134.2 29.0 128.6 64.0 13.2Kerala 16.5 8.5 11.1 36.3 65.3 72.6 116.4 79.8 79.0 68.5 NA NA NA NA 10.4 °'Madhya Pr-desh 4.8 2.3 .5 7.6 15.4 10.8 80.7 49.7 38.5 22.9 82.7 65.9 45.1 26.3 9.6Maharashtra 12.6 4.5 4.0 21.2 42.2 27.3 100.9 76.9 73.4 50.1 97.5 98.9 77.7 83.9 9.9Ori-aa 6.5 1.8 1.0 9.3 21.4 20.7 142.9 - 64.9 36.2 NA NA NA NA 16.5F-Jab 75.0 28.3 5.3 108.6 91.9 76.3 96.6 - 69.2 - 105.9 41.4 58.2 20.5 75.1R.J.athon 6.8 1.4 .4 8.6 30.8 20.1 44.1 - 47.9 25.8 70.1 34.2 22.7 23.7 16.9Tamil Nadu 46.7 13.0 15.5 75.2 69.7 55.4 151.3 - 134.0 46.0 NA NA NA NA 42.8Utt-r Ptadesh 31.7 8.7 3.3 43.5 44.2 32.1 49.5 42.7 37.4 34.9 80.4 37.4 56.4 47.6 45.8Weat Bengal 19.0 6.8 5.7 31.5 66.0 49.8 96.0 57.4 55.4 60.3 134.8 23.7 95.4 44.9 24.0

All India 20.9 6.7 3.6 31.2 45.1 32.9 96.9 53.4 73.5 40.4 85.5 50.2 55.3 31.8 24.2

a/ S-ute: Mini.try of Agriculture and Irrigation and Fortilieer Ae.ociation of IndiaS/. ource: NCAER Survey (onpoblihed)

c/ Source: Pertili.er Statistics 1977-78. The effectIve fipures in severalatates are 50-60% of thoae ahown in the statiptics, due to ahortage of ataer.

Induatrial Pro-erta DepartsentIar.ary 1981 I'r

- 57 -

ANNEX 4-3

INDIA - HAZIRA FERTILIZER PROJECT

BREAKDOWN OF NITROGEN USE BY FERTILIZER TYPE

1961-1987 (000 tons of nutrient)

(Year ending Jan.31) 1961 1968 1973 1981a/ 1987-1% Nitrogen

Product in Product Quantity 1 Quantity % Quantity % Quantity % Quantity %

Urea 46.0 67 22 274 32 1,024 63 3,206 78 6,955 84

AmmoniumSulphate 20.6 153 50 326 38 177 11 159 .4 166 2

AmmoniumSulphateNitrate 26.0 23 8 23 3 11 1 - - - -

CalciumAmmoniumNitrate 21.0-26.0 57 19 129 15 166 10 189 5 166 2

Others(includ-ing com-plex fer-tilizers) 15.0-26.1 6 1 99 12 252 15 534 13 993 12

Total 306 100 851 100 1,630 100 4,088 100 8,280 100

a/ Estimated

b/ Projected

Tndustrial Projects DepartmentJanuary 1981

- 58 - ANNEX 4-4

INDIA - HAZIRA FERTILIZER PROJECT

HISTORICAL CONSUMPTION, PRODUCTION AND IMPORTS OF FERTILIZERS, 1952-1981

Nitrogen Phosphates Potash(000 tons N) (000 tons P205) (000 K20) Total Value of Imorts

Yearl/ Consumption Production Imports Consumption Production Imports Consumption Imports (Million Rupees)

1952/53 58 53 44 4 7 - 3 3 45.6

1953/54 89 53 19 8 14 - 8 7 25.2

1954/55 95 68 20 15 14 - 11 11 30.2

1955/56 107 77 53 13 12 - 10 10 73.3

1956/57 123 79 57 16 17 - 15 15 77.7

1957/58 149 81 110 26 26 - 13 13 158.8

1958/59 172 81 97 29 31 - 22 22 113.1

1959/60 229 84 142 54 51 4 21 33 162.9

1960/61 212 112 399 53 54 - 29 20 121.8

1961/62 250 154 307 60 65 - 28 75 141.1

1962/63 333 194 244 83 88 10 36 41 236.0

1963/64 377 219 228 116 108 13 50 40 187.1

1964/65 555 243 232 149 131 12 69 57 220.8

1965/66 575 238 326 132 119 14 77 73 411.9

1966//67 738 309 632 248 146 148 114 118 1,288.2

1967/68 1,034 402 867 446 207 349 204 270 1,933.1

1968/69 1,209 563 844 382 213 138 170 213 1,629.2

1969/70 1,356 730 667 416 224 94 210 120 1,167.7

1970/71 1,479 832 477 541 228 32 236 120 767.9

1971/72 1,798 949 481 558 290 248 300 268 899.7

1972/73 1,839 1,054 665 581 330 204 367 325 1,212.6

1973/74 1,829 1,050 659 650 324 213 360 370 1,767.5

1974/75 1,766 1,186 884 471 331 286 336 437 5,991.3

1975/76 1,990 1,535 996 430 320 361 278 278 7,227.7

1976/77 2,457 1,857 750 635 478 23 318 278 2,202.2

1977/78 2,913 2,000 758 867 670 164 506 599 3,064.4

1978/79 3,420 2,169 1,228 1,106 776 243 592 517 5,126.8

1979/80 3,498 2,226 1,295 1,151 763 237 .606 473 5,255.0

1980/81 3,742 2,645 n.a. 1,172 n.a. n.a. 636 n.a. n.a.(Es t.)

1/ Consumption figures run from February 1 of the first year to January 31 of the second year.2/ Production figures run from April 1 of the first year to March 31 of the second year.

Industrial Projects DepartmentJanuary 1981

- 59 - ANNEX 4-5

Page 1 of 2

INDIA - HAZIRA FERTILIZER PROJECT

ESTIMATES OF FUTURE NITROGEN CONSUMPTION

1. A number of organizations have prepared estimates of future nitrogenconsumption in India (Project File - Reference A). Virtually all these estimatesare based on some form of extrapolation method. The estimates selected forcomparison are the following:

(a) Fertilizer Association of India (FAI)(December 1980), whichuses a quadratic regression method, omitting from the analysiscertain years in the 1970s considered as atypical.

(b) IFFCO (August 1979), which was fitted exponential curves topast consumption data.

(c) Ministry of Agirculture projections (September 1980), based onStatewise analysis. These estimates are extrapolations of pasttrends, but modified to incorporate the effect of planned changesin irrigation levels, extension services, etc.

(d) IBRD estimates (January 1981), based on the use of Box-Jenkinsadaptive forecasting methods but modified for later years by con-sideration of a maximum consumption of 10 million tons of nitrogenper annum, which takes into account such factors as optimal levelof per hectare usage for wheat and rice crops, expected levels of

irrigation and HYV cultivation, and increases in the number offarmers utilizing fertilizer (Project File - Reference B). Threeestimates are shown: (i) a low estimate which is based on theassumption that the effect of the 1979 drought will lower futuredemand for several years below the pre-drought trend line; (ii) amedian estimate which assumes a faster return to the pre-droughttrend line; and (iii) a high estimate which is also based on theassumption that the current drought will not affect future growth.

India - Estimates of Future Nitrogen Consumption(million tons nutrient)

Ministry ofYear FAI Agriculture

Ending December September IBRD EstimatesJanuary 31 1980 1980 IFFCO (1) Low (2) Median (3) High

1980-81 3.74 4.31 4.08 3.89 4.08 4.281981-82 4.73 4.73 4.63 4.23 4.52 4.831982-83 5.27 5.15 5.25 4.36 4.73 5.121983-84 5.84 5.56 5.95 4.56 5.00 5.481984-85 6.43 6.00 6.78 4.94 5.46 6.041985-86 7.06 6.48 7.58 a/ 5.62 6.26 6.961986-87 7.73 6.96 8.38 a/ 6.14 6.84 7.611987-88 8.41 7.50 6.70 7.47 8.301988-89 9.13 8.00 7.23 8.12 9.041989-90 9.88 8.50 7.94 8.84 9.83

a/ IBRD extrapolation using given trend.

- 60 - ANNEX 4-5

Page 2 of 2

2. A comparison of these estimates is given in the Graph attached tothis Annex. It shows that the Bank high estimate lies generally close to theFAI estimate. The wide range of the three Bank projections indicate the in-herent uncertainty in such projections; by 1986, the difference between thehigh and low estimates is about 2 million tons or about 25%.

