Senegal - Ship Repair Engineering Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4238 PROJECT COMPLETION REPORT SENEGAL: DAKARMARINE ENGINEERING PROJECT (LOAN S3-SE) December 28, 1982 Industry Department 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.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT SENEGAL: DAKARMARINE ENGINEERING PROJECT (LOAN S 3-SE) TABLE OF CONTENTS Page No. PREFACE ............................................................... BASIC DATA SHEET .................(ii) HIGHLIGHTS .............................................(iii) I. INTRODUCTION . II. DAKARMARINE - THE COMPANY.. 2 A. Ownership. 2 B. Organization and Management. 3 C. Technical and Financial Support. 3 III. DESCRIPTION AND IMPLEMENTATION OF THE ENGINEERING PROJECT 4 A. Background. 4 B. Objectives, Scope and Description. 4 C. Use and Performance of Consultants. 5 D. Implementation of the Engineering Project. 6 E. Project Cost, Financing and Disbursement. 7 - Project Cost. 7 - Financing. 8 - Disbursement. 9 IV. MARKET FOR SHIP MAINTENANCE AND REPAIR FACILITIES. 9 V. NEW DRY DOCK PROJECT CONCEPT IN LIGHT OF MARKET DECLINE 10 VI. BANK ROLE AND CONCLUSIONS .11 LIST OF ANNEXES Annex 1 - Project Costs . .. 12 Annex 2 - Disbursement of Loan S-3 SE .... . ............................. 13 Annex 3 - Borrower's comments ......................................... 14 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.   PROJECT COMPLETION REPORT SENEGAL - DAKARMARINE ENGINEERING PROJECT (LOAN S 3-SE) PREFACE This report covers the Dakarmarine Engineering Project sup- ported by Loan S 3-SE. The Engineering Loan of US$0.6 million was approved in September 1973. US$0.49 million of the Loan (82%) was disbursed by the first quarter of 1976, three quarters behind schedule and the balance was cancelled. The loan was made to Dakarmarine, a joint venture company between the Government and several local and foreign private companies interested in the shiprepair business. The Engineering Project con- sisted of several studies to assess the feasibility of a dry dock project for repair of large vessels proposed by the Senegalese Govern- ment. The proposed dry dock project was not considered feasible as a result of these studies. The Project Completion Report (PCR) was prepared by the Industry Department of the Bank on the basis of information from Project files, from the Bank's staff involved, from co-lenders, and from the Borrower. Subsequently, comments on the draft report, received from the Borrower have been taken into account in finalizing the report. The Senegalese Government and/or Dakarmarine approached the Bank and IFC in 1977, 1978 and 1979, requesting them to consider alternative proposals of dry dock and floating dock projects. However, after further studies none of these projects was considered sufficiently economic to warrant further Bank group support. The government finally decided to go ahead with a smaller size floating dock with the assistance of bilateral aid. Comments from Government institutions on the draft report are attached as Annex 3. This report has not been audited by the Operations Evaluation Department.   - ii - PROJECT COMPLETION REPORT SENEGAL - DAKARMARINE ENGINEERING PROJECT (LOAN S 3 SE) BASIC DATA SHEET KEY PROJECT DATA Amount (in US thousand) As of 10/31/82 Original Disbursed Cancelled Repaid Outstanding Loan No. S-3 600 492 108 450 42 CUMULATIVE LOAN DISBURSEMENT FY73 FY74 FY75 FY76 (i) Planned 90 511 600 600 (ii) Actual - 246 413 492 (iii) (ii) as % of (i) - 48 69 82 OTHER PROJECT DATA Original Actual or Loan Date Re-estimated Board Approval 9/11/73 9/11/73 Loan Agreement 9/20/73 9/20/73 Effectiveness 2/05/74 2/05/74 Loan Closing 3/06/76 9/06/77 Date of Physical Completion 10/73 6/75 Borrower Dakarmarine Executing Agency Dakarmarine MISSION DATA Month, No. of No. of Date of Year weeks Persons Manweeks Report Preappraisal I 3/72 1/2 2 1 3/15/72 "1 II 4/72 2 1 2 5/23/72 it III 5/72 1 1 1 6/22/72 Preappraisal IV 7/72 1/2 2 1 7/25/72 Appraisal I 10/72 1 3 3 11/20/72 Appraisal II 2/73 1/2 2 1 n.a. Appraisal III 3/73 1 3 3 n.a. Appraisal IV 7/73 1 3 3 7/07/73 Appraisal V 8/73 1 1 1 9/14/73 Supervision I 11/73 1/2 1 1/2 n.a. Supervision II 2/74 2/5 1 2/5 4/12/74 Supervision III 12/74 1/2 1 1/2 n.a. Supervision IV 1/75 1/2 1 1/2 n.a. Supervision V 10/76 1/2 1 1/2 10/04/76 CURRENCY EXCHANGE RATES Appraisal: Spring 1973 US$l = 230.0 Completion: Spring 1976 US$1 = CFAF 235.12 Average during Implementation US$1 = CFAF 230.0   - iii - PROJECT COMPLETION REPORT SENEGAL - DAKARMARINE ENGINEERING PROJECT (LOAN S 3-SE) HIGHLIGHTS In the Fall of 1971 the Bank was approached by the Senegalese Government to participate in the financing of a dry dock project for ship repair which could comprise: (1) construction of dry docks for repairing ships up to 500,000 dwt; (2) construction of the breakwater, two repair berths and ancillary buildings; (3) dredging of the required basin and entrance channel. The project was estimated to cost US$100 million in 1973 terms. The Bank perceived substantial risks in the project, as proposed, and recommended further studies to establish its feasibility with the dry dock project to be considered in a second phase based on satisfactory results of these studies (paras. 