Documnt of

The World Bank

FOR OMCIAL USIE ONLY

Report No. 13041

PROJECT COMPLETION REPORT

THAILAND

BANGCHAK OIL REFINERY RESTRUCTURING PROJECT(LOAN 2548-TH)

MAY 11, 1994

Industry and Energy Operations DivisionCountry Department IEast Asia and Pacific Region

This document has a restricted distribution and may 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 EQUIVALENTS

Currency Unit - Thai Baht (B)

US$1 - B 25.6- B 25 (October 1993)

GOVERNMENT FISCAL YEAR

October 1 to September 30

ABBREVIATIONS

BPC - Bangchak Petroleum RefineryDED - Defense Energy DepartmentMOAT - Management and Operations TeamMOF - Ministry of FinanceNPPC - National Petroleum Policy CommitteePTT - Petroleum Authority of ThailandRTG - Royal Thai Government

SAR - Staff Appraisal Report

FOR OFFICIL USE ONLYTHB WORLD BANK

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

Office of Director-GenerlOperations Evaluation

May 11, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Thailand - BangehakOil Refinery Restructuring Proiect (Loan 2548-TH)

Attached is the Project Completion Report on Thailand - Bangchak Oil Refinery RestructuringProject (Loan 2548-TH) prepared jointly by the East Asia and Pacific Region and the Finance and PrivateSector Development Vice Presidency. Part II was prepared by the Borrower.

The PCR is of satisfactory quality. It documents the successful rehabilitation, restructuring andexpansion of a run down, inefficient and loss-making refinery which has now become the pace setter forother refineries in Thailand. It is a clear account of how a combination of sectoral reform, acceptance ofthe need for enterprise autonomy, judicious use of expatriate personnel and management assistance, goodproject design, and, above all, timely financial assistance can successfully restructure state ownedenterprises. The Borrower particularly values the enormous contribution of the Bank staff in theconceptualization, design and implementation of this innovative and complex project. This project tookadvantage of a window of opportunity to substantially increase the capacity of the refinery mid-way throughimplementation.

On the basis of the results obtained, the outcome of the project is rated as highly satisfactory.Given the quality of its management, its market orientation and the technical efficiency of its operadon,the sustainability of the project is likely. The project has had substantial institutional development impact.

An audit is planned.

Attachment

|his document has s restricted distribution and nay be used by recipients only in the perfornance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization.

THAILAND

BANGCHAK OIL REFINERY RESTRUCTURING PROJECT (LOAN 2548-TH)

PROJECT COMPLETION REPORT

TABLE OF CONTENTS

Page No.

PREFACE .............................................. i

EVALUATION SUMMARY ................................... ii

PART I: PROJECT REVIEW FROM THE WORLD BANK'S PERSPECTIVE ... 1

Project Identity ....................................... 1Background ......................................... 1Project Objectives and Description .......................... 2Project Components .................................... 2Project Design and Organization ............................ 2Project Implementation .................................. 3Project Results ....................................... 4Project Sustainability ................................... 6Environment ........................................ 7Bank's Performance ................................... 8Borrower's Performance ................................. 8Project Relationship .................................... 8Project Documentation and Data ............................ 9Findings and Lessons Learned ............................. 9

PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE .... 11

PART m: STATISTICAL INFORMATION ......................... 13

Project Timetable ..................................... 13Loan Disbursement .................................... 14Project Costs and Framework .............................. 15Project Financing ..................................... 16Project Results ....................................... 17Economic Impact ..................................... 18Financial Impact ...................................... 19Studies ............................................ 19Status of Covenants .................................... 20Use of Bank Resources .................................. 21

Staff Inputs ...................................... 21Missions ........................................ 22

THAILAND

BANGCHAK OIL REFINERY RESTRUCTURING PROJECT LN 2548-TH)

PROJECT COMPLETION REPORT

PREFACE

This is the Project Completion Report (PCR) for the Bangchak OilRefinery Restructuring Plant in Thailand, for which Loan 2548-TH in the amountof US$85 million was approved on May 21, 1985. The loan closed on June 20, 1992,2 years behind schedule. It was fully disbursed and the last disbursement wasmade June 1992.

The PCR was jointly prepared by the Industry and Energy OperationsDivision, Country Department I, East Asia and Pacific Region and the Oil and GasDivision, Industry and Energy Department of the Finance and Private SectionDevelopment Vice Presidency (Evaluation Summary, Parts I and III), and the.Borrower (Part II).

Preparation of this PCR was started during the Bank's finalsupervision mission of the project in June 1992, and is based inter alia on theStaff Appraisal Report; the Loan Guarantee and Project Agreements; supervisionreports; correspondence between the Bank and the Borrower; and internal Bankmemoranda.

