RETURN TO REPORT"^ OPY RESTRICTED WIT eL J Report No. PI-6a ONE WEEK This report is for official use only by the Bank Group and specifcall[y authorized oirpnizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responslbilitbr for the accuracy or. completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT. INTERNATIONALDEVELOPMENT ASSOCIATION APPRAISAL OF THE IGSAS AMMONIA-UREA MANUFACTURING PROJECT TURKEY April 12, 1972 Industrial Projects Department Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
RETURN TOREPORT"^ OPY RESTRICTED
WIT eL J Report No. PI-6a
ONE WEEK
This report is for official use only by the Bank Group and specifcall[y authorized oirpnizationsor persons. It may not be published, quoted or cited without Bank Group authorization. TheBank Group does not accept responslbilitbr for the accuracy or. completeness of the report.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT.
INTERNATIONAL DEVELOPMENT ASSOCIATION
APPRAISAL OF THE
IGSAS AMMONIA-UREA MANUFACTURING PROJECT
TURKEY
April 12, 1972
Industrial Projects Department
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Currency Equivalents
1 US$ - 14 TL (Turkish Lira)1 TL - 0.714 US$
Abbreviations and Acronyms
ABT Agricultural Bank of TurkeyACC Agricultural Credit CooperativesAN Ammonium NitrateAS Ammonium SulfateCAN Calcium Ammonium NitrateDAP Diammonium PhosphateDonatim T.Z. Donatim Kurumu (Agricultural Supply Organization)ha HectareIGSAS Istanbul Gubre Sanayii Anonim SirketiIPRAS Istanbul Petrol Rafinerisi Anonim SirketiK Potassium Oxide (K20) as fertilizer nutrientN Nitrogen as fertilizer nutrientP Phosphoric Acid (P205) as fertilizer nutrientSFC Sugar Factories CorporationSPO State Planning OrganizationSSP Single Super-phosphateTPAO Turkiye Petrolleri Anonim OrtakligiTSP Triple Super-phosphate
Weights and Measures
Metric tons are used throughout this report
Fiscal Year of IGSAS, TPAO, IPRAS
January 1 to December 31
TURKEY
APPRAISAL OF IGSAS AMMONIA-UREA MANUFACTURING PROJECT
TABLE OF CONTENTS
Page No.
SUMMARY AND CONCLUSIONS .......... .. .............. i
I. INTRODUCTION ...................... 1
II. THE COMPANY AND THE SPONSORS ..................... 1
III. THE FERTILIZER INDUSTRY .......................... 2
A. Industry in Turkey ..... ................ . 2B. Fertilizer Production ....................... 3
IV. THE FERTILIZER MARKET ...... ...................... 4
A. Agriculture in Turkey ....................... 4B. Past and Present Consumption of Fertilizer .. 5C. The present System of Fertilizer Procurement
and Distribution ............... ............. 5D. Future Consumption of Fertilizer ............ 6
E. Nitrogen Balance through 1980 ............... 8F. Present and Future Market Share of Urea ..... 9G. IGSAS Marketing Plan ...... .................. 10
V. THE PROJECT ...................................... 11
A. The Facilities and Products .. ............... 11B. Raw Materials ................................ 12C. Ecology ..................................... 13D. Processes, Engineering, Construction
Management and Staffing ......... .......... 13E. Procurement and Regional Preferences ........ 14F. Construction Schedule and Disbursement
of Bank Loan .............. ................ 15
VI. CAPITAL COST - FINANCIAL PLAN .................... 16
A. Capital Cost ............................ 16B. Financial Plan ............................. 17
TABLE OF CONTENTS (Cont'd)
VII. OPERATING COSTS, FINANCIAL FORECASTS AND RETURNSAND SECURITY PROVISIONS . ......................... 18
IX. AGREEMENTS REACHED AND RECOMMENDATION .... ....... 24
ANNEXES
1. The Sponsoring Companies2. Regional and Seasonal Consumption of Fertilizer3. Projections of Nitrogenous Fertilizer Consumption4. Urea: Suitability, Potential Sales and Seeding Program5. Ecology6. IGSAS: Project Management and Execution7. International Market Prices for Ammonia and Urea8. Internal Economic Return
TABLES
1. Status and Capacity of Fertilizer Plants2. Production of Nitrogenous Fertilizers3. Fertilizer Supply and Consumption4. Production of Phosphate Fertilizers5. Fertilizer Consumption, 1960-19716. Ownership of Fertilizer Sector7. Fertilizer Prices and Distributor Margins8. Present and Projected Consumption of Nitrogenous Fertilizers9. Net Nitrogen Imports10. Estimated Construction Timetable and Disbursement11. Project Cost Estimate12. Operating Costs13. Projected Income Statement
1. Process Diagram2. Project Organization3. Organization and Staffing
MAP
Agricultural Regions and Location of Fertilizer Plants
This report has been prepared by Messrs. R. Carmignani, S. Cottrell,U. Finzi, and W. Kaffenberger of the Industrial Projects Department.
TURKEY
APPRAISAL OF THE
IGSAS AMMONIA-UREA MANUFACTURING PROJECT
SUMMARY AND CONCLUSIONS
i. This report appraises a project for the construction in Turkeyof a Government-owned plant, Istanbul Gubre Sanayii Anonim Sirketi (IGSAS)which is estimated to cost about US$58 million equivalent End for whicha Bank loan of US$24 million has been requested. The plant: would be locatedat Izmit, some 80 km south-east of Istanbul on the Marmara Sea with good sea,road and rail connections. It would produce for sale on the Turkish market274,000 tons per year of urea and 90,000 tons per year of aLmmonia; theammonia would be further processed into caprolactam, the raw material fornylon and into diammonium phosphate fertilizer.
ii. IGSAS was recently formed to build and operate the project. Theshareholders are TPAO (Turkiye Petrolleri Anomim Ortkligi),! the Turkishstate oil company, with 60% of the shares and IPRAS (Istanbul PetrolRafinerisi Anomim Sirketi), a subsidiary of TPAO with the remaining 40%.IPRAS owns an oil refinery on whose land the project would be built andwhich would supply the raw materials - naphtha, fuel oil and off-gas - andvarious other services to the project. Because the connecitions between theproject and IPRAS will greatly reduce the required investmient in new infra-structure and auxiliary facilities, capital costs of the IGSAS plant willbe relatively low.
iii. Turkey is a large importer of nitrogenous fertilizer, and in 1971imported 190,000 tons of N (nutrient content). Local production is onlynow being built up and existing capacity is of small scale and productioncosts are relatively high. Nitrogenous fertilizer consumption in Turkeygrew rapidly in the 1960's, from about 38,000 tons N in 1962 to about245,000 tons N in 1969, equivalent to an annual increase of about 30%. In1970 and 1971, however, fertilizer consumption stagnated primarily becauseof supply constraints such as shortage of foreign exchange for timelyfertilizer imports, scarcity of agricultural credit, and some deficienciesin the fertilizer distribution system.
iv. Once these constraints are removed as expected, growth of con-sumption is anticipated to resume and reach about 500,000 tons in 1976,the first year of full operation of the project. The nutrient content ofthe urea that IGSAS would be manufacturing is forecast to amount to 82,000tons of N in 1976 and build up to 126,000 tons by 1978 when the plant isassumed to operate at capacity. Combined with capacity now in existenceor under construction, the project would help to make Turkey self-sufficientin nitrogenous fertilizer supply by the mid-1970's. Although urea has been
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introduced in Turkey only a few years ago, and IGSAS would be the firstdomestic producer of this fertilizer, the urea market has been rising rapidlyand is expected to absorb the Companyts entire production capability.
v. Of the estimated total project cost of US$58 million, US$32 millionwould be for foreign exchange expenditures. These would be covered by theproposed Bank loan (US$24 million) and by a portion (US$8 million) of a loanfrom the Turkish State Investment Bank which will be converted into foreignexchange by the Turkish Government. The Bank loan would be used primarilyfor the imported ammonia and urea process units, auxiliary systems and theforeign exchange portion of engineering services, as well as interest duringconstruction. The loan would be made directly to IGSAS and would be guaranteedby the Company's two shareholders, TPAO and IPRAS, in addition to the guaranteeof the Turkish Government. IGSAS would pay the Government a guarantee feeof 1 3/4% per annum. Both loans would be for 15 years including a graceperiod of four years. The remaining approximately 40% of project cost wouldbe financed by equity contributions from TPAO and IPRAS and by the balanceof the State Investment Bank Loan. Construction time will be about threeyears and commercial operations are expected to start in mid-1975.
vi. Primary responsibility for execution of the project will rest withIGSAS; the Company will be assisted by a Technical Advisor which would be afirm with appropriate engineering and construction experience, as well ascompetence in the modern ammonia and urea technology that is to be used inthe project. TPAO and IPRAS will back up the Company with administrativeservices and skilled personnel. The physical proximity of the IGSAS and IPRASplants makes this coordination possible. Both TPAO and IPRAS have ampleexperience in a broad spectrum of activities in the oil and petrochemicalindustries, and IPRAS has just successfully completed a major expansion ofits oil refinery.
vii. IGSAS' ex-factory prices are expected to average about US$49 perton of ammonia and US$62 per ton of urea. The ammonia price would be inline with international import prices in the mid-1970's for the smallquantities involved. The urea price would be about 12% below the currentdomestic price of nitrogenous fertilizers, although still about 14% above theexpected cif import price of urea of about US$55 per ton. Under these projec-tions and a prudent build-up of production in the initial years, the Company'sfinancial position is expected to be sound. Debt service after the third yearwould be covered about two times, and will continue to increase thereafter. Thefinancial rate of return of the project would be 14.7% before tax and 13% aftertax.
viii. The project would still be financially viable with adequate debtservice and an acceptable internal financial return (10.3% after tax) ifI(,SAS' ex-plant price of ura were lowered from US$62 to 55 per ton afterthe plant has reached capacity production in 1978. IGSAS production wouldthen be internationally competitive. The internal economic return of theproject would be 15.4% and would remain acceptable (9.7%) even under themost pessimistic assumptions regarding a urea cif import price of US$45/tonfor marginal priced commercial or barter sales.
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ix. The project faces the risks particularly common to. new plants andcompanies, such as the possibility of delays in construction and attainmentof capacity operations because of the difficult task of managing a projectof such complexity efficiently. On the other hand, technical difficultiesin process design and equipment should be minimal since the plant sizeenvisaged is still at the lower range of the new generation of ammonia-ureaplants and earlier technical dificiencies in these plants have been overcomebv now. The success of the project also depends to a large extent on theefficiency of the marketing and distribution arrangements and the rate atwhich the interest of the Turkish farmer in using increasing quantities offertilizer in general, and urea in particular, can be developed. The projectdesign gave particular attention to the requirements of adequate market develop-ment, and this area will need continuing emphasis during project implementation.
x. Based on the agreements reached during negotiations, the projectis suitable for a Bank loan of US$24 million for a term of 15 years, including4 years of grace.
I. INTRODUCTION
1.01 The Government of Turkey has asked for a Bank loan of US$24million to help finance the construction of a new fertilizer plant withan annual capacity of 248,000 tons of ammonia, of which 158,000 tons wouldbe converted into 274,000 of urea for consumption in Turkey. All urea willbe sold as fertilizer, but 90,000 tons per year of the ammonia not neededfor further processing into urea will be sold under long-term contracts tomanufacture caprolactam, the raw material for nylon, and diammonium phosphate,another fertilizer. The project would be executed by the State-owned Istan-bul Gubre Sanayii Anonim Sirketi (IGSAS) and is to be located at Izmit(Map - IBRD 3395), about 80 km from Istanbul, on the Asian shore of the Seaof Marmara, adjacent to an existing oil refinery. The refinery, which wouldprovide feedstock and fuel, is operated by Istanbul Petro Refinerisi AnomimSirketi (IPRAS), a subsidiary of the Government Petroleum Company, TurkiyePetrolleri Anonim Ortakligi (TPAO), the two sole shareholders of IGSAS.The plant is expected to cost US$57.8 million and to be compLeted in mid-1975.
1.02 The project was identified in mid-1970, during a joint IBRD/IFCsector review; it was appraised in Turkey in December 1970 and, followinga change in management and in the scope of the project, reappraised inNovember 1971 by Messrs. R. Carmignani, S. Cottrell and U. Finzi of theIndustrial Projects Department. Discussions were also held with the Mini-stries of Finance and Agriculture, the State Planning Organization (SPO),the Agricultural Bank of Turkey (ABT), and the Agricultural SupplyOrganization (Donatim).
II. THE COMPANY AND THE SPONSORS
2.01 IGSAS was formed in 1971 to build and operate the fertilizer plant.Its Articles of Association were established under the Turkislh CommercialCode. IGSAS will be operated along private enterprise lines. Responsibilityfor the Company's management rests on a five-member executive board nominatedby the shareholders. The share capital of IGSAS will amount ito TL 330million and will be subscribed by TPAO (60%) and by IPRAS (40%9).
2.02 TPAO has a capital of TL 1 billion, owned 60% by the TurkishTreasury, 35% by the Civil Servants and Army Officers Retirement Fund and theremaining 5% by state enterprises, private banks and individuals. It wasestablished in 1964, simultaneously with the Petroleum Law of that year,to explore for oil and gas, exploit oil fields and transport, refine anddistribute oil products. TPAO also has subsidiaries engaged in the manufac-turing of petrochemicals, oil refining and marketing of liquified gas. It
has a seven-member Board of Directors; four, including the Chairman-ManagingDirector, are appointed by the Government and three by the other shareholders.Its audited statements for 1970 show net profits of TL 275 million.
2.03 IPRAS has recently become a wholly-owned subsidiary of TPAO. UntilMarch 1972 it was 51% owned by TPAO and 49% by California Texas Oil Corpora-tion of New York (Caltex), which at that time sold its interest to TPAO,as agreed when IPRAS was formed in 1962. IPRAS operates the oil refinery(capacity 5.5 million tons of crude per year) next to which the project willbe located and from which it will receive its raw materials. In 1970, IPRAShad TL 151 million net profit. Both TPAO and IPRAS are expected to continuetheir profitable operations, but, due to ongoing investment programs oftheir own and other financial commitments, including their equity contribu-tion to the project, the liquidity position of the two companies will remaintight. More details on TPAO and IPRAS are given in Annex 1.
III. THE FERTILIZER INDUSTRY
A. Industry in Turkey
3.01 Turkish manufacturing output grew rapidly by about 10% per year inthe 1960s, particularly in new industrial materials and equipment industriessuch as steel, fertilizers and machinery and now covers 20% of net domesticproduct. However, industrial growth slowed down to about 4% in 1970 becauseof a shortage of imported industrial inputs, tight credit conditions andsome social unrest. Improving foreign exchange earnings sustained byincreased workers remittances from abroad permitted a relaxation of importrestrictions and improved growth in 1971. Turkish industry has been largelyprotected from international competition, and much of the stimulus toincreased manufacturing output has been created by import substitution.
3.02 Manufacturers are still heavily dependent on imported investmentgoods and industrial raw materials, which together totalled US$450 millionin 1962 and increased to US$800 million in 1970, over three-quarters of allTurkish imports. Industrial exports have been modest. They amounted toabout US$50 million per year in the middle 1960s and increased to aboutUS$100 million by 1970.
3.03 The potential for a more export-oriented economy was improved asa consequence of the 66% devaluation of the Turkish lira relative to thedollar in August 1970 and remsined even after the lira retained its goldparity in December 1971 when the dollar was devalued 8%. Industrial growthduring the current decade will depend heavily on an improved balance ofpayments and the Government's willingness to change radically the structureand improve the efficiency of the State Economic Enterprises. A more com-petitive industrial cost structure and an improved foreign exchange positionwill be necessary elements of continuing progress in trade liberalization.
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B. Fertilizer Production
3.04 Azot Sanayii, the State Econopic Enterprise for fertilizer, ownsand operates two plants at Kutahya, about half way between Ankara and Ismir,the only significant present producers of nitrogenous fertiLizer in Turkey.New plants for nitrogenous fertilizers, in addition to IGSAS, are beingconstructed at Mersin, on the Mediterranean, and Samsun, on the Black Sea.Mersin, which is expected to come into production in 1972, has a mixtureof private and public participation, while Samsun is 100% government-owned(Table 1). Production and imports of fertilizers have deve]Loped over thepast few years as shown below:
Nitrogen (N) and Phosphate (P) Fertilizer Supply /a in Turkey 1968-1971(In 1,000 tons of Nutrients)
----- in %-------1968 1969 1970 1971 /c 1968 1971N P N P N P N P N P N P
/a All potash (K) is imported. Recent annual consumption has been small,averaging about 11,000 tons nutrient.
/b See also Tables 2, 3 and 4./c Preliminary estimates.
3.05 Past consumption of fertilizer in Turkey has been met mostly byimports. Although domestic production of nitrogenous and phosphatic ferti-lizers doubled between 1969 and 1971 (when their equivalent sales valuereached about US$20-25 million at world prices), the import share of totalsupply still averaged about 58% in 1971.
3.06 Turkish fertilizer production is based partly on local resources(lignite and sulfuric acid from pyrites) and partly on imported raw materials(phosphate rock, crude oil, liquid ammonia and imported sulfuric acid). In1970, net foreign exchange savings after payments for foreign debt serviceand imported raw materials and supplies were about US$7 million, or aboutone-quarter of total fertilizer production value in that year.
3.07 The fertilizer industry has a number of problems. Due to thesmall initial demand for fertilizer in Turkey, initial plants were construct-ed with a capacity insufficient to provide economies of scale. For example,Kutahya I, the first Azot Sanayii plant, produces only some 30,000 tons ofnitrogen equivalent per year compared to the 126,000 tons planned by IGSAS.
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In addition, inexperienced management and deficiencies in raw material supplyand maintenance has inhibited full utilization of capacity. Furthermore,construction time for some of the recept additions to capacity have beenunduly long. As a result of all of these factors, Turkish fertilizer pro-duction costs are relatively high.
