Crt tqRESTRICTEDFILE COPY Report No. PI-1Ia

This report is for oficial use only by the Bank Group and specifically authorized organizationsor perons It may not be published, quoted or cited without Bank Group authorization. TheDank Group does not secept responubity for the accuracy or completene5s of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

GORAKHPUR EXPANSION PROJECT

FERTILIZER CORPORATION OF INDIA

November 22, 1971

Industrial Projects Department

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Currency Equivalents

Re 1.0 = $0.133Rs 7.5 = $1.0RE 1,000,000 = $133,000

Weights and MeasuresAll weights and measures are in metric unite

1 Metric Ton = 1,000 Kilograms (kg)1 Metric Ton = 2,205 pounds1 Kilometer (kmn) = 0.62 miles1 Hectare = 2.47 acres

PRINCIPAL ABBREVIATIONS AND ACRONYIS USED

GOI, Government The Central Government of IndiaFCI Fertilizer Corporation of IndiaP & D Plannirng and Developnent Division of FCITOYO Toyo Engineering Corporation of JapanI L Indian Explcives LimitedIndian Oil Indi.an Oil Company, Ltd.DCM Delhi Clcth Mills, Ltd.UPSEB Uttar Pradesh State Electricit'y BoardUI4DP United Nations Development ProgrammeUP U"tqr Pr-deshTPY Iletric Tons Per YearTPD Mletric Tons Per DayCIF Cop'., Insurance and FreightIy Fiscal Year

Fiscal Year

April 1 - March 31

,ORAK1IPUR EXPANSION PROJECT

TABLE OF CONTENTS

Page No.

SUlM','ARY AND COICLJSIONS ........................ i

I. Tw,TR(DUCCTI,N . 1

TI. FCI'S FXXISTING 1 OPERATIONS . 1

A. History,, and Organization .1B. FCI M+anagement .2

C. Financial Analysis of FCI .3P. Coraklhpur iTnit. 4l. Financial Analysis of Gorakhpur Unit 5

TII. PRiOPOSED GORAKHPTIR EXPANSION PROJECT 7

A. Project Scope. 7B. Project Description. 7C. Ecology. 8

TV. PR(l.lECT COSTS AND FINANCITA PLAN .. 8

A. Capital Costs. 8B. Wqorking Capital Re1quirements .10C. Financinl Plan .100). Allocation of IDA Credit .10

V. PROJECT EXECUTION .11

A. Project Management .11B. Teclhnical Assistance .11C. Project Sclhcelule and Procurement 12

Vl. 1YAR-KFqT AND MARKETING... 12

A. Present Sittuation in India .12B. Market Forecast for India .12C. Fertili.zer Market in East India ........... 13). Corakh-ptr Marketing .14l Sales lriee and Con-petition .... ........... 15

VI[. 01PIIRATINC ('COSTS .16

Thlis report has been prepared by Messrs. Donald E. Brawn and Rex I. Bossonof tle Industri.al Projects Department based on missions to India in May andJulv 1971.

Table of Contents (Cont'd)

PIare N .

VIII. FINANCIAI. AND ECONOMIC ANALYSIS OF TllEPROJECT . .....................................

A. Financial Analysis ..... ................... 1B. Economic Analysis ...... ...................C. Sensitivity Tests ...... 1)9D. Foreign Exchange Savings ..................

IX. FUTURFE FINANCIAL POSITION OF FCI ANDGORAKHP[JR UNIT ............................... 20

A. FCI ....................................... 2(B. Gorakhpur Unit ............................ 1

X. RECOMMENDATIONS ...... .......................... 23

Annexes

1. Fertilizer Corporation of India

A. Existing Operating DivisionsB. FCI's Expansion ProgramC. FCI's Borad of Directors

2. FCI Consolidated Income Statements (1964-71)3. FCI Consolidated Balance Sheets (1964-71)4. Gorakhpur Unit Income Statements5. Gorakhpur UJnit Historic Balance Sheets6. Technical Description of Corakhpur Expansion Project7. Capital Cost Estimates - Gorakbpur Exnansion Project8. Worlcing Capital Requirements - Corakhpur Unit9. Allocation and Disbursement Schedule for IDA CrecliL10. Gorakhpur Project Implementation Scheclule11. Nitrogen Fertilizer Market for India12. Marketing System - Gorakhpur Uinit13. Operating Costs - Gorakhpur UJnit14. Forecasted Income Statements - Corakliptr Unit15. Internal Financial and Econonic Rates of Return -

Gorakhpur Unit16. Financial Breakeven Chart - Gorakhpur IJnit17. Annual Foreign Exchange Savings - Gorakhpur Unit18. Forecasted Source and Application of Funds -

Gorakhpur Unit19. Forecasted Balance Sheets - Gorakhpur Unit

Map 1: Present and Proposed Major Fertilizer Plants in India

Map 2: Gorakhpur Marketing System in Uttar Pradesh

SUMMARY AND CONCLUSIONS

i. This report appraises a proposed expansion project of the Gorakh-pur unit of the Fertilizer Corporation of India (FCI), the largest fertilizerproducer in the country, and wholly-owned by the Government of India (GOI).Gorakhpur, located in eastern Uttar Pradesh in northeastern India, has adesign capacity of 180,000 tons of urea per year and the proposed expansiouwill increase capacity to 314,000 tons of urea per year. This increasedproduction of 134,000 tons per year will contribute to India's efforts toincrease domestic fertilizer production, one of the most important inputsin its efforts to attain self-sufficiency in future food production.

ii. Total financing required for the project is estimated at $16 mil-lion (Rs 120 million) of which $8.7 million is required in foreign exchange.The proposed International Development Association (IDA) credit of $10 mil-lion (Rs 75.0 million) would be relent to FCI by the Government which wouldprovide the balance of the financing of $6 million (Rs 45.0 million) inequity funds. Terms for the on-lending to FCI are 8.5Z interest per annumto be amortized over ten years after a grace period of three years.

iii. FCI is engaged in a large expansion program with several new ureaplants currently under construction and others in advanced stages of plan-ning. While these have been financed on a conservative 50:50 debt equityratio, FCI's earnings record has been poor and it may have difficulty inservicing its debt in the immediate future. Net earnings in recent yearshave averaged about Rs 11 million per year, which represents about 1% returnon capital. This report, without appraising FCI in depth, focuses primarilyon the Gorakhpur unit and its proposed expansion, and a more detailed analy-sis of FCI, including future financial projections, is being included in thecurrent appraisal of FCI's proposal for a new urea plant at Nangal, PunjabState.

iv. Gorakhpur, which began operations in 1968, is one of the most pro-fitable divisions of FCI. Although its existing plant has a high capitalcost, it has provided a return on invested capital of about 5% thus far,which is much higher than for FCI as a whole. The proposed expansion isexpected to increase return on capital for the combined Gorakhpur plant toan estimated 12%.

v. FCI has appointed an experienced project manager who will beresponsible for the expansion. Engineering and design will be carried outby the Planning and Development Division of FCI with the assistance of ToyoEngineering Corporation of Japan who will provide process guarantees aswell. The proposed project is based on technology identical to that usedin the existing plant and no difficulty is foreseen in its execution.Adequate steps are incorporated in the project to minimize the effect onthe environment.

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vi. The project is proposed to be completed in 30 months. While prev-ious FCI projects have been delayed, much of this project duplicates existingequipment and FCI should be able to complete it in the time allowed. Theassistance of Toyo Engineering in design and procurement is expected to helpin completing the project on time.

vii. With the exception of a small amount of equipment reserved forIndian suppliers (about 4% total value of equipment), and a small amount ofproprietary equipment, all other equipment will be bid competitively underinternational tender with assurances given by GOI that all import licensesrequired will be issued promptly. If any items to be supplied by India,either reserved items or those won by international competition, are delayedand would affect timely completion of the project, GOI has assured that theycan promptly be secured from other sources and will promptly issue anyadditional import licenses. About 22% of the equipment and materials to bebid competitively should be won by Indian suppliers.

viii. The proposed IDA credit will be primarily used to finance inter-nationally bid equipment with a portion of it to be used for foreign engi-neering costs, process licenses, and part of local engineering and erectioncosts.

ix. Forecasts of fertilizer production and consumption in India indi-cate a continuing shortage in nitrogenous fertilizer production which mustbe met by imports. The Gorakhpur unit now sells most of its urea output ina relatively small area in eastern and central Uttar Pradesh. Supply anddemand data for Uttar Pradesh show that a shortfall in nitrogenous supplywill exist through the 1970's. Gorakhpur's primary market region in easternUttar Pradesh is relatively protected from competition due to high transportcosts of other producers and no difficulty is seen in Gorakhpur's disposingof its increased output in its marketing area.

x. While the existing plant has high operating costs, production costsof the expansion project are substantially below the equivalent cost of im-ported urea. These low unit costs reduce the overall ex-factory operatingcost at Gorakhpur to a level almost comparable to imports. Operating costsin the expansion are also comparable to the ex-factory costs realized inother fertilizer projects financed by IBRD.

xi. The project provides a satisfactory economic rate of return of19.2% based on estimated future import prices for urea. The financial rateof return for the project is 29.8%, which improves the overall return for theGorakhpur division to 11.3%. The project's economic and financial returnsare sensitive to changes in selling prices and, to a lesser degree, changesin raw material prices, operating level, and delays in project completion.A combination of a reduction in selling prices by 10%, reduction in operatinglevel by 5%, and a project delay, would still provide a satisfactory economicreturn of 10.3% and a financial return of 18.7%. Net annual foreign exchangesavings at normal production are estimated at $6.5 million.

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xii. IDA has recently made a credit to India for expansion by the Gov-ernment owned enterprise Fertilisers and Chemicals, Travancore Limited (FACT)in Cochin and IFC lhas participated in two private sector fertilizer projectsin India - Indian Explosives Ltd. in Kanpur, Uttar Pradesh and Zuari AgroChemicals Ltd. in Goa. Indian Explosives, a competitor of Gorakhpur, is op-erating and Zuari Agro is expected on-stream in mid-1972. IDA is now appraising the Nangal expansion project of FCI and IFC is presently evaluating asimilar urea project for Ilindustan Lever Ltd., both in Punjab State. In ad-dition, the bank is Executing Agency for a UNDP-financed phosphate miningproject study in Rajasthan.

xiii. Based on the assurances obtained during negotiations, the projectis suitable for an IDA credit of $10 million.

I. INTRODUCTION

1.01 The Governmnent of India (GOI) has requested financing from the In-ternational Development Association (IDA) to expand facilities of the Gorakh-pur Unit of the Fertilizer Corporation of India (FCI). The expansion projectwould increase design capacity from 179,500 metric tons per year (TPY) urea 1/to 313,500 TPY.

1.02 Gorakdipur, located in eastern Uttar Pradesh (UP), is one of fivepresently operating units of the company (see Maps 1 and 2). FCI is whollyowned by the Government, and the largest fertilizer producer in India. Thecompany began production in 1948 2/ and has been incorporated in its presentform since 1961. It is expanding rapidly with six other projects now underconstruction and several additiornal projects, including the Nangal Project,under consideration.

1.03 Tlhe project was suggested by an IDA mission in late 1969 as a ra-tionalizatinn or "debottlonecking" program to utilize spare capacity builtinte the ori-inal plant. FCI and the plant constructors, Toyo EngineeringCorporation of Japan (Toyo) evaluated IDA's proposal and concluded that theoptimum scherc Was to incorporate all spare equipment with additional equip-ment and expand production by about 75%. IDA agrees with the project scopeas now envisaged.

1.04 The appraisal treats Gorakhpur as a separate entity with analysisof PCI limited to its overall operations and its present financial position.'[le Naangal Project, which represents a imuch larger investment, is currentlybeing appraised and will include a more comprehensive evaluation, includinglong-range projections. In view of the large number of projects under con-struction and beinrg planned, additional study is needed to determine fullythe company's future operations and financial prospects. Given the benefitsto Inhdia [rom expandin1g production at Corakhpur, this small project shouldnot he delayed while thie overall appraisal of FCI is being completed.

1.(5 This appraisal report was prepared by Messrs. Donald E. Brown andPex L. Bosson of the Industrial Projects Department based on missions toIndia in May and July 1971.

II. ECd'S EXISTINIG OPERATIONS

A. iHistory and Org,anization

2.01 FCT was incorporated in 1961 under the Companies Act of India, rep-resentin,g a merger of two existing public sector companies - Sindri Fertiliz-ers and Chemicals Ltd. at Sindri, Bihar and Hindustan Chemicals and Fertiliz-ers Ltd. at Nangal, Punjab. These two companies began production in 1948 and

1/ Urea, a solid fertilizer material containinig 46% nitrogen, is used ex-tensivelv in fertilizing rice and wheat.

2/ All years refer to fiscal years ending Mfarch 31.

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1961, respectively. The autliorized shiare capital is presently 1's 2,00)0i l1i 1-lion ($267 million) with Rs 1 ,155 million ($154 million) ini sih:ares otut;sLand-ing; all owned by GOI. Sales have grown steadily to Rs 73½ 1ojliion ($97million) for the last fiscal year. FCT is the largest producer of fertilizerin India with 30% of nitrogen and 10% of phosphate capacity. ,ihis marketshare will grow substanitially through tihe 1970's.

2.02 The operating uinits (or divisions) are (1) Trombay, (2) Nangal, (3)Gorakhpur, (4) Sindri and (5) Namrup. Another division, Planning and Develop-ment (P & D), is responsible for engineering, research and developnment. Inaddition, the company has several major projects under construction: (1)Durgapur, (2) Barauni, (3) Namrup Expansion, (4) Ramagundam, (5) Talcher,and (6) Sindri Rationalization. Several other projects are being activelyconsidered, namely (1) Gorakhpur Expansion, (2) Nangal Expansion, (3) TrombayExpansion, (4) Trombay Debottlenecking, (5) Haldia, (6) Korba and (7) SindriExpansion. These divisions and projects are described in Annex 1 incluclingcapacities and sources of financing.

2.03 Existing employment is approximately 19,000 people, which is high.This figure includes operating personnel and ancillary employment for company-operated schools, hospitals, townshins and training programs at each factory.

B. FCI Management

2.04 FCI is managed by a 12-member Board of Directors of whiich four aresenior managers from rCI, tlhree from government ministries, two from govern-ment-owned corporations and three from other industries. Present Board m!ewl-bership is given in Annex 1 and includes the Chairman, Mr. 1. N. Sethna; andlManaging Director, Dr. K. R. Cha1cravorty. Most Board members are in the In-dian Administrative Service (IAS) and the influence of GOI is felt stronglyin the company's management. Tenure for Board members averages about twoyears for present membershiip, and its effectiveness is likely ir:paired asa restilt. The Board is designed to function as a policy-raking body anic asa liaison and coordinating group betWeen FCI and the Covernment.

2.05 The Managing Director and three Functional Directors (t'roductionand Mlarketing, Projects, and Finance) direct the company's overall policy,growth and operations through a Committee of Management. Theso executives,who are on the Board, are in effect selected by GOI although formally theyare appointed by the Board. These posts are now filled by managers withsubstantial industrial experience in FCI and improvenent in corporate manage-ment since the IDA mission in June/July 1969 is evident. -lowever, furtherimprovement is needed in marketin-,, project implemientation, management re-porting, and correcting operating problems.

2.06 Eachi Operating TJnit is managed as a separate cost center and dny-to-day production functions are controlled by the unit General M1anagers.The company's rapid growth has created a shortage of experience(d managersand unit General Ifanagers have been changed more often than desirable. [he

Gorakhpur General Manager was recently transferred and was replaced by theformer Deputy General Manager who is capable and experienced. FCI hasagreed to inform IDA before making further changes.

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C. Financial Analysis of FCI

2.07 Financial management of such a large and growing company is under-standably complex. Each unit prepares monthly statements which are availablewithin a few days from the end of the month. From these statements monthlyand quarterly reports are prepared for individual units. FCI prepares anannual budget for the following year which sets production and profit goalsas well as forecast of capital needs. However, budgeted goals are oftenoptimistically high and budgets are not periodically adjusted to reflectactual operating conditions. The company's annual report is audited by pri-vate auditors and then by Government auditors and is published about eightmonths from the end of the fiscal year.

2.08 Historical income statements for the company are given in Annex 2

and summarized below:

Summary Income Statements for FCI"(Millions of Rs)

Fiscal Year FY64 FY65 FY66 FY67 FY68 FY69 FY70 FY71 Total(Ending March 31)

Sales 269 245 252 312 393 483 597 730 3,281Cost of Goods Soldand InventoryChanges 103 90 93 112 135 166 173 308 1,180Gross Profit 166 155 159 200 258 317 424 422 2,101Operating Expenses 143 137 155 206 229 259 374 396 1,899Operating Profit 23 18 4 ( 6) 29 58 50 26 202

Other Income 6 6 6 16 12 11 12 20 89Other Expenses 7 2 6 24 24 26 37 29 155Net PublishedProfit 22 22 4 (14) 17 43 25 17 136Adjustment /1 (3) 5 (2) (10) (9) (17) (8) (2) (46)Net Profit (Loss) 19 27 2 (24) 9 26 17 15 90

/1 The above adjustments are taken from the succeeding year's publishedaccounts and reflect expenses charged to subsequent years. However,FCI does not restate earnings for the affected year and net reportedincome for the period greatly exceeds its actual income after adjust-ments.

2.09 FCI has made a profit in all but one recent year, but its earningshave not been satisfactory. This difficulty is due pririarily to delays inbringing new plants into operation and to low production levels. As seen inAnnexes 1 and 2 performance and profitability of individual plants have variedconsiderably. Nangal and Gorakhpur nave consistently operated quite well al-though Nangal has recently experienced a power shortage and had to curtailproduction. The profitability of Sindri has declined due to small and anti-quated plants, and in recent years, Sindri has experienced heavy losses. FCIhas had difficulty in operatirng Troabay and Namrup and these have severelyaffected FCI's profitability.

2.10 Historical company balance sheets are given in Annex 3 and summa-

rized below:

Summary Balance Sheets for FCI(Million of Rs)

Fiscal Years FY64 FY65 FY66 FY67 FY68 FY69 FY70 FY71

Assets

Current Assets 225 190 207 287 341 489 517 582

Net Fixed Assets 485 466 729 809 776 1192 1151 1105

Expansion Projects 283 463 376 432 570 384 756 1043

Other 3 6 20 21 20 20 24 21

Total 996 1125 1332 1549 1707 2085 2448 2751

Liabilities and Capital

Current Liabilities 77 141 201 244 249 300 318 432

Net Long-Term Debt 332 383 494 610 656 892 998 998

Equity 587 601 637 695 802 893 1132 1321

Total 996 1125 1332 1549 1707 2085 2448 2751

Current Ratio 2.9:1 1.3:1 1.0:1 1.2:1 1.4:1 1.6:1 1.6:1 1.3:1

Long-Term Debt: Equity 36:64 39:61 44:56 47:53 45:55 50:50 47:53 43:57

Company growth has been rapid in recent years and much of the increase in

total assets represents construction of new projects. New projects are cur-

rently financed 50% in debt and 50% in equity and as a consequence, the com-

pany is in an acceptable financial position.

D. Gorakhpur Unit

2.11 Gorakhpur Unit is a medium-size urea factory located in Gorakhpur

district in eastern Uttar Pradesh (UP). Plant capacity is 179,500 TPY urea

(82,500 TPY N) in two trains. Ammonia is produced from cracked naphtha 1/

received by rail from the Barauni refinery of Indian Oil Company. The plant's

power requirements (40 MW) are obtained from power stations about 350 km

away. Employment is high, totaling about 2,000 personnel including stafffor schools, hospitals, and township operation. Installed spares for exist-

ing equipment form the basis for the expansion project. The technology and

plant size employed are not competitive with present modern day designs, but

1/ Cracked naphtha is a petroleum (middle distillate) fraction containing

about 25-30% unsaturated hydrocarbons. It is a refinery by-product and

there is no shortage in India as there is with straight-run naphtha.

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wuen planned in 1962 it represented the best available proven technology.The orThinal plant was desicned and erected by Toyo with assistance of FCI'sP & D Division and has been producing, since 1968. It is over-designed in

terms of equilpmcnt size, layout and spare capacity. However, basic designis good, as is maintenance, and the plant regularly produces 100-105% ofrated daily dlesi;.-T capacity. It is now fully managed and operated by FCIstaff with no outside assistance.

