NUMBER 62 * ED Precis 2 Operations Evaluation Department May 1994 Restructuring the Ferilizer Industry in Zambia The Zambia Fertilizer Restructuirinig large-scale, capital-intensive public in- would delay and jeopardize the entire Project, recently audited by OED, was vestments. restructuring of the plant. designed to improve the efficiency qf Nitrogen Chemicals of Zambia Ltd. The project had two components: But the project got off to a shaky (NCZ) and to reduce Zambia's reliance start from which it never fully recov- on importedfertilizer. The disappoinit- * The policy and institutionial co01po- ered. The NCZ I rehabilitation was ing outcome of this complex project had nenit, financed by IDA, provided for successfully carried out, but not so the much to do withi the incentivesfaced by increasing output prices, overhauling NCZ II remodeling or the off-site de- tlhe parties involved and with the management, upgrading staff skills, velopment, both of which had long de- company's ozvnerslhip structuire. The and restructuring company finances. lays and substantial cost overruns. audit reviews the issues and draws An operations management firm lessons. * (OMF) was hired, following IDA CGovernment lacked the budgetary guidelines, to implement the institu- resources to meet the financing com- Project goals, scope tional component. mitments set out in the credit agree- * The plhysical support componient ment. The provision of foreign ex- NCZ, now Zambia's second largest covered the technical rehabilitation of change was affected by the suspension industrial enterprise, was established the first production line (NCZ I, a of IDA disbursements to Zambia in in 1967 to produce ammonium nitrate coal-based ammonium nitrate plant 1987. IDA's performance was mixed; explosives for copper mining. The using proven technology), financed supervision in the initial years was plant also produced ammonium ni- by Japan's Overseas Economic Coop- poor. trate fertilizers and operated at high eration Fund; the second production capacity through the 1970s. In the line (NCZ II, also a coal-based plant The policy and institutional compo- mid-1970s, to support an increased producing ammonium nitrate and nent was not successfully imple- emphasis on agriculture, the govern- compound fertilizers using unproven mented. Policy measures to liberalize ment chose to expand NCZ to in- technology), financed by the German the industry were subject to the gov- crease domestic fertilizer production. Kreditanstalt fur Wiederaufbau; and einment's own timing and were de- As a result, the company became offsite infrastructure and environ- layed. Institutional issues were ad- largely a fertilizer producer. mental facilities, financed by NCZ dressed through the OMF, whose re- itself. OMF had the mandate to coor- sources were spread too thin for the The expansion project involved dinate and supervise the rehabilita- ambitious changes sought, and which building a second production line tion work. did not get along well with NCZ's top which never worked well, and this management. prompted the restructuring project. IDA was to supply $10 million of a The restructuring project (approved total project cost of $69 million. 1986, completed 1991) sought to raise Za-bl NCZ's production efficiency so that Implementation 4'mject reecr Zambia could reduce its reliance on Mz l6 ;w 1994. - I imports and save foreign exchange. Both the NCZ I and NCZ II plants The project played a part in the needed full technical restructumng. Suc- country's industrial strategy, whose cessful restructuring depended on all ; goals included paying more attention the components within each plant being I to the links between industry and ag- completed properly and on time. Poor riculture and to the performance of work or a delay in one component Results management style: one deriving well as a sense of commitmenit to, and from the managing director (ap- responsibilityfor, the project. Their re- While the ERR expected at ap- pointed by the Board/govemment) wards shoutld be tied to the successful praisal was 26.8 percent, the return and the other from the management performnance of the technology. calculated at project completion was put in place by OMF to coordinate * Looking to thefuture, iffurtlher re- negative, at -19.7 percent. The for- the rehabilitation work. hiabilitationi is deemed profitable, the eign exchange spent for the rehabili- Bank may zvant to discuss with NCZ tation reached almost twice the ap- Performiantce incentives the potential costs and benefits of a di- praisal estimate. NCZ is neither fully versified share-hlolding structurefor rehabilitated nor operating effi- The successful implementation of the company, in wlhich technical part- ciently; it has not increased produc- the NCZ I component, which was ners would be shlarehiolders. tion by much, and capacity utiliza- completed only one month behind . Such complex projects will not suc- tion is still very low. Its operations schedule, differs sharply from the ex- ceed withiout an adequate enabling are not sustainable without further tremely poor implementation of the environmttienit, especially price and com- rehabilitation. On the positive side, NCZ II rehabilitation, which had long petition policy incentives. substantial financial restructuring delays and high cost overruns. has been implemented since the re- Supervision, monitoring structuring project closed. The Japanese firm assisting with NCZ I had a share in the company. The Bank should have super- The project's only major achieve- This share, though very small, reflected vised this project more actively in ment is that all key NCZ management a concrete interest in the success of the the crucial early period; complaints positions are now held by Zambians. rehabilitation and a very strong com- raised early on were not addressed High-level staff are better motivated mitment, as co-owner, to the project and contributed to mounting diffi- and more experienced than before. overall. culties as time passed. It should have insisted on detailed plans for Issues and lessons The German contractor assisting implementation of OMF's work and with NCZ II was not invited to par- been more thorough in assessing Design ticipate as a joint venture partner, the work of OMF. Had the Bank but only as a contractor with the task thoroughly vetted the OMF team Design for the NCZ II rehabilitation of executing part of the rehabilitation and effectively resolved complaints was based on a 1983 assessment of the deemed necessary in a 1983 assess- and problems as they arose, some of plant that did not provide for the addi- ment. The limited contractual re- the difficulties and delays might tional rehabilitation requirements that sponsibility and the firm's lack of have been prevented. arose. Success would have been more ownership resulted in minimal moti- likely had the contractor been given re- vation to do a good job. * Whiile making price a majorfactor in sponsibility-tied to the achievement selecting a contractor, care shzould be of performance standards-for full re- The Board and management of taken thlat this does not lead tofalse habilitation of the plant and of the off- NCZ lacked a true incentive to mini- economtiies, if thle winner tries to econo- site areas. mize costs. NCZ now faces competi- mize on the quality of staff. tion from low-priced imports, but be- . In such a complex project, a tlhor- Another important design flaw was cause fertilizer is viewed as a strategic ough evaluation of the management lack of clarity over the responsibilities industry the government will not let team and a detailed planfor monitoring of the OMF. the company go out of business. As implemtientation are vital. If problems owner, manager, regulator, financier, arise they shzould be addressed early on. Management and supplier of a "strategic" product, the government has conflicting objec- Finanlcing The project failed partly because tives that do not necessarily lead to effi- the government and the company's cient production. * Rehiabilitating technically complex board did not seem to have a clear installations requires large contingency strategy for NCZ's rehabilitation and * The expcricecc suggests that owners funds and the acknowledgment of one development. Eventually a dual of technology shouild have slhares in the donor as the leader,filly committed to management structure developed, companly's capital so that they will have promotinig active participationi of all widely differing in approach and a stake in its long-termii profitability, as parties and to achieving overall results. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments and enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. May 1994