Document of

The World Bank FILE COPYFOR OFFICIAL USE ONLY

Report No. 1392a-PAK

STAFF APPRAISAL REPORT

PAKISTAN

FAUJI FERTILIZER PROJECT

August 14, 1978

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 WEIGHTS AND MEASURES

Except where otherwise indicated 1 Metric Ton (t) = 1,000 Kilograms (kg)

all figures are quoted in Pakistan 1 Metric Ton (t) = 2.204.6 Pounds

Rupees (PRs) 1 Kilometer (km) = 0.62 Mile1 Hectare = 2.47 Acres

PR 1.O0 = US$0.10 1 Cubic Meter = 35.3 Cubic Feet

PRs 9.90 = US$1.00PRs 1 million = US$101,010

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

Anic - Anic S.p.A. (Italy)BTU - British Thermal UnitCAN - Calcium Ammonium Nitrate (26-0-0, i.e., 26% Nitrogen)Coming - Coming S.p.A. (Italy)DH - Dawood Hercules Chemicals Ltd.Fauji - Fauji FoundationFFC - Fauji Fertilizer Company, Ltd.ICP - Investment Corporation of PakistanIDB - Islamic Development BankIFU - Industrialization Fund for Developing Countries (Denmark)

JCE - James Chemical Engineering (USA)KfW - Kreditanstalt fuer Wiederaufbau (Germany)K20 - Potassium Oxide, the Indicator of Potassium Content of

FertilizerMAP - Mono Ammonium PhosphateN - Nitrogen, the Indicator of Nitrogen Content of Fertilizer

NFC - National Fertilizer CorporationNIT - National Investment TrustNP - NitrophosphateN:P - Nitrogen/Phosphate RatioPIDC - Pakistan Industrial Development CorporationP205 - Phosphorus Pentoxide, the Indicator of Phosphorus Content

of FertilizerSnam - Snamprogetti S.p.A. (Italy)Topsoe - Haldor Tops0e A/S (Denmark)

FISCAL YEAR

Government: July 1 - June 30FFC: July 1 - June 30Fauji: October 1 - September 30Topsoe: January 1 - December 31

FOR OFFICIAL USE ONLY

PAKISTAN

APPRAISAL OF FAUJI FERTILIZER PROJECT

TABLE OF CONTENTS

Page No.

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

A. Background and Summary ... ................ ........ 1B. Bank Group Involvement in the Pakistan

Fertilizer Sector *** .......................... . 2

II. THE COMPANY ...................................... ... 3

A. Organization and Management ......................... 3B. The Fauji Foundation ...... ......................... 4C. Haldor Tops$e A/S .................................. 5D. Anic S.p.A. .................................................... 6E. James Chemical Engineering .............. ..... 6

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

A. Fertilizer Consumption ................ ............. 7B. Fertilizer Supply ......................* ............ 8C. Projected Nitrogen Supply/Demand Balance ........... 9D. Fertilizer Pricing, Distribution and Credit ........ 10E. Fertilizer Planning Committee ...................... 11F. FFC's Market and Marketing ................. ...... 11G. Fertilizer Transportation Task Force .......... ..... 12

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

A. Project Scope ............................................ 0........ 13B. Gas Supply and Price ............................... 13C. Utilities and Other Raw Materials ................. ... 14D. Plant Location ....................................... 14E. Ecology and Safety Precautions ......... .. ........... 14F. Operational Manpower and Training .................. 14G. Project Execution ........... ......... ... .......... . 15H. Present Status of the Project ...................... 16

V. CAPITAL COST AND FINANCING PLAN ........................ 16

A. Project Cost .. ................... .................... 16B. Financing Plan ......... ............................ 18C. Procurement ... * .................................... 21D. Allocation and Disbursement of IDA Credit .......... 22

This report was prepared by Mr. H. Harald Burmeister of the IndustrialProjects Department.

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

TABLE OF CONTENTS (Continued) Page No.

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

A. Pricing ............................................ 22

B. Project Revenue and Profit ......................... 23

C. Production Costs .................... ..... ......... 25

D. Financial Projections ..... ......................... 25

E. Financial Rate of Return ............... ............ 26

F. Risks .............................................. 27

VII. ECONOMIC ANALYSIS ...................................... 28

A. Fertilizer and Raw Material Prices ................. 28B. Economic Rate of Return ............ .. .............. 28C. Foreign Exchange Effects ..... ................... 29D. Other Economic Benefits ......................... 29

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

ANNEXES

2-1 FFC's Corporate Structure. 322-2 Fauji Foundation..... 37

2-3 Haldor Tops4e A/S . . 442-4 Anic S.p.A. .47

3-1 Fertilizer Consumption. 493-2 Fertilizer Production and Supply/Demand Balance 633-3 Fertilizer Marketing . .743-4 FFC's Marketing Program . .94

4-1 Operational Manpower Need and Training ........ 994-2 Project Execution Organization. 1024-3 Technical Assistance to FFC . .1074-4 Project Execution Schedule . .1124-5 Process Description. 113

5-1 Capital Cost Estimate . . 1165-2 Price Escalation Allowance . . .1175-3 Working Capital Requirements .. .118

5-4 Tentative Allocation of Funds . . .1195-5 Disbursement Schedule for IDA Credit . .120

TABLE OF CONTENTS (Continued) Page No.

6-1 Assumptions Used for Financial Projections 1216-2 Manufacturing Costs at Full Capacity .1236-3 Pricing of Urea ....... ............ ....... 1246-4 Projected Income Statement... 1256-5 Projected Cash Flow Statement. 1266-6 Projected Balance Sheet Statement 1276-7 Break-Even Point .............................. 1286-8 Financial Rate of Return 1296-9 Financial Rate of Return: Sensitivity Analysis 130

7-1 Economic Analysis. 1317-2 Foreign Exchange Effects . .135

MAP

IBRD 10818R1 Pakistan - Present and Proposed Fertilizer Plants

PAKISTAN

APPRAISAL OF FAUJI FERTILIZER PROJECT

I. INTRODUCTION

A. Background and Summary

1.01 The proposed Fauji Fertilizer Project (the Project) consists of a

new natural gas-based urea plant with a capacity of 1,725 tons per day (tpd),

including an intermediate ammonia plant of 1,000 tpd capacity, and other

facilities. It is to be built at Goth Machhi, Punjab Province. A similar

project was prepared in 1976 and an IBRD loan of US$55 million approved by

the Board in April 1977. Before signing of the loan documents, the foreign

sponsor, Agrico Chemical Co. of the US, decided to withdraw from the Project.

Since then, the local sponsors have found new partners with whom they have

agreed to proceed with the Project. The Government of Pakistan has requested

that a US$55 million IDA Credit be granted to finance part of the foreign

exchange cost of the new project.

1.02 The Project's main parameters and the proposed amount of the Bank

Group's contribution have remained substantially unchanged. The plant is

scheduled to come on stream by mid-1981 and will increase Pakistan's nitrogen

capacity by nearly one-third. It is expected to make the country self-suffi-

cient in nitrogeneous fertilizers until 1984. The Project is expected to cost

up to US$272 million equivalent, including US$169 million in foreign exchange.

It is to be implemented and operated by the Fauji Fertilizer Company Ltd.

(FFC), which was formed in May 1978 by the Fauji Foundation (Fauji), a

Pakistani charitable trust with satisfactory industrial experience, and Haldor

Topsje A/S (Topsoe) of Denmark, a well-known chemical plant design and process

development company. Anic S.p.A. of Italy, a parastatal manufacturer of fer-

tilizers and petroleum products, has been retained to operate the FFC plant

during its initial years. Fauji has subscribed 35.8% and Topsoe 6.4% of the

shares in the newly-formed company. The Islamic Development Bank (IDB) the

Danish Industrialization Fund for Developing Countries (IFU), and a consor-

tium of Pakistani commercial banks and financial institutions will own,

respectively, 12.2%, 6.4% and 39.2% of the shares, the latter also providing

the local debt. The proposed IDA credit would be made to the Government of

Pakistan, for on-lending to FFC. Additional external financing is to come

from the United States Agency for International Development (USAID) (US$40

million), Kreditanstalt fuer Wiederaufbau (KfW) (DM 95 million or about US$40

million equivalent), and Italian and Danish government loans of US$10 million

and US$3.9 million equivalent, respectively.

1.03 The Project is based on modern, commercially-proven technology.

Experienced companies pertaining to the Snam Group of Italy have been selected

for the engineering and construction of the plant; they will have financial

incentives to complete the Project on schedule and within a specified budget,

thereby minimizing the risk of construction delays and cost overruns. They

have begun the execution of engineering work and requested suppliers' bids for

some equipment.

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1.04 This report is a revised and updated version of the report entitled,

"Pakistan: Appraisal of Fauji-Agrico Fertilizer Project," issued on March

15, 1977 and, thus, does not entirely conform with the new format for Staff

Appraisal Reports instituted as of 1977. A number of the Annexes to the 1977

Appraisal Report have been omitted from this report whenever their contents

were not of relevance in the context of this re-submission.

1.05 The Project was re-appraised in April 1978 by Messrs. H. Harald

Burmeister and C. J. Pratt, during visits to Pakistan and Denmark and fol-

lowing earlier meetings with the sponsors in Washington, D.C. The previous

report was prepared by Messrs. Iskander, Lietard, Pratt, Skapin and Stier of

the Industrial Projects Department.

B. Bank Group Involvement in the Pakistan Fertilizer Sector

1.06 The proposed Credit would be the Bank Group's third assistance to

the fertilizer industry in Pakistan. The first loan (US$32 million), together

with an IFC equity investment (US$2.9 million), was made in July 1968 to Dawood

Hercules Chemicals (DH) for a 345,000 tpy urea plant. 1/ The Project has

proven a technological and economic success. DH began production in July 1971,

virtually on schedule and close to the original budget, and has consistently

operated above rated capacity. But because of the devaluation of the Pakistan

Rupee in 1971, changes in taxation provisions and differences with the Govern-

ment on pricing and marketing arrangements, discounted returns on local and

foreign investment have decreased to 8% and 4%, respectively.

1.07 The second Loan (US$35 million) was made in May 1974 to the public

sector Pakarab Fertilizers Ltd. to expand and modernize its existing facil-

ities at Multan. 2/ This Project, now under construction and designed to

produce 330,000 tpy prilled nitrophosphate and 600,000 tpy calcium ammonium

nitrate, was appraised in the fall of 1973 before the sharp oil price increase

and has borne the full brunt of the subsequent worldwide inflation and equip-

ment delivery delays. It has also suffered from management deficiencies and

from shortages of skilled Pakistani manpower, attracted by higher wages in

the Middle East. Meanwhile, management has been strengthened and the Project

is now expected to be completed by August 1978, 20 months behind appraisal

schedule. The total financing required is estimated at US$198 million, or 86%

above the appraisal estimate of US$106 million. The company has obtained the

additional financing required. Due to higher international fertilizer prices,

the Project remains economically viable.

1.08 The Bank Group has played an important role in helping prepare

the FFC project. IFC had originally introduced Fauji, which was seeking a

foreign partner with experience in the fertilizer industry, to Agrico. This

1/ Appraisal Report No. AA-4a, June 20, 1968. A Project Performance Audit

Report No. 1235 was issued on November 10, 1976.

2/ Appraisal Report No. 373-PAK, April 3, 1974.

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joint venture approach was encouraged by the Government since the Government-

owned National Fertilizer Corporation (NFC) was already overstretched in

constructing two large projects (at Multan and Mirpur Mathelo), and the two

existing private sector fertilizer companies--Esso Pakistan Fertilizer Ltd.

and DH--had no expansion plans. After Agrico's withdrawal, the Bank continued

to assist Fauji in restructuring the Project to fit the new circumstances.

FFC has now contracted with Anic to operate the new plant, with James Chemical

Engineering (JCE) of the US to provide technical advisor services and with

Topsoe, in addition to joining as an equity partner and providing technical

assistance in implementing the Project, to adequately strengthen its marketing

capability. Earlier, the Bank Group had assisted the Government and the

sponsors in formulating a framework for pricing and marketing the fertilizer

produced so as to simultaneously ensure efficient project execution and

operation, reasonable fertilizer prices, and an attractive return on sponsors'

equity.

1.09 The proposed Project is believed to incorporate the lessons learned

from the DH and NFC projects. It embodies the elements that have contributed

to DH's technological and economic success, namely: the involvement of local

and foreign partners who combine the knowledge of local conditions with tech-

nical, operating and marketing experience; the hiring of engineering firms

which have recent experience in constructing an ammonia/urea plant (the

Pak-Saudi Fertilizers Ltd. plant at Mirpur Matelo) which is almost identical

in design to the Project plant and in a location only 20 miles from the FFC

site; emphasis on reliable plant design; and careful planning and training.The Marketing and Pricing Principles Agreement between the Government and

FFC deals satisfactorily with the pricing, taxation, devaluation and marketing

issues which have adversely affected DH's financial performance. Similarly,

the contracts between FFC and the engineering firms provide a satisfactory

framework for dealing with project implementation problems that have affected

the other projects.

II. THE COMPANY

A. Organization and Management

2.01 The Project will be owned and carried out in the private sector

by FFC, a limited liability company formed in May 1978 under the Pakistani

Companies Act of 1913, with an authorized capital of US$81.6 million equi-

valent. The relationship between the two principal equity investors, Fauji

and Topsoe, is governed by the Participation and Shareholders Agreements;

they are acceptable to the Association and have been approved by the Govern-

ment. This also applies to the Technical Assistance and Know-How Agreements

between FFC and Topsoe, the Technical and Operating Services Agreement with

Anic and the Technical Advisor Service Agreement with JCE. Under these

Agreements, Topsoe and Anic will provide FFC, for reasonable fees, all their

needed current and future know-how relating to engineering, design, procure-

ment, plant operation and marketing, and will also assist in training FFC's

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personnel; Topsoe will, furthermore, assume the primary role in project execu-tion and will supervise the engineering firms which will be paid lump-sum feesfor plant engineering, design and procurement services, plus reimbursable feesfor construction and erection supervision; the latter provision would allowthe engineering firms to supplement local skilled personnel by foreign per-sonnel where necessary. In addition to assuming responsibility for operatingmanagement for a period of at least three years after start-up, Anic willparticipate in the design, engineering, pre-start-up and commissioning stagesof the plant. JCE will provide independent technical advisor services toFFC's Managing Director during the construction period.

2.02 FFC's corporate structures during construction and during commercialoperation are descbribed in Annex 2-1. FFC's Board will be composed of 13directors, of which Fauji will appoint 6, and the other shareholders, oneeach. The Participation Agreement stipulates that the Managing Director ofFauji will also be the Managing Director and Chief Executive of FFC. Also,Fauji will appoint the Assistant Managing Director, to be responsible forday-to-day operations, and the Manager, Finance and Administration. Topsoewill appoint the Project and Marketing Managers; Anic will appoint the Managerof Operations. This organizational structure, which combines Topsoe's tech-nical and marketing know-how, Anic's operating expertise, and JCE's advice onengineering, along with Fauji's working experience under local conditions, isexpected to provide a sound basis for project execution and operation.

2.03 FFC is headed by Maj. Gen. (Retd.) Rao Farman Ali Khan, the ManagingDirector of Fauji Foundation, an experienced businessman, administrator andmilitary officer. Resumes of management appointees, who are all consideredqualified and acceptable by the Association, are summarized in Annex 2-1.

B. The Fauji Foundation

2.04 The Fauji Foundation is a charitable trust, set up in 1953 andoperated for the benefit of military veterans. Its basic purpose is to pro-vide medical services and educational stipends for ex-servicemen and theirfamilies. Apart from a medical center and four small hospitals, Fauji operatesnine industrial ventures with total 1977 sales of PRs 763 million--three sugarmills (generating about 59% of Fauji's sales), three textile mills (39%), agas bottling and distribution company and a food processing firm (2%). Somesalient features of Fauji's audited earnings and financial position aresummarized below from Annex 2-2.

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Fauji: Summary Financial Position(in PRs Million)

Year Ending September 30 1971 1973 1975 1976 1977

Sales 111.2 310.6 510.8 581.8 762.8Earnings 17.5 33.6 15.6 28.9 94.8- Welfare Expenditure 3.9 8.2 10.0 12.9 15.4- Retained Earnings 13.6 25.4 5.6 16.0 79.4

Fixed Assets 34.6 241.9 298.5 327.9 324.3Current Assets 128.6 212.7 347.8 403.2 501.6- Time Deposits 75.7 82.5 146.2 167.4 170.7Current Liabilities 19.8 89.0 240.6 308.0 328.2Long-Term Liabilities 11.2 150.4 125.8 120.9 117.8Equity 132.1 215.2 279.9 302.2 379.8

Debt/Equity Ratio 8/92 41/59 31/69 24/76 24/76Current Ratio 6.1 2.4 1.4 1.3 1.5

2.05 To better finance its charitable activities, which have expandedfrom about PRs 3.9 million in 1971 to PRs 15.4 million in 1977, Fauji hasincreasingly shifted its investments from fixed income securities to indus-trial activities, as shown in the nearly tenfold increase in fixed assets inthat period. The effect of the new investment policy is reflected in theFoundation's rising profitability (except for the recession years 1974 to1976, when earnings were negatively affected by a slowdown in the textileindustry). As the above table indicates, Fauji's capitalization and liquidityhave remained sound. As discussed in para 5.06, Fauji's projected cash flow(Annex 2-2) over the next three years when the fertilizer plant is to beconstructed, together with its present liquidity positionb are expected to beadequate to meet its equity commitment for the Project.

C. Haldor Topsoe A/S

2.06 Topsoe is incorporated under the laws of Denmark with a sharecapital of about US$5 million equivalent, 50% of which is owned by the Topsoefamily through the Topsoe Foundation and 50% by the Italian Snamprogetti S.p.A(Snam), a large, internationally recognized engineering firm selected toexecute the Project. Topsoe is a research, engineering and consulting companyspecializing in heterogenous catalysis and the design of industrial plantsbased on catalytic processes. It maintains extensive research laboratoriesand develops and manufactures catalysts, especially for the fertilizer andgas industries, and licenses a number of processes for them. Its engineeringactivities comprise basic engineering, particularly for contractors in connec-tion with license agreements, detailed engineering and consulting services.As of December 1977, the company's net fixed assets had a value of about US$18million equivalent, its revenues for the year from the sale of catalysts, and

contract services and licenses totaled US$27 million equivalent, with anafter tax net income of US$2 million equivalent. For a more detaileddescription of the company, see Annex 2-3. Topsoe has extensive experiencein engineering as the main contractor of fertilizer plants in Europe andseveral developing countries. The company, thus, appears to be qualfified toadequately provide the Project with the technical know-how needed for itsimplementation.

D. Anic S.p.A.

2.07 Anic, like Snam, is part of the Italian state-owned Ente NazionaleIdrocarburi (ENI) Group. Together with subsidiary and affiliated companies,

Anic is one of the three largest Italian chemical manufacturer with operationsin fields ranging from base to fine chemicals, and with substantial interestsin the sectors of fertilizers, synthetic rubbers, plastics, chemical fibers andintermediate chemical products. Its headquarters are located near Milan, with22 operating plants in Italy and 3 abroad. Fertilizer is manufactured in fourof the Italian locations. Near Manfredonia, in the South-East of Italy, Anicoperates a plant which is largely identical with the one to be constructed byFFC. Anic employs 22,000 people. Its 1976 total consolidated sales amountedto US$1.1 billion equivalent; in 1975 and 1976, the company did not makeprofits. Further information on Anic and ENI is given in Annex 2-4.

2.08 Anic has the capability and manpower availability to adequatelyperform its role as an operating company for the project.

E. James Chemical Engineering

2.09 JCE is a US consulting firm in the fertilizer field. It has pro-vided services to a number of fertilizer projects in the US and many partsof the world, including some financed by the Bank, USAID and IFC in Indonesia,Bangladesh, Egypt and India. JCE has agreed to advise FFC for a period ofthree years on the design, procurement, erection and commissioning of itsplant. The Technical Advisor Services Agreement calls for 225 man-months ofservice to be provided for assignment at the project site, in Rawalpindi andin Milan.

2.10 JCE has the capability of adequately and independently advising FFCin a capacity of Owners Representative. In the opinion of the lenders, theprovision of such services to the Company is required in view of the closestructural relationship between Topsoe, FFC's foreign partner, Anic, theoperating company, and Snam, the primary engineering firm and shareholderof Topsoe.

III. FERTILIZER MARKET AND MARKETING

3.01 A detailed account of the fertilizer sector in Pakistan is givenin Annexes 3-1 through 3-3. As shown in the table below, both production andimports of fertilizers have been increasing rapidly since 1961. In 1977,

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domestic production accounted for 60% and 10% of nitrogenous and phosphaticfertilizer consumption, respectively. All potash requirements, mostlyused on tobacco, are met through imports.

Pakistan: Past Fertilizer Consumption, Production and Imports('000 nutrient tons)

Year Ended Nitrogen (N) Phosphate (P2 05 ) Potash (K20)

June 30 Consump. Product. Imports I/ Consump. Product. Imports 1/ Imports

1961 31 10 21 - - -

1966 69 46 23 1 1 - -

1973 386 274 112 49 8 41 1.41974 342 300 42 58 4 54 2.71975 363 320 43 61 6 55 2.11976 445 317 128 109 11 98 1.81977 511 312 199 118 12 106 2.2

1/ incl. stock variations, etc.

A. Fertilizer Consumption

1. Past Trends

3.02 As shown on the table below, during 1966-1971, nitrogenous andphosphatic fertilizer consumption increased from low bases at average annualrates of 29% and 90%, respectively. This was primarily due to the introduc-

tion of high-yielding varieties of rice and wheat during the mid-1960s,increased availability of water, and attractive fertilizer prices. The 1973floods, the d5ought and the mishaps at the Tarbela Dam, mainly in 1974 and1975, and the doubling of fertilizer prices (reflecting high import prices)without a commensurate increase in crop prices, led to decline and stagnation,respectively, in nitrogenous and phosphatic fertilizer consumption during1973-75. The disruption of the fertilizer distribution system, followingthe takeover of fertilizer marketing in 1973 by the Provincial Governments,further contributed to this decline.

Pakistan: Average Annual Growth Rates of Fertilizer Consumption (%)

Period N P 0 KO0____ ~~~ ~~2 5 2

1966 - 1971 29 90 -1971 - 1976 12 29 81976 - 1977 15 8 22

3.03 In response to this negative development, the Government took anumber of steps in 1975 and 1976 to stimulate fertilizer demand. It improvedthe attractiveness of using fertilizer by increasing crop prices and reducing

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fertilizer retail prices, allowed the fertilizer companies to revive theirown marketing and distribution systems, and increased their marketing margins.In addition, measures were taken to increase availability of agriculturalcredit to small and medium farms and to simplify lending procedures. Allthis, combined with good weather, resulted respectively in a 23% and 79%increase of N and P 05 consumption in 1976 and a further 15% and 8%,respectively, in 1977. The increase in phosphatic fertilizer consumption waslargely due to the Government's policy of maintaining a favorable price forphosphatic fertilizer to correct a serious imbalance in the nitrogen/phosphate(N:P) ratio. As a result, N:P ratio decreased from 14:1 in 1968 to 8:1 in1970 and 4:1 in 1977. It is still, however, double the recommended ratio of2:1.

3.04 Fertilizer is used mainly in irrigated areas on wheat (58% oftotal consumption), cotton (15%), sugarcane (14%), rice (9%) and maize (4%).Urea remains the most popular nitrogenous fertilizer and accounts for about85% of the N consumed. Despite the rapid increase, fertilizer consumptionremains fairly low by international standards; in 1973 application ratesaveraged about 21 kg of nutrient per ha compared, for example, to 161 kg perha for Egypt and 317 kg per ha for Korea. Depending on the type of crop,application rates in Pakistan are only 1/4 to 1/3 the recommended levels.

2. Prospects

3.05 Demand projections up to 1985, based on likely cropping patterns,availability of water and existing benefit/cost ratios for using fertilizers,are given in Annex 3-1. Between 1977 and 1985, consumption of nitrogenousfertilizer is expected to increase from 511,000 to 954,000 nutrient tons,implying an average 8.1% annual growth rate. Annual consumption growth isprojected to progressively decline from 15% achieved in 1977 to about 7% in1981, and about 6% in 1985, as opportunities for further increasing watersupply and using high-yielding seed varieties diminish. A larger growth rateis feasible but will require structural improvements in the efficiency ofthe irrigation system (such as control of salinity, water logging, and soilerosion) and the development of a policy and an institutional framework tobetter reach the small and medium farms.

3.06 Demand for phosphatic fertilizer is expected to almost triple from118,000 nutrient tons in 1977 to 329,000 nutrient tons in 1985. These pro-jections are predicated on the assumption that the Government will maintainits pricing policies to improve the N:P balance from 4:1 in 1977 to 3:1 in1985.

B. Fertilizer Supply

1. Existing Plants

3.07 There are five fertilizer plants in operation inPakistan, with a total combined capacity of 317,000 tpy of nitrogenous and17,500 tpy of phosphatic nutrients. Two are medium-sized plants in theprivate sector: Esso Pakistan Fertilizer Company Ltd. (76,000 tpy of N) and

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Dawood Hercules (163,000 tpy of N) which have consistently operated at over100% of capacity; they account for 75% of the industry's installed capacityfor N and over 85% of output. The remaining plants (with a combined capacityof 78,000 tpy of N) are operated by NFC; because of design deficiencies in theammonia units, the capacity utilization of one plant has averaged about 40%.In 1977, local production met about 60% of the nitrogen but only 10% of theP 20 consumption.

2. Future Supply

3.08 Ongoing investments in three large fertilizer projects, includingFFC, at a cost of about US$700 million, will increase Pakistan's nitrogenand phosphatic fertilizer production capacity by 320% and 900% respectivelyby 1982. Two of these projects--Pakarab at Multan (scheduled to start commer-cial operation by late-197 8) and Pak-Saudi at Mirpur Mathelo (late-1979)--willbe operated by NFC. The third, FFC, will be in the private sector.

C. Projected Nitrogen Supply/Demand Balance

3.09 The following table gives Pakistan's supply/demand prospects fornitrogenous fertilizers until 1985:

Pakistan: Projection of Nitrogen Supply and Demand('000 tons of N)

DesignCapacity 1978 1979 1980 1981 1982 1983 1984 1985

Existing Plants 317 285 259 b/ 259 259 259 259 259 259

Under ConstructionPakarab (Expansion) 245 - 162 212 225 225 225 225 225Pak-Saudi 245 - - 162 212 225 225 225 225

Sub-Total 807 285 421 633 696 709 709 709 709

FFC Project 262 - - - - 170 223 236 236

Total Supply 1,052 285 421 633 696 879 932 945 945

Projected Demand 584 642 706 757 802 850 900 954

Supply Surplus (Deficit)Without FFC (299) (221) (73) (61) (93) (141) (191) (245)With FFC (299) (221) (73) (61) 77 82 45 (9)

a/ For new and expansion projects, capacity utilization is assumed to be65% in the first year of operation, 85% in the second year and 90%

thereafter.b/ 1979 decline due to phase-out of existing Multan facilities.

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3.10 With the implementation of the proposed FFC Project, Pakistan isexpected to be self-sufficient in nitrogenous fertilizer until 1984, with anegligible surplus resulting during the first three years of FFC's operation(1982-84). This production may have to be supplemented by imports in theevent of slippage in the completion of new plants, lower than assumed capacityutilization, higher than projected demand, or an increase in stocks withproducers and dealets from the present minimal levels to perhaps as much astwo months' consumption (up to 150,000 tons of N equivalent). Alternatively,an expansion of the existing DH plant could be envisaged to prevent newshortages from occurring in the mid-1980s. Such a possibility is beingdiscussed in Pakistan but preparation of a specific project has not yet begun.In the event DH should be ready to come on stream with a doubling of theircurrent production (167,000 tons of N) two years after FFC, under currentassumptions for market growth, the development of shortages could be delayeduntil about 1990.

D. Fertilizer Pricing, Distribution and Credit

1. Fertilizer Pricing

3.11 The Government sets both retail and ex-factory prices for ferti-lizers. Retail prices, uniform throughout the country, are reviewed perio-dically in the context of import prices, domestic production and marketingcosts, and the relation between crop and fertilizer prices. The ex-factoryprice is established on a case-by-case basis, in principle with the aim ofallowing each manufacturer a fair return on invested capital. The Governmentalso allows fertilizer producers and importers a marketing margin to covertransportation and marketing costs. During recent years, retail prices (PRs1,360-1,500 per ton of urea) were higher than the prices paid to domesticproducers (PRs 784-856). The difference less the distribution costs, includingdealer margins, was kept by the Government as a "development surcharge" withwhich it subsidized imports.

3.12 Because of higher import prices, between 1973 and 1975 the Govern-ment increased urea prices in stages from PRs 570 to 1,500 per ton without acommensurate increase in crop prices. By 1975, only sugarcane and cotton,which had a benefit/cost ratio over 2.5 (the minimum ratio considered neces-sary to induce farmers to use fertilizers), remained attractive candidates forapplication of additional fertilizer. To stimulate fertilizer demand, theGovernment reduced the urea retail price in 1976 to PRs 1,360 per ton andincreased prices of major crops. The resulting benefit/cost ratios for cashcrops (5.0-5.6) are favorable; those for food crops (2.5-3.5), however,need further review to provide a sufficient incentive to increase productionof food crops by more use of fertilizer.

2. Distribution

3.13 In October 1975, the Government once again allowed private sectormanufacturers and distributors, which accounted for about 80% of fertilizersales prior to the 1973 nationalization of fertilizer distribution, to marketboth nitrogenous and phosphatic fertilizers without any territorial restric-tions. NFC has set up its own marketing organization, thus shifting theresponsibility for fertilizer marketing from the public trading agencies to

the fertilizer producers. Despite an increase, in 1977, of dealer commis-sions from PRs 28 to PRs 40 per ton of fertilizer, the marketing margins still

remain small for adequate promotional and educational programs and need to berestructured to induce producers, wholesalers and dealers to undertake a morevigorous promotional and educational program for small and medium farms. The

Government has agreed to keep this matter under review, and particularly withregard to dealers' commission, will by October 31, 1978, make proposals to theAssociation for a further increase, to be implemented not later than December

31, 1978.

3. Credit

3.14 Largely as a result of simplification in agricultural lending pro-cedures and the participation of commercial banks in such lending, startingfrom 1972, agriculture credit increased from PRs 330 million in 1973 to anestimated PRs 1,600 million in 1977, of which about 20% was for fertilizers.The number of commercial bank branches increased from 3,200 in 1972 to more

than 6,400 in 1977, when their disbursements for agricultural loans were aboutPRs 790 million, of which 60% was for fertilizers.

3.15 Lack of credit appears, however, to still be a constraint on largerfertilizer use. A joint study by NFC and USAID (October 1976) indicates thdtonly 45% of the farmers buy their fertilizer on credit: 4% from institutionalsources and 41% from landlords, family, friends and dealers. The study alsoindicates that 20% of farms in irrigated areas and 55% on rain-fed land donot use fertilizers, and 25% of non-users have cited lack of finance as their

main reason for such non-use.

E. Fertilizer Planning Committee

3.16 The Government has established a Fertilizer Planning Committee. Itswork program which is satisfactory to the Association includes; (i) review andcoordination of policies and programs in the fertilizer sector, notably onpricing, marketing margins and credit; (ii) establishment of a sound statis-tical base for better planning the fertilizer sector; and (iii) explorationof alternative organizational frameworks to coordinate fertilizer policies andprograms.

