Liberia - NIOC Iron Ore Rehabilitation Project

The World Bank F0R CAFICiIAL USE ONLY Report No. 6675 PROJECT COMPLETION REPORT LIBERIA NIOC REHABILITATION PROJECT (LOANS 2080 and 2081-LBR) March 9, 1987 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties.lts contents may not otherwise be disclosed without World Bank authorization.  ABBREVIATIONS NIOC - National Iron Ore Company FMO - Nederlandse Financierings-Naatschappij Voor Ontwikkelingslanden N.V. LMC - Liberia Mining Company PPF - Project Preparation Facility ADB - African Development Bank SAR - Staff Appraisal Report FOB - Free on Board  FOE OFFICIAL USE ONLY THE WORLD SANK Washington. D C 20433 USA Olke od 0OncitwQWhI Ops.ti fjtuzan March 9, 1987 MENORANDUN TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Liberia - NIOC Rehabilitation Project (Loans 2080 and 2081-LBR) Attached, for information, is a copy of a report entitled "Project Completion Report on Liberia - NIOC Rehabilitation Project (Loans 2080 and 2081-LBR)" prepared by the Industry Department. Under the modified system for project performance auditing,further evaluation of this project by the Operations Evaluation Department has not been made. Attachment Thdocument hasanrsuicted disuibuton and my be Od by ripinta onlin t @epfonne of their offcil 4utiKItsconsntsmy amothWwise be dbckoWewithout WorM Bankeutbnzation.  FOR OMCIAL USE ONLY PROJECT COMPLETION REF%JRT LIBERIA - NIOC REHABILITATION PROJECT (LOANS 2080 and 2081-LBR) TABLE OF CONTENTS Page No. Preface ............. i Basic Data Sheet ............. ii Highlights ..... ...** ........................... iv Introduction ......................................................... 1 Background ......**,*,****..***.....**,.................*,*..... 1 Project Identification, Preparation, and Appraisal ................... 1 Project Cost and Financing ........................................... 2 Project Implementation and Management ................... . 3 NIOC Operating Performance 4.................... ................*.. 4 Mine Closure ........................... . 7 Lessons for Similar Projects ...... Ccc, ............................. 10 ATTACHMENT I Liberia: NIOC Rehabilitation Project - Back-to-Office Report ..... 13 ATTACHMENT II Comments Received From The Opec Fund for International Development 17 MAP IBRD 15723: Liberia - Iron Ore Concession Areas This document has a reflticted 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.  - i - PROJECT COI'LTION WRPT_ I;BERIA - NIOC PEHABILITATION PROJECT (LOAus 2080 anl 2081-M) PREFACE The IBRD Loans 2080-LBR (US$11.7 million) and 2081-LBR (US$8.3 million) provided financing for the rehabilitation of mine, railroad, and port facilities to increase production of iron ore from about 1 million tpy to 3.4 million tpy. The project was implemented by National Iron Ore Company (NIOC), a Liberian Corporation. Faced with a permanent shrinking of the market for its specialty ores and as a result the prospect of continuous operational cash losses, NIOC ceased operations on April 3, 1985. The company is in the process of settling severance and pension obligations towards its employees. The Government, NIOC's majority shareholder, has assumed the debt service obligations for the rehabilitation loans. Comments received from the OPEC Fund, one of the co-financiers, have been incorporated in the final report and are reproduced as Attachment TI. No comments were received from the Borrower. This project has snot been audited by the Operations Evaluation Department.  -is. - PEN T 2WCOI.WWrION rREPORT LIBERIA- NIOC REABILITATION PROJECT (LOANS 2080 and 2081-LBR) BASIC DATA SHET (US$ M LOAN POSITION --As of 12/31/86--- Original Disbursed Cancelled Repaid Outstanding Loan No. 2080-LBR 8.3 8.3 0 0 8.3 Loan No. 2081-LBR 11.7 11.7 0 0 11.7 CUMULATIVE LOANS DISBURSEMENT FY82 FY83 FY84 FY85 FY86 (i) Planned 5.0 15.8 19.5 20.0 20.0 (ii) Actual 1.3 5.8 15.4 19.8 20.0 tiii) (11) as % of (i) 2.6? 37% 79% 992 100% OTHER PROJECT DATA Original Actual or Loan Date Re-estimated Board Approval 09/22/81 01/07/82 Loan Agreement - 02/26/82 Effectiveness - 03/18/82 Loan Closing 12/31/85 12/31/85 Total Project Cost (US$M) 67.1 80.4 overrun/underrun - 13.3 Completion of Physical Components 12/83 01/85 Achievement of Full Incremental Production 1984 NA a/ Financial Rate of Return (%) 14.3 NA W/ Economic Rate of Return (X) 26.5 NA 8/ STAFF INPUT (Staffweeks) FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 Total Preappraisal 3.5 56.5 14.9 - - - 74.9 Appraisal - - 41.4 6.5 - - - - 47.9 Negotiations - - - 12.3 - - - - 12.3 Supervision - - - 10.5 37.0 37.9 14.6 - 100.0 Other - - - - - 0.4 - 5.6 6.20 Total 241.1 a/ Mine permanently closed as of April 3, 1985.  -iii- MISSION DATA Month/ No. of No. of Staff Date of Mission Year Weeks Persons Weeks Reports Appraisal 12/80 2 6 12 12/01/81 Supervision I 05/82 1 2 2 06/04/82 Supervision II 10/82 1 2 2 12/06/82 Supervision III 03/83 1 2 2 04/08/83 Supervision IV 06/83 1 2 2 06/21/83 Colenders Meeting I a/ 07/83 0.2 5 1 08/23/83 Supervision V 10/83 2 3 6 11/03/83 Colenders Meeting II 12/83 1 1 1 12/16/83 Colenders Meeting III 01/84 0.3 5 1.5 02/13/84 Supervision VI a/ 08/84 0.3 2 0.6 09/13/84 Colenders Meeting IV 12/84 0.2 5 1 02/07/85 Colenders Meeting V a/ 01/85 0.2 5 1 02/07/85 Supervision VII a/ 03/85 0.5 2 1 NA H/ Held in Washington, D. C. OTHER DATA Borrower Republic of Liberia Executing Agency National Iron Ore Company (NIOC) Fiscal Year of Borrower July 1 - June 30  - iv - PROJECT COMPLETION REPORT LIBERIA - NIOC REHABILITATION PROJECT (LOANS 2080 and 2081-LBR) HIGHLIGHTS NIOC was established in 1958 by private Liberian and US investors to develop the Mano River iron ore deposits near Sierra Leone. The Government of Liberia received 50% of the shares in exchange for permanent exemption from profit taxes and royalties (para. 2). The NIOC Rehabilitation Project, which was initiated in 1978 at the Government's request, was designed to increase both run-of-mine and beneficiated ore output, reduce operating cost, and improve infrastructure facilities, as well as the overall operations of the Company so that NIOC could recover from a virtually bankrupt situation and continue operating (paras. 4 and 5). The project was appraised in December 1980 and approved by the Board in January 1982. The Bank assisted NIOC in all aspects of project preparation, including technical aspects, securing of financing, restructuring of the company and management arrangements. However, between 1978 and 1982, NIOC's operations, which had been unprofitable since 1974, continued to deteriorate substantially. In 1980, the Company defaulted on payment of about US$6.5 million of long-term debt and incurred total losses of over US$6.0 million which was covered by commercial bank credits until August 1980, at which time Government assumed these liabilities, It was thus clear that the survival of NIOC depended on the availability of (i) the long-term financial package for the rehabilitation project and (ii) the immediate shorter-term working capital funds to finance its cash losses (para. 6). The Bank played a key role in securing the financing package. The working capital requirements of US$15 million was financed by commercial banks. However, due to the highly risky situation of NIOC and complexity of trust and insurance arrangements it took about one year to secure this financing (para. 7). For several months at the beginning of project implementation in mid-1982, NIOC had sufficient operating funds. Working capital disbursements of US$15 million under the rehabilitation package bridged the ongoing cash operating losses. Thereafter the losses remained unfinanced or were financed with considerable delays through various government arrangements. Operations became erratic as procurement of spares and other materials, fuel and lubricants became increasingly difficult. Numerous late payrolls depressed staff morale. In addition, NIOC was struck by a serious landslide accident which took 48 lives and injured 38 people (paras. 14, 15 and 19). In parallel to operations and after an initial delay of four months, the rehabilitation project proceeded well until mid-1983. Thereafter the pace of implementation slowed as the project became more and more affected by NIOC's and Liberia's financial difficulties (para. 11).  In the second half of 1982, steel demand experienced a severe downturn, as did consequently iron ore. NIOC (as all iron ore producers) had to accept major price reductions in 1983, i.e. 9% in current terms. Another reduction of 6% followed in 1984, and prices in 1985 remained more or less unchanged (1986 prices for comparison are down another 1.1% on average). Combined with higher than expected asset renewal requirements after completion of the rehabilitation program, these price reductions largely erased any prospects for short- and medium-term viability (paras. 16 and 21). Long-term viability ultimately vanished in mid-1984, when NIOC's market prospects were reduced from 3.25 million tpy to 1-1.5 million tpy, far below break-even requirement. Technological change in blast furnace mix, initiated in part by NIOC's unreliable deliveries both in quantity and quality, and an agile competitor brought about the reduction of NIOC's prospective sales volume (paras. 22-24). In late 1984, the Government proposed to close the mine as it could not support any longer the financial outlays required to keep it open. A closure plan was prepared, dealing in particular with four months of payroll arrears, phased termination, of em.ployment, and severance and pension payments. NIOC closed on April 3, 1985 (pAras. 