REPORT S DESK 1, B :rtID io RZPGRTS DEF W TH1 -N IVe O EPRT DSNKFILE COPY CG.w.E \2TS DO AL AL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 15la-UAR APPRAISAL OF COTTON GINNING REHABILITATION PROJECT EGYPTIAN COTTON GENERAL ORGANIZATION (in two volumes) VOLUME I THE MAIN REPORT June 28, 1973 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS LE 1.0 = US$2.56 LE 0.39 - US$1.00 LE 1.0 - 1,000 milliems 100 piastres (PT) - 5 Tallaries WEIGHTS AND MEASURES 1 Feddan = 0.42 hectare 1 Feddan = 1.038 acres 1 Cantar of Seed Cotton = 157.5 kg 1 Cantar of Cotton Lint = 50.0 kg 1 Ardeb of Cotton Seed = 120 kg 1 Sack of Cotton = 200 kg approc. 1 Country Bale of Cotton = 400 kg approx. 1 Egyptian Export Bale - 330 kg approx. 1 International Bale = 478 lbs approx. = 0.2168 MT approx. PRINCIPAL ABBREVIATIONS AND ACRONYMS USED The Government The Central Government of Arab Republic of Egypt ECGO The Egyptian Cotton General Organization Ginning Companies The five ginning companies owned by ECGO Export Companies The six export companies owned by ECGO Pressing Company Alexandria pressing company owned by ECGO ELS Extra long staple cotton LS Long staple cotton MT Metric Ton Fiscal Year July 1 - June 30 Industrial Projects Department June 28, 1973 APPRAISAL OF COTTON GINNING REHABILITATION PROJECT EGYPTIAN COTTON GENERAL ORGANIZATION TABLE OF CONTENTS VOLUME I Page No STThMARY AND CONCLUSIONS .. ......... ...... .... . . . . . . . . . . . i - iii I. INTRODUCTION . .1............................. .......1 II. EGYPTIAN COTTON GENERAL ORGANIZATION AND GINNING COMPANIES ..................... . .... ... 2 A. History and Organization ........ ................. 2 B. The Cotton System in Egypt ..............*. 3 C. Recent Financial Position of ECCO and Subsidiaries ........ ................................ 3 1. ECGO 3..................................*.... 3 2. Subsidiaries .. ..... . .......... 5 III. THE MARKET ********************** A. Production, Consumption and Trade ................ 6 B. Egypt's Cotton Exports and Domestic Sales ........ 6 C. Future Demand *.................... .... 8 D. Egypt's Competitive Strength as Cotton Producer .. 8 IV. THE REHABILITATION PROGRAM AND THE PROJECT ............ 9 A. The Rehabilitation Program ... . ....... 9 1. Historical Development and Present Condition of the Ginning Industry 9 2. Technology, Work and Employment Conditions n 10 3. Objectives of the Program 11............ 11 B. The Project ... ................................. 13 1. Project Definition ....... 13 2. Degree of Mechanization . . ................... 13 3. Study of Employment Effects ... ............. 14 V. PROJFCT COSTS AND FINANCIAL PLAN ...................... 15 A. Project Costs ......... o .......................... 15 B. Financial Plan .... ........ .................. 16 C. Allocation of the IDA Credit ............. 0........ 17 >AiE OE CONTENTS (Cont'd) __ ~~~~~~~~~~~~~~~~Page No. VI. PROJECT DIPLEMENTATION ...................... , 17 A. Design, Engineering, Project Management and Training ......... 60 ....17 B. Procurement.. ......... 19 C. Financial Accounting . .. ................ 19 VII. FINANCIAL ANALYSIS ............... . , .................. . 20 A. Introduction ..................20 B. Prolect Benefits on Incremental Basis .....20 C. Financial Projections - ECGO . ........... 21 D. Risks in the Project .............. 22 VIII. SOCIAL EFFECTS AND ECONOMIC BENEFITS OF THE PROJECT ... 23 A. Effect of the Project on Employment .............. 23 B. Economic Return of the Project ................... 25 C. Foreign Exchange Aspects ...........*.....*......... 27 IX. RECOIOMENDATIONS ...... ......................... . 27 MAP 1: Location of Ginneries (IBRD 10551) VOLUME II ANNEXES 1. Glossary of Cotton Terms 2. ECGO and its Subsidiary Companies 3. ECGO Headquarters Organization 4. The Higher Committee for the Planning of Cotton Affairs 5. The Cotton System in Egypt 6. Financial Statements of ECGO 7. Summary of Historical Income Statements of Ginning Companies 8. lIorld Cotton Production and Trade and Egypt's Place in the Global Outlook 9. Notes on Ginning Technology and Project Formulation 10. Employment Conditions in the Egyptian Cotton Ginning Industry 11. Effects of Different Levels of Mechanization 12. Egypt: Cotton Ginning Rehabilitation Project Costs 13. Risk Analysis of the Project 14. Expected Schedule of Capital Expenditures 15. Project Implementation Schedule 16. The ECGO Project Implementation Unit 17. Proposed Bid Packages 18. Project Benefits 19. Risk Profiles of Key Financial Results 20. Effect of the Project on Employment 21. Economic Costs and Benefits of the Project Map 1: Location of Ginneries (IBRD 10551) Map 2: Arab Republic of Egypt (IBRD 10047) This report has been prepared by Messrs. Aroon K. Basak, Antonio S. Tarnawiecki and Hiarinder S. Kohli of the Industrial Projects Department. EGYPT APPRAISAL OF THE COTTON GINNING REHABILITATION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a proposed project comprising Phase I (the project) of a program for the modernization of Egypt's antiquated cotton gin- ning industry. The project will cover rehabilitation of ten existing gin- neries and construction of four new ginneries and will be executed by the Egyptian Cotton General Organization (ECGO), a wholly-owned Government entity. At the same time, ten of the existing ginneries will be closed down. Total cost of the project is estimated at US$40.4 million equivalent of which the International Development Associationt (IDA) has been asked to provide US$18.5 million. US$18 million out of the credit will be relent to ECGO (US$500,000 being given as a grant) which will repay them to the Government over 10 years after 5 years of grace at an effective cost of 8-1/2% per annum. The credit is to finance imported enuipment and materials, as well as the foreign exchange component of engineering and technical assistance services and half the cost of a program to retrain workers who will be dislocated by the project. Local financing requirements of US$21.4 million will be provided from retained earnings of ECGO, and US$500,000 given by the Government as a grant. The project is expected to be completed by the end of 1977. ii. The whole program will be divided into three phases spanning a 10- year period from 1973 to 1983, and have a total estimated cost of about US$125 million. During the program, 31 of Egypt's 73 existing ginneries will be shut down, 42 completely rehabilitated, and 12 new ginneries built. Apart from allowing the ginning of a 15% higher cotton output that Egypt expects to achieve by the mid-1980's, the program does not entail an increase in gin- ning capacity. The operation of obsolete, uneconomic ginneries - the ma- jority are well over 50 years old - poses a threat to Egypt's cotton exports which together with yarn and textiles earn 60% of the country's export income. iii. The objectives of the rehabilitation program are mainly to over- come the present deficiencies by forestalling major breakdowns which could have a disastrous impact on the country's cotton production and hence its economy; avoiding further increases in maintenance and operating costs; and securing the highest returns on the volume of cotton grown in Egypt through improved grades and better prices. iv. Another objective of the rehabilitation program and one that the Government considers as very important and which is also strongly supported by ILO and UNICEF, is the improvement of working conditions in the ginneries; at present these are quite unacceptable. Many workers, including women and children, some as young as seven years old, work continuously for 15 hours a day, six days a week for the whole ginning season extending from about the end of September to March. Cotton lint fills the air and affects eyes and lungs and men regularly carry seed cotton sacks well over 100 kg on their - ii - backs. Children up to the age of 15 are drawing around 30-50 USU and adults about 754 for a 15-hour work day. It is therefore not surprising that under the work and employment conditions as they exist at present even in a coun- try like Egypt with a plentiful labor supply, the ginneries find it increas- ingly difficult to obtain certain types of labor. v. To achieve the objectives of the rehabilitation program, a higher degree of mechanization is unavoidable. It has been attempted to find an optimal balance between the economic targets of the program and the displace- ment of labor, which is expected to be reduced by about 6,000 by the end of Phase I from the existing level of about 44,500. This reduction however will be exclusively in unskilled labor and affect primarily women and children; at the same time, the skills of the remaining workers will be upgraded so that the overall payment of wages will only slightly decline. Nevertheless, many families depend on the meager incomes and the absence of some incomes will undoubtedly be felt. At IDA's request, therefore, ILO with UNICEF's assis- tance has been undertaking a study to evaluate the employment effects of the project and make specific proposals for the retraining and reemployment of the displaced workers to proceed in parallel with the project. The cost of such a retraining program to be implemented in tandem with the project, is estimated at about US$1.0 million, and will be borne by the project. vi. World per capita cotton consumption promises to grow but at a slower pace t;han per capita income and consumption of synthetic fibers. Extra-long staple cotton (ELS) - which together with long-staple varieties (LS) make up Egypt's cotton output in a proportion of 40/60 - accounts for only 5% of total world cotton production, and 30% of this is grown in Egypt, the world's largest ELS producer. About 60% of the country's cotton lint is exported but only one-third of this quantity is offered in developed and developing mar- ket economies, the balance going to the USSR and other centrally planned countries. It is not expected that this trade pattern will change drasti- cally although during the past season shipments to convertible currency coun- tries have again increased. ELS prices are firm, and have been keeping well above ordinary cotton grades; also stocks of the grades Egypt has to offer are minimal. vii. The assessment of future demand and price trends for Egypt's cot- ton is influenced by the peculiar position of the USSR as a major emerging ELS producer, which at the same time is a large importer of ELS cotton from Egypt, and her specific trade ties with Egypt as well as the uncertainties that this position implies. None of the other major producers of ELS and LS cotton including Egypt, however, are expected to increase their produc- tion by more than marginal amounts and while ELS prices could drop by as much as 25% this would bring them down only to the level of the mid-1960's. In any case such potential market uncertainties should not reduce the urgency for the rehabilitation program because domestic cotton consumption will more than absorb the modest