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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10825

PROJECT COMPLETION REPORT

CHINA

FERTILIZER REHABILITATION AND ENERGY SAVING PROJECT(LOAN 254 1-CHA)

JUNE 22, 1992

:M.- ., : ..- ::.. .

Industry, Trade and Finance DivisionTechnical DepartmentAsia Region

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

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CURRENCY EQUIVAIENTS

Currency Name = RehminbiCurrency Unit o Yuan (Y)

1991 US$1.00 - Y5.4 (Y1.00 - US$0.185)1990 US$1.00 . Y5.2 (Y1.00 - US$0.192)1989 US$1.00 Y4.7 (Y1.00 - US$u.21)1988 US$1.00 - Y3.7 (Y1.00 - US$0.27)1987 US$1.00 . Y2.8 (Y1.00 - US$0.36)

WEIGHTS AND MEASURES

I hectare (h) - 2.47 acres1 metric ton (ton, t) a 1,00 kilograms or 2,205 pounds1 kilometer (kIn) u 0.621 miles1 cubic meter (mi3) 35.315 cubic feet1 liter D 0.2642 US gallons1 kilocalorie (kcal) - 3,968 British Thermal Units (BTU)1 megawatt (mw) - 1,000 kilowatts1 kilocalorie per kilogram (kcal/kg) a 1.80 British Thermal Units per pound1 kilowatt (kw) . 1,000 watts

GLOSSARY OF ABBREVIATIONS

AN - Ammonium Nitrate LNGCC - Luzhou Natural Gas Chemical CompanyBTU - British Thermal Unit CCFC - Canghou Chemical Fertilizer Companyi3 - cubic meter MCI - Ministry of Chemical IndustryCFDC - China Fertilizer Development mg/l - milligram per liter

CenterCIF - Cost, Insurance and Freight MWK - The M.W. Kellog (US)CNCCC - China National Chemical mWh - megawatt hour

Construction Company N - Nitrogen Content in FertilizersC0 2 - Carbon dioxide NCIC - Nanjing Chemical IndustryFOB - Free on Board Nm3 - Normal cubic metersGOC - Government of the People's p.a. - per annum

Republic of China P 2 05 - Phosphorous Pentoxide Content inHG - Humphreys & Glasgow (UK) PCR - Project Completion Reportha - hectare ppm - parts per millionkcal - kilocalorie SAA - State Audit Administrationkg - kilogram SAR - Staff Appraisal ReportKCN - Kellogg Continental

(Netherlands) SO2 - Sulfur dioxidekm - kilometer SPC - State Planning ComlissionK20 - Potassium Oxile Content tpd - tons per day

(Potash) in Fertilizers tpy - tons per yearKWh - kilowatt hour typn - tons per year of nutrientsLCFC - Liaohe Chemical Fertilizer YNGCC - Yunnan Natural Gas Chemical Company

FISCAL YEAR

January 1 to December 31

FOR OMCIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Direciaoe.CeefiOpiatiom EbskautKm

June 22, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on ChinaFertilizer Rehabilitation and Energv Saving Project (Loan 2541-CHA)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on China - Fertilizer Rehabilitation and Energy Saving Project(Loan 2541-CHA)" prepared by the Industry, Trade and Finance Division, TechnicalDepartment, Asia Regional Office, with Part II contributed by the Borrower. Noaudit of this project has been made by the Operations Evaluation Department atthis time.

Attachment

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

FOR OMCIAL USE ONLY

PROJECT COMPLETION REPOR,

CifiNA

FERIZER REHABILITATI-ON A-ND ENERGY SAVING PROJECT(Loan 2541-CHA)

TABLE OF CONTENTS

Page _N_.

Preface ............................ .................. iEvaluation Summary. iii

Part I PROJECT REVIEW FROM BANK'S PERSPECTIVE ................ 1

Project Identity .......................................... 1

Background ......................................... 1

Project Objectives and Description .......... .................... 3Project Objectives .................................... 3Project Description .................................... 3Project Design and Organization ....... ................... 4

Project Implementation ...................................... 5Loan Effectiveness and Project Schedule ..................... 5Implementation Schedule ........... .................... 5Procurement ....................................... SProject Costs ...................................... 5Disbursements ...................................... 6Loan Allocation ..................................... 6

Project Results ........................................ 6Project Objectives . .................................. 6Physical Results . .................................... 6Economic and Financial Rates of Return ..................... 7Financial Performance .................................. 8Impact of Project . ................................... 8

Project Sustainability . ................................. 8Bank Performance .................................... 9Borrower Performance ................................ 10Project Relationship .................................. 10Consulting Services . .................................. 10Project Documentation and Data ....... ................... 10

This document has a restricted distribution and may be used by recipients only in the performance,1 :r,eir o(Aicial duties Its contents may not otherwise be disclosed without World Bank authorization.

Part Ii PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ........... 11

Borrower's Comments . 11The Plan for Further Energy Saving .12The Comparison B"ween Bank Allocation and Actual Disbursement .14The Function of CFDC .14Bank Performance .14Borrower Performance .15The Relationship with the Bank. 15The Relationship with Other Agencies . 15

Part m STATISTICAL INFORMATION. 17

Related Bank Loans and/or Credits .17Project Timetable .18Loan Disbursements .18Project Implementation .19

Project Cost and Financing .20Project Costs .20Project Costs by Components .21Project Financing .21

Project Results .22Direct Benefits .22Economic Benefits .22Financial Impact .23Studies .23

Status of Covenants .24Missions .25

ANNEXES

1. Physical Performance of the Companies .262. Company Financial Statements .273. Assumptions used for Financial and Economic Analysis .324. Present Status of the Fertilizer Sector in China .34


CMINA

FERTILIZER REHABILITATION AND ENERGY SAVING PROJECT(Loan 2541-CHA)

PREFACE

This is the Project Completion Report (PCR) for the Fertilizer Rehabilitation and EnergySaving Project in China, for wiich Loan 2541-CHA in the amount US$97.0 million wasapproved on May 15, 1985. The loan was closed on December 31. 1990, 18 months behindschedule. The loan was disbursed to the extent of US$96.32 million and an amount of US$0.68million - which remained undisbursed, was canceled. The last disbursement under the loan wason May 3, 1991.

The PCR (Preface, Evaluation Summary, Parts I and III) was prepared by the Industry,Trade and Finance Division of the Asia Technical Department, based substantially oninformation provided by the borrower and the beneficiary companies. The Bank received PartII from the Borrower in early February 1992 for inclu3ion in the PCR.

Preparation of the PCR was started with the presentation of draft PCRs for the differentcomponents by the beneficiary companies in mid-1990 and during the sunervision mission of theproject in October 1990. This was followed by a project completion mission to China in July1991. The PCR is based on the Staff Appraisal Report; the Loan and Project Agreements;Supervision reports; the draft PCRs prepared by the beneficiary companies and discussionsduring the project completion mission in July 1991.

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CHINA


EVALUATIQN SU\MARY

Objectives

1. This project developed into the first of a series of Bank operations in the fertili7er sector (as ofFY91/92: under implementation - Fertilizer Rationalization Project, Phosphate Development Project,Hubei Phosphate Project, and Shenxian/Weixian Fertilizer Components under the Hebei AgriculturalDevelopment Project; and under preparation - Fertilizer Component under Sichuan Gas Development andUtilization Project and Fertilizer Restructuring Project) and has aimed at assisting China establish anefficient fertilizer industry by improving the productivity and international ceonpetitiveness of its existingplants and comprised rehabilitation and energy conservation in nitrogenous fertilizer plants at fivelocations. The plants assisted under this project include four large and one medium size ammonia/ureaplants (i.e. large plants: Liaohe Natural Gas Chemical Company (LNGCC), Yuinan Natural GasChemical Company (YNGCC), Cangzhou Chemical Fertilizer Company (CCFC) and Luzhou ChemicalFertilizer Company (LCFC)) based on internationally adopted technologies; medium size plants: LuzhouChemical Fertilizer Company (LCFC) and the ammonia plant at Nanjing Chemical Industry Company(NCIC) which is based 4,n locally developed technology.

2. In addition the project has supported the sector ir. improving technical and management skills inthe production plants and in strengthening the research, development and design skills in the research anddesign institutes. A study of the production costs of medium size plants in China - carried out under theproject, intended to identify further options in the subsector for efficiency improvements.

3. By pursuing these objectives, the project also attempted to establish demonstration models for themodernization of other existing large size ammonia and urea plants with the purpose of conservingenergy, reducing industrial pollution and expanding capacity.

4. The second Bank operation in the sector (Fertilizer Rationalization Project, Loan 2838-CHA)aimed at optimizing existing medium-size nitrogenous fertilizer plants by upgrading their products andimproving their efficiency. The subsequent third and fourth operations (Phosphate Development Project,Loan 2958-CHA, and Hubei Phosphate Project, Loan 3066-CHA) were designed to develop the deficientChinese phosphate subsector. In continuation of its involvement in the sector, the Bank is currentlyfocusing on the restructuring, upgrading and modernization of existing small and medium size fertilizerplants aiming at improving the sector's overall efficiency by conserving energy, controlling industrialpollution, transferring and up-grading technology, enterprise restructuring, and pricing reform. Theproposed Sichuan Gas Development and Conservation Project and Fertilizer Restructuring Project thatare currently under preparation would be the vehicle for introducing these improvement and establishing

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demonstration models for a large number of potential follow-up and repeater projects under governmentsponsorship.

Implementation Experience

5. Details on appraisal and actual completion dates of the various components of the project arepresentf c; in para 4 of Part 11' and reviewed in para 5.02 of Part I. Due to the realistic assumption ofzero dats in the SAR, loan processing did not result in any project delays. There were small delays inthe completion of modifications of the large ammonia/urea plants mainly due to some variations in projectscope. The medium size ammonia/urea plants at Luzhou were delayed by about 18 months due to delaysin finalizing the designs and procurement caused by difficulties in coordinating the work of the foreignand local engineering firms - not envisaged during appraisal. The Nanjing ammonia plant and utilitieswere delayed due to holdups in finalizing the scope, siow procurement and damage during shipment ofthe ammonia compressor. The training program on research and development - proposed under theproject, was drastically pruned by the Ministry of Chemical Industry.

