Document of

FILE COPY The World Bank

FOR OFFICIAL USE ONLY

Report No. P-2 371 -PAK

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO

THE ISLAMIC REPUBLIC OF PAKISTAN

FOR THE

FAUJI FERTILIZER PROJECT

August 16, 1978

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

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CURRENCY EQUIVALENTS WEIGHTS AND MEASURES

Except where otherwise indicated, 1 metric ton (t) - 1,000 kilograms (kg)all figures are quoted in Pakistan 1 metric ton (t) - 2,204.6 poundsRupees (PRs). 1 kilometer (km) - 0.62 mile

1 hectare = 2.47 acresPRa 1.00 - US$0.10 1 cubic meter = 35.3 cubic feetPRs 9.90 = US$1.00PRs 1 million = US$101,010

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

Anic - Anic S.p.A. (Italy)BTU - British Thermal Up-itCAN - Calcium Ammonium Nitrate (26-0-0, i.e, 26% Nitrogen)Coming - Coming S.p.A. (Italy)DH - Dawood Hercules Chemicals Ltd.Fauji - Fauji FoundationFFC - Fauji Fertilizer Company Ltd.ICP - Investment Corporation of PakistanIDB - Islamic Development BankIFU - Industrialization Fund for Developing Countries (Denmark)JCE - James Chemical Engineering (USA)KfW - Kreditanstalt fuer Wiederaufbau (Germany)20 - Potassium Oxide, the Indicator of Potassium Content of

FertilizerMAP - Mono Ammonium PhosphateN - Nitrogen, the Indicator of Nitrogen Content of FertilizerNFC - National Fertilizer CorporationNIT - National Investment TrustNP - NitrophosphateN:P - Nitrogen/Phosphate RatioPIDC - Pakistan Industrial Development CorporationP205 - Phosphorus Pentoxide, the Indicator of Phosphorus

Content of FertilizerSnam - Snamprogetti S.p.A. (Italy)Topsoe - Haldor Tops4e A/S

FISCAL YEAR

Government: July 1 - June 30Topsoe : January 1 - December 31Fauji : October 1 - September 30FFC ; July 1 - June 30

FOR OFFICIAL USE ONLY

PAKISTAN

FAUJI FERTILIZER PROJECT

Credit and Project Summary

Borrower: Islamic Republic of Pakistan.

Beneficiary: Fauji Fertilizer Company Limited (FFC).

Amount: US$55.0 million.

Terms: Standard.

Relending Terms: 15 years, including 4 years grace, at 10% per annuminterest. FFC will carry the foreign exchange risk.

ProjectDescription: The Project will help meet Pakistan's growing require-

ments for nitrogenous fertilizer using locally availablegas. It consists of the construction of a 1,725 tonsper day (tpd) urea plant, including an intermediateammonia plant of 1,000 tpd at Goth Macchi, Punjab Pro-vince. The Project also includes the construction ofa 33-mile pipeline to transport gas from the Mari fieldto the Project site and all necessary ancillary facil-ities. An important benefit would be substantial for-eign exchange savings, estimated at US$79 millionannually in 1978 terms. Because of inflationary pres-sure in Pakistan, there is some risk that costs willescalate beyond the provisions included in the costestimates. There is also a risk that demand for fer-tilizer may not grow at the projected rates if theGovernment does not pursue appropriate agriculturalpricing and other policies.

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

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Estimated Cost: US$MillionLocal Foreign Total

Buildings & structuresincluding land 12.6 7.9 20.5

Equipment, materials,spares, including freight 2.3 89.1 91.4

Gas & water lines 2.2 4.3 6.5Erection, construction, super-vision, licenses & engineering 9.5 29.9 39.4

Total Plant Cost 26.6 131.2 157.8Township 11.9 0.1 12.0Technical assistance, training - 4.9 4.9Pre-operating & administrative

expenses, including stampduties 11.3 1.7 13.0

Base cost 49.8 137.9 187.7Contingencies: Physical 4.3 8.1 12.4

Price 13.7 12.8 26.5Working capital 12.7 - 12.7

Total Project Cost 80.5 158.8 239.3Interest during construction 21.0 - 21.0

Total 101.5 158.8 260.3

Financing Plan: /a (US$ million)Local Foreign Total

EquityFauji Foundation 27.6 - 27.6Haldor Topsoe A/S 1.8 3.2 5.0IFU-Denmark 1.8 3.2 5.0Islamic Dev. Bank - 10.0 10.0Pakistan FinancialInstitutions &Commercial Banks 30.3 - 30.3Total Equity 61.5 16.4 77.9

DebtIDA - 55.0 55.0USAID - 40.0 40.0

KfW-Germany - 40.0 40.0Italian Govt. - 7.4 7.4Pakistan Fin. Inst.& Commercial Banks 40.0 - 40.0Total Debt 40.0 142.4 182.4

Total 101.5 158.8 260.3

/a A contingent financing plan provides for additional con-tributions in the event of cost increases (see paragraph 44).

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Estimated (US$ Million)

Disbursements: FY1979 FY1980 FY1981

Annual 7.0 23.0 25.0

Cumulative 7.0 30.0 55.0

Rate of Return: 23%

Appraisal Report: No. 1392a-PAK dated August 14, 1978.

Map: IBRD 10818 RI

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTANFOR THE FAUJI FERTILIZER PROJECT

1. I submit the following report and recommendation on a proposeddevelopment credit to the Islamic Republic of Pakistan for the equivalent ofUS$55 million on standard IDA terms to help finance a project for the con-struction of a fertilizer plant at Goth Macchi in the Southern Punjab,with a capacity of 1,725 tons per day (tpd), equivalent to 570,000 tons per

year (tpy) of urea. The proceeds of the credit would be relent to FaujiFertilizer Company Limited (FFC) for 15 years, including 4 years of grace,

with interest at 10% per annum.

2. On April 12, 1977, the Executive Directors approved a Bank loan ofUS$55 million for the project, which at that time was sponsored by the FaujiFoundation and Agrico Chemical Company (Report No. P-2023-PAK). However, onMay 20, 1977, before signing of the loan documents, Agrico informed the Bankand the other parties concerned that Agrico had decided to withdraw from theproject. As a result, the Bank did not proceed with the loan. We informedthe Executive Directors of Agrico's withdrawal (Sec M77-497 dated June 9, 1977)and indicated that a new proposal would be submitted for their considerationif efforts to make new arrangements for the project proved successful. Themain parameters of the project now proposed are substantially the same as inthe earlier proposal. Annex III, page 37 shows, in a summary table, themain differences between the Fauji Agrico project and the present project.Because of Pakistan's present external financial situation, the proposed BankGroup's contribution is now in the form of an IDA credit instead of a Bank

loan (see paragraph 16).

3. The Fauji Foundation (Pakistan) and Haldor Tops$e A/S (Denmark)are the sponsors of the project and are participating in the financing withsubscriptions of up to US$29.2 million equivalent and up to US$5.2 millionequivalent respectively to the share capital of FFC. The IndustrializationFund for Developing Countries (IFU-Denmark) and the Islamic Development Bank(IDB) will also participate with subscriptions of up to US$5.2 million andUS$10 million, respectively, to the share capital of FFC. A consortium ofPakistan financial institutions and commercial banks will subscribe to theremainder of the equity.

4. The United States Agency for International Development (USAID) andthe Kreditanstalt fuer Wiederaufbau (KfW-Germany) are also participating withloans of US$40 million and about US$40 million equivalent, respectively. Inaddition, Italy is providing a credit of up to US$10 million equivalent andthe Government of Denmark will provide a loan of up to US$3.9 million equiva-lent as part of the contingent financing plan in the event there are costoverruns (see paragraph 44). The USAID loan is for 40 years at 2% per annumduring the grace period and 3% per annum thereafter. The KfW loan is for 30years at 2.1% per annum. These four loans would be made to the Government

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which would relend them to FFC on the same relending terms as those applicable

to the IDA Credit. The remaining Rupee financing would be provided by a con-

sortium of Pakistan financial institutions and commercial banks in the form

of loans.

PART I - THE ECONOMY

5. The most recent economic report "Pakistan: Development Issues and

Policies" (No. 1924-PAK, dated April 7, 1978) was distributed to the Executive

Directors on April 11, 1978.

6. Economic performance during the 1970s compares unfavorably with the

record of rapid growth of output and exports during the 1960s. GDP has grown

at about 3% per annum in real terms, compared to more than 6% during the 1960s,

and rapid population growth has meant that there has been virtually no increase

in per capita incomes. Output in the major productive sectors (agriculture and

industry) has risen even more slowly than GDP - at about 2% per annum - and GDP

itself only achieved a growth rate of 3% as a result of expansion in construc-

tion, government and service industries.

7. To a considerable degree this disappointing performance has been due

to factors outside the Government's immediate or direct control. The 1970s

began in crisis with the war with India and the separation of Bangladesh, and

there followed a series of economic and climatic misfortunes which undermined

the basis for growth. These included a poor monsoon in 1974/75 and serious

floods in 1972/73 and 1975/76, as well as the petroleum crisis and the subse-

quent world recession. Moreover, political instability and uncertainty have

had serious economic implications. It is also, however, true that the policy

response to these problems has in many respects been inadequate and has con-

tributed to the economy's disappointing performance. Changing attitudes to

the private sector, illustrated by a series of nationalizations that began

in 1972, had a depressing effect on private investment, while legislation

served to increase real wages in the industrial sector at a time of other cost

increases and increasingly difficult export markets. Major increases in public

investment have more than offset declining private investment, but new invest-

ment has been concentrated in capital-intensive, long-gestation projects which

in many cases have yet to result in increased production. This investment

contributed to a massive deterioration in the trade account. To finance

imports, and to cover serious shortfalls in public saving, the Government

resorted to heavy borrowing from abroad, including a major increase from OPEC

countries. Workers' remittances have increased very substantially over the

last two years, but stagnant exports and rising debt repayments still impose

a serious strain on the balance of payments while the problem of domestic

resource mobilization continues to constrain economic development.

8. A start has been made in the process of policy adjustment and mea-

sures have been implemented which go some way towards solving the country's

serious resource management problems. The new Government has shown that it

attaches importance to the private sector. The agricultural processing

industries (except the vegetable ghee industry) have been denationalized, the

area open to private investment has been greatly extended, credit and taxincentives (especially for export) have been improved and considerableimprovements have been recorded in the labor situation. Agricultural sup-port prices have been maintained, and in some cases increased, and an effortis being made to improve input availability to the farmer. Finally, a reviewof Government investment and related priorities was undertaken in the contextof the preparation of the revised Fifth Plan, which recognizes the limitationsof overall resources and the need to redirect the pattern of economic develop-ment away from large public industrial and other long gestation projects andtowards the agricultural and social sectors.

9. To date the impact of these measures has been limited. While GDP,according to preliminary estimates, grew by around 6.5% during FY78, comparedto only 1.7% in FY77, this represents in large measure a recovery in agricul-ture, especially in the cotton crop which fell disastrously in the previousyear. In contrast, there has been little indication of a significant recoveryin private investment or exports, the budget deficit is likely to remain largein FY79 and inflationary pressures and the external balance continue to givecause for concern. In addition, the 1977/78 wheat crop was a major disap-pointment, with production well below, and thus import requirements con-siderably above, the Government's target.

10. While the overall economic situation provides little room for ma-neuver, and the policy changes that have already taken place are in the rightdirection, it remains the case that further measures which face basic issueslimiting economic growth in the longer term are needed. These issues includethe farm-level factors affecting low productivity in agriculture; the struc-ture and competitiveness of the industrial sector; the factors lying behindcontinued rapid growth in population; the need to redirect social serviceexpenditures; the deterioration in the performance of public sector enterprisesand the administrative machinery generally; the low elasticity of tax revenuesand the problems of public resource mobilization; and the large trade deficitand the continued dependence on capital inflows from abroad.

11. Agriculture remains the economy's mainstay, accounting directly forroughly a third of GDP, employing about 60% of the labor force and, directlyor indirectly, providing nearly two thirds of total exports. Much of agricul-ture's disappointing performance in recent years is attributable to the declinein cotton output since other crops (with the notable exception of wheat lastyear) have generally fared better. Nevertheless, even for these (wheat, rice,sugar) there was a major setback in the early 1970s to the 'green revolution'initiated during the 1960s. While a deceleration in the introduction of newtechnologies after several years of rapid growth is not surprising, yieldsstill remain well below those achieved under comparable conditions elsewhere,even for the new varieties. Since cropped areas have also failed to respondto the opportunities created by increases in water availability (e.g., fromTarbela) production has been well below the potential implied by the resourcesand technologies available. Considerable potential still exists for theadditional use of fertilizer and other inputs, but it appears also essentialto give greater priority to evolving complementary policies and programs whichhave a direct impact at the farm level. Major improvements are possible in

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the water delivery system and in the general level of agricultural practices.High priority therefore needs to be given to water course improvement programs,to investments designed to reverse water-logging and salinity and to projectsdesigned to establish a systematic and effective extension service. Withoutsuch initiatives, agricultural growth in the longer term will suffer and thebenefits from the available inputs and resources will remain well below theirtechnical potential.

