Liberia - NIOC Iron Ore Rehabilitation Project

Document of The World Bank ,. , ( FOR OFFICIAL USE ONLY Report No. P-3172-LBR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL IRON ORE COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA AND A PROPOSED LOAN TO THE REPUBLIC OF LIBERIA FOR AN IRON ORE REHABILITATION PROJECT December 9, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The official monetary unit is the Liberian dollar with a par value equal to the U.S. dollar. The U.S. dollar is a legal tender in Liberia. FISCAL YEAR July 1 to June 30 ABBREVIATIONS AND ACRONYMS ADB African Development Bank BMC Bong Mining Company ExIm U.S. Export-Import Bank FMO Netherlands Finance Company for Developing Countries LBDI Liberian Bank for Development and Investment LIBOR London Interbank Borrowing Rate LEL Liberian Enterprises, Ltd. LJV Lamco Joint Venture LMC Liberia Mining Company ltpy Long tons per year MMAL Mine Management Associates, Ltd. NIOC National Iron Ore Company OAU Organization of African Unity  FOR OFFICIAL USE ONLY LIBERIA NATIONAL IRON ORE COMPANY REHABILITATION PROJECT LOANS AND PROJECT SUMMARY Borrowers: Republic of Liberia and National Iron Ore Company (NIOC). Guarantor: Republic of Liberia (for loan to NIOC). Amount: US$20.0 million (US$8.3 million equivalent for Republic of Liberia and US$11.7 million equivalent for NIOC). Terms: Both loans: 13 years, including 5 years' grace, with interest at 11.6 percent per annum; NIOC will also pay a guarantee fee of 1 perce:it per annum to the Government. Project Description: The project's objectives are to rehabilitate NIOC's iron ore mining operations and reestablish its financial viability. Beneficiated ore output would be increased from 2.3 to 3.25 million long tons per year, and infrastructure facilities would be improved and equipment would be installed to reduce operating costs. The project would improve the railroad to the port at Monrovia, repair the St. Paul River railway bridge, and provide additional mining and miscellaneous support equipment; manage- ment and technical assistance to execute the project and improve the Company's operations would also be provided. The project would benefit about 2,000 workers directly and some 16-18,000 people indirectly. Over the life of the project, the Govern- ment should receive tax revenues of about US$74 million and earn dividends of about US$30 million. The main risks are financial, as returns and cash flow are sensitive to a fall in revenues or an increase in operating costs. However, these risks have been addressed by the inclusion of ample contingen- cies in both the capital and operating costs as well as by the establishment of an off-shore trust account into which all revenues of the Company from the sale of iron ore would be deposited. Payments out of the trust account would be made to service the new loans and to meet the operational cash needs of NIOC before any service payments were made oni existing debt. Overall, the risks are considered acceptable, given the long- term importance of iron ore exports to the Liberian economy and potential earnings to the Government. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: 1/ ------------- UbS million ------------ Local Foreign Total 4 ot base Gost A. NIOC Mining 0.26 9.U3 9.29 36.1 Plant 0.37 3.59 3.96 lb.3 Railroad 1.07 4.25 5.32 21.9 Miscellaneous Equipment - U.6b 0.66 2.7 Project Management/Engineering 0.45 4.67 5.12 21.U Base Cost 2.15 22.20 24.35 1U0.U Physical Contingencies 0.13 1.36 1.49 Price Contingencies U.03 1.55 1.58 Installed Cost 2.31 25.11 27.42 Project Preparation - 0.75 0.75 Interest during Construction - 6.47 6.47 Working Capital 9.03 15.22 24.25 Subtotal NIOC 11.34 47.55 56.b9 B. Bridge Bridp Repair 0.90 3.30 4.2U 97.9 Engineering - O.U9 U.09 2.1 Base Cost 0.90 3.39 4.29 1UU.U Physical Contingencies 0.26 0.70 0.96 Price Contingencies 0.26 U.62 1.U0 Installed Cost 1.42 4.91 6.33 Project Preparation - 0.25 U.25 Interest during Construction - 1.42 1.42 Subtotal Bridge 1.42 6.56 6.U0 C. Economic Studies - 0.25 U.25 Total Project Cost 12.76 54.36 67.14 1/ Net of taxes, from which the project is exempt.  