Document of FILE COPYThe World Bank

FOR OFFICIAL USE ONLY

Report No. 2876-BD

STAFF APPRAISAL REPORT

BANGLADESH

FERTILIZER INDUSTRY REHABILITATION PROJECT

April 23, 1980

Industrial Projects Department

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

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CURRENCY EQUIVALENTS

In August 1979 the Bangladesh Taka was officially devaluedrelative to the Pound Sterling, to a rate of Tk 34.7 to the Pound. Sincethen the Taka exchange rate has been determined through a basket of majorcurrencies, with the Pound Sterling as the reference currency. Consequently,the Taka-US dollar rate has been subject to change. The rates below havebeen used throughout this report except when otherwise stated.

US$1 = Tk 15.5Tk 1 = US$0.065

Tk 1 million = US$64,516

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development Bank

AFCC - Ashuganj Fertilizer and Chemical CompanyBADC - Bangladesh Agricultural Development CorporationBAI - Bresler and Associates, Inc.BCIC - Bangladesh Chemical Industries CorporationDAP - Diammonium PhosphateEEC - European Economic CommunityHYV - High-yielding VarietiesIFAD - International Fund for Agricultural DevelopmentJEG - Jacobs Engineering GroupKfW - Kreditanstalt fur WiederaufbauMscft - Thousand Standard Cubic FeetODA - United Kingdom Overseas Development AdministrationOPEC - Organization of Petroleum Exporting CountriesP 05 - Phosphate Fertilizer Nutrient Unit

PPM - Parts per MillionROP - Run of PileTEC - Toyo Engineering Corporationtpd - Metric Tons per Day

tpy - Metric Tons per Year

TSP - Triple Superphosphate

UNDP - United Nations Development ProgramUSAID - US Agency for International Development

BANGLADESH FISCAL YEAR (FY)

July 1 - June 30

FOR OFFICIAL USE ONLY

BANGLADESH

THE FERTILIZER INDUSTRY REHABILITATION PROJECT

TABLE OF CONTENTS

Page No.

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

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

A. Existing Plants .................. o........................................ 2B. Additional Capacity .............. o.......................................... 2C. Factory Gate Fertilizer Prices 3............... 3D. Foreign Exchange Constraint ........ ...... 4E. Staffing and Training ..................................... 5

III. FERTILIZER MARKET AND MARKETING ......................... 6

A. Fertilizer Consumption/Demand ............ ........... 7B. Fertilizer Supply ......................................... 8C. Fertilizer Sales Prices ..... .............................. 9D. Marketing Arrangements .................................... 10

IV. BANGLADESH CHEMICAL INDUSTRIES CORPORATION .................... 12

A. History and Organizational Structure ......... .. ........... 12B. Financial Performance .9999.................................. 13C. Restructuring of BCIC .. .99.................................. 17D. Ghorasal Plant Facilities ................................. 18E. Chittagong TSP Facilities .. .................... 19F. Fenchuganj Plant Facilities ............................... 24

V. THE PROJECT ............ ....................................... 25

A. Plant Improvement Component .................... . . .......... 26B. Training Component . ..... ....... ...................... 26C. Spares, Catalysts and Chemicals Component ................. 27

VI. PROJECT MANAGEMENT AND EXECUTION ................ .............. 27

A. Project Management ........................................ 27B. Engineering Arrangements ................................. 29C. Project Schedule .......................................... 29

This report was prepared by Messrs. S. Venkataraman and Kurt Loos of theIndustrial Projects Department.

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

TABLE OF CONTENTS (Continued) Page No.

VII. CAPITAL COST, FINANCING PLAN AND PROCUREMENT ................. 30

A. Capital Cost ................ ............................. 30B. Financing Plan .................................. ........ 31C. Procurement and Disbursement ................. ... .......... 32

VIII. FINANCIAL ANALYSIS . ................ .o......................... 34

A. General ....... o ............................................ *...... o... 34B. Operating Costs and Revenues ........ * ................... 34C. Financial Rate of Return . ...... .... ........ ....... . .. . 37D. Financial Covenants and Reporting Requirements ......... 38E. Major Risks ......................... ..................... 38

IX. ECONOMIC ANALYSIS . ........... .......................... ..... 39

A. Economic Costs and Benefits ............. ......... ........ 39B. Economic Rate of Return ..................................... 40C. Other Benefits and Foreign Exchange Savings .............. 41

X. AGREEMENTS ................................................... 42

ANNEXES

3 Fertilizer Offtake in Bangladesh 1965-794-1 List of BCIC's Production Units4-2 BCIC Financial Statements 1976-804-3 BCIC Fertilizer Production and Capacity Utilization4-4 Plant Improvement Component - Project Scope7-1 Plant Improvement Component - Capital Cost Estimate7-2 Estimated Disbursement Schedule for IDA Credit8-1 Estimated Production Cost Summary and Output Value8-2 Cost and Benefit Streams for Financial Rate of Return Calculation9 Cost and Benefit Streams for Economic Rate of Return Calculation

MAP

IBRD-14866 BANGLADESH - Location of Fertilizer Plants

DOCUMENTS AVAILABLE IN THE PROJECT FILE

Reference

A Fertilizer Works Operation Improvement Programme - InceptionReport - Ghorasal Urea Fertilizer Factory. July 1979.Bresler and Associates, Inc.

B Fertilizer Works Operation Improvement Programme - FinalReport. August 1979. Bresler and Associates, Inc.

C Proposal for Rehabilitation Work for Urea Ferttlizer FactoryGhorasal. September 1979. Toyo Engineering Corporation.

D Draft Technical Annex for the Ministry of Overseas Developmenton Triple Superphosphate Complex, Chittagong, Bangladesh.January 1978. Cremer and Warner Ltd.

E Rehabilitation and Conversion Options for T3P MKanufacturingFacility, Chittagong, Bangladesh. April 1979. JacobsEngineering Group, Inc.

F TSP Manufacturing versus Fertilizer Importation. April 1979.Soros Associates Consulting Engineers.

G Feasibility Report on the Fertilizer Production ImprovementProgramme of Urea Fertilizer Factory, Ghorasal. December 1979.Bangladesh Chemical Industries Corporation.

H Feasibility Report on the Fertilizer Production ImprovementProgramme of TSP Complex, Chittagong. March 1980.Bangladesh Chemical Industries Corporatton.

I Feasibility Report on the Fertilizer ProductionImprovement Programme of Natural Gas Fertilizer Factory,Fenchuganj, Sylhet. March 1980.Bangladesh Chemical Industries Corporation.

BANGLADESH

APPRAISAL OF THE FERTILIZER INDUSTRY REHABILITATION PROJECT

I. INTRODUCTION

1.01 The Government of Bangladesh (the Government) has requested an

IDA credit of US$29 million to finance (i) the rehabilitation of the threeoperating fertilizer plants at Ghorasal, Chittagong and Fenchuganj (the PlantImprovement Component); (ii) the setting up of training facilities at Ghorasal(the Training Component); and (iii) the essential spare parts, catalysts andchemicals needs of the fertilizer industry for about two years (the Spares,Catalysts and Chemicals Component). The plants to be rehabilitated (MapIBRD-14866) are at present operated by the Bangladesh Chemical IndustriesCorporation (BCIC), a wholly government-owned corporation. The Government,however, is implementing steps to form the three fertilizer plants intoseparate corporate entities retaining BCIC's overall coordination role (para4.09). The proposed IDA credit of US$29 million would include US$19.7 millionfor the Plant Improvement Component covering along with Dutch assistance ofDFl 10 million (equivalent of US$4.7 million) all of the estimated foreignexchange needs and about 75% of the estimated total financing requirements(excluding taxes and duties) of US$32.3 million; US$1 million for the TrainingComponent covering 100% of the foreign and local costs; and US$8.3 millioncovering 100% of the estimated import needs of the Spares, Catalysts andChemicals Component. The-remaining Project financing would be provided bythe Government.

1.02 The Project includes additions and replacements of equipment and

plant modifications as well as the provision of maintenance and other importedmaterials at the three fertilizer plants to enable them to operate at closeto their rated capacities and to minimize losses in production due to plantinterruptions. Due to the nature of the Project, the investment required foran additional annual ton of fertilizer production will be significantly lowerthan for building fresh additional capacity. The proposed training facilitiesat Ghorasal are crucial to help ensure an adequate and competent work forcefor the operation of the fertilizer plants in Bangladesh.

1.03 The proposed credit is to finance one of three operations under con-sideration by IDA to assist the Bangladesh fertilizer sector. The other twonow under appraisal would (i) provide a fertilizer import credit which is toinclude a component to ensure timely supply of rock phosphate and sulfur tothe Chittagong Triple Superphosphate (TSP) plant; and (ii) improve the trans-portation facilities required for inland fertilizer movement and distribution.

1.04 The Project was identified in July 1979 by a mission consisting ofMessrs. H.P. Gassner of South Asia Programs Department and S. Venkataraman of

the Industrial Projects Department, and appraised in October 1979 by Messrs.K. M. Loos and S. Venkataraman (mission chief) of the Industrial ProjectsDepartment.

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II. THE FERTILIZER INDUSTRY

A. Existing Plants

2.01 Domestic fertilizer production started in Bangladesh with thecommissioning of the Fenchuganj plant in 1961 for the production of urea andammonium sulfate. Two other plants have since then been set up, one at Ghorasalin 1970 for the production of urea and the other at Chittagong in 1969/70 forthe production of TSP. The three plants have a combined installed capacityof 489,500 tons per year (tpy) of urea, 13,200 tpy of ammonium sulfate and152,000 tpy of TSP. The installed nutrient capacity corresponds to 228,000tpy of nitrogen and 70,000 tpy of P 0 5. The nitrogen production is based onabundant domestic natural gas and tAe sulfate and the phosphatic production onimported sulfur currently being procured from Iraq and rock phosphate currentlybeing procured from Jordan and Morocco.

2.02 Capacity utilization achieved by the Fenchuganj plant was closeto 90% during its first nine years of operation but declined after 1971.Following a rehabilitation program completed in 1978, production has sub-stantially improved since :979. The Ghorasal plant faced difficulties fromthe beginning and a serious explosion in late 1974 put the plant out ofcommission for most of 1975. Production has recently improved; the FY1979average capacity utilization of 63% corresponded to 80% of the capacity forthe ten months during which the plant was in operation in FY1979. TheChittagong plant, though completed before Bangladesh's independence in1969/70, began trial runs only in 1974 and 1975 and has been facing technicalproblems and raw material shortages. Despite recent improvements its annualproduction is unlikely to exceed 60% of rated capacity. All the above plantsare owned and operated by BCIC, with fertilizer accounting for about 40% ofthe BCIC production (para 4.01).

B. Additional Capacity

2.03 A large fertilizer plant with an installed capacity of 528,000 tpyof urea is currently under construction at Ashuganj. The plant was initiallyfinanced with the assistance of seven international and national agencies:IDA, ADB, USAID, ODA, Government of Iran, KfW and Government of Switzerland(Report No. 598-BD dated December 18, 1974). The Project encountered substan-tial delays and cost overruns and the Association, together with most of theother original lenders, along with EEC, IFAD and OPEC Special Fund, helpedto cover the foreign exchange cost increase, with the Government providingthe additional local financing required (Report No. P-25-68-BD dated May 18,1979). Construction is now progressing satisfactorily and is expected to becompleted within the revised time schedule (March 1981) and only slightly overthe cost as presented to the Executive Directors in May 1979.

2.04 During the Ashuganj project appraisal the Government and the lendersagreed that it would be preferable to create a new entity which could devoteits full attention to the implementation of the project. Subsequently, a newgovernment-owned company, the Ashuganj Fertilizer and Chemical Company (AFCC),

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was formed to construct, own and operate the facilities. In extension of thisprinciple, the Government now intends to transform the three existing plants,to be rehabilitated under the proposed Project, into separate corporateentities (para 4.09). At the time of the Ashuganj appraisal, the need toidentify and implement measures to improve production from the existing plantswas also recognized and IDA financed studies for this purpose under the Firstand Second Technical Assistance Credits (Credit No. 409-BD dated June 29, 1973and Credit No. 622-BD dated April 8, 1976). The final recommendations form-ulated by the consultants in August 1979 form the basis for the proposed Project.

2.05 Presently BCIC is setting up further new facilities at Ghorasal forthe production of 100,000 tpy of urea with technical and financing assistancefrom the Peoples' Republic of China. The plant is expected to come on streamby early 1984. The Government is also considering construction of anotherlarge fertilizer plant at Chittagong which is to have an installed capacityof 561,000 tpy of urea. This project is expected to be implemented by a newcompany with possible private equity, both local and foreign. The lenderassistance for the Chittagong project is being coordinated by ADB. IDAhas reviewed the project and indicated willingness, in principle, to considercofinancing if requested in time to permit staff participation in preappraisaland appraisal. IFC has also been approached by the Government to assist inidentifying possible private equity participation. The Chittagong urea plantis now expected to start implementation in mid-1981 and be in operation bylate 1985.

2.06 With expected implementation of these projects, Bangladesh wouldhave an installed capacity by 1985 of about 1.63 million tpy of urea, 13,200tpy of ammonium sulfate and 152,000 tpy of TSP, corresponding to 753,000 tpyof nitrogen or about 240% above the country's present nitrogen capacity.There would however be no change in the phosphate capacity. The four signi-ficant factors that will affect the performance of all the fertilizer plantsin achieving capacity production are (i) removing current bottlenecks toefficient production (which is to be achieved under the proposed Project);(ii) adequacy of the factory gate fertilizer prices to ensure reasonable cashflow; (iii) adequate foreign exchange availability to procure the required rawmaterials--rock phosphate and sulfur--and the spares and components needed tomaintain the plants in good condition; and (iv) availability of a well-trainedand competent work force. These factors are discussed below.

C. Factory Gate Fertilizer Prices

2.07 The fertilizer produced by BCIC is pooled with imported fertilizersand distributed by the Bangladesh Agricultural Development Corporation (BADC).The domestic product is taken over by BADC at a transfer price fixed by theGovernment on the basis of BCIC's costs. The Government-fixed price isintended to cover budgeted cash costs, depreciation and a profit element.Adequate pricing norms have not, however, been clearly defined especiallyfor determining an appropriate capital base and return criteria. The prices,though periodically revised, lag behind changes in costs of inputs by severalmonths, often with substantial adverse impact on producer's cash flow andoperations.

2.08 Under the Ashugani Fertilizer Project (Credit No. 527-BD), theGovernment is required to establish an ex-factory urea sales price whichwill enable AFCC to earn a reasonable return after taxes on its net worthafter meeting all costs including depreciation and interest on debt. Areasonable basis for the above purpose is to establish the fertilizer pricesat a production level corresponding to 80% of the plant's installed capacity.However, during the two initial years of operation of the new plant and untilthe rehabilitation measures in the three existing plants are implemented, thepricing could be based on realistically achievable production levels. Thiswould provide the plants the required cash flow and also adequate incentivesto improve their profitability through better performance. The Governmenthas agreed to review at least once each year the ex-factory fertilizer pricesof the three existing plants and establish the prices for each plant for thefollowing year to obtain revenues sufficient to cover operating and adminis-trative expenses including adequate provision for maintenance and deprecia-tion and provide a minimum return of 10% on the equity after interest onborrowings and taxes. For purposes of determining the fertilizer prices,the equity will be determined as net fixed assets, suitably revalued fromtime to time, plus current assets for normal operation less accounts payableand borrowings. The Government has also agreed to extend the above pricingmechanism to the Ashuganj Fertilizer and Chemicals Company.

D. Foreign Exchange Constraint

2.09 An important factor affecting the operations of the existing fer-tilizer plants has been the uncertain and often inadequate availability offoreign currency funds for the import of raw materials, sulfur and rockphosphate as well as spares and components. As a result, the Chittagong TSPplant remained idle for several days in 1979 due to lack of raw materialsand all the fertilizer plants have had inadequate preventive maintenance.As noted previously, the Chittagong TSP plant operates on imported rockphosphate and sulfur and with production at 80% of nameplate capacity,requires imports of about 200,000 tons of rock phosphate and about 44,000 tonsof sulfur annually. The foreign exchange required for the purchase of theseraw materials at the above production level will be about US$20 million peryear (in 1979 dollars). In addition, due to the relatively underdevelopedBangladesh industrial sector, the fertilizer plants need to import sparesand components, catalysts and various other chemicals (such as caustic potashand arsenic oxide). The annual import costs of these materials is estimatedat US$4.0 million (in 1979 dollars). In addition, when commissioned, theAshuganj plant will require imports of similar materials at an annual costof about US$3.0 million. While a large part of the spares and componentswill have to come from the original equipment suppliers, the catalysts andchemicals are competitively procured internationally.