12. Industry contributes about 16% of GDP and during much of the 1950sand 1960s provided a major stimulus to growth. Growth rates in industrialproduction have, however, declined from about 10% per year during the 1960sto only 2% in recent years. The major structural change in the industrialsector since 1973 has been the expansion of the public sector from about 10%to about 25% of industrial assets. Private investment has declined markedlyas a result of nationalization fears, rapid cost inflation, labor problems,adverse export market conditions and problems in raw material supply. Thetextile industry, in particular, which accounts for about 40% of value addedin large-scale industry, has suffered from problems of inefficiency, excesscapacity and a lack of competitiveness in foreign markets, while manufacturinggrowth generally has been affected by the poor performance of public sectorenterprises. A revival in the industrial investment climate depends on aperiod of reasonably prolonged stability and a shift in the overall balanceof production towards higher value added products which are responsive tomarket opportunities and preferences. Also important will be progress in,and results from, oil exploration for which there appears to be considerablepotential.

13. While it is clearly vital to re-establish a base for more rapidgrowth in the commodity-producing sectors, it is also true that rapid growthin population, currently running at about 3% per annum, has seriously handi-capped the country's ability to improve living standards. Family planningprograms have unfortunately had little effect and there have been few changesin the socio-economic environment of a type that usually accompany declinesin fertility. Rapid population growth places severe burdens on Governmentresources simply to maintain education and health programs at their currentinadequate standards. However, without higher literacy rates, improved healthfacilities and a reduction in child mortality, it is doubtful that populationgrowth rates can be much reduced. Expenditures on social services remaincomparatively low and undue emphasis has been given to such elements as highereducation and urban health facilities. High priority needs therefore to begiven not only to increased allocations for family planning and social serviceexpenditure but also to its redirection to serve the wider interests of thepopulation and the economy.

14. Policies that face the longer term issues in both the productiveand the social sectors will take time to have an appreciable effect and willhave to be implemented in the context of continued domestic and externalresource constraints. Domestic resource mobilization has become a major prob-lem area in the economy. Public sector development expenditures increasedfrom 5.5% of GDP in FY71 to 11.2% in FY77 while non-development expendituresmore than trebled. Public sector savings declined, and indeed were negativefrom FY72 to FY75, although they recovered to about 2% of GDP in FY77. The

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scope for non-inflationary domestic borrowing has been limited by decliningprivate savings, so that financing public expenditures has become heavilydependent on external and domestic bank borrowing, with foreign assistancefinancing no less than 70% of development expenditures in FY76, and an evenhigher proportion of public investment. The share of development expendi-tures financed through foreign assistance fell to 48% in FY77 because of adecline in aid receipts. To improve domestic resource mobilization, addi-tional taxation and improvements in tax administration are needed; non-development expenditures must be restrained, possibly through selectivereductions in subsidies; and the contribution of public enterprises shouldbe enhanced, for instance through tariff increases. Given the limits todomestic and external borrowing, and the constraints on increasing revenuesand decreasing current expenditures, it remains essential to limit the sizeand adjust the content of the public investment program. Emphasis needs tobe given to providing adequate resources for agriculture and other areaswhere substantial and rapid increases in production and exports appearpossible, as well as to the social sectors, which have been neglected inrecent years. Conversely, the proportion of resources devoted to capital-intensive industrial and long gestation projects should be reduced.

15. The external position has been greatly assisted by rapidly risingworkers' remittances from abroad, notably from the Middle East, and thesehave risen from US$130 million in FY73 to US$578 million in FY77 and to anestimated US$1,100 million in FY78. This increase has, however, been morethan offset by a massive deterioration in the trade balance with the resultthat the current account deficit increased from about US$130 million in FY73to more than US$1,000 million in FY75. It remained at roughly this level inFY76 and FY77, with rising remittances offsetting further increases in thetrade deficit, but declined in FY78, due mainly to the massive increase inremittances. Allowing for debt repayments, however, external financing re-quirements amounted to about US$1,100 million in FY78. Long-term capitalinflows on concessional terms have been insufficient to cover this amountand - even after suspending debt payments to Iran - substantial recourse toshort-term borrowing proved necessary. The major uncertainty for FY79 andbeyond relates to remittances but, assuming a fairly conservative estimatefor these, external financing requirements are likely to remain well aboveUS$1,000 million in nominal terms, even allowing for fairly optimistic tradeprojections. While financing in the range of US$1,100-US$1,300 millions wasobtained during the mid-1970's, funds from OPEC sources may be more difficultto arrange in the future while assistance from traditional donors is onlylikely to be forthcoming in the required amounts if appropriate developmentpolicies are implemented. Unless workers' remittances rise more rapidly thanis now expected, therefore, the external position is likely to continue tight.

16. Total external debt outstanding at the beginning of FY78 amountedto about US$6.27 billion of which US$3.76 billion was due to Consortiumbilateral donors, US$1.04 billion to OPEC, US$1.08 billion to multilateralagencies and the balance to other bilateral and private lenders. Contractualdebt service to official agencies rose from US$313 million in FY73 to US$394in FY77 although the burden of these payments was eased to US$200 and US$310million respectively as a result of debt relief arrangements. The four-year

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debt relief agreement with bilateral consortium members expired on June 30,1978, and if no further agreement is reached, debt service payments will risesteeply, greatly increased by repayments under relatively short-term OPEC bor-rowing. In FY79, contractual payments are expected to amount to around US$535million and considerably more in subsequent years. As a proportion of exports,non-factor service payments and workers' remittances, debt service can beexpected to rise from about 15% in the FY75-77 period to around 17.5% in FY79,assuming substantial growth in both exports and workers remittances. Pakistanobviously needs to exercise care in protecting its ability to borrow to meetfuture requirements, and to restrict commercial borrowing to a minimum. Forthis reason, Bank Group lending to Pakistan is currently confined to IDAcredits. Pakistan's debt to the Bank and IDA at the end of FY77 was about15% of its external public indebtedness; by 1980 this ratio is likely to fallto about 11%. The share of the Bank Group in total debt service (after takinginto account debt relief from other creditors) is now about 20%, but this isexpected to decrease to about 9% in 1980.

17. Pakistan's resource endowment, especially in the Indus Basin system,is substantial and during the 1960s the economy demonstrated a considerablecapacity for growth. Rough estimates suggest that the economy could grow atperhaps 5-6% per annum over the next five years, and that this could be accom-panied by a wider distribution of the benefits of growth than was achievedduring the 1960s. A start has been made in the process of policy adjustment,but it is clearly evident that a wide range of further initiatives are neces-sary to deal with the causes underlying the economy's disappointing performancein recent years. Only if these new policies and programs are pursued consist-ently over a number of years will the basis for longer-term improvements inliving standards for the population as a whole be established.

PART II - BANK GROUP OPERATIONS IN PAKISTAN

18. The cumulative total of Bank/IDA commitments to Pakistan (exclusiveof loans and credits or portions thereof which were disbursed in the formerEast Pakistan) now amounts to approximately US$1.7 billion. During its longassociation with Pakistan, the Bank Group has been involved in almost all sec-tors of the economy. Through FY78, 37% of total commitments were for publicservices, 30% for agriculture, 31% for industry (of which 10% was for indus-trial imports) and 2% for education. Lending for public services has amountedto almost US$700 million and has included loans and credits for railways,electric power, gas pipelines, Karachi Port, highways, telecommunications andwater supplies. A large part of past lending for agriculture was for IndusBasin projects. Lending for industry has been mainly through the PakistanIndustrial Credit and Investment Corporation (PICIC). For most projects forwhich loans and credits are being disbursed, construction is now going aheadsatisfactorily. The principal problems being encountered are that the ratescharged by some of the public services have not kept pace with inflation and,hence, some utilities are not earning adequate returns. Annex II contains asummary statement of Bank loans and IDA credits as of June 30, 1978 and noteson the execution of ongoing projects.

19. Lending operations in Pakistan have three main objectives. One ofthese is to support the directly productive sectors of the economy and, inparticular, to increase production of import substitutes such as foodgrains,edible oils, fertilizer and engineering goods and to sustain export growthin cotton yarn and textiles, rice and a large number of other industrial andagricultural products. The main part of Bank Group assistance for industrywill continue to be through financial intermediaries. These include PICICfor the medium and large-scale private sector, the Industrial Development Bankof Pakistan (IDBP) for the small and medium scale industrial sector, and theNational Development Finance Corporation (NDFC) for industries in the publicsector. For the agricultural sector IDA lending is expected to be concen-trated on the Government's program to increase productivity in the Indus Basinby controlling salinity and improving the utilization of surface irrigationand groundwater. The Bank is the Executing Agency for a UNDP technicalassistance grant for improving agriculture and water planning in the IndusBasin.

20. Another objective is to support the necessary expansion of, andto improve the institutions which are responsible for, the principal publicservices which have benefitted from Bank Group lending in the past, namely,the Telegraph and Telephone Department, Karachi Port, Water and Power Devel-opment Authority, Pakistan Railways, Sui Northern Gas Pipelines Ltd. and theLahore Water and Sanitation Agency. A number of these agencies are beset byinstitutional weaknesses. In some cases, improvements are being made withtechnical assistance financed under loans and credits. In other cases, wherethe problems are of such a nature that action by government is required, theBank Group is encouraging GOP to take remedial measures.

21. A third objective is to extend lending operations into areas whichwill help to bring economic development to the poorest strata of the popula-tion. This shift implies increased lending for agriculture and rural develop-ment and will involve significant lending for projects complementary to theIndus/Tarbela works. In the urban sector, Bank missions have been workingwith municipal authorities on the plans for the urban development of Karachi,whose population now exceeds 4 million, and Lahore, Pakistan's second largestcity. A Karachi master plan was completed in 1974 with the assistance ofconsultants financed by UNDP. Within the framework of the plan, a projectwas proposed and appraised for urban upgrading in the Lyari section of thecity. This project, however, has been deferred indefinitely due to Govern-ment reconsideration of the project cost and financial arrangements. Plann-ing in Lahore, which has a population of about 2 million, is at a much earlierstage than in Karachi and the immediate need is for technical assistance.Accordingly, the IDA credit for the second Lahore water supply, sewerage anddrainage project includes provision for the financing of urban studies inLahore. The emphasis being given to agriculture and other projects with lowforeign exchange component justifies the financing of some local expendituresin appropriate cases.

22. A number of projects for Bank Group financing are currently underappraisal or being prepared in Pakistan. Appraisal missions have completed

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field reviews of a third power project, a petroleum development project and

another irrigation and drainage project. Preparatory work is proceeding on

a fourth agricultural credit project, a third highways project, a Karachi

bulk water supply project and an agricultural extension and development pro-ject in Sind.

23. IFC has made investments in nine Pakistan enterprises for a totalof US$30.2 million, of which US$22.8 million was by way of loans and US$7.4

million by equity participations (these are shown in Annex II). About US$11

million remains outstanding. The enterprises assisted by IFC include three

in the field of pulp and paper products, two in textiles and one each incement, steel and fertilizers. IFC is also a shareholder of PICIC.

PART III - THE FERTILIZER SECTOR

General

24. As already described in paragraph 11 above, the growth in agricul-

tural production in Pakistan has slowed down in recent years. In order toreverse this trend, the Government is endeavoring to increase the availability

of major inputs such as water, fertilizers, improved seeds, pesticides, farmercredit and extension services. About 48 million acres, or 24% of the coun-try's total area, are cultivated. The main crops are wheat, cotton, rice andsugarcane. About 34 million acres, or 71% of the cropped areas, are irrigated

by an extensive system of canals and tubewells, one of the largest in theworld. The Province of the Punjab, the major agricultural region with about

25 million cropped acres, has a particularly well-developed irrigation system.

25. The expansion of Pakistan's agricultural output will depend pre-

dominantly on developing the potential for higher production in irrigatedareas. At present, year-to-year variability in canal water supply is large

and this uncertainty has a negative impact on fertilizer consumption. TheBank Special Agricultural Sector Review, circulated to the Executive Directorsin March 1976, concluded that on average only 55 to 60% of the water requiredfor maximum yields, and thus for maximum fertilizer application rates, was

actually available at the farm gates. Moreover, because of the yearly varia-tion of water supply, the farmer cannot rely on a stable supply of more than

40 to 45% of water requirements. The Government's efforts to increase totalwater availability from 97 million acre feet (MAF) in 1975 to 116 MAF in 1980are of vital importance for increasing agricultural production. About halfof the increased water supply will be through surface water schemes (mainly

Tarbela) and about half through groundwater development (mainly tubewells).

Fertilizer Market

26. During 1965-73, consumption of nitrogenous and phosphatic fertilizer

increased from a low base at average annual rates of 28 and 70%, respectively.The primary reasons were the introduction of high-yielding varieties of wheat

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and rice during the mid-1960s, increased availability of water and attractivefertilizer prices. The 1973 floods, the subsequent drought, the delay in theavailability of Tarbela water because of the mishaps in 1974 and 1975, and thedoubling of fertilizer prices (reflecting the increase of import prices) with-out commensurate increases in crop prices led to a decline in fertilizer con-sumption during 1973-75. Disruption of the fertilizer distribution system,following the takeover of fertilizer marketing in 1973 by the ProvincialGovernments, also contributed to this decline.

27. In 1975 and 1976, the Government took a number of steps to stimulatefertilizer demand. Crop procurement prices were increased and fertilizerretail prices lowered. Fertilizer companies were allowed to revive theirmarketing and distribution systems, and marketing margins were increased.In addition, lending procedures for small and medium-scale farmers were sim-plified. These measures, combined with good weather, increased consumptionof nitrogenous and phosphatic fertilizers by 23% and 80% respectively in1976 and a further 15% and 8% respectively in 1977. The large increase inphosphate use reflected the Government's efforts to maintain a favorable pricefor phosphate in order to correct the imbalance in the nitrogen/phosphateratio. Despite the rapid increase, fertilizer application rates in Pakistanare only one-quarter to one-third the recommended levels, depending onthe crop.

