Report No. 608-EGT FILE COPYEgypt bFAppraisal ofTourah Cement Expansion Project(In Two Volumes)

Volume 1: Main ReportDecember 30, 1974Industrial Projects Department

Not for Public Use

Document of International Bank for Reconstruction and Development

This report was prepared for official use only by the Bank Group. it may not be published.quoted or cited without Bank Group authorization. The Bank Group does not accept respon-sibility for the accuracy or completeness of the report

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

VOLUKE I

CURRENCY EQUIVALENTS WEIGHTS AND MEASURES

Except here otherwise noted All wita are metric exceptall figures are quoted in noted otherwiseEGYPTIAN POUNDS (IE)

uS $ 1 - LE.3922 1 Metric Ton - 1s000 kilogrsa (kg)LE 1 - US $2.55 1 Netrie Ton - 2,205 poundsLE 1,000 - US $2,550 1 Kilometer (km) * 0.62 miles

1 Motor (a) - 39.3 inohe

ABBEV7IATIONS AND AC1OJN4S

Arab Pbmd Arab lund for Economic and Social DevelopmentARE Arab Repulibc of EgyptCEGA Cairo Electricity and Gas AdministrationCSAD Central state Audit DepartmntB;O Egypt Cement OfficeGOM General Organisation for Building Materials and CeramiesGOFI General Organization for IndutrializationOOFF General Organisation for PetrolemTCC, the CompaiW Teurah Portland Cement CospatTPD (letric) Tons Per DayTPY (Metric) Tons Per Year

TCC FISCAL YEiR

July 1 - June 30 -- Prior to June 30, 1971Jul 1 - December 31 -1971 to 1972January 1 - December 31 -1973 onwards

EGYPT

APPRAISAL OFTOURAH CEMENT EXPANSION PROJECT

TABLE OF CONTENTS

VOLUME I

Page No.

SUMMARY AND CONCLUSIONS ............................ i - iv

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

II. THE COMPANY ......................................... 1

A. Organizational Framework ........................ 1B. The Company Background .......................... 2C. Management ...................................... 2D. Plant Facilities ................................ 3E. Past Performance and Financial Results .... ...... 4F. Recent Financial Position ....................... 4

III. THE MARKET .......................................... 5

A. Supply and Demand .............................. 5B. Distribution and Sales .......................... 11C. Pricing ......................................... 12

IV. THE PROJECT ......................................... 13

A. Scope and Objectives ........................... 13B. Raw Material Availability and Analysis .... ...... 13C. Utilities ....................................... 14D. Process Choice .................................. 14E. Physical Description of the Project .... ......... 14F. Ecology ......................................... 15G. Manpower and Training ........................... 15H. Project Management and Execution .... ............ 16I. Project Timing .................................. 16

V. CAPITAL COST AND FINANCING PLAN ..................... 17

A. Capital Cost ................................... 17B. Working Capital Requirements .................... 18C. Financing Plan .................................. 18D. Procurement ..................................... 20E. Allocation of Bank Loan ......................... 21F. Disbursement .................................... 22

This report was prepared by Messrs. Nayar, Duvigneau, and Wackman of theIndustrial Projects Department.

TABLE OF CONTENTS (Cont'd)

Page No.

VI. FINANCIAL ANALYSIS .................................. 22

A. Revenue ......... 22B. Operating Costs ............................... 23C. Financial Projections ........................... 24D. Break-Even Point ................................ 26E. Reporting and Auditing Requirements .... ......... 26F. Financial Rate of Return ..... ................... 26G. Major Risks ......... ............................ 27

VII. ECONOMIC JUSTIFICATION .............................. 28

A. Economic Rate of Return ......................... 28B. Linkages and Employment ......................... 28C. Foreign Exchange Savings ........................ 28D. Transfer of Technology .......................... 29

VIII. AGREEMENTS ......................................... 29

MAPS

IBRD 11196 - Quarries and Transportation ArrangementsIBRD 11195 - Location of Existing and Future Cement Plants

TABLE OF CONTENTS (Cont'd)

VOLUME II

ANNEXES

1 lechnical Terms and Process Description

2-1 Public Sector Companies in Egypt2-2 Organization Chart of Tourah Cement Company2-3 Deszription of Existing Facilities2-4 ;.t:cor'cal Income Statements2-5 listorical Balance Sheets

3 Marketz for Cement in Egypt

4-1 Raw Material Availability and Analysis4-2 Utilities and Infrastructure4-3 Detailed Project Description4-4 Plant Layout4-5 Flow Sheets4-6 Ecology4-7 Labor Force Projections and Training Requirements4-8 Project Implementation Schedule

5-1 Capital Cost Estimate5-2 Working Capital Requirements5-3 Bank Financed Items5-4 Disbursement Schedule

6-1 Revenue Projections6-2 Production and Operating Cost Projections6-3 Notes to Financial Projections6-4 Income Statement Projections (with Expansion)6-5 Source and Application of Funds Projections (with Expansion)6-6 Balance Sheet Projections (with Expansion)6-7 Income Statement Projections (without Expansion)6-8 Balance Sheet Projections (without Expansion)6-9 Break-Even Point Analysis6-10 Financial Rate of Return and Sensitivity Analysis

7-1 Economic Rate of Return and Sensitivity Analysis7-2 Risk Analysis7-3 Foreign Exchange Savings

MAPS

IBRD 11196 - Quarries and Transportation ArrangementsIBRD 11195 - Location of Existing and Future Cement Plants

EGYPT

APPRAISAL OF THE TOURAH CEMENT EXPANSION PROJECT

SUMMARY AND CONCLUSIONS

i. This report appraises the proposed expansion project of TourahPortland Cement Company (TCC) in the Arab Republic of Egypt from a presentcapacity of about 1.35 million metric tons per year (TPY) of cement to about2.05 million TPY. The project is expected to be physically completed by theend of 1977. TCC is wholly owned by the Government through the GeneralOrganization for Building Materials and Ceramics (GOBM), one of the publicorganizations under the Ministry of Industry. TCC is the oldest and largestcement producer in the country and has a fully integrated plant some 15 kmsouth of Cairo on the Nile. The plant is very well located with respect tothe market and raw materials and is well connected by railroad and highway.The project, for which Bank financing of US$40 million is being sought andin which the Arab Fund for Economic and Social Development (Arab Fund) alsointends to participate, is to use for the first time in Egypt dry processtechnology. The total financing required for the project, including interestduring construction and incremental working capital, is US$93 million, ofwhich the foreign exchange component is about 67%.

ii. The proposed Bank loan of US$40 million equivalent would coverabout 64% of the total foreign exchange required for the project, includinginterest during construction on the loan and would be made to the Governmentand onlent to TCC, which is responsible for the implementation of the projectand its subsequent operations. The proposed Arab Fund loan of US$20 millionwould cover the remaining foreign exchange requirement of the project, in-cluding about US$3 million of interest on its loan during construction. TheBank loan would be for 20 years, including 5 years of grace, at an interestrate of 8.5% per annum, and would be onlent to the Company for 15 years, in-cluding 5 years of grace at an effective interest rate of 10% per annum. Ofthe remaining financing required for the project of about US$33 million, theGovernment is expected to provide US$31 million in the form of equity to meetthe local costs of the project. The residual financing of about US$2 millionfor working capital would be met by the Company's own cash generation. TheGovernment would also cover any cost overrun and working capital requirementsof the project as and when necessary.

iii. Equipment and machinery as well as related services for the projectare to be procured in 12 packages under international competitive bidding.The Bank loan would cover the entire cost of the largest and most criticalpackage, mechanical cement machinery and equipment including engineering,erection and start-up supervision, training and technical assistance, as wellas the foreign exchange cost of expatriate consultant services for the pro-ject. The remaining 11 packages, mostly auxiliary equipment and machinery,would be financed by the Arab Fund and would also follow international com-petitive bidding under its regulations. Civil construction would not be part

- ii -

of the bid packages, but would be carried out by qualified local constructionfirms. Requests for bids have already been issued and production is to startearly in 1978 with full capacity to be reached in 1980.

iv. TCC, which will be responsible for project execution under thegeneral supervision of GOBM and with the assistance of the General Organi-zation for Industrialization (GOFI), has capable management and technicalstaff. While GOFI will provide assistance in international procurement,GOBM will oversee the construction of the plant and its subsequent operations.The supplier of the cement equipment and machinery package will bear respon-sibility for timely project completion and be asked to enter into a suitableperformance guarantee for the entire cement production line -- from crusherto dispatch facilities.

v. The project is part of an overall program to increase Egypt's cementproduction capacity from about 4 million to 8 million TPY by 1980 or shortlythereafter to meet expected future demand. This program is considered vitalfor the development of a broad spectrum of cement consuming sectors, such asagriculture, housing, industry, tourism, rebuilding of infrastructure andreconstruction and development of the Suez region. There are at present fourcement producing companies in Egypt, all owned by the Government through GOBM;three plants (TCC, Helwan and National Cement Companies) are located near Cairoand the fourth (Alexandria Cement Company) near Alexandria. According to aprogram formulated in accordance with Egypt's current planning, three of thefour existing plants will expand and four new plants will be established.Two expansion programs, other than the project, are underway and the remainingfour plants are in various preparation stages.

vi. Domestic consumption of cement in Egypt has been repressed overalldue to shortage of foreign exchange, virtually stagnant production in recentyears, and the deferral of investment due to defense spending. As a resultcement consumption in Egypt grew at barely 3% per year between 1963/64 and1971/72. During this period, no new capacity was added. Total rated capacityand actual domestic production in 1973 were 3.85 million TPY and 3.62 millionTPY, respectively. Since 1967/68, Egypt has not imported cement but has beenexporting, at the expense of local construction, to earn foreign exchange.Egypt has shipped over 500,000 tons annually since 1970/71, mainly to otherArab countries and to West Africa. However, in order to meet the strongdomestic demand, exports have been embargoed in 1974.

