Report No. 456-UAR OPY Appraisalof FIL Talkha11 Fertilizer Project RETURN T REPORTS DESK Public Disclosure Authorized Egypt t WIHIN May 28, 1974 WT EN Industrial Projects Department O Not for PublicUse Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCYEQUIVALENTS WEIGHTSAND MEASURES 1 Egyptian Pound (LE) = 2.55 US Dollars (US$) 1 metric ton (T) = 1,000 kilograms (kg) 1 US$ = 0.392 LE 1 metric ton (T) - 2,204 pounds Tourist Rate 1 US$ = 0.59 LE 1 kilometer (km) - 0.62 miles 1 hectare (ha) = 2.38 feddans 1 feddan = 1.04 acres 1 cubic meter (M3) = 35.3 cubic feet (cu. ft.) PRINCIPAL ABBREVIATIONSAND ACRONYMS Arab Fund - Arab Fund for Economic and Social Development BGPC - Egyptian General PetroleumCorporation El Nasr, the Company - El Nasr Company for Fertilizersand Chemicals (Societe el Naar d'Engraiset d'IndmatriesChimiqves. (Swimo)4) aOACC Oeueral Oim ti.E for Agricultiralana CooperativeCredit GOCI - General Organizationfor Chemical Industries GOFI - General C)rganizationfor Industrialization Government - Governmeztof the Arab Republic of Egypt INP - Institute of National Planning (Cairo) N - Nitrogen Content in Fertilizer P2 05, Phosphate - Phosphorus Pentoxide Content in Fertilizer K20, Potash - Potassium Oxide Content in Fertiliser CIF - Cost, Insurance and Freight FOB - Free on Board TPY - (Metric) Tons per Year TPD - (Metric)Tons per Day KWH - Kilowatt Hour MW - Megawatt M3/D - Cubic Meters-perDay MCF - Thousand Cubi. Feet Fiscal Year July 1 - June 30 1962 to 1971 July 1 - December 31 1971 to 1972 (18 months) January 1 - December 31 1973 onwards EGYPT THE TALKHA II FERTILIZER PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ..... ....................i-iii I. INTRODUCTION ..................... 1 II. PROJECT SPONSORS ........................... 2 A. Organizational Framework .... ...............2 B. El Nasr Company for Fertilizers and Chemicals ............................. 2 C. Financial Analysis of El Nasr Company ...... 3 1. Past ........... ......................3 2. Future - Without the Project .... ...... 5 III. FERTILIZER MARKET AND MARKETING .... .............6 A. Agriculture in Egypt ............... 6 B. Historical Supply and Consumption of Fertilizer ............................ 7 1. Supply ................................ 7 2. Consumption ........................... 8 C. Projected Consumption of Fertilizers ....... 9 1. Fertilizer Application Rates .... ...... 9 2. Consumption Forecasts by Nutrients .... 10 D. Marketing and Pricing System . 12 IV. THE PROJECT .14 A. Project Scope .14 B. Raw Materials and Utilities .15 C. Employment and Training .15 D. Ecology .15 E. Project Execution .16 V. CAPITAL COSTS AND FINANCING PLAN .17 A. Capital Costs .17 B. Financing Plan .19 C. Procurement and Allocation of IDA Credit ... 20 VI. FINANCIAL ANALYSIS . .22 A. Analysis of the Project .22 B. Financial Rate of Return .25 C. Analysis of El Nasr Company .25 D. Major Risks .27 TABLE OF CONTENTS (Cont'd) Page No. VII. ECONOMIC ANALYSIS ..................... 27 A. Raw Material and Fertilizer Prices .... ..... 27 B. Economic Rate of Return ..... ...............28 C. Foreign Exchange Savings ................... 29 VIII. AGREEMENTS REACHED .................................. 29 ANNEXES 1-1 Glossary of Fertil;izerTerms 1-2 Fertilizer Industry'in Egypt 2-1 General Organizationfor Chemical Industries 2-2 El Nasr Company - Descriptionand OrganizationChart 2-3 El Nasr Company - Historical Financial Statements 2-4 El Nasr Company - Projected Financial Statements 3-1 Agriculture in Egypt 3-2 Fertilizer Supply 3-3 Fertilizer Consumption 3-4 Fertilizer Marketing System 4-1 Talkha II Urea Project Description 4-2 Talkha II Urea Project Flow Diagram 5-1 Capital Cost Estimates 5-2 Working Capital Requirements 5-3 Proposed DisbursementSchedule 6-1 Sales Price and Operating Costs 6-2 IncrementalFinancial Projections for Talkha II 6-3 ConsolidatedFinancial Projections 6-4 Incremental Financial Return on Talkha II 7-1 Economic Return on Talkha II 7-2 Foreign Exchange Savings MAP Talkha Fertilizer Project (IBRD-10724) EGYPT TALKHA II UREA MANUFACTURINGPROJECT SUMMARY AND CONCLUSIONS i. The Governmentof the Arab Republic of Egypt has requested IDA financing for a large nitrogen fertilizerplant with a capacity of 570,000 metric tons per year (TPY) urea (262,000 TPY of nitrogen). The facilities will be owned by the El Nasr Company for Fertilizersand Chemicals (El Nasr), a wholly-ownedsubsidiary of the Government-ownedGeneral Organizationfor Chemical Industries(GOCI). Total financingrequired for the project is estimated at US$132 million with