1.01, 1.02, 1.05 and 1.06). The Project under review was an Engineering Project to study the feasibility of the proposed dry dock project and consisted of three categories of studies: (a) technical studies, to determine: the geological, physical and environmental soundness of the proposed site and layout and the optimal scope and size of dry docks which would be technically feasible as a basis for developing sound capital cost estimates; (b) market and economic studies, to develop financial and economic forecasts for the dry dock project based on the supply-demand situation in the shiprepair industry and to establish its financial and economic feasibility; and (c) manpower and training studies, to determine the need for personnel as well as the required qualifications for management and operating personnel for the proposed dry dock project (para. 3.04). Implementation of the studies under the Dakarmarine Engineering Project was satisfactory, mainly as a result of the relatively stable and experienced management of Dakarmarine assisted by the technical sponsor, Beliard Murdock (paras. 2.03 and 3.09). The total cost of the studies (including Dakarmarine's operating expenditure with respect to supervision and coordination of the studies) was US$2.52 million, 18% below appraisal estimates, due to cancellation of some components in the technical studies, i.e., design work and preparation of tender documents (para. 3.10); the cancellation resulted from the conclusion by the Bank that the proposed dry dock project was not economically or financially viable. The Government never fully accepted the Bank's views and con- tinued studying alternative proposals, some of which were subsequently discussed with the Bank and IFC. One of these eventually led to the decision by Senegal to order a 60,000 dwt floating dock supplied and financed under bilateral assistance and operating since 18 months.  - iv - The Bank loan was disbursed to an amount of US$0.49 million, of which US$0.40 million was to finance the studies and US$0.09 million to finance the interest on Bank loan during the implementation (paras. 3.12-3.13). The Engineering Project was completed about six months behind schedule, due to a substantial change in the shiprepair market which required the carrying out of additional market and economic studies (para. 3.08). For analyzing the Engineering Project's experience, the following points are highlighted in the PCR: - Through the Engineering Project, the Bank assisted the Senegalese Government in its negotiations with the private sponsors on the conditions of their participation in the proposed dry dock project aiming at an equitable sharing of risks and benefits between the Government and the foreign sponsors (paras. 3.01 and 3.02). - The Bank's experience in the subsector of maintenance and repair of very large ships was limited, but sufficient to select and supervise experienced and competent consultants for execution of the studies deemed necessary to establish the feasibility of the dry dock project and to reduce the risks foreseen in its implementation and operation (paras. 1.03, 2.04, 3.01, 3.05 and 3.06). - During the execution of the studies, several,developments took place in the international large vessel sector, which reduced the chances for the commercial viability of the proposed dry dock project (paras. 4.01-4.03). Those devel- opments had already been identified as potential risks during the Balk's appraisal. By recommending mui:e de,ailed studies prior to investing in a large capital intensive project, the Bank prevented Senegal from launching an industrial venture which would have resulted in serious financial and economic consequences for Senegal. The Bank's views did not prevent, however, the Government from pursuing the idea of building some shiprepair facilities and from ordering a 60,000 dwt floating dock (paras. 5.01-5.03 and 6.04)  PROJECT COMPLETION REPORT SENEGAL - DAKARMARINE ENGINEERING PROJECT (LOAN S 3-SE) I. INTRODUCTION 1.01 For the purpose of this project completion report, we need to distinguish between two projects: (i) the Engineering Project, which refers to the execution of the studies required to establish the feasibility of a dry dock project proposed by the Government of Senegal and is the object of this completion report; and (ii) the dry dock project for ship repair, which was proposed to comprise: (a) construction of two dry docks, one for repairing ships up to 300,000 dwt and another for ships up to 500,000 dwt; (b) construction of the breakwater and two repair berths; (c) the dredging of the required basin and entrance channel; and (d) necessary buildings. The Bank provided a loan of US$0.6 million for the Engineering Project. 1.02 The dry dock project, then estimated to cost US$100 million in 1973 terms, was one of the main industrial projects considered by the Senegalese Government in the early 1970's. In the fall of 1971 the Government of Senegal approached several financial institutions to consider financial assistance for the project and asked the Bank to take the lead in this respect. At the same time, the Bank was presented with a similar project by the Malagasy Government. The Senegalese project was to be located in Dakar, 15 km East of the Dakar port, with existing small ship repair facilities, while the Malagasy project was to be placed into Narinda Bay, an undeveloped area in the Northwest of Madagascar. 