Results

6. During the test runs, except for the Nanjing ammonia plant, all the components achieved and evenexceeded the benefits envisaged under the projewt. The Nanjing ammonia plant could not improve itsammonia production level dti to a deterioration of the quality of coal now being supplied. rhe Luzhouammonia plants are unable to operate at their full potential due to gas supply constraints and as a result,the ERR of the medium size plant has suffered and is only 13.3%. While the financial position of thecompanies under the project is satisfactory, some of them have suffered a decline in profitability. Thishas been mainly due to (a) lower production levels caused by gas supply shortages, and (b) increases ininput prices often not matched by corresponding increases in product prices. The China FertilizerDevelopment Center (CFDC) was promoted under the project to become the overall coordinating agencyfor research and development work in the fertilizer subsector in China. However, this responsibilitycontinues to remain with the Ministry of Chemical Industry.

7. Encouraged by the attractive benefits experienced under the project, the Ministry of ChemicalIndustry and some individual enterprises have followed the models established and introduced similarrehabilitation schemes in other plants.

Sustainability

8. To derive and sustain the full benefits of energy saving/optimization investments, it is necessaryfor the plants to maximize their production levels based on adequate gas supply and efficient operation.Several of the beneficiary plants are lacing gas supply constraints. Gas supplies are being committedbeyond the supply capabilities resulting in gas allocations which are inadequate to operate the productionfacilities at their optimum levels. There is need for achieving a better match among capabilities for gasproduction, transportation and utilization. The Nanjing ammonia plant, which has suffered from lowercoal quality, is installing three more gasifiers to provide adequate gas. With this investment, the companyexpects to produce at the designed levels.

Findings and Lessons Learned

9. The project has once again confirmed the importance of flexibility in defining the project scopeof optimization schemes - decisions to evaluate more ecoaomic alternatives for the hydrogen removalunit at Liaohe for implementation after project completion and the addition of converter internalmodifications, when an appropriate technology l ecame available, have helped to improve projecteconomics On the other hand, the project has also brouglit out the difficulties in optimizing the oldermedium size plants, whether based on offshore cr local technologies. Both at Luzhou and at Nanjing,there were delays in finalizing the design and procuring th'n supplies. Such optimization projects are bestcarried out under the total responsibility of a single experienced contractor.

10. The benefits foregone due to the limited gas supplies to existing plants are substantial and thisissue needs to be addressed at the policy levels in China. Therm is a strong need to achieve a better Matchamong investments in gas production, transportation and gas consuming industries to coordinate thematerial balances in these linked sectors so that Inefficienci^s in the use of investment resour.es couldbe minimized.

11. It is understood that the gas supply constrair .s are mainly d& 3 to over-co, mitment of availablegas and limitations in the transmission systems. Su?aplV commitments are being made in anticipation ofprojected investments that often P-t delayed. It would also appear that gas allocations are apparentlymade against fertilizer quotas, plants are required to deliver. Additional gas supply is eithler not availablefor production beyond the production quota, or eharged fer at levels which do not support its use asfeedstock for fertilizer mnanufacture. In this cottext, ther-e is some concern tha; e plarts use theallocated gas to the best financial advant.ge of the corapanios. often for purposes oti;e; than the oftenmarginally profitable fertilizer production. The gas supply constraint appears to be especially severeduring winter when there is an increased demand for hleat genera.ion.

Potential Impact on Future Bank Operations

12. The experience with the project brings out several points which may prove very use,ful to theBank's future operations in the Chinese fertilizer sector. Experience shows that the Chinese institutionsare usually not strong enough to formulate on their own revamping programs for existing plants. Thishas been mainly due to limited capabilities in evaluating alternative options, both technically andeconomically, and in finalizing the project scope early in the projecl cycle. This has been especiallyevident in the Nanjing ammonia and utilities sub-components.

13. Revamping of older existing plants is especially difficult as field changes of process or equipment(i.e. the up-to-date state of a plant) are frequently not fully documented. The lack or conflicts of dataand consequent revisions may lead to significant delays in project implementation and procurementactivities as weil as escalations in investment costs. The problems get even more complicated ifresponsibilities are split between a foreign contractor providing the technology and local design institutesproviding detailed engineering. A more unified approach to such projects needs to be developed thatshould support an integration of strong technical assistance with transfer of technologies and equipmentsupplies.

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14. The attractive benefits of optimization investments should not be jeopardized by constraints in rawmaterial/feedstock supplies. In future projects, this aspect should be evaluated more carefully andprovisior. of sustained critical input supplies ensured.

15. Despite notable improvements in the performance standards of most project related entitiesthrough technical assistance and institutional development, the full anticipated strengthening process couldnot be achieved due to major cuts by the Ministry of Chemical Industry of the contemplated trainingprograms. Similar cuts have also been experienced under other projects. This issue is of particulaeimportance as increasing complexity and size of future operations will demand a high degree ofproficiency.


fIUNA


PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

1. Project Identity

Name : Fertilizer Rehabilitation and Energy Saving ProjectLoan Number 2541-CHARVP Unit Asia RegionCountry ChinaSector Industry

2. Backsround

2.01 Fertilizer production subsector in China has played an important role in the growth ofChinese agriculture. It has contributed to the growth in food grain production in China from 164 milliontons in 1952 to 371 million tons in 1989 - an average annual growth rate of about 3.1%. This has beenachieved, in spite of China's limited share of arable land, mainly through improved farming practiceswhich emphasize increased fertilizer application. In 1988/89, the level of fertilizer application per hectareaveraged about 262 kg in China compared with the world average of 99 kg, but well below the levelsin several other countries such as Egypt (400 kg), S. Korea (400 kg), Japan (415 kg) and New Zealand(732 kg). In the last decade, fertilizer consumption in China has grown annually at an average of 6.2 % -stimulated by government policies which ensured adequate and timely fertilizer avai:ability (from bothincreased domestic production and imports).

2.02 As a result, China is presently the world's third largest producer of chemical fertilizers,next only to USSR and USA. The present status of the fertilizer production subsector in China is brieflyreviewed in Annex4 and summarized below. In 1990, China met about 73% of the country's fertilizerrequirement of 25.9 million nutrient tons through domestic production. Of the total nutrient productionof about 18.8 million tons, nitrogen formed about 78% and phosphates about 22%. Nearly all the potash,most of the phosphates and a significant share of the nitrogen requirements continue to be imported.China's nitrogen production comes from 18 large scale plants, 55 medium size plants and about 1063small plants. Their shares in ni; -,en production are about 23%, 21% and 56% respectively. The largernitrogen plants - built mostly in the 1970s, have relatively lower energy efficiencies compared with thepresent generation plants and, in several cases, operate at relatively low capacity utilizations due tonatural gas/naphtha supply constraints. The medium size plants have poor overall efficiency and highproductien costs due to the technologies adopted by them and their vintage. The small size plants - basedon locally developed technologies, operate with locally available coal, fuel oil or gas as feedstock and

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produce, mostly, ammonium bicarbonate. Generally, they have poor energy efficiency and lowproduction levels.

2.03 In the above context, the government's current priorities for the subsector are (a) innIkitr , aiddition of new capacity and rehabilitation and energy saving in existing capacity; (b) innnhnshAk, rapid capacity expansion based on locally available rock phosphate; and (c) in pQtnh,identification and development of domestic resources. The present project addressed item (a) above asa first step in the Bank's support through technical and financial assistance of the Government's majorefforts in the sector. Specifically, the project supported (a) technical renovation and energy savingmeasures in nitrogen fertilizer plants; (b) improvements in the nutrient balance through capacity expansionin the phosphate fertilizer subsector; and (c) institution building and training.

2.04 Following approval of the present loan, the Bank has continued and expanded its dialoguewith the Chinese authorities and participation in further projects in support of the above priorities.Although the Government has taken a cautious approach to overall price reforms due to concerns abouttheir inflationary implications, market-influenced prices negotiated within the limits of guideline retailprices set by local pricing authorities prevail for production outside the state plan quota. This two-tierpricing system is viewed as an intermediate step in the evolution of sectoral pricing policy. TheGovernment's strattgy is to continue gradually reducing its administrative control while simultaneouslydismantling central annual production planning and allocation. Guidelines for future policy reforms arebeing developed with due consideration to the close inter-relationship between the fertilizer andagricultural sectors and the potential for disruption if the allocation and pricing arrangements forfertilizers were to be liberalized in isolation.

2.05 The se'ection of the project scope was based on an attempt to combine the high economicbenefits of rehabilitation schemes comprising energy conservation and capacity expansion in existingplants and using predominantly international technologies with a relatively simple implementation. Asmost of the plants under the project are based on international technologies, the selection of engineeringcontractors and the procurement of equipment and materials were by and large straight forward. Theresult was a project that could be executed without major delays despite deficiencies in experience withBank guidelines and ICB procedures within the Chinese agencies affiliated with the project.

2.06 A further reason for rehabilitating the selected large size plants under the project was theirprofound impact on the performance of the nitrogen fertilizer subsector as result of their magnitude ofoperations and the resulting savings in feedstock and increased output rates.

2.07 The accumulation of wide ranging experience and data under the project as well asagreements reached between the GOC and the Bank during project appraisal on medium to long termsector developments and continued economic reform were expected to establish a firmer basis forcontinued Bank participation in the further development of the sector including increases in size, diversityand complexity of forthcoming operations.

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3. Project Obiectives and Description

3.01 PrQject Objectives: The main objectives of the Project were to assist China in (a)implementing rehabilitation and energy saving measures in nitrogenous fertilizer plants of the fivecompanies located at Luzhou (one large and one medium size plant, Sichuan province), Shuifu (Yunnanprovince), Cangzhou (Hebei province), Liaohe (liaoning province, and Nanjing (locally designed mediumsize ammonia plant, Jiangsu province); (b) strengthening the capabilities of the above companies forproject implementation, plant operations and financial management; (c) strengthening the newlyestablished China Fertilizer Development Center (CFDC) and the fertilizer research and design institutesfor improved research, development and engineering capabilities in the fertilizer industry; and (d)developing strategies for modernization of the medium size nitrogen fertilizer plants through a study ofthis segment of the subsector. As mentioned in para 2.03 above, these objectives are in line with thepriorities of the government for improving the overall competitiveness of the subsector.

3.02 Project Description: The Fertilizer Rehabilitation and Energy Saving Project (Loan2541-CHA) included:

(a) Energy saving modifications of the large 1,000 tpd ammonia plants at Luzhou, Shuifu,Cangzhou and Liaohe.

(b) Installation of hydrolysis units to reduce pollution and recover additional urea from thelarge urea units in the above four locations.

(c) Installation of a low pressure absorption unit to reduce pollution at Luzhou and a carbondioxile gas dehydrogenation unit to improve plant safety at Liaohe - simultaneouslyproducing additional urea.