3. In order to convert consumption figures into demand estimates, eachannual figure was increased by 2% to cover distribution losses and by 20% ofthe increase in consumption over the previous year to allow for additionalmaterial in transit and stocks to be maintained at appropriate levels. Theseadjusted demand estimates are shown in the following table, together with pro-jections of future production:

India - Estimates of Nitrogen Demand and Production(million nutrient tons)

YearEnding Demand

January 31 Low Medium High Production

1980/81 4.05 4.28 4.55 2.581981/82 4.38 4.70 5.04 3.401982/83 4.48 4.86 5.28 4.071983/84 4.69 5.15 5.66 4.471984/85 5.12 5.66 6.27 4.981985/86 5.87 6.55 7.28 5.511986/87 6.36 7.10 7.89 5.771987/88 6.94 7.75 8.60 5.931988/89 7.57 8.41 9.37 5.951989/90 8.00 9.00 10.00 5.95

4. It should be noted that even if the IBRD low estimate is used toforecast annual demand, projected production will be insufficient to meetdemand throughout the next decade.

Industrial Projects DepartmentMarch 1981

- 61 -

ANNEX 4-5Attachme.nt

INDIAHAZIRA FERTILIZER PROJECT

PROJECTION OF NITROGEN FERTILIZERDEMAND AND PRODUCTION

1 0

9I

IBRD HIGH PROJECTION OF DEMAND ;

7FAI DEC 80 ESTIMATE OF DEMAND IBRD LOW PROJECTION OF

J 6 g >/ ...... \....... . .. DEMAND

PROJECTED PRODUCTION

/ IBRD MEDIAN PROJECTION OF DEMAND

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

World Bank-22420

INDIA - HAZIRA FERTILIZER PROJECT

UNITWISE SUPPLY PLAN FROM ALL SOURCES TO HAZIRA MARKETING AREA, 1987/88('000 tons of Urea)

Production ------------------------------- Marketing Area (States)--------------------------------('000 tons Other

Producers by State Urea) Punjab Haryana Rajasthan Gujarat Maharashtra M. P. U. P. States

GujaratKalol 300 - - 30 210 - 60 - -

GSFC (Baroda) 300 20 30 20 120 40 70 - -

GNVF (Broach) 500 100 - 130 180 - 30 60 -

Hazira ° 110 300 310 30 310 40 210 110 -

2,410 420 340 210 820 80 370 170 -Maharashtra

Trombay 330 - - - - 240 90 - -

Thal 1,260 - - - - 640 - 620 -

1,590 - 880 90 620 -Punjab

Nangal 280 210 - - - - - - 70Bhatinda 430 370 20 40 - - - -

710 580 20 40 - - _ _ 70

HaryanaPanipat 430 - 390 40 - -

Kanpur _ - -

430 - 390 40 - _ _ _U. P.

TEL 370 - - - - _ _ 370 -Gorakhpur 240 - - - _- 240 -

Phulpur 420 _- - - 20 400 -1,030 - - 20 1,010 -

RajasthanKota 270 - - 270 - - 40 - -

GoaZuari 270 - - - 20 - - 250

A. P.Ramagundan 390 - - - 40 50 - 300

Eastern StatesTalcher (Orissa) 390 - - - - - 50 - 340Durgapur (West Bengal) 270 - - - 270Haldia (West Bengal) 140 - - 160Namrup (Assam) 650 - - - - _ 190 460Barauni (Bihar) 270 - - - _ _ _ 100 170Sindri (Bihar) 240 _ - 50 190

Total Production 9,060 1,000 750 560 820 1,020 620 2,140 2,210

Imports - Bombay - - - - - - 2,510

- Kandla 410 -

Total Imports 410 - _ _ 2,510

Total Requirements 1,410 750 560 820 1,020 620 4,650

Industrial Projects DepartmentJanuary 1981

INDIAHAZIRA FERTILIZER PROJECT

FERTILIZER DISTRIBUTION SYSTEM

IMPORTED POOL FERTILIZER INDIGENOUS PRODUCTION

STATE GOVERNMENTSUNION TERRITORIES,

AND SELECTEDDOMESTIC MANUFACTURERS

APEX INSTITUTIONAL WHOLESALE WHOLE-CO-OPERATIVES BUYERS SELLING AGENT SALERS

lDISTRICT AND lllTAUA LEVELPRVTDELS

CO-OFERATIVE TRADE

43,000 CO-OPERATIVESELLING POINTS 59,000 RETAIL POINTS

World Bank - 21232

Industrial Projects DepartmentJanuary 1981

INDIA - EAZIRA FERTILIZER PROJECT

RAILWAY FACI.ITIES RFQU1RED FOR HiAZIRA PROJECT

Train Path Requirement Train Path CapacityEoisting Projected 1/

Section 1978/79 1983/84 1983/84 FPrtier Works ReqoiredCopa- Util- rt- Surplus(+) to Cover Deficit

I._ CoaL Corridor KT' city ized (ther ilizer Total Works in Progress Total Deficit(-)2/ Train Path Cau,acity

Udhna-Jalgaon 307 15,0 13.7 17.7 3.5 21.2 Change of traction, more trains arcbcing dicseliced, nunher of trains willrednice comparatively. 13.0 -3.2 Line Capacity Works.

Udhoa-Sslrat 4 55.0 52.3 56.3 0 56.3 Proposed alignment will ky-pass thisSrCtion. Ferti liner trains will have no

II. Prodoo,t Corridor impact. 55.0 -1.3 Line Capacity Works.

Surat-Bharuch 59 40.5 39.9 47.2 2,0 49.2 Conversion of class "D" station intoclass "B" station, provision of loops,intermediate block huts. 47.5 -1.7 Line capacity works, additional loops.

Bharuch-Vadodra 70 41.5 40.9 47.2 2.0 49.2 Conversion of class "D" station intoclass "B" station, provision of loops,intermediate block huts. 47.5 -1.7 Signalling improveient.

Vadodra-Godhra 74 33.0 29.6 29.7 2.0 31.7) Intermediate block signalling with 33.0 +1.3 Line capacity works, if necessary.axle counters.Conversion of class " D"a'

Godhra-Dohad 72 45.0 35.3 47.3 5.0 52.3) stations into class "C" stations. 45.0 -7.3 Line capacity works/signalling improvements.Provision of loop and providing various

Dohad-Ratlam 113 38,0 35.3 47.3 5.0 52,3) facilities (BG complex) and down by-pass 48.0 -4.3 Line capacity works/signalling improvements.lines at Ratlam.

Ratlam-Nagda 41 43.0 35.0 48.2 5.0 53.2 None 43.0 -9.2 Line capacity works/signalling improvements.

Nagda-Kota 225 26.5 24.3 30.0 5.0 35.0 Double tracking for 112 kis. 39.0 +4.0 None.

Kota-Lakheri 61 25.0 24.9 28.7 5.0 33.7 Double tracking for 36 kms. 45.0 +11.3 None.

Lakheri-Swai-Madhopur 48 44.0 27.0 30.0 5.0 35.0 None 44.0 +7.0 None.

Swaimadhopur-Gangapur city 64 35.0 26.8 30.7 5.0 35.7 None 35.0 -0.7 Line capacity works.

Gangapur city-Bayana 77 38.0 26.6 31.0 5.0 36,0 None 38.0 +2.0 None.

Bayana-Matlhra 75 33.0 22.7 27.3 5.0 32.3 Double tracking for 8.34 kss. 41.0 +8.7 None.

Mathura-Palwal 83 48.0 47.0 64.0 5.0 69.0 ) (a) Multiple aspect color light sig- 52.0 -17.0 3rd line to be considered, improvednalling between Mathura-Faridabad. signalling.

) (b) Electrification sanctioned.Palwal-Tughlakabad 39 58.0 53.0 76.0 5.0 81.0

1(c) Automatic block signalling with 58.0 -23.0 Absolute permissive block on the 3rd

axle counters between Mathura- line. Finally 4th line may also havePalwal. to be considered.

1/ After projected completion of works in Progress.2/ Total train path capacity requirements projected for 1983/84 minus total train path capacity 1983/84.