increase in output; Egypt has substantial comparative advantages in cotton growing; the project will retain Egypt's competitiveness in the world's cotton markets; and the cost savings in processing arising from the program would be independent of international price fluctuations. - iii - viii. ECCO will establish a project management unit for the execution of the project and will be assisted by outside engineering consultants in en- gineering and project implementation. While Egypt has been operating its cotton ginning industry in a laudable manner despite the difficulties that the outmoded plants have brought about, ECGO has not carried out a project - not to speak of one of the magnitude here under consideration - and there- fore is seeking some assistance in project management to help assure timely execution of the project and within the estimated costs. ECGO realizes that success in project execution will heavily depend on the effectiveness with which the project management unit and the engineering consultants will be able to work together. ECGO has chosen L.H. Manderstam, the UK firm that is now engaged by ECGO under the recent IDA engineering credit in detailed project preparation, to become their engineering consultants. ix. ECGO will also introduce iiaproved accounting and cost control pro- cedures. Foreign equipment to be financed by IDA will be procured under the Association's guidelines for international competitive bidding. Equipment available in Egypt at adequate quality and at prices expected to be below imports will be reserved for competitive bidding in Egypt and financed by local funds. Although cotton ginning does not involve a complicated tech- nical process and operation of the gin stands will not be much different from what it is today, the higher degree of mechanization will require a substantial upgrading of skills, and training programs are being devised towards that end. X. The incremental financial return of the project is about 18%; it is estimated to vary on the basis of a risk analysis between 14% and 22% with a 75% probability that it will exceed 16.7%. The economic return of the project is estimated at about 25%. xi. Based on the assurances obtained during negotiations, the project is suitable for an IDA credit of US$18.5 million equivalent. I. INTRODUCTION 1.01 The Government of the Arab Republic of Egypt has requested a credit of US$18.5 million equivalent from the International Development Association (IDA) to meet the estimated foreign exchange requirements for the first phase (Phase I or the project) of a program to rehabilitate Egypt's cotton ginning industry. The project, which covers the modernization of ten existing and the construction of four new ginneries, is estimated to cost about US$40.4 million equivalent and is expected to be completed by 1977. The overall program, which will be divided into three phases and cost approximately US$125.0 million, is presently estimated to cover a period of ten years from 1973 to 1983 and call for the closing down of 31 of the 73 ginneries now existing, the rehabilitation of 42 ginneries and the construction of 12 new ginneries. Phase I is fully self-contained; it represents essentially a cross section of the program but being limited in scope permits the later phases to be adapted to new conditions - such as in technological and market developments - and the experience gained from implementation of the first phase. 1.02 Rehabilitation of the ginning industry is an essential step in pro- viding for efficient, reliable and high-quality cotton lint production; it will thus help to maintain Egypt's competitive position in this field, and ensure continuation of its important exports of extra-long and long staple cotton. Benefits flowing from the project are expected to be very substan- tial. Project execution will be the responsibility of the Egyptian Cotton General Organization (ECGO), a Government organization, with the close in- volvement of the five ginning companies, which are all wholly-owned sub- sidiaries. ECGO handles all cotton operations from the purchase of seed cotton from the farmers through to ginning and sale of cotton lint on the domestic and export markets. Ginneries to be covered by the project are located in the Nile Delta area as well as in Upper Egypt (Map 1, IBRD 10551). 1.03 The Government first approached the Bank Group for financing at the end of 1971, after the required assistance had proved unobtainable from other sources. IDA has been helping the Government in preparing the project, including the initial financing of and guidance given to the consulting firm of L.H. Manderstam and Partners (U.K.), Ltd., London, to prepare the feasi- bility report. On November 7, 1972, the Executive Directors approved an IDA Engineering Credit (P-1127 of October 25, 1972) of US$175,000 to cover the foreign exchange cost of preliminary engineering, design work and certain other aspects of Phase I. This work is in progress, and has defined more precisely the project's scope and timing. 1.04 The project was appraised in December 1972 by a mission consisting of Messrs. Aroon K. Basak (Chief), Antonio S. Tarnawiecki and Harinder S. Kohli of the Industrial Projects Department and Mr. Omer L. Godaux, Consul- tant. Discussions were also held with ILO and UNICEF concerning the issue of the employment effects and social consequences of the project and with the International Cotton Advisory Council (ICAC) and GATT on world prices and trade prospects of cotton. 1.05 A glossary of cotton terms used in the report is given in Annex 1. - 2 - II. EGYPTIAN COTTON GENERAL ORGANIZATION AND GINNING COMPANIES A. History and Organization 2.01 Until 1961 both domestic and export trade and processing of Egyptian cotton were in private hands. In 1961, Presidential Decree No. 1899 created "General Organizations" under each Ministry to own and run undertakings in nationalized sectors. ECGO was established in December 1961 as such a "Gen- eral Organization" under the Ministry of Economy to deal with the cotton sec- tor and during the two following years all the sector's activities were na- tionalized. Private owners received a Government bond issue bearing 4% in- terest and payable by the Treasury from 1973 to 1978, using as a basis for compensation the book value of assets established in 1963 of approximately EE13 million. A series of Presidential Decrees culminating with two in 1965 reorganized the corporate set-up of the numerous ginneries and export com- panies and placed them under the ownership and control of ECGO as the holding company. Twelve subsidiary companies were created, five for ginning, six for exporting and one to cover a company in Alexandria that has been pressing cotton bales for export (Annex 2). 2.02 Each subsidiary operates as an economic unit, and the six exporting companies indeed compete with one another in foreign markets. The exporting companies, which are also responsible for domestic sales of ginned and pressed cotton, pay the ginning and pressing companies fees per unit of output. These fees are determined by ECGO. All export contracts negotiated by the export companies require ECGO's approval. The headquarters of ECGO and three gin- ning companies are located in Cairo; the rest of the subsidiaries are based in Alexandria. 2.03 Mr. Zakaria Tawfik, an able senior civil servant, is Chairman of ECGO with the rank of a Deputy Minister. He chairs a Board of Directors con- sisting of 20 members apart from himself, comprising the Chairmen of the 12 subsidiary companies, the Chairmen of the General Organizations for Trade and for Spinning/Weaving, and officials from the Ministry of Economy and Foreign Trade. ECGO's management organization is structured along functional lines (Annex 3). The Chairmen of the 12 subsidiary companies report directly to Mr. Tawfik. 2.04 All of the five ginning companies, each of which operates from 12 to 15 ginneries, have a similar organization structure. The Board of each company consists of a Chairman, four executive directors, and four members elected from amongst the employees. The four executive directors respec- tively supervise: (a) operation of individual ginneries; (b) finance; (c) administration and personnel; and (d) inspection control and planning. 2.05 In 1965 a "Higher Committee for the Planning of Cotton Affairs" was created with the Minister of Economy and Foreign Trade as Chairman. Amongst others, it determines the land to be sown with cotton each year, the price to be paid to the farmers, and the allocation of cotton to export and domestic markets. Membership of this high level policy committee on cotton is given in Annex 4. - 3- B. The Cotton System in Egypt 2.06 Cotton is a perennial shrub but is cultivated as an annual to mini- mize pest and disease problems. All Egyptian cotton, which is grown along the whole length of the Nile, is irrigated and planting dates, areas and varieties are regulated by various governmental agencies. All cotton is handpicked (called seed cotton) and in the subsequent ginning process the fibers (called lint after processing) are mechanically separated from the seeds. Cotton is harvested once a year in August/September and the ginning season as a rule extends from September to March. All cottons are classified by their staple lengths. Almost all Egyptian cottons are long staple (LS) or extra long staple (ELS) i.e. between 1-1/4" and 1-3/8" or over 1-3/8" respec- tively. Unlike cheaper short staple cottons, which are often blended with man-made fibers (MMF), the LS and ELS grades are used to make fine fabrics, shirtings, knitted cotton underwear and sewing threads. 2.07 The organization of the cotton system in Egypt is explained in de- tail in Annex 5. Cotton is grown by individual farmers on land owned or rented by them, within the overall plan announced in advance each year by the Higher Committee for the Planning of Cotton Affairs (para 2.05). Inputs like State inspected planting seed, fertilizers and pesticides are supplied to the farmer by the Ministry of Agriculture against credit granted by the Agriculture Credit Bank. The cotton crop is conveyed by the farmer to the nearest of about 2,000 official collecting centers or 10,000 private stores, where he is paid for his crop at published prices depending on the varieties and grading of the seed cotton. 