Morocco - Jerada Coal Mine Modernization and Expansion Project

Document of The World Bank FOR OMCACIL USE ONLY Rqit No. 12068 PROJECT COMPLETION REPORT MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT (LOAN 2508-MOR) JUNE 24, 1993 MICROFICHE COPY Report No.:12068 MOR Type: (PCR) Title: JERADA COAL MINE MODERNIZATION Author: MAUPRIVEZ, M. Ext. :31709 Room:T 9069 Dept.:OEDD3 Industry and Energy Operations Division Maghreb Department Middle East and North Africa Regional Office This document has a restricted distnibution 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.  CURRENCY EQUIVALENTS At Project Appraisal (July 1984) US$1 - 9.5 DH November 1992 US$1 - 8.65 EH FISCAL YEAR January - December ABBREVIATILONS AND ACRONYMS USED BRPM - Bureau de Recherches et de Participations Miniares C.OR - Cirenterie de l'Oriental CdM - Charbonnages du Maroc KfW - Kreditanstalt fuir Wiederaufbau ONe - Office National de l'Electricite PCR - Project Completion Report tpy - metric ton per year  FOR OFFICIAL U3E ONLY THE WORLD BANK Washiton, D.C. 20433 U.S.A. Offic of Director-General Operations Evaluation June 24, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Note on Morocco Jer&da Coal Mine Modernization and Exoansion Drolect (Loan 2508-MOR) Attached is the report entitled "Project Completion Report on Morocco - Jerada Coal Mine Modernization and Expansion Project (Loan 2508-NOR)" prepared by the Middle East and North Africa Regional Office. Part II was contributed by the implementation agency of the Borrower. The Completion Report provides an informative and comprehensive account of Project achievements. The coal mine expansion at Jerada was undertaken on the premise of relatively high energy prices, following the second oil shock. Declining coal prices and geological difficulties made the project financially unsound and uneconomical. Mine closure has emerged as the most appropriate course of action1 but social considerations have stood in the way of timely Government action. The project performance is rated as unsatisfactory, its benefits as unsustainable and institutional development as negligible. The Bank'. assessment and management of project risks was mnsatisfactory; the PCR hints that such projects would be better left for the private sector to handle. No audit is planned. This document has a restricted distribution and nay be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Wortd Bank authorization.  FOR OFFICiA US ONLY PROJECT COMPLETION REPORT MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT (Loan 2508-MOR)) TABLE OF CONTA= Paite No. Preface L............................. Evaluation Sumary ............. .............. ... .. ii PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project I-oentity ......*00000 **.......... *.** 1 2. Background ..............................*........ ...... 1 3. Project Design *............................ ...*......**. 2 4. Project Objectives and Debcription ........................ 2 5. Project Implementation 4............ ... ***o....... 4 6. Project Reaults .... .............................*........ 7 7. Project Sustainability . ................................*.. 8 8. Bank Performance .......................... ......... 9 90 Borrower Performance *******************10 10. Project Relationships .*.......*..........................11 11. Con8ulting Services 8 ............................ 12 12. Project Documentation and Data ........................... 12 PART II PROJECT REmVEW FROM BORROWER'S PERSPECTIVE PART III STATISTICAL INFORMATION Related Bank Loans Ta.................................... Table 1 Project Timetable .... ................................* Table 2 Loan Disbursements ..... Ta................... .* Table 3 Project Implementation ............ Table 4 Project Costs and Financing ............................. Table 5 Project Results ..*............................ Table 6 Status of Covenants ......... .......................... Table 7 Use of Bank Resources * ................................ Table 8 This document has a restricted distribution and may be used by recipients only in the perfornmnce of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i - PROJECT CONPLETION REPORT MOROCCO JERADA COAL MIME MODERNIZATION AND EXPANSION PROJECT (Loan 2508-NOR) Pr-fg*c This is the Project Compl-tion Report (PCR) for the Jerada Coal Mine Modernization and Expansion Project (Ln. 2508-MOR) in the Kingdom of Morocco. The Loan, made to Charbonnages du Maroc (CdM) in an amount of US$ 27.0 million, was approved on March 21, 1985. The Loan closed o June 30, 1991, with total disbursements of US$ 13.5 million, half the original loan amount. The remaining US$ 13.5 million was cancelled. The PCR was prepared by the Industry and Energy Division of the Maghreb Departmuent in the MN Regional Office (Preface, Evaluation Suimry, Parts I and III), and the Borrower prepared Part II. Coments received from the Project's cofinancier, KfW have been incorporated in Parts I and III. The preparation of the PCR is based on the Staff Appraisal Report (SAR), the President's Report, legal documents, supervision reports, correspondence between the Bank and the Borrower, and interml Bank memoranda.  - ii - PROJECT COMPLETION REPORT MOROCCO JEW, A COAL MINE MODERNIZATION AND EXPANSION PROJECT (Loan 2508-MOR) Evaluation Summary Backeround i. The preparation of the Project reflected the outlook for oil and coal prices after the second oil price shock at the beginning of the 1980s. This prompted an energy policy to substitute domestic coal for imported oil and coal, in order to save foreign exchange (paras. 2.1-2.3). Also there was a growing coal market in Morocco and both the Government and the Bank believed that the existing Jerads coal mine would be able to produce coal at competitive prices vith other fuels. Major consumers -- the national electric power company and the cement industry -- had converted their facilities from oil to coal. Morocco's performance in the mining sector had been good. In addition to promising coal prospects, a compelling factor in favor of the project was continued employment at Jerada, located in the eastern part of Morocco, where there were few alternative employment opportunities. Objectives ii. The Project had two sets of objectives. First, at the country level, the project was to (a) support the expansion of coal subsitution for imported energy, (b) help assure the continued employment in a less-developed region by efficient plant operating practices and modernization of facilities, and (c) maintain an appropriate coal pricing policy. Second, at the level of the Borrower, CdM, the project objectives were to: (a) increase overall coal production from 800,000 tonnes per year (tpy) to 1 million tpy, (b) modify the technology used by the company to increase productivity, (c) improve CdM's organization and mine planning and (d) improve the safety, health and working conditions of the company. Implementation Experience and Results iii. The actual cost of the Project was US$ 82.5 million, 112S of the cost originally estimated at Project appraisal, or 601 of the revised cost estimate. (Part III, Table 5). The most critical variance between planned and actual implementation was the planned cmnstruction of a mine shaft (Shaft 3). The shaft conetruction began when both coal production prospects and the coal price seemed favorable, but after later developments it became clear that completion of the shaft's construction no longer was economic. The Jerada coal mine's production fell far short of projections, mainly because of unexpectedly poor geological conditions The production decline, together with a sharp decline of coal prices, made mine closure the most economic course of action. In retrospect, it would have been better to arrest the Project earlier, but for institutional and political reasons the Government hesitated to face the connected mine closing decision and the Bank was  - iii - reluctant to insist on it. For a detailed review of the Project's implementation, see Part I, paras. 5.1-5.6 and Part III, Table 4. iv. The Project did not achieve its main objectives because of geological problems and lower coal prices than anticipated (paras.6.1-6.8). Safety, health and working conditions improved only marginally. The Project did not achieve its goal of increasing production to 1 millin tpy or assure continued employment. Although the Project heiped to postpone the decline in production temporarily, the economic rate of return on the project is still negative, mainly due to the decline in production. The geological reasons for the Project's failure mainly concern low seam thickness, adverse inclination, cracks and faults, basalt intrusions, dusty coal and high temperatures, all of which hindered the project from achieving its production objectives. CdM is not viable and has an annual cash operating loss of about US$ 10 million. Sustainability v. The minimal benefits resulting from the Project are not sustainable, since the mine should be closed at the earliest possible date (para. 7.1). The Bank has reviewed the personnel situation of the company and has made a preliminary investigation of possible measures to alleviate the unemployment that would result from mine closure. The Bank has indicated, to the Government, its readiness to assist further in this matter. Lessons Learned vi. The following is a summary of tho main lessons which emerged from the Project, based on the detailed lessons for the Bank and the Borrower covered in Part I, paras. 8.4 and 9.3s (a) Mining projects with difficult geological conditions require risk- taking entrepreneurship and the flexibility for quick decision making, characteristic of the private sector. The Bank needs to re-evaluate the extent to whitlh it should become involved in risky projects, in particular at a time when commodity prices are volatile (e*.