Zambia - Mining Sector Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18094 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ZAMBIA MINING SECTOR TECHNICAL ASSISTANCE PROJECT (CREI)IT 2269-ZA) June 25, 1998 Mining and Industry Unit Energy, Mining and Telcommunications Department Private Sector Finance, Africa Regional Office 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.  CURRENCY EQUIVALENTS Currency Unit = Zambian Kwacha (K) US$1 (as of April 1998) = K 1,750 FISCAL YEAR Government = January 1 - December 31 ZCCM = April 1 - March 31 ABBREVIATION AND ACRONYMS IDA - International Development Association ERIP - Economic Recovery & Investment Promotion ERIPTA - Economic Recovery & Investment Promotion Technical Assistance ICR - Implementation Completion Report ISTP - Interim Short Term Plan LDP - Letter of Development Policy LME London Metal Exchange MCL - Maamba Collieries Limited MMMD - Ministry of Mines and Minerals Development PIRCII Second Privatization and Industrial Reform Credit PIRCTA - Privatization and Industrial Reform Credit Technical Assistance SAR - Staff Appraisal Report TA - Technical Assistance ZCCM - Zambia Consolidated Copper Mines, Ltd. ZPA - Zambia Privatization Agency Vice President Callisto Madavo Director : Phyllis Pomerantz Manager Peter van der Veen Staff Member John E. Strongman  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ZAMBIA MINING SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 2269-ZA) TABLE OF CONTENTS PREFACE .......................................................1 EVALUATION SUMMARY ....................................................... 2 PART I: PROJECT IMPLEMENTATION ASSESSMENT ................ 6 A. Background and Project Objectives. 6 B. Achievement of Project Objectives. 8 C. Major Factors Affecting the Project .10 D. Project Sustainability .12 E. Bank Perforance .12 F. Borrower Performance .13 G. Assessment of Outcome .14 H. Future Operations .14 I. Key Lessons Leamed .14 PART II: STATISTICAL ANNEXES ..................................................... 16 Table 1: Summary of Assessment .17 Table 2: Related Bank Loans/Credits .18 Table 3: Project Timetable .18 Table 4: Loan/Credit Disbursenaents: Cumulative Estimated and Actual .19 Table 5: Key Indicators for Pro ject Implementation .19 Table 6: Studies Included in Project .20 Table 7A: Project Costs .................................. 25 Table 7B: Project Financing ................................................ 26 Table 8: Economic Costs and Benefits .......................................... 26 Table 9: Status of Legal Covenant ................................................ 27 Table 10: Bank Resources: Staff Inputs .......................................... 31 Table 1: Bank Resources: Missions .............................................. 31 This document has a restricted distributlion 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.  - 11 - Appendix A: Project Completion Mission Aide-Memoire ................... 32 Appendix B: Borrower's Contribution to the Report ........................... 38  1 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ZAMBIA MINING SECTOR TECH:NICAL ASSISTANCE PROJECT (CREDIT 2269-ZA) PREFACE This is the Implementation Completion Report (ICR) for the Mining Sector Technical Assistance Project for Zambia for which Development Credit Agreement (DCA) 2269-ZA in the amount of SDR 15.6 million equivalent was approved on June 13, 1991. The Credit became eflective on February 5, 1992. The Credit was closed on June 30, 1997, which was the original closing date. Final disbursement took place on October 31, 1997, at which time a balance of SDR 127,214.40 was canceled. As of Jume 1998, there is an outstanding balance for the special account of SDR 52,049 for which final documentation needs to be received. Preparation of this ICR was led by John Strongman of the Mining and Industry Unit of the Energy, Mining ancd Telecommunications Department. It has been reviewed by Peter van der Veen, Manager of the same unit, Emile Sawaya, FPSI Sector Leader, Phyllis Pomerantz, Country Director and has been cleared by LEGLA. The Borrower provided comments that are included as appendices to the ICR. Preparation of this ICR commenced during the Bank's final supervision mission from April 7-28, 1997. It is based on materials collected by the mission and in the project file. The Borrower contributed to the preparation of the ICR by providing historical information regarding both the project and the Credit, by contributing views reflected in the mission's Aide-Memoire and by producing its section of the report.  2 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ZAMBIA MINING SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 2269-ZA) EVALUATION SUMMARY INTRODUCTION Introduction. Mining has long been the backbone of Zambia's economy contributing in the 1970s and 1980s about: 90% of Zambia's foreign exchange earnings and functioning as the largest formal employer after the Government. The aim of the project was to provide technical assistance to the majority Government-owned Zambia Consolidated Copper Mines Ltd. (ZCCM): (a) to assist ZCCM to improve its operations, lower its costs, joint venture its underdeveloped copper resources and divest non-mining assets; (b) to assist the Ministry of Mines and Minerals Development (MMMD) to create an attractive investment environment for inew private sector mining investment and to design an institutional strengthening program for MMMD; and (c) to assist Maamba Collieries to reduce costs and prepare a long run strategy. IMPLEMENTATION EXPERIENCE A ND RESULTS Achievement of Objectives - ZCCM. For ZCCM, the critical objectives of improving efficiency and reducing costs were not accomplished. ZCCM undertook extensive work to prepare an Interim Short Term Corporate Plan (ISTP) for FY93/94 - FY95/96 aimed at lowering costs and increasing production. But instead of improving, ZCCM's performance deteriorated and botht production and efficiency declined to a point where ZCCM became in danger of insolvency. The Government decided that ZCCM should be privatized and a study of privatization options was carried out in 1994 under the PIRCTA (Credit 2406-ZA). Subsequently, in 1995 with support from the ERIPTA (Credit 2875-ZA), the Government hired an investment bank and international lawyer to design and help the Zambia Privatization Agency (ZPA) and ZCCM to implement the privatization. Several packages were privatized in 1997 including the joint venturing of two important undeveloped copper deposits - Konkola North and Konkola Deep. Achievement of Objectives - MMMD. With regard to the support for MMMD, considerable progress has been achieved. The project supported the development of a new mining code and fiscal regime that is conducive to private investment. This has helped facilitate an upsurge of exploration in Zambia by private investors, including many international mining companies, and was a critical precondition for privatizing ZCCM.  3 Achievement of Objectives - Maamba Collieries. The preparation of a long-term strategy for Maamba Collieries revealed that the company was not viable. Following further deliberations, the Government subsequently decided to offer Maamba for privatization and a bid has been accepted. Major Factors Affecting the Project. While there were several factors affecting the project, including world copper prices, government influence over the retention of funds by ZCCM and the availability of funds from the budget for MMMD, the single most important factor was the design and implementation of the ISTP by ZCCM and its consultants. As noted earlier, ZCCM was unable to implement the plan successfully and instead of improving, ZCCM's performance deteriorated severely. Project Sustainability. The assistance under the project for ZCCM was not successful in restoring ZCCM to profitability and increasing its efficiency, let alone sustaining such results. The assistance for MMMD was successful in establishing an attractive legal, regulatory and fiscal environment for private sector investment in mining. The assistance for Maamba Collieries was partially successful in that it laid the basis for a decision to privatize Maamba. While the results of the project are very mixed, it should be noted nevertheless that the outlook for long-term sustainability of the mining sector is positive given the big upsurge in exploration by private mining companies over the past two years and provided the ongoing privatization of ZCCM is completed. Once this is completed, there will be many new international mining companies participating in the mining sector, bringing strong financial capacity as well as strong management and technical capability to the sector. Bank Performance. The Bank performance is considered to be satisfactory. While the project did not initially support privatization of ZCCM's existing mines, it did establish a new vision for the sector and an enabling environment to attract private investment. When ZCCM's performance deteriorated in 1995, at the request of the Government, Bank staff worked rapidly and intensively to identify the underlying problems and to support ZCCM in preparing an Emergency Action Program to enable ZCCM to survive while privatization takes place. In addition, the latter stages of this project directly supported ZCCM's privatization. Borrower's Performance. ZCCM was the implementing agent for the overall work and the main beneficiary of the project. The results were not satisfactory in terms of the inability of ZCCM's management to adequately acknowledge or correct the deterioration of ZCCM's operating performance. The Government's performance in the preparation and implementation of the project is considered satisfactory. MMMD is working well with the private sector and the Government's decision to privatize both ZCCM