3.08 As the result of investments in the last three years in newfertilizer capacity and expansions of about US$120 million, production in-creases in the next few years will not only be substantial but are alsoexpected to make Turkey virtually self-sufficient in meeting its fertilizerneeds, except for potash which will continue to be imported. When existingplants and those under construction plus IGSAS operate at capacity, Turkeywould produce six times as much nitrogen and seven times as much phosphateas in 1970.
IV. THE FERTILIZER MARKET
A. Agriculture in Turkey
4.01 Agriculture accounts for about 30% of the net domestic product,70% of all employment and 75% of Turkey's foreign exchange earnings andprovides a large part of the raw materials for industry as well as animportant market for domestic manufacturers. It is heavily concentratedon cereals (mostly wheat), although fruit and vegetable growing has in-creased recently. Next to cereals and fruits, cotton is Turkey's largestcrop and is the country's single biggest export item. Rainfall is generallyadequate in the coastal regions where high-yielding Mexican wheat varietiesare grown but scanty and unreliable on the large Central Anatolian Plateauwhere cereals are grown by traditional dry farming methods.
4.02 Agricultural production (value added) increased at an averageannual rate of 3.4% from 1963 to 1967, but by only 1.9% in 1968 and a mere1.0% in each of the following years. The stagnation in the 1968-1970 periodwas due to poor weather conditions (which affected in particular wheat pro-duction), shortages of fertilizers when needed and a continued low levelof agricultural technology. Wheat output fell short of domestic requirementsin 1969 and 1970, and 650,000 and 700,000 tons were imported respectively.In 1971, good rainfall and increased use of Mexican high-yielding wheatvarieties (760,000 ha in Fall 1970 against 170,000 ha in 1967) resulted inrecord crops and a cereal surplus.
4.03 The recent Bank report on "Agricultural Policies and Problems inTurkey" (EMA-30a, Volume III, Annex I, March 10, 1971) described the majorproblems of Turkish agriculture and proposes changes to make possible anincrease in agricultural output. Briefly, it concluded that Turkish agri-culture needs a combination of aids, of which fertilizer, c.redit andextension services are particularly important.
B. Past and Present Consumption of Fertilizer
4.04 Past consumption, by type of fertilizer, is shown in Table 5 andsummarized below:
Turkey's Fertilizer Consumption, 1962-1971(In 1,000 tons of Nutrients)
4.05 Consumption increased sharply between 1962 and 1969 (34% per year),decreased by 12% in 1970 and increased again in 1971 up to near the 1969level. The stagnation in the 1970-71 period was due to supply constraints:shortage of foreign exchange to finance imports, inadequate planning ofimports, shortage of credit finance and inefficiencies of the distributionsystem. Had fertilizers and credit been available on time, actual consump-tion of fertilizer in 1971 might well have been some 20% higher. The chang-ing pattern of consumption (by regions, seasons and crops) is described inAnnex 2.
C. The Present System of Fertilizer Procurement and Distribution
4.06 The procurement and distribution of domestic and imported fertilizerare in the hands of: (a) three major State Economic Enterprises, namelyDonatim, the Association of Agricultural Credit Cooperatives, and the SugarFactories Corporation; (b) private dealers; and (c) a few sniall public organ-izations, mainly production and sales cooperatives and state farms. Therelations between distributors and the Ministries of Industry, Commerce andAgriculture, all of whom are involved in fertilizer production or trade,are shown in Table 6. The shares of sales accounted for by the major dis-tributor groups in 1969-1971 are given below:
N, P. and K Fertilizer Sales by Major Distributor Groups(% of total sales)
Ag. Credit Sugar Factories PrivateDonatim Coops. Corp. Dealers Others Total
4.07 Donatim, by far the largest single distributor of fertilizer inTurkey, is a government-owned agency controlled by the Ministry of Agri-culture. The Agricultural Credit Cooperatives combine about 2,000 creditcooperatives with some 1.3 million members in about 20,000 villages and arecontrolled by the Agricultural Bank of Turkey (ABT). There are 125 privatedealers who historically have been importing and distributing compoundfertilizers. They were not granted import allocations in 1970 and 1971 buthave been used by the public distributors to handle sales of importedfertilizers.
4.08 The distribution system worked satisfactorily up to 1969 when ithandled fertilizer with a 472,000-ton nutrient content, the largest annualvolume so far. As mentioned before, in 1970 and 1971, delays in theimportation of fertilizer because of foreign exchange constraints and ashortage of agricultural credit resulted in a decline of consumption. Baddebts and overdue repayments of farmers for fertilizer financing had increasedsharply in 1969 and 1970, reducing the funds available to the AgriculturalBank for new credit. The Government decided to reschedule payments over tenyears, rather than enforce collection. Distribution difficulties also havecaused imbalances in regional stocks and although fertilizer storage has beenadequate, improved coordination among various storage points is required.
4.09 The Government controls the distribution of all fertilizer, bothdomestic and imported, and sets ex-factory and retail prices of domesticand imported straight fertilizer. In contrast, prices of compound fertilizerand urea, which at present are all imported, are not controlled althoughtheir distribution is controlled through the allocation of import licenses.
4.10 Government restrictions, imposed to keep retail prices of domesticfertilizers low, have often led to distribution margins that are insufficientto cover costs and profits (Table 7). Losses on domestic fertilizer bygovernment-owned distributors are supported by budget subsidies and by theprofitable distribution of imported, uncontrolled fertilizer. This pricingpolicy discourages private distribution for all but imported fertilizer and,since private distributors have been unable to receive import allocationssince 1970, their share of distribution has not expanded.
D. Future Consumption of Fertilizer
1. Nitrogenous Fertilizer
4.11 Between 1962 and 1971 nitrogenous fertilizer consumption grewon average 30% per year but, as explained previously, has virtually stag-nated since 1969. Over the past few years, the Ministry of Agriculture, theState Planning Organization, the Turkish engineering firm TUMAS and US AIDhave made forecasts of the nitrogenous fertilizer consumption in Turkeythrough 1980. These forecasts are shown in Table 8 and are summarized below:
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Projected Consumption of Nitrogenous Fertilizers in ulrkey(In 1,000 tons of N)
Date ofProjection 1972 1975 1976 1977 1978 1980
a. Based on past trends /aUS AID 1969 377 523 601 -.a. n.a. n.a.Ministry of Agriculture 1968 600 700 740 800 840 900State Planning 1969 n.a. 600 n.a. n.a. n.a. n.a.Bank Sector Mission 4/1970 n.a. 559 n.a. n.a. n.a. 861TUMAS I 12/1970 474 761 858 951 1039 1196
b. TUMAS II /b 12/1970 405 635 715 790 859 982
C. TUMAS III /c 12/1970 385 543 593 645 697 804
/a Some judgement exercised to modify pure past trend projection./b Non-constrained potential end use analysis of urea.74 Based on growth trends in similar countries.
The above forecasts would suggest that in 1976, the expected first full yearof IGSAS' operations, consumption could reach between 593,000 and 858,000tons in terms of N, indicating annual growth rates of between 18% and 27%during the 1971-1976 period.
4.12 However, because of the various constraints on fertilizer consump-tion growth recently experienced, the Bank is assuming as its "most likelyforecast" only an annual growth of 15%, or a nitrogen consumption of 514,000tons in 1976 (Annex 3). Even this estimate assumes that the marketing programplanned by IGSAS and the Government as described further in paras. 4.19-4.22is implemented. Should it not be carried out, nitrogenous fertilizer con-sumption might reach only about 440,000 tons in 1976, equivalent to an annualgrowth rate of about 11%. The Bank's forecasts are summarized below:
Present and Projected Nitrogenous Fertilizer Consumption, 1969-1980
4.13 That Turkey has substantial potential for the continued growthof nitrogenous fertilizer consumption as projected is also suggested by thefollowing comparison with other Mediterranean countries of nitrogen applica-tion per hectare of arable land.
Nitrogenous Fertilizer Consumption in Mediterranean Countries
Consumption Increase in Consumption(in kg/ha of 1963-1 969arable land) (in % per year)
4.14 Between 1962 and 1971 phosphate fertilizer consumption in Turkey,grew by over 30% per year to a level of 195,000 tons of P, but,like theconsumption of nitrogenous fertilizer, stagnated in 1970 and 1971. Futuregrowth is expected to maintain an annual rate of about 15% to 1975 and 10%thereafter (Table 4), similar to the expected growth of nitrogenous fertil-izer use. Potash requirements are much smaller due to Turkish soil beingrelatively rich in potassium, and consumption in 1971 was only 13,000 tonsof K. Therefore, while the market for nitrogenous fertilizer in some otherdeveloping countries has been restrained by a lack of balance in fertilizeruse, this factor is not a problem in Turkey where a good ratio between Nand P fertilizers has already been attained. As the potassium content isbeing depleted, it is expected that potash requirements will increase at afaster rate than the two other fertilizer nutrients (N and P) over the longterm.
E. Nitrogen Balance through 1980 - Production, Consumption, Imports
4.15 The Bank's estimate of the most likely level of future consumptionof nitrogenous fertilizer in Turkey is compared below with the expectedincrease in local production:
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Nitrogen Balance in Turkey, 1970-1980(In 1,000 tons of N)
Production Actual P r o j e c t i o n sby Plant 1970 1972 1973 1974 1975 1976 1977 1980
/a After adjustments for stocks and consumption by feed industry.T7 After allowance for imports of compound fertilizer and urea for the
IGSAS seeding program (para. 4.21).
4.16 The above estimates indicate that if the IGSAS project is imple-mented, nitrogen production and consumption in Turkey would be about inbalance until 1976/77 when additional production capacity would have to beadded. On the other hand, should nitrogen consumption increase only at the"low range" forecast of para 4.12, Turkey would have a small net nitrogensurplus of 17,000, 38,000 and 9,000 tons respectively for the three years1975 to 1977 (Table 9). The Government, therefore, plans to withhold thefinancing or incentives for any new nitrogenous fertilizer plants until thesewould be required to meet expected demand. However, these surpluses may notdevelop or be smaller if there were even a minor delay in the completion ofthe IGSAS project or any other plant were to operate at lBess than capacity.Furthermore, in view of the Government's current efforts ito improve thedistribution system and the special promotional efforts that IGSAS plansto make, consumption growth seems unlikely to be as slow as the low rangeforecast would indicate.
F. Present and Future Market Share of Urea
4.17 No urea is presently produced in Turkey and IGSAS is expected tobe the only manufacturer of this fertilizer, a. least during its initialyears of operations. Although urea was introduced in Turkey only in 1969,its usage has developed rapidly and reached 63,000 tons in 1971 (28,000tons of N), accounting for about 12% of total nitrogen consumption. TheBank has studied the suitability of urea in Turkey and agrees with theMinistry of Agriculture, IGSAS and several other sources that urea (a) isagronomically suitable, particularly in the coastal areas, where moisture,soil types and cropping practices are appropriate, and (b) could success-fully be substituted for other types of nitrogenous fertilizers presentlyin use in coastal areas. Furthermore, urea enjoys the advantage of beinga concentrated form of fertilizer (46Z nitrogen) and promises to be moreeconomical than other nitrogenous fertilizer currently available in Turkey.
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This is so because IGSAS' anticipated ex-plant price is 10-13% less onequivalent nitrogen basis than the present price of other domestic nitrogenousfertilizers. Transport costs (again in terms of N) are also lower. IGSAShas proposed an ex-plant price for bagged urea of US$62 per ton and hasagreed to consult the Bank before establishing or altering its actual price.
4.18 The financial forecasts of IGSAS assume that the Company would sell179,000 tons of urea (82,000 tons of N) in 1976, its first full year ofoperations, and would increase sales to 274,000 tons of urea (126,000 tonsof N) by 1979 and thereafter. Despite the expected growth of the totalnitrogenous fertilizer market in Turkey, urea consumption is thereforepredicted to attain at least a 16% market share by 1976 and 18% by 1979.While such a share would appear modest both with regard to the 12% sharealready attained in 1971 and in comparison to other countries such as, forexample India, Indonesia and Pakistan where urea accounts for well overhalf of total nitrogen consumption, urea usage in Turkey would still naveto grow on average by almost 25% per year between 1971 and 1976. Neverthe-less, the Bank considers that such growth expectations are reasonable asdiscussed in greater detail in Annex 4.
G. IGSAS Marketing Plan
4.19 Supply constraints which hindered the growth of fertilizer con-sumption in 1970 and 1971 have been eased as a result of a relaxation ofimport restraints. Mersin, a major new nitrogenous fertilizer plant, isalso expected to commence production in 1972. Agricultural credit needsare being studied by the ABT under a Bank credit made in FY71 (Fruit andVegetable Credit, TU-257) and a Fertilizer Committee was formed in February1971 to coordinate production and distribution policy of fertilizer inTurkey. Present members of the committee include SPO, the ABT, Donatim,Azot Sanayii, the ACC, the Sugar Factories Corporation, five ministries andprivate distributors. In addition to these moves by the Government toimprove fertilizer consumption, a marketing program will be implementedspecifically for urea.
4.20 While it has been determined that urea can be used advantageouslyand efficiently in Turkey, particularly in the irrigated areas and coastalregions (Annex 4) where IGSAS expects to market most of its output (Map),there is need for a detailed sales analysis to define more precisely theCompany's marketing area and marketing strategy. Additional information isrequired on such subjects as (a) potential competition from other fertilizersin specific areas, (b) the number, location and requirements of potentialconsumer cooperatives and individual farmers, and (c) existing distribution,transport and storage facilities in the Company's marketing area. Duringnegotiations, the terms of reference for such a study and that IGSAS wouldhave responsibility in carrying out such a study and implement its recommen-dations after their approval by the Government, were agreed upon. The studyis to be completed by March 31, 1973, in time to help guide the Company'surea market expansion program during the projezt's implementation.
4.21 As part of the effort to build up the urea markelt in Turkey inanticipation of the Company's start of production in mid-1975, a ureaseeding program is necessary. To this end the Government has agreed duringnegotiations to import a minimum of 480,000 tons of urea during 1972-1975.At the same time, IGSAS will promote urea use in its future marketing area,including necessary soil testing and extension services. The Ministry ofAgriculture and the Ministry of Rural Affairs will participate in a programof urea trials, while the Agriculture Extension Service will promote theproper use of urea. It was also agreed that IGSAS will be appointed to theFertilizer Committee (para 4.19). Finally, to alleviate the constraintsin fertilizer consumption on account of shortage of agricultural credit, asbecame so evident over the past two years, the Government cluring negotiationsagreed to provide adequate credit facilities for urea sales during projectimplementation and thereafter. These facilities would be made availableunder the existing fertilizer purchasing credit system as needed and wouldbe supplemental.
4.22 Imported urea will continue to be distributed through the presentgovernment-owned network, while IGSAS will sell the urea it: produces eitherdirectly to cooperatives or through the existing distribution channels.
4.23 The 90,000 tons of armonia per year that IGSAS dces not use inthe production of urea will be sold as refrigerated liquid to Petro KimyaA.S. (PETKIM) and Azot-Sanayii under long-term contracts. PETKIM, whichis a subsidiary of TPAO and which manufactures petrochemicals, is cons-tructing a caprolactam unit in its plant adjacent to IGSAS while Azot-Sanayii is now building a 167,000 ton per year nitrogen equivalent diammoniumphosphate plant at Samsun on the Black Sea. PETKIM will receive over thefence 38,000 tons of ammonia per year and Azot Sanayii the remaining52,000 tons at respective ex-plant prices of US$52 and 47 per ton; thedifference between the two prices is due to the fact that P'ETKIM receivesammonia delivered at its plant and is therefore willing to pay a higherprice than Azot Sanayii which has to bear transportation charges from Izmitto Samsun. These prices are about in line with the estimated 1974-1975 c.i.f.price for imported ammonia for such relatively small quantities and the smallstorage capacity that is required under this arrangement for the two ammoniapurchasers.
V. THE PROJECT
A. The Facilities and Products
5.01 As mentioned previously, the plant would be located at Izmit, about80 km south-east of Istanbul, on the Marmara Sea, and would be erected withinthe bounderies of the site of the IPRAS refinery. There are good road andrail connections to the site and a jetty for receipt and delivery of water-borne freight. Most of the urea, principal product of the project, would beshipped out by sea. The main production facilities would be a single-stream
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ammonia plant with a capacity of 750 tons per day and a single-stream ureaplant with a capacity of 830 tons per day. Both plants would employ suitableproven technology. Full annual production would be 248,000 tons of ammonia,of which 158,000 tons would be converted into 274,000 tons of urea, leaving90,000 tons available for sale, as explained in 4.23 above. Urea would beproduced as low biuret 1/ (0.3%), low moisture prills and distributed inbulk or in bags without further treatment. The ammonia unit would be largeenough to benefit fully from modern technology (notably the use of centrifugalcompressors) and economies of scale (Chart 1).
5.02 Besides the main production units, there would be the usual off-sites and auxiliaries. Because of its location on the IPRAS refinery site,however, the project would be able to share, with minor additions, muchof the existing infrastructure and auxiliary facilities of the refinery suchas roads, office space, shops, laboratory and utility systems. Additionalhousing would need to be provided for IGSAS' senior staff. IGSAS and IPRAShave negotiated a long-term lease of the land for the plant site and of thefacilities to be used jointly. Another agreement covers certain services(maintenance, engineering, technical, purchasing, accounting and personnel)that IPRAS will furnish to IGSAS.
5.03 Power would be drawn from the public grid. With the completion ofthe Keban Dam, ample power will be available starting in 1974, and the powercompany is making special provisions for a steady supply to the IPRAS/IGSASsite.
B. Raw Materials
5.04 Feedstock supplied by IPRAS would be partly refinery off-gas,sufficient to produce, on the average, 220 tons per day of ammonia, and partlynaphtha, sufficient to produce, on the average, 530 tons per day of ammonia.The ammonia plant would be designed to operate exclusively on naphtha, ifnecessary, so that fluctuations in off-gas supply or short refinery shutdownswould not affect output.