*g energy price forecasts proved to be too optimistic after the second oil shock). (b) The Bank and CdM should have insisted on a more rigorous geological survey and evaluation prior to project appraisal. Also, it would have been prudent to phase project implementation more carefully, i.e., making the construction of a new mine shaft an option which would be implemented only with prior assurance of sufficient mine production. Furthermore, the Bank should discuss possible conseque-nces of project failure with the Borrower and the executing agency management team at a very early stage of the Projectt reaching an early commitment to actions required in such a case. (c) The Bank should have insisted more strongly on the operation of the mine as a commercial undertaking, rather than as a component of the Government's social and regional development policy, insisting that the Government refrain from interference with the company's financial management and clearly defining the respective role of the executing  - iv - agency In terms of operational viability and productivity, and of the Government in terms of social objectives, constraints and obligation. During Project's execution, the Bank should have applied management, technical, financial and economic evaluation criteria more consistently, and discontinued its support for the Project as soon *s the expected economic rate of return became marginal. But the Bank, by continuing to support the Project, provided tho wrong signal to the Government, which may have continued its support of the Project because of on-going Bank support. (d) The Government should ask and accept Independent expert advice in a risky Troject The Bank shuuld maintain an indepeadent judgment on the project by reviewing such expert advice and should formulato its own appreciation of the situation through field visits. The reliability of the consultant's recommendations should be assessed on a systematic basis during project implementation through discussions with Government representatives and the executing agency management and executives. (e) The Government should not be involved with Industrial activitios which are commercial by nature requiring quick decision-making, which usually is not consistent with the operation of a public sector bureaucracy. Por example Cdl should have been able to make a decision on mine closing and a related action plan several years ago. The Government should be geared to provide assistance for solving social problUem _onnected with a mine closure.  PROJECT COMPLETION REPORT MOROCCO JERADA COAL MINE MODERNIZATION AND EMPANSION iXOJECT (Loan. 2508-MOR) PART Is PROJECT REVIEW PROK BANK'S PERSPECTIVE 1. PROJECT IDENTITS Name s Jerada Coal Mine Mode.nization and Expansion Project Loan Number s 2508-NOR RVP Unit s MN Country s Morocco Sector 2 Energy Subsector I Coal Mining 2. BACKGROM 2.1 After the second oil price shock in the early 1980., the Moroccan Government's energy sector objectives centered on developing local energy resources to reduce dependency on energy imports. The Government took lmediste action to (a) improve oil and gas exploration (b) study the feasibility of utilizing oil shale, Morocco's only major energy resource and (c) expand production of the Jerada coal mine, the only mine producing coal in the country and In North Africa. At the time, Morocco appeared to be a particularly promising case for energy import substitution. The country had become highly dependent on imported energy and its economy wa relatively well developed, with good economic growth prospects. The country's own energy resources, were either scarce (oil, gas and coal) or of uncertain economic viability (oil shale); nevertheless, local and foreign experts considered them viable alternatives for imported energy. The Bank supported the Government's energy sector development policies with loans for cil exploration, oil shale engineering, and the Project under review in this report. 2.2 Consistent with the Government's energy strategy, the Project supported the substitution of local coal for imported oil. There was a growing local coal market and it appeared that the existing Jerada coal mine would be able to produce coal competitively. Potential customers of Jerada coal, the Office National d'Electricit6 (ONE) and the Cimenterie de l'Oriental (CIOR), had converted their plants from oil to coal. There was also the belief that high oil prices would assure sufficiently high international coal prices to allow  - 2 - competitive operation of the Jerada mine. The Government was to increase the price of the coal Jerada produced to the level of opportunity coste of imported coal. An increase of mine output Wve to facilitate eff$ct.vo utilization of the Jorada power plant, meet other customers' needs, and reduce the mine's unit production costs. 2.3 The macroeconomic impact of the Project was also considered to be favorable gad consistent with the country's overall economic goals. The Project was to contribute to foreign exchange savings through the substitution of oil imports and was to maintain employment in an aroa of eastern Morocco, with low employment prospects. Finally, Morocco had a relatively good record in mining performance. 