2.10 IDA has, in a series of program credits, provided foreign currencyto finance the import of fertilizer raw materials, spares and components.As part of the Eighth Program Credit (Report No. P-2664-BD dated January 22,1980) approved in February 1980, the Association will provide up to US$10million for the same purpose. Additional financing for fertilizer raw mate-rials is under consideration as part of a proposed fertilizer imports credit.To assure adequate availability of spare parts, catalysts and chemicals beyond

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the period intended to be covered under the Eighth Program Credit, thecredit presented here includes US$8.3 million to cover about two years'import requirements. For this purpose, BCIC will prepare before December 31,1980 a maintenance program satisfactory to the Association, and the newfertilizer companies will carry it out in accordance with appropriateengineering standards and practices. The preparation of the maintenanceprogram will be a condition of disbursement of the spares, catalysts andchemicals component. The annual foreign exchange requirements of US$24million to cover the operational import requirements of the existing plantswill contribute fertilizer production of about US$100 million in value basedon present fertilizer CIF prices. The Government has agreed to take allnecessary steps to ensure adequate and continuing provision of foreignexchange funds to meet the plants' requirements for imported raw materials,spares, catalysts and chemicals.

E. Staffing and Training

2.11 The three existing fertilizer plants have a total employment ofabout 3,600, about half of them with technical skills. The limited avail-ability of experienced plant operators and technicians due to the lowBangladesh industrial base continues to affect the performance of theseunits adversely. The absence of an adequate program and related facilitiesto hire and train skilled workers in required numbers has been an importantconstraint. The problem is further aggravated by the low salary levelsallowed in the government-owned corporations and the drain of skilled workersto much higher paying jobs in the Middle East. The drain of trained technicalpersonnel, which had stabilized after initial large departures, is once againcausing concern to the plant managements. During early 1980 alone, the threeexisting plants and AFCC are expected to lose about 200 technicians to theMiddle East. While the Ghorasal unit is now implementing a training program,the facilities and the training plans are still inadequate.

2.12 Under a UNDP financed project, a contract has been signed withUNICO International of Japan (UNICO) to provide operations assistance to theGhorasal and Chittagong plants. This project provides technical managementassistance to develop the BCIC management skills and will train each yearapproximately 4 managerial, 7 supervisory, 14 skilled technical and 25operative staff. In addition, the project includes training advisers whowill assist BCIC in developing proposals for the setting up of an adequatetraining center and in assessing the equipment and facilities needed for thepurpose. In addition, the Ashuganj Credit (Credit No. 527-BD) and the IFADCredit (Credit 31-BA) have provided funds for the import of training aidsto be used initially for training technicians for the Ashuganj project andlater to be made available for training technicians for the other fertilizerplants. Since the UNDP project does not finance the setting up of the train-ing center, the Government has requested IDA financing under the proposedCredit. Thus the proposed training component would complement the assistanceprovided to Bangladesh in this crucial area through other UNDP and IDA projects.

2.13 While the setting up of the training facilities will improve theavailable Bangladesh skills, it will be possible to increase and adjust thetraining plans and maintain an adequate work force in the fertilizer plantsonly if annual staff losses are limited to a small part of total availabilityand are spread over the various skill levels and over time reasonably evenly.While the high salaries available in the Middle East are an important factor

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in attracting Bangladesh's skilled manpower, the plant managements are alsoconcerned with the Government decision to maintain government-owned companypay scales on par with those of the civil service. This is especially serioussince promotion opportunities within the fertilizer companies are limited.Under similar circumstances elsewhere, incentives to skilled technicians areoffered in the form of a special allowance linked to different skill levels.

2.14 In the proposed Credit documents, BCIC has agreed to furnish itsdetailed training plans for review by the Association before December 31,1980. Completion of training plans acceptable to the Association will be acondition of disbursement of the training component. Further, the Governmenthas agreed to introduce procedures and schedules governing the recruitmentof fertilizer technicians and engineers from Bangladesh to work abroad. Forthis purpose, the Government will require newly recruited and trained fertil-izer technicians and engineers to continue in service in Government-ownedplants for an appropriate period. The Government will also take measures tominimize, with the cooperation of relevant agencies, the departure offertilizer technicians and engineers to such numbers as can reasonably bereplaced without adversely affecting the operation of the fertilizer plants.BCIC has agreed that the three fertilizer plants will establish by December31, 1980 and maintain subsequently an appropriate program of incentives fortheir skilled technicians in order to retain them in service.

III. FERTILIZER MARKET AND MARKETING

3.01 The proposed Project, aimed at improving production by the existingfertilizer plants, will add to domestic supply about 68,000 tpy of urea and31,000 tpy of TSP. Since the additional supply will form only about 5% to6% of Bangladesh's 1985 demand and the country can be expected to remain asignificant importer of fertilizer for years to come, this section reviewsBangladesh's fertilizer market only briefly. Also, detailed review of thefertilizer market and marketing aspects is contained in Report No. P-2588-BDof June 8, 1979 (Fertilizer Imports Credit) and therefore fertilizer marketand marketing has not been discussed in detail in this report.

3.02 The agriculture sector dominates the Bangladesh economy. In 1979it accounted for 55% of the GDP, 75% of the total employment and over 80%of the country's exports. Bangladesh's agriculture is characterized by thepredominance of rice, which forms about 80% of the gross cropped area and hasa high cropping intensity, generally averaging 135%. Thus increased foodproduction required to achieve self-sufficiency even at a relatively lownutritional level will have to come mainly from higher yields which, in turn,depend mostly on the increased and complementary use of inputs such as fertil-izers, irrigation, high yielding variety (HYV) seeds, pesticides and improvedcultivation/farm management techniques. To achieve and maintain a 3.5-4.0%agricultural production growth rate required in Bangladesh as an absoluteminimum, fertilizer application will have to increase by about 15% per year.Surveys in 1978 indicated that fertilizer is used by as many as 64% of theowner-cultivators and between 43% and 63% of the tenants. Since fertilizerapplication techniques are relatively simple and the results well known tomost Bangladesh farmers, the above growth rates are considered achievable.

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A. Fertilizer Consumption/Demand

3.03 Past Consumption. Use of chemical fertilizers in Bangladesh startedin 1958. Fertilizer consumption has grown rapidly since the formation in 1962of the East Pakistan Agricultural Development Corporation--now the BangladeshAgricultural Development Corporation (BADC). Urea accounts for 62% of thefertilizer consumption, wtth TSP and diammonium phosphate (DAP) forming 29%and potash 9%. Urea is the main nitrogenous fertilizer used, except for smalltonnages of ammonium sulfate used mainly in tea plantations. Since 1966,fertilizer consumption has been increasing at an annual average rate of 16%,as indicated in the table below and Annex 3.

Bangladesh - Fertilizer Consumption 1966-79(in thousand tons of products)

Average AnnualFY (ending June 30) 1966 1970 1975 1976 1977 1978 1979 Growth Rates (%)

1966-79 1976-79

Total Fertllizer 106 277 280 457 513 715 740 16.1 17.4

Urea 84 199 178 319 360 478 495 14.6 15.7

Between FY77 and FY78, total fertilizer consumption increased by 40% dueto improved paddy support pricing and the Government's promotional efforts.Actual consumption in FY79 was about 740,000 tons of product, well below theearlier projected figure of 900,000 tons due to severe drought in that yearwhen fertilizer application levels were below normal under the excessivelydry soil conditions. With this unexpectedly sharp drop in consumptiongrowth, the mid-1979 stocks were about 370,000 tons of product resultingin inadequate storage capacity to handle the additional imports orderedpreviously and domestic production. Fertilizer consumption growth continuedto be depressed by drought conditions during early FY80.

3.04 Future Demand. The estimated demand for FY80 for all fertilizersis between 850,000-900,000 tons, though the BADC target is 1,000,000 tons.The projected offtake for FY81 ranges between 1.05 and 1.15 million tons withurea forming about 61% of total demand, TSP/DAP about 31% and the remaining 8%being made up of potash. Based on historical trends and planned agriculturalirrigation programs, demand for all fertilizers and urea is projected toincrease by about 15% per annum between FY81 to FY85, and by at least 10% perannum during the rest of the decade as shown in the following table. Thiswould compare to actual growth rates for urea (para 3.03) of 14.6% duringFY66-79 and 15.7% during FY76-79 and even slightly higher growth rates reachedfor all fertilizers combined. The projected consumption of all fertilizersin FY85 is slightly lower than the latest Planning Commission estimates.The Planning Commission, however, expects the nitrogen demand growth rate tobe significantly lower than the average for all fertilizers, which appearsunlikely.

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Bangladesh - Projected Fertilizer Demand 1980-90(in thousand tons of products)

Average AnnualGrowth Rates %

FY (ending June 30) 1980 1982 1985 1987 1990 1980-85 1985-90

Total Fertilizers 850-900 1,190 1,810 2,190 2,915 15 10

Urea 569 743 1,130 1,367 1,800 15 10

The urea requirements based on these assumptions would be about 1.13 milliontons by FY85 and 1.80 million tons by FY90. The present use of phosphaticsforms about 31% of the total fertilizer product. Even if the phosphateconsumption grows only at the same rate as that of urea, maintaining thepresent ratio with nitrogenous fertilizers, the TSP/DAP consumption couldreach 574,000 tpy by FY85 and 924,000 tpy by FY90.

B. Fertilizer Supply

3.05 Past. Before independence of Bangladesh, local supplies werelimited to production from the Fenchuganj plant with annual production capa-cities of 115,500 tons of urea and 13,200 tons of ammonium sulfate. Sincethen, as mentioned, the plants at Ghorasal and Chittagong have been completed.Production, however, has been erratic and well below the rated capacities(paras 4.11 to 4.29). In FY79, the best production year in the recent past,local production reached 55% of rated capacity. Against BCIC's targetproduction in FY80 of 449,000 tons (about 69% of rated capacity), the actualproduction in the first six months was 218,000 tons, or about 67% of thecapacity, despite some reduction in production due to the inability of BADC tomove the fertilizer because of the transport priority assigned by the Govern-ment to emergency food distribution and the inadequate raw material supplies.Revised projections of FY80 local supply indicate that it should reach about430,000 tons, giving a 65% capacity utilization rate for the industry.

3.06 Future. The shortfall in supply continues to be met by largeimports which are expected to be close to 600,000 product tons in FY80,despite the reduced offtake due to drought in the early part of the year.With the completion of the large new projects at Ashuganj and Chittagong,assuming satisfactory operation of the existing plants at Ghorasal, Chittagongand Fenchuganj and excluding any additional fertilizer production facilitiesthat may be set up, domestic supply of urea is expected to increase to about930,000 tons by FY85 (82% of the projected demand) and 1.30 million tons byFY90 (77% of the projected demand), based on an average capacity utilizationof 80%. The expected TSP production of about 122,000 tpy would be equivalentto about 21% of the FY85 projected TSP/DAP consumption. The future fertilizersupply and demand balance based on the above assumptions is given in the tablebelow:

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Bangladesh - Projected Fertilizer Demand and Supply Balance 1980-1990(in thousand tons of product)

FY (ending June 30) 1980 1985 1990(Est.) (Projected) (Projected)

Nitrogen (as urea)

Demand 569 1,130 1,800Production 345 930 1,300 a/Import b/ 224 200 500

Phosphates (as TSP)

Demand 285 574 924Production 85 122 122 a/Import b/ 200 452 802

Potash

Demand 80 160 320(all imported)

a/ Excluding production from possible additional capacity not yet planned.b/ Including variations in stock.

C. Fertilizer Sales Prices

3.07 Domestic and imported fertilizers are pooled and marketed by BADC ata farm gate price fixed by the Government, keeping in view the crop/fertilizerprice ratios necessary to promote fertilizer use. BADC purchases fertilizerat the Government fixed ex-factory prices from BCIC and at internationalfertilizer prices in the case of imports. The Government provides a subsidyto BADC to cover the difference between procurement and distribution costs andthe sales revenues. As shown in the following table, the level of subsidy hasgrown substantially over the recent years and is now about Taka 1,376 (US$90)per ton, equivalent to about 40% of the farmer price.

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Bangladesh - Fertilizer Subsidy 1974-1980

Fertilizer Subsidy Percentage of Farmer PriceFY (ending June 30) Taka Million Taka per ton Subsidized

1974 28 74 9.3

1975 150 536 30.5

1976 485 1,060 46.3

1977 644 1,256 46.1

1978 1,200 1,677 50.0

1979 1,301 1,950 50.0

1980 (est.) 1,170 1,376 40.0

The Taka 1,301 million (US$84 million) subsidy in FY79, (and for that matterin the previous years) imposed a heavy burden on the Government budget. Ifunaltered, the burden would further increase as fertilizer consumption isexpected to rise in the coming years. Government policy, agreed with IDA(Report P-2588-BD dated June 8, 1979) and USAID in the context of financingfertilizer and foodgrain imports, is to gradually reduce the fertilizersubsidy, and the Government has stated its intention to eliminate it altogetherby 1985. As a first step, average farmer fertilizer prices were increased byabout 28% in August 1979 reducing the average per ton subsidy from Taka 1,950per ton in FY79 to Taka 1,376 in FY80. The Government's food procurementprogram is also being structured to ensure attractive foodgrain prices to thefarmer so that fertilizer application continues to be economic despite in-creases in farm fertilizer prices. The present paddy/fertilizer price ratioof 1.3 in Bangladesh continues to be attractive (India 0.60, Philippines0.80). In periods of scarcity, significant amounts of fertilizers arereportly sold at black market prices substantially higher than the officialprices. These factors indicate that fertilizer prices can be furtherincreased without adversely affecting consumption growth rates.

D. Marketing Arrangements

3.08 Distribution. BADC, an autonomous government-owned body, is respon-sible for the procurement, storage and marketing of all agricultural inputs,including fertilizers. While the major constraint to increased consumptionhas been inadequate supplies, the fertilizer distribution system has also beenhandicapped by inadequate planning and coordination and lack of transport andstorage facilities. An IDA-financed fertilizer marketing and distributionstudy, completed in 1977, provides the basts for BADC to formulate a compre-hensive and improved marketing and storage program. BADC's marketing system

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has traditionally handled wholesale distribution and limited private parti-cipation to the retail dealer level. In 1978 BADC introduced wholesale andretail competition among fertilizer dealers--private and cooperative--in apilot project in Chittagong division, where about a third of the Bangladeshfertilizer sales are effected. The new system has had a reasonably successfulstart and has been extended to the Dacca and Khulna divisions from January 1,1980. About three-fourths of the fertilizer market is covered now by the newdistribution arrangements.

3.09 Transport and Storage. Even though fertilizers form only a smallpart of the total freight movement (about 3% at ports, 8.5% rail freight and8% of inland water cargo), transport and storage system inadequacies havelimited fertilizer availability and use. While the Government is takingseveral steps to remedy these inadequacies, improvement can only be gradual,particularly in the railways. Current fertilizer storage facilities totallingabout 440,000 tons are not adequate even for FY81 and would continue to beinadequate even after completion of the additional 63,000 tons of capacitycurrently under construction, including about 35,000 tons of capacity withUSAID financing. An additional 173,000 tons of storage is programmed underUSAID financing and is expected to be completed by 1981-82. While the aboveprogram will meet the requirements in the next few years, there would still beneed in the near future for some additional storage at particular locattonsand inaccessible areas and for substantial additional capacity to meet long-term needs.