Source: Indian Railways

Industrial Projects DepartmentJanuary 1981

1NDIAHAZIRA FERTILIZER PROJECT

ORGANIZATION OF MARKETING DIVISION OF 1FFCO

fMAFRKETING| DIRtSCTOR

MANAGER MANAGERNAGE MANAGER MANAGERPUBLIC RELATIONS ETING SERVICES RS AND A DISTN. & TRANSPORTATION RKETING ACCOUNTS

HEAD OFFICE II HEAD OFFICE PLANT OFFICE SPUBLICITY DEPARtTMENT TRAIINING DEPARTMENT MARKEPTIN /NART MANAGER DISTN & TRANSPORTATION AGRICULTURAL SERVICE5 TRANSPORTAT EPTI I I j SERVICES DE~~~~~~~~ ~~PARTMENT (NORTH, EAST, WEST, DEPARTMENT DEPARTMENT AT KANDOLA, KALOL, PHULPUR

Inutra Prjet Departmen

STAre MARKETINGMANAGERS

AREA MANAGERS |

|AREA AGRONOMISTS

FIELD| REPPIESENTATIVES

Wordd Bank - 21234

January I1981 t

- 66 - ANNEX 5-5

INDIA - HAZIRA FERTILIZER PROJECT

FOODGRAIN/NITROGEN PRICE RATIOS

(kgs of wheat or paddy required to buy 1 kg of Nitrogen)

Wheat Paddy

1971 2.64 3.78

1972 2.74 3.78

1973 3.50 5.26

1974 4.14 5.88

1975 3.83 5.43

1976 3.62 5.14

1977 3.16 4.55

1978 3.00 4.38

1979 2.74 3.71

1980 3.72 4.14

Source: Fertilizer Association of India

Industrial Projects DepartmentJanuary 1981

INDIAIIAZIRA FERTILIZER PROJECT

PROJECT IMPLEMENTATION ORGANIZATIONAL CHART

| HU{ARD OF-| IAN DI-LTrR

DIRECUTORS

MANAGIN,GDIHEC1 OR

COHPORATE STAFFAT REGISTILRERD

OFFICE OF KRIaCO

EXECOITIVEDIREC1 OR

PLANNING. REPORTING,

LIAISON & GENERAL

COORDINATION GROIP

-~ EIsPR0JECT ENGINEERING F INANCE TRWISPORTATION PERSONNEL & MATERIACS

MANAGERS _ NAGR MANAGEfl WMAGER AOMN MANAGER MANAGER

NAf4INIA & LREAOFFSITES

STPRPAHATION BUDGET CONNlIDI STORESCOORDINATION OF SIEPEiNAND TPANSPORTATION MEOICAL DRC

EN|INEHRING MA TERIALS Pt ANNING FUNDS M)bILIZATION OITE LDLGIRECT PURCHASING BY

FRII(IIFIEMEN1~SUJPE RVISUN OF ACCOUNTINC ~E IOI SECURITY KFrnBCoPLIOCHFIEMENI Stjo _C ~~~~~~~~~~~~SITE IWM)LNG WELFARiE

CONSTfiOCTION ONIFiACTS COST REPORTING ~~~~~~~~~~~~~~~~~~~~IMPORT FORMALITIESC(NMISIONINIC ESUIPMENT NSEPCTION COST REPOHTING TiISFTATION EQUIPM'T | PERSONNEL RECEIT FAND LISsuING OF

MATERIALS

WoOkd B.nk - 21250

Industrial Projects DepartmentMarch 1981

*+rf zN X~~~ ~ ~ ~~~~~~NDIA s CS I? ,O,e CJ~~~~~~~~~~~AIR RECI

PrOJECT IMPLEMLNIATION SCHEDUCE 4%~~~~~~~~~~~~~~~~A PHASE I

__ _ ¢E14T71"1s1o~~~~~11Xl1 H-1~...................ln .lll..I........ .. S ebZ llE[.0....*o-tllTl -

- - - -- - - - yW- J .-- … ra'it_._-_

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

4t4 - -- - - . .. . . . .. . .__

UOUIUSO - - - -~~~~~~~~~~~~~~.A V ss--- … ------- -

cv,, . ............................................. ,

CIIL PUtt, SILAAS OUUOhh_L UUVMSU _JJ W___.CUbO..ffi CotTt 4 445o SfU.*ofanhaut 4

W4ItUUTMA V - - - - - - _______________

L*cf^lCAL ~ ~ ~ - u5 am.wV.ai._ _ _-t

rOW"~~~~~~~~~~~~~~~~~. .ts on . .................... _JAW

ru*tHIlIE"HoUOn __ | _ w -- J h ---- _ . .

