Tanzania - Coal Engineering Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15751 PERFORMANCE AUDIT REPORT UNITED REPUBLIC OF TANZANIA COAL ENGINEERING PROJECT (Credit 1371-TA) June 17, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents Currency Unit = Tanzanian Shilling (Tsh) 1984 US$1.00 Tsh 17.0 1992 US$1.00 Tsh 300.0 Abbreviations and Acronyms bcf billion (standard) cubic feet of Gas GDP Gross Domestic Product GOT Government of Tanzania IDA International Development Association IMF International Monetary Fund OED Operations Evaluation Department PAR Performance Audit Report PCR Project Completion Report TA Technical Assistance STAMICO State Mining Corporation TANESCO Tanzania Electric Supply Corporation Measurement km Kilometer m meter TOE tonne of oil equivalent tonne metric ton Fiscal Year Govemment: July I - June 30 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General operations Evaluation June 17, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Tanzania Coal Engineering Project (Credit 1371-TA) Attached is the Performance Audit Report (PAR) prepared by the Operations Evaluation Department (OED) on the above project, approved in FY83. An IDA credit of SDR5.9 was fully disbursed for this project. The project's main objective was to broaden Tanzania's energy supply base by establishing the economic potential of the country's major coal resources. Project components included: (i) drilling exploration/delineation bore-holes to confirm the extent of coal deposits in the Kabulo Ridge area and a detailed technical feasibility study for commercial development of this deposit and build a mine-mouth power plant; (ii) delineating additional coal reserves at the Ilima coal field, and thereby extend -ihe life of the existing underground mine at Ilima; and (iii) upgrading the capabilities of STAMICO, the State mining corporation, through training and technical assistance. The project failed to meet its main physical objective, which was to establish adequate economically exploitable coal reserves for a mine-mouth power plant. Sufficient reserves were identified, but its use for power generation was uneconomic in comparison with gas or hydro based power generation. Additional reserves were also delineated at the Ilima mine. When it was found that substantial rehabilitation investment was needed to mine these reserves, unutilized funds were reallocated for this purpose. Current operation of the mine is marginally economic at best. Efforts at rationalizing sector planning and investment failed. At the time of negotiations, the Bank expressed its reservations to the Government about parallel investments in other coal mines, but was unable to come to an agreement with the Government on investment priorities. The Government's investments in these coal mines have proven to be uneconomic and have created further financial burdens on its limited resources. The Bank should not have proceeded with the project without prior agreement on a sectoral development policy. The Audit concluded that the outcome of the project was unsatisfactory, that its sustainability is unlikely, and its institutional development impact was modest. Bank performance was assessed as unsatisfactory, on the basis of poor project design. Borrower performance in implementing the project was satisfactory, although subsector planning did not improve. The findings of this Audit, taken together with the finding of OED's recent audits of three petroleum sector projects and two power sector projects in Tanzania make a strong case that IDA's 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. extensive support for the energy sector over the past fifteen years has been unable to foster effective energy sector planning. In the absence of this integrated view, investments were made in uneconomical coal projects and premature hydro plants, while gas fired power generation and diesel plant rehabilitation investments were, until recently, not given the high priority and serious attention they deserve. Attachment FOR OFFICIAL USE ONLY Contents Preface ............................................................... 3 Basic Data Sheet ........................................................ 5 Evaluation Summary .................................................... 7 1. Introduction ........................................................ 11 Macroeconomic Context ................................... ......... 11 Sectoral Context ........................................ .......... 11 2. Project Objectives and Description ....................................... 13 Objectives ...................................................... 13 Project Components .......................................... ..... 13 PCR Findings .................................................... 13 Audit Issues ..................................................... 14 3. Project Implementation and Results ...................................... 15 Use of Project Savings ................................................. 15 Results......................................................... 15 4. Issue: Dialogue on Coal Sector Development ......................... 17 The Pro-Coal Bias........................................ ......... 17 Other Biases in Energy Sector Development . ........................ ...... 17 5. Findings and Overall Assessment ............................... ......... 19 Bank Performance ................................................. 19 Borrower Performance.............................................. 20 6. Lessons Learned .................................................... 21 Attachment Comments from the Borrower ..................... .................. 23 This report was prepared by Mr. Sunil Mathrani (Consultant) who audited the projects in August 1995, under the supervision of Richard Berney (Task Manager), with administrative assistance provided by Ms. Loma Sibblies and Ms. Helen Watkins. The report was issued by the Infrastructure and Energy Division (Yves Albouy, Chief) of the Operations Evaluation Department (Francisco Aguirre-Sacasa, Director). 