vii. Improved peace prospects in the Middle East have resulted inambitious development plans in Egypt and, consequently, the future supply/demand situation is envisaged to be quite different from recent years. Sub-stantial growth in construction expenditure is projected for all sectors,including the planned reconstruction and development of the Suez Canalarea. Based on the projected investments during 1974-1984, cement demandis expected to grow at an average annual rate of 11.3% with higher growthrates envisaged for some intervening years, when reconstruction activityis to reach its peak. This would result in an increase in per capita consumption

- iii -

from the virtually stagnant level of about 84 kg for the past few years to about180 kg by 1984, which would still be less than the present per capita consump-tion in most other Arab countries at similar levels of income. Combined withproduction from capacity now in existence, under construction and inpreparation, the project would help make Egypt self-sufficient in cementproduction by 1980; until then, substantial imports would be required to meetlocal demand. Supply/demand comparisons indicate that in 1981 and 1982 Egyptmay have some surplus cement capacity for export, which could be absorbed inother Middle East or West African countries.

viii. The Egyptian Cement Office (ECO) is the sole organization respon-sible for the selling and distribution of cement for both domestic and exportmarkets. ECO is under GOBM and its operations are controlled by the cementcompanies. The modal breakdown of distribution shipments in 1973 was about95% by road, 3% by rail and 2% by barge. Cement distribution is poorlyplanned and executed; problems include deficiency in planning and deliverycontrol, inadequate bulk-handling facilities, the lack of regional depots and aninadequate and poorly maintained truck fleet. In order to rectify the presentdeficiencies in the distribution system, GOBM will carry out an in-depth studyand implement appropriate recommendations of such a study prior to the start-upof the project. Cement prices are fixed and controlled by the Government ona bulk ex-factory basis. Bulk f.o.b. plant prices for ordinary portlandcement are (Fall 1974) LE 6.25 (US$15.9) per ton excluding taxes and LE 9.50(US$24.2) per ton including taxes. Egyptian ex-plant cement prices comparefavorably with European domestic price levels and are projected to remainat a level below estimated long-term c.i.f. import prices of about US$32.0per ton of bagged cement at Alexandria.

ix. The Company started operations in 1929 with a capacity of 100,000TPY and at present it has a rated capacity of 1.35 million TPY. The plantis operated and maintained properly and it has been running at close to 95%capacity on the average over the past few years. The Company's capitalizationis sound with virtually no debt which provides a good base for expansion with65% debt financing. The long-term debt/equity ratio would remain strong evenduring the project implementation period with a maximum debt position of 50%being reached in 1978. On the other hand, its liquidity position is strained,because almost all its investments in the past few years were financed out ofinternal cash generation. This situation will be rectified and the Companyis expected to have a satisfactory working capital position on completion ofthe project. Long-term debt service coverage remains satisfactory throughoutthe forecast period.

x. The project has a high economic rate of return of 19%, with a verylow probability that the return would drop below 11% under even the mostadverse forseeable conditions. The annual incremental net foreign exchangesavings to the economy, once the project's additional capacity is fullyutilized in 1980, is expected to be about US$11 million equivalent, thus

- iv -

offsetting in about five years the foreign exchange cost of the project. Animportant non-quantifiable benefit of the project is the transfer of dry pro-cess technology for cement production.

xi. Based on the assurances obtained and summarized at the end of thisreport, the project is suitable for a Bank loan equivalent to US$40 millionto Egypt for a term of 20 years, including five years of grace, for onlendingto the Company for a term of 15 years including 5 years of grace at aneffective interest rate of 10 percent.

_. INTRODUCTION

1.01 This report appraises the proposed expansion project of TourahPortland Cement Company (TCC) / from a present capacity of about 1.35 millionmetric tons per year (TPY) of normal Portland cement to about 2.05 millionTPY, to be completed by the end of 1977. TCC is wholly owned by the GeneralOrganization for Building Materials and Ceramics (GOBM), one of the publicorganizations under the Ministry of Industry. It is the oldest and largestcement producer in the country and has a fully integrated plant some 15 kmsouth of Cairo on the Nile. T'he project, for which Bank financing of US$40million is being sought and in which the Arab Fund for Economic and SocialDevelopment (Arab Fund) also intends to participate, is to use for the firsttime in Egypt dry process technology and is to cost about US$93 million, in-cluding interest during construction and incremental working capital. Theprocess together with other technical terms used in the report is described inAnnex 1.

1.02 The project is part of an overall program to increase Egypt's cementproduction capacity from about 4 to 8 million TPY by 1980 or shortly there-after, to substitute for present imports and to meet expected future demand.This program is considered vital for the development of a broad spectrum ofcement-consuming sectors, such as agriculture, industry, tourism, the re-building of infrastructure and reconstruction and development of the Suezregion. The program was formulated by GOBM with the assistance of theGeneral Organization for Industrialization (GOFI) and includes the expansionof three of the four existing plants and establishment of four new plants.Other than the project, two expansion programs are already underway and arefinanced through USSR credit and Yugoslav suppliers' credit. For the remain-ing four new plants, Egyptian authorities are still exploring the possibilitiesof obtaining funds from Arab sources, private foreign and local capital andother financial sources.

1.03 The project was identified in late 1972 and the Bank has assistedin its evolution, including the choice of process to be utilized. The projectwas appraised in June/July 1974 jointly with the Arab Fund. The Bank missionconsisted of Messrs. Nayar (Chief) and Duvigneau of the Industrial ProjectsDepartment and Mr. Beckton (consultant).

II. THE COMPANY

A. Organizational Framework

2.01 Various government bodies are concerned with industrial develop-ment and coordination in Egypt. In the case of TCC, the Ministry of Industry

1/ Although this is the commonly used English name for the Company, thelegal name is "Societe Egyptienne de Ciment Portland Tourah".

- 2 -

is the main authority. The project is to be carried out and operated by TCCunder the broad supervision of GOBM and with the assistance of GOFI, bothattached to the Ministry of Industry. A description of GOFI's and GOBM'sfunctions is given in Annex 2-1. GOFI, in collaboration with the respectivegeneral organizations, is responsible for fostering and coordinating industrialexpansion in Egypt. GOBM, one of the seven public organizations under theMinistry of Industry, is a holding company for the 13 Government-owned compa-nies in the building materials and ceramics sectors, including TCC. The sub-ordinate companies of GOBM produce a wide range of products with an annualsales value of about LE 44.3 million (US$113 million) and are financiallyindependent and autonomous units, each with its own board of directors. GOBM'sboard of directors consists of the chairman, Eng. Ahmed Aly Shaker; the generalmanager; and the chairmen of all the subsidiary companies. Prior to assumingthe responsibility as chairman of GOBM in 1973, Eng. Shaker was the chairmanof TCC.

2.02 GOBM is responsible for the execution of Government policy and itssubsequent follow-up in the building materials sector, and works jointly withGOFI and the company concerned in formulating, preparing and implementingmajor investment projects. All major investment decisions are made at theministerial level and it is GOBM's role to disburse funds for investmentsunder its supervision. However, responsibility for actual project executionand its subsequent operations are effectively delegated to the ultimate oper-ating company--in the case of this project, TCC. GOBM was established in1961 and was legally made a holding company in 1971 with the right to liqui-date or dissolve, merge or consolidate, and divide its subsidiary companies.To maintain TCC as an independent entity, the Government will not merge orconsolidate the company with other companies without prior consultation withthe Bank.

B. The Company Background

2.03 TCC was founded in 1927 as a private company with a share capital ofLE 200,000, owned principally by Swiss and Egyptian interests, and operationscommenced in 1929 with an initial capacity of 100,000 TPY of cement. In 1961TCC, along with other major companies in Egypt, was nationalized I/ and is nowowned by the Government through GOBM, which holds the Company's entire sharecapital of LE 2,230,608. With various expansions of the plant, TCC's totalcapacity is now 1.35 million TPY. It is presently installing a lime plant,which is expected to be operational by the end of 1975 and which is beingfinanced with cash generation and suppliers' credits from Poland. There has,however, been a delay in the delivery of Polish equipment and in the civilconstruction work.

C. Management

2.04 The Company is organized along functional lines and its organizationchart is given in Annex 2-2. The principal management body, the Board of

1/ Private interests were fully compensated by the Government.

- 3 -

Directors, consists of nine members. The chairman and four senior managersof the Company are appointed by the President of the Republic and serve withfour labor representatives who are elected for a period of three years. TheBoard of Directors meets once every month to formulate operational policies,within the framework of overall Government policy, and submits its decisionsto GOBM for approval before implementation. TCC management controls day-to-dayoperations and is expected to produce profits although it has little directcontrol over the unit cost of its inputs or selling prices.

2.05 TCC's management team is headed by Eng. Mohamed Naguib Abdel Hady,who became chairman of the Company in 1973, after having served TCC formore than 20 years in various management positions; he is a capable executivewho provides stability and leadership. Most of the department headshave been with the Company for more than ten years and have had considerableexperience of the cement industry; their caliber is high and overall coordina-tion among departments appears satisfactory.

2.06 TCC has a good technical department which has provided technicalassistance to other cement companies in Egypt as well as consulting servicesto cement producers in other Arab countries. Presently, TCC is providingconsulting services for a Libyan cement plant. Most of the members of thetechnical department have extensive production and engineering experienceand have made frequent visits to cement factories abroad. The Company'smanagement is considered capable of carrying out the expansion project withlimited technical assistance (para. 5.13).

D. Plant Facilities

2.07 The plant is located near Tourah, 15 km south of Cairo on the eastbank of the Nile, and is well served by railroad and highway. The plant isnear its limestone, clay and sand quarries and includes the cement plantproper, quarrying equipment, and transportation and stockpiling facilitiesbetween the quarries and the plant. The existing cement plant uses wetprocess technology and includes raw material preparation facilities, sixcement kilns, a clinker grinding plant, as well as packing, shipping andall necessary auxiliary facilities. Some portions of it are 40 years oldand need modernization. Except for fuel, electricity and minor supplies,the plant is virtually self-contained. A detailed description of the exist-ing facilities is given in Annex 2-3.