28. Taking into account planned increases in water supply and existingcrop/fertilizer price ratios, fertilizer consumption is expected to continueto grow at relatively high, though declining rates in the next few years.Gradually, as opportunities for increasing water supply and increased use ofhigh-yielding varieties diminish, the growth rate is expected to slow downfrom 15% in 1977 to about 7% by 1981, and 6% in 1985. The level of nitrogenconsumption is forecast to increase from 511,000 nutrient tons in 1977 to954,000 tons in 1985. Demand for phosphate fertilizers is expected to nearlytriple from 118,000 nutrient tons in 1977 to 329,000 tons in 1985.

Fertilizer Supply

29. Pakistan has been heavily dependent on imports for its fertilizersupplies. At present, the country has five operating fertilizer plants, witha combined capacity of 317,000 tpy of nitrogenous and 17,500 tpy of phosphaticnutrients. Two private sector plants, including the Bank/IFC-financed DawoodHercules plant near Lahore, account for 75% of the industry's installed capacityfor nitrogen and over 80% of output. The remaining three plants, accountingfor 25% of capacity, are operated by the public sector National FertilizerCorporation (NFC); because of design deficiencies in the ammonia sections,the capacity utilization of one of these plants currently averages about 40%.In 1977, local production met about 60% of nitrogen and about 10% of phosphateconsumption.

30. Using Pakistan's natural gas, the Government plans to expand fertil-izer production substantially. Including the proposed project, three largeplants will increase production capacity of nitrogenous and phosphatic fer-tilizers by 320% and 900%, respectively, by 1981. Two of these projects - thePakarab plant in Multan, in the financing of which the Bank is participating

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and the Pak-Saudi plant at Mirpur Mathelo - will be operated by NFC. With theimplementation of the proposed FFC project, Pakistan should be self-sufficientin nitrogenous fertilizer from 1981 until 1984. A small surplus of domesticproduction is expected during the period.

31. Both retail and ex-factory prices of fertilizers are set by the Gov-ernment. Retail prices, which are uniform throughout the country, are revisedperiodically to take into account import prices, domestic production costs andcrop prices. The last major revision was undertaken in early 1976 when retailprices were reduced, despite high world prices, in order to stimulate agricul-tural production. Since then, the minimum price for cotton and the procurementprice established by the Government for rice have been increased but those forwheat and sugar have remained constant. While price relationships have beenadequate to encourage the rapid increase in fertilizer offtake mentioned above(paragraphs 26 and 27), there is evidence that further price adjustments,especially in relation to wheat, may be desirable. Ex-factory prices areestablished on a case-by-case basis, with the aim of allowing each manufacturera reasonable return on investment. In recent years, the retail price of urea(PRs 1,360 per ton in 1977/78) has been much higher than the price paid to themain domestic producers (PRs 784 to 856 per ton). The difference, less dis-tribution costs including dealer margins, is paid as a Development Surchargeto the Government and is used to partially offset the subsidy on imports. Asnew projects with much higher initial capital costs (and hence higher ex-factory prices) come on stream and the cost of imported fertilizer continuesto increase, the net subsidy paid by the Government will increase substantiallyunless the retail price of urea is raised. The newly established FertilizerPlanning Committee (see paragraph 41) is expected to review pricing policiesas a whole, including the treatment of different factories and the extent towhich the Government budget can be expected to bear an increasing subsidy. Anyrecommendations for increased fertilizer prices would have to be accompaniedby adjustments to crop output prices in order to maintain, or increase, thereturns to the farmer.

PART IV - THE PROJECT

32. The project was reappraised in March/April 1978. An updatedAppraisal Report (No. 1392a-PAK) is being distributed separately to theExecutive Directors. Additional data on the preparation of the project aregiven in Annex III. Negotiations were held in Washington in July 1978. ThePakistan delegation was led by Mr. Aftab Ahmad Khan, Secretary, Finance andEconomic Affairs, Government of Pakistan.

33. The proposed credit would be the Bank Group's third operation insupport of the fertilizer industry in Pakistan. The first loan - in July1968 - was for US$32 million equivalent and was made, together with an IFCloan of US$1 million and equity investment of US$2.9 million, to DawoodHercules Chemicals Ltd. (DH) for a 1,100 tons per day (tpd) urea plant nearLahore in the Punjab. The project has been a major technological and economicsuccess. The plant was completed at close to the original estimated cost andbegan production in July 1971, virtually on schedule. It has consistently

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operated at high capacity. Because of higher than expected import duties,the reluctance of the Government in granting price increases, the temporarynationalization of the fertilizer distribution system in 1973 (in 1975 pri-vate producers and dealers were again allowed to market fertilizers), andthe devaluation of the rupee in 1972, DH's financial return has been lesssatisfactory (8% for local and 4% for foreign investors) (Project PerformanceAudit Report No. 1345 dated November 10, 1976). However, the Government hasrecently allowed DH a higher price. The second Bank loan in the amount ofUS$35 million was made in May 1974, to Pakarab Fertilizers Ltd. to helpfinance the expansion and modernization of the Government-owned calciumammonium nitrate (CAN) and urea plant at Multan. The Asian Development Bank(ADB) and the Abu Dhabi National Oil Company (ADNOC) are providing loans ofUS$27 million and an equity participation of US$31 million, respectively.When completed, the expanded plant will have a capacity to produce about910 tpd ammonia, 1,000 tpd prilled nitro-phosphate, 1,800 tpd CAN and 200 tpdurea. The project has borne the full brunt of the worldwide inflation andequipment delivery delays following the oil price increases in 1974. Ori-ginally estimated to cost US$106 million equivalent, it is now expected torequire US$199 million. Additional funds are being provided by the OPECSpecial Fund, NFC, ADNOC and commercial banks. Startup, originally scheduledfor early 1977, is now expected to take place in late 1978. The main causesof delay were a shortage of civil contractors' capacity in Pakistan and latedeliveries of critical equipment. Because of the increase of internationalprices of fertilizers that has taken place in the meantime, the projectremains economically viable.

34. The proposed project incorporates lessons learned from the DHand Multan projects. It embodies the elements that have contributed to DH'stechnological and economic success, namely, the involvement of local andforeign partners which combine the knowledge of local conditions with tech-nical and marketing experience; the hiring of competent engineering firmswhich have an incentive for constructing the project on time and withina specified budget and have experience in constructing the Pak-Saudi plantwhich is almost identical in design and only about 20 miles away from thesite of the proposed project; emphasis on reliable plant design; and carefulplanning and training. The Marketing and Pricing Principles Agreement betweenthe Government and FFC also deals satisfactorily with the pricing, taxation,devaluation and marketing issues which adversely affected DH's financialperformance. Similarly, the contracts between FFC and the engineering andconstruction firms provide a satisfactory framework for dealing with theimplementation problems that have affected the Multan project, and containincentives to complete the project on schedule and within a specified budget.These firms have assumed full liability for foreign exchange cost overrunsbeyond US$12 million above US$105 million for the landed cost of importedequipment, materials and spares included in the basic estimate.

35. Essentially, the project arrangements, taken together, constitutea package designed to reconcile three major objectives. First, the Governmentof Pakistan wished to attract foreign private capital and know-how to thecountry in general and to the fertilizer industry in particular to supplementthe effort of the public sector, which is over-stretched in constructing two

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large plants and to provide competition. Second, private sponsors, bothforeign and local, were naturally concerned that in a situation in which theGovernment controls many of the determinants of sales revenue and cost - inparticular, input and output prices as well as marketing margins - theirability to earn a reasonable return on investment should not be jeopardized byGovernment actions. Third, the Government was concerned that the arrangementsfor the project in no way impaired the sponsors' incentive to build and operatethe plant efficiently. To that end, the Government has agreed with FFC andthe sponsors that the project's ex-factory price will be set so as to yieldthe sponsors a reasonable return on their investment if the plant is builtwithin a specified capital cost and operates at efficient levels (paragraph47). The Company will assume the production and sales volume risk and will beallowed to market its output without territorial restrictions in the country.The Company will realize the stipulated return on equity if it builds the pro-ject on time and at or below the established ceiling on capital cost, operatesefficiently at stipulated levels of capacity utilization and effectivelymarkets its output.

Project Scope and Location

36. The proposed credit would finance the construction of a 1,725 tpdgas-based urea plant, an intermediate ammonia plant with a capacity of1,000 tpd and ancillary facilities at Goth Macchi in the southern Punjab. Theproject includes a bagging plant, storage and loading facilities, water puri-fication and effluent treatment units, a power plant, maintenance facilitiesand a housing colony. The plant will be located halfway, about 375 miles,between Karachi and Lahore along the main railway line and highway connectingboth cities. Gas will be transported from the Mari field by a 33-mile pipe-line included in the project and to be built, owned and operated by FFC.The field's reserves are estimated at 4.0 trillion cubic feet (TCF), of which1.8 TCF are proven. Including the proposed project, the Mari field wouldsupply three fertilizer plants, of which one (Esso Fertilizer) has operatedsince 1968 and another (Pak-Saudi Project) is under construction. The provenreserves would meet the requirements of the three plants for about 25 years.However, if a fourth plant of the same size as the proposed FFC plant wereestablished on the basis of Mari gas, the assured reserves would meet the gasrequirements of the four plants for only about 15 years. Accordingly, theGovernment has agreed to guarantee the supply of gas to the project and notto sanction additional users until adequate additional reserves are proven(Section 3.06 (b) of the draft Credit Agreement). A contract between EssoEastern Incorporated and FFC for the supply to the project of gas for 20 yearshas been concluded.

Project Implementation

37. The project will be implemented by a newly established company,Fauji Fertilizer Company Limited (FFC), in which the sponsors, the FaujiFoundation (Fauji), and Haldor TopsOe A/S (Topsoe) will provide up to 36% and

6.4%, respectively, of the equity capital. Fauji is a charitable trust estab-lished in Pakistan in 1953 for the benefit of ex-military personnel and theirdependents. The main benefits provided by Fauji are medical services and

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educational stipends. The Foundation owns and operates nine industrial pro-jects (sugar and textile mills, gas bottling and distribution, and foodprocessing). Currently, Fauji employs about 12,000 people, and in FY77 had an

estimated income of about US$9.6 million equivalent and total assets of US$84million equivalent including net fixed assets of US$30 million equivalent.Topsoe is a well known Danish chemical plant design and process developmentcompany. Founded in 1940 by Dr. Haldor Tops6e, and reorganized into a limited

company in 1972 with a share capital of Danish Kroner 30 million (US$5.6 mil-lion equivalent), the company is engaged in chemical process development and

licensing, process engineering, detailed engineering, catalyst research andmanufacture, as well as consulting and advisory services. It employs about450 people and in 1977 had operating earnings of US$4.7 million equivalent.Topsoe is 50% owned by Snamprogetti S. p. A. (Snam) of Italy. Snam has beenselected as the engineering firm by the sponsors; it will employ the commer-

cially proven Topsoe ammonia process. The direct selection of Snam by thesponsors was accepted by the Association and other lenders because Snam'scontract price and services in 1978 compared very favorably with the proposalsevaluated in 1976 for the Fauji-Agrico Project. This earlier competition and

evaluation process provided a good basis for establishing the reasonablenessand competitiveness of the Snam proposal.

38. Within FFC's organization which will supervise the engineering andconstruction firms selected (Snam and its wholly-owned subsidiary, ComingS.p.A.), Topsoe will have prime responsibility for project execution. AnicS.p.A. of Italy, a major manufacturer of fertilizers and petroleum products(like Snam, a company within the wholly Government-owned ENI Group), has beenretained to assist the FFC plant during the initial three years of operation.Under a technical agreement with FFC, Topsoe will provide for a reasonable feetheir current and future know-how relating to engineering, design, procurement,and marketing and will also assist in training FFC's personnel. Anic, in addi-tion to acting as the operating company, will provide assistance in all pre-operating phases regarding design, engineering, pre-start-up and commissioning.James Chemical Engineering (JCE), in its role as Owner's Representative, hascarefully reviewed the activities of Snam to date and will continue to do soto assure appropriate supervision of Snam.

39. In full operation, the project will employ about 660 people. Be-cause of the rapid expansion of Pakistan's fertilizer industry, the majorityof the skilled work force would have to be trained. To this end, FFC hasarranged for Anic to provide training of Pakistani personnel. Key Pakistanipersonnel will also be attached to the engineering firm during the engineeringand procurement stages and to major suppliers during equipment manufacture.Further training needs will arise during the final stages of plant construc-tion and during start-up and commissioning. It has been agreed that byDecember 31, 1978, FFC will submit to the Association a training programwhich it will implement after obtaining agreement from the Association(Section 2.08 of the draft Project Agreement). The Association will beconsulted on the appointment of FFC's Chairman and Managing Director and ofits Assistant Managing Director (Section 3.02 of the draft Project Agreement).

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Marketing

40. Based on a transportation and marketing study, FFC plans to marketabout 80% of its sales in the Punjab. The remainder will be sold in SindProvince. Prior to plant start-up, FFC will undertake a two-year seeding(market and marketing development) program. It has been agreed that bySeptember 30, 1978, the Government and FFC will develop a seeding program andthat the Government will allow FFC to obtain sufficient local or importedfertilizer for this purpose (Section 3.04 of the draft Credit Agreement).

