Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3332a-EGT

EGYPT

STAFF APPRAISAL REPORT

HADISOLB REHABILITATION PROJECT

May 1, 1981

Industrial Projects Department

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

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CURRENCY EQUIVALENTS(Used in the Appraisal Report)

US$1 = Egyptian Pound (LE) 0.69LE 1 = US$1.45

WEIGHTS AND MEASURES

1 metric ton (t) = I,OOO kilograms (kg) = 2,204 pounds (lb)1 meter (m) = 39.37 inches

1 kilometer (km) = 0.621 miles1 megawatt-hour (MwH) = 1,000 kilowatt-hours (kwh)

ABBREVIATIONS AND ACRONYMS USED

BOF - Basic Oxygen Furnace

CIF - FOB costs, Insurance and FreightCPE - Centrally Planned EconomiesCU - Coordinating Unit

EAF - Electric Arc FurnaceEC - European Community

EGITALEC - Egyptian-Italian Engineering and Construction CompanyFOB - Free on BoardERG - Federal Republic of GermanyGOFI - General Organization for IndustrializationHADISOLB - Egyptian Iron and Steel Company; from Arabic "Hadid"

(Iron) and "Solb" (Steel)ICB - International Competitive BiddingIMC - Executive Organization for the Industrial and Mining

Complexes (former ISC)KfW - Kreditanstalt fuer WiederaufbauLDC - Less Developed Country

OSC - Operating Steel Company (providing technical assistanceservices to HADISOLB)

PIU - Project Implementation UTnittpd - tons per day

tpy - tons per yearUEC - US Steel Engineers and Consultants

FISCAL YEAPR

Government and IIADISOLB: January 1 - December 31 until December 31, 1979January 1 - June 30 January 1 - June 30, 1980July 1 - June 30 after July 1, 1980

EGYPT FOR OFFICIAL USE ONLY

STAFF APPRAISAL REPORT

HADISOLB REHABILITATION PROJECT

TABLE OF CONTENTS

Page No.

I. StION ...................... ........................... U1

A. Theg Band ...... .......................................... r1B. Bank Grouep Involvement in the Egyptian Steel Industry 1. a

II. THE INDUSTRIAkL SECTOR AND THE STEEL INDUSTRY.......... 2

A. The Industrial Sector2 Departmt.B. Developmetnt of the Steel Industry in Egypt........ 4C. Structure and Organization of the Egyptian Steel

Industry.,......................... 4D. Issues arid Problems of the Steel Industry.......... 6

III. MARKET AND PRICE TRENDS FOR STEEL PRODUCTS.......... . 8

A. The Inter-national Steel Industry and Market........ 8

1. Historical World Steel Consumption and ProductionTrends......................... 8

2. Futurt e World Steel Demand and Supply Trends. .onl 103. Intescnational Price Trends for Steel Products .Ban 12

B. Egyptian Steel Demand and Production Trends ........ 13C. Comparison of Egyptian and International Prices for

Steel Products....................... 16

IV. THE COMPANY f........................... 18

A. Backgrounid and Ownership.................. 18B. Production Facilities and Performance............ 18C. Major Problem Areas .................... 19D. Financial. Performance ................... 22E. HADISOLB"s Stage I Rehabilitation Program ......... 23

V. THE PROJECT ~.......................... 26

A. Project Concept and Description .............. 26

1. Stage I Rehabilitation Program............. 262. The Bank Project.................... 27

This report was prepared by Messrs. D.T. Carpio, W. O'Neil, andW. Bertelsmefer of the Industrial Projects Department.

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

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TABLE OF CONTENTS (Cont'd)

Page No.

B. Production Program, Raw Materials and Utilities .......... . 28

1. Production Program ................................... 282. Raw Materials ...................................... .. . 293. Utilities ...... ..................... ......... 29

C. Ecological and Occupational Health Considerations ... ...... 30D. Project Implementation, Management and Training .......... 31

1. Project Engineering Assistance for the EquipmentPackage ............................... ................. 0...... 31

2. Technical Assistance from an Operating Steel Companyfor Improvements in Operations and Management ......... 32

3. Training .................... ....... .00.......................... 33

E. Organizational Improvements and Associated Risks ......... 34

VI. PROJECT COST AND FINANCING PLAN .............................. 35

A. Project Cost Estimate ...... .............................. 35B. Financing Plan ........ ................................... 36C. Procurement ..... 37D. Allocation and Disbursement of Bank Loan .............. ... 38

VII. FINANCIAL ANALYSIS ............................. .. .. .. ....... . 39

A. Production and Sales Forecasts ........ ................... 39B. Production Costs ...... ............... .................... 40C. Financial Projections ................ ..... i .............. 43D. Financial Rate of Return ............... .. ................ 44E. Major Risks .. 44F. Auditing and Reporting ................ .. ................. 45

VIII. ECONOMIC ANALYSIS ............................................ 45

A. Economic Costs and Benefits ..... ......................... 45B. Economics of HADISOLB's Operations . . . 46C. Economic Costs and Benefits of Stage I ................ ... 46D. Economic Rate of Return and Sensitivity Analysis ......... 47E. Other Benefits ........................................... 49

IX. AGREEMENTS .................................................. 49

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TABLE OF CONTENTS (Cont'd)

ANNEXES

1 Miscellaneous Terminology - HADISOLB Rehabilitation Project

3-1 World Stee:L Consumption Trends3-2 World Stee:L Capacity, Production, and Utili-

zation Rate Trends3-3 Percentage Share of Different

Technologies in the Steel Production ofSe:lected Countries

3-4 Projected .1985 Steel Prices3-5 Egypt - Historical Production, Imports and

Consumption of Steel Products3-6 Comparison of International and Egyptian Base

Prices for Steel Products

4 HADISOLB Steel Production Facilities

5-1 Flow Chart - Expected Production Levels After Completion of Stage I5-2 List of Project Facilities5-3 HADISOLB-s Production Plan (FY 1988 and later)5-4 Functional Organizational Chart for PIU and CU5-5 Project Imnplementation, Division of Functions

and Responsibilities5-6 Implementation Schedule

6-1 Capital Cost Estimate6-2 Disbursement Schedule for Bank Loan

7-1 Financial Projections (Without Rehabilitation)7-2 Financial Projections (With Rehabilitation)7-3 Assumptions Used in Financial Projections7-4 Production Cost Per Ton of Raw Steel Before

Rehabilitation7-5 Production Cost Per Ton of Raw Steel After

Rehabilitation (in constant prices)7-6 Production Cost Per Ton of Raw Steel After

Rehabilitation (including real term cost increases)7-7 Production Cost Per Ton of Raw Steel Without Rehabilitation (FY88)

(in constant prices)7-8 Production Cost Per Ton of Raw Steel Without Rehabilitation (FY88)

(including real term price increases)7-9 Financial Rate of Return: Cost and Benefit Streams8-1 HADISOLB 1.979 Operations in Financial and Economic Terms-8-2 Economic Value of HADISOLB's 1979 Sales8-3 Economic Rate of Return: Cost and Benefit Streams

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TABLE OF CONTENTS (Cont'd)

MAP

IBRD EGYPT: Project Location (IBRD Map No. 15272)

DOCUMENTS CONTAINED IN THE PROJECT FILE

1. Atkins Study (4 volumes) 19772. UEC - Operations Improvement Study March 19793. UEC - Market and Facility Study November 19794. UEC - Overall Management Study October 19785. UEC - Corporate Study and Organization Study November 19786. UEC - Development of Iron Ore Deposits7. Studies completed by EGITALEC December 1980

a. Review and update of capital costs.b. Estimation of capacities.c. Modification of one continuous

billet casting machined. Modification of the lime shaft kilns.

8. List of Bid Packages, Preliminary January 19819. Status of Operation Improvements, HADISOLB December 198010. The Rehabilitation of the Egyptian Iron and

Steel Company's Helwan Plant prepared byDr. Samir Taher April 1980

11. Study on Actual Energy Consumption/Ton CrudeSteel and Applicable Recommendations forEnergy Conservation at HADISOLB prepared byEng. Fathalla Kamal April 1980

12. Combined Income Statements of Public SectorSteel Companies January 1981

13. Combined Balance Sheets of Public Sector SteelCompanies January 1981

14. Proportion of Flat and Non-Flat Finished SteelProducts in Production - 1978 (MarketEconomies) January 1981

15. HADISOLB Organization Chart December 198016. International Steel Situation, and Governmental

Intervention Mechanisms in the 1970's February 198117. List of Operations Improvement Schemes to be

implemented as part of the Bank Project February 198118. Worksheets for Calculation of Financial Projections

and Rates of Return March 1981

I. INTRODUCTION

A. Background

1.01 The Gcvernment of the Arab Republic of Egypt and the Egyptian Ironand Steel Companty (HADISOLB), a public sector enterprise, have requested Bankfinancing of US$;64 million equivalent to assist in implementing HADISOLB-s urgentlynecded `eg2 I rehabi' tation and debottlenecking program (Stage I) at its Helwanplant (IBRD Map No. 15272). The proposed Bank project (the Project) would be amajor component of Stage I. The second component will be implemented with financialassistance from Kreditanstalt fuer Wiederaufbau (KfW) of the Federal Republic ofGermany (FRG) arLd a third component with equipment supplied by the USSR. Stage Iis designed to take advantage of a substantial sunk investment which is onlyproducing at about 50% of design capacity at present. It will rehabilitate theold facilities and introduce better operating practices thereby increasing HADISOLB'sefficiency, particularly in terms of energy conservation, and its achievableoutput to about 75% of capacity by 1987. A subsequent Stage II program, which isexpected to be fully defined by early 1983 within the context of the proposedProject, would raise the achievable output to the full design capacity. In 1980,Egypt imported about one million tons of finished steel products at a cost ofabout US$385 million. The expected increase in HADISOLB's output as a result ofStage I will help reduce the import needs of the country as well as make theCompany profital:Je thereby eliminating the Government subsidies to one of itslargest public sector manufacturing enterprise.

1.02 The Project will involve financing of equipment, civil works and technicalassistance and provide the first significant step towards strengthening the organi-zation and operations of HADISOLB which are presently weak. The Project's successwill critically depend on meaningful progress in this area. A key aspect of theProject is the granting of sufficient autonomy to the Company regarding pricing,investments, procurement, personnel policies and remuneration levels adequate toattract and retain qualified employees as well as motivate them to perform well.

1.03 The Project is expected to cost about US$106 million equivalent includingabout US$76 million in foreign exchange. It will be financed with about 39% equity(US$42 million) from the Government and about 61% from the proposed Bank loan(US$64 million),,

1.04 Following preparatory missions in July 1979, October 1979 and April 1980,the Project was appraised in September 1980 and reviewed in December 1980 bya mission consisting of Messrs. D. Carpio (Chief), W. O'Neil and W. Bertelsmeierof the Industrial Projects Department and Mr. F. Kaps of the Country ProgramsDepartment I, EMIENA Region.

B. Bank Group Involvement in the Egyptian Steel Industry

1.05 Bank Group involvement in the Egyptian steel industry started with ametallurgical sector study undertaken as one of six industrial sub-sector reviewsfinanced under the Bank Group's Agricultural and Industrial Imports Project ofDecember 1974 (cr. No. 524-EGT and Ln. No. 1062-EGT). The study was carried outby Atkins Planning (UK) during 1976-77 and identified, among others, a highpriority rehabilitation/debottlenecking requirement for HADISOLB. On the basis

1J Annex I contains a glossary of technical terms used in this report.

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of this study and subsequent discussions among the Government, HADISOLB, theExecutive Organization for Industrial and Mining Complexes (IMC) 1/ and ourselves,the Bank approved a US$2.5 million engineering loan in July 1977 (Iron Ore Benefi-cation and Engineering Project - Loan No. S5-EGT) to finance the foreign costs forthree consultancy tasks; namely: (i) a techno-economic evaluation of beneficiatingthe local iron ore used by HADISOLB which is very difficult to utilize due to itspoor quality; (ii) design and engineering, including the preparation of tenderdocuments, for an iron ore beneficiation project should the techno-economicevaluation identify an economically viable process; and (iii) a diagnostic studyof the technical, operating, managerial and organizational as well as marketingproblems of HADISOLB with recommendations for practical approaches towards solvingthese problems. The first and third tasks were undertaken by the US Steel Engineersand Consultants (UEC) and completed at the end of 1979. The recommendationscontained in UEC's diagnostic study formed the basis for HADISOLB-s Stage IRehabilitation Program and the proposed Bank Project. Likewise, on the basis ofUEC's iron ore beneficiation study, HADISOLB intends to build a semi-industrialpilot plant for washing the ore in order to develop the necessary technical andoperating data for a rigorous techno-economic evaluation.

1.06 HADISOLB, the three other small semi-integrated public sector steelcompanies, (para 2.06), and the El Nasr Coke Company were also beneficiaries underthe Bank's Second Industrial Import Loan of July 1977 (Ln. No. 1456-EGT) receivingfinancing for the import of equipment (US$10 million) and raw materials (US$18million). Finally, the Bank and IFC are considering participation in a major(US$800 million) joint venture integrated steel project (El Dikheila) between theEgyptian Government and a consortium of Japanese steel and trading companies.

II. THE INDUSTRIAL SECTOR AND THE STEEL INDUSTRY

A. The Industrial Sector

2.01 Industry 2/ has become a significant sector of the Egyptian economy withits share in GDP rising from 8% in 1946 to 13.5% in 1979. In that year industryemployed about 1.3 million persons, or nearly 12.4% of the civilian labor forcewhile industrial exports, valued at about LE 500 million (12.7% of the gross valueof industrial output) provided about 18% of commodity exports. The industrialstructure is weighted heavily in favor of industries producing consumer goodswhich account for about 58% of industrial gross value added; intermediate products(building materials, fertilizers, chemicals, and metals) account for about 34%;and capital goods, for only 8%.

2.02 As a result of the nationalizations of the early 1960s, the public sector,comprising some 200 enterprises, accounts for almost all large and medium scaleindustrial enterprises. It generates some two-thirds of the value added inindustry and mining and provides slightly more than half of total industrialemployment, mainly in four subsectors: textiles, food products, metal and engi-neering, and chemicals. Egypt-s basic industries are all in the public sector and

1/ IMC, a public sector agency within the Ministry of Industry, was responsiblefor supervising the installation of HADISOLB's newer production facilities,including the iron ore mining facilities at Bahariya (para 4.03).

2/ Manufacturing and mining excluding petroleum.

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include iron and steel, aluminum and fertilizer. The private sector accounts forabout one-third of total value-added in industry and about half the sector-slabor force. Textiles, food products, leather, woodworking and furniture, andengineering are the important industries of private activity.

2.03 The industrial sector was characterized in 1973-74 by significant idleproductive capacities but rapialy improved during L975-77 iollowing theannouncement in 1973 of the "open door" policy which resulted in the relaxationof controls and greater availability of foreign exchange. This period wasfollowed by a temporary slowdown in the growth of industrial output in 1978(5.7%), but a subsequent recovery in 1979 (11.5%) pointing to the increasingimpact on producition of the investment efforts during the last few years.

2.04 Egyptian industry has significant long-term prospects to grow and broadenits base deriving primarily from the large and growing domestic market, adequatelocal energy resources and a strategic market location vis-a-vis the Middle Eastand Europe. An industrial structure and tradition already exist, as well as alarge and relatively low-cost labor force. Since development of agriculture isproceeding slowly and the service sector (mainly Government) is overstaffed, it isto industry that the Government looks to provide stimulus to growth as well as toabsorb the growing labor force through continued expansion, efficient importsubstitution emphasizing intermediate and capital goods, and expanded exports. Forexample, the sub-sector studies (para 1.05) point to the need to develop exportsand the capital goods and construction industries on a priority basis. The lattertwo subsectors will directly benefit from the Project, since they use HADISOLB'sproducts as a major input.

2.05 The Bank½s recent loans to industry include: (i) program loans toalleviate foreign exchange constraints and thereby improve capacity utilization;(ii) assistance to individual, large, high priority projects; (iii) attempts toaddress the principal issues affecting the productivity of major subsectors; and(iv) assistance no financial intermediaries to enable them to provide financialand technical asistance to private sector firms, including small scale industrialenterprises. The implementation experience of the Bank-s large industrialprojects in Egypti during the 1970's has been poor in terms of long constructiondelays and substantial cost overruns, primarily due to four factors:(i) the severe constraint in the capacity of the local civil works contractingindustry, includ.ng a chronic shortage of cement, rebars and other constructionmaterials due to foreign exchange constraints which limited imports; (ii) delaysin the release of local currency funds from the Government due to its difficultfiscal condition:; (iii) a cumbersome procurement procedure (including boycottprovisions) which prolonged the process of bid preparation, evaluation andaward; and (iv) some delays in filling the foreign exchange financing gapcreated by the suspension of disbursement by Arab co-financing sources followingthe Camp David Agreement in 1978. The more recent Bank industrial projects nowrequire international tendering of civil works contracts, where this is a majoritem, and also place emphasis on the establishment of strong project implementa-tion units as well as more efficient procurement arrangements to overcome someof the problems experienced in the past. The recent improvements in the fiscalsituation of the Government as well as in the balance of payments position arealso expected to ease some of the constraints on project implementation.

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B. Development of the Steel Industry in Egypt

2.06 Steel-making, as a modern industry in Egypt, began with the establishmentof the Delta Steel Company in 1947 and the National Metal Company in 1948, bothnear Cairo, and the Egyptian Copperworks in Alexandria, in 1952. These threefacilities use steel scrap as raw material utilizing mostly the open-hearthfurnace (OHF) and to a lesser extent the electric-arc furnace (EAF) steel-makingtechnologies and producing mostly concrete reinforcing bars (rebars) as well assome other non-flat products. Their combined production in 1980 was about 0.3million tons per year (tpy) of finished products. HADISOLB, in Helwan near Cairo,is the only integrated steel complex in the country; it started operation in1958 and had an initial capacity of about 0.3 million tpy of flat and non-flatsteel products based on iron ore mined locally near Aswan. With the assistanceof the USSR, HADISOLB in the mid-1960's began an expansion which increased productioncapacity to about 1.3 million tpy of finished products. There are also four smallpublic sector foundries and forges 1/ making castings and forgings with a capacityof about 0.1 million tpy of products. The present installed steel-making capacityin Egypt is about 1.7 million tpy of finished products 2/, but production has beenconstrained to about 55% of capacity due to the operating problems at HADISOLB.

2.07 The Egyptian steel industry accounted for about 2% of GDP in 1979 andemployed about 45,000 employees (3% of the industrial labor force); about 55%of these are in HADISOLB.

C. Structure and Organization of the Egyptian Steel Industry

2.08 Except for the few very small foundries still operated by the privatesector, the steel industry was nationalized in the early 1960's. The organizationof the public sector steel industry is shown on the following page and brieflydescribed below. With the Government as majority shareholder, the Ministry ofIndustry has prime responsibility for the industrial public sector enterprises.In this context, the General Shareholder's Assembly 3/ of each company is chairedby the Minister of Industry (or his representative) and the company chairmenreport directly to the Minister. Also directly under the Minister of Industryare the General Organization for Industrialization (GOFI), which is responsiblefor investment planning and procurement, and the Executive Organization forthe Implementation of Industrial and Mining Complexes (IMC) which is responsiblefor the actual implementation of some large scale industrial and mining projectsunder the Ministry of Industry. Finally, there is the High Council for theMetallurgical and Engineering Sector, which is chaired by the Minister of Industryand is composed of the chairmen of the various companies as well as experts in thesector. This High Council has about 45 members and has a technical secretariatwith about 30 employees essentially collecting statistical data. The High Counciloperates on an ad-hoc basis to discuss sectoral problems and development issuesand provides advice to the Minister of Industry. It is also a forum for coordi-nating plans and policies of the companies within the sector, but has no formalresponsibility for formulating development plans and strategies.

11 The- fout gublic sector foundries are Nasr Castings, Nasr Pipes andFittings, Nasr Forgings, and Helwan Iron Foundries.

2/ Equivalent to 2 million tpy of liquid steel.3/ The General Shareholder-s Assembly meets generally twice a year to

review and approve the annual financial statements and the budget, as wellas major capital investment projects and financing arrangements, and toreview operating results.

EGYPT - Organization of the Public Sector Steel Companies

| Minister of lIndustry & Mining_

High Council forthe Metallurgical& Engineering SectorChairman:Tht Minister

General Organizatiorn Executive Organizationfor Industrialization for Industrial & Mining

(GOFI) Complexes (IMC)

I.,Technical

I Secretariat for theMetallurgical &Engineering Sector

General Shareholders I /l Assembly of Each Company

Chairman: The Minister . /

Public Sector Metallurgical andEngineering Companies

NOTE: A solid line indicates a control function, a dotted line acoordinating or advisory function. On matters of capitalinvestment and procurement however, GOFI has a controlfunction in that it has to approve and recommend to theMinister the capital investment plans; also all procurementin excess of IS 0.75 million is done by the company inconjunction with GOFI and GOFI either signing or co-signing the ptrchase order/contract.

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2.09 The operation of individual public sector enterprises is the responsibi-lity of an operating Board of Directors and the enterprise management within theframework of existing policies and legislation. The chairman of the board is alsothe company president; he and the top management members of the board are appointedby the Minister. The labor representatives on the board are elected by theemployees. The degree of enterprise autonomy (para 2.11) is heavily regulated bylaw and/or by ministerial policy which has effectively caused these enterprises tooperate like civil service agencies under a complex and restrictive system ofadministrative rules and regulations.

D. Issues and Problems of the Steel Industry

2.10 The Egyptian steel industry faces a number of serious problems whichaffect its present performance and future development prospects. The key problemareas relate to the: (i) institutional and policy framework for the public sectorenterprises; (ii) obsolete state of equipment and technology of existing steelmills and the need for upgrading the skills of management and workers; and (iii)poor financial situation of the steel companies.

2.11 Institutional and Policy Framework: Under existing legislation and policies,public sector enterprises are under a severe disadvantage relative to privatesector and joint venture companies due to restrictions on salary structure, numberof job grades, procurement, pricing, marketing, investments and retention ofprofits. Thus, these enterprises are finding it increasingly difficult to attractand retain qualified personnel as well as motivate employees to perform effectively,while being at the same time heavily overstaffed in the administrative and un-skilled labor groups because of the past Government practice of imposing employmentquotas. This has led to a gradual weakening in the management and organizationof most public sector enterprises, particularly those that have obsolete/inappro-priate facilities, or serious technical problems, or very low labor productivity.Many of these enterprises are not profitable and not in a position to offermeaningful production bonuses to reduce the large gap in total compensationbetween private sector and public sector pay levels.

2.12 The Government is now seriously considering specific legislative pro-posals to radically reform and liberalize the policies and regulations governingthe public sector enterprises, and thus lay the base for higher efficiency in thesector. In the meantime, several ad-hoc liberalization measures have been graduallyintroduced during the past three years: no employment quotas, an increase fromLE 0.5 million to LE 0.75 million in procurement contracts not requiring GOFIinvolvement, free dealings in foreign exchange including retention of all or partof foreign exchange export earnings, direct imports of capital goods, eliminationof the ceiling on bonus and incentive systems, unlimited participation of foreigncontractors in civil works, and selective increases in some industrial productprices (e.g. steel, textiles) which are about 80% to 105% of international levels.Also, as a result of the substantial improvement in the country's balance ofpayments as well as the Government's fiscal condition, the central Governmentnow has sufficient resources to invest in the rehabilitation/modernization ofpublic sector enterprises.

2.13 Obsolete or Inappropriate Equipment/Technology and Need for TrainingThe production facilities of the four public sector steel companies suffer froma variety of technical problems. In general, there is a combination of obsolete

or inappropriate t:echnology, old equipment, capacity imbalances and inefficientwork-flow patterns. The technical problems are exacerbated by poor to mediocreoperating practices and a shortage of highly skilled and qualified operators,further undermined by the financial attractiveness of working in nearby oilexporting countries. Consequently, production performance is poor -- in terms oflow capacity utilization relative to design capacity, low yield levels, and highconsumption rates of inputs, especially energy. The technical problems of thesteel companies can only be overcome through well-conceived rehabilitation programswhich are complemented by training of the labor force in new technologies as wellas improvements in operating procedures and upgrading of management skills andsystems. GOFI is expected to initiate a feasibility study for a modernization/rehabilitation project for the three smaller public sector steel companies in thenext few months. This effort, together with the implementation of HADISOLB'sStage I Program, and the proposed El Dikheila project, as well as the preparationof the Stage II Rehabilitation Program of HADISOLB, would cover the modernization/-expansion needs of the steel sector until the late 1980s.

2.14 Financial Situation: The profitability of the public sector enterprises,including the steel companies, is not satisfactory due to various technical andoperating problems and general inefficiencies, as well as the substantial finan-cial burden imposed by the past Government policy of: (i) fixing input and outputprices at relative levels that do not provide adequate profits; and (ii) causingsubstantial overemployment. The industry has suffered from a severe lack offinancial resources needed for adequate maintenance, rehabilitation/modernization,and working capital. The combined financial statements of the four public sectorsteel companies are sunmmarized below.

Egypt - Public Sector Steel Companies Combined Financial Statements a/(LE Million)

1975 1976 1977 1978 1979

Gross Revenues 109 123 147 180 264Cost of Sales & Overhead 128 140 154 183 265Operating Profit (Loss) (19) (17) ( 7) ( 3) (1)

Interest & Other Expenses (Net) 3 5 5 5 6Income taxes Net Profit (Loss) (22) (22) (12) ( 8) 77)

Net Profit as % o.: Revenues (20) (18) ( 8) ( 4) ( 3)Current Ratio 1.1 1.1 1.1 1.1 1.1Debt/Equity Ratio 19:81 17:83 16:84 16:84 12:88

a/ HADISOLB, National Metal Company, Delta Steel Company,and Egyptian Copperworks.

2.15 The financial results are heavily influenced by HADISOLB's operations.For example, HADISOLB's revenues account for about 46% and 40% of the combinedrevenues of the four public sector steel companies for 1978 and 1979 respectively.HADISOLB's losses of about LE 10 million for 1978 and about LE 6 million for 1979

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offset the profit of the three smaller steel companies of about LE 2 million in1978 and accounted for 86% of the combined losses for 1979 respectively. Theliquidity (current ratio) of the steel companies continues to be unsatisfactory.The capital structure (debt/equity ratio) however, has remained sound in spiteof cumulative losses because of the substantial additional equity capital thatthe Government has provided, primarily to HADISOLB, to cover both investmentsand increases in working capital requirements. The Government, as part of theproposed legislation to liberalize the public sector enterprises (para 2.12), isalso reviewing the financial aspects of their operations, especially the pricingof their outputs with the view to providing reasonable profits under conditionsof efficient operations.