(d) Revamping and energy saving modifications of the medium size ammonia and urea plantsat Luzhou to increase their capacities by about 50%.

(e) Modification of the medium size coal based ammonia plant at Nanjing to reduce energyconsumption and increase production by more than 25%.

(f) Modification of the ammonium nitrate plant and addition of facilities to increase industrialgrade porous ammonium nitrate production by 50,000 tpy.

(g) Replacement of existing sulfuric acid production with a new more efficient and lesspolluting 200,000 tpy capacity plant based on locally available pyrites.

(h) Improvements to the utility system of the Nanjing industrial complex.

(i) Upgrading production efficiency in the five plants through training and other measures.

(j) Provision of research equipment, scientific instruments, computer facilities and trainingto expand the capabilities of eight member research and design institutes and of CFDCfor research and design work.

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(k) Technical assistance to the project implementation coordination unit of the Ministry ofChemical Industry in international procurement for the overall Project.

(1) Assistance in carrying out a Nitrogenous Fertilizer Production Cost Study to evaluate theoperational and energy efficiencies of medium size nitrogenous fertilizer production andto develop strategies for modernization of the fertilizer industry.

3.03 Except for an earlier technical assistance credit, the project was the first Bank groupoperation in the fertilizer subsector in China. The Bank missions had, therefore, reviewed in considerabledetail the status of the subsector and identified the range of options appropriate for strengthening thesubsector. These findings have supported the present project and further Bank involvements in thesubsector in China.

4. Project Design and Organization

4.01 The Fertilizer Rehabilitation and Energy Saving Project was decigned mainly to optimizethe overall performance, reduce energy consumption and achieve better pollution control in selectedfertilizer plants in China. Based on a Bank mission review of the Chinese fertilizer subsector anddiscussions with the Ministry of Chemical Industry (MCI). the Project was designed around the selectedlarge and medium sized fertilizer plants. This design was based on the conlcusion that other largeammonia/urea plants, built in the 1970's using well known offshore technologies, could benefit fromsubsequent international experience with similar optimization programs. It was also agreed that theproject should include one medium sized ammonia/urea plant based on offshore technology and onemedium sized ammonia plant based on locally developed technology, so that the experience gained fromthese components could have a demonstration effect on other medium size plants in China. It was agreedthat more work was needed before improvement measures could be developed for the large number ofsmaller coal/anthracite based plants for which the potential for improvements is very large.

4.02 For the large ammonia glants, the M.W. Kellogg Company (USA), which hadengineered and supplied the original facilities and has built a large number of similar facilities all overthe world, prepared plant modification proposals based on their experience with similar projectselsewhere. These proposals were evaluated and the project scope defined by the companies, MCI andthe Bank missions based on detailed technical and economic analysis. The project scope was furthermodified during implementation when additional options became available such as the modification ofammonia converter internals. Hydrolyzer units, to reduce the liquid effluent pollution levels of the largeurea plants to the currently acceptable tighter standards, were procured, following competitive bidding,from Snamprogetti (Italy) - a major urea process licensor. Humphreys and Glasgow (UK), which hadoriginally engineered and supplied the medium size ammonia plant at Luzhou, provided the basic designand part of the engineering for the modifications. Basic design and part of the engineering for themedium size urea plant at Luzhou was obtained through competitive bidding from Tecnimont (Italy).Lurgi (Germany) provided the technology support for the pyrites roaster and waste heat boiler for theNanling sulfuric acid plant. All other aspects of project implementation were carried out by the Chinesedesign institutes, the beneficiary companies and the project implementation coordination unit of MCI.

4.03 The performance results that have been achieved and the adoption of similar optimizationprojects - in several cases Bank financed, in other countries indicate that the project objectives weretimely and appropriate. As a result, China has continued the program with additional investments inwhich the Bank has participated or intends to.

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5. Project Implementation

5.01 Loan Effectiveness and ProJect Schedule: Based on progress made with engineeringarrangements by the time the appraisal was completed, it was expected that most engineering contractswould have been awarded by June 1985. However, the SAR conservatively scheduled project completionbased on award of all engineering contracts by December 31, 1985. The loan agreement was signed inAugust 1985 and became effective in December 1985. The loan processing schedule, therefore, did notresult in any project delays.

5.02 Implementation Schedule: The appraisal and actual completion dates of the variouscomponents of the project are presented in para 4 of Part III. The modifications of the large ammoniapiants in the four companies were completed with delays from I to 5 months. The delays were mainlydue to the inclusion of ammonia converter internal modification - now being adopted extensivelyinternationally, in all the four plants and the addition of energy saving rotors for the compressors atLuzhou. The converter internal modification was proposed to the Bank in early 1987 and the contractwith Casale (Switzerland) was signed only in December 1987. The medium size ammonia/urea plantsat Luzhou were delayed by about 18 months. These plants were originally set up in the mid-60s and hadundergone several modifications which were not always reflected in the drawings maintained by thecompany. As a result, frequent design revisions were necessary when modified drawings conflicted withfield conditions. The split in responsibility between the offshore and local engineering agencies furthercomplicated the progress of engineering work and procurement of supplies. These difficulties were notanticipated at the time of project preparation and, in retrospect, the SAR completion schedule for thiscomponent was possibly optimistic. There was, however, good cooperation among the offshore and localengineering firms, the companies and the MCI which helped to minimize the resulting delays. TheNanjing ammonium nitrate plant was completed ahead of schedule. The NanJing sulfuric acid plantwas delayed only by about three months. While the new gas generator, synthesis system and waste heatboiler for the Nanjing ammonia plant were completed in time, the installation of the ammonia storageand pumps and the gas purification modifications were delayed by 7 to 9 months. However, due todamage in transit of the ammonia compressor and delays in receiving the replacement parts, thiscomponent was completed only by the end of 1990. With the Nanjing utility Rlants, there has been adelay of over one year for the medium pressure boiler and the turbo-generator due to design changes anddelays in delivery.

5.03 Procurement: Since the Project was the first Bank operation in China and the Chinesecompanies were not familiar with the Bank's procurement procedures, MCI's project implementationcoordination unit coordinated the procurement of all equipment and materials. MCI was assisted in thistask by an experienced procurement x -isor from UNICO (Japan). The Bank's procurement guidelineswere generally accepted by the companies, who have stated that the guidelines helped efficientprocurement. There were no significant procurement problems during project implementation.

5.04 Project CQos: The final project cost was about US$177.78 million equivalent againstthe appraisal cost estimate of US$186.86 million equivalent. Significant increases in local costs have beenmore than offset by changes in exchange rates. The Luzhou medium size anmnonia/urea plants was theonly component with a significant cost overrun - about 32%. This was mainly due to delays inimplementation of the component and difficulties in establishing the details of the project scope duringappraisal when the engineering studies were not yet completed. The Nanjing components wereimplemented at the appraisal estimated costs. Generally, the actual costs of the large ammonia/urea plantmodifications have been below appraisal estimates, even with the addition of the ammonia converter

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internal modification. This has been due to the favorable international prices under ICB procurement,reduced procurement of spares and changes in exchange rate. The project components have achieved -in general, favorable actual costs through efficient implementation management by the various Chineseinstitutions.

5.05 Disbursements: The appraisal and actual loan disbursements are given in para 3 of PartIII. The actual disbursements were delayed significantly compared with the appraisal estimates, in spiteof the fairly satisfactory project implementation schedule. The original closing date was June 30, 1989;but the loan was actually closed on December 3', 1990 after two extensions of closing dates.Disbursements against already committed items were made till May 3, 1991 and an outstanding loanbalance of US$0.68 million was canceled.

5.06 Loan Allocation: The original allocations and actual disbursements for the loan areshown in Table 5C of Part III. There was significant reduction in the requirement of Bank funds forEngineering, Licensing and Technical Services for Project Management. The available surplus wasreallocated to Equipment, Materials and Spares to finance the ammonia converter internal modificationsand the increased cost of the Luzhou medium size ammonia/urea plants.

6. Proiect Results

6.01 PrjLect Qbjectives: The project has been successful in meeting its main objectives ofimproving the competitiveness of selected plants in the Chinese fertilizer subsector. In the largeammonia/urea plants, energy consumption has been significantly reduced, although full benefits of theoptimization investments are not available due to natural gas supply constraints. However, theinvestments have helped to maximize urea production with the available limited gas supply.Contamination of liquid effluent from the urea plant has been reduced to internationally acceptable levelsincluding the recovery of the pollutant as valuable ammonia. Though the medium size ammonia/ureaplant at Luzhou has been successfully revamped to increase its capacity by about 50%, this additionalcapacity is not fully available due to natural gas supply constraints. The Nanjing ammonia plant has notbeen able to reach good production levels mainly due to poorer quality of coal now being supplied.Project management capabilities - especially for ICB, have been developed within the MCI, the companiesand the design institutes. On the institutional side, the Project expected to build up the China FertilizerDevelopment Center (CFDC) as the overall coordinating agency for the research and developmentprogram relating to the fertilizer subsector. However, this has not happened and the MCI continues toplay this coordinating role.

6.02 Physical Results: The physical results achieved by the Project are summarized in Table6A of Part III. These indicate that, except in the case of the Nanjing ammonia plant, the physical targetsof the Project have been substantially achieved and, in some cases, even exceeded. The large ammoniaplants at Luzhou, Yunnan and Cangzhou have been able to utilize the gas conserved through energysaving investmnents, for additional nitrogenous fertilizer production. The additional productions were67,500 tpy of urea in Luzhou, 42,800 tpy of urea and 3,200 tpy of ammonium nitrate in Yunnan and45,800 tpy of additional urea and 2,200 tpy of ammonia at Cangzhou.

6.03 All the five large ammonia plants revamped under the project suffer from gas supplyconstraints. Only the Liaohe plant is able to operate at its normal capacity, mainly due to the gasconserved under the project. When the ammonia and urea plants are operating at full capacities, thebenefits of the energy saving investments are reflected as reduction in the cost of gas used. This is

-7 -

because the conserved gas cannot be further processed to marketable products. However, if as result ofconstraints in the gas supply the plants operate below their achievable capacities, the conserved gas canbe used to increase production of ammonia and urea and such a plant obtains increased benefits on theincremental investment. A quick analysis indicates that a plant operating at about two-third of its ratedcapacity (base case) will gain an annual benefit (at economic prices) of only about US$2.0 million throughenergy saving. However, if the conserved gas is used to maximize ammonia/urea output, the benefitincreases to US$;0 million per year. If a plants' full gas needs are met, the plants will gain an additionalnet benefit of US$34 million over the base case.