5.05 IGSAS and IPRAS have negotiated contracts for the supply ofnaphtha, refinery off-gas and fuel oil. The contracts are firm for eightyears and renewable indefinitely. Base prices are the Turkish lira equivalentof US$20.83 per ton for naphtha, US$18 per ton for refinery gas and US$17.50per ton for fuel oil. The refinery gas price is constant, but the naphthaand fuel oil prices are subject to escalation by a formula related to theprice of crude purchased by the IPRAS refinery. These prices are in linewith current world prices.
5.06 An alternative raw material source might be, in the future, anatural gas field discovered in Thrace in Western Turkey, about 330 km fromIzmit. Its size is not yet known, but if it can provide natural gas oncommercially attractive terms, the IGSAS plant could be converted readilyto a natural gas feedstock. Another possibility would be liquefied naturalgas (LNG) from North Africa.
1/ An impurity found in urea and toxic to some vegetation.
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C. Ecology
5.07 For a description of effluents discharged by the proposed plant andthe project's pollution control, see Annex 5 The refinery has an AmericanPetroleum Institute (API) oily water separator, a skimming basin and a filterto treat the liquid effluent. There are also a storm sewer catch basin anda septic tank system for sanitary wastes. The water leavLng the plant meetsEuropean code standards. Turkey does not yet have a code of its own. Theammonia and urea plants would each have a separate liquid effluent treatmentsystem. Final design would depend upon the specific ammonia and urea processesrelected, but the system would be integrated with the existing effluent treat-ment system of the refinery.
.08 In general, a great deal of ground is still to lbe broken in thehandling of effluents by ammonia/urea plants. Few of them have installedor even worked out methods for dealing with effluents, except for urea dust.IGSAS visualizes the use of conventional filters and scrubbers for capturingurea dust and the burial of other solid wastes such as filter cake and spentcatalyst. Methods are envisaged for dealing with sulfur-bearing stack gasesand with carbon dioxide released in varying amounts by the ammonia plant.Until more specific plans can be worked out and proven, tall stacks (60 m)are being considered, both for the ammonia-urea complex and for the IPRASrefinery.
5.U9 The plant site is in an industrial area on the Gulf of Iznit wherethiere is a fresh breeze, so that stagnant masses of gaseous effluent would berare. Itowever, the refinery management is aware of the growing public con-cern about water and air pollution and plans to stay ahead of any require-ments. A pollution study at the refinery is now being conducted by the IPRASstaff. IGSAS has committed itself to execute and operate the project withdue regard to ecological and environmental factors.
D. Processes, Engineering, Construction, Management and Staffing
5.10 Mr. Turgut Ogmen has been seconded to IGSAS as acting General Manager.He is an engineer with adequate management talent and experience, most of whichhas been gained in the refining and chemical industries where he has worked in-veral positions. He is presently Deputy Plant Manager of IPRAS. Under theArection of the Acting IGSAS General Manager, primary responsibility for project:xecution would rest with a Project Team which will be set up especially toimplement the project and which will coordinate and monitor all phases of theproject. The Project Team would be primarily recruited from IPRAS personnelwith relevant experience from their recent refinery construction.
5.11 The Project Team would be assisted by a Technical Adviser, whichwould be a firm with appropriate engineering and construction experienceand up-to-date competence in ammonia and urea technology. This firm wouldassist the Project Team in all technical phases of its work, including pre-paration of design criteria, selecting processes, choosing contractors, andsupervising the engineering, construction and testing of the new facilities.
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5.12 Project execution would be done mainly by a General Contractor andsub-contractos as appropriate. Under the direction of the Project Team,assisted by the Technical Adviser, the General Contractor would act asengineering and construction manager and would propose experienced ammoniaand urea process vendors with whom he would enter into sub-contracts. IGSASreserves the right to conclude separate contracts with these process vendors,but in any event they are to be under the direction of the General Contractor.IGSAS would also contract separately with local firms for much of the civilwork and for some of the off-sites and auxiliaries. The specific divisionof work would be agreed in advance between IGSAS and the General Contractor.Both the Technical Adviser and the General Contractor would be chosen throughBank-approved procedures.
5.13 The principal responsibilities of the Project Team, TechnicalAdviser and General Contractor are more fully described in Annex 6 andshown diagrammatically in Chart 2.
5.14 The organization and staffing of the ammonia/urea plant once inoperation is shown in Chart 3. Total employment is estimated at about 250Turkish nationals, not counting some staff who would act both for IGSASas well as IPRAS. The Production Manager, Ammonia Superintendent and UreaSuperintendent will have to have up-to-date ammonia and urea manufacturingexperience. As it is unlikely that experienced Turkish nationals will befound for these key positions, IGSAS plans to employ competent expatriateswho will remain as long as required before Turkish nationals can take overthese responsibilities satisfactorily. Foremen and operators in the manu-facturing units and some of the maintenance personnel will be given severalmonths training in an operating ammonia/urea complex of comparable designand size.
5.15 The organizational, management and staffing arrangements duringboth project implementation and operations of the project are adequate butwill require close and continuing attention by the Bank to help assure speedyand efficient execution of the project.
E. Procurement, Use of Bank Loan and Regional Preferences
5.16 The proposed Bank loan of US$24 million would cover about 75% ofthe project's estimated foreign exchange requirements and finance primarilyequipment procured on the basis of international competitive bidding as wellas some services and interest during construction on the Bank loan. WhileTurkish suppliers would be allowed to bid under the Bank loan and wouldreceive a 15% margin of preference in bid comparisons, it is expected thatmost of the Bank loan would in fact finance goods and services from outsideof Turkey. The Government and IGSAS have given assurances that also thoseitems financed by other funds, i.e., shareholders equity and a loan from theState Investment Bank, would be procured in accordance with procedures whichwill ensure a reasonable degree of competition.
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5.17 The Bank loan would be used for the following purposes:
Allocation of Bank Loan
US$ taillion
Equipment and froight for ammonia and ureaprocess units and utility systems;catalysts and spare parts 16.6
Foreign exchange cost of engineering services :3.2Interest during construction on the Bank loan 1.8Contingencies 2.4
274.0
Foreign exchange provided by the Turkish Government will cover erection,pre-operational expenses and miscellaneous items.
5.18 Turkey is about to enter into a 22-year transitional affiliationwith the European Economic Community (EEC). While this affiliation stillrequires parliamentary approval within the member countries and Turkey, aninterim agreement has been placed into effect. The agreement stipulates afirst-round 5% reduction applicable to industrial goods imported from theEEC as against imports from non-EEC countries. However, since IGSAS isexempted from paying import duties in connection with the project, thispreferential agreement does not affect the bid evaluation of goods procuredwith the Bank loan.
F. Construction Schedule and Disbursement of Bank Loan
5.19 IGSAS is in the process of selecting a Technical Advisor.A detailed construction schedule, including a critical path schedule, isto be prepared by the Technical Adviser and submitted to the Bank bySeptember 30, 1972.
5.20 An estimate of disbursement rates for construction based onexperience for comparable plants and an estimated disbursement schedule forthe Bank loan is described in Table 10. Disbursement of the Bank loan issummarized below:
Disbursement Schedule of Bank Loan
Calendar Year US $ Millions
1972 1.01973 E.01974 11.01975 6.0
Total 24.0
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VI. CAPITAL COST - FINANCIAL PLAN
A. Capital Cost
6.01 The estimates of capital cost for the project are given in detailin Table 11 and are summarized below:
Capital Cost
% ofLocal Foreign Total Local Foreign Total Total Cost
Total 306.6 448.0 754.6 21.9 32.0 53.9 93.3Working Capital 53.9 - 53.9 3.9 - 3.9 6.7
Total Cost 360.5 448.0 808.5 25.8 32.0 57.8 100.0
6.02 The above capital costs are based on an estimate originally pre-pared in 1970 by TUMAS (a Turkish engineering firm and affiliate of HaldorTopsoe of Denmark) for an ammonia/urea plant with a then-planned capacityof 248,000/363,000 tons. It was revised in February 1971 for the somewhatsmaller plant now proposed. Cost estimates were also adjusted to reflectthe effect of the recent revaluation of the Turkish lira relative to thedollar. The increase of local costs in dollar terms is, therefore, coveredin the estimates and total project costs in dollars are now somewhat higherthan the original estimate. Since none of the engineering has been done yet,the estimate is based upon the cost of comparable plants. A contingency of15% was added because of the preliminary nature of the estimate and to coverunforeseeable technical cost increases. A price escalation allowance wasalso included which assumes an increase of 6% per year in the price ofimported equipment and 10% per year in local prices. Working capital in-cludes US$0.3 million to build up raw material inventories for initial pro-duction. The location of IGSAS adjacent to IPRAS enables it to keep these
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low. The remaining US$3.6 million of working capital will cover operatingexpenses and the build up of inventories required by capacity operations.These estimates are considered adequate.
B. Financial Plan
6.03 The sources of funds which would finance the project are shownbelow:
Financial Plan
Local Foreign Total Local Foreign Total(million TL) (million US$)
6.04 The Bank would cover about 75% of the estimated foreign exchangerequired for the project. TPAO and the Bank approached several other sour-ces of finance, including the European Investment Bank and the Kreditanstaltfur Wiederaufbau, but these institutions were unable to coimmit funds toTurkey beyond those already allocated for other projects. Also, in orderto keep project cost to a minimum, the Turkish Government wished to procureimported equipment under international competitive bidding, and in the ab-sence of other untied sources of finance, was willing to have the equivalentof US$8 million of the loan from the State Investment Bank (SIB) convertedinto whatever currency is required. The SIB loan would carry 10-1/2% in-terest for a term of 15 years, including 4 years of grace.
6.05 The proposed Bank loan would also be for 15 years, including 4years of grace, at the Bank interest rate (currently 7-1/4%). The loanwould be made directly to IGSAS and would be guaranteed jointly and sever-ally by TPAO and IPRAS, in addition to the guarantee of the Turkish Govern-ment. IGSAS would pay to the Government a guarantee fee of 1-3/4% perannum, bringing the total cost of Bank funds to IGSAS to 92. The terms ofthe proposed loans are satisfactory from the point of view of the project.
6.06 Equity would amount to TL 330 million (US$23.6 million) and beprovided by TPAO (60%) and IPRAS (40%) to give IGSAS a debt/equity ratio ofabout 60/40 at completion of the project. Although operations of TPAO andIPRAS are profitable, their liquidity has been tight due to large amounts
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of receivables due from Petrol Ofisi, a Turkish Government agency. Moreover,IPRAS has recently completed a major expansion and needs working capitalto finance its expanded operations. During negotiations, agreement wastherefore reached on a back-up, if necessary, by the Government for theobligation of TPAO and IPRAS to provide equity funds to IGSAS.
6.07 In the event of a capital cost overrun in the project, additionalfinancing (both in foreign and local funds) would have to be provided byTPAO and IPRAS on terms and conditions mutually acceptable to the Bank,the Government, TPAO and IPRAS. This commitment by the two sponsoringcompanies is backed up by a guarantee from the Government. Additionalworking capital funds, if needed, to achieve a current ratio of 2.0 at thebeginning of IGSAS commercial operations, would be provided by TPAO andIPRAS on commercial bank terms.
6.08 Provision for auditing of IGSAS accounts in conformance withaccepted accounting principles has been made.
VII. OPERATING COSTS, FINANCIAL FORECASTS AND RETURNSAND SECURITY PROVISIONS
A. Operating Costs
7.01 A detailed description of operating cost estimates and majorassumptions for various levels of production are given in Table 12 and forproduction at capacity these costs are summarized below:
The feedstock for the project includes naphtha, off-gas, and fuel oil fromthe IPRAS refinery for which IGSAS will pay prices in line with internationallevels. Long-term supply contracts for these raw materials which accountfor nearly 45% of operating costs have already been negotiated. Operatingand depreciation costs benefit both from the relatively low labor require-ments and project costs due to the sharing between IPRAS and IGSAS of someof the already existing infrastructure facilities and services.
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B. Financial Forecasts and Returns
7.02 Detailed projections of income statements, cash flow and balancesheets are contained in Tables 13, 14, 15 and are summarizied below:
Summary of Financial Projections(US$ million)
Income Statement and 1975 1976 1977 1978 1979 1980Cash Flow (6 mo.)
Current Ratio 2.3 2.4 3.4 3.8 4.3 4.7Debt/Equity Ratio 61/39 60/40 56/44 52/48 49/51 45/55Debt Service Coverage 1.5 1.5 1.7 1.9 2.0 2.0
7.03 The ex-factory price for bagged urea is assumed to be US$62 perton (TL 868). Sales of urea would be on credit, and a finance fee (at aninterest rate of 15% per year) would be charged for deferral of payment,which is assumed to take place after 90 days. The average ammonia salesprice to PETKIM and Azot Sanayii is US$49 per ton.
7.04 In accordance with Turkish law, a 25% corporate tax would be paidon pre-tax income and 23% of net income after tax would be allocated toordinary and extraordinary reserves. Dividends would be paLid out of netincome of the preceding year, after allocation to reserves. It is expectedthat dividend distribution would start with 6% of share capital in 1978 andwould increase to 10% in 1979, reach 13% in 1982 and continue increasingthereafter. As explained in para. 7.09 dividend payments would be subjectto certain financial tests.
7.05 Based on the projections set forth above, the Internal FinancialReturn (IFR) of the project would be 14.7% before tax and 13.0% after tax(Table 16).
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7.06 These projections of profits - and, therefore, financial return -are based on reasonable assumptions as to buildup of output to full capacityin 1978, 2-1/2 years after beginning of operations. Due to a need to in-crease inventory, the assumed sales buildup only reaches its maximum in 1979.
7.07 The debt/equity ratio would be 61/39 at the end of 1975 and wouldimprove steadily, reaching 56/44 in 1978 and 45/55 in 1980. Due to theassumed slow capacity buildup, the Company would be expected to show lossesduring the first two years of operation. For the same reason, the debtservice coverage would be only 1.5 in 1976 when repayments commence butwould rise to 2.0 by 1979 and improve steadily thereafter. The currentratio would be satisfactory, rising from 2.3 in 1975 to above 3 in 1977 andabove 4 in 1979. A cash buildup occurs in the projections because they donot include provision for future capital investment expenditures (except fornormal plant maintenance) and do not assume reinvestment of depreciation.The cash buildup provides a financial buffer during the early years, shouldinitial performance (7.08-7.09) fail to meet the projections.
7.08 The foregoing analysis indicates that the financial position ofthe project would be strong after the initial two years of operation. Acurrent ratio of 3.4, a debt service coverage of 1.7 and profitable oper-ations are expected by 1977. However, while the assumptions underlying thefinancial projections are realistic with respect to capital and operatingcosts and the buildup of production, it is also a fact that urea has beenused only to a limited extent in Turkey and the possibility can thereforenot be excluded that the buildup of sales will be somewhat slower than nowpredicted. However, if a slower development of the total nitrogenousfertilizer market or an inadequately executed urea marketing program occursso that IGSAS urea sales would be in line with the low range market projec-tions of para. 4.12 the financial return of the project is still expectedto be satisfactory. Debt service would be only about 1.3 to 1.4 during theinitial two years.
7.09 However, the rather ample provision for initial working capitalincluded in the financing plan and the obligation of the Company's share-holders to guarantee a current ratio of 2 at completion of the project, isdesigned to permit absorption of losses during the initial years of oper-ation. Cumulative losses in 1975-76 of as much as US$3.7 million comparedto the US$1.9 million loss now forecast, would still leave IGSAS with acurrent ratio of 1.9 at the end of 1976. To assure the preservation of theCompany's cash, IGSAS has agreed to limit its distribution of dividendsparticularly in the early years of operations; none will be paid during thefirst two years, nor may dividends be paid thereafter, if the current ratiowould fall below 1.5 as a result of such payment. In addition, IGSAS hasagreed to request Bank approval prior to undergoing any new capital invest-ment program.
7.10 Alternatively, if sales develop as now forecast and a capacityexpansion becomes desirable, the financial projections indicate that IGSASwould generate enough surplus cash during the first years of operation to
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contribute substantially to the cost of such capacity expansion. If IGSASwere to begin an expansion program in the years 1977-79 it could provideabout US$12 million from its own financial resources and still maintain acurrent ratio of 1.5 at the end of 1979.
C. Sensitivity Analysis
7.11 A sensitivity analysis has been carried out to determine theInternal Financial Return (after tax) of the project under adverse circums-tances. Although contingency and escalation allowances are already includedin the project projections (Base Case), returns have been calculated formore pessimistic assumptions. The results are as follows:
Capital Cost Operating Costs Selling Price I.F.R.(after tax)
$/ton X
a. Base case Base case 62 13.0b. Base case Base case 55 9.5c. +10% Base case 62 11.6d. +20% Base case 62 10.4e. Base case +10% 62 11.6f. +10% +10% 62 10.3
7.12 The analysis shows that, if the Government and the Company decidedto reduce the price of urea to US$55/ton from start-up, thus bringing it tothe estimated average international urea price (c.i.f. Turkey) in the mid-1970's, the project would still yield an acceptable, although marginal, IFR(9.5% after tax), but the debt service coverage would be only 1.2-1.4 duringthe three years 1975-1977 and unacceptably low. Debt coverage even at thislow price would however, still rise to 1.8 times in 1978 when full capacityis reached. Price reductions to US$55 in later years would, therefore, pro-vide satisfactory debt coverage as well as an internal financial return ofabove 10% and IGSAS could therefore sell its urea output at internationalprices after 1978. On fixing the urea price between US$55 and US$62 per ton,the Government and IGSAS would have a choice between favoring a cash build-up within IGSAS (to finance future expansion or to be distributed as divi-dends) or reducing the price of an essential agricultural input.