2.16 The major problems facing the Egyptian steel industry can be overcomewith a strong commitment on the part of the Government especially for reformsin the way the public sector enterprises are managed and regulated. But theseproblems should not detract from the inherent comparative advantage in steel-making that Egypt possesses and ought to exploit. The country has a relat-ively substantial and growing market for steel which could take advantage ofeconomies of scale in production, a fairly well developed infrastructure, anindustrial tradition including steel-making, its own hydrocarbon energy resources,some iron ore deposits (para 4.03), and a relatively cheap and readily trainablelabor force. In addition, Egypt is at a stage of industrialization whereimportant linkages between the steel sub-sector and the capital goods/consumerdurables sub-sectors as well as the construction industry should be establishedas a means of broadening the industrial base and of employment creation. Thus,the efficient modernization of its steel industry should be among the highpriority programs of the Government, specially since there is already a largesunk investment in the steel industry that is not fully productive at presentbut whose output can be increased substantially at a much lower investment costper ton of incremental output compared to new (green-field) plants.

III. MARKET AND PRICE TRENDS FOR STEEL PRODUCTS

A. The International Steel Industry and Market

1. Historical World Steel Consumption and Production Trends

3.01 During the early 1970's, the world steel industry had an optimisticdemand outlook for the decade and substantial capacity 1/ additions were plan-ned and implemented. However, the recession of 1975 cut consumption by about20% in the industrial countries and 10% worldwide from their respective pre-vious peaks in 1973 and 1974 respectively. The subsequent recovery of demand

1/ Capacity is generally measured in terms of crude steel equivalent. There aretwo generally accepted definitions of capacity: "gross" or "normal" capacity,which is about equivalent to the engineering design capacity and alternatively,"effective" or "sustainable" capacity which can be achieved for sustained periodsunder normal working conditions. In this report, the second (i.e., "effective")definition is used. Effective capacity in the US and Japan is roughly 95% ofthe gross capacity; in the EC it is about 87% of the gross capacity.

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was slower than expected, while firmly committed investments could not be delayedor cancelled. Thus, capacity increased faster than demand and capacity utiliza-tion rates in the industrial countries dropped drastically to between 75% and 82%during 1975-78, although the rates remained close to their practical achievablelevels in most developing countries. With the low capacity utilization rates inthe major historical steel producing areas, i.e. US, Japan and the European Com-munity (EC) -- which together account for about 53% of total world steel capacityand about 41% of world consumption, steel prices became severely depressed due toheightened ccrmpetition and the steel industry in the market economies was plungedinto disarray. The deteriorating situation of the industry in the developedmarket economies finally led to strong government intervention in the major steelproducing and. consuming areas such as the US, Japan and the EC. As a result, somedegree of ordler began to evolve after mid-1978. Historical (1970-80) world steelconsumption, production and capacity data by group of countries are shown inAnnexes 3-1 aLnd 3-2 and are summarized below:

World Steel Consumption and Production a/(In Million Tons of Crude Steel Equivalent)

1970 1973 1975 1977 1979

Industrial CountriesConsumption 355 403 314 333 369Production 384 443 370 377 416Degree of Self-Sufficiency (%) b/ 108 110 118 113 113

Developing CcuntriesConsumption 59 77 91 100 119Production 38 50 56 66 82Degree of Self-Sufficiency (%) 64 65 62 66 69

Centrally PlaLnned EconomiesConsumpticn 176 210 235 239 260Production 176 205 221 230 248Degree of Self-Sufficiency (%) 100 98 94 96 95

World TotalConsumption 590 690 640 672 748Production 598 698 647 673 746

a/ Apparent c onsumption.b/ Production as % of consumption.

3.02 While steel consumption declined in the industrial countries between1973 and 1979, it grew steadily in the developing countries, by about 7.5% peryear, and in the centrally planned economies (CPE) by close to 4% annuallyduring the same period. The developing countries as a group import (net) roughlyone-third of their steel consumption, although individually their degree ofself-sufficiency varies considerably. Between 1970 and 1979, self-sufficiencydeclined fronm 20% to 16% respectively for North Africa and the Middle Eastregion but increased for the Asia and the Pacific region from 54% to 72% and

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for Latin America and the Caribbean region, from 72% to 82%. During the sameperiod the net imports of the developing countries increased from 21 to 37 milliontons and those of the CPE's from practically nothing to about 12 million tons.These increases in net imports were supplied primarily by Japan and the EC. Thus,even though steel-making capacity in the developing countries as a group increasedby about 98% from 46 to 91 million tpy during 1970-80, the group-s self-sufficiencyimproved only slightly from 64% to 68% as demand during 1970-80 grew from 59million tons in 1970 to an estimated 125 million tons in 1980 or by 212% (para3.05).

2. Future World Steel Demand and Supply Trends

3.03 Forecasts of steel demand are generally based on assumed growth ratesof GDP. Before the 1975 recession, the relationship between growth in steelconsumption and growth in GDP in the industrial countries had been stable 1/.However the extremely slow recovery in steel consumption after 1975, even whenGDP growth had recovered somewhat, led to an evolving consensus in the industrythat the basic relationship had changed during the mid-1970's. Three factors arethought to have caused this change: (i) about 30% to 40% of the steel deliveriesin industrial countries are consumed in sectors involving fixed capital formation;thus, as the growth in fixed capital formation continued to remain low relative toother sectors in the economy the growth in steel demand was also adversely affected;(ii) there has been a gradual decline in the usage of steel per unit of final pro-duct as substitution by other materials such as aluminum and plastics intensifiedafter the energy crisis of 1973/74, as energy conservation pressure led to smaller/lighter product designs (e.g. automobile) and as the quality of steel improved,thereby requiring less steel; and (iii) the increasing use of continuous castingtechnology (Annex 3-3) which, in addition to being less energy intensive, provideshigher steel yields than traditional production methods. In other words, a largerquantity of finished product is produced from each ton of crude steel when continuouscasting is used. Consequently, demand in terms of crude steel equivalent, whichis the generally accepted statistic for measuring steel demand and production,declined.

3.04 Forecasts of steel demand and production capacity for various regionshave been prepared for 1985. 2/ The forecasts assume that GDP growth rates inthe industrial countries would be depressed at an average of only 2.8% peryear during 1979-85 as a consequence of recent recessionary trends. In addi-ition, the continuing impact of the three factors mentioned in para 3.03 aboveis expected to further lower the GDP/steel consumption growth ratio for theindustrial countries to about 0.68 during 1979-85, compared to the historicalvalue of about 0.87 during 1960-74 and about 0.7 during 1974-79. On thisbasis, steel demand in the industrial countries is expected to grow at an

1/ The relationship is defined in terms of the ratio of the steel consumptiontina ' A& s of % tel e a½vat'tgowth rate to the Gipgrowth rate in real terms.

2/ The forecasts are based on a world steel market study (The International

Steel Market and the Outlook for Light Non-Flat Products, April 6, 1981)undertaken jointly by the Bank's Industrial Projects Department, the EconomicAnalysis and Projections Department and a specialized steel market consultingfirm.

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average rate of only about 1.9% per year between 1979 and 1985 1/ and reach 390million tons in 1985. It should be remembered that steel consumption in theindustrial countries increased at an average annual rate of 5.3% during the1960's, and while it did not show any consistent growth pattern in the 1970's,the projected 1985 demand is still 3% lower than the peak recorded in 1973.This is a conservative forecast of steel consumption by 1985 assuming continuedsluggish growth in the economies of the industrial countries.

3.05 The sluggish economic performance in the industrial countries expectedduring 1980-85 will also dampen the economic growth of developing countries.Thus, steel demand in the developing countries is projected to grow by onlyabout 5.6% per year 2/ during 1979-85 and reach about 165 million tons in 1985.Steel demand in the CPE's is assumed to grow by about 2.5% per year during 1979-85. The followirtg table gives estimates and forecasts on consumption/demand,production, capacity and capacity utilization for 1980 and 1985 respectively forvarious regions and economic groupings.

Estimate and Forecast of World Steel Demand, Production and Capacity(In Million Tons of Crude Steel Equivalent)

1980 Estimate 1985 ForecastConsump- Produc- Capa- Rate Consump- Produc- Capa- Ratetion tion city (%) a/ tion tion city (%) a/

Industrial Countries

US 113 99 133 74 148 132 135 98EC 106 131 175 75 120 152 170 89Japan 78 112 138 81 83 123 138 89Others 33 37 39 95 39 43 44 98

Sub-Total 330 379 485 78 390 450 487 92

Developing Countries 125 85 91 93 165 115 123 93Total Market Economies 455 464 576 81 555 565 610 93

Centrally PlannedEconomies 265 255 270 b/ 94 300 290 305 b/ 95

World Total 720 719 846 85 855 855 915 93

a/ Capacity utilizzation rate.b/ Estimate assuming capacity utilization rate would be roughly 95%. For 1985,

it is also assumed that net steel imports of the CPE's will remain at 10million tpy.

l/ The average consumption for 1978, 1979 and 1980, has been used as the 1979 baseon which the projected average annual growth rate was applied to calculatethe 1985 consumption.

2/ This compares to an average growth in steel consumption in the developingcountries of about 9.7% per year during 1960-74 and 6.6% annuallyduring 1975-80.

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3.06 Total world steel demand is expected to reach 855 million tons by 1985as against a world production capacity of 915 million tpy of crude steel equivalent.Developing countries are expected to account for nearly half of the increase incapacity between 1980-85 with the CPE's accounting for the remainder. The antici-pated absence of capacity additions in the industrial countries reflects thephase-out of obsolete capacity in the EC and the US, the weak market forecast, aswell as the emphasis on cost-saving and modernization investments to increaseprofitability rather than capacity. Under this scenario, capacity utilization in1985 will be about 93% in the market economies compared to an estimated 81% in1980, and 95% in 1970. This would be close to the effective steel-making capacitythat could be sustained over an extended period of time.

3.07 In the early 1980's, the basic steel supply and demand structure in theindustrial and developing countries will probably remain the same as in the1970's. In the developing countries, a larger proportion (about 60%) of steeldemand and production will continue to be non-flat products such as rebars, wirerods and light sections used in civil engineering construction activities with therest (40%) in flat products, such as tin plate, coils, sheets and plates, whichare used for equipment, pipes and consumer durables. As pointed out in a recentstudy 1/, non-flat steel products, particularly rebars, tend to be competitivelyproduced also by semi-integrated steel mills of smaller sizes and located close tothe market since the simplicity of the technology and small economic sizes,freight savings, and responsiveness to short-term market trends favor this typeof structure. Thus the developing countries are expected to increase capacityprimarily in non-flat steel products. On the other hand, flat steel productsrequire a more sophisticated technology and are in general more efficientlyproduced by large integrated mills mostly in the industrial countries.

3. International Price Trends for Steel Products

3.08 On the basis of the above discussions, it appears that during 1980-85,the steel industry in the market economies will be able to adapt better tomarket conditions and reestablish a healthy balance between demand and capacity.In addition to considerations of profitability, the capacity utilization rate isgenerally believed to be the most influential short-term determinant of steelprices. As capacity utilization rates approach 90% and a seller's market be-gins to develop, market pressures will start to push prices higher. Althoughit is difficult to generalize, past experience indicates significant priceincreases--and particularly so in the export markets--as the capacity utilizationrate exceeds 90%. Since the steel industry in the market economies is projectedto operate at about 93% capacity by the mid-1980's, prices -- and here againespecially export prices -- could therefore be expected to firm up and the pro-fitability of the industry should be satisfactory. Beyond the mid-1980½s, addi-tional capacity would be required to avoid a shortage situation and temporaryextreme price increases may occur if additional capacity is not added in time.Any steel shortage will particularly affect the developing countries, since thisgroup is always the first to suffer in terms of price as well as availabilitywhenever a tight demand/supply balance develops and since the group-s degreeof self-sufficiency is projected to improve only slightly from about 68% in1980 to about 70% in 1985.

1/ Hideo Hashimoto, "Prospects for Markets in Concrete Reinforcing Bars:1980-85, World Bank Division Working Paper No. 1980/5, July 1980.

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3.09 The international prices of selected steel products have been projectedfor 1985 (Annex 3-4) taking into account price trends for iron ore and energy,the economic activity in various regions, and the expected average capacityutilization rate for the industry. The forecasts, together with historicalvalues are shown below. To arrive at the CIF price to most developing countries,ocean freight and related charges will at present generally add roughly betweenUS$40 to 50 per tona of product; by 1985 they are expected to be about US$50 to 60per ton (all in constant 1979 terms).

Historical and Projected Steel Prices - FOB (Antwerp) a/(In US$ per ton)

Rebars Hot-Rolled Strip/Coil(Current (Constant (Current (Constant

Year US$) 1979 US$) b/ US$) 1979 US$) b/

1970 116 346 131 3911972 105 217 128 2651974 311 517 298 4951975 207 298 223 3211976 227 321 246 3481978 234 265 272 3081980 311 276 337 3001985 (Forecast) - 320 - 355

aT Historical prices are the arithmetic average of the quarterly pricespublished by Metal Bulletin.

b/ Based on the Bank's index of international inflation.

3.10 The anticipated situation of the world steel industry by the mid-1980swould indicate opportunities for the developing countries to expand their ownsteel industries wihere efficient import substitution is possible. Thus, developingcountries with relatively large and growing markets, some industrial infrastructure,relatively low labor rates which more than offset their lower labor productivity 1/compared to industrialized countries, and domestic sources of iron ore and/orenergy (e.g. coal, natural gas etc.) would be in a good position to undertakean expansion of their steel industries. One such developing country is Egypt.

B. Egyptian Steel Demand and Production Trends

3.11 Egyptian apparent consumption of finished steel products 2/ was about1.64 million tons in 1980 compared to about 0.67 million tons in 1970 indicat-ing an average anniual growth of about 9.4% during that ten-year period. Incontrast, during 'i950-1970, consumption had grown by only about 4% per year.Domestic production, however, increased by only about 8.8% per year during1970-80, and in 1980 supplied only about 57% of consumption. HADISOLB pro-

1/ Although labor productivity in the developing countries, with the possibleexception of South Korea, is only 25% to 50% of that in industrial countries,wage rates are only 10% to 25% thereby providing some source of comparativeadvantage. Furthermore, steel production in some mills located in developingcountries (e.g. South Korea, Brazil) has now reached or exceeded design capa-city, thus making the equipment productivity of these mills comparable tochose Zn developed countrries.

2/ Finished flat and non-flat steel products respectively are assumed to beequivalent to about 75% and 90% of the crude steel weight. Thus the 1.64million tons of finished steel consumption in 1980 would be equivalent toroughly 1.92 million tons of crude steel.

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duced about 0.36 million tons of flat products and 0.16 million tons ofnon-flat products in 1980 equivalent to 78% and 14% of the local consump-tion of these types of products respectively. The 1979-1980 consumption wasapproximately distributed as follows: rebars and rods - 50%; other non-flatproducts, including steel castings and forgings - 23%; and flat products -27%. The construction industry is the dominant market for steel products inEgypt at present, accounting for about one-half of steel consumption.Construction activity had grown at an average annual real rate of 6.5% during1971-76 and 14% during 1976-79, and the construction boom is expected tocontinue well into the 1980's due to strong housing demand and industrialinvestment activities.

3.12 The historical (1970-80) production, imports and consumption of steelproducts in Egypt are shown in Annex 3-5 and summarized in the following pagefor 1977-80 together with the forecasts for 1985 and 1987. The production in1980 reflects the continuing increase which started in 1975, particularly atHADISOLB and National Steel Company, as the local steel companies improvedoperations and took advantage of the additional capacity that was installedin the early and mid-1970s. However beyond 1980, only minor increases inlocal production can be expected from the existing facilities without anymajor capital investments. The forecast for 1985 and 1987 assumes that HADISOLB'sStage I Program as well as the proposed El Dikheila project proceeds as scheduledthereby resulting in substantially higher production of rebars/rods, medium andheavy sections, as well as flat products. However, the forecast does not assumeany other major investment in the steel sector except for a small continuous bil-let casting facility at Delta Steel. HADISOLB's flat product output is expectedto reach 430 and 495 thousand tons during 1985 and 1987 respectively, compared to355 thousand tons in 1980. The Company's non-flat product output is likewise ex-pected to be 294 and 351 thousand tons during 1985 and 1987 respectively comparedto 160 thousand tons in 1980. The major increase in rebar/rod production willcome from the proposed El Dikheila project which is expected to start operationsin 1985 with an initial output of 200 thousand tons and to reach 790 thousand tonsby 1987. The three semi-integrated public sector steel companies are expected toinitiate feasibility studies for modernization/expansion projects but the scopeand timing of such investments can not be reliably assumed at present and are notshown in the production forecasts. It should suffice to point out that the scopewill take into account the types of non-flat products (e.g. rebars, drawn wire,and light sections) that would otherwise be imported by Egypt as indicated in theprevious table.

3.13 The projected domestic demand for steel products is expected to in-crease by an average of about 8.2% per year during the 1980s. As mentionedearlier, domestic steel consumption increased by an average of about 9.4% peryear during 1970-80. In general, steel demand in a developing economy that is onthe threshold of rapid industrialization, as is the case of Egypt, will grow atslightly more than the rate of growth of GDP. The Egyptian GDP has increased byabout 7.6% per year during 1970-80 and is expected to grow at an average rate ofabout 7% annually during 1980-87. 1/ In particular, the industrial sector isexpected to be the fastest growing sector during the early 1980s, increasing itsoutput by as much as 8% to 10% per year. Thus, an average growth rate in steelconsumption of 8% to 9% per year very reasonable and probably even somewhatconservative. 2/ Finally, demand during the mid-1980½s is expected to be

1/ Bank estimate.2/ During 1970-80, the implied steel consumption/GDP growth ratio averaged

about 1.24; for the forecast period (1980-87), the implied ratio wouldbe 1.17.

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Egypt - Production and Imports of Finished Steel Products(In Thousand Tons)

Average AnnualActual Forecast Growth Rate (%)

1977 1978 1979 1980 1985 1987 1977-80 1980-85

Production a/

. Flat Steel Products 200 222 259 355 430 495 21.0 3.9b. Rebars & Rods b/ 283 288 317 300 550 1,140 2.0 12.9c. Other Non-Flat Products 181 203 215 270 380 430 14.2 7.0

Total Production 664 713 791 925 1,360 2,065 11.8 8.0

Impports

a. Flat Steel Products,Incl. Tubes & Pipes 125 167 191 157 285 350 7.9 12.6

b. Rebars & Rods 163 221 444 728 f/ 625 240 64.6 (3.1)c. Other Non-Flat Product:s 303 278 153 75 160 200 (60.0) 16.0d. Semi-Finished Products 37 47 34 40 80 100 2.0 15.0

Total Imports 628 713 822 1,000 1,150 890 17.8 2.8

Exports c/ 6 54 42 50 80 100 15. 0

Apparent Consumption d/

Flat Products 319 335 408 462 635 745 13.0 7.9Rebars & Rods 446 509 761 828 f/ 1,175 1,380 23.0 8.3Other Non-Flats 484 481 368 345 540 630 (12.0) 8.6

Total 1,249 1,325 1,537 1,635 2,350 e/ 2,755 e/ 9.4 8.2 e/

a/ Finished steel products excluding semi-finished or intermediate productsas well as steel pipes and tubes.

b/ The production forecast for 1985 and 1987 includes 200,000 and 790,000 tonsof rebars and rods respectively from the El Dikheila project.

c/ Egypt exports only flat steel products.dk/ Production plus imports (excluding semi-finished products) less exports without adjust-

ments for stock changes.e/ The forecast uses the- average consumption for 1979 and 1980 as the 1980 base and an

average increase of 8.2% per year for total steel consumption during 1980-87. The projecteddemand is assumed to be distributed as 27% flat, 50% rebars and rods, 23% other non-flats.

f/ Import duties on rebars were suspended in 1980 and international prices were low, prompt-ing a large import quantity to build-up local stocks. Although apparent consumption doesnot take into account stock changes, an adjustment is needed for 1980 to ensure a goodbase figure for the dlemand projections. It is assumed that only about 528,000 of the728,000 tons importedl were actually consumed in 1980 with the remainder carried over asstocks for 1981 (as of March 1981, Delta Steel had stocks of roughly 200,000 tons ofrebars and rods). Thus, 1980 rebar and rod consumption would be about 828,000 tonscompared to local production plus imports of about 1,028,000 tons.

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distributed as follows: 50% rebars and rods, 27% flat products and 23% othernon-flat products as was the case during 1977-80.

3.14 A UNIDO-sponsored study completed in January 1979 estimated that Egyptiansteel demand in 1983 and 1987 would be about 2.1 and 3.1 million tons of finishedproducts respectively which implies a demand of about 2.4 million tons by 1985.The earlier (1978) market evaluation by UEC in connection with the HADISOLBdiagnostic studies (para 1.05) projected a consumption of about 2.3 million tonsand 3.3 million tons of finished products for 1985 and 1990 respectively. Theforecast above used in this report is in line with the UEC projections and slightlyless than that forecasted in the UNIDO-sponsored study.

3.15 On the basis of the above steel consumption forecasts, HADISOLB shouldhave no difficulties in selling the additional production from Stage I. Egyptwill still be importing some flat steel products included in the Stage I product-mixand could absorb the entire output of HADISOLB even if the Company chooses not toproceed with the small quantity of additional exports from 1985 onwards.

C. Comparison of Egyptian and International Prices for Steel Products

3.16 The Egyptian economy has a centralized structure and commodity pricesare still extensively controlled by the Government even after the "open-doorpolicy" was announced in 1973. Due to the complex industrial linkages as well assensitive socio-economic factors, only a gradual elimination or reduction ofconsumer and industrial non-food price subsidies can be expected for a largenumber of products and then only within the context of somewhat parallel increasesin wages and income. Nonetheless, a visible trend in increasing local pricescloser to international levels for a few industrial products, such as steel, hasemerged.

3.17 Domestic steel prices and distribution margins for steel products arecontrolled by the Government. Price changes have been infrequent though substantialwhen they occured. There were only three price increases since 1970: in November1973; in December 1977 (by 25% to 30%); and the most recent in March 1980 (by 20%to 30%). Prior to 1980, domestic ex-factory prices ranged from 85% to 100% of theFOB export prices from Europe and Japan or about 60% to 80% of the landed cost ofimports into Egypt (excluding duties). The recent (March 1980) price increases,however, brought the Egyptian price level reasonably in line with internationalprices. Local ex-factory prices are now 100% to 130% of the FOB export prices inEurope or Japan and about 80% to 105% of the landed cost of imports (Annex 3-6).l/For non-flat steel products, which constitute two-thirds of local steel consump-tion , domestic ex-factory prices are about 90% to 105% of the landed cost ofimports (excluding duties). Steel therefore is among the few commodities whosepresent local price approximates international levels. The present prices areshown below:

1/ The current domestic ex-factory prices range from roughly 90% to 110%of the US Trigger prices (1980, 4th quarter) for hot and cold-rolledsheets, heavy plate, galvanized sheets, rebars and some sections.

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Egypt - I)omestic Steel Prices In Effect Since March 1980

Product LE/Ton US$/TonRange for Range for

Base a/ Extras b/ Base Extras

Pig Iron 125 - 181 -

Billets 135 - 196 -Hot Rolled Strip 211 12-27 306 17-39Hot Rolled Sheel 256 8-10 371 12-15Galvanized Sheet 391 25-90 567 36-131Plate 251 19-45 364 28-65Light Angles 291 17-33 422 25-48Heavy Sections 286 5-42 415 7-61Cold Rolled Sheet 266 13-39 386 19-57Cold Rolled Strip 286 20-88 415 29-128Rebars 269 n.a. 390 n.a.

a/ Includes LE 6 (US$9) per ton for packaging, inspection and loading,except in the case of pig iron and billets.

b/ In line wilth conventional systems elsewhere of charging extras accord-ing to width, thickness, grade and other typical specification options.

3.18 There are tariffs on imported steel products 1/ ranging from 5%to 40% which further increase the difference in the final cost to the consumerbetweeen the imported product and the local steel. On the other hand, energyinputs (power, nLatural gas, and fuel oil) are priced throughout the economy atsubstantially less than their economic or international price equivalent (para8.01). 2 / In the case of HADISOLB, the Company also receives an indirectGovernment subsidy, equivalent to 33% of the price of coke purchased from ELNasr Coke Company (para 4.17). But the Government intends to progressivelyphase-out and eliminate the coke subsidy as HADISOLB's financial strengthimproves with increases in production, efficiency and/or selling prices.Thus, steel producers, though receiving somewhat less for their productscompared to the landed cost of imported steel, are also paying less for theirenergy inputs which constitute a substantial portion of steel productioncosts. Nonetheless, because of the obsolete and inefficient operations,coupled with the low productivity of the Egyptian steel industry, steelproducers in Egypt as a group were unprofitable until prices were raised inMarch 1980. Wit:h these new prices, the steel companies as a group areexpected to about break even or show a small profit.

1/ The 20% import duty on rebars has recently been suspended.2/ The Government has acknowledged the need for a more realistic energy pricing

structure. In the context of two recent Bank energy projects in Egypt(Power III and Cairo Gas Distribution) approved in FY 1980, the Governmenthas initiatedl a comprehensive petroleum product pricing study and thepreliminary results of the study are expected by the end of 1981 and willbe discussed with the Bank. In addition, some increases in the prices ofpetroleum products and natural gas mnay be announced before the end of 1981.

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IV. THE COMPANY

A. Background and Ownership

4.01 The Egyptian Iron and Steel Company (HADISOLB), the project sponsor, isthe only integrated steel plant and the largest steel producer in Egypt. TheCompany was established in 1954 with the construction in Helwan, near Cairo, ofa 0.3 million tpy (finished products) integrated mill supplied by DEMAG (FRG).Commercial operations started in 1958. HADISOLB uses local iron ore from itsown mines as raw material for steel-making and buys its coke from the El NasrCoke Company, another public sector enterprise located adjacent to HADISOLB'sHelwan plant. The first iron ore mine, near Aswan, had a low quality ore (42%Fe and high phosphorus content) and was a relatively small-size deposit (25million tons); it was discontinued in 1975 (para 4.03).

4.02 HADISOLB's equity shareholdings have not changed significantly sincethe early 1960s. About 98% of the equity is held by the Government and otherpublic sector entities and the remaining 2% by private shareholders, includingDEMAG, the supplier of the original plant. Since nationalization in 1961/62,the private shareholders have been entitled to a minimum dividend of 4% on theface value of the shares. This dividend is guaranteed and has in fact been paidby the Government since HADISOLB has not been profitable for the last sevenyears. The equity shareholdings are shown below:

HADISOLB - Equity Shareholdings

Initial (1954) As of December 31, 1979LE Million % LE Million %

Ministry of Finance 2.00 95.2 199.5 62.1Banks and other Institutions a/ 0.04 1.9 12.3 3.8GOFI b/ 0.04 1.9 8.0 2.5IMC c/ - - 94.8 29.5

Sub-total Public Sector Shareholders 2.08 99.0 314.6 97.9

DEMAG 0.01 0.5 1.4 0.4Other Private Shareholders 0.01 0.5 5.3 1.7

Total 2.10 100.0 321.3 100.0

a/ Private sector prior to their nationalization in 1961-62.b/ General Organization for Industrialization.c/ Executive Organization for Industrial and Mining Complexes.

