Document of The World Bank

FOR OFFICIAL USE ONLY DC -H4 Public Disclosure Authorized ReportNo. 7142-CRA


CHINA Public Disclosure Authorized


May 23, 1988 Public Disclosure Authorized

Industry,Trade and Finance OperationsDivision Country DepartmentIII

Public Disclosure Authorized Asia Regional Office

This documenthas a resiticteddishibudon and may be used by recXut onlyin the peromaoce of their officld duties. Its contents may not otherwisebe disclosedwithout World Bank authoization. CURRENCYEOUIVALENTS (As of February 5, 1988)

Currency name = Renminbi (RMB) Currency unit = Yuan (Y) = 100 Fen Y 1.00 = US$0.27 US$1.00 = Y 3.72


1 hectare (ha) = 2.47 acres 1 metric ton (ton) = 1,000 kilograms (kg) 1 kilometer (km) = 0.621 miles 1 cubic meter (i 3 ) = 35.3147 cubic feet (cf) 1 kilocalories (kcal) = 3,968 British thermal units (BTU) 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts (kW)


January 1 - December 3!


ABC - Afmonium Bicarbonate Mg0 - Oxide AMPC - Agricultural Means of Production MAP - Monoammonium Phosphate Corporation MCI - Ministry of CIB - Investment Bank HOC - Ministry of Commerce CIF - Cost, Insurance and Freight MOF - Ministry of Finance CNCCC - China National Chemical Mtpy - Million Tons per Year Construction Corporation MWh - Megawatt Hour CMP - Calcium Magnesium Phosphate N - Nitrogen Content in CMRDI - Chinese Chemical Mines Research NPK - Complex of N,P2 05 and Design Institute and K20 CPI - Chemical Planning Institute p.a. - Per Annum DAP - PA - Phosphoric FOB - Free on Board PCBC - People's Construction Bank of FAO - and Agricultural China Organization of the United P2 05 - Phosphorous Pentoxide Nations ppm - Parts per Million FY - Fiscal Year PRS - Production Responsibility System GDP - Gross Domestic Product ROM - Run of Mine GOC - Government of China SAA - State Audit Administration GPC - Guizhou Phosphate Company SINOPEC - China Petrochemical Corporation ha - Hectare SINOCHEM - China Chemical Export and Import ICB - International Competitive BiddiLg Corporation ICBC - Industrial and Commercial Bank oi SPB - State Pricing Bureau China SPC - State Planning Commission IDC - Interest During Construction SSP - Single Superphosphate R 0 - Potassium Oxide TSP - Triple Superphosphate kXh - Kilowatt Hour tpd - Tons per Day MAAF - Ministry of , Animal tpyn - Tons per Year of Husbandry and Fishery UNIDO - United Nations Industrial Development Organization FOR OMCIL USEONLY



Loan and Project Summary

Borrower: The People's Republic of China

Beneficiaries: Guizhou PhosphateCompany (GPC); Ministry of Chemical Industry (MCI)

Loan Amount: US$62.7 million equivalent

Terms of Loan: 20-year repayment,including 5 years of grace, at the standard variable interestrate

On-lendingTerms: The Governmentwill on-lend the loan proceeds to GPC at an on-lendingrate equal to 1051 of the IBiD variable rate, with a repaymentperiod of 20 years, including5 years of grace. The commitmentcharge and foreign exchange risks will be passed on to GPC. Project Objectives: The Project will assist China in achieving its priority for the fertilizersector under the Seventh and Eighth Five-YearPlans (1986-95),which is to reduce the imbalancein fertilizeruse by expanding the productioncapacity for phosphatefertilizers, particu- larly high-gradeproducts such as triple superphosphate (TSP) and monoaumoniumphosphate (MAP), based on domestic phosphateresources. More specificallythe Projectwill help GOC: (a) devise appropriate strategiesfor developingan efficient phosphate industry,including an optimal investmentprogram to meet phosphateneeds in the least-costmanner; (b) implf'mentthe first major mine developmentof the investmentprogram; and (c) strengthenMCI's capability to plan the developmentof the chemical eubsectors, includin-phosphates. Considerableprogress has already been made with objectives(a) and (c) during Project preparationthrough the PhosphateSubsector Study (the Study),which was carried out jointly by the Bank and MCI and which resulted in a phosphate subsector investmentprogran to the year 2000. The major invest- ment to be implementedunder the Project will provide a demonstrationmodel for the developmentof domestic phosphate1eposits using modern and beneficiation technologies. The Project will increase China's local supply of phosphaterock by about 251.

Thisdocumenthas anstfcted distribution andmay be used byrecipients onlyin the perfornEnce| |oftheirofficial duties. tscontents maynot otherwis be disclosei withioutWorld Bank authorization.| - ii -

Description: The Project has two components: (a) Wengfu mine development- start-up of an open pit mine at Wengfu in Guizhou with a capacity of 2.5 million tons per year (Mtpy) run of mine (ROM) rock and constructionof a modern beneficiationplant to produce phosphate concen- trate at the mine site and an associatedslurry pipeline; and (b) technicalassistance - consultancyservices for Projectmanagement and mine workshop maintenance,and provision of financialand technicalassistance for the computer-basedsector investmentoptimization model, developedunder the Study by the Bank with CPI's assist- ance with the data, to be installed,maintained and further developedat MCI to strengthenits subsector planning capability.

Project Risk: Virtuallyno commercialrisks are foreseen because markets for Project output are assured. The entire output of phosphateconcentrate from the Wengfu mine will be supplied to several downstreamhigh-grade fertilizerplants currentlyunder constructionand another fertilizerplant to be establishedat the mine site. The main technicalrisks lie in the coordination of the implementationand commissioningof the mine and the associatedfertilizer plants. In the past, poor coordinationin implementingmine and fertilizer investments,executed by separate entities under separate budgets,haa been a common cause of under- utilizationof new mines in China, resulting in a significantloss of economic benefits. This risk is mitigatedby involvinginternationally experienced consultantsin the technicalassistance component; they will help MCI and GPC with Project implementationand staff training. The Governmenthas assured the timely completionof all downstreamplants, including the Wengfu TSP plant to be establishedat the project mine site. The Governmentwill coordinateall construction work and report semi-annuallyon the progress of all downstreamplants. This risk will be further reduced because a new 800,OGO tpy TSP plant to be establishedat Wengfu, which would consume about 60X of the Project output, will be implementedby the Project company. This plant will be constructedand ready for operation in accordancewith the scope and timeframeagreed with the Bank. Assuranceshave been obtained from the Governmentand GPC to the same effect. - iii -

Project Cost: Local Foreijn Total --- (US$million)…

W.ngfu mine development Engineering& license fee 3.8 0.2 4.0 Equipment,materials & spares 22.8 50.1 72.9 Civils & erection 70.8 - 70.8 Others 12.5 1.3 13.8 Sub-Total 109.9 51.6 161.5

Technicalassistance - 0.6 0.6 Base cost (January 1988 prices) 109.9 52.2 162.1

Physicalcontingencies 11.0 5.2 16.2 Price contingencies 12.8 5.7 18.5

Installedcost 133.7 63.1 196.8

Incrementalworking capital 4.6 0.0 4.6 Interestduring construction 9.4 11.0 20.4

Total FinancingRequired /a 147.7 74.1 221.8

FinancingPlan: Local Foreign Total -: (US$ million)-

IBRD loan - 62.7 62.7 Governmentloan 143.1 11.0 154.1 Industrialand CommercialBank loan 4.6 - 4.6 Governmentfunds /b - 0.4 0.4

Total Financing 147.7 74.1 221.8


IBRD FY 1989 1990 1991 1992 1993 --TUS$ million)- -

Annual 1.2 8.2 25.1 23.8 4.4 Cumulative 1.2 9.4 34.5 58.3 62.7

Economic Rate of Return: 261

/a The total cost net of sales taxes on locally purchasedequipment and materials(US$2.0 million) is US$219.8million.

/b GOC plans to cover the CPI program to be implementedunder the technical assistancecomponent from the proceeds of the Second Technical Cooperation Credit (Credit No. 1664-CHA). CHINA


Table of Contents

Page No.



A. General Industry Background...... * ...... e 3 B. The GovernmentObjectives and Strategy for Industrial Development...s...... o...... o...... o. .o...... 3 C. Bank Support for the Industry...... 4


A. AgriculturalBackground.. 0000000..001.0...... *..*..***** 5 B. FertilizerUse in griculture...... 6 C. FertilizerDemand and Supplye...... 6 D. Structureof the FertilizerIndustry...... 9 E. FertilizerMarketing and Distribution...... 10 F. FertilizerPricing and Prices...... 11 C. GovernmentStrategy in the FertilizerSector ...... 13


A. World PhosphateMarket Background...... 14 B. The PhosphateIndustry ...... 15 C. Supply of Raw Materials ...... 16 D. The PhosphateSubsector Studye...... 17 E. InvestmentProgram for the PhosphateSubsector 0 ...* 000000 o. 18 F. Bank Role and Project Justification...... 18


A. General InstitutionalBackground...... 20 B. The Guizhou Phosphate Company (GPC)...... 0 21 C. The Ministry of Chemical Industry (MCI)...... 22

This report has been prepared by Messrs. K. Song (AS3IF), K. Constant (ASTIF), H. Hendriks (ASTEG),and D. Lilaoonwala(CTRMI). Messrs. W. Sheldrick (Consultant)and B. Stone (Consultant)contributed to the fertilizersector and phosphatesubsector chapters. Ms. D. Christmasprovided secretarial support in the preparationof this Report. - ii -

Page No. VI THEPROJECT...... oo...... 23

A. Objectives...... 23 B. Wengfu PhosphateMine DevelopmentComponent...... 2Z C. TechnicalAssistance Component...... 24


A. EngineeringArrangementse...... * **...... e25 B. Project Management...... 25 C. ImplementationSchedulee...... 25 D. Training...... ****...... 26 E. EnvironmentalAspects ...... 000000 26


A. Capital Cost ...... 00 27 B. FinancingPlan ...... 28 C Procurement...... 30 D. Allocationand Disbursementof the Bank Loan...... 31

IX. FIEANCIALANALYSIS...... 00...... 0000000000 33

A. FinancialManagement Practices in China...... 33 B. FinancialPerformance and Projections...... 34 C. FinancialRate of Return and SensitivityAnalysis..o...... 36 D. FinancialCovenants...... 37 E. Auditing and ReportingRequirements...... 37

X. ECONOMICANALYSIS .... o...... o... 0000 38

A. Economic Costs and Benefits...... 38 B. Economic Rate of Return and SensitivityAnalysis...... 38 C. Other Benefits...... o...... 000000000000000...... ** 39 D. Project Risks..****o@@*****@***@*oo0*0 000 000000000 40



3.1 FertilizerApplication Rates for Various Countries,1985 3.2 Historic Consumption,Production and Imports of Fertilizers,1976-1986 3.3 Comparisonof Domestic and InternationalPrices of Fertilizers,Main Energy Inputs and Main AgriculturalProducts, January 1988

4.1 Trends in Domestic Productionof PhosphateFertilizers, by Product, 1970-86 4.2 Domestic Productionof Phosphatevertilizers by Products and Provinces, 1985 4.3 Consumptionof Chemical Fertilizersby Province,1985 - iii -

4.4 Major PhosphateDeposits in China 4.5 Major Pyrites Deposits and Mines in China 4.6 An Outline of the PhosphateSubsector Investment Optimization Model 4.7 Planned Phosphate InvestmentProjects to the Year 2000

5.1 OrganizationChart of GPC

6.1 Sumnary of the Wengfu Pho&phateMine DevelopmentComponent 6.2 Scope and Timeframeof the Wengfu TSP Plant 6.3 Summary of the TechnicalAssistance Component 6.4 Outline of CPI's Work Program under TechnicalAssistance

7.1 OrganizationChart of MCI's Project CoordinationGroup 7.2 OrganizationChart of GPC's Project ManagementTeam 7.3 Project ImplementationSchedule and Key Milestones 7.4 EnvironmentalProtection and Standards

8.1 Capital Cost Estimates 8.2 EstimatedDisbursement Schedule for Bank Loan

9.1 AssumptionsUnderlying the FinancialAnalysis 9.2 GPC - A Summary of ProjectedIncome Statements 9.3 CPC - A Summary of Historicaland ProjectedFlow of Funds Statements 9.4 GPC - A Summary of Historicaland ProjectedBalance Sheets 9.5 IncrementalCost and Revenue Streams for FRR Calculations

10.1 AssumptionsUnderlying the EconomicAnalysis 10.2 IncrementalCost and Benefit Streams for ERR Calculations 10.3 Net Savings of Foreign Exchangeover ProjectLife


IBRD 20918 : China - PhosphateReserves and ProductionFacilities IBRD 20503R: Wengfu PhosphateMine Development Component



1. FeasibilityStudies for the Wengfu Mine DevelopmentComponents 2. A Black Book ContainingDetails of the Economic and Financial Analyses 3. The Terms of Reference for Consultantsfor Project Implementationand Mine Workshop Maintenance I. INTRODUCTION

1.1 The Governmentuf the People's Republic of China (the Covernment, cOC)has requested a Bank loan of US$62.7million equivalentto financea phosphatedevelopment project (the Project). The Project embodies an evolution in the Bank's fertilizeroperations in China, geared toward broadening the impact of Bank support on the developmentand efficiencjof the entire fertilizersector. The FertilizerRehabilitation and Energy Saving Project (Loan 2541-CHA,FY85), the first Bank fertilizeroperation, supports the rehabilitationof four large-sizeand one medium-sizenitrogenous fertilizerplants. The subsequentFurtilizer RationalizationProject (Loan 2838-CHA, FY87) aims at demonstratingalternatives for improvingproduction efficiencyat medium-sizenitrogenous fertilizer plants, which currently produce low-gradefertilizers, by convertingproducts from five such plants into high-gradefertilizers. It also aims to strengthen sector-wide institutionalefficiency by introducingimproved management systems at the enterprise level.

1.2 This Project, which would be the third Bank-supportedoperation in the fertilizer sector in China, broade;: the Bank's involvementbeyond the nitrogenousfertilizer subsector. Through the Phosphate Sector Study carried out during Project preparation,a subsectoralapproach to Bank assistancewas initiated,with the Bank providingfinancial and technical support to the Ministry of Chemical Industry (MCI) for the design of subsector-wide strategies..That effort resulted in the preparationof an optimal investment program that would allow China to meet its rapidly growing demand for phosphate fertilizers in the least-cost manner.

1.3 Based on the above framework and consistent with the overall developmentstrategies worked out under the Study, the Project will support: (a) developmentof a modern phosphatemine in Guizhou Province,which will supply processedphosphate concentrate to six high-grade phosphatefertilizer plants--fiveunder constructionand one currently in the design stage (para. 6.5); and (b) provisionof technicaland training assistance to MCI for the installation,maintenance and further developmentof the computer-based investmentoptimization model developed jointly by the Bank and MCI.

1.4 The Projectwas initiallyidentified in 1985, and was appraised by Messrs. K. Song, K. Constant,H. Hendriks, D. Lil-oonwalaand B. Stone in December 1987. The earlier PhosphateSubsector Study was carried out under Mr. W. Sheldrick'sleadership during 1986-87.

1.5 The Project appraisedby the Bank's project team also included the developmentof two additionalphosphate mines and two high-grade fertilizer (respectively,MAP and TSP) plants at the mine sites in Hubei Province. However, at the request of the Government,these investmentswill now be processed separately. GOC wishes to delay the loan processingfor these investmentsas it has still to complete its own internal reviews. These investmentswill now thereforebe implementedon a different schedule. Consideringthe urgency of developing the Guizhou mine in time for the commissioningof downstream fertilizerplants currentlyunder construction,it - 2 -

is importantthat this investmentadhere to the original timetable. A separate project consistingof the Hubei investmentsis expected to be prepared for Bank considerationin late 1988.

1.6 This report recomm.endsa Bank loan of US$62.7 million equivalent, which would cover 28.32 of the total financingrequired and 84.61 of the total foreign exchange financingrequired (equivalentto 100l of the foreign componentof the installedcost). II. AN OVERVIEWOF CHINESE INDUSTRY

A. General IndustryBackground

2.1 Industry is China's largest productivesector accounting for nearly 47Z of its Gross Domestic Product (GDP), and employing 17% of the total labor force. About 94,000 state enterprisesgenerate 74% of total industrial output, the remainder being produced by about 368,000 non-state enterprises, mainly urban and rural collectives. While state enterprisesproduce mainly importantraw materials, capital goods and strategiccommodities such as fertilizers,as well as light industrialand coasumer goods, most of non-state enterprisesare involved in the productionof downstreamconsumer products. Gross industrialoutput amounted to Y 1,119 billion (US$323billion) in 1986. The chemical industry,the main products of which are fertilizers, petrochemicals-andpharmaceuticals, accounted for 102 of the total industrial output.

2.2 Gross value of industrialproduction has grown rapidly at a rate of over 11% in real terms per year during the period 1980-86, in large part reflectingthe high rate of capital accumulationin industry. Until the late 1970s when the Government began to view external trade as an importantelement of economic development,Chinese industrywas oriented mainly toward the domestic market. Since then, Chinesemanufactured exports have grown steadily from around US$8 billion equivalentto over US$20 billion in 1986, although the share of exports in industrialoutput remains low (6.2%).

2.3 China's industrialdevelopment has been constrainedby outdated productiontechnologies, poorly coordinatedeconomic planning,and a distorted structureof industrialprices. The industry structureis biased to basic, heavy industrieswith all their attendantdisadvantages in terms of flexibilityfor change, lumpiness in investmentneeds, centralizedmanagement structurewith little incentivefor innovation,severe distribution constraints,low output prices, and major needs for plant rehabilitationand modernization. About 801 of industrialfixed assets are of pre-1960 vintage. The consumptionof raw materialsand etnergyin factoriesamounts to 85% of manufacturingproduction costs. Although this high rate is partly due to the relatively low cost of labor, it also reflects inefficientuse of inputs in the production process. Incentivesfor more efficient input use have been impeded by low prices of energy and basic intermediates. In addition,past excessive focus on physical output and quantitativetargets, compoundedwith inadequatelinks with markets, often led enterprisesto neglect improvementsin product quality and range.

B. The GovernmentObjectives and Strategy for InduistrialDevelopment

2.4 Since 1979, the Chinese Governmenthas shifted the focus of industrial levelopmenttowards light industryand introducedincentives and market forces as a means of improvingeconomic efficiencyunder on-going economic reforms. The developmentstrategy has emphasizedmodernization of existing equipment,development of more efficient light industryand of manufacturedexports, and material and energy conservationin industry. Price reforms,which have been perceivedby the Governmentas one of the most - 4 -

importantelements of the on-going economic reforms, are aimed at reducing price distortionsgradually to enhance allocativeeconomic efficiency, particularlyby allowing market forces to play an increasingrole in price determination. Since the start of economic reforms, the prices of major industrialinputs, includingenergy, have been raised significantlyto that effect. Reforms adopted in 1984 aim at decentralizingeconomic decision- making towards provincesand enterprises,and greater use of market signals to provide productionincentives. State enterprisereforms, include inter alia the introductionof the contract managementresponsibility system, uniform profit tax rates (55X) and wage incentives,have providedgreater autonomy and more appropriateincentives for enterprisemanagement. However, significant distortionsin relative prices still remain, and the objectiveof replacing tie traditionally"soft" enterprisebudget constrainthas yet to be achieved. The reforms are being implementedat a different pace amfng regions and subsectors. Because of the nature and structureof the fertilizersector, the process of decentralizationhas already progressedto a greater degree than in some other industrialsectors.

