D _11ammi ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 6569

PROJECT COMPLETION REPORT

BANGLADESH - ASHUGANJ FERTILIZER PROJECT

(CREDITS 527-BD AND 527-1-BD)

December 30, 1986

Industry Department

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

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ABBREVIATIONS

ADB - Asian Development BankAFCC - Ashuganj Fertilizer and Chemical CompanyBCIC - Bangladesh Chemical Industries CorporationBFCPC - Bangladesh Fertilizer, Chemical and Pharmaceutical CorporationEPIDC - Eist Pakistan Industrial Development CorporationGC - (,eneral Contractor

GOB - Government of the People's Republic of BangladeshKfW - Kreditanstalt fur WiederaufbauMAF - Management Assistance FirmOAF - Operation A';sistance firmODM - Ministry of Overseas DevelopmentTA - Technical Adivsorstpd - tons per daytpy - tons per yearUSAID - United States Agency for International DevelopmentZFCL - Zia Fertilizer Company Limited

CURRENCY EQUIVALENTS Taka Eouivalent of US$1

At Apprc sal December 1974 7.5Intervening years (Average) 1974/75 8.0

1975/76 Ii.51976/77 14.71977/78 15.31978/79 15.31979/80 16.4

Mechanical Completion Year (Average) 1980/81 16.51981/82 17.11982/83 24.41983/84 25.01984/85 26.0

Completion Report Year (Average) 19R5/86 30.5

WEIGHTS AND MEASURES

I metric ton = 1,000 kilogram1 pound 0.453 kilogram

FISCAL YEAR

July 1 to June 30

FOR OMCIAL USE ONLYrHE WORLD SANKWashington, DC 20433

USA.

O(ke of overN-CanefOp.uatvw Evaklrtmn

December 30, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report: Banglad&h - Ashuganj FertilizerPro ject (Creuits 527-BD and 527-1-BD)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report: Bangladesh - Ashuganj Fertilizer Project (Credits 527-BDand 527-1-BD)" prepared by the Industry Department. Linder the modified systemfor project performance auditing further e\aluation of this project by theOperations Evaluation Department has not been made.

Attachment

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

FOR OMICrAL USE ONLYPROJECT COMPLETION REPORT

BANGLADESH - ASHUGANJ FERTILIZER PROJECT(CREDITS 527-BD AND 527-1-BD)

TABLE OF CONTENTSPage No.

P ref ace ..................................... i

Basic Data Sheets .* * * .**.,* .**... ,. ii

Highlights ....... *. *.*....*........*.....*******.....*..** v

I . I NTRODUC T ION .I ....

II. PROJECT BACKGROUND .. .* *6* 6 ...... ...... 2

A. Project Identification, Preparation, Appraisal,Approval and Credit Effectiveness ................. so. 2

B. Project Description and Objectives **sees ....... 4

III. PROJECT IMPLEMENTATION AND MANAGEMENT..................... 4

A. Achievement of Project Objectives............ 4B. Pro ject Scope S.....*....... 5C. Project Ownership and Management ......... .... 5D. Manpower Development and Training.ses.......... ....... 5E. Performance of Consultants and Engineering Firms ....... 6F. Procurement and Performance of Suppliers ......aa....... 8G. Project Implementation Schedtile. ......... ... 9H. Capital Costs, Financing and D)ishursements .......11)o.. 1u

lV. OPERATING PERFORMANCE .................... e, .......... ..... 13

A. Commissioning and Start-up ...................... 13B. Build-up of ProductionI ...... 6 .......................... 13C. Product Dispatch ....................................... 14

V. FINANCIAL PERFORMANCE . ................ ... ........... 14

A. Fertilizer Pricing .................. . .... ............ 14B. Financial Rate of Return .. ................ * ..... ....s. 15C. Financial Results ........ ,, , ..................... . 16

VI. ECONOMIC PERFORMANCE ....................... ...... .. ... 18

A. Economic Rate of Return ....... 18B. Foreign Exchange Savings .................. of ........... 18C. Technology Transfer .................... .............. 18D. Environmental Aspects ............ . ..... .. 6 ............. 18

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

TABLE OF CONTENTS (Ccnt'd)

Page No.

VII. IDA ROLE .................... 19

VI .. CONCLUSIONS AND LESSONS LEA.RNE') .......................... 19

ANNEXES

1- Organization Chart of ZFCL.............. 222 - IDA-FinanceJ Procurement by Country of Origin ...... 233- Project Implementation Schedule............... 244- Project Cost Disbursement Schedule ................ 255- Project Cost Financing Plan. ............ .... 266 - Operating Performance ....... *****.............. .............. 277 - Assumptions for Financial and Economic Analysis ........... 298 - Production Cost Summary ..... s............o.... .......... . 309 - Summary of Financial and Economic Output Prices ........... . 3110 - Cash Flow for Financial Rate of Return ................... 3211 - ZFCL Financial Statements .o.6 ... .6. ............... so .... 3312 - Cash Flow for Economic Rate of Return ...................... 3513- Comments Received from the Government ...................... 36

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BANGLADESH - ASHUGANJ FERrILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

PREFACE

1. On January 28, 1975, IDA approve(d a credit of UIS$33.0 millionequivalent to the Government of the People's Reptublic of Bangladesh (GOB)to assist in financing of the Ashuganj Fertilizer Project (Credit 527-BD).On June 7, 1979, IDA approved a stpplementary credit of US$29.0 millionequivalent to GOB to assist it in meeting the substantial toreign exchangec7ost overrun due to the delays and technical problems during projectimplementation (Credit 527-1-B1)). The Project was implemente. by theAshuganj Fertilizer and Chemnical Company (AFCC), later renamed Zi.aFertilizer Company Limited (ZFCL).

2. The plant was mechanically completed in October 1981 butcommercial operations could start only by July 1, 1983 due to equipmentproblems. The amended closing date of the credits was June 30, 1985. INI)staff visited Bangladesh in May 1985 for the preparation of the ProjectCompletion Report (PCR) anid had discuissions with the Cov rnment, ZFCI. andthe Bangladesh Chemical Induistries Corporation (BCTC), which is a publicsector holding company. This report reflects the findings of this missionas well ar a review of the project files and related doctumerts. Commenitson the draft report were received from the Government and were taken intoaccotunt in finalizing the PCR. The Covernment ' s comments are attach2d asan Annex.

ihis pro, ect has not been aubaitcu b the Op)erations EvaluationDeuartment.

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BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMIPLETION REPORT

BASIC DATA SHEET

KEY PROJECT DATA(US$ million)

As ofJune 30, 1986

original Amended Disbursed Cancelled Repaid Outstanding

Credit Nos.527-BD &527-1-BD 33.0 62.0 61.7 0.3 0.9 60.8

CUJMULATIVE CREDIT DISBURSEMENTS

Fiscal Year Planined Amended Actual

1975 4.0 - -1976 12.0 3.4 3.41977 20.0 7.4 7.41978 30.0 16.1 16.11979 33.0 29.8 28.n1980 52.0 46.61981 62.0 59.01982 62.0 59.0a/1983 62.0 60.21984 62.0 60.81985 62.0 61.4b/1986 62.0 61.7c/

a/ IDA disbursements durirng this year were offset by reimbursement fromthe OPEC Fund.

b/ Although the formal closing date of the credits was June 30, 1985, theborrower was allowed co submit final disbursement applications up toDecember 31, 1985. As an exception, disbursement applicationsamounting to UJS$0.3 million were also processed until March 31, 1986.

c/ An unutilized amount of US$0.3 million was cancelled on March 31,1986.

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PROGRAM/PROJECT DATA

Credit DatesO7ri-ginal Supplementary527-BD 527-1-BD Actual

Board Approvals January 28, 1975 June 07, 1979 -

Credit Agreements February 11, 1975 June 18, 1979 -

Effectiveness Dates December 19, 1975 Auguist 1, 1979 -Credit Closing Dates December 31, 1982 June 30, 1985 June 30, 1985Date of MechanicalCompletion March 1978 September 1980 October 1981

Completion Time(in months) 48 78 91

Time Overrun (C) - 62% 90%n(in months) 30 43

Date of Start-up ofOperations July 1978 March 1981 Tuly 1, 1983

Total Project Cost(US$ million) 249.4 452.7 433.3

Cest Overrun (Underrun) (x) - 81.5 73.7Financial Rate of Return (M) 13.8 1].( 1.6Economic Rate of Return (t) 21X2 1(.0 7.5

Mission l)ata

Mission Mllonth/ No. of No. of Man- ReportType Year Weeks Persons Weeks D)ate

identification 07/73 0.4 1 0.4 07/73Preparation 05/73 1 3 3 05/73Preappraisal 09/73 1.4 - 2.8 09/73Appraisal 03/74 3 3 9 04/74Supervision 10/75 1 1 1 11/75Supervision 01/76 1.4 1 1.4 02/76Supervision 04/76 0.7 2 1.4 05/76Supervision 05/76 0,7 2 1.4 05/76Supervision 09/76 2 1 09/76Supervision 12/76 ().5 1 0.5 12/76Supervision 06/77 1 2 2 07/77Supervision 07/77 0.7 2 1.4 08/77Supervision n7/77 1 1 08/77Supervision 09/77 1 1 1 10/77Supervision 12/77 1.7 2 3.4 12/77Supervision 02/'a8 1.5 2 3 02/78Supervision 02/78 3 1 3 03/78Supervision (4/78 2 2 4 05/78Supervision W>78 H.' 1 ').5 (5/78Sapervision 07/78 I 08/78

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Mission Month/ No. of No. of Man- ReportType Year Weeks Persons Weeks DateSupervision 09/78 0.4 1 0.4 09/78Supervision 11/78 0.1 1 0.1 11/78Supervision 11/78 2 2 4 01/79Supervision 03/79 2 1 2 03/79Supervision 04/79 1 1 1 04/79Supervision 07/79 0.7 2 1.4 07/70Supervision 08/79 1.1 2 2.9 09/79Supervision 12/80 0.7 1 0.7 12/80Supervision 12/80 1.8 1 1.8 01/81Supervision 11/81 0.7 2 1.4 01/82Supervision 12/81 3 2 6 01/82Supervision 08/82 1.4 1 1.4 11/82Supervision 09/82 o.7 1 0.7 10/82Completion Report 05/85 1.4 3 4.2 07/86

OTHER DATA

Original Plan Actual

Borrower People' s ReŽpubl.ic of Pe ople' S Re phi I i f

Bangladesh Bangladesh

Executing Agenicy Ashuganj Fertilizer and Ashugranj Fertilizer andChemical. Company Chemi cal. Companv/Zia

Fertili,.er Comp.layLiii t e(i

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BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

HICHLIGHTF

1. Chemical fertiLizer is a major input to agriculture, which is oneof the most important economic sectors in Bangladesh. Further increases infoodgrain production to reach and maintain self-sufficiency in food wouldhave to be achieved mainly through continuation of the present soundpolicies and programs in agriculture and intensive cultivation requiringfurther increases in fertilizer application. In this context, theGovernment has encouraged domestic production of nitrogenous fertilizers,taking advantage of local natural gas reserves, to reach self-sufficiencyin nitrogenous fertilizer supplies (para 1.01-1.04).

