China - Changcun (Luan) Coal Mining Project

Documcnt of The World Bank FOR OFCIAL USE ONLY Report No. 13417 PROJECT COMPLETION REPORT CHINA CHANGCUN (LUAN) COAL MINING PROJECT (LOAN 2501-CHA) AUGUST 2, 1994 Industry and Energy Operations Division Country Department II East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Name - Renminbi Currency Unit - Yuan (Y) = 100 Fen $1.00 - Y 2.80 (January 1985) $1.80 - Y 5.48 (December 1993) $1.00 - Y 8.60 (June 1994) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 British Thermal Unit (BTU) - 0.252 kilocalories 1 cubic meter (m3) - 35.315 cubic feet I Gigawatt hour (GWh) - 1,000,000 kilowatt hours 1 kilocalorie (kcal) - 3.97 British Thermal Units 1 kilocalorie per kologram (kcal/kg) - 1.805 British Thermal Units per pound 1 kilogram of coal equivalent (kgce) - 0.64 kilogram of oil equivalent 1 kilometer (km) - 0.621 mile 1 kilovolt (kV) - 1,000 volts 1 kilowatt (kW) - 1,000 watts 1 MVA - 1,000 kilo volt ampere 1 Megawatt (MW) - 1,000 KILOWATTS 1 meter (m) - 3.281 feet 1 square kilometer (kin2) - 247.1 acre or 0.3861 square mile 1 square meter (m2) - 10.764 square feet 1 ton (t) - 1,000 kilogram or 2,205 pounds ABBREVIATIONS CIC Coal Industry Corporation CNCC China National Coal Corporation CNCDC China National Coal Development Corporation CNTIC China National Technical Import Corporation GOC Govemment of China IBRD Intemational Bank for Reconstruction and Development ITC International Tendering Corporation MOCI Ministry of Coal Industries mtpy million tons per year UNDP United Nations Development Program  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation August 2, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China Changcun (Luan) Coal Mining Project (Loan 2501-CIA) Attached is the "Project Completion Report on China - Changcun (Luan) Coal Mining Project (Loan 2501-CHA)" prepared by the East Asia and Pacific Region. Part II was prepared by the executing agency of the Borrower. The US$126 million loan approved on March 14, 1985, was to help develop a large scale, high technology coal mine. The loan was closed 18 months behind schedule and $51.1 million was cancelled. Various reasons combined to delay the commissioning of the mine: a geological accident, the bankruptcy of the main foreign contractor, and the inexperience of the implementing agency with construction projects of this scale. Despite lower project costs, the substantial delay in project implementation (the mine is not yet commissioned) will curtail the economic rate of return and even more the financial rate of return. Lack of experience with modern project scheduling and monitoring practices impeded the development of the mining company. Tight bureaucratic controls added delays. The PCR gives a satisfactory account of the implementation delays and appropriately notes the Bank's excessively optimistic assessment of implementing agency capabilities. Overall, the project is rated as marginally satisfactory, its sustainability as likely once the mine starts producing coal by end 1994, and its institutional impact as modest. The project will be audited. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  PROJECT COMDPLETION REPORT CBINA CHANGCUN (LUAN) COAL MN1ING PROJECT (LOAN 2501-CHA) CONTENTS Preface ............................................ Evaluation Summary .................................... ii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE .1 Project Identity. 1 Background. 1 Project Objectives and Description. 2 Project Design and Organization ......... .................. 3 Project Implementation ............. ................... 3 Project Results ...................................... 6 Project Sustainability . ................................. 8 Bank Performance .................................... 8 Borrower Performance .................................. 10 Project Relationship . ................................. 11 Consulting Services .................................. 11 Project Documentation and Data ......... .................. 12 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .... .. 13 March 14, 1994 Facsimile Introduction .................................... 14 Luan CIC's Performance ................................ 15 The Uncontrolled Main Contractor of Construction .... ....... 15 The Unforeseen Geological Issue ....... ............... 15 The Lack of Construction Management Experience .... ....... 15 The Bankruptcy of Main Supplier for Service Shaft Equipment . .. 15 The Interference from Authorities of Upper Levels .... ....... 16 The World Banks Performance ........... ................ 16  Adequacy and Accuracy of Factual in Part III ....... . . . . . . . . . . . 18 Comments on the Analysis by the Bank in Part I ..... . . . . . . . 18 Comments on the Analysis by the Bank in Part I ...... . . . . . . . . . . . 18 Evaluation of Bank's Performance ........ . . . . . . . . .. . . . . . . . 18 Evaluation of Borrower's Own Performance ....... . . . . . . . . . . . . 18 PART III: STATISTICAL INFORMATION ........ . . . . . . . . . . . . . . . 20 Related Bank Loans and/or Credits ......... . . . .. . . . . .. . . . . . 20 Project Timetable ................... .... .... ... .... . . 20 Loan Disbursements ................ ... ... ... ... ... .. . 20 Project Completion ................. .... ... ... .... ... . 21 Project Costs and Financing .......... . .............. . .. . 22 A. Project Costs ............ ... .. .. .. .. .. ... .. . 22 B. Project Financing ........... .. . .. .. .. . .. .. . .. . 22 Project Results .............. ...................... . 23 A. Direct Results ............ ... .. .. .. .. .. ... .. . 23 B. Economic Impact ........... .. . .. .. .. . .. .. . .. . 24 C. Financial Impact ........... .. . .. .. .. . .. .. . .. . 24 Status of Covenants ............ . .................... . 25 Use of Bank Resources ........... . .................. . . 27 A. Staff Inputs .............. .. .. ... .. .. ... .. . . 27 B. Missions ................ ... ... ... ... ... .. . 28  - i - PROJECT COMPLETION REPORT CHINA CHANGCUN (LUAN) COAL MNING PROJECT (LOAN 2501-CHA) PREFACE This is the Project Completion Report (PCR) for the Changcun (Luan) Coal Mining Project for which Loan 2501-CHA in the amount of $126 million was approved on March 14, 1985. The project loan was closed on December 31, 1993, 18 months behind schedule. The last disbursement was on May 4, 1994 and $4.6 million was cancelled (in addition to the cancellations of $5.5 and 41.0 million in 1987 and 1990 respectively) at that time. The PCR was prepared by the Industry and Mining Division, Finance and Private Sector Development Vice Presidency (Preface, Evaluation Summary, Parts I and IE), on behalf of the Industry and Energy Operations Division, East Asia Country Department II, and the Borrower (Part II). Preparation of this PCR was started following loan closure and completed during the Bank's final supervision/PCR mission in May 1994, and is based, inter alia, on the Staff Appraisal Report; Loan and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and intemal Bank memoranda.   - ii - PROJECT COMPLETION REPORT CHINA CHANGCUN (LUAN) COAL MNING PROJECT (LOAN 2501-CHA) EVALUATION SUMMARY Objective i. The key objective of the Changcun (Luan) Coal Mining Project was to assist the government of China to develop a large scale, high technology coal mine that would provide a model for such development, as well as to contribute to the government's plan to double coal production over the 1980-2000 period (para. 3. 1). Implementation Experience ii. Project implementation was beset by delays, compounded by organizational deficiencies, with the result that at the time of loan closing, project construction was 4 years behind schedule and remained to be completed. Arrangements for project organization and control were ineffective (paras. 