2.1' Corakhour product-d 82% of its design capacity last year despitepouer and equipment failures and a naphtha shortage caused by a rail strike.Power generation and transnission facilities are being steadily improved ineastern UP and power interruptions should decrease (see Annex 1). Gorakhpur'smanagement is adept at understanding and solving production problems and canreasonably be expccted to achieve and maintain current budgeted productiongoals.

2.13 Most of its uirea output is sold in eastern and central UP. Thisreginn is intinsely. crop-pedl in rice, wheat, sugar cane and maize, and is a

aijor fertilizer consuming area. MTarketing, which is discussed further inChapter VI, iz not a pro,l-em.

i. FinaacLcil Analyris of Corakhpur Unit

2. 1./; NAmmonia prod&uction began aL Corakhpur in February 1968, urea inarch 19$IR, and commercial production oJ1 January 1, 1969. From its inceptionir 196,' the project experienced delays in site selection, land acquisition,civil works anid procurerent. Capital employed, Rs 340 miillion ($45.3 million),is excessive due to the reasons above and tihe overdesign of the plant.

.1 I5 istorical income and balance sheet data are shown in Annexes 4 and5, and aire s,rnmarized below:

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Selected Income and Balance Sheet Items - Gorakhpur Unit(Million Rs)

Fiscal Years (Ending 'larch 31) FY69 FY70 FY71

A. Income Statements

Production ('000 TPY urea) 102 158 147Capacity Utilization 57% 88% 82%Sales ('000 TPY urea) 104 141 141

Sales 83.5 111.5 114.5Operating Cost 74.5 75.9 88.8Operating Profit 9.0 35.6 25.7

Net Profit (3.1) 20.3 11.9Net Profit (% of sales) - 18% 10%Debt Service Coverage 1.8 1.7 1.6

B. Balance Sheet Items

Current Ratio 0.9:1 1.4:1 1.1:1Long-Term Debt:Equity 68:32 62:38 53:47

In its three years of operations Gorakhpur has performed well. Plant utiliza-tion is considerably above the average of FCI's other fertilizer operationsand net income as a percentage of sales was 18% and 10% in the past two years.The principal reason for this drop was an increase in power and fuel costs.Net income for FCI was 1.4% and 1.3% of sales in these years.

2.16 Existing Gorakhpur facilities were financed with funds from GOIat a debt:equity ratio of 68:32. Interest rates varied from 6-7% per annum,depending on GOI policy at the time of loan withdrawal. Foreign exchangecosts were covered in part by a Japanese yen credit of Rs 143 million equiv-alent ($19.1 million) to GOI at 5.75% interest with a total maturity of 15years. FCI's debt for Gorakhpur to GOI is expressed in rupees with the gov-ernment assuming the foreign exchange risk of the Japanese credit.

2.17 Debt borrowed by FCI is allocated to the divisions as used. ILow-ever, the repayment from the division to FCI is based on a nominal schedule,usually ten equal annual repayments from start of commercial production.Since this repayment schedule may not correspond to the actual terms on whichFCI obtained the loans, the aggregate debt schedule for the divisions doesnot necessarily correspond to FCI debt. Cash generated above normal require-ments is transferred to FCI Head Office. FCI may treat this surplus cash asa credit to the division or as a pre-payment of debt owed FCI by the division.For the past three years Gorakhpur has generated excess cash which has beenused primarily to prepay its debt. Had this cash been retained in Gorakhpur,,its current ratio would be much higher than the existing ratio of 1.1:1. Atpresent Gorakhpur has a conservative debt equity ratio of 53:47 and lastyear's operation provided a debt service coverage of 1.6:1.

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2.18 FCI has agreed to improve its accounting procedures, wherenecessary, in stating separately and clearly the financial position ofGorakhpur (and other units) and FCI as a whole. Source and applicationof funds for Gorakhpur including funds for the proposed project will bestated separately. Quarterly projections and budgets will be included inGorakhpur's quarterly financial reports. Working capital at Gorakhpurwill be maintained at an adequate level and cash will not be transferredto the company if Gorakhpur's current ratio would be reduced below 1.1:1.

III. PROPOSED GORAKHPUR EXPANSION PROJECT

A. Project Scope

3.01 The proposed project will increase urea design capacity from 544metric tons per day (TPD) to 950 TPD. Corresponding annual capacities are179,500 and 313,500 TPY urea, respectively. Daily production rate will beguaranteed by Toyo (see para. 5.03). Design capacity for ammonia, an inter-mediate product, will be increased from 116,000 to 188,000 TPY. The opera-tion will continue to be based on cracked naphtha from Barauni. Requiredfacilities are ammonia and urea plants to be based on designs from Toyo, whosupplied the original plant. The expansion project will utilize installedspare equipment as well as spare capacity in existing equipment. Offsite fa-cilities, such as steam, power, and water supply and storage require onlyiinimal expansion since excess capacity was installed originally.

B. Project Description

3.02 Production plants at Gorakhpur are small by today's standards anddesign condlitions require the relatively high production cost technology ofexisting designs to be used also in the expansion project. Ilowever, theprocess plants and equipment are conventional and commercial designs. Capi-tal costs are low enough to offset these high operating costs and make theproject economically attractive (see para. 7.07).

3.03 Ammonia will be produced in several steps beginning with partialoxidation of naphtha. The resulting carbon monoxide and hydrogen is furtherreacted to carbon dioxide and additional hydrogen. Carbon dioxide is removedfroml the process gases wlhicli are purified by washing withi liquid nitrogen.Additionial nitrogen is added and the gases are compressed and converted intoammonia. N,itrogen and oxygen requirements are supplied by an air separationplant.

3. 04 Aiiiiiioni;a is combined with the carbon dioxide produced above and re-acLed undcr pressure Lo form ammonium carbamate and tlhen further processedinito tirea. I'lMiS solution is concentrated to an anhydrous melt wlhichi is sol-

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idified into spheres or "prills". The urea process to be used is Toyo's"Improved Total Recycle 'C' Process", which has a lower utility consuluptionthan the existing plant.

3.05 After expansion Gorakhpur will require 50 MI power (as against 4()NW at present) from the UP State Electricity Board (UPSUB) stations at lilhaind

(hydroelectric) and Obra (thermal). FCI has a letter of intent from UlPSElagreeing to provide additional power requirements as an extensioni of tile ex-isting power contract. This region is on a power grid and additional gener-ation and transmission facilities are being installed and will be in opera-tion before the urea expansion project. It is therefore expected that ade-quate power will be available. A more detailed project description is givenin Annex 6.

C. Ecology

3.06 Ammonia/urea plants are relatively free from pollution problemswith the only significant potential concern being discharge of free ammoniain liquid effluents. Aquatic life is sensitive to small quantities of un-neutralized ammonia. Water requirements are obtained from tubewells and anearby lake. Gorakhpur recycles much of its water requirements by use ofcooling towers and collects any discharged water in closed lagoons. Ammoniaeither evaporates or is neutralized before discharging outside the plant en-vironment. Total nitrogen involved is small and insufficient to lhave any ef-fect on algae growth or other related ecological problems. These practicesare normal design and are considered adequate. All necessary pollution con-trol facilities are included in the existing plant and no further capital ex-penditures are required.

IV. PROJECT COSTS AND FINANCIAL PLA.i

A. Capital Costs

4.01 Total estimated capital required for the project is Rs 120 million($16.0 million) including interest during construction. These costs are givenin detail in Annex 7 and are summarized below:

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Summary of Capital Costs(in Millions)

Indian Rupees U.S. DollarsLocal Foreign Total Local Foreign Total %

Equipment and Materials 10.1 42.4 52.5 1.34 5.66 7.00 43.7

Freight 1.6 3.1 4.7 0.21 0.41 0.62 3.9

Duty, Tax 14.6 - 14.6 1.95 - 1.95 12.2

License Fees - 2.8 2.8 - 0.37 0.37 2.3

Engineering Design 4.8 7.8 12.6 0.64 1.05 1.69 10.6

Procurement 1.3 1.7 3.0 0.17 0.23 0.40 2.5

Erection and Commissioning 4.8 2.6 7.4 0.64 0.35 0.99 6.2

Civil Works 5.6 - 5.6 0.75 - 0.75 4.6

Pre-Operating Expenses 2.0 0.1 2.1 0.26 0.01 0.27 1.8

Sub-Total 44.8 60.5 105.3 5.96 8.08 14.04 87.8

Working Capital includingspares 1.6 1.6 3.2 0.21 0.21 0.42 2.6

Contingency 2.9 3.1 6.0 0.39 0.41 0.80 5.0

Total Project Costs 49.3 65.2 114.5 6.56 8.70 15.26 95.4

Interest During Construc-tion 5.5 - 5.5 0.74 - 0.74 4.6

Total Financing Required 54.8 65.2 120.0 7.30 8.70 16.00 100.0

4.02 These estimates were prepared in early 1971 by Toyo and FCI and were

based on current prices plus escalation of about 10%. Engineering fees in-

clude some contingency and FCI is now negotiating a fixed price contract with

Toyo that should be less than the fees given above. The project is well-

defined since most equipment is duplication of existing designs and the phys-

ical contingency given, 8% of direct project costs or 14% of equipment, ma-

terials, and freight, is adequate. Recent changes in world currency values

indicate the project could incur increased foreign exchange costs of about

$0.2-0.5 million. FCI and Toyo are evaluating several possible cost reduc-

tions (Annex 6) that will not affect capacity and guarantees, therefore no

revisions in project costs were made at this time. With the small increase

expected it does not appear that any change in the financial plan will be

needed.

4.03 Foreign exchange costs are estimated at $8.7 million based on about

4% of equipmenit being reserved for Indian procurement and the expectation that

22% of internationally bid equipment will be won by Indian suppliers. For-

eign exchange costs would be $9.3 million if Indian suppliers win only 10%of the internationally bidl equipment, and $8.0 million if they win 35%. About

$0.4 millioni in equipnment should be supplied from Japan due to proprietary

designs. Engineering services to Toyo are about $1.8 million.

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B. Working Capital Requirements

4.04 Working capital requirements (Annex 8) are estimated to increasefrom Rs 42 million to Rs 55 million as a result of the expansion project. Iii-ventories of raw material, product and spare parts will increase proportion-ately less than the capacity increase. Substantially all additional workingcapital is for accounts receivable and storage and about 752 of these fundsare carried as commercial bank credit. Working capital includes accounts re-ceivable of 30 days which are adequate since Gorakhpur sells rmost of its pro-duction to co-operative dealers and agricultural credit organizat[ons (seeChapter VI on marketing) that pay on delivery. The farmning area lhas two cropseasons and distributors take delivery uniformly. Variations in monthly re-tail sales are largely absorbed by dealer storage capacity and his workingcapital. Marginal or permanent working capital requiremanents for tlhte projectare estimated at Rs 3.2 million.

C. Financial Plan

4.05 The Rs 120 million ($16.0 million) financing needed for the projectwill be provided by GOI with Rs 75.0 million as debt and 1s 45.0 msillion inequity.

4.06 Proceeds of the proposed IDA credit of Rs 75.0 million ($10.0 mil-lion) would be relent by the Government to FCI. The on-lending interestrate for the IDA credit has been agreed at 8.5% per annum. GOI's normal pol-icy is to approve funds for the entire project and then disburse in semi-annual or quarterly installments. Each disbursement constitutes a separateloan with a three-year grace and ten-year repayment period. Final disburse-ment for the project is expected in the third year and the last maturity inthe fifteenth year (Annex 9). The loan to FCI is expressed in rupees and ex-change risk remains with the Government.

4.07 To protect against an unexpected overrun in project costs (bothforeign exchange and local costs) GOI has agreed to provide additional fundsas necessary to complete the project. These funds would be contributed withat least half as equity as part of GOI's normal lending to FCI.

D. Allocation of IDA Credit

4.08 Proceeds of the IDA credit would be used as follows:

Allocation of IDA Credit

Expenditures$million

l. Equipment Bid Internationally 6.8It. Imported Equipmuent for Standardization 0.411L. Engineering, P'rocuremiient, Erection and

Commissioning 2.2IV. Unallocated 0.6

'rotal 10.0

- 11 -

The IDA credit will cover CIF cost of imported equipment and ex-factory price(excluding taxes) of locally procured equipment that is internationally bid.It will also include part of foreign exchange costs of process licenses andconsultants' services and a portion of FCI's local costs for engineering andequipment erection. The project's foreign exchange content is about $8.7million as discussed in para. 4.03. Projected disbursement schedule for theIDA credit is given in Annex 9.

V. PROJECT EXECUTION

A. Project Management

5.01 Project management for FCI projects has not been clearly delineatedwith responsibility for project execution divided between P & D and theGeneral Manager of the division involved. FCI has agreed to modify its pro-cedures for the Gorakhpur Project and an experienced Project Manager has beenappointed from FCI's staff. He will report to Gorakhpur's General Manager andthrough him to FCI's Director of Projects and have overall responsibility forbudget and schedule. P & D will provide required engineering, design, and pro-curement services and construction by the unit's General Manager with all ofthese functions controlled by the project manager. FCI has prepared adetailed plan of project implementation through commercial production givingresponsibilities of the project manager, General Manager and P & D. FCIhas agreed to give IDA due notice before any change is made in the positionof the Project Manager.

5.02 P & D Division has considerable design experience in ammonia-ureaplants through FCI's urea projects including the existing Gorakhpur plant.The expansion project is virtually a duplicate of existing design and no dif-ficulty is envisaged in FCI and P & D completing it satisfactorily. Manage-ment is described more fully in Annex 1.

B. Technical Assistance

5.03 Toyo will do basic engineering for ammonia and urea designs and ad-vise P & D on engineering work and assist in erection and commissioning.Toyo's responsibility will permit them to guarantee daily capacity perform-ance in a seven-day test run. Toyo's guarantees are limited primarily to theprocess design. Final contract terms, including penalties have not been com-pleted, but the guarantees are considered adequate. Other process licensorsinvolved are Shell and Benfield, with which FCI has prior agreements.P & D obtains required know-how from these firms and then completes the en-gineering. It has sufficient experience in these areas to execute designsfor Gorakhpur properly. During the project's early stages FCI and Toyo willevaluate several additional design changes (described in Annex 6) that couldpossibly reduce the plant costs further.

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C. Project Schedule and Procurement

5.04 FCI has prepared a critical path schedule showing a project comple-tion time of 30 months, based on information from Toyo and including three tofour months contingency. This schedule should be easily attainable due toequipment duplication and its small size and simplicity. Schedule will bethe project manager's responsibility with the assistance of P & D and Toyo'srole in execution should permit them to exercise some influence on maintain-ing schedule. The chart in Annex 10 shows completion time of major eventsin the project's schedule.

5.05 Most equipment will be bid on international competitive tender inaccordance with Bank guidelines. Indian suppliers will be given a 15% costpreference in bid evaluations (prevailing duty is now 30%) compared againstthe CIF (without duty) India price on bids. About 4% of total estimatedequipment value will be reserved for procurement from Indian supplierswhich is not critical and not likely to affect the project schedule orquality. Also about 5% of total equipment is proprietary designs to beprocured in Japan. GOI has given assurance that any required importlicense will be issued promptly. GOI has also given assurance that, ifdelivery of locally procured equipment (either from reserve list or won byinternational competitive tender) becomes critical, then GOI will permitprocurement to be expedited from other sources. In collaboration with Toyo,PCI will prepare suitable bid packages which will permit qualified Indiansuppliers to compete on smaller packages but still maintain project scheduleand equipment standardization requirements.

VI. MARKET AND MARKETING

A. Present Situation in India

6.01 At present India has insufficient production capacity to meet fer-tilizer demand. Details of the present fertilizer situation and recent his-torical data for supply and demand of nitrogen fertilizer are given in Annex11. Current plans propose increasing reliance on fuel oil and coal as feed-stock for nitrogen fertilizer production. Delays in plant construction andlow capacity utilization of existing plants have caused the production de-ficit to remain.

B. Market Forecast for India

6.02 Supply and demand projections of nitrogen for India are shown below.Supply forecasts are IDA estimates based on information obtained from GOI withdetails shown in Annex 11. All major fertilizer plants are shown on Map 1,

- 13 -

including phosphate as well as nitrogen facilities. Demand forecasts aretaken from a report recently prepared by the Bank and GOI. 1/

Nitrogen Fertilizer Market in India(thousands of tons of N)

Demand Supply Deficit

FY71 1760 850 910FY72 2100 1330 770FY73 2500 1640 860FY74 2900 1990 910FY75 3300 2450 850FY76 3700 2900 800FY77 4100 3560 540FY78 4600 4000 600FY79 5100 4300 800

6.03 These data indicate a substantial nitrogen deficit throughout thepo'riod ranging from 540,000-910,000 TPY. The forecasts assume nitrogen con-sumption will grow at 13.5% compounded annually until FY74 and at 12% tlhere-after. There is a discrepancy between the FY71 figures given above and re-cent GO1 publislhed figures which indicate consumption of only 1,425,000 tonsof N. This inatter is now being reviewed to reconcile the difference and de-termine its effect on future demand projections. Supply forecasts arebased on a realizable but optimistic schedule for new projects and on allplants achieving 90% capacity utilization, which is considerably above theoverall levels achieved in the recent past. This represents IDA's estimateof maximum fertilizer production India can be expected to achieve. Ifassumptions on capacity utilization and schedule of projects are not ful-filled, then estimated supply could be 10-20% below forecasts. Althoughthere is a degree of uncertainty in the forecasts, IDA expects a deficit toexist througlhout the 1970's.

C. Fertilizer Market in East India 2/

6.04 The principal marketing zone for Gorakhpur is eastern and centralUP witlh sales becominig increasingly concentrated in eastern UP. However, con-siderable urea production capacity is under construction in Bihar, Assam andWest Bengal in other FCI plants. Supply and demand for East India is shownin detail in Annex 11. Most new capacity is urea and it is assumed that ureacan supply 70% of nitrogen demand with the balance being required as ammoniumsulfate or mixed fertilizers.

1/ "Effective Demanid for Fertilizer in India," W. B. Donde (GOI) and DorrisD. Brown (IBRD) Mlay, 1971.

2/ States of Assam, Uttar Pradesh, West Bengal and Bihar.

- 14 -

6.05 There is currently a nitrogen deficit in East India which is expec-ted to remain and increase except for 1974/75 when an apparent balance be-tween supply and demand will exist. The 70% market allocation Lo urei slhows

a small urea surplus from 1974-76 but with a widening deficit tlhercafter.This small surplus will most likely be shipped by broad gauge rail to NorthIndia since the additional transport cost relative to the increased distancesinvolved is less costly to the producers than the expense of trans-shipmentto the meter gauge rail serving Corakhpur's principal marketing zone. Supplyforecasts do not include the proposed Sindri or Hlaldia urea projects aIs thisadditional capacity is not needed until the late 1970's. In planning furtherexpansion, it is recommended that GOI and FCI should study regional demandfor fertilizers to assure the most economic plant locations and to minimizeregional supply/demand imbalances. Also more consideration should be givento products otlher than urea.

D. Gorakhpur Marketing

6.06 Gorakhpur sells its production in UP through Apex Agencies, co-operatives, and private dealers. Apex Agencies are credit institutionsthat provide credit and other services on a state level to co-operatives andfarmers. Four institutions operate in UP which are described in Anne. 12along with other details of Corakhpur's marketing system. The Apex Agenciesare structurally sound and are supported financially by the State, GOI, and/or Reserve Bank of India. At present Gorakhpur does not provide credit fa-cilities but as fertilizer consumption increases, the company miglht have totake a more active role in provision of credit.

6.07 FCI's marketing program for the Eastern region is coordinatedthrough its Eastern Marketing Zone Division headquartered in Calcutta. Go-rakhpur has a marketing manager for its output and the program includessuch activities as advertising, demonstrations, soil testing and dealer de-velopment and supervision. Marketing is the responsibility of the Directorof Production and Marketing. FCI has plans to establish a Northern M-larket-ing Zone which will include the Nangal and Gorakhpur regions. This willhelp to separate Management rexponsibilities for production alnd marketing;nevertlheless, given the magnitude of FCI's production potential, it shouldplace more emphasis on long-range planning of its mar'.eting effort antdshould consider the use of outside assistance in marketing.

6.08 Estimated market allocations for Gorakhpur are shown below based on1976 production and consumption forecasts from FCI, whiiclh are imore conserva-tive than IDA forecasts.

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Gorakhpur Market Allocation in FY76'000's TPY of Urea

Total Market Goraklhpur larket

-arket Supply/1 Demand Sales % of Market

Lastern IJP 304 195 64

Central UP 201 55 27

Western UP 350 64 13

Total 1,030 855 314 37

/1 Includes total production of GorakhDur, IEL, and DCMI, although all pro-

ducers sell in other states.