D. Risk
7.13 The project faces technical and commercial risks which are typicalof undertakings of this nature. The technical risks includie the possibilityof delays, due to difficulties in construction and start-up of such a largeand complex plant. These risks will be limited by the cooperation of theTechnical Advisor. Technical difficulties in process design and equipmentshould be minimal because of the plant size, which is at the lower size rangeof recently constructed ammonia-urea plants for which most technical problemshave already been solved. A commercial risk stems from the fact that ureais a relatively new product in Turkey. Therefore, the development of urea
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use has received particular attention during project preparation, and anappropriate urea seeding and market development program has been devised.Implementation of the program will need continuing attention during con-struction. On the other hand, even if the development of the urea marketis slower than expected, the risk of IGSAS being unable to service itsdebt would not be high. Since the projected ammonia sales for IGSAS arerelatively secure, the Company could sell only about 140,000 tons of ureain 1976 (instead of 180,000 as now planned) and still cover its debt service.Finally, distribution and credit will remain an area of substantial risk,depending on the success of the marketing plan (paras. 4.19-4.21) and theGovernment's ability to supply adequate funds (especially if collectionsfrom farmers do not improve) for financing fertilizer sales.
VIII. ECONOMIC JUSTIFICATION
A. The World Nitrogenous Fertilizer Industry
8.01 World consumption of nitrogenous fertilizers has increased about10.5% annually over the past fifteen years to reach a total of about 28.5million tons of N in 1970. Of this total, developing countries accountedfor 4.5 million tons. Despite this consumption growth, a rapid capacitybuildup during 1965-1970 led to a worldwide surplus in the nitrogenousfertilizer industry by the end of the sixties. Potential productivecapacibility 1/ in 1970 has been estimated to be 33-34 million tons, anexcess of 5 million tons over actual consumption. Excess capacity has beenlargely responsible for soft international urea prices which occasionallyduring 1970 were quoted below US$45-47 per ton f.o.b. bagged, the pricelevel estimated to be necessary to earn a 10% investment return in the ty-pical urea plant. The supply/demand prospects of nitrogenous fertilizerare reviewed in detail in Annex 7.
8.02 The future supply/demand balance is expected to improve graduallyand lead to a stabilization in prices. The potential 1976 production capa-bility of 50.4 million tons of N will only slightly exceed the expected1976 consumption of 47.5 million tons of N.
B. Future Urea World Prices
8.03 During 1969 and 1970, West European urea export prices were usuallyquoted in the range of US$45-47 per ton f.o.b. In 1971 a large contract forthe supply of urea from Japan to mainland China was concluded at prices ofUS$50-52 per ton f.o.b. Persian Gulf prices for large contracts to Indiawere US$53 per ton f.o.b. in 1969. All these prices are for bagged urea.While they may be considered as fairly representative, it must also be notedthat substantial international urea sales were transacted at considerablyhigher prices.
1/ Nominal capacity as reported less technical limitations such asallowance for production buildup of new plants.
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8.04 In view of the expectation that there will be some excess of po-tential urea supply remaining on a worldwide basis, it is estimated thaturea prices in the seventies will stabilize at levels slightly below US$50per ton f.o.b. When transport costs of US$6-8 per ton to Turkey from Europe,Africa or the Persian Gulf are added, the resulting expected c.i.f. importprice for bagged urea is in the range of US$53 to 57 per ton. This priceestimate does not take into account the recent currency readjustments nordoes it reflect any emergency sales or systematic low bidding due to tem-porary marginal pricing policies. Instead, it is an estimate of long-termprices in an industry where total supply and demand trends are expected tolead to price stabilization and no major technical improvements would bringabout any further substantial reduction in ammonia/urea production costs.
C. Domestic Selling Prices Compared to Import Prices
8.05 As mentioned above, IGSAS has proposed an ex-plant price ofUS$62/ton (TL 686/ton) for urea in polyethylene bags; this; is 10% to 13%less on an equivalent nitrogen nutrient basis than the current price of otherdomestic nitrogen fertilizers, but about 14% more than the average c.i.f.price of imported urea (uS$55 per ton) forecast for the mid-1970s. But thisforecast of international urea prices does not take into account the probableeffect of the recent currency realignments. Since the revaluation of Euro-pean and Japanese currencies is not expected to lead directly to changes indomestic Turkish fertilizer prices, a comparison of IGSAS prices with inter-national prices should take into consideration an average revaluation of about5% of the currencies of European and Japanese exporters in comparison withthe Turkish lira. Exporters may choose to absorb a part of the revaluationand not reflect its full impact on quoted prices, but the 14% nominal pro-tection of IGSAS production at pre-currency realignment price expectationsseems to be a conservative calculation and is acceptable. Finally, as dis-cussed in para. 7.12, the Company would require the US$62 per ton price onlyduring its initial years of operations and could - once it has reachedcapacity production - reduce its price to the expected level of internationalprices.
D. Expected Domestic Urea Retail Prices
8.06 The Turkish retail price to the farmer of urea was about US$77 perton at the end of 1971. Urea 1971 imports contracted by Dcinatim, the Gov-ernment-owned fertilizer distributor, cost US$55-56 per torn c.i.f. Turkey.Average warehousing and distribution costs for imported fertilizers areUS$8-9 per ton so that the past profit margin on urea distribution has beenparticularly high. (No duties are paid on imported fertilizer). Urea isable to command a price premium because it has a higher relative nitrogencontent than other nitrogenous fertilizers.
8.07 Distribution costs of domestic fertilizers are, on the average,slightly higher (US$10/ton) than those of imported fertilizer because ofthe ability to ship imported fertilizer to selected ports close to theregions where urea is used. Nevertheless, the present high margins on the
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sale of imported urea fertilizer would permit retail prices at least similarto those now in effect when IGSAS commences production. At the presentretail price of US$77/ton and an ex-plant price of US$62/ton, distributormargins would still exceed distribution costs by approximately 50%. Thequestion of appropriate distribution margins will be included in the IGSASmarketing study.
E. Internal Economic Return
8.08 Based on the Bank's projection of economic costs for inputs andoutputs, the Internal Economic Return (IER) for the project would be 15.4%.The calculation uses the average expected international prices for urea andammonia (US$55 per ton and US$42 per ton c.i.f. Turkey, respectively). If weassume that the opportunity cost of capital in the Turkish industry is about12%, this IER is satisfactory (Annex 8).
8.09 The calculation of the IER is based on investment and operatingcosts valued at world prices. For this purpose tradable items, such as rawmaterials, have been taken at international prices. Those local purchasesfor which international prices are not available were modified to an esti-mated international equivalent. The unskilled labor and transfer paymentcomponents of the local price were estimated. The prices used for the eco-nomic calculation exclude transfer payments and value unskilled labor at a50% shadow wage rate. No allowance was made for external economies directlyattributable to the project, such as training of labor and additional benefitsto agriculture resulting from improved marketing facilities.
8.10 The IER was subjected to sensitivity tests, using several assump-tions as to the economic costs of the most significant and uncertain factors:the import price of urea, the prices of raw materials used, and the cost ofinvestment (Annex 8). The IER is sensitive to the import price of urea, butremains acceptable (9.7%) even under the most pessimitic assumption of ac.i.f. import price of US$45/ton of urea on account of marginal commercialor barter sales. It is less sensitive to possible variations in capitaland operating costs. Even if both capital and operating costs increased10%, the IER would still be 11.9%.
IX. AGREEMENTS REACHED AND RECOMMENDATION
9.01 During loan negotiations, agreement was reached on the followingprincipal points:
(a) Coordination of expansion of nitrogen fertilizer capacityin Turkey with projected demand (para. 4.16);
(b) Consultation with the Bank on IGSAS urea prices (para. 4.17);
- 25 -
(c) Preparation of a Urea Marketing Study and implemenitationof its recommendations (para. 4.20);
(d) Implementation of a urea seeding program through imnportsof adequate quantities of urea during the projectconstruction period (para. 4.21);
(e) Appointment of IGSAS to the fertilizer committee (Ipara. 4.21);
(f) Long-term contractual arrangements between IGSAS, Azot Sanayliand PETKIM for the sale of ammonia (para. 4.23);
(g) Long-term contractual arrangements between IPRAS and IGSASfor the provision by IPRAS of administrative servi,ces toIGSAS and for the supply by IPRAS to IGSAS of naphtha,fuel oil and off-gas (paras. 5.02 and 5.06);
(h) Implementation of measures for adequate pollution control(para. 5.07);
(i) Appointment of an engineering firm to act as TechnicalAdviser (para. 5.11);
(j) Employment of competent production personnel includingtemporary use of expatriates as long as necessary (para. 5.14);
(k) Procurement of goods financed by Turkish funds will beconducted with procedures to assure a reasonable degree ofcompetition (para. 5.16);
(1) A detailed construction schedule is to be completed bySeptember 30, 1972 (para. 5.19);
(m) Guarantee fee of 1-3/4% to be charged by the Governmentto IGSAS, thus bringing the total cost of Bank financingto IGSAS to 9% (para. 6.05);
(n) Commitment by TPAO and IPRAS with back-up by the Governmentto provide TL 330 million of equity and to provide fundsboth foreign and local to cover any project cost overrun,(including working capital) that might occur (paras. 6.06and 6.07);
(o) Joint and several guarantee of the Bank loan by TPAO andIPRAS, in addition to the Guarantee of the Republic ofTurkey (para. 6.05);
(p) Auditing of IGSAS accounts (para. 6.08);
- 26 -
(q) Restrictions of dividends and new capital investmentprograms (para. 7.09).
9.02 With the indicated agreements, the proposed project constitutes asuitable basis for a Bank loan of US$24 million for a term of 15 years,including a 4-year grace period.
Industrial Projects DepartmentApril 12, 1972
IGSAS - Turkey
Annex 1Page 1
THE SPONSORING COMPANIES
1. The Project is sponsored by Turkiye Petrolleri Anonim Ortakligi(TPAO) and Istanbul Petrol Rafinerisi Anonim Sirketi (IPRAS). TPAO willprovide approximately 60% and IPRAS the remaining 40% of IGSAS equity(330 million TL).
TPAO
2. TPAO is an oil company controlled by the Turkish Governrent. Itis sometines called the Turkish Petroleum Corporation. It was establishedby a law which became effective simultaneously with the Pstroleum Law of1954 and hbs now been in operation for about 17 years. Its activitiesinclude exploration for oil and gas, exploitation of oil fields, transpor-tation and refining of oil, and distribution of oil products. In additionto its direct activities, TPAO has controlling participations in subsidiariesengaged in the production of petro-chemicals, oil refining and the marketingof liquefied gas and oil products.
3. TPAO has a capital of TL 1 billion. The shareholders are:
Turkish Treasury 60.4%Civil Servants Retirement Fund 27.14%Aruy Retirement Fund 7.7%Etibank (a State Enterprise) 1.7%Is Bank (a Private Bank) 1.0%Sumerbank (a State Enterprise) 0-5%Other (including private individuals) 1.39
100.0%
4. TPAD Is administered by a Board of Directors with seven members,of whom four (including the Chairman-Managing Director) are appointed bythe Government and the remaining three are appointed by the other shareholders.The Chairman-Managing Director, Mr. Selahattin Ozkan, is also Chairman ofIPRAS and Chairman of IGSAS.
5. TPAO produces 1.1 million tons per year of crude oil, owns 540 kmsof oil pipeline (18 inches in diameter, with a capacity of 70,000 barrels perday) and operates the Batan refinery which has a throughput of 800,000 tonsper year, now being expanded to 1.5 million tons per year. The company isconstructing a second refinery at Izmir which will have a throughput of threemillion tons per year and is scheduled to be completed by the end of 1972.A further expansion of the Izmir Refinery and ccnstruction of a new refineryon the Black Sea are under consideration.
Annex 1Page 2
6. TPAO's participations consist of:
a. 100% ownership of IPRAS (see below);
b. A 55% share in PETKIM, which operates a petrochemical plantat Izmit near the IPRAS refinery and the projected site ofthe project;
c. A 51% share in IPRAGAS, which distributes liquefied gas;
d. A 55% share in ISILIT, which markets petroleum products;and
e. A 19% share in TUMA.S, an engineering firm.
7. Net profits of TPAO (after taxes) increased from TL 202 millionin 1968 to TL 235 million in 1969 and to TL 275 million in 1970. Exactinformation on sales and figures on operating costs are not included inthe annual reports, and TPAO's management i3 reluctant to disclose additionalinformation, for fear it could become available to competitors.
8. TPAO is presently engaged in a very extensive expansion program(Batman, Izmir and Black Sea refineries). Financing of local currencyexpenditures for the program both for construction and additional workingcapital requirements) is being provided by loans from the State InvestmentBank. Should the conditions of the Turkish economw result in a period ofcredit stringency, State Investment Bank loans might become less easilyavailable.
9. Another element of uncertainty in TPAO's liquidity situation resultsfrom the fact that Petrol ofi.i (a Turkish Government Agency engaged in thepurchase of oil products on behalf of public entities and in the distributionof oil products) has delayed payments to TPAO, which is therefore carrying avery high amount of receivables. TPAO has partially offset the shortfallin its receipts by delaying payments of taxes due to the Government. TPAO'smanagement and the Turkish Government are aware of the need to reach anorderly solution of the problem. One of the possibilities being consideredis the incorporation into TPAO of the Petrol Ofisi.
10. As a result of the factors discussed above, the ability of TPAOto provide equity funds and any overrun furds that may prove necessary tocomplete the project depends upon decisions to be taken by the Government.It is for this reason that the Government has agreed to guarantee the provisionof equity and cost overrun funds necessary to complete the IGSAS project.
IPRAS
11. IPRAS owns the oil refinery near which the Project would be built.It is incorporated under the Turkish Commercial Code as a private company,although all of its shares belong to TPAO. The California Texas Oil Corporation
Annex 1Page 3
of New York (Caltex), a joint venture of the Standard Oil Co. of Californiaand the Texas Oil Co. owned 49% of IPRA.S until March, 1972, at which timeit sold its interest to TPAO in accordance with an agreement entered into bythe two parties when IPRAS was formed. The Board of Directors of IPRASis composed of five members, all appointed by TPAO.
12. The IPRAS refinery started operations in 1963 with an annualthroughput of about one million tons of crude. Annual throughput increasedto about 2.1 million tons in 1970 (about 30% of all crude processed inthe three refineries now in operation in Turkey). The construction workfor a major expansion (a new refinery contiguous to the existing one) wascompleted at the end of 1971 and will increase the annual throughput to5.5 million tons in 1972. Capacity is to be increased gradually in thefollowing years through the removal of bottlenecks up to seven million tonsper year in 1976.
13. IPRAS's net profits (after taxes) increased from TL 113 millionin 1968 to TL 126 million in 1969 and TL 151 million in 1970. Neitheramount of sales nor information on operating costs are included in the annualreports, and the management of IPRAS is not willing to dLisclose them.
14. Profitability of IPRAS operations is good and will improve furtheras a consequence of the recent expansion. However, in the next few yearsthe liquidity situation of the company will be very tight because of the needof additional capital to finance expanded operations and because of the delaysin payments by Petrol Ofisi (same as for TPAO). As in the case of TPAO, theTurkish Government has agreed to guarantee the obligation of IPRAS to provideequity funds and overrun financing to IGSAS.
Industrial Projects DepartmentApril 12, 1972
IGSAS - Turkey
Annex 2Page 1
REGIONAL AND SEASONAL CONSUMPTION OF FERTflItERSFOR DIFFERENT CROPS IN TUIRKM
1. The moist coastal regions consumed about 80% of all N used inTurkey in 1969 (nearly 90% in 1966). In the case of P, which is lessimportant on moist than on dry lands, the four coastal regions accountedfor only 60% of total consumption in 1969 as against a share of 50% in 1966.
Turkey: Recional Consumption of Fertilizer(in thousand tons of N and percentage of
N and P)Bank Projection
1963_ 1969 1975
Region
I Central North 7.0 24.9 5.0 16.0 48.9 10.7II Aegean 14.4 10.5 19.0 13.0 88.0 19.3III Marmara 16.0 16.8 14.0 14.0 55.5 12.2IV Mediterranean 9.2 7.8 34.0 29.0 107.6 23.6V North EAst 2.0 2.4 2.0 1.0 U.8 2.6VI South East 9.8 3.3 4.0 6.0 18.2 4.0VII ELack Sea 34.5 7.1 13.0 4.0 52.8 11.0VIII Central East 8.9 12.1 4.0 4.0 24.2 5.3IX Central South 7.2 15.1 5.0 13.0 48.0 10.5
Total 100.0s/ 100.0 100.o!/ 100.0 455.0 100.0
Equivalent to 39,200 tons of N in 1963 and 245,200 tons of N in 1969.
2. About 50% of all N consumed in Turkey in 1970 was used on wheat(35% on high-yielding varieties), about 15-18% on cotton, about 10% onsugar beets and another 10% on fruits and vegetables.
Fertilizer Consumption by Crop(in thousand tons of Nutrient)
The possibility of increasing fertilizer us. on cotton and sugar beetsis small, but there is ample room for increased use on wheat, fruits andvegetables both in the coastal areas and on the Central Anatolian Plateau.
3. Fertilizer application in highly seasonal in Turkey. Presentlyabout 70-75% of N is applied from Januairto June and about 60% of P isapplied in the last four months of the year. The seasonal pattern must betaken into account in programming fertilizer distribution to ensure optimumuse of facilities for transport, storage, credit and imports.
4. The rapid increase in fortilizer consunption in the late 1960sup to 1969 was attributable to:
a. a we J conceived extension program supported by the FAO
b. a government distribution system which made availableadequate supplies of fertilizer ibsre needed; andmay be more important,
c. the provision of sufficient credit on liberal termsby the ABT since the mid-1960s.
It was helped by the favorable experience of farmers, mainly with cashcrops and in the coastal areas.