C. Bank Support for Industry

2.5 The Bank Group's industriallending operati3nsin China began in December 1982 with the approval of a loan of US$70.6 mqillionto finance the First China InvestmentBank Project (Loan/Credit2226/1313-CHA, FY83). Three additional loans/creditsof US$575 million to CIB (Loan/Credit2434/1491-CHA in FY84; Loan/Credit2659/1594-CHA in FY86; and Loan/Credit2783/1763-CHA in FY87) have been approved subsequently. Of the total amount lent to this institutionof US$645.6 million, US$294 million was disbursedand outstanding as at January 1, 1988. The main purpose of the CIB operationshas been to develop CIB as the premier financialintermediary providing term financing for small- and medium-scaleindustry. CIB operationsto date have supporteda wide range of subsectors,including: textile, light industry,electronics, food processing,pharmaceuticals, packaging materials, machinery and spare parts, building materials, chemicalsand metallurgical,and other, in a number of provinces,but principallyin Jiangsu, Shanghai,Tianjin, Hebei, Beijing, i Hubei, Liaoning,Anhui and Zhejiang. The wide range of subsectorsand the well-dispersedgeographical pattern have allowed CIB and its principal branches to develop strong institutionalties to small- and medium-scale industry in the country. Disbursementsof the CIB loans and credits are, apart from some delays in the first operation,ahead of schedule. While CIB's manpower and systems require further strengthening,the- basis of a sound developmentbank in China, particularlywith regard to its leading branches has been established.

2.6 Besides the four CIB operations,Bank Group involverentin the industrialsector comprises: (a) two fertilizerloans, totalingUS$194.6 million (para. 1.1); (b) a loan of US$100 million for the Shanghai Machine Tool Project (Loan 2784-CHA,FY87), involvingrehabilitation and modernization of the machine tool sector in Shanghai; (c) a regional developmentproject for Gansu Province (Loan 2812-CHA,and Credit 1793-CIiA,FY87), includingan industrialdevelopment component of US$20 million, to be used for diversificationand modernizationof the predominantlyrural industrialbase in the province. Physical implementationof the two fertilizerprojects is - 5 -

proceedingon sched'zle.A Planning Support and Special Studies Project, which includescomponents for supportinglong-term planning activitiesin selected subsectors,including petrochemicals, was approved in June 1987. None of the above projectshas to date reached completion.

2.7 The Bank's overall objectives in supportof China's industrial developmentare to assist the Government in: (a) improvingthe policy frame- work for the industrial sector as a whole; (b) building sound institutionsand practicesfor financialintermediation, subsector planning, project approval and implementation;(c) promotingand implementingtechnology upgrading, plant restructuringand rehabilitationand energy and material conservationin selected sectorsat the national and provinciallevels; and (d) carrying out the needed reforms in the financialsystem.

2.8 Specific plans include further support for both CIB and other finan- cial intermediaries,in the context of overall sector reform now underway, assistanceto selected major subsectorsat the national and provincial levels, namely, fertilizers,pharmaceuticals and machine tools, and the development of broad-basedindustrial lending operationsat the provincialLevel, involving restructuringof major subsectorsin the context of overall provincial developmentstrategies. The increasingdevolution of planning and implementa- tion responsibilityto the provinceshis the potentialfor a significant impact on industrialdevelopment provided that the provincialauthorities can effectivelyformulate and carry out their new role. The anticipatedseries of provincialoperations is designed to help selected provincesarticulate and implementtheir new responsibilities.Operations are also planned in rural industryinitially through support for the Government'sSPARK program, which provides technicaland financialsupport to selected rural enterprises,many of which are outside the state sector.


A. AgriculturalBackground

3.1 The agriculturesector in China employs some 190 million farm familiesand accounts for about 34% of the country'sGDP. Despite having a shortageof cultivatableland-of China's 960 million hectares (ha), only 10% is cultivated,compared with 75% in --Chinahas achieved self-sufficiency in its basic food requirements. That accomplishmentis all the more remarkablegiven that China has 22% of the world's populationbut only 8% of its cultivatedarea. The reason for this success is intensivecultivation practices,with relativelyheavy inputs of labor, chemical and organic fertilizers,and per unit of land. Foodgrains occupy about 70X of the total cultivatedarea. Cotton is the most importantindustrial crop.

3.2 The agriculturalsector has performedexceptionally well since 1979, when the Government introduceda new agriculturalincentive program, the "productionresponsibility system (PRS)." Reflecting these initiatives,the gross value of agriculturalproduction increased by 10% p.a. over the period 1980-86,compared to an average of 3% p.a. in the preceding20 years. Major changes that have taken place under the PRS include: (a) an increasingrole - 6 - for farm householdsas the fundamentalunits of agriculturalproduction and management;(b) replacementof mandatory procurementquota with voluntary contracts,which gives farmersmore flexibilityin determiningwhat to grow and where to sell; (c) price increasesfor major farm products;and (d) the introductionof flexible prices within a certain range for deliveriesof certain products by collectivesand individualproducers in excess of contractedtargets.

B. FertilizerUse in Agriculture

3.3 While China is the third largest user of chemical fertilizersand the largest consumer of nitrogen in the world, the level of fertilizeruse in 1985--167kg of nutrients per hectare of cultivatedland--was still only about a third of that in neighboringcountries such as Japan and Korea (see Annex 3.1 for a comparisonwith other countries). The implicationis that the potentialfor increasedfertilizer use is large. Sine expansion of the cultivatedarea is not feasible,increasing and more .lancedfertilizer use will remain central to China's strategy for increasedagricultural output.

3.4 At present, there is an imbalancein the use of nitrogen (N), phosphate(P 05) and potash (K 0) fertilizers. China's low applicationof phosphateana potash (para. 3.Z) reduces the synergisticbenefits that could derive from the relativelyhigh level of nitrogen application. This imbalance is a major constrainton increasedapplication of nitrogenousfertilizers. When comparedwith the applicationrates in the other countriesgiven in Annex 3.1, the low level of applicationof phosphateand potash fertilizersis evidentin China. According to results from surveys by the Ministry of Agriculture,Animal Husbandryand Fishery (MAAF) during 1981-83, through- out 73.4% of the cultivatedarea was deficient in phosphate,39.8% being seriouslyso.

C. FertilizerDemand and Supply

3.5 Consumption,production and importsof chemical fertilizersfrom 1974 to 1986 are summarized,together with the projectionsfor 1990 and 1995, in Table 3.A (greater detail can be found in Annex 3.2). -7-


Nitrogen Phosphate (P,O0) Potabh (KRo) Total nutrients C* _s._a Prod. Imp. Cons./a/b Prod.-Imp. Cons.a/c Prod. Imp. Cons.jA Prod. Imp.

1972 3,168 2,444 1,342 1,038 1.249 11 12 8 2 4,219 3,701 1,355 1981 10,363 9,858 1,541 2,735 2,508 499 251 24 250 13,349 12,390 2,290 1984 13,378 12,211 2,828 3,686 2,359 1,342 804 31 755 17,868 14,601 4,925 1985 13,477 11,438 2,052 3,531 1,760 950 920 24 364 17,898 13,222 3,366 1986 13,728 11,592 1,700 4,502 2,340 645 1,075 25 600 19,305 13,957 2,945 1990 (proj.) d 14,860 13,150 2,899 5,880 3,000 3,350 1,765 150 1,756 22,505 16,300 8,005 1995 (proj.)7d 16,400 15,150 2,562 8,200 4,900 3,956 3,280 150 3,392 27,880 20,200 9,910

Average Annul Growth Rt(2) 1972-81 14.1 16.8 11.4 8.1 40.2 13.0 13.7 19.1 1972-86 11.0 11.8 11.0 4.6 37.9 8.5 11.5 9.9 1981-86 5.8 3.3 10.5 (1.4) 47.7 0.8 7.7 2.4 1986 8.5 1.3 12.4 33.0 (2.5) 4.2 8.7 5.6 1986-95 2.0- 3.5 6.9 10.7 13.2 22.0 4.2 -

/a The consumptionfigures (sales to farmers) do not equal production plus imports because of distribution losses, stock changes and some unrecorded imports. Lb Actual phosphate fertilizer consumptionfigures include phosphate rocks directly applied without processing. /c Actual potash consumptionfigures appear to be overestimatedbecause of statistlcal inconsistency. 7d The projected imports for the years 1990, 1995 and 2000 were derived from supply gaps between domestic production and consumption, taking into account an 8SZfertilizer loss ln transit, storage and distribu- tion.

Sources: Consumption data-China Agricultural Handbooks 1981-86, Agricultural Yearbook of China 1985 and MAAF; production data-MCI, and Food and Agriculture Organization (FAO); and trade data--General Administration of Customs end FAO.

3.6 FertilizerDemand. Consumptionof all fertilizersincreased from 4.2 million tons per year of nutrients (tpyn) in 1975 to 19.3 million tpyn in 1986, an average annual growth rate of 14.1Z. Growth in nitrogen consumption, which increasedat an average annual rate of 14.1% during 1972-81, has slowed in recent years, mainly because the level of nitrogen applicationis relativelyhigh, especiallycompared to the use of phosphateand potash fertilizers,whose supplies are limited. Consumptionof the latter showed average growth rates of, respectively,11.0% and 37.9X - during 1972-86, in line with the Government'scontinued emphasis on their increasedapplication to improve the overall nutrient balance.

3.7 China also has a long history of using organic fertilizer. This will continue to be a valuable source of nutrientsand will complementfurther increasesin the use of chemical fertilizer. Total nutrients supplied by organic fertilizersin 1986 are estimatedat about 15 million tons.

1/ Potash consumptionhas shown a very high rate of growth from a negligible base in the early 1970s, but is still very low. 3.8 Based on its agriculturaltargets, the Governmenthas projected that the demand for chemical fertilizerwill reach 27.9 million tpyn in 1995, with implied average annual growth rates of about 2.0% for N, 6.9% for P205 and 13.2% for K20. According to MAAF, the desirablelong-term target for the ratio of these nutrients is 100:50:20,compared with a current one of 100:33:8. GOC plans to achieve the target by 1995 by rapidly expandingthe consumptionof phosphate and potash fertilizers. However, it may be difficult to meet these needs owing to domestic raw material constraintsfor potash and limited financial resourcesfor investmentand imports.

3.9 Fertilizer Supply. China, with about 1,900 operatingfertilizer plants of varying types and sizes, is the world's third largest producer of chemical fertilizersafter the USSR and the US. Chemical fertilizer production increasedfrom 3.7 million tpyn in 1972, peaking in 1984 at 14.6 million tpyn, before falling to 13.2 million tpyn in 1985. In 1986, it reached 14.0 million tpyn. During the 1972-86 period,phosphate fertilizer production showed a modest average growth rate of 4.6%, while nitrogenous fertilizerproduction increased at a much faster rate of 11.8% p.a. For potash the figure was 8.5Z.

3.10 The decline in domestic productionof both nitrogenousand phosphate fertilizersin 1985 was attributablemainly to the Government'sdecision to close some 200 small inefficientplants producinglow quality, low nutrient fertilizers,such as ammonium bicarbonate(ABC), single superphosphate(SSP) and calciummagnesium phosphate (CMP). The Governmenttook this step in response to diminishingdemand for these fertilizers. Despite the aggressive build-up of capacity for high-grade fertilizersin recent years, a significant portion of the fertilizerproduction in China is, however, still low grade: in 1985, only 30Z of nitrogen productionand 2X of phosphateproduction involved high-gradeproducts such as urea (46Z N), MAP (52% P205) and TSP (46% P205). 3.11 China plans to continue expanding the productioncapacity for chemical fertilizer,particularly high-grade phosphate fertilizer, during the Seventh and Eighth Five-YearPlan periods (1986-95). It also intends to rationalizeexisting low-gradefertilizer production facilities, by converting their products to high-grade fertilizers. New large- and medium-scale fertilizerplants to be completedduring the Seventh Five-YearPlan period - are expected to increase China's high-grade fertilizerproduction capacity by approximately1.2 Mtpy of N, 0.6 Mtpy of P205, and 0.1 Mtpy of K20. Projects under the Eighth Five-YearPlan, which is currentlybeing formulated,are expected to include further expansion in capacity for chemical fertilizersof

2/ Two 1,740 tpd urea plants, three 800 tpd DAP plants, a 400 tpd DAP plant, a 2,970 tpd nitrophosphateplant, a 500 tpd nitrophosphateplant, an 1,800 tpd NPK plant, a 500 tpd NPK plant, and a 200,000 tpy potassiumr chloride plant. 2.0 Mtpy of N and 1.9 Mtpy of P205.31 During 1986-95, all medium-sizeplants currentlyproducing low-grade fertilizer will be convertedto high-grade production.

3.12 FertilizerDemand and Supply Balance. Despite the impressivebuild- up in productioncapacity during the last decade, and continuedexpeditious expansionof capacity planned under the Seventh and Eighth Five-YearPlans, China will need to continue importingfertilizers to meet expected domestic demand. In 1986, about 17% of China's apparent total consumption(domestic productionplus net imports) of chemical fertilizerswas met by imports (12% for nitrogen,24% for phosphateand 96% for potash),at a value of over US$1.1 billion p.a., making China the world's largest net importer of fertilizers. As Table 3.A shows, the overall fertilizerdeficit is projectedto increase from 3.4 million tons of nutrientsin 1985 to 8.0 million tons in 1990 and 9.9 million tons in 1995. The foreign exchange situationpermitting, this deficit will be met by imports.

D. Structureof the FertilizerIndustry

3.13 Production. Except for 15 large-sizeurea plants (about 280,000 tpy of ammonia each), most of China's approximately1,900 fertilizerplants (about 1,200 producingnitrogenous and 700 phosphatenutrients) are using outdated technologyand do not conform to current internationalproduction norms. This reflects the fact that most of China's fertilizerplants were built using indigenousdesign, technologyand equipment,a reflectionof a policy in the early phases of the industry'sdevelopment of relying on local technologyand availableraw materials to the extent possible. Because of the outdated technologyat the majority of these plants, the level of energy consumption for fertilizerproduction has been high.

3.14 This approach was modified in the early 1970s, and during that decade and the early 1980s, China built 15 large nitrogenousfertilizer plants using importedtechnology and equipment. Almost all plants currentlyunder constructionare based on internationallyproven importedtechnologies.

3.15 Feedstock. China uses a variety of locally available feedstocksfor fertilizerproduction. The large-sizenitrogenous fertilizer plants use natural gas, naphtha and fuel oil as feedstocksfor ammonia production,while the small- and medium-sizeplants mainly use coal. The small-sizephosphatic fertilizerplants use low-gradephosphate rock to produce SSP and-CMP. The large- and medium-sizehigh-grade phosphatic fertilizer plants under constructionor considerationwill be based on both domestic phosphaterock and imported phosphoricacid.

3/ Ten high-gradephosphate fertilizerplants with a capacity of 240,000- 480,000 tpy DAP or 400,000-800,000tpy TSP, and five large-sizeurea plants. 10 -

E. FertilizerMarketing and Distribution

3.16 FertilizerAllocation. In May 1985, the Governmentchanged its approach to fertilizerallocation significantly by introducinga new contract system for the procurementof farm output (see para. 3.2). In the past, it essentiallyallocated fertilizeraccording to a state allocationplan in exchange for agriculturalproducts acquired through the state procurement system. The current contract system gives both farmers and the Government more flexibiiityin allocatingfertilizer by reducing the quantities covered by the state allocation plan. Fertilizerproducers are thus able to sell an increasingportion of their production outside the state plan, sometimes directly to farmers and across provincialboundaries. However, the state procurementsystem still accounts for about 60% of total fertilizer consumptionand over 90% of the high-gradefertilizers, including urea and DAP.

3.17 FertilizerMarketing. About 90% of chemical fertilizeris marketed through the AgriculturalMeans of ProductionCorporation (AMPC), a state-owned company under the Ministry of Commerce (MOC). AMPC handles all fertilizer under the state allocationquota as well as a significantportion of the above-quotaproduction. Producers sell the balance directly to farmers. AMPC procures fertilizerfrom the domestic plants and China Chemical Export and Import Corporation(SINOCHEM), an agency under the Ministry of Foreign Economic Relations and Trade, that is responsiblefor all imports of chemical fertilizers. AMPC has some 2,500 offices at the national (accountingfor about 20% of AMPC's total purchases),provincial (28%), and county (52%) levels. The county-leveloffices sell fertilizersto farmers through: (a) about 64,000 retail cooperativeshops (about 50% of AMPC's total sales); (b) some 110,000 retail shops (32%); and (c) direct sales (18%).

3.18 FertilizerTransportation. So far, the transportationsystem has been able to move the large and growing quantity of fertilizer,about 94 million product tons in 1986. Its transporthas been given priority to ensure timely availabilityto farmers. Fertilizer is moved, mainly in bagged form, from plants and ports directly to a network of county-levelAMPC warehouses located close to the consumingareas. While high-gradefertilizers such as urea and DAP are hauled long distances by rail, low-gradefertilizer such as ABC and SSP from small plants generally located near the consumingareas is transportedmainly by road. About one-thirdof the total fertilizer distributedin China moves by rail. River transportationalso plays an importantrole.

3.19 Fertilizer Storage. Fertilizerstorage capacityhas not been adequate in recent years to meet the peak storage requirements,given the rise in consumption. The AMPC operates storage facilitiesfor fertilizersat various levels. Total capacity at these facilities is equivalentto three months of national fertilizerconsumption. AMPC warehousesat the national, provincialand county levels account for half the total storage capacity; the rest are located in the countrysideat AMPC's retail shops. To reduce the storage burden and its carrying costs, AMPC is currentlyencouraging farmers to buy fertilizersduring the off-seasonby offering rebates. The shortage of warehousingcapacity at periods of peak storage demand will be alleviated - 11 - gradually as high-gradefertilizers displace the low-gradeones, since the former have a lesser volume.

F. FertilizerPricing and Prices

3.20 Trends under the Price Reforms. GOC has embarked on a major effort to reform the irrationalsystem of prices, which currentlyprevails in the country (para. 2.4). While the pace of the reform will, given the Government concern on macroeconomicmanagement and the obvious sensitivitiesinvolved, inevitablyvary from sector to sector and any time, its overall directionhas been clearly set. These ongoing economic reforms have involved expansionof the role of market forces in fertilizerproduction and allocation. In the past, the Governmentadministered fertilizer prices strictly,as it did those of other essentialcommodities. The current strategy assigns a greater role to market forces in fertilizerpricing and allocationso as to improve the efficiencyof productionand application. As a result, a two-tier pricing system has emerged. The State Pricing Bureau (SPB) and local (province,city and county) bureaus set the prices for the productionsubject to the state plan quotas at both the ex-factoryand farm-gatelevels. Market-influenced prices negotiatedwithin the limits of guideline retail prices set by state and loWal pricing authoritiesprevail for productionoutside the state plan quota.- Fertilizerproducers market these products directly.

3.21 At present, about 40Z of total consumptionis sold at negotiated prices, although the percentagevaries significantlyacross products and localitiesand with the financial situationof individualmanufacturers. In general, high-gradefertilizers are subject to stricter state allocation. Over 90Z of these products, includingurea and DAP, are currentlybeing sold at controlledprices under the state allocationplan.

3.22 The Governmentviews the two-tier pricing system as an intermediate step in the evolution of sectoral pricing policy, given its well-recognized limitations,including: (a) discriminationacross producersand consumers; (b) administrativecomplexity; and (c) distortionsand time lags in the adjustmentof the prices of inputs and outputs. Nevertheless,it expects to use this transitionalsyst-m until it introducesa broader price reform package. The reason is in part the close interrelationshipbetween fertilizer and the agriculturalsector and the potentialfor disruptionif the allocation and pricing arrangementsfor fertilizerswere to be liberalizedin isolation.

3.23 The Government'sstrategy is to continue gradually reducing its administrativecontrol of fertilizerpricing in parallelwith the gradual dismantlingof annual productionplanning and allocation,so that the economy can "grow out of the plan." Guidelinesfor future policy reforms are being

4/ At present, a ceiling for negotiatedprices of all high-grade fertilizers,such as urea and MAP, exists at the retail level. This ceiling is currently set by the SPB, but in the future will be set by provincialauthorities following guidelinesto be given by the SPB. - 12 -

developedby an inter-agencyworking group that is carrying out a comprehen- sive review of the fertilizerpricing and allocationpolicies according to a scope of work discussedwith the Bank. Through these reforms, GOC is committedto remove irrationalitiesthat exist in price relationshipsbetween inputs, fertilizersand agriculturalproducts. The group is headed by the Director of the Department for Heavy Industryand Communicationand comprises representativesfrom related Governmentagencies, including the Ministry of Finance (MOF), MCI, MOC, MAAF and China PetrochemicalCorporation (SINOPEC).