F. FFC's Market and Marketing

3.17 The Project will produce urea, which accounts for about 85% ofnitrogenous fertilizer consumed in Pakistan. According to its Marketing andPricing Principles Agreement with the Government, FFC will be responsible formarketing all its output as well as some phosphatic fertilizers; FFC can do sowithout any territorial restrictions. Based on a transportation and marketingstudy carried out in February 1976, FFC plans to market 80% of its sales(512,300 tpy of urea and 125,000 tpy of imported MAP) in the Punjab, whichaccounts for 65% of the total fertilizer consumed in Pakistan and where FFC'smarket share would be about 30%. The remaining 20% would be marketed in theSind which accounts for 25% of fertilizer consumed in Pakistan; FFC's share

in the Sind would be about 20% (Annex 3-4).

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3.18 To provide the Project with an adequate marketing capability, Topsoehas strengthened its staff by hiring, for assignment to FFC, Mr. J. A. Ward,a citizen of the U.K., who has a background inter alia, as long-time marketingmanager of Esso Pakistan Fertilizer Co. FFC's marketing plans include trainingprograms for employees, agents and dealers, farm demonstration programs andadvertisement. Furthermore, FFC has agreed to undertake, prior to plantstart-up, a 2-year fertilizer seeding program during which about 320,000 tonsof urea and 60,000 tons of MAP would be sold. The Government has agreed toallow the Company to obtain local or imported fertilizer in sufficient quan-tities to undertake such a program effectively. FFC will formulate and theGovernment approve a fertilizer seeding program satisfactory to the Associa-tion by no later than September 30, 1978.

3.19 On the basis of the transportation and marketing study mentionedabove, FFC plans to move 50-60% of its output by truck up to distances of250-300 miles. No difficulty is expected in obtaining the 100-120 trucksper day required. The balance would be transported by rail to six or sevenstrategically located fertilizer depots, using unit trains of 70-80 wagonseach to shuttle between the plant and the depots, whose exact locations willbe determined during the seeding period. This approach is intended to easethe railway congestion that could arise in the early 1980s because of theimplementation of three new fertilizer plants--Pak-Arab, Pak-Saudi and FFC--with a combined production of 1.3 million tons per year. The study alsoconcluded that existing railway and wagon capacities would be sufficient toservice these plants, provided unit trains are used in an efficient manner.

G. Fertilizer Transportation Task Force

3.20 To ensure that transportation receives the attention required, theGovernment has set up a Fertilizer Transportation Task Force of the railwaysand fertilizer companies to formulate detailed action programs and supervisetheir implementation. The work program for the Task Force has been reviewedby the Association and is acceptable to it.

3.21 In view of the difficulties experienced at the present time inmoving the current fertilizer production, it is considered essential for thistask force to develop, as soon as possible, and, if feasible, in advance ofthe start-up of NFC's expanded facilities at Multan in late 1978, an adequatetransportation master plan, to avoid major problems in the movement of ferti-lizer in the future. The Government has also agreed to cause the PakistanRailways to provide sufficient locomotives and railway wagons for FFC'srequirements.

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IV. THE PROJECT

A. Project Scope

4.01 The Project, which is to be owned and operated by FFC, consists

of (i) a 1,725 tons per day (tpd) prilled urea plant, (ii) an intermediate

ammonia plant of 1,000 tpd, (iii) a 33-mile pipeline to transport natural gas

from the nearby Mari gas field to the project site, and (iv) all necessary

ancillary facilities, namely, a urea bagging plant, storage and loading

facilities, water pipeline and water purification system, effluent treatment

units, a power plant, maintenance and off-site facilities, and a housing

colony. The ammonia and urea plants will both be single stream, economic-sized

units of modern proven design. On the basis of 330 stream days per year, the

plant will have a capacity of 570,000 tpy of urea (262,000 tpy of N).

B. Gas Supply and Price

4.02 Exploitation operations of the Mari gas field, located in the

Northern part of Sind Province, are jointly owned by Esso Eastern Inc. (51%)

and the Government of Pakistan (49%), with Esso Eastern being in charge of

development and operation. Mari gas has a relatively high carbon dioxidecontent which reduces its value for heating purposes but makes it ideal for

producing urea. Accordingly, the Government has reserved output of the Mari

field for fertilizer production. The field's total estimated reserves are 4.0

trillion cubic feet (TCF), of which 1.8 TCF are proven. At present, the Esso

Pakistan Fertilizer Co. Ltd. plant at Dharki is the sole user of Mari gas and

the Pak-Saudi project will become the second by late-1979. Esso Eastern has

allocated, with the Government's approval, 0.3 TCF of gas to Esso Fertilizer,

0.75 TCF for Pak-Saudi and another 0.75 TCF for the proposed FFC project.

With these allocations, which add up to the field's presently proven reserves,

Mari could supply the three plants for about 25 years. Furthermore, it is

estimated that assured plus reasonably assured reserves could supply plants

such as these for about 57 years.

4.03 If, however, an additional plant of FFC's size were established and

used Mari gas, the assured reserves would meet the gas requirements of the

four plants for only about 15 years. Accordingly, the Government has agreed

to guarantee the timely availability of the required gas to FFC and not

sanction any new users until sufficient additional reserves are proven to

satisfy those users without jeopardizing the availability of gas to the three

sanctioned projects.

4.04 The gas contract between Esso Eastern and FFC to supply the Project

with gas for 20 years has been approved by the Government. The base price to

FFC at the gathering point in 1980 will be PRs 2.75 per MSCF (at 700 BTU per

SCF) including PRs 1.60 per MSCF in taxes, and is subject to a cost escalation

formula.

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C. Utilities and Other Raw Materials

4.05 All power required for the Project and the housing colony will begenerated on site, using Mari gas. Water will be drawn most of the year froma nearby canal and will be supplemented from tubewells during the annual canalmaintenance period of about three weeks.

4.06 All the plant's output will be shipped in locally-made cotton bagslined with polyethylene. The Government has agreed to provide the foreignexchange required to pay for these and all other imports required for theefficient operation and maintenance of the Project.

D. Plant Location

4.07 The plant will be located on a 575-acre site at Goth Machhi in thePunjab province, near the Sind border. The site has suitable soil character-istics, is close to a railroad line, highway and water supply, and has amplespace for expansion. It is about 375 miles from both Karachi and Lahore,along the main railway line and highway connecting the two cities. Thetransportation and marketing study (para 3.17) concluded that in view ofthe relatively small amounts of gas required and unsuitability of the gasfor other purposes, it would be more economical to build the plant near thegas field and transport the product to its markets, mainly in the Punjab, thanto locate the plant closer to its markets and to pipe the gas to it.

E. Ecology and Safety Precautions

4.08 The plant will be designed and operated in a way to permit FFC tomeet ecological, environmental and safety standards satisfactory to theAssociation. These standards will be achieved by good plant design ratherthan extensive waste treatment. Liquid and gas effluent will be treated toyield maximum recovery of nitrogen compounds and waste liquid will be neut-ralized in a holding pond prior to release.

F. Operational Manpower and Training

4.09 When in full operation, the Project will employ about 660 peopleincluding some 200 contract workers for product handling, loading, andgeneral labor (Annex 4-1). Given the rapid expansion of the fertilizerindustry in Pakistan, it is expected that initially only a relatively smallnumber of the some 100 key experienced personnel could be recruited inPakistan. FFC has therefore entered into a Technical Services Agreement withAnic for operating the plant during the initial three years after start-up, aswell as for selection and training, partly at Anic's plants, of Pakistanioperating, supervisory, and engineering personnel who will be expected toeventually operate and maintain the plant. FFC has agreed to submit a de-tailed training program to the Association no later than December 31, 1978,and to implement it promptly.

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G. Project Execution

4.10 Topsoe will have prime responsibility for project execution, as

shown in the project execution organization chart given in Annex 4-2. Mr. I. C

Carstensen, an experienced Topsoe project engineer, has been appointed Project

Manager. He will report to FFC's Managing Director and will liaise with

Topsoe's Project Director in Denmark. In preparation of its operating role,

Anic will provide know-how and advice during engineering, construction and

commissioning of the plant. JCE will assist FFC by independently advising

on design, engineering, procurement, construction and commissioning.

4.11 As noted above, FFC has selected Snamprogetti S.p.A. (Snam) of

Italy, as the engineering firm for the Project; Coming S.p.A., an Italian

construction firm wholly-owned by Snam, will be responsible for project

construction. Snam will employ the commercially proven Topsoe ammonia

process with which it is experienced, and will design and procure the urea

and ammonia plants and offsites, acting as the prime engineering firm respon-

sible for coordinating the erection and commissioning of the entire plant;

Snam will fully guarantee the work to be performed by Coming S.p.A. The

direct selection of Snam by the sponsors was accepted by the Lenders because

Snam's contract price and services in 1978 compared very favorably with the propo-

sals evaluated in 1976 for the Fauji-Agrico Project. This earlier competitionand evaluation process provided a good basis for establishing the reasonable-

ness and competitiveness of the Snam proposal. JCE, in its role as Owner's

Representative, has carefully reviewed the activities of Snam to date and will

continue to do so to assure appropriate supervision of Snam.

4.12 The contracts signed by FFC with Snam and Coming in May 1978 and

which are acceptable to the Association, USAID and KfW, are based on a

lump-sum fee for plant engineering, design and procurement services, and

reimbursable fees for supervision of construction and erection. The latter

provision allows the engineering firms to supplement local skilled labor by

foreign personnel in case of shortage. The contracts include penalty provi-

sions as an incentive to complete the Project on schedule and within a speci-

fied budget. Snam has assumed full liability for foreign exchange cost

overruns beyond US$12 million above the US$105 million for the landed cost of

equipment, materials and spares included in the Base Capital Cost Estimate

(Annex 5-1).

4.13 Under its Technical Assistance and Know-How Agreements, Topsoe will

make available to FFC its current and future proprietary and technical in-formation relating to project engineering, design, equipment procurement,

plant operation and marketing. Topsoe will be paid (i) a fixed fee (free

of Pakistani tax) of US$1.0 million, to be reduced by any reimbursements by

FFC for actual pre-project expenses, payable during the first two years of

commercial operation, plus (ii) a royalty, payable annually, of US$1 for every

ton of urea produced and sold during a period of ten years, provided that

production in the first year of operations reaches at least 65% of capacity,

85% in the second and 90% thereafter. Out of the royalty, if earned, Anic

will receive US$0.50 per ton as an incentive for the duration of its operating

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contract. In addition, Anic and JCE will be reimbursed for up to US$4 millionof pre- and post-start-up assistance, marketing, training and head officeexpenses. Fauji will be reimbursed for expenses, estimated at US$1.5 millionequivalent, incurred prior to the formation of FFC, all as included in thedetails shown in Annex 4-3. The average total cost (including overhead,travel, and living expenses) for managerial and technical personnel providedby Topsoe, Anic and JCE is estimated at US$7,500 per man month. This assis-tance package and its costs have been approved by the Government and aresatisfactory to the Association and the other lenders.

4.14 The project execution schedule is shown on Annex 4-4. A ProcessDescription is attached as Annex 4-5.

H. Present Status of the Project

4.15 Project preparation is well advanced. Relevant agreements have beensigned between Fauji and Topsoe and between FFC and outside parties and havebeen approved by the Government. Engineering and procurement has been ini-tiated (see para 5.13) and local Civil Works contracts were awarded inJune 1978.

V. CAPITAL COST AND FINANCING PLAN

A. Project Cost

5.01 The financing required for the Project is estimated at US$260.3 mil-lion, including US$158.8 million in foreign exchange. Details of the projectcost estimate are given in Annexes 5-1, 5-2 and 5-3 and summarized below:

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Summary of Capital CostIn PRs Million In US$ Million

Local Foreign Total Local Foreign Total %

Land and Site Preparation 28.7 8.9 37.6 2.9 0.9 3.8 2.0

Buildings & Structures 96.0 69.3 165.3 9.7 7.0 16.7 8.9

Equipment, Materialsand Spares 9.9 827.7 837.6 1.0 83.6 84.6 45.1

Freight & Handling 12.7 54.4 67.3 1.3 5.5 6.8 3.6

Erection, Constructionand Supervision 94.1 139.5 233.6 9.5 14.1 23.6 12.6

Gas and Water Lines 21.8 42.6 64.4 2.2 4.3 6.5 3.5

Licenses & Engineering - 156.4 156.4 - 15.8 15.8 8.4

Total Plant Cost 263.4 1,298.8 1,562.2 26.6 131.2 157.8 84.1

Township 117.9 1.0 118.9 11.9 0.1 12.0 6.4

Technical Assistance - 40.6 40.6 - 4.1 4.1 -Training - 7.9 7.9 - 0.8 0.8 0.4

Pre-establishment Costs 29.7 4.0 33.7 3.0 0.4 3.4 -

Start-up Expenses 9.9 9.9 19.8 1.0 1.0 2.0 1.1

Stamp Duties and OtherFees 66.3 - 66.3 6.7 - 6.7 3.6

Administrative expenses,consulting & profes-sional fees 5.9 2.9 8.8 .6 0.3 0.9 .5

Base Cost Estimate (BCE) 493.1 1,365.1 1,858.2 49.8 137.9 187.7 100.0

Physical Contingency (PC)(6.6% of BCE) 42.5 80.2 122.7 4.3 8.1 12.4

Price Escalation(13.2% of BCE & PC) 135.6 126.7 262.3 13.7 12.8 26.5

Total Installed Cost 671.2 1,572.0 2,243.2 67.8 158.8 226.6

Working Capital 125.7 - 125.7 12.7 - 12.7

Total Project Cost 796.9 1,572.0 2,368.9 80.5 158.8 239.3

Interest During Const. 207.9 - 207.9 21.0 - 21.0

Total FinancingRequired 1,004.8 1,572.0 2,576.8 101.5 158.8 260.3

5.02 The above cost estimate is based on detailed capital cost estimates

prepared by Snam in January 1978, and on costs of comparable urea fertilizer

projects recently financed by the Bank Group. The Project is exempt from

import duties. Physical contingencies are calculated on the basis of 5% for

equipment and 10% for civil works, handling and freight. Price escalation

for equipment is based on projected annual equipment price increases of 7.5%

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during 1978-79 and 7% thereafter. On civil works, escalation rates of 15% peryear during 1978-79 and 12% thereafter have been assumed. These rates, whichare high in comparison with the overall forecast rate of inflation in Pakistan,are based on evidence derived from similar, recently built remote-locationfertilizer plants of substantial increases in heavy construction work. Thissituation is expected to continue given the strains affecting the over-stretched heavy construction industry, mainly as a result of high local demandand emigration.

5.03 The project cost estimate includes working capital requirements forthe first operating year, estimated at US$12.7 million equivalent, excludingthe cost of spare parts and the initial supply of catalysts which are includedas equipment and material costs.

B. Financing Plan

5.04 Two financing plans have been developed: a base plan for US$260.3million--the best estimate of project financing required--and a contingentplan for US$272.0 million. The difference coincides with the amount by which,according to the agreement with Snam, the cost of equipment and material canincrease beyond the US$105 million now included in the basic cost estimate,before Snam would become fully liable. Given Snam's experience in projectexecution, the advanced stage of project preparation, and the fact that analmost identical plant is being constructed by Snam at nearby Mirpur Mathelo(Pak-Saudi Project), the higher figure is considered a reasonable upper limitof financing requirements. An adequate part of the US$11.7 million differencebetween the basic and contingent financing plans is provided in local currency(US$6.9 million) to cover overruns, if any, which might occur in civil works.

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Financing Plans(US$ Million Equivalent)

Base Plan Contingent PlanLocal Foreign Total Local Foreign Total %

EquityCommon -Fauji Foundation 27.6 - 27.6 29.2 - 29.2 10.7

Haldor Topsoe 1.8 3.2 5.0 2.9 2.3 5.2 1.9IFU 1.8 3.2 5.0 2.8 2.4 5.2 1.9Islamic Development Bank - 10.0 10.0 - 10.0 10.0 3.7Pakistani Investment and

Industrial DevelopmentCorporations 16.3 - 16.3 17.0 - 17.0 6.2

PreferredPakistani Banks andFinancial Institutions 14.0 - 14.0 15.0 - 15.0 5.6

Total Equity 61.5 16.4 77.9 66.9 14.7 81.6 30.0

DebtIDA - 55.0 55.0 - 55.0 55.0 20.2USAID - 40.0 40.0 - 40.0 40.0 14.7KfW (up to DM 95 million) - 40.0 40.0 - 40.0 40.0 14.7Danish Government - - - - 3.9 3.9 1.4

Italian Government - 7.4 7.4 - 10.0 10.0 3.7Pakistani Banks andFinancial Institutions 40.0 - 40.0 41.5 - 41.5 15.3

Total Debt 40.0 142.4 182.4 41.5 148.9 190.4 70.0

Total Financing Plans 101.5 158.8 260.3 108.4 163.6 272.0 100.0

5.05 The above financing plans are based on a debt/equity ratio of 70/30.This may seem high for a new company building a grass-roots plant with all itsassociated infrastructure and having to repay its debt on a equal principalbasis. In this case, however, the agreement between FFC and the Government(para 6.01), allows the Company a high enough selling price, particularlyduring the initial years of operation, to enable it to service its debtwithout difficulty. Debt service coverage is projected to remain above 1.6and the current ratio above 2.3 throughout the Project's life. Nevertheless,as a precautionary measure, USAID has agreed to subordinate the on-lending ofits funds to that of other credits until the debt/equity ratio reaches 50/50;this is expected to be achieved during the sixth year of operation.

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5.06 FFC's share capital, to have been fully subscribed as a condition ofeffectiveness of the proposed Credit, will be paid in pari passu with loans tomaintain a debt/equity ratio of 70/30. Under both financial plans, Fauji willprovide 35.8% of the share capital up to US$29.2 million equivalent in localcurrency (PRs 289.1 million). As shown in para 2.06, Fauji's current assets,as of September 30, 1977, include time deposits of PRs 170 million which havebeen reserved to finance the FFC Project. This amount, plus part of the pro-jected PRs 270 million of expected revenue surplus during the period from 1978to 1980, would be sufficient to meet Fauji's equity commitment. Additionally,Fauji has agreed not to undertake without IDA's approval any new industrialinvestments or expansions in its existing industrial units, if thereby ex-penditures in excess of an aggregate PRs 100 million would be incurred, withinthe period ending one year after the Project Completion Date. 1/ Fauji willsubmit its audited annual financial statements to IDA in a timely manner.

5.07 Topsoe's contribution to FFC's capital (up to US$5.2 million) willbe provided from Topsoe's own resources or borrowed funds. The contributionby IFU in the same amount will be provided under an Investment Agreement withFauji and Topsoe. Topsoe and IFU expect to maintain their equity participa-tions until about 1988. Furthermore, Fauji and Topsoe have agreed not to sellor transfer any of their shares in FFC without prior approval of the Associa-tion and to take all necessary measures to ensure that FFC satisfactorilyperforms its obligations under the agreements with IDA and other parties. TheIslamic Development Bank (IDB) is considering an equity contribution of US$10million, the finalization of which will be a condition of the proposed IDACredit's effectiveness.

5.08 A consortium of three Pakistani public sector financial institutions--the Investment Corporation of Pakistan (ICP), the National Investment Trust(NIT), and the Pakistan Industrial Development Corporation (PIDC)--are commit-ted to provide a total of PRs 170 million (about US$17 million equivalent) forcommon stock. Both ICP and NIT will make their equity contribution from theirown resources without difficulty. PIDC will raise its equity contributionfrom a Government development loan, for which it has already obtained theGovernment's commitment. A consortium of five local commercial banks andtwo of the above financial institutions 2/, will contribute up to anotherPRs 150 million (about US$15.0 million equivalent) in equity in the form ofnon-participating preferred shares carrying a 16% cumulative dividend.

1/ For purpose of this covenant, the Project Completion Date will be thedate on which the facilities included in the Project have been tested andproven to be satisfactory in accordance with sound engineering proceduresand practices and have maintained daily production averaging 80% of fullcapacity for a period of at least 60 consecutive days.

2/ This consortium is led by ICP which will contribute PRs 29 million; itincludes NIT (PRs 29 million); and the five nationalized commercial bankswhich have committed themselves to a total of PRs 92 million--Habib Bank,National Bank of Pakistan, and United Bank (PRs 23 million each), MuslimCommercial Bank (PRs 14.5 million) and the Allied Bank (PRs 8.5 million).

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5.09 The Project's foreign exchange requirements not covered by theforeign equity will be met from foreign loans and credits. The proposed IDAcredit of US$55 million would be made to the Government on standard terms foron-lending to FFC at a rate of interest of 10%, for 15 years including fouryears of grace. This rate is comparable with the rates currently beingcharged for foreign currency loans granted by local financial institutions.The inflation rate in Pakistan from 1975-1978 has been in the area of 8% p.a.and is projected to continue at 7-8% for the following three years. The USAIDloan (US$40 million) which was committed in early 1977, will be made to theGovernment for 40 years including 10 years of grace, at an annual interest of2% during the grace period and 3% thereafter. The KfW loan (up to DM 95million) will also be extended to the Government at an interest rate of 2.1%for 30 years, including nine years of grace. The remainder of the foreignexchange needs will be covered by official loans of US$10.0 million equivalentand US$3.9 million, respectively, from the Governments of Italy and Denmark toPakistan, tied to purchases of goods and services in the respective countries,and which have been requested. These funds, as well as the AID and KfW loanswill be on-lent to FFC on the same terms as the IDA Credit. On all, theCompany will carry the foreign exchange risk. As mentioned earlier, theUSAID loan will be temporarily subordinated.

5.10 All local loans (up to US$41.5 million equivalent) are to come fromthe same consortium of seven Pakistani financial institutions and commercialbanks which will provide preferred equity. These loans are for 15 years,including 5 years of grace and carry an interest rate of 4% above the inter-bank rate prevailing at the time of disbursement (currently 10% per year).

5.11 The Government has agreed to cover any project cost overrun aboveUS$272 million and promptly provide or cause to be provided any local andforeign exchange on terms satisfactory to the Association, that may be re-quired to complete the Project.

5.12 The proposed IDA Credit would become effective upon execution ofthe agreements with AID, KfW, IFU and IDB. Furthermore, disbursements inexcess of US$2 million would be made only after the agreements between FFCand AID, KfW, IFU, IDB and the Governments of Denmark and Italy have becomeeffective (para 5.12).

C. Procurement

5.13 With the possible exception of small amounts awarded under interna-tional competitive bidding procedures to local bidders, all foreign loans andcredits will finance imported services and equipment. As shown in Annex 5-4,Topsoe's, IFU's and IDB's equity, together with Italian Government funds, areexpected to finance most of the costs of engineering, licensing, erectionand construction services, technical assistance and training. USAID's loan,which is tied to procurement mostly in the US, will finance JCE's fees (aboutUS$2 million) and equipment, mostly on the basis of a pre-determined list ofitems likely to be available on favorable terms in the US. This list includesconstruction equipment, water treatment equipment, cooling towers, processcompressors, turbo-generators, bagging equipment and others. The balance of

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foreign services and equipment will be financed on a parallel basis by IDA andKfW, whose loan is untied, so as to disburse the two loans approximately on a

pari passu basis.

5.14 The proposed IDA credit is expected to finance about US$5.0 million

of Snam's engineering services, including up to US$1 million on a retroactivebasis, and about US$50.0 million of equipment and materials. Except for a

maximum US$9 million for foreign procured equipment as detailed below, inter-national competitive bidding (ICB), in accordance with Association guidelines,will be used for IDA-financed equipment and materials. Advertisements callingfor vendor registration, approved by the Association, have been published inMay 1978. Proprietary and time critical equipment to be financed by the

proposed IDA credit is estimated to cost no more than US$6 million, and willbe procured following the receipt of bids from lists of qualified foreign

suppliers which have been approved by the Association. Items costing lessthan US$100,000 equivalent each and totalling no more than US$3 million willbe purchased from suppliers on the basis of suitability, availability andprice. A preference of 15% or the customs duty, whichever is lower, will be

allowed to qualified Pakistani manufacturers for the purpose of evaluatingbids following ICB. Bid invitation and evaluation will be FFC's responsi-bility with JCE's and Snam's assistance as required.

D. Allocation and Disbursement of IDA Credit

5.15 Disbursements from IDA will be made on a parallel basis with thecofinanciers as far as practical. Disbursements from the proceeds of theCredit will be made against:

- 100% of foreign expenditures for directly imported

equipment, and engineering services; and

- 100% of local expenditures (ex-factory cost) forlocally manufactured equipment awarded underinternational competitive bidding.

VI. FINANCIAL ANALYSIS

A. Pricing

6.01 As noted in para 3.11, the Government sets the ex-factory price forindividual fertilizer manufacturers on the principle of allowing them a reason-able return on investment. The Marketing and Pricing Principles Agreementwhich has been signed between the Government and FFC and is acceptable to IDA

and other lenders, stipulates that the ex-factory price of urea for the FFCproject will be set for a period of 10 years following the commencement ofcommercial operations, so as to yield an annual 16% after-tax return on the

par value of preferred shares and an annual 20% after-tax return on common

- 23 -

share capital, based on 65% capacity utilization 1/ in the first twelve monthsof operation, 85% in the second, and 90% from the third year onwards. FFCwill bear the production and sales volume risk and will only realize the abovereturns if it produces and sells the urea produced at the levels stipulatedabove. FFC's return will, therefore, be lower/higher should its sales belower/higher than the annual production levels stipulated.

6.02 The Marketing and Pricing Principles Agreement applies to bothdomestic sales and exports of fertilizer, the latter to be allowed if theGovernment declares an exportable surplus, and if they conform with Pakistan'sexport policies. In case of currency realignments, the price of urea will beadjusted so as to allow FFC to service its foreign and local debt and eachsponsor to earn 20% on share capital (denominated in US$ for foreign, and inPRs for local investors), if the plant operates at or above the stipulatedcapacity levels. In case the agreement is not extended after its initialten years, prices of fertilizer will be set to allow FFC a reasonable returnon equity.

6.03 Two major provisions have been added to the Marketing and PricingPrinciples Agreement to induce the sponsors to minimize capital cost, which isone of the most important determinants of production cost in capital intensivefertilizer projects. First, capital cost in excess of US$272 million, whichis considered an upper limit for the Project if efficiently executed, will notbe included in the pricing formula. 2/ This provision puts a ceiling on ureaprices and reduces FFC's return on equity if project cost exceeds US$272 mil-lion. Second, funds borrowed from or through the Government to finance costoverruns in excess of US$272 million will have to be repaid by FFC prior toany dividend payment. This provision would penalize FFC in two ways: (i) itwould reduce its return on net worth (share capital plus retained earnings)since the Marketing and Pricing Principles Agreement allows a 20% return onthe par value of common shares only and not on retained earnings, and (ii) itwould reduce the present value of the dividends by deferring their payment.

B. Project Revenue and Profit

6.04 The financial analysis is done in current prices through 1981, andin constant 1981 terms thereafter (Annex 6-1). It assumes that the Projectstarts commercial operation on July 1, 1981, with a capacity utilizationincreasing from 65% in the first year of operation to 85% in the second year,and 90% in the third year and beyond. The financial analysis is done assuming

1/ For pricing purposes, design capacity is equal to 315 stream days peryear compared to an industry norm of 330 days.

2/ This limit will, however, be adjusted for changes in project scope whichare agreed to by the Government, as well as cost resulting from forcemajeure events which are not within FFC's control and for which itcannot take all reasonable preventive or corrective action.

- 24 -

a design capacity of 330 stream days per year, compared to only 315 streamdays used in the pricing formula; at 90% capacity utilization, the Projectwill produce 512,300 tpy of urea.

6.05 According to Pakistani income tax rules, a capital intensive projectthat operates three shifts per day, as the plant will, has the option to useeither straight-line or accelerated depreciation. FFC has opted for a 9%straight-line depreciation for both book and tax purposes, and would thushave to pay a corporate profit tax of 55% on its income from the first year.

6.06 Based on the estimated capital and operating costs, taxes andprofits, the ex-factory prices of urea are projected as follows (Annex 6-2and 6-3):

FFC Projected Ex-Factory Prices of Bagged Urea /a(in 1978 US dollars)

Year Ending June 30 1982 1983 1984 1985 1986 1991

Ex-Factory Price 239 185 173 171 168 153Ex-Factory Price Netof Income Taxes 198 153 144 141 138 124

/a Based on total project financing requirements of US$260 million.

FFC's urea price during the first year of opeation is high compared to thecurrently depressed landed prices of imports (US$165-170 per ton). This isdue to two reasons: First, unlike most other fertilizer projects which enjoyaccelerated tax depreciation allowances or tax holidays, FFC would pay taxesfrom the first year of operation. Second, to provide FFC with enough liquid-ity during the first year of operation, the price of urea is based on arelatively low 65% capacity utilization. The 1982 ex-factory price net oftaxes (US$198 per ton in 1978 dollars) is, however, substantially in linewith the projected equivalent prices for imports in FFC's market area in 1982(US$190 per ton) and below the projected equivalent prices (US$230 per ton)forecast to be reached by 1985 when the current world excess supply situationis expected to disappear (para 7.01).

6.07 FFC prices decline substantially from the second year as a result ofhigher capacity utilization and lower financial charges. By the third year,when the Project would be operating at 90% of capacity, ex-factory prices netof taxes (US$144 per ton), are expected to be US$78 below projected equivalentlanded prices excluding duties of imports delivered in FFC's market area.The ex-factory ceiling price (net of income tax), imposed by excluding costoverruns above US$272 million from the pricing formula, would only be US$4-5per ton above the corresponding price shown in the table above for a projectcost of US$260 million, and would, therefore, still be about US$70 per tonlower than equivalent cost of imports.

- 25 -

C. Production Costs

6.08 Production costs per ton of urea, when the plant operates at 90%of capacity, are estimated at about US$115 in 1978 terms; this is comparableto other recent Bank financed fertilizer projects. Depreciation and finan-cial charges account for about 53% of production costs, natural gas for 10%,operating supplies and materials for 19%, and labor and overheads for theremaining 18%. Details are contained in Annex 6-2.

D. Financial Projections

6.09 Financial projections for the Project in constant 1982 terms aresummarized below from Annexes 6-4, 6-5 and 6-6:

Summary of Projected Financial Data(PRs million)

Year Ending June 30 1982 1983 1984 1985 1986 1987

Capacity Utilization (%) a/ 65 85 90 90 90 90Sales Volume ('000 tons) 370.0 483.8 512.3 512.3 512.3 512.3

Income & Cash Flow StatementsSales Revenues 1,122.8 1,123.1 1,115.9 1,099.2 1,082.5 1,065.8Manufacturing Costs

(excl. depreciation) 286.8 323.1 324.8 324.8 324.8 324.8Depreciation & Amortization 220.6 220.6 222.5 224.4 226.3 228.3Net Profit 176.2 164.0 167.0 166.7 166.4 166.1Cash Generation beforeInterest 591.1 572.0 559.1 542.8 526.6 510.3

Debt Service 194.3 351.4 333.6 315.7 297.9 280.0

Balance SheetCurrent Assets 295.2 313.8 318.4 318.4 318.4 318.4Surplus Cash 179.4 223.7 260.8 299.7 340.6 383.4Current Liabilities 204.2 216.6 219.7 219.7 219.7 219.7Net Fixed Assets 2,230.5 2,009.9 1,808.7 1,605.6 1,400.5 1,193.5Long-Term Debt 1,641.4 1,477.4 1,313.4 1,149.4 985.4 821.4Equity 859.5 853.4 854.9 854.7 854.5 854.4

RatiosCurrent Ratio (:1) 2.3 2.5 2.6 2.8 3.0 3.2Long-Term Debt/Equity 65/35 63/37 61/39 57/43 54/46 49/51Debt Service Coverage 3.0 1.6 1.7 1.7 1.8 1.8

a/ Assuming a design capacity of 330 stream days per year.

