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The World Bank FILE P CC?,47YFOR OFFICIAL USE ONLY
Report No.2846-PO
STAFF APPRAISAL REPORT
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
May 30, 1980
Industrial Projects Department
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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PORTUGAL
MECHANICAL INDUSTRIES PROJECT
Currency Equivalents Weights and Measures
Excep't where otherwise indicated, 1 metric ton (t) - 1,000 kilograms (kg)all figures are quoted in US Dollars 1 metric ton (t) - 2,204 pounds (lb)(US$) and Portuguese Escudos (Esc.) 1 kilometer (km) - 0.62 milesExchange rate as of December 1979: 1 kilogram (kg) - 2.204 pounds (lb)
Esc. 1.0 - US$0.02 1 hectare (ha) - 2.47 acres
Esc. 47.5 - US$1.0
Esc. 1,000,000 - US$21,050
PRINCIPAL ABBREVIATIONS AND ACRONYMS USED
COMETNA - Companhia Metalurgica Nacional S.A.R.L.C.P. - Caminho de Ferro (Portuguese National Railways)EDP - Electricidade de Portugal (Electricity Company of
Portugal)EEC - European Economic CommunityEIB - European Investment BankFFE - Fundo de Fomento Exportacao (Fund for Export Development)IAPMEI - Instituto de Apoio as Pequenas e Medias Empresas
(Institute for the support of small and medium enterprises)INE - Instituto Nacional de Estatistica
(National Institute of Statistics)IPE - Instituto dos Participacoes do Estado
(Institute for State Participation)MFEP - Ministry of Finance and Economic PlanningMIT - Ministerio da Industria e Technologia
(Ministry of Industry and Technology)OSHA - Occupational Safety and Health Administration (US)PMU - Project Management Unit
SOREFAME - Sociedades Reunidas de Fabricacoes Metalicas S.A.R.L.UGT - Uniao General de TrabalhadoresEsc. - Escudos
Kwh - Kilowatt hours
MW - Megawatts
tpy - tons per year
FISCAL YEARS
Government of Portugal )IPE )COMETNA ) January 1 to December 31SOREFAME )
Industrial Projects DepartmentMay 1980
PORTUGAL FOR OFFICIAL USE ONLY
MECHANICAL INDUSTRIES PROJECT
TABLE OF CONTENTS
Page No.
I. INTRODUCTION * .. ..............................***.*....t............... 1
II. THE MANUFACTURING SECTOR AND THE ENGINEERING INDUSTRIES.. 2
A. The Manufacturing Sector ........................... 2
B. The Mechanical and Engineering Industries .... ...... 4
1. Role in the Manufacturing Sector .... ........... 4
2. Structure, Composition and Development ......... 4
3. Problems and Prospects of Future Growth .... .... 6
C. Project Relevance . ............... .................. 8
III. THE HOLDING COMPANY AND THE BORROWERS ................... 8
A. IPE - The Holding Company ............ .............. 81. Background .................................... 8
2. Organization and Management .................... 93. Financial Structure . . 10
B. The Borrowers ........ .... 10
1. COMETNA . ................. 10
2. SOREFAME .. o ...... oo .................... 14
IV. THE MARKET .... ............. oooo ..... o ....o .... 18
A. Introduction ................ ..... ........... 18B. The Market for the Products ... .o.................. 19
1. Steel Castings . . ....... .. o .... . . .. 192. Industrial Valves .oo................ .. . 21
3. Hydro-Power Generation Equipment ... ........ .. 23
C. Marketing and Sales Organization .... ......... 24
D. Prices and Competitiveness . ... . ....... 25
V. THE PROJECT ........ o .................. o ....... o. 26
A. Project Objectives and Scope ............ o... .... 26B. Project Description ....... ..... ... ooo ..... o 27
C. Project Organization ........ ..... .... ..o .... ....... . 28D. Process, Technology and Licensing Agreements ... o. 29
This report was prepared by Messrs. Sethi, Sood and Nadkarni of the
Industrial Projects Department.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
- ii -
Table of Contents (Continued) Page No.
E. Location and Infrastructure ........................ 29F. Ecology ............................................ 29G. Raw Materials and Components ....................... 30H. Employment, Training and Productivity .... .......... 31I. Project Management and Implementation .............. 32
1. Organization and Management .... ............... 322. Project Implementation Schedule .... ........... 32
VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT .... ....... 33
A. Capital Costs ...................................... 33B. Financing Plan ..................................... 34C. Procurement and Retroactive Financing .... .......... 36D. Allocation and Disbursement of Bank Loan .... ....... 37
VII. FINANCIAL ANALYSIS ...................................... 37
A. Revenues and Operating Costs ....................... 37B. Financial Projections .............................. 39C. Financial Rates of Return .......................... 40D. Break-even Analysis ................................ 41E. Financial Covenants ................................ 41F. Auditing and Reporting Requirements ...... I ......... 42G. Major Risks ........................................ 42
VIII. ECONOMIC ANALYSIS ....................................... 43
A. Economic Costs and Benefits .... .................... 43B. Economic Rates of Return ........................... 43C. Foreign Exchange Savings and Other Benefits ... ..... 45
IX. AGREEMENTS ........................ ....................... 46
ANNEXES
3-1 IPE: Summarized Financial Statements3-2 COMETNA and SOREFANE: Sales Performance since 19733-3 COMETNA: Historical Financial Statements3-4 COMETNA and SOREFAME: Financial Assistance under Viability
Contracts and Additional Measures proposed by the Bank3-5 COMETNA and SOREFAME: Assumptions Used and Financial Projections
Without Project3-6 SOREFAME: Historical Financial Statements
- iii -
Table of Contents (Continued)
ANNEXES
5-1 General Layout of Steel Foundry5-2 Layout of Valve Plant5-3 General Layout of SOREFAME's Power Generation Equipment
Manufacturing Facilities5-4 New Steel Foundry: Organization Chart5-5 New Valve Plant: Organization Chart5-6 COMETNA: Project Management Unit5-7 Project Implementation Schedule
6-1 Capital Cost Estimates6-2 Financing Plan6-3 Items to be Financed by the Bank6-4 Estimated Disbursement Schedule for Bank Loan
7-1 Assumptions Used in Project Financial Projections7-2 COMETNA Foundry: Projected Income Statements7-3 COMETNA Valve Plant: Projected Income Statements7-4 SOREFAME Hydro-Power Equipment Component: Projected Income Statements7-5 COMETNA Projected Financial Statements with Project7-6 SOREFAME Projected Financial Statements with Project
8-1 Economic Return and Sensitivity Analysis8-2 Domestic Resource Cost Measure Calculations
MAP IBRD 14812R - PORTUGAL: Location of Existing and New Facilitiesof COMETNA and SOREFAME
DOCUMENTS AVAILABLE IN THE PROJECT FILE
A. Selected Reports and Studies on Subsector
Al. "Market survey for steel castings in Portugal and selected foreigncountries", prepared by the consulting company, EntwicklungsberatungGmbH, West Germany.
A2. Study on Portuguese market of industrial valves in steel and ironcasting, prepared by consulting company, CODES, Portugal, onbehalf of SERI engineering company, France.
A3. Preliminary report of an overall rationalization study in mechanicalindustries of Portugal, prepared by consulting company, SICAI-TPL,Italy.
A4. "Industria Metalomecanica Pesada", a report on the heavy metallo-mechanic sector 1975, 1977, prepared by Banco de Fomento Nacional.
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Table of Contents (Continued)
B. Selected Reports and Studies Relating to the Prolect
Bl. Initial feasibility study on new steel foundry, prepared byKnight Wegenstein AG, Switzerland.
B2. Feasibility study of steel foundry, prepared by George Fischer AG,Switzerland.
B3. Feasibility study of the valve subproject, prepared by SERI RenaultEngineering, France.
B4. Feasibility study of hydro-power generation equipment preparedby SICAI-TPL, Italy.
C. Selected Working Papers
Cl. Statistics on steel castings production, exports and imports.
C2. Market for hydro-power generation equipment in Portugal.
C3. Assumptions for working capital requirements.
C4. Viability contracts for COMETNA and SOREFAME.
C5. Assumptions underlying financial projections.
C6. Miscellaneous statements relating to financial projections.
C7. Financial and economic return calculations.
Industrial Projects DepartmentMay 1980
I. INTRODUCTION
1.01 The Government of Portugal has requested Bank assistance to financea project that would modernize and expand the facilities of two of Portugal's
leading mechanical engineering enterprises. The two state-controlled
enterprises -- Companhia Metalurgica Nacional, S.A.R.L. (COMETNA) and
Sociedades Reunidas de Fabricacoes Metalicas, S.A.R.L. (SOREFAME) -- like
several others have been hard hit by the disruptions following the country's
revolution in 1974, and to some extent, by the unfavorable changes in worldmarkets after 1973. In view of subsequent improvements in the capital goods
markets in Portugal and the potential of becoming competitive in export
markets, which are particularly important to Portugal in view of its likelyaccession to the European Economic Community (EEC), the companies now face
improved market prospects. Their ability to take advantage of these prospectsis, however, impaired by their severely weakened financial situation and
facility limitations. To overcome these constraints and enhance the companies'long-term competitiveness and profitabiliy, the Government has instituted
financial restructuring schemes to strengthen their financial position, and
the proposed Project is designed to supplement this effort by modernizing andexpanding their productive facilities.
1.02 The Project consists of three major components: (i) the relocation
and expansion of COMETNA's steel foundry; (ii) the relocation and expansion of
COMETNA's valve plant; and (iii) the restructuring and expansion of SOREFAME's
hydro-power equipment manufacturing division. The increased output of steel
castings, valves, and hydro-power generation equipment would contribute to
both exports and import-substitution in line with established investmentpriorities. The Project also includes components to support a comprehensive
study of the engineering subsector in Portugal and to introduce a pollutioncontrol system to improve the working and environmental conditions in COMETNA'sexisting foundry.
1.03 The proposed borrowers -- COMETNA and SOREFAME - are majority-
Government-owned through the state holding company, Instituto dos Participacoes
do Estado (IPE). The Project components will be implemented, operated and
owned by the respective enterprises.
1.04 The total financing required for the Project is estimated atUS$89 million equivalent, of which US$52 million is in foreign exchange.
A Bank loan of US$44 million is proposed, and would cover 49% of the totalfinancing and 85% of the foreign exchange requirements of the Project.Foreign exchange requirements in the amount of around US$6.8 million areexpected to be financed by foreign and local banks. The remaining financingrequirements (US$38.2 million including US$1.2 million in foreign exchange)
will be financed through equity contributions from the IPE/Government andthrough loans from local banks.
1.05 The Project was initially identified in 1977 as part of the Bank'swork on manufacturing export industries (Report No. 1695a-PO, Manufacturing
Export Industries in Portugal, dated December 27, 1977). The Bank has playedan important role in the formulation and further development of the Project,and provided inputs in its design which was carried out with the assistance ofGeorg Fischer of Switzerland (for the steel foundry), SERI-Renault Engineering
of France (for the valve plant), and SICAI-TPL of Italy (for the hydro-powerequipment component). The Bank's involvement extended further into a study
of the four state-controlled enterprises in the heavy metalworking sector --COMETNA, SOREFAME, EQUIMETAL and MOMPOR -- with a view to rationalizing theactivities of these large enterprises. The Project was preappraised in July1979. It was appraised in November 1979 by Messrs. Sethi (Chief), Sood,Nadkarni of the Industrial Projects Department, and Messrs. Cognet and Appleton(Consultants).
II. THE MANUFACTURING SECTOR AND THE ENGINEERING INDUSTRIES
A. The Manufacturing Sector
2.01 A detailed description of the Portuguese manufacturing sectoris given in the report entitled "Manufacturing Export Industries in Portugal"(Report No. 1695a-PO, dated December 27, 1977). Current trends and prospectswere also reviewed in the report "An Updating Report of the Portuguese Economy"(Report No. 2214-PO, dated September 7, 1978). Manufacturing is the leadingsector in the Portuguese economy and, in 1978, accounted for about 36% ofGDP, 24% of employment, 37% of total investment, and 70% 1/ of exports.Manufacturing output grew at an average annual rate of around 11% between1963-73, and led the rapid growth of the Portuguese economy during thisperiod. After 1973, the manufacturing industry was directly affected by thefundamental changes in Portugal following the revolution, and to some extentby the worldwide economic slowdown. Output increased only by 3% in 1974,fell by 10% in 1975, before increasing by 4.5% in 1976 and by over 9% in 1977.Growth slowed to 3.3% in 1978 as Portugal adopted stabilization measuresrecommended by the IMF. In 1978, manufacturing output was only 10% higherthan in 1973.
2.02 The high growth during 1963-73 was concentrated in a relativelysmall number of the large enterprises that enjoyed privileged access to creditand to foreign technology, while the vast majority of small and medium enter-prises were given little assistance and few incentives to modernize and expand.The growth was also attributable'to low wages, low prices of raw materialsand energy, preferential markets for Portuguese exports in the former coloniesand protective tariffs. The resulting industrial structure proved particularlyvulnerable following the 1974 revolution. On the demand side, markets in theformer colonies were at least temporarily lost. The world economic slowdownand sluggish demand in Western Europe also made it an extraordinarily unfavor-able time to develop new foreign markets. In the domestic market, the redis-tribution of income following the revolution meant less demand for productsgeared to upper-middle class consumption.
2.03 On the supply side, immediately after the revolution labor relationsdeteriorated sharply resulting in strikes, absenteeism, lock-outs and indis-cipline in a number of factories. With the sharp rises in Portuguese wages,controlled domestic prices and little adjustment of the exchange rate till1976, industrial profits fell sharply. Many firms suffered severe losses whichcould only be compensated through the liberal provision of credit through thebanking system. These losses could not be reduced through a reduction in the
1/ If wines and processed food are included the share of exports wouldincrease to around 80%.
labor force because of the very restrictive laws on dismissals. When demandrevived, entrepreneurs were not willing to add new workers however, for fear ofanother profit squeeze, and an inability in such a situatioan to release thenewly hired labor. In some instances there was also the fear that any enlarge-ment of the labor force would shift the balance within the factory more towardscontrol by trade unions.
2.04 Post-revolution developments also significantly altered the owner-ship structure of industry. Prior to the revolution, industrial companies,with the exception of armaments producers were all in the private sector.Within one year of the revolution, the Government nationalized banks, insurancecompanies, power companies, the major transportation agencies and the largeindustrial groups in the steel, oil refining, chemicals, cement, ship-building,tea and tobacco industries. The Government also, directly and indirectly,acquired shareholdings in over 1,300 companies, as a result of its national-ization actions. The state administration had initially neither the expe-rience nor the organizational mechanisms to deal with this new sector of theeconomy. Confusion and uncertainty prevailed in both the public 1/ and privatesectors. To compensate for the resulting sluggishness of private investment,the Government in 1976 embarked on an ambitious program of public investment inindustry, mostly concentrated in the SINES industrial zone. It also initiateda number of measures to restore confidence in the private sector.
2.05 Legislation passed in July 1977 defined the armaments, petroleum,petrochemical, iron and steel, fertilizers, and cement industries as basicnational industries reserved to the public sector. The private sector, on theother hand, was free to invest in all other industries. The Government alsocommitted itself not to undertake further nationalization, and establishedthe necessary organization and mechanisms for dealing with its newly acquiredownership in industry. The foreign investment law was revised providinggreater assurance to foreign investors. The laws on labor dismissal wereeased. Finally, to solve the problem of the heavy debt burden facing publicand private companies, legislation pertaining to their economic-financialrehabilitation was enacted. Under this legislation, which is implementedthrough viability contracts, an'economically viable yet financially troubledenterprise may obtain consolidation of its old debts, new loans at subsidizedrates and other financial and fiscal benefits by committing itself to certainproduction, productivity and financial targets. These actions together withother measures have brought about a slow recovery of confidence in the privatesector. The results have also been generally positive in the public sectorreflecting considerable improvements in managerial capabilities and increasedstability in the country.
2.06 Industry will clearly remain the leading sector in Portugal's futuregrowth. The restructuring of the Portuguese economy requires a rapid recoveryand expansion of manufactured exports along with vast improvements in agricul-tural productivity. By 1985, Portugal is likely to be a member of the EEC. Itmust by then substantially improve the productivity of its industrial sector toenable it to withstand competition from other producers within the communityand also take advantage of the new markets resulting from membership in the
I/ According to the Government classification, the "public sector", com-prises only public enterprises in which the State has 100% ownership.Companies in which the State is either a majority or minority share-holder are registered as "private".
EEC. Recent measures have brought positive results; manufactured exports in1978 increased by 21% in dollar terms, and again accelerated in 1979.
2.07 Portugal is well-situated to utilize its comparative advantage interms of natural resources (such as forestry inputs for manufacturing), inthe availability of labor and engineering skills at still relatively lowcosts, and a geographical location affording easy access to markets in WesternEurope, North Africa and the Middle East. However, continued increases inmanufactured exports will depend crucially on further Government measures to:(i) improve the investment climate; (ii) enable financial and organizationalrestructuring of troubled enterprises; (iii) encourage financing of export-oriented investment; (iv) stabilize management-labor union relations; (v)further strengthen existing incentive systems to encourage exports; and (vi)provide assistance to enterprises to expand their technological capabilities.The mechanical and engineering industries, which account for around a quarterof all manufactured exports, will be particularly important in this regard.
B. The Mechanical and Engineering Industries
1. Role in the Manufacturing Sector
2.08 The mechanical and engineering industries, hereinafter called theengineering industries, represent the leading subsector in Portugal's manu-facturing sector, and their role has been consistently growing in importance.The subsector is defined to include metal products (including fabricatedproducts), non-electric machinery, electrical equipment/components and trans-port equipment/components. The subsector accounts for around 20% of employ-ment, 18% of production and 28% 1/ of exports in manufacturing. While thesubsector is an important part of the manufacturing sector, its share thereinis less significant than in other countries in the EEC, thus implying a lowerlevel of engineering development. This is also reflected in the high shareof engineering product imports (52%) in the total domestic consumption ofengineering products (para. 2.10).
2. Structure, Composition and Development
2.09 The subsector is characterized by a large number of small enter-prises. Of a total of about 1,200 in 1977, over 70% are small enterpriseswhich employ less than 50 people, around 10% employ 50-100 people, around18.5% employ 100-1,000 people, and only about 1.5% (or 18 enterprises) havea labor force of over 1,000. The large enterprises dominate the plantequipment and machinery manufacturing activity and account for a significantportion of the output in the transport categories. The ownership of thesubsector reflects significant Government control, particularly of the largerenterprises. Following the revolution, the Government nationalized the ship-building industry into 100% Government-owned public companies and acquired acontrolling interest in four of the other large engineering enterprises.Within the subsector, transport equipment/components, primarily comprised ofthe shipbuilding and repair and automobile manufacture and assembly industries,account for the greatest share of the subsector (41% of production), followedby electrical equipment/components (24%), metal products (23%) and non-electricmachinery (12%).
2.10 The development of the subsector in the 1970s is illustrated in thefollowing table. The real growth rates have been markedly lower after the 1974
1/ If wines and processed foods are included, export share would drop to 24%.
revolution in line with the performance of the Portuguese economy, as discussedearlier (paras. 2.01-2.03). While comparable figures are not available for1978, other data indicate a real production growth of around 2%, in line withthe overall slowdown of the manufacturing sector.
PORTUGAL: Development of Engineering Industries(Current Prices: Esc. million)
Average AnnualGrowth Rate %
1971 1973 1976 1977 1971-73 1973-77
Employment a/ (000s) 91.2 97.7 114.2 120.8 7.0 5.4
Production (A) 15,430 25,109 43,280 63,900 27.6 26.3Value-added (B) 6,467 11,353 20,635 27,923 32.5 25.2Exports a/ (C) 5,122 7,224 9,312 14,927 41.0 19.9Imports a/ (D) 21,893 25,445 34,768 52,776 16.2 20.0Index of Home & Import Prices 100 117 202 278 8.0 24.2Value-added/Production 0.42 0.45 0.48 0.44Import Ratio (D/(A+D-C)) - 0.59 0.51 0.52
a/ 1972 figure substituted for 1971 (for which comparable data is notavailable). Accordingly 1972-73 growth rate substituted for the1971-73 rate.
Source: MIT, Instituto Nacional de Estatistica (INE).
2.11 Exports and Imports: The exports and imports of the three majorcategories of engineering goods are shown in the following table:
PORTUGAL: Trade in Engineering Goods(Current Prices: US$ million)
Average AnnualGrowth Rate %
1963 1973 1976 1977 1978 1963-73 1973-76 1976-78
ImportsNon-electric Machinery 84 433 480 626 714 17.8 3.5 22.0Electrical Machinery 38 189 263 260 311 17.4 11.6 8.7Transport Equipment 54 360 323 415 416 20.9 (3.5) 13.5
Total 176 982 1,066 1,301 1,441 18.8 2.8 16.3
ExportsNon-electric Machinery 7 79 57 90 78 27.4 (10.3) 17.0Electric Machinery 5 122 119 139 163 37.6 (0.8) 17.0Transport Equipment 2 44 53 71 88 36.2 6.4 28.9
Total 14 245 229 300 329 33.1 (2.2) 19.9
Source: UN International Trade Statistics.
The interruption in the high growth of exports between 1973-76 was partlyattributable to the loss of markets in the former colonies. The share offormer colonies in the export of machinery and transport equipment declinedfrom 22% in 1973 to around 5% in 1976. The return to increased stability inPortugal and an improved climate is illustrated in the strong growth of exports
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after 1976. For the engineering industries as a whole export volume growth in1978 was around 8%, and provisional data indicate strong performance in 1979.
2.12 An analysis of the exports and imports shows the Portuguese engi-neering subsector's dependence on other countries at the upper end of tech-nology. Exports are generally limited to standard machine tools and rela-tively simple industrial machinery, office machines, electrical switchgearand electro-mechanical telecommunications equipment, components and interme-diates such as castings, transport equipment (primarily ships and boats) andsome heavy engineering goods such as power-generation equipment components.The technology limitations are further illustrated by the growing dependenceon imports of industrial machinery despite numerous incentives for import-substitution. Portugal is well-suited to capitalize on its available pool ofengineering manpower and experienced manufacturing workforce. While costs ofthese elements have risen since 1973, the increases have been kept below thelevels of domestic inflation, and the costs, even after allowing for lowerproductivity, remain low relative to other industrialized countries. Materialinputs, while primarily imported, are generally available at prices in linewith prevailing international levels. The potential for increased exportsexists both in the areas where exports have been strong traditionally and,with additional technological and other support, in heavy engineering goods ofa custom or jobbing nature, where the engineering and labor content is high.
2.13 Financial Performance and Recent Measures: The general conditionsprevailing in Portugal in the years following the revolution, have adverselyaffected the financial performance of the enterprises in the engineeringindustry, as also in other industries in the manufacturing sector. Thedeterioration of their financial structure between 1973-76 is discussed belowbased on an aggregate of 12 of the largest companies 1/ in the subsector.During that period, the companies' profitability plunged sharply with thereturn on equity declining from 11% to -33%, and the reliance on debt tofinance increases in assets (primarily, working capital) increased from 67% to90%. Together these factors weakened an originally remarkably strong capitalstructure (65% equity in 1973) to marginal levels (29% equity in 1976), withfour of the companies depleting their equity entirely through accumulatedlosses. Financial charges which nearly tripled as a proportion of the value ofproduction in this period have continued to increase; for four of the largestcompanies, financial charges in 1978 averaged 18% of the value of production.
2.14 Along with other industries, the subsector has begun to benefit frommeasures undertaken by the Government to improve the future prospects of themanufacturing sector; financially, the most significant of these is the viabilitycontract legislation enacted in 1977 and expanded in 1979 (para. 2.05). Asimplementation proceeds, the financial situation of companies in the subsectorand in manufacturing as a whole can be expected to improve significantly.
3. Problems and Prospects of Future Growth
2.15 Portugal has a long-standing experience in the engineering indus-tries. The industry has well-established manufacturing skills but continuesto rely heavily on other countries at the sophisticated engineering andtechnology level (para. 2.12). As public investment programs, particularlyin the nationalized industries, are again intensified, the domestic market
1/ After 1976, these have been consolidated into 10 companies, and in 4 ofthese the Government holds a controlling interest.
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for engineering products can be expected to expand rapidly. To effectivelycompete in this market and avail of increased export opportunities, partic-ularly in view of Portugal's likely accession to the EEC, the engineeringindustry needs to be developed further. Given proper support, the industry's
output and exports can be expected to grow at a much faster rate than manufac-turing as a whole. The Government has already adopted a number of measures toprovide such support (para. 2.05), but a number of weaknesses specific to theengineering subsector and relevant to all industry remain, as discussed below.
2.16 The engineering industry has received little attention as subsector.There is no single entity within the Government responsible for formulatingpolicy and development plans for the subsector; policies and plans, exceptwhere prepared on an ad-hoc basis, are virtually non-existent. As a firststep in coordinating the future development of the subsector and formulating acoherent set of policies, a clear delineation of responsibility and a detailedsubsector study are vital. A start has already been made with a study forrationalizing the development of the heavy engineering activity in the state-controlled enterprises (para 1.05) as part of the preparation of the proposedProject. Also a limited review of the subsector is understood to be underway.However, a comprehensive review and planning exercise has not yet been con-ducted. The Government has agreed that a comprehensive sub-sector study withrecommendations for formulation of policies/incentives will be completed andsubmitted to the Bank for an exchange of views by December 1981, and thatagreed recommendations will be implemented promptly thereafter. The frameworkof the terms of reference and the general time schedule for such a studyhave also been agreed to.
2.17 In the context of such a study, the following areas merit particularattention:
(i) Export Promotion: While export prospects for the engineering sub-sector are generally favorable (para. 2.12), their development will requireadditional support in the form of market-intelligence and related marketingservices. Such services are available on a limited scale through the ExportDevelopment Fund (Fundo de Fomento Exportacao-FFE). Also, export incentivesavailable to Portuguese industry need to be reexamined. A recent Bank loanincluded a component for extensive study of export promotion measures, includ-ing joint export-marketing and incentives (Report 2312-PO entitled Small andMedium Scale Industry Development Project, dated April 24, 1979, paras. 5.26to 5.28). Further, many heavy manufacturing activities in this subsectorrequire special export incentives such as working capital financing (in viewof long production lead times) and additional support such as favorable exportsales financing in order to be internationally competitive;
(ii) Institutional Mechanisms: As noted earlier (para. 2.16), there isno subsector-specific entity at the Government level capable of coordinatingthe development of this subsector. Technical assistance to Portuguese industry
is provided primarily by the Institute for the support of Small and MediumEnterprises (IAPMEI), and IPE, the Institute of State Participation whichoversees the operations of companies in which the State has an ownershipinterest. These institutions have been established after 1974, and theyare yet to reach an adequate level of effectiveness in dealing with the fullrange of their responsibilities. These existing institutions need to bestrengthened, and supplemented.