2. The Project was appraised by IDA, jointly with the AsianDevelopment Bank (ADB), the United States Agency for InternationalDevelopment (USAID), and the United Kingdom's Overseas D)evelopment Ministry(ODM) in March/April 1974, following a request by the Government of thePeople's Republic of Bangladesh (GOB). The Project was to he implementedby the Ashuganj Fertilizer and Chemical Company (AFCC), later renamed ZiaFertilizer Company Limited (ZFCL). The Board approved an IDA credit ofUS$33.0 million equivalent to GOB in January 1975. The credit becameeffective in December 1975. Several other multilateral and bilateraldonors also participated in financing the Project. When the Projectencountered substantial foreign exchange cost overruns due to delays inproject implementation and technical problems, the Board approved in June1979 a supplementary credit of US$29.0 million equivalent (paras2.02-2.03).

3. The Project was designed to produce 528,000 tons per year (tpy)of uirea and 305,250 tpy of intermediate ammonia. The Project uses theindigenous natural gas as feedstock and fuel (para 2.06-2.07).

4. The Project was owned by AFCC/ZFCL, who trained about 491people. The project facilities were mechanically completed in October1981, 43 months behind the original appraisal schedula, principally due todelays in the selection of the general contractor and in procurement ofbulk materials, and the time taken in soil investigation and soilcompaction. A longer than expected commissioning period of 20 months tobring the units to full commercial operation phase, due to frequent plantshutdowns arising from technical problems, further increased the overalldelay in the start of operations to 59 months. The main changes in theprcject scope included dynamic compaction of soil to protecz. the plantagainst earthquake risks and a second power generation unit to meet thecritical plant power requirements. The performance of the foreignengineering and other consulting firms have been mixed. This was partlydue to coordination problems, division of authority between the consultantsand AFCC, and the general contractor's lack of prior experience in

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engineering and constructing plants based on the selected processes indeveloping countries. AFCC/ZFCL followed generally acceptable procurementprocedures for construction, equipment, erection and civil works. Therewere, however, serious delivery problemns in the procurement of bulkmaterials (para 3.01-3.16).

5. The total project cost was US$433.3 million compared to theoriginal appraisal estimate of US$249.4 million (74% cost overrun) and thereappraisal estimate of US$452.7 million (4% cost underrun). The overallcost overrun is mainly due to: (i) soil compaction and other unforeseenconstruction costs; (ii) storage charges for equipment; (iii) delays inimplementation, especially in testing and commissioning; (iv) the changesin construction strategies which were found necessary; and (v) the cost ofremedying the equipment defects and failures. Total financing reqlired wasmet with equity provided by GOB (42.6%), IDA credits (15.9%), and otherlong-term credits from multilateral and bilateral sources (4 1.5%) (para3.18-3.21).

6. ZFCL projects to maintain not below 90% capacity utilization(475,200 tons of urea) beginning 1986/87, and expects that the marketdemand for urea in Bangladesh will absorb such production. The financialrate of return (FRR) for the Project is now estimated at 2% and 4.8% undertwo scenarios: Case I--actual urea price which is assumed to remainconstant in the future, and Case II--urea price is assumed to have beenequal to international fob levels since the start of commercial productionin July 1983, and follow international trends in the future. The FRR wasestimated to be 13.8% at the time of original appraisal, and 11.0% at thereappraisal stage. The low FRR is mainly due to (i) the low ex-factoryurea price set by the Government; (ii) long completion delays; (iii)substantial cost overruns; and (iv) the increased cost of natural gaswithout corresponding increases in output prices. The Government's policyregarding ex-factory urea prices does not meet the understandings reachedwith IDA. This issue has been raijed with the Government on severaloccasions and also during the Project Completion Report preparationmission. Despite the adverse impact of the ielays in projectimplementation, cost overruns and the Government's outnut pricing policy,ZiFCL's financial position remains satisfactory. The estimated currentratio for FY87 and beyond is above the required level of 1.5. ZFCL has notmet the required long-term debt/equity ratio of 60:40 in FY85. It ishowever expected to become better than the required level in FY87 andbeyond. The debt service coverage ratio for FY87 and FY88 is estimated tobe 1.2 and 1.1, respectively, which is below the required level of 1.5(para 4.03-5.08).

7. The economic rate of return (ERR) is now computed at 7.5%compared to the appraisal and reappraisal estimates of 21.2% and 10.0%,respectively. The net annual foreign exchange savings to Bangladesh fromthe Project are estimated to be about US$104 million (in constant 1984/85dollars). In addition, the Project has contributed to substantial gains inBangladeshi capabilities, which would continue to be useful to thefertilizer industry in Bangladesh (para 6.01-6.04).

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8. During the various stages of the Project, IDA has werked closelywith GOB, AFCC/ZFCL and their consultants, and contributed to arrangingfinancing, evolving project implementation arrangements, identifyingproblems and in developing practical solutions. However, due toinadequacies in project preparation, general contractirng arrangements andin overall project management arrangements, the Project has sufferedsignificant delays in implementation and substantial cost overruns. Theexperience in the Project brings out the importance of (i) selecting agenerUl contractor with extensive previous experience in engineering andbuilding plants in developing countries based on the selected processes;and (ii) good project leadership to ensure successful projectimplementation (para 7.01-8.06).

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

I. INTRODUCTION

1.01 Agriculture in Bangladesh accounts for about 50% of GDP, anddirectly or indirectly for about 75% of employment and exports. In thelast few years, Bangladesh has achieved L,pressive successes inagricultural development, with foodgrain production accelerating to nearly4% per annum (p.a.), significanitly above the growth in population (2.6%p.a.). However, in spite of the 60% increase in foodgrain production abovethe 1973 level, domestic production is still short of requirements andself-sufficiency may be reached only by the end of the decade. Even thoughagricultural production has become more resilient to weather, naturalcalamities continue to affect food availability, as was seen In the lasttwo years. As a result, high levels of food imports, amounting to about2.6 million tons, were necessary in FY85. The successes achieved so farhave been mainly through the high priority given to agriculture by theGovernment of Bangladesh (GOB), and implementation of basically soundpolicies and programs.

1.02 Of the country's total geographical area of 35 mil1Lon acres andcultivable area of 23 million acres, about 22.5 million acres are alreadyunder cultivation. About half of the cultivated area is also undermultiple cropping corresponding to a cropping intensity of about 150%.Further increases in foodgrain production would, therefore, have to beachieved mainly through intensive cultivation requiring further increasesin fertilizer application.

1.03 Successive development plans have given priority in theallocation of public resources to agriculture. Quick gestation, low costinvestments have been promoted in irrigation and flood control. Thegovernment programs conltinue to provide adequate incentives to thefarmers. Subsidies in fertilizer, foodgrains and irrigation services havebeen reduced substantially, and the role of the private sector in theefficient distribution of key inputs to agriculture has been expanded. Asan important part of its agricultural program, the Government has expandedfertilizer supplies through installation of additional domestic capacityarnd rehabilitation of existing plants, taking advantage of the largenatural gas reserves providing economic feedstock for urea production.

1.04 Chemical fertilLzer consumption has grown substantiall.y since itsintroduction in Bangladesh in 1958 and is expected to continue to grow at ahigh rate. Fertilizer con,;urmption increased at an average rate of lbout12% p.a. froin 1974 to 1985 and reached abouit 1.26 million product tons inFY85 equivalent to about 59(1,000 tons of nutrients (nitrogen, phosphate andpotash). The FY85 level of fertilizer application corresponds to about26 kg per acre of gross cropped area. There are at present five fertilizerplants in Bangladesh--all owned by public sector companits - with theBangladeshi Chemical Industries Corporation (BCIC) as the holding compaty.

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In addition to Ashuganj, there are plants in operation at Ghorasal,Fenchuganj and Chittagong. The combined capacities of all the four plantsis about 1 million tons per year (tpy) of urea, 13,200 tpy of ammoniumsulphate (AS) and 152,000 tpy of triple superphosphate (TSP). The FY85domestic fertilizer production of about 800,000 tpy from the above plantswas about 63% of the total fertilizer distributed. Additionally, A 100,000tpy urea plant has been completed recently at Polash near Ghorasal withtechnical and financial assistance from the People's Republic of China(PRC). Another urea plant, equal in size to the Ashuganj plant, is beingset up at Chittagong, with IDA financing participation (Credit No. 1204-BD)along with the Asian Development Bank (ADB) and other donors.

.I. PROJECT BACKGROUND

A. Project Identification, Preparation, Appraisal, Approval and Credit(s)Effectiveness

2.01 The Project was originally conceived in 1970 by the Fast PakistanIndustrial Development Corporation (EPIDC), as part of a largerpetrochemical complex, based on the domestic natural gas resource.Following the formation of Bangladesh in 1972, the Bangladesh Fertilizer,Chemical and Pharmaceutical Corporation (BFCPC), EPIDC's successor sponsor,revised and presented the project proposal to IDA. After extensivediscussions between the Governmeint, BFCPC and IDA, it was agreed that theproject scope will initially be limited to the ammonia/urea facilities, inview of Bangladesh's resource constraints and the limited range ofpetrochemical products that can be economically produced usingBanglandesh's essentially methane based natural gas. DuriTng subsequentproject preparation missions in 1973, IDA assisted the Government and BFCPCin developing and preparing a viable fertilizer project at Ashuganj. TheProject was being prepared soon after the formation of Bangladesh as anindependent country. The struggle that led to the independence and theconsequences had left behind considerable unce:tainties in the politicalsystem and decision making capabilities. Project preparation andimplementation in such a period was not easy both for the consultants andthe financing agencies. The Project required a more than usual largecofinancing consortium and external management assistance--both of whichhad an adverse impact on. project implementation.

2.02 In view of the large financial needs of the Project, IDA alsoassisted the Government in putting together the project financing packagewith cofinancing from other donors. At the Government's request, IDAinvited, in September 1973, the following bilateral and multilateralagencies to participate in financing of the Project: the ADB, USAID, theUnited Kinglom's ODM, the Kreditanstalt fur Wiederaufbau (MfW) of theFederal Republic of Germany, the Government of Switzerland (GOS) and theGovernment of Iran (GOI).

2.03 The Project was appraised by TDA, ioinily with )NDB, USAID and ODMin March/April 1974. The Proiect entity, the Ashuiganj Fertilizer andCh.mnical Company (AFCC), was established in October I1974 to implement and

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operate the Project. The Projert entity was later renamed Zia FertilizerCompany Limited (ZFCL). The Board approved a credit (US$33.0 millionequivalent) on January 28, ;975 and the credit was signed on February 11,1975. Due to delays in meeting the conditions of credit effectiveness,including cross effectiveness with credits of the other donors, the creditbecame effective only on December 19, 1975. As a result of theimplementation delays and the technical problems, the Project encounteredsubstantial foreign exchange cost overruns and IDA assisted the Governmentin obtaining supplementary financiing for the Project,including anadditional IDA credit of US$29 million equivalent in May 1979. In additionto the original donors to the Project, the European Economic Community'sSpecial Action Fund, the International Fund for Agricultural Development(IFAD) and the Organization for Petroleum Exporting Countries (OPEC)participated in the supplementary financing. To ensure that the projectrelated activities proceed ,zithout delay or interruptions, GOB has utilizedUS$8.2 million of the proceeds of the Tenth Import Program Credit No.1194-BD and the Technical Assistance Credits No. 872-BD/1124-BD to financethe import of spares and components and plant operation assistance.