THAILAND

BANGCHAK OIL REFINERY RESTRUCTURING PROJECT LN 2548-TH)

PROJECT COMPLETION REPORT

EVALUATION SUMMARY

Obiectives

1. The main objective of the project was to assist RTG to transform BPCfrom a loss-making enterprise to a profitable operation through an integratedprogram of corporate restructuring, institution building and physicalrehabilitation. A parallel long-term objective was to strengthen BPC's abilityin a liberalized oil industry to compete with private sector-owned refineries andprovide an effective counter-balance to the two existing private/joint sectorrefineries and future refineries (para 4).

2. The project objectives were meant to be achieved through: (a) arehabilitation component to rationalize the facilities in order to increase itscapacity, improve product-yield, reduce energy consumption and losses, andrestore the mechanical integrity of the refinery; (b) energy conservation toreduce energy use and losses; (c) environmental and infrastructure improvements;(d) project engineering and management and operations assistance for therehabilitation of the project; (e) training; and (f) technical and economicfeasibility study (para 5).

Implementation Experience

3. The project required institutional, management, financial andphysical restructuring. The physical rehabilitation, as well as other projectcomponents were implemented on schedule, without shutting down BPC and wellwithin the estimated costs. The assistance of a high calibre engineering companywho assessed the physical condition of BPC prior to developing the physicalrestructuring strategy, was essential during project preparation and beneficialduring implementation (paras 10-11).

4. The project scope was changed on account of the refinery planningstudy, which recommended that the project include a reduced crude catalyticcracking unit and increase the capacity of the crude distillation unit. Theresult brought the actual distillation capacity to 120,000 bpd which comparesfavorably to the original 65,000 bpd projected at appraisal (para 12).

5. Under the financial restructuring plan, BPC was to receive from theRTG and participating banks, equity contributions amounting to US$20 million, tostrengthen its capital base. The contributions were to be phased over the lifeof the project. However, they were received earlier than expected, delaying theneed to make disbursements of Bank loan proceeds. As project expendituresincreased in the later stages of project implementation, BPC made disbursementson the Loan for the total available funds. The initial project expenditures wereexpected to be funded out of the Bank loan, as BPC was not expected to make amajor turn-around and register profits until about the third year of the project.

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However, as part of its physical restructuring, BPC management made the decisionto shut-down almost two thirds of the refining facilities, which were high energyconsumers and technically unreliable, and supplement the loss in production withimports to meet market requirements. This move immediately stemmed the drain offunds and resulted in BPC registering a profit of US$4.5 million by 1985 whichfinanced initial project expenditures (para 13).

Proiect Results

6. The change in the scope of the project required an extension of theimplementation schedule and the loan closing date. The actual closing was June30, 1992, two years behind schedule. However, all project components unaffectedby the change of scope, were completed on schedule. The improved financialsituation and liquidity of BPC delayed disbursements of Bank funds so that actualdisbursements at the time of expected project completion was only 12% ofestimate. The full disbursement of the Loan was only achieved in December 1992,two and a half years behind the original estimate (para 15).

7. Implementation of the project components proceeded smoothly despitethe changes in project scope, implementation schedule and disbursementperformance. The developments which resulted to a change in scope could not havebeen identified at appraisal. The most optimistic of economic forecasts wouldnot have projected GDP growth and petroleum product consumption to increase atthe rates of 12-15% p.a. The variance in consumption profile resulted from anincreased use of natural gas to substitute for fuel oil while the demand fordistillation petroleum products increased. The project met or exceeded theobjectives set during project appraisal (para 16-17).

Proiect Sustainability

8. Benefits from the project should be sustainable for the followingreasons: (a) BPC has been transformed from a loss-making, inefficient enterprisewith physically deteriorated facilities into an efficient, profit-makingenterprise; (b) as a result of BPC's rehabilitation, its operation sets thestandard for the two other refineries in Thailand; (c) the financialrestructuring of BPC has been completed and has resulted in profitableoperations; (d) BPC was created as an autonomous body under the commercial andcivil code; (e) the provision of a qualified expatriate MOAT has transformed theoutdated and inefficient operations of BPC; and (f) BPC has developed a competentpool of engineers, managers and skilled technical operators (para 24).

Findings and Lessons Learned

9. There are several important lessons of experience: (a) the projectchallenged the hypothesis that state agencies can neither be efficient norprofitable; (b) project preparation needs to be thorough and well planned whilethe implementation strategy needs to be supported by appropriate consultants tosupplement the manpower resources of the implementing agencies; and (c)acceleration of major policy and pricing reforms which the RTG undertook tostrengthen the general organization and regulation of the sector was critical tothe success of BPC and the project and in attracting private investments in thesector (para 33).

