Document of FILE COPYThe World Bank

FOR OFFICIAL USE ONLY

Report No. P-3323-PAK

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

FERTILIZER INDUSTRY REHABILITATION PROJECT

May 17, 1982

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

Currency TJnit = Pakistan Rupee (Rs)US$1 = Rs 10.0 1/Rs 1 = US$0.10

FISCAL YEAR

Government of Pakistan and NFC GroupJuly 1 - June 30

PRINCIPAL ABBREVIATIONS AND ACRONYMS

DH Dawood Hercules Chemicals Ltd.Exxon Exxon Chemicals Ltd.NFC National Fertilizer Corporation of Pakistan Ltd.PAFL Pak-American Fertilizers Ltd.PFL Pakarab Fertilizers Ltd.tpd Tons per daytpy Tons per year

1/ As of January 1982, the Rupee was placed on a floating basis against abasket of currencies, following which the rate of the US$ has ranged from thepreviously fixed Rs 9.90/US$ rate to about Rs 11.70/US$. Since experiencewith this new rate is so far insufficient, a rate of Rs 10.00/US$ is usedt.Yroughout this report.

FOR OFFICIAL USE ONLYPAKISTAN

FERTILIZER INDUSTRY REHABILITATION PROJECT

Loan and Project Summary

Borrower: Islamic Republic of Pakistan.

Beneficiaries: National Fertilizer Corporation of Pakistan Ltd.(NFC) and two subsidiaries, Pakarab Fertilizers Ltd.(PFL) and Pak-American Fertilizers Ltd. (PAFL).

Amount: US$38.5 million equivalent (including capitalizedfront end fee).

Terms: Twenty years, including 5 years of grace, withinterest at 11.6% p.a.

Relending Terms: The proceeds of the loan would be relent to NFC at14% interest p.a. for a period of 15 years, including4 years of grace. NFC would relend US$24.9 millionto PFL at 14% interest p.a. for a period of 15 years,including 4 years of grace, and US$7.1 million to PAFLat 14% interest p.a. for a period of 9 years, includ-ing 3 years of grace. The Government would bear theforeign exchange risk.

Project Description: The main components of the project are designed tomaintain and increase the output of fertilizer atexisting facilities and improve their efficiencythrough: (a) rehabilitation and expansion of theurea plant and expansion of the amnonia plant atMultan; (b) rationalization of the Multan complexto reduce pollution, improve efficiency and increaseproduct despatch facilities; (c) rehabilitation andmodernization of the Daud Khel ammonium sulphateplant; (d) improvement in oyerall managementand operations of the NFC Group, including(i) employment of expatriates to assist inmanaging the Multan plant, (ii) a program toinstitute improved operations management systemsand controls and to provide overseas trainingfor local managers and technicians, and (iii) theestablishment of a technical training center. Theproject would also include a study of future require-ments for fertilizer production capacity. The projectinvolves no special risks.

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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Estimated Costs 1/

Local Foreign Total--------US$ million------…

Multan Rehabilitation and Expansion 3.4 11.0 14.4Multan Rationalization 0.9 4.6 5.5Daud Khel Rehabilitation 2.0 5.0 7.0Technical Assistance, Studies and Training 1.8 4.9 6.7Incremental Working Capital 0.2 - 0.2

Base Cost Estimates 8.3 25.5 33.8

Physical Contingencies 0.9 2.6 3.5Price Contingencies 1.6 5.2 6.8

Total Installed Cost 10.8 33.3 44.1Interest During Construction - 4.6 4.6Front End Fee - 0.6 0.6

Total Financing Required 10.8 38.5 49.3

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

Financing Plan:

Bank - 38.5 38.5Internal cash generation 2/ 10.8 - 10.8

Total 10.8 38.5 49.3

1/ Taxes and duties are negligible.

2/ NFC: US$2.4 million; PFL: US$5.8 million; PAFL: US$2.6 million.

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Estimated Disbursements:

FY83 FY84 FY85 FY86-US$ million--

Annual 1/ 8.0 15.5 13.5 1.5

Cumulative 8.0 23.5 37.0 38.5

Rate of Return: 54% average.

Appraisal Report: No. 3865-PAK, dated May 12, 1982.

Map: IBRD 16234.

1/ Front end fee included in estimated FY83 disbursements.

I

I

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THEEXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE

ISLAMIC REPUBLIC OF PAKISTAN FOR A

FERTILIZER INDUSTRY REHABILITATION PROJECT

1. I submit the following report and recommendation on a proposed loanto the Islamic Republic of Pakistan for US$38.5 million equivalent (includingcapitalized front end fee) to help finance a Fertilizer Industry Rehabilita-tion Project. The loan would have a term of 20 years, including five yearsof grace, with interest at 11.6% per annum. The proceeds of the loan wouldbe relent to the National Fertilizer Corporation of Pakistan (NFC) withinterest at 14% for 15 years, including four years of grace.

PART I - THE ECONOMY 1/

2. The most recent economic report "Pakistan: Economic Developments andProspects" (No. 3802-PAK, dated April 14, 1982) was distributed to the Execu-tive Directors on April 16, 1982.

3. The past four years have witnessed a significant economic recovery inPakistan. Between FY77 and FY81 GDP growth averaged over 6% p.a. Thisgrowth was accompanied by a recovery in agricultural and industrial produc-tion well above the rate of population growth, currently averaging 3% p.a.,and by a rapid growth in exports. Exports increased in real terms by 11%p.a. Value added in agriculture rose by an average of 4.2% p.a. and inindustry by 8.1% p.a. This performance contrasts markedly with the economicstagnation of the early and mid-1970s, when the growth of GDP averaged only3-4% and goods production 1.1% p.a., and export growth was negligible. Fol-lowing a number of other favorable developments, including the conclusionof an Extended Fund Facility arrangement with the IMF, a short-term debtrescheduling arrangement with bilateral creditors of the Pakistan Consortiumand improved external aid inflows, both the budget and the balance of pay-ments are under reasonable control and the short-term economic outlook hasconsiderably improved.

4. The recovery in the economy since 1977 has been aided by severalfactors, including favorable weather, improved foreign demand for Pakistan'sexports and higher domestic demand associated with better crops, rising ruralincomes and workers' remittances from the Middle East. Various policy chan-ges introduced by the Government have also contributed significantly to therecovery.

1/ Parts I and II are substantially the same as Parts I and II of the Presi-dent's Report No. P-3275 PAK (Baluchistan Minor Irrigation and Agricul-tural Development Project) dated April 19, 1982.

5 In recent years the Gover-sment has taken a number of initiatives totmprove agricultural, production- Particular attention has been given toimproving farmer incentives and input supplies 0 Support prices for all majorcrops have been raised so that they are now closer to world prices; andefforts have been made to improve the tertilizer distribution system byexpanding the marlketi ng network an.d by ensuring adequate supplies and timelydelivery of fertiliser imoports. Steps have been takeni to reduce the fer-tilizer subsidy (which hlas been creatintg budgetary problems) and by separat-ing it from the development budget for agriculture in order to protectallocatiorns for other priorlty agricultural projects and programs. AnAgricultural Pric.es Commission 'nas ,been set up to make recoummendations onappropriate chaages in crop support and input prices on a consistent andtirmely basis.

6. In add ition, the Government bas begun tc address the deep-seatedproblems affecting productivity at the farm level, A start has been made inimproving extension services through the adoption of the so-called trainingand visit systema. Reforms have been iritiated to the agricultural researchsystem in line wit. the findings of a USAID/WJorld Ba.k study. The Governmenthas formulated and begun to implement a new agricultural policy based on themain recomm-endations of a UNDP st:udy on irrigated aggriculture whichemphasizes the need to improve the efficiency of the water delivery systemthrough the rehabilitation of distributaries and better scheduling of waterdeliveries to the farm.er; and. to expand the role of the private sector, forexaTaple, through the promotiort of private tubewell development in sweetgroundwater areas,. other programs--in pesticides, seeds, agricultural creditand farn power--have also been strengthlened. These iniitiatives are still atan early stage and a breaktnrough from the problems of low productivity atthe farin level is yet to take place.

7. Major changes have been made during the past four years in Governmentpolicies in the industrial sector. The policies pursued in the early andmid-1970s of extensive nationalizations, tight restrictions on the privatesector, and rapid expansion of the public sector to spearhead industrialinvestment and growthi have been graduially reversed. Most agriculturalprocessinig and some industrial UnitS hale been denationalized; constitutionalsafeguards have been provided to privat2 industry against furthler arbitrarygovernment acquisitions; and the areas open to the private sector have beenwidened. A wide range of incenitives including tax holidays, excise andimport duty concessions, concessioncar credit andi income tax provisions, anddirect cash rebates nhave been granted to encourage private investment andexports. These have bee- suppl.emented by a partial liberalization of importswhiclh will improve the availability of inputs. The investment sanctioningproceduire has been streamlined, Tliese nueasures have Led to an improvement inprivate sector coafidence and to a saarp increase in proposals for relativelysmaller-scale private investment projects. There is also evidence of

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increased interest by investors in larger projects, especially in the cement,chemicals and fertilizer subsectors.

8. At the same time, the Government has embarked on the difficult andinevitably long process of reforming the public industrial sector, which hasbeen plagued by low efficiency and profits. Major studies have been com-pleted of the management and organization of the public sector, and theperformance of individual enterprises. In accordance with the recommenda-tions of these studies, the Board of Industrial Management (BI2I) has beenabolished, the nurmber of sector holding corporations has been reduced, andboards of directors have been established which have helped to increaseautonomy at the enterprise level. Some public sector units which have littleprospect of improved financial performance have been closed down. Thesemeasures, together with additions to capacity and steps to retain skilledtechnical personnel through salary adjustments, for example in the fertilizersubsector, have helped to increase production and capacity utilization sub-stantially in the public sector. In addition to the denationalizationsmentioned earlier, further public disinvestment is being considered on acase-by-case basis.

9. The higher level of economic activity during the past four years andthe Government's efforts to raise existing tax rates, introduce new taxes andreduce tax evasion have helped to improve public revenues. Nevertheless, thebudget remained under strain as expenditures rose as rapidly as revenues.The Government's policies of encouraging production and exports throughsubsidized inputs and export rebates, and the political and social con-straints to making substantial price adjustments on a number of items of massconsumption, inflated subsidies. Rising debt service, following the expira-tion at the end of FY78 of the four-year debt relief arrangement with membercountries of the Pakistan Consortium, and increased defense spending con-tributed to the growth in non-development expenditures. In addition, commit-ments under the ongoing public investment program and higher subsidies foragriculture led to further increases in development spending between FY77and FY79. Despite the iacreased revenues, the overall budget deficitremained around 8% of GNP and the bank-financed deficit around 3-4% of GNP.

10. The budgetary situation improved significantly during FY80 and FY81.Government revenues, following increases of 21% in FY78 and 16% in FY79, roseby an average of 22% p.a. during the two years as a result of the continuedgrowth of the economy, tax and tariff increases announced in the FY80 andFY81 budgets, and intensified efforts to improve tax collections. Althoughpolitical developments outside Pakistan's borders led to unplanned expendi-tures, tight restraints were maintained on total spending; the growth ofpublic expenditures was limited to 11% p.a. Both developnent and administra-tive expenditures were cut back, while subsidies other than those on farminiputs were hiell to the previous year's level in nominal terms. Theserestraints on expenditures, continued revenue growth and some improvement insurpluses generated by public sector agenicies helped to increase the

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availability of non-inflationary domestic resources. During FY80 and FY81,the overall budget deficit averaged 5% of GNP and bank financed budgetdeficit of 1.6% of GNP; both figures are well below those of the late 1970s.