6.04 Even though the newly added tenth gas generator in the Nanjing ammonia plant hasdemonstrated the capability to produce raw gas required for 12,000 to 13,000 tpy of ammonia, the totalammonia production at Nanjing has remained below 110,000 tpy. This has been reported to be due toa deterioration in the quality of available coal, i.e. lower fixed carbon content and increased fines duringfeed preparation. Even if the pre-revamp capacity of the plant is assumed to have declined by about 10%due to poorer coal quality, the additional ammonia production due to the revamp is only about 11,000tpy against the planned increase of 30,000 tpy. The company is adding three more gasifiers - scheduledto be commissioned in 1991, to utilize the full capacities of the plant of 150,000 tpy of ammonia. Theporous ammonium nitrate plant has proved to be capable of producing 50,000 tpy. However, porousammonium nitrate production comes mostly by diversion from crystallized ammonium nitrate already inshort supply in the domestic market. The sulfuric acid plant operated only at about 66% of its capacityearly in 1989, mainly due to market constraints. The production has, however, reached 184,000 tonsin 1990 and is expected to be maintained at least at that level.

6.05 The Nanjing ammonia plant is based on locally developed technologies and uses coal asfeedstock. At the time of SAR, the plant had an installed capacity of 120,000 tpy of ammonia. Theanthracite coal for the plant comes from the Zhencheng (Shanxi province) and Jinzhuo (Hunan province)coal mines located from the plant at about 900 km and 800 Ian, respectively. The plant coal requirementwas originally 285,000 tpy, while the mines had a combined capacity of seven million tons. The Nanjingcomponent under the Project allowed for the expansion of the ammonia plant and included an additionalgasifier to increase overall ammonia capacity by 30,000 tpy. When the gasifier was commissioned, asignificant decline in the qualitv of the coal occurred leading to diminished performance. Currently, theplant can only produce about 110,000 tpy of ammonia, even after the revamp. It was stated that miningoperations in the two mines have been mechanized and as a result there has been a decline in coal qualitydue to admixture of overburden. This has lead to a higher ash content in the coal, lower heating valueand more fines. Consequently, the coal consumption per ton of ammonia has increased from 2.05 tonsto 2.50 tons per ton of ammonia while the ammonia output has declined. The power consumption hasalso increased from about 1545 kWh to 1732 kWh, mainly for processing the additional coal requiredto maintain previous production rates. To cope with the low grade feedstock, the company is addingthree more gasifiers and the coal handling facilities needed for the increase in throughput. However, itis questionable whether ammonia production at Nanjing is economical, if coal (including itstransportation) and power are priced at economical rates using proper conversion factors.

6.06 Economic and Financial Rates of Return: The various assumptions used in estimatingthe economic and financial rates of return are summarized in Annex-2. Appraisal and actual economicrates of return (ERR) of the various investments under the Project are summarized in Table 6B of PartIII. The actual ERR's are estimated using recent (June 1991) preliminary Bank projections for fertilizerand energy prices, which are generally lower than the projections used in the appraisal. In the ammoniaplant at Nanjing the incremental benefits barely match the costs, resulting in a negative ERR. This has

-8 -

been mainly due to the substantially reduced (because of the lowver coal quality) additional ammoniaproduction attributable to the new investment. The ERR could improve if with the three additionalgasifiers now being installed, the additional production can reach 30,000 tpy. The Nanjing sulfuric acidplant will have an ERR of 30.2%, if it can continue to operate at no lower than 85% of its .apacity inthe future years. The medium size ammonia/urea plant at Luzhou has a significantly lower ERR of13.8%. This has been mainly due to constraints in gas availability, the higher capital cost and theimplementation delays. If the gas use in the large plant at Luzhou is maximized to improve theprofitability of the company, the ERR of the medium size plant will decline further. The othercomponents have achieved ERRs comparable with or better than the appraisal estimates. For the largeammonia/urea plants, the ERRs on an incremental basis improve if plant conditions allow the conservedgas to be utilized for increasing nitrogenous fertilizer production. However, the ERR will be higlier ifgas supplies are adequate to optimize the production levels. The appraisal and actual financial rates ofreturn (FRR) of the various components are summarized in Table 6C of Part III and reflect a similarsituation. The Nanjing ammonia and porous ammonium nitrate plants and the Luzhou medium size plantshave low FRRs for the reasons mentioned earlier. In addition, input prices have increased substantiallyand have not oeen fully reflected in product prices.

6.07 Financial Performance: The production levels in the beneficiary companies in 1989 and1990 are summarized in Annex-l. The financial performance of the beneficiary companies has continuedto be satisfactory, though the profitability has generally declined due to changes in input and productprices. The investments carried out under the project will help, except at Nanjing, to improve theperformance, though only in a limited way, due to t;ie relatively small size of the investments. Asummary of the recent financial statements of the beneficiary companies is presented in Annex 2 (A) to4 (E) in Part III.

6.08 Impact of Project: The project has demonstrated the potential that exists in the Chinesefertilizer industry for efficiency improvements in both production and energy. rhe success of the presentProject and the demonstrated benefits derived from it, have created interest in China for preparing andimplementing other similar projects with Bank assistance. Experience through the project hasdemonstrated to the Chinese institutions the benefits of international competitive bidding for obtaininghigh quality supplies at competitive prices. In several locations facing gas supply shortages, the projectwill help to increase fertilizer production without further demand on the scarce natural gas suppliesThrough its training and R&D components, the project aimed at enhancing the technical and managementcapabilities of the Chinese professionals and their contributions to overall subsector efficiencyimprovements. However, the full anticipated benefits of these components could not been achieved, dueto due to MCI's decision to significantly cut the original training program.

7. Project Sustainabilitv

7.01 The energy conservation/optimization investments in nitrogenousfertilizer plants generallyhave very attractive rates of return. However, these benefits can be sustained only under certainsituations. The plants which can process the conserved gas to finished fertilizers derive the maximumbenefits. It is, therefore, necessary to ensure that the gas supply is maintained at an adequate level - inany case not below the present levels, to optimize production and achieve best benefits. The benefits canalso be sustained only if the plants continue to be operated at very efficient levels through sound operationmanagement and good preventive maintenance. This is especially so since the existing plants havealready been in operation for several years. The project has provided for training and procurement ofcritical spares to support efficient plant performance. The inclusion of ammonia converter internal

9 -

modification to the large ammonia/urea plants will not only conserve energy but also increase ammoniaproduction capabilities. The Luzhou plant has modified the rotors of the major machines to benefit fromthis potential. Similar possibilities should be explored in other plants. While the plants have benefittedfrom known options which were available in 1984 and evaluated, further options are now available forenergy saving investments based on more recently developed and proven techniques. These should beexamined for the large ammonia/urea plants in China.

8. Bank Performance

8.01 The Bank missions played an important role during project preparation in developing theproject scope and evaluating the available options. Different options were identified based on proposalsfrom offshore engineering firms, thinking of different Chinese institutions and the Bank's own experiencein other countries. These options were reviewed for their technical feasibility and evaluated for theireconomic attractiveness. Only those options which were considered practical and economically attractivewere included in the project.

8.02 Both Bank missions and Nanjing plant officials failed to recognize fully the difficultiesin optimizing ammonia production in a plant based on solid feedstocks, especially the potential risks ofdeteriorating input quality. In retrospect, investments in the Nanjing nitrogen facilities should have beenmore carefully planned and preceded by adequate detailed studies.

8.03 It is not unusual in optimization and energy saving projects, that the project contentundergoes revision during implementation for several reasons. For example, the hydrogen removal unitat the outlet of the carbon dioxide compressor at Liaohe - proposed to improve plant safety, could notbe installed. Similarly, ammonia converter modification - given up after evaluation of the option availableduring project preparation, was included when better technologies became available. The flexibility ofthe Bank in such cases enabled the plants to achieve increased energy savings within the plannedinvestments.

8.04 Since this Project was the first Bank operation in China in the fertilizer subsector, thebeneficiary companies were not fully familiar with various Bank requirements. The Bank missions sparedno efforts to work with the beneficiary company managers to get them familiar with landk procedures andtheir contribution to project implementation efficiency.

8.05 The difficulties in modifying the Luzhou medium size ammonia plant, i.e. increasingsignificantly its capacity, were not fully recognized during appraisal. This component could have beenmore efficiently implemented - at a lower cost and shorter time, if the total responsibility had beenentrusted to a single institution. The implementation delays were mainly due to coordination difficultiesamong the various institutions.

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9. Borrower Performance

9.01 With full knowledge of their plants and their performance, the beneficiary institutionsparticipated constructively in project preparation. In spite of some initial difficulties in familiarizingthemselves with the Bank procedures, the project components were implemented efficiently. Theirperformance was coordinated by MCI's Project Implementation Coordinating Unit with offshore technicalassistance for international procurement. Project progress was closely watched at the management levelsand problems with potential adverse effects on project implementation were identified in time anddiscussed constructively with the concerned agencies including the Bank.

10. Project Relationship

10.01 The Bank's relationship with the Government and the project beneficiaries has been good.Discussions on various project issues were always constructive and positive.

11. Consultine Services

11.01 The Project utilized offshore consultancy services for different purposes as summarizedbelow:

Assignment Company Country

International Procurement UNICO JapanLarge Ammonia Plants Kellogg USAAmmonia Converter Retrofits Casale SwitzerlandUrea Hydrolysis Snamprogetti ItalyMedium Size Ammonia Plant H & G UKMedium Size Urea Plant Tecnimont ItalySulfuric Acid Plant (Limited) Lurgi Germany

11.02 A large part of the detailed engineering, procurement and construction work were carriedout by various Chinese design institutes and companies. On the overall, the consultants performedsatisfactorily, except, as mentioned earlier, for some coordination difficulties encountered at the Luzhoumedium size ammonia plant.

12. Project Documentation and Data

12.01 The Loan agreement for Loan 2541-CHA was adequate and appropriate for achieving theproject objectives in all the key areas. The staff appraisal report - along with the documentation in theproject files, provided an adequate background to the Bank missions for efficient review of projectimplementation. The beneficiary companies have provided draft completion reports for their individualcomponents. They have also provided the additional information requested for by the Bank. This ProjectCompletion Report has been prepared by a Bank mission in July 1991 consolidatir3 the aboveinformation.

