Documentof The WorldBank FOR OFFCIAL USE ONLY ReportNo. 8755 PROJECT PERFORMANCE AUDIT REPORT MOROCCO PILOT PROJECT FOR SMALL-SCALE MINING (LOAN 2109-MOR) June 15, 1990 OperationsEvaluationDepartment This document has a restricted distribution andmay be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. COUNTRY EXCHANGE RATES Moroccan Dirham (DH/US$) Appraisal Estimate (1982) US$1.00 - DH 5.20 Actual 1983 7.11 1984 - 8.81 1985 - 10.06 1986 - 9.10 1987 - 8.36 1988 8.21 ACROMS AND ABBREVTIONS BRPM - Bureau de Recherches et de Participations Minieres CADETAF - Centrale d'Achat et de Developpement de la Region Miniere du Tafilalet et de Figuig DOM - Directorate of Mining ERR - Economic rate of return FRR - Financial rate of return MEN - Ministry of Energy and Mines n/a - Not available N/A - Not applicable PCR - Project Completion Report PPAR - Project Performance Audit Report SAR - Staff Appraisal Report TFXWORLD SANK FOROMCIAL USEONLY Washmwton. DC. 3033 June 15, 1990 MEMORANDUMTO THE EXECUTIVE DIRECTORSAND THE PRESIDENT SUBJECT: Project PerformanceAudit Report on Morocco Pilot Project for Small-ScaleMining (Loan 2109-MOR) Attached, for information,is a copy of a report entitled 'Project PerformanceAudit Report on Morocco - Pilot Project for Small-ScaleMining (Loan 2109-NOR" prepared by the Operations Evaluation Department. Attachment Thb dcent hasa uite duibon and may be osed Wiec sonly In h pfoance Ofteir ofci duties.5f contentsmaynot othrw,e bediscosedwitho Wrfd Bankauthuiatwn. FOROFFICIAL USE ONLY PROJECT PERFORKANCE AUDIT REPORT MOROCCO PILOT PROJECT FOR SMALL-SCALE MINING (LOAN2109-MQR) TABLE OF CONTENTS Pag2 No. Preface . ....................................................... i Basic Data Sheets ............... ii Evaluation Summary ............................................ iv PROJECT PERFORMANCEAUDIT REPORT I. BACKGROUND ........... ................................. 1 Project Environment .................................. 1 Rationale for Bank Involvement ....................... 1 Previous Bank Experience in Small-scaleKining .... . 2 Project Objectives ................................... 2 Project Description .................................. 2 ImplementationArrangements .......................... 3 Project Issues ....................................... 3 I1. IMPLEMENTATIONEXPERIENCE ............................. 4 Changes in Project Scope ............................. 4 Project Implementation ............................... 4 Project Costs and Financing .......................... 5 Procurement and Disbursements ........................ 5 III. PROJECT OUTCOME ...................................... 6 Project Results ...................................... 6 InstitutionalDevelopment ............................ 7 Economic Performance ................................. 8 Financial Performance ................................ 9 IV. FINDINGS AND ISSUES ..................................10 Overall Assessment ...................................10 Project Design and Formulation ....................... 10 Performance of the Bank .............................. 11 Sustainability ....................................... 12 Lessons of Experience......................... 12 ATTACHMENT 1 Comments from the Borrower ......................... 14 This document has a restricteddistributionand may be used by recipienis only in the performance of their offcia duties. Its contents may not othterwise be disclsesdwithout WorWBankauthoti2tion. 'd) TABLE OF CONTENTS (Cont REPORT PROJECT COMPLETION Page No. PART I Project Iderstity......... 24 ............................ Background.............. ............................. 24 Project Objectivesand Components..... 25 ............... Project Design and Preparation...... 25 ................. Project Implementationand Results ..... 26 .............. Bank and BorrowerPerformance...... 29 .................. ConsultingServices ........ 30 .......................... Summary of Lessons Learned ...... 30 ..................... PART III Project Timetable ......... 33 ........................... CumulativeEstimatedand Actual Disbursements........ 34 Project Implementation Indicators..... 35 ............... Project Costs ............ ............................36 Project FinancingPlan ....... 37 ........................ Project Results .............................. 38 A. Direct Benefits .............. ......... 38 B. EconomicImpact ............. .......... 39 C. FinancialImpact........................ 39 D. Studies ....................... 40 Status of Covenants ............ ............ 41 Staff Inputs ............ ........... 45 Major Bank Missions ............ ........... 46 i PROJECT PERFORMANCE AUDIT REPORT MOROCCO PILOT PROJECT FOR SMALL-SCALE MINING (LOAN 2109-MOR) PREFACE 1. This is a Project PerformanceAudit Report (PPAR) on the Pilot Project for Small-scaleMining, involvingan IBRD loan in the amount of US$ 9.5 million to the Kingdom of Morocco,with the objectiveof assistingthe development of small-scale mining. The loan was approvedon March 23, 1982. The Loan Agreementbecame effectiveon November19, 1982. US$ 4.7 million of the loan amount was cancelledin August 1985 at the requestof the Borrower. The closing date of December31, 1986 was extendedto December31, 1987. Final disbursement was made on August 9, 1988. 2. The PPAR consistsof the Project PerformanceAudit Report prepared by the OperationsEvaluationDepartment(OED)and the Project Completion Report (PCR) preparedby the Europe,Middle East and North Africa region"l department. The PPAR is based on the attachedPCR, the Staff Appraisaland the President's Reports,the loan documents,the transcripts of the Execu- tive Directors'meetingsat which the projectwas considered, on a study of project files, and on discussionswith Bank staff. An OED missionvisited Morocco in January 1990, and discussedthe effectiveness of the Bank's assistancewith CADETAF and the Ministryof Energy and Mines (MEM). Their kind cooperation and valuable assistancein the preparationof this report is gratefullyacknowledged. 3. The PCR providesa good accountand assessmentof the project experience,and discussesthe performances of the Bank and the project executingagency. The PPAR elaborateson particularaspects of project implementation,the design and preparationof the project,and the performanceof the Bank. 4. FollowingstandardOED procedures, copies of the draft PPAR were sent to the Governmentand the Beneficiary. The commentsreceivedfrom CADETAF are reproduced as Attachment to the PPAR. ii AUDIT REPORT PROJECT PERFORMANCE MOROCCO MINING PILOT PROJECT FOR SMALL-SCALE (LOAN2109-MO)R BASIC DATASPEET KEY PROJECTDATA Appraisal Actual or Actual as X of eExectation Current Estimate Appr. Estimate Total Project Cost (US$ million) 15.2 6.8 44.7 Loan Amount (US$ million) 9.5 4.8 50.5 Date Physical Components Completed 06/86 n/a n/a La ProportionCompletedby this Date 100 n/a n/a &i EconomicRate of Return (X) 32.3 negative negative InstitutiortalPerformance Satisfactory Unsatisfactory ia The projectwas only partiallycompleted (PPAR,para. 18). CUMULATIVEESTIMATEDAND ACTUAL DISBURSEMENTS (US$ million) As of June 30, 1983 1984 19 1986 1987 12U 12 (i) Appraisal Estimate 1.35 5.99 8.18 9.50 (ii) Actual 0.07 0.24 1.11 3.27 3.54 4.47 4.78 -iii)(ii) as X of (i) 5.2 4.0 13.6 34.4 37.3 47.1 50.3 Date of Final Disbursement: 08/09/1988 PROJECTDATES OriginalPlan Revised Actual First Mention in Files 11/11/77 Negotiations 12/07/81 12/07/81 Board Approval 03/23/82 03/23/82 Loan AgreementDate 04/15/82 - 04/15/82 EffectivenessDate 07/00/82 11/19/82 Closing Date 12/31/86 12/31/87 12/31/87 iii STAFF INPU (Staff-Weeks) Bank FY 198 2981I2= 1983 1984 15 I2 1987 1988 Totals Preappraisal16.6 20.7 37.3 Appraisal 54.4 0.3 54.7 Negotiations 1.3 27.5 28.8 Supervision - 1LI .. _43 11.6 5.0 _.7 17.3 1.9 62.5 Totals 16.6 76.4 32.1 13.7 11.6 5.0 8.7 17.3 1.9 183.3 mISSION DATA Month/ No. of No. of Date of Year Weeks Persons Man-weeks Reort Identification 06/79 2.0 2 4.0 11/05/79 Preparation 12/79 1.2 2 2.4 01/11/80 Appraisal 04/80 3.0 3 9.0 06/27/80 Post-appraisal 02/82 2.0 1 2.0 03/16/82 SupervisionI 06/82 1.2 2 2.4 06/01/82 SupervisionII 11/82 1.8 2 3.6 12/15/82 SupervisionIII 03/83 1.8 2 3.6 03/29/83 SupervisionIV 11/83 1.8 1 1.8 n/a SupervisionV 04/84 3.4 3 10.2 05/14/84 SupervisionVI 09/85 1.0 2 2.0 n/a SupervisionVII 02/86 1.0 2 2.0 03/13/86 SupervisionVIII 11/86 1.4 1 1.4 11/21/86 SupervisionIX 02/87 1.8 1 1.8 03/13/87 SupervisionX 06/87 L.4 3 7.2 06/29/87 Total 25.8 53.4 OTHER PROJECTDATA Borrower: Kingdom of Morocco ExecutingAgency: Centraled'Achatet de Developpementde la Region Miniere de Tafilaletet de Figuig (CADETAF) Fiscal Year of Borrower: January 1 - December31 Follow-onProjects: None iv AUDIT REPORT PROJECT PERFORMANCE MOROCCO MINING PILOT PROJECTFOR SMALL-SCALE (LOAN 2109-MO) EVALUATIONSUMMARY Introduction 1. The project was the Bank's second operationworldwidein the small-scale mining sector. It was designedto assist small-scale mining in the Tafilalet and Figuig region in southeastern Morocco,where an estimated15,000 artisanal miners were working some 1600 mines with small and irregular lead and zinc ore deposits. The project fitted perfectlyinto the Bank's strategyin Morocco: it was sociallyorientedand productive, promotedexports,and supportedregional development and institution buildingall at the same time (PCR, Part I, para. 1.2; PPAR, paras. 1-7) 2. The project comprisedthe acquisition of ore upgradingand mining equipment,extensionof credit to miners for mining equipmentand works, construction of a trainingmine, institution building,and studies. Because of uncertainties regardingthe region'sore productionpotential,the artisanal miners' productionresponseto the proposedproject inputs,and the Beneficiary's implementation capability, the projectwas designedas a pilot project. The Beneficiary of the Bank loan and the project executingagency was the Centraled'Achat et de Developpement de la Region Miniere du Tafilaletet de Figuig (CADETAF), a small quasi-cooperative agency providinglimited servicesto artisanalminers. (PCR, Part I, para. 1.3; PPAR, paras. 12-15). Objectives 3. The objectiveof the projectwas to increasethe income of local miners and artisanalproductionof lead and zinc concentrates for export by (i) processinglow-gradelead and zinc ores into marketableconcentrates, (ii) facilitatingthe marketingof high-gradeores, (iii) promotingincreased productivityand productionin selectedmines; (iv) improvingand expandingthe servicesoffered by the CADETAF to artisanalmines, and (v) increasing knowledgeof the mineral potentialof the region (PCR, Part I, para. 1.3; PPAR, para. 8). Implementation Experience 4. The pilot nature of the project impliedthat its scope would undergo changes during implementation in the light of experienceand emerging conditions. However,except for the reductionof the number of ore concentrators as a result of unfavorableeconomics,there was no planned effort on the part of either the Bank or CADETAF to fine-tunethe project scope during implementation.Nevertheless, due to implementationdifficulties, CADETAF's financialcollapse,and unfavorable responsefrom artisanalminers, project v lmplementation remainedIncompleteat loan closing (PCR, Part I, para. 1.9; PPAR, paras. 26-31). 5. There were extremelylong delays in the implementation of individual components, due to weaknessesin planningand coordination (PPAR, paras. 18- 20). The total cost of the project,includinginterestduring construction, was about 55 percentbelow the appraisalestimate,due mainly to reductionsin project scope and lower interestduring construction as a result of slower disbursements (PCR, Part III, Table 5, PPAR, para. 21). 6. Procurement under the project sufferedlong delays, due to the Beneficiary's lack of experience, inadequatestaffing,and the complex proceduresfor procurement by Moroccanstate-owned enterprises. Disbursements delays. Loan closing were delayed by about three years, due to implementation was extendedby one year. The unutilizedportion of the loan (US$ 4.7 million) was cancelled(PCR, Part I, para. 1.9 and Part III, Table 3; PPAR, paras. 24- 25). Results 7. The outcome of the projectwas seriouslyaffectedby the low demand for the mining equipmentpurchasedunder the project and decliningore production, hoth due to plummetinginternational lead and zinc prices (PCR, Part I, para. 1.6 and Part III, Tables 7 and 8). 8. One ore concentratorwas purchasedand installedfor both lead and zinc, instead of two originallyenvisaged. This concentrator never really came on stream fully, because operatingcosts exceededrevenuesdue to depressedmetal prices and lower ore quality than originallyexpected,and lack of sufficient ore supply by miners. In 1989 the concentrator was sold to a local private mining company as its operationby CADETAP did not prove to be economicand technically viable. At present,only the ore crusL.-ig and grindingunit purchasedunder the project is operatingsatisfactorily (PCR, Part I, para. 1.9; PPAR, para. 27). 9. One new ore collectioncenter was established by CADETAF insteadof four providedin the project. The trainingmine never became operational(PPAR, para. 19). The sales/rental of equipmentto pilot mines did not produce the expectedresults,because artisanalminers' demand for equipmentand supplies purchasedunder the project was much lower than expected (PCR, Part I, para. 1.9; PPAR, paras. 