11. Pakistan's export performance has improved considerably in recentyears. Rapidly rising workers' remittances from abroad, from US$578 millionin FY77 to over US$2.1 billion in FY81, have also greatly assisted the exter-nal position. These increases have, however, been partly offset by anincrease in the value of imports, mainly petroleum, oil and lubricants,fertilizer, edible oil and capital goods. The current account deficit wasUS$947 million or 3.1% of GNP in FY81, compared to US$1,050 million or nearly7% of GNP in FY77 in current prices. The financing of these deficits hadpresented considerable difficulties to the Government during the past fewyears, since program-type assistance from OPEC countries (which was substan-tial in the mid-1970s) as well as net aid flows from Consortium sourcesdeclined through FY79. However, a strong upsurge of remittances during FY80,a marginal increase in net long-term capital inflows and substantial extraor-dinary receipts from OPEC countries eased the external financing problem inthe second half of FY80 and helped to build up foreign exchange reserves toabout US$750 million at the end of FY80, the equivalent of six weeks'imports.

12. A number of favorable developments substantially improved the balanceof payments situation in FY81. These included the conclusion of an ExtendedFund Facility arrangenent with the IMF in November 1980; a positive responsefrom aid donors to the country's improved economic performiance resultina inincreased aid commitments and inflows; and an agreement with bilateralcreditors in the Pakistan Consortium for rescheduling of debt service pay-ments on official cncessional debt falling due over an 18-month period begin-ning mid-January 1981. In addition, both merchandise exports and migrantremittances expanded by over 20%. As a consequence of improved perforimanceon both current account and capital account, foreign exchange reservesincreased from US$748 million to US$1,058 million during the year; the latteris the equivalent of about twqo months worth of import of goods and services.

13. The recent favorable developments represent modest, though welcome,steps towards the solution of a set of problems whiclh are essentially struc-tural and long term in nature. Notwithstanding these improvements, furtherwide-ranging measures to address the basic issues which are limiting economicgrowth in the longer term are necessary if Pakistan is to sustain itsrecently improved economic performance over the present decade and bringabout a modest improvement in the living standards of its population. Theseissues include the farm-level factors affecting low productivity in agricul-ture; the structure and competitiveness of the industrial sector; the need toimprove performance of public sector enterprises; the factors lying behindcontinued rapid growth in population; the need to redirect social serviceexpenditures; and the problems of resource mobilization.

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14. Agriculture remains the econor.,w's mainstay, accouniting directly forroughly a third of GDP, employing abou 60% of the labor force and, directlyor indirectly, providing nearly two thirds of total exports. Despite recentimprovements in output and yields, a number of fundamental factors continueto limit agricultural productivity at levels well below the potential impliedby the resources and technologies already available. Generally, outputgrowth has not been commensurate with the substantial increases in availableinputs, especially water and fertilizer. While considerable potential stillexists for the additional use of fertilizer and other inputs, it appearsessential to give greater priority to evolving complementary policies andprograms which would have a direct impact on yields at the farm level. Theimportance of increasing farm productivity is now more widely recognized inthe Government and a beginning has been made in addressing this problem.Nevertheless, support for programs to strengthen research, extension, watermanagement and other programs in the agricultural and water sectors needs tobe intensified, while fertilizer subsidies must be further reduced, accom-panied by necessary adjustments in output and consumer prices.

15. Manufacturing contributes about 15% of GDP and during much of the1950s and 1960s provided a major stimulus to growth. Growth rates inmanufacturing production, though recently better, remain well below thoseattained in the 1960s. The textile industry, in particular, which accountsfor nearly 40% of value added in large-scale industry, has suffered fromproblems of inefficiency, excess capacity and a lack of competitiveness inforeign markets, while manufacturing growth has been generally affected bythe inadequate performance of public sector enterprises. Although there havebeen some recent improvements in the output and profitability of publicenterprises, these improvements need to be carried further throughappropriate reforms to remove distortions in pricing, improve performancecriteria and incentives to managers and to further rationalize the sector.To assist and further encourage the recovery in private investment and tomaintain the increased momentum in the industrial sector will require, amongother things, an adequate supply of local and foreign financing, both forinvestments and current inputs, and the more rapid provision of necessaryutilities and other infrastructure requirements. At the same time, it isnecessary to ensure that the Government's incentive systemi supports thoseindustries in which Pakistan has a comparative advantage; more analysis isneeded to determine levels of effective protection for formulating anappropriate industrial development strategy for the 1980s. The recovery inindustry also needs to be reinforced by improvements in labor-managementrelations and by further measures to rehabilitate the textile industry andgenerally to increase exports.

16. The Government's efforts to deal with the energy situation by adjust-ing domestic oil prices, and by encouraging the substitution of other energyforms and the exploration and development of domestic oil resources, have metwith some success. Growth of petroleum consumption has been restrained bythe development of hydro electricity and natural gas resources as well as by

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petroleum price adjustments. At the same time, activity in the oil sectorhas been stepped up, in some instances through joint ventures with foreignprivate companies. Nevertheless, due to a variety of technical, geologicaland other reasons, progress on exploration of new fields as well as thedevelopment of existing fields has been slow; and the benefits of Pakistan'sconsiderable potential in the oil and gas sector are yet to be realized. Anumber of issues relating to such matters as energy planning, pricing andorganization will need to be addressed in order to realize this potential.

17. While it is clearly vital to sustain rapid growth in the com-modity-producing sectors, it is also necessary to contain the rapid growth inpopulation, currently running at about 3% p.a., which has seriously hand-icapped the country's ability to improve living standards. Family planningprograms have so far had little effect and there have been few changes in thesocio-economic environment of a type that usually accompany declines infertility. Rapid population growth places severe burdens on governmentresources simply to maintain education and health programs at their currentinadequate standards. However, without higher literacy rates, improvedhealth facilities and a reduction in child mortality, it is doubtful thatpopulation growth rates can be much reduced. Expenditures on social servicesremain comparably low and undue emphasis has been given to higher educationand urban health facilities. High priority needs to be given not only toincreased allocations for family planning and social service expenditure butalso to its redirection to serve the wider interests of the population andthe economy. While the substantial migration from Pakistan to the MiddleEast over the past few years has to some extent relieved the pressuresresulting from rapid population growth, this clearly cannot be relied upon toprovide an answer to the situation in the long run. The Government hasrecently shown more awareness of this problem; a new population program hasbeen adopted and is in the initial stages of implementation.

18. Policies that face the longer-term issues in both the productive andthe social sectors will take time to have an appreciable effect and will haveto be implemented in the context of continued domestic and external resourceconstraints. To improve the budget and the balance of payments, a fundamen-tal improvement is required in the overall savings levels in the economy,particularly in public savings. At 13% of GNP, national savings are substan-tially above the levels of the early and mid-1970s, but are still low for acountry at Pakistan's per capita income level and stage of development. Thecontinuation of the Government's recent efforts to restrain public spending,improve the performance of the public sector and encourage private investmentwill help to reduce present imbalances between investment and savings flows.At the same time, an increase in savings inevitably calls for restrainingprivate consumption through appropriate price adjustments and selective dutyincreases on non-essential imports. While the Government has made severalprice increase in the recent past, further adjustments will directly reducethe budgetary burden of subsidies. Continued restraints on spending and

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measures t.o 'urther improve revenues through improvements in tax administra-tion and tax and rate increases (for example, property taxes, domestic waterrates and irrigation water charges, are also needed.

19. Increased agricultural production of major crops (particularly riceand cotton) will help directly to sustain export growth. Efforts are alsonecessary to stimulate the output of minor crops, for exanple, pulses,potatoes, enions -nd fruits, for which markets exist in neighboringcountries. In qddition, s':bstantial scope exists for increasing Pakistan'sexports of manufactured goods such as textiles and engineering products, assell as of a wide range of goods produced by the small-scale industrialseccor. Tncreased domestic output of wheat, edible oil, sugar, mineral fuelsa-d fertilizer xoulA help to moderate import growth considerably.

20. As le.cribed above. Pakistan's policies and economic performance haveimproved considerably over the past several years. Improvements in demandmanagement and in planiing, incentives and government programs in agricul-ture, industry and energy have helped to create a climate more conducive torapid economnic growth and better international trade performance. While Banklong-terra forecasts show that foreign borrowing on commercial as well asconcessional terms would be necessary to support economic growth of 5-6%p.a., recent policy initiatives have substantially improved Pakistan'screditworthiness for commercial borrowing and for a blend of Bank and IDAborrowing.

21. At the end of FY80, Pakistan's external public debt (excluding theundisbursed pipeline) stood at US$8.8 billion, of which US$5 billion was owedto bilateral members of the Pakistan Consortium, US$1.3 billion to OPEC andUS$1.5 billion to multilateral agencies and the balance to other bilateraland private lenders. In 1980, The Bank Group's share in Pakistan's externalpublic indebtedness was 13% and in external debt service vwas 11%. Accordingto Bank forecasts, provided recent policy improvements are sustained, Pakis-tan's debt service ratio (debt service divided by exports of goods and factorand non-factor services), which was about 12% in 1981, should remain roughlyconstant through 1985 and, even assuming substantial commercial borrowing,should rise only slowly thereafter to about 17.5% in 1990.

PART II - BANK GROUP OPERATIONS IN PAKISTAN

22. The cumulative total of Bank/IDA commitments to Pakistan (exclusiveof loans and credits or portions thereof which were disbursed in the formerEast Pakistan) now amounts to approximately US$2 billion. During its longassociation with Pakistan, the Bank Group has been involved in almost allsectors of the economy. This has included its involvement with other donors,over a 20-year period, in the major program of works to develop the water

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resources of the Indus Basin. Approximately 38% of total Bank/IDA commit-ments to Pakistan have been for public utility services, 30% for agriculture,31% for industry (of which 9% was for industrial imports) and 2% for educa-tion. Lending for public utility services has included loans and credits forrailways, electric power, gas pipelines, ports, highways, telecommunicationsand water supply.

23. Lending operations in Pakistan have three maain objectives: first,to support the directly productive sectors of the economy; secondly; tosupport the expansion of, and to improve the institutions which are respon-sible for, the principal public services supporting economic growth; andthirdly, to meet basic needs in the areas of rural and urban development.

24. In pursuit of these objectives, the Bank Group has placed specialemphasis on lending for agriculture, which is the mainstay of the Pakistaneconomy. Projects in this sector are aimed at augmenting the supply ofessential inputs, principally irrigation water, fertilizer, seeds and credit;strengthening research, extension and other agricultural supporting services;mproving water management; reclaiming land by controlling salinity andwater-logging; and providing essential facilities including tubewells, live-stock development and dairy processing. An important purpose of this lendingis to assist the Government's program to increase the productivity of avail-able land and water resources in the Indus Basin through quick-yieldinginvestmlentsi as recommended recently in a UNDP-financed study for which theBank was executing agency.

