World Bank Document · Document of The World Bank ... THE TEXTILE MARKET AND MARKETING . . 12 ... 5-1 Product Mix, Number of Spindles and Looms with the Project

Document of

The World Bank

FOR OFFICIAL USE ONLY rIL J

Report No 1959-EGT

EGYPT

STAFF APPRAISAL REPORT

NSWC TEXTILE PROJECT

March 1980

Industrial Projects Department

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

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CURRENCY EQUIVALENTS

Unified Exchange Rate

(Used in the Appraisal Report)US$1.00 = LE 0.69LE 1.00 - US$1.45

WEIGHTS AND MEASURES

1 Metric Ton = 1,000 Kilograms = 2,204.6 Pounds

1 Kilometer (km) = 0.62 Miles1 Hectare = 2.379 Feddans1 Feddan = 1.038 Acres

1 Kantar = 157.5 kg of Seed Cotton = 50 kg of Cotton Lint1 Inch = 2.54 Centimeters (cm)Ne (English Cotton Count) = Measure of Yarn Fineness Indicating the Number of

840-yard length per Pount of Weight1 KwH = 1,000 Watts per Hour1 MW = 1 Million Watts

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

AT = Advanced Technology

BOD = Biological Oxygen DemandCIF = Cost, Insurance, FreightCT = Conventional TechnologyDBA = Unit Measure of Industrial Noise Level (Decibel)EB = Misr El Beida Dyers

EGOSW = Egyptian General Organization for Spinning and WeavingFOB = Free on Board

GDP = Gross Domestic ProductGOFI = General Organization for IndustrializationICB = International Competitive BiddingKED = Misr Fine Spinning and Weaving Company - Kafr El DawarLMPY = Linear Meters per YearM = MeterM2 = Square MeterNSWC = National Spinning and Weaving CompanyPCT = Pre-conventional TechnologyPPM = Parts per MillionPIU = Project Implementation Unit

REP = Rehabilitation & Expansion ProgramSMPY = Square Meters per YearTPY = Tons per Year

FISCAL YEAR

After 1972: January 1 - December 31Until 1972: July 1 - June 30

FOR OFFICIAL USE ONLY

EGYPT

APPRAISAL OF NSWC TEXTILE PROJECT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION .,.,. .......................... .,.. . 1

A. Background .............. 1 fB. Bank Group Involvement in the Egyptian Textile Industry 1

II, THE INDUSTRIAL SECTOR AND TEXTILE INDUSTRY . 2

A. The Industrial Sector ....................... I..... 2B. Cotton Supplies .. 4C. Textile Industry in Egypt . . 5D. Structure of the Textile Industry . . 6E. Organization of the Textile Industry . . 6F. Issues and Problems of the Textile Industry. . 8

III, THE TEXTILE MARKET AND MARKETING . . 12

A. Historical Development of Textile Market . .12

B. Forecast Supply and Demand of Textiles in Egypt 13C. Marketing of Textiles in Egypt . .15D. Export Marketing of Textiles . .16

IV. PROJECT SPONSOR .. 18

A. The National Spinning and Weaving Company (NSWC) 18B. Production Facilities .18C. Rehabilitation Requirements .19D. Financial Performance ......................... 20Be NSWC Rehabilitation and Expansion Program .24F. Organizational Improvement and Training .25

V. THE PROJECT .............................................. 27

A. Project Concept, Scope and Location . .27B. Project Technology .. 29C. Buildings .. 29D. Ecological Considerations and Occupational Hazards 30E. Production Program, Raw Materials and Utilities 30F. Project Implementation, Staffing and Training .. 32

This Report was prepared by Messrs. D. T. Carpio, E. Bolte, H. Oteifa andA. Sandig of the Industrial Projects Department.

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.

TABLE OF CONTENTS (Continued) Page No.

VI. CAPITAL COST, FINANCING PLAN AND PROCUREMENT ............ .. 34

A. Capital Cost ......................................... 34B. Financing Plan ... .............. . ...................... 35C. Procurement .......................................... 37D. Allocation and Disbursement of Bank Funds ........... 38

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

A. Revenue and Operating Cost Assumptions for the Project 39B. NWSC-Financial Forecast with the Project ............. 42C. Financial Rate of Return ....................... 44D. Financial Covenants ...................................... 44E. Major Risks .......................................... 45

VIII. ECONOMIC ANALYSIS . . ....................................... 46

A. Economic Input and Textile Prices ................... . 46B. Economic Rate of Return ....... ...................... 48C. Other Benefits ...................................... 49

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

ANNEXES

2-1 Public Sector Textile Companies2-2 Organization:of the Public Sector Textile Industry2-3 Combined Historical Income Statements of the Public Sector

Textile Enterprises2-4 Consolidated Balance Sheets of the Public Sector Textile Enterprises2-5 Asset and Capital Structure of the Public Sector Textile Enterprises2-6 Textile Projects Approved Under Law 43 of 1974

3-1 Historical and Projected Textile Demand3-2 Forecast of Textile Demand and Supply Situation3-3 The Cotton Fabric Distribution System3-4 Textile Export Markets

4-1 NSWC - Historical Income Statement4-2 NSWC - Historical Cashflow and Balance Sheet4-3 NSWC - Karmouz Spinning Equipment and Productivity Forecast4-4 NSWC - Maharrem Bey (Existing Weaving Mills) Equipment and Productivity

Forecast4-5 Production Schedule without the.Project4-6 Income.. and Funds Flow Statements without the Project4-7 Balance Sheet without the Project4-8 NSWC - Assumptions for Financial Forecast without the Project4-9 NSWC - Organizational Structure

ANNEXES (Continued)

5-1 Product Mix, Number of Spindles and Looms with the Project

5-2 Production Program and Efficiency of Mills with the Project

5-3 Project Raw Material (Fiber) Requirement5-4 Project Implementation Schedule5-5 Project Staffing Requirements

6-1 Capital Cost Estimate6-2 Calculation of Price Escalation Factors6-3 Incremental Permanent Working Capital Estimate

6-4 Interest during Construction - Bank Loan6-5 Disbursement and Financing Schedule

7-1 Depreciation (Incremental) Schedule

7-2 Textile Financial and Economic Price Assumptions7-3 Detailed Production Cost Estimate with the Project

7-4 Production Schedule with the Project7-5 Amortization Schedule - Subsidiary Loan

7-6 Income and Funds Flow Statement with the Project7-7 Balance Sheet with the Project

7-8 NSWC - Assumptions for Financial Analysis with the Project7-9 Financial Rate of Return and Sensitivity Analysis

8-1 Cotton and Polyester Economic Prices8-2 Economic Rate of Return and Sensitivity Analvsis

MAP

IBRD Egypt: Project Location (IBRD Map No.13419)

DOCUMENTS CONTAIFED IN TPE PROJLCT FILL

1. Sectoral Survey of the Egyptian Textile industry, April 28, 1976(8 volumes) - by Werner International (USA)

2. Feasibility Study of Textile II Project - National Spinning andWeaving Company, July 1977 (2 volumes) by Werner International (USA)

3. NSWC Textile Project - Production Program, Equipment List and Price Estimates,January 1980

4. Text of International Advertisement for Registration of Suppliers -published mid-January 1978 and again on April 1980.

5. Terms of Reference for Consultancy Services - NSWC

6. Contract for Consultancy Services Between Gherzi Textil Organisationand National Spinning and Weaving Company

7. EGYPT - Forecast of Domestic Textile Supply and Demand (1982-86), January 19808.. Terms of Reference for Action Plans and Programs for the Egyptian Textile Industry.

I. INTRODUCTION

A. ackground

1.01 The Government of the Arab Republic of Egypt has requested Bankfinancing of US$69 million equivalent to assist the National Spinning andWeaving Company (NSWC), a public sector enterprise, in implemen _ng itsurgently needed rehabilitation and modernization program (the Project).The Project involves the installation of a spinning mill with a capacity of6,600 tons per year (tpy) of polyester/cotton as well as 100% cotton yarn anda weaving mill with a capacity of 20 million linear meters per year (equiv-alent to 28 million square meters per year (smpy)) of fabric and the moderni-zation of most of NSWC's existing production units located in Alexandria. Theproject facilities are expected to start commercial operation by April 1984;about 10% (by weight) of the output will be exported. The Project's fiber rawmaterial requirements are imported short-staple cotton (58%), Egyptian mediumto long-staple cotton (14%) and polyester (28%), which will be locally pro-duced starting in late 1980. The Project will involve strengthening of themanagement and organization of NSWC which is presently weak and its successwill critically depend on significant progress in this area. A key aspect ofthe Project is the transformation of NSWC from a public to a joint-venturesector enterprise which will give autonomy to the Company regarding pricing,profit retention and more importantly enable the Company to implement person-nel policies and a compensation system adequate to attract and retain quali-fied employees.

1.02 NSWC will implement the Project through a project implementationunit mostly staffed with newly recruited qualified personnel which will beassisted by foreign technical consultants. The Project is expected to costabout US$104 million equivalent including about US$79 million in foreignexchange. It will be financed with 34% equity (US$35 million) from theGovernment and private shareholders including local financial institutionsand the balance of 66%, corresponding to 87% of the foreign exchange cost,will be financed by the proposed Bank loan of US$69 million.

1.03 Following preparatory missions in July and September 1977, theProject was appraised in October 1977 by a mission consisting of Messrs.D. Carpio (Chief), E. Bolte and A. Sandig of the Industrial Projects Depart-ment and Mr. F. Kaps of Country Programs Department I, EMENA Region. Afterthe Government completed in August 1979 an extensive review of the investmentplans in the textile sector to ensure a balanced growth of capacity anddemand, the Project was re-appraised in November 1979 by a mission consist-ing of Messrs. D. Carpio (Chief) and H. Oteifa of the Industrial ProjectsDepartment.

B. Bank Group Involvement in the Egyptian Textile_Industry

1.04 Besides an IDA credit of US$18.5 million made in 1973 for the CottonGinning Rehabilitation Project (Cr. No. 423-EGT), Bank Group involvement inthe Egyptian textile sector started with a study of that sector by WernerInternational (USA) as part of the Bank Group's Agricultural and IndustrialImports Project (Cr. No. 524-EGT and Loan No. 1062-EGT) of December 1974.This study was completed in April 1976 and its preliminary findings providedthe basis for the Bank's first textile project which was approved in June

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1976 (Loan No. 1292-EGT) for US$52 million to assist two public sector firms,Misr Fine Spinning and Weaving Company - Kafr El Dawar (KED) and Misr El BeidaDyers (EB), in their expansion programs. Nine other public sector textilecompanies also received a total of about US$11 million from the Bank's SecondIndustrial Import Loan (Loan No. 1456-EGT) towards modernizing theirfacilities. Within the context of the Bank's industrial policy dialogue, theBank is discussing a series of studies aimed at: (a) upgrading the industrialplanning capability of the Government; (b) developing an appropriateindustrial strategy and policies for the 1980's including a list of priorityprojects; and (c) developing specific action programs for the textile andmetallurgical industries. The action program for the textile sector willinclude the identification of priority projects which will form part of theGovernment's medium-term (1981-85) capital investment plan for the textileindustry. Finally, IFC made an investment of US$0.6 million in the NileClothing Company, S.A. (Report No. IFC 7757, October 12, 1977) for a projectwhich recently started production of ready-made garments for exports.

1.05 Overall implementation of the Bank's first textile project is satis-factory, although initial delays in the mobilization of the civil works con-

tractor and the scarcity of construction materials in Egypt have delayedproject completion by about 28 months - to September 1981. Estimated cost ofthe project has increased by about US$20 million, or 13%, all due to localcost increases primarily for civil works. Additional local financing onsatisfactory terms has been arranged with the Government. No increase in theforeign exchange cost has occurred or is anticipated. However, the Arab FundLoan (US$34.5 million) for the project was suspended in late 1979 and theundisbursed portion (US$30 million) has been partly replaced by foreigncommercial bank loans (US$10 million) with the balance being covered by theGovernment and from the companies' resources.

11. THE INDUSTRIAL SECTOR AND TEXTILE INDUSTRY

A. The Industrial Sector

2.01 Industry has become a significant sector of the Egyptian economy;it accounted for about 15% of GDP in 1978 and employed 1.2 million, or nearly12% of the civilian labor force. About 37% of commodity exports originatein industry. Some 200, mostly large, publicly-owned industrial enterprisesdominate the sector, providing two-thirds of value added and half of industrialemployment. The private sector industry has about 4,000 mostly small enter-prises employing 10 or more workers. Artisan shops with less than 10 workers

comprise an additional 100,000 establishments with over 300,000 employees.

2.02 Recent performance of the public industrial sector on the whole has

been mixed as reflected in the growth of output and exports. Real aggregateoutput growth in 1973 and 1974 was low (about 2.1% and 2.6% per year) but itaccelerated to almost 9% annually during 1975-78. However, preliminary esti-mates for 1979 indicate an annual output growth of only 3%. Public sectorexports in current terms increased sharply from LE 118 million in 1973 toLE 168 million in 1974, but stagnated during 1975-77. They again increased

sharply to LE 270 million in 1978. The performance of the private sector

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during the past five years has been somewhat better. Total private sectoroutput which stagnated during 1972-74 increased remarkably by an average of11% annually in real terms between 1975 and 1978 but increased only modestly,by 8%, in 1979. Private industrial exports as a percentage of private sectoroutput declined from 11% in 1975 to 4% in 1978 and actually decreased incurrent terms from LE 54 million in 1975 to LE 44 million in 1978.

2.03 The public sector has been responsible for the lion's share of totalindustrial investment accounting for almost 90% of total investments in1975-78. Following the Government's more liberal policies toward the privatesector, its share of total industrial investment is estimated to have increasedfrom about 4% during 1969-74 to about 10% during 1975-78. Also, investmentlicenses granted to the private sector by the General Organization for Indus-trialization (GOFI) increased from LE 67 million in 1975 to LE 167 million in1978. These data portend an accelerated pace of private investment in thecoming years provided sufficient resources are made available in localcurrency and in foreign exchange. In addition, foreign investment in joint-venture projects is likely to increase as a result of amendments to theforeign investment law that were legislated in June 1977 (para 2.05).

2.04 The past performance of Egyptian industry does not reflect its fullpotential, since shortage of foreign exchange needed for imported inputs anda low level of investments for modernization and expansion has limited capac-ity utilization and output growth. The mixed performance of the public sectorindustry is also a result of inadequate management and labor policies inducingoverstaffing and low labor productivity due to lack of appropriate incentivesto workers. In addition, the administrative structure, which is characterizedin most public sector industries by insufficient decentralization of authorityto enterprise management, has proved to be an obstacle to efficient operationof public industrial enterprises. In the public textile sector, however, someimportant operational functions are effectively performed by the enterprisemanagement (Section E of this Chapter). Other major issues facing the indus-trial sector include the need for revising the system of price controls andthe import tariff structure. For the private sector industry, there is a needto establish a long range policy to promote its further development.

2.05 In the context of lending to industry and formulating technicalassistance activities, the Bank has had, and proposes to continue, discus-sions of the above-mentioned sector issues. Some improvements have alreadybeen achieved through focussed lending and technical assistance in the prep-aration of investment plans and policies for various industrial branches.Thus, the Bank has been able to: (a) make some progress towards developinglong-term lending practices through two IDA credits and two Bank loans tothe Development Industrial Bank; (b) help modernize Egypt's major industry--textiles--with loans for two major public textile enterprises; (c) help tobring about better utilization of existing industrial capacity through twoimport loans which provided much needed foreign exchange for the import ofraw materials and the balancing of equipment, thereby improving plant effi-ciency; and (d) provide assistance to expanding fertilizer and cement produc-tion, both projects involving modernization and improvements in management.The Government has also made progress in the following area: Law 43 of 1974,which is to encourage foreign private investment in Egypt has been amendedin 1977 making it more effective, mainly by reducing taxes and facilitating

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profit transfer. The Bank will continue to seek policy improvements in thecontext of the proposed Project and future lending, sector studies, andtechnical assistance activities.

B. Cotton Supplies

2.06 While Egypt is a minor cotton producer accounting for only 3% to 4%of world production and about 4% of world exports in recent years, it is animportant exporter of medium, long, and extra long-staple cotton, accountingfor about 40% of world trade of medium and long-staple cotton (fiber length1-3/16 to 1-6/16 inches) and about 60% of extra long-staple (fiber lengthover 1-6/16 inches). Egyptian cotton is suitable for the manufacture of highquality yarn and cloth and international prices of medium, long and extralong-staple cotton have been about 40%, 60% and 75%, respectively, higher thanthe world market prices of the standard short-staple cotton. The high profit-ability to the Egyptian economy of cotton production and exports is not passedon fully to the farmer as farm prices, for example, were only about 35% to 50%of the equivalent export prices during the late 1970's (para 3.03). Whilecotton still provides the major source of cash, farmers are wary of Governmentcontrols and low profitability and have been turning to more rewarding cropswith less Government intervention, thus forcing the Government to accept arevision of the cotton acreage quotas. The declining trend in cotton produc-tion and cotton exports since 1970 is being reversed only recently as demon-strated in the table below:

Egypt: Raw Cotton (Lint) Production, Exports and Domestic Consumption

ApparentDomestic

Production % of World Exports % of World Imports ConsumptionYear (1,000 tons) Production (1,000 tons) Exports (1,000 tons) (1,000 tons

1969/70 540 4.7 320 8.3 - 2201973/74 490 3.6 260 6.2 - 2301976/77 395 3.2 130 3.5 25 2901977/78 400 2.9 150 3.7 25 2751978/79 (Est.) 440 3.4 165 3.8 25 300

a/ Apparent consumption does not take into account changes in inventory levels.

2.07 About 60% of the cotton requirements of the Egyptian textile industrycan be satisfied by short-staple cotton as the fabrics produced are mostlyfor local consumption. But Egypt does not produce short-staple cotton anduntil 1974 (para 2008) did not import any to avoid the risk of infestation ofthe local cotton crop. Consequently, the domestic textile mills used mostlymedium-staple cotton and some long-staple cotton while exports were mostlylong and extra long-staple cotton. While local textile consumption increased,total cotton production stagnated or declined and the medium staple cottoncrop, which constitutes only one fourth of the country's cotton output, became-nadaq-u-a s.4As a co-sequence, increasingly more long-staple cotton has beendiverted to the local textile mills, thus cutting severely into the country'sraw cotton export value which was not compensated by increases in textileexports. This trend of declining cotton production and exports has promptedthe Goveznment to grad.ia liy increase the farm level cotton prices which havebeen keyp.: artificially 'Low. The largest increase was effected in 1979 (32.2%)

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thereby raising the farm gate cotton price by about 93% above the 1974 level.However, the present price is still only about 50% of international pricesadjusted to the farm level. The Government will need to continously reviewits agricultural policies, especially the pricing of farm outputs and inputsin order to ensure an optimal pattern of crops given the changing resourcebase and market opportunities in the country and abroad.

2.08 As Egyptian cotton production is not likely to increase in thefuture, the Government has taken steps to release more valuable long-staple cotton for export and replace it with lower-cost imported short-staplecotton. The use of imported short-staple cotton was first tried in 1974; itproved satisfactory, as the risk of infestation of the local cotton crop wasavoided by restricting imports to mills located away from cotton growing areasand by burning the baling materials. The f'rst major quantities (about 25,000tons) were imported in 1976, and continued at the same level through 1979.For example, the Natioral Spinning and Weaving Company, i.e. the beneficiaryof the proposed loan, which tried a small quantity of imported cotton for thefirst time in 1975, increased its use in 1977 and 1978 to about 5,000 tons,equivalent to approximately 36% of its total cotton consumption of 14,000tons. Imported short-staple cotton can also be economically complemented bypolyester fiber, now that the 25,000 tpy polyester plant near Alexandria isabout to start production in late 1980.

2.09 Other means to increase the amount of raw cotton available for ex-ports would be the proper management of cotton wastes. It may be possibleto save up to 8% of the total local cotton presently consumed by applyingsuitable waste control and by substituting to some extent carded yarns forthe finer and higher-priced combed yarns used in textile products for thelocal market. However, due to the low domestic cotton price in the pastcoupled with insufficient financial resources to replace obsolete machinery,there has been little incentive to reduce waste. About 12,000 tons of cottonwaste were exported annually during the past years. Cotton waste is suitablefor the production of coarse cloth (e.g., rationed fabrics, para 3.08) for thelocal market, but Egypt is only now beginning to install sufficient equipmentcapacity to process this material. In 1978 and again in 1979, the Govern-ment raised the local price of raw cotton to the spinning companies by acumulative total of about 185% (there has been no change since 1970). Thecurrent local price plus the production tax on yarn makes the deliveredcost of the local medium-staple cotton to the spinning mills about equal to80% of the imported price of short-staple cotton which could substitute forthe local cotton in most uses. These price increases have spurred the industryto invest in additional open-end spinning rotors to process the waste cotton.There were only 3,068 open-end rotors in 1979 but this is expected to increaseto 13,200 by 1982.

C. Textile Industry in Egypt

2.10 The textile industry is Egypt's largest and most important indus-trial sub-sector. Some 330,000 people are employed in spinning, weaving,finishing and garment making, representing about one-third of the industrialwork force. Gross value added in textile and apparel industries in 1978 wasabout 25% of the manufacturing industry's value added. Textile productsrepresented 50% of industrial exports (excluding petroleum) and 18% of thecountry's total exports in 1978.

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2.11 Past growth of the textile industry has been substantially belowthat of the other industrial sub-sectors and its share in total industrialvalue added decreased from 45% in 1947 to 38% in 1966/67 and about 25% in 1978.The market has never presented a constraint to the expansion of the textileindustry, as domestic demand is substantial and foreign markets largely un-tapped. Low production efficiency, a product line limited to 100% cottonmaterials, and inferior quality, however, have been the industry's majordevelopment problems. The relative decline of the textile industry wasespecially marked during the recent ten-year period 1969-1979, when the outputof textile products increased by only 3% per year on average as compared to anestimated 4.5% for industry as a whole. During this period, employment in thetextile industry increased only marginally and thus contributed little to theimprovement of the country's severe under-employment problem. In the 1960's,textile exports performed well, with its share of total exports increasingfrom about 10% in the early 1960's to about 20% in the early 1970's. Butbecause of the rapid rise in petroleum export revenues during the last threeyears, the share of textile exports to total export revenue declined from21% in 1974 to an estimated 14% in 1979. If petroleum exports are excluded,however, the share of textile exports increased slightly from 23% in 1974 to24% in 1979. The expansion of textile exports in the 1960's and the early1970's took place mainly in the framework of bilateral trade agreements mostlywith Eastern European countries, where export earnings are in non-convertiblecurrencies. Efforts to increase exports of textiles to convertible-currencymarkets have been hampered by insufficient product quality and lack of marketties.

D. Structure of the Textile Industry

2.12 The textile industry is dominated by 30 large public sector enter-prises (Annex 2-1), which were nationalized in 1963, leaving only a small partof up to 5% of share capital to institutional shareholders (i.e. banks andinsurance companies). These companies account for the total spinning capacityin Egypt, two-thirds of the weaving capacity, about one-half of the knittingproduction and one-third of the garments production. About 2.4 million cot-ton spindles and 24,400 cotton looms were operated by the public sector enter-prises in 1979. In addition, specialized public sector mills operated 74,000wool spindles and 900 wool looms.

2.13 Private enterprises form an important part of the textile industry,especially in weaving and garment making. It is estimated that about 16,200power looms, 14,500 hand looms, 4,000 knitting machines as well as 3,800 handlooms for rugs and carpets are operating in the private sector. The privatesector weaving enterprises are all small scale establishments with about 2 to150 looms per establishment and an average of about 10 looms. There are 600private firms with 25 or more employees and about 1,800 with less than 25employees. But by the mid-1980's, the private sector is expected to accountfor about 20% of spinning production and 50% of weaving output as the largeprivate sector projects and the proposed NSWC Project (para 2.26) which villbecome part of the private sector, reach full production.

E. Organization of the Textile Industry

2.14 Until 1975, the operations of the public sector textile enterpriseswere tightly controlled by the General Organization for Spinning and Weaving(EGOSW) under the Ministry of Industry. Since the abolishment of EGOSW andother General Organizations, the public textile enterprises are linked directly

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to the Ministry of Industry and Mining through the General Shareholders'Assembly of each company, which is chaired by the Minister (or his representa-tive). The General Organization for Industrialization (GOFI), the TechnicalSecretariat for Textiles, the Consolidation Fund and tje Higher Council forTextiles, all under the Ministry of /ndustry, have assumed some of the non-operational fttctions of EGOSW. The current organization chart of the publicsector textile industry is shown in Annex 2-2.

2.15 The Higher Council -- a group of about 50 (individuals includingcompany chairmen, retired textile industry executives and representativesof the Ministries of Finance, of Economy and of Industry -- is an institutionoperating on an ad hoc basis, without support staff for analytical work, dis-cussing textile industry issues and advising the Minister of Industry. GOFI'stextile industry department is responsible for project preparation, monitor-ing of implementation, and for procurement in the public sector textile in-dustry. The Technical Secretariat has assumed the functions of collectingstatistical data on the sector, determining yarn allocation quotas for theprivate sector and establishing production targets -- especially with respectto rationed cloth -- for the individual public sector textile enterprises.Government control over the private textile enterprises is wielded in anindirect way through licensing of investments and allocation of yarn producedby the public sector firms. The Consolidation Fund provides assistance indetermining export prices and controlling quality of exported textile prod-ucts. It also negotiates export quotas with convertible-currency countriesand participates in arranging bilateral trade agreements. However, theConsolidation Fund does not assist the individual enterprises in promotingexports to convertible currency countries.

2.16 Plant operation, marketing and pricing of non-rationed cloth, andemployment matters, which were previously controlled by EGOSW, are now to alarge extent performed by the management of individual enterprises within theframework of existing policies and legislation. This represents an improve-ment over the situation which existed before abolishment of EGOSW. In thefield of investment planning (para 2.24), however, the textile industry isleft without a coordinating body. Identification and preparation of projectsin the public textile industry are decentralized and are left with the indi-vidual enterprises who submit their investment proposals to GOFI. But, whileGOFI performs the project monitoring and procurement assistance functionsadequately, it is not properly staffed to effectively perform the investmentplanning function. Private foreign and joint venture investments on the otherhand, are licensed by the Ministry of Economy, which has responsibility forprojects in the free trade zones and for joint ventures with Arab and foreigninvestors (falling under Law 43 of 1974). There are weaknesses in the organi-zation of the textile industry, and it is necessary for the Government insti-tutions involved to become more responsive to the development needs of thisindustry. In this context, the Government and the Bank have already agreedon the terms-of-reference for a study that will lead to an action program forthe development of the textile industry including training and institutionalaspects of the sector. The consultants for this study are expected to behired by October 1980 and will be financed from bilateral soft loans or grantsavailable to Egypt. The study will include prefeasibility studies for highpriority projects as well as a 5-year (1981-85) investment plan for thetextile industry and is expected to be completed by July 1981 (para 2.24).

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F. Issues and Problems of the Textile Industr

2.17 The public textile industry in Egypt faces a number of seriousproblems which affect its present performance and future development prospects.The key problem areas refer to the industry's low productive efficiency, itspoor financial situation, and the lack of an effective investment planningand export promotion. During the appraisal of the first textile projectand in the textile sector study (para 1.04), these sectoral problems beganto be identified and analyzed. One major question in this regard is how toplan and coordinate industrial development and review and analyze the problemsfacing the various agencies involved in that process. It is for this reasonthat the Government, within the context of the study referred to in para2.16, agreed to study the function, responsibilities and procedures of thetextile sector and formulate an action program for the textile industry in-cluding institutional aspects of the sector.

2.18 Efficiency and Training: Current operational conditions in thepublic sector industry are characterized by widespread underutilization ofcapacity, deteriorated and obsolete equipment, over-employment in plants andoffices, and a low level of technical skill of the work force. As a result,the product mix is not consistent with market requirements, the productquality is generally poor, the waste level is relatively high and productivityis low. As a first step to improve plant operation, a large number of workersurgently need technical training to upgrade their skills, or re-training foremployment in areas where currently skilled labor is in short supply. Atpresent, most of the technical training is performed on the job; this hasshown limited results and also has contributed to the perpetuation of badindustrial habits. There are a number of formal training programs in thetextile field in Governmental training centers which, however, have notproduced the quantity and quality of skilled labor required by the textileindustry. As part of the upgrading of eleven vocational training centersunder the Education II Credit (Cr. No. 868, 1979), the vocational trainingprogram and course syllabi for training textile workers will be revised withthe assistance of representatives from the textile industry. But this workdoes not, nor was it intended to, fully address the training needs of thetextile sector. The Government as part of an earlier Education I Credit (Cr.No. 681-EGT, 1977) has almost completed a study on the manpower requirementsof various industries, including the textile industry. This will now befollowed by the preparation of a specific industry-wide training/retrainingprogram which the Government has agreed to prepare by July 1981 and tosubsequerntly implement on an agreed schedule.

2.19 The current difficulties faced by the public sector textile industryin empLoyinng adequately skilled workers are exacerbated by Government-determinedgages and salaries which are not competitive with those paid by the privatesector hi--hl pays two times more for skilled labor and up to four times morefor management personnel. This has induced qualified employees of the publicsector text±le firms to move to private enterprises or to look for lessdeman-dng jobs ia other public sector firms which offer the same benefits.The difficulties facing the public sector textile firms due to the wagedifferentials are expected to get worse with the establishment of new privatesector textile firms, especially in the free trade zone areas. The public

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enterprises located in Alexandria will be specially affected, as a largeintegrated private text'le mill (the El Ameria project) is being built nearby.

2.20 The public sector companies are in theory free to design withinlimits an incentive system for workers which could be adequate to attractand retain a qualified work force. However, under the present lIw produc-tion efficiency and serious over-staffing, the public textile industry cannotsupport the financial implications of what initially is a costly incentivesystem. Thus, to implement attractive compensation systems, the public sectortextile firms would need thd initial assistance and support of the Government.

2.21 Employment Policy: Extreme over-staffing, mostly with unskilledand semi-skilled workers which constitute roughly 60% of the total employmentin public sector textile enterprises, is a major financial burden which haslimited the enterprises from offering more attractive compensation packagesto their productive employees and has therefore also contributed to the lowproductivity. The industry employs between four to five times more factoryworkers and at least five times more administrative employees than enterpriseswith comparable machinery and capacity operating in the US and EC countries,while as noted, at the same time a shortage exists in certain categories ofskilled workers. The Government has recently abolished the quota system ofemployment in public sector enterprises, but companies are still not allowedto terminate unnecessary workers. The problem of over-staffing can, therefore,only be solved over a longer period of time through attrition of superfluousstaff, training and re-training of the existing work force for productiveemployment in new or rehabilitated plants.

2.22 Financial Situation: The profitability of the public sector textileindustry has generally been satisfactory in spite of the substantial financialburden on the companies, imposed by the Government policy of: (a) fixing ex-factory prices of rationed cloth below production cost (para 3.08); and (b)forcing substantial overemployment on the enterprises. But the industry hassuffered from a severe lack of financial resources needed for increasing work-ing capital requirements, maintenance, rehabilitation and expansion of produc-tion capacity because of a low profit retention rate. The combined financialstatements of the public sector textile firms are shown in Annexes 2-3 and 2-4and the profit situation during the period 1973-1978 is summarized below:

Egypt: Public Sector Textile Companies Combined Income Statement (LE million)

1973 1974 1975 1976 1977 1978

Gross Revenues 315 384 406 448 547 627Cost of Sales 274 294 335 382 457 569Operating Profit 41 90 71 66 90 58

Interest and Other Expenses (Net) 7 26 18 17 29 (16) a/Income Taxes 6 20 13 9 17 22

Net Profits 28 44 40 40 44 52Net Profits as % of Sales 9.0 11.5 9.8 9.0 8.0 8.3Net Profits as % of Assets 6.7 8.6 6.6 5.7 5.0 4.6% of Net Profits Retained 23 32 29 27 38 35

a! The Government transferred LE 43 million to compensate the companies forhigher raw cotton prices which was not offset by increases in rationedfabric prices.