(iii) Technological Support. Support to the engineering industry toenable it to upgrade existing technological levels is vital to its further
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development, particularly with regard to exports. The above-mentioned recent
Bank loan included a component for assistance in this area directed to specific
industries relevant to small and medium enterprises (Report No. 2312-PO, paras.
5.20 to 5.25). Future efforts should include assistance to the engineering
subsector. Such assistance to strengthen technological support to industry
will also promote the further development of supplying industries thus
reducing the dependence on imports of components. In addition, financial or
tax incentives to promote in-house technical development activity need closer
assessment; and
(iv) Management Development: Portugal's industrial enterprises were, in
the past, characterized by centralized control by their owners with little
attention to management systems. The management situation was worsened with
the dramatic disruptions and discontinuity following the revolution, parti-
cularly in enterprises where the State acquired control. The areas deserving
the most urgent attention within management are long-term planning, accounting
and control, marketing, production-planning and management. While MIT has
recently expanded its training programs with Bank support (Education Project,
Report No. 1807-PO, paras. 2.22 to 2.25), and IAPMEI and IPE have made a start
with some management education programs, a much larger effort will be required
in the future.
2.18 Finally, as noted previously, the further development of the engi-
neering subsector will crucially depend on Government measures to improve the
investment climate and future prospects of manufacturing as a whole (para. 2.07).
C. Project Relevance
2.19 The proposed Project represents a significant investment in the
further development of the engineering subsector in Portugal. It will assist
in the modernization and expansion of two of the leading companies in the
subsector in which the State has a controlling interest. The investment is
directed to the expansion of exports (and import substitution) relying pri-
marily on the availability of low cost engineering skills and trained labor,
improved productivity, and the companies' long-standing experience in their
respective fields. Technical assistance components are included to promote
acquisition and adaptation of new technologies, and to improve marketing
and other management capabilities. The Bank has played a prominent role in
the preparation and formulation of the Project (para. 1.05). A start has
also been made in strengthening IPE, to better fulfill its role of overseeing
state-controlled enterprises under its purview, particularly with regard to
project development and management. Funds are also being provided to enable
the Government to undertake further studies to assist in planning, policy
formulation and the identification of promising development opportunities
within the subsector. The Project should go a long way in improving future
prospects of the two companies, and serve as a model for similar investments
and financial restructuring in other enterprises in this subsector and else-
where in industry.
III. THE HOLDING COMPANY AND THE BORROWERS
A. IPE - The Holding Company
1. Background
3.01 The Project was initiated by the Instituto dos Participacoes doEstado (IPE). IPE was established in 1976 to manage the State's shareholdings
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in about 300 of the 1,300 companies in which the State acquired majorityor minority ownership following the nationalizations since 1974, remainingcompanies being assigned on a sectoral basis to other Government agencies.IPE's main functions are the following: (i) management of the State share-holdings in various companies; (ii) implementation of national economic plans
and policies for particular industrial subsectors; (iii) supervision of themanagement of the acquired companies, and nomination of managers in caseswhere IPE has a controlling interest; (iv) coordination of activities between
its subsidiary companies and other public enterprises; (v) assistance to itscompanies in management training and in carrying out necessary economic andfinancial studies; and (vi) promotion and implementation of new projects.
3.02 In carrying out its functions, IPE's strategy is to maintaineffective control over the companies in which it participates, to keep themfinancially viable and whenever possible, to encourage private investors asminority partners in the companies under its jurisdiction. The Governmentand IPE determined in July 1979 that only about 65-70 of the over 300 com-panies initially assigned to IPE should form the core group under IPE, withthe remainder to be transferred to sector agencies. COMETNA and SOREFAME, theborrowers of the proposed Bank loan, along with about 8-9 other companies inthe engineering industries subsector form a part of this core group under IPE.IPE has majority ownership in about two-thirds of these companies includingin COMETNA (92%) and SOREFAME (74%). While COMETNA and SOREFAME will be theactual borrowers, IPE will closely monitor the implementation of the Project.
2. Organization and Management
3.03 IPE is an autonomous public company responsible primarily to theMinistry of Finance and Economic Planning (MFEP). IPE's principal managementorgans are the General Council, the Board of Directors, and the AuditingCommittee. The General Council consists of representatives of the principaleconomic ministries, central and regional planning councils, trade unions, andof the companies under IPE's jurisdiction. The President of the Council is anMFEP representative. The General Council meets every six months; it examinesand approves IPE's multi-annual and annual plans of activity and reviews IPE'sannual budget and other periodic operational reports. The Board of Directorsconsists of a Chairman and a number of directors appointed by the Council ofMinisters on the recommendation of MFEP. A new Chairman has been appointedrecently to succeed the previous incumbent who has completed his terms of 3years. The new Chairman has held several responsible positions in Portugalunder previous administrations and is well regarded as a capable and effectiveadministrator. The Board meets at least once a week; it has been grantedadequate operational powers to ensure a smooth and effective discharge ofIPE's functions. The Auditing Committee consists of a chairman and twomembers appointed by MFEP. Its main functions are to oversee compliance withapplicable laws and regulations, monitor values of assets and liabilities, anddecide on major accounting issues.
3.04 In line with the growth of its activities, IPE's staffing hasincreased to about 90 persons. IPE has three departments in charge of sub-sidiary companies including one department recently created for overseeingits subsidiaries in the engineering industries subsector. In relation tothe expanded range of its activities, IPE's staffing is still not adequate.Assurances have been obtained that, as regards the Project, IPE will furtherstrengthen the implementation, monitoring, control and liaison apparatus
- 10 -
through the establishment and adequate staffing by October 1980 of a ProjectMonitoring Unit specifically for the Project (para. 5.19).
3. Financial Structure
3.05 IPE equity capital is entirely owned by the Government. It canbe increased or reduced only by the Ministry of Finance and Economic Planning.Other sources of funds available to IPE include income from its investmentsin various companies, and fees that IPE is allowed to charge for variousmanagement and auditing services. In addition, IPE can raise funds by issuingfixed or variable income bonds and can also negotiate loans in national orforeign currency, in some instances through a special decree of the Ministryof Finance and Economic Planning.
3.06 IPE's summarized financial results for 1977 and 1978 are shownin Annex 3-1. Performance improved in 1978 mainly due to a sharp increasein IPE's income from its participations in affiliated companies. Provisionalresults for 1979 (net income of about Esc. 34 million) submitted by IPE showa continuing improvement in profits. Pending the finalization of the coregroup of companies under IPE (para. 3.02), it has not so far initiated anindepth evaluation of its portfolio of investments. IPE has agreed to engageindependent auditors to complete such an evaluation by December 1981.
B. The Borrowers
1. COMETNA
3.07 Background: COMETNA was founded in 1898 as a small mechanicalworkshop. It presently owns and operates the largest steel foundry in Portugalin addition to a cast iron foundry, a metal-working plant and a valve plant.COMETNA's principal products together with the main consuming industries are:(i) railways - bogies, wheels, brake cylinders and track equipment; (ii) cementindustry - grinder shanks, paving slabs and assorted equipment; (iii) steelplants - rolling mills, rolling-mill cylinders and ingot molds; (iv) stonequarries and mines - crushers, jaws and hammers; (v) chemical and petrochemicalplants - valves; and (vi) power plants - components for hydraulic and steamturbines. COMETNA has a well-established reputation in Portugal for thetechnical quality of its castings and valves and has been successful inexporting a substantial part of its production (para. 4.07). The Company hasa number of technical licenses from firms in the US, the Federal Republic ofGermany, UK and Italy for the production of equipment for the cement, steel,railroad, and power generation industries.
3.08 Until 1975, COMETNA belonged to a group of companies controlledby Mr. Alfredo Alves, a prominent Portuguese entrepreneur. Following itsnationalization in 1975 and the establishment of IPE in 1976, the latternow holds 92% of COMETNA's share capital of Escudos 246 million (US$5.2million equivalent). The remaining 8% is held by MAGUE (a prominent Portugueseprivate sector undertaking manufacturing thermal power and other industrialequipment) and by the Alves family.
3.09 Organization and Management: Under Mr. Alfredo Alves, COMETNA'smanagement structure was highly centralized. Following nationalization, Mr.Alves left Portugal and COMETNA also lost a large number of its top and middlemanagers. The situation was further exacerbated, up to May 1979, by the sub-sequent rapid turnover of key personnel, at both the Board and lower levelsof management resulting in a lack of management direction. The Company
- 11 -
suffered significant losses between 1976-78 (paras. 3.14-3.15) and management
and labor morale declined progressively due to the increasing uncertainty
about the Company's future prospects. In May 1979, IPE replaced COMETNA's top
management and the new team has initiated several organizational and operational
changes to improve COMETNA's operations. These changes along with the restored
confidence in the Company's future in light of the proposed Project investment
in the steel foundry and valve plant and the finalization of the financial
assistance measures under the viability contract (para. 3.16) have signifi-
cantly revitalized management morale and enthusiasm. Earlier difficulties in
attracting qualified personnel have been resolved with recent improvements in
COMETNA's compensation package and in its future prospects.
3.10 The Company's current organization chart is given on the following
page and represents a substantial improvement over the previous situation in
terms of defining specific responsibilities. COMETNA's present Board of
Directors consists of five members all of whom are nominated by IPE and have
operational responsibilities in the Company's management. COMETNA's present
Chairman is a competent individual, with substantial experience in the foundry
industry in Portugal. Several of the other Board members also have substan-
tial experience in the functional areas they supervise in the Company. The
middle management situation has improved substantially and COMETNA has, for
instance, recently hired qualified persons to reinforce its finance, account-
ing and other departments. COMETNA's management has also initiated steps to
reinforce the production, finance and marketing functions through the estab-
lishment of appropriate production planning, cost and divisional accounting,
and management information reporting systems. The Company is currently
exploring with a reputed US software firm the introduction of suitable
computer-based packages for accounting and management information reporting
purposes. Assurances have been obtained that the progress in these areas
especially in pricing policy, will be annually reviewed with the Bank till
Project completion.
3.11 Manufacturing Facilities and Employment: COMETNA's principal manu-
facturing facilities are the following: (i) steel foundry (5,000 tpy capacity)
and iron foundry (10,000 tpy) in Amadora 1/; (ii) valve plant (3,000 units per
year) in Lisbon; and (iii) machine shop (400,000 man-hours per year), forge
(3,000 tpy) and fabrication shop (120,000 man-hours per year) in Palmela 1/.
The combined annual capacity is estimated to amount to a production value of
US$27.8 million in 1979 US$ terms.
3.12 Details of the specific equipment at these plants are available
in the Project files. Most of COMETNA's equipment at the foundries in
Amadora (thickly populated suburban Lisbon) and the valve plant in Lisbon,
and to a lesser extent, at Palmela (50 km southeast of Lisbon), is old,
some of the facilities being in use for over 20 years. The layout of the
two foundries does not permit convenient installation of equipment, leading
to problems in material flow and handling. Further, the ventilation, lighting
and pollution control systems are less than adequate, thereby affecting work
conditions and productivity. The Project will significantly contribute to
an upgrading of COMETNA's steel castings facilities and also create better
working and environmental conditions in the iron foundry.
3.13 COMETNA currently employs around 1,900 personnel of which, about 54%
are in Amadora, 26% in Palmela, and the remaining 20% in Lisbon. There are
two main labor unions, Intersindical and UGT. The membership of Intersindical,
1/ Map, IBRD 14812R.
- 12 -
COMETNA: CURRENT ORGANIZATION
Board of Di ret r l
IPrnidont
(M CGideiral
Now Proifs I Iand Ctrwlot=D,t Public Rebvion
.in4~~~~~~Scrfmla
| OrganiDtion l H=~~~~~~~~~~~~~~~~~~~~P.on.
| Board Mebe ;;30 B Mrtmb r Bor = obe ;7 1 | ord Member l l 3aowd Mmbrwrtt (T~ Pintol (P.-a JII (M. Caldeirs) IF. Faita ( M. Morm)}
I Meral Woricig; Dvsion for Oormn Lisbon A Arator; t5w1 Firinnes 8urget j Hurnan | artge Prozrt o oel Vaha, Plant landt lmeon Founeirin | and Pur chaung. Resoutras i
Str| Aounting" | -nn
r Adm and | [ Adm nd | < Aam and l l~~~~~~~~~~~~~~~~~:an
Int.emai Serwicus Onivl
is drawn mainly from the plant workers (about 1,700) whereas most administra-tive and clerical staff (about 200) are members of UGT. After initial frictionfollowing the revolution in 1974, labor-management relations have been fairlystable in recent years. COMETNA's skilled labor is competent and the qualityof the Company's castings and valves has consistently been remarkably highdespite the constraints imposed by the old and worn-out equipment, past lackof adequate middle management, and the unsatisfactory working conditions inthe foundries which have led to some absenteeism for health reasons. Improve-ments in labor productivity from the present low level are expected, however,following the establishment of the new steel foundry and the improvement ofworking environment conditions in the existing iron foundry (paras. 5.01,5.15) and the consequent expected reduction in absenteeism.
3.14 Past Sales Performance: COMETNA's sales performance since 1973 isshown in Annex 3-2. The Company's sales-mix continues to be diversified. In1979, the steel, cement, and ceramics industries accounted for around 32% ofthe total sales of around US$18.7 million equivalent. Rail and track equipmentaccounted for 19%; the remainder was diversified across a number of uses.
- 13 -
Exports accounted for 22% of sales. The share of exports in total sales
declined between 1974 and 1977 reflecting the loss of Portugal's colonialmarkets after 1974 and the difficult conditions in international markets after1973. However, export sales have increased substantially since then, to about22% of total sales in 1979 mainly on account of sharp increases in exports ofcastings.
3.15 Past and Present Financial Situation: COMETNA's financial perform-ance since 1970 is summarized in the following table. Details are givenin Annex 3-3. Under a recently introduced Decree Law, certain Portuguesecompanies including COMETNA are required to have an annual audit of theirfinancial situation carried out in specified detail. COMETNA has agreed tohave such an audit undertaken expeditiously.
COMETNA: Summarized Financial Statements
1970 1972 1974 1976 1977 1978 1979---------------unaudited--------------- (provisional)
Production (CurrentEsc. million) a/ 326 421 739 723 810 858 990
Sales (Current Esc.million) a/ 268 370 525 785 685 853 890
RatiosNet Income (Loss)/
Sales (%) 2.2 0.1 - (4.6) (19.4) (20.2) (24.1)Interest/Sales (%) 4.5 5.1 4.8 5.3 10.8 18.8 20.2Labor Costs/Value
of Production (%) 30.2 32.8 29.9 40.1 42.5 44.8 45.8Debt: Equity Ratio 81:19 82:18 76:24 -ve -ve -ve -ve
a/ The difference between production and sales figures reflects annualchanges to inventories and production not directed to sales, e.g.for maintenance and repairs.
3.16 In line with the experience of other companies in the engineeringindustries subsector, the progressive deterioration in CDMETNA's financialperformance resulted from four basic causes. First, the loss of Portugal'scolonies deprived COMETNA of some of its major traditional markets (para.2.11) in conjunction with the standstill in domestic investment. Second,labor costs increased substantially due to the social pressures in Portugalconsequent to the revolution in 1974. Third, COMETNA, in view of cash lossesfrom operations, was forced to increasingly resort to short-term borrowings tomeet its funds needs. Together with the steep rise in interest rates since1977 which, moreover, were applied retroactively to existing debt as well,this led to substantially higher interest charges than could have been foreseenby the Company. Fourth, COMETNA's pricing of its products did not adequatelycover the rapidly increasing costs of operation, including the high interestcharges. In early 1979, the Portuguese Government initiated discussion of aviability contract (para. 2.05) for COMETNA aimed at the Company's financialrehabilitation. The initial draft viability contract had to be revised asCOMETNA's estimated losses in 1979 were higher than envisaged. The Bank re-viewed the proposed revised contract and recommended to the Portuguese Govern-
- 14 -
ment that additional financial measures were essential to lay the basis formaking COMETNA a viable operation in the future. The Bank's principalrecommendations concern additional cash equity, conversion of long-term debtinto equity, rescheduling of debt repayment, and additional interest subsidies.Details of the measures under the viability contract with supplementalmeasures to be undertaken by IPE are given in Annex 3-4. The contract wasapproved by the Government in April 1980. Execution of the contract isproposed as a condition for effectiveness of the loan. Implementation of thecontract measures is expected to significantly strengthen COMETNA's financialsituation and alleviate the burden arising from the high interest charges.Further, recent steps to improve overall operations (paras. 3.09-3.10), toincrease prices (para. 4.24) and the proposed Project investment are expectedto provide the basis for the future profitability of COMETNA.
3.17 Financial Projections: Based on the above, financial projectionshave been prepared for the Company's current operations (without taking intoaccount the impact of the Project), and are summarized in Annex 3-5, alongwith the assumptions and methodology underlying these projections (Projectionsincorporating the Project are presented later in para. 7.05). The expectedimprovement in COMETNA's financial performance in 1980 as compared to 1979 islargely the result of the real increase in prices in late 1979 and the improvedorder book and the implementation of some financial restructuring measures.This in turn relies on increased capacity utilization and productivity whichare deemed feasible in view of the management and labor improvements (paras.3.09-3.10). The financial restructuring measures and the recent actions andplans of the new management team are expected to contribute significantly toturning around the financial performance of the Company. This will provide aviable financial base in the existing operations for the implementation of thenew investments proposed under the Project.
2. SOREFAME
3.18 Background: SOREFAME was established in 1943 as a manufacturerof hydroelectric and irrigation equipment. It is the largest private sector(as defined in para. 2.04) enterprise in the engineering industries subsectorand, in 1976, was among the top 10 enterprises in Portugal in terms of numberof employees. SOREFAME's principal products are: hydromechanical equipmentsuch as gates, penstocks, and related equipment; electromechanical equipmentsuch as turbines and generators for hydroelectric power stations; equipmentfor the chemical and petrochemical industries like pressure vessels, sphericaltanks, and heat exchangers; railway passenger coaches and locomotives; andsteel structures like bridges and metallic frames. The Company has licencesfrom reputed firms in the US, France, UK and the Federal Republic of Germanyfor manufacture of hydromechanical, railway and chemical equipment. SOREFAMEhas been exporting a substantial proportion (35% in 1978) of its productionsince 1949, especially hydro-mechanical equipment where it has an establishedreputation. The Company also has subsidiaries in Brazil and South Africawhich it has licensed to produce hydromechanical equipment.
3.19 SOREFAME was nationalized in 1975 when the banks that held amajority of its shares were nationalized. The banks' shares were latertransferred to IPE which currently holds about 74% of SOREFAME's sharecapital of Escudos 950 million (US$19.95 million equivalent). Of the remain-ing 26%, 20% is held by ALSTHOM (a prominent French manufacturer of electro-mechanical equipment and the Company's licensor for turbine-generator sets),and 6% by individual private investors.
- 15 -
3.20 Organization and Management: SOREFAME's current organizational chart
shown on the following page incorporates necessary modifications first recom-
mended by the Bank in June 1979. It represents a considerable improvement over
the previous situation which was characterized by a high degree of centralizationof functions with ill-defined lines of responsibility. The Board of Directors
consists of 6 members of whom 5 are nominated by IPE and one by ALSTHOM. The
present Chairman of the Board of Directors has an established reputation as anindustrial leader in Portugal. Other positions in the Board are occupied by
SOREFAME's higher level managers who are well qualified and competent, and havebeen with the Company for a number of years. Specific improvements in the
current organization structure include the functional integration of responsi-
bilities with each Board member being put operationally in charge of a specificfunctional area and the creation of a separate department for exports marketing.With these changes, the Company has overcome earlier weaknesses in its organiza-
tional structure which led to a diffusion of responsibilities and adverselyaffected operations. The Company's support departments, including a strong
engineering department, are adequate for its requirements. It has alsoinstalled and is increasingly utilizing computer-based cost accounting and
management information reporting systems based on packages obtained from a USsoftware firm specializing in this area. The Company will engage management
consultants to recommend further improvements in its organization and operations.
3.21 Manufacturing Facilities and Employment: SOREFAME's principalmanufacturing activities are located at Amora and Amadora 1/. These include:(i) platework products (6,000 tpy capacity) and structures for construction/offshore works (863,000 man-hours per year) at both locations; (ii) industrialequipment manufacture (4,000 tpy) at Amadora; and (iii) rolling stock manufac-ture (150 coaches per year) also at Amadora. The combined annual capacity,excluding rolling stock, is estimated to amount to a production value of
around US$45 million equivalent in 1979 US$ terms.
3.22 Details of the specific equipment at each plant are available in the
Project files. The greater part of SOREFAME's manufacturing facilities are
located at its Amadora complex, which contains both the Industrial Equipmentand Rolling Stock divisions as well as parts of the Platework and Constructiondivisions. Some of the facilities in these divisions are in need of replace-ment. There is also the need for installation of new equipment to balanceexisting facilities and to enable diversified and increased production. It isin this context that SOREFAME is taking steps for the rationalization, upgrading,
and expansion of its present facilities as proposed under the Project.
3.23 SOREFAME currently employs about 4,250 personnel, which are distri-
buted in the different divisions as follows: head office (19%), industrialequipment (34%), rolling stock (25%) and platework, structural and offshoreconstruction (22%). As in COMETNA, there are two trade unions, Intersindicaland UGT (para. 3.13), with most plant workers (about 2,450) belonging toIntersindical and most administrative and clerical staff (about 1,800) to UGT.In the past, particularly following the revolution in 1974, failure of manage-
ment and the unions to agree on labor issues led to strikes, absenteeism andconsequent loss in productivity. However, morale has improved considerablysince then, with absenteeism showing a declining trend in all departments. The
Company has recently instituted incentives to continue to reduce absenteeism,and is taking further steps to enhance the improvement in labor relations.
1/ Map, IBRD 14812R.
PORTUGALMECHANICAL INDUSTRIES PROJECT
SOREFAME: CURRENT ORGANIZATION
Bowd of
Pnstidont
L -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-
(S.| or Mn) r M (J. IgeO) MC.11 Mtgeirl | Manr Do S al e Rt-son |t
Power Rolling Industrial ~~~~~MosiMv Rde4tat. Coro ~ t
R.letio~~~~ Stock Equipsinant ~~~~~~Conssrmucon . noi Aisthon, N*Vis.TDrosion Disision Osc.eion ~~Dwiciion otl
- Pubiic R.H tions - Enginering - Egoin.ng - Engineering - Brkips - G*n al - Iflustory Enpo" Panning - rch - Power Equip. Div. Sos - Fin
- i4.ith a*d - Fsatrino - Fricstson - Fdklticn end Str-%Wms Maintnan Conrol b Finencing - Oslity - Rolling Stock Din. Stte - Accoundti
Soniot Sorinces - Ertion - In erntm - Erction - Pnadric"ted - Spclot Projects - P,o rne - Export Mrketg - Indst. Equip. Div. Sol
- Lasr Legislation - Internal Accomnting - Intern.l Building - Equipsnnt -E tion - Mod. Cont. Div. Sttos
- Prsonnotl h Accouning Acco.nsing Spcuil Structure - Ross Meser Mketing
Training -. Inrna - Tech. Control
Accounting
- 17 -
3.24 Past Sales Performance: SOREFAME's past sales performance since
1973 is shown in Annex 3-2. In 1978, hydromechanical equipment, industrial
equipment and rolling stock accounted for over 80% of the total sales of
around US$23 million equivalent. Around 35% of sales were directed to exports,
primarily composed of hydromechanical equipment for power generation andindustrial equipment for chemical processing.
3.25 Sales have declined in real terms since 1973, and increased by only
40% between 1973 and 1978 compared to domestic inflation during the period
of 195% and US inflation of 55%. The general reasons for the decline weresimilar to those in the case of COMETNA (para. 3.16) and were the result ofunfavorable domestic and foreign market conditions during the period. In thedomestic market, SOREFAME was particularly affected by the inability, due to
budgetary constraints, of the Portuguese National Railways (C.P.) and the
Lisbon Metro to place orders for rolling stock on the scale earlier contracted
with the Company. SOREFAME, in anticipation of the increased orders, had
substantially expanded capacity, including employment, in the rolling stock
division and had started work on some of the orders. Consequently, SOREFAME
had to close one of the three production lines for rolling stock. Other
SOREFAME divisions, where the Company had also increased capacity and employ-
ment, were also affected by shortfalls in expected orders albeit to a lesser
extent. The declining share of exports in total sales since 1975 indicates
the difficulties faced by the Company in the overseas markets during the
recessionary period. However, SOREFAME's estimated sales increased substan-
tially in 1979 as compared to the previous two years (Annex 3-2), and based
on current order books, the Company expects both total production and sales
to further increase significantly in 1980 (Annex 3-5). For subsequent years,
while the Company expects the situation in the rolling stock market to improve
gradually, it is also considering possible diversification into manufacture
of tram cars and related urban transport (for which it anticipates adequate
domestic demand) should this prove necessary to fully utilize its rolling
stock production capacity. The outlook for the other divisions, especially
hydro-mechanical and power equipment, on the other hand, is considerably more
promising (paras. 4.16 to 4.19).
3.26 Past and Present Financial Situation: SOREFAME's financial per-
formance since 1970 is summarized in the following table and detailed in
Annex 3-6. As in the case of COMETNA (para. 3.15), SOREFAME has agreed to
have a detailed audit of its financial situation carried out expeditiously.
