Mauritania - Guelbs Iron Ore Project

Document of The World Bank FILE C FOR OFFICIAL USE ONLY Report No. P-2433a-MAU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE NATIONALE INDUSTRIELLE ET MINIERE WITH THE GUARANTEE OF THE ISLAMIC REPUBLIC OF MAURITANIA FOR THE GUELBS IRON ORE PROJECT June 21, 1979 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 EQUIVALENT Current Unit = Ouguiya (UM) US$1.00 UM 45 UM 1 = US$0.22 WEIGHTS AND MEASURES EQUIVALENTS 1 metric ton (mt) = 2,205 pounds (lb) 1 kilometer (km) 2 = 0.62 mile (mi) 1 square kilometer (km ) = 0.386 square mile (sq mi) ABBREVIATIONS AND ACRONYMS ADB = African Development Bank AFESD Arab Fund for Economic and Social Development AISI American Iron and Steel Institute ARMICO = Arab Mining Company BCM = Banque Centrale de Mauritanie BRGM = Bureau des Recherches Geologiques et Minieres CCCE = Caisse Centrale de Cooperation Economique COMINOR = Complexe Minier du Nord CVRD = Companhia Vale de Rio Doce DCPP = Departement de Commercialisation des Produits Petroliers EEC = European Economic Community EIB = European Investment Bank FCB = Five Cail Babcock FED = Fonds Europeen de Developpement IISI = International Iron and Steel Institute IRSID Institut de Recherche de la Siderurgie KFAED = Kuwait Fund for Arab Economic Development KFTCIC = Kuwait Foreign Trading, Constructing and Investment Co. MIFERMA = Mines de Fer de Mauritanie MSI Mineral Services Incorporated OECF = Overseas Economic Cooperation Fund (Japan) OPEC Organization of Oil Producing Exporting Countries SNIM = Societe Nationale Industrielle et Miniere SNIMEX SNIM Explosif SOCOMINE = Societe de Cooperation Minere et Industrielle SOFREMINES = Societe Francaise d'Etudes Minieres SOFRESID = Societe Francaise d'Etudes de la Siderurgie SOMIMA = Societe des Mines de Mauritanie SONADER = Societe Nationale pour le Developpement Rural SGTE = Societe Generale de Techniques et d'Etudes FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ISLAMIC REPUBLIC OF MAURITANIA GUELBS IRON ORE PROJECT Loan and Project Summary Borrower: Societe Nationale Industrielle et Miniere (SNIM) Guarantor: Islamic Republic of Mauritania Amount: US$60.0 million equivalent Terms: 15 years including 5 years of grace, with interest at 7.9% p.a. Project Description: The Guelbs project consists of the sequential development of two new iron ore open pits with proven reserves of 386 mil- lion tons, both located in proximity to the present mining town of Zouerate and existing infrastructure, to gradually replace the Kedia pits now being depleted. Implementation of the project would be carried out in two phases to ulti- mately increase the present production capacity of 11.5 million tons to about 14 million tons a year by 1984. Although the Guelbs ore is of a different quality (lower iron content) than the Kedia ore, with magnetic concentra- tion the products will actually be of higher grade and will have good marketing characteristics. The proposed Bank loan will help finance the first phase of the project which would open up production of a new ore deposit, El Rhein, to partially replace the Kedia operations. The main components are: (i) construction of concentration/beneficiation facilities to upgrade the low grade ore (30-40 percent Fe) to an acceptable sinter feed (65 percent Fe); (ii) extension of the railroad from F'Derik to El Rhein (45 km) and increase of existing rail capacity and port facilities to handle 14 million tons of ore per year; (iii) a new power plant, additional water supply, housing and other auxiliary facilities and services; and (iv) engineering, project management and training. The second phase (1986-89) will open a new mine at Oum Arwagen (12 km east of El Rhein) to replace the depleting Kedia reserves. It is expected that SNIM will be able to contribute substantially to financing the second phase from internal cash generation made possible by the first phase of development. The proposed project is crucial to Mauritania's continued development. By maintaining and developing existing mining operations, the project would help sustain Government revenues and foreign exchange inflows and create employment. In addition, it would ensure the continuing existence of 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.  i~~~~~~~~~~~-i SNIM, which through its training program, geological re- search and project promotion, is the main instrument for the future development of mining activities and industry in Mauritania. A potential risk facing the project is the possibility of delays and additional costs due to renewal of military activity in the area. To guard against such an eventuality, the financing plan includes extraordinary contingencies, although the suspension of military activities since early July 1978 augurs well for a peaceful settlement. Another potential risk is that Phase 2 would not be implemented on schedule, with the consequence that, after exhaustion of the Kedia reserves, SNIM would only be able to count on a production of 6 million tpy from Phase 1, and would there- fore operate below the break-even point. To counter this threat, the financing plan for the first phase has been designed so that implementation of the second phase would not, under reasonably foreseeable circumstances, be retarded because of financing problems. Furthermore, the financial projections indicate that over 1983-88 SNIM would generate cash in excess of the US$187 million projected as its own contribution to the financing of the second phase. Finally, the Government committed itself during negotiations not to use, under any circumstances, SNIM' s accumulated cash surplus held in the Central Bank for Phase 2 financing. A timetable for this accumulation has been agreed with the Bank and calls for the first retention to be made in 1984.  -. iii- Estimated Cost: The total financing required for the proposed project (Phase 1) is estimated at US$500.7 million equivalent, of which US$456.1 million is in foreign exchange. A summary table of cost estimates is shown below: Foreign Local Total -US$ million- Mining and Mechanical Equipment for Beneficiation Plant 87.2 1.8 89.0 Port and Railroad Equipment 35.0 0.7 35.7 Power Plant and Main Electrical Equipment 30.3 0.6 30.9 Miscellaneous Plant, Water Supply and Auxiliary Electrical Equipment 4.0 - 4.0 Civil. Works, Buildings and Housing 48.6 9.0 57.6 Erection and Installation 22.4 10.9 33.3 Engineering and Project Management 20.4 1.1 21.5 Preliminary Works and Training 7.0 2.7 9.7 Total Base Cost (mid-1977 prices) 254.9 26.8 281.7 Physical Contingencies 24.9 2.7 27.6 Price Contingencies 99.7 10.4 110.1 Total Fixed Assets 379.5 39.9 419.4 Incremental Working Capital 30.0 3.5 33.5 Interest during Construction 26.6 1.2 27.8 Extraordinary Contingencies 20.0 - 20.0 Total Financing Required 456.1 44.6 500.7  - iv- Financing Plan: US$ Million Percentage Equity Kuwait Foreign Trading, Contracting and Invest- ment Company 40 8 Arab Mining Company 28 6 Republic of Iraq 22 4 Kingdom of Morocco 20 4 Islamic Development Bank 10 2 SNIM Retained Cash Generation 42.7 9 Total Equity 162.7 33 Loans Saudi Fund 65 13 IBRD 60 12 Caisse Centrale 50 10 Kuwait Fund 45 9 AFESD 35 7 EIB 30 6 Abu Dhabi Fund 20 4 OECF (Japan) 16 3 ADB 12 2 OPEC Special Fund 5 1 Total Loans 338 67 Total Financing 500.7 100  v The proposed foreign contributions (US$458 million, including US$120 million in new equity) would cover 100 percent of the estimated foreign exchange component of the project. FY 80 FY 81 FY 82 FY 83 ---------(US$ million)---------- Estimated Disbursements: Annual 3.0 17.0 28.0 12.0 Cumulative 3.0 20.0 48.0 60.0 Rate of Return: The project is expected to yield an economic return of 12 percent Staff Ap- praisal Report: Report No. 2224a-MAU dated June 20, 1979.   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPCISED LOAN TO SOCIETE NATIONALE INDUSTRIELLE ET MINIERE WITH THE GUARANTEE OF THE ISLAMIC REPUBLIC OF MAURITANIA FOR THE GUELBS IRON ORE PROJECT 1. I submit the following report and recommendation on a proposed loan to Societe Nationale Industrielle et Miniere (SNIM) with the guarantee of the Islamic Republic of Mauritania for the equivalent of US$60 million to help finance a project for the continuation of the company's iron ore mining oper- ation. The loan would have a term of 15 years, including 5 years of grace, with interest at 7.9 percent per annum. The Government of Mauritania would charge SNIM a guarantee fee of 2.1 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan outstanding to 10 per- cent per annum. The proposed project would be cofinanced by the following institutions: (i) Saudi Fund for Development for the equivalent of US$65 miLlion, with a term of 20 years, including 4 years of grace and an interest rate of 3 percent per annum; (ii) African Development Bank for 10 million units of account (US$12 million equivalent), with a term of 15 years, including 5 years of grace and an interest rate of 8 percent per annum; (iii) OPEC Special Fund for the equivalent of US$5 million, interest free for 20 years, including 5 years of grace; (iv) Caisse Centrale de Cooperation Economique for the equivalent of US$50 million, representing a direct loan of US$30 million and US$20 million in suppliers' credits guaranteed by the French Government, with an average term of 15 years, including 3 years of grace and an interest rate between 8.5 and 9 percent; (v) European Investment Bank for 25 million units of account (US$30 million equivalent) on terms similar to those of the ADB loan, but at an interest rate between 5.25 and 6 percent per annum; (vi) Kuwait Fund for Arab Economic Development for the equivalent of US$45 million, with a term of 25 years, including 7 years of grace and an interest rate at 3 percent per annum; (vii) Arab Fund for Social and Economic Development for the equiva- lent US$35 million, with a term of 15 years, including 5 years of grace and an interest rate of 4 percent per annum; (viii) Abu D)habi Fund for the equivalent of US$20 million on terms identical to those of the Arab Fund loan; and (ix) OECF of Japan for the equivalent of US$16 million, with a term of 25 years, including 7 years of grace and an interest rate of 4 percent per annum. The first three institutions (Saudi Fund for Development, African Development Bank and OPEC Special Fund) would channel their ftnds through the Government, while theothers would lend directly to SNIM. In addition to the loans described above, equity participation is expected from Kuwait Foreign Trading, Contracting and Investment Company (US$40 million equivalent), Arab Mining Company (US$28 million equivalent), the Republic of Iraq (US$22 million equivalent), the Kingdom of Morocco (US$20 million equivalent), and Islamic Development Bank (US$10 million equivalent), bringing the total external funds for the project to US$458 million. PART I: THE ECONOMY 2. A report entitled "Islamic Republic of Mauritania: Recent Economic Developments and External Capital Requirements" (2479a-MAU) dated June 4, 1979  - 2 - has been distributed to the Executive Directors. Its findings are reflected in the following assessment of the current situation and prospects of the economy. Country Data appear in Annex I. The Setting 3. With a GNP per capita of US$270 in 1977, Mauritania is not classi- fied among the "Least Developed Countries" but, in fact, faces the same basic constraints to development as they do. The standard of living of 80 percent of the population is among the lowest in the world. Primary school enroll- ment does not reach 20 percent. Most of the country is desert; agriculture and livestock herding, which sustain 80 percent of the 1.5 million inhabit- ants, are limited to a narrow belt of land in the southwest along the northern bank of the Senegal River; but even there, rainfall is irregular or insuffi- cient. Some 800 miles away, in the northwest, economic activity centers around the mining/fish processing complexes of Zouerate and Nouadhibou. The capital, Nouakchott, lies in between, separated from each of the two economic centers by 400 miles of desert. Routes linking the agricultural region with neighboring countries, on the other hand, are often less than 150 miles long. As a result, there is little interaction between Mauritania's modern and traditional sectors but considerable economic exchange (not recorded in official foreign trade statistics) between the latter, the western part of Mali and the northeastern part of Senegal, which together form a more inte- grated economic unit. This further accentuates the isolation of Nouakchott, which was built in the early 1960s in a region deprived of all basic infrastructure. 4. Mauritania's main political and economic links have traditionally been with French speaking African countries south of the Sahara. Recently, however, it has established close relations with some of its North African neighbors as well as with the Arab OPEC countries. In June 1972, Mauritania asked for a revision of its 1961 Cooperation Treaty with France in the economic, monetary, technical, cultural, and military fields. A new agree- ment was reached in February 1973, except in monetary affairs. As a result, Mauritania left the West African Monetary Union and the Franc zone and, with the financial support of Arab OPEC countries, established in June 1973 its own Central Bank and introduced its own currency, the Ouguiya (UM). However, it still maintains good economic relations with France and is a member of the Economic Community of West Africa and of OMVS (Organisation pour la mise en valeur du fleuve Senegal). 5. In 1976, after Spain relinquished its control over the Spanish Sahara, Mauritania and Morocco divided the administration of the territory between them, with that part south of the 24th parallel to be administered by Mauritania. Although the population of the Mauritanian section is esti- mated at only about 30,000, the extension of Mauritania's administrative control into this territory was straining the Government's already limited domestic resources, both financial and human. Except for rich coastal fishing grounds and minerals yet to be located, the resources of Mauritania's  - 3 - portion of the former Spanish Sahara are limited; one small advantage per- mitted Mauritania by the acquisition of this territory has been the reloca- tion of a few kilometers of the rail line associated with the iron ore mines in the area -- this allows the ore trains to bypass the Choum Tunnel and adds slightly to the efficiency of rail operations. The Choum Tunnel remains open, however, as an alternative for evacuating iron ore. The Polisario (Front for the Liberation of Spanish Sahara) challenged the partition, and from 1976 to mid-1978, conducted intensive guerrilla operations against Morocco and Mauritania. Recent Developments 6. During the 1960s, the Mauritanian economy grew at about 10 percent per year in real terms. This growth was due mainly to the development of iron ore mining and to the rapid expansion of livestock that resulted from a successful animal health campaign. Since then, however, growth has slowed down to less than 2 percent due to a number of unfavorable developments, most of which were beyond the Government's control. Agricultural output, struck by a series of severe droughts, stagnated in 1971, fell by more than 40 percent in 1972 and again, by 20 percent in 1973. Losses of livestock, principally cattle, amounted to an estimated 30 percent of the herd. All the gains in per capita income of the rural population achieved in the 1960s were lost during the drought years. Thousands of farmers and herdsmen who lost their source of livelihood in rural areas have had to migrate to towns. Unable to find work in the modern sector, many have turned to the informal sector for opportunities, or have remained unemployed. A recovery set in around 1974, and economic activity was slowly returning to normal when the doubling of the price of petroleum products, together with rises in other import prices, put pressures on the balance of payments and set the economy on an unprecedented inflationary path. 7. Mauritania's capacity to respond to this new situation was limited, particularly after 1975, when the stagnation of the world steel market started to affect its main export (iron ore), while the need to maintain and equip a large national defense effort against the Polisario was absorbing an increasing portion of scarce resources. More than ever, stabilization of the economy, a pre-condition for future growth, had to come from abroad. In this respect, Mauritania has been fortunate to receive substantial foreign assistance in the past few years. During the period 1973-77, about US$800 million was made available to the country in response to its growing needs. Most of it came from Arab OPEC countries and consisted of concessionary loans and grants for both balance of payments/budget support and project aid, but a sizeable amount also originated from private banks and foreign suppliers. 