25. In industry, most lending for the private sector has been throughthe DFCs, principally through eleven loans/credits amounting to US$270 mil-lion for the Pakistan Industrial Credit and Investment Corporation (PICIC),and t-wo credits to the Industrial Development Bank of Pakistan (IDBP),totalling US$50 million. Direct lending for industry has also includedassistance to three large fertilizer plants, as well as for small-scaleindustry, IFC has made investments in 14 Pakistan enterprises for a total ofUS$7307 million, of which US$63.9 million was by way of loans and US$9.8oilJtlion by equity participations (these are shown in Annex II). AboutUS$33.9 miLllon of these investments remains outstanding. The enterprisesassisted by IFC include three in the field of pulp and paper products, two intextiles, two in food and food processing, and one each in cement, steel,fertil-izers, plastics, wood processing and petrochemicals. IFC is also ashareholder in PICIC.

26. The focus of Bank Group lending for transport and communications hasshifted increasingly towards assisting Pakistan to better utilize existingcapacity by improving the efficiency of operations and strengthening theinstitutions responsible for these services, especially the Karachi PortTr ist, Pakistan Railways, Telephone and Telegraph Department, and Federal andProvincial highway agencies. In the power sector, the Bank Group hasassisted the Karachi Electric Supply Corporation (KESC) and the Water and

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Power Development Authority (WAPDA) with four and three projects respec-tively; the sector has also been assisted by the construction under the IndusBasin Development Program of Mangla and Tarbela Dams.

27. In the oil and gas sector, the two Sui gas transmission companieshave been assisted with five projects, while IDA has recently financed apetroleum development project and begun to play an important role instrengthening the Oil and Gas Development Corporation. These efforts areassisting in the efficient development and utilization of Pakistan's domesticenergy resources. A second water supply project in Lahore is currently underimplementation. Five IDA credits for education, totaling US$62.5 million,have assisted in upgrading primary, post-secondary and higher technical andagricultural education, middle-level training of primary teachers andagricultural extension agents.

28. Annex II contains a summary statement of Bank loans and IDA creditsas of March 31, 1982, and notes on the execution of ongoing projects. Creditand loan disbursements have been generally satisfactory. Some projects haveexperienced initial delays due to government procedures for project approval,which are now being strengthened, and to slowness in appointment of consult-ants. Rapid turnover of managerial and technical staff, in part due tomigration to the Middle East, and budgetary constraints have been problems inthe case of some projects.

29. A number of further projects for Bank Group financing are currentlyunder appraisal or being prepared in Pakistan. These include projects forwater supply, population, oil and gas development, and railways. Pakistancontinues to have domestic resource constraints for the reasons set out inPart I. To assist the Government to finAnce agricultural and otherhigh-priority projects which have a low foreign exchange component, financingof some local expenditures in specific cases is justified.

30. In addition to lending, economic and sector work provide the basisfor a continuing dialogue between the Bank Group and the Government of Pakis-tan on development strategy, and for the coordination of external assistancewithin the Pakistan Consortium.

PART III - THE FERTILIZER SECTOR

General

31. Agriculture is the mainstay of Pakistan's economy; it accounts forroughly one-third of GDP, employs about 60% of the labor force and directlyor indirectly, provides nearly two-thirds of Pakistan's exports, principallycotton and rice. About 48 million acres, or 24% of the country's total area,are cultivated. About 71% of the cropped areas are irrigated by an extensive

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system of canals and tubewells, one of the largest in the world. Theirrigated area accounts for about 90% of farmn output.

32. The expansion of Pakistan's agricultural output, one of the Govern-ment's main development objectives, will depend predominantly on developingthe potential for higher production in irrigated areas. In order to achievethis, the Goverament has adopted a new agricultural development strategy (seePart I) which places high priority on increasing the availability and improv-ing the efficiency of use of major inputs, of which fertilizers are a prin-cipal component.

The Fertilizer Subsector

33. Total fertilizer consumption in Pakistan has increased byapproximately 20% per year over the last 20 years, from about 40,000 nutrienttons in 1961 to just over 1 million tons in 1981, while per acre useincreased almost four-fold to the present level of 24 kg per acre over thelast decade. The growth of agricultural output has been strongly correlatedwith the growth of fertilizer consumption; an approximate elasticity of 0.25is indicated. The benefits of the growing use of fertilizer have been sharedby small as well as large farmers; surveys show that farms of less than 12.5acres use as much or more fertilizer per acre as farms in the larger sizegroups. Despite the rapid growth in fertilizer consumption, present applica-tion rates are still only 50%, 21% and 4% of the world-wide average applica-tion rates for nitrogen, phosphate and potassium, respectively. The con-tinued encouragement of the increased use of fertilizer therefore remains acentral part of Pakistan's agricultural development strategy.

34. Domestic Production. There are now seven fertilizer plants (two inthe private and five in the public sector) in operation in Pakistan with oneadditional private and one public sector plant due to come on stream thisyear. Domestic manufacture of fertilizers was first undertaken by a govern-ment-owned corporation which established four small factories between 1958and 1962; these are now operated by the public sector National FertilizerCorporation (NFC) which was founded in 1973. The Bank-assisted Multan Expan-sion project, also operated by NFC through Pakarab Fertilizer Ltd. (PFL), I/started production in January 1979. Exxon built the first privately-ownedfertilizer factory in 1968. The second was the Bank/IFC-financed DawoodHercules project (DH) which commenced production in 1972. Total domesticfertilizer production in 1981 was 581,000 nutrient tons of nitrogenous fer-tilizer and 59,000 nutrient tons of phosphate.

35. A further fertilizer plant, the NFC Pak-Saudi plant constructed withfinancial assistance from the Asian Development Bank and Saudi Arabia,

1/ 48% of PFL's shares are owned by a foreign shareholder.

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started production in 1981. Two other plants, the NFC Hazara plant suppliedby the People's Republic of China, and the private sector IDA-assisted Faujiproject, are expected to commence production in 1982. Donestic fertilizerproduction is thus expected to increase to 913,000 nutrient tons per year ofnitrogen and 72,000 nutrient tons per year of phosphate by 1982/83.

36. The fertilizer industry operated at an overall capacity utilizationof 72% in 1980/81, a rate which concealed wide variations among the variouscompanies. Whereas DH and Exxon produced at high levels of capacity utiliza-tion, the level of operation at the PFL plant was relatively low due toinitial design problems and high personnel turnover, both of which are nowbeing resolved. After the further modifications to the PFL plant and theimprovement in management and operations contemplated under the proposedproject, NFC's plants should generally reach 90% capacity utilization by1984/85.

37. Currently, about 40% of Pakistan's requirements of fertilizers areimported. Given expected levels of domestic production iTl the mid-1980s anda projected demand of approximately 1.8 million nutrient tons by FY86 (repre-senting a projected consumption growth of about 11% p.a.), imports wouldconstitute about 40% of supplies in FY86, after declining to about 26% inFY83. Thus, until substantial additional investments in domestic fertilizercapacity are made, imported fertilizer will remain a significant component oftotal supply. Government planning for further investment in the fertilizersector over the next dlecade would be supported by a study of future capacityrequirements under the proposed project. The Government intends that much ofthis investment should be attracted from the private sector. In this con-text, the Government, in consultation with the Bank, would assess the ade-quacy of pricing policies and other incentives for the fertilizer industry(paragraph 60 below).

38. At present, manufacturers' revenues are based on ex-factory pricesfor fertilizer determined by the Government on the basis of agreements witheach manufacturer. The Formulae established under each agreement differ butgenerally allow each manufacturer after-tax profits of between 15% and 20% onequity provided specified levels of output (typically between 65-70% ofdesign capacity in the first year of operation, 80-90% in the second year,and 90-95% thereafter) are reached. Ex-factory prices determined on thebasis of these formulae and tmarketing incidentals allowed to domesticproducers vary widely, ranging at present from Rs 893 per ton of urea forDawood 'Hercules to Rs 2,006 per ton of urea for PFL's Multan plant, reflect-ing differences in production costs. Under the project, the Government wouldensure that ex-factory prices for fertilizer produced by the NFC Group aremaintained at a level that would allow the producers to earn revenues suffi-cient to meet their operating expenses and debt service obligations andproduce a reasonable return on equity. If these ex-factory prices exceed theretail price Eor sale to farmaers, the Government would compensate the

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producers promptly for the difference between the ex-factory and retailprices (Sections 4.03(a) and (b) of the draft Loan Agreement).

39. As indicated above (paragraph 36), the fertilizer manufacturingplants in the public sector have experienced a number of difficulties,chiefly related to shortages of key technical and other staff resultinglargely from uncompetitive compensation, To address these difficulties, aplan of action to improve the capacity utilization of the existing fertilizerplants and new plants being set up in the public domain was agreed under theFertilizer Imports Credit (Cr, 1066-PAK) and is being implemented.

40. Fertilizer Distribution. Fertilizer is moved by rail and road towholesale outlets and retail stores. After a period during which fertilizerdistribution was largely landled by government agencies, major changes topermit greater private participation were introduced in 1975. These changesproved effective and the number of licensed private dealers rose rapidly,reaching currently about 5,000. In addition to licensed dealers, many vil-lage merchants handling other goods also distribute fertilizer.

41, Issues related to economical movement of fertilizer from domesticplants to dealers have been studied by a Fertilizer Transportation Task Forcein accordance with understandings reached with the Bank in 1978 under theFauji Fertilizer project (Cr. 846-PAK) and in 1980 under the FertilizerImports Credit. The Task Force recommended that transportation of fertilizerto constumers within a radius of about 300 km from the plants as well as fromrailhead warehouses should be undertaken by truck, and that delivery fromplants to selected warehouses beyond that distance should be by block trains.The Government has accepted all of the Task Force's recommendations. Thefertilizer companies are in the process of establishing a number ofwasrehouses in market areas, and schedules for operating block trains fromplants to these storage locations are being prepared by Pakistan Railways,who would be required to promptly implement and thereafter maintain theseschedules (Section 4.04 of the draft Loan Agreement).

42. Due mainly to seasonal factors, private truckers have from time totime quoted rates for moving fertilizer from NFC plants in excess of theamounts normally covered by the Government as part of the marketing inciden-tals wh1ich each producer receives, on a fixed per ton basis, to cover theseand other marketing costs. As a result, manufacturers have been unable onoccasion to get their fertilizer moved from the factories to distributors ina timely manner, Under the proposed project, the Government would by March31, 1983, implement a system, satisfactory to the Bank, whereby marketingincidentals are designed to adequately compensate NFC producers for costs offertilizer transportation, financial carrying charges of inventories, dealercommissions and other costs related to the marketing of fertilizer (Section4.03(c) of the draft Loan Agreement).

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Fertilizer Pricing and the Fertilizer Subsidy

43. Retail prices of fertilizer to the farmer are fixed by the Governmentand are uniform throughout the country. Since 1972, the Government hasgradually increased farmgate fertilizer prices; urea prices, for example,were increased from Rs 1.5 per kg nutritent in 1972 to Rs 4.04 per kgnutrient in 1980. Nonetheless, the Government has shielded domestic pricesfrom the post-1973 explosion in world fertilizer prices, resulting in asubstantial increase in the fertilizer subsidy bill.