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Profits of the industry have been at an acceptable level during this period

of about 9.1% of sales and 5.8% of assets. However, there were substantialvariations among individual companies and a declining trend during 1977 and1978 as interest expense increased from 1% of sales in the early 1970's to 4%of sales by 1978 reflecting the increasing short-term borrowings of the com-panies and the increase in interest rates in 1978 and 1979. During 1974,profit levels reached a high of 11.5% of sales and 8.6% of assets. However,that was an exceptional year for the textile industry when internationalcommodity prices, including textile prices, reached high levels and domestictextile prices also increased, though not as dramatically as export prices.The main reason for the lack of financial resources is the low retention rateof profits. By law, 65% of before-tax profits are distributed to the Govern-ment (and the remaining minority private shareholders), 20% to the workers'participation fund and only 15% is retained by the enterprise on which ithas to pay a 40% income tax. This reduces further an enterprise's retainedprofits, after taxes, to the equivalent of only 9% of the before-tax profits.In practice, the Government may waive part or all of its share or the enter-prise may withhold payment and incur an indebtedness. The public sectortextile companies have, therefore, been able to retain after taxes, an averageof 21% of before-tax profits during 1973 to 1976 and about 36% during 1977 and1978; this was still not sufficient to maintain a financially strong position.In the Bank's industrial projects, financial covenants are designed to safe-guard the financial position of the project entities. But the Governmentmay have to re-examine the profit retention policy for all the public sectorenterprises as an industry-wide liquidity problem is already emerging. Thisis being discussed with the Government within the continuing sector policydialogue (paras 2.04 and 2.17). -

2.23 The liquidity and capital structure of the Government textile enter-prises has been deteriorating since 1973 (Annex 2-5). The combined currentratio, which was stable at about 1.8 during 1968 to 1973 declined to 1.6 in1975 and 1.3 in 1978 reflecting the increasingly difficult cashflow andliquidity position of these enterprises as higher working capital and replace-ment needs are more and more being financed with short-term debt rather thanby retained earnings. Between 1973 and 1978, the equity portion of capitaldeclined from 55% to only 41% and current liabilities increased from 28% to44% of total capital employed, respectively. Also, the requirement to pur-chase substantial quantities of long-term Government bonds--which was equiva-lent to about 10% of total assets of the public textile enterprises during1972-74 but fell to 4% by 1978--contributes to the weak liquidity position.

2.24 Investment Planning: The present process of investment planningin the textile industry is unsatisfactory and appears incapable of identi-fying and preparing high priority projects in sufficient quantity to satisfythe future domestic and export demand. Thus, while the textile sector surveyof April 1976 (para 1.04) suggested specific development objectives--in termsof product mix, raw material (fiber) combinations, export orientation as wellas rehabilitation/expansion requirements which the Government supports--noconcrete steps have been taken towards preparing and defining the scope andtiming of specific projects. The preparation of a long term investment planis urgently needed. This plan should ensure balanced growth of capacitybetween spinning, weaving and converting, as well as a more market orientedmix of capacity between coarse, medium and fine yarns and fabrics. In addition,

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spinning and weaving capacity has to be established based on an increasing useof imported short-staple cotton and the availability of locally produced orimported polyester fiber and market demand for polyester/cotton blends. Thetextile sector survey estimates that about 50% of the existing textile equip-ment in Egypt would have to be replaced over the next decade because ofobsolescence and to rectify the cumulative impact of past poor maintenancepractices. Ths installed cost of replacement investments together with thecost of expanding the production capacity needed to maintain the balancebetween forecast demand and supply during the next ten years are estimated atabout US$2.0 billion in 1980 prices. This amount would have to be increasedby US$0.9 billion should the industry's production efficiency remain at thecurrent low level thereby requiring a larger production capacity to meet theexpected demand. This substantial amount of money cannot be spent economi-cally without an appropriate investment planning mechanism. The textileindustry study (para 2.16) is expected to identify an effective investmentplanning function, which would establish and periodically update investmentplans for the textile sector.

2.25 The Government attaches high priority to the rehabilitation andexpansion of the public textile industry together with improvements in pro-ductivity and product quality. To achieve maximum impact, resources availablefor investment in the draft Five-Year Plan (1980-84) are concentrated on therehabilitation and modernization of the large public textile enterprises. TheBank is supporting these objectives, since they represent the most effectiveway to satisfy the need for increased and more productive capacity. Three ofthe six largest enterprises, which account for about 50% of the capacity ofthe public textile sector, are currently being rehabilitated and expanded:Misr Mehalla, the largest public textile enterprise with 35,000 employees andabout 15% of public sector capacity and production is being rehabilitated andexpanded with financial assistance from the US Agency for InternationalDevelopment; and KED and EB (para 1.04) are receiving assistance under theBank's first textile project. In addition, NSWC will be rehabilitatedunder the proposed second Bank textile project. Finally, the rehabilitation/modernization needs of other large public sector enterprises are expected tobe identified in the context of the study to be undertaken by the Governmentwhich will develop an action program for the textile industry (para 2.16).

2.26 Investments in the private sector textile industry (excluding thesmall-scale and artisan enterprises and the large El Ameria project mentionedbelow) are currently almost exclusively in the context of joint ventures withforeign investors and in recently established free trade zones. Ten jointventure firms, mostly medium-scale garment manufacturers, are already inoperation; another seven are under execution and establishment of an additionaltwelve private textile enterprises have recently been approved by the Govern-ment (Annex 2-6). There are two large-scale private sector textile projects.The first, which was completed in late 1979 is the Misr Iran Textile Company(MIRATEX) spinning mill in the Suez Canal free trade zone built with financingfrom Iran. Near Alexandria, a large-scale integrated textile mill (Misr ElAmeria) is under construction with a reported annual capacity of 300 millionsquare meters of polyester/cotton and 100% cotton fabrics. With the exceptionof the MIRATEX and the Misr El Ameria projects, none of the other privatesector investments are in spinning or weaving but rather in knitting, garment-making, finishing and carpet/rug-making which are not capital intensive. Inthe case of weaving, the private sector was not allowed, until late 1979, to

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import new looms because of a yarn shortage through most of the 1970's (except1978 when a domestic surplus developed due to a fall in 1977 exports).

2927 Promotion of Textile Exports: Export promotion for textile productsis currently carried out by the individual companies, with the ConsolidationFund providing assistance in checking quality and negotiating quotas andbilateral trade agreements. This will not be an adequate system for thefuture when, due to the investment programs of major textile enterprises,capacity will become increasingly available for the production of high qualitytextiles including polyester/cotton blends which can be exported to convertible-currency markets. These markets are more highly competitive and fashionoriented than Egypt's traditional markets in Eastern Europe. To be successfulin Western export markets, systematic market and product research must bedeveloped and market ties must be established in major target markets. Thepresent decentralized system of export promotion is not capable of performingthis function effectively. But with the assistance of the International TradeCenter (ITC), the Government is now preparing a comprehensive export promotionprogram. In this context, a ministerial level supreme council for foreigntrade and export promotion as well as a council for export promotion has justbeen established.

III. THE TEXTILE MARKET AND MARKETING

A. Historical Development of Textile Market

3.01 Production, imports, exports and apparent consumption of textilefabrics in Egypt during the period 1970-79 are presented in the followingtable:

Egypt: Historical Fabric Consumption 1970-79(In million square meters of fabric equivalent)

Domestic Production a/ a/ Apparent ConsumptionYear Cotton & Synthetics Woolen Imports Exports Consumption per Capita b/

1970 779 27 38 190 654 19.61971 804 30 38 183 689 19.71972 875 29 45 166 783 21.91973 853 29 35 168 749 21.11974 814 27 48 135 754 20.91975 857 30 61 130 818 22.21976 922 32 45 141 858 22.71977 976 32 26 138 896 23.11978 / 1,010 29 45 146 938 23.51979 1,036 32 40 145 963 23.5

a! axports and imports of fabrics, garments, knitted apparels, and householdgoods but excluding yarn.

7r a-quare meters per person (Egyptian resident in Egypt).£0J Estimate.

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Production of fabrics increased by about 3.0% per annum on average during the1970's. Imports supplied only about 5% of apparent domestic consumption dueto the very high import duties (75% to 155%) while exports represented anaverage of about 17% of domestic production during 1970-79. About 95% ofthe local fabric production is 100% cotton material with synthetic andblends accounting for 2% and woolen fabrics for 3% during this perioa.

3.02 Egypt's textile imports do not show any pattern of growth andsizable increases in some years were done within the framework of bilateraltrade agreements. Exports, however, declined after the peak of 1970 as traderelations with some eastern European countries deteriorated. Starting in1975, however, exports started to improve somewhat and by 1979, fabric exportswere close to 80% of the 1970 level (para 3.11).

3.03 Apparent consumption of textiles in Egypt, not taking into accountchange2 in stocks, increased at an average annual rate of 4.3%, from 654 mil-lion m in 1970 to an estimated 963 million in 1979. However, consumption oftextiles per capita rose by only 2% per annum on averlge, as the populationgrew by 2.3% per year during this period. At 23.5 m per capita, consumptionof cloth in Egypt is higher than in other countries of similar level of GDPper capita. 1/ As discussed in para 3.08, the Government controls prices ofrationed cloth at a low level and has also maintained the cost of cotton,including imported short-staple cotton used in the local textile mills belowworld market prices. This has kept local textile prices below internationallevels and thus induced a higher level of consumption of textiles than wouldotherwise have been the case. But the cumulative impact of the textile priceincreases in 1978 and in 1979 which raised local fabric 2/ prices to within80% to 90% of international levels have kept per capita consumption unchangedbetween these two years. However, by late 1979, inventories of fabrics, whichhave increased significantly in 1978, were close to normal levels as demandstarted to be strong again.

B. Forecast Supply and Demand of Textiles in Egypt

3.04 Bank projections of supply and demand of textiles (Annexes 3-1 and3-2) are summarized below:

1/ International statistics are maintained in terms of per capita consump-tlon of all natural (including jute) and man-made fibers (rather than inm of fabric). Data of per capita GDP and fiber consumption of selectedcountries for 1974 are listed below:

US$/Capita Kg/Capita

Egypt 260 4.5Ghana 290 2.5Ivory Coast 510 4.5Tunisia 460 4.3USA 6,200 22.5

2/ Non-rationed fabrics only.

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Egypt: Projected Demand and SupPly of Textiles

Av. AnnualActual Estimate Forecast % Increase1978 1979 1982 1984 1986 1979-86

I. Textile Demand

2a. Fabric Demand (million m )

(i) Domestic Demand 938 963 1,085 1,171 1,263 3.9(ii) Export Demand 146 145 158 168 178 3.0

Total Fabric 1,084 1,108 1,243 1,339 1,441 3.8

b. Yarn Demand (1,000 tons)(i) For Domestic Weaving a! 193 198 213 248 256 3.7(ii) For Exports 34 41 51 53 55 4.3

Total Yarn 227 239 264 301 311 3.8

II. Textile Supply

a. Fabric Supply (million m )(i) Production 1,039 1,068 1,136 1,381 1,436 4.3(ii) Imports 45 40 - - -

Total Supply 1,084 1,108 1,136 1,381 1,436

b. Yarn Supply (1,000 tons)(i) Production 231 241 267 301 307 3.5(ii) Imports - - - _ _

Total Supply 231 241 267 301 307

III. Surplus (Deficit)

a. Fabric (million m ) - - (107) 42 (5)b. Yarn (1,000 tons) 4 2 3 - (4)

a/ This is the yarn utilized for the local fabric production shown in II-a(i).

In this forecast, production has been projected on the basis of an expectedmodest improvement in efficiency and utilization of existing capacity.Average I nnual production per loom in the public sector is currently about26,500 m of cloth, as compared to an international standard of 38,000 m . Ifeffective programs of replacir.g obsolete equipment and training of machineoperators and mechanics as presently intended are undertaken, it should bepossible 2to raise production per loom over a .10-year period by almost 15% to30,000 m , which would still be about 20% below the present international stan-dard. The for cast above assumes an improvement in annual productivity to onlyabout 27,800 m /loom since a major portion (47%) of the public sector loomswould still be obsolete (i.e., over 20 years old) by 1982, and unless thefinancing constraints are overcome, only a very slow process of replacementcan be expected. In spinning, the present annual production is about 87.5 kgof yarn per spindle compared to about 100 kg per spindle that would be possiblefor the types of yarn produced and the equipment available. However, becauseabout 50% of the spindles in the country were supplied by one manufacturer,and there are serious problems of supply of spare parts, and considering thatabout 14% of the public sector spindles in 1982 will be over 20 years old,

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the forecast assumes that the public sector spinning production will onlybe about 90 kg of yarn annually per spindle0 Finally, the forecast assumesthat the proposed Project of NSWC will start production in early 1984 andthat the large joint-sector integrated project near Alexandria (She El Ameriaproject) with a ca>,--Ity of 45,000 tpy of yarn and 300 million m of fabricannually will start production in 1983 at a production rate of 45% initially,increasing to 75% in 1984 and 90% thereafter.

3.05 The domestic demand for textiles was projected by applying theobserved GDP-textile-demand elasticity 1/ of 0.56 during the period 1970-79(Annex 3-1) and the estimate for the average growth of GDP during 1980-86 of77 per year. The average projected increase of demand until 1986, as shownin the above table, comes then to 3.9% per year, which is less than the 4.3%experienced during 1970-79. During the period 1977-79, the GDP grew at about8% annually and the Government's Draft Five-Year Plan (1980-84) has a targetGDP growth rate of 10% per year. However, with the slow-down in the economicgrowth of the developed countries and the recent reduction in the rate ofgrowth of tourism receipts and remittances from Egyptians working abroad,a range of 6% to 9% annual growth rate for GDP is probably more realistic.For purposes of projecting fabric demand, a 7% average annual growth rate hasbeen assumed.

3.06 The table in para23.04 above shows that the domestic supply deficitwill be about 107 million m in 1982, turning into a very small surplus by 1984and a minor deficit in 1986. The proposed Project will reach full producti nonly in 1986. It will increase the supply of fabrics by about 17 million min 1986 and the incremental output is obviously insignificant compared to theexpected total production of about 1.4 billion m in that year. On the whole,the deficit or surplus indicated for 1983 through 1986 is very small comparedto the total supply and demand and within the error range of the estimates.It can be concluded, therefore, that the overall supply and demand situationwill be more or less in balance during 1983-86 and does not present anyunusual risk to the proposed NSWC Project.

C. Marketing of Textiles in Egypt

3.07 Apart from small quantities of specialty imports, locally producedcotton fabrics are distributed to two different domestic market segments: onefor low quality fabrics allocated as rations at subsidized prices and anotherfor non-rationed, higher quality, novelty fabrics. Approximately one-half ofthe total fabric production is retailed by public sector firms and the otherone-half by private sector firms. However, almost 60% of the non-rationedfabrics and only 45% of the rationed fabrics are distributed by public sectorretail stores (Annex 3-3).

3.08 Rationed Fabrics: Recently, rationed fabrics represented about26% of total fabric consueption; this presently gives to each Egyptian anannual entitlement of 6 m of cloth at subsidized prices. Rationed fabrics aresupplied only by the public sector textile enterprises, and ex-factory prices,

1/ GDP at factor costs expressed in 1975 prices (million LE) and textile

apparent consumption in terms of million m of fabric equivalent.

16

fabric width and fabric construction are determined by the Government. Cur-rently, the average width of rationed fabrics is 80 cm, as compared to 115cm for non-rationed cloth. Until 1978, the ex-factory prices of rationed clothwere fixed at between LE 0.1 and 0.2 per linear meter, which was about 40%below production cost. The retail markup was only about 12%. The totalsubsidy to the consumer involved in the supply of low priced rationed clothwas about LE 20 million in 1976 of which LE 9 million was borne by the Govern-ment (paying LE 0.03 per linear meter to the enterprises) and LE 11 million bythe public textile enterprises. In 1979, however, the Government raised theex-factory price of rationed fabrics to equal the average production cost inthe industry but only raised the retail price by a small amount with the dif-ference being borne by the Government directly. In order to allocate maximumweaving capacity to the production of profitable non-rationed cloth, publicsector enterprises have been commissioning private weavers, on the basis ofreimbursement of cost plus profit margin, to produce ebout 40% of the totalrationed fabrics in recent years (about 100 million e /year). Rationedfabric supply2has increased from about 149 million m in 1970 to about250 million m in 1978 and an estimated 255 million in 1979, for an averageannual growth rate of 4.2% which is about the same as the growth rate of totalfabric consumption. Although rationed fabric production is planned to increaseto about 300 million m in 1980, the Government is also seriously considering agradual increase in retail prices to reduce the subsidy.

3.09 Non-Rationed Fabrics: The market for non-rationed fabrics is sup-plied from both public and private enterprises in the proportion of 74/26. 1/In theory, this market is also regulated by the Government through the Indus-trial Control Board of the Ministry of Industry which is supposed to determinethe fabric prices on the basis of fabric construction and cost data suppliedby the enterprises. In practice, however, the market for non-rationed fabricsfunctions largely without Government regulation, as the Industrial ControlBoard cannot physically monitor the large number of fabric constructions andhas discontinued to determine fabric prices.

D. Export Marketing of Textiles

3.10 While, as noted in para 2.06, the export of Egyptian raw cottondeclined in recent years, textile products have maintained their positionas a major earner of foreign currency. However, compared to exports of othermanufactured goods (excluding petroleum), textile products have performed onlymodestly in export markets and their share of total manufactured exports hasdeclined from 60% in 1970 to 38% in 1976 but improved to an estimated 45% in1979. 2/ New production capacity in the textile industry was mostly employedto satisfy the growing domestic demand. Also, textile products are limitedto mostly 100% cotton materials and in addition, problems in producing highquality fabrics and garments, have restricted textile exports largely to yarnand grey fabrics, which have limited foreign markets. The export trend fordifferent textile products is given in the table below:

1/ All woolen/worsted fabrics are supplied by the public sector. Knittedfabrics are about equally supplied by the public and the private sectors.

2/ If petroleum products are included in manufactured exports, the shareof textile exports to total manufactured exports declined from 3.7% in1974 to an estimated 19% in 1979.

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Egypt: Export of Textile Products(Quantity in 1,000 tons; value in million LE)

a!Yarn Fabrics Others Total

Year Quantity Value Quantity Value Quantity Value Quantity Value

1970 41.4 33.9 20.9 16.1 5.7 6.3 68.0 56.31973 44.7 43.4 19.0 17.9 5.1 12.9 68.8 74.21975 32.4 62.1 11.0 18.5 6.3 27.5 49.7 108.11977 b/ 30.2 70.6 14.9 25.2 4.7 16.0 49.8 111.81978 34.4 85.9 15.5 35.1 5.3 17.6 55.2 138.61979 (est.) 41.0 103.0 15.0 37.0 5.0 20.0 61.0 160.0

a/ Others include knitted goods, garments, pile fabrics, household goodsand cotton wool.

b/ Starting February 1977, exports of textile products were based on theparallel market foreign exchange rate of LE 0.69/US$1.00 compared tothe official rate of LE 0.40/US$1.00 which applied prior to that date.

3.11 Egypt's textile 1/ exports are mostly in the form of cotton yarnwhich constituted about 60% (by weight as well as by value) of total textileexports for the period 1970-79. Fabrics represented about 30% by weight (22%by value) while all others, such as garments, knitted goods and householditems, accounted for the remaining 10% (18% by value). Yarn exports havedeclined by almost 20% in terms of weight from about 43,300 tpy in 1970-73 toan average of about 36,400 tpy in 1976-79. Similarly, fabric exports decreasedby about 40% in the same period. However, all other textile products togetherincreased by about 15% with the net result that total textile exports decreasedapproximately 21% by weight from an average of 68,500 tpy to 56,400 tpy duringthis interval. In terms of value, the average export price of textile productsincreased roughly 41% in current terms, from about US$2,560/ton in the early1970's to about US$3,620/ton in the late 1970's. 2/ Consequently, the totalvalue of textile exports increased from about US$176 million in 1972 to aboutUS$200 million in 1978 in spite of a decrease in export quantity from 69,000tons to 55,000 tons. The decline in the quantity of textile exports can bemostly explained by the continuous drop in exports to Eastern Europe. A com-parison of the 1972 and the 1978 export markets (Annex 3-4), indicates thatexports to Eastern Europe decreased by about 12,000 tons of textile productsbetween 1972 and 1978 which is roughly comparable to the decline in totaltextile exports. The estimated textile export quantity for 1979, whichrepresents an increase of 10% over the 1978 level, is encouraging. During1979, Egypt's yarn and fabric bilateral trade agreements or export quotas inthe major markets were: USSR--17,000 tons; European Community--10,000 tons;People's Republic of China--3,000 tons. The USA has not imposed a quota onEgyptian exports since the quantities so far have been moderate (2,000 to4,000 tons). To improve its textile export performance, Egypt must developstrong market ties to both the North American market and the Western Europeanmarket in addition to maintaining the steady growth of exports to other Araband African countries.

I/ The term textiles includes yarn, fabrics, garments, knitted goods,and household items (e.g., bedsheets, towels, etc.).

2/ In LE terms, the increase is about 250% from about LE 1,000/ton at theofficial exchange rate to about LE 2,500/ton at the parallel foreignexchange rate.

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IV. PROJECT SPONSOR

A. The National Spinning and Weaving Company (NSWC)

4.01 NSWC, located in Alexandria, is the project sponsor. The Companywas established in 1891 and nationalized in 1963 1/. It is the oldest textilecompany in Egypt. Among the 30 public sector textile companies, it is thesixth largest in terms of employment (15,000). However, because of obsoleteand inadequately maintained production facilities, a weak management andinsufficient skilled labor, NSWC has one of the lowest productivity levels andthe poorest financial performance record in the industry (paras 4.10-4.11).In a way, NSWC embodies all the major problems facing the Egyptian textileindustry and the task of transforming the Company into an economically andfinancially viable enterprise is both difficult and a challenge.

4.02 The organizational and managerial shortcomings of the Company aretherefore a serious risk for the Project given the magnitude and complexityof these problems, and it is the Bank's primary and most critical role toassist in the strengthening of the institution. To succeed in this, it isnecessary that the Company adopt personnel policies and a compensation systemadequate to attract and retain qualified personnel. But this is not possiblewithout a complete revision of the policies governing all public sector enter-prises. On the other hand, it would take an indefinite time for NSWC itselfto be converted back to a private sector company thereby allowing it to adoptsuch a compensation system. The Government and NSWC have therefore proposedestablishing a successor company with the Government, investment banks andprivate investors as shareholders under Law 43 and this successor company willthen assume all the assets and liabilities of NSWC as well as operate all theNSWC production facilities including those related to the Project. In thisway, the new company - as a private sector entity - will be free to designpersonnel policies, job classifications and a compensation system as well aspricing and profit retention policies needed to make the enterprise finan-cially and economically successful. The Government and NSWC have agreed toestablish this successor company by March 31, 1981. To this end, a management,organizational, and financial systems improvement program started in March1980 with the assistance of foreign consultants (para 4.19); the program isbeing partly financed from the technical assistance component of the SecondIndustrial Import Loan (Loan No. 1456 EGT) with the major portion to befinanced from the proposed loan. The same foreign consultants will alsoprovide technical assistance during project implementation and commissioningas part of the Project's objective. A permanent operator training program hasalso been included in the Prcject to train/re-train workers for the existingmills and the Project. Agreement was also obtained from the Company tocomplete, by December 1980, specific plans for the training program and toreview this with the Bank.

B. Production Facilities

4.03 NSWC's existing production facilities are located on two sites,Karmouz and Maharrem Bey, about 2 kms. apart, in the southern part of

1/ The Government owns 81% and the private sector 15% of the outstandingshares of the Company; the balance is owned by local insurance companiesand banks, (2%) and the General Organization for Social Security (2%).

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Alexandria (IBRD Map No. 13419). All cotton spinning mills (four) are locatedat Karmouz while all weaving mills (also four), the knitting mill, the garmentsplant and the converting plant are located at Maharrem Bey. The Karmouz site

is supplied with power by the public grid from a thermal station in Alexandria;

this power supply has been unreliable and inadequate, and has contributed tothe low productiv-'zy of the plant. Maharrem Bey is supplied with reliable andsufficient power from the Aswan High Dam circuit. The Company's productionhas seriously deteriorated (paras 4.04 to 4.06) during the last few years asshown below:

NSWC - Historical Production

1975 1976 1977 1978 1979

A. Spinning (yarn in 1,000 tons)

Number of spindles (1,000) a/ 166 164 164 150 140

Yarn output 12.0 10.2 10.0 8.1 7.4of which sale yarn 6.5 5.0 5.4 2.8 2.6

B. Weaving (fabrics in million lm)

Number of looms 2,070 1,700 1,700 1,700 1,700Fabrics woven by NSWC 27.5 27.2 26.8 26.4 22.6Fabrics woven by others b/ 9.2 5.3 5.6 2.7 4.4

C. Converting (million lm)

Fabrics for sale goods 35.9 31.5 34.4 33.9 27.0Commission finishing 5.1 5.7 7.2 12.2 14.6

a/ In operation. The total is about 180,000 spindles but not all are operational.b/ Commission weaving by private sector weavers for NSWC.

C. Rehabilitation Requirements

4.04 The Company's present productivity level of about 60% of ratedspinning capacity and about 50% of weaving capacity 1/ is largely due tothe obsolete production facilities, although the low quality and quantity ofskilled labor and certain management weaknesses are also important factors.The age of the equipment as of 1979 was as follows:

NSWC - Age of Plant Equipment and Machinery

% Age Distribution in 5-Year GroupingsMill 4-8 9-13 14-18 19-23 24-28 29-33 34-38 Over 38 Total

Spinning 45 18 - 25 - 6 - 6 100%Weaving 18 3 10 5 - 12 - 52 100%Converting 17 - 9 16 - 7 - 51 100%Knitting 100 - - - - - - - 100%

1/ The rated capacity has been adjusted downwards by 30% for spinningand 20% for weaving relative to the international standards to reflectthe absence of air conditioning in NSWC's mills.

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4.05 As the table indicates, an exception to the obsolete state ofproduction facilities appears to be the spinning equipment of which about 45%is relatively new and which was installed less than 8 years ago. However,the major portion of this machinery consists of spinning frames (spindles) ofinferior design and make with several technical production problems which arecompounded by lack of proper maintenance. The equipment has performed poorlyand is not expected to achieve any significant productivity improvementsas repeated attempts at adaptation have not proved successful. In addition,the buildings for the spinning equipment are not air-conditioned as is generallyrecommended in order to achieve higher production efficiencies and have onlythe minimal humidifying system which however, in most instances, does notwork. The buildings are also multi-story, which is not ideal for the smoothflow of materials, and are in poor physical condition. Furthermore, since thewaste percentage (para 4.07) of production from the spinning equipment is muchtoo high and the productivity too low, making these facilities uneconomic andnon-competitive, NSWC plans to scrap most of the spinning equipment within thenext 5 years or so. The Karmouz site is also within a residential area andis no longer suitable for a large industrial facility.

4.06 Textile machinery, if properly maintained and operated, shouldphysically last 25 to 35 years. However, in NSCW's case, slightly more thanhalf of the weaving and converting machinery are already over 35 years old.A study has shown that even a larger proportion of equipment will need to bereplaced within the next few years. For example, of the 1,700 weaving looms,about 1,400 (82%) will need to be replaced by 1985. Similarly, the convertingplant consists mostly of very old equipment that has to be scrapped. Inaddition, 80% of the converting capacity is for narrow fabrics (1 meter wideor less) which is less than the present standard width of about 1.4 metersfor fabrics in international trade. There are no facilities for the applica-tion of dimensional-stability finishes or wash and wear finishes, which isincongruous considering the use of expensive print dyes. On the whole, theconverting plant operates at about 50% of international standards. Evenwithout the Project, NSWC would have to rehabilitate the converting plant in1981, at an estimated cost of US$6 million, to maintain production at presentlevels. This investment corresponds to about 50% of the cost of modernizingthe converting plant as provided in the Project to enable NSWC to finishpolyester/cotton blend fabrics as well.

D. Financial Performance

4.07 Several factors have eroded the profitability of the Company andsome of them have already been alluded to above. As a consequence of the poorphysical state of the plants and inadequate skilled workers, productivity islow, the waste level is relatively high and the product quality is poor. Thefollowing table compares the waste percentages of the existing mills (on thebasis of NSWC's product mix) with international standards and those expectedfrom the proposed Project.

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NSWC - Production Waste Percentage a/

Existing Mills International Standard Proposed Proiect

Spinning Mills 26% 15% 10.4% b/Weaving Mills 5% 1.5% 2.2%Converting Plant 4% 3% 3.5%

a/ For spinning, the cotton waste (by weight) is given as percent of the totalcotton input. About 90% to 95% of the waste cotton is sold at about 60%of the existing financial prices. For weaMing, the yarn waste (by weight)and for converting, the fabric waste (by m ) Is given as a percent of theyarn or fabric input respectively.

b/ The combined cotton and polyester waste is given as a percent of totalfiber input. This is not comparable to the international standard of 15%which is for 100% cotton as the polyester waste percentage is much lowerthan that for cotton (para 5.02).

With raw materials (fiber, chemicals, dyes, etc.) accounting for about 45% ofthe Company's total productlon cost, these exceptionally high waste percentagesare untenable. The adverse economic effect of the high waste percentages iseven more severe than the financial impact since NSWC uses more long andmedium staple cotton (60% of total requirements) than necessary for itsproduct mix. Instead, about 75% of NSWC's cotton requirements could be met

by short-staple cotton. While the converting plant's waste percentage isclose to international standards, the quality of the finished fabrics isgenerally poor, since no proper quality control is exercised. It is estimatedthat if Western European or U.S. quality control norms were applied, less than50% of the converting plants' output would pass such quality standards. Whilesuch standards may not have much meaning for a market such as Egypt's, the lowlevel of product quality limits the selling price that the Company can charge,thereby also contributing to the poor financial performance.

4.08 Because of Government employment policies, NSWC is also overstaffedand is burdened with a large unskilled labor force. Ironically, the Companyis facing an acute shortage of skilled workers--especially weavers, spinnersand mechanics--which has adversely affected production. The negative impactof this skilled labor shortage is further magnified by the high absenteeismand turnover rates (especially in the skilled labor category), which run at20% and 25% respectively at the Karmouz site and 12% and 15% at the MaharremBey site. The low basic wage rate relative to alternative private sectorjobs, the unpleasant working conditions in the mills (especially at Karmouz)relative to other industries in the Alexandria area such as pharmaceuticals,the poor physical condition of the mills, the unprofitable performance ofNSWC and the absence of any prospects for improvement, all contribute to theinability of the Company to attract and retain qualified personnel. Becausethe difference between the unskilled labor wage rate and the skilled laborwage rate is not large enough, there is also no incentive for the non-workinglabor force to acquire skills and to work in a productive capacity.