By supplying only 64Z of the projected demand in its immediate area where it

has a distinct freight advantage and 18-27% in the other regions, Gorakhpur

can sell its entire outout within UP. At present the Government Fertilizer

Pool sells about 10% of the fcrtilizer consumed in the area since local pro-

ducers cannot mneet demand. Although Gorakhpur may continue to sell urea in

lwestern Bihar the market analysis above (Para. 6.05) suggests that the major

effort should be away from areas to be supplied by other FCI urea plants.

Goralkihpur should be able to sell all of its production in Eastern UP in 1979

and still only provide about 73% of the market. Thus no difficulties are

foreseen in Gorakhpur's marketing program.

EI. Sales Prices and Competition

6.09 Fertilizer prices in India are generally based on prices set by

the Government Fertilizer Pool. Urea has an official ceiling price and,

while other fertilizer materials have no official control prices, the Pool

handles a large enough fraction of sales to set prices effectively. Since

FCI is a wholly-owned government corporation, there is no likelihood that it

will deviate from GOI pricing policy. Retail urea price in UP was reduced

R's 20/ton in may 1971 to 1zs 923/ton which inclu(les dealer margin of I's 80/ton.

A 1(), excise ta- of Is 75/ton and average freiglht of Rs 25/ton provides Gorakh-

pur with an ex-factory pricc of Rs 743/ton ($99/ton) urea whichi is consider-

ably above tlhe cost of imported urea of Rs 555/ton CIF Gorakhpur (at an ex-

cliange rate of Rs 7.5/$1.0). iowever, since all urea is imported by the Gov-

eriimenit whiclh resells to dealers at the same price as Gorakhpur (Rs 843/ton)

Goraklhpur's ex--factory price is not affected by imports. Operating costs forurea in the (ex-.ponsion project are Rs 478/ton, assuming a 10% return on gross

investment, which tnhdicates that no protection is needed to ensure the viabil-

ity oF thoe (I);ansion. Onh the same basis operating costs at Gorakhpur aftercxpal.nionl Wi 1 1 II(' "g r26)/ton wlicih indicates a small protection level of about

1 2>' is relu i red.

- 16 -

6.10 Principal competitors are Indian Explosives Limited (Il.) in IKanpur,UP and Delhi Cloth Hlills Ltd. (DCM) in Kotah, Rajasthaii. However, 1.asternUP is somexwhat isolated from these and other competitionl by its meter jaugorail system that connects the region witli Lucknow and Assamn (see ,!al 2). I.i .,DCM, and FCI-Barauni, are all located on broad gauge rail lines aind tihe re-quired transshipment, in addition to the distance involved, mal-es thleir freightcharges to the Gorakhpur area much higher. Since the increased freight costmust be absorbed by the producers they will tend to ship to are;.s witlh tile low-est transport and handling costs. Thus, Gorakhpur is somewhat protected in itsimmediate marketing area.

VII. OPERATING COSTS

7.01 Operating costs for existing facilities and the expansion projectare shown in Annex 13 and are summarized below:

Operating Costs - Gorakhpur Unit(Rs/ton)

CombinedExisting Expansion/, After

Facilities Project Expansion

Variable CostsNaphtha 109.7 109.7 109.7Utilities 170.4 155.6 164.1Other 136.0 62.3 104.5Total 416.1 327.6 378.3

Fixed CostsD)epreciation 137.1 71.9 109.3Other 88.7 33.6 65.2Total 225.8 105.5 174.5

Ex-Factory Operating Costs 641.9 433.1 552.8Excise Tax 75.0 75.0 75.0Freight 25.0 25.0 25.0Delivered Cost to Dealers 741.9 533.1 652.8

/1 Incremental costs.

7.02 Full capacity is assumed at 330 days/year operation, which thieplant should be able to maintain as power problems are correctedl. Ilowever,operating costs were determined based on '315 days/year operation and incomestatements are based on this production level. Operating costs of the ex-pansion are incremental costs and do not reflect any labor, overhead, orselling costs since these will be provided by the existing labor force anidfacilities. Operating costs are lower than existing costs due principally

- 17 -

to savings in labor and overhead (Rs 106/ton), lower depreciation (Rs 65/ton) and improved process efficiency (Rs 30/toni).

7.03 Naphtha is delivered to Gorakhpur at a cost of Rs 233/ton ($31/ton)from the Barauni refinery of Indian Oil including Rs 60/ton freight and Rs13/ton excise tax. ilaphtha costs set by GOI are based on cost of importedcrude oil. The world market price for naphtha is about $20-24/ton CIF Cal-cutta. FCI has an existing contract for naphtha supply from Indian Oil whichhas agreed to provide expansion requirements also. The Barauni refinery hassufficient capacity to supply the additional Gorakhpur requirements.

7.04 Coal is purchased under contract from two nearby collieries atRs 67.5/ton ($9/ton) which is a reasonable price. Gorakhpur has exper-ienced no difficulty in coal supply although availability of rail wagonshas been critical at times.

7.05 Power requirements (50 MW) will be purchased under contract fromUPSEB at a cost of Rs 91/MWH (12 mils /KWH) which includes Rs 10/MWH exciseduty. The power cost compares to 6-9 mils /KWH in most industrial countries.Increased power requirements will be met through an additional transmissionline now under construction, which will be completed before the Gorakhpurproject.

7.06 Operating costs of the existing plant are high due to excessivecapital costs and high power consumption required by the process technologyused. The expansion project uses the same technology but capital costsare significantly lower. Although the plants are small, incremental operat-ing costs for the expansion project compare favorably with costs of a large,modern urea factory. Ex-factory operating costs are compared below for sev-eral recent Bank group urea projects:

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Comparison of Operating and Capital Costs for Selected Urea Plant;

Goraklipur /1Pusri Dawood-Hercules Expansion Project -

(Indonesia) (Pakistan) (India)

Capacity, TPY Urea 380,000 345,000 134,000Feedstock Natural Gas Natural Gas Cracked ilaphtllaFeedstock Cost,

$/million Btu 0.20 0.08 0.60

Variable Costs, $/ton 35.40 43.30 43.70Fixed Costs, $/ton 22.00 19.60 14.00

OperatingTotal/Costs, $/ton 57.40 62.90 57.70

Capital Costs, $/annual ton urea 242 180 119 /2

/1 Incremental costs only.

/2 Capital costs for the project would be higher if it were an all newfacility (para. 3.01, 3.02).

VIII. FINANCIAL AND ECONOMIC ANALYSIS OF THE PROJECT

A. Financial Analysis

8.01 Income statements for Gorakhpur, both for existing operations andfor the expansion project are given in Annex 14. Incremental operating costsand income for the project are shown below:

Summary Income Statements forGorakhpur Expansion Project

(in Rs millions)

FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY34

Sales '000 Tons 54 128 128 128 128 128 128 128 128 128Net Sales 38 98 98 98 98 98 98 98 98 98Operating Cost 26 57 57 58 58 58 58 59 59 59Operating Profits 12 41 41 40 40 40 40 39 39 39Interest 5 7 7 6 5 5 4 4 3 2Profit before Taxes 7 34 34 34 35 35 36 36 36 37Taxes 4 8 15 16 25 25 26Net Profit 7 34 34 30 27 20 20 11 11 11

- 19 -

3.02 The internal financial rate of return (financial return) for the

project is 29.8% and it improves the overall financial return of the Gorakh-

pur Unit to 11.3%. Further details, including sensitivity tests, are given

in Annex 15. The project's profitability results from the high selling

price for urea and the relatively low capital costs. Average increTnental

income before taxes for FY76-81 is Rs 35 million ($4.7 million) compared to

Rs 14 million ($1.9 million) for existing facilities.

3.03 Taxes are difficult to calculate since income taxes are paid only

on consolidated income statements. FCI has not paid any income tax due to

low profits and tax benefits accruing from expansion projects, and capital

expansion over the next few years will continue to give the corporation a

low tax liability. Taxes, however, were calculated on a notional basis and

for Gorakhpur would begin in FY78 (Annex 14).

3.04 Profit breakeven level for the existing plant is currently about

80% of capacity and reduces to about 58% for the expanded plant. Respec-

tive cash breakeven levels are about 55% and 52% and rapidly decrease as

debt is repaid. A breakeven chart for profit and cash is shown in Annex 16.

B. Economic Analysis

8.05 The internal economic rate of return (economic return) for the

project is 19.2% based on urea at $65/ton CIF India plus Rs 70/ton inland

freight and handling. Details including sensitivity tests are given in An-

nex 15. The economic return for existing facilities would be much lower on

the same basis but it should be noted that the imported price for urea was in

the order of $100/ton when the present plant was being planned. A major con-

tributing factor to the relatively low economic return of urea projects in

India is the high cost of feedstock based on imported crude oil. In most

other locations (U.S., 'lid-East) nitrogen production is based on natural gas

which is plentiful and cheap. The economic return for the Gorakhpur Project

is relatively high because it represents an incremental expansion which uti-

lizes already installed (but unusable) capital assets as well as the exist-

ing labor force.

8.06 Indirect economic benefits are difficult to describe quantitative-

ly. There shIould be no increase in employment at Gorakhpur but the projectwill permit some factory workers to be upgraded. Related industries such as

marketing and transportation will be expanded as a result of the project.P & I) is doing most of the engineering, thereby saving foreign exchange andbuilding up dlomestic engineering experience.

C. Sensitivity Tests

8.07 Sensitivity of the project's financial viability was determined

for several factors. A 10' reduction in urea selling price reduces the

financial return to 23.2P and a 10% increase in operating costs decreases

the financial retturn to 26.3%. A six-month project delay decreases thefinancial return to 26.1%. At 90% capacity utilization the financial re-

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turn is 28.0%. The combined effect of a six month project delay, 90% oper-ating level, and a 10% decrease in price would give a return of 18.7%'. TIhisis considered the worst likely turn of events. A cost overrun of 10% decreasesthe return to 26.9% but is not considered likely since further design changesshould give lower capital costs than now estimated. These sensitivity anal-yses show that the most critical variables are product prices, capital costs,and naphtha and power costs. Prices of urea and naphtha are set independentlyby Government policy and there is no relationship between changes in the two.

8.08 The economic return is much more sensitive to these same variablesthan the financial return, the most critical being urea sales price. Theeconomic return is 12.5% if assumed urea sales price decreases 10% to $57.5/ton CIF India. The economic return decreases to 18.0% for 90% operatinglevel and to 17.7% for a six-month delay. The combined effect of a 10%price decrease, 90% operating level and a six-month delay gives a returnof 10.3%. World urea prices have dropped drastically over the past fewyears from over $100/ton to about $50-70/ton and delivered prices to Indiahave decreased accordingly. Worldwide excess capacity has been installed,particularly in the Hlid-East and some urea has been offered at distressprices. Future world urea prices are therefore difficult to predict, butare expected to average about $65/ton CIF India.

D. Foreign Exchange Savings

8.09 Net foreign exchange savings (shown in Annex 17) for the expan-sion project are estimated at $6.5 million annually at normal production(95% capacity). Annual local costs required to achieve these savings areRs 38 million ($5.1 million), indicating an efficient import substitution.

IX. FUTURE FINANCIAL POSITION OF FCI AND GORAKIIPUR UNIT

A. FCT

9.01 Provisional statements for FY71 show that FCI had a debt:equityratio of 44:56 and current ratio of 1.4:1. In that year FCI realized a netprofit of Rs 10 million and had a debt service coverage of 1.1:1. Princi--pal due on outstanding debt rises sharply in succeeding years and greatlyincreased net profits will be necessary if FCI is to cover its debt. Itis unclear whether net income will permit FCI to cover its debt service re-quirements in the next two years and some refinancing may be necessary.FCI's cash generation should increase as production builds up in existingplants. One new plant (Durgapur) is expected to start production this vearand two more next year. Success of these plants in going into productionrapidly will have a marked effect upon the company's cash generation, andability to service debt.

9.02 GOI arrangements for financing of projects now under construction,which represent about 36% of company's assets and 75% of its potential ferti-Iizer output, will have a large effect on the company's future financial

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position. Capital funds, if supplied by GOI as 50% debt and 50% equity,

should keep FCI in a conservative financial position. FCI is currently pre-

paring a projection of the company's operating and financial position through

1979. An analysis of FCI's performance and future outlook will be included

in the Nangal appraisal.

. Gorakhpur Unit

9.03 Income statements for Goraklpur after expansion are given in An-

nex 14 and summarized below. Income for the project alone is discussed in

para. 8.01.

Summary Income Statements for Gorakhpur Unit(in Rs Hillions)

Fiscal Years FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80

Sales, '000 Tons 163 171 171 220 299 299 299 299 299

Sales 127 133 133 170 231 231 231 231 231

Operating Costs 108 111 112 137 169 170 170 171 172

Operating Profits 19 22 21 33 62 61 61 60 59

Interest 12 11 9 13 14 12 11 8 6

Profit before Taxes 7 11 12 20 48 49 50 52 53

Taxes/i - - - - - - 15 19 27

NeL Profit 7 11 12 20 48 49 35 33 26

/1 Taxes represent notional calculations (see para. 8.03).

Gorakhpur, along with Nangal, is the most profitable of existing operating

divisions. Surplus cash generated, from these units including the Gorakhpur

expansion project, will greatly assist FCI in improving its financial via-

bility.

9.04 Projected cash flow is shown in Annex 18 and summarized below for

the project implementation period:

Source and Application of Funds for Gorakhpur Unit

During Project Implementation (FY72-75)

Sources Application (Rs Million)

Lone, Term Debt 79.0 Gorakhpur Project 120.0i'quity 45.0 Other Investments /1 4.0

Casli Generation 193.1 Debt Service 121.4317.1 Additional Working

Capital /2 1.6Surplus Cash 70.1

317.1

/I Represents replacement of fixed assets in existing plant./? For existing plant; working capital for project is included above.

- 22 -

9.05 Forecasted cash generation shows that Gorakhpur's surplus cash gener-

ation, over and above debt service requirements, during this period is Rs 70

million, which is well over the total equity funds required for the project.

9.06 Forecasted balance sheets are given in Annex 19 and summarized be-

low:

Summary Balance Sheet for Gorakhpur(in Rs millions)

Fiscal Years FY72 FY73 FY74 FY75 FY76 FY77 FY73 FY79 FY80

Assets

Current Assets 49 49 49 59 66 65 66 65 66Net Fixed Assets 242 243 298 283 250 218 185 152 120Gash Transfers 8 23 39 70 127 183 225 264 312Total 299 315 386 412 443 466 476 481 498

Liabilities and Equity

Current Liabilities 39 39 39 51 59 60 60 45 41Net Long-Term Debt 119 115 145 135 109 82 56 44 37Equity 141 161 202 227 275 324 360 392 420Total 299 315 386 413 443 466 476 481 498

Current Ratio 1.3:1 1.3:1 1.3:1 1.2:1 1.1:1 1.1:1 1.1:1 1.4:1 1.6:1Net Long-Tenn Debt:

Equity 46:54 42:58 42:58 37:63 28:72 20:80 13:87 10:90 8:92

9.07 Long-term debt:equity ratio steadily declines from the current

level of 46% debt even though new project funds are 63% debt. The currentratio is about 1.1:1 during this period. It would be considerably higherbut cash surpluses are shown as a separate account since they would be

transferred to FCI's head office accounts and not retained by Gorakhpur.Debt service coverage increases from 1.4:1 at present, to 2.26 during 1975-

79 and increases rapidly thereafter. This coverage is considered reasonable.

9.08 Based on expected cash generation, Gorakhipur could pre-pay itsdebt to FCI at a rapid pace. In view of heavy obligations by FCI for newprojects in the future, FCI has agreed not to prepay debt or pay dividendsto GOI If consolidated company accounts indicate a current ratio Velow1.5:1 after making such payments. GOI has given assurance that it will

maintain FCI in a satisfactory financial position, with equity at least equalto long-term debt, a current ratio of at least 1.2:1, and provide necessary

funds to complete all projects.

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X. AGREEMENTS REACHED AND RECOMMENDATION

10.01 Agreement was reached on the following principal points duringcredit negotiations:

(a) GOI will provide Fs 75.0 million in loan and Rs 45.0 million inequity for the project. (para. 4.05, 4.06).

(b) GOI will provide funds necessary to complete all projects under-taken by FCI and assure a sound financial position for FCI with equity atleast equal to long-term debt and a current ratio of at least 1.2:1 (paras.2.10, 9.01, 9.02, 9.08).

(c) GOI will promptly issue import licenses as required and promptlyshift to international procurement any items to be procured in India whichwould adversely affect the project. (para. 5.05).

(d) FCI's project manager will be responsible for project execution,budget and schedule. (para. 5.01).

(e) FCI agrees that it will inform IDA before changing the unitGeneral Manager or Project Manager. (para. 2.06, 5.01).

(f) FCI has agreed to improve its accounting procedures, wherenecessary, to indicate clearly accounts for the Gorakhpur unit and to showthe consolidated company accounts in an orderly and accurate manner. FCIwill prepare source and application of funds statement for FCI as a wholeand for the Gorakhpur unit. FCI will submit quarterly, in advance, fore-casted budgets of operations and cash flow for FCI and Gorakhpur. (para. 2.18).

10.02 Completion of the following will be a condition of effective-ness of the credit:

(a) FCI will have completed arrangements with Toyo, Benfield, and Shellfor plant designs and technical assistance.

10.03 On the basis of these assurances, the proposed project con-stitutes a suitable basis for an IDA credit of $10 million.

Insdustrial Projects DepartmentNovember 22, 1971

ANNEX 1

FCI: Gorakhpur Expansion ProjectFertilizer Corporation of India

A. Existing Operating Divisions

T'here are five presently operating units, plus the P & D Division,which are described below. Basic data of these operating units, along with

the expansion projects are summarized in the table, page 8 of the annex.

IHistorical performance for the operating divisions is given in the tableson pages 9 and 10 of this annex which indicates the production capacity and

actual production of the units. On an overall FCI basis, capacity utiliza-

tion has averaged 727 for nitrogen production and 57% for phosphate produc-tion over the past 3 years. An analysis of the tables, however, indicatesthat Gorakhpur and Nangal have had relatively little difficulty (exceptNangal's power problems in 1971) and have consistently operated at high

levels of efficiency. The other three plants, Sindri, Trombay and Namruphave continuing operating problems with the result that they operate con-siderably under the levels for FCI as a whole. The result of these levelsof output is reflected in the table indicating the net profit of each unit,whichi is shown in annex 2, page 2. This table indicates that the Nangalunit has earned more than twice as much over the last seven years as FCI as

a whole. Gorakhpur's contributions to earnings are significant for the

three years it has been in operation and are likely to grow in the futureas its power problems are solved. Sindri's operations, as its plant be-comes older, are becoming increasingly less profitable and it has operatedat losses for the past three years. Trombay and Namrup have operated atlosses in all of the years in which they have been operating, with the ex-

ception of a small profit tentatively indicated for Trombay for 1971. Itshould be noted, however, that Trombay has, in all recent years, charged

off in subsequent years some additional expenses which should have beencharged in tne previous year, and it is not yet clear whether Trombay in

fact made. a profit of the level indicated.

1. Trombay (Nlaharashtra)

The Trombay UJnit produces primarily urea and nitrophosphate plusseveral additional chemicals such as methanol. Initial production was begunin 1965 after considerable delays in project implementation. The plant wasfinanced with funds from r.S. AID and GOI. The major plant units are ammonia(Chemico), uirea (Chemico), nitric acid (C & I Girdler) and nitrophosphate(C & I Girdler) with design contractors listed in parenthesis. The plantshave high construction costs and technical difficulties have occurred. FCI'soperations of the plants have been at a relatively low output level reflect-Ing both technical problems and inefficient plant management. At the presenttime FCI is un(lerstood to be involved in legal action against the contractors.The plants operated abouit 50-60% capacity and have unusually high maintenancecosts. Th1e in-itial fiancial plan was much heavier in debt than normal forFCl - 707 - and the high debt service has also contributed to the poor prof-it performance of Troinbay.

ANNEX 1Page 2

The company has takeni steps to improve performance iii this dlivi sion.The Tennessee Valley Authority (USA) sent a team of experts in 1907 whio madecertain recommendations. As a result of a Bank missioll in 19)(9 thle Bank attempted to work with FCI in obtaining outside consultants to hielp FCI imp1rovethe technical problems in the plant; however, FCT hias not followed thlrous!;hon this, presumably because of the lef,al problems withi contractors. ihefuture profit levels will be affectedl by FCI's efforts to overcome thesetechnical and managerial problems.