11000 piQUR 4 45

HA1z naY s~~~*Dn *jjj -r***aat"""R - iICII

^* ^ 1ht u bes, z i ts @ _ _ _ _ _ _ _ _~~~~~~~* ISAT.4

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Industrial Projects DepartmentMarch 1981

* ~~~~~~,N ~~~~~INDIA 0@ 4

HAZ PROJECT I t -*MJET 0PLEMENTATION SCHEDULE

POCT PHASE 11* , I 2 I 4 I 8 6 i 40 IXI II 2||§ ,3|,. 6 ,. ' .''8s|B|48 20 71, ) ti 28 ^ I? Ii t48 ., di .,, 4 4, 44., 43" 48 | ,- *

IliStCRITICAlOIPS ___

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- ---- ---- - - -

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PIWIC_ _ _ __ _ __ _ _ __--_A----------_*

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084eR F*L1 U414

1-1110 I __ __ __ ___ A_A_A a * _ @ _ @ _ _ *-tiEC*nIA l, _ _ ___ ___nc ud d_n_s

lLICl"ICAI * _ _ _ _ _ _ _ _ e_______________ - a'i

March 1 96.801 4

P*Oi,lCt *C8L4

diiCOIiSi * -D* -lll -R^{ 8O_i vI 8rWOO *rV 1^ O D 1 E W OFY1O

* -JJ --_ - _3u n 8* **i

^ ^ 11 WA v SIDIIIQ ____A__ _ ____ ___t-i

I.AS ~ ~ ~ ~ ~ ~ ~ ~ ~~~*rouen activit Iainlde i.0 .l8 044 N

ndustria PrjetsDeatmntPhaeIMarch~~~~~~~~~~~~~~~~ 1981___Zu|%U* u °°^

- 70 -

ANNEX 8-1

INDIA - HAZIRA FERTILIZER PROJECT

CAPITAL COST ESTIMATE

Rs. Million - US$ Million (Rs. 8.0 =$)Indirect IndirectForeign Local Foreign Local

Exchange Component Exchange ComponentDirect of Local of Local Direct of Local of LocalImports Purchases Purchases Total Imports Purchases Purchases Total

1. Equipment and Spares

Ammonia Plant 705 170 326 1,201 88.1 21.2 40.7 150.0Urea Plant 322 118 226 666 40.2 14.8 28.2 83.2Steam and Coal Plants 395 46 86 527 49.4 5.7 10.3 65.9Power Generation & Distr. 61 36 70 167 7.6 4.5 8.7 20.8Other Offsites 58 108 208 371 7.3 13.5 25.6 46,4Spares 119 42 78 239 14.9 3.3 9.8 30.0Construction Tools 28 7 16 51 3.5 0.9 2.0 6.4

Subtotal 1,688 527 1,007 3,222 211.0 63.9 125.8 402.7

2. Ocean Freight 183 - - 183 22.9 - - 22 '

3. Handling, Duties & Taxes - 7 833 842 - 0.9 104.4 105.3

4. Engineering Services 286 - 284 570 33.7 - 35.5 1.2

5. Project Management & Ins. 7 - 163 170 0.9 - 20.4 21.3

6. Erection - 15 209 224 - 1.9 26.1 '28.0

7. Civil Works and Land - 28 451 479 - 3.3 56.4 59.9

8. Commissioning Charges - - 45 45 - - 5.6 5.6

9. Township - 5 78 83 - 0.6 9.8 10.4

10. Railway Siding - 10 160 170 - 1.3 20.0 21.3

Base Cost Estimate (BCE) 2,164 592 3,232 5,988 270.5 74.1 404.0 748.6(In January 1981 prices)

Physical Contingencies 216 59 323 598 2i.1 7.4 40.4 74.9(10% of BCE)

Price Escalation9a 409 155 839 1,403 51.0 19.3 104c$8 173.4

Total Installed Cost 2,789 806 4,394 7,989 348.6 100.8 549.2 398.6

Working Capital - 191 1,093 1,284 - 23.9 136.6 160.3

Interest during Constructionb/ - 19 923 942 | _.4 115.4 117.8

Total Financing Required 2,789 1.016 6_',10 10.215 348.6 127.1 801.2 1,276.9

al 25% of base cost estimate and physical contingencies, except for the steam plant and engineering serbices,whose procurement is complete on a fixed price basis. Price escalation is based on expected internationaland local inflation annual rates of 12% in 1979, 10.53 in 1980, 93 in 1981, 8% in 1982 and 77 for 1983-85.

b/ Assuming 60:40 debt to ecuitv ratio, capitalization of interrst on tn June 1985: loans of 1!SS0(5 millionfron TDA, uss203.2 million from ROCF and ODA, and 115$93.0 million from IDBI; anid a timing of Governmentcontributions whereby Government equity is paid first and Go-ernment loans later.

Industrial Projects DepartmentMarch 1981

- 71 - ANNEX 8-2

INDIA - HAZIRA FERTILIZER PROJECT

PERMANENT WORKING CAPITAL(at 90% Capacity Utilization - Millions of Rupees)

I. Current Assets ConstantCurrent Jan. 1981

A. Accounts Receivable Prices Prices

(i) NH3 : 15 days of sales 2.9 2.1(ii) Urea: 45 days of sales 617.1 437.7

B. Raw Material Inventory

(i) Coal: 45 days of purchases 24.9 14.9(ii) Bags: 45 days of purchases 33.2 19.6(iii) Chemicals: 60 days of purchases 12.5 7.4

C. Goods in Process Inventory

3 days of Variable Production Costs 18.7 11.1

D. Finished Product Inventory

(i) NH3: 8,000 t at cost of production 14.4 11.0(ii) Urea: 45 days at cost of production 374.4 185.2

E. Operating Cash

One month of cost of production 217.2 127.1

Total Current Assets 1,315.3 816.1

II. Current Liabilities

F. Accounts Payable

Water: 30 days of purchases 1.4 0.7Power: 30 days of purchases 2.1 1.3Bags: 30 days of purchases 22.5 13.'1Chemicals: 30 days of purchases 5.7 3.7

Total Current Liabilities 31.7 15.8

WORKING CAPITAL REQUIREMENTS l-28.6_

(US$160.5 CUS$99.7Million) Million)

Industrial Prolects DepartmentJanuary 1981

- 72 -

ANNEX 8-3

INDIA: HiAZIRA FERTILIZER PROJECT

ALLOCATION OF FUNDS FROM COLENDERS TO PROJECT COMPONENTS(in Million of US Dollars)

Total Cost of Items

In CurrentPrices, inclu-

Base Cost ding Contin- Localin Jan. 1981 gencies and Japan UK Institutions

Prices Escalation - IDA CREDIT OECF ODA and Equity

I. Imported Equipment

Ammonia Plants 88.1 121.6 52.4 69.2 - -Urea Plants 40.2 55.5 55.5 - - -Steam/Coal Plant 49.4 55.6 - - 55.6 _Power Plant 7.6 10.5 10.5 - - _Offsites 7.3 10.1 10.1 - - -

Spares 14.9 20.6 10.1 5.5 5.0 -Construction Tools 3.5 4.8 4.8 - - -Ocean Freight 22.9 31.6 17.2 7.8 6.6 -

Sub-Total 233.9 310.3 160.6 82.5 67.2 -

II. Engineering Services

Ammonia, Urea, Pcwer and Offsites 71.2 80.1 45.4 - - 34.7f/

TII. Local Equipment

Ammonia Plant 61.9 85.5 64.1-/ 16.2C/ - 5.2Urea 43 0 59.4 54O-- 5.4Steam- 34.0-' 42.8 - - 35.3 7.5Power Plant 13.2 18.2 17.8 hI - - 0.4Off-sites 39.1 54.0 38.9- - 15.1Spares 15.1 20.8 15.2b/ - 2.0 3.6Construction Tools 2.9 4.0 4. - - -

Sub-Total 209.2 284.7 194.0 16.2 37.3 37.2

IV. Erection, Civil Works el 234.3 323.5 - - - 323.5Township and Other Local Services-

TOTAL 748.6 998.6 400.0 98.7 104.5 395.4

(Base Cost) (InstalledCost)

a/ The steam plant and foreign engineering services include7physical contingency only, since their procurement is already

set at a fixed price.b/ Amount expected to be won by Indian suppliers under ICB.c/ Amount expected to be won by Indian suppliers under OECF's selective bidding.d/ Including local equipment (US$16.5 million) and local erection, civil works and services (US$17.5 million) related to

steam plant.e/ Excluding engineering services.f/ Of this amount, US$14.7 million represents estimated local taxes on foreign engineering services.

Industrial Projects DepartmentMarch 1981

- 73 -ANNEX 8-4

INDIA - HAZIRA FERTILIZER PROJECT

ESTIMATED DISBURSEMENT SCHEDULEFOR BANK LOAN

(1981 US$ millions)

Quarterly CumulativePeriod Disbursements Disbursements

1981 July - Sept. 5.0 5.0Oct. - Dec. 8.0 13.0

1982 Jan. - March 14.0 27.0Apr. - June 20.0 47.0July - Sept. 22.9 69.9Oct. - Dec. 23.2 93.1

1983 Jan. - March 23.4 116.5Apr. - June 23.7 140.2July - Sept. 25.0 165.2Oct. - Dec. 29.7 194.9

1984 Jan. - March 33.0 227.9Apr. - June 31.1 259.0July - Sept 27.6 286.6Oct. - Dec. 27.0 313.6

1985 Jan. - March 25.2 338.8Apr. - June 22.9 361.7July - Sept. 16.3 378.0Oct. - Dec. 14.1 392.1

1986 Jan. - March 4.6 396.7Apr. - June 3.3 400.0

