Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4572-CHA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $97.4 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FERTILIZER RATIONALIZATION PROJECT May 18, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Yuan (Y) 1 Yuan - 100 fen Calendar 1986 February 1987 $ 1.00 - Y 3.45 $1.00 - Y 3.70 Y 1.00 - $ 0.29 Yl.00 = $ 0.27 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 hectare (ha) = 2.47 acres 1 metric ton (ton) = 1,000 kilograms (kg) 1 kilometer (km) c 0.621 miles 1 cubic meter (m3) = 35.3147 cubic feet (cf) 1 kilocalorie (kcal) = 3,968 British Thermal Units (BTU) 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts (kw) ABBREVIATIONS AND ACRONYMS ABC - ammonium bicarbonate BICEM - Beijing Institute of Chemical Engineering and Management DAP - diammonium phosphate ERR - economic rate of return MCI - Ministry of Chemical Industry NPK - complex fertilizers of nitrogen, phosphate and potassium tpyn - tons per year of nutrients FOR OFmFCIAL USE ONLY CHINA FERTILIZER RATIONALIZATION PROJECT LOAN AND PROJECT SUMMARY Borrower: The People's Republic of China Beneficiaries: Yunnan Xuanwei Chemical Fertilizer Company (Yunnan) Yuanping Chemical Fertilizer Company (Shanxi) Luoyang Chemical Fertilizer Company (Henan) Xuanhua Chemical Fertilizer Company (Hebei) % Beijing Chemical Experimental Company (Beijing) The Ministry of Chemical Industry (MCI) Beijing Institute of Chemical Engineering and Management (BICEM) Loan Amount: US$97.4 million equivalent Terms: 20 years, including 5 years of grace, at the standard variable interest rate Onlending The Government will onlend $96.1 million equivalent of the Terms: loan proceeds to the five project companies at 7.92% with a repayment period of 15 years, including 5 years of grace. An additional amount of $0.45 million equivalent for a management study will be onlent to the same companies with a service charge of 0.75% p.a., for a period of 15 years, including 5 years of grace. The commitment charges and foreign exchange risk will be borne by the companies. Financing Plan: Local Foreign Total -($ million)--_ Bank - 97.4 97.4 Domestic loans 54.2 - 54.2 Companies' internal funds 19.6 12.7 32.3 Government contribution 0.1 _ 0.1 Total 73.9 110.1 184.0 Economic Rate Return: 24% Staff Appraisal Report: Report No. 6662-CHA dated May 11, 1987 This document has a restricted distribution and may be used by recipients only in the perforMance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FERTILIZER RATIONALIZATION PROJECT 1. I submit the following memorandum and recommendation on a proposed loan to the People's Republic of China to help finance a Fertilizer Rationalization Project. The proposed loan for US$97.4 million would have a term of 20 years, including 5 years of grace, at the standard variable interest rate. The Government would onlend $96.1 million equivalent of the proceeds for plant rehabilitation to the five project companies at an interest rate of 7.92% p.a. with a repayment period of 15 years, including 5 years of grace. The balance of $1.3 million in loan proceeds would be used for the institutional development component, which includes $0.45 million to cover a Management Study, to be passed on in equal amounts to the five project companies, with a service charge of 0.75% p.a. and a repayment period of 15 years, including 5 years of grace. The commitment charges and foreign exchange risk on all onlent proceeds would be borne by the project companies. 2. Background. China is the third largest user of chemical fertilizers in the world, with consumption of 17.8 million tons per year of nutrients (tpyn) in 1985. However, China's level of fertilizer application, at 123 kg of nutrients per hectare of cultivated land in 1985, was only one tlhird of the level in neighboring countries such as Japan and South Korea. In addition, due to local shortages, China's application rates of phosphate and potash fertilizers are low compared to the rate for nitrogen fertilizers. Thus, there is large potential to increase chemical fertilizer application in China's agriculture sector. In view of the constraints to expansion of cultivated areas, efforts toward increased and more efficient