5.1-5.2). Construction management deficiencies were almost continuous and attempts to introduce international project scheduling and monitoring practices were not successful (para. 5.3). These deficiencies were compounded by poor performance and accountability of government-appointed construction contractors (para. 5.3), by initial delays in the provision of local funds (para. 5.4), and by slow and cumbersome equipment procurement procedures and inadequate attention and support to complete procurement expeditiously (para. 5.5). Serious delays (totalling 30 months) occurred during mine shaft construction; initially when unforeseen heavily saturated ground was encountered during shaft sinking, necessitating shaft freezing techniques, and subsequently with the declaration of bankruptcy by the lead foreign supplier of the international consortium responsible for the supply, erection and commissioning of the service shaft (para. 5.6). As a result, underground mine development was slower than anticipated and the schedule for initial coal operations was delayed. Project Results iii. Project construction remains to be completed and initial coal operations are yet to commence. First coal movement is now scheduled in late-1994, with rated (4.5 million ton coal per year) production forecast in 1998, over three years behind the original schedule. Project costs were substantially lower than anticipated (para. 6.2) and local coal prices are now at a higher level than forecast due to recent price liberalization in the coal  - iii - sector (paras. 6.3 and 6.4). Moreover, international coal prices (and thus China FOB export prices) have not developed as forecast at appraisal and economic distortions have been reduced. These factors, together with the impact of implementation delays and higher than anticipated operating costs, translate into reduced financial and economic benefits (para. 6.3). However, the project has had a very positive impact on the technological environment (para. 6.5), one of the key project objectives. Project Sustainability iv. On the basis that the Borrower's primary experience is in the successful operation (as opposed to construction) of longwall coal mine operations, it is considered that, following completion of project construction, coal production buildup can be developed as planned and full coal output can be maintained (para. 7.1). However, funding for the completion of construction is an issue during the present transitionary reform period. In addition, rail transport capacity for the movement of coal out of the project area has become a serious bottleneck. An Action Plan in this respect remains to be developed and is critical to ensure the effective distribution and marketing of project coal production (para. 7.2). Any delays in these respects would impact the completion of construction and initial coal production and would undermine project benefits (para. 7.3). Fnmdings and Lessons Learned V. Development of the large-scale, high technology Changcun underground coal mine has proved to be a difficult task for the implementing agency whose experience lies predominantly in operations as opposed to construction. Although ultimately, physical objectives can be reached, project benefits will be reduced. While the economic benefit can be considered acceptable, financial benefits are likely to be minimal at best and, given the high level of debt financing, could negatively impact the overall corporate financial position of Luan CIC, the implementing agency. vi. The importance of a clearly understood and workable organization and management structure within the subsector and at project level, that focuses on effective management control of contractors and on project scheduling and monitoring, cannot be overemphasized (paras. 8.2 and 9.1). The assumption of project ownership by the implementing agency is critical to successful implementation (para. 9.1). Care must be taken in formulating technical assistance and training programs to ensure that the concepts, objectives, and scopes of work, are clearly understood and accepted by all parties (para. 9.3 and 9.4). Well planned and staffed Bank supervision efforts, encompassing periodic development impact assessments, would contribute to a focus on project implementation issues, projected benefits, and follow-up actions necessary to better ensure successful project completion (para. 8.3). vii. Although there are minor differences between the Bank and the Borrower in terms of focus on project organization and management, and implementation issues, (and the Borrower has yet to complete a comprehensive Part II that addresses all project implementation issues, findings and lessons to be learnt), there is broad agreement on the definition and analysis of issues, and on the presentation and content in Part I.  - 1 - PROJECT COMPLETION REPORT CHINA CHANGCUN (LUAN) COAL MINING PROJECT (LOAN 2501-CHA) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Project Name Changcun (Luan) Coal Mining Project Loan No. 2501-CHA RVP Unit East Asia Country China Sector Energy Subsector : Coal 2. Background 2.1 During the early 1980s, after China joined the World Bank group, the Bank's appreciation of the importance of the energy sector in the overall country economy became clear. It was established during early sector initiatives that (a) China was well endowed with primary energy resources (particularly coal, hydrocarbons, oil shale and hydropower); (b) coal was the backbone of the country's energy sector, providing over 70 percent of commercial energy consumption; (c) China's coal production was one of the largest worldwide, second only to the USA in the early-1980s; and (d) China's coal resources (640 billion tons) were the largest worldwide. 2.2 The demand for coal through the year 2000 was seen as strong due to the pace of general economic development. Although energy savings were apparent as a result of conservation and a shift from heavy to light industries, a doubling of coal production was considered a realistic and achievable target. The country's target production was recognized as one that would facilitate coal maintaining its share of total commercial energy production. Key sector development constraints identified included shortage of investment funds for new coal mine development, the need for improved project design and management, a government regulated coal distribution system, and nonremunerative coal pricing policies. 2.3 To ease energy shortages which government identified as a potentially serious constraint to China's economic growth, high priority was placed on boosting the production from primary energy resources. Earlier Bank support had been provided to oil  - 2 - and power sectors. To enable the coal industry to double its production by the year 2000, a series of coal projects were formulated and it was recognized that a development program of large coal mines utilizing modem technology was critical. The Changcun project was seen as a demonstration model which would not only contribute to the large coal production target but which would provide also a model for fully integrated, highly mechanized coal mine operation that had previously not been attempted in China. The project was seen also as an opportunity to provide access for Chinese coal industry specialists to international technology, mine planning and design, and project and construction management. 3. Project Objectives and Description 3.1 The key project objective was to develop a large scale, high technology coal mine that could provide a model for such development, as well as to contribute to the government's plan to double coal production over the 1980-2000 period. Specific project objectives were: (a) to increase coal production by about 4.5 mtpy by the early 1990s, thereby helping to meet China's demand for coal; (b) to transfer technology in mine design, engineering, and construction, specifically the highly productive mechanized longwall exploitation technique; (c) to introduce modern coal preparation technology which would facilitate improvements in the quality of coal provided to quality discriminating consumers and encourage economic use of middling and fine coal in nearby power plants; and (d) to foster improved management techniques for project scheduling, monitoring and cost control, thereby reducing construction time and costs. 3.2 Key components of the project were: (a) construction and provision of equipment for an underground mine with a design capacity of 4 mtpy (actual capacity of 4.5 mtpy) consisting of three vertical shafts, 48 km. underground roadways, and five fully mechanized longwall faces; (b) construction and provision of equipment for a surface coal handling plant and a coal washery with a throughput capacity of 2 mtpy of sized coal;  - 3 - (c) provision of surface infrastructure including a railway spur line, electrical substation, water supply lines, workshops, warehouses, offices, housing, a hospital and schools; (d) technical assistance in project management, design engineering and procurement; and (e) training both abroad and by foreign experts in China in modem mining techniques, management and procurement, and the establishment of mine training centers. 