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FOROFFICIAL USE ONLY

Public Disclosure Authorized A/M 306v

Report No. 7417-CHA

Public Disclosure Authorized STAFF APPRAISAL REPORT

CHINA

HUBEI PHOSPHATEPROJECT

APRIL 25, 1989 Public Disclosure Authorized Public Disclosure Authorized

Industry, Trade and Finance Operations Division Country Department III Asia Regional Office

This document has a restricted distribution and may be usedby recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (As of February 5, 1989)

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

WEIGHTS AND MEASURES

1 hectare (ha) 2.47 acres 1 metric tcn (ton) 1,000 kilograms (kg) 1 kilometer (km) 0.621 miles 1 cuibicmeter (m3 ) 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)

FISCAL YEAR January 1 - December 31

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

ABC - Ammonium Bicarbon'tte K2 0 - Potassium Oxide AMPC - Agricultural Means of Production kWh - Kilowatt Hour Corporation MA" - Ministry of Agriculture, Animal BICEM - Beijing Institute of Chemical Husbandry and Fishery Engineering and Management MgO - Magnesium Oxide CIB - China Investment Bank MAP Monoammonium Phosphate CIF - Cost, Insurance and Freight MCI - Ministry of Chemical Industry CNCCC - China National Chemical MOC - Ministry of Commerce Construction Corporation Mtpy - Million Tons per Year CMP - Calcium Magnesium Phosphate MWh - Megawatt Hour CMPDI - Chinese Chemical Mines Planning N - Nitrogen Content in Fertilizer and Design Institute NCDI - Nanjing Chemical Design CMRDI - Chinese Chemical Mines Research Institute and Dasign Institute NPK - Complex Fertilizers of N.P205 CPI - Chemical Planning Institute and K2 0 DAP - Diammonium Phosphate p.a. - Per Annum FOB - Free on Board PA - Phosphoric Acid FAO - Food and Agricultural PCBC - People's Construction Bank of Organization of the United China Nations P205 - Phosphorous Pentoxide FY - Fiscal Year ppm - Parts per Million GDP - Gross Domestic Product PRS - Production Responsibility System GOC - Government of Cnilna ROM Run of Mine ha - Hectare SAM State Audit Administration HAZOP - Hazard and Operability SINOCHEM - China Chemical Export and Import HMC - Huangmailing Mining Company Corporation HPCC - Huangmailing Phosphate Chemical SPB - State Pricing Bureau Company SPC - State Planning Commission HPG - Hubei Provincial Government SSP - Single Superphosphate ICB - International Competitive Bidding TSP - Triple Superphosphate ICBC - Industrial and Commercial Bank of tpd - Tons per Day China tpyn - Tons per Year of Nutrients IDC - Interest During Construction UNIDO - United Nations Industrial IFC - International Finance Corporat.on Development Organization JPCC - Jinxiang Phosphate Chemical WCEDI - Wuhan Chemical Engineering Company Design Institute FOR OFFICIAL USE3ONLY

CHINA

HUBEI PHOSPHATE PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SUMKARY...... i-iii

I. INTRODUCTION...... 1

II. AN OVERIIEW OF THE CHINESE INDUSTRY...... 2

A. General Industry Background...... 2 B. Government Objectives and Strategy for Industrial Development...... 3 C. Bank Support for Industry...... 3

III. THE FERTILIZER SECTOR...... 5

A. Agricultural Background...... 5 B. FertilizerUse in Agriculture...... 6 C. FertilizerDemand and Supply...... 6 D. Structure of the Fertilizer Industry...... 9 E. FertilizerMarketing and Distribution...... 9 F. Fertilizer Pricing...... 10 G. Goveranent Strategy in the Fertilizer Sector...... 13

IV. THE PHOSPHATE SUBSECTOR...... 14

A. World Phosphate Market.------14 B. The Chinese Phosphate Industry...... 15 C. Supply of Raw Materials ...... 16 D. The Phosphate SubsectorStudy-...... 17 E. lnvestment Program for the Phosphate Subsector.18 F. Bank Role and Project Justification.18

V. PROJECT INSTITUTIONS...... - 19

A. Background...... 20 B. The Jinxiang Phospb te Chemical Company (JPCC)...... 21 C. The Huangmailingehosphate Chemical Company (HPCC)...... 2 D. The Ministry of Chemical Industry (MCI)...... 23

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 fertilizer sector and phosphate subsector chapters. Ms. G. Mohadjer-Niederreiterand Mr. K. Hur (AS3IF) contributed to the financial and economic analysis chapters. Ms. D. Christmas provided secretarialsupport in the preparation of this report.

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

Page No.

VI. THE PROJECT ...... 23

A. Objectivesb...... 23 B. Dayukou Phosphate Mine and Fertilizer Development Component ...... 24 C. Huangmailing Phosphate Mine and Fertilizer Development Component ... 24 D. Technical Assistance Component . . 24

VII. PROJECT MANAGEMENT AND ENVIRONMENTAL PROTECTION... 25

A. Engineering Arrangements..... 25 B. Project Management..... 26 C. Implementation Schedule..... 26 D. Training. .. 27 E. Environmental Aspects...... 27

VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENTAND DISBURSEMENT.. 28

A. Capital Cost Estimates ...... 28 B. Financing Plan ...... 29 C. Procurement ...... 31 D. Allocation and Disbursementof the Bank Loan ...... 32

IX. FINANCIAL ANNALJSIYSIS...... 35

A. Financial Management Practices in China. . 35 B. Financial Performance and Projections . . .36 C. Financial Rate of Return and SensitivityAnalysis 38 D. Financial Covenants. 39 E. Auditing and Reporting Requirements .. .39

X. ECONOMIC ANALYSIS .40

A. Economic Costs and Benefits.40 B. Economic Rate of Return and SensitivityAnalyss .40 C. Other Benefits.41 D. Project Risks .42

XI. AGREEMENTS REACHED DURING LOAN NEGOTIATIONS AND RECOMMENDATION.42

ANNkXES

3.1 Fertilizer Application Rates for Various Countries, 1985 3.2 Consumption, Production and Imports of Chemical Fertilizers,1972-87 3.3 Comparison of Domestic and internationalPrices of Fertilizers,Main Energy Inputs, and Main Agricultural Products, December 1988 - iii -

4.i Trends in Domest.icIroduction of Phosphate Fertilizers,by Product, 1970-86 4.2 Domestic Production of Phosphate Fertilizers by Produictand Province, 1985 4.3 Consumption of Chemical Fertilizersby Province, 1985 4.4 Major Phosphate Deposits in China 4.5 Major Pyrite Eiepositsand Mines in China 4.6 An Outline of the Phosphate Subsector Investment OptimizationModel 4.7 Planned Phosphate Investment Projects to the lear 2000

5.1 Production Performance of JPCC and HPCC 5.2 OrganizationChart of JPCC 5.3 OrganizationChart of HPCC

6.1 Summary of the Dayukou Mine and Fertilizer Development Component 6.2 Summary of the HuangmailingMine and Fertilizer Development Component 6.3 Summary of the Terms of Reference for Consulting Services to Support Project ImplementationUnder the Technical Assistance Componient 6.4 Outline for Training on Hazard and Operability (HAZOP) Analysis

7.1 Organizat' _hart of MCI's Project CoordinationUnit 7.2 Organization Chart of Project Management Teams for JPCC and HPCC 7.3 Project ImplementationSchedule and Key Milestones 7.4 Environmental Protectiun and Standards

8.1 Capital Cost Estimates 8.2 Estimated Disbursement Schedule for Bank Loan

9.1 Assumptions Underlying the Financial Analysis 9.2 JFCC - Summary of Historical and Projected Financial Statements 9.3 HPCC - Summary of Historical and Projected Financial Statements 9.4 Incremental Cost and Revenue Streams for FRR Calculations

10.1 Assumptions Underlying the Economic Analysis 10.2 IncrementalCost and Benefit Streams for ERR Calculations 10.3 Net Savings of Foreign Exchange over Project Life

MAP

IBRD 20919R: China - Phosphate Reserves and Production Facilities IBRD 20504R: Dayukou PhosphateMine and Fertilizer Development Component IBRD 20505R: Huangmailing Phosphate Mine and Fertilizer Development Component

DOCUMENTS AVAILABLE IN PROJECT FILES

Reference

1. Feasibility Studies for the Two Development Components 2. Terms of Reference for Consulting Services to Support Project Implementation 3. A Blackbook Explaining the Economic and Financial Analyses - i -

CHINA

HUBEI PHOSPHATE PROJECT

Loan and Project Summary

Borrower: The People's Republic of China

Beneficiaries: Jinxiang Phosphate Chemical Company (JPCC, Hubei Province); Huangmailing Phosphate Chemical Company (HPCC, Hubei Prov- ince); Ministry of Chemical Industry (MCI)

Loan Amount: US$137.0 million equivalent

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

On-lending Terms: The Government will on-lend the loan proceeds, through the Hubei provincial government,to the two Project companies at an on-lending rate equal to 105% of the IBRD variable rate, with a repayment period of 20 years, including 5 years of grace. The commitment charge and foreign exchange risks will be passed on to the companies.

Project Objectives: The Project will assist China in achieving its priority for the fertilizer sector under the Seventh and Eighth Five- Year Plans (1986-95),which is to reduce the nutrient imbalance in fertilizer use by expanding the production capacity for phosphate fertilizers,particularly high-grade products such as monoammoniumphosphate (MAP) and triple superphosphate(TSP), based on domestic phosphate resources. More specifically,the Project will help GOC to: (a) implement the integrated development of two major phosphate mines and their downstream high-grade fertilizer complexes, the first such operations in China in terms of size and configuration;and (b) strengthen MCI's project management capabilitiesand the capacity cf Chinese design institutes to identify and analyze potential safety hazards and plant operability in chemical plant design and operations. The major investmentsto be implemrntedunder the Project are consistent with the overall dLvelopment strategies worked out through the Phosphate Subsector Study (the Study), which was carried out during project preparation jointly by the Bank and MCI and which resulted in a phosphate subsector investment program to the year 2000. The project investmentswhich comprise the integrated development of domestic phosphate deposits and fertilizers using modern mining, beneficiation and fertilizer production technologies,are also expected to serve as models for the future development of the fertilizer sector. The Project - ii -

will increase China's local supply of phosphate fertilizers by about 25Z.

Project Descriptiont The Project has three componentst (a) Dayukou mine and fertilizer developmernt- initiation of a new open-pit mine of 1.5 Mtpy ROM rock capacity, construictionof a bereficia- tion plant, and establishmentof a 560,000 t-pyTSP fertilizer complex; (b) Huang&ailin&mine and fertilizer development - expansion of the capacity of an existing opern-pit mine from 0.3 Mtpy ROM rock to J.0 Mtpy, constrlictioznof a beneficiationplant, rehabilita:ionof a small low-grade nitrogenous fertilizer plant to supply ammoinlaas feedstock for MAP production, and establishmentof a l0,O000 tpy MAP plant near the mine site; and (c) technical assistance - consulting services for project implementation,technology selection, production start-up and mine workshop maintenance and for training on modern methodologies for Hazard and Operability (HAZOP) analysis.

Project Benefits The Project will generate indirectly significant economic and Risks: benefits in agricultureby reducing the nutrient imbalance and increasing the synergism of fertilizer application. No extraordinary commercial risk are foreseen, given the general shortage of phosphate fertilizersand the apparently buoyant Chinese fertilizer market. The main technical risks relate to the need for coordinated implementation and commissioningof high-grade phosphate fertilizer plants and associated mines. In the past, the lack of proper coordinationhas been a persistent problem in implementingintegrated mine and fertilizer investments, executed by separate entities under separate budgets. This risk will be mitigated by implementingboth mine development and fertilizer plant constructionunder the same project management team and from the same budget, as well as by assurances of diligent monitoring and coordination from the Government. The risk will be further mitigated by involving internationallyexperienced consultants under the technical assistance component; they will assist MCI's project coordinationteam and the project companies with project implementationand production start-up. In addition, the project coripanieswill undertake comprehensive staff recruitmentand training .rogramsfor core operational and maintenance personnel during Project implementation. - iii -

Project Costt Local Foreign Total ----- (US$ million) -----

Dayukou mine and fertilizer development 160.2 73.4 233.6 Huangmailing mine and fertilizer development 75.5 35.1 110.6 Technical assistance - 0.4 0.4

Base cost (January 1989 prices) 235.7 108.9 344.6

Physical contingencies 23.6 10.9 34.5 Price contingencies 37.4 19.6 57.0

Installed cost 296.7 139.4 436.1

Incremental working capital 27.2 - 27.2 Interest during construction 24.4 22.9 47.3

Total Financing Required /a 348.3 162.3 510.6

Financing Plan: Local Foreign Total ----- (US$ million) -----

IBRD loan - 137.0 137.0 GOC loan 240.7 - 240.7 Provincial government loan 80.4 25.2 105.6 Industrial and Commercial Bank loans 8.3 - 8.3 Companies' internal funds 18.9 - 18.9 Bilateral aid - 0.1 0.1

Total Financing 348.3 162.3 510.6

Estimated Disbursements:

IBRD PY 1990 1991 1992 1993 1994 1995 ------(US$ million) ------

Annual 4.1 23.3 48.0 48.3 20.6 2.7 Cumulative 4.1 27.4 75.4 113.7 134.3 137.0

Economic Rate of Return: 172

La The total cost net of sales taxes on locally purchased equipment and materials (US$6.0 million) is US$504.6 million. CHINA

HUBEI PHOSPHATE PROJECT

I. INTRODUCTION

1.1 The Government of the People's Republic of China (the Government, GOC) has requested a Bank loan of US$137.0 million equivalent to finance a Hubei Phosphate Project for (the ProJect). The Project embodies an evolution of the Bank's fertilizer operations in China, geared toward broadening the impact of Bank support for developing and improving the efficiency of the entire fertilizer sector. The Fertilizer Rehabilitationand Energy Saving Project (Loan 2541-CHA, FY85), the first Ba fertilizer operation, supports the rehabilitationof four large and one medium-sized nitrogenous fertilizer plants. The subsequent Fertilizer RationalizationProject (Loan 2838-CHA, FY87) aims to demonstrate alternativesfor improving production efficiency at medium-size nitrogenous fertilizer plants, which currently produce low-grade fertilizers,by converting products from five such plants into high-grade fertilizers. It also aims to strengthen sector-wide institutionalefficiency by introducing improved management systems at the enterprise level. The Phosphate Development Project (Loan 2958-CHA, FY88), the third Bank-supported operation in the fertilizer sector in China (which was prepared and appraised concurrentlywith the Project), broadens the Bank's involvement beyond the nitrogenous fertilizer subsector. It supports the development of a large- scale, modern phosphate mine in Guizhou Province which would provide high- quality phosphate concentratesto several downstream fertilizer plants. Through the Phosphate Sector Study carried out during the preparation of the third project and this project (preparedconcurrently), a subsectoral approach to Bank assistance was initiated,with the Bank providing financial and technical support to the Ministry of Chemical Industry (MCI) for the design of subsector-widestrategies. That effort resulted in the preparation of an optimal investment program that would allow China to meet its rapidly growing demand for phosphate fertilizers in the least-costmanner.

1.2 Consistent with the overall development strategies and investment program worked out under the above Study, the Project will support: (a) integrated development of two pnosphate mines in Hubei Province and their downstream high-grade phosphate fertilizer (MAP and TSP) plants at the mine sites; and (b) provision of consultant services to MCI's project coordination team and the project companies for project implementation,technology selection, production start-up, and mine workshop maintenance.

1.3 The Project investmentswere initially identified in 1985, and were prepared and appraised by the Bank's project team as part of the Phosphate Development Project in December 1987. However, GOC wished to delay the loan processing for these investments and prepare a separate project on a different schedule as its own internal review of them was getting delayed. Considering the urgency of developing the Guizhou mine in time for the commissioningof downstream fertilizer plants currently under construction, the remaining portion of the Phosphate Development Project was processed according to the ori- - 2

ginal schedule, and presented to the Board in June 1988. Key parameters of the Project were updated during postappraisal in February 1989. The earlier Phosphate Subsector Study was carried out during 1986-88.

1.4 This report recommends a Bank loan of US$137.0 million equivalent, which would cover 26.82 of the total financing required and 84.5Z of the total foreign exchange financing tequired (equivalentto 98.3% of the foreign component of the installed cost).

II. AN OVERVIEW OF THE CHINESE INDUSTRY

A. General Industry Background

2.1 Industry is China's largest productive sector, accounting for nearly 47X of its Gross Domestic Product (GDP) and employing 18% of the total labor force. About 97,600 state enterprisesgenerate 62X of total industrial output, the remainder being produced by more than a million non-state enterprises,mainly urban and rural collectives. While state enterprises produce mainly important raw materials, capital goods and strategic commodities such as fertilizers,and light industrial and consumer goods, most non-state enterprises are involved in the production of downstream consumer products. Gross industrial output amouintedto Y 1,381 billion (US$371 billion) in 1987. The chemical industry,which produces mainly fertilizers, petrochemicalsand pharmaceuticals,accounted for 10% of the total industrial output.

2.2 The grois value of industrial production has grown rapidly !etween 1978 and 1987, at a rate of over 10.8X in real terms per year. This growth reflects in large part the high rate of capital accumulation in industry. Until the late 1970s, when the Government began to view external trade as an important element of economic development,Chinese industry was oriented mainly toward the domestic market. Since then, Chinese manufactured exports have grown rapidly from around US$9 billion equivalent in 1980 to about US$26 billion equivalent in 1987. The share of exports in industrial output was 7.4Z in 1987.

2.3 China's industrial development has been constrained by several struc- tural deficiencieswhich stemmed mainly from rigid economic planning and the past industrial strategies oriented towards self-sufficiencyat the national and regional levels. Major deficienciesinclude outdated technologies, institutional rigidities stemming in part from quota and price controls, a distorted structure of prices, inadequate infrastructure,and an under- developed financial sector. Reflecting these problems, labor productivityand the efficiency of resource use for Chinese plants are low. Nearly 80% of the current capital stock is obsolete and needs replacement or technical renovation. The industry structure is biased toward basic, heavy industry. An over-emphasis on self-sufficiencyat the regional level has also led to a fragmented national market, reduced domestic competition,and the suboptimal use of scarce skills and resources. Consequently,potential gains from econ- omies of scale are often missed. Institutionalinflexibility, compounded by inadequate market integration,has provided little incentives for industrial enterprises to improve managerial efficiency and product quality. The low prices of energy and basic intermediatesfor industrial production also con- tribute to the inefficientuse of inputu. nvestments in infrastructure, particularly for transportationand telecomriunication,have lagged behind those in industry. This in turn has posed a major constraint to industrial development. The financial markets, which are in their infancy, have until recently only provided limited intermediationservices for enterprises.

B. Government Objectives and Strategy for Industrial Development

2.4 Since 1979, the Chinese Government has shifted the focus of industrial development towards light industry and introduced incentives and market forces as a means of improving economic efficiency under ongoing economic reforms. The development strategy has emphasized modernization of existing equipment, development of manufactured exports and more efficient light industry, and material and energy conservationin industry. Price reforms, which the Government views as one of the most important elements of the ongoing economic reforms, are designed to gradually reduce distortions to enhance allocative economic efficiency,particularly by allowing market forces to play a greater role in price determination. Since the start of economic reforms, the prices of major industrial inputs, including energy, have been raised significantly qo that effect. Recently the worries relating to the inflationaryimplications of these reforms have resulted in a cautious approach, and the reform process has been temporarily slowed at present. However, price reforms remain a critical item on the Government's reform agenda. Reforms adopted in 1984 aim to decentralizeeconomic decision-making toward the provinces and enterprises,and make greater use of market signals to provide production incentives. State enterprise reforms, which include irT'roductionof the contract management responsibilitysystem and, uniform profit tax rates (55Z) and wage incentives,have provided greater autonomy and more appropriate incentives for enterprise management. However, significant distortions in relative prices still remain, and the objective of replacing the traditionally "soft" enterprise budget constraint has yet to be achieved. Reforms in the financial sector have focused on reducing the role of central planning in the economy by increasing competition among existing and new financial institutionsand the introductionof new types of financial instruments. The reforms are being implementedat different paces among the regions and subsectors. Because of the nature and structure of the fertilizer sector, the process of decentralizationhas already progressed to a greater degree than in some other industrial sectors.

C. Bank Support for Industry

2.5 The Bank Group's industrial lending operations in China began in December 1982 with the approval of a loan of US$70.6 million to finance the First China Investment Bank Project (Loan/Credit2226/1313-CHA, FY83). Three additional loans/creditsof US$575 million to the China Investment Bank (CIB) (Loan/Credit2434/1491-CHA in FY84; Loan/Credit 2659/1594-CHAin FY86; and Loan/Credit 2783/1763-CHAin FY87) have been approved subsequently. The main purpose of the CIB operations has been to develop CIB as the premier financial intermediaryproviding term financing for small- and medium-sized enterprises. CIB operations to date have supported a wide range of subsectors, including: textile, light industry, electronics, food processing, pharmaceuticals,pack- - 4 -

aging materials, machinery and spare parts, building materials, chemicals and metallurgical,and other, in a number of provinces. Disbursementlof the CIB loans and cred..~shave, apart from some delays in the first operation, pro- ceeded satisfactorily. AltiuoughCIB's manoower and system require further strengthening,the basis of a sound development bank in China has been established.

2.6 Besides the four CIB operations, Bank involvement in the industrial sector comprisess (a) three fertilizer loans, totaling US$257.3 million (para. 1.1); (b) a loan of US$100 million for the Shanghai Machine Tool Project (Loan 2784-CHA, FY87), involving rehabilitationand modernization of the machine tool sector in Shanghai; (c) a loan of US$128 million for the Pharmaceuticals Project (Loan 2943-CHA, FY88), to expand pharmaceuticalproduction using modern technologies and improve manufacturingpractices; (d) a regional development project for Gansu Province (Loan 2812-CHA, and Credit 1793-CHA, FY87), including an industrial development component of US$20 million, to be used for diversificationand modernization of the predominantly rural industrial base in the province; and (e) a loan of US$154 million for the Tianjin Light Industry Project (Loan 3022-CHA, FY89) to support the restructuringof three important subsectors (textile dyeing and finishing,pulp and paper, and packaging) of the light industry in Tianjin Municipality. Physical implementation of the three fertilizerprojects is proceeding generally on schedule. A Planning Support and Special Studies Project, which includes components for supporting long-term planning activities in selected subsectors including petrochemicals,was approved in June 1987. No Project Completion Reports (PCRs) have been prepared on any of the above projects. The International Financial Corporation (IFC) has provided support of US$44.3 million equivalent (equity participation of US$4.3 million and loans of US$40.0 million) since its first operation in 1985, through the following five investments: Guangzhou and Peugeot Automobile Co., Ltd. (InvestmentNo. 813, FY85), China Investment Co., Ltd. (InvestmentNo. 974, FY87), Shenzhen China Bicycles Co., Ltd. (InvestmentNo. 1020, PY87), Shenzhen Crown Electronics Co., Ltd. (InvestmentNo. 1066, FY88), and Shenzhen Chronar Solar Energy Co., Ltd. (InvestmentNo. 1119, FY89).

2.7 The Bank's overall objectives in support of China's industrial development are to assist the Government in: (a) improving the policy frame- work for the industrial sector as a whole; (b) building sound institutionsand practices for financial intermediation,subsector planning, project approval and implementation;(c) promoting and implementingtechnology upgrading, plant restructuringand rehabilitation,and energy and material conservation in selected sectors at the national and provincial levels; and (d) carrying out the reforms needed in the financial system.

2.8 Specific plans include further support for both CIB and other financial intermediariesand industrial enterprises in the overall sector reform now under way, assistance to selected major subsectors at the national and provincial levels: fertilizers,pharmaceuticals and machine tools, and the development of broad-based industrial lending operations at the provincial level, involving restructuringof major subsectors. The increasing devolution of planning and implementationresponsibility to the provinces has the potential to have a significant impact on industrialdevelopment provided that the provincial authorities can effectively formulate and carry out their new role. The anticipated series of provincial operations is designed to help selected - 5 -

provinces articulate and implement their new responsibilities. The Bank's program for economic and sectcr work in industry and finance has prov,ded the basis for an active dialogue with the Government. Major studies completed so far include those on the state enterprise management system, finance and investment, external trade and capital, and phosphate subsector planning. Further work is being carried out and is planned in such areas as tax reform, enterprise and financial reforms, and several subsector studies at the national and provincial levels. This work is increasinglybeing carried out jointly with Chinese agencies.