and Maamba is considered the right response to resolving the difficulties of both companies. Assessment of Outcome. The project has largely achieved its objectives regarding MMMD and Maamba Collieries, but did not achieve its objectives regarding  4 ZCCM. Given that ZCCM was by far the largest component of the project, the overall outcome of the project is considered unsatisfactory. Future Operations. While no future operations are presently expected, performance of the mining sector will remain a key issue for Zambia's economic performance for the future and the Bank will continue to monitor the sector's performance. If required, the Bank may consider additional support to the Government to ensure that sector administration and regulation is fully adequate in the light of performance of the private sector organizations. Key Lessons Learned Important lessons can be identified from the Mining Sector TA as follows: * Flexibility needs to be built into the design of TA operations in order for the operation to be able to respond to changing governmnent policy decisions/country circumstances. In the case of this project, the emphasis shifted from support to ZCCM to improve its operations to support to ZCCM to undlertake key preparatory steps necessary for its privatization. a The design of a satisfactory regulatory and legal framework to support private sector investment and operation is a key prerequisite to implementation of privatization and private sector development initiatives. In the case of this project, the establishment of the new mining code, mining fiscal regime and environmental regulations was a key factor for a resurgence in exploration by international mining companies that has taken place in Zambia in the past few years and was also a pre-requisite to the ZCCM and Maamba privatization activities. * The articulation of clear policies, developed with strong input from the various stakeholders in the sector, can contribute to broad based ownership of sector reform and help build a strong consensus among different parties to support the implementation of reform initiatives. ][n the case of this project, the Mining Sector TA Project included an extensive consultation process for the preparation of the new mining law and associated mining enivironmental regulations which built strong support for the opening up of the sector to private investment. * A TA operation can be an important starting point for the process of sector reform, even though the reform program may not be fully developed. In the case of this project, the Mining Sector TA provided the starting point for the process of mining sector reform in Zambia. Subsequently the PIRC II, PIRCTA, ERIP and ERIPTA operations broadened and deepened the reform effort to support the privatization of both ZCCM and Maamba. With hindsight it could be argued that privatization of ZCCM should have been an objective of the Mining Sector TA; however, the reality is that this was not politically feasible in 1991.  5 * A clear separation of different objectives and associated components in a TA project can allow for partial successes. In the case of this project the objectives for regulatory reform were well achieved by the MMMD component. In contrast, the objective of improving sector performance by strengthening ZCCM was not achieved. * The new organizational structure, of a Country Director supported by a Country Team, enabled a team to be formed that could operate effectively across institutional boundaries. In the case of this project, the country team approach was adopted for Zambia in early 1994 and helped facilitate the formation of a team of staff from different vice presidencies that worked in a fully coordinated manner on mining sector reform in Zambia through five different operations.  6 IMPLEMENTATION COMPLETION REPORT ZAMBIA MINING SECTOR TECIINICAL ASSISTANCE PROJECT (CR. 2269-ZA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background and Project Objectives Background The mining sector has long been the backbone of Zambia's economy, contributing in the 1970s and 1980s about 90% of Zambia's foreign exchange earnings and fiunctioning as the largest formal employer after the Government. The dominant products are copper and cobalt. At the time that the credit was approved in 1991 these were produced entirely by the majority Government-owned Zambia Consolidated Copper Mines Ltd. (ZCCM). Copper production had been declining steadily during the 1970s and 1980s and was expected to drop sharply at the end of the century because of expected exhaustion of reserves at several of the major mines. In 1990 the Government embarked on a program of structural adjustment. Given the overwhelming dependence of the economy on the mining sector for foreign exchange earnings, and given the need for new mines to be developed to replace those that were nearing exhaustion, the Government's main goals for the mining sector, while trying to diversify the economy away from copper and cobalt, were to: (a) make ZCCM as efficient as possible in order to generate a significant part of the funds required to diversify the economy; and (b) open the sector to private investments in order to encourage the development of new mineral exports and new mines. The Government approached the Bank to provide assistance in implementing the strategy, following which the Mining Sector T.A. project was prepared. Project Objectives. Tihe objectives of the project as stated in the President's Report were to support the Government in implementing an effective strategy for the mining sector. Specifically, * in the short term, the strategy aimed at improving the efficiency and productivity of the mining sector so that it could generate the resources needed to support the recovery and diversification of the economy. * In the longer term, the strategy aimed at - supporting the development of new copper mines by private investors, - ensuring the systematic phasing out of depleted operations,  7 - supporting the development of non-copper mining exports, especially gemstones; and - helping strengthen environmental protection in mining. The objectives were to be achieved through the following three main components: (A) Support to ZCCM for (a) preparation of geological data for undeveloped resources; (b) preparation and implementation of a corporate plan including: (i) a program of joint venturing and divestitures; (ii) phase down plans for mines with depleting resources; (iii) studies to improve efficiency; and (iv) a manpower and training plan; (c) hiring of technical specialists; and (d) training of Zambian staff to progressively fill, in due course, the technical specialist positions. (B) Support to the Ministry of Mines and Minerals Development (MMMD) for (a) preparation of a new mining act and mining fiscal regime, strengthening for MMMD and assistance to small scale minerals; (b) production of improved geological and mining title data banks and maps; and (c) provision of assaying equipment for MMMD laboratory. (C) Support to Maamba Collieries for (a) identification and implementation of cost saving measures; (b) preparation of a long term strategy. The objectives as set out in the President's Report go well beyond the scope of activities included in the project. The project objectives de facto were more limited and specific. Fundamentally, the aim of the project was to provide technical assistance: (a) to assist ZCCM to improve its operations, lower its costs, joint venture its undeveloped copper resources and divest non-mining assets; (b) to assist MMMD to create an attractive investment environment for new private sector mining investment and to design an institutional strengthening program for MMMD; and  8 (c) to assist Maamba Collieries to reduce costs and prepare a long run strategy. The technical assistance was provided largely through three consulting contracts, each of which was awarded following World Bank international competitive bidding procedures. The largest contract (US$17 million approx.) was for assistance to ZCCM and included all major subcomponents - namely preparation of geological data, preparation and implementation of a corporate plan, provision of technical specifications and training. The assistance to MMMD and to Maamba Collieries was much smaller (contract values US$2.9 million and US$0.7 million respectively). The Evolution of Government Policy regarding ZCCM and Associated Bank Assistance. The Government was the majority shareholder in ZCCM. The Government's policy at the time of the project was to improve the efficiency of ZCCM's existing operations and to joint venture ZCCM's undeveloped copper resources and divest ZCCM's non-mining activities. Subsequently, a new government was elected. During 1992 the new Government decided to embark on an extensive privatization policy for parastatal companies. In the 1993 Second Privatization and Industrial Reform Credit (PIRC II) (Credit 2523-ZA), the Government expressed its commitment in the Letter of Development Policy (LDP) to privatize ZCCM's existing operations, but there was no agreement on the timing or process. A study of privatization options was carried out in 1994 under the associated PIRCTA (Credit 2406-ZA). While the study did not result in a firm decision, it confirmed that privatization was a potentially attractive option and it helped clarify the issues to be resolved and the different possible privatization options. Subsequently, in 1995 the Government made a further commitment in the Economic Recovery and Investment Project (ERIP) (Credit 2764-ZA) LDP with regard to the implementation of the privatizatiori decision. With support from the associated ERIPTA (Credit 2875-ZA), the Governrent hired an investment bank and international lawyers who, as a first stage, designed the privatization process which was endorsed by the Cabinet, the ZCCM Board, the Zambia Privatization Agency (ZPA) Board and the ZCCM minority shareholders representatives (including Anglo American Mining Company Ltd.). Subsequently, the investment bank and international lawyers have assisted ZPA and ZCCM in implementing the privatization. Several packages were privatized in 1997 including the joint venturing of two major undeveloped copper deposits - Konkola North and Konkola Deep - but the process is not yet complete. B. Achievement of Project Objectives There are mixed results for achievement of project objectives for the three components. For ZCCM, the objectives were not achieved. For MMMD, the objectives were largely achieved. For Maamba Collieries, the objectives were partially achieved.  