2.08 Ownership of the seed cotton passes at this point from the farmers to ECGO, which, as has been mentioned before, is responsible for all subse- quent activities through the sale of lint in Egypt and abroad. The seed cotton is routed to the ginneries which store, gin, press and ship the lint, each ginnery handling only one variety of seed cotton. Cotton seed which accumulates with the ginneries goes either for replanting or crushing to extract cooking oil. All lint which is destined for export is shipped to Alexandria and again pressed, baled and inspected before shipment. Lint for the domestic textile industry (about 40%) goes to the units of the General Organization for Spinning and Weaving. C. Recent Financial Position of ECGO and Subsidiaries 1. ECGO 2.09 ECGO is one of the largest and most profitable commercial entities in Egypt. It accounts for half of total Egyptian exports and has an annual turnover of about EE180 million (US$461 million). In 1971/72, it contributed over fE17.7 million as profits to the national treasury. Detailed income and balance sheet statements for the past five years for ECGO itself as a holding 1/ company are given in Annex 6 and are briefly summarized below: 1/ The balance sheets of ECGO show only the investments held in the sub- sidiaries without consolidating assets and liabilities, while the in- come statements show ECGO's direct income plus net transfers allocated to it from the subsidiaries. - 4- ECGO Summary of Historical Income and Balance Sheet Statements (:.E '000) 1967/68 1968/69 1969/70 1970/71 197172A Income Statements Cotton Production (000's tons) 167 167 198 216 201 Cotton Sold to Export CompaniesLi 146,384 156,116 181,802 181,589 160,252 Cost of Cotton Purchased from Farmers 138,167 140,980 170,898 174,288 149,282 Arbitrage Income 8,217 15,136 10,904 7,301 10,970 Management Fees 451 689 1,391 1,658 1,801 Income from Subsidiaries 4,182 5,465 9,912 11,717 12,654 Total Income 12,850 21,290 22,207 20,676 25,425 Interest on Bond 540 540 540 540 540 Income before Tax 11,646 20,287 21,208 19,651 24,422 Income rax 1,558 2,295 4,244 5,120 5,479 Surplus for TreasuryL2 8,588 17,977 16,960 14,483 18,943 Income (before Tax) as % of Net Sales 7.9% 13.0% 11.7% 10.8% 15.2% Balance Sheets (June 30) Current Assets 56,173L 13,08 15,896 7,706 9,839 Current Liabilities 10,902 8,085 13,889 7,696 9,827 Investment in Subsidiaries 12,742 11,641 11,610 11,565 11,565 Fixed Assets - - 2 48 53 Long Term Debt - - - - - Owners Equity 17,078 15,704 12,683 11,623 11,631 Total Assets/Liabilities 68,916L2 24,725 27,508 19,319 21,457 Current Ratio 5.2:1 1.6:1 1.2:1 1.0:1 1.0:1 /1 Valuation of internal transfers of lint from ECGO to the export companies and not the latter's final sales turnover. /2 Excluding special transfers and other expenses. 75 Including a special amount of about TE41 million due the Government and paid in 1968/69. /4 Preliminary figures for 12 months ended June 1972; official fiscal year has been changed to end on December 31, 1972, and the calendar year will be used henceforth. 2.10 While sales to the export companies showed an increase of 24% be- tween 1967/68 and 1970/71, sales value decreased by 11% in 1971/72 due to a drop in cotton volume sold and a slight drop in the quality of cotton produced. Although sales dropped in 1971/72, ECGO's aggregate income (arbitrage income and income from subsidiaries) almost doubled between 1967/68 and 1971/72. Arbitrage income (the difference between transfer prices to the export companies and prices paid the farmers) shows significant fluctuations due to a time lag -5- in the changes in transfer prices to the export companies (fixed periodically in relation to world LS and ELS cotton prices) and subsequent changes enforced by the Government in prices paid to the farmer. Furthermore, as world prices for Egyptian LS and ELS gradually improved during the period (reflected in higher income from subsidiaries) aggregate income as a percentage of sales increased from 8% to 15%. 2.11 The capital structure of ECGO is sound. Neither ECGO nor the sub- sidiaries have any long-term debt. ECGO's low current ratios in recent years reflect accelerated payment of annual surpluses to the Treasury, but the oper- ating companies have comfortable current ratios. ECGO's high sales turnover despite its low equity capital is made possible because the export companies purchase cotton from the farmers on ECGO's behalf, using short-term borrowings. Being a non-operational holding company, ECGO's own fixed assets are naturally small. 2. Subsidiaries 2.12 Profits of subsidiary companies are distributed to themselves (as reserves), their workers, ECGO and through ECGO to the Government. Subsi- diaries charge depreciation on fixed assets at 10% for 10 years and at 5% indefinitely thereafter to provide for rising costs of replacements. Trans- fers to reserves amount to 15% of profit after tax. 1/ Special retentions for contingencies may also be allowed by ECGO. Next, 5% on equity employed during the year is distributed to the employees (1/4th) and ECGO (3/4th), and after ECGO has received 10% of the remaining surplus as a management fee, any final profit balance is again distributed to the employees and ECGO in the same proportion. ECGO pays no tax on its direct arbitrage income. All of ECGO's annual earnings after tax are transferred to the Treasury. 2.13 Internal policy of ECGO regarding the fee structure largely deter- mines how profits are split among the different subsidiaries. In the recent past, the largest shares of ECGO's earnings from subsidiaries derived jointly (80Z) from the export companies and the Alexandria pressing company, the re- maining 20% coming from the ginning companies. Financial statements of the subsidiaries simply reflect the ECGO profit allocations and are therefore not very meaningful. However, as mentioned previously the ginning companies have no long-term debt outstanding, and their liquidity position, with one exception, has been satisfactory. Nevertheless, it is worthwhile mentioning that operating expenses per cantar of lint increased, though only from EEO.75 in 1967 to EEO.81 in 1971, or by 9% (Annex 7). This is a particularly impressive performance since maintenance in these obsolete plants is a constant problem and expenses for maintenance materials and supplies increased by more than 32% during the period; the total wage bill rose by somewhat less than 9%. 1/ The tax rate works out to an average of 37.5%. - 6 - III. THE MARKET A. Production, Consumption and Trade 3.01 The world's cotton production and trade and Egypt's place in them are discussed in some detail in Annex 8 and are briefly summarized below. Cotton fiber (lint) is one of the most important agricultural commodities in international trade. In spite of strong competition from man-made fibers (MMF) - many of which have been developed to meet specific needs - cotton consumption has continued to keep pace with world population, although its share in total textile fiber consumption has dropped from an average of 67% for the 1950/59 decade to 44% in 1971. The main consumers are the USSR, USA, Mainland China and India followed by Japan, Pakistan, Brazil, Germany and France. 3.02 The main cotton producing countries accounting for about three- quarters of total output are again the USSR, the USA, 1/ Mainland China, India, Pakistan, Brazil and Egypt but there are many other countries producing this commodity. LS and ELS cotton production, on the other hand, is concentrated in five countries only which produce close to 90% of world output and of which Egypt is the largest producer. World Production of LS and ELS Cotton (1971/72) ('000 MT) Egypt USSR USA Sudan Peru Other Total LS 309 300 345 80 47 134 1,215 ELS 201 155 21 198 29 14 618 510 455 366 278 76 148 1,833 LS and ELS cotton production, which accounts for about 15% of total cotton production, has increased by 3.3% annually between 1960/62 (average) and 1970/72 (average), that is at a considerably faster rate than for all cotton in the same period (1.9%/yr). ELS prices have been substantially higher than those of other types of cotton (by an average of close to 70% since the mid- 1960's and about 56% in 1971 and 1972) and particularly during the last few years have been much more stable than other cotton prices. B. Egypt's Cotton Exports and Domestic Sales 3.03 Egyvpt ranked in 1970/72 as the world's third largest exporter of cotton (after the USA and USSR) and has a dominant position in international marketing of ELS. Her cotton lint, yarn and textile exports earn 60% of her total foreign exchange income from exports. The direction of Egyptian cotton exports has shifted since the 1950's from developed market-economy to centrally 1/ The U.S.A. was surpassed by the USSR as the world's largest producer in the 1970/71 and 1971/72 seasons, but is expected to take the lead again in the current season ending July 31, 1973. - 7 - planned economy countries. During the last decade, fluctuations in purchases by the USSR and Mainland China have resulted in changing export patterns as shown in the table below. Preliminary indications for 1972/73 suggest that the share of exports to developed market-economy countries has begun to re- cover from the low level of the 1971/72 season. Egyptian Cotton Production and Direction of Exports Direction of Exports Developed Centrally Production Exports Market Planned Developing Year /1 ELS Total ELS Total Economies Economies Countries /2 --0070sof MT-------- ---%s - 1951/53 Avge. 170 404 125 290 63.0 11.4 26.8 1961/63 Avge. 184 396 180 264 27.0 60.6 12.4 1964/65 231 504 202 339 26.8 64.1 9.1 1968/69 167 436 132 237 34.3 48.1 17.7 1969/70 198 541 162 318 21.7 62.2 16.1 1970/71 216 508 186 304 25.0 58.0 17.0 1971/72 201 510 176 299 17.3 68.3 14.4 /1 Ending July 31, except for "direction of exports" which are for year ending August 31. /2 Including some countries, e.g., India and Spain, with which Egypt has payments agreements. Total cotton production in Egypt increased from a level of around 400,000 tons in the 50's and early 60's to more than 500,000 tons in the early 70's. Total ELS exports to Western Europe from Egypt, Sudan and Peru declined from an annual average of 133,000 MT in the 1966 and 1967 seasons to 67,000 MT in the 1970 and 1971 seasons, while exports to Japan remained substantially unchanged (at 26,800 and 25,700 MT respectively) during the same period. Preliminary 1972/73 indi- cations show an upturn in ELS exports to Japan and other developed countries. Figures for total imports of cotton into Western Europe, which also have re- flected a downward trend, having dropped by 10.6% from 1,439,000 MT annual average for the 1966 and 1967 seasons to 1,286,000 MT for the 1970 and 1971 seasons, unfortunately do not distinguish among cottons of different staple lengths. Therefore, the observed trend in Western European trade of ELS based on available statistics is inconclusive. Additionally, figures for USSR cotton exports to Western Europe, which also are not broken down by staple length, may include ELS of domestic production as well as trans-shipments of Egyptian ELS cotton. ECGO has confirmed that the present LS and ELS supply situation is tight and that Egypt has been unable to accept all orders so- licited from Western Europe. There is thus no evidence of market weakness of Egyptian cotton inasmuch as stocks have remained low and prices have firmed. 