44. By 1979/80, the fertilizer subsidy had grown to US$225 million equiv-alent, more than double the amount allocated to other critical developmentsin the agricultural sector. To address this situation, a 50% increase inretail fertilizer prices was introduced by the Government in February 1980,representing a major first step to contain the subsidy at manageable levels;crop output prices were also increased to maintain farmer incentives. Inconnection with the Fertilizer Imports Credit, the Government has indicatedits intention to phase out and eliminate the fertilizer subsidy by mid-1985,and an Agricultural Prices Commission has been established to advise theGovernment on appropriate input and output price adjustments. A furtherincrease in retail fertilizer prices of about 9% was announced in March 1982.

45. Although the use of fertilizer has remained financially attractiveto farmers following the recent changes in fertilizer and crop prices, thesharp increase in fertilizer prices in February 1980 appears to have beenresponsible for a reduction in fertilizer offtake in 1980 compared to thecorresponding months for 1979. In response, the Government has stepped upextension and promotion efforts to publicize the continued benefits of fer-tilizer use to farmers and to improve the efficiency of use of fertilizer.These efforts are being backed by measures to improve the availability ofcredit to farmers through the commercial banking and cooperative systems,which have been expanded substantially. There is evidence that thesemeasures to overcome the initial shock caused by the increased cost of fer-tilizer are beginning to succeed; fertilizer offtake during the 1981-82winter cropping season increased by about 5% over the comparable period of1980/81.

Bank Group Involvement

46. The Bank Group has financed three operations in Pakistan to assistthe fertilizer manufacturing industry. A loan (US$32 million), along with anIFC equity investment (US$2.9 million), was made in July 1968 to DawoodHercules Chemicals Limited for a 345,000 tpy urea plant (Ln. 549-PAK). Theplant began production in July 1971 and has consistently operated above itsrated capacity. The Project Performance Audit Report (PPAR) for the Dawood

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Hercules project 1/ found the project to be technically a major success.Government actions with respect to ex-factory fertilizer pricing, notanticipated at appraisal, affected the financial rate of return. A secondloan (US$35 million) was made in May 1974 to the public sector companyPakarab Fertilizer Limited to expand and modernize its existing facilities atMultan (Ln. 988-PAK). This plant, with a design capacity of 304,500 tpy ofnitrophosphate, 450,000 tpy of calcium ammonium nitrate and 59,400 tpy ofurea, was mechanically completed in late 1978 but has operated below theselevels due to design deficiencies and a lack of sufficiently qualified andexperienced managerial and technical personnel; actions to improve theutilization levels at the plant are being implemented and the problems arenow being overcome. The PPAR for the Multan Expansion project 2/ found thatthe project had suffered from a number of technical problems, and severe costand time overruns. A number of factors contributing to these overruns --high international and domestic inflation after 1973, floods and shippingaccidents, and political disturbances -- were outside the control of thecompany. The project rates of return, though lower than expected atappraisal, were considered to be satisfactory.

47. The third project, for which IDA extended a US$55 million Credit inSeptember 1978 (Cr. 846-PAK), comprises a urea plant with a capacity of569,250 tpy and other facilities being built by the Fauji Fertilizer Company.The plant is being commissioned and is scheduled to go into productionshortly, about one year later than estimated at appraisal, due mainly toinitial delays in project planning and coordination, procurement, and thebuild-up of construction activities; project management at Fauji has beenstrengthened substantially with foreign assistance and the company has hiredqualified foreign and local staff for plant operations.

PART IV - THE PROJECT

48. The proposed project was prepared by the National Fertilizer Corpora-tion (NFC) and appraised in October/November 1981. Negotiations for theproposed loan took place in Washington from April 26 to May 4, 1982. ThePakistan delegation was headed by Mr. Majeed Mufti, Secretary, Ministry ofProduction. A Staff Appraisal Report, entitled "Pakistan - FertilizerIndustry Rehabilitation Project" (Report No. 3865-PAK, dated May 12, 1982) isbeing circulated separately to the Executive Directors. A supplementary datasheet is attached as Annex III.

1/ Report No. 1345, dated November 10, 1976 (SecM76-751).

2/ Report NIo. 3582, dated August 18, 1981 (SecM81-714).

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Project Objectives and Description

49. The proposed project is designed to assure the continued availabilityand increase the supply of domestically produced fertilizer from NFC plantsin order to help satisfy a growing demand which would otherwise have to bemet entirely by imports. The project's main concerns are with rehabilitat-ing, rationalizing and expanding existing production facilities at two ofNFC's plants; improving NFC's overall operational, management and trainingcapabilities; and looking at additional production capacity requirements.

50. The project would:

(a) rehabilitate and expand the urea plant and expand theammonia plant operated by Pakarab Fertilizers Ltd. (PFL)at Multan;

(b) rationalize and improve the management and operationalefficiency of the Multan plant complex;

(c) rehabilitate the ammonium sulphate plant operated byPak-American Fertilizers Ltd. (PAFL) at Daud Khel;

(d) provide technical assistance and training facilitiesin support of improvements in the overall managementand operations of the NFC Group; and

(e) support a study of additional fertilizer production capacityrequirements in Pakistan.

Rehabilitation and Expansion of PFL's Multan Plants

51. The Multan urea plant was commissioned in 1962. Despite their longservice, major parts of the plant are in good mechanical condition, with manyyears of additional life. By replacing and rehabilitating a number of itemsof equipment, the plant can continue functioning for an extended period. Theproposed rehabilitation works, which are based on recommendations made byconsultants after a study of the plant, would include: (a) renewing theinstrumentation and electrical systems; (b) replacing a major part of thesteam piping, some process piping, exchangers and pumps; (c) reconditioningcompressors and plunger pumps; and (d) repairing the ammonia stripper.

52. The original design capacity of the urea plant was 180 tpd of crys-talline urea. In 1974 the crystallization section of the plant was replacedwith larger prilling facilities; however, since the rest of the plant wasunchanged, capacity has remained at 180 tpd of prilled urea. By optimizingthe ratio and increasing the flow of ammonia and carbon dioxide to the ureaconverters, expansion of urea production would be achieved. This wouldinvolve the installation of an additional carbon dioxide compressor and

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ammonia feed pump and increased capacity in the ammonia recovery and recyclesections, which would also be designed to improve ammonia consumption rates.

53. Ammonia production and consumption for the Multan complex are now inbalance. In order to expand the capacity of the urea unit, an additionalsupply of approximately 60 tpd of ammonia is required. This quantity wouldbe secured by de-bottlenecking the existing ammonia unit and installing purgegas recovery equipment which would increase the unit's capacity from 910 tpdto 970 tpd and also reduce energy consumption.

54. Spare parts inventories for the urea plant are depleted and wouldbe replenished under the project to the level of two years' requirements.The increased demand for natural gas (approximately 3%), carbon dioxide andutilities can all be readily supplied from existing capacity without com-promising operation of the other units of the Multan complex. Bagging andstorage facilities are adequate for the expanded production.

Rationalization Program for PFL's Multan Complex

55. In order to improve the operational efficiency and then maintain ahigh capacity utilization level at the Multan plant complex, the followingcritical actions have been identified for implementaton under the proposedproject:

(i) pollution abatement measures to remove chromate from thecooling tower and nitrogen oxide from the oldest of theexisting nitric acid plants. Monitoring equipment tomaintain the required emission standards would also beprovided;

(ii) provision of spare parts for the existing nitro phosphateand calcium ammonium nitrate plants, consisting mainly ofcomplete equipment assemblies used to rapidly replacehigh maintenance units on shut-downs;

(iii) modernization of facilities for maintenance and trainingand provision of inspection equipment; and

(iv) additional rail shunting and bagged product handlingequipment to reduce the turn-around time of railroadblock trains for product dispatch.

56. These measures would substantially assist in strengthening and updat-ing plant operations, particularly in the crucial areas of maintenance andtraining, and would complement recent and ongoing organizational changes inthese departments. The works to be carried out at the Multan complex underthe proposed project are not directly related to the plants which were

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financed under the previous Multan Fertilizer project (Ln. 988-PAK). Thetraining facilities would be geared to the specialized needs of the Multanplant and would not duplicate those provided by the proposed technical train-ing center (paragraph 59 below). The pollution abatement measures would havea positive environmental impact.

Rehabilitation of PAFL's Ammonium Sulphate Plant at Daud Khel

57. Over the past three years there has been a substantial decline inthe mechanical reliability of sections of the Daud Khel plant which werecommissioned in 1958 and 1963. Unless remedial measures are implemented,production at the Daud Khel plant is expected to start declining in thecurrent year and the plant would have to be shut down by 1985. The proposedproject would finance the rehabilitaton or replacement of critical plantsections so as to maintain full economic production for at least seven yearsafter completion, and substantially reduce energy consumption at the plant.During this interim period the Government would study and, if founddesirable, implement plans for the long-term replacement of the Daud Khelfacilities (paragraph 60 below).

58. The remedial measures included in this component, which were proposedby consultants after detailed review of plant operations, include: (i)installation of a new boiler, retubing of an existing boiler and replacementof the existing boiler feed water treatment plant; (ii) renewal of the con-verter and waste heat boiler sections of the sulphuric acid plant; (iii)replacement of three centrifuges in the sulphur plant; (iv) replacement ofthe reformer tubes and air fractionation column intervals in the Koppersammonia plant, and (v) rectification of foundation problens. These proposalswere designed to minimize the investments required to assure continuity offull production. The plant has been well maintained and operated and theequipment not being replaced or refurbished is judged to be capable of opera-tion for the projected life of the rehabilitated plant. Existing utility andraw material supply arrangements and infrastucture are adequate, as noproduction expansion would result from the project. This component is notexpected to have any adverse environmental impact.

Improvements in NFC's Management and Operations

59. This component consists of several measures to improve the managementand operations of the NFC Group, including:

(i) hiring of expatriate personnel for a limited periodto ensure that technical operations at the Multan plant complexare properly managed until such time as local counterpartmanagers and technicians have been adequately trained;

(ii) improvements in the management informationsystems and controls, as recommended by consultants

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retained under Cr. 1066-PAK (see paragraph 66),particularly in the new plants which are based onhighly developed technology;

(iii) training and fellowships for about 21 senior execu-tives and 48 middle-level managers in technical,financial and marketing fields not available locally;

(iv) improvements in productivity and efficiency at theNFC Group's plants; and

(v) establishment (including construction and equipping)of a technical training center at Multan which wouldhandle approximately 200 trainees per year in orderto help satisfy the demand for skilled operation andmaintenance manpower in the local fertilizer industry.An experienced international consulting organizationwould be retained to set up and manage the centerduring the initial two years of operation.

Study of Additional Fertilizer Capacity

60. As indicated above (paragraph 37), expected increases in fertilizerdemand in Pakistan will necessitate continuing heavy dependence on importsunless additional local fertilizer production capacity is installed both forphosphatic and nitrogenous fertilizers. To determine possible options forthe economic expansion of the domestic fertilizer manufacturing industry,particularly with regard to new phosphatic fertilizer production capacity,the Government would undertake a study with the help of consultants to assessdomestic demand prospects; review the domestic availability of productioninputs such as natural gas, phosphate rock and sulfur; and analyze the tech-nical and economic viability of various alternatives to increase domesticfertilizer manufacturing capacity. The study would also consider theadvisability of establishing a new ammonium sulphate plant to replace theexisting one at Daud Khel. In addition, taking into account inter alia theGovernment's desire to increase private investment in the fertilizerindustry, an assessment would be made of the adequacy of current ex-factorypricing policies and possible alternative policies would be presented for theGovernment's consideration. In the light of these findings, the Governmentwould periodically review with the Bank its fertilizer pricing formula (Sec-tion 4.03(a) of the draft Loan Agreement).

