Tunisia - Phosphate Project

Document of The World Bank FOR OMCFIL USE ONLY Report No. 5134 PROJECT COMPLETION REPORT TUNISIA - GAFSA PHOSPHATE PROJECT (LOAN 1042-TUN) June 15, 1984 Industry Departuent This dwmeot has a restrited distfliition and my be used by recpients only in the performnce of their officl duties. Ilscontents may nOt otherwise be disclesed without World Bank autboriztion.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT TUNISIA - GAPSA PHOSPHATE PROJECT (LOAN 1042-TUN) TABLE OF CONTENTS Page Preface .......................................................... (1) Basic Data Sheet ........................... Highlights . (iv) PROJECT COMPLETION REPORT I. INTRODUCTION 1 II. PROJECT BACKGROUND .. 2 III. PROJECT DIPLEMENTATION AND MANAGEMENT . . 6 Overviev .6 Achievement of Objectlves .8 Project Scope and Changes In Scope .9 Project Management and Performance of Consultants ...... 11 Implementatlon Schedule ................................ 12 Procurement and Performance of SuppliersIContractors ... 14 Costs, Disbursements and Financing ..................... 15 Information Systems and Reporting ...................... L8 IV. PROJECr OPERATIMU PERFORMANCE ............................ 18 Comissioning and Start-up ............ ................. ;8 Production Build-up at Mne ............................ 19 Production Build-up at Plant ......... .................. 22 Environmental Implications ........... .................. . 24 Manpower Development ................................... 24 Market Development and Performance ....... .............. 25 Financial/Economic Viability ......... .................. 26 V. COMPANY PRODUCTION PERFORKANCE ........... .................. 26 Mining ............. .......................... 26 Beneficiation ....................................... 28 VI. COMPANY FINANCIAL PERFORMANCE .............................. 30 CPG' s Financial Situation .............................. 30 Financial Covenants .................................... 31 VII. CONCLUSONS ........... .......................... 31 Overall Assessment .................................... 31 Lessons for the Borrower and the Bank for Similar Projects 33 ANNES I Implementation Schedule II Project Cost III Financial Statements IV Comments Received from the Borrower I 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 disclsed without World Bank authorization.  PROJECT COMPLETION REPORT TUNISIA - GAFSA PHOSPHATE PROJECT (LOAN 1042-TUN) PREFACE This is a Project Completion Report (PCR) on the Gafsa Phosphate Project in southern Tunisia, for which a Bank Loan (1042-TUN), for US$23.3 million, was approved in July 1974 to Compagnie des Phosphates de Gafsa (CPG). Following the closing date in December 31, 1981, IND staff visited Tunisia, in May 1982, and had discussions with the Government and the Borrower for the preparation of this PCR. The Report reflects findings of this mission as well as review of Project files and related documents. The purpose of the Report is to present a retrospective factual review of Project implementation and outcome. Comments from the Borrower have been taken into account in finalizing the report and are reproduced in Annex IV. This project has not been audited by the Operations Evaluation Department.  - ii - PROJECT COMPLETION REPORT TUNISIA- GAFSA PHOSPHATF PROJECT (LOAN 1042-TUN) BASIC DATA SHEET Amounts (in US$M) As of 1/31/84 Original Disbursed Cancelled Repaid Outstanding Loan 1042-TUN 23.3 23.2 0.1 10.1 13.1 Cumulative Loan Disbursement FY 75 76 77 78 79 80 81 82 Ci) Planned 2.3 15.8 23.3 23.3 23.3 23.3 23.3 23.3 (ii) Actual - - 4.5 10.5 17.1 19.9 22.2 23.2 (iii) (ii) as X of (i) 0.0 0.0 19.3 - - - - - PROJECT DATA Original Date Actual Date Board Approval 7/25/74 Loan Agreement - 10/01/74 Effectiveness 1/2/75 3/14/75 Loan Closing 6/30/79 12/31/81 Physical Completion 9/77 6/81 1/ Total Project Cost 62.0 80.3 2/ Financial Rate of Return 25% 2.4 Economic Rate of Return 28% 10.2 1/ Of the four longwalls envisaged at appraisal only one was installed which never went beyond its trial stage. 2/ The apparent overrun is 29%. However, if comparison is made for one longwall the appraisal estimate would reduce to roughly US$42 in which case the overrun is 90%.  - iii - MISSION DATA Month, No. of No. of Staff Date of Item Sent By Year Weeks Persons Weeks Report Identification IPD/EMENA 11/72 3 2 6 1/73 Preparation/Preappraisal IPD/EMENA 3/73 3 5 15 5/73 Follow-up I IPD 7/73 1 1 1 7/73 Follow-up II IPD 8/73 1 1 1 9/73 Follow-up III IPD 10/73 1 2 2 10/73 Follow-up IV ITPD 11/73 1 1 1 11/73 Appraisal IPD/EMENA 2174 3 5 15 7/74 TOTAL 13 40 Supervision I IPD 2/75 1 1 1 3/75 Supervision II IPD 6/75 1 1 1 7/75 Supervision III IPD 1176 2 1 2 2/76 Supervision IV IPD 5/76 1 3 3 12/76 Supervision V IPD 11/76 3 3 9 12/76 Supervision VI IPD 4/77 3 7 21 4/77 Supervision VII IPD 11/77 3 2 6 11/77 Supervision VIII IPD 3/78 2 2 4 5/78 Supervision IX IPD 7/78 2 2 4 7/78 Supervision X IPD 10/78 1 2 2 10/78 Supervision XI IPD 3/79 2 2 4 3/79 Supervision XII IPD 7/79 1 2 2 8/79 Supervision XIII IPD 4/80 2 2 4 4/80 Supervision XIV IPD 12/80 2 2 4 1/81 Supervision XV IPD 8/81 1 1 1 9/81 Completion IND 4/82 2 1 2 5/82 TOTAL 29 70  - iv - PROJECT COMPLETION REPORT TUNISIA- GAFSA PHOSPHATE PROJECT (LOAN 1042-TUN) HIGHLIGHTS In the 60's the Tunisian phosphate industry entered a difficult period. Increasing competition from other world producers such as Morocco and USA kept prices low. Production costs of Tunisian phosphate were high due to low grade, unfavorable mining conditions, old installations and overstaffing. Managerial problems and lack of expertise, added to the difficulties. Against this background, studies were contracted to foreign consultants by Compagnie des Phosphates de Gafsa (CPG) to investigate possibilities for expansion and modernization and to lower production costs. The Sehib mine, which is the topic of the Gafsa Phosphate Project, was a product of this quest. The Sehib Project, based on reserves for 20 years of production, involved development of a new underground mine employing the longwall method with an annual output of 2.0 million tonnes per year of gross-sorted-dry phosphate rock to be upgraded in a new waahing plant to 1.6 million tonnes per year of marketable 65/68% BPL rock for export. It included all necessary auxiliary facilities such as water and power supply, workshops, offices, housing and some minor roads. In parallel, the railways company SNCFT was to supply, a 13 km spur line, rolling stock and upgrading of the main line to the port in Sfax to handle the increased production. The Sehib Project was conceived in parallel to CPG's Modernization Program to be undertaken between 1974-78. Cost of the Sehib Project, including interest during construction (IDC) and working capital was estimated during appraisal in 1974 to be US$64.5 million. Cost of the SNCFT infrastructure was estimated at US$10.9 million and cost of the Modernization Program at US$51.3 million, both including IDC. The Project's immediate objective was to improve CPG's production capacity in volume and reduce its unit production costs by mastering a modern, efficient mining method and beneficiation. A longer term objective was to adapt the longwall particularly on the so-called Eastern sector deposits which need an efficient underground method for exploitation. The planned expansion of production and the reduction of unit costs have not been achieved mainly due to lengthy trials of technical feasibility, organizational and project management deficiencies of CPG. The longwall, while finally operating as trial face, underlined the importance of organizational and logistic resources for the successful employ of a mechanized operation. In the absence of these resources, the viability of the longwall remains unproven. A washing plant was built but is utilized significantly below capacity (70% capacity utilization in 1983) through improvised mining operations of limited life span because of (a) inability of the Sehib mine to produce the expected amount of rock tonnages; and (b) delays in complet4ng water wells and pipes necessary to provide the plant with adequate water supply.  v In retrospect, the Project was ill conceived. Including the Bank, CPG and the consultants, all involved parties failed to realize the technical risks and project management requirements. While both the Project authorities and the Bank investigated the technical and economic feasibility of this operation during appraisal , they were too optimistic as regards its technical feasibility and financial returns, in particular since this was a new method. In particular, results from trial mines using special longwall equipment were inaccurately extrapolated for a 2.0 million tonnes per year operation. Project maragement was never properly structured leading to excessive delays in installation, trial runs and trial evaluation. Company organizational, labor and logistic resources were not developed in parallel to support and assimilate the technology of longwall which was new to the labor intensive Company and relatively new to the phosphate mining industry. Parallel to the implementation of the Sehib Project, a continued dialogue between CPG and the Bank on the other rationalization measures and investments was intended within the structure of the