4. Project Design and Organization 4.1 The conceptual foundation for the project design was developed during prefeasibility and feasibility study investigations and, in principle, was clearly understood and accepted by all parties. The project scope and scale was appropriate in the light of the government objective of doubling the country's coal production over the 1980-2000 period. During feasibility considerations, preliminary plans were to produce coal from 8 longwall faces, 5 of which would be fully mechanized and the remainder equipped on a more conventional basis. However, during project appraisal, Bank staff pointed out that longwall faces dimensioned according to western standards could produce the requisite coal output from 5 mechanized and 1 conventional unit (during the early stages of project implementation, Bank staff highlighted that with redesigned longwall faces; actually five longwall faces could generate target coal production; thereby reducing development time and investment requirements). Agreement to these revised specifications was reached during postappraisal; however, the development of detailed specifications during the early years of project implementation became a serious difficulty for Chinese counterparts. In fact, mine planning and design, detailed engineering, and the preparation of technical specifications for the main mining equipment packages had to be assigned to foreign consultants. The difficulties faced by the local agencies in this respect caused procurement difficulties and project delay (para. 5.5). This underscores the importance of ensuring at or prior to appraisal, that project design parameters are agreed and clearly understood. 4.2 The roles and responsibilities of the institutions and agencies responsible for project construction and procurement were considered to be well defined at appraisal. This proved not to be the case and institutional, and organization and management issues seriously impacted project implementation (para. 5.2). In retrospect and although other project implementation issues arose, it was the confused, overlapping and poorly defined roles and responsibilities of the concerned institutions and agencies that contributed most to the failure of the project to meet its schedule. 5. Project Implementation 5.1 The most notable variance between actual and planned project implementation was, and remained at loan closing, the progressive accumulation of project delays. Project implementation issues were many and varied, and dogged the project from  - 4 - the outset of implementation and throughout the construction period. The key implementation issues contributing to project slippage included: (a) serious deficiencies in project organization and management; (b) serious deficiencies in construction management, scheduling, monitoring and cost control; (c) delays in the appointment of construction management consultants and dilution of the consultant scope of work; (d) poor performance of MOCI (Ministry of Coal Industries) appointed contractors; (e) inadequate provision of local funds; (f) cumbersome procurement arrangements and a lack of commitment to complete procurement in a timely manner; (g) inadequate ground investigations for shaft sinking; (h) bankruptcy of the lead supplier of the international consortium for service shaft equipment supply, headframe design, erection, and commissioning; (i) protracted negotiations with cofinancing agencies; and (j) inadequate project reporting. 5.2 A more careful Bank review and understanding of traditional project implementation (construction and operations) practices in China could have lead to improved project organization and management arrangements and therefore, improved project results (para. 8.2). A more careful appraisal of Luan CIC's limited construction management experience, and a more candid dialogue during loan negotiations, might have led to workable construction management, scheduling, monitoring and cost control arrangements. Project construction was plagued by (a) the bureaucratic structure of MOCI and its lack of overall control of the project; (b) the lack of accountability of construction contractors appointed by MOCI to Luan CIC; and (c) the inability by Luan CIC to assume the role of project owner and to assert control over the MOCI-appointed construction contractors. This position was exacerbated by the dissolution of MOCI in the late 1980s and the creation of the China National Coal Company (CNCC) with a much restricted, and essentially policy-based, role. Construction management tools to effectively control project scheduling, monitoring and costs were not well understood or applied seriously by Chinese counterparts until immediately prior to loan closing. At that time the first meaningful project master schedule was completed and the importance and benefits of international project management control tools were understood.  - 5 - 5.3 Serious delays occurred in the appointment of project management consultants at the start of project implementation, underscoring the inadequate organization and management arrangements for project implementation. Indeed, dilution of the consultant's scope of work occurred during the extended period of negotiations; further indicating the lack of understanding of the benefits of international construction management tools. Project implementation was plagued by the poor performance of MOCI-appointed contractors, specifically those involved in underground development works and shaft installation. These contractors failed continuously to provide necessary physical, human and financial resources to the project site and, for the most part, were indifferent to the impact of their poor performance on the accumulation of time and cost overruns. Luan CIC and MOCI displayed also a lack of understanding and an indifference to the impact of poor contractor performance on the project schedule and the benefits to accrue to the coal industry. 5.4 At the start of project implementation, inadequate local funds were provided by government due in part to (a) delays in Board presentation (and thus uncertainty about Bank participation in the project) associated primarily with the extended Bank/government dialogue relating to the government's commitment to coal price increases and to the development of an acceptable coal pricing policy, and (b) delays in loan effectiveness pending appointment of project management consultants. 5.5 Limited engineering personnel within the China National Coal Development Corporation (CNCDC), and inadequate attention and support by the International Tendering Corporation (ITC) subsidiary of the China National Technical Import Corporation (CNTIC) and lack of familiarity with Bank ICB procedures, coupled with periodic government interference, lead to cumbersome procurement procedures for the importation of key mining equipment packages. These procurement difficulties lead to major delays, particularly in relation to the importation of critical longwall equipment packages and the associated domestic procurement of longwall powered supports. 5.6 A serious (12-month) project implementation delay occurred during the sinking of the three project mine shafts due to unforeseen subsurface hydrogeological conditions (not apparent from initial drilling investigation) and the need to freeze large sections of the mine shafts to pass through heavily water-bearing strata. This underscores the importance of adequate ground investigations being an integral part of any project preparation phase. During shaft erection, a further (18-month) delay was occasioned when the lead supplier of the international consortium responsible for all service shaft equipment supply, erection and commissioning, declared bankruptcy. Chinese authorities were very slow to react to and to resolve this issue and, again, ITC appeared unconcerned about the impact of delays. As a result of delays in the commissioning of the service shaft, arrangements had to be made to equip and utilize the smaller diameter ventilation shaft for clearing underground development rock. As a result underground mine development slowed down. 5.7 Design follow-up (detailed engineering) services and training were delayed due to protracted negotiations with the German cormancing agency. Inadequate  - 6 - project reporting throughout most of the project implementation, did not facilitate focus on project implementation issues and actions needed to resolve them in an expeditious and business-like manner. 