3.24 FertilizerPrices. The ex-factoryprices of major high-grade fertilizersand ABC, the delivered prices of the main inputs, and farmers' prices for major grains, togetherwith comparableinternational border prices in January 1988, are shown in Annex 3.3. Presently,the controlledex-factory prices of urea and DAP are below the border prices, while their negotiated prices are close to the economic prices. In January 1988, the controlledurea price-Y 410 (US$l10)/ton--representedabout 73% of the CIF import price of US$151/ton,while the ceiling for the negotiatedprice was set at 94% of the economic value. For DAP, the figures are, for plan output, Y 598 (US$161)/ ton, or 84% of the import parity price of US$192, and for the negotiated price, Y 700 (US$188),or 98%. At present, there is no local productionof TSP and MAP, and controlledex-factory prices have thereforenot been established. The ceilings for negotiated prices for future TSP and MAP productionare expected to be set in line with that for DAP. The Government provi4es subsidies to make up the difference between the import and sale prices for imported fertilizers. Actual negotiatedex-factory prices have usually been equal or close to the ceiling; these prices have frequently exceeded the.ceiling, with approval from the pricing authorities,at least during the peak season.

3.25 An average distributionmargin of about Y 100 (US$27/tonof product) is added to the ex-factoryprice at the farm-gatelevel to cover AMPC's transportand storage costs.

3.26 Prices of FertilizersRelative to AgriculturalProducts. The price structureof agriculturalproducts is similar to that of fertilizers. Agriculturalproducts traded by the state procurementsystem are subject to controlledprices. While some exceptions exist, these are generally below border prices, while the market-influencednegotiated prices more closely approximatethe border prices. For example, as of Janaary 1988, the controlledprice of rice was Y 632 (US$167)/ton,about 79Z of its export value of US$212/ton,whereas its negotiatedprice was Y 840 (US$226)/ton(Annex 3.2). The controlledprice of wheat was Y 328 (US$119)/ton,about 79Z of the CIF import price of US$150, the negotiated price, Y 500 (US$161)/ton.

3.27 Prices of FertilizerInputs and PhosphateConcentrate. The price structureof major inputs into fertilizerproduction is also similar to that of fertilizers. However, country-wideuniform controlledprices for these inputs do not exist, and the controlledprices applied to individualsuppliers are set by each supplier'srespective supervisory pricing authority at the central,provincial and county levels. These prices,while varying to a large extent depending on the quality of product and the location and geological conditionof supply sources, are on the whole far below their border prices. - 13 -

The controlled price of natural gas under the state allocation quota is around 55-65Z of its fuel oil equivalentvalue based on border prices. The controlledprice of coal is 50-60X of its export value. The average ex-mine controlledprice of domestic phosphaterock, the quality of which is usually too low to be tradeable in the internationalmarket, is about 50% of the imr,.vtparity price based on nutrient contents. Negotiated prices above the quota are generally higher than the controlled prices by 15-25X;although in sorm'cases they have, subject to approval by the pricing authorities, approachedborder prices.

3.28 During negotiations,an assurancewas obtained from the Government that GPC will be allowed to market its entire output (fertilizersfrom the downstreamWengfu TSP plant, which will be establishedat the projectmine site, and phosphate concentrateto be sold to other downstream fertilizer plants) outside the state allocationplan at negotiatedprices.

C. Government Strategy in the FertilizerSector

3.29 In view of its importance to agriculture,the fertilizer sector has been, and will continue to be, a sector of high priority for the allocation of investmentresources. The Governmentreiterated this priority in a statement published by the State Council in September 1987.

3.30 The Government'smain objectives in the fertilizersector are to: (a) achieve the desirablenutrient balance of 100(N): 50 (P205): 20 (K20) by the end of the Eighth Five-Year Plan (1991-95)by rapidly expandingthe production capacity for phosphate fertilizers,based on domestic phosphate rock and the developmentof domestic potash resources;and (b) move toward self-sufficiencyin fertilizersduring the Ninth Five-Year Plan (1996-2000). Other priorities include the rationalizationof low-gradefertilizer facili- ties through technicalrenovation, energy-saving measures and improvementin product quality, and greater efficiency in enterpriseoperations through improvementsin management efficiency.

3.31 The Government'sstrategy for sectoral investmentduring the Seventh Five-YearPlan envisages: (a) bringing on-line the new fertilizerproduction capacity currentlyunder construction(see para. 3.11); (b) convertingmedium- size low-grade fertilizerplants to high-grade fertilizerproduction; (c) intensifyingthe exploitationand developmentof domestic phosphate resources, including seven large new phosphatemines and the expansion of pyrites mining capacity;and (d) rationalizationof many small-sizelow-grade fertilizerplants, includingtheir conversionto high-grade operationsusing adaptive technologies. At present, the Governmentdoes not contemplateany investmentsin new small-sizeSSP or ABC plants.

3.32 During the Eighth and Ninth Five-Year Plans (1991-2000),Government strategywill focus on further expansion of phosphatefertilizer production capacity,with State resourcesgoing mainly for phosphatefertilizer. The Governmentwill not initiateany new nitrogenousfertilizer projects; these will be implementedby the provincialauthorities as necessary. This strategy is consideredappropriate, given the nutrient imbalance in fertilizeruse and China's endowmentof phosphaterock. - 14 -


A. World PhosphateMarket Background 4.1 Consumption. World phosphatefertilizer consumption grew steadily in the 1970s and early 1980s except in 1985/86when a decline of 2.6% from the previous year's consumptionwas registered. According to statisticspublished by FAO, world consumptionof phosphatefertilizers rose from 19.8 million tons of P20 to 34.3 million tons during 1969/70to 1984/35 at an annual average rate of 3.5%. The decline in 1985/86 reflects the reduced applicationof fertilizersin severalcountries exporting agricultural products due to the record-lowprices of grains and agriculturalproducts in the international market. In 1986/87,world phosphateconsumption has rebounded to 33.9 million tons of P205 largely due to a rapid consumptionincrease in developing countries. Wc-ld phosphateconsumption is projectedby the Bank's Economic Analysis and ProjectionsDepartment to increaseat an annual average rate of 2.7% between 1985 and the year 2000. In 1985/86,major consuming countries of phosphatefertilizers were USSR (23.0X of the world consumption),U.S. (11.5%),China (8.5%),India (5.7%),France (4.5%), and (3.9%).

4.2 Production. World productionof phosphatefertilizers also grew steadilyfrom 20.6 million tons of P205 in 1969/70 to a peak of 37.2 million tons in 1984/85. In response to the trends in demand for phosphate ferti- lizers, world phosphateproduction decreased to 34.6 million tons in 1986/87, and reboundedin 1986/87. In 1985/86,major producingcountries of phosphate fertilizerswere U.S. (23.0Z of world production),USSR (22.6%),China (5.3%), India (4.2%),Brazil (3.7%),and France (3.0%). According to supply projec- tions by the FAO/UNIDO/WorldBank FertilizerGroup in May 1987, world phosphatefertilizer supply potential,which is derived from world nominal capacity in operationand under constructionand country specific operation rates, was estimatedat 36.8 million tons of P205 in 1986/87,and was expected to reach 41.8 million tons by 1991/92,representing an annual average growth rate of 2.4%. Major increase in capacity is expected to take place in developingcountries, particularlv in Morroco, , , China and . The recent world-widetrend is to locate new productionfacilities near mine sites.

4.3 InternationalTrade and Market Prices. The internationalphosphate market is competitive,with two main exportingregions of North America and Northern Africa and all other regions importing. Phosphatefertilizer prices in the world market, which fell sharplyduring the 1980-83 world-wide recessionand reached the record-lowlevel in 1986, increasedrecently as world demand for phosphatefertilizers, particularly in developing countries, recovered. While the world market prices of phosphate fertilizersare not expected to increase significantlyin the short run given the forecast movement in the agriculturalmarket and the industry's investmentbehavior, the recoveryof these prices is expected to be gradual and steady throughout the 1990s. Fertilizerproduction facilities to be establishedunder the Project are expected to come on stream in early 1993. - 15 -

B. The PhosphateIndustry

4.4 Although domestic productionand the use of phosphate fertilizers has increasedsteadily over the last two decades, developmentof the industry in China has been less spectacularthan that of the nitrogen industry. The main constrainthas been technicaldifficulties in processingCninese rock, which has a high magnesiumcontent, into concentratessuitable for the productionof high-gradefertilizers. Productionof phosphatefertilizer has thereforebeen limited to low-gradeproducts such as SSP and CMP at small provincialphosphate fertilizer plants. Accordingly,there was little planningand coordinationof the developmentof the phosphatefertilizer industryat the State level. However, severalyears ago the Government shiftedthe priority in the fertilizersector from nitrogenousto phosphate fertilizers,in order to correct the significantimbalance in fertilizeruse.

4.5 Domestic PhosphateFertilizer Production. Recent trends in the productionof phosphatefertilizers are summarizedin Table 4.A below (further detailsare given in Annex 4.1). As of the end of 1987, almost all phosphate fertilizerproduction was low-grade,with SSP comprisingmore than 70X and CMP most of the balance. Domestic productionof other phosphatefertilizers has been insignificant--in1985, ammonium phosphateproduction was only 7,000 tons of P,O5, while the total capacityof phosphoricacid plants was only about 50,000 tpy of PRO,. About 400,000 tons of ground phosphaterock were also being applied directly.

Table 4.A: PRODUCTIONOF PHOSPHATE FERTILIZERS,1972-86 ('000 tons of P205, X)

SSP CMP Others /a Total Volumae z Volume Z Volume Z Volume X

1972 740 59.2 488 39.1 21 1.7 1,249 100.0 1981 1,780 71.0 692 27.6 36 1.4 2,508 100.0 1983 1,920 72.0 715 26.8 30 1.1 2,665 100.0 1984 1,683 71.3 644 27.3 32 1.4 2,359 100.0 1985 1,345 76.5 380 21.6 33 1.9 1,758 100.0 1986 n.a./b n.a. n.a. n.a. n.a. n.a. 2,340 100.0 la Ammonium phosphateproduction: 5,000 tons in 1984, 7,000 tons in 1985; the 1986 figure is not available. lb n.a. = not available.

Source: MCI - 16 -

4.6 There are about 700 phosphatefertilizer plants in China, scattered in almost every province (see Annex 4.2). The average output capacity is 15,000-30,000tpy, except for a few SSP plants that have capacities of more than 100,000 tpy. Most of the productionin each province is currently consumed within its boundaries(Annex 4.3).

C. Supply of Raw Materials

4.7 The two main materialsrequired for producinghigh-grade phosphate fertilizersare phosphaterock and sulfuricacid.

4.8 PhosphateRock. China is well endowed with more than 3 billion tons of phosphaterock (see Annex 4.4). The physical nature of the rock is similar across deposits,usually hard and with a high magnesium oxide (MgO) content varying from about 2.5-6.0Z. Until recently,when a new process for benefi- ciating these rocks was developedin China, domestic rocks were not suitable for the productionof high-gradephosphate fertilizers. Now, however, the Covernmentis planning several new large undertakingsto exploit the major depositsof rock, particularlyin Guizhou, Hubei and Yunnan Provinces. The Projectwill support one such effort. Recent explorationalso indicates large rock resourcesin SichuanProvince.

4.9 Relative to the large size of the phosphaterock reserves, the current level of productionis small, for the reasons given above. Average annual productionof phosphaterock between 1983-85 amounted to only 11 million tons of run of mine (ROM) rock, mainly in five provinces,as shown in Table 4.B. In 1985, most of this rock was used as ROM rock; only about 5X was beneficiatedbefore use.


Yunnan Guizhou Hubei Hunan Sichuan Other Total

Production 2,952 1,829 3,372 1,048 1,314 610 11,125

Source: MCI

4.10 Because the phosphate fertilizerplants are small and scattered throughoutthe country, phosphaterock is transportedwidely over China. Yunnan Province,for example, sends rock to 24 provinces,Guizhou to 18 and Hubei to 19. The major importingprovinces are, however, Hubei, Liaoning, Jiangsu,Shandong and Guangxi. China imports a small quantity of rock (varyingbetween 0.2 to 0.3 Mtpy from year to year) for some plants near the . It also exports a small amount of phosphaterock under counter-trading arrangementswith other developingcountries. - 17 -

4.11 . China's sulfuric acid consumptionin 1986 was about 8.5 million tons, of which about 5.0 million tons went for phosphate ferti- lizer production. China meets almost the entire demand for sulfuric acid domestically. About 1.2 million tons of acid comes from smelter gas, and almost ell the remainderfrom pyrites; only a small amount comes from elemen- tal sulfur.

4.12 The major deposits and mines of pyrites are located in Guangdong, Shanxi,Anhui, Li.aoning,Hunan and Sichuan Provinces (Annex 4.5). The major producersof. smelter acid are in Liaoning,Gansu and Hunan. China has discoveredsulfur deposits in Shandong Province,but attempts to exploit them have not been successful. Little sulfur is recovered from the oil and gas industryas most gas deposits are sweet.

4.13 The shortageof sulfur could become a constrainton developmentof the phosphateindustry unless new deposits of pyrites or sources of by-product sulfuricacid (e.g. )are developed. GOC is aware of this possibilityand is establishinga pilot plant in Yunnan to develop a process to recover sulfur from phosphogypsum.

D. The PhosphateSubsector Study

4.14 As mentionedearlier (para. 1.2), during Project preparationMCI and the World Bank carried out a joint Phosphate SubsectorStudy (the Study) to help the Government identifyappropriate strategies for the developmentof an efficientdomestic phosphatefertilizer industry. The main objective of the Study was to prepare an optimal investmentprogram up to the year 2000 that would allow China to meet its rapidly growing demand for phosphate fertilizers in the most economicmanner, given specifiedmarket requirementsand transport constraints.

4.15 The PhosphateModel. As part of the Study, the Bank designed a computer-basedmathematical programming model to facilitatereview of the options, using data providedby MCI (see Annex 4.6 for the details). The model covers optimizationof investmentat the national level as well as at each plant in terms of location, scale of operations,and levels of production in the context of the constraintsassociated with the transportof raw materials,intermediates and final products. Selectionof optimal strategies was based on a comparisonof differentoptions and scenarios. The model enabled the Governmentto review in a consistentand integratedmanner the major issues involved in developingthe fertilizer industry,such as: (a) domestic fertilizerproduction versus imports; (b) optimal mode of transportof raw materialsand finished products; (c) the location of new fertilizerproduction facilities; (d) the relative economicsof producing differenttypes of phosphatefertilizers; and (e) priorities in developing the differentphosphate rock deposits. This model will be installedat MCI's ChemicalPlanning Institute(CPI) under the Project, and continuouslyupdated to provide advice to planning and project implementingauthorities on relevant subsectorstrategies (para. 6.9).

4.16 The results of work with the model provided strong economic justifi- cation for developmentof China's domestic phosphate fertilizerindustry, - 18 - based on domestic raw materials. The analysis suggestedthat productionof high-gradephosphate fertilizers such as TSP, DAP and MAP near the rock sources in Yunnan, Guizhou and Hubei Provinces can be more economic than relianceon imports. Constructionof small DAP plants that use adaptive technologyand local raw materialswill also help China meet its phosphate needs.

E. InvestmentProgram for the PhosphateSubsector

4.17 To meet its agriculturalproduction targets by the year 2000 with balanceduse of the three main fertilizernutrients, China will have to increase its phosphateconsumption to about 9.1 million tons of P205 from its current level of 4.5 million tons. If most of the presently known economic depositsare fully developedby that time, China could increase domestic productionfrom the 1986 level of 2.3 million tons of P205 to 9.0 million tons. This developmentwould necessitatean increase in phosphate rock productionfrom about 11 to 35 million tpy of rock and in sulfuric acid from about 8 to more than 20 million tons. Total related investmentcosts for the productionfacilities are estimatedat about US$8-10 billion in 1988 prices, exclusiveof considerableinvestment required to upgrade the infrastructure needed to transportraw materials to the processingunits and to distribute the final products to the marketplace.

4.18 During the SeventhFive-Year Plan, five new large phosphate rock mines and many small local mines are to be developed (the Wengfu mine in Cuizhou, one mine in Yunnan, and three mines in Hubei). Output at the large pyrites mines in Guangdong,Neimonggol, Hunan and Anhui will be increased substantiallyto meet the demand for sulfuricacid. These local raw materials will feed the new high-gradephosphate fertilizerplants to be implemented during the Seventhand Eighth Five-YearPlan periods. Three DAP plants will be implementedbased on imported phosphoricacid. About 50 small SSP plants will be revamped to produce DAP using adaptive technology,a move that will allow them to ucilize relativelylow-grade phosphate rock. During the Eighth and Ninth Five-YearPlans (1991-2000),the Government intends to fully exploit the domestic phosphateresources to produce a total of 35 Mtpy of phosphate rock (30% P205 basis) and 9.0 Mtpy of phosphate fertilizers(100 P205) by the year 2000. Details on specific investmentsin the phosphate subsectorup to the year 2000, preliminarilyprepared on the above basis, are given in Annex 4.7.

F. Bank Role and Project Justification

4.19 In support of the Government'sefforts to implement its strategies in the fertilizersector (paras.3.29-3.32), the Bank's main role is to provide technicaland financialassistance in: (a) strengtheningGOC's capabilityfor investmentplanning based on modern planning techniques,in order to optimize investmentsin the sector, especiallythose for phosphate and potash fertilizer;(b) assessing specific projects using suitable method- ologies, includingthe selectionof appropriatetechnologies; (c) building new fertilizerproduction capacity, as well as renovatingexisting facilities, particularlyfor phosphateand potash fertilizers;(d) enterprise-level restructuringand upgradingthe efficiencyof fertilizerdistribution so as to - 19 -

reduce fertilizerlosses during distribution;and (e) improvingthe managerial efficiencyof sector companiesthrough the introductionof modern enterprise- level managementsystems.

4.20 The two previous Bank-supportedfertilizer projects supported China's priority objectiveduring the early part of the Seventh Five-Year Plan (1986-90),which has been given to improvingthe technicaland managerial efficiencyof existing fertilizerplants. Most of the existing large- and medium-sizefertilizer plants, includingthe large ones built based on inter- nationallyproven technologiesin the 1970s, do not use up-to-datetechnolo- gies and requiremajor investmentsto improve energy and productionefficien- cies. The first project (FertilizerRehabilitation and Energy Saving Project, Loan 2541-CHA,FY85) which is expected to be completed in the latter half of 1988, provides financialassistance for improvementsin efficiencyat one medium-sizeand four large nitrogenousfertilizer plants. The second project (FertilizerRationalization Project, Loan 2838-CHA,FY87), being supportedby t~-eBank provides financialassistance both to upgrade the operationsof five medium-sizenitrogenous fertilizer plants, includingconversion of their products to hiah-gradeones, and to introducemodern enterprise-levelmanage- ment systems in tie fertilizerindustry overall. Implementationof these projects iE proce-dingwell and on schedule. An IDA-financedtechnical credit was also provides to supportproject preparation,including tests of the phosphaterock and feasibilitystudies for the Project.

4.21 The Project supportsChina's priority in the fertilizersector during the Seventhand Eighth Five-YearPlans (1986-95),which is to reduce the nutrient imbalancein fertilizeruse by rapidly expanding the production capacity for high-gradephosphate products. At the same time, the process of project preparationhas providedan opportunityto introducemodern subsector planning techniquesand methodologiesto the phosphate industry and to help GOC articulatean optimal strategy for the developmentof the subsector. The implementationand further developmentof this strategy will be supported under the Project. By involvingMCI in the joint phosphatesabsector study, its subsectorplanning capabilityhas been strengthened. The experienceand methodologieslearned from the Study can also be applied to other subsectors, an aspect in which the Chinese Governmenthas already expressedan interest. This Project also supports the developmentof a modern phosphatemine, the first such mine developmentin China in terms of size and configuration. This effort will help China gain the experiencenecessary for implementingother similar investments,which have already been identifiedin the Study. The technicalassistance component is designed to ensure successfultransfer of subsectorplanning technologiesfrom the Bank to GOC. - 20 -


5.1 The PhosphateDevelopment Project involves: (a) Guizhou Phosphate Company (GPC), Guizhou Province,which will implementthe Wengfu mine develop- ment component(paras. 6.3-6.6); and (b) MCI, which will coordinateProject executionand implementthe technicalassistance component (paras. 6.7- 6.9). The operational,managerial and organizationalaspects of these institutionsare reviewed in this chapter, while the financialaspects are reviewed in Chapter IX.