9 ZCCM. While all of the major sub-components for ZCCM were completed, the critical objectives of improving efficiency and reducing costs were not realized. ZCCM and its consultants undertook extensive work to prepare a corporate plan as the basis for lowering its costs and improving its operations. Two reports were prepared, an Interim Short Term Plan for FY 93/94-95/96 (ISTP) report dated February 1994 and a Ten Year Corporate Plan - Draft No. 2 Report dated June 1994. The ISTP presented a program for ZCCM to increase production from 399,700 tons in 1993/94 to 456,600 tons in 1995/96. Bank staff supervising the project had strong reservations at that time that ZCCM's operational plan would not be adequate to achieve the objectives. These concerns were clearly communicated to ZCCM and the Government (e.g. letter dated June 19, 1994 from WB Country Director to Zambian Minister of Finance). However, no significant changes were made by ZCCM's management to the ISTP. ZCCM was unable to implement the ISTP successfully. Instead both production and efficiency declined and in 1995/96 production was only 341,000 tons of copper compared with the target of 456,600 tons - a shortfall of 25%. ZCCM - Annual Production and Net Income FY 1993-97. 92/93 93/94 94/95 95/96 96/97 Copper produced ('000 tons) 432 392 351 341 307 Net Income (US$m) 183 (174) 1 (31) (313) ZCCM's situation reached crisis conditions in 1995 and the company was in danger of insolvency. The Government as majority shareholder then requested the Bank to assist in analyzing ZCCM's difficulties and identifying possible solutions. The Bank responded with a rapid, in-depth review of ZCCM which revealed that instead of helping to identify the problems so that the situation could be improved, the ISTP corporate plan over-estimated the production that could be achieved and deflected attention from underlying problems which included lack of attention to cost reduction and cost competitiveness, poor capital allocation, ineffective management and poor optimization and priority setting. The plan did not include any corporately defined cost reduction mechanisms, nor management directives on cost reduction implementation. ZCCM used a bottom up budgeting process, rather than a top down management and planning mechanism. As a result of ZCCM's bottom-up budgeting approach, large amounts of capital were directed to improving its smelting operations at a time when the greatest need for capital was in the mines. And even where large amounts of capital were provided to the mines, such as for Baluba and Mufulira, implementation difficulties resulted in poor returns on the money invested. Based on the findings of the World Bank Review Team, ZCCM moved promptly to design and implement an Emergency Action Program in FY95/96 and FY96/97 which then enabled ZCCM to survive. Given the need to take emergency measures to address the immediate crisis and given the Government  10 decision to privatize ZCCM, ZCCM and its consultants did not complete the Ten Year Plan. With regard to undevelopecl copper reserves and non-mining assets, even though ZCCM had several attractive, undeveloped copper deposits such as Konkola Deep and Konkola North, ZCCM only attempted to joint-venture/sell one property under the project - a closed mine at Chambishi, for which there were no takers. Subsequently, Konkola Deep, Konkola North and Chambishi have been joint ventured and privatized as part of the overall ZCCM privatization. Z('CM's non-mining assets have been privatized by ZPA as part of the overall parastatal privatization program. As of mid 1998 ZCCM was in the latter stages of being privatized and private investors are starting to operate some of the mines and are undertaking exploration and feasibility work in preparation for the possible, future development of undeveloped copper resources. Once the ZCCM privatization is complete, private companies will take over operations and management of the mines and will also make the decisions on phasing out older mines when they are no longer viable. MMMD. With regard to tho support for MMMD, considerable progress has been achieved. The project supported the development of a new mining code and fiscal regime that is conducive to private investment. This has helped facilitate an upsurge of exploration in Zambia by private investors, including many international mining companies, and was a critical precondition for the privatization of ZCCM which has been taking place in the past two years. Under the project, sound licensing and fiscal arrangements have been put in place to support private mining investment. The mining title system is working well and new geological data bases and maps have been prepared and published. Studies were undertaken to restructure and strengthen MMMD and to design a plan to help improve gemstone mnines. Assistance is being provided under the ERIPTA so that the MMMD can start to implement the results of the studies, including the establishment of regional mine offices with the aim of providing greater assistance to gemstone mines and other small and medium mining operations. New mining environmental regulations have been also been prepared and issued. Maamba Collieries. The preparation of a long-term strategy for Maamba Collieries concluded that the company was not viable as a parastatal operation. The results of the study helped avoid a possible situation in which government might have heavily subsidized Maamba. Instead it helped pave the way for Government to consider other possible options, and the Government decided to offer Maamba for privatization to see if a private sector investor could improve the operations so that the mine could continue to operate. Subsequently a bid has been accepted. C. Major Factors Affecting The Project Factors Not Subject to Government Control. The major factor not subject to Government control was the world copper price. During the period of project implementation, copper prices dropped sharply in 1993 which was an important  11 contributing factor to ZCCM's difficulties in 1993 and 1994. However, the ISTP indicated that ZCCM should have been able to make a profit at a copper price of US$ US$0.87 per lb - thus the drop in copper prices was only one factor at work. Indeed, copper prices have since improved whereas ZCCM has remained in a very difficult and worsening financial position because the improvement in efficiency and productivity aimed for under the project was not realized. AnnualAverage LME - World Copper Price 1991-97. (US $ per lb.) 1991 1992 1993 1994 1995 1996 1997 1.06 1.03 0.87 1.05 1.33 1.04 1.03 Source. Commodity Markets and the Developing Countries, World Bank. Factors Subject to Government Control - ZCCM related. There were two main factors subject to Government control regarding the ZCCM component. The first important factor subject to Govemment control was the retention of cash and foreign exchange by ZCCM for operating and capital expenditures. ZCCM has traditionally provided 90% of the foreign exchange for the economy. ZCCM's foreign exchange earnings must not only serve ZCCM's operating, capital expenditure and debt service needs but also the needs of the Government and the rest of the economy. Given the urgent needs for foreign exchange for other sectors in the economy, there was not enough available to meet all of ZCCM's needs and ZCCM had become increasingly undercapitalized over the past decade. However, as ZCCM encountered financial difficulties in FY94 and FY95, Government progressively reduced transfers from ZCCM in order to assist ZCCM's situation. A second factor under government control was the exchange rate. In 1993 a significant appreciation of the Kwacha took place which had the effect of increasing ZCCM's operating costs at a time when international copper prices were declining thereby increasing the financial squeeze on ZCCM. Factors Subject to Government Control - MMMD related. The Government directly controls annual operational and capital budgets for MMMD. Throughout the period of the project, the Government has been in a very tight overall budget situation and most ministries have been working within strict budget limits. Government supported implementation of the project by making counterpart funds available to MMMD. But while MMMD has made good progress overall, its performance more recently has been constrained by lack of and late release of budgetary funds. The continuation of "appropriation in aid" will be very important to helping ensure that funds are available to MMMD on a timely basis to fulfill its work program. Given the progress made under the project, IDA has provided further support for MMMD under the ERIPTA operation which includes components for: (a) geological data  12 acquisition; (b) data dissemination and investment promotion; and (c) institutional strengthening. Factors Under the Implementing Agency Control. ZCCM was the implementing agency for the program. The main factor under ZCCM's control was the design and implementation of the Interim Short Term Corporate Plan and the joint venturing of undeveloped copper deposits. As noted