2. Gorakhpur (Uttar Pradesh)

This division, whiclh produces urea only, began production iTn early1968. The project was begun in 1962 and experienced many delays before com-pletion. Gorakbpur, financed with Japanese credit plus funds from GOI, wasbuilt by Toyo Engineering Corporation of Japan at a total project cost ofabout $45 million. This cost is excessive for this size plant (179,500 TPYurea) with much of the high cost due to over-sized and spare equipment. Theproject represented Toyo's first urea contract outside Japan and they werevery conservative in the design. Also, the lengthy project schedule contrib-uted to the high cost.

However, the plant operates very well and can easily exceed 100%of design capacity on a daily basis. As power reliability improves in east-ern UP the annual performance of this division should steadily increase to100%. The Gorakhpur division is, along with Nangal, one of the best operat-ing divisions of FClr and its profit performance should grow as its powerproblems are overcome. In FY71 the plant's third year of production, 148,000TPY urea was produced, or 82% of capacity. The shortfall was due to unavail-ability of naphtha due to a railroad strike, power loss due to strike at theUP State Electricity Board, equipment failure and to power interruptions.

The plant obtains naphtha from the Barauni refinery of Indian OilCompany; at a distance of 250 km. The naphtha is shipped by rail and evenover this short distance a change in rail gauge is involved. Naphtha stor-age capacity is about 8,500 tons or 30 days capacity. Rail transport is notalways reliable and this storage capacity will be doubled in the expansionproject. The total quantity of naphtha required after expansion is 148,000TPY and this amount can easily be supplied by Indian Oil. The quality is notsuitable for many other applications of naphtha and the grade used by Gorak-hpur fits well with the refinery operations. In addition, the Barauni re-finery is being expanded by 50% (by 1974). Indian Oil has assured FCT thatsufficient naphtha will be available. The pricing of naphtha and other petro-leum products is set by GOI which has just posted an increase of about Rs 33/ton which has been incorporated into the evaluation of the expansion project.

Power reliability, as indicated above, has been a serious operatingproblem. The plant was being commissioned in 1968 and the excessive powerinterruptions then caused considerable difficulty in plant performance. Re-cently, however, the power situation has improved as a result of a detailedstudy made by UPSEB, FCI, and IEL. The recommendations made by this studygroup are now being implemented. During 1971 there were only 18 failures and

ANNFX 1Page 3

9 voltages dips. The major cause in lost production was a labor strik-e aitUPSEB as indicated above. The present 132 MI line to Gorakhpur is fullyloaded and sensitive to other users. The recent switch to a 220 KV line overa portion of the distance dramatically improved power supply. A new 220 KVline under construction (to be completed in 1973) should minimize power prob-1 lems.

The plant units at Gorakhpur are ammonia and urea. The ammoniaplant is designed in two steams, each with a capacity of 175 TPD NH3. Theplant uses electrically-driven reciprocating compressors and has a relative-ly high operating cost as a result. Operating costs are also high because ofthe high cost of feedstock and the processing steps required by the use ofcracked naphtha. A technical description of the processes used at Gorakhpuris included in Annex 6.

3. Nangal (Punjab)

The Nangal Division produces heavy water (for use in atomic energyproduction) and calcium-ammonium nitrate (257 N) fertilizer (CAN). The pro-cess units are (1) Electrolysis, (2) Heavy Water, (3) Air, (4) Ammonia, (5)Nitric Acid, and (6) CAN. Initial production began in 1961 with a ratedcapacity of 80,000 TPY nitrogen.

The ammonia process technology employed is expensive and is seldomused today in producing ammonia, primarily because of the high power consump-tion. The Nangal design requires about 12.5 MWH/ton of ammonia, compared to1.83 '¶VH/ton of the Corakhpur design, and 0.2 MtXJ/ton for a typical modernprocess design. Power is obtained from a hydroelectric station at the near-by Bhakra dam at about Rs 22/WIH. This power rate is low when compared tothe cost of power elsewhere in India or the costs of power to other indus-trial users in the area and thus, Nangal's profits are, in a sense, over-stated. The process is, however, simple and Nangal can easily operate at100% of capacity. D)uring recent months the area has had a power shortagedue to low water level in the Bhakra reservoir, so the plant has been oper-ating only at about half capacity. Also the State Electricity Board is ap-plying pressure to increase power rates since it can sell the power to otherconsumers at higher rates. Continuing disputes with the Bakra Power Authori-ties have occurred in recent years and a settlement in 1969 resulted in acharge for power costs from the beginning of 1966 through that date in theamount of Ks 16 million. While FCI charged these increased power costsdirect to capital, the Income statements for Nangal in Annex 2 have beenadjusted so that effective power costs are reflected in the year in whichpower was purchased.

The low power rates paid by Nangal cause the profits of the unit tobe inflated. The plant will be completely depreciated by 1974 so profitsw i I1 i nprovo Ftirthc r. A furthier advantage is that ammonia is produced fromW;Itl'l-r aInd 8il, ;lIbe it eXpeCnSively; but IIo foreign exchange is rcquiired sinceno pot roleu m p rO(iuCt is needed.

ANNEX I

Page 4

4. Namrup (Assam)

The Namrup factory produces urea and ammonium sulfate. The plantwent into commercial production in January 1969 and has never aclhievedi normalproduction. The factory was designed by Chemico and contains small processunits for ammonia, urea and ammonium sulfate production. The plant has ex-perienced many equipment failures and in FY71 operated only at about halfcapacity with a loss of Rs 16 million for the year. Ammonium sulfate salesare low due to competition from Hindustan Steel which produces by-productammonium sulfate at a lower price than Namrup can.

A detailed evaluation of Namrup was not made but it is doubtful ifthis division can ever be very profitable without major revisions. The plantis being expanded (330,000 TPY urea) with the new units expected on-stream inlate 1973 (see below). However, the total market for fertilizer in Assam islow so most of the increased production must be shipped into Bihar and thennorth, south and west to consuming areas.

5. Sindri (Bihar)

The Sindri division produces ammonium sulfate, urea, and doublesalt (ammonium sulfate - ammonium nitrate) plus industrial chemicals. 'lostof the existing production facilities are old, inefficient units with highmaintenance costs. The plant operates at about 70% of capacity with majorcauses being power and equipment failures. The ammonium sulfate plantat Sindri which operates with high cost gypsum as feedstock has proven proble-matic. As a result the division lost about Rs 15 million in FY71 even thoughits outstanding debt is low.

A rationalization program is underway including adding productionfacilities for phosphoric acid and triple superphosphate (TSP), improvingammonium sulfate production and possibly shutting some of the older facili-ties. All of these improvements will take time and the performance of Sindriis not expected to improve although FCI forecasts a net profit of about Rs 5million in 1972 (the current fiscal year).

6. Planning and Development Division (Bihar)

The P & D Division is the engineering and research and developmentarm of FCI. It is located adjacent to the Sindri Unit in Bihar. Total staffof P & D is about 2,000 with about 700 engineers and designers working direct-ly on engineering projects, planning and technical service functions for theexisting units.

In addition to engineering duties, the division develops and manu-factures catalyst for use in ammonia plants and has extensive pilot plant anclieQa0;rch atid development facilities. The catalyst manufacturing program is.wlki ir.41 IVl utnldt ntlid Some cattnlyst has been sold and used in plants in India.

i.owevex , F(A I las not kept detatled accounting records of the costs involvedfn the development of this catalyst and thus there is no way to estimate whenit will break even on this venture. Over the next few years as catalyst con-sumption grows in the country, catalyst production should become profitable.

ANNEX 1Page 5

P & D has several license agreements with international processengineering firms; the most notable being:

Montedison - Italy - ammonia and ureaLurgi - Germany - Rectisol C02 removalShell - Netherlands - fuel oil gasificationKoppers - Germany - coal gasificationNissan - Japan - phosphoric acid

Licensing arrangements for other process technology are obtained when neededfor other projects. P & D has also developed its own process know-how forsuch teclnology as ammonium sulfate, ammonia synthesis gas purification andothers. In all of the present ammonia-urea works in progress P & D is re-sponsible for engineering, design, project schedule and procurement based onprocess design packages from the various licensors. Where supplier's creditsare involved, the foreign process collaborator handles most procurement fromoutside India.

Project implementation in FCI is not clearly defined and the re-sult has been that a number of new projects have been delayed in completionas long as ttwo or three years. There is no one project manager with overallresponsibility; instead, the functions are divided or shared between thegeneral manager of a particular unit and P & D. Project construction andsupervision of work at the site including subcontractors for unit works,some procurement, and plant commissioning is the responsibility of the Gene-ral Manager of that unit. Although P & D is responsible for project sched-ule, its completion time can be greatly affected by the General Manager'sstaff. Budget control is another critical area of split responsibility withP & D responsible for design and procurement and the division management re-sponsible for construction costs. P & D appoints a project coordinator tosupervise its activities and maintains liaison with the unit management.Major decisions on design and procurement are made by a committee consistingof the top level management of P & D so the project coordinator does not havefull responsibility for project management. The general engineering capabil-ities of P & D are quite good. Typical design drawings and specificationswere reviewed for the several projects now in the design stage and they ap-peared to be thorouglh and professionally done.

The overall responsibility of P & D in executing the several am-inonia-urea projects is greater than heretofore generally recognized by IDA.The responsibilities of the process licensors appear to be the initial pro-cess package, a limited amount of checking, and supply of construction andcommissioning advisors. The guarantees offered are process guarantees andare not likely to be enforceable to any significant degree. FCI as a wholehas total responsibility for project management, project schedule and budget.

It is in these areas where P & D (FCI) is most lacking. Projectcoordinators and newly appointed General Managers are not always experiencedin the complex task of designing, assembling and erecting the vast quantityof equipment, materials and manpower required for these projects which havecapital investments of $50-100 million. Many delays are outside P & D con-

ANNEX 1Page r,

trols due to such factors as license restrictions, supplier's credits limi-tations, and domestic difficulties such as transport and fabrication. rhepresence of such problems, however, requires muclh more attention to a proj-ect's critical path schedule, more advanced planning, and leaves less roomfor error than in more typical industrialized nations.

The procurement procedures agreed to for ID)A projects will hlelp re-move some of these factors, and the straight-forward design of Corakhpuir andthe assistance of Toyo should reasonably permit P & D to execute the smallGorakhpur project successfully. However, the much more difficult task of anew $100 million project involving many process sub-contractors, extenisivecivil works, and complicated process technology will present an exceedinglychallenging assignment for P & D.

B. FCI's Expansion Program

FCI has six major projects under implementation at present. Thecapacities, costs and expected on-stream dates are given in the table below(page 8). All these projects are being executed by FCT's P & D Division withthe assistance of various other process and engineering firms.

Iurgapur, Nanrup (expansion) and Barauni are substantially dupli-cate plants based on process designs obtained from Montecatini Edison (Italy),and include process units for ammonia and urea. These projects are being fi-nanced with Italian credits and funds from GOI. The Sindri RationalizationProject is a triple superphosphate (TSP) unit which includes facilities forsulfuric and phosphoric acid as well as TSP. Much of the engineering pro-curement is domestic, including a subcontract with FACT. GOI is providingall funds including foreign exchange from Belgium and Bulgarian credits.

Talcher and Rmmagundum are large ammonia-urea projects withi ammoniabeing produced by coal gasification. Montedison is the major engineeringcollaborator with additional assistance from Koppers (Cermany), Lurgi (Cer-many), and Technoexport (Czechoslovakia). Coal gasification is relativelyunproved technology and the projects are ambitious undertakings by GOI andFCI. GOI is also providing the project funds including Italian and Czechcredits. The projects are in the early design stage and because of antici-pated design problems, are not expected to be completed before 1976.

All of the above projects have been financed half as equity andhalf as debt and represent approximately 40% of the total assets of the cor-poration. All expenses including interest during construction are beingcapitalized, so the company performance will not be affected by these proj-ects until production starts or unless the projects are delayed. The proj-ects now under actual construction, Durgapur, Namrup and Barauni, have ex-perienced excessive delays. Durgapur is already two years late in commis-sioning with procurement and poor project management being major causes.

ANNEX 1Page 7

In addition, FCI has several projects under active consideration

which are also given in the table below. These projects are in various de-

velopment stages and it is difficult to predict their ultimate disposition.The dates given are FCI's estimates. IDA is currently considering financing

two projects, Corakhpuir and Nangal. These data indicate the growing influ-

ence of FCI and the public sector on the fertilizer industry in India. If

FCI maintains its capital expansion program on schedule then in 1979 thecompany will have 54% of India's nitrogen capacity and 24% of phosphate ca-

pacity compared to 30% and 10% respectively for the current capacity.

C. FCI Board of Directors

The membership of the Board is given in the attached table. Ofthe 12 total members, four are from FCI, three from government ministries,

two from other public sector enterprises and only three are from outsideprivate business. The influence of GOI, particularly the Ministries of Fi-

nance and Petroleum & Chemicals is seen very strongly in the company's man-agement and operation. Excluding the Board Chairman, the average term is

quite short, about 2 years, and it is doubtful if long range company policyand management can be effectively directed by the Board.

ANNEX 1Page 8

FCI's Existing Units and Planned Expansion Program

DesignCapital Capacity

Costs '000 TPY On-StreapName Location Products (Rs million) N L2Oc Date

Existing Units

Trombay Maharashtra Urea, NPK 90 43 1965Gorakhpur Uttar Pradesh Urea 80 1968Nangal Punjab CAN1/ 80 1963Namrup Assam Urea, AS2 / 45 1968Sindri Bihar Urea, AS,

Double Salt3 117 1948

Total 412 43

Projects Under Construction

Durgapur West Bengal Urea 486 152 1972Namrup Assam Urea 470 152 1973Barauni Bihar Urea 526 152 1973Sindri Bihar TSP 340 156 1974-7Ramagundam Orissa Urea 946 229 197Talcher Orissa Urea 9h6 229 1976

Total 914 156

Projects in Planning Stage

Gorakhpur UP Urea 120 62 1974hNangal Punjab Urea 868 229 1976Haldia West Bengal Urea/NPK 854 152 76 1976Korba Madhya Pradesh Urea 946 229 1977Sindri Bihar Urea 954 169 1977Trombay laharashtra NPK 30 132 132 i.97,Total 973 208

Grand Total for FCI 2299 407

Total Projected Capacity in India in 1979 t2l(i 17 'C

% of Projected Capacity in 1979 by FCI - l

1/ Calcium Amnmonium Nitrate/ Airnionium Sulfatev Awiionium Sulfate - Ammonium Nitrate

FCI: GORAKHPUR EXPANSION PRO)JECT

ODMPARISON OF CAPACITY AND PRODUCTION OF FCI OERATINGUNITS

ACTUAL PRDDUCTIONRated

Fiscal Years Ended March 31 Capacity 1964 1965 1966 1967 1968 1969 1970 1971

(In '000 tons of N)

SINDRIAnnonia - Direct Sales - 4.7 5.9 5.4 5h4 6.9 7.9 n/aAmwnium Sulphate 74.5 64.5 65.3 68.6 65.9 50.6 55.8 61.1 57.7Double Sat 31.7 12.2 12.4 14.4 15.6 16.0 12.8 11.1 10.8Urea 10.8 8.3 8.3 8.8 8.5 7.4 7.1 7.2 6.9

117.0 85.0 90.7 97.7 95.4 79.4 - . 3 75.4

NANGALCalcium Amwonium Nitrate (C.A.N.) 80.0 76.7 76.3 69.3 71.9 77.7 77.3 79.8 53.8

TROMBAY V/Urea 46.0 - - 3.7- 24.5 26.4 31.5 26.6 29.4Nitrophosphate 44.0 _ _ 2.61/ 11.4 22.1 25.3 21.4 26.9

9U.-O 6.3-I 35.9 48.5 56.8 3

GORAXHPUR, 21Urea 82.5 - - - - 1.2- 46.9 72.7 67.7

NAMRUP 3/Ammonium Sulphate 20.5 _ _ _ _ - 6.4- 13.8 13.2Urea 24.5 _ _ _ _ - 5. 2-/ 12.0 16.0

45.0 - - - - - T 25.9 29.2

FCI TOTAL 41 4 .5 161.7 167.0 173.3 203.2 206.8 275.2 313.6 282.4

(In '000 tons of P2 0 5 )

TROMBAY 1/Nitrophosphate 35.1 - - 2.1- 9.3 17.0 21.2 17.0 21.3

FCI TOTAL 35.1 _ _ 2.1 9.3 17.0 21.2 17.0 21.3

1/ Five months operationf/ Two months operation5/ Six months operation

Industrial Pro ects DeparhnentJuly 30, 1971

FCI: aORAKHPUR EXPANSION PROJECT

PERCENT CAPACITY UTILIZATION FOR FCI OPERATING UNITS

N PRODUCTION AS PERCENTAGE OF CAPACITY

Fiscal Years Ended March 31 1964 1965 1966 1967 1968 1969 1970 1971

SINDR 73 78 84 82 68 71 75 64

NANGAL 96 95 87 90 97 97 100 67

TRDMB_AY - - - 40 54 63 53 63

GORAKHPUR - _- - 57 88 82

NANRUP - - - - - - 57 65

FCI TOTAL: Capacity ('000 tons)l 197.0 197.0 234.5 287.0 300.8 392.0 414.5 414.5: Protduction ('000 tons) 161.7 167.0 173.3 203.2 206.8 275.2 313.6 282.4

: Production as percentage of Capacity 83 85 74 71 69 70 76 68

P205 PRODUCTION AS PERCENTAGE OF CAPACITY

FCI TOTAL: Trombay Capacity ('000 tons) - - 14.6 35.1 35.1 35.1 35.1 35.1Trombay Production ('000 tons) 2.1 9.3 17.0 21.2 17.0 21.3

Production as percentage of Capacity - - 14 26 48 60 48 61

17 Adjusted for commencement of production in new plants.

Industrial Projects DepartmentJuly 30, 1971

FCI ManagementBoard of Directors

Years of FCI ServiceN ame Position Board Company

1. IMr. H. N. Sethna FCI Board ChairmanDirector, BhabhaAtomic Research Centre 11

2. Mr. M. Ramakrishnayyaq/ Joint SecretaryMinistry of Petroleum and Chemicals 4

3. Mr. S. M. H. Burney Joint SecretaryMinistry, Food and Agriculture 3

4. Hr. D. P. Chakravarti Private 3Dsi.±;ess 4

5. 't. S. K, iajuiear Joint SecretaryMinistry of Finance 2

6. Mr. B. G. Gade M. L. A. Advocate

7. Mr. J. S. Patel Private 3usires s 1

8. Mr. C. R. Das Oupta Director, Indian Oil 1

9. Dr. K. R. Chakravorty Managing Director, FCI 2 20

10. Mr. 0. K. Ghosh Director of Finance, FCI 2 6

11. Yr. K. C. Sharma Director of Projects, FCI 2 20

12. Dr. S. K. Mukherjee Director of Production and MarketingFCI 2 20

1/ Mr. Ramakrishnayya has recently been transferred from this position and is therefore no longeron the Board. His probable replacement will be Mr. V. N. Kasturir,-ngan from Ministry of Petrolemrand Chemicals, who has served the Board tr7' n-1_

ANNEX 2

FCI: GORAKHPUR EXPANSION PROJECT

FCI - CONSOLIDATED INCOME STATEMNTS - HISTORICAI2

-'

Fiscal Year Ended March 31 1964 1965 1966 1967 1968 1969 1970 1971(In Mllion Rupees) -

Sales23 269 245 252 312 393 483 597 730

Costs of Goods Sold

Raw Material 55 58 66 78 98 127 156 173Consumable Stores 11 11 14 17 18 21 25 30Bags 21 18 21 25 24 27 37 44Finished Goods - - - - 1 23 3 46

4/ 77 101 120 o 171 293Increase (Decrease) in Investments- (16) (3) 8 8 6 32 48 (15)

Gross Profit 166 155 159 200 258 317 424 422

Operating Expenses

Salaries Wages54rd Benefits 29 38 41 50 54 66 86 104Power and Fuel-Z 6/ 36 38 43 61 67 71 97 98Freight and Handling 2 2 2 3 9 11 25 32Taxes, Insurance and Royalties 12 5 4 3 3 4 6 9Repairs and Maintenance 21 22 21 32 39 43 54 52Interest on Short-Term Borrowings - 1 4 4 4 4 5 7Depreciation 50 39 51 72 74 85 117 119Adninistrative Overheads7/ 4 4 5 7 9 15 25 29Consolidation Adjustmentv (6) (7) (11) (10) (10) (12) (16) (24)Expenses allocated to Projects under

Construction (5) (5) 5) (8 (12) (202 (22) (30)143 137 155 214 237 267 377 396

Operating Profit 23 18 4 (14) 21 50 47 26

Other Income 6 12 6 16 14 11 12 20

Other Expenses

Interest on Long-Term Debt 19 22 27 39 41 52 67 67Interest Capitalized for Projectsunder construction (12) (20) (20) (16) (17) (27) (29) (38)

Net Interest Charges 7 2 7 23 24 25 38 29

Miscellaneous2/ 3 1 1 3 3 10 4 2Sub-Total 10 3 8 26 27 331

Net Profit 19 27 2 (24) 8 26 17 15

I/ These statements have been adjusted by IDA staff. A breakdown of the adjustments to the published profit figures ispresented in Page 2 of this Annex,

2/ The ctnparative net profits of the individual units and consolidated inccme expenditure breakdown are presented inPage 3 of this Annex.