2.9 The various reform measures introduced in recent years have expanded significantlythe scope for non-state enterprises,mainly urban and rural collectives. The environment for foreign investment in China has also improved significantly since the promulgationof the joint venture law in 1979. Bank operations designed to assist the rapidly growing non-state sector are contemplated. For example, assistance to the rural industrial sector is expected through support for the Government'sSPARK program, and CIB, hitherto the major beneficiary of Bank support for financial intermediation, is expected to gradually expand its financing of non-state enterprises and joint ventures. IFC support for the Chinese industrial sector has hitherto been limited to export-orientedjoint ventures. With minor exceptions only, joint ventures are required to earn their own foreign exchange to service foreign obligations,which in turn has tended to make it difficult for IFC to support import substituting joint ventures; most potential joint venture partners in China are interested in the domestic market. As part of the ongoing economic and sector dialogue, both the Bank and IFC have proposed major changes in the foreigniexchange allocation and management system designed to alleviate these difficulties. The growing importance and role of the foreign exchange cen- ters, which were established recently in important trading cities and provinces, have the potential for alleviating this constraint.

III. THE FERTILIZER SECTOR

A. Agricultural Background

3.1 The agriculture sector in China employs some 190 million farm families and accounts for about 34X of the country's GDP. Although it has a shortage of cultivatable land--only 102 of China's 960 million hectares (ha) is cultivated, compared with 75Z in India--Chinahas achieved self-sufficiency in its basic food requirements. That accomplishmentis all the more remark- able given that China has 22% of the world's population but only 8% of its cultivated area. The reasor.for this success is intensive cultivation practices, with relatively heavy inputs of labor, chemical and organic fertilizers, and water per unit of land. Foodgrains occupy about 70Z of the total cultivated area. Cotton is the most important industrial crop.

3.2 The agricultural sector has performed exceptionallywell since 1979, when the Government introduced a new agriculturalincentive program, the "production responisibilitysystem (PRS).n Reflecting these initiatives,the gross value of agricultural production increased by 10% p.a. over the period 1980-86, compared to an average of 3% p.a. in the preceding 20 years. Major changes that have taken Dlace under the PRS include: (a) a larger role for -6-

farm households,which now functionas the fundamentalunits of agricultural productionand management;(b) replacementof the mandatoryprocurement quota with voluntarycontracts, which gives farmersmore flexibilityin determining what to grow and where to sell; (c) price increasesfor major farm products; and (d) the introductionof some flexibilityin pricesfor deliveriesof certain productsby collectivesand individualproducers in excessof contracted targets.

B. FertilizerUse in Agriculture

3.3 While China is the third largestuser of chemicalfertilizers and the largestconsumer of nitrogenin the world, the level of fertilizeruse in 1985--167kg of nutrientsper hectareof culti"zatedland--was still only about a third of that in neighboringcountries such as Japan and Korea (seeAnnex 3.1 for a comparisonwith other countries).The implicationis that the potentialfor increasedfertilizer use is large. Since expansionof the cultivatedarea is not feasible,increasing and more balancedfertilizer use will remaincentral to China'sstrategy for increasedagricultural output.

3.4 At present,there is an imbalancein the use of nitrogen(N), phosphate (P205) and potash (K20)fertilizers. China's low applicationof phosphate and potash (para.3.6) reducesthe synergisticbenefits that could derivefrom the relativelyhigh level of nitrogenapplication. This imbalance is a major constraintto increasingthe applicationof nitrogenous fertilizers.Compared with the applicationrates in the other countriesgiven in Annex 3.1, China'slevel of applicationof phosphateand potash fertilizers is quite low. Accordingto resultsfrom surveysby the Ministryof Agricul- ture, AnimalHusbandry and Fishery(MAAF) during 1981-83, the soil throughout 73.4X of the cultivatedarea was deficientin phosphate,and 39.8X of it was seriouslydeficient.

C. FertilizerDemand and Supply

3.5 Table 3.A summarizethe consumption,producti(n and importationof chemicalfertilizers from 1974 to 1986 and presentsprojections of these acti- vitiesfor 1990 and 1995 (greaterdetail can be found in Annex 3.2). TIb ..LA: O4INA - Q4EICAL tERTILIZERCONSUMPTION, PRODUCTION AND ISPOR, PASTAND PROJECtEDL ('000 tons of nutrient)

Nitrooan Pho8shntbm445).... PqoQsosh Total nutrient. Cone.La Prod. Imp. Cono.zaa Prod. Imp. Cons.LN Prod. Imp. Con&./a Prod. Imp.

1072 3,168 2,444 1,342 1.038 1,249 11 12 8 2 4,219 3,701 1,S5S 1Q81 10,36S 9,868 1,641 2,785 2,508 499 281 24 2E0 13,349 12,390 2,290 1984 18,878 12,211 2,828 8,686 2,389 1.342 804 31 788 17,868 14,601 4,928 1988 18,477 11,438 2,052 3,531 1,760 960 920 24 364 17.898 18,222 3,866 1986 18,728 11,888 1,700 4,802 2,826 648 1,078 25 600 19,306 18,987 2,045 1990 (proj.)g 14.860 18,160 2,899 S,880 3,000 8,880 1,768 10 1,786 22,505 16.800 8.005 1995 (proj.)/d 16,400 lS,160 2,562 8,200 4,900 3,956 3,280 160 8,S92 27,880 20,200 9,910

_veran Annug (trowth Rate (O) 1972-41 14.1 16.8 11.4 8.1 40.2 18.0 18.7 19.1 1972-6 11.0 11.8 11.0 - - - ll.8 9.9 1981-86 8.8 8.8 10.5 (1.4) 47.7 0.8 7.7 2.4 16 8.6 1.8 12.4 38.0 (2.8) 4.2 8.7 5.6 1986-95 2.0 8.5 6.9 10.7 18.2 22.0 4.2 -

L The consumption figures (sales to farmers) do not equal production plus imports because of distribution losses, stock changes and some unrecorded imports. L Actual phosphate fertilizer consumption figures include phosphate rock. directly applied without processing. , Actual potash consumption figures appear to be overestimated because of atstieticsl Inconsistency. Ld The projected Imports for the yesr4 1990, 1995 snd 2000 were darived from supply Caps between domestic production and consumption, takino into account an S8 fertilizer lo"s in transit, storage and distribution.

Sources: Consumption data--Chins Agricultural Handbooks 1981-86, Agricultural Yearbook of China 1988 and KMAF; production dats--MCI. and Food and Agriculture Organization (FAO); and trade data--General Administrationof Custom and FAD.

3.6 FertilizerDemand. The consumptionof all fertilizersincreased from 4.2 milliontons per year of nutrients(tpyn) in 1975 to 19.3 milliontpyn in 1986, representingan averageannual growth rate of 14.1Z. Growthin nitrogen consumption,which increasedat an averageannual rate of 14.1Z during 1972-81,has slowedin recentyears, mainly because the levelof nitrogen applicationis relativelyhigh, especiallycompared to the use of phosphate and potash fertilizers,whose suppliesare limited. The consumptionof phosphateand potash showedaverage growth rates of 11.0? and 37.91 respectively,l/during 1972-86; this coincideswith the Government's continuedemphasis on increasingtheir applicationto improvethe overall nutrientbalance.

1/ Potash consumptionhas grown very quickiyfrom its low base in the early 1970s,but it is stillvery low. 3.7 China also has a long history of using organic fertilizer. This will continue to be a valuable source of nutrients and will complement further increases in the use of chemical fertilizer. Total nutrients supplied by organic fertilizers in 1986 are estimated at about 15 million tons.

3.8 Based on its agriculturaltargets, the Government has projected that the demand for chemical fertilizer will reach 27.9 million tpyn in 1995, with implied average annual growth rates of about 2.0X for nitrogen (N) 6.9% for phosphorous (P205) and 13.2X for potassium (K20). These projections appear to be somewhat conservative,based on the limited supplies of phosphate and potash fertilizers. According to MAAF, ths desirable long-term target for the ratio of these nutrients is 100:50:20, compared with a current ratio of 100:33:8. GOC plans to achieve the target by 1995 by rapidly expanding the consumption of phosphate and potash fertilizers. However, it may be difficult to satisfy these requirementsowing to domestic raw material constraints for potash and limited financial resources for investmentsand imports.

3.9 Fertilizer Supply. China has about 1,900 operating fertilizer plants of varying types and sizes and is the world's third largest producer of chemical fertilizers after the USSR and the US. Chemical fertilizer production increased from 3.7 million tpyn in 1972 to 14.6 million tpyn in 1984, and then fell to 13.2 million tpyn in 1985. In 1986, production reached 14.0 million tpyn. Juring 1972-86, phosphate fertilizer production increased at a modest rate of 4.6%, while nitrogenous fertilizer production increased at the much faster rate of 11.82 p.a. For potash the figure was 8.5Z.

3.10 The decline in domestic production of both nitrogenous and phosphate fertilizers in 1985 was mainly due to the Government'sdecision to close some 200 of the small, inefficient plants. These plants produced low quality, low nutrient fertilizers such as ammonium bicarbonate (ABC), single superphosphate (SSP), and calcium magnesium phosphate (CMP). The Government took this step in response to diminishing demand for these fertilizers. Despite the aggres- sive buildup of capacity for high-grade fertilizers in recent years, a significant portion of the fertilizer production in China still is low grade: in 1985, only 30% of nitrogen production and 2X of phosphate production involved high-grade products such as urea (46% N), MAP (522 P205) and TSP (46% P205).

3.11 China plans to continue expanding its production capacity for chemical fertilizer, particularlyhigh-grade phosphate fertilizer, during the Seventh and Eighth Five-Year Plan periods (1986-95). It also intends to rationalize existing low-grade fertilizer production facilities, by converting their products to high-grade fertilizers. New large- ard medium-scale fertilizer plants to be completed during the Seventh Five-Year Plan period 2/ are expected to increase China's high-grade fertilizer production capacity by approximately 1.2 Mtpy of N, 0.6 Mtpy of P205, and 0.1 Mtpy of K20. Projects under the Eighth Five-Year Plan, which is currently being formulated, are expected to include further expansion in capacity for chemical fertilizers of

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 nitrophosphate plant, an 1,800 tpd NPK plant, a 500 tpd NPK plant, and 200,000 tpy potassium-chlorideplant. 2.0 Mtpy of N and 1.9 Mtpy of P205.3/ During1986-95, all medium-sizeplants currentlyproducing low-grade fertilizer will be convertedto high-gradepro- duction.

3.12 FertilizerDemand and SupplyBalance. Despitethe impressivebuild- up in productioncapacity during the last decade,and continuedexpeditious expansionof capacityplanned under the Seventhand EighthFive-Year Plans, Chinawill need to continueimporting fertilizers to meet expecteddomestic demand. In 1986, about 16% of China'sapparent total consumption(domestic productionplus net imports)of chemicalfertilizers was met by imports(122 for nitrogen,24% for phosphateand 96Z for potash),at a value of over US$1.1 billionp.a., makingChina the world's largestnet importerof fertilizers. As Table 3.A shows,the overallfertilizer deficit is projectedto increase from 2.9 milliontons of nutrientsin 1986 to 8.0 milliontons in 1990 and 9.9 milliontons in 1995. If the foreignexchange situation permics, this deficit will be met by imports.

D. Structureof the FertilizerIndustry

3.13 Production.Except for 16 large-sizeurea plants (about280,000 tpy of ammoniaeach), most of China'sapproximately 1,900 fertilizerplants (about 1,200 producingnitrogenous and 700 phosphatenutrients) are using outdated technologyand do not conformto currentirternational production norms. This is becausemost of China'sfertilizer plants were built using indigenous design,technology and equipmentreflecting the industry'searly policy of relyingon local technologyand availableraw materialsas much as possible. Becauseof the outdatedtechnology at the majorityof these plants,the level of energyconsumption of fertilizerproduction has been high.

3.14 The relianceon local technologywas modifiec,in the early 1970s. During that decadeand the early 1980s,China built 15 large nitrogenousfer- tilizerplants using importedtechnology and equipment. Almost all plants currentlyunder constructionare based on internationallyproven imported technologies.

3.15 Feedstock. China uses a varietyof locallyavailable feedstocks for fertilizerproduction. The large-sizenitrogenous fertilizer plants use naturalgas, naphthaand fuel oil as feedstocksfor ammoniaproduction, while the small-and medium-sizeplants mainly use coal. The small-sizephosphatic fertilizerplants use low-gradephosphate rock to produceSSP and CMP. The large-and medium-sizehigh-grade phosphatic fertilizer plants under construction or considerationwill be based on both domesticphosphate rock and importedphosphoric acid.

E. FertilizerMarketing and Distribution

3.16 FertilizerAllocation. In May 1985, the Governmentchanged its approachto fertilizerallocation by introducinga new contractsystem for the procurementof farm output (see para. 3.2). In the past, it allocatedferti- lizer accordingto a state allocationplan in exchangefor agricultural

3/ Ten high-gradephosphate fertilizer plants with a capacityof 240,000-480,000tpy DAP or 400,000-800,000tpy TSP, and five large-size urea plants. - 10 -

products acquired through the state procurement system. The current contract system gives both farmers and the Government more flexibility in allocating fertilizer by reducing the quantities covered by the state allocation plan. Fertilizer producers thus are able to sell an increasing portion of their production outside the state plan, sometimes directly to farmers and across provincial boundaries. However, the state procurement system still accounts for about 60? of total fertilizer consumption and about 85Z of the high-grade fertilizers, including urea and DAP.

3.17 Fertilizer Marketing. About 90? of chemical fertilizer is marketed through the AgriculturalMeans of Production Corporation (AMPC), a state-owned company under the Ministry of Commerce (MOC). AMPC handles all fertilizer under the state allocation quota and a significantportion of the above-quota production. Producers sell the balance directly to farmers. AMPC procures fertilizer from the domestic plants and China Chemical Export and Import Cor- poration (SINOCHEM)--theagency responsible for all imports of chemical fertilizers under the Ministry of Foreign Economic Relations and Trade. AMPC has some 2,500 offices at the national (accountingfor about 202 of AKPC's total purchases), provincial (282), and county (52Z) levels. The county-level offices sell fertilizers to farmers through: (a) about 64,000 retail coopera- tive shops (about 50? of AMPC's total sales); (b) some 110,000 retail shops (32Z); and (c) direct sales (18Z).

3.18 Fertilizer Transportation. So far, the transportationsystem has been able to move the large and growing quantity of fertilizer,about 94 million product tons in 1986. The transport of fertilizer has been given priority to ensure its availability for farmers. Fertilizer is moved, mainly in bagged form, from plants and ports directly to a network of county-level AMPC warehouses located close to the consuming areas. While high-grade fertilizers such as urea and DAP are hauled long distances by rail, low-grade fertilizer such as ABC and SSP from small plants generally located near the consuming areas is transportedmainly by road. Ab6ut one-third of the total fertilizer distributed in China moves by rail. River transportationalso plays an important role.

3.19 Fertilizer Storage. Fertilizer storage capacity has not been adequate in recent years to meet the peak storage requirements.given the rise in consumption. The AMPC operates storage facilities for fertilizers at various levels. Total capacity at these facilities is equivalent to three months of national fertilizer consumption. AMPC warehouses at the national, provincial and county levels account for half the total storage capacity; the rest of the warehouses are located in the countryside at AMPC's retail shops. To reduce the storage burden and its carrying costs, AMPC is encouraging farmers to buy fertilizers during the off-season by offering rebates. The shortage of ware- housing capacity at periods of peak storage demand will be alleviated gradually as high-grade fertilizers replace low-grade ones, since the former have a lower volume.

F. Fertilizer Pricing

3.20 Trends under the Price Reforms. GOC has embarked on a major effort to reform the prevailing system of prices in the country (para. 2.4). Given the Government's concern for macroeconomicmanagement and the obvious sensiti- - 11 -

vities involved, the pace of reform inevitablywill vary from sector to sector and over time. Recently the Government has taken a cautious approach to overall price reforms due to concerns about their inflationaryimplications (para. 2.4). However, the overall direction of reform has been clearly set. The ongoing economic reforms involve expansion of the role of market forces in fertilizer production and allocation. In the past, the Government administered fertilizer prices strictly, as it did those of other essential commodities. The current strategy assigns a greater role to market forces in fertilizer pricing and allocation so as to improve the efficiency of production and 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 production subject to the state plan quotas at both the ex-factory and farm-gate levels. Market-influencedprices negotiated within the limits of guideline retail prices set by local pricing authorities prevail for production outside the state plan quota.4/ Fertilizer producers market these products directly.

3.21 At present, about 402 of total consumption is sold at negotiated prices, although the percentage varies significantlyacross products and localities and with the financial situation of individual manufacturers. In general, high-grade fertilizers are subject to stricter state allocation. About S5% of these products, including urea and DAP, are being sold at controlled prices under the state allocation plan.

3.22 The Government views the two-tier pricing system as an intermediate step in the evolution of sectoral pricing policy, given its well-recognized limitations, including: (a) discriminationacross producers and consumers; (b) administrativecomplexity; and (c) distortions and time lags in the adjustment of the prices of inputs and outputs. Despite these limitations, the Government expects to use this transitionalsystem until it introduces a broader price reform package. The reason is partly the close inter- relationshipbetween fertilizer and the agriculturalsector and the potential for disruption if the allocation and pricing arrangementsfor fertilizerswere to be liberalized in isolation.

3.23 The Government's strategy is to continue gradually reducing its administrativecontrol of fertilizer pricing in parallel with the gradual dismantling of annual production planning and allocation, so that the economy can "grow out of the plan." Guidelines for future policy reforms are being developed by an inter-agencyworking group that is carrying out a comprehensive review of the fertilizer pricing and allocation policies according to a program discussed with the Bank. Through these reforms, GOC is committed to removing the irrationalitiesin the price relationshipsbetween inputs, fertilizers and agriculturalproducts. The working group is headed by the Director of the Department for Heavy Industry and Communicationand comprises repre- sentatives from related Government agencies, including the Ministry of Finance (MOF), MCI, MOC, MAAF and China PetrochemicalCorporation (SINOPEC). However,

4/ At present, there is a ceiling on the negotiated prices of all high- grade fertilizers, such as urea and MAP, at the retail level. This ceiling currently is set by the SPB, but in the future it will be set by provincial authorities following guidelines to be given by the SPB. - 12 -

specific guidelines are expected to emerge only after the agenda for further overall price reforms is firmly in place (para. 2.4).

3.24 Fertilizer Prices. The ex-factory prices of major high-grade fertilizers and ABC, the delivered prices of the main inputs, and farmers' prices for major grains, together with comparable internationalborder prices in 1988, are shown in Annex 3.3. Presently, the controlled ex-factory prices of urea and DAP are below the border prices, while their negotiated prices are close to the economic prices. In December 1988, the controlled bagged urea price--Y 428 (US$115)/ton--representedabout 62% of the CIF import price of US$185/ton, while the ceiling for the nei iated price quota, which differs among provinces and is set by respective provincial pricing authorities,was 95-102Z of the economic value. For DAP, the figures are, for plan quota, Y 570 (US$153)/ton,equivalent to 67% of the current import parity price of US$229, and for the negotiated price, Y 700-860 (US$188-231),or 82-101Z. At present, there is no local production of TSP and MAP, and controlled ex- factory prices therefore have not been established. The ceilings for negotiated prices for future TSP and MAP production are expected to be set in line with those for DAP. The Government provides subsidies to make up the difference between the import and sale prices for imported fertilizers. Actual negotiated ex-factory prices have usually been equal or close to the ceiling; reflecting market conditions, 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 140 (US$38/ton of product) is added to the ex-factory price of high-grade fertilizer at the farm-gate level to cover AMPC's transport and storage costs.

3.26 During negotiations, an assurance was obtained from the Government that the Project companies would be allowed to market their entire output (TSP and MAP) outside the state allocation plan at negotiated prices.

3.27 Prices of Fertilizer Inputs Relative to Fertilizers. The price structure of major inputs is also similar to that of fertilizers. However, there are no country-wideuniform prices for these inputs, and the controlled prices applied to individual suppliers are set by each supplier's respective supervisory pricing authority at the central, provincial and county levels. Although these prices vary to a large extent depending on the quality of product and the location and geological condition of supply sources, on the whole they are far below their border prices. The controlled price of natural gas under the state allocation quota is around 55-65% of its fuel oil equivalent value, based on border prices. The controlled price of coal is 65-75Z of its export value. The average ex-mine controlled price of domestic phosphate rock, the quality of which is usually too low to be tradeable in the international market, is about 45% of the import parity price based on nutrient contents. Negotiated prices above the quota are generally 15-25% higher than the controlled prices; although in some cases they have, subject to approval by pricing authorities, approached border prices. The entire production of phosphate concentrate from Wengfu mine, to be developed under the Bank- supported Phosphate Development Project (Loan 2958-CHA, FY88), will be allowed to be sold outside the state allocation plan at market influenced negotiated prices. - 13 -

3.28 Prices of Fertilizers Relative to Agricultural Products. The price structure of agciculturalproducts is similar to that of fertilizers. Agri- cultural products traded by the state procurement system are subject to con- trolledIprices. While some exceptions exist, the prices of these products generally are below border prices, while the market-influencednegotiated prices more closely approximate the border prices. For example, as of January 1988, thR controlled price ef rice was Y 632 (UTS$167)/ton,about 65Z of its export value of US$258/ton,whereas its negotiated price was Y 840 (US$226)/ ton (Annex 3.2). The controlled price of wheat was Y 328 (US$119)/ton,about 682 of the CIF in.portprice of US$1.75,the negotiated price, Y 500 (US$161)/ ton.

G. Government SLrategy in the Fertilizer Sector

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 investment resources. In recent years, the Government rei.erated this priority on several occasions, including statements published by the State Council, respectively, in September 1987 and September 1988.

3.30 The Government'smain objectives in the fertilizer sector are tc: (a) achieve the desirable nutrient balance of 100(N): 5U (P205): 20 (K20) by the end of the Eighth Five-Year Plan (1991-95)by rapidly expanding the production capacity for phosphate fertilizers based on domestic phosplhaterock and the development of domestic potash resources; and (b) move toward self- sufficiency in fertilizer production during the Ninth Five-Year Plan (1996-2000). Other priorities include the rationalizationof low-grade fertilizer facilities through technical renovation,energy-saving measures and improvement in product quality, and greater efficiency in enterprise operations through improvements in management efficiency.

3.31 The Government's strategy for sectoral investment during the Seventh Five-Year Plan envisages: (a) bringing on-line the newifertilizer production capacity currently under constraction (see para. 3.11); (b) converting medium- size low-grade fertilizer plants to high-grade fertilizer proluction; (c) intensifyingthe exploitationand development of d3mestic phosphate resources, including seven large new phosphate mines and the expansion of pyrite mining capacity; and (d) rationalizationof many small-size low-grade fertilizer plants, including their conversion to high-grade operations using adaptive technologies. At present, the Government does not contemplate any investments in new small-size SSP or ABC plants.

3.32 During the Eigh-n and Ninth Five-Year Plans (1991-2000),Government strategy will focus on further expanding phosphate fertilizer production capacity. With the recent decentralizationof project implementationresponsi- bilities, State resourceswill be used mainly for phosphate fertilizer; the central Government will ntotinitiate ary new nitrogenous fertilizer projects and these will be implementedby the provincial authorities as necessary. This strategy is considered appropriate,given the nutrient imbalance in fertilizer use and China's endowment of phosphate rock. - 14 -

IV. THE PHOSPHATE SUBSECTOR

A. World Phosphate Market

4.1 Consumption. World phosphate fertilizer consumption grew steadily in the 1970s and 1980s except in 1985/86, when a decline of 2.62 from Zhe previous year's consumptionwas registered. According to statistics published bv FAO, world consumption of phosphate fertilizers rose from 19.8 million tons of P205 to 34.3 million tons during 1969/70 to 1984/85, at an annual average rate of 3.5Z. The decline in 1985/86 reflects the reduced applicationof fertilizers in several countries exporting agriculturalproducts due to the record- low prices of grains and agriculturalproducts in the internationalmarket. In 1986/87, world phosphate consumption rsbounded to 34.4 million tons of P205, largely due to a rapid increase in consumption in the developing countries. The 1987/88 consumption is estimated at 36.4 million tons of P205, or an increase of 5.82 from the previous year's consumption. World phosphate consumption is projected by the Bank's InternationalEconomics Department to increase at anLannual average rate of 2.7Z between 1987/88 and the year 2000/2001. In 1986/87, the major consumers of phosphate fertilizerswere the USSR (24.3X of the world consumption),US (10.6Z), China (8.OZ), India (5.7z), Brazil (4.9Z), and France (3.9%).