3.27 The reasons for SOREFAME's deteriorating financial performance are
similar to those for COMETNA described earlier (para. 3.16) together with some
specific circumstances affecting SOREFAME (para. 3.25). SOREFAME was affected
even more severely than COMETNA by the rapid escalation of labor costs and
interest charges during 1974-79. Under the prevailing labor legislation, the
Company was unable to release its surplus labor arising from the shortfall in
expected orders. SOREFAME also operated largely under fixed price contracts
during the period and was thus unable to cover its rapidly escalating costs,
especially labor and interest charges. Also, SOREFAME's domestic customers
are mostly public and state-controlled entities, which like itself, were faced
with the same unfavorable economic and financial conditions. SOREFAME's
ability to negotiate appropriate prices was further affected by the prevailing
domestic competition in the then tight market. However, with the March 1979
accord (para. 4.17) on market-sharing and specialization, and the expected
improvement in its cash flow under the viability contract, SOREFAME is now in
- 18 -
SOREFAMIE: Summarized Financial Statements
1970 1972 1974 1976 1977 1978 1979-----------------unaudited------------------ (provisional)
Income Statements
Production (CurrentEsc. million) a/ 398 782 937 1,629 1,773 2,092 2,696
Sales (CurrentEsc. million) a/ 329 743 804 1,118 1,441 1,143 2,472
Ratios
Net Income (Loss)/Sales (%) 6.1 4.3 (4.6) (18.4) (30.4) (43.5) (33.5)
Interest/Sales (%) 3.0 2.3 4.2 16.7 25.1 47.8 26.4Labor Costs/Value
of Production (%) 35.4 31.7 44.4 47.9 49.4 46.2 47.0
Debt: Equity Ratio 27:73 27:73 44:56 81:19 76:24 74:26 89:11
a/ The difference between production and sales figures reflects annualadditions to inventories and production not direction to sales, e.g.for maintenance and repairs.
a vastly improved situation. In this context, some recent contracts concludedby the Company reflect adequate flexibility for price revisions to accommodateincreased costs, if any. As in the case of COMETNA (para. 3.16), the Portuguese
Government initiated a viability contract in 1978, and revised it in 1979 sinceSOREFAME's losses in 1978 were higher than envisaged. The Bank recommendedadditional measures which aim at restoring the Company to a sound financialposition (Annex 3-4). Execution of the contract, which was approved by theGovernment in April, is proposed as a condition of effectiveness of the loan.
3.28 Financial Prolections: Based on the aspects discussed above,financial projections for the C6mpany (without taking into account the impactof the Project) are summarized in Annex 3-5 along with the assumptions under-lying these projections. (Consolidated projections with the Project arepresented later in para. 7.05). The expected improvements in SOREFAME'smarkets (para. 3.25) and thus in its sales, and the financial restructuringmeasures are projected to restore SOREFAME to a sound financial position by
1982. The increased sales, in turn, will enable the Company to benefit fromhigher capacity utilization and better utilization of its currently under-utilized labor force which it cannot reduce under existing legislation.
IV. THE MARKET
A. Introduction
4.01 The products to be manufactured under the Project are (i) inter-mediate components like steel castings and industrial valves produced byCOMETNA for manufacturing industries such as petroleum, chemical and petro-chemical, steel, cement, mining, railways, automobiles, and shipping, and(ii) capital goods like hydraulic turbines, generators, hydraulic gates, andpenstocks for power generation, produced by SOREFAMIE. In the absence of a
- 19 -
clearly defined medium/long-term development policy in Portugal it is diffi-cult to make market forecasts. However, future demand projections have been
prepared, taking into account (i) specific development projects, already
established or likely to be established, which would utilize the type of goodsproduced by the Project; (ii) the likely growth of various consuming sectors;
(iii) the possibility of import substitution through domestic production; and(iv) the possibility of exporting different products, based on considerationsof quality and cost-competitiveness. In the following sections, the demand
and market for the products of the three principal Project components, namelysteel castings, industrial valves, and hydro-power generation equipment, isexamined to establish the viability of the production targets in the Project.
B. The Market for the Products
1. Steel Castings
4.02 Supply and Demand of Castings: There are about 90 small and mediumsize foundries in Portugal, of which only four produce steel castings. In1978 the total output was 8,900 tons, of which 2,000 tons were exported. Theremaining 6,900 tons were sold in the domestic market and accounted for about
95% of total domestic consumption. The following table gives past and pro-jected demand and supply of steel castings in Portugal for selected years upto 1990:
PORTUGAL: Demand/Supply for Steel Castings(tons per year)
Average Annual Growth1974 1978 1985 1990 Rate (%)---- Actual---- --- Forecast--- 1978-85 1985-90
Production 8,900 8,900 15,300 20,300 8.0 5.8Imports 400 400 500 500Total Supply 9,300 9,300 15,800 20,800 7.8 5.6
DomesticConsumption 7,000 7,300 10,800 13,800 5.8 5.0
Exports 2,300 2,000 5,000 7,000 14.0 7.0Exports % ofProduction 26 22 33 34
Source: Based on market study for steel castings prepared byEntwicklungsberatung GmbH, Germany.
4.03 Major users of steel castings in Portugal are the chemical, petro-chemical, and petroleum industries (valves and pumps); railway equipment(bogies, crossings, wheels, etc.); automobile and shipping industries; andthe agricultural machinery manufacturing industry; which following the 1974revolution are being operated, to a great extent, by state-owned or state-
controlled enterprises. Primarily as a result of uncertainties regardingeconomic policies in the past few years, and the consequent low level of
domestic investment, domestic consumption of steel castings remained virtuallystatic at about 7,000 tpy during 1974-78. The level of production also showed
no growth reflecting the lack of investment. In comparison with other coun-tries at the same or higher level of economic development, the present percapita consumption of steel castings in Portugal is at relatively low levels,as illustrated in the table below:
- 20 -
Per Capita Consumption of Steel Castings in Selected Countries, 1977(kg/capita)
U.S.A. 7.6 Sweden 3.4Japan 5.5 Spain 3.0Germany 4.8 Yugoslavia 2.6France 4.3 Italy 1.7United Kingdom 3.8 Portugal 0.8
Source: United Nations annual industrial statisticsand GATT trade statistics.
4.04 Current investment plans in Portuguese foundries other than COMETNAindicate that production of steel castings in Portugal will increase from8,900 tpy to 10,300 tpy by 1985. The new foundry, forming part of the Project,would further increase the total production to about 15,000 tpy by 1985 andpossibly to 20,000 tpy by 1990.
4.05 The future demand for steel castings in Portugal was assessedin a market study carried out in May 1979 by a German consulting company,Entwicklungsberatung GmbH, retained by the Bank. Based on a review of thefuture investment plans of individual consuming sectors (para. 4.03), andthe likely demand which these would generate for steel castings, the demandfor steel castings is expected to grow at an average annual rate of 5.8%until 1985. This growth rate and that projected for the domestic productionof castings is in line with the Bank's projections of Gross Domestic Productand output in Portugal 1/. For the 1985-1990 period, a somewhat lowerrate of growth of 5% per annum for the demand of steel castings has beenassumed.
4.06 Because of the low prices of Portuguese castings relative toEuropean levels, and the fact that demand will come to a great extent fromstate-owned or state-controlled enterprises, which have existing arrangementswith Portuguese suppliers, imports are estimated to remain at a low level.
4.07 Portugal is a net exporter of steel castings. Against importsof 400 tpy, it exported on average about 2,000 tpy of steel castings duringthe period of 1974-78. Portugal is well placed to export steel castings.In most developed countries foundries are operating below full capacity,due greatly to high labor costs and enforcement of strict environmentalregulations. The developed countries are relying increasingly on imports fromdeveloping countries of the less sophisticated steel castings. Portugal hasgained a good reputation for steel castings of good quality among customers inthe United States, Canada, Great Britain, Sweden, and the Federal Republic ofGermany. In its market study, Entwicklungsberatung GmbH assessed the futuredemand of current overseas customers for castings from Portugal at about10,000-15,000 tons per year of steel castings in the next five years (1980-85);however, for the purpose of the Project, conservative figures of 5,000 tons in1985 and 7,000 tons in 1990 have been assumed.
4.08 COMETNA's Market Position: COMETNA is the largest producer andexporter of steel castings in Portugal. In 1978, the Company's production
1/ Report No. 2214-PO, mentioned earlier in para. 2.01.
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of 4,000 tons accounted for about 45% of Portugal's total output of these
products. Out of its 1978 production, it sold 2,400 tons (60%) in the domestic
market, representing a market share of about 33% and the remaining 1,600 tons
(40%) was exported, equivalent to about 80% of total Portuguese exports of
these products. COMETNA's main consumers are the railways, mining, cement, and
steel industries, and various mechanical equipment manufacturers. With the
operation of the proposed steel foundry, COMETNA will significantly increase
its production of steel castings, raising its share in the domestic market
from 33% in 1978 to 56% in 1985.
4.09 COMETNA's main clients abroad are located in Western Europe and
North America. Due to capacity constraints, COMETNA has not been able to meet
its clients' potential demand, which is well above the level of COMETNA's
present shipments to them. After the Project starts production, COMETNA is
expected to be in a position to about double its exports to 4,000 tons in 1985
and 6,000 tons in 1990. COMETNA's exports will then account for about 40% of
its production. This percentage is in line with COMETNA's recent experience
(para. 4.08) and its current 1980 export orders for steel castings of 38%.
2. Industrial Valves
4.10 Introduction: Industrial valves can be classified into four major
categories: automatic valves, fluid power valves, general valves and manual
valves. Manual valves, also known as industrial valves account for about one
third share of the total valve market in the world. They perform primarily
two basic functions--shutoff and throttling service--and are of many designs
like globe, check, gate, butterfly, ball, etc. Industrial valves offered in
the international market generally range from 10 to 1,500 mm in diameter;
however, 80% of the market is concentrated in the range of 50 mm to 200 mm.
The major users of industrial valves are the chemical and processing indus-
tries, electric and gas utilities, mining and manufacturing industries, and
water/sewage facilities. The chemical and processing industries represent
about 45% of the total use with the requirement for valves in these industries
amounting, in value, to 1 to 2% of total fixed assets.
4.11 Supply and Demand: At present, there are seven enterprises in
Portugal manufacturing industrial valves together producing 14,100 valves
(600 tons) in 1978. Taking into account the current expansion plans of these
manufacturers, including COMETNA, annual production is expected to increase
to 30,300 valves (1,000 tons) by 1985. The industrial valves manufact red
in Portugal range from 10 to 600 mm in diameter and from 4 to 40 kg/cm in
pressure. However, a major part of the production is presently co centrated
in the middle range of 50 to 200 mm in diameter and 10 to 16 kg/cm in
pressure, conforming to a large extent to the range offered in the interna-
tional market. The table on the next page gives past and projected demand and
supply of valves in Portugal.
4.12 The demand for industrial valves can be classified into two groups:
(i) original equipment market as a result of new investments, and (ii) re-
placement market due to maintenance and repair investments. The higher con-
sumption of valves in 1976 and 1978 shown in the following table resulted
mainly from the new investments in Portugal's SINES refinery and in an ethylene
project. Excluding these two major investments, the average demand in the
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period 1974-78 was about 50,000 valves (1,500 tons) per year. Based on aclose review of the projects likely to be implemented in the 1980-84 period,it is expected that the demand from new investment projects would be about54,000 valves during that period or on average about 10,800 valves per year.The demand arising from repairs and maintenance is assumed to grow at 2% perannum or to 57,300 valves per year by 1985. The total annual demand wouldthen be about 68,100 valves in 1985.
PORTUGAL: Demand/Supply for Industrial Valves(Numbers)
1975 1976 1977 1978 1985---------------Actual--------------- Forecast
Production 11,100 13,500 10,400 14,100 30,300Imports 44,200 74,100 34,600 59,800 37,800Supply/Domestic Consumption 55,300 87,600 45,000 73,900 68,100Imports as % of Supply 79.9 84.6 76.9 80.9 55.5
Source: Based on market study prepared by CODES, Portugal.
4.13 During the period 1974-78, imports covered 80-85% of total domesticrequirements of valves in Portugal. These imports were concentrated in thelower rapges of valves with diameter up to 100 mm and pressure higher than16 kg/cm . The principal reasons for such substantial imports are primarilythe nonavailability in Portugal of specific types of valves, and long deliveryperiods associated with the limited availability of domestic castings andforgings. With the implementation of new investments in the foundry andforge sectors now underway in Portugal, castings and forgings of good qualityto support domestic valve production are expected to be more readily available.The share of imports in the market for valves would correspondingly be reduced.Nevertheless as indicated in para. 4.11, even in 1985 imports would stillaccount for more than half of the domestic consumption of industrial valves.
4.14 Exports of industrial valves have not been taken into account inthe above analysis. Portugal exported about 800 tpy of valve bodies in theform of castings in the past three years (1975-78), and it plans to export2,000 tpy in the 1980's. While industrial valves manufactured in Portugalconform to the internationally recognized DIN and ASA norms, penetration intothe international market has been difficult. The original equipment marketis controlled by international engineering companies operating in the oil,chemical, fertilizer and energy sectors, which tend to rely on companies withwhich they are familiar for the valve requirements. However, as Portuguesecompanies increasingly seek collaboration with engineering firms in thefuture, increasing international market penetration is expected.
4.15 COMETNA's Market Position: COMETNA is the largest manufacturer ofvalves in Portugal. In 1978, it produced 3,100 valves (430 tons), equivalentto 22% of Portugal's total production in numbers and to about 72% in terms oftonnage. When the new plant comes into operation, COMETNA is expected toincrease its share in domestic production to about 50% in numbers and about75% in tonnage. The major increase in COMETNA's production would be in thelow size range of valves, which have so far been imported.
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3. Hydro-Power Generation Ecquipment
4.16 A detailed analysis of the market for hydro-power generation equip-
ment manufactured in Portugal is provided in the Project files. The power
generation capacity added in Portugal during 1973-77 was largely made up of
thermal power which accounted for 60% of the total installed capacity of 1,059
MW in this period. Over the same period, power consumption increased at a
rate of 9.4% and in the future is expected to grow at an average annual rate
of 8%. In line with this forecast, the Electricity Company of Portugal (EDP)
has planned an expansion program for thermal and hydro plants at a total
investment cost of about US$1.7 billion over the years 1980-84. The projected
pattern of installed capacity would then be:
PORTUGAL: Projection of Installed Power Capacity (MW)
Percent increase
1979 1980 1981 1982 1983 1984 1984 over 1979
Hydro 2,358 2,508 2,673 2,876 2,981 3,035 29.6
Thermal 1,638 1,638 2.058 2,058 2,393 2,728 66.5
Total 3,996 4,146 4.731 4 934 5,374 5.763 44.2
Source: Feasibility Study of the Project prepared by SICAI-TPL, Italy.
In addition, several other projects are at bidding stage for commissioning by
1987, leading to an addition of about 200 MW/year for the period 1980-87. By
1987, around 50% of Portugal's surveyed hydroelectric resources are expected
to be utilized. EDP also believes that, taking into account the expected
costs and availability of other forms of energy, the remaining hydro resources
will in most part be exploited by the end of the century. The equipment
deriving from this planning, comprising hydraulic gates, penstocks, turbines,
generators, etc. will form a steady continuous market for the Project.
4.17 The manufacture of hydro and thermal power plant equipment in
Portugal has been governed since March 1979 by an agreement under the authority
of the Ministry of Industry and Technology. Under this agreement SOREFAME
will be the sole domestic supplier of equipment for hydro power stations using
the technology of two French companies, NEYRPIC and ALSTHOM; and MAGUE, a
private manufacturing enterprise will be the sole domestic supplier of equip-
ment for thermal power stations. This agreement provides also, that (i) 30%
(in value) of each hydro turbine ordered by EDP will be imported from NEYRPIC.
In return NEYRPIC will place orders with SOREFAME for a value of at least 30%
of the value of the EDP import and that (ii) 15% (in value) of each hydro
generator ordered by EDP will be imported from ALSTHOM. In return ALSTHOM
will place orders with SOREFAME for a value of 20% of such import.
4.18 The overall sales of the hydro-power generation equipment to be
manufactured by SOREFAME, taking into account the factors mentioned above and
SOREFAME's expansion plans, are illustrated below. The market comprises a
number of complex products which are difficult to define in physical units.
It is therefore assessed in terms of sales value.
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SOREFAME: Sales of Hydro-Power Equipment(in constant 1979 US$ million)
1976 1977 1978 1985 a/-------Actual--------- Forecast
Sales 5.4 8.1 7.5 40.8of which:Domestic 3.3 3.9 1.0 30.0Exports 2.1 4.2 6.5 10.8
Exports % of Sales 39 52 87 26
a/ Average annual forecast for 1985-1989, assuming thatthe Project is implemented as scheduled.
Source: Based on feasibility study prepared by SICAI, Italy.
4.19 Portugal has a good record of achievement in the export marketfor hydro-power equipment. Over the past three years (1976-78) over 40% ofSOREFAME's total sales derived from exports. Further, export prospects inthe future are good, specially in view of current energy problems worldwidewith a projected resurgence of schemes to use available hydro resources. Inthe light of past export achievements, it is expected that on average exportsof around 25% of its total sales will be attainable in the future.
C. Marketing and Sales Organization
4.20 COMETNA has recently decentralized its sales organization. Thesales responsibility for different product groups -- castings, industrialvalves, plant equipment, and special projects -- rests with individual plantgeneral managers who report to the Board. The current sales organization forcastings and industrial valves is appropriate. However, when the new Projectis implemented, COMETNA plans to supplement the present activities of thesales organization with additional market research and promotion activitiesunder the direct operational responsibility of a Board member.
4.21 In the domestic market, selling castings and industrial valvesis, at present, mainly restricted to the follow-up of sales enquiries andtechnical assistance rather than active promotion. However, when the newplants for castings and valves come on stream, COMETNA plans to change itspolicy into active selling through strengthening the present staff. Further,it will be able to provide quicker response to customer requirements andincrease the reliability of delivery. No difficulty in this regard isexpected. However, COMETNA has agreed to review its pricing policies annuallywith the Bank (para. 3.10).
4.22 As for export sales, COMETNA has gained sufficient experience inconducting business abroad, specially for castings. The Company has alreadyinitiated activities to strengthen its contacts with present clients, explorenew markets and seek cooperation agreements with foreign companies for thesupply of castings to increase its exports. This is essential in view of thefact that once the steady state operation of the new foundry has been reached,about 40% of the production is expected to be exported.
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4.23 As mentioned earlier (para. 4.17), SOREFAME is the sole supplier ofhydro-power generation equipment to one major customer, EDP, and consequentlyan elaborate domestic sales organization is not relevant. Nevertheless, theCompany is involved in the early phases of technical planning and implementa-tion of various hydropower projects and has sufficient qualified staff torender this service and to keep close contacts with the Government agenciesand a continuous information exchange with EDP. As far as exports are con-cerned, SOREFAME has experience in exporting hydromechanical components andparts. To further promote its exports, the Company has also reorganized itsexport division, planning to increase the strength from 25 presently to 40people. In addition, work overseas is acquired through the licensors NEYRPICand ALSTHOM, and through a network of agents and other contacts. Thesearrangements are considered adequate.
D. Prices and Competitiveness
4.24 COMETNA's prices for castings and valves in the past have beenwell below international levels. This has partially resulted from the Com-pany's inadequate accounting and pricing systems which, for example, havenot made allowances to enable the Company to keep abreast of inflation. Newmanagement, appointed in May 1979 (para. 3.09), has taken a number of stepsto improve the situation in this regard. Price increases of 25% were imple-mented since then. Further, COMETNA is currently in the process of implement-ing a computerized data processing system to maintain its accounts on aproduct by product basis. It has also taken steps to introduce a priceescalation mechanism into its pricing system. In addition to an annual reviewof its pricing policies (para. 3.10), COMETNA has agreed to complete by notlater than December 31, 1980, a study of its prices, aimed at formulating ashort-term action program and a long-term policy.
4.25 The following table shows a comparison of COMETNA's prices inOctober 1979 (after above-mentioned increases) for a range of products withthe estimated lowest sales prices of German (Federal Republic), Swiss andFrench companies.
COMETNA: Comparison of Selling Prices (FOB) October 1979(Esc. per kg)
Estimated European PriceCOMETNA's European as percentage of
Product Price Price COMETNA's price
Carbon steel valves 90 107 119Railway bogies 90 107 119Railway wheels 45 65 144High alloy steel parts 85 169 199Steel mill rolls 74 92 124Low alloy steel grinding media 33 74 224
Average (based on COMETNA mix) 80 100 125
Source: Feasibility study prepared by Georg Fischer AG, Switzerland.
The low level of prices coupled with good product quality has resulted inincreased demand of castings by foreign customers. The average price levelper kilogram of castings on export markets is presently 25% higher than thoseprevailing in OOMETNA. COMETNA intends to implement a real price increase ofan average of about IO0 once the new foundry starts production enabling the
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Company to provide quality castings consistently and within competitivedelivery schedules. Such an increase is deemed to be realistically possiblewithout in any way jeopardizing the Company's strong competitive po4itionand ability in establishing new markets. Domestic prices are free of pricecontrols and are approximately on the same level as the export prices. Higherprices could, most likely, be achieved; however, an increase of only 10%(still 15% below the international level) has been conservatively assumed inthe financial projections.
4.26 In case of industrial valves, COMETNA's expertise in the past hasbeen in the supply of large valves of over 50 mm diameter. In this range ofvalves, COMETNA's prices are about 20-25% lower than the average price ofimports from Europe and 15% below the lowest price for imports. For smalldiameter valves of less than 50 mm COMETNA will face competition from importsfrom other low cost countries, especially Spain. As noted earlier, this isthe range of valves in which, as a part of the new Project, COMETNA intends tosubstitute for present imports. With the increase in the productivity, andprompt and reliable delivery expected to result from the new plant, COMETNAis expected to enjoy a strong competitive position. In addition, the plantdesign permits flexibility in the choice of the product mix to allow COMETNAto penetrate into the most profitable markets.
4.27 Pricing has also been a problem within SOREFAME for the hydro-powergeneration equipment, with costs increasing at a faster rate than the pricescharged. SOREFAME's failure to keep prices in line with rapidly rising costswas partly due to its inability to suitably revise its pricing methods to takeinto account the high rates of inflation. Further on the domestic market,the competition from other Portuguese suppliers of similar equipment forcedthe Company to keep its prices low. Finally, in light of the low capacityutilization and related low productivity, the Company accepted low prices tofill its order books. As far as future pricing is concerned, SOREFAME hascorrected the problem of coping with inflation and recent contracts includerevision formulae to take the actual cost increase, that may occur, intoaccount. Also, within Portugal it will no longer be in competition withother manufacturers due to the agreement with EDP to be the sole supplier(para. 4.17). In the international market, on the other hand, SOREFAME facesdifficult competition, especially due to the high costs arising from thecurrent high level of financial charges in turn resulting from its weakfinancial position, and the lack of specific export support mechanisms suchas export sales financing, which is offered by a number of its competitors.However, after improvements in the Company's financially situation andincreasing productivity upon implementation of the Project, SOREFAME's com-petitive position is expected to improve substantially. Also, the Governmentis reviewing and is expected to implement specific export incentives andsupport facilities which would further enhance SOREFAME's competitiveness(paras. 2.16 and 2.17(i)).
V. THE PROJECT
A. Project Objectives and Scope
5.01 The primary objective of the Project is to contribute towards theimprovement of performance of the Portuguese engineering industries subsectorthrough the relocation, modernization and expansion of COMETNA's steel castingand valve facilities to a new location (para. 5.11), and the rationalization
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and expansion of SOREFAME's existing hydro-power generation equipment manu-
facturing facilities, which lacked adequate reinvestments in past years.
Further, the existing COMETNA foundry in Amadora is situated in a populated
residential area with unsatisfactory pollution control systems, thereby
having an adverse impact on the working and residential environment. The new
facilities included in the Project, in addition to improving the working and
environmental conditions, are expected to lead to better product quality and
higher labor productivity.
5.02 The proposed Project includes three major components: (i) Reloca-
tion and expansion of COMETNA's existing steel casting foundry (5,000 tpy
capacity) to an initial capacity of 10,000 tpy with provision for future
expansion; (ii) relocation and expansion of COMETNAA's present facilities
for the production of industrial valves (3,000 units per year) to a capacity
of 15,000 units per year including diversification of products; and (iii)
rationalization and expansion of SOREFAME's hydro-power equipment manufactur-
ing facilities to being able to produce selected equipment for one hydro-power
plant per year of up to 250 MW capacity (as against 150 MW presently). In
addition the Project includes a technical assistance component to undertake
a study of the engineering subsector (para. 2.16). The Project also provides
for proper environmental control facilities in COMETNA's existing foundry,
which will continue to produce iron castings, until these facilites are also
moved to the new location at a later date.
B. Project Description
5.03 With an initial planned capacity of 10,000 tpy, the new foundry will
produce steel castings, weighing up to a maximum of 7 tons for the domestic
and export markets. COMETNA plans to limit its present wide range of castings
of about 2,000 different items by concentrating on about 600 important and
intricate castings. However, the design of the plant will permit considerable
flexibility to meet the changing needs of customers. The product-mix at full
effective capacity of 10,000 torns in 1986 would be as follows: Valve bodies
3,000; railway parts 3,100; components for steel industry 700; parts for cement
industry 2,800; and miscellaneous 400 tons.
5.04 The design of the plant is appropriate for an economical medium
sized foundry. The buildings and the layout also take into account possible
further expansion to 15,000 tpy, now tentatively planned to come on-stream by
1989. The proposed plant will be equipped primarily with new manufacturing
and auxiliary facilities, as the present steel foundry equipment is old and
obsolete. Some of the equipment of the present facilities will be used by the
iron foundry, which will continue its operations at the present premises. Thenew production facilities will include (i) a main shop with sections such as:
melting, equipped with 3 arc furnaces of 6-ton capacity and one medium fre-
quency induction furnace of 2-tons capacity; machine molding with three semi-
automatic lines for grinding media, small and large steel castings; hand
molding for wheels, rolls and heavy parts; sand plant with preparation and
regeneration equipment; and core making; and (ii) a secondary shop consisting
of fettling, gritblasting, heat treatment, grinding and finishing sections.The plant will also include a pattern shop, a maintenance shop and other
auxiliary facilities. The plant layout is shown in Annex 5-1.
5.05 The valve plant will replace the present manufacturing facilitiesof COMETNA in Lisbon, which produce about 3,000 valves per year. The new
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plant with an effective capacity of about 15,000 units per year in 1985 isplanned to produce the following product-mix: 10,500 pieces (150 tons) ofupto 50 mm; 3,500 pieces (250 tons) of 50-150 mm; and 1,000 pieces (350 tons)of over 150 mm diameter. The design of the valve plant has, however, madeprovision to accommodate changes within the full range of the industrialvalves sizes from 10 to 600 mm diameter and also of the various types such asglobe, gate and non-return valves. An adjustment towards the higher propor-tion of larger valves could increase the production of the plant to 1,200 tonsof valves per year. The new facilities are designed for repetitive, small andmedium-size batch production runs based on the product-mix and the proposedsize of the plant. They include various machine tools such as numericallycontrolled turning lathes, a multi-spindle drilling machine, horizontal boringmills, milling machines, special testing facilities, painting and finishingequipment. Some machinery from the existing facilities, such as two machinetools, testing and painting equipment will be incorporated in the new plant.The equipment to be transferred is generally in good condition but will beoverhauled before installation. The plant layout is shown in Annex 5-2.