8. The Government used these resources to nationalize the mining sector in 1974-75, thus bringing under public control the country's major economic and financial activities. It then started to play a more decisive role in managing the economy by organizing and directing large investments. Between 1973 and 1977, public investments more than doubled in real terms and reached UM 10.4 billion (US$232 million), an amount equivalent to 50 percent of GDP.  - 4 - Most of these investments, however, were concentrated in non-directly produc- tive sectors such as infrastructure. The few large projects in the industrial sector were ill-conceived and financed on very hard terms. The most important ones, a sugar refinery and an oil refinery were completed last year, but neither can at present be operated profitably and both remain closed for the time being. As a result, the burden of the external debt sharply increased while the capacity of the economy to serve it did not. 9. During 1977 the situation deteriorated sharply. The drought struck again and production of millet, the main crop, fell from about 36,000 tons per year to an estimated 21,000 tons. More than 100,000 tons of grain (main- ly rice and millet) had to be imported, of which only about a third was grant-financed. World market prices for iron ore remained depressed, while rail evacuation from the mines to the port (650 km) became difficult because of Polisario attacks, in spite of a large defense effort. As a result, iron ore exports dropped to US$127 million in 1977, as compared to US$154 million the year before. To add to the difficulties, budget support from Arab coun- tries was drastically cut. Reflecting these unfavorable developments, the resource gap reached US$208 million (47 percent of GDP) and the balance of payments registered a deficit of US$45 million, which had to be financed by a drawdown of official reserves. At the end of 1977, for the first time since independence, net reserves of the Central Bank moved to a negative position. 10. On the public finance side, the situation was even more disquieting. Payment arrears of the Treasury accumulated. Despite the adoption of a revised austerity budget in August 1977, the current deficit, estimated at US$64 million in 1976, increased to US$90 million in 1977, and the Government was forced to divert some project aid and to use large advances from the Central Bank to cover it. 11. In turn, the Central Bank, faced with a large demand for credit from the Government, had to impose strict limitations on credit to the pri- vate sector and to reduce commercial banks' access to rediscounting facili- ties, apparently bringing many small local enterprises to the brink of bankruptcy. Though there was an increase in private sector credit in 1977, this was mostly due to the need to replace with domestic credit a part of foreign suppliers' credit in the financing of imports. These, which in the past financed the import trade, were no longer available in 1977. 12. On July 10, 1978, a bloodless coup d'etat deposed President Moktar Ould Daddah. The new Government pledged to honor all Mauritania's foreign and international commitments. The arrival of a new team in power seemed to have opened the way for new peace initiatives. The Polisario declared a temporary cease-fire and has so far faithfully observed it. All parties interested in the Western Sahara question have met during the last ten months and discussions are apparently continuing. Rehabilitation Program and Short-Term Outlook 13. On the economic and financial front, the new Government appears determined to take hard measures to improve the situation but desperately  - 5 - needs renewed budget assistance. It has, therefore, officially adopted the various measures outlined in a program for rehabilitation of the balance of payments and the current budget that was prepared by the former Government with Bank assistance. This program, which is consistent with measures being recommended by the IMF, proposes the consolidation or rescheduling of a substantial proportion of the Government's external debt (about US$215 mil- lion), 1/ emphasizes the importance of current budget assistance (about US$60-65 million a year until the early 1980's) without which the Mauritanian administration will not be able to function, imposes strict conditions on Government's future borrowing and tight control of public expenditures, and recommends drastic changes in public investment priorities. 14. The new Government has discussed the Rehabilitation Plan on a bilateral basis with a number of countries and has obtained encouraging results. Abu Dhabi, France, Kuwait, Libya, Morocco and Saudi Arabia have pledged to give about US$150 million, most of it as grants for balance of payments and budget support. About US$80 million have already been dis- bursed. This substantial inflow of foreign aid, supplemented by the STABEX compensation for iron ore export shortfalls in 1977 and 1978 and two drawings on the IMF Trust Fund, have permitted Mauritania to avoid a difficult finan- cial crisis in 1978. 15. Concurrent with the search for budgetary assistance, the Government has started to renegotiate part of its external debt, which reached a very high level for a country like Mauritania. An agreement, in principle, has been reached bilaterally with some Arab countries holding loans for which rescheduling was recommended by the Rehabilitation Plan. The Government is still renegotiating with Voest Alpine and KFTCIC the terms and conditions of two hard loans they have granted, which amounted to US$97 million. For debts held by private banks and former shareholders of MIFERMA (Mines de Fer de Mauritanie), the Government hopes to avoid direct renegotiations and is trying to obtain from friendly Governments a soft loan of about US$50 million to consolidate them. 16. On the domestic side, the Government macle efforts to reverse the deteriorating trend of the past. With the exception of debt service pay- ments, budgetary expenditures in 1978 were kept within the limits set by the 1/ At the end of 1977, Mauritania's external public debt, including undis- bursed, amounted to US$677 million; US$574 million was contracted by the Government, US$44 million by the Central Bank of Mauritania, US$50 million by SNIM, and US$9 million by other public enterprises. Debt rescheduling recommended in the Rehabilitation Plan only concerns the Government and Central Bank debt as it is expected that SNIM would generate sufficient cash flow to cover both existing commitments and new debts contracted for the Guelbs project. The US$215 million include all Government debts contracted on hard terms and a few large bilateral loans for which grace periods have expired.  - 6 - Rehabilitation Plan, while revenues were higher. In 1979, the Mauritanian authorities intend to pursue the same policy of expenditure restraint, but will not be able to avoid a liquidity crisis without substantial foreign assistance. Already a deterioration in the budgetary situation could be observed during January-March 1979. Tax collection was slow while practically no budgetary assistance was received. In addition, although current expendi- tures were budgeted at the level foreseen in the Rehabilitation Plan, impor- tant non-budgeted equipment purchases were made, bringing total expenditures in 1979 to UM 11.7 billion, or UM 1.0 billion higher than forecast in the budget. The situation is still manageable, however, provided the Government strictly controls the execution of the budget and sees to it that no other non-budgetary expenditures are committed. Taking into account the financing already obtained, the additional external assistance needed to cover the expected budgetary deficit in 1979 is of the same order of magnitude as initially foreseen in the Rehabilitation Plan. 17. The failure to observe budgetary procedures in committing expendi- tures and the inefficiency of the information system reflect to a certain extent an unavoidable weakening of Mauritanian administrative services fol- lowing the change of Government in mid-1978. The new Government is conscious of the problem and has obtained additional technical assistance from France to strengthen its administration. To help improve the public finance situ- ation, it also decided, in line with the Rehabilitation Plan, to: (i) keep SOMIMA, the copper mine, closed in spite of some internal pressure, thus saving about US$10 million in subsidies; (ii) postpone the start of operations of the oil and sugar refineries until their profitability is clearly established; (iii) limit the creation of new positions for civil servants and to restrict salary increases to 5 percent per annum in current terms until 1980; (iv) take necessary measures to improve tax collection and combat tax fraud; and (v) observe strict financial standards in the choice of its investments; projects that cannot be financially and economically justified will be dropped. 18. However, the Government knows that Mauritania's financial situ- ation will remain precarious until the early 1980s when deceleration of military expenditures and the projected doubling of iron ore exports enable it to stabilize its budgetary and balance of payments position. During the next three to four years, over a third of the budget will have to be  financed from abroad. The risks of a liquidity squeeze are therefore con- siderable as, even if available, the inflow of foreign assistance may not match budgetary expenditures. The situation will require constant and careful monitoring. Improvement of the existing control mechanisms in order to rapidly detect any deterioration in the situation and take the appropriate measures to correct it is essential. Continued tight control of credit and budgetary expenditures will also be necessary. Such a policy will make the recovery of the private sector more difficult as many private firms derive their business from Government contracts. However, there is no other alternative until the position of the Treasury improves. Strategy and Long-Term Prospects 19. Financial stabilization is, and will remain for some time to come, the Government's first priority. However, some attention has also been given to considering policies that would tackle the deeper seated structural prob- lems of the economy. 20. In a substantial reversal of past policies the Government decided to sharply reduce its role in organizing and directing investments in mining and basic industry. Given the Government's limited financial means, a new policy of liberalism and openness towards private foreign investments will be followed. Thus, Government intends to leave to foreign investors the initiative and responsibility of implementing the copper sulfide project and the pellet project and will not guarantee loans which could eventually be contracted for them. As a consequence, these projects should not create a burden for the budget or the balance of payments. 21. With regard to the public investment program, projects included in the Rehabilitation Plan indicate a clear departure from past policies, where the main emphasis was on industry and transport development. With the exception of two large infrastructure projects (the Nouakchott port and the Kiffa-Nema road), the execution of which has already started, most of the proposed investments are concentrated in the productive sectors in order to broaden the economic base and accelerate structural changes necessary for future growth. The highest priority is given to the continuation of iron ore exploitation as this activity is (and will remain in the foreseeable future) the main support of the Mauritanian economy. Indeed, the Guelbs project is the cornerstone of the Government's Rehabilitation Plan. Without it, all the efforts to redress the economy (including debt rescheduling) currently under way would be in vain. The iron ore project will be the main, or pro- bably, the only public industrial project to be started over the next few years, while the traditional sectors (agriculture, livestock, and fisheries) will be given increasing priority. 22. The most formidable obstacle to this strategy is the scarcity of well prepared projects. Mauritanian administrative services are inadequately staffed for project preparation and analysis; many projects for the rural  - 8 - sector selected by the Government need additional preparatory work to become economically viable. Equally critical is the lack of project execution capability. Two IDA financed technical assistance projects to the Ministry of Planning and to SONADER, the newly created agency in charge of rural development, should help the Government overcome some of these problems by providing the key personnel and the needed project preparation expertise. 23. From 1977 to 1985, the overall growth of the economy could reach about 3.5 percent per annum, with iron ore mining being the main motor of expansion. During this period, development of the rural sector will remain moderate because of the long gestation period of agricultural projects. After 1985, this sector could achieve a growth of about 3.8 percent per annum if all the large irrigation projects included in the Rehabilitation Plan are successfully implemented. The increase in real GDP between 1985 and 1990 should be around 3 percent per annum and should result in a slow improvement in the level of income of the Mauritanian population. These moderate rates (substantially higher than those recorded in the recent past) show that the recovery of the Mauritanian economy is possible. It will be a long and dif- ficult process, however, requiring careful management of available resources since a substantial investment effort will be demanded from the country around the mid-1980s in order to continue the Guelbs project (Phase 2). As a result, savings outside the mining sector will not be able to increase much without unacceptably reducing private consumption. During the 1978-85 period, most of the capital needed to achieve the Government's development program (about US$1.1 billion, including the Guelbs project) would therefore have to come from abroad. Half of this is already assured. Indeed, the Government has been very prudent to include in the Rehabilitation Plan only projects that have already attracted the interest of external donors. Prospects for mobi- lizing the remainder are relatively good, provided the Government manages to improve the balance of payments and budget situation. However, considering the country's general poverty, its strong reliance on a single export product, and the long gestation period of many of its important projects, Mauritania can only afford the necessary borrowing if the foreign capital for projects other than the Guelbs is made available on conditions similar to those indicated in the Rehabilitation Plan (2 percent interest rate for 40 years, including 8 years of grace). In addition, general budget austerity imposed by the present economic conditions will severely limit Government's ability to put up local funds for its investment program. Foreign donors should be prepared, therefore, to finance a substantial proportion of the local costs of the few high priority development projects which will go ahead in the next few years; indeed, some donors have indicated their willingness to cover 100 percent of the investment costs of such projects in order to give Govern- ment maximum breathing space during this difficult period, while permitting development activity to continue. In the medium-term at least, financing of some recurrent costs linked to development, but non-immediate revenue earning projects will also be unavoidable. 