Financing Plan: US$ Million Local Foreign Total Debt Financing World Bank 1.4 18.6 20.0 African Development Bank - 11.4 11.4 Netherlands Finance Company for Developing Countries - 3.5 3.5 The Opec Fund - 8.3 8.3 Commercial Banks 6.0 8.5 14.5 Subtotal 7.4 50.3 57.7 Equity Financing Government Equity 3.0 4.1 7.1 NIOC Participation 2.3 - 2.3 Subtotal 5.3 4.1 9.4 Total 12.7 54.4 67.1 Estimated Disbursements: (Bank Loans) US$ Million Bank Fiscal Years FY82 FY83 FY84 FY85 Annual 5.0 10.8 3.7 0.5 Cumulative 5.0 15.8 19.5 20.0 Rate of Return: 26.5 percent. Staff Appraisal Report: Report No. 3479 LBR, December 1, 1981. Map: IBRD 15723   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO LIBERIA AND THE NATIONAL IRON Oi'E COMPANY FOR A NATIONAL IRON ORE COMPANY REHABILITATION PROJECT 1. I submit the following report and recommendation on: (a) a pro- posed loan to the National Iron Ore Company (NIOC) with the guarantee of the Government of Liberia for the equivalent of US$11.7 million to help finance a project to rehabilitate the NIOC mine. The loan would have a term of 13 years, including 5 years of grace, with interest at 11.6 percent per annum. The Government of Liberia would charge NIOC a guarantee fee of 1.0 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan to NIOC to 12.6 percent per annum; and (b) a proposed loan to the Govern- ment of Liberia for the equivalent of US$8.3 million to help finance bridge repairs and studies associated with the NIOC rehabilitation project. This loan would also have a term of 13 years, including 5 years of grace, with interest at 11.6 percent per annum. 2. The proposed project would be cofinanced by (i) the Atrican Devel- opment Bank (ADB) for the equivalent of US$11.4 million, with a term of 13 years, including 5 years of grace, at an interest rate of 7.5 percent to the Government with an onlending rate of 8.5 percent to NIOC; (ii) the Nether- lands Finance Company for Developing Countries (FMO) for the equivalent of US$3.5 million, with repayment over 13 years, including 4 years of grace, at an interest rate of 9 percent; (iii) the OPEC Fund for US$8.3 million to the Government, with repayment terms of 15 years, including 5 years of grace, at a service charge of 0.75 percent per annum, to be relent to NIOC at the same terms as the Bank loan to NIOC; and (iv) US$14.5 million from a syndicate of commercial banks led by the Bank of America, with repayment over seven years and interest charges of about 2.0 percentage points above LIBOR and an addi- tional 3.0 percent insurance charge. PART I - THE ECONOMY Structural Characteristics 3. The growth of Liberia's economy remains heavily dependent on the performance of the enclave sector consisting mainly of: (a) iron ore mines, (b) rubber plantations, and (c) forestry concessions. These enclaves are the main source of export earnings. Iron ore mining is by tar the largest single activity in the enclave sector, accounting for about one-third of gross domestic product at factor cost. There are only limited linkages between the enclaves and the rest of the economy; as a result, the benefits of economic growth have been unevenly distributed. 4. The income disparities between traditional agriculture and the (monetized) modern sector are a manifestation of structural imbalance in the economy. Traditional agriculture has minimal inter-action with the rest of the economy; however, it supports the majority of the population - as much as  -2- 60 percent - who live at, or near, subsistence level. With a population of about 1.7 million, average per capita GNP in 1979 is estimated at US$500. While the enclave sector yields a per capita GNP of about US$1,620 compared to US$780 for the rest of the monetized economy, the great majority of the population who live in the traditional non-monetized sector have a per capita income of about US$185 per annum. Development Plan and General Economic Policy 5. After completing its first four-year Development Plan, Liberia has embarked upon preparation of a Second Plan. The first Plan was intended as the first of a series of multi-year investment programs aimed at meeting the basic, long-term objectives of Liberia's socio-economic development. These are: (a) diversification of production; (b) dispersion of sustainable socio- economic activities throughout the country; (c) greater involvement of Liberians in development activities; and (d) equitable distribution of the benefits of economic growth. Performance under the first Plan fell short of expectations. Investment in the productive sectors was below the original target, while one-fourth of total expenditure during the Plan period was for facilities and buildings for the Organization of African Unity (OAU) confer- ence, which had not been included in the original Plan. 6. The new Government which assumed power in April 1980, reaffirmed the broad objectives of the First Plan. Work had been initiated under the former Government on the preparation of the Second Plan (FY82-86) which is scheduled for completion shortly. The general economic policy statement issued by the Government of the People's Redemption Council on June 5, 1980 sets out the broad objectives of the new regime. The main thrust of the economic policy is to expand the country's productive capacity, especially in agriculture, and to ensure that benefits from economic growth and development are enjoyed by an increasing number of Liberians. To achieve this end, the Government intends to encourage local and foreign private investment