3/ Excluding excise daty inposed from April 17, 1969.4/ Finished Product Inventories.3/ Retroactive adjustments for increased power rates for the Nangal unit have been allocated to the respective years.3/ The increases from 1967 orwards are due to the gradual shift from distribation through the Goverment Fertilizer pool to

direct marketing by FCI.7/ Indirect expenses on repairs, power and fuel etc., charged to these heads and also included in other heads of expenditure.WI Includes interest from Rourkela contract (see Page 2). the 1971 figure includes Ra 7 million from the Hhakra

Management Board compensating FCI for losses due to power cuts at Nangal.2/ Includes retroactive adjustments for different heads of expenses and write-off for Korba Project.

InKiustrial Projects DepartmentOctooer 1971

FCI: GORAKH?UR EXPANSION PROJECT

FCI - ADJUSTMENTS TO PUBLISHED

CONSOLIDATED INCOME STATEMENTS-/(In Milion Rupees) Total

Fiscal Year Ending March 31 1964 1965 1966 1967 1968 1969 1970 1971 1964-1971

Net Profit as shown in PublishedIncome Statements 22 22 4 (14) 17 43 25 17 136

2/Power Adjustments for Nangal Unit - - - (8) (8) (8) (3) -

Retroactive adjustments for Tombay Unit2/ - - - (1) (1) (6) (3) _Adjustments for other units3/ 3 (1) ( 1 - (1)

X3) () X T 97 (1X 7m-

Write-off of Development Expenses4/ (2) (2) (2) (2) (8)

Income from Rourkela Contract 6 2 8

Adjusted Net Profit T9 27 2 (2 v4 I 77 T7 1 90

1/ Net Profit figures shown in published statements are before expenses relating to past periods, and also do not takeinto account write-off of development expenses. Since these expenditures occur every year, the published profit figures

consistently overstate actual profit, and the adjusted figures are considered to more accurately represented profits (losses)

of FCI. For the 8 year period, 1964-71, profits are overstated by 51%.2/ A prolonged dispute over power tariffs was settled in 1970, requiring that FCI pay increased rates retroactive to January 1,

1966. The power rates have now been settled and no further adjustments are anticipated in the near future.3/ Debits relating to past periods. 3mall adjustments related to FY1971 can be expected to show up in the FY1972 accounts.

:/ Includes write-off for the Korba Project of Rs. 2 million in each of the years 1968-71. 'd

Industrial Projects DepartmentOctober 1971

FCI: GORAKHPUR EXPANSION PROJECT- 1/

COMPARATIVE NET PROFIT OF FCI UNITS(In Million Rupees)

Total TotalFiscal Year Ended March 31 1964 1965 1966 1967 1968 1969 1970 1971 1964-1971 1964-1971

as % Total FCI

Sindri 5 10 15 10 2 (4) (2) (16) 20 22Nangal 18 17 1} 5 24 34 5° 27 186 209Trombay (20) (41) (18) (3) (27) 6 (103) (116)Gorakhpur 1 20 12 33 37Namrup (3) (21) (14) (38) (42)P & D (3) (6) (4) 2 3 (1) 2 7) (9)

20 21 2 (24) 8 28 19 17 91 100

Rourkela 7 2 9 10Write-off Korba and DevelopmentExpenditures 1 1 - - 2 2 2 2 (10) (11)

Total FCI net profit (adjusted) 19 27 2 (24) 8 26 17 15 90 100

2/FCI CONSOLIDATED INCOME AND EXPENIITURE BREAKDO0N-

(As percentage of Sales)

Fiscal Year Ending March 31 1964 1965 1966 1967 1968 1969 1970 1971

Sales 100 100 100 100 100 100 100 100Cost of Goods Sold and inventory /changes 39 37 37 36 34 34 29 42- e

Gross Profits 61 63 63 64 66 66 71 SXOperating Expenses 53 56 62 69 60 55 63 54Opprating Profi-t o 7 1 (5) 5 10 M 4Other Income 2 5 2 5 4 2 2 3Other Expenses 3 1 3 8 6 5 7 5Net Income 7 11 - (8) 2 5 3 2

Debt Service Coverage 2.8 5.7 1.6 1.3 1.3 1.5 1.6 1.2

1/ These net profits are based upon published profit statemen s, corrected by redistributing expenses relp.i<g to past periods.2/ The adjustments discussed above have been incorporated in this breakdown.3/ The large increase in this figure over past years represents the purchase of Rs 46.1 million of finished product for resale.

Industrial Projects DepartmentOctober 1971

ANNEX 3

FCi: GOttAuitPUR dfrmidldw ASOJd(YFCI - 0ONSOLIDATED BALANCE SHEETS - HISTORICAL

Fiscal Year Ending March 31 1964 1965 1966 1967 1968 1969 1970 1971

(Millions of Rupees)

ASSETS

Current Assets

Cash 2 3 3 5 6 17 14 21Trade Receivables 53 21 22 71 80 112 87 105Loan and Advances 73 73 46 52 49 96 113 155Total Inventories 97 93 136 159 206 264 303 301Total Current Assets 7227 797 2(7 777 777 77 17

Fixed Assets

Gross Value 821 846 1162 1315 1360 1865 1941 2018Less: Depreciation 336 380 433 507 584 673 790 913Net Fixed Assets 777 777 777 gm 777 1757 Ti57 1105

Expansion Projects- 283 463 376 432 570 384 756 104,Investments 1 1 1 0 1 1 1 1

Other Assets 2 5 19 22 19 19 23 20

TOTAL ASSETS: 996 1125 1332 1549 1707 2085 2448 2751

LIABILITIES AND CAPITAL

Current Liabilities

Accounts Payable andAccrued Expenses 37 72 78 75 89 124 103 136Short-Term Debt 11 13 54 71 49 58 67 67

Accrued Interest 7 8 17 17 18 26 19 17Other Current Liabilities 12 19 2'1 23 30 21 24 31Current Portion of Long-Term Debt 10 29 31 58 63 71 105 161Total Current Liabilities 77 i&: 201 2C 249 7T0 713 M7

Long Term Debt2

G,O.I. 228 293 407 488 534 681 636 651U1S.A.I.D. 114 119 118 180 164 147 130 113Others 21 135 337 395Total 772 712 777 Ea5 771 77 l 1073 ¶77

Less Current Portion of LT Debt2/G.O.T. 10 11 19 42 45 55 64 82U.S.A.I.D. - 18 12 16 18 16 17 19Others - - - - - - 24 60Sub-Total 10 79 37 73 73 771 ¶7 ¶77

Net Long-Term Debt 332 373 797 610 7 592 797 79

Equity-are Capital 480 480 515 579 676 728 966 1156Reserves and Surpluses 107 121 122 116 126 165 166 165Total 77 377 637 ;7 6702 373 1132 1321

Total Liabilities and Capital 996 1125 1332 1549 1707 2085 2448 2751

Current Ratio 2.9:1 1.3:1 1.0:1 1.2:1 1.4:1 1.6:1 1.6:1 1.3:1Net Long Term Debt/Equity Ratio 36:64 39:61 44:56 47:53 45:55 50:50 47:53 43:57

See Footnotes on Page 2.

Industrial Projects DepartmentOctober 1971

FCI: GORAKHPUR EXPANSION PRFJECT

FOOTNOTES TO CONSOLIDATED BALANCE SHEETS

1/ Capital Expenditure for new plants ain expansion projects is not transferred to the Fixed Asset Account until the plant or project begins commercial operations. The Rs 1104 million onMarch 31, 1971 is made up as follws:

Plant or Division SINDRI NANGAL TROEBAY NAMYUP GORAKHPUR DUlRGAPUR BABAUNI P & D RAMAGUNDAM TAICHER TOTAL(In Millions of Rupees)

Capital Work in progress at Cost 46.7 1.0 21.0 236.7 3.9 300.4 253.0 6.o 19.9 19.8 90b.4Expenditure during Construction pending 0.7 109.1

allocation 1.9 - - 21.3 - 57.2 27.2 0.8TOTAL 48.0 ri 358 3.9 357.6 2 BOW 2 20.7 20 . 1017.5

Plus: Pyrites, Phosphates and Chemicals Limited. Sulphuric Acid Plant- Suspense Account 26.4

2/ The Terms of Outstanding Long-Term Debt as of March 31, 1971 are as follows: 10439

Source Amount Outstanding Interest Amortization Schedule: Principle due in year ending March 31March 31, 1971 Rate

(In Millions of Rupees) 1972 1973 1974 1975 1976 1977 1978 1979 190o 1981 1982 1983(In Millions of Rupees)

0.O.I. 9.3 414 9.3 - - - - - - -G.O.I. 113.7 6% 22.3 22.3 22.3 22.3 21.3 3.1 - - - _ _ _0.0.1. 526.6 7% 50.5 51.5 59.3 59.3 59.3 59.3 59.3 46.8 36.8 27.9 8.8 7.8LOTAL __

G.O.I. 649.6 82.1 73.8 81.6 81.6 80.6 62.4 59.3 46.8 36.8 27.9 8.8 7.8

U.S.A.I.D. 112.3 5-3/4% 18.7 19.8 20.9 22.1 23.4 7.4 - - - - - -ItalianCreditsa/ 376.7 5-3/4% 58.4 40.4 40.4 40.4 40.4 40.4 40.4 40.4 40.4 12.9 - -BulgarianCredits b/ 2 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 -Belgium 19.3Credits b/ 5-34% 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 -

a) Suppliers Credits including: Rs 125.4 for Durgapur; Rs 123.5 for Barauni; Rs 127.8 for Namrup Expansion.b) Suppliers Credits approved for Sindri Rationalization Program. These have not been fully drawn as yet.c) Includes both Italian and Czechoslovakian Credits for the Talcher and Ramagundam Projects. As of March 31, 1971 no portion of these credits had been drawn down.

Note: Suppliers Credits approved on March 31, 1971 totalled Rs 609 million, of which Rs 396 million has been disbursed and is presently outstanding.

Industrial Projects DepartmentOctober 1971

FCI: GORAKHPUR EXPANSION PE)JECT ANNEX 4

GORAXHPTJR UNIT INCOME STATEMENTS

1/Fiscal Year Ending March 31 1969 1970 1971

VolumesProduction (000 tonS) 102 158 147Percentage of Capacity of 180,000 tons 57% 88% 82%Sales (000 tons) 104 141 3141

Income (Millions of Rupees)

Sales 83.5 111.5 114.5Cost of Sales: 2/ 2.5

Opening Inyentory 2.5 2.0 11.1Purchases -/ 24.1 17.3 2.0less: Ending Inventory2/ .2...0 11.1 2.6

Sub-total 24.6 8.2 10.5

Gross Proofit 58.9 103.3 104.0

Operating Expenses:Salaries and Wages 8.5 8.2 9.2Power and Fuel 13.0 15.3 aJ.9Freight and Handling 2.4 4.3 4.9Rates, Taxes and Duty i.0 11.4 12.4Repairs 1.7 4.9 4.4Insurance 0.7 0.7 °-5Depreciation 22.9 22.9 23.1

Sub-total 50.2 67.7 78.5

Less: Indirect Expenses charged toCapital Expenditure (0-3) - (0.2)

Net operating Expenses 49.9 67.7 78.3

Operating Profits 9.0 35.6 25.7

Other Income 0.9 0.7 0.9

Other ExpensesMiscellamieous Expenditure 2.0 4.5 5-4Interest l1..0 11.5 9.3

NET PROFIT T3;17 2. iw

Add Depreciation 22.; 22.9 23.1

Net Cash Generation 19.8 43.2 35.0

Ratios:Debt Service Coverage l.B:l 1.7:1 1.6:1Operating Profit as Percentage of Sales 11% 32% 22%

1/ The published income statement for FY69 only included production and sales for the 3 month periodfollowing January 1, 1969 (the start of conarcial operations.) Revenue and expenditure for the periodApril 1, 196t - Decenber 31, 1968 (the tasting and ooiuieieoning portovl) were alocated to capital -costs as a net credit. The FY 69 income itAte,eent has been recast to reflect a full year's operationand the balance sheets appropriately adjusted.

2/ Finished Product Inventories

3/ Raw material consumed (Naptha, Coal, Conssimable Stores and Bags), plus net transfers of finished productto and from the unit.

Industrial Projects DepartmentJuly 30, 1971

ANNEK 5

FCI: GORAKHPUR EXPANSION PROGRAM

GORAKHPUR DIVISION HISTORIC BAIANCE SHEETS-

Fiscal Position atStart of Testing Position of March 31

and Commissioning Period 1969 1970 1971March 31, 1968

ASSETS (Millions of Rupees)Current AssetsCash 0.5 0.5 1.7 1,Trade Receivables - 11.7 5.6 8.6

Loan: Advances 9.0 3.6 2.3 4.3

Inventories 9.8 26.0 37.6 30.8Total Current Assets 19.3 UT 7

Fixed AssetsGross Value 36.6 318.6 328.0 329.9

Less: Depreciation 4.5 27.4 50.3 73.4

Net Fixed Assets 21 291.2 27T7 26T

Construction in Progress 286.1 5.7 1.7 3.9

Investments 0.1 0.2 0.1 0.2

Other Assets 2.14 2.4 1.7 0.8

TOTAL ASSETS 340.0 341.3 328.4 306.6

LIABILITES AND CAPITALCurrent LiaoilitiesAccounts Payable and Accruedexpenses 16.5 18.8 9.3 8.3

Advances against orders 9.0 1.8 1.4 1.3

Short-term Debt 3.4 6.3 0.7 10.4

Other Current Liabilities 0.2 0.4 1.1 0.5

Current Portion of Long-term Debt 4.6 21.5 21.5 19.0

Total Current Liabilities 33.7 48.8 33.9 39.5

Long-term Debt 219.6 215.0 196.7 152.0

less Current Portion 4.6 21.5 21.5 19.0

Net Long-term Debt 2 1 1

Equity

Share Capital 91.1 101.9 101.9 104.8Reserves and Surpluses 0.2 (2.9) 17.4 29.3

Total Equity 91.3 99.0 T19.3 134.1

TOTAL LIABILITIES AND CAPITAL 340.0 341.3 328.4 306.6

Current Ratio 0.6:1 0.9:1 1.4:1 1.1:1

Long-term Debt/Equity Ratio 71:29 68:32 62:38 53:47

V/ As published but with adjustments to Fixed Assets and Eamed Surpluses to reflect a full year of operation in

F1969. Surplus revenue of Rs 11.1 million received over the testing and commissioning period and credited

against capital costs has been removed from Gross Assets, effectively increasing this value by the same amount.

In addition a full year's depreciation has been charged against FY 1969 operations.

Industrial Projects DepartmentJuly 23, 1971

ANNEX 6

FCI: Gorakhpur Expansion ProjectTeclnical Description

The expansion project will utilize installed spare equipment and

excess capacity in the existing plants. The existing facilities are describ-

ed below:

Ammonia Plant

Plant capacity equals 350 TPD Ni'3 in two trains. The process steps

and equipment presently installed are given below:

1. Naphtha is partially oxidized using Shell gasifiers operating at

23 atmospheres (atm) followed by carbon scrubbing and removal. Three gasi-

fiers (one spare) and two carbon scrubbing units are installed.

2. The process gas is converted to carbon dioxide (C02) in a shift con-

vertor using high temperature shift catalyst (manufactured by FCI). Two units

are installed.

3. CO2 is removed in three different stages with two complete trains

installed. This step separates the C02 from the process gas stream for use

in the urea plant.

(a) hot potassium carbonate scrubbing(b) monoethanol amine (MEA) scrubbing(c) caustic soda scrubbing to remove final traces of C02

'4. The nitrogen wash unit removes all remaining impurities from the

process gas by scrubbing with liquid nitrogen at low temperature (-170°C),

and the air separation plant provides the oxygen for the partial oxidation,

nitrogen for nitrogen wash unit and for ammonia synthesis. Two complete

units are installed including a spare nitrogen compressor.

5. Synthesis gas is compressed to about 360 atm using reciprocating

compressors driven by electric motors. Gas from the nitrogen wash unit is

hydrogen which is mixed with nitrogen from the air separation plant in the

correct ratio to produce ammonia. Three compressors are installed with one

being a spare.

6. Ammnonia synthtesis is achieved by reacting the compressed gas in the

presence of a catalyst. After reaction, ammonia is removed by cooling and

condensing and the remaining gases are recycled to the synthesis step. Twoconverters are installed.

Urea tlant

The urea plant has dual units in most areas and has a rated capac-

ity of 600 TPD urea except for prilling which is rated at 544 TPD urea.

Ar!NNTX 6

Page 2

1. Urea synthesis is carried out by a non-catalytic reaction of am-monia and CO2 to form ammonium carbamate at about 20() atm. Five reactors(918 TPD total capacity) are installed including one spare unit whiclh lhasdesign capacity of 318 TPD urea.

2. Urea is recovered by decreasing the pressure and decomposing theammonium carbamate solution. Two reactors are installed.

3. The urea is concentrated by evaporating, crystallizing, centrifug-ing, drying and melting to obtain an anhydrous urea melt suitable for pril-ling.

4. Prills are produced by spraying the melt through a nozzle into atower about 50 meters high. The droplets fall against a counter-currentstream of air which cools and solidifies the urea into spheres called prills.Two towers are presently installed with a design capacity of 545 TPD urea.

5. The urea is then bagged and stored for shipment.

Utilities and Storage

The present power requirements are 40 MW with sufficient electricalequipment installed to handle 50 MW. Power is received from UPSIB at 132 KVand transformed to 11 KV in substations provided by FCI.

Water requirements are 26,500 cubic meters per day obtained fromtubewells and a nearby lake, Chilwa Tal. The plant has three coal-firedsteam boilers with a total steam capacity of 135 tons per hour.

Storage capacities of materials based on existing facilities are:

Storage Annual RateTons TPY

Naphtha 8,500 90,000Coal 15,000 90,000Urea 30,000

The expansion facilities required are:

Ammonia Plant

The ammonia plant will consist of three separate trains after ex-pansion. All of the existing spare units will be utilized.

1. Gasification unit. The present three gasifiers will be used. Onhlyminor modifications to burner tips are required.

2. An additional carbon scrubber unit is required.

ANNEX 6Page 3

3. An additional shift converter is needed. FCI and Toyo will eval-uate switching to BASF catalyst or othet means of reducing CO leakage. Re-sults of this study may show that the third shift converter is not neededand/or result in reductions in size of nitrogen units and air separationplant.

4. An additional C(2 removal system is planned. However, the resultsof FCI's study should prove that existing units are large enough. Principalmodifications are to change tower packing to a more efficient type and toswitch to a process called modified Benfield.

5. Additional nitrogen unit and air separation plant are to be pro-vided with the exception of an existing spare nitrogen compressor. The re-sults of the study in (3) above will determine the actual requirements.

6. Another synthesis gas compressor is not required since the instal-led spare will be used.

7. An additional ammonia converter will be added.

Urea Plant

The urea capacity to be added is 350 TPD in all sections exceptprilling which will be 400 TPD. The size of the urea expansion is based onutilizing all of the expanded ammonia capacity.

1. Urea reactor capacity is sufficient for 918 TPT including the fifthreactor, so a small supplemental reactor is proposed. FCI will evaluate theneed for this supplemental reactor. It is required for a guaranteed outputof 950 TPD but the design may prove to be sufficient without it.

2. A spare CO2 compressor is available but a small booster compressoris required. Existing spare ammonia pumps will be used but an additionalpump is required.

3. An additional urea decomposer is required.

4. A direct urea concentrator will be included in the expansion de-sign.

5. Urea prilling. An additional prilling tower of 400 TPD capacitywill be added.

Utilities and Storage

The following facilities will be added:

1. 8,500-ton naphtha storage tank.