THAILAND

BANGCHAK OIL REFINERY RESTRUCTURING PROJECT (LN 2548-TH)

PROJECT COMPLETION REPORT

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

1. Project Identity

Project Name: Bangchak Oil Refinery Restructuring ProjectLoan No.: 2548-THRVP Unit: East Asia and PacificCountry: ThailandSector: EnergySub-sector: Petroleum

Background

2. Thailand's economic expansion commenced in the late 1970s withannual GDP gaining at a rate exceeding 10%. In parallel, theconsumption of commercial energy also increased registering annualgrowth rates ranging from 10% to 17%. By the late 1970s and the early1980s, imported petroleum accounted for nearly 80% of Thailand's totalenergy requirements. In 1980 the import bill for crude oil andpetroleum products was US$2.6 billion, which represented 31% of totalimports and absorbed 45% of the economy's export earnings. The RoyalThai Government (RTG) realized that to meet the energy requirements ofthe country's rapidly growing industrial, agricultural and transportsectors, major investments would have to be made to exploit itsindigenous energy sources, particularly natural gas and lignite, and tomodernize and expand the petroleum refining industry. The RTGestablished a strategy of progressive liberalization of the energysector which comprised: (a) providing incentives to the private sectorto develop indigenous energy resources such as oil, natural gas, ligniteand hydropower; (b) giving greater autonomy to state agencies andimproving their efficiencies to compete with the private sector; (c)deregulating the petroleum product imports and prices; and (d)encouraging investments by the private sector in energy projects,particularly petroleum refining.

3. The petroleum consumption profile changed rapidly over the 1980sdue to the rapid growth of the transport, industrial and power sectorsand the increasing use of natural gas to replace fuel oil. The threeThai refineries: Esso; TORC; and the state-owned Bangchak PetroleumRefinery (BPC), originally the Bangchak Oil Refinery or the Military OilRefinery; were unable to meet the changing demand and demand patterns.The country had to import more than 40% of its requirements at premiumprices. In addition, in the early 1980s BPC was incurring heavy loses,averaging US$20 million annually, in contrast to the Esso and TORCrefineries, which were registering modest profits. All threerefineries, however, clearly needed major investments to modernize andmodify their processing facilities.

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Proiect Objectives and Descriptions

4. The main objective of the project was to assist RTG to transformBPC from a loss-making enterprise to a profitable operation through anintegrated program of corporate restructuring, institution building andphysical rehabilitation. A parallel long-term objective was tostrengthen BPC's ability in a liberalized oil industry to compete withprivate sector-owned refineries and provide an effective counter-balanceto the two existing private/joint sector refineries and futurerefineries.

Project Components

5. The project objectives were meant to be achieved through: (a) arefinery rehabilitation component to rationalize the facilities in orderto increase its capacity, improve product-yield, reduce refinery energyconsumption and losses, and restore the mechanical integrity of therefinery; (b) energy conservation to reduce energy use and losses; (c)environmental improvement by eliminating sulphur oxide emissions; (d)infrastructure improvements; (e) project engineering and management andoperations assistance for the rehabilitation of the project; (f)training; and (g) technical and economic feasibility study to identifythe future expansion and development strategy of BPC and the country.

Proiect Design and Orzanization

6. The basis, rationale and the justification for the project wereclearly understood by the key policy making body, the National PetroleumPolicy Committee (NPPC) whose input was critical and crucial for theformulation and, subsequent implementation of the project.

7. Prior to Loan negotiations and Board presentation, majorinstitutional reforms had to be carried out which involved: (a)separating BPC from the control of both the Defense Energy Department(DED) and the Petroleum Authority of Thailand (PTT), through theestablishment of a totally autonomous BPC; (b) providing adequateworking and investment capital through equity contributions and long-term loans; (c) liquidating liabilities which were not theresponsibility of BPC; and (iv) reducing staff from about 1,400 to lessthan 500. The formation of an autonomous, commercially oriented companyreduced the influence of DED and PTT on BPC's management and operations.As these agencies were represented on BPC's Board, they understood theneed for such a corporate change and extended their full cooperation.The physical rehabilitation and other technical assistance programs wereclearly understood by all RTG agencies involved with BPC.

8. The project concept was innovative and involved multiple areas:institution building, corporate restructuring, financial management,physical rehabilitation, management and operations assistance, anddevelopment of strategies for retaining the continued financial andeconomic viability of BPC. It was also unique in its objective oftransforming an inefficient, loss-making agency to an efficientprofitable enterprise, while retaining its state ownership. This was

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contrary to the popular belief that state-run institutions can neitherbe efficient nor profitable.

9. The concept of engaging an umbrella management and operations team(MOAT) to provide assistance in selected areas while monitoring theoverall operations of the refinery was developed in consultation withBPC. BPC had a history of poor management and there was a strongsentiment to initially engage the services of an oil company to manageand operate it under a comprehensive management contract. BPC, however,had a readily trainable pool of technical and management staff who wererelegated to positions of little or no responsibility under a previousmanagement contract. They were therefore deprived of their opportunityto develop their potential. Hence, it was argued that anothermanagement contract would perpetuate the problem and seriously hamperthe transfer of technology and experience.

Prolect Implementation

10. The project required institutional, management, financial andphysical restructuring. BPC was faced with poor employee morale, poormanagement structure, inadequate financial base, and facilities whichwere in very poor condition due to years of accumulated neglect. Withno clear demarcation of responsibilities and controlled by two powerfulagencies, institutional restructuring assumed major importance.Although some of the institutional changes were made prior to the Loan,getting BPC to interface and coordinate with different energy sectoragencies still had to be achieved.