earlier, ZCCM's performance did not improve but deteriorated to near insolvency and only one property was offered unsuccessfully for sale/joint venture. D. Project Sustainability The assistance under the project for ZCCM was not successful in restoring ZCCM to profitability and increasing its efficiency, let alone sustaining these results. The assistance for MMMD was successful in establishing an attractive legal, regulatory and fiscal environment for private sector investment in mining. The assistance for Mamba Collieries was partially successful in that it laid the basis for the decision to privatize Mamba. While the results of the project are very mixed, it should be noted that the outlook for long term sustainability of the mining sector is positive. There has been a big upsurge in exploration by private mining companies over the past two years. The Government, with the support of the Bank under the ERIPTA, has made substantial progress on the privatization of ZCCM and new investors are now participating in the mining sector. These companies will bring strong financial capacity as well as strong management and technical capability to the sector.' There are good prospects that the performance of the existing operations will improve and that feasibility work will be completed for new projects such as Konkola North and Konkola Deep and that they will be successfully implemented. The new mining code and fiscal regime, together with the institutional strengthening of MMMD create a sound enabling environment for future private investment in mining and the new Mining Environmental Regulations should help ensure that both existing and new mining investment and operations are environmentally and socially sustainable. E. Bank Performance The Bank's performance is considered to be satisfactory in terms of both the preparation and implementation of the project. The project was designed and prepared in 1990/91 as the first TA operation after the government embarked on structural adjustment. While the project did not support full privatization of ZCCM, it did establish a new vision for the sector, that included joint venturing of undeveloped copper resources with private mining companies. Operational plans are not available from private investors. A 5-year operational plan was prepared by ZCCM which gives an indication of what might have been expected had ZCCM become an efficient company.  13 As the Government's policy towards ZCCM evolved, the Bank used the same staff to supervise the Mining Sector TA, the PIRCTA, the ERIP and the ERIPTA so that there was a full complimentarity of the four operations. In practice, from mid 1995 onwards the Mining Sector TA and the ERIPTA were always supervised together. When ZCCM's performance had deteriorated to the point that it threatened to undermine both Zambia's economic recovery and the proposed privatization, at the request of the Government, Bank staff worked rapidly and intensively with ZCCM in 1996 to prepare an Emergency Action Program to support the survival of ZCCM until privatization could be accomplished. To support prompt and effective implementation of the Emergency Action Plan, funds were made available under this project to support the hiring of additional technical specialists (beyond those originally envisaged under the project) to fill gaps and strengthen ZCCM's management at the mining operations. Towards the end of the project, Bank staff also supported ZCCM in using some of the remaining funds to prepare end-of-mine life environmental plans which were required under the new Mining Law and were also prerequisites for completing the privatization transactions. F. Borrower Performance ZCCM was the implementing agent for the overall work and was the major beneficiary of the project. The results were not satisfactory in terms of the deterioration of ZCCM's operating performance and the drain it became on Government energies and resources. ZCCM's management proved unable to manage the company effectively and were unresponsive to warning signals that the ISTP was not working as expected. The working relationship between ZCCM, MMMD and Bank staff was generally constructive and for the most part procurement for all components went smoothly. While some implementation delays occurred, the project closed on time with the credit almost fully disbursed. Some cost savings occurred during the project with the result that savings available towards the end of the project were used by ZCCM to hire additional technical specialists and to prepare end-of-mine life plans required under the new Mining Law. The Government's performance in the preparation and implementation of the project is considered satisfactory. MMMD performed well in the implementation of their component and there was a close working relationship between the government officials and Bank staff regarding the mining sector. The Government kept the Bank fully informed as its policy towards ZCCM evolved from joint-venturing of undeveloped copper resources to the privatization of all of ZCCM's operations and assets. Not surprisingly there were divided views in Zambia regarding privatization in general and the privatization of ZCCM in particular, with strong opposition from vested interests within the state holding company ZIMCO which caused progress to be slower than might  14 have been desirable. As noted in the ICR for the PIRC operations 2 "In the PIRC II LDP, the Government committed itself to privatize ZCCM. However, other than a commitment to review the appropriate privatization options, there was no agreement on follow-up actions. Failure to deal more explicitly with the problems of ZCCM at this stage in the adjustment process has proven to be a serious problem and may have been a major contributing factor to slow growtl." G. Assessment of Outcome The assessment of the outcome is complicated because of the "shifting goalposts" within the sector associated with subsequent operations (i.e. the PIRC and ERIP operations) and the decision to privatize ZCCM. Given this caveat, the outcome for the mining sector TA can be considered in terms of two criteria. First, did the project achieve its objectives? Second, how sustainable is it likely to be? As discussed in Section B, the project has largely achieved its objectives regarding MMMD and the new mining code and fiscal regime but did not achieve its objectives regarding ZCCM. Given that ZCCM was by far the largest component of the project, the overall outcome of the project is considered unsatisfactory. It should however be noted that the present outlook for the mining sector is positive as a result of the change in strategy to privatize ZCCM, and provided that this strategy is fully implemented. As a result of the ongoing ZCCM privatization activities and the work with MMMD to establish a mining sector legal and fiscal framework that is conducive to private investment, private investors will take the lead in the development of new copper mines and private management should ensure that depleted mines are closed when no longer viable. H. Future Operations While no future operations are presently expected, performance of the mining sector will remain a key issue for Zambia's economic performance for the future. The Bank will continue to monitor the sector's performance and, if required, may consider support to the Government to ensure that sector administration and regulation is fully adequate in the light of performance of the private sector organizations. I. Key Lessons Learned Important lessons can be identified from the Mining Sector TA as follows. Flexibility needs to be built into the design of TA operations in order for the operation to be able to respond to changing government policy decisions/country circumstances. In the case of this project, the emphasis shifted from support to ZCCM to improve its 2 Para 32, ICR, PIRC I (Credit 2405-ZA) and PIRC II (Credit 2523-ZA) Report 16192-ZA, December 30, 1996.  15 operations to support to ZCCM to undertake key preparatory steps necessary for its privatization. * The design of a satisfactory regulatory and legal framework to support private sector investment and operation is a key prerequisite to implementation of privatization and private sector development initiatives. In the case of this project, the establishment of the new mining code, mining fiscal regime and environmental regulations was a key factor for a resurgence in exploration by international mining companies that has taken place in Zambia in the past few years and was also a pre-requisite to the ZCCM and Maamba privatization activities. * The articulation of clear policies, developed with strong input from the various stakeholders in the sector, can contribute to broad based ownership of sector reform and help build a strong consensus among different parties to support the implementation of reform initiatives. In the case of this project, the Mining Sector TA Project included an extensive consultation process for the preparation of the new mining law and associated mining environmental regulations which built strong support for the opening up of the sector to private investment. * A TA operation can be an important starting point for the process of sector reform, even though the reform program may not be fully developed. In the case of this project, the Mining Sector TA provided the starting point for the process of mining sector reform in Zambia. Subsequently PIRC II, the PIRCTA, the ERIP and the ERIPTA operations broadened and deepened the reform effort to support the privatization of both ZCCM and Maamba. With hindsight it could be argued that privatization of ZCCM should have been an objective of the Mining Sector TA; however, the reality is that this was not politically feasible in 1991. * A clear separation of different objectives and associated components in a TA project can allow for partial successes. In the case of this project the objectives for regulatory reform were well achieved by the MMMD component. In contrast the objective of improving sector performance by strengthening ZCCM was not achieved. * The new organizational structure, of a Country Director supported by a Country Team, enabled a team to be formed that could operate effectively across institutional boundaries. In the case of this project, the country team approach was adopted for Zambia in early 1994 and helped facilitate the formation of a team of staff from different vice presidencies, that worked in a fully coordinated manner on mining sector reform in Zambia through five different operations.  