6.10 The financial forecast shows that the pricing formula and lendingterms provide for a sound financial structure if FFC performs as expected.As a result of high prices in the first year of operation, the Project would

- 26 -

generate enough cash to service its debt and maintain a comfortable liquidityfrom the outset. The current ratio is maintained above 2.3 throughout theProject's life. Debt service coverage does not drop below 1.6 even in 1983,the first year of full loan repayment, and the debt/equity ratio falls from70/30 at project start-up to below 50/50 during the sixth year of operation.

6.11 To ensure that FFC operates in a financially satisfactory manner,FFC has agreed to:

(a) seek prior Association approval for additional investments infixed assets in excess of the equivalent of US$5 million in anyone fiscal year, or US$5 million plus the unutilized portion ofprevious years subject to a maximum of US$15 million;

(b) take all necessary actions not to exceed at any time a debt(including subordinated) to equity ratio of 70/30, and a debtto equity of 60/40, when including subordinated debt as equity;

(c) not incur any additional debt if by so doing it could notmaintain a debt service coverage of at least 1.4 in any ofthe succeeding fiscal years;

(d) maintain a current ratio of at least 1.5 at the project com-pletion date, and thereafter of at least 1.2. Dividends willbe paid only out of accumulated net earnings and neitherdividends will be paid, nor any distribution with respect toshare capital made nor debt prepaid by FFC unless a currentratio of at least 1.5 is maintained after such payments; and

(e) implement a satisfactory cost control, accounting and managementinformation system, which, inter alia, will provide informationto the Government suitable for pricing the Company's sales.

6.12 The profit break-even point for the Project in 1984, the first yearof full (90%) operation, is estimated at 60% of capacity; and the cash break-even at 38%. A break-even chart is provided in Annex 6-7.

E. Financial Rate of Return

6.13 For the purpose of calculating the financial rate of return of theProject, capital costs are used in 1978 terms; cost and benefit streams areshown in Annex 6-8. The return is 20.9% before, and 13.6% after taxes. Thediscounted yield on shareholders' investment, assuming the capital is fullyrecovered at the end of the ten-year contract period, would be about 15.1% forcommon shares and 12.6% for preferred shares. Results of sensitivity analyses(Annex 6-9) are summarized below:

- 27 -

Sensitivity Tests on Financial Rate of Return after Taxes

Case Percentage

1. Base case 13.62. Capital cost increase by 10% 11.83. Capital cost increase by 20% 10.24. 12-month project delay 11.55. 80% capacity utilization a/ 11.36. 100% capacity utilization a/ 16.07. Combination of (2) and (6) 14.08. Combination of (2) and (4) 10.09. Combination of (2), (4) and (5) 8.1

a/ Fromfi the third year onwards.

6.14 The rate of return is sensitive to changes in capital costs, capac-ity utilization and delay in implementation. A 12-month delay in projectimplementation, combined with a 10% capital cost overrun and the eventualattainment of only 80% capacity utilization, would reduce the return to 8.1%.However, the likelihood that a combination of these events materialize is low,particularly because of the involvement of experienced foreign partners and ofcompetent engineering firms.

F. Risks

6.15 The Project design is based on modern, commercially proven tech-nology for economically efficient large-scale production, thus minimizingtechnical and obsolescence risks; it is to be executed by well reputedengineering firms with recent experience in constructing a very similarplant at a location near the Project site and have the incentive to minimizecosts, and it will be managed by experienced partners who combine the know-ledge of local conditions with technical and marketing experience and whosereturn is sensitive to capital cost, project delay and capacity utilization.The project capital cost estimate includes US$26.5 million for price escala-tion, which should be adequate. But in view of the inflationary pressure inPakistan, a price escalation beyond that provided for cannot be totally ruledout; therefore, financing for an additional US$11.7 million equivalent hasbeen secured on a stand-by basis to cover unforeseen cost overruns. The salesrisk is negligible and does not exceed the first three years of operation: by1984, domestic production is expected to exceed demand by only 5%; if needed,FFC's competitive cost would enable it to market any surplus in neighboringcountries where nitrogenous fertilizer deficiency is likely to persist in theearly 1980s.

- 28 -

VII. ECONOMIC ANALYSIS

A. Fertilizer and Raw Material Prices

7.01 During the late 1960s world fertilizer prices were depressed byexcess supply. Subsequent expansion in demand during the early 1970s was notmatched by increased capacities. The resulting scarcity, along with sharpincreases in the price of petroleum, led to substantial increases in ureaprices. The f.o.b. prices for urea peaked at US$350-400 per ton in August1974 (from US$50-60 per ton in 1970), but have since declined to US$135-145per ton. This decline is attributable to both the reduced imports of fer-tilizer by countries which had accumulated substantial stocks during the panicbuying of 1973 in anticipation of further price increases, and the substantialinvestments stimulated by high prices in 1973-74. An equilibrium betweensupply and demand of nitrogenous fertilizers is expected to be reached by themid-1980s at which time the price of urea is likely to be determined by theselling price from new natural gas based plants. On this basis, the f.o.b.price of urea by 1985 is projected at US$203 per ton of bagged urea, expressedin 1978 terms. Allowing for ocean freight, insurance and local port handlingof US$25 per ton, the projected long-term landed cost of urea to Pakistanwould be US$228 per ton in 1978 prices. Adjusting for the difference intransport cost between the port and plant with respect to the main consumingcenters, the economic price for bagged urea at plant site by 1985 would beabout US$230 per ton for imported fertilizer.

7.02 The wellhead price of gas to FFC will be US$0.28 per MSCF (at 700BTU per SCF). The opportunity cost of gas is taken at US$0.94 per MSCF (in1978 prices) which is equivalent to US$1.29 per MSCF for 700 BTU per SCF gasat consuming centers. On an energy equivalent basis, the latter figurecorresponds to a fuel oil price of US$70 per ton (in 1978 terms).

B. Economic Rate of Return

7.03 The economic analysis is based on 1978 dollar terms as shown inAnnex 7-1. Except for gas and urea, the opportunity costs of the Project'sinputs and outputs are based on financial costs adjusted for taxes. Theeconomic benefits of the Project are derived from import substitution and theopportunity value of urea is taken as the amount of foreign exchange thussaved. As noted in para 7.01, the economic price per ton of bagged urea fordomestic sales is assumed to increase from US$190 in 1982 to US$230 in 1985and thereafter (in 1978 dollar terms). On the basis of a 12-year operatinglife, the Project shows an economic rate of return of 22.7%, compared to the13.6% financial rate of return. The difference between the two rates ofreturn indicates that the adjustment in the accounting price of gas is out-weighed by the adjustment in price of urea and taxes paid to the Government.

- 29 -

Sensitivity Analysis on Economic Rate of Return

t%)

Economic Price of Urea(in 1978 US$/Ton) 210 230 250

Cases

1. Base Case 18.7 22.7 26.1

2. 10% Cost Overrun 16.9 20.7 23.9

3. 12-month Delay 15.1 18.2 20.84. Combination of (2) and (3) 13.6 16.6 19.1

7.04 As shown in the above table, the economic rate of return is sensi-

tive to changes in fertilizer prices and capital cost, delays in construction,

and lower capacity utilization. However, even under the unlikely combination

of the most adverse of the above circumstances, the economic rate of return

would remain satisfactory.

C. Foreign Exchange Effects

7.05 The average net annual foreign exchange savings attributed to the

Project are estimated at US$79 million in 1978 terms, after payment of divi-

dends to foreign shareholders and royalties and fees to Topsoe and Anic

(Annex 7-2). If FFC repeats the performance of the two joint Pakistan-US

fertilizer companies and operates at 100% capacity, the net foreign exchange

earnings would increase by US$11-12 million per year depending on whether the

additional output is exported or consumed locally.

D. Other Economic Benefits

7.06 The unquantified economic benefits of management training, assured

supplies of fertilizer, development of a strong marketing organization and

regional development add to the attractiveness of the Project.

VIII. AGREEMENTS

8.01 The following assurances and agreements were obtained from the_Government, FFC, Fauji and Topsoe:

1. from the Government, that it will:

a) by September 30, 1978, agree with FFC on a fertilizer seeding

program, inter alia allowing FFC to obtain sufficient ferti-

lizer to effectively undertake such a program (para 3.18);

b) guarantee the supply of gas to the Project and commit itselfnot to sanction any new users of Mari gas until adequate

additional reserves are proven (para 4.03);

- 30 -

c) take all necessary steps to insure that foreign exchange

is provided to meet the imports of parts and materials

needed for the efficient operation and maintenance of the

Project (para 4.06); and

d) take all necessary steps to assure that all funds, including

foreign exchange, are provided as required to complete the

Project on terms satisfactory to the Association (para 5.11).

2. from Fauji, that it will:

a) not undertake, without IDA's prior approval, any new indus-

trial investments or expansion of existing industrial units,whereby expenditures in an excess of an aggregate PRs 100

million would be incurred within the period ending one yearafter the Project Completion Date (para 5.06); and

b) submit its audited annual financial statements to the

Association in a timely manner (para 5.06).

3. from Fauji and Topsoe, that they will

not sell or transfer any of their shares in FFC without IDA's

prior approval and will take all necessary measures to

ensure that FFC satisfactorily performs all its obligations

(para 5.07).

4. from FFC, that it will:

a) prior to plant start-up, undertake a two year fertilizerseeding program satisfactory to IDA (para 3.18);

b) ensure that operation of the plant will meet satisfactoryecological, environmental and safety standards (para 4.08);

c) prepare by December 31, 1978, and implement promptly, a

detailed training program acceptable to IDA (para 4.09);

d) conduct its operations in a financially sound manner, bymaintaining a current ratio of 1.5 at project completionand at least 1.2 thereafter; maintaining a debt/equity

ratio of at least 70:30, and 60:40 by including sub-

ordinated debt as equity; not incurring additional debtif by doing so its debt service ratio would fall below

1.4; not paying dividends or prepaying debt if by doingso its current ratio would fall below 1.5; and implement-ing satisfactory cost control, accounting and management

information systems (para 6.11); and

- 31 -

e) not make investments in fixed assets, outside the scope of

the Project, in excess of the equivalent of US$5 millionin any one fiscal year or US$5 million plus the unutilized

portion of previous years, subject to a maximum of US$15

million, without IDA approval (para 6.11).

8.02 The IDA Credit would become effective upon (i) subscription by all

shareholders of FFC's full share capital of the equivalent of US$81.6 million

(para 5.06); and (ii) execution of the agreements between FFC and AID, KfW,

IFU and IDB. Furthermore, disbursements in excess of US$2 million would be

made only after the agreements between FFC and AID, KfW, IFU, IDB and the

Governments of Denmark and Italy have become effective (para 5.12).

8.03 Based on the assurances received and agreements reached, the

Project is suitable for an IDA Credit of US$55 million equivalent to be made

to the Government of Pakistan for on-lending to FFC at 10% interest for 15

years, including four years of grace.

Industrial Projects DepartmentAugust 1978

- 32 - ANNEX 2-1

PAKISTAN: FAUJI FERTILIZER PROJECT

FFC'S CORPORATE STRUCTURE

1. FFC's Board of Directors is composed of 13 members. As itsChairman, Maj. Gen. (Retd.) Rao Farman Ali Khan has been appointed,who is also the Managing Director of the Fauji Foundation. Fauji will intotal nominate six members and the Danish shareholders, two, with the remainderto come from the other shareholders.

2. During the construction period, FFC's Board will have anExecutive Committee headed by the Managing Director, with two membersfrom Fauji, Maj. Gen. Haider and Mr. Pasha, and one from Topsoe, Mr. Hansen,Topsoe's Project Director. The Executive Committee will have authorityto carry out the Board's policy and to take all required steps betweenBoard meetings.

3. FFC's corporate structure for the construction stage is shown inExhibit 1, and for the operations stage, in Exhibit 2. FFC's management,which is subject to the control of its Board, is vested in the ManagingDirector. According to the Participation Agreement between Fauji andTopsoe, this position is to be held by Gen. Farman for a period of sixyears. In line with said Agreement, Fauji has appointed as Assistant tothe Managing Director, Maj. Gen. (Retd.) Khurshid Haider and as Managerof Finance and Administration, Mr. M. Y. Pasha. Topsoe has appointed asProject Manager,Mr. I. C. Carstensen and as Marketing Manager,Mr. J. A.Ward. (See brief descriptions below.) Anic is to nominate the Manager,Operations. Each partner's appointments will be subject to the approvalof the other.

4. This organization is designed to provide for smooth, direct-line responsibility and authority and yet provide a means for thesponsoring companies to exercise both their rights and obligations.

5. During the construction period the Managing Director will haveat his disposal the services of independent engineering consultants tobe provided by James Chemical Engineering. JCE will have a seniorTechnical Advisor resident at Rawalpindi and advisory personnel in NewYork, Milan and at the Plant Site.

6. During the construction period, the Project Manager will havecomplete control and the necessary authority for project execution. Hewill be located at Rawalpindi and will report to the Managing Director.An FFC group of engineers headed by Mr. A. Rahman will be located atMilan, duly assisted by the JCE advisory personnel; this group willfunction under the direct controlof the Project Manager. Topsoe willprovide technically qualified personnel to supervise design and engineering.

- 33 -

ANNEX 2-1Page 2

7. Beginning with plant start-up, the Manager, Operations (fromAnic), will be in residence at Goth Macchi. He will be in administrativecharge of all personnel at the plant site, reporting to the ManagingDirector.

8. The Marketing Manager will be located at Lahore and in charge ofthe entire marketing program (including the pre-start-up seeding program),sales, warehousing, distribution, agent selection, etc., with necessaryguidance, direction and support from the Managing Director.

9. The following describes briefly the individuals selected so farfor FFC's management positions:

MaJ. Gen. (Retd.) Rao Farman Ali Khan (55) has been Managing Director ofFauji Foundation for four years, during which great advances in operationssize and diversity and profitability were achieved. He assumed thisappointment after 32 years of Army service: after graduating at CamberleyCollege (UK) and receiving further education at Fort Sill (US), he wasinstructor at the Quelta Staff College and War Course; after attendingthe Administrative Staff College at Lahore, he gained extensive experiencein Civil Administration as Advisor to the Governor of East Pakistan.

Maj. Gen. (Retd.) Khurshid Haider (53) joined Fauji in mid-1976 after 33years of Army service. During the last six years he was responsible formanagement and control of the indigenous development and production ofmilitary equipment for the Pakistan Army, Navy and Air Force. He is ascience graduate with a strong electronics and engineering background.

M. Y. Pasha (47) is a Senior Director on Fauji's Board. He is anexperienced chartered accountant, trained and qualified in the U.K. Heattended an Executive Course on Business Administration conducted by theHarvard School of Business Administration, and has considerable ex-perience in financial administration. He has been associated with theplanning of this Project for several years and from its inception.

Mr. Abdul Rahman (42) is a senior Pakistani engineer (M.Sc., AlbertaUniversity, Canada) with a background in petroleum refinery construction,natural gas processing and petrochemical studies. He has worked on theFFC project since its inception and is familiar with all of its technicalaspects.

Mr. Holger Hansen (58) is a senior and experienced chemical and fertilizerengineer, who has been with Topsoe for the past 34 years. He has abackground of research and process development work besides having beenin charge of Topsoe's consulting and advisory services for fertilizerplants in Syria, Kuwait, Iraq and Algeria. Was also responsible for theconstruction and commissioning of a fertilizer plant in Greece.

- 34 -

ANNEX 2-1Page 3

Mr. I. C. Carstensen (50) is an experienced electrical engineer and has beenwith Topsoe for the past 20 years. He worked for over six years as atechnical consultant to the Kuwait Government for the establishment of the"Shuaiba Industrial Area." He was also associated with the establishmentand construction of the KNPC refinery and two fertilizer complexes in thesame area based on Topsoe's detailed engineering. He is currently incharge of construction of Topsoe's new catalyst plant in Denmark.

Mr. J. Anthony Ward (55), a citizen of the U.K., is a specialist inmarketing of agricultural chemicals, with extensive experience in thisfield in developing countries. He vas with two Asian subsidiaries ofExxon, first as a Vice President - Marketing of Esso Pakistan FertilizerCo. Ltd. (1965-1970) and then as Managing Director of Esso ChemicalsThailand (1970-1975). Previously, he had been with several otherfertilizer companies in England and India.

Industrial Projects DepartmentAugust 1978

- 35 - ANNEX 2-1

Exhibit 1

PAKISTAN: FAUJI FERTILIZER PROJECT

FFC ORGANIZATION

DURING

DESIGN AND CONSTRUCTION

|FFC BOARDI

LEXECUTIVE COMMITTEE|

ASST MNG DIRECTOR PROJECT MANAGER INDEPENDENTCONSULTANT -JCE]

<--CORPORATE ORGANI 'ATION-> *-PROJE CT ORGANIZATION ->

|MARKETING MANAGER Hl

l OPERATING COMPANYl OPERATOR TRAINING

II ~ ~ ~ ~ ~ ~ ~ ~~~~~ST

|llPERSO-NNE--1 MANAGER

~ ~~ IIN ICA

-_lAGRO SERVICES -----HIAL ___

tSECETA ROATE

BUDGET_BUDGET CONTROL ___

MANAGER, TIME SCHEDULElFINANCE --------------------- T. S. CONTROLl

AND ADNINISTRATIONl

GNRAL CONTRACTORS |

FuB. CONTRCOS

Industrial Projects Department

August 1978

- 36 -ANNEX 2-1

PAKISTAN: FAUJI FERTILIZER PROJECT Exhibit 2

FFC ORGANIZATION

DURING

INITIAL THREE YEARS OF OPERATION

FFC BOARD

MANAGING DIRECTORASST. MNG. DIRECTOR

RAWALPINDI/LAHORE GOTH MACHHI

|SECRETARIATE

MANAGER TECHNICAL MANAGERMARKETING MANAGER OPERATIONS

IMANAGER TECHNICAL ECONOMIC PRODUCTIONFINANCE COORDINATION REPORTING MANAGER

_ . ~~~~~~STATISTICSNEW PROJECTS BUDGET

MANAGER LLABADMINISTRATION AMMONIA

UREA

| SAFETY W ~UTILITIESPERSONNEL

HOUS INGSTORAGE MAINTENANCETRAFFIC _ ENGINEER _

|TECH. OFFICE L SCHEDULINGITROUBLE SHOOTING fi INSP.& TESTIndustria Project D mWAREHOUSE_

SPARE PARTS

|MECHANIC l|ELECTRICALL{INSTRUMENTS | CIVIL l

Industrial Projects DepartmentAugust 1978

- 37 -

ANNEX 2-2

PAKISTAN: FAUJI FERTILIZER PROJECT

FAUJI FOUNDATION

Origin

1. The Fauji Foundation, formerly the Post War Services Reconstruc-tion Funds, is a Charitable Trust created under the Charitable EndowmentsAct 1890 and is devoted exclusively to the welfare of ex-servicemen andtheir families and families of soldiers who died in wars since thecreation of Pakistan.

Aim

2. The aim of the Foundation is to provide and generate funds for thewelfare of ex-servicemen and their families. The guiding policies are:

a. investment in industrial undertakings its own discretion,with income being utilized for the collective benefitof the beneficiaries.

b. the Foundation's funds are not utilized for contributionstowards measures which it is the responsibility of theGovernment to take.

c. no cash grants are made to individuals.

d. the objects of the endowments do not extend beyond the fourprovinces of Pakistan and the centrally administeredtribal areas.

3. The main welfare fields of endeavour are the operation ofmedical facilities and the granting of education stipends for ex-servicemen and their families.

Organization

4. The Foundation is controlled by a Committee of Administration(supreme governing body) consisting of the following:

a. Secretary, Ministry of Defence - Chairman

b. Four Principal Staff Officersof GHQ Pakistan Army (ofGeneral Rank) - Members

c. Two Principal Staff Officers(one each) from the Naval andAirforce Headquarters - Members

- 38 -

ANNEX 2-2Page 2

5. The above body is responsible for laying down general policy,approval of annual budgets and audited accounts and for investments/disinvestments, overall control over the functions of the Foundation.

6. The executive functions for the day-to-day functioning of theFoundation are vested in the Board of Directors which exercises all thepowers of the Committee of Administration less those enumerated in para4 above. The current composition of the Board reconstituted in March1975, is as under:

a. Secretary, Ministry of Defence - Chairman

b. Managing Director

c. Financial Director

d. Welfare Director

e. Director Coordination and Personnel

f. Director Textile Projects

g. Director Sugar Projects

7. Each industrial and welfare project has its own separate boardof management for conducting its business, headed by the Managing Directorin the case of industrial projects and by the Chairman in the case ofwelfare projects. The Board of each project includes members of theFoundationts Board of Directors, the General Manager of the Project andthe relevant technical experts at Head Office.

Industrial Projects DepartmentAugust 1978

PAKISTAN FAUJI FERTILIZER PROJECT

ORGANISATION OF THE CENTRAL ORGANISATION OF FAUJI FOUNDATIONCOMMITTEE OF ADMINISTRATIONCENTRAL BOARD OF DIRECTORS

DEFENCE SECRETARY -_ _ CHAIR?MAN

MANAGING DIRECTOR -V _ICE CHAIRMAN & MANAGrING DiRECTORFINANCE DIRECTOR __ - DIAECTORP

DIRECTOR WELFARE _ _ DIRECTORDIRECTOR PERS.&ADM DIRECTOR.

DIRECTOR TEXTILE -_ DIRECTORDIRECTOR sUGAR -… DI RECTOR

MANAGL4NG DIRECTOR

ADVISER P ZR I AiN, DIVISION EHAN RrIR TEXTILE DIVISION SLGAR a190N WED(Vl ODIRECTCR(PL FWM (I. M DIRECTOR (TI T DRECTOR (SI D5NEC1T (WI

PLANNING VA"G n 1 I1L1

S LIS) Pwo¢UCIISd11~~~~~~~~~~~51u. ~~~~~~~~~~~~~~~DIR

IF TIIZER) CAH IrSEH) CWSJT 15ON EER |

M ACCtLTLASs SECRETARY LEGAL DEPT PR AEIASER ACO14CET ACCOUtNT tE tPR CFif CED (PJiCECLIN4A tAS

LEGAL DISER I LiEGL AUASEA 11 AIC°ERY LAW I IG6EIjENALI t RE

IAVOFFICER LA. OFFICEP P

&S IT) CO T CMOTO MANAGER PlCAJC11OA ISARCThINI1I1 1 I I ] 5C sT) ACCSTT COTTON OFFICE,R DIR G MiAHAGEI I4ANA&ER S.EiA IPtS>lEk) ANAMENr CHIEF CIVIL RESltlEN DIR RE5YWDIR

RIPEA) IfDfksmwLI ANAFCSIA ENGINER IKARACHI) (LASTOREI rC IA

DPUTY CHF CIVIL -ASSr SAt.ES ANNESA ICc_ORtt] R ON1EETAT| NAPOAT SIFN CCWSWI f MANAGVER NIER

ASNDM'FICER SALES IAANASER SALES EXPORT MiARKST RESEARCH

(YAL N I) I4WI3R IAE SUIEPROJOEcLt A E A5 TTY SugVEyoR AE (LY40PUI rtNGINEi E/M I FIELDI ASST EXFRT

F'ROCUREMENT FNGCLREMEHt FRrLIEMENT FRCtLNENTIINAINGEN MAIMERILOCAU hV1AGERIFORY rMANArERRA C4I IIIIIISI IARAII LASEIR

ASSTFPFCUREET ASSI PRIOIENT E L A A AMANAGER MANAGER wT SALES ikSSTAERF SR) A%gGERIFC II AN

NOTE:-ADVISER WLL BE EX OFFICIo DIRECTOR OF THE CENTRAL BOARD OF DIRECTMRSAB,trj.), ProU D8pArItNN

Aug..I, 1978

- 40 -ANNEX 2-2Page 4

PAKISTAN: PAIIJI FERTILIZER PROJECT

FAUJI INDUSTRIAL AND WELFARE PROJECTS GENERAL INFORMATION

PRo MillionYear of Starting _ E.ployment Actual Projection

Production Capacity Ex-Servicemen Civilian 1974 1975 1916 1977 1978 1979 1980 1981 1982

Profits

Sugar Mills

Fauji Mills TaudoMohd Khan 1959 2,000 TPD 233 1,035 31.3 20.7 21.1 44.0 45.9 40.5 25.4 25.4 25.4

Fauji Sugar MillsKhaski 1971 3,000 TPD 204 1,020 14.6 3.4 6.5 37.6 38.0 40.0 25.0 25.0 25.0

Mudern Sugar MillsSanyla 1972 1,500 TPD 184 814 (4.9) 3.4 2.2 11.2 11.0 10.0 7.5 7.5 7.5

Subtotal 41.0 27.5 29.8 92.8 94.9 90.5 57.9 57.9 57.9

Textile Mills

Fouji Testile Mills 1955 25.000 spindles 1,828 1,147 (J.S (3.7) (1.9) 1.2 - - 1.5 1.5 1.5Jhelum 500 looma

Lyallpur Cotton Mills 1934 45,000 spindles 207 6,037 3.2 (19.7) (19.8) (18.3) - - - - -Faisslabad 1972 800 looms

FPsji Cotton MillsHasan Abdal 1974 25,000 spindles 406 839 0.6 (2.5) (2.1) (5.1) - - - 0.5

Subtotal 4.6 (25.9) (23.8) (22.2) - - 1.5 1.5 2.0

Others

FPuji Cereals R'Pidi 1957 90,000 packets of 50 40 0.6 0.6 0.5 1.0 0.9 1.0 0.8 0.8 0.8cornflakes30,000 packets ofporridge per month

Fauji Gas Foundationhburllian 1973 14,000 TPY 56 33 (0.4) 0.0 0.2 1.6 2.0 2.0 2.0 2.0 2.0

Kyber Tobacco Co. Ltd.Marden (33L. Share) 1960 0.4 0.4 0.7 0.5 0.3 0.3 0.3 0.3 0.3

Subtotal 0.6 1.0 1.4 3.1 3.7 3.3 3.1 3.1 3.1

Total Profits 46.2 2.6 7.4 73.7 98.1 93.8 62.5 62.5 63.0

Welfare

Fauji Foundation MedicalCenter 1960 300 beds 246 152 3.8 4.4 5.3 6.2 5.8 6.4 7.1 7.8 8.6

Fauji Foundation HospitalKeller Kehar 1975 50 beds

FeuJi Foundation HospitalLachi 1975 50 beds

F.uji Fo-ndetion Hospital ) 193 104 0.1 0.7 1.7 2.6 2.8 3.5 3.8 4.2 4.6Lava 1977 50 beds

Fauji Foundation HospitalB.asal 1977 50 beds

Fauji Foundation DOy TreatmentCenter Jhelum 1976

Fauji Foundation Day Treatment ) 11 6 - - 0.4 (0.1) 0.4 0.6 0.8 0.9 1.0Center Manscra 1978

Stipends, Grants and Others 18.8 4.8 5.0 6.0 9.7 8.9 9.7 10.7 11.6

Total Welfare Expenditure 9.9 12.4 14.7 18.7 19.4 21.4 23.6 25.8

Retained Efarnis (includingether income.-' orother eapenditore) 27.6 4.4 13.9 79.5 103.9 101.3 66.4 66.9 69.9

1/ Interest On deposit and income from inveatmeota - other rests.

Industrial Projects DepartsmntAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECT

FAUJI FOUNDATION

CONSOLIDATED INCOME STATEMENT(In PRs million)

1972 1973 1974 1975 1976 1977

Sales 206.61 310.56 479.41 510.77 581.77 762.77Less: Cost of Sales 156.65 246.76 399.66 461.46 522.10 624.01

Gross Income 49.96 63.80 79.75 49.31 59.67 138.76

Other Income 7.71 10.00 10.28 15.26 22.46 24.66

Total Income 57.67 73.80 90.03 64.57 82.13 163.42

Less:Administration and Selling Expenses 9.56 11.42 18.19 25.31 27.29 32.77Financial and Other Expenses 10.88 11.36 18.81 22.17 24.33 30.75Workers Profit Participation Fund 1.33 2.38 2.66 1.52 1.60 5.09

Operating Income 35.90 48.64 50.37 15.57 28.91 94.81

Less: Welfare Expenses 19.59 23.20 22.72 9.98 12.86 15.44

NET INCOME 16.31 25.44 27.65 5.59 16.05 79.37

Industrial Projects Department r |

August 1978 0 x

PAKISTAN: FAUJI FERTILIZER PROJECT

FAUJI FOUNDATION

CONSOLIDATED BALANCE SHEET(In PRs million)

1972 1973 1974 1975 1976 1977

CURRENT ASSETS- Cash and Bank Balances 13.88 5.97 4.43 5.54 3.62 4.0- Accounts Receivable (Less Allowance for Doubtful Accounts) 21.39 16.87 30.03 62.53 75.15 65.68- Inventories 58.18 76.25 114.81 95.95 127.17 216.59- Advances, Deposited Prepayments 8.40 31.09 33.93 37.58 29.92 44.57- Time Deposits 75.41 82.48 117.89 146.19 167.36 170.74

177.66 212.67 301.09 347.79 403.22 501.58

FIXED ASSETS- Net Fixed Assets 158.21 231.39 229.80 269.53 293.88 282.41- Capital Work in Progress at Cost 1.94 3.78 41.25 18.93 18.92 18.79- Long-Term Investments at Cost 5.73 5.73 5.73 5.70 5.70 5.70 1- Expenditures on Proposed Projects 1.38 0.96 1.01 4.35 9.40 17.39

167.26 241.86 277.79 298.51 327.90 324.29

TOTAL ASSETS 344.52 454.53 578.88 646.30 731.12 825.87

CURRENT LIABILITIES- Short-Term Debt 27.62 23.07 104.92 122.68 173.13 140.67- Customers' Security Deposits - - 4.08 9.60 12.47 17.37- Long-Term Loans Payable Within One Year 18.33 18.03 16.21 15.01 25.88 15.52- Accounts Payable and Accrued Liabilities 22.01 47.86 40.60 93.29 107.52 154.67

67.96 88.96 164.81 240.58 318.00 328.23

LONG-TERM LIABILITIES- Loans 71.20 105.79 102.69 82.78 68.04 73.13- Referred Purchase Consideration 33.06 30.54 28.01 22.95 20.43 17.90- Employees Funds 7.49 8.99 10.93 12.48 13.65 15.14- Provision for Retirement Gratuity 4.22 5.05 7.15 7.63 8.77 11.67

115.97 150.37 148.78 125.84 110.89 117.84

a MEQUITY 160.59 215.20 264.29 279.88 302.23 379.80 a'

TOTAL LIABILITIES AND EQUITY 344.52 454.53 578.88 646.30 731.12 825.87

Industrial Projects DepartmentAugust 1978

- 43 -

ANNEX 2-2Page 7

PAKISTAN: FAUJI FERTILIZER PROJECT

FAUJI FOUNDATION

CASH FLOW PROJECTIONS 1978-1982(Prs in Million)

1978 1979 1980 1981 1982

REVENUE RECEIPTS

- Dividends from Operating Divisions 98.3 94.0 62.6 62.6 63.1- Interest from Operating Divisions 23.2 26.4 24.8 26.4 31.1- Office Expenses Reimbursement 6.6 6.9 7.3 7.6 8.0- Miscellaneous 2.4 1.5 1.6 1.6 1.6

130.5 128.8 96.3 98.2 103.8

REVENUE EXPENDITURE

- Welfare Expenditure 18.8 19.4 21.5 23.6 25.8- Establishment (Expenditure HeadOffice and Offices Karachi andLahore) 6.6 6.9 7.3 7.6 8.0

- Interest 1.1 1.1 1.1 - -

26.5 27.4 29.9 31.2 33.8

REVENUE SURPLUS 104.0 101.4 66.4 67.0 70.0

CAPITAL EXPENDITURE

- Loan Repayments - - 10.0 - -

- Investment in FFC 50.0 120.0 70.0 49.1 -

- Welfare Projects 10.2 2.9 2.4 2.4 2.4- Others 20.5 30.6 .6 .6 .6

Sub-total 80.7 153.5 83.0 52.1 3.0

SURPLUS/ (DEFICIT) 23.3 (52.1) (16.6) 14.9 67.0

OPENING BALANCE 211.4 234.7 182.6 166.0 180.9

CLOSING BALANCE 234.7 182.6 166.0 180.9 247.9

Industrial Projects DepartmentAugust 1978

- 44 -

ANNEX 2-3

PAKISTAN: FAUJI FERTILIZER PROJECT

HALDOR TOPSOE A/S

1. The Haldor TopsOe organization was founded in 1940 by Dr. HaldorTops0e, a citizen of Denmark, and reorganized in 1972 into a limited company,HALDOR TOPS0E A/S, under which name it is incorporated under the laws ofDenmark, with a share capital of Danish Kroner 30 million. 50% of theCompany is owned by Snamprogetti S.p.A. of Italy.