24. Assuming that the existing debt is rescheduled or consolidated in the proportions stated by the Government, the debt service ratio (including the debt service cushion representing one semi-annual debt service payment to  - 9 - all Guelbs lenders) would increase from about 16 percent in 1978-79 to a peak of about 20 percent in 1982-83, when a large monetary deposit of about US$24 million contracted in 1973 by the Central Bank falls due at the same time Guelbs debts start to mature. Thereafter, the debt service ratio would probably stabilize around 15-16 percent, a maximum level that Mauritania must try not to exceed, even in the long-term. PART II: BANK GROUP OPERATIONS IN MAURITANIA 25. The Bank Group has participated in the financing of thirteen opera- tions in Mauritania. Total lending amounts to US$132.5 million. The first operation was a Bank loan of US$66.0 million for the MIFERMA iron ore mining project in 1960. Eleven others are IDA credits totalling US$46.5 million. Four of these operations are in the transport sector: US$6.7 million in FY66 for the construction of the Nouakchott-Rosso road; US$3.0 million in FY69 for a four-year road improvement and maintenance program; US$3 million in FY75 for another six-year follow-up to the first maintenance program; and US$8 million in FY76 for the extension of the Nouadhibou Port. Four operations are in the rural sector: US$4.2 million for livestock development in FY72; US$2.5 million for a drought relief fund project in FY73; US$1.1 million for the Gorgol irrigation engineering project in FY74; and US$3.5 million in FY77 for a technical assistance project to SONADER, the Government agency in charge of preparing and executing rural development projects, particularly those involv- ing irrigation. One operation is in the education sector amounting to US$3.8 million in FY74; another is a US$2.7 million technical assistance operation to the Ministry of Planning in FY77; and the last one is an US$8.0 million IDF project in FY79. In 1968, IFC made a loan to and an equity investment in SOMIMA, a copper mining company, which totalled US$20 million; this IFC participation and the accompanying loan were paid back when the Government nationalized SOMIMA in 1974. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of April 30, 1978, as well as notes on the execution of ongoing projects. 26. Implementation of these projects has often been retarded by cumber- some Government administrative procedures. The combination of administrative delays and those due simply to the exceptionally difficult conditions prevail- ing in Mauritania (very unfavorable climate, huge distances separating the few population centers, inadequate or nonexistent transport network, and a general lack of trained manpower) has led, in a period of high inflation and adverse changes in exchange rates, to cost overruns on many of the projects financed in the period from FY69 to FY75. In addition, the difficult financial situa- tion facing the country has forced the Government to drastically curtail ex- penditures, including the provision for local funds for its on-going develop- ment program. The scope of some of these projects has, of necessity, had to be reduced accordingly in order to stay within the financial package provided. In the case of the Third Highway Project (Cr. 519-MAU), IDA and Kuwait Fund, the co-financier, agreed to cover 100 percent of the remaining outlays for a reduced project.  - 10 - 27. The Government is acutely aware of the problems it is encountering in project execution. The two recently approved technical assistance projects to the Ministry of Planning and to SONADER are an important element of the Government's program to overcome these problems. By strengthening Govern- ment's project preparation capacity and by providing for monitoring of project execution on a more systematic basis, the planning team will help the Govern- ment anticipate problems in project implementation and take steps to deal with them before they occur; similarly, the technical assistance provided to SONADER should help turn it into a strong development agency capable of carry- ing out a rational investment program for the rural sector. These projects have made a good beginning, and the staff of the planning team is actively assisting the Government of Mauritania in the review of its investment program. 28. In 1970-72, the Bank Group was the third largest donor (providing about 18 percent of Mauritania's external capital assistance) behind France (21 percent) and the European Economic Community (19 percent). Given the rapidly growing external financial assistance available to Mauritania, the Bank Group's share decreased to about 6 percent in 1977. We are now empha- sizing technical assistance and coordination of cofinancing arrangements, both with traditional donors and with Arab OPEC countries and will concentrate our intervention on a few high priority development projects. With most of the objectives of the SONADER technical assistance project well on their way to being achieved, we are considering a project which would open up 3,600 ha for irrigation for the direct benefit of 4,600 families (about 28,000 people). This project, the first large-scale irrigation project envisaged in Mauritania, will bring to fruition efforts we have made in the past few years to develop the southern part of the country, one of the poorest in the world. Because of the vital importance of education for the future development of Mauritania, further Bank involvement in this sector is also envisaged. All projects now under preparation emphasize institution building, improved management and project execution. 29. Bank Group efforts to assist the Government in its development efforts would be in vain, however, if iron ore mining, the mainstay of the Mauritanian economy, should come to a close by the late 1980s when the Kedia reserves presently in exploitation are depleted. The continuous exploitation of this resource is necessary to finance the development of other sectors, which would in time constitute a renewable base for economic growth in Mauritania. The proposed project described in this report is designed to open up new sources of iron ore and thus enable Mauritania to maintain and increase production levels made possible by the MIFERMA operation which the Bank Group helped finance in 1960.  - 11 - PART III: THE MINING SECTOR Description of the Sector 30. Mining is the most important sector of the Mauritanian economy in terms of contributions to the budget and to exports. It consists primarily of the exploitation of iron ore and, to a lesser extent, of gypsum and previously copper. All these activities are carried out by SNIM, initially created as a 100 percent public corporation in 1971. Following the divestiture of SOMIMA (SNIM's copper division) in April 1978, SNIM was reconstituted as a state- controlled, limited liability corporation (Societe d'economie mixte), to permit private and foreign participation. 31. Iron Ore Operations. Production of iron ore in Mauritania dates back to 1953 when Societe Anonyme des Mines de Fer de Mauritanie (MIFERMA), a company owned predominantly by French, British, German and Italian interests, started to exploit a high-grade iron ore deposit in the Kedia mountains with an investment of US$190 million, of which US$66 million was financed by the Bank. Output, for which the main purchasers were the shareholders themselves, was originally intended to be 6 million tpy, but as mining proceeded smoothly, capacity was gradually expanded, attaining about 11.5 million tpy at present. The most recent significant expansion took place in 1973, when somewhat lower grade pits were brought into production. The operations are located inland, at Zouerate, some 650 km east-northeast of Nouadhibou, the port of shipment, which is connected with the mining town by rail. 32. Since MIFERMA's nationalization in 1974, the iron mines, which account for nearly all of the value added of the mining sector, have been operated by the Complex6\Minier du Nord (COMINOR), SNIM's largest opera- ting unit. During 1975, while MIFERMA shareholders were negotiating the terms of nationalization, COMINOR's operations were maintained at a normal level. In particular, the former shareholders did not interrupt their iron ore purchases. Most of MIFERMA's expatriate staff also stayed in their positions. In January 1976, an agreement was reached between the Government of Mauritania and the former shareholders. It called for a total compen- sation of US$90 million, of which US$40 million was to be paid in cash and US$50 million in five annual installments of US$10 million each, starting in December 1976. The cash payment was made in April 1976 with the proceeds of a loan contracted by the Government from KFTCIC (Kuwait Foreign Trading, Contracting and Investment Company). Three of the five installments have been paid. 33. Copper Operations. The Societe des Mines de Mauritanie (SOMIMA) was created in March 1967 1/ to mine the copper deposits of Akjoujt (200 km 1/ The share capital was distributed as follows: Charter Consolidated .............................. 44.6% Islamic Republic of Mauritania ........................... 22.0% French Group . .............................. 18.4% IFC . 15.0%  - 12 - northeast of Nouakchott). SOMIMA exploited copper oxide ore and produced a concentrate based on the TORCO process, which had a very high fuel cost. Furthermore, the arsenic content of the copper concentrate made marketing difficult, and the product therefore had to be sold at below world market prices. 34. From the commencement of operations in 1971, major technical diffi- culties were experienced, and most of the time SOMIMA operated at less than 50 percent capacity, turning out a profit (of UM 137 million) only once, in 1973, when copper prices reached an all time peak. 35. In late 1974, as a result of the increase in fuel prices and rapidly deteriorating copper prices, the shareholders closed the mine. To maintain jobs, the Government of Mauritania bought the copper company and integrated it with SNIM. SOMIMA resumed operations in the second half of 1975, and its continuous high losses seriously affected SNIM's overall finan- cial position thereafter. As a result, the Government decided to separate SOMIMA from SNIM in April 1978, and agreed to assume responsibility for losses and debts SNIM had incurred on SOMIMA's behalf. In May 1978, the copper mine was closed. While there is a project under consideration to mine the (under- lying) sulfide ore body and produce blister copper, the Bank has voiced strong doubts as to whether: (i) the envisioned smelter technique could in fact produce blister; and (ii) the ore's arsenic contamination could be reduced to levels which would not seriously impair the marketability of the final product. For the time being, the project is not going ahead. 36. Gypsum. Since 1973, SNIM has been exploiting the large deposits of gypsum found to the north of Nouakchott. The entire output (roughly 17,000 tpy) is sold to the Rufisque Cement Plant in Senegal as part of an agreement whereby Senegal purchases Mauritanian gypsum, and, in turn, accords a 12 per- cent rebate on the price of cement sold in Mauritania. Organization and Management of the Sector 37. Since the nationalization of MIFERMA and SOMIMA in 1974-75, all mining activities have been run by SNIM. Until its reorganization in April 1978, SNIM was directly under the responsibility of the President of Mauri- tania and was administered by a Board of Supervisors composed of 12 members representing the various ministries and presided over by the Minister of Plan- ning and Mines. The new SNIM is to be administered by a Board of Directors, chaired by a Mauritanian Government official. The Vice Chairman is a repre- sentative of the foreign shareholders, which include the Arab Mining Company, the Islamic Development Bank, KFTCIC, the Moroccan Government and the Iraqi Government. 38. Besides COMINOR, which generates 90 percent of SNIM's revenues and constitutes 95 percent of fixed assets, SNIM includes a few minor ventures, such as: (i) SNIMEX, an explosives factory which is entirely captive to the  - 13 - iron ore mine; (ii) DCPP (Departement de CommerciaLisation des Produits Petro- liers), a distribution system for petroleum products, 40 percent of which are sold to COMINOR; and (iii) the gypsum operations referred to in paragraph 36 above. In 1979, SNIM will start operation of a small steel mill (SNIMACIER), to smelt COMINOR-generated scrap for the production of rebars for the local market. SNIM has its head offices and support services in Nouakchott. These include a technical department for various project studies, a geological research group, and training facilities. SNIM also holds participations in a number of firms whose activities are to some extent connected with its own (construction, engineering, oil products storage, port services, stevedoring, mining and geological research, etc.). 39. With a view to strengthening SNIM's management by concentrating its operations on iron ore exploitation, the Government decided in early 1979 to separate the gypsum operations and DCPP from SNIM. The Government will ade- quately compensate SNIM for any resulting loss and has agreed to discuss with the Bank the level of that compensation. Financial Situation 40. SNIM's overall financial position is predominantly determined by that of COMINOR, which in turn varies closely with the cycles in the world iron ore market and the general level of economic activity in the major steel producing countries. In 1973-74, sales and profitability peaked with the completion of COMINOR's expansion program which increased total production capacity to 11.5 million tpy and coincided with a very strong demand for iron ore world-wide. Average FOB prices for Kedia ore further increased to US$15.6 per ton in 1975. Sales volumes began to decrease, however, as the first effects of the steel industry recession in the major producing coun- tries started to be felt. In 1977 and 1978, COMINOR's profitability was further reduced as export prices dropped respectively by almost US$1 and US$2 per ton on average compared to 1976. Polisario attacks against the mining town of Zouerate in the spring of 1977 and the frequent disruptions of railway services until mid-1978 also affected operations. However, while the spring attack caused an exodus of expatriate workers and forced a temporary shutdown of mining operation, COMINOR's management was able to accelerate Mauritaniza- tion, particularly in the crucial maintenance and mining departments, and pro- duction resumed normally. The savings made on expatriate salaries combined with better cost control under the pressure of a depressed market actually resulted in a reduction of operating costs in real terms, as compared to 1976. 41. COMINOR's financial results were also affected by the tax systemn which, since 1976 consisted of a 10 percent export tax on FOB sales, regard- less of the company's actual net profits. The Government established this system to keep its main source of revenue steady and to avoid dependence on fluctuating income taxes or dividends. It has decided, however, to change COMINOR's tax system during the execution period of the Guelbs project (paras. 68 and 82).  - 14 - 42. Within SNIM, the high profit margin generated by COMINOR has in the past been offset by losses of certain units. While DCPP, SNIMEX, and the gypsum plant were generally profitable, SOMIMA's substantial cash short- falls (US$12 million per annum from 1975 to 1977) and the heavy expenditures of SNIM's central organization on activities not related to iron ore (such as the development of a new scrap based mini-steel mill) drained away a large portion of COMINOR's cash generation. Despite this, SNIM has remained profit- able and has recorded a net loss only twice, in 1977 and 1978, due principally to COMINOR's low profits in the face of security problems and the initial effects of SNIM's ambitious program started in 1975 to develop and diversify its central organization. SNIM has now agreed to reduce overall expenditures and has presented a comprehensive program to substantially cut overhead costs over a four-year period (para. 86). Contribution of the Mining Sector to the Economy 43. Iron ore mining by COMINOR is the mainstay of the Mauritanian economy and its development throughout the 1960s has been the principal determinant of the country's rapid economic growth. By the mid-1970s, COMINOR directly accounted for 21 percent of Mauritania's GDP at factor cost, and 80 percent of its exports. It is the second largest employer in the country after the Government (with a total of about 4,800 workers), and provides about 25 percent of total public revenues. Aside from these direct contributions, iron ore mining also supports a host of other economic activi- ties in Mauritania. Moreover, the continuous exploitation of this resource is necessary to finance the development of other sectors, which would in time constitute a renewable base for the country's economic growth. 