4.09 Finally, NSWC's quota for the production of rationed fabrics is fairlyhigh relative to its capacity to absorb losses. Although actual rationed fabricproduction averaged only 16.5 million lmpy during 1978-79 1/ compared to the

1/ The rationed fabric production of NSWC averaged 13 million lmpy during1974-77.

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Company's quota of 19 million Impy, it still accounted for 59% of NSWC'sfabric output. This is higher than the 40% average for all Egyptian publicsector textile firms and is a heavy financial burden.

4.10 The Company's historical financial statements are shown in Annexes4-1 and 4-2 and summarized on the following page together with the projectedfinancial position under the assumption that NSWC will not have any majorcapital investment program (i.e. without the Project). To see the Company'sfinancial performance in the proper context, it must be noted that all textilecompanies did very well in 1974 (para 2.22). NSWC achieved in 1974 a profitof LE 1.2 million, or about 6% of sales revenue. Since that time, however,the Company's product prices have either stabilized or only improved moder-ately, while production costs have continued to rise. Consequently, theCompany's profitability has kept declining, reaching a break-even level in1976 and turning into small losses in 1977 and 1978. The estimate for 1979indicates a very large loss of about LE 5.3 million unless the Governmentretroactively provides some subsidies.

4.11 NSWC's financial performance is one of the poorest among the 30public sector textile companies. During the period 1974-78, these companies,as a group, earned net incomes (after taxes) corresponding to about 9% ofsales revenue (as compared to 1% for NSWC) and had a combined current ratioof 1.7 in 1974 (1.0 for NSWC) but which had declined to 1.3 by 1978 (still1.0 for NSWC), reflecting the increasingly difficult cashflow and liquidityposition for these enterprises (paras 2.22 and 2.23). In the case of NSWC,short term debt accounted for slightly more than half of the current liabili-ties. To improve NSWC's liquidity position, the Government provided additionalequity contributions of about LE 2.4 million in 1977 and LE 3.5 million in1978. While these have prevented an otherwise untenable liquidity problem andkept the Company afloat, only a major rehabilitation program together withchanges in the Company management and operating policies and procedures canturn the Company around towards profitability.

4.12 The Company's future financial prospects have been analyzed underthe assumption that the Project would not be proceeding. For this analysis,the three following important assumptions are made: (a) the obsolete equip-ment that is intended to be scrapped as part of the Project will be kept inoperation for two more years than provided in the Project 1/; (b) rationedfabrics will be reduced to 35% of the Company's total fabric production,implying a declining rationed fabric production as total fabric production isexpected to peak at 29 million lmpy (excluding commission weaving of 5 to 6million lmpy) during 1980 and gradually decline thereafter; and (c) commissionfinishing will increase up to 20 million lmpy as NSWC's fabric productiondecreases to keep the converting plant output between 30 and 40 million lmpy.The financial forecast without the Project (Annexes 4-6 to 4-8) focuses on theperiod 1980-84 which is critical to the corporate capital investment plans ofthe Company.

1/ For comparative purposes, Annexes 4-3,and 4-4, show the number of oper-ating spindles and looms together with their average respective produc-tivities for two cases: (i) without the Project; and (ii) with theProject. NSWC production without the Project is shown in Annex 4-5.

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NSWC - Historical and Projected FinancialPerformance Without the Project

(In millions of current LE)

Esti-Actual mate Forecast

Lncome Statement 1974 1975 1976 1977 1978 1979 1980 1982 1984

3ross Revenues 19.1 18.0 17.2 20.8 20.2 17.6 26.4 29.7 20.7Cost of Sales 17.0 16.8 16.3 19.8 19.4 21.0 28.3 31.2 29.4Operating Profit 2.1 1.2 0.9 1.0 0.8 (3.4) (1.9) (1.5) (8.7)

Interest Expenses a/ 0.9 0.8 0.9 1.1 1.4 2.0 2.0 3.9 5.3Income Taxes - - - - - - - - -

Net Profit (Loss) 1.2 0.4 0.0 (0.1) (0.6) (5.4) (3.9) (5-4)(14-0)

Net Profit as % of Sales 6 2 0 (1) (3) (30) (15) (18) (68)

Long-Term DebtService Payments 1.3 1.6 1.3 3.0 1.0 1.1 1.1 1.4 2.0

Debt ServiceCoverage Ratio b/ 2.0 1.1 1.2 0.5 0.7 (3.5) (2.4) (2.5) (6.2)

Balance Sheet as ofDecember 31

Current Assets 11.2 13.6 14.5 17.1 24.7 28.6 26.2 26.9 21.4Net Fixed Assets 10.6 10.8 11.1 12.2 10.5 9.4 8.7 10.8 8.2Other Assets 3.5 2.9 2.1 0.5 0.4 0.4 0.1 0.1 0.1

Current Liabilities 11.3 13.2 14.0 16.1 20.8 29.1 30.4 41.2 56.8Long-Term Debt c/ 9.0 8.1 7.6 5.4 3.6 2.8 2.0 3.5 1.0Equity 5.0 6.0 6.1 8.3 11.2 6.5 2.6 (6.9)(28.1)

Total Assets &Liabilities 25.3 27.3 27.7 29.8 35.6 38.4 35.0 37.8 29.7

Current Ratio 1.0 1.0 1.0 1.1 1.2 1.0 0.9 0.7 0.4Debt/Equity Ratio 64:36 57:43 56:44 39:61 24:76 30:70 43:57 - -

a/ Interest on short- and long-term debt. Most of the interest, about two-thirds, is on short-term loans.

b/ Long-term debt service coverage. If interest on short term loans is in-cluded, the ratios would be lower.

c/ Assuming the investments for the modernized converting plant in 1981 arefinanced with long-term loans of LE 4.1 million (in current LE).

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4.13 The previous talblle indicates that the Company's longer term finan-cial prospects are not encouragina. During the next five years (1980-84)losses are predicted at an increasing rate as obsolete equipment must eventu-ally b£ scrapped. In addition to the problems mentioned in paras 4.07 to 4.09above, thi.s negative trend is primarily due to declining productivity in thespinning mills and the scrapping of some spinning machinery starting in 1980and some weaving equipment starting in 1981 (Annex 4-3 and 4-4). Because theCompany is not expected to generate any investable funds in the future, themiodernization of the converting plant in 1980-81 (para 4.06) which is necessaryeven without the proposed Project, is assumed to be financed with a long-termloan of LE 4.8 million. The impact of the deteriorating machinery and thescrapping of substantial equipment clearly becomes untenable after 1982, andsignals an urgent need for corrective action.

E. NSWC Rebabilitation and Expansion Program (REP)

4.14 With the assistance of foreign consultants (Werner International-USA)financed through the Bank Group's Agricultural and Industrial Imports Project(Credit No. 524-EGT and Loan No. 1062-EGT) of December 1974, NSWC in 1977developed a ten-year (1978-87) Rehabilitation and Expansion Program (REP)with a view to restoring the competitiveness and financial viability of theCompany. The need for such a program was identified in the textile sectorsurvey (para 1.04).

4.15 After the proposed REP was reviewed and its first phase appraised bythe Bank as a possible project in October 1977, a large private sector project(the El Ameria project) sponsored by the Bank Misr, a major public sectorbank, was also confirmed to be planned for implementation concurrently withthe proposed NSWC project. To determine the appropriate capacity of the ElAmeria Project, the Government undertook a review of the future textile supplyand demand situation as well as the investment plans in the industry to ensurethat a serious over-capacity situation does not develop which would endangerthe economic viability of all textile projects in Egypt. The Governmentreview was completed in August 1979 when the El Ameria project was granted anindustrial license with a capacity of about 45,000 tpy of yarn and 300 millionof m of fabric per year.

4.16 The Bank then undertook in October and November 1979 a re-appraisalof the REP including an evaluation of the market impact of the El AmeriaproJect sccpe as well as the other rehabilitation and modernization projectsin the sector to ascertain the most appropriate product mix and scope forNSWC's modernization project as well as the market risks the project wouldface. This evaluation, which was done jointly with NSWC management, led toa revision of the REP into a single phase (the proposed Project) at a lowerfinal capacity and a product mix with a higher proportion of polyester/cottonblend yarns and a smaller proportion of wide fabrics for sheeting. Thefollowing table shows the overall changes in NSWC's production after completionof the proposed Prolect:

4:, -

NSWC - Summary of Production Changes after the Project

ProductionAnnual Production Efficiency1977 oy After the After the1978 - Project Project

1. Spinning ( 1 _0 22_)_iy)

a. Karmouz location (100% cotton yarn) 10.0 2.0 b/ 55b. New Mill (Maharren Bey)

(i) Polyester/cotton yarn - 4.5 90(ii) 100% cotton yarn - 2.1 c/ 80

Total Yarn 10.0 8.6 80

2. Weaving (million lmpy) d/a. Existing mills

(i) 100% cotton fabrics 26.8 8.3 74(ii) Polyester/cotton fabrics - 6.7 77

b. New MillPolyester/cotton fabrics - 19.6 85

Total Fabric 26.8 34.6 80

3. Terry Towels (tpy) 445 975 e/4. Converting (million lmpy) f/ 46.1 55.05. Knitting (tpy) 41 -6. Garments & Household apparel (million

pieces) 2.0 1.67. Sales yarn (tpy) 4.6 -

a/ The production shown is the larger of the 1977 or 1978 actual output.b/ This is the production of spinning mill No. 3. It is not economic

to transfer this mill to Maharren Bey and rehabilitate it. It will beoperated for about 5 years and then closed.

c/ Including 500 tpy of sewing thread.d,t Excluding commission weaving of about 3 to 6 million lmpy.e/ 975 tpy of terry towels is equivalent to a weaving production of 1.34

million lmpy (2.68 million smpy).f/ Including commission finishing of 10 to 15 million lmpy.

F. Organizational Improvement and Training

4.17 The existing organizational structure of NSWC is shown in Annex 4-9.The Chairman and President, Mr. Mohamed Salama Ismail, was appointed to theposition in 1974. He reports to the General Shareholders Assembly, which ischaired by the Minister of Industry and Mining. The assembly meets semi-annually and approves the Company budget, investment plans and generaloperating policies. The assembly is dominated by Government representativesand in practice, the Minister exercises significant control or influencein the operations of the enterprise. The Company has an advisory board ofdirectors, consisting of four representatives each from management and fromlabor, and one representative from the minority private shareholders.

4.18 As mentioned previously, NSWC is organizationally weak. Apartfrom the Chairman, there are a few qualified management personnel in theCompany, but not enough to make an adequate impact in its operation. The

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organizational structure partly reflects this shortage of management resource;for example, the span of control of the production general manager is toobroad, having seven major operating units reporting to him. The three keyoperating management positions, the commercial general manager, the productionmanager and the financial manager are particularly weak. The lack of manage-ment talent is further compounded by non-existing or ineffective managementplanning and control systems.

4.19 An improvement in the organizational and labor efficiency of NSWCmust therefore accompany the physical rehabilitation and modernization Projectif the Company is to realize the potential return from its capital investments.Otherwise, the new facilities will, in a very short time deteriorate to asimilar condition as the present mills. NSWC has therefore engaged GHERZITextil Organisation (Switzerland) and in addition, will also hire by October1980 an accounting firm to assist in the development and implementation of anorganizational, management, and financial system improvement program, includingtraining of management and administrative staff. In general, the objective ofthe program is to adopt the Company's organizational structure and its manage-ment, planning and control, as well as accounting systems to the needs of amodern and large scale private sector textile operation. The program willinclude the development of (a) a new organizational structure suited to theCompany's expanded operations including job descriptions for key positions;(b) a management training and development program; (c) a management reportingsystem; (d) a financial planning and control system; (e) a production costingsystem; (f) a review/revision of the compensation and benefits package,including the production bonus system; (g) a ten-year manpower plan for bothadministrative and production workers covering attrition, retirement, reassign-ment, recruitment, and training to achieve a smooth transition during therelocation out of the Karmouz site and from an overstaffed to an efficientlystaffed company; (h) a production planning system; and (i) improvements inthe coordination/ communication functions needed to have a modern, large-scaletextile company that can come close to international levels of efficiency.The organizational improvement program will start in March 1980, and last forabout two years. The Company will provide a counterpart team to work with theconsultants (para 5.17). In addition, NSWC has agreed that the top operatingmanagement of the Company will be promptly strengthened after the successorcompany to NSWC has been established under Law 43.

4.20 The technical and financial consultants, while providing a veryimportant service, are not substitutes for the Company's own management staffand cannot, by themselves, be expected to implement and initially operate theProject successfully. The implementation and subsequent operation of theproposed Project will only be successful if the Company is able to attract andretain sufficient qualified management and factory personnel. Agreement wastherefore reached with the Government and with NSWC that the Company, in closecooperation with the Government, will design by December 31, 1980, for reviewand comment by the Bank and implement promptly after the successor company hasbeen established (para 4.02) a compensation/benefits package (including bonussystem) for its operating and management staff that will, under conditions ofefficient operation, be adequate to attract and retain qualified personnel.There is one practical problem that must be overcome concerning this cove-nant. It concerns the scope of application of the new compensation package.The new compensation system may have to be initially restricted to

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the management personnel and introduced at the operating level in the existingfacilities at the same time as the new mills start production in 1984. Thisis so because of the heavy financial burden that such a system will impose ifimmediately applied on a Company-wide basis, given the serious over-staffingand low profitability of the existing production facilities. This is theassumption usee in the financial analysis of NSWC with the Project (Chapter VII).

V. THE PROJECT

A. Project Concept, Scope and Location

5.01 The Project is designed to produce high-quality medium count type offabrics. This product mix will complement the present expansion programs ofother public sector firms, such as KED (para 1.05) and Mehalla (para 2.24),which are designed to produce fine and very fine count fabrics for the localand export markets. The Project will increase the Company's output of fabricsfrom about 27 million to about 35 million lmpy and terry towels from about 445tpy to 975 tpy. A small portion, some 10% (by weight) of NSWC's total outputafter the Project, consisting in about equal parts of fabrics and bedsheetsets 1/ and a small quantity of terry towels , is intended for exports pri-marily to convertible currency countries, even though the domestic market willbe able to absorb the entire NSWC production after the Project is completed.The exports will also help to earn the foreign exchange to pay, directly orindirectly, for part of the Project's raw material imports (i.e. short-staplecotton and dyestuffs). Exporting will also expose NSWC to the discipline ofinternational competition, and improve the Company's profitability, as profitmargins on exports are expected to be slightly higher than those on localsales.

5.02 Cotton products (i.e. 100% cotton) will account for about 50% of theproduction by weight but only 18% of the Company's total revenue after theProject reaches full production (1986); the major portion of the revenue willbe derived from polyester/cotton blends. For purposes of project appraisaland analysis, two polyester/cotton blend combinations have been used - 65/35and 50/50. Blended fabrics have gained worldwide acceptance and popularity.The reasons are: (a) a lower waste factor for man-made fibers, about 6% forpolyester, in the spinning operation compared to about 10% (for carded yarn)to 30% (for combed yarn) for cotton; (b) the longer wear-life, from two tothree times, of blended fabrics compared to 100% cotton fabrics, and (d) theeasy-care and anti-crease properties of clothing made from blended fabricswhich apart from their economic justifications have great consumer appeal inEgypt. Should the demand for the Project's polyester/cotton products be muchmore than presently envisaged, the Project has the flexibility, with somesmall investments, to shift its polyester/cotton yarn production from 52% toabout 70% of total NSWC yarn output.

5.03 A major portion of the textile market in Egypt are sheeting fabricsfor bedsheets and pillow cases, where the trend to printed and wide sheets is

1/ The bedsheet sets will be of two types: (a) two sheets and two pillowcovers per set, and (b) two sheets and four pillow covers per set.

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fairly well established. Thus, about 19% of the fabric output of the Projectwill be wide (1.5 to 2.8 meters) sheeting fabrics, all made of 50/50 polyester/cotton blends; about 46% will be shirting/dress fabrics (1.2 meters wide) madeof 65/35 polyester/cotton blends; about 27% will be rationed fabrics (100%cotton); and the remaining 8% will be fabrics for household articles (e.g.tablecloths) made of 50/50 polyester/cotton. In addition 2to the fabricoutput, the Project will also produce about 2.7 million m /year (975 tpy) ofterry towels (100% cotton) from the rehabilitated mills. All of the yarnoutput of the new spinning mill will be used for the Project's own weavingoperation. In addition to the yarn for weaving (6,083 tpy), the new spinningmill will also produce 500 tpy of 100% cotton sewing thread. The remainingspinning mill at Karmouz (mill No. 3) will provide the balance (1,999 tpy) of100% cotton yarn needed by NSWC to be used for commission weaving of rationedcloth and terry towel production.

5.04 The components of the Project are as follows:

(a) Installation of a new 6,600 tpy (production basis) spinning millwith about 73,000 spindles at Mallaha, near the existing facilitiesat Maharrem Bey. Included in the 73,000 are about 48,000 rehabilitatedspindles from Karmouz. About 52,000 spindles at Karmouz will bescrapped;

(b) Installation of a new polyester/cotton weaving mill to produce19.6 million lmpy (production basis) with about 768 looms adjacentto the new spinning mill; closing of two weaving mills (No. 2 and 3)by eliminating 1,100 obsolete looms; airconditioning and upgradingof weaving mill No. 4 which contains 300 looms in relatively goodcondition thereby permitting production of polyester/cotton blendsand slightly increasing its production from 6.0 to 6.7 million lmpy;and some minor rehabilitation of weaving mill No. 1;

(c) Modernization of the existing converting plant at Maharrem Bey toprocess wide fabrics and polyester/cotton blends including theinstallation of effluent treatment facilities;

(d) Reorganization of the garment-making unit (to make only institutionaltypes of garments) and the towel-making unit, including the produc-tion and marketing procedures; installation of a new bedsheet-makingunit of 0.65 million sets per year; and sale of all existing knittingmachines;

(e) Erection of mill management and supervisory staff housing (60 dwellingunits);

(i;) Technical assistance for project implementation; establishment ofa training program including training abroad of NSWC staff (para4.02); and

(g) Sector studies and training (paras 2.16 and 2.18).

Tl52h eistng converting plant at Maharrem Bey will be modernizeds nianr;d production increased from 46 to 55 million lmpy. Part of the

addu-&i:*ai converting capacity of from 10 to 15 million lmpy will be used

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for commission finishing for which there is a growing demand in the country.Until 1977, NSWC processed 5 to 6 million Impy on a commission basis but thequantity increased to 12 million meters in 1978 and almost 15 million metersin 1979. The small expansion of the converting plant has been combined withthe modernization to take advantage of economies of scale.

5.06 Several alternative project sites, all within 25 kms of the cityof Alexandria, were considered as possible location for the new spinning andweaving mills. The sites evaluated all have ample power supply from the AswanHigh Dam circuit and adequate fresh water supply from the Alexandria watersystem. The main selection criteria were the availability of a large con-tigous tract to provide space for future expansion and the price of land.The industrial land (100 acres) already owned by NSWC at Mallaha, which onone side is along a major highway and on the opposite side is separated fromNSWC's Maharrem Bey mills only by a 30-meter railroad right-of-way and whichis presently used for open storage of cotton, was finally selected as itwill also provide for better coordination and management of the entire NSWCoperations.

B. Project Technology

5.07 The technologies presently available for a textile mill can begrouped under three main categories: (a) pre-conventional technology (PCT)based on narrow mechanical looms and direct spinning; (b) conventional tech-nology (CT) based on broad automatic shuttle looms, and ring spindles; and(c) advanced technology (AT) based on labor-saving devices such as automaticopening in blow rooms, chute-fed high-speed cards, single-process drawing intandem with carding, open-end spinning, unifils and electronically-operatedshuttleless looms which are increasingly introduced in developed countriesin the face of sharp increases in labor costs. The PCT technology has becomeoutdated because of: (a) very slow machine speed; (b) higher capital andoperating costs than for CT machines to produce a given quantity of fabricsin a given time; and (c) lack of machine versatility to produce fine fabrics.Further, the use of the PCT technology requires high skilled operators. Thevarious technologies available have been examined in detail with respect tocosts and benefits before recommending the appropriate technology for Egyptianconditions. For the proposed Project, modern but conventional technology (CT)will be used for the spinning and weaving mills--the main units of the Projectaccounting for about 60% of the installed cost of the Project. As for theconverting plant the latest processing technology has been chosen to ensurehigh product quality and also to economize on the use of water, fuel, dyestuffsand chemicals. The use of this technology at the converting plant is notoriented towards saving on labor cost. Nevertheless were less advancedtechnology to be employed, the converting plant would require hardly anyadditional employees. Almost all (98%) spinning, weaving, converting andservice equipment has to be imported because these are not produced in Egypt.

C. Buildings

25.08 A covered floor space of about 50,600 m , of area2is provided tohouse the new spinning and weaving mills, including 3,400 m for storageareas. The floor space is in lije with norms accepted in the textile industry,i.e. 0.4 m per spindle and 25 m per loom plus storage and service areas.

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Workshop and office facilities (3,350 m2 of 5loor area) will also be providedin the new site. In addition, about 2,400 m of floor space will be added tothe existing converting plant at Maharrem Bey for the boiler house, and forthe water and effluent treatment facilities. All factory buildings are to beof prefabricated s frame structures to reduce the time of civil workserection and avoid the problems associated with the cement shortage in thecountry. For technical and quality reasons, about 70X of the area in the newspinning and weaving mills will be airconditioned. Furthermore, the spinningmill will have an overhead air-exhaust system and the carding room an addi-tional floor waste filter exhaust to improve yarn quality as well as workingconditions. The Government has agreed to give the Project high priorityregarding the availability of construction materials and supplies so thatimplementation can proceed according to schedule.

D. Ecological Considerations and Occupational Hazards

5.09 As the output of the facilities at the new mills will be only yarnand grey fabrics, no water and air pollution problems are expected. The newspinning and weaving facilities will be equipped with air filters to controlfibers and dust being exhaused into the atmosphere; humidity and temperaturewill be controlled for technical reasons but at the same time to create betterworking conditions. Carding machines will be equipped with floor wasteexhaust filters and the dust will be kept below 0.5 mg/m . Also, the designof the buildings will allow the noise level in the spinning and weaving millsto be kept below 95 and 100 DBA 1/ respectively; in addition, the operatorswill be required to wear ear plugs in the working areas and insulated boothswill be provided where the operators can go when not attending to the machines.

5.10 There will be no air-conditioning in the converting plant at MaharremBey but all departments generating heat and/or steam will be equipped with spe-cial hoods with forced exhaust systems to lower the temperature in the workingareas. As the effluent of the converting plant is likely to be alkaline andits biological oxygen demand (BOD) at the assumed production level is esti-mated at about two tons per day, and thus exceeds Icceptable standards, aneffluent treatment plant with a capacity of 300 m /hour is provided underthe Project; as a consequence the treated effluent discharged to the municipalsewer system will have a 6 to 8 pH and a BOD below 100 PPM.

5.11 The boilers will be operated on heavy fuel oil and will be equippedwith automatic regulatory devices to ensure maximum combustion so that theboiler flue gases will contain no carbon monoxide. The design of the chimneyswill also keep the a erage sulphur dioxide content of the air on the groundlevel below 0.1 mg/m . The above precautions are considered acceptable andthe Company has agreed to install these facilities and properly maintainand operate them.

E. Production Program, Raw Materials and Utilities

5.12 The product mix and production program of NSWC after the Project iscompleted are shown in Annexes 5-1 and 5-2.

1/ Decibels.

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The production is based on 7,200 hours per year of operation and a weightedaverage of 80% production efficiency 1/; this is achievable, not only sincethe international norms are over 90% but also because the better run millsin Egypt have attained continuously 85% to 88% production efficiency ratesin recent years. With the assistance of the technical consultants and theestablishment of the operator and maintenance labor training program (para5.19), and the provision of temperature and humidity control (airconditioning)facilities for optimum results, the Project facilities are expected to be ableto achieve 80% production efficiency reasonably soon and eventually operate at85%. But considering the present situation in the Company, a level of 80%throughout has been used in the financial and economic analysis.

5.13 The main raw materials for the Project are cotton, polyester, dye-stuffs and chemicals. Egypt, as previously noted, does not produce short-staple cotton, which constitutes 81% of the Project's cotton requirement andwill therefore be imported. The other 19% of the Project's cotton require-ments will be the medium to long staple variety (1-3/16 to 1-6/16 inches)grown in Egypt, such as the Ashmouni and GIZA 66 varieties (1-3/16 to 1-4/16inches) or the GIZA 67 and GIZA 69 varieties (1-5/16 to 1-6/16 inches). Forpurposes of the economic analysis, it is assumed that the GIZA 69 varietywhich is the most expensive of the four, will be used. Polyester will belocally supplied with the recent start-up of a 25,000 tpy public sectorpolyester plant near Alexandria. Finally, about 75% of the required chemicalsand dyestuffs will be imported with the remainder procured locally. TheGovernment will ensure that the Project will have access to all the rawmaterials and supplies, including the foreign exchange necessary to acquiresuch materials, needed for the efficient operation of the project facilities.

5.14 NSWC's annual consumption of fiber (Annex 5-3) and utilities when theProject reaches full production are summarized below and also given in detailin the financial annexes:

NSWC - Fiber and Utilities Requirement of NSWC after the Project(at 90% capacity utilization)

Item Unit Annual Requirements Source

Short-staple cotton tpy 5,571 ImportedMedium to Long-staple Cotton tpy 1,332 LocalPolyester tpy 2,684 LocalPower

New Mills Million KwH 52.4 Aswan High DamConverting Plant Million KwH 8.8 Power SystemExisting Mills a/ Million KwH 22.0

Fuel Oil b/ tpy 3 14,888 LocalWater 1,000 m 458 Alexandria City

System

a/ 11.8 million KwH for spinning mill No. 3, 9.5 for weaving mills No. Iand No. 4 and 0.7 for the bedsheet and garment plant.

b/ 14,033 tpy for the converting plant; 503 tpy for the new weaving mill and352 tpy for the existing (rehabilitated) weaving mills.

1/ (,Z(JU hours per year ot operation corresponds to 90% capacity utilization(100%=8,000 hours per year). In developed countries the production efficiencyis about 98% for spinning mills and 95% for weaving mills.

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5.15 As Maharrem Bey and Mallaha are supplied with power from the AswanHigh Dam circuit, no supply problems are anticipated. The new mills will beprovided with six 1.5 MW transformers and two 2-ton per hour (tph) boilers.In addition, three 15-tph boilers will be erected at Maharrem Bey to meet thesteam requirements of the converting plant. Additional water filtratL n andtreatment facilities will also be installed at Maharrem Bey, which is suppliedwith water from the Alexandria city system. All the above facilities will beprovided under the Project and financed under it. The Government will alsoensure that the Project will be supplied with all the required power and water.

F. Project Implementation, Staffing and Training

5.16 The project implementation period covers 48 months starting March1980 with the hiring of the technical consultants and commercial operation isexpected to commence in April 1984 after four months of commissioning. Theimplementation schedule is shown in Annex 5-4; it allows for 43 months forcompletion of civil works, including 10 months for civil design and inter-national tendering of the main civil works contract 1/ and 33 months foractual construction. Due to a shortage of local building contractors andsevere delays in civil works experienced in most of the Bank's projectsin Egypt, the Project's main civil works contract will be bid as a single-responsibility contract subject to international competitive bidding and Bankfinancing of US$10.4 million representing about 74% of the estimated costof the main civil works contract is included in the Project for this purpose.In awarding the civil works contract a particular premium will be placed onspeedy contract execution and on the degree of reliability with which suchexecution can be achieved. The architectural and building design services willalso be provided by GHERZI and financed by the Bank. With the above measuresit is hoped that the 43 months period allowed for completion of civil workscan be adhered to and possibly be improved upon. If-so, the Project can startcommercial operation earlier by the time saved in civil works construction.

5.17 It is recognized that because of the weaknesses in NSWC's technicalmanagement, the Project can only be implemented with extensive external con-sultancy assistance and with the recruitment of new technical staff with suit-able qualifications. NSWC has therefore engaged foreign technical consultantson terms and conditions agreed with the Bank (GHERZI Textil Organisation -Switzerland) and will also hire by October 1980, accounting consultants. Theconsultants will provide assistance in three main areas: (a) management andorganizational improvement, discussed in para 4.19; (b) project implementation,start-up and technical training, discussed below; and (c) financial andaccounting systems. In addition, NSWC has already constituted two teams towork with the consultants: (a) an organizational and financial systems im-provement counterpart team; and (b) a project implementation unit (PIU),

1/ The main civil work contract will cover about 50,600 m of area for 2the new spinning and weaving mills (including stora e area of 3,400 m>)It does not include general plint services (2,400 m ); administrationand social facilities (4,150 m ); housing facilities (4,100 m ); and sitepiling and improvements (fences, roads, etc.).

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staffed with technical personnel. The staffing of the two teams is shownin Annex 5-5. NSWC has already hired an experienced and qualified textileengineer, Mr. Ghorab, who has worked for a foreign consulting firm in imple-menting and operating textile projects in Africa, as project manager and head-f`-the PIU. The Company will ensure that the PIU and the counterpart team

will continue to be fully staffed with qualified personneI.

5.18 The financial and accounting consultancy services is estimated toinvolve about 45 man-months. The terms-of-reference as well as the firmsinvited to submit proposals for the financial and accountancy services havebeen agreed upon between NSWC and the Bank. The accounting consultant isexpected to be hired by October 1980. The technical consultancy services willinvolve about 220 man-months starting March 1980. and will cover three mainareas: (a) Assistance in constructing and commissioning the project facil-ities; (b) Assistance in reorganizing the Company's existing garments opera-tions and its marketing organization including the establishment of an exportmarketing group; and (c) Assistance in designing and implementing the organi-zational and management improvement program described in para 4.19. For thefirst two areas, that is (a) and (b) above, the scope of work will cover:(i) Architectural and building design; (ii) Review of plant design and machin-ery specifications; (iii) Assistance in the preparation of tender documentsfor the main civil works contract, bid evaluation and supervision of the maincivil works contractor; (iv) Assistance in the preparation of tender documentsfor plant equipment and evaluation of bids; (v) Assistance in developingproduction plans, work assignments, operations and maintenance standards andprocedures, as well as quality standards and control systems; (vi) Developmentand implementation of a training program for plant workers and supervisors,including arrangements for foreign training and technical education of produc-tion management and supervisory personnel; (vii) Assistance in the developmentand operation of a project monitoring and control system including the prepara-?Ion of a project reporting system satisfactory to the Company management andthe Bank; and (viii) Assistance in the inspection of erected equipment,start-up and initial operations.

5.19 The training of skilled workers as well as plant supervisors arecritical activities that the consultants will program and monitor. Someforeign technical training will be needed, mostly in the facilities of themajor equipment (spinning and weaving) suppliers and the foreign exchangecost of this technical training component is included in the project cost.Total employment for the new spinning and weaving mills, roughly one-thirdof which is expected to be transfers from the existing mills at Karmouz,is estimated at 2,000 persons, on the basis of a staffing schedule that isconsidered efficient under Egyptian conditions although it still assumes 50%of the labor productivity level of US or European mills using similar equip-ment. For the new mills, the investment cost (excluding interest duringconstruction) per job is about US$35,000. The modernized converting plantand the bedsheets plant however, will not require new staff as the requiredpersonnel (about 750 persons) will be drawn from the existing labor force.NSWC has agreed that it will staff the Project's facilities (e.g., the newspinning and weaving mills) in a manner acceptable to the Bank (Annex 5-5).