Industrial Projects DepartmentMarch 1981

- 74 -

ANNEX 9-1Page 1 of 2

INDIA - HAZIRA FERTILIZER PROJECT

ASSUMPTIONS USED IN THE FINANCIAL ANALYSIS OF THE PROJECT

1. The financial projections of the Project are calculated in currentRupees. Revenues are determined on current terms by the retention priceformula (Annex 9-2). Costs have been escalated with inflation prices of15% in 1980/81, 9% per year in 1981/82, 8.5% in 1982/83, 7.5% from 1983/84

till 1985/86 and 6% thereafter for years ending March 31. The financialprojections are presented according to KRIBHCO cooperative years from July 1 to June 30.

A. Financing Plan and Debt Service

2. The project financing plan is detailed in Chapter VIII of thereport and the debt service schedule is presented in Annex 9-5. The followingassumptions have been used to compute the debt service schedule:

(i) The IDA credit will be on lent by the Government at 10.75% perannum. Its maturity will be 15 years including 5 years of grace.

(ii) The ODA and OECF funds will be partly channeled through GOI,and will be on-lent to KRIBCO at an interest of 10.75% per annumand partly through IDBI. For the GOI channeled funds, eachyearly disbursenent will be paid back over 15 years after 5 yearsof grace (equal principal repayment once a year); this correspondsto a total maturity of 20 years. No commitment charge will belevied.

(iii) The IDBI loan will be at 11.85% per annum. Its maturitywill be 15 years, including 5 years of grace. Commitmentfee will amount to D.5% of the undisbursed amount.

For the financial projections, interest during construction and commitmentfees were capitalized.

B. Capacity Build-up

3. It is assumed that the first stream of ammonia and urea plants willstart commercial operation by October 1984, 42 months after zero date. Thisfirst stream of ammonia and urea plants is assumed to operate at 60% capacityutilization the first year of operation, 80% the second year and 90% there-after. The second stream of ammonia and urea plants is assumed to followthis exact pattern with a lag of 12 months. It has been assumed that 0.6tons of ammonia will yield 1 ton of urea, so that at 90% capacity utilization,the project will produce 801,900 tpy of ammonia of which 784,080 tpy will beused in the production of 1,306,800 tpy of urea and 17,820 tpy will be soldto other IFFCO's plant at Kandla for the production of NPK fertilizers.

- 75 -

ANNEX 9-1Page 2 of 2

C. Revenues

4. All revenues are at ex-factory prices. They do not include govern-ment levy, excise duty, freight and storing costs, dealer's margin, nor anycharges that determine the spread between ex-factory and retail price. Thisis consistent with the fact that ex-factory prices are set by the retentionprice formula (Annex 9-2) and distribution expenses do not accrue to theProject entity.

D. Operating Costs and Working Capital

5. Production costs, which are presented in Annex 9-4 in January 1981Rupees, are based on IFFCO estimates and have been cross-checked with similarestimates for the Thal and other projects. The estimates are realistic. Asmentioned in para 1 of this Annex, all costs have been escalated for priceinflation. A 12-year straight line depreciation has been used for the finan-cial projections and for the retention price calculation. Working capitalrequirements are detailed in Annex 8-2.

E. Taxes and Dividends

6. Following Indian tax laws, the Project will benefit from InvestmentTax Credit and Tax Holidays. For income tax calculations, depreciation iscalculated following the written down value method; 75% of plant cost iscredited as Investment Tax Credit the first year of operation; and 7.5% ofcapital employed is deducted from profit under the Tax Holiday law for thefirst 7 years of operation. Benefits accruing for the last two items arecarried forward for 8 years of operation.

7. It is expected that dividends of 6% of share equity will bedistributed in 1988, and 10% thereafter.

Industrial Projects DepartmentJanuary 1981

- 76 -

ANNEX 9-2Page 1 of 2

INDIA - HAZIRA FERTILIZER PROJECT

UREA RETENTION PRICE CALCULATION

1. The urea retention price is calculated as per the formula enunciatedby the Marathe Committee. The calculations are made for pricing periods of3 years as follows:

(i' Share capital used in urea production (95% of total sharecapital). In each successive pricing period, share capitalis equal to that prevailing at the beginning of the period.

(ii) + Retained earnings.

(iii) - Capital employed outside the business and accumulated surplus cash.

(iv) = Capital employed in the business. A lower limit has been set forthis cap-tal employed and it cannot decrease belowshare capital.

(v) 29.4% return on capital employed.

(vi) + Variable and fixed production costs at 80% capacity utilizationrelated to urea production, with depreciation as provided inthe company balance sheet.

(vii) + Interest on short aLd long-term debt associated with ureaproduction. In each successive block of 3 years, intereston long and short-term debt are considered equal to those ofthe middle year.

(viii) + Sum = ex-factory revenue to producer.

(ix) Production volume of urea at 80% capacity utilization.

(x) Urea Retention Price allowed.

2. As can be seen in the price retention schedule below, captial employedin business equals share capital after 1985. This is because accumulated surpluscash exceeds retained earnings, and the provision on the lower limit applies.Meanwhile increases in production costs due to inflation tend to increase theretention price. The formula provides the Company a large cash flow during theinitial years of operations, declining in real terms thereafter. In fact, overthe 10-year period considered, the retention increases at about 2% per year incurrent terms, which is well below the assumed inflation rates. The Project'srevenues decrease at about 5% per annum in real terms.

INDIA - HAZIRA FERIlILIZER PROJECT

PRICE RETENTION SCHEDULE

(IN MILLION OF CURRENT RUPEES)

1985 1986 198/ 1988 1989 1990 1991 1992 1993 1994 1996 1997

SHARE CAPITAL 3,42z4 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424RETAINEIE' EARNINGS - - - 1,413 1,413 1,413 4,118 4,1t8 4,118 4,565 4,565 4,565

SUB TOTAL 3,424 3,424 3,424 4.837 4,837 4,837 7,542 7,542 7i542 7-989 7,989 7,989

SURPLUS CASH - - - 1.492 1,492 1,492 4,616 4,616 4,616 5,358 5,358 5Y358

CAFIrAL EMPLOYED 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424 3,424-a

29,4Z RETURN ON CAFITAL 1,007 1,007 1,007 1,007 1,007 1,007 1,007 1,007 1,007 1,007 1,007 1,007VARIABLE PRODUCT[ON COSTS 1,4:;l 1,557 1,642 1,742 t,854 1,968 2,082 202O6 2,339 2,484 2,782 2,945FIXED PRODUCTION COSTS 1,167 1, 200 1,136 1,166 1,194 1,226 1,258 1,293 1,330 1,371 1,455 1,670INTEREST ON S.l. DEBT 67 67 67 - - - - - - - - -INTEREST ON L,T. DEBT 558 558 558 450 450 450 283 283 283 109 109 109

SALES TO REALIZE 4,250 4,389 4,410 4,365 4,505 4,651 4,630 4,789 4,59 4,971 5,353 5,731

UREA PRODUCTION ('000 TONS) 1,162 1,162 1,162 1,162 1,162 1,162 1,162 1,162 1,162 1,162 1,162 1,162