3.10 Due to the inadequacies of the transport and storage facilities,strained further by the unforeseen foodgrain crisis in 1979, BADC could notmove adequate quantities of fertilizers from the BCIC warehouses during theearly part of FY80, resulting in excessive stock accumulations and forcingproduction levels below capabilities. While the problems were caused byfactors specific to the period, BADC and BCIC did not anticipate the problemsand evolve alternative solutions in time. Even when such emergency situationsare not present, coordination between fertilizer production and its movementhas not been adequate. In order to improve such coordination, the Governmenthas agreed that BADC will enter into agreements with the three fertilizerplants by October 31, 1980 covering arrangements for the pick-up of fertilizersby BADC. The agreements will include provisions for (a) BADC to compensatethe fertilizer plants to cover the additional costs of warehousing or higherstacking incurred by the plants on fertilizers not picked up by BADC inaccordance with agreed arrangements; (b) the fertilizer plants to compensateBADC for failure of the plants to supply the fertilizer as per agreed sched-ules; and (c) evolving arrangements which would permit the plants to sellthe fertilizer directly to private sector wholesalers. Additional measuresare under discussion in connection with a proposed fertilizer transport creditappraised in January/February 1980. Assistance to transport operators isexpected to be included in proposed Development Finance Corporation and smallindustry credits scheduled for consideration in the near future.

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IV. BANGLADESH CHEMICAL INDUSTRIES CORPORATION

4.01 Bangladesh Chemical Industries Corporation (BCIC), the Projectsponsor and proposed beneficiary of the Credit, is a fully Government-ownedcorporation. It is one of the country's major manufacturing companies witha total work force of 27,000 and projected sales revenues of Taka 3.2 billion(US$207 million) for FY80. It presently operates 30 operating entities whichare engaged in 10 different major product areas in the chemical industry,i.e., fertilizer, pulp and paper, soap and detergents, safety matches andrubber products, to mention the most important. A full list of BCIC's presentproduction units and their respective revenues are given in Annex 4-1.

A. History and Organizational Structure

4.02 BCIC is an autonomous public sector enterprise formed in July 1976,when the Government decided to combine its numerous holdings in the chemicalsector 1/ into one major chemical corporation. Many small and medium-sizedcompanies had suffered enormously during the liberation war of 1972 and afterindependence were in shaky financial condition, often without effectivemanagement/owners. Subsequently, a large number of these companies werenationalized to avoid bankruptcy. After this takeover, the Government becameincreasingly aware that many of the small, often inefficient and inadequatelymanaged operations under BCIC imposed an evergrowing burden on the Government'sfiscal budget. Furthermore, it was extremely difficult to coordinate andmanage activities of the 89 independent companies, which often competed witheach other, and to bring them in line with the Government's major objectiveof optimal allocation of resources. The Government decided that a strongcommercially oriented corporate management team, operating from a centralizedheadquarters, was required to develop and implement successfully a programfor streamlining and consolidating of the various Government interests in thechemical sector. BCIC was assigned this responsibility.

4.03 Since the formation of BCIC, its management has been primarilyoccupied with two tasks: (i) restructuring the accumulated assets intomanageable and self-sufficient operating units; and (ii) improving the operat-ing efficiency and levels of capacity utilization in various plants. Duringthis process, about 60 of the companies acquired earlier were either dis-invested to the private sector, integrated into existing or newly createdunits, or shut down where no other economic solution could be found. Atthe end of this first phase of reorganization in mid-1979, BCIC's corporatestructure had improved considerably limiting the company's activities to 10mainly chemical related product areas and 30 operating units (Annex 4-1).

I/ The merger involved in total 89 companies, of which the 4 most importantwere the following: (a) Bangladesh Fertilizer, Chemical & PharmaceuticalCorp.; (b) Bangladesh Paper & Board Corp.; (c) Bangladesh TanneriesCorp.; and (d) Sylhet Pulp and Paper mills.

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4.04 From the administrative and operational points of view, theseremaining units are decentralized in their day-to-day operations. Each

unit operates as a separate profit center and maintains individual--thoughstandardized--accounts. However, all policy decisions regarding capital

expenditure and budgeting are taken by the corporate management in Dacca,

in close consultation with the Government. In addition, all support func-tions, such as finance, procurement, planning and development, are carriedout in BCIC's corporate headquarters. Headquarter staff comprises of only

a relatively small number of professionals and is organized according to its

supportive, supervisory and coordinative functions as shown in the organogram

on the following page.

B. Financial Performance

4.05 BCIC's financial statements for the period 1977-1980 are shown in

Annex 4-2 and summarized below:

BCIC - Summary Financial Statements 1977-1980(in million Takas)

FY (ending June 30) 1977 1978 1979 1980 a/(projected)

Net Sales 1,658 1,927 2,343 3,216

Cost of Goods Sold 1,299 1,690 1,888 2,820

Depreciation 165 199 122 234

Interest 111 133 109 130Operating Profit 359 237 455 396

Net Profit 167 (8) 156 66Cash Flow Before Interest 443 324 387 430

Current Assets 2,224 2,690 3,498Current Liabilities 1,849 2,197 2,579Long-term Debt 1,757 1,906 2,218Equity 249 756 939

Operating Profit/Sales (%) 22 12 19 12

Current Ratio 1.2 1.2 1.4Debt/Equity Ratio 88:12 72:28 70:30

a/ Assuming ex-factory prices of 1979 remain unchanged.

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BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECTBCIC ORGANIZATION CHART

BOARD OF DIRECTORS

CHAIRMAN

- | | ~~~MANAGEMENT lPERSONNEL INFORMATION PBLIC RELATION SECRETARIAT

SERVICE

TREASURY PLANNING PRODUCTION l-/CIVIL PRHSN CONSTRUCTION PURCHASING I

GENERAL DEVELOPMENT PRODUCTION I I| MAINTENANCE PURCHASING 11

l COST l|MAINTENANCE| li

_ ACCOUNTING | _ CHEM. PLANT EXPORT

& BUDGETING |& EQUIPMENT

-| AUDITING l_DOMESTIC SALES|

a/ Includes: Fertilizer, Paper, Paper Products, Boards, Matches, Rayon, Dilphane, Pharmaceuticals.$/ Includes: Chemicals, Tanneries, Rubber Products, PVC Products, Resin Products, Insecticides,

Pesticides, and Other Miscellaneous Products.

Industrial Projects Department

February 1980 World Bank -21218

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Considering the difficult circumstances and often adverse operating conditions,BCIC's financial performance has been quite reasonable. During 1977-80, thecompany achieved revenue growth rates averaging about 25% in a period ofrelative price stability. 1/ Operating profit margins averaged a reasonablelevel of about 20%--with the exception of 1978 when it was 12%. However,profit before taxes suffered due to the heavy burden of interest charges onborrowings (averaging about one-third of operating profit) required because ofthe under-capitalization of the company, its debt/equity ratio was 88:12 in1977 and 70:30 in 1978. Although some progress has been made in strengtheningthe capital structure, as a result of a substantial capital infusion in 1978,BCIC is still well below the preferred debt/equity ratio of 60/40. Whilethe working capital ratios appear reasonably acceptable, as indicated bythe current ratio of 1.4 at the end of 1979, BCIC is suffering from inflatedworking capital requirements. At the end of 1979, current assets had reachedabout 18 months of sales primarily as a result of high inventory and accountsreceivables (each equivalent to about 8 months of sales). Since accountspayable amount only to about 4 months of sales, the balance of about 14 monthsof sales is financed through other short-term sources.

4.06 Part of the problem lies in unusually high stocks of raw materialsand spare parts, considered by BCIC as necessary to ensure sufficient supplydue to long delivery times. Despite the recent substantial increases ofinventory of spares and components--mainly towards imported spares, chemicalsand catalysts--there is still a noticeable need to complement and to replacethe present stocks with specialty items in the forthcoming years. Inventoryof finished products is relatively low with about 1.8 months of productioncosts (excluding depreciation). While the above observations are, in general,also valid for the three individual fertilizer units, their capital structureand profitability are better than that of the consolidated company, as shownin the table below and detailed in Annex 4-2:

1/ While 1977 experienced a deflation of 5%, the inflation rates for 1978and 1979 were 6% and 15%, respectively. However, many of the company'sproduct prices were hardly or not at all increased. Ex-factory fertil-izer prices, for example, have remained practically unchanged sinceApril 1976.

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BCIC - Key Ratios of Fertilizer Units

FY (ending June 30) 1977 1978 1979 1980(projected)

Ghorasal

Operating Profit/Sales (%) 47 14 36 30Current Ratio 2.5 2.1 2.7 -Debt/Equity Ratio 96:4 77:23 66:34 -

Chittagong

Operating Profit/Sales (%) 30 29 29 22Current Ratio 0.7 0.9 1.0 -Debt/Equity Ratio negative 28:72 27:73 -

Fenchuganj

Operating Profit/Sales (%) 41 33 43 30Current Ratio 2.5 2.8 5.4 -Debt/Equity Ratio 31:69 36:64 61:39

4.07 The operating performance of the three existing fertilizer units aregiven in Annex 4-3 and summarized below:

BCIC - Capacity Utilization of Existing Fertilizer Plants a/

First HalfFY (ending June 30) 1977 1978 1979 1980 1980

(actual) (target)

Ghorasal 56 40 65 69 67Chittagong 40 27 41 30 b/ 60Fenchuganj 67 55 50 81 87

Average 52 40 55 63 69

a/ Based on 330 operating days for Fenchuganj and Ghorasal, and 300operating days for the TSP plants at Chittagong according toindustry practice.

b/ The low production during the first six months of FY80 was due toraw material shortages and product movement problems.

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The above table shows a significant drop in average capacity utilization in

1978 due to the operating problems discussed in paras 4.11 to 4.29. The

capacity utilization staged a recovery in 1979, slightly above the 1977

levels and continued to improve during the first half of 1980, though it isuncertain if the target for the full operating year will be achieved. This

trend in operating performance is closely reflected in the profits generated

by each unit. As a result of improved capacity utilization in 1979, BCIC's

fertilizer units were able to maintain their profit level, despite increased

input costs, while ex-factory sales prices remained unchanged.

C. Restructuring of BCIC

4.08 With the formation of separate profit centers and the assignment

of competent management to the operating units, the first phase of the Govern-

ment's efforts to restructure the chemical industry was completed in mid-1979.

However, the wide range of products of the industry and the relative scarcity

of managerial capabilities at corporate level have made it difficult to res-

pond quickly to the day-to-day requirements of the individual units, especially

in the technologically difficult fields like fertilizer and paper. The Govern-

ment has recognized the need to implement a second phase of reorganization to

overcome inefficiencies associated with the rigid nature of centralized proce-

dures. To give unit management maximum entrepreneurial initiative, decisions

requiring quick responses should be taken as far as possible at the plant unit

level.

4.09 In an effort to decentralize and delegate responsibility, the

Government has, therefore, decided to form unit-wise Boards of Directors by

restructuring each of the operating units into independent companies. It

is understood that the implementation of the restructuring will be a gradual

process which will start with the fertilizer units in mid-1980. The result-

ing fertilizer companies will be the final beneficiaries of the plant

rehabilitation component of the Credit. The Government is currently working

out the capital structure of the individual companies based on a 60/40

debt/equity ratio for each. BCIC is also preparing a detailed plan describ-

ing the powers to be delegated to the individual boards. The Government

expects to continue using BCIC's corporate staff for coordinating the

overall budgeting and investment plans of the units. BCIC is expected to

perform this coordinating role either by holding equity in the units or as

an agent of the Government. The Government has yet to take a decision on

this. The Government has confirmed that the Ghorasal and Chittagong com-

panies will be registered by May 30, 1980 under the Companies Act. The

formalities for making the Companies Act applicable to the Natural Gas

Fertilizer Co. Ltd. Fenchuganj will also be completed by the above date.

The present Enterprise Management Boards will become Boards of Directors of

the three companies by June 30, 1980. The Boards of the new companies will

be empowered adequately to take decisions on production planning, financial

operations and production management. The powers provided to the companies

under the draft Memorandum and Articles of Association are adequate for per-

forming their responsibilities. The establishment of the three fertilizer

companies will be a condition of credit effectiveness.

4.10 The following three sections of this Chapter give a brief description

of the history, major technical features, recent performance, current operating

problems and major plant improvement needs of the three existing fertilizer

plants at Ghorasal, Chittagong and Fenchuganj.

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D. Ghorasal Plant Facilities

4.11 The Ghorasal complex (Map IBRD-14866), located in Dacca districton the Sitalakhya river bank, includes a 660 tpd ammonia plant and a 1,137tpd urea plant along with gas turbine power generators, cooling towers,maintenance shops and other auxiliary facilities. The ammonia plant usesthe conventional steam reforming process with the Giammarco-Vetrocoke Processfor the decarbonation of the raw synthesis gas and a centrifugal system tocompress the gases to the ammonia synthesis pressure. The urea plant is basedon the Mitsui-Toatsu Process and produces prilled urea. The plant facilitieswere engineered and constructed by Toyo Engineering Corporation (TEC) of Japanand were completed in 1970.

4.12 The natural gas required for ammonia, steam and power productionis supplied from the Titas gas fields by a pipeline which delivers gas atpressure to the plant. The raw water needed for the process and cooling towermake-up requirements are taken from the Sitalakhya River, and the effluentwater is returned after treatment to the river. The steam requirements aremet from the process waste heat boilers and a gas-fired auxiliary boiler.The fertilizer plant requires approximately 12.6 MW of power. At present,two gas turbines installed as part of the Ghorasal facilities, each with arated capacity of 8 MW, supply the plant's power requirements. The system hasbeen engineered to use the national grid power if one of the turbines is undermaintenance. Urea is shipped both through a five-mile rail spur to Tongi andfrom the plant's river wharf using barges and the inland waterways.

4.13 Following the test run in 1970, the Ghorasal complex suffered twomajor shutdowns--in FY72, during the war of independence, and in FY75,following an explosion in the control room. Urea production touched a peak of236,000 tpy in FY79 against the rated capacity of 374,000 tpy. The productionperformance of the Ghorasal plant since start-up in FY71 is shown below:

Ghorasal Plant - Production Performance(in tons)

Fiscal Year Annual Urea Capacity Average Daily Production Operating Days(ending June 30) Production Utilization Urea Ammonia Urea Ammonia

(%)

Capacity 374,000 100 1,137 660 330 330

1971 45,000 12 596 239 76 1181972 - - - - - -1973 175,000 46 736 389 238 2821974 221,000 59 825 468 268 2951975 21,000 5 713 196 15 351976 229,000 61 898 480 255 3031977 208,000 56 914 497 228 2651978 151,000 40 920 510 164 2071979 236,100 63 930 580 254 262

Source: Bresler Reports.

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Ammonia production continues to be the major constraint and there have been

difficulties in reaching and maintaining rated levels of production as well

as in achieving consistently even 300 annual operating days, while the annual

production capacity is based on the general industry practice of 330 operating

days per year. FY79 has been the best performance year so far and production

could have been significantly higher but for interruptions due to events

outside plant management's control. Of the FY79 total ammonia plant downtime

of 103 days, nonavailability of gas supply (25 days) and national grid power

supply interruptions (17 days) together accounted for 42 days of downtime; 61

days of downtime was due to normal and unforeseen maintenance. The gas supply

was interrupted due to the fall in hydel power production following the

drought and the resulting priorities assigned to gas supply for increased

thermal power generation. The excessive downtime for maintenance was due

primarily to the lack of appropriate preventive maintenance, spare parts and

poor physical condition of some equipment. During the first six months of

FY80, urea production was about 143,000 tons. The FY80 urea production is

expected to be 240,000 tons, equivalent to a capacity utilization rate of 64%.

4.14 Under the First and Second Technical Assistance Credits (Credit Nos.

409-BD and 622-BD), Bresler and Associates, Inc. (BAI) of the US carried out

studies to review the performance of the Ghorasal facilities and to recommend

specific measures to improve their operation and maintenance. The findings of

the BAI study presented in the consultants' final report submitted in August

1979 (Reference B - Prolect File) were reviewed by IDA staff with the plant

and BCIC managements. Several of the recommendations have been implemented

during the latest plant shutdown for maintenance in 1979 and some others will

be during the scheduled shutdown in the next few months. The performance of

the facilities was also reviewed in April 1979 by Toyo Engineering Corpora-

tion, who formulated their preliminary recommendations in their report dated

September 12, 1979 (Reference C - Project File). The recommendations of the

consultants proposed to be implemented as part of the present Project are

summarized in Annex 4-4.

