Morocco - CIOR Cement Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4237 PROJECT COMPLETION REPORT MOROCCO: CIOR CEMENT PROJECT (LOAN 1383-MOR) December 28, 1982 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MOROCCO: CIOR CEMENT PROJECT (LOAN 1383) Table of Contents Page No. PREFACE . .................................................... (i) BASIC DATA SHEET ............................................ (ii) HIGHLIGHTS . .................................................. I. INTRODUCTION ...........................................1 II. CIOR - THE COMPANY ....................................1 A. Ownership ........ ................................. B. Organization and Management ....................... 2 III. PROJECT DESCRIPTION AND IMPLEMENTATION ................ 2 A. Project Background and Description .... ............ 2 B. Project Management, Construction and Completion 3 C. Manpower Development, Training and Technical Assistance ...................................... 4 D. Environmental Aspects ............................. 6 E. Project Capital Cost .............................. 6 F. Project Financing ................................. 9 G. Disbursement of Bank Loan and Procurement .... ..... 10 IV. THE DOMESTIC CEMENT MARKET AND PRICING .... ............ 12 A. Historic and Projected Demand/Supply Balance and Project's Impact ............................ 12 B. Distribution and Transport ........................ 14 C. Pricing ............................................ 15 V. PROJECT OPERATION ..................................... 17 A. Production Build-up and Sales ..................... 17 B. Operating Costs ................................... 18 C. Financial Performance and Rate of Return .... ...... 20 D. Economic Benefits and Rate of Return .... .......... 21 VI. THE BANK'S ROLE ....................................... 22 A. Project Formulation and Supervision .... ........... 22 B. Lessons to be Learned ............................. 23 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. ANNEXES 1 Comments from the Borrower ............................. 24 3-1 List of Production Facilities and Changes in Scope ..... 26 3-2 Implementation Schedule ................................ 28 3-3 Manpower ............................................... 29 3-4 Capital Cost ........................................... 30 3-5 Items Financed by Bank Loan ............................ 32 3-6 Disbursement of Bank Loan .............................. 33 4-1 Domestic Cement Market: Historic Supply/Demand Balance 34 4-2 CIOR: Regional Distribution of Cement Sales, 1979-81 . 35 4-3 Domestic Cement Market: Projected Supply/Demand Balance 36 4-4 Morocco: Ex-Factory Prices Bagged Cement, 1975-82 ..... 37 4-5 CIOR: Selling Prices and Contributions from Price Equalization Fund, 1979-82 ............................ 38 5-1 CIOR: Clinker and Cement Production ................... 39 5-2 Details of Operating Costs ............................. 40 5-3 Historic and Projected Financial Statements ............ 42 5-4 Financial Rate of Return: Cost and Revenue Streams .... 45 5-5 Economic Rate of Return: Cost and Benefit Streams ..... 46  (i) 'PROJECT COMPLETION REPORT MOROCCO: CIOR CEMENT PROJECT (LOAN 1383-MOR) PREFACE This report covers the CIOR cement project supported by Loan 1383-MOR. The loan of US$45.0 million was approved in March 1977 and became effective four months after the approval. The loan amount was fully disbursed by the fourth quarter of FY 1982, almost three years behind schedule. However, 93% of the loan was disbursed within the appraisal estimated disbursement period. The project under review consisted of the design, construction and commissioning of a cement plant with a nominal capacity of 1.2 million tpy of cement, including off-site infrastructure, and of distribution facilities re- quired for the marketing of the plant products. The project also included the training of personnel to operate the plant, the establishment of management systems for the plant, and a study of the Moroccan cement pricing and distrib- ution system. The Bank loan of US$45 million financed civil works (US$17.5 million) equipment and services (US$24.7 million), and interest during construc- tion (US$2.8 million). The loan was made to Cimenterie de l'Oriental (CIOR), a company set up for the project and originally owned entirely by the public Office pour le Developpement Industriel (ODI). During project implementation, 18% of CIOR's share capital was sold to the Islamic Development Bank. The Project Completion Report (PCR) was prepared by the Industry Department of the Bank, on the basis of information and data supplied by and discussed with CIOR during the two completion missions which visited the project. Comments on the draft report, received from the Regional Department of the Bank and from the Borrower have been taken into account in finalizing the report. Comments received from ODI are attached as Annex 1. The project has not been subjected to an audit by the Operations Evaluation Department.  