28-30). Given the lack of demand for, and in order to prevent further deteriorationin storage,of mining equipmentpurehasedunder the project, CADETAFsold them during 1988-1989to other mining coneernsat a substantialloss. 10. A geochemical study was completed,but did not lead to any new discovery or significant follow-upwork. The socio-economic study includedin the project scope was not undertaken. Althougha financialmanagementstudy was completed,it was too late to have any significantimpact on CADETAP's financialsituation(PCR, Part I, para. 1.9; PPAR, para. 31). vi 11. Due to the remotenessof its area of operation,CADETAF was unable to recruit sufficientlyqualifiedstaff. Throughoutproject implementation, weaknessespersisted at cadres criticallyimportantfor adequateproject implementation and CADETAF sufferedfrom frequentturnoverof its top management. As a result, it has never attainedthe institutional objectiveof the project,which was to transformit from a small quasi-cooperative agency providinga few servicesto artisanal miners in a remote region into an institution activelypromotingartisanalmining. After the closing of the loan, CADETAFhas returnedto its originallimited role and drastica'.ly reduced the scopb of its operationsand its staffing(PPAR, paras. 34-38). 12. None of the economicbenefitsexpectedat appraisalhave been realizedso far, since both the sales of lead and zinc ores and ore prices remained considerably below appraisalforecasts(PPAR,para. 40). In fact, except in 1982 and 1985, ore sales remainedbelow the levels achievedbefore the initiationof the project. 13. As a result of low ore sales and revenues,CADETAF'soperatinglosses mounted rapidly. At the end of 1988, CADETAF'sbalance sheet showed an accumulatedloss of DH 71.4 million,up 70.8 million from 1982. CADETAF's financialloss in 1988 alone was DH 27.3 million (PPAR,paras. 40-42). 14. In 1987, CADETAF'snew managementstopped the implementation of the project and initiateda restructuring program. The number of staff was reduced;operationswere consolidated; and investments sharplycurtailed. As a result, CADETAF showed a small operatingsurplus in 1989. Given its nature as a non-profitgovernmentorganization, CADETAF does not expect to generate additionaloperutingprofits to service its debt, which stood at DH 66.3 million at the end of 1990. Therefore,it will need substantial Government subsidiesor other financialassistancefor debt service. Sustainability 15. The project did not produce any benefits and remainedincomplete(PPAR, paras. 26-31). Therefore,the sustainabilityof project benefits is a moot issue. Findingsand Lessons 16. Although conceivedas a pilot project, the project design lacked the requiredflexibility. Major project components were clearly defined at appraisalin the same way as an investment project. Neither were arrangements providedto closely monitor developments both in the project area and in international mining circles and to modify the project componentsaccordingly. Aside from certain loan covenants, which proved to be of limited effectiveness, no provisionswere made to complementthe Beneficiary's limitedproject implementation capability(PPAR, paras. 46-47). 17. Due to its novelty for both the Bank and the Borrowerand its pilot nature, the project'ssupervision requirementswere heavier than standard mining projects. However,the Bank was unable to provide an effective supervision because of staff constraints. AlthoughCADETAF'sproject vii implementation and financialdifficulties were noted and extensivelyanalyzed in various supervision reports,the Bank failed to initiatedecisiveaction to restructurethe project in the light of changingcircumstances and accumulated experience. As a result,chances to minimize losseswere missed (PCR, Part I, para. 1.10, and Part III, Table 9; PPAR, paras. 52-54). 18. In retrospect, the projectwas too risky to be done as a stand-&'one project in a single stage. It should have been designed in two stages,with the first stage consistingmainly of studies,geologicalsurveys,and technical assistanceto improve CADETAF'soperational practicesand managerialand financialcapabilities. If warrantedby the results of this first stage, a second stage envisagingthe extensionof CADETAF'sservicesto a larger number of artisanalminers and the installation of mineral ore upgradingfacilities should have been considered(PPAR,para. 51). 19. Project experiencesuggeststhe followinglessons: - When the Bank enters a new field of lending,it would be desirable to start with an uncomplicatedproject,so that it can b.ild up its staff resourcesand gain sufficientexperienceto fulfill its non- financialrole (PPAR,para. 56); - In preparingpilot projects,the area of the unknown needs to be delimitedand the risk elementskept within reasonable bounds, in order to provide a meaningfulinstrumentto test technical, soeiological, and institutional assumptions in a new field of activity(PPAR, paras. 58-59); - Specialarrangements need to be made for pilot projectsat appraisalto ensure that the Bank and the borrowerreact to emergingresults and restructure the project accordingly(PPAR, para. 57); and = In designingpilot projects,there is a need to keep the project scope relativelysimple and, in case novel activitiesbeyond the executingagency'snormal operationsare contemplated, to allow in project schedulingfor the time needed for the requisite institutionbuilding (PPAR,para. 60). AUDIT REPORT PROJECT PERPOEMANCE MOROCCO MINING PILOT PROJECTFOR SMALL-SCALE (LOAN2109-MOR) I. BACKGROUND Project Enviropment 1. The project was designedto assist small-scale mining in the Tafilalet and Figuig region in southeastern Morocco. The region lacked basic infrastructure and, outside the oases had little agriculturalor other economic potential,except for mining. There were an estimated15,000 artisanalminers working some 1600 mines with small and irregular--butvery rich-- lead and zinc ore deposits./1 Miners made independent decisionsdependingon ore prices and the chances of other non-miningactivities. A proportionof mine workers lead a nomadic life. Productivity was low due to rudimentarymining methods used./2 2. Morocco'stotal productionof lead, the major non-phosphate mineral,was around 134,000 tons per year (4 percent of exports)and that of zinc about 25,000 tpy (0.5 percent of exports). Small-scale artisanalmining provided about 25 percent of zinc productionand 10 percent of lead production(PCR, Part I, para. 1.2.). 3. International metal prices had starteddecliningat the time the project was appraised. The decline continuedthroughout project implementation. Between appraxaalin 1981 and completionin 1987, lead and zinc prices declined by 33 percent and 23 percent,respectively, in real terms./3 Rationalefor Bank Involvement 4. At the time the project was appraised,the Governmentand the Bank were giving a high priorityto projectsdesignedto stimulateexpozt growth and improveincome distribution in disadvantaged and infrastructure regions of the country (PCR, Part I, para. 1.1). 5. The project would materiallyassist and improvethe economicwell-being of a large number of miners, many of whom were subsistingon the margin of /1 Artisanalmining refers to mining undertakenby independentindividuals or by small informalgroups,using only hand tools, with very low productionrat.s --generallyno more than a few hundred tons per year by any particularwork group. /2 SAR. Morgeco:Pilot Project for Small-ScaleMining, Report No. 3393- MOR, February26, 1982, paras. 1.01 and 1.03. /3 Half-YearlyRevisionof Commodit;Price Forecasts,June 28, 1989. 2 economic societyand whose basic needs were not fully met. It would do so without callingfor a radical transformation of their traditionalectivities and at a relativelylow cost. Mining projectswould be located in the most deprived regionsof Morocco and were expectedto have an importantemployment generatingeffect. 6. Projectpreparationand executionwould permit the resolutionof sectoral and subsectoralissues, such as sector organization and the ore pricing policy, which had impeded the development mining potential. The project of small-scale thus fit.:ed perfectlyinto the Bank's strategyin Morocco:it was socially orientfd nd productive, promotedexports,and supportedregionaldevelopment and ii -. t-tion building all at the same time. Mining Previou Link Experiencein Small-scale 7. The project was the second Bank operationin small-scale mining sector. The first project in Boliviahad the objectiveof developingpreselectedsmall mining operationsthroughprovisionof supervisedcredit and complementary technicalassistance. The results of that project were mixed. Disbursements had lagged because of the unfamiliarity of the beneficiarieswith the Bank's disbursement and subprojectappraisalrequirements. The project goal of transformingsmall mining units into efficientmining enterprises was found to be too ambitious. Difficulties were experienced in coordinating various technicalassistanceactivitiesdue to unclear definitionof this componentand of the implementation responsibility during preparation. Also, the design of the assistancethroughforeign consultants had been less than optimum,due to failure to take into consideration the limitedcapacityand lack of receptiveness of intendedbeneficiaries./4 Project Objectives 8. The objectiveof the projectwas to increasethe income of local miners and artisanalproductionof lead and zinc concentrates for export by (i) processinglow-gradelead and zinc ores into marketableconcentrates, (ii) facilitating the marketing of high-gradeores, (iii) promotingincreased productivityand productionin selectedmines; (iv) improvingand expandingthe servicesofferedby the Centraled'Achatet de Developpement de la Region Miniere du Tafilaletet de Figuig (CADETAF) to artisanalmines, and (v) increasing knowledge of the mineral potentialof the region (PCR, Part I, para. 1.3). project Descrigtion 9. The project comprisedthe followingcomponents:(i) acquisition of mobile ore concentrators along with a crushingand grindingunit and mining equipment, (ii) extensionof credit to miners for mining equipmentand works, (iii) establishment of a trainingmine, (iv) developmentof CADETAF'sfinancialand /A PCR. Bolivia: Small-scale Mining DevelopmentProject (Loan 1331-BO), Report No. 5712, June 17, 1985, paras. 3.03, 6.03, 6.06, and Annex 6, para. 30. 3 studies (PCR, Part managementsystems;and (v) geologicaland socio-economic I, para. 1.3). Arrangements Inmlementation 10. The project would be implemented by CADETAFwith assistancefrom the Bureau de Rechercheset de Participations Minieres (BRPM),the Government entity in charge of the mining sector,and consultants. BRPM was expectedto provide assistancein metallurgical testing,engineering, procurement,and installation of the ore concentratorsand crushingequipment,as well as procurementof equipmentfor other project componentsand trainingfor the instructors of the trainingmine. To handle credit in kind in the form of mining equipmentto artisanalmines, CADETAF,which hithertohad not any credit experience, was to establisha credit unit./5 11. Although CADETAFhad little experience with credit operations,it was considered to be better placed than banking institutions to control repayment by the miners, due to its close working relationship with the miners and its mineral purchasemonopoly. Project Issues 12. The success of the project dependedessentially on three factors:(i) Availabilityof sufficientore reservesin the project area to sustain increasedore productionneeded to amortizeproposed investments; (ii) Artisanalminers' productionresponseto the measures,equipment,and services introducedunder the project;and (iii) CADETAP'sproject implementation capacity. 13. Ore Reserves. The existingknowledgeof lead and zinc reservesin the project area was insufficient.Although the Bank was aware of this fact, it did not see a need for a systematicassessmentof ore reserves,since CADETAF's theoretical estimatesand consultants' reports supportedthe existenceof adequatereservesto sustain increasedore production. The low level of artisanalore productionwas attributedto the lack of ore concentration facilitiesto process low-gradeores into marketableconcentrates and to the almost completeabsence of basic mechanizedmining equipment./A 14. Miners' Reaction. During project preparation, the availableinformation on the parametersdeterminingthe artisanalproductionfunctionwas insufficient. The interrelationship between productivity increases,the opportunity to sell low-gradeore, metal prices, and seasonalagricultural as well as other non-miningactivitieswas recognized, but could not be quantified. This, however,was not consideredto be a seriousobstacleto initiatinga pilot project,since the socio-economic study proposedunder the projectwas intendedto deal with some of these aspects. /5 SAR, paras. 5.38-5.42. /j SAR, paras. 2.05-2.09. 4 15. CADETAF'sInstitutional Casacitv. AlthoughCADETAF did not have the requisiteexperienceand institutional and financialcapability,the project requiredit to assume importantresponsibilities in mineral ore explorationand processing. To strengthenCADETAF'sfinancialsituation,the project provided an equity injectionby the Governmentof US$ 7.8 million equivalent. To make up for its institutional and technicalweaknesses,loan covenantsrequired CADETAF to enter into a technicalassistanceagreementwith BRPM and to hire within six months of loan effectivenessqualifiedstaff in sufficientnumbers at both managementand operational levels./7 EXPERIENCE II. IMPLEMENTATION Changes in Project Scope 16. Due to uncertainties regardingcertain factorswhich had a direct bearing on its success (PPAR, paras. 