4.2 Production. World production of phosphate fertilizers also grew steadily, from 20.6 million tons of P205 in 1969/70 to 37.2 million tons in 1984/85. In response to the trends in demand for phosphate fertilizers,world phosphate production fell to 34.6 million tons in 1985/86, and rebounded to 37.0 million toDs in 1986/87. In 1987/88, the world production level reached an estimated peak of 38.3 million tons of P205. In 1986/87, the major producers of phosphate fertilizerswere the USSR (22.9% of world production), US (22.0%), China (5.8%), India (4.62), Brazil (4.12), France (2.7Z), Tunisia (1.92) and Morocco (1.3Z). According to supply projections by the FAO/UNIDO/WorldBank Fertilizer Working Group in May 1987, world phosphate fertilizer supply potential, which is derived from world nominal capacity in operation and under constrution and country-specificoperation rates, was estimated at 36.8 million tons of P205 in 1986/87, and was expected to reach 41.8 million tons by 1991/92, representingan annual average growth rate of 2.4Z. A major increase in capacity is expected to ,takeplace in developing countries, particularly in Morocco, Tunisia, Jordan, China and Egypt where major raw materials are abundant. The recent worldwide trend is to locate new production facilities near phosphate rock mine sites.

4.3 InternationalTrade and Market Prices. The internationalphosphate market is competitive; the two main exporting regions are North America and Northern Africa and all other regions import. Phosphate fertilizer prices in the world market, which fell sharply during the 1980-83 worldwide recession and reached a record low in 1986, have increased steadily in recent years as world demand particularly in developing countries recovered. While the world market prices of phosphate fertilizers are not expected to increase significantly in the short run given the forecast movement in the agricultural market and the industry's investment behavior, the recovery of these prices is expected to continue gradually and steadily throughout the 19909. Fertilizer - 15 -

production facilities to be establishedunder the Project are expected to come on stream in early 1994.

B. The Chinese Phosphate Industry

4.4 Although the domestic production and use of phosphate fertilizershas increased steadily over the last two decades, development of the phosphate industry in China has been less spectacularthan that of the nitrogen industry. The main constraint has been technical difficultiesin processing Chinese rock, which has a high magnesium content, into concentrates suitable for the production of high-grade fertilizers. Production of phosphate fertilizer therefore has been limited to low-grade products such as SSP and CMP at small provincial phosphate fertilizer plants. Accordingly, there was little planning or coordination of the development of the phosphate fertilizer industry at the state level. However, several years ago the Government shifted the priority in the fertilizer .ector from nitrogenous to phosphate fertilizers, in order to correct the large imbalance in fertilizer use.

4.5 Domestic Phosphate Fertilizer Production. Recent trends in the production of phosphate fertilizers are summarized in Table 4.A below (further details are given in Annex 4.1). As of the end of 1987, almost all phosphate fertilizer production was low-grade,with SSP comprising more than 70Z and CMP most of the balance. Domestic production of other phosphate fertilizershas been insignificant--in1985, ammonium phosphate production was only 7,000 tons of P205, while the total capacity of the phosphoric acid plants was only about 50,000 tpy of P205. About 400,000 tons of ground phosphate rock were also being applied directly.

Table 4.A: PRODUCTIONOF PHOSPHATEFERTILIZEPS, 1972-86 ('000tons of P2 05 , Z)

SS? CMP Others /a Total Year Volume I Volume Z Volume X Volume Z

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 1,713 73.7 558 24.0 54 2.3 2,325 100.0

Ja Ammonium phosphate productiont 3,000 tons in 1984, 7,000 tons in 1985; the 1986 figure is not available.

Source: MCI

4.6 There are about 700 phosphate fertilizer plants in China, scattered among almost all the provinces (see Annex 4.2). The average output capacity - 16 -

is 15,000-30,000 tpy, except for a few SSP plants that have capacities of more than 100,000 tpy. Most of the production in each province is consumed within its boundaries (Annex 4.3).

C. Supply of Raw Materials

4.7 The two main materials required for producing high-grade phosphate fertilizers are phosphate rock and sulfuric acid.

4.8 Phosphate Rock. China is well endowed with more than 3 billion tons of phosphate rock (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 benefici- ating these rocks was developed in China, domestic rocks were not suitable for producing high-grade phosphate fertilizers. Now, however, the Government is planning several large new undertakingsto exploit the major deposits of rock, particularly in Hubei, Guizhou and Yunnan Provinces. The Project will support several such efforts. Recent exploration also indicates large rock resources in Sichuan Province.

4.9 Relative to the large size of the phosphate rock reserves, the current level of production is low, for the reasons given above. Annual production of phosphate rock in 1986 amounted to only 15 million tons of run of mine (ROM) rock, mainly in five provinces, as shown in Table 4.B. In 1986, most of this rock was used as ROM rock; only about 5X was beneficiatedbefore use.

Table 4.B: AVERAGE ANNUAL PHOSPHATE ROCK PRODUCTION BY PROVINCE, 1986 ('000 tons rock)

Yunnan Guizhou Hubei Hunan Sichuan Other Total

Production 3,264 2,484 5,460 1,090 2,953 294 14,957

Source: MCI.

4.10 Because the phosphate fertilizer plants are small and scattered throughout the country, phosphate rock is transportedwidely o-er China. Yunnan Province, for example, sends rock to 24 provinces, Guizhou to 18, and Hubei to 19. The major importing provinces are Hubei, Liaoning, Jiangsu, Shandong and Guangxi. China imports a small quantity of rock (varying between 0.2 to 0.3 Mtpy from year to year) for some plants near the coast. It also exports a small amount of phosphate rock under counter-tradingarrangements with other developing countries.

4.11 Sulfuric Acid. China's sulfuric acid consumption in 1986 was about 7.6 million tons, of which about 5.0 million tons went for phosphate fertili- - 17 -

zer production.China meets almostthe entiredemand for sulfuricacid domes- tically. About 1.5 milliontons of acid comes from smeltergas, and almost all the remainderfrom pyrites;only a small amountcomes from elemental sulfur.

4.12 The major depositsand mines of pyritesare locatedin Guangdong, Shanxi,Anhui, Liaoning, Hunan and SichuanProvinces (Annex 4.5). The major producersof smelteracid are in Liaoning,Gansu and Hunan. China has discoveredsulfur deposits in ShandongProvince, but attemptsto exploitthem have not been successful.Little sulfuris recoveredfrom the oil and gas industryas most gas depositsare sweet.

4.13 The shortageof sulfurcould inhibitdevelopment of the phosphate industryunless new depositsof pyritesor sourcesof by-productsulfuric acid (e.g.phosphogypsum' are developed. GOC is avare of this possibilityancd. is establishinga pilot plant in Yunnanto developa processto recoversulfur from phosphogypsum.

D. Th? PhosphateSubsector Study

4.14 As mentionedearlier (para. 1.1 and 1.4), duringProject preparation MCl and the World Bank carriedout a joint PhosphateSubsector Study (the Study)to help the Governmentidentify appropriate strategies for developing an efficientdomestic phosphate fertilizer industry. The main objectiveof the Studywas to preparean optimalinvestment program up to the year 2000 that would allow China to meet its rapidlygrowing demand for phosphatefer- tilizersin the most economicwanner, given specifiedmarket requirementsand transportconstraints.

4.15 The PhosphateModel. As part of the Study,the Bank designeda computer-basedmathematical programming model to facilitatereview of the options,using data providedby MCI (seeAnnex 4.6 for the details). The model coversoptimization of investmentat the nationallevel as well as at each plant in terms of location,scale of operations,and level of production in the contextof the constraintsassociated with the transportof raw materials,intermediates and finalproducts. The selectionof optimalstrategies was based on a comparisonof differentoptions and scenarios. The model enabledthe Governmentto reviewin a consistentand integratedmanner the major issuesinvolved in developingthe fertilizerindustry, such as: (a) domesticfertilizer production versus importation; (b) optimalmode of trans- portingraw materialsand finishedproducts; (c) the locationof new fertilizerproduction facilities; (d) the relativeeconomics of producingdif- ferenttypes of phosphatefertilizers; and (e) prioritiesin developingthe differentphosphate rock deposits. This model is being installedat MCI's ChemicalPlanning Institute (CPI) with technicaland financialassistance from the Bank under the PhosphateDevelopment Project (Loan 2958-CHA, FY88). It will be continuouslyupdated to provideadvice to planningand projectimple- mentingauthorities on relevantsubsector strategies.

4.16 The resultsof work with the model providedstrong economic justifi- cationfor developmentof China'sdomestic phosphate fertilizer industry, based on domesticraw materials. The analysissuggested that producinghigh- grade phosphatefertilizers such as TSP, DAP and MAP near the rock sourcesin - 18 -

Yunnan, Guizhou and Hubei Provinces can be more economic than relying on imports. Construction of small DAP plants that use adaptive technology and local raw materials also will help China meet its phosphate requirements.

E. Investment Program for the Phosphate Subsector

4.17 To meet its agriculturalproduction targets by the year 2000 with balanced use of the three main fertilizer nutrients, China will have to increase its phosphate consumption to about 9.1 million tons of P205 from its current level of 4.5 million tons. 'f most of the presently known economic deposits are fully developed by that time, China could increase domestic production from the 1986 level of 2.3 million tons of P205 to 9.0 million tons. This development would necessitate an increase in phosphate rock production from about 11 to 35 million tpy of rock and in sulfuric acid from about 8 to more than 20 million tons. Total related investment costs for the production facilities are estimated at about US$8-10 billion in 1988 prices, excluding the large Investment required to upgrade the infrastructureto transport raw materials to the processing units and to distribute the final products to the marketplace.

4.18 During the Seventh Five-Year Plan, five large new phosphate rock mines and many small local mines are to be developed (the Wengfu mine in Guizhou, one mine in Yunnan, and three mines in Hubei). Output at the large pyrites mines in Guangdong, Meimonggol, Hunan and Anhui will be greatly increased to meet the demand for sulfuric acid. These local raw materials will feed the new high-grade phosphate fertilizer plants to be implemented during the Seventh and Eighth Five-Year Plan periods. Three DAP plants will be implemented based on imported phosphoric acid. About 50 small SSP plants will be revamped to produce DAP using adaptive technology, a move that will allow them to utilize relatively low-grade phosphate rock. During the Eighth and Ninth Five-Year Plans (1991-2000),the Government intends to fully expioit the domestic phosphate resources to produce a total of 35 Mtpy of phosphate rock (30Z P205 basis) and 9.0 Mtpy of phosphate fertilizers (10O P205) by the year 2000. Details of specific investments in the phosphate subsector up to the year 2000, estimated 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 stracegies in the fertilizer sector (paras. 3.28-3.31), the Bank's main role is to provide technical and financial assistance in: (a) strengtheningGOC's capability for investment planning based on modern planning techniques, in order to optimize investments in the sector, especially those for phosphate and potash fertilizer; (b) assessing specific projects using suitable methodologies, including the selection of appropriate technologies; (c) building new fertilizer production capacity, as well as renovating existing facilities,particularly for phosphate and potash fertilizers; (d) enterprise-levelrestructuring and upgrading the efficiency of fertilizer distributionso as to reduce fertilizer losses during distribution;and (e) improving the managerial efficiency of sector companies through the introductionof modern enterprise-levelmanagement systems. - 19 -

4.20 The two previous Bank-assistednitrogenous fertilizer projects supported China's priority objective during the early part of the Seventh Five-Year Plan (1986-90),which has been given to improving the technical and managerial efficiency of existing fertilizer plants. Most of the existing large- and medium-size fertilizer plants, including the large ones built with internationallyproven technologiesin the 1970s, do not use up-to-date technologies and require major investmentsto improve energy and production effi- ciencies. The first project (FertilizerRehabilitation and Energy Saving Project, Loan 2541-CHA, FY85), which was physically completed on schedule by the end of 1988, provided financial assistance for improvementsin efficiency at one medium-size and four large nitrogenous fertilizer plants. The second project (FertilizerRationalizaton Project, Loan 2838-CHA, FY87) provides financial assistance both to upgrade the operations of five medium-size nitrogenous fertilizer plants, including conversion of their products to high-grade ones, and to introduce modern enterprise-levelmanagement systems in the fertilizer industry overall. Implementationof th.a project is proceeding well and on schedule. An IDA-financedtechnical credit also was provided to support project preparation, including tests of the phosphate rock and feasibility studies for the Project.

4.21 The Project, together with the third fertilizer project (the Phos- phate Development Project, Loan 2958-CHA, FY88), supports China's priority in the fertilizer sector during tineSeventh and Eighth Five-Year Plans (1986-95), which is to reduce the nutrient imbalance in fertilizer use by rapidly expanding the production capacity for high-grade phosphate products. At the same time, the process of project preparationhas provided an opportunity to introduce modern subsector planning techniques and methodologies to the phosphate industry and to help GOC articulate an optimal strategy for developing the subsector. MCI's involvement in the joint phosphate subsector study has strengthened its subsector planning capability. The experience and methodologies learned from the Study also can be applied to other subsectors, a process in which the Chinese Government has already expressed an interest. A further innovation of this Project is the integrated development of phosphate mines and high-grade fertilizer complexes, the largest and most complex of such operations in China to date. This effort will provide China with the experience needed to implement similar other investments,which already have been identified in the Study. The technical assistance component is designed to ensure successful Project implementation.

V. PROJECT INSTITUTIONS

5.1 The Hubei Phosphate Project involves: (a) Jinxiang Phosphate Chemi- cal Company (JPCC), Hubei Province, which will carry out the Dayukou mine and fertilizer development component (paras. 6.3-6.4, 6.6); (b) HuangmailingPhos- phate Chemical Company (HPCC), Hubei Province, which will carry out the Huang- mailing mine and fertilizer development component (paras. 6.5-6.6); and (c) MCI, which will coordinate Project execution by the Project companies and implement the technical assistance component (paras. 6.7-6.10). The operational, managerial and organizationalaspects of these institutions are reviewed in this chapter, while the financial aspects are reviewed in Chapter IX. - 20 -

A. Background

5.2 Chinese chemical fertilizer companies and phosphate mines are state- onmed but operate as financially and administrativelyindependent entities. In the past, the administrative,production, ma:ketiDg and financial operations of these companies were under the direct supervisionof the provincial governments. However, their autonomy in th'eirbusiness decisions has been expanding, and is expected to continue doiag so, under the ongoing economic reforms. Large-size companies already enjoy wide autonomy in almost all aspects of their operations. The project companies have been registeredwith their respective provincial authorities to provide them with the status of legal entities. Charters of the project companies describe the scope of their activities, responsibilitiesand authority in the conduct of business.

5.3 Organization and Management. The organization and management practices of Chinese state-owned industrial enterprises reveal strong similar- ities. Their organization is basically flat--thereare numerous unit workshops and departments with their own management layers, all at the same organ- izational level. A general manager, appointed by the supervisory government, heads each company. Under the general manager are the second-layermanagers, twhoshare functional responsibilitiesrelated to procurement and sales, administration,production, maintenance and construction. A chief engineer, also second-layer,is charged with all technical matters, including development and renovation. A chief accountant has a similar position in the area of financial matters.

5.4 This structure has not promoted contemporarystandards of organiza- tional and managerial efficiency, such as adequate scope of control, functional distribution of responsibilitiesamong line managers, and adequate managerial and financial autonomy. The Government (SPC, MCI and the local Governments)has been setting annual production targets, allocating inputs, distributingoutput, and allocating funds from budgets. Some managers, particularly those responsible for production, have been overloaded with supervisory responsibilities. Horizontal coordinationamong various departments and workshops is not satisfactory. Because of insufficientautonomy, good management information and cost management systems do not exist.

5.5 Recent Management Reforms. Under the recent economic reforms, Chinese fertilizer companies have received increasing management 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. Companies can make their own decisions regarding production levels, procurement of raw materials, sales of products above the quota, and utilization of funds generated by those sales, within the context of the flexible plan. Although state planning for the fertilizer sector is expected to continue in the near future, the scope for flexible planning and management is to expand further, providing greater autonomy to management.

5.6 MCI recognizes the strong need to restructure the organizationand management of the chemical fertilizer companies so that they can effectively carry out their mandates for organizationalchange. This reatructuringcan be - 21 -

done tiiroughthe introductionof modern enterprise-levelmanagement systems for infomnation and costs, as well as investment and financial planning. MCI, with Bank assistance under the Fertilizer RationalizationProject (Loan 2838-CHA, FY87), is sponsoring a management efficiency study, using internationallyexperienced consultants. The aim of the study is to raise managerial efficiency in fertilizer companies in the context of the changing business environment. The study is expected to be completed by the end of 1989. It also will provide practical recommendationsfor introducing suitable modern systems. MCI plans to introduce these systems gradually in the entire chemical industry, including the project companies, following successful introductionof them at several companies on a pilot basis. The Beijing Institute of Chemical Engineering and Management (BICEM),MCI's management training arm for engineers and managers of chemical enterprises as well as MCI's own staff, is currently implementinga comprehensiveprogram to upgrade its management training capabilitieswith Bank assistance under the same project.

B. The Jinxiang Phosphate Chemic'l Company (JPCC)

5.7 Background. JPCC is the new name of the JinxiRng Mining Bureau (JMB), which has been operating since 1958 at Huji City, about 400 km northwest of Wuhan, the capital of Hubei Province. Presently, JPCC operates three phosphate rock mines: (a) the Dayukou open-pit mine, with a capacity of 0.4 million tpy; (b) the Liuchong undergroundmine, with a capacity of 0.6 million tpy; and (c) the Wangji undergroundmine, the first phase of which was completed in 1985 and which is currently being expanded to its final capacity of 1.5 million tpy. The rock of Dayukou and Liuchong is currently being sold as feedstockwithout beneficiation to low-grade phosphate fertilizer plants, mainly in Hubei Province. The total output of the Wangji mine will be bene- ficiated at the company's Wangji beneficiationplant, which was completed in 1986. Phosphate rock concentrate from Wangji will be sold to the Lucheng nitrophosphateplant in Shanxi Province.

5.8 Production Performance. Except in 1987, when they were faced with difficulties in marketing low-grade rock, Dayukou and Liuchong mines have operated at relatively high levels of capacity utilizaton (around 92-99%) (see Annex 5.1 for details). The new Wangji mine and beneficiationplant, the physical construction of which was completed in mid-1987, started up only in mid-1988 because of delays in completing the downstream Lucheng fertilizer plant. The existing Dayukou mine has suffered from defective design, mainly in terms of undersized and poorly adapted main mining equipment. Expansion of the Dayukou mine under the Project is intended to eliminate the above defects through the selection of well-adapted equipment.

5.9 Organization and Management. JPCC is headed by a general manager who is appointed by the Hubei provincial government. The general manager is assisted by six second-layermanagers: (a) the chief engineer; (b) the director for production; (c) the director for administration: (d) the chief economist; (e) the chief accountant; and (f) the legal advisor. No major changes in JPCC's organizationalstructure are currently envisaged after project completion, except as a result of the expansion of the Dayukou mine and fertilizer complex (see Annex 5.2). Management already has gained valuable experience in constructing a large-scalemine and a beneficiationplant from the new and complex Wangji iacility. However, the addition of the new - 22 -

largemine and a moderncomplex fertilizer production operation will require managerialstrengthening, including the recruitmentof qualifiedsecond- and third-layermanagers.

5.10 Staffingand Training. JPCC's staffpresently number 10,170, of whom 3,220have higher educationsand 690 are engineersand managers. After completionof the Project,JPCC will have 12,670staff, including 1,100 engineers. In additionto strengtheningmanagerial capability, recruiting addi- tionalexperienced technical staff also is required. During loan negotiations,an assurancewas obtainedthat JPCC would prepare,and furnishto the Bank for commentby December31, 1990,a comprehensiveprogram to strengthen management,recruit qualified staff, and providetraining, and thereafterwill carry out the agreedprogram. JPCC will obtainassistance from internation- ally experiencedconsultants and local designinstitutes in preparingthe program.

C. The HuangmailingPhosphate Chemical Company (HPCC)

5.11 Background.HPCC will be createdby mergingtwo companies- -HuangmailingMining Company (HMC) located at Huangmailing,about 160 km north of Wluhan,the capitalof Hubei Province,and the Dawu ABC plant, located15 km from the Huangmailingmine. This mergeris intendedto facilitatethe constructionand operationof the TSP complexto be establishedunder the Project by puttingthe core facilitiesof the complexunder one management. HMC, foundedin 1973, currentlyoperates an open-pitmine with a designcapacity of 300,000tpy of ROM ore, an adjacentrock beneficiationplant of the same capacity, and an SSP plant of 40,000tpy capacity,together with a smallpyrites- based sulfuricacid plantof 15,000tpy capacityand a recentlyadded small (10,000tpy) bulk blendingfacility that producesN-P-K fertilizers.The Dawu ABC plant,with a capacityof 15,000tpy of ammoniaand 51,000tpy of ABC, was establishedin the early 1970s.

5.12 ProductionPerformance. HMC's output of beneficiatedrock has been substantiallybelow designcapacity in recentyears (seeAnnex 5.1),mainly becauseof a delay in the constructionof downstreamhigh-grade fetilizer plants. The small scalelow-grade phosphate fertilizer plants have been operatingat relativelyhigh capacitiesbecause of the generalshortage of phosphatefertilizers in the localitydespite the gradualshift towardhigh- grade phosphatefertilizers. Integration of the new mine and the proposed HuangmailingMAP plantwill help HPCC solve the problemof timingmismatch of upstreamand downstreamfacilities, since all the rock concentrateproduced by the existingbeneficiation plant will be consumedby the MAP plant.

5.13 Organizationand Management.HPCC will be headedby a general manager,assisted by four directorsresponsible for: (a) operations;(b) production;(c) personnel;and (d) administraticn.Some streamliningof HPCC's organizationalstructure after projectcompletion is being considered to accommodatethe major expansionof operationsunder the Project(see Annex 5.3 for details). As HPCC'sexisting operations are of simpledesign, its managershave not been exposedto the requirementsof modern,complex facilities. Significantreinforcement of HPCC'smanagement will be requiredto ensure successfulimplementation and completionof the Project. - 23 -

5.14 Staffing and Training. HPCC staff presently number 905, of whom 60 are engineers and managers. After completion of the Project, total staff are expected to increase to 1,750 and engineers to 120. Considering the inexper- ience of management and the low level of technical skills within the company, considerableexternal recruitment and intensive training will be required. During loan negotiations, HPCC provided the same commitment as that obtained from JPCC with respect to management strengthening,and staff recruitment and training (para. 5.10).

D. The Ministry of Chemical Industry (MCI)

5.15 Background. The Ministry of Chemical Induetry (MCI) has national supervisory responsibilityfor the chemical fertilizer sector, including phosphate mining, and a number of refineries, rubber plants and several other chemical industries. MCI prepares the five-year plans for these subsectors, works out annual production targets, coordinates the supply of raw materials and sales of output, and monitors the activities of the chemical industry at the provincial and county levels in coordinationwith the Chemical Industry Bureaus of local governments. MCI also coordinates the implementationof large-scale investment projects in the chemical sector which are supported financially and managed by the national government agencies under the national investment plans.

5.16 Organizationand Management. MCI is headed by a minister, who is assisted by four deputy ministers responsible for respectivelys (a) finance and foreign affairs; (b) production; (c) constructionprojects; and (d) education and research. MCI maintains a task force known as the "World Bank Project ImplementationCoordination Group" to coordinate with the Bank. It is headed by the deputy minister for finance and foreign affairs. The World Bank Loan Office, an executive arrrof the group headed by a director-level official, maintains project coordination groups for Bank-supportedprojects, including this Project.

VI. THE PROJECT

A. Objectives

6.1 The specific objectives of the Project are to: (a) provide financial and technical assistance in implementingsome of the first major projects of the investment program developed from the Phosphate Subsector Study undertaken during Project preparation (paras. 1.1, 1.4 and 4.14)--theseprojects would provide models for integrated development of phosphate mines and fertilizer plants; and (b) strengthen MCI's project management capabilities,particularly with respect to reducing technical risks associated with the integrated development of large-scalephosphate mines and high-grade fertilizer complexes.

6.2 To achieve the objectives, the Project comprises three major components: (a) Dayukou phosphate mine and fertilizerpruduction development component; (b) Huangmailing phosphate mine and fertilizer production development component; and (c) technical assistance component. - 24 -

B. Dayukou Phosphate Mine and Fertilizer Development Component

6.3 This component, which will be carried out by JPCC, involves estab- lishment of: (a) a new open-pit mine of 1.5 million tpy ROM rock capacity, to replace the existing ineffLcient Dayukou mine; (b) a beneficiation plant, to produce 0.65 million tp, of phosphate rock concentrate (33Z P205); (c) a 560,000 tpy TSP plant, together with a pyrites-based sulfuric acid plant of 560,000 tpy capacity and a phosphoric acid plant of 200,000 tpy P205 capacity; (d) a 12,000 tpy aluminum fluoride plant; and (e) related infrastructure (see Annex 6.1 for details). After commissioningthe new Dayukou mine and beneficiation plant, the existing Dayukou and Liuchong mines will be phased out. The mine and beneficiation plant have been designed by the China Chemical Mines Research and Design Institute (CMRDI), with assistance from Jacobs Engineering,a US company, and the fertilizer plant by Nanjing Chemical Design Institute (NUDI),with guidance from Chemsystems,also a US company.