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CHINA


Part II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

Per the requirement of providing the Borrower's views in the second part of PCR for2541-CHA, we present you our following comments through discussion with project entities for yourinformation.

The Fertilizer Rehabilitation and Energy Saving Project (2541-CHA) was the first projectin fertilizer sector in China with the World Bank's financing, which comprises five companies located

at Luzhou, Shuifu (Yunnan), Cangzhou, Liaohe and Nanjing as well as newly established China FertilizerDevelopment Centre (CFDC). The whole project had spent 5 years for completion from the beginningto loan closing date generally with construction period of 3 or 4 years. This project was efficient andsuccessful with result of energy saving, production expansion, good training of various personnel,addition of research and design equipment and improvement of enterprises' efficiency at five companiesand one centre. All beneficiary agencies and the departments concerned are satisfactory with the projectachievements and consider the Bank's involvement in supervision and supporting rehabilitation projectfruitful and efficient.

We reviewed the parts of PCR prepared by the Bank on the basis of draft PCRs andinformation and data provided by the MCI and all beneficiary companies as well as the discussion madeduring the meeting between the Bank supervision mission and project entities; and find it revealed thepractical situation. We and the beneficiary companies have no objection to the basic content of the Bankprepared PCR, but would like to make additional comments as follows:

1. The four large size fertilizer plants obtained fruitful result in energy conservation withmodification of converter internals and addition of energy saving rotor for the compressor, achievingmaximum energy conservation at 1.02 mill. Kcal and maximum production expansion at 15% (generallyat 10%). The whole project proceeded basically as projected construction schedule.

2. The rehabilitation of medium size ammonia plant at Luzhou was also efficient withremarkable energy saving results. The maximum daily capacity reached to 200 ton. It was delayed byabout 18 months due to the difficulties in cooperation between foreign and local engineering agencies ondesign work and the removal of 50% of the old equipment and 80% of pipings during the constructionas well as equipment modification, readjustment of process layout and utilities, which the latter one werethe major reasons causing large delay. These points were not anticipated at the time of project appraisaland increased the volume of work by 8 months. The current poor efficiency at Luzhou medium ammoniaplant is mainly due to gas supply constraints not envisaged before, which caused the plant is unable tooperate at its full potential.

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3. The upgrading equipment and technology at Nanjing ammonia plant with 50 year historyoriginally based on our own financial sources. Due to financing shortage at that time, this projectcomponent obtained positive support from the Bank and once again make the old plant modificationsuccessful. This project component was finalized as four items, i.e. (a) Modification of ammonia plant,(b) replacement of existing poor sulfuric acid plant with a new more efficient plant, (c) Addition offacilities to increase industrial grade porous ammonium nitrate production replacing crystallizedammonium nitrate, (d) Improvements to the utilities. The above component was proposed in 1983 andfinalized to use the World Bank financing at the end of 1985. During appraisal there were some changesin project scope and this caused the delays in following engineering design and procurement work.

3.1 One coal gasifier was in operation in December 1986 and convertor with 1.6 M diameter,waste heat boiler and synthesis unit installed at the end of 1987 and put into production on May 9, 1988.It is one of the largest system with our own design and equipment fabrication. The execution of theabove two items followed the Bank's schedule. 1000 M3 ball tank and liquid ammonia pump were inoperation in October 1988, which removed the liquid ammonia storage constraints. The appraisal onpressure shift and decarbonization units were not completed until July 1988, which caused about ninemonths delay in processing the project. Due to the damage in transit of the ammonia compressor anddelays in receiving the replacement parts, the goods was delivered to Shanghai port from USA tillFebruary 1990, which caused overall delay in ammonia plant modification. The reason for Nanjingammonia plant could not improve its ammonia production level is a deterioration of the quality of coalnow being supplied. To cope with this situation, Nanjing decided to add three more gas generators andthe ammonia production level and tne consumption index have fully meet the Bank appraisal requirementupon the completion and operation of newly-added gasifiers in December 1991. The efficiency onmodified part of ammonia plant has been reflected to some extent. The capacity has been expanded by12,000 T/Y and the recovered steam exceeded 100,000 ton every year after rehabilitation.

3.2 The design institute under Nanjing Chemical Industry Company carried out overallarrangement and detailed engineering of building new sulfuric acid plant except for roaster, waste heatboiler and electric precipitator supplied by Lurgi and procurement of some other critical equipment suchas blower and acid cooler with anode protection with a view to develop its capability in design large sizesulfuric acid plant. The institute completed all design work of sulfuric acid plant in May 1986 and startedconstruction work in third quarter of the year 1986. Well organized procurement work ensured theproject proceeding as per expected schedule. Nanjing sulfuric acid plant was commissioned on March8, 1988. In year 1989 the plant only produced 131,540 T sulfuric acid due to market constraints, butoperated at 91.8% of the design capacity to produced 183,582 ton sulfuric acid, exceeding the Bank testfigure 78.57%. Rock consumption for per ton acid production was also reduced *o 0.9766 T/T(calculated at 35% sulfur content in pyrite). The porous ammonium nitrate and utilities items werecompleted in time. The success of these items indicates that the institute under Nanjing ChemicalIndustry Company and the construction firms have the capabilities to undertake engineering andconstruction of large size fertilizer plant.

3.3 The plan for further energy savine

(a) To improve the energy application efficiency by increasing steam pressure of gas generatorand waste heat boiler from 8 kg/cm2 to 20 kg/cm2 recovering additional heat energyproduced by pressure differential; to preheat boiler feedwater with fume coming from wasteheat boiler achieving better waste heat recovery.

.. ., ,. , ., . i ~.I............................... 1 ..,b1_

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(b) To obtain energy saving at conversion system by selecting low steam ratio catalyst forconserving steam; to heat copper wash liquid with hot water generated by recoveredremaining heat at conversion system. Rough calculation shows that per ton ammoniaproduction can save steam by 0.4-0.5 T/T.

(c) About 300 ton hot water with 90 C can be recovered at per hour acid prciuction. Nowonly about 100 ton hot water has been utilized and they try to achieve better application ofhot water in following steps.

4. The established CFDC is fruitful and efficient, which mainly reflect as follows:

4.1 Many institutes have upgraded their equipment level by adding a batch of necessaryapparatus (including computer).

(a) Four institutes purchased computers and CAD systems, which are prerequisite conditionsto conducting modern design. The application of CAD svstem not only improved theworking efficiency, but also can process those design work which are beyond manpower(such as three dimensional layout drawing).

(bj There were poor facilities for catalyst research at the institute in the past. The newly addedcomputer with automatic control and data processing has precise control over the job andeasy operation and achieves quality research work as well. This ensures largeimprovements of catalyst research and development work with complete engineering dataand experiences.

(c) The technical personnel can conduct any testing work with newly added large analytical andexperimental apparatus and small testing instruments. The new testing facilities facilitateour lab work and also improves the preciseness of our research work and expedite ourworking progress.

(d) The institute also purchased some soft wares including process simulation and engineeringdesign soft ware, while upgrading the existing facilities. Some purchased soft wares hasfully showed their efficiency and some are under second development, which will soonshow their efficiency.

All these indicate the purchased hard and softwares with the Bank financing improved theequipment level of CFDC members.

4.2 The Bank loan played positive role in improving the professional quality and research abilityof scientific and technological personnel at each institute. A batch of middle-aged backbone at institutewere designated to go abroad for advanced study. The benefits show: (a) the understanding of the worlddevelopment trend in each field; (b) The study and application of most advanced experimental apparatusand method. Many people has completed research task abroad- (c) A batch of backbone at each memberinstitute has been well trained in the field of fertilizer research such as high pressure phase balance,absorption engineering catalyst theory and research development, chemical mining and beneficiation,nitrogenous fertilizer process, chemical equipment development, multi units in chemical engineering,chemical technical and economic analysis with application of computer.

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In a ward, there are large improvement, after training, in professional knowledge and qualityamong the technical forces of the institutes. These technical forces will play significant role in furtherdevelopment at each research field and also will benefit the nther people by sharing advanced newtechnology.

Based on the above overall situation, we can say we have realized the projected loanobjectives. The enhancement of equipment level and the upgrading of technical personnel quality willmake more contribution to the development in fertilizer sector.

4.3 The comparison between Bank alloation and actual disbursement

(Unit: Mill. USD)

Bank Loan Actual Percentage betweenAllocation Disbursement Column Two and One

1. instruments andequipment procurement 8.25 9.12 110.5%

2. Personnel training 1.54 0.38 24.7%

3. Consultation andothers 0.21 0.01 4.8%

TOTAL 10.00 9.51 95.1%

4.4 The Function of CFDC

CFDC is a technical development institute established based on state reform policy onscientific research system in 1984. Although it didn't become overall coordinating agency as previouslyprojected for research and development work in the fertilizer sub sector in China, CFDC has playedpositive role in promoting technical advance in fertilizer industry. Besides organizing seminar onintroduction of advanced foreign and local technologies, CFDC also recommends suitable new technologyfor specific nitrogenous fertilizer plant modifications, which help the plant to have better benefits. CFDChas become the bridge between the institutes and the enterprises for spreading locally developedtechnology. CFDC has large involvement in organizing and preparing feasibility study as well asevaluation of key construction projects; and also enjoys good reputation. CFDC has many contacts withforeign engineering firms and overseas fertilizer development companies and also selectively recommendssuitable overseas technology for local technical rehabilitation projects. Now CFDC members hasexpanded from early 9 to 19. Most of fertilizer enterprises consider it's a wise selection to technicallyrely on CFDC and try to become CFDC member.

Generally speaking, there have been large improvement in capability of CFDC and its 8members with the Bank loan. They are playing positive role in technical advance and fertilizer Industryexpansion.

5. Bank Performance

The Banig's supervision played major role in smoodi implementation of the project and theBank has made great effort to ensure the project following the schedule. The selected project components

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based on the Bank's evaluation during appraisal stage were reasonable and were consistent with the realsituation of project entities. We obtained timely procurement guidance and assistance from the bank sothat we can purchase both economic and advanced equipment and materials. The Bank's procedures andmethods for project management are rigorous and scientific. The Bank's requirement to project entitiesare also reasonable. The evaluation personnel and project operators of the Bank are professional,competent, conscientious to the work and also very easy to get along with.