16 PART II. STATISTICAL ANNEXES  17 Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Negligible Not applicable Macro policies Sector policies E Financial Objectives Institutional development E Physical objectives Poverty reduction Gender issues Other social objectives Environmental objectives j2 Public sector management Private sector development B. Project sustainability Likely Unlikely Uncertain C. Bank performance Highly Satisfactory Deficient satisfactory Identification Preparation assistance Appraisal li Supervision D. Borrower performance Highly Satisfactory Deficient satisfactory Preparation Implementation Covenant compliance Operation E. Assessment of outcome Highly Satisfactory Unsatisfac- Highly satisfactory tory unsatisfac- tory  18 Table 2: Related Bank Credits Credit title Purpose Year of Status approval Preceding operations 1. Coal Engineering Credit Rehabilitation of Maamba Collieries 1983 Closed (Credit 1333- ZA) Limited. 2. Export Rehabilitation and Support for rehabilitation of ZCCM and 1984 Closed Diversification Credit (Credit 2391- diversification away from copper. ZA) Following Operations 1. Privatization and Industrial Letter of Development Policy 1993 Closed Recovery II Credit (PIRC II) (Credit commitment to ZCCM privatization. 2523-ZA) 2. PIRCTA (Credit 2406 ZA) Provided financing for initial ZCCM 1994 Closed privatization study 3. Economic Recovery and Letter of LDevelopment Policy set Action 1996 Closed Investment Promotion (ERIP) Plan for ZCCM privatization (Credit 2764-ZA) 4. ERIPTA (Credit 2875 ZA) Provided financing for investment bank 1996 and legal advisors to implement ZCCM privatization. Table 3: Project Timetable Steps in the project cycle Date planned Date actual Identification (Executive Project Summary) 10/90 10/90 Preparation 12/90 Appraisal 01/91 01/91 Negotiations 04/91 05/91 Board Presentation 05/91 06/13/91 Signing ___ 07/24/91 Effectiveness 08/91 02/05/92 First tranche release N/A N/A Mid-term review N/A N/A Second tranche release N/A N/A Project completion 12/31/97 12/31/97 Credit Closing 06/30/97 06/30/97  19 Table 4: Credit Disbursements: Cumulative Estimated and Actual (US$ millions) FY FY FY FY FY FY FY 92 93 94 95 96 97 98 Appraisal estimate 2.1 8.1 14.1 20.1 21.0 21.0 21.0 Actual 1.0 2.9 9.0 15.4 19.7 23.7 23.7 Actual as % of estimate 48 36 64 77 94 113 113 Date of final disbursement 18 August 1997 Table 5: Key Indicators for Project Implementation Type of Indicator Estimated Actual I. Key operating indicators in None SAR/Presidents Report II. Modified Indicators (if None applicable) III. Modified Indicators for None future operation (if applicable) Note: Key Indicators were not identified in the President's Report as they were not required as part of project appraisal at the time.  '20 Table 6: Studies Included in the Project Study Purpose Date Impact of study A. ZCCM Component 1. Corporate Assess the strategy for the Mar Comprehensive work Structural strengthening of ZCCM. Design 93 program designed and Reorganisation work program agreed with IDA Project 2. Geology, Review the past geological work Feb Improved knowledge of the Reserves and performed by ZCCM and use it 93 reserves and resources, Resources to determine the quantity and improved geological quality of developed ore reserves procedures at ZCCM and resources 3. Mine Operations Identify mines with the best Apr Identified the need to and Planning potential for the near term,revise 93 prepare realistic production development, production and cost estimates, introduce new data, assess on-going planning mining methods and requirements improve performance. New production schedules prepared and training undertaken 4. Beneficiation, Establish benchmarks for plants Mar Identified operating Smelting and and identify opportunities to 93 procedures as major problem Refining improve performance with the mineral processing aspects of ZCCM. Extensive training of operators undertaken 5. Finance and Assess possibilities to restructure May Financial procedures and Accounting balance sheet,enhance the budget 93 accounting systems process, enhance cost analysis, modified. Improved review training programs understanding of costs achieved. Training undertaken 6. Human Resources Review policies and practices, Jul 93 Lead to strengthening of identify needed changes, assess operational management skills of work force and prepare implementation plan 7. Training Review approaches to needs Jun 93 Identified needs for assessment, review artisanal additional training mining training schemes  21 8. Materials Identify steps that could be taken Jul 93 Resulted in major overhaul Management to improve efficiency of materials of materials management Systems management system 9. Marketing Improve the effectiveness and Jun 93 New marketing systems efficiency of the ZCCM implemented marketing 10. Environmental Recommend a corporate Feb Improved environmental Review environmental strategy, identify 93 assessment and management environmental protection at ZCCM measures that could have a significant impact on ZCCM I costs I_I  22 B. MMMD Component 1. Mining Policy Assist Government to formalize Dec GOZ adopted private sector Study new policies for the mining 93 orieted policies sector 2. Mineral Assess technology needed to Sep A new sector management Inventory, Mining implement the mineral inventory, 93 system was put in place, Title, and Statistics operate the mining title registry personel were trained and Database and maintain statistical database. equipment purchased Prepare equipment specifications 3. Scoping Report Identify physical and training Aug Personel were trained and on Laboratory needs to refurbish the laboratory 93 the laboratory refurbished Needs 4. Structure, Assess the structure and staff of Dec Limited impact as this Organisation and MMMD, design a new 93 component overlapped with Staffing of MMMD organisational structure and broader civil service reform evaluate staff qualifications and which took priority L=:experience. 5. Draft Mines and Prepare a draft act for discussion Feb This draft formed the basis Minerals Act with all interested stake-holders 94 of the new Mines and Minerals Act enacted during the project 6. Review of Mines Prepare comments on proposed Mar Alerted GOZ to the non- and Minerals act to ensure international 94 competitiveness of the Investment Act competitiveness proposed act which was withdrawn 7. Mineral Promote investment opportunities Apr Distributed at conferences. Investment in Zambian mining sector 94 Attracted investment to Opportunities in Zambia Zambia 8. Draft Model Make available to MMMD a May Model Agreement is Mining draft agreement for mineral 94 available to MMMD Development sector investments Agreement 9. Small Scale Countrywide assessment of all Feb The first complete Mining Study: aspects of small scale mining 94 assessment of the scope and Preliminary Report nature of small scale mning in Zambia was completed. Reports 11-20 were based on this study 10. Small Scale Supplement to Report 9 Apr Broadened the scope of Mining Study: 94 Report 9 Addendum I  23 11. Investment Nov These studies (Reports 11- Promotion material 94 20) provided valuable input for subsequent mining sector support (provided under the ERIPTA) by identifying sectoral needs, preparing budgets and suggesting implementation modalities. 12. Regional Mines Nov Being implemented. Bureaux 94 13. Gemstone Nov Being implemented Trading 94 Arrangements - 14. Educational Nov Being implemented Seminars and 94 Roadshows 15.Beacon Survey Nov Being implemented Procedures and 94 Security 16. Equipment Nov Being implemented Contracting 94 Promotion 17. Self-help Nov Being implemented Nationwide Library 94 18. Standard Nov Being implemented Financing 94 Agreement 19. Government- Nov Being implemented held Data Release 94 20. Industry Nov Being implemented Representation and 94 Information Exchange 21. Final Report: Summarized all the TA to Nov Showed work program to Mining Sector TA MMMD 95 have been completed satisfactorily and under budget 22. Geological Augment and improve the 93-95 22 new geological maps and Maps geological data-base 4 new structural geology maps published  24 C. Maamba Collieries Limited (M-C-L) T1 1. Assessment of Review all aspects of the Jul 93 MCL was found to have Coal Mining operation and make limited potential to be a Operations recommendations for the future viable enterprise. The company was ultimately privatized  25 Table 7A: Project Costs (US$ Millions) Appraisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total costs costs costs costs A. ZCCM Management Consultancy 1.0 5.9 6.9 1.0 17.0 18.0 Specialist Hiring 0.5 6.5 7.0 0.5 3.0 3.5 Staff Training 0.5 2.6 3.1 0.5 0.5 Sub-total 2.0 15.0 17.0 2.0 20.0 22.0 B. MMMD Management Consultancy 0.1 0.8 0.9 0.1 1.7 1.8 Staff training 0.1 0.3 0.4 0.1 0.3 0.4 Data Banks 0.1 0.5 0.6 0.1 0.5 0.6 Geological Maps 0.2 0.8 1.0 0.2 0.8 1.0 Assaying Equipment 0.0 0.1 0.1 0.0 0.1 0.1 Sub-total 0.5 2.5 3.0 0.5 3.0 3.5 C. Maamba Collieries Management Consultancy 0.0 0.4 0.4 0.0 0.4 0.4 Technical Assistance 0.1 0.3 0.4 0.1 0.3 0.4 Sub-total 0.1 0.7 0.8 0.1 0.7 0.8 TOTAL 2.6 18.2 20.8 2.6 23.7 26.3 Contingencies 0.4 2.8 3.2 0.0 0.0 0.0 TOTAL PROJECT COST 3.0 21.0 24.0 2.6 23.7 26.3 * Included in management consultancy. It should be noted: (i) that the management consultancy contract also included specialist hiring and staff training services; and (ii) total actual project costs in US dollar terms exceed the appraisal estimate due to strengthening of the SDR against the US dollar.  