11. The physical rehabilitation, as well as other project componentswere implemented on schedule, without shutting down BPC and well withinthe estimated costs. The assistance of a high calibre engineeringcompany who assessed the physical condition of BPC prior to developingthe physical restructuring strategy, was essential during projectpreparation and beneficial during implementation.

12. The project scope was changed on account of the refinery planningstudy, which was completed in November 1988. The study identified thedramatic increase and change in the petroleum products consumptionprofile and the urgent need to increase capacity and secondaryconversion facilities. As recommended in the study, the projectincluded a reduced crude catalytic cracking unit and increased thecapacity of the crude distillation unit. The result brought the actualdistillation capacity to 120,000 bpd which compares favorably to theoriginal 65,000 bpd projected at appraisal.

13. Under the financial restructuring plan, BPC was to receive fromthe RTG and participating banks, equity contributions to strengthen itscapital base. These contributions, amounting to US$20 million, were tobe phased over the life of the project. However, they were receivedearlier than expected, delaying the need to make disbursements of Bankloan proceeds. As project expenditures increased in the later stages ofproject implementation, BPC made disbursements on the Loan for the totalavailable funds. The initial project expenditures were expected to be

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funded out of the Bank loan, as BPC was not expected to make a majorturn-around and register profits until about the third year of theproject. However, as part of its physical restructuring, BPC managementmade the decision to shut-down almost two thirds of the refiningfacilities, which were high energy consumers and technically unreliable,and supplement the loss in production with imports to meet marketrequirements. This move immediately stemmed the drain of funds andresulted in BPC registering a profit of US$4.5 million by 1985 (comparedto a loss of US$18.3 million in 1984) which financed initial projectexpenditures.

14. Adding further to BPC's profit was the unexpected increase inrefining margins due to the sudden collapse in the price of crude oil in1986 and the consequent increase in demand for petroleum products. Thecumulative profits between 1984-90 was US$45.4 million above theprojected SAR profits. Also, due to the change in project scope, someof the large lumpy investments were postponed towards the end of theproject.

Project Results

15. The change in the scope of the project required an extension ofthe implementation schedule and the loan closing date. The actualclosing was June 30, 1992, two years behind schedule. However, allproject components unaffected by the change of scope, were completed onschedule. The improved financial situation and liquidity of BPC delayeddisbursements of Bank funds so that actual disbursements at the time ofexpected project completion was only 12% of estimate. The fulldisbursement of the Loan was only achieved in December 1992, two and ahalf years behind the original estimate.

16. Implementation of the project components proceeded smoothlydespite the changes in project scope, implementation schedule anddisbursement performance. The developments which resulted to a changein scope could not have been identified at appraisal. The mostoptimistic of economic forecasts would not have projected GDP growth andpetroleum product consumption to increase at the rates of 12-15% p.a.At appraisal, petroleum product consumption was expected to increase byonly 6% p.a. The variance in consumption profile resulted from anincreased use of natural gas to substitute for fuel oil while the demandfor distillation petroleum products increased.

17. As the table illustrates, the project met or exceeded theobjectives set during project appraisal.

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SAR TARGET 1992 Actual

(i) ProductionCapacitybpd 65,000 120,000

Production bpd l

(ii) Yield in mmbbls- LPG 0.70 1.20- Gasoline 4.60 7.45- Kerosene 3.20 5.20- Diesel oil 6.70 11.10- Fuel oil 6.40 10.80

(iii) EnergyConsumption, 3.0 3.0

- Volume % of feed

(iv) ERR (X) 28.0 38.5

(v) FRR (X) 21.6 33.0

(vi) Profitability, 18.44 28.20

18. The favorable variances between planned and actual results,particularly in ERR and FRR are due to: (a) better than expectedinternational prices for petroleum products and improved margins betweenproducts and crude oil; (b) efficient performance of BPC in implementingthe project; and (c) the ability of BPC to optimize production byvarying it to balance swings in international prices of petroleumproducts (i.e. when products are in surplus in the oil market and pricesdecline, products are imported to meet contractual obligations anddropping refinery through-put, and vice-versa).

19. Under the physical restructuring component of the project, therefinery (consisting of three separate crude distillation units, athermal cracker and a visbreaker) was streamlined by retiring one crudeunit, the thermal cracker and the visbreaker, and by temporarilysuspending the operations of the second crude unit, pending itsrehabilitation. The remaining third crude unit underwent an acceleratedrehabilitation program. This enabled the third unit to achieve acapacity of 65,000 bpd., exceeding the combined capacity of all threecrude units, and reducing energy consumption and losses to less thanthree volume percent. After the rehabilitation of the second crudeunit, BPC achieved a total capacity of 120,000 bpd, and a vastlyimproved products yield structure.