3.04 Egypt has also an important textile industry, consuming nearly 40% of its cotton output and giving employment to 230,000 workers. Approximately 16% of the production of the textile industry valued at LE378 million in 1970/71 was exported, nearly one third to Western Europe, Africa and the - 8 - Middle East. While still modest, these textile exports have increased from bE48 to 59 million between 1966/67 and 1970/71 or by somewhat more than 5% per year. C. Future Demand 3.05 Numerous studies on the future demand for cotton have been made by the US Department of Agriculture (USDA), FAO, the International Cotton Advisory Council, the National US Advisory Commission on Food and Fibers, and others. The USDA 1/ world cotton consumption projections for 1980, prob- ably the most comprehensive, range between 14.6 and 15.0 million MT for prices between 24 and 30 US cts per lb. 2/ as against 11.7 million MT in 1970/71 at a price of 32 US cts per lb. The resulting average rate of growth - 2.4% annually - is only slightly higher than the actual rate in the previous decade. This fore- cast is based on separate projections for 39 countries or regions and on cotton crop and yield estimates for 24 countries or regions. Such a level of cotton consumption would represent about 38% of total projected fiber consumption in 1980 as compared to the present ratio of 44%. This would appear to be a con- servative estimate. While there is no reason to believe in a reversal of the past trend towards a lower share of cotton in total fiber consumption, the past downward direction of prices of competing synthetic fibers has already been arrested and in some instances reversed, and increased costs of petroleum and gas feedstocks and the generally inflationary trends in developed countries will tend to push up synthetic fiber prices in the future. 3.06 An assessment of the future demand and price trends for LS and ELS is more d:.fficult to arrive at, primarily due to the peculiar position of the USSR which is now a major ELS producer and probably an exporter (para 3.03), but still continues as a large importer of ELS particularly from Egypt, under specific trade ties between the two countries. Thus apparent consumption of ELS in the USSR increased from 94,000 to 234,000 tons between 1966/67 and 1971/72, or by nearly 2.5 times. While it is not predictable whether the USSR can be counted on to continue taking a major portion of Egypt's ELS cotton exports (67,000 tons in 1971/72 or one third of her ELS production), the other ELS cotton producing countries are not known to plan on any major increase in their production. This is true also for Egypt, which is expected to increase its total cotton production only by about 15% by 1985, or by 1% annually, including new varieties of ELS presently being introduced. Partic- ularly due to shifts in USSR policies, ELS prices could drop by as much as 25% though this would bring prices down only to the level of the mid-1960's. 3/ Furthermore, such price decrease could make ELS more competitive, depending upon relative prices of shorter staple cotton and man-made fibers. D. Egypt's Competitive Strength as Cotton Producer 3.07 There are various reasons, however, why international market un- certainties would not eliminate the need or reduce the urgency for the rehabil- 1/ USDA, World Demand Prospects for Cotton in 1980, published in January 1971. 2/ CIF Liverpool prices for US Memphis SM 1-1/16" lint. 3/ The latest Bank commodity study dated May 4, 1973 predicts an average fall of 10% by 1980 in export prices of all cotton. itation of Egypt's cotton ginning industry. First, Egypt's textile industry plans to increase by 1975 its installed capacity of yarn and textiles by 40% and 25% respectively. Increased usage of cotton for domestic textile consump- tion alone is expected to absorb most, if not all, of the increased lint output. As regards textile exports, they could continue to grow at the recent rate of about 5% annually, but the prospects for any greater growth are slim in view of widespread import restriction policies. Secondly, Egypt has a substantial comparative advantage in cotton growing. It arises from a rare combination of climate, soils and water availability at the right times as well as suc- cessful genetic research and control and low rural wages. Cotton yields in Egypt have increased by more than 80% over the past 15 years and are presently 796 kg/ha (as lint), or 2.1 times the world average of 379 kg/ha, surpassed among the large cotton producers only by the USSR. As to LS and ELS cotton, Egypt has higher yields than its major competitors, with the exception of the USSR. As a result, lint cotton costs in Egypt are substantially below the costs of even lower valued varieties in other countries such as the USA, Mexico and Pakistan for which compar.able data are available. 1/ Thirdly, Egypt has shown a marked ability in geneti: improvement of cotton varieties, plan- ning of cotton crops and marketing of cotton abroad, and the phasing of the program ensures the very flexibility that is needed to adapt to possible changing market, price and technological conditions. Fourthly, but most importantly, the project will contribute to retain the competitiveness of Egyptian cotton in world markets, primarily through the increase of lint yields and the upgrading of quality of lint production, rather than an ex- pansion of cotton cultivation which, as is mentioned in the preceding para., will be very modest. Finally, the program of rehabilitation is essentially designed to replace an obsolete industry with modern facilities without a substantial increase in total capacity (para. 4.09). The cost savings in processing would be independent of price fluctuations in international markets. 3.08 Area under cotton in Egypt has decreased from about 1.87 to 1.53 million feddans between 1960 and 1971 as a consequence of mounting demands for and greater attractiveness to farmers of food crops and livestock products. Continually increased yields have permitted Egypt to maintain cotton produc- tion substantially at a constant level in spite of the significant cut in area under this crop. In the next five years, Egyptian agricultural exports as a whole are expected to grow by not more than 0.9% annually. While the optimal use of agricultural land needs to be kept under constant review, the dominant position of cotton and its manufactures in Egypt's exports will not easily or rapidly be replaced. IV. THE REHABILITATION PROGRAM AND THE PROJECT A. The Rehabilitation Program 1. Historical Development and Present Condition of the Ginning Industry 4.01 The first ginnery in Egypt was installed around 1860 and the industry grew fast under the incentive to supply the growing needs of the U.K. textile 1/ Lint cotton costs in these countries including ginning but excluding land rentals, are on a weighted average some 45% above those in Egypt. - 10 - industry, whose cotton supplies from the USA were interrupted by the Civil War. By 1950 there were 105 ginneries with 6,475 ginstands. Overcapacity led to destructive competition among ginneries, and after the July 1952 revolution, most of the owners, fearing nationalization, ceased to invest in their mills and reduced maintenance to a minimum. As a result, upon nationalization in 1963, ECGO inherited ginneries which were not only antiquated, but also badly run-down. Many ginneries which were too old and uneconomic have been closed down in the last decade, leaving 73 ginneries with about 4,700 ginstands now running, but only three of these have been built in the last 30 years while nearly one-half are well over 50 years old. In spite of the ingenuity of maintenance personnel, the remaining ginneries are in precarious running con- dition and liable to incur major breakdowns. 4.02 Almost all ginneries have seen towns growing up around them, so that most of them are cramped for space, with totally inadequate yard areas inside their premises. The yards must store a full season's requirements for seed- cotton. Many ginneries are thus forced to rent or own outside, and sometimes out-of-town, storage yards which lead to increased handling costs, damage and physical loss to the cotton, and traffic problems in the towns themselves. 2. Technology, Work and Employment Conditions 4.03 Ginning is essentially the simple process of separating the fiber or lint from the cotton seed. Annex 9 contains a description of the project, process and the equipment involved. There are two basic types of gins: the "saw" gin and the "roller" gin. The finer LS and ELS cotton needs the gentler and slower treatment of roller gins which are used throughout Egypt. Modern gins are basically still the same as those used in the early days, advances being confined to mechanization of the blending operation and transportation of seed cotton to the ginstands and of lint to condensing, humidifying and pressing, so as to exclude contamination and damage that might be caused by manual methods. A modern ginnery is therefore less labor intensive, but more efficient in enforcing strict quality control. 4.04 Work conditions inside the ginneries are quite unacceptable and are described in detail in Annex 10. Many workers, including women and even children from 10 to 16 years of age, work continuously for 15 hours a day, six days a week for the whole ginning season. To see boys and girls as young as seven years old work in the ginneries is not uncommon and it is estimated that about 17% of the present work force comprises children under 12. Male porters regularly carry seed cotton sacks weighing well over 100 kg on their backs. Cotton lint fills the air and affects eyes, noses and lungs and presents a serious fire hazard. These conditions persist despite Law No. 91 of April 15, 1959, which forbids the employment of children under 12, and allows children between 12 and 15 to work only under certain prescribed conditions. A sample survey (Annex 10) revealed that children up to the age of 15 are drawing around PT 15 to 20 (37 to 50 US cents) and adults about PT 30 (75 US cents) for a 15-hour work day. The law provides for a minimum wage of PT 30 per eight hour shift, less one PT for each year of age below 21. 4.05 Since the ginning season extends from end-September to end-March, the bulk of employment in the industry is seasonal; only supervision, main- tenance and security personnel comprising about 12.5% of the total work force - 11 - are carried permanently and protected against dismissal. During the off- season, the rest of the workers - men, women and children - either manage to find alternative temporary work on farms and in households, or remain un- employed. About one-seventh of these temporary hands, called "seasonal workers", are directly employed by the ginneries and normally assured work for the whole ginning season. The rest of the workers, called "contract workers" never become direct employees of the ginneries. 4.06 While it is difficult to assess accurately the number of workers in the ginneries, the present employment position is estimated as follows: Present Employment Position in the Ginneries % of Total Average Cost per Months Total Annual Wages per Cantar of /2 Employed Employed Numbers Wages Month Ginned Cotton - (11EM000) (BE) (PT) Permanent 12 12 5,277 1,670.2 26.40 16.48 Seasonal 7 12 5,291/1 343.2 9.20 3.38 Contract 6 76 34,018-- 1,265.6 6.20 12.49 Total 100 44,586 3,279.0 32.35 /1 Estimated to consist of 21,316 men; 6,570 women; and 6,132 children. 