12-15),the projectwas designedas a pilot project. This meant that its scope would undergo changes during implementation in the light of experienceand emergingconditions. However,except for the reductionof the number of ore concentrators as a result of unfavorable economics (PCR, Part I, para. 1.9), there was no planned effort on the part of either the Bank or CADETAF to fine-tunethe project scope during implementation.The Bank has continually urged CADETAF to implementthe project as originallyconceived,and this latter has endeavoredto do so to the best of its ability,which clearlywas not up to the requirements. However, due to implementation difficulties, CADETAF'sfinancialcollapse,and unfavorableresponsefrom artisanalminers,project implementation remained incompleteat loan closing (PPAR,paras. 27-32). Project Implementation 17. Despite the extensionof the loan closingby one year, the projectwas only partiallycompleted. Since CADETAFhas not pursued the project further after the closing date, one cannot meaningfully speak of an overall implementation delay. Nevertheless, there were extremelylong delays in the implementation of individualcomponents. For some (notably,the acquisition of ore concentrators and the financialmanagementstudy) actual completiondates exceededappraisalestimatesby more than twenty months. 18. Project implementation sufferedprincipallyfrom weaknessesin planning and coordination. This is illustrated by the constructionof the trainingmine and the implementation record of the socio-economic study, which the Bank considered very important because of the insufficiency of information on parameters determining artisanal mine productionand miners' responseto services to be extended under the project. 19. The training mine was initiallylocated at Keba. In June 1982, CADETAF, with the approvalof the Bank, changed the mine locationto Beni Tadjit in /2 Loan Agreementdated April 15, 1982, Sections2.04 and 3.01(b). 5 order to utilize some existinginfrastructure.However,mine development work was stopped and this project component was abandoned,after incurring an expenditureof DH 122,000,due to absenceof mineralization at the selected site and lack of other suitablelocation. This waste of funds and effort could undoubtedly have been prevented if a geologicalinvestigation of the selected site had been carried out prior to the initiationof mine development work. 20. According to the project implementation schedulepreparedat appraisal, work on the socio-economic study was to start in June 1983 (which, incidentally, coincidedwith the completionof mining equipmentprocurement) and end in October 1984. However,there was no mention of the study in the Bank's supervisionreportsuntil March 1986. Then, at the Bank's urging, CADETAF agreed to prepare the terms of referencebefore the end of March 1986 and expeditiously tender it for completionbefore end-1986. There was, however,no furtheraction on the study despite repeatedremindersfrom the Bank, because neither the Ministryof Energy and Mines (MEM) nor CADETAFwere convincedabout its utility (PCR, Part I, para. 1.9). Proiect Costs and Financing 21. Costs. Given that the scope of the project as implemented was considerablysmaller than originallyconceived(PPAR, paras. 17-20), a meaningfulcomparisonof actual costs with appraisalestimatesis not possible. The total cost of the project,includinginterestduring construction, (US$ 6.75 million)was about 44 percent of the appraisalestimate(US$ 15.21 million),due mainly to reductionsin project scope and lower interestduring constructionas a result of slower disbursements(PCR, Part III, Table 5). 22. F£inancing.The projectwas financedlargelyby the Bank loan (US$ 4.8 million,or 71 percent)and Governmentcontributions (US$ 1.1 million equivalent,or 17 percent). CADETAF contributed only 12 percent of the financingrequired. The share of the Bank financingwas roughly 15 percent higher than the appraisalestimate,due to the fact that the reductionin local costs (65 percent)was higher than the reductionsin foreigncosts (50 percent) (PCR, Part III, Table 6). Procurementand Disbursements 23. CADETAF had only limitedexperiencein procurementand no experience whatsoeverwith the Bank's procurementguidelines. The Dahir regulating CADETAF provided that equipmentput at the disposalof miners was to be procuredby BRPM and that CADETAFwas to entrustresearchworks to BRPM except for the program of lead and zinc researchworks in the Tafilaletregion. 24. Despite CADETAF'sconscientious efforts to follow the Bank's procurement guidelinesand advice,procurement under the project sufferedlong delays,due its lack of experience,inadequatestaffing,and the complexproceduresfor procurement by Moroccan state-ownedenterprises. As a result,procurement imposeda heavy burden on CADETAF'ssenior staff. CADETAF'spracticeof having all procurementdecisionmeetingsat Rabat was espbciallydemandingon staff time, since it involvedfrequentlong-distance tr-_els. 6 25. Disbursements were delayed by about three years, due to implementation delays. The unutilizedportion of the loan (US$ 4.7 million)was cancelled (PCR, Part I, para. 1.9 and Part III, Table 3). III. PROJECTOUTCOME Project Results 26. The outcome of the project was seriouslyaffectedby the low demand for the mining equipmentpurchasedunder the project and decliningore production, both due to plummetinginternational lead and zinc prices (PCR,Part I, para. 1.6 and Part III, Tables 7 and 8). As a result, the scope of the project was reduced,and some componentsnever attainedtargetsset at appraisal. 27. One ore concentrator was purchasedand installedfor both lead and zinc, insteadof two as originallyenvisaged. This concentrator never really came on stream fully because operatingcosts exceededrevenuesdue to depressedmetal prices and lower ore quality than originallyexpected,and lack of sufficient ore supply by miners. With the Bank's concurrence, the concentratorwas sold in 1989 to a local private mining company as its operationby CADETAF did not prove to be economicand technically viable (PCR,Part I, para. 1.9). This was a judiciousdecision,since CADETAFhad never succeededto operate the concentrator at full capacitybecause of lack of funds to purchaseconsumables, such as reagentsand diesel fuel, and to pay for technicalassistancerequired to ensure efficientoperationof the concentrator./8At present,only the ore crushingand grindingunit purchasedunder the project is operatingto CADETAP'ssatisfaction. 28. One new ore collectioncenter was established by CADETAF insteadof four providedin the project. The trainingmine never became operational(PPAR, para. 19). 29. The sales/rental of equipmentto pilot mines did not produce the expected results. Miners' demand for equipmentand suppliespurchasedunder the project was lower than estimated,due to reduced income resultingfrom decliningmetal prices as well as miners' apparentpreferencefor the purchaseof less expensive,second-hand equipmenton the free market. Althoughequipment amountingto about DH 1 millionwas deliveredto certainpilot mines, generally owners of pilot mines did not wish to sign credit agreements, because they were uncertainof their ability to repay the credit in view of weak metal prices. By the same token some of the equipmentwas destinedfor mir.-s which were no longer viable or which had ceased production. The larger compressors, pumping equipment,and mechanicalhoists were acquiredfor these mines. Thus, some of the equipmentturned out to be inappropriate to actual needs. /1 CADETAFmaintains that the operationof the concentrator was stopped because of poor ore recoveryand product quality and attributesthe lack of success to inadequatelaboratorytestingof ore samplesand selection of inappropriate technology(Attachment1, para. III(a)). 7 30. Given the lack of demand for, and in order to prevent further deterioration in storage,of mining equipmentpurchasedunder the project, CADETAP sold them during 1988-1989to BRPM and private mining concernsat a price corresponding approximatelyto one-halfof the acquisition cost (DH 14 million). 31. A geochemical study was completed,but did not lead to any new discovery or significant follow-upwork./9 The socio-economic study includedin the project scope was not undertaken(PPAR, para. 20). Althougha financial managementstudy was completed,it was too late to have any significantimpact on CADETAP'sfinancialsituation(PCR, Part I, para. 1.9). In view of its restructuredorganization and activities,CADETAPbelieves that this study has lost its relevanceunder the present situation. Development Institutional 32. CADETAFwas established in 1960 as ar.autonomousnon-profitagency to protect artisanalminers from exploitation by unscrupulous middlemenand to encouragemining of numerousknown lead and zinc outcropsby facilitating sales and providingbasic servicesto miners./J1 It was placed under the administrative control of the Directorate of Mines (DOM) in the Ministryof Energy and Mines (MEM). CADETAF'sresponsibility consistedof purchasingand marketingore, and providingminers with various inputs, technicalassistance, and social services,such as medical facilitiesand insurance. Its operations were supervisedby a 19-memberadministrative board made of the representatives of various ministries,miners, and three provincialgovernors (PCR, Part I, paras. 1.3-1.4). 33. Until 1979, CADETAF'stop managementwas assuredby BRPM staff based in Rabat who combinedtheir CADETAF responsibilities with other functions. In early 1979, the Governmentdecided to move CADETAF'sheadquarters to Errachidia which is fairly centrallylocated in the mining area and entrust its management to a team who would be working on behalf of CADETAF's and the artisan miners' intereston a full-time basis. In June 1979, when project preparationstarted, organizational arrangementswere still in a state of flux and severalnew positionswere in the process of being filled. The missionwas given only a provisionalorganization chart. 34. The project requiredCADETAF to expand the scope of its traditional activities. Therefore,the Loan Agreementprovided for the strengthening of its cadres by sufficientlyexperienced staff. The remotenessof CADETAF's operationalarea had in the past made it difficultto recruit and maintain qualifiedtechnicalstaff. This was also one of the reasonsprivate mining companieshad abandonedmining activitiesin the area. However, the SAR did not expect major difficultieswith staff recruitment,since salariesfor /2 CADETAF maintainsthat the geochemicalstudy should have been undertaken only after the completionof a base geologicalstudy and financedby an institution 1, paras. I-3 and III(c)). other than CADETAF (Attachment /10 SAR, para. 2.04. 8 CADETAF's medium- and high-levelstaff, which had to be recruitedfrom other parts of the country,containedbonuses of up to 50 percent over normal civil service salaries./fl 35. Early during project implementation, it became apparentthat the higher technicalcadres of GADETAF had to be filled with recent graduateshaving little practicalexperience. Given the difficultyof recruitingexperienced staff, the Bank suggestedthat BRPM put additionalstaff at CADETAF'sdisposal. As predictedby the representatives of the Ministryof Finance prior to loan negotiations(PCR, Part I, para. 1.5), this did not prove to be an effective arrangement. 36. The recruitment of a sufficientnumber of staff was graduallycompleted. However,weaknessespersistedat cadres criticallyimportantfor adequate project implementation.As a result, the General Directornever had the necessarytechnicalsupportneeded. Due to the impossibility of delegating responsibility,the General Directorhad to make a superhumaneffort to advance project implementation. 37. Moreover,CADETAF sufferedfrom frequentturnoverof its top management. During the life of the project,GADETAFhas had three General Directors. In February1987 the entire top CADETAFmanagementwas unceremoniously dismissed on charges of financial misconduct./l2 38. objectiveof the projectwas to transformCADETAF, The main institutional a small quasi-cooperative agency providing a few services to artisanal miners in a re,ote region into an industrialconcernwith full managerial structure./IU This objectivewas not achieved. After the closing of the loan, CADETAFhas returnedto its originalrole and drasticallyreduced the scope of its operationsand its staffing (PPAR,para. 42). EconomicPerformance 39. The economicrate of return (ERR) of the project on an incremental basis was estimatedat 32 percent at appraisal. The projectednet foreign exchange earningof the project amountedto US$ 34.0 million equivalentthrough 1990./14 Unfortunately, none of these benefitshave been realizedso far, since both the sales of lead and zinc ores and ore prices remainedconsiderablybelow appraisalestimates (PPAR,para. 40). In fact, except in 1982 and 1985, ore sales remainedbelow the level achievedin 1981, before the initiationof the project. Moreover, throughout1982-1986international ore prices were 52-69 /11 SAR, paras. 2.04 and 3.06. /12 Report by RJR ResourcesInc, February1987, SectionA, Back-to-Office para. 4. /13 PCR, Part I, para. 1.12. /14 SAR, para. 8.09. 