A. General InstitutionalBackground

5.2 Chinese chemical fertilizercompanies and phosphatemines are state- owned, but operate as financiallyand administrativelyindependent entities. They are registeredwith their respectivesupervisory authorities--provincial, city or county governmentsto provide them with the status of legal enti- ties. In the past, the administrative,production, marketing and financial operationsof these companieswere under the direct supervisionof the super- visory authorities. However, their autonomy in business decisions has been expanding,and is expected to continue doing so, under the ongoing economic reforms. Particularly,large-size companies already enjoy wide autonomy in almost all aspects of operations. GPC is a new comppy which was legally establishedto carry out the Wengfu mine component." GPC's charter, which has been registeredwith the Guizhou provincialauthority, describes the scope of its activities,responsibilities and authority in the conduct of business.

5.3 Organizationand Management. The organizationand management practicesof Chinese state-ownedindustrial enterprises reveal strong simila- rities. Their organizationis basically flat--thereare numerous unit work- shops and departmentswith their own managementlayers, all at the same organizationallevel. A general manager, appointedby the supervisorygovern- ment, heads each company. Under the generalmanager are the second-layer managers,who share functionalresponsibilities related to procurementand sales, administration,production, maintenance and construction. A chief engineer,also second-layer,is charged with all technicalmatters, including developmentand renovation. A chief accountanthas a similar position in the area of financialmatters.

5.4 This structurehas not promoted contemporarystandards of organiza- tional and managerialefficiency, such as adequate scope of control, func- tional distributionof responsibilitiesamong line managers, and adequate managerialand financial autonomy. The Government(SPC, MCI and the local Governments)has been setting annual productiontargets, allocating inputs, distributingoutput and allocatingfunds from budgets. Some managers, parti- cularly those responsiblefor production,have been overloadedwith supervi- * sory responsibilities.Horizontal coordination among various departmentsand

5/ GPC currentlydoes not have productionoperations. - 21 - workshops is not satisfactory. Because of insufficientautonomy, good manage- ment informationand cost management systemsdo not exist.

5.5 Recent ManagementReforms. Under the recent economic reforms, Chinese fertilizercompanies have received increasingmanagement autonomy. One result, however, is that there is now a two-tier planning and management system. The state plan mandates a basic minimum level of activity,but beyond that level each company is free to operate in response to market forces under its own flexible plan. Companiescan make their own decisionsregarding productionlevels, procurementof raw materials, sales of products above the quota, and utilizationof funds generatedby those sales, within the context of the flexible plan. Although state planning for the fertilizersector is expected to continue in the near future, the scope for flexible planning and managementis to expand further, providing still greater autonomy to manage- ment.

5.6 MCI recognizesthe strong need to restructurethe organizationand managementof the chemical fertilizer(including phosphate mining) companies so that they can effectivelycarry out their mandates for organizational change. One means is through the introductionof modern enterprise-level managementsystems for informationand costs, as well as investmentand financialplanning. MCI, with Bank assistanceunder the Fertilizer RationalizationProject (Loan 2838-CHA, FY87), is currently sponsoringa managementefficiency study, using internationallyexperienced consultants. The aim is to raise managerialefficiency in fertilizercompanies in the contextof the changing business environment. This study, which is expected to be completedby the end of 1989, will also provide practical recommendationson the introductionof suitablemodern systems. MCI plans to introducethese systems graduallyin the entire chemical industry following successfulintroduction of them at several companieson a pilot basis.

B. The Guizhou PhosphateCompany (GPC)

5.7 Background. GPC, located in Wengan County, about 160 km northeast of Guiyang, the capital city of Guizhou Province,was founded in 1984 to exploit the phosphatedeposits in the Wengfu area. The company has completed explorationwork.

5.8 Organizationand Management. GPC has the basic organizational structuredescribed above (para. 5.3). It is headed by a general manager, to whom four second-layermanagers report (the director of the mine, the chief engineer,and the managers of the constructionand finance departments). Severalthird-layer managers have also been appointed. Most managerial personnelhave relevant experience in phosphatemining from their involvement in Guizhou'sKaiyang phosphatemine and through the recent exploration, projectpreparation and constructionactivities for this Project. Neverthe- less, considerablereinforcement of GPC's management capabilitiesneeds to take place during Project implementation. Annex 5.1 shows GPC's existing organizationalstructure as well as the one currentlyenvisaged after Project completion. - 22 -

5.9 Staffingand Training. CPC staff presently number 90, of whom 20 are second- and third-layermanagers, 68 are engineersholding college degrees or higher, and 22 are administrativestaff and workers. The ratio of upper to lower level staff is relativelyhigh, because GPC is still being set up. After project completion,GPC's total staff is expected to be about 1,000, of whom 110 will be managers. The implicationis that GPC will need to recruit additional skilledpersonnel from other mines.

5.10 Given the requirementof staff experiencedin implementingand operatingsuch a complex Project, consultancyservices will be required for smooth Project implementation. Further, recruitmentand training of qualified staff will be essentialto the success of the Project. During loan negotia- tions, an assurancewas obtained that GPC will prepare, and furnish to the Bank for comment by June 30, 1989, a comprehensiveprogram to strengthen management,recruit qualified staff, and provide training,and thereafterwill carry out the agreed program. GPC will obtain assistance from internationally experiencedconsultants and local design institutesin preparing the program.

C. The Ministry of Chemical Industry (MCI)

5.11 Background. The Ministry of Chemical Industry (MCI) has overall supervisoryresponsibility at the national Government level for the chemical fertilizersector, includingphosphate mining, as well as for a number of refineries,rubber plants and several other chemical industries. MCI prepares the five-yearplans for those subsectors,works out annual production targets, coordinatesthe supply of raw materialsand sales of output, and monitors the activitiesof the chemical industryat the provincial and county levels in coordinationwith Chemical Industry Bureaus of local governments.

5.12 Organizationand Management. MCI is headed by a minister, assisted by four deputy ministerswho are responsible,respectively, for: (a) finance and foreign affairs; (b) production;(c) constructionprojects; and (d) educa- tion and research. MCI maintains a task force known as the "World Bank Project ImplementationCoordination Group" to coordinatewith the Bank. It is headed by the deputy minister for finance and foreign affairs. The World Bank Loan Office, an executivearm of the group headed by a director-level official,maintains project coordinationgroups for Bank-supportedprojects, includingthis Project.

5.13 MCI's Chemical Planning Institute (CPI) is the department-level researchand advisory unit of MCI. Establishedin 1978, CPI provides assis- tance in: (a) drafting subsectoral,regional and enterprise developmentplans and strategies;(b) advising MCI on strategies for technologydevelopment and technologyselection for new processes and products;and (c) assessing feasi- bility studies for major investments. CPI currentlyhas 250 staff, including 47 administrativesupport staff personnelwho are assigned to its eight line divisions;it also has a computer center. CPI worked closely with the Bank on the joint PhosphateSubsector Study, including preparingmost of the major data inputs for the model. Three CPI staff members have already received intensivetraining on the fundamentalsof the model from Bank staff to iacili- tate future operationaltransfer of the model. - 23 -


A. Objectives

6.1 The specific objectivesof the Project are to: (a) help China establishappropriate strategies for developing an efficientphosphate indus- try, includingdevelopment of an optimal investmentprogram to meet the future demand for phosphate fertilizers;(b) provide financialand technicalassis- tance in implementingthe first major mine developmentof the investment program,which would provide a model for future such investments;and (c) strengthenMCI's capabilityfor subsectoralplanning through transferring the expertisethe Bank obtained in the joint-PhosphateSubsector Study.

6.2 Considerableprogress with respect to objectives (a) and (c) has already been achieved as a result of the Phosphate SubsectorStudy undertaken during Project preparation(paras. 1.2 and 4.14). To achieve the remaining objectives,the Project comprisestwo components: (a) Wengfu phosphatemine developmentcomponent; and (b) technicalassistance component.

B. Wengfu PhosphateMine DevelopmentComponent

6.3 This component,to be carried out by GPC, involves establishment of: (a) an open-pitmine to produce 2.5 Mtpy of ROM rock; (b) a beneficiation plant to process the rock into 1.9 million tpy of high-grade phosphateconcen- trate (34Z P205); and (c) related on-site and off-site infrastructure,includ- ing a slurry pipeline (see Annex 6.1 for details). Of the phosphatedeposits in China, the Wengfu area offers the best conditions for large-scalemining of phosphaterock with a high P20, content. In addition to the large proven reserves and good quality of phosphaterock, the site benefits from the fact that a major railway line runs 45 km from the proposed mine. The phosphate rock concentratewould be pumped as slurry to a railway loading site, where it would be dewateredand loaded. This low-cost slurry pipeline technology, currentlybeing used successfullyby several modern mines in other countries, will be introducedinto China for the first time.

6.4 This Project componentwas prepared and designed by the Chinese ChemicalMines Research and Design Institute (CMRDI),which has considerable experience in designing large mines and industrialprojects, with technical guidance from Jacobs Engineering,a US company, on the overall layout of the project, and from Pipeline EngineeringSystems, a West German/UScompany, on the design and engineeringof the slurry pipeline; technicalguidance services from these companieswere covered by the IDA-financedTechnical Cooperation Credits (Credit 1412-CHA,FY84, and Credit 1664-CHA,FY86).

6.5 About 40Z of the concentrateproduced at Wengfu would be used to feed severalhigh-grade phosphatefertilizer plants currentlyunder constructionoutside Guizhou Province including: (a) a 120,000 tpy DAP plant in Tonglin,Anhui Province; (b) a 70,000 tpy nitrophosphateplant in Jinan, Shandong Province; (c) a 90,000 tpy nitrophosphateplant in Kaifeng, Henan Province; (d) a 480,000 tpy DAP plant in Guixi, Jiangxi Province;and (e) a 240,000 tpy DAP plant in Dongting,Hunan Province. The balance would be convertedon-site into TSP at a new 800,000 tpy TSP plant, to be constructed as a separate project. - 24 -

6.6 To ensure implementationof all these plants in time for completion of the Wengfu mine, MCI will coordinate all constructionand will assure timely completionof the new TSP plant at Wengfu. During loan negotiations, an assurancewas obtained from the Government that it will rieportsemi- annually on the progress of all plants and will ensure that GPC completesthe Wengfu TSP plant by January 31, 1994. A separate assurancewas obtained from GPC that the Wengfu TSP plant will be constructedand ready for operation in accordancewith scope and timeframeagreed with the Bank (see Annex 6.2).

C. TechnicalAssistance Component

6.7 The technicalassistance component, to be carried out by MCI, has two elements: (a) servicesof internationallyexperienced consultants for MCI's Project coordinationteam, to support Project implementationand main- tenance of mine equipment;and (b) provisionof financialand technical support to MCI for the acquisitionof computer hardware and software at CPI to strengthenMCI's subsectorplanning capability. This component is summarized below (see Annex 6.3).

6.8 Consultant Services for Project Implementationand Maintenance of Mine Equipment. The Project involves risks associatedwith the coordinated implementationand commissioningof the mine and downstreamhigh-grade phosphatefertilizer plants. In the recent past, new mines and beneficiation plants in Hubei Province have remained idle or underutilized,mainly due to delays in the completionof downstream fertilizerplants. To mitigate these technicalrisks, the technicalassistance subcomponentwill provide internationallyexperienced consultants for MCI's project coordinationteam, who will help the team and the Project company with: (a) selectionand procurementof approptiatetechnologies and equipment; (b) timely identificationand resolutionof problems with Project implementation, particularlyin coordinatingmine developmentwith the constructionof downstreamfertilizer. plants; (c) training of Project management team staff; (d) preparationof staff recruitmentand training programs;and (e) implementationof a preventivemine workshop maintenancesystem. The scope of their work was discussed during project preparation,and the terms of referencewere finalizedduring loan negotiations(see Project File No. 3).

6.9 Financialand Technical Support to StrengthenMCI's Subsector PlanningCapability. As noted, the Phosphate SubsectorStudy resulted in the developmentof a subsectorinvestment programming model. To strengthen MCI's subsectorplanning capability,this model will be installed,maintained and furtherdeveloped at CPI. Under this subcomponentCPI will: (a) acquire computerhardware with adequate capacity; (b) install the model at CPI; and (c) provide local and overseas trainingof selectedMCI staff. Similar work with models is expected to be done for other subsectorsin the future. The outlineof CPI's program is given in Annex 6.4. - 25 -


A. EngineeringArrangements

7.1 CMRDI, the local design institutethat prepared the feasibility study for Wengfu, will carry out the detailed engineeringfor the mine, bene- ficiationplant and infrastructure. It has extensive experiencein the design, engineering,construction and start-upof comparablemines and benefi- ciation plants.

7.2 During project preparation,CMRDI received substantiveassistance from internationallyexperienced engineering firms on the overall layoit of the mine, the beneficiationplant, and infrastructureas well as on the lesign and engineeringof the slurry pipeline for which it does not have any experienceand capability(para. 6.4). The internationallyexperienced firm which will design the slurry pipeline will use technologiesthat are commerciallyproven and acceptable in terms of investment,efficiency, safety and environmentaspects, and will provide design guarantees. Its additional serviceswill include assistance in the procurementof critical equipment to ensure efficientselection and adequate quality control during manufacturing and prior to shipment.

B. Project Management

7.3 The arrangementsfor overall Project coordinationare similar to those under the two ongoing Bank-financedfertilizer projects, where they have proven satisfactory. MCI will have primary responsibilityfor supervising Project implementationand for coordinatingthe constructionwork with raw materialssupply and downstreamplants. The Project coordinationgroup set up within MCI (Annex 7.1) will regularlyreview progress on Project implementa- tion and procurementand coordinate efforts to remove any constraints. The coordinationgroup will also maintain liaisonwith CPC and the Bank, submittingto the latter quarterly financialand technicalprogress reports. During negotiations,an assurancewas obtained from the Government that the group will be maintainedduring Project implementation.

7.4 CPC has already set up its own Project managementteam (Annex 7.2), chargedwith implementingits respectivecomponent. The key staff responsible for specificaspects of Project implementationhave been appointed. Because GPC is a new company with no direct experiencein managing construction projects its Project management team will receive substantialsupport from CMRDI that has experience in large mine and chemical projects in China. Internationallyexperienced consultants to be hired by MCI under the technical assistancecomponent will also provide assistance (see para 6.8). During negotiations,an assurancewas obtained from the GPC that it will maintain its projectmanagement team during Project implementation.

C. ImplementationSchedule

7.5 Implementationof the Project is expected to take 54 months from the date of loan approval. Constructionwork for the mine and the beneficiation plant is expected to be complete by December 1992. The mine will be finished - 26 - before the beneficiationplant so that raw rock can build up the necessary stocks for beneficiationoperation. The overall Project is scheduledfor completionby June 30, 1993. The Project implementationschedule, along with key milestones for project implementation,is shown in Annex 7.3. In light of experiencewith previous Bank-financedfertilizer projects, the Project schedule is reasonable. D. Training

7.6 Substantialtraining is required for GPC to ensure successful implementation. GPC has already recruiteda nucleus of experiencedtechnical and managerialstaff. However, their skills and experience still do not conform to what is required to ensure smooth start-upand operations.

7.7 MCI and GPC are well aware of the need for training. GPC will prepare a comprehensiverecruitment and training program, with assistance from internationallyexperienced consultants and local design institutes,and will implementit (para. 5.10). The training program will include early assignment of managersand key technical staff during Project implementationto their positionsprior to start-up so that they can learn from the consultants, licensorsand engineeringfirms. The program also allows for overseas train- ing in new technologiesfor open-pit mining and beneficiation. On-the-job training in the operation of a modern mine will be provided at existing Chinese modern open-pit (mostlycoal and iron ore) mines. Over the next two years, CMRDI will focus on training for key technical staff and company trainers.

E. EnvironmentalAspects

7.8 The mine and the beneficiationplant under the Project will be designed and constructedto meet locally and internationallyacceptable environmentalstandards. The internationallyexperienced consultants involved in Projectpreparation have paid particularattention to appropriatemeasures to ensure the least environmentalimpact, with a specific focus on the selectionof appropriatesites and configurationsof the open-pit mine and the beneficiationplaLt. For example, mining operationswill be concentratedin one large open pit; beneficiationtailing ponds will be designed to avoid any ground ;and water treatmentplants will be installedto process all liquid effluent from the beneficiationplant and the slurry pipeline prior to discharge into public . The expected environmental standardsto be applied to the Project, which are consistentwith local statutorystandards and Bank guidelines,are given in Annex 7.4.

7.9 Assuranceswere obtained from GPC that it will build and operate the Projectmine and plant with due regard to safety and ecologicaland environ- mental factorsand will comply with environmentalstandards satisfactory to the Bank. - 27 -


A. Capital Cost Estimates

8.1 The total financingrequired for the Project, includinginterest during construction(IDC) and incrementalworking capital, is estimated at US$221.8million equivalent,of which US$74.1million, or 33.4X, is in foreign exchange. The estimate includes all off-site facilitiesnecessary for the Project, such as water and power supply, facilitiesfor transport,storage and handlingof raw materials and products,and social infrastructure. The capital cost estimates (detailedin Annex 8.1) are summarizedin Table 8.A.


X of Local Foreign Total Local Foreign Total Total --- (Y millions)------(US$ millions) --

Wengfu mine component Engineering & license fee 14.1 0.7 14.8 3.8 0.2 4.0 2.4 Equipment,materials & spares 84.8 186.3 271.1 22.8 50.1 72.9 45.0 Civil & erection 263.3 - 263.3 70.8 - 70.8 43.7 Others 46.5 4.9 51.4 12.5 1.3 13.8 8.5 Sub-Total 408.7 191.9 600.6 109.9 51.6 161.5 99.6

Technicalassistance - 2.2 2.2 - 0.6 0.6 0.4

Base Cost /a 408.7 194.1 602.8 109.9 52.2 162.1 100.0 (January1988 prices)

Physical contingencies 40.9 19.2 60.1 11.0 5.2 16.2 10.0 Price contingencies 111.7 50.8 162.5 12.8 5.7 18.5 11.4

Installedcost 561.3 264.1 825.4 133.7 63.1 196.8

Incrementalworking capital 20.4 0.0 20.4 4.6 0.0 4.6 Interest during con- struction 40.1 46.4 86.5 9.4 11.0 20.4

Total Financing Required 621.8 310.5 932.3 147.7 74.1 221.8

/a Local costs include sales tax on locally purchasedequipment and materials amounting to US$2.0 million. - 28 -

8.2 The base cost estimates,expressed in January 1988 prices,were derivedfrom estimatesprepared by the Projectentities and MCI in collabora- tion with the domesticdesign institutes,after checkingwith internationally experiencedengineering firms. Physicalcontingencies are calculatedat 1O0 of the base cost estimates. In calculatingthe base cost and physticalcontin- gencies,the prevailingezchange rate of Y 3.72 to US$1 was used. Price escalationfor foreign costs was calculatedon the basis of anticipatedannual internationalprice movementsof 3.0Z for 1988-90and 4.02 thereafter. Price escalationfor costs expressedin local currencywas calculatedbased on pro- jected annual local inflationrates of 8.02 for 1988, 7.O for 1989 and 6.52 thereafter. Equipmentand materialsimported for the Projectare exempt from importduties. The local companieswill pay sales tax on locallyprocured equipmentand materials.