E. Chittagong TSP Facilities

4.15 The Chittagong fertilizer complex is located about 2 miles south

of Chittagong City on the Karnaphuli River. The complex consists of two

separate TSP plants. The TSP-1 plant consists of a 100 tpd sulfuric acid

plant, a 31 tpd phosphoric acid plant and a 100 tpd Run-of-Pile (ROP) TSP

plant. The TSP-2 plant consists of a 400 tpd sulfuric acid plant, a 135

phosphoric acid plant and a 450 tpd ROP-TSP plant. The TSP-1 facilities were

engineered and constructed by Pan American Consultants (US) and Technique

Chimie (France) and were completed in 1968. The TSP-2 facilities were

engineered and constructed by Hitachi Zosen (Japan) and were completed in

1970. The rock phosphate and sulfur required by the complex are imported in

shiploads, unloaded at BCIC's own wharf on the Karnaphuli River and conveyed

by a belt conveyor to the plant storage facilities. The plant power require-

ments are met from the public grid. The waste gypsum is moved and dumped into

a 20-acre pond within the plant area.

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4.16 The TSP-1 plant, first commissioned in 1969, almost immediatelyran into difficulties due to the use of Jordan rock phosphate contaminatedwith sea water instead of the Moroccan rock for which the plant had beendesigned. As a result, several of the pumps and agitators were badly corrodedrequiring plant shutdown for replacements. A legal dispute over the contractualliabilities for the replacements led to the plant remaining shut until April1977, except for intermittent operation of the sulfuric acid plant to producesulfuric acid for sale and for use in the TSP-2 plant. Since April 1977, theplant has been in operation except during overhauls in late 1977 and 1979.The TSP-2 plant, though completed in 1970, was not commissioned until 1974--after the war of independence. The TSP production has generally been around40,000-45,000 tpy against the combined installed capacity of 152,000 tpy. TheTSP production reached a maximum of 62,300 tpy in FY79 as indicated below:

Chittagong Plant - Production Performance 1975-79(in tons)

Annual TSP Production Annual AverageFY (ending June 30) TSP-1 TSP-2 Total Capacity Utilization %

Capacity 32,000 120,000 152,000 100

1975 - 33,000 33,000 281976 - 39,240 39,240 331977 - 48,000 48,000 401978 3,300 38,000 41,300 271979 9,000 53,300 62,300 41

Source: Bresler Reports.

4.17 The FY79 production was only equivalent to 41% of the rated annualcapacity, primarily due to the very low plant operating days of 150. Duringthe days the plant was operating, production averaged 75-80% of the dailyrated capacity. Factors responsible for the plant downtime and their sharein total operating days lost are summarized below:

Chittagong TSP Plant Downtime Factors 1974-79

No. of Days Lost Percent of TotalFactors 1974-78 (Avg) FY79 1974-78 (Avg) FY79

Equipment Failures andMaintenance Problems 114 113 61 53

Shortage of Raw Materials 51 79 27 37Power Failure 23 12 12 5Insufficient ProductLifting by BADC - 10 - 5

Total 188 214 100 100

Source: Bresler Reports.

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Equipment failures and maintenance problems accounted for 53% of the totallost days. Shortage of raw materials, power supply interruptions, and BADC'sdifficulties in moving fertilizers, all of which were outside the control ofthe plant authorities, were also important factors accounting for 47% of thelost days. These same factors are expected to adversely affect the FY80production which may be only about 70,000 tons of TSP. Production during thefirst six months of FY80 was only about 23,000 tons mainly due to shortage ofraw materials.

4.18 The BAI study mentioned earlier also included the Chittagong TSPplants (para 4.14). These facilities were reviewed by Jacobs EngineeringGroup, Inc. (JEG) of the US under a subcontract with BAI. The Chittagong TSPcomplex was also studied by Cremer and Warner Ltd. of the UK in January 1978and recommendations made to the UK Ministry of Overseas Development (ReferenceD - Project File). The rehabilitation and conversion options for the TSPcomplex were studied by JEG in April 1979 (Reference E - Project File) undera separate subcontract to Soros Associates Consulting Engineers of the US aspart of the study on bulk shipment and unloading of fertilizer imports inBangladesh. In addition to the major technical recommendations, the variousstudies highlighted the need for: (i) adequate and acceptable quality watersupply; (ii) more reliable power supply; (iii) long-term arrangements forgypsum disposal; (iv) resolutions of other environmental problems; and (v) astudy of the economics of continuing TSP production at Chittagong. Theseaspects are discussed further in the following paragraphs.

4.19 The two TSP plants were initially designed to use water drawn fromtubewells within the plant area and having a salinity not exceeding 100 partsper million (ppm) of chlorides, for the process and boiler feed water require-ments. The quality of the tubewell water has deteriorated with salinityincreasing up to 1,400 ppm and as a result the water treatment and demineraliz-ing facilities have proved inadequate. Limiting the use of the tubewells toperiods when the quality is acceptable and supplementing the supplies withpublic utility water have not been adequate to meet the plant process waterrequirements. Hydrological surveys have also not identified possibilities ofimproved water supply with new tubewells. BCIC studies have, however, con-firmed that Karnaphuli river water has acceptable salinity during 1-2 hoursper tide. BCIC has, therefore, already made arrangements to meet most of theplant process water requirements by pumping water from the river during lowsalinity periods and thus providing adequate plant raw water storage; con-sidering the small size of the plants which require modest amount of water,this solution would not require construction of large storage capacity. BCICsupplements the water supply by stand-by arrangements with the public watersupply authority. With these arrangements the plants are assured of adequatewater supply.

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4.20 Power interruptions are mainly due to the failure of the Chittagonggrid supply. The deficiency of the Chittagong grid supply is recognized bythe Government and a project is currently being implemented to improve thesupply by installing additional substations in the area. The Chittagong TSPplant has two diesel generators which provide emergency power supply to keepthe vital plant units (such as the agitators in the phosphoric acid reactionvessels) in operation during grid power supply failures. The diesel generatorcapacity however is not adequate to provide emergency power to all those unitswhich should be kept in operation during power failures. To minimize produc-tion losses and limit equipment damage, BCIC intends to install additionaldiesel generating capacity which, along with the expected improvements inthe Chittagong power grid quality, will make the power supply situationsatisfactory.

4.21 After the TSP production gets stabilized at an annual rate of122,000 tpy (or about 80% of rated capacity), the Chittagong plant is expectedto produce about 230,000 tpy of waste gypsum. Gypsum is at present slurriedand pumped to a 20-acre pond where it is allowed to drain. About 15,000-20,000 tpy of gypsum is manually recovered from the pond and sold for cementmanufacture. According to current estimates, the land for gypsum disposalwill be adequate for another 3 or 4 years. Additional land required forsubsequent gypsum disposal would be expensive and could find better usesin the industrially developed North Patenga area. Alternative arrangementsfor the use or disposal of gypsum have to be identified and implemented beforethe disposal develops into a serious problem. Gypsum could be useful fordirect application as a soil conditioner and for land reclamation but theseapplications require considerable promotional and marketing efforts. Undera UNDP financed study, other alternatives for gypsum utilization have beenevaluated and the findings are being reviewed by BCIC. These include (i)production of ammonium sulfate using the conventional Merseberg process; (ii)cement and sulfuric acid production based on the Chemie Linz technology; and(iii) to a limited extent production of gypsum wall boards. With the plannedexpansion of cement production, the use of gypsum for that purpose couldincrease to about 75,000 tpy or about one-third of the total. The consultantanalysis, confirmed by preliminary studies by IDA staff, indicates that usefor cement/sulfuric acid manufacture could be an economic alternative. Thereis, however, concern with the limited commercial experience available with thetechnology and its sensitiveness to gypsum quality. Unless uniform quality ofrock phosphate supplies can be maintained with long-term contractual arrange-ments, it would not be possible to maintain the required gypsum quality.

4.22 If economic utilization of gypsum cannot be developed, gypsum wouldeither have to be pumped to the Bay of Bengal about 3 km away or disposed ofin the present area developing high banks of gypsum material to increase thecapacity. Disposal to the sea would have to be planned carefully to reduceany adverse impact on marine life, but it would be a relatively permanentsolution. The second alternative is expected to enable BCIC to continue todump gypsum in the present area for another 6 to 7 more years and is possiblythe cheapest one at least in the short term. In view of the importance of

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gypsum disposal to the continued operation of the TSP plants, satisfactoryassurances have been obtained that the Government will complete by December31, 1980 the evaluation of alternatives for gypsum disposal or utilizationand review with IDA the findings and recommendations of the study and theplan for their implementation.

4.23 The major environmental problems at the Chittagong TSP plantsresult from (i) sulfure oxide emissions; and (ii) dust emissions. The sulfuroxide emission problems are mainly the result of equipment conditions andpower outages. With completion of the plant renovation program, improvedpower supply and better operating procedures the sulfure oxide emissions canbe maintained within acceptable levels. Further improvement would be possibleby converting the sulfuric acid plant to the double catalysis/double absorp-tion process which would be economically justified if adequate markets areidentified for approximately 60,000 to 100,000 tpy of additional acid thatwould then become available.

4.24 Good plant maintenance and better operating practices would beadequate to minimize dust pollution in the sulfur and rock phosphate handlingand storage areas. Since the Chittagong facilities produce and market arun-of-pile product, the bagging and storage areas are very dusty as in othersimilar facilities. The working conditions in this area are unpleasant andpresent health risks. The atmosphere in which the shovel drivers and baggingpersonnel work is so heavily laden with dust that visibility is limited to ayard or so and the workers are inhaling dust. While no sickness statisticsare available, the dust inhalation damage causes symptoms only after someyears. From the point of view of obtaining an acceptable working environment,it is essential to granulate the TSP and thereby reduce dusting. The plantswere initially planned to include granulation facilities which were not builtdue to financing constraints. According to JEG, the dust problem can beminimized adequately by building semi-granulation facilities. However,farmers find fully granulated TSP easier to apply and have shown a markedpreference in their purchases for the imported TSP and DAP-which are fullygranulated. The Project will, therefore, include provisions for the somewhatcostlier full granulation alternative. If engineered around the existingfacilities and by using as far as possible the available equipment, thisoption would improve product quality and farmer acceptance without substantialadditional cost.

4.25 Finally, there is the question of whether it is economical to con-tinue production of TSP at Chittagong. Production of one ton of TSP requiresabout 0.36 tons of sulfur and 1.64 tons of rock phosphate--both of which areimported and generally without the benefit of long-term supply contracts.Since about two tons of raw materials are required per ton of TSP, the produc-tion of phosphatic fertilizers based on imported rock phosphate and sulfurmust be reviewed carefully, taking into account the freight costs. While freshinvestments in Bangladesh for phosphatic production based on imported rockphosphate would for this reason probably not be an economic investment, con-tinued operation of existing facilities with marginal renovation investmentoffers better economics. Economic production cost estimates included inAnnex 8-1 indicate that, at an annual production level of 121,600 tpy (80%

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capacity utilization rate) after renovation, the annual economic cost of TSPproduction would be lower than the import cost by about Taka 104.5 million orUS$6.7 million (in 1979 dollars). It is, therefore, considered economicallyadvantageous to Bangladesh to continue with the Chittagong Plant TSP produc-tion. This conclusion differs from the findings of a study carried out bySoros Associates in April 1979 on the economics of bulk import of fertilizersthrough the Chittagong and other Bangladesh ports (Reference F - Project File)that there could be economic advantages in shutting down TSP production topermit the plant's wharf, handling, storage and bagging facilities to be usedinstead for bulk fertilizer imports. This study concluded that the savingsfrom import of bulk fertilizer (instead of bagged fertilizer) using thefactory's facilities would be greater than the savings from continued TSPproduction in Bangladesh vis-a-vis imports. However, a further detailed studyby a Bank consultant has concluded that the plant facilities have adequatecapacity to handle fertilizer imports without shutting down TSP production. Arecent IFAD project (Report 2729-BD) includes a component to quickly upgradeexisting facilities at the TSP jetty to handle small bulk ships, lighters,mini-bulkers and, if the river were dredged, large bulk ships. The IFADproject bulk unloading component would assist in meeting immediate requirementswhile long-term solutions such as an offshore unloading platform or use ofshuttle bulkers with wharf bagging are being investigated and carried out.

4.26 In summary, continued TSP production at Chittagong is economicallyadvantageous provided the bulk unloading project at Chittagong will be imple-mented in accordance with the relevant provisions of the IFAD project agree-ment. Satisfactory assurances have been obtained from the Government tothis effect.

F. Fenchuganj Plant Facilities

4.27 The Fenchuganj complex, located about five miles from the Fenchuganjtown in Sylhet district, includes a 200 tpd ammonia plant, a 333 tpd ureaplant, a 35 tpd sulfuric acid plant and a 40 tpd ammonium sulfate plant. Thefacilities also include steam turbine power generating facilities, coolingtowers, maintenance shops and other auxiliary facilities. The plant andfacilities were supplied and erected by Kobe Steel (Japan) based on ammoniaand urea technologies from Chemical Construction Corporation (US) and thesulfuric acid and ammonium sulfate technologies from Lurgi-Mitsubishi (FRG-Japan). The ammonia and urea plants were completed in 1961 and commencedcommercial production in 1962. The sulfuric acid and ammonium sulfate plantswere completed in 1969 and began commercial production in 1970. Natural gasfor process and energy needs are met from the Haripur gas fields. Most ofthe urea is shipped via rail spur to the main rail system through Maijgaon.

4.28 Urea production at the Fenchuganj plant in recent years is shownbelow:

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Fenchuganj Plant - Urea Production Performance 1964-80(in tons)

Annual AverageFY (ending June 30) Annual Urea Production Capacity Utilization %

Capacity 115,500 100

1964 53,300 461966 98,700 851968 122,200 1061970 96,700 841973 35,900 311977 77,500 671978 61,400 531979 59,500 511980 (Projected) 95,000 82

4.29 During 1962 to 1970, urea production average 87% of the ratedcapacity with ammonium sulfate production often exceeding capacity. Theproduction levels, however, declined thereafter and in FY77 the capacityutilization was only 67%. The decline in production was mainly due to theabsence of thorough inspection and overhaul of the facilities from the timethey were erected till 1974. Under a contract with Kobe Steel, the facili-ties were fully renovated during the summer of 1978. Since the recommis-sioning af"ber renovation, the plants operate at rated daily capacities andthe monthly average production has increased from 5,000 tons of urea and 510tons of ammonium sulfate before renovation to 8,700 tons of urea and 760tons of ammonium sulfate after renovation. During the first six months ofFY80, urea production was about 52,500 tons. Production is expected to beabout 95,000 tons in FY80. The present major need of the facilities is tomaintain an adequate and competent work force, so that downtime can beminimized by proper operation and preventive plant maintenance. However,some of the recommendations of the consultants for improving instrumentationhave not been carried out during the renovation. There is also need toreplace some of the heat exchangers for critical duties and provide a spareset of turbine blades for the power generation unit to ensure continuedsatisfactory production levels.

V. THE PROJECT

5.01 The Project has been designed to improve the performance of BCIC'sexisting fertilizer plants. It consists of three components: (i) improve-ments to be carried out at Ghorasal, Chittagong and Fenchuganj (Plant Improve-ment Component); (ii) construction of a training center at Ghorasal to ensureavailability of skilled staff to operate the plant facilities (TrainingComponent); and (iii) import of critical plant spares, catalysts and chemicals

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to meet the needs of the plants for the next two years (Spares, Catalysts andChemicals Ccmponent). The specific modifications and improvements required atthe three plants for better performance were identified by consultant studies(para 4.11 to 4.29) and further reviewed by a BCIC Technical Committee forpreparing feasibility reports. In formulating the details of the improvementprograms, the Technical Committee has taken into account the more recentperformance experience of the plants and the modifications already carriedout or planned to be carried out in turnarounds before the implementation ofthe proposed Project. The three project components are described below.

A. Plant Improvement Component

1. Ghorasal Plant Improvement Program (Estimated Cost US$17.8 million)

5.02 As mentioned, the requirements of the Ghorasal Plant were identi-fied by the BAI and the TEC studies (para 4.14). Parts of the requirementshave been implemented in May/June 1978 and BCIC has arranged to carry outfurther improvements during early 1980. The program to be carried out as partof the proposed Project (Reference G - Project File) are given in Annex 4-4.The program covers generally the following categories of improvements: (a)modifications to remove equipment inadequacies; (b) replacement of equipmenthaving difficult maintenance problems; (c) improvements to the water and steamsupply systems; (d) improvements to the power generation system; (e) modifica-tion of the vetrocoke system; and (f) revamping the instrumentation of thetrip system.