44. Impact on GDP. Though COMINOR directly accounts for 21 percent of GDP at factor cost, its total contribution is considerably higher, for iron ore mining has a substantial indirect impact on the overall economic activity. Many industrial and construction enterprises work mainly, or exclusively, for COMINOR; mining also creates -- directly or indirectly -- local value added amounting to about 25 percent of public utilities, commerce, transport, and services; finally, since mining accounts for one-quarter of total current public revenues directly, it provides the means for substantial expenditures in the services sector. Taken together these indirect impacts amount to 10 percent of GDP, thus bringing the total contribution of iron ore mining to GDP to about 31 percent. On the other hand, were the iron ore mines to close (i.e. were the Guelbs project not to be executed and the current Kedia opera- tions to cease), the ensuing reduction in GDP would almost certainly be more severe than these calculations would indicate, as the resultant excess capacity in the services sector would lead to uneconomic levels of operation, and so to a further reduction in value added. In addition, there would be multiplier effects on demand for public and private services, as both Government and private spenders would be forced to reorder the uses of their remaining dis- posable incomes. 45. Beyond the reduction in GDP, a closing of the iron ore mines would also cause a de facto destruction of the present capital stock in both the  - 15 - mining and services sectors, as most of these investments would become obso- lete long before a comparable source of income (and so demand for their services) could be generated. 46. Public Revenues Effects. In 1976, total taxes received from COMINOR amounted to US$26.9 million, or 29 percent of total public revenues. Of these, taxes on iron ore sales amounted to US$15.9 million, while US$9 million related to personal income tax; the remainder was generated by miscellaneou?; taxes. As noted above, a substantial part of the income of employees and enterprises in public administration, public utilities, commerce, and services is supported by taxes on iron ore mining. Therefore, aside from the direcL contribution of iron ore mining to Government revenues, a closure of the mines would cause a further decrease in Government revenues, as the taxes on the personal incomes of the people affected would decline, along with the taxes on the imports related to these incomes. The income tax base in Mauritania is extremely narrow, consisting only of the public sector and a relatively small number of private firms, many of which work directly with COMINOR. 47. Balance of Payments Effects. At present, iron ore exports account for 80 percent of Mauritania's foreign exchange earnings. Even assuming a major expansion in fish exports, iron ore would still represent 70 percent of exports of goods and non-factor services for sometime to come. The continua- tion of iron ore production is therefore essential in maintaining Mauritania's capacity to import the intermediate and capital goods required for the devel- opment of the country. If iron ore exports were to disappear, only a substan- tial devaluation would permit Mauritania to balance its external accounts. Such a devaluation would have further severe disruptive effects on development because of the resultant sharp changes in relative factor prices, and the likelihood that foreign exchange rationing would have to be introduced in order to secure essential imports. It is also likely that the remaining foreign exchange earnings would be insufficient to cover the food bill, as 50 percent of Mauritania's food requirements are imported. 48. Employment Effects. Iron ore operations currently provide 4,300 direct jobs to Mauritanians. These, in turn, sustain the entire population of Zouerate (30,000) along with a substantial proportion of that of Nouadhi- bou (also about 30,000) where the only other industry -- fishing -- directly employs less than 1,000 workers. The closure of the iron ore mines would, therefore, directly affect between 40-50,000 people. Furthermore, as dis- cussed above, if mining accounts for a third of service sector value added, then probably about a third of employment in the services sector, or 6,500 jobs, would be lost. Employment in public administration would also be affected, as a large component of the civil servants' salary bill is supported by taxes on iron ore mining. The repercussions on the economy of a loss of employment of this magnitude would be difficult to exaggerate. Resettling these individuals in some other part of the country and finding them alter- native emp,oyment would be difficult. There are no significant altcrnatives in industry, while the scarcity of farmland precludes agriculture as a viable alternative and would require investments in housing and social services which are beyond the Government's means. The displacement of such a large part of the modern sector labor force would also most likely have severe political and social ramifications.  - 16 - Role of the Bank Group 49. In 1960, when the Bank Group helped start the MIFERMA operation it was apparent that, although the Kedia reserves were adequate, new mines would eventually have to be opened to continue making use of the large infrastruc- ture investments, notably the 650 km railway and port facilities. From the outset, the possibility of developing the "Guelbs" (a number of iron ore out- croppings located in the proximity of the present operations) was explored. This exploration work was largely carried out in the 1970's and a suitable project to replace the declining Kedia operations was identified. 50. The Bank has closely followed the preparation of the Guelbs project since receiving the first feasibility study in 1976. The support it has given to the project has been instrumental in mobilizing the necessary external financing and is considered both by the Mauritanian authorities and by the co-lenders as essential in ensuring the successful completion of this diffi- cult undertaking. PART IV: THE PROJECT Background 51. In 1976 the Mauritanian Government and SNIM requested the Bank to help finance the Guelbs project. A Bank identification mission in January 1977 was followed by an appraisal mission in October 1977, which was joined by representatives of most of the future co-lenders; six co-lenders meetings were convened between 1977 and 1979 to develop a viable financial plan. Several post-appraisal missions discussed organizational issues, reviewed SNIM's financial performance and the impact of guerilla activity on projected cash flows and examined the structure of security arrangements required by the Bank and some other donors. Negotiations were held in Paris from February 26 to March 6, 1979 and in Nouakchott, Mauritania, from May 2-8, 1979 with a Mauritanian delegation headed by Mr. Ahmed Ould Zein, Minister of Industry and Mines. Representatives of African Development Bank, Arab Fund for Economic and Social Development, Caisse Centrale de Cooperation Economique, European Investment Bank, Islamic Development Bank, Kuwait Fund for Arab Economic Development (also representing OPEC Special Fund), Overseas Economic Cooperation Fund of Japan, Saudi Fund for Development, and SNIM's foreign shareholders (Arab Mining Company, Kuwait Foreign Trading, Contracting and Investment Company and Islamic Development Bank) attended the negotiations in Paris. The Staff Appraisal Report (No. 2224a-MAU dated June 20, 1979) is being circulated separately to the Executive Directors. 52. The Guelbs project consists of opening two new mines in order (i) to replace the declining production of the Kedia deposits, which will be totally exhausted by 1991, and (ii) to increase production capacity from 11.5 million to about 14 million tpy by 1984. The project will be implemented in two phases. The first phase (1979-82) will bring a new ore body, El Rhein (located 22 km northeast o0 Zouerate) inito production. Since this ore body  - 17 - is of a lower grade than that of Kedia, major capital expenditures are required. The second phase (1986-89) will open a new mine at Oum Arwagen (located 12 km east of El Rhein). This report deals primarily with the first phase, which the proposed Bank loan would help finance. Since implementation of the second phase is essential to maintain the projected output of 12-14 million tpy and to assure the continued financial viability of SNIM, the financing plan for the first phase has been designed to facilitate the imple- mentation of the second phase. The latter is expected to be financed by an appropriate combination of internal cash generation and external financing (largely on commercial terms). Project Description 53. The first phase of the project would essentially consist of the following items: (a) opening the El Rhein deposits; (b) constructing the proposed concentration/beneficiation facilities; (c) extending the railroad to El Rhein and increasing the capacity of existing rail and port facilities; (d) providing power, water supply, roads, buildings, housing and other auxiliary facilities and services; and (e) engineering, project management and training. 54. The overall mineralogy of the Guelbs ore is simple. It consists of a blend of coarse and fine magnetite, as well as coarse and fine hematite (referred to by SNIM as oxidized ore). Following extensive mineralogical studies, laboratory and semi-industrial tests were carried out in France, the US, UK, Canada, Germany and Japan. Because of insufficient water resources at the prospective mining site, a dry milling process has been chosen for which successful tests were obtained from Aerofall Mills Ltd. of Canada. Also, Swedish and French tests established that low-intensity, magnetic separators were probably best suited for developing a successful flow sheet. To supplement the earlier laboratory work, a pilot plant was erected in Zouerate in June 1974, to: (i) treat separately all major ore types; (ii) determine the mix between magnetic and oxidized ores; and (iii) produce sufficient concentrates for the testing campaign in Europe and Japan, which ascertained the suitability of Guelbs sinter feed for the blast furnace. 55. Mining at El Rhein, as in the existing Kedia operations, will be done in open pits. Primary crushing will be done at the El Rhein crushing yard. Beneficiation will be necessary to upgrade the iron content in the crude ore from about 38 percent to 65 percent in the concentrates. This will be achieved by dry grinding with aerofall mills followed by concentration with  - 18 - magnetic separators. The concentrates will be transported from the El Rhein plant to F'Derik on a new 45 km railway line linking the new operation to the existing rail system. 56. During Phase 1 (1979-82), transport requirements will increase to 14 million tons of ore per year. This will necessitate the purchase of four additional main locomotives and 293 ore wagons, as well as the construc- tion of additional minor maintenance facilities in Nouadhibou. A number of modifications will be made to the existing port handling and loading system in order to obtain the loading capacity required. The main acquisition here will be a new shiploader with a capacity 44 percent greater than that of the existing unit. The latter will, however, be retained to provide standby capa- city. 57. The bulk of the new power will be consumed by the grinding (aero- fall mills) operation, and the beneficiation plant. Additional power is also required for the electric shovels, for workshops and services and for the township. Since the generator station of Zouerate is worn out, a new power station with associated standby facilities will be built. Peak power during the first phase will be 34 MW. 58. The supply of water for social as well as industrial purposes is of great importance in this part of Mauritania. Nouadhibou is supplied with water by pipeline from a strong aquifer at Boulanouar some 80 km east of the town along the railway line, while Zouerate gets its water from a number of producing wells along the Kedia mountains. These supplies are based on fossil, and, to a lesser extent, renewable water resources. A detailed drilling program has been initiated to develop the requisite water resources during the Guelbs exploitation period. Currently proven water reserves will cover the Guelbs operation's requirements for a period of 30 years. The company will be asked to furnish the Bank with annual reports describing the existing water reserves and its prospecting efforts for developing new ones (Section 4.04 of the draft Loan Agreement). 59. A new road linking Zouerate with El Rhein will be constructed during Phase 1. An additional 528 housing units will be required in the mining town of Zouerate to accommodate the additional manpower needed for the project. 60. The pollution generated by SNIM's iron ore operations is not signi- ficant. Dust generation at the port can be at times severe, but prevailing winds tend to blow the dust towards the open sea. There is a covenant in the loan agreement to the effect that SNIM should continue to operate its installations with due regard to ecological and environmental safety stan- dards, and to carry out a long-term study on the effects of dust inhalation by the workers in order to determine whether adequate protection exists. The Company will report annually to the Bank on dust levels, and if needed, suitable equipment will be installed to protect the workers. (Section 4.03(b) of the draft Loan Agreement).  - 19 - Project Cost 61. Total financing requirements for Phase 1 of the Guelbs project are estimated at US$500.7 million, of which US$456.1 million is in foreign exchange. This total includes equipment and construction costs, engineering, start-up expenses, physical, price and extraordinary contingencies, incre- mental working capital and interest during construction. The project will be exempt from import duties. 62. Equipment costs have been derived from 1976 estimates prepared by SNIM and SOCOMINE, a French consulting firm hired by SNIM to help prepare and execute the project, and were updated to mid-1977 prices. Costs for civil works, transportation and erection are based on works recently undertaken by SNIM including the recent expansion of the Kedia deposits. Costs of the railway extension are estimated on the basis of ongoing experience in track replacement and recent realignment works of some sections. Physical contin- gencies amount to a total of about 10 percent of base costs. Price contin- gencies have been estimated on the basis of projected annual price increases of 8 percent for 1977-79 and 7 percent thereafter. An additional extra- ordinary contingency of US$20 million has been added to reflect the parti- cular circumstances under which the project is to be implemented. Incremental working capital requirements, estimated at US$33.5 million, have been cal- culated on the basis of SNIM's historical needs, given the projected imple- mentation schedule. 63. Capital costs of Phase 2 (to be carried out over the period 1986-89) have been estimated on the same basis, at US$436.9 million in current terms. In addition, during the transition period between Phases 1 and 2, SNIM will purchase about US$36.8 million of additional equipment. Total fixed assets (i.e. base cost plus physical contingencies) for Phases 1 and 2 would be approximately US$517 million in mid-1977 terms, represent- ing a cost per ton of concentrates produced of about US$37. This compares favorably with a number of other recent projects in Australia and South Africa and may to a large extent be attributed to the fact that the Guelbs project will use existing railroad and port facilities and therefore requires limited new investments in infrastructure. Financing Plan 64. The total financing required for Phase 1 will be financed by SNIM's internal cash generation (US$42.7 million), additional share capital (US$120 million) and long-term loans (US$338 million). The additional share capital will be subscribed by KFTCIC (US$40 million), Arab Mining Company (US$28 million), the Iraqi Government (US$22 million), the Moroccan Government (US$20 million), and the Islamic Development Bank (US$10 million). About US$77 million, representing the totality of the issue premium and 25 percent of the nominal value is expected to be paid in very shortly. The remaining 75 percent of the nominal value will be paid in according to the project's expected requirement timetable. The share capital of the Mauritanian Govern- ment in the new SNIM is 72 percent.  - 20 - 65. Long-term loans are provided by the Saudi Fund (US$65 million), the French Caisse Centrale (US$50 million), the Kuwait Fund (US$45 million), the Arab Fund for Economic and Social Development (US$35 million), the Abu Dhabi Fund (US$20 million), the European Investment Bank (US$30 million), Japan OECF (US$16 million), the African Development Bank (US$12 million), the OPEC Special Fund (US$5 million) and the World Bank (US$60 million). The proposed Bank loan would be made directly to SNIM at the prevailing interest rate, plus a guarantee fee payable to the Mauritanian Government to bring SNIM's total financial charges to 10 percent per annum. The Bank loan would cover 13 percent of the project's foreign exchange cost. The foreign exchange risk would be borne by SNIM. 66. The loans from the Saudi Fund, African Development Bank and OPEC Special Fund, which are made to the Government, will be onlent to SNIM in foreign exchange and under the same terms. Effectiveness of foreign loans aggregating US$265 million and satisfactory assurances that loans representing the remaining US$73 million will be forthcoming are conditions of loan effec- tiveness (Section 7.01 of the draft Loan Agreement). The Bank accepted this solution in order not to delay project implementation because of administra- tive problems in the processing of certain loans, and in view of the fact that not all financing is required from the outset. 67. The proposed long-term foreign loans, adding up to US$338 million, would cover 74 percent of foreign exchange costs of the project (or 68 per- cent of total capital costs). Together with externally-financed additional equity, they would cover 100 percent of the foreign exchange cost of the project (or 91 percent of total costs). However, during the period 1979-82 SNIM will also have to expend some US$51 million on new investments and replacements for the Kedia operations as well as repay existing debt. There- fore, SNIM's internal cash generation during this period is critical to the success of the project. In addition, slippage and/or cost overruns could increase the financing requirements substantially, even though the above estimates are considered reasonable and include normal and extraordinary contingencies. In similar projects elsewhere, financially strong share- holders have been asked to provide unlimited cost overrun commitments or at least guarantee overrun financing for 30-40 percent of the base cost. In this case, however, a completion guarantee is only provided by the Gov- ernment (Section 2.03 of the draft Guarantee Agreement). Assurances of project completion are nevertheless deemed to be satisfactory since by the end of Phase 1, SNIM's accumulated cash surplus should be substantial, and the company's overall financial position should permit it to raise additional long-term debt should the Bank deem such borrowings appropriate. Further- more, the commitment of certain shareholders and lenders to the project and to Mauritania is such that, even without a formal commitment, they would con- sider themselves obligated to maintain SNIM's financial viability on which the Mauritanian economy depends. 68. To ensure that SNIM will generate the cash necessary both for its contribution to project financing and for recurrent replacement costs, the Government agreed during negotiations to reduce the tax levied on iron ore from 10 percent of FOB value to between 5 and 7 percent (according to volume) during the first phase of the project. This arrangement will permit SNIM to save about US$7 million per annum until 1983. However, given the  - 21 - Government's difficult financial situation, the Bank and the other lenders have accepted that, subject to the approval of two representatives of the lenders (of which one would be the Bank), the tax Levied on iron ore may be reviewed on an annual basis in light of the company's actual financial situation. During negotiations the Government also agreed to defer a certain proportion of SNIM's tax payments, thus increasing the company's retained earnings, should cost overruns require additional funds. (Such provision is to be made in the Convention Particuliere referred to in para. 82 of this report.) Project Implementation 69. The project will be executed by SNIM and SOCOMINE, the French con- sulting firm that has been contracted by SNIM to be responsible for overall design, construction supervision, start-up and commissioning of the project, as well as assistance during the first years of operations. SOCOMINE's senior management staff were all managers in MIFERMA and they are very familiar with the technical and managerial issues to be handled during the project implementation. However, considering the project's size and SOCOMINE's relatively small manpower of 18 professionals, the consultant and SNIM have been led to seek assistance from three other well-known French consultant groups (SOFRESID, SGTE and FCB) for specific technical, engineering and super- vision tasks. Furthermore, it has been agreed during negotiations that an expert committee will be established to assist in the supervision of those steps in the execution of the project which require a high degree of technical expertise (such as the detailed engineering for the aerofall mills). Even- tually, to guarantee that the fullest attention is given to the project, SNIM has accepted to ensure that SOCOMINE will not take on any additional major engagements during project implementation. The cost per man-month for SOCOMINE's consultants is estimated at US$6,500, and the total cost of SOCOMINE's services, including the cost of subcontracts to SOFRESID, SGTE and FCB, at US$6.7 million per annum. 70. The project management contract between SOCOMINE and SNIM foresees completion of all the physical work and delivery on January 1, 1983. This date is imposed by the long construction and erection time of the aerofall mills and supposes that orders for this critical item as well as the gener- ating sets can be placed by early September 1979. A definitive implementation plan, and a detailed critical path schedule are being worked out by SOCOMINE and will be presented to the Bank shortly. Procurement and Disbursement 71. Procurement for the project will be carried out in accordance with the rules of the lending agencies, which generally require international competitive bidding. As a result, packages representing at least 85 percent of total project cost will be subject to international competitive bidding. Preparation of the bid documents is being carried out by SOCOMINE and the other consultants, who will assist SNIM in evaluating bids and in negotiating contracts. Procurement has been divided into 18 packages, separating supply of imported equipment from construction work in Mauritania. These arrange- ments, previously used by SNIM on other works, appear best-suited for this  - 22 - kind of project in Mauritania. Financing will be mostly in parallel, with the exception of (i) CCCE and OPEC Special Fund which will be jointly financ- ing part of the beneficiation plant and (ii) Kuwait Fund and Arab Fund for Economic and Social Development which will be jointly financing their packages. 72. The Bank loan will finance US$50.3 million on the following equip- ment items, all in foreign exchange and all to be procured under international competitive bidding or international shopping procedures in line with the Bank's Procurement Guidelines: (i) all ore-handling equipment in the bene- ficiation plant; (ii) miscellaneous equipment in the beneficiation plant; (iii) railroad ore wagons to transport ore on the main line; and (iv) the civil works contract. The latter covers the total foreign cost of contrac- tors, equipment, and back-up maintenance personnel. Local labor input will be minimal and the cost will be borne by SNIM. International shopping for Bank financed items is not expected to exceed US$2.0 million. The list of items to which international shopping will apply, has been agreed with the Bank. None of the equipment items in the project are produced locally and, therefore, no local suppliers will be prequalified for items on the Bank list. For the civil work contracts, local contractors might be interested in bidding. However, because of the large size of the venture it is likely that the local contractors could only participate through a joint venture with established foreign enterprises. Depending on the terms of the venture, it will have to be determined, following Bank guidelines, whether the joint contractors would be entitled to the usual 7.5 percent preference granted to local contractors in the evaluation of bids. 73. Financing of the railroad ore wagons will be shared between the OECF (Japan) under untied financing, and the Bank. Since the OECF procure- ment guidelines require that the bid price, as well as the final contract, be quoted in Yen, the wagons will be financed in parallel. This should not be difficult since the cars are to be procured in several lots, starting in 1979 through 1981, according to a standard design, and the lots can be structured so as to accommodate the earmarked amounts of the two institutions. 74. The Bank loan will also finance interest during construction (approximately US$9.7 million). This is justified by the need to relieve Mauritania and SNIM from paying hard currency during a critical period; in addition, during the first three years of implementation of Phase 1, virtually all of SNIM's cash generation will be used to finance the project's local costs and other investments in Kedia, as well as to repay existing debt. 75. The Bank loan is estimated to be disbursed against 100 percent of foreign expenditures, except for the civil works contract should it be won by a Mauritanian firm, according to the following schedule: US$8 million in 1980, US$25 million in 1981, US$25 million in 1982 and US$2 million in 1983. Market Prospects 76. Like most major commodities, the iron ore market fluctuates between high and low cycles of about 5 years. Studies prepared by the Bank and other institutions indicate that the present soft iron ore market should slowly  - 23 - improve during the next year or two as the steel industry gradually recovers from the current recession. During the 1980s, a fairly balanced supply and demand situation is expected to prevail until around 1985, when the possi- bility of oversupply may once again develop as current mine investments start production. In such a market situation, the Guelbs project should not, however, experience serious marketing problems, since the additional iron ore supply that the project will introduce onto the world market is very small (3-4 million tpy, or less than 1 percent of total world exports). SNIM's competitiveness over many other iron ore producers is also enhanced by a freight advantage in the European market. Presently, the Kedia hematite ores, in the form of both natural fines and lumpy material, constitute well- established sinter and direct blast furnace feeds in Europe and, more recently in Japan. This production will be gradually replaced by the Guelbs self- fluxing magnetic sinter feed, which shows comparable, if not superior, proper- ties when compared to currently used European and Japanese ore feeds in terms of fuel savings on the sinter strand and productivity gains in the blast furnace. As it is now expected that the demand for prime sinter will grow in the EEC and Japan (SNIM's main markets), the small disadvantage for the company of marketing a new product should be more than compensated by the good characteristics of the Guelbs concentrates. SNIM's marketing efforts will be facilitated by the good relationships it has with its traditional clients, particularly the reputation reliability which the company enjoys among iron ore producers. Letters of intent and expressions of interest from prospective buyers covering more than 50 percent of the future Guelbs production have already been obtained. 77. The price projections used in the financial analysis take into account the cyclical behavior of the market, including the possibility of oversupply at the end of the 1980s. Thus, from a level of US$15.2/ton in 1977, prices for Kedia ore in real terms are expected to drop in 1979, but would gradually recover and rise to 1977 levels (US$15.2/ton) in the mid-1980s. Thereafter, they would decline again during the low cycle to about US$13.1/ton in 1989. A similar pattern of price changes has been retained for the Guelbs ore, but around a higher base price (US$16.9/ton in constant 1977 terms) because of the higher iron content. The Guelbs ore is in fact likely to command an additional premium due to the magnetic character- istics of two-thirds of its output. This, however, has not been taken into account in the financial projections. Local Sales 78. SAMIA, a Mauritanian company with a participation of KFTCIC, is currently considering the possibility of erecting a pellet plant with a capacity of about 2 million tpy to supply Qatar, Iraq and possibly later on Saudi Arabia with direct reduction pellets. The plant has been designed to use Guelbs magnetite as feed. However, since SAMIA's ore requirements would represent a sizeable proportion of Guelbs magnetite production, the requirement of the pellet plant might affect SNIM's marketing. Therefore, discussions are planned between SAMIA and SNIM in order to ensure that SNIM's marketing strat- egy is not affected. In any event, it has been agreed with Government and SNIM during negotiations that SNIM will always sell its products at world market  - 24 - prices and in return for convertible foreign exchange and that SNIM will not enter into any contract or marketing arrangement which would preclude it from maximizing its sales revenues and profits. Financial Analysis 79. Separate projections have been made for SNIM's iron ore operations (COMINOR) and for the rest of SNIM. These have then been consolidated into financial statements and cash flow projections for SNIM as a whole. COMINOR 80. COMINOR's production and sales of iron ore are projected to increase from a low level of about 6.5 million tons in 1978 (due to the cumulative im- pact of inadequate maintenance and guerrilla activity early last year) to reach an average of 12-13 million tons after completion of the first phase, with a peak of 14 million tons in 1984 when the gradual recovery of the steel industry should result in a more balanced relationship between world demand and supply of iron ore. 81. Projections of operating costs were prepared in 1976 by SNIM and SOCOMINE and updated for the last time in early 1979. In this context, it should be noted that following improvement in operations and cost control combined with a substantial reduction in expatriate manpower, some operating costs were lower in real terms in 1977 than during the two previous years. On the other hand, guerrilla activity in late 1977 and early 1978 had a negative impact on maintenance costs. It has been assumed that operations will return to normal in early 1979. 82. Since 1976, COMINOR has been exempted from income tax but has been subject to an export tax of 10 percent on FOB sales instead; while SNIM's other units have been charged taxes proportional to sales. Under the draft Convention Particuliere to be finalized between Government and SNIM, all these charges will be replaced by a single tax on iron ore exports for a period of 20 years. For the period 1978-83, this export tax will be equal to a certain percentage that increases with the volume of exports, according to a series of simple formulae. Basically, these imply a levy of about 5.0 percent of FOB value on exports of up to six million tons p.a., roughly 5.5-6.0 percent on total exports of up to 10 million tons, and 6.5-7.0 percent on exports of up to 14 million tons p.a. For the year 1984 and thereafter, this will be replaced by a single rate of 10 percent of FOB value, regardless of sales volume. SNIM is not subject to import duties but does pay miscellaneous taxes on goods, personnel and services, which together amount to roughly 3 percent of the FOB ore export value. These taxation arrangements were confirmed during negotia- tions. The signing of the Convention Particuliere satisfactory to the Bank between the Government and SNIMl describing the fiscal, economic, and legal conditions under which SNIM will operate is a condition of loan effective- ness (Section 7.01(c) of the draft Loan Agreement). 83. While COMINOR's projected results fluctuate widely, on the whole, performance is expected to be satisfactory and SNIM should have generated a  - 25 - cumulated cash surplus of about US$69 million by 1982 and US$113 million by 1983, providing a major potential source of financing for any unforeseen cost overruns. 