41. The Government recognizes that, because of the variety of factorsand linkages affecting fertilizer use, there is a need for more effectivereview and coordination of policies and programs in the fertilizer sector,particularly in pricing, marketing margins and credit. There is also a needfor sound statistical data and a more effective organizational frameworkto coordinate, within the Government decision-making machinery, fertilizerpolicies and programs. The Government has, therefore, recently set up aFertilizer Planning Committee (FPC) to examine these matters and to reviewits findings with the Association (Section 3.03 of the draft Credit Agreement).At present, retail dealers receive a commission of PRs 40/ton, which may notprovide adequate incentives for them to undertake a vigorous marketing effort,particularly to reach more remote areas and smaller farmers. The Governmenthas agreed to consult with the Association from time to time regarding theadequacy of dealer's margins (Section 3.08 of the draft Credit Agreement)and intends to request the FPC to review this matter on a priority basis.

42. FFC plans to transport about 50-60% of its output by truck fordistances up to 300 miles and the remainder by rail. Pakistan's present andprospective fertilizer plants located near the Mari gas field will make heavydemands on the country's rail transportation facilities. The Government hasestablished a Fertilizer Transportation Task Force, consisting of representa-tives of GOP and of the railways and fertilizer companies, to formulate, basedon a recent transportation study, detailed action programs and to supervisetheir implementation. The Government will ensure that Pakistan Railways pro-vide the required number of trains to transport FFC's output (Section 3.05 ofthe draft Credit Agreement).

Cost Estimates and Financing Plan

43. Total financing required is estimated at US$260.3 million, of whichUS$158.8 million is in foreign exchange. The project is exempt from importduties. Physical contingencies have been provided at 5% for equipment and10% for civil works, handling and freight. Price escalation for equipment hasbeen calculated at 7.5% during 1978/79 and 7% thereafter. On civil works,escalation rates of 15% per annum during 1978/79 and 12% thereafter have beenassumed because of the overstretched state of the heavy construction industry,particularly in remoter areas of Pakistan. The cost estimates include initialworking capital requirements of US$12.7 million and interest during construc-tion totalling US$21 million. A summary table of the cost estimates is shownin the Credit and Project Summary.

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44. The base financing plan is as follows (in US$ million equivalent):

Local Foreign TotalEquityFauji 27.6 - 27.6

Topsoe 1.8 3.2 5.0IFU 1.8 3.2 5.0IDB - 10.0 10.0Pakistan Financial Institutions 30.3 - 30.3and Commercial Banks

61.5 16.4 77.9DebtIDA - 55.0 55.0USAID - 40.0 40.0KfW - 40.0 40.0Italian Government - 7.4 7.4Pakistan Financial Institutionsand Commercial Banks 40.0 - 40.0

40.0 142.4 182.4

Total 101.5 158.8 260.3

Although US$260.3 million is the best estimate of total project costs at thepresent time, arrangements have been made for possible cost overruns. Undera contingent financing plan totalling US$272.0 million, cost increases wouldbe financed by additional equity contributions of US$1.6 million from Fauji(bringing its total equity contribution to US$29.2 million equivalent) andUS$0.2 million each from Topsoe and IFU (raising each of their contributionto US$5.2 million equivalent), additional equity from local banks and addi-tional loans from the Danish and Italian Governments and local banks.Cost increases beyond the amount covered by the contingent financing planwould be financed partly by Snam under the guaranteed price provisions oftheir contract (see para 34) and any remainder by the Government.

45. FFC's share capital will be paid in pari passu with loans to main-tain a debt/equity ratio of 70/30 (Section 4.06(a) of the draft ProjectAgreement). This is relatively high for a new company building a grass-rootsplant with associated infrastructure, and having to repay its debt on an equalprincipal basis. However, the Marketing and Pricing Principles Agreementbetween FFC and the Government provides the company with enough liquidityfrom the first year of operation to enable it to service its debt withoutdifficulty. Moreover, USAID has agreed that its loan be subordinated to thoseof other lenders until the debt/equity ratio reaches 50/50, which is expectedto be achieved during the fourth year of operation. The USAID loan has beencommitted. The KfW loan is expected to be signed in September 1978. Thecommitment of the Pakistan financial institutions and commercial banks hasalready been obtained. The remainder of the foreign exchange requirementswould be met by an Italian Government loan and, in the event of cost escala-tion, a loan from the Danish Government. The IDA credit will become effectiveafter agreements covering loans from AID, KfW and the group of commercial

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banks and equity contributions from Fauji, Topsoe, the Consortium of Pakistanbanks and financial institutions, IFU and IDB have been signed. Disbursements

from the proposed IDA credit would, however, be limited to US$2 million equiv-alent until all loan and equity agreements have become effective. All foreignloans will be relent to FFC for 15 years, including four years grace, at 10%p.a., a rate comparable to that charged by local financing institutions forlong-term foreign-currency loans. FFC will bear the foreign exchange risk.

Since 1975 wholesale prices have risen an average of 8% per year; inflation

during the next three years is expected to be only slightly less severe.

Procurement and Disbursement

46. Foreign loans will be used to finance imported services and equip-

ment. Local expenditures will be financed by local funds and partly byTopsoe's and IFU's equity, after competitive bidding. The balance of Topsoe's

and IFU's as well as IDB's equity, together with the Italian credit, willfinance engineering, licenses, technical assistance and training. USAID'sloan, which is tied, would finance equipment and JCE's fees. The balance of

imported services and equipment will be financed by the Association and KfWon a parallel basis. Except as mentioned below, international competitivebidding procedures (ICB), in accordance with Bank Group guidelines, will be

used for equipment and materials to be financed by the Association. Process-critical and proprietary equipment and items in limited supply to be financed

by the IDA credit (estimated to cost US$6.0 million in total) will be pur-chased following bidding from qualified suppliers, which have been approved bythe Association. In addition, items costing less than US$100,000 each, up to

a total of US$3.0 million, may be purchased through international shopping.The IDA credit will be disbursed to meet 100% of foreign expenditures forimported equipment and services and 100% of the ex-factory cost of locally

manufactured equipment awarded after ICB. Qualified Pakistani manufacturersparticipating in international bidding would be accorded a preference of 15%or the prevailing import duties whichever is lower. Local manufacturers areexpected to supply not more than US$1 million equivalent (less than 2% of theIDA credit). Up to US$1 million of the IDA credit will be used for retroac-tive financing expenditures prior to the date of the Credit Agreement.

Financial Covenants

47. As already noted, prices of fertilizer in Pakistan are controlledby the Government; ex-factory prices are set on a case-by-case basis with theaim of allowing a reasonable return on each manufacturer's investment. Forthe proposed FFC project, FFC entered into a Marketing and Pricing PrinciplesAgreement with the Government which provides that the ex-factory price forurea will be set, for a period of 10 years following the commencement of com-

mercial operations, so as to yield a 16% annual after-tax return on the par

value of preferred shares (to be held by Pakistan financial institutions andbanks) and a 20% annual after-tax return on the par value of common shares,provided the plant operates at 65% of capacity in the first year of operation,85% in the second year, and 90% from the third year onwards, based on 315operation days a year. FFC will bear the production and sales volume risk

and will only realize the above returns if it sells at or above annual levels

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stipulated in the agreement. The agreement also contains two major provi-sions to induce the sponsors to mur'mize project cost. First, there willbe a ceiling on the ex-factory price of urea should capiLal costs increasebeyond US$272 million (i.e. by more than 520 above the pr2sent cost estimate),which is considered an upper limit for project cost if eLficiently executed.Secondly, funds borrowed from or through the Government -o finance costoverruns in excess of US$272 million will be repaid by FiC prior to anydividend payment.

48. To ensure sound financial management of FFC, il has been agreedthat, unless the Association shall otherwise agree, FFC will:

(a) not make additional investments in fixed assets outside theproject exceeding US$5 million equivalent per year plusunutilized balances of previous years, or cumulatively,a maximum of US$15 million in any one year (Section 4.04of the draft Project Agreement);

(b) not exceed a debt/equity ratio of 70/30 (Section 4.06 (a)of the draft Project Agreement);

(c) achieve a current ratio of at least 1.5 at the project com-pletion date and 1.2 thereafter (Section 4.06 (b) of thedraft Project Agreement) and will not incur any additionallong-term debt if a debt service coverage ratio of at least1.4 cannot be maintained in the succeeding fiscal years(Section 4.06 (c) of the draft Project Agreement); and

(d) pay dividends only out of accumulated net earnings andno dividend or any other distribution with respect toshare capital will be paid unless a current ratio ofat least 1.5 is maintained after such payments (Section4.05 of the draft Project Agreement).

In addition, Fauji and Topsoe have agreed that they will take all necessarymeasures to ensure that FFC performs its obligations under the Project andother Agreements (Section 2 of the draft Fauji Topsoe Agreement).

Project Benefits and Risks

49. The estimated financial rate of return on the project as a whole is21% before taxes and 14% after taxes. The economic rate of return of theproject is estimated at 23%. These rates of return are sensitive to changesin fertilizer prices, capital cost, delays in completion of construction andcapacity utilization. However, even under the unlikely combination of themost adverse foreseeable circumstances, they remain satisfactory. One impor-tant benefit of the project would ": substantial savings in foreign exchange.The average annual savings, after payment of dividends to foreign shareholdersand royalties and fees to Topsoe and Anic, are estimated at US$79 million in1978 terms. The project would also have unquantified benefits of managementtraining, assured fertilizer supplies, and development of a marketingorganization.

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50. Project design, which will meet environmental and safety standardssatisfactory to IDA, will be based on modern commercially proven technology,thus minimizing technical risks. The plant will be built by an experiencedengineering firm, which has the incentive to minimize cost, and will be man-aged and operated with the assistance of experienced partners and advisors

who combine the knowledge of local conditions with technical and marketingexperience and whose return is sensitive to capital cost, timely completionand capacity utilization. Because of inflationary pressure in Pakistan, thereis some risk of price escalation beyond the US$26.5 million equivalent pro-vided in the cost estimates and an additional US$11.7 million has been securedon a stand-by basis from the sponsors, local financial institutions and Danishand Italian Governments. The Government will provide, on terms satisfactoryto the Association, funds to cover costs in excess of US$272 million. Theforecast of fertilizer demand is based on conservative assumptions, but thereis a risk that demand for fertilizer will not grow at the projected rates ifthe Government pursues adverse agricultural pricing and other policies. Thepromotion of agricultural development figures prominently in the Bank'sdialogue with the Government of Pakistan. There will also be a slight salesrisk during the first three years of operation when domestic nitrogenousfertilizer production is expected to exceed demand by a small amount. Theplant, however, is expected to be able to export any surplus output profitably.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

51. The draft Development Credit Agreement between the Islamic Republicof Pakistan and the Association, the draft Project Agreement between theAssociation and FFC, the draft Agreement between the Association, Fauji,Topsoe and Anic and the Recommendation of the Committee provided for inArticle V, Section I(d) of the Articles of Agreement are being distributedseparately.

52. Special conditions of the project are listed in Section III ofAnnex III. Additional conditions of effectiveness (Section 5.01 of the draftCredit Agreement) include the signing of the USAID Agreement, the KFW Agree-ment, the agreement to be entered into by the consortium of Pakistan financialinstitutions and banks, the Fauji Topsoe Agreement, the IFU Agreement, the IDBAgreement, the Participation and the Shareholders' Agreements (between Faujiand Topsoe). No withdrawals from the Credit in excess of an aggregate ofUS$2 million equivalent may be made until these agreements, as well as theDanish loan and Italian credit agreements, have become effective.