B. Production Facilities and Performance

4.03 In the early 1960's HADISOLB embarked on an expansion program. Atthe outset, it installed its first sinter plant and a light section mill in1964. In 1968 it signed an agreement for a USSR-designed and suppliedexpansion to be carried out in two phases. The first phase was started in1968 and mechanically completed in 1973; it involved primarily the additionof a 0.6 million tpy (liquid steel) integrated flat product plant. The secondphase, with an incremental capacity of also 0.6 million tpy (liquid steel)

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involved an expansion/modernization of the non-flat products facilities. Itwas started in 1972/73 and mechanically completed in 1978, except for themedium section mill which was completed only in 1980. A new iron ore mine atBahariya, some 350 kms southwest of Cairo, was also developed with USSR tech-nology and started operations in 1973. The Bahariya iron ore, although bet-ter than the Aswan ore, is also of poor quality (para 4.08 - 4.10) but the orereserves of the mine are relatively large (250 million tons).

4.04 HADISOLB's major steel-related production facilities and their respectedrated capacities are shown in Annex 4 and summarized below together with therecent production performance.

HADISOLB - Capacity of Main Facilities and Production Performance(In Million Tons)

Facility Product 1975 1976 1977 1978 1979 1980

1. Iron Ore Mine Iron Ore Capacity a/ 2.5 2.5 2.5 2.5 2.5 2.5(Bahariya) Production 0.88 1.11 1.29 1.45 1.70 1.85

Util. Rate (%) 35 44 52 58 68 74

2. Sinter Plants Sinter Capacity 1.74 1.74 2.40 3.15 3.15 3.15Production 0.86 1.08 1.21 1.19 1.41 1.78Util. Rate (%) 49 62 50 38 45 54

3. Blast Furnaces Pig Iron Capacity 0.96 0.96 0.96 0.96 1.30 1.75Production 0.51 0.57 0.63 0.63 0.75 1.00Util. Rate (%) 53 59 66 66 58 57

4. Steel-Making Liquid Capacity 0.93 0.93 1.24 1.55 1.55 1.55Steel Production 0.34 0.43 0.51 0.52 0.58 0.84

Util. Rate (%) 37 46 41 34 37 54

5. Steel-Casting Crude Capacity 0.95 0.95 1.25 1.55 1.55 1.55Steel Production 0.19 0.28 0.36 0.38 0.51 0.76

Util. Rate (%) 20 29 29 24 33 49

6. Rolling Mills Finished Capacity 0.95 0.95 0.95 0.97 0.99 1.19Products Production 0.30 0.27 0.28 0.32 0.36 0.52

Util. Rate (%) 32 28 29 33 36 43C. Major Problem Areas

4.05 The periods 1974-77 and 1978-80 were the operational learning periods forHADISOLB-s first and second phase expansion projects respectively. The produc-tion performance of HADISOLB has slowly improved but is still low, with productionof the steel shops only at about 54% of design capacity in 1980. Under presentconditions, that is, without any major rehabilitation and operations improvementprojects, output can be expected to improve to at most only about 0.9 million

a/ The mining capacity is actually 3.3 million tpy but constraints in thetrain loading' facilities limit potential shipments to Helwan to not morethan 2.5 million tpy at present (assuming locomotives and wagons areavailable). This actual shipping capacity is adequate to serve thepresent requirements of HADISOLB as well as future requirements underthe proposed Project.

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tpy of liquid steel or about 60% of liquid steel capacity by 1985 after somemore learning experience. The extremely poor production performance of HADISOLBat present and unfavorable future prospects without a substantial rehabilitationprogram are primarily due to three major problems: (i) a low quality rawmaterial (local iron ore) that is difficult to process; (ii) equipment whicheither embodies obsolete or inappropriate technology; and (iii) an organizationand management that is basically inadequate to operate and maintain a plant ofHADISOLB-s size, complexity and difficult technical conditions, coupled withoveremployment and an uncompetitive salary structure. Even a strong organizationand management would find the complexity of the operations and the technical andpersonnel problems of the Company a difficult challenge.

4.06 Several consulting firms have studied various aspects of the technicalproblems of HADISOLB since the mid-1970s. The latest and most comprehensivediagnostic studies were undertaken by US Steel Engineers and Consultants (UEC)under the Bank-s engineering loan (para 1.05). The UEC studies also developedpractical approaches for solving these problems and provided the basis forHADISOLB-s Stage I Rehabilitation Program (paras 4.18 - 4.23)

4.07 The three major problem areas (para 4.05) and the proposed solutionsare briefly described below:

4.08 Low Quality of the Bahariya Iron Ore: The local ore mined byHADISOLB at Bahariya has an average content of only 52% Fe, a rather low gradecompared to about 60% to 65% for the typical internationally traded iron ore.The most serious problem with the ore is however its relatively high contentof undesirable compounds such as salts (sodium chloride and potassium chloride),silica, alumina and manganese which make the operation and maintenance of thesinter plant and the blast furnaces very difficult. The use of high qualityimported ore or pellets for blending with the local ore would help significantlybut is not possible at present because there are no adequate port-handlingfacilities and local rail transport is also a serious bottleneck.

4.09 Several studies have been undertaken concerning the possiblebeneficiation of the Bahariya ore. UEC-s technical evaluation, on thebasis of comprehensive laboratory tests and some pilot plant tests at USSteel½s facilities suggest that a leaching and washing beneficiation processwill reduce the salt content, in terms of chlorine equivalent, by about 85%.In this context HADISOLB is proposing to build a semi-industrial pilot oreleaching/washing plant to further evaluate the technical, financial as well asenvironmental aspects as a basis for a full feasibility study. The Bank isfinancing, under the engineering loan, the cost of consultants who will designand engineer the pilot plant. Any decision on a commercial scale beneficiationproject will probably be part of HADISOLB's Stage II Rehabilitation Program.In the meantime, as part of the Stage I Rehabilitation Program, HADISOLB willpartially compensate for the low quality iron ore by implementing the relevantoperations improvement schemes proposed by UEC, and by adding equipment toovercome the reduction in effective capacity as well as the process restrict-ions imposed by the low quality ore (paras 4.11 and 4.12). But productionefficiency at the sintering and blast furnace operations will continue tosuffer until a method for improving the quality of the iron ore rawmaterial is implemented.

4.10 Notwithstanding the low quality of the Bahariya iron ore, it is stillan economic raw material for HADISOLB because the cost of mining and transportis low (financial cost is US$10 per ton of ore delivered to the plant andeconomic cost is roughly about US$15 per ton) compared to the landed cost into

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Egypt of high quality imported iron ore (at least US$40 per ton) 1/. The lowmining cost is due to the relatively easy mining conditions, the low capitalinvestment in the mine associated with the USSR-supplied equipment and techno-logy and the use of many items of salvaged heavy equipment from the Aswan HighDam construction project.

4.11 Equipment andJ Related Technical Problems: The technology and equipmentassociated with much of the original DEMAG plant is over 20 years old and hasalso suffered from inadequate maintenance practices in the past; and thus itis obsolete and must either be scrapped or rehabilitated given the technolo-gical developments during the last twenty years. Aside from the old DEMAG plant,the newer facilities supplied by the USSR are also experiencing technical andoperating problems. In general instrumentation in these facilities is unsatis-factory. Thus, of the roughly 17,000 instruments in the new facilities, about11,000 have been planned for replacement during the next three to five years.In the sintering plants, the high cloride content of the ore has caused saltdeposits to drastically reduce the effective sintering capacity and efficiency.With a modified grate bar design recommended by UEC, and better instrumentationand operating practices to be introduced as part of the proposed Bank Project,the existing sinter plants should be able to support the Stage I target productionof 1.2 million tpy of liquid steel equivalent. The fifth sinter machine (para4.20) included in the Stage I scope will raise sinter production to supportthe design production level of 1.6 million tpy of liquid steel equivalent.

4.12 The operations of the two new blast furnaces have been adversely affectedby several factors; the high salt (chloride) and silica content of the iron ore,the low blast temperatures caused by the low calorific value of the top gas, andthe use of poorly calcined fluxes (limestone and dolomite). The ultimateconsequences of these factors are: a coke consumption rate that is roughly 40%higher than the projected rate under Stage I; an effective capacity that isroughly 60% of the attainable capacity; a very short operating life for thefurnace refractory linings; and frequent and expensive maintenance work (anddowntime) to remove scales as well as to reline the furnaces. UEC has submittedseveral recommendations, particularly the use of an acidic slag in the blastfurnaces followed by external desulphurization, to minimize these operatingproblems and these recommendations have been incorporated in the Stage I scope.

4.13 The three new basic oxygen furnaces (BOF) in the steel-making shop alsohave problems which will be corrected under the Bank Project. The continuousslab casting shop has produced close to capacity but the yield is poor (e.g. toomany rejects) and the surface quality of the slab is also poor. Better instru-mentation and better operating practice should correct most of the slab-castingproblems. The three continuous billet-casters on the other hand, have producedat only one-third of capacity and are the most serious production bottlenecks atpresent. A major modification of the billet casters will be required to correctthe problems and the Project scope includes a major revamp of one billetcaster. The remaining billet casters will be modified in the Stage II Rehabili-tation Program to minimize the disruption of production during the Stage Iimplementation period as well as to confirm the level of improvement that couldbe achieved through the modification of the first billet caster.

1/ On an iron content basis, that is, per ton of Fe, the financial cost andthe economic cost of the Bahariya ore would be about UJS$19 and US$29 res-pectively compared to the landed cost of high quality imported ore ofabout US$62. These costs are in 1980 ITS$.

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4.14 Finally, the iron ore storage and handling system at the Helwansite is limited and cannot support an output of more than roughly one milliontpy of liquid steel at present, especially not with the disruption in railwaytransportation from the Bahariya mines during the three-month sandstormseason. Again, Stage I is designed to overcome this problem. At theBahariya mine, mining capacity is adequate with the addition of five 70-tontrucks which were financed under the Bank's Second Industrial Import Loan (para1.06).

4.15 Management and Organizational Problems: As mentioned earlier (para2.11), the policies and regulations governing public sector enterprises areamong the major causes of the managerial and organizational problems ofHADISOLB. The Government has agreed however, to provide HADISOLB such degreeof autonomy in the areas of investment, procurement, pricing, and wages and man-agement policies to enable the Company to achieve its financial and operationalobjectives under the Project. Even now, HADISOLB is already taking advantageof the liberal regulations (para 2.12) introduced during the last few years.Thus, the Company has introduced a more innovative incentive system during thepast two years, and although it has several shortcomings and still leaves awide gap between salaries and wages paid in the private sector, the systemappears to have had a positive impact on overall performance. In addition,the top management of HADISOLB has began to recognize and take correctivemeasures with respect to the weak operating systems of the Company. Thus,UEC, under a separate UNIDO financed project, designed a computerized prevent-ive maintenance and spare parts control system which has been implementedalso with technical assistance from UNIDO. This UEC assignment recommended amuch broader set of computerized support functions for production such as aproduction planning system and a raw material control system; these have beenincluded in the scope of the Project. The Company has also established anenergy conservation unit and an industrial engineering unit to fill importantorganizational voids in the technical support staff. But much remains to bedone. For example, the employee turnover rates, specially among managers (20%-30%) and among engineers and skilled workers (10% - 15%) are still very high.Also, while the Company has a relatively well-conceived training program,implementation is not satisfactory. At present, the steel mill has no envi-ronmental protection standards nor does it have any pollution monitoringequipment. Finally, industrial safety is also not adequately emphasized.Under the Project, these shortcomings will begin to be corrected (para 5.05).

D. Financial Performance

4.16 The recent financial performance of HADISOLB is shown below, and the pro-jected situations with and without Stage I are discussed in Chapter VII.

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HADISOLB - Historical Financial Performance(in Million of Current LE)

1974 1976 1976 1977 1978 1979 1980 a/(6 months)

Gross Revenues 35.0 56.5 58.9 62.8 83.0 106.7 78.0Cost of Sales & Overhead 34.6 74.6 81.3 74.7 90.0 110.3 76.4Operating Profit (Loss) 0.4 (18.1) (22.4) (11.9) (7.0) ( 3.6) 1.6Interest Expense 0.7 2.0 2.5 2.4 2.7 2.4 1.6

Net Profit (0.3) (20.1) (24.9) (14.3) (9.7) (6.0) 0.0Cash Generation 4.3 (9.7) (7.6) 4.6 9.9 18.5 13.3

Current Assets 58.5 84.5 101.4 124.5 152.4 180.7 214.4Fixed Assets 221.1 231.4 237.2 230.2 221.7 261.5 262.8Current L-iabilities 36.9 64.6 84.0 95.9 123.7 149.8 158.0Long-term Debt 55.8 48.8 43.5 3P.2 33.2 28.1 28.2Equity & Reserves 186.9 202.5 211.1 220.6 217.4 264.3 283.6

Net Profit as X

of Revenue (1) (36) (42) (23) (12) (2) 0Current Ratio 1.6 1.3 1.2 1.3 1.2 1.2 1.2Debt/Equity Ratio 23:77 19:81 17:83 15:85 13:87 10:90 9:91

a/ The fiscal year for HADISOLB was changed from calendar year to July-June startingin July 1980. A half-year statement was therefore prepared for January-June 1980.

4.17 HADISOLB has not been profitable for many years now. This is mostlydue to the very slow build-up of capacity utilization for the new facilitiesand to a lesser extent, to the steel product prices set by the Government which,until March 1980, were much below international levels. Since 1978, losseshave been reduced substantially due to the steel price increase in December 1977and the slow, but consistent, increase in production. In spite of the largecumulative losses, HADISOLB's debt/ equity ratio was very good at 9:91 in June1980 due to the 100% equity financing from the Government for the USSR-suppliedfacilities. Nonetheless, an increasingly large fraction of the growingcurrent assets required to support the higher production level are beingfinanced by short-term debt because cash generation is inadequate. Thecurrent ratio has declined from 1.6 in 1974 to 1.2 in mid-1980. As notedbefore, the Government presently subsidize HADISOLB's coke purchases to mini-mize the Company's losses. The subsidy amounts to LE 25/ton of coke, or about33% of the coke price 1/. Without the subsidy, the coke price charged by ElNasr Coke Company of about LE 75 per ton would be comparable to internationalprices. It is the intention of the Government to gradually phase-out the cokesubsidy (para 3.18).

E. HADISOLB's Stage I Rehabilitation Program

4.18 There is a very large sunk investment in HADISOLB's facilities (steelplant and mine), with a gross book-value of about US$0.7 billion equivalent

1/ Only one-half of the subsidy was given to HADISOLB in 1979 and none wasgiven in the first half of 1980. However the full subsidy is in effectfor FY81. Without the 16.6% (LE 12.50/ton) coke subsidy in 1979, theloss would be LE 12 million instead of LE 1.9 million.

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and a replacement value at present prices of roughly US$1.5 billion. Therehabilitation and modernization of IIADISOLB, coupled with improvements inoperating practices and a strengthening of its management and organizationis the most economic alternative available to Egypt to meet a large por-tion of its steel requirements. During 1979-80, HADISOLB gradually developedStage I on the basis of part of the UEC recommendations, designed to increasethe achievable output to about 1.2 million tpy of liquid steel equivalent, orabout 75% of the original design capacity of 1.6 million tpy. A subsequentStage II Program, which will be defined by March 1983 as part of the Bankproject with the assistance of consultants (para 5.05), will further increasethe achievable output to the full design capacity or even more, depending on theresult of studies to be undertaken shortly. In this context, HADISOLB hasagreed that its decisions on new investments as well as choices of operatingpractices shall take into account, to the extent that is technically and finan-cially feasible, such economic factors as the economic cost of productioninputs, capital cost, economic benefits, and long-term trends in the inter-national prices of steel. HADISOLB will also review by December 31, 1983, thetechnical and financial feasibility of using coke-oven gas in its operation andmake reasonable efforts to reach agreement with the El Nasr Coke Company for thesupply of coke-oven gas. 1/

4.19 The original Stage I concept developed by HADISOLB only involved thephysical plant rehabilitation; it was subsequently refined and broadenedduring appraisal to maximize the energy conservation aspects, to include theinitial steps towards strengthening of the management/organization of HADISOLB,to promote substantial improvements in the Company's operating practices, andto introduce technical assistance to help ensure efficient implementation ofStage I. The subsequent Stage II will likely involve: revamping of the othertwo continuous billet casters; replacement of the oxygen plants; upgrading ofthe cold-rolling mill to produce high quality blackplate suitable for tin plateand galvanized sheet production; installation of electrolytic tinning facilitieseither as part of HADISOLB's operation or as a separate joint-venture project;installation of a continuous bloom caster; expansion of the train loadingcapacity at the Bahariya mine; and iron ore beneficiation.

4.20 Stage I is expected to cost about US$174 million equivalent orabout US$580 per ton of incremental liquid steel output. It thus comparesmost favorably with the cost of about US$1,500 per ton (1980 prices) fornew greenfield plants (blast furnace, BOF steel-making, continuous castingand rolling facilities). It will be implemented with financial assistance orequipment supply from three different sources: (i) the USSR, whose scope ofwork mainly involves the supply of equipment to ease some of the productionbottlenecks in the new plant it recently supplied; (ii) KfW, whose projectinvolves the rehabilitation of the four old rolling mills in the originalDEMAG plant; and (iii) the Bank, whose Project is described in Chapter V. Aprotocol of agreement spelling out the remaining obligations, including supplyof specified equipment, of the USSR supplier was signed in September 1980 and

1/ A possible natural gas-based ammonia/urea project may be initiated by ElNasr Coke Company. This would free the coke-oven gas, which is presentlyused for fertilizer production, for use by HADISOLB. There is an exist-ing coke-oven gas pipeline connecting the two plants. The substitution bycoke-oven gas of part of the natural gas requirements of HADISOLB appearsto be economic and should be encouraged by the Bank.

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is now under implementation. In addition to the supply of five equipment pack-ages (only three of which are essential to Stage I) and some spares, it alsoinvolves some technical assistance to overcome specific operating problems. Theequipment packages will be supplied at an FOB cost of US$3.6 million equivalent.An additional cost of about US$6.4 million will cover freight and local purchases.Of the US$10 million total cost, about US$7 million equivalent is for a fifthsinter machine w`hich is not needed to reach the Stage I output of 1.2 milliontpy of liquid st,eel equivalent but for reaching the design output of 1.6 milliontpy. The fifth sinter plant is expected to be completed in late 1984 or early1985. The other equipment will be delivered before the end of 1983. The totalcost (about US$10 million) will be financed by the Egyptian Government throughits bilateral clearing account with the USSR. The Government funds will berecorded as loans to HADISOLB but will probably be converted to equity as wasdone with previous loans.

4.21 The KfW-financed component of Stage I is expected to cost US$58 millionequivalent; it was appraised in July 1980 and will be implemented on a turnkeybasis. The bidding documents were issued in early 1981 and contract awardis expected in late 1981. KfW envisages a loan of about US$45 million equiva-lent; it will be made to the Government on concessionary terms and onlent toHADISOLB (para 6.09). The remaining cost of about US$13 million, all for localpurchases, will be financed by the Government in the form of additional equitycontributions to HADISOLB.

4.22 The cost and financing plan for Stage I is as follows:

Stage I Cost and Financing Plan - In US$ Millions

Capital Cost Estimate a/ Financing SourceForeign Exchange Local

Component Cost b/ Cost Total Government KfW Bank

1. USSR Project 5 5 10 10 - -2. KfW Project 40 18 58 13 453. Bank Project 76 30 106 42 - 64

Total 121 53 174 65 45 64

a/ Includes interest during construction (IDC) and contingencies.b/ Includes estimated indirect foreign exchange cost.

4.23 The three components of Stage I are physically separable but opera-tionally inter-related. Thus, implementation of the components can proceedindependently of each other but should be coordinated in terms of time-scheduleto ensure that all elements are in place and ready to function by the targetStage I completion date (which is the same as the Bank Project completion date).In terms of implementation schedule, the USSR component, which is already under-way,is expected to be completed first, followed by the KfW component and thenthe Bank Project. Thus, even if the KfW and/or the USSR components are delayedby roughly six-months, the operating benefits from the Bank Project or Stage Iare not expected to be adversely affected.

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V. THE PROJECT

A. Project Concept and Description

1. Stage I Rehabilitation Program

5.01 As stated previously the overall concept of HADISOLB's Stage I Rehabili-tation Program evolved from the extensive technical/economic/management studiesconducted by US Steel Engineers and Consultants (UEC) between 1977 and 1979,financed under Bank Loan No. S5-EGT, (para 1.05). From that work, and furtherdiscussions between HADISOLB, UEC and the Bank, a list of key high priorityelements was selected as the basis for Stage I. Subsequently, at the Bank-srequest, a follow-up study was done by EGITALEC/ITALIMPIANTI to confirm thetechnical viability of Stage I and the Bank Project itself including its basicmakeup, design, scope, equipment list, unit capacities, product flow, yields,and attainable capacity of the complex. A process flow chart and the expectedproduction levels of HADISOLB after completion of Stage I are shown in Annex5-1.

5.02 The prime objective of Stage I, of which the proposed Bank Project isa critical component, is to more effectively utilize the extensive existingfacilities through rehabilitation and roundout investments, together withoperational and management improvements designed to achieve substantial increasesin productivity and product quality as well as reduce costs of production,particularly through energy conservation. 1/ Stage I will also facilitate moreeffective integration between HADISOLB-s relatively new USSR-supplied plant andits older DEMAG-built plant.2/ Significant improvements in productivity,quality and efficiency will be achieved through: the shutdown of some older,less efficient iron and steel-making facilities (i.e., the older, small blastfurnaces and the Thomas Shop) and shifting of iron and liquid steel productionto more efficient facilities (i.e., new, larger blast furnaces, and BOF shop)together with more extensive use of continuous casting instead of ingot teeming;the introduction of more effective and reliable instrumentation systems toimprove process control; the modification of deficient facilities and/or instal-lation of complementary equipment to overcome existing technical and designshortcomings; and most important, the implementation of operations and manage-ment improvement schemes. Stage I would raise the achievable productionlevel of HADISOLB during the mid-1980 s from about 0.9 million tpy of liquidsteel equivalent to about 1.2 million tpy by FY88. HADISOLB-s management alsorecognizes the importance of terminating uneconomic production facilities andconfirmed that as soon as the Stage I target production level of 1.2 milliontons of liquid steel per year is nearly attained, HADISOLB will review the casefor closing the small blast furnaces and the Thomas steel-making shop, and takeappropriate action based on full consideration of financial and economicfactors. Initial steps towards developing an environmental protection capability,

1/ For example, coke consumption per ton of saleable product is expected tofall by over 25%.

2/ Until recently these two plants, located at the same site, had beenplanned and operated separately, with little or no interchange of products,and services between the two.

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as well as the strengthening of the industrial safety and occupational healthpractices, and of the training program of the Company, are all included in theStage I Program scope.

2. The Bank Project

5.03 Within Stage I, the Bank Project will consist of two packages - anequipment package and a management/operations improvement package includingtechnical assistance.

5.04 The equipment package in the Bank Project includes items to improve,modify or introduce the following: raw material handling and preparation (ironore yard, sinter plant modifications); lime calcining; external desulphurizationof hot metal (outside blast furnace); BOF steelmaking, ladle preparation, trans-fer cars, argon stirring; one continuous billet casting machine; ingot teemingfacilities; instruments, scales and weighing equipment; pollution monitoringequipment; a newq computer for the information service center; electrical dis-tribution; and additional plant services including supply of oxygen and argongas. With respsect to the installation of a new oxygen plant equipped with anargon separationi unit, a brief technical study by HADISOLB-s consultants willbe prepared to confirm the viability of accelerating by three years the replace-ment of one of the existing oxygen plants. Completion of this review will be acondition of Bank disbursement for this item. Additional details are given inAnnex 5-2.

5.05 The operations and management improvement package, as well as theclosely related technical assistance services, are designed to implement theProject efficiently and - of greater long-range importance - to improve opera-tional efficiency, control costs of production, improve the general performancelevel of HIADISOLB and plan the future development of the Company in an economicmanner. It consists of the following:

(a) Implemnentation of about 80 operations improvement schemesrecommended in the UEC diagnostic study. HADISOLB has alreadyimplemented, or is in the process of implementing, about 150other operations improvement schemes which had also beenrecommended by UEC.

(b) Development and introduction by July 1984 of a more competitive andeffective job classification/grade system and remuneration system asdiscussed in para 5.28.

(c) Development and application of computerized management control andinformation systems including, but not limited to, the followingwhich are to be implemented by the end of 1984: production planningand material tracking system; manpower planning and control system;raw material control and mines development system; and rolling stockutilization control system.

(d) Strengthening of the industrial safety and occupational healthpractices (para 5.15).

(e) Development by the end of L982, and thereafter implementation ofenvironmental protection standards and policies acceptable to theBank, including the proper operaticn and maintenance of the pollution

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monitoring instruments to be installed as part of the Project

(para 5.15).

(f0 Development of a sound long-range plan for overall plant rehabi-litation and roundout, including the conceptual engineering anddesign of the Stage II Rehabilitation Program, and completion ofa feasibility study by March 1983.

(g) Strengthening of the Company's general training program, includingdevelopment by December 1982 of a managerial training program andpolicy/program of training or retraining redundant employees to enablethem to be productively employed in the Company or elsewhere (paras5.23 to 5.26).

Agreement was reached with the the Company that it will undertake these programswith the assistance oL consultants, under terms of reference acceptable to the Bank.

B. Production Program, Raw Materials and Utilities

1. Production Program

o.06 The Company's production build-up over the next eight years is expectedto be gradual, being restricted by the operating and raw material problemsdescribed in Chapter IV, but partially alleviated under Stage I by (i) gradualremoval of production bottlenecks (especially billet caster); (ii) the introduc-tion of improved operating and maintenance practices; and (iii) higher metallicyields as a consequence of improved process control and instrumentation.

HADISOLB's Expected Production Build-up 1981-1988(1,000 tons)

With Stage I a/ Without Stage I d/Rolled c/ Rolled

Liquid Metallic b/ Steel Pig Liquid SteelYear Steel Yield (%) Products Iron Total Steel Products

FY81 814 76 620 120 740 814 620FY782 825 76 627 120 747 871 662FY83 836 77 644 100 744 896 681FY84 937 77 721 85 806 889 676FY85 1,040 77 801 70 871 866 658FY86 1,170 78 913 60 973 838 637FY87 1,227 79 957 60 1,017 812 617FY88 1,250 79 986 60 1,046 783 595

a/ Assumes effective utilization of technical assistance for project implementa-tion and operating practices.

bl Under the Project and based primarily on adopting suggestions made by UEC,HADISOLB is expected to achieve some improvements in overall plant metallicyield. TWSe have assumed a nominal improvement of 3 percentage points in theliquid steel to finished product yield. Metallic yields assumed to be attainedthrough the Project are judged to be somewhat conservative and may be surpas-sed.

c/ Including cast billets for sale. The product mix for FY88 and later years isshown in Annex 5-3.

d/ Without Stage I, pig iron production ranges between 120,000 to 60,000 tpy,similar to the case with Stage I.