5.8 Under the project, a training center was to be developed at Changcun to train mine operators and maintenance personnel. Although this facility was constructed and teachers were trained in Germany, the building and extensive equipment financed and installed, lay essentially idle throughout a major part of the implementation period. 5.9 The original schedule anticipated 1 year site preparation and 6 years construction, with coal production start-up in 1991 and rated (4.5 mtpy) coal production being attained in 1994. At the present time, 9 1/2 years following the start of site preparation, construction is not completed. First coal production is now not anticipated until late-1994, with design production (4.0 million tons coal per year) tentatively scheduled in 1997 and rated production (4.5 million tons coal per year) capacity scheduled in 1998, a cumulative delay of 3 to 3 1/2 years. This delay occurred primarily due to (a) the perpetual project and construction management deficiencies, (b) the 12-month slippage in shaft sinking, (c) the further 18-month delay occasioned by the lead supplier of the shaft erection/commissioning consortium declaring bankruptcy, and (d) the ripple effects of (c) above on the rate at which underground mine development was able to proceed. 5.10 Project risks were evaluated at appraisal. These related during project implementation, to anticipated problems in time and cost overruns. The definition of these risks was accurate in principle, but, in retrospect, was underestimated. Sensitivity analysis undertaken at appraisal identified the impact of these factors but did not anticipate the potential magnitude of the time/cost overruns or the fact that technical assistance schemes may not prove adequate or successful in strengthening Chinese project management deficiencies, thus, in themselves, contributing to the serious project implementation delays. 6. Project Results 6.1 The objective of developing a 4.5 mtpy underground longwall coal mine operation has not been met at this time. Although construction is nearing completion now, first coal production is anticipated only in the last quarter of 1994 and target (rated 4.5 million tons per year) coal production is not anticipated until 1998. The major variance between the planned and actual project implementation schedule occurred primarily due to delays occasioned by deficiencies in project management arrangements, poor local contractor performance, delays in appointing consultants, procurement mismanagement and delays, and problems with shaft sinking operations and related foreign shaft erection contractors (Section 5). 6.2 The total project cost at project completion is estimated at $274.6 million, over 20 percent lower than the appraisal estimate of $357.0 million. The principle reason for the cost reduction is the competitive costs for imported equipment, obviating the need to utilize physical and price contingencies, and leading to the cancellation of Bank loan proceeds totalling $51.1 million.  - 7 - 6.3 However, despite the lower than anticipated project cost, the economic rate of return is estimated at 11 percent, compared to the appraisal estimate of 21 percent. The reduction in economic benefit is due to (a) a deterioration of international coal prices (forecast at appraisal to be $46.5 per ton in 1994, compared with an actual level of $31.0 per ton) and thus the economic (FOB export) price of project coal; (b) the delays incurred during project implementation and thus a delayed revenue buildup stream; and (c) the reduction in economic distortions identified at appraisal, which have been eliminated to a large extent over the 10 year implementation period. The project financial rate of return is estimated at only 3 percent, compared to the appraisal forecast of 9 percent. The $84 million project cost savings, together with higher than anticipated local coal prices (Y 109 per ton coal as compared to the appraisal forecast of Y 58.5 per ton coal) have been more than offset by (a) the impact of accumulated project delays; (b) higher than anticipated mine operating costs (now forecast at Y 58.5 per ton coal, more than double the appraisal estimate due to higher than anticipated inflation rates and the removal of subsidies on input materials (cement, steel, machinery, etc.); and (c) an increase in commercial taxation (introduced by government as a mechanism to recover its investment in the project from Luan CIC) from 3 percent at the time of appraisal, to an average of 13 percent. 6.4 The project was not expected to have major impact on macro or sectoral growth and policies, although it did provide an opportunity for continued dialogue with government on the importance of developing an economically rational coal pricing policy. (Coal prices were liberalized over the 1993/94 period and coal sales arrangements are now determined essentially by market forces). In terms of human resource development, considerable overseas and internal training was accomplished, although training facilities developed at Changcun remain underutilized. Even though misunderstandings occurred in relation to the development of environmentally acceptable construction waste heaps, their design, which is now under implementation, will provide an improvement to the control of environmental degradation caused by coal mining operations. 6.5 The technological environment will be much enhanced following completion of the project, as the Changcun project will represent the first large scale fully mechanized mine developed with latest international underground coal mine technology. Indeed, Luan CIC has already gained much from the underground mine technology transfer and has effectively increased production at its existing coal mines to 9.5 million tons coal per year from 6 longwall faces, compared with the production of 6 million tons coal per year from 12 longwall units in the early-1980s. In addition and although not appreciated until the latter stages of the project, Luan CIC (and indeed MOCI personnel also) have now understood the critical importance of project management, scheduling, monitoring and cost control tools in the efficient management of large-scale mine projects. 6.6 At the national level, institutional development impact is greatest within CNCDC and CNTIC where the mechanisms for optimizing mine design and handling international procurement have been much enhanced. At the local level, Luan CIC has finally come to understand the importance and benefits of international construction management techniques and their benefits to project control and has begun to understand that project delays can have serious impact on project benefits and on its overall  - 8 - profitability. These lessons are also more clearly understood now at the national level, in MOCI. 7. Project Sustainability 7.1 With project construction yet to be completed and a three to four-year coal production buildup schedule, project sustainability cannot be discussed with any certainty. Recognizing that the major part of project construction has been completed and that Luan CIC's internal skills have traditionally been in coal mines operations (production), as opposed to mine construction, it is considered that the rated coal production capacity can be reached within the foreseen time frame and that the project output (4.5 million tons coal per year) can be sustained thereafter, and with the financial and economic benefits calculated (para. 6.3). Indeed, given the performance of Luan CIC existing mines over recent years (para. 7.2), it is considered likely that the rated Changcun coal production capacity can be exceeded in future years. 7.2 However, following loan closing, two key issues have been identified that could impact this position. Firstly, local financing (Y 350 million) needed to complete project construction has not been forthcoming during the present transitionary reform period when responsibility for such funding is passing from MOCI to industrial development banks. It is considered that this issue is likely to be resolved in the near term, such that further delay to project construction completion is unlikely. Secondly, during the project implementation period, a large number of local provincial and municipal coal mines have been developed and are currently producing about 8.5 million tons coal per year. A major portion of this coal production is being transported on the south Shanxi rail system such that rail capacity in and out of the area is now such a bottleneck that Luan CIC is facing difficulty to dispatch coal production from its existing mine operations. No short-term plan has been developed by either Luan CIC/MOCI or by the Ministry of Rail to develop additional rail capacity to transport Changcun project coal. In the event that such a plan is not developed and implemented within the near term, project construction may be completed but, in part at least, coal production may be unable to reach markets. In such a situation, financial and economic benefits accruing from the project would be far less than currently forecast. 