and give priority to labor intensive investments. Significant measures taken by the new Government since its assumption of office include decisions: (a) to retain the Liberian dollar at par with the US dollar, which remains legal tender in Liberia; (b) to honor all existing contractual agreements with foreign private investors and to change such agreements only through negotia- tions with all parties concerned; (c) to permit free flow of capital, goods and services; and (d) to regulate labor relations by full protection of the rights of both workers and management. Recent Economic Developments 7. While strong world demand for Liberia's major export, iron ore, brought large gains in export prices in 1974, the subsequent recession in industrialized countries significantly reduced demand for the country's most important export commodities--iron ore, rubber and timber--in the 1975-78 period. With growth performance continuing to be largely a function of enclave activities, growth of real GDP--which averaged about 6.3 percent a year in the 1967-70 period and 4.2 percent a year in the 1970-74 period--has slowed down significantly and is estimated to have been about 0.7 percent per  - 3 - year between 1974 and 1978. Economic performance in 1979 and the first quarter of 1980 had taken a turn for the better, but following the change in Government in April 1980 there was a setback in growth, and, according to the preliminary estimates, real GDP is reported to have declined by 4.4 percent in 1980. 8. During 1974-78, mostly reflecting accelerated international infla- tion, imports rose by 14 percent annually, exceeding the 5 percent annual export growth rate. However, the temporary resurgence in world prices of iron ore, and increases in the price of timber and rubber helped Liberia to expand its exports by 10 percent in 1979 and 14 percent in 1980. Oil imports increased from US$15 million in 1973 to US$103 million in 1979, or one-fifth of the country's total imports. But higher prices for Liberia's major exports helped achieve a trade surplus of US$30 million in 1979; the growth in imports has been relatively lower in the last 18 months due to the general slack in economic activities following the change in Government. The current account deficit, reflecting substantial remittances of capital and other factor income from enclave operations, increased to about US$132 million in 1979, or 13 percent of GDP, as compared to US$30 million in 1974, or 5 percent of GDP. Rising current account deficits were financed mostly by private capital transactions, but in the last two years, official capital inflows have risen substantially. 9. Liberia has had a long history of sound fiscal management and public sector resources did not come under undue pressure until the mid-1970s. Since 1974, the Government has been facing growing budgetary deficits. The deficit in 1975 was only about US$4.0 million, but by FY1979 had reached US$161 million, or 79 percent of government revenues. The strain on public sector finances intensified during 1979-80 and assumed serious proportions in the aftermath of the change in Government. The decline in public revenues, coupled with a decision to increase the salaries of low-paid military personnel from $100 to $250 per month and the payment of pending bills from the OAU Conference, increased the overall budgetary deficit from an estimated $56 million to $95 million (9 percent of GDP) by the end of the fiscal year. The shortfall in revenues was caused largely by lower import duty collection in the last quarter. The doubling of salaries of the lowest grade civilian employees from July 1, 1980 aggravated the budgetary deficit for FY1981 and the Government was faced with a serious liquidity crisis when it approached the IMF in May 1980 for further assistance. Relations with the IMF 10. In July 1980 the new Government introduced a two-year stabilization program to support a standby arrangement with the IMF providing for support in an amount of SDR 65 million (about US$85 million). Major elements in the stabilization program included tighter fiscal policies and stricter control of the financial operations of the public corporations, increased mobilization of domestic revenues, rationalisation of energy pricing policies, and a freeze on wages and salaries of Government employees. Limits were placed on new borrowings with a maturity of one to twelve years and on credit to the Government and public sector from the banking system.  - 4 - 11. An IMF review of progress made by the Government in implementing the stabilization program took place in May 1981. The Government had intro- duced the necessary measures to revise tax rates and levy import surcharges. However, the budgetary deficit in FY81 is likely to be about $100 million (45 percent of Government revenues), or $25 million higher than the original budget estimates. While revenue collection is higher by 10 percent as com- pared to the previous year, it fell short of the expected yields as a result of a decline in customs duties. There was also some increase in recurrent expenditures beyond budget estimates. This budgetary imbalance, lack of strict control on the operations of public corporations, and the consumer subsidy on rice are some of the major issues which were addressed in the context of the second year of the stabilisation program. In this connection the Government has recently announced some important economic decisions. The consumer subsidy on rice has been eliminated; a new progressive national reconstruction tax has been levied on wages, salaries and self-employed income, and excise taxes on beer and gasoline have been increased. The Government also proposes to improve the financial viability of the public corporations. The IMF Board approved the program in August 1981 and made available SDR 55 million for the second year of the Standby Arrangement. 12. Monthly payments for oil imports continue to create a serious liquidity problem in public sector finances as receipts generated abroad are not sufficient to meet oil payments and service the public sector's external debt. A recent infusion of US$25 million provided by the U.S. Government in form of a grant from the Economic Support Fund will help to ease the situation. Creditworthiness 13. Liberia's external public debt outstanding and disbursed was estimated at about US$495 million as of June 1980. The Bank Group share of the public debt outstanding and disbursed is presently about 15 percent and is expected to increase to about 24 percent by 1984. As a proportion of public debt servicing liability, the Bank Group's share is expected to increase from 14 percent to 18 percent over this period. Debt service pay- ments as a proportion of exports of goods and non-factor services were esti- mated at about 10 percent in 1979 as compared to 5.7 and 7.7 percent for 1974 and 1972 respectively. Public debt service payments as a percentage of Government revenues (a more meaningful indicator for Liberia which uses the US dollar as a medium of exchange) declined from about 24 percent in 1972 and 21 percent in 1974 to 16.5 percent in 1978, but again went up to 23 percent in 1980. This upsurge in the debt service ratio has occurred primarily as a result of short-maturity loans contracted by Liberia in the last few years to finance OAU-related expenditures and meeting the growing budgetary deficits. In the short run, this increase in debt servicing obligations has created severe pressures on Liberia's public finances. The Government therefore sought and obtained the assistance of the Paris Club in rescheduling its external public sector debt of US$32 million maturing during the period July 1980 to December 1981; the rescheduled debt is to be repaid over 9 years, including four years of grace.  - 5 - 14. Assuming a continuation of the recent rate of growth in public revenues and exports (10 percent and 5 percent per annum, respectively) Liberia's debt service ratio is estimated to increase to about 33 percent of public revenues and 12 percent of exports by 1985; should there be an improvement in the country's economic prospects over the next few years, the debt service ratio would be somewhat lower (around 29 percent) by 1985. Although the movement in world prices of Liberia's main export commodi- ties in 1981 is not particularly favorable, the growth in export earnings is projected to be higher in subsequent years as a result of the likely strengthening in demand for iron ore and an increase in iron ore prices. Forecasts for natural rubber prices also indicate a consistently upward movement, and Liberia may expect higher yields from the recently replanted acreage and new planting of rubber. Other on-going agriculture projects (particularly for coffee, cocoa, palm oil), and successful exploration and development of other mining resources, including gold and barite, will help diversify the economy and should result in an acceleration in the rate of growth of exports during the next three to four years. Public revenues will benefit from these increased export earnings. However, these prospects are clearly contingent upon a number of policy measures which the Government has to initiate and sustain over the next years, e.g., a reduction in the size of the Government budget deficit, restraint on new commercial borrowings and public sector credit expansion, increased mobilization of public savings, maintenance of the traditional openness of the economy, appropriate pricing and tariff policies, revival of investor confidence, inflow of new private investment and improvement in the coordination of overall economic management. Although Liberia has acute short-term liquidity problems, restoration of growth and stability is feasible, provided the Government is able and willing to pursue the right course. 