2. The Company is engaged in chemical process developmentand licensing, process engineering, detailed engineering, catalystresearch and manufacture as well as consulting and advisory services. TheCompany is particularly active in the field of heterogenous catalysis,and its scope of activities includes:

- Theoretical research relative to catalytic processes,their kinetics, the physical and chemical properties ofcatalysts, the mechanism of catalytic processes, catalystactivation procedures, stability of catalysts, effects ofpoison, etc.

- Applied research relative to catalytic processes and newcatalysts to develop necessary data for engineering ofcatalytic units and for application of catalysts inexisting industrial units.

- Specialized computer work applicable in the field ofresearch in heteregenous catalysis, engineering of catalyticprocess units and analysis of performance of industrial units.

- Process engineering of catalytic industrial units andassociated equipment and complete plants incorporating suchunits.

- Detailed engineering of such units.

- Supervisory engineering services during construction, start-up and operation of catalytic units or complete plants.

- Manufacture of catalysts in plants located in Denmark,and the United States, and sale of such catalysts worldwide

- Consulting engineering and management services includingfeasibility studies for industrial projects, development oftender documents and evaluation of tenders, project manage-ment and assistance in development and training of operatingstaffs.

- 45 -

ANNEX 2-3Page 2

3. The major part of the company's engineering work is undertakenin collaboration with others, either other engineering companies,contractors or operating companies within the chemical processingindustry. It is possible for the Company to undertake complete detailedengineering for a major project but this is rather an exception, and theCompany has been and is accordingly developing working relationships withcompetent and experienced engineering contractors throughout the world.

4. Haldor Topste A/S which employs about 450 people, mostlyengineers and university graduates licenses processes such as:

- Desulphurization of liquid hydrocarbons with EBP up to 240°C,based on gas-phase hydrogenation.

- Secondary desulphurization, for desulphurization of hydro-carbons down to a sulphur level of 0.05 ppm.

- Tubular steam reforming of hydrocarbons, based on feed-stocks ranging from refinery off-gas and natural gas allthe way up to naphtha with EBP of 2400.

- The HTAS/SBA autothermal reforming process, using as feed-stock natural gas, LPG, or naphtha. In the HTSA/SBA unithydrocarbons are reacted with steam and air or oxygen toform ammonia synthesis gas or oxo-gas.

- and others.

5. The Company owns and operates catalyst plants in Denmark and theU.S., and maintains an office in Brazil. It owns subsidiary companies inthe U.S., France, Sweden, Japan and Turkey (40% shareholding).

6. Some key financial data follow: (in $ millions)

1975 1976 1977

Revenues 29.5 28.4 27.9Operating Earnings 3.1 3.8 4.7Net Income 2.1 2.5 2.0*

*Estimate

Its preliminary 1977 balance sheet is attached as an Exhibit.

Industrial Projects DepartmentAugust 1978

HALDOR TOPS0E A/S

BALANCE SHIEET AS OF DECEMBER 31st, 1977

ASSETS DKR. xOOO LIABILITIES AND SHAREHOLDERS' EQUITY DKR. xOOO

CURRENT ASSETS: CURRENT LIABILITIES:

- Cash and banks 986 - Bark loans 20,634

- Trade and contracts receivables 35,769 - Trade payables and accrued expenses 17,880

- Prepayments to suppliers 3,155 - Advances received and billings in

- Receivables frarn ass. co. s. 8,229 eexcess of cost of work performed 47,591

- Other receivables and prepayrents 4,001 - Payables to ass. co. s. 1,858- Reserves for warranties and other 16,827

- Catalyst stocks and work in progress 25,792

77,932 104,790

FINANCIAL ASSETS: LONG TERM LOANS:

- Shareholding 4,936 Mortgage loans 26,506 1

- Meortgage bonds 12,491 Bank loans 6,649 0a

17,427 - Loans frarn shareholder 6,64839,803

EIXED ASSETS:INCOME TAX FUND 5,097

- Properties 59, 482

- Plant, machinery, furnit., etc. 62,969 SHAREHOLDERS' EQUITY

122,451 -Share capital 30,000

- Leqal reserves 7,500Less: Accum. depreciation 24,928

-UTndistributed earnings 1, 220_97,523 (+) 38,720

INTANGIBLE ASSETS 11,065 Gross profit before income tax (+) 15,537

TOTAL ASSETS 203,947 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 203,947

__ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~____ x, t

Industrial Projects Department

August 1978

- 4-

ANNEX 2-4

PAKISTAN: FAUJI FERTILIZER PROJECT

ANIC S.p.A.

1. FFC has selected Anic S.p.A. (Anic) to operate and maintain theFFC plant for a period of three years after start-up.

2. Anic, which is part of the Italian state-owned Ente NazionaleIdrocarburi (ENI) Group, is one of the largest Italian manufacturersof chemicals and fertilizers. It has operations in fields ranging frombase to fine chemicals and with substantial interestsin sectors such asfertilizers, synthetic rubber, plastics, chemical fibers and intermediatechemical products. Its 1976 sales amounted to US$1.1 billion equivalent,employing productive assets valued at US$1.0 billion. Anicts totalfertilizer capacity in Italy corresponds to a nitrogen content of 820,000tons per year. Its 1978 production of plastics, synthetic rubbers, andchemical fibers is estimated respectively at 900,000 tons, 360,000 tonsand 140,000 tons.

3. Anic was founded in 1936 as a mixed company with public andprivate capital. It was incorporated into ENI upon creation of the latter in1953. Anic's first petrochemical plant, located at Ravenna, began opera-tion in 1967 producing fertilizers and synthetic rubber. Since then thecompany's activities have been expanding and growing rapidly. TheCompany now operates 22 plants in Italy and 3 abroad. Fertilizers aremanufactured in four of the Italian locations. One of these,nearManfredonia which has a capacity of 510,000 tpy of urea and 330,000 tpyof ammonium sulfate and has started production in 1976, is largely identicalin concept and design with the FFC project.

4. Due to the worldwide slack in demand for fertilizers in recentyears, Anic's expansion process has stagnated, and as a result, man-power can be made available to projects such as FFC's. Given Anic's size--it employs over 22,000 people--and its growing body of experience in Italyand abroad, the company should have no difficulty in supplying the man-power needs which it will require to perform its role as operating companyfor FFC.

5. FFC would be Anic's first fertilizer plant operation outsideItaly. However, the company has been operating, either as shareholders orcontractors, refineries and petrochemical plants in Ghana, Tunisia, Zambiaand other countries. In connection with these operations, it has developedample facilities for training foreigners at its Italian locations.

6. The ENI Group, whose consolidated 1976 sales totaled theequivalent of US$12.3 billion, ranks as number 18 in Fortune Magazine'scombined listings of the largest industrial enterprises within and outsidethe United States. ENI's major fields of activity, with the respective majorsubsidiaries and 1976 revenues, are as follows:

- 48 -

ANNEX 2-4Page 2

US$billion

Petroleum and nuclear products, Agip, Agip Nucleare,natural gas and Snam Groups 10.1

Petrochemical products, cement Anic Group 1.0

Engineering and services Snamprogetti, Saipen .5

Mechanical manufactures Nuovo Pignone .2

Textile products Teston .3

Industrial Projects DepartmentAugust 1978

- 49 -ANNEX 3-1

PAKISTAN: FAUJI FERTILIZER PROJECT

FERTILIZER CONSUMPTION

Past Trends

1. The farmers in Pakistan used little fertilizer before 1960(Table 2). The period up to 1965 was characterized by a rapid increasein nitrogen consumption but hardly any phosphate or potassium was yetapplied in the fields. The farmers were given additional impetus to usemore fertilizers in the second half of the sixties through the intro-duction of new, highly fertilizer responsive, wheat and rice varieties.Between 1966 and 1973, total fertilizer consumption increased at anaverage rate of about 30% per annum; this in spite of a set-back in 1971when total nutrient use declined by 8% as a result of: a reduction inthe canal water availability and untimely rainfall, a fall in the benefit/cost ratio as a result of fertilizer price increases and a considerablereduction in the credit disbursements by the Agricultural DevelopmentBank of Pakistan (ADBP), the major institutional source of fertilizer cre-dit. Some over-reporting and some advance purchases by farmers due totemporary discounts in 1970, however, indicate that the 1971 decline infertilizer consumption is somewhat more apparent than real. This set-backapart, the introduction of high yielding wheat and rice varieties (HYV's),the increasing supplies of irrigation water, favorable fertilizer/cropprice ratios and increasing availability of institutional credit, all con-tributed to the rapid increase in fertilizer consumption in the periodfrom the mid-sixties to the early seventies.

2. In the early seventies the increase in fertilizer consumption lostits momentum as the acreages under high yielding varieties stabilized andincreased at much lower rates than during the introductory period. The mainconstraint on fertilizer consumption has since then been the availability ofirrigation water - practically all fertilizers are used in irrigated areas.Between 1973 and 1975, there has been no increase in the availability ofwater supply which has stagnated around 96 million acre feet (MAF) at thefarm gate. Fertilizer consumption also reached a peak in 1973 at 436.5thousand tons of nutrient and then fell back to 403.4 thousand tons in1974.

3. The 1974 decline was only in nitrogen fertilizer consumption.Phosphate usage, however, continued to increase though at a reduced rate.The 1974 decline in nitrogen consumption can partly be ascribed to theAugust 1973 floods, but mainly to the near doubling of the cost of ferti-lizer to the farmers (reflecting the world shortage) without a correspond-ing increase in crop prices. A contributing factor was also the Governmenttakeover of the fertilizer distribution system described elsewhere. Atripling of fertilizer credit from the ADBP as a flood relief measure wasnot enough to outweigh these negative factors.

- 50 -ANNEX 3-1Page 2

4. The ratio of nitrogen to phosphate consumption (N:P ratio) in1973 was 8:1, a much too high ratio for Pakistan conditions where soilsare deficient in phosphorus and the target ratio should be about 2:1.The increase in phosphate consumption in 1974 against all the negativefactors that caused the decline in nitrogen use, is an indication thatphosphate usage in Pakistan was supply constrained. The reduction in aidfinance available for phosphate imports in 1971 and 1972 was a severecheck on phosphate consumption in those years. The large amount of aid-financed DAP imports in 1973 eased the Pakistani phosphate supply situa-tion in 1974. Although the doubling of phosphate prices reduced farmersdemand as compared to what it would have been otherwise, their purchaseswere still larger than in the preceding year, 1973, when short supply hadleft a lot of unsatisfied demand.

5. The opposing effects of severe drought in the beginning of the1975 season and an increase in wheat prices resulted in a partial recoveryof nitrogen consumption in 1975. Increase of water supply, improvedcrop/fertilizer price ratios, improved dealer incentives through largermarketing margins and a liberalization of fertilizer marketing alloweda break-through in fertilizer consumption which, in aggregate, increasedby 30% in 1976, to 556,000 tons of nutrients of which N accountedfor 445,000 tons. The easy supply of phosphate and the de-restrictionto allow private marketing of the nutrient caused a jump in its usewhich increased by more than 75% in 1976 to reach 109,000 tons of P205sThis improved the N:P ratio to 4.1:1. However, the commencement of theprivate sector participation in the distribution of phosphates and theresulting increase in the number of phosphate sales points, has requireda building up of a larger working stock than earlier. Some of theincrease in phosphate offtake, which is the proxy for consumption, istherefore probably not reflected in a corresponding increase in actualapplications in farmers fields.

6. Pakistan's fertilizer application rates per hectare of arableland are still rather low as can be seen below and in Table 10:

Table 1

Fertilizer Consumption per Hectare Arable Land 1974(kg of nutrient per ha)

Nitrogen Phosphate Potash Total

Pakistan 17.6 3.0 0.1 20.7India 11.1 3.8 1.9 16.8Egypt 133.2 26.3 1.1 160.6Korea 172.3 82.1 62.8 317.2France 98.4 115.5 97.6 311.5

7. The development of the consumption of different types of ferti-lizers is shown in Table 3. Urea now accounts for about 85% of nitrogenconsumption and will be still more dominant when the new urea plants

- 51 -

ANNEX 3-1Page 3

come on stream. There have been some critics of such a high share ofnitrogenous fertilizers being supplied by urea. It was argued that ureawas not as good a nitrogen carrier for Pakistan conditions as othersources of this nutrient. The mission has reviewed this problem and notfound urea less effective than other nitrogenous fertilizers if properlyapplied.

8. That urea gives good responses is supported by Pakistaniagronomists and FAO trials. For the three major agricultural provinces,Punjab, Sind and NWFP, under irrigated conditions, FAO trials showaverage responses to nitrogen ranging from 10 to 12.5 units of wheat perunit of N (Table 4). The relatively low response factor of 3.8 forBaluchistan shown in the table is attributed to inadequate water supplyunder the traditional khareez systems. The nutrient sources for thetrials were not specified. Similarly, the average response of IRRI riceranged from 8 to 17 units of paddy per unit of N (Table 5). All trialswere conducted by FAO 1967 to 1970 in farmers' fields, and the prevailingagricultural practices were followed.

9. In the same FAO project, the efficiency of different nutrientsources were compared for major crops. The results of 1,154 trials onwheat and 433 trials on rice are shown in Tables 6 and 7. For wheat, onecan see no disadvantage of urea as a nitrogen source. Ironically enough,since urea is commonly known as a fertilizer particularly good for rice,ammonium sulphate seems to have a slight edge over urea on rice. Thismay, however, be due to the difference in the phosphate source also. Atany rate, the considerable advantages in production and distributioneconomics in favor of urea by far outweigh the non-significant biases infavor of other nitrogen carriers that may be shown in Tables 6 and 7.It appears, therefore, that on the whole, the issue of the efficiency ofurea as a nitrogen carrier amounts to the problem of assuring that ureais properly applied. This is essentially the task of the extensionservices.

- 52 -

ANNEX 3-2Page It

TABLE 2

PAKISTAN: FAUJI FERTILIZER PROJECT

FERTILIZER CONSUMPTION IN PAKISTAN

Nitrowen Phosphate Potash

Increase Increase Increase(Decrease) (Decrease) (Decrease)Over Pre- Over Pre- Over Pre-

Year Tons N ceding Year Tons P205 ceding Year Tons K20 ceding Year

1960 19,0001961 31,0001962 41,659 34.41963 41,16o (1.2) 2101964 67,620 64.3 630 200.01965 84,147 24.4 1,029 63.31966 69,242 (17.7) 1,245 21.01967 107,779 55.7 3,911 214.0 14h1968 177,h41 64.6 12,777 227.0 212 47.21969 203,521 1h.7 38,642 202.0 2,486 1,073.01970 272,566 33.9 33,801 (12$5) 1,344 (46.o)1971 251,519 (7.7) 30,h62 (9-9) 1,225 (8.8)1972 343,973 36.8 37,231 22.2 7bi (39.3)1973 386,385 12.3 48,730 30.9 1,380 85.51974 341,934 (11.5) 58,O84 19.2 2,672 93.61975 362,831 6.1 60,571 4.3 2,086 (28.0)1976 445,000 22.7 109,000 80.0 1,800 (15.9)1977 511,000 14.8 118,000 8.3 2,200 22.2

Average Annual Growth Rates

1961-1966 17.4 n.a. n.a.1966-1971 29.4 89.5 n.a.1971-1977 12.5 25.5 10.2

1961-1977 19.1 n.a. n.a.1966-1977 19.9 n.a. n.a.

Source: Various GOP published statistics; Federal Directorate of Agricultural Supplies(FDA.S) for recent years.

Industrial Projects DepartmentAugust 1978

- 53 -

ANNEX 3-1Page 5

TABLE 3

PAKISTAN: FAUJI FERTILIZER PROJECT

FERTILIZER CONSUMPTION IN PAKISTAN, BY PRODUCT('000 tons of nutrient)

1971 1972 1973 1974 1975 1976 1977

Ammonium Sulphate 10,373 12,018 11,875 10,710 13,221 21,332 27,549Ammonium Nitrates 13,506 23,390 19,166 7,350 20,394 21,806 22,510Urea 220,317 295,749 335,562 300,420 302,857 356,491 396,994Nitrophosphates 2,570 10,016 12,516 4,750 12,692 33,896 75,972Diammonium Phosphate 21,468 27,899 47,533 74,700 70,134 101,053 91,071NPK's - - - 240 1,502 2,781 1,116

Triple Superphosphate 10,834 7,368 47 - 1,225 2,797 692Single Superphosphate 2,914 4,764 8,416 1,920 3,204 8,567 13,608Potassium Chloride 72 5 46 - - - -

Potassium Sulphate 1,152 739 1,344 2,590 1,586 1,915 2,093

Total 283,206 381,948 436,505 402,680 426,815 550,638 631,605

Source: Federal Directorate of Agricultural Supplies (FDAS).

Industrial Projects DepartmentAugust 1978

- 54 -ANNEX 3-1Page 6

TABIZ 4

PAKISTAN: FAUJI FERTILIZER PROJECT

UNIT RESPONSE OF MMI-PAK 65 WHEAT TO NITROGEN. PHOSPHATE AND POTASH(pounds of grain per pound nutrient)

Number of N in the P20O5 in the [20 in theProvince Trials Presence of P205 Presence of N Presence of N+P205

Punjab 633 10.0 4.0 5.4

Sind 566 12.5 3.0 8.9

Baluchistan 402 3.8 2.5 3.7

N.W.Frontier 218 12.5 5.6 6.3

1J Figures obtained by interpolation.

Source: FAO Preinvestment Studies for the Promotion of the Fertilizer and Petro-chemical Industries: Pakistan, Final Report on Fertiliser Use andRequirements, Rome 19n1, Table 3.

TABLE 5

PAKISTAN: FAUJI FERTILIZER PROJECT

UNIT RESPONSE OF RICE TO NITROGEN, PHOSPHATE AND) POTASH(pounds of paddy per pound of nutrient)

N in the P205 in the K20 in theNumber of the presence the presence the presence

Province Variety Trials Of P205 of N of N + P205

Punjab IRRI-8 160 17.0 _ 5.1

Sind IRRI-8 339 14.8 19.9 4.5

N.W. Frontier (UIt-8 141 8.1 - 3.1(Basmati 46 5.0 _

Source; FAO Preinvestment Studies for the Promotion of the Fertilizer and Petro-chemical Industries: Pakistan, Final Report on Fertllizer Use andRequirements, Rome 1971, Table 12.

Industrial Projects DepartmentAugust 1978

- 55 -

ANNEX 3-1Page 7

TARTF. 6

PAKISTAN: FAUJI FERTILIZER PROJECT

RESPONSE oF MEXI-PAK 65 WHEAT TO DIFFERENT SOURCES OF NITROGEN AND PHOSPHATE1"(Based on 1,154 trials)

Nutrient Source Response as percentage of a standardPunjab Sind Baluchistan NWFPStraights

Ammonium sulphate and single superphosphate (Standard) 100 100 100 100Ammonium sulphate and triple superphosphate 96 103 96 101Urea and single superphosphate 99 108 104 100Urea and triple superphosphate 97 110 103 103Ammonium sulphate nitrate and single superphosphate 104 107 108 -Ammonium sulphate nitrate and triple superphosphate 99 110 92 102

Compounds

Ammonium nitrate and di-calcium phosphate 91 96 86 103Mono-ammonium phosphate and ammonium sulphate 91 98 88 101Nitrophos 95 100 99 109

Complex

Mono-ammonium phosphate and urea 100 105 80 83Diammonium phosphate and ammonium sulphate 98 104 84 -Diammonium phosphate and urea 95 - - 103

1/ Applied at rates of N:60; P205:60; K20:O and N:120; P205:60; K20:0 lbs/acre.

Source: FAO, Preinvestment Studies for the Promotion of the Fertilizer and PetrochemicalIndustries: Pakistan, Final Report on Fertilizer Use and Requirements, Rome 1971,Table 4.

TABLE 7

RESPONSE OF RICE TO DIFFERENT SOURCES OF NITROGEN AND PHOSPHATE-/(Based on 433 trials)

Response as percentage of a standardNutrient Source PunjabZl Sind 2/ NWFP2/

(IRRI-8) (IRRI-8) IRRI-8 Basmati

Straights

Ammonium sulphate and single superphosphate 100 100 100 100Urea and triple superphosphate 92 96 - -

Compounds

Monoammonium pho7phate and ammonium sulphate 82 80 108 89Supra-complasal3 84 80 109 101Kali phosphate4/ 82 88 116 -

1/ Applied at the rates of N:120; P205:80; K20:80 and N:150; P205:80; K20:80 lb/acre.T/ Number of trials: Punjab 160; Sind 186; NWFP 41 (IRRI-8); 46(Basmati).3/ Supra-complasal: 15:15:04/ Kali phosphate: 0:20:20.

Source: FAO, Preinvestment Studies ......... op. cit. Table 13.

Industrial Projects DepartmentAugust 1978

- 56 -

ANNEX 3-1Page 8

Prospects

10. Taking account of all factors which had been identified as beingthe main determinants to changes in fertilizer consumption in the past, theBank has made an assessment for the likely market development for nitrogenand phosphate fertilizers. The forecasts are shown in Table 8. Table 9shows the forecasts made by some other organizations.

11. Increased water supply, improved credit facilities and crop/fertilizer price ratios, the backlog in demand experienced in recent yearsof shortages, all this is expected to continue to lead to above averagegrowth rates in nitrogen consumption in the next year or so. Gradually,however, as these gains are realized, the growth rate is expected to slowdown from 19% in 1977 to about 9% by 1980 and 5 to 6% thereafter. Theaverage growth rate between 1975 and 1980 is forecast to be about 15% ascompared to nearly 17% between 1969 and 1973. The level of nitrogen con-sumption is forecast to increase from 445 in 1976 to 730 in 1980 and 980in 1985, all in thousand tons of nutrient.

12. The projections are consistent with planned increases in watersupply. Any shortfall can have serious effects on fertilizer consumption.As mentioned, the recent Bank Special Agricultural Sector Review concludedthat only 55 to 60% of the water required for maximum yields is available.This would reduce the yield potential by some 20 to 25%. In addition, thevariability in the monthly supply means that the farmers cannot rely on andplan for more than 40 to 45% of water requirements corresponding to areduction in the yield potential by some 35 to 50%.

13. The FAO trials show that dwarf wheat gives near maximum yield atfertilizer application rates of about 200-100-100 lbs/acre. The averagerecommended dosage is about 120-60-0 which, however, assumes that adequatewater is available. Due to the risk involved in higher application ratesbecause of the non-assured availability of water, the farmers, on average,would be reluctant to exceed an application rate of the order of 80-40-0.This has been taken account of in the Bank's projections which assume thatthe application rate on wheat increases from 45-10-0 in 1974/75 to 80-20-0in 1979/80 and 85-30-0 in 1984/85 (see Tables 10 and 11). Similar assump-tions were made for other crops accounting for about 50% of fertilizerconsumption, and the projected application rates for 1980 and 1985 areconsistent with the fLndings of the agricultural sector mission. Table 12shows that if the recommended fertilizer application rates were followed,the potential use of nitrogen and phosphate fertilizers in 1980 would beabout 1.3 million tons of N and about 0.7 million tons of P205.

14. Exclusive of fertilizer demand induced through acreage increasesor technological progress, these figures would seem, for practical purposes,to put an upper limit towards which fertilizer consumption in Pakistan wouldgrow at a decreasing rate.

- 57 -ANNEX 3-1Page 9

15. Assuming that the Bank's fertilizer consumption projections arerealized and that crop acreages increase as shown in Table 10, it can thenbe roughly estimated that cereal (wheat, rice and maize) production canincrease at a yearly rate of more than 5% in the latter half of theseventies, and at about 4% in the first half of the eighties. Thisassumes a response ratio of 7 units of cereals per additional unit ofnutrient applied. This is obviously a rough and ready method of calcu-lation, but it would seem to allow the conclusion that food supply percapita in Pakistan will improve significantly if the Bank's fertilizerdemand projections are correct.

16. Forecast phosphate fertilizer demand (Table 8) is based on thetarget to improve the N:P ratio from 6:1 in 1975 to about 4:1 in 1980and 3:1 in 1985. The final goal should be about 2:1. There now seemsto be general acceptance in Pakistan that the N:P ratio has to be improved.As a step in that direction, GOP has recently given permission to thefertilizer industry to distribute phosphate fertilizers. This was earlierentirely in Government hands. GOP also fixes the P205 price relativelymore favorably than that of N. Moreover, to promote the use of NP and DAP,these materials are cheaper sources of nitrogen and phosphate than straightfertilizers. The effect of all this has been that phosphate consumptionincreased by three-quarters in 1976 and already improved the N:P ratioto 4.1:1. It has already been mentioned that the 1976 phosphate offtakefigure probably overestimates actual consumption due to increases in retailstocks. It is therefore believed that the 4:1 ratio forecast for 1980 isstill a reasonable one.

17. Pakistan soils are generally not deficient in potash and noeffort has been made to forecast future consumption of this nutrient.

Industrial Projects DepartmentAugust 1978

- 58 -ANNEX 3-1Page 10

TABLE 8

PAKISTAN: FAUJI FERTILIZER PROJECT

FORECAST OF NITROGEN AND PHOSPHATE

FERTILIZER CONSUMPTION IN PAKISTAN

('000 tons of nutrient)

Year-/ Nitrogen Phosphate

Ending Rabi Kharif Total Rabi Kharif TotalSeptember

1978 339 245 584 80 55 135

1979 372 270 642 89 73 162

1980 388 318 706 103 91 194

1981 409 348 757 117 108 225

1982 425 377 802 128 119 247

1983 442 408 850 139 133 272

1984 468 432 900 152 146 298

1985 487 467 954 168 161 329

1/ Years are on an October-September basis with Rabi covering October-Februaryand Kharif March-September.

Source: Bank staff forecasts.

Industrial Projects DepartmentAugust 1978

- 59 -ANNEX 3-1Page 11

TABLE 9

PAKISTAN. FAUJI FERTILIZER PROJECT

C(?PARISON OF FORECASTS FOR NITROGEI CONSUMPTIOV

IN PAKISTAN 1980

('000 tons of N)

Cento Committee on Fertilizers (1968) 789

J. G. Vermaat (1968) 496

Humphrey & Glasgow/UNIDO (1970) 635

ESSO (1971) 507

Chemcon (1972) 550

Toyo/Dawood Corp. (1972) 1000

Bank Multan Appraisal (1974) 790

GOP Ministry of Industry (1974) 810

GOP Planning Commission (1974-?) 750

Chemoon (1974) 760

USAID FAUJI Project Paper (1975) 750

TVA (1975) 750

Nitrex (1975) 800

ESSO (1975) 692

ADB Mirpur Mathelo Appraisal (1975) 758

Bank FAFCO Appraisal (197?) 730

Esso (1977) 714

DR (1977) 814

Thts Report (1978) 706

Industrial Projects DepartmentAugust 1978

TABLE 1.0

PAKISTAN: FAUJI FERTILIZER PROJECT

FERTILJZER APPLICATION RATES IN PAKIS2AN

Thousand Acres Pounds of Nutrient per Acre1975 1980 1985 1975-' 1980 1985 1975 1980 1985

PEt. Actual _ Forecast Est, Actual Forecast kt, Actual Forcast Nitrogen Phosphate

Wheat WU9 1vA = 17s 30 a 63 6 18 21

HYV 7733 9264 11000 45 80 85 10 20 30Local 6664 6645 6500 12 20 25 5 7

Rice 3866 4271 600 17 46 61 L 1

HYV 1623 2150 2400 29 70 90 10 25 35Local 2243 2121 2200 9 20 30 1 3 10

Maize 1545 1700 1800 22 46 80 1 12 26

Sugarcane 1572 1738 1900 73 110 140 10 30 47

Cotton 5019 5550 6100 30 45 50 1 11 17

h/ ere are no statistics on actu0- fertilizer &:>J icatioi

by crop. The estimates are based on a sample survey carriedout by ZSSO in 1974 and checked with the seasonal vari-ation in fertiliser sales.

Industrial Projects DepartmentAugust 1978

i .t'

A

- 61 -

ANNEX 3-1Page 13

TABLE U

PAKISTAN: FAUJI FERTILIZER PROJECT

TOTAL FERTILIZER APPLICATION BY CROP

I(PLIED IN ESTIMATED FERTILIZER APPLICATION RATES

('000 tons of nutrient)

Nitrozen Phosphate

1975 1980 1985 1975 1980 19985

Wheat 14 400 500 IL l0C 170

HYV 157 340 425 37 85 150Local 37 60 75 - 15 20

Rice 30 89 128 8 28

HYV 21 70 98 7 25 38Local 9 19 30 1 3 10

Maize 15 36 65 1 9 21

Sugarcane 54 85 121 7 23 41

Cotton 67 U5 139 2 28 47

Other 3 5 1 2

Total 363 730 980 56 190 336

Industrial Projects DepartmentAugust 1978

- 62 -

ANNEX 3-1Page 14

TABLE 22

PAKISTAN: FAUJI FERTILIZER PROJECT

POTETIAL FERTLIZER USE IN 1980

IF REC1I=DED FERTILIZEII AppLICATION RATS ARE FOLLW? )

1980 Recommended dose Potential Fertilizer useMillion Acres Lbs per acre 1980

' 000 Tons

N P205 N P20

Wheat 15.9 a=

HYV 9.8 120 60 532 266Local 6.1 45 30 121L 83

Rice 4-1 !69 98

HYV 2.1 135 60 128 57Local 2.0 45 45 41 41

Maize 1.7 76 46

HYV 1.1 120 60 60 30Local 0.6 60 60 16 16

Sugarcane 1.7 160 80 123 62

Cotton 5.6 60 40 152 101

Other n/a n/a n./a 167 74

Total 1343

Industrial Projects DepartmentAugust 1978

ANNEX 3-2

PAKISTAN

FAUJI FERTILIZER PROJECT

FERTILIZER PRODUCTION AND SUPPLY/DEMAND BALANCE

The Existing Fertilizer Industry

1. The manufacture of fertilizers in Pakistan was first taken up bythe Government-owned Pakistan Industrial Development Corporation (PIDC),which established three factories between 1958 and 1962. By 1973, PIDChad grown too large and was split into ten specialized corporationscoordinated through a Board of Industrial Management. The NationalFertilizer Corporation (NFC) took over PIDC's fertilizer operations andwas incorporated as a private limited company wholly owned by GOP. NFCacts as a holding company to the operating units directing, coordinatingand controlling the group activities.