2. ACditional coolfng tower section for urea plant.No new facilities are required for urea storage, power supply and

water supply.

ANNEX 7

FCI: GORAKHPUR EXPM SION PROJECT

CAPITAL COST ESTIMATES(In MilionsT

Indian Rupees U. S. Dollars

Local Foreigi Total Local Foreign Total

Equipment and Materials:Pivprietory Itess* / 2.8 2.8 - 0.37 0.37Items on Reserve List- 2/ 1.6 Q.4 2.o 0.21 .°5 0.26Items bid Internationally-* 8.5 fLL2 47.7 1.13 5.24 6.37

Sub-total 10.1 42.4 52,5 1.34 5.66 7.00

Ocean Preight34/ - 3.1 3.1 - 0.41 0.41Inland Freight- 5/ 1.6 - 1.6 0.21 - 0.21Customs Duties and Sales Tax 14.6 - 14.6 1.95 1.95

Erection and CommissioniniEquipment Erectior# 3.4 - 3.4 0.15 - 0.45TEC Supervision* 1.1 2.6 3.7 0.15 0.35 0.50FCI Supervision* 0.3 - 0.3 0.04 - 0.04

Sub-total 4.8 2.6 7.4 0.64 0.35 0.99

Civil Works 5.4 - 5.4 0,72 - 0.72Plant Lighting 0.2 - 0.2 0.03 - 0.03

6/Licence Feesr *

shell- 0.4 o.4 - 0.05 0.053enfield - 0.6 0.6 - 0.08 0.08T.E.C. _ 1.8 1.8 - 0.24

10.24

Sub-total - 2.8 2.8 - 0.37 0.377/*

Design and EngineeringTEC Design Package - 4.2 4.2 - 0.56 0.56FCI Engireerir,g 4.8 - 4.8 0.64 0 o.64TEC assistance and checking of

design - 3.6 3.6 - 0.49 o.49

Sub-total 4 .8 7.8 12.6 o.64 1.05 1.69

n ndIspetion- 9/ 1.3 1.7 3.0 0.17 0.23 0.40Preliminary Survey ad Studies9/ - 0.1 0.1 - 0.01 0.01FCI Overheaad!/ 2.0 - 2.0 0.26 - 0.26

TotalDirect Costs 44.4 60.5 105.3 5.96 8.08 14.04II/

Equo mentarxtMaterials 0.8 2.2 3.0 0.11 0.29 0.40

Erection and Commissioning 0.8 0.3 1.1 0.11 0.04 0.15Civil Works 0.6 - o.6 0.o8 - 0.08Design aid Engineering o.4 o.6 1.0 o.05 0.08 0 1Administration and Overhead 0.3 - 0.3 0.o4 - o o

Sub-total 2.9 3.1 6.o 0.39 0.41 0.8012/

Working Capital Including 1.6 1.6 3.2 0.21 0.21 0.42SparesTotal Fixed Capital 49.3 65.2 114.5 6.56 8.70 15.26

13/Interest During Construction7- 5.5 - 5.5 0.74 - o.74

Total Capital Costs 54.8 65.2 120.0 7.30 8.70 16.0

See Footnotes on Page 2

*Items to be included in IDA financing.

Industrial Projects DepartmentNovember 1971

FCI: GORAKHPUR EXPANSION PROJECTASSUMPTIONS AND FOOTNOTES TO CAPITAL COST ESTIMATES

I/ Approximately 5% of total equipment is to be reserved for local procurement2/ Approximately 22% of the ecpipment bid Internat-ionally is expected to be won locally. Locally procured

equipment has am estimated foreign exchange component of 20%3/ Seven percent of imported equipment and materials/ Three percent of FOB/FOR cost of equipment

5/ Customs Duty are 30% of C & F cost, and Sales Tax is 3% of the F.O.B. cost of local supplies/ Estimates on the basis of negotiated licence agreements, for:

a) Shell Gasification process; b) Benfield Gasification process; c) TEC for the Ammonia and Urea processes7/ Preliminary negotiations have set the cost of the TEC design package at 200 million yen, and TEC engineering assistance

and checking of design at 165 million yen. Detailed engineering will be done by the FCI P & D department, at anestimated cost of 10% of FOB/FOR cost of supplies

8/ Procurement will be conducted by FCI at estimated cost of 2% of FOR/FOR cost of supplies, plus provision for foreigntravel. Inspection and testing will be conducted jointly by FCI and TEC

9/ TEC will conduct further studies to explore any possibilities for further cost redactions in the capital programTo/ Includes: share of FCI Head Office expenses attributable to the expansion program; insurance on equipment and

supplies; clerical and stationery costs; and preoperating expenses11/ Includes $% contingency on foreign equipment purchases and 5-10% contingency on all other items. Note: Equipment

cost estimates include a provision of 10% for escalation12/ Includes Rs 2.3 million as additional spares (Rs 1.6 million as foreign exchange costs)17/ Assuming debt and equity is paid in alO:6 ratio. Interest rate of 8i6

Industrial Projects DepartmentNovember 1971

-J

FCI: GORAKHFUR EXPANSIDN PROJECT

WORKING CAPITAL REQUIRDI ENTS1

Before Expansion For Expansion After ExpansionITEM Unit Quantity Amount Quantity Amount Quantity Amount

Rate (tons) (Rs. Millions) (tons) (Rs. Millions) (tons) (is. Millions)(Rs/ton)

1. Receivables:

Trade2 / 843 15,000 12.6 11,000 9.3 26,000 21.9Other- 4.3 4.3

2. Raw Material Inventorie./

Naptha 233 7,000 1.6 5,000 1.2 12,000 2.8Coal 65-5 7,500 0.5 7,500 °.5

3. Operating Supplies:

Bags 200,000 0.5 200,000 0.5Chemicals and consumables o.4 hI o.4Spares 22.8 2.3 25.1

4. Goods in Process: 0.2 0.1 0.35/

5. Product Inventory at cost 700 8,000 5.6 3.5 13,000 9.1

6. Cash Balance 0.6 o.6

7. Total Curreant Asset

Requ.irements:

8. Imes Accounts Payable

Ram materials and Average 1 2.1 Average 1Supplies 6/ month's supplies 3.4 month's supplies 5.5Power Average 1

month's supply 2.0 1.5 Average 1month's supply 3.5

Advances againstorders and depositsetc. 7/ 1.3 1.3

9. TrAL WORKING CAPITALBEQUIRRMENTS: 42.4 12.8 55.2

10. Bank corrowings-/ 13.6 9.6 23.2

11. Margin Required on WorkingCapital: 28.8 3.2 32.0

1/ Using 1970-71 price levels.2/ Receivables from suppliers, contractors; deposits with customs and port trust and prepaid expenses.'/ A decision is yet to be made on the merits of increased Naptha Storage.:/ The foreign exchange component of the additional spares is Rs. 1.6 million.§/ Finished produt inventory fluctuates seasonally varying oetween 5000 and 18000 tons in FY 1971, but averages one half month's production7/ As a result of the invoicing and payment procedures Gorakhpur carries approximately 1l½ months supply as accounts payaule. However, it is

considered that these payments should be made within 1 month.7/ Many of the cooperative distributors are required to make security deposits with product orders.U/ FCI has credit agreements with the Commercial Banks for the financing of 75% of Accounts Receivasle, plus Finished Product Inventories.

9/ Actaals as of March 31, 1970 and March 31, 1971 were Rs. 47.1 million and Rs. 44.0 million respectively.

Industrial Projects DepartnentJuly 30, 1971

A&NNEX ;

FCI: GORAKHPUR &XPAN6ION PROJICT

ALLOCATION AND PROJPGCThD JIIBUR6NENTS OF PRO(E0b OF IDA CREDIT

A. Allocation of Proceeds of IDA Credit Total

1/ (In U.S.$ millions)6quipment ana Material-s- 7.2

Engineering, Erection and Commissioning 2.2

Unallocated o.6

Total 10.0

1/ Covers CIF cost of imported equipment and the ex-factory price of locallyprocured equipment that is internationally bid, but excludes items on thereserve list.

B. ProJected Disbursements of IDA Credit

Fiscal Year: 197d Disbursements Loan Outstanding Loan Undisbursed(I =4$ Millions)

Oct - Dec (1971) - _ 10 0Jan - March (1972) 0.1 0.1 9.9April - June (1972) o.s 0.6 9.4

Fiscal Year: 1973

July - sept (1972) 0.5 1.1 8.9Oc-t Dec (1972) 0.5 1.6 8.4Jan - March (1973) 0.5 2.1 7.9April - June (1973) 1.0 3.1 6.9

Fiscal Year: 1974

July - bept (1973) .0 5.1 4.9Oct - Dec (1973) 2.5 7.6 2.4Jan - March (1974) 1.1 8.7 1.3April - June (1974) 0.7 9.4 o.6

673

.iscal Year: 1975

Tuly - ;ept (1974) 0.4 9.8 0.2Oct - Dec (1974) 0.2 100o

Indlustrial Projects Departmentd)ept. J0, 1971

FCIGORAKHPUR EXPANSION PROJECT

IMPLEMENTATION SCHEDULE

1972 1973 1974

J FIMIAM J SO J ND J F M A M J J AIS OIN DJ F M AIM JJA AS O D

PROCESS ENGINEERING I U

DETAILED ENGINEERING

EQUIPMENT AND MATERIALS

PROCUREMENT z ZO

0

H ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~DEQUIPMENT AND MATERIALS z IE E El*llffff*l

DELIVERY |

CIVIL WORKS E E rEEEEE** |O ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~LU

EQUIPMENT ERECTION ********** * 0~~~~~~~~~~~~~~~~

TESTING AND COMMISSIONING

Industrial Project Department IBRD-6114 R x

November 1971

ATNEX 11

FCI: Gorakhpur Expansion ProjectNitrogen Fertilizer Market for India

A. Present Situation in India

Fertilizer production is a major part of India's program to become

self-sufficient in agriculture. Currently about half of the required nitro-

gen fertilizer is imported but steps have been taken by GOI to increase domes-

tic production. Nitrogen is now produced in India primarily as ammonia and

urea based on naphtha from imported petroleum feedstocks. Current plans pro-

pose increasing reliance on fuel oil and indigenous coal as raw materials

to produce nitrogen fertilizer. Several projects have been sanctioned based

on imported ammonia but few such additional projects are expected. A major

problem h-ias been the length of time required to get a production facility

commissioned so capacity has not expanded as rapidly as desired.

Nitrogen supply and demand for recent years are shown below based

on data from the Fertilizer Association of India, GOI and IDA.

Nitrogen Fertilizer Consumption and Production in India(thousands of tons)

Consumption Production Deficit

FY65 580 240 340

FY66 530 240 290

FY67 660 310 350

FY68 920 400 520

FY69 1,200 560 640FY70 1,450 720 730

FY71 1,760 850 910

Statistics for 1971 are higher than data recently released by GOI (1425 TPY N).

This discrepancy is currently being studied and an effort made to discover the

reasons therefor and to ascertain what effect any slowdown in consumption might

have on future demand. In the meantime the FY71 consumption of 1,760 tons as

estimated by Messrs. Brown of IBRD and W. B. Donde of COI has been used. Ni-

trogen consumption increased at an average annual rate of about 20% and produc-

tion increased at about 28% per year, hut production still lags behind con-

suimption. Delay In projects now in construction and low production levels(about 6O,' of capacity) In existing plants have contributed to these deficits.

B. Forecast of Nitrogen Supply in India

The nitrogen supply forecast through 1979 is given in the followingtable. These data are compared with demand forecasts in Para. 6.02. Theforecasts are obviously subject to large error since there is disagreementon current consumption data and there is a large discrepancy between IDA andGoi forecasts of future supply.

ANNEIX 11Page 2

C. Comparison of Fertilizer Consumption

Nitrogen consumption varies widely throughout the world dependingon availability of land resources and the intensity of cropping. recentdata taken from FAO Production Yearbook 1969 are as follows:

Nitrogen Consumption(kg/hectare)

Country Rate

Taiwan 177.9Japan 131.4Netherlands 153.4United Kingdom 46.5United States 13.7Pakistan 8.2India 7.8Canada 5.2Uttar Pradesh (India) 15.0

Food grain production, particularly high yielding varieties, is afunction of the fertilizer application rate and India is well below optimumrates. Fertilizer usage in UP is substantially higher than the average forall India. Nevertheless, the table indicates clearly the room for growth infertilizer usage that exists in Indian agriculture.

Regional forecasts for India (Assam, Bihar, West Bengal and UttarPradesh) are given in the following table (page 4). These data show a smallurea surplus in the region in 1974-76, but the Gorakhpur marketing area shouldnot be affected. (see paras. 6.04, 6.05).

ANNEXU 1Page 3

FCI: OOBhYRPUR PEXANSION PROJECT

FORECAST OF NITROGEN PRODUCTION FOR INDIA

(thousands of metric tons per year)

DESION I/EXISTING FACILITIES CAPACITY FY70- FY71 FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79

Public SectorFACT-UDL 92 35 35 60 75 80 Bo 80 80 80 80FCI-NAMRUP 4S 26 30 40 40 40 4o 40 4o 40 40FCI-SINI2I 117 79 75 105 105 105 105 105 105 io5 105FCI-NANOAL Bo 79 75 77 77 77 77 77 77 77 77FSI-TROMBAY 90 44 40 80 Bo 8o 80 80 80 80 80FCI-GORAIFPUR 83 73 70 80 83 83 83 83 83 83 83ROURFCC -0A 120 30 4o 110 1 110 110 110 o110 no 110NEY7ELI 70 42 35 60 60 60 60 60 60 60 60GSFP', bARODA 216 111 130 200 200 200 200 200 200 200 200OTHER PRODUCERS 12 12 12 12 12 12 12 12 12 12 12

SUB TOTAL 72; 531 U;' = lT7 EL7 M 7 7 E

PRIVATE SECTORCOROMANDEL 80 68 60 73 73 73 73 73 73 73 73DCM, KOTA 130 81 100 120 120 120 120 120 120 120 120IEL, KANPUR 200 17 120 185 185 185 185 185 185 185 185OTHER PRODUCERS 34 30 30 30 30 30 30 30 30 30 30

SUB TOTAL 4h4 196 310 408 408 4o8 h08 ho8 hoe 4o8 hoe

TOTAL EXISTINO PLANTS 1369 727 852 1232 1250 1255 1255 1255 1255 1255 1255

PROJECTS UNDER CONSTRUCTION

Public SectorFACT-COCHIN C 152 25 75 140 140 140 140 14O 140FCI-DURGAPUR 152 25 75 140 140 140 140 140 140FCI-3ARAUNI 152 - 25 75 14O 140 lbO 140 140FCI-NAMRUP 152 - 25 75 140 140 1io 140 140MAEARS 190 50 100 175 175 175 175 175 175

SUB TOTAL 793 100 300 605 735 735 735 735 735

Private SectorZUARI AGRO-OOA 175 - 90 125 i6o 16o i6o 16o 16o

TOTAL-UNDER CONSTRUCTION 973 100 390 730 895 895 895 895 895

PROBABLE PROJECTS (NEAR FUTURE)

Public SectorFACT OCHIN IC 47 25 35 45 45 45FCI-TRONBAY EXP. 132 65 90 120 120 120FCI-GOR nDmPUR EXP. 61 60 60 6o 60FCI-TALCHER 229 - 75 160 205 205FCI-RAMADUNDAM 229 - 75 16o 205 205FCI-WALDIA 152 - 75 110 140FCI-NANGAL EXP. 152 - - 75 110 140

SUB TOTAL 1002 140 335 695 855 915

Private Sector

IFFOO,KANDLA 215 110 150 195 195 195COROMANDEL EXPANSION 80 - 40 60 70 70SPIC, TUTICORIN 248 50 125 175 220 220MANGALORE 160 - - Bo 110 145

_ _1 _5 _i 5_9 _30

SUB TOTAL 703 160 315 510 595 630

TOTAL PROBABLE PROJECTS 1705 300 650 1205 1450 1545

LONG RANGE PROJECTS - 2040 - 100 200 400 600

GRAND TOTAL 6090 730 850 1330 1640 1990 2450 2900 356o 4000 4300

GOI ESTIMATE 6020 716 85o 1420 1820 2185 3140 3970 4420 4700 5200

1J Fiscal Years ending March 31

2/ Public Sector: Korba, Kamptee, Rajasthan, Mirzapar, ParadeepPrivate Sector: Coromiandel, Tata, Hindustan Lever, Mbaramsi NorarJi

3/ Roorkela not likely to achieve forecasts in FY72 and FY73 due to recent plant breakdown.

Industrial Projects DepartmentJuly 23, 1971

FCI: Gorakhpur Expansion Project

Nitrogen Fertilizer Market for East India('OOO's metric tons per year)

1/ DesignDemand - Capacit 1971/72 1972/73 1973'704 1974/75 1975/76 1976/77 1977/78 1978/79

Uttar Pradesh 405 485 565 633 709 794 889 995Bihar 83 99 117 133 152 173 197 225West Bengal 43 51 59 68 79 92 107 124Assam 5 6 6 8 9 12 15 18

Total Demand - Nitrogen 3/ 536 641 747 842 949 1071 1208 1362Total Demand - Urea (As N)- 375 h50 520 590 660 750 850 950

Supply 2/

FCI - Namrup (Total) 191: 40 65 115 180 180 180 180 180Sindri 117 105 105 105 105 105 105 105 105Gorakhpur (Total) 130 80 80 80 120 130 130 130 130Durgapur 152 25 75 140 140 140 140 140 140Barauni 152 25 75 140 140 140 140 140Indian Explosives 200 185 185 185 185 185 185 185 185

Total Supply - Nitrogen 945 435 535 700 870 880 880 880 880Total Supply - Urea (As N) 820 320 420 585 725 735 735 735 735

Nitrogen Deficit (Surplus) 101 106 47 (28) 69 191 328 483

Urea Deficit (Surplus) 55 30 (65) (135) (75) 15 115 215

1/ Data taken from IDA Peport2/ . From Annex 10 V

3/ 70% of N consumed as urea

Industrial Projects DepartmentJuly 23, 1971

ANNEX 12

FCI: Gorakhpur Expansion Project

Marketing SystemGorakhpur Unit

Uttar Pradesh has the largest state population in India (88 mil-

lion) with the second largest area (29.5 million hectares). Area under cul-

tivation is about 12.5 million hectares with 4.8 million hectares being crop-

ped twice in a year to give a net cultivation area of 17.3 million hectares.About 6.3 million hectares, or 36% of the cultivated area is irrigated. Ir-

rigation from canals and tubewells has been growing at an average rate of

about 4% per year and by 1974 could reach a total of 7.5 million hectares.With this high percentage of irrigation, there is less likelihood of a major

crop failure compared to other areas of India. The principal crops in UPare wheat, rice, sugar cane, barley, and maize.

Sugar cane is an important cash crop for the area and requiresheavy dosages of nitrogen. Present farming practice in UP represents about

48 kg N/hectare against a recommended rate of 168 kg N/hectare. UP plansto increase the application rate to an average of 86 kg/hectare by 1974.Thus, the potential growth rate of fertilizer usage in sugar cane is quitelarge.

Other major crops are being developed through high yielding varie-

ties programs. These programs began in India in 1967 with about 25% of theprogram area being in UP. Adequate water and fertilizer are the two impor-tant factors in the growth rate of high yielding varieties. Area under cul-

tivation with high yielding varieties is growing at a rapid pace and ferti-lizer consumption will grow accordingly.

For purposes of market analysis, FCI divides UP into three regions

which are shown on Map 2. The nitrogen and urea consumption for these re-gions is shonm below based on 1970 data:

Nitrogen and Urea ConsumptionUttar Pradesh

% asNitrogen UreaKg/Hectare

Eastern UP 16.8 62

Central UP 8.4 58

Western UP 17.0 58

ANNEX 12Page 2

The growth of nitrogen and urea demand is estimated as follows:

Nitrogen and Urea Consumption in Uttar Pradesh

1973/74 1974/75 1975/76 1978/79N Urea N Urea N Urea N Urea

Eastern UP 168 257 186 283 200 304 280 430Central UP 121 171 133 188 142 201 200 280Western UP 210 297 231 326 248 350 350 490

Total 500 725 550 800 590 855 830 1200

Urea consumption is assumed to grow to 70% of nitrogen usage in eastern UPand 65% in the other regions. Total nitrogen demand for 1973-76 is FCI'sestimates and is about 10-15% below GOI and IDA forecasts. The 1979 projec-tions are based on a nitrogen growth rate of 12%.