72 Estimated for 1972/1973. 4.07 Prom the time of the earliest ginneries, labor contractors have procured contract workers and provided their services to the ginneries at a fee based on output. Since this had resulted in considerable exploitation, the Government stopped the use of labor contractors after nationalization in 1963 and set up "labor cooperatives". However, their main function has con- tinued to be the supply of labor to the ginneries and still at a fee related to output. There is little evidence to suggest that employment conditions have gained much from the change. Each ginnery also has a labor union, but it is not clear to what extent these have a separate existence from the labor cooperatives. There has been no history of strikes or disruptive labor disputes and yet it is not surprising that under such work and employ- ment conditions ginneries find it increasingly difficult to obtain the full contingent of certain types of labor. 3. Objectives of the Program 4.08 The objectives of the rehabilitation program are mainly to overcome the present deficiencies by (a) forestalling major breakdowns which could have a disastrous impact on the country's cotton production and hence its economy; (b) avoiding further increases in maintenance and operating costs; (c) secur- ing the highest returns on the volume and quality of cotton grown; and (d) improving working conditions in the industry, an aspect which is strongly supported by the Government, ILO and UNICEF. - 12 - 4.09 While it is now envisaged that 42 ginneries can be rehabilitated, 31 others will have to be closed down because the condition of their equip- ment and buildings makes modifications uneconomic or, in some cases, because they have no storage space or are too small and have no scope to expand. Twelve new ginneries will be built to substitute for capacity closed down during the rehabilitation program giving scope for improving location and storage arrangements. Rehabilitation of the whole industry will be spread over at least 10 years and into three phases. Although the number of ginneries will decline from presently 73 to 55 at the end of the rehabilitation program in 1983 and the number of ginstands from 4,722 to 4,594, ginning capacity (on the basis of two-shift capacity as at present) will increase by 15% in line with the modest rate of expansion of cotton production as described in the previous chapter. A summary of the program elements is given below: Rehabilitation Program Including Phase I End of Program Present Position End of Phase I (Tentative) No. of No. of No. of No. of Plants Ginstands Plants Ginstands Plants Ginstands New Ginneries (a) Built with British aid, under con- struction - 1 72 1 72 (b) Phase I - 4 432 - - (c) Phases I, II and III - - - - 12 1512 - 5 /1 504 13 /2 1,584 Rehabilitated Ginneries (a) Phase I - 10 789 - - (b) Phases I, II and III - - - - 42 3,010 Existing Ginneries (unrehabilitated) 73 4,722 53 3,152 - - Total 73 4,722 68 4,445 55 4,594 Closed Down Ginneries - - 10 - 31 - /1 Three will be "single" units of 72 ginstands each and two "twin" units of 144 stands each. /2 Four "single" units and nine "twin" units. The overall program is roughly estimated to cost US$125 million, with Phase I costing about US$40.4 million equivalent. Phasing of the program is designed so as to reduce each phase to manageable size for implementation; to keep the program flexible; and to allow individual ginneries to be selected in a way which allows rehabilitated ginning capacity to be balanced with cotton varieties and output available in each surrounding area. - 13 - B. The Project 1. Project Definition 4.10 The scope of Phase I - the establishment of four new ginneries and the rehabilitation of ten existing ginneries - was defined by L. H. Manderstam, an,d agreed to by ECGO. Size and locations of the four new ginneries (Map 1, IB&D 10551) were chosen with due regard towards obtaining an optimal balance between ginning capacity and the projected crops in the surrounding areas; the need to gin different varieties separately; the existence of infrastructure and availability of land, labor and services. The project will increase total ginning capacity by about 5%, assuming two-shift operations. 4.11 The "unit" size of a new ginnery will comprise 72 ginstands. Two of the proposed new ginneries (like the one now being built with the help of British Aid) will be "single" units of 72 ginstands and the other two "twin" units of 144 ginstands. Construction of larger ginneries is not economical because increased transportation costs from more distant cotton supplying areas more than offset savings in annual fixed investment charges. In the rehabilitated ginneries, the existing ginstands and most of the construction will remain, but mechanical distribution and conveyance will be introduced as in the new ginneries. More uniform feeding and lower down time for main- tenance will improve both productivity and capacity utilization. 2. Degree of Mechanization 4.12 ECGO, its consultants and IDA have studied alternative cut-off levels for mechanization, and their effect on employment and economic returns. Ad- ditional mechananization in the new and rehabilitated ginneries relates mainly to feeding, distributing and conveying equipment but falls into several seg- ments: (a) yard handling of seed cotton sacks; (b) pneumatic conveying of seedcotton from reception to blending hall, directly or passing through bulk storage; (c) pneumatic conveying of seed cotton from blending hall to ginning hall; (d) seedcotton distribution (by scroll conveyor) to feeder hoppers and automatic feeding of ginstands; (e) conveying of lint from ginstands and its automatic humidifying and trampling into press boxes; and (f) handling (by bale-lift trucks) of lint bales from presses to yards and dispatch. 4.13 The most important benefits flowing from the project are the in- creased yield of lint and the improvement of its grade. To attain these aims and improve working conditions, manual handling in any of the core seg- ments (c), (d) and (e), which are interdependent, cannot be retained. Manual handling in any one or all of these segments would continue to allow trash, dust, and oil to contaminate the lint and lower the grades as it does today. Mechanization of these segments will, therefore, have to be the minimum that is implemented. 4.14 Annex 11 has a fuller discussion on alternative levels of mechaniza- tion; some financial measures of the effects are as follows: - 14 - Effects of Alternative Levels of Mechanization /1 (for new and rehabilitated ginneries of Phase I) Minimum Intermediate Full c-FdaTe- b+d-f- e aCb+c+d+e+f Ki) Capital Cost (US$ million) 23.86 (1000)L 35.10 (147) 35.61 (149) (2) Net annual benefits (US$ million) /2 2.31 (100) 4.07 (176) 4.25 (184) (3) Reduction in Employment 5,013 (100) 5,447 (109) 5,958 (119) (4) Benefits/Capital Cost (2) - (1) 0.097 (100) 0.116 (120) 0.119 (122) (5) Benefits/Jobs Lost (2) . (3) 461 (100) 707 (153) 713 (155) /1 Calculations at market prices; shadow pricing of labot in the ginneries would leave results of the evaluation unchanged. Capital costs do not include training costs. /2 Benefits (quality and yield improvement) less main costs related to mechanization (labor, power, fuel, transportation and depreciation). /3 Figures in brackets are indexes. The above two ratios (4) and (5) would rank full mechanization slightly ahead of intermediate mechanization but give the intermediate alternative a major edge over the minimum mechanization level. ECGO favors full mechanization, i.e. including mechanized handling at the initial and final stages. However, the minor additional advantage in revenue terms of full over intermediate mechanization, the fact that a decision on full mechanization need not be taken immediately, and the disadvantage of full over intermediate mechaniza- tion with respect to employment, all suggest that the intermediate solution is the optimal one at present. This solution would permit a slow phasing out of the manual handling in the yards. ECGO has agreed during negotiations to limit mechanization to the intermediate level. The economic and social impact of mechanization is discussed in Chapter VIII. 3. Study of Employment Effects 4.15 Following IDA's discussions with the Government, ECGO, ILO and UNICEF, and in response to a formal request from the Government, a study was conducted in March/April 1973 by ILO with UNICEF's assistance and financing to measure the employment problem that may emerge from the project, and also formulate actions to be taken to retrain and re-employ displaced workers. The Government, ECGO, ILO and UNICEF comprised a coordinating committee to direct the study which was conducted by the Egyptian National Institute of Planning. A preliminary report arising from this study was submitted to IDA in April, 1973. 4.16 Agreement has been reached with the Government and ECGO during nego- tiations, that a retraining and re-employment program for the displaced workers will be carried out in tandem with the rehabilitation project. While the Gov- ernment will be responsible for the program, ECGO will be its executing agency. It has been agreed that the working group (comprising ECGO, ILO, UNICEF, - 15 - Ministries of Manpower, Education and Social Affairs) would continue its work in order to (a) complete its investigations to identify new demands for employ- ment in each town and district affected, and (b) draw up a detailed training program involving pre-vocational and vocational education, functional literacy training as well as job training for re-employment. Thereafter, a complete retraining program will be presented by ECGO to IDA by October 31, 1973, or a later date that may mutually be agreed. Active roles in the implementa- tion of the retraining program, may be assigned by ECGO to ILO and UNICEF. A provision of US$1 million equivalent to cover the cost of the retraining program has been included in project cost estimates (para 5.01 and 5.02) and in the calculation of the economic return of the project. An allocation of US$500,000 will be available in the IDA Credit towards the retraining program, up to half of which may be used to meet local currency expenditure. V. PROJECT COSTS AND FINANCIAL PLAN A. Project Costs 5.01 Detailed project cost estimates are given in Annex 12 while Annex 13 discusses the assumptions made and the techniques used in a risk analysis. The cost estimates were prepared by the consultants and are based on enquiries for equipment (both imported and local) and civil works of early 1973. They also include the expected effect of the recent US dollar devaluation, and assume a construction period of four years and project completion by December 1977. Contingencies are expected to be adequate to absorb 55% of the risks of a cost overrun; they are judged to be adequate