4  (ii) BASIC DATA SHEET MOROCCO: CIOR CEMENT PROJECT (Loan 1383-MOR) KEY PROJECT DATA As of 10/31/82 Original Disbursed Cancelled Repaid Outstanding Loan No. 1383 45.0 45.0 - 8.18 36.82 CUMULATIVE LOAN DISBURSEMENT FY78 FY79 FY80 FY81 FY82 (i) Planned 38.6 44.8 45.0 45.0 45.0 (ii) Actual 29.5 41.1 43.1 44.6 45.0 (iii) (ii) as % of (i) 76 92 96 99 100 PROJECT DATA Original Actual Loan Date Re-estimated Board Approval 3/22/77 3/22/77 Loan Agreement 4/29/77 4/29/77 Effectiveness Date 7/07/77 7/07/77 Closing Date 6/30/80 12/31/81 Date of Physical Completion 10/78 8/79 Date of start-up Operations 8/78 6/79 Financial Rate of Return (%) 10.0 10.7 Economic Rate of Return 13.8 11.5 Borrower Cimenterie De L'Oriental (CIOR) Executing Agency CIOR Fiscal Year of Borrower Calendar Year MISSION DATA Item Month, No. of No. of Date of Item Year weeks Persons Manweeks Report Identification 3/73 - 1 - 3/13/73 Preparation 8/74 1 1 1 11/01/74 Preappraisal 12/74 1 2 2 1/05/75 Appraisal 3/75 2.5 3 7.5 4/04/75 Subtotal 6.5 14.5 Supervision I 6/77 1 2 2 6/27/77 Supervision II 1/78 0.5 2 1 2/17/78 Supervision III 10/78 0.5 2 1 10/31/78 Supervision IV 5/79 0.5 1 0.5 5/31/79 Supervision V 6/80 0.5 2 1 7/03/80 Completion I 6/81 1 2 2 Completion II 10/81 0.5 0.5 rota' 11.O 22.5 COUNTRY EXCHANGE RATES DIRHAM (DH) Appraisal Year Average (1977 US$1 = DH 4.50 Intervening Years Average (1977-80) US$1 = DH 4.03 Completion Year Average (1980) US$1 = DH 3.94 1981 Average US$1 = DH 5.1   (iii) PROJECT COMPLETION REPORT MOROCCO: CIOR CEMENT PROJECT (LOAN 1383) HIGHLIGHTS Implementation of the project has been generally satisfactory. The project was completed about 10 months behind schedule, with a slight cost over- run (0.1% in DH terms; 12.6% in US$ terms). The main reasons for the imple- mentation delay were (i) delays by the main equipment supplier in manufacturing and delivery of equipment and in providing sufficient qualified staff during erection, (ii) lack of familiarity of the civil works contractor with country condition, and (iii) the project location in a remote area. Although the delays in civil works resulted in higher costs, overall financing requirements were hardly affected due to underruns for mechanical equipment and working capital. Regarding project financing, the major difference from the original plan was the inability of the Government to provide all treasury advances that had been committed for about one third of funding requirements. These funds have been compensated, without causing major problems for project implementation, by loans from other sources and cash generation, as part of the project costs were in- curred after start-up of operations. The competent and stable management of CIOR has been a key to the success of the project. Technical assistance arrange- ments during construction and start-up of operations have been adequate and the association of local and foreign consulting firms in two instances proved to be a success. Operations of the project have so far been satisfactory although somewhat below expectations. Considering the delay in production start-up of 8 months, due to the longer construction period, the production build-up in the first 3 years of operations has been below the appraisal estimate, because of market constraints and minor technical problems. Operating costs have been substantially higher than foreseen, mostly as a result of unexpected high in- creases in the unit costs of the energy inputs (fuel oil and electricity). To reduce the high and rising cost of energy, CIOR is considering the conversion of the CIOR plant from fuel oil firing to coal firing which conversion would have an attractive economic rate of return. As a result of delayed start-up of the project, CIOR's financial performance has been disappointing with sub- stantial losses in 1979 and 1980 and a modest profit in 1981. However, CIOR's financial position is expected to improve following the recent increases of cement prices, the establishment of a new cement pricing and distribution system by the Government, and by reducing CIOR's costs of energy consumption by converting its plant from fuel oil firing to coal firing. As a result, the project is now expected to achieve a satisfactory financial rate of return of 10.7%. The economic rate of return is presently estimated at 11.5%. The Bank played an important role in assisting CIOR and the Moroccan