6. Borrower Performance

The project entities have attached great importance to the project and closely followed theproject progress. Competent and experienced professional personnel were selected to take care of projectat each beneficiary company. They were diligent, conscientious and eager to learn; efficiently fulfilledthe work as per the specified requirements of the Bank, MCI Loan Coordination Group and CNCCC.Having been getting involvement in project, they are familiar with the Bank procedures and requirement;and improved their abilities to handle Bank financed project. However, because this is the first time forus to handle the project with the Bank financing, they know very little about the Bank's approach e.tc.Thus, there are still room for further improvement in planning and projection while carrying out projectimplementation.

7. The Relationship with the Bank

We maintained good relationship with the Bank during project implementation. Our peopleworked together with the Bank project operators and had close cooperation. All the discussion on specificpoints between both sides were always constructive and positive.

S. The Relationship with the Other Agencies

There were many agencies involved in this project. The coordination work among so manyorganizations became very difficult. However, the beneficiary companies still maintained goodrelationship with each agency and strictly executed the contracts under the guidance of MCI and CNCCC.They closely worked with other companies and learned from each other to achieve mutual advance. Anyproblems arisen during implementation were properly solved through timely and friendly discussion. Thisensured the smooth project completion.

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PROJECT COMMLEMON 1REEORT

CHINA

(Loan 2541-CHA)

PART III: STATISTICAL INFORMATION

1. Related Bank Loans and/or Credits: Loan 2541-CHA is the first Bank Group operation inChina in the fertilizer production subsector. Other Bank Group operations in the subsector in China aresummarized below.

Loan/Credit Year of StatusTitle Purpose Approval

Cr. 1412-CHA Testing of phosphate 1983 CompletedTechnical rocks in Hubei and GuizhouCooperation provinces and studies forCredit exploiting them.

Ln. 2838-CHA Improve production efficiency 1988 ProceedingFertilizer of medium and small size satisfactorilyRationalization plants through renovationProject phosphate capacity expansion.

Ln. 2958-CHA Establish first large size local 1988 Proceeding withPhosphate Develop- phosphate mine and beneficiation somement Project plant for high grade phosphates. implementation

delays

Ln. 3066-CHA Set-up demonstration models for 1989 ProceedingHubei Phosphate large and medium size integrated satisfactorilyProject phosphate mining and fertilizer

manufacture.

Cr. 2159-CHA As project sub-components, establish 1990 ImplementationHebei Agricultural two models for the rehabilitation started recentlyDevelopment Project of existing small size nitrogenous

and phosphate fertilizer plants.

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2. Irolet Timetable

Date DateItem Planned Actual

Preparation Sep. 1983 Sep. 1983Prm.-apraisal/Appraisal Jul/Aug. 1984 Jul/Aug. 1984Follow-up M.ission Dec. 1984 Dec. 1984Loan Negotiation March 1985 April 1985Board Approval April 1985 May 1985Loan Signature August 1985Loan Effectiveness Dec. 1985Loan Closing June 30, 1989 Dec. 31, 1990Loan Completion May 3, 1991

3. Loan Disbursements

Disbursements (in US$ Million)

Bank Fiscal Year Estimated Actual Actual % ofAnd Semester Cumulative Cumulative Estimated

198603/31/86 4.0 0.5 1306/30/86 13.0 1.3 10

198712/31/86 27.0 5.9 2206!30/87 52.0 11.7 23

198812/31/87 82.0 32.2 3906/30/88 92.0 61.7 67

198912/31/88 97.0 71.4 7406/30/89 - 88.1 91

199012/31/89 - 91.7 9506/30/90 95.8 99

199105/03/90 96.3 99

Based on the World Bank Disbursement lformadon.

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The original closing date for the Project was June 30, 1989. The closing date was extended toJune 30, 1990 in October 1989 in view of delays in the implementation of some of the components. Theclosing date was further extended to December 31, 1990 in June 1990. An amount of about US$0.7million was canceled.

4. Proiect Implementation

Indicators Appraisal ActualCompletion Completion

i) Energy Improvement Luzhou June 1988 November 1988in large ammonia Yunnan June 1988 July 1988and urea plants Cangzhou June 1988 September 1988

Liaohe June 1988 October 1988

ii) Liquid effluent Luzhou June 1988 December 1988treatment for large Yunnan June 1988 August 1988urea plants with urea Cangzhou June 1988 September 1988recovery Liaohe April 1988 November 1988

iii) Large urea plant Luzhou June 1988 November 1988improvements with Liaohe June 1988 Not Implementedadditional urea output

iv) Modification of Luzhou Ammonia June 1988 November 1989medium size plants Urea June 1988 January 1990

v) Modification of Nanjing Ammonia December 1987 July 1990ammonia and other plants Amm.Nitrate December 1986 December 1985

Sulf. Acid December 1987 December 1987Utilities June 1987 September 1989

vi) CFDC Component December 1987 End 1989

Comments on Project Implementation

There has been about 3 to 4 months delay in the implementation of the lageammonia/urea plant modifications. This has been mainly due to the addition of converter internalmodifications to the project scope based on improved technology that became available. The hydrogenremoval unit for the Liaohe urea plant was not installed due to the expected long installation time and theresulting production loss. Implementation of the Luzhou medium size ammonia/urea plants was delayedby about 18 months. Given the complexity of the project and the potential difficulties in coordinatingthe joint design efforts of the foreign and local firms, the appraisal schedule was optimistic. The delaycould have been less if the project had been implemented under the total responsibility of a singlecontractor. The Nanjing ammonium nitrate and sulfuric acid plants were implemented well withinschedule. The ammonia plant and utility modifications have been carried out over time and some items

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have been delayed due to various factors often outside the control of the company. Some training underthe CFDQ Component spilled into 1990.

5. Prlect Cost and Finandog

A. Prflject Costs(in US$ millions)

Apriusal Estimate Actusl CostsLocal Pomign Total Local Foreign TotalCost Cost Cost Cost Cost Cost

Plant Rehablbitation andEnemy Savlne Comooneol

Enginering and Licensws 4.92 7.07 11.99 3.51 8.87 12.38Equipment and Materials 14.97 51.28 66.25 20.04 68.50 88.54Taxes 1.60 1.60 0.10 0.10Freight and Insurance 4.54 5.05 9.59 1.51 1.85 3.36Civil Works and Etection 22.43 1.19 23.62 36.33 36.33Project Management 0.56 5.33 5.89 2.28 1.97 4.25Sparm Parts 0.51 7.56 8.07 4.05 4.05Training Aids 0.10 1.52 1.62 0.01 1.24 1.25Trining 0.04 1.52 1.56 0.01 0.44 0.45Others 2.83 2.83

Bae Cost Estimate 49.67 80.52 130.19 66.62 86.92 153.54

Physical Contingency 4.95 7.19 12.14 0.64 0.64Price Contingency 7.77 12.64 20.41

Installed Cost 62.39 100.35 162.74 67.26 86.92 154.18

Working Capital 0.29 0.29 0.07 0.07

Subtotal 62.68 100.35 163.03 67.33 86.92 154.25

Fertlizer Research andDevelogment (CFDC) Comoonent

Equipment 0.35 4.10 4.45 0.73 5.70 6.43Computer Hardware and Software 0.10 3.24 3.34 0.37 3.41 3.78Trining 0.30 1.49 1.79 0.02 0.39 0.41Project Management 0.06 0.06 0.01 0.01

Subtotal 0.75 8.89 9.64 1.12 9.51 10.63

Contingency 0.09 1.11 1.20

Subtotal 0.84 10.00 10.84 1.12 9.51 10.63

Interest During Consruction 0.58 12.41 12.99 3.69 9.21 12.90

Total Financing 64.10 122.76 186.86 72.14 105.64 177.78

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S. Olec Costs by Components(in US$ millions)

AimmL ai AcdalEPrioc CWL om L=ocl Foisign Total Local Foreign Total

Cost Cost Coat Cost Cost Coat

Piq IRehbll8b~ Ed

* Luzhou 15.59 46.31 61.90 18.32 48.23 66.55- Yunnin 5.57 13.84 19.41 2.58 10.50 13.08- Cangzhou 5.27 12.97 18.24 4.49 13.15 17.64- Liaohe 5.95 11.79 17.74 4.00 7.55 11.55- Naujing 30.88 27.85 58.73 41.63 16.70 58.33

SubtotA 63.26 112.76 176.02 71.02 96.13 167.15

FerAlier R & D (CG 0.84 10.00 10.84 1.12 9.51 10.63

Total Financing 64.10 122.76 186.86 72.14 105.64 177.78

Above pejct cost daa psokidd by I. bmnsfiisy comanies, CFDC and CNCCC.

C. lml iai

(in US$ millions)

Planned(Lan 2541-CHA) Acald Finming

Agmeia

IBRD FlAoan(Expendtur Catgre)

Equipment, Materials anW Spa 78.86 84.51Engineering, LicaninS and Toeh. Svieec 14.08 10.65

for Project MabnagmuOverseas Visit by Local ltdf for 0.63 0.33

Engineoin and P _ourmtOverseas Training 3.19 0.66Consultant Services for Trawin 0.17

Subtotal 97.00 96.32

lioaw Fla~

Dometic Dank Lon 22.80 14.90Own Funds 67.04 66.56

Total fUndoe - 186.84 177.78

IBRD loan of about USSO.6S mioe ow cuussd.

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6. irieBt Resut

A. Diret Benefits

Indicators Appraisal Actual (eat)

a) Energy Improvement Luzhou 0.76 kcal/t 1.26 kcal/tin large amnonia Yunnan 0.76 kcallt 1.05 kcalltand urea plants Cangzhou 0.76 kcal/t 1.10 kcait

Liaohe 0.76 keal/t 0.83 koal/t

b) Liquid effluent Luzhou 5000 tpy 5000 tpytreatment for large Yunnan 5000 tpy 2000 tpyurea plants with Cangzhou 5000 tpy 5000 tpyurea recovery Liaohe 5000 tpy 2000 tpy

c) Effluent Quality < Sppm < 2ppm

d) Large urea plant Luzhou 3000 tpy 3000 tpyimprovements with Liaohe 3000 tpyadditional Urea output

e) Modification of Luzhou Ammonia 49,500 tpy 49,500 tpymedium size plants Urea 82,500 tpy 82,500 tpy

1) Modification of Nanjing Ammonia 30,000 tpy 11,000 tpyammonia and other plants Amm.Nit. 50,000 tpy 50,000 tpy

Sulf. Acid 200,000 tpy 200,000 tpyUtilities -

The above achieved result. are based on the test runs.