RETENTION FRICE (RS/TON, 3,657 3,777 3,795 3,7S6 3,877 4,003 3,985 4,121 4,268 4,2/8 4,607 4,932 OQ

NOTE: AS PER INDIAN REGULATIONS, CAPITAL EMPLOYED EDLlALSSHARE CAPITAL, WHEN SURPlUS CASH EXCEEDS RETAINED EARNINGS.

INDUSTRIAL FPROJECTS DEPARTEMENTREFORT PFREPARED;03/03/81

INDIA - HAZIRA FERTILIZER PROJECT

FINANCIAL PRODUCTION COSTS

(at 90% Capacity Utilization - Jan. 1981 Rupees)

1. At 90% capacity utilization, the Project will produce 1,306,800 tpy of urea. It will produce 801,900 tpy of

NH3 of which 17,820 tpy will be sold as surplus NH3 (0.6 t of NH3 per ton of urea).

2. Variable tostsCost for Cost

Cons. Per M13 Cons. Per for Urea Total

Ton of Production Ton of Production CostsUnit Rate NH (mln Rs) Urea (mln Rs) (mln Rs)

Gas Rs 1020/1000 Ncm 1,072 Ncm 876.8 -- 876.8

Coal Rs 210/t .097 it 16.3 .374 t 102.6 118.9Water Rs 0.44/cm 14.82 cm 5.2 4.55 cm 2.6 7.8

Purchased Power Rs 2761MWH .013 MWH 2.9 0.02 MWH 7.9 10.8Generated Power Rs 28/ MWH .067 MWH 1.5 0.096 MWH 3.5 5.0Bags Rs 6/bag - - 20 bags 156.8 156.8

Chemicals 34.8 - 9.4 44.2Suib-Total 937.5 282.8 1,220.3Intermediate NH3 (916.7) 916.7 - m

Total Variable Costs for Products Sold 20.8 1,199.5 1,220.3

3. Fixed Cos Ls

Labo. r 13.3 15.5 28.8Maintenance (3% of plant cost) 117.1 57.5 174.6Insurance (5% of depreciable assets) 25.4 12 .2 37.6Selling and administrative expenses 8.8 ss . 64.1Depreciation 314.1 154. 646.Sub-Total 4787154.8 468.9

Iutermediate NH3 (468.0) 295.3 774.0Total Fixed Costs 10.7 468.0 -

763.3 774.0Total Production Costs for Products Sold 31.5 7L62.8 1,994.3

Industrial Pro jects DepartmentJanuary 1981

- 7 9 -

INDIA -HAZIRA FERTILIZER PROJECT ANNEX 9-4

FPROJECTED INCOME STATEMENTS Page 1 of 3

(IN M[LLION OF CURRENT RUFEES)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

CAPACITY UTILIZATION (X) 22.9 60.0 80.7 88.5 90.0 90.0 90.0 90.0 90.0 90.0

SALES DATA ('000 TFY)

AMMONIA SURFLUS 5 12 16 18 18 18 18 18 18 18UREA 277 799 1,144 1,2/6 1,307 1,301 1.307 19307 1.307 1,307

PRODUCT PRICE (RS/TON)

AMMONIA 3,291 3,399 3,416 3Y380 3,489 3,603 3,587 3,709 3,841 3,850UREA 3,657 3,777 3,795 ;3,7S6 39877 4,003 3,985 4,121 4,268 4,278

REVENUES

AMMONIA 16 41 55 61 63 65 65 67 69 69UREA 1,013 3,018 49341 4,793 5,067 5,232 5F208 5Y386 5P578 5,591

TOTAL SALES 1,029 3,059 49396 49854 5,130 5,297 5,2/3 5,453 5,647 5,660

COST OF 60OS SOLD

VARIABLE PRODUCTION COSISGAS 315 883 1s258 1P466 1P578 19675 1,771 1,876 1,990 29113COAL 43 120 171 199 214 227 240 254 270 287WATER 3 8 11 13 14 15 16 17 18 19PURCHASED POWER 4 11 15 18 19 21 22 23 25 26GENERATED POWER 2 5 7 8 9 10 10 11 11 12BAGS 56 158 225 262 282 299 317 336 356 378CHEMICALS 16 44 63 74 80 84 89 95 100 107

VARIABLE FRODUCTION COSIS 439 1.229 19750 2,040 2,196 2,331 2,465 2,612 2,770 29942

FIXED PRODUCTION COSTSLABOR 15 38 46 49 52 55 58 62 65 69

250 2"7 297 314 373 353 374 396 421i 6 64 6u 76 80 85 91

DEPRECIATION 269 708 708 708 708 708 708 708 708 708

FIXED PRODUCTION COSTS 396 1.027 1.093 1,118 1.142 1,168 1,195 1,224 1,254 1,289

TOTAL FRODUCTION COSTS 835 2,256 2,84:3 3,158 3t338 3,499 3,660 3,836 4,024 4,231

CHANGE IN INVENTORY 135 207 88 49 27 26 25 30 29 34

COST OF GOODS SOLD 700 2,049 2.755 3,109 3,311 3.473 3,635 3,806 3,995 4,197

GROSS PROFIT 329 1,010 1,641 1,745 19819 1.824 1,638 1,647 1,652 1,463

SELLING & ADMIN. 34 85 103 109 115 122 129 137 146 154

OPERATING PROFIT 295 925 19538 1,636 1,704 1,702 1,509 1,510 1,506 1,309

INTERESI ON S.F. LOANS 28 70 70 - - - - - - -INTEREST ON L.T. LOANS - 587 590 523 474 419 359 298 235 175

NET PROFIT BEFORE TAXES 267 268 878 1,113 1,230 1,283 1P150 1,212 19271 1,134TAXES 26 - - - - 63 666 736 794 757

NET PROFIT AFTER TAXES 267 268 878 1,11:3 1.230 1,220 484 476 477 377

DIVIIIENDS - - - 198 330 330 330 330 330 330

RETAINED EARNINGS 267 268 878 915 900 890 154 146 147 47

RATIOS

OPERATING PROFIT /SALES IX) 29 30 35 34 33 32 29 28 27 23NET PROFIT AFIER TAXES/SALES IZ) 26 9 20 23 24 23 9 9 8 7PROFIT BREAK EVEN FROM OPERATIONS IX) 18 58 57 55 53 52 54 53 51 54

INDUSTRIAL PROJECTS DEFARTMENTREPORT PREPARED t13/03/81

INDIA - HAZIRA FERTILIZER PROJECT

FROJECTED CASH FLOW STATEMENTS______________________________

(IN MILLION OF CURRENT RUF'EES)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

SOURCES OF CASH

F'ROFIT AFTER TAX - - - 267 268 878 1,113 1,230 1,220 484 476 477 377DEF'RECIATION - - - - 269 708 708 708 708 708 708 708 708 708

INTERNAL CASH GENERATION - 536 976 1,586 1,821 1,938 1,928 1,192 1,184 1,185 1,085

S.T. LOANS - - - - 200 300 - - - - - - -L.T. LOANS - 549 985 2,171 1,399 466 - - - - - - - -EQUITY 318 1,300 1,072 454 260 96 - - - - - - -

TOTAL SOURCES OF CASH 318 1,849 2,057 2,625 2,395 1,838 1,586 1,821 1,938 1,928 1,192 1,184 1,185 2,085

USES OF CASH

FRINCIPAL REPAYMENT S.T. DEBT - - - - - - 500 - - - - - - -F'RINCIPAL REFAYMENT-L.T. DEBT

IBRD - - - - - - 320 320 320 320 320 320 320 320OTHERS - - - - - 127 127 127 182 226 237 237 237 237 o

CAPITAL EXF'ENDITURESINTEREST DURING CONSTRN - 38 122 294 488 - - - - - - - - -INVESTMENTS 318 1,8L1 1935 2,331 1,062 531 - - - - - - - -

WORKING CAPITAL REQUIREMENTS - - - - 387 556 229 112 49 49 49 54 55 60DIVIDENDS - - - 198 330 330 330 330 330 330

TOTAL USES OF CASH 318 1,849 2,057 2,625 1,937 1,214 1,176 757 881 925 936 941 942 947

ANNUAL CASH SURPLUS - - - - 4b8 624 410 1,064 1,057 1,003 256 243 243 138

ACC CASH SURPLUS - - - - 458 1,082 1,492 2,556 3,613 4,616 4,872 5,115 5,358 5,496

RATIOS

DEBT SERVICE COVERAGE - - - - - 2.1 2.0 2.4 2.5 2.5 2.4 2.6 2.8 2.8 o 1CASH BREAK EVEN (%) - - - - 7 39 49 47 47 47 49 48 46 49 4-

RETURN ON INVESTMENT = 9.115%

INDUSTRIAL PROJECT IDEPARTMENTREFORT PREPARED:03/03/81

INDIA - HAZ]RA FERTILIZER PROJECT

PROJECTED BALANCE SHEETS

(IN MILLION OF CURRENT RUPEES)

1981 1982 1983 1984 1985 1986 1987 1988 1989 199O 1991 1992 1993 1994

ASSETS

CURRENT ASSETSOF'ERATING CASH - - - - 66 159 196 217 229 243 257 272 289 306RECEIVABLES - - - - 195 464 574 620 632 643 655 666 678 689INVENTORIES - - - 135 342 430 479 506 532 557 587 616 650

SUB TOTAL - - - - 396 965 1,200 1,316 1,367 1.418 1.469 1,525 1.583 1,645

ACC. EXCESS CASH - - - - 458 1,082 1,492 2,556 3,613 4,616 4,872 5,115 5,358 5.496

FIXED ASSETSNON DEPRECIABLE ASSETS 108 108 130 315 401 431 431 431 431 431 431 431 431 431WORK IN PROCESS 210 2,059 4.094 6,534 3,698 - - - - - - - - -

GROSS DEF'R. ASSETS - - - - 4,300 8,499 8,499 8,4?499 8499 8499 8,499 8,499 8,499 8,499ACC. DEPRECIATION - - - - 269 977 1,685 2,393 3,101 3,809 4,517 5,225 5,933 6,641

…__ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -NET DEF'RECIABLE ASSETS - - - - 4,031 7,522 6,814 6,106 5,398 4,690 3,982 3,274 2,566 1,858 0

TOTAL ASSETS 318 2,167 4,224 6,849 8,984 10,000 9,937 10,409 10,809 11,155 10,754 10,345 9,938 9,430

LIABILITrIES___________

CURRENT LIABILITIESFAYABLES - - - - 9 22 28 32 34 36 38 40 43 45S.T.DEBT - - - - 200 500 - - - - - - - -CURR. PORTION LT DEBT - - - - 127 447 447 502 546 557 557 557 557 557