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The assumed Stage I production build-up, reaching the full target output onlyin FY88, is admittedly slow. However, it is considered realistic given theuncertainties involved in introducing improved operating practices and in thereponsiveness of the Company to the difficult challenge it faces in imple-meriting Stage I, 3.s well as the constraints in the project implementationcapability in the country, particularly the overloaded industrial infrastruc-ture and lack of trained manpower.

2. Raw Materials

5.07 At the projected FY88 production level with Stage I, HADISOLB will use2.1 million tons o:f iron ore, 0.86 million tons of coke and 0.40 million tons oflimestone (from its own mines). The required quantities of local iron ore andlimestone are expected to be available without problems. Under Stage I, theiron ore storage and handling capacity at Helwan will be increased to permitthe build-up of stocks (up to 2 months supply). In order to assure reliabletransportation between the mine and the steel plant, measures are also beingtaken by the Railways to avoid blockage of the tracks by shifting sands, duringthe three-month sandstorm season, including improved track maintenance bymechanized means. In anticipation of the higher iron ore requirements under thefuture Stage II Program, project studies are now underway to expand and improveore mining facilities which would be included in the Stage II Program scope. Asmentioned earlier (para 4.09), HADISOLB also intends to construct a small pilotplant (of about 50 to 100 tons per day) for washing/leaching the local iron ore.In the long-term, the possibility of utilizing high quality imported iron ore, topermit economic levels of blending with local ore, is being reviewed by HADISOLB.Blending of imported and local iron ores will be possible when the proposed ElDikheila port becomes available in the mid-1980s as presently planned.

5.08 All of Egypt's coking coal requirements are imported from the USA,Poland, USSR, Soulh Africa and Australia. In the near term it is expectedthat there will be enough coking coal available on world markets. However, inthe long-term, the availability and particularly the price, of good cokingcoal are more uncertain, although these are not presently considered seriousproblems. HADISOILB has a representative on Egypt's coal import committee, tohelp assure that adequate imports of coking coal will be made, as needed tosupport continuous coke plant operations. Finally, the El Nasr Coke Companyhas sufficient calpacity to supply HADISOLB's coke requirements under the StageI Program. 1/ Supply of raw material and additives needed for steelmaking,are not expected to cause problems for HADISOLB.

3. Utilitieas

5.09 Electric Power: HADISOLB is working closely with the Egyptian Elec-trical Authority (EEA) 2/, to assure that its expanding needs for electric powerwill be met effectively without causing delays in the startup of new facilitiesor curtailing future production due to lack of power. Although EEA does notmake legal commitments, that authority has confirmed (verbally) that HADISOLB'sprojected requirement of 115 MW (maximum half-hour load) at 1.25 million tpylevel (at 0.75/0.85 power factor), is already incorporated in EEA-s approved

1/ Major maintenance of some coke ovens may be necessary at a future date.2/ HADISOLB has a representative who sits as a committee member during meetings

of the Egyptian Electrical Authority.

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load and facility plans for 1981-1985. HADISOLB's own estimate of loadrequirement (about 105 MW) allows for some margin of safety since - under theProject - new electrical load management equipment is expected to result inmore effective load management and thereby reduce peak power requirements.

5.10 Water: HADISOLB obtains its plant service water from its own system(operated by the Egyptian Water Authority) near the Nile River, adjacent to theHelwan plant.l/ Capacity of this system is adequate for the Stage I needs.Its reliability will be improved under the Project by addition of automaticstarting diesel engine-driven pumps to cover occasional surge water demand,power outages and other emergencies.

5.11 Natural Gas: HADISOLB's total requirement for natural gas underStage I is expected to be about 230 million cubic meters per year, based oncontinued heavy usage of natural gas for injection in the two new blast fur-naces and assuming that El Nasr Coke Company will continue to use all the coke-oven gas. A major pipeline from gas fields in the Gulf of Suez to the Cairoares conducts this gas to the Helwan plant; availability of natural gas forHADISOLB-s use is not expected to be a problem during the 1980-s.

5.12 Argon Supply: The supply of argon gas for the new argon stirringstations is to be provided from a new oxygen plant equipped with an argonseparation unit, all included in the project scope.

5.13 The Government agreed to ensure that HADISOLB will have access to allthe coke and utilities (e.g. water and energy) needed for the efficient operationof the Company.

C. Ecological and Occupational Health Considerations

5.14 At present, HADISOLB does not have effective programs for properoccupational health safeguards for employees, plant safety, plant air quality,or control of liquid effluents; nor does it have suitable equipment to measureactual conditions existing in the workplace for air and water pollution. 2/ Asan example, HADISOLB-s recent records for lost time accidents indicate a levelabout 50 times that being experienced in steel plants in developed countries.Fatal accidents are also about 5 to 10 times higher. The attitude of HADISOLBmanagement in the past has been that operating problems took precedence overenvironmental and occupational health problems. However, over the last fewyears the topic has been raised frequently by the Government authorities andthe Bank, and a gradual change in attitude is developing. At least the topmanagement of HADISOLB is now more committed towards improving worker safety andecology. As part of the Project, HADISOLB agreed that a consultant would helpwork out a practical action program - including detailed procedures - to beimplemented by the Company with the help of the technical assistance firm to bechosen under the Project (para 5.18).

5.15 Specifically, the Company would undertake the following:

(i) Development by the Company of an effective Plant Safety and OccupationalHealth Program which will include short training visits to IIADISOLB by experiencedmanagers of steel safety programs now in use in other countries, along with the

1/ Potable water is supplied by wells at Helwan.2/ Possibly with exception of noise.

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supply of descriptions of systems used, safety manuals, and related materialaids. Such visits will be arranged through the technical assistance firm (para5.18). Visits of HADISOLB's safety personnel to foreign steel plants would also bearranged. Such plans are to be implemented soon after hiring of the consultants,and will cover at least: (a) classes in safety awareness; (b) regular in-plantsafety meetings; (c) provision of routine safety equipment such as hard hats,safety shoes, gogZgles, ear protection, and protective clothing; and (d) trainingin safe working methods and procedures.

(ii) With respect to ecology and working conditions, HADISOLB will purchaseunder the Project, suitable instruments for initial monitoring of air and waterpollution, and develop (with Bank assistance and help from the technical assist-ance firm) an ongoing program for effective measurement, and continued monitor-ing of employee working conditions (i.e., gases, dust, fumes, noise, chemicaland radiation exposure, temperature, etc., at job site) and air and water pol-lution in the plant and immediate surrounding area. The Company will alsodevelop, suitable standards for air and water pollution and a plan for futurecontrol of air anld water pollution, including pollution control facilitiesto be incorporated in its Stage II Rehabilitation Program.

D. Project Implementation, Management and Training

5.16 HADISOLB recognizes the importance of efficient implementation ofStage I and of quickly developing the scope of the Stage II Program particularlygiven the present: situation where Egypt has to rely on imports for a large partof its steel requirements. Overall control of implementation rests with HADISOLB.The implementation arrangements envisage a project implementation unit (PIU)and a coordination unit (CU) within HADISOLB with adequate authority andresponsibility for the entire Stage I reporting directly to the chairman. ThePIU and CU will be assisted by an experienced foreign operating steel company(OSC) providing broad technical assistance particularly in the implementationof the management: and operations improvement program, and a local engineeringcompany (EGITALEC) providing more focused project engineering and managementassistance for the implementation of the equipment package included in theProject. In add.ition, individual foreign or local consultants may be hired fromtime to time as dleemed necessary by either the Bank (in consultation withHADISOLB) or by HIADISOLB for specific trouble shooting or very highly specializedtechnical expertise (e.g. pollution, civil works). This implementation arrange-ment is schematically shown in Annex 5-4 and the division of responsibilities isshown in Annex 5-5 and described briefly below.

1. Project Engineering Assistance for the Equipment Package

5.17 The PIIJ, established in 1980, is comprised of individuals with exten-sive plant operating and maintenance experience, but with limited knowledge inproject management and implementation. Given this lack of suitable experienceand the limited staff of the PIU, and even after recognizing that the physicalpart of the Project is relatively simple, HADISOLB agreed that the PIU willrestrict its function to overall top management control, coordination, andfollow-up; and delegate most of the day to day work of project implementationsuch as engineering, procurement, critical path scheduling, inspection, expediting,shipping, field supervision and control, construction management, budgets, testingand commissioning, to the more experienced personnel available through EGITALEC,the recently hired project engineering firm. Thus, most of the responsibility

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for effectively carrying out the work of implementation, and ensuring that projectschedules, costs, and other aspects are controlled efficiently, will be delegated toEGITALEC,l/ a joint venture of ITALIMPIANTI of Italy, a well-known and experiencedfirm with world-wide design and erection experience in steel plant facilities,and of the four public sector Egyptian operating steel companies. ITALIMPIANTIhas given an assurance to HADISOLB that EGITALEC will have prompt and completeaccess to all the specialized expertise available at ITALIAMPIANTI as needed.HADISOLB's contract with EGITALEC includes provisions for technical supportfrom ITALIMPIANTI.

2. Technical Assistance from an Operating Steel Company for Improvementsin Operations and Management

5.18 An experienced foreign operating steel company (OSC) is to be selectedto provide technical assistance to both the PIU and the CU. The OSC will assistthe PIU in handling needed coordination between technical detail and operatingaspects of the Stage I Program and the several comprehensive technical studieswhich have already been completed. It will also assist the PIU in such areasas specialized aspects of equipment design, desired operating characteristics ofnew facilities, steel plant operating practices, commercial practices, as wellas Project implementation and operator and maintenance training. The mostimportant function to be covered by the OSC is assistance in actual implementa-tion of the operations and management improvement programs mentioned in para5.05. The CU will coordinate the implementation of these programs betweenHADISOLB's operating departments and the OSC. The OSC's tasks would also cover:(i) technical assistance in implementation of the equipment package included inthe Project as needed, and not covered by HADISOLB-s contract with EGITALEC and(ii) full access to HADISOLB of all operational, managerial, and commercialknow-how of the OSC, throughout execution of the Project, covering all areas ofplant operations, maintenance, process control, management, training, etc.including troubleshooting and general problem-solving. A satisfactory initialProject implementation organization, with appropriate working relationshipsbetween the PIU, the CU, OSC and EGITALEC, and an appropriate staffing plan forboth the PIU and the CU has been agreed upon.

5.19 Although the equipment package included in the Bank Project is notcomplex, the overall coordination of the three components of Stage I, togetherwith the plant's serious raw material, operating, and maintenance problems, andthe highly complex technical and economic analysis needed to develop a goodStage II rehabilitation plan will all require a very high level of effort andcoordination to achieve HADISOLB's long-range objectives within a reasonabletime (say 6 to 8 years). Adequate technical assistance and effective engineer-ing services are essential elements to achieve the improvements indicatedin this report. A draft contract negotiated between HADISOLB and EGITALEC hasbeen reviewed by the Bank and comments have been given to HADISOLB. Satisfactorycontracts with EGITALEC and with an OSC are conditions of loan effectiveness.Finally, agreement was also reached that these consultancy services will beretained throughout project execution, including during the start-up period inthe case of the OSC.

5.20 A list of five highly qualified foreign operating steel companies

(OSC candidates) for the technical assistance services has already been agreedupon, and satisfactory terms of reference for such services has already been

1/ For a few selected equipment packages, the equipment supplier will assumesome of the duties mentioned above.

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issued. Proposals are expected to be received by HADISOLB in June/July 1981and a contract signed by August 1981.

5.21 The schedule for implementation of the Project is given in Annex 5-6.To get the Project moving on schedule, prequalification of major suppliers wouldhave to be completed by June 1981; the writing of the main specifications byJune/October 1981; invitation to bid to be issued by July/November 1981; andmajor contracts signed between February and August 1982. Mechanical completionis expected by March 1985, followed by a testing and commissioning periodthrough September 1985.

5.22 The above schedule is considered realistic and attainable. It givescognizance to local conditions and makes adequate allowance for some expecteddifficulties in slaking needed changes in HADISOLB's manageaent laid controlpractices, and in its organization. For purposes of monitoring actual progress,the above schedule 1/ and also individual unit implementation schedules pre-pared by EGITALEC will be used. The development of a simple but accurateschedule for implementation, and the periodic updating of this schedule, isincluded in the responsibilities of EGITALEC. It has been agreed that suchschedule will be updated quarterly and will be sent to the Bank as a partof the reporting requirements for this Project. Both the USSR component andthe KfW component, are expected to be physically completed before the end of1984 while the Bank Project is expected to be mechanically completed by thefirst quarter of 1985. However, in order to allow for unforeseen delays, and amoderate learning curve, the attainment of full production under the Stage Iprogram is not claimed until FY88 for purposes of the financial and economicanalysis of Stage I and the Project.

3. Traininlg

5.23 Stage ], and the Project in particular, contain a few areas where theintroduction of -partially or entirely new processes are involved, such as: (i)external desulphurization of hot metal; (ii) argon stirring; (iii) BOF practices(i.e., calcined lime supply, new ladle preparation practices, slide gates); and(iv) continuous casting.

5.24 In such cases, training under the OSC contract at foreign plantsoperating such equipment and/or brief training conducted by foreign experts atHADISOLB is envisaged. Other cases involving very specialized expertise - suchas operations/maintenance on specific instruments/control systems; pollutionmonitoring, electrical distribution, computer applications, will probablyrequire additional training and follow-up from the OSC or directly from equip-ment suppliers (as a part of their installation/startup services). HADISOLB hasagreed that adequate arrangements for such training will be included in contrac-tual arrangements with the OSC and equipment suppliers.

5.25 Another aspect of employee training now being considered by HADISOLBis retraining some of its surplus manpower. This consideration is part of anoverall long-range plan for HADISOLB to gradually reduce its excess manpowerthrough normal attrition, shifting existing manpower to new or expanded produc-tion facilities whenever possible, and/or shifting excess personnel to other use-ful functions inside or outside the plant (possibly including general services,

1/ It is expected that schedules utilized for purposes of management object-ives will be tighter.

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maintenance, plant housekeeping, collection of scrap throughout the plant area,etc.).

5.26 HADISOLB's plan for handling its problem of excessive manpowerdoes not include forced layoffs or cutbacks of its surplus work force (esti-mated as over one-third of its present work force), but instead depends ona more gradual reduction as outlined above. Agreement was reached thatHADISOLB will carry out adequate training programs designed to train HADISOLBstaff for productive employment within the Company or elsewhere. In addition,HADISOLB will follow strict recruitment policies to help contain over-staffing.

E. Organizational Improvements and Associated Risks

5.27 Stage I faces one very serious risk -- the weak organization ofHADISOLB -- which could seriously hinder the effective implementation of theprogram as well as prevent the Company from realizing the full improvements inproductivity, efficiency, and quality that are expected to be attained. Thus,the institution-building aspects included in Stage I through the proposed BankProject, including the Project implementation arrangements, are very important,and make the Bank role crucial to the success of Stage I. However, it is recog-nized that only a step-by-step and evolutionary process of change and improve-ment will bring about the strengthening of HADISOLB. The Bank's strategy underthe proposed Project is to help set the most basic institutional foundationsupon which further hoped-for improvements can be built. This involves two mainareas: the first relates to the ability of the Company to plan its operationsand to operate its plant efficiently and effectively, and the second relates tothe ability of the Company to attract and retain qualified personnel as well asto motivate its workforce to perform well. The first area was discussed inparas 5.15 to 5.19, while the second is discussed below:

5.28 Employee turnover in HADISOLB is very high, particularly in themanagerial and skilled labor group. In addition, differentiation between jobsis grossly inadequate, allowing for only seven job grades from the chairmandown to the lowest employee compared to the over 30 job classifications foundin steel companies in the industrial countries and advanced developing count-ries. Thus, not only is the absolute level of wages/salaries uncompetitive,but the relative salaries within the Company also do not promote individualmotivation and acceptance of responsibility/authority due to the absence ofmeaningful differentiation. The production incentives are now primarily designedto reduce somewhat the total compensation gap between the public sector and theprivate sector 1/ and only secondly to induce better productivity. They arebased solely on total output. The incentive system must be improved to takeinto account responsibility, authority, the value of the equipment/producthandled, efficiency, product quality as well as productivity, etc. as in othermodern steel mills. To prepare for the enactment of a public sector reform law(para 2.12), HADISOLB agreed to develop with the assistance of the OSC a jobclassification and grading system that will form the basis for a more rationalbasic salary structure in the future as well as a transitional remuneration andincentive system suitable to its requirements. After taking into account theBank's comments, the Company agreed to take steps to implement such system notlater than July 1984.

1/ At present, the salary levels in the private sector are about 100% to200% higher than for similar occupations in the public sector.

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VI. PROJECT COST AND FINANCING PLAN

A. Project Cost Estimate

6.01 The total financing required for the Project (including interest duringconstruction) is estimated at about US$106 million equivalent, of which USb76million is in foreign exchange. The cost includes a physical contingency of 10%and an overall price escalation of about 16% on foreign purchases, and about 25%on local purchases. The project cost estimate is based on the current exchangerate of US$1.00 = LE 0.69.

6.02 The original capital cost estimates were prepared by UEC in January,1979. Foreign exchange costs were based primarily on budget proposals frominternational equipment suppliers, and also on adjusted cost data for equipmentand materials fronm other recent steel projects. The capital cost estimates andrelated assumptions were reviewed and updated in December 1980 by EGITALEC/ITALIMPIANTI. That review incorporated late modifications in project scope,and also updated the local currency costs, particularly for civil works anderection services.

6.03 A summary of the estimated capital cost is given below and a more detailedbreakdown is shown in Annex 6-1.

Summary of Capital Cost Estimate

Foreign Local Total Foreign Local Total(in LE Million) (in US$ Million)

Equipment, Spares &Structural Materials (FOB) 17.5 0.4 17.9 25.4 0.5 25.9

Electricals and Cables 11.8 0.2 12.0 17.3 0.2 17.5Ocean Freight and Insurance 1.4 - 1.4 2.0 - 2.0Customs Duties - 3.4 3.4 - 5.0 5.0Port Charges and Local Transport - 2.5 2.5 - 3.6 3.6Civil Works 0.9 0.6 1.5 1.3 0.9 2.2Engineering and Know-How 1.4 0.9 2.3 2.1 1.2 3.3Erection and Commissioning 1.1 5.0 6.1 1.5 7.4 8.9Technical Assistance and Training 2.5 1.2 3.7 3.5 1.9 5.4

Base Cost Estimate (BCE a/) 36.6 14.2 50.8 53.1 20.7 73.8

Physical Contingency (10%) 3.7 1.4 5.1 5.3 2.1 7.4Price Escalation (20%) b/ 6.4 4.0 10.4 9.3 5.6 14.9

Installed Cost 46.7 19.6 66.3 67.7 28.4 96.1Interest During Construction 5.9 0.7 6.6 8.5 1.0 9.5

Financing Required 52.6 20.3 72.9 76.2 29.4 105.6

a/ Prices as of December 1980.b( Weighted average for the total of foreign and local currency costs.

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6.04 Except in a few cases where substantial differences in the design orphysical scope of the equipment rehabilitation became necessary (i.e. limekilns), EGITALEC's estimates were reasonably close to UEC's - indicatingreasonably firm original estimates.

6.05 HADISOLB has not yet applied for exemption from import duties, anda provision of about 12% of the CIF value of direct imports has been includedin the capital cost estimates to cover these costs. This estimate is based onthe prevailing tariff structure for the mix of items involved. The estimatedtotal base cost of engineering and consultancy services is about US$5.2 million.The technical assistance to be provided by the OSC of about 250 man-months, areexpected to be provided at an average man-month cost of US$13,000, includingsalary, costs, know-how fees, international travel and subsistence. Actual costswill depend on the final selection of a contractor from a list of 5 well-qualifiedfirms from 5 different countries. The Bank will finance this item. The servicesof EGITALEC for the Project, with some back-up support from ITALIMPIANTI, are estim-ated to require about 600 man-months at an average man-month cost of about US$3,300.The large difference in cost per man-month is due primarily to the amount of localservices involved for EGITALEC, and the low salaries prevailing in Egypt, as com-pared to developed countries. In addition, some specialized foreign or local indi-vidual consultancy services, of about 10 man-months or less, may be needed at anestimated average cost of US$10,000/man-month.

6.06 The costs of civil works, a relatively small component of the Projectamounting to about 3% of the base cost estimate, have been determined on thebasis of construction costs of civil works projects carried out by EGITALEC inEgypt during 1980. As a general example of cost levels prevailing in Egypt,building costs average about 275 LE/m1 (US$398) for complete heavy industrialbuildings. Hourly labor costs, which have a major influence on erection andinstallation costs, range from LE 0.7/hour for unskilled labor in the publicsector to LE 11/hour for highly skilled labor in the private sector. It isexpected that much of HADISOLB's skilled erection/installation labor will comefrom private sources. Price escalation for equipment is calculated on the basisof projected international equipment price increases of 9.0% in 1981, 8.5% in1982, and 7.5% annually during 1983-85 in major equipment supplying countries.The same price inflation rates have also been used for about US$12.0 million(BCE basis) worth of local currency costs (except mainly erection and commis-sioning costs) on the assumption that price escalation on these items in Egyptwill follow the rates in those countries. However, for erection and commission-ing costs, civil works, and local equipment/electrical supplies, amounting toabout 12% of the base cost estimate, a price escalation rate of 18% per yearhas been assumed based on experience in the recent past and the expectationthat the cost of erection/ installation labor in Egypt will continue to risefaster than the international level, due in part to shortages. The above costestimate, including the provisions for physical and price contingencies, isconsidered adequate.

B. Financing Plan

6.07 The following table gives the proposed financing plan for the Project:

LE Million US$ Million _

Bank Loan 44.2 64.0 61Government Equity 28.7 41.6 39

Total 72.9 105.6 100

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6.08 The US$64 million Bank loan would be made to HADISOLB at the standardinterest rate for a period of 15 years including 4.5 years of grace. HADISOLBwill bear the foreign exchange risk and also pay a guarantee fee to the Govern-ment which would bring the total cost of borrowing to 10% over the actual Banklending rate (now expected to bring the total rate to HADISOLB to about 11%which is roughly in line with present local commercial interest rates).The Government has agreed that the remaining foreign exchange cost andthe local cost of the Project would be financed by the Government throughadditional equity contributions (US$41.6 million equivalent). In addition,agreement was reached that should cost overruns occur, the Government willprovide, or cause 'EADISOLB to be provided with additional funds includingforeign exchange in the form of equity and/or long-term loans (in the propor-tion of not more than 60% loan) promptly as needed to complete Stage I and theProject on time. For purposes of this covenant, the Project is consideredcomplete when the facilities included in the Project scope have been tested andproven to be satisfactory in accordance with established engineering proceduresand have operated at an average production rate of 75% or better of their StageI incremental target output (where applicable) for not less than 60 consecutivedays. The Project is expected to finish the completion tests around September1985.

6.09 The KfW 'Loan amount and on-lending terms are still subject to finalnegotiations in May/June 1981 between the Egyptian Government, KfW and HADISOLB.For purposes of the financial analysis, it has been assumed that the KfW loanwould total DM 90 million or US$45 million equivalent and would carry aninterest rate (on-lending) of 8%. The loan would be for 20 years, including 5years grace.

C. Procurement

6.10 The tota:L value (CIF/ex-factory basis) of the equipment, materialsand spares for the Project is about US$58 million, of which about US$54 millionwill be bid internationally in accordance with procedures consistent with theBank-s procurement guidelines and the balance (US$4 million), which is determinedto be not well suilted to international procurement, will be purchased locally. Ofthe internationally bid items, about US$47 million (87%) are expected to be pro-cured through international competitive bidding (ICB) and about US$7 million (13%)through limited international tendering (quotes solicited from not less than 4suppliers from 3 different countries). Limited international tendering will berestricted to imported items estimated to cost less than US$500,000 (CIFbasis, and not exceeding a total of US$3 million) equivalent, proprietaryequipment, items of limited international supply whose delivery periods arecritical to the timely completion of the Project, and items required to havetechnical compatibility with existing equipment, including standardization ofoperations and maintenance practices. Civil works, which are not expected toexceed US$3 million equivalent will be procured through local competitioninvolving both local and joint venture construction companies registered inEgypt. The list of pre-qualified contractors will be approved by the Bank.Although the local civil works contracting capacity will continue to be severelystrained for some time to come, HADISOLB is not expected to have any difficultyin obtaining acceptable bids on the basis of local competition. To minimizedelays in procuremient, particularly in bid preparation, evaluation and award,

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the Government has been asked to grant HADISOLB full authority on procurementdecisions with respect to the Project witlh GOFI having only a representativein HADISOLB-s procurement review committee (paras 2.08 and chart on page 5) aswas the case in the Bank's first textile project (Loan No. 1292-EGT of June1976).

6.11 For internationally bid items to be financed by the Bank the list ofgoods will require prior Bank approval and major equipment suppliers will beprequalified in accordance with criteria acceptable to the Bank. Qualifiedlocal equipment suppliers will be allowed to participate in ICB with a 15%(or the import duty rate if lower) preference margin provided the domesticvalue added exceeds 20%. However, because of the limited capacity and capabil-ity of the domestic equipment industry, practically all the equipment to bebid internationally, is expected to be supplied from abroad. The contractsfor the OSC consultancy services, (US$3.0 million) as well as EGITALEC'sservices (US$2.0 million), will be financed by the Bank. Down payments forthese two contracts (up to about US$0.3 million) are to be financed from theunutilized funds of the Bank's engineering loan (Ln. No. S-5EGT). Under theproposed loan, retroactive financing of up to about US$1.5 million to coversubsequent payments for the consultancy services and other payments after March1, 1981 will be allowed so that Project implementation will not be delayed.

D. Allocation and Disbursement of Bank Loan

6.12 The allocation of the Bank funds is shown below and the expecteddisbursement schedule is given in Annex 6-2.

Amount of theLoan Allocated % of(expressed in ExpeadIuLtUs

Category Dollar Equivalent) to be Financed

(1) Equipment, machinery, 44,000,000 100% of foreign expenditures,materials and spare parts 100% of local expendituresand related services exfactory, and 80% of local

expenditures for importeditems procured locally.

(2) Oxygen plant and argon 6,000,000 100% of foreign expenditures.separation unit a/

(3) Civil works 2,000,000 60%.