9 percentbelow projections. In the absenceof significantincrementalore production,the project'sERR was negative. FinancialPerformance 40. The project'sfinancialrate of return (PRR) was estimatedat 24 percent./15 However,it was recognizedthat, if the ore sellingprices and incremental ore productionfell 15 percentbelow the projected levels, the project would become marginal. The table below comparesCADETAF'sactual ore sales, sales prices and revenueswith the SAR estimates: 198t 1982 lg193 198 i98 1986 ORESALES(tons) SAREstimates/a 14,000 15,355 19,860 29.180 33,445 Actual/k 17,899 18.823 11,155 14,826 21,24S 12,580 Difference/£ 34.5 (27.4) (28.1) (27.2) (62.4) ORE AVERAGE PRICE(DR/ton) SAR Estimates/fl 1,534 1,819 2,196 2,464 2,615 Actualtk 675.2 586.9 675.1 1,047.0 1,299.9 804.1 Difference/£ (61.7) (62.9) (52.3) (54.1) (69.3) ORESALEREVE4UE (DNmillion) SAR Estimates/fl 21.5 27.9 43.6 71.9 87.s Actuat/k 12.1 11.0 7.5 15.5 24.0 10.1 Difference/g (48.8) (73.1) (64.4) (66.6) (88.5) /a SAR Annex7.8. /, lack-to-office Report by Saican Consuttants Inc., Supervision Nission of June 7-16, 1987. (Actual - SAR Estimate)/(SAR Estimate). Parentheses indicate shortfall. Thus, during 1982-1986total ore sales (78,629tons) were 29.7 percent below appraisalestimates (111,840tons). Ore sales revenues (DH 68.1 million)were 73 percentbelow forecasts (DH 252.4 million). The situationdid not improve during 1987-1988. For example,total lead and zinc ore sales in 1988 amounted to 14,529 tons, about 41X of the appraisalexpectation of 35,855 tons./1j6 41. As a result of low ore sales and revenues,CADETAF'soperating losses mounted rapidly. At the end of 1988, CADETAF'sbalance sheet showed an accumulated loss of DH 71.4 million,up 70.8 million from 1982./12 CADETAP's financialloss in 1988 alone was DR 27.3 million,includingan exceptionalloss of DH 15.0 million on the sale of the ore concentrationunit. 42. In 1987, CADETAP'snew managementinitiateda restructuring program. The number of staff was reduced from 300 to 66. Operationswere consolidatedand /12 SAR,para.7.32. /16 SAR, Annex 7-1. /17 SAR,Annex7-10. 10 investmentssharply curtailed, In additionthe Governmentgranted annual subventionsto CADETAF. As a result, CADETAF showed a small operating surplus in 1989 (DH 0.4 million). Given its nature as a non-profitgovernment organization, CADETAF does not expect to generateadditionaloperatingprofits to service its debt, which stood at DH 66.3 million at the end of 1990. GADETAF estimatesthat between 1990 and 1999 it will need some DH 57 million (about US 7.2 million) in Governmentsubsidies,or other financiala3sistance, for debt servicealone. IV. FINDINGSAND ISSUES Overall Assessment 43. The project failed to achieve its basic objectiveof increasingthe income of local miners and artisanalproddctionof lead and zinc ore concentrates, since both ore productionand revenueshave actuallydeclined (PPAR,para. 40). The main reason was the sharp decline in internationalmetal prices. In the face of this adverse development,it is doubtfulwhether any project aiming at increasinglead and zinc productionfrom marginalmines could have achievedits economicgoals. ProjectDesian and Preparation 44. The project would have to achieve its objectivesin an environment where productiondecisionsare made by thousandsof independentindividuals. Due to uncertainties surroundingartisanalminers' reactionto various project components,in particulartheir productionbehavior,it was conceivedas a pilot project to determine if and how future assistanceshould be provided./18 45. By definition, a pilot project is a controlledexperiment. This implies that it should be flexible,contain arrangements for continuously monitoring irnterimresults and modifyingproject design in the light of emergingresults and changingcircumstances, and be scheduledso that irrevocable commitments are delayed to the extent possible. As any project,it should also be compatiblewith existinginstitutional capabilitiesor should provide properly orientedinstitutional support. 46. The design of the project lacked the requiredflexibility. Major project componentswere clearly defined at appraisalin the same way as an investment project. A case in point is the supply of equipmentfor pilot mines. These were clearly identifiedat appraisaland, accordingto the SAR (para. 6.03), "changeswere neither expected,nor warranted." Despite this assurance, GADETAF ended up with a stockpileof equipmentfor which there was no demand or viable use (PPAR, para. 29). In retrospect, procuringequipment for pilot mines in smallerpackageswhose contentswould be modifiedaccordingto miners' reactionwould have been a better approach. /J1, SAR, para. 5.01. 11 47. Neither were arrangements provided to closelymonitor developments both mining circles and to modify the in the project area and in international project componentsaccordingly. For example,the work on ore concentrators and equipmentpurchases continuedaccordingto originalplans, althoughCADETAF's difficultiesin recruitingqualifiedtechnicalpersonneland the decline in artisanalore productionbecame apparentearly in the life of the project. 48. During project preparation,the availableinformation on the parameters determiningthe artisanalproductionfunctionwas insufficient (PPAR, para. 14). The socio-economic study proposedunder the project was intendedto deal with some of these aspects. However,procurement of equipmentfor pilot mines a&4 CADETAF'sown use was scheduledto be completedbefore the start of the socio-economic study, renderingit useless for this purpose./12 49. Before loan negotiations, the Bank was warned in no uncertain terms by certain Moroccanauthoritiesof the difficulties CADETAFwould face in recruitingand retainingqualifiedtechnicalstaff and its limited absorptive capacity. However,asicie from loan covenantsrequiringCADETAF to enter into a technicalservicescontractwith BRPM for the ore concentrators and crushing and grindingequipment,and to employ suitablyqualifiedmedium-level technical and support staff by given dates, no provisionswere made to complementits limited project implementation capability./20 50. As the PCR (Part I, para. 1.4) concludes,the project design called for CADETAF,which had limited technicalcapabilityfor project implementation and no previous experiencein dealingwith the Bank, to take on responsibilities outside its scope of operations. CADETAFhas been unable, for a number of reasons,to build up its managementand staffingto meet the demandsof the project. This, exacerbated with its inabilityto obtain the necessarysupport from other public institutions,was responsiblefor suboptimalproject implementation. 51. In retrospect,the projectwas too risky to be done as a stand-alone project in a single stage. As initially suggestedto the Governmentby the Bank, it should have been designedin two stages,with the first stage consistingmainly of studies,geologicalsurveys,and technicalassistanceto improveCADETAF'soperational practicesand managerialand financial capabilities. If warrantedby the results of this first stage, a second stage envisagingthe extensionof CADETAF'sservicesto a larger number of artisanal miners and the installation of additionalmineral ore upgradingfacilities should have been considered, along with modificationof CADETAF'smandate and mode of financing. Performanceof the Bank 52. The Bank spent a large amount of staff resources(120 staff-weeks)in preparingthe project. However,project supervision sufferedfrom sub-optimal /j2 SAR, para. 5.43. /20 Project Agreement,Sections2.04 and 3.01. 12 mission timing,discontinuity of Bank staff in charge of project supervision, and heavy relianceon outsideconsultants(PCR, Part I, para. 1.10, and Part 111, Table 9). In fact, Bank staff were present in only seven of the ten supervision mission fielded,and the continuityof supervision was ensuredby a consultant. 53. Early in project preparation, the Bank was aware that the project would impose a heavy burden on its staff resources. An internalBank memorandum states: "Our experiencewith small- and medium-scale mining projects in South America indicatesthat metals market and financialaccounting expertisemust be providedby Bank staff if the important institution buildingaspects are to be achievedand needed technicalassistancecorrectlydefined. As you know, the IDB operationsin the mining field have been less than successfulinter alia because of the extensivetechnicaland financialstaff input required to ensure a minimum of success in the exceedinglyrisky mining field."/21 54. Due to its novelty for both the Bank and the Borrowerand its pilot nature, the project'ssupervision requirements were heavier than standard mining projects. However, the Bank failed to provide an effectivesupervision because of staff constraints. AlthoughCADETAF'sproject implementation and financialdifficulties were noted and extensivelyanalyzedin various supervisionreports,the Bank failed to initiatedecisiveaction to restructure the project in the light of changingcircumstances and accumulated experience. Sustainability 55. The project did not produce any benefitsand remainedincomplete(PPAR, paras. 26-31). Tnerefore,the sustainabilityof projectbenefits is a moot issue. Lessons of ExDerience 56. The projectwas the second Bank operationin small-scale mining (PPAR, para. 7). Although the Bank was aware of the need for intensesupervision by specializedBank staff, it failed to do so because of staff constraints(PPAR, paras. 52-54). As a result, the chances to restructure the project in the light of emergingconditionsto minimize losses were missed. This experience suggeststhe followinglesson: When the Bank enters a new field of lending,it would be desirableto start with an uncomplicated project,so that it can build up its staff resourcesand gain sufficientexperienceto fulfill its non-financial role; /21 IPDDl Memorandumto EMP dated November30, 1979, paras. 2 and 4. 13 57. The world recessionof 1979 depressedthe market for project outputs. Market prices were so much lower than anticipationsat appraisalthat it became difficultfor the project to succeed (PPAR, para. 40). Such events underlie the need for prompt and decisiveaction on the part of both the borrowerand the Bank to adjust to a changingenvironment. 58. Pilot projectsnormallyprovide a valuable instrumentto test technical, sociological, and institutionalassumptionsin new fields of activity, Even a pilot project,however,can be a meaningfulexerciseonly if the area of the unknown is delimitedand the risk elementskept within reasonablebounds. Preparation and design thereforeremain essentiallyimportanc,and must be sensitiveto factors affectingbehavior -- sociologicalas well as economic--as to technicalparameters. 59. The design and preparation of the projectproved to be inadequate, because of the optimisticassumptions made at appraisalregardingartisanal miners' productionresponseto the measures,equipmentand servicesintroduced by the project,potentialfor increasedore production,and future metal prices, and the lack of arrangementsfor specialmonitoringand supervisionof experimentalfeaturesof the project (PPAR,paras. 12-15 and 44-47). This observationsuggeststhat In preparingpilot projects,the area of the unknown needs to be delimitedand the risk elementskept within reasonablebounds; and Special arr.angementsneed to be made for pilot projectsat appraisalto ensure that the Bank and the borrower react to emergingresults and restructurethe project accordingly. 60. ConsideringCADETAF'sinstitutional capability,the scope of the project was too ambitious. It includedactivities, such as ore processingand extendingcredits to artisanal miners, where CADETAFhad no previous experience. CADETAF did not have the requisitefinancialand technical expertiseto branch out into other areas, and the technicalassistanceprovided under the project did not bring about the necessarysupport (PCR, Part I, para. 1.12(c)). This resultedin eventualabandonment of project objectivesand CADETAF'sincurringa huge debt burden (PPAR,paras. 26, 38, and 40-42). This experiencesuggeststhat multifacetedand complex investmentprogramsare not suitablevehiclesfor pilot projectsand points to the followinglesson: In designingpilot projects,there is a need to keep the project scope relativelysimple and, in case novel activitiesbeyond the exacuting agency'snormal operationsare contemplated, to allow in project schedulingfor the time needed for the requisiteinstitution building. 14 ATTACHMENT 1 Page 1 of 10 FROMTHE BORROWER COMMENTS Centraled'Achat et de Developpementde la Region MiniUre du Tafilaletet de Figuig No. 334/DG May 2, 1990 Mr. AlexandreNowicki Chief, Division II OperationsEvaluationDepartment IBRD, Washington,D.C. SUBJEcr: Pilot Proiect for Small-Scale Mining (Loan 2109-MOR) REF: Your letter of March 23. 