Loan. While such discussions did take place, they had little effect on the actions taken by CPG. Some highlights on observations on the Project are summarized below: (i) Realization of Objectives - The immediate objective of the Project which was to increase the productive capacity of CPG and reduce its unit costs has not been achieved, and the differences between planned and actuals have been very large. - Four longwalls were foreseen for 1977 to produce 2.0 million tonnes per year starting 1979. Presently only one longwall exists which has given its best performance in 1980 and 1981 with 0.4 million tonnes per year at a unit extraction cost about twice the Company's average in the rest of its mines. The high levels of extraction were never continuous enough to assure an extraction of 1800 tonnes/workable day which is what *'s needed on a 280-workable-days-a-year schedule to attain 0.5 million tonnes per year per longwall. This level was attained only for two months in 1980 and for four months in 1981. In fact, insplte of thi-s performance, problems, be it timely mine development or ventilation, do continue to persist. - At the washing plant, planned to be ready in 1977, a production of 1.6 million tonnes per year coming from 2.0 million tonnes per year feed was foreseen. The plant was ready only in 1979 and the most active year was 1983 with a feed of 2.0 million tonnes and 1.1 million tonnes output, a 70% utilization.  - vi - - Project cost with four longwalls was estimated at US$62 million. The actual cost with one longwall has amounted to about US$67 million (65Z foreign) excluding sunk operating costs and other related investments such as the Secteur 100 and Oum El Khecheb, this cost overrun being mainly due to the delays in project completlon. (ii) The Mine - The longwall method was applied too fast without recognizing the technology transfer implications, which involve well structured project management arrangements for implementation and well assimilated company logistic resources, as described below, for operation. This is a highly mechanized, capital intensive method whose unit costs are very sensitive to discontinuity in production. A logistic build up in the following key areas is still a prerequisite for any mechanization to become viable: p preventive maintenance spare parts inventory policy cost control standards of performance training for mechanized operations training for organized team work (iii) The Plant - Construction delays were due to lack of proper management. - Low capacity utilization has been primarily due to (a) lack of water, (b) failure of the Sehib mine to deliver expected feed, and (c) inadequacy of training resulting in long learning curve. (iv) Planning and Cost Control in CPG - Since 1975 an increase in investments, mechanization and personnel is observed with no increase in tonnages mined (excluding subcontracting) as opposed to an increase in feed capacity of plant. Overall an increase in unit costs per washed tonne is observed. A dispersement of plants and mines within an area of 50 km has created complex pro-lems. All this calls for planning and a rationalization of the existing 'traffic" between mines and plants.  - vii - - The Company still lacks a system of quality and cost control, standards of performance, timely preparation of reports. These tools are essential to identify the problem centers and define accordingly the priorities to be addressed as a function of financial possibilities. They ought to be in place before any capital intensive operation is undertaken. (v) Financial Issues - The financial situation of the Company has deteriorated in the past with unexpected low phosphate prices, high unit costs and an increase of its fixed assets by US$0.6 billion from 1975 to 1981. The liquidity ratio has come down from 2.7 in 1975 to 0.8 in 1981. The debt:equity ratio nas deteriorated from 8:92 in 1975 to 63:37 in 1981. Thus, our financial covenants of 1.3 for liquidity and 55:45 for debt:equity were mostly not observed. A lesson may be that threat of suspension of the loan should have been utilized earlier to ensure more timely implementation of managerial efficiency and to avoid excessive spending on new investments. - With its present financial structure, CPG is in no position to undertake a nev major investment project. The longwall experience to date does not provide a valid basis for the adoption of longwall mining in Tunisia. As long as CPG cannot obtain or provide from its own in-house resources the logistic support required to install and operate continously a planning-intensive mining technique such as longwall faces, longwall mining cannot be considered