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 wiLhout World Bank authorization.  3 Preface This is a Performance Audit Report (PAR) on the Coal Engineering Project for which an IDA Credit of SDR 5.9 million to the United Republic of Tanzania was approved in May 1983. The Credit was fully disbursed and closed in June 1990. The PAR was prepared by the Operations Evaluation Department (OED) and was based on the Project Completion Report, the President's Report, project files and discussions with Bank staff. Prior to preparing the PAR, an OED mission visited Tanzania in July 1995 to audit this and three other projects in the energy sector. The other projects are reviewed separatelyl, which should ideally be read in conjunction with this report. The Audit Mission discussed the results of these projects with Government officials and representatives of energy sector entities whose cooperation and assistance is gratefully acknowledged. The PAR reassesses the restructuring and achievements of the project; in particular it examines its relevance and the quality of the dialogue on coal sector development. Following standard procedures, OED invited Borrower comments on the draft PAR. The comments received from TANESCO have been incorporated into the report as an attachment. 1. Performance Audit Report of the Songo-Songo Petroleum Exploration Project (Credit S-027 TA) Second Songo-Songo Petroleum Exploration Project (Credit 1199-TA) and Petroleum Sector Technical Assistance Project (Credit 1604-TA)  5 Basic Data Sheet COAL ENGINEERING PROJECT (CREDIT 1371-TA) Key Project Data (amounts in USS million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 7.0 8.1 116 Loan amount 6.3* 7.4* 100 Cofinancing 0 0 Cancellation 0 0 Date physical components completed 6/30/87 6/30/90 Economic rate of return n.a. n.a. Institutional performance n.a. n.a. * Equivalent to SDR 5.9. Cumulative Estimated and Actual Disbursements FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 Appraisal estimate (US$M) 0.2 2.5 4.7 6.3* - - - - Actual (US$M) 0.0 0.3 1.3 2.4 3.6 4.4 7.0 7.4* Actual as % of appraisal 0.0 12 28 38 57 70 100 100 Date of final disbursement: 1/4/91 * Equivalent to SDR 5.9 million Project Dates Original Actual Initiating memorandum 9/81 9/21/81 Negotiations 4/83 4/22/83 Letters of Development Policy 5/83 5/19/83 Board approval 5/83 5/19/83 Signing 6/83 9/22/83 Effectiveness 8/23/84 8/23/84 Closing date 6/87 6/30/90 6 Staff Inputs (staff weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86-90 Total Preappraisal 3 5 8 Appraisal 5 5 Negotiations 4 4 Supervision 6 1 4 4 15 Total 3 5 5 10 1 4 4 32 Mission Data Date No. of Staff days in Specializations Performance Types of (monthvyear) persons field represented rating problems Through Appraisal 4/80 3 5 F, G - 4/81 1 3 F - 9/81 3 13 F, G, M 12/82 3 8 F, G, M Appraisal through 3/83 2 11 F, G - Board Approval Board Approval 8/83 3 8 F, G, M 2 F, M, T through Effectiveness 10/83 1 3 G 3 M 3/84 1 6 M 2 M, F Supervision 9/85 3 7 F,G,M 2 M, F, T 5/86 1 6 G 2 M, F, T 10/87 1 6 M 2 M, T 7/90 1 4 G 2 M, T a/ Key to Specializations: F=Financial Analyst; G=Geologist and M=Mining Engineer. b/ Key to Status: l=Problem-free or Minor Problems; 2= Moderate Problems and 3= Major Problems c/ Types of Problems: F=Financial; M=Managerial and T=Technical. Other Project Data Borrower/Executing Agency: FOLLOW-ON OPERATIONS Operation Credit No. Amount Board Date (US$ million) None 7 Evaluation Summary Background I. Tanzania's coal resources are estimated at about 2 billion tons, of which 300 million tons are proven. The reserves are concentrated in two main basins: in Songwe-Kiwira, located in the western part of the country, close to the city of Mbeya; and in Mchuchuma, in the extreme south, close to the border with Mozambique. Today, coal production from two underground mines takes place on a small scale, with total annual sales of under 50,000 tons, mainly for cement production. In the early 1980s, there were two choices for sector development, both within the Songwe-Kiwira field: Ivogo Ridge, a high-cost underground deposit and Kabulo Ridge, which was amenable to open cast mining, but whose reserves needed to be proven. Objectives and Description 2. The project's main objective was to broaden Tanzania's energy supply base by establishing the economic potential of the country's major coal resources. Project components included: (i) drilling exploration/delineation bore-holes to confirm the extent of coal deposits in the Kabulo Ridge area and a detailed technical feasibility study for commercial development of this deposit and building a mine-mouth power plant; (ii) delineating additional coal reserves at the Ilima coal field and thereby extend the life of the existing underground mine at Ilima; and (iii) upgrading the capabilities of STAMICO, the State mining corporation, through training and technical assistance. The scope of the project was later extended to include rehabilitation of the Ilima coal mine. Implementation 3. The exploration at Kabulo Ridge was completed by late 1987. It successfully established proven reserves of 45 million tons amenable for recovery by open-cast methods. However, the detailed feasibility study for a mine to extract these reserves was dropped from the scope of the project, because power planning studies carried out by the power utility had established that a mine-mouth thermal power plant using coal from Kabulo Ridge would not be competitive with the gas or hydro alternatives. 