1990 Dear Mr. Nowicki: I have the honor to enclose for your attentiona memorandum preparedby CADETAF giving its observations, commentsand recommendations regardingthe draft Project PerformanceAudit Report you sent to it for comment. This memorandumhas been approvedby the Directorateof Mines. Yours sincerely, DALIL Mly Abdellah DirectorGeneral,CADATEF 15 ATTACHENT 1 Page 2 of 10 Centraled'Achatet de D6veloppementde la Region Minieredu Tafilaletet de Figuig MEMORANDUM ON THE PROJECTPERFORMANCE AUDIT REPORTON THE PILOT PROJECTFOR SMALL-SCALEMINING (LOAN2109-MOR) OED NOTES 1. INTRO.DUCTION The purposeof this memorandumis to present CADATEF's observations and coments on the draft Project Performance Audit Report preparedby the World Bank in Febt-rory1990 on the Pilot Project for Small- Scale Mining (Loan 2109-MOR). CADATEF'sobservations and comments will be given for each of the sectionsforming the report as listed below: A. EvaluationSummary B. ProjectPerformance Aue.itMemorandum C. Project Completion Report A. Summary of Evaluation 1. Results The outcome of the project was by and large negative for the following reasons: 1.1 Mining eguinment The equipment intended for sale/rental to artisanal miners could not be placed in that way because the miners bought equivalent (second-hand) equipment at much lower prices. This operation should not have been included because CADATEF is not a credit institution. Moreover considerable difficulties are currently being experienced in recovering the value of the few items sold to miners. Regarding the sale of a part of the mining equipment, it should be PPAR noted that the items in question were sold for DH 14 million. Seventy percent para. 31 of the proceeds of this sale was used to pay off a portion of CADATEF's prior amended debt. 1.2 Concentrator was sold for the followingreasons: The concentrator - Low zinc recovery (about40X) - Production concentrate of nonmarketable (contentless than 40X Zn) - Veryhigh operatingcost. 16 ATTACHMENT I Page 3 of 10 OED NOTES The halting of operation of the concentrator and its sale was a jo4nt decision of the Government. CADATEF and the World Bank. The PPAR para. 28 concentrator was sold for DH 12.5 million,i.e. about half ita purchasecost. amended 1.3 Studies The geochemicalstudy should not have been made until after a Footnote added basic geologicalstudy. Moreover,even if such a study w-'re essential, to PPAR para. CADATEF should not have been requiredto financeit. 32 The financialmanagementstudywas of no use at all for CADATEF because it was not completeduntil after the closing of the project. Implementation of this study'srecommendations would requirea complicated organization chart and a budget incompatiblewith CADATEF'sresources. 1.4 CADATEF'spresentactivity The report presentsCADATEF (aftertermination of the project)as Evaluation no more than an intermediary between the producers and two ore buyers. This Summary (para. is not correct since CADATEF is presentlyperforming all its functionseven 12) amended though it has embarkedon farreaching restructuring and rehabilitation measures. CADATEF is continuingto handle output marketingand to provide assistanceto the mining sector in the form of supervision of operatingworks, maintenance of productiorequipmentand supply of consumables to artisanal miners. 2. Findinssand Lessons CADATEFhas no objectionsto the conclusionsexpressedat the end of the ProjectPerformanceAudit Report. B. ProiectPerformanceAudit Memorandum 1. Backgrutr Two of the items making up this section call for the following comments and observations: (1) Bank eXDerience The Bank does not have any experiencein small-scale mining. The PPAB para. 7 sole experimentcarriedout in Boliviaended in failurefor reasonssimilarto also notes the those that caused the projectundertakenin Morocco to be unsuccessful. same (2) Projectissues Successof the projectdependedon three key parameters: availabilityof produciblereserves,miner responseand CADATEF'scapacity. ATTACHMENT 1 17 Page 4 of 10 OED NOTES (2.1) Ore reserves Identificationand certificationof ore reservesshould have been Reflected in the first thing done before anythingelse. The memorandumrecognizesthat the PPAR paras. questionof reserveswas approachedin a superficial manner and therefore 13-15 acknowledges that the project'sother componentswere built on an unsure foundation. (2.2) Hiner response The mining area involvedis worked by artisanalminers and does not belong to CADATEF. Commitmenton the part of the artisanalminers,who are the true beneficiaries, is a prerequisitefor the project. This co mitment, accompanied by suitableguarantees, should thereforehave been obtainedprior to startupand not, as providedin the proposedsocioeconomic study, at the end of the project. In the event, the main mining operators proved rightly or wronglynot to be in favor of the projectas envisaged. (2.3)CADATEF'scagacity At the time the projectwas started,CADATEF'spersonnelonly had experiencein ore collectionand with technical assistancein works direction and equipmentmaintenance. It was not therefore appropriateto entrustdesign and executionof so significant a projectto CADATEF. II. PROJECT IMPLMETION Chaneesin ProsectScooe The decisionnot to go ahead with completion of the projectwas PPAR para. 27 taken by CADATEF and the Government after consultation with the Bank. This amended decision was taken once the three parties were convinced that the project was not going to succeedand that the resultingsituationhad to be rectified. It was thereforea decisiondesignedto limit the financiallosses caused for CADATEF. Prolect Execution This sectionemphasizes in particularthe delays during implementationof the project and weaknessesin how it was carriedout. This situationwas the outcome of the following: a. grocedures Administrative Public establishments are subject to rigid control which is often Reflected in incompatible with their functions. This situation impacted the project PPAR para. 25 especially throughthe delays in concluding contractsand in effectingthe corresponding payments. ATTACHMENT 1 18 Page 5 of 10 OED NOTES b. Rmoteness The fact that CADATEF's management offices are 500 km from Rabat and the size of the area involved in the project (50,000 km2) also contributed to the delays. These circumstan.es together with the constraints imposed by the administrative procedures caused quite considerable delays and additional expenses. c. CADATEF capacitvlimitations When the projectwas started,CADATEFhad no relevantexperience. Except for its DirectorGeneral (the only person authorizedto negotiateon its behalf), its staff were all young engineerslackingany experiencein mining exploration,productionand ore processing. III. pOCT OUTCOME The project'sfailurewas not solely due to fallinglead and zinc prices,but was also the outcome of shortcomings in each of its components: a. The concentrator Operationof the lead and zinc concentratorwas halted primarily -Footnote added on accountof the low recoverylevels and the nonmarketablequalityof the to PPAR para. concentrateobtained. 28 The enrichment processconsistedin flotationof a zinc ore expressedin zinc oxides,carbonatesand silicates. This is a complicated process and one that is very rarely appliedand operatedsuccessfully. In view of its limitedexperience and means, CADATEFshould not thereforehave been autr.rizedto use this process,the successof which was further comprom. a by the fact that the laboratory trials were insufficient, no semi- industrial trials were done and the samplestaken for testingwere not representative. b. Sale of minin8 eauilment The miners preferrednot to acquirethe equipmentintendedfor Reflected in purchase and financing under the project because they felt it was too PPAR para. 30 expensivewhile their incomeswere contracting as a result of fallingore prices. Another part of the equipmentwas not used because it was unsuitable for use in small mines (big compressors, drills with limited performance and high operating cost). c. Studies While the financialmanagement study was not of any help to CADATEF,the geochemical study should never have been made. The latter study could have been replacedby individual investigations in the form of geological studies and an inventoryof precisemineralization indexesthe significance of which could have been assessedby samplingor test mining. 19 ATTACHMENT 1 Page 6 ot 10 OED NOTES The results of such investigations would have been more meaningful and the cost less. d. development Institutional of CADATEF This section, which considers CADATEF's functions and responsibilities, states that the objective of the project was to transform a public nonprofit establishment into an industrial concern. However, since the project was not completed, CADATEF is referred to as now merely performing an intermediary role between producers and purchasers. These allegations call for the following comments: - Ever since its establishment in 1960, CADATEF has always performed its function, which consists in promotion of the artisanal mining sector by means of technical assistance and marketing services. The project, however, obliged CADATEF to move beyond its true responsibilities and into a field requiring means acid a degree of autonomy the agency does not possess. - Following the halting of the project CADATEF has successfully PPAR para. 39 undertaken its own rehabilitation and has reverted to performing amended its true functions. Three years later, the results posted are satisfactory for the producers and for CADATEF. e. Financial gerformance The project did not generate any additional benefits in terms of production or earnings. It was in fact the reason for the recession suffered during its execution, pushing CADATEF into debt so that it was no longer able to pay for ore purchased. This situation, which was the root cause of the drop in production in 1986 and 1987, was aggravated by the fall in ore prices during the same period (L280 for lead and $760 for zinc). However, contrary to what is stated in the memorandum, the PPAR para. 41 situation began to improve as of 1988 because earnings in that year were DH 20 amended million (as opposed to the DH 4.9 million stated in the memorandum) and about DH 30 million in 1989. As to the exceptional loss of DH 27.3 million posted in 1988, this PPAR para. 42 was due to the depreciation of the value of the concentrator (DH 15 million), amended the bookkeeping regularization of amortizations (DH 5.4 million) and the finance charges generated by the project (DH 4 million). The foregoing clearly demonstrates that CADATEF's unsatisfactory financial situation was the result of the failure of the project. IV. CONCLUSIONS 1. Overall Assessment The project failed to achieve its objective of increasing the Reflected in miners' income. On the contrary, it caused CADATEF's financial situation to PPAR para. 42 ATTACHMENT 1 20 Page 7 of 10 OED NOTES deteriorateas a result of its indebtedness and the disruption of its day-to- day operation. 2. ProjectDesign CADATEFapproves the Bank's conclusionsregardingthe way in which the projectshould have been approached. Prior tc proceedingwith procurementof mining equipmentand concentrationplant, the operationslistedbelow should first be carriedout: - simple and precise geologicalstudies; - review of the generallegislationsettingout CADATEF'sfunctions PPAR para. 51 and responsibilities to specifyhow it is to be applied, amended particularly the agency'sobligations and rights vis-a-visthe producers; - provisionof appropriatefinancialresourcesfor CADATEF in the form of subsidiesand not a loan since the objectivesought is promotionof a mining area the workingof which is entrustedto artisanalminers and not to CADATEF. 3. Lessons Investmentin mining is a high-risk operation. For it to be successful,three essentialprerequisites must first be met: a. M-e reserves Ore reservesmust be present in sufficient quantityand quality. Reflected in Production of these reserves should be entrusted to the promoter of the PPAR paras. project. 58-61 b. Metal prices The metal prices to be used in the feasibilitystudy shouldbe estimatedon pessimistic bases to guard againstany downwardtrend. c. Projectexecution In the case of a pilot project,executionand supervisionshould be performedby personswith relevantqualifications and experience. As the above three requisiteswere not met, this pilot small-scale mining projectwas not a success. 