2.08 The Company also operates a small foundry, about 3 km south of Tourah,to meet plant requirements, primarily for grinding balls, although some salesare made to nearby outside customers. Due to lack of foreign exchange, someof the spare parts which would normally be imported are also being made byTCC. A paper sack factory, located within the plant site, produces about32 million sacks per year, not only for TCC's use but also for local limeplants, fertilizer factories and other cement producers. On the whole TCC'splant is well maintained and operated, although housekeeping could be improved.At present the Company employs some 2,050 persons in its operations.

- 4 -

E. Past Performance and Financial Results

2.09 The Company's income statements for the period 1969/70-1973 arecontained in Annex 2-4 and selected items are given below.

TCC - Selected Income Statement Items(LE Million)

1969/70 1970/71 1971/72 /1 1973 /2

Sales (000 Tons) 1,207 1,337 1,323 1,218Net Sales 6.62 6.66 7.16 7.65Gross Profit 1.89 1.89 1.99 2.35Net Profit After Taxes 0.63 0.71 0.95 1.03

Net Profit as Z of:Net Sales 9.5 10.7 13.3 13.5Average Net Fixed Assets 7.5 8.4 10.9 10.9Average Equity 8.2 9.0 11.4 11.6

Cash Generation 1.49 1.48 1.59 1.88

/1 Annualized from 18 months operation ended December 31, 1972. All prioryears ended June 30.

/2 Fiscal Year ended December 31.

2.10 Over the past 4-1/2 years TCC has been operating at close to 95%capacity on the average. This is particularly noteworthy in view of the ageof the plant, the difficulties in obtaining imported spare parts and otherfactors not under the Company's control. The Company's financial performanceover the period has been satisfactory and improving. Net profits after taxesas a percent of: (1) net sales, (2) average net fixed assets; and (3) averageequity have steadily increased. This trend is partly attributable to improvedefficiency of plant operations and partly due to higher export selling prices.The 8% drop in sales volume in 1973 was mainly caused by a decrease in pro-duction during the months of November and December, 1973, as a result of theOctober war and a shortage of kraft paper for bagging. The paper shortagealso severely affected production during the first two months of 1974, whenoutput declined to 70% of capacity. However, this situation has now beenrectified and the Company is currently operating near capacity.

F. Recent Financial Position

2.11 TCC's balance sheets for the past four fiscal years (1969/70-73)are given in Annex 2-5 and selected items are given below.

- 5 -

TCC - Selected Balance Sheet Items /1(LE Million)

6/30/70 6/30/71 12/31/72 12/31/73

Current Assets 3.15 3.81 3.27 3.78Net Fixed Assets /2 8.45 8.51 8.82 10.08Current Liabilities 4.24 4.86 4.86 5.92Long-Term Debt 0.36 0.07 0.09 0.34Equity 7.68 8.05 8.69 9.11

Current Ratio 0.7 0.8 0.7 0.6Long Term Debt/ 5:95 1:99 1:99 4:96

Equity Ratio

/1 Fiscal year ended June 30 through 1971, changed to December 31 from 1972onward.

/2 Includes projects under construction.

2.12 It can be seen that the Company's capitalization is sound with adebt/equity ratio of 4:96 at the end of 1973. Equity, including reserves,was then over LE 9 million, almost equal to net fixed assets of about LE 10million, of which approximately LE 4 million were projects under construction.TCC's liquidity position on the other hand is strained, primarily due to the

fact that all of the Company's investments undertaken in the last four yearswere financed out of internal cash generation. Moreover, current liabilitiesinclude the year's profits, a major portion of which have to be distributedto GOBM and workers, as well as taxes, which are paid in the following year.To improve its liquidity position, the Company has been borrowing short-termcredits. The Company is fully aware that the present situation is not a

satisfactory long-term solution and is taking steps to rectify it. This is

further discussed in paras. 5.04 and 6.09.

III. THE MARKET

A. Supply and Demand

1. Past

3.01 A detailed description of the cement market, including distributionand pricing in Egypt, is presented in Annex 3. The following merely summarizesthe major findings.

3.02 Egypt has had a cement industry since 1900 and, while the countryrelied on imported cement to supplement domestic production for many years,it has not imported any cement since 1967/68. Prior to that time it had ex-ported only moderate quantities of cement but since then it has increased ex-ports substantially to alleviate its foreign exchange difficulties. Theseexports have gone primarily to other Arab countries and to West Africa.

3.03 Overall domestic consumption, particularly in sectors other thandefense, has been repressed in recent years due to (1) the export policy;(2) virtually stagnant domestic production; (3) the suppression of importsdue to a lack of foreign exchange; and (4) the deferral of other investmentsdue to defense spending. As a result, cement consumption in Egypt grew bybarely 3X per year between 1963/64 and 1971/72. The effect of this, coupledwith Government pricing control, has resulted in some black market activityduring the supply/demand imbalance of recent years.

3.04 The history of Egypt's cement supply/demand situation for the lastdecade is shown in the following table:

Cement Supply and Demand in Egypt: 1963-1973(000 tons)

ApparentDomestic Domestic

Year Production /1 Imports /1 Exports /1 Consumption /2

1962/63 2,376 - 258 1,9371963/64 2,622 90 132 2,2961964/65 2,411 245 211 2,2731965/66 2,578 223 353 2,4211966/67 2,661 126 271 2,4321967/68 2,904 - 600 2,4321968/69 3,485 - 868 2,6371969/70 3,628 - 629 3,0601970/71 3,814 - 900 3,1031971/72 3,883 - 971 2,9441973 /3 3,617 - n.a. n.a.

/1 Egyptian Cement Office figures./2 Ministry of Planning estimates; net production plus imports less exports,

with adjustments for stock changes./3 Financial and statistical year changed to calendar year.

3.05 There are four companies producing cement in Egypt, three (the TCC,Helwan and National Cement companies) located 15 to 35 km south of Cairo,and a fourth (Alexandria Cement Co.) near Alexandria. All these companiesare owned and controlled by the Government through GOBM (para. 2.01). Nonew capacity has been added since the late 1960's and the physical deterio-ration of plants and a shortage of imported kraft paper and bags has causedsome curtailment of production from time to time. The rated capacities,actual production and plant utilization for the four companies were as followsin 1973:

Egyptian Cement Companies--1973

Rated Actual CapacityCompany Capacity Production Utilization

(000 tons) (000 tons) (Z)

TCC 1,350 1,235 91.5 /1Helwan 1,300 1,204 92.6 T1National 700 668 95.4Alexandria 500 510 102.0

Total 3,850 3,617 94.0

/1 Production at the TCC and Helwan plants has been restricted by shortagesof spare parts and by operating difficulties with extremely old kilns,as well as the bag shortage and limited bulk storage facilities.

2. Future

3.06 The future supply/demand situation is envisaged to be dramaticallydifferent from recent years. Improved peace prospects in the Middle Easthave resulted in ambitious development plans in Egypt, for both the economyas a whole and the cement industry in particular. Substantial growth inconstruction expenditure and related cement consumption is projected forall sectors, including the planned reconstruction and development of theSuez area.

3.07 Three plant extensions (at TCC, Alexandria and National) and fournew plants (at Tourah-unrelated to TCC--Suez, Alexandria and Assiut) arebeing planned for a total annual capacity of 8.37 million tons of cement by1981 (table below).

- 8 -

Egypt: Present and Future Cement Capacity by Plant

Annual Rated Capacity ExpectedPresent Additions Future Start-up Present Status- --____(000 TPY)…-----__

Expansion

TCC 1,350 720/1 2,070 end 1977 Tendering has startedHelwan 1,300 - 1,300National 700 850 1,550 end 1976 Equipment orders placedAlexandria 500 300 800 early 1977 Raw material tests completed

Sub-total 3,850 1,870 5,720

New

Cairo (at Tourah)- - 1,000 /2 mid 1978 Discussions underway withpotential private partners

Suez - - 1,000 mid 1979 Discussions underway withpotential private partners

Alexandria - - 500 end 1984 Early planning stageAssiut - - 500 1981 Early planning stage

Sub-total 3,000Less Retirement

of existing capacity (350) /3

Total 8,370

/1 Based on current and forecast product mix./2 One-half of production (500,000 tons per year) committed for purchase by

Kuwait, if Kuwait participates in financing as proposed.13 Due to obsolescence.

3.08 So far only the expansion of the National and Alexandria CementCompanies have started although that of TCC has reached an advanced state ofpreparation. While there remains some doubt as to the actual timing, includingavailability of funds, of some of the projects, they are included in the pro-duction projections shown in the table below, together with demand projections,the resulting import requirements and projected exports. The overall supplyand alternative domestic consumption projections are compared graphically inthe chart of Annex 3.

-9-

Projected Supply and Demand Situation in Egypt: 1974-1984(000 tons)

Domestic Domestic Committed Import Uncommitted TotalYear Production Demand Exports /1 Requirements Exports Exports /2

1974 3,500 3,030 - 470 4701975 3,850 3,110 - - 740 7401976 3,850 4,140 - 290 - -1977 4,540 5,780 - 1,240 - -

1978 5,350 6,200 150 1,000 - 1501979 6,330 6,530 350 550 - 3501980 7,070 6,580 430 - 60 4901981 7,870 6,770 500 - 600 1,1001982 8,200 7,520 500 - 180 6801983 8,370 7,830 500 - 40 5401984 8,370 8,330 500 460 - 500

/1 50% Kuwaiti share of output of Cairo plant./2 Including committed exports, which would be earmarked for Kuwait.

3.09 Even with its proposed expansion, the contribution of the existingTCC plant to total national production will decline from its current (1974)share of about 34% to about 24% by 1984, although it will still be the largestsingle contributor to a substantially higher level of national production.The above production build-up assumes that new capacity would be utilizedat 60% in the first year, 80% in the second year and at 100% thereafter.While a somewhat faster production build-up may be attainable, the plannedstart-up dates for the expansion of the Alexandria plant and for the newplant at Tourah are already rather tight and continued full capacity oper-ation may not be easy to maintain. Therefore, actual production may lagsomewhat behind the above projections. In addition, the scope and timingof some of the new plants will be further reviewed with the aid of a marketstudy (para. 3.14).