4. The resulting savings from the Credit were reallocated to other coal sector related activities and the scope of the project was extended. The new components included the rehabilitation of an existing, run-down underground mine (the Ilima mine), located in the Songwe-Kiwira field, and the extensive overhaul of drillings owned by the State Mining Corporation (STAMICO). These new components had not been considered under the original project scope. The shift of funds was implemented in an informal manner and appears to have never been rigorously appraised by Bank staff. Since there was no formal restructuring, the revisions were never sent to the Board for formal sanctioning. Findings 5. Even though the narrow objective of confirming the size of the Kabulo Ridge coal reserves was met, there is no foreseeable prospect of a coal mining project being set up to extract 8 the reserves confirmed by the Bank-financed exploration, because power sector planning studies in the mid/late 1980s have shown that a coal-fired power plant would be uncompetitive with other power production alternatives, one of which is a gas-fired plant. 6. The rehabilitation of Ilima appears to have been marginally justified. The mine, which would have had to close without the rehabilitation investment is operating, apparently without major continuous Government subsidies. The rehabilitation of STAMICO's drilling rigs has proven to be of great value to STAMICO. They are currently being used to undertake profitable drilling work for third parties (primarily private sector). 7. At the time of negotiations of the IDA Credit, the Government was also arranging financing for the Ivogo Ridge mine. It refused to accept IDA's proposal that it delay a decision to proceed with Ivogo Ridge till the results of the IDA-financed exploration was completed. The Bank deferred to GOT's insistence on the issue, with the result that Tanzania has since been saddled with an underground mine with extremely high production costs that GOT knew could never operate profitably. 8. The Bank has been unable to come to an agreement with GOT on a consistent and economically rational policy towards the coal sector. An IDA Credit was granted to Tanzania, even in the absence of a unifying policy. As a result, a great deal of resources were squandered and sectoral development continues on a suboptimal basis in the absence of a coherent overall policy. Should a coal thermal power project become viable at some future date, it is unlikely that the reserves identified by the IDA project will be mined, since current GOT plans focus, for strategic reasons, on first developing coal reserves in another region of the country (the Mchuchuma field). 9. Integrated, "country focused" energy sector analysis and planning of the kind promoted by the Bank/UNDP Energy Assessment Program does not appear to take place either by the Borrower or the Bank during project identification, appraisal and implementation. Even when an attempt was made by the 1984 Energy Assessment Report to have provided a sector-wide view of problems and their solutions, many of its recommendations were ignored in subsequent project identification work. Sub-sectoral lobbies were too strong and succeeded in promoting investments that were either uneconomic (coal) or premature (Kihansi hydro), while gas remained unexploited. Bank staff dealing with the energy sector in Tanzania were dispersed across three different administrative units and do not appear to have taken a global view of the sector and its macroeconomic links. The situation appears, however, to be improving somewhat, with the Bank's current efforts to support a private sector project to utilize available gas reserves for power production. Conclusions 10. The Audit assesses the project outcome as unsatisfactory. Substantial coal reserves were identified, but upon further investigation it was found that it would be uneconomic to develop them. The project therefore made no contribution to Tanzania's development. These reserves are unlikely to be utilized in the foreseeable future since there are other coal reserves for which utilization plans are being made. Project design was also inappropriate, given the alternative domestic energy resources, including domestic gas reserves at Songo-Songo and the country's significant hydro potential, both of which had been identified at time of Board approval of this coal project in 1983. The Audit concludes that the project was unlikely to be sustainable. The 9 Audit assesses the institutional development as modest, since STAMICO is able to undertake contract drilling operations for private sector exploration activities. However, there is still no long-term integrated plan for the coal sector. IDA performance was assessed as unsatisfactory. Borrower performance was assessed as marginally satisfactory in the context of the implementation of the agreed project. It is not possible to compare the Audit's assessments to those of the PCR, since the PCR does not contain an explicit assessment of the project outcome. It only indirectly suggests that performance on all the above criteria was unsatisfactory. Lessons 1. The Bank should not finance investments to confirm coal (or other energy) reserves without evaluating the likely costs of developing these reserves and coming to an agreement with Government on an overall sectoral development policy within which they can be rationally developed. 12. An integrated "country focus" for Bank lending is vital to ensure the best use of resources, particularly for the energy sector, where there are numerous options, each of which may be supported by artisan factions. The Bank's interventions in the energy sector in Tanzania over the past 15 years suffered from "compartmentalization": they were not harmonized to be consistent with either sectoral or national priorities. 