Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7328 PROJECT PERFORMANCE AUDIT REPORT TOGO/IVORY COAST/GHANA CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) AND CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) June 23, 1988 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. ABBREVIATIONS AND ACRONYMS AfDB African Development Bank BADEA Banque Arabe pour le Ddveloppement Zconomique de l'Afrique BOAD Banque Ouest Africaine de Ddveloppement CCCE Caisse Centrale de Cooperation Economique CEB Communaut6 Electrique du Bdnin CFT Compagnie des Chemins de Fer Togolais CIDA Canadian International Development Agency CIMAO Ciments de l'Afrique de l'Ouest CIMTOGO Ciments du Togo COFACE Compagnie Frangaise d'Assurance du Commerce Extbrieur DEG German Development Company EEC European Economic Community EIB European Investment Bank ERR Economic Rate of Return FED Fonds Europeen de Ddveloppement GOIC Government of Ivory Coast GOT Government of Togo KfW Kreditanstalt fUr Wiederaufbau PCR Project Completion Report MPWM Ministry of Public Works and Mines (Togo) PAL Port Autonome de Lomd SAR Staff Appraisal Report SITRAM Maritime Shipping Company (Togo) SOCOTEC Soci4td de Contr8le Technique (Paris) STH Socidtd Togolaise des Hydrocarbures TPD Tons Per Day TPY Tons Per Year VRA Volta River Authority CURRENCY EXCHANGE RATES (CFAFIUS$) Appraisal Estimate US$1 = CFAF 225 Implementation Average (1977-80) US$1 = CF.% 219 1980 US$1 = CFAF 226 1981 US$1 = CFAF 287 1982 US$1 = CFAF 336 1983 US$1 = CFAF 417 1984 US$1 = CFAF 480 1985 US$1 = CFAF 378 1986 US$1 = CFAF 323 1987 (October) US$1 = CFAF 295 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. OMIce of DWeco-GenWal Operate6 fvaluatwn June 23, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Togo/Ivory Coast/Ghana: CIMAO Regional Clinker Project (Loans 1295-WAF/1296-TO/1297-IC/1298-GH) and CIMAO Restructuring Project (Credits 1326-TO/1327-GH) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Togo/Ivory Coast/Ghana: CIMAO Regional Clinker Project (Loans 1295-WAF/1296-TO/1297-IC/1298-GH) and CIMAO Restructuring Project (Credits 1326-TO/1327-GH)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by reciplents only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TOGOIIVORY COAST/GHANA CIHAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) AND CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) TABLE OF CONTENTS Page No. Preface ........................................................ . . Basic Data Sheets ................................................ii Evaluation Summary...............................................v PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT CONCEPTUALIZATION ...............................1 Integration with Grinding Stations ...................... 2 Comparative Advantages/Disadvantages .................... 6 Competitiveness ......................................... 9 Clinker Prices ................... .......... 13 Conclusions................... ........... 16 II. PROJECT IMPLEMENTATION PROBLEMS.......................... 16 Design.. ............................... ............. 16 Ownership Structure............... 19 Management and Technical Arrangements.................. 21 III. THE "RESCUE" OPERATION .................................. 25 IV. OPERATING EXPERIENCE .................................... 26 V. BANK'S ROLE ............................................. 31 VI. FUTURE OF CIMAO.......................................... 33 VII. PROJECT EXPERIENCE AND LESSONS LEARNED .................. 36 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. TABLE OF CONTENTS (continued) Page No. ANNEXES 1. CIMAO Clinker Plant - Conversion from Fuel Oil to Coal...... 41 2. Gross Domestic Product Investment and Cement Consumption in Togo, Ivory Coast and Ghana............................ 43 3. CIMAO Sales and Regional Clinker Sales (1980-1984).......... 44 4. Clinker Prices.............................................. 45 5. Operating Costs of CIMAO and European Producers............. 46 6. Consumer Price Index....................................... 47 7. LIMAO Clinker Operating and Distribution Cost............... 48 8. CIMAO Revised Clinker Production and Distribution Costs..... 49 9. Investments for Recommissioning the Plant and for Converting it to Coal................................. 53 10. Assumptions in Future Imported Clinker Prices............... 54 11. Assumptions for Calculating the Economic and Financial Rate of Return of Project to Reopen CIMAO Plant........... 55 12. Economic Rate of Return of Project to Reopen CIMAO Plant... 56 13. Project Cost to Reopen CIMAO Plant.......................... 57 14. Financial Rate of Return of Project to Reopen CIMAO Plant... 58 PROJECT COMPLETION REPORT I. INTRODUCTION............................ ............. 61 II. PROJECT SCOPE AND IDENTIFICATION................ 62 III. PROJECT IMPLEMENTATION AND MANAGEMENT..................... 72 IV. THE RESTRUCTURING PROJECT................................. 80 V. OPERATING PERFORMANCE................................. 85 VI. FINANCIAL PERFORMANCE................................. 87 VII. ECONOMIC PERFORMANCE...................................... 88 VIII. BANK'S ROLE AND LESSONS LEARNED........................... 89 PCR Annexes PROJECT PERFORMANCE AUDIT REPORT TOGOIIVORY COASTIGHANA CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1997-IC/1298-GH) AND CIMA0 RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) PREFACE This is a Project Performance Audit Report (PPAR) on the CIMAO Regional Clinker Project, involving four IBRD loans in the total amount of US$60.0 million to the Ciments de l'Afrique de l'Ouest Company (CIMAO) (US$49.5 million) and to the three shareholding Governments of Togo, Ivory Coast and Ghana (US$3.5 million for each country). The main objective of the project was import substitution. The project was also the first industrial enterprise of regional scope in the three countries. The loans were approved on June 24, 1976 and became effective on April 19, 1978. The loans were fully disbursed by December 1980. Cofinancing in the amount of US$49.8 million equivalent was provided by the Caisse Centrale de Coopdration Economiqlte (CCCE) of France (US$20 million) and the European Investment Bank (EIB) of the European Economic Community (US$29.8 million). In addition five other banks and aid agencies provided US$99.3 million debt financing for the project. These were: African Development Bank (AfDB), Banque Arabe pour le Ddveloppement Economique de l'Afrique (BADEA), Fonds Europ6en de Ddveloppement (FED), Kreditanstalt fUr Wiederaufbau (Kfw) and Canadian International Development Agency (CIDA). The Borrower also used export credit financing of US$48.7 million equivalent. To help CIMAO face severe financial difficulties, a restructuring Project for CIMA0 was approved in February 1983 and two IDA credits totalling US$15 million were granted to the Governments of Togo (US$5.7 million) and Ghana (US$9.3 million). The French Caisse Centrale and the European Investment Bank also lent US$12.8 million and US$7.0 million, respectively, for this Project. The PPAR consists of the Project Performance Audit Memorandum (PPAM) and the Project Completion Report (PCR) prepared by the Industry Department (previous to the Bank reorganization). The PPAM is based on the attached PCR, the Staff Appraisal and the President's Reports, the loan documents, the transcripts of the Executive Directors' meetings at which the project was considered, a study of project files, and discussions with Bank staff. The Borrower did not prepare a project completion report. An OED mission visited Togo and Ivory Coast and held discussions on CIMA0 with representatives of local authorities. Their kind cooperation and valuable assistance in the preparation is gratefully acknowledged. Following standard OED procedures, copies of the draft PPAR were sent to the Governments, the Borrower (CIMAO), and the cofinancing agencies. No comments were received. - ii - PROJECT PERFORMANCE AUDIT REPORT CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF, 1296-TO, 1297-IC, AND 1298-GH) BASIC DATA SHEET (Amounts in US$ million) LOAN STATUS As of 8/31/87 Original Disbursed Cancelled Repaid Outstanding Loans 1295-WAF, 1296-TO, 1297-IC, and 1298-GH 60.00 60.00 - 29.83 30.17 CUMULATIVE LOAN DISBURSEMENT /a FY77 FY78 FY79 FY80 (i) Planned 13.8 37.4 51,1 54.5 (ii) Actual - 22.6 41.5 56.4 (iii) (ii) as % of (i) - 60.4 81.2 103.5 OTHER PROJECT DATA Original Actual Board Approval - 06/24/76 Loan Agreement Signed - 06/28/76 Effectiveness - 04/19/78 Closing Date 06/30/80 12/31/80 Total Project Cost (US$ M) 284.0 316.7 Overrun (%) - 11.5 Financial Rate of Return (%) 8.1 - Economic Rate of Return (%) 10.2 STAFF INPUT (staffweeks) FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Totals Preappraisal 2.9 35.9 .7 - - - - - - - - - 39.5 Appraisal - .4 152.5 - - - - - - - - - 152.9 Negotiation - - 38.9 - - - - - - .4 - - 39.3 Supervision - - 1.4 49.3 23.0 32.5 30.1 10.9 28.6 1.3 4.5 .7 182.4 Other - .0 - - - - .1 - - - - - .1 Total Project 2.9 36.4 193.6 49.3 23.0 32.5 30.2 10.9 28.6 1.7 4.5 .7 414.3 /a Excluding interest during construction estimated at US$5.5 million at appraisal and actually disbursed US$3.6 million. - 111 - MISSION DATA No. of No. of Missions Month/Year Days Persons Report Date Preappraisal 6/74 14 8 7/74 Appraisal Jul/Aug/75 28 1 8/75 Supervision I 7/76 18 4 Aug/Sep/76 Suiervision II 10/76 2 11/76 Supervision III 3/77 19 1 4/77 Supervision IV 6/77 17 1 7/77 Supervision V Feb/Mar/78 11 i Mar/Apr/78 Supervision VI 8/78 7 1 9/78 Supervision VII 11/78 2 11/78 Supervision VIII 1/79 7 2 2/79 Supervision IX 10/79 10 1 12/79 Supervision X 2/80 10 2 3/80 SuperviEion XI 3/81 9 2 3/80 Supervision XII 7/81 9 2 3/81 Supervision XIII 10/81 6 3 10/81 - iv - PROJECT PERFORMANCE AUDIT REPORT CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) BASIC DATA SHEET (Amounts in US$ mi4lion) CREDIT STATUS Original Disbursed Cancelled Credits 1326-TO/1327-GH 15.0 - 15.0 OTHER PROJECT DATA Original Actual Board Approval - 02/24/83 Credit Agreement - 08/29/83 Effectiveneis - 02/29/84 Closing Date 05/30/84 06/30/84 Total Project Cost 51.9 51.9 Financial Rate of Return (%) 10.0 - Economic Rate of Return (%) 17.0 STAFF INPUT (staffweeks) FY81 FY82 FY83 FY84 FY85 FY86 Totals Preappraisal 2.6 17.5 - - - 20.1 Appraisal - 30.3 3.0 - - - 33.3 Negotiation - 2.6 16.9 - - - 19.5 Supervision - - 9.3 27.0 23.0 4.3 63.6 Totals 2.6 50.4 29.2 27.0 23.0 4.3 136.5 MISSION DATA No. of No. of Missions Month/Year Days Persons Report Date Appraisal Jan/Feb/82 9 2 2/82 Supervision I 3/82 5 1 3/82 Supervision II 6/82 6 2 6/82 Supervision 1II 7/82 1 1 7/82 Supervision IV 11/82 2 2 12/82 Supervision V 3/83 12 1 4/83 Supervision VI 5/83 4 1 8/83 Supervision VII 6/83 4 2 6/83 Supervision VIII 4/84 4 1 5/84 Supervision IX 5/84 5 1 5/84 Supervision X 9/84 3 5 9/84 - v - PROJECT PERFORMANCE AUDIT REPORT TOGO/IVORY COAST/GHANA CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1997-IC/1298-GH) AND CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) EVALUATION SUMMARY The Ciments de l'Afrique de 1'Ouest (CIMAO) regional clinker plant started production in February 1980, but was forced to shut down in April 1984 and has not been reopened until now. This report analyzes the genesis of this project, its conceptualization, the many problems met during con- struction and its operating performance. The critical role played by the Bank from its inception to the clcsure of the plant, the future of CIMAO (if any) and lessons which can be learned through this project's experience are also described below. Brief History. The project was designed to produce 1.2 million tons of clinker per year for delivery to grinding stations producing cement in Togo, Ivory Coast and Ghana. The plant is located at Tabligbo (about 70 km northeast of Lomd, the capital of Togo) near limestone deposits. 'ie project consisted of (i) an industrial complex, comprising quarry, clitker plant operating the dry process and including two kilns of 2,000 tons per day each and related workshops and (ii) infrastructure components compris- ing a substation and a 10 km power line from the substation to the plant, a railway line to Lomd, a rail/port terminal at the Lomd port, clinker stor- age, shiploading facilities and a township for CIMAO personnel. The CIMAO company was originally established in 1968 by the Gov- ernments of Togo and Ivory Coast as well as a French private building ma- terials firm sharing ownership in equal parts. In 1975, the Government of Ghana became a shareholder and the ownership of CIMAO was set at 87.2%, equally shared by the three States--Togo, Ivory Coast and Ghana--and 9.5% and 3.2%, respectively, by two French companies. Unfortunately, the private partners of the Togolese, Ivorian and Ghanaian grinding plants could not participate in the ownership and thus a captive local market could not be ensured for CIMAO through such ownership. Since the clinker grinding stations were not integrated with CIMAO, the captive market was supposed to be ensured by a 1975 Treaty between the Governments of Togo, Ghana and Ivory Coast instituting the CIMAO project. However, this Treaty proved to be ineffective when, after three years of operations, CIAO's - vi - rising costs required a sell:g price of clinker so high that the govern- ments (and in particular Ivory Coast) refused to meet all their require- ments from CIMAO arguing that the result would have been to substantially increase the price of cement, thus depressing further the market. Original Expectations. When the project was appraised by the Bank in 1975/76, the total cost was estimated at $284 million,l/ although the actual cost turned out to be $317 million,2/ i.e., 11.61 higher. The original financing plan provided external financing of $221 million (of which the Bank financed US$60 million) and financing by CIMAO's shareholders of $63 million, i.e., only slightly above 202 of the total project cost. On the basis of such estimated cost, of expected CIMAO sales of 1.2 million tons of clinker from 1981 onwards (against projected demand in the CIMAO region of 1.6 million tons for 1981) and of a selling price of US$33 per ton of clinker (equivalent to the long-term forecasted CIF price) the financial rate of return for the project was a low 8.12. The three main reasons given were (1) the relatively high transport costs of shipping equipment to Western Africa and providing -ervices to the project site; (ii) the expected high cost of civil work in the area; and (ii!) large infrastructure and service facilities were required and conceived for an expanded 1.8 million tons per year production. The economic rate of return (assuming a foreign exchange shadow-priced by 202 and semi-skilled and skilled labor shadow-priced by 50Z on account of the serious unemployment in Togo and the region) was also relatively low at 9.8Z for reasons similar to the ones given for the financial rate of return. However, it was thought, at the time of appraisal (1976), that an important "non-tangible benefit" would be the project's contribution to a regional economic and commercial institution building process. "The ex- perience which the countries will gain with the cooperation and coordina- tion needed for the successful construction and operation of the CIMAO plant w1l be a vital foundation for planning and executing additional re- gional projects. Moreover, a regular and assured supply of clinker and nement at stable prices is crucial for a steady development of important cement consuming subsectors such as housing, agriculture, transportation, industry and tourism. The three countries, and in particular Togo, will benefit from the transfer of modern technology resulting from the installa- tion of a large plant that will use modern management techniques. This transfer will eventually be helpful for establishing and operating other 1/ Including working capital and interest during construction and using an exchange rate of US$1 - CFAF 225. 2/ Using an average exchange rate of US$1 = CFAF 225. - vii - industrial enterprises." (Staff Appraisa) Report - Vol. 1, paras. 9.03-9.04 - June 14. 1976.) In other words, in the context of the strong thinking prevalent in the Bank in the mid-seventies that economic integration of West African countries was the only hope for large-scale industrial development, more attention was paid Io "non-tangible benefits* than to financial and economic rates of return calculations showing low or marginal results. However, as stated above, the fact that the cost of clinker produced by CIMAO became prohibitive annihilated all prospects of regional coopezation through market arrangements. A major reason for the project's failure was the grossly overoptimistic forecast of the cost of imported clinker made by the Bank when the original loans were made. Also the non-integration of regional grinding compauies with CIMAO which would have given them an incentive to provide a captive market to CIMAO clinker achieved to doom any hopes for CIMHAO survival in a very competitive envi- ronment. The Outcome. A first Bank loan of US$60 million was made in 1976.3/ However, due to mounting difficulties experienced by CIMAO, further exter- nal financial assistance was sought to salvage the project. A total of US$51.9 million was provided in the form of a "Restructuring Project", to which IDA contributed $15 million, of which US$7 million retroactively to provide for the urgent needs of funds for CIMAO. The balance was provided by other donors. However, the Credit did not become effective until February 1984 and by then the situation had seriously worsened. The Credit was not even used since the plant was forced to shut down in April 1984 due to a power shortage caused by the drought in West Africa. In September 1984, the shareholders decided to keep the plant closed until 1987, since market prospects were extremely gloomy and there was little hope to reduce costs siguificantly. It was hoped that private grinding station owners eventually would make proposals to take over and operate CIMAO. No propos- al has been received so far, and the plant remains closed. On the basis of continued low CIF clinker prices, estimated CIMAO high production costs and investments required to reopen the plant (and eventually to convert it to coal use), the economic rate of return is practically nil and the financial rate of return i's negative (Annexes 12 and 14). Project Experience and Lessons Learned The CIMAO experience has some important implications relating directly to trade and 3 tegration issues. There have been four major prob- lems relating to assumptions on prices, marketing, managemnnt and high costs. First the project success depended on expectations of future in- creases in imported clinker prices. This failed to materialize and clinker prices collapsed after 1975. In 1983, CIMAO's selling price was US$66 per 3/ In fact, there were four Bank loans: one to CIMAO (US$49.5 million) and three loans to the Governments of Togo, Ivory Coast and Ghana (US$3.5 million to each government). - viii - ton whereas imported clinker price was US$32 per ton only. The CIMAO proj- ect was one of the last "grand vision" type of projects, which assumed, besides the smooth international cooperation/solidarity, that everything would go up (demund, prices, etc.) and, of course, nobody thought, at appraisal time, that there would be a second oil shock and that the African economy would largely collapse. With hindsight and in a more pragmatic age (like the second half of the 1980s), the project would have been rejected. But at that time, it was definitely a part of an upbeat tendency. The erroneous judgment passed on prospects for cement and clinker prices was all the more regrettable that one could already foresee, in the mid-1970s, the emergence of an excess cement production capacity in Europe, inevitably leading to an important exportable surplus resulting in lower prices. Also, clinker export price formation mechanism was not fully analyzed. Clinker is essentially an intermediate product whose quantities exported are marginal in relation to total cement sales (in 1983, clinker exports form Western Europe amounted to 22 only of production). Producers are thus able to export clinker a. or near marginal costs. It is the sim- ple transfer pricing technique which occurs here, equally true for aluminum (bauxite-alumina), gasoline (crude oil and refined petroleum products), even crude steel, etc., and this has nothing to do with production costs. Such a situation already prevailed when the CIMAO clinker project was appraised and one should have seriously questioned then its basic economic viability. The economic crisis in Africa resulted in a fall of cement con- sumption and consequently of clinker demand. Commercial arrangements had been provided from the start to give CIMAO a fully protected market against imported clinker and cement and consequently CIMAO was supposed to be shel- tered from a fall in regional clinker demand. But this was on the assump- tion that CIMAO selling prices would not be much higher than CIF prices. In fact, when CIMAO selling price became almost twice higher than imported clinker price, trade agreements quickly ceased to operate. One lesson emerging from CIMAO's experience is the practical difficulty to put into force protective regional arrangements (even when they are called "Treaties") in the context of strong economic recession, falling demand and low priced imports. A major factor which led to CIMAO's failure was the emergence of extremely high production costs. There were four main reasons for such high costs: (a) very large administrative and technical assistance expenses; (b) doubling in fuel oil costs (in real terms) while European clinker plants were converted to lower cost coal thus increasing their competitivity vis-&-vis CIMAO; - ix - (c) the high indebtedness of the project (8O external lending against 20Z equity participation) created a heavy financial burden for CIMAO and contributed to higher exploitation costs; (d) cost overruns and excessive operating expenses forced CIMAO to further borrow heavily with resulting high financial expenses. CIMAO should have rapidly taken much more concrete steps to im- prove technical assistance efficiency and cut rising overhead costs. CIMAO should also have listened to bank staff advice in 1981 to study a possible conversion to coal, specially after the closure of the Lomd refinery. Operating problems may have been less important if the expatriate technical Assistant had better supervised the plant. But this Assistant did not have full managerial powers and was not associated with the company's financial results. Integrating local grinding stations with CIMAO may have enabled the latter to survive thanks to better cost control and to improved manage- ment in general. The higher debt/equity ratio may have been reduced had private investors (managers - owners) been brought in to substantially participate in CIMAO's share capital, as originally anticipated. In retrospect, the project was inadequately prepared and its basic economic viability was not proven, as confirmed by the facts. The conse- quences are heavy, a large debt is serviced by the three countries (COte d'Ivoire. Ghana and Togo); the plant is closed; and instead of the project creating the necessary good will to promote future cooperation, it has brought about recrimination and mutual distrust. Above all, the objectives of promoting growth in regional trade of clinker and regional industrial development did not succeed. There is little hope for CIHAO to restart operations in the future. - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM TOGO/IVORY COAST/GHANA CIMAO REGIONAL CLINKER PROJECT (LOANS ?295-WAF/1296-TO/1997-IC/1298-GH) AND CIMA O RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) I. PROJECT CONCEPTUALIZATION 1. The CIMA0 project was approved by the Bank in 1976 after a long preparation process. The Loan Committee decided in 1971 that the Bank should not proceed with further consideration of a 1.2 million tons per year clinker project that was to be constructed in Togo near Aveta to sup- ply clinker to the regional market--primarily Togo, Ivory Coast and Upper Volta (now Burkina Faso). The Governments of Togo and Ivory Coast had requested the Bank to provide financial assistance for such a project in 1970. The negative decision was reached primarily on the following grounds: (a) The limestone deposits to be used by CIMAO were of low quality. technically risky to exploit and were expected not only to cause relatively high operating costs but also to yield inferior quality cement. (b) The clinker was not considered internationally competitive outside West Africa and might be undersold even there by low-cost (though marginaily cost-priced) imports.1 (c) Marketing opportunities were therefore expected to be limited to West Africa, and this put into doubt the feasibility of establish- ing an economic plant right from the outset (1.2 million tons/year of clinker) without Ghana--the second most important market after Ivory Coast market in 19722 --making a firm commitment to purchase some of CIMAO's production. Such commitment was judged difficult to obtain. 1/ Clinker is an intermediate product whose quantities sold on the market are marginal in relation to total demand sales (e.g., clinker exports represent only 1.2 co 2Z of the total clinker production). Clinker producers can thus afford, if needed, a policy of pricing at or near marginal costs. 