The NFC Group

61. As indicated above (paragraph 34), NFC was founded in 1973 as agovernment holding corporation for the existing public sector fertilizerplants. Besides overseeing the operations of these plants, NFC has imple-mented a substantial expansion program which included enlarging the Multan

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plant and establishing two new plants. From 1973 to 1981, the NFC Group'soutput of fertilizer grew five-fold to a present output of 1,018,000 producttons. With combined 1981 gross revenues of US$179.6 million equivalent, theGroup is the third largest industrial enterprise in Pakistan. Besides itsproduction subsidiaries, NFC has a marketing subsidiary, National FertilizerMarketing Limited, which has developed an extensive country-wide sales net-work covering over 1,200 dealers.

62. To date, NFC's role vis-a-vis its subsidiaries has been mainly thatof a holding company and principal shareholder, acting as a financial super-visor, investment planner, channel of communication with governmentauthorities and procurement agent for certain specialized items or bulkpurchases. NFC is headed by a Chairman who reports through a Board of Direc-tors to the Secretary of the Ministry of Production. He is supported by asmall staff of capable individuals who have been working within the fer-tilizer industry in Pakistan for many years. The NFC Chairman chairs theboards of all the TFC subsidiaries.

63. The NFC Group as a whole currently employs about 4,750 people, 900 ofwhom are in managerial and technical categories; 2,350 are skilled and 1,500are semi-skilled laborers. Although staffing is inadequate at the managerialand technical levels, semi-skilled labor is excessive due to Pakistani laborlaws which make it difficult to lay off redundant personnel. The financialimpact of the excess labor, however, is not significant, as unskilled laboris paid relatively low wages (average IJS$1,200 p.a.).

64. The performance of NFC and its subsidiaries has been greatly affectedover the past several years by a significant turnover in all levels ofmanagerial and technical personnel. The main reason for this problem hasbeen the relatively low levels of remuneration in Pakistan state enterprises;these levels are generally tied to public sector industry pay scales andhistorically have been well below the levels customary in comparable privatesector industries in Pakistan. The high personnel turnover in the NFC Grouphas been further exacerbated by the drain of skilled technicians to theMiddle East. The Bank has urged the Government to allow TFC and other publicsector enterprises using sophisticated technology to raise pay scales inorder to attract and maintain the highly qualified staff needed. Partly inresponse to these representations, the Government significantly improved payconditions in 1979 in the major NFC plants by allowing them to raise emolu-ments for certain key technical and managerial staff; further increases werepermitted in 1980 and 1981. While these improvements have reduced turnoverat the plants, difficulties remain in obtaining locally all the qualifiedmanagement and technical staff required, due to a large extent to the muchhigher salaries offered abroad, principally in the Gulf area. To meet someof the personnel requirements of PFL for the immediate future, severalexpatriates would be hired under the project to temporarily fill managementand technical staff positions and give training to local staff.

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65. While pay limitations have been eased for NFC's principal sub-sidiaries, they continue to constrain the ability of NFC to attract andretain suitable headquarters personnel to permit NFC to perform its projectimplementation, monitoring and planning roles adequately. Under the proposedproject, the Government would take all action necessary to enable NFC and itssubsidiaries to attract and retain adequately qualified technical andmanagerial staff (Section 4.02 of the draft Loan Agreement).

66. An organization and management study carried out under Cr. 1066-PAKrecommended a number of practical changes in the organizational structure ofthe NFC Group which would facilitate its adaptation to the demands of largemanufacturing organizations and of the high level of technology with whichthe large NFC plants are now endowed. The principal recommendations of thisstudy include:

(i) greater autonomy for the NFC Group in operationalmatters, particularly the setting of compensation;

(ii) delineation of responsibility and delegation ofpowers between NFC and its operating units;

(iii) restructuring of the organization of NFC and itsoperating units and their alignment with recom-mended plant manning levels;

(iv) development of integrated training programs foremployees, with suitable systems for periodicalappraisal and performance reviews; and

(v) detailed review and revision of current managementinformation systems, accounting manuals, etc.

A number of the study's recommendations have already been implemented. Inconsultation with the Bank, NFC would complete the management and organiza-tion program based on the recommendations arising out of the study.

Implementation

67. The Government would carry out the study to establish the require-ments for additional fertilizer production facilities; implementation of theother components of the project would be the responsibility of NFC and itsrelevant subsidiaries. PFL would be responsible for implementing all of theworks at the Multan complex and PAFL for the works at Daud Khel. NFC wouldbe responsible for the implementation of the remaining components, and wouldprovide overall coordination and assistance.

68. Project implementation is expected to take three years. For theworks at Multan, selection and award of engineering contracts should be

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completed in the third quarter of 1982. Final commissioning is scheduled forcompletion by the second quarter of 1985. The works at Daud Khel areexpected to be completed by mid-1984, and all other components by the firstquarter of 1984.

Cost Estimates and Financing Plan

69. The total estimated financing required for the proposed project,including interest during construction and capitalized front end fee, isUS$49.3 million. Detailed cost estimates are shown in the Loan and ProjectSummary. Costs are based on January 1982 prices, adjusted for physical andprice contingencies. Bank-financed expatriate consultant costs (includingallowances and overheads) have been estimated at US$10,000 per man-month.Physical contingencies have been provided at 10% of base cost estimates,except for the expansion of ammonia capacity in the Multan component where15% has been allowed to reflect possible changes in the scope of the design.Price escalation rates in dollar terms, based on estimated increases in thefertilizer engineering industry, have been assumed at 8% in 1982, 7.5% in1983, 7% in 1984, and 6% in 1985 and thereafter. These international infla-tion rates have also been used for local equipment and materials, civil worksand erection, on the assumption that differences in domestic and interna-tional rates will be offset by adjustments in the exchange rate of the rupee.The rate of inflation in Pakistan in recent years has averaged 10-12% p.a.,and is expected to remain around this level during the next few years.

70. The proposed Bank loan of US$38.5 million, which represents about 78%of estimated financing costs, would finance the foreign exchange costs of theproject (including capitalized front end fee). The proceeds of the loanwould be on-lent by the Government to NWC at 14% interest p.a. for a periodof 15 years, including 4 years of grace. NFC would, in turn, re-lend US$29.4million to PFL and US$7.1 million to PAFL for project works at Multan andDaud Khel, respectively. The PFL sub-loan would be at 14%"o interest p.a. for15 years, including 4 years of grace; the PAFL sub-loan would carry an inter-est rate of 14% p.a., with a term of 9 years including 3 years of grace. TheGovernment would bear the foreign exchange risk. Estimated local projectcosts of about US$10.8 million would be met by NFC, PFL and PAFL from inter-nal cash generation.

Procurement and Disbursement

71. Contracts for items to be procured from the proceeds of the Bank loanwould be awarded in accordance with Bank's guidelines for procurement.International competitive bidding would be used for equipnient and materialpurchases, except for US$3.8 million of proprietary and critical items,including equipment costing US$100,000 or less, which may be procured throughdirect negotiations with suppliers or limited international tendering. Forpurposes of bid evaluation, local suppliers would receive a preference of 15%or the amount of the customs duty for non-exempt imports, whichever is lower.

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Local equipment and services not financed by the Bank would be procuredthrough the normal commercial practices of the NFC Group which are satisfac-tory. In order to avoid delays in the implementation of the project, anamount of US$1.4 million has been included for retroactive financing of theforeign costs of studies and front-end engineering work, and down paymentsfor critical equipment made after December 1, 1981 (Schedule I, paragraph 4,of the draft Loan Agreement).

72. Disbursements from the proposed Bank loan would be made for 100% of:(i) foreign expenditures for imported items; (ii) the ex-factory price oflocally procured items; (iii) foreign expenditures on consultants' servicesand training; (iv) the front end fee on the loan; and (v) interest incurredup to completion of the two production-oriented components of PFL and PAFL.

Financial Performance

73. Following the recent completion of new plants, the NFC Group's finan-cial results and position have improved considerably; gross revenue increasedfrom US$50.7 million in 1979 to US$131.8 million in 1980 and US$179.6 millionin 1981. Internal cash generation (US$40.7 million) is now satisfactory,causing the financial position of NFC and its subsidiaries to be substan-tially strengthened and permitting the latter to pay dividends. Investmentsunder the proposed project would have a positive effect on the financialsituation of NFC and its two subsidiaries, PFL and PAFL.

Benefits and Risks

74. As indicated above (paragraph 36), the projected growth in fertilizerconsumption in Pakistan will result in increasing imports unless existingdomestic production is maintained and is further supplemented by additionalcapacity. The proposed rehabilitation and expansion of the Multanammonia/urea and rehabilitation of the Daud Khel ammonium sulphate plantswould assist in narrowing the gap between demand and supply by producingannual incremental output of 178,000 tons of fertilizer until new productionfacilities, to be identified by the study of additional fertilizer capacity,can be installed (paragraph 60). The strengthening of NFC's management andorganization would assist all NFC plants to attain and maintain high levelsof capacity utilization.

75. Foreign exchange savings generated by the productive components ofthe project are estimated to total about US$250 million over their respectivelives, compared to the foreign exchange cost of these components of US$31.0million. The incremental economic rates of return for the Multan urea plantexpansion and rehabilitation, the Multan ammonia plant expansion and the DaudKhel ammonium sulphate plant rehabilitation are estimated at 54%, 96% and42%, respectively.

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76. The Multan components are sensitive to a delay in project completion;rates of return would be reduced to 40% for the urea plant and 66% for theammonia plant if production start-up were to be delayed by one year. In thecase of Daud Khel, the returns are more sensitive to changes in operating

* revenues and costs; a 10% increase in operating costs or a decrease of 10% inrevenues would reduce the rate of return to between 18% and 25%.

77. In considering the justification for rehabilitating and expandingthe facilities, the economic viability of the companies as a whole, includingexisting and proposed facilities under the project, was also analyzed. TheMultan facilities (PFL) were assumed to have a remaining life of ten yearsafter the expected 1985 project completion, and those at Daud Khel (PAFL) ofseven years after the 1984 project completion. PFL's continued operation isestimated to have an economic rate of return of 19%.

78. The project would also help to greatly improve the economics of theDaud Khel plant, which currently is a high-cost producer. After rehabilita-tion, its cost of production would be below the import cost of ammoniumsulphate. Due to the age and the small size of the facilities, the plant asa whole would have an estimated economic return of 13%, though this wouldrise to 27% if allowance is made for a price premium for ammonium sulphateover the nutrient value of urea, which is usual in Europe. By enabling theDaud Khel plant to continue functioning, the project would maintain its workforce of about 1,000 in an area which otherwise offers only limited alterna-tive employment. The maintenance of this work force would be of additionalbenefit in view of the fact that the existing ammonium sulphate plaxit is tobe replaced by a larger and more economic unit later in the 1980s, providedthat the proposed studies conclude this to be desirable.