15. In recent years Bank group lending to Liberia has been a blend of IDA credits and Bank loans; in view of the country's relatively low per capita income and high public debt service liability, continued IDA assistance is justified. PART II - BANK GROUP OPERATIONS IN LIBERIA 16. The Bank has approved 18 loans (including one Third Window loan) for projects in Liberia totalling US$135.7 million; there have been 9 IDA credits totalling US$47.1 million, and one technical assistance grant of US$200,000 for development planning. IFC has made two equity investments totalling US$556,000 in the share capital of the Liberian Bank for Develop- ment and Investment (LBDI). The Bank Group assistance has financed roads, agriculture, rural development, power, education, water supply, LBDI, small enterprises, and petroleum pre-exploration. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of August 31, 1981 and notes on the execution of ongoing projects. Following the change of Government in April 1980, implementation of a number of projects was disrupted. For the most part projects are now being implemented well,  although problems have been caused by the Government's inability to meet its full share of financing for some projects as a result of the severe budget constraints. 17. The objectives of Bank Group operations are: (a) to help Liberians take greater initiative in developing their own resources for the benefit of their own people; (b) to support policies and programs leading to a broader distribution of the benefits of economic growth; (c) to help the Government broaden the economic base and overcome infrastructural constraints to growtn- and (d) to assist the Government in mobilizing development resources from other external agencies. In furthering these objectives particular attention is being paid to (a) the need to expand the supply of trained manpower and (b) measures to strengthen and improve the operations and finances of the public corporations in Liberia. 18. In support of the objectives of raising the standard of living of lower income groups and broadening the productive base, the Bank Group lending program emphasizes agriculture and rural development. The Bank Group is currently cofinancing with USAID two agricultural projects in Bong and Lofa Counties. These projects are designed to (a) assist subsistence farmers to expand their production base and to increase their productivity and income through the provision of support services and infrastructure, and (b) to help diversify the country's export and revenue base. A rubber project, co- financed with the Commonwealth Development Corporation (CDC), will expand exports and increase productivity and incomes of small and medium size farmers by strengthening credit and extension services and promoting greater Liberian participation in the development of this subsector. The forestry project which the Bank is co-financing with the African Development bank (ADb) and the German Agency for Technical Cooperation, will strengthen the Govern- ment's forest service, initiate an industrial plantation program, and help Liberia better manage and exploit its forestry resources. The oil palm project, co-financed by the ADB and the CDC, will help expand and diversify the country's export and revenue base, provide employment, increase the income level of rural families, and strengthen the institutional capability in the country for oil palm development. A second phase of the Lofa County agricul- tural development project was recently appraised by the bank. Consideration is also being given to a rural development project in the southeastern region of Liberia. 19. In addition to its support for agriculture, the Bank Group is also assisting the Government in its diversification efforts through exist- ing lines of credit to LBDI for the manufacturing sector. The small and medium scale enterprises project, approved in November 198U, will stimulate economic activity and employment by providing a line of credit and technical assistance. The objective of the petroleum exploration promotion project, approved in October 1980, is to establish Liberia's hydrocarbon potential by attracting oil companies to take oil exploration permits in Liberia. While the proposed project to rehabilitate the National Iron Ore Company would not serve the Government and Bank Group's objectives directly, the project addresses a number of development issues of importance to Liberia. It would mobilize resources for a productive activity which would improve the Govern- ment's ability to achieve these objectives through other means. By improving  the efficiency of an existing investment, the project would secure the Jobs of 2,000 workers with no alternative means of employment and would permit the Government to take advantage of the recovery in the iron ore market which is expected in coming years. Over the life of the rehabilitated mine, the government should receive over U100 million in taxes and dividends from the Company whaich could be used for development purposes. 