20. The energy use and losses at BPC prior to rehabilitation wereabnormal at about six volumes percent. As a result of therehabilitation program, the energy consumption and losses were reducedto less than 3 volume percent on account of the rationalization of the

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use of facilities, the reduction of gas losses by flaring, theinstallation of waste-heat recovery facilities, improvements inefficiency of process units, and reduction of heat losses by repairinginsulation and improvements in instrumentation.

21. With the rehabilitation program in place, environmental andinfrastructure improvements also resulted. Sulphur oxide emissions wereeliminated through the addition of a sulphur recovery unit. Othergaseous, liquid and solid emissions were also reduced by more than 60X,bringing BPC emission levels within the standards set by the NationalEnvironmental Board. The infrastructure program envisioned under theproject were also achieved. It included the construction of landdrainage, sewer rehabilitation, floodwater control, rehabilitation ofroads within the refinery, improvement in street lighting, andrehabilitation and vegetation of fire-water ponds.

22. The MOAT provided 12 key specialists to assist BPC's line-managersto operate the refinery. The MOAT and its Thai staff, working togetheras a team, developed operating manuals and procedures. Thisarrangement, besides imparting effective training and experience, alsoreduced the cost of management assistance for the two-year period toless than US$8 million, compared to the US$20 million or more that wouldhave been incurred under a turnkey management contract. Moreimportantly, the Thai staff gained managerial and operational experienceand confidence at an accelerated pace.

23. As a result of the institutional strengthening undergone by BPC,greater autonomy was vested on the BPC board, particularly with regardto staffing, investment decisions and procurement. The managingdirector was given full authority, subject to board approval, to makeday-to-day decisions on matters effecting the financial health of therefinery. While RTG formulates broad policies, actual implementation isleft to BPC's management.

Project Sustainability

24. Benefits from the project should be sustainable into theforeseeable future for the following reasons:

(a) BPC has been transformed from a loss-making, inefficiententerprise with physically deteriorated facilities into anefficient, profit-making enterprise. The transformationinvolved the institutional, management, financial, andphysical restructuring of BPC.

(b) As a result of BPC's rehabilitation, its operation sets thestandard for the two other refineries in Thailand. BPCengages in every aspect of crude oil procurement, processingand marketing operations. For instance, BPC's charteringrates for crude oil transport were consistently below thoseof the two competitors. This comparison forced thecompetitors to negotiate better terms, very often from theirown subsidiary freight companies.

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(c) The financial restructuring of BPC has been completed andhas resulted in profitable operations. With a less complexrefining operation and with no state subsidy, BPC is moreprofitable than its other competitors, forcing thecompetitors to improve their own operations. The financialsuccess of BPC has encouraged major private sector refininginvestments in Thailand and furthered RTG's efforts toattract private sector participation.

(d) BPC was created as an autonomous company under thecommercial and civil code. The new organization providesfor a delegation of financial and managerial responsibilityto management and has corporatize the character andstructure of BPC. The responsibilities, roles, andfunctions of the different agencies were clearlyestablished. The shareholders of BPC (MOF, Ministry ofDefense and Industry through PTT, DED, Krung Thai Bank andthe Thai Military Bank) determine broad policy throughnominated directors. Rather than seeking approval ofconcerned ministries from time to time on different aspectsof BPC's activities, all major decisions are now taken bythe board. The managing director has overall responsibilityto ensure that BPC's operations are consistent with theboard's policies, while the president takes responsibilityfor day-to-day operations, the short- and long-term workprogram, and investment strategies of BPC.

(e) The provision of a qualified expatriate MOAT has transformedthe outdated and inefficient operations of BPC. Theconsultant engineering firm provided assistance to design,monitor and supervise the rehabilitation components, andmanagement of the general contractor engaged to procure,install and implement the project.

(f) BPC has developed a competent pool of engineers, managersand skilled technical operators, who are highly sought byother state and private enterprises and other industries.

Enyironment

25. Air pollution reduction/mitigation is a major RTG commitment andfuel reformulation as one of the options is being pursued. BPC hasproven to be the main testing ground with regard to the technical andcommercial feasibility of petroleum fuels reformulation, which hadfaced some resistance from the other two oil refineries. BPC haveproven that fuel reformulation is technically and financially feasibleand has thus made a valuable contribution in promoting RTG's sectoralobjectives with regard to air pollution abatement.

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Bank Performance

26. The Bank has performed satisfactorily and met the expectations ofthe Borrower throughout the project cycle. The Bank has assisted BPC inidentifying problems, developing options, and selecting a strategy. TheBank missions worked with several RTG agencies not only to develop theprogram for corporate restructuring, institution building, physicalrehabilitation and manpower development, and in organizing BPC, but alsoin smoothing out differences between the agencies and BPC. The Bank'sadvice was sought; the Bank's regional procurement specialist providedvaluable guidance to BPC staff while Bank's disbursement staff visitedand trained BPC staff. The main contributions of the Bank were itsability to put together a team with the required managerial, financialand technical skills, and coordinate the task with RTG agencies.