5. As a result of foreign exchange and TL shortages, fertilizersarrived too late in 1969. At the same time, its sale was inhibited by ashortage of credit in-late 1969 and 1970 both for the procurement andstorage of fertilizer by distributors and for retail buying by farmers.This credit stringency was the result of a svDrtage of cash in the ABTFertilizer Financing Fund which provides about 80% to 85% of all fertilizercredits and in turn was attitbutable to:
a. a levelling off of the ABT's contribution to the Fund, and
b. poor recovery of ;2ans mostly from farmers on the CentralAnatolian Plateau-.
Fortunately, an AID emergency loan to the Fund in October 1970 of TL 243million enabled it to grant credit to distidbutors to purchase donosticfertilizer, thus both improving the flow of fertilizer to distributorsand helping reduce excessive stocks at plants.
The Freedom Fro HMunger Campaign Program of FAO did much to promote theuse of fertilizer in Turkey.
2/ The average credit cycle for money advanced to distributors to financetheir own purchases and sales to the farmers lengthened from 22 monthsto about 60 months.
Annex 2Page 3
6. Although the Government has taken several steps to solve retailcredit and marketing problems for 1971 (including a cash down payment byfarmers on fertilizer purchases financed by ABT, no credit to delinquentfarmers and an increase from TL 4I,000 to TL 15,000 on allowed borrowingsfor fertilizer purchases), the general credit situationl/, coupled with adefinite shortage of supply (only 15,000 tons of N were available in stockbefore the Fall 19'71 season), led to a similar stagnation of fertilizeruse in 1971.
1/ Available resources from the Fertilizer Fund (the authorized Fund levelis TL 1.7 billion) are, given the low repayment rates by farmers, notsufficient to finance procurement and retail sales for a program costingabout TL 1.5 billion. It has been estimated that about half (or TL 400million) of the Fund's resources for retail credit was frozen in 1970O
Industrial Projects DepartmentApril 12, 1972
IGSAS - TurkeyAnnex 3Page 1
PROJECTIONS OF NITROGENOUS FERTILIZER CONSUMPrION
Nitrogen Consumption in 1971
1. Fertilizer supply sources and consunption (1968 to 1971),together with the Gvvernment Distribution Program for 1971 are shown below:
Fertilizer Supply Sources and Consumption(in thousand tons of Nutrient)
2. The Bank's estimate of N consumption in 1971 (255,000 tons ofN) is shown in the following table. It falls short of the target establishedby the original Government program (368,000 tons of N) as well as the revisedprogram (June 1971) of 319,000 tons of N.
Bank Estimate of 1971 Nitrogenous FertilizerConsump =on
(in t ousand tons of N)
1971Production 86.
ImportsPermits issued andorders placed 190.3
Stock - beg. of period 34.7Stock - end of period -56.3
Total 23T.1
Annex 3Page 2
3. The major reasons for the Bank estimate are explained as follows.The January-to-June 1971 fertilizer supply was insufficient to meet thefirst six month consumption (70 to 75% of the yearly consumption) impliedin the Government target. The reasons are:
a. The Government was unable to finance the entireTL 1.7 billion estimated wholesale cost of the 1971program; (see Table A, page 5). The estimateddeficit was nearly TL 1 billion as of March 1971(see Table B, page 6).
b. Production will be lower than forecasted by theGovernment due to delays in start-up of the Akdenizplant at Mersin.
c. The distribution system eVperienced a number ofbottlenecks in 1970 and 1971 (see para 4.08).
4. Effective demand in 1971 has also been lower than anticipated bythe Government. Retail credit resources frao the Fertilizer Financing Fundwere insufficient to finance the farmers' demand. Also, although adequateon most crops in coastal regions, the farmers' financial return ratios forfertilizer application are unsatisfactory for local native wheat in theCentral Plateau; demand by wheat growers will fall short of Governmentexpectation in this region.
5. Most of these critical factors (Government finance, credit,distribution efficiency, fertilizer pricing) will need time to be correctedand will continue to affect adversely future fertilizer consumption. TheGovernment, however, recognized these weaknesses and established (inFebruary 1971) a committee under the Ministry of Agriculture for "TheReorganization of Fertilizer Supply and Distribution."
Projection of Nitrogen Consumption - 1972-1980
6. The results expected from this decision over time, together withvarious other events affecting consumption -- new plants entering into pro-duction, new distribution agencies, etc. -- led the Bank (a) to forecastdifferent growth rates for N consumption during three intermediate periodsand (b) to show three alternative assumptions (likely consumption, low andhigh range) depending on the Government's policies achievements. Growthrates for the period 1972-1975 are shown in the Table below and take intoaccount projections made by others, consumption growth in other developingcountries, discussions with fertilizer expertsj/, and the Bank's evaluationof factors influencing fertilizer consumption growth.
1/ Mr. John Hill (US Aid Fertilizer Advisor) and Mr. Kiroglu (Ministryof Agriculture).
Annex 3LPage 3
Projected Annual Ratesof Growth of Nitrogenous Fertilizer Consumption - 1972 to 1980
(in % per annum)
Each yearAssumption In 1972 & 1973 In 1974 & 1975 frctn 1976 to 1980
Lcw range 8 12 14Likely 12 14 15 tc 12High range 15 17 16 to 10
Growth rates for the period 1976-1980 are those obtainecd along three logisticcurves- -- one for each of the three alternative assump;tions -- fitted overthe period 1965-1975.
7., The forecasts are also dependent on the followning general assunp-tions:
a. No serious constraints due to a defective distributionsystem.
b. Proper Government pricing policy for fertilizer and 2/agricultural products to maintain minimum return ratios-of 2.5 to 3 an most crops.
c. Increase of fertilizer credit at a rate of 12 to 15%in the medium and long range.
8. More specifically for each of these periods the Bank made thefollowing assumptions on the major factors determining increases in nitrogenousfertilizer consumption:
1972-1973. Primarilys the IGSAS promotional programin paras. 4.19 - 4.22 and the start up of thei Mersinplant will increase supply and consequently consumptionthrough removing supply limitations.
1974 - 1975. The general condition of the fertilizersector will improve following the IGSAS marketingmeasures and increased local supply of fertilizer.one fourth of the N supply and part of the distributionimprovement are directly atributable to the :[GSAS plantand new marketing program.
1/ Growth rates along logistic curves, which best fit fertilizer usedevelopment in most countries with already high fertilizer consumptionlevels, successively are slow, increase rapidly, slow down and leveloff.
2/ Return ratios express the farmer's incremental inc0ne from improvedcrops relative to the incremental cost of fertilizer use.
Annex 3Page 4
1976-1980. Growth rates will level off and drop(likely and high range assunmtions) following the trendalong the mentioned logistic curves. Application ratesper hectare will stabilize in coastal areas and therewill be difficulties in increasing fertilizer use onthe Central Anatolian Plateau.
9. On the basis of growth rates given in the above Table, the Bankhas projected N conwumption through 1980 in Table 8 which compares theBank's projections with those of other sources.
10. It can be seen from Table 8 that forecasts of N consumption differsubstantially. This is pTivarily due to the earlier dates of sorne of theforecasts which thus did not take into account the stagnation in 1970 and 1971.The TUMAS II forecast is based on a detailed end-use analysis for fertilizerapplication by region and crops. However, while this method is essentialto determine potential demand of fertilizer, it does not take account ofconstraints such as inadequate availability of credit or distributioninefficiency that diminish the potential demand estimates to a consumPtionforecast.
industrial Projects DepartmentApril 12, 1972
Annex 3Page 5
TABLE A
COST OF 1971 flRILIZER PROGRAM(Million of TL)
Agr. BankRetail Credit
Tons of Cost iii Retail Needed atFertliizer Distributor Cost to 56% of DistributorAll Grades Warehouses Farmers Retail Cost Profit or Loss
Domestic Production 1,371,000 1,o44.8 999.8 559.9 - 44.9
Imports 737,000 650.9 728.3 407.13 77.4
TOTAL 2,108,000 1,695.7 1, 728.1 967.7 32.5
Note: Stock on hand January 1, 1971 estimated at 76,000 nutrient ton valued atTL. 2547 per nutrient ton warehouse cost or a total wholesale value ofTL. 193.6 million. This has already been financed by Agricultural Bankloans to Donatim and Agr. Credit Coops. in 1970.
Sugar Company and Production and Sales Cooperative finance own retail sales.For 1971 this is estimated at 14% of total retail sales or TL. 236 million.Cash purchases and minimum 25% cash payment on all retai]L credit by farmersestimated at TL. 520 million or 30% of balance not financed by Sugar Companyor Pruduction and Sales Cooperatives; thus the estimate that AgriculturalBank FLnancing Fund will need to finance 56% of retail s.Les if Governmenttargets are to be met.
Anex.3Page 6
TABLE B
1971 PERTILIZER FINANCIG ESTIMA.TE
Million of TLAgricultural Bank Fert. Financing Fund
From Bank funds and retail credit repaymentImports Credit for Spring 1971Domestic Credit for 1971 to 292
Sales and Production Coops.
From capital and general operating budget loan 90from Agr. Bank 90
Donatim
Operating Budget 1212
Agri. Credit Coops.
Capital and operating budget 48Retail credit repayment at 40% of 380 mil 154
202
Sugar Co.
Capital retail credit repayment and Sugar Bank 120borrowing 120
Tea Coop.
Capital retail credit repayment and general 32operating budget from Agr. Bank 32
2. About 63,000 tons of urea were used in 1970 (i.e. about 11.5% ofthe total estimated nitrogen consumption). Other types of nitronenousfertilizers used were amionium sulfate (AS); Calcium Ammonium Nitrate (CAN);Diammonium Phosphate (DAP); and compounds as given in the following table:
Types of Nitrogenous Fertilizers Used in 1971(in 1,000 tons of N)
3. The table below shows the Bank projections of urea consumptionand imports which will gradually increase from 1972 through 1974 as partof a urea seeding program. Imports will level off in 1975 (start-up ofthe IGSAS plant and phase-out in 1976).
ProJections of Urea Consumption and Imports(in 1,000 tons of product)
4. Finally the following table shows the share of urea in totalnitrogen consumption in Turkey through 1979; it indicates thaturea suppliedby the IGSAS plant (and conservatively supposed to be consumane during theyear of production) will represent a maximum of 18 to 19% of the totalnitrogen consumption when the plant will operate at full capacity.
Urea Consumption as Percentage of Total N Consumption(in 1,000 tons of N and %)
1971 1973 1975 1977 1979
Total N consumption 255 350 4s55 565 672N as Urea 29 55 83 112 126N as Urea as % of Total N
Consumption 11.5% 15.5% 18.3% 19.8% 18.8%
5. Urea, which enjoys the advantage of being a relatively concentratedform of fertilizer (46% of Nitrogen) and is therefore economic to transport,has however the disadvantage of being converted rapidly to aimonium car-bonate which is unstable and dissociates to give tree ammonia (nitrogen)that may be lost to the air if the change occurs on or near the soil surface.This problem is exacerbated under certain soil (alkaline soil) and culturalpractices (top dressing in dry conditions).
6. Agronomists agree that in Turkey urea is applicable on all crops inregions where soil moisture is sufficient (i.e. coastal areas), but expectbetter results on certain crops like vegetables, cotton and sugarbeet than onother crops. They agree that urea will have little effect on wheat in theAnatolian Plateau due to low moisture and cold in winter, and recomnend usingDAP because of a sufficient N content in DAP and of better crop responses toP205 under the dry conditions of the plateau. The Tennessee Valley Authority"Report on the Development of the Turkish Fertilizer Industry" - August 1966indicates:
AIn1x 4Page 3
"A brief review of the general soil types and cropping practicesindicates that, for future production facilities, almost anynitrogen fertilizer can be considered, especially if they areessentially acid in their reactions with soil. Urea, since itis essentially acid in reaction, should be highly suitable."
7. Fertilizer trials, although relatively limited with urea, showedthat urea was in all cases (when applied as basal dressing or as top dress-ing under irrigated or moist conditions), as efficient as any other type offertilizer. On the dry Anatolian Plateau it is recommenLded that nitrogenbe applied half as basal dressing and half as top dressing. In the coastalareas or under irrigated conditions, it is recoamended to apply one-thirdof nitrogen as basal dressing and two-thirds as top dresising.
8. Since the form under which the nitrogen will be supplied to thesoil is crueial to avoid nitrogen loss, the Bank has made a detailed enduse analysis of nitrogenous fertilizers for the year 1975 - the firstyear of production of the IGSAS project - and has estimatted the potentialurea market in Turkey for that year as shown in the table on the follow-ing page:
Nitrogenous Fertilizers: Ed Use Analysis -17
Type of Crop on Irri- Potentialgated (I) or Non-Ir- Rate of Total Userigated (NI) Land Area Sown A lication N use of Urea
(000 CKg of N/ha) (000 (000 tonshectares) Toas of N) of N)
High yielding wheat I 400 110 44 40NI 2,700 40 108 45
Local wheat NI 4,780 15 71 20BarleyA4aize/Padd y I 320 70 22 12
Other Cereals NI 3,500 12 42 10Cotton I 550 80 44 30
NI 130 15 2 -Oilseeds I 100 40 4 2
NI 270 60 16 3Sugarbeets I 150 130 19 15
NI 60 60 4 -Potatoes I 130 75 10 5
NI 50 - - -Vegetables I 420 60 25 15
NI 210 - - -Fruits/Olives/ I 320 35 11 5Vineyards NI 1,530 10 15 3
Other Crops 3,100 18 5
Sub-Totals I 2,470 180 210NI 16,250 275
Total: 18,720 455
Annex XPage 4
The projection indicates that a quantity of about 210,000 tons of N couldbe used as straight urea in Turkey. Even more urea could be used if partof it is used through adequate urea-based compound fertilizers (like urea-ammonium phosphates mix or urea-phosphates). There is an annual provisionfor about 40,000 tons of compound fertilizers in the Bank projections ofconsumption.
9. The 1975 estimsted agricultural use of urea is about 83,000 tonsof nitrogen (or which 30,000 tons will be produced locally) and the totaloutput of the IGSAS plant by 1978 will be 125,000 tons of N, out of whichabout 10,000 tons will be used by the compound feed industry.
10. The expected use of urea in 1975 will, therefore, amount only toabout 40% of the potential use by Turkish agriculture. The expectedmaximum supply of urea for agricultural use (to be reached by 1978) willalso only amount to 55% of the potential use of urea in 1975, i.e. 3 yearsbefore the plant reaches full production.
Industrial Projects DepartmentApril 12, 1972
IGS LS-TurkeyAxMex 5Pagei 1
ECOLOGY: LIQUID SOLID AND GASEOUS EFFLUENTS
Liquid effluent
About 7,500 liter per hour of wash liquor containing 0.1% to0.5% NH3 may be discharged from the ammonia plant, although it may bepossible to utilize this liquor in the urea plant depending on the ureaprocess. There may be 19,00-22,500 liter per hour of scrubber liquorfrom the urea plant containing approximately 10 kg per hour of nitrogenas ammonia. This again depends upon the process finally selected, andthe method used to suppress dust in the prilling section. Since nocooling towers are planned there will be no blow-down to deal with. Itis possible, however, that the closed cooling water system will have tobe purged occasionally. There will be boiler blow-down containing theusual water treating chemicals but no details are yet available. The oilywaste associated with the handling and burning of large tormages of naphthaand fuel oil can presumably be directed to the existing IPRAS system.Gland water from cooled machinery stuffing boxes will not create seriousproblems. Sewage will be disposed of in the IPRAS system where septic tanksare used.
Solid effluent
Depending upon the process selected there will be filter cake tobe disposed of which may contain oily residues, urea and allied compounds.A certain amount of urea dust is generated in the prilling, handling, andbagging operations for which scrubbers, bag filters and the like will beneeded. Periodically spent catalyst in considerable volume must be disposedof and can be buried on plant property.
Gaseous effluent
Depending upon the quality of fuel used there may be considerablesulfur compounds from stack gases from reformer furnaces and auxiliaryboilers. There is a sulfur recovery unit in the IPRAS refinery for petroleumproducts but not for stack gases. It is possible that stack gases could berouted through a similar unit. Meanwhile it is planned to raise IPRAS stack to aheight of 60 m and to plan IGSAS stacks similarly. Although there willbe some leakage of ammonia, this will be kept at an absolute minimum both toprevent direct loss and to minimize corrosion of equipment and structures.Depending upon the balance between the rates of operation of the ammoniaplant and the urea plant, considerable tonnages of carbon dioxide will bereleased. Plans for collecting or treating waste carbon di.oxide have notbeen formulated.
Very few ammonia/urea plants have so far installed or even formu-lated means for dealing with their effluents, with the exception of ureadust. Hence, considerable new ground must be ploughed.
Industrial Prjecots DepartmentApril 12, 1972
IGSAS-TurkeyAnnex6Page 1
RESPONSIBILITIES IN PROJECT EXECUTION
Project Management and Execution
IGSAS would be under the general direction of a Greneral Managerappointed by and responsible to the IGSAS Board of Directors. Under thedirection of the General Manager, the entities responsible for the designengineering, procurement, construction, testing and initial operation ofthe new facilities would be:
1. The IGSAS Project Toam2. The Technical Adviser3. The General Contractor
The functions and duties of these three entities would be as follows:
The IOSAS Project Team
1. Represent IGSAS in dealings with the General Contractor andother external agencies directly concerned with the design, engineering,procurement, construction, testing and initial operation of the new facili-ties, relying upon the Technical Adviser for appropriate assistance. Thesefunctions will be generally designated as Construction of the new facilities.
2. Agree with the General Contractor on the coordination of hiswork, which will be related mainly to the ammonia and urea process units andcertain off-sites and auxiliaries., with the work to be handlled directly bythe IGSAS project team, which will be related mainly to iil. w and tocrtain of the off-sites and auxiliaries, which can be handlled to advantageby local firms hired by IGSAS. All to be in accordance with the terms ofthe contract between IGSAS and the General Contractor.
3. Coordinate the activities of the General Contractor and anyother contractors or external agencies with IPRAS Refinery operations.