3.10 As to future cement consumption in Egypt, the above demand projec-tions have been built up from analysis of each of the major cement-consumingsectors as well as from macro-economic correlations with such indicators asthe country's population and projected GDP growth--the latter having beenestimated at an average of 6.5% per annum between 1974 and 1980. During thesame period, average investment growth is projected at 14% per annum witha corresponding strong growth in the construction sector. The resultingaverage growth rate of cement demand is 11.3% Per year. Ilowever, sincereconstruction is envisaged as peaking in the late 70's, the highest

demand build-up will be in 1976 and 1977. Total investments of the orderof LE 3 billion have been envisaged over a 5 to 10 year period, but the

establishment of more definite phasing and the sectoral distribution of

this program will,await the completion of master plans studies for thereconstruction of the Canal Zone. Although a study by the Institute of

National Planning shows reconstruction investment peaking at levels of

- 10 -

LE 400 million in 1978 and 1979, for the projections shown above it hasbeen assumed that this curve will be much flatter. Construction expend-iture and cement consumption projections have been estimated accordingly. Thismore conservative assumption makes allowance for financial, technical andother resource constraints which could well restrain the level of reconstruc-tion activity during a period when resources will be in high demand for othersectors of the economy.

3.11 The above projections indicate an increase in per capita 1/ cementconsumption in Egypt to a level of 180 kg by 1984. This compares with 84kg/capita in 1972. The 180 kg level in the Egyptian context would be closeto the 1972 levels 2/ of 201 kg for Syria, 407 kg for Lebanon, 149 kg forJordan and 216 kg for Saudi Arabia.

3.12 Export prospects, including those within the Arab nations, aredifficult to predict. A substantial number of plants are being planned andproposed, such that even if cement demand for each country were projectedwith reasonable accuracy, the actual timing and size of new productionfacilities could still vary widely from any forecast made at this time.Although various studies 3/ have been made of the cement demand/supply situ-ation in the Arab states, these are rather superficial and imprecise in theirestimates. A review of these, with some additional studies carried out bythe Bank, indicates that the demand/supply gap could be as low as one milliontons annually by the early 1980's, with perhaps only Kuwait as a significantimporter.

3.13 During the second half of the 1970's, the projections for Egyptindicate substantial cement import requirements, with a cessation of exportsfor about two years until the Cairo plant, also near Tourah, comes on streamin 1978. If this plant goes ahead as presently envisaged with joint Kuwaiti-Egyptian financing, one-half of its output will be earmarked for export toKuwait. By 1980, imports should cease, and there may be some temporary exportcapacity, in addition to the Kuwait commitment. However, at present, it isdifficult to predict whether Egypt will in fact be able to execute its overallinvestment and construction program, including the completion of all proposedcement plants, with the speed now envisaged. Should cement demand not be asgreat as projected, Egypt may be able to maintain the level of exports ofabout 900,000 tons per annum achieved in recent years. However, although itis likely that Kuwait could absorb a substantial proportion of Egypt's

1/ See Table 6, Annex 3 for population projections.

2/ See Table 9, Annex 3 for consumption and GNP for capita data for selectedcountries.

3/ Study of the Manufacturing of Building Materials in Arab Countries byIDCAS: Industrial Development Centre for the Arab States; and an Eco-nomic Study of the Egyptian Cement Industry by ARE: Institute of NationalPlanning.

- 11 -

projected temporary export capacity, cement production capacity in the Regionis expected to also expand rapidly in the future, and it is therefore uncertainwhether Egypt can rely on a substantial continuing level of cement exports.In any event, Egypt's future export capacity is expected to be available onlyfor one or two years in the early 1980's. Moreover, if cement demand in thecountry does not grow as predicted, the scope of some of the new plants couldbe scaled down or implementation of these plants could be delayed. In anycase, the success of the project does not depend on exports of Egyptian cement,which will at best only be marginal.

3.14 Due to the uncertainty of both demand and supply projections, theseaspects were further discussed with the Egyptian authorities during negotiations,and agreement was obtained that, on the basis of terms of reference to be agreedupon with the Bank by March 31, 1975, a comprehensive study of production, distri-bution and marketing facilities in the cement sector will be carried out and, onthe basis of this study and in consultation with the Bank, an appropriate invest-ment program will be prepared. The Bank will be consulted prior to the estab-lishment of new cement production facilities if these were to increase totalcapacity above the level contemplated in this investment program. The studyshould be completed by June, 1976. Para. 3.18 contains further details.

B. Distribution and Sales

3.15 Distribution and sales of cement in Egypt are handled by the Egypt-ian Cement Office (ECO) in Cairo, whose operating expenses are covered bycontributions from the four cement companies in proportion to their respectiveannual production volumes. Besides being the recipient of all orders fromcustomers and intermediate dealers and arranging for cement dispatch from theappropriate plants, the ECO also has its own fleet of trucks, which togetherwith sub-contractor fleets, transport 95% of Egyptian cement production. Thebalance is shipped by rail (3%) and barge (2%). The continuing shortage ofkraft paper and bags has lent impetus to bulk transport, which in the pasthas accounted for less than 2% of distribution. There are plans to expandthis through the acquisition of more bulk trucks and storage silos.

3.16 Transport tariffs are set by the Government and range from aboutLE 0.04-0.05 per ton-kilometer for the short haul to Cairo down to LE 0.01per ton-kilometer for longer hauls. Transport costs add from LE 0.60 (Cairo)to LE 8.00 (Aswan) per ton to ex-factory prices and are passed on directlyto the customer. The decreed tariff levels are sufficient to cover the trans-portation costs incurred by the ECO.

3.17 Cement distribution is poorly planned and suffers from variousbottlenecks and shortcomings, including poor rail delivery control, inadequatebulk-handling facilities, excessive spillage, the lack of regional distribu-tion depots, and inadequate and poorly maintained truck fleets. All of theseresult in rather costly and time-consuming distribution of production.

- 12 -

3.18 These deficiencies will grow in importance with the planned rapid ex-pansion of cement production. The comprehensive study mentioned in para. 3.14above will help (a) to determine Egypt's future distribution requirements, in-cluding necessary investments in handling and distribution facilities; (b) todevelop more effective distribution planning, and thus less costly distributionof cement; and (c) to establish a training program for ECO staff for the execu-tion of such planning. Experienced consultants will be engaged to carry outthis study which will be one of the six sector studies included in the BankAgricultural and Industrial Imports Credit/Loan recently approved by the ExecutiveDirectors. The study is expected to cost about US$200,000 equivalent, of whichan estimated US$150,000 is needed in foreign exchange.

C. Pricing

3.19 Cement prices in Egypt are controlled by the Government--both onex-factory and retail levels--and between 1965 and March 1974 only one generalincrease 1/ was allowed (in 1969) in ex-factory and retail prices. Tax in-creases, however, have been more frequent. The recent price increase inMarch 1974 was substantial and was aimed at allowing cement producers amargin of 30% on sales, a margin which according to Government policy is tobe approximately maintained in the future (see para. 6.01). Taxes and trans-port charges were also raised, and previously-absorbed bag costs are nowpassed on to the customer. The Cairo prices for ordinary portland cement asat mid-1974 were determined as follows:

Cement. Prices, ex-factory and in Cairo, in mid-1974

LE/ton US$/ton

Bulk, ex-factory price (excl. taxes) 6.25 15.9Bulk, ex-factory price (incl. taxes) 9.50 24.2Wholesale delivered price, bulk 10.10 - 10.60 /1 25.6 - 27.0Wholesale delivered price, bagged 11.80 - 12.30 30.0 - 31.5Retail delivered price, bulk 11.10 - 11.60 28.4 - 29.6Retail delivered price, bagged 12.80 - 13.30 32.6 - 34.0

/1 The price range for wholesale and retail prices stems from thedifference in transport costs to different areas in the greaterCairo region.

3.20 Regional prices vary substantially due to the transport cost and inmore remote areas can potentially inhibit cement use. At Aswan for example,retail prices are more than 50% above those in Cairo. The establishment ofdecentralized plants planned for Suez and Assiut will eventually help correctthis imbalance.

1/ An exception was made in 1967 for the Alexandria Cement Co. which wasallowed a premium of LE 0.56 per ton to cover its higher productioncosts.

- 13 -

3.21 Egyptian cement prices compare favorably with domestic prices inother countries (although Egyptian production costs are reduced somewhat bysubsidized oil prices), as well as with the much higher international tradingprices, which are now weakening from their recent unprecedented levels. Evenwhen these eventually drop further, however, as they are expected to do withsubstantial expansion of Mediterranean, Middle Eastern and European production,long-term c.i.f. import prices at Alexandria should still remain above Egyptianlomestic price levels.

IV. THE PROJECT

A. Scope and ObJectives

4.01 The project is designed (i) to expand TCC's normal cement capacityby 700,000 TPY by 1978, from 1.35 to 2.05 million TPY of cement through use ofdry process technology; (ii) to modernize and improve some of the existingequipment to enable the Company to maintain capacity in its present plant;and (iii) to provide a better base for future conversion of the existingfacilities from wet to dry process. The project introduces no new productsand can be implemented without interfering with the existing production.Due to lack of space, however, no further major expansion of the plantbeyond that contemplated by the project is possible, although some capacityincrease could still be achieved by the above-mentioned conversion of theexisting plant from wet to dry process (para. 4.05).