2.04 The organizational arrangements for project execution at the timeof appraisal included the following: (a) AFCC as owner and executingauthority for the Project; (b) Technical Advisors (TA), who were engaged inFebruary 1974 to assist the Government in the preparation of the Projectand AFCC during implementation; (c) an engineering firm (generalcontractor, GC) who would be responsible for design, engineering,procurement, construction, erection and commissioning the plant; and (d)the Management Assistance Firm (MAF) to provide management assistance toAFCC during both project implementation and initial operation. The Projectwas initially expected to be mechanically completed by March 1978 andcommissioned by July 1978--on the assumption that the general contractorwould have been contracted for, and would be able to start work, by June1975. However, due to delays in contracting and mobilization of theproject teams, progress was initially slow. The Project suffered furtherdelays, triggered by a number of technical and non-recurring problems, withrespect to site preparation and civil construction primarily due to seismicrisks identified during soil investigations in August 1976. Continuousdifficulties within the overall management of the Project and slowdecision-making exacerbated the adverse impact of the technical problems onthe project progress. As a result, during project implementation, itbecame necessary to adopt changes in the initial organizationalarrangements for the project execution when needed.

2.05 Materials procurement and mobilization, generally critical toproject completion, were under reduced pressure due to the above delays.The Project, however, suffered further construction delays and by December1979, overall progress achieved was only 43%. The schedules were furtherrevised and the Project progress followed the revised schedule until about1980, when material shortages especially of bulk items started to beencountered due to short ordering of several items. The Project wasmechanically completed in October 1981, about 43 months behind theappraisal schedule (para 3.17). First produiction of urea was achieved inDecember 1981, abotut 40 months behind the appraisal schedule. Major

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equipment problems and plant outages however resulted in further delays andsustained production was not achieved until May 1983. The plant washowever put in commercial operation on July ., 1983. As a result of theabove difficulties in project implementation, the Project sufferedsubstantial cost overruns. The actual project cost of US$433.3 million is74% higher than the original appraisal estimate. Following further plantrepairs and modifications in October 1984, the plants have been performingwell at close to rated capacities.

B. Project Description and Objectives

2.06 The Project, located at Ashuganj, about 60 kilometers (km) north-east of Dhaka, includes a 925 tons per day (tpd) natural gas based ammoniaplant and a 1,600 tpd urea plant along with the necessary associated infra-structure and offsite facilities and a housing colony. The Project wasdesigned to produce 528,000 tpy of urea and 305,250 tpy of intermediateammonia on a 330-day operating year basis. The Project is based on the useof natural gas from the Titas and Habiganj gas fields as the feedstock andenergy source. Thke site, located on the eastern bank of the Meghna river,had been reclaimed from the river bed through dredging and filling. Of thetotal project site area of 130 acres, about half is used for the productionfacilities and the rest for the housing colony. Even though there has beensubstantial implementation delays and cost overruns, the facilities havebeeni built essentially as originally envisaged at the time of theappraisal.

2.07 The mailL objective of the Project was to produce urea fertilizerusing indigenous natural gas, thereby reducing fertilizer imports and sav-ing scarce foreign exchange. As a major agricultuiral input, the increaseddomestic fertilizer availability would assist in increasing food productionand furthering the objective of achieving food self-sufficiency. To alimited extent, the Project has also generated some employment and upgradedprofessional skills.

III. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Achievement of Project Objectives

3.01 The Project was mechanically completed in October 1981 and placedin commercial prodaction on July 1, 1983. The total cost overrun was 73.7%over the appraisal estimate. In FY84, the first year of operation (July1983 to June 1984), the urea plant operated at an average capacityutilization of 72%. Further repairs and modifications were carried outduring the scheduled shutdown in October 1984 and the plant has since beenoperating at close to rated capacity. The Project has, therefore, achievedthe objective of providing domestic urea supplies based on locallyavailable natuiral gas, thereby, saving foreign exchange, althoughconsiderably behind schedule. The Project has buiilt up a competent workforce of 1,100 Bangladeshis and assisted in accelerating economicdevelopment in the region.

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B. Project Scope

3.02 The project facilities include a natural gas-based 925 tpdcapacity intermediate ammonia plant, a 1,600 tpd urea plant to convert theabove ammonia to prilled urea, and the related offsite and infrastruetureunits. The installed facilities are, generally, as envisaged duringproject appraisal except for the following variations. As a result of thefindings of detailed soil investigations, critical areas of the plant sitewere subjected to dynamic compaction to protect the facilities againstearthquake risks. Based on detailed analysis of the plant energy systemand the reliability of the grid power supply, it was decided to install asecond power generation unit to make the critical plant power requirementsindepende.it of the less reliable national grid.

C. Project Ownership and Management

3.03 As noted earlier, Ashuganj Fertilizer and Chemical Company(AFCC), a fully government-owned company, was established in October 1974to implement and subsequently operate the Project. The company's name waslater changed to Zia Fertilizer Company Limited (ZFCL). ZFCL organizationis shown in Annex 1. In view of the large size and technical sophistica-tion of the Project, a joint venture consisting of a US and a l!K firm wasappointed to be Technical Advisors (TA), initially to BCIC and theGovernment, and later to AFCC. The TA initially assisted AFCC in selectingand contracting for the General Contractor (GC) and later in monitoring thetechnical aspects of the Project.

3.04 To assist AFCC in efficiently implementing the Project and,later, in successfully operating it, an experienced tUS operating companywas appointed as the Management Assistance Firm (1MAF). It was envisagedthat AFCC and MAF staff would man the project team positions and overseeproject implementation and plant operation. The team was led by anexpatriate project director who was expected to be delegated full authorityand responsibility on project related matters and report directly to theAFCC managing director.

3.05 The GC was responsible for overall project implementationincluding management, engineering, equipment and material procurement,construction and commissioning management and all other services needed toprovide AFCC with a completely operating facility. Contractutally, the TA,MAF and GC had varying obligations to assist AFCC in arranging fortraining.

3.06 After the Ashuganj facilities were commissioned, the Governmentdecided to change the crganizational structure of AFCC consistent with theneeds of an operating plant. While maintaining its independent corporatestructure, the responsibility for coordinating and monitoring thefunctioning of the AFCC was transferred by the Government to BCTC. Thisrevised arrangement has been working satisfactorily.

D. Manpower Development and Training

3.07 ZFCL (previouslv AFCC) at present employs about 1,100 personsconsisting of 7 managers, 171 technical/professional suipervisors, 64 other

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supervisors, 398 skilled workers and 460 unskilled workers. Present totalstaffing compares well with the project appraisal estimate of i,200persons. Recognizing the limited technical base in Bangladesh from whichthe personnel could have been recruited, the project preparation had placedconsiderable emphasis on training. In the preparation of its trainingplan, AFCC had the advice and support of all the consultants. AFCC'straining ?olicy considered that a selected group of core personnel wasneeded to be trained intensively both within the country and abroad.Consistent with the above policy, 55 maintenance, 46 production and 40other personnel underwent intensive training. The training generallyincluded short periods of one to two months at the Bangladesh GermanTechnical Training Center to develop manual skills, followed by six to 12months of in-plant training at the Ghorasal fertilizer plant. The coretechnical personnel were then sent abroad, based on needs as identified,for further training in similar sized fertilizer plants and suppliers'manufacturing shops under arrangements made by the GC. At the suggestionof the donors, AFCC's technical staff, particularly production personnel,were trained at PUSRI's Bank financed training facilities at Palembang,Indonesia.

3.08 A significant part of the project construction was carried out byBangladeshi personnel who had been hired and trained for the purpose. AFCCbenefitted from the skills gained by these personnel during constructionthrough employment of a large part of them as AFCC's regular staff. AFCCalso set up a Training Center at the plant premises in January 1980 whichis equipped to upgrade the skills of maintenance workers. AFCC has so fartrained 350 technicians in the above training facilities.

3.09 During the project implementation period, several AFCC trainedtechnicians left the company for employment in the private sector oroutside Bangladesh, primarily the Middle East, dse to inadequate AFCC paylevels. Even though AFCC shared the concern of the ionors on the need toimprove the salary levels to minimize the loss of trainr. personnel, theGovernment could not agree to significant salary increases. AFCC has,however, introduced schemes to improve the fringe benefits and to provideperformance incentives. With the slackening of investments in the MiddleEast, migration of trained Dersonnel is, also, no longer a serious problem.

E. Performance of Consultants and Engineering Firms

3.10 As described earlier, initial project implementation arrangementsenvisaged that AFCC would engage a Technical Advisor, a ManagementAssistance Firm and a General Contractor to assist in the implementation ofthe Project and its initial operation. During implementation, it becamenecessary to adopt changes in the above arrangements. The performance ofthe consultants and the General Contractor and the changes in arrangementsduring project implementation are described below.

3.11 Technical Advisor (TA). A joint venture of a LIK firm and a USfirm was engaged in February 1974 to provide technical assistance to theGovernment in the preparation of the Project and to AFCC duringimplementation. As part of the project preparation, a soil study had beencarried out on the unfilled site, essentially to evaluate the overall site

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conditions and to facilitate preparation of the specifications for dredgingand filling. The Project had provided for detailed soil investigationsafter site preparation--to be arranged by the General Contractor (GC), toobtain all the site data needed for design and engineering. However, thisstudy brought out potential site problems under the unusual combination ofconditions not anticipated earlier both by the TA and the Bank staff, whichrequired substantial additional site preparation work. Based on experiencein neighboring countries, the project preparation had assumed substantialuse of local construction capabilities in the project implementation, whichdid not materialize due to the uncertain political and economic conditionsthat prevailed in Bangladesh during the period. This had substantialimpact on project implementation and schedules due to the needs thatdeveloped for shifts in implementation strategies and the resistance fromZFCI/GOB to such changes. The TA's technical assistance during implementa-tion was mainly in the areas of engineering and procurement and TAperformed satisfactorily in these areas. The contract with the TA expiredat the end of 1978 and was not extended since by then a major part of theengineering and procurement work had already been completed.

3.12 Management Assistance Firm (MAF). An extensive search was madeto identify an appropriate management assistance f :m to assist the Projectduring implementation and initial operation. However, the response wasvery limited due to the lack of interest of the better known manufacturingcompanies in such tasks at that time and the uncertain economic andpolitical climate in Bangladesh in that period. AFCC contracted a USfertilizer manufacturing company--with operating experience of fertilizerplants though of smaller capacity than the Project and limited projectmanagement experience, in November 1975 for management assistance duringboth project imnplementation and initial operation. The MAF personnel wereto take line positions and be fully integrated along with the AFCCpersonnel into a team that would be led by the MAF-appointed projectdirector with full autlhority and responsibility. This arrangement did notwork satisfactorily since (a) Z%CL/GOB subsequently became less supportiveof the arrangement, (b) the MAF could not gain the confidence of AFCC byestablishing their competence, and (c) AFCC was unwilling to delegate fullauthority to an expatriate manager. The MAF also could not mobilize anadequate team with substantial project implementacion experience. As aresult when the Project encountered substantial delays and cost overruns,another US firm was contracted by UISAID to review the project performanceand advise on the needed measures. The company was later hired in November1978 by AFCC to provide the project construction management services. Itwas expected that the MAF will continue to provide the rest of themanagement assistance services.