7.3 There remains also a risk that operational (start-up) issues will arise with the initial longwall coal production units and that coal production buildup will be slower than planned and the attainment of rated coal production capacity delayed beyond the target date of 1998. Sensitivity analysis indicates that in the event of a further two-year delay in the attainment of full production, financial and economic benefits would be reduced by a factor of approximately 10 percent, with the financial and economic rates of return likely to reach only 2 and 10 percent, respectively. 8. Bank Performance 8.1 The main strengths of the Bank's performance were in assisting Chinese agencies to identify, prepare and appraise thoroughly the technical, financial and economic  -9- aspects of the Changcun project (as distinct from institutional aspects) and to utilize subsequent supervision missions effectively to maintain Luan CIC's focus continuously on project implementation delays and other project issues, and actions necessary to resolve them. Supervision missions proved also a useful vehicle to escalate critical implementation issues to government level for remedial action. 8.2 The Bank made a conscious decision in the early 1980s to proceed with the preparation of the Changcun project prior to the development of a full appreciation of the coal sector and related issues, and to utilize the planned Changcun lending operation as a vehicle upon which to build a better understanding of the sector. This decision was made in order not to delay what was seen as a very important role that the Bank could and should play in the important energy subsector and recognized that time would be required for the government to better understand the Bank's interest and need to be informed about broad coal sector policies, operations and issues. As a consequence, certain sector (particularly institutional) understandings were incomplete at appraisal. Bank understanding of the organization and management responsibilities and accountabilities of the various agencies in the sector (MOCI, the MOCI Construction Department, MOCI Construction Department contractors, and Luan CIC) was incomplete and important issues, including project ownership, Luan CIC's lack of construction management experience and expertise, as well as the question of the accountability of MOCI-appointed contractors, were not well understood (para. 9.1). These issues were at the root of project management deficiencies that plagued project implementation (paras. 5.1 and 5.2). The lack of clear definition and understanding of appreciation of organization and management arrangements in the coal sector and for the Changcun project, and their likely impact on project implementation, was a weakness of Bank performance. 8.3 Another weakness in the Bank's performance was the frequency and staffing of supervision missions. In the early stages of implementation, it became clear that serious issues had remained unresolved at appraisal and that additional issues were likely to arise. Successive Aide-Memoires repeatedly referred to the need for higher than normal intensity of supervision effort. However, during certain critical stages of implementation (April 1987-January 1988 and April 1991-December 1993), supervision missions were not scheduled with the required frequency. In addition, the majority of supervision effort was focused on technical, procurement, organization and project management issues. Bank financial/economic staff were not scheduled to participate in the majority of the supervision effort. As a result, the development impact of the project was not reassessed during implementation. Such a development impact assessment would have assisted to focus the Bank and the Borrower on the accumulating loss of financial and economic benefits and the importance of avoiding further delays during project implementation. 8.4 Closing of the loan account at end-1993 (after only one extension of 6 months and a further extension of 12 months) prior to completion of construction and due to the poor history of project implementation, may not have been in the best interests of the project. Although the original implementation period was long by any industry project standard and implementation delays were many and varied, the benefits of a joint Borrower/Bank commitment to complete large, issue-oriented, industry projects would  - 10 - mitigate project start-up delays and ensure that financial and economic benefits are maximized. 9. Borrower Performance 9.1 The main weaknesses in the performance of Luan CIC, the Borrower and project implementing agency, were (a) its lack of assumption of ownership of the project, (compounded by the lack of accountability of MOCI-appointed construction contractors to Luan CIC); (b) its inexperience in project construction management and thus, inherent project management deficiencies; and (c) its reluctance to utilize international expertise in construction management, scheduling, monitoring and cost control. After various Bank staff discussions and appeals to MOCI, provision was made for contractors to be responsible and accountable to Luan CIC. However, because of the traditional independence of the contractors and their historic arms-length position in relation to CICs, the limited interest of Luan CIC to assume project ownership was rather overpowered by the presence of the contractors. Because of its traditional assumption of coal mine responsibility only after completion of construction, Luan CIC failed in the early years of implementation to mobilize an effective construction management team or personnel that could direct contractor operations. As a result, Luan CIC was not able to resolve or to seek resolution of the human, physical and financial resource deficiencies of the contractors. In addition, basic project (construction) management concepts were not understood or appreciated. Bank-financed technical assistance consultants appointed at the outset of the project to assist to develop project scheduling, monitoring and cost control techniques were not well received or understood by the Chinese counterparts and the consultant input failed to achieve its objective to transfer, effectively, modern project management scheduling, monitoring and cost control techniques. 9.2 In the preparation of Part II of the PCR, neither Luan CIC nor MOCI have indicated the capability to assess or quantify the economic or financial benefits likely to accrue from the project. Indeed there appears still a complacency and even an indifference regarding the impact of the project on both the country's economy and the financial affairs of Luan CIC. There appears to remain in the coal sector a lack of appreciation of the time, value of money, the cost of capital and the effect of implementation delays on the accrual of project benefits. These factors which have contributed to an element of disinterest in the speed of project implementation. 9.3 In general terms, Luan CIC did not take advantage fully of the many areas of technical assistance provided. Project management assistance was not understood or accepted, design follow-up technical assistance was often considered an unnecessary interference and expense, and assistance introduced in the later stages of project implementation to develop a project master schedule and mechanisms to monitor this, were slow to be accepted. 9.4 Another weak area of the Borrower's performance was the lack of attention and interest to the development of the project training center and interest in training. A teaching center was developed and equipped at Changcun, but although a number of  - 11 - teachers were successfully trained in German training facilities, Luan CIC's interest in utilizing the center facilities and the imported training items and equipment, was indifferent. The original concept that engineers also from the Chengzhuang mine and of neighboring CICs would utilize the facilities was not taken up by the Borrower. 