B. Raw Material Availability and Analysis

4.02 The two principal raw materials, limestone and clay, will be fromthe same deposits which TCC currently leases from the Government. Require-ments of limestone and clay after the expansion will be about 2.7 and 0.6million TPY respectively. Limestone reserves of satisfactory quality, con-firmed by an independent study 1/ carried out in 1969, are sufficient toensure operations of the expanded plant, as well as the new lime plant (para.2.03), for some 30 years. Beyond these confirmed reserves, there is anabundance of limestone which could assure operations for a much longer period.Confirmed clay reserves, with an adequate chemical composition, are alsosufficient and would allow operation of the Company's expanded plant for over30 years. The Government has agreed to continue to grant to the Company theexclusive right to use the clay and limestone quarries at Tourah for at leasta further 30 years. Total estimated clay reserves are about three times aslarge as those confirmed but there is some question as to their chemicalsuitability. These reserves are currently being investigated in connectionwith GOBM's plans to build another new cement factory near Tourah underseparate management with a proposed annual capacity of 1.0 million TPY (para.3.07). Other raw materials are partly quarried by TCC (sand, gypsum) and

1/ Polimex-Cekop of Poland.

- 14 -

partly purchased (pyrite ash, blast furnace slag). These current arrangementswill be continued and are adequate for the expanded plant's requirements.Details on raw material deposits, and sources of supply are given in Annex 4-1.

C. Utilities

4.03 The Company's existing plant operates on mazout (heavy fuel oil--Bunker C) for clinker burning and this will also be the fuel for the expandedplant. Mazout is supplied at US$19.1 per ton by the General Organization forPetroleum (GOFP) from their Cairo refinery via an 8" pipeline which is suffi-cient to supply the needs of the expanded plant. The Government has agreedto take necessary steps for adequate and timely supply of fuel. The projectdesign takes into account possible use of gas from the Abu Gharadig gas fieldswhich already serve industrial complexes around Cairo. If the gas is usedin the future as heating fuel, the mazout installations would be maintained asstandby.

4.04 Power for the project (presently costing US$0.0158/KWH) will besupplied by the Cairo Electricity and Gas Administration (CEGA), through anew 30 MVA substation connected to the Cairo grid. The Company's own powerstation, which now contributes about one third of TCC's total current require-ments of 120 million KWH per year, will be maintained as a standby. Thesearrangements and the timely availability of power have been confirmed duringnegotiations. TCC, as at present, will draw its additional water require-ments from the Nile by replacing the existing pumphouse, which is obsolete,with a new enlarged pumping station. The supply of all utilities is thussatisfactorily assured. Details of utilities are contained in Annex 4-2.

D. Process Choice

4.05 In view of substantial fuel savings, the project will utilize dry-process technology and will be the first of its kind in Egypt, although theexact design of the process to be employed will be decided only after bidevaluation. The basics of the dry process are widely judged to be economical,efficient and competitive among international cement producers (Annex 1).An economic comparison of the alternatives--dry versus wet process--for theparticular case of TCC, is made in Annex 4-3. In addition to its low fuelrequirements and, hence, lower operating costs, an important considerationin process selection was the possibility of designing the project so as topermit future conversion of existing equipment to the dry process. Suchconversion would not only reduce fuel consumption but would also allow anincreased output from the facilities, so converted, of between 30 and 50%at relatively modest investment cost.

E. Physical Description of the Project

4.06 The project consists of a complete line of mechanical and electricalcement machinery and equipment for the expanded output, as well as provisionsfor updating existing equipment. Included are equipment for the limestone

- 15 -

and clay quarries, a new crusher, modification of limestone transport andstorage facilities, a raw grinding plant and raw meal storage, a kiln of arated capacity of 2,000 TPD of clinker complete with preheater, cooler andelectrostatic precipitator, a complete clinker grinding plant, cement storageand dispatch facilities. Also included are a substation and all relatedelectrical equipment and cabling, the expansion of the existing controlstation, a new pumping station and expansions of the existing mechanicaland electrical workshops and the laboratory. A more detailed project des-cription, together with detailed equipment lists, is contained in Annex 4-3.General plant layout and process flow charts are given in Annexes 4-4 and4-5 respectively.

F. Ecology

4.07 The project will be designed to meet standards considered acceptablein Western industrialized countries. The project will include facilities,costing over LE 1 million, to reduce the amount of solid effluents-the mainenvironmental problem in cement plants--to internationally acceptable levels.Currently TCC is executing a project designed to reduce solid pollutants from;-he existing facilities to the same suitable level. The Company also oper-ates a waste treatment plant for its sewage effluents. Other liquid andgaseous effluents will not be harmful. Appropriate noise-abatement pre-cautions and facilities will also be implemented, keeping noise pollutionwithin tolerable limits. Depending on the type of dry process to be utilized,special raw material characteristics may require a by-pass system to collectharmful dusts, which would be difficult to dispose of. Tenderers have beenrequested to suggest suitable and environmentally acceptable methods for dis-posal of these dusts. The Company will install and maintain pollution controlfacilities satisfactory to the Government and the Bank. Details on theecological precautions being taken by TCC, both for existing equipment andfor the project, are given in Annex 4-6.

G. Manpower and Training

4.08 Cement factories are capital intensive and have a very high laborproductivity. The project will therefore provide direct employment for onlyabout 200 persons, primarily skilled personnel. The present manning levelin the existing plant (about 2,050 persons) is high by European standards,though this is more a function of the Government's social and economicpriorities than of the actual need for labor to operate the plant. Theproject will, however, improve the Company's overall labor productivity byabout 40%, though considering the low prevailing wage scale in Egypt, theeconomics of the overall plant are not unduly affected by the high manninglevel. Training and recruitment plans have already been prepared in somedetail by the Company and are considered satisfactory. The supplier of thecement equipment line, will provide training abroad on similar dry-processfacilities for about 20 key personnel. The remainder of the operationalstaff will be trained locally in TCC's training facilities and in its exist-ing plant. Details of labor force projections and training are containedin Annex 4-7.

- 16 -

R. Project Management and Execution

4.09 TCC will be responsible for project execution, under the generalsupervision of GOBM and with the assistance of GOFI. Management of TCC,with many previous plant expansions and modifications to its credit, is con-sidered qualified to undertake such responsibilities. GOFI will provideassistance particularly during the procurement stage and GOBM will overseeconstruction and subsequent operations. The main burden of project executionwill rest on TCC's Project Department, recently established with staff pre-dominantly from the Company's Research and Industrial Planning Department,which has been responsible for execution of new projects, maintenance plan-ning, technical trouble shooting, and consulting to local and foreign cementcompanies. Mr. M. Taha, an experienced mechanical engineer and presently themanager of the power plant, will head the project team, which will work underthe general guidance of the Company's Chairman. If required, GOBM and GOFIwill provide additional experts for assistance. This arrangement is satis-factory and during negotiations TCC confirmed that it will assign to theproject sufficient competent staff.

4.10 The supplier of the mechanical cement machinery and equipmentpackage (para. 5.09) is to provide detailed engineering of all cement plantfacilities, including items not supplied by him, and will bear the responsi-bility for timely project completion, attainment of capacity, performanceefficiency and warranties. These guarantees are possible because the items --mainly electrical equipment, which form an integral part of the cement pro-duction facilities and are to be supplied by different suppliers, -- will be inaccordance with the specifications and criteria to be set by the cement ma-chinery and equipment supplier. Civil works will be designed and constructionsupervised by an Egyptian firm with whom TCC has had previous experience.Civil construction will be carried out by local contractors. The civil engi-neering firm will work closely with TCC's project team.

I. Project Timing

4.11 Tender documents, prepared in accordance with the Bank guidelines,were mailed out in July, 1974, after a joint review by the Bank and Arab Fund,to interested suppliers of cement machinery and equipment, which is the mostcritical item in the project implementation schedule. Technical bids areexpected to be opened on February 1, 1975, and the contract should be concludedin spring 1975. Delivery, construction and erection schedules are based oninformation provided by potential suppliers and TCC's past experience. Thedetailed project implementation schedule, prepared by TCC, is shown in Annex4-8 and is considered realistic. According to that schedule, the project isexpected to start up in early 1978.

- 17 -

V. CAPITAL COST AND FINANCING PLAN

A. Capital Cost

5.01 Capital cost estimates are detailed in Annex 5-1 and are summarizedbelow:

Summary of Capital Cost Estimates(in millions)

LE US$ % ofLocal Foreign Total Local Foreign Total Total Cost

Building and Civil Works 4.1 0.7 4.8 10.3 1.8 12.1 14Equipment /1 1.0 12.8 13.8 2.6 32.5 35.1 42Freight & Insurance 0.1 0.9 1.0 0.4 2.2 2.6 3Duties and Taxes 1.5 - 1.5 3.7 - 3.7 4Execution & Installation 0.4 0.1 0.5 1.1 0.3 1.4 2Other Expenses /2 0.2 0.2 0.4 0.5 0.7 1.2 2Total Base Cost /3 7.3 14.7 22.0 18.6 37.5 56.1 67

Contingencies: Physical 0.7 1.5 2.2 1.9 3.7 5.6 7Price 2.8 5.1 7.9 7.3 13.0 20.3 24

Total Fixed Assets 10.8 21.3 32.1 27.8 54.2 82.0 98Incremental Working

Capital 0.8 - 0.8 2.0 - 2.0 2Total Project Cost /_ 11.6 21.3 32.9 29.8 54.2 84.0 100

Interest during Con-struction 0.4 3.1 3.5 1.0 8.0 9.0Total Financing Re-quired 12.0 24.4 /4 36.4 30.8 62.2 /4 93.0

Percentage 33 67 100

/1 FOB port of shipment./2 Includes preoperating and start-up expenses, training and technical

assistance./3 End 1974 price basis.|4 Above figures reflect direct and indirect foreign exchange costs.

5.02 The cost estimates were prepared by the Company based on quotationsreceived in late 1973 from European equipment suppliers and TCC's previousexperience. End-1974 base cost estimates for equipment are derived from thesequotations, after increasing them by about 35% to account for actual priceincreases to the end of 1974. Import duties and taxes of about 10.7% ofthe c.i.f. value of imported equipment have been added. Freight and insurancefrom the port of shipment to the plant site is estimated to cost about 7% ofthe total equipment cost. Since Egyptian regulations require all shipmentsby vessels designated by Egyptian Maritime Authorities, assurance was obtained

- 18 -

that if this policy would cause significant project delays, exceptions willbe made for the shipment of equipment and machinery required for the project.Civil construction cost estimates for the end of 1974 are based on enquiriesamong local contractors obtained in late 1973 and include a 30% price escal-ation over such enquiry prices. Pre-operating and start-up expenses as wellas engineering services are based on TCC's previous experience. To coverpossible omissions and changes in project design, physical contingencies of10% of the total base costs have been added.