B. Economic Benefits

Appraisal EstimatedEstimate Actual

Luzhou Medium Size Plant. 44.7% 13.8%Large Size Plant. 27.5% 53.4%

Yunnan Large Size Plants 38.8% 63.4%Cangzhou Large Size Plants 27.2% 43.8%Liaohe Large Size Plants 26.8% 25.5%Nanjing Nitrogen Plant. 17.8%

Ammonia Plant (274.3%)Porous Ammonium Nitrakt 21.9%Sulfuric Acid Plants 28.7% 28.7%

Total Project 30.8% 24.9%

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C. Flandlal InUt

Appraisal EtimatedEstimate Actual

Luzhou Medium Size Plants 25.8% (1.4%)Large Size Plants 18.4% 22.7%

Yunnan Large Size Plants 31.4% 22.4%Cangzhou Large Size Plants 12.6% 22.1%Liaohe Large Size Plants 16.0% 16.5%Nanjing Nitrogen Plants 18.4%

Ammonia (9.3%)Porous Ammonium Nitrate 8.3%Sulfuric Acid Plans 19.1% 11.8%

D. Studies

Purpose asDefined at Impaet ofAppraisal Status Study

Nitrgenous Festilizer To study production Completed Has helped toProduction Cost Study costs of selected locate options

medium-size plants for efficiencyfor which potential improvementsfor efficiencyinprovement issubsanti

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7. Status of Covenants

Section Covenant Deadline Status

Loan Agreeinent

3.06 (i) Provide its 4 year R&D develop- Oct. 31, 1985 Completedment plan and allocation of workamong institutes for 1986-9C

3.06 (ii) Provid- annual R&D for next Oct. 31 of Completedyear by Oct. 31 each year each yearfrom 1986 to 1990

3.07 Cause CFDC to develop its Sept. 30, 1985 CompletedTraining Program

Projet Agreements

2.07 Carry out and provide the Bank Dec. 31, 1985 Completedwith environmental safety casestudies

2.06 Develop company training programs Sep. 30, 1985 Completed

Provide Bank each year with October 31 of Completedprojected financial statements each yearfor the next five years

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8. Missions

Stage of Month/ Number of SW Specialization Performance Rating Types ofProject Cycle Year Persons in field Represented' Status Problems

Through Appraisal

Prenaration 9/83 4 8 Eng.,Eco./FA

Preappraisal 3/84 5 14 Eng.,Eco/FAAppraisal Fert.Mktg.

Follow-up 1/85 4 10 Eng.,Eco.,FA

Supervision

1 9/85 2 5 Eng.,FA 12 5/86 3 2 Eng.,Eco.,FA 13 9/87 1 2 Eng. 14 10/88 1 2 Eng. 25 9/89 1 2 Eng. 26 10/90 2 4 Eng.,FA 2

Project Completion

1 7/91 2 2

Eng . EngineerEco . EconomistPA . Fa ncial AnalystPert.Mkig. Fenilizer Marketing Specialist

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Annex - 1

FERTILIZER REHABILITATION AND ENERGY SAVING PROJECT

Physical Performance of the Companles

(in thousand tons per year)

Projected 199i 1990

A. LNGCC (Luzhou)

Large Size Plant Ammonia 270 346 334Urea 478 539 503

Med. Size Plant Ammonia 72 38 82Urea 210 37 99

B. YNGCC (Yunnan)


C. CCFC (Can zhou)


D. LCFC (Liaohe)


E. NCIC (Nanling)

Ammonia 150 102 103Methanol 45 40 41Ammonium Nitrate 85 84 81Ammonium Nitrate (IG) 50 30 28Ammonium Bicarbonate 97 62 64Sulfuric Acid (100%) 180 132 184

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Annex - 2Pane 1 of S

LNGCC - Flnanclal Statements

(in million Yuans)

< A-- Appraisal --------------> < ------ Actual ----->1984 1989 1990 1989 1990

A. INCOME

Gross Sales Revenue 235.6 311.2 328.0 305.9 319.9Less: Product Tax 6.4 62.2 65.6 55.2 50.6Net Sales Revenue 229.2 249.0 262.4 250.7 269.3Cost of Goods Sold 138.8 179.1 186.3 215.4 247.9Add: Other Incorme 3.0 3.4 3.5 6.8 6.4Less: Financial Charges 0.2 9.4 8.5Less: Loan Amortization 3.9 19.1 29.5 25.8Net Taxable Income 93.2 60.0 52.0 12.6 2.0Less: Taxes and Remittances 87.1 53.7 46.5 2.0 2.0Retained Profits 6.1 6.3 5.5 10.6 (0.0)

B. BALANCE SHEET

Current Assets 102.1 145.9 162.4 168.6 174.9Net Fixed Assets 258.2 308.9 283.0 394.8 369.7Works in Progress 1.8 3.4 3.5 16.4 65.6Long Term Bonds 9.8 9.8 9.8 14.6 17.0Total Fixed Assets 269.8 322.1 296.3 425.8 452.3Total Assets 371.9 468.0 458.7 594.4 627.2

Current Liabilities 7.6 28.1 25.2 63.9 74.4Long Term Debts 107.7 91.7 100.2 102.5State Funds 299.7 223.6 216.8 317.5 319.0Reserves 64.6 108.6 125.0 112.8 131.3Total Equity 364.3 332.2 341.8 430.3 450.3Total Equity & Liabilities 371.9 468.0 458.7 594.4 627.2

C. RATIOS

Net Profit/Sales (96) 39.3 20.5 21.7 8.7 13.8Operating Income/ 24.7 17.0 19.6 3.9 7.2

Average Assets (%)Current Ratio 13.4 5.2 6.4 2.4 2.6LT Debt/LT Debt & Equity 24.5 21.2 18.9 18.5 18.9Total Liabilities/Total Assets (%) 2.0 29.0 25.5 28.2 27.6Debt Service Coverage 97.5 2.7 1.8 2.3 2.1

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Annex - 2Page 2 of S

YNGCC - Financial Statements

(in million Yuans)

< -~~ Appraisal -- > <--- Actual-->1984 1989 1990 1989 1990

A. INCOME

Gross Sales Revenue 172.2 227.2 234.1 255.6 284.1Less: Product Tax 5.2 45.4 46.8 40.9 45.6Net Sales Revenue 167.0 181.8 187.3 214.7 239.1Cost of Goods Sold 117.8 138.1 141.5 173.6 187.5Add: Other Income (0.4) 1.5Less: Financial Charges 2.1 1.9Less: Loan Amortization 1.2 2.8 9.2 15.0Net Taxable Income 49.2 40.4 41.1 31.5 38.1Less: Taxes and Remittances 46.2 31.3 31.8 15.2 16.1Retained Profits 3.0 9.1 9.3 16.3 22.0

B. BALANCE SHEET



C. RATIOS

Net Profit/Gross Sales (%) 28.6 18.3 18.8 15.8 18.4Operating Income/ 19.5 17.4 19.5 13.5 16.7

Average Assets (%)Current Ratio 21.2 20.8 21.6 3.5 3.0LT Debt/LT Debt & Equity 6.9 6.0 1.7 6.2Total Liabilities/Total Assets (%) 0.9 8.7 8.0 16.5 9.2Debt Service Coverage 7.1 5.4 6.2 4.5

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Annex - ZPalle 3 of 5

CCFC - Financial Statements

(in million Yuans)

<C-~ Appraisal > <-- Actual ->1984 1989 1990 1989 1990

A. INCOME

Gross Sales Revenue 148.5 220.7 227.4 228.1 267.7Less: Product Tax 14.0 44.1 45.5 28.7 32.2Net Sales Revenue 134.5 176.6 181.9 199.4 235.5Cost of Goods Sold 99.6 129.1 132.2 175.1 225.8Add: Other Income 0.9 14.9 36.4Less: Financial Charges 0.2 2.7 2.5Less: Loan Amortization 1.3 3.1 9.2 15.5Net Taxable Income 35.6 43.5 44.1 30.0 30.6Less: Taxes and Remittances 28.8 39.1 39.7 12.9 15.4Retained Profits 6.8 4.4 4.4 17.1 15.2

B. BALANCE SHEET



C. RATIOS


Average Assets (%)Current Ratio 19.9 1.7 11.9 4.3 8.0LT Debt/LT Debt & Equity 9.2 8.0 6.9 8.0Total Liabilities/Total Assets (%) 0.9 13.2 12.4 12.4 16.4Debt Service Coverage 110.0 4.3 3.4 5.3 6.1

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EagcAOf5

LCFC - Finandal Statements

(in million Yuans)

< ---- Appraisal--- > <-Actual->1984 1989 1990 1989 1990

A. INCOME

Gross Sales Revenue 235.1 222.5 229.2 273.1 300.9Less: Product Tax 19.4 44.5 45.8 52.3 54.8Net Sales Revenue 215.7 178.0 183.4 220.8 246.1Cost of Goods Sold 113.2 137.4 140.5 186.0 209.4Add: Other Income (7.4)Less: Financial Charges 0.1 2.6 2.3Less: Loan Amortization 3.2 5.4 6.8 4.2Net Taxable Income 102.4 34.8 35.2 20.6 32.5Less: Taxes and Remittances 96.1 33.4 33.8 12.1 8.5Retained Profits 6.3 1.4 1.4 8.5 24.0

B. BALANCE SHEET


Current Liabilities 8.5 13.3 14.1 51.4 65.9Long Term Debts 30.8 26.1 14.7 15.7State Funds 267.3 228.1 213.0 317.6 326.4Reserves 77.0 86.1 99.1 92.3 108.1Total Equity 344.3 314.2 312.1 409.9 434 5

Total Equity & Liabilities 352.8 358.3 352.3 476.0 516.1

C. RATIOS


Average Assets (%)Current Ratio 10.8 10.2 10.5 3.2 2.8LT Debt/LT Debt & Equity 8.9 7.7 3.0 3.5Total Liabilities/Total Assets (%) 2.4 12.3 11.4 13.1 15.8Debt Service Coverage 159.0 4.3 3.8 6.1 13.6

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Annex - 2

NCIC - Financial Statements

(in million Yuans)

<-- Appraisal -- > <- Actual ->1984 1989 1990 1989 1990

A. INCOME

Gross Sales Revenue 326.7 400.2 416.6 653.6 705.2Less: Product Tax 22.7 28.2 29.3 35.2 36.3Net Sales Revenue 304.0 372.0 387.3 618.4 668.9Cost of Goods Sold 247.8 278.4 287.8 541.7 615.9Add: Other Income (0.8) 1.0 1.0 (18.1) (22.8)Less: Financial Charges 0.7 5.0 4.7Less: Loan Amortization 3 n 5.3Net Taxable Income 54.7 ,.6 90.5 58.6 30.2Less: Taxes and Remittances 20.0 64.9 67.9 15.0 15.0Retained Profits 34.7 21.7 22.6 43.6 15.2