B. FinancingPlan

8.3 The proposedBank loan of US$62.7million will meet 84.6Z of the total foreignexchange and 28.32 of the total financingrequired. The remain- ing financingwill be met mainly by local lendinginstitutions (71.52), and GOC's own funds (0.22). The proposedfinancing plan for the Project is sum- marized in Table 8.B. Table 8.B: FINANCINGPLAN

Local Foreign Total Local Foreign Total 2 5Y million)-- - ($ million) -

A. Wengfu Mine Component (GPC) IBRD loan - 261.9 261.9 - 62.5 62.5 28.2 oOC loan la 601.4 46.4 647.8 143.1 11.0 154.1 69.7 ICBC loans /b 20.4 - 20.4 4.6 - 4.6 2.1 Internalfun-s ------Subtotal 621.8 308.3 930.1 147.7 73.5 221.2 100.0 B. TechnicalAssistance IBRDloan - 0.7 0.7 - 0.2 0.2 33.3 GOC funds /c - 1.5 1.5 - 0.4 0.4 66.7

Subtotal - 2.2 2.2 - 0.6 0.6 100.0 C. Total Project IRD loan - 262.6 262.6 - 62.7 62.7 28.3 GOC loan /a 601.4 46.4 647.8 143.1 il.0 154.1 69.4 ICBC /b loans 20.4 - 20.4 4.6 - 4.6 2.1 cOC funds /c - 1.5 1.5 - 0.4 0.4 0.2 Total 621.8 310.5 932.3 147.7 74.1 221.8 100.0

/a OOC and provincialgovernment loans are channelledthrough the People'sConstruction Bank of China (PCBC). /b Industrialand CommercialBank of China. 7E OCC plans to cover the costs for the CPI program from the proceedsof the Second Technical CooperationCredit (CreditNo. 1664-CHA). - 29 -

8.4 IBRD Loan Financing. The proposed Bank loan will be made available to GOC at the Bank's standard rate of interest for 20 years, including5 years of grace, with a commitmentcharge of 0.75%. The total amount of the loan will be on-lent by GOC to GPC at an on-lending rate equal to 1052 of the Bank variable loan rate, with a commitmentcharge of 0.75X and a repaymentperiod of 20 years, including5 years of grace. The foreign exchange risk will be passed on to the company. During negotiations,assurances were obtained from the Government that a subsidiary loan agreementwould be signed by GOC and CPC on terms and conditionssatisfactory to the Bank as a conditionof loan effectiveness.

8.5 Local Financing. GOC, through the Peeple's ConstructionBank of China (PCBCs,will provide GPC with a constructionloan of Y 649.9 million (US$154.4million equivalent)to cover the local financingrequirements for fixed assets at its prevailingrate for similar investments(currently 3.6Z p.a.), with a maturity of 15 years, includinga grace period equal to the constructionperiod. A portion of loan will be used to cover IDC on the proposed Bank loan. Interest paymentson this loan will be deferred during the constructionperiod and repaid in installmentsafter completionof the Project. Foreign exchange requirementsof US$400,000equivalent to cover the CPI program to be carried out by MCI as part of the technicalassistance componentwould be met from the proceeds of the Second TechnicalCooperation Credit (CreditNo. 166-CHA, FY86). The remaininglocal financingneeds, includingincremental working capital,will be met entirely by short term loans from local banks. During negotiations,confirmation was obtained from the Government on all necessaryarrangements for the provisionof local funds to finance the Project. - 30 -

C. Procurement

8.6 The procurementarrangements are summarizedin Table 8.C:


Procurementmethod Total Project element ICs LIB Other cost

Equipmentand materials 50.0 8.0 30.7 88.7 (50.0) (8.0) (3.0) (61.0) License, engineeringand consultancy services 4.9 4.9 (0.4) (0.4) Project managementand commissioning 15.9 15.9 (1.0) (1.0) Land, civil works and erection 86.0 86.0 (0.0) (0.0) Training 0.9 0.9 (0.3) (0.3) Other /a 25.4 25.4 (0.0) (0.0)

Total Financing 50.0 8.0 163.8 221.8 (50.0() (8. (4.7) (62.7)

/a Includingincremental working capital and interest during construction.

Note: Figures in parenthesesare the amounts to be financed by the Bank.

8.7 A major portion of the equipmentand materials (82Z of those financedby the Bank loan) will be procured through internationalcompetitive bidding (ICB) in accordancewith Bank guidelines. In ICB, domestic manufac- turerswill be given a margin of 15Z or the prevailingcustoms duty, whichever is lower, for purposes of bid evaluation. Internationalengineering and tech- nical assistanceservices will be selectedaccording to Bank guidelines for the use of consultants.

8.8 Specializeditems with only a limited number of suppliers,such as specialpumps for the slurry pipelinewill be procured through limited inter- nationalbidding (LIB). Items for LIB, are expected not to exceed US$8.0 mil- lion in aggregate. All qualifiedbidders would be invited under LIB.

8.9 Orders for small or miscellaneousitems with an estiimatedvalue of up to US$200,000each will be procured through internationalshopping from at least three qualifiedand eligible suppliers,up to an aggregate amount of US$3.0million. - 31 -

8.10 No procurementthrough direct contractingis envisaged. Packages with an estimatedvalue of US$1.0 million or more, expected to number about 7, would be subject to prior Bank review; packages below US$1.0 million each would be subject to post-reviewby the Bank. Contractswith consultantswill be subject to Bank approval prior to signature. Internationalprocurement will be giecuted by the China National Chemical ConstructionCorporation (CNCCC),-1in cooperationwith MCI's Project coordinationgroup. To avoid delays in Project execution,the Bank loan will retroactivelyfinance up to US$0.5 million of eligible expendituresfor down payments for engineering contractsand technicalservices, and internationaltravel incurredbetween February 5, 1988 and the date of loan signing.

8.11 ProcurementArrangements for Local Financing. Local procurement will be carried out by the respectiveoperating companies with assistancefrom the design institutes. Since SPC identifiesthe Project as a key national project, the supply of local constructionmaterials, plant and equipment is regulatedby an allocationsystem administeredby central and provincial Governmentagencies. Applicationsfor annual requirementshave to be made in advance to SPC and the State Materials Supply Bureau. However, under recent provisions,buyers and suppliersof equipmenthave some scope for negotiation as to the type of equipment,delivery and price.

8.12 Most of the civil works, erection,a major part of the engineering work, and some equipmentand materialswill be procured locally. Contracts for civil works and erection will be awarded through assignment to specialized constructionbureaus or companiesunder negotiated contractsthat specify unit costs, terms of payment and incentives/penaltiesfor early/late completion/ delivery. The capacity and capabilitiesof local contractorsproposed for the Project are satisfactoryfor timely and efficient executionof the proposed work.

D. Allocationand Disbursementof the Bank Loan

8.13 The proposed allocationof the Bank loan is summarized in Table 8.D.

6/ CYZCC is responsiblefor internationalprocurement of the two on-going Bank-supportedfertilizer projects. - 32 -


US$ million Bank loan financing

Equipment,materials 61.0 100lof foreign expendi- and spares tures, 100l of local expenditures(ex- factory),and 75Z of local expendituresfor items procured locally

Engineering,licenses 1.2 100% of expenditures and technicalservices

Training 0.3 1OOX

Project Management/a 0.2 1002

Total 62.7

/a Consultantservices for projectmanagement will be provided for MCI's Project CoordinationGroup as well as GPC's ProjectManagement Team.

The proposed Bank loan will cover: (a) 100% of the foreign expendituresfor directly importedgoods, 1002 of local expenditures(ex-factory) for domesti- cally manufacturedgoods, and 752 of local expendituresfor items procured locally; (b) 1OO2 of the expendituresfor licenses,engineering and technical services for procurementand training; (c) 100% of the cost for overseas training;and (d) 1002 of the cost for technical servicesfor Project Manage- ment. To facilitatethe disbursementof funds, a specialaccount will be establishedin US dollars at a commercialbank acceptableto the Bank, with an authorizedallocation of US$5.0 million. Disbursementwill be against full documentationexcept for training,overseas travel and contractsvalued at less than US$200,000equivalent each, which would be against statementsof expenditure. Documentationof statementsof expenditurewill be maintainedby MCI's Project coordinationgroup, to be audited annually by independent auditors acceptableto the Bank, and to be made available for review by the Bank during Project supervision.

8.14 The Project completiondate would be June 30, 1993; the closing date is expected to be December 31, 1993. An estimateddisbursement schedule for the Project, which has been prepared based on Bank experiencewith previous comparableprojects in China, and is generally in line with the Bank's recommendedstandard disbursement profile for industrialprojects in Asia Region, is given in Annex 8.2. - 33 -


A. FinancialManagement Practices in China

9.1 FinancialAutonomy. In the past, the Government made all major financialdecisions, including approval of new investments. Enterprises remitted almost all internallygenerated funds to the Government,and funds for new investmentswere, in turn, provided as grants through budget alloca- tions. Recent reforms have resulted in greater financialautonomy and accountabilityfor the managers of individualenterprises. Major changes include: (a) enterprisescan retain lOOZ of their depreciationallowances; (b) enterprisescan retain an increasingportion of their profits (this provision varies across companiesand provinces);(c) new funding require- ments, includingthose for investments,are to be met out of a company's internallyretained funds or interest-bearingloans (long-termcapital con- structionloans for fixed investmentsand short-termborrowing for working capital);and (d) enterprisesmay utilize an increasingportion of internally retained funds without prior Government approval. Given the increasing financialautonomy and accountabilityof companies,there is a growing need and opportunityfor these enterprisesto engage in longer term financial planning and to improve on the traditionalc.acentration on one-year financial targets.

9.2 Financingof New Projects. The recent economic reforms have also changed dramaticallythe Government'spolicy on financingnew investments. In the past, all new investmentswere, as noted, financed through budget alloca- tions in the form of grants. Recently, the Government introducedthe concept of interest-bearingloans as an incentive to industrialenterprises to econo- mize on the use of funds. While this was, in principle,a positive step, it has been carried out to the point that new government-financedinvestments for state-ownedenterprises must now be financed entirely through debt. As a result, newly formed companiesare entirely debt-based,a financial structure that conflictswith the basic norm for prudent financialmanagement and accountability. In particular,many companieshave been facing cash flow difficultiesduring the initialyears of operationsbecause of their excessive debt serviceburden, and they have had to enter into negotiationswith respect to financingand bail-outson a case-by-casebasis. While, given China's structureof state ownership,the companies'existence has not been threatened,this situationundermines the autonomy of the enterprisesand conflictswith the basic thrust of China's economic reform, which is designed to place greater responsibilityon enterprisemanagement.

9.3 The Governmentrecognizes the need to allow for equity-typefunding and is currentlymoving toward the creation of instrumentsfor such financ- ing. In this context, the Governmenthas announcedits intentionto create large-scalesectoral investmentcorporations and joint stock companies. However, it will take time for the new instrumentsof financingto develop sufficientlyto allow for large-scaleequity financing.

9.4 FinancialAccounting and Audits. The Chinese accountingsystem is governed by severalregulations issued by central and local governments. - 34 -

Special featuresof the system include: (a) maintenanceof two separate accounts--onefor productionoperations, the other for constructionprojects-- that are not consolidated;(b) the inclusionof interest charges in the production costs, so that operating income reflects the company's financial structure;and (c) the matching of funding sourceswith specific types of assets--fixedassets with fixed funds, currentassets with current funds, and specialassets with special funds.2./Thefinancial statements of Chinese enter- prises are subject to external audits by the State Audit Administration(SAA), which was establishedin 1983 to ensure efficientand prudent financial management by enterprises. The Bank has been supportingthe Government's efforts to improve its audit capabilitythrough training under a Technical CooperationCredit (Cr. 1412-CHA).

B. FinancialPerformance and Projections

9.5 As a new entity, GPC does not have historicalfinancial records. The financialprojections for the company were carried out in current yuan terms, based on relativelyconservative assumptions on key parameters such as output rates, input consumptionand output prices. It's output price is assumed to be lower by 30-40% than projectedCIF import prices despite the fact that this price is, as the price reform process deepens, expected to progressivelymove towards import parity (para. 3.24 above). The real prices of inputs and outputs (i.e., after allowing for inflation)were assumed to remain unchangedat their January 1988 levels over the of the Project. Detailedprojected financialdata, prepared,after several adjustmentsfor the Chineseaccounting system, in accordancewith conventionalaccounting concepts based upon internationalaccounting standards, are given in Annexes 9.2-9.4. The salientfeatures che projectedfuture finances of the company are shown in Table 9.A.

7/ Strict applicationof earmarking,or non-fungibility,is graduallybeing relaxed, as enterprisesretain increasingportions of their internally generated funds as special funds. - 35 -

Table 9.A: SUMMARY OF SELECTED PROJECTEDFINANCIAL DATA (million of currentyuan unless otherwisestated)

Construction After start-up 1988 1990 1992 1993 1994 1995 1996 1997

Income Statements Gross sales revenue - - - 76.7 212.3 313.0 351.9 374.7 Variable cost - - - 15.6 43.2 63.7 71.6 76.2 Fixed costs - - - 66.8 76.1 83.0 86.6 89.5 Net profit /a - - - (62.5) 29.1 97.7 124.2 139.9

Funds Flow Statements Internal cash generation - - - 15.7 114.0 186.1 212.0 225.8 Debt service paymentst Principal repayments - - - 53.1 54.2 85.9 87.2 88.6 Interest expenses - - - 45.5 45.0 44.0 42.3 40.2

Balance Sheets Current assets - - - 25.6 50.5 112.4 192.7 285.2 Net fixed assets /b 28.0 339.4 919.2 895.5 858.7 817.6 775.5 733.6 Current liabilities /c - - 53.1 169.4 186.3 167.8 140.0 112.3 Long term debt: World Bank Loan 2.3 107.7 261.6 257.1 251.4 244.3 235.5 224.8 Domestic loans 25.7 231.7 604.6 561.4 518.2 415.0 431.8 388.6 Equity - - - (66.8) (46.8) 42.8 161.0 293.0

Ratios Capacit? utilization tX) - - - 25.0 65.0 90.0 95.0 95.0 Net profit/gross sales (Z) - - - - 13.7 31.2 35.3 37.3 Debt service coverage (times) - - - 0.2 1.1 1.4 1.6 1.8 Current ratio (times) - - - 0.2 0.3 0.7 1.4 2.5 Long-term debt/equity 100:0 100:0 100;0 lOOsO 100:0 94:6 81:19 68:32

/a Net profit before loan aortization and taxes. 7i Including work-in-progress and special fund expenditure. 7c Including the current portion of long-term debts, and short-term working capital loans.

9.6 FinancialProjections. While CPC is expected to show negative profits in 1993, the first year of operation,it is anticipatedto achieve satisfactoryprofits thereafter. Its net profit margins on sales revenue will remain at relativelyhigh levels-over 30X--onceits operation reaches full capacity. GPC's first-yearlosses are mainly a result of low capacity utilization,a normal experiencefor new mines and fertilizerplants, and partly a consequenceof the Government'scurrent investmentfinancing policies which are based entirely on debts (para. 9.2). With the build-up of capacity, - 36 -

GPC's net profit is expected to increase from a negative Y 62.5 million in 1993 to a positive Y 29.1 million in 1994, Y 97.7 million in 1995, and Y 124.2 million in 1996.

9.7 In the first year of start-up,GPC will face cash flow difficulties unless additional external funds are provided. Again, in part the reason is the current Governmentpractice of entirely debt-basedfunding for new invest- ments. However, CPC will generate sufficientcash internallyfrom the third year onward to service its debts and to make the necessary investmentsin maintenanceand replacements. Because of the Government'scurrent funding policy, new companiessuch as GPC, which do not have significantcapital base, will have high financialleverage until they accumulateretained earnings from operations. Given this background,the Governmentintends to take an action to allow GPC to achieve sound financialpositions rapidly in the event that it changes the funding policy, and a specific financialcovenant has been designed to ensure that GPC will be able to cope with potentialcash flow difficultiesduring the start-up years (para. 9.9).

C. FinancialRate of Return and SensitivityAnalysis

9.8 The cost and revenue streams for the incrementalfinancial rate of return (FRR), expressed in January 1988 yuans, are presented in Annex 9.5. The estimatedbase case FRR (beforetaxes) is: 12.4X. The FRR is lower than the economic rate of return (ERR), mainly because the financialprices for fertilizersare below their economic value. The results of sensitivitytests are shown in Table 9.B.


FRR (%)

Base case 12.4 Capital cost up 20% 10.3 Capital cost down 20% 15.0 Sales revenue up 20X 15.8 Sales revenue down 20% 8.1 Variable cost up 20% 11.6 Variable cost down 20% 13.1 2-year delay in completion 10.2

The FRR for the Project is sensitiveto changes in, in descending order, sales revenue,which is a function of the unit price of output and sales volume, capital cost, and input prices. Given that adverse changes in the variables by a margin of 20%, particularlyfor the price of phosphateconcentrate, are not likely, satisfactorylevels of FRR over 10-12% are likely to be realized. - 37 -

D. FinancialCovenants

9.9 During negotiations,agreement was reached that GPC will: (a) maintain a debt servicecoverage ratio of at least 1.2 and not incur any long-termdebt unless their projected internal cash retention for each fiscal year during the term of the debt will exceed 1.2 times their projecteddebt service requirementsin that year; (b) maintain a long-termdebt/equity ratio of 75:25 or better; and (c) maintain a current ratio of 1.2 or better, once such covenantedratios are reached. Because of the current Government financingpractice with respect to new investments(para. 9.2), GPC will not be able to achieve these covenanted ratios in the initialyears of operations, particularlythe debt/equityratio, until it builds up capacity utilization and retained earnings. The timeframefor achievingthese ratios is as follows: 1995 for the debt servicecoverage ratio; 1997 for the long-term debt to equity ratio; and 1996 for the current ratio. Therefore, an additionalassurance has been obtained from the Governmentthat it will cover GPC's cash flow deficits during the initial three years of operations, provided such deficits are not the result of inefficientmanagement and operation. Efficiencycriteria were agreed at negotiations. Moreover, if the Government adopts an alternativefunding policy to allow for equity-type funding (para. 9.3), it plans to allow GPC to convert a portion of local loans to its own funds so that it can achieve a long-termdebt/equity ratio of 75:25 or better. An assurancewas obtained from GPC that it will prepare and furnish to.the Bank for review, by October 31 of each year from 1989 to 1997, its rolling five-yearfinancial plans, includingproduction, marketing and investmentplans, in the form of projectedfinancial statements. Such plans will be supportedby. (a) a detailedanalysis of productioncost trends; (b) analysis of operationaland financialbudget variances for the current fiscal year; and (c) financingarrangements for the investmentsproposed over the five-yearperiod.

E. Auditing and ReportingRequirements

9.10 An assurancehas been obtained that GPC will have its annual financialstatements and project accounts audited by independentauditors acceptable to the Bank. It will also submit the audit report for both the productionand capital constructionaccounts to the Bank within six months after the close of each fiscal year. Based on Project progress and the financial reports submittedby GPC, MCI will provide the Bank a quarterly sulmmaryof its Project progress and procurementstatus, and a semi-annual summary of its financialstatements, within 45 days after the end of each period. An assurancehas also been obtained that the Governmentwill have MCI's Project accounts for the technicalassistance component,and the accounts for the SpecialAccount, audited by independentauditors acceptable to the Bank. It will submit the audit report to the Bank within six months after the end of each fiscal year. Within six months after the closing date for the Project,GPC and MCI will prepare and provide to the Bank a completion report for their respectivecomponents of the Project, to cover Project implementation,initial operation,actual Project costs and projectedcosts and benefits. - 38 -


10.1 Calculationof the economic rates of return (ERR) was made only for the investmentcomponent because the benefits from the technicalassistance component,though significant,are not quantifiable. The key assumptionsin the economic analysis of the Project are detailed in Annex 10.1.

A. Economic Costs and Benefits

10.2 Economic Benefits. The quantifiableeconomic benefits of the Project, expressed in 1988 US dollars, come mainly from phosphateconcentrates to be produced from the mine to be developed. The economic price of phosphate concentratewas derived from its projectedinternational price by adding unloading,port handling, bagging and mixing charges, and inland freight from ports to the plant sites.