6.4 Because Dayukou rock alone is not suitable for the production of TSP, mainly due to its high magnesium content, about 220,000 tpy of phosphate concentrate with good reactivitywill be supplied from Yunnan Province by rail. During loan negotiations, an assurance was obtained from JPCC that it would prepare supply and transport arrangementssatisfactory to the Bank for the required quantity of this concentrate by December 31, 1991.

C. Huangmailing Phosphate Mine and Fertilizer Development Component

6.5 This component, which will be carried out by HPCC, involves the establishmentof: (a) a new open-pit mine of 1.0 million tpy ROM rock capacity, to replace the existing mine; fb) a beneficiationplant to produce 240,000 tpy of phosphate rock concentrate (332 P205); (c) an MAP plant of 180,000 tpy capacity, together with a pyrites-based sulfuric acid plant of 280,000 tpy capacity and a phosphoric acid plant of 93,000 tpy P205 capacity; and (d) rehabilitationof a small coal-based ABC plant at Dawu, about 15 km from the project site, to produce 30,000 tpy of ammonia as feedstock for MAP production (see Annex 6.2 for details). After commissioningthe new complex, HPCC's existing small SSP and NPK facilitieswill be phased out, and the existing beneficiation plant will be operated to complement the new beneficiation plant. Raw materials and products will be transported by truck between Huangmailingand a new railway siding to be built at Guangshui, about 40 km from the Project site. The mine and the beneficiationplant were designed by the China Chemical Mines Planning and Design Institute (CMPDI), the fertilizer plant by lWuhanChemical Engineering Design Institute (WCEDI).

6.6 When the above two components are completed, the production of phosphate fertilizer in Hubei Province will reach 450,000 tpy of P205, of which 350,000 tpy, or about 782, are expected to be consumed within Hubei. The balance will be marketed in adjoining provinces, which are generally short of phosphate fertilizers,particularly high-grade products.

D. Technical Assistance Component

6.7 The technical assistance component, to be carried out by MCI, has two components: (a) the services of internationallyexperienced consultants for MCI's project coordination team to support project implementation,process and - 25 -

technology selection, production start-up, and the maintenance of mine equipment; and (b) the services of internationallyexperienced consultants for local training in hazard and operability (HAZOP) analysis with respect to chemical plant design and operations.

6.8 Consultant Services for Project Implementation. The Project involves risks associated with the coordinated implementationand commissioning of high-grade phosphate fertilizer plants and associated mines. As mentioned in paras. 5.8 and 5.12, JPCC's new Wangji mine and I)eneficiationplant remained idle for one year after their physical completion, and HPCC's mines have been underutilized mai-:lydue to delays in the completion of downstream fertilizer plants.

6.9 To mitigate these technical risks, this technical assistance component will provide internationallyexperienced consultants for MCI's project coordinationteam, who will help the team and the project companies withs (a) selection and procurement of appropriate technologiesand equipment; (b) timely identificationand resolution of problems with project implementation; (c) training of project management team staff; (d) preparation of staff recruitment and training programs; and (e) implementationof a preventive mine workshop maintenance system. The scope of their work was discussed during project preparation, and the terms of reference (see Annex 6.3 for summary) will be finalized during loan negotiations.

6.10 Training in Hazard and OperabilitZAnalysis. To strengthen the capacity of Chinese design institutes to identify and analyze potential safety hazards in chemical plant design and operations and plant operability,MCI will sponsor a workshop on modern methodologies for Hazard and Operability (HAZOP) analysis, with assistance from internationallyexperienced consultants (see Annex 6.4 for details).

VII. PROJECT MANAGEMENT AND ENVIRONMENTALPROTECTION

A. EngineeringArrangements

7.1 Local design institutes will handle most of the basic and detailed engineering for the Project. The two local design institutes that prepared the feasibility studies, CMRDI for Dayukou and CMPDI for Huangmailing,will carry out the detailed engineering for the mines, beneficiationplants, and infrastructure. These two design institutes have extensive experience in the design, engineeLing, constructionand start-up of comparable mines and beneficiation plants. Overall responsibilityfor the basic and detailed engineering for the fertilizer plants also will lie with local design institutes--NCDIfor the TSP complex at Dayukou, and WCEDI for the MAP complex at Huangmailing.

7.2 However, these institutes will not handle any facilities for which they do not have sufficient experience and capability, namely, the sulfuric acid, phosphoric acid, and granulation plants. Internationallyexperienced engineering firms will be invited to provide the design and know-how for those plants. Although NCDI has had considerableexperience in designing of Sul- furic acid, phosphoric acid and DAP plants, including a DAP plant in Yunnan - 26 -

supported under the ongoing Bank-financedFertilizer RationalizationProject (Loan 2838-CRA, FY87), it has not been involved with plants of a size comparable to the Dayukou project. The services to be obtained from the interna- tionally experienced engineering firms will include assistance in the procurement of critical equipment to ensure efficient selection and adequate quality control during manufacturing and prior to shipment. These firms will use technologies that are commerciallyproven and acceptable in terms of investment, operating costs, efficiency, safety and environmentalaspects, and will provide process guarantees. They will involve local design institutes as much as possible feasible for technology transfer.

7.3 Local input in the design of the fertilizerplant at Huangmailing is expected to be larger than that for Dayukou, as the scope of the former is compatiblewith locally available and commerciallyproven experience. The local design instituteswill conduct hazard and operability studies on all critical processes, in collaborationwith specialists. The respective local design instituteswill also provide guaranteeson processes designed locally.

B. Project Management

7.4 The arrangements for overall Project coordinationare similar to those under the three ongoing Bank-financedfertilizer projects, where they have proven satisfactory. MCI will have primary responsibilityfor supervis- ing implementationof all Project components and for coordinatingthe construction work with raw materials supply and downstreamplants. The project coordinationgroup set up within MCI (Annex 7.1) will regularly review progress on project implementationand procurement and coordinateefforts to remove any constraints. The coordinationgroup also will maintain liaison with the companies and the Bank, submittingto the latter quarterly financial and technical progress reports. During negotiations, an assurance was obtained from the Government that the group would be maintained during project implementation.

7.5 Each of the two project companies has already set up its own project management team (Annex 7.2) charged with implementingits respective component. The key staff responsible for specific aspects of project implementation have been appointed. JPCC, which has just completed the major Wangji mine and infrastructureproject, is well prepared to carry out the Dayukou component. Because HPCC has limited experience in managing projects of comparable magnitude, its project management team will receive substantial support from CMRDI, which has experience in large mine and chemical projects in China. Internationallyexperienced consultants to be hired by MCI under the technical assistance componentwill also provide assistance (see para 6.9). During negotiations, assuranceswere obtained from the companies that they would maintain their project management teams during project implementation.

C. ImplementationSchedule

7.6 Implementationof the Project is expected to take 54 months from the start of the selection process, which is scheduled to take place in the fourth quarter of 1989. Construction under the two development components is expected to be complete by March 1994. The mines and the beneficiation plants - 27 -

will be finishedbefore the fertilizerplants so that they can build up the necessaryintermediate stocks. The overallproject is scheduledfor completion by September30, 1994. The projectimplementation schedule, along with key milestonesfor projectimplementation, is shown in Annex 7.3. In light of experiencewith previousBank-financed fertilizer projects, the projectsche- dule is reasonable.

D. Trainina

7.7 Substantialtraining is requiredfor the companiesto ensuresuccess- ful projectimplementation. JPCC has some experiencein implementingand runninglarge mine operations,as noted. HPCC has experiencewith smaller mines and fertilizerplants. However,their skillsand experiencestill do not conformto what is requiredto ensuresmooth start-up and operations.

7.8 MCI and the projectcompanies are well aware of the need for training. Each companywill preparea comprehensiverecruitment and training program,with assistancefrom internationallyexperienced consultants and local designinstitutes, and will implementit (paras.5.10 and 5.14). The trainingprogram will includeearly assignmentof managersand key technical staff to their positionsduring project implementation but prior to start-up so that they can learn from the consultants,licensors and engineeringfirms. The programalso allowsfor overseastraining in new technologiesfor open-pit mining,beneficiation, medium/large capacity sulfuric acid production,and phosphoricacid/MAP/TSP manufacture. On-the-job training in the operationof high-gradefertilizer plants will be providedat existingChinese sulfuric acid plantsand new phosphoricacid and DAP plantsunder construction.Over the next two years,the designinstitutes will focus on trainingfor key technical staff and companytrainers. MCI plans to make arrangementsfor intensive trainingof key managersof both companiesat BICEM (see para. 5.6) beforethe productionstart-up.

E. EnvironmentalAspects

7.9 All the mines and chemicalplants under the Projectwill be designed and constructedto meet locallyand internationallyacceptable environmental standards. The internationallyexperienced consultants involved in Project preparationhave paid particularattention to appropriateemission levels at the two phosphatefertilizer plants to ensuresatisfactory process controls. The s4tes and configurationsof the open-pitmines, beneficiation plants and fertilizerplants were selectedto ensurethe least environmentalimpact. For example,all mining operationsare concentratedin one large open pit at each Projectsite; beneficiationtailing ponds and phosphogypsumstorage areas will be designedto avoid any groundwaterpollution; and water treatmentplants will be installedto processall liquideffluent from the beneficiationand fertilizerplants prior to dischargeinto publicwaters (themajority of liquideffluents and processwater from the processingunits will be treated and recirculatedinto the processes).Air pollutionwill be kept within internationalstandards. The expectedemission levels from each plant are comparedto local and internationalstandards in Annex 7.4.

7.10 Assuranceshave been obtainedfrom the two companiesthat they will build and operatethe Projectmines and plantswith due regardto safetyand - 28 -

ecological and environmental factors and will comply with environmental standards satisfactory to the Bank.

VIII. CAPITAL COSTS, FINANCING PLAN, PROCUREMENTAND DISBURSEMENT

A. Capital Cost Estimates

8.1 The total financing required for the Project, including interest during construction (IDC) and incrementalworking capital, ic estimated at US$510.6 million equivalent, of which US$162.3 million, or 31.8%, is in foreign exchange. The estimate includes all off-site facilities necessary for the Project, such as water and power supply, facilities for transport, storage and handling of raw materials, intermediatesand products, and social infrastructure. The capital cost estimates (detailed in Annex 8.1) are summarized in Table 8.A.

Table8.A: PROJECTCAPITAL COSTS

U of Local Foreign Total Local Foreign Total Total ---- (Y mIllIons)------(US$ millions)---

Dayukoumine and fertilizercomponent 596.9 278.0 868.9 180.2 78.4 238.6 67.8 Huangmailingmine and fertilizercomponent 280.9 130.6 411.5 76.6 36.1 110.6 32.1 Technicalassistance - 1.5 1.6 - 0.4 0.4 0.1

Base Costis 876.8 406.1 1!281.9 236.7 108.9 344.6 100.0 (January1989 prices)

Physicalcontingencios 87.7 40.6 128.2 23.8 10.9 84.6 10.0 Price contingencies 861.0 182.2 633.6 37.4 19.6 67.0 16.6

Installedcost 1.315.6 627.9 1,943.3 298.7 139.4 436.1

Incrementalworking capital 188.7 0.0 183.7 27.2 0.0 27.2 Interestduring constructionlb 111.6 104.7 218.2 24.4 22.9 47.8

Total FinancinQ Required 1,660.7 732.6 2.293.8 348.8 162.8 610.6

La Localcosts Includesales tax on locallypurchased equipmont and matorialsamounting to USS8.0milIIon.

Lb Basedon an assumptionof an onlondingrate oqual to 1065 of the Bank loan rate. - 29 -

8.2 The base cost estimates,expressed in January1989 prices,were derivedfrom estimatesprepared by the Projectauthorities and MCI in collaborationwith the domesticdesign institutes, after checkingwith internation- ally experiencedengineering firms. Physicalcontingencies are calculatedat 1OZ of the base cost estimates. In calculatingthe base cost and physical contingencies,the prevailingexchange rate of Y 3.72 to US$1 was used. The price escalationfor foreigncosts was calculatedon the basis of anticipated annualinternational price movementsof 5.32 for 1989-90and 4.1 thereafter. Price escalationfor costs expressedin local currencywas calculatedbased on projectedannual local inflationrates of 15.OZ for 1989, 10.0% for 1990-91 and 8.0% thereafter.Equipment and materialsimported for the Projectare exemptfrom importduties. The local companieswill pay sales tax on locally procuredequipment and materials.

B. FinancingPlan

8.3 The proposedBank loan of US$137.0million will meet 84.5% of the total foreignexchange and 26.8% of the total financingrequired. The remaining financingwill be met mainlyby loans arrangedby GOC (47.2%),loans arrangedby the Hubei provincial-. overnment(HPG) (20.7Z),internal funds of the companies(3.7?), loans from the Industrialand CommercialBank of China (ICBC)(1.6%), and bilateralaid (0.1%). The proposedfinancing plan for the Projectis summarizedin Table 8.B. - 30 -

Table 8.B: FINANCING PLAN

Local Foreign Total Local Foreign Total Z (Y millions) - - ($ million) ----

A. Dayukou Mine and Fertilizer Component (JPCC) IBRD loan - 425.7 425.7 - 94.0 94.0 26.9 GOC loans La 710.1 - 710.1 159.6 - 159.6 45.7 HPG loans /a 260.3 69.1 329.4 58.6 15.4 74.0 21.2 ICBC /b loans 28.7 - 28.7 5.8 - 5.8 1.7 Internal funds 78.5 - 78.5 16.0 - 16.0 4.6

Subtotal 1,077.6 494.8 1,572.4 240.0 109.4 349.4 100.0

B. P.uangmailingMine and Fertilizer Component (HPCC) IBRD loan - 200.9 200.9 - 42.7 42.7 26.6 GOC loans /a 359.9 - 359.9 81.1 - 81.1 50.5 HPG loans 96.7 35.4 132.1 21.8 9.8 31.6 19.5 ICBC /b loans 12.5 - 12.5 2.5 - 2.5 1.6 Internal funds 14.0 - 14.0 2.9 - 2.9 1.8

Subtotal 483.1 236.3 719.4 108.3 52.5 160.8 100.0

C. Technical Assistance IBRD loan - 1.1 1.1 - 0.3 0.3 75.0 Bilateral aid /b - 0.4 0.4 - 0.1 0.1 25.0

Subtotal - 1.5 1.5 - 0.4 0.4 100.0

D. Total Project IBRD loan - 627.1 627.1 - 137.0 137.0 26.9 GOC loans /a 1,070.0 - 1,070.0 240.7 - 240.7 42.2 HPG loans /a 357.0 105.1 462.1 80.4 25.2 105.6 20.7 ICBC loans 41.2 - 41.2 8.3 - 8.3 1.6 Internal funds 92.5 - 92.5 18.9 - 18.9 3.7 Bilateral aid /b - 0.4 0.4 - 0.1 0.1 0.1

Total 1,560.7 732.6 2,292.6 348.3 162.3 510.6 100.0

/a GOC/HPG loans are channeled through the People's Construction Bank of China (PCBC) and its Hubei branch. Lb During negotiations, an understandingwas reached that GOC would cover the HAZOP workshop from its own funds if bilateral aid will not be available in time. - 31 -

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, including 5 years of grace, with a commitment charge of 0.75Z. The total amount of the loan will be on-lent by GOC, through HPG, to the two companies at an on-lending rate equal to 1052 of the Bank variable loan rate, with a commitment charge of 0.752 and a repayment period of 20 years, including 5 years of grace as follows: (a) JPCC, US$94.15 million; and (b) HPCC, US$42.85 million. An amount of US$300,000 to cover consultant services for project implementation to be provided under the technical assistancecomponent will be equally shared by the two companies, and the loan amount for each company includes one half of this amount. The foreign exchange risk will be passed on to the companies. During negotiations, assurances were obtained from the Government that subsidiary loan agreementswould be signed by GOC and HPG, and HPG and the companies on terms and conditions satisfactoryto the Bank as a condition of loan effectiveness. HPG will provide a foreign exchange denominated loan of US$2.3 million to cover some minor imported items, and the terms of the loan will be the same as the on-lending terms of the Bank loan. An additional foreign exchange requirement of US$22.9 million equivalent to cover interest during construction (IDC) on the Bank loan will be covered by a local currency loan to be arranged by HPG, and the required foreign exchange will be made available from GOC's and HPG's own foreign exchange reserves.

8.5 Local Financing. GOC, through the People's Construction Bank of China (PCBC),will provide constructionloans to cover 69Z of the local financing requirements for fixed assets at its prevailing rate for similar investments (currently3.6Z p.a.), with a maturity of 15 years, including a grace period equal to the constructionperiod as follows: (a) JPCC, Y 710.1 million (US$159.6million); and (b) HPCC, Y 359.9 million (US$81.1 million). HPG, through the provincial branch of PCBC, will provide the balance of the local financing requirements for fixed assets on the same terms; (a) JPCC, Y 322.2 million (US$72.7million) and (b) HPCC, Y 128.1 million (US$30.6mil- lion). Portions of the loans arranged by HPG will be used to cover IDC on the proposed Bank loan (para 8.4). Interest payments on these loans w'.llbe deferred during the construction period and repaid in installmentsafter completion of the Project. The remaining local financing needs, including incrementalworking capital, will be met either by internal funds or short term loans from local banks. Financial projections indicate that both project companies will need short-term loans from local banks to cover a portion of their incrementalworking capital requirements. During negotiations, confir- mation was obtained from the Government on all necessary arrangementsfor providing local funds to finance the local costs of the Project.

C. Procurement

8.6 The procurement arrangementsare summarized in Table 8.C: - 32 -

Table 8.C: PROCUREMENTARRANGEMENTS /a (US$ million)

Procurementmethod Total Project element ICB LIB Other cost

Equipment and materials 83.6 22.0 119.9 225.5 (83.6) (22.0) (5.7) (111.3) License, engineering and consultancy services 30.4 30.4 (18.2) (18.2) Project management and commissioning 44.2 44.2 (5.7) (5.7) Land, civil works and construction 129.4 129.4 (0.0) (0.0) Training 3.0 3.0 (1.8) (1.8) Other La 78.1 78.1 (0.0) (0.0)

Total Financing 83.6 22.0 405.0 510.6 (83.6) (22.0) (31.4) (137.0)

Ta Including incrementalworking capital and interest during construction.

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

8.7 A major portion of the equipment and materials (752 of those financed by the Bank loan) will be procured through internationalcompetitive bidding (ICB) in accordance with Bank guidelines. Standard bidding documents to be applied to all Chinese projects are currently being prepared to improve procurement efficiency in ICB. In ICB, domestic manufacturerswill be given a margin of 152 or the prevailing customs duty, whichever is lower, for purposes of bid evaluation. Internationalengineering and technical assistance services will be selected according to Bank guidelines for the use of consultants.

8.8 Specialized items with only a limited number of suppliers, such as agitators for the phosphoric acid reactor and gypsum filters, will be procured through limited internationalbidding (LIB). Items for LIB are expected not to exceed US$22.0 million in aggregate. All qualified bidders would be invited under LIB.

8.9 Orders for small or miscellaneous items with an estimated value of up to US$200,000 each will be procured through internationalshopping from at least three qualified and eligible suppliers, up to an aggregate amount of US$5.7 million. No procurement through direct contracting is envisaged. - 33 -

8.10 Packages with an estimated value of US$1.0 million or more, expected to number about 20, would be subject to prior Bank review; packages below US$1.0 million each would be subject to post-review by the Bank. Contracts with consultants will be subject to Bank approval prior to signature. Inter- national procurementwill be executed by the China National Chemical Con- struction Corporation (CNCCC),5/ in cooperationwith MCI's Project coordinationgroup. To avoid delays in Project execution, the Bank loan will retroactivelyfinance up to US$2.0 million of eligible expenditures for downpayments for engineering contracts and technical services and internationaltravel, incurred between February 5, 1989 and the date of loan signing.

8.11 ProcurewentArrangements for Local Financing. Local procurement will be carried out by the respective operating companies with assistance from the design institutes. Since SPC identifiesthe Project as a key national project, the supply of major local constructionmaterials, plant and equipment (about 90% of the total items required) is regulated by an allocation system administeredby central and provincial government agencies. Applications for annual requirementshave to be made in advance to SPC and the State Materials Supply Bureau. However, under recent provisions, buyers and suppliers of equipment have seme scope for negotiation as to the type of equipment, delivery and price.

8.12 Most of the civil works, construction,a major part of the engineeringwork, and some equipment and materials will be procured locally. Contracts for civil works and ccnstructionwill be awarded through assignment to specialized constructionbureaus or companies under negotiated contracts that specify unit costs, terms of payment and incentives/penaltiesfor early/late completion or delivery. The capabilitiesof local contractors proposed for the Project are satisfactoryfor timely and efficient execution of the proposed work.

D. Allocation and Disbursementof the Bank Loan

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

5/ CNCCC is responsible for internationalprocurement of the three ongoing Bank-supported fertilizerprojects. - 34 -

Table 8.D: BANKLOAN ALLOCATION (US$ million equivalent)

JPCC HPCC MCI Total Bank loan financing

Equipment, materials 78.0 33.3 - 111.3 100X of foreign expendi- and spares tures, 100? of local expenditures (ex-factory), and 75? of local expenditures for items procured locally.

Engineering, licenses 11.4 6.8 - 18.2 100? of expenditures and technical services

Training 1.1 0.7 - 1.8 100o

Project management 3.5 1.9 0.3/a 5.7 1002

Total 94.0 42.7 0.3 137.0

La Consultant fees for the technical assistance component will 1ieshared equally by JPCC and HPCC.

The proposed Bank loan will cover: (a) 1002 of the foreign expendituresfor directly imported goods, 100? of local expenditures (ex-factory)for domestic- ally manufactured goods, and 75? of local expendituresfor items procured locally; (b) 100? of the expendituresfor licenses, engineering and technical services for Project management; and (c) 100? of the cost for overseas travel b7 local staff for engineering,procurement and tzaining. To facilitate the disbursementof funds, a special account will be established in US dollars at a commercial bank acceptable to the Bank, with an authorized allocation of US$10.0 million. Disbursementwill be against full documentationexcept for training, overseas travel and contracts valued at less than US$200,000 equivalent each, which would be against statements of expenditure. Documentationof statements of expenditure will be maintained by MCI's project coordination group, to be audited annually by independent auditors acceptable to the Bank, and to be made available for review by the Bank during Project supervision.

8.14 The Project completion date would be September 30, 1994; the closing date is expected to be March 31, 1995. An estimated disbursement schedule for the Project has been prepared based on Bank experience with previous comparable projects in China; it is generally in line with the Bank's recommended standard disbursement profile for industrial projects in Asia Region. It is given in Annex 8.2. - 35 -

IX. FINANCIAL ANALYSIS

A. Financial Management Practices in China

9.1 Financial Autonomy. In the past, the Government made all major financial decisions, including approval of new investments. Enterprises remitted almost all internally generated funds to the Government, and funds for new investmentswere, in turn, provided as grants through budget allocations. Recent reforms have resulted in greater financial autonomy and accountability for the managers of individual enterprises. Major changes include: (a) enterprises can retain 100Z of their depreciationallowances; (b) enterprises can retain an increasing portion of their profits (this provision varies across companies and provinces); (c) new funding requirements, including those for investments, are to be met out of a company's internally retained funds or interest-bearingloans (long-termcapital construction loans for fixed investments and short-term borrowing for working capital); and (d) enterprisesmay utilize an increasing portion of internally retained funds without prior goveranent approval. Given the increasing financial autonomy and accountability of companies, there is a growing need and opportunity for these enterprises to engage in longer term financial planning and to improve on the traditional concentration on one-year financial targets.

9.2 Financing of New Projects. The recent economic reforms have also changed dramatically the Government'spolicy on financing new investments. In the past, all new investmentswere, as noted, financed through budget allocations in the form of grants. Recently, the Government introduced the concept of interest-bearingloans as an incentive for industrial enterprises to econo- mize on the use of funds. While this was, in principle, a positive step, it has been carried to the point that new government-financedinvestments for state-owned enterprisesmust now be financed entirely through debt. As a result, newly formed companies are entirely debt-based, a financial structure that conflicts with the basic norm for prudent financial management and accountability. In particular,many companies have been facing cash flow difficulties during the initial years of operations because of their excessive debt service burden, and they have had to enter into negotiationswith respect to financing and bail-outs on a case-by-casebasis. While the companies' existence has not been threatened because of the country's structure of state ownership, this situation undermines the autonomy of the enterprises and conflicts with the basic thrust of China's economic reform, which is designed to place greater responsibilityon enterprise management.