1.03 During the spring and summer of 1972, Bank staff carried out an inten- sive study, assisted by two marine consulting firms, Shipping Consultants of Oslo, which conducted a market survey and Shipping Research Services, also of Oslo, which looked into the technical and operational aspects of the two dry dock projects. The findings of the study suggested that (i) a high risk was associated with this type of project, and (ii) if both projects were to proceed at the same time, each would create market difficulties for the other. Dakar was in a better position because: it had technical sponsors, Beliard Murdoch I/ and SCAC, 2/ who were committed to the project; it had an excellent geographic location with some experience in shiprepair business; and some of the on-shore industrial and social infrastructure was already available. Upon completion of the preappraisal of both projects in September 1972 it was therefore decided to consider only the Dakar project. 1.04 Under the proposed dry dock project, a Government financed infra- structure company would construct and own the dry docks, breakwater and other infrastructure, and lease these facilities to a second superstructure company, to be owned and financed largely by the private partners and experienced ship repair firms who would be responsible for providing the superstructure (cranes, equipment, wareho'ses) and for operation of the dry docks. The Bank 1/ A private Belgian group owning five shipyards in Belgium and France, who was seeking to set up a center for the repair of supertankers and ore carriers. The existing facilities of the group could only accomodate tankers/carriers up to 300,000 DWT. 2/ Societe Commerciale d'Affretement et de Combustibles, a French private company, owner of a small shipyard at Dakar, who had similar interests to Beliard Murdoch.  - 2 - considered this enclave character of the project as highly risky for the Government, unless appropriate arrangements were made to share the project's risks between the two companies. 1.05 The Bank also foresaw a high degree of market-, technical, and resulting financial risk for the Dakar dry dock project. The market risk combined with uncertain technical conditions 3/, which could substantially increase capital costs, and possible problems with productivity, could jeopardize the project's viability. Failure of such a large investment would represent a serious burden for the Senegalese economy. 1.06 The Bank recommended phasing of the project. The initial phase would comprise required studies as well as minor investments to be made almost immediately in order to rehabilitate and expand the existing small ship repair facilities. The Bank would assist in financing the required studies. The performance of the existing facilities would demonstrate the ability of Dakar to build up clientele for ship maintenance and repair, and would enable prospective investors to see whether the existing yard could build up a good reputation. Only after completion of the studies, a decision would be made on whether to proceed. The next phase would involve execution of the large dry dock project, after the required studies would have (i) demonstrated its market potential, (ii) provided detailed capital cost estimates, and (iii) established the project's feasibility; and after new financial arrangements, acceptable to the Bank, had been negotiated. II. DAKARMARINE 4/ - THE COMPANY A. Ownership 2.01 Dakarmarine was founded by the Government of Senegal, in 1971, to carry out the pre-feasibility studies for and to promote the dry dock project. Originally, the Company was established with a capital of CFAF 100 million (US$0.44 million) of which 90% was provided by the Government of Senegal, 5% by Beliard Murdoch and the remaining 5% by SCAC. Practically all of the original capital was used for pre-feasibility study work undertaken prior to the Bank's involvement. 2.02 To participate in the financing of the required studies proposed by the Bank, Dakarmarine increased its share capital to CFAF 210 million (US$0.9 million). The Senegalese Government provided CFAF 16 million (US$0.07 million) of the capital increase, with the balance taken up by Beliard Murdoch, SCAC, SENEMATEL (a subsidiary of a French industrial group), FINCANTIERI (a subsi- diary of the Italian group IRI), A.G. Weser (a German shipbuilding and repair facility and subsidiary of a German industrial group), two Senegalese Banks (Union Senegalaise de Banque and the Banque Internationale pour le Commerce et l'Industrie au Senegal) and the European Investment Bank (EIB). As a result, the Government's shareholding decreased to about 51%. 3/ The uncertainty related to the soil conditions which could significantly affect project design. 4/ Societe pour le Developpement de l'Infrastructure de Chantiers Maritimes.  - 3 - Subsequently, EIB transferred its share of the equity to the Government as a grant. The shareholding structure of Dakarmarine at inception, at appraisal, and subsequently is shown in the following table. SENEGAL - Shareholders of Dakarmarine (in CFAF million) Share- As Of Addi- holdings at December Original % tional appraisal % 31, 1976 % Government 90 90 16 106 50.5 136 64.8 Beliard Murdoch 5 5 15 20 9.5 20 9.5 SCAC 5 5 15 20 9.5 20 9.5 SENEMATEL - 10 10 4.8 10 4.8 A.G. WESER - 10 10 4.8 10 4.8 FINCANTIERI - 10 10 4.8 10 4.8 USB - 2 2 0.9 2 0.9 BICIS - 2 2 0.9 2 0.9 EIB - 30 30 14.3 - - 100 100 110 210 100 210 100 B. Organization and Management 2.03 Until the Bank's Engineering Loan was made, Dakarmarine had little operating staff. Its Chairman and Chief Executive was Mr. Issa Diop, a Senegalese with extensive administrative experience and the head of several Senegalese corporations. The technical director responsible for project promotion and execution of the studies, was Mr. Dinechin, a dynamic expatriate engineer who had been associated with the project since its inception. Under the financing plan for the Engineering Project, funds were included for the employment of two engineers, a financial and accounting officer, and the necessary secretarial and accounting staff, as well as for offices and communication facilities required for coordination of the studies. C. Technical and Financial Support 2.04 The original feasibility report presented to the Bank in November 1971 was prepared by Beliard Murdoch and its consultants. The Bank suggested that it was essential that the dry dock project included sound technical and commercial assistance to ensure a full service capability competitive with the European yards, which was deemed to be critical. Beliard Murdoch, the technical advisor and main sponsor, was capable of providing technical assistance and operating the dry dock project. Further, the Bank proposed to Dakarmarine that it also associate itself with other financial or industrial firms who would be able to help provide the financial resources needed for the  - 4 - ultimate realization of the dry dock project. This prompted participation of the above mentioned firms in the company's shareholdings (para 2.02). III. DESCRIPTION AND IMPLEMENTATION OF THE ENGINEERING PROJECT A. Background 3.01 In Spring 1973, following the Bank's proposal to the Senegalese Government for a phased approach (para 1.06), the Bank held meetings with the Government, private sponsors and co-lenders such as FAC, EIB and Fond Europeen de Developpement (FED). The Bank decided to participate in financing the studies because of its leadership in organizing and supervising earlier technical work, its objective of ensuring the quality of the studies, as well as its desire to help secure more equitable risks-and-rewards sharing arrangements between the Government and the private partners. Preliminary agreement was reached on the estimated cost of the necessary studies (U.S. $3.09 million equivalent), the scope and terms of reference for the Engineering Project, the financing plan (including guaranteed reimbursement) and the disbursement arrangements. These arrangements were confirmed during negotiations which took place in Washington from August 6 to 10, 1973. The following points were agreed: (i) A Bank loan of US$600,000 would be provided to Dakarmarine for partial financing of the studies; (ii) Beliard Murdoch would guarantee, jointly and severally with the Government of Senegal, for repayment of the Bank loan, in case the dry dock repair project did not go forward; (iii) Equitable financial arrangements between the Government and the sponsors on the dry dock project were necessary including provision of a significant share of the capital by private sponsors; and (iv) Arrangements for adequate technical backing by private sponsors would be worked out. 3.02 It was also agreed, prior to negotiations, that the existing shiprepair facilities at Dakar would be expanded and improved to serve ships up to 30,000 dwt and be operated during the study execution to build experienced manpower, a client base and a good reputation. The success of this expansion and operation was to be a condition for Bank participation in the financing of the large dry dock project. B. Objectives, Scope and Description 3.03 The objectives of the studies were to: (i) assess the market for ship repair in order to reduce the market risk through the formulation of an appropriate scope for the ship repair facilities to be built in Dakar;  - 5 - (ii) provide technical and design information, such as exact location, type of foundation, size of dry dock and scope of necessary maritime infrastructure leading to a reliable capital cost estimate for the ship repair facilities; (iii) establish the feasibility of the dry dock project, based on (i) and (ii) above; and (iv) suggest more equitable arrangements to share the risk and rewards between the infrastructure and superstructure companies. Through this Engineering Project, the Bank would have an opportunity to assist the Government in its negotiations with the private sponsors on the conditions for their participation, technical assistance and operations of the proposed ship repair facilities. 