authorities in adequate preparation and implementation of the project. Partic- ularly in defining the project scope, in establishing the financing plan, in defining technical assistance arrangements for the project, and in clearly establishing procurement guidelines. The Bank's involvement also had a positive effect on the cement sector, particularly through the dialogue with the Government on cement pricing and distribution, following a study on this sub- ject financed by the Bank loan. This has been instrumental in the setting of more realistic cement prices in Morocco since the mid-1970's, and in the  (iv) establishment of a pricing and distribution system in early 1982 which is an important step toward the liberalization of the cement market in Morocco and which provides incentives for efficient cement producers. Several lessons can be drawn from the project: - Quality, stability and personality of top management are of paramount importance for the success of a project; - Consultants, suppliers and contractors should not under- estimate the difficulties resulting from the remote location of a project and its effect on the implementation schedule; - Major sector issues (such as pricing and distribution in the project's case) should be identified early in the project cycle and be addressed continually during project preparation and execution, and Government actions on these issues where possible, be made conditions of the Bank loan; - Short and medium term market projections at project appraisal, which deviate from long term projects that are normally prepared at appraisal should be given more attention, in order to provide more precautions against adverse economic conditions.  PROJECT COMPLETION REPORT MOROCCO: CIOR CEMENT PROJECT (LOAN 1383-MOR) I. INTRODUCTION 1.01 The CIOR cement project was one of the main industrial projects included in the Moroccan 1973-77 Five Year Plan, and its objectives were (i) import substitution by satisfying the growing domestic cement demand by local production, and (ii) development of the Oriental Region, one of the lesser developed areas of Morocco. The project, which was implemented during 1976- 79, consisted of the construction of a 1.2 million tpy cement plant near Oujda in the Oriental Region in Northeast Morrocco, and a 500,000 tpy distri- bution center in Fes in the Central Region to facilitate cement distribution of the plant in that region and Western Morocco. Oujda was chosen as the plant location because of the availability of raw materials (limestone and clay), and its proximity to Algeria, which was to participate in the project. 1.02 Originally, in 1972, the project was started as a joint venture between Morocco and Algeria and it was the intention that half of the plant's production would be shipped to Algeria. When the cooperation between Algeria and Morocco came to a halt in 1976, the Moroccan authorities created Cimenterie de L'Oriental (CIOR) to take over project implementation. After analyzing the options (i) original project scope, (ii) reduced scope, and (iii) liquidation, it was then decided to carry out the project scope as originally planned, with Morocco fully responsible for project financing, and with the construction of an additional distribution center near Fes to sell production in excess of demand in the Oriental Region. Compared to the other options, the advantages were: (i) no delay in project implementation, (ii) use of sunk cost already incurred, and avoiding penalties of about US$20 million in cancelling existing contracts, and (iii) possibility of eventually allowing Algeria to re-enter the joint venture. 1.03 Due to the above developments, project preparation by the Bank took longer than expected. After a project preparation mission in August 1974, the project was originally appraised in March 1975, after which Algeria withdrew from the project. The project was re-appraised in November 1976 when the ownership of CIOR had been settled. The US$45.0 million Bank loan, which financed civil works, equipment, consulting services and interest during construction, was approved in March 1977 and became effective in July 1977. Five supervision missions and two completion missions visited the project during 1977-81. II. CIOR - THE COMPANY A. Ownership 2.01 In late 1972 Morocco and Algeria established the Cimenterie Maghre- bine (CIMA) to implement and operate the project. Half of CIMA-s shares were owned by the Moroccan Bureau d'Etudes et de Participations Industriels (BEPI), the predecessor of the Office pour le Developpement Industriel (ODI), and the other half by the Algerian Societe Nationale des Materiaux de Construction (SNMC). As mentioned earlier, Morocco created CIOR in 