2. Chittagong Plant Improvement Program (Estimated Cost US$15.0 million)

5.03 The requirements of the Chittagong plant were identified by the BAIand Cremer and Warner studies (para 4.18). Parts of the requirements wereimplemented during late 1979. The improvement program intended to be carriedout under the proposed Project (Reference H - Project File) includes thefollowing categories of works: (a) provisions of replacement and standbyequipment where required; (b) improving plant utilities including steam, powerand treated water facilities; (c) improvements in instrumentation; and (d) TSPgranulation facilities (Annex 4-4).

3. Fenchuganj Plant Improvement Program (Estimated Cost US$4.5 million)

5.04 The Fenchuganj facilities were fully renovated during the summerof 1978 (para 4.29) and the present program (Reference I - Project File) islimited to: (a) improvement of the present instrumentation for better processcontrol; (b) replacement of heat exchangers for some of the critical duties;and (c) a set of turbine blades and diaphragm for the power generation unit.These items would improve reliability and reduce downtime.

B. Training Component

5.05 Under UNDP financing, technical assistance has been made availableto BCIC in the preparation and implementation of training plans at Ghorasal(para 2.12). The UNDP project does not include financing for setting up thetraining facilities. IDA staff will review the training plans prepared by

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BCIC and its consultants and will finance the setting up of training facili-ties identtfied in the above plans under the proposed Project. The trainingcomponent estimated to cost US$1.0 million will include (a) equipment andtraining aids required for the setting up of the training center at Ghorasal;(b) construction of the training center and the workshop; and (c) trainees'hostel.

C. Spares, Catalysts and Chemicals Component

5.06 Inadequate foreign exchange availability has been a major constraintto domestic fertilizer production (para 2.09). The existing BCIC plantsrequire annually about US$4.0 million of imported spares, catalysts andchemicals for maintaining and operating the existing fertilizer plants. Theproposed component would provide US$8.3 million to finance the import of theessential spares, catalysts and chemicals during the fiscal years (endingJune 30) 1981 to 1983. As part of this component, BCIC will prepare beforeDecember 31, 1980 a maintenance program satisfactory to the Association(para 2.10).

VI. PROJECT MANAGEMENT AND EXECUTION

A. Project Management

6.01 Implementation of the Plant Improvement Programs at Ghorasal andChittagong will be the responsibility of the individual General Managersof the plants, assisted by their Material Control Managers and separateProject Managers. The engineering contract management, procurement coor-dination and material planning will be the responsibility of the two ProjectManagers. The civil works and construction will be carried out by theexisting maintenance departments of the plants, each of which will have acoordinator/material controller to coordinate the renovation work. A materialmanagement cell will be formed to receive, store and issue, as required, therenovation materials. In critical areas, specialist erectors and technicianswould be drawn from equipment suppliers or engineering firms. Overall tech-nical coordination will be provided by the selected expatriate engineeringftrms, Toyo Engineering Corporation (Japan) for Ghorasal and another suitableengineering firm for Chittagong. All the BCIC managers and staff required forthe program implementation will be organized from persons already with BCIC.The proposed organogram is given in the following page. The Fenchuganj plantimprovement program, which is by far the smallest, will be carried out by theplant's operating, maLntenance and material managers without a formal implemen-tation organization.

6.02 The training component will be Implemented based on proposalsprepared with the technical assistance of the UNDP-financed consultants andreviewed with IDA (para 2.12). BCIC will appoint by June 30, 1980 a trainingmanager reporting to the Ghorasal General Manager, to coordinate the implemen-tation of the training component. The facilities will be engineered by acompetent architect firm and constructed as part of the Ghorasal ImprovementProgram.

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECTPROJECT IMPLEMENTATION ORGANIZATION

| GENERAL MANAGER

|MATERfAL CONTROL PRCEC_ !A

| ~ ~ ~ ~ ~ ~ ~ ~ ~~~PWC MANAGERMANAGER____J ~~~~~CHIEF CO-O0RDINTR

MATERIAL MECHANICAL ELECTRICAL POWER

MANAGEMENT MAINTENANCE MAINTENANCE ST STATION OPERATI

CELL

| CO N TRO LL ER C O O R O N ATOR CONTROLLER CO--O RD IN ATOR CO NTROLLER COO RD INA T ORIC O O RD IN A TO R CO N T RO LLER C O O R D N A TO R

SUPER ISORY SUPERVISORY SUPER ISORY SUPERVISORY SUPERVISORY

GROUP GROUP GROUP GROUP GROUP

VVOR K ING WORKING WORKING WORKINGL GROUP GROUP GROUP GGROUP

Industrial Projects Department

February 1980 W Buk -- 21414

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6.03 The annual requirement of spares, catalysts and chemicals will beassessed by the technical managers of the three existing BCIC plants, alongwith the UNDP consultants taking into account the present inventories, andfurther reviewed by BCIC's Production Director. The plant material managerswill procure the items to match the plant's requirements.

B. Engineering Arrangements

6.04 BCIC intends to contract Toyo Engineering Corporation (TEC) toassist in implementing the improvement program at Ghorasal. Since the plantfacilities were engineered, supplied and constructed by them, TEC has accessto the full design and engineering details and is best equipped to carry outthe program. TEC is also expected to find it easier to obtain equipmentsupplier participation in studying the plant and developing improvements. Theagreement to be negotiated between BCIC and the TEC will include TEC servicesfor required engineering, supply of proprietary equipment, procurement ofother supplies and providing specialist technicians as required.

6.05 For the Chittagong TSP plant, BCIC intends to negotiate an agreementwith a competent engineering company to provide the engineering, procurementassistance, and implementation coordination services. No external engineeringassistance is proposed for the Fenchuganj component. The proposed credit willrequire engineering services for Ghorasal and Chittagong on terms acceptableto the Association, and the signature of appropriate contracts will be condi-tions of disbursement for each of these respective components.

C. Project Schedule

6.06 The project schedule for Ghorasal and Chittagong are determinedby two factors: (a) the speed with which BCIC can finalize the engineeringarrangements for Ghorasal and Chittagong and (b) the need to carry out themodifications with minimum production interruptions and therefore mostlyduring scheduled annual overhauls. BCIC has already asked TEC to presentits proposals for Ghorasal and will invite proposals for Chittagong afterCredit negotiations. BCIC expects to receive the technical and commercialproposals from the engineering consultants by October 30, 1980 and finalizethe engineering arrangements by January 31, 1981. The equipment and suppliesare expected to be delivered to the site by March 31, 1982 and the programshould be completed by August 31, 1982. Due to the nature of the suppliesand the involvement of experienced engineering firms in engineering andprocurement, the above time schedule is considered reasonable. The programat Fenchuganj can be completed in about 15 months after the procurementbid invitations are issued or by December 1981. With finalization of thetraining plans by end of 1980, the facilities including setting up of theworkshop and installing the training aids can be completed by March 1982.The procurement of spares, catalysts and chemicals will occur during thefiscal years 1981 to 1983 to match the plant requirements.

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VII. CAPITAL COST, FINANCING PLAN AND PROCUREMENT

A. Capital Cost

7.01 The total financing required for the plant rehabilitation componentis estimated at US$37.3 of which US$24.4 million equivalent is in foreignexchange. In addition, the financing includes a training component of US$1million and a program component of US$8.3 million for import of spares,catalysts and chemicals. The capital cost estimates for plant rehabilitationare detailed in Annex 7-1 and summarized below:

Plant Improvement Component - Summary of Capital Cost

Taka million US$ millionLocal Foreign Total Local Foreign Total %

Equipment and Supplies - 246.5 246.5 - 15.9 15.9 61Freight and Insurance 3.1 24.8 27.9 0.2 1.6 1.8 7Taxes and Duties 54.3 - 54.3 3.5 - 3.5 13Inland Handling 9.3 - 9.3 0.6 - 0.6 2Foundations and Structures 21.7 - 21.7 1.4 - 1.4 5Erection 17.0 - 17.0 1.1 - 1.1 4Engg. & Mgmt. Assistance 14.0 17.0 31.0 0.9 1.1 2.0 8Base Cost Estimate (BCE) 119.4 288.3 407.7 7.7 18.6 26.3 100Physical Contingency (PC)(15% of BCE) 18.6 43.4 62.0 1.2 2.8 4.0

Price Escalation(14.3% of BCE + PC) 20.1 46.6 66.7 1.3 3.0 4.3

Total Project Cost 158.1 378.3 536.4 10.2 24.4 34.6Interest During Construction 41.8 - 41.8 2.7 - 2.7Total Financing Required 199.9 378.3 578.2 12.9 24.4 37.3

7.02 The base cost estimates are in December 1979 prices and were pre-pared by Bank staff, based on BCIC staff's estimates following preliminarydesigns and information submitted by engineering firms combined with theBank's own cost information obtained from contractors' budgetary quotations.Physical contingencies are calculated generally at 15% of the base costestimate, in light of the rehabilitation nature of this project component.Price contingencies are based on annual escalation rates for equipment andmaterials of 12% for 1980 and 10% thereafter, slightly higher than thelatest CPS guidelines. These estimated escalation rates were used for bothlocal and foreign expenditures (when expressed in US dollars) on the assump-tion that differences in the international and domestic inflation rates willbe accounted for by changes in the exchange rate which is periodicallyrepegged. It is estimated that all equipment and materials will be importedand that about 60% of engineering and management assistance will be providedby foreign suppliers. The cost of engineering services are expected to formabout 5% of the base cost estimate, excluding duties for Ghorasal and

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Chittagong, and would total about US$2.0 million. TEC services requirement isesttmated to be about 70 man-months and would cost about US$12,000 per man-month whLch includes salary, social costs, international travel and subsistence.In addition to these personnel costs, the contract cost will include homeoffice costs and other minor items. The man-month requirement of engineeringservices for Chittagong is roughly estimated at 15 man-months.

7.03 The capital cost breakdown by project components is as follows:

Fertilizer Industry Rehabilitation Project - Capital Cost Breakdown(in US$ million)

Project Component Local Foreign Total %

I Plant Improvement ComponentGhorasal 6.1 11.7 17.8 38Chittagong 5.3 9.7 15.0 32Fenchuganj 1.5 3.0 4.5 10

II Training Component 0.9 0.1 1.0 2

III Spares, Catalysts andChemicals Component - 8.3 8.3 18

Total Financing Required 13.8 32.8 46.6 100

About 80% of the total financing required is estimated to be needed for theplant improvement component mainly in the Ghorasal and Chittagong plants andanother 18% for the import of essential supplies for the sustained operationof the three works. The balance of 2% would be required for the trainingfacilities.

B. Financing Plan

7.04 The financing plan for the plant improvement component is shown below:

Plant Improvement Component - Financing Plan(in US$ million)

Local Foreign Total %

EquityGovernment of Bangladesh 12.9 - 12.9IDA Credit to Government - 2.0 2.0

Sub-total 12.9 2.0 14.9 40

DebtDutch Assistance to Government - 4.7 4.7IDA Credit to Government - 17.7 17.7 60

Sub-total - 22.4 22.4

Total Financing 12.9 24.4 37.3 100

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The above component will be financed with 40% equity and 60% debt. TheGovernment will provide as equity US$12.9 million equivalent to financelocal project costs. The terms of on-lending of the Dutch financing (US$4.7million) have not yet been determined. The project debt financing of US$22.4million equivalent is assumed to be financed with Dutch and IDA assistanceon-lent by the Government to the new fertilizer companies. To the extentsuch on-lending may bring the ratio of debt financing to equity financingfor any of the new companies above 60:40, a part of IDA assistance now esti-mated at US$2 million may be passed on as equity. The proposed IDA creditportion of US$19.7 million will cover 53% of total financing requirements andis equivalent to 81% of the estimated foreign exchange cost of the PlantImprovement Component. US$18.7 million out of an IDA credit totalling US$20.7million for the Plant Improvement and Training Components would be on-lent bythe Government on standard terms to the new fertilizer companies at a rate ofinterest of 10%, for 10 years including 3 years of grace. The exchange riskwill be borne by the new fertilizer companies. These terms are comparablewith the terms currently being applied to other foreign currency loans presentlyon-lent to BCIC and other similar enterprises. Finalization of satisfactoryon-lending agreements for the plant improvement and training components willbe a condition of credit effectiveness.

7.05 IDA funds for the spares, catalysts and chemical component totallingUS$8.3 million will be made available by the Government to the new fertilizercompanies against payments in local currency.

C. Procurement and Disbursement

7.06 The proposed credit covers plant improvements in the three existingplants, the setting up of training facilities and imports of spares, catalystsand chemicals for the operation of the three existing plants. The proposedprocurement arrangements have taken into account the specific needs of thethree components and procedures most appropriate for them. The procurementpackages for the plant improvement component will generally be of small valueand in large part of proprietary nature. It is expected that only about 15packages will exceed US$50,000 in value and several of them are best procuredfrom the original equipment vendors. Only 7 packages with total value ofabout US$3 million may be appropriate for international competitive bidding(ICB). The rest of the equipment and supplies totalling about US$13 millionin value will include proprietary items (about US$8 million) and small valueitems (about US$5 million) procured following Bank procurement guidelines.The same arrangements will also cover supplies for the training component.In view of the nature of the project, such procurement procedures areappropriate to ensure timely and efficient plant renovation.

7.07 The engineering services will be provided by selected engineeringfirms most appropriate for the nature of the services involved. For Ghorasal,BCIC has selected Toyo Engineering Corporation who engineered and constructedthe present facilities. For Chittagong BCIC intends to select a firm thatcan provide efficiently the required services. The engineering agreementswill be negotiated with the selected firms.

7.08 The plant improvement component has only limited civil works,foundation and construction requirements (about US$2.6 million) and thesewill be carried out by the respective plant maintenance personnel using local

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subcontractors when required. The civil works for the training componentswill be implemented with local civil subcontractors selected following com-petitive bidding procedures.

7.09 The catalysts and chemicals will be imported following internationalshopping among a representative list of suppliers. Spares and components willbe procured internationally following BCIC's normal procurement procedures forsuch supplies, which provide for limited competition whenever possible. Thesearrangements are considered satisfactory.

7.10 The existing plants were mostly engineered and constructed byJapanese engineering firms with large part of the equipment coming fromJapanese suppliers. As a result, spares and components required for revampingmoving machines would probably come from the same suppliers. However, equip-ment replacements for heat exchangers, etc. will be procured internationally.The total supplies are expected to be shared about 60% from Japan, 25% fromEurope and 15% from other countries.

7.11 The allocation of the proposed credit of US$29 million will be asfollows:

Fertilizer Industry Rehabilitation Prolect - Allocation of the Credit(in US$ million)

Ghorasal Chittagong Fenchuganj Total ApplicationPlant Improvement Program

Equipment, Materials &Spares procured under ICB 2.5 1.0 - 3.5 100% of foreign

and localex-factory

Critical, Proprietary orSmall Items 5.5 1.5 2.5 9.5 100% of foreign

Engineering Services 0.8 0.3 1.1 100% of foreign

Training Component - - - 0.8 100% of foreignand 90% of local

Spares, Catalysts & Chemicals - - - 7.5 100% of foreign

Unallocated - - 6.6

Total 29.0

The credit includes about US$1.0 million to finance local currency expendi-tures mainly under the training component.

7.12 The credit is expected to be fully disbursed by June 1983 asindicated in the disbursement schedule given in Annex 7-2.

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VIII. FINANCIAL ANALYSIS

A. General

8.01 Since the nature of the Project is the rehabilitation of existingoperating plants, an incremental approach has been used for the financialand economic evaluations; only the increments in cost and revenue as a resultof the proposed rehabilitation program are considered in the financial andeconomic analyses. The production increases assumed for the three plantsare summarized below:

Plant Improvement Component - Projected Annual Production Increases

Rated Capacity Util- Increase in ProductionCapacity ization in % Annual Output Increase

in 1,000 tpy Before After in 1,000 tons Estimated toPlant Product of Product Rehab. Rehab. of Product Materialize in FY

Ghorasal Urea 374 67 85 67.9 1983Chittagong TSP 152 60 80 30.4 1983Fenchuganj Urea 116 87 a/ 87 a/ - NA

a/ Target capacity utilization after renovation is completed in 1978.