B. BALANCE SHEET

Current Assets 200.2 190.7 204.3 407.4 463.6Net Fixed Assets 205.7 318.2 303.6 394.5 513.6Works in Progress 64.4 52.1 52.5 68.9 87.3Long Term Bonds 7.1 11.9Total Fixed Assets 270.1 370.3 356.1 470.5 612.8Total Assets 470.3 561.0 560.4 877.9 1,076.4

Current Liabilities 43.1 49.6 50.4 328.5 410.3Long Term Debts 3.0 38.0 32.4 56.1 145.8State Funds 301.9 341.2 331.9 461.1 483.7Reserves 122.3 132.2 145.7 32.2 36.oTotal Equity 424.2 473.4 477.6 493.3 520.3Total Equity & Liabilities 470.3 561.0 560.4 877.9 1,076.4

C. RATIOS


Average Assets (%)Current Ratio 4.o 3.8 4.1 1.2 1.2LT Debt/LT Debt & Equity 1.0 7.4 6.4 10.2 21.9Total Liabilities/Total Assets (%) 10.0 15.6 14.8 43.8 48.1Debt Service Coverage 66.4 5.4 4.6 5.9 4.9

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Annex - 3Palge I of 2

Assumptions used for Financial and Economic Analysis

A. .General

1. The financial and economic rates of return for all the components except the Nanjing porousammonium nitrate and sulfuric acid plants have been calculated on incremental basis. All calculationsare in constant 1991 US dollars. The life of the investments have been assumed to end in year 2000 withno salvage value for the assets. Duties and taxes have been excluded from all cost and benefit streamsfor economic analysis. Appropriate conversion factors have been applied to convert the financial pr.cesof local currency components of the capital cost, non-traded goods and other items to economic prices.

B. Production Levels

2. The production levels and benefits now projected for the various components are summarizedin the table below.

Production Levels and Benefits(in thousand tons unless otherwise stated)

Phnot Produ ProducdnQ heneflb

Before Aftr

Luzhou (Large) Aumonia 233.8 270.0 Urea 67.5Urea 359.9 427.4

(Modium) Ammonia 96.8 114.8 Urcs 40.8Urea 153.7 194.5

Yunnan Ammfonia 273.3 300.0 Urea 42.8Urea 437.2 480.0 AN 3.2

Cangzhou Anmonia 221.4 250.0 Urea 45.8Urea 354.2 400.0 Ammonia 2.2

Liaohe Anumonia 322.0 322.0 Ammonia 1.5Urea 526.0 526.0 Gas (Million kcal) 1.15

Nanjing Porous AN 35.0 Porous AN 35.0Sulfuric Acid 180.0 Sulf.Acid 180.0Ammnone. 99.0 110.0 Ammonia 11.0

3. All the four locations, where energy saving investmnents have been carried out under theProject, are now encountering gas supply constraints. Despite concerns about adequacy of gas supplies,the Liaohe plant is expected to operate at its normal levels taking advantage of the conserved gas. At thislocation, the benefit is reflected as the value of gas conserved. At the other three locations, the ammoniaplants will operate at below their achievable production levels because of continuing gas supply

t

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Annex - 3Page 2 of a

constraints. Production losses are especially severe in the winter months. Due to the energy savinginvestments under the Project, these plants are able to produce more fertilizers than they could havebefore the renovations. For these plants, the energy conservation benefits are reflected through additionalproduction of ammonia, urea and/or ammonium nitrate obtained using the conserved gas.

4. At Nanjing, the ammonia plant continues to produce only about 110 thousand tpy ofammonia, even after the investmeints. This is reported to be due to the deterioration in the quality of coalsupplies following mechanization of the coal mining operations. It is now estimated that the Nanjingammonia plant would have produced only about 99 thousand tpy of ammonia without the investmentsunder the Project. The company expects that production can reach 150 thousand tpy with thecommissioning of three more gasifiers expected to be commissioned in 1992. This has not been takeninto account in the analysis. In all cases, the analysis has been carried out using actual production up to1990, expected production in 1991 and the above projected levels for the subsequent years.

C. Capital Cos

5. The capital costs and their phasing are as estimated by the companies and have beenconverted to 1991 US dollars using average exchange rates prevailing in the year of disbursement andthe preliminary international inflation rates as projected by the Bank in June 1991. Interest duringconstruction, cost of spares and cost of training (including training aids) have been deducted from theproject costs. Due to the nature of the investments, there is no significant increase in working capital.

D. Benefits

6. Financial product prices obtained from the companies have been converted to 1991 USdollars using an average exchange rate for 1991 of US$1 = Yuan 5.5. Economic product prices have beenobtained - wherever available, from the June 1991 preliminary Bank Commodity Price Forecasts, suitablyadjusted for the locations. Ammonia and ammonium nitrate prices have been derived from the ureaprices using the same assumptions as in the Staff Appraisal Report.

E. Operating Cos

7. Financial costs for the different components have been obtained from the production costssheets of the companies. Economic costs of inputs such as coal, pyrites and natural gas have beenderived adopting the same assumptions as in the SAR. Other costs - both variable and fixed, have beenconverted to economic costs using appropriate conversion factors.

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Annex - 4

FERTILIZER REHABILITATION AND ENERGY SAVING PROJECT

Present Status of the Fertilizer Sector in China

1. Fertilizer continues to play an important role in China's agricultural production. Between1952 and 1989, foodgrain production has increased from 164 million tons to 371 million tons - anaverage annual increase of 3.1 %. National development plans envisage that China's foodgrain productionwill increase to 447 million tons by 1995 and 500 million tons by the year 2000. However, China sharesonly about 8% of the world's arable land, though required to support about 22% of the world population.Continued emphasis on intensive agriculture based on improved farming practices and high fertilizerapplication levels is, therefore, important to China's food self-sufficiency programs. China's fertilizerconsumption in 1989 was about '52 kg. per hectare of arable land compared with the world average of99 kg. However, fertilizer application intensity in China is still lower than several countries, such asEgypt (351), S. Korea (422), Japan (415) and New Zealand (732).

2. Historical and projected consumption and production of chemical fertilizers in China aresumrnmarized in the table below.

CHINA - Fertilizer Consumption and ProductionPast and Proiected

(in thousand tons per tear of nutrients)

NITRO4GEN PHOSPHATE POTASH TOTILConsumption Production Consumption Productlon Consumption Production Consumption Production

1975 4.71 3.75 1.92 1.92 0.05 0.04 6.68 5.671980 11.53 9.99 2.38 2.31 0.34 0.05 14.25 12.341985 12.93 11.50 2.34 1.76 0.41 0.05 15.68 13.311986 12.97 11.59 2.58 2.33 0.82 0.05 16.37 13.961987 15.55 13.42 3.47 3.24 1.12 0.05 20.14 16.711988 16.94 13.61 3.66 3.61 1.33 0.03 21.93 17.271989 17.23 14.24 3.67 3.61 1.01 0.04 21.91 17.881990 17.60 14.64 5.84 4.12 2.46 0.07 25.90 18.801995 16.70 15.71 7.90 4.86 3.10 0.23 27.70 20.802000 18.00 17.63 9.00 6.26 4.60 0.60 31.60 24.50

Source: Miniatty of Chemical Induatriea, China

The consumption of all fertilizers has increased from 6.68 million tons per year of nutrients(tpyn) in 1975 to 25.90 million tpyn in 1990 - corresponding to an average annual growth rate of 9.5%.The actual 1990 consumption was higher than the Seventh Five Year Plan (SFYP) projection of 21.40million tpyn by about 21%. As a result, imports formed about 29% of the 1990 consumption, ascompared with 20% projected in the SFYP. During the period 1985 to 1990, the consumption ofnitrogen. phosphates and potash grew at an average rate of 6.4%, 20.1% and 43% per year respectivelycompared with 1.2%, 7.0% and 21.6% respectively projected in the SFYP. The ratio of nutrients

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Annex -

consumed in 1990 of 100:33:14 - though short of the SFYP target of 100:50:20, shows an improvementover the 1983 ratio of 100:32:5 especially for potash. Further efforts are, however, required to obtaina better balance.

3. Chemical fertilizer production in China has increased from 12.34 million tpyn in 1980 to18.80 million tpyn in 1990. The increase in production consisted of 4.65 million tpyn of nitrogen and1.81 million tpyn of phosphates against 3.00 million tpyn of nitrogen and 1.69 million tpyn respectivelyprojected in the SFYP. As tavisaged in the SFYP, the additional production has come from bothcapacity additions and improved performance of the existing plants. During the SFYP period, five largenitrogen plants and two large phosphate plants have been brought into production. The average capacityutilization has improved from 81% in 1983 to 87% in 1991. About 137 of the small nitrogen plants havestopped production. The share of low nutrient ammonium bicarbonate continues to be about 58%, butthe share of urea has increased to about 34%. About 94% of the phosphate production continues to bein the form of low nutrient products. On the overall, there has been some improvement in the energyefficiency of the plants - partly through energy saving investments and partly through improved operation.

4. The share of nitrogen output based on natural gas has declined from 23% in 1983 to about19.5% in 1991. This is indicative of the gas supply restrictions faced by several gas based plantsincluding some of the beneficiary companies under the present Project. It would appear that gas suppliesare being committed beyond the supply capabilities resulting in gas allocations being inadequate to operatethe production facilities at their optimum levels. For optimum use of investments in these facilities, thereis need for achieving a better match among capabilities for gas production, transportation and utilization.

5. China's national plans project for the production of about 24.5 million tpyn of fertilizers bythe year 2000. This is expected to include about 17.6 million tpyn of nitrogen and about 6.3 million tpynof phosphates. Several projects are being planned and/or being implemented to achieve the requiredcapacity. In addition, efforts will be continued to improve the productivity of the subsector. Investmentsare being planned to upgrade the products of small and medium size plants from low nutrient ammoniumbicarbonate to higher nutrient urea. Small coal based ammonia plants are being revamped to reduceenergy consumption from about 14.3 million kcal per ton to about 12.0 million kcal per ton. While thereare plans to add phosphate capacity for high nutrient ammonium phosphates, there are no defined plantsfor improving the existing plants - especially those producing low nutrient phosphates, and for developingalternative sulfur supply sources such as sulfuric acid production based on phosphogypsum.

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