Koyo is a fully owned subsidiary of Koyo Ecological Agrotech Group Ltd. (the sponsor), which is a chemical fertilizer company based in China with operations in Chengdu, Sichuan province. It is listed on the Hong Kong GEM with an annual turnover in 2007 was about $100 million and EBITDA of $10 million. The sponsor manufactures and markets four main products through five subsidiaries: bulk blend (BB) and compound fertilizers, sodium carbonate and ammonium chloride, urea, ammonia and ammonium carbonate.

The project is estimated to cost $150 million. The proposed IFC investment includes up to $30 million via a combination of an A loan and a C loan for IFC’s own account and a $50 million B loan.

40.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	20.0
Equity	20.0

* These investment figures are indicative

The proposed project will be Dazhou city, 400 km away from Chengdu City, a poor region of China. It will be located inside a designated natural gas chemical industrial zone of which approximately one third of the area has been developed or is in the process of being developed. Dazhou is one of the three natural gas bases in China.

The nearest community is about 2.5 km from the project site. The complex has direct access to major roads and railway by which the product will be transported.

The Capital Expenditure Program will create employment opportunities. It is expected that the project will employ 400 people on a permanent basis, as well as 1000 for the construction. In addition, the proposed project will contribute to the development of the local economy. First, Koyo [plans to rely exclusively on Chinese contractors and construction workers for the implementation of the Project. Second, it will provide much needed fertilizer to a region of China that has been devastated by the earthquake of May 2008. Lastly, the company has an ongoing education program to help local Chinese farmers improve their use of fertilizers, which Koyo plans to enhance as a result of this project.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- direct employment levels,
- volume of urea available to the local farmers
- contribution to enhancing local farmer awareness of improved fertilizer usage
- value of construction contracts awarded to local firms.
- use local resource and enhance local economy which is primary agriculture-based

FIT WITH THE WBG STRATEGY:
The project fits well with the most recent (2006-2010) World Bank Group Country Partnership Strategy (CPS, report No. 35435 discussed by the Board on May 23, 2006), which is organized around five main pillars that aim to help:

- Integrate China into the world economy by deepening its participation in multilateral economic institutions, reducing internal and external barriers to trade and investment, and contributing to its overseas development efforts;
- Reduce poverty, inequality and social exclusion, through promoting balanced urbanization, sustaining rural livelihoods, and expanding access to basic social and infrastructure services, particularly in the rural areas;
- Manage resources scarcity and environmental challenges, through reducing air pollution, conserving water resources and optimizing energy use, improving land administration and management, and observing international environmental conventions;
- Deepening financial intermediation, by expanding access to financial services(especially among Small and Medium Enterprises), developing the capital markets, managing systematic risks, and maintaining financial stability; and
Improve public and market institutions by improving firm competitiveness, reforming public sector units and rationalizing intergovernmental fiscal relations.
- Within this framework, IFC has a growing role supporting transactions that set standards in areas like corporate governance while creating demonstration effects. IFC’s strategy in China is based on:
- Encouraging the development of China’s local private sector, including small and medium sized enterprises;
- Investing in the financial sector to develop competitive institutions that will meet international corporate governance and operating standards;
- Supporting the development of China’s western and interior provinces; and
- Promoting private investment in the infrastructure, social services and environmental industries.

IFC will make its contribution to the proposed project in the following ways:

Provide a funding source to the private sector in Sichuan for the rebuilding post earthquake:

The earthquake raises tremendous funding demands from those affected by the earthquake. However under limited available funding sources, the private sector has experienced difficulties in obtaining the needed financing. In addition, long-term financing, beyond 5 years, is scarce in China, particularly for private companies. IFC will help Koyo put in place a long-term capital structure to sustain its large capital investments and weather the cyclicality of the fertilizer business.

Benefits to local farmers on better using fertilizers through linkages: IFC’s advisory team will look into helping Koyo to develop a linkage program with the local community to help improve the distribution of fertilizers to farmers.

Environmental & Social: IFC will review Koyo’s environmental and social practices and assist the company in complying with international environmental and social standards.

IFC''s early review of this investment has identified the following environmental, social, health and safety issues: air emission, wastewater treatment and discharge, solid and hazardous waste management, operation hazard and hazardous material management, employee health and safety, fire protection and emergency response, energy efficiency and greenhouse gas emissions, community health/safety, community relationship and development, and land acquisition process.

While all Performance Standards are applicable to this investment, IFC’s environmental and social due diligence indicates that the investment will have impacts that must be managed in a manner consistent with the following Performance Standards:

- PS1: Social and Environmental Assessment and Management Systems
- PS2: Labor and Working Conditions
- PS3: Pollution Prevention and Abatement
- PS4: Community Health, Safety and Security
- PS5: Land Acquisition and Involuntary Resettlement

Based on this early review, it is anticipated that this investment will require 30/ days disclosure by IFC prior to Board and has been provisionally categorized as B.