53. I am satisfied that the proposed development credit would complywith the Articles of Agreement of the Association.

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PART VI - RECOMMENDATION

54. I recommend that the Executive Directors approve the proposeddevelopment credit.

Robert S. McNamaraPresident

AttachmentsAugust 16, 1978

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ANNEX ITABLE 3A

PAKISTAN - SOCIAL INDICATORS DATA SHEET

LAND AREA (THOU KM2)PAKISTAN REFERENCE COUNTRIES (1970)

TOTAL 803.9 MOST RECENTAGRIC. 244.5 1960 1970 ESTIMATE INDIA THAILAND TURKEY**

_ -_------_ -------- ------- --_-----_ ----- _ -----__-- ------ _-----------

GNP PER CAPITA (USS) 60.0 110.0 170.0 100.0 210.0 500.0

POPULATION AND VITAL STATISTICS

POPULATION (MID-YR, MILLION) 45.3 59.8 71.3 547.6 36.3 35.6

POPULATION DENSITYPER SQUARE KM. 56.0 74.0 89.0 167.0 71.0 46.0PER SO. KM. AGRICULTURAL LAND 198.0 246.0 292.0 308.0 263.0 65.0

VITAL STATISTICSCRUDE BIRTH RATE (/THOU, AV) 49.2 47.6 47.4 41.0 44.3 40.6CRUDE DEATH RATE (/THOU,AV) 26.3 20.1 16.5 19.0 13.7 14.4INFANT MORTALITY RATE (/THOU) 142.0/a8b 124.3 113.0 .. 80.0 153.0/aLIFE EXPECTANCY AT BIRTH (YRS) 42.1 47.4 49.8 47.2 55.5 54.4GROSS REPRODUCTION RATE 3.2 3.7 3.6 2.9 3.2 2.6/b,C

POPULATION GROWTH RATE (X)TOTAL 2.3 2.9 3.0 2.3 3.1 2.5URBAN 5.0 4.0 3.9 3.2 4.9 4.9tt

URBAN POPULATION (X OF TOTAL) 22.5 24.8 26.0 19.8 15.0 38.7

AGE STRUCTURE (PERCENT)0 TO 14 YEARS 42 /ac 43C 4 41.6 45.1 41.7

15 TO 64 YEARS 52.0:/a 52.7 .. 55.3 51.8 54.065 YEARS AND OVER 6.0 3.9 .. 3.1 3.1 4.3

AGE DEPENDENCY RATIO 0 9/a c 0.9 .. 0.8 0.9 0 9ECONOMIC DEPENDENCY RATIO 1I7: i 1.6/a I i.1 /a t.:9/ 1:,/e

FAMILY PLANNINGACCEPTORS (CUMULATIVE, THOU) .. *- .- 14585.0 470.0USERS (% OF MARRIED WOMEN) .. .. .. ,, 10.0 8.2

EMPLOYMENT

TOTAL LABOR FORCE (THOUSAND) 13000.0 18100.0 20400.0 218000.0 16700.0Lh 140D.0. LfLABOR FORCE IN AGRICULTURE (%) 59.0 57.0 54.8 69.0 79.0 63.4UNEMPLOYED (% OF LABOR FORCE) .. .. . 4Z4 L, .. 11.9 t

INCOME DISTRIBUTION

% OF PRIVATE INCOME RECID BY-HIGHEST 5% OF HOUSEHOLDS 20.3 3 17.8 17.3 25.0 . 22.0 326HIGHEST 20% OF HOUSEHOLDS 45.3.4 41.8 41.5 53.1 /C 51.1/C 60.6LOWEST 20X OF HOUSEHOLDS 6.4 Li *.0 8.4 4,7 /C 5.6 I 2.9LOWEST 40 OF HOUSEHOLDS 17.5 .Z 20.2 20.6 13.1 /C 14.3 9.4

DISTRI8UTION OF LAND OWNERSHIP_ __ _ __ __ --- _ _ __ _ _ -- _ _ _ _

% OWNED BY TOP 10% OF OWNERS 46.2 .. ,.,0

% OWNED BY SMALLEST 10% OWNERS 0.4 .. 07iHEALTH AND NUTRITION

POPULATION PER PHYSICIAN 7450.0/& 431O.O/b 3910.0/a 4890.0 7970.0 2250.0POPULATION PER NURSING PERSON 14860.07W 844O.079 7180 07a b 5220.0tg 6650.0 1770.0APOPULATION PER HOSPITAL BED 2070.07; 1870.0 18 50.0s 1610. 890.0 500.0

PER CAPITA SUPPLY OF -CALORIES (X OF REQUIREMENTS) 80.0 94.0 93.0 92.0 103.0 112.0PROTEIN (GRAMS PER DAY) 48.5 .. 5U.0 53.0 52.0 78.0-OF WHICH ANIMAL AND PULSE 1?6/a. 14.0/c 14.3 16.0 17.0/d 22.O/k

bEAT' RATE (/THOU) AGES 1-4 .. 17.4/d .. .. .. 1

EDUCA ION

ADJUSTEU ENROLLMENT RATIOPRIMARY SCHOOL 30.0 44.0 51.0 63.0 81.0 109.0SECONDARY SCHOOL 11.0 14.0 15.0 30.0 16.0 28.0

YEARS OF SCHOOLING PROVIDED(FIRST AND SECONO LEVEL) 1O.O/k 10.0/6 10.0/C 12.0 12.0 1t.0

VOCATIONAL ENROLLMENT(% OF SECONDARY) 1.0 1.5 1.5 .. 14.0/e 14.0

ADULT LITERACY RATE (%) 16.0/1 20.0 21.0 33.0 79.0 55.0/rn

HOUSING

PERSONS PER ROOM (URBAN) 3.1/m * .. 2.8 .. 1.9OCCUPIED DWELLINGS WITHOUT

PIPED WATER (X) .. .. .. .. . . 64.0ACCESS TO ELECTRIC4TY

(X OF ALL DWELLINGS) .. .. .. .. .. 41.0

RURAL DWELLINGS CONNECTEDTO ELECTRICITY (X) .. .. .. .. .. 18.0

CONSUMPTION

RADIO RECEIVERS (PER THOU POP)- 6.0 . 15.0 21.0 7B.0 89.0PASSENGER CARS (PER THOU POP) 1.0 3.0 3.0 1.0 5.0 4.0ELECTRICITY (KWH/YR PER CAP) 22.0 67.0 137.0 114.0 124.0 247.0NEWSPRINT (KG/YR PER CAP) 0°'/a n 0.6/C 0.3 0.3 1.0 0.7

SEE NOTE AND D-EFT-------------I-----O--R---E-------------------------I----------------------- -----SEE NOTES AND DEFINITIONS ON REVERSE

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NOTES~~~~~~~~~NON

ULess o:.therwise noted, dote for 1960 refer to any year between 1959 and 1961, for 1970 between 1969 and 1971, and for Most Rerent Estimate between1973 ad 1976.

00 Turkey baa been, aeIlcted aaa bjective o-nutry for Pakistan sine. the natural resoercee, agricultural hbasia and eooialefficientprodootion and tnv..earnt proaranoare likely to be similar in both countries. Moreover, Turkey and Pakistan hav asomilar religions andcultural baokgrownde, with nany of the oas social and cultural barriers ta ond.anination with Turkey being Oscsewhat ahead in, this procesa.

PAKISTAN i96i Ia Tuciodra data for Bangladesh; lb 1962-65; .c ixcclading frontier regions; /d 15-59 and 60 years and over respectively;/g Retio of population under 15 sod 65 and over is tetal labor fence; If 1963-64; La Reglstered, mar all practicing in the

.- try0; /h Includes. nidwivss; Ai Including dispensaries; LT 1960-62; lk Up to roatricolatiec (10th grads);/1 yasrsaend over; the aility no read with undarstanding a short statement Mon very day life in, spy lacl enae;j data

rater to houceho1ds; to Figors dogs not inladed iports by lend.

1970 /afoti of populatIon under 15 end 65 and over is total labor force; /b Registered, not all practicing in the country;- 7.W lec1iding dats for Bangladesh: Id Enlodiga population ef D.1. Than cud Pssha-a Divisiene; Is Tp cc oacrlculstinn

(10th grade).

MOST ORENTM ESTIMATE: /0 Registered, not all pr...ricing in the country; lb T1o1sdingource-dafdwvra; It Op to natricolation(10th grade).

INDIA 1970 /cotio of population coder 15 end 65 and Over to total loabr force age 15 cod over; /b Eatimeted by National Sample Survy,In toc onfv the average ounher of person Necks of onenpIn)yert as perce..tege of ntotl peranon /weehe in, the total labor force;1o967-69; Id lnludinf nidwivee.

THAILANDh 1970 Ia Otio of population cadet 15 and 65 sand ovan to e.non-ically active popalation - age 11 and over; /b Econoanioally active__ _population age 11 cnd over; Ic Rural only; Id 1964-66b Is Public schools, whinh includes rechntcl'educstian at

the poot-secodary level.

TRKNiEY 1970 I 1967; /b tEoludee 17 eastern provinces; /n 1965-67; Id 1965-70; Is Ratio of population coder 15 and 65 and over______ ____ __to total laboar force; I/f Civilian labor force; /a Inluding Peak season agricultural underemployment; /6 Disposable

mouswe (1966) ; / Agricultural land (1973), ignoring landless bouaseholds; Ij Including assistant nurses and midwives;Lk 1964-6,6; /1 1967-68; _/n Person sic years and aver who tell the caseus takers that they can read and write..

R13, may 12, 1978

DmEIuWO Of BQIUL DIDICATORLand Are ithe _e

2) P-elatiLsn ft. norsin se.so - Population diolded by noeber of praticing

Total- Total surface area comprising leand area and island wasters, mle sad female graduaste nurses, "trained" or "CertifiRed" unures, sandAgric.- Moat recent estimate of ogfutrlare awed iaoporarily at par,s- axeiliarY personnel with trafaing on exe,prience.neatly for crops, pastures, nrket 6kitchen gardns or to ha. follmw. Poeslatiem ea ibseal bed - Pspulatinn divided by saber of hospioti heda

avial spbic and Privts general sand speniallzed hospital andiMP en cotta(000 - NP Per- .. pit. astiesstes at current sacht Prices, rahabilitatifn Renters; excludea nursieg homes end etatblishesents farcaolmdby a- nono-rion method asa Woand Book Atlas (1974-76 basis); asatediaI ad pevea.tiva osre.

1960; 1970 and 1976 deta. r capiat el ccalci:.% t eairm-ts5 - Computed teem energyequvalnt f mt fed uppiesavila:ble is oeustry per capita per dsy;Population and vital stetistice avaitaha aupplies mompriss domesi prduatio. imPerta, lea. separis, andPopulation (mid-year mIlion) - Anof July fi"ap: if eat avaIlable, syctag Changes in stack; met supplies exclude anial feed, seeds, quantities usedof twa end-year estimates; 1960, 1970 and 1976 data. ia feed processing end Iass.. in distribution; reqeireests were eatieted

by FAO baead ee physiatogical masdate normael activity ad health comaid-Ponulottoc dteait, - par eooars he - Mid-yea population. por square kil amss sting smeiraoental tosaperat,,rs, body saight, age and se. distribtciee af(100 hectares) of Catol area. pepulatilso, ad allseeg lOt far waste at household level.Population, density - Par aeqarels a f geric, land - Esutad aso babov fee Pa aia ed t orR foram ear day) - Pesate. courntest Patpr naplesagitnloland only. ma.t uppty effeeda pe e; met supply of food Is defined se abeve; require-

mentse fall. csuetrias esatablished by USDA Eceameo Research Se,vife-pital statiatios provide fat a mdLatesin alloweance at 60) grew. at total preteke pee day, andCrude birth rate par thmsaand, ovrage - Amnes1 live hints per thousand at 20 gslatm- animal and poles pnatain. at which 10 gr-s should beniamid-year population; tnyaeritoasetic averages -ding is 1960 and 1970, Prtotai; rheas standards are, lamer thee thoss of 75 gems of tstal protein

and five -year averag ending in 1975 far emat recent setimsate. and 23 geese- at aimal pretein as an average fat the world, Preposed.by PADCrude deaat rate ear th-au nd. average - Annual. deathe per thousand o at md-year, in tha Third Wlorld Fead Survey. papuletian; ten-year aritesetlc averages ending in 1960 and 1970 end f in- Pa aiaeeemas rmeimel end Pulse - Protein sapply af teedyear averag ending in 1970 for most rec..ant estimate, dervdfoonmasadple in gin sper day.Infeant aertaliry rate 0/thaul Annatl destba at imfsta uandar ens pear at gag Death rats (Itheul eRe- 1-4 - Anneal dsthe Per thousad in sea group 1-iper thb.a.a.d live births. years , to children 19 this age group; suggested as em indicator ofLitte a..eceenY at birth (yr.) -Avera.ge ounber of peace at life resaOsiniaso atale,trition.birth;, usually f ives-year averages ending in 1960, 1970 and 1975 tar develop-tag nonns.EducatIon

Drre preerdu_ctiam rate, - Average oa-brofa live daughtrer a comae will boar Ajseeniuatrio-pmryscohol - Rarallmant of all ages as Par-in bee o-na reproductive period if abs eaperienca prvaemt age-apacifc canfg oprmyshe-aepeplatia; includse nhild-m aged 6-lI yesesfertility rates; usually five-year enrages ending is 1960, 1970 and 1973 but adjusted fat diffa-rst Iengths at primary edccecio; tar cousries withfor dvleping coutries. universsl educatime, enainllmet may sexceed 1% sine suew pupils are balso,Po ainarmed, rats it) - total - Compound annutal growth -atas aft md-year at abase th. eg inial school age.poPulation fo at1950-60, 1960-70 and 1970-75. Adutdspnla t eRe- seeondary sohenl - t'pmsatd as shav; eanedaryPpoelatnon areth rate (X - urban - Computed like greth eats of total adustim rqures at laset four yearsa appenwed primary- Instruction;paplation; di fferat defini-sin of urban arses may afgect comparability at Provides general, vacational at teachar traimig Instructions far pupils

dat amnconcia.a 12 to 17 years at ajpp; corrsponsmdaq ora B aaal elddUrban P=claio 0i7. attoal) - Ratio at urant teisl Papuletion; diffsrent Yasetor f aln reie (first an 4end levels) - Total yeasr. gdefiaitiaaa of urbsa erae may afsot comarability of dsta anang coutries. shalg attseneday val, vesatenJ im_tnstia my be partially asc"1ataly axcleded.

dee arootta fsromm) -Children, (0-14 years), weoftia-aga (13-64 years), Yaaimlerian t tscdr)-Pcranliaiafm sldAndl retired (f65 yaa. an ve)a parcatagas ef mid-yeas populaiaoin. - tehia,idsra=rahrpoe chitch aprate Redap4adancl at asAR. desend-sy ratis - Ratio of Population undsr 15 sold 65 end over to chess departments, of asos_dary Rtin, fsaZRof rs15trug 4 AdulRItiree rae (1 -Litarata adults (able ta read and write) aa par-nonenic dpeodnov rtis Rata ofpoplatin under 11 and 63 and awr to cetg ftoa dl oplto gd i pasts end aver.tbs labor force in age gr-ep of 15-64 yeasr.

lankly olnii-eceeaf,sitv.tel-tmusslati-s neshr at acptove aio..iLof birth-sset-1i delcs oadsr ..cepices at natiemal fesly Planslng program Praaertm ubn - Average mnbr of persona par rcae in acuiadsince inception. cneinadwlngRnrban are...; dwellings aclud.a ne-pateanent

pasil oteciog- uses ftat mrrie woan -Preatagas af oarrisd wassa at atrciuca sand -n-,pisid prtschild-heaing ~age4 (115-44 ~Year)who s bieth-coutral devices, to all marrisd Oore wlig iha oa sa 'i-Oope svsinldciigwesn is aas age group. iuraanrularawihtisds or a ptada piedwtr sIiiaa.