2/ Nigeria cement consumption was the highest in West Africa in 1972 (1.8 million tons) against 0.6 million tons in Ivory Coast and 0.4 million tons in Ghana. However, Nigeria was not seriously considered as a possible partner in CIMAO. - 2 - (d) The economic rate of return of the project was expected to be relatively low, at around 11Z, assuming a shadow rate for un- skilled labor of zero and an additional allowance for the over- valuation of the CFA Franc. However, due to the significant uncer- tainties, particularly under (a) and (c) above, the probability of reaching even such a return was considered low. 2. By 1973, the project had changed in a number of respects, namely: (a) The earlier (Aveta) limestone deposits had been abandoned and another deposit with ample reserves and very good quality lime- stone had been discovered near Tabligbo. Although the new deposit was some 70 km farther from the port of LomO (Aveta was close to Lomd), existing infrastructure could be used to a large extent, thereby limiting the increase in overall land trantport charges; (b) Import prices and the supply situation of clinker had somewhat firmed up, and on the basis of a more thorough assessment of fu- ture clinker price developments, there was ground for counting on a CIF West Africa import price of about CFAF 4,050/ton (US$18), about 4Z higher than the CFAF 3,900/ton (US$17.3) used in the 1971 analysis by Bank staff. (c) The market in the region for cement had grown somewhat more rapid- ly than expected earlier; together with the fact that the project would be coming on stream some two to three years later, this might have made it possible to build an economically sound plant (1.2 million tons) from the outset. (d) The economic return of the project was increased to about 13Z (comparable to the 11% mentioned above). This continued to be a rather low return for a still rather risky project, but the proba- bility of reaching this was thought to have considerably in- creased. Integration with Grinding Stations 3. There were still a number of crucial questions that needed to be resolved satisfactorily before the staff could say that the project was good for Togo to execute and for the Bank to support. At the time of appraisal, the two most crucial ones to be considered were (a) the absolute necessity of incorporating an adequate percentage of grinding capacity into the CIMA0 project or finding some other means of increasing eventual prof- its from the clinker by adding to it much higher profits from the grinding operations %clinker production alone was thought to be traditionally a low return proposition and had to be integrated with profitable cement-produc- ing operations; also integration with grinding stations would guarantee a market for CIMAO clinker production; and (b) a satisfactory management set- up to execute and operate the project. -3- 4. The Bank Projects staff also still had misgivings about such a highly capital-intensive project with little employment creation (600 per- sons) and a rather low economic return in a small country such as Togo. On the other hand, Projects staff understood that regional aspects of the project were supposed to be attractive and should be given substEatial weight. In particular, the net foreign exchange benefits (due to import substitution of clinker by local production) were thought to be quite sig- nificant. Also, the knowledge that there were no other known commercially exploitable limestone deposits of equal quality in the region, and the belief that the danger of having low-priced imported clinker reliably available in the region had been reduced led the staff on balance to the conclusion that the CIMAO project could be made into an economically viable one. 5. On that basis, Bank management wrote to the Presidents of Togo and Ivory Coast advising them of the Bank's willingness to assist their Govern- ments in preparing the project for possible Bank financing. The Bank emphasized the need to spell out a method of integrating the grinding plants in Togo and the Ivory Coast to assure the marketing of CIMAO clinker under satisfactory conditions. The Bank was anxious to find some way of reserving the lion's share of the Togolese and Ivorian cement market for CIMAO and of providing CIMAO with an adequate portion of the profits gen- erated by existing Ivorian and Togolese grinding plants since c.dnker pro- duction by itself -as thought to be unlikely to provide a financially sound base for the project.3 6. A formal agreement was given by the Presidents of Togo and Ivory Coast to the Bank that the grinding stations be integrated with CIMAO in order to guarantee a captive market for at least 702 of CIMAO output, but the Governments did not specify how they planned to implement this integra- tion nor what form of compensation was eventually to be given to grinders. 7. However, it soon appeared that the private grinders in the Ivory Coast were not eager to cooperate with the CIMAO project. Their operations were profitable--and they kept pressing for being left out of the project. The grinders enjoying a protected market, feared not only a reduction of their profit margJn because of CIMAO but also a locs of markets since reduced clinker imports would result in lower production and hence profitability of their European clinker plants. The Government of Togo also started questioning the merits of such an integration indicating that its only grinding station, CIMTOGO, had little cash flow to provide to CIMAO. Ghana also did not favor the integration of its two grinding stations. 8. At a meeting in Paris, an agreement was reached that 100% of the Togolese and Ivorian clinker markets would be reserved for CIMAO output. Since the price of imported clinker continued to rise and actual shortages 3/ Since Ivorian and Togolese private grinders would have owned substantial equity shares in CIMAO, profits may have been shared between CIMAO (clinker manufacturers) and the grinders. caused the temporary shutdown of some grinding plants along the coast, creating a favorable atmosphere for the CIMAO project, and in view of the Governments' guarantee to reserve 100% of their markets for CIMAO and of their financial commitments to the project, the question was raised by part of the staff whether the Bank really needed to prezs for integration of CIMTOGO and of existing Ivorian grinders into CIMAO. Would it not be better to press for long-term sales contracts which would permit to sell CIMAO clinker at an attractive price and without integration which, after all, gave the impression to the borrowing Governments that the Bank was pushing for nationalization. In the generally optimistic atmosphere pre- vailing at that time regarding prospects for clinker pr!ces, future region- al demand and West Africa's industrial integration, t,.t; issue of integra- tion with the grinder progressively disappeared. The 1976 appraisal report does not even mention the subject and apparently the Board was not aware of the possibility.4 9. The basic concept of the project was that CIMAO had to he partial- ly integrated with the clinker grinding plants in Togo and also in the Ivory Coast (cf. PCR, para. 2.05). This concept was meant to ensure as large a captive market as possible for CIMAO, but more importantly, it recognized that clinker was internationally traded at a low price and that profits in the cement-making process were therefore realized at the grind- ing stage. The idea was that for CIMAO to be financially viable some of the profits of the clinker grinding plants would have to be shifted back to CIMAO. In other words, CIMA0 would have had to sell its clinker at prices higher than traded clinker. This issue was to become the main problem for CIMAO, as explained below. 10. Basically, the project's appraisal rate of return (financial as well as economic) was found to be low and/or marginal (SAR, paras. 8.08 and 9.02). The projected financial rate of return (base case) was only 8.1% and the economic rate of return 10.2%. The reasons for this low rate of return5 were that: (i) equipment and engineering costs had increased con- siderably in the world during 1974-75; moreover, CIMA0's investment costs were high because most goods and services had to be imported at high trans- port costs; (ii) the CIMAO plant needed relatively large infrastructure and service facilities which were conceived, in part, to be already adequate for a future expanded plant; full charges to cover such excess costs were taken into account in the cost streams of calculation for the financial rate of return; an expanded plant (50% capacity increase from 1.2 to 1.8 million tons) would have been likely to increase the financial rate of return by about 1.5 percentage points; and (iii) the financial rate of 4/ By December 1975, it was announced that the Ivorian grinding firm, SCA, and possibly the Ghanaian grinding firm, Ghana Cement Works, Ltd., were expected to acquire 2.6% each of the share capital. These were obviously token contributions compared to the 92? Governments' participation. 5/ Lower than calculated in earlier staff studies of the Project (1971 and 1973). - 5 - return was based on clinker prices which were expected to be competitive with projected import prices (US$33 per ton CIF);6 but these assumed prices did not yet reflect adequately the higher cost of recently added capacity in the world or replacement investments.7 Very interestingly, the Apprais- al Report remarked, "the financial rate of return is not a very meaningful yardstick for the financial viability of CIMAO since it is up to the parti- cipating Government shareholders to set clinker prices." (SAR, para. 8.08.) 11. The economic rate of return was 10.2% based on a regional CIF import price of US$33 per ton, in 1975 terms, during the first three years of production. Then as explained below (cf. footnote 11), the price, from then on, was assumed to increase (also in 1975 terms) by 1% per year. Two adjustments to the financial rate of return weret (i) investment and oper- ational costs were shadow-priced to the extent of an average of 50% for semi-skilled and unskilled labor, on account of the serious unemployment in Togo and the Region;8 and (ii) the investment costs were adjusted to take into account that about 16% of the project's total investment required was financed by tied resources.9 The opportunity cost of these tied funds was said to be equivalent to their actual debt service payments. Therefore, investment cost streams were reduced to the extent equivalent to these tied resources, and their debt service was added to the cost streams. 12. Wete one to disallow the concept that the tied resource would not otherwise have been available to Togo, the base case economic return would have declined from 10.2 to 9.3%. After shadow pricing foreign exchange by 20%, the Appraisal Report also concluded that the economic rate of return would have been 10.7%. Such a return was qualified "sound, albeit margin- al" for reasons similar to the ones given for the financial rate of return: (i) relatively high capital cost, (ii) initial clinker rates (during the first three years) which did not fully reflect recent worldwide capital cost movements pointing to higher clinker prices in the future, and (iii) 6/ CIF clinker prices had risen from about $17 in 1973 to $29 in 1975. 7/ In 1976, Bank staff believed that real clinker prices would increase by 1% per year, since an increasing number of new high capital cost plants would come on stream and influence the price of cement upwards. 8/ Such adjustment has the effect of reducing total labor costs from CFAF 475 to CFAF 350 million, i.e., from 12.7% of total operating costs to 8.4%. The 1971 preliminary project study had assumed a shadow rate for unskilled labor of zero (cf. para. 2.01(d)). 9/ The Appraisal Report considered that part of the funds ($45 million) that were to be provided by the multilateral and bilateral financing institutions were assumed to be "tied resources" as these funds would not have been available in the Region if the CIMAO project was not being executed. The opportunity cost of these funds was, therefore, their actual debt service; then, the investment cost stream was reduced, by the amount of tied funds ($45 million), while the operating cost stream was increased by the debt service for those tied funds. -6- large infrastructure investment, most of which could accommodate an ex- panded CIMAO plant; such an expansion was said likely to increase the eco- nomic rate of return by 1.5 percentage points. 13. Under normal commercial conditions such a low return situation would not have been acceptable for proceeding with a project, particularly not one of such complexity and in a location where there is little indus- trial experience. However, because of the so-called "identity" between the owners of the Company (the three Governments of Togo, Ivory Coast and Ghana) and the buyers of its product (the grinding companies stationed in the same three countries), a set of covenants was devised to safeguard the financial viability of the project and allow further expansion of capacity reasonably quickly. The most important covenant was that the Governments allowed CIMAO to set its prices to cover all its obligations, including debt service, and give it a reasonable rate of return on invested capital, even if this were to mean that in the initial operating years the Company's prices would be above import prices. Experience showed a few years later that CIMAO partners did not adhere to this covenant when CIMAO's selling prices became much higher than imported clinker.10 It is interesting to note, in this context, that while Togolese authorities thought that CIMAO would contribute to industrial expansion of Togo, the Ivorian authorities may have been more interested by the potential of CIMAO beneficial conclu- sion to political integration of the Region since economic benefits for the Ivory Coast to import clinker from CIMAO rather than from Europe may not have been fully proven to them. 14. In addition to the ownership problem (i.e., lack of integration with the grinding stations), two other issues came up at the time of the project's conceptualization: (i) the extent to which CIMAO had comparative advantages/disadvantages with sinilar projects in the world as regards infrastructure and energy com-ionentsll of the project; and (ii) how competitive could CIMAO be, given market prospects and pricing assumptions? Comparative Advantages/Disadvantages 15. The CIMAO project did not seem to have a priori significant advantages/disadvantages compared with other cement projects. Good quality and ample limestone reserves had been identified. A railway line and port facilities already existed and mainly had to be strengthened and improved, cheap surplus power was available from neighboring Ghana and residual fuel oil (Bunker C) could be easily delivered by the nearby refinery. Township 10/ In order to protect CIAO, the Bank also supported an agreement between the three Governments according to which the latter committed themselves to off-take the total clinker production of CIMA. The three Governments also entrusted CIMA0 to coordinate the procurement (international bidding) of imported clinker. 11/ As explained below (cf. para. 2.16), fuel oil was to be delivered to CIMAO at compet.'tive prices. Power was to be sold to CIMAO at US$0.022/kwh whica also appeared to be a competitive rate. -7- investments had to be made to meet personnel requirements but would repre- sent only 2Z of the total project costs. However, one drawback was that CIMAO being a clinker project (in fact having a clinker plant not integrated with a cement plant was practically a unique case) had to ship clinker to Ivory Coast (the main market) and Ghana grinding stations at a relatively high transport cost.12 This reduced the competitivity of CIMA0 clinker vis-&-vis imports. It was assumed during appraisal that while the average long-term ocean freight rate in 1975 terms for shipping clinker from Europe to West Africa would be US$10 per ton, it would cost as much as $3.87 per ton for shipping clinker by boat from Lomd to Ivory Coast and Ghana (excluding Lom4 port charges). This estimate of shipping cost from Lomd to Ivory Coast and Ghana proved realistic later on but, as a percentage of total CIF price, shipping charges amounted to less than 5% in 1983 while they were projected to be as much as 12Z at appraisal. Shipping costs increased less rapidly than other costs and was thus not a determining factor in high clinker CIF prices. 16. The alternative of using coal rather than fuel oil could not seriously be envisaged when the CIMAO project was appraised. There were two compelling reasons to use fuel oil rather than coal: (i) coal prices were still substantially higher than fuel oil in 1975-76,13 and (ii) there would be surplus Bunker C available from the Lomd refinery scheduled to start up in 1977, and the Togolese Government wanted this refinery to maximize local production through sales to CIMAO at competitive prices. (Fuel oil was assumed to be delivered to CIMAO at a price of US$78 per metric ton comparable to FOB Rotterdam and freight cost.) 17. It is interesting to compare historically the price evolution of fuel oil and steam coal for the period 1970-85 on a calorific basis and also take into account coal lower combustion efficiency. 12/ Cost per ton/km was higher than for shipment from Europe since the number of days spent on loading and unloading clinker (6 days on average) was higher in relation to number of travel days (4 days travel from Lomd to Abidjan and return, compared to 20 days from Europe to Abidjan and return). This was definitely a drawback because most current plants are as close as possible to consumption markets (the main market being the Ivory Coast in this case) due to the high transport cost of cement. 13/ As shown in the table below, while the difference in price between coal and fuel oil was negligible in 1973-74, sharp increases in coal prices took place in 1974-76 (i.e., when the CIMA0O project was appraised), with the result that, in 1975, coal was 40% more expensive than fuel oil. - 8 - FUEL OIL AND COAL PRICES (US$/ton at 1980 constant dollars) Coal /c (fuel oil Ratio Fuel Oil /a Coal Jb equivalent) Coal/Fuel Oil 1970 53.00 42.32 67.71 1.28 1971 41.00 47.15 75.44 7.84 1972 35.30 47.90 76.64 2.17 1973 61.90 45.04 72.06 1.16 1974 123.00 78.80 126.08 1.03 1975 98.90 86.42 138.27 1.40 1976 107.50 84.00 134.53 1.25 1977 108.90 77.51 124.02 1.14 1978 94.00 69.24 110.78 1.18 1979 146.50 61.95 99.12 0.68 1980 170.20 55.70 89.12 0.52 1981 182.60 57.76 92.42 0.51 1982 168.00 57.79 92.46 0.55 1983 169.50 59.62 95.39 0.56 1984 188.20 61.00 97.60 0.52 1985 156.60 48.65 77.84 0.50 1986 64.80 38.71 61.94 0.96 1987 (1st half) 83.70 30.64 49.02 0.59 /a Heavy, 3.5% sulphur, barges, FOB Rotterdam, yearly average. /b Bituminous, expokt unit value, FOB U.S. ports, yearly average. /c Using a ratio of 1.6 to take into account lower calorific value of coal ard lower combustion efficiency. Source: Commodity Trade and Price Trends, World Bank. 18. The above table shows clearly that if fuel oil prices (in constant 1980 U.S. dollars) trebled from 1972 to 1975, coal prices also increased by 80Z. Prices of replacement fuels such as coal were influenced by rising prices of hydrocarbons. High demand for coal generated sharp increases in coal prices in 1974-76. The result was that coal prices were still 40Z higher than fuel oil in 1975. Clearly, coal was not competitive with fuel oil when the CIMAO project was appraised in 1975/76. 19. It was only in 1979/80 after the price of fuel oil went up consid- erably (as a result of the second oil shock, which could hardly have been predicted at the time of appraisal), while the price of coal continued to decline from its 1976 peak, that careful attention was paid to coal conver- sion by CIMAO. Bank staff requested CIMAO management to look into that problem. As a result, in 1981 consultants were hired to undertake a study which demonstrated that coal was extremely competitive with fuel oil. Coal delivered at the plant at Tabligbo would have cost only 58? of fuel oil on -9- the same calorific basio (See Annex 1). Taking into account investments needed to build coal storage capacities at Lomd and at Tabligbo as well as coal grinding facilities totalling about US$12 million, the study concluded that the financial rate of return of a coal conversion project was as high as 482. 20. However, governments were reluctant to pursue the recommendations of the study, mainly because they had surplus fuel oil from their refi- neries that they could sell to CIMA0. The opportunity cost of such fuel oil was probably extremely low since marketability of that product was locally very limited due to stagnating demand which meant that surplus fuel oil had to be sold at distress prices and could then have been competitive with coal.14 Also, one could argue that fuel oil was produced almost as a "residual" from local refineries using either local (in Ivory Coast) or imported crude for which foreign exchange had to be spent in any case. Coal, although cheaper, would have had to be fully paid in foreign ex- change. Consequently, no decision was made to convert the plant to coal. However, after the closure of the Lom6 refinery in 1983 and the elimination of fuel oil production at the Abidjan refinery after an hydrocracking unit was installed by end 1983, the situation changed; and it may have then been justified for CIMA0 to convert to coal. But CIMAO was already in serious trouble by then and overwhelmed by other problems. The CIMAO plant was shut down in April 1984. Competitiveness 21. Another important issue at the time of the CIMA0 project conceptu- alization (besides the three Government ownership question and the compara- tive advantages/disadvantages issue, including the energy problem) was the potential competitiveness of that project. In other words, did the market analysis correctly assess prospects for clinker in the Region; were price assumptions reasonable; were commercial arrangements sufficiently realistic to ensure future marketability of CIMAO production, etc.? 22. Market requirements were forecast on the basis of Bank projections for GDP at that time (1975). These projections conservatively assumed that there would be some slowing down in the economic growth of the three member countries but still proved largely optimistic since nobody in the Bank seems to have anticipated such a slow economic growth in 1975-85. For instance, while GDP grew by 6.12 annually in Togo from 1965 to 1975, it was assumed to increase by only 42 from 1975 to 1985. But actual growth was only 0.62 per annum during that period, i.e., much lower than foreseen. As regards Ivory Coast, GDP growth was 7.72 per year from 1965 to 1975 and was expected to decline to 62 per year in 1975-1985. In fact, it proved to be only 4%. For Ghana, growth was also much lower and GDP only grew by 0.5Z annually in 1975-85 (cf. Annex 2). 14/ For example, the SIR refinery in Abidjan has a capacity utilization of only 442 in 1983. - 10 - 23. Cement consumption actually fell in Ivory Coast and Ghana during 1975-85, thus showing a negative elasticity with GDP while, when the CIMAO project was conceived, elasticity had conservatively been assumed to be either lower or similar to the elasticity observed in 1965-75 but positive overall (at least calculating the lower range estimate).15 The rapid de- crease in cement consumption also can be compared to the accelerated de- cline of domestic investment. For instance, domestic investment fell at the annual rate of 222 in the Ivory Coast in 1980-85 while cement consump- tion declined by about 10% annually during the same period. Meanwhile, GDP grew by 4Z per annum. In Ghana, GDP declined by 0.3Z in 1980-85, but do- mestic investment fell faster, by 1.62 per annum, and cement consumption by 5,2Z. 24. As a result of all this, even the lowest estimate for cement (and clinker) consumption was much higher than actual demand. Regional clinker consumption was 712 of projected consumption in 1982 and 372 in 1985, as shown belov. CLINKER CONSUMPTION, 1975-1985 (in 1,000 tons) 1975 1981 1982 1983 1984 1985 19821a 1985/b ------------------actual--------------- --projected-- Togo 113 168 169 175 162 150 155 195 Ghana 631 380 246 238 210 210 580 647 Ivory Coast 618 812 755 627 455 380 917 1,145 TOTALS 1,262 1,360 1,170 1,040 827 740 1,652 1,987 /a Lower estimates. ]b EAtrapolating Appraisal Report projections for 1982. 25. Regional consumption was projected to grow by 7.8% per year in 1975-85 against 5.82 in 1965-75. On that basis CIMAO would have supplied only 722 of total consumption in 1982 and 60Z in 1985, the balance being met by imports. However, consumption actually fell by about half in 1975-85 and in 1985 represented only 602 of CIMAO capacity of 1.2 million tons. 26. Under these circumstances, commercial arrangements made to guaran- tee a captive market for CIMAO production proved ineffective. As explained above, since the grinding stations were not integrated into CIMAO, the three Governments had signed a Treaty in 1975 and had reached commercial agreements on the distribution of CIMAO clinker, namely thatt 15/ For example cement/GDP elasticity was projected for the Ivory Coast to be 2.2 ini 1975-85 while it was actually -12.3 during the same period. - 11 - (i) Togo's needs would be met in totality by clinker produced by CIMAO, on the condition that her requirements did not exceed one- third of the estimated production (Togo projected maximum clinker demand was assumed to be 230,000 tons in 1982, i.e., 192 of CIMA0 production capacity--significantly below the agreed one-third ceiling); (ii) The remainder of CIMAO's production would be distributed between Ivory Coast and Ghana in equal portions or according to any other distribution ratio agreed by these two countries;16 (iii) The price of clinker would be the same at every port of unloading in Ivory Coast, Ghana or Togo. 27. In addition, it was agreed by the Governments (Article 21 of the 1975 Treaty) that in order to ensure the sale of CIMAO's entire production in the three national markets, they would take the necessary measures, par- ticularly to limit, as and when necessary, the importation of clinker and cement into their territories to the extent CIMAO would be in a position to supply the quantities of clinker and cement required by the national mar- kets (SAR, Annex 3-4). 28. When the project was conceived and appraised (i.e., at the same time the Treaty was signed), clinker imports were considered inevitable since CIMAO capacity was to be significantly below expected future demand. The three Governments even went so far as to entrust CIMAO to coordinate the procurement (international bidding) of imported clinker. The three States gave power to CIMAO to act as their representative to coordinate clinker imports from outside the region, to invite tenders and after having chosen the lowest offer, to make recommendations enabling the Governments to sign contracts and ensure their application (SAR, Annex 3-4). Underly- ing these arrangements were the assumption and prediction that CIMAO's selling price would be about the same as the import price of clinker of the region. In other words, CIMAO would have been basically competitive with imports. 29. The market share of CIMAO in each of the countries evolved was as follows (in Z) (Annex 3): 16/ Experience showed that, when CIMA0 prices reached a very high level (in 1983), Ivory Coast agreed to buy more than Ghana, because Ghana's consumption was declining and could not absorb as much as the Ivorian market. But, at the same time, Ivory Coast continued to import European clinker (at a much lower price) which shows that CIMA0 could not compel Ivory Coast to buy despite the existence of the Treaty. - 12 - 1980 1981 1982 1983 Togo 71 86 100 100 Ghana 56 53 100 100 Ivory Coast 13 18 40 59 TOTAL 29 40 64 75 30. Total CIMAO sales rose from 576,000 tons in 1981 to 753,000 tons in 1983 (full production years) while clinker imports by the three coun- tries together declined from 955,000 tons to 256,000 tons during the same period. The latter rose to 624,000 tons in 1984 after CIMAO stopped pro- ducing in April 1984. It appears very clearly from the above table that while Togo and Ghana took 10O% of their requirements from CIMA0 (in 1982-83), Ivory Coast never took more than 59Z (in 1983). This was due to Ivory Coast's reluctance to pay much more than the CIF price for imported clinker. Such imported clinker was much cheaper and cost only CFAF 13,000 per ton in 1983 while CIMAO sold clinker to the Ivorian grinding stations at CFAF 22,740 per ton (August-September 1983 quotations). The two grinding stations, SICM and SCA (both of them with French private majority participation), probably did not agree to pay a much higher price for CIMAO clinker (they were not CIMA0 shareholders (SICM) or had only a token participation in it (SCA)). Despite the existence of a formal treaty signed by the three Governments, the Ivory Coast Government did not feel that it could enforce the treaty rules which it could have done by not granting import licenses for other than CIMAO's clinker. 