5.06 Within the hydro-power equipment manufacturing component of theProject, the existing facilities of SOREFAME will be reorganized, expandedand rationalized by concentrating different production activities in threemain complexes--fabrication, machining, and electrical-cum-assembly facil-ities. The reorganization will substantially improve the existing plantfacilities to enable SOREFAME to undertake the manufacture of larger hydro-power units up to 300 MW, versus up to 150 MW at present. The fabricationshop will be strengthened with equipment like a 12m longitudinal automaticsubmerged arc column, heavy welding positioners, welding machines, a heattreatment furnace for heavy pieces up to 150-tons weight, five cranes ofdifferent capacities, painting and other auxiliary equipment. The machineshop will have large machine tools to handle heavy and bulky cubicle andcylindrical precision components. The machinery will include such items asa large vertical lathe for pieces up to 12m diameter, boring mills, and aturning lathe for parts up to 10m in length. Some small investments areincluded in the electrical-cum-assembly shop to rationalize certain processes.The production facilities on completion of the subproject are presented inAnnex 5-3.
C. Project Organization
5.07 The three subprojects are to be implemented by COMETNA and SOREFAME,and will be operated as individual profit centers within their other activi-ties. As regards the foundry, COMETNA is presently seeking a foreign partnerto participate financially in the new venture. Such an approach is plannedby the Company to raise equity and to enhance its future export prospects.From the technical and technological point of view, COMETNA does not need aforeign partner, as it has sufficient experience in modern foundry techniques(para. 5.08). While the prospects for foreign participation appear limited atthe present time, COMETNA plans to continue to pursue its efforts in thisdirection, without intending to modify drastically the scope of the Project,were it to find such a partner. The new foundry will, therefore, be initiallyestablished as a clearly delineated division of COMETNA with the possibilityof conversion into a separate company. COMETNA has agreed not to enter intoany collaboration without the prior approval of the Bank. The organizational
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set-up of the new foundry and the new valve plant is shown in Annex 5-4 andAnnex 5-5; that of the hydro-power component remains unchanged (para. 3.20).
D. Process, Technology and Licensing Arrangements
5.08 The various products proposed for manufacture under ti.: Projectrequire production processes and technologies which are already being used invarying degrees by the existing companies. These were acquired by them eitherthrough licensing agreements with foreign companies or through their owndevelopment activities and accumulated practical experience over many years ofoperations. COMETNA and SOREFAME already possess various technical assistanceand licensing agreements with reputed European companies (paras. 3.07 and3.18). The technology applied in the foundry is based on the modern processesand equipment presently available on the market. Furthermore, COMETNA'sintention to seek foreign participation would lead to further access to futuredevelopments in casting production technologies.
5.09 COMETNA's present industrial valve technology meets the marketrequirements. However, in order to continuously upgrade its technologicalbase, COMETNA will, by end December 1980, set up an engineering department toanalyze various developments in the valve industry and has also agreed tomake arrangements for technical assistance to develop new valve designs andtechnology.
5.10 As mentioned earlier (para. 4.17), SOREFAME already possesseslicensing agreements with French companies, NEYRPIC for hydraulic turbinesand ALSTHOM for power generators. To ensure effective transfer of technologyfrom the licensing companies, the liaison responsibility is assigned directlyto a member of the Company's Board of Directors. Further, the Company main-tains its own research and development department in the metallurgical andwelding fields.
E. Location and Infrastructure
5.11 Two components of the Project, namely the foundry and the valveplant under COMETNA will be relocated from their existing facilities inAmadora and Lisbon respectively, to a new site. The hydro-power equipmentcomponent will involve the expansion of the existing facilities of SOREFAMEin Amadora. The site 1/ selected for the foundry is within a radius ofabout 5 km from the present foundry facilities, and has been approved by theconcerned authorities. The on-site services like electricity, water, telephoneand sewage will be easily available. All formalities regarding the acquisitionof the site have been completed. The Government has agreed to ensure theprovision of necessary infrastructure in line with the project schedule. Thevalve plant will be installed within the foundry complex, as the proximitywill minimize the transportation costs of rough steel castings, which are themajor input for the production of valves and to minimize investments.
F. Ecology
5.12 According to the Portuguese law it is obligatory for industrialestablishments to obtain certification from the Office of Environmental and
1/ Map, IBRD 14812R.
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Safety Control as to whether the required conditions for pollution protectionhave been met. There are only limited governmental environmental standards;however, adequate features have been incorporated in the foundry design forthe prevention of pollution and for maintaining adequate safety and healthstandards in line with OSHA-codes. The plant is designed to include (i) dustcollection units for all arc furnaces, sand systems, shakeouts, sand reclama-tion, shotblast units, weld-arc repair and grinding systems; (ii) noisereduction devices at all shakeout areas; (iii) electrostatic precipitators forabsorption of fumes and particles of arc furnaces; (iv) sound absorbing workbooths for all finishing stations; and (v) individual ventilation control invarious areas of the main shop. Various environmental control devices incor-porated in the design are expected to keep the pollution levels below theThreshold Limit Value (TLV) of OSHA-codes. In view of the particular impor-tance of environmental consideration, it is also planned to improve the dustand fume collection system of the existing foundry so as to achieve improvedworking and ecological conditions. The production facilities of the valveplant will be relatively clean with no adverse effects on the environment.In the hydro-power equipment component, no major environmental problems areanticipated. SOREFANE already practices various health and safety measuresin its plant comparable to those in similar manufacturing facilities inEurope. All the measures for the Project components, especially for thefoundry, are judged to provide adequate and satisfactory environmental andsafety control facilities. Nevertheless, assurances have been obtainedwith regard to the proper final design, implementation and operation of thevarious control facilities.
G. Raw Materials and Components
5.13 The main raw materials for the foundry are steel scrap, ferro-alloys, various sands, refractory materials, electrodes, and chemicals andadditives for molds. Major part of these raw materials are available inPortugal, however various ferro-alloys, additives, and some special typesof sand will be imported. For the valve plant, the main material inputsare castings and forgings, which will be domestically produced in Portugalprimarily by COMETNA itself. Some parts and components will partly be pur-chased locally from existing suppliers in Portugal and partly imported fromEurope.
5.14 The products in the hydro-power equipment component are predomi-nately either machined or fabricated parts. The major inputs for the firstgroup are sophisticated castings and forgings, which are partially locallyavailable from COMETNA and partially imported. Plates, bars and profiles willform the raw materials for the fabricated items. Except for some categoriesof bars and profiles, which are locally available, all other raw materialswill be imported. In addition to these raw materials the Company needs avariety of parts and components, such as controls, electrical systems, specialalloy items, etc. which will be entirely imported. The availability ofimported raw materials and components in required quantities for the Projectcomponents -- in value terms 45% of the total material costs at full productionfor the foundry, 10% for the valve plant, and 70% for the hydro-power component(para. 7.04) -- presents no difficulty as SOREFAME and COMETNA have wellestablished contacts with foreign suppliers.
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H. Employment, Training and Productivity
5.15 Since it is partially a relocation and modernization project, the
Project will create additional employment for only about 350 people. Most
of the labor force will be obtained from existing facilities, thereby con-
solidating employment of another 560 people in the foundry and valve plant,
which would have been jeopardized otherwise in the near future. The investment
cost per job created (or saved) equals US$69,000 for the foundry, US$63,000
for the valve plant and US$91,000 for the hydropower component (incremental),
and US$73,000 for the Project as a whole. At full production, the labor
productivity in the three major Project components is expected to increase
substantially. The increase in productivity (paras. 5.16-5.18) is one of the
major features of the Project and would enable the Companies to better utilize
their present labor force in various activities. The productivity targets
proposed in the Project are judged to be realistic. They are still about 20%
lower than those attainable in similar plants with a comparable product mix in
more industrialized countries.
5.16 Following the relocation, modernization and expansion of the steel
foundry, as provided for in the Project, the foundry's labor productivity is
expected to improve to 100 man hours per ton of castings as against the
present 190 man hours. Based on this productivity, the new plant would
require 620 people (mostly to be provided by COMETNA's existing steel casting
facilities). COMETNA's labor force is well-skilled and trained. Neverthe-
less, the foundry component includes provision for technical assistance to
train the people in operating the new equipment. Further, a part of the
present operational labor will be employed to erect the equipment and gain
skills and to familiarize themselves with the new equipment. This will ensure
the availability of a trained team in the start-up phase. As mentioned earlier
(para. 5.11), the new plant is located within a radius of 5 km of the existing
facilities and, thus, is not expected to pose any special problems with
respect to transportation of the labor force.
5.17 The valve subproject is expected to require about 90 people in
single shift at full production, of these about 20-30 people will be trans-
ferred from the present facilities in Lisbon and the rest will be recruited
from the outside. COMETNA will make necessary arrangements for technical
assistance to train people on the new machine tools. The new plant will
also result in significant improvements in labor productivity, increasing it
by about 100% at full production.
5.18 In the hydro-power equipment component, SOREFAME presently employs
about 1,500 people. Following reorganization, modernization and expansion of
the existing facilities under the Project, SOREFAME will recruit about 200
people from outside or transfer labor from its rolling stock division, in case
the Company is not able to acquire the expected orders from the Portuguese
Railways (para. 3.25). At full capacity utilization of the facilities in
1984, the productivity is expected to be 750 Escudos (1979 terms) per manhour
as against the present 490 Escudos (1979 terms) per manhour, showing an
increase of more than 50%. The productivity increase will be achieved through
the addition of new equipment and SOREFAME's own training program; no problems
are expected in the operation of the new equipment.
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I. Project Management and Implementation
1. Organization and Management
5.19 COMETNA and SOREFAME will be responsible for the implementation ofthe corresponding Project components. IPE will also set up in its own organi-zation a Project Monitoring Unit with adequate staffing (para. 3.04). Thisunit will expedite the required government actions, coordinate project manage-ment at the two companies where required, and serve as a focal point for Bankcontact.
5.20 For the execution of the foundry and valve plant, COMETNA is inthe process of establishing a Project Management Unit (PMU). A former foundrymanager with extensive operational as well as project implementation experiencehas been assigned primary responsibility for implementation. He will workunder the guidance of the Company's management board. The proposed organiza-tion of the PMU is shown in Annex 5-6. The Company has already startedseeking experienced personnel in technical, budget and project control functionsand intends to build-up the staff with the necessary qualifications by June1980. The PMU is seeking foreign technical assistance for the detailedengineering, preparation and selection of equipment, construction management,supervision of erection of the foundry, training of personnel and installationof a management information system. The Company has selected, in consultationwith the Bank, a qualified consultancy firm for this task. Civil and infra-structure construction work as well as equipment erection will be undertakenby Portuguese contractors with the assistance of COMETNA's operational people.The consulting firm will be responsible for overall coordination of its workwith that of the Portuguese contractors. In addition to technical assistance,suppliers of the equipment are to provide necessary assistance for the erec-tion and start-up of the plant.
5.21 The detailed design of COMETNA's valve plant will also be undertakenby the consulting firm associated with the foundry component. It will also beresponsible for the civil works and for the erection of the equipment to beundertaken by the Portuguese contractors. The SOREFAME Project component,consisting mainly of the erection of machine tools in existing buildings, issimple in its implementation. The civil engineering work along with theerection of the equipment will be carried out by SOREFAME's own experiencedcivil construction department. The production engineering department will beresponsible for the specification and selection of equipment. These arrange-ments for Project implementation are considered adequate.
2. Project Implementation Schedule
5.22 The schedule for Project implementation is shown in Annex 5-7.For the foundry component, COMETNA has appointed the technical consultantsfor detailed engineering and qualified Portuguese consultants for the relatedcivil engineering in May 1980. Based on the appointment of consultants andfollowing the detailed engineering, equipment specification and correspondingtender documents for critical items are expected to be ready by about mid-1980with order placement beginning soon thereafter. The Company plans mechanicalcompletion of the facilities by the end of 1982 and start of production in1983. Full production of 10,000 tons is expected to be achieved in 1986.
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5.23 For the valve plant, equipment specifications are expected to befinalized by June 1980 and orders placed by September 1980 leading to mechanical
completion by the end of 1981. For the hydropower equipment component under
SOREFAME, the Company has already initiated procurement actions. Advertisements
for international bidding have been placed, and the Company is in the process
of prequalifying prospective bidders. The preparation of detailed specifica-
tions for the machinery and equipment is well advanced. For ont critical long
delivery item (a vertical turning lathe), SOREFAME expects to place the order
by the end of June 1980, i.e. prior to scheduled loan signature. All equipment
is expected to be operational by the end of 1981.
VI. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT
A. Capital Costs
6.01 The total Project financing required is estimated at US$89.0 million,
of which US$52.0 million or 58% would be in foreign exchange. The detailed cost
breakdown by principal Project components is given in Annex 6-1 and the over-
all costs of the Project as a whole and of various components are summarized
in the table on the following page.
6.02 The base cost estimates were prepared by foreign engineering firms--
Georg Fischer, Switzerland for the foundry, SERI-Renault, France for the
valve plant, and SICAI, Italy for the hydro-power equipment component, on
the basis of quotations received in October 1979 from equipment suppliers in
Europe. The estimates were discussed with the concerned engineering firmsand the Companies and revised, based on changes of equipment design to suit
Portuguese working conditions. Civil and building work costs are based on an
estimate of total volume of work required for the foundry and valve plant and
unit prices calculated by a reputed Portuguese construction company, whichcarried out the site selection and related soil tests. The estimates for
engineering and technical assistance, which are based on proposals already
received by the companies, include foreign consultancy services of about 230
man-months for detailed engineering, management system development and techni-
cal assistance for COMETNA and about 40 man-months for management systems
assistance to SOREFAME. The total man-month cost of these services, including
fees, overheads and other expenses, is expected to be around US$10,000.Around 120 man-months of assistance is also envisioned for the subsector
studies at a similar cost.
6.03 In line with the Government policy for major investment projects,all imported equipment and material for the Project will be exempted from
import duties and taxes. A physical contingency factor of 10% has been
added to the base cost estimates and is considered adequate. Price contin-
gencies arising from annual escalation of both local and foreign costs of
equipment, materials, civil works and other capital items in US$ terms are
projected to be 10.5% in 1980, 9% in 1981 and 8% thereafter. These inter-
national price escalation rates were used for both local and foreign capital
expenditure (expressed in US$) on the assumption that, in future, differences
in the international and domestic inflation rates would be accounted for by
corresponding adjustments in the exchange rate in line with the Government
current policy in this respect. The price contingencies represent about 20%
of the base cost estimates plus physical contingencies. The installed costestimate of the Project including contingencies is considered reasonable andadequate.
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Prolect Capital Cost Estimates
Current Esc. Million a/ Current US$ Million
Local Foreigr- Total Local Forei___ otal %
Civil Works and Buildings 594 138 732 12.4 2.9 15.3 30.6Machinery, Equipment and Spares 180 1,126 1,306 3.8 23.7 27.5 55.0Installation & Supervision 86 47 133 1.8 1.0 2.8 5.6Engineering & Technical Assistance 28 128 156 0.6 2.7 3.3 6.6Preoperating & Start-up Expenses 14 43 57 0.3 0.8 1.1 2.2
Base Cost 902 1,482 2,384 18.9 31.1 50.0 100.0
Physical Contingencies 86 138 224 1.8 3.0 4.8 9.6Price Contingencies 185 328 513 3.9 6.9 10.8 21.6
Installed Cost 1,173 1,948 3,121 24.6 41.0 65.6 131.2
Incremental Working Capital 441 171 612 9.3 3.6 12.9 25.8Environmental Control System 14 57 71 0.3 1.2 1.5 3.0Subsector Studies 47 57 104 1.0 1.2 2.2 4.4
Project Cost 1,675 2,233 3,908 35.2 47.0 82.2 164.4
Interest during construction 86 237 323 1.8 5.0 6.8 13.6Total Financing Required 1.761 2,470 4,231 37.0 52.0 89.0 178.0
of which:Foundry 1,177 1,519 2,696 24.6 32.2 56.8 63.8Valve Plant 180 162 342 3.8 3.4 7.2 8.1Hydro-Power Component 342 675 1,017 7.3 14.0 21.3 23.9Environmental Control System 14 57 71 0.3 1.2 1.5 1.7Subsector Studies 48 57 105 1.0 1.2 2.2 2.5
1,761 2,470 4,231 37.0 52.0 89.0 100.0
a/ The costs in Escudos have been calculated from US$ cost using an exchangerate of Esc. 47.5 = US$1.00.
b/ Includes indirect foreign exchange component which is estimated to beUS$4.3 million (about Esc. 200 million).
6.04 Working capital requirements have been estimated at US$12.9 million,taking into account price escalation as described in the preceding paragraph.The relatively low requirement is due to the reason that a part of the Projectwill replace the existing old facilities and is also based on assumptions thatCOMETNA and SOREFAME will improve their working capital management over thatexisting presently in their operations (Annex 3-5). Further, the implementa-tion of the viability contracts (paras. 3.16, 3.27) will also improve theworking capital position of the Companies. Interest during construction isestimated at US$6.8 million, based on the investment schedule and an interestrate of 10% (in US$ terms) for all debts, from both local and foreign sources.
B. Financing Plan
6.05 The total financing requirements for the Project as a whole areproposed to be covered as follows. Details for the principal componentsof the Project are given in Annex 6-2.
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Project Financing Plan(current US$ million)
Local Foreign Total PercentageFoundry, Valve & Hydro-Power Components
EquityIPE 32.9 1.2 a/ 34.1 40
DebtIBRD - 41.6 41.6 49Other Sources 2.8 6.8 9.6 11Sub-total Debt 2.8 48.4 51.2 60
Financing Need for PrincipalComponents 35.7 49.6 85.3 100
Environmental Control System 0.3 b/ 1.2 c/ 1.5Subsector Studies 1.0 d/ 1.2 c/ 2.2Total Financing 37.0 52.0 89.0
a/ For indirect foreign exchange.b/ To be financed from local debt.cI Proposed to be financed by the Bank.dI To be financed by Government contribution.
6.06 Of the total financing requirements of US$89.0 million for the Project,the local currency component is estimated at US$37.0 million. In view of thepresent financial situation of COMETNA and SOREFAME, 40% of the cost of eachProject component (other than environmental control system and subsector studies)will be covered by equity. Assurances have been obtained from IPE that it willensure provision of US$25.6 million and US$8.5 million in equity funds forCOMETNA and SOREFAME respectively. The timing of the equity participationhas also been agreed. Finally, the Government has agreed to guarantee theprovision of such equity and the maintenance of a maximum debt equity ratio of60:40 for each of the Companies, and to ensure the provision of US$1.0 millionto cover the local currency costs of the subsector studies.
6.07 Debt financing requirements are expected to amount to US$51.2 millionfor the principal project components and US$2.7 million for the environmealtalcontrol system and subsector studies. The proposed Bank loan of US$44.0 mil-lion equivalent, which would also finance the foreign exchange element ofinterest during construction, the environmental control system and the sub-sector studies, would cover 49% of the total cost and 85% of the foreignexchange cost. The loan would be made directly to COMETNA (US$33.4 million)and SOREFAME (US$10.6 million), and will be guaranteed by the Government. Theforeign exchange risk will be borne by COMETNA and SOREFAME. The portion ofthe loan for subsector studies will also be extended to COMETNA, which wouldmake it available to the Government. The term of the loan would be for 15years including 3 years grace at an annual rate of 10% with the differencebetween the 10% and the prevailing Bank's lending rate of 8.25% payable to theGovernment as a guarantee and administration fee.
6.08 The remaining portion of the debt financing (US$9.9 million), whichincludes US$3.5 million to be contracted by June 30, 1981, is expected to becovered by commercial loans. IPE has agreed to provide necessary fundsincluding additional funds as may be required to cover any financingshortfalls and cost overruns, on terms and conditions satisfactory to theBank, to complete the Project in a manner that ensures compliance with the
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financial covenants. The Government has also agreed to provide, if needed,funds to complete the Project.
C. Procurement and Retroactive Financing
6.09 The Bank loan is proposed to finance the foreign exchange costs ofequipment and machinery, engineering services, subsector studies and interestduring construction. Procurement will be in accordance with the Bank'sguidelines and a detailed list of the items to be financed by the Bank isgiven in Annex 6-3. Equipment packages costing over US$100,000 equivalenteach will be procured by international competitive bidding, while packagescosting less than US$100,000 equivalent each (up to a maximum total of US$4million) will be obtained through limited international tendering, under whichthe borrower may award contracts after having received at least three compar-able bids from qualified suppliers in at least three eligible countries.
6.10 Portuguese suppliers are expected to bid directly for some packageswith an approximate value of US$2.5 million. In such cases a margin ofpreference of 15% or the applicable import duty, whichever is less, will beaccorded to the bids from qualified domestic bidders. Also, in a few keypackages of foundry equipment (melting shop, sand plant and molding lines),incorporation of domestically fabricated components in the main foreign bidis expected. However, in view of the need to assign single contractorresponsibility for these packages, these packages have been included in theirentirety under Bank-financed items, while allowing the local suppliers toparticipate as subsuppliers to the main bidder. For the purpose of bidcomparison of these packages, a preference margin of 15% of the c.i.f. bidprice or the applicable import duty, whichever is less, will be accorded toclearly identified and separable Portuguese components (which have more than20% domestic value added) incorporated in the foreign bids. The mechanism ofbid evaluation for such packages will be specified in the bid documents. Thetotal amount of such components is expected to be under US$3 million.
6.11 Civil engineering, civil works, erection contracts and some equipmentwhich is expected to be procured locally will be financed by the Companieswith Portuguese funds. The civil engineering contract for the foundry and thevalve plant is expected to be awarded in June 1980. Civil construction,building works and erection contracts will be awarded after competitivebidding among local contractors. The capabilities of these contractors areconsidered adequate for timely and efficient completion of these works.
6.12 COMETNA has awarded the contract for detailed engineering of thefoundry in May 1980 (paras. 5.21, 6.02). An early appointment of a consultingcompany was crucial for meeting the Project implementation schedule. A partpayment of US$150,000 for these services is expected to be paid prior to thesignature of the loan. This amount is proposed to be retroactively financedunder the loan. Retroactive financing is also proposed to cover the downpayment of around US$450,000 of a total value of US$4.5 million for a criticallong delivery vertical turning lathe for SOREFAME (para. 5.23). The lathe isneeded urgently in order for SOREFAME to meet its schedule for the supply ofhydropower equipment.
D. Allocation and Disbursement of Bank Loan
6.13 The allocation of the proposed Bank loan of US$44 million will beas follows. Details are given in Annex 6-3.
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Allocation of Bank Loan(US$ million)
COMETNA SOREFAMECategory Total Application
Machinery, Equipment 21.3 8.4 29.7 100% of foreign expenditureand Spares and 100% of local expenditure
ex-factory
Engineering and 4.8 0.4 5.2 100% of foreign expenditureother Services and 90% of expenditure of
local consultants
Environmental 1.0 - 1.0 100% of foreign expenditureControl System and 100% of local expenditure
ex-factory
Subsector Studies 1.2 - 1.2 100% of foreign expenditureand 90% of expenditure oflocal consultants
Interest DuringConstruction 4.0 1.0 5.0
Unallocated 1.1 0.8 1.933.4 10.6 44.0
6.14 The disbursement schedule for the Bank loan given in Annex 6-4 isbased on estimates of order placement and expected delivery times for equipmentin line with the implementation schedule (para. 5.22). The Bank loan will bedisbursed against 100% of the foreign exchange cost of equipment and machinery;100% of the ex-factory local costs of subcontracts where these form part ofinternationally bid packages and of direct local purchases; and 100% of theforeign costs and 90% of local consultancy costs of engineering services andsubsector studies. Portuguese suppliers are expected to bid for componentsand packages not exceeding US$5.5 million (para. 6.10); probable localcurrency financing under the Bank loan based on this level of participationis estimated at around US$4 million.
VII. FINANCIAL ANALYSIS
A. Revenues and Operating Costs
7.01 The main assumptions underlying the projections are detailed inAnnex 3-5 for the Companies' existing operations and in Annex 7-1 for theProject components. Revenues and costs have been inflated to current termsup to the achievement of full production (1986 for COMETNA and 1984 forSOREFAME) and maintained constant thereafter. The financial projections areexpressed in current U.S. dollars instead of Escudos and are based on inter-national inflation rates projected by the Bank. This approach assumes thatany difference between domestic and international inflation rates will beaccounted for by appropriate exchange rate adjustments, a policy currentlybeing followed and expected to be continued by the Government.
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7.02 Revenues: It is assumed that the foundry will start commercialproduction in 1983 and the valve plant and the hydro-power equipment componentin 1982. Projected income statements showing annual revenue and operating costsfor the different Project components are given in Annexes 7-2 through 7-4.
Project Production Build-ups and Sales Revenues(current US$ million)
1982 1983 1984 1985 1986FoundryProduction (tons) - 4,000 7,000 9,000 10,000Sales Revenues - 10.0 18.7 25.7 30.4
Valve PlantProduction (tons) 450 530 650 750 750Sales Revenues 2.9 3.7 4.8 5.9 6.3
Hydro-Power Equipment Component a/Production 5.5 14.0 19.7 19.7 19.7Sales Revenue b/ 3.4 8.1 15.0 19.7 19.7
a/ On an incremental basis.b/ Expressed in constant terms after 1984.