27. In parallel with project preparation, the Bank conducted a studyto asses the international supply and demand for petroleum productsunder different scenarios and its likely impact on refining margins.The study correctly concluded that the risk of reduced refining marginsbetween distillate petroleum products and crude oil which wouldadversely impact BPC and the project's economic viability were minimum.

Borrower Performance

28. BPC implemented the project satisfactorily. Its new managementteam had several tasks in connection with the takeover of management andnew operational responsibilities which BPC performed well. Theyinclude: (a) organizing the new company to carry out its mandatedfunctions; (b) interphasing with several RTG agencies and banks toensure that commitments were made to fund the new company; (c) reducingexcess staff and negotiating employment terms with unions; (d)implementing the project, which required the selection of four firms toprovide the services required and its physical implementation; and (e)recruiting and training of new staff.

29. BPC management acted with foresight in forming teams within theorganization and in delegating responsibility to them. Management alsoused consultant services effectively. The working and inter-personalrelationship that developed between the consultants and BPC staff weregood. BPC's president exercised fully his authority, resulting in quickdecision making and no procurement delays. Likely delays in projectconstruction were avoided by paying attention to proper design. Costover-runs were eliminated by developing a realistic schedule andprocurement strategy. The timetable and strategy reduced the number ofprocurement packages by combining similar items, and breaking therehabilitation programs into different unit areas. Likewise, costoverruns were eliminated by developing cost estimates with theassistance of a reputed engineering company.

Project Relationship

30. The relationship between BPC and the Bank has been and continuesto be cordial and mutually beneficial. A substantial amount of Bank and

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BPC time were spent on project preparation in order to accomplishinstitutional reforms needed prior to restructuring. Bank's involvementand the missions' direct intervention in settling out inter-agencydifferences facilitated project implementation. At the same time,excellent rapport has been established by the Bank with BPC and RTGagencies making it possible to amicably resolve various issuesthroughout project implementation. It was against this background thatthe Bank readily agreed to modify, at BPC and RTG's request, theoriginal project scope and timetable.

31. BPC confirmed that the recommendations and suggestions from theBank during implementation of the project were helpful; and neither theBank nor BPC had any adverse comments regarding their relationshipthroughout the project cycle.

Proiect Documentation and Data

32. The SAR was comprehensive and well prepared and gave a thoroughaccount of the rehabilitation program. The legal documents provided thenecessary legal framework for project implementation and no difficultieswere encountered with them. Information from BPC provided essentialdata for Part III of the PCR.

Findings and Lessons Learned

33. There are several important lessons of experience:

(a) The project challenged the hypothesis that state agenciescan neither be efficient nor profitable. Given the properconditions for institutions to exercise initiative, assumeresponsibility and reward performance, a public sectorenterprise could perform as well as a private one. Duringproject preparation, both RTG and the Bank endeavored toattract international oil companies to participate in theproject. The options considered were an outright sale,participation in the project as a major or minor equitycontributor, and part owner with management responsibility.No interest was generated because BPC was considered beyondhelp. However, after the project, several international oilcompanies and private investors have expressed interest ininvesting in future BPC projects;

(b) Project preparation needs to be thorough and well plannedwhile the implementation strategy needs to be supported byappropriate consultants to supplement the manpower resourcesof the implementing agencies. Under the project four groupsof consultants were used: one group assisted the appraisalteam to prepare the project; another assisted BPC inimplementing the rehabilitation program; a third providedmanagement, operation assistance and training; and a fourthconducted the planning study for the future expansion andmodification of the refinery.

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(c) Acceleration of major policy and pricing reforms which theRTG undertook to strengthen the general organization andregulation of the sector was critical to the success of BPCand the project and in attracting private investments in thesector. Though no conditionalities were set under theproject, other than to set ex-refinery price of petroleumproducts at the same level as import parity prices, therewas a consensus that RTG had to liberalize the sector. Oncethe decision has been made, RTG pursued petroleum sectorderegulation vigorously and in October 1992 completelyderegulated importation and prices of petroleum.

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PART II

(By Bangchack Petroleum Public Company, Ltd)40. The following are our comments on the draft Parts I and III of thePCR, given to us for comments.

Part III

41. A draft of Part III of the PCR was reviewed by the SeniorExecutive Vice President of the Bangchak Petroleum Company PublicLimited and other management staff. The report is adequate, factual andaccurate.

Part I

42. Part I of the PCR was also reviewed by BPC. Here again theanalysis reflects the objectives, scope, implementation characteristicsand benefits which BPC has derived from the project.

43. Our comments on various aspects of the project and projectimplementation are given below.

Banks Performance

44. We consider the identification of this most beneficial project thedirect result of the interest taken by the World Bank and the detailedknowledge the project team both with regard to the industry and therestructuring of a weak company. The Bank impressed on the Ministriesof Finance, Industry and Defence on the issues and problems facing therefinery. The Government accepted Bank advice and the project. Thedesign of technical assistance provided to Bangchak to manage andoperate the refinery was very helpful to get Bangchak staff thenecessary experience and confidence in a short time. Similarly, thetechnical assistance provided to assist Bangchak to implement theproject proved of great benefit to Bangchak. The experience gathered inthe two phases, refinery operations and project implementation haveprovided a sound basis for the company to undertake future projects.The study to identify future requirements were initially thought to bepremature. This study has now proven to be timely and has helpedBangchak as well as the Government to appreciate the need formodification and expansion of refining facilities. Bangchak PetroleumCompany had little experience in implementing a complex project likethis. The assistance provided by Bank staff at every stage of theproject gave Bangchak confidence. We consider Bank staff as consultantswho always acted in the best interest of Bangchak.