79. The main risk facing the project is the possibility of delays inimplementation. This risk will be reduced by the strengthening of opera-tional staff, the hiring of expatriates and the involvement of engineeringfirms in project design and implementation. Risks associated with projecttechnology, start-up and operations are moderate as all components are basedon commercially proven technology. Commissioning problems after rehabilita-tion and difficulties in attaining and maintaining a high operating ratecannot be ruled out. However, the involvement of engineering firms indesign, engineering and commissioning should greatly reduce this risk. Nocommercial risk is foreseen. Even on the basis of a conservative marketforecast, the country will continue to be deficient in fertilizer.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

80. The draft Loan Agreement between the Islamic Republic of Pakistan andthe Bank, the draft Project Agreement between the Bank, NFC, PFL and PAFL andthe Report of the Committee provided for in Article III, Section 4(iii) of

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the Articles of Agreement are being distributed to the Executive Directorsseparately.

81. Special conditions of the project are listed in Section III of AnnexIII. Additional conditions of effectiveness are: (a) the Subsidiary LoanAgreement has been executed on behalf of the Government and NFC (Section6.01(a) of the draft Loan Agreement); and (b) the Sub-Loan Agreements havebeen executed on behalf of NFC and PFL, and NFC and PAFL, respectively (Sec-tion 6.01(b) of the draft Loan Agreement).

82. 1 am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATION

83. I recommend that the Executive Directors approve the proposed loan.

A. W. ClausenPresident

AttachmentsMay 17, 1982

- 25 - ANNEX I

TABLE 3APAKISTAN - SOCIAL INDICATORS DATA SHEET

PAKISTAN ~~~REFERENCE GROUPS (WEIGHITED AVEKACESLAND AREA (THOUSAND SQ. KM.) PMTISTAN - MOTRPECENT ESTIMATE)-

TOTAL 803.9 MOST RECENT LOW INCOME MIDDLFE INCOMEAGRICULTURAL 249.9 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC

GNP PER CAPITA (US$) 60.0 130.0 260.0* 232.3 1136.1

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 136.0 196.1 218.2 499.4 1150.6

POPULATION AND VITAL STATISTICS *POPULATION, MID-YEAR (THOUSANDS) 45850.5 60448.9 79705.0*URBAN POPULATION (PERCENT OF TOTAL) 22.1 24.9 27.8 17.3 40.8

POPULATION PROJECTION,POPULATION IN YEAR 2000 (MILLIONS) 141.2STATIONARY POPULATION (MILLIONS) 340.0YEAR STATIONARY POPULATION IS REACHED 2100

POPULAT1ON DENSITYPER SQ. KM. 57.0 75.2 99.1 153.6 373.1PER SQ. 101. AGRICULTLRAL LAND 201.0 249.0 309.4 360.3 2382.8

POPULATION AGE STKUCTURE (PERCENT)0-14 YRS. 43.8 46.3 46.4 37.4 39.8

15-64 YRS. 51.8 50.5 50.7 59.2 56.765 YRS. AND ABOVE 4.4 3.2 2.9 3.5 3.5

POPULATION GROWTH RATE (PERCENT)TOTAL 2.3 2.8 3.1 2.1 2.3URBAN 4.6 4.0 4.3 3.4 3.8

CRUDE BIRTH RATE (PER TIIOUSAND) 48.4 47.3 44.4 27.7 29.7CRUDE DEATH RATE (PER THOUSAND) 22.6 17.4 14.3 10.2 7.5GROSS REPRODUCTION RATE 3.2 3.7 3.2 2.5 1.9FAMILY PLANSING

ACCEPTORS, ANNUAL (THOUSANDS) .. 1908.1 2085.0UlENS (PERCENT OF M.ARRIED WOMEN) .. .. 6.0 20.4 44.1

FOOD AND NUTRITIONINDLX Of FOOD YLODUCTION

PER CAPITA (1969-71-100) 89.0 102.0 101.0 107.1 123.7

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 83.0 97.0 99.0 98.6 112.6PROTEINS (GRAYS PER DAY) 55.0 60.0 63.0 56.9 62.5

OF WHICH ANIMAL AND PULSE 22.0 20.0 20.0 14.2 19.7

CHILD (AGES 1-4) MORTALITY RATE 24.0 18.4 14.8 14.6 4.8

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 43.5 48.8 52.2 57.7 64.0INFANT MORTALITY RATE (PERTHOUSAND) 135.0/c .. .. 89.1 50.2

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL .. 21.0 29.0 30.1 45.9URBAN .. 77.0 60.0 65.8 68.0RURAL .. 4.0 17.0 20.1 34.4

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 3.0 6.0 17.6 53.4URBAN .. 12.0 21.0 71.0 71.0RURAL .. .. .. 4.8 42.4

POPULATION PER PHYSICIAN 1l000.0/d 4299.0/e 3758.0/e 3857.7 4428.7POPULATIONIPER NURSING PERSON . 133

05.

97e 9984.8Te 6411.8 2229.7

POPUIATION PER HOSPITAL BEDTOTAL 1742.9 1860.1 1894.8 1132.8 588.5URBAN 507.2 648.5 709.2 322.3 579.6RURAL 22850.0 12476.0 11819.6 5600.5 1138.5

ADMISSIONS PER HOSPITAL BED .. ..

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 5.4 5.3LRBAN 5.5 5.5RURAL 5.4 5.2

AVERAGE NUMBER OF PERSONS PER ROOMTOTAL 3.1 2.8/fURBAN 3.1 2.77 ..RURAL 3.1 2.87? ..

ACCESS TO FLECTRICITY (PERCENTOF LWELLINGS)

TOlAL *- 17.9/fURBAN 54.6/fRURAL .. 4.97? .

- 26 - ANNEX I

TABLE 3APAKISTAN - SOCIAL INDICATORS DATA SHEET

REFERENCE CROUPS (WEI HTED AV,RACESPAKISTAN - MOST RECENT iS,MATE)L-

MOST RECENT LOW INCOME MIDLLE INCOuE1960 lb 1970 /b ESTIMATE Jb ASIA & PACIFIC ASIA & PACIFIC

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMAFY: TOTAL 30.0 44.0 51.0 85.9 99.8KALE 46.0 62.0 69.0 94.4 100.6FEtALE 13.0 24.0 32.0 64.5 98.8

SECONDARY: TOTAL 11.0 14.0 17.01 38.0/aa 53.5MALE 18.0 22.0 25.0f) 34.67a 58.4FEMALE 3.0 6.0 S. ig.o7aa 48.6

VOCATIONAL ENROL. (Y OF SECONDARY) 1.0 1.5 1.5LI 3.8 21.1

PUPIL-TEACHER RATIOPRIMARY 39.0 41.0 40.0 32.8 34.2SECONDARY 24.0 20.0 19.0/ 19.9 31.7

ADULT LITERACY RATE (PERCENT) 15.0/ 20.7 24.0 52.8 86.5

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 1.0 2.6 2.8 1.7 12.7RADIO RECEIVERS PER THOUSAND

POPULATION 6.0 17.: 66.8 35.3 174.1TV RECEIVERS PER THOUSAND

POPULATION .. 1.6 8.3 3.7 50.6NEWSPAPER ("DAILY GENERALINtEREST") CIRCULATION PERTHOUSAND POPtLATION 7.0 .. 13.3 14.6 106.8CINEMA ANNUAL ATTENDANCE PER CAPITA 0.8 3.0/h .. 3.4 4.3

LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 14447.6 17364.1 21787.1

FEMALE (PERCENT) 8.6 9.3 10.4 29.3 37.4AGRICULTURE (PERCENT) 60.8 58.9 57.2 69.8 50.2INDUSTRY (PERCENT) 17.9 18.7 19.9 14.1 21.9

PARTICIPATION RATE (PERCENT)TOTAL 31.5 28.7 27.3 39.7 40.2KALE 55.2 50.4 47.5 51.5 49.8FEMALE 5.7 5.5 5.9 23.3 31.1

ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.8 1.1 1.1

INCOMF. DISTRIBUTIONPERCENT OF PRIVATE INCOMEFECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 20.3/i 17.8HIGHEST 20 PERCENT OF HOUSEHOLDS 45.3/i 41.8LOWEST 20 PERCENT OF HOUSEHOLDS 6.4/i 8.0LOWEST 40 PERCENT OF HOUSEHOLDS 17.5/i 20.2

POVERTY TARGET GROUPSESTIMtATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. 68.0 176.0 134.1 248.6RURAL .. 47.0 122.0 111.6 193.7

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. 34.0 88.0 .. 249.8RURAL .. 22.0 58.0 .. 234.3

ESTIMATED POPULATION BELOW ABSOLUTEPOVERTY INCOME LEVEL (PERCENT)

URBAN .. 42.0 32.0 41.7 21.2RURAL .. 43.0 29.0 51.7 32.2

Not availableNot applicable.

NOTES

/a The group averages for each Indicator are populatton-weighted arithmetic means. Coverage of countriesamong the indicaLors depends on availability of data and is not uniform.

/aa China included in total only.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for M.st RecenL Estil.ate, between 1976 and 1979.

/c 1962-65; Id Includes Bangladesh; /e Registered, not all practicJng in the country, /f 1973;/g 1960-62; /h 1972; /i 1963-64; Li 1975.

* e upLdated 1.9t.O CNP per z.pita and p:'pul;ILir,n cstiratcs r:c$3Q0 (at 197Fi-192 a80 :-a pricns) and b2,153,OO resprtli. .ly. Kay, 1981

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I xaNw -12z-

- 28 -ANNEX I

ECONOMIC DEVELOPMENT DATA

GROSS NATIONAL PRODUCT IN 1980: 81 ANNUAL RATE 0F GROWTH (%, conseast prices)

US$ billion X 1969/70-1974/75 1975/76-1980/81 1980/81

GNP at Market Prices 29.99 100.0 3.5 6.3 6.2Gross Domestic Investment 4.87 16.2 -5.5 5.4 4.4Gross National Saving 3.94 13.1 -2.1 8.2 10.3Current Account 3alance -0.95 -Resource Gap -2.93 -9.8 6.7 15.1 -29.4

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1979/8OLa

Value Added Labor Fbrce V.A. Per WorkerUS$ millios % Million % US$ million %

Agriculture 7,538 30 13.2 54 571 56Gudautry 6,490 26 4:5 18 1,442 141Services 11,127 44 6.9 28 1,613 158

Total/Average 25,155 100 24.6 100 1,023 100

GOVERNMENT FINANCE

General Government Central Government(Rs billion) % of GDP (Rs billion) % of GDP1980/81 1980/81 1976/77-1980/81 1980/81 1980/81 1976/77-1980/81

Current Receipts 46.8 16.9 16.2 36.1 13.0 12.4Current Espenditures 36.8 13.3 14.0 28.6 10.3 10.5Current Surplus/Defioit 100.0 3.6 2.2 7.5 2.7 1.9Capital Euperdicures 25.0 9.0 9.7 21.5 7.8 7.8External Assistance (net) 5.7 2.0 3.0 5.7 2.0 3.0

MONEY, CREDIT AND PRICES

1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980l 81/b

Me-ey and Quasi Money 33.1 41.6 51.7 63.7 76.5 90.7 104.0Bank Credit to Public Sector (net) 17.7 22.9 29.5 34.3 43.1 48.1 53.8Bank Credit to Private Sector (gross) 19.7 23.1 30.1 35.7 42.7 50.6 58.7

Money and Quasi Money as % GDP 31.6 34.3 38.1 40.5 42.8 42.7 41.7Wholesale Price Index (1969/70 = 100) 211.3 229.4 255.3 271.4 289.7 316.7 358.8

A.nnual Percentage Change in:Wholesale Price Inden 23.6 8.6 11.3 6.3 6.7 9.3 13.3Bank Credit to Public Sector (net) 21.2 29.4 28.8 16.6 25.6 11.6 11.8Bank Credit to Private Sector (gross) 26.3 17.3 30.3 ' 18.6 19.6 18.5 16.0

/a Labor force data are official figures of the Ministry of Finance and Planning. Serious underenumeration nay exist, especially of women./b Provisional.