3.04 The studies were divided into three components: (i) Technical Studies included drillings and ultrasound tests necessary to investigate the geological and physical characteristics of the soil to determine the possible site, layout and dimensions of the dry dock, repair yard and breakwater. These studies also included the preliminary design of the docks and yard, based on the optimal scope and size of dry docks resulting from the economic study. Detailed cost estimates were to be calculated on the basis of the selected project scope; (ii) Market and Economic Studies included a survey of the world fleet of large vessels and demand for repair facilities, a forecast of the evolution of the world fleet and traiffic likely to pass the West African region to determine the likely demand for services at the proposed dry dock as well as an investigation of actual and planned dock capacity to determine the supply of competitive services. Based on the above, financial and economic forecasts were to be developed for the dry dock project; and (iii) Manpower Development and Training Requirement Studies included determination of the requirements for management and operational personnel as well as the required qualifications. Technical assistance for management and coordination of these studies was provided by Beliard Murdoch throughout the execution of the Project. C. Use and Performance of Consultants 3.05 The procedures followed for the selection of consultants were acceptable to the Bank.5/ The main consultant for the technical studies was J.C. DeWeger International, B.V., of Holland, who also coordinated and 5/ At that time there were no published guidelines on the use of Consultants.  - 6 - supervised other engineering firms (drilling, hydrographic studies) and prepared the preliminary design of the layout and structure of the ship repair facilities. Drillings were carried out by INTRAFOR-COFOR of France in association with a Senegalese company SASIF (Societe Africine de Sondage, Injections et Forages). Hydrographic studies were carried out by Delft Hydraulic Laboratory (DHL) of Holland, acting as a subcontractor to DeWeger. DHL covered the mathematical and physical models to determine the most effective location of the dry dock and the shape of the breakwater. 3.06 The main consultant in the market and economic studies was SEMA of France, which also coordinated the work of Lloyds Shipping Company of England and Shipping Consultants of Norway. Lloyds investigated frequency and duration of vessels staying for maintenance and repair, including frequency of vessel accidents and resulting repair requirements. Shipping Consultants prepared the forecast for the evolution of the World Fleet and the corresponding traffic relevant to Dakar. Input of information from one consultant to another about the optimum size and number of dock and quay facilities based on the market situation was not produced in time and resulted in a delay of one month of the report on yard layout, preliminary drawings and the detailed cost estimates. Investigations on the necessary training and recruitment for the management and operating personnels of the ship repair project were done by EUREQUIP of France, under the supervision and coordination of SEMA. 3.07 The technical studies were satisfactory and established that the soil conditions at the selected site were suitable for the construction of a dry dock. The Bank considered the conclusions of the market and economic reports to be optimistic; the impact on the dry dock project's viability of (i) the possibility of the widening and reopening of the Suez Canal, (ii) the constructions of new dry dock projects in several parts of the world, notably in OPEC countries, and (iii) most importantly, the low growth in oil con- sumption with the resulting stagnation of the world tanker fleet, was considered underestimated. The training and recruitment studies were judged to be satisfactory in their content. D. Implementation of Engineering Project 3.08 Drilling at the proposed site was started as early as June 1973 based on a contract between Dakarmarine and INTRAFOR-COFOR and SASIF, signed in July 1973, prior to the presentation of the Bank loan to the Board. The Bank agreed to financing initial payments of up to US$25,000 under the contract retroactively. The technical studies were completed by DeWeger within schedule and submitted to the Bank in September 1974, whereas the market and economic studies were submitted in April 1975, six months behind schedule due to requests for additional information in the light of a changing market situation. This also delayed the final submission of the manpower and training studies which were combined with the market studies in a single report. The realized schedule, as compared to appraisal projections, is shown in the following table. Recruitment of staff under the Engineering Project (para 2.03) proceeded satisfactorily.  - 7 - SENEGAL - Dakarmarine Engineering Project Implementation Schedule Starting Month Ending Month Appraisal Actual Appraisal Actual Technical Studies June '73 June '73 Aug. '74 Sept. '74 a/ Economic Studies Oct. '73 Oct. '73 Oct. '74 Apr. '75 Manpower and Training Requirement Studies Oct. '73 Oct. '73 Oct. '74 Apr. '75 a/ Only reflects the first stage. A second stage dealing with design and tender document preparation was subsequently cancelled. 