21 ATTACHMENT 1 Page 8 of 10 OED NOTES C. Completion Report I. Background During the 1970s the production of the Tafilalet and Figuig artisanal mining sector posted a downward trend. This situation resulted from PCR paras. the exhaustionof the surface reserves, the deepening of the workings and the 1.2 and 1.3 consequentoperatingdifficulties. It was this development which promptedthe contain design and preparation of the pilot small-scale mining project for the region. comparable statements The purpose of the projectwas thereforeto discovernew deposits (geological studies),to increaseproduction(procurement equipment) of tmining and to process run-of-the-mine ores into high-gradeconcentrates (concentrators). I1. ProjectObjectivesanidComRonents In order to improvethe incomederivedby the miners from sale of ore products,the project sought to increasethe quantityand enhancethe qualityof mining output,which consistsessentially of lead and zinc. To achieve this objective,the projectcomprisedprocurementof mining equipment. upgradingof output and provisionof services (studies). CADATEF,a public establishmentwith responsibility for helpingto promotethe sector,was led to contracta loan in order to achieve the objectiveset in the miners' interests. It was accordinglyagreed that the World Bank would grant a loan of US$9.5 million to the Moroccan State for onlendingin the form of equipment and servicesto the miners throughCADATEF. The initialcomponentsof the projectwere: - Procurementof two mobile concentrators for processingthe lead and zinc ores; - Grantingof loans to miners for purchaseof productionequipment; - Establishment of a trainingmine; - Executionof geological,financialmanagementand socioeconomic studies; - Provisionof variousfacilities and equipmentitems for CADATEF (constructionof collectioncenters,four-wheel drive vehicles, etc.). III. ProjectPregaration Preparationof the projectwas entrustedto CADATEFand the World Reflected in Bank, two organizationswhose experiencewas very limited,bearing in mind the PCR para. 1.4 complexity and diversityof the projectcomponents and the uncertainties 22 ATTACHMENT 1 Page 9 of 10 OED NOTES of producible regardingthe basic projectiondata used, namely availability reserves,behavior of metal prices and miner response. TV. and Results ProjectImnlementation Once executionof the projectwas under way, the parties involved realizedthat it had very little chance of succeedingin view of: * The collapseof metal prices (lead and zinc); * The fact that the geochemicalstudy had not producedany concrete Summarized in findings; PCR para. 1.6 - operatingcosts exceededrevenues; The fact that concentrator - The miners'unreadiness to purchase the equipment intended for rental/sale to them; - The inappropriateness of CADATEF's administrative and technical structures for execution of the project. By 1987 the MoroccanGovernment,the World Bank and CADATEF were Summarized in fully convincedthat the projectwas a failureand decided to cut back its PCR para. 1.8 scope by cancelingall components that had not yet been begun, primarily procurement of a second concentrator and the socioeconomic study. At the same time the parties also agreed to sell off the concentrator and the mining equipmentalreadyprocuredbut not sold to miners, in order to limit the financiallosses entailed. In applicationof the recommendationsmade to it, CADATEFmanaged to sell the concentrator(at about 0S of its purchaseprice) and most of the mining equipmentintendedfor rental/saleto artisanalminers. V. Bank and CADATEF Performance As noted in the Bank's projectcompletion report, the Bank helped to define the project'sscope and acceleratedits preparation. It was also the Bank which speeded its execution,since the projectset specificand relatively short time limits for its implementation. This tight scheduling led to full implementation of the projectbeing viewed as an end in itself and not as a means for promotingthe mining sector. As a result of this new orientation,and in the absenceof Reflected in effectivesupervisionof the progressof events,CADATEFwas left holdinga PCR para. 1.7 equipmentat a time prices were plunging on the metals stock of inoperational market. The alarming situation that resulted made termination of the project unavoidable. This decision was accordingly taken in 1987 although certainBank consultants were still opposedto it. VI. CADATEFConclusionsand Recommendations 23 ATTACIAENT 1 Page 10 of 10 OED NOTES The 4oroccan Government,CADATEFand the World Bank jointly designed the pilot projectfor small-scalemining (Loan 2109-MOR). The aim of these threepartieswas to help increasethe income of a populationand a region sufferingfrom droughtand devoid of any resourcesother than ore. CADATEF,a public nonprofitestablishment, sparedno effort to Reflected in make the project a successand to help to the extent of its capabilitieswith PCR para. 1.10 the promotionof the artisanalmining sector. The projectfailed to achieveits objectivesdespitethe efforts put into it because of: - Its complexityin relationto the means of CADATEFand the Bank; Reflected in - The very unfavorable market situation; PCR para. 1.6 - T.heminers'lack of enthusiasmfor its main components. The project'sconsequences for CADATEXhave been seriousbecause Reflected in it caused indebtedness beyond the ability of a public nonprofit establishment PPAR para. 42 to repay. First there is the indebtednessderivingdirectlyfrom the loan contracted for the projectand comprising the principaland interestpayments due on that loan. Then secondlythere is the furtherindebtedness caused by the additionaloperatingcosts engendered by the project and the change in CADATEF'sday-to-day operationdue to the concentration of all its effortson implementationof the project. The MoroccanGovernment, being aware of CADATEF'sdisturbing financialsituation, has grantedan annual subsidyto help ease this situation. However,the subsidy is far smallerthan the amount requiredon account of the size of the debt. CADATEF,for its part, has successfully carriedout a program to trim its operatingcosts to the maximum extent possible while continuing to efficiently supervise artisanal mining. In view of everything that has been done to contain the adverse impacts of the project, the World Bank should take appropriate action to help restore CADATEF's financialsituation. The Bank's contribution could take the form of reduction of its claim under Loan 2109-MORby cancelingin particularthe interestpayableon the loan. This relief requestedfrom the Bank is justifiedsince the sank participated closelyand on the same footingas the other partiesin the design and implementation of the project. PROJECT COMPLETIONREPORT Morocco: Pilot Small-Scale Mining Proiect Loan No. 2109-MOR Industry and Energy Division Country Department II Europe, Middle East and North Africa Regional Office 24 PROJECT COMPLETIQN REPORT Norocco: P!ilot Small-Scale Mining Project Loan No. 2109-MOR PART I: REPORT OF THE BENK Project Identity Project Name: Pilot Project for Small-Scale Mining Loan No.: 2109-fOR Regional Office: ENENA Country: Morocco Sector: Industry Subsector: Mining Backaround 1:1 Whenthe Pilot Small-Scale Mining Project was appraised (1982), the Government of Morocco and the Bankwere giving a highpriority to projects designed to stimulate export growth and improve income distribution and infrastructure in disadvantaged regions of the country. The Pilot Small-Scale Mining Project was intended to both promote mining exports and stimulate economic activity in the remote southeastern region of Morocco. The region was known to contain high-grade zinc and lead deposits in thin, discontinuous seams unsuitable for industrial mining because of the irregular pattern of their occurrence. Local agricultural workers bad been engaged in small-scale mining for centuries on a part-time basis. The Bank and the Governet sought to increase exportable lead and zinc concentrate and improve the income potential of small-scale artisanal miners by (a) improved knowledge of resources, (b) better equipmet, training and marketing and (c) vertical integration of local mining to the stage of lead and ZinCconcentrate. 1.2 Morocco's total production of lead, the major non-phosphate mineral, was around 134,000 tons per year (4S of exports) and that of zinc about 25,000 tpy (0.5 1 of exports). Small-scale, artisanal mining represented around 25S of zinc production and 10S of lead production. It employed, on a part-time basis, some15,000 artisanal miners producing mineral ore for export local processing and export. There were about 1600 small, temporary minesunder exploitation without a systematic exploration of reserves. Production was restricted due to a lack of mechanization as well as continuity of operations on a sufficient scale. 1.3 To facilitate sales and provide basic services to miners, the Goveret created, in 1960, an autonomus noa-profit agency, the Centrale d'Achat et de Developpeent de la Region Miniere de Tafilalet et de Figuig 25 (CADETAF), the beneficiary of the Project. This agency was placed under the administrative controlof the Directorate of Mines (DOM) under the Ministryof Energyand Mines (MEN). CADETAF'sresponsibilities consistof purchasing and marketing ore, and providing miners with variousinputs,technical assistance to miners sad social services such as medical facilities and insurance. 1.4 CADETAF s operations are supervised by a 19-member Administrative Board, chaired by a representative of MEM,and consisting of representatives from other concerned ministeries (5), DON (1) BRP! (1) Governors of the provinces of Errachidia, Quarzazateand Figuig(3) and minera representatives (8). The Administrative Board sets guidelines for CAD-TAFand muat consent to: (a) the annual investment and operating budget, (b) the pricing of mining inputs sold to miners, (c) conditions and terms of equipment loans to the miners (d) employment and salary guidelines for CADETAF's staff, (e) all contracts with thirdparties (f) applications for and acceptance of loans from Banks as well as advancesand subsidies from the GovernDent and (g) CADETAF's financial statements. ProJectObiectivesand Components 1.3 The objectiveof the Projectwas to increasethe income of local miners and artisanal production of lead and zinc concentrates for export by: (a) processing low-grade lead and zinc ores into marketableconcentrates; (b) facilitating the marketing of high-grade ores; (c) promotingincressed productivity and productionin selectedmines; (d) improving and expandingthe servicesofferedby CADETAF to artisanal miners;and (e) increasing knowledge of the mineral potential.of the region for futureexploitation. To achieve these objectives, the Projectcontained the following components: (a) CADETAF's acquisition of mobile lead and zinc concentrators, along with a crushingand grindingunit; (b) extension of credit to miners for mining equipment and works; (c) establishment of a training mine; (d) development of CADETAF's financial and management systems; and (e) execution of geological and socio-economic studies. The project was supported by a Bank loan of $9.5 million of which $0.9 was earmarked for consultant services. Prolect Desi and Preaati 1.4 The Projectwas termed pilotand consideredinnovative in the sense that its concepts had never been tested previously in Morocco and the Bank had been involved in only one other project in the small and medium-scale mining sector. The success of the Projecthinged,to a largeextent,on two factors which were inherently risky in that they were difficult to predict and control: (a) international prices for lead and zinc and (b) reactions of the miners to incentives for production expansion, in order to maintain economic utilization of the concentrators and mechanizedmining equipmentto be purchased under the Project. Furthermore, the project's design called for the 26 whichhad limited Borrower, technical and fitancialcapability for project implementationand no previous experience in dealingwith the Bank, to takeon responsibilitiesoutside its usualscopeof operation. Thusthe mainrisks surroundingthe Project's economicviability were: (a) unstable international metalprices. (b) insufficient production responsefromsmall-scale artisanal minersto production incentives and (c) inabilityof CADETAF to effectively managethe Project and assure timely of components. implemaentation In order to reducetheserisks,the Project's designincluded the following: (a) fairly conservative priceprojections; (b) a socio-econouic study to gather informtiou on the activities and preferences of the miners; (c) financial covenanta to supportCADETAF's planning, budgeting, and capital/operating cost reco%ery; and (d) technical assistance to improve CADETAF's technical and financial expertise. 1.5 The Project timetable is givenin Part111, Table2. Therewere significant reservations aboutthe Project, on the partof the Bankand the Government. Duringthe Project's preparation, the Bankpointed out that taking account of lead/zinc market prospects, the project might wellbe submarginal, considering the Bank's usual economic criteria. During the Project negotiation process, Morocco's Ministry of Finance voicedsomefairly strongreservations. Firstof all,the Min2mstry feltthe Project was too ambitious in viewof CADETAF's absorptive capacity. Theyexpressed particular concern about the additional professional staffing required for CADETAF to implement the project and the difficulties foreseen in recruiting and retaining suchstaff. Secondment of key stafffromBRPM, was viewed with skepticism because of the CADESAF's isolated location geographical locationof CADETAF. Furthermore, the Ministry believed that (a) the existing knowledge of leadand zincreserves was insufficient to ensure adequate ore production to amortize proposed investments and (b) the uncertainty surrounding the miners' production response to the measures, equipment and services under the Project cast some doubt on the financial projections for CADETAF. Prolect Iaglementation and Results 1.6 The implementation of the Project was delayed, the closing datewas extended a year later than planned and a large portion of the loan was cancelled. Project implementation was affected seriously by plummeting international prices for lead and zinc, the low demand of the miners for mining equipment purchased under the Project, inadequate pricing mechanisms for purchase of ironore fromminers, and the lackof sufficient ore production, coubined with management expertise, to make the operation of the concentrator economically viable. By the originalloan closing (1986),metal (in real appraisal prices were 25S below those at the timeof project 27 terms). Accordingto the economicand financial rate-ofreturn scenarios preparedby the Bank, such a drop in prices (not even takingaccountof declinesin production) would implya decreasein the economicrate of return from 322 to less than 151 and the financialrate of return from 241 to less than 9%. 