1976, entirely owned by ODI, to take over project implementation. The project was appraised when these arrangements were completed. In 1978, 18% of CIOR's share capital  was sold by ODI to the Islamic Development Bank for DH 45 million (US$11.3 million). So far, the Islamic Development Bank has taken the position of a silent partner and ODI, which owns 82% of CIOR s shares, remains the Company's major shareholder. B. Organization and Management 2.02 CIOR's management structure and organization have performed well. The President of the Board, who is also the General Director of ODI, is now Mr. Belkhayat, former assistant to the Prime Minister. Most of the other Board members, consisting of representatives from ODI and from the Ministries of Industry, Finance, Public Works and the Prime Minister-s Office have been maintained. CIOR s Board exercises the wide powers traditionally exercised by the Board of a "societe anonyme", e.g. establishment of annual and long term investment and operational plans; approval of all major contracts, agreements and loans; appointment of the General Manager; and approval of financial statements. Mr. Ennadifi, CIOR's General Manager, has kept excellent relations with the President and with the Board. This has considerably facilitated project implementation, since in their respective fields, the Board members have always made their best efforts to support the project. 2.03 Mr. Ennadifi has been a key element in the success of the project. Open to advice, competent and dynamic, he has managed to attract in a remote area a well motivated and qualified team, which is now composed of a plant manager and five directors, respectively for Finance, Marketing, Production, Administration and the Fes Distribution Terminal. This organizational structure is adequate. 2.04 As had been agreed during negotiations of the Bank's loan, CIOR employed outside consultants to study the Company's financial planning and internal auditing system. The study was carried out by a French engineering firm and major cement producer, in conjunction with a Moroccan consulting firm specialized in electronic data processing. The study was of good quality and its recommendations were implemented in a timely manner. III. PROJECT DESCRIPTION AND IMPLEMENTATION A. Project Background and Description 3.01 The project was initiated by the Moroccan authorities as a result of lack of initiatives from the private sector to build new cement capacity in Morocco. The private sector had abstained from investing in additional cement capacity in spite of the growing cement demand in Morocco, because of a long period of price controls during which prices were frozen at low levels (para 4.10). 1/ The project consisted of the construction of a cement plant at El Aioun, 45 km west of Oujda in Northeast Morocco, close to the Algerian 1/ Cement prices have been increased more regularly since 1975 (para 4.13).  - 3 - border. The plant has a nominal capacity of 1.2 million tpy of cement with two production lines, using energy efficient dry process technology to manufac- ture ordinary Portland cement as well as some special cement types. Compared to appraisal, the project scope has undergone only minor changes, the most important of which are (i) changes in lay-out of conveyor belts, (ii) changes in position of the raw mill, (iii) addition of a spout packer and weighing bridges, (iv) addition of a gypsum crusher station and a clinker reclaiming station, and (v) additional buildings for offices and social services. Together with the list of production facilities, these changes are presented in Annex 3-1. B. Project Management, Construction and Completion 3.02 The overall project management was carried out by a small team headed by Mr. Ennadifi, CIOR-s General Manager. The team was assisted by a British consulting firm which in a first phase prepared the feasibility study, in cooperation with a local consulting company, and in a second phase carried out detailed engineering, procurement, training, and supervision of civil construction, erection and commissioning. 3.03 At appraisal, execution of the Oujda plant project was estimated to take 37 months from the date of contract signature of mechanical equip- ment. Completion was scheduled for August 1978, when the second line of production was planned to start operations following starting of the first production line 2 months earlier, i.e. in June 1978. This relatively short execution period was considered realistic since contracts for about 80% of the project items had already been signed prior to appraisal. Actually, the first production line started to produce clinker in December 1978, and the second line in June 1979, respectively 6 and 10 months after the dates estimated during appraisal. In addition, various finishing works were finalized 3 months after the starting of the second production line. Under these cir- cumstances, the total project delay was 13 months, with an average composite of about 10 months 1/. The actual implementation time schedule compared with the appraisal is given in Annex 3-2 and is summarized below: 1/ Arithmetic average between delays of first production line, second production line and full completion of the plant.  - 4 - CIOR Cement Project: Analysis of Implementation Delays Type of Work Completion date Delay Appraisal Actual (Months) Contract Signature: - Civil Works April, 1976 April, 1976 - - Mechanical Equipment June, 1975 June, 1975 - - Electrical Equipment June, 1976 June, 1976 - - Process control July, 1976 July, 1976 - Site Preparation March, 1976 March, 1976 - Civil Works March, 1978 November, 1978 8 Mechanical Equipment June, 1978 May, 1979 a/ 11 Electrical Equipment May, 1978 May, 1979 b/ 12 Process Control Equipment May, 1978 May, 1979 b/ 12 Connections to Power Networks March, 1978 July, 1978 4 Service and Loose Plant March, 1978 July, 1978 4 Quarry January, 1978 August, 1978 6 Start-up and Commissioning - Line 1 June, 1978 December, 1978 6 - Line 2 August, 1978 June, 1979 10 Housing October, 1978 January, 1979 3 Fes Distribution Center - July, 1979 - a/ Actual completion of finishing works by July 1979, i.e., 1 month after the start-up. b/ Actual completion of finishing works by October 1979, i.e., 4 months after start-up. 3.04 Within the average composite delay of 10 months, it is estimated that four months were caused by civil works and six months by the delivery and erection of equipment. Three main factors contributed to these delays. First, CIOR alleges that the main equipment contractor was responsible for about 6 months delay in manufacturing and delivering the equipment, and provided insufficient qualified staff for erection. Second, the civil work contractor, although technically competent had to familiarize themselves with the Moroccan environment and procedures. Third, the project was located in a remote area, making it difficult to attract and maintain local qualified staff for constru- ction and to obtain supplies in a timely fashion. In particular, there were periods of shortages for key materials such as cement and steel structures. 3.05 The Fes distribution terminal started operations in July 1979, as scheduled. C. Manpower Development, Training and Technical Assistance 3.06 CIOR's total labor force has reached 642 persons, 202 people or 46% more than foreseen during appraisal. A detailed comparison between  - 5 - the appraisal estimate and actual employment is shown in Annex 3-3. The main reasons for the deviation from the appraisal estimate are (i) the re- cruitment of 82 persons for the Fes distribution center, 14 persons for the Marketing Department, 6 persons for the Casablanca distribution center and 6 persons for the Rabat Office, which had all not been included in the appraisal estimate, (ii) the strengthening of the technical department (73 additional persons), and of administration (33 additional persons), which according to CIOR were understaffed in the original plan. As compared to European standards, the labor force for the Oujda plant seems high. However, the lower productivity of the Moroccan labor force as compared to European standards has contributed to this situation. 3.07 CIOR's management has given particular attention to training and technical assistance, and this has been a major factor in enabling the Company to rapidly achieve adequate production levels. A training program was carried out by a British Consulting firm in cooperation with a local firm, and the equipment suppliers. This program, involving about 70 persons and costing about US$750,000, has been achieved and was supplemented through training in other Moroccan cement plants and by internal training within the company. After project start-up, intensive training of personnel, partly in CIOR's plant, partly in other Moroccan and foreign plants involved about 120 persons during 1979 and 1980. 