4. Secure appropriate assistance from TPAO and/or IPRAS duringconstruction of the new facilities.
5. Assist General Contractor,in dealings with local, state andfederal agencies in all matters affecting construction of the new facilities,such as:
a. Seocring necessary permits and licenses for construction.b. Compliance with rules and regulations regarding employment
of local labor and expatriates.c. Expediting materials and equipment through custons.d. Application of income and excise taxes.e. Procuring adequate insurance.
6. Scrutinize proposed plans and designs with a view to obtaininga reliable installation.
7. On behalf of IGSAS approve all bidding documeonts, evaluation ofbids and issue all purchase orders (which will normally be prepared by theGeneral Contractor).
Annex 6.Page 2
8. On behalf of IGSAS verify and approve for payment all vouchersfrom the General Contractor and other agencies.
9. Handle local purchasing if necessary.
10. Scrutinize all progress schedules and progress reports andinitiate corrective action if needed.
U. Generally monitor all phases of the project.
12. Give overall impetus to the project by issuing necessary di-rectives, removing local bottlenecks, dealing with local authorities, etc.
The Technical Adriser
The Technical Adviser would assist the IGSAS Project Team in thefollowing:
1. Develop design data in sufficiert detail to obtain responsiveand comparable bids from reputable and competent Engineering Firms for theservices of the General Contractor, as set out in the next section.
2. Prepare invitations for pre-qualification of General Contractorand draw up pre-qualification conditions and methods of evaluating responses.
3. Assist in evaluating qualification responses.
4. Prepare invitations for proposals for the work of the GeneralContractor to be issued by the Project Team.
5. Evaluate the proposals received and recommend to the ProjectTeam the award of the work.
6. Review General Contractors designs, specifications, tenderdocuments, evaluation of bids and proposed awards and make appropriaterecomendations to Project Team.
7. Review General Contractors progress reports and make appropri-ate recommendations to Project Team.
8. Supervise the performance of the General Contractor and makeappropriate recommendations to Project Team.
9. Assist Project Team in making sure that technically and economicallysound, easily operable, and up-to-date facilities are designed and installed;that the General Contractor performs his work in workmanlike manner at the lowestcost consistent with the needs of the project; that all aspects of the workcomply with the requirements of IBRD or other lenders; and that facilities inacceptable condition are finally turned over to IGSAS.
.Anniam4 i.
The General Contractor
1. Act as Eagineering and Coastruction Manri0ter ?c %^- oortionof the new facilities assigned to Fix, reporting to tho O Irojot1 Team.
2. Through Wts own resources -, through snl- ciontracts withexperienced vendors of ammonia and urea pronsases:
a. Sc-.ure licenses for thu ammoni2a -rqn naea procesmes.b. Provide the process dcstgn for the ammonia au:.' nrea
units and perform the detailed macbkudtal designfor these units.
3. Perform the process and mecbanical demign :for such of theoff-sites and auxiliaries as are assigned to his in his agremnent.
4. Manage procurement for his part of the Job.
5. Manage construction and erection of equipment for his portionof the job.
6. Assune responsibility for testing, start-up and initial oDerattenthrough the completion of satisfactory performance tests.
7. Provide suitable expatriate personnel for carrying oUtthese duties.
8. In cooperation with the ammonia and urea proress vendors,provide adequate training for IGSAS personnel in operating plants ofcomparable size and sophistication.
9. In cooperation with the ammonia and urea process vendors,provide continuing technical assistance to IGSAS for up to two years aftArsatisfactory completion of performance tests.
Industrial Projects DepartmentApril 12, 1972
IGSAS-TurkoyAnnex 7Page 1
INTERNATIONAL MARKET AND PRICESFOR AMMONIA AND UREA
1. This Annex briefly analyzes the past and future development ofthe worldl/nitrogenous fertilizer industry and trade with a particularemphasis on (a) ammonia and urea (directly relevant to the project), and(b) major capacity and trade increases in regions close to Turkey - es-sentially Eastern Ehrope, North Africa and Persian Gulf countries. Itsuccessively reviews the general trends in the nitrogen fertilizer sectoron a world basis, the nitrogen supply/demand balance and trade on a regionalbasis, and the urea and ammonia trade and prices on both.
General Trends in the World Nitroaenous Fertilizer Sector
2. World total consumption of nitrogenous fertilizers has increasedvery rapidly over the past fifteen years - at about 10.5% annually. Growthrates for developing countries were higher than the world average and ac-celerated at the end of the last decade (see Table A below). As a resultof a compound growth rate of about 17% annually from 1966 to 1969, the shareof developing countries in world consumption reached about 17% in the lateryear. The developing countries' consumption, however, stagnated in 1970;this was mainly due to difficulties in maintaining high growth rates bycertain of the major consumers, and the leveling off of Aid-financedfertilizer exports to developing countries in the year 1969.
Table A: PAST NITROGENOUS FERTILIZER CCNSUMPTION INDEVELOPING COUNTRIES AND WORLD AS A WHOLE
Quantities in million tons of N Annual growth rates in %1956 1966
1956 1966 1969 1970 to 1966 to 1970
Developing countries 1.0 2.8 4.5 4.5 10.8 12.6World total 7.1 19.2 26.2 28.5 10.4 10.5
3. As a result of major technological innovations and changes in theregional consumption pattern - in part due to the increased share of develop-ing countries in world consumption during the last decade - capacity built-upand production developed even faster than consumption. Also, the criteria forlocation of plants and the pattern of trade began to change at the end of thedecade. The outstanding innovations were:
a. Rapid increase in ammonia units sizes from a maximumof about 400 to 500 tons/day of ammonia in 1965 to1,000 to 1,500 tons/day in 1970, bringing about sub-stantial economies of scale in production.
1/ See attachment at the end of this Annex for definitionfs used.
Annex 7Page 2
b. USe or natural gas, naphtha and refinery off-gasesas the predominant basic raw materials for newmodern plants.
c. Construction of large ammonia plants for exports,located close to cheap natural gas sources avail-able in developing countries - Caribbean area,North Africa, Middle East.
d. Decaptivation of ammonia and development of aninternational trade for it.
e. Increased use of high grade fertilizer includingammonia directly applied to soils.
f. Devolopment of a liquifiednatural gas trade - whichmay in the long run challenge the present advantagesof producing ammonia at the source of natural gas -and improvement in transport techniques.
4t. Projections made IV others (Tennessee Valley Authority, UNIDO, U.S.President Science Advisory Committee, British Sulphus Corporation) were takeninto account in the following Bank's projection of world nitrogenous ferti-lizer consumption.
Table B: WCORLD NITROGENOUS FERTILIZER CONSUMPTICN BY RBGION
Quantities inmillion tons of N Annual Growth Rate )
1970 1975 1980 1970 to 1980
Developed Non-Commnmit 1h.h 18.6 22.8 4.7Eastern Europe 7.1 11.4 15.7 8.3Developing 4.5 9.4 13.3 n.5Communist Asia 2.5 4.7 6.7 10.h
World Total 28.5 44.1 58.5 7.4%
Nitrogenous Fertilizers Supply/Demand Balance and Trade
5. From 1965 to 1970 the rapid capacity built-up has led to a world-wide surplus capacity in the industry at the end of the decade. Table Cshows the Nitrogen Fertilizer Rated Capacity/Consumption relationship from1965 to 1976 on a world and regional basis. However, "Rated Capacity" doesnot represent the potential supply which is considerably lower for thefollowing reasons:
a. Production losses and production built-up in newplants.
Table C: NITROGEN FERTTLIZER CAPACITY¢ /CQNSUMPTION RELATIONSBIPWORIhDIDE AND BY REGIONS
(in million tons of N)
Actual Projected1965 1970 1974 1976
Regicns Cap.c/Cons. Cons.-as Cap.c/Cons. Cons. as Cap.c/Cons. Gns. as Cap.c/Cons. Cons. as% of Cap. % of Cap. % of Cap. % of Cap.
Communist Asia 0.7 1.0 143 1.8 2.5 139 2.5 4.3 172 3.0 5.2 173
World Total 24.5 16.4 67 44.9 28.5 63 60.3 41.2 68 67.2 47.5 7.
a/ Includes USSR.
b/ Excludes Japan and Communist Asia.
c/ Rated capacity and not potential supply, which is about 75% of this figure as indicated in paragraph 5 page 2Annex 7. The ratios of potential supply to consumption-- the indicator of actual world supply-demandbalance -- are shown in Table D, page 4 of Annex 7.
Annex 7Page 4
b. Systematic operation below capacity because of demandslow-down in regional markets on which certain plantsare based and because of difficulties in feedstocksupplies.
6. Potential supply ranges in different estimates of organizationswhich follow fertilizer development - such as British Sulphur CorporationUK, OECD, TVA - from 70% to 85% of rated capacity. The average potentialsupply in the time span of this projection has been estimated to be about75% of the rated capacity. With this assumption the following Table Dshows that the potential supply will be about 4 million tons above worldnitrogen consumption, in 1974, i.e. about 10% above it.
Table Ds WORLD POENTTIAL SUPPLY/CONSUMPTION GAP1965 to 1976
(in million tons of N)
1965 1970 1974 1976
Potential Supply 18.4 33.6a' 45.3 50.4Consumption 16.4 28.5 41.2 47.5World Gap 2.0 5.1 4.1 2.9Gap as % of Consumption 12.5 17.5 9.7 6.1
a/ Actual output is 29.6 million tons of N.
The "gap" is large in 1970 but decreases rapidly by 1976, though it is nottotally eliminated and is slightly above the surplus required to ensurestable world trade.
7. The following Table E summarizes the world nitrogen trade in 1970excluding intra-regional deliveries and North America-Europe trade. Thistrade appears to be lower than the estimated world gap of 5 million tons ofN shown in Table D above.
Table E: INTERNATIONAL NET TRADE MATRIX - 1970(in million tons of N)
North America Developing CommunistSource and Barope Countries Asia Total
North America * 0.6 - 0.6West Ehrope * 1.2 0.5 1.7East Europe * 0.5 neg. 0.5Japan - 0.2 0.8- 1.0Developing Countries 0.1 0.1 neg. 0.2
Total 0.1 2.6 1.3 4.0
* Inter-regional and intra-regional deliveries between North America andEarope are excluded.
Annex 7Page 5
Supply/Demand Balance and Trade for Ammonia and Urea
(a) Merchant Ammonia'
8. The future potential supply of ocean-traded ammonLia is shown inTable F below:
Table F: POTENTIAL SUPPLY OF AMMONIA FOR EXPCIT(in million tons of N)
9. From the point of view of demand for merchant ammionia, it is dif-ficult to see where all the ammonia due for export is going to be consumed,since at present, few countries have shown any worthwhile interest in import-ing ammonia on a comparatively long-term basis. To the preisent day, WestEuLrope has been the focal point of the bulk of ammonia export shipments,which have originated largely from the U.S. and Trinidad buLt this is unlikelyto continue, and there is also a substantial degree of trading in ammoniawithin Europe.
10. While an import demand of between 1.5 and 1.6 million tons of Nammonia up to the end of 1972 seems logical considering the number and sizeof existing import markets, demand for imported ammonia can only reach a levelof 3.2 million tons of N, if imported ammonia is accepted as a base for ni-trogen industries in a greater number of developing countries.
(b) Urea
11. The share of urea in world N producticn has increased from about 9%4 n 1962 to 22% in 1970. The following Table G shows the expected share ofurea capacity in the future world fertilizer nitrogen capacity.
1/ In this section, we are only concerned with non-captive ammonia that couldbe internationally traded.
Annex 7Page 6
Table G: UREA Vs WORLD FERTILIZER RATED NITROGEN CAPACITY(ln million tons of N)
1970 1974
Urea 10.9 13.9Others 34.0 46_ 4
World Total 44.9 60.3
12. Table H below compares forecast coasumption with rated capacityand potential supply. The ratio of potential supply as a percentage ofcapacity is expected to be about 70% 1/ from 1970 to 197h. The export-able world urea surplus would range from 1.2 million tons of N in 1970 to1.6 million tons in 1974. While the table indicates that potential supplyremains in excess of demand, the difference is only about 15%. This isnot expected to be large enough to cause serious price sacrifices amongthe exporters.
1/ 5% below the estimated 75% ratio for nitrogen as a whole; this is due toa more rapid increase in urea capacity than in other types of nitrogenousfertilizers through 1974.
Annex 7Page 7
Delivery Prices for Ammonia and Urea from the Persian Gulf
13. As a first step towards determining the possible price for deliveryof both amonia and urea, the Bank estimated the production costs in thePersian Gulf. This will give an idea about prices from large Ammonia-Ureaplants based on natural gas and on potential prices to Trkcey in case theSuez canal reopens. This calculation is based on actual costs for typicalplants that have just started or are being built, i.e. an ammonia plant of800 tons per day and a urea plant of 1,000 tons per day.
Table I: PERSIAN BIJI: PRODUCTION COSTS AND SELLINl3 PRICESFOR AMMONIA AND UREA (BULK)
1/ The urea unit is adjacent to the ammonia unit but not integrated; andthe price retained for ammonia entering into urea produietion is$39/ton.
1b. In the case of ammonia it shows that costs would rise by US$2.6ton, if capacity utilization does not exceed 80%, and that the return ontotal investment would disappear entirely if capacity utilization fellbelow 56% of capacity. Another consideration is that, for limited periods,selling prices could well be allowed to fall below the total cost per tonof roughly US$26.5 in circumstances when arnr contribution earned fromsales towards covering fixed costs would be an improvement over no sales atall. In an extreme case, a company might contemplate selling limitedquantities for short periods at very little above the variable costs, butthis cannot be significant as a long-term export because Peirsian Gulfproducers have very little captive market (compared to their output capacity)and therefore cannot live with sustained marginal costing. Furthermore,
Anniex 7Page 8
since the export markets are in the Far East, relatively far from theWestern producers who could apply some marginal costing, the transport burdenmakes it impossible for European or US producers to bring prices down dras-tically, especially as these firms do not enjoy the same advantages of "cheap"feedstock and power as Persian Gulf manufacturers.
15. Concerning urea, the calculation - based on a separate unit closeto an ammonia plant and purchasing the necessary carbon dioxide from theammonia unit -assumes that ammonia will be purchased at $39 per ton andshows that urea could be sold at $45 per ton f.o.b. Persian Gulf.!/
16. In case of an integrated ammonia urea complex - like the QuatarPlant - some savings will be generated on investment and on carbon dioxidepurchases. Given the capacities envisaged in our calculation, the ureaplant working at 90% capacity would require 172,300 tons of ammonia whichwould leave 65,300 tons free for sale outside. Assuming the ammmonia neededis paid internally $39 per ton, then the ammonia unit would cover all fixedand variable costs and earn 2.7% return on total investment. The integratedcomplex as a whole, i.e. including the urea plant, would then earn about7.8% return on investment capital, even with no outside sales of ammonia. Ifthe ammonia not used in urea production were sold at $17.5 per ton, theammonia unit's return on investment could then be doubled to 5.3%. This il-lustrates the very powerful stimulus to dispose of the surplus ammonia atalmost any price above variable costs; an ammonia plant entirely directedtoward selling ammonia, cannot of cource afford to do this. Establishedfertilizer producers - North African and European - would then be capableof even underbidding the ammonia export-oriented plant in the Persian Gulf,but only on marginal quantities of excess ammonia.
Present and Future International Prices for Ammonia and Urea
17. The international c.i.f. prices - for both ammonia and urea - ofwhich Turkey will be exposed in the 1970's will be conditioned by:
- The levels of prices in ports of North West Europe,which will serve as a base for determining pricelevels in the Mediterranean Basin after due al-lowance for transport costs.
- The potential selling prices to Turkey by EastEuropean, North African or Persian Oulf plants (incase Suez Canal reopens).
1/ Plant operating at 90% of capacity.
Annex 7Page 9
(a) Ammonia Prices
18. As a result of the technical innovations and of the prevailingsurplus supply,,prices for ammonia have considerably decreased throughoutthe world during the last decade; from a level of $65 to $570 per tonin 1965 in both the US and Europe to about $35 to $40 in 19i70. In factthe latest contracts signed by India with Kuwait and Iran sihow a c.i.f. Indiaprice of $45 per ton and the Algeria/Spain contract of the end 1970 showsa c.i.f. Spain import price of $40 per ton.
19. As from 1972-73;onwards, the price of ammonia in the US shouldapproach a long term equilibrium of about $35 to $37 per tcn. In Europepressure on prices wlll be maintained and the equilibrium Flriceis expected to be$43 to $45 per ton for the same period. The following table shows howlong term prices for ammonia will stabilize as from 1972-73 onwards.
Table J: EQUILIBRIUM AND WWEST IMPORT PRICESFOR AMMONIA IN DIFFERENT LOCATIONS
(in US$ per ton of Ammonia)
Long-Term /Equilibrium Transportation Cost- c.i.f. Prices (ex duty)
Lowest possible import price 46 42-44Estimated average c.i.f. price 45-47 44
1/ Suez Canal reopened
20. The potential c.i.f. import price for ammonia in Turkey will beabout $44/ton from 1972-73 onwards. This price does not takeinto account any dumping or emergency sales resulting from any sharpcompetition in the Mediterranean basin. An economic price of $42/ton isused in the calculation of the IER to take into account the fact that IGSASwill have to ship nearly 60% of its ammonia sales to the Samsun Plant on theBlack Sea.
Annex 7Page 10
(b) Urea Prices-
21. In the early 1960's f.o. b. urea prices per ton were - in theworld - well in excess of $100 and since that time they have shown asteady decline to levels which have occasionally reached - in Ehrope andJapan - $48 per ton in 1969, and $42 per ton in 1970. These pricesare valid for the free urea market, i.e., outside the Aid tied exportsto developing countries. In the latter case per ton f.o.b. prices arehigher than on the free market; they ranged in 1969 from $58 to $81and from $55 to $85 in 1970. Transport costs are sometimes much higherin the case of the Aid-financed trade because of obligations to use donorcountries' flag vessels.2/
22. Urea quotations for Turkey are rare, given the limited amountso far imported in the country; however, Donatim has contracted to import32,500 tons of urea in 1971 at $55.6 per ton c.i.f.