13. The findings of this Audit, taken together with the finding of OED's Audit of three petroleum sector projects implemented in parallel with this Audit Report3 and those of its 1995 Audit of two power sector projects in Tanzania (Report 14503), make a strong case that, while most individual project components were competently executed, the Bank's extensive support for energy sector development over the past 15 years has been unable to foster an integrated energy sector analysis and planning of the kind promoted by the Bank/UNDP Energy Assessment Program. There has been an excessive concentration on hydropower development, without due consideration for the risks of drought to which an excessively hydro-based generation system is subject if it does not have adequate back-up resources (including interconnected grids to other systems, better maintenance and greater availability of diesel generation sets, and the development of indigenous based gas fired combined cycle plants). In the absence of this integrated view, investments were made in uneconomical coal projects and premature hydro plants, while gas fired power generation and diesel plant rehabilitation investments were, until recently, not given the high priority and serious attention they deserve. 2. The Songo-Songo Petroleum Exploration Projects. 3. Performance Audit Report of the Songo-Songo Petroleum Exploration Project (Credit S-027 TA), Second Songo-Songo Petroleum Exploration Project (Credit I l99-TA) and Petroleum Sector Technical Assistance Project (Credit 1604-TA) I 11 1. Introduction Macroeconomic Context 1.1 The early 1980s was the worst period for the Tanzanian economy since independence. Real GDP declined, transport infrastructure and public services deteriorated, capacity utilization was very low, exports fell, and inflation was high. The acute shortage of foreign exchange made even basic consumer goods scarce. Tanzania had no access to IMF resources during this period, due to its unwillingness to devalue its currency. Nor was there a Bank-supported structural adjustment program. 1.2 Since the launch of the Economic Recovery Program in 1986, Tanzania has dropped its two-decade experiment with "socialist" economic policies, dismantled many state controls over economic activity, and introduced much more market-oriented policies. Growth has recovered, inflation has fallen, and the exchange rate is freely floating. Real GDP has risen by about 4 percent per annum in recent years, a little above the rate of population growth. 1.3 However, despite a decade of reforms, Tanzania is still handicapped by its pre-1985 socialist development legacy. There are still about 300 parastatal organizations, many involved in purely commercial activities, although a program of privatization is now gathering momentum. Donor funding is required for a very high proportion of the investment program, as well as to cover a significant share of recurrent expenditures. Since 1993, Tanzania's macroeconomic performance has started to deteriorate once again, as budget deficits and inflation have risen. Economic growth has also fallen, partly as a result of electricity shortages through the period 1993-1995 brought about by the impact of a prolonged drought on a power system excessively dependent on hydro generation plants. Sectoral Context 1.4 Tanzania has no indigenous oil supply and petroleum accounted for 30 percent of total imports in 1982, even though the consumption of petroleum products had stagnated from 1975 onwards at about 0.6 million tons/year due to a shortage of foreign exchange. There was a significant level of suppressed demand, controlled by rationing, despite the depressed level of industrial activity. Consumption is now unrestricted and by 1993 had risen to 0.8 million tons, representing under 10 percent of the value of Tanzania's total imports. Exploration activity for oil by foreign private firms started in the 1970s and continues on a modest scale, but there have been no discoveries to date. 1.5 Gas was first discovered in the mid 1970s. Proven natural gas reserves in two different locations amount to almost 750 bcf, but for reasons explained in the PAR on the Songo-Songo Petroleum Exploration Project these reserves have yet to be developed commercially. 1.6 Despite plentiful but potentially expensive hydroelectric resources, estimated at 3800 MW, under 250 MW had been developed by the early 1980s. Annual per capita electricity consumption in 1982 was only 36 kWh, low even by standards of sub-Saharan Africa. Hydroelectricity accounted for 80 percent of supply. Hydro generation capacity has since risen to 382 MW and now accounts for over 90 percent of electricity produced. Electricity demand 12 has risen rapidly since macroeconomic conditions improved in the mid-1980s. Per capita electricity consumption had risen to 53 kWh by 1993. 1.7 Because the Tanzanian power supply was overwhelmingly hydro-based, it was highly vulnerable to the effects of drought. Poor rainfall since 1992, combined with more rapid than expected demand growth and delays in bringing new generating plant into service resulted in substantial load shedding in 1993, 1994 and 1995, which has had serious economic consequences. In 1994 capacity was down by over 30%, (100 MW) and economic costs of contraction in economic activity that year alone are estimated to be in the order of US$170 million (about 8 percent of GDP). 1.8 Tanzania's coal resources are estimated at about 2 billion tons, of which 300 million tons are proven. The reserves are concentrated in two main basins, at Songwe-Kiwira, located in the west, close to the city of Mbeya, and at Mchuchuma, in the extreme south, close to the border with Mozambique. Today, coal production from two underground mines in these regions takes place on a small scale, with total annual sales of under 50,000 tons, mainly for cement production. In the early 1980s, when coal fired mine-mouth power plants were thought to be a viable option for diversifying energy production, there were two choices for its development, both within the Songwe-Kiwira field: at Ivogo Ridge, a high-cost underground deposit, and the Kabulo Ridge field which was amenable to open-cast mining but whose reserves needed to be proven. 