Not applicable.

February 1982

-29-

ANNEX I

RALANCE OF PAYMENTS (US$ million) MERCbRNDISE EXPORTS (AVERAGING 1977/7N-IQRA/81)

1976/77 1977/78 1978/79 1979/80 1980/81 /a US$ million X

Exports of Goods, NFS 1,404 1,651 2,107 2,955 3,450 Raw Cotton 259.4 8.5Imports of Goods. NFS 2.877 3,297 4,485 5,709 6.385 Cotton Yarn 179.3 9.8Renource Gap (deficit - ) -1.473 -1,646 -2,378 -2,754 -2,935 Cotton Cloth 219.2 12.4

Rico ~~~~~~383.2 19.6Interest Payments -172 -183 -261 -285 -322 All Other Conoinditien 1, 034.6 49.7Work.en' Remittancsa 578 1,166 1,395 1,748 2,117 - Total 2,085.7 100.0Other Factor Payments (net) 15 62 134 151 193Net Transfers .. .. .. .. .. EXTERNAL DEBT, DECEMBER 31, 1980Balance on Current Account -1,052 -601 -1,110 1,140 -947

Direct Foreign Investment .. .. .. .. .. US$ millionNet NLT Borrowing Public Debt, Including Guaranteed 8,775.3

Dinbursements 961 841 813 1.134 1,067 Non-guaranteed Privato Debt /f ..Amortieation -175 -122 -235 -310 -358 Total Outstanding and Disbursed 8,775.3Sub Total 786 719 578 824 709

Transactions with IMF /b 44 41 -14 78 331 DEBT SERVICE RATIO FOR 1979/80 /g

Other Items n.e.i. /c 24 163 238 600 217 US0$ illionIncrease in Reserves (-) 198 -322 308 -362 -310 Public Debt, Including Guaranteed 12.1

Gross Reserves (year end) /d 372 694 386 748 1,058 Non-guaranteed Private Debt --Net Reserves (year end) In -146 150 -92 340 330 Total 12.1Official Gold (year end; illio n 1.6 1.7 1.8 1.8 1.9 IBRD/IDA LENDIN9 (SEPTEMBER 1981) (US$ illion)

FPol and Related Materials IBRD IDA

Petroleum Imports 413 497 530 1,079 1,535 Outstahding and Disbursed 312.2 825.6Petroleum Exports 27 63 61 178 169 Undisbursed 36.5 549.9

Outstanding, including Undisborsed 348.7 1,375.5RATE OF EXCHANGE

Through May 11, 1972 May 11, 1972 - February 15, 1973 February 15, 1973 - January 8, 1982 January 8, 1982 /h

USS - Rn 4.7619 0S$ = 11.00 US0$ 9.90 US5 - 10.1R. - US$O.2100 R. = 0.0909 Rs - 0.1010 Rs - 0.09

/a Government estimete.lb Including Trust FPnd.Ic Including net short-term berraving and errors snd omissiens.Id Foreign exchange and SDR holdings of the State Bank.T. Excluding use of IMF credit./f Private debt is negligible.At Ratio of debt service to exports of goods, non-factor services and workern' remittanoes; not including ahort-term or IMF charges./h Since January 9, 1982, value of rupee is being .anaged with reference to a weighted basket of currencies.

Not available.

February 1982

- 30 - ANNEX II

STATUS OF BANK GROUP OPERATIONS IN PAKISTAN

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1982)

(US$ million)Loan/ (Amount net of cancellations)Credit Fiscal Undis-Number Year Purpose Bank TW IDA bursed

Eighty loans and credits fully disbursed /a 611.2 634.3

492 1974 Fourth Karachi Port -- 16.0 0.41107 1975 Fourth Sui Northern Gas 53.0 -- 0.7546 1975 Industrial Development (NDFC) -- 30.0 0.51208T 1976 Power (Second WAPDA) -- 32.0 -- 1.8620 1976 Seed Project -- 23.0 7.51326 1976 Development Finance (PICIC X) 25.0 -- 0.4630 1976 Second Lahore Water Supply -- 26.0 7.4648 1976 Irrigation & Drainage (Khairpur) -- 14.0 7.01366T 1977 Livestock Development (Punjab) -- 10.0 __ 9.81372) 1977 Railways 35.0 -- 12.8684 ) 1977 Railways -- 25.0 1.3678 1977 Third Education -- 15.0 7.8751 1977 Hill Farming Development -- 3.0 1.6754 1978 Salinity Control & Reclamation -- 70.0 69.1755 1978 Hazara Forestry Pre-investment -- 1.7 1.5813 1978 Punjab Ext. & Agric. Dev. -- 12.5 7.8846 1978 Fauji Fertilizer -- 55.0 6.6867 1979 Toot Oil & Gas Development -- 30.0 2.5877 1979 Salinity Control & Recl. (Mardan) -- 60.0 58.8892 1979 Primary Education -- 10.0 8.6922 1979 Sind Agricultural Extension -- 9.0 9.0957 1979 Agricultural Development (ADBP) -- 30.0 17.6968 1980 Power (Third WAPDA) -- 45.0 39.2974 1980 Third Highway -- 50.0 41.31019 1980 Development Finance (PICIC XI) - 40.0 29.21066 1981 Fertilizer Imports -- 50.0 29.41109 1981 Vocational Training -- 25.0 25.01113 1981 Small Industries -- 30.0 29.91157 1981 Grain Storage -- 32.0 32.01158/b 1981 Agricultural Research -- 24.0 24.01163 1981 On-Farm Water Management -- 41.0 41.01186/b 1982 Industrial Development (IDBP II) -- 30.0 30.0Total 724.2 42.0 1,432.5 561.5of which has been repaid 432.3 - 28.4

Total now outstanding 291.9 42.0 1,404.1Amount sold 23.9of which has been repaid 23.9 -- -- --

Total now held by Bank and IDA7TE- 291.9 42.0 1,404.1Total undisbursed 13.9 11.6 536.0 561.5

ta Excludes the disbursed portion of loans and credits wholly or partly forprojects in the former East Pakistan which have now been taken over byBangladesh.

/b Not yet effective./c Prior to exchange adjustments.

- 31 -

ANNEX II

B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982)

Fiscal Amount In US$ MillionYear Obligor Type of Business Loan Equity Total

1958 Steel Corp of Rolled Steel 0.63 -- 0.63Pakistan Ltd. Products

1959 Adamjee Industries Textiles 0.75 -- 0.75Ltd.

1962- Gharibwal Cement Cement 5.25 0.42 5.671965 Industries Ltd.1963- PICIC Development -- 0.52 0.521969- Financing19751965 Crescent Jute Textiles 1.84 0.11 1.95

Products1965- Packages Ltd. Paper Products 4.43 0.84 5.2719801967- Pakistan Paper1976 Corp Ltd. Paper 5.38 2.02 7.401969 Dawood Hercules Fertilizers 1.00 2.92 3.92

Chemicals Ltd.1969 Karnaphuli Paper Pulp and Paper 5.60 0.63 6.23

Mills Ltd.1979 Milkpak Ltd. Food and Food 2.40 0.39 2.79

Processing1979 Pakistan Oilfields Chemicals and 29.00 1.82 30.82

Ltd. and Attock PetrochemicalsRefinery Ltd.

1980 Fauji Foundation Woven Polypropy- 1.78 -- 1.78lene bags

1980 Premier Board Particle Board 2.70 -- 2.70Mills Ltd.

1981 Habib Arkady Food and FoodProcessing 3.15 0.17 3.32

Total Gross Commitments 63.91 9.84 73.75

Less: Cancellations, Terminations,Repayments and Sales 38.85 1.01 39.86

Total Commitments Now Held by IFC 25.06 8.83 33.89

Undisbursed (including participants) 3.15 0.53 3.68

- 32 -

ANNEX II

C. PROJECTS IN EXECUTION 1/

Credit No. 771 Tarbela Dam: US$35 Million Credit of March 10, 1978;Effective Date: April 4, 1978; Closing Date: June 30,1982

Work to construct a flip-bucket at the outlet of Tunnel No. 4 is inprogress and will be completed in 1983. Serious erosion in the plunge poolbelow the service spillway during 1977 necessitated additional protectionworks which, together with work in the downstream channel, were completed inJune 1980. Similar protection work in the auxiliary plunge pool is virtuallycompleted. Since 1975, irrigation requirements from the dam have been met.Power generation by the first four units began in 1977. Construction of asecond power plant with six units is in progress. All Credit proceeds havebeen disbursed; the Bank continues to administer the Tarbela DevelopmentFund.

Credit No. 492 Fourth Karachi Port: US$16 Million Credit of July 8,1974; Effective Date: September 18, 1974; ClosingDate: December 31, 1981

The project is completed and, as of March 31, 1982, disbursementsamounted to US$15.6 million. The balance is committed and final withdrawalsare expected by end-April 1982.

Loan No. 1107 Fourth Sui Northern Gas: US$60 Million Loan of May 15,1975; Effective Date: July 5, 1975; Closing Date:December 31, 1982

The Closing Date of the Loan has been extended to December 31, 1982to allow the Borrower to utilize undisbursed funds toward increasing thecapacity of the Islamabad/Rawalpindi natural gas distribution system. Con-struction should be completed in June 1982.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report anyproblems which are being encountered, and the action being taken toremedy them. They should be read in this sense, and with the understand-ing that they do not purport to present a balanced evaluation ofstrenaths and weaknesses in project execution.

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Credit No. 546 National Development Finance Corporation (NDFC):US$30 Million Credit of May 15, 1975; EffectiveDate: July 17, 1975; Closing Date: December 31, 1981

The Credit was closed on December 31, 1981. The undisbursed amount(about US$0.5 million) will be cancelled in April 1982.

Loan No. 1208-T Second WAPDA Power: US$50 Million Third Window Loanof February 19, 1976; Effective Date: April 30, 1976;Closing Date: December 31, 1981

Most of the project components were commissioned in the last quarterof 1980. Some payments are outstanding pending final comnissioning of theremaining components. The Government has requested an extension of theClosing Date to September 30, 1982 to accommodate payment of these sums.

Credit No. 620 Seed Project: US$23 Million Credit of March 29, 1976;Effective Date: November 29, 1976; Closing Date:June 30, 1983

Project implementation remains behind schedule, with the most impor-tant delays being the construction and equipping of three processing plantsin Punjab due to disputes with civil works contractors. As presentlyscheduled, the Punjab component should be completed by June 1983. The plantin Sind is complete except for some silos and the machinery is installed.The Closing Date, originally December 31, 1981, has been extended to June 30,1983.