23. The latest development of urea prices - at the end of 1969 andin 1970 - are cited belowt
a. Latest f.o.b. prices quoted for West European urea - at the endof 1970 - are in the range of $45 to $47 with large quantitiesoffered at each bidding. Prices as low as $40 to $42 f.o.b.North West Earope were reported for the Europe-Mainland China1970-71 contracts. These were the lowest prices ever contractedfor large exports of urea;
b. The Sino-Japanese 1970-71 contract was concluded at $56 per tonc.i.f. China, i.e., at about $50 to $52 per ton f.o.b. Japan,as a result of large stock piles in Japan - reaching about one-third of the total nitrogen trade in the world outside the NorthAmerica-Europe trade.
c. The free foreign exchange tender held by the Indian Government inOctober 1969 provides an example of the potential challenge ofPersian Gulf urea producers to the influence of established ex-porters from Europe, US and Japan in the Indian Ocean. The con-tract was awarded to Kuwait at $58 per ton c.i.f. India, i.e.,at $53 f.o.b. Persian Gulf.
d. Low prices have also been offered by East European producers.Polish suppliers have offered urea at $45 to $46 ex Baltic portsin mid-1970. Rumania and Btulgarla will dispose of substantialurea surpluses from 1970 through 1976; Rumania proposed baggedurea for export at $46 per ton f.o.b. Elack Sea at the end of1970.
1/ All prices given here refer to bagged products.2/ Freights from the US Gulf coast to India in US bottoms are generally
in the $40 to $50 per ton range, compared with the $14 to %16 marketfreight rate.
Annex 7Page UL
24. In view of the increased production capacity, the f.o.b. prices(for sales to Turkey) are expected to stabilize at a leve:L slightly below$50 per ton in North West Europe, at $47 to $50 per ton for East Europeansuppliers and around $46 to $50/ton in the Persian Gulf and $46 to $48 forNorth Africa.l/ A number of contracts might even be concluded at priceswhich will necessitate the producers being content with slubstantiallyreduced profits in order to make sales. However, these are likely to beonly sporadic when the producer needs to keep the plant operating at itsmost efficient level or to reduce stock piles.
25. The potential c.i.f. import price for bagged urea in Turkey wiLLstabilize at $53 to $57 per ton from 1972-73 onwards. This price doesnot reflect any energency sales or systematic underbidding due to the com-petition to the Mediterranean area, in such cases, prices could occa-sionally be as low as $48 to $50/ton. It il possible that some contractsmight be offered at such a price to Turkey between 1973 and 1977. This ishowever expected to be a rare occurrence.
Table K: EQUILIBR-UM AND LOWEST IMPORF PRICES FOR BAGGED UREATN DIFFERENT LOCATIONS - AS FROM 1973-L974
(in US$ per ton of urea)
Long-termEquilibrium Transport Costb/ c.i.f.. Prices (ex duty)
Regions Price Turkey Turkey
North West Europe 48-50 6-7 54-57Persian Gulf 46-50 6-7 52-57North Africa 46-48 5-6 51-54Rumania/Bulgaria 47-50 4-5 51-55
Lowest possible import price 51Estimated average c.i.f. price 53-56
a/ These prices still imply a 5 to 7% return on total investment.b/ Assuming Suez Canal opened.
1/ The urea plants in Western Europe, where urea is not used in greatquantities, are positively export-oriented, as also are those inBulgaria/Rumania, North Africa and the Persian Gulf.
Annex 7Page 12
DEFINITICNS USED IN ANNEX 7
The following geographical definitions are used throughout this Annex:
a. World includes al1 the countries of the world;
b. Developing countries include all countries of Africa,Central and South America and Asia - less Turkey whichbelongs to Western Europe and Japan and Communist Asia;
c. Communist Asia includes Mainland China, North Koreaand North Vietnam;
d. Eastern Eirope includes USSR; and
e. Developed non-Communist countries cover North America,Western Europe and Oceania/Japan.
Throughout the Annex, fertilizer years are used when referring toconsumption, production or capacity; end year is used to designate thefertilizer year: July 1969 - June 1970, for example, is refereed to asyear 1970.
Industrial Projects DepartmentApril 12, 1972
IGSAS - Turkey
Annex 8Page 1
METHODOLOGY USED IN CALCULATING THE INTERNAL ECONOMIC RTURN (IER)
The methodology used is an adapted cost-benefit, analysis basedon an approach to project appraisal - now known as the Little/Mirlees (LM)method-developed by the OECD Development Centre in 1968/69.
The Approach
a. The method classically makes a basic distinction between fin-ancial and economic returns and calculates an internal rate of r0urn(economic) through discounting costs and benefits to the economynY as theyare incurred over time.
b. The way of valuing economic costs and benefits makes its orig-inality. The project's inputs (both operating and investments costs) andoutputs are first split into tradable and non-tradable goods and serviceswhich are to be valued in terms of border prices (c.i.f. or f.o.b.), andunskilled labor.
c. Tradable goods and services are those which are actually im-ported or exported (or close substitutes) or those that could be tradedinternationally. Border prices are used because they represent the actualterms on which the country can trade; they apply even if the goods andservices are actually bought from a domestic supplier. Purchase taxes andimport duties (transfer paymenta within the economy) are ignored.
d. Non-Tradable goods and services are those that are not (orcannot be) traded across the border, like power (in most cases), internaltransport, construction, etc. Instead of using a shadow foreign exchangerate to estimate the contribution of Non-Tradables to eaniing or saving offoreign exchange, Non-Tradables are broken down into the same three cate-gories with sindlar iterative treatment of Non-Tradables (in short input/output methods are resorted to) and finally also valued at border prices.
e. Unskilled Labor identified either directly or as a remainingitem in the iterative process is also given a shadow price which rangesbetween the accounting marginal productivity of labor in agriculture (pro-duction per man foregone because of withdrawing one worker from agriculture)and the consumption (considered as a worker' input) of the new industrialworker valued at border prices.
j Market prices (whether actual or predicted) clearly do not reflectrelative scarcities for a country's economy and hypothetical (shadowor accounting) prices that reflect better the real costs of inputsand benefits of outputs to the economy have to be used.
Annex 8Page 2
The Method in Practice
In practice investment costs and operating costs are treatedseparately. For each item, market prices are broken down into threecolumns as shown in the table below.
Classification into and border prices evaluation for Tradableinputs and outputs are a matter of analysis in each case.
Investment costsMachinery direct and Transfer pay-Construction (border indirect (in- ments (dutiesEtc... (as shown prices of cluding the taxes, sub-
in finan- Tradables labor component sidies, priceOperating costs cial cal- and Non- of Non-trad- differentials,Materiia inputs culation) Tradables) ables) etc...)PowerEtc...
Concerning Non-Tradable goods, the accounting values are obtained(according to the degree of refinement imposed by the importance of theitem considered) through either:
a. A direct breakdown of this item into its components followedby a shadow pricing of the components' values (for example construction intoraw materials - cement, steel, etc. - labor and transfer payments followedby an estimate of the accounting value of cement,, steel, etc. Cementcould be either Tradable or Non-Tradable depending on transport costs; itsaccounting value will be the border price (if Tradable) or obtained througha further breakdown of cement into its components on the basis of typicallocal plants (if Non-Tradable); or
b. The use of a typical input/output table which usually shows(taking again the example of construction) the sector's sales and payments(including a breakdown into c.i.f. imports, indirect taxes, other materialinputs, electricity, service inputs and value added); each component itembeing converted into accounting prices to obtain a final percentage break-down of construction into accounting values, unskilled labor and transferpayments; or
c. The use of a standard conversion factor (a short cut) for lessimportant inputs and outputs or when information is difficult to obtain.Domestic values (net of purchase or excise taxes) are converted into accountingvalues by subtracting from the former the weighted average price differentialbetween the domestic value of Tradables and their world market value convertedat the official exchange rate. The calculation of such a factor is a veryuseful preliminary to project evaluation.
1. Investment Costs
On the following two pages, Table A gives the Investment Expend-itures of the project and Table B the Investment Costs for the EconomicReturn calculation.
TURKEY
IGSAS AMMONIA-UREA MANUFACTURING PROJECT
Table A: INVESTMENT EXPENDITURES 1972 TO 1975(in thousand US dollars)
1972 (6 months) 1973 1974 1975 (6 months) TotalLocal Foreign Local Foreign Local Foreign Local Foreign Local Foreign
Items Currency Currency Total Currency Currency Total Currency Currency Total Currency Currency Total Currency Currency Total
Notes to Table B on Economic Rate of Return: Investment Costs.
The following assumptions were made to split the projecttsinvestment values at market prices into (a) accounting valuies for goodsand services excluding unskilled labor, (b) unskilled labor, and (c) aresidual item covering transfer paymentsi/:
Item 1. Residual transfer payments: 30% of local costs plus 10% offoreign exchange costs. Accounting value: 90% of foreign exchange costsplus 70% of local costs.
Item 2. Accounting value: 30% of local costs to cover foreign exchangecost of fuel, repair parts and depreciation of imported equipment. Unskilledlabor: 25% of local costs. Residual transfer payments: 45% of local costs.
Item 3; The costs of building and civil works are shown as local costs inTable 1. They include raw materials bought locally (cemerLt, steel, bricks,etc.), local skilled and unskilled labor and transfer payments like taxes,rents., price differentials between c.i.f. and local priceEs for some materialinputs and services. In a first stage, these local costs are broken downinto: 30% total labor, 58% materials, 12% residaal. In the second stage,the accounting values of labor and materials are estimated: a) half of thelabor is unskilled; b) materials costs for steel and cemernt have been brokendown into foreign exchange, total labor and a residual component on the basisof typical plants both in Turkey and in other developing countries similarto Turkey. / The breakdowns were: 20% foreign exchange, 30% total labor,50% local costs excluding labor for cement; 30% foreign exchange, 20% totallabor and 50% local costs excluding labor for steel. In a third stage, theratios applicable to the item building and civil works are obtained:accounting value 39%, unskilled labor 24%, residual transfer payments 37%.These ratios are comparable to ratios found for construction in Pakistan(40%, 22%, 38%) and India (45%, 25%, 35%).
Item 4. The foreign exchange cost (c.i.f. Turkey) of imported goods is acost to the economy and is a part of the accounting value of item 4hy. Localcosts cover part of processing equipment, casing for some equipment, part ofinsulation and painting. Their accounting value has been taken as the eco-nomic cost of local production of steel. Therefore the breakdown of item 4is: direct foreign exchange cost plus 30% of local costs for the accountingvalue and 50% of local costs for residual transfer payments.
The resulting ratios were then applied to foreign exchange and localcosts expenditures shown in Table A.
2/ This methodology is used since Turkey is self-sufficient in cement andconstruction steel.
3/ No duties are paid on imported equipment.
Annex 8Page 6
Item 5. Table A assumes that all the equipment will be transported inTurkish bottoms.
Item 6. The accounting value equals foreign exchange cost.
Item 7. The foreign exchange content of erection covers equipment rentalor depreciation, tools and supplies coming from abroad and foreign labor.Local costs include local labor fees (60%), locally purchased supplies orequipment 25% and transfer payments (15%). A local firm is assumed to dothe erection. Thirty per cent of the local labor used for erection isunskilled; the rest (70%) will enter in the accounting cost as skilledlabor since Turkey could export that manpower. The accounting portion ofthe locally purchased supplies and equipment is 30%. Therefore the ratiosused for item 6 are: for the accounting value foreign exchange cost plus55% of local costs, 30% of local costs for unskilled labor and 15% of localcosts as residual.
Item 8. Erection supervision covers the cost of supervision by venodrs.The local part represents local expenses of foreign expatriates (assumedto be a use of local resources) and the foreign exchange part includes thecost of expatriates themselves.
Item 9. The foreign exchange cost of imported spare parts is estimatedat world prices. The cost of spare parts locally produced was broken downusing the following ratio: 35% for the accounting value, 15% for unskilledlabor, and 50% as residual.
Item 10. This item includes training, start-up expenses, feasibility studiesand travel expenses before start-up. The ratios retained are: 15% of localcosts for total unskilled labor and 30% of local costs for local transferpayments.
Item 11. The same ratios as for the total of items 1 to 10 were used forcontingencies.
2. Operating Costs
Table C on the following page shows the operating costs for theEconomic Returm calculation.
Annex 8Page 7
TURI
IGSAS AMOIA -UREh MAFACTURING PROJPCT
fable C: ECONOMIC RATE OF REU: BASIC CASE OPERATING COSTS(in thousand US dollars)
One year operating costs at 100% capactyInternationalMarket Prices
Prices to for goods & UnskilledTe3m IGSAS a/ services b/ labor Residual
a/ Raw Hterial Prices (Naphtha US $20.83/ton, off-gas US$18/ton and fuel- oil at US$17.5O/ton)
b/ Ecluding unskilled labor, Estimated international raw material price (Naphtha US $22/ton,off-gas US $20-70/ton, fuel-oil US $15/ton)
c/ Rent of land and facilities and general expenses (to cover insurance ard miscellaneoustaxe8) are excluded.
.knnex: 8Pagr 8
Notes to Table C on Economic Rate of Return: Operating Costs
The actual costs of inputs to the economy result from breakingdown the corresponding market prices into (a) accounting values for goodsand services excluding unskilled labor, (b) unskilled labor and (c) residual.The main assumptions used for world prices of tradable inputs and accountingvalues of non-tradable inputs are given below.
Item 1. Basic raw materials
(a) World prices of naphtha
Naphtha is worldwide traded. The economic cost depends on (a)the potential f.o.b. export prices from Turkey and (b) the alter-native use value of naphtha in Turkey.
After supply of IGSAS and of the projected petrochemical complexthere ill remain a naphtha surplus in Turkeyl/ throughout the period1971-1980. This surplus will fluctuate between 60,000 tons and 500-000tons per year, and Turkey could therefore easily export it. Naphthaprices in Europe (which provides a good base for establishing worldprices of petroleum products in Turkey) increased from US $18/ton f.o.b.in 1969 to about US $20 to 24 at the end of 1970 and 1971. Ar equi-librium price on the basis of 1970 prices of crude from North Africaand the Persian Gulf is US $20 to 22 per ton. As a result of the nego-tiations between OPEC (Organization of Petroleum Exporting Countries))countriesZ4 and 23 international oil companies, the posted price oflight crude from the Persian Gulf increased by 36 cents per barrel inFebruary 1971. The price is expected t increase each year by 2.5% plus5 cents per barrel. The price increase of Persian light crude3/ (43%between 1970 and 1975)wouldresult in increased naphtha prices inEurope (to an estimated US $25 to 28 per ton f.o.b. Europe from 197b/75onwards). After allowance for transport costs, Turkey could exportnaphtha at about US $21 to 24 f.o.b. from 1974 onwards.
An alternative use of naphtha is to transform it into premiumgasoline 4 / in already existing facilities in IPRAS. The processingcost is about US $2/ton. The present f.o.b. Europe price for gasolineis about US $28 in winter and US $30 to 32 in summer. An estimatedalternative use value of naphtha could then be about US $22 per tol.
The naphtha prices retained in the economic calculation rangefrom US $21 to US $24 for the period 1974 onwards.
1/ As from March 1971 Turkey will only import crude oil and some LPG andlocal refineries will produce the different types of petroleum productsneeded. The ratio of imported to local crude will be about 30/70 from1974 to 1980.
2/ OPEC countries supply about 5C% of the European crude consumption.3/ Long term contract prices will probably increase even faster than
posted prices.4/ One ton of naphtha gives about 0.8 ton of premium gasoline and 0.15 ton
of LPG.
Annex 8Page 9
(b) World prices of refinery off-gases and fuel oil
Alternative uses of refinery off-gases (sold to IGSAS at US$18per ton) could be (a) to sell them as town gas or to the neaibyceramic factory or (b) to use them as fuel in the IPRAS refinery.;For the economy, using 1 ton of refinery off-gases is equivalent tousing 1.15 ton of fuel. The off-gases consumption has thereforebeen converted into fuel equivalent using the 1.15 ratio.
Fuel oil is expected to be in surplus in Turkey fron 1973 until1970 and its production about 2 million tons in excess of theestimated 8.5 million tons consumption in 1980.
World fuel orices must be about 1/2 to 3/4 of naphtha prices,because of less calories provided by fuel and morel investmentnecessary to burn it. After closure of theSuez Canal there wasa shortage of fuel in Europe due to the fuel demand by thermalplants. This led to a price distortion, and fuel prices surpassednaphtha prices in Europe. They increased from US$10 to $12 in1969/70 to US$20 to $23 at the end of 1970. At present fuel oil No. 6sells f.o.b. Turkey for export at US$20 per ton and locally at USM15.5.
On the basis of future Persian Gulf crude oil prices and worldnaphtha prices, the estimated fuel prices retained is US$15 to $18f.o.b. Turkey from 1974 onwards.
Item 2. Power
Using the results of a Tumas study for a 12 NW station in Turkey,the foreign exchange content in the price of 1 kwh was estimated at 45% ofthe market price. The local cost was broken down into 25% unskilledlabor, 30% accounting value and 45% residual. Consequently, 61% of thekwh price represent the accounting value and 14% the wuskilled labor.
Item 3. Catlaysts and Chemicals
The breakdown was: 70% accounting value, 5% unskilled labor,25% residual.
Item 4. Labor
The labor input has been divided into skilled and unskilledlabor. Unskilled wolkers are estimated at about 85 and account for 25%of the payroll bill. The accounting value of skilled iworkers and manage-ment has been taken equal to the market value due to the scarcity ofskills in Turkey.
1/ The sales of refinery off-gases to IGSAS is equivalent to about 1/3of the total fuel consumption of the IPRAS refinery.