9.3 The Government recognizes the need to allow for equity-type funding and is currently moving toward the creation of instruments for such financing. However, it will take time for the new instrumentsof financing to develop sufficiently to allow for large-scaleequity financing, particularly in light of the current ambiguities relating to enterprise ownership.

9.4 Financial Accounting and Audits. The Chinese accounting system is governed by several regulations issued by central and local governments. Special features of the system include: (a) maintenance of two separate accounts--one for production operations, the other for constructionprojects-- that are not consolidated; (b) the inclusion of interest charges in the production costs, so that operating income reflects the company's financial - 36 -

structure; and (c) the matching of funding sources with specific types of assets--fixed assets with fixed funds, current assets with current funds, and special assets with special funds.6/ The financial statements of Chinese enterpr'ses are subject to external audits by the State Audit Administration (SAM), which was established in 1983 to ensure efficient and prudent financial management bv enterprises. The Bank has been supporting the Government's efforts t3 improve its audit capability through training under a Technical Cooperation Credit (Cr. 1412-CHA).

B. Financial Performance and Prolections

9.5 The financial projections for Project entities were carried out using current yuan. It was conservativelyassumed (the key assumptions are detailed in Annex 9.1) that their output prices would be lower by 10-20Z than their projected CIF import prices. Their actual prices are expected to be deter- mined at levels close to import parity, since GOC would allow the entire output of the project companies to be sold at negotiated prices (para. 3.26); the current ceiling for negotiated prices of high-grade phosphate fertilizers (DAP) is 98Z of its import parity price (para. 3.24). The real prices of inputs and outputs (i.e., after allowing for inflation)were assumed to remain unchanged at their January 1988 levels over the life of the Project. Detailed historical and projected financial data, prepared in accordancewith conven- tional accounting concepts adjusted for the Chinese accounting system, are given in Anrexes 9.2-9.3. The salient features of financial performan ' and the projected future finances of the companies are shown in Table 9.A.

6/ Strict application of earmarking, or non-fungibility,is gradually being relaxed, as enterprises retain greater portions of their internally generated funds as special funds. - 37 -

Tjble. .A: SIMMARYOF SiFELTED HISTORICALAM PROJECTEDFINANCIAL DATA (millions af current yuan unla" otherwise stated)

Proiacted Ao.tul - PrElim. Construction After sjlrtuo Year ending December 31 1Q88 1987 1Q88 1989 1993 1994 1996 1998 1997 1998

FinancialStatementM: Gross sales revenue 28.0 21.S 62.0 83.1 133.0 S92.4 747.6 9O9.8 1,014.6 1,095.8 Not profit /A 10.3 2.2 9.7 1.S 17.9 64.2 165.5 284.7 309.1 880.7 Internal caeh generation 8.2 12.1 22.2 17.0 34.0 227.6 314.8 418.8 436.6 469.1 Debt service payments14 - - - - - 189.8 181.0 162.0 162.5 162.3 Current as*ta 18.2 13.8 43.8 46.2 71.4 162.7 248.6 524.3 77.0 933.0 Current liabilities1r 11.5 9.1 19.6 26.1 128.1 128.0 147.9 171.0 177.3 183.5 Long-term debt - - - 88.8 1,140.0 1,828.4 1,284.8 117.8 1,098.8 1,018.0 Equity 1d 402.3 428.7 470.7 478.9 497.3 610.8 761.0 995.8 1,283.8 1,868.0

Not profit/groa &alee (S) 39.8 10.2 18.6 2.8 14.6 10.8 22.1 30.8 30.8 32.0 Debt service coverage (times) - - - - - 1.4 2.0 2.6 2.7 2.9 Currant ratio (times) 1.4 1.8 2.2 2.2 0.6 1.3 2.0 3.1 4.2 6.1 Long-term debt/equity 100:0 100:0 IOO:O 8:92 74:26 69:31 63:37 84:46 47:53 89:61

FinancialStttements: Oros" sales ravanuo 3.8 4.0 4.7 14.4 12.8 168.0 224.0 290.3 313.8 898.8 Net profit & 0.3 0.2 0.3 2.2 1.3 28.8 61.S 103.4 118.0 134.1 Internal cash generation 0.6 1.4 1.4 3.3 2.5 90.7 127.4 189.6 183.0 197.7 eobt service payments L - - - - - 74.6 78.1 78.4 78.6 75.4 Current eaosts 3.6 3.8 8.3 11.3 22.0 66.8 128.3 233.3 348.1 472.0 Current (labiliti;e Lg 1.7 0.8 0.6 3.1 44.0 89.4 68.1 77.4 79.9 82.7 Long-toermdebt - - - 16.4 663.8 630.3 S8S.7 860.0 622.8 484.0 Equity L4 19.1 18.8 19.6 21.8 16.3 47.4 103.2 201.S 314.7 444.4

Net profit/gross ssl .e (3) 9.9 8.6 8.6 14.9 10.1 1.2 27.8 36.2 38.3 40.2 Debt servicecoverage (times) - - - - - 1.2 1.7 2.6 2.8 3.0 Current ratio (times) 2.2 8.0 0.4 3.6 0.5 1.1 1.9 4.0 6.0 8.0 Long-term debt/equity 100:0 100:0 100:0 38:82 e2:8 86:24 80:20 69:31 69:41 49:61

LI Net profit before loan amortization end taxes. Lb Repayment of long-term debt plua interest paymento for both long-term end short-term debts. 14 Including the current portion of long-term debto, and short-term working capital loane. L4 Including etate fixed funds, state circulatingfunds, enterprise fixed funds, and specialfund reserves.

9.6 Financial Performance. JPCC and HPCC have virtually no debt as a result of the Government's earlier policy of financing state-owned enterprises by providing investment and working capital as grants through budget allocations. Both companies remained relatively stable in terms of production and finances over the past five years, despite the general decline in demand in China for low-grade phosphate rocks and fertilizers,because their local markets were less affected by imported high-grade fertilizers. While JPCC's sales revenue and net profits dropped significantlyin 1987, this was mainly because of the low utilization of the new Wangji mine and the delayed start-up of the Wangji beneficiation plant. Since the commissioningof the Wangji plant in mid 1988, JPCC's financial performance improved in 1988, and is expected to improve further as the plant achieves its full capacity from 1989 onwards. HPCC, which operates outdated, inefficient facilities,has - 38 -

experienced low and declining profit margins, again mainly because of the declining demand and prices for low-grade fertilizer (paras. 5.8 and 5.12).

9.7 Financial Projections. Both companies are expected to achieve satisfactory profits, and their net profit margins on sales revenue will remain relativelyhigh at over 252--once their operations reach full capacity. In 1994, the first year of operations, JPCC and HPCC are expected to achieve only marginal net profits because of low capacity utilization,a normal experience for new mines and fertilizerplants. With the build-up of capacity, the combined net profits of the two companies are expected to increase from Y 89.5 million in 1994, to Y 227.0 million in 1995, and Y 388.1 million in 1996.

9.8 The two companies nre not expected to have any serious cash flow difficulties, and will generate sufficient cash internally to cover cash expenditures. However, HPCC will not show a comfortable debt service ratio in its first year of operations. Because of the Government'scurrent funding policy (para. 9.2), HPCC, which does not have a significantcapital base, will also have high financial leverage until it accumulates retained earnings from operations. Given this background, the Government intends to take action to allow the companies to achieve sound financial positions rapidly in the event that it changes the funding policy, and a specific financial covenant has been designed to ensure that the companies will be able to cope with potential cashflow difficulties during their start-up years (para. 9.10).

C. Financial Rate of Return and SensitivityAnalysis

9.9 The cost and revenue streams for the incremental financial rate of return (FRR), expressed in January 1989 yuan, are presented in Annex 9.4. The estimated base case FRRs (before taxes) for the companies are: 14.2Z for the Dayukou component, and 13.1Z for the Huangmailingcomponent. The FRRs for the companies are lower than their respectiveeconomic rates of return (ERRs), mainly because the assumed financial prices for fertilizers are below their economic value. The results of the sensitivity tests are shown in Table 9.B.

Table 9.B: SENSITIVITY TEST ON FINANCIAL RATES OF RETURN (BEFORE TAX) (in percentage)

Dayukou Huangmailing (JPCC) (HPCC)

Base case 14.2 13.1 Capital cost up 202 12.0 10.8 Capital cost down 20Z 17.2 15.0 Sales revenue up 20Z 19.1 16.9 Sales revenue down 20Z 8.2 8.8 Variable cost up 202 12.7 11.9 Variable cost down 20Z 15.8 14.3 2-year delay in completion 11.4 10.6 - 39 -

The FRRs for the Project are sensitive to changes in, in descending order, sales revenue, capital cost, and variable costs (input prices). Given that adverse changes in the variables by a margin of 202 are not likely, satisfactory levels of FRR are likely to be realized.

D. Financial Covenants

9.10 During negotiations, agreement was reached that the companies would: (a) maintain a debt service coverage ratio of at least 1.2 and not incur any long-term debt unless their projected internal cash retention for each fiscal year during the term of the debt exceeds 1.2 times their projected debt service requirements in that year; (b) maintain a long-term debt/equity ratio of 75:25 or better; and (c) maintain a current ratio of 1.2 or better, once such covenanted ratios are reached. Because of the current government financing practice with respect to new investments (para. 9.2), HPCC will not be able to achieve these covenanted ratios in the initial years of operations, particularly the debt/equity ratio, until it builds up capacity utilization and retained earnings. The timeframe for achieving these ratios is as follows: debt service coverage ratio--1994 for JPCC and HPCC; long-term debt to equity ratio--1994 for JPCC, and 1996 for HPCC; current ratio--1994 for JPCC, and 1995 for HPCC. Therefore, an additional assurance has been obtained from the Government that it will cover any cash flow deficits, provided such deficits are not the result of inefficientmanagement and operation of the project companies, during the initial three years of operations. Efficiency criteria were agreed at negotiations. Moreover, if the Government adopts an alternative funding policy to allow for equity-type funding (para. 9.3), it plans to allow the companies to convert a portion of local loans to the companies' own funds so that they can achieve a long-term debt/equxityratio of 75:25 or better. An assurance has been obtained from the companies that they will prepare and furnish to the Bank for review. by October 31 of each year from 1990 to 1998, their rolling five-year financial plans, including production,marketing and investmentplans, in the form of projected financial statements. Such plans will be supported by: (a) a detailed analysis of production cost trends; (b) analysis of operational and financial budget variances for the current fiscal year; and (c) financing arrangementsfor the investments proposed over the five-year period.

E. Auditing and Reporting Requirements

9.11 An assurance has been obtained that the companies will have their annual financial statements and project accounts audited by independent auditors acceptable to the Bank. They will also submit the audit report for both the production and capital constructionaccounts to the Bank within six months after the close of each fiscal year. Based on project progress and the financial reports submitted by the project companies,MCI will provide the Bank a quarterly summary of the project progress and procurement status, and a semi-annual summary of the companies' financial statements,within 45 days after the end of each period. An assurance was obtained that the Government will have MCI's Project accounts for the technical assistance component, and the accounts for the Special Account, audited by independent auditors 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, the companies and MCI will prepare and provide - 40 -

te the Bank a completionreport for their respectivecomponents of the project,to coverproject implementation, initial operation, actual project costs and projectedcosts and benefits.

X. ECONOMICANALYSIS

10.1 Calculationsof the economicrates of return (ERR) for the investment componentswere made on an incrementalbasis. The key assumptionsin the economicanalysis of the Projectare detailedin Annex 10.1.

A. EconomicCosts and Benefits

10.2 EconomicBenefits. The quantifiableeconomic benefits of the Project,expressed in 1989 US dollars,come from two major sources: (a) phosphate fertilizer(TSP and MAP) productionutilizing phosphate rock from the mines to be developedunder the Projectand other local raw materialssuch as pyrites,ammonia and high-qualityrocks from YunnanProvince (Dayukou and Huangmailing);and (b) improvedeconomic efficiency of productionthrough the restructuringof existinginefficient operations, including the conversionof productionfrom low economicvalue fertilizers(ABC) into high economicvalue fertilizers(MAP) (Huangmailing).

10.3 The economicprices of fertilizerproducts were derivedfrom their projectedinternational prices. The economicex-factory prices of MAP and TSP were derivedfrom their CIF importprices by addingunloading, port handling, baggingand mixingcharges, and inlandfreight from ports to the plant sites.

10.4 EconomicCosts. The economicvalue of tradeableinputs was based on their estimatedFOB exportprices. The economicvalue of pyritesat each plant was derivedfrom theirestimated long-term marginal production cost. Non-tradeableinputs were convertedto their economicvalue by applyingtheir respectivespecific conversion factors.

B. EconomicRate of Returnand SensitivityAnalysis

10.5 The base-caseERRs in constantterms are 17.9% for the Dayukoucom- ponent (JPCC)and 14.02 for the Huangmailingcomponent (HPCC). The ERR for the entireProject is 16.72. The streamsof economiccosts and benefitsfor the ERR calculationsare given in Annex 10.2.

10.6 The resultsof the sensitivityand switching-valueanalyses are summarizedin Table 10.A. - 41 -

Table 10.As SENSITIVITYANALYSIS OF ERR (Z)

Dayukou Huangmailing Project as (JPCC) (HPCC) Whole

Cases

Base case 17.9 14.0 16.7 Capital cost up 20% 15.5 11.8 14.4 Capital cost down 202 21.2 17.0 19.8 Sales benefits up 202 22.8 17.6 21.2 Sales benefits down 202 12.1 9.7 11.5 Variable cost up 202 16.5 12.9 15.4 Variable cost down 202 19.3 15.1 19.0 2-year delay in completion 14.3 11.3 13.4

- Switching values of selected variables (Z) /a

Variables

Capital cost +99.5 +42.0 Sales benefits -27.7 -18.8 Variable cost +120.0 +68.0

/a A 102 discount rate is used.

The results of sensitivity tests indicate that the ERRs for the Project are sensitive to changes in, in descending order, sales benefits (which are closely related to the internationalborder prices of phosphate fertilizers and production volume), project capital costs, and variable costs. Even assuming a 202 reduction in sales benefits, the Project would obtain a satisfactory ERR of 11.5Z. The switching-valueanalysis of the major variables indicates that the Project would remain economicallyviable under various conceivable adverse conditions, and confirms that the price of fertilizers is the most critical variable determining the economic viability of the Project.

C. Other Benefits

10.7 Once full operating capacity is reached, the Project will lead to net import substitution of high-grade phosphate fertilizers of 320,000 tpy of P205 that will result in gross foreign exchange savings of about US$196 million equivalent p.a. in 1989 prices. After netting out the annual service of the foreign debt (both principal repayment and interest payments), the net annual foreign exchange savings, as of 1996, are estimated at about US$180 million equivalent (see Annex 10.3 for details). - 42 -

D. Project Risks

10.8 No extraordinary commercial risks are foreseen, given the general shortage of phosphate fertilizers,particularly high-grade products, and the apparently buoyant Chinese fertilizer market. The main technical risks lie in coordinating the implementationand commissioningof the high-grade fertilizer plants and associated mines. As observed in the cases of JPCC's new Wangji mine and HPCC's mines (paras. 5.8 and 5.12), poor coordination in implementing integrated mine and fertilizer plant investments,executed by separate entities under separate budgets, has been a common cause of underutilization of new mines in China, resulting in a significant loss of economic benefits. In order to reduce this risk, both mine development and fertilizer plant construction of the Dayukou and Huangmailing components will be implementedunder the same project management and budget. This risk will be further mitigated by involving internationallyexperienced consultants in the technical assistaace component. They will help MCI and the project companies with project implementationand staff training.

AI. AGREEMENTS REACHED DURING LOAN NEGOTIATIONSAND RECOMMENDATION

11.1 During negotiations, confirmationwas obtained from the Government that:

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

(b) if the Government adopts an alternative policy to allow for equity- type funding i'jrnew investments of state-owned enterprises, it plans to allow the two project companies to convert a portion of local loans to the companies' own funds so that they can achieve a long- term debt/equity ratio of 75:25 or better (para. 9.10).

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

(a) allow the project companies to market their entire output outside the state allocation plan at negotiated prices (para. 3.26);

(b) maintain MCI's project coordinationteam during project implementation (para. 7.4);

(c) on-lend the proceeds of the Bank loan to JPCC (US$94.15million) and HPCC (US$42.85million) under subsidiary loan agreements that will specify terms and conditions acceptable to the Bank, including an on- lending rate equal to 105% of the Bank variable loan rate, with a commitment charge of 0.75Z p.a. and repayment over 20 years, including 5 years of grace (para. 8.4); - 43 -

(d) cover any cash flow deficits of the project companies during the initial three years of operations, provided such deficits are not the result of inefficientmanagement and operation of the companies (para. 9.10); and

(e) meet the auditing and reporting requirements (para. 9.11).

11.3 During negotiations, assurances were obtained from JPCC and HPCC that each would:

(a) prepare and furnish to the Bank for comments by December 30, 1990, a comprehensiveprogram to strengthenmanagement, recruit qualified staff and provide training, and thereafter carry out the agreed program (paras. 5.10 and 5.14);

(b) maintain their respective project management teams during pro4ect implementation (para. 7.5);

(c) build and operate the project mines and plants with due regard to safety, ecological and environmental factors and in accordance with environmental standards satisfactoryto the Bank (para. 7.10);

(d) maintain a debt service coverage ratio of at least 1.2 once that ratio is reached, but no later than December 31, 1994. The companies will not incur any long-term debt unless their projected internal cash retention for each fiscal year during the term of the debt to be incurred will exceed 1.2 times their pxojected debt service requirements in that year (para. 9.10);

(e) maintain a long-term debt to equity ratio of 75:25 or better once that ratio is achieved, but no later than December 31, 1994 for JPCC, and December 31, 1996 for HPCC (para. 9.10);

(f) maintain a current ratio of at least 1.2 once such a ratio is achieved, but no later than December 31, 1994 for JPCC, and December 31, 1995 for HPCC (para. 9.30);

(g) prepare and furnish to the Bank for review, by October 31 of each year from 1990 to 1998, their rolling five-year financial plans, to cover production,marketing and investment plans, to be presented in the form of projected financial statements (para. 9.10); and

(h) comply with the auditing and reporting requirements (para. 9.11).

11.4 During negotiations, an assurance was obtained from JPCC that it would prepare supply and transport arrangementssatisfactory to the Bank for the required quantity of Yunnan phosphate concentrate adequate for TSP production by December 31, 1991 (para. 6.4).

11.5 Conditions for loan effectiveness are: - 44 -

(a) signing of subsidiary loan agreementsbetween the Government and HPG, and HPG and JPCC and HPCC under terms and conditions satisfactory to the Bank (para. 8.4); and

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

11.6 With the above assurances and arrangements,the Project is suitable for a Bank loan of US$137.0 million equivalent to the People's Republic of China at the Bank's standard variable rate for 20 years, including 5 years of grace. ANNEX 3.1

- 45 -

CHINA

HUBEI PHOSPHATE PROJECT

Fertilizer Application Rates for Various Countries, 1985 /a (kg per hectare of arable land)

Country Nitrogen Phosphate Potash Total Ratio

Japan 145.9 155.7 128.8 430.4 100:107:81

Korea 198.7 91.9 101.7 392.4 100:46:5l

France 127.2 77.5 95.2 300.9 100:61:76

China /b 135.6 27.4 4.4 167.4 100 20:9

USSR 47.2 32.8 29.4 109.4 100:69:6Z

Indonesia 62.2 23.9 8.5 94.6 100:37s13

US 49.9 19.9 24.0 93.3 100:40s48

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

/a Rates are based on apparent consumption figures obtained by adding net imports of fertilizers to domestic consumption.

Lb FAO'S apparent consumption figures are not consistent with the acutal consumption statistics published by MAAF text (Table 3.A) due to a difference in statisiticalmethods and bases.

Source: FAO Fertilizer Yearbook, 1986, Vol. 36.

China Department March 1989 CHINA HUBEI PHOSPHATEPROJECT

Consumption, Production and Imports of Chemical Fortilizers. 1972-86 /a ('000 tons of nutrient)

Nitro gn Phosphate Potash All nutrients Year Consumption Production Imports Consumption Produection Import. Consumption Production I1port. Consumption Production Imports

1972 3,108 2,444 1,842 1,038 1,249 11 12 8 2 4,219 3,701 1,356 1978 8,048 2,996 1,230 4,468 1,689 72 1S 7 1S 6,864 4,692 1,317 1974 3,490 2,827 928 1,890 1,390 82 57 6 57 4,916 4,222 1,067 1975 4,020 3,709 964 1,531 1,531 34 40 7 39 5,407 5,247 1,037 1976 4,468 3,816 928 1,360 1,418 20 18 11 6 5,844 6,244 954 1977 6,065 6,609 1,147 1,416 1,708 161 a3 21 23 8,513 7,238 1,321 1978 7,728 7,639 1,227 1,114 1,033 248 46 21 31 8,885 8,693 1,.04 1979 8,997 8,820 1,461 1,768 1,817 190 108 1S 108 10,8683 10,653 1,749 1980 10,180 9,993 1,637 2,368 2,307 395 128 20 126 12,670 12,320 2,058 1981 10,363 9,858 1,541 2,736 2,508 499 251 24 250 13,349 12,390 2,290 1982 10,433 10,219 1,808 8,448 2,637 631 s58 25 489 14,449 12,781 2,928 1983 11,923 11,094 2,365 3,945 2,666 1,028 728 29 684 16,696 13,789 4,027 1984 18,378 12,211 2,828 3,S66 2,359 1,342 804 31 765 17,868 14,601 4,925 1s8s 18,477 11,438 2,052 3,631 1,760 950 920 24 364 17,898 13,222 3,36 1986 18,728 11,592 1,700 4,602 2,340 645 1,075 26 600 19,305 13,957 2,946 is Nutrient composition of compoundfertiliz r Is assumdto be 2:3:1 (nitrogWn, phosphate and potash). Sources: Ministry of Chemical Industry; Ministry of Agriculturo, Animl Husbandry and Fishery; GeneralAdministration of Customs; and State StatisticalBureau. China Departmsnt March 1989

Ia ANNEX 3.3

- 47 -

CHINA

HUBEI PHOSPHATE PROJECT

Comparison of Domestic and International Prices of Fertilizers, Main Energy Inputs, and Main Agricultural Products, December 1988 (US$/ton /a unless otherwise stated)

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

Products Urea Ld 115 175-188 155 185 62.2 94.6-101.6 DAP 153 188-231 196 229 66.8 82.1-100.9

Inputs Coal Le 22 25 38 30 73.3 83.3 Natural gas 3 (per mln Btu) 1.7-2.OjL 1.9-4.1/f - .11& 54.8-64.5 61.3-132.3 Phosphate rock 25/h n.a. 36 56 44.6 n.a.

Agricultural Products Rice 167 226 258 258 64.7 87.6 Wheat 119 161 141 175 68.0 92.0

/a US$1 = Y 3.72. /b Annual averages of January-December 1988. /c For imported products, CIF China prices, and for exportable inputs, netback value from exports. /d Ba&ged urea. /e Based on average anthracite price for medium-size fertilizer plants. /f Average natural gas price for large-size urea plants under MCI. /& Fuel oil equivalent economic value (netback from exports) in calorific terms. /h Based on the low-quality rock after adjustments only in term3 of nutrients.

China Department March 1989 ANNEX 4.1 - 48 -

CHINA

HUBEI PHOSPHATE PROJECT

Trends in Domestic Production of Phosphate Fertilizers, by 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 1,589 1974 940 430 20 1,390 1975 1,029 476 26 1,531 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 33 /a 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 27lb 2,359 1985 1,345 380 24/ 1,758 1986 1,713 558 54 2,325

La Monoammonium phosphate production was 12,000 tons in 1979 and 13,000 tons in 1980. lb Diammonium phosphate production 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 Chemical Research Institute, MCI, STIRI; China Chemical Industry: World Chemical Industry Yearbook, 1985-87.

China Department March 1989 ANNEX 4.2 - 49 - CHINA

HUBEI PHOSPHATEPROJECT

Domestic Production of Phosphate Fertilizers, by Product and Province, 1985 ('000 tons P205)

Single Calcium magnesium Province superphosphate phosphates Other Subtotal

North Beljing 1.1 - - 1.1 Tianjin 3.6 - - 3.6 Hebel 29.7 - - 29.7 Shanxi 18.9 - - 18.9 Neimonggol 1.1 - - 1.1 Northeast Ta-tonIn9m g14.0 - - 14.0 Jilin 4.6 - - 4.6 Heilong iang 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 J'angxi 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 nunan 117.0 51.9 - 168.9 Guangdong 143.2 - - 143.2 Guangxi 55.8 26.3 0.1 82.2 Southwest bicnuan 150.1 32.7 4.3 187.1 Guizhou 19.1 24.5 - 43.6 Yunnan 61.0 102.0 15.6 178.6 Tibet - - - - Northwest SnaanxV. 26.8 - 0.1 26.9 Gansu 28.4 - - 28.4 Qinghai 2.9 - - 2.9 5in$xia 5.0 -- 5.0 Xinjiang 1.3 - - 1.3 Total 1,346.1 380.2 32.9 1,759.2

Source: MCI.