10.3 Economic Costs. The economic value of tradeableinputs was based on their estimatedinternational market prices. Non-tradeableinputs were convertedto their economic value by applying their respective specific conversionfactors.

B. Economic Rate of Return and SensitivityAnalysis

10.4 The base-caseERR in constant terms is 26.01 for the Wengfu component. (The streams of economic costs and benefits for the ERR calculationsare given in Annex 10.2.) The results of the sensitivityand switching-valueanalyses are summarizedin Table 1O.A. - 39 -


- Economic rates of return (X) Cases

Base case 26.0 Capital cost up 201 23.1 Capital cost down 201 29.7 Sales benefits up 201 29.8 Sales benefits down 20Z 21.5 Variable cost up 20Z 25.5 Variable cost down 20Z 26.4 2-year delay in completion 20.3

- Switchingvalues of selectedvariables (X) /a


Capital cost +178.9 Sales benefits -51.8 Variablecost +541.7

/a A 12S discount rate is used.

The resultsof sensitivitytests indicate that the ERR for the Project is sensitiveto changes in, in descendingorder, sales benefits,which are closely related to the internationalborder prices of phosphate rocks and productionvolume, project capital costs, and variable costs. Even under the assumptionof a 20Z reduction in sales benefits,the Projectwould obtain a satisfactoryERR of 21.51. The switching-valueanalysis of the major variablesindicates that the Project would remain economicallyviable under various conceivableadvyerse conditions, and confirms that the prices of phosphateconcentrate 8 are the most critical variable determiningthe economicviability of the Project.

C. Other Benefits

10.5 Once full operatingcapacity is reached, the Project will to net import substitutionof 1.8 Mtpy of phosphateconcentrate that will result in gross foreign exchange savings of about US$124 million equivalentp.a. in 1988 prices. After netting out the annual service of the foreign debt (both principalrepayment and interest payments),the net annual foreign exchange

8/ The internationalprices of phosphateconcentrate are closely related to those of phosphate fertilizers. - 40 - savings,as of 1997, are estimated at about US$112 million equivalent (see Annex 10.3 for details).

D. Project Risks

10.6 Virtuallyno commercialrisks are foreseen becausemarkets for GPC's output are already assured. The entire output of phosphateconcentrate from the Wengfu mine will be supplied to several downstreamhigh-grade fertilizer plants currentlyunder constructionoutside Guizhou Provinceand another fertilizerplant to be establishedat the project mine s-te. The main technicalrisks lie in the coordinationof the implementationand coumissioningof the mine and the associatedfertilizer plants. In the past, poor coordinationin implementingmine and fertilizer investments,executed by separateentities under separate budgets, has been a common cause of underutilizationof new mines in China, resultingin a significantloss of economic benefits. This risk is mitigatedby involvinginternationally experiencedconsultants in the technicalassistance component, who will help MCI and GPC with Project implementationand staff training. The Government will coordinateconstruction of all downstreamplants and report semi-annually on the progress of their implementation(para. 6.6).

10.7 This risk will be further reduced because a new 800,000 tpy TSP plant to be establishedat Wengfu, which would consume about 40X of the Project output, will be implementedby GPC itself. Although it will not be implementedas a part of the Project, the Bank's project team has been involved in its preparatorywork, includingthe carrying out of feasibility studies. The preparatorywork is proceedingwell. GPC has provided an assurance that the Wengfu TSP plant will be constructedand ready for operationin accordancewith the scope and timeframefor the implementation agreed with the Bank, and a separate assurancehas been obtained from the Governmentto the same effect (para. 6.6).


11.1 During negotiations,confirmation was obtained from the Government that:

(a) all necessary arrangementsfor the provisionof local funds will be made to finance the local costs of the Project (para. 8.5); and

(b) if the Governmentadopts an alternativepolicy to allow for equity- type funding for new investmentsof state-ownedenterprises, it plans to allow GPC to convert a portion of local loans to the company'sown funds so that GPC can achieve a long-termdebt/equity ratio of 75:25 or better (para. 9.9).

11.2 During negotiations,assurances were obtained that the Government will:

(a) allow GPC to market its entire output outside the state allocation plan at negotiatedprices (para. 3.28); - 41 -

(b) provide semi-annuallya progress report on the constructionof the downstreamphosphate fertilizer plants that will consume the Wengfu phosphateconcentrate (para. 6.6);

(c) ensure the completionof the Wengfu TSP plant by January 31, 1994 (para. 6.6);

(d) maintain MCI's Project coordinationgroup during Project implementa- tion (para. 7.3);

(e) on-lendthe proceeds of the Bank loan to GPC under a subsidiaryloan agreementthat will specify terms and conditionsacceptable to the Bank, includingan on-lendingrate equal to 105X of the Bank variable loan rate, with a commitmentcharge of 0.75Z p.a. and repaymentover 20 years, including5 years of grace (para. 8.4);

(f) cover any cash flow deficits of GPC during the initial three years of operations,provided such deficits are not the result of inefficientmanagement and operation (para. 9.9); and

(g) meet the auditing and reportingrequirements (para. 9.10).

11.3 During negotiations,assurances were obtained from GPC that it will:

(a) prepareand furnish to the Bank for comments by June 30, 1989, a comprehensiveprogram to strengthenmanagement, recruit qualified staff and provide training,and thereaftercarry out the agreed program (para. 5.10);

(b) have the Wengfu TSP plant constructedand ready for operationsin accordancewith scope and timeframeagreed to with the Bank (para. 6.6);

(c) maintain its Project managementteam during Project implementation (para. 7.4);

(d) build and operate the Project mine and plant with due regard to safety,ecological and environmentalfactors and in accordancewith environmentalstandards satisfactoryto the Bank (para. 7.9);

(e) maintain a debt service coverage ratio of at least 1.2 once that ratio is reached, but no later than December 31, 1995. It will not incur any long-termdebt unless its projectedinternal cash retentionfor each fiscal year during the term of the debt to be incurredwill exceed 1.2 times its projecteddebt service reqjirementsin that year (para. 9.9);

(f) maintain a long-termdebt to equity ratio of 75:25 or better once that ratio is achieved,but no later than December 31, 1997 (para. 9.9); - 42 -

(g) maintain a current ratio of at least 1.2 once such a ratio is achieved, but no later than December 31, 1996 (para. 9.9);

(h) prepare and furnish to the Bank for review, by October 31 of each year from 1989 to 1997, its rolling five-year financialplans, to cover production,marketing and investmentplans, to be presented in the form of projectedfinancial statements (para. 9.9); and

(i) comply with the auditing and reportingrequirements (para. 9.10).

11.4 Conditions for loan effectivenessare:

(a) signing of the subsidiaryloan agreement between the Government and GPC under terms and conditionssatisfactory to the Bank (para. 8.4); and

(b) approval of the loan agreementby China's State Council.

11.5 Subject to the above assurancesand arrangements,the Project would be suitable for a Bank loan of US$62.7million equivalent to the People's Rept,lic of China at the Bank's standardvariable rate for 20 years, including 5 years if grace.

May 23, 1988 - 43 - ANNEX 3.1



/a FertilizerApp!lication Rate*rlor Various Countries. 1985 (kg per hectare of arable land)

Country Nitrogen Phosphate Potash Total Ratio

Netherlands 558.0 91.1 134.2 783.3 100:16:41

Japan 145.9 155.7 128.8 430.4 100:107:81

Korea 198.7 91.9 101.7 392.4 100:46:51

France 127.2 77.5 95.2 300.9 100:61:76

China /b 135.6 27.4 4.4 167.4 100:20:3

USSR 47.2 32.8 29.4 109.4 100:69:62

Tndonesia 662.2 23.9 8.5 94.6 100:37:13

US 49.9 19.9 24.0 93.8 100:40:48

India 33.7 11.5 5.1 50.3 100:35:15

Morocco 16.2 13.1 6.3 35.6 100:81:39

Brazil 11.2 17.3 14.0 42.5 100:154:125 la Based on apparent consumptionfigures obtained by adding net imports of fertilizersto domestic consumption. lb FAO'S apparent consumptionfigures are not consistentwith the acutal consumptionstatistics published by MAAP text (Table 3.A) due to a difference in statisiticalmethods and bases.

Source: PAO FertiligerYearbook, 1986, Vol. 36.

China Department February 1988 CHINA


Consumption,Production and Importsof ChemicalFertilicers _1972-86/a (.000 tona of nutrient)

Nitrogen Phosphate Potash All nutrients Year Consumption Productlon Imports Consumption Productlon Imports Consumption Productaion Iports Consumption Production lmports

1972 3.168 2,444 1,342 1.038 1,249 11 12 8 2 4,219 3,701 1,355 1973 3,043 2,996 1,230 4,468 1,589 72 IS 7 IS 6,654 4,592 1,317 1974 3,490 2,627 928 1,390 1,390 82 57 5 57 4,915 4,222 1.067 1975 4,020 3,709 964 1,531 1,531 34 40 7 39 S,407 5.247 t.037 3976 4,468 3,815 928 1,360 1,418 20 16 It 6 5,844 5.244 954 1977 5,065 5,509 1,147 1,415 1,708 151 33 21 23 6,513 7,218 1,321 1978 7,726 7,639 1,227 1,114 1,033 246 45 21 31 8,885 8,693 1,504 t 1979 8,997 8,820 1,451 1,7S8 t,817 190 t08 16 108 10,863 10,653 1,749 4 1980 10,180 9,993 1,537 2,368 2.307 395 128 20 126 12,676 12,320 2,058 *.- 1981 10,363 9,658 1,541 2,7M5 2,508 499 251 24 250 13,349 12.390 2.290 1 3982 10,433 10,219 1,808 3,448 2,537 631 568 25 489 14.449 12,781 2.928 3983 11,923 11,094 2,365 3,945 2,666 1,028 728 29 634 16,596 13,789 4.027 1984 13,378 12,211 2,828 3,686 2,359 1,342 804 31 755 17,868 14,601 4.925 1985 13,477 11,438 2,052 3,531 1,760 950 920 24 364 17,898 13.222 3.366 1986 13,728 11,592 1,700 4,S02 2,340 645 1,075 25 600 19,305 13,957 2,945

/a Nutrient composition of compound fertiltzer is assumed to be 2:3:1 (nitrogen, phosphate and potash).

Sources: Nintstry of Chemical Industry;Mtnistry of Agriculture, Animal Huabandry and Fishery; General Admtnistration of Customs; and State StattsticalBuresu.

China Department February 1988

I! -45 - ANNEX3.3



Comparison of Domestic and InternationalPrices of Fertilizers Main Energy Inputs. and Main Agricultural Products. January 1988 (US$/ton /a unless otherwise stated)

Domestic ex-factory prices FOB inter- Ceiling for national Economic Domestic price as Controlled Negotiated price price /c _ of economic price (A) (B) (C) (D) A/D B/D

Products Urea lb 110 140 118 151 72.8 93.5 DAP 161 188 159 192 83.9 97.9

Inputs Coal /d 22 25 42 34 64.7 73,5 Natural gas (per mln Btu) 1.7-2.0/e 1.9-4.1/e - 3.1/f 54.8-64.5 61.3-132.3 Phosphate rock 24 31/g 31 51 47.1 56.8

Agricultural Products Rice 167 226 212 212 78.8 106.6 Wheat 119 161 136 170 70.0 94.7

/a US$1 - Y 3.72. Tb Bagged urea. 7< For Imported products, CIF China prices, and for exportable inputs, netback value from exports. /d Based on average anthracite price for medium-size plants. T Average natural gas price for large-size urea plants under MCI. T? Fuel oil equivalent economic value (netback from exports) in calorific terms. T Based on the ceiling price, preliminarily set for the Wengfu concentrate.

China Department April 1988 ANNEX A,j



Trends in Domestic Production of PhosphateFertilizero, b Product, 1970-86 ( 000 tons of P205)

Single Calcium magnesium superphosphate phosphate Other Total

1970 567 339 1 907 1971 646 416 16 1,078 1972 740 488 21 1,249 1973 1,020 560 9 1,389 1974 940 430 20 1,390 1975 1,029 476 26 1,53i 1976 996 376 46 1,418 1977 1,140 470 98 1,708 1978 478 524 24 1,033 1979 1,243 518 44/a 1,817 1980 1,646 615 337a 2,308 1981 1,780 692 28 2,508 1982 1,799 701 29 2,537 1983 1,920 715 23 2,665 1984 1,683 644 27/b 2,359 1985 1,345 380 247W 1,758 1986 - - - 2,340

/a Monoamonium phosphate productionwas 12,000 tons in 1979 and 13,000 tons in 1980.

/b Diammonium phosphateproduction was 5,000 tons in 1984 and 7,000 tons in 1985. Triple superphosphateproduction was 1,000 tons in 1985.

Sources: Data provided by the Shanghai ChemicalResearch Institute,MCI, STIRI; China Chemical Industry: World Chemical Industry Yearbook, 1985-87.

China Department February 1988 - 47 - ANNEX 4.2



Domestic Production of Phosphate Fertilizers, by Products and Provinces, 1985 t§UU', tons F2 05 )

Single Calcium Province superphosphate magnesium phosphates Other Subtotal

North Bel ing 1.1 - - 1.1 Tianjin 3.6 - - 3.6 Hebei 29.7 - - 29.7 Shanxi 18.9 - - 18.9 Neimonggol 1.1 - - 1.1

Northeast JiloingLiaoning 14.04.6 - - 14.04.6 Heilongjiang 7.2 - - 7.2 Shanghai 24.3 - - 24.3 Jiangsu 190.6 12.5 4.5 207.6 Zhejiang 47.1 20.4 0.2 67.7 Anhui 119.1 - 7.7 126.8 Fujian 36.8 2.0 0.3 39.1

East ~~:TGangxi 13.7 40.4 - 54.1 Shandong 35.6 7.8 0.1 43.5 Henan 26.7 45.9 - 72.6 Hubei 161.4 13.8 - 175.2 South Central Hunan 117.0 51.9 - 168.9 Guangdong 143.2 - - 143.2 Guangxi 55.8 26.3 0.1 82.2 Southwest Irc1uian 150.1 32.7 4.3 187.1 Guizhou 19.1 24.5 - 43.6 Yunnan 61.0 102.0 15.6 178.6 iTibet - _ _-

Northwest S~NUhaanxi 26.8 - 0.1 26.9 Gansu 28.4 - - 28*4 Qinghai 2.9 - - 2.9 Ningxia 5.0 - - 5.0 Xinjiang 1.3 - - 1.3 Total 1,346.1 380.2 32.9 1,759.2

Source: MCI.

China Department February 1988 - 48 - ANNEX4.3



Consumptionof Chemical Fertilizersby Province, 1985 ('000 tons nutrient)

Nitrogen Phosphate Potash Total (N) (P205) (K20) nutrients

North MTjing 67 15 0 82 Tianjin 37 5 1 43 Hebei 838 236 30 1,104 Shanxi 302 81 15 398 Nelmonggol 143 51 6 199 Northeast :Laoning 551 144 14 709 Jilin 425 77 19 521 Heilongjiang 293 106 22 421 Shanghai 107 18 1 126 Jiangsu 1,214 326 40 1,579 Zhejiang 586 103 22 711 Anhui 810 289 37 1,136 Fujian 323 93 75 491 East )TangKi 326 124 90 539 Shandong 1,484 319 54 1,857 Henan 1,044 351 42 1,436 Hubei 672 194 51 917 South Central Hunan 618 167 112 897 Guangdong 783 174 147 1,104 Guangxi 339 114 68 521 Southwest SlchunU 1,115 211 21 1,347 Guizhou 208 61 11 280 Yunnan 277 112 15 404 Tibet 6 2 0 8 Northwest 369 50 10 429 Gansu 165 40 6 210 Qinghai 156 9 4 168 Ningxia 46 8 0 55 Xingjiang 143 51 9 203 Total 13,447 3,531 920 17,898

Source: AgriculturalYearbook of China, 1985. China Department February 1988 - 49 - ANNEX 4.4



MaJor PhosphateDeposits in China

Reserves ore Ratio (ore/ Province Deposit (mllion tons) concentrate)

Hubel Dayukou 162 2.14 Wangji 90 2.14 Fanmasheng n.ea. n.a. Lungwaisheng n.e. n.a. Yichang 1,068 3.33 Huangmailing 110 3.33

Guizhou Kaiyang 320 n.a. Wangjayuan SO n.ea. Chuanyondong 280 n.e. Datang 160 n.a. Yuhua n.a. n.e. Xingiao n.e. n.a. Xiaoba 104 n.a. Yingping 110 1.50 Wofang 70 1.57 Dazhai n.a. n.a.

Jiangsu Jigping 29 4.00

Sichuan Jinhe n.a. n.a.

Shaanxi Han Zhong n.ea. n.ea.

Jiangxi Cao Yang n.a. n.a.

Yunnan Raikou 152 n.a. Kunyang 105 n.e. Jinning 281 n.a. Anning a.a. n.a. Chengjaing n.a. n.a. Longshan n.a. n.a.

Hebei Panshan 91 n.e.

Hunan Liyaing n.a. n.ea.

Source: Various internationalhandbooks.

China Department February 1988 - 50 - ANNEX4.5



MaJorPyrite Deposits and Nines In China/a (million tons)

Sulfur Province Mine name Reserves content (Z)

Guangdong Yunfu 206 32.1 Yingde 37 23.2

Neimonggol Tanyaokou 72 23.3

Jiangsu Yuntaishan 9 22.8

Hunan Qibaoshan 6 39.6

Liaoning Zhangjiagon 5 22.2

Anhui Xingjiao 36 29.3 Xiangshas 129 14.8

Sichuan Chuan Nan n.a. n.a.

Zhejiang Langyou 5 24.0

Shaanxi Yangguan 71 19.0-24.0

Other provinces /a n.a. n.a. nea.

/a There are additional small pyrite mines in several provinces,usually associatedwith coal mining.

Source: Various internationalhandbooks.

China Department February 1988 ANNEX 4.6 - 51 - Page 1 of 2



An Outline of the Phosphate Subsector

InvestmentOptimization Model

A. The TransportModel

1. Objective. The objective is to optimize the transportof raw materials, intermediatesand final products in meeting the demand for phos- phate fertilizers.

2. A MathematicalProgramming Formulation. To find the "cheapest" route between sets of origins and sets of destinations,a linear-programming model was developed,with four major networks--rail,river, ocean and road- representingthe transportsystem.

3. Results. The cheapestmode of transportationis derived from simul- taneous determinationof the location size, timing and process of future fer- tilizer plants and importingports, and distributionpatterns.

S. The IndustryModel

4. Objective. The objective is to assess alternativelocations, sizes, products and distributionpatterns associatedwith investmentprojects in the subsector.

5. A MathematicalProgramming Model Formulation. A mixed-integer programmingmodel was designed to minimize the total costs of investments, production,transportation, and imports such that:

(a) demand for P 05 is satisfiedin each province through small-scale production (for SSP, DAP and CMP), production in the modern sector or imports;

(b) mine and plant productionat each location is limited by existing capacity but can be expanded by new investments;

(c) phosphaterock and pyrites production in each region is limited by available domestic reserves;

(d) policies limit the percentageof P205 demand in each province that can be satisfiedby ce,caln products;and

(e) transport out of certain regions is severely constrained.

6. Results. The desired result is a national optimizationgiving at each location: AMNEX 4.6 -52- Page 2 of 2

(a) the production levels of raw materials, intermediatesand final fer, tilizer products and the processesemployed;

(b) the scale of the mines and productionplants;

(c) the investmentsin the sector under economies of scale;

(d) the shipmentpatterns of raw materialsto plants, of intermediate materialsbetween plants, and of final products to markets;

(e) the domestic purchase of raw materials, intermediates,labor and miscellaneousinputs;

(f) the export of products to export regions; and

(g) the import of intermediatesto plants and final products to markets.