Annex 8Page 10
Item 5. Maintenance Supplies
This item is taken as 8% of equipmeat cost and is broken downin the same proportion as in line 4 in Table A (equipment and machinery).
Item 6. B
Kraft paper bags are now produced in five plants; the recentopening of a 60,000 ton kraft paper plant will enable the demand to be metthrough local supply. Polyethelene bags are also produced locally since1970. The f.o.b. potential export price for bags is roughly equal to theforeign exchange ccntent of locally produced bags (48% of the total cost).The bags item has been divided into 60% accounting value (48% foreignexchange cost plus the accounting value of local manufacturing costsestimated at 12%), 20% unskilled and 20% residual.
On the basis of the above assumptions the Internal EconomicReturn of the project has been calculated in the following Table D,together with a sensitivityanalysis for different input/output prices andcosts. Economic benefits in Table D are calculated using expected IGSASsales volume at international market prices. Social costs are computedas the sum of the costs which can be valued at international prices(Accounting Value in Tables C and D) and local costs, which consist of un-skilled labor and a residual (transfer payments). A 50% shadow wagerate for unskilled labor has been used and transfer Dayments were excluded.
Industrial Projects DepartmentApril 12,1972
TURKEY IGSAS AMMONIA-UREA MANUFACTURING PROJECT
Table D: Economic Rate of Return: Calculation of the Internal Economic Return(in thousand US$)
Total Costs: 1,203 18,914 16,751 7,216 8,222 9,136 9,136 9,136
Net Social Benefits (1,203) (11,120) (18,914) (10,578) 7,304 8,463 9,712 9,712 16,176 15.4%
1/ 507. shadow rate used for unskilled labor wages.2/ Working capital assumed to have same usage breakdowtn as operating costs3/ Plant estimated scrap value of $3,000,000 and recovery of the social cost of working capital is assumed.
4/ Assumes economic feedstock prices of $22 for naphtha, $20.70 for off gas, $15 for fuel oil.
Internal Economic Return: Sensitivity Analysis
Net Social Benefits Under Different Assumptions1. Urea $50/ton (1,203) (11,120) (18,914) (10,990) 6,298 7,275 8,342 8,342 14,806 12.6%
sTrATU9 AND CAPACITY OF FERTILIzER PLANTS (AS OF ED NOVEMBER 1971)
Location and Status Start Up Ownership Product 000 tons Nutrient 000 ton
Operating/ N P
Kutahyia I Nov. 61 Azot Sanayii&/ AS 21% 85 N 17.5 --and CAN 20% 60 N 12.0 --
Imnit I End 61 Gubre Fabrikalari SSP 18% 120 P -- 21
Iskenderun I June 68 Giubre Fabrikalari 2 / TSP 46% 120 P -- 55
Kutahyia II Aug. 68 Azot Sanayii CAN 26% 338 N 88.0 --
Samsun I Apr. 71 Azot Sanayii TSP 46% 220 P -- 101or DAP 18-46-o 140 N and P 25.0 64
Elazig Dec. 71 Azot Sanayii SSP 18% 330 P -- 54
Under Construction
Mersin Feb. 72 Akdeniz GubreW CAN 26% 600 N 156 -Apr. 72 DAP 18-46-0 150 N and P 27 69
Ismit II Ext. Beg. 74 Gubre Fabrikalari TSP 46% 16O P -- 75Iskenderun II Ext. Mid. 74 Gubre Fabrikalari TSP 46% 100 P - 46
Programmed
Samsun II Kid 74 Azot Sanayii DAP 18-46-0 220 N and P 40 101
Ismit III Spring 75 Petkim, 5 AS 21% 100 N 21 --
Iemit IV Spring 75 IGSAS Urea 46% 274 N 126 - -
E4visaged
Gemlik Undecided§6 Azot Sanayii CAN 26% 600 N 156 --Bandirma Undecided Bandirma CGubre SSP 18% 220 P -- 40 H
3/ In addition the Karabruk Steel plant produces about 9,000 tons/yr. of AS 21%, i.e. about 2,000 tons per yearof N, as a by-product.
2/ Azot Sanayii (the Nitrogen company) is 100% government-owned.3/ Gubre Fabrikalari (the Fertilizer Industry Company) is owned 68% by the Government and 32% by various local
private organizations.4/ Akdeniz Gubre (the Mediterranean Fertilizer Company) is owned 40% by Kuwait Petroleum Industries, 40% by Azot
Sanayii, 10% by Sugar Bank and 10% by Is Bank.5/ Petkin (the State Petroehemical Company) is 100% government-owned.
Azot Sanayii has already called for tenders although the Ministry of Industry has not yet given final approvalfor this plant's erection.
Industrial Projects DenartmentApril 12, 1972
TURKEY
IGSAS Ammonia-Urea Manufacturing Pro,ject
1/PRODUCTION OF NITROGENOUS FERTILIZERS=
(in thousand tons of N)
Actual Production P r o j e c t e d P r o d u c t i o rrSources 1965 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
Possible level. of production 63 113 188 243 275 3302/ 380-/ 420 425 425 425
1/ This plant will produce only DAP as from mid 1974.2/ Operation of plants at below (8 to 10%) potential level of production unless marginal exports are arranged.
Industrial Projects DepartmentApril 12, 1972
TURKEY Table5
IGSAb Ammonia-Urea Manufacturing Project
FERTITLIZER CONSUMPTION. 1960 TO 1971(in thousand tons of nutrients)
Nitrogenous Phosphate PotashYear Fertilizers Fertilizers Fertilizers Total
1960 9.7 10.2 0.7 20.8
1961 29.4 13.1 - 42.5
1962 37.9 17.8 5.3 61.o
1963 39.2 37.2 10.5 56.9
1964 54.2 45.1 4.6 103.9
1965 73.5 76.8 5.4 155.7
1966 98.3 92.9 5.8 197.0
1967 141.9 143.6 7.5 293.0
1968 193.0 200.2 10.1 403.3
1969 245.3 214.7 12.1 472.1
1970 238.0 165.7 11.1 414.8
1971"/ 255.1 194.9 13.0 463.o
a/ Preliminary estimates.
Industrial Projects DepartmentApril 12, 1972
TURKEY
EIISS Aeseooia-Ilrea Hseufoctorioa Project
SHARE OF GOVERNMENT AGENCIES AND PRIVATE SECTOR IN TURKISHFERTILIZERreUTN ISTRERUTlIHN RESEARCH ANX PeoDrUCTot
PRODUCTION. FINANCING, 1971 FER=TZER RESEARCH AND SOIL T7STDIGfStatiosi -r Lahrsrtries ShIFetit
Ministry p % of Y of Tot. ilorki rking on Fertilizer Teting
O-nership Fertilizer Pln-ts Minirtry C oe !oitol OrElnisations Ministry RGese rob Lahntories
Various Orgezi-otione 319.% GObNr FPb at Iomit h Iwkinderoc igriouituro Dso-titn,holly owned by 4A2
Ministry of Ar. Villge Arffirs Toprekhe
Private Sector Dealers & leportere 17% This group haS bhen denied Agricutlra Teknik Zireat
inport pereits for 171, hutin 1970 e comted for % of Prits Sectortoctal s.los of fartiliser
Source: US AIL, Akos-c Office tUe. of eupsod fertilizers.
Preducti & Sales Coops.
Uee fr fa,tilizr or apscific erp-, tea o-lu, oto
IndustrIal rojecee 1eper9e7o2
Apeil 12, 1972
TURKEY
IGSAS Asmnonia-Urea Manufacturing Project
FERTILIZER PRICES (D0MSTIC AMD IPORTED) AS OF NOVEMBER, 1971-(in Tl/Ton)
Lo cally P r o d u c e d F e r t i li s e r s I mp or t ed F e r t i l i s e rProducts Fixed Selling price Distributor- Retail Selling Difference retail price Estimated average Distributor Retail Selling Difference retail
at plant 1/ Warehouse cost 2/ Price 3/ less distribution cost c.i.f. price WarehouBe cost 4/ price 5/ price less Dist. cost
AS 21% 480 620 600 -20
CAN 20.5% 480 620 600 -20
CAN 26% 580 720 710 -10
DAP t8-46 1,200 1,340 t,400 +60
TSP 4z3% - 45% 930 1,070 1,000 -70
SSP 17% 400 540 450 -90
Compound NPE 900-975 1020-1095 1,200 +105-180
AS 21% 360-390 480- 510 60o + 90-120
Urea 750-825 870-945 1,150 +215_285
DAP 8-46 1,200 1,320 1,400 + 80
CAN 26% 540 660 6oo - 60
Potash 60( K20 900 1,020 1,300 +280
1/ All products in paper bags; fixed prices for products in polyethylene or jute begs are TL 20/ton higher.
2/ Distributor costs for domestic product equal fixed cost at plant plus TE 40 per ton (estimated average cost for transportation, warehousing, interest and overhead).
2/ Ex distributor's warehouse throughout the country.
4/ c.i.f. price plus TL 120 per ton (estimated average distribution cost for imported fertiliser1 a,
5/ Average estimates for the year 1971. a
6/ Urea in bags has been sold at TL 1350 per ton in 1970 and at the beginning of 1971. Although ures prices are not fixed, Donatim established the urea price level
at TL t150 (US $77/ton) which the other urea distributor (Agricultural Credit Cooperatives) had to accent to be competitive. On a nutrient basis equivalent ureaprices would have been US $91/ton (using AS 21% as base).
Industrial Projects DepartmentApril 12, 1972
TURKEY
IGSAS Ammonia-Urea Manutacturing Pro jec
PRESENT AND PROJECTED CONSUMPTION OF NITROGENOUS FERTILIZERS(in thousand tons of N)
Date Of Estimates versusProjection Actual Consp!tion P r o j e c t i o n s 1972 - 1980
1/ Basically these projections are inspired by past trends, even if some judgment has been exercised to modify a pure past trend projection; theydiffer from the use of different adjustment curves.
2/ Non constrained end use analysis.3/ Based on trends in similar countries.l/ Constrained projection taking into account the evolution of the major constraints: procurement planning, distribution efficiency, credit, return ratios
and pricing policy.5/ Estimated level of consumption with flall implementation of the package of measures and policy changes suggested by the Bank (see ohapter X).b/ Estimated level of consumption with only partial implementation of the same package.7/ This preliminary Bank estimate for 1971 is below actual demand by farmers because of supply constraints.I/ Estimated to represent the average level of consumption in 1971 and 1972 that would be used as a benchmark for projections through 1980.
Industrial Projects DepartmentApril 12, 1972
TURKEY
IGSAS Ammonia-Urea Manufacturing Project
N NITROGEN IMPCRTS (SURPLUS 1970-1980in thousand tons of N
PreliminaryActual Estimates P r o j e c t i o n s1970 1971 1972 1973 1974 1975 1976 1977 1970 1979 1980
Total Net Nitrogen Imports (Surplus)Likely 151 190 110 55 64 46 37 64 90 139 203Low range - - 90 24 14 (17) (38) (9) 9 62 130
Of which Urea (seedingProgram) - - 46 55 64 46 19 7 - - -
Assuming normal carryover equal to about 15% of annual consumption except for years 1972 and 1973 for whichstocks are higher as a result of new plants coming on stream.
2 S-e Table 3.3 Includes about 52,000 tons of N as compound fertilizers.
Includes about 40,000 tons of N as compound fertilizers.
Industrial Projects DepartmentApril 12, 1972
Table 10TURKEY
IGSAS Aimmonia-Urea Manufacturing Prom.ects
ESTIMATED CONSTRUCTION COST TINETABLE(US$ thousand)
Construction Costa/ 1,503 13,418 22,269 12,340Working Capital - 3,860
Total Costs 1,503 22X269 1 - - - - - -
BENEFITS BEFORE TAX
Net Income before Interest,before Depreciation, before Tax - - - 2,440 7,210 9,521 11,512 11,628 11,628 11,628 11 ,628 11,628 11,628 11.628 1S.488'
BENEFITS AFTER TAX
Net Income before Interest,before Depreciation, after Tax - - - 2,440 7,210 9,504 10,455 10,480 10,415 10,346 10,275 10,200 1 10.039 9,952 13
I.F.R. before tax: 14.7 %
I.F.R. after tax: 13.0 %
a/ Total cost less interest, guarantee fees and working capital (57,750 - 3,273 - 1,087 - 3,860 = 49,530)
b/ Includes recovery of initial working capital.
Industrial Projects Department
April 12, 1972
Chart 1
TURKEYIGSAS AMMONIA-UREA MANUFACTURING PROJECT
PROCESS DIAGRAM
NAPTHA REFINERY GAS
118,500 T/A 72,000 T/A
FUEL OIL
50,500 T/A
AMMONIAPLANT
AMMONIA CO2 (BY-PRODUCT)248,000 T/A 210,000 T/A (NO COST)
38,000 T/A 52,000 T/A 158,000 T/A
|PETKIM AZOT SANAI I UREA
CAPROLACTAM FERTI LIZER PLANTPLANT PLANT
UREA274,000 T/A
World Bank-6738
Chart 2
TURKEYIGSAS AMMONIA - UREA MANUFACTURING PROJECT
PROPOSED PROJECT ORGANIZATION
IGSASACTING GEN. MANAGER
AUTHORITY PROJECT AUTHORITY
INFORMATION TEAM INFORMATION............ 0--* .................. ..........
REPRESENT IGSAS IN _
DEALINGS WITH GENERAL
TECHNICAL CONTRACTOR AND ALL GENERALOTHER EXTERNAL AGENCIES GENERAL
ADVISER CONTRACTOR
COORDINATE ACTIVITIES
ASSIST PROJECT TEAM AS FOLLOWS OF GEN. CONTRACTOR AkCT AS ENGINEERING ANDAND ALL OTHER EXTERNAL CONSTRUCTION MANAGERAGENCIES WITH IPRAS
DEVELOP DESIGN DATA REFINERY OPERATIONS
PREPARE INVITATIONS FOR Z uj SUB-CONTRACTS PROVIDE uj 0PRE-QUALIFICATION OF GEN ASSIST GEN. CONTRACTOR E O z LICENSES, DESIGN AND r C zCONTRACTOR AND METHODS OF IN DEALINGS WITH LOCAL, E X > ENGINEERING FOR AMMONIA c w
EVALUATING RESPONSES STATE AND FEDERAL AND UREA UNITSAGENCIES___
EVALUATE RESPONSES PERFORM PROCESS ANDSCRUTINIZE AND APPROVE MECHANICAL DESIGN FOR
PREPARE TENDER DOCUMENTS ALL PLANS AND DESIGNS OFF-SITES AND AUXILIARIES
FOR WORK OF GEN. CONTRACTORAPPROVE ALL BIDDING MANAGE PROCUREMENT
EVALUATE PROPOSALS AND DOCUMENTS, EVALUATIONS ASSIGNING TO IGSASRECOMMEND AWARD OF BIDS, AND ISSUE ALL LOCAL PROCUREMENT AS
PURCHASE ORDERS PREPARED DESIRED BY THEM
REVIEW GEN. CONTRACTOR'S BY GENERAL CONTRACTOR _
DESIGNS, SPECIFICATIONS BE RESPONSIBLE FOR TEST-TENDER DOCUMENTS, EVALU- VERIFY AND APPROVE PAY- ING, START-UP AND INITIALATION OF BIDS AND PROPOSED MENT OF ALL VOUCHERS OPERATION THRU SUCCESSFULAWARDS AND MAKE APPROPRIATE FROM GEN. CONTRACTOR ACCEPTANCE TESTSRECOMMENDATIONS AND OTHERS _
PROVIDE EXPATRIATE PER-REVIEW GEN. CONTRACTOR'S REVIEW ALL PROGRESS SONNEL NEEDED FOR THESEPROGRESS REPORTS AND MAKE SCHEDULES AND REPORTS DUTI ESAPPROPRIATE RECOMMENDATIONS AND INITIATE CORREC-
TIVE ACTION IF NEEDED ARRANGE FOR TRAINING IGSASMONITOR WORK OF GEN. CON- ___________________________ PERSONNEL IN OPERATINGTRACTOR AND MAKE APPROPRIATE MONITOR ALL PHASES OF PLANTSRECOMMENDATIONS PROJECT
ASSIST PROJECT TEAM IN ALL ~~~~~~~~IN COOPERATION WITH AMMONIAASSIST PROJECT TEAM IN ALL GIVE OVERALL IMPETUS AND UREA PROCESS VENDORSOTHER TECHNICAL ASPECTS OF TO PROJECT PROVIDE TECHNICAL ASSIST-ITS WORK _ _ _ _ _ _ _ _ _ _ _ _ _ _
HANDLE LOCAL PROCURE- ANCE UP TO TWO YEARS AFTERMENT AND CONSTRUCTION _AS NECESSARYAS_____NECESSARY _____________ MANAGE CONSTRUCTION AND
ERECTION OF AMMONIA AND
UREA UNITS AND SUCH CIVIL
WORK, OFF-SITES AND AUX-ILIARIES AS DESIGNATED BY IGSAS
World Bank-6735
TURKEY
IGSAS AMMONIA- UREA MANUFACTURING PROJECT
ORGANIZATION AND STAFFING CHART
BOARD OF DIRECTORS
GENERAL MANAGER
-~~~~~~~~~~~~~~~~~~~~~~~~~~
PESONNEL AND ACCOUINTING PLANN IN"G AND TECHNICALPEMMUNICATION DEPARTMNT _ORGANIATION -SERVICES
CCORDINATAR I COCRDINATOR ICHIEF CLERK I CHIEF CLFRK I
CLERSKT CLERK/TYPIST; 3
L-TESSEINGR I j5 15
r - ------ _--_ , _
I PROJECT I PR DUCTION | MARKETING ANDMANAGCER A V,ANAG R ' ALES MAI NAGER
L_
SUPEIVIR k/AINlRENANCt| |E *OPERATION ||OPERATION |ALES ANDM I AERINEANCD INIO g N TE SUPERV YRnTEND SUPERISNO DEVELPMENT