13 2. Project Objectives and Components Objectives 2.1 The project originated in 1981, following a review by Bank staff of Tanzania's coal sector prospects. During this period of high real energy prices there was pressure to develop indigenous resources to substitute for imported hydrocarbons, which accounted for a high proportion of Tanzania's imports. The project supported this indigenization process. Its main objective was to broaden Tanzania's energy supply base by establishing the economic potential of the country's coal resources. Project Components 2.2 The central project component was an exploration program designed to confirm the extent of coal deposits in the Kabulo Ridge area of the Songwe-Kiwira coal-field. About 120 drill-holes were envisaged. This confirmation program was to be followed by a detailed technical feasibility study for commercial development of this deposit (along with a mine-mouth power plant), if the proven reserves justified such a project. The second project component was to delineate additional coal reserves at the Ilima coal field, and thereby extend the life of the existing underground mine at Ilima, which was also located within the Songwe-Kiwara coal- field. The third project objective was to upgrade the capabilities of STAMICO, the state mining corporation, through technical assistance and training. The scope of the project was later extended to include rehabilitation of the Ilima coal mine. PCR Findings 2.3 The project took over seven years to implement; it was completed in late 1990, three years behind schedule. The final cost was US$8 million, of which IDA financed the entire foreign cost of US$7 million. 2.4 The exploration at Kabulo Ridge was completed by late 1987. It successfully established proven reserves of 45 million tons of coal amenable for recovery by open-cast methods. However, subsequent studies demonstrated that the cost of using coal for power generation would be too high. Consultants financed under the project had estimated that coal from a 350,000 ton/year mine to supply a 100 MW mine-mouth power plant would cost about US$27/ton. Separate analyses carried out by the power utility (TANESCO) system planners demonstrated that at this price, a thermal power plant using coal from this mine would not be competitive with the gas or hydro alternatives.4 As a result of these analyses the technical feasibility study for a mine to extract these reserves was dropped from the scope of the project. 2.5 The PCR notes in its discussion of coal sector policy, that the Bank was unable to convince the GOT to defer the construction of an uneconomic coal project (in the immediate vicinity of its own project) that was implemented and financed with Chinese-assistance, but only 4. The attractiveness of domestic coal-based power declined further in subsequent studies. The TANESCO Power Planning Study dated July 1989 concluded that even imported coal would be a cheaper option, although still more expensive than fuel oil or gas. 14 indirectly suggests that sector policy performance was unsatisfactory because of this misallocation of resources. It also failed to make an explicit assessment of the project's overall development outcome. Its partial findings were that the Bank made a positive contribution to the exploration of coal resources in Tanzania. The only explicit lesson mentioned was that more effort should have been made to get STAMICO to fully staff its project implementation unit and shoulder more responsibility for project implementation. Audit Issues 2.6 The Audit takes a broader view of the project in the context of Tanzania's coal sector strategies and its overall energy sector development planning policies. In addition, it provides a more detailed look at the process of restructuring the project and the impact of the individual restructured components. 15 3. Project Implementation and Results Use of Project Savings 3.1 In 1988, after the completion of the exploration activities, it was decided that the technical feasibility study for coal utilization would not be implemented because the cost of mining the coal made a power plant uneconomic. As a result, nearly US$2 million remained unused out of the Credit. The President's Report to the Board stated clearly that: "If the results of the earlier work did not justi undertaking the feasibility study, the balance of funds for this component would be canceled" Nevertheless, IDA management decided to utilize these funds to enlarge the scope of the project by adding two new project components: (i) equipment to rehabilitate the Ilima mine (US$0.6 million); and (ii) a major overhaul of STAMICO's drilling rigs (US$1.1 million). Neither component had been envisaged under the original project. This restructuring was implemented on an informal basis, without any significant analyses of their economic justification or likely economic benefits. There is no record of the process by which management determined that the added project components fit within the original scope of the project's objectives to delineate additional reserves at Ilima. The Board was not formally advised of the project restructuring. 3.2 Issues related to the justification for and implementation of the project restructuring were not discussed in the PCR. The Audit believes that the project "restructuring", which shifted the project focus from exploration/delineation activities to coal production activities was a significant change in project scope, and that a formal and rigorous economic analysis should have been implemented to justify such a shift in resource utilization. Clearly, a more formal management approval process than the one recorded in the project files would have been appropriate. This major project restructuring necessitated extension of the original closing date (mid-1987), three times, to mid-1990. Results 3.3 Mine Rehabilitation. The delineation drilling around the Ilima mine financed by the project had successfully established the presence of new reserves sufficient to considerably extend the life of the mine. However, the mine was in poor operating condition and could not extract the newly-proven reserves without first being rehabilitated. The mine rehabilitation component is not discussed in the PCR; nor was there evidence in the project files of any financial analysis to establish the return on the rehabilitation expenditures. This Audit has determined that production from the mine had virtually ceased prior to rehabilitation, and has since risen to 9000 tons/year, close to its sustainable output. 