1.7 During the first two years of the Project's implementation, the Bank preparedtwo full supervision reports (Form 590) per year. In the firstyear of the Project's supervision (1982),the missionrated the Projectas virtuallyproblemfree. In the secondyear (1983),the Projectwas ratedas having moderateproblemswith disbursements and adherenceto the anticipated projectcompletion date. The Bank sent one missionconsistingof two financial analystsand a mining engineer(April 1984)to supervisethe Project in its thirdyear. This missionreportedthat projectimplementation was about a year behind schedule because of cumbersome disbursement and procurement procedures, as well as the inexperience of CADETAF's staff in project management. In addition, the mission reported that depressed metal prices had resulted in operational losses for CADETAF in 1982 and 1983. However,the missionalso stated that the Government recentlyhad decided to simplify procedures to accelerate procurement and disbursement and that despite problems, prospects for successful project implementation appeared relatively favorable. Moreover, the mission found that all covenants in the loan agreement had been complied with and that the Project Agreement compliance was generally satisfactory except for delays in (a) invitations for consultant proposals for geochemical and financial assistance, (b) specification of training programs (a serious question three years after launching the project) and (c) establishment of a credit unit because of delays in equipment deliveries for miners, related to delayed project implementation. The mission recoamended a supervision interval of six months. However,accordingProjectfiles,about 16 months passed befowq the next supervision mission,which consisted of two financial analystswho discussed partialcancellation of the remainingloan amount due to lower than anticipated projectcosts. Tle mission did not preparea full supervision report. 1.8 The next full supervision report was prepared by a consultant angineerin March 1986, indicating that CADETAF was suffering from weak management and severe cash flow problems caused mainly by declines in metal prices. However, the overall status of the project continued to be rated as having only moderateproblems(2) while project management was rated as having major problems(3). A missionof June 1987, by the same consultant engineer, rated the Project 3 overall,citing major problemsin every categoryof supervision. It found that CADETAFhad accumulated substantial losses which it could not expect to recoverin future operations. Furthermore, an ore sampling campaign had indicated insufficient ore reservesfor medium-term operation of the concentrator and the miners remainedreluctantto purchase or 28 by CADETAF.This raisesthe question acquired reutnew miningequipment (whichdoes not seem to have been addressed by earlierBank Supervision mission)of why CADETAFacquired equipment before assessingthe miners'demand for it. The missionexplainedto CADETAFthe need to restructure its operations (focusing on ore purchasing/selling), drasticallyreduce its operating costs, improvefinancialcontrolover its operations, and clearpast debts. In addition,the mission proposedthat CADETAFfind an experienced operatorfor the concentrator or sell it and recoamendedpartialsale of mining equipment. The estimat of projectcosts was reducedto US$ 5.8 million.Estimatedactual projectcosts were US$ 6.75 million couipared to US$ 15.2 million at appraisal (Part lll,Table 5). 1.9 At the closingof the Project,the Bank had disbursed a total of US$ 4.8 million,of vhich US$ 3.5 million were for equipment and US$ 1.3 million for consultant services. representing 51X of the original loan amount. The balance of the loan ($4.7 million) had been cancelledin two steps. The incurred debt amounts to about 200o of CADETA's annual revenue, which was about US$ 2.5 million at the time disbursements ceased. At that ti.e, CADETAF'scash operating expenses were about 201 higher than revenues. In the futures CADETAF will require assistance from the Government of Morocco in meeting its financial obligations under the Project. The results of the individual project components are discussed below. Concentrators The Project purchased and installed one concentrator for both iead and zinc, insteadof two, as originally envisaged. After substantial delay, and trial runs, the concentrator never really came on stream fully becauseoperating costs exceeded revenues due to depressed metal prices and lower ore quality than originally expected and lack of sufficient ore supplied by local miners. At the closing of the loan, metal prices were substantially lower, in real terms, than at appraisal. The lover prices reduced the operating margin of the concentrator considerably and limited economically recoverable raw ore reserves. Since loan closing, the concentrator has boee sold a local private operator as its operation by CAD3TAFdid not prove to be economic and technically viable. Sales of Mining Eouioment. The miners' demand for equipment purchase and financing under the Project was lower than estimated due to reduced income resulting from declining metal prices as well as the miners' apparent preference for the purchase of less expensive, second-hand equipment on the free market. Leasing does not sees to have been used by the miners. Trainina Mine. This component was not well-conceived and did not prove to be of major assistance to the miners. Ore Coll:ction Centers. Some additional ore collection centers were establisbed but the decline in mining activity made it uneconomic to keep them open. 29 Financial Management. CADETAF received technical assistance in improvingits accounting practices. This assistance did not have a major impacton CADETAF's financialsituation, but has contributed to a more reliableanalysisof CADETAF'sfinancesand helped prepare the company's eventualrestructuring. Studies. The geologicalstudy was completed but did not lead to any new discoveryor significant follow-up work, an inherentrisk of such studies. The socio-economic study never took place due to the declinein mining activitylinked to lower metal prices. Bank and BorrowerPerformance. 1.10 The Bank helped define the Project's scope and accelerated its preparation. In light of the results,it is perhapslegitimateto wonder whetherthe Bank was not somewhat over optimistic about the benefitsand potential of the project. During the implementation process,Bank supervision missionsgave warningsabout deterioration of the CADETAF'sfinancial situation and eventually encouraged the company to restructure, but could not preventthe losses that occurred. However,the supervision activity describedin paras. 1.7 and 1.8 (obtained from Projectfiles) Indicates that close supervision taperedoff during the period 1984-1986from Intervals of about six months to a year or more. It seems that a projectwith the major problems CADETAF was experiencing should have had more frequent formal supervision. While the focus of supervision was at that time primarily on technical matters, the Bank should be criticized to have paid less attention to financial and institutional aspects. In addition,the overallprojectwas rated as having only moderate problems in 1984 and 1986, whereas the content of the reports,and particularly the detailed consultant reports, indicate major problems. Also, the Bank's high staff turnover on the Project and the heavy relianceon a consultantfor supervision during the Project'slater years hamperedthe effectiveness of the supervision effort. However,all things considered, it appears that CADETAFdid not have the management capability or the operational flexibility to avoid major losses resulting from external market changes. In fairness to CADETAF,it did not have total independene in pricing decisions and apparently Government involvement in the decision-imking process was an impediment since its approval and guldelines for fixing the purchaseprice for ore delivered by the miners did uot allow for the quick decision-making required to convince miners to deliver their ore to CADETAN. CADETWF di reevaluate the scope of the Project when external conditions changed and made some important adjustments which reduced losses, such as purchasing only one concentrator instead of two, and reducing equipment purchases and studies associated with the project. 30 _Services Consultin 1.11 CADETAFused foreignconsultants to preparea geological study. This was a fairlycostly approachgiven the high risk and the labor-intensive natureof the activity. It probablywould have been more cost-effective for BRPM to conductthe geological survey since it had the requisitetechnical expertise and was well-acquainted with the geologyof the region. CADETAF used local consultants to improveaccounting and financialmanagement but contract execution was slow. In this case, it probably would have been more effective to hire a competent financial manager to handle the work and make selective use of consulting services. During the project supervisLoanprocess, the Bank employed a consultant to do a major portion of supervision work. Summ.r of Lessons Learned 1.1Z One may question the soundness of the Project's design frau the beginning- transforming a small, quasi-cooperative agency providing a few services to miners in a remote regicn, recognized as unsultable for lndustrial mining,into an industrial concern with a full managerial structure. The Small-Scale Mining project was inherently risky. The Bank and the Government were well aware of the fact and therefore provided for a number of components and covenants to minimize the risks, as mentioned in para. 1.4. A major factor inhibiting the success of the Project was a drastic decline in metal prices. Although a substantial drop in the price of metals was included as part of the economic and financial scenarios prepared during the appraisal process, their probability was evidently not considered to be very high. Leaving aside the external price shocks, however, there were certain aspects of the Project's design which could have been improved to increase the Project's likelihood of success and minimizethe impact of externalshocks. These are as follows: (a) Given the riskynature of the Project,it probablywould have been better to developit as a component of a larger industrial or mining project; in this case it might have been easier to stop the Project as its losses began to mount. (b) By conducting some of the survey work and market information gathering implied in the the socio-economic study (included in the Project but not completed) before completing the design of the Project, it might have been possible to better tailor the Project's design to the needs and preferences of the miners. Thus, it may have been possibleto improve performance of the Projectcomponents for mining equipment and trainingdespite major metal price declines. 31 (c) The Projectallocatedtoo many varied tasks to the Borrower, CADETAF. This stall regional organizatiov was createdas a non-profit organization to providemarketing and socialservice to the small-scale miners and the Bank and the Government seem to have been overly optimistic about CADETAF'sabsorptive capacity. It did not have the requisite financialand technical expertise to branch out into other areas and the technical assistance provided under the project did not bring about necessary changes in operationsto effectively reduce financial losses. In hindsight, it probably would bave been more efficient to allocate the purchase and operation of the concentrator to a private, experienced entrepreneur and geological research to the country's geological survey (BRPH). early on (d) As alreadynoted, the scope of the Bank's supervision should have encompassedfinancial,managerialand organizational issues as well as technicalaspects. Soam of the lessons from this Projectmay be useful for the small-scale mining work the Bank is looking into in West Africa. Furthermore, it would perhaps be worthwhile for OED to extract some wider lessons by evaluating a number of similar small-scale projects, prepared in the early 1980., which required a very large suount of staff time and had similar outcomes. 32 PROJECT COPEION RFPOR MOROCCO: SMAUL-SCgL= MINING PROJECT STATISTICALINFORMATION Table 1 Related Bank Loans Conment: No related Bank loan. This pilot project vas the first of its kind in Morocco. 33 Table 2 Prolect Timetable Planned Revised Actual Identification 06/00/79 06/00/79 06/00/79 Preparation 09/00/80 09/00/80 09/00/80 Appraisal Mission 12/15/80 12/15/80 12/15/80 Negotiations 12/07/81 12/07/81 12/07/81 Board Approval 03/23/82 03/23/82 03/23/82 Signature 04/15/82 04/15/82 04/15/82 Effectiveness 11/19/82 11/19/82 11/19/82 Closing 12/31/86 12/31/87 12/31/87 Date of last disbursement 08/09/88 Comments A/ Project to be considered pilot in nature. Its concepts had never been tested previously in Morocco. 2/ Bank cautioned that because of uncertainty surrounding the demand and price of metals, the Project could be sub-marginal according to normal Bank criteria. Morocco's Ministry of Finance voiced strong reservations concerning CADETAP's absorptive capacity, difficulties in recruiting and retaining staff, adequate knowledge of lead and zinc reserves, and the production response of miners to the various Project components. h/ Project extended a year later than planned. Implementation was behind schedule due to cumbersome disbursement procedures and the inexperience of CADETAF staff in project management. 