EmaL1Y___R_t ~~~~~~~~~~~~~~~~as percentage -at all.anpiad dwal1inga.ftraleyso Acetitealapriciy ftofnaluddsingasad Conventionsl dwellinga with.oa -lprfoc lihaayed -u aludngoiel ashes_. pesn,icuigswd lcrct nlvn quarter. as Parcent of total dwellings Is urb,an sdfornue sod uemployed ba estotadinghanaecivea,audeots, etc.; dafinltiona rural areas.is v-rio- c.oanrosa sea co ospa-bla ualdelia oomatd o lciie (. -Cn. pucda bv a ua

Lahor force insnolue(1 .gicrllbor, fract (in fanning, torestey, dwlings nY. - .bw a ..basting and fihag a ecetg of totallabor force.5(1)96fl!oved it at la~~bor farce) Unemployd -rsusully dafimd as Persona wha ton-emtionare able ad willin:g ta tkbe a Mo, tu 07 a job on a iven fey, reanad out Raiteavr er-thasna-p) - All types at receivers foe -adi. broadamataof a job, and aseking work furaaeiidmnm eee e eedn u Ato ers pulcPer thousand of Papulation;.. slolds. unicensed renei-ar

ek; may rot be loc,p-cbla between coatrias des ta differest datefi.1iuns iscusr and in pearst whea registration at radia sacs was in affect;of .acpIoved and source at data, e.g., employment office statitics, samPle data fur recant years may not he ompracble since east csartris abolishedsuvys, cOpalsry uneploynan in...ra.n..ticensing.

111- dItIblill -- I I~~~~~~~Pessga or.fet ho ca - Psaanger ours. comprise eotsfr cars aseatingloo'os dtao-0bcicsprc ta :t5 c priva te imooe (both is nash and kind) lTessthas, sight Pereou; selude mablsoes hoarae and militaryrece.ived by riohast 17., rchet20%, poorst lit, and pooreat 40% at h-ous- heblle..balds. ilsortloity Okeb/vo per cas) -~~~~~~~~ ~ ...oel n-Samapriem of industrial, cins-oisl,I

Diotrib.tiu. .1,11.~~~~~~~~~~~pali and private eleotricity in kilmawti hour per capita, genrally_itrbaio oflrdaorei Poccenoages of land noted by ecaltbiest 10% hpsasd on pradacties data, witkoselmet c farels. ngid e lo-and poorest 107% of land oweetrs. Roe far imparts and expartts of al-triniity. .. -Si.btal

Stealth_sod Nutrition~ esimtdrrm omsic cpita ansul tanaceptian in kilogramsP`eoc4Laco proran - Populatiss divided by mache at praticingaoat. i."t mot fa.pjtphyairisra qualified free a nedicl1 scheel at universty leve..

-22 -ANNEX I

ECONOMlC DRWVLOI 87T DA:A

(A-ount. n MIllions of U.S. Dollr,)

II t 7aEll 73z..Eetod 1975 19771- 197811- 1931975 17.96 1977 197 1983 21 19 93 988 1977 1978 i983

t "1977 Pries- *d Kthan.e Rate. Atetaoe Annool Crooth Rates As Prrc-t of COY

44720NAL ACCO41TS

.-tog corNotc Prndoct 14,227 14,452 14,709 15,710 20,729 1.7 9.8 5.7 4.4 100.0 100.2 99.9

oos fro- Tere.oflTrado -300 _ 264 _ -36 nil

Co -ns Gonstlt foco- 13,927 14,1i 14,709 15,674 20,740 2.8 6.6 5.8 4.4 l00.0 100.0 100.0

2-port, f-ci. NTS 2,430 2,549 2,933 3,405 3,488 9.8 16.1 0.S 3.5 19.9 21.7 16.8-f xr. rts t 1. NF5 (toport <"- o tty3 1 192 1. 9 1,405 1,656 2.,299 8.5 17.9 6.8 5.0 9.6 10.6 11.1

Rec...te Cap 1,238 1,160 1,9528 1,749 1,189 11.1 14.5 -7.5 2.8 10.3 11.2 5.9

C:rtapttot Eopett ditte 13,046 13,033 13,497 14,400 28,235 1.7 6.7 4.8 4.2 91.0 91.9 97.9.-v.stvntt topondi Nor,. (Iec. sooks) 1,929 2,642 2,740 3,055 3,683 19.2 11.9 3.8 3.9 18.6 19,5 17.8

VC:,stlo Sactaga 81 1,155 1,212 1,306 2,506 17.3 7.8 13.9 5.4 0.2 12.1 17.0I ttoai SatiNg. 991 1,345 1,634 2,053 3,163 28.3 25.6 9.0 3.5 11.1 15.0 15.3

:3R HANDISE TRAOD A-n-Il Dat, a Correct Price A-erane Atros Growth Ratre As Perrrnt of Total

loportt Capttal Goode 621 723 884 1,076 1,660 19.3 21.7 9.1 01.1 03.4 24.4 34.9

nt-eccediste Goods (soti. fol.) 799 651 799 813 1,200 0.0 1.8 8.1 12.0 30.2 26.0 25.2of ihlth, fer-ttlier 97 56 63 142 35 _20.0 125.5 -24.0 - 2.4 4.5 0.7

POL. 350 357 All 486 612 10.8 18.2 4.7 102 10.0 10.5 10.9Gorcuptloo Ooode 837 399 2432 37d9 600 -23.0 o8 63. 4 9.0 14.04 0. Id8 1'2. .]Z 7

Other Inporta' 130 209 319 375 681 90.0 17.6 17.8 9.0 12.1 12.0 14.4

Got-i trrthandtse Irporte (t..f.) 2,322 2,341 2,645 3,129 4,762 6.8 18.3 8.7 11.7 100.0 100.0 100.0

Eoport.oas cotton 159 99 30 110 302 .43.0 266.7 30.0 6.9 2.6 8.2 10.7

Cotton raro 88 144 1~~ ~ ~~~~ ~~~~ ~~~~~~~ ~~~~~ ~~~~2 3 118 247 .19.6 .4.1 10.9 13.4 00.6 98 0.7ctot Cloth 133 130 162 168 29 10.4 3. 7 12.0 13.4 14.2 12.6 10.5

IrsI 233 250 250 230 596 3.6 -8.0 21.0 9.1 21.9 17.2 21.0others 367 539 576 712 1.391 25.0 23.6 14.3 16.2 50.5 53.2 49.1

Total nerthandiae Eport. (fot) 978 1,162 1,141 1,338 2,832 15.7 17.2 16.2 14.1 100.0 105.0 100.0

:c-h-rdiAe Trade ldio.. Aea. 1977 .10

Etport Prire lode, 83.9 83.9 100.0 106.0 151.7 9.2 6.0 7.4 6.9onpart Petoe Index 105.0 ~~~~~ ~~~~~~ ~~~~~~~~~9:9. 100.0 100.0 150.9 .2.5 0.5 6.0 7.0

Ter=s of Trida 79.9 84.3 100.0 97.7 100.5 11.9 .2.3 0.6 0.1RAPOn of VGats,, lnde, 105.4 121.3 100.0 113.9 164.8 _2.5 )3.9 7.7 6.8

VALUE ADDED 8Y SECTOR Aentul Data at 1977 Frttss nd Ethngee Rttes Avera-e Ano-l CroSh RO-tee A, Pertent of Toal

grti4tr 4,121 4 306 4,446 4,783 5,989 3.9 6.4 4.6 4.2 33.0 33.6 31.5'aoofantoriog 2,840 2,965 2,929 3,090 4,333 1.5 51.5 7.0 B.0 21.9 21.7 23.9Other sectors 5.804 5,974 5.985 6,377 8374 1.5 6.5 5.6 0.9 44.0 44.8 44.7

rotal 12,765 13,245 13,360 14,250 18,696 2.3 8.1 5.6 5.9 100.0 100.0 100.0

LCOLIC FINANCE A-nual D tc t 1977 Price, . nd tochanas OAtea Aterhsa Aena1 Grott Rate, An Porro-c of 000

loottroi Gonerno,eit)l/C - Rc cpns 2,059 2,221 2,264 .. .. 4.9 .. .. .. 15.4C-rrnt EP-dtt-re 2.451 2.502 2.30 . -28 1

Othrt Peblia Sector.. . *-- .. .. .. .. .. .. .. ..Pnblto Sector Is-e-t.ee 1.370 1,539 1,754 13.1 .. .. .. 11.9

CUERENT EXPENIlIT DETAILS Actnu lmst. enI. f IL tI. PtBLIc SEG07R At 1977 Yrices and inctatas rat,. % of to1

(A -. Total C1rrett Eorndttore9 1975 0974 1937 1978 IWESTM7E9NT PdOG6AN 1975 1974 1977 1975-77

Ed-catoi 7.0 7.8 8.6 9.8 Soolsi Sectors 232 308 265 17.3ther Social ServIces 18.7 12.0 8.2 7.4 Agrictul-trtI 356 360 390 23.7

o;ttolt-n 3.2 6.1 4.6 4.1 Lndoetry M Nttlo 238 307 479 22.0tIer E-tan e-i.es 3.2 3.0 3.3 4.0 P-der 090 060 257 12

of.en.e 39.7 41.6 41.4 39.0 Tr.nep. 4 c,enniooo--oc 167 2s0 344 19.1AdrtJInt-ti.on 7.5 8.3 9.3 8.6 Othet 87 24 19 2. 7OtherO/ 20.6 23.2 24.8 26.9

Total lopa,di-cra 1,370 1,539 1, 754 100.0Total Correct Elparditoro 100.0 100.0 100.0 100.0

Pbhiic Sefton s-nito!7/ .83 102 291 6.7Do=etic Onroo-ong 356 376 672 30.1F-ret 0

Bortoeto 1J097 1061 791 40.2

Total Ft,tctti - 1,370 1,539 1,754 100.0

NOte: All orors gioa iI thi table refer to the PaRkitan tfiol ypear July I - lone 30. The fle-al Tear - s identiffld by the calrtder yTen i nhih It rndt.

1/ Otidoal brt.rer tco-l tnpcrts en recorded Ib th, Stte R.ank and b7 the Otcltic-I Olivston at the Otina-ry of Ftante.21 Oo,nidatrdfd Fedrl nd Pro-onct] rrl roa ene.3/ nc.odir" roprtdfturr on h . Ta-bhla DR= r-jeo-.4, .ncludre nterrat cetnoonts.

odj..ard for innee o tt torrent bhdgt, cratetrn of -rpl..e and eeif-fi.Oncnt g by poblf sector.

Sooth AtoNronrtprnthay 12, 1978

- 23 - -- 6 6ANNU I

PAKISTAN MIlANCE OF PAYMErN. EXTERNAL ADSIS7ANCE AND DEdrsoants in milions oi .S. doll arm at currcnt prices)

1973/74 1*74/75 t975176 1976717 977tU 1978179 1979/80 1980/al L981/82 1962/6) [977/76 - L982t83

-- 111 F FA-~-- 111SLNeNRiY icLtDlLE OF PA17116T46

1,997 2,317 2.675 3,044 3,46881.Eopurts (-i1. NFS) 1,202 1,252 1,433 1,406 1,679 _71 4349 4691 5.266 8.4mports (tnct NFS) I 829 -1,29 _ -6,637 -71782 -1,724 -1.674 -1,647 -1,776

j627jij 2:5519 2.533 * 4 18379667 -,7

16 -244 -260 .2 77 -292 11.7trimmere (net) _80 -93 -109 -141 -141. -66 -64 -62 -62 -58 -litrect Ion, nmestnnncas. (gret) A38 A14 -36 -28 -68 1,610 1,281 1.350 1,350 1,350 S.8

Aurbeem' Renttnsncme (gross) 138 21~ ~ ~~~ ~~3 335 578 1, 020 00 25 -3 - -1 -k-rr Faocor Seroit. e (n t) 12 7 _37 -12 .2

Currrnc Transfers (nt) .. ..t .C-- Tt-f- (-0 -- - -- -- ~~~~~~~~~~~~~~~~96 .49 -649 _-634 -7177-

Plalcca on torrent Account -549 -1,16B -947 -1,052 -1.028 _969 _T 649 _634 7774255

PrLcain limct Innemnatant (met) * - 41 45 50 166 6678600 00 0D 00 8.2Official Uspicti Gronts (net) 67 104 120 149 100

DlFburs_ nt/ 446 918 1,067 649 1,099 989 1,052 1,074 ,24B6 1,20Dtsboramssntsk' -107~~~~~~~~44 432 1047 -649 -28_366 -06 .. 24 -476 -398

Net Dtsbretm-at- 339 786 903 480 841 645 652 650 670 606

Othi r46LT Lo a. 30 30 30 30 30

DisborssOetta ... .... ... . . 5 3 -2 -2 -2 2

Nrt ibrsm,tta 1. 27_ . .. _ -2 8 28 28 28Ner Di.b.rtm-t.