The market allocation of Gorakhpur is shown below based on FCI's1976 forecast:

Gorakhpur Market Allocation in 1976 (as Urea)

GorakhpurTotal Market Average Gorakhpur Market

Market Supply/1 Demand Freight Sales % of M1arketRs/ton

Eastern UP 304,000 14 195,000 64Central UP 201,000 29 55,000 27Western UP 350,000 40 63,500 18

Total 1,030,000 855,000 313,500 37

/1 Total output from IEL, DCM, Gorakhpur although a large part of IEL andDCM capacity is marketed outside of UP.

The entire Gorakhpur output could be marketed in eastern UP by1979 with FCI obtaining 73% of the market. The above calculations are basedon FCI capturing 80% of the market in an area where their freight advantageexceeds Rs 10/ton, and lesser portions where Gorakhpur's freight advantage issmaller. At present Gorakhpur markets 82% of its sales in UP. Sales outsideUP are controlled by FCI's overall marketing plan ance its need to establishand maintain markets in other states.

At present, FCI, DCM, and IEL market urea at the dealer level atthe same price. This situation is expected to prevail as long as demand ex-.ee.lds Stspply. lhese prices are based on Pool prices which are deliveredc4-4t.;, thetrefore, freight savings are being taken by producers.

ANNEX 12Page 3

Distribution System

Most agricultural supplies including fertilizer are sold through

cooperatives. The cooperatives are banded together on a state level in an

agency (called Apex Agencies) that provides storage, credit and other central

facilities. Most states have only one such agency but in UP there are four.

These agencies, with pertinent data for each, are described below. In addi-

tion, there are private dealers who are assuming an increasing portion of

the market.

Fertilizer Distribution Agencies in Uttar Pradesh

Sales Storage FCIRetail Turnover Capacity Market Sales

Agency Outlets Rs Million '000 Tons % x

1. Agro-IndustrialCorporation 400 50 40 7 12

2. Cane Union Federation 800 100 113 13 31

3. Agricultural SuppliesOrganization 2,000 200 100 27 24

4. Provincial Co-opFederation (UP Co-operative Bank) 2,400 250 390 33 0

Private Dealers 6,000 150 - 20 33

Total 11,600 750 100 100

Agro-Industrial Corporation was formed in 1968 with a subscribed

capital of Rs 50 million, equally divided between the Governments of India

and UP. The corporation handles all agricultural inputs such as fertilizer,

chemicals, equipment and seeds. Operating loans are secured from commercial

banks with a State Government guarantee. Sales volume and market share of

this organization is expected to increase rapidly over the next five years.

UP Cane Union Federation is a collection of 132 cooperatives lo-

cated in 32 districts of UP where the predominant crop is sugar cane. It

has over 2.2 million farmer members. Capital is subscribed by the member

cooperatives with an additional contribution of Rs 50 million by the ReserveBank of India.

Provincial Co-operative Federation consists of 52 District Co-operative Federations, 161 Primary Co-operative Societies and 7 ProcessingSocieties. Operating capital is subscribed from members, and Reserve Bank

of India made available Rs 250 million in 1971. Loans are obtained throughco-operative banks that are federated into the UP Co-operative Bank on a

state level. At present, it is the largest Apex Agency but FCI does notmarket its fertilizer through this organization since FCI has had difficulty

in obtaining payments from them.

ANNEX 12

Page 4

Agricultural Supply Organization is a branch of the UP Directorateof Agriculture. Its financial requirements are met by the state governmentwith loans granted to the cultivators by the state government. This organ-ization will probably be absorbed into Agro-Irldustrial Corporation.

FCI has placed considerable emphasis on developing a network ofprivate dealers. At present there are about 127 private dealers in Gorakh-pur's marketing network and this number should grow to 300 by 1975. Thesedealers now handle about 33% of Gorakhpur's output and 20% of the total UPmarket. Their market share has been growing and it is anticipated they willcontinue to do so.

Structually, the Apex Agencies appear to be sound but overdue ac-counts are historically a problem as apparent with the Provincial Co-op Fed-eration now. To date FCI has not had to carry much of the burden of agri-cultural credit but may have to do so in the future.

Urea Pricing and Competition

The Government Fertilizer Pool sets a ceiling price for urea soldin India. This price represents the wholesale price to dealers at railheadand allows the dealer Rs 80 to cover his costs of distribution. The Poolsells all imported fertilizer so at present plays a large role in marlceting.Although there is no official duty on imported fertilizer the Pool pricesare substantially higher than world market.

Urea Price History in India

Consumer Price Pool PriceDate Rs/ton Rs/ton

Dec. 1, 1961 715Jan. 1, 1964 615Feb. 1, 1966 680 -Apr. 1, 1967 840 760Apr. 19, 1968 860 780Apr. 17, 1969* 943 863Mar. 1, 1971 923 843

* 10% excise tax became effective April 17, 1969.

The Pool Price cannot be exceeded by anyone legally and there is little in-centive to sell underneath the price in most cases due to shortage of supplyand high operating costs for urea production in India.

Gorakhpur has a relatively simple pricing strategy since it marketsonly urea and has only two competitors in its main marketing area; neitherone of which has any difficulty selling its production at the establishedPool Price. The Pool Price is equivalent to a freight equalized price atdestination so there is an incentive to sell in nearby areas. Also the bulk

ANNEX 12Page 5

of fertilizer sold in UP goes through government owned or supported creditinstitutions, so little price competition is expected to develop here al-though private dealers may attempt some price cutting as a means of increas-ing their market share.

Distribution

Hlost urea in UP is transported by rail but trucks are also used.The bagging, storage and handling facilities at the Gorakhpur factory areadequate. Availability of rail wagons is critical at times and occasionallythere is an insufficient number available. This shortage also affects rawmaterial movements as well. The railroad serving the factory is a metergauge system which works to Gorakhpur's advantage in the immediate marketingarea since other producers are on broad gauge lines (Map 2). For shortdistances movement by truck is used and this type distribution is handledby private contractors.

FCI: GORAKRPPR EXPANSION PROJECT

OPERATING COSTS AT 95% P2DDUCTION CAPACITY

YTSTsTING PLANTz EXPANSIOE PROJECT AFTER EXPANSION-

Stom Unit Unit Rats AnnuaL Annual Cost Cost/to f U.r. Ann _l ANnal Cost Cost/to of Urea Annual (Annual GCot Cost/ton of Urea

(Rs) Quantity (Rn Millions) (R.) Quantity (Rs Millions) (Rs) Quantity (Re Millions) (Rl)

Urea Production metric tons 171,360 127,890 299,250

Variable Cos tsNaptha_/I 000 tons 233.0/ton 80.7 18.8 109.7 60.2 14.0 109.5 140.9 32.8 109.7

Coal3/ 000 tone 67.5/ton 94.2 6.4 37.3 46.8 3.1 24.2 141.0 9.5 31.8

pove 4/ 000 HW 91.0/MWR 290.3 22.8 133.1 14.8 16.8 131.4 435.1 39.6 132.3

Consumable Btores- 4.7 27.6 1.6 12.5 6.3 21.2

Bags 6' Millions 2.5/bag 3.4 8.6 50.0 2.6 6.4 50.0 6.o 15.0 50.0

Labor and Supervision- 10.0 58.5 10.0 33.3

Total Variable CLots 71.3 4632 113.2

Fixed Coots 7/General Oveisead ErPensen- 4.6 26.8 4.6 15.4

Selling aid Administrative Expenaeo 3.5 20.4 3.5 11.7

Maintenance Materials8/ 5.9 34.4 3.4 26.6 9.3 31.1

Depreciation 9/ 10/ 23.5 137.1 9.2 71.9 32.7 109.3

Interest on Short-Ten, DCbt- 1.2 7.1 0.9 7.0 2.1 7.0

Total Fixed Costs 72 7 3257 105. 5 7S

Total Coot of Production 110.0 641.9 55.4 433.1 165.4 552.8

Freight (to Distributors) 4.3 25.0 3.2 25.0 7.5 25.0

Excise Duty 11/ 12.8 75.0 9.6 75.0 22.4 75.0

COST DELIVERED TO DISTRCJUTOR 127.1 714 .9 68.2 533.1 195.3 652.8

1/ 95r Capacity is 315 operating days per year; full caoacity is 330 operatirg days per year. |

2/ Naptha Price includes: Rn 159/ton F03 Baranni Refinery; Re 60/ton freight; Rs 13.0/ton excise duty and sa]es tax.

3/ Coal Price includes: PUB price pit-head Rs 34.7/ton; freight and handling Rs 29.5/ton; duties and taxes Rs 3.3/ton.4/ Power Rates inlude Rn 10/EMW as ecaine duty7/ Tha foreign exchange component of consumable stores for existing plmnt aid expansion project are Rs 0.3 million and Rs 0.2 million

equivalent respectively.6/ Because of overenployvent in the existing plamt, no additional staff will ba required to operate the expanded plant.7/ Includes; rnsorance, Rs 0.7 million; Share of Rood Office Expooses, Rs 1.0 million, mnd other -isellaneous expenses including rent, payment to

P & D for ser-ines, Rn 2.9 million.8/ The foreign exchange component of maintenance materials for existing plant aid expasioin project are Rs 2.9 million aid Rn 1.7 million equivalent respeotively.

The breakdown in 50% foreign exchange, 30% intemral freight duties ald taxes, aid 20% local paauXreuent.9/ Based upon straight-line depreciation over a 12 year period for equipment and straight-line depreciation for periods up to 25 yearn for ouildings and civil oorks.

10/ Asosuming 9% Interest on short-term debt used to finance receivables and finished product inventories.11/ 10% of ex-factory price.

Industrial Projects DepartmentJuly 30, 1971

FCI: GORAKHPUR EXPANSION PROJECT

FORECASTED INCOOE STATEl2lNTS OF GORA1(lPUR UNIT 1/

INCLUDING BOTH CURRENT PLANT AND EXPANSIONPROJECT

Fiscal Year Ending March 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

(Thousands of Metric Tons)

Volunc 2/Uea Proction- 163.2 171.4 171.4 225.4 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3Percentage of Capacity22 90% 95% 95% 71% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95%Urea Sales 163.2 171.4 171.4 220.4 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3 299.3

Income Statement (Millions of Rupees)

Gross Sales3/ 137.6 144.5 1-44.5 185.8 252.3 252.3 252.3 252.3 252.3 252.3 252.3 252.3 252.3 252.3 252.3 252.3Less: Excise Duty 12.2 12.9 12.9 16.6 22.4 22.4 22.4 22.4 22.4 22. 4 22.4 22.4 22.4 22.4 22.4 22.4Net Sales 125.4 131.6 1.6 6 l9:9 22 229.9 229.9 229.9 229.9 229.9 2 2 29.9 9. 2

Production Costs-'Naptha 17.8 18.8 18.8 24.7 32.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8 32.8Coal 6.1 6.4 6.4 7.8 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5Power 21.7 22.8 22.8 29.9 39.6 39.6 39.6 39.6 39.6 39.6 39.6 39.6 39.6 39.6 39.6 39.6Consumable Stores and Supplies 12.7 13.3 13.3 16.8 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3Maintenance Materials 3.6 4.0 4.3 6.o 7.5 8.1 8.7 9.3 10.0 10.5 11.2 11.8 12.4 13.2 14.0 14.8Salaries and Wages 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0Freight and HandLing 4.1 4.3 4.3 5.6 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5Selling and Adninistrative Expenses) 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5General Overhead Expenses ) 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6Depreciation 23.5 23.5 23.5 28.1 32.7 32.7 32.7 32.7 32.7 32.71/ l3.13 / 13.2 13.5 13.5 13.5 13. 5

510 77 =?211. 137.0 160 16.6 7 2 i7 1715i OI3-.1 153.o 154-.7 15 5 15- -7 71

Opt Profit 7 i 32.2 60.9 W3 397 9T ; 779 7 761 72 7. 7 72.80tbr IiiE s6/7 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0Less: Interest on:

Short-term Debt @ 9% 1.2 1.2 1.2 1.8 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1G.O.I. 7% Lon 7/ 10.6 9.5 8.2 6.9 5.6 4.2 2.9 1.6 0.3 - - - - - - -

G.O.I. 81A Loani8/ - - - 4.7 6.3 5.9 5.3 4.7 4.1 3.6 2.8 2.2 1.5 0.9 0.3

Income before Taxes 7.0 17 .viUi149.1 05.7 72.8 7 272.9 72Less: Taxes 9/ _ _ _ _ _ - 15.0 18.5 26.8 27.1 36.9 36.9 36.7 36.7 36.5 36.2

Net Profit 7.0 10.7 11.7 19.8 47.9 49.1 35.4 33.2 26.1 26.3 36.0 35." 35.9 35.7 35.7 35.5

1/ All projections have been made in constant 1971 prices.7/ Full Capacity is 33D days full production per year; 95% Capacity is 315 days production per year3/ Sales to Distributors at a delivered price of Rs 843/ton.I5I As detailed in Annex 13; except that maintenance costs have been escalated over the period to reflect increasing

maintenance requirements as the plant ages.5/ By FT 1982 the existing plant will be substantially depreciated.3/ Includes rent received from townsite.7/ Two installments (including some prepayment) has been made on the existing G,O.I. 7% debt. The remainder is assumed

to be repaid in 8 equal installments of Rs 19 million over the period FY 1972-FY 1980.8/ The 8&% G.O.I. Loan for the expansion project is assumed to be repaid in 10 annual installments following a 3 year

grace period for each annual disbursement.9/ Since taxes are paid on a corporate basis, any tax calculations for an individual division is nominal . The tax

calculations (see Annex 16, Page 3) have been made according to taxation laws in India under the assumption thatthe Gorakhpur unit is a separate corporate entity.

Industrial Projects DepartmentNovember 1971

FCI: GORAKHPUR EXPANSION PLANT

FORECASTED INCOME STATEMENTS OF GORAKHPUR UNIT-(EXPANSION PROJECT ONLY)

Fiscal Year Ending March 31 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Volume (Thousands of Metric Tons)Urea Production 54.0 127.9 127.9 127.9 127.9 127.9 127.9 127.9 127.9 127.9 127.9 127.9 127.9

Percentage of Added Capacity34/ 4o% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95%

Income Statement3/

Gross SaleBs 41-3 107.8 107.8 107.8 107.8 107.8 107.8 107.8 107.8 107.8 107.8 107.8 107.8Less: Excise Duty 3.7 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6Net Sales 37.6 98T.2 9F 98.2 9h.2 9 7 YW7 W 2 9b.2 9 ;

Produc tion CostsNapth a 5.9 1-4.0o 14.0 1.4.0 14.0 14.0 1.4.0 14.0 14.0 14.0 14.0 14.0 14.0Coal 1.4 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1Power 7.1 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8

Consamable Stores and Supplies 3.5 8.0 8.0 8.0 8.0 8.o 8.0 8.0 8.0 8.0 8.0 8.0 8.0Maintenance Materials 1.7 2.5 2.9 3.2 3.5 3.8 4.1 4.4 4.7 5.0 5.3 5.6 5.9Freight and Handling 1.3 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2Depreciation 4.6 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2

E 57.5 3g P7 77U 7r 5 7T 59.0 9 59.6 79.9 02Operating Profit 12.1 4 Uii 407 4 0.4 FE7 5 8 5. 0

Interest on:Short-term Debt @ 9% o.6 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0 9 0.9 0.9 0.9Long-term Debt @ 8LAJ 4.7 6.3 5.9 5.3 4.7 4.1 3.4 2.o 2.2 1.5 0.9 0.3 3

Incose before Taxes 7;7 3772 v 3 35 T 34T 357 3 .1 1T e l 71 ;7T

less: Taxes-31 - 4.4 7.4 15.2 15.5 25.3 25.4 25.4 25.8 25.8 25.8

Net Profit 6.8 34.2 34.2 30.1 27.4 19.9 20 .0 10.5 10.7 11.1 11.U 11.3 11.3

1/ An incremental income statement, with revenues, costs and taxes being the difference between those for the expanded Gorakhpur facilities vis-a-vis those for existing Gorakhpur facilities.7/ Added annual capacity for 330 days per year is 134,000 tons of Urea; 95% Capacity is 315 days per year operation.'/ These represent the additional taxes payable by the division as an entity, with the expansion project over and above those taxes payable by the existing

plant without the expansion project. (See Annex l4, Page 3) Note: Tax holiday and development rebate allowances for the project provide asaving in taxes of RslO.1 million, in FY1977.

Industrial Pro jects DepartmentNovember 1971

FOI: GORAKHPUR EXPANSION PROJECT

INTERNAL ECONOMIC AND FINANCIAL RATES OF RETURN 1/

INTFRNAL 7J¶RBCIAL RATES OF RETURN INTERNAL ECONOMIC 2/

(after taxes) RETVRN _ /

EXISTING PLANT EXPANSION PROJECT EXPANDED PLANT EXPANSION PROJECTCASE A (BASE CASE)

With Qperating Efficiency @ 95% Capacity

(a) Base Case 8.4 29.8 11.3 19.2

(b) With 10% Increase in Operating Costs 6.9 263 9.5 15.0(c) With 10% Decrease in Sales Price 5.7 23. 8.5 12.5

(d) Combination of (b) and (c) 3.1 20.8 6.4 7.4(e) A 15% Capital Cost Over-run and a

!. year delay in start-up of the project n/a 20.0 10.8 12.9(f) Six month delay in start-up of project n/a 26.1 11.2 17.7

(g) Ccmbination of (c) and (f) n/a 20.5 8.4 12.1

CASE B

Vt'h Ou- zt._ng Efiiiency @ 90% Capacity

(a) Base Caec 8.0 28.0 10.9 18.0(b W:th 114% Increase in Operating Costs 6.3 24.7 9.1 13.9

(c, W`th 1C% Jecrease in Sales Price 5.0 21.6 8.1 11.5(a' Ccvibins:'nn of (b) and (c) 2.6 19.2 6.2 6.5

(C. h 15% CGviotal Cost Over-run and a1 year delay in start-up of the project n/a 19.0 10.6 11.9

(f') Six month delay in start-up of project n/a 23.7 10.8 16.3(g) Combination of (c) and (f) 18.7 8.0 10.3

CASE C

With OperatingEffciency @ 85% Capacity

(a) Base Cas 7.7 25.4 10.4 16.4

(b. Tfith 10^ Increase in Operating Costs 5.9 23.1 8,8 12.7

(c) fDith lO' Vscrease in Sales Price 5.1 19.4 7.9 9.8(d) .orrinat.1nn of (b) and (c) 2.2 18.1 6.0 5.8

(e) A 15% Cspital Cost Over-rtun and a1 year delay in start-up of the project n/a 18.2 10.1 10.8

(f) Six montlh delay in start-up of project n/a 22.2 10.3 14.9q

(g) Combination of (c) and (f) 17.8 7.8 8.8

1/ See Assomptions and Comments on Sensitivity Analysis on Pages 2, 3, and 4 of the Annex.7/ The Economic Returns of the existing and overall expanded plant are discussed in paragraph 11 on page 4 of the Annex.August 4, 1971

AWEX 15PAGE2

ASSUKPTIONS USED IN WNPUTINO INTEDRAL FPNMACIAL AND ECONOMICRATES O RETUR°N

1. The Base Case assuemd 95% Capacity Utilization (or 315 full operating days/yser), before and after expansion, as aaussmd in the financialprojections. Economic and Financial rates of return were computed for the existing plant, and expanded plait as well as on the expansion projectto place the project in its correct perspective and clearly indicate its effects of improving the returns and adding staoility to theGorakhpur unit. The computations are made strictly on the basis of cash flow streams.

2. Urea Production for the different production levels are sumsarized below:

Output at Various Production Levels

e 95% Capacity Utilizxtion @ 90% Capacity Utilization 6 85% Capacity Utilization(315 days/year) (300 dayc/year) (265 days/year)

(in thouswmde of netric tons)

Existing Plant 171 162 152Epansion Projtect 128 120 10lExpaided Plant 299 282 260

3. Basic Inpnts for 3ase Case A were as follows:

Description Financial Return Eccnoein Ieturw

Selling Price of Urea Rs 743/ton F.O.B. Oorakhpur Rs 557.5/ton FPO.B. Gorakhpwr ($65/ton laded cost

Calcutta, plus Rs 70/ton handling and freightcharges)For Cases(c) the price is reduced toRe 502/t!n ($57.5 plus Rs 70)

Raw Material Coits (as detailed in Annex 13)Raptha Rs 233/ton Re 220/ton (Rs 233/tin less Rs 13/tsn excise tan)Coal Rs

67.5/ton Rs

64/ton (Rs

67.5/ton less Rs 2.5/ton taxes)

Power Rs 9l1d5 Re 81/ton (R. 91/5M lnes Rs 10/nWH taxes: Note thinremains high oy Intermational standards)

Other Production Inputs (as detailed in Annex 13) As detailed in Annex 13. (The financial costs areconsidered ti cissely represent econom.ic cent.)