China Department March 1989 ANNEX 4.3 - 50 -

CHINA

HUBEI PHOSPHATE PROJECT

Consumption of Chemical Fertilizers by Province, 1985 ('000 tons nutrient)

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

North ze Ting 67 15 0 82 Tian;in 37 5 1 43 Hebei 838 236 30 1,104 Shanxi 302 81 15 398 Neimonggol 143 31 6 199 Northeast iLaon-ng 551 144 14 709 Jilin 425 77 19 521 Heilongjiang 293 106 22 421 Shanghai 107 18 1 126 Jian su 1,214 326 40 1,579 Zhejtang 586 103 22 711 Anhui 810 289 37 1,136 Fujian 323 93 75 491 East JIanaxi 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 iuunan 618 167 112 897 Guangdong 783 174 147 1,104 Guangxi 339 114 68 521 Southwest stchuar. 1,115 211 21 1,347 Guizhou 208 61 11 280 Yunnan 277 112 15 404 Tibet 6 2 0 8 Northwest SfaanHxl 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: Agricultural Yearbook of China, 1985. China Department March 1989 - 51 - ANNEX 4.4 CHINA

HUBEI PHOSPHATE PROJECT

Major Phosphate Deposits in China

Resirves ore Ratio (orel Province Deposit (million tons) concentrate)

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

Guizhou Kaiyang 320 n.a. Wangjayuan 50 n.a. Chuanyondong 280 n.a. Datang 160 n.a. Yuhua n.a. n.a. Xingiao n.a. n.a. Xiaoba 104 n.a. Yingping 110 1.50 Wofang 70 1.57 Dazhai n.a. n.a.

Jiangsu Jingping 29 4.00

Sichuan Jinhe n.a. n.a.

Shaanxi Han Zhong n.a. n.a.

Jiangxi Cao Yang n.a. n.a.

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

Hebei Fanshan 91 n.a.

Hunan Liyaing n.a. n.a.

Sources Various internationalhandbooks.

China Department March 1989 ANNEX 4.5

- 52 -

CHINA

HUBEI PHOSPHATE PROJECT

Major Pyrite Deposits and Mines 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 Xiangsham 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. n.a.

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

Source: Various internationalhandbooks.

China Department March 1989 ANNEX 4.6 Page 1 of 2 - 53 -

CHINA

HUBEI PHOSPHATE PROJECT

An Outline of the Phosphate Subsector Investment OptimizationModel

A. The Transport Model

1. Objective. The objective is to optimize the transport of raw materials, intermediatesand final products in meeting the demand for phosphate fertilizers.

2. A Mathematical Programming Formulation. To find the "cheapest"route between sets of origins and sets of destinations,a linear-programmingmodel was developed, with four major networks--rail,river, ocean and road--repre- senting the transport system.

3. Results. The cheapest mode of transportationis derived from simul- taneous determination of the location size, timing and process of future fertilizer plants and importing ports, and distributionpatterns.

B. The Industry Model

4. Objective. The objective is to assess alternative locations, sizes, products and distributionpatterns associatedwith investment projects in the st.bsector.

5. A Mathematical ProgrammingModel Formulation. A mixed-integer pro- gramminigmodel was designed to minimize the total costs of investments,production, transportation,and imports such that:

(a) demand for P205 is satisfied in each province through small-scale production (for SSP, DAP and CMP), production in the modern sector or imports;

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

(d) policies limit the percentage of P205 demand in each province that can be satisfied by certain products; and

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

6. Results. The desired result is a national optimization giving at each location: ANNEX 4.6 Page 2 of 2 - 54 -

(a) the production levels of raw materials, intermediatesand final fertilizer products and the processes employed;

(b) the scale of the mines and production plants;

(d) the shipment patterns of raw materials to plants, of intermediate materials between plants, and of final products to markets;

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

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

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

China Department March 1989 ANNEX 4.7 -55 - Page 1 of 3

CHINA

HUBEI PHOSPHATE PROJECT

Planned Phosphate InvestmentProjects to the Year 2000

I. During the Seventh Five-Year Plan (1986-90)

A. Fertilizer Plants

Planned '000 tpy of year of Project Province Product product (QO5L completion Jinchan Gansu SSP 400 (60) Completed Lucheng Sharni NP 900 (120) Completed (26:13:0) Kaifeng Henan NP 150 (20) Completed (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 (110) 1990 Tonglin Anhui DAP 120 (55) Completed Qin.huangdao Hebei NPK 600 (110)/a 1991 (15:20:15) Dalian Liaoning DAP 240 (110)/a 1989 Nanjing Jiangsu DAP 240 (110)/a 1989 Xuanwel Yunnan DAP 120 (55) 1992 Huangmalling Hubei MAP 180 (93) 1993 Hanghezhou Yunnan DAP 120 (55) - Zhanjiang Guangdong DAP 60 (28) 1991 Huaxian Shaanxi DAP 60 (28) - Small-sizedMAP/ Various MAP/DAP 1,500 (650) - DAP plants (50) provinces Dayukou Hubei TSP 560 (300) 1993 Wengfu Hubei TSP 800 (368) 1994 Total (2,322)/b

/a Based on imported phosphoric acid. Tb Exclusive of imported phosphoric acid. ANNEX 4.7 Page 2 of 3 - 56 -

B. Phosphate Mines

Estimated Planned Production reserves Mining Rock quality year of ('000 tons/year) Province Name of mine (mln tons) method P!OS Mg2 R203 completion ROM 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

Hubei Yichang 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

Huangmailing 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

Neimonggol /a Tanyaokou Underground 450 190

Hunnan Qibaoshan Underground 250 200

Neimonggol Lb Tanyaokou Underground 1,050 410

/a Expansion. lb New mine. ANNEX 4.7 Page 3 of 3 - 57 -

II. Durin.the Eighthand NinthFive-Year Plans (1991-2000)

A. FertilizerPlants

Phosphatefertilizer production Type of fertilizerproduct (milliontpy of P205) Nitrophosphate(NP) 0.5 Triple superphosphate(TSP) 2.8 Ammoniumphosphate (DAP/MAP) 1.7

Total 4.5

B. PhosphateMines

New capacity Total outputla (milliontpy) (milliontpy) Province ROH ore/Product ROM ore/product

Yunnan 8.1/6.9 12.4110.8 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 -I- 1.5/0.4

Total 35.8/29.0 47.4/34.5

C. PyriteMines

New capacity (milliontpy) Estimatedproduction Province crude ore/352sulfur (milliontpy)

Hebei 0.710.3 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 taking into accountdepleted mines.

China Department March 1989 ANNEX 5.1 - 58 -

CHINA

HUBEI PHOSPHATEPROJECT

Production Performance of JPCC and HPCC

A. Design Capacity and Production ('000 tpy)

Design Company and product capacity 1983 1984 1985 1986 1987 1988/a

JPCC Liuchong 600 420 500 550 570 484 490 Dayukou 400 280 340 370 380 331 394 Wangji 1,000 - - - - - 500

Total 2,000 700 840 920 950 815 1,384

HPCC Concentrate 100 44 64 - 20 51 60 SSP 40 32 25 6 19 40 50 NPK 10 - - 1 2 6 10 Ammonia (Dawn) 15 14 16 14 12 14 15 ABC (Dawn) 60 55 63 54 48 58 55

B. Capacity Utilization (Z of design capacity)

Company and product 1983 1984 1985 1986 1987 1988/a

JPCC Liuchong 70 83 92 95 81 82 Dayukou 70 85 93 95 83 99 Wangji - - - - - 50 HPCC Concentrate 44 64 0 20 51 60 SSP 80 63 15 48 100 125 NPK - - 13 15 60 100 Ammonia 93 107 93 80 93 100 ABC 92 105 90 80 97 100

/a Extrapolatedbased on actual production from January to September 1988.

China Department March 1989 59 ANNEX5.2 CHINA - HUBEI PHOSPHATE PROJECT Organization Chart of JPCC A. Existing

LiuchoPgdaucton &rItnnonAdngli | Productioni "~~Proucton UUCDayukou wangB & Statistics ae

mine Mw|e Mae | Control Finc

Maintenance Maintenance oflto uc" Por8orWnBI Plant I I

GenwW Genera atnrce&Srie services Services

Services

B. After Project Completion |CliatEcononst| GeneralManager r t ClUtEgMee r CorporatlorOfflc s hAdiior

Productlon |Administration

FortzerConix WanaPM <

C cAd MaFtenWneelnt

. w I~~~~~~~~~~e413o _ cdPantfi5Wbe. - 60 - MNEX 5.3

CHINA - HUBEI PHOSPHATE PROJECT Organization Chart of HPCC A. Existing

DeneralManager

ChEof Enginoer -.-

put eraaung enecatlon Planning & Flnarce Union RGlatlona

_ Planning _ Mlno | l Education

XPurchasing BenefilGateon enerallMnaer Operatin ProAfterPojetCmnto 4Plant l H WLlta

. Mainteanance

.ti PrtonPrel

I ChifEninSP & NPK rEIfZ] B. After Prolect Completion

MAPPlant~00f ccmtn

Mai nutwnac Peot Cld |~~ ~~~~~~~~~~~~~~~~~~~~e~1 2c| -E iC-MAoPer _ewncptSuppWSorag ANNEX 6.1 - 61 - Page 1 of 3

CHINA

HUBEI PHOSPHATE PROJECT

Summary of the Dayukou Mine and Fertilizer Development Component

A. Geology

Rock reserves: 90 Mt at Dayukou, of which 28 Mt recoverable by open pit, 4.5 t/t average ratio overburden/rock;JPCC holds additional underground reserves at Liuchong and Wangji

Rock quality: 19.0? P205, 3.9Z MgO average analysis of primary rock

B. Mining

Capacity: 1.5 Mtpy of ore and 6.8 Mtpy of overburden in 3 shifts/day, 6 days/week operation

Mine layout: One single open pit, equipped with rotary drills, hydraulic excavators and trucks, primary crushing at mine site

C. Beneficiation

Capacity: 1.5 Mtpy ore feed, 0.65 Mtpy concentrate output

Product specificationd: Concentrate,332 P2C5, 1.8? MgO

Process: Flotation, with heated pulp

D. Sulfuric Acid Plant

Capacity: 540,000 tpy (approximately1,600 tpd), probably in 2 parallel trains Storage capacity for pyrites: 42,000 t (30 days) Storage capacity for product acid: 10,000 t (6 days)

Product specification: 932/982 H2 S04

Process: Pyrites drying; fluidized bed pyrites roasting; double contact/doubleabsorption acid production with cogenerationof electricity; scrubbing of off-gases to achieve SO2 emission levels below 450 ppm, typically 300-350 ppm; plant design will be based on foreign technology ANNEX 6.1 Page 2 of 3 - 62 -

Pyrites supply: 535,000 tpy (38X S on dry basis) from Yunfu mine, Guangdong Province; supply and transportation confirmed

Cinder disposal: By conveyor, total storage capacity 3 years, can be expanded if cinder cannot be processed elsewhere

E. PhosphoricAcid Plant

Capacity: 200,000tpy P205 (approximately650 tpd) Storagecapacity for productacid: 4,500 t (7 days)

Productspecificationt 502 or lowerP 205 H3P04; the concentrationand compositionmust be suitablefor manufacturingTSP from Yunnansecondary phosphate rock

Process: Single-stage,dihydrate process with wet scrubbing and concentrationof diluteacid; processwill be reliableand flexibleand allow possiblefuture adap- tationfor recyclingof sulfurfrom phosphogypsum

Gypsumdisposal: Slurrypipeline or conveyor(2.5 km) to disposal area, whichevermore feasible;total storagecapacity 12.9 milliont (18-20years); capacities and tech- niquesfor gypsumdumping cleared by environmental pollutioncontrol authorities

F. AluminumFluoride Plant

Capacity: 12,000tpy of AlF3 (dry basis)

Productspecification: Minimum96% AlF3; productmust be suitableas make-up for aluminumsmelters

Process: Foreigntechnology proven for same application;conversionof Al(OH)3 with fluosilicicacid, H2SiF6, purification,drying and bagging

Supply of Al(OH3): 13,000tpy of aluminumhydroxide from Zheng-Zhou, Henan .ovince

G. TripleSuperphosphate Plant

Capacity: 560,000tpy (approximately1,900 tpd) of baggedcured granular product Storagecapacity for fulls curing--minimum4 weeks (53,000t) Storagecapacity for secondaryrock--minimum 14,000 t (20 days) Storagecapacity for final product--minimum57,000 t (30 days' production) ANNEX 6.1 Page 3 of 3

- 63 -

Product specification: Bagged granular TSP, 462 available P205, free H3PO4 maximum 42 expressed as P205, H20 below 32, minimum 95? within 1-4 mm

Process: Probably den-processwith 3-4 weeks' curing, followed by drum granulation, intermediatefinal product storage (1-2 days) and bagging; technology still to be verified by pilot-scale tests; design will be carried out in cooperationwith f"reign consultant

Supply of secondary rocks Jining mine, Yunnan Province, 34.1? P205, 222,000 tpy, supply and transportationhave been confirmed

H. Infrastructure

Mine site: Workshop, store, equipment service facilities, office

Plant site: Workshops, stores, effluent treatment plant, labora- tories, offices

Power supply: 110 kV transmission line connecting with existing substation

Social infrastructure: Expansion of existing housing, dormitories and welfare facilities.

China Department March 1989 ANNEX 6.2 Page 1 of 3

- 64 - CHINA

HUBEI PHOSPHATE PROJECT

Summary of the HuangmailingMine and Fertilizer Development Component

A. Geology

Rock reserves: 110 Mt, of which 26 Mt recoverableby open pit, 2.9 t/t average ratio overburden/ore

Rock quality: 11.6Z P205, 2.32 MgO and 2.9% S (recoverable)average analysis of primary ore

B. Mining

Capacity: 1.0 Mtpy of ore and 3.0 Mtpy of overburden in 3 shifts/day, 6 days/week operation

Mine layout: One single open pit equipped with rotary drills, hydraulic excavators and trucks; primary crushing at mine site

C. Beneficiation

Capacity: 0.8 Mtpy ore feed for new plant and 0.2 Mtpy for existing plant; 240,000 tpy concentrate output from new plant and 60,000 tpy from existing plant

Product specifications: Concentrate, 332 P205, 1.3? MgO

Process: Flotation, with heated pulp

D. Sulfuric Acid Plant

Capacity: 280,000 tpy (approximately820 tpd) Storage capacity for pyrites--20,000t (1.7 months) Storage capacity for product acid--4,900 t (6 days)

Product specification: 93Z/98Z H2SO4

Process: Pyrites drying; fluidized bed pyrites roasting; double contact/doubleabsorption acid production with cogenerationof electricity; scrubbing of off-gases to achieve SO2 emission levels below 450 ppm, typically 300-350 ppm; plant wil'lbe designed with assistance of foreign engineering firm ANNEX 6.2 Page 2 of 3

- 65 -

Pyrites supply: 145,000 tpy (38Z dry basis) from Yunfu mine, Guangdong Province; supply and transportation confirmed

Cinder disposal: By conveyor, storage Capacity 1 Mt (10 years)

E. Phosph3ric Acid Plant

Capacityt 93,000 tpy P205 (approximately300 tpd) Storage capacity for product acid--2,100 t (7 days)

Product specification: Approximately 50X P205 H3P04; the composition and concentrationmust be suitable for the manufacture of MAP/DAP

Process: Single-stagedihydrate process with wet scrubbing and concentration of dilute acid; the process will be reliable and flexible and allow possible future adaptation for the recycling of sulfur from phosphogypsum

Gypsum disposal: Slurry pipeline (2 km) to final storage area with capacity of 30 Mt (20 years); capacities and techniques for gypsum dumping have been cleared by the environmentalpollution control authorities

P. Monoammonium Phosphate Plant

Capacity: 180,000 tpy (approximately600 tpd) of bagged granular product Storage capacity for final product--minimum18,000 t (30 days' production)

Product specification: Bagged granular MAP, 12Z N, 52% available P205, mois- ture content less than 3%, minimum 952 within 1-4 mm

Process: Preneutralizer/pipereactor process, also allowing production of DAP to utilize fully the ammonia output from the Dawu ammonia plant; the granulation section will be equipped with a dust extraction and scrubbing system to meet the emission standards for particu- lates, ammonia and fluorine, intermediate final product storage (capacity 1-2 days' production) and bagging units; the plant will be designed in cooperationwith a foreign engineering firm ANNEX 6.2 Page 3 of 3

- 66 -

G. Dawu Ammonia Plant

Capacity: The capacity of the existing coal-based ammonia/ABC plant at Dawu will be expanded from 15,000 tpy of gaseous to 30,000 tpy of anhydrous liquid NH3

Process: The Wuhan Chemical Design Institute (WCDI) has been involved in similar revamps and will employ its experience with local technology to expand the ammonia plant

Supply of NH3 : Ammonia from the Dawu plant will be transferred to MAP plant by pipeline or road, whichever proves more feasible; it is anticipated that ammonia plant will be achieving design output rates soon after recommis- sioning; to facilitate full utilization of output, the design of the MAP plant will also allow production of DAP

H. Infrastructure

Mine site: Workshop, store, equipment service facilities

Plant site: Workshops, stores, effluent treatment plant, labora- tories, offices

Social infrastructure: Housing and welfare facilities at Dawu.

China Department March 1989 ANNEX 6.3

- 67 -

CHINA

HUBEI PHOSPHATE PROJECT

Summaryof the Terms of Referencefor ConsultingServices to Support ProjectImplementation Under the TechnicalAssistance CoDironent

A. Objective

Internationallyexperienced consultants will provideadvisory servicesto ensurethe selectionand procurementof appropriatetechnologies and equipment,timely identification and resolutionof Projectimplementation problems,training of Projectmanagement team staff,and preparationof staff recruitmentand trainingprograms.

B. Tasks

The consultantswill providethe followingservices:

(1) for projectimplementation--(i) assistance in technology selection;(ii) adviceon the structureof Projectteams and executionof Projectimplementation for the coordinated commissioningof mines and fertilizerplants; and (iii) counselingon implementationissues to facilitatetimely correctiveactions; and

(2) for maintenanceof mobilemine equipment--(i)review of the designand layoutof workshops;(ii) assistancein the selectionand procurementof criticalequipment; (iii) setting- up of a preventivemaintenance system; (iv) reviewof the staff recruitmentand trainingprograms; and (v) monitoringof projectimplementation.

C. Timing

The consultantsare expectedto commencefield work by May/June 1989, and completetheir taskswith the commissioningof the plants.

D. EstimatedBudget

Consultingfees US$220,000 Travelexpenses 50,000 Contingencies 30,000 Total US$300,000

China Department April 1989 ANNEX 6.4

- 68 -

CHINA

HUBEI PHOSPHATEPROJECT

Outline for Trainingon Hazard and Operability(HAZOP) AnalXsis

Objectives

1. Main objectivesof the trainingon hazard and operabilityanalysis (HAZOP/HAZAN),to be carriedout by the Ministryof Chemical Industryas part of the technicalassistance component, are tot (i) stimulateand improve awarenessfor safety and operabilityaspects among relatedChinese government agencies,research and design institutes,and enterprisesinvolved in the chemicalprocessing industry; and (ii) strengthenthe capabilitiesof Chinese design institutesfor identifyingand analyzingpotential sources of safety hazardsand major productionlosses in chemicalplant design and operation.

tlorkScope

2. A consultantwill be appointedtos (i) presentin China a seminaron HAZOP/HAZANtechniques; and (ii) conductworkshops to practice the application of those techniquesin sector-specificcase studies.

3. Presentationof HAZOP/HAZANSeminar. The seminarwill cover all major areas of basic and advancedHAZOP/HAZAN techniques and highlightgeneral aspectsof other methodologiesfor technicalrisk analysis (e.g. hazard sur- veys and inventories;systems reliability/faulttree analysis;event tree analysis;risk assessmentand safetyaudits). Major topics to be coveredby the seminarare: (a) basic principles;(b) planningand timing; (c) selection of study teams; (d) study procedures;(e) evaluationof potentialproblems; (f) recordingof the study; and (g) processingof actions.

4. Presentationof Workshopswith Sector-SpecificCase Studies. Follow- ing the seminar,2-3 workshopswill be conductedto promote the practical understandingand applicationof the HAZOP techniquesexplained. The number of participantsin each workshopwill be about 20. Appropriateindustry- specificcase studiesincluding typical Chinese conditions should be presented. Each of the workshopswill last about 5 days.

Work Plan

5. The consultantwill preparea work plan for the assignmentwhich will be reviewedby MCI and the World Bank. MCI will, in consultationwith design institutes,prepare case studiesfor presentationduring the workshops.

Timing

6. The seminarand workshopsare plannedto be held around April 1990.

China Department April 1989 CHINA: HUBEI PHOSPHATE PROJECT Organization Chart of MCIs Project Coordinatlon Unit

World Bank ProJect Imple ment atlon COoo rdcnat lon Group Deputy Mnlaiter of Finance

Project General Manager| Chief World Bank Loan Office

Vlce General Manager

Deputy Director, CNCCC

Project Officer

Design Technology Construction Procurement Traspration Finncig C nt Coordinator Coordfinator Coordinator Coordinao Coriao oriao

9kNw413O5D - 70 - ANNEX 7.2 Page 1 of 2

CHINA HUBEIPHOSPHATE PROJECT OrganizationChart of JPCCProject Management Team

Generl Manager

F PMRDRoje Manager

DesdgnrInstHtMe 1Cocrdinotbon Unit

Beaato PhosporicAcid ||Maintenance | FlnKw Manacger | | Manog | Monoger || Mancoger |

World Bank-428Stt1 ANNEX7.2 - 71 - Page 2 of 2

CHINA HUBEIPHOSPHATE PROJECT OrganizationChort of HPCCProject Management Team

HPCC General Manager

HPCC ProjectManager

CMRDI _ - MCI Pr(ect Design_r _ituteCoordination Unit

Mlning SulphuricAcid Map Infrastructure Planning Procurement Manager Manager Manager Manager Manager Manager

World Bank42840:2 - 72 - ANNEX7.3 Page 1 of 3

CHINA HUBEIPHOSPHATE PROJECT ProjectImplmentation Schedule

314 1 213 4 1231 4 1 2 3 4 4 2 3 4 1 2 3 4

DAyUKOUMINE & FEQIIUZERDEVLOPMENT COMPONENT

TSPprodutctlon tests

PXe#m selection _

Basic englnwdrng __ Rocuement of ma,orequipment

Detalled enginsedng______

site preparaHacvl s______EqulpmentIrnstallaHon______Commlnlng______Reproduction ovedbren removal

Raw ore stock bulidup Conoentratestock buildup

Commerclal production HUANGMALJNGMINE & FECaLIPEODEV.T OMPONENT

ProcesseWctflon Prsocenreulnesr ln _ monItI Pobient mninogof equipmmaintenent

Detolled traeinng

SNepreparateon/ctr plans

off-site constructions _

Ralhsay sldlng

Dawuammonio plant _T- I__ I III

EaulprnaentInstallatlon T__I

Cormissloning

P eprductibn ovebuwden remcvol _

Raw ore stock bufldup l lll_1 Concentrate stock buildup r L Commewclolproduction lECHNICALASS9STANCE COMPONENTWll l

Procss sMectlon |e

Pro,Sc executlon planning & monNorlng 46 m

Moblis minlng eaulpment rnalntenance

OvEaas trailnlng IIIt_

Phoshae &estorplannln _g.., t t _ ANNEX 7.3 - 73 - Page 2 of 3 CHINA

HUBEI PHOSPHATEPROJECT

Key Milestonesfor ProjectImplementation

Milestone TargetDate

A. DayukouMine and FertilizerDevelopment Component

Major ProcessRelated Activities: TSP production tests Sep. 1989 Processselection and contractawards for sulfuricacid, phosphoric acid and TSP plants Mar. 1990 Processselection and contractaward for aluminumfluoride plant Jun. 1990 Commencementof local engineering Jan. 1990 Completionof local engineering Mar. 1992 Commencementof foreignengineering Apr. 1990 Completionof foreignengineering Sep. 1991 Commencementof internationalprocurement Apr. 1990 Completionof internationalprocurement Sep. 1992

Site Activitiest Commencementof site preparation Jan. 1989 Completionof civilwork Sep. 1992 Commencementof equipmentinstallation Apr. 1992 Mechanicalcompletion Sep. 1993 Completionof commissioning Mar. 1994 Commencementof commercialproduction Apr. 1994