7.03 The production build-ups are considered achievable as the implement-ing Companies have adequate experience in operating similar plant and equip-ment. Consequently, the foundry is expected to reach full production in1986, the valve plant in 1985 and the hydro-power equipment component in 1984.After allowing for the 10% real increase in the price of castings planned tobe implemented by COMETNA management when the foundry starts production,prices for castings and valves remain 15% below comparable internationallevels (paras. 4.25-4.26). Although this differential suggests that evenhigher prices would be feasible, Project revenues for the foundry and thevalve plant have been conservatively based on this level of prices for thepurposes of financial projections. For SOREFAME's hydro-power equipmentcomponent, it is assumed that the Company will be able to maintain its realprices and compete successfully in the international market. Finally, it isimportant that the Companies set appropriate prices so as to earn a reasonablereturn on their capital provided their facilities are operated efficientlyand the Government does not preclude them from doing so. COMETNA has agreedto review its pricing policies annually with the Bank (para. 3.10), andassurances have been obtained from: (i) COMETNA and SOREFAME that they willset prices that will enable them to earn an adequate return on investedcapital, and (ii) the Government that, if and when it intends to introduceany measures which might significantly affect the prices that the Companiesare able to charge their domestic customers, it will consult with the Bankprior to implementing any such measures.
7.04 Operating Costs: Project operating costs are based on feasibilityreports prepared by consultants (para. 1.05) and supplemented with data oncurrent operations supplied by the Companies (Annex 7-1). The table on thenext page shows comparative production costs for the existing and Projectfacilities. All three Project components are expected to lead to substantialgains in labor productivity (paras. 5.16-5.18). For the new foundry and valveplant, productivity improvements, as shown below, are expected to amount toaround 60% (US$520 to US$320/ton) and 75% (US$1.06 to US$0.60/kg) respectively.
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For SOREFAME, it is expected that the Project component will reduce the share
of manufacturing labor costs in total production of the hydro-power equipment
division from about 26% at present to 22%. Material costs will increase for
the new foundry on account of the more sophisticated product mix, but are
expected to be more than offset by the lower labor costs per ton and the
higher average prices for the superior product-mix. The situation is expected
to be similar for the valve plant. For SOREFAME, projected material costs
are in line with the Company's current experience for the same product.Overall, the operating cost estimates are judged to be satisfactory.
Comparison of Price/Cost Structure between ProjectComponents (at full production) and Existing Operations
(1979 US$ terms)Hydro-Power Equipment
Foundry Valve Plant Division(US$'000/ton) (US$/kg) (US$ million)
Existing % New % Existing % New % Without WithProject % Project %
Average Price a/ 1.53 100 1.73 100 4.35 100 4.80 100 28.1 b/ 100 40.8 b/100
Production CostsMaterials 0.17 11 0.22 13 2.50 57 2.60 54 10.0 36 14.5 36
Consumables &Utilities 0.33 22 0.28 16 0.08 2 0.10 2 1.0 4 1.3 3
Labor 0.52 34 0.32 18 1.06 24 0.60 13 7.3 26 9.0 22
Total 1.02 67 0.82 47 3.64 83 3.30 69 18.3 66 24.8 61
Margin 0.51 33 0.91 53 0.71 17 1.50 31 9.8 34 16.0 39
a/ For comparability, the average prices shown for the existing steel foundry
and valve plant are derived by applying the expected prices for the newsteel foundry and valve plant to the 1979 product-mixes of the existingsteel foundry and valve plant respectively.
b/ Value of production. -
B. Financial Projections
7.05 The main assumptions underlying the projections are given in Annex 7-1.
Consolidated financial statements for COMETNA incorporating the new foundry and
the valve plant and for SOREFAME incorporating the hydro-power equipment component
are given in Annexes 7-5 and 7-6 respectively and summarized in the table on the
following page. The financial projections assume that the viability contract
together with the additional measures through IPE (Annex 3-4) will be implemented
in full as scheduled. The consolidated projections for COMETNA indicate
satisfactory financial ratios through 1990. For SOREFAME, as shown, the debt
service coverage is low up to the start-up of the Project primarily due to
high interest expenses (on past debt) in relation to the Company's internal
cash generation. However, this is considered acceptable as the Government
and IPE are willing to provide the Company adequate funds to meet its opera-
tional needs and debt service requirements as well as for investments. The
situation is expected to improve once the Project starts production and the
Company's financial ratios are projected to reach the stipulated levels
by end 1982, i.e., before the commencement of amortization of the Bank loan.
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COMETNA AND SOREFAME: Summary of Consolidated Financial Projectionswith Project
(current a/ US$ million)
A. COMETNA 1979 1980 1981 1982 1983 1985 1987(provis.)
Income StatementsSales 18.7 24.3 28.2 34.8 42.5 61.8 69.0Pre-tax Profit (4.5) (0.6) 0.4 0.9 (1.5) 6.9 11.2Net Profit b/ (4.5) (0.6) 0.4 0.9 (1.5) 4.1 6.7
Balance SheetCurrent Assets c/ 25.1 30.8 33.9 35.7 33.8 42.6 54.6Surplus Cash - - - 0.8 3.2 1.9 4.4Current Liabilities 34.9 19.7 21.7 23.2 24.9 26.8 27.5Med. & Long-Term Debt 2.0 18.9 30.7 43.4 40.3 31.9 24.7Equity (7.5) 13.9 30.5 35.2 33.8 35.2 38.8
RatiosCurrent Ratio d/ 0.7 1.6 1.6 1.6 1.5 1.7 2.2Debt:Equity Ratio -ve 58:42 50:50 55:45 54:46 45:55 32:68Debt Service Coverage b/ 0.0 1.2 1.8 1.4 1.3 1.4 2.0
B. SOREFAME
Income StatementsSales 51.9 70.9 57.3 97.3 109.0 129.4 129.4Pre-tax Profit (17.4) (4.1) (2.7) 4.4 11.7 17.7 19.3Net Profit b/ (17.4) (4.1) (2.7) 4.4 11.7 10.6 11.6
Balance SheetCurrent Assets c/ 95.7 108.5 118.3 133.5 145.8 160.5 160.5Surplus Cash - - 2.5 2.9 11.6 26.3 38.1Current Liabilities 115.4 74.1 81.5 94.6 106.1 112.3 113.6Med. & Long-Term Debt 42.9 73.1 78.1 69.8 62.6 51.2 37.1Equity 5.2 30.7 38.9 45.9 57.6 86.0 104.5
RatiosCurrent Ratio d/ 0.8 1.5 1.5 1.4 1.5 1.7 1.7Debt:Equity Ratio 89:11 70:30 67:33 60:40 52:48 37:63 26:74Debt Service Coverage b/ 0.0 0.4 0.8 1.6 1.4 1.7 1.6
a/ In current terms through 1986 for COMETNA and 1984 for SOREFAME, constantterms thereafter.
b/ Net profit and debt service coverage in 1985 and 1987 reflect the effectof tax payments from which the Companies are exempt till 1984 under theviability contracts.
c/ Excluding surplus cash.d/ Including surplus cash.
C. Financial Rates of Return
7.06 The Project's pre-tax financial rates of return on the basis ofrevenue and cost streams adjusted to real 1979 US$ terms are consideredadequate and are as follows: foundry (13.5%), valve plant (10.3%) and hydro-power equipment component (34.3%). The after-tax returns are 10.3%, 7.1% and27.6% respectively. The comparatively high rate of return for the hydro-powerequipment component of the Project reflects the fact that, in this case, arelatively small debottlenecking investment leads to a substantial increase inproductive capacity. Results of the sensitivity tests on the Project's ratesof return are discussed in detail in relation to its economic return (paras.8.03 and 8.04).
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D. Break-even Analysis
7.07 Based on the projected income statements (Annexes 7-1 through 7-3),
the Project components would start to make net positive contributions to the
Companies' cash flow and earnings in 1985 for the foundry, 1984 for the valve
plant and 1982 for the hydro-power component. The break-even capacity utili-
zation levels are shown in the following table:
Project Break-even(% of capacity utilization)
Hydro-Power
Foundry Valve Plant Equip. Component a/
Cash Break-Even 62 71 33
Profit Break-Even 69 72 39
a/ On an incremental basis.
The profit break-even levels are higher than the cash break-even levels as
the impact of depreciation is larger than that of debt repayment.
E. Financial Covenants
7.08 The Government and IPE have agreed to implement the financial
restructuring measures for COMETNA and SOREFAME (paras. 3.16, 3.27). Based on
the projections, which incorporate these measures, it is expected that the
Companies will achieve a sound financial position and maintain satisfactory
financial ratios essential for viable operations. However, to ensure main-
tenance of a sound financial position, agreement was reached that: (i) The
Borrowers (i.e. COMETNA and SOREFAME) will maintain a minimum current ratio of
1.3; (ii) COMETNA will reach a maximum debt/equity ratio of 60:40 by end 1980
and SOREFAME by end 1982 (SOREFAME will reach a maximum debt-equity ratio of
75:25 by end 1980 and 70:30 by end 1981), and maintain it thereafter; and the
Borrowers will not, without the prior consent of the Bank, incur new debt
if, as a consequence, this leads to a debt-equity ratio higher than 60:40 or a
debt service coverage lower than 1.5; (iii) In case of a financing shortfall
and/or an overrun in the Project cost, IPE/the Government will supply the
additional funds necessary to complete 1/ the Project consistent with the
Borrowers maintaining annuaLly a maximum debtequity ratio of 60:40 (para.
6.06); (iv) In order to ensure adequate management attention to the Project,
COMETNA and SOREFAME will not, without the prior consent of the Bank, under-
take in any one year until Project completion, investments unrelated to the
Project exceeding US$3 million and US$5 million respectively; (v) The Govern-
ment and IPE will take all necessary steps to see that the Borrowers are
enabled to maintain financial ratios as covenanted; (vi) The Government and
IPE will not take any actions to transfer or change majority ownership of the
Borrowers without the prior consent of the Bank to the arrangements for an
orderly transfer of obligations with regard to the Project; and (vii) The
Borrowers will not create subsidiary companies or enter into financial or
technical collaboration without the prior consent of the Bank.
1/ Completion for the foundry and valve plant is defined as the achievement
of 2 months continuous production at the rate of 8,000 metric tons per year
and 600 metric tons per year respectively. For the hydro-power equipment
component, it is defined as achievement of production at 80% of capacity
for at least 3 continuous months.
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F. Auditing and Reporting Requirements
7.09 IPE, COMETNA and SOREFAME have agreed to have financial auditsundertaken by independent auditors. Assurances have been obtained that (i)IPE and the Borrowers will submit independently audited financial reportswithin six and four months respectively of the closing of each fiscal year;(ii) the Borrowers will submit monthly progress reports and quarterly finan-cial statements and projections within 45 days of the end of the period; and(iii) after completion of the Project, the Borrowers will prepare and furnishto the Bank a comprehensive report on the Project, its implementation, initialoperation, and the costs and benefits derived and expected to be derivedthereon. In addition, IPE has agreed that it will complete an independentaudit of its investments by December 1981 and COMETNA has agreed to establishappropriate divisional accounting systems by December 1980 to the satisfactionof the Bank.
G. Malor Risks
7.10 Major risks associated with the Project can be divided into twocategories: (i) those beyond the control of the Companies; and (ii) Companyassociated risks. The most significant of the risks beyond the control ofthe Companies, is that of substantially lower than expected rates of domesticgrowth or planned investment. Such lower growth rates could have significantadverse impacts on the markets for the hydro-power equipment component underSOREFAME. Any inability of EDP, the sole domestic purchaser of such equipment,to implement its hydropower expansion schemes as planned will affect SOREFAME'sdomestic sales. Further, a continuing inability of the Portuguese Railways (CP)to purchase rolling stock from SOREFAME as contracted earlier could adverselyaffect the Company's future profitability and cash-flow. Based on intensivediscussions with EDP, CP and other concerned authorities in Portugal, the riskof such an eventuality is, however, judged to be low. Moreover, both SOREFAMEand COMETNA could partly compensate for less than expected domestic sales oftheir products through further increases in exports where they have been com-peting successfully thus far and are further strengthening their capabilities.
7.11 Another risk is the future establishment of competing additionalcapacity in the Projects' products. However, the Government has alreadyinitiated in March 1979 policies for the orderly development of the companiesin these areas based on market sharing and product specialization and it isexpected that this would continue in the future. Recommendations for theoverall rational development of the subsector expected to result from theproposed study (para 2.16), are expected to further curtail such a risk.
7.12 The most significant of the risks associated with the Companies,is that of their inability to turn around their performance based on currentplans and programs. As stressed earlier, recent management actions coupledwith the measures proposed for both companies to establish a sound financialposition indicate that the Companies are already on their way to bringingabout such a turnaround. Further, significant safeguards in terms of improvedmanagement systems have been built into the Project to further enhance theCompanies' prospects. Another risk relates to any failure of the Companies,particularly SOREFAME, and the labor unions to continue the current improvingtrends in relations, as such failure could adversely affect the Companies'future labor productivity and competitive ability. However, in view of the
- 43 -
general positive atmosphere within the Companies and their recent actions and
ongoing program to adequately reinforce the above areas (para. 3.23) as neces-
sary, these risks are reduced to a great extent. Nevertheless, the Bank will
periodically review these areas to ensure that appropriate measures are imple-
mented to promote further improvements. Both Companies do not face any
major technical risk which could seriously jeopardise Project execution as theyhave both successfully implemented similar investments and operated similarplant and equipment.
VIII. ECONOMIC ANALYSIS
A. Economic Costs and Benefits
8.01 For calculating the economic costs and benefits of the Project
components, border prices based on international prices have been used for
all tradeable goods and services and domestic prices for all non-tradeables.
8.02 As noted earlier (paras. 4.25 and 4.26), COMETNA's prices for steel
castings and valves are well below comparable international levels. For the
economic analysis, these have been increased by 15% to reflect the lowest
competitive international price. No adjustments have been made in theoutput prices for hydro-power equipment since SOREFAME's prices are already
in line with international levels. As regards inputs, prices for scrap and
domestically supplied ferro-alloys have been increased by up to 30% to reflect
prevailing international levels, prices of castings (input to valve plant and
hydro-power component) have been increased by 15%, prices of other intermedi-
ates increased by 10-15%, and the price of power has been increased by 15% to
reflect present prices of energy inputs. These changes result in an increase
in the direct production costs (excluding labor) of 20% in the foundry, and
10% in the valve plant and the hydro-power equipment component. A life of 13
years has been assumed for the hydro-power component to reflect the likelihood
of more rapid obsolescence, 15 years for the valve plant, and 17 years for the
foundry. No scrap value has been assumed.
B. Economic Rates of Return
8.03 The economic rate of return for the foundry and valve plant has been
calculated, based on treating the proposed components as greenfield investments.
The return for the hydro-power component is calculated based on the incrementalcosts and benefits associated with the Project investment. The economic rates
of return for the base case are presented in the following table:
Economic Rates of Return (%) - Base Case
Steel Foundry 16.3Valve Plant 16.6
Hydro-power Equipment Component 31.9Project (all components) 19.9
- 44 -
The economic returns for the Base Case are higher for the foundry and valveplant and lower for the hydro-power equipment component than the respectivefinancial returns due to the economic adjustments outlined in para. 8.02. Theincrease in the return of the valve plant is higher than for the foundry dueto the smaller adjustment in its input costs and due to its greater sensitivityto changes in output prices (para. 8.04). The economic rates of return forthe foundry and valve plant based on incremental considerations (to reflectthe alternative of the continuing operations without the benefit of theplanned investment) are 15.0% and 16.1% respectively. It should be notedthat the incremental returns are only marginally lower than in the Base Casesince the existing plants effectively have a low profitability based on lowproductivity due to old facilities, short remaining useful life and significantreinvestment requirements if production and quality are to be maintained atacceptable levels. Further, the steel foundry design incorporates the potentialfor expansion to 15,000 tons with minimal additional investment. If the costsand benefits of such an expansion are included in the analysis, the economicreturn of the foundry increases to 18.5%.
8.04 The sensitivity of the Base case rates of return to changes invarious cost and benefit parameters is illustrated in the following table interms of the percentage changes in these parameters that would "switch" therate of return to 12%.
Switching Values(% changes to "switch" rate of return to 12%)
Steel Foundry Valve Plant Hydro-Power Equipment
Capital Costs 37% 34% 166%Output Prices (12%) (6%) (27%)Operating Costs 21% 8% 50%Labor Costs 94% 51% 198%
Of the various parameters, changes are most probable in the area of capitalcosts; however, as shown above the Project components are only marginallysensitive to such changes. While sensitivity is high with regard to changesin output prices particularly for the valve plant and the foundry, a decreasein these prices is not considered probable in view of the conservative assump-tion that the economic price equals the lowest price prevailing presently forthese products in the international markets. The return for these componentsis also reasonably sensitive to changes in operating costs. However, for mostoperating cost components, such as material inputs, increases are likely tobe accompanied by offsetting output price increases. Sensitivity is lowwith regard to the labor cost component, which could increase without suchoffsetting changes. Based on these considerations, the risk of a decrease inthe economic return to below 12% is considered negligible for the hydro-powercomponent, very low for the foundry component, and low for the valve plant.Sensitivity analysis is further detailed in Annex 8-1.
- 45 -
C. Foreign Exchange Savings and Other Benefits
8.05 As can be expected from the economic rates of return, which are
derived based on official exchange rates, the Project components prove to be
fairly efficient in converting domestic resources to foreign exchange. The
Domestic Resource Cost measure (DRC) 1/, equals 46.9 for the fou-.ry, 46.9 for
the valve plant and 28.9 for the hydro-power component, and 41.0 for the Project
as a whole. These compare favorably with a shadow exchange rate of 58 Escudos/
US Dollar. Details are shown in Annex 8-2. The Project's net foreign exchange
savings after provision for debt service of foreign loans is expected to amount
to US$20 million annually in constant 1980 dollars when the components reach full
production as compared to the foreign exchange component investment of about
US$45 million. In addition to the adequate economic rate of return, the Project
will generate substantial other economic benefits. The expansion of steel
castings production is expected to provide the foundation for the development
of a number of related engineering industries based on domestic availability
of quality castings. Further, the relocation of the steel foundry and environ-
mental improvements in the existing foundry are expected to significantly
enhance the working conditions for 800 foundry workers in COMETNA. The valveplant is expected to upgrade technology of valve production in Portugal and
permit the country to penetrate the market for small sophisticated valves
which have traditionally been imported. The valve plant is expected to rely
significantly on outside vendors for the supply of a number of valve fittings,such as seals, special nuts and screws, and would thus promote the development
of small and medium-sized supplying industries. The hydro-power equipment
component will also serve to upgrade Portuguese capability in the manufacture
of hydro-power equipment from the present limit of 150 MW plants to 300 MWplants. Also, as illustrated in the high rate of return, it will substan-
tially increase productive capacity with a relatively small de-bottleneckinginvestment.
8.06 The direct additional employment impact of the Project is estimated
at around 350 persons. In addition, it consolidates employment of another
560 persons in the foundry and valve plants, which would have been otherwise
jeopardized by the shutdown of the obsolete facilities in the near future.Based on the investment cost (including working capital) of about US$66.7
million, the investment per direct job created (or saved) amounts to US$73,000
(para. 5.15).
8.07 The Project investment in the modernization and expansion of domestic
capacity in the selected mechanical engineering industries is in line withPortugal's comparative advantage in these industries. The advantage derives
from the availability of trained labor and engineering manpower at costs which
are low relative to those in other producing countries. Labor costs which
account for 13-22% of sales (para 7.04) for the Project components in Portugal
would account for much higher proportions (around 25-40%) in other European
1/ DRC is, herein, defined as the domestic resource costs incurred per unit
of foreign exchange earned or saved, i.e. the ratio of the discounted net
present value of domestic economic costs and benefits (in local currency
units) to the net present value of the economic foreign exchange costs._and benefits (in US$), discounted at the opportunity cost of capital.
- 46 -
countries, where comparable wage rates range between around 150% (Spain,Italy) and 300% (Federal Republic of Germany) of those in Portugal. Forexample, the labor cost in the foundry component of around US$320/ton ofproduct in Portugal compares with around US$450/ton in Spain and much higherlevels in Germany. This significant advantage justifies the expansion andfurther development of the selected industries. Further, the companiesalready possess engineering and technological capabilities and adequateexperience in the respective fields thereby requiring minimal investment intraining and technology transfer.
8.08 The sector study to be carried out under the Project (para. 2.16)is considered important in planning and coordinating the future developmentof the subsector including the formulation of appropriate policies and in-centives. The implementation of these policies is expected to, over time,upgrade technological and management capabilities and promote increasedexports. The Project will serve to strengthen IPE particularly in its proj-ect development and management functions. Finally it is expected to serveas a model for future efforts in the rehabilitation of other enterprises inthe engineering subsector and other parts of the manufacturing sector.
IX. AGREE21ENTS
9.01 Execution of the viability contracts for COMETNA and SOREFAME isjudged to be critical for the Project and is proposed as a condition foreffectiveness of the loan (paras. 3.16 and 3.27).
9.02 The following major agreements were reached:
A. With the Government that it will: (i) carry out a comprehensive sub-sector study, and implement agreed recommendations (para. 2.16); (ii)guarantee to meet any shortfall in equity contributions by shareholders,and provide funds to complete the Project (paras. 6.06 and 6.08);(iii) provide US$1.0 million equivalent to cover the local costs of thesubsector studies (para. 6.06); (iv) consult with the Bank prior toimplementing any measures that would prevent the Borrowers from settingappropriate prices (para. 7.03); (v) implement the financial restructur-ing measures for COMETNA and SOREFAME (para. 7.08); and (vi) not take anyaction to transfer ownership of COMETNA and SOREFAME from IPE withoutprior consent of the Bank of the transfer arrangements (para. 7.08).
B. With IPE that it will: (i) set up a Project Monitoring Unit withadequate staffing (paras. 3.04 and 5.19); (ii) engage an independentauditor to undertake by December 1981 an evaluation of its portfolio ofinvestments (para. 3.06); (iii) provide US$34.1 million in equity fundsduring the Project construction and guarantee provision of other necessaryfunds to complete the Project (paras. 6.06 and 6.08); (iv) not relinquishof its own accord its majority ownership in COMETNA and SOREFAME withoutprior consent of the Bank (para. 7.08); and (v) comply with auditing andreporting requirements (para. 7.09).
- 47 -
C. With COMETNA and SOREFAME that they will: (i) undertake to implementand operate the plant facilities to comply with environmental, safetyand health standards acceptable to the Bank (para. 5.12); (ii) pay aguarantee fee to the Government (para. 6.07); (iii) set prices thatenable them to earn an adequate return on capital (para. 7.03); (iv)abide by the financial and related covenants applicable to the Company(para. 7.08) and (v) comply with auditing and reporting requirements(para. 7.09).
D. With COMETNA that it will: (i) review annually with the Bank untilProject completion its organizational, marketing and pricing policies(paras. 3.10 and 4.21); (ii) carry out a study on the adequacy of thepricing of its products (para. 4.24); (iii) not to enter into anycollaboration for the foundry component without prior approval of theBank (para. 5.07); (iv) set up an engineering department in the valveplant and make arrangements for technical assistance for the designand technology of valves by December 1980 (para. 5.09); (v) staff ade-quately a Project Management Unit to coordinate and control variousactivities of the Project (para. 5.20); (vi) make available US$1.2million of the loan proceeds to the Government (para. 6.07); and (vii)introduce by December 1980 in consultation with the Bank a divisionalaccounting system (para. 7.09).
9.03 Based on the above agreements, the Project is suitable for a Bankloan of US$33.4 million equivalent to COMETNA and US$10.6 million equivalentto SOREFAME, for 15 years, including 3 years of grace, at a cost of 10% perannum, including a fee of 1.75% payable to the Government.
Industrial Projects DepartmentMay 1980
- 48 -ANNEX 3-1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
IPE: SUMMARIZED FINANCIAL STATEMENTS(Esc. million)
1977 1978(unaudited) a/
Income Statements
Income from Investments 1.9 66.3Other Income - 2.0Total Income 1.9 68.3Cost of Operations 28.1 59.5Net Income (26.2) 8.8
Balance Sheets
Current Assets 685.9 1,341.1Financial Investments 238.6 1,942.0Net Fixed Assets 82.4 95.3Other Assets - 5.1Total Assets 1,006.9 3,383.5
Current Liabilities 20.0 167.6Medium and Long-term Debt - 1,069.6Other Debt - 0.5Paid-in Equity 1,013.1 2,163.2Retained Earnings (26.2) (17.4)
Financial Ratios
Current Ratio 34.3 8.0Debt:Equity Ratio 0:100 33:67
a/ Means unaudited by an independent external auditor. Nonetheless,all accounts are audited by a body responsible to the Board andpublished in the form of an Annual Report.
Industrial Projects DepartmentMay 1980
- 49 -
ANNEX 3-2
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
COMETNA AND SOREFAME: SALES PERFORMANCE SINCE 1973
(Current Esc. million)
A. COMETNA 1973 1974 1975 1976 1977 1978 1979(est.)
Cement industry equipment 44 182 211 264 80 76 82
Steel industry equipment 41 46 152 79 86 121 158
Valves 12 19 11 58 35 53 56
Rail & Track equipment 125 120 91 172 196 276 171
Ceramics industry equipment 12 15 9 9 15 46 43
Construction equipment 17 15 4 5 12 17 23
Power plant equipment 16 3 - - 2 - -
Raw castings for exports 11 46 71 46 43 71 119
Trash carts and containers 13 10 19 32 42 61 130
Other 91 69 58 120 174 132 108
Total: 382 525 626 785 685 853 890
of which - Exports a/ 87 245 121 143 76 139 196
(% of exports to total sales) 23 47 19 18 11 16 22
B. SOREFAME 1973 1974 1975 1976 1977 1978
Hydromechanical equipment 395 345 360 165 249 305
Industrial equipment 2 7 65 405 511 398
Rolling stock 394 401 231 316 433 223
Bridges and structures - 29 79 83 117 163
Other 21 22 213 149 131 54
Total 812 804 948 1,118 1,441 1,143
of which:Exports a/ n.a. n.a. 455 523 393 395
(Exports as % of Total Sales) n.a. n.a. 48 47 27 35
a/ Including exports to Portugal's former colonies.
Industrial Projects DepartmentMay 1980
- 50 - ANNEX 3-3Page 1.