2. Esso Pakistan Fertilizer Company Ltd. built the first private

fertilizer factory in the private sector in 1968 and was followed by the

Bank/IFC financed joint venture Dawood Hercules in 1972. Historical andprojected production of nitrogenous fertilizer is shown in Table 13. Theexisting fertilizer plants are shown in the table below:

Existing Fertilizer Plants

1/Design Capacity-ton product '000 ton nutrient

Company Location Product per day per year

A. Nitrogen

NFCPak-American Daudkhel Ammonia (76) (21)

AS 273 19

Pak-Arab Multan Ammonia (264) (72)

Urea 180 27CAN 300 26

Esso Daharki Ammonia (300) (82)Urea 515 78

Dawood-Hercules Chichoki- Ammonia (620) (169)Mallion Urea 1,100 167

B. Phosphate

NFCFaisalabad Chem. & Faisalabad Sulph.Acid (20) -Fertilizer SSP 60 3.5

Jaranwala Sulph.Acid (50) -SSP 240 14

1/ Figures in brackets indicate intermediate products.

- 64 -

ANNEX 3-2Page 2

3. Nitrogen: The NFC subsidiary Pak-American Fertilizer Ltd. startedup Pakistan's first nitrogen fertilizer plant with USAID assistance in1958. Its location was at Daudkhel in Northern Punjab. Initially thefactory was designed for 40 tons per day (tpd) ammonia to be fully con-verted to 150 tpd of ammonium sulphate. This corresponds to about 10thousand tons per year (330 days) of nitrogen (10 MtpyN). In 1968, theplant was expanded and an additional 36 tpd (10 MtpyN) ammonia was processedand added 123 tpd (8 MtpyN) to the ammonium sulphate capacity. The rawmaterials for the project were coal and gypsum until 1973 when gas becameavailable via the Sui Northern pipeline and the plant was modified to usenatural gas instead of coal. Until the modification, part of the ammoniahad been used for refrigeration and defense purposes and this, togetherwith plant modifications plus fuel and other problems, had restricted theannual ammonium sulphate output to 60,000 tons or so (12 MtpyN) which wasabout two-thirds of its nominal capacity. After the modification tonatural gas, the plant produced about 91,000 tons of ammonium sulphatein 1974 and about 94,000 tons in 1975. This is a very satisfactoryresult and about 4% above the rated capacity of 90,000 tons in 1975.

4. Another NFC project, now part of the Pak-Arab Fertilizers Ltd.plant at Multan in Central Punjab started production in 1962. The complexwas built with French financial assistance and originally consisted of a204 tpd (56 MtpyN) double stream ammonia unit to feed a 180 tpd (27 MtpyN)urea unit and a 300 tpd (26 MtpyN) Calcium Amnonium Nitrate (CAN)-1anit.---

The ammonia units have never achieved more than about 75% of design capa-cities. In 1968, an "Ammopac" 60 tpd (16 MtpyN) packaged ammonia plant wasinstalled to make up for the deficiency, but this unit has also not workedproperly. The complex never managed to increase its urea and CAN outputover the levels achieved before the installation of the Ammopac unit. Likethe Daudkhel plant, the Multan plant uses gas from the Sui field as itsraw material for ammonia production. As detailed below, the Multan plantis now being expanded with Bank assistance.

5. In the private sector, Esso Pakistan Fertilizer Ltd. brought onstream a prilled urea plant in Northern Sind based on Mari gas. The plantcommenced operation in 1968 and consists of a 300 tpd (82 MtpyN) ammoniaunit and a 515 tpd (78 MtpyN) urea unit. Esso's urea output has consis-tently exceeded the design capacity, in 1975 by as much as 20%. Theseproduction levels can be achieved because of Esso's recent major invest-ments in debottlenecking the plant.

6. In 1971, Dawood Hercules brought into operation a 620 tpd (169 MtpyN)ammonia unit and a 1,100 tpd (167 KtpyN) urea plant. The Bank, IFC and USAIDprovided financial assistance for the project which is lceated at Chichoki-Mallian not far from Lahore in Eastern Punjab near the Indian border. Itsammonia production is based on Sui gas. Apart from interruptions due tohostilities and one or two mechanical failures, the plant has demonstratedits capability of operating at near or above its design capacity.

- 65 -

ANNEX 3-2Page 3

7. Phosphate: Pakistan's first fertilizer plant, the NFC LyallpurChemicals and Fertilizers Ltd. small plant at Faisalabal in the Punjabstarted production in 1957. It then consisted of a 20 tpd sulphuricacid plant and a 60 tpd (3.5 Mtpy P205) Single Superphosphate (SSP) den.In 1968, a first expansion of Lyallpur Chemicals' facilities were madeat Jaranwala about 35 km from Lyallpur. Another expansion at Jaranwalawas completed at the end of 1975 and the Jaranwala Complex now consistsof two 50 tpd sulphuric acid plants to produce 240 tpd (14 Mtpy P205) ofSSP. The Lyalipur Chemicals' facilities have operated at low rates ofcapacity utilization both because the sulphuric acid has been used forother purposes and the farmers' reluctance to handle powdered SSP.Jordan rock, and sulphur currently imported from Poland, are the rawmaterials for these plants.

Fertilizer Capacity Expansion Program

8. Present plans for the expansion of public sector (NFC) ferti-lizer capacity include new facilities for the Pak-Arab plant at Multan,and the Pak-Saudi project at Mirpur Mathelo. In the private sector, thereis the proposed FFC project.

9. The Multan expansion program, financed with Bank and ADB assis-tance, consists of the construction of: a 910 tpd (246 MtpyN) ammoniaunit based on Sui gas, a double stream nitric acid unit with a capacityof 1,200 tpd (100% nitric acid basis), a nitrophosphate plant producing1,020 tpd prilled 22.5-22.5-0 (75 Mtpy each of N and P205) and a 1,500tpd CAN (26.5% N) plant (119 MtpyN). The existing urea and CAN plants,after modification to produce 218 tpd (33 MtpyN) prilled urea and 300tpd (26 MtpyN) granular CAN will be integrated with the new units. Theold double stream ammonia units will probably be mothballed or scrappedwhereas the Ammopac unit is likely to continue to serve in one way oranother but its ammonia probably will not be used for fertilizer produc-tion. The Multan project is now expected to be in commercial productionby latel978. It is based on Sui gas and Jordan phosphate rock.

10. The Pak-Saudi project at Mirpur Mathelo in the Sind is being builtwith ADB and Arab assistance and consists of a 1,000 tpd (272 MtpyN)ammonia unit and a 1,740 tpd (264 MtpyN) urea unit. Like the proposedFFC project, it is based on gas from the Mari gas field. It isexpected to be on stream by latel979.

11. Finally, among the active projects, we have the one proposedfor IDA financing, the FFC plant to be located at Goth Machhi to pro-duce 1,000 tpd (272 MtpyN) ammonia to be converted into 1,725 tpd(262 MtpyN) of urea. As mentioned elsewhere, it is expected to be incommercial production in mid-1981.

12. In addition, NFC planned to build a nitrogen and phosphate com-plex at Haripur in Hazara district, NWFP, with the assistance of China.The plant was to produce 170 tpd (46 MtpyN) ammonia and 290 tpd (44 MtpyN)urea. Although some work has started on the site, the project has beenpostponed indefinitely.

- 66 - ANNEX 3-2Page 4

13. There were also plans to build a phosphate complex consistingof a 750 tpd sulphuric acid plant based on imported sulphur, a 300 tpd(99 Mtpy P205) phosphoric acid plant based on rock from the Hazaradeposits, a 750 tpd sulphuric acid plant based on imported sulphur, a615 tpd (55 Mtpy P205) urea ammonium phosphate (UAP) plant and a triplesuperphosphate plant of unspecified size but presumably to use theremaining 44 Mtpy P20 5 in phosphoric acid not used by the UAP plant.Due to the delayed results from the survey of the Hazara rock deposits,and the uncertainty with regard to these deposits, the phosphate projectshave been postponed; their future is uncertain.

TABLE 13

PAKISTAN: FAUJI FERTILIZER PROJECT

NITROGEN FERTILIZER PRODUCTION IN PAKISTAN('000 tons of N)

Company Esso Dawood-Percules National Fertilizer Corporation Fauji TotalPlant Daharki Chichoki-Nallion Daudkhel --------------------- Multan-------------------- Mirpur Mathelo Goth MachhiProduction (% N) Urea (46%) Urea (46%) AS (21%) CAN (26%) Urea (46%) NP (22.57) Urea (467) Urea (46%)Nominal Capacity 78 167 19 26 119 27 75 264 262Start-Up Year 1968 1972 1958 1961 Apr 78 1961 Mid-78 Mid-79 Mid-80 1,037

1961 - - 10 - - - _ _ - 101962 - - 11 _ _ - - - - 111963 - - 11 3 - 13 - - - 271964 - - 11 17 - 19 - - - 471965 - - 7 16 - 21 - - - 441966 - - 8 20 - 19 - - - 471967 - - 9 20 - 22 - - - 511968 - - 10 21 - 20 - - - 511969 32 - 9 20 - 21 - - - 821970 75 - 12 17 - 21 _- - 1251971 85 - 12 22 - 21 - - - 1401972 75 94 14 22 - 13 - - - 2181973 88 150 12 20 - 6 - - - 2761974 91 158 19 17 - 15 - - - 3001975 94 172 20 15 - 9 - - - 3101976 97 169 20 18 - 11 - - - 3151977 85 162 19 18 - 17 - - - 301

1978 80 167 12 18 - 17 - - _ 2851979 80 167 12 - 88 25 49 - _ 4211980 80 167 12 - 115 33 64 162 - 6331981 80 167 12 - 122 35 68 212 - 6961982 80 167 12 - 122 35 68 225 170 8791983 80 167 12 - 122 35 68 225 223 9321984 80 167 12 - 122 35 68 225 236 9451985 80 167 12 - 122 35 68 225 236 945

1/ Actuals until 1976/77. Thereafter estimates based on presently existing and planned capacities. Assuming that new capacities operate at 65% of nominal capacity the year mof start up, at 85% the second year and then at 90%. PI

xr

Industrial Projects DepartmentAugust 1978

- 68 - ANNEX 3-2

Page 6

Fertilizer Supply/Demand Balances

14. Historical and forecast production of nitrogenous fertilizers isshown in Table 13. In the past, single superphosphate (SSP) was the onlyphosphate fertilizer manufactured in Pakistan and, in recent years, outputaveraged about 4,000 tons of P205 per annum. With the coming on stream ofthe Jaranwala plant, 1977 production increased to 10,000 tons. Table 14shows the forecast phosphate fertilizer production.

15. As can be seen in Tables 15 and 16, Pakistan has been relyingheavily on imports to fill its nutrient requirements. With the dramaticincreases in international fertilizer prices, fertilizer imports havebecome a severe burden on Pakistan's balance of payments. For example,it is estimated that fertilizer imports during 1977 cost Pakistan aboutUS$110 million, which represented about 5% of their total import bill.The cost of urea imports alone amounted to nearly US$50 million that year.

16. Due to the heavy import dependence, the international fertilizerprice hikes were immediately reflected on the nutrient prices in Pakistan.For example, the price of urea doubled from Rs 700 ($71) per ton in 1972 toRs 1,500 ($152) per ton in 1973. This compares to local production costsaveraging about Rs 800 ($81). The USA domestic price for urea was $82 perton in 1972 and $230 per ton in 1974.

17. The external price effects had serious repercussions onPakistan's fertilizer consumption which stagnated until crop prices wereadjusted sufficiently upwards and fertilizer prices began to decline againin 1976. Although difficult to quantify, the stagnation of fertilizerconsumption in the 1972-1975 period was certainly a major factor in thedoubling of the level of foodgrain imports during that same period, justas the rapid increase in fertilizer consumption in the late sixties was amajor factor in bringing Pakistan close to food self-sufficiency in 1969-70.

18. With the implementation of the proposed FFC project, Pakistanwill be assured of a stable supply of fertilizers at prices reflecting produc-tion costs in Pakistan. According to the Bank's projections, Pakistan wouldbecome self-sufficient in fertilizers between 1981 and 1984 with the FFCplant. This would be a small margin as a buffer against unforeseenevents like slippage in the completion of new fertilizer plants, plantbreakdowns and other reasons for lower than expected (90%) capacity utili-zation, higher than forecast consumption and necessary stock build-up. Anyremaining small surpluses should not be too difficult to sell or barterelsewhere in Asia. Competitive production costs, experienced foreigncompanies like Esso and Hercules should be an asset in findingforeign markets. A small surplus margin would also give an extra incentivefor an intensification of the fertilizer promotional effort. Table 17shows the forecast supply and demand balances of nitrogen fertilizers inPakistan.

19. The supply and demand forecasts for phosphate fertilizers (Table18) show deficits throughout the period under review and local phosphatefertilizer production might seem justified. It is not clear, however, whatthe phosphate rock availability in Pakistan is. A survey of the Hazaradeposits is now being undertaken and results could be expected by the endof 1978. Phosphate fertilizer production in Pakistan based on importedsulphur and rock does not appear to be an economic proposition, particularlyin view of falling international prices of finished phosphate fertilizers.

Industrial Projects DepartmentAugust 1978

- 69 -ANNEX 3-2Page 7

TABLE 14

PAKISTAN: FAUJI FERTILIZER PROJECT

FORECAST PHOSPHATE FERTILIZER PRODUCTION IN PAKISTAN-/('000 tons of P205)

Plant ............... Faisalabad Jaranwala MultanProduct (7. P205) .. .....SSP (20.5%) SSP (20.5%) NP (20.5%)Nominal Capacity....4 15 75Start-Up Year ....... 1957 1976 end-1978 Total

1977 (actual) 4 10 14

1978 4 14 - 18

1979 4 14 49 67

1980 4 16 64 84

1981 4 16 68 88

1982 4 16 68 88

1983 4 16 68 88

1984 4 16 68 88

1985 4 16 68 88

1/ Based on presently existing and planned capacities. Assuming that newcapacities operate at 65% of nominal capacity the year of start-up, at85% the second year and then at 90%.

Industrial Projects DepartmentAugust 1978

- 70 -ANNEX 3-2Page 8

TABLE 15

PAKISTAN: FAUJI FERTILIZER PROJECT

FERTILIZER BALANCE SHEET 1967/68-1976/77('000 tons of nutrient)

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977

Opening Balance 84.75 97.94 89.51 163.30 163.00 45.60 63.51 312.50 344.75 250.30

Nitrogen 64.61 40.07 32.11 138.00 122.00 34.34 31.87 217.67 281.18 190.50Phosphate 20.04 57.87 53.80 23.00 36.00 6.36 28.04 87.63 57.67 55.95Potash 0.10 - 3.60 2.30 5.00 4.90 3.60 7.20 5.90 '.85

Local Production 51.00 80.62 133.60 132.00 219.88 282.68 303.87 325.58 327.10 322.72

Nitrogen 49.70 78.05 128.60 128.00 215.00 274.24 299.86 319.91 316.50 312.12Phosphate 1.30 2.57 5.00 4.00 4.88 8.44 4.01 5.67 10.60 10.60Potash - - - - - - - - - -

Imports 152.70 155.31 269.52 152.00 70.64 173.53 348.29 132.17 177.50 245.49

Nitrogen 103.20 117.51 267.22 108.00 70.64 111.45 228.35 106.43 74.70 122.69Phosphate 49.30 32.00 2.30 39.00 - 62.08 113.64 24.94 102.80 120.52Potash 0.20 5.80 - 5.00 - - 6.30 .80 - 2.28

Total Availability 288.45 333.87 492.63 447.30 453.52 501.81 715.67 770.25 849.35 819.82

Nitrogen 217.51 235.63 427.93 374.00 407.64 420.03 560.08 644.01 672.38 625.32Phosphate 70.64 92.44 61.10 66.00 40.88 76.88 145.69 118.24 171.07 188.36Potash 0.30 5.80 3.60 7.30 5.00 4.90 9.90 8.00 5.90 6.14

Consumption 190.42 244.36 307.67 283.20 381.93 436.53 462.61 425.50 555.20 631.57

Nitrogen 177.44 203.52 272.57 252.00 344.00 386.39 341.93 362.83 444.70 510.99Phosphate 12.78 38.64 33.80 30.00 37.23 48.74 58.08 60.57 108.70 118.12Potash 0.20 2.20 1.30 1.20 0.70 1.40 2.60 2.10 1.80 2.46

Closing Balance 98.03 89.51 184.96 164.10 71.59 65.28 313.06 344.75 294.15 182.90

Nitrogen 40.07 32.11 155.36 122.00 63.6411 33.64 218.15 281.18 227.68 114.33Phosphate 57.86 53.80 27.30 36.00 3.65 28.14 87.61 57.67 62.37 64.54Potash 0.10 3.60 2.30 6.10 4.30 3.50 7.30 5.90 4.10 4.03

1/ Closing and opening balances do not always tally because of various small adjustments likelosses, exports, etc.

2/ Exports to East Pakistan and Afghanistan amounting to 8 thousand and 2.3 thousand nutrienttons respectively are included in the closing balance 1971/72 but not in the opening balance1972/73.

Source: FDAS.

Industrial Projects DepartmentAugust 1978

- 71 -ANNEX 3-2

Page 9

TABLE 16

PAKISTAN: FAUJI FERTILIZER PROJECT

IMPORTS OF FERTILIZERS, BY PRODUCT('000 tons)

Year Urea AS ASN AN/CAN NP DAP/MAP TSP SOP NPK

1967/68 93,518 - 9,750 - 7,636 38,400 50,379 - -

1968/69 216,936 - 14,638 - 9,200 - - 5,000 -

1969/70 281,207 - 5,720 - 13,800 12,800 - - -

1970/71 100,353 - 520 - 10,212 46,976 - - -

1971/72 70,495 - - - - - -

1972/73 91,077 - - - 16,410 88,905 - - -

1973/74 166,140 2,090 - 9,540 18,440 130,590 - 5,490 2,460

1974/75 93,070 - - 6,170 26,530 11,900 5,060 - 2,250

1975/76 30,755 - - - 7 3 -

1976/77 122,690 - - - 120,520 - 2,288

Source: Changez Shuja, Fertilizer Subsidy in Pakistan, paper prepared for the FAO/FIACAd Hoc Working Party on Economics of Fertilizer Use (undated), except for 1974/75and 1975/76 which are from FDAS. 1976/77 from NFC.

Industrial Projects DepartmentAugust 1978

- 72 -

ANNEX 3-2Page 10

TABLE 17

PAKISTAN: FAUJI FERTILIZER PROJECT

BANK FORECASTS FOR NITROGEN PRODUCTION

AND CONSUMPTION IN PAKISTAN('000 tons of nutrient)

Production Surplus (Deficit)With Without With WithoutFFC FFC Consumption FFC FFC

1977 (Actual) 285 285 511 (239) (239)

1978. 2R5 285 584 (299) (299)

1979 421 421 642 (221) (221)

1980 633 633 706 (73) (73)

1981 696 6n6 757 (61) (61)

1982 879 709 802 77 (93)

1983 932 709 o5u 82 (141)

1984 945 709 900 45 (191)

1985 945 709 (9) (245)

Industrial Projects DepartmentAugust 1978

- 73 -

ANNEX 3-2Page 11

TABLE 18

PAKISTAN: FAUJI FERTILIZER PROJECT

BANK FORECASTS FOR PHOSPHATE FERTILIZERPRODUCTION AND CONSUMPTION IN PAKISTAN

('000 tons of nutrient)

Production Consumption Deficit

1977 (Actual) 14 125 (111)

1978 18 150 (127)

1979 67 165 (98)

1980 84 216 (106)

1981 88 215 (127)

1982 88 240 (152)

1983 88 270 (182)

1984 88 300 (212)

1985 88 348 (247)

Industrial Projects DepartmentAugust 1978

- 74 -

ANNEX 3-3

PAKISTAN

FAUJI FERTILIZER PROJECT

FERTILIZER MARKETING

Fertilizer Pricing and Price Policies

1. GOP gives high priority to fertilizers and has strict control overthe sector on the strength of the Essential Commodities Act.

2. Fertilizer ceiling retail prices, as well as procurement prices ofthe major crops, are fixed by the Government and therefore provide it withan important policy instrument. These prices are uniform throughout thecountry. Cost differentials between imported and locally produced ferti-lizers are made up for through levies or subsidies. The retail price ofurea and SSP are fixed first and then the other straight fertilizer materialsare priced to equate the price per unit of N and P205 respectively. Toachieve a better N:P balance, the Government subsidizes P205 at a higher ratethan N. Moreover, to promote the sales of DAP and particularly NP, thesematerials are cheaper sources of nitrogen and phosphate than straight ferti-lizers. Thus, for example, in 1975, imported TSP was subsidized at a rateof Rs 6,700 per ton of nutrient compared to imported urea's Rs 4,000 per tonof nutrient (Table 21). The present retail price of NP (24-24-0) is about13% below the corresponding weighted prices of urea and TSP.

3. Since 1972, GOP has gradually increased fertilizer prices (Table 19).Urea, for example, has increased in stages from Rs 700/ton in 1972 to Rs 1,500/ton in 1974. Although GOP also increased procurement prices for major agri-cultural crops such as wheat, rice, cotton and sugarcane, the increases werenot in proportion to fertilizer price increases and the benefit/cost ratiossuffered considerably as shown in the table below:

Benefit/Cost Ratios for Fertilizer Application 1972-771'

1972 1973 1974 1975 1976 1977

Rice, Basmati - - - - - 3.3Rice, coarse 3.3 3.3 2.0 2.3 2.5 1.9Wheat 2.6 2.9 1.9 2.1 2.3 2.4Maize 2.8 3.1 1.9 2.4 2.5 3.2Cotton 6.8 7.2 5.3 3.7 5.6 6.1Sugarcane 5.4 6.2 4.6 4.3 5.2 5.2

1/ Benefit/cost ratios are calculated by taking the physicalresponse of each crop per unit of nutrient application, and multi-plying it by the ratio of the price of output and the cost offertilizer input. The physical response rates used are: wheat,maize and rice, 7:1, sugarcane, 10:1, cotton (seed), 6:1.

ANNEX 3-3Page 2

4. In 1976, fertilizer prices were reduced and prices of some cashcrops increased thus resulting in an improvement in the benefit/costratios, but those for cereals are still considerably below the levelsobtained in 1972. The 1974-75 slowdown in fertilizer ccnsumption waslargely due to deteriorating benefit/cost ratios.

5. Farmers react more strongly to changes in fertilizer prices thanto corresponding changes in crop prices, at least in the short term. Thisseems to be supported also by an Esso inquiry in 1974 (Table 20). Also, astudy carried out by Dr. Ahmad Saeed Khan at the University of Agriculturein Lyallpur found that, certeris paribus, an increase in wheat prices by20% increased fertilizer consumption on wheat by only 22%, whereas a reduc-tion of the fertilizer price by 20% gave rise to an increased consumptionof as much as 46%.

6. In view of the price elasticity of demand for fertilizers, theGovernment should review fertilizer and crop procurement prices in orderto assure that fertilizer consumption increases at desired rates and isconsistent with its food and agricultural production targets.

7. The Government also reviews the production and marketing costsfor each fertilizer producer in Pakistan, and fixes their ex-factory priceand distribution margin. If the allowed production and marketing costsadd up to more than the ceiling retail price, the Government subsidizesthe company to cover the difference. If the same cost adds up to lessthan the ceiling price, which is the case for nearly all locally producedfertilizers at present, then the difference is levied on the company as a"development surcharge". Whenever there is a fertilizer glut, actualprices paid by farmers are generally somewhat below the ceiling prices.There is thus a certain price competition in which the local producersfeel that they are not given fair treatment. In fact, the Governmentallows a higher marketing margin ex rail for imported than for locallyproduced fertilizers. This makes it possible to give a larger discount onimported nutrients. Tables 21 and 22 show that, for example, locally pro-duced urea after recent increases is given a total marketing margin betweenex factory cost and the ceiling retail price of Rs 101 to Rs 129 per tonfor the various factories. This compares to a margin of Rs 320 forimported urea.

8. Although fertilizer prices have gone up considerably, the commis-sions paid to retail dealers was set, until recently, at Rs 22 per ton ofurea. This represented about 1.5% of the cost of the fertilizer to coverhandling and transport charges from railhead to shop, storage and othershop costs and profit. To improve this situation, GOP raised this marginsuccessively, until in 1977 it reached Prs 40 per ton for urea. With thereduced urea price, this now represents 3% of the fertilizer cost to theconsumer, a level still considered inadequate to provide sufficient incentivefor the dealer to actively promote sales of fertilizer at a time whenlocally produced supplies are expected to grow rapidly. GOP has agreed toreview these dealer incentives, to provide the Association by October 31,1978, with the results of its review and its recommendations for adjustment,and to implement such adjustment, as agreed with IDA, by December 31, 1978.

- 76 - Ai-,NEX 3-3

Page 3TABLE 19

PAKISTAN: FAUJI FERTILIZER PROJECT

CEILING RETAIL PRICES OF CHEMICAL FERTILIZERS(Rs per ton of Product)

Effective NPDate Urea AS AN ASN SSP TSP 23-23-0 DAP SOP

jan. 10/ 6 4 500 160 192 - 140 - - _ _

Sept. 24/65 500 170 205 - 150 - - _ _

June 8/66 500 220 282 280 200 380 400 - -

Aug. 29/68 520 230 291 290 190 400 420 560 380

Mar. 27/69 520 260 333 290 190 400 420 560 400

June 29/70 570 340 435 360 190 400 420 560 400

Sept. 25/72 700 340 435 360 190 400 420 700 400

Jan. 30/73 700 340 435 360 190 400 700 700 400

Mar. 30/73 840 400 512 460 220 520 800 880 500

Aug. 11/73 1,100 500 640 620 300 680 1,100 1,140 640

Feb. 22/74 1s100 500 640 620 300 680 1,100 1,140 640

Apr. 20/74 1,500 680 870 860 440 1,100 1,300 1,500 640

Mar. 10/75 1,500 680 870 860 440 1,100 1,100 1,500 640

Apr. 15/761/ 1,360 620 780 780 360 920 1,000 1,440 640

1/ No change in prices in 1977/78.

3ource: Paper prepared for FAO/FIAC Ad Hoc Wiorking Party on Economics of Fertilizer Use-hy Change Shuia of Dawood Hercules and official statistics.

Industrial Projects DepartmentAugust 1978

TABLE 20

PAKISTAN: FAUJI FERTILIZER PROJECT

CHANGE IN UREA CONSUMPTION DUE TO CHANGES IN OUTPUT AND UREA PRICE(Bags/Acre)_!

Punjab Sind NWFP PakistanCommodity Rs 55/ Rs 75/ Rs 55/ Rs 75/ Rs 55/ Rs 75/ Rs 55/ Rs 75/

Crop Price Per Bag Per Bag Per Bag Per Bag Per Bag Per Bag Per Bag Per Bag

Basmati Rice Low 1.0 0.4 - - - - 1.0 0.4High 1.3 0.6 - - - - 1.3 0.6

IRRI Rice Low 10 0.4 0.6 0.5 - - 0.8 0.5High 1.2 0.5 1.2 1.0 - - 1.2 0.7

Local Rice Low 0.7 0.2 0.9 - - - 0.7 0.1High 0.7 0.3 3.6 1.7 - - 1.3 0.6

Wheat 1.0 0.5 1.2 0.9 1.7 1.3 1.1 0.6

Cotton Low 0.8 0.4 1.2 0.9 - - 0.9 0.5High 1.1 0.5 1.5 1.1 - - 1.2 0.7

Sugarcane Low 1.2 0.7 2.2 1.8 2.1 1.4 1.7 1.1High 1.6 0.8 2.7 2.2 2.1 1.4 2.0 1.3

1/ 50 kg urea per bag.

Source: Esso survey

industrial Projects DepartmentAugust 1978

- 78 -

TABLE 21

PAKISTAN: FAUJI FERTILIZER PROJECT

COS'. MARKETING MARGINS, SUISIDY 197)-75-(Rs per Ton of Product)

Indigenous Fertilizer Imported FertilizerDH Esso NFC NFC NFC NFC AN DAP MAPUrea Urea Urea AS AM SSP Urea CAN TSP 18::4 6 11:43 NP

Price 784 854 850 621 519 374 3034 1564 3827 4743 4541 2006L/(Ex-Factory orC & F)

Marketing 104 129 101 101 101 101 320 274 367 370 370 201Margin

Total Cost 888 983 951 722 620 475 3354 1838 4194 5113 4911 2207

Retail Price 1500 1500 1500 680 870 440 1500 860 1100 1500 1400 1100

Subsidy (612) (517) (5)49) 42 (250) 35 1854 978 3094 3613 3511 1107(Surcharge)

1974-75 Pro- 392 206 20 94 59 32 202 24 11 11 9 36duction/Imports('000 tons)

Total Subsid1 (240) (107) (11) 4 (15) 1 375 23 34 39 32 40(Surcharge)/(Rs Million)

1/ 'Co Set the actual subsidy expenditure in 1974/75, changes in stocks must be takenaccount of. The figures in the table are averages for 1974/75 production and imports.Later information is not yet available.

2/ Excluding a grant of about 29,000 tons of NP.

Source: Paper prepared for FAO/FIAC Ad Hoc Working Party on Economics of Fertilizer Useby Changez Shuja of Dawood Hercules, and 3ank updates.