5.03 The allowance for price escalation amounts to about 33% of totalbase cost plus physical contingencies. For imported equipment a decliningrate of 15% in 1975, 12% in 1976, 10% in 1977 and 10% thereafter has beenused, and for local civil construction works one of 25%, 20%, 15% and 10%respectively. This unusually high price escalation provision for civil worksis considered realistic because the expected rapid increase in constructionactivity in Egypt, particularly for reconstruction, is apt to exert an extra-ordinary upward pressure on construction costs. Total physical and pricecontingencies allowed for amount, therefore, to about 46% of total base costs.The project costs, including contingencies, are considered realistic estimates.

B. Working Capital Requirements

5.04 As indicated in paras. 2.11 and 2.12, the Company's currentliabilities exceeded current assets at the end of 1973 by LE 2.1 million,about equivalent to the bank overdrafts outstanding at that time. To alle-viate the Company's present working capital shortage and to provide theincremental working capital required for the project, approximately LE 0.8million (Annex 5-2), the financing plan envisages that funds from TCC's ownresources and contributions from the Government will increase net workingcapital during project implementation by about LE 3.8 million, including re-duction of the existing overdrafts. This was confirmed during negotiations.By start-up of the project the Company is expected to have net working capitalof approximately LE 1.7 million and, in addition, will be able to borrow fromits line of credit with the Bank of Alexandria up to LE 3.75 million. Thesearrangements are expected to provide adequate working capital for the Company'soperational needs. In any event, the Government will provide funds in orderto maintain a satisfactory working capital position on completion of theproject (para. 5.08).

C. Financing Plan

5.05 The plan to cover the expansion project's total financing require-ments of LE 36.4 million (US$93.0 million) consists of LE 12.9 million(US$33 million) in the form of equity and the remaining LE 23.5 million(US$60 million) in loans. All machinery and equipment, including foreignengineering, technical assistance and training, will be financed by loansfrom IBRD and the Arab Fund. The financing plan for the project isas follows:

- 19 -

Financing Plan for the Project(in millions)

Egyptian Pounds US Dollars % ofLocal Foreign Total Local Foreign Total Total

Equity

Government Participation 12.1 - 12.1 30.9 - 30.9 33.2TCC's Cash Generation /1 0.8 - 0.8 2.1 - 2.1 2.3

Subtotal 12.9 - 12.9 33.0 - 33.0 35.5

Debt

IBRD - 15.6 15.6 - 40.0 40.0 43.0Arab Fund - 7.9 7.9 - 20.0 20.0 21.5

Subtotal - 23.5 23.5 - 60.0 60.0 64.5

Total 12.9 23.5 36.4 33.0 60.0 93.0 100.0

/1 Represents working capital required for the project alone. TCC and/orGovernment total cash contribution to working capital during constructionperiod will be LE 3.8 million.

5.06 The proposed Bank loan of US$40 million equivalent will be madeto the Government for 20 years, including 5 years of grace, and at an interestrate of 8.5% per annum. The Government will then relend the proceeds of theloan to the Company for 15 years, including 5 years of grace, and will chargethe Company an effective interest rate of 10% per annum. The Company willbear the foreign exchange risk on the loan. The proposed Arab Fund loan ofUS$20 million equivalent (including an estimated US$3.0 million for interestduring construction) will be for 20 vears, including 5 years of grace, at aninterest rate of 6% per annum. The Company will again bear the foreign exchangerisk. While confirmation of the terms and conditions of Arab Fund financinghas been received, the finalizing of the financing arrangements between theArab Fund TCC will be a condition of effectiveness for the Bank loan.

5.07 The equity financing of LE 12.9 million consists of two portions:(i) the LE 0.8 million of TCC's own cash generation to finance the incre-mental working capital requirements caused by the project; and (ii) theLE 12.1 million equity contribution by the Government to cover the remaininglocal costs. The Company's additional cash generation during the projectimplementation period--about LE 18.2 million--is expected to be utilized forthe completion of the ongoing lime plant construction, payoff of bank over-drafts and the legally required distribution of profits to Government andemployees.

5.08 The Government's obligation to provide the LE 12.1 million equityfinancing will be independent of the Company's ability to internally generatecash during the project implementation period in addition to the amount now

- 20 -

projected. Moreover, whatever further resources--foreign as well as local--might be needed to complete the ongoing investment programs and the project 1/and bring them into operation, including maintenance of an adequate workingcapital level, equivalent to a current ratio of at least 1.5:1, and inde-pendently of whether the need for such additional funds is caused by a costoverrun or a shortfall of cash generation, will be provided by the Government(see also para. 6.09).

D. Procurement

5.09 Equipment and machinery as well as related services for the projectare to be supplied in 12 packages which will be procured under internationalcompetitive bidding. The largest and most critical package is that for supplyof cement machinery and equipment, including supervision of erection, andstartup training and technical assistance. To ensure single responsibilityfor the implementation of this package by one contractor--deemed imperativefor a successful project--this package cannot be split further. The Bankloan would be utilized to finance this critical package in its entirety at anestimated cost of US$35 million. The Arab Fund will finance the remaining 11packages consisting of all ancillary equipment and machinery.

5.10 The Bank-financed package will be internationally bid in accordancewith Bank Guidelines. While no Egyptian manufacturers qualify to bid directlyfor this package, it is estimated that equipment worth US$3.5 million equivalent,or about 10% of the total estimated cost of this package, could be supplied fromlocal sources. Therefore in order to give Egyptian Equipment Manufacturers anopportunity to supply items fr the project while maintaining the overall guaran-tee for the entire package from the main supplier, a 15% margin of preference orthe prevailing import duty, whichever is lower, will be allowed for purposes ofbid evaulation in respect of clearly identified Egyptian components, included inforeign bids, and which except for the need to execute the package under singleresponsibility could be bid separately. Procurement of Arab-financed packageswill also follow international (including non-Bank member countries) competi-tive bidding, under the regulations of the Arab League.

5.11 Tentative agreements have been reached with the Arab Fund regardingprocedures to be followed during project execution and supervision, coveringsuch matters as procurement procedures, coordination of follow-up missions,exchange of information and standardization of reporting requirements. Theseprocedures will be confirmed through exchange of letters between the Arab Fundand the Bank.

5.12 Procurement of the cement machinery and equipment package--but notof the others--will be based on performance specifications rather than de-tailed technical specifications. This is done to encourage the maximum

1/ The project will be considered complete when the plant operates contin-uously for a period of at least 90 days at or above 90% capacity.

- 21 -

number of suppliers to tender by deliberately not excluding any particulardry process technology. Considering the technical complexity of these bids,TCC has adopted a two-stage bidding 1/ procedure for both this and the equallycomplex electrical equipment package. The remaining packages will follownormal single-stage bidding. All prospective suppliers have been informed,through tender documents, of the details of the bidding procedure.

5.13 To help the Company achieve an optimal design and equipment selection,in dry process technology where it has little direct experience, it is essen-tial for it to have assistance during the technical bid evaluation. TheCompany has therefore agreed to appoint the necessary consultants before theopening of the technical bids, scheduled for February 1, 1975, and to retainthem at least until the award of the contract. As the appointment of theconsultants before that time is crucial for meeting the project implementationschedule, a small portion of the US$50,000-100,000 required for bid evaluationservices may have been expended before the Loan is considered by the ExecutiveDirectors. It is recommended that the Bank reimburse this amount retroactively.

E. Allocation of Bank Loan

5.14 Bank and Arab Fund financing will be on a parallel basis withseparate specific lists of goods and services. The Bank will finance:(i) the single responsibility package for mechanical cement machinery andequipment, including engineering, training and technical assistance; and (ii)consultant services for bid evaluation (para. 5.13), and (iii) interest duringconstruction. The Company is investigating the retention of consultants fortechnical assistance of a somewhat broader nature than bid evaluation, in or-der to help make the transition from the wet to the dry process more effective.If funds are available, it is recommended that the Bank consider financingthese further services from any unallocated portion of the loan should theybe deemed justifiable. Allocation of the Bank loan is shown in detail inAnnex 5-3 and summarized below:

1/ First, firm technical proposals and separate price bids will be submittedfollowed by opening, consultation and modification of the technical bidsto achieve reasonable uniformity among the final technical bids, andsecondly, and only at this stage, will the original price bids be opened,accompanied where necessary, by supplemental price bids to reflect thetechnical changes.

- 22 -

Allocation of Bank Loan(in millions)

% ofLE US$ Total

Equipment and Spares 12.27 31.30 78.2Engineering, technical assistanceand training 0.53 1.35 3.4

Consultant Services 0.04 0.10 0.3Interest During Construction 1.96 5.00 12.5Unallocated 0.88 2.25 5.6

Total 15.68 40.00 100.0

The Bank loan would finance about 64% of the total estimated foreign ex-change requirement of the project. While, as mentioned previously, no Egyptiansupplier is expected to bid directly for this package, local sub-suppliesare possible and may amount to about 10% of the Bank loan.

F. Disbursement

5.15 The Bank loan would be disbursed against 100% of the foreign ex-change cost of the mechanical cement machinery and equipment package andagainst the ex-factory costs of any locally supplied components within thatpackage (para. 5.14), as well as against 100% of the foreign exchange cost ofconsultant services. A schedule of estimated quarterly disbursements isgiven in Annex 5-4, which is in line with the project implementation schedule(para. 4.11).