While, as noted before, the capital expenditures of Chittagong and Ghorasalare aimed to raise substantially the operating level of the respective plantsby means of debottlenecking, the investments at Fenchuganj are aimed towardspreventive measures in order to avoid or at least shorten potential operatinginterruptions which might impair achieving continuation of the present levelof capacity utilization. Since the plant improvement expenditure for Fenchuganjforms only a small portion (10%) of the total project cost and is of a"preemptive character," it is difficult to reasonably quantify potentialsavings in the future and no financial analysis for this project componenthas been undertaken.

B. Operating Costs and Revenues

8.02 An estimated operating cost breakdown for each plant at the expectedcapacity utilization rates upon project completion (para 8.01) is given inAnnex 8-1 and summarized on the following page:

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Fertilizer Industry Rehabilitation Project - Estimated Production Costs a/

After Project Completion

Ghorasal % Chittagong % Fenchugani %

Product Urea TSP Urea

Expected Capacity Utilization 85% 80% 87%

----------in constant 1979 Taka/ton----------

Raw Materials 301 22 2,269 65 385 20

Other Variable Costs 536 40 529 15 711 37

Fixed Costs 515 38 713 20 812 43

Production Costs 1,352 100 3,511 100 1,908 100

----------- …;n constant 1979 US$/ton----------

Production Costs 87.2 226.5 123.1

Ex-factory Prices 122.6 280.7 154.6

Internat. FOB Prices b/ 190.0 215.0 190.0

Landed Cost Bangladesh b/ 240.0 275.0 240.0

a/ Excluding financial charges.

b/ As of December 1979.

As a result of the low cost of the abundantly available natural gas (between

US$0.30 and US$0.40 per Mscft), urea production costs including depreciation

are very competitive at Ghorasal with similar plants elsewhere. Although

Fenchuganj costs are substantially higher than Ghorasal because of smaller

plant size and the use of power-intensive technology, they are nevertheless

well below international prices. While the current price of natural gas

permits the covering of operating expenses and capital charges of related

facilites, it is on the low side considering the present costs of developing

new gas fields and providing transport facilities. The Bank is currently

appraising a pipeline project in Bangladesh and the issue of an appropriate

gas price for commercial users will be reviewed in the context of that project.

Natural gas accounts for only about 20% of urea production cost--as indicated

in the table above--so that even a 50% rate increase would not significantly

affect the project's financial viability.

8.03 With regard to TSP production at Chittagong, Bangladesh is less

favorably endowed with raw materials, and depends entirely on imports of both

sulfur and rock phosphate. Consequently, raw material costs account for

two-thirds of its production costs, causing production costs to be equal to

international FOB prices. The production costs, however, would be lower if

the investments already made were treated as sunk costs. Domestic TSP produc-

tion costs are, nevertheless, still significantly lower than the landed cost

of imported TSP (Annex 8-1).

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8.04 Since the Government is still to finalize the ex-factory fertilizerprices based on the negotiated pricing arrangements (para 2.08), the revenueestlmates are based on current ex-factory prices. Due to the proposed forma-tion of independent companies within BCIC which will also involve a substantialrevision of the present capital structure of the three fertilizer units and inconsideration of the relatively small amounts of capital expenditures allocatedto each plant, detailed financial statements of BCIC and the fertilizer unitshave not been presented in this report. Instead, it appeared more appropriateto prepare projections of key income data in constant 1979 terms for theindividual plants. Based on the above revenue and cost assumptions, financialkey data are projected for the three plants as follows:

Fertilizer Industry Rehabilitation Project - Projected Income Statements a/(in constant 1979 million Taka)

Ghorasal Chittagong FenchuganiFY ending June 30 1981/82 1983 1981/82 1983 1981/82/83

Capacity Utilization in % 67 85 60 80 87

Production in 1000 tons 250 318 91 122 100Revenues 475 604 397 529 240Production Cost 351 408 327 412 191Operating Profit 124 196 70 117 49Cash Flow Before Debt Service 200 272 104 151 92Cash Flow After Debt Service d/ 60 132 57 104 7

Key Ratios (in %)

Operating Margin 26 32 18 22 20Return on Assets b/ Before

Interest and Tax 12 19 9 16 8Return on Assets Before

Interest and After Tax c/ 10 13 7 10 7

a/ Assuming that the capital structure of June 1979 for the threeentities remains basically unchanged.

b/ Defined as total assets minus non-interest bearing current liabilities.c/ Corporate tax rate is 55%.d/ Amount of debt service is notional, based on 1979 balance sheets.

8.05 The operating profits for both plants at Ghorasal and Chittagongare expected to improve substantially, i.e., by 58% and 67%, respectively,after completion of their plant improvement projects. Similarly, the returnon assets before interest and after tax will increase from 10% to 13% forGhorasal and from 7% to 10% for Chittagong, which are considered as acceptable

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levels of income. In both cases the cash flow after debt service will approxi-mately double. With regard to Fenchuganj, the project will help sustain theestimated operating profit. The return on assets of 7% is lower than for thetwo other plants, mainly as a result of higher operating costs which are notadequately covered by the present FenchuganJ ex-factory price of urea. Aprice increase of about 10% to Taka 2,635 per ton of urea would achieve areturn on assets of approximately 10x. The relatively small cash flow afterdebt service at Fenchuganj is a direct consequence of high requirements ofnet working capital which by requiring large short-term debt substantiallyincreases the debt service.

C. Financial Rate of Return

8.06 The financial rates of return before tax, in constant 1979 terms,on an incremental basis for the plant improvement components at Ghorasal andChittagong are calculated at about 30% and 22%, respectively. The cost/benefitstreams for the base cases are given in Annex 8-2 and the results of thesensitivity analysis are summarized below:

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

Rate of ReturnGhorasal Chittagong

(a) Base Case 30 22(b) Capital Cost up 25% 23 16(c) Capacity Utilization Improvement

75% of Target 21 14(d) Combination of (b) and (c) 15 9(e) Gas Price up 50% 25 NA

The financial rate of return is most sensitive to changes in the assumed ratesby which the capacity utilization is projected to improve. Nevertheless, evenin a severe case of a combination of a capital cost increase of 25% and animprovement of capacity utilization 25% below target would result in a stillsatisfactory rate of return of 15% for Ghoras4l and a marginally acceptablerate of return of 9% for Chittagong. However, due to commercially proventechnology, experienced contractors and increased operating training assis-tance, the likelihood of a combination of such adverse sensitivities appearsto be remote.

D. Financial Covenants and Reporting Requirements

8.07 BCIC has agreed that the three new fertilizer companies to be formedunder BCIC's restructuring plan (para 4.09) will follow prudent financialpractices and conform to the following financial covenants: (i) maintain atall times a debt/equity ratio of 60/40 or better; (ii) maintain a current

- 38 -

ratio of at least 1.3:1.0; (iii) not incur any additional debt if by doing sothe projected debt service coverage would fall below 1.4; (iv) not pay at anytime any dividends, prepay any debt or effect any other cash distributions,including to affiliated companies, if by doing so the current ratio woulddrop below 1.5; and (v) obtain prior agreement of the Association for all newprojects requiring capital expenditures in excess of US$1.5 million untilproject completion. In addition, the Government has agreed to supply thecompanies with adequate funds to ensure a timely completion of the Projectand to cover promptly any justified unexpected cash needs over and above theagreed budget.

8.08 BCIC has agreed that the successor companies will submit: (i) annualaudited financial reports within six months of the closing of each fiscal year;and (ii) monthly progress reports and periodic financial statements and pro-jections according to a schedule and form satisfactory to the Bank.

E. Major Risks

8.09 The Project faces only limited technical risks since the technologyassociated with the plant improvement component is commercially proven andwill be supplied by internationally experienced firms. However, the sustainedperformance of the plants at the projected operating levels will depend to asubstantial extent on the availability of an adequate and competent managementand work force. The availability of sufficiently experienced personnel isexpected to be reasonably ensured by including a training component in thecredit and by other measures that would help to retain the trained manpowerat technical and managerial levels (para 2.14).

8.10 The Project also would face some potential financial risks if notfor the pricing arrangements proposed. The continued satisfactory financialperformance of the sponsoring companies is largely dependent on the recommendedchange in the Government's present fertilizer pricing policy at producer leveland subsequent implementation of a pricing mechanism which allows for timelyprice adjustments during periods of rapidly rising production costs. Thisrisk is expected to be adequately met by the proposed agreements with theGovernment, which will allow the companies to earn a minimum agreed returnon their assets (para 2.08).

8.11 There is also a potential, though limited, marketing related risk,mainly due to the need to improve the effectiveness of the present distribu-tion system as a result of inadequate transportation capacity. However,this risk is within acceptable levels and will be further reduced by likelyinvestments to be financed under a Fertilizer Transport Project recentlyappraised, and by facilities in Development Finance Corporation and smallindustry projects for providing funds to the private sector for financing ofbarges and trucks. In addition, an improved coordination of transport andmarketing arrangement between BADC and BCIC is being stipulated (para3.10).

- 39 -

IX. ECONOMIC ANALYSIS

A. Economic Costs and Benefits

9.01 For the economic analysis, costs and benefits are divided intotradeable and non-tradeable items. The economic costs and benefits of thetradeables are calculated by using projected long-term international prices,while those of non-tradeables are determined by using domestic prices aftermaking necessary adjustments for local taxes, except for natural gas for whicha higher opportunity cost of US$1.00/Mscft is used (Annex 8-1). Bangladesh hasadequate gas reserves to meet the country's and the Project's needs. Inaddition, Bangladesh has a small fuel oil surplus thus preventing its economicsubstitution by natural gas. Therefore, the opportunity value of natural gasused by the Project should be based on the higher of (i) economic cost of gasproductions and delivery, or (it) anticipated value of exports of natural gasin the form of LNG. Bangladesh is in an unfavorable position for the produc-tion and export of LNG due to its somewhat limited gas reserves relative tothe very substantial gas requirements for an economically sized LNG plant, itsinadequately developed infrastructure base and the limited port capabilities.Furthermore, studies carried out tn the past on possible LNG projects inBangladesh have not established the economic viability of such a project.As a result, the gas price at which LNG can be exported competitively fromBangladesh would be lower than in other possible locations. Even with theincreasing international LNG prices, the netback for natural gas from apossible project in Bangladesh is, therefore, not likely to exceed US$1.00per Mscft in 1979 terms. The economic cost of gas production and deliveryto Chittagong is estimated at about US$0.66 per Mscft (Report No. P-25-68-DPdated May 18, 1979). While the base case uses US$1.00 per Mscft, a sensitiv-ity analysis was undertaken for Ghorasal applying a 50% increase above theapparent maximum value of US$1.00 per Mscft. The Project's economic cost isderived from the financial capital cost estimate after deducting applicableimport duties and taxes on equipment and are expressed in US Dollar based onan exchange rate of US$1.00 - Taka 15.5.

9.02 Except for natural gas, which is supplied from indigenous sources,Bangladesh is an importer of all major raw materials as well as of the outputproducts urea and TSP. The economic costs for raw materials delivered atfactory and output prices are derived from the latest price forecasts forthe mid-1980s by the Bank's Commodities and Export Projections Division. Theprojected costs and prices reflect the most recent price increases for hydro-carbons, energy and phosphate rock, expected improvement of current bottle-necks tn distribution of sulfur and higher capital costs of new capacities.It is assumed that the raw materials sulfur and phosphate rock will be Importedfrom the Middle East, while the alternative sources of supply for the finishedproducts urea and TSP would be Europe 1/ and Mexican Gulf, respecttvely. For

1/ It is conceivable that on a spot contract basis urea could be also pro-cured from the Far East. In this event, however, it is assumed that thesavings in transport cost are likely to be compensated by higher FOBprices.

- 40 -

urea an FOB price of US$245/ton 1/, US$40/ton for ocean freight and US$10/tonfor port-handling and inland transportation differential are assumed. In thecase of TSP, a FOB price of US$195/ton is assumed with ocean freight and porthandling cost of US$50/ton and US$10/ton, respectively. The computation ofeconomic costs and prices are shown in Annex 8-1 and its results are givenbelow:

Fertilizer Industry Rehabilitation Project -

Economic Costs and Ex-Factory Prices(in constant 1979 dollars)

US$/ton

Raw MaterialSulfur 115Phosphate Rock 73

OutputTSP 270Urea 280

B. Economic Rate of Return

9.03 The economic rates of return, calculated on an incremental basis,for the Ghorasal and Chittagong plant improvement programs are 92% and 18%,respectively. These satisfactory returns reflect the Project's rehabilitationnature which results in substantial revenue improvements through relativelysmall capital expenditure. Ghorasal's economic rate of return is considerablyhigher than its financial return of 30%, mainly due to the fact that domesticurea ex-factory prices as discussed earlier are presently substantially belowworld market level and the financial return is calculated on the basis ofcurrent prices as explained in para 8.04. In the case of Fenchuganj, therelatively small improvement program is "preemptive" in nature and aims tomaintain operating reliability (para 5.04). No economic rate of return hasbeen computed for this part of the project due to the difficulties in esti-mating with reasonable accuracy the inefficiency costs that may result fromexcessive downtimes and consequent loss of production without the proposedinvestment. However, the investment would be economically justified with thesavings realized even if the annual downtime would be reduced by only one weekover the plant's economic life.

9.04 The cost/benefit streams used for calculating the economic ratesof return are given in Annex 9 and results of the sensitivity analysis aresummarized below:

1/ All costs and prices are expressed in constant 1979 terms.

- 41 -

Sensitivity Tests on Economic Rate of Return(in percent)

Rate of ReturnCase Ghorasal Chittagong

(a) Base Case 92 18(b) Capital Cost up 25% 76 13(c) Capacity Utilization Improvement

75% of Target 72 11(d) Combination of (b) and (c) 59 7(e) Gas Price of US$1.50/Mscft 82 NA

The economic return of the Ghorasal plant improvement component is of suchmagnitude that even under a combination of adverse circumstances--withinreasonable limits--its economic viability is more than ensured. Althoughthe Chittagong component is more exposed to adverse conditions than that ofGhorasal, due to its lower base case return, it also does not face any unduerisk jeopardizing its economic viability. Sensitivities of a 25% capital costincrease and of a 25% below projected capacity utilization increase show stillsatisfactory economic returns of 13% and 11%, respectively. It is unlikelythat a combination of these factors will occur.

C. Other Benefits and Foreign Exchange Savings

9.05 At Chittagong, the present TSP plants have no granulation facilitiesand thus create problems of severe dust hazard not only for plant workers butalso for farmers using mainly hand distribution. The implementation ofgranulation facilities as part of the proposed Project will eliminate thecurrent dust problem, which could become otherwise--in the long run--a serioushealth hazard.

9.06 The economic output value of the plant improvement component isestimated at US$17 million annually, and its net annual foreign exchangesavings after provision for principal and interest payments on the foreignloans are estimated at about US$12 million expressed in constant 1979 USdollars. The related foreign exchange costs of about US$24 million will thusbe offset by the foreign exchange savings in about two years after Projectcompletion.

9.07 Removing production bottlenecks which limit output at the existingfertilizer plants will also have a significant effect on the morale offertilizer industry workers, and are expected to set standards for attainableproduction efficiency for other fertilizer plants. Bangladesh has abundantand cheap natural gas resources for which few other economically attractiveuses are available. In the long run, as Bangladesh gains experience inurea production and improves its productivity, it should be able to competeeffectively in producing urea for export. Improving the productivity of itsplants producing for the domestic market is an important first step.