3.09 Beliard Murdoch was effective in its role as Project promotor, coordinator and the firm providing technical assistance and facilitated Project implementation. It was responsible for relations with the co-lenders and was effective in gaining their approvals etc. expeditiously. E. Project Cost, Financing and Disbursement Project Cost 3.10 The total financing required for the Project was estimated at CFAF 710 million (US$3.09 million) including: (i) an estimated cost of the studies of CFAF 540 million (US$2.36 million), (ii) CFAF 75 million (US$0.31 million) for local expenses of the studies and operating cost of Dakarmarine to coordinate the studies and (iii) a provision of CFAF 95 million (US$0.42 million) for price escalation and contingencies. The actual costs of the studies amounted to CFAF 475 million (US$2.07 million) or about 75% of the original estimate, including contingencies. Co-lenders had concluded based on the studies and their own assessment that the dry dock project was not financially and economically viable and therefore there was no need to go ahead with design and tender document preparation included in the original scope of the Engineering Project. This resulted in a cost underrun in the technical studies. The actual cost of the economic studies was higher than the appraisal estimate due to the additional work done in response to the changing market condition. The detailed Project costs are shown in Annex 1 and summarized in the following table.  - 8 - SENEGAL -Dakarmarine Engineering Project Project Cost (Appraisal: million, constant 1973 terms) (Actual: million, current terms) Appraisal Estimate Actual CFAF US$ a/ CFAF US$ b/ Studies 540 2.36 475 2.07 Operating expenditures 75 .31 105 .45 (Project Coordination Expenses) Sub-total 615 2.67 580 2.52 Escalation and Contingencies 95 .42 - - Total Costs 710 3.09 580 2.52 a/ Exchange rate: US$1 =CFAF 230 b/ Average exchange rate during implementation: US$1 = CFAF 230 Financing 3.11 The co-lenders financed 100% of the foreign exchange cost of the studies, whereas Dakarmarine financed, out of its additional equity (para 2.02), the local cost, as well as its own operating and coordination expenses. The appraised and actual financing plan are contrasted below: SENEGAL - Dakarmarine Engineering Project Financing Plan (million, current terms) Appraisal Actual CFAF US$ % CFAF US$ % Equity: Dakarmarine 110 .49 15 110 .48 19 Loan: EIB 240 1.04 34 189 .82 31 FAC 240 1.04 34 189 .82 31 IBRD 120 0.52 17 113 .49 19 710 3.09 100 601 2.61 100 3.12 The Bank loan financed 92 million CFAF (US$0.40 million) of the cost of the studies, including US$25,000 retroactively as originally envisioned, and 21 million CFAF (US$0.09 million) of interest charges during the two years of implementation.  -9- Disbursement 3.13 Disbursement was arranged based on an agreed "lenders protocol", whereby all lenders received evidence of expenditure from Dakarmarine. US$.49 million of the Bank's loan was disbursed and $.II million cancelled. The first disbursement was one quarter behind the appraisal schedule, due to delayed effectiveness, and the last disbursement of US$.08 million was made in the first quarter of 1976 or about two quarters behind schedule, mainly due to the delay in the execution of the economic study. The disbursement schedule for the Bank loan is shown in Annex 2. 3.14 The closing date of the loan was extended by 18 months, from the originally agreed date of March 6, 1976 to September 6, 1977, mainly because the Senegalese Government was still considering a reformulated ship repair project and reappraising the ship repair market (para 5.01). IV. MARKET FOR SHIP MAINTENANCE AND REPAIR-FACILITIES 4.01 Demand: Dakarmarine's dry dock project was originally aimed at the construction of two dry docks for repair and maintenance of large oil tankers and ore carriers of 100,000 dwt and up to 300,000 dwt (VLC's), with a capability of handling vessels up to 500,000 dwt. During 1968-1973, the growth of the vessels with capacity between 100,000 - 300,000 dwt had been rapid, with over 200 VLC's in use in 1973. During the time of appraisal, the growth of these large vessels was projected to continue to be high leading to an estimated 600 VLC's in service in 1975. However, a stagnation in world oil consumption and imports as a result of drastic fuel price increases starting in late 1973, the reopening and widening of the Suez Canal in 1975, and the construction of the SUMED pipeline in Egypt in the mid 1970s led to a stagnation and even a partial mothballing of VLC fleets. Moreover, new technology in tanker repair and maintenance also contributed further to drastically reducing the demand for repair facilities. Because of these developments, and the corresponding reduction in demand for ship repair facilities, co-lenders asked Dakarmarine in Spring 1975 to investigate the possibility of seeking a "captive" market, i.e. of obtaining firm assurance (contracts) from oil producing countries to send their fleets to Dakar for repair. This measure was intended to reduce the substantially increased market risk; without it the dry dock project was perceived to be unacceptably risky. 