31. Retrospectively, one may wonder why the Bank did not insist on a multicountry long-term contract setting clinker prices for several years together with a buy-back arrangement by the shareholders, i.e., the Govern- ments who had contributed to the investment in CIMA0. As explained above, the Bank was convinced that regional demand for clinker, even under the most pessimistic assumptions, would steadily increase in future years, despite some expected slowing down of the economy. Consequently, CIMA0 production (with a limited capacity of 1.2 million tons) would have re- mained insufficient to meet total market requirements and would have had to be supplemented by imports. Commercial arrangements, as described above, would have reflected just a potential "scarcity" situation where the clink- er production would be "rationed" between the three countries. As regards prices, the belief that long-term clinker real prices would incr-ae by at least 1Z per year would have been beneficial to CIMAO in case its produc- tion cost may have been somewhat higher than anticipated. Given good qual- ity limestone deposits, use of largely existing infrastructure, and good economic size, the project was assumed to be competitive and able to sell clinker at a price comparable to the long-term CIF price. In short, the Bank was unprepared for a downside risk. 32. All this fell apart when the regional economy changed to much lower levels than anticipated by Bank staff with resulting drastic decline in clinker consumption and when CIMA0 production costs rose much above the - 13 - CIF price. Since the "real" buyers, i.e., the grinding stations (particu- larly in the Ivory Coast) were not part of the CIMAO agreements (despite having been originally insisted upon by Bank staff) and only the Govern- ments were involved in CIMAO, when the whole situation seriously deterio- rated (i.e., by 1982-83), the Ivory Coast (and others) did not feel com- pelled to implement the protective clauses of the Treaty and gave in to the grinding stations' complaint that CIMAO clinker price had become prohibi- tively high and that lower cost (imported) clinker was needed for their operations. Clinker Prices 33. The CIMAO project was justified in part on the assumption that because of rising demand, clinker prices would remain firm. They had risen (CIF Abidjan and in 1975 terms) from CFAF 5,450 per ton in 1971 to CFAF 6,370 per ton in 1975. These prices, however, were based on produc- tion costs in European plants, which were built before sharp increases took place in investment costs in 1974-75. Eventually, as the European export- ers had to replace and increase capacities, it was assumed that ex-works prices would have to reflect the resulting higher capital charges as well (SAR, Volume I, paras. 3-12). The long-term average CIF price of imported clinker expressed in 1975 terms was forecast to reflect such higher charges and to be about CFAF 7,700 per ton in 1979 when the CIMA0 project would start production. This represented a 2UZ increase in real terms above the actual CIF price in 1975. - 14 - CLINKER PRICES (CFAF/ton in 1975 terms) CIF Price CIMAO CIMAO CIF CIMAO CIMAO Imported Production Selling Long Term Production Selling Clinker Cost /a Price Price Cost Price Le Abidjan Lg ---- forecast---------------------actual------------- 1975 6,370 1976 5,665 1977 5,300 1978 5,370 1979 11,840 8,000 /b 7,740 /c 5,071 1980 9,190 8,000 7,740 11,615 5,795 4,803 1981 7,390 8,000 7,740 d 12,335 6,178 7,463 1982 7,160 8,000 7,817 9,542 7,582 5,756 1983 6,805 8,000 7,895 11,186 8,523 /f 5,010 1984 6,485 8,00 7,974 6,827 4,851 1985 6,185 8,000 8,054 4,688 1986 5,940 8,000 8,135 4,136 1987 5,800 8,000 8,216 3,942 /a Including depreciation and financial charges. /b A price of CFAF 8,000 per ton slightly higher than CIF price was assumed for the period 1974-84 to take into account CIMAO's tight financial position--Staff Appraisal Report, Annex 8-2. /c Average of CFAF 7,650-7,775 per ton based on FOB European price of US$24.25 per ton and ocean freight of US$8-12 per ton (average US$10) giving CIF price of $34-35 per ton. Rate of exchange used in 1975: US$1=CFAF 225. Id From 1981 on, the Appraisal Report assumed the price to increase by 1% per year, in 1975 terms, because an increasing number of new high capital cost plants would come on stream which would continuously push the price of clinker upwards due to increased depreciation and finan- cial charges. /e Financial Department, CIMAO. if Selling price to SICH and SCA (Ivorian grinders). L& Source: Statistics Department, Abidjan, Ivory Coast. Current prices were deflated by Consumer Price Index (Annex 6). Note: Clinker prices forecast is taken from Staff Appraisal Report; actual prices have been provided by CIMAO and deflated by Ivory Coast Consumer Price Index (Ivory Coast is the main market). Data in current prices are shown in Annex 4. - 15 - 34. Such a forecast proved wrong largely due to stagnating or declin- ing production output particularly in Western Europe, the majoL source of exports to the CIMAO region. European cement production actually fell in 1975-77 compared to 1974 while installed capacity increased. Cement prices fell during those years, and this was reflected in CIF clinker prices Abidjan which declined from CFAF 6,370 per ton in 1975 to CFAF 5,378 per ton in 1980, a 25Z decrease. After European production firmed up in 1980-81, cement prices reached a peak in 1981 but fell again in recent years (i.e., since 1982) in line with decreasing European output. Overall, the CIF price Abidjan, after a rapid decline in 1976-80, remailed (in 1975 terms and with the 1981 exception) more or less constant during the period when CIMAO was in production. In 1980-84, the CIF price averaged CFAF 5,600 per ton while the originally forecasted CIF price was CFAF 7,800 per ton for the same period, i.e., 40Z higher. 35. An even more important factor was the constant increase in the CIMA0 selling price during the period 1979-83 (in 1975 terms). Due to higher costs than originally forecast, CIMA0 prices rose from CFAF 5,795 per ton in 1980 to CFAF 8,523 in 1983,17 i.e., by 47%, while CIF prices rose by only 5Z. Average CIMAO selling price in 1980-83 was CFAF 7,020 per ton compared to an average CIF clinker price of CFAF 5,770 during the same period, i.e., 22% higher. It is also interesting to note that CIMAO prices were below the originally expected average selling price of CFAF 8,000 per ton with obviously severe financial consequences for the Company's profita- bility. Clearly, CIMAO had to cut its price to the bone in order to meet increasing international competition particularly in the Ivory Coast. 36. The lower than anticipated CIF price of clinker reflected a fail- ure to realistically assess the supply/demand prospects in the European cement industry from 1975 on, including fast increasing production capacity (in Spain and in Greece for example), and stagnating local demand resulting in a lasting oversupply of cement and in much larger exports outside Europe and particularly to Africa. The ability of new producers in Spain and Greece to have significantly lower production costs proved to be in direct contradiction with the Bank forecast of higher long-term prices based on higher investment costs. After 1980181, when the price of oil had risen sharply, the accelerated conversion of European plants to coal resulted in lower marginal costs for most producers, and imported clinker in the African market was consequently priced at this marginal cost (PCR, para. 2.18). The average CIF price of CFAF 5,600 per ton in 1980-84 was equiva- lent to about US$14 per ton (in current terms - Annex 4). This was signif- icantly below the ex-factory production cost of European clinker plants during that period (US$26 per ton on average) and corresponded only to variable costs (fuel, electricity and supplies). A CIF price of US$14 per ton of clinker imported from Europe evidently reflected trade practices to sell clinker at "transfer prices" rather than cost plus profit plus freight and clearly showed that one cannot compete against marginal costs in capi- tal-intensive productions. 17/ The year 1984 is not taken into account since CIMAO decided to decrease prices despite increasing costs, but soon after had to stop production in April 1984. - 16 - Conclusions 37. Although, prima facie, the Bank could have been tempted to support a project based on local good quality limestone deposits (rare to find in West Africa) and enjoy geographic protection due to relai-ively high ocean freight costs for clinker from Europe to West Africa,18 in fact the competitiveness of such a project proved to be far from ensured. CIMAO (i) was faced with high cost investments in a little industrialized environment; (ii) was to market its output in three separate countries without the full supDort of the privately owned grinding stations in the Ivory Coast and with the sole assistance of governments well meaning but finally reluctant to buy clinker at any price; (iii) was implemented at the very moment when the European cement industry started to suffer lasting supply/demand problems with long-term depressing effects on prices and as a result was led to maximize exports sales at or near marginal cost thus undermining CIMAO's ability to compete;19 and (iv) came into production when regional demand for clinker fell drastically due to slow or even negative economic growth in the Region, thus preventing CIMAO to fully utilize capacity. Had the Bank correctly assessed the world market and price prospects for cement and clinker and the high risks involved for CIMAO, especially in the absence of grinding stations' participation, no doubt second thoughts would ha7e been given to this project; and it is doubtful that the Bank would have supported it. II. PROJECT IMPLEMENTATION PROBLEMS 38. The main problems met during implementation of the project were related to design of the plant, the ownership structure and technical and management arrangements. Design 39. The project consisted of two complementary components as summarized below: (a) Industrial Complex. The largest single element in the project was the construction of a new dry process clinker plant with an annual capacity of 1.2 million tons to be built at Tabligbo, Togo, about 65 km northeast of Lom6 and to include a raw material quarry, two clinker production lines, storage and train-loading facilities for clinker. This component was estimated to cost US$220 million. 18/ However, such protection was reduced by the need for CIHAO to ship clinker to Ivory Coast and Ghana at extra transport cost. 19/ In the sixties and the first half of the seventies, cement exports represented a small share of the world (5.2Z in 1974) or European (6.6%) production. However, when large production surpluses emerged in the late seventies and in the eighties, trade exports became much more important (they reached 112 of West European production in 1978 and 13.6Z in 1983). - 17 - (b) Infrastructure. The Industrial Complex was complemented by the following infrastructure components: (i) a 10 km power link and substation connecting the plant to the existing power network, (ii) a township to provide housing for about one-fourth of the plant's employees, (iii) a railway line of about 75 km (50 km new and 25 km upgrading existing line) to connect the plant with the port of Lomd, and railroad equipment to transport the complete output of the plant, and (iv) a rail/port terminal within the port of Lom6 with apprcpriate clinker handling and storage facilities prior to shipment. The infrastructure components were owned by the Togolese Government and were estimated to cost US$64 million. The project benefitted from the fact that 25 km of an already existing railway line could be used and only had to be upgraded; that a major expansion of the port was already under way including a multipurpose mineral bath (including clinker traffic); housing was already available near the industrial plant for 80Z of the staff and electricity was available from the Volta Dam in Ghana. 40. The plant concept was classical and used well-proven dry process technology. Two parallel production lines of 2,000 tons per day each were installed. However, the design allowed for future expansion through the addition of a third (and eventually fourth) line to increase capacity by 50% (and another 50%) in the 1980s, when the growth in demand was again expected to call for substantial clinker imports. The expansion was sup- posed to improve the project's benefits through economies of scale, not only in the plant itself but even more in the infrastructure. 41. Power was to be supplied to CIMAO by the Communautd Electrique du Bdnin (CEB), a regional entity of Togo and Benin, which was responsible for the purchase and distribution of hydropower from Ghana. Ghana's Volta River Authority (VRA), generating hydropower, assured the Togolese Govern- ment that it would guarantee all power requirements of CIMAO. As can be seen below (para. 5.03), experience showed that due to drastic drought conditions this could not be ensured and CIMAO had to close down in 1984 due to lack of power. 42. Since a railway already connected Lomd to the northeast, the proj- ect simply provided the necessary transport link with and improvement in the existing system for shipping CIMAO's clinker (and inbound fuel oil) between the plant and Lomd. It mainly consisted of (i) construction of a new 50 km meter gauge single track railway line, (ii) upgrading and renewal of 25 km of existing line, and (iii) hookup to rail terminal facilities at the clinker plant and at the port. 43. A major expansion of the Lomd port was already underway in 1976, including the construction of a mineral berth to serve multiple purposes, including clinker traffic. However, a rail/port terminal had to be built to include rail unloading, clinker storage, handling and shiploading facil- ities with a handling capability of 1,000 tons/hour, and a storage capacity of 50,000 tons. - 18 - 44. Overall, some over design was implied in the project since a third kiln was planned from the beginning to meet increased clinker demand in the 1980s. This resulted in somewhat larger expenditures, particularly in in- frastructure and service facilities (SAR, Vol. 1, para. 8.08). As indi- cated, the plant finally included two kilns, but thought was also given to installing only one large kiln. Although one single production line of the double capacity would have permitted economies of scale and might have re- duced investment costs by some $20 million (SAR, Annex 5-1, page 1), it would also have increased the risk of a temporary shutdown due to opera- tional problems and would have thereb; more than doubled potential produc- tion losses. 45. The plant design was based on maximum use of reinforced concrete, which may be considered as controversial considering the chronic procure- ment problems in Africa for cement and framing for concrete. An alterna- tive was to use steel but steel prices had reached historical peaks in 1974--76 and this may have encouraged the project promoters to use concrete instead. 46. Over design can be identified in some instances. For instance, (a) the long distance adopted beyond the crushing unit and the plant itself is hard to comprehend; this layout of the complex led to extra capital costs (e.g. long conveyors), (b) the Lom4 port terminal had belt conveyors protected with metal housing, which was unnecessary; (c) excessive con- struction could be found in buildings with slanted roofs similar to the ones in countries having heavy snowfalls; a luxurious laboratory, a control room so large it could be used for two more production units,20 a truck weighing station in a project where all material is delivered by train and clinker is shipped by railroad. 47. If all the over designed elements were eliminated approximately US$20 million of investment costs might have been saved (in a variety of components, had a more simple design been adopted).21 This is to be compared to a total investment cost estimated at US$284 million at appraisal (actual cost was US$317 million). Consequently, the overall reduction in cost, which would have been made possible through elimination of over design, was no higher than 6Z to 7% of total project cost. 48. Changes in design during project implementation resulted i. cost overruns totalling US$25.2 million, i.e., 75Z of total overruns.22 There 20/ As a result of the original plan to expand the plant in the 1980s. 21/ Excluding US$20 million which could have b,en saved by having one single kiln instead of two kilns. As seen above, safety considerations prevented the use of only one kiln. 22/ Total overruns amounted to US$33 million or less than 12Z of originally estimated costs, which may be considered acceptable for such a complicated project in a difficult environment. Moreover, higher imported costs are calculated at current prices. - 19 - were two main changes in design: (a) an expensive roof was added over the storage area (where the raw materials are blended) at a cost of US$5.5 million; and (b) changes were made in design of the final layout of the kilns. 49. At appraisal, it was planned that the storage area would be uncov- ered but it was later decided (during the plant construction) that it should be covered to avoid major problems during the rainy season. Al- though this appeared quite reasonable, the cost might have been slightly lower with a "softer" cover system (perhaps saving some US$0.5 million or 10Z of the extra cost). 50. The change in design of the kilns' layout was due to the desire to elevate the level of kilns to avoid any flooding of the clinker pit during the rainy season. Other changes included setting electric filters on top of the raw mill building and also the construction of two steel chimneys for the kiln instead of a single concrete one. Although such changes were probably justified, the result was an increase in civil works. The execu- tion of the civil works by SONITRA, an Ivorian firm whose shareholders were a very experienced Israeli company, was consequently delayed and higher costs were incurred.23 The higher costs due to design changes were accepted apparently without being given enough consideration by the project manager and the engineering firm in charge of supervision of the project. Ownership Structure 51. As explained above, the CIMAO project evolved from one with a substantial private ownership and leadership to a practically full public one with only a token private participation. Such a situation had a seri- ous impact on project implementation as external technical assistance had to be sought by the governments to implement and supervise the CIMAO project with resulting serious problems, as will be seen below (cf. section on technical and management problems). It thus is interesting to throw some light on how the ownership structure was finally decided upon before project implementation. 52. A French private company was the original promoter of the CIMAO project. In 1974, the Togolese and Ivorian Governments and the Bank had agreed that CIMAO's equity would be divided in three equal shares with the promoter holding a 33Z share in the company. Taking into account the then estimated cost of CIMAO's industrial component of $110 million as well as the 65/35 debt/equity ratio considered prudent by the lending consortium headed by the Bank, the latter repeatedly asked the promoter to commit itself to provide $12-$13 million to the project. However, the French company was unwilling to do so. 23/ Total overrun in civil works was US$19.7 million in which are included extra costs due to changes in layout of the kilns by the supplier of the kilns, Polysius. - 20 - 53. As an alternative, the Bank thought of advising the Governments to invite experienced cement manufacturers--several of whom were already ac- tive in the region--to subscribe up to 33Z of CIMAO's equity individually or as a group. Technical assistance and management for the project would be provided by CIMAO's new private promoter, if one could be found, or by one of the experienced cement manufacturers providing private group financing for the project. 54. However, the Bank also felt that the Governments might reject that proposal on the ground that interesting cement manufacturers in taking a sufficiently large financial position in CIMAO would certainly be time consuming and difficult, particularly if several companies were involved. As an alternative, Bank management then informed the Government that it would be prepared to support a project if the amount of private equity suggested in its original proposal was replaced, in part or entirely, by Government equity, as long as a satisfactory overall debt equity structure would be achieved and a satisfactory management contract, with a qualified and experienced firm would be arranged. In this regard, it was to be noted that Ghana had recently expressed an interest in the project. The Bank then felt that it could, therefore, envisage the Togolese, Ivorian and possibly Ghanian governments as CIMAO's main shareholders. Under this scheme, thought likely to have great appeal to the Governments, technical assistance as well as management for the project was to be provided by whichever "experienced" cement manufacturer offered CIMAO the best deal. 55. After discussions between the Togolese and Ivorian governments and the Bank, it was agreed to ask a French company to come in as a technical partner with a small equity participation. This company agreed to take a stake in CIHAO's equity in 1975 and to provide technical assistance to CIMAO. At that time, the Ivorian authorities wanted to increase their stake in SICM (a grinding station in the Ivory Coast owned by the above cement manufacturer) from 5Z to about 30Z. Furthermore, they asked the latter to reinvest all or part of what it would receive as compensation for SICM in CIMAO. The company was prepared to do so to protect its remaining majority share in SICM. However, it seems to have asked for a high payment for its technical assistance to CIMAO as a "disguised dividend" for the equity which it would put in the project. The reason it asked for such high dividends was that it did not expect CIMAO to generate any real - 21 - dividends in its early years and because it felt that a private shareholder being pressured24 to buy equity into CIMAO should be entitled to at least a "reasonable return" on its invested capital.25 56. Also, in 1975, in order to increase CIMAO's market size for clink- er and to raise equity contributions to the project, the Togolese and Ivor- ian Governments obtained Ghana's participation in CIMAO. Moreover, two new partners (Socidtd des Ciment d'Abidjan) and Ghana Cement Works, Ltd. were brought in by their governments in order to remove the deadlock between the Bank and the governments, since the Bank kept insisting on a "reasonable" debt/equity ratio. Total private holdings totalled, however, US$6.6 mil- lion only, i.e. 7.8Z of total equity compared to 92.22 for the three gov- ernments.26 This "token" private participation was about as much as one could have expected from a project that was to serve a guaranteed market in which there would be some pressure to hold down the ex-CIMAO price of clinker. Management and Technical Arrangements 57. To assist CIMAO, which was then a new company with no experience and which unfortunately had no close ties to a group which could have pro- vided expertise in project management or operations (PCR, para. 2.11) ex- ternal management and technical arrangements became necessary. Such arrangements included hiring a cement manufacturing firm to provide technical and management assistance and another company for engineering. 58. However, the first step was to appoint a managing director and a Togolese national with experience in cement manu'acturing with French com- panies was appointed. This managing director was assisted on one hand by a 24/ Particularly from the Bank, which was still insisting on some private participation in the project. Neither the French partner nor the governments were keen on this private participation and would just as well have done the project without it. 25/ The project's previous promoter, was eliminated because it opposed the technical assistance safeguards considered crucial to the project and refused to accept other private firms as CIMAO shareholders while also refusing to increase its own equity position in CIMAO. 26/ Total equity was US$86 million, of which US$79 million for the three Governments and US$7 million for other private investors. Each Government owned US$26 million, i.e., one-third of government-owned equity. - 22 - Management Committee of three members appointed by the Board and representing each of the three governments and on the other hand by a project coordinator.27 Consequently, the organizational set-up to implement and operate the project was a managing director assisted by a three-member committee and a project coordinator. Expertise was to be provided by two expatriate firms mentioned in para. 57. 59. A conflict soon developed between the Committee and the Managing Director regarding separation of responsibilities. The Committee then did not function again until 1982 (PCR, paras. 3.03-3.08). The Managing Direc- tor performed adequately during the implementation of the project but be- came overwhelmed by the multitude of problems during the operating phase and left in mid-1983 (PCR, para. 3.07). It can be added that even during the project implementation period, CIMAO's management had to rely heavily on the advisory company which was given overall responsibility in its contract28 to control on behalf of CIMAO the implementation of the industrial complex. 60. The advisory cement company was given very wide responsibilities to provide (i) technical and management assistance during preparation, execution and start up; (ii) preparation and execution of a recruitment and training program in France and in Togo; (iii) technical assistance during five years after start up of the plan; and (iv) management assistance for one year after plant start up. It was also to establish an accounting system and a cost control system to be used during project implementation and operation. 61. The engineering firm was selected to (i) prepare a feasibility study and design the clinker plant and rail/port terminal based on complete raw material analyses; (ii) prepare tender documents and assist CIMAO in procurement of equipment and services; and (iii) supervise fabrication, delivery, erection, installation, testing, start up and commissioning of equipment for both plant and terminal. Engineering and supervision of civil works, for the Industrial Complex only, was also to be carried out by the engineering firm. 62. What was the advisory company's perfcrmance? The question is important since it was given a key role by CIMAO end the lenders, including the Bank, in implementing and operating the project. First of all, although the firm is a well-known and experienced current manufacturing company, it is questiona'le whether or not there was a conflict of interest 27/ A British engineer, with extensive experience in the cement industry, both in plant construction and operation, was appointed. He coordinated projeLt preparation and communication between CIMAO, shareholders, lending institutions, Origny and ACPM. He was afterwards to coordinate the execution of the infrastructure components (rail, power, port, etc.). 28/ Cf. ORIGNY-DESVROISE-CIMAO. Contrat Assistance Technique, Art. 3.3. Mission de ContrOle. - 23 - since it owned one of the grinding stations in the Ivory Coast (PCR, para. 3.13). The Bank had misgivings about this potential conflict of interest as the Company was not only a cement producer but also exported directly to West Africa. However, as explained above, the Ivory Coast insisted that the Company be appointed as technical assistant" and it felt pressured to agree, also to take a token participation in CIMAO's equity. 63. Tensicns developed at an early stage between CIMAO management and the Company, which complained that CIMAO had rejected their proposal to provide additional training, althoigh, on the whole, the training was reasonably well executed. The Company which was contractually bound to assist in setting up a financial system did not do an adequate job. It did develop a cost accounting system but only two years after start up, general weaknesses developed in the financial and administrative areas. Bank su- pervision missions identified such weaknesses but without apparently much result. Consultants were appointed to help in these areas rather than CIMAO calling the Company to solre these problems. One difficulty may have been due to the wording of the technical assistance contract, at least as compared to the contract later signed with the firm which succeeded the Company, after cancellation of its contract in November 1981. 