a foreign exchange componentof US$93 mil- lion. Foreign exchange costs are to be covered by the proposed IDA Credit of US$20 million and other debt financingof US$69 million from the Abu Dhabi Fund, the Arab Fund for Economic and Social Development (Arab Fund), the Kuwait Fund, the Libyan Arab Foreign Bank and the State of Qatar. The IDA funds would be on-lent to the Company for fifteen years including five years grace and at an effective annual interest rate of 8.5% to El Nasr wihich would carry the foreign exchange risk during the period of the loan. The average Arab co-lenderterms, both to the Governmentand the Company are for 19 years includingfive years grace and 5.2% annual interest. The residual financing of US$43 million equivalentincluding all local currency expendi- tures, working capital, and US$4 million in foreign exchange expenditures (for a portion of interest during construction)will be provided by the Governmentas equity. ii. The new plant will be located at Talkha in the Nile Delta some 135 km north of Cairo and be implementedby El Nasr under the supervisionof the General Organizationfor Industrialization,the authority responsible for the developmentof the industrialsector in Egypt. The project will utilize efficientmodern technologyand will use natural gas feedstockfrom the nearby Abu Mahdi gas field. It will be one of the largest fertilizer projects financed to date by the Bank Group. El Nasr has since 1947 been operating a calcium nitrate and ammonium sulfate fertilizerplant in Suez which stopped operating in 1969 following the military action in the area. The Company is currently erecting on the same site at Talkha a calcium- ammonium-nitrate(CAN) unit (Talkha I)} dismantledfrom Suez where it was partially erected in 1967/68. This unit will also run on Abu Mahdi gas and is expected to start producingby the end of 1974. Although the Company has not operated since 1969, its financial positiolnhas remained sound because of adequate Governmentsubsidies. Once Talkha I begins commercialoperation, the Company is expected to be able to support itself and repay all its out- standing debt before the project (Talkha II) will be completed. iii. El Nasr has capable management;during project implementationand plant start-up, it will be supported under a Technical Advisor, Cremer and Warner (UK) whose initial work is being financed by the IDA Engineering Credit of US$400,000 approved by the Executive Directors in November 1973. Additional - ii - major responsibilitiesfor project executionwill rest with a General Contractor. The IDA Credit would cover the foreign exchange expendituresof the General Contractor and the Technical Advisor as well as a portion of equipment and materials, all procured under Bank/IDAguidelines. iv. Nitrogen (N) fertilizer consumptionin Egypt grew 7% per year in the 1950's and early 1960's but slowed to 3.5% during 1965-1972 to reach about 320,000 tons of N in 1972. Dboaesticproduction was only 100,000 tons of N in 1972 and Egypt has thereforebecome a major importer of nitrogen fertilizers to the extent of about 220,000 tons of N in 1972 with a current value of between US$50-60million. Urea, introduced into Egypt in the early 1960s, is well suited to Egyptian agrLcultureand its use has increasedrapidly, accounting for about 60% of toc:alN imports in 1972. v. Consumptionof N has been adverselyaffected by low domestic pro- duction and limited availabilityof foreign exchange and, more recently, tight internationalsupplies at high prices. Future consumptionis conservativiely estimated to grow at about 4% per year and reach some 500,000 tons of N in 1980. Combined with production from capacity now in existenceor under con- struction, the project will, uLder such growth assumptions,help make Egypt self-sufficientin nitrogen fertilizerproduction by 1980. However, the potential demand for nitrogen and other fertilizer grades is considerably higher since for an intensive zmd virtually fully irrigated agricultureas that of Egypt, fertilizerapplication will still be low particularlyif Egypt moves towards more high-yieldingcrop varieties and the promotion of high-value, non-traditionalexports to head off a potential food crisis and help overcome its strained balance of payment:situation. Since, in addition, Egypt has a comparativeadvantage in producing its own nitrogen fertilizer,the project has a high priority in being mc'vedforward quickly. vi. The project is well located as it is close to its raw material source (natural gas) and marketing area and the site is already developed with largely existing