3.4 Rig Rehabilitation. The objective of this component was to enable STAMICO to continue its own minerals exploration program and was not related to coal-specific activities. The US$1 million rehabilitation of five drilling rigs was financed from savings arising from the cancellation of the feasibility study. The PCR lacks any discussion of this component, the 5. Paragraph 53, Report and Recommendations of the President of the International Development Association to the Executive Directors on a Proposed Development Credit of SDR 5.9 Million to the United Republic of Tanzania for a Coal Engineering Project: May 22,1983. 16 justification for which has proved hard to ascertain, given the absence of any analytical documentation in the Bank's project files. However, the rehabilitation has proven to be of great value to STAMICO in recent years. It uses the rigs to undertake profitable drilling work on contract for third parties, including private firms interested in investing in Tanzania's untapped mineral resources. Thus, the rig rehabilitation gave a new lease on life to STAMICO, which, before this rig rehabilitation program, had been a non-viable, loss-making parastatal. 3.5 Technical Assistance (TA) and Training. It was impossible to assess the benefits from training activities carried out almost ten years ago. Many staff who benefited from it have left STAMICO, whose payroll has shrunk from about 300 in 1990 to less than 100 in 1995. The TA in the areas of accounting and financial management appears to have helped to introduce a more commercial and business-oriented approach to STAMICO's operations, which was essential for its effective shift to contract work. 3.6 Overall Performance. The PCR concluded that the project was successful in overall terms because it proved the existence of large reserves at Kabulo Ridge suitable for open-cast mining and because it demonstrated that the Ilima mine had significant additional coal reserves, and assisted with the mine rehabilitation program that allowed these reserves to be mined. The failure to develop the Kabulo Ridge reserves is attributed to the sharp decline in energy prices since project appraisal. This Audit does not concur with the PCR's favorable assessment of the project outcome. The Audit believes that the project's central objective, the delineation of reserves at Kabulo ridge, was an ill-conceived investment because it was made without an adequate review of likely cost relative to Tanzania's other energy options. 3.7 IDA failed, during the identification and appraisal process, to confront the critical issues related to overall energy sector planning, and the role of the coal sector within the energy planning framework. In fact, it would appear from the project files that the original project was designed without reference to a cut-off cost, above which a mine-mouth power plant would no longer be viable relative to other alternatives. The coal utilization studies were undertaken later during project implementation. Furthermore, it appears from the project correspondence files that the mine and power plant design development was canceled because the study found that the coal plant could not compete with available hydro-generation alternatives, which had been identified before the project was initiated. The fall in external energy prices (oil, gas and coal) only strengthened the case against the mine. 6. Excluding coal miners employed by its subsidiary companies. 17 4. Issue: Dialogue on Coal Sector Development The Pro-Coal Bias 4.1 The Bank was unable to come to an agreement with GOT on a consistent and economically rational policy towards the coal sector during project identification, appraisal and implementation. At the time of appraisal of the IDA Credit, there were two choices for sector development: Ivogo Ridge, a high-cost underground deposit and Kabulo Ridge, which was amenable to open-cast mining, but whose reserves needed to be proven. GOT was seeking to develop both sites simultaneously and had obtained Chinese assistance for Ivogo Ridge. Construction of the Ivogo Ridge mine had not yet started when the IDA project was appraised, and at negotiations the Bank sought to defer a final decision on it until the outcome of the IDA- financed exploration at Kabulo Ridge was known. However, the Government refused to accept the IDA proposal to delay proceeding with the Ivogo Ridge mine, arguing that it was an irreversible commitment made with China at the highest political level. 