4.02 Supply: A report on "Repairing and Dry Docking Large Carriers" by Drewry 6/, of July 1974, suggested that a potential over-supply in dry dock facilities would result if only 12 of the 30 large carrier repair docks, planned at that time, materialized. At the same time, some OPEC countries who had been approached by Senegal to consider investing in the proposed dry dock project and commit repair of their tanker fleets to the Dakarmarine project were starting ship repair projects of their own, i.e. in Dubai, Bahrain and Iran, and therefore showed no interest. Japanese yard owners, because of empty order books, converted existing yards for VLC construction to repair facilities. Moreover, Dakar would have to compete against yards in Europe and Japan which had definite advantages over Dakar through the ready availability 6/ H.P. Drewry, Shipping Consultants Ltd. of London.  - 10 - of repair materials, the ease of obtaining sophisticated parts, the availability of highly qualified labor forces and an established reputation for expertise, reliability and speed. 4.03 Demand-Supply Balance: The residual demand for dry docking facilities, which had been projected mainly based on the fast growing demand of VLC's had turned out to be non-existent: on the contrary, the stagnant number of VLC's coupled with several new dry dock facilities to meet the earlier optimistic forecast had created an oversupply situation in the repair market. V. NEW PROJECT CONCEPT IN LIGHT OF MARKET DECLINE 5.01 In spite of the developing oversupply situation in repair facilities for VLC's, the Senegalese Government continued to consider a VLC repair project.7/ In late 1977, the President of Senegal requested the Bank to evaluate a reappraisal of the ship repair market and to consider another project concept, considerably scaled down and reformulated in response to a revised market study. The Government also requested the Bank to finance the final engineering studies necessary for the new scaled-down project. The market study prepared by A & P Appledore, a shipping consultant of England (published in August 1977 and presented to the Bank in April 1978), had been financed by the Senegalese Government and suggested existence of demand for ship repair facilities in the Dakar region, capable of receiving ships up to 60,000 dwt. The project cost for the shipyard itself, its docks and its equipment was estimated at US$60 million in 1977 prices, the rate of return at around 15-20%. The project was proposed to be implemented in two phases: a floating dock capable of taking ships up to around 30,000 dwt in the first phase, followed by a 60,000 dwt dock in the second phase. 5.02 Since the financial viability of the project would still hinge on the establishment of a sufficient market share, the Bank was in favor of first establishing Dakarmarine's ability as a competitive ship repairer in Dakar's existing facilities. The Bank again recommended a phased approach. The first phase would be upgrading and expanding the existing facilities, serving ships up to 30,000 dwt and establishing training programs for marketing management and technical operation of the project. The acquisition of a facility to handle vessels exceeding the capacity of the existing dry dock, was suggested to go ahead only in a second phase when the operations were proven to be efficient and financially viable and the future market was assured. 5.03 Nevertheless, the Senegalese Government went ahead with the order of a 60,000 dwt floating dock assisted by a bilateral aid program. The dock, was installed in the port of Dakar in 1980, and- began operation on March 18, 1981. At this point, it would be difficult to make a fair judgment on its performance since the project has been in operation for not even two years. 7/ Several alternative project scopes were considered by Dakarmarine and its consultants subsequently, but none of them was considered feasible by the colenders.  - 11 - VI. BANK ROLE AND CONCLUSIONS 6.01 The Engineering Loan for this Project was the Bank's first involvement in the large scale ship repair subsector. The Bank obtained significant inputs of know-how early on by making use of experienced consultants in the field, such as Shipping Consultants of Oslo (Norway) and Shipping Research Institute (Norway). This enabled the Bank subsequently to take a decisive lead in project preparation, coordination of lenders, the identification of some equity partners and the selection of consultants. 