64. Other reasons for the cancellation of the contract was that troubles developed with the follow up of the civil engineering contract awarded to an Israeli-controlled Company. The Company (and also the engineer) seems to have accepted major changes in plant design from the supplier of the kilns, without taking due account of its cost implication on the civil works and without informing CIMAO (cf. para. 3.13 above on design problems). The Bank also recommended that the Company should add a civil engineer to its staff on the site to follow up on its civil works program. The Company refused, claiming it could perform the job without such a person. However, there seems to have been little improvement in the planning of its work. 65. Another difficulty was that capacity utilization remained low during the first two years of operation (on average 51Z in 1980-81) and reached 72Z only in 1982. Although reasons for low capacity utilization were largely due to the need for frequent rebricking, electricity shortages and fuel oil supply problems, CIMAO management felt that the Company should have been more active in raising capacity utilization. The especially low production in October and November 1980 led CIMAO to withhold payments due under the contract clause of Transfer of Know-How. After negotiations a revised contract was prepared to provide the Company with a variable bonus per ton (1981 production was 602,000 tons). However, CIMAO terminated the Company's zontract in November 1981 and replaced it. The actual cost of technical assistance by the Company itself exceeded the original estimate by about three times (CFAF 643 million against CFAF 224 million). 29/ This was linked to partial takeover of SICK by Ivory Coast in 1975. - 24 - 66. The engineering firm was selected as the lower from two bidders. The design plant was a copy of a plant in Morocco (CIOR), which partly explains the low bid of the Engineer. The firm's problems became evident in almost all areas it had to cover, i.e., in detailed engineering, in civil engineering, drawing, in planning and in cost control. The PCR discussed examples of the problems in cost control, in planning and in engineering (including costly changes in design without informing CIMAO management). Regarding the civil engineering study, there were major delays in issuing drawings mostly because of language problems (comprehension and interpretation of contract terms) and excessively long drawing approval procedures (drawings produced in England, sent to France, for approval, returned to London with comments, updated in London, transmitted to France prior to being finally sent to Togo). Due to a number of problems, CIMAO suspended payments to the Engineer in December 1979. The latter finally satisfied CIMAO in January 1980 and payments were resumed. 67. A lesson to be learned from the above, is that the advisory company and the Engineer, not being the owners, were, above all, concerned that the plant worked without problems. Consequently, they were reluctant to reduce excessive safety margins which the owner of the project who commit-ed its own money could have done after balancing safety elements against the benefits of lower investment costs. By international standards, and even after taking into account rapid increases in cement plants prices resulting from expanding cement investments in the world and growing inflation, CIMAO capital costs were considered somewhat high (SAR, Volume 1, para. 7.02) due to (i) the relatively high transport costs of shipping equipment to Western Africa and providing services to the project site, and (ii) the expected high cost of civil works in an isolated location. However, part of the high cost may have been due to the design itself. CIMAO had a design similar to a plant in Morocco which was also designed by the Engineer and built shortly before CIMA0 at an investment cost of US$153 per ton of clinker produced compared to US$162 for CIMAO. 30 However, according to an IFC study, dated August 1984, similar scale projects financed by IFC had an investment cost of US$124 per ton (1980 dollars). 68. Investment costs for the industrial complex and infrastructure were not substantially higher than originally estimated. They amounted to US$317 million against US$284 million31 i.e., less than 12Z more. The major causes for overruns were higher civil works costs, delays in startup which resulted in higher pre-operating expenses, and some extra costs for the township and for the port terminal equipment. Nevertheless, CIMAO had to find new financial sources for these overruns (US$33 million). More- over, projections covering the operation period of CIMAO showed that CIMAO would also not cover its operating expenses during the first few years of operations. 30/ Appraised cost excluding working capital and interest during construction. 31/ Using a rate of exchange of 1US$ = 225 CFAF in 1975 and 1US$ = 219 CFAP (average rate 1977-1980). - 25 - III. THE "RESCUE" OPERATION 69. To correct the rapidly deteriorating situation and in order to salvage the project, the co-lenders (the Bank, the European Investment Bank and the French Caisse Centrale) in July 1981 proposed to CIMAO credits for US$51.9 million of which IDA was to contribute US$15 million.32 70. A co-lenders Action Program was presented to CIMAO (PCR para. 4.01) which included: (a) financing measures, which would allow for a temporary increase in clinker selling prices, (despite evidence that buyers did not want to buy clinker from CIMAO at a higher price) an increase in capi- tal and the raising of additional debt; (b) strengthening of management, by giving more responsibilities and more financial incentives to the Technical Assistance Firmi 33 and (c) measures of cost reduction, by the revision of CIMAO previously signed, very expensive contracts for railway transport, port hand- ling and maritime shipping of clinker and a reduction of overhead costs. 71. The most significant co-lenders proposal was to increase clinker prices, as in 1975, and despite the continuously low level of CIF imported clinker prices, the Bank again forecast an increase in FOB clinker prices and freight rates. It was assumed that CIF prices of European clinker imported into West Africa followed a cycle with a low of CFAF 13,000 per ton and a high, covering full production and transport costs, of CFAF 23,500 per ton in 1982 terms. The 1982 prices at CFAF 13,000 per ton were to be the low point of the cycle, would increase each year to reach their peak in 1988, and then decrease again to reach the low point in 1992. However, the price increase never materialized and prices have declined to about CFAF 12,500 per ton in current terms in 1987, which means they have gone down in real terms (imported clinker constant prices fell 32Z from 1982 to 1987). It is interesting to note that the significant decrease in clinker prices which took place around 1975 has continued until now, while until the mid 1970s there were cyclical price movements (upwards or down- wards) lasting from 3 to 5 years. It must be recognized that it was proba- bly very difficult to forecast at the same time such a long 7asting fall in clinker prices (although European cement over capacity was bound to exert pressure on prices) and such a drastic downturn in the Region's economic growth resulting in stagnating and even declining demand for cement. 32/ IDA Credits 1326-TO/1327-GH (CIMAO Restructuring Project). The $15 million amount was to be used to purchase fuel oil (US$12 million), spare parts ($0.7 million) and to finance technical assistance. To provide for the urgent need of funds for CIMAO the IDA credit provided for up to US$7 million o. retroactive financing from July 1, 1982. 33/ Origny was replaced by SCF in November 1981 with wide powers, particularly regarding financial management. - 26 - 72. With hindsight, this optimistic forecast had little rationality and this persistence in forecasting unrealistically higher clinker prices unfortunately helped to provide at least some economic basis for the opera- tion and thus justify a quick infusion of fresh money in the hope to save the CIMA0 project. Another assumption was to treat the investment in the plant as a sunk cost.34 On this basis (higher price and sunk irrestment cost) the project had an economic rate of return of 17Z. When the price increases did not materialize, there was in fact no return to the project. 73. Despite the increase in CIMAO clinker current price from CFAF 19,000 per ton in January 1982 to CFAF 22,700 in 1983, and successful (al- though protracted) negotiations of reduced cost contracts with the railway Company, the Lomd port, the oil refinery and the maritime shipping company, the IDA credit did not become effective until February 1984. Delays oc- curred due to (i) the above mentioned lengthy negotiations; and (ii) the Governments' sudden insistence in reducing the clinker price from CFAF 24,200 per ton to CFAF 19,000 per tun (imported clinker cost was CFAF 13,500 per ton) while the co-lenders insisted on an increase. Due to these delays, IDA funds were not disbursed since, as explained below, CIMA0 stopped producing in April 1984. IV. OPERATING EXPERIENCE 74. The PCR has reported on low capacity utilization problems (the annual average reached 72? in 1982 but dropped to 58% in 1983 and to 512 before closure in April 1984). Thic resulted in increased costs in 1983/84 and made any price decrease impossible. Reasons for low capacity utiliza- tion included: (i) need for frequent rebricking;35 (ii) frequent , electricity shortages which prevented sustained higher level of production; 36 and (iii) problems in supply of fuel oil after the Lomd refinery sto ped producing and the Ivorian refinery stopped marketing fuel oil in 1983.3' 34/ The alternative to provide additional credit was to close down CIHAO. Since the three governments were joint guarantors of the loans made to CIMAO, the debt service had to be met in any alternative, resulting in treating the plant investment as a sunk cost. 35/ Due to low sulfur content of the fuel oil, the use of siliceous sand and frequent power shortages creating important temperature changes in the kilns. 36/ 7ull capacity utilization of the two kilns was achieved only in March 1983. 37/ Fuel oil was then supplied, through competitive bidding, from France. - 27 - CIMAO - CLINKER PRODUCTION AND CAPACITY UTILIZATION 1980 /a 1981 1982 1983 1984 lb Production ('000 tons) 468 602 868 693 154 Capacity Utilization (Z) 52 50 72 58 51 /a Nine months. /b Three months. 75. Examination of the plant Journal covering the period 1980-1984 reveals a high frequency of work stoppages. The main causes for strnpages were cooler problems; problems with kiln feeding system; power failures; 38 voltage drops; fuel shortages; and brick work problems. 76. In April 19b4, the power company (CEB) cut its power supply to CIMAO and CIMAO shut down, at first for four months, since there was no reliable alternative source of electricity to hydroelectricity supplied from Ghana.39 77. Obviously, CIMAO could have started production again when CEB would have been able to resume power supplies a few months later since alternative sources were being repaired or launched in Togo. However, the basic reasons for the decision not to reopen CIMA0 were the declining re- gional clinker market and the high price of CIHAO clinker compared to the low CIF price of imported clinker. On the basis of a study made by SCF, CIMAO's technical assistant, the Bank concluded that permanent closure of tha plant would be the best solution since projected CIMAO clinker costs,40 future capital investaents41 and working capital requirements led to a higher total cost than importing clinker. 78. At the production level of 770,000 tons projected in the SCF study, CIMAO's ex-factory costs of clinker (excluding depreciation, finan- cial expenses and profit), were estimated at CFAF 16,019 (US$35.6) per ton. 42 A review of European plants indicated factory costs (also excluding de- preciation, financial expenses and profit) of US$21 per ton. Adding an estimated US$10 per ton for ocean freight, would give a total CIF cost of 381 As customary in the cement industry, CIMAO did not have any standby generators and was getting all its power from the grid. 39/ The latter was interrupted due to a sever drought affecting water level at the Akossombo dam. 40/ Excluding financial expenses and depreciation. 41/ Such as replacement of mobile equipment. Coal conversion equipment cost was also considered with the objective to reduce production costs. 42/ Assuming use of fuel oil. Coal use would have reduced cost to CFAF 13,664 (US$30.4) - 28 - US$31 per ton, slightly above the actual CIF price of US$29 per ton, still lower than CIMAO's estimated production costs. However, one has also to add to the latter, distribution and shipping costs leading to total CIMAO clinker delivered price of $43 per ton 4 to be compared to US$29 per ton for imported clinker (also including distribution and shipping costs). Even after shadow pricing foreign exchange by 302 (to take into account an overvalued CFA franc) and doing this on the domestic portion of CIMAO costs (i.e. about 402) would still lead to US$39 per ton i.e. about one-third above the US$29 CIF clinker price (see paras. 6.06-6.15 below). 79. CIMAO's operating costs have evolved as follows compared to pro- jected costs: CIMAO OPERATING, EX-FACTORY AND CIF COSTS IN 1988 Projected Cost La Actual L _ Ratio Actual/ (1988 prices) (1983 prices) Projected Cost CFAF/ton X CFAF/ton X Production (000' tons) 1,200 693 0.58 Variable Costs Fuel Oil 8,888 23.0 7,842 24.5 2.04 Electricity 922 5.6 1,404 4.4 1.62 Supplies 1,48 8.6 698 2.2 0.48 Subtotal 6,193 87.5 9,939 21.1 1.60 Fixed Costs Labor 790 4.7 1,461 4.6 1.85 Technical Assistance 247 1.5 1,142 8.5 4.62 Administrative and Other Costs 310 1.9 28548 8.0 2.21 Subtotel 1,847 8.1 5,146 16.1 8.62 Total Operating Costs 7,640 45.1 15,085 47.2 2.00 Financial Expenses 2,888 14.8 8,446 26.4 8.54 Depreciation 8670 22.0 5.484 17.2 1.41 Total Ex-Factory Costs 13,598 81.4 29,015 98.8 2.18 Distribution Costs a9 18.6 2,956 9.2 0.95 Total Cost CIF Abidjan or Accra 16,707 100.0 81,921 109.0 1.91 /a Staff Appraisal Report, Volume II, Annex 8-3, Table 2, June 1976. Projected prices were 1988 prices, assuming a 7.41 annual Inflation rate In 1975-1988. Above prices have been adjusted to take Into account actual Inflation in 1975-1988 1.*. 11.6X per annum. Lb PCR, page 27. 431 US$38 per ton after conversion to coal. - 29 - 80. Operating costs in 1983 proved to be twice higher than originally projected during Appraisal. Fixed costs per ton of clinker produced rose much faster than variable costs, due to the fact that capacity utilization was only 58Z in 1983. Administrative and technical assistance costs per unit of output were 6.5 times higher than projected. As explained above, (paras. 3.28 and 4.02(b)) technical assistance proved to be far more expen- sive than foreseen and contracts had to be revised upwards to accommodate growing management and engineering firms personnel and costs. 81. As regards variable costs, fuel oil obviously remained the most important item but represented the same portion of total operating costs (i.e. about 50%) than originally projected because technical assistance and administrative costs also increased rapidly. Reflecting worldwide price increases, fuel oil was twice more costly per ton of clinker produced in 1983 than projected at appraisal. Interestingly, actual cost per ton of clinker of materials, spares and supplies was only half the projected one.44 Almost two-thirds of the cost was to come from spare parts (CFAF 880 per ton) but actual expenditure was CFAF 693 per ton only.45 82. Forty-three percent of overruns in operating costs were due to high technical assistance and administrative costs (they alone represented 24% of operating costs in 1983) while about 50% were due to fuel oil costs. While higher fuel costs corresponded to higher oil prices worldwide (thus affecting the entire cement industry), the significant increase in adminis- trative and technical assistance expenses in CIMAO may indicate poor mana- gerial performance. Even on the assumption of capacity utilization reach- ing the level projected in appraisal they still would have been 3.8 times higher. 83. Ex-factory costs, i.e., adding to operating costs, financial ex- penses and depreciations, were also about twice higher per ton of clinker than anticipated. Financial expenses jumped more than three times above the projected level. CIMAO experienced heavy net losses46 during the en- tire production period and had to borrow sizeable amounts from local and French banks to finance its accounts receivables. 44/ Items included imported grinding media, spare parts, explosives, fuel, diesel, lubricants, grease for mobile equipment, and miscellaneous supplies for workshops and laboratories. 45/ This may have been due to lower maintenance, savings on spares or a combination of both but no specific information is available on this point. 46/ Accumulated net losses amounted to CFAF 19.7 billion compared to projected CFAF 1.9 billion net profit. - 30 - 84. Taking into account distribution costs (rail transport and ship- ping), the CIF cost of clinker (Abidjan or Accra) was CFAF 31,971 per ton in 1983.47 Since the CIMAO price charged to grinding stations was CFAF 24,200 per ton48 of clinker, CIMAO was losing CFAF 7,771 per ton or 24% per ton produced while, when the project was appraised, a 10% profit per ton had been projected (SAR, Annex 8-5). 85. The CIF Abidjan imported clinker price was CFAF 13,500 per ton in 1983, i.e., 59? of CIMAO's selling price during the same year and 45Z of CIMAO's production cost per ton. However, to take into account large vari- ations of the U.S. dollar in relation with the CFA Franc, the table below shows a comparison both in CFAF and in U.S. dollars of CIMA0 delivered costs (in Abidjan) and selling price with imported cli..ker (CIF Abidjan). Data are all in current prices to also enable comparisons with price pro- jections made at Appraisal (see Annex 4). Ratio CIMAO CIMAO CIMAO Imported Selling Price/ Cost Selling Price Clinker Imported Clinker Rate of Exchange CFAF/ton USS/ton CFAF/ton USS/ton CFAF/ton USS/ton CFAF/USS 198 25,058 110.9 /a 12,500 65.8 10,359 45.8 1.21 228 1981 28,950 100.9 14,500 50.5 17,510 81.0 0.83 287 1982 24,037 71.5 19,100 568.8 14,500 48.2 1.31 336 1983 29,845 71.8 22,740 64.6 13,5600 32.4 1.89 417 /a Production was 468,000 tons only in 1980 compared to 600,000 tons in 1981, 868,000 In 1982 and 693 tons In 1983. 86. The above table shows that while CIMAO cost per ton delivered to Abidjan actually decreased in 198249 CIMAO selling prices sharply rose in 1981-83 but increased much less in dollar terms since the CFAF decreased vis-&-vis the U.S. dollar. Selling price increases in CFAF terms took place in order to reduce the wide gap between cost and selling prices. As regards competition from imported clinker, while CIMAO's selling price was 21% above the CIF price of imported clinker in 1980, it became 68? higher in 1983. This led to strong protests from grinding stations and consumers and eventually to the closure of the plant since Governments refused to support the project at any cost. Finally, a comparison of CIMAO and 471 Slightly less than twice the projected cost since distribution costs were actually slightly lower than anticipated. 481 CIF price for grinding stations in Abidjan in 1983, although in the last quarter of 1983 such price was reduced to CFAF 18,000. 49/ Capacity utilization was higher in 1982, thus reducing fixed cost per ton produced. - 31 - European ex-factory prices indicates that average European producer prices ranged from US$22 to US$36 (PCR, Annex il) while CIMAO's costs were as high as $71.6 per ton in 1983. 87. When shadowing foreign exchange by 30% to take into account an overvalued CFAF franc and applying this shadow rate to the domestic portion of CIMAO costs (i.e. about 40Z), the CIMAO selling price would be reduced from CFAF 22,740 per ton to CFAF 20,011 per ton, which would still be 48% above the price of imported clinker in 1983.50 Even shadow pricing by 50? the domestic portion of CIMAO cost would give a cost of CFAF 18,192 per ton, 35Z above imported clinker price. 88. The financial rate of return of the project had been projected to be a low 8.1? at the time of appraisal. Due to high production costs and the wide gap between such costs and actual selling prices, CIHAO never achieved any profit and suffered a negative rate of return. This also applies to the economic rate of return which proved negative, despite shadow pricing labor and foreign exchange. Since labor cost is a small component of total costs (4.5? in 1983)51 and domestic inputs also represent only about 40Z of costs,52 there is a relatively small difference between financial and economic rates of return. V. BANK'S ROLE 89. The Bank has played a lead role in promoting this project; it has helped arrange co-financing by other lending institutions to complete the 50/ As shown in Annex 8, major components of clinker production costs are fuel, materials, spares, foreign technical assistance, and shipping charges for which the foreign exchange content varies from 70Z to 100Z. Domestic costs are significant only for labor, electricity and administrative and other costs. Local limestone was provided by the Togolese Government to CIMAO for a nominal fee of CFAF 100 per ton. 51/ There were 616 employees in 1984. 52/ Including administrative and other overhead costs (royalties for limestone, insurance, telecommunications, etc.), which represented 17Z of operating costs in 1983 but are assumed to be about 7% under more normal operating circumstances (see Annex 8). Foreign technical assistance, which was very expensive in 1983 (82 of operating costs), was payable mostly in foreign exchange, with little domestin cost. - 32 - financing plant, participated in the selection of a project coordinator and reviewed the technical assistance and management contracts.53 90. Early during project preparation (1972-73) Bank staff did a com- mendable job in spelling out, in no uncertain terms, the minimum conditions for the project to be viable. As explained earlier these conditions were later relaxed. In particular, the Bank did not hold to its original line of requesting an integration of the clinker plant and the grinding mills by having a cross-ownership. This possible safeguard being removed, the Bank was overoptimistic in considering the market as captive and in its assess- ment of international prices of clinker (PCR, para. 8.02). The three Gov- ernments did not adhere to the commercial agreements protecting CIMAO against imports because CIMA0 prices (even after adjustment for an over valued CFAF franc) were considerably higher than imported clinker 'transfer* prices. 91. The Bank's role in supervising equipment selection was positive since the dry process (rotary kiln with suspension preheater) was the best suited process. However, the Bank should have examined more closely the detailed design of the plant proposed by the engineering firm which was similar to a plant in Morocco (CIOR) which was also designed by the engineer and built at a higher cost than usual in other plants of that kind.54 92. The Bank helped the Borrowers to work with the technical assis- tance firms both during project implementation and the years when the plant was in operation. Several management problems were identified. For exam- ple, the Bank suggested studying coal conversion in 1981, increasing tech- nical assistance (in order to accelerate production build-up and to cut costs) and performing an audit of the financial system. CIMAO sent several missions to the Bank in Washington for urgent help in finding solutions to problems not foreseen at the time of appraisal. However, in several areas 531 At Appraisal, the Bank's role was described as follows: *The Bank has, since the discovery in Togo in 1972 of the first and only high quality limestone deposit in the Region, played an active role in the gestation of the project by helping to shape its concept, promote it, and gather and tailor the necessary finance. The Bank's appraisal process extended over the year 1975 and early 1976 in parallel with the firming up of the organizational, commercial, technical, financial and legal arrangements and consisted of several missions to Western Africa, Canada and Europe to coordinate among the three governments, two private partners, eight co-lenders and engineering and technical assistance firms." SAR, para. 1.02. 54/ The CIOR plant was built at a cost of US$153 per ton while CIMAO cost was appraised at US$162 per ton. Similar scale projects financed by IFC had an investment cost of US$124 per ton, all in 1980 dollars. - 33 - (such as the appointment of competent senior management staff, vague formu- lation of contractual obligations between CIMAO and the technical assis- tance firm, failure of the latter to establish an adequate cost accounting system in time), the Bank staff was less successful. 93. When CD.AO's financial situation rapidly deteriorated in 1981, the Bank, together with other lenders, prese-ated the Board of CIMAO with an Action Program which was the basis for a $15 million IDA Credit which, however, became effective in February 1984, only too late to help CIMAO before the plant finally closed in April 1984. Also, unfortunately, one of this project's basic assumptions was that a high economic rate of return (17Z) could be achieved through an expected increase in CIF prices of Euro- pean clinker. Such forecast proved once more completely wrong. The price increase never materialized and imported clinker prices continued to de- cline in real terms in the face of a continued large excess supply situa- tion prevailing in the European industry. VI. FUTURE OF CIMAO 94. The PCR stated that there is little hope for the restart of CIMAO operations in the near term, given the present and potential long-term excess supply of cement, particularly in the West African market (PCR, para. 8.06). This view seems to be confirmed by a somewhat more detailed analysis of what could be the economic rate of return of a "new" CIMAO project. 95. Cement consumption in the Region (i.e. Togo and Ivory Coast)55 is estimated at 750,000 tons for 1987. Consumption declined in later years (it was 800,000 tons in 1983) and prospects are uncertain. It is now too small to enable CIMAO's two kilne to be fully utilized (at least until demand picks up) and a solution may thus be to operate one production line which techLically could eventually reach 700,000 tons/year. A one-line operation would also be easier to operate and maintain particularly in opening years. 96. One important issue remains conversion to coal. Since only one of the two existing grinders would be utilized for one kiln, the other grinder could be converted to grind coal so that pulverized coal could be used in clinker production. Estimated cost of coal conversion (including building storage facilities at Lomd and Tabligbo) is estimated at US$6 million.56 Use of coal would be. cheaper than fuel oil and operating costs could be 55/ Ghana is a shareholder of the CIMAO company but annual cement consumption seems to have fallen to very low levels, i.e. no more than 250,000 tons and Ghana, since 1983, has not been supporting CIMA0 since in particular it was reluctant to approve the "Restructuring" Project. 