SUB TOTAL - - - - 336 969 475 534 580 593 595 597 600 602

L.T. DEBT OUTSTANDING - 549 1,534 3,705 4,977 4,996 4,549 4,047 3,501 2,944 2,387 1,830 1,273 716EQUITY 318 1,618 2,690 3,144 3,404 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500RETAINED EARNINGS - - - - 267 535 1,413 2,328 3,228 4,118 4,272 4,418 4,565 4,612

TOTAL LIABILITIES 318 2,167 4,224 6,849 8,984 10,000 9,937 10,409 10,809 11,155 10,754 10,345 9,938 9,430

RAT'IOS

CURRENT RATIO - - - - 2.5 2.1 5.7 7.3 8.6 10.2 10.7 11.1 11.6 11.9 @DEBT:EQUITY RATIO (.) - 25 36 54 58 55 48 41 34 28 23 19 14 8 °

INDUSTRIAL FROJECTS DEPARTMENTREPORT PREPARED:03/03/81

INDIA - HAZIRA FERTILlZER PROJECT-----------------------------------

-DEBI SERVICE SCHEDULE - -

(IN MILLIONS OF CURRENT RUPEES) _ _-

1981 1982 1983 1984 1985 1986 1987 198B 1989 1990 21_ L49 2IW594

LONG TERM LOANSIDRD LOAN -----

AMOUNT OUTSTANDING BEG. YEAR _ - 376 1,1S -s22 27 2894 3,200 2,880 2_ 560 2P240 1,920 1,600 1,280 960-ANNUAL DRPAWINGS - ,S 746 Y 0B127-- 306 -- - - -

FRINCIFAL REPAYMENT - - - - - - 320 320 320 320 320 320 320 320

AMOUNT OUTSTANDING END YEAR 376 ,Pi22- 2072 2,894 3,200 2,680 '2,5h 2,240 1,920 1,600 1,280 7A0--Z0

INTEREST DURING CONSTRN. _-_ 23- _8 7 178 273 - - - - - - ___ - _ __ _ -

INTEREST DUE - - - - - 331 344 292 258 224 189 155 120 86

--- EtEBT-SERVICE- 23 87 178-?73 -331 --664- 612- 578 44 50T 47i 440 408

GOI LOAN (OECF I ODA)_____________________

AMOUNT OUTSTANDING BEG, YEAR-- --- _ - -- --- - 550 - 990 1.1100 1,100 1.100 -4-#045----946- 86-----7-26----44h4 -ANNUAL DRAWINGS - - - 550 440 110 - - - - - - - -PRINCIPAL REPAYMENT - - - - - - - - 55 99 110 110 110 110

AMOUNT OUTSTANDING END YEAR - - - 550 990 1,100 11 00 1,100 1,045 946 836 726 616 506

INTEREST DURING CONSTRN. - - = 30 83 - - - - - -

INTERESf DUE -- --- - - - 112 118 118 --118 112 -102- -90--- - 7- -7-7 ---

DEBT SERVICE - - - 30 83 112 118 118 173 211 212 200 187 176

IDBI LOAN

AMOUNT OUTSTANDING BEG. YEAR - - 173 412 1.083 1.220 1.143 1,016 889 762 635 508 381 254ANNUAL DRAWINGS --- 173- 239 671 137 50 - - - - -PRINCIFAL REPAYMENT - - - - - 127 127 127 127 127 127 127 127 127

---hMOUNT-OUTSThANDT - -N TE.- - I/i 41Z 1 U1 83I22U T4189 762 635 508 381 254 127

INTEREST DURING CONSTRN. - _ 7 _ 28 82 130 - - - - - - - - _COMMITMENT FEE - 8 7 4 2 - - - - - - - - -

SUB-TOTAL - 15 35 86 132 - - - - - - - -

INTEREST DUE - - - - - 144 128 113 98 83 68 53 38 23

DEBt SERVICE - 15 35 86 132 271 255 240 225 210 195 180 165 150

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED :03/05/81

0I o tLI

INDIA - HAZIRA FERTILIZER PF'OJECT

DEBT SERVICE SCHEDULE

(IN MHLLIONS OF CURRENT RUPEES)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 199, 1992 1993 1994

SUMMARY OF:TOTAL LONG-TERM LOANS___ _________________

AMOUNT OUTSTANDING BEG. YEAR - - 549 1,534 3,705 5,104 59443 4,996 4,549 4,047 3,501 2,944 2,387 1,830ANNUAL DRAWINGS - 549 985 2,171 1,399 466 - - - - - - - -PRINCIPAL REPAYMENT - - - - - 127 447 447 502 546 557 557 557 557

AMOUNT OUTSTANDING END YEAR - 549 1,534 3,705 5,104 5,443 4,996 4,549 4,047 3,501 29944 2,387 1,830 1,273

INTEREST DURING CONSTRN. - 30 115 290 486 - - - - - - - - -

COMMITMENT FEE - 8 7 4 2 - - - - - - - -

SUB-TOTAL - 38 122 294 488 - - - - - - - - -

INTEREST DUE - - - - - 587 590 523 474 419 359 298 235 175

L.T. DEBT SERVICE 38 122 294 488 -714 1,037 - 970 976 965 916 855 792 732

SHORT TERM LOAN________________

ANNUAL BORROWINGS - - - - 200 300 - - - - - - - -

PRINCIPAL REPAYMENT - - - - - - 500 - - - - - - -

INTEREST DUE - - - - 28 70 70 - - - - - - -____ ---- ----- --- ___-- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----

S.T. DEBT SERVICE - - - - 28 70 570 - - - - - - -

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED :02/25/81

Lo0 tn

- 84 - ANNEX 10-1Page 1 of 4

INDIA - HAZIRA FERTILIZER PROJECT

ASSUMPTIONS USED IN THE ECONOMIC ANALYSIS OF THE PROJECT

A. Capital Cost Estimate

1. The economic capital cost of the Project in "Adjusted 1981 prices," isobtained from the financial capital cost in current prices after deflating itto January 1981 prices using a currency deflation factor of 7.0% p.a. and afterdeducting import duties and local taxes on imported equipment and other items.

Installed Cost in current prices Rs 7,988Less Duties - 738Less Physical Contingencies on Duties - 74Less Price Contingencies on Duties - 203

Economic Capital Cost (current prices) Rs 6,973

Then according to the phasing of expenditures, the above capital cost isdeflated as follows:

Year Capital Cost in AdjustedEnding Phased Capital Costs January 1981. PricesJune 30 (%) (Current Rs million) Deflator (Rs million)

1980/81 6 418.4 1.000 453.71981/82 21 1,443.4 .935 1,349.61982/83 24 1,687.5 .837 1,473.21983/84 29 2,029.1 .816 1,655.81984/85 13 927.4 .762 706.71985/86 7 467.2 713 333.0

100 6,973.0 5,972.0

B. Working Capital

2. The economic working capital for the Project has been calculated as theincremental requirements that the Project will impose on the total workingcapital requirements for the country. In addition to taxes and duties, AccountsReceivables/Payables and Minimum Cash have been omitted as they do not representcosts incurred by the economy, but merely instruments of "transfer of obligations."Finished Goods Inventory has also been omitted since in this case of importsubstitution the inventory of urea produced by the Project substitutes for thatof imported urea and does not increase the country's total inventory. Workingcapital requirements for the Project have thus been taken as follows:

Economic Value(Adjusted 1981 Rs million)

(a) Raw Material Inventory

(i) Coal = 45 days of purchase 15.4(ii) Bags = 45 days of purchase 18.7(iii) Chemicals = 60 days of purchase 7.8

(b) Goods in Process

3 days of variable production costs 20.6

Total Economic Working Capital 62.5

- 85 - ANNEX 10-1

Page 2 of 4

C. Operating Cost Estin-ates

(i) Natural Gas: The economic price of natural gas in January 1981prices is assumed at US$214 per thousand Ncm (US$5.7 per thousandscf) in 1984/85. This cost is derived from the relationship betweenthe calorific value of gas and fuel oil and assuming a fuel oil pricein 1984/85, landed at Bombay, at US$227/t (FOB Middle-East US$210/tonplus ocean freight US$17/ton). Since fuel oil price is assumed toincrease at an average of 3.2% p.a. natural gas economic value alsoincreases in real terms, at an average rate of 3.2% p.a. An alter-native approach to derive the economic cost of gas was also con-sidered, under which the economic price of gas is set at the levelthat will ensure capital investment recovery for the gas fielddevelopment and pipeline project plus a reasonable return on thisinvestment. The price derived under this approach is US$42 perthousand Ncm which provides a 10% return to the investment in boththe gas field and pipeline project (Project File, Reference E).This price relating to the economic cost of delivering the gas tothe Project is lower than the gas opportunity value derived fromfuel oil prices, and the higher value has been used in the economicanalysis. However, the sensitivity analysis includes calculationsbased on the lower economic cost of delivering gas to the Project.