20. Given Liberia's pressing needs for physical infrastructure, the Bank Group continues to play a leading role in financing development and maintenance of water supply, roads, and power. A water supply project for which a credit was granted in 1978 is designed to help rehabilitate and expand the Monrovia water supply system, extend water distribution to lower income groups in metropolitan areas, and strengthen the management, staffing, and finances of the Liberia Water and Sewer Corporation. The teeaer roads project for which a Bank loan was approved in 1979 is designed to open up the agricultural hinterland of Liberia in support of the ongoing and proposea agricultural and rural development programs. The nearly completed fourth highway project has, like earlier Bank-financed projects, expanced the coun- try's limited basic road network. A fifth highway project under consideration would improve the country's road maintenance capability. In tthe power sector, a nearly completed fourth power project has expanded the Liberia hlectricity Corporation's (LEC) thermal generating facilities to meet current demand, strengthened LEC's management, and extended connections to poor urban house- holds in Monrovia. Bank Group assistance will also be considered to meet Liberia's longer term electricity needs through hydropower development. 21. Since the lack of trained manpower is a major constraint to develop- ment in Liberia, the Bank Group has financed three education projects and is currently financing preparation of a fourth project through an advance trom the PPF. The proposed project would continue the emphasis on manpower training and upgrade primary and secondary education in the rural areas. PART III - THE MINING SECTOR Contribution to the Economy 22. Mining dominates the modern sector in Liberia, accounting tor more than 54 percent of the country's export earnings and 24 percent of GDP in 1979. Iron ore accounts for about 95 percent of total mineral production, with artisanal gold and diamond mining accounting for the balance. Througn- out the 1960s and early 1970s, iron mining provided substantial 6overnment revenues, making possible initial efforts to develop infrastructure and otner sectors outside the concession areas. 23. Total iron ore production and its contribution to GDP showed average annual increases until 1974, during which year production amounted Lo 2j million tons and iron ore revenues accounted for over 37 percent of GDP and 13 percent of Government revenues. Since 197b, however, prolonged recession in the world steel industry has depressed both the volume and price of iron ore exports. Liberia's total tonnage exported fell by 28 percent from 1974 to  - 8 - 1979, although iron ore continues to account for over half of export earnings. In terms of contribution to Government revenue, the share of tne iron ore mines has been small during the last few years because earnings have been low or negative and most of the concession agreements provide for profit sharing with the Government and no fixed royalties. Thus, in 1979 iron ore production accounted for only five percent of Government revenues. 24. Over 35 percent of employment in the modern sector is in mining; a greater proportion of the workers employed in mining are skilled and semi-skilled than in other industrial sectors of the country. In 1979, expatriates accounted for under 8 percent of the labor force in the Liberian iron ore sector; at the National Iron Ore Company (NIOC), this proportion was even lower at slightly above 3 percent. 25. The mining sector provides socio-economic benefits to the families which depend directly or indirectly on the mining activities for support. The mining companies provide housing, schooling, and medical services in remote areas of the country. Iron Mining Activity 26. Three companies currently produce iron ore in Liberia. The most important mining company is the Lamco Joint Venture (LJV) which is owned jointly by Bethlehem Steel of the United States (25 percent) and Lamco (75 percent)--a consortium in which the Government holds 50 percent, private, local, and foreign interests 12.6 percent, and a Swedish consortium heaced by Granges AB holds the remaining 37.4 percent. LJV's production capacity is 12 million long tons per year (ltpy), but production has fallen in recent years because of market problems and the need to suspend the costly production of pellets because of fuel price increases. Deposits in the current LJV mining area are expected to be depleted by 1985-1987. k'easibility studies for expansion into the Western Area have been completed, but no decision has been made whether or not to undertake the investment for which about US$30U million would be required. The decision will be influenced by plans to develop the Mifergui-Nimba iron ore deposits across the border in Guinea. Current plans call for evacuation of the Guinean ore on the LJV railroad infrastructure. More recently, a proposal has been made to combine the LJV Western Area and Guinean projects, but few details have been presented. Thus, the future of Liberia's principal iron ore mine is uncertain. 