(4) (a) Local engineering and 2,000,000 100%.consultant services

(b) Foreign consultant 4,000,000 100% of foreign expenditures.services and training

(5) Unallocated 6,000,000

Total 64,000,000

a/ There is a condition of disbursement for this item (para 5.04).

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VII. FINANCIAL ANALYSIS

7.01 This chapter discusses the financial outlook of HADISOLB under twoscenarios: (i) the 'without Stage T- case, i.e., without rehabilitatior, andthe 'with Stage I case-, i.e., with the rehabilitation program. The financialobjectives of HADISOLB under the Project are to reach and mailntain a satisfactoryliquidity within t'hree years, to generate sufficient profits without any Govern-ment subsidies wit'hin five years and thereafter pay dividends, build-up reservesand finance a portion of future investments consistent with the current ratio,debt service coverage ratio and debt/equity ratio stipulated in para 7.12.

A. Production and Sales Forecast

7.02 As noted previously, HADISOLBs present output is far below its ratedcapacity and production in 1980 was approximately one-half of design capacity.The effecl:s of the rehabilitation are expected to be felt by FY84 and graduallyreach its full impact in FY88 as shown in para 5.06 for the production build-up.Sales forecasts by product are given in Annex 7-1 and Annex 7-2. 1/ The useof natural gas and' blast furnace gas instead of fuel oil is reflected in bothcases with and without Stage I starting in FY82. The projections for FY81 andFY82 are essentially the same with or without Stage I. The production build-upassumed for the USSR-built medium section mill, which was only started up inlate 1980, is not expected to be substantially affected by the rehabilitation,nor is the output volume of the relatively minor production lines of cold-formed sections and galvanized sheet. Since HADISOLB's inventories of saleableproducts are already very large, 2/ no increases in inventories of finishedproducts are assumed. With proper production planning, HADISOLB should evenbe able to reduce its finished products inventories below present levels.

7.03 The ex-fact:ory prices of steel in the financial forecasts for both thecases with and without Stage I, are assumed to remain constant in real termsat the new prices put into effect in March 1980 (para 3.17) which were roughly80% to 105% of the landed cost of imports during 1980. For the without StageI case, the input costs, such as the cost of energy 3/ and labor, are assumedto remain in real terms at the 1979 level because HADISOLB is not expected tobe profitable. However the price of coke is expected to increase from aboutLE 75/ton at present to about LE 88.5/ton by 1988 in December 1980 prices, andthis additional burden would have to be subsized by Government since cashgeneration by HAD-[SOLB would be insufficient. For the with Stage I casehowever, the cost of energy and labor are assumed to gradually increase inreal terms. Thus for FY88 and beyond, the following prices are assumed in

1/ Starting July 1980, HADISOLB changed its fiscal year from January-December(same as calenLdar year) to July-June. FY81 refers to fiscal year 1981 cover-ing the period-1 July 1980 to June 1981.

2/ This is due to deficiencies in production planning and a lack of coordina-tion between various departments, particularly marketing and production.

3/ This would impily that without Stage I, the Government will have to provideHADISOLB cash subsidies, in addition to the coke subsidy, to cover futureincreases in t:he prices of natural gas and electricity. These additionalcash subsidies are not shown in the financial projections without Stage I buton the basis of the price increases assumed for the case with Stage I, wouldamount to about LE 1 million in FY83, increasing to LE 3 million in FY 85 andLE 4 million in FY88 (in December 1980 prices).

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real terms (in constant 1980 LE): natural gas -- LE 33/1,000 m3 com-pared to LE 6.5/1,000 m3 in 1980 (408% increase); and wages and salaries --50% higher than the FY80 level. The expected tightening of the demand-supplybalance for coal is reflected in an 8% increase in the price of coke by 1985from LE 75/ton to LE 81/ton. Thereafter, the price of coke is expected toincrease at 3% annually in real terms, bringing the FY88 coke price to LE 88.5/ton in December 1980 LE terms. The other assumptions used in the financialprojections are shown in Annex 7-3.

7.04 Even without Stage I, HADISOLB might be able to achieve some cost andyield improvements in its USSR-built plants. At the same time, HADISOLB islikely to face increasing difficulties in the old DEMAG plant units, which havebeen operating since 1958, even though it is difficult to exactly predict theremaining useful life of these mills. The increasing risk of break-downs isreflected in an assumed decrease in production and a total phase out by 1990.Because of the deterioration of the blooming, plate, light and heavy sectionmills, an increasing proportion of raw steel would have to be sold. Since thereare no other ingot rolling facilities in Egypt and export prospects are mostuncertain, the gradual deterioration of the blooming mill without rehabilitationwould bring about limitations on steel ingot production by the mid-1980s, andforce a shut down of the Thomas and EAF shops which both cast all their outputinto ingots. By the late 1980s the expected end of the useful life of theblooming mill would also affect the BOF shop which is casting about 8% of pro-duction into ingots which then would have to be scrapped and recycled. Thesefactors are all reflected in the production and sales forecast without Stage I.

7.05 With Stage I, HADISOLB is expected to be able to increase itsoutput to 1.2 million tpy of liquid steel by about FY88. Because of therehabilitation of the old DEMAG mills under the component financed by KfW,the blooming, plate, light and heavy section mills will be shut-down for re-vamping in FY83. They will be restarted in the following year and reach fullproduction by FY87. The rehabilitation will relieve the main bottlenecks inthe continuous casting areas, and thus create an additional output of 100,000tpyl/ of finished flat products and 70,000 tpy of billets by FY88. Duringthe revamping of one continuous billet caster during FY83, billet production(of the two remaining billet casters) will be only 140,000 tons. The revampedbillet caster would be restarted in FY84 and is expected to reach full pro-duction by FY88.

B. Production Costs

7.06 Since HADISOLB mines its own iron ore, the cost of producing and deliver-ing the ore is included in the various cost categories, such as labor and energy.A comparison with the present production costs (Annex 7-4) indicates that averagevariable costs per ton of crude steel would be about 35% lower after Stage I in1979 prices (Annex 7-5). With the average variable cost per ton of raw steel roughlyequal to 80% of that of finished products for HADISOLB-s product mix, this wouldresult in about a 28% cost reduction per ton of finished product if there were noreal term increases in the unit cost of variable inputs. With real increasesin the price of energy inputs (para 7.C03), the VY8M -ariable cost Is about ?°%higher than in 1979 (Annex 7-6). The production cost structure indicates the largeshare of energy, in particular coke, in HADISOLB's production cost. It also showshow expensive steel making is in the old Thomas shop, which consumes nearly

1/ Excluding plate from the old DEMAG mill.

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1.5 tons of coke per ton of crude steel, due to the high coke rate of about1,136 kg/ton of pig iron in the two old blast furnaces and to the pooryield from hot metal to crude steel of 77%. HADISOLB's average production costwithout Stage I are shown in Annexes 7-7, and 7-8 are summarized below:

HADISOLB - Cash Production Cost Per Ton of Crude Steel - Before/After Stage I a/

Before Without After Stage I (FY88)Stage I (1979) Stage I (FY88) (including real

(including real (in 1979 term unitterm price increases) prices) b/ price increases)

LE % LE % LE % LE %Cost ItemFuel Oil 0.5 0.4 - - - - - -

Coke 60.7 51.0 92.9 63.8 42.9 52.9 60.8 53.9Power 4.3 3.6 5.8 4.0 4.1 5.0 5.9 5.2Natural Gas 1.2 1.0 6.7 4.6 1.7 2.1 8.8 7.8

Sub-total Energy 66.7 56.0 105.4 72.4 48.7 60.0 75.5 66.9

Other Inputs 12.7 10.7 8.3 5.7 10.0 12.4 10.0 8.9

Sub-total VariableCost ;79.4 66.7 113.7 78.1 58.7 72.4 85.5 75.8

Labor 18.1 15.2 15.3 10.5 7.8 9.6 11.5 10.2Maintenance c/ 11.2 9.4 8.7 6.0 7.6 9.4 8.2 7.3Other Expenses c/ 10.4 8.7 7.9 5.4 7.0 8.6 7.6 6.7

Total 119.1 100.0 145.6 100.0 81.1 100.0 112.8 100.0

a/ Excludes provision for capital charges (i.e., depreciation and interest) andonly covers cost from mining up to the slab, billet or ingot stage (i.e.,excluding the rolling mill costs for the production of finished steel productsfrom the slab, billet or ingot). All costs are expressed in constant 1979 terms.

b/ In constant 1979 IE to show the effect of Stage I on production costs incomparison to actual 1979 levels.

c/ Assumed as 50% fixed and 50% variable with Stage I, and 100% fixed withoutStage I.

7.07 Without Stage I, HADISOLB would basically continue its recent perfor-mance with some improvements likely in the more modern plant units, but increas-ing difficulties in the older mills. Recent production costs of HADISOLB perton of crude steel have been rather high, as shown in Annex 7-4. Also, theolder mills would face increasing risks of breakdowns, so that in constantprices the cost of production of the old plant units can be expected to increase.While this trend is, difficult to quantify exactly, it has been assumed for pur-poses of the financial projections, that the cost per ton of finished productin the older mills would increase by 2% annually in real terms. The shut down ofthe inefficient Thomas steel shop expected to be forced by the deterioration ofthe blooming mill would reduce the average cost of raw steel at HADISOLB by 4.3%in constant prices. The real term increases in the cost of coke, natural gas andlabor (para 7.03) by FY88, however, would cause an increase in HADISOLB s costof crude steel by 22.2% in real terms.

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7.08 With Stage I, HADISOLB is expected to achieve major reductions inits production costs, including a 37% lower energy consumption per ton ofcrude steel. First, the most important improvement would be the reduction ofexcessive coke consumption in the two new big blast furnaces from 968 kg/ton ofpig iron at present (including coke fines used in the production of sinter) to662. Excluding coke consumed at the sinter plant, the coke rate would drop from736 to 530. Second, the increase in output from the more modern plant unitswould allow the shut-down of the uneconomic Thomas shop, which would result in areduction of average variable cost by about 1.9% and of average total cost perton of crude steel by about 4.3%. Third, the rebuilding of the old DEMAG millswould improve the present poor yields by 7 percentage points for heavy sections,2 percentage points for plate, and 4 percentage points for light sections. Thevariable cost per ton of those finished products would drop accordingly. Opera-tions improvements in the more modern USSR-built rolling mills would lead toyield improvements of 2 percentage points. Fourth, the increased output of theBOF shop from 505,000 tpy in 1979 to 1,195,000 tpy of crude steel by FY88 wouldsubstantially reduce the fixed cost per ton of crude BOF steel from LE36.4 toLE 21.8 or by about 40%. The benefits from the incremental output in terms oflower average fixed cost is significant because even at the roughly 50% capacityutilization in 1980, HADISOLB was financially about breaking-even in terms ofprofit and hence, its fixed costs were already about covered. Depreciationcharges were, however, small because of low investment costs. 1/ Any increasein production would thus be highly beneficial. For the EAF, output level andproduction cost per ton of crude steel are expected to remain unchanged.Finally, there are a large number of minor benefits from the various smallerinvestments which have not been quantified in the production cost summary aftercompletion of Stage I (Annex 7-5). It is expected that the full effect of thecost savings will be felt beginning in FY86.

7.09 Without Stage I, HADISOLB is expected to remain in an unsatisfac-tory financial condition and would have increasing losses and thereforecontinue to rely on the coke subsidy provided by the Government to balanceits cash flow. This would be so inspite of strong debt/equity and currentratios and mainly due to the poor production performance and decreasing out-put from its deteriorating older facilities.

7.10 With Stage I, the output and cost improvements mentioned earlier(para 7.08), would substantially improve HADISOLB's financial performanceand thus remove the necessity for coke subsidies from the Government. Instead,the Company would be able to first wipe out the accumulated losses and thenbegin distributing dividends by the late 1980's. Because of its present lowdebt/equity ratio, the additional debt to finance part of Stage I would notincrease the projected debt/equity ratio beyond a very good 16/84. Debt servicecoverage is not projected to fall below 3 times which is also very conservativeand again due to HADISOLB-s small debt at present.

1/ Gross fixed assets (including mining) of HADISOLB per ton of liquid steelcapacity (i.e. 1.6 million tpy) is about US$242 on the basis of historical(i.e. acquisition) cost for the fixed assets compared to an estimatedpresent capital cost of about US$1,500 for new greenfield plants. Grossinvestments (gross fixed assets plus current assets) in HADISOLB is aboutUS$405 per ton of liquid steel design capacity.

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C. Financial Projections

7.11 Projected Sales, Income Statements, Sources and Applications of Funds,and Balance Sheets are given in Annex 7-1 (without Stage I) and Annex 7-2(with Stage I). Principal data for selected years are summarized below forboth cases:

HADISOLB - Projected Financial Performance(current LE million)

Without Stage I With Stage IFY81 FY83 FY85 FY88 FY83 FY85 FY88

Income and Cash Flow- Sales 158 214 238 255 190 298 416- Net Income 2 (5) (8) (10) 9 10 35- Internal Cash Generation 32 24 20 10 39 47 70- Debt Ser~vice 11 8 6 0 9 15 11- Profit Distribution - - - - - - 14- Coke Subsidy 22 10 10 15 22 - -

Balance Sheet (as of June 30)- Current Assets 241 301 345 414 295 381 543- Current Liabilities 172 211 224 260 192 227 267- Long-term Debt 20 12 4 - 59 69 45- Equity 286 267 255 227 301 335 389

Ratios- Current 1.4 1.6 1.7 1.7 1.7 1.8 2.2- Debt/Equity 6/94 4/96 2/98 0/100 15/85 16/84 10/90- Debt Service Coverage 3.0 3.0 3.3 n.a. 4.4 3.0 6.2

The financial projections with Stage I do not include the planned Stage IIrehabilitation which will require some of the cash generated by Stage I.

7.12 To ensure t:hat the future profitability of HADISOLB will be satisfactoryunder the Project, HADISOLB agreed that after Project completion, it will setits steel prices and operate its production facilities such that: (i) it canearn sufficient profits to allow it to pay dividends, build adequate reserves,and finance a portion of its future investments under conditions of efficientoperations; and (-ii) it will take into account the prices of internationallytraded steel products in setting its own prices. For purposes of this covenantefficient operations will-mean: production of the steel-making shops at notless than an average of 7,500 heats per year for each BOF vessel in operation;a minimum metallic yield from liquid steel to finished products of 75% forflat products and of 79% for non-flat products; and an average blast furnacecoke rate of not more than 600 kg/ton of pig iron. In order to protect thefinancial soundness of HADISOLB, the Company also agreed that unless itreceives prior approval from the Bank, it will:

(i) maintain at all times a debt/equity ratio of not more than 60/40and after June 1984 maintain a current ratio of at 'Least 1.3;

(ii) not incur any long-term debt if any future debt-service ratiowould be estimated to fall below 1.5 times and if the debt/equity ratio would exceed 60/40; and

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(iii) inform the Bank of the financing and implementation plans for invest-ments totalling in excess of US$5 million equivalent in any one yearbefore completion of Stage I and ensure that such investments willhave no adverse impact on the Project or the compliance by HADISOLBwith its agreements with the Bank under the Project.

7.13 The summary sources and uses of funds for FY82-FY86 is shown below:

HADISOLB - FY82-86 Financing Plan(million LE)

Sources Applications

Cash Generation 216.6 Stage I Investment 120.0Bank Loan 44.2 Working Capital Increase 110.6KfW Loan 31.0 Debt Service 62.2Capital Increase 44.9 Retained Earnings 43.9

Total 336.7 Total 336.7

D. Financial Rate of Return

7.14 The incremental financial rate of return of Stage I was calculatedon the basis of the difference between the -with Stage I' and -without StageI' cases, as presented in Annexes 7-1 and 7-2. The cost/benefit streams areexpressed in constant LE of December 1980 and shown in Annex 7-9. The financialrate of return of Stage I is estimated at 36% before taxes and 32% after taxes.Sensitivity tests are summarized below:

HADISOLB - Sensitivity Tests of Stage I Financial Rate of Return Before Taxes

(%)

Base Case 36.5Capital Costs up 20% 30.8One Year Project Delay 27.6Prices Down 10% 28.1Prices Up 10% 45.1Base Case (After Tax) 31.8Base Case (including Coke Subsidy) 41.6

To test the sensitivity of the rate of return further, a worst case scenario wasconstructed: (i) output increase of only up to 1 million tpy of liquid steel,(ii) achievement of only half the cost reductions assumed in the base case and,(iii) one-year delay in implementation. Even under such combination of adverseconditions, Stage I would be expected to achieve an 18% return before taxes.

E. Major Risks

7.15 While the incremental financial rate of return of Stage I is high, aswould be expected for a rehabilitation project, this is under the critical assump-tions that: (i) the management will be able to implement and operate the new faci-lities with reasonable efficiency; (ii) HADISOLB will follow a pricing policy thatwill allow the Company to earn adequate profits under reasonably efficient opera-tions; (iii) the three different components (Bank, KfW, USSR) of Stage I will beimplemented in a coordinated and timely manner.

7.16 Organizational weakness has been one of the reasons behind the diffi-culties in increasing output and efficiency at HADISOLB. The proposed Project

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is to address this weakness through the provision of technical assistance inproject implementation, plant operation and training. Moreover, the intro-duction of new job classifications and remuneration levels are designed toimprove productivity, morale and HADISOLB's competitiveness for skilled laborin comparison with other enterprises in Egypt.

7.17 As mentioned previously (paras 3.17 and 3.18), the ex-factory steelprices in Egypt before the price increase in March 1980 were below internationallevels and contributed to the poor financial performance of the steel companies,including HADISOLB. The recent prices provide a more favorable cost/pricerelationship and if maintained as agreed to by HADISOLE, should be adequate toensure a sound financial condition for HADISOLB after implementation of Stage I.

7.18 The three components of Stage I are operationally interlinked. All arebased to a large degree on the extensive work done by UEC. The KfW and Bankcomponents have been prepared in close coordination between the two financialinstitutions. ntis coordination is intended to continue throughout the implemen-tation of Stage 1]. To protect the Project against delays in securing financingparticularly in case cost overruns occur, the Government agreed to ensure timelyavailability of funds to complete Stage I. While adequate measures have beentaken to reduce the Project risks as much as possible, the success of theProject will hinge largely on the determination of the Government and theCompany to properly utilize the opportunities the Project offers for turning arun-down plant into an efficient operation.

F. Auditing and Reporting

7.19 All public sector enterprises in Egypt are audited by the CentralAgency for Auditjing, which is an independent governmental organization andacceptable to the Bank. HADISOLB agreed to submit to the Bank annual financialaccounts and statements, audited by the Central Agency for Auditing or anindependent auditor acceptable to the Bank within seven months of the end ofeach fiscal year.. The Company will also submit quarterly project progress andprocurement status reports, together with production and financial statements.Finally, after completion of the Project, HADISOLB will prepare and furnish tothe Bank a comprehensive report on the Project, its implementation, initialoperation, and the updated costs and benefits expected to be derived therefrom.

VIII. ECONOMIC ANALYSIS

A. Economic Costs and Benefits

8.01 The economic costs and benefits of Stage I and the Bank Project areexpressed in constant LE of December 1980 and the tradeable items have beenvalued at their respective border prices. The major non-tradeable items areiron ore, labor, power and natural gas. Iron ore, which would be very difficultto export because of its poor quality, is priced at its cost of production.The average financial cost of power to HADISOLB, despite an increase fromLE .0083 (US$0.012)/KwH in 1979 to LE.012 (US$.017)/KwH in 1980, is still only 52%of the economic cost of LE .023 (US$.034)/KwH. Power accounts for about 11.5%of current production costs at economic prices. For natural gas, the economiccost of LE 109.55 (US$158.85)/1,000 m3, or US$4.50/mcf is the energy equivalent

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of the F.O.B. value of fuel oil. 1/ The financial price of natural gas in 1980of LE 6.5 (US$9.42)/1,000 m3 is only about 6% of the economic price. 2/Natural gas accounts for about 12.4% of HADISOLB's present production costs ateconomic prices. The economic cost of labor is taken as identical to thefinancial cost. Salaries and wages account for about 16.7% of the presenteconomic costs (Annex 8-1).

8.02 The tradeable items are coke, fuel oil, other raw materials excludingiron ore, spare parts, and steel. With the exception of coke and fuel oil, thefinanancial prices of all inputs are based on the delivered cost of imports. Onthe basis of international prices for imported coal, coke supplied by the ElNasr Coke Company has an economic cost of about LE 75/ton (US$108.75), which isin line with international prices. The price of coke is expected to increase by8% in real terms by 1985 and at 3% annually in real terms thereafter bringingthe economic cost to LE 88.5/ton by 1988. Fuel oil is currently priced very lowin Egypt at LE 7.5 (US$10.88)/ton, compared to an economic value of about LE131.79 (US$191)/ton, which is the current export price. 1/ Fuel oil accountsfor about 5.7% of HADISOLB's present economic production cost but after 1981,HADISOLB will stop using fuel oil and instead, substitute a mixture of naturalgas (95% by calorific value) and blast furnace gas (5% by calorific value). Theeconomic value of the steel output is derived on the basis of the export and theimport substitution benefits. International steel prices are discussed in paras3.08-3.09. Exports are priced at their projected F.O.B. value; products substi-tuting for imports are priced at landed costs (F.O.B. export prices plus freightand handling costs). Exports have been accounting for a small part of HADISOLB'ssales of flat products and their share is expected to decline further, as aresult of growing internal demand.

B. Economics of HADISOLB's Operations

8.03 Because of the economic distortions in the prices of both inputs andoutputs for steelmaking in Egypt, substantial adjustments need to be made toHADISOLB's financial results in order to arrive at approximations of theeconomic costs and benefits to Egypt and to make meaningful comparisons withsteel producers in other countries. HADISOLB's expenses and revenues areadjusted as outlined above in Annex 8-1. The result of these adjustmentsindicates a somewhat larger economic loss than the financial one for 1979.Details of the adjustments for revenues are given in Annexes 8-2. In 1979,the direct and indirect subsidies on the input side were largely (87%) balancedby controls of domestic steel selling prices which were below the landed costof imports. In the longer term and with increasing production and efficiencydue to Stage I, HADISOLB is projected to not only be financially profitable,but at economic prices, to generate a significant economic surplus.

C. Economic Costs and Benefits of Stage I

8.04 The benefits of Stage I can be grouped into two main categories: (a)cost savings, particularly in energy consumption, and (b) benefits of incre-mental output.

1/ This is in line with the crude oil price of about US$39/barrel.2/ The issue of energy pricing in Egypt is being discussed with the Govern-

ment in the context of the Bank's energy lending program.

- 47 -

8.05 The cost savings will be achieved through a variety of measures.First, the output in the more modern installations will allow the closing downof the inefficient and uneconomic Thomas steel shop and small blast furnaces.This alone would reduce HADISOLB's average cost of crude steel by about 3%between 1981 and the assumed attainment of the full benefits of Stage I in FY88.Second, the Project would include various specific items (e.g., externaldesulphurization, argon stirring, better instruments) that would help improveoperating efficiency. Third, the rehabilitation would improve yields as discussedin para 7.08.

8.06 The table below shows the effect of the three major cost savings, i.e.,the closing of the Thomas shop, the reduction in coke consunmption rates and theimpact of higher capacity utilization on fixed cost per output unit, on HADISOLB'saverage cost per ton of crude steel. It also shows the substitution of fuel oilby natural gas and blast furnace gas.

HADISOLB: Economic Benefits of Stage IEconomic Production Cost Per Ton of Crude Steel a/

Before AfterRehabilitation Rehabi]Litation b/LE % LE ___

Fuel Oil 8.8 5.3 - -Coke 72.8 43.9 60.8 44.1Power 11.5 7.0 10.3 7.5Natural Gas 20.3 12.2 29.4 21.3Sub-total Energy 113.4 68.4 100.5 72.9

Other Inputs (less credits) 12.7 7.7 10.0 7.3Sub-total Variable Costs 126.1 76.1 110.5 80.2

Labor 18.1 10.9 11.5 8.3Maintenance c/ 11.2 6.7 8.2 6.0Other Expenses c/ 10.4 6.3 7.6 5.5

Total 165.8 100.0 137.8 100.0

a/ Billets, slabs or ingots; does not include rolling mill cost for theprocessing into finished products, but includes iron ore mining costs.

b/ Including real term price increases.c/ See footnote c/ in table of para 7.06.

D. Economic Rate of Return and Sensitivity Analysis

8.07 The incremental economic rate of return of Stage I has been esti-mated at 42%. Cost and benefit streams are shown in Annex 8-3. Sensitivitytests are summarized below:

- 48 -

HADISOLB - Sensitivity Tests of Economic Rate of Return of Stage I(%)

Base Case 42.1Capital costs up 20% 36.9One year project delay 33.8Prices down 10% 35.3Prices up 10% 48.2Energy Costs up 3% annually in real terms 39.8from 1981 onwards a/

a/ Power and natural gas; the real term increase in coke prices is built intothe base case.

A worst case scenario was also explored under conditions similar to those out-lined in the financial analysis (para 7.14). Even with a one-year project delay,an output of only 1 million tpy of liquid steel and just half of the expectedcost savings, Stage I would still show a rate of return of about 24%.

8.08 The rate of return of Stage I is rather high, which is expected for arehabilitation of an existing large sunk investment producing at only half ofdesign capacity at present and plagued with technical problems that causeunusually high energy consumption. Thus, in addition to energy savings,production increases can be achieved at a lower incremental investment costper ton of additional output compared to completely new greenfield steelprojects. For example, greenfield plants such as the proposed El Dikheilasteel project, have a much lower rate of return.

8.09 An attempt was made to separately estimate a rate of return for theBank Project as distinct from the other components of Stage I, although thisis somewhat artificial because of the operational interlinkages between thethree components of Stage I. The benefits that can clearly be attributed tothe Bank Project include the cost savings resulting from the various investmentssuch as argon stirring and external desulphurization; the latter is generallyconsidered to have the highest energy saving benefits in steelmaking, aftercontinuous casting. Also, the increase in output that would result from therevamping of one continuous billet caster can be credited to the Project. Aneconomic rate of return thus estimated for the Bank Project is about 32%.Sensitivity tests of the economic rate of return for the Bank Project showsimilar results as for Stage I. Because the Bank and USSR components arestrongly complementary, a common rate of return has been calculated for both.The rate of return of the KfW project is higher than for the Bank Project mainlybecause the increase in labor costs as a result of the various salary and jobclassification measures is charged to the Project.

8.10 HADISOLB's cost of production after Stage I, at economic prices for in-puts, is competitive internationally for the following reasons: low investmentcost per ton of production (para 7.08), low cost for iron ore mining (para 4.10),and low labor rates compared to developed as well as advanced developing countries.