- 42 -

X. AGREEMENTS

10.01 Satisfactory assurances and agreements have been obtained from theGovernment that it will:

(a) review at least once each year the ex-factory fertilizerprices of each of the three existing fertilizer plants andestablish prices for each of the plants which would provideafter interest and taxes at least 10% return on equity(para 2.08);

(b) agree to take all necessary steps to ensure adequate andcontinuing provision of foreign exchange funds to meetthe plants' requirements for imported raw materials spares,catalysts and chemicals (para 2.10);

(c) introduce procedures and schedules governing the recruitmentof fertilizf"r -echnicians and engineers from Bangladesh towork abroad so that the departures are restricted to suchnumbers as can reasonably be replaced without adverselyaffecting the operation of the fertilizer plants (para 2.14);

(d) cause BADC and the three new fertilizer companies to enterinto a satisfactory agreement before October 31, 1980 onarrangements for pick-up of fertilizers from the plantwarehouses with provision that BADC payment will includean agreed compensation to cover additional cost of higherstacking or renting additional warehouse space if fertilizeris not picked up according to a predetermined schedule andthat arrangements will be evolved to permit BCIC to sellfertilizers directly to wholesalers, as well as to BADC(para 3.10);

(e) complete the evaluation of alternatives for gypsum disposalor utilization, and review with IDA the plans by December 31,1980 (para 4.22); and

(f) cause the Chittagong bulk unloading project to be implementedin accordance with the relevant provisions of the IFAD project(para 4.26).

10.02 Satisfactory assurances and agreements have been obtained fromBCIC that:

(a) it will furnish its detailed training plans for review beforeDecember 31, 1980 (para 2.14);

(b) the three fertilizer plants will establish by December 31,1980 and maintain subsequently an appropriate program ofincentives for their skilled technicians in order toretain them in service (para 2.14);

- 43 -

(c) it will form the three new fertilizer companies to theagreed time schedule and with powers delegated to thethree fertilizer entities to ensure efficient managementon corporate and plant levels (para 4.09); and

(d) the three new fertilizer companies will follow prudentfinancial practices and conform with the financial covenantsand meet reporting requirements described in paras 8.07 and8.08.

10.03 Establishment of the three new fertilizer companies (para 4.09),Government approval of the Project proforma and finalization of satisfactoryon-lending arrangements (para 7.04) for the Plant Improvement and TrainingComponents would be conditions of credit effectiveness.

10.04 The preparation of the detailed maintenance program would be a con-dition of disbursement for the Spare Parts, Catalysts and Chemicals Component(para 2.10). The presentation of BCIC's training plans to the Associationfor review and agreement would be a condition of disbursement for the trainingcomponent (para 2.14). The signature of the appropriate contracts for engi-neering services, acceptable to the Association, for Ghorasal and Chittagongplants would be conditions of disbursement for these respective components(para 6.05).

10.05 With the above assurances and agreements, the Project is suitablefor an IDA Credit of US$29 million equivalent under on-lending terms asdiscussed in para 7.04.

Industrial Projects DepartmentApril 23, 1980

- 44 -

ANNEX 3

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

FERTILIZER OFFTAKE IN BANGLADESH 1965-79

Year Offtake ('000 tons) Percent Change

1965 93.8

1966 106.2 13.2

1967 162.1 52.6

1968 211.1 30.2

1969 225.3 6.7

1970 277.1 23.0

1971 304.4 9.8

1972 243.8 -19.9

1973 383.7 57.3

1974 379.8 - 1.0

1975 279.6 -26.4

1976 457.2 63.5

1977 512.6 12.1

1978 715.4 39.6

1979 740.0 3.4

Source: Bangladesh Agricultural Development Corporation

Industrial Projects Department

April 1980

ANNEX 4-1

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

LIST OF BCIC'S PRODUCTION UNITS

- - - -In Million Takas- - -

FY79 FY80Projected

Production Unit Sales % Sales %

I Fertilizer1. Urea Fertilizer Factory 3702. Natural Gas Fertilizer Factory 1193. Triple Super Phosphate Fertilizer 297

Complex

Sub-total 786 31 1,060 32

II Pulp & Paper Products1. Khulna Newsprint Mills 3492. Karnaphuli Paper Mills 2893. North Bengal Paper Mills 854. Sylhet Pulp & Paper Mills 695. Karnaphuli Rayon & Chemicals 1436. Khulna Hard Board Mills 137. Star Particle Board Mills 19

Sub-total 967 38 1,080 32

III Soap, Detergent & Miscellaneous1. Crescent Industries 742. Kohinoor Chemical Co. 2083. Kohinoor Battery Mfg. Co. Ltd. 79

Sub-total 361 14 650 19

IV Safety Matches1. Dacca Match Factory 502. Dada Match Factory 393. Ujala Match Factory 224. Habib (Match) Industries 24

Sub-total 135 6 160 5

V Rubber1. Bengal Belting Corporation 302. Karim Rubber Industries 333. Lira Industrial Enterprise 94. Bella Artifitex Industries 7

Sub-total 79 3 120 4

- 46 - ANNEX 4-1Page 2

- - - -In Million Takas- - - -

FY79 FY80Projected

Production Unit Sales X Sales %

VI Pesticide and Insecticide1. Agro Chemicals Ltd. 292. D.D.T. Factory 23

Sub-total 52 2 95 3

vII Packing and Converting1.- Bangladesh Paper Products. 202. Eagle Box & Carton Mfg. Co. Ltd. 193. Manifold Industries 5

Sub-total 44 2 50 2

VIII Pharmaceuticals1. Albert David (Bangladesh) Ltd. 37 2 50 1

TX Chemicals1. The Chemical Industries of Bangladesh 272. Farookh Chemical Industries 4

Sub-total 31 1 40 1

X Glass & Ceramic1. Usmania Glass Sheet Factory 25 1 45 1

Total 2,517 100 3,350 100

Industrial Projects DepartmentApril 1980

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80-/

CONSOLIDATED INCOME STATEMENTS(in Million Takes)

FY Ending June 30 1976 1977 1978 1979 1980Budget

Sales Revenue (Net) 1,112.4 1,658.1 1,926.9 2,342.7 3,216.1

Materials Consumed 648.4 679.6 945.5 1,058.1 1,663.4

Power and Fuel 159.2 194.2 164.5 262.1 346.7

Change in Invent. of Fin. Goods ( 40.8) 17.1 13.1 ( 48.4) ( 7.4)Salaries, Wages and Bonuses 148.1 170.6 221.3 254.5 306.9

Production Overheads 91.7 73.0 147.2 239.8 276.4

Depreciation 157.2 164.6 198.5 121.6 234.1

Cost of Goods Sold 1,163.8 1,299.1 1,690.1 1,887.7 2,820.1

Gross Operating Profit ( 51.4) 359.0 236.8 455.0 396.0

Administrative Overhead 60.3 63.8 94.0 165.6 200.0Sales Cost 14.3 16.8 18.0 24.5 )_ _

Net Operating Profit (126.0) 278.4 124.8 264.9 196.0

Financial Charges (Net) 112.9 111.1 132.8 108.8 130.0

Profit (Loss) Before Taxes (238.9) 167.3 ( 8.0) 156.1 66.0

Ratios

Gross Margin in % ( 4.6) 21.7 12.3 19.4 12.3

Net Margin (Bef. Taxes) in % ( 21.5) 10.1 ( .4) 6.7 2.1

a/ Source: BCIC

- 48 - ANNEX 4-2

Page Z

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80

CONSOLIDATED BALANCE SHEETS(in million Takas)

FY ending June 30 1976 1977 1978 1979

AssetsCash and Banks 51.2 58.8 134.1 78.1Accounts Receivable 460.6 828.1 1,018.0 1,464.4Inventory 1,090.5 1,089.4 1,240.2 1,600.3Raw Material 379.4 385.8 459.0 632.3Stores and Spares 416.2 346.2 565.1 729.2Finished Goods 294.9 357.4 216.1 238.8

Loans and Advances 177.2 247.2 298.1 355.2

Total Current Assets 1,779.5 2,223.5 2,690.4 3,498.0

Gross Fixed Assets 2,462.5 2,500.4 3,322.2 3,562.6Less Accumulated Depreciation 719.8 910.4 1,197.3 1,352.4

Net Fixed Assets 1,742.7 1,590.0 2,124.9 2,210.2Investments 62.5 42.3 42.9 25.3

T o t a 1 A s s e t s 34584.7 3,855.8 44858.2 54733.5

LiabilitiesAccounts Payable 1,139.4 960.3 888.8 806.5Bank Loan 262.9 116.7 185.8 235.3Other Current Liabilities 514.3 772.4 1,121.9 1,534.3

Total Current Liabilities 1,916.6 1,849.4 2,196.5 2,576.1

Long-term Debt 1,720.5 1,757.2 1,905.6 2,218.4

Share Capital 491.1 615.6 1,296.7 1,291.7Retained Earnings (543.5) (366.4) (540.6) (352.7)

total rquitv ( 52.4) 249.2 756.1 939.0

T o t a 1 L i a b. & E q u i t y 34584.7 34855.8 4385.8.2 5 5733.5

RatiosCurrent Ratio 1.6 1.2 1.2 1.4Quick Ratio 0.4 0.6 0.7 0.7Debt Service Coverage 0.1 1.7 0.9 1.5Debt/Equity Ratio 88:12 72:28 70:30

a/ Source: BCIC

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80a/

GHORASAL INCOME STATEMENT(In Million Takas)

FY Ending June 30 1976 1977 1978 1979 1980Budget

Sales Revenue (Net) 228.8 357.9 269.2 397.7 459.5

Materials Consumed 94.3 91.8 82.3 121.7 185.4

Power and Fuel - - 2.1 19.1 20.9

Change in Invent. of Fin. Goods 6.0 ( 2.8) 3.0 ( 7.6) (36.3)

Salaries, Wages and Bonuses 9.4 13.2 13.2 14.7 20.1 1

Production Overheads 17.2 14.2 56.5 105.5 55.0 X

Depreciation 66.9 74.7 75.2 .2 76.6

Cost of Goods Sold 193.8 191.1 232.3 253.6 321.7

Gross Operating Profit 35.0 166.8 36.9 144.1 137.8

Administrative Overhead 4.9 8.0 7.4 34.8 36.0

Sales Cost .1 .0 .0 .9 )

Net Operating Profit 30.0 158.8 29.5 108.4 101.8

Financial Charges (Net) 6.9 16.5 12.8 15.6 5.0

Profit (Loss) Before Taxes 23.1 142.3 16.7 92.8 96.8

Ratios

Gross Margin in % 15 47 14 36 30 * X

Net Margin (Bef. Taxes) in % 10 40 6 23 21 >

a/ Source: BCIC

ANNEX 4-2Page 4

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80

GHORASAL BALANCE SHEETS(In Million Takas)

FY ending June 30 1976 1977 1978 1979

AssetsCash and Banks 1.8 1.3 20.3 1.3Accounts Receivable 176.1 374.8 439.5 621.9Inventory 94.7 112.6 183.4 227.5Raw Material - 30.9 50.9 2.7Stores and Spares 94.5 78.6 132.5 219.9Finished Goods .2 3.1 .0 4.9

Loans and Advances 12.4 3.5 8.2 10.1

Total Current Assets 285.0 492.2 651.4 860.8

Gross Fixed Assets 773.1 811.8 817.0 822.6Less Accumulated Depreciation 195.5 298.1 373.3 448.5

Net Fixed Assets 577.6 513.7 443.7 374.1Investments - ..3 _

T o t a 1 A s s e t s 862-6 _55.9 1,095.4 8634.9

LiabilitiesAccounts Payable 196.4 193.6 259.4 185.5Bank Loan _ _ _ _Other Current Liabilities 3.6 7.6 54.4 137.1

Total Current Liabilities 200.0 201.2 313.8 322.6

Long-Term Debt 775.7 771.9 601.9 601.9

Share Capital 8.4 8.4 177.9 177.9Retained Earnings (121.5) 24.4 1.8 132.5

Total Equity (113.1) 32.8 179.7 310.4

T o t a 1 L i a b. & E q u i t y 862.6 1_005.9 1,095.4 1.234.9

RatiosCurrent Ratio 1.4 2.5 2.1 2.7Quick Ratio 1.0 1.9 1.5 2.0Debt Service Coverage 1.3 2.7 1.3 1.3Debt/Equity Ratio - 96:4 77:33 66:33

a/ Source: BCIC

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

a/BCIC - FINANCIAL STATEMENTS 1976-80 -

CHITTAGONG INCOME STATEM1ENT

(In Million Takas)

FY Ending June 30 1976 1977 1978 1979 1980Budget

Sales Revenue (Net) 103.8 190.3 168.1 272.5 410.5

Materials Consumed 101.3 75.7 81.7 117.2 225.7

Power and Fuel 1.7 4.7 7.9 8.3 13.1

Change in Invent. of Fin. Goods 3.2 10.6 (21.8) ( 4.1) 4.5

Salaries, Wages and Bonuses 4.9 4.9 8.1 17.0 14.1

Production Overheads 17.8 10.7 11.5 12.5 27.0

Depreciation 26.9 27.4 32.8 44.9 34.4

Cost of Goods Sold 155.8 134.0 120.2 194.0 318.8

Gross Operating Profit (52.0) 56.3 47.9 77.6 91.7

Administrative Overhead 4.7 6.6 9.5 5.2 6.0

Sales Cost .1 .0 .1 .4 ) _

Net Operating Profit (56.8) 49.7 38.3 71.1 85.7

Financial Charges (Net) 20.3 20.4 20.2 20.2 18.9

Profit (Loss) Before Taxes (77.1) 29.3 18.1 50.9 66.8

Ratios

Gross Margin in % (50.0) 29.6 28.5 28.5 22.3

Net Margin (Bef. Taxes) in % (74.1) 15.4 10.8 18.7 16.3

a/ Source: BCIC

- 52 -ANNEX 4-2Page 6

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80

CHITTAGONG BALANCE SHEETS(In Million Takas)

FY Ending June 30 1976 1977 1978 1979

AssetsCash and Banks 3.1 1.2 7.4 5.3Accounts Receivable 20.9 70.5 130.4 259.1Inventory 96.8 124.6 153.6 322.2Raw Material 47.1 6.8 14.9 49.3Stores and Spares 13.4 .0 127.6 251.1Finished Goods 36.3 117.8 11.1 21.8

Loans and Advances 4.0 3.5 6.2 7.8

Total Current Assets 124.8 199.8 297.6 594.4

Gross Fixed Assets 305.2 308.2 327.2 320.3Less Accumuldted Depreciation 51.0 84.7 146.6 155.5

Net Fixed Assets 254.2 223.5 180.6 164.8Investments - - - -

T o t a 1 A s s e t s 379.0 423.3 478.2 759.2

LiabilitiesAccounts Payable 103.8 20.9 13.5 9.4Bank Loan 70.0 - - -Other Current Liabilities 116.7 288.3 328.7 565.1

Total Current Liabilities 290.5 309.2 342.2 574.5

Long-rerm Debt 210.9 210.5 38.6 49.5

Share Capital - - 174.8 174.8

Retained Earnings (122.4) ( 96.4) ( 77.5) ( 39.7)

Total Equity (122.4) ( 96.4) 97.4 135.2

T o t a 1 L i a b. & E q u i t y 379.0 423.3 478.2 759.2

RatiosRatios

Current Ratio .4 .7 .9 1.0Quick Ratio .1 .2 .4 .5Debt Service Coverage - 1.9 1.8 2.9Debt/Equity Ratio - 28:72 27:73

a/ Source: BCIC

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

__ . ~~~~~~a/BCIC - FINANCIAL STATEMENTS 1976-80

FENCHUGANJ INCOME STATEMENT(In Million Takas)

FY Ending June 30 1976 1977 1978 1979 1980

Sales Revenue (Net) 57.3 145.8 149.2 96.2 234.9

Materials Consumed 33.5 43.5 46.5 34.4 75.8Power and Fuel - 1.6 1.3 .9 3.3Change in Invent. of Fin. Goods ( 9.9) ( 3.0) 14.0 ( 7.9) ( 1.9)Salaries, Wages and Bonuses 14.0 19.6 14.8 15.8 24.5 1Production Overheads 10.4 10.7 9.3 2.7 25.4 LDepreciation 14.1 13.9 13.7 8.8 37.8 (

Cost of Goods Sold 62.1 86.3 99.6 54.7 164.9

Gross Operating Profit ( 4.8) 59.5 49.6 41.5 70.0

Administrative Overhead 6.7 5.8 7.9 6.6 )Sales Cost .5 .4 .3 .2 ) 8-0

Net Operating Profit (12.0) 53.3 41.4 34.7 62.0

Financial Charges (Net) 4.4 4.3 5.4 4.2 32.0

Profit (Loss) Before Taxes (16.4) 49.0 36.0 30.5 30.0

Ratios

Gross Margin in % (8 ) 41 33 43 30 ANet Margin (Bef. Taxes) in % (29 ) 34 24 32 13 X s

a/ Source: BCIC

- 54 - ANNEX 4-2

Page 8

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

BCIC - FINANCIAL STATEMENTS 1976-80 8/

FENCHVGANJ BALANCE SHEETS

(In Million Takas)