3.13 The relationship between AFCC and the MAF, however, furtherdeteriorated and, in May 1979, a Swiss consulting company along witlh anAustrian manufacturing company was hired to replace the MAF as OperationAssistance Firm (OAF) to assist ZFCL during commissioning and initialoperation of the facilities. Whil tV?re were frequent differences betweenZFCL and OAF on the quality of sonie of the OAF personnel and on the size ofthe appropriate OAF team, the arrangement worked well. As a resul-t the OAFcontinued to provide support. under extended contractual arrangement up toJune 1985.

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3.14 General Contractor (GC). Capabilities of potential firms wereevalue.ted and a short list of prequalified firms was prepared for purposesof bid invitation. A FRG firm, which had been prequalified, conveyed itsunwillingness to take up d rect project responsibility in view of its otherwork load and proposed working join:ly with a UK based firm as an alterna-tive. Based on fi:i:ther review, the British firm was prequalified on thebasis of the comlined capabilities of the two firms and waS selectedfollowing bid evaluation to take up total responsibility for projectimplementation. The GC obtained the technology for ammonia and urea from aFRG and a Dutch firm, respectively and carried out the engineering,procurement, construction and commissioning services. The GC wasengineering the facilities based on the above technologies for the firsttime, but was considered acceptable with the involvement of the FRG firm.However, the involvements of the two partners were not defined adequatelyand clearly.

3.15 As a result, while the project facilities are now performingsatisfactorily, there were long delays and serious commissioning problems.Planning for the procurement of bulk materials such as steel structures,anchor bolts, pipe and cable racks, pipes and fittings, insulationmaterials and cables were deficient, often leading to hold ups inconstruction waiting for the additional materials. The (,C's constructionplans had not fully taken into account the limited availability of localsubcontractors and skilled workers and its attempts to use more expatriatesubcontractors were not easily accepted by AFCC. Even when the facilitieswere finally ready for commissioning, the plant experienced frequentshutdowns due to various technical problems encountered in several items ofequipment. The deterioration in the working relationship between AFCC andGC did not help to speed Up solutions to the problems. AFCC has filedclaims against GC under international arbitration procedures for inadequatecontractual performance; the arbitration proceedings are still pending. Asa result the tests for performance guarantees of the plants have not yetbeen undertaken.

F. Procurement and Performance of Suppliers

3.16 The overall responsibility for project procurement rested withthe GC. The technical bid evaluations were reviewed by the TA andthe contract awards required AFCC approval. The procurement was carriedout generally in accordance with the provisions set out in theco-financiers' agreement. Since the orders for all time critical and majorequipment were placed during July 1976 and mid-1978 and the Project wasdelayed due to the additional time taken for site compaction, no majordifficulties were encouLntered In the timelv delivery of the equipment andmachinery. Serious delivery problems were, however, encountered in theordering and delivery of bulk materials such as piping, electricals andinstruments. Even though orders were placed for these items in late 1977,there were several changes in quantities and specifications. As a result,insufficiently ordered items had to be reordered and procured during thepeak ot the procurement period ia early 198('. In some cases, there hadbeen as many as ten purchase order amnendments. In several Instances,chartered shipping and air freightinJg wis necessary to obtain the material

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on time, resulting, according to ZFCL, in additional foreign exchange costof US$1.6 million. The initial team, at the GC's offices, of technicalexperts from the TA and MAF was supplemented in mid-1976 with AFCC staff toreview and approve the technical evaluation. The GC recommendations,however, had to be still sent to Dhaka for commercial approval and, as aresult, contract awards were considerably delayed. In July 1977, the teamwas given the authority to approve awards up to US$150,000 and this limitwas increased to US$200,000 in April 1978 - a measure which improvedconsiderably the speed of procurement. About 48% of the IDA credits weredisbursed in the IUK - to finance a large part of the GC's reimbursablecosts. The rest of the amount was spread fairly evenly among equipmentsuppliers for such projects (Annex 2). Overall, the equipment suppliersperformed satisfactorily and provided support to AFCC when plant problemswere encountered. In cases when plant failures were due to defectiveequipment and the equipment warranties were still valid, the equipmentsuppliers also carried out the repairs/modifications at their own costs.In all other cases, the repairs were carried out by AFCC and the costsclaimed from the insurers.

G. Project Implementation Schedule

3.17 The Project was mechanically completed in October 1981, about 43months behind the appraisal schedule of March 1978, and about 13 monthsbehind the 1979 revised completion schedule of September 1980.1/ Firstammonia/urea production was achieved in December 1981, about 40 monthsbehind the appraisal scheduile and about 9 months behind the 1979 revisedschedu'le. However, due to production interruptions and plant problems,sustained production was achieved only in May 1983. As noted earl]ier inpara 2.05, the plant was put in commercial operation on July 1, 1983 tocoincide with the beginning of the fiscal year 1983-84. The projectimplementationI schedule is shown in Annex 3. The substantial delays inproject implementation were due to: (i) the initial delay of about sixmonths in finalizing the general contracting arrangements; (ii) a delay ofabout 20 months in the start and completion of tthe factory civil work!c dueto the time that was taken to evaluate the soil investigation reports,evolve agreed solutions, and implement the dynamic soil compaction andspecialized foundation designs that became necessary; (iii) a delay ofseven months due to delays in the procurement of bulk materials, especiallyquantities which were in excess of the initial estimates and items notdelivered due to labor problems in one of the suppliers works; and (iv) adelay of about 10 months in plant commissioning and testing mainly due tofailures of a number of equipment and machines such as the package boiler,ammonia storage tank, flue gas duct and refractory lining of the secondaryreformer. Following the partial plant repairs and modifications the plants

1/ Detailed estimates of the delay in mechanical completion are shown inAnnex 3, and are based on the actual appointment of the TechnicalAdvisers in February 1974 and the Project start date of April 1, 1974.The Government's comments indicated that the tiiue spani for realizationof key milestones suich as the mechanical completion should he coiuntedfrom January 1, 1976, i.e., the effectiveness date of the firstCredit. The Induistry practice however is to count it fromn the daite ofaward of i major cont ra lc such as for the Thc hnical Arivisory Services.

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performned moderately well. After further plant repairs and modificationsin October 1°84, the plants have been performing well at close to ratedcapacities.

H. Capital Costs, Financing and Disbursements

3.18 Project capital cost estimates at the time of the 1974 appraisaland the 1979 reappraisal and the actual costs are presented in the Tablebe low.

Table 3.1: Stmnary of Project Capital Costs(US$ million)

October 1974 April 1979Appraisal Estimate Reappraisal Estimate Actual Costs

local Foreign Total Local Fbreign lbtal Local Foreign Total

Land and Site Preparation 2.5 9.4 11.9 3.9 13.3 17.2 4.0 11.0 15.0Equipment & Materials - 50.8 50.8 1.3 101.2 102.5 0.5 98.8 99.3Construction Equipmnt - 5.3 5.3 1.7 14.7 16.4 0.0 15.1 15.1

iuildings & Structures 4.0 6.4 10.4 39.2 21.7 60.9 24.3 19.0 43.3Freight, Insurarce & Duties 30.5 6.1 36.6 24.4 11.2 35.6 46.2 9.1 55.3Construction & Erection 6.9 1.9 8.8 25.8 46.5 72.3 36.5 52.3 88.8Engineering & ManagementAssistance 1.6 28.6 30.2 0.9 33.6 34.5 1.2 32.5 33.7

Preoperational Expensesa! 3.4 1.6 5.0 6.0 4.4 10.4 (16.4) 3.2 (13.2)Working Capital 7.2 1.3 8.5 21.0 1.1 22.1 2.7 7.6 10.3

base Cost 56.1 111.4 167.5 124.2 247.7 371.9 99.0 248.6 347.6Physical Contingency 5.4 10.7 16.1 6.0 2.5 8.5 - - -

Price & Other Contingencies 18.4 20.2 38.6 8.3 9.5 17.8b/ - - -

Installed Cost 79.9 142.3 222.2 138.5 259.7 398.2 99.0 248.6 347.6Interest Durinrg Construction 27.2 - 27.2 54.5 - 54.5 85.7 - 85.7

Total Financing 107.1 142.3 249.4 193.0 259.7 452.7 184.7 248.6 433.3zaz== _=== _zcz === . _ ,. . .

a/ Includirg profit/loss fran urea production before ccamrcial operations.b/ Including delay contingency of $10.4 million estimated for a 6 months delay in completion beyond

SeptEmber 1980.

By June 1983, the Project had incurred a total cost of US$433.3 million,which is 74% higher than the original appraisal estimates. The actualproject costs (expressed in US dollars) are, however, 4% lower than the1979 revis-d estimates, mainly due to depreciation of the taka. Thevarious contributing factors for cost overruns are closely interrelated.The higher actual project costs as shown in the Table on the followingpage are mainly, directly or indirectly, due to (i) soil compaction andother unforeseen construction costs, (ii) storage charges for equipment,(iii) delays in implementation, especially in testing and commissioning,(iv) che change in construction arrangements which were found necessary,and (v) the cost of remedying the equipment defects and failures.

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Table 3.2: Project Cost Overrun_Analysis(US$ million)

Appraisal Actual Cost % ofItems Estimate a/ Cost Overrun Overrun

Land Acquisition & SitePreparation 14.3 15.0 0.7 0.4

Equipment & Materials 66.1 99.3 33.2 18.0Construction Equipment 6.7 15.1 8.4 4.6Buildings & Structures 16.7 43.3 26.6 14.5Freight, Insurance & Duties 48.4 55.3 6.9 3.8Construction & Erection 14.5 88.8 74.3 40.4Engineering and ManagementAssistance 35.3 33.7 (1.6) (0.9)

Preoperational Expensesb/ 7.4 (13.2) (20.6) (11.2)Working Capital 12.8 10.3 (2.5) (1.4)Interest During Construction 27.2 85.7 58.5 31.8

Total 249.4 433.3 183.9 100.0

a/ Including physical and pri.e contingencies as provided in theappraisal report.

b/ Including profit/loss from urea production before commercialoperations.

3.19 lWhile the identification of the earthquake problem, working outan appropriate solution and carrying out the soil compaction were importantevents which affected significantly the project schedule and cost, thedirect cost of the soil compaction itself was only about US$9 million.However, there were substantial indirect costs. All the major equipmenthad been ordered during August 1976 - July 1977 and their deliveries had tobe rescheduled to match the revised project schedules. As a result,suppliers' warranties had to he renegotiated and in many cases theequipment had to be warehoused abroad. The GC and MAF services had to becontinued for longer periods. The more elaborate foundation designsadopted required substantial additional expatriate subcontracting. Thelonger project implementation increased interest costs. All these -;esultedin substantial cost increases in construction and erection (40.4%),interest during construction (31.8%), equipment and materials (18.0%) andbuilding and structures (14.5%).

3.20 An additional factor which was responsible for the cost increasesin construction and erection was the substantial increase in foreignsubcontracting compared to appraisal estimates, as a result of theinadequate availability of competent local subcontractors with the neededconstruction equipment, and the difficulties the C,C had in hiring, training

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and retainitig a competent local construction work force. 1/ As a result ofthe higher cost of such subcontracting, the cost of construction and theforeign component increased suhstantially. It was also necessary for theProject to purchase more construction equipment. A large part of theincreased GC's reimbursable cost for construction supervision during thelonger implementation period is included under construction and erection.