56/ The cost would be twice higher if a special grinding installation for coal had to be installed. - 34 - reduced by 14%. The previous objection from Togolese authorities that, although coal is cheaper there was excess fuel oil at the Lomd refinery (with a lower opportunity cost than coal), is no longer valid since Togo is now importing fuel oil (and thus spending foreign exchange as it would have to do for coal) after the Lomd refinery was closed. However, despite possible savings through use of coal, the argument remains that Ivory Coast (a potential clinker buyer from CIMAO) is an oil producer, has an efficient oil refinery at Abidjan and could, if needed, export fuel oil to CIMAO.57 Hence, the conversion to coal may have to be investigated further, if and when needed. 97. Total investment costs would be relatively small (see Annex 9) and would include rehabilitation of the plant, coal conversion and purchase of mobile equipment, which would have to be renewed from time to time. Such costs are estimated, for the first three years, at US$18 million. Invest- ments made in 1976-1983 would be considered as sunk costs.58 98. As regards production costs, the main assumptions are the use of coal by CIMAO (coal prices have substantially declined in 1983-87) and operation of one single line to produce 600,000 tons of clinker per year. Detailed estimates regarding labor, electricity, supplies, technical assis- tance, rail charges, shipping, etc., are shown in Annex 8. Total produc- tion costs would amount to US$40.7 per ton, i.e. lower than CIMAO costs in 1983,59 most of this decrease ia costs being due to much lower fuel costs ($9.9 per ton for coal in 1987 against $20.6 for fuel oil in 1983) and lower technical assistance and administrative costs. 99. Selling prices have been assumed to be in line with CIF prices for imported clinker. Such prices have remained extremely lou since 1983 and on the basis of information collected from the European cement industry, the prevailing excess supply situation shoul6 persist for the foreseeable future, leading to continued pressure on cement (and clinker) prices. Under these circumstances, the "transfer" mechanism by which clinker is considered as an intermediate product and is disposed of at so-called "mar- ginal" value is likely to continue to bring low-priced clinker in West African ports. A CIF price of US$40 has been used to calculate the economic rate of return of the project to restart CIMAO and is based on a spot price FOB Greece/Turkey of US$18 per ton (to which has been added a relatively high ocean freight cost of US$22 per ton due to shipment in small 12-15,000 boats adapted to African ports conditions).60 A higher price of US$45 per ton has also been used to test the ERR sensitivity to price variations. 57/ Togo and Ivory Coat belong to the same monetary zone. Another issue is also to know whether Ivory Coast would be able to sell fuel oil at a price competitive with coal. 58/ The IDA "restructuring" Credit was not intended to finance investments (PCR, Annex 8). 59/ Such costs at 1983 prices were US$47.5 per ton (at US$1 = CFAF 380) or US$60.2 (at US$1 = CFAF 300). 60/ See Annex 10. - 35 - 100. For economic rates of return calculations, foreign exchange has been "shadowed" by 30? to take into account the over valuation of the CFA franc given, in particular, the poor prospects for regional commodities ex- port prices.61 However, the impact of such a shadow rate (which does in- crease the economic rate of return) is largely offset by the fact that a substantial portion of operating costs (60%) is in foreign exchange. This also applies to capital and working capital costs. 101. Results are shown in Annex 12. The rate of return is practically nil with a $40 per ton CIF price but jumps to 20X when assuming a $45 per ton CIF price. However, past experience as regards prices of imported clinker has been extremely poor and these prices have tended to decrease since 1975. Consequently, assuming that clinker would be imported at $45 per ton or more may prove extremely hazardous as a basis for the reopening of CIMAO at this stage, given the serious supply/demand disequilibrium in Europe. Should European prices firm up in the next few years due, for instance, to substantially increased demand, it may be worthwhile to re- evaluate possibilities of producing clinker in Togo. 102. The=e are a number of other factors militating against reopening CIMAO. The plant has been closed since 1984 and may already be in very poor condition. A careful assessment of physical conditions will have to be made before any decisions can be made as regards possible restarting. Second, financial charges and depreciation costs remain as they were, i.e., extremely high (about 452 of delivered clinker cost at Abidjan in 1983) and the question is raised as to who would pay for such costs. A new CIMAO company would, in principle, inherit such financial charges, but in this case CIMAO clinker would remain totally noncompetitive. The present share- holdera (the three Governments) have until now serviced the debt all along and recognize their obligation to continue to do so, whether or not the plant is operating. Should a new CIMAO company be formed, the three Gov- ernments would have to be persuaded to continue to absorb existing financial charges and this would have to be negotiated between CIMAO, the co-lenders and the Governments from the start. Third, the issue of manage- ment (and eventually ownership) of a cement manufacturing company remains to be solved since experience has shown how expensive external technical assistance can be and it is unlikely that the three Governments would agree to continuation of such "technical" arrangements. Fourth, the question of an appropriate contract, which would make it mandatory that the CIMAO par- ticipants purchase a certain amount of their cement (or clinker) consump- tion annually as a ratio of their annual consumption of cement, should be settled obviously before starting the plant again. This is probably even more important than the management issue, based on past experience. 103. Under these circumstances, there does not seem any unambiguous case for reopening CIMAO, at least at this stage. It would take heroic assumptions to justify such restarting and, in any case, a full feasibility 61/ Although the o er valuation of the CFA Franc can be estimated at 30%, in turn, the French Franc may now be over valued with respect to the U.S. dollar by perhaps 20%. - 36 - study would be needed. Perhaps, however, attempts could again be made to interest cement grinders in the Ivory Coast and Togo to take over the CIMAO facilities through flexible arrangements such as management contract or even a lease as needed, and/or consider negotiating a tight purchase con- tract with CIMAO. Another (unlikely) possibility, would be CIMAO facili- ties being sold to eventual buyers at a certain percentage of book value, so that the project would at least break even. VII. PROJECT EXPERIENCE AND LESSONS LEARNED 104. The CIMAO experience has some important implications relating directly to trade and integration issues. There have been four major prob- lems relating to assumptions on prices, marketing, management and high costs. First, while the project was at best marginal,62 its success largely depended on expectations of future increases in imported clinker prices. This failed to materialize. The collapse of clinker prices after 1975 in fact translated into a negative rate of return to the project, even after shadowing foreign exchange to take into account the over valuation of the CFA Franc. In 1983 the landed price of imported clinker was CFAF 13,500 (US$32) per ton while CIMAO's selling price was CFAF 27,740 (US$66) per ton. The CIMAO project was one of the last 'ground vision" type of project which assumed, besides the smooth international cooperation/solidarity, that everything would go up (demand, prices, etc.) and, of course, nobody thought, at appraisal time, that there would be a second oil shock and that the African economy would largely collapse. With hindsight and in a more pragmatic age (like the second half of the 1980s), the project would have been rejected. But at that time, it was definitely a part of an upbeat tendency. 105. An erroneous judgment was passed on prospects for the European cement industry in the mid-1970s. Bank staff foresaw a tight supply situa- tion for cement, a continuous increase in capital costs and higher selling prices. In fact, a large over supply developed in Europe as a result of important new capacities coming into production and stagnating demand. New large producers (Spain and Greece in particular) were able to cut produc- tion costs substantially and increasing competition led to falling prices in real terms. Although a rapid decline in European consumption was diffi- cult to predict accurately, plans for development of massive new capacity were well known and construction was already under way. 106. Moreover, clinker export price formation mechanisms were not fully understood. Clinker is essentially an intermediate product. Quantities sold are marginal in relation to total cement salesb" and producers can 62/ Projected financial rate of return was 8.1Z and economic rate of return 10.2%. 63/ In 1983 clinker exports from Western Europe amounted to 2% only of cement production. - 37 - afford a policy of pricing at or near marginal cos:s. It is a simple prob- lem of transfer pricing, Pqually true for aluminum (bauxite-alumina), gaso- line (crude oil), even crude steel, etc., and this has nothing to do with production costs. Since the CIMAO clinker (and not cement) project was confronted from the start with such a situation, its basic economic viabil- ity should have been seriously questioned. 107. Another factor (although less important but often overlooked) was the need for CIMAO, as a clinker plant, to export more than two-thirds of its production to Ivory Coast and Ghana.64 This reduced the competitiveness of clinker production since CIMAO distribution costs (including shipping to Ivory Coast and Ghana) were estimated at as much as US$7.64 per ton while freight rates from Europe to West Africa averaged as little as US$10 per ton of clinker (SAR, Annexes 3-1 and 8-3). 108. Furthermore, the international recession and other sources of economic shock in the three countries reduced the growth rate of cement consumption well below projected levels. While cement (and clinker) demand forecasts were based on what seemed at the time reasonably conservative GDP growth rates for the three countries, in fact such growth rates turned out to be much lower than anticipated by Bank staff and growth was even nega- tive in 1980-85. As a result of lower economic growth and investment, regional cement (and clinker) consumption actually declined at the very moment CIMAO was coming into production. 109. Commercial arrangements had been provided from the start to give CIMA0 a fully protected market against imported clinker and cement. But this was on the assumption that CIMA0 selling prices would not be much higher than CIF prices. Both Ghana and Togo met all their requirements from CIMAO. But Ivory Coast did not. Since Ivory Coast was importing clinker from Europe,6- it had the capacity to absorb additional output from CIMAO. To achieve this, Ivory Coast could have restricted clinker imports from Europe. For a number of reasons, including high CIMAO clinker prices and grinding station complaints that such high prices were depressing the cement market further, Ivory Coast was reluctant to take up the quantities necessary to absorb all of CIMAO's production. One lesson emerging from CIMAO's experience is, beside the general economic irrationality of pro- ceeding with such arrangements, the practical difficulty of putting into force protective regional arrangements (even when they are called "Treaties") in the context of strong economic recession, falling demand and low priced imports. 110. Some of these problems may perhaps have been avoided the Bank and Governments adhered to the original concept of integrating the grinding stations in the Region with CIMAO by having cross-ownership between them. One major factor in CIMAO's demise was its inability to reduce costs, not only because fuel oil became expensive (this was a worldwide phenomena) but 64/ The two countries consumed about the same quantity of cement in 1975 but by 1983, Ivory Coast consumed three times more cement than Ghana. 65/ Despite a falling domestic cement consumption. - 38 - also because RdmUnistration and technical assistance costs became dispro- portionately high.66 As a result of serious management deficiencies.67 The party who is in the best position to control costs is an experienced owner- manager that knows both design and production and commits its own mcney to the project. In a project such as CIMAO, where a new organization was created with no financial link to an experienced operating company, a "Technical Manager" was appointed. However, such a manager does not have the motivation to reduce safety margins, his main obj--ctive being that the plant operate without problems. The need to have an owner-manager could have been satisfied by having an experienced operating company own a substantial share of the Company or making it interested in its profit and operate it (PCR, para. 8.0.). A management contract with an operating company might have been a second best s-lution, since fully experienced local management was not available. Instead the solution adopted for CIMAO was to appoint a local manager who was assisted by a technical assistance firm which was an experienced operating company but did not have full managerial powers. 111. The owner-manager solution might have resulted in lower investment and production costs, but as seen above, there were other external factors, such as growing fuel costs, which were beyond management's ability to con- trol, and low imported clinker prices. Because of such factors, CIMAO may have failed in any case due to lack of economic viability, the "poor man- agement" explanation being relatively secondary. Also, grinding station owners, even if made responsible for CIMAO management, most likely would have decicid to import clinker for their own mills if CIMAO costs and sell- ing prices had become too high in their view, which proved to be the case. But at least the "integration" solution would have given CIMAO the chance to sarvive, however slight, through better cost control and management. 112. Besides pricing, marketing and management issues, high production cost was a major factor which led to CIMAO's failure. There were five major reasons for such high costs: (i) Very large administrative and technical assistance expenses which in 1983 amounted to one-fourth of total operating costs and were, after fuel oil, the largest single cost items. They were 6.5 times higher per unit of output than projected at the time of appraisal, and even or. the assumption of capacity utilization reaching the level. projected at appraisal, they would have still been 3.8 times higher. §6/ Per unit of output they amounted to 25? of operating costs in 1983 against a projected 102 at appraisal. 67/ Cf. Chapter III on CIMAO project implementation problems and Chapter V on operating experience. - 39 - (ii) Doubling in fuel oil costs (in real terms) as a result of the general increase in petroleum prices; although fuel oil costs per ton of clinker were not higher as a share of total costs than originally anticipated, the fuel oil based CIMAO plant was in- directly affected by the conversion of European plants to coal, particularly after the second oil shock (1980-81) which further reduced CIMAO's competitiveness with European-produced cli.iker.68 (iii) Cost overruns (although limited) and excessive operating expenses forced CIMAO to borrow heavily, with resulting high financial expenses: the latter amounting to 26Z of delivered clinker cost in 1983 against 14% originally forecast and thus becoming an even larger cost item than fuel oil. (iv) More genarally, the high indebtedness of the project (80% external lending against 20% equity participation) and relatively high capital costs created a heavy financial burden for CIMAO; while in 1983 operating costs amounted to CFAF 16,132 per ton, depreciation and financial charges were almost as large at CFAF 13,113 per ton, practically equal to import prices. 113. Some of these extra costs could have been avoided with better design and management. For instance, administrative and technical assis- tance expenses might have been lower if a proper management set up had been established. CIMAO should have taken rapidly much more concrete steps to improve technical assistance efficiency and cut rising overhead costs. Such issues were identified by a number of Bank supervision missions which urged CIMAO management to move quickly to solve growing problems. CIMAO should also have listened to Bank staff advice in 1981 to study a possible conversion to coal, especially after the closure of the Lome refinery. Operating problems (kiln troubles, etc.) might have been less important if Origny had better supervised the plant. Capital costs might have been lower and overruns might have been avoided, at least in part through more careful attention paid by the engineering and advisory firms to expensive suppliers' proposals. Finally, the higher debt/equity ratio might have been reduced had private investors (manager-owners) been brought in to substantially participate in CIMAO's share capital, as originally anticipated. 114. CIMAO's experience has some important lessons. In retrospect, the project was inadequately prepared and its basic economic viability was not proven--ex ante as well as (a fortiori) ex post--as confirmed by the facts. The consequences are heavy: a large debt is being serviced by the three countries (Togo, Ivory Coast, Ghana); the plant is closed; and instead of the project creating the necessary good will to prcvvte future cooperation, it has brought about recrimination and mutual distrust. Above all, the objectives of promoting growth in regional trade of clinker and regional industrial development did not succeed. There is little hope for CIMAO to restart operations in the future. 681 According to a consulting firm study, fuel oil cost per ton in 1984 was US$20.2 per ton of clinker against coal cost of US$7.6 in an average European clinker plant and US$13.3 if CIMAO had been converted to coal. -41 - ANNEX 1 Page 1 of 2 CIMAO CLINKER PLANT Conversion from Fuel Oil to Coal 1. Assumptions made in a 1981 study by a consulting firm to convert the two 600,000 tons/year kilns to coal with a calorific value of 6664 cal/kg and using 150,000 tons per year were the followings COST OF COAL PER TON (in US$) FOB price 63.25 Ia Ocean freight 25.00 Lb CIF Lomd 88.25 Unloading at port 1c 2.40 Transport to terminal 0.55 Storage 0.75 Rail transport Lomd-Tabligbo 3.72 CIF cost at Clinker Plant 95.67 Electricity (78 kWh/ton) 0.21 Labor 0.27 Equipment maintenance 1.10 TOTAL 97.25 Equivalent to 1.459 US cents per therm (1000 calories) /a FOB price U.S. Eastern Coast - US$55/ton (basic price) plus low sulfur content (1Z) premium oi US$8.25/ton. lb Self-unloading 30-35,000 ton ship - Shipping contract 100 to 180,000 tons/year. Average between Hatteras Cape (North Carolina) $23/ton and Mexican Gulf ports ($27.5/ton). Ic Including payments for delays at port (on the basis of five 35,000 tons ships per year with 5 extra waiting days per ship at US$12,000 per day). - 42 - ANNEX 1 Page 2 of 2 2. Fuel oil costs were estimated as follows: Cost per ton (in US$) FOB price 187.00 /a Ocean Freight 22.00 CIF Lomd 209.00 Transport Lomd-Tabligbo 39.00 CIF cost at Clinker Plant 248.00 Equivalent to 2.495 US cents per therm 3. A comparison between coal and fuel oil to calculate the energy cost per ton of clinker gave the following results: COAL HEATING FUEL OIL HEATING COAL FUEL OIL TOTAL FUEL OIL Heating (therm/ton) 833.0 26.0 859.0 859.0 Drying of clinker (therm/ton) -- 44.5 44.5 44.5 Drying coal (therm/ton) -- 15.5 15.5 -- Sub-total (1) 833.0 86.0 919.0 903.5 Therm cost (US cents)(2) 1.459 2.495 Energy cost (US$/therm)(1x2) 13,41 22,54 4. Coal Investments were estimated to amount to US$12.3 million and would have been fully amortized after producing 2.3 million tons of clinker, i.e. in about 2 years./b /a FOB Rotterdam, July 1981. Heavy fuel oil - low sulfur (0.1Z) - 9940 calories/kg. Lb Taking two Kilns producing each 600,000 tpy. - 43 - ANNEX 2 GROSS DOMESTIC PRODUCT, INVESTMENT AND CEMENT CONSUMPTION IN TOGO, IVORY COAST AND GHANA GROWTH DOMESTIC CEMENT GDP GROWTH INVESTMENT CONSUMPTION ELASTICITY (Z p.a.) (Z p.a.) (% p.a.) (Cement/GDP) I. TORO a) forecast 1975-1985 (low case) 4.0 5.3 1.3 1975-1985 (high case) 4.0 7.8 1.9 b) actual 1965-1975 6.1 9.0 /a 13.6 2.2 1975-1985 0.6 -6.8 /b 2.9 4.8 II. Ivory Coast a) forecast 1975-1985 (low case) 6.0 7.7 1.3 1975-1985 (high case) 6.0 12.9 2.2 b) actual 1965-1975 7.7 10.4 a 9.4 1.2 1975-1985 4.0 -22.0 Lb -4.9 -12.3 III. Ghana a) forecast 1975-1985 (low case) n.a. 3.7 n.a. 1975-1985 (high case) n.a. 8.3 n.a. b) actual 1965-1975 1.2 -1.3 Ia 2.4 2.0 1975-1985 0.5 -1.6 Lb -5.2 -10.4 /a 1965-1980 /b 1980-1985 Sourcesz Forecast 1975-85: Appraisal Report-CIMAO Project, June 1976. Annex 3.3. Actual data - Togo, Ivory Coast, Ghana Divisions - IBRD. - 44- Annex 3 CIMAO SALES AND REGIONAL CLINKER SALES (1980-1984) ('000 tons) 1980 1981 1982 1983 1984 1a Total Total I. CIMAO Sales Togo 167 204 195 170 65 802 29 Ghana 146 202 330 212 64 954 34 Ivory Coast 140 170 299 371 74 1.054 37 Total 453 576 824 753 203 2,810 100 II. Regional Clinker Sales lb Togo 235 237 195 170 162 999 16 Ghana 261 380 330 212 210 1,393 22 Ivory Coast 1,077 944 755 627 455 3,858 62 Total 1,573 1,561 1,280 1,009 827 6,250 100 III. X CIMA0 in Total Clinker Sales Togo 71 86 100 100 40 80 Ghana 56 53 100 100 30 68 Ivory Coast 13 18 40 59 16 27 Total 29 40 64 75 25 45 /a Estimates. /b Including clinker imports and CIMA0 sales. Sources Based on PCR data (Annex 1 and Tables, page 26). - 45 - ANNEX 4 CLINKER PRICES (CFAF/ton at current prices) Imported CIMAO CIMAO CIMA0 Clinker Appraisal operating Total Selling CIF CIF Forecast Production Cost /a Cost b Price Price Price ('000 tons) (US$/ton) /d 1980 900 6,906 13,110 11,540 11,540 51.3 1981 1,200 6,703 11,398 12,345 12.345 54.9 1982 1,200 7,278 11,819 12,385 12,385 55.0 1983 1,200 7,662 12,019 13,250 13,250 58.9 1984 1,200 8,030 12,260 14,180 14,180 63.0 Actual 1980 468 12,515 25,053 12,500 10,359 45.8 1981 602 15,487 28,950 14,500 17,510 61.0 1982 868 15,079 24,037 19,100 14,500 43.2 1983 693 16,732 29,845 22,740 13,500 32.4 1984 154 n.a. n.a. 19,000 13,500 /c 28.2 (3 months) /a Including distribution costs (rail transport to Lomd, port charges, shipping charges to Ghana and Ivory Coast). /b Including depreciation and financial expenses. Ic Compared to ex-factory price of CFAF/ton 11,835 for "average" European Producer (cf. PCR, Annex 11); shipping cost European port to Abidjan was estimated at CFAF 8,000/ton. Ld Conversions: CFAF/ton into U.S. dollars at the exchange rate for each individual year. Rate of exchange used to forecast CIF price was US$1 = CFAF 225. Sources: CIMA0 and Staff Appraisal Report - 46 - ANNEX 6 OPERATING COSTS OF CIMAO AND EUROPEAN PRODUCERS AVERAGE EUROPEAN CIMAO PRODUCER Operating Costs/ton Estimated Operating Operating Costs (1983) Cos (1984) Lb 1984 /d CFAF/ton US$/ton L CFAF/ton USS/tn Ic US$/ton Variable Costs Fuel 7842 20.8 9099 20.3 7.6 L0 Electricity 1404 8.8 1747 3.9 2.7 Supplies 698 1.8 657 1.5 8.8 Sub Total 9989 26.2 116.8 26.6 18.6 Fixed Costs Labor 1481 8.8 1854 8.6 Technical Asst. 1142 3.6 88 1.9 Maintenance 845 2.2 847 8.2 Other Administrative and Selling Expenses 169 4.5 1449 8.2 Sub-Total 5148 28.5 4518 10.0 7.6 TOTAL 15686 39.7 1819 85.6 21.2 NOTE: Shadow pricing by 8X the domestic portion (46) of operating costs (I.*., excluding fuel and supplies, which are Imported as well as part of technical assistance which is paid in foreign exchange), reduces CIMAO estimated operating cost in 1984 to US832.8, still more than 6 above European clinker cost. /a US81 = CFAF 886 (average for 1988). b Based on Societe des Cimente Frangals Study - assumes production of 776,00 typ (64S capacity utilization) Instead of 1983 pr*duction of 9300 tone. Prices ar. 1=4 prices. Fuel oil is the energy used. /c US21 = CFAF 460. Ld Assuming 76 utilization factor. /e Coal-based plant. Use of coal by CIMAO is estimated to result In cost of CFAF/5976/ton or USS18.3. - 47 - ANNEX 6 TOGO, IVORY COAST, GHANA Consumer Price Index (1980=100) TOGO IVORY COAST GHANA 1975 60.3 46.4 7.38 1976 67.3 52.0 11.52 1977 82.4 66.2 24.92 1978 82.8 74.8 43.15 1979 89.0 87.2 66.63 1980 100.0 100.0 100.0 1981 119.7 108.8 216.49 1982 133.0 116.8 264.76 1983 145.5 123.7 590.08 1984 140.3 129.0 824.32 Source: IFS - International Monetary Fund. - 48 - AM~li 7 CIMA CL1IM OPMA71ND1 AM DISTIfJTl COSTS SCF Studv SCr Studm Undatld Comte Uj>daed Costa Acua C»ta (Fu*t Oil) (CoaM) (Fuel 011) (Coi) (1983 Prisc. (1984 Pric.a) (1984 Prices) (1987 Prics) (1987 Pric~a) CFAFton ^ ton M CAtan lj/tL£ M CAF/tan USItan CFAF/tgn USI/ton f CFAFIton US/ton /1d VeriableCst Fuet 7,842 20.6 9,099 20.2 5,976 13.3 4,9386 16.5 2,984 9.9 Eletlclty 1.404 8.8 1.747 8.9 1.747 8.9 2,498 8.3 2,498 8.3 supplis .._m J -U 7 ._U -_m .LA 1.201 _Q 1.201 ..L" Sub-Total 9.939 26.2 11.608 25.6 8,380 18.7 8,38 28.8 6,661 22.2 PliNed Coa Labor 1,481 3.8 1.84 8.0 1.884 3.0 1.100 8.7 1.100 3.7 Tø~nical Aal*tanc* 1.142 3.0 66 1.9 8 1.9 700 2.8 700 2.3 MAin. Å Oher Costa 2.M J 22.m -W L2=I J" .j2 L .. Q,1 Sub-Total 5,14 18.5 4,818 10.0 4,816 10.0 2.700 9.0 2.700 9.0 Totl Operating 15,085 89.7 16.019 35.6 12,896 28.7 11.88 37.8 9,3861 31.2 Costs Deproalation, - - - - 768 1.7 - - - - Int*rest an CaI znv*et.ent Dis~lbutlon Cosa .2,9M .