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VI. CAPITAL COST, FINANCING PLAN AND PROCURENENT

A. Capital Cost

6.01 Total financing required for the Project is estimated at US$104 mil-lion equivalent (LE 72 million) of which US$79 million (LE 55 million) is inforeign exchange. The capital cost estimate is based on prices at the endof 1979. The total financing required (including proportional allocations oftechnical assistance and training, physical contingencies, price escalation,incremental working capital and interest during construction) is approximatelyallocated among the various project components as follows: (a) the newspinning mill--US$48 million (46%); (b) the new weaving mill--US$37 million(35%); (c) the modernized converting plant--US$15 million (14%); and (d) therehabilitated weaving mills and the new bedsheet plant--US$4 million (4%).Details of the cost estimate and the assumptions used are given in Annexes 6-1and 6-2 and are summarized in the following page.

6.02 The equipment costs have been derived from the equipment list andcost estimates prepared by NSWC and reviewed by the Bank based on the resultsof the ongoing procurement for other textile projects. The Project is exemptfrom import duties but will pay a general import tax of 5% of the CIF value ofimported equipment. The estimated total cost of both the engineering andfinancial consultancy services is about US$2.9 million. The engineeringconsultancy services of about 220 man-months will be provided by GHERZI (para.5.17) at an average man-month cost of US$11,000 including salary, costs, fees,international travel and subsistence. The financial consultancy services,which will be contracted for by October 1980, is estimated to require 45man-months at an average man-month cost of about US$10,200. The cost of thecivil works have been estimated on the basis of the construction cost of thefirst textile project currently under implementation as well as other Bankassisted projects in Egypt including adjustments for the type of constructionand the international pro urement. The civil works base cost es5imate comesto an average of US$275/m for the production areas and US$145/m for non-production areas.

6.03 Price escalation for equipment is calculated on the basis of pro-jected international equipment price increases of 10.5% in 1980, 9.0% in 1981,8.0% in 1982 and 7.0% annually during 1983-85 in major equipment supplyingcountries. The same price inflation rates have also been used for about US$7million (BCE basis) worth of services and local supplies (except civil works)on the assumption that price escalation on these items will follow the ratesin those countries. On civil works however, a price escalation rate of 12%in 1980, 10% in 1981, 9%, in 1982 and 8% in 1983 has been assumed, based onexperience in the recent past and the expectation that the cost of civil worksin Egypt will continue to rise faster than the international price level. Theabove cost estimate, including the provisions for physical and price contin-gencies is considered adequate.

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NSWC Prolect-- Summary of Capital Cost Estimate a/

--------LE Million -------- -------US$ Million-------Foreign Local Foreign LocalExchange Currency Total Exchange Currency Total %

Equipment, Materials &Spares (FOB) 24.9 0.2 25.1 36.1 0.3 36.4 56

Freight, Insurance &Local Handling 1.7 0.9 2.6 2.5 1.2 3.7 6

Erection & Relocation 0.9 0.5 1.4 1.3 0.8 2.1 3General Import Tax - 1.3 1.3 - 1.9 1.9 3Civil Works & Site

Imprevements 6.8 3.7 10.5 9.9 5.3 15.2 24Project Supervision, Tech-

nical Assistance, Training& Commissioning 2.4 1.1 3.5 3.4 1.7 5.1 8

Base Cost Estimate (BCE) 36.7 7.7 44.4 53.2 11.2 64.4 100Physical Contingencies

(PC) b/ 3.6 0.8 4.4 5.3 1.1 6.4 10Price Escalation c/ 7.6 1.8 9.4 10.9 2.6 13.5 21

Installed Cost 47.9 10.3 58.2 69.4 14.9 84.3 131Working Capital - 5.5 5.5 - 8.0 8.0Interest During

Construction 6.6 1.7 8.3 9.6 2.4 12.0

Total Financing Needed 54.5 17.5 72.0 79.0 d/ 25.3 104.3

a/ Based on an exchange rate of LE 0.69 - US$1.00.b/ 10% of the BCE for all items.c/ 25% of the BCE and PC for civil works; 17% of the BCE and PC for all other items.dI Includes US$3.0 (LE 2.0) million of indirect foreign exchange cost.

6.04 The incremental permanent working capital requirement, virtuallyall in local currency, is estimated at US$8 million equivalent (Annex 6-3).Interest during construction is calculated on the basis of total debt financingof US$69 million, approximately covering 87% of the foreign exchange cost ofthe Project, i.e. excluding interest during construction. This level of debtfinancing corresponds to 66% of the total project cost and is relatively high.However, the Company as a whole is projected to have a debt/equity ratio of60:40 or better after the first full year of operation of the Project (1986)although the ratio could be as high as 64:36 during some stages of projectimplementation (para 7.07). The proportion of debt financing is thereforeacceptable. The calculation of the interest during construction is shown inAnnex 6-4.

B. Financing Plan

6.05 The financing plan for the Project is as follows:

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NSWC Project--Proposed Financing Plan

LE Million US$ Million %

Equity:Government a/ 20.7 30.0 29Private Shareholders 3.4 4.9 4

Total Equity 24.1 34.9 33

Loans:Bank 47.6 69.0 66Government b/ 0.3 0.4 1

Total Loans 47.9 69.4 67

Total Financing 72.0 104.3 100

a/ The Ministry of Industry has already included this amount inits investment budget for 1980-83.

b/ The Government already provided this loan to NSWC from theBank's Second Industrial Import Loan (Ln. No. 1456-EGT) tofinance the downpayment for the consultancy services.

The above equity funds of about US$35 million (LE 24 million) will be providedby the Government from budgetary allocations and by private shareholders. Inaddition, since the Company is expected to experience cash deficits fromoperations during project implementation (para 4.13), the Government willprovide or cause NSWC to be provided with additional equity funds to coversuch deficits. This obligation is to improve the Company's current ratio (orat least keep it from deteriorating further) during project implementation andensure that the funds provided for the Project under the above financing planare not diverted to cover NSWC's operating deficits. The additional equityrequirements are estimated at about LE 2 million in 1980 and LE 4 million peryear during 1981-83 (para. 7.07). The Bank loan of US$69 million equivalent,will be made to the Government for 15 years, including 4.5 years of grace atthe standard interest rate. The loan will be onlent to the Company on thesame terms and at an annual interest rate of 10%. The Company will bear theforeign exchange risk for the Bank loan proceeds.

6.06 Regarding the above financing plan, the following assurances havebeen received from the Government and the Company: (a) the Government willitself provide US$30 million (LE 21 million) and ensure an additional US$5million (LE 3.4 million) of equity funds from other shareholders and/or theGovernment as needed by the Project; (b) the Government will onlend theproceeds of the Bank loan on terms and conditions acceptable to the Bank(i.e. at the terms mentioned above); and (c) should a cost overrun occur orshould NSWC experience - as expected - operating cash deficits during Projectimplementation, the Government will ensure that NSWC will be provided withthe necessary funds including foreign exchange, in the form of equity and/orioans, to complete the Project without delay. The funds should therebybe provided in such a way as to help NSWC towards maintaining a debt/equityratio at or below 60:40 and attain a current ratio of at least 1.5:1.0 atcompletion of the Project. For purposes of this covenant, the Project isconsidered complete when the new spinning and weaving mills included in the

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Project scope have been tested and proven to be satisfactory in accordancewith established engineering procedures and have operated at an averageproduction rate of 75% (or better) of their design capacity for not less than60 consecutive days; the completion test period is expected to be completed byApril 1985.

C. Procurement

6.07 The total value (CIF/ex-factory basis) of the equipment, materialsand spares for the Project is about US$50 million of which US$49 million (98%)will be bid internationally using the Bank's procurement guidelines and thebalance, which is either not suitable for or cannot be more economicallyacquired through international procurement, will be purchased locally. Ofthe internationally bid items, about US$46 million will be procured throughinternational competitive bidding (ICB) and US$3 million through limitedinternational tendering, on the basis of suitability, availability and priceconsiderations. Limited international tendering will be restricted to importeditems each costing less than US$100,000 (CIF basis) equivalent, proprietaryequipment, and items in limited international supply or whose delivery periodsare critical to the timely completion of the Project. The main civil workscontract will also be bid under ICB; it will include: (a) constructionoverhead and profit, (b) the cost of imported construction equipment andmaterials, and (c) the cost of locally procured materials and sub-contractedservices. The total value of this contract is estimated at US$14 millionincluding about US$8.4 million in foreign exchange (US$6.3 million for directlyimported equipment and materials and US$2.1 million for overhead and profit).Some construction equipment presently in short supply in Egypt and needed bylocal contractors bidding for the other civil works items 1/ with an estimatedvalue of US$1.5 million will also be purchased using limited internationaltendering and would be sold to the local contractors after their work on theProject is completed. Some imported cement and structural steel with anestimated foreign exchange cost of US$0.5 million for the other civil worksitems will be purchased from Government enterprises who are the exclusiveagents for importing these materials. The remaining civil works items, withan estimated value of US$5 million, including about US$2 million of indirectforeign exchange cost, will be bid using local competitive bidding and willnot be financed from the Bank loan. Assurances have been obtained from theGovernment that the Project will be able to acquire the necessary quantityof construction materials, either by direct imports or by local purchases, tomaintain the implementation schedule.

6.08 For internationally bid items to be financed by the Bank, the listof goods will require prior Bank approval and suppliers will be prequalified.Qualified local equipment suppliers will be allowed to participate in inter-national competitive bidding (ICB) with a 15% (or the import duty rate iflower) preference margin. However, because of the limited capacity andcapability of the domestic equipment industry, practically all of the plantequipment and materials bid internationally are expected to be suppliedfrom abroad. Contractors participating in international competition will berequired to submit a list of equipment they intend to import for the Projectin accordance with the construction schedule. A fixed mobilization advance

1/ The other civil works items not covered by the main civil works contractare site preparation and piling; site improvements (roads, etc.); housing,administrative and social facilities; and general service areas.

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estimated at about 20% 11 of the contract value will be provided. Again,because of the shortage of construction services and capacity in Egypt, themain civil works contract is expected to be awarded to a foreign or a jointventure firm. For purposes of bid comparison (for both plant machinery andcivil works items), the highest rate of exchange for the foreign currenciesconcerned declared by the Central Bank of Egypt will be applied.

D. Allocation and Disbursement of Bank Funds

6.09 The allocation of the Bank funds is shown below:

NSWC Project - Allocation of Bank Group Funds

US$ Million % to be Financed

1. Plant Equipment, Materials & Spares 45.7 100% of foreign expenditures(FOB); Ocean Freight and Insurance; or local ex-factory prices.Foreign Erection Services

2. Main Civil Works Contract 10.4 100% of foreign expendituresfor imported items and 35% oflocal expenditures for otheritems.

3. Imported Construction Equipment 2.0 100% of foreign expenditures forand Locally Procured Construction imported items and 60% of localMaterials expenditures for other items.

4. Technical Assistance & Training 3.5 100% of foreign expenditures.

5. Unallocated 7.4

Total 69.0

6.10 The technical assistance services proposed for Bank financinghave already been contracted (para 5.17). Retroactive financing to cover anestimated US$1.0 million of disbursements after February 1, 1980 for technicalassistance (US$0.3 million), and civil works items (US$0.7 million) is recom-mended. The estimated disbursement schedule for the Bank Group funds is shownin Annex 6-5.

1/ The actual percentage will be determined when the bidding documentsare finalized.

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VII. FINANCIAL ANALYSIS

A. Revenue and Operating Cost Assumptions for the Project 1/

7.01 The new spinning and weaving mills are assumed to start commercialproduction in April 1984 at an initial capacity utilization 2/ of 50%, then70% during 1985 and reaching the steady state at about 90% in 1986 at aproduction efficiency of 87% for the new spinning mill and 85% for the newweaving mill respectively. Although it is possible for the new mills toachieve a production efficiency of 90% or better given the intention toestablish a meaningful production bonus system, training, and the technicalassistance included in the project scope, this higher level of efficiency willprobably be achieved only over a few years and the efficiencies mentionedabove have been used from 1984 onwards in the financial analysis. The rehabil-itated facilities are expected to be fully operational by early 1984 but forthe financial analysis, they are only assumed to produce the incrementaloutput commercially starting in April 1984. The production efficiency of therehabilitated weaving mills has been assumed as 77% for mill No. 4 and 80% formill No. 1. The remaining spinning mill No. 3 at Karmouz, which is notrehabilitated, has been assumed to operate at 55% production efficiency.These would yield a weighted average production efficiency of 80% for NSWC asa whole including the new mills after the Project is completed. Depreciationcharges (Annex 7-1) are on a historical cost basis using the straight linemethod over a weighted average of 15 years and takes into account the differentdepreciation periods allowed for civil works and equipment under Egyptianpractice. Except for the labor costs of the project facilities, textileproducts and polyester prices (see below), all other prices and costs arethose prevailing at the end of 1979, and have been escalated throughout theforecast period in the financial analysis at the international price inflationrates on the assumption that price increases for these items (e.g. textileinputs) will follow the international rates from 1980 onwards.

7.02 The Project is designed to produce high-quality textile productsand a small portion of the output, equivalent to 10% by weight (824 tpy) ofNSWC's total production is to be exported. The exports correspond to about7% of the finished fabrics, 29% of the bedsheets and 25% of the terry towels,although the domestic demand could absorb all of the Project's production.At present, the ex-factory price of non-rationed, 100% cotton fabrics is about90% of the international price. However, in the case of polyester/cottonfabrics, the domestic price is about 30% to 50% higher than the internationalprice due to an almost negligible domestic production capacity at present andthe high import duties on textiles. For the financial analysis, the ex-factoryprices for the Project's output during the 1980's have been assumed as follows:

1/ In the financial and economic analysis of the Project, references toNSWC refer also to the successor company to be established under Law 43which will assume all the assets and liabilities of NSWC and will operateall the production facilities of NSWC including those included in theProject.

2/ 100% capacity utilization equals 8,000 hours per year of operation.

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(a) for polyester/cotton fabrics - 100% of the international price; (b)for 100% cotton fabrics (rationed cloth) - LE 0.28 per meter 1/ which is theprice currently set by the Government; (c) for sheets, garments and towels -about 95% of the international (FOB) price; (d) for sewing thread - 73% ofthe export price; and (e) for commission finishing - 75% of the economic pricesince a significant portion (30% to 40%) will involve the finishing of rationedfabrics for other companies (Annex 7-2).

7.03 The average labor cost assumed for the new mills is LE 79 (US$114)per man-month (in constant end of 1979 LE) or about 65% higher in real terms,than NSWC's present wage bill (including social overhead) and already in-corporates a production bonus component. This level is considered to becompetitive with alternative private sector employment in the Alexandria areafrom where the Project will recruit its labor force. The polyester fiberdelivered price of LE 1,810/ton (US$2,623/ton) is based on the expected importcost in the 1980's including import duties, although the Project will utilizelocally produced polyester. Labor costs, textile products and polyesterprices, have also been escalated in the financial forecasts at the assumedinternational inflation rates.

7.04 About 81% of the raw cotton requirements of the Project can be metby imported short-staple and the balance by medium to long staple cotton.At present, the imported short-staple cotton used by local textile mills issold to them by the Government at the same price of LE 933/ton (US$1,352/ton)as the Egyptian medium staple variety (i.e. the Ashmouni and GIZA 66 varieties).The long staple (i.e. Menoufi or GIZA 69) cotton price to the local spinnersis presently LE 967/ton (US$1,401/ton) and the financial forecast assumes thatthese local prices will also escalate at the international inflation rates.

7.05 The production cost structure for the various mills after the Projectis completed is shown in Annex 7-3. The total NSWC sales revenue and produc-tion cost structure is summarized below:

1/ Equivalent to LE 0.35/mi since rationed fabrics are only 0.8 meters wide.

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a/NSWC -Sales Revenue and Production Cost after the Project-

(In Constant End of 1979 LE).

Annual Quantity Average Price or Cost Annual Value %(LE Million)

Sales Revenue2

Polyester/Cotton Fabrics 24.0 million m LE 0.96//m2 23.0 52100% Cotton Fabrics 13.9 million m2 LE 0.35/m2 4.9 11Bedsheets b/ 648 thousand sets LE 12.02/set 7.8 18Garments c7 1.0 million pieces LE 2.00/piece 2.0 5Terry Towels 2.7 million m2 LE 1.20/m2 3.2 7Commission Finishing 11.8 million m2 LE 0.15/m2 1.8 4Sewing Thread 500 tons LE 3,022/tons 1.5 3

Variable Production Cost 44.2 100

Cotton 6, 903 tons LE 939/ton 6.5 20Polyester 2,684 tons LE 1,810/ton 4.9 15Direct Labor:

(a) new mills 21,264 man-months LE 79.4/man-month 1.7 5(b) existing & rehab. mills 26,292 man-months LE 78.0/man-month 2.0 6

Fuel Oil 14,888 tons LE 60/ton 0.9 3Power 83.2 million KwH LE 0.015/KwH 1.2 4Commission Weaving 7.0 million m2 LE 0.06/m2 0.4 1Excise & Treasury Taxes 1.6 5Other variable costs 1.8 5Less: sales of waste cotton 923.4 tons LE 488/ton (0.5) (1)

Sub-total 20.5 63

Fixed Production Costs

Depreciation and Provisions- 7.0. 22Maintenance Materials 1.5 5Indirect Labor el, Administrative .and other Fixed Costs 3.2 10

Sub-total 11.7 37

Total Production Cost 32.2 100

Cost of Surplus Labors' 3.4

Total Cost before Interest Charges 35.6

a/ At an average of 90% capacity utilization (i.e. 7,200 hours per year of operation).b/ Bedsheets use 14 m2 of sheeting fabric per set.c/ Garments use 1.6 m2 of polyester/cotton. (Print A and Print B types)

fabric per piece.d/ Depreciation at historical or acquisition cost.e/ About 650 employees for the existing mills at LE601nan-month and 80 employees

for the new mills at LE 70/man-month.f/ This will gradually be decreased from about 7,000 employees in 1984 to about

5,000 in 1986 and practically nothing in 1991. The cost is LE 40/man-month andthe amount shown (LE 3.7 million) is for the full 7,000 employees.

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Cotton and polyester will account for about 35% and depreciation charges about22% of the production cost of NSWC when the Project reaches full production.Although the Project's variable costs are fairly high at about 63% of totalproduction cost, the Project still shows a good increase in profitability withhigher capacity utilization and thus provides a sound financial basis forintroducing a production incentive system. The Government'! excise duty onyarn output of LE 28.6/ton and treasury taxes of LE 0.025/m9 of woven fabric(Annex 7-3) have been included in the production cost of NSWC and are alsoincluded in the assumed selling prices. These taxes account for 5% of theproduction cost.

7.06 The production cost of the Project is internationally competitiveprimarily because of the low cotton prices relative to the internationalprice, the low wage rate (even after assuming the increase in wage rateenvisaged under the Project) and the low cost of energy (power and heatingfuel) in Egypt. The Project is forecast to provide at least LE 8.7 million(in 1979 constant LE) annually of operating profit when the Project reachesfull production from 1986 onwards and should ensure the financial viability ofthe Company.

B. NSWC - Financial Forecast with the Project

7.07 The projections of the debt service payments, the production, theincome, the cashflow and the balance sheet statements together with the majorassumptions used for the financial analysis of NSWC with the Project, arepresented in Annexes 7-4 through 7-8. The financial statements are summarizedon the following page. The financial forecasts indicate a satisfactory finan-cial situation for NSWC, after the Project exceeds the profit breakeven capa-city utilization rate in 1985, with a long-term debt service coverage ratioof at least 1.9 before profit distribution. But because of large operatingcash deficits expected during the implementation period (1980-83), additionalequity funds (about LE 2 million in 1980 and LE 4 million per year during1981-83) are assumed to be provided to cover the operating cash deficits andimprove the Company's tight current ratio. The Government will ensure (para6.05) that such equity funds will be made available to NSWC. In the finan-cial forecast, the sale of assets has not been assumed in assessing the extentof the possible additional equity infusion. The debt/equity ratio will beas high as 66:34 during project implementation but is expected to be about57:43 by the end of 1985, the first full year of production. Thus, when theProject starts commercial operation in 1984 (at 50% capacity utilization for 9months), the current ratio could be as low as 1.0. But the situation canrapidly improve if no dividends are paid out during 1985 and 1986 in whichcase the current ratio will be 1.5 at the end of 1985 and reach 2.5 a yearlater. Should NSWC promptly sell a parcel, about 3 acres, of industrial landat Maharrem Bey it no longer needs, and another of about 8 acres of theKarmouz site after Project completion 1/, or if the reduction of surplus laborwere faster than assumed (Annex 5-5), then the additional equity infusionduring Project implementation would be less than indicated in the forecasts.

1/ The price of 2land at Karmouz and Maharrem Bey at present is at leastLE 100 per m

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NSWC - Summary of Projected Financial Statements with the Project a/

(In millions of current LE)

1980 1981 1982 1983 1984 1985 1986

Capacity Utilization (new mills) - - - 50% b/ 70% 90%Income & Cash FlowStatementsRevenue 26.4 29.6 29.7 26.5 34.2 62.1 83.8Cost of Sales &Financial Expenses 29.9 32.3 32.6 31.5 41.5 56.9 66.0Income Taxes - - - - - -Net Profit (Loss) ( 3.5) ( 2.6) ( 2.6) ( 4.5) (T6.8) 5.8 18.9

Net Profit as % of Revenue ( 13 ) ( 9 ) ( 99) ( 17 ) ( 19 ) 9 22

Balance Sheet as of Dec. 31Current Assets 26.2 26.6 26.9 30.6 27.6 31.8 37.2Net Fixed Assets 8.7 7.6 6.5 5.4 64.8 57.8 50.8

Other Assets & Investments 3.5 23.9 47.0 65.0 0.1 0.1 0.1

- Current Liabilities 26.3 25.9 25.0 22.1 24.9 21.4 15.2Long-term Debt 4.6 20.5 36.4 47.9 43.3 38.6 34.0Equity 7.6 11.7 19.0 31.1 24.3 29.7 38.9

Total Assets or Liabilities 38.4 58.1 80.4 101.1 92.4 89.7 88.1

Current Ratio 1.0 1.0 1.1 1.4 1.1 1.5 2.5Debt/Equity Ratio 39.61 64:36 66:34 61:39 64:36 57:43 53:47Debt Service Coverage - - - - 0.6 1.9 4.4

Profit & Interest as % ofAssets Employed (notRevalued) (4) 0 (0) (2) (0) 14 28

Breakeven Indicators

Profit Breakeven CapacityUtilization (%) - - - - - 60 54Cash Breakeven Capacity

Utilization (%) - - - - - 55 49

a/ In the financial forecast with the Project, it is assumed that there is a gradual

reduction in surplus labor between 1980 and 1984 (Annex 5-5).b/ Nine months of production at 50% capacity utilization of new spinning and weaving

mills.c| Profit plus short-term and long-term interest as a % of total assets at book value.

If the fixed assets at the end of 1979 is also the 1979 revalued amount, then the

percentage for 1986 and 1987 would be about 12% and 17% respectively.

- 44 -

Starting 1986, when capacity utilization is expected to reach 90%, the aftertax profits are expected to be at least 22% of sales revenue and the return onassets employed (revalued) should exceed 12%. The financial covenants (para7.10) also require that NSWC will take all reasonable actions to improve itscurrent ratio during project implementation, such as by obtaining additionalequity funds, selling assets no longer required for its operation, or reducingthe surplus labor, and to maintain the current ratio at 1.5 or higher afterProject completion. To this end NSWC has agreed that the proceeds from thesale of any assets (e.g., land, building, old equipment) that will no longerbe needed by NSWC will be retained in the Company to improve its financialsituation, and to help cover any cost over-run in the Project should it occur.The profit and cash breakeven capacity utilizations for the entire NSWC opera-tion after the Project is completed are calculated at 60% and 55% respectively.Upon reaching 90% capacity utilization (1986), NSWC is still expected to showa profit breakeven even if the textile product prices were to fall by 17% orif the cotton prices increased by 123% or about 30% above the projectedinternational price level (para 8.03).

C. Financial Rate of Return

7.08 The financial rate of return was calculated by treating the existingassets of NSWC as sunk costs and by excluding the cost of the surplus laborafter Project completion. 1/ The cost/benefit streams for the financial rateof return are expressed in constant end of 1979 LE (Annex 7-9). The financialrate of return is 22% before taxes and 20% after taxes and is thereforesatisfactory. The return before and after taxes are not very differentbecause of the five-year tax holiday and because the income tax rate of 40% isapplicable only to the profits retained by the Company. Sensitivity tests(Annex 7-9) show that even under moderately adverse conditions, such as a 10%increase in capital costs, or a 10% fall in product prices, or a 20% increasein the cash production costs (equivalent to a 78% increase in the cotton priceif all other costs are unchanged), the after-tax return would still be atleast 15%.

D. Financial Covenants

7.09 To safeguard the financial position of the Company, especially inthe areas of cotton pricing and product mix (para 7.11) of the enterprise(i.e. areas that are partly outside the control of NSWC), agreement wasreached with the Government that:

(a) After Project completion, it will not take any action which wouldprevent NSWC from (i) generating sufficient revenues to meet alloperating expenses and to service its debt, and (ii) from earninga reasonable return on investment under conditions of efficientoperation 2/;

1/ This methdology would yield a slightly lower rate of return compared tothe method of incremental cash flow on a with and without the Projectbasis because of the large cash deficits of the Company without theProject especially after 1983. If the cost of the surplus labor after1983 is included in the Project operating cost, the return drops to 19%.

2/ Earn a return on assets (revalued) employed of 12% or higher at aproduction efficiency of 80% and a capacity utilization rate of 100%.

- 45 -

7.10 NSWC also agreed to follow prudent financial practices, and observethe following:

(a) It will limit any prepayment of debt, profit distribution,or other long-term investments in order to maintain acurrent ratio of at least 1.5 after Project completi*n;

(b) Not incur any additional long-term debt if its future debtservice ratio will (i) fall below 1.2 after allowing forprofit distribution, and (ii) fall below 1.5 before distributionof profits;

(c) It will not take any action, other than concluding the subsidiaryloan agreement for the Bank funds, which would cause its debt/equity ratio to exceed 60:40 or make the ratio higher if italready exceeds 60:40;

(d) Until December 1987, consult with the Bank before undertakingany other modernization or expansion program or any other in-vestment not related to the Project exceeding US$3 millionequivalent annually.

(e) Have its accounts continue to be audited by independent auditorsacceptable to the Bank. 1/

(f) It will set its product mix (or production program) in a mannerthat will (i) insure efficient utilization of its facilities, and(ii) under conditions of efficient operation, earn a reasonablereturn on its investment.

(g) It will operate the new spinning mill, the new weaving mill,and the modernized converting plant as separate profit/costcenters and maintain separate accounts for each unit.

(h) It will retain in the Company the proceeds from any saleof assets no longer required for the Company's operation.

E. Major Risks

7.11 The Project does not face any major technical risks but as mentionedearlier (para 4.02), serious potential management and organizational as wellas financial risks exist. These risks can only be contained with the strongcommitment of NSWC's chairman, with the assistance of technical consultantsand with the Government's support, especially by allowing the Company to adopta new compensation system. The financial forecasts in paras 7.07 and 7.08assume that the Company will have the necessary complement of qualified manage-ment and factory personnel which should be possible once the Company has been

1/ All public sector enterprises are audited by a Government agency, theCentral Agency for Auditing, which is acceptable. The successor companywill however, be audited by private accounting firms.

- 46 -

transformed into a private-sector enterprise under Law 43 and adoptsa new compensation system. The financial risks are related to the expectedlarge cash operating deficits during Project implementation which would needto be financed by additional equity funds in order to avoid a fatal liquidityproblem and a serious erosion of the equity base. The Government has agreedthat such funds will be made available to NSWC. The Project also faces somecommercial risks, especially in the exports of its products and in theproduction of rationed fabrics. If the Government should maintain theCompany's quota of rationed fabrics above the production of the existing orthe remaining (after the scrapping of obsolete looms) narrow width looms,which are the appropriate machinery for manufacturing the relatively narrowand inferior rationed fabrics, then the Company will be forced to use thewider width and modern equipment to produce an inferior and unprofitableproduct instead of the profitable high quality fabrics the equipment iscapable of producing. The covenants in para 7.09(a) and para 7.10(f) aboveare also designed to avoid uneconomic use of the Project facilities.

7.12 The Company presently exports a small quantity of textile products,mostly yarn, but only to trade agreement countries or middle-eastern coun-tries. NSWC does not therefore have now the experience and expertise tomarket the Project's output in the more competitive west European or USmarkets in which Egypt has so far not fulfilled its export potential. Thetechnical consultants will assist NSWC develop an export marketing groupwithin the Company.

VIII. ECONOMIC ANALYSIS

A. Economic Input and Textile Prices

8.01 The economic costs and benefits of the Project are expressed inconstant end of 1979 LE and the tradeable items have been valued at theirrespective border prices. The two major non-tradeable items are power andlabor. For power, the economic cost of LE 0.035 (US$0.051) per KWH is basedon the marginal economic cost of thermal power generation in Egypt and is 133%higher than the financial cost of LE 0.015 (US$0.022) per KWH and power costsaccount for about 9% of the economic production cost. The economic cost of-labor is taken as identical to the financial cost, which is already 65% hfigher,in real terms than the prevailing wage--rate paid by the Company (para 7.b2T.~Salaries and wages account for about 20% of the econAie .production cost.

8.02 The tradeable items are cotton, polyester, chemicals (dyes andsizing materials), fuel oil and maintenance materials. With the exceptionof cotton and fuel oil, the financial prices of the other inputs are basedon the delivered costs of imports. The only adjustment to the financialcost are therefore the indirect taxes of 8% on the chemicals and maintenancematerials and the import duties of 17% on the polyester fibers. The economicprice of fuel oil is taken as LE 103.5 (US$150) per ton, 1/ almost 73% morethan the financial cost of LE 60.0 (US$87.0) per ton. Fuel oil, chemicals andmaintenance materials account for 5%, 4% and 5% respectively of the economicproduction cost.

1/ On the basis of about US$33 per barrel of crude oil. The fuel oil pricehas historically been about 75% of the crude oil price.

- 47 -

8.03 Polyester has become an economic and accepted substitute for short-staple cotton and the polyester price is expected to follow the price trendsof short-staple cotton closely. Because of a temporary over-supply, the pres-ent polyester fiber price of about US$1.55 per kg FOB is below the expectedlong-term price. But this situation is expected to change in the future asdemand for polyester continues to grow and polyester's share of the worldfiber consumptibon increases. A long-term international price of US$1.95 perkg 1/ FOB, has been taken and reflects both the expected long-term productioncost of polyester as well as the price trend of cotton. The delivered economiccost of polyester is about US$2.27 (LE 1.57) per kg. The long-term interna-tional price for short-staple cotton is estimated at about US$2.05 per kg 1/(CIF, Northern Europe), and as this will be imported the corresponding economicdelivered cost is about US$2.15 (LE 1.48) per kg or almost 13% more than thefinancial price. About one-third of the cotton requirements of the Projectwill be of the medium to long staple variety produced in Egypt. Historically(1952-1978), the standard extra long-staple Egyptian cotton (Menoufi) has soldat an average premium of about 75% (CIF basis) above the standard short-staplecotton variety (Mexican St. Middling 1-1/16 inches), although this premiumfluctuated rather widely and has been as low at 30% and as high as 130%. Forthe Project however, less expensive types are adequate for its medium to longstaple cotton requirements (para. 5.14) and for purposes of the economicanalysis, the GIZA 69 variety is assumed to be used. This variety sold ata historical premium of about 60% (CIF basis) above the short-Btaple cottonprice. The economic cost of the medium to long staple cotton requirementsof the Project has therefore been set at the export (FOB) price of US$3.15(LE 2.17) per kg, about 2.2 times the financial price. On the average, theeconomic cotton price is therefore 1.7 times the financial price 2/. Thederivation of the cotton and polyester prices are shown in Annex 8-1.