3.21 The cumulative disbursement pattern for the IDA credits is shiownin the Table below. The delays in the major project activities and inproject completion resulted in the diLbursement of IDA credits over alonger period compared with the appraisal estimates and even thereappraisai estimates. The disbursement schedule for the total projectcost is shown in Annex 4.

Table 3.3: Ouilative IDA Cedit Disbursements(US$ million)

FY 1975 76 77 78 79 80 81 82 83 84 85 86

Appraisal 4.0 12.0 20.0 30.0 33.0Reappraisal - 3.4 7.4 16.1 29.8 52.0 62.0 62.0 62.0 62.0 62.0 62.0Actual - 3.4 7.4 16.1 28.0 46.6 59.0 59.0 60.2 60.8 61.4 61.7a/Actua' as % of

ReappraisalEstimate - 100 100 1(0 94 90 95 95 97 98 99 100

a/ The in'utilized amrxnt of US$0.3 millio has bhen cancelled.

3.22 The actual project financing plan compared with the originalappraisal and the i979 revised plans are shown in Annex 5. The only nmajorchanges between the revised financing plan and the actual are the use offunds from IDA's Tenth Import and Technical Assistance Credits forfinancing the Project (US$8.2 million), a decrease in the Government'scontribution (US$6.2 million equivalent), and currency differences.

1/ Detailed estimates of the delay in mechanical completion are shown ,nAnnex 3, and are based on the actual appointment of the TechnicalAdvisers in February 1974 and the Project start date of April 1, 1974.The Government's comments indicated that the time span for realizationof key milestones such as the mechanical completion should be countedfrom January 1, 1976, i.e., the effectiveness date of the firstCcedit. The Tndustry practice however is to count it from the date ofaward of a major contract sueh as for the Technical Advisury Stfrvices.

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IV. OPERATING PERFORMANCE

A. Commissioning and Start-up

4.01 As mentioned earl'er, the plant w&'s mechanically completed inOctober 1981 and the first ammonia/urea were produced in Dece,aber 1981.However, initial plant operations had many difficulties especially in the11 months up to October 1982. In late October 1982, the plant encounteredserious failures with the process gas cooler and the superheater tubes ofthe waste heat boiler and the plant had to be shut down while ZFCL arrangedfor the repairs. During the first 11 months' operation, from December 1981to October 1982, the plant could, therefore, produce about 115,000 tons ofurea (24% of the rated capacity). Mobilizing the material required andcarrying out the repairs took nearly six months and the plant was restartedin April i983. Until the completion of major repairs during the scheduledfirst turn-around in October 1984, ZFCL maintained operation of the plantgenerally below 85% of the rated capacity since the condition of therefractory lining was continuing to be the cause for concern.

B. Build-up of Production

4.02 Actual and expected production level of the plant SiTnc( thebeginning of commercial operations in July 1983 is shown below.

Table 4.1: Actual and Expected Production Level('000 tons)

Ammonia Urea

Rated Capacity 305.2 528.0

FY84Production 223.5 379.1Capacity Utilization 73 72

FY85Production 250.9 414.5 a/Capacity Utilization 82 i9

FY86Programmed Prodtuction 254.3 440.0Capacity Utilization 83 83First Ten Months (July 1985-April 1986)Production 201.5 344.3Capacity Utilization 79 78

FY87 and OnwardsProgrammci Prodtuction 274.7 475.2Capacity Utilization 90 9(

a! Month-to-month production data in Annex 6, however. Ad to onlv407,600 tons.

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4.03 During the first year of commercial operation (FY84), the ureaproduction totalled about 379,100 tons, corresponding to 72% of the ratedcapacity. During the first annual turnaround of October 1984, allimportant modifications needed to build up production and maintain it atclose to rated capacity have been carried out. During FY85, the Projectproduced about 414,500 tons of urea corresponding to about 79% of the ratedcapacity. Between July 1985 and February 1986, while the plant continuedto operate at close to rated capacity, the plant had to be shut down inMarch 1986 for repairs of the package boiler, refractories and other itemsin the synthesis gas compressor area. As a result, the plant produced only5,200 tons of urea (12% of the rated capacity) in March 1986. Productionin April 1986, however, increased to 27,770 tons of urea or 63% of therated capacity. ZFCL projects to maintain not below 90% capacityutilization beginning 1986/87. If the qualified personnel can continue tobe retained and competent new personnel hired and trained as needed andthere are no external constraints such as gas availability or foreignexchange to finance maintenance imports, the Project should continue toperform satisfactorily.

C. Product Dispatch

4.04 The project output is transferred to the Bangladesh AgriculturalDevelopment Corporation (BADC), which has the responsibiliLy formarketing. Even though, initially, there were some transportationconstraints, the level of dispatches have improved touching around 40,000tons per month. ZFCI. expects that the nmarket demand for urea in Bangladeshwill absorb all productiorn from the plant (475 nOO tons of urea beginningFY87).

V. FINANCIAL PERFORMANCE

A. Fertilizer Pricing

5.01 Fertilizer prices ir Bangladesh are set by the Government at thewholesale marketing level and at the ex-factory level. With a view copromoting fertilizer consumption, the farm gate fertilizer prices have inthe past been generally maintained low. Since the prices were belowinternational prices, there was a resulting large fertilizer subsidyimpinging adversely on resources available for financing other essentialinvestments. Under an agreemnent with IDA in 1979, in the context of theFertilizer Import Credit (Cr. 944-BD), the Government agreed to eliminatethe fertilizer subsidy in stages by the end of FY85, later revised to FY86under the Twelfth Imports Pcogram Credit (Cr. 1471-BD). Through a seriesof increases in fertilizer sale prices during FY79 to H84, the fertilizersubsidy has been reduced fromi 9% of the Annual Development Prograrr in FY79to about 4% in FY84. With the most recent adjustments in fertilizer saleprices with effect from October 1, 1985, the economic subsidy on urea(which accounts for two-thirds of fertilizer consurnotion in Bangladesh) hasb-n eliminated, and the economic subsidy on TSP and muriate of potash hasbeen reduced to about 14% and 1.8%, respectively. The Government is

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committed to revicuing the fertilizer sale prices frequently and adjustingthem as needed to ensure that there is no economic subsidy on such sales.

5.02 The Government periodically reviews the fertilizer productioncosts of the fertilizer manufacturing units and sets the ex-factoryprices. Under the Ashuganj Fertilizer Project (Credit 527-BD), theGovernmnt had agreed to set the ex-factory prices at a level that willprovide at least a debt service coverage of 1.5 for AFCC/ZFCL, and yield areasonable return on equity. Based on discussions on ex-factory fertilizerpricing in Bangladesh under the IDA-financed Fertilizer IndustryRehabilitation Project (Credit 1023-BD), the Government had agreed to setthe ex-factory fertilizer prices for the Ashuganj facilities based on amutually agreed rate of return on equity, determined for this purpose asnet fixed assets suitably revalued from time to time plus current assetsfor normal operations less accounts payable and borrowings. In subsequentdiscussions, the Government has expressed concern that this basis couldresult in a very high ex-factory price given the substantial delays inproject implementation and the excessive cost overruns. IDA is inagreement with the GOB's above position, and as mutually agreed anindependent firm of Bangladeshi auditors have reviewed the project costs todetermine the appropriate capital cost which could provide a reasonablebasis for determining the ex-factory price. The report is heing evaltuatedby BCIC, ZFCL, and the Government before consultations with IDA.

5.03 The present urea ex-factory price of Ik 4,055/ton (US$133/ton),after an increase of 5% in January 198 , in current prices, is in line withthe international fob price and arounrd 80% of the landed economic price ofurea. World price of urea is currentLy very low dule to a temporaryoversupplv situation.

5.04 The Government's policy regarding ex-factory urea prices does notmeet the understanding reached with IDA. The present price is insufficientTo achieve a debt service coverage of 1.5 and to provide a reasonablereturn on equity, in spite of the recent good plant performance. Thisissue has been raised with the Government on several occasions and alsoduring the Project Completion Report preparation mission. Following LheBCIC, ZFCL, and the Government's review of the consultants' study on theProject costs and revaluation of ZFCL's assets, IDA should undertake amission to discuss the results of the study and the matter of ex-factoryfertilizer price witli the Government again.

B. Financial Rate of Return

5.05 The assumptions, productioni costs and the ouitput prices forfinancial anid economic analyses are given in Annexes 7, 8, and 9. Thefinancial rate of return (FRR) for the Project has been calculated Lindertwo different cases as given in Annex 10 and summarized below. In bothcases, actual input prices currently prevailing are taken and are assumedto remain constant (in taka terms) during the project life. All pr4ces areexpressed in 1984/85 constant taka terms.

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Table 5.1: Financial Rate of Return

FRR

Case I. Actual urea price which is assumed to remainconstant (in 1984/85 constant taka terms)during the project life. 2.0X

Case II Urea price is assumed to have been equal to theinternational fob levels since commercialproduction on July 1, 1983, and followinternational trends during project life(in 1984/85 US dollars converted into takasusing ,he FY85 average exchange rate ofUS$1 - Tk 26). 4.8%

5.06 In both cases, the Project's FRR at 2.0% and 4.8% is much lowerthan the appraisal estimate of 13.8% and the reappraisal estimate of 11.0%,mainly due to (i) the low ex-factory urea price; (ii) long completiondelays and problems in plant commissioning; (iii) substantial costoverruns; and (iv) the increased cost of natural gas without correspondingincreases in fertilizer prices. At appraisal, the cost of natural gas wasestimated at 9% of the urea ex-factory price, while it now represents about14% of the urea ex-factory price due to significant increase in natural gasprices in 1985 without corresponding adjustments in the urea price.

C. Financial Results

5.07 Detailed financial statements of ZFCL are presented in Annex 11.The selected financial data for ZFCL as projected up to 1987/88 are shownin the Table on the following page.

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Table 5.1: ZFCL - Selected Financial Data a/(ini millions of takas, unless otherwise noted)

1983/84 i984/85 1985/86* 1986/87* 1987/88*

Capacity Utilization % 72 79 83 90 90

Sales Revenue 1,464 1,530 1,742 1,927 1,927Operating Income 591 434 490 670 670Other Income 21 (25) 182 181 47Depreciation 439 623 623 623 623Interest Expense 363 219 631 564 497Foreign Exchange Risk Cost 170 b/ - - - _

Internal Cash Generation 1,049 1,023 1,286 1,465 1,331Current Assets 2,424 3,462 3,452 1,967 2,135Total Assets 8,735 11,481 10,845 8,739 8,282Current Liabilities 1,936 2,588 2,588 872 872Long-Term Debt 4,059 5,972 5,304 4,936 3,968Equity 2,740 2,921 2,953 3,231 3,442

Ratios

Current Ratio 1.3 1.3 1.3 2.3 2.4L.T. Debt/Equity Ratio 60/40 67/33 64/36 60/40 54/46Debt Service Coverage Ratio 2.0C/ 4.0C/ 1.0 1.2 1.1

* Estimate.a/ ZFCL is exempt from income taxes for nine years starting from July 1,

1983, due to its location in Ashuganj, which is located in anindustrially backward area.

b/ From FY85 onwards, this item is included as adjustments in debtservice obligations.

c/ Based on actual debt service payments. ZFCL did not make the fulldebt servire payments to GOB in FY84 and FY85.