Capital Tranmactions n.n.i.-2/ 40 371 49 180Chans It lit RssnvT s ( inTrte.) 103 -93 _166 198

Actual -

RAcuT Aol LutN 00684ITlEN11N SUIT AID DEBT SERVICE 1973/74 1974/75 1973/76 197/57

Officia1 GOrnte 3 39 24 164 ' - t-lm De tDots. A D bt4/ 6,521 6,893 3D5 6,641mtnnonPoblic Dnbt

4/ 86 935 149 141

Poblic MALT Lo-ns Ptal 60on Dobt St.i1

187 2 135253 3149IDM 60 60 so 70 Tat-DebtohI Sabi- Srnln18.28 03 1DA 53 82 108 94 Tth r Debt Sennia (.nt) 18i 2i8 253 310Other Mtttilltsr-l 82 71 119 94Gorsr,osni/ 973 572 679 43 oardn AK EIpact Earnings (2)2/

Suppliers ~~~~ ~~~~~~~~~~15 4 2 -15fFircOal Insitttian 22 16 - Poblic Debt Samvi 13.8 15 4 14.3 l5.4P nc-_ Tatal Debt Se-ni-a

PBli t snei ........- T.... -SD Dict I-Vt. Ine

Total PMblit MHLT Loans 1,241 845 1,040 865 A Ange Tsem of Public Debt

l.tet,a . Prior l..r 0040 1.9 2.1 2.2 2.5Antoal Debt OWtst-ndtya o June 30. 1977 Anr. e t Prior Yetr D0OD 2.5 3.0 3.0 2.9

Disborand Onlo PercentEXTERb'AL DEFT LaDE Dabt. Sons. A Disbursed 299 257 305 330

EXTERHAL. DEBT DM0) as I olcDb 6.6 53 5.4 5.3LIBD Dabi Service 52.5 44.9 39.6 56.5

IED 330 5 IEitD s I Public Debt Setvica 28.1 19.7 15.5 18.2DIA 597 t0

Othern Mnitilt.a.l 162 3 ID Debt Dot. I Dlsborand 465 471 506 597Govrrs_nst 4,978 79 ID, as % Poblic 0bD 06D 10.3 9.6 8 9 9.5Suppliers 103 2 "N Debt Service 4.2 5.7 5.7 3 8Ftri-tiol Institutioos 92 1 IA a. P Doblic Debt Service 2.2 2.5 2.2 1.9

Poblic Debt. ne-it_

Total Poblic MALT Debt 6,264 100

Other rLT Debt.

Short-te Debt (ditsb only)

Not svoilo.bls,.aSml miaaint av ilbls- egliibl.Not a_ailable esp-rtely but it-lodd in total. L. .te than heif the elss -Et bt.d

i The figore. for 1977/78 incIds iEmpated disb-raaemt on c- onont of dmbt relisf aIrsady agr-d rith thn Pakist;n Aid Cnn-orti-tP Ocrl1die errors aid oesisaians

I rnclud4iDE toeitnscs sda foe debt relief-only shoe ebhieved through reft-ooing credits.TiNt f debt relief.

/7' Border -t -oringe Iron empprte Ilo diudg NFS and -krees'eiisns

- 24 -

ANNEX II

STATUS OF BANK GROUP OPERATIONS IN PAKISTAN

A. STATEMENT OF BANK LOANS AND IDA CREDITS(as of June 30, 1978)

Loan or US$ MillionCredit Amount (less cancellations)Number Year Borrower Purpose Bank TW IDA Undisbursed

Seventy loans and creditsfully disbursed /a 537.5 478.3

621 1969 Pakistan Railways 14.5 -- 1.1206 1970 Pakistan Engineering

Education -- 4.0 0.7213 1970 Pakistan Power

Distribution -- 23.0 1.1422 1973 Pakistan Karachi Port III -- 18.0 2.8961 1974 Pakistan Industrial

Investment 25.0 -- 3.8

988 1974 Pakarab MultanFertilizer Fertilizer 35.0 -- 0.01

492 1974 Pakistan Karachi Port IV -- 16.0 9.3510 1974 Pakistan Telecommuni-

cations III -- 36.0 4.21107 1975 SNGPL Gas Pipeline IV 60.0 -- 12.1546 1975 Pakistan Industrial

Development(NDFC) -- 30.0 7.4

- 25 -

ANNEX II

Loan or US$ MillionCredit Amount (less cancellations)Number Year Borrower Purpose Bank TW IDA Undisbursed

1208 1976 Pakistan Power Trans-mission - 50.0 - 48.4

620 1976 Pakistan Seed 23.0 22.31326 1976 PICIC Industrial

Development 25.0 - 19.3630 1976 Pakistan Lahore Water II - 26.6 25.5648 1976 Pakistan Irrigation and

Drainage - 14.0 13.11366 1977 Pakistan Livestock - 10.0 - 10.01372/684 1977 Pakistan Railways 35.0 25.0 60.0678 1977 Pakistan Education - 15.0 14.9683 1977 Pakistan Flood Reha-

bilitation - 40.0 16.5751 1977 Pakistan Hill Farming - 3.0 3.0754 1978 Pakistan SCARP VI /b - (70.0) (70.0)755 1978 Pakistan Hazara Forestry /b - ( 1.7) ( 1.7)771 1978 Pakistan Tarbela II 35.0 35.0813 1978 Pakistan Punjab Extension /b (12.5) (12.5)

TOTAL 732.0 60.0 786.9of which has been repaid 336.9 -0- 15.4

TOTAL now outstanding 395.1 60.0 771.5

Amount sold 23.3of which has been repaid 22.3 1.0

Total now held by Bankand IDA Ic 394.1 60.0 771.5

Total Undisbursed 71.31 58.4 180.8 310.5

/a Excludes the disbursed portion of loans and credits wholly or partlyfor projects in the former East Pakistan which have now been takenover by Bangladesh.

lb Not yet effective and not included in totals.

/c Prior to exchange adjustments.

- 26 -

ANNEX II

B. STATEMENT OF IFC INVESTMENTS (as of June 30, 1978)

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

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

1959 Adamjee IndustriesLtd Textiles 0.75 -- 0.75

1962 Gharibwal Cement Cement1965 Industries Ltd 5.25 0.42 5.67

1963-1969- Development1975 PICIC Financing -- 0.52 0.52

1965 Crescent JuteProducts Textiles 1.84 0.11 1.95

1965 Packages Ltd Paper Products 2.31 0.84 3.15

1967- Pakistan Paper1976 Corp. Ltd Paper 5.38 2.02 7.40

1969 Dawood HerculesChemicals Ltd. Fertilizers 1.00 2.92 3.92

1969 Karnaphuli PaperMills Ltd Pulp and Paper 5.60 0.63 6.23

Total Gross Commitments 22.76 7.46 30.22

Less: Cancellations, TerminationsRepayments and Sales 18.16 1.01 19.17

Total Commitments Now Held by IFC 4.60 6.45 11.05

Undisbursed

- 27 -ANNEX II

C. PROJECTS IN EXECUTION 1/

Credit No. 771 Tarbela Dam: US$35.0 Million Credit of March 10, 1978;Effective Date: April 4, 1978; Closing Date:June 30, 1982

This credit is intended to help finance the repairs and additionalworks required to complete the project. In September 1973, the Indus Riverwas diverted through tunnels on schedule to enable the final stage -- theconstruction of the closure section of the dam -- to be undertaken. By end-June 1974, the main embankment had been completed to full height, and thefirst impoundment began on schedule in July 1974. In early August, difficul-ties were encountered in the operation of the tunnel gates and damage to oneof the tunnels necessitated the emptying of the reservoir and repair of thetunnels and outlet structure. Agreement was reached with the parties of theIndus Basin and Tarbela Development Funds whereby special contributions weremade by a number of parties, including IDA (Credit 581-PAK), to help with thecost of repairs and additional remedial works. The stilling basins sufferedfurther damage in August 1975 and again in April 1976. Stilling Basin 3 hasnow been redesigned and repaired, and operated satisfactorily during the1977/78 irrigation season. The permanent solution for Stilling Basin 4 isstill under discussion. Serious erosion in the plunge pool below the servicespillway during 1977 necessitated additional protection works. A first phaseof these was successfully completed before the current flood season. From1975 through mid 1978, irrigation requirements have generally been met. Powergeneration by the first four units began in 1977.

Loan No. 621 Ninth Railway: US$14.5 Million Loan of June 26, 1969;Effective Date: August 28, 1969; Closing Date:June 30, 1978

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

Credit No. 684 Closing Date: June 30, 1982

The Ninth Railway Project is nearly complete; disbursements amountto more than US$13.0 million. The main outstanding item is construction ofthe first stage of a new marshalling yard at Pipri, near Karachi. The loca-tion and design of this yard were changed twice following protracted inves-tigations and negotiations between various agencies and planning authoritieswith a view to reconciling urban planning and railway marshalling objectives.

1/ These notes are designed to inform the Executive Directors regardingthe progress of projects in execution, and in particular to reportany problems which are being encountered, and the action being takento remedy them. They should be read in this sense, and with theunderstanding that they do not purport to present a balanced evalua-tion of strengths and weaknesses in project execution.

- 28 -ANNEX II

The GOP has requested an extension of the Closing Date until March 31, 1979.

The Tenth Railway Project became effective on May 9, 1977; procurement underthe Project is proceeding satisfactorily although there have been no dis-bursements so far. PR's 1976/77 traffic level and financial results wereadversely affected by the severe flooding in August 1976, a sharp drop inwheat imports and political unrest in the first half of 1977. Revised esti-

mates show an improved financial performance for 1977/78 as a result of a 20%increase in passenger fares and a 12.5% increase in freight rates effectiveJuly 1, 1977 and efforts to hold down working expenses. PR's performance ofcovenants is generally satisfactory.

Credit No. 206 Engineering Education: US$4.0 Million Credit ofJune 29, 1970; Effective Date: July 14, 1971; ClosingDate: December 31, 1978

The Credit provides US$4.0 million to finance the relocation ofthe NED University of Engineering and Technology, Karachi (formerly NEDEngineering College) and technical assistance for the upgrading of Universitystaff. The new physical facilities were expected tobe in full use by June1978. An extension of the Closing Date until December 1978, has been agreedto allow for execution of technical assistance and other qualitative improve-ment programs.

Credit No. 213 Power Transmission and Distribution: US$23.0 MillionCredit of August 13, 1970; Effective Date: December 11,1970; Closing Date: December 31, 1978

Physical construction of the grid substation and associated equip-

ment of this Project is underway and can now be considered to be 70 percentcomplete. Physical completion of the project is expected by the end of 1978.To enable retention payments and final payments for equipment deliveries tobe made, a further postponement of the Closing Date by six months toDecember 1978 has been approved.

Credit No. 422 Third Karachi Port: US$18.0 Million Credit of July 19,1973; Effective Date: December 14, 1973; ClosingDate: June 30, 1979

Credit No. 492 Fourth Karachi Port: US$16.0 Million Credit of July 8,1974; Effective Date: September 18, 1974; ClosingDate: December 31, 1979

Construction work on the Juna Bunder Berths is currently about15 months behind schedule. Quay piling was substantially completed in June1978 and shed construction is now scheduled for completion by July 1979.The initial and subsequent delays in construction of the Napier Mole Bridgewill mean that completion is likely to be delayed until late 1979 - about18 months behind schedule. About US$14.5 million (82%) of Credit 422 hasbeen disbursed. Construction of the oil berth commenced in January 1977,

- 29 -ANNEX II

some 27 months behind the program prepared at the time of appraisal, andhas now been substantially completed; only some electrical equipment lostin transit remains to be fitted. Tenders have been invited from prequali-fied contractors for channel dredging works and dredger procurement. Ninebids have been received for supply of the dredger, and bids for the channeldredging were due to be returned by June 26. Disbursements total aboutUS$5.8 million (36%) from Credit 492. Covenants and understandings reachedat the time of negotiations relating to the improvement of management andfinances have not been satisfactorily complied with. A new Chairman of KPTwas appointed in March and actions taken since then have been favorable andgenerally in line with those proposed by the Association to KPT and GOP.Cargo handling and other mechanical equipment has been contracted out forurgent repairs and new equipment is being obtained from Bulgaria. Stepsare being taken to modify the priority system of ship berthing to promoteimproved berth utilization.

Loan No. 961 Industrial Investment: US$25.0 Million Loan ofJanuary 31, 1974; Effective Date: April 3, 1974;Closing Date: June 30, 1979

The Loan was made to the Government and is administered by PICIC.The loan has been fully committed and disbursements amounted to $21.2 millionon June 30, 1978. The Closing Date has been extended by one year to June 30,1979, to accommodate three subprojects.

Loan No. 1326 Development Finance Company - PICIC: US$25.0 millionLoan of September 14, 1976; Effective Date:November 29, 1976; Closing Date: December 31, 1980

As of June 30, 1978, subprojects for US$19.3 million had beenapproved by the Bank. PICIC remains a capable institution, but its operationsand collections have been adversely affected by the recent political diffi-culties in Pakistan. Its long-term prospects will depend mainly on devel-opments in the political/economic environments, including the textile sector,which accounts for a large portion of PICIC's outstandings.