4.2 The Bank accepted to GOT's position on the issue, with the result that Tanzania has since been saddled with an underground mine with extremely high production costs that GOT knew since the start could never operate profitably. As explained in the PCR, the Bank should have taken a firmer stance at the time of negotiations. This would have helped GOT avoid investment in a non-viable project requiring annual subsidies to keep it operating. Alternatively, since it was clear before loan negotiations that GOT was proceeding with the Ivogo Ridge project regardless of its economic merits, the Bank could have chosen to drop its own project. Instead, the Bank appears to have been convinced by the GOT argument that there would be sufficient demand for coal in the 1990s to absorb production from both the Ivogo Ridge and any open-cast mine that might be recommended by the IDA project. Indeed, the Bank itself in its 1981 coal sector review had also optimistically projected a market of 0.3 million tons for power generation, despite the availability of considerable hydro and gas resources, which were also competing for the same power market. As a result, an IDA Credit was thus granted to Tanzania even in the absence of a unifying coal sector policy, a great deal of resources were squandered, and coal sector development continued on a suboptimal basis in the absence of a coherent overall policy. Other Biases in Energy Sector Development 4.3 As has been noted in previous Project Audit Reports (PAR), Tanzania's power sector development has also been weakened by the absence of a unified energy sector development policy. The PAR for the Fourth Power Project and Power Rehabilitation Project (Report No. 14503 of May 16, 1995) points out that the project sequencing was suboptimal, and that the alternative of using gas-fueled power plants was not sufficiently investigated before the decision was made to proceed with the Mtera hydroelectric scheme in the early 1980s. The PAR for the three natural gas related projects, points out that the gas option was still not being considered a decade later in the beginning of the 1990s, when decisions were being made on the Kihansi Hydro Project (IDA Credit 2489 approved in May 1993).  19 5. Findings and Overall Assessment 5.1 The Audit assesses the project outcome as unsatisfactory. The narrow objective of confirming the size of the Ivogo Ridge coal reserves was met, but the broader, ultimate objective of broadening Tanzania's energy supply base by establishing the economic potential of the country's coal resources was not met. The reserves that were identified proved to be uneconomic to develop, and there is no foreseeable prospect of a coal mining project being set up to use these coal reserves. Furthermore, power sector planning studies in the mid-1980s have shown that a coal-fired power plant would be uncompetitive with other domestic energy resource based generation facilities, including domestic resource based gas-fired combined cycle generation and hydro generation. 5.2 The Audit, therefore, concludes that the project is unlike to generate any sustainable benefits. The GOT now prefers to develop other coal reserves, and has recently obtained over US$4 million in donor funding,7 to carry out a feasibility study to develop an integrated coal and 400 MW mine-mouth power project based on the Mchuchuma coal deposits near the border with Mozambique. GOT views the development of a mine at Mchuchuma as a means of facilitating the future exploitation of the Liganga iron ore deposits, which are situated close to Mchuchuma.9 While the Mchuchuma deposits have a higher calorific content than the coal presently mined in Tanzania, they are far from the existing transport and power transmission infrastructure. It does not appear as if GOT even considered the alternative of developing the Kabulo Ridge reserves identified by the Bank project. STAMICO was not involved in this decision, and would have preferred to set up a joint-venture to develop an open-cast mine at Kabulo Ridge, but in the light of the GOT decision to proceed with a feasibility study for Mchuchuma, has shelved the idea. The continuing lack of sector planning is clear, especially since neither potential project appears to have a ready market outlet at a competitive price. 5.3 The project had a modest institutional impact on STAMICO. Short-term planning and budgeting has improved, although auditing of accounts has not. STAMICO has been able to maintain its drilling rigs and lease them out for private sector exploration activities. However, longer-term planning for sector development does not seem to have improved. Bank Performance 5.4 Bank performance is assessed as unsatisfactory, principally because of its decision to proceed with the project without reaching an acceptable agreement with the GOT on the establishment of a rational sector development policy, and its use of an ad hoc informal restructuring process. The option of cancellation of the surplus funds originally earmarked for the feasibility study does not appear to have been examined. Instead, the Bank's project staff agreed to extend the scope of the project to cover new components, some unrelated to the original project objectives. Although, there is no record in the project files of documents 7. From the African Development and the USTDA. 8. These were not examined at the time of appraisal as an alternative to Kabulo Ridge because of their remote location from potential markets. 9. The last study of the Liganaga iron ore deposits in 1979 found development to be uneconomic. 20 assessing the justification and viability of the new components, even though none of these components had been examined at the time of appraisal. There is some evidence to suggest that these subproject components may have had a positive development impact. The mine is producing at its rated capacity and drilling rigs are being profitably employed in support of private sector mining initiatives. 5.5 Given the successful outcome of the exploration to delineate reserves at Ilima (which was part of the original scope of the project), the decision to allocate some of the unused IDA Credit to finance mining equipment for the rehabilitation of the mine was logical and probably justified on economic grounds. In fact, it was an oversight not to have included it in the scope of the original project, since it was a necessary condition for the justification of the reserve delineation component. An economic analysis of the benefits of such an integrated program should have been carried out at appraisal to ensure that the reserve delineation component was actually justified. In the absence of this analysis, it is not possible to come to an informed judgment on this project component. 