Industrial Projects DepartmentAugust 1978

TABLE 22

PAKISTAN: FAUJI FERTILIZER PROJECT

INCIDENTALS ON IMPORTED FERTILIZERS 1974-75(Rs per Ton of Product)

AS AN UREA DAP SOP TSP MAPCentre (FDAS)

Wharfage/Wharf Rent 3.75 3.75 3.75 3.75 3.75 3.75 3.75Stevedoring, Clearing & forwarding charges 16.58 16.58 16.68 26.27 16.58 16.58 26.27Bank Commission on letter of credit on imp.bills 7.50 8.12 13.04 17.33 14.85 19.14 17.33Railway Charges(a) Actual for despatches of fertilizer 71.42 71.42 71.42 71.42 71.42 71.42 71.42(b) Railway charges for placement weight-

ment and other charges 3.00 3.00 3.00 3.00 3.00 3.00 3.00Interest charges on funds arranged forpurchases of fertilizer at an average rateof 9k7. per annum (Handling of 2 months) 49.49 49.05 70.16 106.09 111.65 123.94 109.17Purchase and inspection 5.80 5.80 5.80 5.80 5.80 5.80 5.80

157.54 157.72 183.75 233.66 227.05 243.63 236.74Provinces

Interest charges on funds arranged for handlingof 4 months at sale price 20.97 26.52 46.25 46.25 19.73 33.92 43.17Organization and AdministrationCommission to Agents 39.57 39.57 39.57 39.57 39.57 39.57 39.57Sale promotionHandling at Rail head & upto sales depots 14.41 14.41 14.41 14.41 14.41 14.41 14.41Carriage/handling upto non mandi town 18.33 18.33 18.33 18.33 18.33 18.33 18.33Storage 12.50 12.50 12.50 12.50 12.50 12.50 12.50Unforseen 5.00 5.00 5.00 5.00 5.00 5.00 5.00

110.78 116.33 136.06 136.06 109.54 123.73 132.98

GRAND TOTAL 268.32 274.05 319.81 369.72 336.59 367.36 369.72

Industrial Projects DepartmentAugust 1978

0 'X

w)

- 80 -

ANNEX 3-3Page 7

The Fertilizer Planning Committee

9. Substantial progress has been made during 1975-76 to improve thefarmer's incentive to use more fertilizer, to improve the dealer's incen-tive to sell more fertilizer and to streamline the fertilizer distributionsystem (see below section on Fertilizer Distribution). In addition to acontinued tuning of the general variables affecting fertilizer consumption,future major gains would come from selective measures aimed at certain tar-get groups, in particular the small farms. Such incentives, however,require more data and, a coordinated effort to collect and analyze newdata permitting detailed central planning therefore seems called for.USAID, the UNDP and others make considerable but uncoordinated and, there-fore to some extent, overlapping efforts to provide new planning data. AGOP-sponsored Fertilizer Planning Committee has been set up to review andcoordinate the various activities in the fertilizer sector and will greatlycontribute towards a better understanding, and hence a more optimumdevelopment of the sector. At present, responsibility for fertilizerplanning is scattered between various Ministries and public and privateagencies and arrangements for coordinating their decisions are lacking.The objectives of the new Committee are:

A. To review and coordinate fertilizer policies andprograms and make recommendations for improvements.

B. To lead and coordinate the collection and analysisof a sound data base for fertilizer planning.

C. To explore alternative organizational frameworksfor the permanent coordination of fertilizer planning.

10. In somewhat more detail, the scope of the committee'swork includes, but is not limited, to:

Under A.

i) review farmer's incentives to use fertilizer, dis-tinguishing different groups of farmers characterizedby size of farm, water supply conditions, croppingpatterns, and other characteristics that affect theindividual incentives. Relate this to existing crop/fertilizer price structures and propose improvementsconsistent with plan production and social targets.

ii) review the efficiency of the fertilizer distributionsystem giving particular attention to marketing mar-gins and sales promotion incentives in the system.Make recommendations for improvements.

iii) review existing credit programs and targets, comparethem with credit requirements and make recommendationsfor improvements, giving particular attention to thesmall and poor farmers' problems.

- 81 -ANNEX 3-3Page 8

iv) review other policies and programs affecting fertilizeruse.

Under B.

i) establish what information and data is required foreffective fertilizer planning and in what form it shouldbe available.

ii) make an inventory of existing data and ongoing effortsto generate and analyze new data.

iii) coordinate ongoing data collection efforts and assurethe collection of missing data.

iv) make proposals with regard to the periodic updating ofthe data base.

Under C.

i) review existing institutions in fertilizer planning anddetermine to what extent such planning is hampered bylack of coordination, overlapping, badly defined areasof competence, etc.

ii) develop proposals for institutional arrangements per-mitting effective coordination of fertilizer planningand initiation of policy changes.

11. The Committee is expected to be credible and effective sinceall major groups with an interest in the fertilizer sector are repre-sented. The Central Government is the sponsor of the Committee whichis chaired by a GOP official. The Committee furthermore includesrepresentatives from the various secretariats interested in the fertilizersector, representatives from the provincial governments, fertilizerindustry, fertilizer distributors and consumers, transportation and othersconcerned with fertilizer policy. The recently established UNDP/FAOFertilizer Development Center will be geared to providing an importantpart of the secretariat support needed for the Committee.

12. The Government has prepared the detailed terms of reference forthe Fertilizer Planning Committee which are acceptable to IDA.

- 82 -

ANNEX 3-3Page 9

Fertilizer Credit

13. Next to water, the cash required to buy fertilizers is themost important constraint on fertilizer consumption. The money require-ments to buy fertilizers can either be reduced through the lowering offertilizer prices or be met through credit. The main sources forinstitutional agricultural credit in Pakistan are: The AgriculturalDevelopment Bank of Pakistan (ADBP), the Cooperatives and the CommercialBanks.

14. GOP gives high priority to agricultural credit. Disbursementsincreased from Rs 330 million in 1973 to Rs 1 billion in 1975. Targetsincreased from Rs 1.7 billion in 1976 to an annual average of Rs 2.5billion during 1977 to 1981. 90% of this is targeted for small and med-ium farmers. How much of this will go to fertilizer is impossible tosay but for the major institutional agricultural credit source, theAgricultural Development Bank of Pakistan (ADBP), their share has beendecreasing from 30% in 1974 to just under 15% in 1976. It is furtherestimated that about 65% of the agricultural loans made by the commercialbanks and about 20% of the cooperative loans were for fertilizer.

15. There is not much data aVailable on credit extended for ferti-lizers in Pakistan. The best data available is that collected by severalUSAID sponsored surveys including preliminary results from the on-goingNFC/USAID Survey on Fertilizer Distribution and Credit. Tables 23 to 29summarize the data:

- Tenants use more credit for fertilizers than owner-operators (Table 23);

- Medium farms (15-25 acres) buy more fertilizers oncredit than small and very large farms (Table 24);

- Non-availability of credit is a considerable con-straint on fertilizer use, more so for small thanlarge farmers (Table 25);

- Farmers perceived credit needs to increase considerably(1972) over actual credit obtained (1971) (Table 26);

- 71% of the farmers were current fertilizer users but20% of the non-users had used fertilizer before(Table 27);

- 45% of the users had borrowed money for their ferti-lizer purchases but only 4% had used institutionalcredit; the remaining 41% having borrowed money fromtheir landlords, families, friends, dealers, etc.(Tables 28 and 29).

- 83 -

ANNEX 3-3Page 10

16. The State Bank of Pakistan is the primary source of funds forADBP's agricultural credit operations. It currently provides funds to ADBPat an interest rate of 7% per year, which is 2% less than the ruling bankrate in Pakistan. ADBP relends the funds to farmers through about 115branches throughout the country. The current interest rates charged byADBP for short-term loans are 10% per year for loans up to Rs 5,000 and 11%for loans above Rs 5,000. The State Bank of Pakistan is also the mainsource of funds for the cooperative societies. Funds are made available bythe State Bank of Pakistan at 7% per year to the provincial cooperativebanks, which relend the funds to the secondary cooperative banks at 7.5% peryear. The secondary cooperative banks in turn relend the funds at 8 to 8.5%per year to the primary cooperative societies, which finally extend creditto farmers at interest rates ranging from 9 to 12% per year.

17. Commercial banks first entered into agricultural credit operationsin 1972. By the end of March 1975, there were more than 4,000 branches ofcommercial banks spread all over the country. The current lending rate ofthe commercial banking system for fertilizer credits is 12% per year, andthe banks derive funds for such operations from saving account deposits oftheir customers for which they pay an interest of normally 6% per year.The commercial banks can also secure funds from the State Bank at 9% peryear. To ensure adequate distribution of available credits to small farmers,the commercial banks are statutorily obliged to extend 70% of all their agri-cultural loans to farmers with holdings of less than 12.5 acres.

18. Under a credit guarantee arrangement, the State Bank shares withthe commercial banks on a 50:50 basis any bonafide losses on agriculturalcredit operations. However, due to the good recovery rates of loansextended by the commercial banking system, no claim for reimbursement undersuch guarantee arrangements has thus far been filed by any commercial bank.In contrast, about 50% of ADBP loans are said to be in default. Similarly,the repayment situation of the majority of cooperatives is considered veryunsatisfactory. To remedy matters, ADBP recently appointed special recoveryagents for branches with heavy arrears, and each branch was assigned anofficer exclusively for recovering loans.

19. The major constraint on increased lending for fertilizers is thedifficulty in reaching, in particular, the small farmer. To simplify thelending procedures, GOP, in 1973, introduced a scheme for issuing credit pass-books to farmers. Each passbook will contain details of the land held by thepassbook holder, valuation of the land and encumbrances, and will be used torecord the status of the loans advanced to the holder. The purpose of thescheme is to facilitate farmers in obtaining credit. It was originallyplanned to issue passbooks to 25% of the farmers each year so that after fouryears, the target of 4.8 million passbooks would have been issued. However,in one-and-a-half years, only about 150,000 passbooks were issued. A driveto speed up the issue of passbooks is in progress. It is yet unclear towhat extent passbooks have benefitted the small farmer.

- 84 -

ANNEX 3-3Page 11

20. The ADBP has introduced the "Village Banker" scheme where onefarmer of the village will be trained to act as a representative of theADBP. The target in a pilot effort is to reach 500 villages by the endof 1976. It is hoped that this scheme will provide an answer to ADBP'sdifficulty in reaching the farmers and reverse the trend in its ferti-lizer lending which has decreased from Rs 113 million in 1973/74 to Rs 80million in 1975/76.

21. The National Bank of Pakistan (NBP) has also an interestingpilot program for small farmer credit. This program was initiated ona test basis in 1972, it had up to June 1976 disbursed Rs 176 millionfor production purposes, mainly for fertilizer. It now serves 2,383villages. Recoveries have been satisfactory, but the program is not cover-ing its cost at 12% interest.

TABLE 23 ANNEX 3-3Page 12

PAKISTAN: FAUJI FERTILIZER PROJECT

PERCENT OF FERTILIZER PURCHASED ON CREDIT ANDCASH BY TENURIAL CLASS (1971 SURVEY)

FertilizerFertilizer Purchased withPurchased on Farmers' ownCredit as % Resources as %

Tenurial Status of Total Ferti- of Total Ferti-of Farmers lizer Purchases lizer Purchases Total

Owner-operator 10.4% 89.6% 100%

Owner-cum-tenant 12.5% 87.5% 100%

Tenant 22.7% 77.3% 100%

Owner-cum-operator 8.8% 91.2% 100%

All farms (average) 13.5% 86.5% 100%

TABLE 24

PERCENT OF FERTILIZER PURCHASED ON CREDITAND CASH BY SIZE OF FARM (1971 SURVEY)

Size of Farm (Acres) Credit Cash Total

0-5 13.2% 86.8% 100%

5-15 15.0% 85.0% 100%15-25 17.3% 82.7% 100%25-50 13.4% 86.6% 100%50+ 10.0% 90.0% 100%

TABLE 25

NON-AVAILABILITY OF FUNDS AS A CONSTRAINTIN LIMITING FERTILIZER USE BY SIZE OF FARM

(1970 Survey in Punjab)

% of Farmers Reporting Non-AvailabilitySize of Holding of Funds as Reason why Fertilizer was

(Acres) "onot easily available"

2.5-7.5 81.6%7.5-12.5 77.6%12.5-25.0 79.2%25.0-50.0 47.4%

50.0 and over 40.0%All sizes (average) 75.0%

Industrial Projects DepartmentAugust 1978

- 86 -ANNEX 3-3

TABLE 26 Page 13

PAKISTAN: FAUJI FERTILIZER PROJECT

PERCEIVED INCREMNTAL FERTILIZER CREDIT NEEDS

% increase in perceived fertilizercredit needs for 1972 compared to

Tenurial status actual credit obtained in 1971

Owner-operator 247%Owner-cum-tenant 189%Tenant 73%Owner-non-operator 604%Average (weighted by FRs value) 188%

TABLE 27

PERCENTAGE OF FARMERS WHO WERE CURRENTLY USING OR HADEVER USED FERTILIZERS (1975-76 SURVEY)

(percent)Of Non-Users

Current Use Ever UsedUsers Non-Users Yes~ No

Total 70.5 29.5 21.5 78.5Irrigated 79.9 20.1 29.7 70.2Non-Irrigated 44.4 55.6 13.2 86.8

TABLE 28

RELATIVE IHPORTANCE OF SOURCES OF SHORT-TERM CREDIT 1975-76 SURVEY(percent of farmers)

Institutional Sources 9.6%

ADBP 37.06Habib Bank Ltd. 14.81National Bank of Pakistan 33.33United Bank Ltd. -Allied Bank Ltd. 3.70Muslim Commercial Bank Ltd. -Cooperative Banks 7.40Other 3-70

Non-Institutional Sources 90.4%

Family 9 e88Landlord 66.81Conmission Agent 5.14Shopkeeper 2.37Friend 8.69Moneylender -Other 7.11

100.00 100.0%

Industrial Projects DepartmentAugust 1978

- 87 -

ANNEX 3-3Page 14

TABLE 29

PAKISTAN: FAUJI FERTILIZER PROJECT

FARMERS' PREFERRED SOURCES OF CREDIT FORFERTILIZER AND SEED, SARGODHA DISTRICT, 1964

Preferred source offertilizer and seedcredit as % of

Credit Source farmers interviewed

Institutional

ADBP 1.Cooperative Societies 13.0

Non-institutional Sources

Commission Agents 18.5Friends and Relatives 17.0Shopkeeper 7.0Landlord 82.8*

* This is the percent of tenants (not all tenorialclasses interviewed) that preferred landlords asa source of fertilizer and seed credit

T£ABLE 30

VALUE OF FERrILIZER CREDIT ErrENDED ANNUALLY - ADBP(1000 PRs)

Credit DeflatedFertilizer by Fertilizer

Fiscal Year ADBP Price Index Price Index

1968-69 10,000 1.00 10,0001969-70 16,000 1.00 16,0001970-71 99500 1.01 9,l406

1971-72 12,500 1.01 12,3761972-73 11, 000 1.37 29,9271973-74 112,850 2.22 50,8331974-75 80,280 2.88 27,8751975-76 73,000 2.88 25,3471976-77 110,000 2.62 411,985

Industrial Projects DepartmentAugust 1978

- 88 -

ANNEX 3-3Page 15

The Fertilizer Distribution System

a. The Distribution Network

23. Between 1953 and 1967 all fertilizer importation and distributiondown to the wholesale level was carried out by the Central Government ofPakistan. Private trade was only involved at the retail level as dealersto Government wholesalers.

24. In 1967 four large private enterprises, Esso, Dawood-Hercules(DH), Pakistan National Oil (PNO) and Jaffer Brothers, were appointed"principal agents" for the marketing and distribution of both locally pro-duced and imported fertilizers. The market share of the private tradeincreased rapidly to reach nearly 80%, employing some 2,000 dealers.

25. During the international shortage of fertilizers in 1973, theGovernment decided that, based on past consumption, each province was tobe given a fixed percentage of locally produced fertilizers and the sameshare of imported fertilizers as shown below:

Fertilizer Distribution in Pakistan 1973

Share of Marketas Fixed by GOP Share of Share ofMay 25, 1973 Public Sector Private Sector

Punjab 67.0 54.0 46.0Sind 22.5 83.0 17.0NWFP 9.0 23.0 77.0Baluchistan 1.5 55.0 45.0

Pakistan 100.0 70.0 30.0

Source: The Fertilizer Marketing System in Pakistan by Changez Shuja. FAO/FIAC ad hoc Working Party on Fertilizer Marketing and Credit, Rome,June 1974.

26. On July 1, 1973, the control of fertilizer distribution was trans-ferred from the Federal Government to the Provincial Governments. importationof fertilizers remained the responsibility of the Federal Directorate of Agri-cultural Supplies (FDAS). The Provincial Governments to a varying degree tookover wholesaling and retailing of fertilizers earlier in private hands. Adrastic reduction in the number of retailers was the result, contributing tothe slowdown or even reduction in fertilizer consumnti4n descrVbed etrtier.

27. The Governments of Punjab and Sind set up their own marketingorganizations; Punjab Agricultural Supplies and Development Corporation(PASDC) and Sind Agricultural Supplies Corporation (SASCO). In Punjab, 677. ofthe prorated fertilizer market, PASDC took over both wholesale and retailtrade of imported fertilizers, output from Government owned (NFC) plants and50% of Punjab's prescribed share of the output from the DH plant. Essodefended successfully its right to distribute its own output on the strength

- 89 -

ANNEX 3-3Page 16

of a provision in its investment agreement with GOP. In Sind (22.5% ofconsumption), SASCO had taken over 54% of the wholesale trade (46% is withEsso), but most retailing was made by private dealers. SASCO was alsohandling the distribution of fertilizers in Baluchistan (1.5% of consumption).Fertilizer distribution in the North West Frontier Province (NWFP, 9% con-sumption) was left unchanged with 23% of wholesale trade in Government handsand most retail trade through private dealers. Table 31 summarizes thefertilizer distribution system as it was before a new, still on-going,process of change started.

28. On October 5, 1975, GOP announced significant changes in itsfertilizer marketing policy, in particular:

1. Territorial marketing restrictions introduced in 1973were removed for domestic producers.

2. Private sector distribution were given a share in phos-phate fertilizer marketing in relation to their nitrogensales.

3. Licensing of dealer applicants was liberalized to thepoint of becoming nearly automatic.

4. Private dealers were given access to supplies from bothprivate and public wholesalers.

5. Retail margins were increased.

29. These actions lead to an increase in the number of fertilizerretailers from about 2,300 in 1975 to about 3,700 in 1976. About two-thirdsare in the private sector, where most of the expansion took place. Thisincludes NFC which is setting up its own marketing organization and thusgradually taking over from PASDC.

30. Although, in principle, the prorating of markets was removedfor domestic producers, the PADSCO-DH arrangement was to remain unlesschanged through mutual agreement of the two parties. After negotiations inJuly 1976, PADSCO now markets 29% of DH sales in the Punjab compared to theearlier 44%. Graph I shows the present distribution system.

31. For imported fertilizers, the individual shipments are still dis-patched according to the old prorated share of each province. Thus, of eachshipment, in principal, the Punjab gets 67%, the Sind 22.5%, NWFP 9% andBaluchistan 1.5%. The strict prorating of fertilizer supplies from eachsource to earmarked provinces was a measure introduced during a period ofshortage and was intended to guarantee that all the provinces received theirfair share of supplies. Now that fertilizer supplies are ample, this systemis unnecessarily rigid and contributes to increased costs, in particular,for transportation. It also increases the load on the railway system which,in peak periods, is already unable to supply the capacity requirements. GOPshould continue to liberalize fertilizer trade particularly where some ofthe present restrictions hardly have any justification any more.

TABLE 31

PAKISTAN: FAUJI FERTILIZER PROJECT

PRORATED MARKETS BY COMPANY 1973-1975

Type of Punjab Sind N.W.F.P. Baluchistan TotalName of Factories Fertilizer (67.00) 25 (9.09%) (i.50V)1/ (1002)

Esso Urea 13.98p 86.02p -- - 100;

Dawood Hercules Urea 87.83% - 12.17% - 100%

National Fertilizer Corporation Urea 100.00% - - 100%

National Fertilizer Corporation AN 91.00% - 9.00% - 100%

National Fertilizer Corporation AS 70.00% - 30.00% - 100% o

National Fertilizer Corporation SSP 91.00% - 9.00% - l00'%

1 Baluchistan's share at 5.73% Ex-Esso production transferred to Punjab under the Ministry of Food and Agri-culture letter No. $.1-1/73-F&P dated 15.9.73. The corresponding quantity out of imported quota of Punjabwas to be supplied to Baluchistan.

Source: FDAS

Industrial Projects DepartmentAugust 1978

(Dm

GRAPH 1

PAKISTAN: FAUJI FERTILIZER PROJECT

PAKISTANFERTILIZER DISTRIBUTION SYSTEM

as of Sept. 76 Proposed

Esso Pak-Arabu Imports Dawood-HerculesPak-Saudi FDAS a -H

100efo Lyallpur NFCI_

Urea Daudkhel C Urea, DAP,AS,CAN,Urea,SSP NP, MOP Urea

100% Urea Urea I

FFC MarketingEsso Nlktg. 25(6 . NFC Mktg. - AP ADSCO _ Dawood Corp \ Department

9.1 25% ~~~~~~~~~~0% 8% 17%'

\73% \30 , C_ i 8\ 2 00 kr

| Dealers \\ Dealers & Super Dealers Dealers b Super Dealers Dealers & Special Agents_ Cotton Gins Cotton Mills

Sugar Mills Sugar Millscoops

Baluchistan ab

Industrial Projects DepartmentAugust 1978

- 92 -ANNEX 3-3Page 19

b. Storage

32. Imported fertilizers are mostly loaded at Karachi port intowaiting rail wagons and moved directly to the market towns. Fromdifferent reports, it appears that the fertilizer storage capacity atKarachi port is 10,000 tons, but that a Government warehouse with acapacity of 250,000 tons at Pipri, 20 miles from the port, also can beused. This is said to be sufficient by one source, but that statementcan be challenged. Many ships carry more than 10,000 tons of fertilizerand since the Karachi marshalling yard is one of the most importantbottlenecks on the Pakistan rail system, it is unlikely that the railwagons are always available at the shipside when needed. Transportationto Pipri may not always be easy to arrange directly either.

33. Fertilizer factories have storage space at the plant siteequivalent to between one and six months of production. Availableinformation is shown in the following table:

Storage Capacity at Plant Site

Approximate Storage CapacityIn Months of Production In '000 Tons ProductBulk Bag Bulk Bag

NFC Jaranwala: SSP 2.5 - 17 -NFC Lyallpur : SSP 1 - 2 -NFC Daudkhel : AS 2 - 14 -NFC Multan : AN 3 - 30 -

Urea - 6 - 9

Esso Daharki : Urea 1 2 days- 10 negl.1'DH Chichoki-Malian: : Urea 5 1.5 5 45

Total 1 1 68 54

1/ Esso claims that storage of bags in the open is no problem. The plantis located in a desert area with hardly any rain. Losses when bagsare stored in the open are 2-5%.

34. There are hardly any big fertilizer warehouses in the field.For field storage both the public and the private sector rent warehouseswith capacities from 250 - 1,000 tons at about 100 key locations. Governmentagencies rent several warehouses at each of these locations to serve asintermediate storage for feeding retail shops. Private dealers have smallmulti-purpose godowns with an average capacity of about 25-50 tons.

- 93 -

ANNEX 3-3Page 20

35. Storage capacity at the retail level seems inadequate. Thepresent glut, the uneven availability of rail wagons or trucks to shipthe fertilizer from the plant site, the fixed retail margin which makesthe dealer unwilling to hold stocks and the expected future requirementsby PR for full trainload shipments to only a few destinations, all thesefactors make the present availability of large warehouses, in some casesat the plant site but particularly in the field, insufficient.

c. Transportation

36. Unless well planned, major difficulties are foreseen intransporting the fertilizer from FFC's plant to its market area due tothe close location of the Multan and Mirpur Mathelo plants, all locatedwithin 40 miles along the main raod and railway linking Karachi tothe Punjab.

37. To avoid any problems, GOP has agreed to set up a Fertilizer TransportationTask Force, but it has not yet been convened. The Task Force is to includerepresentatives from GOP, Pakistan Railways, Karachi Port Authority andthe Fertilizer manufacturers. In view of the difficulties experienced inmoving current fertilizer output from plants to markets, it is consideredessential for this Task Force to be established and to develop a masterplan for fertilizer movement as soon as possible, certainly in advance ofthe start-up of NFC's Multan plant expansion.

Industrial Projects DepartmentAugust 1978

94 -

ANNEX 3-4

PAKISTAN: FAUJI FERTILIZER PROJECT

FFC'S MARKETING PROGRAM

1. The organization of the marketing group will follow the structureoriginally proposed by Agrico in the "Proposed Marketing Plan" (August 1976).This plan was jointly developed by Agrico and Fauji Foundation and made availablefor the present project. The plan is to be adopted with certain additions andmodifications.

2. Agricultural extension services to support the FFC marketing effortswill be furnished in accordance with agreements between the Pakistani andScandinavian Governments and agricultural organizations, including Farmer'sOrganizations and Cooperatives and in continuance of the collaboration alreadyexisting for years. A detailed program will be set up, to be based inter aliaon reviews of:-

- existing research activities of fertilizer use and associatedproblems at university and lower level educationalinstitutions;

- the activities of existing experimental institutions, in-cluding experimental farms, and institutions and proceduresfor giving individual advice to farmers or farmer groups;

- arrangements for distribution and sale of fertilizers and forfinancing of farmer's fertilizer use; and

- fertilizer demand forecasts and updating of such forecasts.

Arrangements will be made to receive a number of university and lowerlevel trainees in Scandinavian agricultural institutions.

3. Prior to the FFC plantTs expected start-up in July 1981, it is essentialthat the company gradually build up its market with a seeding program. Thus, a24-month Market Development Program will be carried out over four consecutiveseasons. Sales to dealers are planned to start in late 1979. Before this, thewhole marketing structure will have been established. In addition to urea,mono-ammonium phosphate (MAP, 11-52-0) is to be imported to meet phosphatefertilizer demands. The planned seeding program is shown below:

FFC Seeding Program('000 tons product)

Arrival at Karachi Urea MAP

August-October 1979 80 20February-March 1980 100 20August-October 1980 1201/ 30February-March 1981 150- 40

450 110

1/ No imports may be required if local production available.

- 95 -ANNEX 3-4Page 2

4. The marketing group will be headed by a Marketing Manager who willbe employed by Topsoe and assigned to FFC's management group. Topsoe hasselected Mr. J. Anthony Ward, who has extensive working experience in thePakistan fertilizer market (see also Annex 2-1). Mr. Ward is to be hired inmid-1978 for an initial 3-year period. He will work with and support fromScandinavian organizations and companies in the field. During these years,the marketing group will be staffed and the marketing network graduallydeveloped.

5. The Marketing Manager will have at his disposal three main groups: ageneral promotion and advertising group, a distribution and transportation groupand a technical services group. The two first groups are foreseen to be headedby Pakistanis - possibly with some help from expatriates - whereas the technicalservices group should be headed by a Scandinavian or Pakistani. This group willundertake the following:-

- Agro-services including training of extension personnel. TwoScandinavians will here be working with a Pakistani staffgrowing to about ten.

- Training of FFC staff in general sales and marketingactivities including use of modern computer methods, inplanning and monitoring sales, traffic, warehousing, etc.Also here expatriate assistance is foreseen. Emphasis isplaced on early development of material for information, pro-motion and advertising adapted to the level of local agentsand farmers. This material will be used by the main group forgeneral promotion and advertising.

- Farm demonstration activities. An expatriate will manage thegroup, that will otherwise have Pakistani staff growing toapproximately 5 at headquarters and 10-20 travelling. Thegroup will have at its disposal (fairly simple) mobilelaboratory and similar equipment. It will supervise andsupport the farmer service staff working at the premises oflocal agents and these shall, although reporting to localsales agents, coordinate their activities with the TechnicalServices Group.

- Setting up of a statistics and sales planning group.

- Provide all necessary help to farmers to get agriculture loansmade available by GOP, ADBP and Commercial Banks.

6. Expatriate specialists attached to the FFC marketing organization areexpected to be phased out a few years after plant start-up. It is, however,likely that separate agreements can be made with Scandinavian Governmentsallowing for more permanent collaboration of a scientific and practical nature.

- 96 -

ANNEX 3-4Page 3

7. FFC's marketing program is based on the following premises:

- to sell a high quality urea product;

- to organize its sales administration on a regional basis;

- to establish strategic storage capacity;

- to maintain flexibility in transportation;

- to allocate part of sales to commercial customers;

- to reach farmers through an extensive dealer network;

- to promote products through training and advertisingprograms.

8. FFC's Marketing Division headquarters will be in Lahore, the capitalof the Punjab, where the company plans to market 80% of its output, 20% goingto the Sind. In 1982, when the sales volume reaches maturity, seven regionaloffices will serve the Punjab and two the Sind. The Marketing Division is builtaround the concept of a decentralized organization. Overall policy decisionsand coordination with the plant and between regions will emanate from MarketingDivision headquarters in Lahore but day-to-day operations and implementation ofstrategy will be left to the regions. Such an organization will enable theMarketing Division to meet separate and peculiar needs of each region. TheDivision headquarters will provide overall marketing policy, develop sales pro-grams, long-range planning, advertising and promotional programs. Headquarterswill be responsible for implementing the Marketing and Pricing PrinciplesAgreement which pertains to marketing with the Central Government and ProvincialGovernment offices. All product logistics, including control of warehouse levelsand transportation from the plant to marketing regions, will be coordinated inLahore. Personnel, technical service and other management functions affectingmore than one marketing region will be administered by the appropriate manager atthe headquarters.

9. The transportation system, envisaged by FFC for marketing its product,is divided into two phases: Phase I covers movement from the plant to eitherwarehouses or dealers; Phase II refers to that product which must then be trans-shipped from warehouses to dealers. The diagram below illustrates the trans-portation system:

FFC Transportation System

(truck) _ _242,400 MT

57% 41,000 MT

FFC Phase I IWarehouses. (truck) . DealersPLANT 490,000 MT 247,600 MT

43%206,600 MT

(rail) l

- 97 -ANNEX 3-4Page 4

10. Although 57% of the product will be shipped from the plant by truck,that method accounts for only 47% of the total shipping cost of 16.l millionrupees. In Phase I, the product will travel an average distance of 251.22miles; shipment from the warehouses to dealers in Phase II will average anadditional 25 miles.

11 As a part of its rail transport program, FFC intends to use raketrains, each made up of a locomotive and 60-80 wagons. These rakes will travelto a single destination to be unloaded and then returned to the plant. A raketrain containing approximately 1,400 tons will be dispatched about every otherday to an FFC regional warehouse. An average 655 tons per day will move bymeans of rake trains.

12. An average of about 900 tons of urea will be dispatched daily by truckfrom the plant to either warehouses or dealers. Consequently, 90-100 truckswill be required at the plant on each day.

13. FFC will negotiate contracts with two or three truck firms to supply90-100 trucks per day. With a long-term (2-3 years) contract in hand, truckcontractors will be able to obtain bank financing for the purchase of trucksemployed full-time to move product from the FFC plant to dealers and ware-houses.

14. Truckers have recommended that four or five acres at the plant be setaside for a truck depot. Petroleum companies in Pakistan could bid on the con-struction of a truck terminal and facilities such as a low-cost restaurant andcovered sleeping area for drivers and helpers. Approximately 200-250 drivers,helpers and mechanics would be on hand in and around the truck depot in orderto dispatch the 90-100 trucks per day.

15. Transportation costs are based on 1976 rates. Rail rates usedare 110% of the rates actually in effect in 1975. The truck ratesare those which were obtained by Esso in 1975 in its 12-month contract withNew Malik Trucking Company. Based on the 1976 rates, total transport cost ofurea will average 68.96 rupees per ton.

16. MAP will be imported through the port of Karachi and dispatched froma bulk bagging warehouse in the Karachi area. The total estimated transportcost of imported MAP is 134.54 rupees per ton, comprised of 121.54 rupees toship from Karachi to FFC regional warehouses and 13 rupees to ship fromwarehouses to dealers.

17. FFC has planned for an overall storage capacity of 144,000 tons whichequals about 3 1/2 months' production of which 1 1/2 is at the plant site:

Plant Storage Capacity:Bulk 45,000 TBagged 15,000 T

Regional Warehouse:Bagged 84,000 T

144,000 T

- 98 - ANNEX 3-4Page 5

18. In order to stimulate dealers to warehouse fertilizer productsthrough off-season periods, FFC will provide a warehousing allowanceduring these months. This allowance will cover expenses of warehousingand interest costs for one to two months. In some instances, FFCdealers with approved credit may be supplied three or four truckloads offertilizer on a delayed billing basis with the payment due after thestart of the next fertilizer season.

19. Warehouses will be accessible to railways as well as to pavedhighways. They will be. so situated as to be able to accommodate raketrains of 60-80 wagons each plus a locomotive. Rake trains made availableby the Pakistan Railways will be used and will be returned intact to theplant for reloading for their next destination.