PORTUGAL
MECHANICAL INDUSTRIES FROJECT_____________________________
COMETNA: HISTORICAL INCOME STATEMENTS-------------------------------------
(ESC. MILLION)
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979
VALUE OF PRODUCTION 326 387 421 436 739 749 723 810 858 990
LESS: CHANGES IN INVENTORIES 58 84 51 54 214 123 (62) 125 5 100
SALES 268 303 370 382 525 626 785 685 853 890
COSTS OF OPERATIONMATERIALS 130 142 150 145 178 245 256 265 325 420
SUBCONT. & UTILS. 55 84 80 *84 287 206 125 220 121 74
TAXES & ROYALTIES 4 - 8 7 7 3 5 13 12 15
SUP-TOTAL 189 226 238 236 472 454 386 498 458 509
FERSON. I ADMIN. COSTS 98 119 138 149 221 268 290 344 384 503
DEPR. & AMORT. 24 23 24 23 20 19 24 21 24 23
SUB-TOTAL 122 142 162 172 241 287 314 365 408 526
TOTAL COST OF OPERATIONS 311 368 400 408 713 741 700 863 866 1,035
LESS: INVENTORY ADJUSTMENT 58 84 51 54 214 123 (62) 125 5 100
COST OF GOODS SOLD 253 284 349 354 499 618 762 738 861 935
GROSS PROFIT 15 19 21 28 26 8 23 (53) (8) (45)
NET INTEREST CHARGES 12 13 19 23 25 31 42 74 160 180
INCOME FROM SALES 3 6 2 5 1 (23) (19) (127) (168) (225)
OTHER INCOME/PROVISIONS 3 - - (3) 1 (25) (17) (6) 4) 8
PROFIT AFTER TAX 6 6 2 2 2 (48) (36) (133) (172) (2217)
INDUSTRIAL FROJECTS DEPARTMENTMAY 1980
- 51 -
PORTUGAL-------- A}niX 3-J
MECHANICAL INDUSTRIES PROJECT Page 2_____________________________
COMETNA: HISTORICAL BALANCE SHEETS
(ESC. MILLION)
1970 1971 1972 1973 1974 1975 1976 1977 1978
ASSETS
CURRENT ASSETSCASH AND DEPOSITS 68 9 15 65 9 8 27 38 11ACCOUNTS/NOTES RECEIVABLE 67 57 69 94 138 194 282 301 418OTHER RECEIVABLES 2 9 4 9 18 51 29 29 34
INVENTORIESFINISHED GOODS - 21 23 24 26 25 34 36 35WORK IN PROCESS - 133 141 184 385 450 353 446 422
MATERIALS AND CONSUMABLES - 56 60 54 83 118 114 148 212
TOTAL INVENTORIES 108 210 224 262 494 593 501 630 669
PREPAID EXPENSES - - - - - - 5 14 16
TOTAL CURRENT ASSETS 245 285 312 430 659 846 844 1,012 1,148
INVESTMENTS 2 2 2 4 3 3 3 3 3
GROSS FIXED ASSETS 237 258 286 295 305 321 331 361 383LESS: ACC. DEPR. 131 146 167 185 204 219 237 258 278
NET FIXED ASSETS 106 112 119 110 101 102 94 103 105INTANGIBLE ASSETS 9 4 4 4 4 2 2 1 3ASSETS IN PROGRESS 6 9 7 2 3 5 6 5 27
TOTAL FIXED ASSETS 123 127 132 120 111 112 105 112 138
TOTAL ASSETS 368 412 444 550 770 958 949 1,124 1,286==m =-.- ss= ==== MaM =s== === ===== =====
LIABILITIES AND CAPITAL
CURRENT LIABILITIESADVANCES FROM CUSTOMERS - 104 51 212 372 495 279 301 225OTHER PAYABLES - - - - - 181 227 335 358
SHORT-TERM LOANS - - - - - 67 324 404 664PAYABLES TO STATE - - - - - 49 62 34 107OTHER CURRENT LIABILITIES 156 14i 163 139 215 74 49 49 31
TOTAL CURRENT LIABILITIES 156 251 214 351 587 866 941 1,123 1,385
MEDIUM AND LONG TERM LIABILITIESLOANS - - - - - - - 26 68
DUE TO STATE I OTHERS - - - - - - - 33 23
TOTAL MEDIUM AND LONG-TERM DEBT 172 118 198 156 139 82 33 59 91
TOTAL LIAIBLITIES 328 369 402 507 726 948 974 l,182 1,476
EQUITYSHARE CAPITAL 9 9 40 40 40 55 55 155 195REVALUATION AND * OTHER RESERVES 26 28 - 1 2 4 4 4 4ACCUM. RETAINED EARNINGS 5 6 2 2 2 (49) (84) (217) (389)
TOTAL EQUITY 40 43 42 43 44 10 (25) (58) (190)
TOTAL LIABILITIES AND EQUITY 368 412 444 550 770 958 949 19124 1,286__, ,= = …== …== = == ======= == =
RATIOS
CURRENT RATIO 1.57 1.14 1.46 1.23 1.12 0.98 0.90 0.90 0.83LONG-TERM DEBT TO EQUITY 81:19 73:27 82:18 78:22 76:24 89:11 - - -
INDUSTRIAL PROJECTS DEPARTMENTMay 1980
PORTUGALMECHANICAL INWUSTRIES PROJECT
COMETNA AND SOREFAME: FINANCIAL ASSISTANCE UNDER VIABILITY
CONTRACTS AND SUPPLEMENTAL MEASURES THROUGH IPE
(Esc. Million)
SOREFAME COMETNA BOTH TOGETHER
1980 1981 1982 1983 1980-83 1980 1981 1982 1983 1980-83 1980 1981 1982 1983 1980-83
Measures Included in ViabilityContracts
A. Cash Measures1. Cash Equity 500 375 135 125 1,135 205 50 - _ 255 705 425 135 125 1,390
2. New Subordinated Loans - - - - - - - - - - - - -
3. New Long Term Loans for Investments 236 - - - 236 52 - - _ 52 288 - - - 288
4. Working Capital Loans 150 - - - 150 100 - - - 100 250 - - - 250
5. Interest Subsidies 515 378 360 310 1.563 99 89 77 50 315 614 467 437 360 1,878
Sub-Total 1,401 753 495 435 3,084 456 139 77 50 722 1,857 892 572 485 3,806
B. Conversion Measures
Conversion of Short-term into
Long-term Debt 1,809 - - - 1,809 664 - - - 664 2,473 - - - 2,473
Total of Cost and Conversion 3.210 753 495 435 4.893 1.120 139 77 50 1.386 4,330 892 572 485 6 279
Measures
Supplemental Measures Through IPE
A. Cash Measures a/1, Cash Equity 200 - - - 200 100 50 40 - 190 300 50 40 - 390
2. Interest Subsidies - - - - - - - - -
Sub-Total 200 - - - 200 100 50 40 _ 190 300 50 40 - 390
B. Conversion Measures3. Conversion of Existing Long-term
Loans into Equity/Subordinated Debt 610 - - - 610 250 - - - 250 860 - - 860
Total of Cash and Conversion 810 - 810 350 50 40 - 440 12160 50 40 - 1.250Measures - -
Total Assistance
Cash Measures 1,601 753 495 435 3,284 556 189 11 50 912 2,157 942 612 485 4,196
Conversion Measures 2.419 - - - 2.419 914 _ - - 914 3,333 3.333
Grand Total 4.020 753 495 435 5.703 1,470 189 117 50 1.826 5,490 942 612 485 7.529
a/Proposed by IPE to be provided as an interest free shareholder's loan.
Industrial Projects DepartmentMay 1980
- 53 -ANNEX 3-5Page 1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
COMETNA AND SOREFAME: ASSUMPTIONS USED AND FINANCIALPROJECTIONS WITHOUT PROJECT
A. Introduction
1. The financial projections have been made in current US dollarsinstead of Escudos, using the Bank's projections of expected internationalinflation as follows: 1980 - 10.5%, 1981 - 9%, 1982 - 8%, 1983-85 - 7%, and1986 - 6%. This approach assumes that any difference between domestic andinternational inflation rates will be accounted for by appropriate exchangerate adjustments in line with the Government's current policy which is expectedto continue in the future. Both revenues and costs have been escalated intocurrent terms up to achievement of full production (1986 for COMETNA and 1984for SOREFAME) and maintained constant thereafter. Assumptions regardingfinancial projections of the Company's existing operations are detailedseparately for COMETNA and SOREFAME in Tables 1 and 2 in this Annex, andbriefly discussed in the following paragraphs.
2. For the purposes of calculating the debt/equity ratio, the Companies'subordinated debt (guaranteed to be serviced by IPE in case the Companies areunable to do so while maintaining the ratios stipulated in the financialcovenants), has been treated as equity. In the case of COMETNA, such debtamounts to Esc. 250 million (US$5.25 million) and for SOREFAME, Esc. 810million (US$17.0 million). The financial projections assume, however, thatthe Companies would continue to service this debt in addition to their otherdebt. The projected financial ratios calculated accordingly on this basis aresatisfactory.
B. COMETNA
3. Revenues: Projected sales revenues for 1980 (Table 1) reflectthe real average price increase of 10% achieved by the Company in late 1979,and a real production increase of 4.8% based on the current order books. Forsubsequent years, projections are based on the anticipated production in-creases shown which are deemed achievable in light of the Company's pastexperience. The decline in real production after 1983 reflects the phasingout of the valve plant and the gradual projected decline of the existing steelfoundry due to increasing wearing-out of machinery and equipment, and spaceconstraints.
- 54 -ANNEX 3-5Page 2
4. Operating Costs: Costs of raw materials and of subcontracts,consumables and utilities (Table 1) have been projected on the basis of theCompany's 1979 experience. The declining ratios of labor and of administra-tive selling costs to sales reflect productivity increases and better utiliza-tion of administrative and commercial personnel which are considered achiev-able. Maintenance costs have been projected to increase with the continueduse of the existing old facilities. Depreciation and amortization is basedon the Company's current practice. In estimating financial charges (in US$terms), starting with the average interest rates actually borne by the Companyin 1979, interest rates have been projected to progressively decline tointernational levels (10%) in keeping with the expected decline in inter-national inflation (para. 1).
5. Working Capital: COMETNA's current working capital ratios reflectthe tight financial situation faced by the Company and many of its domesticcustomers during the period 1974-79. With the financial assistance underthe viability contracts, COMETNA's working capital management is expectedto improve as required under the viability contract. Projections havebeen made assuming future improvements that are considered achievable.
6. Taxes: Under the viability contracts, the Company is exempt frompayment of income taxes till 1984. For subsequent years, a tax rate of40% is assumed based on the prevailing rates.
C. SOREFAME
7. Revenues: Projections for 1980 reflect a 11% increase in realvalue of production based on current order books. For subsequent years,projections are based on anticipated increased capacity utilization andproductivity increases enabled by market improvements and the improving laborsituation. The production increases are considered achievable in light of thecurrent underutilization of capacity and labor, particularly in the rollingstock and platework product divisions, caused primarily by shortfalls inpreviously expected orders. With the market-sharing and specializationaccords initiated by the Government, the Company is expected to improve itscompetitive situation and be able in future to maintain its prices in realterms.
8. Operating Costs, Working Capital and Taxes: Specific assumptionshave been made for SOREFAME (Table 2) following the same general considerationsand approach as in the case of COMETNA (paras. 3 to 6).
Industrial Projects DepartmentMay 1980
PORTUGALMECHANICAL INDUSTRIES PROJECT
COMETNA: Assumptions in Financial Projections Without Project
1979 1980 1981 1982 1983 1984 1985 1986
Income Statements b/Production Increase-/ (1979 = 100) 100.0 104.8 111.0 115,5 112.8 108.2 102.8 102.8
Productivity Increase (1979 = 100) 100.0 104.8 111.0 115.5
Real Price Increasec/ (1979 = 100) 100.0 110.0 110.0 110.0 110.0 110.0 110.0 110.0
Sales Revenues (in constant 1979 US$ million) 18.7 21.6 22.8 23.8 23.8 22.3
Inflation Index (mid-1979 = 100) 100.0 112.5 123.5 134.0 144.1 154.2 165.0 175.7
Sales Revenues (current US$ million) 18.7 24.3 28.2 31.9 34.2 34,4 34.9 37.2
Costs of OperationsRaw Materials (% of sales) 42.4 39.0 39.0 39.0 39.0 39.0 39.0 39.0
Subcontract, Services + Others (% of sales) 7.5 5.8 5.8 5.8 5.8 5.8 5.8 5.8
Labor 37.6 32.0 30.7 29.5 29.5 29.9 30.8 30.8
Depreciation + Amort. (current US$ million) 0.5 1.1 1.3 1.4 1.4 1.2 1.2 1.2
Maintenance (current US$ million) - 0.1 0.1 0.1 0.4 0.6 0.7 0.7
Admin. + Sell. Costs (%. of sales) 13.3 11.3 10.9 10.4 10.4 10.4 10.8. 10.8
U'
Working CapitalMinimum cash (months of cash oper. expenses) 1 1 1 1 1 1 1 1
Accounts Receivable (months of sales) 5.2 5.2 5 4.5 4 3.5 3 3
Inventories- Raw Materials (months of consumption) 6.9 6.5 5.2 3.9 2.6 2.6 2.6 2.6
- Work in frocess (months of sales) 6.1 6.0 5.5 5.0 4.5 4.5 4.5 4.5
- Finished Goods (months of sales) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Advances from Clients (months of sales) 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3:4
Accounts Payable (months of purchases of materials,subcontracts and services) 8.0 7.8 7.2 6.5 5.0 3.5 3.5 3.5
Reinvestment for Replacement (current US$ million) 0.6 0.6 0.6 0.7 0.7 0.7 0.8 0.8
a/ Decline in real production after 1983 reflects the phasing out of the existing valve plant and projected progressive decline of the
existing steel foundry.b/ Based on current order books.c/ In late 1979.
Industrial Projects Department
May 1980Li
PORTUIGALMECHANiCAL INDUSTRIES PROJECT
*SOREFAME: Assumptions in Financial Projections Without Project
1979 1980 1981 1982 1983 1984 1985 1986Income Statements a/Production Increase (1979 ' 100) 100.0 111.3 108.6 119.8 125.8 125.8 125.8 125.8Value of Production (constant 1979 US$ million) 56.6 63.0 60.9 67.8 71.2 71.2 71.2 71.2Inflation Index (mid-1979 =100) 100.0 112.5 123.5 134.0 144.1 154.2 154.2 154.2Value of Production (current US$ million) 56.6 70.9 75.2 90.8 102.6 109.8 109.8 109.8Inventory changes (current US$ million) 4.7 - 17.9 3.0 1.7 - - -Sales Revenues (current US$ million) 51.9 70.9 57.3 93.8 100.9 109.8 109.8 109.8
Costs of Operations
Materials (% of productioni) 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0Subcontracts & Utilities (% of production) 19.6 19.6 16.0 16.0 16.0 16.0 16.0 16.0Labor (7 of production) 37.2 33.2 33.2 30.0 28.4 28.4 28A4 28.4Deprec. & Amort. (current US$ million) 3.2 3.3 3.4 3.5 3.6. 3.7 3.8 3.8Adm. & Selling Costs (7 of production) 9.8 8.8 8.8 7.9 7.5 7.5 7.5 7.5
Working CapitalMinimum Cash (months of cash oper. expenses) 0.9 0.9 1 1 1 1 1 1Accounts Receivable (months of sales) 0.2 6.2 5.8 4.8 4.3 4.3 4.3 4.3Inventories- Raw Materials (months of consumption) 8.8 8.4 8.0 8.0 8.0 8.0 8.0 8.0- Work-in-Process (months of production) io.9 8.7 11.1 8.8 8.0 7.4 7.4 7.4- Finished Goods_/ (% of production)Advances from Clients (% of inventories) 64.0 65.0 70.0 75.0 75.0 75.0 75.0 75.0Accounts Payable (months of purchases of materials,
subcontracts and services) 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8
Reinvestment for Replacement (current US$ million) - 1.8 1.4 1.5 1.6 1.6 1.6 1.6
a/ Based on current books.b/ Represents a very small percentage of total inventories.
Industrial Projects DepartmentMay 1980
- 57 -ANNEX 3-5Table 3
COMETNA AND SOREFAIE: SUMMARIZED FINANCIAL PROJECTIONS WITHOUT PROJECT(Current US$ million)
A. COMETNA 1979 1980 1981 1982 1983 1 85 1987(provis.)
Income StatementsSales 18.7 24.3 28.2 31.9 33.5 34.9 37.2Net Income (Loss) a/ (4.5) (0.6) 0.4 0.7 1.0 0.5 1.0Balance SheetsCurrent Assets 25.1 30.8 33.9 36.0 34.6 31.6 32.2Current Liabilities 34.9 19.7 20.7 22.6 21.6 20.3 20.5Medium and Long-term Debt 2.0 11.8 10.7 9.7 8.6 6.5 5.5Equity (7.5) 9.2 11.7 12.1 12.1 11.4 12.1RatiosNet Income (Loss)/Sales (%) (24.1) (2.5) 1.5 2.1 3.0 1.5 2.6Interest/Sales (%) 20.2 9.1 7.7 8.8 6.9 5.1 4.2Current Ratio 0.7 1.6 1.6 1.6 1.6 1.6 1.6Debt-Equity Ratio -ve 56:44 48:52 44:56 42:58 36:64 31:69Debt Service Coverage a/ 0.0 1.2 1.8 1.3 1.1 1.0 1.5
B. SOREFAME
Income Statements
Sales 51.9 70.9 57.3 93.8 100.9 109.8 109.8Net Income (Loss) a/ (17.4) (4.1) (2.7) 3.1 7.4 5.9 6.3
Balance SheetsCurrent Assets 95.7 108.5 118.3 129.3 138.0 148.4 151.4Current Liabilities 115.4 74.1 81.7 92.1 95.1 96.3 97.6Net Fixed Assets 55.2 51.9 49.3 47.2 45.1 40.9 36.6Medium and Long-term Debt 42.9 71.2 68.0 59.2 53.0 43.3 30.9Equity 5.2 28.6 33.1 38.5 45.9 59.4 67.9
RatiosNet Income (Loss/
Sales (%) (33.5) (5.8) (4.7) 3.3 7.3 5.4 5.8Interest/Sales (%) 26.4 5.8 10.8 6.0 4.9 3.4 3.1
Current Ratio 0.8 1.4 1.4 1.4 1.4 1.5 1.5Debt-Equity Ratio 89:11 72:28 68:32 61:39 54:46 42:58 31:69Debt Service Coverage a/ 0.0 0.4 0.8 1.4 1.2 1.4 1.3
a/ Net income and debt service coverage in 1985 and 1987 reflect the effectof tax payments from which the Companies are exempt till 1984 under theviability contracts.
Industrial Projects DepartmentMay 1980
- 58 - ANNEX 3-6Page 1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
SOREFAME: HISTORICAL INCOME STATEMENTS-------------------------------------
(ESC. MILLION)
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979
VALUE OF PRODUCTION 398 634 782 929 937 1P172 1,629 1,773 2,092 2,696
L_ESS: CHANGES IN INVENTORIES 69 49 39 115 133 224 511 332 949 224
SALES 329 585 743 813 804 948 1,118 1,441 1,143 2,472
COSTS OF OPERATIONMATfRIALS 156 266 356 387 346 288 423 531 634 636SUBCONT. & UTILS. 40 89 91 150 136 315 336 357 382 528TAXES I ROYALTIES 1 1 I 1 1 4 3 5 10 iO 10
SUB--TOTAL 197 356 448 538 486 606 764 898 1,026 1,374
FERSON. S ADMIN. COSTS 141 194 248 308 416 509 781 876 967 1,267DEPR. S AMORT. 20 23 31 28 30 36 78 86 89 150MISC. OTHER CHARG. 4 6 9 .9 7 7 11 - - -
SUB-TOTAL 165 223 288 345 453 552 870 962 1,056 1,417
TOTAL COST OF OPERATIONS 362 579 736 883 939 1,158 1,634 t,860 2,082 2,791
LESS: INVENTORY ADJUSTMENT 69 49 39 115 133 224 511 332 949 224
COST OF GOODS SOLDI 293 530 697 768 806 934 1,123 1,528 1,133 2,567
GROSS FROFIT 36 55 46 45 (2) 14 (5) (87) 10 (95)
NET INTEREST CHARGES 10 13 17 20 34 99 167 362 546 752
INCOME FROM SALES 26 42 29 25 (36) (85) (192) (449) (536) (847)
OTHER INCOME/PROVISIONS (6) (17) 3 4 (10) 1 (14) 11 39 17
FROFIT AFTER TAX 20 25 32 29 (46) (84) (206) (438) (497) (1330)
INDIJSTRIAL PROJECTS DEPARTMENTMAY 1980
- 59 -
PORTUGAL
MECHANICAL INDUSTRIES PROJECT ANNEX 3-6______ ______________________ Pa-g-er Z
SOREFAME: HISTORICAL BALANCE SHEETS
(ESC. MILLION)
1970 1971 1972 1973 1974 1975 1976 1977 197.3
ASSETS
CURRENT ASSETSCASH AND DEPOSITS 120 53 23 12 48 53 83 91 107ACCOUNTS/NOTES RECEIVABLE 44 - 242 134 125 227 376 375 562 56.OTHER RECEIVABLES 70 154 77 69 124 151 256 116 249
INVENTORIESFINISHED GOODS 5 3 8 3 2 2 3 a 10WORK IN PROCESS 218 243 262 354 431 583 1,237 1,497 2,381MATERIALS AND CONSUMABLES 114 122 129 134 168 283 271 312 475
TOTAL INVENTORIES 337 367 398 491 601 868 1,511 1,816 2,866
OTHER CURRENT ASSETS - - - - - - - 5 9
rOTAL CURRENT ASSETS 571 815 631 697 999 1,448 2,226 2,589 3,797
MEDIUM-TERM RECEIVABLES - - - - 43 128 195 199 145INVESTMENTS 57 51 76 69 69 71 72 81 80
GROSS FIXED ASSETS 277 333 408 426 457 618 1,100 1.984 3,004LESS: ACC. DEPR. 127 145 165 184 206 255 371 439 517
NET FIXED ASSETS 150 188 242 242 251 363 729 1,545 2,487INTANGIBLE ASSETS 28 23 13 26 34 42 64 52 41ASSETS IN FROGRESS 9 19 9 39 158 322 308 238 255
TOTAL FIXED ASSETS 244 281 340 376 511 798 1,173 1,916 2,866
TOTAL ASSETS 815 1.096 971 1.073 19553 2,374 3,594 4,704 6,806
LIABILITIES AND CAPITAL
CURRENT LIABILITIESADVANCES FROM CUSTOMERS 427 629 429 330 376 471 1,155 1,312 1,483OTHER PAYABLES 69 118 134 120 157 164 191 289 442SHORT-TERM LOANS 46 17 47 52 313 584 875 1,333 1,509PAYABLES TO STATE - - - - - - - 53 99OTHER CURRENT LIABILITIES 24 88 69 122 182 310 227 183 448
TOTAL CURRENT LIABILITIES 566 851 679 623 1,029 1,529 2,448 3,169 3,980
MEDIUM AND LONG TERM LIABILITIESLOANS 43 33 58 52 122 330 871 1,056 1,983DUE TO STATE I OTHERS 23 19 22 32 106 154 62 86 73
TOTAL MEDIUM AND LONG-TERM DEBT 66 52 80 83 230 484 933 1,143 2,056ADVANCE BILLINGS - - - - - - - 30 49
TOTAL LIAIBLITIES 632 903 759 706 1.259 2.013 3,381 4,342 6,085
EQUITYSHARE CAPITAL 160 160 160 250 250 250 400 400 400REVALUATION AND I OTHER RESERVES 3 8 20 88 90 90 90 677 1,535SUBSIDIES - - - - - 150 - - -ACCUM. RETAINED EARNINGS - - - - - (46) (130) (277) (715)EARNINGS FOR CURRENT PERIOD 20 25 32 29 (46) (84) (148) (438) (497)
TOTAL EQUITY 183 193 212 367 294 361 213 362 723
TOTAL LIABILITIES AND EQUITY 815 1,096 971 1,073 1.553 2t374 3P594 4,704 6,808
RATIOS
CURRENT RATIO 1.01 0.96 0.93 1.12 0.97 0.95 0.91 0.82 0.95LONG-TERM DEBT TO EOUITY 27:73 21:79 27:73 18:82 44:56 57:43 81:19 76:24 74:26
INDUSTRIAL PROJECTS DEPARTMENT
May 1980
PORTUGALMECHANICAL INDUSTRIES PROJECT
GENERAL LAYOUT OF STEEL FOUNDRY
BUILDING EXPANSION - I
SAND PLANT
MACHINE MOLDING - -___IGRINDING MEDIA)
MACHINE MOLDINGCORE SHOP (MEDIUM WEIGHT)
AND 2 I z 0 STORAGE ~~~MACHINE MOLDING OZz < jf:STORAGE (HEAVY WEIGHT)' (D z
WHEEL AND ROLLS F Z >
MOLDINGj 0000 :: HANDCO~~~~~~~~~~~NVEYOR I AND-FLOOR I u00 00I. H F L OOMO L D I N G M O L D I N G j - - _ _ _ _ _
............... .......... .. .. .. . .... ~ ~~~~~~~~SITE FOR FUTURERELOCATION OF
FLAME CUT WELD AND GRINDING GREY IRON FOUNDRY
1 01 |I I | | | I ; W;Hr HS | i |z 0
1 F- HEL S I I I I RC AIR |P| ANDGRICNTING I o 1
I 0000 1 00 L 0: f l 01 MES; | A N D W E 2 L 4 D I NGJTREATMENT I -1
I 1 ifi;7 7fd A 0i Z3 SHIPPINGE D /5201 0 O z ~~~FLAME CUT REPAIRS I
I 5 I I.D00 400
AND WELDI~~~~~~~~~~~~~~~~ANG DGRI I
t~~~~~~~O COLLECTNIO
LBUIDING EXPANSION GATE
Industrial Projects Department
May 1980 1ig;;0040;0000000ilt0i: < -ii0000i0-000000000W d a - 1
World Bank-15
PORTUGALMECHANICAL INDUSTRIES PROJECT
LAYOUT OF VALVE PLANT
| -tLarge Valves AssemblyI~~~~, EZZI II - - - - -- - - I ~~~~STORAGE
STORAGE i L MACHINED PARTSFINISHED PRODUCTS TESTING ASSEMBLY c OUTSIDE SUPPLIED
SHIPPING LI/PARTS
PAINTING| - ------ RAW MATERIALS
_ _ . = =_ = __ _ =- __ __ -- __ _ -w |
STO RAG E K ST RA0STORAGESTOROUGCASNGE MACHINING TOOLING
ROUGH CASTING 0SHARPENING
|______________ ________________________ ___--- 7 O O m ---- ----- - - - - ___ __--75 .00 m-- -------
Industrial Projects Department
May 1980 World Bank - 21155
I t
PORTUGALMECHANICAL INDUSTRIES PROJECT
GENERAL LAYOUT OF HYDRO-POWER GENERATION EQUPMENTMANUFACTURING FACILITIES
Paint Shop -
Rolling
| RECEPTION | | F Stock DesignOfficeDivision DeinOic
I 'j S ' 'S '' i ' i 4 rzle t
> n ; H E A V Y M A C H I N E S~~ HYRUI AN ELCR Prod.