8.04 The economic value of the textile output is derived on the basisof the export as well as the import substitution benefits of the Project.Polyester/cotton blend products have not been produced in Egypt in the pastand only one firm has started production recently but on a limited scale.Thus, the cotton/polyester products consumed locally have been valued at theeconomic cost of imports. For the 100% cotton textile products, the exportprices have been used to value the locally consumed output. The economictextile product prices are shown in Annex 7-2 together with the financialprices. The economic value of NSWC's output is about US$63 million equivalent,of which US$8 million is from export sales, and on the average, the economicvalue of the production is about 7% above the financial value. The economicvalue of the output and the production cost structure. of NSWC at 90% capacityutilization are shown in Annex 7-3 and are summarized below.

8.05 While raw materials constitute the major portion of the productioncost of textiles, energy (power and heating fuel) and labor are also importantcost elements. Egypt is a net exporter of energy 3/ and its labor costs are

1/ In constant end of 1979 US dollars.

2/ However, if the excise duty and treasury taxes on textile production areconsidered as part of the cotton financial cost, then the financial costwill be about 70% of the economic cotton cost.

3/ About 60% of the present power generation of 2.7 thousand mega-wattsis hydro-electric power and there are plans to shift some thermalpower plants from fuel oil to natural gas, thereby allowing a highervolume of fuel oil exports.

- 48 -

generally lower than the costs in many other textile exporting countries.These factors, together with the availability of locally produced textilefibers (long-staple cotton and polyester), provides the basis for theProject's, as well as Egypt's potential comparative advantage in textileproduction. To transform this potential comparative advantage into an econo-mically viable operation and more especially, a meaningful export performance,will however require an improvement in the production efficiency - that is,machine productivity, labor productivity, product quality and raw materialefficiency (waste reduction and utilization of raw materials toward their mosteconomically valuable product) along international standards. The Project, onthe basis of the technical assistance and other arrangements discussed earlier'should be able to approach closely, if not achieve, international productionefficiency levels.

NSWC - Economic Benefits and Production Cost of NSWC After the Project a!(In constant end of 1979 LE)

Annual Quantity Average Price Annual Value(LE millions) %

Economic Valueof Output

Polyester/Cotton Fabrics 24.0 million m2 LE 0.98/r 2 23.5 50100% Cotton Fabrics 13.9 million mi2 LE 0.40/mm2 5.6 12Bedsheet sets 648 thousand sets LE 12.74/set 8.3 18Garments 1.0 million pieces LE 2.10/piece 2.1 4Terry Towels 2.7 million m2 LE 1.25/m2 3.4 7Commission Finishing 11.8 million m LE 0.20/m 2.4 5Sewing Thread 500 tons LE 4100/ton 2.0 4

Total 47.3 100

Variable Production CostsCotton 6,903 tons LE 1,613/ton 11.1 37Polyester 2,684 tons LE 1,570/ton 4.2 14Direct Labor 47.6 thousand LE 78/man-month 3.7 13

man-monthsPower & Fuel Oil 4.5 15Other Variable Costs (Net) - 1.6 5

Sub-Total 25.1 84

Fixed Production Costs 4.7 16Total Cost 29.8 100

a! At 90% capacity utilization.

B. Economic Rate of Return

8.06 At 90% capacity utilization, the output of NSWC will provide a neteconomic benefit of about LE 17.6 million annually. The economic rate ofreturn is satisfactory at about 22% and justifies the high priority accordedby the Government to the rehabilitation and expansion of the textile industry.SholJd capacity utilization rise faster than assumed (i.e. reaching 90%a1^ _ady 1y 1985), which is possible, the return would be 23%. Sensitivitytescs 'Ainnex 8-2) indicate that the return would still be at least 14% even if

- 49 e

operating cost were to increase by 20% or if product prices decline by 15X, orif capital costs increase by 20%.

C. Other Benefits

8.07 The Project will set in motion the eventual relocation of NSWC'sspinning facilities out of the Karmouz site, which is a residenitial areaunsuited for a large industrial operation. This move should provide additionalurban spaEe for housing which is in great demand in Alexandria. About 2.5million m by of the Company's PE/cotton fabric output will be sold locally,and considering the high product quality expected, should provide opportunitiesfor establishing small-scale garments businesses not only for the local marketbut also for exports. Garment production requires only modest capital invest-ment and is labor intensive. As the Project will utilize imported short-staplecotton and polyester fiber for about 86% of its fiber consumption, it willhelp conserve Egypt's more valuable long-staple cotton for better economicutilization. Finally, the Project will directly create about 2,000 new jobs.

IX. AGREEMENTS

9.01 During negotiations, the following major agreements and confirmationswere obtained:

From the Government:

(a) The Government will undertake and complete, by July 1981,a study to develop an action program for the developmentof the textile industry and complete an investment planfor the sector (para 2.16);

(b) The Government will complete, by July 1981, an industry-wide training program for the textile industry (para 2.18);

(c) The Government will ensure that NSWC will be transformed into aLaw 43 company by March 31, 1981 (para 4.02) and will allow NSWCto design a compensation/benefits package that would be adequateto attract and retain qualified personnel (para 4.20);

(d) The Government will ensure that the Project will be able toobtain the necessary quantity of construction materials neededto maintain the Project schedule (paras 5.08 and 6.07);

(e) The Government will ensure that NSWC will have access to allraw materials and all utilities (power and water) that willbe needed by the Project (paras 5.13 and 5.15);

- 50 -

(f) The Government will onlend to NSWC the Bank funds and provideequity funds for the Project according to the financing planand terms discussed in paras 6.05 and 6.06 and in addition,provide funds to NSWC or cause NSWC to be provided with fundsto cover any cash deficits in its current operations until theProject is completed in a manner that will help NSWC achieveda debt/equity ratio of 60:40 or better (paras 6.05 and 7.09);

(g) The Government will not take any action that will prevent NSWCfrom (i) being financially viable and (ii) maintaining itscurrent ratio and its debt/equity ratio at acceptable levels(para 7.09).

From NSWC:

(h) The Company will establish a successor company under Law 43 byMarch 31 to assume all the assets and liabilities of NSWC andoperate all its production facilities (para 4.02);

(i) The Company will strengthen its management promptly after thesuccessor company has been established (para 4.19), maintainthe project implementation unit with qualified personnel (para5.17), and staff the project facilities in a manner acceptableto the Bank (para 5.19);

(j) The Company will design and implement a compensation/benefits package that would be able to attract and retainqualified personnel (para 4.20);

(k) The Company will operate and properly maintain the environmentalprotection facilities included in the project scope (para 5.11);and

(1) The Company will follow the financial covenants in para 7.10.

9.03 On the basis of the agreements listed above, the Project is suitablefor a Bank loan of US$69 million equivalent to the Government for 15 yearsincluding 4.5 years of grace to be onlent to the Company on the same terms andat an interest rate of 10%.

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

PUBLIC SECTOR TEXTILE COMPANIES

CAPACITY, PRODUCTION, SALES AND ASSETS IN 1978

Number of Number Sale_/ AssetsSpindles A/. _f Looms t/ Production of Yarn-/ Production of Fabric A/ Domestic Export Total Dec. 31

(1,000) (1,000 tons) (milllon linear meters) (LE million)(LE million) (LE million) (LE millien)

Company

Misr. Meballa 293.6 4,942 41.2 174.4 58.4 34.5 92.9 167.3Escf) 232.1 2,416 21.9 66.4 32.2 7.2 39.4 65.1Misr. Helwan 120.1 3,122 11.3 67.1 24.4 4.8 29.2 61.1N:,;VC 180.1 1,866 8.1 27.2 10.4 5.2 15.6 47.3

Siotf 123.8 1,480 15.1 32.5 18.5 3.9 22.4 48.2C-boerbagui 43.7 372 3.4 6.3 11.0 0.2 13.2 21.4Orient 59.7 654 5.3 8.6 9.5 2.0 11.5 31.7Kafr el Dawar 586.8 3,672 18.8 112.9 29.2 13.8 43.0 99,0Deiormietta 114.6 822 6.6 17.1 8.1 12.4 20.5 40.2Dakahlia 148.5 - 10.3 - 7.8 11.3 19.1 40.0Upper Egypt 149.2 - 13.0 - 11.5 0.3 11.8 50.9 tS¾,ebin el Kome 160.4 - 8.2 - 2.5 22.1 24.6 44.* 4Aracb United 170.5 666 20.0 12.0 22.6 8.6 31.2 42.4Alcyandria 103.4 - 11.3 - 10.2 5.6 15.8 32.9Delia 51.6 264 3.1 6.4 7.2 1.9 9.1 28.9El Beida 3.9 - .5 - 29.2 3.1 32.3 78.8Nasr Mehalla 52.0 1,334 5.1 39.8 22.6 1.2 23.8 72.5Cairo Silk Co. - 1,802 - 23.2 8.5 - 8.5 25.2Stia 62.1 584 7.4 8.8 37.2 3.6 20.8 45.2WooItex 31.9 509 2.7 3.9 13.5 - 13.5 32 1Portex 10.5 485 1.2 11.5 7.8 1.0 8.8 33Cairo Textile 6.2 - .6 - 4.9 0.0 4.9 14.6Misr. Rayon - - , 5.0 - 19.9 0.8 20.7 101.5Aral Carpet 2. 56 0.7 .2 6.1 0.0 6.1 13.6Central 'Egypt 119.9 948 9.2 22.2 5.6 5.0 10.6 39.8

Total 2,823.2 25,994 230.0 640.5 398.8 148.5 547.3 1.297.9

al Including equipment and output for wool products

Sjirce: Textile Secretariat

Industrial Projects DepartmentMarch 1980

- 52 -

ANNEX 2-2

EGYPT - NSWC TEXTILE PROJECT

ORGANIZATION OF THE PUBLIC SECTOR TEXTILE INDUSTRY

Ministry ofPetroleum, Industry

and Mining

|Higher Council /\ Consolidation Fundl

General Organization Tfor Industrialization for Textiles

4 ,' I

,' General Shareholders Assembly of each 'Xi ~~Company, Chairman: the Minister X

. ~~Public Sector Textile Companies

Note: A solid line indicates a control function, a dotted linea coordinating or advisory function

Industrial Projects DeaprtmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

COMBINED HISTORICAL INCOME STATEMENTS OF THE PUBLIC SECTOR TEXTILE ENTERPRISES(in LE million)

1967/68 % 1968/69 % 1969/70 % 19?0/li Z 1972 % 1973 % 1974 2 1975 S 1976 2 11977 2 1 28

Sales 243 100 247 100 258 100 276 100 308 100 315 100 384 100 406 100 448 100 547 100 627 100Cost of goods sold 196 81 200 81 209 81 222 80 247 80 247 79 264 69 304 75 346 77 418 76 523 83Gross margin 47 19 47 19 49 19 54 20 61 20 68 21 120 31 102 25 102 23 129 24 104 17

Adminigtrative and 15 6 15 6 16 6 17 6 23 8 27 8 30 8 31 8 36 8 39 7 46 7sales ex?enses

Operating profit 32 13 32 13 33 13 67 14 38 12 41 13 90 23 71 17 66 15 90 17 58 9

Other income (8) (3) (6) (2) (5) (2) (4) (2) (5) (2) (3) (1) (22) (6) (12) (3) (7) (2) (13) ( 3) 43 7(expenditure)

Profit before 'ntereSt 24 10 26 11 28 11 33 12 33 10 38 12 68 18 59 14 58 13 77 14 101 itInterest 2 1 3 1 3 1 3 1 4 1 4 1 4 1 6 1 9 2 16 3 27 4Profit before tax 22 9 23 10 25 10 30 11 29 9 34 11 64 16 53 13 49 11 61 11 74 12

4 2 4 2 4 2 4 2 4 1 6 2 20 5 13 3 9 2 17 3 22 1

Net ir.come 18 7 19 8 21 8 26 9 25 8 28 9 4411 4010 40 9 44 8 52 8

Allocation of net income:

To reserves 6.6 23 14.0 32 11.5 29 10.7 27 16 .7 38 18.2 35 To workers' bonus 4.9 17 6.7 15 6.3 16 6.6 16 5.9 13 7.5 14To Guvxernment 16.4 58 22.9 52 21.4 54 22.0 55 19.9 45 24.8 47To other shareholders 0.5 2 0.5 1 0.5 1 0.9 2 1.0 2 1.3 3

Note: For years 1967/68 to 1970/71 fiscal year ended June 30ror other years fiscal year ended December 31

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

CONSOLIDATED BALANCE SHEETS OF THE PUBLIC SECTOR TEXTILE ENTERPRISES

(in LE million)

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978

Cash 13 16 18 15 15 17 26 20 17 22 27

Accounts receivable 61 67 67 80 66 64 80 88 104 116 170

Raw material inventory 38 39 47 47 47 46 55 80 74 116 141

Finished goods inventory 50 36 34 31 31 32 38 41 45 64 115

Supplies inventory 14 25 27 29 32 35 54 68 90 109 126

Work in process 28 28 27 27 31 30 35 41 42 48 73

Total current assets 204 211 220 229 222 224 288 338 372 475 652

Machinery and equipment 111 114 125 131 145 156 165 184 215 259 300

Land, buildings & other fixed assets 72 74 78 82 91 100 104 115 131 162 186

Accumulated depreciation (87) (96) (105) (116) (131) (142) (154) (166) (180) (197) (219) ,

Assets under construction 11 12 12 22 35 45 62 79 111 124 172 >

Total fixed assets 107 104 110 119 140 159 177 212 277 348 439

Investments 12 19 24 30 39 43 49 55 56 57 45

Total assets 323 334 354 378 401 426 514 605 705 880 1,136

Bank overdraft 29 28 29 27 26 32 40 68 104 168 226

Accounts payable 57 58 60 64 60 56 87 103 115 133 191

Taxes payable and accrued expenses 29 32 31 34 31 32 38 47 58 80 85

Total current liabilities 115 118 120 125 117 120 165 218 277 381 502

Long-term debt 38 39 47 55 64 71 79 91 107 124 165

Equity capital 44 44 45 47 47 50 50 50 54 74 124

Retained earnings (reserves) 126 133 142 151 173 185 220 246 267 301 345

Total liabilities and capital 323 334 354 378 401 426 514 605 705 880 1,136

Note: Years 1968 to 1970 are ending June 30. All other years are ending December 31

Industrial Projects Department

March- 1980

EGYPT - NSWC TEXTILE PROJECT

ASSET AND CAPITAL STRUCTURE OF THE PUBLIC SECTORTEXTILE ENTERPRISES (%)

Asset 1967/68 1968/69 1969/70 1971 1972 1973 1974 1975 1976 1977 1978

AssetsCurrent Assets 63 63 62 61 55 53 56 56 53 54 57Net Fixed Assets 33 31 31 31 35 37 34 35 39 40 39

Other Investments 4 6 7 8 10 10 10 9 8 6 4Total 100 100 100 100 100 100 100 100 100 100 100

LiabilitiesCurrent Liabilities 35 35 34 33 29 28 32 36 39 43 44

Long-term Debt 12 12 13 15 16 17 15 15 15 14 15

Equity 53 53 53 52 55 55 53 49 46 43 41 >

Total 100 100 100 100 100 100 100 100 100 Tl 100 Ui

Current Ratio 1.8 1.8 1.8 1.8 1.9 1.9 1.8 1.6 1.3 1.2 1.3

Debt/Equity Ratio 18:82 18:82 20:80 22:78 23:77 24:76 22:78 23:77 25:75 25:75 26:74

Note: Years 1969 to 1970 are ending June 30.All other years are ending December 31.

Industrial Projects DepartmentMarch 1980

- 56 -ANNEX 2-6

EGYPT - NSWC TEXTILE PROJECT

TEXTILE PROJECTS APPROVED UNDER LAW 43 OF 1974

Capital Source Legal Form(LE 1000)

Project Local Foreign Total

I: In Production

1. E & D Industrial CaliforniaOverseas of America - 665 665 Single

2. Lastex Societe 4 121 125 Partnership3. Tetreco for Ready-Made Cloth Co. 45 72 117 Single4. Reda Knitting Co. (ZAKMAN) 186 186 372 Partnership5. OMATRAD for Tricot Ready-Made

Suit 20 40 60 Joint Venture6. Happiness Co. for Commerce

and Industry 60 180 240 Partnership7. Berzi Knitting & Ready-Made

Factory 121 89 210 Partnership8. MIBA Co. for Industries & Trade 10 9 19 Partnership9. Knitting & Underwear Industries

"M. Gasy" 63 100 163 Partnership10. Polyester Fibers Production Co.

"Adel Aga" - 2,092 2,092 Joint StockTOTAL 509 3,554 4,063

II. Under Execution

1. DIEA Co. for Knitting & Fashion - - 48 Joint Venture2. United Acetate Co. - - 300 Joint Venture3. TADAMOUN Arab Co. - - 310 Partnership4. DELTA Industries "Ahmed Said & Co." - - 500 Partnership5. Lebanon Egyptian Co. for Factory

and Trade "Meltex" "ZakiHeadroj & Co." - - 65 Partnership

6. Middle East Carpet Co. - - 1,700 Joint Stock7. Misr-Iran Textile Co. - - 13,260 Joint Stock

TOTAL - - 16,183

GRAND TOTAL 509 3.554 20.246

III. Recent Approvals

1. Societe Projects Inter- 55 186 241 Partnershipnational

2. Ready-Made Garments Project 407 333 740 Joint Stock3. Misr-elamria for Polyester 49,000 21,000 70,000 Joint Stock4. Polyester and Ecleark Fibers

Project "Abd Elminam Suoudi"- - 1,750 1,750 Partnership5. Ecleark Fibers Production Co.

"M. El Ashram" 680 737 1,417 Partnership6. Parlon Fibers Production 116 348 464 Limited Liability7. Fine Textiles Factory 247 253 500 Limited Liability8. Ready-Made Cloth Co.

"Shouman" 58 48 106 Single9. Knitting and Ready-Made Cloth

Co. "A. Kashef" 194 492 686 Joint Venture10. Ready-Made Cloth Co.

"El Sockary" 44 28 72 Single11. MEDICCO Industries 120 360 480 Partnership12. Belgo Egyptian for Flax

Manufactured 245 255 500 Limited LiabilityTOTAL 51,166 25,790 76,956

Source: Ministry of Economy

Industrial Projects DepartmentMarch 1980

57 - ANNEX 3-1

EGYPT - NSWC TEXTILE PROJECTED

HISTORICAL AND PROJECTED TEXTILE DEMAND

A. Historical and Projected Consumption

Gross DomesticDomestic TextileProduct 1/ Consumption

(LE million) (million m2) 2/

YEAR

1970 3,665 6541971 3,846 6891972 4,077 7831973 4,238 7471974 4,326 7541975 4,779 8181976 5,268 8581977 5,654 8961978 6,120 9381979 (Estimate) 6,647 963

1980 (Forecast) 7,112 1,0061981 7,610 1,0451982 8,143 1,0851983 8,713 1,1271984 9,322 1,1711985 9,975 1,2161986 10,673 1,263

B. Least - Squares (Regression) Estimate of Consumption - GDP Elasticity

Equation I: C = aGbwhere C = Apparent domestic textile consumption in million m2 of

fabric equivalent.G - Gross Domestic Product at factor costs in 1975 prices

expressed in LE million.b = textile consumption - GDP elasticitya = a constant

Using the linear regression equation log C = log a + b log GThe least - squares estimate for b and log a are:

log a = 0.845461

or a 7.06

b = 0.56

The r2 (coefficient of determination or correlation) for theequation is 0.874 which is significant at the cf= 0.0001 level

Equation I with the above values of a and b are used to forecasttextile consumption from 1980 to 1986 assuming GDP grows by 7%per year as shown above.

1/ In constant 1975 prices. For 1980-86, GDP is assumed to grow at 7% per year.2/ In fabric equivalent. The forecast is based on the regression equation defined

in Section B above.Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

FORECAST OF TEXTILE DEMAND ANID SUPPLY SITUATION (1982-86)

Actual Estimate Forecast1976 1977 1978 1979 1982 1983 19B4 1985 1986

I. TFXTILE DEMAND

A. Fabric Demand (In million square meters)I. Domestic Demand 85B 896 938 963 1,085 1,127 1,171 1,216 1,2632. Export Demand 141 138 146 145 15B 163 168 173 178

Total Fabric Deinand 999 1,034 1,084 1,108 1,243 1,290 1,339 1,389 1,441

B. Yarn Demand (In thousand tons)

1. For Domestic Fabric Production a/ 178 188 193 198 213 233 248 255 2562. For Export b/ 40 30 34 41 51 52 53 54 55

Total Yarn Demand 18 218 227 -> 74 79R3 11 UM MTI

II. TEXTILE SLPPLY

A. Fabric Supply (In million square meters)

1. Public Sector - Woven Fabrics 574 613 622 640 696 696 696 696 6962. Private Sector (Excluding El Ameria) I

- Woven Fabrics 243 25] 276 276 280 280 280 280 280 tn3. Knitted Fabrics (Public & Private co

Sectors) 105 112 112 120 135 140 145 150 155 14. Woolenh/Worsted Fabrics c/ 32 32 29 32 35 35 35 35 355. Imporcs 45 26 45 40 - - - - -

Sub-Total 999 1,034 1,084 1,108 1,136 1,51 1,151 6 1,161 1,1666. El Anieria Proiect - - - - 135 225 270 270

Total Fabric Supply 999 1,034 1,084 1,108 1,136 1,286 1,381 1,431 1,436

B. Yarn Supply (In thousand tons)

1. Public Sector(a) Cotton 193 210 212 219 233 233 233 233 233(b) Synthetics & Woolen 21 21 19 22 23 23 23 23 23

2. MIRATEX Project - - - - 11 11 11 11 113. Imports 2 - - - - - - - -

Sub-Total 216 23' 231 241 267 267 267 267 2674. El m:eria Project - - - - - 20 34 40 40

Total Yarn Supply 216 23:. 231 241 267 287 301 307 307ITI. SURPLtUS (DEFICIT)

A. Fabric (In million square meters) - - - - (107) (4) 42 42 (5)B. Yarn (In thousand tons) (2) 13 4 2 3 2 - (2) (4)

a/ This is the yarn used for the local fabric production.hi Yarn exports for 1932-86 includes 6,000 tpy, from the Iranian-Egyptian joint venture (MIRATEX) project destined

for Iran as that country's share of the project's productior.c/ At an average of 350 kg/m

2.

Industrial Projects DepartmentMarch 1980

EGYPT - NS'C . ^ i

THE COTTON FABRIC DISTRIBUTION SYSTEM

Production Non-Rationed Cloth Rationed Cloth

17 public sector (74% of cloth produced) (26% of cloth produced)

and about 1500private enterprises.

10% 11% 56% 23% 55% ~~~~~~~~45%

Wholesale Private Wholesale _ Public Wholesale

2 public sector and Enterprises (distri- Enterprisebuting 8% of cloth (Distributing 31%

about 550 private produced) of cloth produced)enterprises

1007l \ j 100701 J

Retail P rivate Retail Enterprises Public Retail Enterprises

6 public sector (with (Distributing 47% of cloth (Distributing 53% of cloth400 branches) and pribuced) c pribuced)about 100,000 private produced)enterprises

Note: The percentage figures indicate the distribution route of cloth produced in 1977 (in m2).

X

Industrial Projects DepartmentMarch 1980

-60-

ANNEX 3-4

EGYPT - NSWC TEXTILE PROJECT

TEXTILE EXPORT IMRXETS(Quantity in thousand tons; value in million LE)

1972 1975 1978Q"untity Value Quantity Value Quantity Value

1. Eastern Europe

Tarn 26.8 29.8 25.1 55.1 20.6 58.6Fabrics 6.1 6.4 3.6 8.7 2.1 6.8Others 4.0 10.1 5.1 26.0 2.1 11.5Sub-Total 36.9 46.3 33.8 89.8 24.8 76.9S of Total (all Products) 54 67 68 83 45 55

2. Western Europe

Yarn 10.2 6.3 4.5 4.0 8.4 17.7Fabrics 3.7 2.2 1.9 1.8 4.3 9.2Others 0.1 0.1 0.1 0.2 0.6 1.9Sub-Total 14.0 8.6 6.5 6.0 13.3 28.82 of Total Call Products) 20 13 13 6 24 21

3. Arab Countries

Yarn 1.4 0.9 1.4 1.9 2.8 5,3Fabrics 5.9 5.7 5.1 7.7 6.6 15.0Others 0.6 0.4 0.8 1.0 1.4 3.7Sub-Total 7.9 7.0 7.3 10.6 10.8 24.0Z of Total (all Products) 12 10 15 10 20 17

4. USA and Canada

Yarn 1.9 1.1 0.3 0.2 1.3 1.6Fabrics 2.9 1.9 0.3 0.2 2.4 3.9Others - - - - 0.1 0.2Sub-Total 4.8 3.0 0.6 0.4 3.8 5.7% of Total (all Products) *7 4 1 - 7 4

S. Asia & Australia

Yarn 3.3 2.6 0.1 0.2 0.4 1.2Fabrics 0.1 0.1 - - - -Others -

Sub-Total 3.4 2.7 0.1 0.2 0.4 1.2Z of Total (all Products) 5 4 - - - 1

6. Africa and Others

Yarn 1.1 0.6 1.0 0.6 0.9 1.5Fabrics 0.3 0.3 0.1 0.1 0.1 0.2Others 0.1 0.2 0.3 0.4 1.1 0.3Sub-Total 1.5 1.1 1.4 1.1 2.1 2.02 of Total (all Products) 2 2 3 1 4 2

Total Each Product

Yarn 44.7 41.3 32.4 62.1 34.4 85.9Fabrics 19.0 16.6 11.0 18.5 15.5 35.1Others 4.8 10.8 6.3 27.5 5.3 17.6

Total all Products 68.5 68.7 49.7 108.1 55.2 138.6

at The values for 1972 and 1975 are based on the official foreign exchange rate of US$1.0 LETI.C39. For 1978; thevalues are based on the parallel exchange rate of US$1.00 - LE 0.69.

Industrial Projects DepartmentMarch 1980

- 61 -ANNEX 4-1

EGYPT - NSWC TEXTILE PROJECT

NSWC - HISTORICAL INCOME STATEMENT(In Million Le)

Actual Estimate1973 1974 1975 1976 1977 1978 1979

RevenueTextile Sales 12.32 17.83 17.23 15.65 17.87 14.10 10.42Treasury Tax (0.48) (0.41) (0.38) (0.35) - - -Other Revenue 1.92 1.67 1.22 1.95 2.89 11.01 9.10

Gross Revenue- 13.76 19.09 18.07 17.25 20.75 25.12 19.52

Production CostRaw Materials & 7.24 7.33 8.54 7.99 8.96 11.52 10.14SuppliesSalaries & Wages 3.25 3.65 4.57 5.41 6.46 7.65 8.02Other Direct Costs 0.33 0.34 0.38 0.28 0.41 0.28 0.28Excise Tax on Yarn 0.29 0.28 0.25 0.21 0.52 0.52 0.59

Sub-total (directtosts) 11.11 11.60 13.74 13.89 16.35 19.97 19.03

Sales & Administration 1.18 1.41 1.49 1.35 1.61 1.71 1.68Depreciation & Prov. (Net) 0.73 1.61 1.57 1.06 1.59 2.37 1.83Indirect Taxes 0.14 0.21 0.23 0.28 0.06 0.09 0.05Other Indirect Costs 1.39 1.95 0.16 0.40 0.18 0.21 0.19

Sub-total (indirectcosts) 3.44 5.18 3.45 3.09 3.44 4.38 3.76

Total Production Cost 14.55 16.78 17.19 16.98 19.79 24.35 22.79

Increase in InventoryValue 0.98 (0.25) 0.37 0.65 - - -

Cost of Goods Sold 13.57 17.03 16.82 16.33 19.79 24.35 22.79

Operating Profit 0.19 2.06 1.25 0.92 0.96 0.76 (3.27)

Interest Expense 0.76 0.88 0.82 0.91 0.96 1.21 1.98

Income Taxes - - - - 0.12 0.13 0.15

Net Income (Loss) (0.57) 1.18 0.43 0.01 (0.12) (0.58) (5.40)

Industrial Projects DepartmentMarch 1980

- 62 -

ANNEX 4-2

EGYPT - NSWC TEXTILE PROJECT

NSWC-RISTORICAL CASHEFLOW AND BALANCE SHEET

(LE Million)

Actual Estimate1973 1974 1975 1976 197F 1978 1979

Cashflow StatementSources of Funds

Net Profit (0.57) 1.18 0.43 0.01 (0.12) (0.58) (5.40)Interest on Long-Term Debt 0.33 0.40 0.38 0.35 0.32 0.22 0.22Depreciation 0.73 1.03 0.99 1.05 1.15 1.09 1.16Increase in Short-Term Debt 3.45 (2.38) 0.77 0.74 0.71 3.53 3.32Increase in Long-Term Debt 1.19 0.79 0.35 0.53 0.39 - -Decrease in Other Assets 0.71 1.49 0.67 0.95 0.27 - -Increase in Other CurrentLiabilities 0.49 0.53 1.12 0.08 1.74 0.19 5.07

Increase in Equity - - - - 2.38 3.49 0.65Long-term Provisions (Net) - 0.58 0.58 0.01 - - -

Total Services 6.33 3.62 5.29 3.72 6.84 7.96 5.03

Uses of FundsInterest in Long-term Debt 0.33 0.44 0.38 0.35 0.32 0.22 0.22Repayment of Long-term Debt 0.65 0.90 1.25 0.95 2.69 0.81 0.92Increase in Fixed Assets 3.46 1.49 1.24 1.51 0.65 (0.69) -Increase in Current Assets 1.89 0.82 2.42 0.91 3.18 7.62 3.89Profit Distribution - - - - - - -Others _ 0.01 - - - - -

Total Uses 6.33 3.62 5.29 3.72 6.84 7.96 5.03

Long-Term Debt Service CoverageRatio 0.5 2.0 1.1 1.2 0.5 0.7 (3:5)

Balance Sheet.as of Dec. 31Current AssetsCash & Accounts Receivables 2.97 3.07 4.25 5.57 6.45 9.27 9.24Finished & Goods in Process 3.83 3.61 4.03 4.69 5.32 10.26 12.19Raw Materials & Supplies 3.55 4.49 5.31 4.24 5.34 5.20 7.18

Total Current Assets 10.35 11.17 13.59 14.50 17.11 24.73 28.61

Gross Fixed Assets 14.94 17.09 18.30 19.68 21.94 21.36 21.36Less Accum. Depreciation 5.50 6.53 7.52 8.57 (9.72)(10.81) (11.96)

Net Fixed Assets 9.44 10.56 10.78 11.11 12.22 10.55 9.40

Assets Under Construction 1.45 0.79 0.82 0.95 0.42 0.32 0.32Other Assets 4.28 2.79 2.12 1.17 0.08 0.08 0.08

Total Assets 25.52 25.31 27.31 27.73 29.83 35.68 38.41

Current LiabilitiesAccounts Payable 4.71 5.25 6.37 6.45 7.90 8.09 13.17Short-Term Loans & Others 8.45 6.06 6.83 7.57 8.28 11.82 15.13

Total Current Liabil--ities 13.16 11.31 13.20 14.02 16.18 19.91 28.,0

Long Term Debt 9108 8.97 8.07 7.65 5.35 4.54 3.E2EquityShare Capital & Consolidat. 1.76 1.75 1.75 1.75 3.81 6.52 6.52Retained Earnings & Provi-sions 1.52 3.28 4.29 4.31 4.49 4.72 - (0.02)

Total Equity 3.28 5.03 6.04 6.06 8.30 11.23 6.49

Total Liabilities 25.52 25.31 27.31 27.73 29.83 33.68 38.41

Current Ratio 0.8 1.0 1.0 l.0 1.1 1.2 1.0Long-Term Debt/Equity RatJo 73t27 64:36 57:43 56:44 39:61 29:71 36:64

Industrial Projects Department

March 1980

EGYPT - NSWC TEXTILE PROJECT

NSWC - KARMOUZ SPINNING EQUIPMENT AND PRODUCTIVITY FORECAST

Case I Case IIWithout the Project With the Proiect

Number of Production per Total Yarn Sale Number of Production Total Yarn SaleSpindles Spindle a/! Output Yarn Spindles b/Per Spindle Output c/ Yarn(1,000) (kg/year) (1,000 tpy) (1,000) (1,000) (kg/year) (1,000 tpy) (1,000 tpy)

Year

1975 (Actual) 166.0 72 12.0 6.51976 164.0 62 10.2 5.01977 164.0 58 10.8 5.4

1978 150 54 8.1 2.81979 (Actual) 140 53 7.4 2.6

1980 (Forecast) 113.0 77 8.7 3.4 113.0 77 8.7 3.,41981 113.0 75 8.5 4.2 113.0 75 8.5 4.21982 113.0 72 8.1 4.1 113.0 72 8.1 4.31983 113.0 65 7.3 3.8 113.0 d/ _ 6.5 1.21984 72.0 58 4.2 0.8 40.3 50 2.0 0.01985 72.0 54 3.9 1.2 40.3 50 2.0 0.01986 72.0 54 3.9 1.2 40.3 50 2.0 0.01987 30.0 54 1.9 (0.9) 40.3 50 2.0 0.01988 30.0 64 1.9 (0.9) 0.0 -1989 30.0 64 1.9 (0.9) 0.0 -

1990 30.0 64 1.9 (0.9) 0.0 -

a/ The average annual rated capacity of the spindles is about 110 kg of yarn per spindle.b/ Approximately 47,424 spindles will be rehabilitated under the Project and transferred to the new spinning mill at

Maharrem Bey.c/ From 1984 to 1987, the -production in Karmouz will come from mill No.3 which is a medium count yarn mill (NE 30 to

NE 45). However, NSWC will actually need coarse count yarn (NE 10 to NE 24). It is assumed that NSWC willexchange this medium count yarn for coarse count yarn and the production cost estimate for mill No.3 is basedon the production of coarse, rather than medium count yarn. Mill No.3 is expected to be scrapped after 1987and NSWC will either purchase 2,000 tpy of coarse count yarn or build another spinning mill at Maharrem Bey.

d/ 47,424 spindles will operate for nine months and then transferred to the new mill at Maharrem Bey.