20. Each region will have a Regional Sales Service Center to provideservice for dealers in the region and to store products during off-seasons.Storage capacity of the warehouses at Service Centers will range from 6,000to 20,000 tons each (6,000 square meters to 20,000 square meters each).Table 37 proposes a plan for regional warehouses to meet projected needs in1982.

21. Four to six pickup trucks will be supplied to each center for useby its managing staff and technical servicemen. Commission Sales Agents whodo not have vehicles of their own will be assisted by the company inobtaining financing for the purchase of a suitable vehicle.

22. Deliveries from regional warehouses to dealers will be made byshorthaul contract truckers, so the region itself will not own any trucks.

23. Technical Servicemen will be equipped with a pickup truck, a two-wheel hand tractor and implements for assisting farmers in preparing fielddemonstrations. Approximately 60 cars and pickup trucks plus 18 two-wheeltractors with attachments will be needed in 1980 for the Marketing Division.

24. Two methods have been suggested for financing the Sales ServiceCenters. One has been to capitalize the incurred costs in theFFC capitalbudget. The other which is being recommended to FFC management by itsstaff is to negotiate with private investors in Pakistan to build the ServiceCenters to FFC's specifications and lease the centers back on a long-termcontract, subject to renewal. FFC staff have discussed the latter meansof financing the sales centers with several entrepreneurs and commercialbanks in Pakistan. Their response to the lease-back approach was favorable.

25. FFC's marketing program given above is based on studies conducted in1976. This is presently under review and an updated marketing plan will bedeveloped in detail by end 1978.

Industrial Projects DepartmentAugust 1978

- 99 -

ANNEX 4-1

PAKISTAN: FAUJI FERTILIZER PROJECT

OPERATIONAL MANPOWER NEED AND TRAINING

1. When in full operation, the project will employ about 660people (including some 200 contract workers for product handling, load-ing and general labor) as shown in the accompanying organization chart(Exhibit 1). About 100 of these will be production and engineeringpersonnel ranging from senior managers to shift supervisors and chiefoperators. A few experienced key people may possibly be recruited fromthe other fertilizer producers in Pakistan plus, perhaps, several Paki-stanis now working overseas. However, the majority of the skilled workforce needed will have to be hired and trained in Pakistan, as it is theintention of the sponsors and GOP to use Pakistani staff and labor to thefullest extent and as soon as possible. Accordingly, FFC has entered intoa Technical Services Agreement with Anic SPA of Italy for operating theFFC plant as well as for selection and training of Pakistani personnelrequired to operate and maintain the plant. Anic possess the requisitetechnical knowledge and experience of Snam plants and are admirablysuited to undertake the training of key supervisory, operating andengineering personnel of FFC. This is expected to cost about US dollars800,000 for training abroad as well as within Pakistan.

Training Program for FFC Technical Personnel (Outside Pakistan)

2. On the basis of their experience, Anic estimate that about 460manmonths of training abroad will be required for FFC technical personnel.This training would take place either at Anic's plants or at similar plantsbelonging to Third Parties.

3. The training program, including the training period at the plantsand the number of trainees for each cycle, shall be established by Anicaccording to the availability of instructors and plant facilities.

4. The operating personnel, during practical training at plants,shall be present at shut-downs, start-ups and various operations; yieldchecks and optimization calculations will also be provided for Develop-ment Managers; laboratory analysts will have practice in sample drawingsand analyses.

5. If feasible, the maintenance personnel will also spend a train-ing period at Suppliers' Workshops, each according to his own specialty,i.e. compressor and turbine operators at NUOVO PIGNONE if this Company isthe supplier of said machines; instrument fitters at the workshops of theInstrumentation Suppliers; electricians at the electrical equipmentsuppliers, etc.

6. Anic will ask Snamprogetti to include training of Pakistanipersonnel at the Suppliers' workshops when the various orders are issued.

- 100 -

ANNEX 4-1Page 2

7. The maintenance Personnel will also attend machine dismantlingand assembly, inspections and tests on operating machines and equipmentas well as various maintenance operations at Anic workshops.

8. The theoretical courses will be held by Anic's instructors withan average of one teacher per 15 trainees.

The training program summary shows the qualifications (60 persons)envisaged by Anic and the total training periods.

Training Program for FFC Personnel in Pakistan

9. This training will be carried out with the assistance of Anic'spersonnel during plant operation and maintenance and is estimated torequire about 285 manmonths.

10. For personnel not trained abroad, Anic proposes special trainingconsisting of theoretical courses held by Anic's teaching personnel andpractical courses at Pak-Saudi Urea plant now under construction atMirpur Mathelo as well as at Goth Machhi FFC Plant during erection (formaintenance personnel) and start-up.

11. The training program summary shows the qualifications envisagedby Anic and the total training periods.

Personnel Training at Suppliers' Workshops

12. As requested by the Bank, further training opportunities will beprovided for key Pakistani project and operating personnel by arrang-ing for them to work in the office of Snam during the engineering andprocurement phases of the project. Selected groups of Pakistani engineersand others will work side by side with their foreign counterparts and willalso be given appropriate experience in the workshops and offices of themajor equipment vendors (especially makers of rotary machines). Mostimportantly, during the final stages of plant construction and subsequentcommissioning, Pakistani administrative, supervisory and operating man-power will work closely with experienced field crews from the contractors,vendors and key expatriate operating personnel and put into practice theirpreviously acquired learning. This supplemental experience plus the formaltraining program organized by Anic should provide FFC with a proficient,safety-conscious and reliable plant operating staff.

13. Training of senior designated Pakistani executives in projectand operations administration, market research and marketing will also beundertaken on a side-by-side basis in conjunction with experienced ex-patriate personnel according to the corporate management structures shownin Annex 2-2 and Annex 4-6 and as part of the Technical Assistance andKnow-How Agreement between Fauji and Topsoe and Anic.

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECTMANPOWER NEEDS

(Total Manpower 658)

ManagerOperation

1200 1320 |135

|Co-mmecal Poctn Chel

LMage E Mnaeri .eer

[ | | Mb ntenanLe | A3 t.t Asistant

Manager S716| enMiogr S r Senior SeniorPurchase & MaintenanceMehnia Electrical instraument

Wareh-e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~EgierEngineer Engineer Engineer

16 1715334 20

Maintenance Maintenance MaintenanceEngineer Engineer EngineerUtilities Ammonia Urea & Bagging

8 8 8

Pruiert Mechanical |Engineering EngineerSupervisor (Shopsi

14 28

MenagerMnage aae g

Urlte AmoiIaga e.am World B-nk-16660

42 26 260 20

Industrial Pnajects Department

August 1978

- 102 -

ANNEX 4-2

PAKISTAN: FAUJI FERTILIZER PROJECT

PROJECT EXECUTION ORGANIZATION

1. Topsoe will have responsibility for project execution as shownin the project organization structure (Exhibit 1). Mr. I. C. Carstensen,a senior Topsoe project executive, has been appointed Project Manager.He will report to the Managing Director of FFC and will liaise with theProject Officer in Denmark (see also Annex 2-1). Exhibit 2 illustratesthe basic organization structure for Project Engineering and Exhibit 3shows the organization of the project senior job-site staff. Asmentioned, most senior project personnel will initially be Topsoe staffmembers, but as the project proceeds, increasing responsibility will begiven to counterpart Pakistanis, after training and demonstrated competence.

2. FFC have engaged the services of an independent engineeringconsultant, James Chemical Engineering of New York (JCE),to advise theManaging Director FFC on the design, engineering procurement, andcommissioning of the plant.

3. Anic S.p.A. of Italy have been selected to provide experttechnical services to FFC for operation and maintenance of the plant.During the construction period Anic will assist FFC in checking the designand layout of the plant. Anic will also train FFC's technical personnelfor the operation and maintenance of the plant.

4. FFC has selected Snamprogetti, S.p.A. of Italy to design andengineer the plant and Coming S.p.A. (a wholly owned subsidiary ofSnam) to erect and commission the ammonia and urea plants. Snam willalso assist FFC with procurement. Snam will act as prime engineering firmand coordinate the erection and commissioning of the entire plant, under-taking responsibility for offsites, design and procurement, plus projecttime and cost control. Snam's selection was accepted by IBRD, USAID andKfW.

5. The contract between FFC and the engineering firms is basedon lump-sum fee for engineering and design of the plant and procurementservices, plus a reimbursable fee for supervision of plant construction anderection. The contract also includes a 28 months mechanical completiontime, a ceiling price for plant and equipment in addition to a GuaranteedMaximum Selling Price (GMSP) for design, procurement services, supplyconstruction and erection of the plant. Snam has given a Ceiling Price,for all plant and equipment, above which the overruns will be 100%Snam's liability. As an incentive to minimize project cost the constructionfirm (Coming) is to pay a penalty equal to 10% of the difference betweenthe actual cost and the GMSP, subject to a limit of US$1,000,000. Thisamount represents about 20% of a typical contractor's profit on a projectof this type and magnitude and is considered an adequate incentive.

- 103 -

ANNEX 4-2Page 2

6. Under the Know-How Agreement, Topsoe will make available to FFC,for a royalty of US$1 million (to be reduced by any reimbursement made by FFCfor actual pre-project expenses), payable in the first and second year of opera-tion, its current and future proprietary and technical information relatingto the engineering, design, equipment, procurement and operation of plantssimilar to the project, including advice relating to the technical, legal,financial, administrative, managerial and marketing supervision duringall stages of implementation of the project up to commencement of commercialoperation. Topsoe and Anic will continue to provide operating, management,control and technical services know-how as it relates to production,debottlenecking and expansion for a fee of US$1 per ton of product soldfor a period of ten years. In addition, Topsoe and Anic will be re-imbursed up to US$3 million for expenses incurred with pre-start-up andpost start-up assistance, marketing, training and overhead as detailedin Annex 4-3.

Responsibility and Authority

7. The following will in summary be the arrangements concerningresponsibility and authority:

- The FFC Board will have ultimate responsibility for theProject.

- The Board will delegate authority to make main decisionto the Managing Director.

- Responsibility and authority for project execution willbe further delegated to the Project Manager. Hisauthority, however, will be limited as follows:

- Where approved contracts exist, to follow these- and where approved contracts do not exist, to make

decisions with financial consequences limited toagreed amounts.

- Authority for plant operation will be delegated to theOperating Company, Anic.

- Project Execution by the General Contractor will befollowed by a technical Independent Consultant who willadvise the Managing Director and Project Management andreport in parallel to Project Management, ManagingDirector, and lenders.

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECTPROJECT EXECUTION ORGANIZATION

Off icer Dircto

OperatingServices Anic

Topsoe " ProjectServices Manager

Denmark I

Independent IProcess/Project

Consultant (JCE)

> 0 l l l ~~~~~~~~~~~~~~~~~~~~~~~~~~Cost and Schedulc

Project Account/ Project Engineering Construction Project ServicesOffice Manager Manager General ~~~~~~~Manager Managt ervie

Engi neering/Const. ManagerContractor

Staff Organization Organization Staff

I I

Contractor Contractor 1H.O. Organization Field Organization X

1 t'

Industrial Projects Department World Bank-16661August 1978

PAKISTAN: FAUJI FERTILIZER PROJECTPROJECT ENGINEERING ORGANIZATION

ContractorProject CounterpartManager

H.O. Org.

Cost andSchedule OEngineer v-n

Ammonia Area Urea Area Utilities & OffsitesProject Engineer Project Engineer Project Engineer

World Bank-16663

Industrial Projects Department

August 1978

rt l-I-,.

PAKISTAN: FAUJI FERTILIZER PORJECTJOBSITE ORGANIZATION

Construction ContractorManager Site Management

ResidentEngineer

o

Field Accounting &Office Cost Control;Scheduling;Engineering Services;Inspection.

Ammonia Area Urea Area Utilities & Offsites Off Plant FacilityField Engineer Field Engineer Field Engineer Field Engineer

World Bank-16664

Industrial Projects Department

August 1978

- 107 -

ANNEX 4-3

PAKISTAN: FAUJI FERTILIZER PROJECT

TECHNICAL ASSISTANCE TO FFC

1. During the engineering and construction phase FFC will have thetechnical services of Topsoe, providing the Project Management and Anic,providing operating, maintenance and training services and JCE, as anindependent engineering consultant. These services are described below:

A. Haldor Tops6e A/S (Topsoe), Project Management

2. The manpower to be provided by Topsoe to FFC during the preparation,construction and commissioning of the FFC Project is summarized below:

Project Manager (Rawalpindi) 36 Man months

Senior Process Engineer (Milan and

Site) 36 "

Site Manager (Milan and Site) 36

Budget and Budget Control Engineer 24

Assistant Site Manager 18

Marketing Manager 36

Total 186 Man months

3. The Project Management to be provided by Topsoe will on behalf of FFCtake responsibility for the work of Snamprogetti and of other organizations,including contractors and suppliers working for the Project. Procedures willbe established for collaboration between the Project Management and theseparties and the Independent Consultant. Special emphasis will be placed onthe one hand on efficient planning, execution, and monitoring of all activi-ties according to normal procedures for collaboration between ProjectManagement, Snam, etc., and, on the other hand, on the work of theIndependent Consultant as described above.

4. In the event of differences of opinion between Snam and theProject Management, this shall be dealt with in accordance withthe contract between FFC and Snam. In cases of importance the ProjectManagement shall, however, report to the Managing Director and causethe Independent Consultant to submit his recommendations simultaneously.The Managing Director will then either decide the case or call for a Boarddecision.

5. Project Management will report directly to the Managing Director andwill be undertaken by Topsoe through delegation of experienced seniorpersonnel to FFC. The Project Management will be part of the FFC organisationand responsibility and authority will be delegated by the Board andManaging Director according to normal terms of reference for such work.

- 108 -

ANNEX 4-3Page 2

B. Anic S.p.A., Operating Company

6. The main duties of the Operating Company are:

- to ensure that design, main equipment, construction methods,and start-up activities are such that they do not causeany undue problems to the satisfactory operation of theplant.

- in collaboration with Snam, Topsoe, vendors, andsubcontractors,to train FFC's operating andmaintenance personnel.

- to organize and establish FFC's operating and auxiliarytechnical services and with the assistance of its ownpersonnel, be responsible for proper operation andmaintenance of the plant.

More specifically, Anic shall perform the following functions:

1. Review and comment upon P & I Diagrams, layouts,engineering and safety standards, manuals andprocedures for commissioning start-up and operation.

2. Inspect key equipment and follow construction anderection work to the extent deemed necessary toassure proper operation.

3. Prepare and establish the plant organization ofFFC and institute suitable systems for control ofoperation, maintenance, spare parts, safetyand reporting.

4. In collaboration with Snam, Haldor Tops$e A/S,vendors and subcontractors,develop a comprehensive

training program for FFC's staff, operators andmaintenance crew.

This program shall aim at creating a competentPakistani group, able with the shortest practicabledelay at its own responsibility to take over operationand maintenance of the plant.

The training program shall include

- fundamental theoretical training in the offices andlaboratories of Topsoe.

- participation in the engineering activities in theSnam's offices.

- participation in inspection and testing of equipment

- 109 - ANNEX 4-3

Page 3

- training in vendors shops, especially for compressors,pumps and instruments.

- training in similar ammonia and urea plants abroadand in Pakistan.

- training of maintenance personnel in ANIC's maintenanceshops.

- on-site training in Pakistan with the assistance ofPakistani already trained by setting up courses for thedifferent groups of operators and inspection and main-tenance personnel. These schools will follow coursesdeveloped for "dry runs" and instruction at site inequipment lay-out, process characteristics, catalystproperties, maintenance procedures, etc.,etc.

5. On behalf of FFC and by means of own and FFCstaff, render assistance to Snam during pre-commissioning, start-up and test runs as foreseen in thecontract between Snam and FFC.

6. After conclusion of test runs, ANIC shall under its respon-sibility and with reference to the Managing Director of FFCoperate the plant and shall thus:-

- operate the manufacturing facilities to the maximumattainable level of output consistent with safe andefficient operational practices. Coordinate functionsof all departments in accordance with approved writtenprocedures.

- maintain a high level of quality control, and, to thisend, develop and implement an appropriate system ofquality control, testing and recording procedures.

- maintain the plant and equipment in top condition andsound working order so that a continuing high on-streamutilization can be attained; with this objective establishan efficient system of preventive and routine maintenancebased on adequate equipment records and operatinghistories. Plan annual shut-down, execute shut-down,maintain the plant during shut-down and restart-up theplant.

- maintain and consolidate the spare parts inventory andcontrol system instituted during construction of theProject.

- develop and implement appropriate production control pro-cedures including accurate measurements and maintenance ofrecords of consumption of raw materials, utilities andservices and other inputs compared to production of inter-mediaries, by-products and final products, so as to maintaina high production efficiency and to minimize losses andidentify sources of Project operational inefficiencies.

- 110 -

ANNEX 4-3Page 4

- institute security, fire and safety systems aimed at pro-tecting the plant and develop disaster control procedureswith adequate staff instruction and training.

- implement systems whereby performance against cost budgetsis regularly checked and results reported to management.

- develop and implement whatever control techniques may benecessary to ensure that FFC is able to operateefficiently on a continuing basis.

7. Approximately the following training for FFC personnel hasbeen foreseen:-

Man MonthsIn Vendors

Abroad Shops In Pakistan

OperatingPersonnel 120 - 135

MaintenancePersonnel 165 175 150

8. For performance of their duties, Anic have foreseen to placeup to 60 expatriates at disposal.

In case qualified Pakistani staff can be found - and webelieve this is entirely possible in view of the number ofPakistanis now engaged in fertilizer production in Pakistanand the Gulf area - the number of expatriates is expected tobe reduced to 25-30.

C. James Chemical Engineering (JCE), Independent Consultants

7. The Managing Director's Office is to be supported by JCE, theindependent consultant,who will, in continuance of the work done on behalf ofFauji Foundation, execute certain work until test runs have been performed. JCEwill put at disposal a number of experienced engineers and their total effort isestimated to be equivalent to 200 man months.

8. The main tasks of the independent consultant will be to contribute tothe success of the project. He will work under FFC's Managing Director and willbe in direct, daily contact with Project Management, and will monitor all aspectsof design, engineering procurement, construction, start-up and acceptance, asprovided in the engineering and construction contracts between FFC and Snam.

- 111 -

ANNEX 4-3Page 5

9. The independent consultant will be responsible to adviseFFC on all steps to be taken to assure that (i) Snam performs hisservices in an acceptable manner with adequate cost, quality and schedule con-trol; (ii) all aspects of the work comply with requirements of the Lenders; and(iii) facilities which meet specified performance guarantees are finally turnedover to FFC in acceptable operating condition. JCE's technical service willend on acceptance of the plant by FFC.

Summary

10. The scope and magnitude of the technical assistance to be providedby Topsoe, Anic and JCE during the preparation, construction and commissioningof the FFC Project are reflected in the following manpower and cost estimates:

Man Months Cost1978 1979 1980 1981 Total (US$ Millions)

Topsoe 60 45 30 15 150 1.125Anic 10 20 35 128 193 1.450JCE 80 60 40 20 200 1.500

150 125 105 163 543 4.075

The above estimates are based on the following costs per man year:

Average base salary $30,000Benefits at 30% 9,000

Subtotal $39,000Overseas premiuns, $4,000 + 20% of subtotal 11,800Employee benefits at 10% 3,900Travel, living expenses 12,000Indirects at 60% of subtotal 23,300

Total estimated annual cost $90,000

Monthly cost $ 7,500

Industrial Projects DepartmentAugust 1978

- 112 -

ANNEX 4-4

PAKISTAN: FAUJI FERTILIZER PROJECTPROJECT EXECUTION SCHEDULE

(as per Snam Contract)

MONTHS 0 6 12 18 24 30 36

BASIC ENGINEERING------------

DETAILED ENGINEERING----- ----

PROCUREMENT &EQUIPMENT DELIVERIES

SITE PREPARATION -----------

CONSTRUCTION - -----------------& ERECTION

PLANT START-UP-& COMMISSIONING

GUARANTEE TESTS --------- -- ------------- J......

World B8nk-17132

Industrial Projects Departn-entJuly 1978

- 113 -

ANNEX 4-5

PAKISTAN: FAUJI FERTILIZER PROJECT

PROCESS DESCRIPTION

Ammonia Production

1. Synthesis gas for ammonia production is produced from natural gasin a series of steps beginning with a primary reforming with steam. Here,desulfurized gas is combined with superheated steam in an amountapproximately equal to a 3 to 1 steam/carbon ratio. The combined streamat a pressure of approximately 500-550 psig is then preheated to about950 degrees F and passed through catalyst-filled 25/20 chromenickel alloytubes suspended in the radiant section of the reformer. In passingthrough the tubes, the hydrocarbon components, mostly methane, are partlyconverted to carbon oxides and hydrogen and exit at a temperaturenormally in excess of 1,500 degrees F. The partially reformed gas thenflows to a secondary reformer where it is mixed with preheated air in aquantity necessary to reform the unconverted hydrocarbons and at thesame time provide the required amount of nitrogen for ammonia synthesis.Air required for the secondary reforming step is supplied from acentrifugal steam-turbine-driven compressor.

2. Reformed gas from the secondary reformer now containing lessthan about 0.4% methane is cooled in waste heat boilers down to about700 degrees F prior to introduction to the high temperature shiftconverter where part of the carbon monoxide content of the gas isconverted to carbon dioxide by reaction with steam, with an equivalentproduction of hydrogen. To complete this conversion of carbon monoxide,the gas after cooling flows into a second stage low temperature shiftconverter where the carbon monoxide content of the gas is reduced toless than 0.5 percent.

3. The raw synthesis gas now contains essentially hydrogen,nitrogen, carbon dioxide and small amounts of hydrocarbons and carbonmonoxide and goes through a series of purification steps to provide anammonia synthesis gas with a hydrogen to nitrogen ratio of 3 to 1. In thefirst step, carbon dioxide is removed from the gas by scrubbing withactivated potassium carbonate solution. Then, the remaining carbonoxides are removed by conversion to methane by reaction with hydrogen inthe presence of a nickel base catalyst. The final synthesis gas thencontains in addition to nitrogen and hydrogen, less than about 10 ppmof carbon oxides, the maximum which can be tolerated by the ammoniasynthesis catalyst, and small amounts of methane which are harmless andare continually purged from the ammonia synthesis system.

4. The carbon dioxide absorbed by the potassium carbonate solutionis removed from the solution by heating the rich absorbent in a strippingtower. The recovered carbon dioxide is subsequently reacted with ammoniato form urea. The composition of Mari gas is such that the quantity of

- 114 -

ANNEX 4-5Page 2

carbon dioxide produced in the gas reforming process described issufficient to enable all the ammonia produced to be converted to urea.

5. In the synthesis of ammonia the nitrogen-hydrogen mixture iscompressed to a pressure of about 3,650 psig by a steam turbine drivencentrifugal compressor. Recycle gas plus make up gas after cooling andremoval of liquid ammonia are compressed in a separate case to some3,850 psig. Then the gas which now contains only about 3.6 percentammonia is reheated by heat exchange and passed to the ammonia converter.This vessel is of special radial design and contains an activated iron-base catalyst to promote the synthesis reaction and special provisionfor control of the reaction heat developed so as to maintain optimumreaction temperature. The converter effluent gas is cooled from thereaction temperature of about 900 degrees F by preheating boiler feedwater and heat exchange with incoming converter feed gas before coolingwith cooling water, heat exchange and refrigeration subsequent mixingwith make-up gas as described above.

6. Liquid ammonia produced in the process is transferred directlyto the urea unit for production of urea, or to storage.

Urea Production

7. In the production of urea, ammonia and carbon dioxide are re-acted at a pressure of about 2,150 psig and at a temperature of about 360degrees F to produce ammonium carbamate, an intermediate product which issubsequently dehydrated to form urea. An excess of ammonia is used forthe reaction and the dehydration reaction does not proceed to completion.Therefore, the reaction products are urea, ammonium carbamate, freeammonia and water formed during dehydration reaction. The reactionproducts flow from the urea reactor to the urea stripper operating at thesame pressure and externally heated where the excess ammonia acts asstripping agent to concentrate the urea solution. The stripped carbamatevapour are condensed and recycled to the reactor. The products flowfrom the stripper to the first and second stage decomposers where thepressure is reduced and heat is applied to convert the ammonium carbamateback to ammonia and carbon dioxide. The ammonia and carbon dioxideare then condensed and recycled back to the synthesis loops as carbonatesolution. The excess ammonia is condensed and returned to the reactorwith fresh ammonia feed. The final urea solution is concentrated byevaporation of the water under vacuum and sent to a prilling bucket insidea tall tower to form solid beads or "prills." The prills are collectedon a belt conveyor system at the bottom of the tower from where the ureaproduct leaving the tower is transported to the bulk storage building orto the bagging station.

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTI LIZER PROJECTBASIC FLOW DIAGRAM

-20 Million Furnaces & ll* To Colony

Std. Cubic Feet per Day Utilities T

Un

:C60 Million Amoi E1,0 MTPD NH 3 Urea Urea

Std. Cubic Feet per Day Plant | 13 MTPD C lant Storage

41,000 Metric Tons per Day (MTPD) 1,725 MTPD 160,000 Tons

Prilled Urea to Market 4

Max AmmoniaGas Storage

World Bank-166595,000 Tons

Industrial Projects Oepartment

August 1978

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PAKISTAN: FAUJI FERTILIZER PROJECT

PRICE ESCALATION ALLOWANCE

Period Escalation Amount

(Years) Multiplier US$ Million

Local Foreign Local Foreign Local Foreign Total

Land acquisition & site development (Note 3) 1.0 1.0 0.15 0.08 0.4 0.1 0.5

Buildings & structures 1.5 1.0 0.24 0.08 2.3 0.6 2.9

Equipment (Note 4) - 0.75 - 0.06 - 4.2 4.2

Materials & spare parts 1.5 1.5 0.24 0.11 0.2 3.4 3.6

Freight & handling 1.5 1.5 0.24 0.11 0.3 0.6 0.9

Duties 1.5 - 0.24 - 1.6 - 1.6

Erection & supervision 2.0 2.0 0.32 0.16 3.0 2.3 5.3

Gas & water lines 1.5 1.0 0.24 0.08 0.5 0.3 0.8

Township 1.5 - 0.24 - 2.9 - 2.9

Technical assistance - 2.0 - 0.16 - 0.3 0.3

Pre-establishment costs 2.0 2.0 0.32 0.16 1.0 0.1 1.1

Start-up expenses 2.5 2.5 0.42 0.20 0.4 0.2 0.6

12.6 12.1 24.7

Physical contingencies 1.1 0.7 1.8

13.7 12.8 26.5

NOTES

1. Costs have been escalated from January 1978.

2. Period covers the time between January 1978 and the average dates of disbursement.

3. Land already acquired.

4. Equipment will be purchased on firm price basis by about March 1979.

5. Equipment cost overrun beyond US$117 million is entirely to the account of contractors.

Estimated cost of equipment is US$105 million, as per Annex 5-1.

Industrial Projects DepartmentAugust 1978

- 118 -

ANNEX 5-3

PAKISTAN: FAUJI FERTILIZER PROJECT

WORKING CAPITAL REQUIREMENTS(PRs Million)

Raw Materials- Catalysts and Chemicals 12 months 10.2- Bags 2 months 7.0

Work in Progress (ammonia) 5 days 9.7

Finished Goods Inventory(at production cost) 1.5 months 48.8

Accounts Receivable (at sales price) 1 month 64.9

Cash (10% of cash production cost) 28.0

Less: Accounts Payable 1.5 months (42.9)

11Net Initial Working Capital-/ 125.7

1/ For a 65% capacity utilization. Working capital beyond 65%capacity utilization will be covered by cash generation.

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECT

TENTATIVE ALLOCATION OF FUNDSI'(In US$ million)

ItalianIDA USAID KfW Government Local Equity

Credit Loan Loan Loan Loans Local Foreign Total

1. Equipment, materials & spares 45.0 34.0 34.0 - - - 5.0 118.0

2. Engineering services,construction, erection,project management &operating expenses 5.0 - 2.0 7.0 - 5.0 5.0 24.0

3. Technical assistance - 2.0 - - - - 2.0 4.0

4. Initial working capital - - - - - 12.7 - 12.7

5. Interest during construction - - - - 2.0 19.0 - 21.0

6. Other local cost of project - - - - 30.0 16.0 - 46.0

7. Other expenses - - - - 7.0 - - 7.0

8. Unallocated 5.0 4.0 4.0 .4 1.0 8.8 4.4 27.6

Total 55.0 40.0 40.0 7.4 40.0 61.5 16.4 260.3

1/ For Base Financing Plan only.

Industrial Projects Department X

August 1978 U

- 120 -

ANNEX 5-5

PAKISTAN: FAUJI FERTILIZER PROJECT

DISBURSEMENT SCHEDULE FOR IDA CREDIT(In US$ million)

By Calendar Disbursement UndisbursedQuarter By Quarter Cumulative Amount

1978 III 2.0 2.0 53.0IV 2.0 4.0 51.0

1979 I 2.0 6.0 49.0II 1.0 7.0 48.0III 5.0 12.0 43.0IV 5.0 17.0 38.0

1980 I 6.0 23.0 32.0II 7.0 30.0 25.0III 10.0 40.0 10.0IV 10.0 50.0 5.0

1981 I 3.0 53.0 2.0II 2.0 55.0 0.0

Industrial Projects DepartmentAugust 1978

- 121 -

ANNEX 6-1

PAKISTAN: FAUJI FERTILIZER PROJECT

ASSUMPTIONS USED FOR FINANCIAL PROJECTIONS

1. Commissioning date: July 1, 1981

2. Capacity utilization: 1981/2A: 65%; 1982/3: 85%; 1983/4 andthereafter: 90% (at 330 stream days peryear)

3. Revenues and costs are in current terms up to 1981, and in 1982terms thereafter.

4. Pricing of urea (see para. 6.02)The ex-factory price of urea is set, for a period of 10 years fol-lowing the commencement of operations, so as to yield an annual 16%after-tax return on initial preferred share capital and an annual20% after-tax return on initial common share capital. The 16%return on preferred stock is cumulative (i.e., if not paid in oneparticular year, it is carried forward for payment in the followingyears). The 20% return on common stock is based on 65% capacityutilization (at 315 stream days per year) in the first year ofoperation (12 months), 85% in the second year, and 90% from thethird year onwards. The 20% return will be realized only if theCompany sells the urea produced at the annual levels stipulatedabove, and therefore the actual return will be lower/higher shouldthe sales be lower/higher than the annual production level stipulated.

5. Manufacturing costs at full (90')capacity: See Annex 6-2.

6. Marketing Department: See Annex 3-4.

7. Know-How Fees: US$0.5 million to Fauji and $1.0 million to Topsoe,payable in the first and second years of operation,and US$1.0 per ton of urea produced and sold for thefirst ten years of operation, split between Topsoe and Anic.

8. Fixed and variable manufacturing cost:

Natural Gas 85% variable, 15% fixedCatalysts and Chemicals 100% variableRaw Water 85% variable, 15% fixedBags 100% variableOperating Supplies 100% variableRoyalty 100% variableLabor 85% fixed, 15% variableMaintenance Supplies 85% fixed, 15% variableInsurance 100% fixedGeneral & Administration 100% fixed

*Fiscal years ending June 30.

- 122 -

ANNEX 6-1Page 2

9. Depreciation and amortization, straight-line over 10 years. Residualvalue of the plant after 10 years is 10% of original investment.