L_EHEAVYCUL ASSEMBLY SHOP T UE/
HEAT_ __ _______________ I 1 1 ;/e
MAGNETIC SHEEl PROO )JITIl N r l,
Industrial ProjectS Department
May 1980 Wrr su 15
- 63 - ANNEX 5-4
PORTUGALMECHANICAL INDUSTRIES PROJECT
NEW STEEL FOUNDRY: ORGANIZATION CHART
Board ofDirectors l
General Manager
Planning Engineering
_ Melting | i_ __~Mehods | Purchase|
_ Molding CoUntrtol _Administration
Hand Molding Laboratories t and
_FinishingMajor functions performed by headquarters
-|Maintenance|
Industrial Projects DepartmentJanuary 1980 World Bank - 21 151
- 64 -
ANNEX 5-5PORTUGAL
MECHANICAL INDUSTRIES PROJECTNEW VALVE PLANT: ORGANIZATION CHART
Board of| Directors
General Manager
TechncialrProdM in a f s p a General.Industrial Projects Departmenttion Sales Services
Product | ] Planning | Sales PersonnelDeveiopment llllll.
-|Engineering | [ Machining A fter Sales | Admninistration
IndustrialiProjecty DepartmentWorld Banku-21152
May 1980
- 65 - ANNEX 5-6
fORTUGALMECHANICAL INDUSTRIES PROJECT
COMETNA: PROJECT MANAGEMENT UNIT
ManagerProject Development
I SUppOrt |
I IFinancing |
Cost Control Procurement Technical Coordination Civil Works
Schedule Control Coordination
Industriai Projects DepartmentMay 1980
World Bank -21148
PORTUGALMECHANICAL INDUSTRIES PROJECT
PROJECT IMPLEMENTATION SCHEDULE
Activity 1980 1981 1982 1983
I I IT I I I I I I I I I I I I 1 1 Basic DesignCriteria -_
Civil Engineering _ _
Technical Engineering
Civil Worksand Installation
Bids PreparationsOrdering and Delivery
EquipmentInstallation
V
Production Start
Foundry V Commercial Production.---- V ~ Valve
Power Generation Equipinent
Industrial Projects DepartmentJanutary 1980
World Bank -21157
PORTU GAL
MECHANICAL INWSTRIES PROJECTCAPITAL COST ESTIMATES
(in current US $ million)
COMETNA - FWNyRY COfETNA - VALVE PLANT SOREFAME - HThRO-P ER EQUIP. PROJECT
Local Foreign- Total Local Foreign - Total Local Toreign o Tcal Local Foreign */ Total
Civil Works 6 Buildings 11.35 2.63 13.98 0.94 0.18 1.12 0.17 0.04 0.21 12.46 2.85 15.31
Machinery, Equipsasnt,Spares. i.
Insurance and Freight 1.86 14.18 16.04 0.55 1.73 2.28 1.34 7.79 9.13 3.75 23.70 27.45
Installation & Supervision 0.60 0.86 1.46 0.11 0.10 0.21 1.05 - 1.05 1.76 0.96 2.72
Engineering & Tech. Assistance 0.46 2.27 2.73 0.16 0.09 0.25 - 0.37 0.37 0.62 2.73 3.35
Preparatory & Start-up Expenses 0.21 0.77 0.98 0.06 0.09 0.15 - _ - 0.27 0.86 1.13
Base Cost 14.48 20.71 35.19 1.82 2.19 4.01 2.56 8.20 10.76 18.86 31.10 49.96
Physical Contingenciea 1.45 2.07 3.52 0.18 0.22 0.40 0.22 0.66 0.88 1.85 2.95 4.80 _
Price Contingencies 3.04 4.97 8.01 0.35 0.44 0.79 0.47 1.51 1.98 3.86 6.92 10.78 1
Installed Cost 18.97 27.75 46.72 2.35 2.85 5.20 3.25 10.37 13.62 24.57 40.97 65.54
W4oteking Capital (Increm.) 4.16 0.80 4.96 1.26 0.15 1.41 3.86 2.66 6.52 9.28 3.61 12.89
Environmental Control System - - - - - - - - 0.30 1.20 1.50
Subsector Studies - - - - - 1.00 1.20 2.ZO
Total Project Cost 23.13 28.55 51.68 3.61 3.00 6.61 7.11 13.03 20.14 35.15 46.98 82.13
interest during Construction 1.48 3.62 5.10 0.20 0.35 0.55 0.16 1.04 1.20 1.84 5.01 6.85
Total Financing Required 24.61 3217 56.78 3.81 3.35 7.16 7.27 14.07 21.34 36.99 51.99 88.98
1i Includes indirect foreign exchange cqmponent
Industrial Projects DepartmentMay 1980
ON
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
FINANCING PLAN(current US$ million)
COMETNA COMETNA SOREFAMEFoundry Valve Plant Hydro-Power Equip. Principal Components
Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total
Equity
IPE 22.7 - 22.7 2.9 - 2.9 7.3 1.2 8.5 32.9 1.2 34.1
Debt -
co
IBRD - 28.2 28.2 - 2.8 2.8 - 10.6 10.6 - 41.6 41.6
Other Sources 1.9 4.0 5.9 0.9 0.6 1.5 - 2.2 2.2 2.8 6.8 9.6
Sub-Total Debt 1.9 32.2 34.1 0.9 3.4 4.3 - 12.8 12.8 2.8 48.4 51.2
a/ b/ CIFinancing Need 24.6 32.2- 56.8 3.8 3.4" 7.2 7.3 14.0- 21.3 35.7 49.6 85.3
a/ Includes US$3.1 million indirect foreign exchange.
b/ Includes US$0.4 million indirect foreign exchange.
c/ Includes US$0.8 million indirect foreign exchange. x
Industrial Projects DepartmentMay 1980
- 69 -ANNEX 6-3
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
ITEMS TO BE FINANCED BY THE BANK
Category Amount of Loan(000 US$ equivalent)
Foundry
Melting Shop 3,490Molding and Sand Preparation Shop 8,180Core Shop 390Fettling, Heat Treatment and Finishing 3,350Auxiliary Equipment and Miscellaneous 3,990Engineering and Other Services 4,500Interest During Construction 3,700
Sub-Total Foundry 27,600
Valve Plant
Machine Tools 1,360Material Handling, Equipment & Tools 560Engineering & Miscellaneous 330Interest During Construction 300
Sub-Total Valve Plant 2,550
Hydro-Power Equipment Component
Management Consultancy Services 400Machine Tools 6,200Heat Treatment & Welding Equipment 2,200Interest During Construction 1,000
9,800
Environmental Control System 1,000
Subsector Studies 1,200Unallocated 1,850
Total 400
Industrial Projects DepartmentMay 1980
- 70 -ANNEX 6-4
PORTUGALa.
MECHANICAL INDUSTRIES PROJECT
ESTIMATED DISBURSEMENT SCHEDULE FOR BANK LOAN(US$ million)
Bank Fiscal Yearand Quarter Disbursement Cumulative Undisbursed Amount
1980 IV 44.0
1981 I 44.0
II 4.0 4.0 40.0
III 3.2 7.2 36.8
IV 3.6 10.8 33.2
1982 I 4.8 15.6 28.4
II 5.6 21.2 22.8
III 4.2 25.4 18.6
IV 5.4 30.8 13.2
1983 I 3.3 34.1 9.9
II 4.7 38.8 5.2
III 3.0 41.8 2.2
IV 2.2 44.0 0.0
Industrial Projects DepartmentMay 1980
- 71 -ANNEX 7-1Page 1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
ASSUMPTIONS USED IN PROJECT FINANCIAL PROJECTIONS
A. Introduction
1. This Annex summarizes the main assumptions (Table) used in thefinancial projections of the Project components, and in the consolidatedprojections of the Companies including the Project. (Assumptions and metho-dology used in financial projections of the Companies' existing operations aregiven in Annex 3-5).
B. Revenues
2. Sales revenues in current US$ terms have been projected for theProject components on the basis of the expected production build-ups andinternational inflation (Table). For the steel foundry, an increase of 10%in the average real price of castings (as planned by COMETNA management) isassumed once the new foundry starts production. With this increase, theaverage price of castings will amount to US$1,730 per ton in 1979 US$ terms.However, average prices would still be about 15% below international levels.
3. For the valve plant, though COMETNA is expected to be in a vastlyimproved competitive position with the establishment of the new plant, it willstill initially face substantial competition from other low-cost countries.especially Spain, as a substantial part of its product-mix would be smalldiameter valves, where the competition is most severe. For the financialprojections, it is conservatively assumed, therefore, that COMETNA willmaintain average valve prices in real terms.
4. For the hydro-power equipment component, as SOREFAME is the soledomestic supplier to EDP and, moreover, is covered by a Government-sponsoredaccord regarding future supply of such equipment to EDP, it is assumed thatprices will be maintained in real terms. As regards exports, SOREFAME'sprices are already in line with international levels and it is expected thatthe Company will maintain them in real terms.
C. Operating Costs
5. Main categories of operating costs for the three Project componentsare shown in the Table. For the steel foundry, average unit costs of majorinputs are as follows: ferrous scrap (Esc. 4.5/kg); pig iron (Esc. 13.5/kg);silica sand (Esc. 540/ton); ferro-manganese (Esc. 19/kg); ferro-silicon(Esc. 20.9/kg); ferro-chromium (Esc. 110/kg); and electric power (Esc. 1.45/kwh).
- 72 -ANNEX 7-1Page 2
6. For the valve plant, the average unit cost of foundry items, theprincipal inputs, for representative valve sizes are assumed as follows:
Valve Plant - Principal Input Costs/Unit(Esc./kg)
2" Valve 4" Valve 10" Valve
Body 94 83 83Bonnet 109 83 83Others 115-139 115-122 109-122
7. For the hydro-power equipment component, material costs have beenprojected on the basis of the existing operations for similar products inSOREFAME's power equipment division.
8. Labor costs have been projected for the three Project componentson the basis of the phased transfer/increase of the labor force, taking intoaccount the Companies' present wage and salary practices, including socialcharges and benefits, and in the case of COMETNA's steel foundry and valveplant, the increased costs of transporting personnel to the new plant site.
C. Other Charges
9. Interest charges have been estimated using an average interestrate of 10% in keeping with the expected decline in international inflation.Interest during construction has been capitalized, and consequently, doesnot enter the income statements till commencement of commercial production.
10. Depreciation and amortization have been calculated using the follow-ing amortization periods: Buildings and civil works (25 years); machinery andequipment (10-15 years); erection, administration and supervision (5 years);pre-operation expenses (5 years); and spare parts, freight and insurance (5years).
11. Taxes are paid on the consolidated income (including income from theProject) of the Companies. Under the viability contracts, the Companies areexempt from income tax payment till 1984. For subsequent years, a tax rate of40% is assumed based on existing rates.
D. Working Capital
12. Under the viability contracts, the Companies are required to improvetheir working capital management. In view of the improved financial situationwith the implementation of the viability contracts and management's effortsat improving the Companies' working capital situation as required under theviability contracts, the working capital assumptions for the Project components(Table) are deemed adequate.
- 73 -ANNEX 7-1Page 3
E. Consolidated Projections
13. In consolidating the new steel foundry and the valve plant withCOMETNA's existing operations, it is assumed that the existing steel foundryand valve plant will gradually be phased-out--the steel foundry by 1985, andthe valve plant by 1983.
Industrial Projects DepartmentMay 1980
PORTUGALMECHANICAL INDUSTRIES PROJECT
Project: Assumptions in Financial Projections
Hydro-Power Equips7 ntFoundry Valve Plant Component -
1983 1984 1985 1986 1982 1983 1984 1985 1982 1983 1984Income StatementsCapacity Utilization (7) 40.0 70.0 90.0 100.0 60.0 70.7 86.7 100.0 32.0 76.0 100.0Sales/Production b/ (const. 1979 US$mill.) 6.9 12.1 15.6 17.3 2.2 2.6 3.1 3.6 4.1 9.7 12.8Inflation Index (mid-1979=100) 144.1 154.2 165.0 175.7 134.0 144.1 154.2 165.0 134.0 144.1 154.2Sales/Production b/ (current US$mill.) 10.0 18.7 25.7 30.4 2.9 3.7 4.8 5.9 5.5 14.0 19.7
Costs of OperationMaterials (7. of sales/prodn.) --------------25.6- - - - - 54.0----------- - --- ----------35.6----------Subcontracts, Consumables
+ Utilities (X of sales/prodn.) ---------------5.2--------------- ---------------5.5--------------- -----------1.5----------Labor c/ ( ) 28.0 20.9 19.1 17.1 13.8 16.0 16.6 15.0 10.8 16.7 13.2 2Depreciation + Amort. (current US$mill.) ---------------3.5--------------- 0.4 0.4 0.4 0.3 1.1 1.J 1.1Adm. + Sell. Costs (% of sales/prodn.) 16.1 12.6 11.3 9.3 4.8 5.1 5.2 4.7 ----------- 0 d/_---------
Working CapitalMinimum Cash (mos. of cash operating exp.) ---------------1------- ------- ---------------1----------------- -----------I------------Accounts Receivable (moe. of sales) ---------------2----------------- ---------------2----------------- 3.4 3.0 3.0Inventories- Raw Materials (mqso of consumption) ---------------2----------------- ---------------2----------------- 8.0 8.0 8.0- Work in Process (mos. of production) ---------------1.5--------------- ---------------1.5--------------- -----------8.7----------- Finished Goods (mos. of production) ---------------0.5--------------- --------------- 5--------- 0-
Advances from Clients (mos. of sales) ---------------1----------------- --------------- 70----------------- ----------75.07--------Accounts Payable (mos. of purchases) ----------- 3-3-3.4-
a/ On an incremental basis for the Project component.b/ In the case of the hydro-power equipment component, costs have been related to total production instead of sales
on account of the annual inventory charges arising from the longer production time compared to the steel foundryand the valve plant.
c/ Including maintenance.d/ The Project will utilize the current administrative and sales organization.e/ % of inventories.
Industrial Projects Department F January 1980
- 75 - ANNEX 7-2
P ORTUGAL
MECHANICAL INDIUSTRIES PROJECT
COMETNA: PROJECTED INCOME STATEMENTS FOR FOUNDiRY__________________________________________.______
(CURRENT.US$ MILLION -a/)
1983 1984 1985 1986 1987 1988 1989 1990
SALES 9.96 18.66 25.66 30.36 30.36 30.36 30.36 30.36
COST OF GOODS SOLDMATERIALS 2.55 4.78 6.57 7.77 7.77 7.77 7.77 7,77SUBCONT. & UTILS. 0.40 0.75 1.03 1.21 1.21 1,21 1.21 1.21LABOR 2.31 3.18 3.78 4.02 4.02 4.02 4.02 4.02TAXES I ROYALTIES 0.12 0.23 0.32 0.38 0.38 0.38 0.38 0.38
SUBTOTAL 5.38 8.94 11.70 13.38 13.38 13.38 13.38 13.38.
INDIRECT EXPENSESDEPR. I AMORT. 3.53 3.53 3.53 3.53 3.53 2.56 2.56 2.56ADM. & SELL. COSTS 1.60 2.35 2.58 2.81 2.81 2.81 2.81 2.81MAINTENANCE 0.48 0.72 1.11 1.18 1.18 1.18 1.18 1.18
SUBTOTAL 5.61 6.60 7.22 7.52 7.52 6.55 6.55 6.55
GROSS PROFIT (1.03) 3.12 6.74 9.46 9.46 10.43 10.43 10.43
NET INTEREST CHARGES 1.59 3.09 .278 2,48 2.17 1.85 1.53 1.24
PROFIT BEFORE TAXES (2.62) 0.03 3.96 6.98 7,29 8.58 8.90 9.19
.Y' IN CURRENT TERMS TILL 1986,CONSTANI THEREAFTER.
INDUSTRIAL PROJECTS DiEPARTMENTMAY 1980
- 76.- ANNEX 7-3
PORTUGAL
MECHANICAL ItNDUSTRIES PROJECT_____________________________
COMETNA? PROJECTED INCOME STATEMENTS FOR VALVE FLANT---------------------------------------------------
(CURRENT US$ MILLION A/)
1982 1983 1984 1985 1986 1987 1988 1989 1990
SALES 2.89 3.69 4.83 5*94 6.33 6.33 6.33 6.33 6.33
COST OF GOODS SOLDMATERIALS 1.56 1.99 2.61 3.21 3.42 3.42 3.42 3.42 3.42SUBCONT. & UTILS. 0.06 0.07 0.10 0.12 0.13 0.13 0.13 0.13 0.13LABOR 0.37 0.53 0.7L 0.76 0.81 0.81 0.81 0.81 0.81TAXES & ROYALTIES 0.10 0.13 0.17 0.21 0.23 0.23 0.23 0.23 0.23
SUBTOTAL 2.09 2.72 3.59 4.30 4.59 4.59 4.59 4.59 4.59
INDIRECT EXPENSESDEF'R. & AMORT. 0.43. 0.43 0.43 0.29 0.29 0.29 0.29 0.29 0.29AlM. & SELL. COSTS 0.14 0.19 0.25 0.28 0.29 0.29 0.29 0.29 0.29MAINTENANCE 0.03 0.06 0.09 0.13 0.14 0.14 0.14 0.14 0.14
SUBTOTAL 0.60 0.68 0.77 0.70 0.72 0.72 0.72 0.72 0,72
GROSS PROFIT 0.20 0.29 0.47 0.94 1.02 1,02 1.02 1.02 1.02
NET INTEREST CHARGES 0.17 0.33 0.32 0.29 0.26 0.23 0.20 0.17 0.13
PROFIT BEFORE TAXES 0.03 (0.04) 0.15 0.65 0.76 0.79 0.82 0.85 0.39
A/ IN CURRENT TERMS TILL 1986,CONSTANT THEREAFTER,
INDIUSTRIAL PROJECTS DEPARTMENTMAY 1980
77 - ANNEX 7-4
FORTUGAL
MECHANICAL INDUSTRIES PROJECT
SOREFAME: INCREM. INCOME STATEMENTS - POWER EQUIPf. TVIYSION
(CURRENT US$ MILLION A/)
1982 1983 1984 1985 1986 1987 1988 1989 1990
VALUE OF PRODUCTION 5.46 13.96 19.66 19.66 19.66 19.66 19.66 19.66 19.66
LESS: INVENTORY CHANGES 2.05 5.88 4.71 - - - --
SALES 3.41 8.08 14.95 19.66 19.66 19.66 19.66 19.66 19.66
COST OF OPERATIONSMArERIALS 1.94 4.94 6.95 6.95 6.95 6.95 6.95 6.95 6.95
SUBCONTRACTS AND UTILITIES 0,08 0.28 0.31 0.31 0.31 0.31 0.31 0.31 0.31
LABOR 0.59 2.43 2.60 2.60 2.60 2.60 2.60 2.60 2.60
SUBTOTAL 2.61 7.65 9.86 9.86 9.86 9.86 9.86 9.86 9.S6
DEPREC. AND AMORT. 1.00 1.00 1.00 1.00 1.00 0.80 0.80 0.80 (.80
SUBTOTAL 1.00 1.00 1.00 1.00 1.00 0.80 0.80 0.80 0.80
TOTAL COST OF OPERATIONS 3.61 8.65 10.86 10.86 10.86 10.66 10.66 10.66 10.66
LESS: INVENTORY ADJUSTMENT 2.05 5.88 4.71 - - - - - -
COST OF GOODS SOLD 1.56 2.77 6.15 10.86 10.86 10.66 10.66 L0.66 10.66
GROSS PROFIT 1.85 5.31 8.80 8.80 8.80 9.00 9.00 9.00 9.00
A/ IN CURRENT TERMS TILL 1984,CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY e980
- 78 - ANNEX 7-5Page 1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
COMETNAI PROJECTED INCOME STATEMENTS WITH PROJECT-------------------------------------------------
(CURRENT US$ MILLION A/)
1979 1980 1981 1982 1983 1984 1985. 1986 1987 1998 1989 1990
SALES 18.71 24.27 28.23 34.77 42.49 52.96 61.76 69.99 68.98 68.98 68.98 68.98
COST OF GOODS SOLDMATERIALS 7.93 9.47 11.01 13.99 15.79 18.84 21.54 23.78 23.78 23.78 23.78 23.78SUBCONT. I UTILS. 1.40 1.40 1.41 1.63 1.91 2.32 2.66 2.95 2.95 2.95 2.95 2.95LABOR 7.02 7.76 9.67 9.78 11.44 12.55 13.34 14.20 14.20 14.20 14.20 14.20TAXES S ROYALTIES 0.07 0.09 0.11 0.22 0.36 0.51 0.64 0.73 0.73 0.73 0.73 0.73
SUBTOTAL 16.42 18.72 21.20 25.64 29.50 34.22 38.18 41.66 41.66 41.66 41.66 41.66
INDIRECT EXPENSESDEPR. I AMORT. .0.46 1.13 1.29 1.82 5.35 5.44 5.14 5.14 5.14 4.17 4.17 4.17ADM. I SELL. COSTS 2.43 2.75 3.08 3.48 4.29 5.12 5.43 5,85 5.85 5.85 5.85 5.85MAINTENANCE 0.06 0.08 0.09 0.12 0.64 0.92 1.36 1.44 1.44 1.44 1.44 1.44
SUBTOTAL 2.95 3.96 4.45 5.42 10.28 11.48 11.93 12.43 12.43 11.46 11.46 11.46
GROSS PROFIT (0.66) 1.59 2.59 3.71 2.71 7.16 11.65 14.89 14.89 15.86 15.86 15.86
GROSS INTEREST CHARGES 3.78 4.30 4.05 4.43 5.26 6.21 5.43 4.57 3.68 3.22 2.82 2.40INTEREST SUBSIDIES - 2.08 1.87 1.64 1.07 0.86 0.64 0.32 - - - -
NET INTEREST CHARGES 3.78 2.22 2.18 2.79 4.19 5.35 4.79 4.25 3.68 3.22 2.82 2.40
OTHER INCOME/PROVISIONS (0.10) - - - - - - - - - - -
PROFIT BEFORE TAXES (4.54) (0.63) 0.40 0.92 (1.49) 1.81 6.86 10.64 11.21 12.64 13.04 13.46LESS:TAXES - - - - - - 2.74 4.26 4.48 5.06 5.22 5.38
PROFIT AFTER TAXES (4.54) (0*63) 0.40 0.92 (1.48) 1.81 4.12 6.38 6.73 7.58 7.82 8.08
A/ IN CURRENT TERMS TILL i986,CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1980
- 79 - ANNX 7-5PORTUGAL Page 2
MECHANICAL INDUSTRIES_PROJECT
CONETNA: PROJECTED FLOW OF FUNDS WITH PROJECT
(CURRENT USS MILLION A/)
1979 1990 1981 1982 1993 1994 199! 1996 1997 1988 1999 1990
SOURCES
FROM OPERATIONS
NET PROFIT BEF. INT. I TAX (0.76) 1.59 2.58 3.71 2.71 7.16 11.65 14.89 14.89 15.96 15.86 15.86
DEPREC. I AMORT. 0.46 1.13 1.28 1.82 5.35 5.44 5.14 5.14 5.14 4.17 4.17 4.17
INTERNAL CASH GENERATION (0.30) 2.72 3.96 5.53 8.06 12.60 1.6.79 20.03 20.03 20.03 20.03 20.03
INCREASE IN DEST
PROJECTLTD FROM WORLD BANK - 4.50 13.72 14.14 1.02 - - - - - - -
LTD FROM DOM. SOURCES - 2.58 1.16 - - .- - - - - -
SUB-TOTAL - 7.09 12.99 13.74 1.02 - - - - - - -
NON-PROJECTLTD (INCL. CONY. OF STD) 0.09 9.80 - - - - - - - - - -
SNORT-TERM LOANS 3.03 - - - - 0.52 - - - - - -
O3TAL FROM DEBT 3.11 16.99 12.98 13.74 1.02 0.52 - - - - - -
INCREASE IN EQUITY
SHARE CAP. 'SUBORD. DEBTI SUPRIMENTOS 1.05 16.36 16.25 3.76 0.07 (0.39) (0.56) (0.54) - - - -
ASSET REVALUATION - 5.60 - - - - - - - - -
TOTAL FROM EQUITY 1.05 21.96 16,25 3.76 0.07 (0.39 (0.56) (0.54) - - - -
TOTAL SOURCES 3.86 41.56 32.99 23.03 9.15 12.73 16.23 19.49 20.03 20.03 20.03 20.03
APPLICATIONS
INCREASE IN FIXED ASSETSPROJECT - 11.75 27.03 17.31 1.41 - - - - - - -NON-PROJECT 0.72 6.70 1.59 0.83 0.68 0.79 0.81 0.88 0.88 0.99 0.88 0.88
SUB-TOTAL 0.72 19.45 28.61 19.14 2.09 0.79 0.91 0.88 0.99 0.89 0.98 0.99
REPAYMENT OF LTD
PROJECTWORLD BANK - - - - - 2.79 2.79 2.78 2.79 2.79 2.79 2.79DOMESTIC LOANS- - - - - 0.33 0.33 0.33 0.33 0.33 0.33 0.33
SUB-TOTAL - - - - - 3.11 3.11 3.11 3.11 3.11 3.11 3.11
NONPROJECTLTD - - - - 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05
REPAY. OF OTHER DUES- 0.80 - - - - - - - - - -
CONY. OF STD INTO LTD -13.94 - - - - - - - - - -
TOTAL REPAY. OF LTD I
CONY. OF STD INTO LTD. - 14,74 - - 1.05 4.16 4,16 4.16 4.16 4.16 4.16 4.16
INTEREST PAYMENTS
NET INTEREST 3.78 2.22 2.19 2.79 4.19 5.35 4.79 4.25 3.68 3.22 2.92 2.40
TAXES - - - - - - 2.74 4.~6 4.48 5.06 5.22 5.39
INCREASE IN WaRK. CAP. REQUIRED
PROJECT - - - 0.75 3.00 2.59 2.11 1.26 - - - -
NON-PROJECT (0.64) 5.23 1.61 (0.80) (3.65) 0.64 (0,91) 0.87 - - - -
SUB-TOTAL (0.64) 5.23 1.61 (0.05) (0.65) 3.22 1.20 2.13 - - - -
TOTAL APPLICATIONS 3.96 40.64 32.40 20.88 6.69 13.51 13.70 15.68 13.20 13.32 13.08 12.92
REPAYMENT OF STD/CASH SURPLUS - 0.92 0.59 2.15 2.47 - 2.53 3.91 6.83 6.71 6.95 7.21
_4/ IN CURRENT TERMS TILL 1996. CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1990
- 80 - ANNEX 7-5Page 3
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
COMETNA: PROJECTED BALANCE SHEETS WITH PROJECT----------------------------------------------
(CURRENT US$ MILLION .gh)
1979 1980 1981 1982 1983 1994 1985 1986 1987 1988 1989 1990
ASSETS
CURRENT ASSETS
MINIMUM CASH 0.64 1.83 2.07 2.48 2.92 3.42 3.82 4.17 4.17 4.17 4.17 4.17SURPLUS CASH - - - 0.80 3.23 1.88 4.36 8.14 14.97 21.68 28.63 35.84ACCOUNTS RECEIVABLE 6.96 10.51 12.22 12.44 11.88 12.51 12.82 14.20 14.20 14.20 14.20 14.20OTHER RECEIVABLES 2.06 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.2oINVENTORIESFINISHED GOODS 1.05 1.01 1.18 1.44 1.72 2.11 2.47 2.74 2.74 2.74 2.74 2.74WORK IN PROCESS 10.29 12.14 12.93 13.65 12.53 13.94 15.26 16.70 16.70 16.70 16.70 16.70MATERIALS 3-97 3.95 4.13 4.30 3.20 3.72 4.19 4.60 4.60 4.60 4.60 4.60
TOTAL INVENTORIES 15.31 17.10 18.24 19.39 17.45 19.77 21.92 24.04 24.04 24.04 24.04 24.04
PREPAID EXPENSES 0.09 0.12 0.14 0.17 0.21 0.26 0.31 0.34 0.34 0.34 0.34 0.34
TOTAL CURRENT ASSETS 25.06 30.82 33.93 36.54 36.95 39.10 44.49 52.15 58.98 65.69 72.64 79.85
INVESTMENTS AND MEDIUM-TERM RECEIVABLES 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06
FIXED ASSETS
GROSS FIXED ASSETSPROJECT - 11.75 38.78 56.09 57.50 57.50 57.50 57.50 57.50 57.50 57.50 57.50NON-PROJECT 10.23 16.93 18.51 19.34 20.02 20.80 21.61 22.49 23.37 24.25 25.13 26.01
SUB-TOTAL 10.23 29.68 57.29 75.43 77.52 78.30 79.11 79.99 80.87 81.75 82.63 83.51
LESS: ACC. DEPR. - - - - - - - - - - - -PROJECT - - - 0.43 4.39 8.35 12.17 15.99 19.81 22.66 25.51 28.36NON-PROJECT 6.59 7.72 9.00 10.39 11.78 13.26 14.58 15.90 17.22 18.54 19.86 21.18
SUB-TOTAL 6.59 7.72 9.00 10.82 16.17 21.61 26.75 31.89 37.03 41.20 45.37 49.54
NET FIXED ASSETS 3.64 20.96 48.29 64.61 61.35 56.69 52.36 48.10 43.84 40.55 37.26 33.97
INTANGIBLE FIXED ASSETS 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06
ASSETS-IN-PROGRESS 0.61 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53
TOTAL ASSETS 29.43 52.43 82.87 101.80 98.95 96.44 97.50 100.90 103.47 106.89 110.55 114.47_=,s, ,:,, k,,... .... .... =... ...... ........ ....... ... ...... ......... ...... ......... .- ,.......... . -...*- ..... -. -
LIABILITIES & EQUITY
CURRENT LIABILITIES
ADVANCES FROM CUSTOMERS 5.04 6.80 7.90 9.17 9.22 10.17 11.06 12.09 12.09 12.09 12.09 12.09PAYABLES 1 SHORT-TERM DEBT 25.93 8.96 8.77 .8.01 6.55 5.83 6.60 7.29 7.29 7.29 7.29 7.29CURRENT PORTION OF LTD DEBT - - 1.05 2.10 5.21 5.21 5.21 4.16 4.16 4.16 4.16 4.16OTHER CURRENT LIABILITIES 3.95 3.95 3.95 3.95 3.95 3.95 3.95 3.95 3.95 3.95 3.95 3.95
TOTAL CURRENT LIABILITIES 34.92 19.71 21.67 23.23 24.93 25.16 26.82 27.49 27.49 27.49 27.49 27.49
LONG-TERM DEBT
LTD FROM WORLD BANK - 4.50 18.22 32.36 33.38 30.60 27.82 25.04 22.26 19.48 16.70 13.92LTD FROM OTHERS 1.99 14.37 13.53 13.13 12.08 10.70 9.32 7.94 6.36 5.18 3.80 2.42LESS: CURR. PORT. OF LTD - - 1.05 2.10 5.21 5.21 5.21 4.16 4.16 4.16 4.16 4.16
NET LONG TERM DEBT 1.99 18.87 30.70 43.39 40.25 36.09 31.93 28.82 24.66 20.50 16.34 12.18
EQUITY
SHARE CAPITAL & SUBORD. DEBT 5.15 21.51 37.76 41.52 41.59 41.20 40.64 40.10 40.10 40.10 40.10 40.10REVAL. t OTHER RESERVES 0.08 5.68 5.68 5.68 5.68 5.68 5.68 5.68 5.68 5.68 5.68 5.68ACCUM. RET. EARN. FROM PREV. YEARS (8.17) (12.71) (13.34) (12.94) (12.02) (13.50) (11.69) (7.57) (1.19) 5.54 13.12 20.94RETAINED EARN. FOR CURR. PERIOD (4.54) (0.63) 0.40 0.92 (1.48) 1.81 4.12 6.38 6.73 7.58 7.82 8.08
TOTAL EOUITY (7.48) 13.85 30.50 35.18 33.77 35.19 38.75 44.59 51.32 58.90 66.72 74.80
TOTAL LIABILITIES 1 EQUITY 29.43 52.43 82.87 101.80 98.95 96.44 97.50 100.90 103.47 106.89 110.55 114.47..... ...... ...... ...... ...... ...... ...... ...... ...... - .... ...... ......