Industrial Projects DepartmentMareh 1980

EGYPT - NSW'C TEXTILE PROJECT

NSWC M-NIARREM BE'Y (EXSTING WEAVING MILLS) EQUT_i'MENT A PRODUCTIVITY FORECAST

Case I Case II_W_iuthou.t the Prwelect a/ -g-thPrec

'Numbe- Production Fabric c/ Commission Total NuTaber Production Fabri[c c/ otemlo sioo tOi alYear o rLooms Per Loomih b/ Production Woven Fabric of Looms Per Loom d/ Productso,s Wv .- ic

1 ,000 LuTiyY ------------- million LfP}Y (-----110a -

1975 (Actual) 2070 13.3 27.5 9.2 36.71976 1700 16.0 27.2 5.3 32.51977 1700 15.4 26.8 5.6 32.41978 1700 15.5 26.4 2.7 29.11979 (Actual) 1700 18 3. 22.6 4.4 27.0

1980 (Forecast) 1700 17.0 28.9 6.0 34.9. 1700 17.0 28.9 6.0 34.91981 1120 18.6 20.8 6.0 26.8 1120 18.6 20.8 6.0 26.8 >

1982 1120 17.6 19.7 6.0 25.7 1120 17.6 19.7 6.0 25.71983 870 19.0 16.6 6.0 22.6 870 19.0 16,6 6.0 22.61984 870 18.0 15.7 6.0 21.7 572 13.6 6.3 7.8 l/,.l1985 570 20.0 11.4 6.0 17.4 572 23.4 1.7 7.8 19,51986 570 20.0 11.4 6.0 17.4 572 27.4 15.1 7,8 22,91987 570 20.0 11.4 6.0 17.4 572 27.4 15'1 7.8 22,91988 500 21.0 10.5 6.0 16.5 572 27.4 15.1 7.8 22.91989 500 19.4 9.7 6.0 15.5 572 27.4 15.1 7.8 22,91990 300 23.0 6.9 6.0 12.9 572 27.4 15.1 7.8 22.9

a/ Excluding terry (jacquard) looms which number as follows: 1976 -- 92; 1977 -- 108;1978 onwards -- 118. Terry production is about 400 tpy from 1980 onwards.

b/ The average annual rated-loom capacity is about 30,000 m/loom.c/ Including 2% to 4% of filament fabricsd/ Excluding 86 rehabilitated jacquard looms from 1984 onwards with a production of 1.3 million LMPY (999 tpy) of terry.

Industrial Projects DepartmentMarch 1980

65 - ANNEX 4-5

EGYPT - NSWC TEXTILE PROJECT

PRODUCTION SCHEDULE - WITHOUT THE PROJECT(In thousand tons unless otherwise indicated)

Actual Projected1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Z CAPACITY UTILIZATION - - - - - -

A. RAW MATERIAL

1. COTTONMEDIUM/LONG-STAPLE COTTON 3.1 2,4 4.2 4.1 3.9 3.5 2.1 1.9 1.9 1.0SHORT STAPLE COTTON 8.0 8.0 7.5 7.4 7.0 6.3 3.6 3.3 3.3 1.6

TOTAL COTTON 11.1 10.4 11,7 11.5 10.9 9.8 5.7 5.2 5.2 2.6

2.POLYESTER - - - - - - - - - -

B. SPINNING OUTPUT

1. WEAVING YARN-OLD MILL-100% COTTON 8.0 7.3 8.6 8.4 8.0 7.2 4.1 3.8 3.8 1.82. WEAVING YARN-NEW MILL-lOO1 COTTON - - - - - - - - - -3. POLYESTER/COTTON WEAV.YARN - - - - - - - - - -4. SEWING THREAD-IOOX COTTON 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 O.1

TOTAL 8.1 7.4 8.7 8.5 8.1 7.3 4.2 3.9 3.9 1.9

OF WHICH.(A) FOR SALE YARN I THREAD 2.9 1.5 3.4 4.4 4,1 3.7 0.7 1.1 1.1 (0.9)(B) FOR WEAVING I TERRY MILLS 5.2 5.9 5.2 4.0 3,9 3.5 3.4 2.7 2.7 2.7(C) KNITTED I NON-WOVEN GOODS 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

4. WASTE COTTON 3.0 3.0 3.0 3.0 2.8 2.5 1.5 1.3 1.3 0.7

C. WEAVING I TERRY MILLS

1. FROM EXISTING MILLS-1OOX COTTON 26.4 22.0 28.9 20.8 19.7 16.6 15.7 11.4 11.4 11.42. FROM REHABILITATED HILLS-PE/COTTON - - - - - - - - - -3. FROM COMMISSION WEAVING 2.7 4.4 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.04. FROM NEW NILLS - - - - - - - - - -

TOTAL FABRIC (MIL LM) 29.1 26.4 34.9 26.8 25.7 22.6 21.7 17.4 17.4 17.4

TOTAL FABRIC WEIGHT 4.3 5.1 4.5 3.4 3.3 2.9 2.8 2.2 2.2 2.2

A. TERRY CLOTH-IN MILLION LM 1.1 0.8 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1B. TERRY CLOTH -IN TONS 0.4 0.3 0.4 0.4 0.4 0,4 0.4 0.4 0.4 0.45. WEAVING WASTE 0.4 0.4 0.3 0.2 0,2 0.2 0.2 0.1 0.1 0.1

D. CONVERTING PLANT

1I FABRIC FOR SALE GOODS 33.9 26.3 33.2 25.5 24.4 21.5 20.6 16.5 16.5 16.52. COMMISSION FINISHING 12.2 14.6 10.7 18.4 19.5 20.0 20.0 20.0 20.0 20.0

TOTAL FABRIC (NIL LM) 46.1 40.9 43.9 43.9 43.9 41.5 40.6 36.5 36.5 36.5

SALE GOODS WEIGHT 4.1 4.8 4.3 3.2 3.1 2.8 2.7 2.1 2.1 2.1

3. DYED YARN (FOR TERRY) 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.44. CONVERTING UASTE (SALE GOODS) 0.1 0.1 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1

E. KNITTED A NON-WOVEN GOODS 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

F. MADE-UP GOODS1. GARMENTS 0.8 0.4 0.5 0.5 0.5 O., 0.5 0.5 0.5 0.52. BED SHEETS - - - - - - - - - -3. COMMISSION WORK 0.7 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

TOTAL GARMENTS (NIL PIECES) 1.5 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

FABRIC USED FOR SALE GOODS 1.3 0.6 0.8 0.8 0.8 0.8 0.8 0,8 0.8 0.8FABRIC WEIGHT 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED:03/07/80

- 66 -

ANNEX 4-6Page 1 of 2

EGYPT - NSWC TEXTILE PROJECTINCONE AND FUNDS FLOW STATEMENTS - WITHOUT THE PROJECT

(IN MILLION CURRENT LE)

---ACT UAL--- -PROJECTED---1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

x CAPACITY UTILIZATION - - - - - - - - -

INFLATION FACTOR (1979=1,00) 1.00 1.00 1.05 1.16 1.25 1.35 1.49 1.71 1.94 2.19

REVENUE

YARN SALES 1.33 2.94 9.77 13.51 12.53 12.11 2.24 4.27 4.85 (5,46)NON-RATIONED FABRIC SALES 4,68 3.60 9,08 7.60 7.88 7.43 7.87 7.14 8,12 9.14RATIONED FABRIC SALES 1.82 1.41 3,34 2.80 2.90 2.73 2,89 2,63 2.98 3,36TERRY - - 1.25 1.38 1.49 1.60 1.78 2.04 2.31 2.61GARMENT - - 0.86 0.94 1.02 1,10 1.22 1.39 1.58 1.78BED SHEETS - - - - - - - - - -THREAD - - 0,32 0.35 0.38 0.41 0,45 0.52 0.59 0.66OTHER TEXTILE PRODUCTS 1.35 1.05 - - - - - - - -COMMISSION FINISH, 2.00 1.55 1.35 2.55 2.93 3.23 3.58 4.10 4.66 5.24OTHER INCONE 9,00 7.02 0.47 0.52 0.56 0,61 0.67 0.77 0.87 0.98

TOTAL REVENUE 20.18 17.57 26,44 29,65 29.69 29.22 20,70 22.86 25.96 18.31

PRODUCTION COST

COTTON (NET OF UASTE SOLD) 7.82 7.82 10.17 10,95 11.28 10.91 7.00 7.36 8.37 4.67POLYESTER - - - - - - - - - -

OTHER NATERIALS I SUPPLIES 3.70 2.32 2.08 2.14 2.26 2,21 1.91 1.94 2.20 2.01SALARIES I WAGES 7,65 8.02 9.45 10.37 11.25 12.09 13.39 15.33 17.42 19.62OTHER DIRECT COSTS 0,28 0,28 0.91 0.98 1.06 1.12 1.23 1.38 1.58 1.75EXCISE I TREASURY TAXES 0,52 0.59 0.61 0.57 0.58 0.56 0.50 0.48 0.55 0.52

TOTAL DIRECT COSTS 19.97 19,03 23.22 25.01 26.43 26,89 24.03 26.49 30.12 28,57

SALES I ADNINISTRATION 1.71 1.68 1.77 1.94 2.11 2.26 2.50 2.87 3.26 3.67DEPRECIATION I PROVISIONS 1.09 1.16 1.07 1.31 1.31 1.31 1.31 1.31 1.31 1.31ANORTIZATION - - - - - - - - -INDIRECT COST 1.49 0,97 1.00 1.10 1.19 1.28 1.42 1.62 1.84 2.08INDIRECT TAXES 0.09 0.05 0,17 0.17 0.18 0,18 0,15 0.16 0.18 0.16SURPLUS LABOR - - - - - - - - - -

TOTAL INDIRECT COSTS 4.38 3.86 4.01 4.52 4.79 5.03 5.38 5.96 6.59 7.22TOTAL PRODUCTION COST 24.35 22.89 27,23 29,53 31,22 31.92 29.41 32.45 36.71 35.79LESS INCR. IN FIN.GOODS INV. 4.94 1.93 (1,09) (1.10) - - - - - -COST OF GOODS SOLD 19.41 20.96 28.32 30.63 31422 31.92 29.41 32.45 36471 35.79OPERATING PROFIT 0.77 (3.39) (1.88) (0.98) (1.53) (2.70) (8.71) (9.59) (10.75) (17.48)INTEREST ON SHORT-TERM LOANS 1.13 1.76 1.78 2,84 3.32 3.89 4.75 5.86 7.69 9.91INTEREST ON LONG-TERM LOANS 0.22 0.22 0.25 0.21 0.58 0.71 0.55 0.10 - -INCOME TAXES - - - - - - - - - -

NET PROFIT (LOSS) (0.58) (5.37) (3,91) (4.03) (5.43) (7.30) (14.01) (15.55) (18.44) (27.39)===== ~ ~~ -- ----- ------ ------ ------ ------== = == = == = = = =

- 67 -

ANNEX 4-6Page 2 of 2

EGYPT - NSWC TEXTILE PROJECTINCOME AND FUNDS FLOU STATEMENTS - WITHOUT THE PROJECT

(IN MILLION CURRENT LE)

--- ACT UALt--- -PROJECTED---1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

CASH FLOW STATEMENTS

SOURCES OF FUNDSNET PROFIT (0.58) (5.37) (3,91) (4.03) (5.43) (7.30) (14.01) (15.55) (18.44) (27,39)INTEREST ON LONG-TERM DEBT 0.22 0.22 0,25 0.21 0.58 0,71 0.55 0.10 - -DEPRECIATION 1.09 1.16 1,07 1.31 1.31 1.31 1.31 1.31 1.31 1.31AMORTIZATION - - - - - - - - - -INCREASE IN SHORT-TERM DEBT 11.80 15.13 24.13 28.25 33.12 40,39 49.91 65441 84.38 105.98INCREASE IN LONG-TERM DEBT:

OTHER LONG-TERM DEBT - - - 4,10 - - - - - -IBRD LOAN - - - - - - - - - -

INCREASE IN SHARE CAPITAL 3.49 0.65 - - - - - - - -

INCREASE IN ACCOUNTS PAYABLE 0.19 5.07 (7.72) 0.46 0.33 0.14 (0,50) 0.61 0.85 (0.18)LONG-TERN PROVISIONS (NET) - - - - - - - - - -

TOTAL SOURCES 16.21 16.86 13i82 30.30 29.91 35.25 37.26 51.88 68.10 79.72

USES OF FUNDSINTEREST ON LONG-TERM DEBT 0.22 0.22 0,25 0.21 0.58 0.71 0.55 0.10 - -REPAYMENT OF SHORT TERN DEBT 8.30 11.80 15.13 24.13 28,25 33.12 40.39 49,91 65.41 84.38REPAYMENT OF LONG-TERN DEBT 0.81 0.91 0.81 0.81 0,81 1.83 1.41 1.02 1.03 -REPLACEMENTS - - - 4.80 - - - - - -INCREASE IN FIXED ASSETS (0,69) - - - - - - - - -

INCREASE IN CURRENT ASSETS 2.68 1.79 (2,37) 0.35 0,27 (0.41) (5.09) 0,85 1.66 (4.66)PROFIT DISTRIBUTION - - - - - - - -INCREASE IN OTHER ASSETS 4.89 2.14 - - - - - - - -

TOTAL USES 16.21 16.86 13.82 sO.30 29.91 35.25 37.26 51.88 68.10 79.72

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED:03/07/80

- 68 -

ANNEX 4-7

EGI8T - NSE TEXTILE PROJECTBALANCE SHEET - WITHOUT THE PROJECT

(IN )ILLION CURRENT LE)

---ACT UAL ---1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

CURtENT iASEE7SCASH S 1 AE REC£ 9,27 9.24 7,79 8.74 8.74 8.58 6.01 6.63 7.53 5.20FIN. GrODS & IN PRCOMI V 026 12.19 11.10 10.00 10,00 10.00 10,00 10.00 10.00 10.00RAU MA9T ' SUPPLIES 5..20 7. 5 7.35 7,85 8.12 7.87 5.35 5.58 6.34 4.01

TOTAL 2IR, hS8ET8 24,73 28.6l 26,24 26.59 26.86 26.45 21,36 22.21 23.87 19,21

CROSS FiXED ASSETS 21,36 21o36 2i.68 26,48 26,48 26.48 26,48 26.48 26.48 26,48DEPRECIATION 10i81 11.96 13,03 14.34 15,65 16,96 18,27 19,58 20.89 22.20ANORTIZATION

-'a TAT - --- ----- ----- ---- ------ ------ ------ --- - --

)1E1T 7EIXL)p Z?TS 1MM5 9,40 8065 12,14 10.83 9.52 8.21 6.90 5.59 4,28

ASST, UN0DER MRTRUCTION 0,32 0.32 - - - - - - -

THER ASSETS 0.08 0.08 0,08 0.08 0.08 0.08 0,08 0,08 0.08 0,08

TOTAL A8ETS 35t68 3MM41 34.97 38,81 37,77 36.05 29,65 29,19 29.54 23,57

CURRENT LIABILITIESAOCO UNTS PAYABLr 8,09 13.17 5t45 5,91 6.24 6.38 5,88 6,49 7.34 7,16%M'D TE1RY LCNS 1180 15.13 24,13 28.25 33,12 40.39 49.91 65M41 84,38 105.98CURRENT P8CRTION L/T BErT '9M 0,81 01 08l 1.83 1.41 1.02 1.03- - -

TOTAL CURREIiT LIABiLITIES 20e82 29.11 30,39 34t97 41.19 48.18 56,81 72,93 91,72 113.14

LON8-TERA D8BT 3.62 2.81 2.00 5.29 3,46 2.05 103 - - -

EGUITYSHARE CAITA'L 6.52 6.51 6.51 6,51 6.51 6.51 6951 6.51 6.51 6,51RETAINED EARNINbS 4,72 (0.02) (3M93) (7.96) (13,39) (20.69) (34.70) (50,25) (68,69) (96,08)

TGTh EO)ITI 11.24 6,49 258 (1,45) (6.88) (14.18) (28,19) (43.74) (62.18) (89,57)

TOTAL LIABILITIES 35,68 38M41 34.97 38,81 37i77 36.05 29,t5 29.19 29.54 23.57

R A T I C, 8

CURRENT RATI. 119 0..98 0.86 0,76 0.65 0. 55 0,38 0.30 0.26 0.17DEST/EGUITY RATIO 0.32 0.43 0,78 M3,65) (0.50) (0,14) (0.04) - - -

INDUSTRIAL PROJECTS DEPARTHENTREPORT PREAR EM03[07/80

69

ANNEX 4-8Page 1 of 2

EGYPT: NSWC TEXTILE PROJECT

NSWC - ASSUMPTIONS FOR FINANCIAL FORECAST WITHOUT THE PROJECT

A. Product Mix and Cotton Requirements

1. It is assumed that rationed fabrics will constitute 35% of fabricoutput. There will be no sales of grey fabrics (all will be converted). Long-staple cotton will continue to be 23% of total cotton requirements, the balancewill be either short-staple and/or medium-staple cotton. The total cottonconsumption is shown in Annex 4-5. The yarn available for sale will be soldas follows: 65% locally and 35% for exports.

B. Sales Prices

2. The selling prices (in constant end of 1979 LE), including the exciseand treasury taxes are those prevailing at the end of 1979 as follows:

LE/Unit LE/UnitDomestic Export Percent Weighted

Item Unit Price Price Exports Average Price

Yarn tons 1,150 3,226 35 1,877Thread tons 3,022 - 0 3,022Non-Rationed Fabric M 0.41 - 0 0.41Rationed Fabric M 0.28 - 0 0.28Terry Fabric tons 2,883 3,062 55 2,981Garments piece 1.63 - 0 1.63Non-Woven Goods ton 2,238 - 0 2,238Knitted Goods ton 4,250 - 0 4,250Commission Converting M 0.12 - 0 0.12Waste Cotton tons 274 663 55 488Commission Garments piece 0.50 - 0 0.50

C. Rehabilitation Requirement and Financing

3. The existing plant will be rehabilitated (but not expanded) in 1981 forLE 4.8 million equivalent to maintain production at about 40 million LMPY. Thedepreciation charges (straight line, 12 years) will therefore increase by LE 0.4million/year starting 1982. The investment will be financed by a long-term loanfrom the Government of LE 4.8 million at10% annual interest rate to be repaidover 5 years starting 1983.

D. Production Cost Structure (in end of 1979 constant LE)./

4. (a) Cotton Prices: LE 933/ton for short and medium-staple cotton andLE 967/ton for long-staple cotton (the prices prevailing at theend (of 1979).

1/ These costs are those prevailing at the end of 1979.

- 70 -

ANNEX 4-8Page 2 of 2

(b) Other Raw Materials & Supplies:

(i) LE 108/ton of spinning output (yarn & thread).(ii) LE 0.012/meter woven by NSWC, including terry.

(iii) LE o.01i/meter converted, including commission converting.

(c) Other Direct Costs:

(i) LE 2.39/ton of spinning out(ii) LE o.00]l/meter woven by NSWC

(iii) LE 0.05/meter for commission weaving by private sector weaversfor NSWC.

(iv) LE 0.004/meter converted.

(d) Other Production Costs:

(i) Salaries & Wages - LE 8.98 million/year. -(ii) Other Direct Costs - LE 0.4 million/year(iv) Other Indirect Costs - LE 0.95 million/year.

(e) Debt Service Payments - For long-term debt, as shown in Table I.For short-term debt, interest is 9.0% annually on the balance out-standing at the start of the year.

(f) Excise & Treasury Taxes (calculated on the basis of yarn and fabricproduction) - The excise tax is LE 23/ton of yarn the treasurytax is about LE 10.5 per thousand meters of woven fabric.

(g) Indirect Taxes: 8% of the cost of other raw materials andsupplies.

E. Balance Sheet Items.

5. The following assumptions are used:

(a) Cash & Accounts Receivable - 30% of textile sales.

(b) Finished Goods & In-Process Inventory - LE 10.0 millioa in currentterms from 1981 onwards.

(c) Raw Materials & Supplies - 60% of the annual cost for these items.

(d) Accounts Payable & Others - 20% of the total production cost.

F. Profit Distribution.

6. All the mandatory profit distribution are assumed to be paid out.

1/ It is assumed that any reduction in the labor force will be used to increasethe wage rates of the skilled workers, thereby keeping the total wage billmore or less constant in real terms.

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

NATIONAL SPINNING AND WEAVING COMPANY

INTEREST AND REPAYMENT St;HEDULE FOR EXISTING LONG-TERM LOANS

(In Thousand LE and the official Exchange Rate as 6f December 11, 1976)

Annual Balance 1978 1979 1980 1981

Interest as of 1977 Interest Repayment Interest Repayment Interest Repayment interest Repayment

Rate, Dec. 31, 1976 Interest Repayment

A. Foreign loans 18.7 121.9 15.6 121.9 12.6 121.9 9.5 121.9

1. East Germany (a) 2.5 868.7 21.7. 121.9 7.6 38.0 6.6 38.0 5.7 38.0 4.7 38.0

(b) 2.5 341.6 8.5 38.0 9.4 34.4 8.6 34.4 7.7 34.3 6.9 34.3

(c) 2.5 411.9 10.3 34.4 7.8 91.8 5.5 91.8 3.2 91.8 0.9 37.6

2. Czechoslovakia Z.) 4Gu4.6 lu3.l 91 29.1 161.7 24.2 161.7 19.4 161.6 14.5 161.6

3. India (a) 3.0 1131.5 33.9 161.7 0.2 - 0.2 0.2 - 0.2

(b) 3.0 7.6 0.2 -

(c) 5.0 5.2 0.3 5.235 26. 1.7 26.8 - - - -

4. Japan 6.5 80.5 5.2 26.9

5. Federal 'Rep. of _45_80__ 2-

Germany 8.0 84.1 6.7 28.0 80.8 502.6 64.6 502.7 48.8 447.6 36.7 393.4

Sub-Total 3335.9 96.9 507.9

3. Local Loans 92.9 - 92.9 _ 92.9 - 92.9 -

1. Ministry of Finance (a) 4.5 2064.5 92.9 _ 8.0 40.0 6.0 40.0 4.0 40.0 2.0 40.0

(b) 5.0 200.0 10.0 40.0 56.8 216.4 43.8 229.4 30.0 243.2 15.5 257.7

2. Industrial Bank 6.0 1150.9 69.1 204.2 11.8 197.3 - - -

3. Alexandria Bank 6.0 397.3 23. 200.0 74.6 _ 74.6 _ 74.6 90.9 61.0 90-9

4. Arab Bank 15.0 497.6 74.6 _ 244.1 453.7 217.3 269.4 201.5 374.1 171.4 388.6

Sub-Total 4310.3 270.4 444.2324.9 956.3 281.9 772.1 250.3 821.7 208.1 782.0

Total Debt Service 7646.2 367.3 952.1 5737,8 4965.7 4144.0 3362.0

C. End of Year Loan Balance 7646.2 6694.1 A ;

Sa..

to'a.

IAZLE IAnnex 4-8Page 2

EGYPT - NSIWC TEXTIL.E PROJECT

NATIONAL SPINNINC AND WEAVINC Ct,!PYANY

INTEREST AJND REPAYtENT SCIIEDIWLE FOlt EX1!:;C LONG-TERM LOANS

(In Thousand LE and the official Exchange Ratea ar of December 31. 1976

1952 1955 ~~~~~~1984 1985 1986 1987 1988 1989 C. d

Jaterear BSZaX-_nt Intert Rep-y.nt Lnt Ircest Rcpanenat I.nter-ot nt ,cnarr,nt

A. Foreign Loans

1. East Germany (a) 6.5 121.9 3.4 121.9 0.4 15.4 -

(b) 3.8 38.0 2.8 37.9 1.9 37.9 0.9 37.9 _ _ _

(c) 5.1 34.3 5.1 34.3 4.3 34.3 3.3 34.3 2.6 34.3 1.7 34.3 0.9 34.3 -

2. Czechoslovakia

3. India (a) S.7 161.6 4.8 161.6 - - - _ _ _ _ _ _ _

(b) 0.2 - 0.2 7.6 - - - -_ , , _

(c) - _ _ _ _

4. Japanr

5. Federal Rep. of Germany - -_ - - - -

Sub-Total 25.3 355.8 16.3 363.3 6.6 87.8 4.2 72.2 2.6 34.3 1.7 34.3 0.9 34.3 - -

B. Local Loans

1. Ministry of Finance (a) 92.9 - 92.9 - 92.9 _ 92.9 _ 92.9 _ 92.9 - 92.9 92.9 _

(b) - - - - _ _

2. Industrial Bank

3. Alexandria Bank

4. Arab Bank 47.4 90.9 33.7 90.69 20.1 90.9 6.5 43.1 -

Sub-Total 140.3 90.9 126.6 90.9 113.0 90.9 99.4 43.1 92.9 - 92.9 92.9 - *

Total Debt Service 165.6 446.7 142.9 454.2 119.6 175.2 103.6 115.3 95.5 34.3 94.6 34.3 93.8 34.3 92.9

C. End of Year Loan Balance 2915.3 2461.1 2285.9 2170.6 2136.3 2102.0 2067.7 2067.7

co

Industrial Projects DepartmentMarch 1980

EGYPT: NSWC TEXTILE PROJECT.ORGANIZATION STRUCTURE - NATIONAL SPINNING AND WEAVING COMPANY

GENERALSHARIEHOLDERS

ASSEMBLYCHAIRMAN

MINISTER OF INDLfSTRYS

.2BARC OF; DIRECTORSMA4-MANAGMEMENT BOARD

4-LABOR V CHAIRMAN1_PRIVAtE AND PRESIDENT

SHAREHOLDER

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~W* -a -~ 21484M

G-NERAL PRODUCTION t flNANCIAL ADMINISTRATIDN

GINVALAT GENrERAL E MNAER MAhN.GER

'48 Woi Ban - 2148

Indus:rsal ProXecss Deparlmel ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~4

EGYPT - NSWC TEXTILE PROJECT

PRODUCT -lily, NbMBE-R O-F P__IINlES ANDl LOOMS1 WIITH THE PROJECT;1

FINIShED)

1'RODCCTION Fabric (Wovean).Welght Ievn 11&Sobrof looms Yarn Req.uirement !Ea-ST g - 11-11 Egoioote a/

fYODUCIO He/ii Mill No. 1 Eff. Number of Loous Yar. Count (NE) ty N _ew Spindles Rehab Spindles

I Print A 65/35 Et/Cot. 468.3 151.84 No.4 80 100 20 522.55 ) 2,856 ) 12,240 (Toyoda)

2 Yrint B 65135 PElCot. 950.9 126,53 New Mill 85 258 30 1,061.07

744.5 85.29 New Mill 85 256 45 830.81 - 15,120 (Reiter)

3 Batiste C 65/35 PE/COt.

4 Batiste D 65J35 PE/Cot. 365.3 84,89 New Mill 85 134 50 385.37 7,680

5 HSousehold Atticles E 50/50 FE/Cot. 426.8 191,04 No.4 75 100 24 476.14 j 6,720

6 SlNeeting F 50150 Y2/Cot. 440.1 137.35 No.4 75 100 24 494.27

7 Sheeting G 50/50 PE/Cot. 392.4 121,42 New Hill 85 72 30 441.26 ) 4,320

8 Sheeting N S0150 FE/Cot. 167.7 106,48 New Mill 85 36 30 187.13 )

9 Sheeting 1 50/50 PE/Cot. 55.0 105.06 New Mill 85 12 36 61.93 3,360 _

Sub-total: 3,991.0 207.95 1,068 4,463.53 24,936 27,360

10 Rationed Fabrics OO. Cottoa 1,305.4 207.95 No.1 75 272 16 1,620.49 - 8,928 (Polia' S Reiter)

11 Terry Towels 100)b Cotton 364.15 No,l 65 86 10 b 20/2 998.96 -

2,482.8 358

8,928

Sub-totalt

C/26 2,__23 24,936 28§

GRAND 70TAL 40/3 500 - 11,136 (Polish)

500 tn

12 Sewing Thread

mill No.3 at armlouc.The production efficiency is 90% for all polyester/cotton yarn spinning and 807 for the 100% cotton yarn

and sewing thread.b/ About 93% is count NE 10 and 7% is count NE 2012. All this yarn is to be provided from spinning mill No.3

at Kariouz which will have 40,352 spindles.