China Department February 1988 ANNEX 4.7 - 53- rage I or 3 CHINA PHOSPHATEDEVELOPMENT PROJECT

Planned Phosphate InvestmentProjects to the Year 2000 I. During the Seventh Five-YearPlan (1986-90)

A. FertilizerPlants Planned '000 tpy of year of Project Province Product product (Pq05) completion Jinchan Gansu SSP 400 (60) Completed Lucheng Shanxi NP 900 (120) 1987 (26:13:0) Kaifeng Henan NP 150 (20) 1987 (26:13:0) Jinan Shandong NP 150 (20) 1988 (26:13:0) Yicheng Hubei NPK 160 (30) 1992 (15:20:15) Guixi Jiangxi DAP 240 (120) 1990 Tonglin Anhui DAP 160 (80) 1987 ; tQinhuangdao Rebei DAP 480 (240)/a 1991 i Dalian Liaoning DAP 240 (120)/a 1989 Nanjing Jiangsu DAP 240 (120)/a 1989 Xuanwei Yunnan DAP 120 (60) 1992 Huangmailing Hubei MAP 180 (60) 1993 Hanghezhou Yunnan DAP 120 (60) - Zhanjiang Guangdong DAP 60 (30) 1991 Huaxian Shaanxi DAP 60 (30) - Small-sizedMAP/ Various MAP/DAP 1,500 (650) - DAP plants (50) provinces Dayukou Hubei TSP 560 (200) 1993 Total (1.540)/b

/a Based on imported phosphoricacid. 7W Exclusive of imported phosphoricacid. ANNEX 4.7 Page 2 of 3 - 54 -

B. Phosphate Mines

Estimated Planned Production reserves Mining Rock auality year of ('000 tons/ryear) Province Name of mine (mln tons) method P M 0 P RM etion Concentrate

Yunnan Jining 110 Open 32 0.4 5.6 n.a. 700 700 pit

Guizhou Wengfu 110 Open 29 3.7 1.13 1993 2,500 1,850 pit

Hubel Yicheng 1,060 Under- 21 2.6 3.6 n.a. 3,000 1.500 ground

Dayukou 90 Open 19 3.9 2.6 1993 1,500 650 pit

8uangmailing 110 Open 11 2.3 4.9 1993 1,000 300 pit

C. Pyrite Mines

Proposed production (000 tons) Province Mine name Mining method ROM Concentrate

Guangdong Yunfu Open pit 3,000 2,400

Neimounggol /a Tanyaokou Underground 450 190

Hunnan Qibaoshan Underground 250 200

Nelmonggol /b Tanyaokou Underground 1,050 410

/a Expansion. T7- New mine. ANNEX4.7 Page 3 of 3 - 55-

II. Duringthe Eighthand Ninth Five-YearPlans (1991-2000)

A. FertilizerPlants Phosphatefertilizer production Type of fertilizerproduct (milliontpy of PpOc) Nitrophosphate(NP) 0.5 Triplesuperphosphate (TSP) 2.8 Diammonium phosphate (DAP/MAP) 1.7 Total 4.5

B. PhosphateMines New capacity Total outputla (milliontpy) (milliontpyT- Province ROM ore/product ROM ore/product Yunnan 8.1/6.9 12.4/10.8 Guizhou 11.3/9.5 10.8/9.4 Hubei 13.9/8.8 15.6/9.6 Hunan 0.5/0.3 13./0.8 Sichuan 1.5/1.3 3.4/2.9 Jiangsu 0.21/0.1 1.0/0.3 Hebei 0.41/0.1 1.6/0.5 Other provinces -/- 1.5/0.4 Total 35.8/29.0 47.4/34.5

C. PyriteMines New capacity (milliontpy) Estimatedproduction Province crudeore/35Z sulfur (milliontpy) Hebei 0.7/0.3 0.42 Shanxi 2.0/1.0 2.07 Neimonggol 4.8/2.1 2.45 Anhui 4.4/2.0 3.12 Guangdong 2.0/1.7 4.54 Sichuan 5.0/1.8 2.38 Other provinces 2.0/1.0 6.62 Total 20.9/9.9 21.60

/a Includingoutput from existingmines after takinginto accountdepleted mines. China Department February 1988 ANNEX5.1 - 56 -


General Manages

c9eadepty M e | | Depnty Geeeal Manager aon R||atio oductior A

I Capital I Maknager i Construction Ad=ni=stration

Deveclopmednt Personne

Pwchaskg 1 & Sales

* I Manage~~jrnent

B. After Project Completion

General Manager

Deputy Genrsl Mnagern | Deputy GeneralMana ger Pang & Finance Unon Relations

ProductloL Ad Svics|

Plandg a.Managers uffice _Personnel

HPibic Relations seneflcistion C_dWrs _Civil worls

Trarflport _ q Eqipment

IMahntrunc ANNEX 6.1 - 57 - Page I of 2



Sumary of the Wengfu Mine Development Component


Rock reserves: Over 100 Mt, of which about 90X recoverable by open pit, 56 Mt in 2 initialopen pits (Yingpinand Mofang), 12 m average thicknessof rock layer, 4.8 t/t average ratio overburden/ore

Rock quality: 29X P205, 3.7X MgO, 491 CaO average analysis of RON rock

S. Mining

Capacity: 2.5 Mtpy of ore and 12 Ntpy of overburdenin 3 shifts/day,6 days/weekoperation

Sequence of operations: Sequentialmining in 2 open pits, first Yingpin for 15 years, then Mofang for another 8 years

Mine layout: Open pit equipped with rotary drills, hydraulic excavatorsand trucks, primary and secondarycrushing at mine site

C. BeneficiationPlant

Capacity: 2.5 Ntpy raw ore feed, 1.8 Mtpy concentrateoutput

Product specifications: Concentrate,35% P205, 1.2X KgO Process: Reverse flotation

D. ConcentrateSlurry Pumping

Capacity: 1.8 Mtpy of concentrate,pumped as a slurry with 60X solid content

Pipeline: 45 km distance between charge and discharge ANNEX6.1 - 58 - Page 2 of 2

E. ConcentrateDewatering and Loadins

Location: At Machangping,45 km southeastof mine

Capecitys 0.9 Mtpy dewatered to -10 moisture for loading into railcars;0.9 Mtpy for wet feeding of on-site phos- phoric acid plant

Filtration: Press filters, filtrate water dischargedafter treatment to acceptable standards

F. Infrastructure

Mine site: Workshops and store, equipmentservice facilities, mine office

Beneficiationsite: Workshops and store, laboratory,offices

Dewatering and loading site: Workshops, stores,offices

Water supply: From Qingshui river, 20 km west of beneficiation site, pumping capacity 35,000 m3/d, 600 m difference in elevation

Power supply: 110 kV transmissionline connectingwith existing substation

Social infrastructure: Housing and dormitories,commercial facilities, schools, medical and recreationalfscilities.

China Department February 1988 - 59 - ANNEX 6.2



Scope and Timeframe of the Wengfu TSP Plant

A. Project Description

1. The project is designed to process about 1.2 million tons per year

of phosphateconcentrate into high-gradephosphate fertilizer. It comprises

the constructionof a triple superphosphate(TSP), plant at Machangping,

Guizhou Province, together with on-site and off-site infrastructure.

B. Project Implementaion

Technical Description: Target Date

Completionof feasibilitystudy Dec. 31, 1988 /a Process selectionand contract awards for foreign engineeringof chemical plants Dec. 31, 1989 Commencementof local engineering Oct. 31, 1989 Commencementof internationalprocurement Jan. 31, 1990

Site Activities:

Commencementof site preparation Oct. 31, 1989 Commencementof equipment installation Jan. 31, 1992 Commencementof commissioning Aug. 31, 1993 Commencementof commercialproduction Jan. 31, 1994


Identificationof financingsources for foreign exchange requirement Sep. 30, 1988

/a English version will be delivered to the Bank.

China Department May 1988 - 60 - ANNEX 6.3



Summary of the TechnicalAssistance Component

A. Assistance for Project Managementand Mine Workshop Management

1. Internationallyexperienced consultants w.ll provide advisory services to ensure the selectionand procurementof appropriatetechnologies and equipment, timely identificationand resolutionof Project implementation problems, training of Projectmanagement team staff, and preparationof staff recruitmentand trainingprograms, with a particularfocus on:

(a) project implementation--(i)assistance in technologyselection; (ii) advice on the structureof Project teams and executionof Project implementationfor the coordinatedcommissioning of mines and fertilizerplants; and (iii) counselingon implementationissues to facilitate timely correctiveactions; and

(b) maintenanceof mobile mine equipment--(i)review of the design and layout of workshops; (ii) assistance in the procurementof critical equipment; (iii) setting-up of a preventivemaintenance system; (iv) review of the staff recruitmentand trainingprograms; and (v) monitoringof projectimplementation.

S. Strengtheningof CPI's DevelopmentPlanning Capacity

2. This componentconsists of:

(a) providingcomputer equipment and software;

(b) installing,maintaining and further developingof the phosphate subsector investmentoptimization model at CPI;

(c) providingdomestic training by internationallyexperienced consult- ants for CPI/MCI's staff in investmentplanning and computer pro- gramming for the investmentoptimization model; and

(d) providingoverseas training of key staff.

China Department may 1988 - 61 - ANNEX 6.4



CPI's Work program Under TechnicalAssistance

Activity Target Date

1. Purchase and installationof hardware and software Nov. 30, 1988

2. Transfer the Bank's expertise on the Phosphate Subsector Planning Model

a. The Bank will complete documentation of the model and scenario runs for CPI Jun. 30, 1988

b. Training of CPI staff at the Bank Sep./Oct. 1988

3. StrengthenCPI's capacity to apply the model work to other subsectors

a. Training of CPI staff at CPI by consul- tants on: (i) formulatingoptimiza- tion models with CAMS for subsector planning;and (ii) analysis and applicationof model results. Mar./Apr. 1989

b. Training of CPI's staff for further work on the analysis,development and applica- tion of modelling. Topics would consist of: (i) operations research; (ii) industrialplanning models; (iii) economic and financialanalysis; and (iv) management informationsystems and data base management Jun.1989- Jun.1990 CHINA: PHOSPHATE DEVELOPMENT PROJECT Organization Chart of MCra Project Coordination Unit

World Bank Project . ImplementationCoordnation Group . Deputy Ministerof Finance

Project GeneralManager Chief World Bank Loan Office I Vice GeneralManager Deputy_N_CC_ Director. I 0

Project Officer ]

Design Technolooy Construction Procurement Transportation Financing a Cost Coordinator Coordinator Coordinator Coordinator Coordinator Coordinator Coordinator

*W41305D - 63 - ANNEX 7.2

CHINA PHOSPHATEDEVELOPMENT PROJECT Organtzaflon Char of GPC ProjectManagement Team


H MnelenI I M O IFi Mc


Wodd Baric-41936 - 64 - ANNEX7.3 Page 1 of 2

_ I 1}

iS (A__ m- _-


34~~~~~~~~1 ANNEX 7.3 Page 2 of 2 - 65 - CHINA


Key Milestones for Project Implementation

Milestone Target Date

A. Wengfu Mine DevelopmentComponent

Major Process Related Activities: Slurry pumping and filtrationtest Mar. 1988 Feasibilitystudy for Wengfu TSP plant Apr. 1988 Commencementof basic engineering Mar. 1988 Completionof basic engineering Aug. 1988 Commencementof detailed engineering Sept. 1988 Completionof internationalprocurement Jun. 1989 Commencementof internationalprocurement Oct. 1988 Completionof internationalprocurement Jun. 1990

Site Activities: Commencementof site preparation Jul. 1988 Completionof civil work Jun. 1991 Commencementof equipment installation Jul. 1990 Mechanical completion Dec. 1991 Completionof commissioning Jun. 1992 Commencementof commercialproduction Jan. 1993

B. TechnicalAssistance Component

ConsultantServices for Project Implementation: Commencement Jul. 1988 Completion Dec. 1992

Consultant Services for Mine Engineering Selection 2 Maintenance: Commencement Apr. 1989 Completion Dec. 1992

SubsectorPlanning Support: Commencement Jul. 1988 Completion Dec. 1989

Hazard and OperabilitySeminar Early 1989

China Department April 1988 CHINA


Environmental Protectionand Standards

Standards Project Hazard Measures taken subcomponent or pollutant Bank under project Local guidelines

Open-pit mines Overburden dumps Concentratedin few Must be safe, appropri- areas next to mine, no ate location to be interferencewith other selected installations Beneficiation plants Pumped into safe ponds Same as overburdendumps 0 on wasteland away from mine and other installa- tions

Waste water (from Wengfu Treated to Chinese stan- Solids-100 filter mg/l 100 mg/l presses) dards for petroleum and BOD-60 mg/l chemical industries COD-200 mg/l

China Department April 1988 ANNEX 8.1 - 67- CHINA


Capital Cost Estimates

Local Foreign Total Local Foreign Total -- US$ million -Y million

Phosphate Development License fees 0.0 0.0 0.0 0.0 0.0 0.0 Engineering 3.8 0.2 4.0 14.1 0.7 14.8 Equipment & materials 19.7 42.6 62.3 73.4 158.4 231.8 Spare parts 1.4 4.2 5.6 5.1 15.8 20.9 Freight & insurance 1.7 3.3 5.0 6.3 12.1 18.4 Civils & erection 70.8 0.0 70.8 263.3 0.0 263.3 Project management 12.1 1.0 13.1 44.9 3.9 48.8 Training 0.4 0.3 0.7 1.6 1.0 2.6

Base Cost (January 1988) 109.9 51.6 161.5 408.7 191.9 600.6

Physical contingencies 11.0 5.2 16.2 40.9 19.2 60.1 Price contingencies 12.8 5.7 18.5 111.7 50.8 162.5

Installed Cost 133.7 62.5 196.2 561.3 261.9 823.2

Incremental working capital 4.6 0.0 4.6 20.4 0.0 20.4 Interest during construction /a 9.4 11.0 20.4 40.1 46.4 86.5

Subtotal (A) 147.7 73.5 221.2 621.8 308.3 930.1

Technical Assistance Project mgmt. & mine maintenance - 0.2 0.2 - 0.7 0.7 CPI program - 0.4 0.4 - 1.5 1.5

Subtotal (B) - 0.6 0.6 - 2.2 2.2

Total Financing Required (A+B) 147.7 74.1 221.8 621.8 310.5 932.3

/a Commitment fees are included.

China Department May 1988 ANNEX8.2

- 68 -



Estimated Disbursement Schedule for Bank Loan

Disbursement Semester Annual Cumulative Annual Cumulative Year (FY) ending - (US$ million)- - (% of total) -

1989 Dec 31, 1988 0.3 0.3 0.5 0.5

Jun 30, 1989 0.9 1.2 1.2 1.9

1990 Dec 31, 1989 1.9 3.1 3.0 5.0

Jun 30, 1990 6.3 9.4 10.0 15.0

1991 Dec 31, 1990 10.7 20.1 17.0 32.0

Jun 30, 1991 14.4 34.5 23.0 55.0

1992 Dec 31, 1991 16.9 51.4 27.0 82.0

Jun 30, 1992 6.9 58.3 11.0 93.0

1993 Dec 31, 1992 2.5 60.8 4.0 97.0

Jun 30, 1993 1.9 62.7 3.0 100.0

China Department May 1988 ANNEX 9.1 - 69- Page 1



AssumptionsUnderlying the FinancialAnalysis

A. General

1. The financialprojections were carried out in current yuan using projecteddomestic inflationrates for local inputs and outputs and interna- tional inflationrates for imported inputs as follows: annual domestic inflationrates--8.OZ for 1988, 7.0% for 1989, and 6.5% thereafter;and annual internationalinflation rates--3.0Z for 1988-90,and 4.0% thereafter. The key assumptionsfor financialprojections were based on the actual annual perform- ance of companiesunder Chinese regulations. To provide an overall view of the companies'financial performance in accordancewith conventionalaccount- ing concepts based on internationalaccounting standards, the following acjustmentswere made to the Chinese accounting system: (a) the two sets of financial statements-productionoperations and capital constructionwere consolidated;(b) the accounts in the income statementsand balance sheets were reclassifiedas necessary in accordancewith conventionalconcepts; and (c) the sources and applicationsof funds statementsthat do not exist under the current Chinese accounting system were prepared. For financial rate of return (FRR) calculations,cost and benefit streams in constant yuan were used. The capacity utilizationis assumed at 50% of the design capacity (1.85 million tpy of phosphate concentrate)in the first year of operation,65% in the second year, 90% in the third year and 95% thereafter. A summary of productioncosts per ton of product at full capacity is given in Table 1 of this Annex.

B. Income Statements

2. Sales Revenue. Sales prices are assumed to be maintainedat levels indicatedby MCI and SPB as the expected sales prices for project output-- Y 115/tonfor phosphateconcentrate. Net sales revenue were calculatea after deductingthe product tax. During Project implementation,GPC will not pay the product taxes under specialarrangements; product tax rate for phosphate concentrateis currently5%.

3. Variable ProductionCosts. Annual consumptionof i-nputswas obtained frum the estimatedmaterial balance and estimatedproduction levels after the commissioningon the mine and the beneficiationplant with and without the Project. The materials balance is given in ProjectFile Ref. No. 2.

4. Depreciation. Fixed assets were depreciatedusing the straight-line method at rates agreed on between GPC and its supervisoryauthorities as follows: over 20 years for equipmentand over 30 years for civils. In addition,a mining maintenancefee of Y 7/ton of ore is charged. ANNEX 9.1 Page 2 - 70 -

5. MaintenanceCosts. In the Chinese accounting system,maintenance costs are divided into two categories--annualoverhaul and other. Provisions for annual overhaul are provided as a percentageof the original acquisition value of the fixed assets and are managed separatelywithin the special fund account. Other maintenancecosts were covered as operating expenses. The rate of provisionfor annual overhaul is 6X.

6. Interest Expenses. Interest on foreign exchange-denominatedloans were converted into local currency usini projectedforeign exchange rates, assumed to be adjusted to preserve the relative currency values between the two currencies.

7. Taxes. Taxable income is derived from net profits after deducting the amortizationof long-termloans, and is taxed at a uniform rate of 55%. CPC will not pay income and adjustment taxes on profits during Project implementationand the repaymentperiod of the Bank loan.

C. Balance Sheets

8. Fixed Assets. Fixed assets are shown at historicalcosts.

9. Equity* The followingtwo items are considered as "equity,"given their equity nature": (a) enterprise fixed funds allocated from internally generatedfunds; and (b) net special funds (special fund assets minus special loans) retained by enterprises.

D. Funds Flow Statements

10. DepreciationFund. The current Covernment policy allows companies to retain 100X of the fund.

11. Expendituresfrom Special Funds. Provisions for annual overhaul were used to cover annual overhaul expenses. Annually, 15% of the retained depreciationfund and profits are paid to the Energy ConservationFund. GPC will be exempt from this contributionduring Project implementation. A portion of internallygenerated funds (in the special fund account) is used for: (a) productiontechnology development; (b) improvementof workers' living condition; (c) cash bonuses; and (d) new product test fund. The balance is accumulatedwithin the companyas reserve funds.

China Department April 1988 ANE 9.1 - 71 - Table 1



GPC - Unit Product Cost at 95X Capacity /a (1988 yuansltonof phosphateconcentrate)

Yuans Z

Variable Cost Diesel oil 2.81 4.2 Electricity 1.58 2.4 Flotationagents 2.63 4.0 Sulphuricacid 2.46 3.7 Explosives 1.75 2.6 Tyres 4.09 6.2 Other 8.71 13.1

Total variable cost 24.04 36.2 Fixed Cost Labor 1.35 2.0 Maintenance 10.12 15.2 Administration 2.81 4.2 Depreciation 24.08 37.2 Other 3.39 5.2

Total fixed cost 42.34 63.8

Total Cost 66.38 100.0

/a Production cost is exclusiveof interest expenses and product taxes. CHINA


GPC - A Summary of Income Statements (In current yuan millions)

1993 1994 1995 1996 1997 1998 1999 2000

Gross Sales Revenue 76.7 212.3 313.0 351.9 374.7 399.1 425.0 452.7

Leas: Productiontax 3.8 10.6 15.7 17.6 18.7 20.0 21.3 22.6 Variable cost 15.6 43.2 63.7 71.6 76.2 81.2 86.5 92.1 Fixed costs 66.8 76.1 83.0 86.6 89.5 92.5 95.8 99.3 Administrativeexpenses 7.0 7.4 7.9 8.4 9.0 9.5 10.2 10.8

OperatingIncome (16.5) 74.9 142.7 167.7 181.3 195.9 211.4 227.9

Less: Non-operatingexpenses 0.5 0.8 1.1 1.2 1.2 1.3 1.4 1.5 Financialcharges 45.4 45.0 44.0 42.3 40.2 37.8 35.3 32.7

Net Income Before Tax (62.5) 29.1 97.7 124.2 139.9 156.8 174.6 193.7

Less: Loan amortization 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7 Taxes & other remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ReservedProfits (115.6) (25.1) 42.4 67.5 81.8 96.9 112.9 130.0

Ratios Capacityutilization (%) 50%/a 65% 90% 95% 95% 95% 95% 95% Net profit/grosssales (%) - 13.7 31.2 35.3 37.3 39.3 41.1 42.8 Operatingincome/average assets in service (Z) -1.8 8.4 16.6 20.3 23.1 26.2 29.9 34.2

/a Half of this year's productionwill be used to build up initial inventories.