26 Table 7B: Project Financing (US$ Millions) Appraisal estimate Actual/latest estimate Source Local Foreign Total Local Foreign Total costs costs costs costs IDA 0.0 21.0 21.0 0.0 23.7 23.7 ZCCM 2.3 0.0 2.3 2.0 0.0 2.0 Government 0.6 0.0 0.6 0.5 0.0 0.5 Maamba Collieries 0.1 0.0 0.1 0.1 0.0 0.1 Total 3.0 21.0 24.0 2.6 23.7 26.3 Table 8: Economic Costs and Benefits Not estimated for this project.  27 Table 9: Status of Legal Covenants Agree- Section Covenant Present Original Revised Description of covenant Comments ment type status fulfill- fulfill- ment ment date date Credit Agree- ment 3.01 (b) 2 The Borrower shall relend out of the proceeds of Completed the Credit an amount not exceeding SDR 12,760,000 to ZCCM under a subsidiary loan agreement to be entered into between the Borrower and ZCCM, under terms and conditions which shall have been approved by the Association whichi shall include: (i) repayment over a term of 10 years, includinig 3 years grace; (ii) a rate of interest of eight point five percent (8.5%) per annum on the principal withdrawni and outstanding; and (iii) ZCCM to bear the foreign exchange risk. 3.01 (c) The Borrower shall relend out of the proceeds of Completed the Credit an amount not exceeding SDR 592,000 to Maamba Collieries under a subsidiary loain agreement to be cistered into between tlle Borrower aiid Maamba Collieries, under terms and conditions which shall have been approved by the Association which slsall include: (i) repayment over a term of 10 years, including 3 years grace; (ii) a rate of interest of eight point five percent (8.5%) per annum on the principal withdrawn and outstandiisg; and (iii) Maamba Collieries to bear the foreign exchanige risk. 3.06 (a) 3 C 12/31/92 The Borrower shall: (a) not later than Dec. Conmpleted and (b) 12/31/93 31,1992 submit to IDA for review and consnsents an action program to support the development of small scale minling; and not later than Dec. 31, 1993, implemenit said action progranm, taking into account the Associations views. 3.07 (a) 3 C The Borrower shall cause Maamba Collieries: to Conmpleted carry out a study, Linder terms of reference acc eptable to the Association, on the long term outlook for its operations, includiisg measures to reduce foreign exclsange requirements. 3.07 (b) 3 CD 12/31/92 07/93 The Borrower shall cause Maamsba Collieries: to, Completed not later than Decenmber 31, 1992, submit to the Association for comments the findinigs of said study. 3.07 (c) 3 C 06/30/94 The Borrower sliall cause Maamba Collieries: to, Partially completed - not later than Junie 30, 1994. implemenit the Company has been findings of the study, taking into account the privatized Association's views. 3.08 3 CP 12/31/92 The Borrower shall: (a) not later than Decensber Delays caused by 12/31/93 31 1992, submit to the Association for review a overall civil service draft staffing plan for its Ministry of Mines; aisd reform review. Plan (b) not I ater than December 31, 1993, implement completed in 1993 said staffing plan taking into account thse but not fully Association's views.. implemented. 9 C Without limitation or restriction on its other Limited compliance reporting requirements ulider the Gneral Conditions aild this Agreement the Borrower shall, with etfect from the first qLiarter of 1992,  28 submit quarterly progress reports to the Association for its review on thc iiiplenientation of Parts A and B of the Project. 4.01 (a) 1 C The Borrower shall maintain or cause to be In compliance maintained records and accotnts adequate to reflect in accordancc with consistenltly maintained sound accountinig practices the I_expenditures financed out of the Credit. 4.01 (b) I CD The Borrower shall: (i) have the records and Audit reports were accounts referred to in paragraph (a) of this submitted but Section including those for the-Special Account insufficient detail for each fiscal year audited, in accordance with appropriate auditing principles consistenitly applied, by independent auditors acceptable to the Association; (ii) furnishi to the Association as soon as available, but in any case not later than six months atter the eisd of such year, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; aisd (iii) furnish to the Association SUCII other information concerning such records and accounts and the audit thereof as the Association shall reasonably request from tihe to time. 4.01 (c) I C The Borrower shall cause Maamba Collieries to Completed maintain records and accounts adequate to reflect in accordance with sounid accounting practices the operations and financial condition of Maamba Collieries. 4.01 (d) I CP The Borrower shall cause Maamba Collieries to: Partial compliance (i) have its records, accounts and finalicial statements for each i'scal year audited in accordance with appropriate auditinlg principles applied by independenit auditors acceptable to the Association; (ii) ftinishi to the Association as soon as available, but in any case not later than six months after the end of each suchI year (A) certified copies of its financial statementsfor each year as so audited, and (B) the report of each audit shall be of such scope and in suLCs detail as the Association may have reasonably requested; and (iii) furnish to thc Association such other information concerning such records, accounts. financial statemenits and the audit thereof as the Association shall from time to tinie request.  29 4.01 (e) I C For all expenditures with respect to which Records kept by withdrawals from the Credit Account ZCCM were made on the basis of statements of cxpcnditures, the Borrower shall and shall cause Maamba Collieries to: (i) maintain or cause to be maintained in accordance with sound accounting practices, records and accounts reflecting suci expenditures; (ii) ensure that all records evidencing such expenditures are retained until ay least one year after the Association has received the audit report for the fiscal year in which the last withdrawal from the Credit Account was made; and (iii) enable the Association's ._________ _____________ _____________ representatives to examine such records. Project Agree- ment 3.01 5 C ZCCM shall carry on its operations and Complied with conduct its atfairs in accordance with within the sound administrative, technical and limitations of mining practices under the supervision of available staff. qualified and experienced management assisted by competent staff in adequate tnmibers. 3.02 5 CP ZCCM shall at all times operate and Complied with, maintain its plaint, machinery, equipment within the and other property, and from time to time. limitations of promptly as needed, make all neccessary available repairs and renewals thereof, all in resources. accordance with sound engineering, financial, technical and mining practices. 3.03 13 C ZCCM shall take out and maintain with Completed responsible insurers, or make other provision satisfactory to the Association for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. 3.04 (a) 5 CD 12/31/92 06/30/93 ZCCM shall not later than December 31. Plan submitted 1992, submit to the Association for in June 1993. review and comment a draft corporate plan including perlbrmiaice targets, proposals for phasing down existing mines and measures to strengtheni its finanicial structure. 3.04 (b) 5 CP 1994 ZCCM shall implemenit the corporate Attempts to plan, satisfactory to the Association implemeint the begiining with ZCCM's fiscal year 1994. plan were only partially successfull. 3.04 (c) 5 C Annual ZCCM shall not later than December 31 Discussion of of each fiscal year discuss with the the corporate Association the implementation of the plan was a corporate plan for the following fiscal continuous year. process. 3.05 5 CP 12/31/92 ZCCM shall: (a) not later than December The project 06/30/95 31, 1992, submit to the Association for supported an review and comments its proposals for (i) on-going joint venturing or selinig its under- process of utilized or unused assets relating to preparing mining activities; (ii) rationalizing and ZCCM for asset divesting all non-mining assets; (iii) divestiture  30 improvinig the pcrformance of' culminating in procurement, matcrials managemenit and the privatisation mainitenance functions; and (b) not later process of than June 30, 1995, implement said 1996-97. proposals, takinig into account the views of tile Association. 3.06 5 CP 12/31/92 07/31/93 ZCCM shall: (a) not later than December Reports 12131/95 31, 1992, submit to the Association for submitted late review and comments a manpower and in July 1993. training program for the period 1993- Implementation 1995; and (b) taking into account the limited. Associations vicws, implement said program and complete it not later than )December 31, 1995. 3.07 9 C ZCCM shall, with effect from the first Limited quarter of 1992 submit to the Association compliance for its review quarterly progress reports on the implementation of Part C of the Project. 4.01 (a) I C ZCCM shall maintain records and Completed accounts adequate to retlect in accordance with sound accounting practices its operations and financial condition. 