CI Excluding 500 tpy of sewing thread to be produced at tha mew spPining sill.

Note: (a) 2.5% shrinkage is assumed for all PE/Cotton Fabrics from grey to finished state.

(b) 2.0% elongation is assumed for rationed fabrics from grey to finished state.

(c) Terry towels are loorn-state finished.

EGYPT - .jS;b A . .

PRODUCT MIX, NUMBER OF SPINDLES AND LOOIIS WITH THE PROJECT

PROCESS INGTYPE OF CLm CONSTUCTION_ STYLE WEAVING PROWUCTION a/ FINISHED PRODCTION

bWarK2 mm X Weft Nm X Cloth Width in/yr m 2/yr Im/yr in2/yrEndsc _ X _Picks/cm (Finished Width) (in _QO (in 000) (in 000) (in 000)

I Print A 65/35 PE/Cot. 33.8 X 33.8 X 128 (120) Plain Print 2,636 3,374 2,570 3,08423.6 X 23.6

2 Print B 65135 PE/Cot. 50.7 X 50.7 X 128 (120) Plain Print 6,423 8,221 6,262 7,51529.5 x 29.5

(Print/Strip3 Batiste C 65/35 PE/Cot. 76.1 X 76.1 X 128 (120) Plain (Piece Dye 7,461 9,550 7,274 8,729

34.6 X 25.2(Print/Strip

b4 Batiste D 65/35 PE/Cot. 84.5 X 84.5 X 128 (120) Plain (Piece Dye 3,477 4,451 3,390 4,06837.8 X 28.3

5 Lousehold Articles E 50/50 PE/Cot. 40.6 X 40.6 X 128 (120) Satin Print 1,909 2,444 1,861 2,23443.3 X 28.3

6 Sheeting F 50/50 PE/Cot. 40.6 X 40.6 X 162 (150) Plain Bleach 2,191 3,549 2,136 3,20426.8 X 24.4

7 Sheeting G 50/50 PE/Cot. 50.7 X 50.7 X 258 (240) Plain B1./Dye/Pr. 1,381 3,563 1,346 3,232 >29.9 Xt 26.8

8 Sheeting H 50/50 PE/Cot. 60.8 X 60.8 X 258 (240) Plain B1./Dye/Pr. 673 1,736 656 1,57531.8 It 27.5

9 Sheeting 1 50/50 PE/Cot. 60 .8 X 60.8 X 301 (280) Plain Print 192 578 187 52431.8 It 27.5

!/ 4/ a/ a/Sub-total: 26,343 37,466 25,682 34,165

10 Rationed Fabrics 100% Cotton 27.0 X 16.9 X 91 (85) Twill Yarn Dye 8,349 7,598 8,516 7,23922 X 19

11 Terry Towels 100% Cotton 33.8/2 X 27.0 X 216 (4X50) Terry Yarn Dye 1,342 2j64 1.3J2 2.6422 X 28

Sub-total: 9,691 10,282 9,858 9,923

GRAND TOTAL 36 034 47748 35,540 0

12 Sewing Thread Nm 67.6/3 (Ne 40/3)

A' Excl-d-ng`c-nmission we.aving of rationed fabric, at about 8.13 million imPy (7.4 million lmpy of finishedProduct-on) without average width of 0.90 meters. This vill require 100py (f moarso rn of sini;h mill N0:3 at Earomous. 'iwilrqie100tYocoreanfompnt,

Note: (a) 2.5% shrinJ;age is assumed for all PE/Cotton Fabrics from grey to finished state. '5(b) 2.0% elongation Is assumed for rationed fabrics from grey to finished state. L(c) Terry towels are loom-state finished.

Industril,j Projects DepartmentMarch 1980

- 76 -ANNEX 5-2

EGYPT - NSWC TEXTILE PROJECT

PRODUCTION PROGRAM AND EFFICIENCY OF MILLS WITH THE PROJECT

Number % Annual ProductionI. Yarn Production By Type of Spindles Efficiency (tpy)

A. New Spinning Mill1. 65/35 PE/Cotton 37,896 a/ 90 2,8002. 50/50 PE/Cotton 14,400 b/ 90 1,6633. 100% Cotton 8,928 c/ 80 1,6204. Sewing Thread - 100% Cotton 11,136 c/ 80 500

Sub-Total 72,360 87 6,583

B. Mill No. 3 at Karmouz1. 100% Cotton 40,352 55 1,999

Total Spinning 112,712 80 8,582

II. Woven Fabrics By Type Number X Annual Productionof Looms Efficiency - Thousand----

lmpy smpyA. New Weaving Mill

1. 65/35 PE/Cotton Print 258 85 6,423 8,2212. 65/35 PE/Cotton Batiste 390 85 10,938 14,0013. 50/50 PE/Cotton Sheeting 120 85 2,246 5,877

Sub-Total d/ 768 85 19,607 28,099

B. Rehabilitated Weaving Mill No. 41. 65/35 PE/Cotton Print 100 80 2,636 3,3742. 50/50 PE/Cotton Sheeting 100 75 2,191 3,5493. 50/50 PE/Cotton Household

Articles 100 75 1,909 2,444Sub-Total e/ 300 77 6,736 9,367

C. Rehabilitated Weaving Mill No. 1 f/1. 100% Cotton-Rationed Fabrics g/ 272 75 8,349 7,5982. 100% Cotton Terry Towels 86 65 1,342 2,684

Sub-Total h/ 358 74 9,691 10,282Total Weaving 1,426 80 36,034 47,748

III. Finished (Converting) Production1. PE/Cotton Fabrics 25,682 34,1652. Rationed Fabrics (including commission woven) 15,916 13,9053. Terry Towels 1,342 2,6844. Commission Finishing 12,060 12,060

Total Finished Production 55,000 62,814

a/ 10,536 are new spindles and 27,360 are rehabilitated.b/ All new spindles.c/ Rehabilitated spindles.d/ Equivalent to 2,967 tpy of PE/cotton yarn.e/ Equivalent to 1,496 tpy of PE/cotton yarn.f/ Only minor rehabilitation is included in the Project for mill No. 1.*g/ In addition to these rationed fabrics, commission weavers will also weavc for

NSWC 7,800 million lmpy (7,000 million smpy) of rationed fabrics using 1,000 tpyof yarn from spinning mill No.3.

h/ Equivalent to 999 tpy of cotton yarn (for the terry towels and 1,620 tpy of cotton

yarn (from the new spinning mill) for the rationed fabrics.

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC %EXTILE PROJECT

NSWC RAW MATERIAL (FIBER) REUIREMENT AT FUML PRODUCTIOEI WITH THE PROJECT

X Spinning Annual Yarn Annual Raw -bterialType of Yarn Waste a/ Output (tons) bl Requirements (tons)

Cotton L/ Polyester Total-'-. 1007. Cotton (carded) 3,L19.5 3,619.5

Total Waste 15.7 634.9Less: Reworkable Waste (5.2) (210.3)

Net Waste lG.5 424.6

Sub-Total (Product & Net Waste) 4,044.1 4,044.1

B. 100% Cotton 5ewina Thread 50. 0 500.0

Total Waste 32.7 219.4Less: Reworkable Waste - (7.2) ( 48.3)

Net Waste 25.5 171.1

Sub-Total (Product & Net Waste) 671.1

C. Polyester/Cotton (1) 65/35 blend 2,799.8 979.9 1,819.9(2) 50/50 blend 1,663.7 831.8 831.9

Sub-Total (Blended Yarn) 4,A63.5 ! 1,811.7 2,651.8

(i) Polyester WasteTotal Waste 10.7 287.2Less: Reworkable Waste (9-S) (255.0)Net Waste 1.2 32.2

(ii) Cotton (Combed) WasteTotal Waste 20.0 452.9Less: Reworkable Waste _ 76.6)Net Waste 17.2 376.3

Sub-Total (Product & Net Waste) 2,188.0 2,684.0 4,872.0

D. Total for All Yarn Products 8,583.0 6,903.2 2,684.0 9,587.2

Waste Summary - All Products d/Total Waste 16.6 1,307.2 287.2 1,594.3

Less: Reworkable Waste (6.2) ( 335.2) 255.0) ( 590.2)Net Waste 10.4- 972.0 c| 32.2 1,004.1

14a/ Waste (by weight) as X of the raw material (fiber) input.b/ Based on 80% average capacity utilization. About 1,990.0 tpy of the 100% cotton carded yarn ia vroduced at Karwouz

(mill No.3) and 1,620.5 tpy is produced in the new spinning mill.cl The cotton required for the carded yarn count SE 10 to NE 24 is sbort-staple cotton (1-1/16 inches) and represents

80.7% (5.571.3 tpy) of the tntal '.ntot rQquir"mnts. The other 19.3% (1,331.9 tpy) is used to spin combed yarn forsewing thread (count NE 50/3) and requires medium-staple cotton (about 1-3/16 to 1-4/16 inches).

d/ The waste summary for cotton ig: Total waste - 18.9%; Reworkable Water - 4.8%; Net Waste - 14.1%e/ 95% of this waste (923.4 tons) is sold and the other 5% is lost.

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECTIMPLEMENTATION SCHEDULE

1980 1981 1982 1983 1984ACTIVITY 1-

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

G EINE R ALIHire ConsutantsRecruitrnent & -l _ l

Training

CIVIL WORKSSite Preparation _ _Design & Detailed _

Engireering IPrepare & Issue ITBEvaluate & Award

ContractMobilizationConstruction - - - _ - m -

EQUIPMENTPrepare

SpecificationsPrepare& Issue ITBEvaluate BidsIssue AwardsDelivery mErection - muTesting &

Commissioning

Industrial Projects Department World Bank- 18414

March 1980

79 -

ANNEX 5-5Page 1 of 2

EGYPT: NSWC TEXTILE PROJECT

PROJECT STAFFING REQUIREMENTS

A. Counterpart Team for Organizational and Financial System Improvement Program

1. Marketing Specialist2. Management Planning/Reporting Specialist3. Cost Accountants (3) and Financial Systems Analyst (1)4. Manpower Planning & Training Specialist5. Production Planning & Quality Control Specialist

(Any of the 5 can be the team leader).

B. Project Implementation Unit.

1. Spinning Specialist2. Weaving Specialist Project Manager from among these three.3. Converting Specialist4. Civil Engineer5. Electrical Engineer6. Mechanical Engineer7. Procurement Specialist8. Financial Specialist9. Project Coordinator (Project Monitoring & Control)

C. Operating Staff For Project Facilities -/

1. New Spinning & Weaving Mill Complex

No. of Persons

General Office 70Maintenance 50Transport 30Spinning Mill

(i) Operators 1,000(ii) Clerical 50

Weaving Mill(i) Operators 772(ii) Clerical 30

Total 2,002

2. Modernized/Expanded Converting Plant

The required staff is 600 persons k/ which will be drawn from the existingemployees of about 1120 in the existing converting plant.

3. Bedsheet Plant

The required staff is 150 persons which will also be drawn from theexisting garments plants.

a/ The new mills will train four work groups to rotate on three shifts/day,334 days per year (each work group will therefore work 5 days per week).

b/ Including 18 clerical.

- 80 -

ANNEX 5-5Page 2 of 2

EGYPT - NSWC TEXTILE PROJECT

PROJECT STAFFING REQUIREMENTS

D. Estimated Employment (Factory and Administrative) Changes with the Project a/

Year New Employees Gainfully Employed Surplus Total

1979 (Existing) - - - 15,000 (approx.)1984 1,300 6,000 7,000 13,0001985 - 6,000 6,500 12,4001986 6,000 5,000 10,9001987 6,000 4,000 9,9001988 - 6,000 3,000 8,9001989 - 6,000 2,000 7,9001990 - 6,000 1,000 6,9001991 - 6,000 0 5,900

a! It is assumed that between 1979 and 1984 there will be a net reductionof about 800 (surplus) employees per year.

Industrial Projects Department

Marth 1980

EGYPT - NSWC TEYTILE PROJECT

CAPITAL COST FSTIMATE(In Millions of US Dollars)-

Foreign Exchange CostForeign Exchange Total Local Currency Total Total

Direct Part of Local Foreign Part bf Local Local ProjectImports Purchases Exchange Purchses Purchases Cost _

Equipment & Spares (FOB/Ex-Pactory)1. New Spinning Mill 12.0 - 12.0 - - 12.02. New Weaving Mill 9.8 _ 9.8 0.2 0.2 10.03. Converting Plant 4.3 4.3 - - 4.34. Existing Weaving Mill 0.7 0.7 - 0.75. Making-up Plant 1.1 1.1 - - 1.6. Misc. Equipment b/ 8.2 _ 8.2 0.1 0.1 8.3Sub-total (FOB/Ex-factory) c/ 36.1 - 36.1 0.3 0.3 36.4 4

Ocean Freight & Insurance (7% of FOB) 2.5 _ 2.5 - - 2.5

Local Handling 6 Transport (3% of CIF) - 1.2 1.2 1.2Erection (4.7% of FOB) 1.3 - 1.3 0.4 0.4 1.7Relocation & Renovation - - 0.4 0.4 0.4

Sub-total 3.8 - 3.8 2.0 2.0 5.8 9

General Import Tax (5% of CIF) - - - 1.9 1.9 1.9 3Civil Works

1. Site Preparation, Service Area, etc. 1.2 0.4 1.6 0.9 1.3 2.52. Housing - 0.4 0.4 0.2 0.6 0.6 i3. New Spinning & Weaving Mills 6.5 1.4 7.9 4.2 5.6 12.1 C_oSub-total 7.7 2.2 9.9 5.3 7.5 15.2 24

Project Supervision, Technical AssistanceTraining & Commissioning 3.4 - 34 1.7 .7

Base Cost Estimate (BCE) 51.0 2.2 53.2 11.2 13.4 64.4 10

Physical Contingency e/ 5.1 0.2 5.3 1.1 1.3 6.4 10

Price Escalation f/ lO.3 0.6 10.9 2.6 3.2 13.5 21Installed Cost 66.4 3.T 14.9 17.9 84.3 1 1

Working Capital - - 8.0 8.0 8.0Interest During Construction 9.6 - 9.6 2.4 2.4 12.0

Total Financing Needed 76.0 3.0 79.0 25.3 28.3 104.3

a/ At the parallel foreign exchange rate of tE 0.69 - US$1.00b/ Boilers, pumps, water and effluent treatment, office equipment, workshop machinery, transport, pipes, lockers, etce.c/ Spares represent 4.3% of the FOB costs of directly imported equipment-(e.g US$1.6) million FOB or US$2.32 bdllion

delivered including price escalation).d/ US$2.4 million for technical assistance and US$0.4 million for training.e/ 10% for all items.f/ 25% for civil works; 17% for all other costs (taken from Annex 6-2).

Industrial Projects DepartmentMarch 1980

- 82 -

ANNEX 6-2

EGYPT - NSWC TEXTILE PROJECT

CALCULATION OF PRICE ESCALATION FACTORS

A. Assumed Inflation Rates

% Annual Inflation Rate % Compounded Inflation Rate a/

Equipment and Equipment andGeneral Price General Price

Year Level Civil Works Level Civil Works

1980 10.5 12.0 5.2 6.01981 9.0 10.0 15.5 17.61982 8.0 9.0 25.3 28.71983-85 7.0 8.0 (1983) 34.6 (1983) 39.7 (1983)1986-90 6.0 - _ _1990 onwards 5.0

a/ From end of 1979 to mid-year for 1980 through 1983.

B. Capital Cost Commitment Schedule (Base Cost Estimate and Physical Contingencies)

% CommittedYear Civil Works Equipment and Other Costs

1980 5 101981 40 651982 35 201983 20 5

100 100

C. Price Escalation Factors

Weighted % Price Escalation Factor-/Year Civil Works Equipment and Other Costs

1980 0.3 0.51981 7.0 10.01982 10.0 5.11983 7.9 1.7

25.2 17.4

Say 25% 17%

a/ The compounded price escalation rate from (A) weighted by the fractioncommitted during the year from (B).

Industrial Projects DepartmentMarch 1980

- 83 -

ANNEX 6-3

EGYPT - NSWC TEXTILE PROJECT

-NCREMENTAL PERMANENT WORKING CAPITAL ESTIMATE-/

Items LE Millions US$ Millions

1. Accounts receivable

1/6 of annual sales 7.16 10.38

2. Finished and intermediate goods inventory

(1/12 of annual production cost excludingtaxes and depreciation) a/ 1.92 2.78

3. Raw materials inventory

(1/12 of annual cotton, polyester, fueloil and other variable costs 1.16 1.68

4. *Spare parts at acquisition cost (BCE + PC) 1.37 1.99

5. Minimum cash requirement

(1/12 of annual production cost excludingtaxes, depreciation, raw materials and maintenance) 0.87 1.26

Sub-total - 12.48 18.09

6. Less:

(a) Spare parts included in capital cost 1.37 1.99(b) Short-term debt b/ 6.79 9.84(c) Accounts payable (30% of raw materials inventory)b/ 0.35 0.51

Sub-total 8.51 12.34

7. Permanent working capital in constant end of 1979LE or US dollars 3.97 5.77

8. Escalated permanent working capital to End of 1983LE or US dollars (plus 39%) 5.52 8.0

Say 5.5 8.0

a! The production cost is shown in Annex 7-3. This finished goodsinventory is additional to the inventory that would otherwiseexist without the project.

b/ The current ratio implied here is 1.7

Industrial Projects DepartmentMattth 1980

- 84 -

ANNEX 6-4

EGYPT - NSWC TEXTILE PROJECT

INTEREST DURING CONSTRUCTION - BANK LOAN

A. Loan Amount and Onlending Terms

Amount - US$69 million equivalent.

Interest - 10% annually on amount disbursed. The annual interest rateis divided as follows: 8.0% to the Bank and 2.0% to theGovernment. a/

Commitment Fee - 0.75% annually on the undisbursed amount of the Bankloan but is ignored in the calculation as the amount issmall.

B. Loan Disbursement Schedule

Year Amount (Million US$)Amount %

1980 b/ 3.4 51981 24.2 351982 24.2 351983 c/ 17.2 25

Total 69.0 100

C. Interest during Construction

In Million US$1980 1981 1982 1983 Total

1. Total outstanding at start of year- 0.0 3.4 27.6 51.82. Interest on (1) at 10% 0.0 0.3 2.8 5.23. Disbursed during year 3.4 24.2 17.2 17.2 69.04. Interest on (3) at 5% 0.2 1.2 1.2 0.95. Total Interest (2 + 4) 0.2 1.5 4.0 6.1 11.8

Say 12.0

a/ The actual interest rate on the Bank loan will be determined at the timeof loan presentation to the Executive Board, expected to be April/May1980.

b/ The Bank Group loan will be effective only about October 1980. It isassumed that the bridge financing which will be reimbursed from theBank funds, will also carry an interest charge of 10% per year.

c/ A small amount (for warranty payments) will be disbursed in January-March 1984 but is assumed to be disbursed in 1983.

d/ The amount outstanding at the start of the year is equal to the out-standing balance at the start of the previous year plus the disburse-ment during the previous year.

Industrial Projects DepartmentMarch 1980

- 85 -

ANNEX 6-5

EGYPT - NSWC TEXTILE PROJECT

DISBURSEMENT AND FINANCING SCHEDULE

A. Capital Cost Disbursement Schedule:

In Millions US$1980 1981 1982 1983 Total

1. Direct Imports

Equipment & Spares (CIF) 0.5 14.8 21.0 13.4 49.7Technical Assistance & Training 0.9 1.7 0.9 1.0 4.4Interest during Construction 0.2 1.2 3.2 5.0 9.6Civil Works 1.9 6.1 1.4 1.2 10.6

- - 0.5 1.2 1.7

Sub-total 3.5 23.7 27.0 21.8 76.0

2. Local Purchases

Equipment and Materials 0.2 0.1 0.1 0.1 0.5Site Preparation & Civil Works 1.0 4.0 2.9 2.4 10.3Local Handling & Transport - 0.4 0.6 0.5 1.5General Import Tax - 0.7 1.1 0.6 2.4Erection, Relocation & Renovation - - 0.3 0.7 1.0Supervision, Training & Commissioning 0.2 0.4 0.6 1.0 2.2Interest during Construction 0.1 0.3 0.8 1.2 2.4Working Capital - - - 8.0 8.0

Sub-total 1.5 5.9 6.4 14.5 28.3

3. Total Disbursements 5.0 29.6 33.4 14.5 104.3

B. Financing Sources:

- Government Loan 0.4 - - - 0.4- Bank Loan 3.4 24.2 24.2 17.2 69.0- Government & Private Inv. (Equity) 1.2 5.4 9.2 19.1 34.9

Total Sources 5.0 29.6 33.4 36.3 104.3

C. Estimated Quarterly Disbursement of Bank Funds:

Year Quarter Disbursed Cumulative Disbursement(In Millions US$) In Millions US$ %

1980 IV 3.4 3.4 51981 I 3.2 6.6 10

II 4.8 11.4 16III 7.2 18.6 27IV 9.0 27.6 40

1982 I 6.1 33.7 49II 6.1 39.8 58III (.G 45.8 66IV 6.0 51.8 75

1983 I 5.2 57.0 83II 4.0 61.0 88III 4.0 65.0 94IV 4.0 69.0 100

a/ Including retroactive financing of about US$1.5 million for disbursements fromFebruary 1980. Bridge financing for disbursements up to the expected Bankloan effectiveness (October 1980) of about US$2.0 million will be arranged bythe Government.

Industrial Projects DepartmentMarch 1980

- 86 -

ANNEX 7-1

EGYPT - NSWC TEXTILE PROJECT

DEPRECIATION (INCREMENTAL) SCHEDULE

AnnualDepreciation/ Acquisition Cost Depreciation atAmortization In In Historical CostsPeriod (Years) Million US$ Million LE (LE million/year)

A. Depreciable Assets1. New Spinning Mill

a. Civil Works 40 11.8 8.1 0.20b. Equipment 12.5 23.1 16.0 1.28

Sub-total 34.9 24.1 1.48

2. New Weaving Milla. Civil Works 40 7.8 5.3 0.13b. Equipment 12.5 18.8 13.0 1.04

Sub-total 26.6 18.3 1.17

3. Modernized Converting Planta. Civil Works 40 0.5 0.4 0.01b. Equipment 12.5 10.0 6.9 0.55

Sub-total 10.5 7.3 0.56

4. Rehabilitated Weaving Millsa- Equipment 12.5 1.6 1.1 0.09

5. Garment & Bed-Sheet Planta. Equipment 12.5 1.6 1.1 0.09

6. Employee Housing (Civil Works) 40 0.8 0.6 0.02

B. Amortizable Project Costsa. Project Supervision, Technical

Assistance, Training andCommissioning 5 6.7 4.6 0.92

b. Interest during Construction 5 12.0 8.3 1.66

Sub-total 18.7 12.9 2.58

C. Non-Depreciable Assetsa. Spares - 1.6 1.1 -b. Working Capital - 8.0 5.5 -

Sub-total 9.6 6.6

Total Assets and Depreciation 104.3 72.0 5.99

Industrial Projects DepartmentMarch 1980

EGYPT - NSWC TEXTILE PROJECT

TEXTILE PRICE ASSUMPTIONS(In constant end of 1979 LE)

Items Annual Sales Quantity % Export Financial Price, LE/Unit Economic Price/Unit

tons 1,000 Units Sales Domestic Export LE Domestic a/ LE Export (FOB) US$ Equiv. Export (FOB)

A. Finished Fabrics (Unit = m2)

Print A 65/35 PE/Cot. b/ 346.8 2,284 m2

_ 0.79 0.79 0.82 0.79 1.15

Print B 65/35 PE/Cot. b/ 849.6 6,715 m2

0.90 0.90 0.93 0.90 1.30

B';tiste C 65/35 PE/Cot. 744.5 8,729 m2

25 1.00 1.00 1.03 1.00 1.45Batiste D 65/35 PE/Cot. 345.3 4,068 m

2 25 1.10 1.10 1.13 1.10 1.60Household Fabrics E 50/50 PE/Cot. 426.8 2,234 mn

2- 0.90 0.90 0.93 0.90 1.30

Rationed Fabrics 100% Cot. c/ 2,435.4 13,905 m 2 0.35 - 0.40 - -

B. Bed-Sheets (Unit = sets) d/

Sheeting F 50/50 PE/Cot. (9 m2/set) 431.3 356 sets - 7.87 8.28 8.55 8-28 12.00

Sheeting G 50/50 PE/Cot. (18 m2/set) 383.4 179 sets 40 16.39 17-25 17.79 17.25 25.00

Sheeting H 50/50 PE/Cot. (18 m2/set) 163.4 87 sets 40 16.39 17.25 17.79 17.25 25.00

Sheeting I 50/50 PE/Cot. (20 m2/set) 53.5 26 sets 100 19.66 20.70 21.30 20.70 30.00 1

C. Terry Towels (Unit = m2) 977.4 2,684 m2

10 1.19 1.25 1.25 1.25 1.81 Co

D. Sewing Thread 500.0 - - 3,025.00 4,100.00 4,100.00 4 ,l 0000 5,950.00 1

E. Garments (Unit = piece) e/ 211.6 1,000 pieces - 2.00 2.10 2.15 2.10 3.05

P. Commission Finishing - 12,060 m2

- 0.15 - 0.20 - -

a/ The economic value of the domestically consumed PE/cotton fabrics, sheets and garments is the CIF value of imports.b/ About 800,000 m

2each of P5int A and Print B fabrics are used to make the 1 million pieces of garments.

c/ including 6,666 thousand m of commission woven fabrics.d/ One set includes 2 sheets and 2 or 4 pillow cases. Fabric usage is before trimming (waste provision is 2%)e! Garments use 1.6 meters of fabric (Print A and B) per piece, including about 5% of waste. The average fabric weight is 139.18 gm/.

2.

Note: The total export revenue is LE 6.02 million per year at full production (80% capacity utilization)

Industrial Projects Department

March 1980

- 88 -

ANN8E 7-3

EOYPT - NSWC TEXTILE PROJECT

DETAILED PRODUCTION COST ESTIMATE WITH THE PROJECT(In Constant End of 1979 LE)

Units of % Financial Costs Ecnonmic CostsInptf/Unit Production Annual LE/Unit LE/Unit Annual Cost LE/Unit LE/Unit Annual Cost

Unit of Product Efficiency Qu-ntity of Input of Product (1.000 LE) of Input of Product (1,000 LE)

A. New Spinning Mill

(i) Product - Yarn & Thread b/ Tons - 67 6,584.0(ii) Inpts:

1. Short-Staple Cotton Tons 0.5069 3,337.7 933.0 472,94 3,113.8 1,480.0 749.92 4,937.42. Mediur - Staple Cotton Tons 0.2023 1,331.9 967.0 195.62 1,288.0 2,170.0 438.99 2,890.3

Less: Sales of Waste Cotton Tons 0.1064 700.6 488.0 (51.92) (341.9) 488.0 (51.92) (341.9)3. Polyester Staple Tons 0.4077 2,684.3 1,810.0 737.94 4,858.6 1,570.0 640.09 4,214.34. Power 1,000 Xtd 5.8984 38,835.1 15.0 S8.48 582.5 35.0 206.44 1,359.25. Water 1,000 ,,3 0.0185 121.8 50.0 0.92 6.1 50.0 0.92 6.16. Direot Labor Man-n,onths 1.8226 12,000.0 75.0 136.70 900.0 75.0 136.70 900.07. Excise Tex LE - - - 28.62 188.4 - - -S. Other Variable Costs c/ LE I _ - 13.05 85.9 _ 12.00 79.0

Total Variable COstS 1,662.35 10,681.4 2,133.14 14,044.4

9. Depreciation & A,crtization - - - - 398.54 2,624.0 - -10. Maintenanos Materialo - - 69.87 460.0 _ 69.87 460.0It. Salaries & Adzin. Expenses - _ - - 45.56 300.0 - 45.56 300.012. Other Fixed Coots - - - - 41.01 270.0 - 41.01 270.0

Total Fixed Costs 554.98 3,654.0 156.44 1,030.0

Total Yarn Production Cost 2,217.33 14,335.4 2,289.58 15,074.4

B. Spinning Mill No.3 (Karoon)

(i) Product - 100% Cotton Yarn Tons - 55 1,999(ii) lnputs:

1. Short - Staple Cotton Tons 1.1174 2,233.6 933.0 1,042.49 2,083.9 1,480.0 1,653.69 3,305.7L.oo: Sales of Waste Cotton Tons 0.1114 222.8 488.0 (54.39) (108.7) 488.0 (54.39) (108.7)

2. Power 1,000 KwH 5.8984 11,790.9 15.0 88.48 176,9 35.0 206.44 412.73. Water 1,ooo a,

30.0185 37.0 50.0 0.92 1.8 50.0 0.92 1.8

4. Direot Labor Han-nths 3.4637 6,924.0 75.0 259.78 519.3 75.0 259.78 519.35. Exeise Tas LE - - - 28.62 57.2 - - -6. Other Variable Coat c/ LE - _ _ 13.05 26.1 12.00 24.0

Total Variable Costs 1,378.95 2,756.5 2,078.44 4,154.8

7. Depresiation & ASortication - - - - 235.62 471.0 - -8. Maintenance Materials - - - - 150.08 300.0 - 150.08 300.09. Salaries & Admi. Expenses - - - - 450.22 900.0 - 450.22 900.0

10. Other Fixed Costs - - - - 100.05 200.0 - 100.05 200.0

Total Fixed Costs 935.97 1,871.0 700.35 1,400.0

Total Yarn Produetion Cost 2,314.92 4,627.5 . 2,778.79 5,554.8

C. Nov Weaving Mill

(i) Product - PE/Cotton Fabrion 1,000 a,2

85 28,099(ii) Inputs:

1. Yarn (at variable cost) Tons 0.1056 2,967.5 1,662.35 175.56 - 2,133.14 225.282. Sicing Material (PVA) Tons 0.0395 1,109.9 225.0 8.89 249.7 225.0 8.89 249.73. Power 1,000 Fvh 0.4835 13,585.9 15.0 7.25 203.8 35.0 16.92 475.54. FPel Oil Tons 0.0179 503.0 60.0 1.07 30.2 103.5 1.85 52.15. Water 1,000 on

30.0031 87.1 50.0 0.16 4.4 50.0 0.16 4.4

6. Direct Labor Man-onths 0.3297 9,264.0 85.0 28.02 787.4 85.0 28,02 787.47. Treasury Taxes LE _ - _ 25.0 702.5 - -B. Other Variable Costs c/ LE _ _ _ 2.97 83.4 _ 2.00 56.2

Total Variable Costs 248.92 2,061.4 283.12 1,625.3

9. Depreciation & Awortiaation - - . . 73.10 2,054.0 - -10. Maintenance Materials - - . . 13.17 370.0 - 13.17 370.011. Slaries & Admin. Costs . - . - 10.68 300.0 - 10.68 300.012. Other Fixed Costs . - - - 5.34 150.0 - 5.34 150.013. Transferred Fixed Costs fron Yarn

(a) Depreeiation - - 42.09 - -(b) Other Pixed Coats - - - - 16.52 - - 16.52 -

Total Fixed Coats 160.90 2,874.0 45.71 820.0

Total New Mill Weaving Cost 409.82 4,935,4 328.83 2,445.3Industrial Projects DsparrmentMarch 1980

- 89 - ANNEX 7-4

EGYPT - NSWC TEXTILE PROJECT

PRODUCTION SCHEDULE - WiOH THE PROJECT

(IN THOUSAND TONS UNLESS OTHERWISE INDICATED)

1970 1979 1980 1981 1982 1983 1984 1985 1986 1987

1 CAPACITY UTILIZATION - - 50 70 90 90

A, RAW MATERIAL

I C.TTONMEDIUM'LONG-STAPLE COTTON 3.1 2.4 4.2 4.1 3.9 3.2 0,5 1.0 1.3 1.3SNORT STAPLE COTTON 0.0 8.0 7.5 7,4 7.0 5.6 3.7 4.8 5.5 5,5

TOTAL COTTDN 11.1 10.4 11.7 11.5 10.9 0.0 4.2 5.0 6.0 6.0

2. POLYESTER - - - 1.1 2,1 2.7 2,7

B. SPINNING OUTPUT

1. UEAUING YARN-OLD MILL-100 CDTTON 8.0 7.3 0.6 B.4 8.0 6.4 2.0 2.0 2.0 2.0-. WEAVING YARN-NEli ILL-100 COTTON - - - - - - 0.7 1 .6 1.6

3. POLYESTER/COTTON iEAV.YaFN - - - - - --1, 3.5 4.5 4,54. SE0iNG THREAD-100Y COTTON 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.4 0.5 0.5

TOTAL 8.1 7.4 8.7 8.5 8.1 6.5 4,8 7.1 8.6 0.6

Of WHICH.A) FOR SALE YARN 0 THREAD 2.9 1.5 3.4 4,4 4.1 2.7 0,2 0.4 0.5 0.5

(Bl FOR HEAVING i TERRY MILLS 5,2 5.9 5.2 4.0 7.9 3.5 4.6 6.7 8.1 8.1(Cl ENITIED I NON-W0VEN GOODS 0.1 0.1 0.1 0.1 0.1 0.1 - - - -

4. WASTE COTTON 3.0 3.0 3.0 30 2.8 2.3 0.5 0.8 0.9 0.9

C. AEAVING & TERRY MILLS

1. FR00 EXISTIN6 hlLLS-100Y COTTON 26,4 22.0 28.9 20,8 19.7 16.6 3.3 5.6 7.5 7.52. FRONI REHABILITATED MlLLS-PE/COTTON - - - - - - 4.0 '.4 9,5 9.53. FROM C0M?ISSITN WEAViNG 2.7 4.4 6.0 6.0 6.0 6.0 7,0 7.0 7.0 7.04. FROM NEW MILLS - - - - - - 12.0 22.0 28.3 20.3

TOTAL FABRIC (NIL LM) a! 29.1 26,4 34.9 26.0 25.7 22.6 26.3 42.0 52.3 52.3

TOTAL FABRIC WEIGHT 4.3 5.1 4.5 3.4 3.3 2.9 3.5 5.6 6.9 6.9

A. TERRY CLOTH-IN MILLION L1 a/ 1.1 0.0 1.1 1.1 1.1 1.1 2,7 2.7 2.7 2,70. TERRY CLOTH -IN TONS 0.4 0.3 0.4 0,4 0.4 0.4 1.0 1.0 1.0 1.05. WEAVING WASTE 0.4 0,4 0.3 0,2 0.2 0.2 0.1 0.1 0.2 0D.