34 Table Qumulatvg Estimatedand Actual Disbursements (in US$ million) EL ^ Actual X Act./Est., 1983 1.35 0.07 5.2 1984 5.99 0.24 4.0 1985 8.18 1.11 13.6 1986 9.50 3.27 39.0 1987 *- 3.54 1988 .. 4.47 1989 .. 4.78 Fo1llowU-: No follow-upproject prepared. 35 Table 4 Indicators Proiect Implementation Indicator AppraisalEst. Actual Start-upof Lead Concentrator Aug. 1984 A/ Start-upof Zinc Concentrator Nov. 1984 1/ Start-upof Crushingand GrindingUnit Sept. 1983 Nov. 1986 Purchaseof Mining Equip- ment and works Jul. 1983 Oct.1986 of Training Establishment Mine Jul. 1983 MetallogenicSurvey Jan. 1986 4/ GeochemicalSurvey Jan. 1986 Feb. 1987 Reserve Estimation Sept. 1985 Establishmentof Ore CollectionCenters Aug. 1986 A/ Purchaseof Laboratory and WorkshopEquipment July 1983 Apr. 1986 Completionof Financial ManagementStudy October 1984 Nov. 1986 study of Socio-economic artisanalminers January 1985 A/ A/ Only one concentratorfor lead/zincpurchased. It began trial operationin June 1986 but never fully came onstream. hi Site selectionsmade but the mine never became fully operational. W Done in contextwith geologicalsurveywork. 4/ Completed. Date unspecified. W/Not completed. 36 Tible 5 ProjectCosts (in million US dllars) Items ' Es3timat g£t LAC. EQE. Tot, Lac. FoK, Tot. Lead/zinc Concentrator 0.91 2.37 3.28 1.07 2.19 3.26 Crushingand GrindingUnit 0.11 0.23 0.34 0.14 0.16 0.30 Mining Equip. 0.44 1.37 1.81 0.33 0.69 1.02 and Works TrainingMine 0.03 0.08 0.11 0.01 0.00 0.01 Ore Collection 0.38 0.15 0.53 0.01 0.00 0.01 Centers Equipmentfor 0.07 0.21 0.28 0.14 0.26 0.40 CADETAF Technical Assistance 0.18 0.18 0.36 0.06 0.10 0.16 Studies 0.89 0.90 1.79 0.21 0.77 0.98 Working Capital 1.97 0.00 1.97 0.00 0.00 0.00 Base Cost 4.98 5.49 10.47 1.97 4.17 6.14 Phys. Conting. 0.20 0.47 0.67 0.00 0.00 0.00 Price Conting. 0.52 1.20 1.72 0.00 0.00 0.00 Total Pro]. Cost 5.7 7.16 12.86 1.97 4.17 6.14 Int. during Const. 0.0 2.34 2.34 0.00 0.61 0.61 TOT5L FI5 2CI7 8 REOUIRED 5.70 9.5 15.20 1.97 4.78 6.75 37 Table 6 Project-FinanobgPa C in million US S) Source Planned X Actual X Eauits Govt. Contrib. 5.1 34.0 1.14 16.9 CADETAF A/ 0.6 4.0 0.83 12.3 IBRD Loan 9.5 62.0 4.78 70.8 Total Financing 15.2 100.06.75 100.O A/ Internalcash generation. 38 ProlectResults A. D2irect Benefits Aopnraisal Estimate Acuacl 1. Cumulativenet foreign 1. Level of earnings exchangeearningsof US$ 34 not achieveddue to in- million between 1982 and 1990 insufficient reservesfor Earningslinked to economicoperationof the increasein the production concentrator, drastic of lead and zinc concentrates decreasesin international from 14,000 tpy to 33,000 tpy. metals prices, technical problemswith operationof the concentrator and lack of sufficientresponsefrom miners to the purchaseof mining equipmentunder the Project. 2. Incremental income of 2. Benefitnot achieved USS 145 per year per miner since concentratorwas due to increasedsales of low- not operational grade ore processedthrough throughoutmost of the operationof the concentra- Project. tor. 3. Additionalannual income 3. Benefitnot &chieveddue per miner of US$ 275 through to much lower than estimated used mining equipmentpurchased given lower production,under the Project. prices, and responsefrom miners to equipmentfor sale. No precise estimateavailable. ......... ................ _ A/Between1982 and 1986 productionfluctuateddrastically between 11,200 tpy and 21,200 tpy. 39 Table 7 (continued) B. EconomicImoact Appraisal Est. Actual (M) EstimatetX Incremental Econ- omic Rate of Return 32 A/ AMsumRtions Economicrate of return calculatedfrom financialcost/benefitstreams (See sectionTable 7, section C) which were amended to eliminateall identifiable taxes and subsidiesin capitaland operatingcosts. A/Given the project resultsoutlinedin sectionA above, a new incremental economicrate of return for the Projectwas not calculatedbut is expectedto be minimal. C, FinancialImRact ,9puraisal Est. Actual (X) Estimate M^ Incremental Financial Rate of Return 24 .1 Assu,Xtions 1. Capital costs consistingof working capital for concentratorsand CADETAF and replacementinvestments in the period 1988-91. 2. Cost streams includeCADETAF'sincremental productioncosts, artisanalproductioncost of DH 165 per tonne of concentrate and incremental labor costs. 3. Labor productionof 6 tonnes per man-year. 4. Nominalwages of DH 6,600 per man-year,about 50X above minimum wage. 5. Benefitsconsistof revenuesfrom sales of concentrate. A/Given the project results outlinedin sectionA above, a new incremental financialrate of return for the Projectwas not calculatedbut is expectedto be minimal. 40 Table 7 (continued) D. $StA41. Title Objectiveand Impact Geologicalsurveys Metallogenic and other geological evaluations were designedto im- prove knowledgeof reservebase and denote promisingareas for production. Surveys indicated a reserve base insufficient for economic use of the concentrator purchased under the Project. Socio-economic Designedto assess the impact of the study of the arti^ artisanal mining sector on the regional sanal mining sector and national economy. Study was not completed because the Project did not achievemost of its objectives.It probablywould have been useful to conduct a study of the miners' activitiesand preferences before designingthe Project,since its sucess dependedstronglyon a responsefrom the miners to the various incentivesfor enhancedproductionresponse. 41 Table 8 (continued) Status of Covenants Source Description Satus IA 2.10 to 2.08 Generalcovenantsrelatingto re- payment of the Bank loan and pro- curementpolicy. OK IA 3.01 to 3.02 General covenantsrelatingto the executionof the Project. OK LA 4.01 Generalcovenantscoveringexternal debt of the Borrower,the creationof liens and definitionof the term Opublic "assets." OK IA 4.02 Implementation prior to October 1, 1982 x/ OK provisionspertainingto the formula for ore pricing and payment for purhasesfrom miners set forth in Schedule4 of the Loan Agreement. This provisionnot to be amendedprior to exchangeof views with Bank, to take place not later than June 30 1984 or anotherdate agrced with the Bank. OK LA Sched. 4 Provisionsfor (a) ore pricing and payment of miners (b) calculation of CADETAP's withholding margin and (c) calculationof fees for use of the Concentrator and treatmentof oreo. OK PA 2.01 General conditionsfor executionof the Project. OK PA 2.02 Employmentof experts and consultants, Partial / accordingto Bank guidelines,by (a) liance ComQ 12/31/83to assist CADETAFin the 42 Table 8 (continued) Status of Covenants Source Description Status PA 2.02 (continuedfrom page 1) geochemical survey and (b) no later than 9/30/82 to assist CADETAP in the analysis of its organizational structure and the development of systemsand proceduresfor improved management of information and finances. Review, with the Bank, of consultantfindingson CADETAF's managementsystemsno later than 6/30/83 (or other date amenableto the Bank) and relatedstaffingand trainingneeds. PA 2.03 Borrowerto provide Bank with terms of PartialS/ referencefor (a) the managementconsul- C=Rliance tants by 3/31/83 and (b) the socio-econ- omic study by 6/30/83 as well as copies of contractsfor the executionof the work. PA 2.04 Borrowerto enter into technicalservices OK contractwith BRPM on terms and conditions acceptableto the Bank. BRPM to provide procurementservicesand carry out metal- lurgicaltesting,flow-sheetand engineer- ing, receipt,installation and start-upof the concentratorsfor lead and zinc, as well as the crushingand grinding unit and related staff training. PA 2.05 Generalprovisionsgoverningprocurement. OK PA 2.06 Generalprovisionsgoverninginsurance. OK PA 2.07 General provisionsgoverningreportingre- quirements. OK PA 2.08 2.09 ProvisionsgoverningCADETAP's performance under the Subsidiary Loan Agreement. OK 43 Table 8 (continued) Status of Cvenants Souree Descrntinn status PA 2.10 Special provisionsconcerningthe training Partal / of mlners: (a) preparation of a detailed Co 2liance trainingprogram,including selectioncri- teria for trainees;(b) furnishthis program to the Bank no later than 9/30/88unless otherwiseagreed with the Bank and (c) implementthe pro- gram promptly,taking Bank's comments into account. PA 3.01 (a) General provisionsgoverningCADETAF's management. OK 3.01 (b) Unless otherwise agreed with the Bank, Paxtialb/ Borrowerto maintainin positiona Cmlianee technicaldirectorassistedby a geolo- ist, acting as deputy director,a finance director,a mining engineerat the head of its mining section and a maintenance engin- eer. Employ no later than 12/31/82,and maintainin positionat least until the completion of the Project: a geologist, a foreman instructorfor the trainingmine, an assayer and assayertechnician, two credit agents reportingdirectlyto the finance directorand a chief statistician. Employ no later than 6/30/83,and maintainin position at least until project completion, a beneficia- tion engineerand two beneficiation technicians. PA 3.02 General provisions governing insurance. OK PA 3.03 General provisions governing land rights. OK PA 3.04 General provisions governing maintainance OK and disposal of equipment and other property. PA 4.01 General provisions governing the maintenance of financial records. OK 44 Table 8 (cZntinued) Status of Covenants SAource Desrigtign Status PA 4.02 (a) Establishment and maintenanceof a OK ji separateaccount for a financing facility for equipment and works of the lead mines. PA 4.02 (b) Auditing and reportingrequirements for CADETAF'saccounts. OK PA 4.03 Limitationson investmentsbefore Project completion. Definitionof terms used in section4.03. OK PA 4.04 CADETAF to take all necessarysteps to OK A/ implement, no later than 10/1/82, measuresand decisionstaken pertaining to the formula for ore pricing and payment for purchasestrom miners set forth in Schedule4 of the Loan Agreement. a/ Compliancesatisfactory but the Bank consultanteventuallysuggested studies for a new, more flexibleore pricingand payment formulato improve CADETAW's cash flow and timely payment of the miners. b/ CADETAF experienced difficulties and delays in hiring qualified staff. Some additionalstaff were not necessarydue to market conditionsand the actual results of the Project. c/ Delay in completion of the financial management study. Socioeconomic study not implemented due to market conditions and project results. d/ Delay in completion of training program. Not specified in enough detail to be effective. e/ Account established but apparently never used. 45 Table9 StaffImuts Stare of ProjectCycle Staffoks ThroughAppraisal 46.7 Through Effectiveness 73.9 Supervision 6.9 TOTAL 185.1 PROJECT COMPLETION REPORT Morocco: Pilot Small-Scale Mining Project Loan 2109-MOR Table 10 Major Bank Missions nth/ o. " In Performe Activity Yea Persons tiold Secialiation blissl C_ts Prp./AppraSl 6/79 Is 1.0 . Project identification. 12/" 6 * OC;L0 n.. Project discussions. 4/Ue 2 14 IfA;B6 a.a. fMoie. of (a) institutioorl, geologscal aW stinsn & ts md (h1 switablity of CIAF as a borrower. A.praisa to MorE Aproal 2/U2 1 of IN n.. nome Supevision 6/82 2 6 lfA;WI Selatively I problemfree. mainactivitiesproceeding on scbed*lo. IIJ82 2 * IfA; us I Minor probles reportd.Difficultles t'preparation of pr _omt documents. Delay in procurmnt of the lead concentrator. 3/83 2 9 lfA;lI1 2 odrate problems with ditsburseents and hithadhertng to tne anticipatedprojct Comletion dte. 4/84 3 17 2f1;INE 2 Major ptroblem cited including ingl _ntation delays. itel price and production dectines; lac" of expertenced technical an financial stafd. 9/85 2 4 2f s.r. Discussion of partial of the loan. cancellation 2/86 2 5 Sh IfA;: 2 Weakm nt and severe cash flow problems. ynsa 11/86 2 7 aH£ 2 Majorproble in projectmanegent. Propose: (a) extenston of closing dateby I yearand (blfinancing techoical assistance for tbeoperation of the concentrator. a matnns sector study and reowrganiation of CAlTAF. 2/87 1 9 INC n.r. CAKTAUFs _Wotions at a standstill. Little progress onsales of equ.i_nt to mners.Should consider of project still worth pusuing. CAOITAF uwableto build up maement capabsilty requareod ad has net receied Own support for theproject froothe Geeovenat. 6/87 3 12 I1C/fA; I Majr problems tn all categories of project supervision. Large 2bE tMod forCAKTAF to restructure on ore (concentrating purchasing/solln) Improve finansial control of osieat ons and clear debts. fPopos finding experienced operator for the concethtrator or stlling It.and _mdiate part i) saleof *s.st.i equount. nequeot for cancellattin of USS4.2million of loan. Lon to closeas planned. Sehstantial losses resulting fromaeclintig intalp.ices. ineffective selling/purcehson proceures and poor ungseawnt. DC - OtwistonChief HE H£ Mechanical Ensineer IC Econoasst an.&. not applicable A z FinancialAnalyst n.r. = not reported LO - LoanOffi'er . nn^ 1,4)J
Группа Всемирного банка · Project Performance Assessment Report
Morocco - Pilot Project For Small-scale Mining Project
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Project Performance Assessment Report
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Марокко
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Всемирный банк