10. Project Relationship 10.1 The main strength of the Bank-Borrower relationship was the jointly shared commitment to identify action plans to resolve project implementation issues. Unfortunately, because of the extent of project implementation issues, the commitment tended to focus on technical, contracting and procurement issues, rather than on development impact and the quantification of the impact of delays on originally projected benefit streams. 10.2 The Bank's relationship with government was channelled primarily through MOCI and yielded some support and assistance to key issues during the early years of project implementation, However, in the late-1980s and with the dissolution of MOCI and the formation of the China National Coal Corporation (CNCC) with a much reduced staff and a focus restricted more towards policy initiatives in the coal sector, the relationship could not be maintained with the same level of focus, although CNCC did try to resolve key project management deficiencies in the latter stages of project implementation. 10.3 The relationship of Luan CIC to MOCI and MOCI-appointed contractors was weak. Until the last year of the project implementation, Luan CIC did not display any interest in assuming project ownership and there seemed to be no clear view between MOCI and Luan CIC, in relation to the important question of project ownership. 10.4 The main lesson to be learnt from the Bank-Borrower relationship is the importance of project ownership and that all construction contractors must be directly accountable and responsible to, and paid by, the project owner. With the difficult experience of implementation of the Changcun project, Chinese agencies now appreciate better this lesson. 11. Consulting Services 11.1 Extensive consulting services were provided throughout project preparation and appraisal, through the initial development of project management arrangements and follow-up design assistance to equipment commissioning and scheduling and monitoring assistance. Generally speaking, the consultant input was satisfactory, although in many cases, Luan CIC neither understood nor committed itself to the consultant inputs. As a result and particularly in relation to project management, scheduling, and monitoring services provided, the impact on the project was not satisfactory. 11.2 Many foreign suppliers were involved in project implementation; a key activity being the supply, erection and commissioning of the three mine shafts. Suppliers generally did not seem to exhibit a very positive attitude towards the Chinese counterparts  - 12 - and relationships were frequently strained. In part, this was due to the long delay between equipment supply and erection, and the indifferent attitude of certain suppliers, but also due to the discomfort of Chinese counterparts in recognizing the need for foreign supplier assistance, and the poor performance and cooperation of local (MOCI-appointed) contractor counterparts. Local suppliers of underground and coal preparation equipment generally did not perforrm as well as the foreign suppliers in terms of equipment fabrication and delivery schedules. 12. Project Documentation and Data 12.1 Legal agreements for the project were adequate throughout the project implementation and no particular lesson can be learnt from this aspect of the project. There was generally a lack of commitment by Luan CIC to the importance of loan covenants and particular confusion occurred in complying with the methane gas monitoring and environmental (waste heap reclamation) covenants. Project reporting was also an area of persistent disinterest and weakness. 12.2 The Bank's Staff Appraisal Report proved to be a good framework for project implementation, for the Borrower and for Bank supervision missions. Data relevant to the Project Completion Report were readily available. However, with project preparation, appraisal and implementation spanning nearly 13 years and with a variety of Bank Task Managers involved, considerable time was necessary to assimilate the historical data (particularly financial), to reconstruct the appraisal financial evaluation and to document key project implementation issues. With the Bank's ongoing development of key industry project performance criteria to assist supervision of future Bank projects, the collation would improve.  - 13 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE FACSIMILE Date: March 14, 1994 No. of pages: 6 To: Name: Mr. Christopher Wardell, Principal Mining Engineer Dept: Industry and Energy Div.: Industry and Mining, 613/10 Rm No. G-2-039 Fax: 001-202-477-6619 From: Liu Xinzhong, Deputy Manager, World Bank Projects Dept. CNCDC Re: CHINA - Changcun (Luan) Coal Mining Project (Loan 2501-CHA) Dear Mr. Wardell: Please find the attached Project Completion Report, Part II for your review and reference. Project Completion Report (Chinese version) was submitted to CNCDC on the end of February 1994, but the content of the report is not as required by the Bank and it describes more about the history of the project. It has to be rewritten and translated by CNCDC. Please advise your travel plan to China for Changcun Project. Your sincerely, Liu Xinzhong (signed)  - 14 - LUAN COAL INDUSTRIES CORPORATION CHANGCUN (LUAN) COAL MNING PROJECT (LOAN 2501-CHA) PROJECT COMPLETION REPORT This report is Part II of Project Completion Report for Changcun (Luan) Coal Mining Project (2501-CHA). The report was compiled by Luan CIC and CNCDC; and it includes the evaluation of Luan CIC's performance and the World Bank's performance during the implementation of the Changcun Project. A. INltODUCTION 1. Changcun (Luan) Coal Mining Project under Luan Coal Industries Corporation (Borrower) is located in southeast part of Shanxi Province. The initial preparation for the project financed by the World Bank started from November 1981 and actual implementation of the project started in July 1985 with development of underground and surface construction. 2. The project comprises the construction and provision of equipment for an underground mine with a design capacity of 4 million tons per year, consisting of three vertical shafts, 46.37 km underground roadways with 90,177 m3 waste and five mechanized longwall faces; construction and provision of equipment for a coal washery with a capacity of 2 million ton per year of clean coal; provision of surface infrastructure including a railway spur line, electrical substation, water supply lines workshops, warehouse, offices, a hospital and schools with 8,796 m2 building/residential area; the establishment of mine training centers. 3. The project is expected to be completed in September 1994 and the coal production of Luan CIC will be increased to 14 million ton per year. Changcun Coal Mine is one of the largest underground coal mines with the most advanced equipment imported in China. The project is the first coal project financed by the World Bank; and the consultant and the suppliers of equipment provided the training to management and engineers for the project construction management and electrical/mechanical maintenance and operations. The training center was established, and it can provide the training to miners before they work for the mine. 4. Now the project development components are nearly completed and the project objectives are basically reached. It will be an initial model for the utilization of the loan from the World Bank in coal sector.  - 15 - B. LUAN CIC's PERFORMANCE 5. Changcun (Luan) Coal Mining Project seems to be an unsuccessful project in China since the project completion is seriously delayed for three years against the appraisal target. The reasons for delay for the project related to all kinds of problems, but the following issues were recognized as main issues of the project The Uncontrolled Main Contractor of Construction 6. The First Construction Company under the Ministry of Coal Industry was assigned to be one of the main contracts for the underground development and construction with electricallmechanical installation by MOCI without any competition. Before 1991, Luan CIC was not able to control the contracts, and all contractors were controlled by MOCI. The major problems about construction could not be solved at the site but could be finalized in Beijing. From 1991 to now, all the power for the control of contractors was given to Luan CIC, but they could not control the contractors very well since the limitation exists. The Unforeseen Geological Issue 7. The result of geological drill holes for water outflow indicated that the water outflow for three shafts was not much, 10-13 m3 per hour in September 1984. But during the three shafts sinking, the actual water outflow was from 40-280 m3 per hour and the development had to stop for the grounding (the urgent method to reduce the water outflow) since the special shafts sinking method was selected before the start of development because of the loss water outflow considered. The three shafts sinking took 6 to 10 months more than the predetermined plan. The Lack of Construction Management Experience 8. Before the start of construction, the senior management comprising director and project manager was not trained for the computerized construction management technique, and no one knew the advance scheduling and monitoring mechanism. The consultant provided the training for the construction management in 1986, but the main management shown little interest in the project management toll because of the limitation and the real power for labor force and other resources not in their hand. Some junior engineers could develop the master schedule, but they did not know how to estimate and monitor the progress of each activity. The Bankruptcy of Main Supplier for Service Shaft Equipment 9. All equipment for service shaft should be provided no later than October 1987, but actual delivery was finished in December 1989 since the main supplier was bankrupt in 1987. Under the assistance of the World Bank, the subsuppliers took over the full responsibility for the supervision of installation and commissioning, but the service they provided was not ideal and sufficient since the engineering work of service shaft was  - 16 - done by main supplier. The installation and commission of the service shaft equipment took 40 months, 24 months more than the predetermined target. The Interference from Authorities of Upper Levels 10. Luan Coal Industries Corporation is a state-owned coal company and the appointment of management, with resources allocation such as investments, etc., should be decided and approved by Ministry of Coal Industry of Shanxi Provincial Coal Board. The management structure and political system were not reformed in the initial years of the project and the western management concept was not accepted by coal sector at that time. Some interference from authorities of upper levels involved the management of the project implementation. The procurement of longwall face equipment took nearly three years since the authorities involved the bid evaluation. C. THE WORLD BANKS PERFORMANCE 11. In the past 10 years, the World Bank made a great effort to Changcun (Luan) Coal Mining Project, especially the Bank's missions which tried to change the situation of the project and mobilize the interests of the management from all levels of the project to speed up the progress of the project. Generally speaking, what the Bank's missions have done is alright and the actions that the Bank's missions took is suitable to the project. The completion of the project would have been postponed if the project was implemented without the assistance and supervision from the World Bank. The relations between the Bank and Luan CIC is good and the cooperation between two sides is satisfactory. We have the following comments except the satisfaction. 12. Montan Consultant was invited by Luan CIC to provide consulting service to Changcun Coal Mining Project for construction management. Montan Consultant has the experience in worldwide management and engineering; and the cooperation between to parties is OK. but sometimes Montan could not provide the real story to the World Bank since Montan wanted to find more jobs to do on the site. During the bid evaluation of Safety Monitoring and Production Control System, Montan was invited to provide the evaluation for technical aspects, but Montan considered only German systems were qualified since one engineer from Montan who involved the bid evaluation was a consultant to German bidders. Finally, an independent consultant was invited to provide further evaluation by the World Bank under the pressure of Luan CIC. It took 12 months from the submission of bid evaluation report before the evaluation report was approved by the World Bank.  - 17 - FACSIMLE Date: April 27, 1994 No. of pages: 3 To: Name: Principal Mining Engineer Dept: Industry and Energy Div.: Industry and Mining, 613/10 Rm No. G-2-039 Fax: 001-202-477-6619 From: Liu Xinzhong, Deputy Manager, World Bank Projects Dept. CNCDC Re: CHINA - Changcun (Luan) Coal Mining Project (Loan 2501-CHA) Dear Mr. Wardell: Thank you for fax dated April 21, 1994 with a copy of draft PCR, and the translation version has been forwarded to Luan CIC. Attached is a revised draft of Part II of PCR prepared by CNCDC and Luan CIC. Please advise your comments for it. Mr. Zou Jucheng will escort your mission to Luan by air via Taiyuan and please advise the name of hotel booked for Mr. Sadhan and his group mater, in Beijing. Best regards, Liu Xinzhong (signed)  - 18 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 13. Adequacy and Accuracy of Factual in Part m 13.1 , The factual date of the project presented in the tables of Part III, prepared by the Bank and Luan CIC, was reviewed and cross-checked thoroughly with the Bank's mission in May 1994. It is adequate and accurate. Comments on the Analysis by the Bank in Part I 14. Comments on the Analysis by the Bank in Part I 14.1 The analysis and comments made by the Bank are basically comprehensive and objective with candid views. 15. Evaluation of Bank's Performance 15.1 Throughout project implementation, the World Bank maintained a good cooperative relationship with Luan CIC and coal sector (Borrower/Beneficiary) except it is advised to CNCDC for loan close only one week before the close date required by the World Bank. The World Bank regularly sent supervision missions to supervise, inspect and direct all phases of project to reduce further delays' performance of the project. 15.2 The World Bank's staff assisted Borrower with greater effort for negotiations with the German cofinancing agency for design follow-up (detailed engineering) and the establishment of training center and in resolving the issue for all service shaft equipment supply, erection and commissioning after lead supplier declared bankruptcy. 16. Evaluation of Borrower's Own Performance 16.1 The project was implemented with serious delays but the main objectives of project for initial stage are to be met by September 1994. The project was the first World Bank project in coal sector and it was unfamiliar with the Bank's regulation and procedures and project management control technique in initial years, but all kinds of problems were experienced and lessons were gotten for the implementation of the Bank project in later years of the project. 16.2 The Borrower/Beneficiary introduced and absorbed basically the advanced technology on design, procurement, construction management and operation. ICB and LCB procedures were mastered by CNCDC and more than $20 million was saved in the procurement. 16.3 The training center was established and teachers' training was done. It is a good foundation for the future operation.  - 19 - 16.4 In the process of project implementation, the Borrower/Beneficiary carefully followed the Loan Agreement and Project Agreement and met all the covenants, and also strictly respected relevant Bank's guidelines for procurement, use of consultants and the disbursement handbook. 17. Lessons learned from the project are: (a) The training of the managerial staff including project manager, activities managers, estimators and progress inspectors and cost controller for construction management should be carried out before the start of implementation. (b) The contractors for construction should be appointed by national limited bidding procedures and totally controlled by the owner of project. (c) The adequate ground investigations should be required before the start of the implementation of project for the shaft sinking.  - 20 - PART III: STATISTICAL INFORMATION 1. Related Bank Loans and/or Credits None 2. Project Timetable Item Date Date Date Planned Revised Actual Identification/preparation 09,11/81 n/a 09/11/81 Preappraisal Appraisal 09/83 - 09/83 Postappraisal 12/83 11/83 02/84 03/84 08/84 Loan negotiations 05/84 07/08/84 01/85 Board Approval 07/84 08,10/84 03/85 Loan signing 05/85 n/a 05/85 Loan effectiveness 08/85 09/85 10/85 Loan closing 06/92 12/92 12/93 Loan completion 09/92 03/93 05/94 3. Loan Disbursements Financial year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Appraisal estimate 4.8 24.6 48.6 79.5 102.8 116.6 126.0 - - - Actual /a /b 0 2.6 5.8 12.6 20.8 21.6 32.9 41.9 63.1 74.9 Actual as % estimate /c 0 2.1 4.8 10.5 17.3 27.2 41.4 52.7 79.4 100.0 Date of final disbursement (refund for Special Account full recovery): 05/04/94 /a $5.5 million cancelled 05/87; $41.0 million cancelled 06/90. /b $4.6 million cancelled at loan closing 05/04/94. /c Percentage of revised loan amounts, following cancellations.  - 21 - 4. Project Completion Indicators Appraisal estimate Actual/PCR estimate Overall status 1 3 Project development objectives 1 3 Compliance with loan covenants 1 2 Project management performance 1 3 Availability of funds 1 2 Procurement progress 1 2 Training progress 1 1  - 22 - 5. Project Costs and Flnancing A. PRoJEcr Coms ($ million) Appraisal estimate Actual Local Foreign Total Local Foreign Total costs costs costs costs Mine development 22.9 11.1 34.0 55.0 - 55.0 Civil works 19.2 5.5 24.7 36.2 - 36.2 Equipment 39.7 93.0 132.7 56.8 60.8 117.6 Preproduction works 11.9 - 11.9 29.6 1.1 30.7 Technical assistance - - - - - - Training and engineering - 7.5 7.5 0.3 7.6 7.9 Base Cost 93.7 117.1 210.8 177.9 69.5 247.4 Physical contingencies 14.1 12.4 26.5 - - - Price contingencies 49.7 25.3 75.0 - Installed C= 157.5 154.8 3123 1L77.9 695 247.4 Working capital 8.0 0.2 8.2 6.1 - 6.1 3roiect Co 165. 155 0 205 184. .69.5 253. Int. during constr. - 36.5 36.5 12.9 8.2 21.1 Total Financing Required 165. 191.5 357.Q 1962 77.7 274.6 B. PRoJEcr FINANCING ($ million) Planned loan Sources Items to be financed agreement Final IBRD Imported equipment and technical assistance 126.0 74.9 Germany Technical assistance 1.9 2.3 UNDP Technical assistance 0.4 0.4 GOC Local and indirect foreign cost and interest during construction 220.5 190.9 People's Bank Working capital 8.2 6.1 Total Financing 357 0 24A  - 23 - 6. Project Results A. DIRECT RESULTS Indicators Unit Appraisal Revised target Actual achievement target at closing Land acquisition/ site preparation 116 ha III Qtr/85 - Completed Rail line/siding 17 km IV Qtr/88 IV Qtr/93 Completed Shaft construction: 1,358 m Sinking/fitting IV Qtr/89 IV Qtr/93 Completed Perm. hoists IV Qtr/89 IV Qtr 93 Completed Underground mine development 44.3 km I Qtr/90 I Qtr 94 Completed for first 3 longwalls Longwall face commissioning 5 I Qtr/90 I Qtr/94 Schedule: LW1 - 08/94 LW2 - 09/94 LW3 - 11/95 LW4 - 01/97 LW5 (Standby) - N/A Longwall coal output 4.5 mt 1994 1998 Scheduled 1998 Coal preparation plant HI Qtr 89 IV Qtr 93 Completed Residential housing 10,142 m IV Qtr/92 IV Qtr/92 Completed  - 24 - B. ECONOMIC IMACT Appraisal Estimate at estimate completion Economic rate of return 21.0 10.8 Assumptions Incremental basis Yes Yes Same cost streams used for financial rate of return Yes Yes Shadow pricing for rail transport Yes (2.2) Yes (2.1) Benefit stream based on net back FOB export prices Yes Yes Exclusion of transfers and duties Yes Yes Life of mine projection No Yes Base year 1984 1994 C. FINANCIAL IMPACr Appraisal Estimate at estimate completion Financial Rate of Return 8.7 2.8 Other Financial Indicators Coal Sales at peak production (mt) 4.2 4.2 Date of commercial production 1991 1995 FY94 domestic coal price (yuan/ton) 66 109 Commercial tax on revenue (%) 3 13 Ratio of revenue to cash costs at steady state 2.8 1.8 Nominal capital cost to completion ($ million) 357 275  - 25 - 7. Status of Covenants Covenant Subject Status Loan Agr. 2.02(b) Government to open and thereafter maintain in dol- In compliance lars a Special Account in a bank on terms and condi- tions satisfactory to the Bank 3.01 Government to carry out Part B(2) of the project by Bank agreed to strengthening the technical capability of the Jincheng government CIC in project management, design and mine opera- request to tion; training of personnel and establishment of a delete Part B(2) training center of the project 3.05 Part B(2) of the project to be carried out in accor- Bank agreed to dance with a program acceptable to the Bank government request to delete Part B(2) of the project Project Agr. 2.05(a) Luan CIC to furnish the Bank plans, construction In compliance and (b)(iii) and procurement schedules and periodic progress reports as requested 4.02 Luan CIC to furnish to the Bank, not later than June In compliance 30, annual financial statements, audited by indepen- dent auditors acceptable to the Bank (including the Special Account) 4.03 Luan CIC to take, or cause to be taken, measures as In compliance shall be required to produce for each of its fiscal years after december 31, 1984, gross revenues from all sources equivalent to not less than its total operat- ing revenues 4.04 Luan CIC not to incur any long-term debt if the debt In compliance service coverage is projected to be less than 1.2 times  - 26 - Covenant Subject Status 4.05 Luan CIC to furnish to the bank by October 31 of In compliance each year, for its comment, (a) a financial plan for the next fiscal years, and (b) an investment plan for the next five fiscal years Part A2 Project management consultants to be employed by Delayed, but in May 31, 1985 compliance Part A3 After the development tunnels first reach the coal In compliance seam, the Luan company shall promptly measure the gas emission in a manner acceptable to the Bank and take all reasonable and appropriate steps to prevent any ignition or explosion of gas. Part A5 Luan CIC shall furnish to the Bank by December 31, Delayed, but 1986, for its comments, a comprehensive reclama- now under uon plan for waste dumps and subsidence areas in implementation the project, and implement the plan taking into in acceptable account the Bank's comments manner Part A6 Commencing January 1, 1986, Luan CIC will make Statistics and available to the Bank (a) once every 6 months cur- diseases rent accident statistics, and (b) annually a report on reviewed by the occurrence of silicosis and occupational diseases successive SPN SPN missions missions Part A7 Luan CIC, from time to time, to monitor effluent Only applicable from the projects to determine whether water quality from the start meets standards acceptable to the Bank, and to take of coal produc- all necessary steps to ensure that such effluent meet tion, now sche- these standards. duled late-1994  - 27 - 8. Use of Bank Resources A. STAFF INPUTS Task FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 Total LENP 46.8 29.2 10.3 - - - - - - - - - 86.3 LENA - - 104.3 31.8 - - - - - - - - - 136.1 LENN - - 14.1 - - - - - - - - - - 14.1 LOP 4.0 1.2 5.1 8.3 - - - - - - - - - 18.5 SPN - - - 15.2 36.4 20.7 27.9 12.6 15.8 17.2 9.8 18.8 3.8 178.2 PCR - - - - - - - - - - - - 9.5 9.5 Total 50.8 30.4 1197 69.4 36.4 20.7 27.9 12.6 1.0 M2. 9.8 18.8 13.3 442.7  - 28 - B. MISSIONS Stage of No. of Specialists Performance Project Cycle Month/Year Persons Represented a/ Rating/Status b/ Types of Problems c/ Through Appraisal 09/81 4 M(2),F,E - DO 11/81 4 M(2),F,E,P - DO, F/E,R,SD 10/82 2 M,F - TA,PM,P,SD 04/83 3 M,F,OA 06/83 4 M(3),F - Appraisal through 09/83 4 M(2),F(2) Board Approval 12/83 2 M(2) - F,FS 08/84 5 M(2),F,E,OA - F,P,OL,L Board Approval 03/85 5 M(2),F(2),OA 2/2/1/2 F,PM,P,T through Effectiveness 06/85 3 M,F(2) 2/1/1/1 PM,T Supervision Mission 1 11/85 4 M,F(3) 1/1/1/1 PM,TE 2 03/86 3 M,F,OA 1/2/1/2 PM,TE 3 01/87 2 M,F 1/2/1/2 PM,P,T,TE 4 04/87 2 M,F 1/2/1/2 PM, P,T 5 01/88 1 M 1/2/1/2 PM,P,T,TE 6 03/88 2 M,F 1/2/1/2 PM,P,T 7 11/88 1 M 1/2/1/2 PM,P,T 8 04/89 1 M 2/3/2/3 PM,TE 9 12/89 2 M,F 2/2//1/2/2/2/3 F,PM,P,TE 10 11/90 2 M,F 2/2/1/3/2/2/3 F,PM,P,T 11 04/91 2 M(2) 2/2/1/3/1/2/3 PM,P 12 03/92 2 M(2) 2/2/1/3/1/2/3 PM,P,R 13 08/92 2 M(2) 3/2/2/2/1/2/2 F,E,R 14 02/93 2 M(2) 4/3/3/4/2/3/2 PM,E,R,LA 15 08/93 1 M 3/3/2/3/2/2/1 P,TE 16 05/94 2 M,F PCR Mission F/E, F,R a/ M - Mining Engineer; F - FinancialAnalyst; E - Economist OA - Operations Assistant; P - Power Engineer b/ Through 04/89, performance rating is Available Funds/Project Management Management/Development Impact/Overall Status, starting 1 2/89, performance rating is Overall Status/Project Development Objectives/Compliance with Loan Covenants/Project Management Performance/Availability of Funds/Procurement Progress/Training Progress Procurement Progress/Trainng Progress c/ DO - Design Optimization; F/E - Financial/Economic Evaluation; R - Railway; SD - Sector Data; F - Funds allocation/financial; FS - Feasibility Study Schedule; P - Procurement; OL - On-lending arrangement; L - Legal; PM - Project Management, T - Training TE - Technical; E - Environment; LA - Loan Agreement/Compliance with Covenants