84. Phase 2 of the Guelbs project is projected to be financed by US$250 million in new loans from official development institutions and suppliers' credits, the balance (about US$187 million) being derived from COMINOR's internal cash generation. Even after having contributed this amount, SNIM's cumulated cash surplus is projected to increase by a further US$138 million in current terms between 1983-90. During the same period, SNIM's debt service coverage ratio is projected to be on average about 2.0 and its debt equity ratio is not expected to exceed 50:50. However, if revenues from iron ore sales were to fall below the levels assumed for the period 1979-90 by a mere 5 percent on average, SNIM's projected cumulated cash surplus of US$207 million (after Phase 2 financing) for the same period would be almost wiped out. On the other hand, given the conservative export prices and sales volumes assumed in the projections, such an event is thought most unlikely, so no major financial difficulties threaten the implementation of Phase 2. Finally, if worst came to worst, SNIM's financial situation could be remedied by deferring the export tax for some years. Other SNIM Units 85. The new mini-steel mill plant will start production in 1979. Out- put -- primarily reinforcement bars for construction -- is expected to reach 10,000 tons in 1980, most of this is to be sold on the local market. Pro- duction and sales of SNIMEX, the explosives factory, will be dominated by COMINOR's explosives requirements. Gypsum production, for export to Senegal, is projected at about 17,000 tons per year until 1979. Starting in 1980, an additional 26,000 tons per year will be extracted for sale at cost to a new plaster project, in which SNIM is to have a minority holding. Sales of petroleum products by DCPP are expected to increase at about 4 percent per annum until the late 1980s; and the proportion of its sales going to other SNIM units -- currently 55 percent -- is expected to decrease as the local market outside SNIM develops. As already mentioned in para. 39, these last two units will eventually be divested from SNIM. 86. SNIM has recently prepared a reorganization and streamlining pro- gram which is to be implemented over four years, gradually generating, by the end of the period, recurrent cost savings in the central organization of 30-40 percent compared to 1977-78 levels. At negotiations, SNIM committed itself to implement this program and to review its results with the Bank from time to time (Section 4.08 of the draft Loan Agreement). Costs other than operating costs consist primarily of additional expenditures for the com- pletion of the Head Office building in 1978, and expenditures on special studies, research, exploration and training. 87. Repayment of loans pertaining to SNIM units other than COMINOR, relate primarily to a US$2 million loan for the office building, loans total- ling US$3.6 million for the training centers, a US$2.4 million equivalent soft-term loan from Abu Dhabi, and a US$5.5 million suppliers' credit for  - 26 - the steel project. In addition, other miscellaneous loans totalling about US$5 million were outstanding at the end of 1978. A further US$4.2 million of committed loans is expected to be disbursed to other SNIM units in 1979, while a US$5 million revolving credit from UBS is expected to be renewed in 1980. 88. In early August 1978, the Government and SNIM reached agreement on the financial separation of SOMIMA and the liquidation of miscellaneous debts (advances made by SNIM in favor of the refinery, plus compensation payments to the former shareholders of MIFERMA, less SNIM outstanding tax liabilities). The terms of this agreement constitute a significant effort by the Government to put SNIM on a sound financial footing, and may be summarized as follows: (i) SOMIMA's long-term debts disbursed after January 1, 1978 and SOMIMA's current expenses paid by SNIM after the separation will be taken over by the State; and (ii) US$30.8 million -- representing the balance as of January 1, 1978 of the net State debt to SNIM referred to above plus payables owed by SOMIMA to SNIM -- will be paid back by the Government over the period 1978-85. This has been confirmed with the Government during negotiations (Section 3.04 of the draft Guarantee Agreement). 89. It has been further agreed that the US$39.5 million equivalent that SNIM has outstanding in the form of overdrafts with a consortium of local banks will be repaid in 1979. Effective repayment of these bank overdrafts or conclusion of other satisfactory agreements to this effect to permit SNIMI to meet the current ratio test referred to in para. 92 will be a condition of effectiveness (Section 7.01(b) of the draft Loan Agreement). 90. The Government has agreed that SNIM will not have to cover any of the compensation payments pertaining to the nationalization of MIFERMA, either directly to the shareholders or as repayment of loans contracted by the Govern- ment to cover previous payments. This has been confirmed during negotiations (Section 3.04 of the draft Guarantee Agreement). 91. Although COMINOR dominates SNIM (iron ore sales are projected to constitute roughly 80 percent of SNIfI total revenues throughout), SNIM's financial situation will continue to be adversely affected by the results of its other units. DCPP, SNIMEX and the gypsum plant are all forecast to have a positive contribution margin. That of the steel plant, on the other hand, is expected to be negative during its first years of operation (1979-83), as the normal losses of the learning process are compounded by the heavy debt service on the suppliers' credits and commercial bank loans obtained to finance it. The steel plant is projected to become eventually a profitable operation after repayment of the hard loans in 1982-83. Until 1986, however, even with a positive contribution from the steel plant, the net margin gene- rated by SNIM's other units will not be sufficient to cover the head office and support services expenditures they require. During the critical period 1979-82, SNDI's net consolidated cumulative cash surplus is projected to amount to US$69 million. However, it is expected to reach US$138 million during the period 1983-90 (net of the projected US$187 million contribution of COMINOR to Phase 2). Moreover, with an average debt service coverage  - 27 - ratio above 2.0, and a projected maximum debt: equity ratio of 50:50 through- out the period 1979-82, SNIM should be able to borrow additional funds for Phase 1 cost overruns, should this prove to be necessary. 92. During negotiations, SNIM agreed to the f'ollowing financial cove- nants: (i) to maintain at all times, unless the Bank should agree otherwise, a debt: equity ratio not exceeding 60:40, a current ratio of at least 1.3:1 and a debt service coverage ratio of at least 1.5:1; (ii) not to contract any additional loans in excess of US$5 million without the prior consent of the Bank until Phase 2 of the project has been completed; (iii) not to under- take -- without prior consent of the Bank -- any new projects, either on its own behalf, or through subsidiaries, or any capital expenditures outside the project of more than US$5 million per annum; and (iv) not to invest in any other corporate entity more than US$2 million per annum without prior approval of the Bank (Sections 5.04(a), 5.05(a) and 5.07 of the draft Loan Agreement). SNIM will not distribute any dividends unless the above financial convenants are met and the retained earnings deposited in a special account at the Central Bank are accumulated to a level necessary for the financing of Phase 2 (Section 5.06 of the draft Loan Agreement). Similarly, the Government com- mitted itself to guarantee that any foreign exchange deposited in this acccunt will be made available to SNIM, as and when required for the purpose of Phase 2 financing (Section 3.02(b) of the draft Guarantee Agreement). Auditing and Reporting 93. SNIM had its 1978 accounts audited by the French firm Helios and has agreed to have its future accounts audited annually, by auditors acceptable'to the Bank, and to submit these to the Bank within four months after the end of each year (Section 5.02 of the draft Loan Agreement). Financial Rate of Return 94. The incremental financial rate of return on the Guelbs project (Phase 1 and Phase 2 combined) is estimated at 5.4 percent before royalties, and 1.4 percent after royalties. If the US$20 million extraordinary contin- gencies are not included, the rates of return increase to 5.8 percent and 1.7 percent, respectively. These returns have been calculated by comparing the situation "with" and "without" the Guelbs project. In the latter case, COMINOR would have to maintain production at Kedia at an average rate of 8 million tpy in order to assure a reasonable profit until exhaustion of the deposit in 1990. This production level is substantially higher than the 5-6 million tpy assumed to be the Kedia's share in COMINOR total output, should the project be implemented. No adjustment has been made in the calculations for the costs (such as resettlement and welfare payments) that would be incurred on closure in 1990-91, if the project were not to proceed since these are not, strictly speaking, SNIM costs. This rate of return, therefore, underestimates the cost to the economy of closing down mining operations which is the overwhelming concern of the major shareholder, the Mauritanian Govern- ment. The economic benefits of the project, on the other hand, are high as it extends the life of the mine, and thus develops, in the long-term, the major productive sector of the Mauritanian economy and the only sustainable activity in the northern part of the country.  - 28 - Economic Analysis 95. In calculating the incremental economic rate of return, the finan- cial cost streams have been corrected by excluding all tax payments (export royalty and all indirect taxes), and by shadow pricing Mauritanian labor costs. The cost of Mauritanian laborers and foremen have been shadow priced at, respectively, 30 percent and 50 percent of the financial costs. Similarly, the local components of project construction work by contractors, and by SNIM's own labor force, have been reduced to take into account indirect taxes and shadow priced labor. The benefit streams have also been amended to take into account the cost of closing the mine, the town site of Zouerate, the communities along the railway line, and the Nouadhibou facilities, were the project not to be implemented, for few alternative means of employment or subsistence are available in Nouadhibou, and none exist around Zouerate. Once the existing Kedia deposit is exhausted, all mining of iron ore would come to a halt and most of the population -- estimated at 40,000 -- would have to be resettled in other parts of the country (near the capital Nouakchott or in the agricultural lands along the Senegal river). Because of the shortage of adequate infrastructure and the high cost of building in Mauritania, as well as that of creating alternative urban or agricultural employment, the resettle- ment cost is expected to be high. On the basis of new or on-going projects with comparable components in Mauritania and neighboring Senegal, the resettle- ment cost has been estimated at a minimum of US$2,000 per person. 96. On the basis of the above assumptions, the economic rate of return for the combined Phases 1 and 2 is estimated at 11.8 percent. If the US$20 million of extraordinary contingencies are excluded, the rate of return in- creases to 12.4 percent. The sensitivity tests indicate that the rate of return is not overly sensitive to a 10 percent increase in either capital or operating costs. However, a 10 percent decrease in sales revenue would reduce the rate of return to 8.6 percent. 97. One of the most important benefits that Mauritania will receive from the project is its foreign exchange earnings. At full production, Phases 1 and 2 are expected to yield incremental net foreign exchange earnings after debt service of US$14 million and US$51 million per annum on average (in real terms) respectively. Combining the existing mining operation with the two Phases of the project, COMINOR is projected to yield total net foreign exchange earnings of US$60 million per annum in real terms, on average, over the period 1979-92. 98. Implementation of the project will help maintain existing mining operations, as well as further develop them. This is crucial to Mauritania in order to sustain Government revenues and foreign exchange inflows, and to create employment. In addition, the project will ensure the continuing existence of SNIM, which through its training program, geological research and project promotion, is the main instrument for future development of mining activities and industry in Mauritania.  - 29 - Debt Service Payments and Security Arrangements 99. Bank loans for mining projects in countries which are not other- wise creditworthy for Bank financing, generally involve technical, commercial and/or financial guarantees from third parties, usually foreign shareholders who plan to buy the project output. While the Bank loan to MIFERMA provided for strong working capital guarantees from shareholders/consumers of iron ore, the proposed Bank loan to SNIM could not include such guarantees, since the nationalization of MIFERMA in 1974 broke the financial links between the Mauritanian operation and the MIFERMA shareholders, who continue to purchase part of their iron ore from SNIM but are not given and do not seek any privileged commercial and financial relationship with SNIM. 100. The proposed project, however, will generate considerable foreign exchange earnings. On average, total iron ore sales revenues are projected at 9-10 times annual debt service requirements and, therefore, constitute an important assurance of repayment for the lenders, provided arrangements are made to ensure both that proceeds from the sales of iron ore will be allocated in priority to debt service payment and that sufficient foreign exchange for SNIM's day-to-day operations will be at its disposal at all times. 101. Under normal Mauritanian foreign exchange procedures, all proceeds from exports must be repatriated. By derogation thereto, part of the iron ore export sales proceeds will be kept abroad as follows. 102. Under the provisions of a Set-Aside Agreement, SNIM will covenant that SNIM's purchasers will be instructed to make all payments of sales proceeds directly to a special account at a designated bank, the Societe Generale in Paris (SG Paris). SNIM will be under an obligation to put into all its sales contracts a provision to that effect. 103. The Set-Aside Agreement will be entered into between SNIM, the Central Bank, all the Guelbs lenders and the SG Paris, and a Trust Deed will be entered into between SNIM, the Central Bank, all the lenders and the Law Debenture Corporation of London, the latter acting as trustee. SG Paris, as recipient of all iron ore sales proceeds, will be under permanent and irrevocable instructions to transfer monthly (with priority over any other allocations or transfers of proceeds received) to a Trust Account in London such amounts as will be required to (i) accumulate therein the necessary amounts for the next semi-annual debt service payment due (through equal monthly deposits of 1/6 of the next semi-annual payment due and (ii) accumu- late and maintain therein a permanent cushion equivalent to the next semi- annual payment due. 104. SG Paris will further be under permanent instructions in the Set- Aside Agreement to transfer monthly out of the remaining funds, certain minimum balances to a SNIM Operational Account. Such amounts will be deter- mined on the basis of annual budgets for COMINOR's anticipated foreign exchange operating expenses, which will have received prior approval from the Central Bank. The remaining funds will then be repatriated in Mauritania and credited to SNIM's account at the Central Bank.  - 30 - 105. As an additional safeguard, SNIM will provide the participating lenders collectively under a Security Agreement with (i) an unconditional global assignment of all future sales proceeds from the sale of iron ore and (ii) specific assignments of sales proceeds under contracts covering at all times 50 percent of the annual iron ore production. Under the same Agreement, SNIM will undertake not to assign sales proceeds to any other party, unless agreed by the participating lenders. On the other hand, the lenders agreed not to notify the purchasers of these assignments 1/ except in the event that: (i) SNIM fails to instruct any purchaser as referred to in paragraph 102 and such default continues for a period of 30 days after notice from one of the lenders to SNIM; (ii) SNIM changes existing payment instructions; (iii) SNIM fails to provide the lenders with assign- ments with respect to sales contract together with a copy of such contract within 30 days after notice from one of the lenders to SNIM; (iv) SNIM assigns sales proceeds under sales any contract in a manner inconsistent with the above requirements; or (v) the amounts available in the debt service cushion referred to in paragraph 103 fall at any time below a level required to cover the next semi-annual debt service payments, either as a result of a deliberate action by SNIM, or as a result of attachments by third parties of funds in the Set-Aside account in Paris or of sales proceeds due to SNIM. The above events are designed to protect the Bank and other lenders, to the extent possible, against deficiencies and risks inherent to a system of assignments which have not been notified from the outset. The right to notify the assignments to the purchasers and instruct the purchasers to pay into a collective account in the name of the lenders at the SG Paris may be exercised independently by the Bank and one other representative of the lenders. However, a majority of the lenders holding two-thirds of the out- standing loans made for the project could veto the decision of notification. Therefore, before notification, all other lenders will have to be informed and will have seven working days to respond. 1/ The Bank accepted that the assignments not be notified from the outset in view of the possible negative impact on SNIM' s commercial efforts as advanced by the company. This reduces the level of security provided to the lenders, since they will be in a junior position in case third party creditors notify assignments to purchasers, or attach SNIM's claims against purchasers, before the Guelbs lenders notify their assignments to the same purchasers.  - 31 - 106. The proposed arrangements provide some protection and limited security to the Guelbs lenders without penalizing the Government excessively as they deal only with obligations related to the Guelbs project. At the same time, the SNIM Operational Account should strengthen the company by assuring that foreign exchange will be available for its day-to-day opera- tions. Agreement on the principle of these various arrangements has been reached. Together with the issuance of payment instructions for all existing contracts and of specific assignments covering 50 percent of SNIM's annual iron ore production, conclusion of the Set-Aside Agreement, of the Trust Deed and of the Security Agreement will be conditions of effectiveness. 107. Assurances have been obtained from Government and SNIM that the above arrangements do not infringe upon the rights of other creditors pro- tected by negative pledge, pari-passu, or other provisions in their respective agreements. There is, however, a slight chance that one of Government's non-Guelbs creditors might participate in the security arrangements. Major Risks 108. One of the risks faced by SNIM is related to the past guerrilla activity which could be very damaging to the future of the entire mining venture. Were such activity to resume at the same intensity as in late 1977 and early 1978, project implementation could be seriously affected and the company might be unable to maintain a financially viable operation. However, the financing plan includes extraordinary contingencies, and the suspension of military activities since early July 1978 augurs well for a peaceful settlement. 109. Another potential risk is that Phase 2 could not be implemented as scheduled, with the consequence that, after exhaustion of the Kedia reserves, COMINOR would only be able to count on a production of 6 million tpy from Phase 1 and would, therefore, operate below the breakeven point. To counter this threat, the financing plan for Phase 1 has been designed so that imple- mentation of Phase 2 would not, under reasonably foreseeable circumstances, be retarded because of financing problems. Furthermore, the financial pro- jections indicate that, over 1983-88, SNIM would generate cash in excess of the US$187 million projected as its own contribution to the Phase 2 financing. Finally, the Government committed itself during negotiations not to use, under any circumstances, SNIM accumulated cash surplus held in the Central Bank for the financing of Phase 2 (Section 3.02(b) of the draft Guarantee Agreement). A timetable of this accumulation has been agreed with the Bank and calls for the first retention of SNIM's cash surplus to be made in 1984, at which time 14auritania should have been well on its way to economic recovery. 110. The project faces the normal market risk of any iron ore export project. However, SNIM is expected to produce good quality iron ore at internationally competitive costs, and any marketing difficulties should, therefore, at most, be temporary. Also, the incremental iron ore which the project will introduce onto the world market is relatively small. Finally, letters of intent and expressions of interest amounting to more than 50 percent of Guelbs production have already been obtained, and the general response from the purchasers to the sales campaign initiated by SNIM is quite favorable.  - 32 - 111. The project is not expected to face any particular risks as regards mining and transportation, since it is merely an extension of current activity. Operations of the concentration/beneficiation plant, on the other hand, will constitute a new activity for the company. However, since the process to be employed is relatively simple and well-proven commercially, and adequate training of operators is envisaged, no extraordinary difficulties in running this plant satisfactorily are expected. 112. With respect to project management, although SOCOMINE is a rela- tively small concern, it is staffed with experienced people who had been in management positions during the implementation and operation of the original MIFERMA project, and who will be reinforced by qualified people from several large consulting organizations. To ensure that the entire SOCOMINE staff will be assigned full-time to the project during implementation, there is a covenant in the draft Loan Agreement (Section 3.02(a)) which precludes SOCOMINE from taking on outside prejudicial activities during the period. Given this restriction, overall project management during implementation is considered likeiy to be satisfactory. 113. Finally, while the Government would guarantee repayment of the Bank loan to SNIM, SNIM will also enter into the debt service payments mechanism and security arrangements described in paragraphs 99-106. Moreover, since the smooth and efficient operation of SNIM is the Bank's best security, the Government has been asked to permit the company to retain a certain propor- tion of its foreign exchange earnings outside Mauritania to ensure the timely coverage of its operating costs. Furthermore, to safeguard the company's financial resources and ability to properly execute and operate the project, and to avoid any management diversion from other tasks, SNIM has agreed not to proceed with any investments above US$5 million that are unrelated to its iron ore operation without the prior consent of the Bank (Section 5.07 of the draft Loan Agreement). PART V - LEGAL INSTRUMENTS AND AUTHORITY 114. The draft Loan Agreement between the Bank and SNIM, the draft Guarantee Agreement between the Islamic Republic of Mauritania and the Bank and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed to the Executive Directors separately. 115. In addition to the features of the above Agreements which are referred to in the text and listed in Section III of Annex III, the following features are of particular interest: (a) Section 2.09 of the draft Loan Agreement and Section 2.04 of the draft Guarantee Agreement provide that in case of prepayment of any other loan for the project, a proportionate amount of the Bank loan will also be prepaid.  - 33 - (b) Section 3.02(b) of the draft Guarantee Agreement requires the Central Bank to issue necessary authorizations or take any other steps required to ensure availability at all times of necessary foreign exchange for SNIM's operations as well as for the second phase financing. (c) Section 3.03 of the draft Guarantee Agreement requires the Government to maintain a controlling majority shareholding in SNIM. (d) Section 3.04 of the draft Guarantee Agreement stipulates obliga- tions of the Mauritanian Government with respect to settlement of financial matters between SNIM and the Government, namely with respect to SOMIMA debt, MIFERMA compensation, and advances made by SNIM to the Government. (e) Section 3.06(a) of the draft Guarantee Agreement requires the Government to perform its obligations under the Convention Parti- culiere (para 82 of this Report), the Set-Aside Agreement, the Trust Deed and the Security Agreement. (f) Section 3.06(b) of the draft Guarantee Agreement requires the Government to implement the new tax regime referred to in para- graphs 68 and 82 of this Report. (g) The following additional events of suspension and accelera- tion have been added, namely: (i) a default occurs in performance of the Convention Particuliere, of the Set-Aside Agreement, Trust Deed or Security Agreement (paras 99 to 106 of this Report; Sections 6.01(a) and (b) and 6.02(a) and (b) of the draft Loan Agreement); (ii) any of the agreements under (i) above shall have been amended, suspended, abrogated, terminated, waived or assigned without the prior approval of the Bank (Sec- tions 6.01(c) and 6.02(c) of the draft Loan Agreement); (iii) amendment of the Statutes without prior approval of the Bank (Sections 6.01(d) and 6.02(c) of the draft Loan Agreement); (iv) cross remedies with co-financing agreements (Sections 6.01(f) and 6.02(c) of the draft Loan Agreement); and (v) failure of such loans for which no cross-effectiveness has been provided to become effective by June 30, 1980 or default in the paying in of the callable portion of the borrower's capital (events of suspension only: Section 6.01(f) and (g) of the draft Loan Agreement).  - 34 - (h) Additional conditions of effectiveness include: (i) cross-effectiveness provisions with loans aggregating US$265 million (Section 7.01(a) of the draft Loan Agree- ment); (ii) repayment of the overdrafts aggregating US$39.5 million equivalent or conclusion of other satisfactory arrangements with respect to such overdrafts (Section 7.01(b) of the draft Loan Agreement); (iii) the Convention Particuliere, the Set-Aside Agreement, the Trust Deed and the Security Agreement all satis- factory to the Bank have been concluded, and assign- ments with respect to existing long-term sales con- tracts representing 50 percent of SNIM's production have been provided to the lenders (Section 7.01(c) and (d) of the draft Loan Agreement); (iv) instruction to purchasers to pay to Societe Generale in Paris have been given under existing long-term sales contracts (Section 7.01(e) of the draft Loan Agreement); (v) arrangements satisfactory to the Bank for the calling in of the unpaid amount of SNIM's capital subscriptions has been made (Section 7.01(f) of the draft Loan Agree- ment); (vi) the mining concession on the Guelbs deposit has been granted (Section 7.01(g) of the draft Loan Agreement); (vii) provision of satisfactory legal opinions on the binding character of measures under (iii) and (vi) above and on the validity of SNIM's reorganization and capital increase. 116. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATI0N 117. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President June 21, 1979  - 35 - ANNEX I Pane l TAILE 3A HAURITANIA - SOCIA INDICATORS DATA SHEET REPRENCI GROUPS (ADJUSTED AVERAGES MAURITANIA Li LAND AREA (THOUSAND SQ. WM.) - MOST RECENT ESTIMATE) TOTAL 1030.7 SAME SAME NEXT HIGCER AGRICULTURAL 402.6 HDST RECENT GEOGRAPHIC INCEKE INCOHE 1960 /bk 1970 lb ESTIMATE Lb REGION Lc GROIUP Ld GROUP L GNP PER CAPITA (US$) 70.0 160.0 270.0 223.6 432.3 867.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OP COAL EQUIVALENT) 18.0 144.0 108.0 86.7 251.7 578.3 POPULATION AND VITAL STATISTICS TOTAL POPULATION, MID-YEAR (MILLIONS) 1.1 1.3 1.5 URBAN POPULATION (PERCENT OP TOTAL) 8.0 14.2 20.9 13.6 24.2 46.2 POPULATION DENSITY PER SQ. EM. 1.0 1.2 1.4 18.4 42.7 50.8 PER SQ. EM. AGRICULTURAL LAND 2.7 3.2 3.7 53.6 95.0 93.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 41.6 41.8 41.9 44.4 44.9 42.9 15-64 YRS. 55.2 55.1 55.0 52.7 52.8 53.5 65 YRS. AND ABOVE 3.2 3.1 3.1 2.8 3.0 3.5 POPULATION GROWTH RATE (PERCENT) TOTAL 0.8 /f 1.8 2.5 Of 2.6 2.7 2.5 URBAN *- 7.8 8.2 5.8 8.8 4.7 CRUDE BIRTH RATE (PER THOUSAND) 44.8 44.9 44.8 46.9 42.2 37.8 CRUDE. DEATH RATE (PER THOUSAND) 27.1 24.7 24.9 20.6 12.4 10.8 GROSS REPRODUCTION RATE .. 2.9 2.9 3.1 3.2 2.5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. .. USERS (PERCENT OF MARRIED WOMEN) .. .. .. 2.5 14.2 20.0 POOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 100.0 100.0 73.5 94.2 104.3 107.3 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 85.0 87.0 81.0 90.1 99.5 105.3 PROTEINS (GRAMS PER DAY) 73.0 75.0 63.2 55.2 56.8 63.0 OF WHICH ANIMAL AND PULSE .. 44.0 I . 17.1 17.5 21.7 CHILD (AGES 1-4) MORTALITY RATE 34.0 h .. .. .. 7.5 8.0 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 35.9 41.0 38.5 43.7 53.3 57.2 INFANT MORTALITY RATE (PER THOUSAND) 187.0 . 169.0 138.4 82.5 53.9 ACCESS TO SAPE WATER (PERCENT OP POPULATION) TOTAL 17.0 22.4 31.1 56.8 URBAN .. 98.0 *- 66.3 68.5 79.0 RURAL .. 10.0 .. 10.4 18.2 31.8 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL *- 7.0 *- 23.9 37.5 30.9 URBAN .. 100.0 .. 70.3 69.5 45.4 RURAL .. .. .. 14.2 25.4 16.1 POPULATION PER PHYSICIAN 30000.0 L 17210.0 15150.0 21757.5 9359.2 2706.8 POPULATION PER NURSING PERSON 7130.0 i 4320.0 2450.0 3473.8 2762.5 1462.0 POPULATION PER HOSPITAL BED TOTAL 4140.0 /uk 2760.0 /k 2320.0 645.4 786.5 493.9 URBAN .. 500.0 Lk 600.0 172.9 278.4 229.6 RURAL *- 5320.0 k 3628.0 1292.6 1358.4 2947.9 ADMISSIONS PER HiOSPITAL BED .. .. .. 19.2 19.2 22.1 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. .. .. 4.9 .. 5.2 URBAN .. .. .. 5.0 .. 5.0 RURAL .. .. .. 4.7 .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. .. .. .. 2.0 URBAN .. .. .. .. 2.3 1.5 RURAL .. .. .. .. .. 2.7 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. .. .. 28.3 64.1 URBAN .. .. .. .. .. 67.8 RURAL .. .. .. .. 10.3 34.1  - 36 - ANNEX I Page 2 TABLE 3A MAURITANIA - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES MAURITANIA La - MOST RECENT ESTIMATE) SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 lb 1970 lb ESTIMATE Lb REGION /c GROUP /d GROUP Le EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 8.0 16.0 17.0 52.1 75.B 99.8 FEMALE 3.0 9.0 9.0 37.6 67.9 93.3 SECONDARY: TOTAL 0.4 2.0 3.0 8.0 17.7 33.8 FEMALE .. 1.0 1.0 5.0 12.9 29.8 VOCATIONAL (PERCENT OF SECONDARY) 12.0 12.0 15.7 7.2 7.4 12.8 PUPIL-TEACHER RATIO PRIMARY 20.0 24.0 .. 43.2 34.3 34.9 SECONDARY 17.0 23.0 .. 22.8 23.5 22.2 ADULT LITERACY RATE (PERCENT) 5.0 10.0 .. 20.3 63.7 71.8 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 0.4 4.0 4.0 Li 3.9 7.2 12.4 RADIO RECEIVERS PER THOUSAND POPULATION 16.0 47.0 64.0 40.1 71.1 104.5 TV RECEIVERS PER THOUSAND POPULATION .. .. .. 2.2 14.1 28.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. .. .. 3.9 16.3 45.2 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 1.2 1.6 4.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 310.0 360.0 400.0 FEMALE (PERCENT) 3.9 6.3 4.3 32.6 28.0 25.7 AGRICULTURE (PERCENT) 91.0 87.5 85.0 73.3 54.1 46.2 INDUSTRY (PERCENT) 2.9 3.9 PARTICIPATION RATE (PERCENT) TOTAL 32.1 31.3 30.9 42.0 37.8 33.8 MALE 62.1 60.5 59.9 54.8 50.3 48.1 FEMALE 2.5 2.6 2.6 27.3 20.9 17.3 ECONOMIC DEPENDENCY RATIO 1.4 1.4 1.3 1.2 1.3 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. .. 25.7 19.5 23.6 HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. .. 55.1 48.9 52.3 LOWEST 20 PERCENT OF HOUSEHOLDS .. .. .. 5.8 5.9 4.3 LOWEST 40 PERCENT OF HOUSEHOLDS .. .. .. 14.5 15.7 13.1 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 108.8 155.9 191.9 RURAL .. .. 85.0 74.1 97.9 193.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 125.0 124.4 143.7 319.8 RURAL .. .. 65.0 59.6 87.3 197.7 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 50.0 26.8 22.9 19.8 RURAL .. .. 