4.01 1 C ZCCM shall: (i) have its records, Completed - accounts and finanicial statements for each liscal year audited, in accordance with appropriate auditing principles coisistenitly applied by independent auditors acceptable to the Association; (ii) lurnlishi to the Association as soon as possible but in any case not later than six months atler the end of each such year (A) certified copies of its financial statements for such year as so audited. and (B) the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (iii) fumish to the Association such other information concerning such records, accounts and financial statements as well as the audit thereot; as the Association shall from time ti time reasonably request.  31 Table 10: Bank Resources: Staff Inputs Stage of the Planned Revised Actual proiect cycle Weeks US$ Weeks US$ Weeks US$ Preparation 23.0 41,950 to ADpraisal Appraisal 20.0 43.,832 Negotiations 29.3 70,834 thro'Board Approval Supervision 108.4 2 Completion 5.0 1.449 Table 11: Bank Resources: Missions Performance rating Stage of Month Number Days Specialized Implemen- Develop- Types of project / of in staff skills tation obiectives problems cycle vear persons field represented status Through aPPraisal 11/90 1 8 Econ Appraisal thro' Board approval 01/91 4 18 Econ, Econ, Enn. Eng Supervision 09/91 2 15 Econ. Geol 03/92 3 14 Econ, Geol, En_ 06/93 1 7 Geol 2 2 10/93 2 12 Geol. FA 2 2 02/94 1 7 Geol 2 2 03/94 2 10 Geol, FA 2 2 03/95 2 10 Geol. Econ S S 07/95 1 4 Econ n.r. n.r. 11/95 5 10 Econ, FA, n.r. n.r. Eng,Eng.Met 07/96 1 4 Econ n.r. n.r.  32 01/97 4 14 Econ, FA,Eng, n.r. n.r. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _E n g 04/97 1 10 Econ n.r. n.r. Completion 02/98 2 2 Econ; PSD n.r. n.r. _ _ __ __spec n.r. - not rated (joint supervision missions with ERIPTA and ZCCM privatization tasks)  33 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF ZAMBIA MINING SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 2269-ZA) APPENDIX A Completion Mission Aide-Memoire  34 MINING SECTOR TECHNICAL ASSISTANCE IMPLEMENTATION COMPLETIONiNMISSION AIDE - MEMOIR 1. Introduction A World Bank mission consisting of Messrs. John Strongrnan (Mining Advisor) and Emile B. Sawaya ( Principal Private Sector Development Specialist) visited Zambia between February 23 and March 3 1998 to discuss and finalize the Implementation Completion Report (ICR) for the Mining Sector Technical Assistance Project (Credit 2269-ZA). During this period the mission members also undertook supervision of other World Bank projects including the Economic Recovery and Investment Promotion Technical Assistance Credit ( Credit 2875-ZA). The mission's conclusions, which are presented below, would be confirmed by the World Bank following the mission's return to headquarters. The mission wishes to thank the Government and other officials that assisted its work during this visit. 2. The Bank's View on Project Implementation and Operation The mission presented the views of the Bank regarding the implementation and operation of the three components of the project which were (a) assistance to Zambia Consolidated Copper Mines ( ZCCM) Ltd.; (b) assistance to the Ministry of Mines and Minerals Development (MMMD); and (c) assistance to Maamba Collieries. The Bank's view is that the results are mixed for the achievement of the objectives for the three components. For ZCCM, the objectives were not achieved. For IIMMD, the objectives were largely achieved. For Maamba Collieries, the objectives were partially achieved. ZCCM Component The main objective of the project for ZCCM was to provide assistance to improve ZCCM's operations, lower its costs, joint venture its undeveloped copper resources and divest its non-mining assets. This was not achieved. The project provided assistance for the development and implementation of an Interim Short Term Plan for FY93/94 - FY95/96 designed to achieve these aims. However, the plan proved overly ambitious and was not successfully implemented. Instead, ZCCM's production and efficiency declined and little progress was made in joint venturing undeveloped copper resources or divesting non-mining assets. MMMD Component. The main objective of the project for MMMD was to provide assistance to MMMD to create an attractive investment environment for new private mining exploration ancl investment and to design an institutional strengthening program for MIMD. This was largely achieved. The project supported the development of a new mining code and fiscal regime. Exploration and investment by private companies has increased from about US$2 million in 1990 to US$40-50 million in 1997. The project has also resulted in the design of an institutional strengthening program for MMMD, which is being implemented with support under the ERIPTA.  35 Maamba Collieries. The main objective of the assistance for Maamba Collieries was to reduce costs and prepare a long run strategy. This was partially achieved. A long run strategy was prepared which revealed that the company was not viable. It has subsequently been offered for privatization and sold to a new private owner. Sustainability of the Mining sector. Although the support for ZCCM did not achieve its objectives the outlook for the mining sector is considered positive. Rather than making renewed efforts to improve the efficiency of ZCCM, the government changed its strategy and instead decided to privatize all of ZCCM's operations. The privatization is almost complete and prospects are very positive for a large increase in investment in the sector. Following the successful establishment of the new mining code and fiscal regime and the nearly completed privatization of ZCCM, private investors will take the lead in the development of new copper mines and the operation and management of the existing mines. 3. The View of the Borrower and the Implementing Agency on Project Implementation and Operation The Ministry of Finance as representative of the Borrower, ZCCM as the Implementing Agency for the project and MMMD as a beneficiary of the project and as the lead ministry for the mining sector all concur with the Bank's assessment of the project that the project objectives were not achieved for ZCCM, were largely achieved for MMMD and were partially achieved for Maamba Collieries. They also concur that the outlook for the mining sector is very positive given the successful establishment of the new mining code and fiscal regime and the nearly completed privatization of ZCCM. ZCCM provided a brief note with more specific comments which is attached as an Annex. 4. Next Steps Following the return of the mission to headquarters, the draft ICR will be finalized taking into account minor changes and corrections provided to the mission. The ICR will then be printed, processed and distributed according to Bank procedures. March 2, 1998 Lusaka, Zambia  36 signed For the Government . ~' Professor Benjamin Mweene Secretary to the.Treasury Ministry of Finance Mr. Albr KasR' - Permanent Serctaiy Ministry of Mines and Minerals Development For ZCCM:' Dr. Edwin. Koloko ror the Intemational Developmen Association: JA J4 John Strongman Task Manager, Mining Sector TA World Bank Ltsalen Zambia March 2,1998  37 ZAMBIA CONSOLIDATED COPPER MINES LIMITED MINING TECHNICAL ASSISTANCE PROJECT IMPLEMENTATION COMPLETION RE-PORT We have reviewed the draft and largely agree with the conclusions. There are a few statements and observations pertaining to the performance of ZCCM, which if critically reviewed, may not result in the same significance attached to them in the report. However, such review would not materially impact on the final conclusions. The lack of success of the ZCCM component of the project has been determined from performance against the projected objectives of the Interim Short Term Plan. The plan was originally formulated at a time of relative stability but was finalised at a time of extreme crisis threatening the very survival of ZCCM. Perhaps on reflection, delaying the fialisation of the plan to enable an assessment of the impact of austerity measures imposed to survive the crisis may have led to a more realistic assessment of ZCCM's capabilities. The report recognises that the project took place during a period of social and economic change in the country and that whilst the privatisation of ZCCM was a current issue, neither the method or a timetable had been established. Whilst critical of management, managing an operation of the size and complexity of ZCCM under such circumstances would present a challenge to any management team, even without the crisis of 1993. 031/98 - 02 March, 1998  38 IMPLEMENTATION COMPLETION REPORT REPUBILIC OF ZAMBIA MINING SECTOR TECHNICAL ASSISTANCE PROJECT (CREDIT 2269-ZA) APPENDIX B Borrower's Contribution to the Report  39 ZAMBIA CONSOLIDATED COPPER MINES LIMITED MINING SECTOR TECHNICAL ASSISTANCE PROJECT BORROWERS CONTRIBUTION TO TEE IMPLEMENTATION COMPLETION REPORT Objectives The overall objective of the contract was to design and execute a programme leading to maximising the returns to the economy from minerals. To this effect the programme aims at ensuring that the resources are exploited and marketed efficiently. ZCCM was required to: a) develop a corporate strategy with clearly defined objectives so as to maximise the efficiency and thus the profitability of the operations; b) prepare a viable divestiture and joint venture strategy; and, c) implement the strategies and the required restructuring measures. The Political and Economic Environment The political and economic environment that prevailed during the execution of the project is summarized below. * ZCCM had been undercapitalised since it's formation in 1981. . Copper production was declining but the mineral reserves were available to reverse the decline. . The socialist government of Dr. Kenneth Kaunda was replaced in 1991 by a coalition of opposition groups unified under the umbrella of the Movement for Multi-Party Democracy. 