China Department May 1988 CHDA


GPC - A S ar_yof Funds Flow Statements (In current yuan millions)

- Actual- Projected- 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Sources of Funds

Funds from operations: Retained profits - - - 0.0 0.0 0*0 0.0 0.0 (115.6) (25.1) 42.4 67.5 81.8 96.9 112.9 130.0 Depreciation& amortleation - - - 0.0 0.0 0.0 0.0 0.0 30.2 37.2 41.6 42.5 42.5 42.5 42.5 42.5 Interestexpenses - - - 0.0 0.0 0.0 0.0 0.0 45.4 45.0 44.0 42.3 40.2 37.8 35.3 32.7 Other adjustments - - - 0.0 0.0 0.0 0.0 0.0 55.5 56.8 58.2 59.7 61.4 63.3 65.3 67.6

Internal cash generation - - - 0.0 0.0 0.0 0.0 0.0 15.7 114.0 186.1 212.0 225.8 240.4 256.1 272.7 Funds from outside sourcest World Bank loan - - - 2.3 16.3 88.4 126.4 28.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 L. Domestic long-termloan 1.5 0.3 0.3 25.7 69.1 136.9 204.9 211.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Domestic short-ternloan - - - 0.0 0.0 0.0 0.0 0.0 118.0 14.4 9.6 0.6 0.7 0.7 0.8 0.8

Total Outside Sources 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 111.8 14.4 9.6 0.6 0.7 0.7 0.8 0.8

Total Sources of Funds 1.5 0.3. 0.3 28.0 85.5 225.3 331.3 239.7 127.4 128.3 195.7 212.6 226.4 241.1 256.8 273.5 Applicationsof Funds

Investmentin fixed assets 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Principalrepayment of long-termloans - - - 0.0 0.0 0.0 0.0 0.0 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7 Repaymentof short-termloan - - - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30.5 30.5 30.5 0.0 0.0 0.0 Interestexpenses - - - 0.0 0.0 0.0 0.0 0.0 45.5 45.0 44.0 42.3 40.2 37.8 35.3 32.7 Increase in working capital - - - 0.0 0.0 0.0 0.0 0.0 20.4 14.4 9.6 0.6 0.7 0.7 0.8 0.8 Special fund expenditure - - - 0.0 0.0 0.0 0.0 0.0 6.5 6.9 7.4 7.8 8.3 8.9 9.5 10.1

Total Applications of Funds 1.5 0.3 0.3 28.0 85.4 225.3 331.3 239.7 125.4 120.4 146.7 137.9 137.8 107.2 107.2 107.3

IncreaseIn Cash - - - 0.0 0.0 0.0 0.0 0.0 2.0 7.9 49.0 74.7 88.7 133.9 149.6 166.2 Ratios

Debt service coverage (times) ------0.2 1.1 1.4 1.6 1.8 2.5 2.6 2.8 D

China Departnent May 1988 ANDl 9.4



GPC - A S ry of BDlance Sheets (In current yuan millions)

- Actual- Projected 1985 1986 1987 1988 1989 1990 1991 1"2 1993 1994 1995 1996 1997 1998 199 2000

Current assetes Cash - - - 0.0 0.0 0.0 0.0 0.0 2.0 9.9 58.9 133.6 222.2 356.1 505.7 671.9 Inventories - - - 0.0 0.0 0.0 0.0 0.0 20.5 31.9 40.6 44.7 47.6 50.7 54.0 57.5 Accounts receivable - - - 0.0 0.0 0.0 0.0 0.0 3.2 8.7 12.9 14.5 15.4 16.4 17.5 18.6

Total Current Assete - - - 0.0 0.0 0.0 0.0 0.0 25.6 50.5 112.4 192.7 285.2 423.2 517.2 748.0

Fixed aesets: Net fixed assets - - - 0.0 0.0 0.0 0.0 0.0 889.0 851.8 810.2 767.7 725.3 682.8 640.3 597.9 Work In progress 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total nied Assets 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 889.0 851.8 810.2 767.7 725.3 682.8 640.3 597.9

Special assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.5 6.9 7.4 7.8 8.3 8.9 9.5 10.1

Total Assets 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 921.1 909.2 9292.9 968.3 1.018.8 1.114.9 1.227.0 1.356.0 1

Current liabilities: > Accounts payable - - - 0.0 0.0 0.0 0.0 0.0 0.6 1.8 2.6 2.9 3.1 3.3 3.6 3.8 Other payables - - - 0.0 0.0 0.0 0.0 0.0 2.9 3.1 3.3 3.5 3.7 3.9 4.2 4.5 Short-term loan - - - 0.0 0.0 0.0 0.0 0.0 I11.8 126.1 105.2 75.4 45.6 46.3 47.1 47.9 Current portion of long-ters loans - - - 0.0 0.0 0.0 0.0 53.1 54.2 55.4 56.7 58.1 59.9 61.7 63.7 65.9

Total Current Liabilities - - - 0.0 0.0 0.0 0.0 53.1 169.4 186.3 167.8 140.0 112.3 115.3 118.6 122.1

Long-term Liabilitiest World Bank lon - - - 2.3 18.6 107.7 237.2 261.6 257.1 251.4 244.3 235.5 224.8 212.1 197.1 179.6 PCB A government loans 2.8 3.1 3.3 25.7 94.8 231.7 436.6 604.6 561.4 518.2 475.0 431.8 388.6 345.5 302.3 259.1 Total Long-term Liabilities 2.8 3.1 3.3 28.0 113.4 339.4 673.7 866.1 818.5 769.6 719.3 66.38 613.5 557.6 49.4 438.7

Equity: Enterprise fixed funds - - - 0.0 0.0 0.0 0.0 0.0 53.1 107.2 162.6 219.2 277.4 337.2 398.9 462.6 Special fund reserves - - - 0.0 0.0 0.0 0.0 0.0 (119.9) (154.0) (119.7) (58.3) 15.7 104.8 210.1 332.5

Total Equitv _ _ - 0.0 0.0 0.0 0.0 0.0 (66.8) (46.8) 42.8 161.0 293.0 442.0 609.0 795.2

Total Libilities and Equity 2.8 3.1 3.3 28.0 113.4 339.4 673.7 919.2 921.1 909.2 929.9 968.3 1.018.8 1-114.9 1,227.0 1.356.0

Itatiost Current ratio (times) - - - 0.0 - - - - 0.2 0.3 0.7 1.4 2.5 3.7 4.9 6.1 Long-term debt/equity - - - 100:0 100:0 100:0 100*0 100:0 100:0 100:0 94:6 81s:9 68s32 56:44 45:55 36:64 . .. D~~~~~~~~.. - 75 - ANNEX 9.5



Incremental Cost and Revenue Streams for FRR Calculations (millions of 1988 yuan)

Capital Working Production Sales Net cash costs capital costs revenue flow

1988 23.7 - - - (23.7) 1989 72.2 - - - ;72.2) 1990 178.3 - - - (178.3) 1991 238.5 - - - (238.5) 1992 147.7 - - - (147.7) 1993 - 14.2 41.0 53.2 (2.0) 1994 - 9.4 58.3 138.3 70.6 1995 - 5.9 69.1 191.5 116.5 1996 - 1.2 71.3 202.1 129.6 1997 - - 71.3 202.1 130.8 1998 - - 71.3 202.1 130.8 1999 - - 71.3 202.1 130.8 2000 - - 71.3 202.1 130.8 2001 - - 71.3 202.1 130.8 2002 - - 71.3 202.1 130.8 2003 - - 71.3 202.1 130.8 2004 - - 71.3 202.1 130.8 2005 -- - 71.3 202.1 130.8 2006 - - 71.3 202.1 130.8 2007 - - 71.3 202.1 130.8 2008 - - 71.3 202.1 130.8 2009 - - 71.3 202.1 130.8 2010 - - 71.3 202.1 130.8 2011 - - 71.3 202.1 130.8 2012 - (30.7) 71.3 202.1 161.5

Return on Investment = 12.4%

China Department April 1988 - 76 - ANNEX 10.1 Page 1 ofF3



Assumptions Underlying the EconomicAnalysis

A. General

1. The economic rates of return (ERRs)were calculatedon an incrementalbasis. Prices were expressedin constant January 1988 US dollars. The economic life of the plant was assumed to be 20 years. The followingconversion factors, which were provided by Bank economic work, were applied to the financialprices of nontradeablegoods and services to derive their economic prices:

Nontradeableitems Conversionfactor

Unskilled labor 0.25 Technical labor 4.00 Managerial/administrativelabor 1.00 Electricity 1.50 Local machinery 1.34 Construction 1.08

B. Capital Cost

2. The economic capital cost expressed in January 1988 prices was obtained from the financialbase capital cost after: (a) deducting the duties and taxes on equipmentand other items; (b) deducting the costs of those spare parts that are to be included in the operating costs; and (c) applying conversionfactors to nontradeablegoods and services for economicvaluation.

C. Working Capital

3. Incrementaleconomic working capital requirementswere derived by comparinggoods and services employed in productionwith and without the Project.

D. Economic Benefits

4. Economic benefits of the Project come mainly from the production of phosphateconcentrate. The economic prices of phosphate corcentratewere derived from its latest projected internationalprices, taking into account marine freight from the origin of export to China ports, unloading and port handling charges, and inland rail freight to plant sites. Marine freight, estimatedfrom the latest statistics,was assumed to change in line with ANNEX 10.1 - 77 - Page 2 of 3

internationalenergy costs. The projectionsof the economic prices for phosphateconcentrate are given in Table 1 of this Annex. The import parity price of phosphateconcentrate is based on the imported price from Morroco, adjusted for marine transportcosts.

5. Savings in transportationcosts are attributedmainly to the reduc- tion of transportationvolume because of the higher nutrient content of MAP and TSP. Potential savings in terms of transportationdistances were not consideredbecause of difficultiesin measuring them.

E. Operating Costs

6. TradeableRaw Materials. The economic cost of exportable inputs was derivedby adding to the netback prices, from exports at the production sites, the inland transportationcosts between the productionand the plant sites. The netback value of inputs at the production sites wa;.calculated by deduct- ing inland freight between the sites and exportingports from the FOB export prices. The economic cost of importableinputs was based on their projected internationalprices plus marine freight from the origin of export to ports in China, plus inland freight to the plant sites. The economic values of diesel oil, the only major tradeable input during the operation stage, are also given in Table ' of this Annex. Since China is an importer of diesel oil, the economicvalue of diesel oil was derived from the import price from Singapore .plus transportationcosts to the plant sites after adjusting for ocean losses and insurance.

7. Other NontradeableItems. The economic value of nontradeableinputs was based on their long-termmarginal productioncosts plus inland transporta- tion costs adjusted by specific conversionfactors. The economic costs of locallypurchased chemicals, and bagging materials,were derived from their financialcosts by applying specific conversionfactors.

8. Fixed Costs. The economic costs of various fixed cost items, includinglabor, maintenanceand general sellingand administrativecosts, were based on financialcosts adjusted by specific conversionfactors.

China Department April 1988 ANNEX 10.1 - 78 - Table 1



Economic Prices of Tradeable Inputs and Output for Economic Analysis (1988 US$/ton of product)

Economic Price of Phosphate Concentrate 1993 1995 1997 1999 2001

FOB price () 40.8 44.5 46.1 47.7 48.4 Marine freight to Shanghai 23.5 25.9 28.5 31.4 33.0 Add: T-ansport from port to markets 7.0 7.0 7.0 7.0 7.0 Less: Transport from markets to project 11.0 11.0 11.0 11.0 11.0

Economic price at Wengfu 60.3 66.4 70.6 75.1 77.4

Economic Price of Diesel Oil 1993 1995 1997 1999 2001

FOB price (Singapore) 169.6 173.0 176.5 180.0 183.6 Marine freight to Shanghai 12.7 14.0 15.4 17.0 17.8 Ocean loss & Insurance 1.3 1.3 1.3 1.4 1.4 Inland transportation 12.8 12.8 12.8 12.8 12.8

Economic price at Wengfu 196.4 201.1 206.0 211.2 215.6

China Department April 1988 ANNEX 10.2 - 79-__



Incremental Cost and Benefit Streams for ERR Calculations (1988 US$ million)

Capital Working Production Fales Net cash costs capital costs revenue flow

1988 7.7 - - - (7.7) 1989 22.8 - - - (22.8) 1990 54.1 - - - (54.1) 1991 72.7 - - - (72.7) 1992 47.2 - - - (47.2) 1993 - 4.8 13.2 27.9 9.9 1994 - 1.9 18.3 76.2 56.0 1995 - 1.2 21.5 110.5 87.8 1996 - 0.3 22.1 120.3 97.9 1997 - - 22.1 124.1 102.0 1998 - - 22.2 128.0 105.8 1999 - - 22.2 132.0 109.8 2000 - - 22.2 136.0 113.8 2001 - - 22.2 136.0 113.8 2002 - - 22.3 136.0 113.7 2003 - - 22.3 136.0 113.7 2004 - - 22.3 136.0 113.7 2005 - - 22.3 136.0 113.7 2006 - - 22.4 136.0 113.6 2007 - - 22.4 136.0 113.6 2008 - - 22.4 136.0 113.6 2009 - - 22.4 136.0 113.6 2010 - - 22.4 136.0 113.6 2011 - - 22.4 136.0 113.6 2012 - (8.2) 22.5 136.0 121.7

Return on investment - 26.0%

China Department April 1988 CRDIA


Net SaVinhs of PoreisR lachangeOver Project llfe (18WSllton)

1988 1989 1"90 199l 1992 1993 1994 1995 1996 1997 1998 1999 2000-12 Total

A. In 1988 US Dollar.

Inflows: World Bank loan 0.8 3.9 19.6 26.2 5.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1 IWport subetitutionof fertilizers 0.0 0.0 0.0 0.0 0.0 27.9 76.1 110.5 120.3 124.1 128.0 132.0 1,768.5 2,487.4

Total Inflows 0.8 3.9 19.6 26.2 5.6 27.9 76.1 110.5 120.3 124.1 128.0 132.0 1.768.5 2.543.5 Outflove: Foreign capital ewpenditure 0.8 3.9 19.6 26.2 5.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1 Interest during conatruction and co Dtaent fee on World Bank loan 0.5 0.6 1.5 3.0 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.6 Interest paymente on World BDankloan 0.0 0.0 0.0 0.0 0.0 4.1 3.7 3.5 3.2 2.9 2.6 2.3 8.7 31.0 World lank loan repayments C.0 0.0 0.0 0.0 0.0 1.8 1.9 2.0 2.0 2.1 2.2 2.3 22.6 36.9 Raw material imports 0.0 0.0 0.0 0.0 0.0 1.6 4.3 5.9 6.3 6.3 6.3 6.3 84.4 121.4

Total Outflows 1.3 4.5 21.1 29.2 9.6 7.5 9.9 11.4 11.5 11.3 11.1 10.9 115.7 255.0

Net savings (0.5) (0.6) (1.5) (3.0) (4.0) 20.4 66.2 99.1 108.8 112.8 116.9 121.1 1,652.8 2,288.5

Cuultive Net Savins

Total Inflowk 0.6 4.1 21.5 29.8 7.3 34.2 97.3 146.9 166.3 178.4 191.4 205.4 3.475.3 4558.0

Outflowst Fore gn capital eapenditure 0.8 4.1 21.5 29.8 6.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 62.7 Interest during construction and cousituent fee on World Bank loan 0.5 0.1 1.5 3.5 4.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.0 Interest payment on World Bank loan 0.0 0.0 0.0 0.0 0.0 5.0 4.8 4.6 4.4 4.1 3.9 3.6 15.4 45.8 World lank loan repayments 0.0 0.0 0.0 0.0 0.0 2.2 2.4 2.6 2.8 3.1 3.3 3.6 42.7 62.7 Raw material ievorts 0.0 0.0 0.0 0.0 0.0 1.9 5.4 7.9 8.7 9.0 9.4 10.0 166.0 218.3

Total Outflows 1.3 4.8 23.0 33.3 11.3 9.1 12.6 15.1 15.9 16.2 16.6 17.2 224.1 400.5

Net aaving (0.5) (0.1) (1.5) (3.5) (4.8) 25.1 84.7 131.8 150.4 162.2 174.8 188.3 3,251.2 4,157.5

Cumulative Oet 8avings t0*5 (1.2) (2.7) (6.2) (11.0) 14.1 98.8 230.6 381.0 543.2 118.0 906.3 4,157.5

Chins Department Noy 1988 5'0' 7's'IR~ ;

US 5 5 R J 5 5 R ,A5,\ -_ ~ , _.

( N ~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~Songirog,

| w ,f M O~~~~~~~1AN CG O L I A y -0 <4

-400 h


AFG,-IAN,SrA,J _- % Hotoo LA , OF KOREA A F______T _|NI_S _ _ _ _ _ H I \ E IJSI Toky- ______Toogob..~~~~~~~~~~~~~~~~~~~~~~..L r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

T0 l. moo M oo0'0 100cOlbY .b. i001080*00141 II000'y 7 h OF oTh.n 00008Tb. Wtod .. '- OE - To,Y'-

-'h o,w dom ~of004 001,

X I-G. Z At M it} + ' g w f *0000of 0' 77 w*

L~dOo.XAK-00 0 &W VW PHOSPHUt~~~~~~~~~~~"~' - " t - t~~~~~~l F - C " - &- JSIDENSI P R" - -i- "-, N - ~ .$ : 3-

#~~~~~~~Y~ P.W..w ~ - 0. kga.eb.~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~2.-. r

W~ d.itlMl ~ D.- od Proinc Q -S A,-J~LA PEPL?5 A A~~~~~ LagA eimSzePopaePat -. O O O

Pyrite Mines ' MAcAC.ro.'~~~~~~~~~~~~~C


ProjectgProiinceitrMgjn Plarts BURMATAIWA "K Roads e ProvinceMediitaSszeENitrogenPlLAOse 20 A___ Loge/ edumSiePhspLtESan U ige ag Raelioad DoubleGaugeRailrads S--eMinesL.EMOcNTICn. NIntroernoPtsooPovinc Bounariaste i20Nonure -| __ _ p A


Single GouugeRasilroads PoinerntoaBoundaries L EM CRT

t- AP~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MUL19- ,' ,t- ANv -I ). I ) SA4NXI HENA N f 1,\ WASTE DUMP1/ /


PIT hcx



>1l ,,_ N0K * /oI 3AET N0, U.K.


\ - // | OF~~~BlIIFICATIO






III lo,lo _-,-

ZUNTI.. 27'30. | f\ 4g TONGREN


Mine Areas Lz / N G 2 1Buildings A tS Dp Road IGY AN G( INN(MOC AN F ConveyorBelt

'~'Toiling Pond and ___ 26f30 - - DumpingAreas Province Boundaries Roads --- InternationalBoundaries RoilroJ °nXs( ConcentrateSlurry Pipeline 0 1 2 3 -- Preeue Boundari(s KILOMETERS Coneentr Slura r Pipeline ioaoo' APRIL 1988