Hazira - Gas Prices(in January 1981 prices)

84/85 85/86 86/87 87/88 88/89 89/90 90/91

US$/1000 Ncm 214 220 228 235 243 250 255US$/1000 SCF 5.7 5.8 6.0 6.2 6.4 6.6 6.8Rs/1000 Ncm 1,712 1.760 1,824 1.880 1,944 2,000 2,040

(ii) Coal: Economic cost of coal is assumed at Rs 204/ton (US$25,5/ton)based on economic mine head production costs of Rs 112/tcn andeconomic transport costs of Rs 92/ton.

(iii) Water, Power, Bags and Chemicals: Economic costs of water, power,bags and chemicals are derived from financial costs after deducting localtaxes, as summarized below:

Annual 1981 Base 1981 Base Annual Economic CostConsumption Financial Cost Economic Cost Adjusted 1981 Prices

Water 17.8 x 106 cm Rs .44/cm Rs .40/cm 7.6Purchased Power 39.2 x 103 MWH Rs 276/MWH Rs 248.4/MWH 10.4Generated Power 179.2 x 103MWH Rs 28/MWH Rs 25.2/MWH 4.9Bags 26.1 x 10 bags Rs 6/bags Rs 5.0/bags 138.5Chemicals 41.1

Sub-total 202.5

- 86 - ANNEX 10--Page 3 of 4

(iv) Fixed Costs: Economic fixed costs comprise labor, maintenanceinsurance and adminstrative costs which are valued as follows:

Economic Cost Economic Costin January 1981 Prices Adjusted 1981 Prices

(Rs million) (RB million)

Labor 28.7 29.7Maintenance 174.6 179.5Insurance 37.6 38.8Administrative Costs 27.6 28.5

Sub-total 268.5 276.5

D. Revenues

5. Economic price for urea, ex-factory, was based on the CIFBombay price plus domestic economic distribution freight to Hazira. Thiswas worked out in January 1981 prices, as follows for the year 1984/85.Calculations for the other years are presented on page 4 of this Annex.

Hazira - 1984/85 Urea Economic Price(Jan. 1981 US$/t)

FOB North West Europe bagged 277.0Marine freight to Bombay 50.5Port handling and storage 5.5

CIF landed price at Bombay 333.0Bombay-Hazira rail freight and loading 6.6

Hazira Ex-factory Price 339.6

The economic ammonia price was estimated on the basis of its FOBN. W. Europe price, assumed at 0.9 times that of bagged urea. Thus theammonia price for 1985/86 is estimated at US$310.6/ton. The detailedyear by year economic price of ammonia is shown on page 4 of this Annex.

6. The revenue build up is calcualted as follows:

January 1981Year Ending Sales Volume Base Economic Price Yearly RevenueJune 30th (million tons) (Rs/ton) (Adjusted 1981 Rs million)

1984/85 Urea .271 2,716.8 780.4Ammonia .004 2,484.8 10.0

1985/86 Urea .841 2,823.2 2,516.6Ammonia .011 2,580.8 30.0

1986/87 Urea 1.163 2,861.6 3,527.5Ammonia .016 2,615.2 44.3

1987/88 Urea 1.282 2,896.8 3,936.3Ammonia .017 2,646.4 47.6

1988/89 Urea 1.306 2,936.0 4,064.3Ammonia .018 2,682.4 51.0

1989/90 Urea 1.307 2,980.8 4,129.5Ammonia .018 2,722.4 51.9

1990/91 Urea 1.307 3,009.6 4,169.7Ammonia .018 2,748.0 52.5

INDIA - HAZIRA FERTILIZER PROJECT

UREA ECONOMIC PRICE(in January 1981 US$/t unless otherwise indicated)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991/98

Mid 1980 US$ 215 211 216 233 251 270 273 276 278 281 284 284

Jan 1981 US$ 228 224 230 248 267 287 290 293 295 299 302 302

For Yr. ending June 30 226.0 227.0 239.0 257.5 277.0 288.5 291.5 294.0 297.0 300.5 302

Marine Freight to Bombay 44.0 45.5 47.1 48.8 50.5 52.3 54.1 56.0 57.9 60.0 62.1

Port handling & storage 5.0 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5-5

Cif landed Bombay 275.5 278.0 291.6 311.8 333.0 346.3 351.1 355.5 360.4 366.0 364.6

Bombay Hazira freightand handling 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6

Hazira Ex-factory -(in constant January 1981US$/t) 282.1 284.6 298.2 318.4 339.6 352.9 357.7 362.1 367.0 372.6 376.2

Hazira Ex-factory Ammonia Price3/ 258.8 261.1 273.3 291.5 310.6 322.6 326.9 330.8 335.3 340.3 343.5

1/ As per IBRD Commodity Price Forecasts.2/ Assumed to increase at 3.5% in real terms.3/ Ninety percent of urea price plus US$5,5/t for supplementary transport and handling charges.

Industrial Projects DepartmentJanuary 1981 l

o G)

.0-

INDIA - HAZIRA FERTILIZER PROJECT

COST AND BENEFIT STREAMS FOR ECONOMIC RATE OF RETURN(in millions of Adjusted January 1981 Rupees)

Variable CostYear ending Capital Working Fixed Total Net CashJune 30th Cost Capital Cost Gas Coal Others Variable Cost Revenues Flow

1980/81 453.7 (453.7)1981/82 1,349.6 (1,349.6)1982/83 1,473.2 (1,473.2)1983/84 1,655.8 (1,655.8)1984/85 706.7 17.7 103.7 323.9 25.4 42.0 391.3 790.4 (429.0)1985/86 333.0 25.4 242.0 1,230.9 93.9 154.7 1,479.5 2,546.6 466.71986/87 11.8 276.5 1,625.4 120.0 197.8 1,943.2 3,571.8 1,340.31987/88 4.1 276.5 1,711.6 122.5 202.5 2,036.6 3,983.9 1,666.7 11988/89 276.5 1,769.7 122.5 202.5 2,094.7 4,115.3 1,744.1 m

1989/90 276.5 1,824.6 122.5 202.5 2,149.6 4,181.4 1,755.3 m

1990,'M 276.5 1,856.6 122.5 202.5 2,181.6 4,222.2 1,764.11991/92 276.5 1,856.6 122.5 202.5 2,181.6 4,222.2 1,764.11992/93 276.5 1,856.6 122.5 202.5 2,181.6 4,222.2 1,764.11993/94 276.5 1,856.6 122.5 202.5 2,181.6 4,222.2 1,764.11994/95 276.5 1,856.6 122.5 202.5 2,181.6 4,222.2 1,764.11995/96 276.5 1,856.6 122.5 202.5 2,181.6 4 222.2 1,764.11996/97 (234.3) (21.1) 138.5 928.3 61.3 102.0 1,091.6 2,111.1 1,136.4

Economic Rate of Return = 16.6%

Industrial Projects DepartmentJanuary 1981

xm

- 89 ANNEX 10-3

INDIAHAZIRA FERTILIZER PROJECTECONOMIC RATE OF RETURN

SENSITIVITY ANALYSIS

24-

REVENUES

22-

20

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World Bank - 22421

INDIA - HAZIRA FERTILIZER PROJECT

FOREIGN EXCHANGE SAVINGS(in constant 1981 dollar million)

Inflow/Savings OutflowF.E. Savings by F.E. Component F.E. ComponentProducing Urea & of Captyal of Ope-,ting Capitalized Debt Net Cumulative

Loans Ammonia Total Costs- Costs- F.E. IDC Servicing Total Savings Savings

1980/81 0 0 0 27.0 0 0 0 27.0 (27.0) (27.0)81/82 81.8 0 81.8 80.3 0 0.4 0 80.7 ( 1.1) (25.9)82/83 140.9 0 140.9 87.7 0 0.8 0 88.5 (52.4) 26.583/84 180.3 0 180.3 98.5 0 1.2 0 99.7 80.6 107.184/85 156.1 98.8 254.9 42.0 40.5 0 2.4 84.9 170.0 277.185/86 47.0 318.3 365.3 19.8 153.9 0 3.0 176.7 188.6 465.786/87 0 446.5 446.5 0 203.2 0 3.0 206.2 240.3 706.087/88 0 498.0 438.0 0 214.0 0 3.0 217.0 281.0 987.088/89 0 514.4 514.4 0 221.2 0 3.0 224.2 290.2 1,277.289/90 0 522.7 522.7 0 228.1 0 3.0 231.2 291.5 1,568.7 £90/91 0 527.8 527.8 0 232.1 0 3.0 235.2 292.6 1,861.3 '

91/92 0 527.8 527.8 0 232/1 0 7.0 239.1 288.1 2,149.492/93 0 527.8 527.8 0 232.1 0 7.0 239.1 288.7 2,458.193/94 0 527.8 527.8 0 232.1 0 7.0 239.1 288.7 2,726.894/95 0 527.8 527.8 0 232.1 0 6.9 238.2 289.6 3,016.495/96 0 527.8 527.8 0 232.1 0 6.9 238.0 289.8 3,306.296/97 0 263.9 263.9 0 116.0 0 6.9 122.9 141.0 3,447.2

1/ Assuming 47.6% of Foreign Exchange Component (FEC) for capital costs.2/ Assuming 75.5% of FEC for operating costs.

Industrial Projects DepartmentMarch 1981

C H I N A INDIA

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