27. The Bong Mining Company (BMC), Liberia's second largest iron ore mining company, produced 7.5 million ltpy in 1980. BMC is owned 5U percent by the Government, but is controlled by several European steel companies, consis- ting of a consortium headed by Exploration and Bergbau of Germany (34 percent) and Finsider S.A. of Italy (16 percent). BMC's reserves are sufficient to permit production at present levels until the mid-to-late 1990s. riowever, pellets account for a large share of its production, and production costs nave increased, resulting in large financial losses. BMC has been torced to cut back production in order to reduce losses. 28. The National Iron Ore Company (NIOC) is described in aetail in Part IV of this report. Upon effectiveness of the proposed rehabilitation loans, it would be owned 80 percent by the Government and 20 percent oy  - 9 - foreign and local private shareholders. Until recently NIUC produced about 2.4 million ltpy. Production in 1980 was only 1.8 million tons because of technical and financial problems, which, if not addressed promptly, will lead to the closing of the mine. Sufficient proven reserves exist, however, to produce the planned 3.25 million ltpy until 1995 if the mine is rehabilitated under the proposed project. 29. A fourth mining company, the Liberia Mining Company (LUC), operated the Bomi Hills deposits until 1977 when its reserves were depleted. Until LMC withdrew, it owned the railroad from Bomi to Monrovia which is now owned by the Government and forms part of the railroad infrastructure used by NIbC to transport its ore to the Monrovia port. Future Development Potential 30. Prospects for the iron ore sector are uncertain; ail three operating companies are experiencing financial, technical, and/or marketing problems which may jeopardize their future operation. In addition to the three opera- ting mining concessions, three other iron ore deposit areas (the bie mountains, the Wologisi range, and the Putu range) are covered by concession/lease agree- ments. Exploration work has been done in all these areas, and the reserves are estimated at 200-600 million tons of low-grade, fine-grainea ores suitable mainly for pellet feed production. These areas lack infrastructure, and would require substantial investments to be developed. In view of tne poor quality of the reserves in these concessions and the high investment costs required to develop them, the likelihood that these deposits will be developed in tne foreseeable future is slim. 31. The Bank has had no previous involvement in the mining sector in Liberia. Indeed, through both its lending program and its economic dialogue, the Bank has encouraged the Government to diversify the economy so as to reduce dependence on a single commodity and spread development beyond the enclaves to the largely subsistence rural population. The proposed project represents, therefore, a special case in which the life of an existing mine would be extended in order to "buy time" to prepare for an orderly phaseout and generate government revenues with which to stimulate alternative economic activity for the population currently dependent on the mine. PART IV - Tdh PROJECT 32. The proposed project was initiated in 1978 at Government's request for assistance to rehabilitate the National Iron Ore Company tNIUC) in order to forestall imminent suspension of mining production at the Mano kiver mine. The Bank subsequently helped NIOC and the Government prepare the project by providing in 1979 a US$500,000 Project Preparation Facility (PPF) advance to the Government to finance consulting studies and engineering work to aefine the project scope, design, and viability. The project was appraisea in December 1980, and a second PPF advance of US$500,0O0 was approved in February, 1981 to finance detailed engineering and legal assistance. Loan negotiations  - 10 - were held in Washington on September 4, 1981. The LiDerian delegation was headed by Mr. Rudolph Johnson, Deputy t4inister of Finance. Signiticant events and special conditions are summarized in Annex III. The project is described in detail in Staff Appraisal Report No. 3479-L