3. PROJECT DESIGN Conceation and Justification 3.1 The conceptual foundation of the Project appeared to be sound. The Jerada mine was the only coal mine in the country. Its operations were proven, and coal reserves appeared to be sufficient. The Project called for a concentration of operations with a relatively modest and apparently feasible expansion of production. It was a significant reduction from an earlier scheme of developing a new mine (Siege VI), a much more ambitious project. Risks 3.2 At the time of project appraisal, the Bank mad CdM considered geological risks small, due to knowledge of the coal deposit from existing operations; unfortunatoly, geological conditions in the new area turned out to be worse than in known areas (pars. 5.3). The Project addressed potential geological risks through its component for an exploration drilling program and the requirement for the satisfactory completion of drilling and engineering prior to execution of the contract for shaft-sinking. The Project took account of technical/economical risks connected with capital-intensive mechanization of underground mining by restricting mechanization to a small number of longwall units after an extended test period1. Otbor equipment supply components of the Project were of a less risky nature. The Project was to minimize managerial risks by introducing, during the Project's preparation, improvements in management and organizational structure. In fact, prior to the Project, CdM was separated from its BRP parent organization, to allow more efficient management with greater financial responsibility. The inclusion of a tecbnical assistance component in the Project was also an important element for reducing managerial risks. Financial risks were considered to be low by the existence of an adequate local market and the adoption, by the Government, of a coal pricing policy based on opportunity costs of imported coal, which were sufficiently high at that time to protect the mine and the Project. I A pre-fdentification mission of September 1981 rejected the Project at that stage because the proposed mchanization as Insuffiefently tested.  - 3 - Iggget gf Prolect DesRia gn Pro1ect Performance 3.9 The sufficiently faworoble geological conditions in the known areas of th. min, combined with the strorq assumption in project design that these conditions vould occur In prospective production areas were a significant feature of the Project's d-eign. Ueing this assumption as a basis for decision-making had a serious impact on Project results, Unfortunately, mining conditions in the new areas turned out to be coniaderably worse than anticipated at appraisal sad after the original evaluation of the additional drilltngS. Concerns about the geological nature of the deposit came to the forefront only after mining in the first area fully prepared under the Project showed unsatisfactory results$. This was during the period 1987/88, after CdM already had made the decision to go ahead with construction of Shaft 3 bated, in rettospect, on an interpretation of drilling results which did not sufficiently account for the serious geological problems later discovered (para. 5.3). Also, the belief that better mine planning and a more rational, less dense grid of roadways could offset geological risks, proved to be an error'. 4. *POJEICT OBJECTIVES AND DESCRIPTION 4.1 The project had two sets of objectives. First, at the country level, the project was to (a) support the expansion coal substitution for oil by increased domestic coal production, (b) help assure the continued employment In a less developed region by efficient operating practices and modernization of plant facilities, and (c) ensure the maintenance of an appropriate coal pricing policy. Second, at the level of the company, CdM, project objectives were to (a) expand coal production at Jerada from 800,000 tpy to I million tpy, (b) modify the technology used by the company in order to increase productivity, (c) improve CdM's organization and mine planning and (d) better the safety, health and general working conditions of the company. 4.2 In order to achieve the above objectives, the Project contained the followtig components: (a) an exploration drilling program to prepare underground development work and shaft sinking; (b) underground development work to prepare future mining areas and to simplify existing mining areas; (c) the sinking of an additional vertical shaft to maintain production capacity of 2 in their report of August 1986, C states that the dritting confirmed appraIsal aessmptlona and that relativety good mining conditions could be expected in western parts of the mine. a Enven though the development of new mining panels in the north-central part of the deposit had demonstrated the existence of apparently acceptable dfnfno conditions, the coal extraction units (longwalls) encuntered basalt intrusions and other geological irregularities which led to abandornement of sowe of the reserves and low productivity and high cost xtraction of the remaining reserves In that area. 4 Oue to much less recmmnissance work and the lack of medfum-term mine planning in Cdiis pre- Project operatfonr, the old network of roadways was dense and erratic. It was believed that more exploration drilltng, accelerated advancement of roadmays and systematic medium-term mine plaming, all introduced under the Project, woutd significantly sieplify the miness network of roadways. In reality, the new network had to be constantly adapted to the channg geology and therofore looks very similar to the old anm.  - 4 - thc single mlne after completion of the Project and th. depletion of CdU' saller mines; (d) the installation of underground and surfa-e equipment to increase officiencw, production capacity and to improve safety and healths and (a) technical assistancu to CdH. 5. PROJECT INIMNL=RTITIO .1 At the project completion date (June 30, 1991), the implementation of about 75 2 of the Project's original scope had taken place, at a cost of US$ 82.5 million, or 1122 of the original appraisal estimate (602 of the revised cost estimate). The most critical variance between plannd and actual Implementation is in the construction of the new mineshaft under the Project, Shaft 3, which was abandoned after it had become clear that its completion was uneconomic. The mtne's production fell far short of projections, mainly because of poor geological conditions and related problems in project design and implementation. The unforeseen production problem, together with the coal price decline and the inability of Cdt to adjust its operations, made mine closure the most economic course of action. In retrospect, it would have been preferable to arrest the Project earlier, but for instit4tional and political reasons, the Government hesitated to face the connected mine closing decision, and the Bank was reluctant to insist on it. The Shaft 3 Construction Issue 5.2 At project identification, sad during much of projoct preparation, the construction of a new mineshaft was not foreseen. Shaft 3 became a project component after a feasibility study, which in hindsight, was based on insufficient exploration data and engineering to support its construction. The Bank had insisted on several precautionary measures but all of them failed to prevent the decision to go ahead with shaft construction. First, the Borrower was asked to carry out a supplementary studr of the Shaft to demonstrate its necessity and economic justification . The study concluded that the shaft would be absolutely essential for extending economic mine operation beyond 1990, that it was the least-cost solution, and that its implementation was urgent in order to avoid a drop in mine production. Secondly,. CdM did esploration drilling as part of the Project and presented a report on the results, along with their evaluation for more detailed planning of mining in new areas; this evaluation covered the zone around and beyond the location of Shaft 3*. The report indicated that reserves were adequate and that mining conditions In the new areas were relatively favorable, allowing some mechanixation. Thirds in February 1987, when a Moroccan delegation visited Washington, CdM submitted a report on the engineering of Shaft 3, together with an acceptable workplan for its construction. Cdl thus was in compliance with the loan covenant regarding the execution of the shaft 5 Etude Justtf catiw du Pufts 111, August 1985. p Rapport wr to D04toppsment des ExploItations des assmins Sud et Centre- Los Raccords avec le Puits II et tour Extenson vers l'Ouest, Charboriaes du Naroc, AuAust 1986.  - 5 - construction'. In addition, due to CdM's production problems, which had already become apparent at that time, the Bank had requested, a a fourth precaution, a re-evaluation of tho economic benefits of constructing the shaft. The study concluded that despite lower production and coal price*, the construction still would be justified. However, the rlne's output continued to decline. In 1989, BIM re-examined the geological evaluation of drilling in the area around Shaft 3 and found that previous conclusions were erroneous. They found much lover reserves and, more importantly, mining conditions that were considerably nore difficult than previously indicated. There was a change in CdM's management and the new management come under BRPM's control. Expectations were that the new mansaement would halt and reverse the production docline. After a further drop in production, the Bank communicated formally to the Government, In January 1990, that the preferred action was to discontinue the Project and close the mine as soon as possible. However, given the serious social consequences related to such a decision, the Bank was also willing to support the Project further, with the condition that the Government implement an appropriate action plan to reduce costs and assure CdM's financial viability. Due to the unsatisfactory economic viability of the project, RfW did not finance Shaft 3. The Action Plan Issue 5.3 In February 1990, a joint Bank/IfW mission examined a draft aetion program prepared by an inter-ministerial committee. The main components of the plan were to reduce personnel by about 25 1, to transfer all debt and social charges to the Government, and to assure approplate financial liquidity of CdM for efficient operation. CdM were to maintain a production level of 620,000 tons per year. While, in principle, the proposal appeared acceptable, there was a lack of clarity In the defluition of some components and an absence of concrete lmplementation steps. In Noy 1990, the Bank, in consultation with KfW, notified the Goveriment that it would suspend disbursements within 30 days If it did not take appropriate steps for clarification and implementation of the plan. Further correspondence led to extending the date of suspension, but the Government was not forthcoming in making the necessary clarifications and taking the additional steps required. Therefore, on August 7, 1990, the Bank and RfW suspended disbursements. Meanwhile, the continued drop in production made it clear that continuation of mining ope?