45.0 47.6 36.7 35.1 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1973 and 1977. /c Africa South of Sahara; /d Lover Middle Income (S281-550 per capita, 1976); /e Intermediate Middle Income ($551-1135 per capita, 1976); /f Difference between IBRD population growth rate and U.N. rate of natural increase due to use of different census bases; 14 1964-66; /h 1964-65; /i 1962; /I Government personnel only; 1k Government hospital establishments only; /1 1972. September 1978  - 37- ANNEX I DEFINITIONS OF SOCIAL INDICATORS Page 3 Note: The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. Due to lack of data, group averages for Capital Surplus Oil Exporters and indicators of access to water and excreta disposal, housing, income distribution and poverty are simple population-weighted geometric means without the exclusion of extreme values. LAND AREA (thousand sq. km) Population per hospital bed - total, urban, and rural - Population (total, Total - Total surface area comprising land area and inland waters. urban, and rural) divided by their respective number of hospital beds Agricultural - Most recent estimate of agricultural area used temporarily available in public and private general and specialized hospital and re- or permanently for crops, pastures, market and kitchen gardens or to habilitation centers. Hospitals are establishments permanently staffed by lie fallow. at least one physician. Establishments providing principally custodial cere are not included. Rural hospitals, however, include health and medi- GNP PER CAPITA (US$) - GNP per capita estimates at current market prices, cal centers not permanently staffed by a physician (but by a medical as- calculated by same conversion method as World Bank Atlas (1975-77 basis); sistant, nurse, midwife, etc.) which offer in-patient accommodation and 1960, 1970, and 1977 data. provide a limited range of medical facilities. Admissions per hospital bed - Total number of admissions to or discharges ENERGY CONSUMPTION PER CAPITA - Annual consumption of commercial energy from hospitals divided by the number of beds. (coal and lignite, petroleum, natural gas and hydro-, nuclear and geo- thermal electricity) in kilograms of coal equivalent per capita. HOUSING Average size of household (persons per household) - total, urban, and rural- POPULATION AND VITAL STATISTICS A household consists of a group of individuals who share living quarters Total population, mid-year (millions) - As of July 1; if not available, and their main meals. A boarder or lodger may or may not be included in average of two end-year estimates; 1960, 1970, and 1977 data. the household for statistical purposes. Statistical definitions of house- Urban population (percent of total) - Ratio of urban to total popula- hold vary. tion; different definitions of urban areas may affect comparability Average number of persons per room - total, urban, and rural - Average mum- of data among countries. ber of persons per room in all, urban, and rural occupied conventional Population density dwellings, respectively. Dwellings exclude non-permanent structures and Per sq. km. - Mid-year population per square kilometer (100 hectares) unoccupied parts. of total area. Access to electricity (percent of dwellings) - total, urban, and rural - Per sq. km. agriculture land - Computed as above for agricultural land Conventional dwellings with electricity in living quarters as percentage only. of total, urban, and rural dwellings respectively. Population age structure (percent) - Children (0-14 years), working-age (15-64 years), and retired (65 years and over) as percentages of mid- EDUCATION year population. Adjusted enrollment ratios Population growth rate (percent) - total, and urban - Compound annual Primary school - total, and female - Total and female enrollment of all ages growth rates of total and urban mid-year populations for 1950-60, at the primary level as percentages of respectively primary school-age 1960-70, and 1970-75. populations; normally includes children aged 6-11 years but adjusted for Crude birth rate (per thousand) - Annual live births per thousand of different lengths of primary education; for countries with universal edu- mid-year population; ten-year arithmetic averages ending in 1960 and cation enrollment may exceed 100 percent since some pupils are below or 1970 and five-year average eding in 1975 for most recent estimate. above the official school age. Crude death rate (per thousapd) - Annual deaths per thousand of mid- Secondary school - total, and female - Computed as above; secondary educa- year population; ten-year arithmetic averages ending in 1960 and 1970 tion requires at least four years of approved primary instruction; pro- and five-year average ending in 1975 for most recent estimate. vides general vocational, or teacher training instructions for pupils Gross reproduction rate - Average number of daughters a woman will bear usually of 12 to 17 years of age; correspondence courses are generally in her normal reproductive period if she experiences present age- exocluded. specific fertility rates; usually five-year averages ending in 1960, Vocational enrollment (percent of secondary) - Vocational institutions in- 1970, and 1975. clude technical, industrial, or other programs which operate independently Family planning - acceptors, annual (thousands) - Annual number of or as departments of secondary institutions. acceptors of birth-control devices under auspices of national family Pupil-teacher ratio - primary, and secondary - Total students enrolled in planning program. primary and secondary levels divided by numbers of teachers in the corre- Family planning - users (percent of married women) - Percentage of sponding levels. married women of child-bearing age (15-44 years) who use birth-control Adult literacy rate (percent) - Literate adults (able to read and write) as devices to all married women in same age group. a percentage of total adult population aged 15 years and over. FOOD AND NUTRITION CONSUMPTION Index of food production per capita (1970=100) - Index number of per Passenger cars (per thousand population) - Passenger cars comprise motor cars capita annual production of all food commodities. seating less than eight persons; excludes ambulances, hearses and military Per capita supply of calories (percent of requirements) - Computed from vehicles. energy equivalent of net food supplies available in country per capita Radio receivers (per thousand posulation) - All types of receivers for radio per day. Available supplies comprise domestic production, imports less broadcasts to general public per thousand of population; excludes unlicensed exports, and changes in stock. Net supplies exclude animal feed, seeds, receivers in countries and in years when registration of radio sets was in quantities used in food processing, and losses in distribution. Re- effect; data for recent years may not be comparable since most countries quirements were estimated by FAl based on physiological needs for nor- abolished licensing. mal activity and health considering environmental temperature, body TV receivers (per thousand population) - TV receivers for broadcast to general weights, age and sex distributions of population, and allowing 10 per- public per thousand population; excludes unlicensed TV receivers in coon- cent for waste at household level. tries and ii years when registration of TV sets was in effect. Per capita supply of protein (grams per day) - Protein content of per Newspaper circulation (per thousand population) - Shows the average circula- capita net supply of food per day. Net supply of food is defined as tion of "daily general interest newspaper", defined as a periodical publi- above. Requirements for all countries established by USDA provide for cation devoted primarily to recording general news. It is considered to a minimum allowance of 60 grams of total protein per day and 20 grams be "daily" if it appears at least four times a week. of animal and pulse protein, of which 10 grams should be animal protein. Cimna annual attendance per capita per year - Based on the number of tickets These standards are lower than those of 75 grams of total protein end sold during the year, including admissions to drive-in cinemas and mobile 23 grams of animal protein as an average for the world, proposed by units. FAO in the Third World Food Survey. Per capita protein supply from animal and pulse - Protein supply of food EMPLOYMENT derived from animals and pulses in grams per day. Total labor force (thousands) - Economically active persons, including armed Child (ages 1-4) mortality rate (per thousand) - Annual deaths per thous- forces and unemployed but excluding housewives, students, etc. Defini- and in age group 1-4 years, to children in this age group. tions in various countries are not comparable. Female (percent) - Female labor force as percentage of total labor force. HEALTH Agriculture (percent) - Labor force in farming, forestry, hunting and fishing Life expectancy at birth (vears) - Average number of years of life as percentage of total labor force. remaining at birth; usually five-year averages ending in 1960, 1970, Industry (percent) - Labor force in mining, construction, manufacturing and and 1975. electricity, water and gas as percentage of total labor force. Infant mortality rate (per thousand) - Annual deaths of infants under Participation rate (percent) - total, male, and female - Total, male, and one year of age per thousand live birhts. lemale labor force an percentages of their respective populations. Access to safe water (percent of population) - total, urban, and rural - These are ITLO's udjusted participatios rates reflecting age-sen Number of people (total, urban, and rural) with reasonable access to structure of the population. nod lono time trend. safe water supply (includes treated surface waters or untreated but Economic dpepndency ratio - Ratio of population under 15 and 65 and over to uncontaminated water such as that from protected boreholes, springs, the labor force in age group of 15-64 years. and sanitary wells) as percentages of their respective populations. In an urban area a public fountain or standpost located not more INCOME DISTRIBUTION than 200 meters from a house may be considered as being within rea- Percentage of private income (both in cash and kind) received by richest 5 sonable access of that house. In rural areas reasonable access would percent, richest 20 percent, poorest 20 percent, and poorest 40 percent imply that the housewife or members of the household do not have to of households. spend a disproportionate part of the day in fetching the family's water needs. POVERTY TARGET GROUPS Access to excreta disposal (percent of population) - total, urban, and Estimated absolute poverty income level (18$ per capita) - urban and rural - rural - Number of people (total, urban, and rural) served by excreta Absolute poverty income level is that income level below which a minimal disposal as percentages of their respective populations. Escreta nutritionally adequate diet plus essential non-food requirements is not di' s-,l may include the collection and disposal, with or without affordable. rf-a.c-nt, of human excreta and waste-water by water-borne systems Estimated relative poverty income level (US$ per capita) - urban and rural - o hr the use of pit privies and similar installations. Relative poverty income level is that income level less than one-third P,op., inn per physioan - Population divided by number of practicing per capota person1 income of the .o..try. physicians qualified from a medical school at university level. Estimated population below poverty income level (percent) - urban and rural - Population per nursing person - Population divided by number of Percent of population (urban and rural) who are either "absolute poor" or practicing male and female graduate nurses, practical nurses, and "relative poor" whichever is greater. ou-ict-nt nurses. Eosnomic and Social Data Division Economic Analysis and Projections Department  - 38 - ANNEX I Page 4 ECONOMIO DEVELOPMENT DTA (Amo n millions of U.S. do=llas Actual Estimated Projected '973- 1975 - 1977 - 1985 - M 1975 1977 197 1985 1990 1975 1977 1985 1990 1973 1977 1990 NATIONAL ACCOUNTS ___ 5-erAverage aLt 1977 Prices & Exchange Rates Aveage AnnualGotRae AsPrntfGO Gross Domestic Product 412.1 447.9 453,0 460.0 596.5 690.0 R4a2 1.1 3.4 3.0 96.5 99. b91.b Gains from Terms of Trade (+) 14.8 28.4 2.0 - 8.3 37.2 63.3 . . . . 3.5 0.4 8.4 Gross Domestic Income 4 26 79 77 ; 7E075 1415.7 0 33 75. 5.6 -1.7 4, 1 3.5 loo.6 100.0 100.0 Import (incl. NFS) 249.3 351.5 374.6 378.3 321.9 379,8 18.7 3.2 -1.9 3.4 58.4 81.4 50.4 ExPorts " (import capacity) 225.2 220.7 182.9 169.7 314.8 351.4 -1.0 -8.9 7.0 2.2 52.8 39.7 46.6 Resource Gap - 2 h T -130.8 -191.7 -208.6 -7.1 ,78W . 5 7 -41.7 , , _ Consumption Expenditures 353.7 427.6 420.0 438.2 520.3 640.5 9.9 -0.9 2.7 4.3 82.8 91.3 85.0 Investment " (incl. stocks) 97.3 179.5 231.7 222.1 120.5 141.2 36.c 13.6 -7.8 3.2 22.8 50.4 18.7 Domestic Savings 73.2 48.7 4o.o 13.5 113.4 112.8 -18.0 -9.4 13.9 -0.5 17.1 8.7 15.0 National Savings 88.1 119.9 113.9 60.1 98.4 100.7 16.0 -2.5 -1.9 0.5 20.6 24.8 13.4 MERCHANDISE TRADE Annual Data at Current Prices and Exchange Rates As Percent of Total Imports Capital goods and Intermediate goods (clfuels) 81.3 144.9 170.3 142.8 226.6 382.9 33.5 11.3 3.6 11.0 58.2 58.3 56.8 Fuels and related materials 10.0 26.7 32.1 34.1 65.3 91.6 63.0 9.6 9.3 7.8 7.2 11.0 13.6 Consumption goods 48,4 70,2 89.5 90.0 141,5 200,0 20.5 17.9 5-9 7.2 34,6 30.7 29.6 Total Merch. Tmports (niT) 139.7 241.8 291.9 266.9 433.4 r7TT2 31.5 12.9 5.0 9.3 100.0 100.0 100.0 Exports Iron Ore 102.9 143.4 127.0 99.2 398.6 497.4 18.0 -5.9 15.4 4.5 76.7 76.1 75.3 Copper Concentrate 12.8 4.5 10,7 9.4 - - -41.2 53.0 . 9.5 7.2 - Fish Products 12.3 16.0 20,5 21.0 71.6 158.2 14,0 13.2 16.9 17.1 9.2 16.1 23.9 O ther Products 16.2 3,1 1,8 0.7 34 5 5.0 7j2 6 -23,7 8.7 7.4 4.6 0.6 0.8 Total Merch, Expor-ts (fob) 1-34.2 167 . I 00 1oo 530.4 47 3.7 7 11.6 -2-2 WT- 97 1700.0 100.0 100o.0 Merchandise Trade Indices Average 1977 - 100 Export Price Index 75.4 107.0 100.0 99.6 183.6 251.4 19,1 -4.9 7.9 6.4 Import Price Index 70.5 90.3 100.0 107.0 161.6 206.3 13.2 5,2 6.2 5.0 Terms of Trade Index 107.0 1i18.5 100.0 93.1 113.6 121.9 5.2 -8.2 1.6 1,4 Exports Volume Index 111.2 97.5 100.0 86.3 161.2 164.2 -6.4 1.3 6,.1 o.4 VALUE ADDED BY SECTOR Annual Data at 1977 Prices and Exchange Rates Average Annual Growth Rates As Percent of Total Agriculture 90.2 116.0 103,3 116.3 150.9 182,7 13.4 -5.2 4,9 4.0 25,0 25.9 30.5 Industry and Mining 141.1 111.5 108.9 100.8 181.8 201.3 -11,1 -1.2 6.6 2.1 39.2 27.3 33.5 Service 129,1 151,6 186.7 171.8 182.6 216.0 8.4 11.0 0.2 2.7 35'8 46.8 36.O Total 360,4 379.1 39829 3.5T9 522.3 600O.0 2.5 T 27 1000.0 100.0 100,0 PUBLIC FINANCE Annual Data in Current Prices and Exchange Rates As Percent of GDP (Central Government) Current Receipts 62.9 90.3 100.7 108.2 291.1 444.4 20.0 6.4 13.9 8.8 23.9 22.7 26.8 Current Expenditures 58.4 99.5 190.4 197.0 300.4 362.4 29.0 39.5 5.1 3.8 22.2 42.9 21.9 aurrent Ralanne -9.2 -89.7 -88,_8.. 9-3 17 _ -20 CURRENT EXPENDITURE DETAILS Actual Prelim. DETAIL ON 1R As Total Current Expend. )173 1974 1975 1976 1977 PUBLIC SECTOR Wages and Salaries 35; 32.5 347 27.0 35.2 INVESTMENT PROGRAM Material and Supplies 16,5 18.0 20.4 16.6 23.6 Agriculture 25,2 5.9 Maintenance 2.6 1.1 0.9 0.3 o.6 Mining 110,0 25.6 Subsidies and Transrers 9.1 11.8 16,6 6.3 7.9 Manufacturing 114.0 26.5 Public Debt (interest) 1.3 6.0 3.0 6.8 4.1 Infrastructure 130,0 30.2 Other 13.1 10.2 7.7 4.1 0.9 Public Utilities 19.0 4.4 Stecial Accounts 21.8 20.4 16.7 36.9 27.7 Other 31.8 7.4 Total Expenditures 100.0 100.0 00.0 10a0.0 100.0 Total Expenditures 430.0 100.0 FINANCIING Public Sector Savings 33.2 7.0 Foreign Capital Grants 45.3 10.5 Foreign Loans 351.5 81.8 Total Financing 430.0 100.0 1/ LABOR FORCE Total Labor Force In Thousands % of Total 1970 - 77 1970 1977 1970 1977 Growth Rate Agriculture (inl. Livestock) 306.0 315.0 85.0 75.0 o.4 Industry and Service 54.0 105.0 15.0 25.0 12.8 Total 360.0 420.0 100.0 100.0 2.2 not applicable - nil or negligible not available -- less than half the smallest unit shown J Including unemployed.  - 39 - ANN1EX I Page 60WANE OF PA1T9WT0S EE?MU4kL ASSI8TANCO IJID DM8T taesacota in asillitnsa of 0.0. dollars at current prices) 1/ Avgg. Acl Artaci __________ Profl9~~~~~~~~~1..... Orseth Rate. 19VJ 1974 1975 1976 197 1978 l 7 398 DPro c7-197 7 1977 -1990 S21883RY RiLANCE OF PAYMTS Epocrte (incl. NFS) 144 8 203.6 185.6 201.9 , 178.8 161.4 196.9 238,0 411.Z 51S.6 725.5 5 .4 11.4 0swar4.s(3nc1.7VFSc1.~f