Loan No. 1326 Development Finahce Company (PICIC IX): US$25 MillionLoan of September 14, 1976; Effective Date: November29, 1976; Closing Date: December 31, 1981

This Loan was closed on December 31, 1981. The undisbursed amount(about US$0.4 million) will be cancelled in April 1982.

Credit No. 630 Second Lahore Water Supply, Sewerage and DrainageProject: US$26.6 Million Credit of June 8, 1976;Effective Date: September 21, 1976; Closing Date:December 31, 1982

All major works have been contracted. Construction delays, however,continue and will probably cause a further delay in project completion.

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Credit No. 648 Khairpur Tile Drainage and Irrigated FarmingDevelopment Project: US$14 Million Credit of July 22,1976; Effective Date: March 14, 1977; Closing Date:July 31, 1982

Overall progress is currently about two years behind schedule due todelays in employing consultants and procurement problems. Canal remodeling,surveys, and extension services are proceeding satisfactorily but the tileand collector drain construction has progressed slowly. Actions have beeninitiated with the Association's concurrence to curtail cost overruns andreduce completion delays.

Loan No. 1366-T Punjab Livestock Development: US$10 Million ThirdWindow Loan of February 18, 1977; Effective Date;August 3, 1977; Closing Date: December 31, 1982

The Government and the Bank have conditionally agreed on a revisedproject which would aim to rehabilitate the Lahore Milk Plant and to estab-lish about 300 Village Livestock Associations and their related serviceactivities. The contract of the milk plant consultants has been extended tocover the period of construction and commissioning of the plant.

Loan No. 1372 Tenth Railway: US$35 Million Loan and US$25 Millionand Credit of March 8, 1977; Effective Date: May 9, 1977;

Credit No. 684 Closing Date: June 30, 1982

The project is proceeding satisfactorily. The telecommunications andsignaling scheme is making good progress and the complete network is expectedto be commissioned before mid-1983. Procurement has been completed and thetotal proceeds of the Loan/Credit have been committed.

Credit No. 678 Third Education: US$15 Million Credit of February 18,1977; Effective Date: July 6, 1977; Closing Date:December 31, 1982

The project is generally making good progress. Nearly all of civilworks contracts have been awarded and about 80% have been completed. Oneproject study has been completed and the two others are nearing completion.About 70% of the project equipment has been procured and the balance is inthe process of procurement. Technical assistance specialist services are nowbeing provided satisfactorily and about 90% of the fellowships have been usedor committed. Project implementation in Sind and Baluchistan is behindschedule by about one year, due to initial delays in building construction.

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Credit No. 751 Hill Farming Technical Development: US$3 MillionCredit of December 1, 1977; Effective Date: March 7,1978; Closing Date: September 30, 1983

Staff vacancies are causing implementation problems, and the com-ponents dealing with fodders, demonstration farms, apples and land-use areprogressing slowly. Nevertheless, most technical developments are progress-ing satisfactorily and the training program is on schedule. A draft proposalfor a follow-up project has been received. Expenditures and disbursementshave been less than expected because of cost savings and procurement delays.

Credit No. 754 SCARP-VI: US$70 Million Credit of January 19, 1978;Effective Date: December 28, 1978; Closing Date:November 30, 1986

Although the project is about three years behind schedule, sig-nificant momentum has now begun in project implementation following theresolution of bu;.getary and other initial problems. Progress has been madein awarding the first civil works contracts and obtaining necessary equip-ment, vehicles and materials.

Credit No. 755 Hazara Forestry: US$1.7 Million Credit of January 29,1978; Effective Date: July 14, 1978; Closing Date:December 31, 1983

There has been significant progress in different project activities.The Guzara socio-economic study, chir pine forest inventory and pulping testfor chir pine, and the first phase of the feasibility study have been com-pleted. As a result of these developments, the final phase of thefeasibility study is expected to commence in the Fall of 1982.

Credit No. 813 Punjab Extension and Agricultural Development:US$ 12.5 Million Credit of June 6, 1978; EffectiveDate: September 12, 1978; Closing Date: June 30, 1984

The project is behind schedule despite some progress in staffrecruitment, acquisition of building sites and construction work. Implemen-tation of the T&V system and the research-extension linkages continue to beweak. Low salaries for village level staff and delays in recruiting consult-ants remain problems.

Credit No. 846 Fauji Fertilizer: US$55 Million Credit of September 14,1978; Effective Date: December 19, 1978;Closing Date: June 30, 1982

The plant is nearing completion and commercial production is due tostart in April 1982.

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Credit No. 867 Toot Oil and Gas Development: US$30 Million Credit ofJanuary 12, 1979; Effective Date: April 25, 1979;Closing Date: March 31, 1983

Tw7o new producing oil wells in the Toot field have recently beencompleted despite very difficult drilling problems. However, seriouswell-drilling and management problems still persist. Project implementationis about 15 months behind schedule. The Closing Date, originally December31, 1981, has been extended to March 31, 1983, to allow completion of theoriginal 8-well drilling program.

Credit No. 877 Salinity Control and Reclamation Project (SCARP) Mar-dan: US$60 Million Credit of February 7, 1979; Effec-tive Date: October 16, 1979; Closing Date: June 30,1986

Initial budgetary and other problems have been resolved and CIDA (theproject co-financier) is assisting WAPDA in scheduling implementationactivities as well as in preparing subsurface drainage design and specifica-tions. The project is about two years behind schedule.

Credit No, 892 Primary Education: US$10 Million Credit of April 18,1979; Effective Date: October 23, 1979; Closing Date:June 30, 1985

Good progress is being maintained. About 80% of the project inputsincluding civil works, equipment, staff appointments and training have beenprovided with less than six months' delay. The evaluation program is beingredesigned after the exDeriences gained in the first 18 months of evaluation.

Credit No. 922 Sind Agricultural Extension and Adaptive ResearchProject: US$9 Million Credit of June 12, 1979; Effec-tive Date: June 26, 1981; Closing Date: June 30, 1984

Critical staff has been recruited and project implementation hasstarted. Recruitment of consultants has been delayed pending signing of aproject agreement between INDP and the Government.

Credit No. 957 Fourth Agricultural Development Bank: US$30 MillionCredit of December 7, 1979; Effective Date: June 5,1980; Closing Date: December 31, 1982

Overall progress of the agricultural credit component has been satis-factory and the agricultural engineering training component has begun. It isanticipated that project completion will be about one year behind schedule.

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Credit No. 968 Third WAPDA Power: US$45 Million Credit of January 10,1980; Effective Date: July 30, 1980; Closing Date:December 31, 1984

Despite some delays, mainly in land acquisition, execution of theproject is proceeding satisfactorily. Procurement action schedules andconstruction targets for substations and transmission lines are generallybeing met.

Credit No. 974 Third Highway: US$50 Million Credit of April 9, 1980;Effective Date: August 21, 1980; Closing Date: June30, 1984

Of the five rehabilitation contracts, two are nearing completion, onehas been terminated due to poor performance by the contractor and re-awarded,and work is progressing slowly on the remaining two contracts. Discussionsare in progress on equipment procurement and provision of technical assis-tance to two provincial governments to improve road maintenance, and severalcontractors have shown interest in using loans through IDBP for purchase ofmechanical equipment.

Credit No. 1019 PICIC Industrial Development: US$40 Million Credit ofMay 30, 1980; Effective Date: October 29, 1980; Clos-ing Date: March 31, 1984

As of March 31, 1982, about US$29 million had been authorized forsub-loans and US$10.8 million disbursed. The Government and PICIC have takencorrective measures to improve collections on past sub-loans, and implementa-tion of the project is proceeding well'

Credit No. 1066 Fertilizer Imports Credit: SDR 38.2 Million Credit(US$50 Million equivalent) of October 17, 1980; Effec-tive Date: December 1, 1980; Closing Date: September30, 1982

As of March 1982, about US$21 million had been committed. The Clos-ing Date, originally June 30, 1981, has been extended to September 30, 1982to accommodate the award of contract for and shipment of the remaining fer-tilizer under the project.

Credit No. 1109 Fifth Education (Vocational Training): SDR 19.7 Mil-lion Credit (US$25 Million equivalent) of April 24,1981; Effective Date: October 27, 1981; Closing Date:December 31, 1986

Agreements have been reached with ILO for the provision of technicalassistance services and for procurement of equipment, and a contract signedwith architectural consultants for the provision of design services. The

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institutional and in-plant training components are about six months behindschedule.

Credit No. 1113 Small Industries: SDR 23.6 Million Credit (US$30Million equivalent) of April 24, 1981; Effective Date:October 6, 1981, Closing Date: December 31, 1985

Sub-loan commitment started in January 1982 after key commercial bankloan officers were trained in November/December 1981. Bidding for equipmentand selection of consultants for the service centers are in progress.Evaluation of proposals and selection of consultants for the export promotionand the project development components are ongoing.

Credit No. 1157 Grain Storage: SDR 26.1 Million Credit (US$32 Millionequivalent) of October 21, 1981; Effective Date: March15, 1982; Closing Date: December 31, 1985

This Credit was declared effective on March 15, 1982.

Credit No. 1158 Agricultural Research: SDR 19.7 Million Credit (US$24Million equivalent) of August 19, 1981; Effective Date:April 29, 1982; Closing Date: December 31, 1986

This Credit is not yet effective.

Credit No. 1163 On-Farm Water Management: SDR 33.4 Million Credit(US$41 Million equivalent) of August 19, 1981; Effec-tive Date: March 31, 1982; Closing Date: December 31,1984

This Credit was declared effective on March 30, 1982.

Credit No. 1186 Second Industrial Development Bank of Pakistan(IDBP II): SDR 26.7 Million Credit (US$30 Millionequivalent) of February 19, 1982; Effective Date:May 19, 1982; Closing Date: June 30, 1985

This Credit is not yet effective.

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ANNEX III

PAKISTAN

FERTILIZER INDUSTRY REHABILITATION PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project:

18 months.

(b) Agency which prepared the project:

National Fertilizer Corporation of Pakistan.

(c) Date of first presentation to the Bank, anddate of first Bank mission to consider theproject:

June 1980 and November 1980.

(d) Date of departure of appraisal mission:

November 5, 1981.

(e) Date of completion of negotiations:

May 4, 1982.

(f) Planned date of effectiveness:

September 1982.

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

(i) Goverment to ensure ex-factory prices forfertilizer are kept at a level to allowproducers to earn sufficient revenues; ifprices exceed retail prices, government tocompensate producers promptly for difference

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between ex-factory and retail prices(paragraph 38); government to periodicallyreview with the Bank its fertilizer pricingformula (paragraph 60);

(ii) Pakistan Railways to implement and thereaftermaintain satisfactory schedules for operatingblock trains from plants to storage locations(paragraph 41);

(iii) Government to implement a system to adequatelycompensate producers for marketing costs(paragraph 42);

(iv) Government to take all necessary action to enablethe NFC Group to attract and retain adequatelyqualified staff (paragraph 65).

The following would be special conditions of effectiveness(paragraph 81):

(a) execution of a Subsidiary Loan Agreement betweenthe Government and NFC;

(b) execution of Sub-Loan Agreements between NFC andPFL, and NFC and PAFL.

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