VI. FINANCIAL ANALYSIS

A. Revenue

6.01 Details of revenue calculations are given in Annex 6-1. Salesrevenue has been calculated in constant 1974 prices for the proposed productmix on the assumptions that the project will start up in early 1978 and reachfull production in 1980, and that the entire production will be sold domestic-ally. Cement is sold on an ex-factory price basis and the customer pays forthe transportation cost. Ex-factory selling prices include taxes, which arecollected and remitted directly to the Government by ECO and are, therefore,netted out from the sales price in calculating sales revenue. Selling prices,which are set and controlled by the Government, were increased in March 1974,and the weighted average selling price for the proposed product mix is aboutLE 11.2 (US$28.5) per ton of cement, including weighted average taxes of LE 3.0per ton and the cost of bags of LE 1.7 per ton of cement. The Government hasagreed to maintain ex-factory cement prices such that the Company would earna reasonable return on its investment and maintain a debt service coverage ofat least 1.5 times. Total revenue to the Company also includes revenue from

- 23 -

sales of lime and foundry products as well as revenue from consulting servicesrendered. As a result of the expansion, TCC's sales revenue is forecast toincrease by about 50%, from LE 12.3 million (US$31.4 million) in 1977 to LE18.3 million (US$46.7 million) in 1980, when the project would reach fullproduction.

B. Operating Costs

6.02 Production costs estimates (Annex 6-2), like those of sales, arebased on the proposed product mix as well as the planned production build-upand are in constant (1974) prices, except for labor and imported spare parts.To reflect relative price changes, it has been assumed that until 1978, TCC'slabor costs would increase annually by about 5% and the cost of imported spareparts by 10%. Any increase thereafter is assumed to be compensated for byincreases in product prices. Considering the present pricing system in Egypt,these assumptions are reasonable since cement prices will be periodicallyreadjusted to absorb the higher cost of labor and raw material inputs and toconform with the price agreement mentioned in para 6.01 above. Thus effectsof production cost increases beyond the control of the Company are expectedto be offset by higher selling prices. Total operating costs in 1980 forthe existing facilities, the expansion facilities and total plant after ex-pansion are given below.

TCC - Production Cost Estimates- (1980)(1974 constant Prices)

Existing Plant Expansion only Total Plant(wet process) (dry process)

US$/Ton % US$/Ton % US$/Ton %

Fuel 3.11 25.2 1.73 17.7 2.63 23.0Electricity 1.40 11.4 1.73 17.7 1.51 13.2Paper 3.57 29.0 3.57 36.5 3.57 31.2Misc. Materials & Supplies 2.35 19.0 2.37 24.2 2.36 20.6Labor (Direct & Maintenance) 1.66 13.5 0.33 3.4 1.20 10.5General Overhead 0.23 1.9 0.05 0.5 0.17 1.5

12.32 100.0 9.78 100.0 11.44 100.0

/1 Excludes depreciation, financial charges and administrative overhead.

6.03 That operating costs per ton of cement will be low in comparison tosimilar cement plants elsewhere is mainly due to: (i) good location relativeto raw materials and utilities; (ii) subsidized fuel prices; and (iii) com-paratively cheap labor. The Company buys fuel at a subsidized price of LE7.5/ton (US$19.1/ton) compared with an actual cost to Egypt of LE 22.5/ton(US$57.4/ton). Even assuming a price of LE 22.5/ton, the total operating costper ton of cement compares favorably with similar plants abroad. This fuelsubsidy is virtually offset by the taxes imposed on cement prices. Total

- 24 -

production cost per ton of cement in 1980, when the project would reach fullcapacity, is expected to drop by about 7% from present levels mainly due tothe fuel savings in the dry process, increase in plant efficiency, and economiesof scale. As can be seen from the above table, the dry process is expected tosave at least US$1.05 of fuel and electricity cost per ton of cement producedas compared to the wet process even at the subsidized fuel prices. This savingwould amount to US$3.8/ton of cement if the subsidy were not taken into account.Details of the operating costs, together with the major assumptions, are con-tained in Annex 6-2.

C. Financial Projections

6.04 The financial projections are based on a gradual build-up of produc-tion from the assumed start of expanded operations in early 1978 to full capa-city utilization in 1980. Sales revenue as well as operating costs are basedon 1974 prices, as explained in paras 6.01 and 6.02. Assumptions used in thefinancial projections are given in Annex 6-3. The technical and commercialassumptions underlying these projections are considered sound and the proj-ected levels of cash generation attainable.

6.05 Detailed income and cash flow forecasts through 1984 are given inAnnexes 6-4 and 6-5 respectively and selected items are summarized below:

TCC - Selected Income Statement Items(LE Millions)

1974 1975 1976 1977 1978 1979 1980 1984

Net Sales 11.2 11.9 12.2 12.3 15.9 17.1 18.3 18.3Gross Profit 5.1 5.2 5.2 5.2 7.0 7.6 8.3 8.2Operating Profit 3.8 3.8 3.7 3.7 3.0 3.6 4.3 4.9Net Profit after Taxes 3.5 3.5 3.5 3.4 1.6 1.8 2.3 3.4

A of Sales (%) 31 29 29 28 10 11 13 19Cash Generation 4.7 4.8 4.8 4.8 5.3 5.5 6.0 6.5

6.06 Due to the cement price increase in March 1974, net profit aftertaxes was projected to increase from LE 1 million in 1973 to LE 3.5 millionin 1974. More recent information from the Company indicates that productionand sales in 1974 are somewhat lower than originally projected, but the effecton the income statement is not yet known, and the impact on cash flow is notexpected to be substantial. Thereafter, during the implementation of theproject, between 1974 and 1977, sales will increase by about LE 1 million,reflecting the completion and operation of the lime plant, although net profitafter taxes will remain virtually unchanged because of the assumed increasesin labor and spare parts costs. During this period, TCC will be subject tovery low depreciation charges as most of the old facilities have been virtuallywritten off. As the new plant comes on stream in 1978 at 60% of capacity andbuilds up to full capacity in 1980, its higher efficiency will be reflected inincreases in gross profit of more than 60% while sales will increase by onlyabout 50%. Nevertheless, with higher depreciation charges and high financialcharges in the early years of operation, net profits after taxes in 1980 will

- 25 -

still be below pre-expansion level. As can be seen from the above table, how-ever, cash generation rises steadily once the new plant is in operation andaccelerates as financial charges decrease, demonstrating the beneficial impactand financial viability of the project.

6.07 Forecast Balance Sheets for 1974 - 1984 are contained in Annex 6-6.Significant data from these are shown below. For the purpose of comparison,projected income statements and balance sheets without expansion are given inAnnex 6-7 and 6-8 respectively.

TCC - Selected Balance Sheet Items(LE Million)

(end of year) 1974 1975 1976 1977 1978 1979 1980 1984

Long-Term Debt 0.2 9.0 16.4 21.7 23.9 21.9 19.9 11.7Equity 9.8 13.3 20.0 23.2 23.7 24.0 24.4 26.1Long-Term Debt/

Equity Ratio 2:98 40:60 45:55 45:55 50:50 48:52 45:55 31:69Current Ratio /1 0.8 0.9 1.1 1.3 3.0 2.6 2.7 3.2Debt Service (Times

Covered) 14.8 14.7 16.2 17.8 4.8 3.8 2.0 2.3

/1 Including surplus cash.

6.08 TCC has virtually no long-term debt and therefore, the long-termdebt/equity ratio remains strong during the implementation of the projectwith a maximum debt position of 50% being reached in 1978. Thereafter, thedebt/equity ratio declines until, by 1984, TCC will have only 31% in debt.This capitalization puts TCC in a good position to finance future conversionof existing facilities (para. 4.01). Nevertheless, in order to maintain itssound financial position, agreements were obtained that, without prior consentof the Bank, the Company will (i) not undertake additional capital investmentin excess of LE 3.0 million annually until the project is complete; (ii)during the life of the loan, not borrow additional long-term funds if itsdebt would exceed its equity. Agreement was also obtained that the Companywill, after the project is complete, take every action within its powers toensure that its debt service coverage is at least 1.5 times.

6.09 While net working capital will remain relatively low during projectimplementation, the Company's financial position should improve rapidly there-after. At the end of 1978, the first year of operations, the Company's currentratio is expected to be in excess of 2:1. While Egyptian law requires theCompany to distribute most of its net profit to the Government and to its em-ployees, the Company's financial position is expected to remain strong dur-ing operations as depreciation charges would be about two times debt serviceobligations. Agreement was obtained that, after completion of the project,the Government and the Company will undertake to maintain TCC's current ratioat no less than 1.5:1 and the Government will not make withdrawals, other thanmandatory withdrawals, from the Company if, as a result, the current ratiowould fall below 1.5:1.

- 26 -

6.10 Since the Company's long-term debt outstanding is small, debt ser-vicing should be no problem during project implementation or subsequent oper-ations. Long-term debt service coverage is lowest, at 2.0 times, in 1980, thefirst year of the repayment of the Bank loan, and rises thereafter. This isample and would permit additional borrowings in the late 1980s to help financethe future conversion of existing facilities.

D. Break-Even Point

6.11 The profit break-even point in 1980, after reaching full produc-tion, would be about 79% of capacity or 1.58 million tons of cement. Fromthere on it would steadily decline as financial charges decrease. The cashbreak-even point in 1980 would be only 64% of capacity, since debt repaymentwould be less than the annual depreciation. In other words, in 1980, assumingfull production, prices could fall about 21% before the Company's cash genera-tion would be zero. Further details on break-even levels are found in Annex 6-9.

E. Reporting and Auditing Requirements

6.12 The Company submits to GOBM periodic reports concerning its operationsand projects under implementation. These reports generally provide adequateinformation for proper supervision. The accounting system employed by TCC,which was established in 1968 for all industrial and trading companies inEgypt, is referred to as the "Unified Accounting System" and is designed tomeet the accounting and statistical needs of the Government. It is fairlyconsistent with generally accepted Western accounting practices. In additionto the internal audit carried out by TCC, the Company accounts are auditedannually by the Central State Audit Department (CSAD), whose methods corres-pond to Bank requirements. The Company shall continue to be audited by CSADor by an independent auditing firm acceptable to the Bank.