fertilizer use are central to China's strategy to increase agricultural output. China currently has about 1,900 operating fertilizer plants and is the world's third largest producer of chemical fertilizers. Despite an impressive build-up of production capacity during the last decade, China still had to import nearly 30% of fertilizer consumed in 1985. Most of the plants are small and produce low grade fertilizers, using outdated technology which consumes excessive amounts of energy. As demand for fertilizer is projected to reach 23.4 million tpyn in 1990, the Government has identified further development of capacity to produce fertilizer as a priority under the Seventh Five-Year Plan (1986-90). However, China is expected to continue importing fertilizer for at least the next decade. 3. In the past, fertilizer prices were strictly administered by the Government. The ongoing economic reforms in China have introduced two-tier pricing for fertilizers which, along with a change in policy on fertilizer allocation, has allowed market forces to play an increasing role in determining production and allocation. Under two-tier pricing, fertilizer plants sell their output at controlled prices for the state plan quota and market-related prices for above-quota output. At present, about 40% of the country's total consumption of fertilizers is sold at market-related prices outside the state allocation plan. The Government's strategy has been to continue gradually - 2 - reducing administrative control of fertilizer pricing in parallel with the gradual dismantling of annual production planning and allocation. The Government has recently formed an inter-agency working group to review fertilizer pricing and allocation policies, according to a scope of work discussed with the Bank. 4. Project Objectives. The proposed project is designed to assist the Government in achieving its development objectives for the fertilizer sector, namely: (a) improvement of production efficiency of medium and small-size plants through technical renovation and energy saving; (b) reduction of nutrient imbalances through expansion of capacity for producing phosphate fertilizers; and (c) improvement of institutional efficiency through the introduction of modern economic, financial and operational systems and techniques. 5. Project Description. The project will comprise three components: (a) establishment of phosphate fertilizer production capacity at a low-grade nitrogenous fertilizer plant in Yunnan Province; (b) conversion of nitrogenous fertilizer production of four medium-size operating plants from low-grade to high-grade products, and expansion of production capacities using energy saving technology; and (c) a management efficiency study to introduce improved enterprise management systems and a program to strengthen sector-wide management training capabilities and establishment of an information management system for MCI. The project will be carried out over five years, and the proposed loan will provide foreign exchange funds for: (a) equipment and materials; (b) licensing, engineering and consultancy services; (c) project management and commissioning; (d) consultancy services for the management study; (e) overseas training of the companies' staff; and (f) training and technical assistance. The pollution control measures and expected emission levels of the five companies' plants are acceptable to the Bank. The total cost of the project is estimated at US$184.0 million, with a foreign exchange component of US$110.1 million (59.8%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 6662-CHA dated May 11, 1987, is being distributed separately. 