Loan No. 988 Multan Fertilizer: US$35.0 Million Loan of May 24,1974; Effective Date: July 30, 1974; Closing Date:September 30, 1978

Delays and escalating prices for civil works and, to a lesser extent,for foreign equipment have raised the total project cost above the appraisalestimate by about 87% (US$92 million). Construction delays have been due toa shortage of civil contractors' capacity in Pakistan and to late deliveriesof critical equipment. Project completion is currently forecast to be about18 months longer than the appraisal estimate and production is expected tostart in September 1978. The project's economic return is still close to 28%,because of higher forecast international fertilizer prices. The company hasobtained the extra financing required, in equity from the Government and the

- 30 -ANNEX II

foreign partner, and in debt from the OPEC Special Fund and commercial banks.The project's corporate and field management has been strengthened. Craftsmenand field supervisors from Europe have been hired to expedite plant construction.

Credit No. 510 Third Telecommunications: US$36.0 Million Credit ofSeptember 12, 1974; Effective Date: October 25, 1974;Closing Date: December 31, 1978

The project covered by this Credit is proceeding reasonably satis-factorily, but is now about 12 months behind schedule. Procurement action forall the main equipment items has been substantially completed, installationof plant and equipment is making good progress, and about 70% of the additionalsubscriber's lines are in service. As part of the project, T&T was to havebeen reorganized so as to function more effectively along commercial lines andto have been given a greater degree of autonomy. This reorganization, importantto improving the efficiency of operation of the sector, has been delayed, butproposals which appear satisfactory are awaiting final Government approval.The matter is continuing to be pursued with Government.

Credit No. 546 National Development Finance Corporation (NDFC):US$30.0 Million Credit of May 15, 1975: EffectiveDate July 17, 1975; Closing Date: September 30, 1979

The Credit has been fully committed and US$22.6 million had beendisbursed as of June 30, 1978. We anticipate that the Credit will be fullydisbursed by next March. Although NDFC is currently a highly profitableand financially stable institution there are several aspects of its operationwhich are of concern. The orientation of NDFC's activities has been towardcommercial banking; its development impact would be improved if it were toredirect its efforts toward analyzing sector problems in the public industrialsector. Its rapid expansion has placed considerable strain upon its limitedmanpower resources and newly established systems and procedures. While furthergrowth is projected over the next few years, staffing and systems developmentmay prove limiting factors.

Loan No. 1107 Fourth Sui Northern Gas: US$60.0 Million Loan ofMay 15, 1975; Effective Date: July 5, 1975; ClosingDate: December 31, 1979

Project activities are generally on schedule. A recent re-estimateof final project costs (including the additional pipelines and distributionsystems authorized by the Bank) indicates savings in foreign exchange expendi-tures of about US$7.3 million. The Borrower has applied to the Bank forpermission to apply these savings towards equipment and facilities needed forhandling additional gas supplies from the Potwar basin as well as towardseveral other items that are required.

- 31 -ANNEX II

Credit No. 620 Seed Project: US$23.0 Million Credit of March 29, 1976;Effective Date: November 29, 1976; Closing Date:December 31, 1980

Progress continues to be satisfactory. Civil works contracts havebeen awarded for the three processing plants for the Punjab Seed Corporation(PSC). It is anticipated that equipment contracts will also be finalizedshortly, and that the first processed seed from the project will be avail-able in May/June 1979. Equipment tender documents for a similar plant ofthe Sind Seed Corporation (SSC) have been approved by the Association. Co-ordination of the project has improved. Development of the Corporations'seed farms is proceeding; PSC has now started - and SSC will start next year -their registered growers' schemes. Pilot projects for vegetables and potatoesin Baluchistan and NWFP and for potatoes in Punjab have started. Progressof the Seed Certification Agency and the National Seed Registration Agencyhas been slower; GOP is still in the process of nominating the Directors ofthese agencies.

Credit No. 630 Second Lahore Water Supply, Sewerage and Drainage:US$26.6 Million Credit of June 8, 1976; EffectiveDate: September 21, 1976; Closing Date: December 31,1980

The detailed design of the project is now nearing completion butthis has been delayed and consequently the construction has also been delayedand is about one year behind schedule. UNDP is financing US engineering con-sultants who are advising and assisting WASA staff and local consultants tocarry out the engineering work. Experts provided by UK are assisting withengineering management, leak detection and training.

Loan No. 1208-T Second WAPDA Power: US$50 million Third Window Loanof February 19, 1976; Effective Date: April 30, 1976;Closing Date: December 31, 1980

Physical construction of the 336-mile transmission line betweenFaisalabad (formerly Lyallpur) and Guddu and associated equipment will startduring 1978 with a completion date scheduled for December 1980. The contractfor consultant engineering and supervision was signed in April 1976 and mostbidding documents for equipment and material have been issued with awardshaving been made on the major items.

Credit No. 648 Khairpur Tile Drainage and Irrigated Farming DevelopmentProject: US$14.0 Million Credit of July 22, 1976;Effective Date: March 14, 1977; Closing Date: July 31,1982

Overall progress is about ten months behind schedule due to delaysof about six months in appointing consultants and of a further four monthsas a result of political disturbances last year. Tenders for the supply ofa major part of the construction equipment were invited in May 1978, and bid

- 32 -ANNEX II

openings are expected in September. The Water and Power Development Authorityis completing construction of housing and offices for the construction colonyand is preparing to start construction early in 1979. Agricultural extensionactivity has begun and program staff are being mobilized. Aerial surveys havebeen completed and arrangements have been made to carry out field work for theLandsat Imagery component in April 1979. The National Bank of Pakistan plansto provide credit to farmers for leveling beginning early in 1979.

Credit No. 678 Third Education: US$15.0 million Credit of February 18,1977; Effective Date: July 6, 1977; Closing Date:December 31, 1982

The project, which became effective in July 1977, provides facilitiesfor: (a) primary teacher training and experiment on adult functional liter-acy program and related studies; and (b) agricultural education to assist indeveloping higher and middle level agricultural manpower, farmer training andrelated studies. Project implementation is about three months behind schedulebecause of: (a) delays by the Government in confirming the appointment ofconsultant architects in the Province of Sind; and (b) delays in contractingtechnical assistance for the project. The architects have been now appointedand the Government is addressing the problem of contracting specialists.

Loan No. 1366-T Punjab Livestock: US$10.0 million Loan of February 18,1977; Effective Date: August 3, 1977; Closing Date:December 31, 1982

Project implementation has been slower than expected with delaysbeing experienced in the appointment of consultants and the formation ofVillage Livestock Associations (VLA's). The Managing Director of the PunjabLivestock Board (the major project implementing agency) has been replacedand Government has given assurances that project implementation will bespeeded up. It is anticipated that milk collection from the first VLA's willcommence in July and that consultants will be in place by January 1979.

Credit No. 683 Flood Damage Restoration: US$40 million Credit ofMarch 8, 1977; Effective Date: April 27, 1977;Closing Date: December 31, 1978

Progress on this Project has improved considerably in recent months.All of the civil works restoration was completed by July 1978; orders forUS$10.5 million (of the US$12.4 million allocated in the Credit) have beenplaced for spares, equipment, materials and assemblies; and reports havebeen prepared on Phase I of the National Flood Plan and on Operation andMaintenance of Flood Protection and Drainage Facilities. The report on theCivil Works Contracting Industry has been delayed until September 30, 1978.The Association has approved reallocation of US$4.58 million from major tominor civil works restoration and US$1.64 million from spares to equipment,materials and assemblies. It should be possible to meet the December 31, 1978closing date.

- 33 -

ANNEX II

Credit No. 775 Hazara Forestry US$1.7 Million Credit of January 19, 1978;Effective Date: July 14, 1978; Closing Date: December 31,1983

This Credit became effective on July 14, 1978. Short-lists ofconsultants for the feasibility study, and for forestry and inventory spe-cialists have been prepared. There has been good progress in land acquisi-tion, building construction and local staff appointments.

- 34 -

ANNEX III

PAKISTAN

FAUJI FERTILIZER PROJECT

A. Supplementary Project Data Sheet

Section I: Timetable of Key Events I/

(a) Time taken by the country to prepare the project

One year

(b) The agency which has prepared the project

The Fauji Foundation of Pakistan, in cooperationwith Haldor Topsoe A/S (Denmark)

(c) Date of first presentation to the Bank anddate of first Bank Mission to consider theproject

November 1977; First mission March 1978

(d) Date of departure of appraisal mission

March 11, 1978

(e) Date of completion of negotiations

July 17, 1978

(f) Planned date of effectiveness

About October 15, 1978

Section II: Special Bank Implementation Actions

(a) Reviewed contract of engineering and construction firms.

(b) Reviewed contracts with operating company and technicaladvisors and between sponsors.

(c) Review training program.

1/ Subsequent to the withdrawal of Agrico Chemical Co. from the Projectin May 1977.

- 35 -

ANNEX III

(d) Review fertilizer seeding program.

(e) Review work programs and timetables of FertilizerPlanning Committee and Transportation Task Force.

Section III: Special Conditions

(a) Government not to sanction additional users ofMari gas until adequate additional reserves areproven (para 36).

(b) FFC to submit to the Association a training programby December 31, 1978, and to consult the Associationon the appointment of key management (para 39).

(c) Government and FFC to agree by September 30, 1978 onseeding program, and that Government will allow FFCto obtain sufficient local or imported fertilizers(para 40).

(d) Government to maintain a Fertilizer Planning Committee(para 41) and a Fertilizer Transportation Task Force(para 42).

(e) Government to consult periodically with the Associa-tion regarding the adequacy of dealers' commissions(para 41).

(f) Fauji, Topsoe, IFU and IDB to subscribe up to US$29.2million, US$5.2 million, US$5.2 million and US$10 mil-lion, respectively, of FFC's equity (para 44).

(g) Financial Covenants (para 48):

(i) FFC to require IDA approval prior to makingadditional fixed investment outside the Projectexceeding US$5 million per year or US$5 millionplus unutilized portions of previous years sub-ject to a maximum of US$15 million;

(ii) FFC not to exceed debt/equity ratio of 70/30(or 60/40 including subordinated debt as equity);

(iii) FFC to achieve current ratio of at least 1.5at project completion date and 1.2 thereafter.FFC will not incur additional long-term debtif it could not maintain a debt service cover-age of at least 1.4;

- 36 -

ANNEX III

(iv) FFC will pay dividends only out of accumulatednet earnings and only if a current ratio of atleast 1.5 is maintained after such payments; and

(v) Fauji and Topsoe to ensure that FFC performs itsobligations under the Loan Agreement.

- 37 -

ANNEX III

B. Main Parameters of the Fauji-Agrico (FAFCO) Project

and the Fauji Fertilizer (FFC) Project

FAFCO FFC

1. Sponsors Fauji Foundation and Fauji Foundation and

Agrico International, Topsoe A/S, Denmark

USA

2. Project Implemen- Agrico, USA FFC, Topsoe A/S, James

tation Management Chemical Engineering, USA

3. Engineering and Kellogg (Ammonia), USA Snamprogetti, S.p.A. Italy

Construction Toyo (Urea), Japan Coming, S.p.A. Italy

4. Operating Management Agrico, USA Anic, S.p.A. Italy

5. Marketing Management Agrico, USA FFC with Topsoe A/S

6. Financing Plan Equity:-Agrico, USA: Equity:-Topsoe A/S,

(Changes) US$25 million Denmark, US$5.0 million- IFU, Denmark, US$5.0million

- Islamic Dev. Bank,US$10.0 million

Debt:-KfW US$39 million Debt:-KfW US$40 million

- Japanese Suppliers - Italian Govt.

Credit: US$18 million US$7.4 million- Danish Govt.US$3.9 million

- Pak. Comm. Banks: - Pak. Comm. Banks,

US$38 million US$40.0 million

7. Pricing and Market- 20% Return on Equity 20% Return on Equity

ing Agreement US$1.5 million plus US$1.5 million andUS$1/ton Know How Fee US$1/ton Know How Fee

8. Project Finances Project Estimated Cost: Project Estimated Cost:

and Viability US$259.8 million US$260.3 million

(Base financingplan) Financial Rate of Return

after Taxes: 12% 14%

Economic Rate of Return:24% 23%

IBRD 10818RII JUNE 1978

6'2 ~~~ ~~~66- 70 O 74'

U. S./, CHINA

PAKI STAN \N rJ --- r

PRESENT AND PROPOSED FERTILIZER PLANTS .. ,jfs ' ~JAMMU

.~ / ' AND 36g< > gm--o1 KASH M I

FERTILIZER PLANTS A-,

NITROGEN: PHOSPHATES:

* 0 Completed JLi C) Under Construction o,(bP ,Line Of Contr

* ~~~~Proposed FFC Site 0w 1 ei..

* Natural Gas Fields PESH A uNatural Gas Pipelines Raw Iz d CroplandRoads E dKe ?

---- Railways

Divisional BoundariesProvincial Boundaries Sargo

- - International Boundaries GO

~~~~~~~~~~~~~~~~~~~~~~~~~ot AdX :/

Mastung / ~hawalnogarNlKdiC H A G Ar

-28°- K A L T l MSiruraFie/do ._ A 28°

n / 0 100 200 300 400

I f - X i_XC ) (g2 st~~~~~~~~~~~~~~~~~~KIOMETReS 0 100 200 300

Karacirp 0 Oodns.X 74§

-24 t X 24 - _1 A-- RA.A . Line Of ... d

v~~~~~~~~~~~~~ 9-I I.:7 -V2 C H I N A

A R A B A N S E A S -

N HN

I.I I A S62- 66- 7Q- H v 91 L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ANKIAO$