F. Financial Rate of Return

6.13 Financial rate of return calculations are on an incremental basisand the cost and benefit streams, including those for capital costs, are in1974 real value terms and are derived from financial projections. Owing toGovernment's policy of holding down domestic cement prices to encouragereconstruction and regional development, and to its tax policies, the finan-cial rate of return of the project of 10.4% in real terms is comparativelylow. The assumptions for the calculations and the cost/benefit streams aregiven in Annex 6-10. Sensitivity tests have been made to determine theeffects of various alternatives on the financial rates of return. They areshown in Annex 6-10 and are summarized below:

- 27 -

Sensitivity Tests

FinancialCase Description Rate of Return (%)

1. Base Case 10.42. One Year Delay in Project Completion 9.13. Capital Cost Increase 10% 9.24. Operating Cost Increase 10% 9.25. Revenue Decrease 5% 9.2

6.14 The project is most sensitive to changes in sales revenue. Adrop of 10% in sales revenue without corresponding reduction in operatingcosts decreases the return to 7.4%. If the selling price of cement isincreased by LE 1.0/ton the return would increase to 12.9%. If the fuelsubsidy were to be eliminated without corresponding selling price increases,the return would be 6.6%. A one-year delay in project start-up would dropthe return to 9.1%. In view of: (i) the past experience of TCC staff inmanaging and construction of similar projects; (ii) the expected guaranteesfrom the cement equipment supplier for timely completion and his participationin erection and start-up; and (iii) the pricing policy in Egypt; the likelihoodof the return falling below 9% is low. Nevertheless, considering the sounddebt/equity position of TCC at this time, even a 9% return would still keepthe Company in sound financial condition under forseeable circumstances.

G. Major Risks

6.15 The project has two major areas of potential risk: (i) simultaneousoperation of dry and wet process production units; and (ii) distribution ofcement. After completion of the project both dry process plant (the project)and the wet process plant (existing plant) will have to run alongside oneanother. This may pose some initial operational as well as organizationaldifficulties. The projections take this potential eventuality into accountand the production build-up has been made on a more conservative basis thanwould be used in normal cases involving cement plant expansions. Moreover,with the technical assistance for two years after start-up from the cementmachinery and equipment supplier, TCC is expected to overcome any initialoperational difficulties. In order to avoid the risk in distributing cement,it was agreed that a detailed marketing and distribution study will be carriedout (para. 3.18), and that an investment program, based on the study's re-commendations, would be prepared by the Government in consultation with theBank. This investment program would cover appropriate marketing and dis-tribution facilities.

- 28 -

VII. ECONOMIC JUSTIFICATION

A. Economic Rate of Return

7.01 The incremental economic rate of return of the project is about19% in 1974 prices and is based on a conservatively estimated long-termprice (in 1974 prices) for imported bagged cement of US$32 per ton c.i.f.Egyptian port, with the same price being assumed ex-factory at TCC, and adelivered fuel price of US$ 57.4 per ton. The use of world market prices andthe elimination of taxes explain the wide discrepancy between the economicand financial rates of return. Further details of prices as well as sensitiv-ity analyses are given in Annex 7-1. In the unlikely event that world cementprices were to drop as low as the marginal cost of production, i.e. equal toabout US$28 per ton at Egyptian ports, the economic return of the project wouldfall to about 15%. If the long-term fuel price is assumed to be US$70 perton, then the return would decrease to about 18%. The effects of price changeson the rate of return are given in Annex 7-1. In order to take into accountprevailing uncertainties with respect to prices, equipment and civil constructioncosts, a probability analysis has been carried out, as detailed in Annex 7-2.Based on this analysis, there is a 90% probability that the return would bebetween 11% and 25%, the most likely return being about 18%, with a 75% chancethat the return would exceed 14%. Thus the project provides a good returnunder foreseeable adverse circumstances.

B. Linkages and Employment

7.02 The project is crucial for the reconstruction needs and the futuredevelopment of the economy. Investments are expected to expand at an annualrate of over 14%. This rapid growth would not be possible without theavailability of adequate cement supplies at reasonable prices. Without theTCC expansion, Egypt would in the late 1970's have to depend on large-scalecement imports at higher prices, straining the foreign exchange resources ofthe country. Therefore, it is probable that some of the investment programswould have to be scaled down or postponed if Egypt were to depend largely onimported cement.

7.03 While the proposed project would create directly only about 200additional jobs, it would also open up jobs, particularly in downstream indus-tries, although it is difficult to quantify them. Nonetheless, the effect isconsiderable, particularly in the construction industry and the transportsector.

C. Foreign Exchange Savings

7.04 The foreign exchange savings from the project by replacing cementimports are considered of importance to an Egyptian economy burdened bychronic balance of payments problems. The net foreign exchange savings fromthe project, at 1974 prices, would be over US$11 million per year, offsetting

- 29 -

its estimated cost in about 5 years at full production. Further details ofthe calculation of foreign exchange savings are shown in Annex 7-3.

D. Transfer of Technology

7.05 Transfer of technology is also an important aspect of the projectsince this will be the first dry-process plant operating within the country.The experience that will be gained by TCC staff from this project could beused in assisting other companies in Egypt in formulating, designing andoperating dry process plants in the country. It will also enable TCC toplan the conversion of its existing facilities in an efficient manner.

VIII. AGREEMENTS

8.01 The following principal assurances and agreements were receivedfrom the Government and the Company:

A. The Government will:

(a) not consolidate, or merge the Company without priorconsultation with the Bank (para. 2.02);

(b) carry out a study of cement production, marketing,and distribution facilities and prepare in consultationwith the Bank, an appropriate investment program, andconsult with the Bank prior to establishing productioncapacity in excess of the levels contemplated in thatprogram (paras. 3.14 and 3.18);

(c) continue to grant to TCC the exclusive right to use theclay and limestone quarries at Tourah for at least 30years (para. 4.02);

(d) provide adequate and timely supply of fuel and power(paras. 4.03 and 4.04);

(e) make exceptions to existing regulations regarding shipmentof equipment and machinery required for the project, if theproject will be delayed otherwise (para. 5.02);

(f) relend the proceeds of the loan to the Company on termsand conditions satisfactory to the Bank (para. 5.06);

(g) provide LE 12.1 million in the form of equity for the pro-Ject (para. 5.08);

(h) provide completion and cost-overrun guarantees for theproject and the ongoing investment programs (para. 5.08);

- 30 -

(i) not, after completion of the project, make withdrawals,other than mandatory withdrawals from the Company, ifsuch withdrawals would cause the current ratio to fallbelow 1.5:1, and provide funds to maintain that level,if necessary (paras. 5.08 and 6.09); and

(j) maintain ex-factory cement prices such that the Companywould maintain a reasonable return on its investment anda debt service coverage of at least 1.5 times (para. 6.01).

B. That the Company will:

(a) implement and maintain strict environmental protection mea-sures (para. 4.07);

(b) assign sufficient competent management and staff for theproject (para. 4.09);

(c) secure the balance of foreign exchange financing (US$20.0million) from the Arab Fund (para. 5.06);

(d) appoint technical consultants for bid evaluation (para.5.13) and possibly some broader services (para. 5.14);

(e) not undertake additional capital investment prior tocompletion of the project in excess of LE 3.0 million perannum (para. 6.08);

(f) not borrow additional long-term funds if its debt wouldexceed its equity (para. 6.08);

(g) take all action within its powers such that its debt servicecoverage is at least 1.5 after completion of the project(para. 6.08); and

(h) maintain a current ratio of 1.5 after completion of theproject (para. 6.09).

8.02 Agreement has tentatively been reached with the Arab Fund coveringsuch matters as procurement procedures, allocation of goods and services,coordination of missions, supervision, exchange of information, and stand-ardization of reporting requirements. These procedures will be confirmedthrough an exchange of letters between the Arab Fund and the Bank (para. 5.11).Confirmation of the terms and conditions of Arab Fund financing have beenreceived but finalization of the financing arrangements between the Fund andTCC will be a condition of effectiveness of the Bank loan.

- 31 -

8.03 On the basis of the above agreements, the project provides a soundbasis for a loan to the Government equivalent to US$40 million for 20 years,including a 5-year grace period, and for relending of this amount to TCC for15 years, including a five year grace period.

Industrial Projects DepartmentDecember 30, 1974

I BRD 11196SEPTEMBER 19Y4

ARAB REPUBLIC OF EGYPT SYR AN

TOURAH CEMENT EXPANSION PROJECT SYRAN

Quarries and Transportation Arrangement LRBAB.OYA ARAB

Cla,y q.,arry SAet

Lf- tnrsimone quarry face ( _

C remnt Plart C.. (JORDAN ?

Cortour lines, meters -

A F Lats for Cly reserve la-ashNtilots SAUDID :~~~~~~~~~~~~~~~~~~~~~~~~~Clay d.pUsit u,der iIle.tigatot ARABIA

- C C-eyor belis m

K ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~ - W~re fe-c ARBRPBI.- bIgt Hlgh-fenauen safleric lines ARAB REPUBIC

DmIdUd highway O F EGYPT

~~~~<z> <? 0,. .d. _,ta . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ccS.,,' ccrcccc

f)~ ~ ~~~~~~~~~i. C- y S,1, hr,f,

/rd B'd,A. A_t --1//

D I ~= = /B R O S P e C FION/B

P g% A0 S L- =I \/

KILOMETER

U 1/2

MILE

Z.

* MILLIONS T11EY U MILLIS TRN A MILLIOST TRY

A ALSNOI SE 03 CEO

I- -- - - ----- ,-

2E s ~~~~SRIEoA URSAf I\ <~is 4<

ARAB REPBILC I F tGYPTL

TOURAH CEMENT EXPANSION PROJECT -/slOCATION OF EXISTING AND PROJECTED CEMENT PLANTS| emm, .

pqn I S~~~~~-N IA-t~ ~ / iSR

A~~~~~~~~~~~~~~~~~~~~~~~~~~

* PLAh NE- NEW FLANTS >_ _LHA H tv\

ASER Zb>" _h LAEHR UFCDRASo<v

| AILWASDULETAE|/r-.-

Lll ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~L

- NAVIOAELECANALS /