B. HuangmailingMine and FertilizerDevelopment Component

Major ProcessRelated Activities: Processselection and contractawards for sulfuricacid, phosphuricacid and MAP plants Feb. 1990 Commencementof local engineering Jan. 1990 Completionof localengineering Feb. 1992 Commencementof foreignengineering Mar. 1990 Completionof foreignengineering Sep. 1991 Commencementof internationalprocurement Apr. 1990 Completionof internationalprocurement Sep. 1992

Site Activities: Commencementof site preparatior. Jan. 1990 Completionof civilwork Sep. 1992 Commencementof equipmentinstallation Apr. 1992 Mechanicalcompletion Sep. 1993 Completionof commissioning Mar. 1994 Commencementof commercialproduction Apr. 1994 ANNEX7.3 Page 3 of 3

- 74 -

Off-site construction: Railway siding commencement Sep. 1992 completion Sep. 1993 Dawu ammonia plant rehabiliation commencement iApr.1991 completion Mar. 1993

C. Technical Assistance Component

Consultant Services for Project Implementation: Commencement Nov. 1989 Completion Mar. 1994

Consultant Services for Mine Engineering Selection and Maintenances Commencement Jul. 1990 Completion Mar. 1993

Hazard and Operability (HAZOP) Seminar Apr. 1990

China Department March 1989 CHINA HUBEI PHOSPHATE:PROJECT

Environmental Protection and Standards

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

Open-pit mines Overburden dumps Concentrated in few Must be safe, appropri- Ireas next to mine, no ate location to be interference with other selected installations Beneficiation plants Tailings Pumped into safe ponds Same as overburden dumps on wasteland away from mine and other installations Waste water (from Wengfu Treated to Chinese stan- Solids-100 mg/l 100 mg/l filter presses) dards for petroleum and BOD-60 mg/l chemical industries COD-200 mg/il

Sulfuric acid plants Off-gas Wet scrubbing to maximum 500 ppm S02 220 ppm SO2 - 450 ppm S02, typically v 300 ppm Ammonia plant Waste water Treated to: -0.5 mg/l cyanogen -0.5 mg/l 0.5 mgIl -0.5 mg/l sulfide -1.0 mg/l 0.5 mg/l -30 mg71 solids -500 mg/l 50 mg/i Phosphate acid plants Off-gas Wet scrgbbing to 50 mg/ml3 F 10 mg/m3 10 mg/rn3 P Waste water Pumped into beneficia- n.a. n.a. tion tailings pond after neutralization MAP and TSP plants Off-gas Wet scrubbing to: 10 mg/rmn F 50 mg/o3 10 mg/m3 80 mg/m3 NH3 72 mgJm3 100 mg/in particulate 170 mg/m3 100 mg/rn3

China Department March 1989 1I - 76 -

gift l4mEl PQFHATEKPROJECr

Capital Cot Eatimatee

bawukou iWuanmiingICI lb Total Local Foreign total tocl Forsign Total Loal Foreign Yotal Locl IForeign Total

A. In Mi1lion

Lieane team 0.0 8.8 3.8 0.0 2.8 2.8 - - - 0.0 6.1 6.1 Engineering 5.7 S.0 10.7 4.1 8.1 T.2 - - - 0.8 6.1 17.9 Equipment A aterial- 61.8 82.9 104.7 26.7 24.5 61.2 - - - 78.8 77.4 168.9 Spare parts 8.0 8.8 8.0 1.6 1.7 8.8 - - - 4.8 8.8 10.1 FreiGht A insurance 8.6 4.0 9.6 1.8 1.8 8.8 - - * 7.1 5.e 12.9 Civil& erection 70.2 0.0 70.2 88.7 0.0 88.7 - - - 103.0 0.0 10.0 Project manageent 28.4 8 0 2S.4 7.8 1.2 8.7 - - - 80.9 4.2 85.1 Training 0.5 0.9 1.4 0.4 0.5 0.9 - - - 0.9 1.4 2.8 Technica! aessetanca 0.0 0.0 0.0 0.0 0.0 0.0 - 0.4 0.4 0.0 0.4 0.4

Bass Cost fJanuara 1.i3u1 160.2 114 fI. i li ILL llO.S 24 24 2; 108.0 S44.

Phyaical contingencies 16.0 r.8 23.4 7.8 8.8 11.0 - - - 28.8 10.9 54.5 Price contingencies 25.5 18.6 89.0 11.9 8.1 18.0 - - 887.4 19.8 87.0

Insal l Coot 201. 20. 2J 9. M44. Ii G4Q 04 2e6.7 llW4 IILL

Incemeental orting capital 21.0 0.0 21.6 5.4 0.0 8.4 - - - 27.2 0.0 27.2 Intareat during con- otruction k 16.6 15.2 01.6 7.9 7.7 15.6 - - - 24.4 22.9 47.8 Total i8nLninn R"cuired Le 2aAs 12t4 A&U4 IQ EM 7 Q & eiQ il nuSh Am"

8. It Y MilioUn

License to" 0.0 14.1 14.1 0.0 8.6 8.8 - - - 0.0 22.7 22.7 Engineerlng 21.8 18.6 89.9 15.4 11.6 27.0 - - - 86.7 80.2 68.9 Equipment A eaterials 192.7 198.8 889.5 99.2 91.0 190.2 - - - 291.9 287.8 579.7 Spare parts 11.2 14.1 25.8 5.5 6.4 11.9 - - - 16.7 20.8 87.2 Freight A insurance 2.0 14.0 8.8 5.7 6.8 12.8 - - - 28.7 21.6 48.3 Civil& A erection 261.0 0.0 281.0 12S.8 0.0 128.8 - - - S88.8 0.0 888.8 Project aneagment 88.0 11.0 97.9 28.1 4.6 82.7 - _ _ 116.0 15.6 180.6 Training 2.0 8.4 8.4 1.5 1.8 8.8 - - - 8.8 8.2 8.7 Technical aesietance 0.0 0.0 0.0 0.0 0.0 0.0 - 1.8 1.8 0.0 1.6 1.5

Bass Coot (January 19121 A191.1 2I22 110.1 921.! 11 *11.1 LI L& 821.i 411. 1 21.9

Physical contingancle 89.6 27.8 68.9 2Z.1 18.1 41.2 - - - 87.7 40.8 128.0 Price continenles 289.8 198.4 884.7 111.7 87.0 168.7 - - - 881.0 162.4 588.4

hM;,. ".4 1 IILI 21 L1 021 2. J L214 AA LI L.1 82. LU.UL

Incremntal morking capital 107.2 0.0 107.2 28.8 0.0 28.8 - - - 1s8.7 0.0 138.7 Interest during construction L/ 78.4 89.8 14.7 88.1 88.4 71.8 - - - 111.5 104.7 216.2

Total Finencina ReiI ed La LI7 494.1 11 24 2A 21.1 24 LI Li LII.! Z12.1 L2-2.2

Comitaent fe= ara Included. &i To cover tho technical asaistance comonent. S Excluo %11100.000 to cor the training coat an PAM analysis to be provided under tho technical asaistanco compon.

Chino Dseprtoent March 1089 ANNEX 8.2

- 77 -

CHINA

HUBEI PHOSPHATE PROJECT

Estimated Disbursement Schedule for Bank Loan

Disbursement Semester Annual Cumulative Annual Cumulative Year (FY) ending --- (US$ million)------(2 of total) ----

1990 Dec 31, 1989 1.1 1.1 0.8 0.8

Jun 30, 1990 3.0 4.1 2.2 3.0

1991 Dec 31, 1990 4.1 8.2 3.0 6.0

Jun 30, 1991 19.2 27.4 14.0 20.0

1992 Dec 31, 1991 21.9 49.3 16.0 36.0

Jun 30, 1992 26.1 75.4 19.0 55.0

1993 Dec 31, 1992 21.9 97.3 16.0 71.0

Jun 30, 1993 16.4 113.7 12.0 83.0

1994 Dec 31, 1993 15.1 128.8 11.0 94.0

Jun 30, 1994 5.5 134.3 4.0 98.0

1995 Dec 31, 1994 2.7 137.0 2.0 100.0

China Department March 1989 ANNEX9.1 Page 1 of 2 - 78 -

CHINA

HUBEI PHOSPHATE PROJECT

Assumptions Underlying the Financial Analysis

A. General

1. The financial projectionswere carried out in current yuan using projected domestic inflation rates for local inputs and outputs and international inflation rates for imported inputs as followss annual domestic inflation rates--15.0 for 1989, 10.02 for 1990, and 8.0% thereafter;and annual international inflation rates--5.3% for 1989/90, and 4.1% thereafter. The key assumptions for financial projectionswere based on the actual annual performance of companies under Chinese regulations. To provide an overall view of the companies' financial performance in accordance with conventionalaccount- ing concepts based on internationalaccounting standards, the following adjustments were made to the Chinese accounting systems (a) the two sets of financial statements--productionoperations and capital constructionwere consolidated; (b) the accounts in the income statements and balance sheets were reclassifiedas necessary in accordancewith conventionalconcepts; and (c) the sources and applicationsof funds statements that do aot 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 assumed capacity utilization and production levels with and without the Project are given in Table 1 of this Annex.

B. Income Statements

2. Sales Revenue. Sales prices are assumed to be maintained at levels indicated by MCI and SPB as the expected sales prices for project output as the following: Y 750/ton for TSP and Y 900/ton for MAP. Net sales revenue were calculated after deducting the product tax. During Project implementation, Project companies will not pay the product taxes under special arrangements. The rates of the product tax are as follows: 3% for TSP and MAP, and 102 for aluminum fluoride.

3. Variable Production Costs. Annual consumption of inputs was obtained from the material balance and estimated production levels with and without the Project. Materials balances for each company with and without the Project are given in Project File Ref. No. 2.

4. Depreciation. Fixed assets were depreciated using the straight-line method at rates agreed on between the companies and their respective supervisory authorities as followss (a) Dayukou--over 15 years; and (b) Huangmailing --over 12 years. In addition, a mining maintevence fee of Y 7/t of ore charged by all the companies was included.

5. Maintenance Costs. In the Chinese accounting system, maintenance costs are divided into two categories--annualoverhaul and other. Provisions for annual overhaul are provided as a percentage of the original acquisition ANNEX 9.1 - 79 - Page 2 of 2 value of the fixed assetsand are managedseparately within the specialfund account. Other maintenancecosts were coveredas operatingexpenses. The rate of provisionfor annualoverhaul for the companiesis 62.

6. InterestExpenses. Intereston foreignexchange-denominated loans were convertedinto local currencyusing projectedforeign exchange rates, assumedto be adjustedto preservethe relativecurrency values between the two currencies.

7. Taxes. Taxableincome is derivedfrom net profitsafter deducting the amortizationof long-termloans, and is taxed at a uniformrate of 55?. The companieswill not pay incomeand adjustmenttaxes on profitsduring Proj- ect implementationand the repaymentperiod of the Bank loan.

C. BalanceSheets

8. Fixed Assets. Fixed assetsare shown at their historicalcosts.

9. Equity. The followingfour items are consideredas "equity,'given their equity "nature': (a) state fixed funds;(b) statecirculating funds; *c) enterprisefixed funds allocatedfrom internallygenerated funds; and (d) net specialfunds (specialfund assetsminus specialloans) retained by enterprises.

D. Funds Flow Statements

10. DepreciationFund. The currentGovernment policy allows companies to retain1002 of the fund.

11. ExDendituresfrom SpecialFunds. Provisionsfor annualoverhaul were used to cover annualoverhaul expenses. Annually,15? of the retaineddepre- ciationfund and profitsare paid to the EnergyConservation Fund. The companies will be exemptfrom this contributionduring Project implementation. A portionof internallygenerated funds (in the specialfund account)is used for: (a) productiontechnology development; (b) improvementof workers'liv- ing condition;(c) cash bonuses;and (d) new producttest fund. The balance is accumulatedwithin the companyas reservefunds.

China Department March 1989 ANNEX 9.1

- 80 - Attachment 1

CHINA

HUBEI PHOSPHATE PROJECT

Production Levels and Capacity Utilization With and Without Project

Davukou Huanamailing TSP Aluminum fluoride HUP ABC Without with Without With Without With Vithout With project project project project project project project project

Production ('000 tpy)

1994 - 339 - 7 - 109 51

1995 - 424 - 9 - 137 51

1996 - 509 - 11 - 164 51

1997 - 509 - 11 - 164 51

2006 - 509 - 11 - 164 51

Capacity Uti- lization (Z)

1994 - 60 - 60 - 60 90

1995 - 75 - 75 - 75 90

1996 - 90 - 90 - 90 90

1997 - 90 - 90 - 90 90

2006 - 90 - 90 - 90 90

China Department March 1989 Pnehate D0oie."-lt Pmlrcl

- Incre Stat.nt

(in cUrrant M millions

______^,cc., Ipl _ ; ______------Projected ------1985 1928 198? 19E8 198 1990 1991 192 199S 1994 1995 lC96 1997 1998 1999 2000 20OI

Cro Sal_. R -eaue 27.3 28.0 21.5 62.0 83.1 97.7 99.2 12S.2 133.0 592.4 747.6 939.Z 1.04.6 1.095.8 1.1t83.5 1.278.1 1,3MO.4 Lem: Production To. 1.4 1.4 1.1 3.1 4.0 5.9 6.6 8.9 10.4 7.0 6.8 7.4 22.3 24.1 42.0 46.2 49.9 Variablo Cost 4.9 5.0 6.0 14.6 25.0 26.3 28.9 81.8 84.0 177.6 22.5 279.8 302.2 82.4 36.2.5 380.7 411.1 FiVRe Coa. 0.9 9.2 9.2 26.8 41.2 43.7 44.4 48.0 50.9 233.7 238.9 280. 263.0 276.6 291.2 307.0 324.1 Adainistrative Expense 2.4 2.5 2.5 7.3 9.4 9.9 10.8 11.8 12.S 32.7 35.3 38.2 41.2 44.6 40.1 51.9 86.1

Add: Othr ineome 2_Z O S i 4 i La . LA L. iLl ILA AJu AmJ t4.z 15. 1L7 Ai E20

Chmrat'in Im"sJ t2.6 UA. Li B m 6. 1 B 172 35.eOAlSS.O 254.7 S77.2 48006 440.t 466.0 S10.0 559.

Lte.: Mon-operating expmam 1.0 1.6 1.2 2.8 3.6 4.0 4.0 4.8 6.2 15.3 18.4 21.1 22.1 23.1 24.1 25.1 26.1 Financial Ca:rges 7 07 06 1.i Lz L L L LZ ZLI ZLS71. 67.0 4.1i 60. 573 OA 49. hIroosa D2atoe Tas 114 lO. L2 9.7 1.5 91S. 10 J VLA MA2 167.8 2f91 314.3 SaM. AS6 4S2: 48. I 03 Lm: LoanAxortiZatiw 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 86.2 68.2 90.6 93.2 96.1 9.5 103.2 107.4 Taxs A other ,waiotence 74 7.4 L2 LA 0. Qf i 9Q L° ° °i ° ° ° ° °i 0.0° °i R~Mrv*A Profite la &2 La 4.4 2L1. L1S9 Ll 32 VA 8 £ZLQ1 73.1 1 21.1 ZA5. 2S6.1 M.. o 76

Not Profit / Groo_ Sales () 38.1is 36.63 10.21 15.6# 1.95 14.33 11.13 20.53 20.93 10.85 22.45 30.83 31.03 32.ss 32.s6 3S.83i 35.5 0perstina Inco_ / Average Assets in Service 6.2S5) 4.23 1.13 3.53 1.73 1.53 3.91 2.23 8.83 14.011 14.SS 22.23 24.73 28.63 31.93 37.13 43.13

0. g41M

POPHTE DEeLOtO FRO=

Prel; ---- Procted------ActAuI ---- 1998 1999 2000 2001 1988 1Q86 1987 1988 te 1990 1991 1992 1998 1994 199s 1996 1997

285.1 829.0 876.3 taV.rnsdFd"Its 3.0 2.9 1.0 4.4 1.5 13.9 11.0 25.2 27.8 (22.0) 79.0 198.5 221.1 259.9 11.9 12.8 12.6 92.5 98.6 93.6 98.8 98.6 98.6 98.6 93.6 Depreceation & Amortization 13.1 7.7 4.8 10.9 l8.0 14.1 40.4 0.7 0.5 1.8 1.7 1.9 2.3 2.5 2.7 78.6 71.0 67.0 64.1 60.9 57.8 58.5 Int~er.t Ezp.iaee 0.7 99.5 103.2 107.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.2 68.2 90.6 98.2 96.1 Repaynmt eol Lxx-t.'e Loan (2.6) (17.1) (88.9) (86.4) (41.4) (44.8) (49.9) (86.0) Other odjuet_ent. (S.8) (3.1) 5.8 5.6 0.7 0.4 (0.8) (0.4) o.e AL94j a4.8 4j1 4 12.8MJ -6e Internal CephCaneetCion 12.1 17.0VA z_ A a1 ._

Outmids, Sourcqreex de frog 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 "Wrl Arf I ; 0.0 0.0 0.0 0.0 2.8 17.8 125.1 190.4 88.7 38.0 179.8 221.2 449. 1 158. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oomseb;c long-temr loon 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0 2 (2.4) 10.0 5.9 2.7 8.2 2.5 2.5 29.7 (28.7) 0.0 0.0 0.0 Dosxeic short-term loan 0 0,0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 Cudgaot contribution 80.0 40.9 22.0 22.0 0.0 0.0 0.0 0.0 0 QaIS ° . -oo 2° Toh^l Outeide Surcee fILQg 4 x 44.n 7 212. aso 5 Je ZoL. 245-ta2 2s 41S a 48As 469.1 49Aa $29.3 s706 1 T*mll Sorcen of Funds tS 49 3 ALI A Z fi.L 2JJ A N.U 2es 2es 'g,_d, A-R~~~~~~~~~~Lt=-ef ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~000.0 0.0 0.0 0.0 9 Assets 44.5 25.1 25.1 a8.8 197.1 847.3 6a9.5 242.6 0.0 0.0 0.0 0.0 . . ent seao em.s 0.4 0.4 0.5 0.1 0.0 0.1 0.1 0.2 0.8 0.4 0.4 0.5 0.5 0.6 0.7 0.7 0.4 In.etwmnt in long term Bonds 55.2 88.2 90.6 93.2 9d.1 99.5 103.2 107.4 1 Principal repayment of long term loen 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.8 1.7 1.9 2.8 2.5 2.7 75.8 71.0 87.0 64.1 60.9 57.3 53.5 49.4 Intoreot Expenses 0.7 0.7 0.5 1.8 1.9 2.0 (O.S) (1.5) 0.4 0.2 0.0 0.2 0.4 3.8 o.s 28.7 17.4 e.8 1.5 1.6 Increae in Working Capital 48.8 48.4 56.2 68.7 185.6 38.4 415 44". Special Fund Expenditure 4.0 4.1 6.0 8.2 15.0 18.7 17.4 19.7 s6.0 2 26 238 a AMU 294-J 197.4 200. 201 T7vtl Anvlicmtiona of Funds 8. 47-8 2LI Ait ALA 2P-1 ARA MU MU 0 1e.IL 21 4 1L4iI 2ss 8 a7 s Xncrwo" in C-oh 0.0 LA L.4J 1 1_ LA4 9 2_ iL LA 2

1.4 2.0 2.0 2.8 8.0 8.1 5.4 3.4 -If Samice C".reg.. (tim) 9.3 11.7 24.2 17.1 9.8 18.7 11.0 15.2 16.5

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~m"

,0"

0*LOQ (in currant yun *ila iore)

--- Atual ------Prelim - 1ess P 198I 1987 1908 1w8 1990 1991 1992 1983 1994 1a99 199 1997 1998 1999 2000 2001

0.1 1.6 1.2 20.8 InvnCri_ a 2s.9 42.8 8O.4 66.5 78.1 96.9 157.5 340.0 582.8 6.6 6.3 5.3 13.0 18.7 21.0 726.8 1,020.6 15.49. 1,715.8 Acccunto Rocaivabla 13.9 23.6 20.9o 1.8 97.0 218.6 143.0 184.5 166.8 180.2 8.3 7.3 10.8 11.6 12.6 14.1 15.6 16.9 194.6 210.1 18.8 25.1 82.6 35.2 88.0 41.0 44.3 47.8 Tto,tl C,re nt Aesta 2J IL2 l 4S IAU ZLA MA UL1 i2LA =LA. L2 ANA 741.9ss. f1ti 0 LZ1.241J a 2 1. 9.- Fs t wx_erAewt& 260.0 8.8 375.5 889.7 401.6 387.7 37S.8 363.2 Uovk in progreos 83.8 44.5 SE0.6 1.723.3 1,629.7 1,886.1 1,442.5 1.348.9 1,255.4 1.161.8 1.068.2 ta term-ands 28.1 28.1 88.8 238.9 863.1 1.222 1,485.2 0.0 0.3 0. 4 0.5 0.7 1.0 1.3 1 a0. 00 00 00 00 00 00 4 2 2 2 a 8.8 39 4. 5. 5. 5 8.40 Totl Fixetd Aa.ta 3SL.8 aRM -40o 416.S .S 624. 0602s LZ7J IS le. 1872o IJJ 1.5L0 1Mo447.2 LS54. 12WJ8 1.167.7 1.074.6 Ot'as ameste 12.9 17.0 23.0 31.2 48.2 59.9 77.3 97.0 183.0 176.6 rToI Aevt aZL 41sXs &U? 4903 225.0 281.2 844.9 480.5 581.9 560.4 60s.2 W4.a ?60. I? 1L7956 L?.72. 2 115, 2 .lS9.1 2,.E B 2.5a4.0 Lieiliti~ ~ ~ ~ ~ 15 dAL 8l I 2.766-1 3S01B 3,31s 3aW Z 1J fI 2ZJLLDL5ILMOLLDLU1Lt1 DIIL Accownt. Payable 7.2 2.6 2.6 tth r Puyables 8.1 8.7 4.0 4.5 8.1 5.6 8.6 7.5 0.0 0.0 0.0 0.0 0.0 9.7 10.6 11.4 12.3 18.8 14.8 Sho,t term loan 0.0 0.0 0.0 0.0 8.4 8.6 8.9 4.3 4.6 8.7 8.9 6.8 16.8 22.4 23.1 2.8 50.86 8.0 5.4 8.8 Currant portion of long-tarm loan- 0.0 0.0 8-.8 20.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 86.2 88.2 0.0 80 90.6 93.2 96.1 99.5 108.2 107.4 112.1 Li Total Currant Lsbift;e. LAS 9115 .I 2L. 2. a au Ig. 12s =L 10AMJ9 auL mi Z6 S IM2 *.Ld lor 0.0 n 0.0 0.0 0.0 2.0 20.6 PCS A Covernent loans 147.7 84S.0 420.7 427.5 422.9 415.7 405.3 891.8 878.2 0.0 0.0 0.0 0.0 86.0 215.8 436.8 8ss.6 380.4 822.1 970.2 900.9 813a.6 762.3 698.0 628.7 554.4 488.1 41s.8 Totsl Loan Torn Lia;lA I ;ti ofl o2 o oL2 AM 1.s230.f 139 132S.4 2 1. 17sB Lo.mJ *1014.0 922ZL 8ass 7SIo g >rpriae Fined FNo 851.2 392.1 414.1 414.1 414.1 414.1 Special Fund Resr.ea 414.1 414.1 414.1 500.8 568.5 679.1 772.8 6.5 968.0 10.2 10.2 14.6 86.6 64.0 81.7 94.8 115.0 1,071.2 1 178.5 155.1 160.4 214.2 572.6 552.5 757.2 ,005.5 1,283. 7 T*tAl EMUtv 1,606.0 A 470.7 478. 49s.a Ai.6 S2-1 S47 2 m. 2W 1-051- 1,3248 13 1.M. LIL4.9 2.78M3 Total Li&bi I iti*s A foultv mm7 9 40 497. 490.£t 1. Z7S i I75602L19J_ 22.61 L38 2.fl 2L7La L J6.L3 S brrwnC Ratio (tee.) 1.3 1.4 1.5 2.2 2.2 2.6 2.7 8.1 Long-tar. Debt/Eqpity 100:0 1.0 1.7 8.0 4.8 6.7 8.1 10.8 12.6 14.9 100:0 100:0 100O 0:72 3:3?7 S4:46 72:2g 74:26 69:31 old 6S:87 57:43 53.47 49:51 48:57 39:61 84:66 t

OQ 1-h

LA) Phlo.hat. D0a.lloaent Proiect

HPCC - Inecm Stat&a..t (in current yuan milliorn)

------_ ---- Actual ----- Prals ------Proctd------1994 1995 1996 1997 1998 1999 200 2001 1985 1986 1987 1986 1989 1990 1991 1992 1993