to carry out the project. Summary of Project Costs Egyptian n 000's US$ 000's Local Foreign Total Local Foreign Total % Equipment & Spares 1,244 4,187 5,431 3,184 10,719 13,903 38.1 Freight & Insurance 45 511 556 115 1,308 1,423 3.9 Import Duties 658 - 658 1,684 - 1,684 4.6 Erection 124 214 338 317 549 866 2.3 Land & Civil Works 3,237 - 3,237 8,287 - 8,287 22.8 Engineering, Technical Asst. 578 565 1,143 1,480 1,448 2,928 8.0 Training - Project 49 101 150 125 258 383 1.0 - Reemployment 293 98 391 750 250 1 000 2.7 Sub-Total 6,228 5,676 11,904 15,942 14,532 83,474 83.4 Contingencies Physical 597 540 1,137 1,528 1,380 2,908 8.0 Price Escalation 299 913 1.212 766 2.338 3,104 8.6 Total Project Cost 7124 7,129 14,253 18,236 18.250 36,486 100.0 Interest During Construction 14,527 - 1,527 3,909 - 3,909 10.7 IDA allocatħion of local cost - of reemployment training/2 - 98 + 98 - - 250 + 250 - - Total Financing Required 8,553 7,227 15,780 21,895 18,500 40,395 T12.1 /1 FOB foreign port for imported equipment and FAS Egyptian plant for domestic equipment. /2 See para 5.02. - 16 - No additional working capital is provided in the project cost for covering the slightly higher level of operations, since the export companies will as usual .over this with short-term borrowings. Interest during construction will not !:2 capitalized, but paid out of current operations. B. Financial Plan 5.02 An IDA Credit of US$18.5 million equivalent is proposed in order to fiLnance all expected foreign exchange costs of the project and including 50% of the retraining program, viz. US$500,000 equivalent, which should allow IDA to exercise some control over execution of the retraining program. Up to US$250,000 equivalent from the allocation of US$500,000 to the retraining program, would be available to cover local currency expenditure. All other local currency expenditures for the project would be met by retained earnings of ECGO. Project financing would therefore be provided as 45% debt and 55% equity as summarized below: Financial Plan US$ Million _ Long-Term Debt - Relending of IDA Credit 18.00 45 Equity - Retained Earnings of ECGO 21.39 55 Government Grant for Retraining Program including $500,000 from IDA 'redit 1.00 22.39 40.39 __ 5.03 The proposed IDA Credit would be made on standard IDA terms to the Government, which would onlend US$18 million equivalent to ECGO as a loan for 15 years including a grace period of 5 years at 6% interest. Repayment to the Government would be in 10 equal annual installments, covering both prin- cipal and interest. ECGO would also pay the Government a Ministry of Finance, Economy and Foreign Trade charge of 2-1/2% per annum on the outstanding amount of the loan, thus raising the cost of finance to ECGO to 8-1/2% per annum. The Government has agreed to bear the cost of the retraining program, and pass the IDA allocation of US$500,000 equivalent to ECGO as a grant. ECGO will execute the project and be the ultimate borrower, but since project expenditure on the ginneries will increase the fixed assets of the ginning companies, ECGO will acquire corresponding shares in the ginning companies' equity capital. 5.04 Reqtuirements for financing local costs of US$21.4 million equivalent will also be generated during project implementation through the earnings of ECGO, and invested (excluding interest during construction) in the equity of the ginning companies. ECGO's level of cash generation in the last three years has been in excess of two-and-a-half times the yearly local finance required during project implementation. The Government has agreed during negotiations that ECGO will be allowed to retain sufficient surpluses (instead of passing them annually to the Treasury, para 2.13) to enable it to meet local costs of the project as and when these occur, and that any additional funds, both foreign exchange and local, that may be needed to complete the project will be provided by the Government on terms satisfactory to IDA. - 17 - C. Allocation of the IDA Credit 5.05 The US$18.5 million IDA Credit will be used to finance the following: Allocation of IDA Credit (US$ 000) Foreign Costs Local Costs Equipment, materials and spares 10,719 Freight and insurance on imported equipment and foreign cost of erection 1,857 Training for project 258 - Training for reemployment 250 250 Refinancing of IDA engineering tredit and advances for technical assistance 228 - Engineering services and technical assistance I,220 Escalation, contingencies and unallocated 3,718 - 18,250 250 5.06 Disbursements of the IDA Credit will be made in accordance with normal Association procedures; except that disbursements for local costs of re-employment training will be made against statements of expenditures, and the supporting documents shall be retained by the appropriate organizations, and shall be open to inspection by the Association. A projected disbursements schedule is given in Annex 14. VI. PROJECT IMPLEMENTATION A. Design, Engineering, Project Management and Training 6.01 L. H. Manderstam (LHM) is now engaged by ECGO under the recent IDA engineering credit in the preliminary design of the new ginneries; the de- tailed engineering of the first two ginneries to be rehabilitated; the identi- fication of equipment suitable for local procurement; and the preparation of bidding documents for imported and local equipment. The execution of soil tests as well as the preparation of drawings and tender documents for civil works are to be subcontracted under the supervision of engineering consultants to a competent Egyptian contractor. ECGO has decided to continue working with LHM and appoint them as their engineering consultants during the execution of the project. IDA considers that Manderstam is qualified to perform such a function satisfactorily. A detailed project execution schedule is shown in Annex 15. 6.02 Neither ECGO nor the five ginning companies have at present the necessary personnel with adequate experience in construction work to handle project execution on their own. With construction proceding at 14 different locations more or less at the same time, and procurement covering international and local supplies as well as domestic fabrication of imported materials, the - 18 - project management function will be crucial for implementing the project effi- ciently and on time. Agreement has been reached during negotiations with ECGO and the Government on the following broad set-up for project management depicted ax_ 16: (a) ECGO will establish a project management unit ultimately staffed with about 100 personnel, consisting essentially of a project director and three functional departments under its control - engineering, finance and administration. The engineering con- sultants will form part of the office of the Project Director and act through him. This team might hopefully be able to undertake project implementation without expatriate assistance from Phase II onward. The project management unit will be under the execu- tfve supervision of ECGO's Chairman. (b) Within the functions of the office of the Project Director and with the staff support of the project management unit, the engineering consultants will be responsible primarily for the design and engineering work, the coordination and supervision of procurement, the erection and commissioning of facilities and the performance of equipment at both new and rehabilitated ginneries. It is envisaged that the engineering consultants will have about 5 people in the field plus any further temporary backup that may be required from time to time. (c) Locally recruited technical advisors, being either individuals or a firm, will be appointed by ECGO to advise ECGO's management in evaluating and assisting the work of the project management unit including the engineering consultants, whenever required. (d) A coordination committee consisting of the Chairman of ECGO as Committee Chairman and including the chairmen of each of the five ginning companies, the Project Director, a representative of the engineering consultants, certain Ministry officials and the technical advisors will be set up to allow the proper coordination of project aspects concerning the different ginning companies and to secure their agreement in the implementation of the project. While the committee will not have executive power over the Project Director and the project implementation unit any major disputes arising in the committee will have to be resolved by ECGO's Board. 6.03 Success in project execution will heavily depend on the effective- ness with which the project management unit and the engineering consultants will be able to work together. Agreement has been reached during negotiations that ECGO wlUl set up the project management unit and appoint enginesring con- sultants acceptable to IDA (to be retained throughout project implementation) within 60 and 30 days respectively, of signing of the IDA Credit Agreement. ECGO and Manderstam are now preparing a contract for engineering consultancy and implementation services with detailed terms of reference, which will need to be satisfactory to IDA. - 19 - 6.04 Although cotton ginning does not involve a complicated technical process and operation of the ginstands will not be much different from what it is today, the higher degree of mechanization in the new and rehabilitated ginneries will require a substantial upgrading in skills of plant operators. Training programs will be designed by the consultants and implemented by ECGO and the ginning companies. Some workers are expected to be upgraded by the vocational training institutes of the Ministry of Manpower; other key workers and supervisors will receive special training from selected suppliers of equip- ment. Ginning managers and senior executives will require orientation to new management skills. During negotiations ECGO has agreed to submit to IDA by March 31, 1974, for its approval, a detailed proposal for the training of workers and supervisory personnel and implement it promptly as required. Adequate provision has been made under the IDA Credit to cover the foreign exchange requirements of the engineering services and the training. B. Procurement 6.05 Equipment such as shaker conveyors, hopper feeders, fuel tanks, small boilers and miscellaneous electricals are available in Egypt of adequate quality and at prices expected to be below c.i.f. prices of imports. These would be reserved for local competitive bidding against local financing. The Government has agreed that it would allow this equipment to be imported if prolonged deliveries should threaten to delay the project as measured against the agreed implementation schedule (Annex 15). The rest of the equipment which has been included in the IDA Credit will be procured through international competitive bidding in accordance with IDA guidelines and the Government has agreed during negotiations that all permits and licenses needed for the project will be ex- peditiously issued. Roller ginstands representing 10% of imported equipment cost, are manufactured