a viable proposition in the immediate future. On the one hand, the trials have been completed successfully and a technically feasible equipment configuration operated at projected output levels during the trials. On the other hand, technical suitability alone is insufficient for proving the long term viability of the longwall technique. As long as the logistic support (organization, management, maintenance, skilled labor, cost and parts control) is not ensured, introduction of this method represents a major risk. As a result, the main benefit of the work to date is the testing experience since 1970 providing CPG personnel with a valuable exposure to this mechanized operation and demonstrating the need for organizational and logistic improvement. A continued cooperation between the Bank and CPG in the form of technical assistant, is envisaged. Such technical assistance will involve (a) a diagnostic study to identify means to improve organizational and logistic deficiencies and to rationalize existing operations; plus (b) evaluation of certain open pit deposits which offer lower risks and costs compared to underground operations, in general.  PROJECT COMPLETION REPORT \. TUNISIA - CAFSA PHOSPHATE PROJECT (LOAN 1042-TUN) I. INTRODUCTION 1.01 The following is a Project Completion Report for Gafsa Phosphate Project prepared by the Mining and Non-Ferrous Metals Division of the Industry Department. The Project is otherwise referred to as the Sehib Project. A loan was extended to the Compagnie des Phosphates de Gafsa (CPG) on October 1, 1974 by IBRD in the equivalent amount of US$23.3 million to finance imported equipment and consultant services for the Sehib mine development and beneficiation plant in the Gafsa region. The Loan was made for 15 years including 3 years of grace at an assumed interest rate of 7-1/4Z plus a guarantee fee of 1-3/4Z. The Loan is referred to as Loan TUN-1042. The closing date of this Loan was December 31, 1981. 1.02 The Sehib Project, based on ore reserves estimated at appraisal to be sufficient for 20 years of production, involved development of a new underground mine at Sehib employing the longwall method with a projected annual output of 2.0 million tonnes per year (mtpy) of gross-sorted-dry (BTS) phosphate rock to be upgraded by washing to 1.6 mtpy of marketable 65/68% BPL (1.00% BPL - 0.46% P205) rock for export. The Sehib Project also included all the necessary auxiliary facilities such as water and power supply, workshops, offices, housing and some minor roads. Parallel to the Sehib Project the railways company SNCFT was to supply, a 13 km spur line, rolling stock and upgrading of the main line to the port in Sfax to handle the increase in production. The Sehib Project was conceived in parallel to CPG's Modernization Program to be undertaken between 1974-78. Cost of the Sehib Project, including interest during construction (IDC) and working capital was estimated during appraisal in 1974 to be US$64.5 million. Cost of the SNCFT infrastructure was estimated at US$10.9 million and cost of the Modernization Program at US$51.3 million, both including IDC. 1.03 The Loan corresponds to about 7.5% of IBRD disbursement to Tunisia between 1975 and 1981. It is one of the four industrial projects financed by the Bank in Tunisia during the seventies. Its economic objectives were to promote the second best Tunisian national resource beside crude oil and develop competitive exports while also helping one of the most deprived areas of the country. 1.04 CPG, the beneficiary of the Loan, is an old company. Its roots go back to 1887 when it was formed as "Societe Anonyme' with headquarters in Paris after the discovery of phosphate reserves in 1886 near Metlaoui. In 1896 authorities granted concessions and exploitation started in Metlaoui. Output increased as new deposits such as Redeyef (1906/12) and Moulares (1919/23) were opened. Initially the rock was marketed dry-and-handsorted. Beneficiation began after Morocco started exploiting its high grade ore and it took roots particularly in the 50's with the  - 2 - Redeyef (air classification) and Metlaoui (3 washeries) plants. The Company joined the cartel CPAN in 1930 and remained in it until 1960, which restricted it to exports of 1.5 million tonnes a year with regulated price and sale conditions. In 1960, after Independence, the private shareholders offered the Government a 50% equity participation which was paid at DN 2.5 million between 1961-64. The Company later in the 60's acquired the phosphate mining company CIPHOS as part of a settlement of a previous railway concession it had. This acquisition brought with it among other things the then operating M'Dilla mine and concessions on the newly discovered Sehib, Kef Eddour and Sra Ouertane deposits. In 1962, the headquarters was transferred to Tunis. 