5.08 Despite the adverse impact of the delays in projectimplementation, cosc overruns and the Government's output pricing policy,ZFCL's financial position remains satisfactory. The agreed financialcovenants require ZFCL to maintain a cu-rent ratio and a debt servicecoverage ratio of at least 1.5 from 36 months after the start of commercialoperations, and a long-term debt/equity ratio of 60:40 or better. Theestimated current ratio for FY87 and beyond is above the required level.The debt service coverage ratio during FY87 is estimated to be 1.2 which islower than the requited level. The long-term debt/equity ratio in FY84 andFY85 at 60:40 and 67:33, respectively, was maintained because ZFCL delayedloan repayments to GOB. In FY85, ZFCL adjusted its balance sheet toreflect the increase in its long-term debt due to changes in the exchangerates. The long-term debt/equity ratio for FY87 is however expected toequal the required level, and become better in FY88 and beyond than therequired level.

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VI. ECONOMIC PERFORMANCE

A. Economic Rate of Return

6.01 As mentioned earlier, the assumptions, production cost and outputprice details are summarized-in Annexes 7, 8, and 9. For economicanalysis, all tradeable items have been priced based on the projectedinternational prices, and adjustments have been made for taxes and dutiesfor all costs. The economic cost and benefit streams are given inAnnex 12.

6.02 The economic rate of return (ERR) is now estimated at 7.5%, lowerthan the appraisal and reappraisal estimates of 21.2% and 10.0%, respec-tively. The main reasons for the low ERR are the long delays in projectcompletion and the cost overruns.

B. Foreign Exchange Savings

6.03 The average foreign exchange value of the Project's productionwith the facilities operating at 90% capacity is estimated to be US$107million annually (in 1984/85 constant dollars). The annual foreignexchange cost of maintenance materials, catalysts and chemicals, polyethy-lene pellets and maintenance of technical assistance is expected to be inthe order of US$3 million. Therefore, the net annual foreign exchangesavings for Bangladesh are estimated to be US$104 million (in 1984/85constant dollars) compared to the appraisal estimate of about US$87 million(in 1984/85 constant dollars).

C. Transfer of Technology

6.04 The Project has contributed to substantial gains in Bangladeshicapabilities. Even though the Project was essentially designed, engineeredand implemented through expatriate assistance, Bangladeshi professional andtechnical personnel participated in various parts of the Project, madevaluable contributions and gained useful experience. Bangladeshitechnicians recruited and trained for the Project were used for largeparts of the project construction activities. Bangladeshi operators andtechnicians, with the guidance and support of the Project's advisors,carried out the testing and commissioning of the facilities andimplemented the plant modifications when they became necessary. Thus,working with specialists on various aspects of the Project, they havegained considerable skills, which have contributed to the subsequentsuccessful operation of the plant facilities. The skills gained during theProject by the Bangladeshi personnel have given them a confidence whichwould continue to be useful to the fertilizer industry in Bangladesh.

D. Environmental As1 ects

6.05 The project facilities have been constructed in conformity withenvironmental norms agreed during project appraisal, and are adequate. Theeffluents control system in the plant is adequate and satisfactory.Effluents from the cooling water system are treated to reduce the

- 19 -

hexavalent chromium in to the insoluble trivalent state. The treatedeffltcnts after sedimentation are passed through drainage pipe into theriver. The chromium content in the final effluent is either not detectableor is within the permissible limits. The urea plant has its own built-inpollution control system, and its effluent to the river normally contains amaximum of 50 ppm of ammonia and 200 ppm of urea, which is consideredwithin the safe limits. Effluent of the water demineralization unit isneutralized in neutralization sump pits and then discharged into the riverwithin the permitted pH range. The main drain effluents from the plant areregularly checked and monitored by taking samples as scheduled. The ureaprilling tower is well equipped with anti-pollution apparatus to reduce airpollution.

VII. IDA ROLE

7.01 During the various stages of the Project, IDA has worked closelywith the Government, AFCC/ZFCL and their consultants, especially inidentifying problems as they arose and in evolving practical solutions.Considerable initial efforts were necessary in developing projectimplementat!on arTrngements consistent with financing from multiplesources, organizational and infrastructural inadequacies in Bangladesh andthe problems in building up a new project entity. The project financingarrangements to cover the foreign exchange requirements were coordinated byIDA--both initially and iTl 1979 when the Project encountered costoverruns. When the Project ran into site and power supply problems in1976, IDA both at the staff and management levels worked with theGovernment and the consultants in evolving appropriate solutions and inhaving them implemented.

VIII. CONCLUSIONS AND LESSONS LEARNED

8.01 The Project is, at present, operating at satisfactory productionlevels. As mentioned earlier, the Project did undergo significant delaysand substantial cost overruns, which will have to be considered in thecontext of problems to be expected during project implementation under theunsettled conditions of a newly independent country with very limitedinfrastructure and industrial base. Implementation of this Project has,therefore, provided experience from which valuable lessons can be learnt.Responsibilities for project delays and cost overruns can be attributedbroadly to three areas: (i) inadequacies in project preparation; (ii)general contracting arrangements; and (iii) overall project managementarrangements.

8.02 The experience of the Project has brought out the importance ofcareful attention to all aspects of project preparation, since mostdeveloping countries with limited reservoir of industrial experience arenot adequately equipped to handle unforeseeni project problems. While it isto be recognized that the Bank staff and in most cases even the consultantshired for project preparation may not have the expertise to evaluate and

- 20 -

prepare for all contingencies likely to occur during project implementa-tion, it is necessary for them to be alert to potential problem areas.This would enable them to identify, during project preparation, areas ofpotential concern so that necessarv specialized expertise can be brought infor project preparation. In the case of the Ashuganj Fertilizer Project,such expertise could have benefitted the Project in two areas in minimizingproject implementation delays and substantial cost overruns. The Projectis on an earthquake prone site, reclaimed from the river bed by dredgingand filling. The potential risks of such a site were not, however,recognized either by the Bank staff or the consultants during projectpreparation and as a result timely arrangements were not made for competentassistance in preparing and carrying out the site work. Similarly, boththe Bank staff and the consultants did not adequately recognize the verylimited subcontracting ̂apabilities available in Bangladesh for thespecialized construction work especially under the uncertain conditionsthat prevailed soon after the liberation of the country. A detailed studyof domestic capabilities would have possibly prepared both the ZFCL/GOB andthe donors for the more substantial foreign involvement in projectconstruction.

8.03 In a Project which has encountered substantial delays and costoverruns, it is appropriate to review the adequacy of the generalcontracting arrangements. As was mentioned in para 3.14, the generalcontractor was selected following competitive procedures giving emphasis toexperience. The selected GC--a reputed UK based engineering contractingfirm, had not previously engineered and constructed a large ammnoniacomplex. The above firm was, however, prequalified on the basis of itsworking jointly with a prequalified FRG firm because of the general concernthat there would be limited interest for bidding for the Project in view ofthe then construction boom in the Middle East. However, both theconsultants and the Bank staff did not specify the nature and extent of theFRG firm's involvement needed to ensure successful project implementation.The lack of earlier experience in implementing large ammonia/urea complexesmade it difficult for the GC to adequately plan the bulk materialrequirements and organize for construction. Diffused project managementresponsibilities, multiple sources of financing and a construction strategyaiming excessively on limited locally available skills made the GC's jobeven more difficult. The experience in the Ashuganj Fertilizer Projectbrings out the importance of selecting a GC who has extensive previousexperience in engineering and building plants in developing countries basedon the selected processes. The cost-plus arrangement of the general con-tracting that was necessary under the prevailing contracting market condi-tions of the mid-1970s did not also pr)ve satisfactory as it did notinclude adequate incentives and penalties for obtaining timely and appro-priate efforts by GC when the Project encountered difficulties. The over-all contract management needed from the owner could also not be effectivelyprovided either by ZFCL or its consultants. In the context of the changedcontracting market conditions, a turn-key fixed price type of contractingwould be more appropriate for such a project und2r Bangladeshi conditions.

8.04 The foreign exchange costs of the Project were initially financedwith funds fron. seven sources (IDA, ADB, IJSAID, O0DM, Kfw, GOS and GOI).7fne supplementary financing included three more sources (OPECi, IFAD and

- 21 -

EEC). The multiplicity of financing sources was essentially the result ofthe needs of Bangladesh to obtain the entire foreign exchange requirementsfrom bilateral and multilateral institutions. But this arrangement intro-duced multiplicity of procedures in procuring the goods and services andadded to difficulties in arriving at solutions when problems occurred inview of the divergent views among the donors. There is need to avoid pro-ject cofinancing with such a large number of agencies and for the donors toagree on common procedures and leadership to speed up decisions.

8.05 The project preparation work included considerable efforts inidentifying the project implementation and operation requirements, theextent of their availability in Bangladesh and the measures to supplementthem, wher3 needed, with external assistance. In practice, however, thepersonnel assigned by the various firms did not meet the AFCC/ZFCL expecta-tions and, therefore, could not win their confidence. As a result, theycould not fulfill the roles that were envisaged in project preparation.Also, while the arrangements brought in professional skills, the Projectstill lacked leadership, which was not forthcoming either from AFCC/ZFCT, orthe other firms. As a result, there were often a range of views, but nodecisions. A review of the experience with the Ashuganj Fertilizer Projectas compared with the other projects in the South Asia region indicates thata strong project leader plays an important part in successful projectimplementation. If the project entity and its consultants do not find suchda project leader, the financing institutions should be willing to work withthe Government in identifying a competent leader and financing his costs.The importance of such leadership came out clearlv in the AshuganjFertilizer Project. When the Project was still encountering implementationdelays, the Government's decision in early 1981 to positioin a competentBangladeslhi Project Director at Ashuganj with full coordination responsibi-lity and adequate authority and ability/willingness to respond when neededhelped the Project to proceed satisfactorily towards its completion andcommissioning.

Industry DepartmetitJuly 1986Revised: December 1986

ANA.IAIs-Mi A.ft4lANI FEITtILLZUK Vbt VICCI (CKEDITS %ZI AND 21- _-MbJ

F'SUJt.r Ct*WtLETlUN KEut.ttl

Zt'CI. UKt ANIZATrIUN CIIAK'l

(Au t April 1984)

r IAN-M- I 1 M.C1 _

IlilUUIA tlF'F'lt E | t HA tM.Ett| FIIUIt tANAtk ITDji

r '~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r

rIj...ias& L.~7 .. rIh,l 4 i Io

ADIINISTAATLON VALiWC! I l4'.NAN4:I- |ICIINlICA. | o t lNTS. [LACIAttFl civil- EWNI41,t1 'IN ;D PAfT1MN IJI:A:> . | )|IU'lA* I |:N r I Ib*:.AX rIMa.H III VJErArNFr |UtN.lTt: Dt.PAKTMI:NI'

la rIJ D1 part-etApttrJ I98b.