- 49 -

E. Other Benefits

8.11 Other benefits from the Project include (i) improvement in plantsafety and occupational health with a reduction in accidents; (ii) the introduc-tion of pollution monitoring instruments and development of a pollution controlpolicy which will be implemented in Stage II; (iii) institution building; and(iv) improved planning for the future rehabilitation and expansion of HADISOLB.

8.12 One important Project benefit that is very difficult to quantify isthe inclusion of pollution monitoring equipment and improvement in plant safetyincluded in the Bank Project. Until now, there have been no monitoring devices atHADISOLB. Under the Project, pollution will be monitored. The results of theseefforts would serve as a basis for a comprehensive pollution control programduring Stage II. While the pollution monitoring items are to address primarilythe long-term efiEects of pollution, there are also much more immediate benefitsfor the health of the workers operating the plant.

8.13 The proposed Project would have a beneficial impact on HADISOLBthrough such institution building aspects as strengthening and build-up of thePIU, the CU and the computer center through various technical assistancecomponents. Also, better planning for Stage II is expected as a result of theProject.

8.14 The institution-building aspects of the Project, while specificallydesigned to benefit HADISOLB and help ensure the success of the Project, havea much wider implication in the context of the public sector industrialenterprise systerm. The principle of enterprise autonomy in managing theirinternal affairs and designing their organizational/operational systems andpolicies according to their own needs in order to be efficient, while generallyrecognized as desirable, is not effectively practiced in the case of thepublic sector indlustrial enterprises in Egypt. This has held back the develop-ment of this sector and had contributed to the net financial drain caused bythe public sector enterprises on the Government's resources. The Project,which will directly affect one of the largest public sector enterprises isexpected to provide a meaningful example of what even a modest degree of auto-nomy, when couplead with appropriate personnel, operating systems, proceduresand technical advice, can achieve in terms of improved efficiency and financialviability. The Project also provides a purposeful approach to more effectivemanpower planning and control, a major weakness of the public sector enterprises.HADISOLB, instead of being continuously subsidized by the Government as wouldbe the case without Stage I, could now be expected to contribute in a meaningfulway to the Government's resources and the industrial development of thecountry.

IX. AGREEMENTS

9.01 The following major agreements and confirmations have been obtained:

1. From the Government that:

(i) HADISOLB will be provided such degree of autonomy in the areasof investment, procurement, pricing, and wages and managementpolicies so that the Company can achieve its financial andoperational objectives under the Project (paras 4.15 and 6.10);

- 50 -

(ii) It will ensure that HADISOLB will have access to all the energyand water needed for its efficient operations (para 5.13); and

(iii) It will provide IIADISOLB equity contributions (para 6.08) forthe local costs and remaining foreign exchange cost of theProject not covered by the proposed Bank loan and provide orcause HADISOLB to be provided with funds needed to completeStage I and the Project in a form as stipulated in para 6.08.

2. From HADISOLB that:

(i) Its decisions on new investments as well as choices of operatingpractices will take economic factors into account (para 4.18);

(ii) To minimize the use of natural gas it will review the feasi-bility of using coke-oven gas that may be made available byEl Nasr Coke Company (para 4.18);

(iii) It will undertake and implement the various operations andmanagement improvement programs described in para 5.05 andexplained further in paras 5.15, 5.23 to 5.26, and 5.28;

(iv) A suitable PIU and CU with appropriate technical assistancewill be retained throughout the project implementationperiod. A satisfactory technical assistance contract withEGITALEC and a foreign operating steel company (OSC) will beconditions of loan effectiveness (paras 5.17, 5.18 and 5.19);

(v) It will design by December 1982 and substantially carry outtraining programs, satisfactory to the Bank, to trainsurplus staff for productive employment within the Companyor elsewhere (paras 5.24 to 5.26);

(vi) It will observe the financial covenants and ratios describedin para 7.12; and

(vii) It will submit to the Bank within seven months of the end ofeach fiscal year, annual financial statements audited by inde-pendent auditors acceptable to the Bank as well as quarterlyfinancial and progress reports within 45 days after eachquarter (para 7.21).

9.02 On the basis of the agreements mentioned above, the Project provides agood basis for a Bank loan to HADISOLB of US$64 million equivalent for a period of15 years including 4.5 years of grace at the Bank's standard interest rate plusa guarantee fee (equal to 10% of the Bank-s interest rate) to the Government.

Industrial Projects DepartmentMay 1981

- 51 -

ANNEX 1EGYPT: HADISOLB REHABILITATION PROJECT

Miscellaneous Terminology - HADISOLB REHABILITATION PROJECT

1. Liquid steel Refined steel in its first liquid state,usuallyin ladle or steelmaking furnace immediatelyupon manufacture.

2. Raw steel Refired steel in 1st solid state after its manu-facture (typically in form of ingot or castbillet/slab/bloom).

3. Semi-finished products Steel product in a solid form at an intermediatestage of processing between liquid steel andfinished products (i.e. slab, bloom, billet).

4. Finished steel products Steel product in its commercial form as n'ormallyshipped from steel plant (i.e. rods, bars, angles,beams, channels, hot rolled and cold rolled sheets,hot rolled and cold rolled coils, plate, coatedproducts etc.).

5. Billet - semi-finished product, normally of cross section " 235CM2

6. Bloom - semi-finished product, normally of cross section > 235CM2

7. Slab - semi-finished product, (typically 250MM x 1,300MM x lOM and variable).

8. BOF - basic oxygen furnace.

9. Thomas Process - An older steelmaking process which utilized air asa medium in refining process, in a bottom blownvessel. (Twas particularly well suited to processingsteel made from high phosphorous raw materials.)

10. Sinter The product of the sinter plant - an aggregatedform of fine materials (iron ore, coke, lime-stone,dolomite, flue dust mill scale and other materials)produced at high temperature, and utilized as afeed material for the blast furnace.

11. Pig iron The product of the blast furnace - the firstmetallic form of iron after being reduced fromiron ore, over 90% iron; can be in liquid form(called "hot metal") or in easily managed solidform (called "pigs").

Industrial Projects DepartmentJanuary 1981

EGYPT: HADISOLB REHABILITATION PROJECT

WORLD STEEL CONSUMPTION TRENDS

APPARENT CONSUMPTION

Average Annual

- - - - - - - - - - - - In Million Tons of Crude Steel Equivalent - - - - - - - - - Growth Rates (%)

1960 1970 1973 1974 1975 1976 1977 1978 1979 1980 1960-74 1975-79

(Est.)

Industrialized Countries

us 91 127 150 144 117 130 134 146 143 113 3.3 5.1

EC 82 124 125 127 98 117 104 102 113 106 3.2 3.6

Japan 19 70 89 79 65 65 63 67 78 78 10.7 3.8

Others 19 34 39 _41 34 34 32 31 35 33 5.6 0.8 1

Sub-Total 211 355 403 391 314 346 333 346 369 330 4,5 4.2

Developing Countries

Africa: South of Sahara 3 7 8 10 10 9 8 13 13 - 9.0 6.8

North Africa & Middle East 2 5 5 14 15 15 15 18 19 - 14.9 6.1

Asia & Pacific 7 13 20 20 18 24 27 30 32 - 7.8 15.5

Latin America & Caribbean 8 18 24 27 28 29 28 32 33 - 9.1 4.2

Southern Europe 5 16 20 20 20 21 22 20 22 - 10.4 2.4

Sub-Total 25 59 77 91 91 98 100 113 119 125 9.7 7.0

Total Market Economies 236 414 480 482 405 444 433 459 488 455 5.2 4.7

Centrally Planned Economies 107 176 210 224 235 232 239 250 260 265 5.4 3.4

World Total 344 590 690 706 640 676 672 709 748 720 5.3 4.0

X

Sources: UN Economic Commission for Europe, 'The Steel Market'; UN Statistical Yearbook; and OECD, The Steel Market in 1978 and Outlook for 1979.

Industrial Projects Department

January 1981

EGYPT: HADISOLB REHABILITATION PROJECT

WORLD STEEL CAPACITY. PRODECTION ANDE ETJLIZATEON RATE TERSERS(In MilEleons of Crude Steel Equival-at)

1960 1970 1973 1974 1975 1976 1977 1978 1979 190 snt.)EeduutnoelondCouoties plrdl 4 rd7 4 Pro- 2 Po a d 71 - 7 CaDro 4 rd ¾ p prod Cp 4 Prod Ca p Pro I

us 90 132 122- - 140 135 135 100 132 108082 - 119- - 116- 136 127 93 133 126 95 133 99 74REC- 98 - 136 138- - 150- 156 155 99 167 126 75 134- - 126- 178 133 75 179 140 78 175 131 75Japan 22 - 99 94- - 119- 126 117 93 177 102 80 - 107- 102 - 136 102 75 138 112981 138 112 81Others 17 - 32 3E-0 34- 38 3 93 38 34 89 - 34- 33 39 3590o 39 387 39 37 93

Sub-Total1 227 - 399 384 - - 443 - 455 443 97 46-4 378 80 - 394 - - 377 - 489 397 81 489 416 83 485 379 78

AfireR: South of Sahara 2 5 6 6 7 7 8 8 9North Africa & MdIddE East c/ 1 1 2 2 2 2 3 3A.sia & Pacific 4 7 10 10 02 15 17 20 23L. tin Anserla Carihh.ao 3 13 17 18 18 19 21 24 27Souther Eurpe 4 _ 12 __ 6 _ 17 _ 17 17 __ 8 __9 _ 20

Sub-Total - 15 - 46 38 - S0 64 53 83 69 56 81 - 60 - - 66 - 83 74 89 88 82 93 91 85 93

Total Mtarht Ecooiole - 241 - 445 422 - - 493- 519 496 96 Sx- 426 80 - 454- - 443- 572 471 82 377 498 86 376 464 80

.Cnt-rafly_2Plannd Eco...,_leo - 105 - 196 176 - - 205 - 236 212 90 246 221 90 - 227 - - 230 - 222 246 98 268 248 95 270 235 94

World Total-1 - - 641 598 - - 698 - 755 708 94 79 647 83 - 81 - 7 44 717 85 837 246 89 846 719 73

a! Rfac.ti- Cpapeity

b/- Produetiee

= Lens tha one-ha blf the unit coed.

Suc: Sta tictiochen BUY'DESAMIT, RISEN UND STAHL; sod 1151, 'Monthly Crude Stool Pr-Cution; EYES, Annua Stetietical Escort, GEtS, Iron anod Steel Toductry; ECEC, In-etucot ic che Co-nsity Coal Mining and 1ro sod Steelloduotni-o; end Japan Iron and Steel F.d-rtfno, TORKEO TOKE! YORAN.

Ind-strfa1 Projects Dnpart-etJanoary 1981

- 54 -AlNN&X 3-3

EGYPT: hADISOLB RPNSBILIUATION PROJECT

PERCENTAGE SHARE OF DITFERENT TECHNLOGIES IN THE STEEL PROD7CTION OP SELECTED COUNTRIES

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

1. U.S.A.

Production (nillion ten. crude steel) 119.3 109.3 120.9 136.8 132.2 105.8 116.1 113.7 124.3 123.7Steel-Making (7.)

Esaic Oxygen Furnace (BOF) 48.2 53.1 56.0 55.2 56.0 61.6 62.4 61.8 60.9 61.1Electric Arc Furnace (EAF) 15.3 17.4 17.8 18.5 19.7 19.4 19.2 22.2 23,5 24.9Open-Hearth Furnace (OhF) & Others 36.5 29.5 26.2 26.3 24.3 19.0 18.4 16.0 15.6 14.0

TOTAL % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Steel-Castina (7.)Continuoca Casting - 4.8 - 6.8 - 9.1 - 11.8 15.2 16.7Ingot Casting 95.2 93.2 90.9 _ 88.2 84.8 83,3

TOTAL - - 100.0 100.0 - 100.0 - 100.0 100.0 100.0

2. JAPAN

Production (million tons crude steel) 93.3 86.6 96.9 119.3 117.1 102.3 107.4 102.4 102.1 111.7Steel-NskinR (h)

Basic Oxygen Furnace (BOF) 79.1 80.0 79.4 80.5 80.8 82.5 80.9 80.5 78.1 76.4Electric Arc Furnace (tAF) 16.7 17.6 18.6 17.9 17.8 16.4 18.6 19.1 21.9 23.6Open-Hearth Furnace (0HF) & Others 4.2 2.4 2.0 1.6 1.4 1.1 0.5 0.4 -_

TOTAL . 100.0 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Steel-Casting (%)Continuous Casting - 11.2 - 20.7 - 31.1 - 40.8 46.2 52.0Ingot Casting S9.8 _ 79.3 _ 68.9 - 59.2 533. 48.0

TOTAL 7. - 100.0 - 100.0 - 100.0 - 100.0 100.0 100.0

3. tlEST GEE2/ANY

Production (rillion tons crude steel) 45.0 40.3 43.7 49.5 53.2 40.4 42.4 39.0 41.2 46.0Steel-Makine (')

Basin Oxygen Furnace (BOF) 55.8 61.8 64.6 67.8 68.8 69.3 71.9 74.4 74.6 76.1Electric Arc Furnace (EAF) 9.8 10.0 10.2 10.4 10.8 12.6 12.4 13.0 14.4 14.0Open-Hearth Furnace (OhF) & Others 34.4 28.2 25.2 21.8 20.4 18.1 15.7 12.6 11.0 9.9

TOTAL 7. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100,0

Stee1-CGstinc (%)Continuous Casting - 10,2 - 16.3 - 24.3 - 34.0 46.2 52.0Ingot Casting - 89.8 - 83.7 - 75.7 _ 66.0 53.0 48.0

TOTAL /. 100.0 100.0 100.0 100.0 100.0 100.0

4. UNITED K0NGDOM

Prodiuction (nillion tons crude steel) 28.3 24.2 25.3 26.6 22.3 20.2 22.3 20.5 20.3 21.4Sten -H kinR (7.)

Basic 0xyge Furnace (BOF) 32.1 . 38.7 42.6 47.0 48.0 50.3 51.5 53.1 55.8 60.2Electric Arc Furnsce (EAF) 19.5 18.1 19.4 19.9 23.5 27.6 30.3 30.7 35.4 34.2Open-Hearth Furnace (OhF) L Others 48.4 43.2 38.0 33.1 28.5 22.1 18.2 16.2 8.0 5.6

TOTAL 7. 100.0 100.0 100.0 100.0 100.0 100.0 100,0 100.0 100.0 100,0

Steel-Caoting (h)Continuouns Casting - - - - - - - - - -Ingot Casting

TOTAL 7. - - - - - - - - -

5. ITALY

Production (nillion tons crude steel) 17.3 17.4 19.8 21.0 23.8 21.8 23.4 23.3 24.3 24.2Steel-SHking (7.)

Basic Oxygen Furnace (BOF) 31.5 36.5 39.1 41.6 43.8 45.8 45.5 44.8 43.1 42.0Electric Arc Furnse (EAF) 40.5 40.5 40.8 41.1 41.4 43.0 46.1 48.4 50.7 53.3Opon--Herth Furnce (OHF) & OtherS 28.0 23.0 20.1 17.3 14.8 11.2 8.4 6.8 6.2 4.7

TOTAL 7. 100.0 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Steel-C.stinc (°)Continnous Casting - 6.7 - 16.1 - 27.0 - 38.5 41.3 46.8Ingot Casting - g237 83.-9 - 73.0 61.5 58.7 53.2

TOTAL X - 100.0 - 100.0 100.0 100.0 100.0 100.0

6. FRANCE

Production (.illion tons crude steel) 23.8 22.8 24.0 25.3 27.0 21.5 23.2 22.1 22.8 23.4Steel-Baking (7.)

Basic Onygfn Furnace (0OF) 29.0 37.1 45.9 51.9 58.4 63.4 68.3 73.4 78.1 79.7Electric Arc Furnace (EAF) 11.1 10.7 10.6 10.7 11.5 14.2 14.3 14.5 15.1 15.3Open-Hearth Furnace (OHF) & Others 59.9 32.2 43.5 37.4 30.1 22.4 17.4 12.1 6.0 5.0

TOTAL % 100.0 100.0 100.0 100.0 100,0 10.0 100.0 1000. 100.0 100.0

Steel-Cantine (7.)Continuou. Casting Ingot Canting - - - - _ _ _ _ _ _

TOTAL7E - - - - _ _

NOTE: The production figurcs in this annex sre not nece-sarily exactly the sane as the figures shoun in Annen 3-2 (e.g., US and Japan)bec-use nf difleront sources of data.

Source: Japan '.on and Steel Federatice. Tekko Tokei Yoran (Bssic Stctisticc of Iron end Steel).

Industrial Proje-tn Depart-entDecenber 1980

- 55 -

ANNEX 3-4Page 1

EGYPT: HADISOLB REHABILITATION PROJECT

PROJECTED 1985 STEEL PRICES

A. Forecast of Rebar Production Cost

Estimated Production Cost of Rebars a/(In Constant 1979 US$)

Cost US$/tonCost Itemt 1979 1985

Scrap 130 b/ 130Energy 45 55Electrode.s 10 10Other Materials 25 25

Total Variable Cost 210 220

Labor 40 40Depreciation 25 25Other Costs 15 15

80 86

Total Production Cost 290 300

Profit MaLrgin 20 20

FOB Price 310 320

Ocean Freight, Insurance, etc. c/ 50 55

CIF Price Developing Country 360 375

a/ For typical mills in the U.S., European Community and Japan(EAF /continuous billet casting/rolling mills).

b/ At US$117 per ton of scrap (delivered to mill) and 1.11 tonsof scrap per ton of rebar.

c/ Japan to Middle East and Africa.

- 56 -

ANNEX 3-4Page 2

B. Foretast of Hot-Rolled Strip/Coil Production Cost

Estimated Production Cost of Hot-Rolled Strip/Coil a/(In Constant 1979 US$)

Cost US$/ton of productCost Item 1979 1985

Iron Ore b/ 50 58Purchased Scrap c/ 5 5Coking Coal d/ 60 65-Other Energy 25 30Other Materials 20 20

Total Variable Cost 160 178

Labor 70 70Depreciation 60 60Other Costs 15 15

Total Fixed Costs 145 145

Total Production Cost 305 323Profit Margin 10 e/ 32

FOB Price 315 355

Ocean Freight, Insurance, etc. 50 55

CIF Price, Developing Country 365 410

a/ For typical integrated mill in the U.S., EC and Japan withBF/BOF/continuous casting/rolling facilities, including cokeovens and sinter plant.

b/ 1.77 tons of iron ore (62% Fe) per ton of product.

c/ 0.05 tons of purchased scrap per ton of product.

d/ 0.94 tons of coking coal per ton of product.

e/ This is a low profit margin due to depressed marketconditions for hot-rolled flat products in 1979.

Source: Bank estimates.

Industrial Projects DepartmentJanuary 1981

- 57 -

ANNEX 3-5

EGYPT: hIADISOLE REhABILITATION PROJECT

EGYPT - HISTORICAL PRODUCTION. IMPORTS AND CONSUMPTION a/ OF STEEL PRODUCTS(IN 1,000 TONS)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

I. PRODUCTION b/

1. Flat - Steel ProductsHADISOLB 65 i/ 118 184 165 123 203 197 200 222 259 355

2. Non-Flat Steel Products(i) Rebare, Rods & Wire

PADISOLB n.a 25 25 25 21 22 13 16 17 30 15

DELTA n.a. 18 49 54 53 53 52 56 56 56 56

NATIONAL n.a. 81 88 93 94 90 97 123 126 142 140

EGYPTIAN CCPPERWORKS n 77 86 71 72 75 84 08 89 09 89

SUB-TOTAL 203 201 248 243 240 240 246 283 280 317 300

(ii) Other Non-Flats c/HADISOLB n.a. 73 74 81 73 92 84 86 102 109 145

DELTA -a. 11 12 17 20 24 30 30 31 31 30

EGYPTIAN COPPERWORKS na. d/ d/ 3 3 4 6 d/ dl d/ d/

OTHER PRODUCERS e/ n.a. 47 52 55 60 51 59 65 70 75 95

SUB-TOTAL 130 i/ 131 138 156 156 171 179 101 203 215 270

TOTAL PRODUCTION 398 l/ 450 570 564 519 614 622 664 713 791 925

II. IMPORTS f0

1. Flat-Steel Products(i) Pipes and Tubes 45 27 42 1 02 294 115 38 52 90 72

(ii) Plates, Sheets, Coils. etc. 103 63 71 79 80 151 78 87 115 0lE 85

SUB-TOTAL 148 100 113 S0 162 445 193 125 167 191 157

2. Non-Flot Produnts(i) Reborn & Rods 108 78 131 66 132 269 266 163 221 444 728 )1

(ii) Other Noe-flats 19 11 39 42 99 65 165 303 278 153 75

(iii) Seni-Finihsed Produets 99 128 193 100 97 59 31 37 47 34 40

SUB-TOTAL 226 217 363 208 328 393 462 503 546 631 843

TOTAL IMPORTS 374 317 476 288 490 038 655 620 713 822 1,000

III. EXPORTS &/

1. Flot Produ-ts - - - - 42 39 30 6 54 42 50

2. Non-flat Products - - - - - - - - -

TOTAL EXPORTS 42 39 22 6 54 42 50

IV. DOMESTIC CONSUMPTION h/

1. Flat Products 213 218 297 245 243 609 368 319 335 408 462

2. Nos-flat Prodncts 460 421 556 507 627 745 856 930 990 1129 1,173 i/

TOTAL CONSUMPTION 673 639 853 752 870 1,354 1,224 1,249 1,325 1,537 1,635

a/ Apparent cossunption of finisbed steel peoducta asd does not take ijts account cha-ges is inventory.b/ Production of finished steal products and ecrlRdes internediotes such as bloons, billets, isgots and slobs that are sold to other loal producers for further rolling.

Doesotic production of steel pipes and tubes are also excluded since the flat-steel used to sake the pipe. and tubes are already counted as either local or importedflat-steel sheets, coils, platss sod keolp.

c/ Includes steel castings aed forgings.d/ Included with -ebaos, rods and Iire above.e/ Estimates for 1976-80. Other pr.oducers include Nose Castings, Nasr Forgings and Nel.an Iron Fnuodries. The pipe and tube production of Nasr Pipes and Fittings have

been occluded (see footnote b/E.f/ Irport statistics for 1970-76 alre fron the UEC report based on exports to Egypt by varinon countries as reported in the annual UN Statistics of World Trade is Steel.

Inport statistics for 1977-79 as's bhsed on official Egyptian inport data fr.. tha Central Agency for Public Mobilization and Statistics.S/ Excludes intermediate products (semi-finished) and pig-iros.h/ Production plus inports (but oc:luding iaports of seni-finished products) loss exports.i/ Dats from Atkins Planning Sector Survey and is teb average of FY 1969/70 and FY 1970/71.

I 7mport doties on rebs-s were nu-pended in 1980 and international prices wore low, pro-pting a large import quantity to build up stocks. Delta Steel held rebhr

stocks of rnughly 200,000 tons in Macnh 1981. It is assumed that only abost 528,000 of the 728,000 tons imported in 1980 were nonsumed.

Industrial Prnjocts Depart-entApril 1981

- 58 -

ANNEX 4

EGYPT: HADISOLB REHABILITATION PROJECT

HADISOLB STEEL PRODUCTION FACILITIES

Plant and year of Ratedinstallation General Description output

tpy -A/

2 --Sinter plant 1 (1964) 2 machines, 5°m2 strand area 500,000Sinter plant 2 (1973) 2 machines, 75m2 strand area 1,325,000Sinter plant 3 (1977) 2 machines, 75m strand area 1,325,000Blast furnaces 1 & 2 (1958) 2 furnaces, 476m3 3 409 tpd 500,000Blast furnace 3 (1973) 1 furnace, 1,033m 3, 1,930 tpd 670,000Blast furnace 4 (1979) 1 furnace, 1,033m , 1,930 tpd 670,000Pig casters (1973) 2 machines, 1,600 tpd each -

Thomas converters (1958) 4 x 17 t converters 300,000Elec Arc furnaces (1958) 2 x 12 t furnaces 50,000BOF plant (1973) 2 vessels (1 standby) bl 1BOF plant (1977) third vesselIngot casting several casting bays -Continuous casting (1973) 1 billet caster, 2 slab casters 1,500,000Continuous casting (1977) 2 billet. casters, 1 slab caster

Blooming mill (1958) soaking pits and a 2-high reversing mill 200,000Plate mill (1958) 1.5 metre single stand reversing mill (3-high) 45,000Heavy section mill (1958) three stand 2-high mill 125,000Light section mill (1964) six stands 70,000

Hot strip mill (1973) 1 metre continuous mill 500,000Cold strip mill (1973) 2 single stand reversing mills 260,000Tinning & galvanising (1973) Hot dip tanks for sheets 60,000

Medium section mill (1980) 8 stand mill 200,000Cold forming mill (1977) 14 stand continuous mill 40,000

Repair shops (1973) Foundry, forge, machine shop, fabrication shop -

a/ Plant capacities are those given in the Russian Detailed Project Report.

b/ The LD vessels of the BOF plant were designed with a capacity of 67 tons each,but operate with an 80-ton load at present.

Industrial Projects DepartmentJanuary, 1981

- 59 - ANNEX 5-1

EGYPT: HADISOLB REHABILITATION PROJECTFlow (Chart - Expected Production Levels After Completion of Stage I

ORE 2,078 SINTER PL. No. 2COKE 251

2,1 85

IN 1000 TONS/YEAR(1987)

COKE B.F.No.3&4610

SCRAP55 60 PIG IRON

FOR SALE

ELECTRICF. LIME LD.SHOP SCRAP- 90

50 1,200

II']GOTS SCRAP 7095 INGOTS 1,100 LIQUID STEEL

1145 INGOTS 645 1455

BLOOMING M. SLAB CASTERS BILLET CASTERS

116 595 420

SCRAP 25 45 30

20 .796 5020 1150 80

PLATE M. HEAVY SECM. HOT STRIP M. MED SEC. M.

SCRAP 17 12 25 6 8

1250 1240

H.R. PRODUCTS COLD STRIP60% COIL 1% COIL40% SHEET 02255 99% SHEET

20 30

TOTAL FINISHED PRODUCTS = 846.000T/Y (+140,OOOT. OF BILLETS)TOTAL SCRAP GENERATION = 288.000 T/YTOTAL SCRAP REQUIREMENT= 294.OOOT/Y VVorld Bank -22448

* Components - Modernization financed by KfW

ANNEX 5-2

- 60 -

EGYPT: HADISOLB REHABILITATION PROJECT

LIST OF PROJECT FACILITIES

1. Raw material storage and handling system modifications includingadditional storage volume, conveying systems, and new stacker/reclaimer.

2. Sinter plant modifications - including additional feeding, crushingand screening equipment.

3. External desulphurization of hot metal (outside BF).

4. Three argon stirring stations for liquid steel.

5. Application of slide gates on all steel ladles.

6. Complete rebuilding of the production facilities for calcined lime(for BOF Shop). (Scope of supply requires additional study.)