1  40 . The new Government embarked on a programme of market and monetary liberalisation and the privatisation of state owned and controlled enterprises, including ZCCM. . The country underwesnt a period of hyperinflation. Major disturbances that negatively impacted on the ability of the company to maximise the financial benefits which were expected from the pro:ject were the collapse of the copper price in September 1993 to an all time real low, and government monetary policy which led to a 38 per cent revaluation of the Kwacha during the period of declining copper prices and depressed revenues Project Design and Execution SRI International as lead Consultant of a consortium with Mineral Resources Deveslopment Inc, Performance Associates, Arthur Andersen and Steffen, Robertson and Kirsten were awarded the contract for consulting services. The project commenced in October 1992 and will end during the first half of 1997. The project was designed as a number of Analysis and Implementation Modules (AIM's) covering the following activities within ZCCM: * Geology, Reserves and Resources * Mine Operations and Planning * Metallurgical Operations and Planning * Finance and Accounting * Human Resources * Training * Maintenance Management Systems * Materials Management Systems * Marketing 2  41 * Environmental Review The analysis of each activity drew upon the results of previous studies and produced approximately 350 specific recommendations to improve performance. These were reviewed by ZCCM and most of the accepted recommendations were designated for implementation by ZCCM staff. With the funding available for external consultants, a smaller number of recommendations was designated for implementation by consultants and ZCCM counterpart staff. Most of the recommendations were actions that could increase productivity and profitability in the short term; others had longer term impacts. In some areas the objectives were to improve performance company wide, e.g., accounting and finance; supply; environmental protection, and marketing. In the principal activities of geology, mining, metallurgical operations and maintenance engineering, where there is less commonality, specific operations were targeted to improve grades and recoveries and reduce operating costs at each unit operation in the Divisions. In addition, the mining consultants, assistance focused on proving backfill mechanized mining methods that would reduce long-term mining costs. An Interim Short Term Plan (ISTP) was developed nine months after the initiation of the analysis phase. It incorporated the anticipated benefits from the implementation programmes. The Plan laid out the Corporate strategy for the short term and included the elements of labour reduction, closures, cost savings and the Government actions to support the plan. The collapse of the copper price in September 1993 coincided with the finalisation of the plan. Consequently the plan was refocused on survival and capital expenditures were prioritised and severely restricted. The AIM implementation programs began in February 1994. Throughout the project, the performance of the Consultants has been entirely satisfactory. They have maintained a full commitment to the designated tasks and demonstrated a high degree of professionalism. They have been flexible when required and responded promptly to the requirements and requests of ZCCM. ZCCM is also highly appreciative of the performance of the Bank and its officers who have been involved with the project. The administration has been smooth and trouble free, which can 3  42 be attributed to the long association and familiarity with the procedures of both entities. In a project of this magnitude, complexity and time span, it is inevitable that priorities will change and events will disrupt the planned activities. The Bank's officers have closely cooperated with the borrower throughout the evolutionary and implementation phases of the project and have been receptive and flexible to the borrower's changing requirements. Project Results The major focus of the project was to improve the efficiency of ZCCMs operations and lower operating costs, and in these areas the project has had some success. Although the overall production and unit cost targets established in the ISTP were not achieved, many of the cost trends between FY1993/94 and FY1995/96 have been favourable. The major, unanticipated problems that prevented the Company from achieving ISTP targets were: * Unforeseen adverse mineralogy from a major new open pit ore source at Nchanga, which led to reduced production of both copper and cobalt and pocr quality of concentrates(see Figure 1). * Commissioning and operational problems(e.g. persistent outages of ancillary equipment) at the Nkana smelter, which led to reduced acid production and restricted acid usage at the Tailings Leach Plant. In addition to the unanticipated problems mentioned above, the underground mining operations failed to achieve the targeted improvements in stoping and extraction efficiencies. Action plans for achieving the improvements were not developed and implemented in a timely fashion. In addition, the Divisions were overly optimistic concerning their ability to achieve the required improvements with minimal outside assistance. As a result the planned contained and finished copper targets were not achieved(see Figure 2). The areas of success include: * The labour force has been trimmed down from approximately 52,000 to 42,000 and senior positions reduced by nearly one third(see Figure 3). However, austerity measures introduced as 4  43 a result of the low copper prices led to an erosion of real wages in FY1994/95 (see Figure 4), depressed employee morale, and the loss of skilled manpower * The loss-making Kabwe mine was closed down. * Stores inventories were reduced and managed at lower levels. * Operating and maintenance stores expenditures, which account for approximately 50k of total operating costs, were significantly reduced (see Figures 5 and 7). The cents/pound costs also declined in spite of production declines (see Figures 6 and 8). * The quality and timeliness of financial reporting have improved. * Environmental awareness has been raised and a major commitment has been made to the development of mine closure plans. With the recovery of metal prices in 1994, capital spending increased beyond the severe limits in the ISTP by nearly US$100 million. However, contrary to the guidelines stated in the ISTP, most capital was allocated to completing strategic projects, and only about one-third of the increase went to replacements (see Figures 9 and 10). Lessons Learned 1. Management Involvement Strong, persistent involvement by the company's top management is necessary to ensure that the many actions described in the AIMs and ISTP are implemented and sustained. Specific responsibilities and the authority to implement the actions need to be assigned and followed-up by periodic reviews of progress at the highest management level. However, disruptions in management continuity due to job rotations of GM's and AIM counterpart teams who formulated the plans made commitment to implementation more difficult to sustain. 2. Sustainability of Efficiency Improvement Programs (Making Changes Stick) Special measures are required to ensure that the efficiency 5  44 improvement programs initiated by the consultant/ZCCM AIM implementation teams become permanently incorporated into ZCCM's operating and business procedures. These measures should include: * Clear, consistent line management actions that demonstrate managements' support of the programs and desire to have them successfully implemented in a timely manner. Examples are actions to: - remove roadblocks and barriers and create a positive environment for program implementation - visible rewards fcor staff who successfully implement programs and achieve the desired improvements * Periodic, ongoing involvement of the consultants to help resolve problems during implementation and maintain program momentum. 3. The Company's Ability to Implement Action Programs ZCCM overestimated its ability to implement the action programs recommended to improve the efficiency of its operations and at the same time effectively manage and perform the day-to-day operations; of the Company. As a result, many of the efficiency improvement programs designated for implementation by ZCCM staff alone were delayed or not begun. On the other hand, ZCCM underestimated its ability to create a cost conscious culture. Stores price reductions, material consumption reductions, staff reductions, and labour cost austerity measures were all introduced more quickly than anticipated in the ISTP. 4. Efficiency Improvement:s in Underground Mining Operations The time required and the importance of re-establishing detailed standard operati ng procedures and sustaining strict adherence for the core mi.ning activities was not recognized. There were no implementation assistance resources allocated to mining operations from project funds. Additionally, with the exception of Mufulira mine, the individual mines were not: able to update the detailed 6  45 procedures and influence the day to day workplace work habits. A better balance of implementation assistance to include the fundamental mine efficiency improvements was needed and this did not occur. ZCCM. 10 January 1997 7  Figure I Figure2 300,000 400,000 250,000 350,000 ____________ 20Nchng, 00Pit Contained Cu, ISTP 3(0n000 U/gs2nd Mim Contained CuI 200,000 (Toonns) 250 ,000__ ISTP (Tonnes) 150,000 - Nchanga O/Pit Contained Cu, 200,000 _ t/ground Mines Contained Cia, Actual (Tonnes) Actual (mronnes) 100.000 El Nhanga 0/Pit Finished Cu, al U/ground Minm Finished Cu, Actl 50,000 ~~~~~~~~~(Tonnes) 100 (Toines) 1993194 1994195 1995196 1993/94 1994/95 1995/96 Flgure 3 Figure 4 : 60,000 250 50,000 200 . 40,000 . w I 5 _ -_ 30000 _ *Cot oEIabour, AFtual($I)o 20,000 _ _ Total Labour, Actual (No.) Yr. Endi I00 - __ 0,000 50 _ 0 0 1993/94 1994/95 1995/96 1993/94 1994/95 1995/96 All monetary values are expressed in constant 1993 dollars.