6.02 The Bank played a very valuable role in the preparation of the project. It recommended strongly that the large dry dock project, although potentially viable, might face very serious risks which would have to be reduced to acceptable levels before the dry dock project could be supported. It prompted the participation of several industrial and financial institutions in Dakarmarine's equity. It also motivated the development and acceptance of an equitable formula for sharing risks and benefits between foreign project sponsors and the Senegalese Government. The Bank had foreseen the potential risks of the proposed dry dock project. Since Beliard Murdoch, the private sponsor, was to guarantee repayment of the Bank's engineering credit (para 3.01), in case the project would not materialize, legal documents stipulated that Beliard Murdoch was to be liable for debt service as a primary obligor jointly and severally with the Government and Dakarmarine. When the foreseen ship repair project, in fact, did not materialize, Dakarmarine was billed by the Bank for repayment of the credit with copies to all guarantors (Government and Beliard Murdoch) as per usual procedure; the Government/Dakarmarine are repaying the Bank loan. 6.03 During the execution of studies for the dry dock project, several developments took place in the international large vessel sector which reduced chances for the commercial viability of the proposed dry dock project below acceptable limits. It was precisely those developments, which had already been identified as potential risks for the project as part of the Bank's appraisal. Thus, through its recommendation of proceeding with detailed market, engineering, financial, and economic studies prior to a full commitment to the large capital intensive project, the Bank prevented Senegal from launching an industrial venture which would have resulted in serious financial and economic consequences. Through brief but relatively frequent supervision missions the Bank was able to maintain an effective dialogue with the Government and Dakarmarine. 6.04 In the subsequent dialogue with the Government on potential ship repair facilities in Dakar, the Bank did point repeatedly to the oversupply in the ship repair market for vessel sizes above 30,000 dwt, and proposed instead that Senegal concentrate on the rehabilitation and improvement of the existing repair facilities in the port of Dakar for vessels up to 30,000 tons which would enable the service and repair, predominantly of local and coastal vessels. However, the Bank's proposal was not accepted; the Government proceeded with the investment in a floating dock installation for vessels up to 60,000 dwt (para 5.03).  ANNEX 1 - 12 - SENEGAL - DAKARNARINE ENGINEERING PROJECT PROJECT COST (million) Appraisal Estimate Actual (Constant 1973 terms) (Current terms) CFAF US$ CFAF US$ A. Technical Studies Geotechnic 120 .52 125 .54 Hydrographic, Civil Works & Electromechanical Studies 360 1.57 243 1.06 Machine Shops 4 .02 - - Slop Stations 10 .04 16 0.07 494 2.15 384 1.67 B. Economic & Other Studies Market & Feasibility Studies 31 .14 91 .39 Training 15 .07 - - 46 .21 91 .39 C. Dakarmarine & Project Coordination Expenses 75 .31 105 .46 Base Cost 615 2.67 580 2.52 Escalation & Contingencies 95 .42 - - Total Cost 710 3.09 580 a/2.52 a/ Excluding interest during implementation. Industry Department Division III July 1982  ANNEX 2 - 13 - SENTEGAL - DAKARMARINE ENGINEERING PROJECT DISBURSEMENT OF BANK LOAN S-3SE 1/ (in '000 US$) President's Report Actual Quarterly Cumulative Quarterly Cumulative Calendar 1973 4th Quarter 90 90 - Calendar 1974 1st qtr. 114 204 1.5 1.5 2nd qtr. 115 319 148.4 149.9 3rd qtr. 107 426 65.9 215.8 4th qtr. 85 511 29.8 245.6 Calendar 1975 1st qtr. 69 580 41.5 287.1 2nd qtr. - 580 43.7 330.8 3rd qtr. 20 600 83.5 414.3 4th qtr. - 600 - 414.3 Calendar 1976 1st qtr. 600 77.8 492.1 1/ A total of $492,050.00 was disbursed and $107,950.00 cancelled. Industry Department Division III July 1982  ANNEX 3 - 14- SENEGAL - DAKARMARINE ENGINEERING PROJECT BORROWER'S COMMENTS A. Translation of technical part of Mr. D. Diallo's 1/ letter of October 1, 1982 (1) The new draft that we have carefully reviewed does not call for any particular comment from our part. However, we would like to provide an additional information which would clarify the EEC's role in the financing of the study of the dry dock project. (2) The role of EEC in this project has been two fold: (2a) EIB bought FCFA 30,000,000 of shares under the condition that if the project was not implemented, the government would buy the EIB's shares back. Hence, Senegalese Government became shareholder since the initial project was abandoned. (2b) EIB also invested FCFA 188,865,956 in risk capital expecting the results of the dry dock study to define the final purpose of these funds (consolidated capital or subsidy). After the Senegalese Government decided to change the project scope, the EEC decided to transfer the above amount to the government as a subsidy included in the 5th EDF. B. Translation of the telex of the Minister of Industrial and Manual trade Development - signed Cheik Hamidou Kane Following your letter dated August 11, 1982 I inform you that I agree on the completion report regarding the DAKARMARINE Project except for the comments forwarded to you by Dakar Marine in their letter of October 1st (above). C. Translation of the Telex of the Minister of Plan and Cooperation - Signed Mamoudou Toure We agree with comments made by Dakarmarine on the French version of the draft report. These comments were sent to the Rank in a letter from Dakarmarine, dated May 17, 1982. 1/ Finance and Administrative Director and Acting President of Dakarmarine at the time.