- 23 - ANNEX 2

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

IDA - FINANCED PROCUREMENT BY COUNTRY OF ORIGIN

Amount Percentage

United Kingdom 29.6 48Japan 6.5 itFederal Republic of Germany 5.2 8France 4.1 7South Korea 3.5 6Jnited States 5.6 9Italy 2.9 5Switzerland 1.9 3Ind'a 0.9 2Netherlands 0.3 -Indonesia 0.3 -Others 0.9 1

61.7 T00

Industry DepartmencApril 1986

BANGLADESH - ASHUCAL4J VERTILIZER PROJECT (CtEDITS 527 AND 5271-8-D)

PROJECT COMPLETION REPORT

INPLEMENTATION SCHEDULE

1974 1975 197b 1977 1978 1979 1950 1981 1982 1983

_J. ___- - -MayGelierdl Contract Mar.__ _ _ , ,v.

sit_________ ____ ____ _____._ __ ______..__ _

14ayf Prt'pdrdt {<l ~r. __ __ __ __ cDec

IUkIgn .nJ I'rvoc;remelt Hny_ __ _ _ _ _ - JanJail_- _ _ _ _ _ __ _ __ _ _ _ __ .

Cuoostruc-toln aiad Erecti(E -- Iu _ _ __ - _Mar.

I_CI _D________ - -_ _ ___ ___ . Dec.

Co.msisstoiliing and Start-wup Ha - -- June

_ _ __ _ ___ ___ _____ _ .___ ___ [ _ Nov. _ tune

Ii t1ilg i * Ka hIct.

Matiageameot b Operat losial Mar. - *- - - -_ --a- Dec.Aas istanice

Jan. _ _ __ _ = _ June 1985

_Appraisal Est idatenActual

KEY DATES

asal1(1974) Reappraisal (1979) Actual

Project Start Date April 1, 1974

Mechanical Completion End-March 1971 September 3o. 1980 Dctober 1981

Time (uonths) 48 78 91Conivisiaoilng End-July 19/8 Etkd-Marcl; 1981 July 1 1983*

Time (mmnisths) 52 84 i

* First urea produced In December 1981.

Isidus ry he PdUt dellt

Apri[' 8

BANCLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COKPLETION REPORT

PROJECT COST DISIURSEIENT SCHEDULE(in million takas unless otherwise noted)

1973/ 1974/ 1975/ 1976/ 1977/ 1978/ 1979/ 1980/ 1981/ 1982174 75 76 77 78 79 80 81 82 83

I. hBsic Cost 6 54 189 310 1,213 1,127 954 718 354 -1852. Tidxes aod Duties - 4 9 - 28 172 197 183 61 1623. 1nteresc During ConstructIon - - - 6 7 21 300 29 42 1,1074 Working Capital - - - - 16 14 125. Total Pruject Coct 6 58 198 316 1,248 1,320 1,451 946 471 1.096

t. Finanicial Capital Cost 6 58 198 110 1,241 1,299 1.151 901 415 -23(1t2) rn

7. Uuaestic inflation Index 0.34 0.58 0.44 0.43 0.49 0.52 0.61 0.64 0.71 0.79(1984/85 - 1.00)

B. Findaicial Capital Cost 18 100 450 721 2,533 2,498 1,887 1.408 585 -29lit FY85 Coaskitast Traka

9. Fin.ancial Working Capital - - - - - - - 25 20 15in FY85 Coaastant Takas

IO. Exl:hasige Rate 8)0 8.0 11.5 14.7 15.3 15.3 16.4 16.5 17.1 24.4II. EIcunoaic basic Cost in 0.8 6.8 16.4 21.1 79.3 73.4 58.2 43.5 20.7 -7.6

US$ miLlion (lu10)12. MFUV Inde. (FY85 - 100) 55.5 63.9 67.7 71.4 79.7 90.3 100.0 104.8 104.4 102.413. Eionuoaic basic Cost in FY85 1.4 10.6 24.2 29.5 99.5 81.3 58.2 41.5 19.8 -7.4

CiiiaMIE MilLion Dollars

Iii,hastry Departienit IApi I 1 1986

- 26 -

ANNEX 5

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

PROJECT FINANCING PLAN

Source October 1974 April 1979 Actual----- USS million---------------

Equity

GOB Funds and InternalResources 107.1 193.0 186.8

Loan

IDA 40q-BD 0.3 0.3 0.3527-BD ana 527-1-BD 33.0 62.0 61.710th Import Credit - - 5.0Technical Assistance Credi. - - 3.2

ADB 30.0 55.0 55.0USAID 30.0 53.0 53.0ODM 18.0 18.0 11.9a/GOI 12.5 12.5 12.5GOS 6.5 11.5 13.7a/Kf'w 12.0 22.0 18.4E/

EEC Special Action Credit 3.0 3.2IFAD 4.7 4.1a/

OPEC 10.0 10.0Currency Appreciation 7.7and Others

Subtotal Loans 142.3 259.7 252.0

Total Financing 249.4 452.7 438.8b/

a/ US dollar equivalent of actual disbursements.b/ Includes $5.5 aillion equivalents over the actual project costs by

June 30, 1983, to cover loan disbursements for expenditures after June30, 1983 (IDA - $1.5 million, GOS - $0.2 million; USAID - $3 million,and Kfw - $0.8 million).

Industry DepartmentJuly 1986

ANNEX 6-27 - Page I of 2

BANGLADESH - ASHUGANJ FERTILIZER PROJECr (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

OPERATING PERFORMANCE(in tons)

Year/Month Ammonia Urea

Monthly Design Capacity 25,438 44,000

1981

December 4,531 3,746

1982

January - 60February 3,804 4,460March 12,636 19,888April 17,772 30,499May 1,129 1,858June 1,865 1,985July 7,243 10,975August 5,524 8,487September 13,136 22,284October 6,491 10,641November - 56December ___

Total 1982 69,601 111,193

1983

JanuaryFebruaryMarchApril 5,349 7.325May 23,988 40,062June 22,372 38,061July 21,453 35,053August 24,125 40,721Sep.ember 10,486 18,583October 10,638 17,784Novem.ber 19,902 32,850December 20,245 34,540

Total 1983 158,558 264,979

-28 - ANNEX 6Page 2 of 2

Aumonia Urea-…in tons8-----------

1984

January 20,540 34,581February 19,521 33,445March 16,412 28,423April 18,919 32,201May 20,831 35,561June 20,377 35,38uJuly 21,637 38,003August 15,942 26,737September 16,862 9,895October 3,238 2,375November 23,050 38,192December 18,574 32,649

Total 1984 215,903 347,442

1985

January 25,490 43,409February 25,269 43,178March 24,276 41,554April 26,123 44,921May 24,056 42,132June 26,356 44,515July 19,285 32,617August 76,083 44,734September 26,813 45,514October 17,111 28,197November 24,963 42,567December 22,34697

Total 288,171 491,735

1986

January 28,189 48,877February 17,545 30,385March 3,073 5,197April 16,112 27,770

Industry DepartmentJuly 1986

- 29 -ANNEX 7

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

ASSUMPTIONS Ft R FINANCIAL AND ECONOMIC ANALYSIS

1. All prices are expressed in 1984/85 constanit teras.

2. For determining economic value of bagged urea at Ashuganj, US$35is added to fob urea prices and US$12 is further added for port handlingand internal transportation. The economic prices of urea (fob), projectedby the Bank's Commodity Studies and Projections Division (January 1986) areused.

3. The economic value of natural gas in Bangladesh is 10w by worldstandards due to the country's very large reserves relative to domnesticdemand for at least next decade, and the prospects for exports of massivequantities of gas over the next several years, either on lanld (o

neighboring country(ies) or in other forms to other countries, are modest.A US$1.25 per thousand standard cubic feet (mscf) has been used as theopportunlty value of gas.

4. All otiher local costs after deductirng of duties anld taxes areconverted tc 1984/85 constant dollars (using the 1984/85 exchange rate) andassumed to remain constant in dollar terms.

5. For financial rate of return, actual input prices are taken andassumed to remain constant (in 1984/85 constant taka terms) for the life ofthe Project. The price of natural gas as of July 1, 1985 is assuirned toremain constant at Tk 15.66/mscf; in 1984/85 taka terms, it is calculatedat Tk 13.98/mscf. For output prices, two cases have been analyzed. UnderCase I, actual output prices of urea, converted into 1984/85 constant takaterms, have been used, and are further assumed to remain constant duringthe Project life. Under the hypothetical Case II, output prices areassumed to have been at international levels (fob) since commercialoperations (July 1983), and in the future are assumed to follow expectedinternational trends for fertilizer prices (in constant 1984/85 dollarterms converted into takas using the 1984/85 exchange rate).

Industry DepartmentDecember 1986

- 30 -ANNEX 8

BANGLADESH - ASNUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLZTION REPORT

PRODUCTION COST SUXMARY AT 90% CAPACITY UTILIZATION a/(in constant 1984/85 prices)

Financial EconomicFinancial Cost Economic Cosc

Unit/ Price Tk million Price USS millionUnit Ton Urea Tk/Unit per year USS/Unit per year

Variable cost 427.8 26.7

Natural Gas 1,000 saf 35 13.98 232.5 1.25 20.8Catalysts & Chemicals 16.4 0.4Polyethylene Pellets 21.1 0.4Jute sags 149.7 4.8Others 8.1 0.3

Fixed Costs 230.1 7.3

Labor 29.3 1.1Spares and Accessorids 78.0 b/ 1.5

Insur&nce 12.9 0.5Technical Assistance 27 .5 1.0Overheads 82.4 3.2

e/ Beginning 1986/87.b/ Estimated at 1.5% of plant and equipment costs.

Industry DepartmentJuly 1986

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

SUMMARY OF FINANCIAL AND ECONOMIC OUTPUT PRICES(in 1984/85 constant prices)

Financial EconomicAnnual Annual Annual

Urea lUrea Price Value Ulrea Price Value Urea Price ValueYears Sales Tk/ ton Tk mllI ion Tk/ton Tk mili ion US$S ton a/ US$ millioi

('0(10 tons) ---------- Case I----------- -------- Case II …

1983/84 379 4,337 1,644 3,952 1,498 199 75.41984/85 396 3,86t) 1,53u 3,952 1,565 I 9 78.81985/8b 440 3,534 b/ 1,555 3,302 1,453 174 76.61986/87 475.2 3,534t 1,679 3,458 1,643 180 85.51987/88 475.2 3,534 1,679 3,952 1,878 199 94.61988/89 475.2 3,534 1,679 4,31h 2,051 213 101.21989/90 475.2 3,534 1,679 4,681) 2,224 227 107.91990/91 475.2 3,534 1,679 4,992 2,372 239 113.61991/92 475.2 3,534 1,679 5,044 2,397 241 114.51992/93 475.2 i,534 1,679 5,148 2,446 245 116.41993/94 475.2 3,534 1,679 5,2010 2,471 247 117.41994/95 475.2 3,534 1,679 5,304 2,520 251 119.3

a/ International fob prices plus US$35/ton for marine ft-tight to Bangladesh and US$12/ton for port handlingand inland tranisportation.

b/ Weighted average price. Ex-factory urea price was increased from TK 3,860/ton toTk 4,054.65/ton on January 5, 1986.

Case I: Actual ex-factory urea price corrected to 1984/85 constant takas ani assumed to remair constant (intaka terms) during proiect life.