7. Install facilities to improve ladle preparation bay operations andemergency ingot teeming in the LD shop, including improvements insludge handling cooling water systems.

8. Hot metal transfer car modifications (in the BOF Shop).

9. Oxygen plant equipped with argon separation facility.

10. Complete modification (of replacement) of one continuous billetcasting machine.

11. Revamping or replacement of the most important instruments in theplant; and installation of pollution monitoring equipment.

12. Revamping of essentially all scales and weighing equipment in plant.

13. New computer for the information service center.

14. Improvement in electrical distribution system, including: automaticload dispatching, load shedding, protective relays, DC motor drivecontrols, and additional distribution networks.

15. Miscellaneous equipment for utilities and plant services, includingwater supply for furnace water cooling system, sand clearing equipment,and transport services.

16. Communications equipment, including systems for locomotives and mobile- equipment.

17. Engineering services.

Industrial Projects DepartmentApril 1981

- 61- ANNEX 5-3

EGYPT: HADISOLB REHABILITATION PROJECT

HADISOLB's PRODUCTION PLAN (FY 1988 and later)

Basic Products

Sinter 2,185Hot Metal 1,150Liquid Steel 1,250

Finished Flat Products

Plate 1/ 75Hot Rolled Coil and Sheet - 215Cold Rolled Coil and Sheet 205

Sub Total 495

Finished Non-FIat Products

Heavy Sections 131Medium Sections 140Light Sections 70Formed Sections 10

Sub Total 351

Semi-Finished Products

Billets, for sale 140

Rolled Steel Products (and Billets), Grand Total 986

(Other Products: Pig Iron 60,000 tons)

1/ Excludes Formed Sections.

Industrial ProJects DepartmentApril 1981

EGYPT: HADISOLB REHABILITATION PROJECT

FUNCTIONAL ORGANIZATIONAL CHART FOR PIU AND CU

PROsP1 iSEATION

EMWAN ~ ~ ~ ~ ~ ~ ~ ~ W

PRGDli(TION i_

tl[AOOfiUP b[-' iv 1Hi fiVtl COORDINATINGM)AINIf4r, K01rf.11bV15 UNIT (CU) …

FLARNlNrI ______NI (U)r ___________

I . .,I

SCHEOblE BUDGETI PRO(URFMENt ENGtlERNEMG SITEP ROGRESS ENO. COSTCONTROL AXUtN APFW7JAIS ctlw | ra

I (!) ®3 fK

PROlECT ItMEMENTAT7 N UNIT-il SThFF rAX I

IECHNICAL ASSISTANCE SERVICES LIN*

E'.':'s'T9 EPNRJOIJEfCETR EPNRfOJEC(T ' A Ns ENGIrR ECI:MELEPR (NCiETERPaWECT ~ -~~''i~t ECT'E Niff RJt PROJECT P7; REGIOEtY

Cf@'Pet ,-.,fNT </%yt.t INSThUMENTATIDN PERN0O4.EL ' EG tttO $ HILLS USSR ON- V-.<i

& F,-H,Tf I & AFET comIPoJNTS PRWJECTS

9? | INSTRLKNTATION C II I I EA11 i I S 1 tE U1

1 ___Mf=CAL A5115TtA SLAV' Lt_ ttLW ___ _1____

su 44)VE8tEtft - BASIC - DB CLASSIFfATIO - ALL BASIC I SOmtf DtTNLfO -SUiPtRAS04 OF -SUPfRVIMSIN Of -Or TtI ON-M e_S"f (&EPI CSItG4 E(NGitUtfRiNG -REMUNERATKCN ENWERlGKi A MEtMA4TURKEY RteNIR8I fRB16S.M I ET & FEJ.BILITY STUDIS A SUlitivisEN & utti1rE STUOES SUPtRVISION O, WO CONTRAt PROT=_ORE FiCATC*N Of tuSTRJMCN1TV4 -SAFtTy REHIABILITAWt3N IT115

& EUMFUTER (A NVIR>NMNY EMPt 14ESdRUKENATIN

1/ Coordinating Unit

IndustLi.l Projects Department

April 1981 slOws COSlWTMET P ///7

tthULWINT 0

ANNEX 5-5

- 63 -

EGYPT: HADISOLB REhIABILITATION PROJECT

PROJECT IMPLEMENTATION

DIVISION OF FUNCTIONS AND RESPONSIBILITIES a/

Engineer/ T.A.

Function PIU EGITALEC Firm

1. Conceptual Engineering x

2. Detailed Engineering X

3. Procurement/Specification Writing X

4. Procurement - Preparation of Tenders X

5. Procurement/Bid Evaluations X W

6. Contracting x w

7. Scheduling/Expediting/Follow-up/Critical Path Analysis, FieldSupervision Inspection X

8. Construction, Erection, Super-vision (overall) x w

9. Coordination, Training (with CU) X

10. Budget: Control X

11. Startup and Acceptance,

Tests (Commissioning) x

12. Maintenance Planning X

13. Operations/Know-How X

a/ An "X" Trmeans primary responsibility.A "W" means actually carry out the work.

Industria:l Projects DepartmentApril 1981.

- 64 - ANNEX 5-6

EGYPT: HADISOLB REHABILITATION PROJECTIMPLEMENTATION SCHEDULE

1981 1982 1983 1984 1985

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Engineering C

1 A-1 Two Ore Piles and ConveVors E S 8 C M

A-2 One Stacker and Reclaimer

2 A-3 Sinter Interconnecting Conveyor E S B C M

A-4 Coke Surge Pile

A-5 Sinter Surge Pile

3 B-2 Sinter Plant No. 2 Modifications E S B C M, A

4 B-3 Sinter Crushing and Screening E S B C _

5 C-2 Extemal Desulfurization E S B C M.

6 D-1 Trhee Argon Stirring.Stations E S B C M _ _

7 D-3 Burnt Lime Facilities E S B C _ M

8 D-4 Emergency Teeming E S B C M

9 D-6 Slide Gates Application, including S B C M

D-2 Ladle Prep Facilities

10 E-1 Continuous Casting E S B C' M ___

11 F-i Electrical Distribution E S B C M

to Automatic Load Dispatching

F-5 Power Sapply te Modified Equipment

and Emergency Power Shedding

D-5 Power System Protective Relaying

D.C. Circuit Breaks on Strip Mills

12 G-1 Emergency Pumps Facilities E S B C _ M

G-3 HSM Furnace Cooling

13 G-2 L.D. Shop Dust Removal and Gas Cleaning E S B C M

14 H-i Argon Production - New O.ygen Plant E 5 B C - M- - -

15 H-2) Replacement of Instruments and Installation S B C M,_ _ B C M. B C M

H-3) of Pollution Monitoring Instruments

16 H-4 Dosing and Weighing Equipment S B C M - -A

1 7 H-6 Computor and Technical Assistance for Information Center E S B C M

18 Transportation and Services E S B C M _

19 _ _ _ _ _ _ _ _

LEGEN DS - Issue Major Specification __ Civi WorksB - Receive Bids ErectionC - Place Major Orders A CommissioningM - Delivery of Major Pieces of Equipment (Start)E - Engineering

IPDApril 20, 1981 World Bank -22447

ANNEX 6-1- 65 -

EGYPT: HADISOLB REHABILITATION PROJECT

CAPITAL COST ESTIMATE(In US$ Million)

Direct Local PurchasesForeign Indirect Local Total

Exchange Cost Foreign Exchange Currency Cost

A. Equipment, Spares &Structural Materials (FOB 23.11 2.54 0.46 26.11

B. Electricals and Cables 16.20 1.13 0.17 17.50

C. Ocean Freight and Insurance 1.96 - - 1.96

D. Customs Duties - 5.30 5.30

E. Port Charges and 'LocalTransport - 3.61 3.61

F. Civil Works 1.26 0.68 1.94

G. Engineering and Know-How 2.10 - 1.15 3.25

H. Erection and Commissioning 1.30 - 7.4 8.70

I. Technical Assistance andTraining 3.53 - 1.90 5.43

a/Base Cost Estimate 48.20 4.93 20.67 73.80

Physical Contingency (10%) 4.82 0.49 2.07 7.38b/

Price Escalation 8.43 0.86 5.63 14.92

Installed Cost 61.45 6.28 28.37 96.10

Incremental Working Capital -c/

Interest During Construction 8.50 - 1.00 9.50

Financing Required 69.95 6.28 29.37 105.60

a! December 1980 prices. An exchange rate of USSl.O0=LE 0.70 has been used.b/ 15.9% on foreign and local, except 38.6% on local, items A, B, F, and H.c/ Based on World Bank loan of US$64 million with guarantee fee to the Government.

All other project cost (US$41.6 million) assumed to be financed with equityfrom the Governmenit.

Industrial Projects DepartmentApril 1981

ANNEX 6-2- 66 -

EGYPT

HADISOLB REHABILITATION PROJECT

DISBURSEMF.NT SCHEDULE FOR BANK LOAN

(US$ million)

Calendar Quarterly Cumulative

Year and Quarter Disbursement Disbursement

1981 IIIIII - --

IV 0.4 0.4

1982 I 0.8 1.2

II 1.5 2.7

III 4.5 7.2

IV 8.0 15.2

1983 I 8.0 23.2

II 13.0 36.2

III 7.5 43.7

IV 5.0 48.7

1984 I 4.3 53.0

II 3.1 56.1

III 3.1 59.2

IV 3.2 62.4

1985 I 1.2 63.6

II 0.4 64.0

Industrial Projects Department

April 1981

EGYPTHADISOLB REHABILITATION FROJECT

SALES FrORECAST

F'ISCAL YEARS ENDING JUNE 30

WITHOUT REHABILITATION

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

SALES (000 l'ONS)

COLD FORMED SECTIONSi 10 10 10 10 10 10 10 10 10 10GALVANIZED SHEEIT 2 2 2 2 2 2 2 2 2 2COLD ROLLED SHEET&COIL 127 141 152 152 152 152 152 152 152 152HOT ROLLED SHEET/COIL 145 157 166 166 166 166 166 166 166 166PLATE 59 49 44 39 34 29 24 19 10 -LIGHT SECTIONS 58 48 43 38 33 29 24 19 10 -MEDIUM SECTIONS 40 80 110 140 140 140 140 140 140 140HEAVY SECTIONS 49 42 37 33 28 23 19 14 9 -BILLETS 130 133 117 96 93 86 80 73 70 70PIG IRON 120 120 120 100 85 70 60 60 60 60

TOTAL SALES 740 782 801 776 743 707 677 655 629 600

FRICES (CONS. LE/TION)

COLDII FORMED SECI'IONS 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00GALVANIZED SHEET 391.00 391.00 391.00 391.00 391.00 391.00 391.00 391.00 391,00 391.00COLD ROLLED SHEETSCOIL 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00 266.00HOT ROLLED SHEET/COIL 211.00 211.00 211.00 211.00 211.00 211.00 211.00 211.00 211.00 211.00FLATE 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00LIGHT SECTIONS 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00MfEDIUM SEECTIONS 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00 290.00HEAVY SECTIONS 286.00 286.00 286.00 286.00 286.00 286.00 286.00 286.00 286.00 286-00BILLETS 135.00 135.00 135.00 135.00 135,00 135.00 135.00 135.00 135.00 135.00PIG IRON 12.5.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00

SALES REVENUE (CONSTANT MILLION LE)

COLD FORMED, SECTIONS 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66GALVANIZED SHEET 0.78 0.78 0.78 0.78 0.78 0.78 0-78 0.78 0.78 0.78COLD ROLLED SHEET&COIL 33.78 37.51 40.43 40.43 40.43 40.43 40.43 40.43 40.43 40.43HOT ROLLED SHE'ET/COIL 30.60 33.13 35.03 35.03 35.03 35.03 35.03 35.03 35.03 35.03FLATE 14.81 12.30 11.04 9.79 8.53 7.28 6.02 4.77 2.51 -LIGHT SECTIONS 16.82 13.92 12.47 11.02 9.57 8.41 6.96 5.51 2.90 -MEDIUM SECTIONS 11.60 23.20 31.90 40.60 40.60 40.60 40.60 40.60 40.60 40.60HEAVY SECTIONS 14.01 12.01 10.58 9.44 8.01 6.58 5.43 4.00 2.57 -BILLETS 17.55 17.96 15.80 12-96 12.56 11,61 10.80 9.86 9.45 9.45FIG IRON 15.00 15.00 15.00 12.50 10.63 8.75 7.50 7.50 7.50 7.50

TOTAL REVENUE 157.61 168.47 175.69 175.21 168-80 162.13 156.21 151.14 144.43 136.45

AVERAGE REVENUE FER l'ON (LE/TON) 212.99 215.43 219.34 225.79 227.19 229.32 230.74 230.75 229.62 227.42TOTAL REVENUE (CURRENT MILLION LE) 157.61 190.37 214.34 229.53 238.01 244.82 249.94 255.43 258.53 259.26:NFLATION 1.00 1.13 1.08 1.08 1.08 1.07 1.06 1.06 1.06 1.06COMPOUND INF'LATION 1.00 1.13 1.22 1.31 1.41 1.51 1.60 1.69 1.79 1.90

tGAYFT

HAl ) IDS REAEAIL. ITATION FRO.IE1:T

F ISCAI YEARS ENDING JUNE 30

(CURRENT MILLION LE)

PROJECTED INCOME STATEMENT - WITHOUT REHABILITATION

1981 1.982 1983 1984 19985 1986 1987 1988 1989 1990

SALf RlF .VENUIE 157,61 190.37 214.,34 22.9.53 238.01 244.82 249.94 255.43 258.53 259.26

C:OST OF GOC01DS cl I1.1 1.49.55 179.91 202.24 217,22 230. 13 241.66 251. .74 262.44 271.90 280(.46C:OCKE SUS I DY 22.00 22.00 10. 00 1.00 10.00 10.00 15.00 15.00 18.00 26.00

GRC) t ; INCOC)M 30.06 32.46 22.10 22.31 17.88 13.16 13.2.0 7.99 4.63 4.80

NIENTE i ET I FTCI S

DN:tCD ENC;INtRINIG L.N 0.12 0.11 0.09 0.08 0.06 0.05 0.04 0.02 0.01- hFlJa-

OTIII R 2.16 2.02 1.93 1.79 1.69 1.60 0.80 - -SHURF.T Tl RM [ED T 3.96 2.82 2.01 1.13 0.35

IEPRCI C[ATON * AMU)RTI TATMIIZ TON 23 .41 23.41 25 1.0 25. 10 25. 10 25.t10 19.99 19.99 19.99 12.00

I:T NANCI'AI C:IIAR.E:S 29. 65 28.36 29+13 28.10 27.20 26.75 20.83 20.01 20.00 12.00 Oa

OCFRFA.TINCG INCOME 0.41 4.10 (7.03) (5.79) (9.32) (13.59) (7.63) (12. 02) (15.37) (7.20)

SUBTOTA O HER INCOME 1 .71 1 .71 1.71 .7 1.71 1.71 1.71 1.71 1.71 1.71

.............. ....... .... ..... .. .... .... ..... ...... ....... ..... _ ..... .. _.__._ ....... .. .... .... ... _. _... ... . __. _... ........... __.... _. .... ._._ .._ .___

NET INIC)OM BEF TAX&I:IV 2.12 5.831 (5.32) (4.08) (7.61) (11,88) (5.92) (10.31) (13.66) (5.49)

x:' iS 1EdI OFN OF I'NC)MIDolDl -- -N'_

WCIRR 01(1W ART IC:IIFA hI[ON--INCOMI TAX-_

TORT [E ..1. 1 : ON OF I NO :(.. .... .. ..

1:1 TAINIt I'INCOME 2.12 5.81 (5.32) (4.08) (7.61) (11.88) (5.92) (10.31) (13.66) (5.49) .

CASH; (;rNrRATICON 31.77 34.17 23.8L 24.02 19.59 14.87 14.91 9.70 6.34 6.51

I N IDT I Al fI PRO.JEC:Trs DEPARTMENTlRFTP )rT l RFCFARE t' 04/24X81

HADI S)OLB RZEHA'IL IT AT ION PROJECT

EFISCAL. YEARS END IING JUNE :30(CURRENT MI L.....I.TON LED

PROJECTED SOURCES AND APPLICATIONS OF FUNDS - WITHOUT REHABILITATION

1.981 :1. 981'2 1.983 :1. 98B4 .1 96E 15 .1.986 I1.987 1968 1989 1990

I CY 1 C)JII,/ -34-.1/ - 3,t-$l. A. ,.,.jAy. ... ... n.. l 9.170O 6.3 6,ZAJ.

I DiAUl L. (AN ISURE NTKFW .... ....S.... N..CAPITAL 'INC.RlE.ASE F--

TOTAL.. SOURCES 31 .77 34. 17 23.681. 24.02 1.9.59 14 .87 1.4. 91 9,70 6.34 6.51

APPL... ICAT IONS

CAP ITAL EXPENDITURE'S - .................WO.RK<ING.' CAPITAL. INCREASE 0.*42 25. 14 1.5 .830 1 7 1.8 13. 75 9. 11 7.07 5. 20 4. 54 4 * 388

IFIRD COMMI 1.MENT ... .FEE.......

lI FtR D) P C I A . .... .... .... .... ....

IBRD ENG. INT 0.12 0.11 0.09 0,0 0.06 0.05 0.04 0.02 0 I.0IBRI: ~ ENS. RI.N 0.18 018 0. 17 0. 17 0. 17 0 1 7 0,1 7 0 .17 0,11 01 7

I B R D B' F. FtY IS F RI C,E 0.30 0429 0,26 0.25 0,23 0.22 0. 2:1 0,19 0 . 1.8 0. 17

NEFW I NTE REI:.STI.. .. .. ..NEW P:RINC,I.I'AL - ** **** *

NE7W DEBT SERVICE .... ..... - ....O'THE4 .R T NTEREF T 2. 16 2.02 1 .93 1 .79 1 .69 1 .60 0,8O)THIE R FR I NC PL. 4,22 3.9() 3. 81. 3.67 3.57 3. 57 3.57

OTH4ER DEBIT SERVICE 6.38: 5.92 5. 74 5.46 5.26 5. 17 4.37 -

SHO-I(RT.TE R M .DE T 3,96 2.82 2.01 1.1 3 0.3`5.......TOTAL. D EBT S(3ERZV,I.C E 1.0,64 9.03 8l.0(1. 6. 84 5. 84 5. 39 4 58 0. .19 0 . 1 8 0 .1.7

DI'V 'D I .. END S *-.*** .... .... ..

WORKERS EAR TIA11131PAT IA ON. .... ... .... .. ....TAX .. ....

'TOTAL. ABFEL.. IAT I 0 NS- A.1 * 06 34. 17 213. .81 24. 02: 19. 59 14. 5o I1 1.65 5. 39 4.*72 5.0

DEBT SRICECOVERAGE 2.99 :3.78 29 13.5 13 .35. 2, 76 :3.26 51 .05 35.j. 2 2 138.29NETr CA )Sir- E,L.OW 2,7:1 O 037 13.*26 4 * 31 i * 62 1.*46

'I N- D1L) STRI A I..F: JEl:i DElPART IME::NTJREPORTR A E~042,'81

EGYPT

HADISOLB REHABILITATION PROJECT

AS OF JUNE 30(CURRENT MILLION LE)

PROJECTED BALANCE SHEETS - WITHOUT REHABILITATION

1981 1982 1983 1984 1985 1986 1987 1988 1989 199()

ASSETS

CASH 12.46 14.99 16.85 18.10 19.18 20.14 20.98 21.87 22.66 23.37

RECEIVABLES 37.83 45.69 51.44 55.09 57.12 58.76 59.99 61.30 62.05 62.22

INVENTORIES 191.00 216.00 233.00 250.00 269.00 288.00 306.00 323.00 342.00 363.00

EXCESS CASH - - - - 0.37 3.63 7.94 9.56 11.02

CURRENT ASSEIS 241.29 276.68 301.29 323.19 345.30 367.27 390.60 414.11 436.27 459.61

EQUIPMENT 142.44 142.44 142.44 142.44 142.44 142.44 142.44 142.44 142.44 142.44

LAND 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37

OHER FIXED ASSETS 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97

ACCUM. DF:PR. 119.15 136.26 153.37 170.48 187.59 204.70 216.70 228.70 240.70 252.70

NET FIXED ASSETS 147.63 130.52 113.41 96.30 79.19 62.08 50.08 38.08 26.08 14.08

OTHER ASSETS 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64

ACC. AMORT. 33.09 39.39 47.38 55.37 63.36 71.35 79.34 87.33 95.32 95.32

NET OTHER ASSETS 89.55 83.25 75.26 67.27 59.28 51.29 43.30 35.31 27.32 27.32

7OTAL ASSETES 478.47 490.45 489.96 486.76 483.77 480.64 483.98 487.50 489.67 501.01

LIABILITIES S CAPIrAL

SHORT-7ERM DEBI 34.37 24.62 19.43 10.15 3.51 - - -- - -

PAYABLES 134.00 154.00 168.00 182.00 197.00 213.00 226.00 240.00 256.00 273.00 °

C.P. LI DEBT 4.08 3.98 3.84 3.74 3.74 3.74 0.17 0.17 0.17 -

CUlRRENT LIABILITIES 172.45 182.60 191.27 195.89 204.25 216.74 226.17 240.17 256.17 273.00

IBRD ENG. LN. 1.36 1.19 1.02 0.85 0.68 0.51 0.34 0.17 - -IBRD - - - - - - - - -

KFWt OTHER Ltl DEBT 18.19 14.38 10.71 7.14 3.57 - _ _ ___

TOTAL L T DEBI 19.55 15.57 11.73 7.99 4.25 0.51 0.34 0.17 - _

TOTAL LIABILITIES 192.00 198.17 203.00 203.88 208.50 217.25 226.51 240.34 256.17 273.00

EQtJITY 341.24 341.24 341.24 341.24 341.24 341.24 341.24 341.24 341.24 341.24

RETAINED EARNINGS (60.58) (54.77) (60.09) (64.17) (71.78) (83,66) (89.58) (99.89) (113.55) (119.04)

RESERVES 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.81

TOTAL EQUITY ANDI RESERVES 286.47 292.28 286.96 282.88 275.27 263.39 257.47 247.16 233.50 228.01

TOTAL LIABILITIES & EGUITY 478.47 490,45 489.96 486.76 483.77 480.64 483.98 487.50 489.67 501.01 t

RATIOSCURRENT 1.40 1.52 1.58 1.65 1.69 1.69 1.73 1.72 1.70 1.68

DEBT 0.06 0.05 0.04 0.03 0.02 -- - - - -

EQ(JITY 0.94 0.95 0.96 0.97 0.98 1.00 1.00 1.00 1.00 1.00

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPAREI':04/28/81

HAD ISOLP RE'HADI I:.1TAT IONPRJC

S)A LE- S) FO RE CA S'T

F I SCAL. YEARS E..ND INO JUNE. 30

WITH REHABILITATION

1. 91 1)I I982 :1.983 1984 1.98S3 .1.986 1.987 I 9,88 1989 1990

SAlEfS (000 TONS)

COLD. )j:FlO5MED 1: E CT1ICM5 1.0 'I. 10 :1 0 10 10 .10 10 0 1 0

CO )LD1 RO0ILEDSHE:E"T LE.O!L 1.27 1.41. 190 18 S5 195 203 203 203 203 203HOT' ROI. EDSEE/L)I 145 157 :178? .179 190 2'.15 21 2.15 .:15 2'15FE1-A I F :1 59 49 3 8 53 64 75 75 75 75

L. I I3HT SECT IONS 5~ ~ ~~~~~~ ~~~ ~~~8 48B 39 49 <)70 70 $0 70MEDIUM SE1.C"T I INS' 40 F.) 1.20 140 140 1 40 140 :140 1 :-() 140HE1:AVY SEECT IONS 49 42 67 95 1.15 131 1.31. 131 131F131 LI.. F. 1.3<) 133 1.26 77 88 I11< 119 14<) 140 1.40PIG I RO.N 1 2<) 120) :100 85 70) 60 60 6<) 0 6<)

TOTAL. (:AL E 740) 78~32 7.6 822 892 979 1 025. 1 rp046 :1.046 1 p 046

COLD FORMED SEdCT I INS' 266.00)< 266. <)< 266.0<) 266. <)0 266. * )< 266.0<0 266. 00 266.0<) 266 .00 266 .00G'AL VAN I F'DSEE 391.00)< 391 *0<0 391 .00 :391 * <0 391 * 0<) 39:1 00 :391 * 0<) 391L * <)< 391.00)< 391. .C FIT.. LiJ' R OL I..F: fHEFSO). 266. <)< 266). <)0 266. * 0 266.0<) 266.00)< 266 .0<) 266.0<) 266.0<) 266 .00 26,6.HOI T R (IJL.LEO 1 :: ., HET/COI I. II2I * 00 21.1 * <0 211 .0<) 21 1 * <) 0 211.0<0 11 . 00 2i *. 0 0 2.11 .00 211 .0 0 211 . 00FLAT F: 2','' 1. 0<) 25:1 .00 251*0<0 2"51. . 00 2'51. .0) 251.00 2'51. 00 25:1 *00 251 . 00 25,'j1 . 0<)I.I GH--lT SECTIOFINS 290) <0 29<). 0<) 29<) . 00 '29<). 0<) 290.00 29<0.00 290 .00 1290. <)< 29<).00 129<) .00MEODI UN 2EE OS'90).00) 290. 00)< 29<) *<)0 2'90<0 2 ) 90. * 0 '90 <)0 290) <) 29<).00 290) * oF 29<).0HE::AVY SE'F:T<IONS 286 00 286. <)< 2FB6.00)< 286.0<) 206. <)< 206 <)< 286. <0 286, 00< 286. <)0 286. 0in [IILET (T' 1 3.i.00I3 <) 00 135.<)) :3,<< 1:35 .0 I35t 0<) 135 <)< 135.0 I)<) 135 .<)<) 3135 .<) 0 135.<00rI: 1 ('I RO0N 1 2'5. 0<) 125. <)< :125. <)< :1: 5 0<) 1 2 <) .00 1. ,. 0< 1. 2 <)<).0 125.00)< 1 25.- <)00 1.25. <)<

S.'Ai.F:S REENE COFNST'ANT MILL1FION LEE)

COLD FCORMED)SC FN 2.66 2.66 2. 66 '2 .66 2+66 2.*66 2.66 2.66 2.66 2.66G.-AL...VANII 13:D) iHE 01 *78 0. 011 ).713 0) 78 <) 70 0) .7F <) 7F1 0,78 <*713 <) 78CFII.D ROLLF SET FDIF :3:3, 78 37,1. 50. 54 49.21 51 I7 5 / .-4. )< 54 . <)<) 54. <)< 54. <)<) 54. 0HOT) R0F1 I IF.D 3FFTFI 30.60 :3:3. 1:3 37. 56 37. 77 40. 0)9 45. :37 45`.-J3 7 45,j. 3 7 45. 37 45. 37PILATE: :14.131 12,3<) - 9.54 .13.3<) 16. 06 1 F.8: E3 1.8133 18E).8f3 18S.8: 3