FY Ending June 30 1976 1977 1978 1979

AssetsCash and Banks 2.3 1.5 13.7 3.5

Accounts Receivable 47.3 94.6 125.0 171.2

Inventory 120.4 139.5 134.9 162.0

Raw Material 14.0 - 1.3 46.8

Stores and Spares 104.0 120.4 130.2 100.7

Finished Goods 2.2 19.1 3.4 14.5

Loans and Advances 13.5 5.1 27.1 56.8

Total Current Assets 183.5 240.7 300.7 393.5

Gross Fixed Assets 230.1 234.8 230.4 446.7

Less Accumulated Depreciation 98.8 113.4 127.3 141.5

Net Fixed Assets 131.3 121.2 103.1 305.2

Investments .2 .4 1.9 .2

T o t a 1 A s s e t s 315.0 362.3 405.7 698.9

LiabilitiesAccounts Payable 82.3 76.6 49.9 58.0

Bank Loan - - - -

Other Current Liabilities 6.2 19.5 56.4 14.6

Total Current Liabilities o8.5 96.1 106.3 72.6

Long-term Debt 78.2 83.5 103.7 384.2

Share Capital 100.0 100.0 100.0 100.0

Retained Earnings 48.3 82.7 95.7 142.1

Total Equity 148.3 182.7 195.7 242.1

T o t a 1 L i a b. & E q u i t y 315.0 362.3 405.7 698.9

RatiosCurrent Ratio 2.1 2.5 2.8 5.4

Quick Ratio .7 1.1 1.6 3.2

Debt Service Coverage .3 5.0 4.0 3.0

Debt/Equity Ratio 35:65 31:69 36:64 61:39

av Source: BCIC

Industrial Projects DepartmentApril 1980

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PRDJECI

BCIC - FERTILIZER PRODUCTION AND CAPACITY UTILIZATION(In '000 tons per year)

FY77 FY78 FY79 FY80 ProjectedDesign Operating Operating Operating Operating

Plant Product Capacity Production Rate as % Production Rate as , Production Rate as % Production Rate as 7°

Fenchuganj Urea 115.5 77.5 67 61.4 53 59.5 52 100.0 87

Sulfate 13,2 9.3 70 9.6 73 5.3 40 9.0 68

Ghorasal Urea 374.0 208.0 56 151.0 40 236.1 63 250.0 67

Chittagong

No. 1 TSP 32.0 041.3 27 62.3 41 90.0 60

No. 2 TSP 120.0 48.0 40

Total 654.7 342.8 52 263.3 40 363.2 55 449.0 69

a/ Based on 330 operating days for Fenchuganj and Chorasal, and 300 operatingdays for the TSP plants at Chittagong according to industry practice.

Industrial Projects DepartmentApril 1980

4-

ANNEX 4-4- 56 -

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

PLANT IMPROVEMENT COMPONENT - PROJECT SCOPE

A. Ghorasal Plant Improvement Program

- Improvement of the refrigeration system including theammonia condenser.

- Modifications as required of the synthesis gas compressor.

- Modification of the auxiliary boiler fan.

- Improved type of replacement tube bundle for the methanatoreffluent economizer.

- Replacement tube bundle for the reformed gas waste heat boiler.

- Investigations and adoption of the ICI technique to improve thevetrocoke decarbonator performance.

- Additional reboiler for high pressure decomposer.

- Replacement of the urea plant ammonia and carbamate pumps withcentrifugal pumps.

- Modifications as required of the carbon dioxide booster and maincompressors.

- Improvements to the cooling towers to improve their capacity.

- Repairs, replacements and improvements of the existing gas turbinegenerators.

- Addition of a new package boiler.

- Third water purification unit.

- Revamping the instrumentation and the trip systems.

- Replacement of the turbine rotor and intercooler of the airturbocompressor.

- Replacement of the urea crystals centrifuge.

- Any other modifications as may be agreed to between theBorrower and the Association.

57 ANNEX 4-4Page 2

B. Chittagong Plant Improvement Program

- Provision of replacement and standby pumps in the sulfuricand phosphoric acid plants.

- Standby phosphoric acid concentrator.

- Modifications and improvements in main air blower and digesters.

- Improving distributors in sulfuric acid towers.

- Installation of filters and drying towers.

- Additional agitators.

- Oil-fired steam boiler.

- Improvements to water treatment system.

- Diesel emergency generator set.

- TSP granulation facilities. a/

- Improvements and replacements of instrumentation.

- Water cooling and recycling system.

- Improvements in material handling.

- Any other modifications as may be agreed to between theAssociation and the Borrower.

C. Fenchuganj Plant Improvement Program

- Provision fur replacement of some critical pumps and prefabricatedpipes.

- Improvement of the present instrumentation for better process

control.

- Replacement heat exchangers and condensers for some of thecritical duties.

- A set of turbine blades and diaphragm for the power generation unit.

- Any other modifications as may be agreed to between the Association

and the Borrower.

a! These installations will be financed out of Dfl 10 million provided

by the Government of The Netherlands.

Industrial Projects DepartmentApril 1980

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROTECT

PLANT IMPROVEMENT COMPONENT - CAPITAL COST ESTIMATE(in million US Dollars)

CHORASAL CHITTAGONG FENCHUGANJ PROJECT

Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total

Equipment and Supplies - 7.31 7.31 - 6.46 6.46 - 2.10 2.10 - 15.87 15.87Freight and Insurance 0.07 0.73 0.80 0.06 0.65 0.71 0.02 0.21 0.23 0.15 1.59 1.74Taxes and Duties 1.62 - 1.62 1.43 - 1.43 0.47 - 0.47 3.52 - 3.52Inland Handling 0.41 - 0.41 0.04 - 0.04 0.10 - 0.10 0.55 - 0.55Foundation and Structures 0.39 - 0.39 1.00 - 1.00 0.05 - 0.05 1.44 - 1.44Erection 0.52 - 0.52 0.45 - 0.45 0.16 - 0.16 1.13 - 1.13Engineering and Management 0.64 0.82 1.46 0.20 0.30 0.50 0.05 - 0.05 0.89 1.12 2.01

Base Cost Estimate (BCE) 3.65 8.86 12.51 3.18 7.41 10.59 0.85 2.31 3.16 7.68 18.58 26.26 X

Physical Contingency 0.55 1.33 1.88 0.47 1.11 1.58 0.13 0.35 0.48 1.15 2.79 3.94(PC) at 157. of BCE

Price Escalation 0.60 1.46 2.06 0.52 1.21 1.73 0.14 0.38 0.52 1.26 3.05 4.31(14.37, of BCE + PC)

Total Project Cost 4.80 11.65 16.45 4.17 9.73 13.90 1.12 3.04 4.16 10.09 24.42 34.51

Interest during Construction 1.30 - 1.30 1.11 - 1.11 0.33 - 0.33 2.74 - 2.74

Financing Required 6.10 11.65 17.75 5.28 9.73 15.01 1.45 3.04 4.49 12.83 24.42 37.25

Industrial Projects DepartmentApril 1980

- 59 - ANNEX 7-2

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

ESTIMATED DISBURSEMENT SCHEDULE FOR IDA CREDIT

Bank Fiscal Estimated CumulativeYear and Quarter Disbursements Disbursements

1980 July - September 0.3 0.3October - December 0.4 0.7January - March 3.6 4.3April - June 3.8 8.1

1981 July - September 4.5 12.6October - December 5.3 17.9January - March 4.5 22.4April - June 4.2 26.6

1982 July - September 1.0 27.6October - December 0.8 28.4January - March 0.5 28.9April - June 0.1 29.0

Industrial Projects DepartmentApril 1980

- 60 - ANNEX 8-1

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

ESTIMATED PRODUCTION COST SUMMARY AND OUTPUT VALUE

GHORASAL: UREA PRODUCTION COSTS AT 85% CAPACITY UTILIZATION a/

… - - - - - - - - - -…In constant 1979 Takas- - - - - - -Financial Financial Financial Economic Economic Economic

Unit/Tons Cost/Ton Cost/Year Cost/Ton Cost/Yearof Product Price/Unit of Product In MM Tk Price Unit of Product in MM Tk

1. Variable Costs

Natural Gas (Mscft) 48.2 6.25 301.3 95.8 15.5 747.1 237.6Chemicals - - 108.6 34.5 - 103.2 32.8Duty on Electricity (MKWH) .381 10.0 3.8 1.2 - -Packing Materials 37 9.46 350.0 111.3 8.50 314.5 100.0Others - - 73.3 23.3 70.4 22.4

Total Variable Costs 837.0 266.1 1,235.2 392.8

2. Fixed Costs

Salaries 58.5 18.6 58.5 18.6Maint. Materia,as 33.7 10.7 32.1 10.2Depreciation - 307.9 97.9 _ _Others 114.7 36.5 114.7 36.5

Total Fixed Costs 514.8 163.7 205.3 65.3

3. Total Urea Cost 1,351.8 429.8 1,440.5 458.1

4. Value of Output

318,000 to6siof urea 1,900.0 604.2 4,340.0 1,380.1

a/ Nameplate capacity: 374,000 tpy urea.b/ Based on BCIC's budget estimates for FY80 plus depreciation of Taka 21.3 million for Plant Improvement

Component.

Economic Assumptions

1. Natural Gas Tk 15.5 or US$1.00 per Mscft reflects economic price (para 9.01).2. Chemicals Financial cost less 5% for local taxes and duties.3. Packing Materials: Financial cost less 10% for import duties (35%) on PE lining.4. Maint. Materials : Financial cost less 5% for import duties.

Port Handling,Ocean Transportation

FOB Freight Differential Economic Cost- - - - - - - - - - -US$-US$ Tk

5. Urea 230 40 10 280 4,340.0

- 61 - ANNEX 8-1

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT Page 2

ESTIMATED PRODUCTION COST SUMIMARY AND OUTPUT VALUE

CHITTAGONG: TSP PRODUCTION COSTS AT 80% CAPACITY UTILIZATION-2J

… - - - - - - - - - -…In constant 1979 Takas- - - - - - - - - - - -Financial Financial Financial Economic Economic Economic

Unit/Tons Cost/Ton Cost/Year Cost/Ton Cost/Yearof Product Price/Unit of Product in MM Tk Price/Unit of Product in MM Tk

1. Variable Costs

Sulfur 0.36 1,469.0 528.8 64.3 1,782.5 641.7 78.0Phosphate Rock 1.64 1,061.0 1,740.0 211.6 1,131.5 1,855.7 225.6Catalysts & Chemicals 49.6 6.0 47.1 5.7Power & Fuel 146.0 17.8 182.5 22.2Packing Materials 20 12.2 243.6 29.6 10.4 207.4 25.2Others 90.0 10.9 86.3 10.5

Total Variable Costs 2,798.0 340.2 3,020.7 367.2

2. Fixed Costs

Salaries 90.5 11.0 90.5 11.0Maint. Materials 36.2 4.4 34.4 4.2Depreciation b/ 405.4 49.3 - _Others 180.9 22.0 180.9 22.0

Total Fixed Costs 713.0 86.7 305.8 37.2

3. Total TSP Costs 3,511.0 426.9 3,326.5 404.4

4. Value of Output

121,600 tons of TSP 4,350.0 529.0 4,185.0 508.9

a/ Nameplate Capacity: 152,000 tpy TSP.b/ Based on BCIC's budget estimates for FY80 plus depreciation of Taka 14.9 million for Plant Improvement

Component.

Economic Assumptions Ocean Port landling

FOB Freight Bagging & Unloading Economic Cost

-- - - - - - - -- US 9- - - - - - - - - -- US$ Tk1. Sulfur : 90 25 - - 115 1,782.5

Phosphate Rock: 49 25 - - 73 1,131.5TSP : 195 50 15 10 270 4,185.0

2. Chemicals : Financial cost less 57 for local taxes and duties.3. Power & Fuel : Financial cost plus 25% for economic value of fuel oil (US$230/ton).4. Packing Materials : Financial cost less 15% for import duty (35%) on PE lining.5. Maint. Materials : Financial cost less 5% for local taxes and duties.

- 62 - ANNEX 8-1

Page 3BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

ESTIMATED PRODUCTION COST SUMMARY AND OUTPUT VALUE

FENCHUGANJ: UREA PRODUCTION COSTS AT 87% CAPACITY UTILIZATION IV

- - - - - - - - - - - -In constant 1979 Takas…- - - - - - - - - - -Financial Financial Financial Economic Economic Economic

Unit/Tons Cost/Ton Cost/Year Cost/Ton Cost/Yearof Product Price/Unit of Product in MM Tk Price/Unit of Product in MM Tk

1. Variable Costs

Natural Gas (Mscft) 86 4.48 385.3 38.5 10.3 885.8 88.6Chemicals - - 185.0 18.5 175.8 17.6Duty on Electricity (MKWH) 2.177 10.0 21.8 2.2 - -Packing Materials 41 9.54 391.2 39.1 8.50 348.5 34.8Others - - 111.2 11.1 106.6 10.6

Total Variable Costs 1,094.5 109.4 1,516.7 151.6

2. Fixed Costs

Salaries 254.7 25.5 254.7 25.5Maint. Materials 45.6 4.6 43.3 4.3Depreciation b/ 418.4 41.8 - -Others 93.5 9.3 93.5 9,3

Total Fixed Costs 81 75 81.2 391.5 39.2

3. Total Urea Cost 1,906.7 190.6 1,908.2 190.8

4. Value of Output

100,000 Tons of FTrea 2,395.7 239.6 4,340.0 434.0

a/ Nameplate capacity: 115,500 tpy urea.b/ Based on BCIC's budget estimates for FY80.

omic Assumptions

1. Natural Gas Tk 10.3 or US$.66 per Mscft reflects charges applied to non-preferential industrial users andis used as economic price due to the remote location and limited size of the Hiaripur gas fields.

2. Chemicals Financial cost less 5% for local taxes and duties.3. Packing Materials Financial cost less 102 for import duties (35X) on PFE lining.4, Maint. Materials Financial cost less 5% for import duties.

Port Handling,Ocean Transportation

FOB Freight Differential Economic Cost- - - - - - - US$- -- - - - - - - - - - US$ Tk

5. Urea 230 40 10 280 4,340.0

Industrial Projects DepartmentApril 1980

BANGLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

COST AND BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN CALCULATION(in millions of constant 1979 US dollars ) 1/

Incremental IncrementalCapital Variable Output Net

FY ending June 30 Costs 2/ Costs Value Benefit

Chittagong1981 3.5 - - (3.5)1982 7.6 - - (7.6)

1983-1992 - 5.5 8.5 3.0

Financial Rate of Return Before Tax = 21.8%

Ghorasal1981 4.1 - - (4.1)1982 9.0 - - (9.0)

1983-1992 - 3.7 8.3 4.6

Financial Rate of Return Before Tax 29.8%

1/ At an exchange rate of US$1.00 = Taka 15.5.

2/ Excluding interest during construction.

Industrial Projects Department

April 1980

BANDLADESH - FERTILIZER INDUSTRY REHABILITATION PROJECT

COST AND BENEFIT STREAMS FOR ECONOMIC RATE OF RETURN CALCULATION(in millions of constant 1979 US dollars)|/

Incremental IncrementalCapit2a3 Variable Output Net

FY ending June 30 Costs- Costs Value Benefit

Chittagong

1981 3.0 _ (3.0)82 6.7 - _ (6.7)

1983-1992 - 5.9 8.2 2.3

Economic Rate of Return 18.2%

Ghorasal

1981 3.6 - (3.6)82 7.9 - (7.9)

1983-1992 - 5.4 19.0 13.6

Economic Rate of Return = 91.7%

1/ At an exchange rate of US$1.00 = Taka 15.5.

2/ Financial cost less import duty of US$1.9 million and US$2.1 million for Chittagong andGhorasal, respectively.

Industrial Projects DepartmentApril 1980

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