mainly by Platt International of the U.K. and its licensees in one or two other countries. Conveying and distributing equipment, presses and imported seed room equipment are expected to be tendered for in the U.K., U.S.A., Brazil, Belgium, Germany and some other countries. Civil works would be carried out by Government owned civil engineering organizations, following local competitive bidding among these organizations. The substantial value of the civil works contracts will, under local rules, attract competition only from the larger civil engineering contractors. Tentative bid packages for both foreign and local procurement are listed in Annex 17. C. Financial Accounting 6.06 Financial accounting, cost control and internal reporting procedures within ECGO will need strengthening to provide improved management tools. ECGO has agreed during negotiations that, where necessary with the assistance of consultants, it will introduce within its organization and that of the ginning companies by July 1, 1974 improved accounting, cost control and re- porting procedures satisfactory to the Association. Financial statements will continue to be audited annually by the State Audit Organization, in accordance with sound auditing principles consistently applied in such scope and detail as the Association shall have reasonably requested. - 20 - VII. FINANCIAL ANALYSIS A, Introduction 7.01 In the following financial analysis, projections are made on two distinct bases. First, cost and benefits are given on an incremental basis for the project, irrespective of how they will be reflected in the financial statements of ECGO and its subsidiaries. The rates of return are calculated or. an incremental basis from these projections. Second, financial projections are given for ECGO as a holding company which, as the project sponsor and the umbrelia organization, will receive all project benefits either through the ginning companies (cost savings) or the export companies (revenue benefits). Any changes in internal transfer prices such as the ginning fee cancel out in this analysis. 7,02 Conventional sensitivity analysis in Bank/IDA appraisals points out the variations expected in the rate of return if some variables change from the best estimates assumed in the calculations. It does not give a judgement on the likelihood of variations occurring in the key variables, nor does it give an indication of the likely magnitude of such variations. In short, it does not consider the "risk" in its calculations. Uncertainties regarding costs, benefits and timing inherent in the project have been tackled by the use of a risk analysis technique. This exercise considered these uncertainties by eszablishing ranges of values with their likelihood, to arrive at a "risk profile" of each major element. All projections in the appraisal are based on the averages of values of all possible outcomes weighted by the chances (probabilities) of each occurring. A complete description of the risk analysis exercise is given in Annex 13. B. Project Benefits on Incremental Basis 7.03 The project will yield benefits in three different ways: (a) by avoiding the cost penalty (through breakdowns, inefficient operation, and capacity constraint) of not rehabilitating the ginneries, (b) by reducing operating costs from present levels, (c) by increasing revenue (Annex 18). Revenue gains will contribute about 75% of project benefits, more than half of project benefits resulting from an improvement in the grade of lint which will command higher average cotton prices in world markets. By 1978, or about one year after project completion, rehabilitation is expected to yield sig- nificant operating cost savings; according to the estimates in the risk analy- sis, operating costs would drop from the present average of 62.2 PT/Cantar by 13.2 PT/Cantar or 21% (Annex 13). 7.04 A summary of incremental project benefits is given below; Annex 18 gives the details: - 21 - Project Benefits on Incremental Basis (BEI 000) 1975/76/1 1976/77 1977/78 1978/79 1983/84 1987/88 Volume of Cotton Ginned (1,000 cantars) 271 1,543 3,700 4,458 4,927 4,927 Revenue Gains 172 948 2,264 2,527 2,796 2,719 Cost Savings (Incl. Cost Penalty) 45 300 681 825 1,006 1 026 Total Project Benefits 217 1,248 2,945 3,352 3,802 Additional Depreciation 986 1,287 1,425 1,425 1,322 713 Interest 393 505 597 597 359 84 Taxable Incremental Profits (1162) (544) 923 1,330 2,121 2,948 (Los) /2---- - - Taxes (436)L2 (204)/- 350 497 795 1,105 Profit after Tax (726) (340) 573 833 1,326 1,843 Incremental Cash Flow after Taxes but before Interest 653 1,452 2,595 2,855 3,007 2,640 ,r1 Project benefits accrue from 1975/76. 2 Reflecting tax benefit resulting from tax treatment of loss. C. Financial Projections - ECGO 7.05 Annex 18 presents the projected income of ECGG as a holding company in which present operational results are used as a base and only the effects of the Phase I project are superimposed. World prices of cotton have been kept constant. December 1972 prices of inputs and outputs have also been used. A summary of projected income statements of ECGO is given below: - 22 - ECGO: Summary of Projected Income Statements (fZ'000) 1971/72L1. 1975/76 1976/77 1977/78 1978/79 1982/83 Cotton Sold (000 cantars) 10,193 10,698 10,857 11,015 11,182 11,839 Arbitrage Income 10,970 11,553 11,726 11,896 12,077 129786 Additional Revenue from Project - 172 948 2,264 2,527 2,800 Management Fee Income 1,801 1,893 1,922 1,950 1,979 2,095 Additional Cost Savings from Project - 45 300 681 825 1,004 Income from Subsidiaries 12,654 13,212 13,408 13,603 13,810 14,621 Other Expenses 463 473 479 486 447 473 Additional Depreciation - 986 1,287 1,425 1,425 1,425 Interest 540 933 1,045 1,136 596 414 Income before Taxes 24,422 24,483 25,493 27,347 28,750 30,994 Income Taxes 5,479 5,226 5,545 6,179 6,421 7,005 Income after Taxes 18,943 19,257 19,948 21,168 22,329 23,989 (Surplus sent to Treasury) Cash Flow for debt service 19,528 18,630 21,032 22,946 24,020 25,337 Debt Burden 585 978 1,090 1,182 1,071 1,071 L.T. Debt Service Coverage 33.3 19.0 19.3 19.4 22.4 23.6 /1 1972/73 data not yet available and 1971/72 results were used as a base. 7.06 ECGO's long-term debt service coverage is lowest in 1975/76 at 19.0. Although this seems to indicate a very comfortable coverage, ECGO's cash flow could change substantially with marginal decreases in world cotton prices and/or increase in farmer prices for cotton. An average 5% drop in prices of Egyptian cotton or a 5% increase (LE1.0/Cantar) in seed cotton price paid to the farmer, can reduce ECGO's cash flow by over UE10 million. The Government has agreed during negotiations to keep ECGO in a sound financial position, with a view to maintaining a debt service coverage of at least two times. ECGO has also agreed to consult with IDA prior to undertaking other major investments in addition to the project. In view of the importance of cotton production and particularly cotton exports to Egypt's economy, it is highly unlikely that Egypt would not take the necessary measures to maintain ECGO's healthy finan- cial position. 7.07 The incremental financial return of the project is 17.9%. However, this can vary from 14% to 21.8% as shown in Annex 19 with a 75% probability that it will exceed 16.7%. The project is thus financially attractive. D. Risks in the Project 7.08 The modernization program aims at mechanizing an industry which hitherto has been manually operated except for the ginstands. There are no precedents in Egypt to enable reliable estimates of the benefits of mechani- zation in the form of quality improvement, productivity increase and cost savings, although the basic technology of ginning is familar in Egypt, and the mechanization processes are well-proven in other countries. Grade improve- - 23 - ment, ginning outturn and increased volume of lint production are therefore subject to uncertainties. ECGO's inexperience with project construction could lead to delays in implementation. This, coupled with uncertainties regarding currency parities, leave project cost vulnerable to variations. The risk analysis technique has been used to take these uncertainties into account. 7.09 Annex 19 gives the risk profiles of five key factors: rate of return, net present value, foreign capital costs, revenues due to grade improvement, and net cash flows in 1979/80 chosen as an example. These risk profiles indicate the range of uncertainties that exist in the project. The foreign component of the capital costs (without price escalation) is projected at about hE6.2 million, but it could be as high as about LE8.2 million. On the other hand, there is about a 50% probability that this cost will be under UE6.1 million. Similarly, substantial variations in net cash flows are possible. For example, in 1979/80, the project cash flow is UE2.46 million. There is, however, a 25% probability that the cash flow will be hE2.04 million or less; in the worst case, it could go down to LE1.27 million. Annex 13 contains a full discussion of these re- sults and their implications which are summarized below: Risk Profiles of Key Financial Results of the Project (BE '000) Projected Lowest Val Highest Vahe Value Possible- Possible Rate of Return 17.9% 14.0% 21.8% Revenue Gains from Grade Improvement in Year 1979/80 1,791 506 4,851 Net Cash Flows in Year 1979/80 2,456 1,271 4,424 /1 With 0.01 probability. 75 With 0.99 probability. VIII. SOCIAL EFFECTS AND ECONOMIC BENEFITS OF THE PROJECT A. Effect of the Project on Employment 8.01 The project will radically alter the composition of the work force in the ginneries affected. Permanent and seasonal workers will increase in numbers, but those under contract will be considerably reduced. All the children and most of the women will be displaced by men with higher skills required to operate new mechanical and electrical equipment. No worker in future should work more than one eight-hour shift. ECGO has agreed during negotiations that employment and working conditions in the ginneries to be financed under the project will be improved upon implementation of the project. 8.02 The following table summarizes the employment effect of Phase I: - 24 - Employment Effect of Phase I/ Permanent Seasonal Contract Total A. Number of Workers - Present Employment in Ginneries to be rehabilitated (10) and to be closed down (10) 1,256 1,130 7,864 10,250 - Future Employment in Rehabi- litated Ginneries (10) and New Ginneries (4) 13440 1,520 1,835 4,803 - Addition (Reduction) 184 398 (6,029) (5,447) B. Wages for the whole Industry (LE '000) - Present 1,670 343 1,266 3,279 - Future 1,979 486 615 3,080 - Addition (Reduction) 309 143 (651) (199) /1 Assumes two-shift operation, one eight-hour shift for workers, and "inter- mediate mechanization." Since Phase I is roughly one-third of the rehabilitation program total reduc- tion in employment throughout its 10-year execution, assuming conservatively that the yards (para 4.14) will by then all have been mechanized, may be around 17,500. 