Peru - SIDERPERU Technical Assistance Project

Documenl of The World Bank FOR OFFICIAL USE ONLY Report No. 7079 PROJECT COMPLETION RErORT PERU SIDERPERU TECHNICAL ASSISTANCE PROJECT (LOAN S19-PE) January 5, 1988 Industry Departrent This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency unit - Sol (SI.) GOVERNMENT OF PERU FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES ABBREVIATIONS COFIDE - Compania Financiera de Desarrollo DR - Direct Reduction Process for the production of sponge iron used as raw material in steelmaking EAF - Electric Arc Furnace LD - Linz Donawitz (Basic Oxygen Furnace) SIDERPERU - EmDress Siderurgica del Peru SLRN - Stelco-Lurgi - Republic National (a Coal-based DR process) tpy - Metric tons per year.  FOM OFMCIAL USE ONLY THE WORLD BANK Wdshingtni. DC 20433 USA January 5, 1988 IEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Peru - Siderperu Technical Assistance Project (Loan S-19-PE) Attached, for information, is a copy of report entitled "Project Completion Report on Peru - Siderperu Technical A. -tance Project (Loan S19-PE)" prepared by the Latin America and the Caribbean Regional Office. Further evaluation of this project by the Operations Evaluation Department has not been made. Attachment 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 discobsed without World Bank au!thorization.  M Ol(ICIAL US ONLY PROJECT COMPLETION REPORT PERU - SIDERPERU TECHNICAL ASSISTANCE PROJECT (LOAN S-19-PE) TABLE OF CONTENTS Page No. PREFACE .......... **** ........j........ i BASIC DATA SHEET .........*.. .... i HIGHLIGHTS .................. ... I. INTRODUCTION ........................... 1 II. PROJECT BACKGROUND .......................................... 1 A. Project Origin, Appraisal and Loan Approval ............. 1 B. Project Objectives and Description ...................... 2 III. PROJECT IMPLEMENTATION AND MANAGEMENT ....................... 3 A. Achievement of Project Objectives ....................... 3 B. Project Management ............................... . 3 C. Implementation Schedule ............... .................. 6 D. Performance of Consultants 6............................. 6 E. Disbursements ........ ................................. 7 IV. CONCLUSIONS ....... 7 A. Overall Assessment ...7....... .................... ... 7 B. Lessons Learned 7 BORROWER'S PROJECT COMPLETION REPORT .............................. 10- 24 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 COKPLETION REPORT PERU - SIDERPERU TECHNICAL ASSISTANCE PROJECT (LOAN S-19-PE) PIREPACE Loan 5-19-PR for the SIDERPZRU Steel Company, in the aount of US$5.0 million, was signed on Deceuber 15, 1980, and becam *ffective April 16, 1981. After one extension of the cloaing date, the Government of Peru requested on OLtob4r 31, 1985, that the undiabursed portlon of the loan (US$3.4 million) be cancelled. The loan was closed on December 9, 1985. The original objective of the loan had been to strengthen SIDERPERU's project execution and plant operation capability to enable it to install iuccesafully and manage a two-stage 400,000 tpy expansion of the Chimbote steel mill. After completion of a technical diagnostic study in August 1981, (financed under the loan) it was deterained that prior to embarking on the expansion project, the plant had to undergo a full rehabilitation project. In Oct-ber 1982, SIDERPERU agreed to postpone the expansion program and concentrate on the rehabilitation effort and the project scope from expansion to rehabilitation was formally approved by the Bank on April 12, 1983; The Project Completion Report has been prepared by the Industry Department based on a draft report from SIDERPERU, information In project files and knowledge of staff in the Industry Department who were associated with this project. A Bank mission visited Peru in October 1986 for the purpose of preparing this report. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED), but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft report to Government and the Borrower for comments. However, no comments were received.  - ii - PROJECT COMPLETION REPORT PERU - SIDERPERU TECHNICAL ASSISTANCE PROJECT (LOAN S-19-PE) BASIC DATA SHEET Project Data Loan Amount (US$ million) Original Disbursed Cancelled Repaid Outstanding 5.0 1.6 3.4 1.6 Cumulative Disbursements (US$ million) Bank FY: 1981 1982 1983 1984 Appraisal Estimate 1.2 3.1 4.7 5.0 Actual - 0.4 1.3 1.4 Project Appraisal February 1980 Board Approval July 1980 Loan Signing December 1980 Loan Effectiveness April 1981 Loan Closing December 1985 Completion N/A MISSION DATA No. of No. of Report Mission Month/Year Days Persons Date Identification 09/79 09/04/79 Preappraisal 02/80 5 3 02/19/80 Appraisal 03/80 & 06/80 8 2 07/14/80 Supervision I 04/81 5 2 07/29/81 Supervision II 06/81 5 2 07/29/81 Supervision III 10/81 5 3 11/11/81 Supervision :V 03/82 10 2 04/16/82 Supervision V 05/82 5 2 07/12/82 Supervision VI 10/82 4 1 10/28/82 Supervision VII 01/83 17 2 02/03/83 Supervision VIII 03/83 4 1 04/04/83 Supervision IX 04/83a/ 3 5 05/04/83 Supervision X 04/83 11 3 06/10/83 Supervision XI 09/83 6 3 09/30/83 Supervision XII 02/84 5 1 10/18/83 Supervision XIII 06/84a/ 3 3 07/02/84 Supervision XIV 04/85 6 2 07/08/85 PCR 10/86 5 2 10/31/86 a/ Visit by Peruvian delegation and consultants.  - ili - PROJECT COMPLETION REPORT PERU - SIDERPERU TECHNICAL ASSISTANCE PkOJECT (LOAN S-19-PE) HIGHLIGHTS The project was conceived as technical assistance to SIDERPERU to strengthen the company's project management capabilities and to implement successfully and manage its expanded facilities (para- 3.01). With this objective, the SIDERPERU Technical Assistance Project was approved in July 1980. SIDERPERU's Chimbote plant, located 460 km north of Lima, was at that time the only integrated steel plant in Peru, accounting for 90X of the steelmaking capacity in the country. Although the plant's crude steel capacity was rated at 500,000 tons per year, its rolling capacity was in excess of 700,000 tpy and the company had relied on imported slabs and billets to feed its rolling mills. To eliminate this imbalance and to cope with an apparent growth in steel demand in the country (which at the time had one of the lowest per capita consumptions in Latin America) the company had begun implementing a balancing and expansion program. Shortly after Board approval of the loan, the new Government that took office in July 1980, requested a full review of the expansion program. Before agreeing to sign the loan, it also questioned the quality of existing operations and whether the expansion being planned would still be viable with tariffs lower than those prevailing at the time (para. 3.02). In response, the Bank agreed to include in the project scope a review of the Stage I expansion and a diagnostic study of the plant and its existing operations, including market and sector issues. On these premises, the loan was signed in December 1980 and made effective in April of the following year after nine and a half months of delay (para. 3.03). in June 1981, a Belgian consulting engineering firm associated with an operating steel company was selected to carry out the diagnostic study. The study, which was completed in August 1981, revealed that the plant facilities were in such poor condition that they would require substantial rehabilitation (para. 3.04). In addition, poor maintenance practices resulting mainly from the compan,"s lack of funds had aggravated the situation during the period 1980/81. It was therefore decided - with full agreement of the Bank - to restore the company's operating efficiency and improve its financial position prior to embarking on the expansion project. In October 1981, SIDERPERU agreed to postpone the expansion project and to undertake a full feasibility study (also including bidding doctments and technical specifications) of the rehabilitation project (para. 3.06). That confirmed SIDERPERU's intent to change the project objective and physical scope from expansion to rehabilitation.  - iv - The feasibility study was completed during 1982. In parallel, a management diagnostic study was carried out and some of its recommendations implemented in early 1983. By then, however, the company's financial position had seriously deteriorated and declining steel demand made the full rehabilitation project, estimated at US$170 million, no longer viable (para. 3.09). After a number of attempts to reduce the scope of the project to fit budget and market prospects, a minimum sCope estimated at US$38 million was agreed and a project manager was selocted in June 1985. SIDERPERU's Board, with a new national Government coming into office. postponed a decision to approve contract negotiations with the selected consulting firm. Subsequently, the new Board appointed by the incoming Government refused to approve the selection on the grounds that it lacked sufficient information to act. After one extension of the loan closing date in June 1985, the Government requested cancellation of the undisbursed balance of the loan in October 1985 (para. 3.14). The Bank cancelled the loan on December 9, 1985, with US$3.4 million still undisbursed. Although there were some achievements under this project, they remain largely obscured by the overall failure to implement the project components. First, after completion of the diagnostic study, the Bank successfully ccnvinced SIDERPERU to reorient its priorities and focus on rehabilitation and operating practices. Second, the Bank was instrumental in the quick and efficient implementation of the management diagnostic study and subsequent plan of action which instituted some changes in the management organization which still prevail. Third, through intensive dialogue with the Government, the Bank pressed for a financial restructuring of the company as a condition for project execution (a financial restructuring took place during 1984). Finally, the Bank brought into perspective the need to undertake broad studies of the overall development of the steel sector to help establish and clarify the role that SIDERPERU should play in such a development (para. 4.01). Two important lessons can be learned from this project. First, when the Bank is not able to participate actively and in a timely way in the design and supervision of the preparatory work, it may happen that all the elements required for satisfactory appraisal are not carefully studied. Although in the case of the SIDERPERU T.A. loan it was stated that the first stage expansion had not been appraised in depth, a blanket endorsement of the company's overall expansion program was provided by the Bank. While the T.A. loan financed the studies that led to the conclusions that