Case lI: Hypothetical case where the ex-factory urea prices are assumed to equal to international fob pricessince commercial production in July 1, 1983 (in 1984/85 US dollars, and converted into takas usingthe FY85 average exchange rate of US$1 = Tk 26.0).

Industry DepartmentDecember 1986

- 32 -ANNEX 10

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

CASH FLOW FOR FINANCIAL RATE OF RETURN(in million 1984/85 constant takas)

Project Working Variable Fixed Revenues Net Cash FlowYear Cost a/ Capital Cost Cost Case I Case II Case I Case II

1973/74 18 (18) (18)1974/75 100 (100) (100)1975/7b 450 (450) (450)1976/77 721 (721) (721)1977/78 2,533 (2,533) (2,533)1978/79 2,498 (2,498) (2,498)1979/80 1,887 (1,887) (1,887)1980/81 1,408 25 (1,433) (1,433)1981/82 585 20 (605) (605)1982/83 (29) 15 14 141983/84 (135) 27(0 b/ 358 120) 1,644 1,498 1,031 8851984/85 '384 143 1,530 1,565 1 ,()3 1 ,0381985/86 429 132 1, 55 1,453 994 8921986/87 428 230 1,679 1,643 1,021 9851987/88 428 230 1,679 1,878 1,021 1,2201988/89 428 230 1,679 ',051 1,021 1,3931989/9u 428 230 1,b79 2,224 1,021 i,5h61990/91 428 230 1,'179 2,372 1,021 1,7141991/92 428 230 1,679 2,397 1,021 1,7391992/93 428 230 1,679 2,446 1,021 1,7881993/94 428 230 1,679 2,471 1,(21 1,R131994/95 (330) 428 3(0 1,679 2 ,52) 1 ,'351 2,192

Financial Rate of Return Case I 2 .0'.Case IL = 4.8%.

Case 1: Actual ex-factorv urea price corrected to 1964/65 oiinstanit takas anid assumed to remain constant(in taka terms) during project life.

Case IL: Hypothetical cast where the ex-factory urea prices are aissumed to equaL to internationl,L fobprices since comrercial productioni or 'uly 1, 1963 (in 1984/85 US doLlars and converted into takasusing the FY85 average exchange rate of US$1 = Tk 26.0).

a/ Inciuding credit iromn sales of urea during pre-operational period.!/ Based on estimated working capital requiremrent at 90% capacity utilization.

Industry Departmu1entDecember 1986

- 33 -

ANNEX 11-1

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

ZFCL: INCOME STATEMENTS(Taka million)

1983/ 1984/ 1985/ 1986/ 1987/

84 85 86* 87* 88*

Sales Volume ('000 tons) 379.0 396 440.0 475.2 475.2

Urea Unit Price (Tk/ton) 3,86(0 3,860 3,958 d/ 4,055 4,055

Sal3s Revenue 1,464 1,530 1,742 1,927 1,927

Variable Operating Costs

Gas (Feed and Fuel) 167 185 241 260 260Bagginlg Materials 110 149 191 171 171

Catalysts and Chemicals 17 19 24 16 16

Other 25 31 25 8 8

Total Variable Costs 319 384 481 455 455

Fixed Operating Costs

Labor 27 31 31 31 31

Maintenance and (ther 68 99 104 135 135Insurance 12 13 13 13 13

Depreciation 439 623 a/ 623 623 623

Total Fixed Costs 546 706 771 8012 802

Total Production Costs 865 1,150 1,252 1,257 1,257Stock Adjustment 8 (54) - - -

Operatting Profit 591 434 490 670 h67Other Income 21 (2S) b/ 182 I/ 181 e/ 47 e/

Contributionl to WorkersParticipation Fund 2 9 9 9 9

Total income 611) 400 6¢63 842 708

Ititerest Expense 363 219 6-31 564 497Foreign Exchange Risk Cost 170 - C/ - -

Before Tax Income 77 181 (32) 278 211Income Tax - - - - -

After Tax Income 77 181 (32) 278 211

Deprecia ion Added Back 439 623 t,23 623 I2-

Interest Expense Added Back 363 219 631 564 497

Foreign Exchange Risk CostAdded Back 170) - - - -

Cash from Operations 1,049 1,023 1,286 1,465 1,331

* Estimate.a/ Based on adjusted gross fixed assets to account for changes in the exrhange

rates.b/ Includes loss on disposal of fixed assets.c/ ZFCL adjusted its long-term debt in FY85 to accouint for changes in the

exchange rates. No further adjustments in the future are assumed.d/ Weighted average price.e/ Assumirng 10M interest income is earned on 90 of depo its in banks.

Industry DepartmientIDecember 1986

- 34 -

ANNEX 11-2

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

ZFCL: BALANCE SHEETS(Taka million)

1982/ 1983/ 1984/ 1985/ 1986/ 1987/83 84 85 8b* 87* 88*

Assets

Cash and hanks 15( 1,223 ',()16 2,0)t00 523 689Accounts Receivable 12u) 119 27 O 27 t 27u) 2770Advance Deposit &

Prepayraents 197 291) 217 217 217 217Inventory 633 792 959 959 959 959

Total Current Assets 1,1 )) 2,424 3,4 62 3,45'2 1,969 2,135

Gross Fixed Assets 6,942 6,822 9,299 b/ 9,299 9,299 9,299Less: Accumulated

Depreciation 79 518 1,283 129e iLk529 3, 12

Net Fixed Assets 6,863 h,304 8,116 7,i93 h,77o 6,147

Work in Progress 11 7 3 - - -

TOTAL ASSETS 7,974 8,7i35 11,481 10,845 8,739 8,282

Liabilities and Equity

Accounts Payable a/ 1 ,3'7 1 ,9q) 1 ,92 1 ,920 .'i4 d N4Current Portion

of L.'r. Debt - 3h 6h8 668 668 668

Total Currenit

Liabilities 1,37/ 1,9n 9, 8 2 , ,588 s872 872

Total Long-Term Debt !4,1 56 4,i)59 5,972 ''/ 5, 3(3 ,,irhO 36 s } 9

Total Eguity 2,541 2,740 2,921 2,953 3,231 3,42

TOTAL EQUITY ANDLIABILITIES 7,974 8 ,735 1,481 10,845 8,739 8,282

* Estimate.

a/ Includes unpaid interest during construction (IDC) and custoans dutLes to theGovernment.

b/ 'n FY85, ZFCL adjausted the gross fixed assets to account for chrnges in theexchange rates.

c/ Foreign exchange risk on long-term debt is borne by ZFCL. In FY85, ZFCL adjustedits long-terna debt to account for changes in the exchalnge rates.

d/ Assuming that outstanding interest payrnents includinig LUC of Tk 1,716 million willue paid in 1986/87.

Industry DepartmentDecember 1986

35 - ANtXE 12

BANGLADESH - ASHUGANJ FERTILIZER PROJECT (CREDITS 527 AND 527-1-BD)

PROJECT COMPLETION REPORT

CASH FLOW FOR ECONOMIC RATE OF RETURN(in million 1984/85 US dollars)

Project Working Variable Fixed CashYear Cost Capital Cost Cost Revenues (low

1973/74 1.4 (1.4)1974/75 10.6 (10.6)A75/76 24.2 (24.2)1976/77 29.5 (29.5)1977/78 99.5 (99.5)1978/79 81.3 (81.3)1979/80 58.2 (58.2)1980/81 41.5 1.2 (42.7)1981/82 19.8 0.8 (20.6)1982/83 (7.4) 0.1 7.31983/84 (5.2) 21.3 7.3 75.4 52.01984/85 22.5 7.3 78.8 49.01985/86 24.7 7.3 76.6 44.61986/87 26.7 7.3 85.5 51.51987/88 26.7 7.3 94.6 60.61988/89 26.7 7.3 101.2 67.21989/90 26.7 7.3 107.9 73.91990/91 26.7 7.3 113.6 79.61991/92 26.7 7.3 114.5 80.51992/93 26.7 7.3 116.4 82.41993/94 26.7 7.3 117.4 83.41994/95 (2.1) 26.7 7.3 119.3 87.4

Economic Rate of Return * 7.5%

Industry DepartmentJuly 1986

ANNEX 13

-36- Page-I o 2I**t> __ i,~c . r' @,21} j nSff~~~~~~~~~~~~w 21ttqlft

A - COMMENTS RECEI2',r2D FROM TDJY GOVERNMENT (093-4RW 111l

Xit I)/]I)A-1/Iit(i- 1/84 Vol IX/S3.o <5r¶,,23.11.86.

slhjects- I'i-Q)eCt 2` ipl.ettnn Report on AM11%xg'nndFert_Iize ProAect,(:dit 5i27 n 5;L7-7!d

Poi^r 1'¾ >skk

Kindly refer to the i~--ld Bank's letter dated S.aptembox

15, 1986 on the above 7MubjeCt. GOB comnments on the 1'roject

Completicn lieport on Aehuigi,nj Fert1liz.er ProJocte(oredit 527and

527-1-LW) nrc v, followo i

1) At page-V 'ei1w programmel'/projoct d&tt) date of

mnchniitcal completion a2ider original credit hns been

ehoWn Qe 11... ,*. .sad the completlin time to be 48

montlhs. The projoot become effective on Ist Jtanary,1976,

Thoreoff-., in March'78s thti time for cormplotiost of the

l:ro ec o i-od be 27 montlie unt not 48 montbs lhown in

thtU. repOrt.

2) Ia eiopplementary credit tho cdnte of mechmnical

complatiton lIs been shown as Ssptainl,er'80A, which nmeans 57

tnotitlt :'i c the offective dr3te of 'ie conitrect And not

7t8 mnonths.

3' The actual achieveo'ibnt in Oct,'RI should be 70 montlr

and nuo 91 months. Th)s means thot efn odditiinel1 21

months kihn kotutz a&dLIOd 'rn stuch column against theo comple-

tion timne for reaosons not cleair to ue.

le) tim , te over run in monthes lould road as 19

~,'.tead of 30 and 32 in place of 43, There is a diff,-

res-ca of 11 months in *oth cases.

5) Thle pr: duction tr guro at PaGn-13 tn fiscal yeer

8(4-65 siould be 4,14,500 ton fnd not 407,600 ton.

f) At p; ge 15 wider para 5.03 the present ox-factoryr s e eis Tk. 4054,.' end not Tk,b)bO/- as shown in the

r eport.

Contd.,,,, P/2

ANNEX 13Page 2 of 2

7) In thio month or Mayt83 theo plant p,roduced 91,010

of the ins~talled caxpacity or %urept, It may, thOrefo-vts

be considored that the plant wAs in commorcial

proidction from May and not July, although ror the

"ake ol convenience of record keeping theo project has

b7)i docLpred n s Co Mploat on 30th Junrod 1983,iet at

the end of the fisoal year, 82-83. On this ba*ie at

page viii, pora-4, 43 tmontlis in line-3 should reed

22 auid 59 in line-9 lshotld rearl 51.

You rtre reltieated to kindly commuinicate GOB comments

to IDA Wnshington.

Jtogard S

Yours 9incerely,

( Md. Idris Ali Dowan

Mr, Surinder K. tlalik,Industrial Economist,World Bank Rosident Missionin Bangladeah,222, New 2akaton RortiDhaka.

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