8.03 In macro-terms this volume of unemployment is small, particularly because it relates largely to contract workers, not all of whom work through the whole ginning season, to children who would no longer be allowed to work in the ginneries, and to most of the women. The reduction in employment must also be seen in the context of the intention of the Government to create in the next Five-Year Plan (1973-1977) some 200,000 new jobs annually. Finally, while the number of workers would be reduced by about 12% at the end of Phase I (from 44,586 to 39,139), the wage bill would decrease by only 6%. Neverthe- less, as a sample survey (Annex 20) recently undertaken indicated, many families depend on the meager incomes from seasonal employment and the absence of some incomes will undoubtedly be felt. These social effects are offset by the substantial economic benefits flowing from the project as explained hereunder. These economic benefits, furthermore, provide sufficient resources for the support of a reemployment training program, to be executed in tandem with the project (para 4.16). - 25 - B. Economic Return of the Project 8.04 As already discussed, the cotton sector is of vital importance to the Egyptian economy. Egypt enjoys an important natural comparative advantage in production of LS and ELS cotton due to a unique combination of its land and climate. Egypt's high yield of LS and ELS cotton combined with its cheap labor enables the country to produce cotton at very economical cost. Annex 21 shows that the average cost to the country of exporting one cantar of cotton, is 7.E16 against an average export price of approximately &E26 per cantar leaving a margin of about LEIO per cantar for distribution as profits and other transfer payments in the economy. This substantial margin enables Egypt not only to export cotton competitively, but also to supply inputs to the ex- isting local textiles and cooking oil industries at favorable prices. Domes- tic prices of lint are 10-40% lower than equivalent export prices. Cotton seed is made available to the oil extraction industry at about 1/7th of the world price. It is important for Egypt to maintain its comparative advantage in world trade by safeguarding and improving the quality of its cotton. The rehabilitation program is designed to retain, during ginning, the highest possible quality of Egyptian cotton. 8.05 In evaluating the economic costs and benefits, goods have been valued at world market prices as far as these goods are tradeable, and at economic costs where non-tradeable supplies are concerned. Duties, taxes and other transfer payments within the economy, have been eliminated from costs. The economic cost of the local component of capital expenditures has been arrived at by eliminating such local transfer costs and shadow pricing unskilled labor employed in the equipment and construction industries. Foreign equipment cost has been taken at financial cost less import duties. On the revenue side, economic value of exports has been taken as equal to the financial earnings since cotton is exported under free world competition. 11 Domestic sales of cotton, including long staple, are mainly for applications which could be satisfied with short staple cotton. Egypt has considered exporting all its long staple cotton and importing short staple cotton for domestic use but decided against it because of the possibility of contamination of its cotton crop, and the possible boomerang effect on world prices of Egyptian cotton that might result from offering increased quantities internationally. Since domestic long staple cotton prices are very near those of short staples in world markets, the economic value of domestic cotton sales has been taken as equivalent to prevalent domestic sales prices. In operating costs only labor has been shadow priced and other relatively smaller components left at their financial values. 8.06 For the local component of investment costs, skilled labor in the construction and equ!ipment industry has been valued at market wage rates, and unskilled labor has been shadow priced at 0.5. The economic cost of the investment in the project with these adjustments is US$27.6 million (ME10.8 million) as summarized in Annex 21, which also gives the assumptions used in the calculations. 1/ Sales to the centrally planned countries are reportedly also made at free market prices. - 26 - aO07 The project will replace present old and inefficient equipment with new and efficient facilities. This will reduce costs of production and bring -at add itonal revenues through improved quality and marginal increase in caoscity. Total incremental economic benefits from the project are estimated at inE4.2 miDllon annually. ,3060 ln calculating the economic benefits, assumptions giveni in Annex 21 have been used. Existing labor in the present ginneries, being ailmost all unskilled, has been shadow priced at 0.5, i.e., the same as unskilled labor for investment costs. The labor in the new and rehabilitated ginneries, on the other hand, would be mostly semi-skilled. This labor was shadow priced at a sactor of 0.7 of the market wage levels, which is between the factors used for 8killed and unskilled labor in determining project cost. The latter shadow prici, besides representing the opportunity cost of the labor, is further justified as the external economies resulting from the project in the form of the upgrading of this labor, are not accounted for in the calculation of project benefits. 3. 09 The expected economic return of the project by using the above shadow rates is calculated at 24.7%. 8.10 It should, however, be further noted that the unskilled labor force presentlv eimployed in existing ginneries is to some extent coerced into working. In addition, the workers, including children and women, work under unhealthful conditions entailing future costs for the economy through health deterioration and they, o90r at least some of the children, could realize a potential of greater vaiue to the economy through further education. IDA considers that the elimiaation of these undesirable conditions is an important benefit of the project. Ti.e shadow price factor for the existing labor in the present ginneries of 0,5 makes no allowance for these penalties to the economy of the existing system, Su6chi allowance can be made by raising the economic cost of the existing labor from 0,5 to the full market wage rate, though even that might understate the actual penalty to the economy. I 8.11 If these indirect but important benefits of moving from the present to the project situation were quantified by using the market wage rate for unskilled labor in the present ginneries, the expected economic return would rise to 28,9%, The actual return to the economy might be even higher since, Pls -Lndcicated, the above quantification of the social benefits may be conserva- tive; frtharmore, the project benefits disregard the external economies resulting from the upgrading of the skills of the displaced workers through the training scheme, for which US$1.0 million has been charged to the project. 8.12 As described in Annex 13 on Risk Analysis, the expected return is the weighted average of probable likelihoods. Conventional sensitivity analysis showed that even if revenue for grade improvement dropped 25% below the expected values used in the risk analysis, the economic return would still be about 19.8%. This return is considered to be well above the opportunity cost of capital in Egypt. If it is desired to penalize the project still further because of its higher degree of mechanization, this can be done by notionally raising project costs. If project costs were thus increased by 50%, the return would be above 16.8%, which is still acceptable. - 27 - C. Foreign Exchange Aspects 8.13 Primarily by improving the average quality of cotton exported, the project will increase the export earnings of Egypt by about US$4.2 million (1E1.6 million) annually, compared to the expected foreign exchange cost of the project of US818.25 million. IX. RECOMMENDATIONS 9.01 Agreement was reached during credit negotiations on the following principal points: (i) The Government will, (a) Provide ECGO from the IDA Credit, a grant of US$500,000 equivalent towards the retraining program and a loan of US$18 million equivalent, to be repaid to the Government in 15 years including five years of grace, with interest at 6% per annum plus a Ministry of Finance, Economy and Foreign Trade charge of 2-1/2% per annum on the outstanding balance of the loan (para 5.03). (b) Authorize ECGO to use the equivalent of US$21.4 million from its earned surplus during project implementation, to invest in the equity of the ginning companies for financing of the local capital expenditures on the project as and when they arise (para 5.04). (c) Provide additional funds, both foreign exchange and local, as may be required to complete the project on terms satisfac- tory to the Association (para 5.04). (d) Ensure that ECGO maintains a minimum long-term debt service coverage of 2.0 until the proceeds of the IDA Credit have been repaid to the Government (para 7.06). (e) Allow equipment to be imported that was previously expected to be supplied domestically if prolonged deliveries should threaten to delay the project, and issue all permits and import licenses needed for speedy implementation of the project (para 6.05). (f) Arrange for the on-going ILO study on the employment effects of the project to be completed, and submit to IDA a specific proposal by October 31, 1973, for re-training and re-employing the workers displaced by the project, and carry out such a program as agreed to by IDA, in parallel with execution of the project (para 4.16). - 28 - (ii) ECGO will: (a) Appoint within 30 days of the signing of the IDA Credit Agreement, engineering consultants and technical advisors (both to be retained throughout project implementation), and within 60 days set up a project management unit within the ECGO organization9 as acceptable to IDA (paras 6.02 and 6.03). (b) Limit mechanization under the project to the intermediate level (para 4.14). (c) Provide improved employment and working conditions in the ginneries to be financed under the project (para 8.01). (d) Consult IDA before undertaking major capital expenditures outside the project (para 7.06). (e) Undertake to execute the project on an agreed implementation schedule (para 6.01). (f) Arrange for the consulting engineers to draw up a program for training workers and supervisory personnel by March 31, 1974, satisfactory to ECGO and IDA, and implement it thereafter (para 6,04). (g) Strengthen the accounting and reporting procedures of ECGO and the ginning companies to the satisfaction of IDA, by July 1, 1974 anid make auditing arrangements satisfactory to IDA (para 6,06), 9.02 Based on the assurances obtained during negotiations, the project constitutes a suitable basis for an IDA Credit of US$18.5 million. Industrial Projects Department June 28, 1973 3'0' 3? 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