25-26). Major lessons learned iinclude: (i) when preparing rehabilitation projects and making an initial aseessment of the projects' financial and economic viability, provisions should be made for possible further deterioration during the period between preparation and start of implementation. (ii) A corollary to lesson one is that rehabilitation of a neglected capital stock is not only costly but costs are difficult to estimate. Therefore, when making provisions for asset renewals of a deteriorated capital stock careful assumptions (i.e., physical contingencies) should be applied. (iii) To ensure that signals of impending change in the market place are picked up, the basis for commodity projections needs to be thoroughly reviewed one more time, whenever there is a lapse of over six months between appraisal and board presentation. (iv) Overstaffing, if existing, needs to be dealt with from the beginning, even if the rehabilitated production volume warrants existing staffing levels. During the rehabilitation period, the cost of keeping/releasing/ temporarily laying off the redundant staff has to be clearly identified and financed as a separate project cost item. Preparation of such programs has to start early in the project cycle because they are politically sensitive and require time to be agreed upon and to be implemented (paras. 30-34).  PROJECT CORMLETION REPORT LIBERIA - NIOC REHABILITATION PROJECT (LOANS 2080 and 2081-LBR) Introduction 1. In February 1982, two IBRD loans totalling US$20 million 1/ equivalent were extended to the NIOC and the Government of Liberia for a rehabilitation program to modernize the mining and railway facilities and to increase the productive capacity of the operations. In addition to World Bank financing, the rehabilitation program was supported by North American commercial banks, headed by Bank of America, African Development Bank (ADB), OPEC Fund, and Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (Dutch FMO), Background 2. NIOC was established in 1958 by private Liberian and US investors to develop the Mano River iron ore deposits near the Sierra Leone border. The Government of Liberia received 50% of the shares in exchange for permanent exemption from profit taxes and royalties. The Mann mine was originally developed as an adjunct to the Liberia Mining Company (LMC) mine at Bomi Hills, with whose ore NIOC's could be mixed to meet grade specifications. 3. NIOC had experienced losses in every year since 1974 except in 1977 when it benefitted from a peak in its selling prices while managing to keep its costs at a stable level. In 1979 there was a dramatic deterioration when (i) the production costs increased by more than 14%, (1i) production remained static, (iii) the year-end loss was about US$1.7 million, and (iv) the Company defaulted on payment of about US$6.5 million of long-term debt. Project Identification, Preparation and Appraisal 4. The NIOC Rehabilitation Project was initiated in 1978 at the Government's request to rehabilitate NIOC in order to forestall imminent closure of the Mano River mine. An identification mission visited NIOC in the fall of 1979 and subsequently the Bank helped NIOC and the Government to prepare the project by providing, in October 1979, a US$500,000 project preparation facility (PPF) advance to the Government to finance consulting studies and detailed engineering work to define the project scope, design and viability. A Canadian consultant group undertook the preparation work, and in July 1980 submitted the final report. A second PPF advance of US$500,000 was approved In February 1981 to finance detailed engineering and legal assistance. 1/ Loan 2080-LBR was to NIOC for US$11.7 million equivalent and Loan 2081-LBR was to the Government in thae amount of US$8.3 million equivalent.  -2- 5. The NIOC Rehabilitation Project was designed to increase both run-of-mine and beneficiated ore output, reduce operating costs, and improve infrastructure facilities so that NIOC could recover from a virtually bankrupt situation and continue operating. The project was based on proven ore reserves for at least 12 years' operation at the increased level of production (after completion of the rehabilitation), and additional probable reserves with the possibility of extending the life of the mine for an additional 5 years. The concentrating plant output was to increase from 2.3 million tpy to 3.25 million tpy with a recovery of 53%, implying an increase in run-of-mine ore output from about 4.5 million tpy to 6.1 million tpy. Due to scarcity of managerial and technical capabilities in Liberia at that time, the project also Included management and technical/engineering assistance to improve as well as to manage .he operations of the Company. 6. Between early 1978 and December 1980, the time of project appraisal, NIOC's situation had substantially deteriorated as a result of the shortage of funds, and senior staff departures. Due to equipment breakdown and lack of spare parts, the mine was operating at less than half of its capacity (below 100,000 tons/month) in 1980. Total 1980 losses amounted to more than US$6 million and were covered by commercial bank credits until August 1980, at which time these liabilities were assumed by the Government. It was thus clear that without an immediate and substantial inflow of funds within a short period of time NIOC would close down. Therefore, the survival of NIOC depended on the ability to finalize quickly the long-term financial package for the rehabilitation project and on the immediate availability of shorter-term working capital funds to finance its cash losses. Project Cost and Financing 7. The Project financing plans of April 1982 and the actuals of December 1986 are presented below: Flinancing Sources April 1982 December 1986 -----US$ Million--