6. Rationale for Bank Involvement. The Project will complement the Bank's ongoing Fertilizer Rehabilitation and Energy Saving Project (Loan 2451- CHA), which is focused on efficiency improvements in large plants, and will broaden the Bank's contribution to improvement of sector-wide efficiency. This second loan for fertilizers supports the Government's strategy to rationalize its existing medium-size plants. The phosphate fertilizer development component will establish one of the first major DAP production facilities in China utilizing local phosphate rock, thereby supporting the Government's strategy to develop a phosphate fertilizer industry to help improve the balance of nutrients in fertilizer use. Experience gained in the preparation and implementation of the project will be useful to the Government in implementing similar projects in the future. The institutional development component will support the Government's efforts to improve management efficiency in the sector and will serve as a model of a comprehensive sectoral approach to adapting organization and management of enterprises to the increasingly commercial environment in China. - 3 - 7. Agreed Actions. The Government has agreed on the following actions: (1) to carry out the management study in accordance with terms of reference and a timetable acceptable to the Ban'c; (2) to permit the five companies to market directly the entire output of fertilizer from project-supported facilities, at market-related prices, which are currently about 95-100% of CIF import prices (subject only to such general Government provisions as may affect fertilizer pricing at the retail level); (3) to ensure that BICEM will carry out a program for strengthening sector-wide management training with scope, content and timing agreed with the Bank; and (4) to maintain MCI's project coordination unit. The five companies will: (a) develop training programs by December 1987 for review by the Bank; (b) build and operate the plants with due regard to safety, ecological and environmental factors and in accordance with environmental standards satisfactory to the Bank; (c) maintain their respective project management teams; (d) maintain debt service coverage ratios of at least 1.2; (e) maintain long-term debt to equity ratios of no more than 75:25; (f) maintain c1.rent ratios of at least 1.2; and (g) prepare five-year rolling financial plans for each year from 1987-1992. During negotiations it was confirmed that: (i) all necessary arrangements for the provision of local funds to the five companies have been approved; (ii) the working group for the study of fertilizer pricing and allocation (para. 3) has been formed and work has commenced on preparing the study, for which the detailed terms of reference will be sent to the Bank by end-June 1987. Signing of subsidiary loan agreements between the Government and each of the companies under terms and conditions satisfactory to the Bank, as well as State Council approval of the Loan Agreement, will be conditions of loan effectiveness. 8. Justification. The quantifiable benefits of the project derive from: (a) production of phosphate fertilizer (DAP) utilizing locally available phosphate rock, pyrites and ammonia (which is currently used for ABC production); (b) imlrovement in economic efficiency of production through conversion of low to high economic value fertilizers; (c) expansion of ammonia production; (d) improvements in the energy efficiency of ammonia production; and (e) savings in transportation costs of products mainly due to the higher nutrient content of urea, DAP and NPK compared with ABC. The ERR for the project is estimated at 24%. The benefits from the institutional development component, though unquantifiable, are expected to be significant. 9. Risks. The project is not subject to any unusual technical or commercial risks. It deals with existing plants, technically and commercially proven technology, and with products which will be sold (at market-related prices) in what are expected to be buoyant markets. There is some risk of delay due to the lack of local experience in designing and operating facilities for DAP and urea-based NPK fertilizers. The involvement of international engineering firms and provision of comprehensive training for local staff would minimize this risk. 10. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable Attachments President Washington, D.C. May 18, 1987 -4- Schedule A CHINA FERTILIZER RATIONALIZATION PROJECT Estimated Costs and Financing Plan Local Foreign Total Estimated Costs Phosphate development 13.9 36.4 50.3 Nitrogenous fertilizer rationalization 37.7 46.5 84.2 Institutional development 0.1 1.3 1.4 Base Cost " 51.7 84,2 135.9 Physical contingencies 5.2 8.3 13.5 Price contingencies 2.9 4.9 7.8 Installed Cost 59.8 97.4 157.2 Working capital 10.4 - 10.4 Interest during construction 3.7 12.7 16.4 Total Projgct Costs 73.9 110.1 184.0 Financing Plan Bank - 97.4 97.4 Domestic loans 54.2 - 54.2 Companies' internal funds 19.6 12.7 32.3 Gover.iment 0.1 - 0.1 Total 73.9 llQ.l 184.0 /a The project is exempt from taxes and duties. -5- Schedule B Page 1 CHINA FERTILIZER RATIONAL S'TION PROJECT Procurement Method and Disbursements (US$ million) Procurement Method Total ICB LIB Other cost Project Element Equipment and materials 60.3 9.5 43.0 112.8 (60.3) (9.5) (13.3) (83.1) Licenses, engineering and consultancy 11.4 11.4 services (8.7) (8.7) Project management and commissioning 6.0 6.0 (3.1) (3.1) Land, civil works and erection 23.4 23.4 (0.0) (0.0) Training 2.0 2.0 (1.2) (1.2) Institutional development 1.4 1.4 (1.3) (1,3) Others /a 27.0 27.0 (0.0) (0.0) Total ELI 9.5 114.2 184.0 (60.3) (9.5) (27.6) (97.4) /a Including incremental working capital and interest during construction. Note: Figures in parenthesis indicate the respective amounts to be financed by the Bank. -6- Schedule B Page 2 Disbursements Category U to be financed Equip.aents, materials 83,100,00 and spare parts 100% of foreign expendi- tures; 100% of local expenditures 'ex-factory) Engineering, licenses 10,500,000 100% of foreign expenditures and technical services Overseas travel for 1,300,000 100% engineering and procurement Overseas training 1,200,000 100% Institutional development 1,300,000 100% component Estimated Disbursements IBRD Fiscal Year 1988 1989 1L990 1991 1992 1993 Annual 5.8 25.3 38.6 19.4 6.3 2.0 Cumulative 5.8 31.1 69.7 89.1 95.4 97.4 _ .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -7- Schedule C CHINA FERTILIZER RATIONALIZATION PROJECT Timetable of Key Project Processing Events Time taken to prepare One year Prepared by Government with Bank assistance First Bank mission September 19&5 Appraisal mission departure January 1987 Negotiations May 4-7, 1987 Planned date of effectiveness September 1987 List of relevant PCRs and PPARs Not applicable -8- Schedule O Page I of 2 STATUS OF WANII GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1987) Loan or Amount in USS million Credit Fiscal (less cancellations) Number Year Borrower Purpose Bank I UndisbursedfM 2021/1167 81 People's Republic of China University Development 100.0 100.0 0 1261 82 People's Republic of China North China Plain Agriculture - 60.0 9.42 2207 82 People's Republic of China Three Ports 69.0 - 13.94 1297 82 People's Republic of China Agric. Education & Research - 75.6 13.46 2226/1313 82 People's Republic of China Industrial Credit 60.6 30.0 10.64 2231 83 People's Republic of China Daqing Petroleum 162.4 - 33.62 2252 83 People's Republic of China Zhongyuan-Wenliu Petroleum 100.8 - 44.79 2261/1347 83 People's Republic of China Heilongjiang Land Reclanation 25.3 45.0 11.58 1411 83 People's Republic of China Polytechnic/TV University - 85.0 32.59 1412 83 People's Republic of China Technical Cooperation - 10.0 2.66 1417 84 People's Republic of China Rubber Development - 100.0 49.13 2382 84 People's Republic of China Lubuge Hydroelectric 145.4 - 80.14 2394 84 People's Republic of China Railway 220.0 - 54.40 1462 84 People's Republic of China Rural Credit - 50.0 24.60 1472 84 People's Republic of China Rural Health 6 Medical Educ. - 85.0 38.16 2426 84 People's Republic of China Karamay Petroleum 99.5 - 62.42 2434/1491 84 People's Republic of China Second Industrial Credit 105.0 70.0 50.36 2444/1500 84 People's Republic of China Second Agricultural Education 45.3 23.5 23.82 1516 84 People's Republic of China Second Agricultural Research - 25.0 13.83 1551 85 People's Republic of China Second University Development - 145.0 118.49 2493 85 People's Republic of China Second Power 117.0 - 83.86 2501 85 People's Republic of China Changcun (Luan) Coal Mining 126.0 - 121.55 1557 85 People's Republic of China Seeds - 40.0 24.14 1578 85 People's Republic of China Rural hater Supply - 80.0 76.91 2539/1594 85 People's Republic of China Highway 42.6 30.0 61.25 2540 85 People's Republic of China Second Railway 235.0 - 215.11 2541 85 People's Republic of China Fertilizer Rehabilitation and 97.0 - 88.83 Energy Saving 1605 bS People's Republic of China Forestry