substantial rehabilitation work was required prior to embarking in the ambitious expansion program, this might also have become evident if a more thorough appraisal had been carried out. it is also possible that, by endorsing the concept of expansion, the Bank may have impaired the management's credibility to sell the rehabilitation program to the new government after it became apparent that the expansion project was not viable. Second, the difficulties associated with a forthcoming change in government should not be underestimated. Although there was a perception of support from the incoming new government, SIDERPERU was concerned with possible delays that would occur if a new economic team had to review and approve the project concept. In Peru this was admittedly a lengthy process  -v - because of the various layers of government agencies which were normally required to review and approve public sector projects. The long delay experienced between loan approval and eventual effectiveness in this project, however, have shown that expediency in processing a loan prior to government changes can produce opposite results than those desired.  PROJECT COMPLETION REPORT PERU - SIDERPERU TECHNICAL ASSISTANCE PROJECT (LOAN S-19-PE) I. INTRODUCTION 1.01 The SIDERPERU Technical Assistance Project (the Project) was d- 4 ned to assist the company to: (i) strengthen its project execution cai lity and enable it to implement successfully and manage the Stage I expaeron project (442 of project costs); (ii) improve its operating pract ies, including yield and quality standards, maintenance procedures, produc.lon planning and information systems (20% of project costs); (iii) provice staff training, both for coal-based DR operations and other practices (232 of project costs); and (iv) finance feasibility studies for the Stage II expansion project and other smaller studies (13% of project costs). 1.02 Peru is a country with adequate amounts of raw materials needed for the production of steel. High quality iron ore pellets are produced in mines located about 600 miles to the south of Chimbore and coal suitable for the direct reduction process is economically available from nearby mines. Despite these natural advantages, and despite having one of the lowest per capita steel consumptious in Latin America, Peru's domestic steel production had been unable to satisfy domestic demand. In fact prior to project appraisal, the country had been importing up to 30% of its steel requirements./ 1.03 Since 1975, SIDERPERU had been operating successfully an experimental kiln to test the use of the STARN coal-based direct reduction (DR) technology owned by Lurgi of Germany. It permitted the use of low cost anthracite coal located close to Chimbote to produce sponge iron from iron ore pellets. Sponge iron can be substituted for scrap in an electric arc furnace (EAF). II. PROJECT BACKGROUND A. Project Origin, Appraisal and Loan Approval 2.01 The Project developed in mid-1979 from a Government request for Bank assistance in reviewing two plans for the debottlenecking and expansion of the Peruvian steel industry. One of the plans presented to the Bank consisted of a two-stage installation of a new 1 million ton per year conventional blast furnace plant and a second one consisting of a short-term development program, which would entail a small phased debottlenecking and minor improvements and the expansion of liquid steel capacity in two stages of 200,000 tons per year each. The Bank did not agree with the 1 million ton per year project since, under local market 1/ A large portion of these imports, however, were black plate coils which could not be manufactured by SIDERPERU.  -2- conditions existing at the time, a large portion of the output would have had to be exported and the plant could not reach the levels of production that would make it competitive in the international market. Instead, the Bank recommended the short-term development program which was considered financially and economically more attractive. 2.02 In February 1980, a Bank identification mission visited Lime and Chimbote and determined that the technical viability of the short-term developoent progrm (i.e., 400,000 tpy expansion in two stages) was sound. The mission, however, reached this conclusion solely from discussions with SIDERPERU's technical staff, since no project related study had yet been supplied to the Bank. In fact, SIDERPERU (which was well under way for the procurement of the Phase I expansion) was initially concerned that Bank participation would delay the project and were reluctant to release a UNIDO-financed study, apparently the only available document at the time, because of what it considered "the narrow scope of the study" 2/ and the possibility that it might have been misinterpreted by government officials. After a one-man, one-day mission to France to review with SIDERPERU and French consultants (which had met to review the bids received for the first phase expansion and selection of suppliers), it was recommended that the Bank consider making an engineering loan to cover the foreign exchange cost of a contract for management services, associated with the provision of training and operating assistance, in the amount of US$5.0 million. 2.03 With national elections forthcoming in May of 1980, SIDERPERU had indicated to the Bank