D. CONVERTING PLANT

I. FABRIC FOR SALE GOODS 33,9 26.3 33.2 25,5 24.4 21.5 24,4 38.8 48.3 48,32. COhMISSION FINISHING 12,2 14.6 10.7 18.4 19.5 20.0 20.0 20.0 11.8 11.8

TOTAL FABRIC (NIL LN) a! 46.1 40.9 43.9 43.9 43.9 41.5 44.4 S0.0 60.1 60.1

SALE 600GB WEIGHT 4,1 4.8 4.3 3.2 3.1 2.0 3.3 5.1 6.4 6.4

3. DYED YARN (FOR TERRY) 0.6 0.5 0.4 0.4 0.4 0.4 1.0 1.0 1.0 1.04. 1ONVEETINO WASTE (SALE GOODS0 0,1 0.1 0.2 0.2 0.2 0.1 0.2 0.5 0.5 0.5

E. KNITTECI Y N0N-i0VEN G0D00 0.1 0.1 0.1 0.1 0.1 0.1 - - - -

F. NADE-UP GOODS. GARMENTS 0. 0.4 0.5 0.5 0.5 0.5 0.7 0.9 1.0 1,0

2. RED SHEETS - - - - - - 0.3 0.5 0.6 0.63. CONMISSION WORE 0,7 0.3 0.3 0,3 0.3 0.3 - - - -

TOTAL GARMENTS (NIL PIECES) 1.5 0,7 0.0 0.8 0. 0.0 1.0 1.4 1.6 1.6

FABRIC USED FOR SALE GOODS 1,3 0.6 0.0 0.0 0.0 0.0 4.7 8.1 10.2 10.2FABRIC WEIGHT 0,2 0.1 0.1 0.1 0.1 0.1 0.6 1.0 1.3 1.3

y FROM 1904 ONWARDSs IN MILLION SQUARE METER (SN) INSTEAD OF LINEAR METER (LN).

INDUSTRIAL PROJECTS DEPARTMENTMARCH 21, 19B0

EGYPT - NSWC TEXTILE PROJECT

AMORTIZATION SCHEDULE-- SUBSIDIARY LOAN

Interest Due b/ -Repayment Amount Bank Government Total Principal Repayment Total Debt ServiceNumber Date Outstanding a/ _ _

1 March 1985 69.0 2.76 0.69 3.45 3.25 6.742 S%pt. 1985 65.71 2.63 0.66 3.29 3.29 6.583 March 1986 62.42 2.50 0.62 3.12 3.29 6.414 Sept. 1986 59.13 2.37 0.59 2.96 3.29 6.255 March 1987 55.84 2.23 0.56 2.79 3.29 6.086 Sept. 1987 52.55 2.10 0.53 2.63 3.29 5.927 March 1988 49.26 1.97 0.49 2.46 3.29 5.758 Sept. 1988 4".97 1.84 0.46 2.30 3.29 5.599 March 1989 42.68 1.70 0.43 2.13 3.29 5.42 110 Sept. 1989 39.39 1.58 0.39 1.97 3.29 5.26 011 March 1990 36.10 1.45 0.36 1.81 3.29 5.1012 Sept. 1990 32.81 1.31 0.33 1.64 3.29 4.9313 March 1991 29.52 1.18 0.30 1.48 3.29 4.7714 Sept. 1991 26.23 1.05 0.26 1.31 3.29 4.6015 Marrch 1992 22.94 0.92 0.23 1.15 3.29 4.4416 Sept. 1992 19.65 0.78 0.20 0.98 3.29 4.2717 March 1993 16.36 0.66 0.16 0.82 3.29 4.1118 Sept. 1993 13.07 0.52 0.13 0.65 3.29 3.9419 March1994 9.78 0.39 0.10 0.49 3.29 3.7820 Sept.1994 6.49 0.26 0.06 0.32 3.29 3.6121 March 1995 3.20 0.13 0.03 0.16 3.20 3.36

Total 30.33 7.58 37.91 69.00 106.91

a/ Amount outstanding before payment of principal due that dateb/ The interest is for the preceding six-month period. The Bank's share of the 10% annual interest rate is 8% and

the Government's 2% respectively.

Industrial Projects DepartmentMarch 1980

- 91 - ANNEX 7-6

Page 1

EGYPT - NSWC TEXTILE PROJECTINCOME AND FUNDS FLOW STATEMENTS - WITH THE PROJECT

(IN MILLION CURRENT LE)

---ACT UAL--- --PROJECTEb1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

'ACITY UTILIZATION - - - - - - 50 70 90 90

!T19N FACTOR (19779=1.00) 1.00 1.00 1.05 1.16 1.25 1.35 1,49 1.71 1.94 2.19

NUE

RN SALES 1.33 2.94 9.77 13.51 12.53 9.42 - - -N-RATIONED FABRIC SALES 4.68 3.60 9.08 7.60 7.88 7.43 12,98 29.46 44.32 50.92;TIONED FABRIC SALES 1.82 1.41 3.34 2.80 2.90 2.73 4.69 7.06 9.28 10.57RRY - - 1.25 1.38 1.49 1.60 4.43 5.53 6.29 7.08,RMENT - - 0.86 0.94 1.02 1.10 1.92 3.00 3.85 4.37D SHEETS - - - - - - 4.93 9.53 13.78 15.77IREAIi - - 0.32 0.35 0.38 0.41 0.83 1.97 2.88 3.30IHER TEXTILE PRODIUCTS 1.35 1.05 - - - - - - -

3MMISSION FINISH. 2,00 1.55 1.35 2.55 2.93 3.23 4.47 5.12 3.43 3.87THER INCOME 9.00 7.02 0.47 0,52 0.56 0.61 - - - -

OTAL REVENUE 20.18 17.57 26.44 '29.65 29,69 26.53 34.25 62.07 83.83 95.80

DUCTION COST

.OTTON (NET OF WASTE SOLD) 7.82 7.82 10,17 10.95 11.28 9.76 5.52 8.66 11.58 13.05QOLYESTER - - - - - - 2.97 6,49 9.48 10,687THER MATERIALS I SUPPLIES 3.70 2.32 2.08 2,14 2,26 2.09 2.39 3.77 4.64 5.21ALARIES 8 WAGES 7.65 8.02 9.45 10.05 10.53 10.63 J.52 s.3. 7.18 8.')8ITHER DIRECT COSTS 0.28 0.28 0.53 0,57 0.61 0,63 1.65 2.48 3.23 3.64

XCISE t TREASURY TAXES 0.52 0.59 0.61 0.5' 0.58 0.53 1.18 2.14 3.02 3,40

TOTAL DIRECT COSTS 19.97 19.03 22.84 24.28 25.26 23.64 19.23 29.86 39.13 44,06

SALES & ADMINISTRATION 1.71 1.68 1.7' 194 2.11 2.26 3.58 4.10 4.66 5,24DEPRECIATION I PROVISIONS 1.09 1.16 1.07 1.07 1.30 1.07 3.59 4.44 4.44 4.44AMORTIZATION - - - - - - 1.94 2.58 2.58 2.58INDIRECT COSI 1.49 0.97 1.00 1.10 1.19 1,28 3.43 3.93 4.46 5.03INDIRECT TAXES 0.09 0.05 0.17 0.17 0.18 0.17 0.19 0,30 0,37 0.4zSURPLUS LABOR - - - - - - 5.07 5.29 4.66 4.15

TOTAL INDIRECT COSTS 4.38 3.86 4.01 4.28 4.55 4.78 17.80 2(f.64 21.17 21.86JTAL PRODUCTION COST 24.35 22.89 26485 28,56 29.81 28.42 37.03 50.50 60,30 65.92ESS INCR. IN FIN.GOODS INQ. 4,94 1.93 (1.,09 (1,10) - - 3.02 1.12 0.84 0.46OST OF GOODS SOLD 19,41 20,96 27.94 29.66 29.81 28,42 34.01 49.38 59.46 65.46PERATING PROFIT 0.77 3,391 (1.50) (0.01) (0.12) (1.89) 0.24 12.69 24.37 30.4'2NTEREST ON SHORT-TERM LOANS 1.13 1.;6 1.78 2.36 2.28 2.14 1,88 2i24 1.73NTEREST ON LONG-TERM LOANS 0.22 0.22 0.25 .. 24 0.20 0.43 5.14 4.b7 4.2( 3,74NCOhE TAXES - - - - - - - - -

NET PROFIT (LOSS) (0.58) (5.37) 3,'53) (2.61) (2.60) (4.461 (6.78) 5.78 18.44 26.68

-92 - ANNEX 7-6Page 2

EGYPT - NSWC TEXTILE PROJECTINCOME AND FUNDS FLOW STATEMENTS - WITH THE PROJECT

(IN MILLION CURRENT LE)

---ACT UAL--- --PROJECTE3D1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

CASH FLOW STATEMENTS

SOURCES OF FUNDSNET PROFIT (0.58) (5.37) (3,53) (2.61) (2.60) (4.46) (6.78) 5,78 18.44 26.68INTEREST ON LONG-TERN DEBT 0.22 0422 0,25 0,24 0.20 0.43 5.14 4.67 4.20 3.74DEPRECIATION 1.09 1.16 1.07 1,07 1.07 1.07 3.59 4.44 4.44 4.44AMORTIZATION - - - - - - 1.94 2.58 2.58 2.58INCREASE IN SHORT-TERM DEBT 11.80 15.13 20,07 19,41 18.24 15.99 19.06 15.09 8,41 -INCREASE IN LONG-TERM DEBT:OTHER LONG-TERM DEBT - - 0.30 - - - - - - -IBRD LOAN - - 2.30 16.70 16.70 11,90 - - - -

INCREASE IN SHARE CAPITAL 3.49 0.65 4.61 6,74 9,88 16.57 - - - -

INCREASE IN ACCOUNTS PAYABLE 0.19 5.07 (7.80) 0.34 0,25 (0,28) (4.52) 0.49 0.43 0.27LONG-TERM PROVISIONS (NET) - - - - - - - - - -

TOTAL SOURCES 16421 16.86 17,27 41.89 43.74 41.22 18,43 33.05 38.50 37.71

USES OF FUNDSINTEREST ON LONG-TERM DEBT 0.22 0.22 0,25 0.24 0.20 0.43 5.14 4.67 4.20 3.,4REPAYMENT OF SHORT TERM DEBT 8.30 11.80 15.13 20.07 19.41 18.24 15.99 19.06 14.69 8.41REPAYMENT OF LONG-TERM DEBT 0.81 0.91 0,81 0.81 0,81 0,81 0.3B 4.63 4.63 4.63REPLACEMENTS - - - - - - - - - -

INCREASE IN FIXED ASSETS (0.69) - 3.45 20.42 23.05 17.96 - - -

INCREASE IN CURRENT ASSETS 2.68 1.79 (2,37) 0.35 0.2, 3,78 (3.08) 4.29 5.76 3.56PROFIT DISTRIBUTION - - - - - - - 0.40 9.22 13.34INCREASE IN OTHER ASSETS 4.89 2.14 - - - - - - - 4.03

TOTAL USES 16.21 16.86 17.27 41.89 43.74 41.22 18,43 33.05 38,50 37.71

PROFITABILITY IBREAK-EVEN INDICATORS

NET PROFIT AS XOF NET SALES - - - - - - - 9.31 22.00 27.83PROFIT B.E. CAP, UTIL.(X) - - - - - - - 59.78 54.27 44,09CASH B.E, CAP. UTIL,(X) - - - - - - - 54.53 49.42 39.90

X DECREASE IN PRODUCT PRICES

PROFIT B.E.PRODUCT PRICE(Z) - , - - - - - - 7.51 20.99 27.35CASH B,E. PRODUCT PRICE(X) - 11.36 23.85 29.84

Z INCREASE IN COTTON I PE. COSTS

PROFIT B.E. COTTON I POLYESTER(%) - - - - - - - 30.76 83.57 110.49CASH B.E. COTTON I POLYESTER(Z) - - - - - - - 47.00 95.00 121.00

INDUSTRIAL PROJECTS DEPARTMENTMARCH 21. 1980

- 93 - ANN 7-7

EGYPT - NSWC TEXTILE PROJECTBALANCE SHEET - WITH THE PROJECT

(IN MILLION CURRENT LE)

---- ACTUAL-- -- PROJECTED---1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

CURRENT ASSETSCASH I ACC. REC. 9t27 9.24 7.79 8.74 8.74 9.64 10.68 12.22 15.29 17.51FIN. GOODS I IN PROC.INV. 10.26 12.19 11.10 10.00 10.00 10.00 13.02 14.14 14.98 1h.44RAW MAT. I SUPPLIES 5.20 7.18 7.35 7.85 8.12 11.00 3.86 5.49 6.94 7.82

TOTAL CURR. ASSETS 24.73 28.61 26.24 26,59 26.86 30.64 27.56 31.85 37.21 40.77

GROSS FIXED ASSETS 21.36 21.36 21.68 21.68 21.68 21.68 86.56 86.56 86.56 86.56DEPRECIATION 10.81 11.96 13.03 14.10 15.17 16.24 19.83 24.27 28t71 33.15AMORTIZATION - - - - - - 1.94 4.52 7,10 9.68

NET FIXED ASSETS 10.55 ?.40 8.65 7.58 6.51 5,44 64.79 57.77 50.75 43.73

ASST. UNDER CONSTRlUCTION 0.32 0.32 3.45 23.87 46.92 64.88 - - - -OTHER ASSETS 0.08 0.0? 0,09 0,09 0.09 0.09 0,09 0.09 0.09 4.12

TOTAL ASSETS 35.68 38.41 38.43 58.13 80.38 101.05 92,44 89.71 88.05 88.62

CURRENT LIABILITIESACCOUNTS PAYABLE 8.09 13.17 5.37 5.71 5.96 5.68 1,16 1.65 2.08 2,35SHORT TERM LOANS 11,80 15.13 20.07 19,41 18.24 15.99 19.06 15.09 8.41 -CURRENT PORTION L/T DEBT 0.91 0.81 0.81 0.81 0.81 0.38 4.63 4+63 4.63 4.63

TOTAL CURRENT LIABILITIES 20.82 29.11 26.25 25.93 25.01 22.05 24.85 21.37 15.12 6.98

LONG-TERM DEBT 3.62 2.81 4.60 20.49 36.38 47.90 43.27 38.64 34.01 29.38

EQUITYSHARE CAPITAL 6.52 6.52 11.13 17,87 27.75 44,32 44.32 44.32 44.32 44.32RETAINED EARNINGS 4.72 (0.02) (3,55) (6,16) (8,76) (13.22) (20.00) (14.62) (5,40) 7,94

TOTAL EQUITY 11.24 6.50 7,58 11.71 18.99 31.10 24.32 29,70 38.92 52.26

TOTAL LIABILITIES 35.68 38.42 38.43 58.13 80.38 101.05 92,44 89.71 88.05 88.62

R A I I a S

CURRENT RATIO 1.19 0.98 1,00 1.03 1.07 1.39 1.11 1.49 2.46 5.84DEBT/EQUITY RATIO 0.32 0.43 0.61 1,75 1.92 1.54 1.78 1.30 0.87 0.56

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED:03/21/80

- 94 -

ANNEX 7-8

EGYPT - NSWC TEXTILE PROJECT

NSWC - ASSUMPTIONS FOR FINANCIAL ANALYSIS WITH THE PROJECT

1. The following assumptions have been used concerning balance sheetitems from 1984 onwards, (all values are in constant end of 1979 LE unlessstated otherwise):

(a) Cash & Accounts Receivable - 1/12 of annual sales revenues.

(b) Finished Goods & In-Process Inventory - LE 10.0 millioncarried over from the existing operation (in current terms)and 1/12 of production from 1984 onwards.

(c) Raw Materials & Supplies - 1/6 of the annual cotton,polyester, fuel oil and other variable costs plus spareparts included in the Project.

(d) Accounts Payable & Others - 30% of the raw materials andsupplies inventory.

2. Dividends are assumed to be paid up to 50% of net profits unless thecurrent ratio or the debt/equity ratio falls below 1.5.

3. Other assumptions regarding the operations of the existing operationsfrom 1980 to 83 are contained in Annex 4-8.

4. There is a five-year (1984-88) income tax holding. Thereafter, theincome tax is 40% of the retained earnings.

Industrial Projects DepartmentMarch 1980

- 95 -

ANNEX 7-9

EGYPT - NSWC TEXTILE PROJECT

FINANCIAL RATE OF RETURN AND SENSITIVITY ANALYSIS

A. Cash Flow for Financial Rate of Return - (Base Case - In Millions Constant End of 1979 LE)

Price Level Index Capital Cash Operating Depreciation & IncomeYear (End 1979 = 1.00) Costs b/ Revenue Costs Interest c/ Taxes

1 1.05 (1980) 3.09 - _2 1.16 16.71 - - -

3 1.25 16.23 - - - -

4 1.35 15.40 - - - -5 1.49 (1984) - 20.8 17.0 8.3 -6 1.71 - 34.3 20.7 6.9 -7 1.94 - 44.2 25.3 5.9 -8 2.19 - 44.2 25.3 5.0 -9 2.32 - 44.2 25.3 4.5 -10 2.46 - 44.2 25.3 3.0 3.2 e/11 2.61 - 44.2 25.3 2.7 3.212 2.74 - 44.2 25.3 2.4 3.313 2.87 - 44.2 25.3 2.1 3.414 3.02 - 44.2 25.3 1.8 3.415 3.17 - 44.2 25.3 1.6 3.516 3.33 - 44.2 25.3 1.4 3.517 3.49 - 44.2 25.3 1.2 3.518 3.67 - 44.2 25.3 1.0 3.619 3.85 (5.27) d/ 44.2 25.3 .8 3.6

Financial IRR = 20.

a/ Incremental cash flow with and without the project would yield a slightly higher IRR. For thisanalysis, existing assets are considered a sunk cost and surplus labor is excluded.

bj Excluding interest during construction. Taken from Annex 6-5.c/ Not part of cash flow but shown here to facilitate computation of income taxes.d/ Recovery of working capital.e/ 40% tax rate applicable to 50% of net income not distributed as dividends.

B. Sensitivity Analysis

Financial IRR After Taxes, 7.

Product Prices

Costs -157 -10% -5% Base Case +57% +10% +15%

(a) Base Case 12.3 15.4 18.1 20.5 22.9 25.1 27.1(b) Capital Costs up 20% 10.5 13.8 16.7 19.3 21.7 23.9 25.9(e) Capital Costs down 5% 13.0 16.2 19.0 21.5 23.9 26.1 28.2(d) Cash Operating Costs up 20% a/ 2.7 7.3 11.1 14.3 17.1 19.7 22.0(e) Cash Operating Costs down 5% 14.2 17.1 19.7 22.0 24.3 26.3 28.3(f) Before Income Taxes 14.6 17.3 19.7 22.0 24.1 26.1 28.1(g) Production Efficiency 90% b/ 13.0 16.3 19.1 21.7 24.1 26.3 28.4(h) Capital Costs up 10% and

Operating Costs up 20% 1.7 6.2 9.8 12.9 15.6 18.2 20.3(i) Delay in Completion and

lower Capacity Utilization cJ 5.9 8.8 11.3 13.7 15.7 17.6 19.4(j) Faster Rise in Capacity Utilization d/ 13.0 16.2 19.0 21.6 24.0 26.2 28.3(k) Industry Surplus labor 10.7 13.8 16.6 19.2 21.5 23.7 25.8

a/ Equivalent to 78/ increase in cotton prices if all other costs are unchanged.bJ Starting in 1986.c/ 1 year delay in project completion, 50% utilization during first year of production

(1985) and 65% thereafter.d/ 90% capacity utilization from 1985 onwards.e/ 5-year tax holday from start of production in 1984.

Industrial Projects DepartmentMarch 1980

- 96 -

ANNEX 8-1Pa_e 1 of 4

EGYPT - NSWC TEXTILE PROJECT

COTTON AND POLYESTER ECONOMIC PRICES

A. Cotton Economic Prices

1. Egypt grows four basic varieties or types of cotton which rangefrom medium-staple to extra-long staple cotton. Most of the cotton exportsare the high quality long and extra-long staple varieties; while most ofthe medium and some long-staple varieties are used by the domestic textileindustry. The different cotton varieties and their spinning limits areshown below:

Egypt - Major Cotton Varieties

Variety Commercial Fiber Spinning LimitName Length (maximum count)

_______ ___________ (inches)

1. Extra Long-Staple GIZA 45 1-8/16 and Ne 200 combedlonger

2. Extra Long-Staple Menoufi and 1-7/16 to Ne 140 combedGIZA 68 1-8/16

3. Long-Staple GIZA 67 and 1-5/16 to Ne 80 combedGIZA 69 1-6/16

4. Medium long-staple Ashmouni and 1-3/16 to Ne 40 Carded;GIZA 66 1-4/16 Ne 60 combed

2. Historically (1952-1978), the standard extra-long-steple Egyptiancotton (Menoufi) has sold at an average premium of about 80% (CIF NorthernEurope) above the standard short-staple cotton variety (Mexican St. Middling1-1/16 inches) although this premium has fluctuated rather widely and hasbeen as low as 30% and as high as 120% as shown below.

EGYPT - LONG-STAPLE AND SHORT-STAPLE COTTON PRICES(CIF, Northern Europe, in Constant 1978 US cents/kg)

Year Egyptian Cotton Mexican Cotton Price Egyptian Cotton Mexican Cotton Price(Menoufi) Price (Short-staple) Ratio Year (Menoufi) Price (short-staple) Ratio

Price Price

1952 596.2 302.2 1.88 1965 325.4 183.0 1.78

1953 385.4 276.1 1.40 1966 314.9 177.7 1.77

1954 437.3 290.8 1.50 1967 331.0 190.7 1.74

1968 388.6 206.0 1.89

1955 428.3 272.7 1.57 1969 414.6 186.3 2.22

1956 519.6 238.9 2.17

1957 427.3 230.1 1.86 1970 369.0 181.0 2.04

1958 291.0 219.9 1.32 1971 335.8 193.3 1.74

1959 247.1 193.5 1.27 1972 320.3 184.6 1.73

1973 414.4 257.6 1.61

1960 327.3 198.5 1.65 1974 501.6 216.2 2.32

1961 298.5 201.8 1.48

1962 280.9 197.6 1.42 1975 366.2 158.2 2.31

1963 278.6 195.2 1.43 1976 379.9 220.7 1.,21977 384.1 2.05 °

1964 321.4 193.5 1.66 1978 Average (1952-1978) 295.6 1.84

Source: Commodity Trade and Price Trends, Report No. EC 166/79 World Bank, August 1979. 1.75

- 98 -

ANNEX 8-1Page 3 of 4

3. The Bank's long-term price forecast (1985. and later) for the short-staple cotton is US$2.05 per kg, CIF Northern Europe, in constant end of 1979US dollars. On this basis, the corresponding Egyptian Menoufi price, usinga premium of about 80%, would be US$3.69 per kg. Ocean freight andinsurance for cotton would typically be about US$0.20 per kg. Amongthe different Egyptian cotton varieties, the Menoufi has historicallysold (FOB basis) at a premium of about 10% to 12% above the GIZA 69 priceand 30% to 35% above the Ashmouni price. These historical premiums areused to derive the economic prices of the GIZA 69 and Ashmouni varietiesas shown below:

Egypt - Long-Term (1985 Onwards) Economic Prices of Cotton Varieties

Price In Constant End of 1979 US$ per kgEgyptian Cotton FOB CIF, N. Europe

1. Menoufi 3.50 3.702. Giza 69 3.15 3.353. Ashmouni 2.65 2.85

Short-Staple Cotton 1.85 (USA/Mexico) 2.05

4. For the project, the Ashmouni variety would be adequate for themedium to long-staple cotton requirements. However, for the economicanalysis, tgae FOB price of the GIZA 69 or US$3.15/kg)which is about 19%more than the Ashmouni price, has been used as the basisfor the cost of the medium to long-staple cotton that will be used by theproject. The imported short-staple cotton economic price, delivered tothe project facilities, is taken as US$ 2.15per kg to allow for port hand-ling, storage and local transport costs.

B. Polyester Economic Prices

5. The long-term (1985 onwards) economic price of polyester fiberis assumed as US$1.95per kg (FOB), in constant end of 1979 US dollars. Thisis higher than the prevailing depressed (due to temporary supply surpluses)prices of about US$1.55 per kg, but reflects both the expected long-term production cost plus a reasonable return for new investments and theprice trend of short-staple cotton for which polyester is a substitute.The delivered cost (financial and economic) of polyester to the projectfacilities are shown below:

- 99 -

ANNEX 8-1Page 4 of 4

EGYPT - DELIVERED COST OF POLYESTER(In Constant End of 1979 US dollars per kg)

Financial Cost Economic Cost

FOB Price (Europe) 0.88 0.88Ocean Freight & Insurance (8%) 0.07 0.07

CIF (Egypt) 0.95 0.95.axes & Duties (17% of CIF) 0.16Local Handling (8% of CIF) 0.08 0.08

Delivered Price 1.19 0.03

In US$ per kg 2.62 2.27In LE per kg 1.81 1.57

6. A new public sector 25,000 tpy polyester plant recently started commer-cial production early 1980. Thus, polyester is locally available. For pur-

poses of the financial and the economic analysis, however, the delivered costis assumed to be identical to the cost of imports as shown above.

Industrial Projects DepartmentMarch 1980

- 100 -

ANNEX 8-2

EGYPT - NSWC TEXTILE PROJECT

ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS

A. Base Case Costs and Benefit Streams a/ (in Millions of Constant End of 1979 LE)

Capital Operating Costs Economic Value Net

Year Costs Cotton Other of Output Benefit

1 (1980) 3.09 - - - (3.09)2 16.23 -- - (16.23)3 15.47 - - - (15.47)4 14.99 - - - (14.99)5 (1984) - 4.6 10.9 23.0 7.506 8.6 15.5 36.9 12.87 - 11.1 18.6 47.3 17.68 - 11.1 18.6 47.3 17.69 - 11.1 18.6 47.3 17.6

0_( - 11.1 18.6 47.3 17.61 - 11.1 18.6 47.3 17.6

12 - 11.1 18.6 47.3 17.613 11.1 18.6 47.3 17.614 - 11.1 18.6 47.3 17.615 11.1 18.6 47.3 17.616 - 11.1 18.6 47.3 17.617 - 11.1 18.6 47.3 17.618 - 11.1 18.6 47.3 17.619 (5.27) c/ 11.1 18.6 47.3 22.9

Economic IRR 22.3o

B. Sensitivity Analysis

Product PricesBase

Costs -15% -10% -5o Case +5% +10% +15%

(a) Base Case 13.6 16.8 19.7 22.3 24.7 26.9 29.1(b) Capital Costs Up 20% 11.1 14.0 16.7 19.1 21.3 23.4 25.3(c) Capital Costs Down 5% 14.4 17.6 20.5 23.2 25.7 28.1 30.2(d) Cash Operating Costs Up 20% 3.2 7.9 11.8 15.2 13.2 20.9 23.5(e) Cash Operating Costs Down 5 d/ 15.7 18.6 21.3 23.8 26.1 28.3 30.4(f) Production Efficiency 90% -d 15.1 18.3 21.2 23.9 26.3 28.6 30.8(g) Capital Costs Up 15% and

Operating Costs Up 20% 2.2 6.8 10.5 13.7 15.6 19.2 21.6(h) Delay in Completion and /

Lower Capacity Utilization - 6.7 9.8 12.4 14.9 17.0 18.9 20.8(i) Faster Rise in Capacity f/

Utilization - 14.3 17.5 20.5 23.2 25.7 28.0 30.2(j) Including Surplus Lahor 11.3 14.5 17.3 20.0 22.4 24.7 26.9

a/ Incremental cash flow with and without the project would yield a slightly higher IRR.For this analysis,existing assets are considered a sunk cost and surplus labor isexcluded

b/ Sama as financial zapital costs but excluding the General Import Tax.c/ Recovery of working capital.d/ Starting in 1986.c/ One year delay in project comt.letion, 50% capacity utilization during the first year

(1985) and 65% thereafter.f/ 90% capacity utilization from 1985 onwards.

Industrial Projects DepartmentMarch 1980

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