11.8 12.8 165.9 224.0 290.2 3135.5 338.5 365.6 394.9 426.5 1.5 8.8 4.0 4.7 14.5 1.5.2 10.8 11.0 11.8 12.8 Groom Sales Revnume 0.4 0.5 0.3 0.4 0.4 5.0 6.7 0.7 9.4 10.2 Lose: Production 'ao 0.1 0.1 0.1 0.1 89.0 97.0 104.8 113.2 122.2 122.0 1.6 1.9 7.8 8.2 8.6 7.2 7.8 51.3 69.3 Variable Coat 0.6 1.5 5.0 47.4 49.7 82.1 53.6 55.2 67.0 58.9 61.0 0.8 1.9 2.0 2.3 3.8 3.9 2.7 2.8 8.9 4.2 Fixed Coat. 0.3 0.2 0.3 0.3 2.4 2.6 2.8 8.1 8.3 3.6 Administrative Expenn_ 0.0 0.1 0.1 0.1 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Add: Other incone 0.2 0.2 0.0 0.0 0.0 1 1.2 LA iLZ A. 22L& 150.4 1I.n 180.9 19l4 2lS Oxrntino Inco_. LA 0.4 0. ea . 2la 22 0.0 0.3 0.4 0.5 0.6 0.6 0.7 0.7 0.8 0.0 0.1 0.0 0.0 0.1 0.1 0.0 0.0 24.7 22.8 La..: Ncn-corating expenses 0.0 0.0 0.0 0.0 34.1 32.9 31.1 29.7 28.2 26.6 Financial OChrges 0.0 0.0 0.0 0.0 0.0 94 L LAs 21J Ik 10 .1 120.1 3La 13Z.7 172.8 102 Not Incown SPr, Tax La 0.4 aa 9A , L.i 0.0 0.0 40.6 41.5 42.5 43.7 4t.1 48.6 48.3 50.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 La..: TLoan Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 O.D eaxe and othe,. remittences 0.0 0.0 0.0 0.0 0.0 124.3 142.8 2.8 0.9 1.1 1.3 -1S.3 20.8 62.6 76.4 91.2 107.1 Rr-nad ProtiO 0.4 0.2 0.3 2.2 CO Ratios: 43.7% 46.26 15.31 8.65 9.41 t0.11 L5.26 27.63 36.26 38.35 40.25 42.01 Hat Profit / Croec Sales (1) 16.71 9.91 6.61 5.6S 14.95 32.1% 37.25 43.0O Opearting Inca.s / Average 15.11 7.35 10.71 13.91 17.11 14.11 21.01 24.11 27.81 Acaate in Swicae (1) 1.81 2.41 1.31 1.6% 15.261

0* w ICC - Fund. Flow State_nt (in current umna IIliem)

Actual - Prelim --- - Projected 198S 1986 197 1988 1989 1990 1991 1992 1998 1994 1998 1996 1997 1998 1999 2000 2001

Hetemnedt rofat Onere. 0.S 0.4 0.2 0.8 2.2 2.8 0.9 1.1 1.8 (13.8) 20.8 62.6 76.4 91.2 107.1 124.S ODorecietion A ADortiztion 0.2 0.2 1.1 1.1 1.1 1.1 142.8 Interest Expeane 1.1 1.1 1.1 81.2 S2.2 83.2 83.2 53.2 8S.2 88.2 88.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 34.1 82.9 S1.1 RhpsyV_nt of Longtetrm Loone 0.0 0.0 29.7 2S.2 28.8 24.7 22.8 0.0 0.0 0.0 0.0 0.0 0.0 C.0 40.5 41.5 42.5 43.7 45.1 UTer odjwat_nmto 0.0 0.0 0.0 0.0 0.0 46.8 48.S 50.2 0.0 0.1 0.1 0.1 0.1 (0.6) (1.7) (2.0) (2.0) (2.1) (2.1) (2.2) Internal Cwh Conermtian 0.4 _i LA La la LE i L L2 9 126. I6.7Z 189 1953S Zi2 2M3 241.7

S§res g_Fund fra Outsid- gorld lencanli 0.0 0.0 0.0 0.0 1.7 12.0 67.0 97.9 22.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Domtic long-tere Ion 0.0 0.0 0.0 0.0 13.8 85.8 16.9 192.8 Oe_tic ohort-ter loan 78.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.5 (12.5) 0.0 0.0 DBdget contribution 0.8 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Talt Outide Sowr; L. 0 A 0. L. ALA1S4 . S ismf AN E2 =l 0.0& L_ PA Q_ L. 0 . Total Snroce. of Rnd La L. la La IL lOD A2U =A EJ IU. 1U&2 W7.7lZZ eZiLl 5. 22a. 24.7 . i -ixed A"oto 0.7 0.9 0.0 (0.0) 15.4 97.8 193.9 290.8 95.8 0.0 0.0 Invetemtn in long tere Bond 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00 00 0 Prineipal rwpny_nt of long trm Iowna 0.0 0.0 0 .0 0. .0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0 40.8 41.5 42.5 48.7 45.1 46.8 48.8 60.2 Intereat Expens 0.0 0.0 0.0 0.0 0.0 0.0 0.0 U Inere.. in Working Capitel 0.0 0.0 84.1 82.9 31.1 29.7 28.2 28.5 24.7 22.8 0.5 0.8 1.4 0.6 0.6 0.2 (4.2) 0.0 0.0 12.5 6.5 7.1 0.6 Other wpphication 0.2 (0.0) 0.0 0.0 0.6 0.7 0.7 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Avnlicntiatm of Funds LA 0 14A 2i M.2 IL 1A 290.S IU- 23 U. ZLI ZLI ZLZ 7Z7 ZLZ Ioverernin Cneh Q -° 5Q.Q2L LQ LI 22 LA L4 LI gi aLl MA ILl 1l07 22S7 lIRA 31 17i9

DObt Service Coverao (time) 1.2 1.7 2.3 2.5 2.7 2.9 8.1 8.4

tDm

i0 0* CHIN PeOPTE DEVMJeLOdT PROJECT

-Actual-~~~~~~~~i curr-nt yunX eo-

19t5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2C00 2001

Current Ascotc. Cash 0.2 0.2 0.2 1.0 3.7 7.0 13.4 15.8 18.1 34.1 67.4 154.4 261.4 383.1 520.7 675.3 848.3 Inventories 3.3 2.4 2.6 3.0 5.7 6.0 2.9 3.1 3.4 25.3 32.6 40.9 44.1 47.7 51.5 55.6 60.0 Accounts Receivablo 0.6 1.1 1.1 1.3 1.8 1.9 0.4 0.5 0.5 6.8 9.2 11.9 12.9 13.9 15.0 16.2 17.5 Total Current aets A A AA3. 53 1 14.9 16.7 19.2 207.2 318.4 4.7 587.2 747.1 92!i9 Fixeud AM Not Fixed AowS 15.5 16.9 16.0 14.8 13.7 12.5 11.4 10.3 9.1 670.8 638.6 605.4 572.3 539.1 505.9 472.7 439.6 Work in Progress 0.9 0.2 0.0 0.0 15.4 112.7 306.5 597.1 692.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long torn 8onda 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TotaI F;xod Aaseto 18.44 17.2 16.0 14.8 i 125.2 317.9 607.3 702.0 f70.8 656 WS.i4 57. 3 539L 05.0 472.7 439.6 Other Am..ts 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total O 21.3 20S 198 a20.2 40.3 1401 334.6 626.6 724.0 737.1 747.8 M. 6C90.7 9as.s 101 1 -219 X.365.4

LCrirbitioo AEauiti Account.. Payable 0.0 0.0 0.0 0.0 0.2 0.2 0.3 0.3 0.3 2.1 2.8 3.7 4.0 4.3 4.7 5.0 5.4 Other Payableo 1.6 0.5 0.5 0.6 2.9 3.1 2.7 2.9 3.1 3.4 3.6 3.9 4.3 4.6 5.0 5.4 5.6 Short teorm loan 1.4 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current portion of long-torm loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40.5 41.5 42.5 43.7 45.1 46.6 48.3 50.2 52.3 Total Current Liabilitie 3.0 0 .6 3.2 44.0 59.4 49.0 51.3 53- S 5. 57.9 60.6 63.6

Lnt.rawLlibAilitio7 Iilerld Tank;om.0.0 0.0 0.0 0.0 1.7 13.7 81.3 183.0 204.6 203.9 202.1 199.1 194.8 188.7 180.8 170.8 1S8 3 eC8a Goat. loan, 0.0 0.0 0.0 0.0 13.8 99.1 226.0 418.6 459.2 428.4 393.6 360.8 328.0 295.2 282.4 229.6 196.8 Total Lonc tart Limbiliti . 00 15.4 1t2.7 307.3 601.6 663.8 630.3 59b7 559.9 522.8 483.9 443. 400.4 355.

N8ntrprioo Fixed Funds 15.7 16.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40.5 82.0 124.5 168.2 213.3 259.8 308.2 3S8.3 Sp.cial Fund Reeervoo 2.7 2.2 19.3 19.8 21.8 24.1 24.4 21.8 16.3 6.9 21.1 76.9 146.5 231.1 332.1 450.8 588.5 TOtDI Ea, it 18.4 19.1 L9_ 1.I iL 241 24.4 6 47.4 103.1 201.4 314.7 444.4 592. 75.9 946.8

Total Liebilitie A Eouita 21.3 20.1S 9. 20.2 40.3 140.1 334.6 626.6 724. 737.1 747.8 812.7 890.7 983.8 1.09S 1 1.219.9 1 35.4 Ration:fD3 C-urrnt Ratio (tiamo? 1.4 2.2 8.0 9.4 3.6 4.5 5.7 6.0 0.5 1.1 2.2 4.0 6.0 8.0 10.1 12.3 14.6 Long-torm Debt / Equity 0:100 0:100 0:100 0:100 38:62 80:20 92:1S 96:4 92:18 86:14 80:20 69:31 59:41 49:51 41:59 33:67 26:74 W O0 CHINA

HEtEI PUOSPH ATE PROJECT

Incremental Cost and Benefit StLieane for FRE Calculations

(millions of 1989 yuan)

------______--- - - ___------DAYUKOU HUAN(MQ.ILING ------CAPITAL WORKING PRODUCTION SALES NET CASH CAPITAL WORKING PRODUCTION SALES NET CASH COSTS CAPITAL COSTS REVENUE FLOW COSTS CAPITAL COSTS REVENUE FLOW ------…______------______----_____-_____------______1989 30.6 - - - (30.6) 11.9 - - - (11.9) 199C 156.3 - - - t156.3) 77.3 - - - (77.3) 1991 245.7 - - - (2A5.7) 138.0 - - - (138.0) 1992 410.9 - - - (410.9) 185.3 - - _ (185.3) 1993 112.5 - - - (112.5) 40.' - - - (40.7) 1994 - 63.5 152.9 268.2 51.8 - 15.7 35.1 90.1 39.3 1995 - 9.5 173.0 335.3 152.8 - 3.6 42.7 114.7 68.4 1996 - 9.5 193.1 402.4 199.8 - 3.3 50.$ 139.3 ?5.3 1997 - - 193.1 602.4 209.3 - - 50.4 139.3 88.9 1998 - - 193.1 402.4 209.3 - - 50.4 139.3 se.9 i999 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2000 - - 193r1 402.4 209.3 - - 5O.^ 132.3 88.9 co 2001 - - 153.1 402.4 209.3 - - 50.6 139.3 68.9 1 2002 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2003 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2004 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2005 - - 193.1 402.4 209.3 - - 50.b 139.3 88.9 2006 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2007 - - 19S.1 402.4 209.3 - - 50.4 139.3 88.9 2008 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2009 - - 193.1 402.4 209.3 - - 50.4 139.3 88.9 2010 - - 193.1 402.4 209.3 - - 30.4 139.3 88.9 2011 - - 193.1 402.4 209.3 - . 50.4 139.3 88.9 2012 - - 193.1 402.4 209.3 - _ 50.4 139.3 88.9 2013 - (82.53 193.1 r02.4 201.8 (22.9) 50.4 139.3 111.8

Return on Investment-14.21 Return on Inveatment-13.1Z ______------…------_-______~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I. ANNEX10.1 - 88 - Page 1 of 3

CHINA

HUBEI PHOSPHATE PROJECT

Assumptions Underlying the Economic Analysis

A. General

1. The economic rates of return (ERRs) were calculated on an incremental basis for the three fertilizer plants. Prices were expressed in constant January 1989 US dollars. The economic life of phosphate mines was assumed to be 20 years based on the size of their proven exploitable phosphate reserves. The economic life of downstream fertilizer plants was also assumed to be 20 years. The assumptions for the production levels of the plants with and without the Project are presented in Table 1 of Annex 8.1. The following conversion factors, which were provided by Bank economic work, were applied to the financial prices of nontradeable goods and services to derive their economic prices:

Nontradeable items Conversion factor

Unskilled labor 0.6 Technical labor 2.0 Electricity 3.4 Local machinery 1.4 Construction 1.3 Rail transport 1.5 Other 0.7

B. Capital Cost

2. The economic capital cost of each project element expressed in January 1989 prices was obtained from the financial base capital cost after: (a) deducting the duties and taxes on equipment and other items; (b) deducting the costs of those spare parts that are to be included in the operating costs; and (c) applying conversion factors to nontradeablegoods and services for economic valuation.

C. Working Capital

3. Incremental economic working capital requirementsfor each project element were derived by comparing goods and services employed in production with and without the Project.

D. Economic Benefits

4. Economic benefits of the Project come mainly from two major sources: (a) phosphate fertilizer (MAP and TSP) production utilizing locally available phosphate rock, pyrites and ammonia; and (b) improved economic efficiency of production through the conversion of low economic-valuefertilizers (SSP and ABC) to high economic-valuefertilizers (MAP and TSP). The economic prices of AXI'NEX10.1 - 89 - Page 2 of 3 internationallytraded products were derivedfrom their latestprojected internationalprices, taking into accounitmarine freightfrom the originof exportto China ports,unloading and port handlingcharges, and inlandrail freightto plant sites. Marine freight,estimated from the lateststatistics, were assumedto changein linewith internationalenergy costs.

5. The projectionsof the economicprices for each productare given in Table 1 of this Annex. The kev assumptionswere:

(a) MonoammoniumPhosphate (MAP). SinceMAP is not activelytraded in the internationalmarket, its economicvalue was derivedfrom the economicvalue of DAP, TSP and urea, takinginto accounttheir relative nutrientcontents (MAP 122 N; 52? P205; DAP 18% N: 462 P205; TSP 46% P205; urea 462 N). (b) TripleSuperphosphate (TSP). The importrarity price of triple superphosphate(TSP) is derivedfrom the price of importedTSP from the US Gulf coast,plus freightand baggingcosts.

6. Savingsin transportationcosts are attributedmainly to the reductionof transportationvolume because of the highernutrient content of MAP and TSP. Potentialsavings in terms of transportationdistances were not consideredbecause nf difficultiesin measuringthem.

E. OperatingCosts

7. TradeableRaw Materials. The economiccost of exportableinputs was derivedby addingto the netbackprLces, from exportsat the productionsites, the inlandtransportation costs betweenthe productionand the plant sites. The netbackvalue of inputsat the productionsites was calculatedby deducting inlandfreight between the sites and exportingports from the FOB export prices. The economiccost of importableinputs was based on their projected internationa'Drices plus marine freightfrom the originof exportto ports in China,plus inlandi:reight to the plant sites. The economicvalues of the major tradeableinputs are given in Table 2 of this Annex. The key assumptions were:

(a) Coal. Coal is currentlyexported from China. The economiccost of the coal deliveredat the plant siteswas derivedfrom the netback from exportprices.

(b) Fuel Oil. The economicvalue if fuel oil was based on the netback pricesof fuel oil exportsto Singapore. The internationalprice of fuel oil was expectedto move in line with internationalcrude oil prices,as currentlyprojected by the Bank.

(c) DieselOil. Since China is an importerof dieseloil, the economic value of dieseloil was derivedfrom the importprice from Singapore plus transportationcosts to the plant sites after adjustingfor ocean lossesand insurance. ANNEX 10.1 - 90 - Page 3 of 3

8. Other Nontradeable Items. The economic value of nontradeable inputs was based on their long-term marginal production costs plus inland tranuporta- tion costs adjusted by specific conversion factors. The following assumptions were made for major nontradeable inputs:

(a) Pyr'tes. Pyrites are not actively traded in the internationalmarket. The pyrites used for the Project cannot be exported economic- ally because of their grade and unfavorable location.

(b) Utilities, Chemicals and Bagging Materials. The economic costs of other nontradeable items such as utilities and locally purchased chemicals were derived from their financial costs by applying specific conversion factors.

9. Fixed Costs. The economic coRts of various fixed cost items, including labor, general selling and administrativecosts, were based on financial costs adjusted by specific conversion factors. Maintenance costs were conservativelyassumed at over 8Z of the original acquisition costs throughout the life of the project.

China Department March 1989 CHINA

HUBEI PHOSPHATE PROJECT

Incremental Cost and Benefit StreinMe for ERR Calculations ------_------(1989 U.S.$ million)

DAYUKOU UANGMAILING

CAPITAL WORKING PRODUCTION SALES NET CASH CAPITAL WORKING PRODUCTION SALES NET CASH COSTS CAPITAL COSTS REVENUE FLOW COSTS CAPITAL COSTS REVENUE FLOW 1989 11.7 - - - (12.7) 4.5 - - - (4.5) 1990 59.7 - - - (59.7) 28.8 - - - (28.8) 19Si 84.9 - - - (84.9) '7.6 - - - (47.6) 1992 145.3 - - - (145.3) 63.9 - - - (63.9) 1993 37.2 - - - (37.2) 14.1 - - - (14.1) 1994 - 20.5 57.1 98.7 21.1 - 4.6 12.4 30.0 12.8 1995 - 2.6 63.9 126.2 59.8 - 1.1 15.2 38.9 22.7 1996 - 2.6 70.6 155.0 81.8 - 1.1 17.9 48.3 29.4 1997 - - 70.7 158.7 88.0 - - 17.9 49.0 1998 31.1 - - 70.7 162.4 91.7 - - 17.9 50.0 31.9 1999 - - 70.8 166.3 95.5 - - 17.9 50.6 32.7 2000 - - 70.8 170.3 99.5 - - 18.0 51.4 33.5 2001 - - 70.9 173.5 103.6 - - 18.0 52.0 34.1 2002 - - 70.9 177.6 106.7 - - 18.0 52.7 34.7 2003 - - 71.0 180.8 109.8 - - 18.0 53.3 35.3 2004 - - 71.0 184.2 113 1 - - 18.0 54.0 36.0 2005 - - 71.1 187.6 116.4 - - 18.0 54.6 36.6 2006 - - 71.2 191.0 119.9 - - 18.0 55.2 37.2 2007 - - 71.2 194.6 123.4 - - 18.0 55.9 37.9 2008 - - 71.3 198.3 127.0 - - 18.0 56.6 38.5 2009 - - 71.4 202.1 130.7 - - 18.0 57.2 39.2 2010 - - 71.4 205.9 134.5 - - 18.0 57.9 39.9 2011 - - 71.5 209.9 138.4 - - 18.0 58.6 40.6 2v12 - - 71.6 214.0 142.4 - - 18.1 59.3 41.3 2013 - (25.6). 71.7 218.2 172.1 - (6.6) 18.1 60.0 48.6

Return on Investment-17.92 Return on Investment-14.0Z

…------

______,______F4JSEI PHOSPHATEPRMJiT

Net Savinas of Foreion Exchange Over Proiect Life

CU.S.8 million)

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001-13

1989 U,S. 0o larn

Inf lowo World Bank loon 1.0 6.5 38.3 52.5 18.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Import oubetitution of fartilizers 0.0 0.0 0.0 0.0 0.0 121.4 157.6 196.3 198.8 201.3 203.8 206.4 2,717.9

Total inflow* 1.0 6.5 52.5 18.7 121.4 157.6 1°6.3 198.8 201.3 203.8 206.4 2.717.9 Outf logo Foreign capital oxpandituro 1.0 6.5 38.3 52.5 18.7 0.0 0.0 0.0 0.C 0.0 0.0 0.0 0.0 Intoerat during conztruction and commitrant feo on World Bank loan 1.0 1.2 2.8 5.9 8.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Intoraot paymenta on Wo,ld Bank loan 0.0 0.0 0.0 0.0 0.0 8.2 7.6 7.0 6.4 5.8 5.2 4.6 17.1 World Bank loan repayments 0.0 0.0 0.0 0.0 0.0 3.8 4.0 4.2 4.3 4.5 4.7 4.9 46.5 Raw material imports 0.0 0.0 0.0 0.0 0.0 2.9 3.7 4.5 4.5 4.5 4.6 4.6 63.3

Total outflown 2.1 7.7 41.1 58.4 26.9 15.0 15.3 15.6 15.2 14.8 14.4 14.1 126.9 Not cavinga (1.0) (1.2) (2.8) (5.9) (8.1) 106.4 142.4 180.7 183.6 186. 189.4 192.3 2.591. Cumulative not onvings (1.0) (2.3) (5.1) fi.0) (19.1) 87.3 229.7 410. 594.0( 7805 969.8 1,162.1 3.753.1

Current U.S. Dollar*

Inf Ions World Bank loan 1.1 7.2 44.2 63.1 23.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Import oubatitution of fortilizers 0.0 0.0 0.0 0.0 0.0 158.1 213.7 277.0 292.0 307.8 324.4 342.1 S,724.2 Total inflown 11 7.2 44.2 63.1 23.4 158.1 213.7 27.0 2.0 307.8 324.4 342.1 5.724.2 Outf l owa Foreign capital exponditure 1.1 7.2 44.2 63.1 23.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Intareat during conatruction and commitment fee on World Bank loan 1.1 1.4 3.2 7.1 10.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Intoroot payoant. on World Bank loan 0.0 0.0 0.0 0.0 0.0 10.7 10.3 9.9 9.4 8.9 8.3 7.7 S3Z.2 World Bank loan repayments 0.0 0.0 0.0 0.0 0.0 5.0 5.4 5.9 6.3 6.9 7.4 8.1 93.6 Raw material importo 0.0 0.0 0.0 0.0 0.0 3.8 5.0 6.3 6.6 6.9 7.3 7.6 133.7 Total outfloe 22 8.5 47.4 70.1 33.6 19.5 20.7 22_0 22.3 2.6 23.0 23.4 259.5 Not cavinge (1.1) (l.4 (3.2) (7.11 fl0.1) 138.5 193.0 25.0 269.7 285.1 301.4 318.7 5.464. Cuoulative not aevingz (1.13 (2.5) (5.73 (12.a8 29 115.6 308.6 53.6 833.3 18.4 1.419.9 1.738.6 7.203.3

0> ______IIB RD 22 09 19 7D o0 100- 12M -,D-0

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.J-.. E -' f 6 -S m i Cldosa . / AM *sOn.aSonoIfln.nonOae Large/ MediumSize PhospholePlSn . . . . . ;Ai

*MerJium [] Size NitrogenPlants 9 > 7 20v-~~~~~~~~~~~m

unsSCoSOit uChTo* CHINA Mines CGRG.% lE HUBEIPHOSPHATE PROJECT

TO BE CONSTRUCTED UNDER UNDER r~~~- ______q . cor - ;BCOEE EXISTING CONSeRU THFEPROJECT Largeize Nitrogen,Plats 5

S ig nRiri g le a s M diu Sia n- N i t groe nP l an t s 1 207 A A A Large/ MediamSize Phosphate Plants I4~ot. 0'A.. 2GMS 765 IOD

® ® ® ~~~~~~PhosphateMines /2 . onnn n 460 aS Py,iteMines ,7a26 IE

Prajet Proinc-3 Major Parts BURM

Roods a Provinc Capitals*5n{ LA PE LS'. =t== DoableGauge Railroads Proinc Boudaries 2?., LDM CA C .0I. HLPIE -v-- Sin,ginGooge Railroads letn-aionl Boundaries THAILAND PHILIPPINES/An/A

1000 ~.- . 120M 130' 1 OCT03ER198R IBRD20504R CHINA HUBEIPHOSPHATE PROJECT DAYUKOUPHOSPHATE MINE AND FERTILIZERDEVELOPMENT COMPONENT PROJECT: EXISTING: ( ) Mine Area El o Buildings

Tailing Pond and - Roads Waste Dumping Areas Railroads t] !-1 Buildings Concentrate Slurry Pipeline Prefecture Boundaries Roads Province Boundaries - - .- International Boundaries

/ 'ZHONG HU, (HO:..C) To XMadnon / AIjINlG POND ADMINISTRATION

EXPLOSIVESSTORAGE/ '''\

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KILOMETERS/ I\ _ /\ _

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0@ f/ KILOMETERS APRILI1988