ß.245 .ZU 3.245 .g 2.850 .212.80 Bø TOTAL COSTS 18,041 48.8 19,284 42.8 16.909 37.6 14.183 47.3 12,211 40.7 CIF zoported 18,000 34.2 18,000 26.9 1.000 28.9 13,300 40.0 18,800 40.0 Clinker price Clinker Producion 693,00 770,000 * 770.000 00,000 600.000+ (000 tene) Rotlo CDA/Iarted 1.39 1.40 1.80 1.07 0.92 Clinker Prico LA Re ll t~aport to Logl and Shipping charg*a to Ahidjen. /b U81 - CFAF 860 (*verag. for the year) /c VU1 - CFAP 480. /d ~.1 - CFAF 800. /e Eneluding financial charger and deprecielean. * Projeted for 1988 * Projected for 1991 - ANNEX 8 Page 1 of 4 CIMAO REVISED CLINKER PRODUCTION AND DISTRIBUTION COSTS ASSUMPTIONS A. VARIABLE COSTS Fuel Oil Average energy consumption in 1983 was 900 calorieslkg. of clinker, i.e. 91.41 kg. fuel oil/ton of clinker (assuming 9,846 calais calories kg of fuel). The price of low viscosity fuel oil delivered to CIMAO is taken at CFAF 54 per kilog (Source - Shell, Lomd, Togo), i.e. US$20 per ton or about US$28.6 per barrel of fuel oil. Fuel oil cost per ton of clinker is thus = 91.41 x 54 = CFAF 4,936. Coal US$/ton CFAF/ton FOB - US East Coast (price lst half 1987) 36.80 11,040 Ocean Freight 7.20 2,160 44.00 13,200 Port Charge 3.33 1,000 Rail transport Lomd - CIMAO 2.80 840 (estimated at half rate for empty clinker car return use) Costs for grinding, drying and handling coal 11.7 0 TOTAL 61.80 18,540 Coal consumption is estimated at 160 kg per ton of clinker. Thus, the cost for coal per ton of clinker is 0.160 x 18,540 = CFAF 2966 per ton of clinker or US$9.89 per ton. Electricity In 1983, electricity consumption at CIMAO was 78 kwh/ton of clinker produced. CEB (the power company in Togo) estimates the 1987 cost of electricity for CIMAO at CFAF 32/kwh or 78 kwh x 32 = CFAF 2,496 per ton of clinker. - 50 - ANNEX 8 Page 2 of 4 1983 CIMAO COST PER TON CONSUMPTION UNIT COST OF CLINKER SUPPLIES PER TON OF CLINKER (CFAF) (CFAF) Explosives 234 grams 0.42 per gr 102 Tires (quarry) - - 25 /a Diesel Oil (quarry) 1.56 liter 120 per liter Lb 187 Lubricants (quarry) - - 29 /a Grinding media 78 grams 300,000 per ton /C 8 Lining 18 grams 500,000 per ton /C 9 Brickwork 1.7 kg. 300,000 per ton /C 510 Lubricants (plant) - - 71 /a Diesel (plant) 0.12 liter 120 per liter Lb 15 /a Spare parts (plant) - - 224 /a Spare parts (terminal) - - 6 /a Diesel (terminal) 0.119 liter 120 per liter /b 14 Lubricants (terminal) - - 1 a TOTAL 1,201 B. Fixed Costs Labor - CIMAO's work force would be reduced from 616 (1984 figure) to 275 since production would be limited to 600,000 tons. Id On that basis, labor cost would amount to CFAF 1100 per ton of clinker produced. Ia 1983 prices increased by 20Z. /b Source: Shell, Lomd. Ic Estimate. Id Cuts would be mainly in administrative staff, production, maintenance and township personnel. ANNEX 8 - 51 - Page 3 of 4 Technical Assistance Technical assistance would be provided by seven expatriates (general manager, plant, technical, production and financial managers, one engineer and one mining specialist) at an average monthly cost of CFAF 5 million (in US$16,700). The annual technical assistance cost would thus be CFAF 420 million i.e. CFAF 700 per ton of clinker. Administrative and Other Costs Royalty - royalty paid to the Togolese Government for use of area including limestone, CFAF 100/ton of clinker Electricity - lump sum of CFAF 80 million per year as payment to CEB (power utility) for fixed portion of electricity rate (CFAF 300 per ton of clinker) Administration CFAF million/year Insurance 200 Telecommunications 30 Entertainment Expenses 10 Staff Transportation 20 Subscriptions, Advertising 10 Company cars maintenance 5 Miscellaneous 25 TOTAL 300 Equivalent to CFAF 500 per ton of clinker Distribution Costs Rail Charges - government wages having increased very little from 1983-87 and the price of diesel oil having substantially decreased, the 1983 rate of CFAF 20/ton/km (quoted by the Togolese railways) has been kept for 1987. Cost per ton of clinker is 77 km x CFAF 20 = CFAF 1,540. Shipping Charges Freight rate is estimated at US$5 per ton of clinker or CFAF 1,500 plus insurance and demurrage costs. The total cost is estimated at CFAF 2000 per ton of clinker transported, close to the 1983 cost. Since about two-thirds of clinker is exported (the rest is consumed in 'g, 1e cost per ton of clinker produced is CFAF 2,000 x 66 = CFAF 1,310 per ton. - ANNEX 8 Page 4 of 4 OPERATING COSTS FOR REOPENING CIMAO (clinker production of 600,000 tons) Foreign CFAF/ton US$/ton Exchange of Clinker of Clinker z Labor 1,100 3.66 30 La Materials, spare parts, supplies 1,201 4.00 100 Coal 2,966 9.89 80 Lb Electricity 2,496 8.32 25 Rail transport 1,540 5.13 50 Shipping charges 1,310 4.37 90 Technical assistance 700 2.36 70 Administrative and other costs 900 3.00 30 Total 12,213 40.73 60.3 /a Payments to expatriates (mainly technicians and foremen). /b CIF cost of imported coal represents 70? of delivered cost to the plant to which 10? is added for foreign costs involved in coal transport from Lom4 to plant and in grinding and handling coal expenses. - 53 - ANNEX 9 INVESTMENTS FOR RECOMMISSIC'ING THE PLANT AND FOR CONVERTING IT TO COAL A. Investments for recommissionina the plant 000 USg Rehabilitation of existing equipment 1,000 New lot of spare parts 2,000 /a Levelling of 11 km of road tracks 1,000 Revamping of electrical supply line (insulation) 1,000 Redesign. of kiln feeding system 300 /a Equipment inspection with supplies 300 /a Kiln Alignment verification 400 /a Sub-Total 6,000 B. Investment for Coal Conversion Coal storage at CIMAO terminal in Lom6 1,600 Coal storage at CIMA0 industrial complex 1,60C Conversion of one of the two grinding mills to 1,400 /a grinding coal Engineerinr and other expenses 1,400 Lb Sub-total 6,000 C. Replacement of Mobile and Other Equipment - 20 units at US$150,000 per unit (average cost) Lc 3,000 /a - Major repairs and other equipment 3o000 Ld 6,000 D. TOTAL (A, B. C) 18,000 (of which foreign exchange) (9,000) /a To be paid in foreign exchange. Jb Of which $400,000 to be paid in foreign exchange. Ic Mobile equipment has been assumed to be replaced two years after CIMAO plant recommissirning and every five years thereafter. [d Of which $1.2 million to be paid in foreign exchange. - 54 - ANNEX 10 ASSUMPTIONS ON FUTURE IMPORTED CLINKER PRICES 1. Leading clinker exporters are Greece and Turkey. Spot FOB prices from those countries are around US$18 per ton to which must be added the ocean freight cost of US$22 per ton. 1 Freight rates have increased in recent years for relatively small (12,000 to 15,000 ton) boats used between Europe and West Africa. Despite the current over supply in the general maritime shipping market (specially for larger ships) there is a sustained demand for the small specialized bulk carrier which has access to virtually all important ports in Western Africa. 2. Compared to Greek/Turkish clinker price (FOB US$18 and freight US$22 totalling US$40 cif West African ports), quotations from French com- panies give an FOB price of US$33 per ton to which are also added US$22 per ton freight (ex-French Northern ports). The CIF price for West Africa would thus be US$55 per ton. However, this may represent bids made by Origny for high quality clinker and Greek, Turkish and Spanish exporters may well quote lower prices, thus leading Origny to also sell at lower prices, i.e., around US$40 per ton. East Germany and North Korea are quot- ing clinker prices considerably lower. Under these circumstances, and in view of past experience regarding clinker prices forecast which consistent- ly proved optimistic, it would seem prudent to use US$40 per ton as a basis for projecting long-term clinker cif prices in West African ports. 1/ Such freight rates are more or less similar to the US$10 per ton rate assumed in the 1976 Appraisal Report, taking into account inflation since 1975. - 55 - ANNEX 11 ASSUMPTIONS FOR CALCULATING THE ECONOMIC AND FINANCIAL RATE OF RETURN OF PROJECT TO REOPEN CIMAO PLANT 1. Reopening Scenario - coal conversion - restart one kiln (600,000 tons per year) - convert one grinder for coal grinding use - production profiles 1990 - 702 1991 - 90% 1992 - 1002 2. Investments - the existing investment is treated as sunk cost - coal conversion - US$6 million (1990) - recommissioning - US$ 6 million (1989) - purchase of mobile and other equipment - US$ 6 million (1991) a 3. Working Capital - 25% of annual expenses Jb 4. Useful Life - 20 years 5. Selling Price Lover Case: equivalent to present cif spot price of US$40 from Greece/Turkey. Higher cases equivalent to cif price of US$45 Ja Renewal of such equipment every five years afterwards. Lb Including purchase of coal at US$44 per ton prior to startup. - 56 - ANNEX 12 ECONOMIC RATE OF RETURN OF PROJECT TO REOPEN CIMAO PLANT YEAR COSTS REVENUES /a NET CASH FLOW 1989 5,308 16,800 (5,308) 1990 26,490 21,600 (9,698) 1991 26,026 24,000 (4,426) 1992 22,556 24,000 1,444 1993 22,182 24,000 1,818 1994 22,182 24,000 1,818 1995 22,182 24,000 1,818 1996 27,490 24,000 3,490 1997 22,182 24,000 1,818 1998 22,182 24,000 1,818 1999 22,182 24,000 1,818 2000 22,182 24,000 1,818 2001 27,490 24,000 (3,490) 2002 22,182 24,000 1,818 2003 22,182 24,000 1,818 2004 22,182 24,000 1,818 2005 22,182 24,000 1,818 2006 27,490 24,000 (3,490) 2007 22,182 24,000 1,818 2008 22,182 24,000 1,818 2009 22,182 24,000 6,300 Economic Rate of Return - 0.6%. /b a Selling price US$40 per ton or CFAF 12,000; production - 420,000 tons in 1989, 540,000 tons in 1990 and 600,000 tons in 1991 and after. /b ERR is 20.2% with an assumed cif price of US$45 per ton of clinker (CFAF 13,500) PROJECT COSTS TO REOPEN CIMAO PLANT (in USI W98) Investment Cont Operatinn Costa /b Workina Capital Total Cost (a) (b) (c) (**b+c) Foreign Local Adjusted Foreign Local Adjused Foreign Local Adjusted Adjusted ya Cosi e Cosi Total Tota a Cost Cosi Total Totai & Cost C fot_. Total Toml Total 1999 8,0 8,000 6,000 5,868 6,196 6,388 19m 8,=00 8,0 6,0ma 6,8~ 11,468 d 7,608 19,614 17,259 7,789 e 8,6 4,264 8,981 29,768 26,498 1991 3,= 8,= 6, f~ 5,818 18,578 9,052 22,80 20,541 64 la 214 123 28,844 26,66 1992 14,668 9,775 24,488 22,182 118 889 452 889 24,~91 22,668 1998 14,68 9,775 24,488 22,182 24,488 22,182 1994 14,868 9,776 24,488 22,182 24,488 22,192 1996 14,668 9,775 24,488 22,182 24,488 22,182 1996 8,~ 9,~ 8,~ 6,8m 14,668 775 24,488 22,182 80,488 27,499 1997 14,198 9,776 24,488 22,182 24,488 22,182 1996 14,668 9,775 24,488 22,182 24,488 22,182 4 199 14,668 9,776 24,488 22,182 24,488 22,182 2 14,668 9,775 24,488 22,182 24,488 22,182 201 *,M 8, 6,=9 6,88 14,668 9,775 24,488 22,182 90,488 27,496 2192 14,668 9,775 24,488 22,182 24,488 22,182 2~8 14,668 9,776 24,488 22,182 24,488 22,162 204 14,668 9,775 24,488 22,182 24,488 22,182 2~ 14,668 9,776 24,488 22,182 24,488 22,182 2US 8, 8, 6,39= 8,868 14,68 9,775 24,488 22,182 81,488 27,491 219 14,608 9,776 24,488 22,182 24,488 22,182 2~ 14,883 9,775 24,488 22,182 24,488 22,182 29 14,668 9,775 24,488 22,182 (1,86) (4,964) (6,420) (4,482) 19,618 17,710 la After =6 reduc6lon of local cosi (shados exchange rae). L Including distrlbution costa but excluding depreciatlon and financial charges. fL Assuming 6= foreign oechange cosi. Ld Assuming 6n foreign exchange coso (fuel, *upplies, ec.). La Aseuming 265 foreign exchange cost. - 58 - ANNEX 14 FINANCIAL RATE OF RETURN OF PROJECT TO REOPEN CIMAO PLANT Working Investment Operating Capital Total Net Cash Cost Cost Cost Cost Revenues Flow 1989 6,000 6,000 16,800 10,800 1990 6,000 19,014 4,254 29,768 21,600 (8,168) 1991 6,000 22,630 214 28,864 24,000 (4,844) 1992 24,438 452 24,840 24,000 (890) 1993 24,438 24,438 24,000 (438) 1994 24,438 24,438 24,000 (438) 1995 24,438 30,438 24,000 (6,438) 1996 6,000 24,438 24,438 24,000 (438) 1997 24,438 24,438 24,000 (438) 1998 24,438 24,438 24,000 (438) 1999 24,438 24,438 24,000 (438) 2000 24,438 24,438 24,000 (6,438) 2001 6,000 24,438 30,438 24,000 (6,438) 2002 24,438 24,438 24,000 (438) 2003 24,438 24,438 24,000 (438) 2004 24,438 24,438 24,000 (438) 2005 24,438 24,438 24,000 (438) 2006 6,000 24,438 30,438 24,000 (6,438) 2007 24,438 24,438 24,000 (438) 2008 24,438 24,438 24,000 (438) 2009 24,438 (5,240) 19,018 24,000 4,982 - 59 - 599 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) APRIL 28, 1987 Industry Department - 61 - PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) I. INTRODUCTION 1.01 In 1976, the Bank approved four loans totalling US$60 million to help finance a clinker plant to be owned and operated by a company, Ciments de l'Afrique de l'Ouest (CIMAO). C1MAO, located in Togo and jointly owned by the Governments of Togo, Ghana and Ivory Coast, received a US$49.5 million loan and each of the three Governments received a US$3.5 million loan. The CIMAO Regional Clinker Project was the first regional project in the industrial sector in West Africa. The project was designed to produce 1.2 million tons of clinker per year for delivery to the cement grinding mills in the three shareholder countries, and its main objective was import substitution. It was envisaged that the plant capacity might be expanded to 1.8 million tons after a few years of operation with a view to reducing per ton fixed costs arising from the heavy investment in infrastructure. The project includes an industrial plant, the CIMAO plant, and related infrastructure components comprising a township for CIMAO personnel, electricity linkage to the national grid, a port terminal and a rail link from the plant to the port. The Bank had joint financing arrangements with the Caisse Centrale de Cooperation (CCCE) of France (US$20 million) and the European Investment Bank (EIB) of the European Economic Community (US$29.8 million). In addition five other banks and aid agencies provided debt financing for the project. These were: African Development Bank (AfDB), Banque Arabe pour le Developpement Economique de l'Afrique (BADEA), Fonds Europeen de Developpement (FED), Kreditanstalt fur Wiederaufbau (KfW) and Canadian International Development Agency (CIDA). In addition, the French export credit insurance agency, Compagnie Frangaise d'Assurance du Commerce Exterieur (COFACE), provided export guarantees for supplier credit lines. 1.02 The project was completed and all the loans fully disbursed in 1980. Immediately thereafter, CIMAO faced severe financial difficulties due to cost overruns and operating losses. In late 1981, after CIMAO's failure to obtain additional financing from other sources, the three colenders, CCCE, EIB and the Bank, agreed in principle to provide additional financing. After several Board presentation conditions were finally met in December 1982, a Restructuring Project for CIMAO was presented to the Board in February 1983, and two IDA credits totalling US$15 million granted to Togo (US$5.7 million) and Ghana (US$9.3 million). CCCE and EIB lent US$12.8 million and US$7.0 million, respectively, to the three shareholding countries for the Restructuring Project. - 62 - 1.03 In April 1984, CIMAO was forced to shut down due to a power shortage caused by the drought in West Africa. In mid-1984 a review of CIMAO's long-term prospects led the Bank to conclude that there was little chance to make CIMAO economically viable in the near or medium term. In September 1984, the sharehol4ers decided to shut down the plant for about 29 months and asked the private operators of the grinding mills in the three countries to make proposals to take over and operate CIMAO. No proposal from the grinding station owners has been received so far. II. PROJECT SCOPE AND IDENTIFICATION ANALYSIS OF THE PROJECT PROBLEMS Project Scope 2.01 The project included the construction of a clinker producing plant owned by CIMAO and the related infrastructure. The plant is located at Tabligbo, about 70 km northeast of Lome, the capital of Togo. It is adjacent to a limestone, sand and clay quarry, known as the Mono deposit, which provides the raw materials. The deposit was estimated to allow plant operations for more than 30 years. The clinker plant operates under a classic dry process with two kilns with a capacity of 2,000 tons per day (tpd) each, and includes workshop, laboratory and plant administration buildings. The headquarters of the company are located in Lome and house the general management, finance, administration and commercial staff. The infrastructure includes (i) a township to house about 90% of CIMAO's plant personnel; (ii) a 50 km railway extension linking the plant to the railway central line and the upgrading of about 25 km of existing railway; (iii) a rail/port terminal at the Lome port including rail unloading, clinker storage, handling and shiploading facilities; and (iv) a power component including a substation and a 10 km power line from the substation to the plant. 2.02 The capacity of the plant was determined to benefit from economies of scale. Since the size of the markets of the original promoters of the project, Togo and Ivory Coast, was not deemed sufficient to warrant a 1.2 million ton plant, at least in the first years of operation, the participation of other countries including Ghana, Benin and/or Nigeria was sought. At the earlier stages of project preparation, the participation of was considered. Finally, Ghana joined the 'project in 1975 (para 2.09) providing a third market which seemed to ensure that CIMAO's full production would be easily absorbed. Project Identification 2.02 The project took a long time, from 1968 to 1975, to crystallize and the evolution of the project structuring during this period provides a number of important lessons. Although it appears that the main reason for - 63 - the failure of the project is that it is uneconomical due to the availability of imported clinker at low prices, its chances of success were further diminished by the decisions made on some critical issues. The main issues were (i) ownership of CIMAO: (ii) link with clinker grinding stations; (iii) capacity of the plant; (iv) management; and (v) choice of fuel. 2.03 CIMAO was established in 1968 with a share capital of CFAF 1.0 billion owned in equal parts by the Governments of Togo (GOT) and Ivory Coast (GOIC) and a French private building materials firm, who was the original promoter of the project. The company was to produce 1.2 million tons of clinker per annum from the Aveta deposit near Lome in Togo for the markets of the two countries and possibly for other Western African countries. Bank financing was requested. In September 1971, the Bank's Loan Committee decided that the Bank should not proceed with this project. The negative decision was reached primarily on the following grounds: (a) the Aveta limestone deposits to be used by CIMAO were chemically contaminated (too high in phosphate) and of low quality; (b) the clinker was not considered internationally competitive and might be undersold by low-cost imports; (c) the management setup was uncertain and did not provide for the strong leadership that the project required; and (d) the economic rate of return of the project was expected to be marginal, at around 11%. However, due to the significant uncertainties of the project, the probability of reaching even such a return was considered low. * 2.04 In 1972, a new limestone deposit of good quality was discovered near the Benin border, about 70 km from Lome. Although the Bank still felt that the economic return of the project was low, the Togolese Government insisted, particularly when Mr. McNamara visited Togo in early 1973, that the Bank further study the project. The Togolese Government believed that European producers would not have the clinker capacity in the near future to supply African countries and that, as a result, clinker prices would rise. In mid-1973, a preliminary review of the project by the Bank indicated an economic rate of return of 12.5%, up from 11% for the original project. This improved return was based on the Bank's analysis of the European and African cement markets, leading to a conclusion that international clinker prices would go up in the medium term. Ownership, Link with Grinding Stations, Capacity 2.05 As it stood at that time, the project was conceived such that CIMAO was partially integrated with the clinker grinding plants it was to supply. This concept was meant to ensure as large a captive market as possible for CIMAO, but more importantly, it recognized that clinker is traded at a low price and that profit in the cement making process is - 64 - therefore realized at the grinding stage. The idea was that for CIMAO to be financially viable some of the profit of the clinker grinding plants would have to be shifted back to CIMAO. In other words, CIMAO lvould have to sell its clinker at prices higher than traded clinker. This issue was to become the main problem for CIMAO (paras 2.18-2.20). The ownership of CIMAO was planned as follows: Ivory Coast - 36% Togo - 36% French Promoter - 12% Other Private (to be shared by grinding mills in Togo and Ivory Coast) - 16% while the individual grinding plants' ownership would have been: CIMAO - 33% Private - 33% Government (Ivory Coast or Togo) - 34% However, the Ivorian grinders seem to have been reluctant to follow this plan since it meant that it would decrease their ownership in the grinding stations and third parties, i.e., CIMAO and the French promoter would also become shareholders. 2.06 Another concern which also emerged was the promoter's lack of experience in managing a sizeable clinker plant and the consequent need for proper technical assistance. The promoter had only a limited experience in cement production in operating a small integrated cement plant in Haiti and the clinker grinding plant in Togo. As a consequence, the Bank put the following prerequisites for further consideration of the project: (i) that the project incorporate the grinding stations of the participating coun- tries to ensure a captive market amounting to at least 70% of CIMAO's total clinker production; (ii) that the promoter agree to increase its financial participation substantially; and (iii) that appropriate technical arrange- ments to be made with an experienced cement producer. 2.07 In December 1973, in a meeting between Bank and Government repre- sentatives, a major change was proposed by the Togolese and Ivorian delega- tions: (i) CIMAO ownership would be 66% by the private partners of the Togolese and Ivorian grinding plants; (ii) project management would be assured by one of the private partners of the grinding plants or a firm of their choice; and (iii) CIMA0 would have no ownership in any of the Ivorian grinding plants. The Ivorian grinders also proposed that tie plant should start in a first phase with only 0.6 million tons of capacity. At the same meeting, the Bank delegation rejected the above offer and made a counterproposal (no explanation exists in the files for the rejection of the Togolese and Ivorian proposal): (1) 332 ownership by the promoter and 67% by the Government; (ii) project management by the promoter associated with an experienced cement manufacturer; (iii) financing on a debt/equity ratio of no more than 60:40 which would require that the French promoter put in US$9 million of equity; (iv) incorporation into CIMAO of one grind- ing plant in each member country; and (v) commitment by the Ivory Coast Government to purchase at least 70Z of its clinker requirements from Togo. This position appeared acceptable to the Togolese and Ivorian delegations. However, the promoter was not prepared to put in US$9 million, arguing that - 65 - the project should be financed on an 87:13 debt/equity ratio, which would limit LF's contribution to US$3 million. Signs began to emerge that if LF could not increase its participation, the Governments would be prepared to dismiss this company. 2.08 Some Bank staff members argued that the grinders should take the lead in this project and also that if they found it profitable to finance a 600,000 ton plant, there was a good chance that this was an economical alternative. However, after a thorough review, the Bank concluded that the smaller size plant would not be economic due to the high costs of infra- structure and insufficient economies of scale. The French Caisse Centrale de Cooperation Economique (CCCE) who was a possible lender argued for a smaller project, adding that, besides reducing the market risk (they point- ed out that a third country's participation was still uncertain and that the growth of the Ivory Coast and Togo markets may not be sustained at the same high growth rate experienced in running a 600,000-ton plant before expanding to 1.2 million tons, if the market warranted it. Although they agreed that Governments could have a majority ownership in CIMAO, they also were of the opinion that Government participation should not exceed 522 and that the experienced cement producer which would be involved in the project should not only be a technical assistant but also a full partner who should fully manage the project. This partner would take all or most of the re- maining 48Z ownership. 2.09 Based on the Bank's analysis, discussions on the project continued on the Bank's counterproposal with increasing signs of tension between the French promoter and the Governments. At that time, there were also discussions about asking Ghana and possibly Nigeria to participate in the project. In October 1974, the promoter announced it had secured private financing for the whole plant on a basis of 90:10 debt/equity plan. The Bank's financing would be sought only for the infrastructure component. However, the Governments found the debt financing too high and wanted to retain Bank participation in the industrial part of the project. They insisted on the promoter increasing its participation. It was also decided that the technical assistant supporting the French promoter in the project would be one of the French private partners in an Ivorian grinding plant. After failing to obtain an agreement on these two points, the two Government finally decided in late 1974, to dismiss the promoter as such and to seek actively Ghanaian and/or Nigerian participation in the project. Finally in April 1975, Ghana was brought in as a shareholder and the ownership of CIMAO was set at 87.32 equally shared by the three States, Togo, Ghana and Ivory Coast and 9.5% and 3.22, respectively, by the company providing technical assistance and the original promoter. Total equity, based on project cost estimates of US$194 million, was set at US$10.5 million. No grinding station was incorporated in the project but the States had made the commitment that they would reserve up to 100%, if need be, of their markets to CIMAO production. 2.10 At this stage, the project had evolved from one with a substantial private ownership and leadership to a practically fully publicly owned one with only a token private participation. More importantly, for reasons unknown, the opportunity of having a project with a majority of private ownership (although it cannot be ascertained how serious were the proposals of the private grinders), an integration with the grinding plants and a - 66 - phased capacity build up had been turned down. During further preparation of the project, when project cost estimates were increased, the equity contribution of the States had to be increased 92.2Z shared equally between the three states and 7.82 shared equally between the companies representing the grinding plants in Ivory Coast and Ghana. The original promoter of the project was completely eliminated. Management 2.11 Since CIMAO was a new company with no experience, and did not belong to a group which could provide expertise in project management or operations, the issue of management and owner's representation during proj- ect implementation arose. This problem was dealt with by the owners of CIMAO through appointment at Ivory Coast insistence of a technical assis- tant and owner representative, despite Bank misgivings about a potential conflict of interest as the appointee (the Company) is also a cement pro- ducer and exports directly to West Africa. During project preparation, the Company was to help CIMAO select an engineering firm, supervise and control the work of the engineering firm, follow up on infrastructure progress, help CIMIAO in recruiting its labor force, train the labor force and manage- ment and develop an accounting and administrative system. The Company to provide management assistance for one year after plant start up (with an option for CIMAO to have it further extend this service) and technical assistance for five years. In addition, in mid-1975 a project coordinator was appointed to help CIMAO's Managing Director coordinate project prepara- tion and communication between CIMAO, shareholders, lending institutions, technical assistance firm and engineering firm until September 1976. He was afterwards to coordinate the execution of the infrastructure compo- nents. 2.12 In April 1975, a British firm was selected in competition with two French firms. The Engineer was to conduct a full survey of the limestone deposits, determine the optimal process for the operations of the quarry, design the clinker plant and the rail/port terminal, prepare tender documents, assist CIMAO in procurement of equipment and services, and supervise fabrication, delivery, erection, installation, testing, start up and commissioning of equipment for the plant and the terminal. 2.13 Since the promoter was finally out of the project, a new General Manager was selected to replace the previous one who had been part of the promoter's group. A Togolese national with experience in cement manufac- turing with French companies was appointed in December 1975. 2.14 Arrangements such as the ones above, designed to appoint an owner's representative, carry an inherent weakness. Such arrangements can - 67 - rarely optimize the design of the plant. The only party who has a strong motivation to keep investment costs at the lowest possible level is the one who can balance the benefits of lower investment costs with the risk of more difficult operations in the future and this party can only be the owner of the project who commits his own money. In a substitute arrangement, the primary concern of the engineering firm and the consultants controlling their work is that the plant works without problems. Consequently, they will be reluctant to reduce excessive safety margins. Moreover, none of the parties has the motivation to go through the painful efforts necessary to provide technical solutions which would be simpler taan the standard ones which are usually produced at the start. Bank staff are also not well placed to be a substitute for an owner-manager, as they lack the day-to-day contact with the project necessary for this task. As a result, some overdesign and higher investment costs can be expected in such a situation. 