Lessons Learned

45. The project is considered by the Government as a good example forother public corporations to follow. The elimination of losses andtransforming the refinery to a profitable company is viewed by all as a

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great achievement. A major lesson learned is that given autonomy to acompany, a company could perform more efficiently and profitably.

Bangchak's Performance

46. Bangchak staff worked hard on this project. Initially Bank'sprocurement procedures were not familiar to Bangchak. However, workingwith the Bank missions, Bangchak staff gained familiarity quickly andwere able to handle all procurement matters in a transparent and anexpeditious manner. The project management experience Bangchak gainedduring the implementation of this project will be very useful for thenew project that is now under preparation. Our staff learned quicklyfrom consultants as well as the Bank. Very often Bangchak staff workedon project implementation aspects which were in the contract ofconsultants, when consultant progress lagged and thereby expeditedproject implementation as well as reduced costs. There were no delaysor disputes between Bangchak and consultants/contractors. Bangchakmanaged the implementation of the project while carrying on its normalbusiness of operating the refinery. Project was completed in time,except for the additional work which took another 18 months. Ourrelationship with Bank staff was always cordial.

- 13 -

Part III

Project Timetable

Date Date DateItem Planned Revised ActualIdentification (Executive Summary) 11/82 - 11/17/82Preparation 01/83 - 01/28/83Appraisal Mission 08/28/83 - 09/30/83Loan Negotiations 11/84 - 11/29/84Board Approval 05/85 - 05/21/85Loan Signature - - 09/27/85Loan Effectiveness 12/85 - 01/22/86Loan Closing 06/30/90 06/30/92Loan Completion 07/31/92

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Loan Disbursements

Cumulative Estimated and Actual Disbursement(US$ Million) l

ActualPeriod Ending ADpraisal Estimate Actual as Z of Estimate

12/31/85 8.8 0.0 0.00

06/30/86 14.9 0.3 0.00

12/31/86 27.7 3.0 11.01

06/30/87 38.9 3.5 8.99

12/31/87 51.9 7.1 13.71

06/30/88 60.7 7.7 12.67

12/31/88 69.0 8.3 12.04

06/30/89 76.6 8.9 11.60

12/31/89 82.0 9.5 11.67

06/30/90 85.0 10.1 11.73

12/31/90 10.5

06/30/91 15.8 _

12/30/91 45.8 _

06/30/92 71.1

12/31/92 85.0

- I j

Proiect (Co5Qa. rlvy

_ _8' W IClA~~~~~, n... ,,' ~1s .1.A. PRQ,T't .t'

SAR Cost . hIsf>.{,s ON

Estimate .tlL_ I Ata

l.Refineryrehabili- Local Foreign T:Af ' ',sA D.t, i l ForeiQ iotation and energy Iconservation in-.icluding infrastruc-ture, engineeringand construction,

14.1 98.7 112.8 i46 125.7 38.0 92.2 130.20

2. Technical assis-tance (training/management/study, etc) 1.3 7.1 8.4 b - 5.8 5.8

3. Interest during Li 2 1 . 22.6 j l QQ _ 1 1construction : _

TOTAL 16.1 127.2 14;. 8 3 i 4 ' 39.5 104.5 144.0

_ M . . _. ,^ . ':C . A.__. .4 - -;

- 16 -

B. PROJECr FINANCINGI _________________ (mm USS) .

l | ~~~~~Loa A Lyeement | Rvsd |Eill

IBRD 85.0 T - I 85.0

Suppliers' credit 30.8 T -_TCommercal Banks 13.0 T_ -T 44.0

Ministry of Finae 7.50 7.50

rung Thai Bank 7.50 _ _- 7.50

Other Resources |||

Cash

TOTAL 143.8 144.8

Comments: Bangchak used its short-term credit line to fund some of the project work andpaid these off out of its profits.

17 -

Proiect Results

A. DIRECT BENEFITS

A+ FullDescrtiWo ADDraisal Estimates Cost at Closinr Developm

1. Staff training and Training of about 12 Trainaed 15 No changedevelopment of savice staffan efficientorgantionalstcwture.