Capital Costs for the Project:FY1977 Re 1.0 million Rs 1.0 millionFY1973 RB 23.8 million Rs 22.5 millionFY197b Re 75. million Rs 65 2 millionFP11975 Be 14.,nillion Rs13.5 millionTOTAL Re 114.5 million (Rs 120 million less Rs 5.5 million is 102.2 million (Rs l11.5 million less Rn 12.3 illicn

in Interest charges) in duties aid taxes)

eAssumed Construction period of 30 months (See AnMx 10)

Cepital Ccst for the Existing Plant: (eased spon actual expenditure schedules)P11926 Re 83.3 million (includes smail expenditures

made FY62-64) RE 75.5 millionFT1966 Re 115.6 million Rs 104.3 millionFll967 Rs 19.8 million is 17.9 millionFY1968 Rs 3b.1 million Rs 30.8 millionF11969 Rs 46.8 idllion Rs b2.3 millionF11970 Rs 8.7 million Rs 7.9 millionrY1971 3s 4.1 dillion Rs 3.7 millionTOT AL Rs 312.1 r'llion (Rs 347.7* million less Rs 35.3 Ts-T 2.4 riTon (Rs 312.1 million less Rs 30.0 million

million financing charges) in duties aid taxes)

arotal Capital Cont of Oorakhpur Unit as of March 31, 1971 as detailed in March 31, 1971 Quarterly Report - adjusted by removring a Rs 25 million testing andcommissioning credit applied against the capital costa.Excludee that portion of initial Working Capital financed by ahort-term debt and current liabilities.

4, The rates of return for the total Gorakhpur Unit both with and without thw expansion project, used, actual expenditure and revenue figures, for the periodFT 1965 to FT71.

5. Life of Plant: Roth the existing plant acd expansion pr.oject are assemed to continue operations through to the and of FP1987.

6. Salvage Value: No Salvage Value is asusued.

7. Taxes: For the Bass Case taxes were calculated treating the Goral-hpur Unit as a separslts t-s.oie entity. (See Annex 11.) Approximatetaxation figures were also computed for each run in the sensitivity anlyads.

Industrial Projects Dep_rtmentNovember 1971

ANNEX 15Page 3

COMNENTS ON SENSITIVITY ANALYSIS

A. Financial Rates of Return

1. The project forms an integral part of the Gorakhpur Unit, hencefinancial rates of return were calculated not only for the expansionproject, but also for the total Gorakhpur Unit, both with and without theexpansion project. The project increases financial return for the unitfrom 7!Q-8;a to a more acceptable level of lC-ll\%; with the projectitself having very satisfactory rates of return (25-30%). The expansionproject strengthens the unit by lessenirng its sensitivity to fluctuationsin sales prices and operating costs. The cause for the large disparitybetween the rate of return on the project and that on the total expandedplant is the large capital base of the existing plant (Rs 340 million),compared to the Rs 120 million capital investment required for the project.Excessive delaye in construction of the existing plant also contribute tothe lower rates of return.

2. Cases (a):- changes in the level of operating efficiency -have little effect on either the returns of the project or on the totalGorakhpur Unit, and in the unlilkely event that the plant only reaches 85%Capacity (a level lower than its current operating rate) the project stillshows very acceptable returns.

3. Cases (b):- a 10% increase in operating costs - is not likelysince the prices used in the projections are considered conservative andthe prices of the major inputs are controlled by G.O.I. The test indicatesthat the financial return is reasonably insensitive to changes in operatingcosts, which could increase considerably before endangering the rate of return.

4. Cases (c):- a 10% decrease in selling price - although not con-sidered likely is a possibility due to indirect Government control over theurea price. The test indicates that prices could decline considerably withincreased competitiQn and the project still show acceptable returns.

5. Cases (d):- a combination of cases (b) and (c) - represent aneffective decrease in the profit margin (in real terms) by some 30%. Thiscondition is considered very improbable and the test was run to indicate howthe project and the expanded plant will stand up in the face of extremelyadverse conditions.

6. Cases (e):- a 15% capital cost over-run, and a one year delay inthe start-up of the expansion project - is considered most unlikely since itis expected that the capital costs will actually be reduced below the $16.0million. The test was run to indicate how the project will stand up in theface of extremely adverse conditions.

7. Cases (f):- a six month delay in project implementation - isconsidered a more likely event than case (e).

ANNEX 1'5Pa ge l.

8. Cases (g):._ a combination of decrease in sales price and6-month delay in construction - is included as the realistic "worst t'unof events."

1. Economic Rates of Return

9. Economic rates of return computed. for the project, indlicate thata very acceptable level is attained, but that the economic rate is muchmore sensitive to changes in operating costs and price levels than the financiLlrate of return. However, under any adverse conditions considered possiole,the rate of return remains acceptable.

10. Reductions in the price of urea (CIF Calcutta), from the $65/tonused in the basic calculations to $60, and $55 reduces the economic rates ofreturn for tte project to 16% and 11% respectively. An increase of the CIFprice to $75/ton would increase the economic return to about 30%.

11. It is impossible at this time to reconstruct with any reasonable degreeof accuracy what the economic rate of the existing Gorakhpur plant was at thetime the decisions to proceed (1962-63) were taken. Nevertheless, the processdesign represented modern competitive technology at the time, although, sincethen the scaling up of annnnia plants and the use of more efficient compressorsrender the existing plant non-competitive today. While $65/ton CIF India hasbeen used in the computations for the expansion plant, a suitable long-termprice in 1962-63 for the existing plant would have been in excess of $100/ton.The book cost of the Gorakhpur plant was affected by delays in project completion,overdesign and the Indian currency devaluation in 1966 and thus, does notreflect the expected capital cost at the time the economic decision was made.IDA staff judgment is that the Gorakhpur plant was a reasonable decision nf FCIat the time, and the iniputation of currently known facts tothe Indian judgmentof 1962-63 would be misleading. It is apparent, however, from staff calculationcthat, given the investment already made in the existing Gorakhpur plant, orgiven the debt still outstanding on that plant, the production of fertilizer atGorakhpur renders a substantially positive economic rate of return to In(lia atthis time.

FCI:GORAKHPUR EXPANSION PROJECT

FINANCIAL BREAK-EVEN CHART- EXPANDED GORAKHPUR UNIT

FULL CAPAC ITY OF EXPANDED PLANT

300

250

3 75< t

-S wz m

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

8 200 4.z ~~~~~~~~~~~~~~~~~~~mmz~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I~~~~~~~~~~~~~~~ ; R t\CTiO in I

U 00a

W. ~~~~~~~~~~~~~50 r150 25

_ X

>- _

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ P~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~rn

ioo ~~~~~~~~~~~~~~...CASH BREA.-VEr

< ~~~~~~~~~~~~~~~~~~~~~~~~~25

50

0 _ _ __ _ _ 0

1975 1977 1979 1981 1983 1985 1987

Fiscal Yeairs Ending March 31 .>(LZ

xIBRD-6040

C..

I

FCI:GORAKHPUR EXPANSION PROJECT

FINANCIAL BREAK-EVEN CHART-EXISTING GORAKHPUR UNIT

FULL CAPACITY OF EXISTING PLANT--- … 7-- - -- -------- --

150 PROFII z

C.) ~~~~~~~~~~~~~~~~~~~~~~~CTI075

a. .z- . I I I I . IA

CASH BR ON~ ~~~~~~~~~~~~~~IR-63

0 Lo

wo ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~3>

_j ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0>

0 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 1971 1973 1975 1977 1979 1981 1983 1985 1987~~~~~~~~~~

jTh nraebten1971 an73197 975s iec1eul9f77 eces in79Area Price 195 98

and an increase in Naptha price.

IBRD-6039

FCI: GORAKHPUR EXPANSION PROJECT

ANNUAL FOREIGN EXCHANGE SAVINGS AT 95% CAPACITY

EXISTING FACILITIES EXPANSION PROJECT AFTER EXPANSION

Quantity Annual Amount Quantity Annual Amount Quantity Annual Amount'000 tons US$ Million '000 tons US$ Million '000 tons US$ Million

Gross Foreign Exchange Savings

Urea (@ $65/ton) 171 11.1 128 8.4 299 19.5

Less Foreign Exchange Costs

Spares and Consumable Stores 0.3 0.2 0.5Naphtha(@ $12/ton) 1/ 80.7 1.0 60.2 o.6 140.9 1.6

Depreciation 2/ 1.6 0.7 2.3

Interest on Foreign Debt 3/ 0.8 0.4 1.2

Total Foreign Exchange Costs 3.7 1.9 5.6

Net Foreign Exchange Savings 7 3-9w _ ~ ~ ~ ~ ~ ~ ~~~~Z= z

Local Currency Costs (-i].3io;is of Erpees)

Total Operating Costs4/ 110 55 165

Less Duties 2 1 3

Plus Interest on Local Debt3- 3 3

Plus 10% on Equity 10 5 15

Total Annual Costs im 59 _gr

Less Foreign Exchange Costs 51 28 14 42

Less Additional Freight on Imported Urea- 9 7 16

Net Local Currency Costs _97 122

Net Local Currency Costs dividedby Net Foreign Exchange Savings 11.4 Rs/$ 5.8 Rs/$ 8.8 Rs/$

1/ Naphtha is allocated a foreign exchange cost of $12/ton, the same cost as imported crude, sincenaphthais a by-product of refinery operation.

2/ Based upon actual foreign exchange component of the capital investment in the existing plant and

on $8.3 million foreign exchange of the project. Depreciation assumes straightline, over 12 years.

3/ Assuming an Interest Rate of 8o0 on foreign funds needed to fund existing plant (Rs 143 million

equivalent), and on the US$ 9.0 million foreign debt for the expansion project. Interest on local

debt is 7% on Rs 77 million for existing plant.

h/ Both local and foreign inclusive of depreciation.

5/ Assuming the costs of handling and freighting urea from coapt to market is Rs 70/ton, and

- distribution costs from Gorakhpur to market averages Rs 25/ton.

Industrial Projects DepartmentAugust 4, 1971

FCI: GORAKRPUR EXPANSION PROJECT

FORECASTED SOURCE AND APPLICATIONS STATEMENT OF GORAKHPUR ElNIT

Fiscal Year Ending March 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

SOURCE OF FUNDS (Millions of Rupees)

Incoim befbre Tax and InterestCurrent Operations 18.8 21.4 21.1 21.1 20.5 20.3 20.0 19.1 19.3 1Y.1 30.3 37.y 31.3 3u.u 38.3 35.8Exp.inLon - - - 12.1 41.4 41.0 40.7 40.4 40.1 39.8 39.5 39.2 38.9 38.6 38.3 30.0PlU Dwreciation 23.5 23.5 23.5 28.1 32.7 32.7 32.7 32 . 32.7 32.7 13.1 13.2 13.5 13.5 13.5 13.5

Cash Omoerated yr operations 42.3 44.9 44.6 61.3 94.6 94.0 93.4 92.0 92.1 y1.6 YtU.Y YU.3 09.7 oo.9 66.1 2 7.3Increae in Equity2/ 2/ 0.4 9.1 29.4 6.1Increase n Long-Ter Debt- 3/ 1 9.1 10.0Increase in Shcrt-Term Debt_/ V 3.2- 7.6 2.0Increase in Current Liabilities (3.4) 2.0 1.6

TOTAL ±47.1 69.3 123.1 87.0 7g2 W 77U 97 9r27 5 76 3 89.7 88,9 . , 73

A1PLICATION OF FUNDS

Optimization and EquiPment Replacemnt5/ 4.0 - - _ 0.5 - - _ 0.5 - 2.5 2.0 2.0 - 2.0 2.0Eapantlon Projiect:!tEquiprt And Plant 6.5 415.0 4.0Erection Commissioning & Civil Works 0.2 10.0 4.5Freight, Duties and Taxes 2.1 15.8 1.4Licenses, Desigi, Engineering ad Supervision 1.0 15.0 4.5 1.3Interest during Construction - o.6 3.2 1.7

Sub-Total 1.0 24.4 78.5 12.9

Interest on:Short-Tsre Debt 1.2 1.2 1.2 1.8 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1G.O.I. Long-Term Debt 0 7% 10.6 9.5 8.2 6.9 5.6 4.2 2.9 1.6 0.3 - - - - - - -G.O.I. Long-Term Debt 0 8S - - - 14-7 6.3 5.9 5.3 4.7 4.1 3.6 2.6 2.2 1.5 0.9 0.3

Amortization of Long-Tern Debt:0.0.1. 7a Loan7/ 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 4.0O.O.I. 8 Loan8/ 0.1 1.7 6.6 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.4 5.8 0.9

3/ 9/10/ l0/Increase in Current Assets 3.9 10.3- 6.1Taxes - 15.0 i8.5 26.8 27.1 36.9 36.9 36.7 36.7 36.5 36.2

TOTAL 39.7 54.1 106.9 55.7 41.3 37.8 51.8 53.4 45.3 40.1 51.8 50.7 4°.8 47.1 46.7 41.2= = = = ==== = = = = =

Annusl Cach Surpluses 7.4 15.2 16.2 31.3 56.9 56.2 41.6 39. 46.8 51.5 3Q.7 3°.6 300 h .:.R 11. 1±6.1

Debt Service Carerage-I 1.4:1 1.5:1 1.6:1 1.9:1 2.7:1 2.5:1 2.1:1 2.1:1 3.6:1 5.0:1 4.4:1 4.5:1 4.8:1 5.0:1 6.3:1 17.0:1

V/ All projections are in constant 1971 prices.2/ Debt snd Equity for the project is put in the ratio of 10,6 :Debt Inflow in Pf72 includes Rs 4 million for optimization program.2/ Nomenal changes to adjust Working Capital position from that shaon on Actual 7Y1971 Balance Sheets to that indicated as required in Annex 8.11/ increases needed as indicated in Annex 8.3/ Includes optimization program underway plus major equipment replacement to existing plant as it ages.

B/ based upon critical path schedule developed for the projeet ad assuming start of engineering in early 1972.x/ xisting G.O.I. debt outstanding is aSsUed to be amortized over 8 years.

/ Following standard .0.1. practice, each annual disburseoent of the G.O.I. Loan for the project is assused to be a separate lon, with 3years grace ad 10 year repayment schedule.9/ Increase in spare parts for the project, Rs 2.3 million.1O/ Increases in acwmunts receivable and finished product ienrtories.11/ Net Cash Generation after taxes, including servicing of short-term debt.

Industrial Projects DepartientNovember 1971

FCI: GORAKHPUR EXPANSION PROJECT

FORECASTED BALANCE SHEET OF GORAKHPUR UNIT

Fiscal Year Ending March 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

ASSETS (Millions of Rupees)1/

Current Assets

Cash asd Equivalents 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6Receivables: Trade 12.6 12.6 12.6 16.6 21.9 21.9 21.9 21.9 21.9 21,9 21.9 21.9 21.9 21.9 21.9 21.9

Other 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4,3 4.3 4.3 4.3Inventories 31.6 31.6 31.6 37.9 38.7 38.7 38,7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7 38.7

Total Current Assets 49.1 49.1 49.1 59.4 65.5 65.5 65.5 65.5 65.5 65.5 65.5 65.5 65.5 65.5 65.5 65.5

Transfers to Read Office- 7.6 22.8 39.0 70.3 127.2 183.4 225,0 264.4 311.2 362.7 401.8 441.4 481.3 523.1 564.5 610.6

Fixed AssetsCross Value 338.8 363.2 441.7 454.6 455.1 455.1 455.1 455.1 455.6 455.6 458.1 460.1 462.1 462.1 464.1 466,1Depreciation 96.9 120.4 143.9 172.0 204.7 237.4 270.1 302.8 335,5 368.2 381.3 394.5 408.0 421.5 435.0 448.5

Net Fixed Assets 241.9 242.8 297.8 282.6 250.4 217.7 185.0 152.3 120.1 87.4 76.8 65.6 54.1 40.6 29.1 17.6

TOTAL ASSETS 298.6 314.7 385.9 412.3 443.1 466.6 475.5 482.2 496.8 515.6 544.1 572.5 600.9 629.2 659.1 693.7

LIABILITIES AND CAPITAL

Current LiabilitiesAccounts Payable Accrued Expenses,and Security Deposits 6.7 6.7 6.7 8.7 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3 10.3Short-Term Debt 13.6 13.6 13.6 21.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 73.2Current Portion of Long-Term Debt 19.0 19.0 19.1 20.7 25.6 26.5 26.5 11,5 7.5 7.5 7.5 7.5 7.4 5.8 0.9 -

Total Current Liabilities 39.3 39.3 39.4 50.6 59.1 60.0 60.0 45.0 41.0 41.0 41.0 41.0 40.9 39.3 34.4 33.5

Long-Term 9ebtC.O.I. (Existing) @ 77. 137.0 118.0 99.0 80.0 61.0 42.0 23.0 4.0 - - - - - - - -C.0.I. (Expansion) @ 8½7% 0.6 15.9 65.0 74.9 73.2 66.6 59.1 51.6 44.1 36.6 29.1 21.6 14.1 6.7 0.9

Sub-Total 137.6 133.9 164.0 154.9 134.2 108.6 82.1 55.6 44.1 36.6 29.1 21.6 14.1 6.7 0.9

Less: Current Portion of:Existing 7% Debt 19.0 19.0 19.0 19.0 19.0 19.0 19.0 4.0 - - - - - - -Expansion 847% Debt - - 0.1 1.7 6.6 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.4 5.8 0.9

Net Long-Term Debt 118.6 114.9 144.9 134.2 108.6 82.1 55.6 44.1 36,6 29.1 21.6 14.1 6.7 0.9 -

EquityShare Capital 105.2 134.3 143.7 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149 8 149.8 149.8 149.8Reserves and Surpluses:

Development Rebate - - - - 36.0 51.1 57.6 57.6 57.6 57.6 57.6 57.6 57.6 57.6 57.6 57.6Earned Surplus 35.5 46.2 57.9 77.9 89.6 123.6 152.5 185.7 211.8 238.1 274.1 310.0 345.9 381.6 417.3 452.8

Total Equity 140.7 160.5 201.6 227.5 275.4 324.5 359.9 393.1 419.2 445.5 481.5 517.4 553.3 589.0 624.7 660.2

TOTAL LIA31LITIES ANQD CAPITAL 298.6 314.7 385.9 4t2.3 443,1 46G.6 475.5 482.2 496.8 515.6 544.1 572.25 600.9 629.2 659.1 693.7TOTAL~~~ ~ ~ ~ LIBLTE AN CAIA .9 .. 6 4 ao. 31 6

Current Ratio 1.2:1 1.2:1 1.3:1 1.2:1 1.1:1 1.1:1 1.1:1 1.5:1 1.6:1 1.6:1 1.6:1 1.6:1 1.6:1 1,7:1 2.0:1 2.0:1Currest Assets plus Cash SurplusTransfers/Current Liabilities 1.4:1 1.8:1 2.2:1 2.6:1 3.3:1 4.1:1 4.8:1 7.3:1 9.2:1 10.4:1 11.4:1 12.4:1 13.4:1 15.0:1 18.3:1 20.2:1Net LT Debt/Total Equity 46:54 42:58 42:58 37:63 28:72 20:80 13:87 10:90 B:92 6:94 4:96 3:97 1:99 0:100 0-100 0 100Outstanding LT Debt/Share Capital 57:43 54:46 53:47 51:49 47:53 42:58 35:65 27:73 22:78 20:80 16:84 13:87 9:91 4:96 0:100 0:100

1/ Adjusted to correspond with Working Capital Requirements as detailed in Annex 8.2/ Corresponds to Cash Surpluses generated from operations. These surpluses will in practice be transferred to the FCI Head Office AccOu,nt to finance other expansion programs and/or

service debt of the less profitable divisions. For this reason a conservative approach has been taken. and no income hal been envisaged accruing to the Unit from these cash s-:rpluses-

Industrial Projects DepartmentNovember 1971

MAP I

70' \ ,J' ,. . 60 90°

;>,, ' u. ~~~~~INDIAAFGHANISTAN . RSN N NI

,e /.t^""r.itliM <o 2 PRESENT AND PROPOSED MAJOR FERTILIZER PLANTS

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