LIGHT SECT IONS 16~~~~~~~~~~~~~~~~.12 132 .11 . 31 :14. 21 174<) 20. 30 2<) *30 2<).30) 2<) 30ME'DIUFI SE7ET I FNS 11 .6<) 23.2<) 34. B1< 40).6<) 40).6<) 40. 6<) 40). 6<) 40).6<) 40).6<) 40.60HEA. 0V Y SELE I FI NS :14. <)1 12,:. <)1 1.9. 16 27.1/.I7 32. 89 37. 47 37. 47 37. 47 3 7.47BFi t F. LTS,: :1'.575 17,96 1 7.<)l 1<.O.40 11.88.I :1.4.1185 1.6, 07 18~. 9<) I 18.90 111,I9<)P IC LI RFCIN 1<)) 15.<)0 12 .50 l<0.63 E38.7 7I," ~50 7 .5<)' 7. 5< .5<) 7 , 0

TOT''AL. RE:VE.NUEF: 15.61 1613. 47 1.550 1.92 <06 211I $31J 232. 11 243. 58F 246. 41 246. 41 246.4.1

AVERAWG E-F RE:VE:.NUE'. PE R TON (I<' L/'T C) N 212,'?'? 2 15J. 4 3 214.67 2 3 3 .6S-: 236. 119 237.09 237. 64 235+57 235. 57 23,5.57TOTAL RE,VE'NUEJ: (C,(LIRRENT MI LLT ON LE:.) :1 5:'j7 .61 .1.9<) 37 19<). 14 251-:l 6<) 297.95 350. 49 339 . 73 4:16. 43 441 * <07 4613.13 'B

INFLATION 1.)) 1 13 .1.<)1W3 1,(F)F I .<)8 l.<07 1.0)6 1.<06 J.<) 6 1.<06CONF'OUND IFNFt ATI ON 1 * <) 1.*1:3 1.*22 1. 31. 1 +41 1 .51 1.. 6<) 1.69 1 .79 .1 * 90

EGYPT

HADISOLD REHABILITATION PROJECT

FISCAL YEARS ENDING JUNE 30

(CURRENT MILLICON LE)

PROJECTED INCOME STATEMENT - WITH REHABILITATION

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

SAlES REVE:NUE 157.61 190,37 190.14 251,60 297,95 350.49 389.73 416.43 441.07 468.18

(:OST OF GOODS SOLID- 149.55 179.91 175.31 216.44 253.04 291,78 325.62 348.31 368.92 391.59

COKE SUJBSIDY 22.00 22.00 22,00 - - - -

GROSS INCOME 30.06 32.46 36,83 35.16 44.91 58.71 64.11 68,12 72,15 76.59

INTEREST, FEESIBRI:' 0.26 1.71 3.59 4.36 4,19 3.75 3.31 2,87 2.43

IBRI:' ENGINEERING LN 0.12 0,11. 0,09 0.08 0,06 0,05 0,04 0.02 0.01 -

KFW - 0,29 I'l 1.48 1,54 1.43 1.30 1.18 1,05 0.93

- O'T'HER 2.16 2.02 1.93 1.79 1,69 1,60 0.80 - - -

-- SHORT-TE:RM DEBT 3.96 2. .92 - - - - - - - -

D:,EPF:RE.CIATIO)N, AMORTIZAI'ION 23.41 23,41 25,10 29.31 29,31 30,60 30.60 30.60 30,60 30,60

FINANCIAL CHARGES. 29.65 29,01 29,94 36.25 36,96 37,87 36,49 35.11 34,53 33,96

…-~~~~~--- - - - - - - -- -------

OPEFRATING INCOME 0,41 3.45 6,89 (1.09) 7,95 20.84 27.62 33.01 37,62 42.63

SUB-TOTAL OTHER INCOME 1.71 1.71 1,71 1.71 1.71 1.71 1,71 1.71 1.71 1,71

NET INCOME BEF TAX&DIV 2.12 5,16 8,60 0*62 9.66 22.55 29,33 34,72 39.33 44.34

DI-STRIBUTION OF INCOMED IVlI DENDS N I ) - 5.21 5,90 6,65

WORKERS PARTICIPATION - - _ _ . - 8.68 9,83 11,09

INCOME TAX - -- -- - - - - 19,10 21,63 24.39

TOTAL DISTRIBUTION OF INCOME - - - - _ _ _ 32,99 37,36 42.13

RETAINEE:, INCOME 2t12 5,16 8,60 0.62 9,66 22,55 29,33 1473 1,97 2.21

CASH GE NERAION 31.77 34,17 38,54 36.87 46,62 60,42 65,82 69,83 73,86 78.30

:INDUSTRIAL. PROJECTS DEPARTMENTI:'EPORT PREp'ARED: 04/23/81

EGYF:PT

HAD:iISOLB REHAII IITATIION PROJECT'

FISCAL.. YEARS E:NDING JUNE 30(CURRENT MILLION LE)

PROJECTED SOURCES AND APPLICATIONS OF FUNDS - WITH REHABILITATION

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

SOURCE- .. ... .... ... .... ......... .

CA SH GiE:NE.RAT' I ON 31. 77 34. 17 38.54 36.87 46.62 60.42 65,82 69.83 73.86 78.30I BRDI L()AN D I SF.UR'.EMENT1S - 1 . E6 23 11 13.72 5 * 45 - - - -

KF W lDISBUJRSEMENITS 5.70 16.40 7,40 1.30 0.20 -- - - -

CAPITAL INCREASE, 2.48 18.25 16.32 7.81 -. - -

.... ... ...... ... .... .... ... .... . .. ......... ......... ... _ . _ _ . .. . _...._ _ _ _ _ _ .. _ _ _. _ _ _ _ _ . _ _ _ _ _ _TO l' .. SOlURCES 31 . 77 44. 21 96. 30 74.31 61.18 60.62 65.82 69.83 73.86 78.30

APF:LI.. IC ATI ON':... .... .... ... ..... .... ............

C A F:1.[ 'I' AI EX F:'E:: ND l 'I' I.IR ES '3 - J 0 04 S 7 76 3710.04 57.76 37.44 14.56 0.20 - - -

WORKIN[ CAPIN TAL INCREASE: 0.42 24.49 27.83 21 . 18 18.18 t 18.84 17,24 11.29 10.63 12.39I BI C11OMM I I MENT FEE 0 .16 0.23 0.09 0.02 -- -- - -

IF.RII NNTERERST 0.10 1.48 3,50 4.34 4.19 3,75 3.31 2.87 2.43IBRI FPRINCIPAL.. -- - -- 4.01 4.01 4.01 4.01 4.01 4.01

IFIRD ENG. INI 0.12 0.11 0.09 0.08 0.06 0.05 0.04 0.02 0.01 -

I[SR:D ENG. FRIN 0.18 (.18 0.17 0.17 0.17 0.17 0,17 0.17 0.17 0.17

1BRI:l D:EFBTr SERVICE 0.30 0.55 1.97 3.84 8.60 8.42 7,97 7.51 7.06 6.61

KF:W IN'1'ERE ST - 0.29 1.11 1,48 1.54 1.43 1.30 1.18 1.05 0.93Kl:'W FR I NC I Al ... - - - 2.5() 2,50 2.50 2.50 2.50KhF:W DE-R'T' S:,E.:RVIC OE 0.29 1.11 1.48 1.54 3.93 3.80 3.68 3.55 3.43

OTHER I NTE:RE.-':T 2. 16 2 02 1 .93 1 .79 1 .69 1 .60 0.80 -

0lTIER FRWINC I PAL 4.22 3.90 3.81 3.67 3.57 3.57 3,57 -- -

OTHER D:'EDT SE:RVICE: 6.383 5.92 5.74 5.46 5.26 5.17 4.37 -

SHORT TERM DF'T 3.9 6 2 * 92 - -- -- -. --

TOTAL.. DEBT SERVICE 10.64 9,68 8.82 10.78 15.40 17,52 16.14 11t19 10.61 10.04DI VU I F.:, N El -- - - -- - 5 . 2 1 5.90 6.65WORKER'S :'PARTICIPATION - - -.- 8.68 9.83 11.09TAX 19- --- --- -- -- - 19.10 21t63 24.39

TOTAL APPLICATIIO)NS .11 .06 44.21 94.4;14 69.40 48.14 36.56 33;38 55.47 58.60 64.56

Dl-:B'T' SEHlRVICE COU-RAGE 2.99 3 .53 4.37 3.42 3.03 3.45 4. 08 6,24 6.96 7.80Nl-E.'T' CAS'H Fl .) OW 200.71 1.89 4.91 13.04 24.06 32 .44 14.36 15.26 13.74

'INDU USTITR:IAL.. PROJE(:T ' DEFARTMENTREPORT P:Rl..PARE:04/28/81

EGYfT

HADICSOil REHAP IL I lA A l lIN f(iOJEC'

... ~~~~~~~~~ ~ ~~~~~ ......... .... ...

AS OF JUNE 30((:URRE:NT MILLION LE)

PROJECTED BALANCE SlEETS - WITi REHABILITATIoN

1961 1982 1983 19134 1985 1986 1987 1988 19(39 199)

ASSETS

CASH 12.46 14.99 14.61 18.04 21.09 24.32 27.14 29.03 30.74 32.63RECEIVABLES 37.83 45.69 45.63 60.38 71.51 84.12 93.54 99.94 105.86 112.36INVENTORIES 191.00 216.00 233.00 250.00 269.0() 288.00 306.00 323.00 342.00 363.00EXCESS CASH - 1.89 6.80 19.64 43.90 76.34 90.70 105.96 119.70

. _ _ _ . . . _ _ . _ _ _ _ .._ _ ._ .......... ,, ., ., ... _ _ _ _ ._ ._ _ ._ _ _ ._ _ ..... _ _. _..

CURRENT ASSETS 241.29 276.68 295.13 335.22 381.44 440.34 503.02 542.67 584.56 627.69

EOIJIPMENT 142.44 152.48 210.24 247.613 262.24 262.44 262.44 262.44 262.44 262.44LAND 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37OTHER FIXED ASSETS 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97 116.97ACCUM. DEPR. 119.15 136.26 153.37 174.69 196.()1 218.62 241.23 263.84 286.45 309.06

NET F-IXED ASSETS 147.63 140.56 181.21 197.33 190.57 168.16 145.55 122.94 100.33 77.72

OTHER ASSE TS 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64 122.64ACC. AMORT. 33.09 39.39 47. 38 55.37 63.36 71.35 79.34 87.33 95.32 103.31

NET OTHER ASSETS 89.55 83.25 75.26 67.27 59.28 51.29 43.30 35.31 27.32 19.33

TOI'AL ASSFTS 478.47 500.49 551.60 599.812 631.29 659.79 691.87 700.92 712.21 724.74

LIABILITIES S CAPITAL

SHORT- TERM lDEBT 34.37 25.27 -- - - - - - - -PAYABLES 134.00 154.0(0 168.00 182.00 197.00 213.00 226.00 240.00 256.00 273.00C.P. LT DEBT 4.08 3.98 3.84 7.75 111.25 10.25 6.68 6.68 6.68 6.51

CURRENT I IABILI.TIES 172.45 183,25 171.84 189.75 20)7.25 223.25 232.68 246.68 262.68 279. 51

IBRD EN(3. LN. 1.36 1.19 1.02 0.85 0.68 0.51 0.34 (1.17 -IBRD - 1.86 24.97 34.68 36.12 32.11 28.11) 24.09 20.08 16.07KFW - 5.70 22.10 29.511 28.30 26.0(0 23.50 21.00 18.50 16.00OTHER LT DEBI 18.19 14.38 10,71 7.14 3.57 - -

TOTAL. L--T DEBT 19.55 23.13 58.80 72.17 68.67 50.62 51.94 45.26 3(3.58 32.07

TOTAL LIABILITIES 192.00 206.38 230.64 261.92 275.92 281.87 284.62 291.94 301.26 311.58

EQUITY 341.24 343.72 361.97 378.29 3136.10 386.10 386.10) 386.10 386.10 386.10

RETAINED EARNINGS (60.58) (55.42) (46.82) (46.20) (36.54) (13.99) 15.34 17,07 19.04 21.25RESERVES 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.81 5.i31

TOTAL EGUIIY AND RESERVES 286.47 294.11 320.96 337.90 355.37 377.92 407.25 408.98 410.95 413.16

TOTAL LIABILITIES I EQUI'l'Y 478.47 51113.49 551.60) 599.fl2 631.29 65V./9 691 .8/ 700.92 712.21 724.74

RATIOS1CIJRRENT 1.40 1.51 1.72 1.77 1.8i4 1.97 2.16 2.21) 2.23 2.31)DEBT 0.06 0.07 0.15 0.18 0.16 0.1S3 O.1 ().10 0.09 0.09EOIJITY 0.94 0.93 0.85 0.82 0.84 0. 87 (.89 ().9() 0.91 3.91

INDUSTRIAL PROJECTS DEPARTMENTREPORT FREFARED:04/28/81

- 75 -ANNEX 7-3Page 1

EGYPT: HADISOLB REHABILITATION PROJECT

Assumptions Used in Financial Projections

1. Unless otherwise stated, prices are expressed in constant LE of December1980. The following inflation factors have been used for inflation of localcurrency and the US$ in %):

Fiscal Years 1982 1983 1984 1985 1986 1987 1988 1989 1990

LE ].3.0 18.0 18.0 18.0 6.75 6.0 6.0 6.0 6.0

US$ 8.75 8.0 8.0 8.0 6.75 6.0 6.0 6.0 6.0

2. Production cost analysis is based on 1979 data, the last year for whichcomprehensive information was available at appraisal. Production cost figuresin the financial projections include the full cost of coke; the coke subsidyis shown separately.

3. Dividends are payable only after all accumulated losses have been wipedout. Distribution of net income before taxes is as follows, once there areno longer any carried over losses (in %):

Income tax 55%Workers participation 25%Dividends 15%

Total distribution 95%Reserves allocation 5%

Total Income 100%

4. Prices for both inputs and outputs are assumed to remain constant in realterms unless otherwise stated.

5. Working Capital requirements are expected to grow as a percentage of costof goods sold as follows:

Receivables 90 daysOperating Cash 30 days

Other short-term debt, which accrued mainly to balance operating deficits ofHADISOLB, is assumed to be paid back depending on the cash flow. Inventories,and payables which are very high at present, are assumed to remain constant inreal terms and increase only with inflation. The interest rate for short-termdebt is taken at 11.5% p.a.

* 76 -

ANNEX 7-3Page 2

6. Depreciation rates are given below:

Item % Years

Structures, Buildings 4 25Railways 10 10Administrative Buildings 2 50Machinery, Equipment 5 20Trucks, Locomotives 20 5Blast Furnace Lining 14.3 7

Industrial Projects DepartmentApril 1981

- 77 -ANNEX 7-4

EGYPT: HADISOLB REHABILITATION PROJECT

PRODUCTION COST PER TON OF RAW STEEL BEFORE REHABILITATION

EAF THOMAS b/ BOF TOTALProcess LE % LE % LE LE _

Cost Item a!

Fuel - - 0.2 0.1 0.5 0.4 0.5 0.4Coke c/ - - 92.3 38.4 65.6 56.5 60.7 51.0Power 5.7 6.5 7.3 3.0 4.0 3.5 4.3 3.6Natural Gas - - 1.3 0.6 1.3 1.1 1.2 1.0

Sub-total Energy 5.7 6.5 101.1 42.1 71.4 61.5 66.7 56.0

Other Inputs 47.2 53.7 19.6 8.1 8.3 7.1 12.7 10.7

Sub-total Variable Cost 52.9 60.2 120.7 50.2 79.7 68.6 79.4 66.7

Labor 10.6 12.1 54.5 22.7 17.0 14.7 18.1 15.2Maintenance 11.2 12.7 32.0 13.3 10.2 8.8 11.2 9.4Other expenses 13.2 15.0 33.2 13.8 9.2 7.9 10.4 8.7

Total 87.9 100.0 240.4 100.0 116.1 100.0 119.1 100.0

1979 Output 49,000 7.7 27,000 4.2 564,000 88.1 640,000 100.0

a/ In 1979 prices.bI Fixed costs at the Thomas shop per ton of raw steel in 1979 were particu-

larly high because of the low output (27,000 tpy versus 78,000 tpy in1980) due to the shutdown for several months. In m ore "normal" years,fixed costs per ton of raw steel at the Thomas shop would have been LE 42per ton of raw steel instead of LE 120; and total cost about LE 162 insteadof LE 240.

c/ At the 1979 price of 62.5 LE/ton.

Source: HADISOLB

Industrial Projects DepartmentFebruary 1981

- 78 -

ANNEX 7-5

EGYPT: HADISOLB REHABILITATION PROJECT

PRODUCTION COST PER TON OF RAW STEEL AFTER REHABILITATION(in constant prices)

Process EAF THOtNAS BOF TOTALCost Item a/ LE x LE % LE % LE %

Fuel - - -Coke b/ - - - - 44.9 55.6 42.9 52.9Power 5.7 6.5 - - 4.0 4.9 4.1 5.0Natural Gas - - - - 1.8 2.2 1.7 2.1

Sub-total Energy 5.7 6.5 - - 50.7 62.7 48.7 60.0

Other Inputs 47.2 53.7 - - 8.3 10.3 10.0 12.4

Sub-total Variable Cost 52.9 60.2 - - 59.0 73.0 58.7 72.4

Labor 10.6 12.1 - - 7.7 9.5 7.8 9.6Maintenance 11.2 12.7 - - 7.4 9.2 7.6 9.4Other Expenses 13.2 15.0 - - 6.7 8.3 7.0 8.6

Total 87.9 100.0 - - 80.8 100.0 81.1 100.0

Output (000 tpy) 50 4.3 - - 1,115 95.7 1,165 100.0

a/ In 1979 LE prices.b/ At LE 62.5/ton.

Source: HADISOLB

Industrial Projects DepartmentApril 1981

- 79 -

ANNEX 7-6

EGYPT: HADISOLB REHABILITATION PROJECT

PRODUC'T'ION COST PER TON OF RAW STEEL AFTER REHABILITATION(including real term cost increases)

Process EAF THOMAS BOF TOTALCost Item a/ LE % LE % LE x LE %

Fuel -Coke b/ - - - - 63.5 55.8 60.8 53.9Power 8.2 9.1 - - 5.8 5.1 5.9 5.2Natural Gas - - - - 9.2 8.1 8.8 7.8

Sub-total Energy 8.2 9.1 - - 78.5 69.0 75.5 66.9

Other Inputs 47.2 52.2 _ - 8.3 7.3 10.0 8.9

Sub-total Variable Co)st 55.4 61.3 - - 86.8 76.3 85.5 75.8

Labor 10.6 11.7 - - 11.6 10.2 11.5 10.2Maintenance 11.2 12.4 - - 8.1 7.1 8.2 7.3Other Expenses 13.2 14.6 - - 7.3 6.4 7.6 6.7

Total 90.4 100.0 - - 113.8 100.0 112.8 100.0

Output (000 tpy) 50 4.3 - - 1,115 95.7 1,165 100.0

a! In 1979 LE terms.b/ At LE 88.5/ton in 1979 prices.

Source: HADISOLB

Industrial Projects DepartmentApril 1981

- 80 -

ANNEX 7-7

EGYPT: HADISOLB REHABILITATION PROJECT

PRODUCTION COST PER TON OF RAW STEEL WITHOUT REHABILITATION (FY88)(in constant 1979 LE)

Process EAF THOMAS BOF TOTALCost Item LE % LE % LE % LE %

FuelCoke a/ - - - - 65.6 58.8 65.6 58.8Power - - - - 4.0 3.6 4.0 3.6Natural Gas - - - - 1.8 1.6 1.8 1.6

Sub-total Energy - - - - 71.4 64.0 71.4 64.0

Other Inputs - - - - 8.3 7.4 8.3 7.4

Sub-total Variable Cost - - - - 79.7 71.4 79.7 71.4

Labor - - - - 15.3 13.7 15.3 13.7Maintenance - - - - 8.7 7.8 8.7 7.8Other Expenses - - - - 7.9 7.1 7.9 7.1

Total - - - - 111.6 100.0 111.6 100.0

Output (000 tpy) - - 756 100.0 756 100.0

a/ At LE 62.5/ton.

Source: HADISOLB

Industrial Projects DepartmentApril 1981

- 81 -

ANNEX 7-8

EG:YPT: HADISOLB REHABILITATION PROJECT

PRODUCTION COST PER TON OF RAW STEEL WITHOUT REHABILITATION (FY88)(including real term price increases)

Process EAF THOMAS BOF TotalLE % LE LE % LE

Cost Item

FuelCoke a/ - - - - 92.9 63.8 92.9 63.8Power - - - - 5.8 4.0 5.8 4.0Natural Gas - - - - 6.7 4.6 6.7 4.6

Sub-total Energy - - - - 105.4 72.4 105.4 72.4

Other Inputs - - - - 8.3 5.7 8.3 5.7

Sub-total Variable Cost - - - - 113.7 78.1 113.7 78.1

Labor - - - - 15.3 10.5 15.3 10.5Maintenance - - - - 8.7 6.0 8.7 6.0Other Expenses - - - - 7.9 5.4 7.9 5.4

Total - - - - 145.6 100.0 145.6 100.0

Output (000 tpy) - 756 100.0 756 100.0

a! At LE 88.5/ton

Source: HADISOLB

Industrial Projects DepartmentApril 1981

- 82 -

ANNEX 7-9

EGYPT: HADISOLB REHABILITATION PROJECT

FINANCIAL RATE OF RETURN: COST AND BENEFIT STREAMS(in millions of constant LE of December 1980)

Capital Cost a/ Operating Cost b/ Benefits b/ Coke Subsidy b/

1982 8.11983 43.3 (22.1) (19.8) (9.8)1984 26.2 ( 0.6) 16.9 7.61985 9.5 16.3 42.5 7.11986 0.1 33.2 69.9 6.61987 - 46.2 87.4 6.31988 - 50.8 95.3 8.91989 - 54.2 102.0 8.41990 - 58.5 102.9 13.71991 - 58.5 109.9 12.91992 - 58.5 109.9 12.21993 - 58.5 109.9 11.51994 - 58.5 109.9 10.81995 - 58.5 109.9 10.21996 - 58.5 109.9 9.61997 - 58.5 109.9 9.11998 - 58.5 109.9 8.61999 - 58.5 109.9 8.12000 - 58.5 109.9 7.62001 - 58.5 109.9 7.2

a/ The Capital Cost Stream shows the base cost estimate, excludinginterest during construction and price escalation, but includingphysical contingencies. The capital cost includes the cost sintermachine No.5 which is not necessary to reach the Stage I output.If the cost of sinter machine No.5 were to be excluded, the rateof return would increase by less than one percentage point.

b/ Negative values are due to the production loss because of therehabilitation in 1983.

Industrial Projects DepartmentApril 1981

- 83 -

ANNFX 8-1

EGYPT: HADISOLB REHABILITATION PROJECT

HADISOLB - 1979 Operations in Financial and Economic Terms(LE million)

Financial Values Economic ValuesTotal Total

Cost Items Unit Cost (LE) (LE Million) % Unit Cost (LE) (LE Million) %

Fuel 7.5/ton 0.4 0.4 131.79/ton 7.0 5.7Coke 62.5/ton 45.5 49.7 74.5/ton 54.2 44.1Power 8.6/1000 kwh 5.3 5.8 23/1000 kwh 14.2 11.5

Natural Gas 6.5/1000 m3 0.9 1.0 109.55/1000 m3 15.2 12.4

Total Energy 52.1 56.9 90.6 73.7

Other Inputs 29.9 32.6 29.9 24.3Credits a/ ( 23.2) (25.3) (30.4) (24.7)

Variable Cost 58.8 64.2 90.1 73.3

Wages, Salaries 20.5 22.4 20.5 16.7Other Charges 12.3 13.4 12.3 10.0

Total Economic Cost 91.6 100.0 122.9 100.0

Capital Charges b/ 22.8 22.8Non-Operating Income ( 1.7) ( 1.7)

Total Expenses and Costs 112.7 144.0

Revenues 106.7 134.2

Profit (Loss) ( 6.0) ( 9.8)

a/ Representing stock increases, and credits for scrap and coke-oven gas.b/ Capital charges are taken as actual. An attempt to estimate the economic

value of capital changes at 20 years depreciation and 10% capital costwould result in an annual capital cost of LE 39.3 million for 1979.

Source: HADISOLB

Industrial Projects DepartmentApril 1981

- 84 -

ANNEX 8-2

EGYPT: HADISOLB REHABILITATION PROJECT

ECONOMIC VALUE OF HADISOLB'S 1979 SALES

Output values are adjusted to price domestic sales at the estimatedlanded cost of imports. The value thus adjusted of domestic sales would totalLE 126.3 million for 1979, as broked down below. The value of goods that arenot currently imported is calculated by adding 20% for insurance, freight andport handling on top of the current European export price.

HADISOLB: Economic Value of Domestic Sales 1979

000 tons US$/ton F.O.B. US$/ton Landed LE million Cost Total

Blooms 2.1 218 262 0.4Pig Iron 84.7 180 216 12.6Billets 75.5 218 262 13.6Heavy sections 57.2 320 388 15.3Light sections 61.2 320 388 16.4Plate 43.0 320 396 11.7Sheet 4.7 333 400 1.3HR sheet/coil 93.6 333 400 25.8CR sheet/coil 86.1 377 452 26.8CF sections 7.8 377 452 2.4

Total 515.9 126.3

Including HADISOLB's export sales of LE 7.9 million, HADISOLB-s total 1979revenues would amount to LE 134.2 million.

Industrial Projects DepartmentApril 1981

- 85 -

ANNEX 8-3

EGYPT: HADISOLB REHABILITATION PROJECT

ECONOM:[C RATE OF RETURN COST AND BENEFIT STREAMS(in constant LE of December 1980)

Capital Cost Operating Cost a/ Benefits a!

1982 8..11983 43.3 (22.1) (29.4)1984 26.2 ( 0.8) 10.81985 9.5 22.3 55.6'.986 03.1 43.8 88.1i987 - 61.0 103.01988 - 64.5 118.11989 - 69.7 132.01990 - 73.3 138.01991 - 74.2 138.01992 - 75.4 138.01993 - 76.4 138.01994 - 77.4 138.0

1995 - 78.6 138.01996 - 81.0 138.01997 - 82.3 138.01998 - 83.5 138.01999 - 84.8 138.02000 - 86.2 138.020)01 - 87.5 138.0

a! Negative Values are due to the production loss because of the rehabilita-tion in 1983 and 1984.

Industrial Projects DepartmentApril 1981

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