RATIOS
DEBT/EQUITY RATIO -ve 58:42 50:50 55:45 54:46 50:50 45:55 39:61 32:68 26:74 20:80 14:86CURRENT RATIO 0.7 1.6 1.6 1.6 1.5 1.6 1.7 1.9 2.1 2.4 2.6 2.9DEBT SERVICE COVERAGE (0.1) 1.2 1.8 1.4 1.3 1.2 1.4 1.7 2.0 2.0 2.1 2.2
A IN CURRENT TERMS TILL 1986, CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1980
- 81 - ANNEX 7-6Page 1
PORTUGAL
NECHANICAL INDUSTRIES PROJECT_____________________________
SOREFANE: PROJECTED INCOME STATEMENTS WITH PROJECT-------------------------- __------_-__-_-----------
(CURRENT US. MILLION A/)
1979 1990 1981 1992 1983 1984 1985 1986 1997 1998 1989 1990
VALUE OF PRODUCTION 56.62 70.88 75.21 96.21 116.54 129.43 129.43 129.43 129.43 129.43 129.43 129.43
LESS: INVENTORY CHANGES 4.71 - 17.89 (1.05) 7.54 4.71 - - - - - -
SALES 51.91 70.88 57.32 97.26 109.00 124.72 129.43 129.43 129.43 129.43 129.43 129.43
COST OF OPERATIONSMATERIALS 17.55 21.97 22.56 29.17 35.71 39.88 39.88 39,88 39.88 39.88 39.88 39.88SUBCONTRACTS AND UTILITIES 11.10 13.89 12.03 14.60 16.69 17.97 17.87 17.87 17.87 17.97 17.87 17.87LABOR 21.05 23.55 24.99 27.87 31.64 33.86 33.86 33.96 33.86 33.86 33.86 33.86
SUBTOTAL 49.70 59.41 59.58 71.64 84.04 91.61 91.61 91.61 91.61 91.61 91.61 91.61
ADM. AND SELL. COSTS 5.56 6.22 6.60 7.20 7.71 8.25 8.2S 8.25 8.25 8.25 8.25 9.25
OPER. FIN. CHARGES 1.93 1.98 2.18 2.36 2.56 2.74 2.74 2.74 2.74 2.74 2.74 2.74DEPREC. AND AMORT. 3.15 3.26 3.36 4.47 4.57 4.68 4.78 4.78 4.58 4.58 4.58 4.58
SUBTOTAL 10.64 11,46 12.14 14.03 14.84 15.67 15.77 15.77 15.57 15.57 15.57 15.57
TOTAL COST OF OPERATIONS 60.34 70.87 71.72 85.67 98.98 107.28 107.38 107.38 107.18 107.18 107.19 107.19
LESS! INVENTORY ADJUSTMENT 4.71 - 17.89 (1.05) 7.54 4.71 - - - - - -
COST OF GOODS SOLD 55.63 70.87 53.83 86.72 91.34 102.57 107.38 107.38 107.18 107.18 107.18 107.18
GROSS PROFIT (3.72) 0.01 3.49 10.54 17.66 22.15 22.05 22.05 22.25 22.25 22.25 22.25
NET INTEREST CHARGES 13.73 4.08 6.22 6.15 6.00 4.73 4.33 3.96 2.96 3.00 2.48 1.99
PROFIT BEFORE TAXES (17.45) (4.07) (2.73) 4.39 11.66 17.42 17.72 19.09 19.29 19.25 19.77 20.26LESS:TAXES - - - - - - 7.09 7.24 7.72 7.70 7.91 8.10
PROFIT AFTER TAXES (17.45) (4.07) (2.73) 4.39 11.66 17.42 10.63 10.95 l.57 11.55 11.86 12.16
.a IN CURRENT TERMS TILL 1994,CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1980
-82- ANNEX 7-6?;;s 2
PORTUGAL
MECHANICAL INDUSTRIES PROJECT_ __ __ __ -_ --- _ _-- _ --- _-----_ _
SOREFArEI PROJECTED FLOW OF FUNDS WITH PROJECT
(CURRENT US$ MILLION A/)
1979 1980 1991 1992 1993 1994 1995 1986 1997 1998 1989 1990
SOURCES
FROM OPERATIONS
NET PROFIT 8EF. INT. B TAX (3.72) 0.01 3.49 10.54 17.66 22.15 22.05 22.05 22.25 22.25 22.25 22.25DEPREC. I AMORT. 3.15 3.26 3.36 4.47 4.57 .4.69 4.79 4.78 4.58 4.58 4.59 4.58
INTERNAL CASH GENERATION (0.57) 3.27 6.85 15.01 22.23 26.93 26.93 26.93 26.83 26.E3 26.93 26.83
INCREASE IN DEBT
PROJECTLTD fROM WORLD BANK - 1.90 9.26 0.41 - - - - - - - -
SUR-TOTAL - 1.90 8.26 0.41 - - - - - - - -
NON-PROJECTLTD (INLL. CONY. OF STD) 4.29 30.14 - - - - - -
SHORT-TERM LOANS 10.56 2.05 - - - - - - - - - -
TOTAL FROM DEBT 14.94 34.09 9.26 0.41 - - - - - - - -
INCREASE IN EQUITY
SHARE CAP. SU8ORD. DEBT1 SUPRIMENTOS 11.55 29.56 10.90 2.65 0.05 1.09 10.74) (1.94) (2.07) (2.24) (2.39) (2.76)
TOTAL FROM EQUITY 11.55 29.56 10.90 2.65 0.05 1.09 (0.74) (1.94) (2.07) (2.24) (2.39) (2.76)
PRICE COMP./DISINVEST. - 1.47 - 1.99 2.10 - - - - - - -
TOTAL SOURCES 25.82 68.39 26.01 19.96 24.39 27.91 26.09 24.89 24.76 24.59 24.44 24.07es . .... ..... ...... ..... ...... .. .s.... ..... ...... ..... ...... ..... ............. Aw...
APPLICATIONS
INCREASE IN FIXED ASSETSPROJECT - 3.95 10.32 0.50 - - - - - - - -NON-PROJECT - 0.76 1.35 1.50 1.62 1.62 1.62 1.62 1.62 1.62 1.62 1.62
SUB-TOTAL - 4.71 11.73 2.00 1.62 1.62 1.62 1.62 1.62 1.62 1.62 1.62
REPAYMENT OF LTD
PROJECTWORLD BANK - - - - - 0.89 0.89 o.89 0o88 0.99 0.o8 0.99
SUB-TOTAL - - - - - 0.99 0.B8 0.99 0,89 0.99 0.99 0o.a
NONPROJECTLTD - 4.54 1.85 3.23 7.19 6.22 4.75 5.23 5.73 6.30 6.99 9.32
REPAY. OF OTHER DUES - 9.45 3.09 3.21 0.32 - - - - - - -
CONY. OF STD INTO LTD - 37.99 - - - - - - - - - -
TOTAL REPAY. OF LTD ACONY. OF STD INTO LTD - 51.98 4.94 6.44 7.50 7.10 5.63 6.11 6.61 7.19 7.77 9.20
INTEREST PAYMENTS
NET INTEREST 13.73 4.09 6.22 6.15 6.00 4.73 4.33 3.96 3.46 3.00 2.49 1.99
TAXES - - - - - - 7.09 7.24 7.52 7.70 7.91 8.10
INCREASE IN WORK. CAP. REOUIRED
PROJECT - - - 0.18 2.17 2.90 1.58 - - - - -NON-PROJECT 1.47 7.61 (5.66) 3.76 (1.70) 2.72 - - - - - -
SUB-TOTAL 1.47 7.61 (5.66) 3.94 0.47 5.62 1.59 - - - -
OTHER APPLICATIONS 10.62 - - - - - - - - - - -
TOTAL APPLICATIONS 25.92 68.39 17.23 18.53 15.59 19.07 20.25 19.93 19.21 19.50 19.79 20.91, .. ~~.... .. .,... su ..... ...... ms_soc,...... s= a= .... . .... ..... ...... .....
REPAYMENT OF STD/CASH SURPLUS - - a.79 1.43 8.79 9.94 5.B4 5.96 5.51 5.09 4.66 3.16
.A/ IN CURRENT TERMS TILL 1984. CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1990
- 83 - ANNEX 7-6Page 3
PORTUGAL
MECHANICAL INDUSTRIES PROJECT_ _ -- - -- ----_ _ -_ - _-- _
SOREFAMEI PROJECTED BALANCE SHEETS WITH PROJECT----------- ___-_----------------------__--------
(CURRENT US$ MILLION l/)
1979 1980 1981 1982 1983 1984 1985 1986 1987 i989 1999 1990
ASSETS
CURRENT ASSETS
MINIMUM CASH 4.23 4.73 5.91 6.73 7.52 9.32 9.72 8.72 8.72 B.72 8.72 8.72SURPLUS CASH - - 2.46 2.85 11.62 20.45 26.29 32.25 38.10 43.19 47.85 51.01ACCOUNTS RECEIVABLE 26.99 36.86 27.51 38.49 38.35 43.26 44.44 44.44 44.44 44.44 44.44 44.44OTHER RECEIVABLES - - - - - - - - - - -INVENTORIESFINISHED GooDs 0.29 0.35 0.38 0.48 0.59 0.65 0.85 0.65 0.65 0.65 0.65 0.85WORK IN PROCESS S1.51 51.51 69.40 68.35 75.89 90.80 90.60 80.60 90.60 80.60 90.60 80.60MATERIALS 12.46 14.88 15.04 19.24 23.31 25.98 25.99 25.89 2s5.8 25.99 25.88 25.99
TOTAL INVENTORIES 64.25 66.74 94.92 89.07 99.78 107.13 107.13 107.13 107.13 107.13 107.13 107.13
PREPAID EXPENSES 0.21 0.21 0.21 0.21 0.21 0.21 0.21 0.21 0.21 0.21 0.21 0.21
TOTAL CURRENT ASSETS 95.69 109.54 120.91 136.35 157.4, 179.37 186.79 192.75 198.60 203.69 208.35 211.51
INVESTMENTS ANDMEDIUM-TERM RECEIVABLES 11.91 11.91 11.91 10.02 7.92 7.92 7.92 7.92 7.92 7.92 7.92 7.92
FIXED ASSETS
GROSS FIXED ASSFTSPR;OJECT - 3.95 14.33 14.93 14.83 14.83 14.83 14.83 14.83 14.83 14.83 14.53NON-PROJECT 89.70 88.70 89.46 90.91 92.31 93.93 95.55 97.17 9e.79 100.41 102.03 103.65
SUB-TOTAL 88.70 92.65 103.79 105.64 107.14 108.76 110.38 112.00 113,62 115.24 116.96 118.49
LESS: ACC. DEPR. - - - - - - - - - - - -PROJECT - - - 1.00 2.00 3.00 4.00 5.00 5.80 6.60 7.40 8.20NON--PROJECT 33.52 36.78 40.14 43.61 47.18 50.88 54.64 58.42 62.20 65.98 69.76 73.54
SUB-TOTAL 33.52 36.78 40.14 44.61 49.18 53.86 58.64 63.42 68.00 72.58 77.16 81.74
NET FIXED ASSETS 55.18 55.97 63.65 61.03 57.96 54.90 51.74 49.58 45.62 42.66 39.70 36.74
INTANGIBLE FIXED ASSETS 0.82 0.82 0.82 0.82 0.82 0.82 0.92 0.82 0.82 0.82 0.82 0.02
ASSETS-IN-PROGRESS - 0.76 1.35 1.50 1.62 1.62 1.62 1.62 1.62 1.62 1.62 1.62
TOTAL ASSETS 163.59 177.90 199.54 209.72 225.80 244.63 249.89 251.69 254.59 256.71 258.41 258.61..F_u........ ...... ........ ...... ........ ...... ........ ...... ........ ...... ........ ...... .... . .. .. ........ _..... ...
LIABILITIES I EQUITY.....................
CURRENT LIABILITIES
ADVANCES FROM CUSTOMERS 41.06 43.38 59.37 66.06 74.83 80.35 80.35 90.35 80.35 80.35 90.35 90.35PATABLES I SHORT-TERM DEBT 52.43 20.88 14.04 17.52 20.62 22.53 22.53 22.53 22.53 22.53 22.53 22.53CURRENT PORTION OF LTD DEBT 4.54 1.85 3.23 9.38 9.32 7.43 8.05 8.68 9.42 10.16 11.96 9.20OTHER CURRENT LIABILITIES 17.41 7.96 4.87 1.66 1.34 1.34 1.34 1.34 1.34 1.34 1.34 1.34
______ ------ ------ ------ ------ ----- - ------ ------ ----- - ------ ------ ------
TOTAL CURRENT LIABILITIES 115.44 74.07 91.51 94.62 106.11 111.65 112.27 112.90 113.64 114.39 116.18 113.42
LONG-TERM DEBT
LTD FROM WORLD BANK - 1.90 10.16 10.57 10.57 9.69 9.81 7.93 7.05 6.17 5.29 4.41LTD FROM OTHERS 47.45 73.05 71.20 67.97 60.79 54.57 49.82 44.59 39.86 32.56 25.67 17.35LESS: CURR. PORT. OF LTD 4.54 1.85 3.23 9.38 9.32 7.43 8.05 8.68 9.42 10.16 11.96 9.20
NET LONG TERM DEBT 42.91 73.10 78.13 69.16 62.04 56.83 50.58 43.84 36.49 28.57 19.00 12.56
EQUITY
SHARE CAPITAL I SUBORD. DEBT 19.95 49.51 60.41 63.06 63.11 64.19 63.45 61.51 59.44 57.20 54.81 52.05REVAL. I OTHER RESERVES 28.20 28.20 28.20 29.20 20.20 28.20 29.20 29.20 28.20 29.20 28.20 29.20ACCUM. RET. EARN. FROM PREV. YEARS (25.46) (42.911 (48.991 (49.71) (45.32) (33.66) (16.24) (5.61) 5.24 18.81 28.38 40.22RETAINED EARN. FOR CURR. PERIOD (17.45) (4.07) (2.731 4.39 11.66 17.42 10.63 10.85 11.57 11.55 11.96 12.16
TOTAL EQUITY 5.24 30.73 39.90 45.94 57.65 76.15 96.04 94.95 104.45 113.76 123.23 132.63
TOTAL LIABILITIES I EQUITY 163.59 177.90 199.54 209.72 225.80 244.63 248.89 251.69 254.58 256.71 25S.4t 258.61, .... ........ ........ ........ ........ ........... ...... ........ ...... ........ ...... ........ ...... ........ ...... ........ ......
RATIOS
DEBT/EOUITY RATIO H9:11 70:30 67133 60:40 52:48 43:57 37t63 32:68 26:74 20:90 14:06 9191CURRENT RATIO 0.8 1.5 1.5 1.4 1.5 1.6 1.7 1.7 1.7 1.8 1.U 1.9DEBT SERVICE COVERAGE - 0.4 o.8 1.6 1.4 1.9 1.7 1.6 1.6 1.5 1.5 1.3
-A/ IN CURRENT TERMS TILL 1984. CONSTANT THEREAFTER.
INDUSTRIAL PROJECTS DEPARTMENTMAY 1980
- 84 -
ANNEX 8-1Page 1
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
ECONOMIC RETURN AND SENSITIVITY ANALYSIS
1. The cost and benefit streams (in current US$ through the achievementof full production) used for the economic analysis are shown below along withthe factors used to convert these into real terms.
Other RealCapital Working Labor Operating Conversion
Period Costs Capital Costs Costs Benefits Factor----------------Current US$ 000s--------------
Steel 1 9,470 0 0 0 0 1.00Foundry 2 20,060 0 0 0 0 1.10
3 14,450 0 0 0 0 1.194 0 1,250 2,310 6,180 11,460 1.285 0 1,440 3,180 9,980 21,460 1.376 0 1,040 3,780 13,520 29,510 1.477 0 1,170 4,020 14,380 34,910 1.568-19 0 0 4,020 14,380 34,910 1.5620 0 (5,900) 4,020 14,380 34,910 1.56
Valve Plant 1 1,120 0 0 0 0 1.002 4,060 0 0 0 0 1.103 0 750 370 2,060 3,320 1.194 0 150 530 2,660 4,240 1.285 0 200 710 3,510 6,550 1.376 0 170 760 4,300 6,830 1.477 0 100 810 4,590 7,280 1.568-16 0 0 810 4,590 7,280 1.5617 0 (1,370) 810 4,590 7,280 1.56
Hydro-Power 1 3,850 0 0 0 0 1.00Equipment 2 9,590 0 0 0 0 1.10Component 3 0 180 590 2,220 5,460 1.19
4 0 380 2,430 5,740 13,960 1.285 0 3,210 2,600 7,990 19,660 1.376 0 2,640 2,600 7,990 19,660 1.377-14 0 0 2,600 7,990 19,660 1.3715 0 (6,410) 2,600 7,990 19,660 1.37
- 85 -ANNEX 8-1Page 2
2. These streams differ from those used in the financial analysis inthat prices for castings and valves have been increased by 15% to reflecteconomic price levels. Further, to take into account adjustments in pricesof scrap, ferro-alloys, castings, other intermediates, and power to economiclevels, direct production costs (excluding labor) have been increased by 20%for the foundry and 10% in the valve-plant and hydro-power equipment component.This results in the "other operating costs" above being higher by 15%, 9%, and10% than comparable financial values for the foundry, valve plant, and hydro-power equipment component respectively.
3. The results of the sensitivity analysis are shown below:
Economic Rate of Return (in %)
Steel Valve Hydro-PowerFoundry Plant Equipment
Base Case 16.3 16.6 31.9
Capital Cost up 20% 13.7 13.6 27.5Capital Cost up 10% 14.9 15.0 29.5Start-up Lag 1 yr 14.0 14.4 26.3Start-up Lag 2 yrs 12.3 12.8 22.5
Output Prices down 10% 12.6 8.4 25.9Output Prices up 10% 19.5 23.6 38.0Output Prices up 20% 22.4 29.9 43.7
Operating Costs up 20% 12.2 3.7 24.6Operating Costs up 10% 14.3 10.7 28.4Operating Costs down 10% 18.1 21.8 35.3
Labor Costs up 20% 15.4 14.8 30.1Labor Costs up 10% 15.8 15.7 31.0Labor Costs down 10% 16.7 17.4 32.8
Production down 20% 12.8 12.5 26.5Production down 10% 14.6 14.6 29.3Production up 5% 17.2 17.6 33.2Production up 10% 17.8 18.4 34.4
Industrial Projects DepartmentMay 1980
- 86 -ANNEX 8-2
PORTUGAL
MECHANICAL INDUSTRIES PROJECT
DOMESTIC RESOURCE COST MEASURE CALCULATIONS
Methodology
1. The calculations are based on the cost and benefit streams used inthe economic analysis of the Project. The benefit stream is regarded as aforeign exchange stream as it reflects exports and/or import substitution,but for a small proportion attributed to local currency benefits to reflectsavings in domestic transportation costs in the case of import substitution.All cost-streams have individually been separated into foreign exchange anddomestic resource costs based on the particularly characteristics of eachProject component and the individual cost stream. The streams thus obtainedare aggregated and discounted, at the estimated opportunity cost of capitalof 16%, to yield net present values (NPV) of the domestic resource costsand of the foreign exchange earnings (savings). The Domestic Resource Cost(DRC) measure is defined as ratio of the two NPVs. Stream data is availablein the Project files.
Results
2. The results of the calculations are shown below:
DRC MeasureNPV of NPV of DRC
Domestic Costs FX Earnings (Savings)(Esc. million) (US$ million) Measure
A B A/B
Steel Foundry 2,026.7 43.2 46.9Valve Plant 628.7 13.4 46.9Hydro-Power Component 793.9 27.5 28.9Project (all components) 3,451.3 84.1 41.0
The measures, as shown above, demonstrate the efficiency of the Project inconverting domestic resources into foreign exchange. For example, for theProject as a whole, domestic resources equivalent to 41 Escudos are expectedto yield 1 US$ in foreign exchange. This compares most favorably with theestimated shadow exchange rate of Esc. 58: 1 US$.
Industrial Projects DepartmentMay 1980
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