Development - 47.3 52.22 2579/1606 85 People's Republic of China Pishihang-Chaohu Area Development 17.0 75.0 90.12 2580 85 People's Republic of China Weiyuan Gas Field Technical 25.0 - 22.23 Assistance 1642 86 People's Republic of China Second Rural Credit - 90.0 87.82 2659/1663 86 People's Republic of China Third Industrial Credit 75.0 25.0 76.42 1664 86 People's Republic of China Second Technical Cooperation - 20.0 2l.13 1671 86 People's Republic of China Provincial Universities - 120.0 131.79 2678/1680 86 People's Republic o t:hina Third Railway 160.0 70.0 240.99 2689 86 People's Republic of China Tianjin Port 130.0 - 130.0 1689 86 People's Republic of China Freshwater Fisheries - 60.0 62.35 2706 86 People's Republic of China Beilungang Thermal Power 225.0 - 223.32 2707 86 People's Republic of China Yantan Hydroelectric 52.0 - 46.26 2708 86 People's Rzpublic of China Lisodong Say Petroleum Appraisal 30.0 - 26.11 2723/1713/b 86 People's Republic of China Rural Health 6 tevntive 15.0 65.0 88.54 Medicine 1733 87 People's Republic of China Red Soils Area Development - 40.0 43.71 2257 87 People's Republic of China Shuikou Hydroelectric 140.0 - 140.0 2783/1763 87 People's Republic of China Fourth Industrial Credit 250.0 50.0 302.58 e1 87 People's Republic of China Shanghai Machine Tools 100.0 - 100.0 e/ 87 People's Republic of China Xinjiang Aricultural Dev't - 70.0 73.67 Total 2,949.9 1,786.Z Total now held by Bank and IDA 2,949.9 1,786.2 Total Undisbursed 2,121.35 1,217.63 3,338.98 /a As credits are denominated In SDRs (since IDA Replenishment VI), undisbursed SDR credit balances are con- verted to dollars at the current exchange rate between the dollar and the SDR. In some cases, therefore. the undisbursed balance Indicates a dollar aount greeter than the original principal credit amount expressed in dollars. /b Not yet effective. /c Not yet signed. Notes: (1) The status of the projects listed in Part A is described in a separate report on all Bank/IDA financial projects in execution, which ts updated twice yearly and circulated to the Executive Directors or. April 30 and October 31. (2) Subsequent to the above date of Stetement A, the following loans and credits have been aPproved: (a) $45.0 million loan and $100.0 million credit for the Shanghai Sewerage Project; (b) $25.0 million loan and $125.0 million credit for the Beijing-Tianjin-Tanggu Expressway Project: and (e) $20.0 million loan and $150.5 million credit for the Gansu Provincial Development Project. -9- Schedule IJ Page 2 otf 9 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1987) Amount in US$ million Year Obligor Type of business Loan Equity Total 85 Guangzhou Automobile 15.0 2.0 17.0 and Peugeot Automobile Co. Total Gross Commitments 15.0 2.0 17.0 Less cancellations, terminations, repayment and sales - - - Total Commitments now held by IFC 15.0 2.0 17.0 Total Undisbursed 15.0 0.6 15.6 = V 7b~~~ 0) -, 1 0' 4N l~~~~~~~~~~ N l o- loo Bo- soo lso Dw~. Kb *. . S e0," f~~~ t-t'' -1e1M 71 '40° ^_ -d a0 - _ ~W . Th.-W.d B. AfQHANISTAN _- _ I C"P"b. The d 0, TO4 Won d SaM4 av do,01 0* 00b00,W O4-0 C Wo,olS Bao. CQOrw of. a O - A ,"g "n e-d- cnc olIl 000ds and So lwr.ans 9 , 7 n 4ww- 4ao so not '. on 44 5001 f maWOl400 , , 4 " 4 i,hou , 000 t ,o5 notr an O 44 toa ott 0 ojt_anlv tol an d .- andoron 0 e oc01a0t d 300 sua>~~~~~~~~~~~~i. . ' S tslr 11{t,1=0=tt,osa -i C H I N A r . FERTILIZER RATIONALIZATION PROJECT xc9oo UNDER TO BE RATIONALIZED i G - EXISTING CONSTRUCTION UNDER TKE PROJECT i. 0 LJ no on Large Size Nitrogen Plants t O tD B Medium Size Nitrogen Plants A A A ^ Large /Medium Size Phosphate Plants " . C2Ž:) Coal Fields Roads S . , ' Oil F,ilds . Double Gauge Railroads Gas Fields --- Single Gauge Railroads -S ?VIET NAo ® Phosphate Mines ( Major Ports B RM- HO t* Pyrite Mines S * LAO PEOPLE S 3) International Boundaries LDEMPOURiATiC THAILAND S .. 100° IBRD 20217R 0'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - t1oa ~~~~~~~12'0'_- 8s13'0 140- , 7 l < ~~u s s R A / , r 1-) dQq g~~~~~~~. Kho hon ,k ) ~~~~~~~~~~~~~~~~~~~~~ viodw,,otok 400- -,z X gt LInud fe ccoo >\ Xfbi / 53 Z-loOq,hoa Xnone 200- 1^ - | 5lHystquKILOMETERS 750100 r 250 200 200 400 600 -g 4,. ~ eMILES PHILIPPINES lzn $, 1200 13(0 MAY 1987