3.08 The preparation, detailed engineering and supervision of execution and start-up arrangements involved an overall cost of US$7.2 million, and included about 1,100 manmonths at an average total cost of US$6,100 per manmonth. These arrangements have been satisfactory. Geological surveys, feasibility studies, general plant design, procurement, and supervision of construction and erection have been carried out by a British firm. This firm also assisted CIOR in overall project coordination and management. Detailed engineering and supervision of civil works were subcontracted to a British consulting firm, and market studies for the feasibility study, local recruitment and training study to a Moroccan consulting firm. A local firm was in charge of housing construction. Technical assistance arrangements involved a total of about US$1.0 million, and included about 140 manmonths at an average total cost of about US$7,100 per manmonth. In conjunction with a French firm, a Moroccan consulting firm provided assistance for the design and implementation of accounting, cost control, budgeting and financial planning systems. The French firm was also selected to carry out the feasibility study, detailed engineering, supervision of erection and commissioning of the Fes distribution center and to provide, together with the main suppliers, technical assistance after project start-up. 3.09 The arrangements for technical assistance during start-up have been quite exemplary. They have included an agreement between the Oujda plant and a French Cement producer, involving (i) exchange of information and visits, (ii) spot assistance in all areas whenever needed, and (iii) availability to CIOR of the French producers' internal technical, commercial and financial documentation. Overall, the technical assistance arrangements made by CIOR for the project have been comprehensive and performed well, and the cooperation between European and Moroccan consulting firms has been quite successful.  -6- D. Environmental Aspects 3.10 The plant is located in a semi-arid area with little agricultural use. Nevertheless, it was designed to meet anti-pollution standards comparable to those maintained by Western European countries. 3.11 Air pollution is the main problem posed by dry process cement plants. To control pollution, electrostatic precipitators and filters have been instailed at the various stages of production to keep dust discharges below 115 mg/Nm . Total costs of these installations (excluding civil works) amount to about US$5.3 million. To control noise pollution, appropriate abatement precautions have been taken at the noise generating mills and crushers. Finally, sewage treatment facilities have been installed to treat liquid effluents. Total cost of antipollution measures, including mechanical and electrical equipment and civil works, was about US$11.4 million. E. Project Capital Cost 3.12 Total financing required for the project amounted to DH 819.4 million, DH 0.9 million or 0.1% above the appraisal estimate of DH 818.6 million. In US$ terms, the total financing required was US$204.9 million compared to US$181.9 million estimated during appraisal, the 12.6% difference resulting mainly from the decline of the value of the US$ between appraisal and the dates when the costs of the project were incurred.  - 7 - 3.13 A detailed comparison between the estimate made at the time of appraisal and the final cost of the project is given in Annex 3-4 and summarized below: CIOR Cement Project: Capital Cost a/ Appraisal Estimate Actual Foreign Local Total Total Foreign Local Total Total ---- DH Million ---- US$ million b/ -----DH Million------ US$ Million c/ Buildings & Civil works 81.4 107.3 188.7 41.9 94.2 119.0 213.2 53.3 Equipment 285.6 127.2 412.8 91.7 256.7 127.9 384.6 96.2 Infrastructure 8.4 70.3 78.7 17.5 16.3 59.6 75.9 19.0 Preoperating Expenses 3.6 31.0 34.6 7.7 3.2 28.1 31.3 7.8 Engineering 15.8 7.0 22.8 5.1 19.2 9.6 28.8 7.2 Total Fixed Assets 394.8 342.8 737.6 163.9 389.6 344.2 733.8 183.5 Working Capital 6.1 25.5 31.6 7.0 4.4 17.7 22.1 5.5 Total Cement Plant 400.9 368.3 769.2 170.9 394.0 361.9 755.9 189.0 Distribution Studies and Terminal 11.1 9.8 20.9 4.7 7.2 16.4 23.6 5.9 Total Project Cost 412.0 378.1 790.1 175.6 401.2 378.3 779.4 194.9 Interest during Construction 15.3 13.2 28.5 6.3 19.8 20.1 39.9 10.0 Total Financing Required 427.3 391.3 818.6 181.9 421.0 398.4 819.4 204.9 a/ At the time of appraisal, physical and price contingencies had been prorated among the various cost categories. The actual figures have been recorded using the same methodology. b/ Exchange rate at appraisal of US$ 1.0 = DH 4.5. c/ Exchange rate of US$ 1.0 = DH 4.0, which is a weighted average exchange rate during project implementation. The annual percentage weights are: 1976 - 10%; 1977 - 30%; 1978 - 50%, 1979 - 10%. Source: CIOR.  - 8 - 3.14 As shown in the table, the overall cost overrrun of DH 0.8 million (overrun of US$12.6 million) is the result of plus and minus variations which can be explained as follows: CIOR Cement Project: Analysis of Additional Financing Required Changes in Higher price Deviation Projected Scope Escalation from above Physical than Appraisal Category Contingency Delay Foreseen Other Total Estimate Total ---------------------