1.05 In 1982, CPG is operating 9 mines and 14 beneficiation plants. Most mining is undergroundl/ except for 2 open pit mines2/ producing a third of the mine output. About three quarters of realizable feed capacity in beneficiation plants comes from washeries3/ with the rest coming from air classification and drying plants.4/ Realizable mine extraction capacity is 10 mtpy of BTS rock. Realizable plant feed capacity is 12 mtpy of BTS rock with a realizable output capacity of 8 mtpy of beneficiated rock. In 1981, mine output was 8 mtpy and plant output was 5 mtpy. CPG is the only phosphate rock producer in Tunisia. Its rock exports account for 2-3% of world phosphate rock trade and its domestic sales help Tunisia maintain about 10% of world P205 trade. In 1981, CPG exported 1.0 mtpy of beneficiated rock and sold 3.2 mtpy to domestic markets. The Company employs about 13,750 people of whom 2% are professionals. The Company is owned almost entirely by the State. II. PROJECT BACKGROUND 2.01 In the 60's the Tunisian phosphate industry entered a difficult period. Increasing competition from other world producers such as Morocco and USA kept prices low. However, production costs of Tunisian phosphate were high due to relatively low grade of the deposits; relatively unfavorable mining conditions; old installations for mining, beneficiation and transport; and overstaffing of the operations due to lack of other employment opportunities. Managerial problems and lack of expertise, partly as an aftermath of the industry's nationalization in the early 60's added to the difficulties. Against this background studies were contracted to foreign consultants to investigate possibilities for expansion and modernization of the industry with the objective to lower production 1/ Old exploitations: Redeyef, Moulares, Metlaoui, M'Dilla, Kalaa Djerda. New exploitations: M'Rata, Sehib, Kef Eschfair, Secteur 100. 2/ Kef Eschfair and Secteur 100. Some open pit mining is done in Moulares. 3/ Old washeries: Metlaoui (3), M'Dilla (1). New washeries: Moulares (1), Kef Eschfair (1), M'Dilla (1), Sehib (1). 4/ Old units: Redeyef (l), l4oulares (3). New units: Redeyef (1), Kalaa Djerda (1).  - 3 - costs. In 1966, a foreign engineering company completed a report on existing installations and possible new projects in the Tunislan phosphate mining industry. In this report, the Sehib Project achieved the highest rate of return in comparison with other, not yet fully explored sirface mine prospects. Following this review, the Sehib Project, located in the poorly develcped southern region with little employment opportunities, received priority ranking by the Tunisian authorities. In 1968, another mining consulting company prepared a report commending on CPG's plans for mine development in the area around Sehib (Djellabia, M'Dilla aud Sehib itself). The report confirmed that mining at Sehib could be expected to involve about the same conditions and production costs as the neighboring existing M'Dilla mine. CPG envisaged a mechanized longwall mining system from the outset. The mining consultant, however, advised to pursue the Project only after successful operation of a trial longwall. 2.02 In 1968, the Tunisian Government submitted a request to the UNDP Special Fund for assistance in developing a master plan for the Improvement of the phosphate industry in the Gafsa Basin. This was in parallel to other ongoing or proposed studies In the sector amongst which three new development projects Kef Eschfair (2.0 mtpy BTS), Sehib (4.0 mtpy, BTS) and Kef Eddour (1.0 mtpy BTS) to produce rock for beneficiation at 73% BPL were already being considered for inclusion in the 1969-72 Investment Plan. The Tunisian authorities were contemplating Bank involvement in such developments and requested the Bank's comments oa the Draft Contract for engineering services on the development of these three mines. The Bank in its comments pointed out to the necessity of waiting for the results of the beneficiation tests and the market study undertaken by outside consultants before fixing the production targets in volume and grade for the feasibility studies contemplated within the scope of such contract. Furthermore, the necessity of coordinating the phosphate development plans with other infrastructural developments and downstream facilities was pointed out. Subsequently, r foreign engineering company was given the contract but only the Sehib proposal was studied and that at a target production level of 2.0 mtpy