2.15 With an investment cost excluding working capital and interest during construction of US$224 million, the specific investment cost per annual ton of clinker produced was US$187. For comparison, at this time the unit cost of a large scale clinker plant in industrialized countries is estimated at about US$90 per ton. Similar scale projects financed by IFC had an investment cost of US$124 1/ per ton in 1980 dollars. The CIMAO plant can therefore be considered as a high cost one. Some reasons for the high costs will be examined later (paras 3.16-3.20). Choice of Fuel 2.16 The choice of a fuel oil firing system for the kilns was also a major handicap for the plant right from the start. At the time of the plant design, the first oil shortage had occurred and some European plants had already started their conversion to coal firing. The alternative of using coal for CIMAO was reviewed to some extent. A 1974 report by the design consultant associated with Lambert Freres recommended the use of coal instead of fuel oil. However, after reviewing the economies of coal vs fuel oil at appraisal, the latter was finally selected. The Engineer design was for fuel oil with the possibility of using coal in the future. Apparently the advisor company and the Engineer also reviewed in 1975 the possibility of using coal imported from Nigeria but considered that the transport to Togo presented too many difficulties. Other sources of import do not seem to have been explored at the tine. 2.17 In 1981, after a year of review, the Bank recommended that CIMAO convert its firing system to coal. A feasibility study estimated that the conversion would cost US$14 million and provide savings of about US$5-6 per ton of clinker or about US$6.5 million per year at full capacity. However, all three Governments were reluctant to pursue the coal conversion idea, mainly because they had surplus fuel oil from their refineries that they could sell to CIMAO. Later in the year, the Bank judged it would be more 1/ Lessons from IFC Operations in the Cement Industry - August 1984 (average capital cost for large-scale project US$107 per ton of cement adjusted for 300 days' operation and for clinker to cement ratio of 0.95). - 68 - prudent to delay a coal conversion because CIMAO was already faced with too many problems. It was decided that a coal conversion would not be part of the Restructuring Project but would be reviewed when CIMA0 would have solved its present problems with the help of a new technical assistant (para 3.14). When this issue was reviewed later on, the marketing problems had arisen and although a coal conversion would reduce CIMAO's cost, it still would not make the plant competitive with imported clinker (paras 7.02-7.05). Clinker Prices 2.18 However, the major cause of CIMAO's troubles is due to the persistent availability of imported clinker at low prices which makes the project uneconomical. These low prices generally do not cover the full production costs of European cement manufacturers. When the first CIMAO project was rejected in 1971, it seems that the Bank evaluation was that this situation would persist (para 2.03). However, in 1973, the Bank, after a review of the European and African cement markets (the review is unavailable in the files) expected prices of clinker to go up and to cover full production costs. In fact, clinker prices CIF Abidjan did go up from about CFAF 3,750 to CFAF 5,000 per ton from 1971 to 1975 and this increase seemed to confirm the Bank's projection. During this period, the US was a major importer and the OPEC countries has started on major construction activities with a resultant high demand for cement imports. During the appraisal of the project, a long-term price of imported clinker was projected at CFAF 7,500 per ton in 1975 terms. This price was assumed to cover all production costs of a modern European plant and was meant to be an average of clinker prices over an economic cycle. Prices would be lower at times of low economic activity in Europe resulting in oversupply of clinker and cement and would be higher when clinker supply would be reduced in periods of high activity. In effect, CIMAO would then offer a constant supply of clinker at stable prices. It was, however, recognized that during its earlier years of operation, CIMAO may have to sell its clinker at prices higher than import prices to be financially viable. It was deemed that this would be feasible even if the excess price were substantial, since CIMAO had a captive market. In fact CIMAO's treaty had a pricing clause according to which CIMAO's selling prices were to cover all the company's costs, enable debt service and provide a reasonable return on investment. According to the appraisal projections, the CFAF 7,500 per ton selling price would meet the above objective. When CIMAO started production in 1980, its selling price was set at CFAF 12,500 per ton, which was not enough to cover its costs, while the price of imported clinker was CFAF 10,600 per ton. This was due to increasing oversupply in the European and world cement markets, and the ability of producers in Spain and Greece to have significantly lower production costs (including depreciation and interest charges). Although the price of energy, particularly oil, had risen sharply, the accelerated conversion of all European plants to coal, resulted in lower marginal costs for most producers, and imported clinker in the African market was consequently priced at this marginal cost. 2.19 When in 1981 and 1982, CIMAO's financial troubles prompted the colenders, CCCE, EIB and the Bank, to make a second loan for CIMAO - 69 - restructuring, the basic economic justification for the project was that European FOB clinker prices and freight rates would go up in the future. For the economic analysis of the restructuring project, it was assumed that CIF prices of European clinker imported into West Africa followed a cycle with a low of CFAF 13,000 and a high, covering full production and transport costs, of CFAF 23,500 per ton in 1982 terms. The 1982 prices at CFAF 13000 per ton were to be the low point of the cycle, would increase each year to reach their peak in 1988 and then decrease again to reach the low point in 1992. However, the price increase never materialized and prices have remained at about CFAF 13,000 per ton in current terms since 1983, which means they have gone down in real terms. 2.20 The continuing availability of clinker at prices which do not cover full costs led the Bank to have a fresh look at the market forces. This review pointed out that (i) Western Europe capacity utilization of cement production had declined from 82% to 75% from 1979 to 1983, resulting in unused capacity of about 67 million tons (Annex 1); (ii) the share of exports of cement and clinker in the total sales had increased from 10.3% to 13.6% in the same period indicating a growing competition in this area; (iii) clinker exports themselves represent only 1.2% to 2% of the total productiont and (iv) the overcapacity situation was not going to improve in the near or medium term since the biggest export market, Saudi Arabia, which imported 16 million tons in 1983, was expected to become self-sufficient by 1986/87. Clinker appeared more and more to be an intermediate product whose quaucities sold are marginal in relation to total cement sales, and on which producers can afford a policy of pricing at or near marginal costs. Based on this outlook, it was projected that at best the prices of imported clinker would remain constant in 1984 terms over the next few years. They have in fact gone further down in 1985, being at about CFAF 12,500-13,000 in early 1985. Furthermore, some very efficient European plants particularly in Spain and Greece can cover all or a major portion of their costs with these prices. With prices not likely to rise, it appeared unlikely that CIMAO could be in a competitive position (paras 7.02-7.04). Market 2.21 On top of the problems already mentioned, CIMAO has also been hard hit by the economic recession in Ivory Coast and the general situation in Ghana, two factors which were difficult to predict. The Togolese market has also declined since 1978, but since this market was never expected to be substantially higher than 200,000 tons per year, it does not have a severe impact. The Ghana market experienced a sharp drop starting in 1979, before CIMAO started operating, and the lack of foreign exchange has resulted in repressed demand since then. This market which was expected to be about 700,000 tons in 1984 at appraisal of the first project and about 350,000 tons at the appraisal of the Restructuring Project, turned out to be actually about 210,000 tons. The Ivory Coast clinker consumption which had started to decline from a high of about 1 million tons in 1979 to about 760,000 tons in 1982, drastically shrank in 1983 and 1984 to about 460,000 tons. The total 1.2 million tons which seemed to present no problem at the time of appraisal of both the original and restructuring - 70 - projects has now been reduced to less than 800,000 tons and a recovery appears unlikely in the near future. Actual and projected consumption at the various stages of the project are summarized below: Consumption of Clinker in the Region ('000 tons) 1970 1975 1977 1979 1981 1982 1983 1984 1985 1990 At Appraisal of First Project 889 1,362 N.A. 1,465 1,665 1,775 N.A. N.A. N.A. N.A. At Appraisal of Restructuring Proect 889 1,362 1,580 1,500 1,360 1,290 1,290 1,340 1,390 1,700 1984 Projections 889 1,362 1,580 1,500 1,360 1,170 1,040 827 740 800 Consumption by country is shown in Annex 2. 2.22 With hindsight, the 1984 projections show the importance of the decision concerning the initial capacity of the plant. As mentioned earlier (paras 2.07-2.08), one issue had been to start with a 600,000 tpy kiln and later add a second kiln of the same capacity, instead of starting immediately with two kilns. It is of course speculation at this stage to wonder whether a second kiln would have been built, if the initial plant had been started with one kiln. On one hand the disappearance of the 1.2 million ton market was not fully perceived until 1983/84 and thire would have been considerable pressure to add a second line to reduce overall unit production costs. On the other hand, production problems were not solved until early 1983 (para 5.02) and management problems were still acute which may have resulted in a delaying of the decision to add a second kiln. However, infrastructure costs would have been prohibitive for a 600,000 TPY operation. Commercial Arrangements 2.23 Since the clinker grinding statio.-s were not integrated with CIMAO, the captive market was supposed to be ensured by the 1975 treaty between the Governments of Togo, Ghana and Ivory Coast instituting the CIMA0 project and by an annex to this treaty. The treaty stated in general terms that to ensure the sale of CIMAO's entire production in the national markets of the three countries, the Governments would take the necessary steps to limit the importation of clinker and cement into their countries. The annex specified the sharing of CIMAO's output: (i) Togo's need would be met in totality by CIMAO, on condition that her requirements do not exceed one third of the estimated production; (ii) the remainder of CIMAO's production would be distributed between the other two countries in equal portions or according to any other distribution ratio agreed by these two countries; and (iii) the price of clinker will be the same at the Togo grinding station as well as at any port of unloading of Ivory Coast and Ghana. - 71 - 2.24 This arrangement presented no problem until early 1982 when CIMAO's production finally reached about 70% of capacity. At that point, Ivory Coast grinding stations were unwilling to take up the quantities necessary to absorb all of CIMAO's production because of the extra price of CIMAO's clinker. Ivory Coast was the only market which could take additional output from CIMAO, since it was still importing from Europe. Ghana and Togo were meeting all their requirements from CIMAO. The colenders insisted with the Ivorian authorities that the treaty be respected and that Ivory Coast increase its offtake. While Ivorian authorities agreed in principle, the increase did not materialize and for the year 1982, Ghana ended up taking 330,000 tons of clinker from CIMAO while Ivory Coast bought only 299,000 tons from CIMAO and 456,000 tons from other sources. In the meanwhile, CIMAO ended the year with an inventory of 96,000 tons. For 1983, Ivory Coast insisted on an interpretation of the treaty that Ghana's and Ivory Coast's purchases from CIMAO had to be in equal shares although the Treaty clearly stated that different shares could be agreed on (para 2.23). In early 1983, CIMAO's shareholders approved a 1983 sharing of CIMAO's production as follows (in '000 tons): Ivory Coast .... 475 Ghana .......... 450 Togo .......... 175 Total ..... 1,100 However, it was already doubtful that Ghana's market could absorb the above quantity, and thus the above plan was somewhat optimistic. 2.25 The colenders insisted that in view of the reduced market in Ghana, Ivory Coast should meet all its requirements from CIMAO. This was not agreed but finally Ivory Coast increased its share of CIMAO's offtake in the second half of 1983. However, CIMAO had to shut down in June to avoid excessive inventories and CIMAO's Board decided to reduce production in the second half of the year. Actual 1983 production and sales of CIMAO were as follows (in '000 tons): Production ............ 693 Sales - Ivory Coast .... 371 Ghana .......... 212 Togo .......... 170 753 Ivory Coast imported about 260,000 tons from Europe. 2.26 It is of course not surprising that there was great reluctance from Ivory Coast grinders to buy CIMAO's clinker at CFAF 24,200 in early 1983 instead of imported clinker at CFAF 13,000 (para 4.09). However, the Government of Ivory Coast did not enforce the treaty rule which it could have done by not granting import licenses for other than CIMAO's clinker. The main reason for this attitude was probably that GOIC felt at the time it was already carrying a very heavy CIMAO burden. CI1MAO had been unable to service its debt to the colenders which started to mature in August 1981. Since the three States were joint guarantors of the CIMAO loan, the - 72 - colenders had exercised the guarantee clause. But each time, it was Ivory Coast which met the obligations of the three States. Ivory Coast did not want to increase its share of the burden, arguing that if all its clinker requirements were met from CIMAO it would have to increase the price of cement in Ivory Coast. This would have further depressed the market. 2.27 To make matters worse, there were also problems in collecting payments for the clinker delivered. In 1983, the Ghanaian grinding station could not pay its early 1983 clinker offtake because import licenses, which were necessary to obtain the foreign currency from the Central Bank had not been issued. Also the Togolese grinding station, claiming a poor financial position, was not paying the full CIMAO price. 2.28 The above problems could probably have been avoided by giving CIMAO from the onset the monopoly for clinker imports within the three partner states and letting CIMAO set an average selling price based on its production costs and the import prices. In 1982 and 1983, this option was discussed among colenders but was ftonr' ly not pursued because it was felt that CIMAO was already overburdened wi1i too many problems. It was also felt that Ivory Coast would not agree to this option. III. PROJECT IMPLEMENTATION AND MANAGEMENT Design Change 3.01 The project was implemented with a delay of about ten months and a cost overrun of CFAF 5.1 billion or 8% in CFAF terms (US$32.7 million or 12% in US$ terus). The main reason for the overrun and the delay was a change in design which required a reinforcement of civil works. The Bank was not informed of the design change before it was well under way. The other major cost overrun was due to the construction of a roof over the storage area wherc the raw materials are blended. At appraisal it was planned that this area be uncovered but the advisory company strongly sug- gested that it should be covered to avoid major problems during the rainy season. Construction of the roof cost about CFAF 1.2 billion (US$5.5 mil- lion). Infrastructure Construction 3.02 Some of the infrastructure components incurred minor delays which did not affect the start-up of the plant, except for the township construction. Township A, which included 27 houses for expatriates and social and recreational facilities, although delayed was completed in time for the plant start-up. However, Township B which included 84 houses for the African personnel was only partially ready at the plant start-up and was not completed until mid-1980. This component was financed by the Fonds Europeen de Developpement (FED). The major difficulty resulted from the FED's requirement that small contractors carry out the work. Many of these contractors were chronically short of funds and did not operate on a continuous basis. Moreover, several of them went bankrupt. In late 1979, several contacts were assigned to larger and more effective contractors - 73 - with FED's agreement. The delays in construction created acute social and work problems at the start-up of the plant. Project Management 3.03 The industrial part of the project was managed by CIMAO with the assistance of the advisory company and the engineering firm (paras. 2.11-2.12). The infrastructure parts were managed by the various Togolese agencies responsible for their implementation under the overall responsibility of the Ministry of Public Works and Mines of Togo (MPWM): (i) Compagnie des Chemins de Fer Togolais (CFT) for the railway component; (ii) Port Autoncme de Lome (PAL) for the port terminal; (iii) Communaute Electrique du Benin (CEB) for the power component; and (iv) MPWM for the township. A British engineer with extensive experience in the cement industry, both in plant construction and operation, was appointed project coordinator (para. 2.11). The CIMAO treaty also had a provision for a Management Committee of at least three members, appointed by the Board, which would assist the company's Managing Director. This Committee operated from time to time until 1976. During that period some problems were encountered in the separation of the responsibilities between the Committee and the Managing Director. This Committee then did not function again until 1982 (para. 3.08). 3.04 In October 1981, CIMAO terminated its assistance contract with the advisory company. In July 1982, a contract -as signed with another French cement producer, for management and technicai assistance. However, the Company's new team remained at the plant until personnel started arriving in October 1982. 3.05 While the performance of CIMAO's management was adequate on fol- lowing construction progress on the physical side, problems in the finan- cial and administrative areas quickly emerged. The positions of Admini- strative and Finance Directors were not filled until early 1977 and the appointees did not have adequate experience to develop the management sys- tems needed for CIMAO and were not really of the caliber required for the positions. The advisory company which was contractually bound to assist in setting up the financial system, did not do an adequate job (para. 3.11). The weaknesses in these areas were quickly identified by the colenders' supervision missions, but the recommended solutions were limited to appointments of consultants to develop the systems and of expatriate assistance to the directors. CIMAO's Board refused expatriate assistance, but accepted consultants and also the appointment on a temporary basis of two financial and system experts. However the colenders did not formally recommend the replacement of these directors, which was the solution needed. CIMAO replaced on its own decision the Administrative Director in 1981 and the colenders finally recommended in late 1981 the appointment of a new Finance Director by effectively demanding that the new technical and management contract that CIMAO was negotiating include the function of financial management. 3.06 As a result of the poor financial records, CIMAO had not issued by 1984 any financial statements subsequent to the 1980 statements and the audit of the latter had not been completed. - 74 - 3.07 The Managing Director performed adequately during the implementa- tion of the project but became overwhelmed by the multitude of pr3blems during the operating phase. His previous experience had been in the pro- duction field and he had no general management experience which was really needed at that stage. When a new management and technical assistance con- tract was negotiated in 1982, CLMAO's shareholders were finally willing to have the Managing Director position fill d by the new advisory company, but the latter did not agree to accept this tesponsibility. In mid-1983, the Togolese Government, without prior consultation with its partners, abruptly removed the Managing Director from the company. By that time, the advisory company was prepaied to assume the Managing Director's function under con- ditions that they receive assurances that the financing plan of the re- structuring project would be effectively implemented. CIMAO's Board had informally indicated it would accept this solution. Prevailing uncertain- ties did not enable the implementation of this solution and until the plant's closure, the Administrative Director assumed the Managing Director's position ad interim. 3.08 During the operation period, the management of the company became further complicated by the need to convene many Board meetings to review important issues beyond management's competence. Gathering a multinational Board with several ministers as directors was cumbersome. In early 1983, the Management Committee was revived (para. 3.03). Composed of one repre- sentative from each shareholder state, it was to assist the Managing Director in preparing decisions to be taken by the Piard, such as clinker deliveries, prices, etc. and to be an intermediary between the Board and management. This Committee provided the opportunity to review important issues more quickly. However, its role may have been impeded by a conflict of interest for the Ivorian representative who was the Managing Director of two of the Ivorian grinding stations. Ghana raised this issue at a Board meeting and a Bank mission raised it with CIMAO's Chairman, but Ivory Coast maintained the same person on the Committee. Engineering and Technical Assistance during Project Implementation 3.09 In general, the engineering study, and procurement of the mechani- cal and electrical contracts were adequately dealt with by the Engineer and the original advisory company. However, troubles developed with the follow up of the civil engineering contract awarded to Sonitra, an Ivory Coast company. Both the Engineer and the original advisory company seem to have accepted major changes in plant design from the supplier of the kilns, Polysius, without taking due account of its cost implication on the civil works and without informing CIMAO. The first mention of the major cost overrun (CFAF 4 billion) and of an estimated 6-month delay to start the first kiln came out in a report by the Engineer submitted in July 1978, without prior warning. Following this, CIMAO and a Bank mission expressed to the Engineer the need to improve (i) planning of work, (ii) supervision of the contractor and (iii) a cost conscious behavior when making or ac- cepting changes in design. The Bank also recommended that the advisory company should add a civil engineer to its staff on the site to follow up better on civil works problems. However, there seems to have been little improvement in the planning of work. The engineer was repeatedly unable to provide CIMAO with a bar chart planning system. As a result, CIMAO sus- pended payments to the Engineer in December 1979. The latter finally satisfied CIMAO in January 1980 and payments were resumed. The advisory - 75 - company, despite several requests by CIMAO, did not provide a civil engi- neer on site, claiming it could perform the job without such a person. 3.10 The training program by the advisory company seems to have been reasonably well executed. However the company wanted to give additional training in France to some personnel just before the start up of opera- tions, which CIMAO refused. The company claimed that this lack of training made the start up operations more difficult. 3.11 The advisory company was to develop an administrative and account- ing system. Actually it did develop a cost accounting system and it claims its responsibility was limited to this area. However, considering the numerous criticisms made toward the lack of systems at CIMAO particularly the absence of accurate records of the investment costs, and the need to hire consultants and expatriates (para. 3.05) the performance of the advi- sory company in this area does not appear fully satisfactory. Part of the problem lies with the very vague definition of the responsibility as "to design an administrative and accounting system" and the lack of a strong counterpart in CIMAO to ensure that all necessary work is executed. Technical Assistance During Operations 3.12 Production build up during the first 12 months of operation of the 2 kilns reached only 52% of the full capacity. The especially low produc- tion in October and November 1980 led CIMAO to withhold payments to the advisory company due under the contract clause of transfer of know-how. After the company threatened in early 1981 to stop providing its services, it agreed with CIMAO to the need of revising the technical assistance con- tract to provide more incentive to increase production. CIMAO also agreed to the company's request previously denied that expatriate personnel be increased from 17 to 25 and that they be vested with full responsibilities and powers of their respective position within the CIMAO hierarchy. The revised contract would have provided for a variable bonus per ton of clink- er produced above 600,000 tons per year. However, in September 1981, CIMAO's Board decided to cancel the advisory contract and to look for a new technical assistant. The company continued its function on an interim basis until October 1982 when a new technical assistant started operating. 3.13 Although the original advisor is a well-known and experienced cement manufacturing company, it is questionable whether it was not under a conflict of interest since it fully owns one of the grinding stations in Ivory Coast. Its token participation in the capital of CIMAO (2.6%) was not enough to avoid the above since in any event in 1975 it reluctantly became a shazeholder under pressure of the Ivorian Government. It showed in several instances that, at least financially, it did not behave as a shareholder. When it was negotiating its first technical assistance con- tract in 1975, it initially asked for a remuneration which was jtdged ex- cessive by CIMA0 and later admitted that it included a "hidden dividend" for the equity it would put in the project. It then insisted to have a 10% guaranteed return on its equity through the form of preferred shares. This was initially agreed to by the other shareholders but finally did not take - 76 - place. Finally after the company was dismissed as technical assistant in 1981, it insisted that it be repaid its CFAF 500 million investment in CIMAO at face value. When no agreement was reached on this point, its Ivorian subsidiary, a customer of CIMAO, withheld the CFAF 500 million from invoices due to CIMA0. 