BCP's own manage- BCP took over com- Not applicablement team was plete operationalexpected to take responsibilities be-own responsibilities fore end 1988by end 1988 _

2. Planning study Completion end Completed end 1989 Not applicable1987

3. Refinery, pro- No changeduction

(1000 bpd) 21.417 36.225

4. Capacity util- No change,ation 84 90

5. Mid-distillate No changeproduction

(1000 bpd 7.495 13.766

6. Net petroleum No changeproduct yield 96 96

7. Profit after tax Could increase(mm USS) 18.44 28.2

1___ , EA" IMPACT

Economic rate ot 't ir3 38.5

Underlying allurnnti) 1) margin (S/mt) bet.veen

- gasoline and crude t ii 150- kerosene and cruoe 130- diesel oil and crudIe k;- 125- fuel oil and cnhdL o,l 47

2) Production and ProducL'sValue Maij X! L XYit

rnm 1hI mrmn,) (mmS) (mm $)

1991 ` ,36.7 10.0 278.3

1992 J.6 14.8 333.0

3) Processing costs 0.35S /bb _

Comments: 'Te highc r o Lrn eApe.- irt tite margin of distillate petroleum productsover crude oil prices, mne USJUAUL-l ~ .' i ICFe, the improvement in products yield andthe reduction of r.fne- jr ; .t to the very favorable ERR.

- 19 -

C. FINANCIAL IMPACT

| _ ~~~~~~~~Without Proiect Wt ric

Financial rate of return Negative 33

Other Financal IndicigorsCurrent ratio

1991 1.4 1.41992 1.6 1.6

Debt/equity rauo1991 34/66 30/701992 22n78 30/70

Debt service coverage1991 1.6 2.01992 2.0 2.5

Comment: the above were provided by BCP.

D. STUDIES

Purpose as Defined__ at 3ApdImpa _ _ _ _ _U_

1. Techono- To identify the Completed The study identifiedeconomic study modification and ex- the need for very

pansions needed to substantial increasemeet future demands in refining and -and remain competi- conversion facili-dve and profitable ties. Based on the

study, RTG gaveapproval to twolarge refineries,which are nowunder constructionby the privatesector.

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Status of Covenants

Covenan

RTG shall:

(a) establish ex-refinery prices which would allow Prices have beenrefincries under conditions of efficient management deuld.to cover costs and an adequate return - whilstbeing reasonably competitive with prices in majoroil-producing countries;

(b) by December 31, 1986 to (i) carry out a refinery Studies completed andsub-sector study to balance future national demand submitted to the Bankand supply and furnish a copy of the study to the on 06/30/87. RTG hasBank for its comment, along with the comments of approved expansion ofthe RTG-appointed review panel; and (ii) thereafter, refining capacity aton the basis of the first phase of the study, under- Bangak and Torc intake a detail feasibility study to appraise any line with the study,process modification that may be recommended for recommendations andBangchak refinery; the two new refineries.

nanmcial Covenants

BCP shall:

(c) maintain a ration of current assets to currentliabilities of not less than 1.1 until December1998 and 1.2 thereafter;

(d) until December 31, 1988, not incur and debt In compliance.unless estimated net revenue is at least 1.2times that of all debt service and thereafter netrevenue shall be at least 1.3 times debt service;

(e) not repay in advance of maturity any outstanding In compliance.debts which could materially alter its ability tomeet its financial obligations;

(f) furnish to the Bank within 30 days after the end of In compliance.each fiscal quarter project progress reports forsuch quarter, and within 60 days the unauditedfinancial statement for each quarter;

-21 -

(g) have the accounts for each fiscal year audited In compliace.and submitted to the Bank no later than six monthsafter the end of each fiscal yea;

RTG shall:

(h) furimsh to the Bank by November 30, 1985, or some In compliance.other date as agreed to with the Bank, for comment March 12, 1987proposals designed to ensure that the depatun,agencies and state enterprises of the guarator(RTG) purchasing petroleum fueltirectly or in-direcly from the borrower will settle their accountin respect thereof within 30 days from delivery ofsuch fuel; and

(i) ther implement such proposals taking into In compliance.accoum the Bank's comments thereon.

Use of Bank Resources

A. STAFF INPUTS

_______________ ____________ _ (D ays)

Se of ProjctCyle |Ell

Throug apprisal 1,130

Appraisal thrugh Board approval 480

Board approval through effectiveness 60

Supervision 1,230

TOTAL 2,900

Wp ocN wwHA . s 18. IMR

- 22 -

MISSIONS

Mission Speciali PerforStage Number manceof Month/ of Day in zation Rating Type of

Project Year Persons Field Repre- Status ProbleCycles sented m

Through 08/82 3 21 Refining N/A N/AApprais Ial Econo-

micsFinance

11/82 5 10 N/A N/A- do -

Apprais 12/83 2 6 - do - N/A N/Aal 10/84 2 11 - do - N/AThrough 02/85 2 7 - do - N/ABoardApprova1BoardApprova1Through 07/85 1 6 - do - N/AEffectiveDate

Super- 02/86 2 8 Finance/ N/Avision 06/86 1 4 Refinery 1

03/87 2 7 206/87 4 8 210/87 1 4 202/88 1 6 210/88 2 4 702/89 1 10 110/89 1 4 108/90 1 5 103/91 1 5 106/91 1 9 102/92 1 5 1

1