BTS as determined by CPG to give a 1.6 mtpy marketable rock of 65/68% BPL. The marketing study was completed in mid-1970 and concluded that Tunisia could find markets for 6-7 mtpy primarily in 65/68Z BPL rock. 2.03 Meanwhile in 1968, CPG had ordered equipment for longwall trials with financial assistance from KfW. The longwall method had been well tried and proven in coal mines, but its use on harder rock such as phosphate was limited to two faces over 5-6 years in Moroccan phosphate mines. The feasibility study was completed in mid-1971 conceiving a mine uLilizing the longwall method along with an adjacent new washing plant at the above production targets. The study was completed awaiting conclusive resulta from the operation of the trial longwall. The trial longwall was installed and trial mining started in December 1970. 2.04 The period from late 1970 until appraisal in 1974 was characterized by trial mining with interruptions to modify equipment. Roof  -4- control, mechanical malfunctions, breakdown of the shearing machine and unavailability of spare parts were among the major problems. Nevertheless, it was believed by all concerned, including the Bank, that mechanical modifications such as closed rather than simple supports, a plow instead of a shearer and a narrower conveyor would provide the continuity in high output production. Decision to make these modifications was taken in February 1974 and the same longwall supplier, under a performance guarantee for 2,000 tonnes BTS per day over a two month period, entered into a contract with CPG to equip and operate this new modified longwall. The new longwall was installed in April 1975, after Bank's appraisal in February 1974. 2.05 The Tunisian authorities indicated their preference for Bank financing over supplier's credit in mid-72. From the beginning, the Bank emphasized upgrading CPG and reviewing the total Tunisian phosphate industry with the objective of modernizing and rationalizing it to restore its competitiveness among other world producers. Assurances were obtained from CPG that it would improve its managerial effectiveness through proper planning,. control and inernal coordination. Annually updated five-year investment programs were to be prepared and sent to the Bank for review. The Company was also financially upgraded through an increase in equity participation by the Government. At the request of the Bank, a planning unit was established at CPG and a Modernization Program was drawn up in 1973 to Improve safety and efficiency and to lower the costs of the Company's existing operations. In addition to new projects, Sehib being one of them, the Modernization Program was to increase production from existing operations to 3.9 mtpy (20% above 1973 level) of beneficiated rock by 1977. Although not financed under the Bank's Loan, the Modernization Program was to be parallel to the Sehib Project. The Company agreed to strengthen its staff for planning and implementing the Modernization Program and to update the Program annually in consultation with the Bank (Loan Agreement, sections 4.02 and 5.04). Since the Modernization Program would reduce the Company's manpower, a study of alternative development possibilities in the region (Regional Development Study), such as livestock development and artisan activities, to be carried out by the Government was also linked to the Sehib Project. 2.06 The appraisal mission was undertaken in February 1974. The Project centered on the installation of new phosphate mining and beneficiation facilities at the Sehib deposit, consisting of the following: (a) an underground mine, to be equipped with 4 longwalls, with an annual capacity of about 2.0 million tonnes BTS of phosphate ore (Loan Agreement, schedule 2, part A); (b) a washing and drying plant producing 1.6 mtpy of 65/68% BPL rock; connected to the mine with a 6 km long conveyor; and including storage facilities, repair shops and offices (Loan Agreement, schedule 2, part B).  -5- 2.07 For the above installations, the Bank Loan was to finance the purchase of equipment up to US$23.0 million- An additional US$0.3 million were included in the Loan to finance consultant services for the Regional Development Study. 2.08 Parallel to the above, the Project included provision of infrastructure by CPG consisting of: - water supply over 32 km distance; - power distribution to mine and beneficiation plant; - 7 km of new roads between the mine and the beneficiation plant; - upgrading the existing 9 km dirt road connecting Sehib with M'Dilla into an all-weather road; - 100 additional houses at M'Dilla. 2.09 Total project cost plus IDC and working capital for above installat