10. Terms of Loans and Credits- maturity: 15 years including 4 years of grace- repayment: in equal semi-annual installments- interest cost: foreign: 10%

local: 14%

11. Contributions to Workers Participation Fund: 7% of pre-tax income.

12. Taxes: the corporate income tax rate is 55% of pre-tax income (lessworkers' participation fund); losses can be carried forwardfor five years for tax purposes.

13. One-half the dividend on common stock is paid during the year in whichit is earned and the remaining half during the following year.

14. 1978 prices are arrived at by using a discounting factor of 6% per annumbetween 1978 and 1982.

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECT

MANUFACTURING COSTS AT FULL (90%) CAPACITY-/

The cost of all inputs are expressed in constant prices prevailing at early 1978 and includes real increasesin labor and overhead cost between 1978 and 1982.

Consumption per Price per ton of CostUnit metric ton of urea urea (PRs) (PRs million)

Natural gas- ammonia plant m3 9lO2 98. 92 50.8- utilities m3 2001/ 21.53/ 11.1Raw water m3 10 .64/ 0.3Chemicals and catalysts5/ 23.2 12.0Bagging materials 100.46/ 51.6Plant operating supplies 1.2 .6Maintenance materials 7 / 91.2 46.8Labor and fringe benefits 8 ! 35.6 18.3Insurance3/ 10/ 42.6 21.9General and administrative costZ°- 78.5 40.3Royalty to Topsoe/Anic 8.0 4.1

501.7 257.8

1/ Based on 330 stream days per year.

2/ Assuming 700 BTU/NFt3.

3/ Based on US¢43.5/MMBTU.

4/ Based on PRs 0.06/m3.

5/ Including (i) catalyst volumes and CO scrubbing chemicals for the ammonia unit; (ii) formaldehyde forthe urea unit; and (iii) various chemicals for the utilities.

6/ Applies to bags only; bagging labor and supplies are included under operating and maintenance expenses.

7/ 1.8% of plant cost.

8/ PRs 8.3 million plant wages and salaries, plus PRs 10.0 million fringe benefits (e.g., hospital care,severance pay, insurance). Housing allowance is included as capital expense, and operating andmaintenance expense.

9/ Insurance is 1% of plant and equipment.

10/ 5% of gross revenue (based on US$197/ton of urea).

Industrial Projects DepartmentAugust 1978

- 124 - ANNEX 6-3

PAKISTAN - FAUJI FERTILIZER PROJECT-----------------------------------

PRICING OF UREA

(PRS MILLION)

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10

PIRODUCTION (IN 000 TONS) 353.2 461,9 489.0 489.0 489.0 4B9.0 489.0 489.0 489.0 489.0

CAPACITY UTILIZATION (X) 65 85 90 90 90 90 90 90 90 9O

MATERIALS

NATURAL GAS-AMMONIA PLANT 44.2 57.7 61.1 61.1 61.1 61.1 61.1 61.1 61.1 61.1

NATURAL GAS-UTILITY FUEL 9.6 12.6 13.4 13.4 13.4 13.4 13.4 13.4 13.4 13.4CATALYSTS AND CHEmICALS 10.4 13.6 14.4 14.4 14.4 14.4 14.4 14.4 14.4 14.4RAW WATER .3 .4 .4 .4 .4 .4 .4 .4 .4 .4BAGS 44.7 58.5 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0

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

SUB-TOTAL 109.2 142.8 151.3 151.3 151.3 151.3 151.3 151.3 151.3 1 ,1.3

OPERATING EXPENSES

OPERATING SUPPLIES .7 .7 .7 .7 .7 .7 .7 .7 .7 .7

MAINTENANCE MATERIALS 59.0 59.0 59.0 59.0 59.0 59.0 59.0 59.0 59.(

LABOR AND BENEFITS 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.f

SUB-TOTAL 82.8 82.8 82,8 82.8 82.8 82.R 82.8 82.8 (32.8 02.fC

OTHER CHARGES

INSURANCE 27.6 27.6 27.6 27.6 27.6 27.6 27.6 27.6 27.6 27.6GENERAL AND ADMINISTRATION 50.8 50.8 50.8 50.8 50.8 50.e 50.8 50.0 50.8 ROYALTY 3.5 4.6 4.9 4.9 4.9 4.9 4.9 4.9 4.9 449KNOW-HOW AGREEMENT 14.9 - - - - - - - -WORKERS PARTICIPATION FUND 24.9 24.9 24.9 24.9 24.9 24.9 24.9 24,9 24.9 4.9

IDEPREC. AND AMORT. 220.6 220.6 222.5 224.4 226.3 228.3 230.2 232,1 232.1 232.1

SUJB-TOTAL 342.3 328.5 330.7 332.7 334.6 336.5 338.4 340.3 340.3 340.5

INTERESI AND TAXES

INT. ON LT DEBT (FOREIGN) 139.5 134.5 121.7 108.9 96.1 83.3 70.4 56.6 41.8 25.9INT. ON LT DEBT (LOCAL) 54.8 52.9 47.9 42.8 37.8 32.7 27.7 22.7 17.7 12./TAXES 182.0 182.0 182.0 182.0 182.0 182.0 182.0 182.0 182.0 182.0

SUB-TOTAL 376.3 369.4 351.6 333.7 315.9 298.0 280.1 ?61.3 241.5 220.6

TOrAL PRODIUCTION COST 910.7 923.6 916.5 900.5 884.6 868.6 852.6 835.7 815.9 795.0

NET INCOME

INC. ON COMMON SHARES 126.2 126.2 126.2 126.2 126.2 126.2 126.2 126.2 126.2 126.2INC. ON PREFERRED SHARES 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5

_ _ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ... ._ _ ,_ _ _ _ _._

SUB-TOTAL 148.7 148.7 148.7 148.7 148.7 148.7 148.7 148.7 148.7 148.7

REVENUES 1059.4 1072.3 1065.2 1049.2 1033.3 1017.3 1001.3 984.4 964.6 Y43.7

IJNIT PRICE OF UREA (82$)

ER-FACTORY (PRS/TON) 2999 2321 2178 2145 2113 2080 2047 2013 1972? 1929EX-FACTORY (USS/TON) 302 234 220 216 213 210 206 203 199 194EX-FACTORY NET OF TAX (S/T) 250 194 182 179 175 172 169 165 161 157

UNIT FPRICE OF UREA (78$)

EX-FACTORY (USS/TON) 239 185 173 171 168 165 163 160 157 153

EX-FACTORY NET OF TAX (S/T) 198 153 144 141 138 136 133 131 127 124

Indutrial Projects OepartuatAugust 1978

- 125 - ANEX 6-4

PAKISTAN - FAUJI FERTILIZER PROJECT

PROJECTED INCOME STATEMENT

(PRS MILLION)

1979 1980 1981 1992 1983 1984 1985 1986 1987 t988 [90J9

CAPACITY UTILIZATION (X) - - - 65 85 90 90 90 9( 90 90

SALES VOLUME (IN 000 TONS) - - - 370.0 483.8 512.3 .,12.3 512.3 512.3 512.3 S12.3

NET SALES REVENUES

UREA SALES - - - 1109.8 1123.1 1115.9 1099.2 1082.5 1065.13 1049.0 1031.4

OTHER (SEEDING F'ROGRAM) 2.6 5.9 16.4 13.0 - - - - -- -

SUB-TOTAL 2.6 5.9 16.4 1122.8 1123.1 1115.9 1099.2 1082.5 1065.8 1049.0 1031.4

MANUFACTURING COSTS

NATURAL GAS - - - 56.4 73.7 78.0 78.0 78.0 78.0 78.0 78).0

CATALYSTS AND CHEMICALS - - - 10.9 14.2 15.1 15.1 15.1 15.1 15.1 [-5.1

RAW WATER - - - .3 .4 .4 .4 .4 .4 .4 .4

BAGS - - - 46.8 61.3 64.9 64.9 64.9 64.9 64.9 64.9

OPERATING SUPPLIES - - - .7 .7 .7 .7 .7 .7

MAINTENANCE MATERIALS - - - 59.0 59.0 59.0 59.0 59.0 59.0 59.0 59.0

LABOR AND BENEFITS - - - 23.1 23.1 23.1 23.1 23.1 23.1 23. t 3.1

INSURANCE - - - 27.6 27.6 27.6 27.6 27.6 27.6 27.6 .7.6

GENERAL AND ADMIN. - - - 50.8 50.8 50.8 50.8 50.8 50.83 50.B 50.8

ROYALTY AND KNOW-HOW - - - 11.2 12.2 5.1 5.1 5,1 5.1 5, *

SUB-TOTAL - - - 286.8 323.1 324.8 324.8 324.8 324.8 324.3 324.tl

DEPREC, AND AMORT. - - - 220.6 220.6 222.5 224.4 226.3 228.3 230.? 232.t

OPERATING INCOME 2.6 5.9 16.4 615.4 579.4 568.6 550.0 531.4 512.8 494.1 4/4.t,

INTEREST

t r LOAN (FOREIGN) - 139.5 134.5 121.7 108. 96.1 83.3 /0,4 J6.6

tT LOAN (LOCAL) - - - 54.8 52.9 47.9 42.8 37.8 32.7 77.7 22.7

SUB-TOTAL - - - 194.3 187.4 169.6 151.7 133.9 116.0 98.1 79.3

INC.BEF.TAX + WORKERS PARTICIP 2.6 5.9 16.4 421.1 392.0 399,0 398.3 397.5 396.8 396.0 395.2

WORKERS PARTICIF. FUND (7%) - - - 29.5 27.4 27.9 27.9 27.8 27.8 27.7 27.7

INCOME TAXES (55X) 1.4 3.2 9.0 215.4 200.5 204.1 203.7 203.3 203.0 202.5 20:''

NET INCOME 1.2 2.7 7.4 176.2 164.0 167.0 166.7 166.4 166.1 165.7 t6t,.4

Industrial Projects DepartmentAugust 1978

- 126 - ANNEX 6-5

PAKISrAN - FAUIJI FERTILIZER FROJECr_ ~ ~ ~ ~ ~ ~ ~ ~ . ... ...... .. . .. .I - -_ -_ 1 _ - - - -

PROJECfTED CASI-I FlOW S TAFEMENI. . .. .... .. _____. ._. ...

(PRh MILL ION)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

CASH GENERATION

NET INCOME 1.2 2.7 7.4 176.2 164.0 167.0 166.7 166.4 166.1 165.7 165.4DEPREC. AND AMORT. - - - 220.6 220.6 222.5 224.4 226.3 228.3 230.2 232.1INTEREST - - - 194.3 187.4 169.6 151.7 133.9 116.0 98.1 79.3

SUB-TOTAL 1.2 2.7 7.4 591.1 572.0 559.1 542.8 526.6 510.3 494.0 476.8

CAF'ITAL FUNDS

COMMON SHARES 73.B 237.8 306.5 12.6 - - - - - - -F'REFERRED SHARES 16.5 53.0 68.4 2.8 - - - - - - -LT LOAN (FOREIGN) 165.1 527.6 682.5 34.4 - - - - - - -LT LOAN (LOCAL) 46.3 149.2 192.4 7,9 - - - - - - -

SUB-TOTAL 301.7 967.6 1249.8 57.7 - - - - - - -

TOTAL CASH AVAILABLE 302.9 970.3 1257,2 648.8 572.0 559.1 542.8 526.6 510.3 494.0 476.8

CAPITAL EXPENDITURES

FLANT AND TOWNSHIP 255.7 852.5 1023.1 - - - - - - - -WORKING CAPITAL 14.0 - 54.0 79.7 44.7 11.6 - - - - -OTHER CAFITAL EXFENDIT. 32.0 115.1 172.7 - - -RECURRENT CAPITAL EXPENDIT.

1- - - - - 21.3 21.3 21.3 21.3 21.3 21.3

SUB-TOTAL 301.7 967.6 1249.8 79.7 44.7 32.9 21.3 21.3 21.3 21.3 21.3

DEBT SERVICE

INT. ON LT LOANS (FOREIGN) - - - 139.5 134.5 121.7 108.9 96.1 83.3 70.4 56.6INT. ON LT LOANS (LOCAL) - - - 54.8 52.9 47.9 42.8 37.8 32.7 27.7 22.7F'RINCI. REF'AY. LT LOAN (FOR) - - - - 128.0 128.0 128.0 128.0 129.0 128.0 128.0FRINCI. REF'AY. LT LOAN (LOC) - - - - 36.0 36.0 36.0 36.0 36.0 36,0 36.0

SUB-TOTAL - - - 194.3 351.4 333.6 315.7 297.9 280.0 262.1 243.3

ANNUAL CASH SURPLUS 1.2 2.7 7,4 374.8 175.9 192.6 205.8 207.4 209.0 210.6 212.2

DIVIDEND PAYMENT

DIV. ON PREFERREDI SHARES - - - 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5DIV. ON COMMON SHARES - - - 76.9 147.6 143.0 144.3 144.0 143.7 143.4 143.1

SUB-TOTAL - - - 99.4 170.1 165.5 166.8 166.5 166.2 165.9 165.6

TOTAL CASH REDUIREMENT 301.7 967.6 1249.8 373.4 566.2 532.0 503.8 485.7 467.5 449.3 430.2

ANNUAL NET CASH SURPLUS 1.2 2.7 7.4 275.5 5.8 27.1 39.0 40.9 42.9 44.7 46.7CUMULATIVE CASH SURPLUS 1.2 3.8 11.2 286.7 292.5 319.6 358.5 399.4 442.2 487.0 533.6

DIEBT SERVICE COVERAGE - - - 3.0 1.6 1.7 1.7 1.8 1.8 1.9 2.0

1/ Includes interest during construction of PRs millions 11.0 in 1979, 57.0 in 1980 and 140.0 in 1981.

Industrial Projects DepartitAnut 1978

ANNEx 6-6- 127-

PAKISTAN - FAUJI FERTILIZER PROJECT-----------------------------------

Pnacn am Soswum

(PRS MILLION)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1989 1989

ASSETS

CURRENT ASSETS

CASH (OPERATING) 3,4 3.4 20.6 138.2 109.2 101.6 101.6 101.6 101.6 101.6 71.9RECEIVABLES 4.0 4.0 31.0 62.0 81.1 85.7 85.7 85.7 85.7 85.7 85.7INVENTORIES 12.0 12.0 36.5 73.0 95.5 101.1 101.1 10.1 101.1 101.1 101.1CASH (MARKETING) - - - 22.0 28.0 30.0 30.0 30.0 30.0 30.0 30.0

SUB-TOTAL 19.4 19.4 88.1 295.2 313.8 318.4 318.4 318.4 318.4 316.4 288.7

CASH (EXCESS) 1.2 3.8 11.2 179.4 223.7 260.8 2S9.7 340.6 383.4 428.2 504.5

FIXED ASSETS

PLANT AND TOWNSHIP 255.7 1108.2 2131.3 2131.3 2131.3 2131.3 2131.3 2131.3 2131.3 2131.3 2131.3RECURRENT CAPITAL EXPENDIT. - - - - - 21.3 42.6 63.9 85.2 106.5 127.8CAF'ITALIZED? EXPENSES 32.0 147.1 319.8 319.8 319.8 319.8 319.8 319.8 319.8 319.8 319.8

GROSS FIXED ASSETS 287.7 1255.3 2451.1 2451.1 2451.1 2472.4 2493.7 2515.0 2536.3 2557.6 2578.9LESS ACC. DEPREC. AND AMORT. - - - 220.6 441.2 663.7 888.1 1114.5 1342.8 1572.9 1805.0

NET FIXED ASSETS 287.7 1255.3 2451.1 2230.5 2009.9 1808.7 1605.6 1400.5 1193.5 964.7 773.9

TOTAL ASSETS 308.3 1278.5 2550.4 2705.1 2547.4 2387.9 2223.7 2059.5 1895.4 1731.2 1567.1

LlABILITILS

IURRENT LIABILITIES

FAYABLES 5.4 5.4 20.1 40.2 52.6 55.7 55.7 55.7 55.7 55.7 55.7LT DEBT DUE (FOREIGN) - - - 128.0 128.0 128.0 128.0 128.0 128.0 128.0 128.0IT DEBT DUE (LOCAL) - - - 36.0 36.0 36.0 36.0 36.0 36.0 36.0 36.0

SUB--TOTAL 5.4 5.4 20.1 204.2 216.6 219.7 219.7 219.7 219.7 219.7 219.7

LONG-TERM DEBT (EXCL CURR. F'ORT.)

FOREIGN 165.1 692.7 1375.2 1281.6 1153.6 1025.6 897.6 769.6 641.6 513.6 385.6LOCAL 46.3 195,5 387.9 359.8 323.8 287.8 251.8 215.8 179.8 143.6 107.8

SUB-TOTAL 211.4 888.2 1763.1 1641.4 1477.4 1313.4 1149.4 985.4 821.4 657.4 493.4

EQLII TY

COMMON SHARES 73.8 311.6 618.1 630.7 630.7 630.7 630.7 630.7 630.7 630.7 630.7F'REF'ERRED SHARES 16.5 69.5 137.9 140.7 140.7 140.7 140.7 140.7 140.7 140.7 140.7RETAINELI EARNINGS 1.2 3.8 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2 11.2EARNINGS FOR DIV. PAYM. - - - 76.9 70.8 72.2 72.1 71.9 71.6 71.6 71.5

SUB--TOTAL 91.5 384.9 767.2 859.5 853.4 854.9 854.7 854.5 854.4 854.2 854.1

TOrAL LIABILITIES AND EQUITY 308.3 1278.5 2550.4 2705.1 2547.4 2388.0 2223.8 2059.6 1695.5 1731.3 1567.2

R A T I O S

CURRENr (TO 1, EXCL. EXC.CASH) 3.6 3.6 4.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.3CURRENT (TO 1. INCL. EXC.CASH) 3.8 4.3 4.9 2.3 2.5 2.6 2.8 3.0 3.2 3.4 3.6LT DEBT/EQUITY RATIO (TO 1) 2.3 2.3 2.3 1.9 1.7 1.5 1.3 1.2 1.0 .8 .6

Indurtriol Projcts DsepartteAugst 1978

- 128 -

ANNEX 6-7

PAKISTAN: FAUJI FERTILIZER PROJECT

BREAK-EVEN POINT

The profit break-even point of the FFC fertilizer project in 1984 is esti-mated at 60% of capacity; the cash break-even at 38%. The year 1984 isselected because it is the first year of full (90%) production.

(PRs million)

1,300

1,200

1,100 e Income before

Workers' Partici-pation Fund and1,000 Profit Break-even Taxes

Point: 60% 50/10

900 I

800 Cash Break-even IPoint: 38 10 ~~~~292.4 Variable Manu-

700 _ < l4t ~~~~~~~~~~~~Costs700

600

5159.9 Fixed Manu-________________________ facturing Costs

300 }1/ I § § __ [l92.8 Interest

200/

100 I I I 222.5 Depreciation100 & Amortization

/ I

0 10 20 30 40 50 60 70 80 90 100

(Percent Capacity Utilization)

Industrial Projects Depart4ientAugust 1978.

- 129 -

ANNEX 6-8

PAKISTAN: FAUJI FERTILIZER PROJECT

FINANCIAL RATE OF RETURN(PRs million in 1978 prices)-

2/ 3/Investment Costs- Operating Costs- Revenues Taxes

1978 15.0 -1979 281.7 -1980 835.4 -1981 1,052.4 -1982 65.3 259.3 909.7 176.61983 36.6 287.3 920.5 164.31984 27.0 289.1 914.7 167.21985 17.5 289.1 901.0 167.01986 17.5 289.1 887.3 166.61987 17.5 289.1 873.6 166.41988 17.5 289.1 859.8 166.01989 17.5 289.1 845.5 165.81990 17.5 289.1 831.2 165.61991 17.5 289.1 816.8 165.41992 17.5 289.1 812.65/ 165.11993 (351.1)4/ 289.1 798.2 164.8

Financial Rate of Return (in real terms)- before taxes: 20.9%- after taxes: 13.6%

1/ Based on income and cash flow statements (Annexes 6-4 and 6-5). Toarrive at 1978 prices, a discounting factor of 6% per annum is appliedbetween 1978 and 1982.

2/ Including all working capital requirements through 1984.

3/ Excluding depreciation and financial charges, but including workersparticipation fund.

4/ Residual value equivalent to working capital plus 10% of original plantinvestment cost excluding working capital.

5/ Assuming the pricing formula is also used to determine the urea pricein the 11th and 12th year of operation.

Industrial Projects DepartmentAugust 1978

- 130 -

ANNEX 6-9

PAKISTAN: FAUJI FERTILIZER PROJECT

FINANCIAL RATE OF RETURN: SENSITIVITY ANALYSIS

Return afterCase Taxes (%)

1. Base case 13.62. Capital costs increase by 10%/! 11.83. Capital costs increase by 20Y1/ 10.24. Capacity utilization of 80%02/ 11.35. Capacity utilization of 1007i2/ 16.06. Delay of 12 months in project implementation 11.57. Capital costs increase by 10%, but

capacity utilization of 100% 14.08. Capital costs increase by 10%, plus delay

of 12 months in project implementation 10.09. Capital costs increase by 10%, plus delay

of 12 months in project implementation, pluscapacity utilization of 80% 8.1

1/ According to the pricing formula, the price of urea will takeinto account capital cost increases up to US$272 million, i.e.+ 5% from the US$260 million basis. Any further increase incapital costs will not lead to an upward adjustment in the priceof urea.

2/ According to the pricing formula, the price of urea the third yearonwards is based on a capacity utilization of 90% (at 315 daysper year). A higher (resp. lower) capacity utilization will beto the advantage (resp. detriment) of FFC. This report uses abasis of 330 stream days.

Industrial Projects DepartmentAugust 1978

- 131 -

ANNEX 7-1

PAKISTAN: FAUJI FERTILIZER PROJECT

ECONOMIC ANALYSIS

Raw Material Prices

1. The Project will be based on the Mari gas field which has arelatively high carbon dioxide content and low heating value (700 BTU perSCF compared to a standard of about 950 BTU per SCF for gas used forheating purposes) which makes it unsuitable for long-range transmission anduse for energy purposes unless it is first purified at appreciable cost. Itis ideal, however, for producing urea which is made by combining ammoniaand carbon dioxide. The price of gas to FFC would be US$0.28 per MSCF atwellhead. The opportunity cost of gas is taken at US$0.94 per MSCFat wellhead, which is equivalent to US$1.29 per MSCF for 700BTU per SCF gas at consuming centers. On an energy equivalentbasis, the latter figure corresponds to a c.i.f. fuel oil price ofUS$70 per ton (in 1978 terms).

Treatment of Foreign Exchange Required by the Project

2. The foreign exchange required by the Project is treated in twoways,depending on whether it is available to Pakistan irrespective ofwhether the Project was carried out or not.

3. Topsoe's, IFU's and IDB's equity is clearly tied to the Project.It would not have been available to the country in the absence of theProject and does not materially affect the availability of other foreignexchange to the economy. Accordingly, the use of this share capital doesnot involve any cost to Pakistan. However, the repatriation of royalties,dividends and equity involve a cost to Pakistan at the time these paymentsare made since in the absence of the Project these payments would nothave occurred.

4. By contrast, it is assumed that foreign credits and loans from IDA, USAID,KfW, Italy and Denmark would, by and large, have been available to theeconomy in the absence of this Project. Accordingly, the use of theseloans is imputed at cost. The repayment of the loans is not made (atmore or less the same terms) in the absence of the Project. Accordingly,the opportunity cost of the untied foreign exchange cost is obtained bysubtracting the above equity contributions from the capital cost streamused in financial analysis (after adjusting for taxes and import duties).No shadow pricing is used for the local currency. All the constructionlabor is assumed to be skilled labor, and,hence, the actual wages areused as opportunity cost of labor.

- 132 -

ANNEX 7-1Page 2

Table 1

Capital Cost Estimates from Untied Sources(PRs million)

Fiscal 1/ 1 Foreig, EconomiS EconomicYear Capital Cost- Taxes- Equity_ Cost./ Cost2/

(1) (2) (3) 1-(2+3) (in 1978 prices)1978 15.0 - - 15.0 15.01979 290.7 - 29.7 261.0 253.41980 910.6 28.3 89.1 793.2 727.71981 1,109.8 38.0 108.9 962.9 830.11982 79.7 - 7.9 71.8 58.91983 44.7 - - 44.7 36.61984 32.9 - - 32.9 27.01985 21.3 - - 21.3 17.51986 21.3 - - 21.3 17.51987 21.3 - - 21.3 17.51988 21.3 - - 21.3 17.51989 21.3 - - 21.3 17.51990 21.3 - - 21.3 17.51991 21.3 - - 21.3 17.51992 21.3 - - 21.3 17.51993 (405.2)3/ - (235.6) (169.6) (139.0)

1/ All figures in the first four columns are in current terms up to 1982 and1982 terms thereafter.

2/ The Economic Cost in 1978 terms is obtained by discounting the fourthcolumn. The inflation rate is assumed at 6% per year.

3/ Working capital plus residual value of equipment (10% of originalplant investment).

Economic Rate of Return

5. The economic analysis is carried out in real terms using 1978prices as base. Foreign exchange in the hands of the Government is usedas numeraire. Except for gas and urea prices, the opportunity cost ofthe Project's inputs and outputs is based on financial costs adjusted fortaxes. No shadow pricing is used for local currency labor cost.

6. The economic benefits of the Project are derived from importsubstitution. The opportunity cost of urea is taken as the foreignexchange saved. The economic price for bagged urea is assumed to beincreasing from US$189 per ton in 1982 to US$230 in 1985 and thereafter.The resulting cost and benefit stream are shown in Table 2.

- 133 -

ANNEX 7-1Page 3

Table 2

Base Case Benefit and Cost Stream(PRs million in 1978 terms)

2/Fiscal Capital Cost Operating Cost-/Year Benefit Untied Tied-_ Variable Fixed

1978 - 15.0 - - -1979 - 253.4 - - -1980 - 727.7 - - -1981 - 830.1 - - -1982 689.0 58.9 30.7 208.9 150.21983 943.5 36.6 50.5 269.6 150.21984 1,085.0 27.0 42.6 285.6 150.21985 1,138.5 17.5 39.6 285.6 150.21986 1,158.3 17.5 37.6 285.6 150.21987 1,158.3 17.5 35.6 285.6 150.21988 1,158.3 17.5 33.7 285.6 150.21989 1,158.3 17.5 31.7 285.6 150.21990 1,158.3 17.5 29.7 285.6 150.21991 1,158.3 17.5 28.2 285.6 150.21992 1,158.3 17.5 26.7 285.6 150.21993 1,158.3 (139.0) 126.7 285.6 150.2

Economic Rate of Return: 22.7%.

1/ Payments consist of (1) Topsoe's royalty of a total US$1.0million to be paid during the two initial years of operation,plus a fee of US$1 per ton of urea produced (including US$.50to Anic during the three initial years of operation), (2)dividends to foreign shareholders (Topsoe, IFU, IDB) and (3)repatriation of foreign equity.

2/ The operating cost does not include royalty payment, but includespayments to workers' participation fund, considered as transferpayments.

7. Sensitivity analysis was carried out to test the effect ofchanges in fertilizer prices, delay in construction and lower capacityutilization on the economic rate of return. Three prices of urea wereused, US$220, US$23Q and US$250 per ton of urea; the corresponding f.o.b.prices of exports are US$35 per ton lower. The assumptions made are:(i) 10% cost overrun, (ii) a delay of six months in project constructionand (iii) lower capacity utilization (50% during the first year, 65%during the second, 85% during the third, 90% from the fourth year on-

- 134 -

ANNEX 7-1Page 4

wards). The result of the sensitivity analysis is shown in Table 3.As would be expected in capital intensive projects, the rate of return issensitive to changes in the above variables. But even under the unlikelycombination of the most adverse circumstances, the economic rate ofreturn remains satisfactory.

Table 3

Sensitivity Analysis on Economic Rate of Return(%)

Economic Price of Urea (US$/Ton) 210 230 250

Cases

1. Base Case 18.7 22.7 26.12. 10% Cost Overrun 16.9 20.7 23.93. 12 Months Delay 15.1 18.2 20.84. Combination of (2) and (3) 13.6 16.6 19.1

Industrial Projects DepartmentAugust 1978

PAKISTAN: FAUJI FERTILIZER PROJECT

FOREIGN EXCHANGE EFFECTS(1978 US$ million)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

I. Inflow

1. Foreign equity 2.6 7.9 9.7 0.42. Foreign loans and

credits 15.8 47.3 58.1 2.5Subtotal 18.4 55.2 67.8 2.9

II. Outflow

1. Capital expenditure- Fixed assets including .

interest during construction 18.4 53.1 65.8 2.9 - - - - - - - - - w2. Operating and recurrent capital

expenditure - - - 8.0 8.0 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.53. Debt servicel/ - - - 21.4 19.8 17.7 15.9 14.2 12.6 11.2 9.8 8.4 7.04. Foreign dividends and royalties - - - 3.0 5.2 4.7 4.7 4.4 4.2 3.9 3.6 3.3 3.05. Repatriation of capital - - - - - - - - - - - - 12.6

Subtotal 18.4 53.1 5.8 35.3 33.0 30.9 29.1 27.1 25.3 23.6 21.9 20.2 31.1

III. Foreign Exchange Surplus (Deficit) - 2.12/ 2.03/ (32.4) (33.0) (30.9) (29.1) (27.1) (25.3) (23.6) (21.9) (20.2) (31.1)

IV. Foreign Exchange Saved and/orEarned from Profit_ - - - 67.7 92.9 107.0 113.2 115.2 115.2 - - -

V. Incremental Foreign ExchangeSurplus - 2.1 2.1 35.3 59.9 76.1 84.1 88.1 89.9 91.6 93.3 95.0 84.1

1/ Interest on foreign loans is assumed to be equal to actual (on-lending) interest paid by the Company.

2/ Urea prices used in calculating foreign exchange saved or earned are border prices of urea in 1978 terms.

3/ Foreign exchange financing used for local project cost.

Industrial Projects DepartmentAugust 1978

IBRD 10818R1I JUNE 1978

620 660 70- 074

U. S. S

P A K I S T A N \ J CHIN

PRESENT AND PROPOSED FERTILIZER PLANTS '-'-'i' J A MM U

~~~ ( ~~~ANI 36

< 9 ,^ ~~~KASHht ,,I

FERTILIZER PLANTSNITROGEN: PHOSPHATES:

* * Completed16) Under Construction fnAteLeofcontr

* ~~~~Proposed FFC Site Odf b tb *pc~i

4 Natural Gas Fields S H ASD

- Natural Gas Pipelines t 1 -. owlpd 1

_VMM Cropland

Roads r -;

iRailways

32' ~~~~Divisional Boundaries b320 ~~~~Provincial Boundaries\ aroaE3

- - International Boundaries R

X ~~U E T TA tot Add M

Mo~ ~ ~ ~ ~ MastungX L rI >t Uy=p / Bahawalncigar

Nole Kundi ~C H A G A J 1 f "hwalpurf

) F i e ( d s / I N D I A> > ~ ~ ~ / st 8,J / R_ f _Rahi~~~~~~ahmyor Khan ji

oGoth Machhi J 28-

/ _ 2+ g ( , > 0 100 200 300 400

> , 240-Z <$0, 2 300S.IL ,S

62- 66- 70' < 0,)SRI LANKAe~- ~

A ~ ~ ~ ~ ~ ~ ~ ~ NI

8 A D~~~~~~~~~~~~~UM

Ka 7il'~~~~~~~~~~RE ~ A

AL4BIAN SEA ~ H N

62' 0,0f0,0sd ~ ~SRI LANKA