5.6 Integrated "country focused" energy sector analysis and planning of the kind promoted by the Bank/UNDP Energy Assessment Program does not appear to have taken root. Even when an attempt was made by the 1984 Energy Assessment Report to establish a sector-wide view of problems and their solutions, many of its recommendations were ignored. Sub-sectoral lobbies in both the Bank and GOT were too strong and succeeded in promoting investments that were either uneconomic (coal) or premature (Kihansi hydro) while gas remained unexploited. 5.7 At the time of project appraisal, Bank staff dealing with the energy sector in Tanzania were dispersed across three different administrative units and do not appear to have taken a global view of the sector and its macroeconomic links. As a result the project appears to have been "supply-driven" by the Bank's coal staff, without much concern given to comparative costs of alternative energy sources, including the natural gas reserves at Songo-Songo and the country's hydro potential, both of which were well known at time of Board approval in 1983. The Bank had no influence over sectorial investment policy, despite its significant involvement in the sector. Initially, the Chinese-funded mine went ahead, despite the Bank's attempt to convince GOT to defer it till the results of the Kabulo Ridge exploration where available. Later, the Bank was not consulted on the choice of Mchuchuma as the site for a possible new coal based power project. Borrower Performance 5.8 The Borrower's performance is assessed as marginally satisfactory. The project was in line with the IDA Credit agreement. However, STAMICO's inability to maintain a fully staffed, effective project implementation team throughout the implementation period, along with the lack of timely availability of local counterpart funds, substantially delayed project implementation. It should also be noted that the Government's approach to coal sector development was marked by a failure to establish a coherent strategy for the subsector as a whole, or for a way to integrate coal sector development with that of the country's overall energy supply policy. 21 6. Lessons Learned 6.1 The Bank should not finance investments to confirm coal (or other energy) reserves without evaluating the likely costs of developing these reserves once they are proven, and coming to an agreement with Government on an overall sectoral strategy within which these resources can be rationally developed. 6.2 An integrated "country focus" for Bank lending is vital to ensure the best use of resources, particularly for the energy sector, where there are numerous options, each of which may be supported by partisan factions. The Bank's interventions in the energy sector in Tanzania in the 1980s and early 1990s, suffered from "compartmentalization": they were not harmonized to be consistent with either sectoral or national priorities. 6.3 The findings of this Audit, taken together with the finding of OED's Audit of three gas 10 11 sector projects and those of its 1995 Audit of two power sector projects in Tanzania, when taken together make a strong case that, even though most individual project components were competently executed, the Bank's extensive support for energy sector development in the 1980s and early part of the 1990s was unable to foster an integrated energy sector analysis and planning of the kind promoted by the Bank/JNDP Energy Assessment Program. In the absence of this integrated view, investments were made in uneconomical coal projects and premature hydro plants, while gas fired power generation and diesel plant rehabilitation investments were, until recently, not given the high priority and serious attention they deserved. 10. See the findings of the PAR on the Songo-Songo Petroleum Exploration Projects. 11. Audit of Fourth Power and Power Rehabilitation Projects, May 16, 1965, Report No. 14503.  23 ATTACHMENT COMMENTS FROM THE BORROWER TAllANIA suCTR SU Y COMPANY UMITED VIuLWOM "am or"Me 2m472 s. sex seo TMONG sc TAZIRA van~ 41$1 rA Jr swamanCP anasswsa DCPRIMCP/STUDIES/10 2nd May, 1996 Yves Albovy Chief Intrastructure Division Operations Evaluation Department The World Bank 1818 H Street NW Washington DC 20433 USA. Fax 202-522-3125 RE::. DRAFT PERFORMANCE AUDIT REPORTS FOR SONGOSONGO PETROLEUM PROJECT AND COA ENGINEERING PROJECT. We have received a review of performance audit reports for the above named projects which were supported by the World Bank. We have gone through the reports and found that one of the reports (the coal enginnering project) has to do with the State Mining Corporation (STAMICO) and therefore had little to comment on. Comments on the two reports are attached as you requested. Yours faithfully, for TANZANIA ELECTRIC SUPPLY COMPANY LIMTED f .E..T Lahanga for: MANAGING, DIRECTOR 24 ATTACHMENT COAL ENGINEERING REPORT: Comments. The development of the coal sector was the responsibility of State Mining Corporation (STAMICO) and the coal deposits of Songwe-Kiwira are managed by STAMICO under Chinese expertise. TANESCO only buys excess power (about 1MW) from the Kiwira Mine Power Station. TANESCO is therefore not in a good position to comment on issues raised in the Audit Report on the operations of the coal mine. On the Mchuchuma Coal deposits is true that another government agency the National Development Corporation (NDC) is taking the lead role and not STAMICO. The reasons is that the envisaged project is an iron ore and coal complex targeting on the exploitation of the Liganga iron dre deposits situated close to Mchuchuma coal field. The coal and power project will be evaluated on its own merit of cost of power and energy production. The information will be a valuable input in our next Power Master Plan which is supported by the World Bank under Power VI Project. We are convinced that STAMICO would have been in a more better position to respond the to thus audit report.    IMAGING Report No: 15751 Type: PPAR