3.14 After the cancellation of the advisory contract, in November 1981 CIMAO invited three offers for a management and technical assistance con- tract. A contract was signed in July 1982 and became effective in December 1982. At the insistence of the colenders, CIMAO agreed with great reluc- tance that the position of Finance Director be filled by the new advisor. On the production side, CIMAO argued for a reduction of the number of expa- triates, since production had already improved in the first part of 1982. The new advisor was finally asked to provide 9 persons, including a plant manager, instead of 25 requested at the beginning of the negotiations. The contract provided for payment of a fixed fee covering full costs with a small margin for profit. In addition, a variable bonus would be paid for each ton of production exceeding 880,000 tons per year. 3.15 The performance of the new advisor in raising production was al- ways limited by outside factors, mainly electricity supply or sales prob- lems (paras. 2.24-2.25). Production on the two kilns did reach full capac- ity in March 1983 when no external constraints affected the plant. How- ever, when CIMA0 started operating only one kiln in mid-1983, it consis- tently operated at a high capacity utilization of that kiln (para. 5.02). On the financial side, major improvements were brought in financial analy- sis and preparation of budgets and income statements. However, official financial statements for the years following 1980 were still not issued. The main problem still preventing their issuance was the lack of accurate accounting of the company's fixed assets (para. 3.11). Overall, the new advisor's performance can be considered satisfactory under the difficult operating circumstances. Procurement 3.16 Most of the procurement was done under international competitive bidding. Items financed jointly by CCCE, EIB and the Bank were bid internationally under the Bank's guidelines. Goods financed by other institutions were bid under the specific institutions' guidelines for international bidding. For the railway link, the CIDA-financed items were restricted to competition between Canadian firms. Procurement for the industrial complex was split among 15 lots. No major problems were encountered except for the execution of the civil works contract which resulted in an overrun of CFAF 3.9 billion (Us$19.7 million), the major overrun of the project, and a major cause of the start-up delay. The main causes of delay in the civil works completion were (i) bad weather; (ii) increase in the volume of work; (iii) delays in reception of drawings from the civil engineering firm; (iv) shortage of material on site; (v) insufficient equipment on site; (vi) poor organization and planning on site; and (vii) insufficient skilled personnel. Causes (i) through (iii) were beyond the control of the Engineer but the other reasons increased the delays further. - 77 - 3.17 The increase in the volume of worK is attributable to changes in design brought in by the final layout proposed by the kiln supplier, Polysius. The level of kilns was higher than originally thought to avoid a flooding of the clinker pit during the rainy season, and required more civil works. Another major design change included setting the electrofilters on top of the raw mill building which also required a reinforcement of the civil works, and the construction of two steel chimneys for the kiln instead of a single concrete one. The civil works had been tendered using provisional rather than definite designs for the kilns. This method is widely used and generally results :n substantial 6-9 month savings in time over the alternative of waiting for final designs and layouts. At the time of tendering for civil works, the engineer did not anticipate a variation of more than 10% in cost due to the finalizing of designs. The higher costs due to design changes were accepted withouth apparently being given enough consideration by the Engineer and the original advisor. 3.18 Bank funds financed mainly civil works (67%). The allocation of funds is shown in Annex 3. Three countries (France, Togo and Ivory Coast) were the major (78%) countries of origin for procurement. Source of Bank-financed Goods and Services US$'000 % France 19,426 32.4 Togo 17,239 28.7 Ivory Coast 10,114 16.9 Germany 4,367 7.3 Israel 3,371 5.6 UK 2,463 4.1 Switzerland 1,395 2.3 USA 1,194 2.0 Others 431 0.7 Total 60,000 100.0 Project Costs 3.19 Project costs estimates rose considerably during project preparation. The first 1973 estimates of CFAF 14.2 billion (US$57 million at US$1 - CFAF 250 exchange rate) were raised to CFAF 38.4 billion (US$160 million at US$1 - CFAF 240 exchange rate) by end 1974. The final 1976 appraisal estimates were CFAF 63.9 billion (US$284 at US$1 = CFAF 225 exchange rate). Actual costs were CFAF 69.0 billion (US$316.7 million at US$1 = CFAF 219 exchange rate). Investment costs are summarized below and detailed in Annex 4. - 78 - Investment Costs Underrun/ Appraisal a/ Actual b/ (Overrun) CFAF US$ CFAF US$ CFAF US$ M1n. M1n. M1n. M1n. M1n. M1n. Industrial Complex Plant & Equipment 38,410 170.5 41,598 190.3 (3,188) (19.8) TA, Engineering, Training 2,745 12.2 3,051 14.0 (306) (1.8) Preoperating Expenses 2,900 12.9 4,366 19.9 (1,466) (7.0) Working Capital 1,985 9.0 2,050 9.8 (65) (0.8) Interest During Construction 3,460 15.4 2,074 10. 1 38 5.3 Total Industrial Complex 49,500 220.0 53,139 244.1 (3,639) (24.1) Infrastructure Equipment & Services 14,085 62.6 15,500 70.8 (1,415) (8.2) Interest During Construction 315 1.4 400 1.8 (85) (0.4) Total Infrastructure 14,400 64.0 15,900 72.6 (1,500) (8.6) Total Financing Required 63,900 284.0 69,039 316.7 (5,139) (32.7) a/ US$1 = CFAF 225. b/ US$1 = CFAF 219 (average rate). The overruns on civil works (CFAF 3.9 billion or US$19.7 million) and on the roof for the blending area (CFAF 1.2 billion or US$5.5 million) were the major causes of the plant and equipment overrun (CFAF 3.2 billion or US$19.8 million) and were already discussed (paras 3.01 and 3.16-3.17). The delay in startup caused the overrun on operating expenses. For the infrastructure, cost overruns occurred mainly for the township and for the port terminal equipment. 3.20 Even without cost overruns, the appraised investment costs for the plant appear on the high side at US$195 million (excluding working capital and interest during construction) or US$162 per ton of clinker produced. The high level of economic activity and inflation at th. time of appraisal and project implementation can explain part of the high costs, as well as the isolated location of the plant and difficult working conditions on site. However, part of the high costs must be due to the design itself. CIMAO had a design similar to a plant in Morocco which was also designed by the Engineer and built shortly before CIMAO at an investment cost of US$153 per ton. The inherent higher design costs in situations such as CIMAO have already been discussed earlier (para 2.14). Financing Plan and Disbursements 3.21 Completion of the financing plan was a difficult task since investment costs estimates rose sharply during preparati )n of the project. Eight lending institutions participated in the financing of the project and export credits were obtained from French suppliers. To provide a sound capitalization of CIMAO, it was decided that equity would provide about 40% - 79 - of the financing required for the industrial complex. Part of the loans of the three colenders were made to the three shareholder states to help them finance their equity contributions to CIMAO. The financing plan is summarized below: Financing Plan Appraisal Actual CFAF US$ CFAF US$ IMn. Mln. c/ Mln. Mln. d/ Industrial Complex Equity: Governments a/ b/ 17,800 79.2 17,800 81.0 Grinding Stations a/ 1,500 6.6 1,500 6.9 Subtotal Equity 19,300 85.8 19,300 87.9 Loans: IBRD 11,150 49.5 10,439 49.5 CCCE 2,250 10.0 2,250 10.2 EIB 5,400 24.0 5,792 26.3 BADEA 2,250 10.0 2,158 10.0 ADB 2,200 9.8 2,278 10.8 Export Credits 6,950 30.9 10,341 48.7 Subtotal Loans 30,200 134.2 33,258 155.5 Total Industrial Complex 49,500 220.0 52,558 243.4 Infrastructure Togo 320 1.4 1,080 4.9 ADB 490 2.2 1,375 6.3 CIDA 3,830 17.0 2,490 11.4 FED 4,610 20.5 5,005 22.8 KfW 5,150 22.9 5,950 27.2 Total Infrastructure 14,400 64.0 15,900 72.o Total 63,900 284.0 68,458 316.0 a/ In three equal shares. b/ Partly financed by colenders: IBRD U$10.5 million; CCCE US$9.8 million; EIB US$3.5 million. c/ US$1 - CFAF 225. d/ Variable exchange rate depending on time of disbursements. Average rate US$1 - CFAF 217. Disbursements of the Bank's loans are shown in Annex 5. The start of disbursements was delayed by one year because the loans did not become effective until April 1978 due to delays in meeting conditions of effectiveness (mainly capital increase of CIMAO and legal opinions). 3.22 No major problems were encountered for the infrastructure cost overruns which were financed either by increased loans or by additional - 80 - contributions from the Togolese Government. For the CIMAO plant, the overrun was partially financed by increased export credits which rose from about CFAF 7 billion estimated at appraisal to CFAF 10.3 billion. However, a shortfall remained which was promptly identified by Bank and cDlenders' missions in early 1979. 3.23 Preliminary financial projections done in early 1979 and covering the operation period of CIMAO showed that on top of being unable to finance its cost overruns, CIMAO would not cover its operating expenses during the first fez years of operation. The colenders made recommendations to CIMAO to solve this problem. Possible remedies included a capital increase, payment of subsidies by the States through the mid-1980s, increases in selling prices, cost reductions, and an increase of capacity utilization. A selling price increase seems to have been favored by the shareholders to cover the operating deficit while other sources of financing were explored to finance the cost overruns. The shareholders did ask the colenders for additional loans and for a rescheduling of the earlier maturities of their loans, which they could not accept. The German Development Company (DEG) and SIFIDA of Switzerland, contacted with the help of the Bank, expressed interest in financing CIMAO while the Banque Ouest Africaine de Developpement (BOAD) declined to participate. In early 1980 CIMAO's Board declined to accept an offer from SIFIDA which was judged too expensive and in January 1981, DEG's Board rejected a loan proposal on policy grounds (no financing of cost overruns and absence of a German partner in CIMAO). By that time CIMAO's financial position was critical and the company unable to meet all its payments. The lack of additional financing led to the Restructuring Project. IV. THE RESTRUCTURING PROJECT Background 4.01 To correct the rapidly deteriorating situation, in July 1981 the colenders, CCCE, EIB and the Bank presented to CIMAO's Board an Action Program including: (a) financing measures, which would allow for a temporary increase in clinker selling prices, an increaqe in capital and the raising of additional debt; (b) strengthening of management, by giving more responsibilities and more financial incentive to the Technical Assistance Firm; and (c) measures of cost reduction, by the revision of the contracts fGr railway transport, port handling and maritime shipping of clinker, reduction of overhead costs and a conversion of CIMAO's kilns from fuel oil to coal firing. 4.02 The proposed financial measures included a capital increase of CFAF 6 billion, raising debt by about CFAF 6 billion and semiannual clinker - 81 - price increases with an immediate increase in September 1981 from CFAF 14,500 to CFAF 17,000 per ton. While CIMAO's shareholders agreed to the recommendations, they were reluctant to implement the clinker price increase. A price increase became effective only in November 1981, after strong pressure from the colenders. To compensate for the lost revenue since September, the price was, however, increased to the level planned for January 1982, CFAF 19,100 per ton. The States requested financing from the colenders for the capital and long-term debt increase. This financing was provided through the Restructuring Project. 4.03 After having started to renegotiate its technical assistance contract with the advisory company, CIMAO caicelled it in October 1981 and selected SCF as a new assistant (paras. 3.12 3.14). CIMAO negotiated a 121 reduction on its maritime freight contract. CFT and PAL agreed in principle to reduce railway charges and port terminal rent by 33Z and 25Z, respectively. As regards the conversion of the kiln-firing system from oil to coal, considering CIMAO's critical financial situation and the already difficult task of increasing production with the fuel-firing system, it was felt that a decision to convert to coal firing should be postponed until the Company had overcome its current technical, financial and managerial problems (para. 2.17). Project Description 4.04 The objective of the proposed project was to assist CIMAO in the implementation of the Action Program (para 4.01) to set the company on a sound operational and financial footing. To this end, the project was to provide for (i) management and technical assistance to help CIMAO to achieve full capacity utilization rapidly; (ii) additional quarry equipment to prevent quarry operations from becoming a bottleneck; (iii) spare parts and equipment to permit full plant operations and the carrying out of an adequate maintenance program; (iv) financing of fuel oil; and (v) the restoration of working capital to a healthy level. The project was also to restore CIMAO's financial viability through provision of medium-term financing directly to CIMAO and long-term financing to the shareholder Governments to be contributed as equity to CIMAO. 4.05 The project was appraised in January/February 1982 and presented to the Loan Committee in May 1982. However, despite the urgency of the project, it was presented to the Board only in February 1983 because of Board presentation conditions which were not met earlier. These included inter alia (i) an agreement of the three shareholder states on the sharing of the whole 1982 clinker production of CIMAO and of the projected sharing of the 1983 production; (ii) effectiveness of the technical assistance contract with SCF; and (iii) confirmation from local Togolese banks of their intention to extend a medium-term credit to CIMAO of about CFAF 2,650 million (US$7.8 million) as part of the financing plan. The first one was the most difficult to obtain. The Bank accepted the proposed sharing of output, although Ghana's share (475,000 tons) appeared high, in an effort to speed up the project (para 2.24). During 1982, two CFA franc devaluations (through its fixed parity with the French franc) and the rise in the dollar value worsened CIMAO's cost structure by increasing its fuel - 82 - oil and maritim,. shipping costs. As a consequence, during 1982 it became necessary to modify the financing plan by channeling more funds into CIMAO as equity and reducing loans. To enable CIMAO to survive until funds from the colenders would be available, CIMAO, upon the recommendations of the Bank, requested and obtained a credit line from local banks to finance its accounts receivables and CCCE was instrumental in helping Ivory Coast obtain a CFAF 6 billion (US$17.6 million) loan from a group of French banks. This loan was finally made available in December 1982 and funds passed on to CIMAO for bridging purposes to meet its most urgent payments. This loan was meant to be repaid with the colenders' new funds. However, when the loan matured in June 1983, the various credits were not yet effective and Ivory Coast repaid the loan. Project Costs - Financing 4.06 Project costs were covering fuel, spare parts and technical assistance costs from July 1, 1982 to June 30, 1583. It also included about CFAF 6.2 billion (US$18 million) for payment of past due bills and CFAF 1.3 billion (US$3.9 million) for restoration of the working capital which had been used to pay part of the original project cost overruns. Details of the project costs are shown in Annex 6 and are summarized below: Project Costs CFAF US$ a/ Million Million Technical Assistance 634 1.9 Spare Parts & Equipment 990 2.9 Fuel Oil 6,384 18.8 Base Cost 8,008 23.6 Physical Contingencies 495 1.4 Price Contingencies 576 1.7 Subtotal 9,079 26.7 Working Capital 1,329 3.9 Interest During Project Implementation 1,007 3.0 Unpaid Bills & Suppliers' Credit Due 6,241 10.3 Total Financing Required 17,656 51.9 a/ US$1 = CFAF 340. 4.07 The project was to be financed partly by CIMAO's internal fund generation projected at about CFAF 1.4 billion (US$4.2 million). CFAF 11.8 billion (US$34.8 million) was to be provided as equity by the three governments in equal parts. The equity funds would be made available by the proposed loans from CCCE, EIB and IDA. Togolese banks were also to provide a CFAF 2.7 billion (US$7.8 million) medium-term loan and a CFAF 500 million (US$1.5 million) credit line to finance CIMAO's accounts - 83 - receivable. The balance was expected as debt rescheduling by the Compagnie Frangaise d'Assurance du Commerce Exterieur (COFACE), the French export credit insurance agency. The financing plan was as follows: Financing Plan Sources Togo- lese CO- CIMAO EIB CCCE IDA Banks FACE Total CFAF ---------------(US$ mil)ion) -------------- billion Internally Generated Funds 4.2 - - - - - 4.2 1,442 Equity - 7.0 12.8 15.0 - - 34.8 11,846 Medium-term Loans - - - - 7.8 - 7.8 2,650 Short-ta'rm Loans - - - - 1.5 - 1.5 500 French Baiks' Rescheduling - - - - - 3.6 3.6 1,218 4.2 7.0 12.8 15.0 9.3 3.6 51.9 17,656 = = = = =m = = = To provide for the urgent needs of funds for CIMAO the IDA credits provided for up to US$7.0 million of retroactive financing from July 1, 1982. 4.08 EIB was to lend its funds (US$7.0 million) in equal parts to the three countries. To enable the most favorable repartition among the three countries of lending terms available from CCCE and the Bank Group, the latter's lending would only be through IDA funds made available to Togo and Ghana. CCCE was lending to Ivory Coast and Togo. The lending allocation is shown in Annex 7. 4.09 The project included a schedule of further selling price increases from the January 1982 level of CFAF 19,100 per ton as follows: CFAF per ton August 1, 1982 21,400 January 1, 1983 23,200 July 1, 1983 25,200 Thereafter it was planned that prices would be set annitally in accordance with the provisions of the Regional Treaty, at a level sufficient to cover costs and debt service. Just before Board presentation, CIMAO decided to have a single price for the full year 1983 and set it at CFAF 24,200,2/ which was acceptable to the Bank. 2/ Actually a two-tier pricing system resulting in an average of CFAF 24,200 was set. Two different prices were set according to the quantities delivered for each country. - 84 - Project Implementation 4.10 Although the project was of an urgent nature, the credit agreements were not signed until August 29, 1983, because Ghana did not nominate anyone to sign the agreement. This delay most likely reflected the hesitation of Ghana in further supporting the project. The credits then did not become effective until February 29, 1984, one year after Board presentation. This delay was due, first, to protracted negotiations for reduction of service contracts for railway transport with CFT and for transit of CIMAO's fuel oil through the Lome refinery, Societe Togolaise des Hydrocarbures (STH), and then to difficulties in working out the actual deliveries of clinker and finally to a renegotiation of the pricing agreement. 4.11 An important feature of the project was the reduction of costs for service contracts CIMAO had with the railway company, CFT, the Lome port, PAL, the Lome oil refinery, STH and the maritime shipping company SITRAM. Satisfactory revised contracts were conditions of effectiveness of the IDA credits. While the PAL and SITRAM contracts were easily renegotiated, the Bank had to reject several proposals from the Togolese Government on the rates to be charged by CFT and STH because they did not in fact provide for reduction. Agreements on CFT and STH rates were reached only in June 1983. 4.12 When the issues of cost reductions were solved, the issue of clinker deliveries became critical again w.th CIMAO stopping production in June 1983 (para 2.25). In September 1983, the shareholders claiming that high clinker prices created a decrease in cement demand, proposed to revise the clinker pricing agreement at least for 1983 and 1984. For the fourth quarter of 1983, CIMAO's clinker price would be reduced from CFAF 24,200 (para 4.09) to CFAF 18,000 per ton (imported clinker cost was about CFAF 13,000 per ton). This price would be increased to at least CFAF 19,000 in 1984. They also reduced the planned production of CIMAO to 860,000 tons for 1984. To compensate for the lost revenues of CIMAO, they proposed to take over CIMAO's debt service and to provide working capital if and when needed. The principles of these new arrangements were confirmed by the respective Heads of State of the three countries to the colenders in early 1984. Procurement and Disbursement 4.13 IDA funds were to finance the management and technical assistance contract with SCF and purchase of fuel oil and spare parts- Allocation of funds is shown in Annex 8. Fuel was purchased under competitive bidding from France. Spare parts, to be purchased mainly on a recurrent basis from original suppliers of the complex, were to be bought under prudent international shopping. However, CIMAO did not supply the Bank with any disbursement request and, therefore, no disbursements have been effected. Before they suspended their disbursements in April 1984, EIB and CCCE had respectively disbursed US$2.3 million and US$5.3 million out of their respective US$7.0 million and US$12.8 million loans. - 85 - Economic Justification 4.14 The restructuring project was justified on the basis of (i) expected increases in international clinker prices (para 2.19) and (ii) treating the investment in the plant as a sunk cost. The alternative to having a restructuring project was to close down CIMAO. Since the three states were joint guarantors of the loans made to CIMAO, the debt service had to be met in any alternatives, resulting in treating the plant investment as a sunk cost. On this basis the restructuring project had an economic rate of return of 17%. With the price increases not materializing there was in fact no return to the project (para 7.01). V. OPERATING PERFORMANCE 5.01 Firing of the two kilns took place in February and March 1980, respectively, instead of March and June 1979 as planned at appraisal. At the firing of the first kiln, a problem immediately developed with the brick lining and 48 m of bricks had to be replaced. Frequent rebricking always remained a problem, although the frequency decreased in 1983. Th problem seems to be partly attributable to the low sulphur content (1.5%) of the fuel oil used by CIMAO, the use of siliceous sand in the raw material and frequent electricity shortages creating important temperature changes in the kilns. Production was as follows: 1980 a/ 1981 1982 1983 1984 b/ Production ('000 t) 468 602 868 693 154 Capacity Utilization (%) 52 50 72 58 51 a/ Nine months. b/ Three months. 5.02 From 1982 until the plant closure, frequent electricity shortages, together with marketing problems, prevented a high sustained level of production. A full capacity utilization of the two kilns was achieved only in March 1983. However, when CIMAO operated on one kiln during the second half of 1983, capacity utilization was high and even in October 1983 exceeded the guaranteed capacity of 2,000 tpd, getting very close to the rated capacity of 2,100 tpd. Annex 9 shows production during that period. 5.03 The calorific consumption of the kiln at about 870 kcal per ton of clinker was good, although slightly on the high side because of a rather high energy loss (about 96 kcal per ton of clinker) in the cooling system of the kiln. 5.04 One of the main operating problems ot CIMA0 was to ensure its supply of fuel oil. When the project was conceived, it was planned that the Lome refinery, STH, would supply CIMAO. Under a contract signed in 1979, STH did supply CIMAO for the major part of 1980 and early 1981. The price of fuel was based on international spot market prices at Rotterdam - 86 - less freight charges Lome-Rotterdam. In 1981 deliveries by STH became irregular, due to frequent stoppages of the refinery, and STH overcharged CIMAO. The refinery stopped productioL in early 1981. In February 1982, a Bank mission recommended that the refinery be converted into a storage unit. CIMAO then received its fuel oil from Ivory Coast on a basis very similar to the STH contract. In 1983, the Ivorian company stopped marketing fuel oil and CIMAO procured its fuel oil on the basis of competitive bidding (para 4.13). However, the fuel oil imported by 0IMA0 was still transiting through STH tanks and STH was overcharging CIMAO for the transit charge (para 4.11). In addition, STH was requiring that the sulphur content of CIMAO's fuel not exceed 1.5% whereas CIMAO's kilns would have accepted 2.5-3% sulphur content. This requirement increased CIMAO's fuel costs by about US$10 per ton. 5.05 The electricity problem became very acute in 1983. Due to the severe drought in West Africa, the water level of the Akossombo dam in Ghana which supplied electricity to CEB dropped dramatically and in the second quarter of 1983, CEB started reducing its allocation of power to CIMAO. In April 1984, CEB cut its power supply to CIMAO and CIMAO shut down, at first for four months, since there was no reliable alternative source of electricity. However, it was at this stage doubtful whether CEB could reliably supply CIMAO in the latter part of 1984. In any case, CEB rates would increase by about 60% by that time further increasing CIMAO's production costs. Alternate sources of electricity were being repaired or launched in Togo but were very costly. In addition, the cement market was still decreasing and international prices of clinker were not increasing. In view of all these factors adversely affecting the project, the colenders felt that the long-term viability of CIMAO had to be reassessed and a study was launched to that effect (para 7.02). 5.06 Sales by countries were as follows: 1980 1981 1982 1983 1984 Total Total -('000t)---------------- (T Togo 167 204 195 170 65 802 29 Ghana 146 202 330 212 64 954 34 Ivory Coast 140 170 299 371 74 1,054 37 Total 453 576 824 753 203 2,810 100 The estimated market share of CIMAO in each of the countries was as follows: 1980 1981 1982 1983 (%)------------ Togo 71 86 100 100 Ghana 56 53 100 100 Ivory Coast 13 18 40 59 - 87 - VI. FINANCIAL PERFORMANCE 6.01 CIMAO always operated at a loss. Summary income statements are as follows: 1980 1981 1982 1983 ------ (CFAF billion) ------ Sales ('000 tons) 453 576 824 753 Revenue 5.7 8.7 16.6 17.5 Operating Costs 5.0 8.2 11.4 12.4 Operating Profit 0.7 0.5 5.2 5.1 Interest 2.8 3.1 4.1 5.9 Depreciation 3.9 3.6 4.0 2.8 Net Loss (6.0) (6.2) (2.9) (4.6) 6.02 The delivered cost of clinker in 1983 was CFAF 31,971 per ton (US$84.1) summarized as follows: CFAF/ton USS/ton a/ Variable Costs Fuel Oil 7,842 20.6 Electricity 1,404 3.8 Supplies 693 1.8 Subtotal 9,939 26.2 Fixed Costs Salaries 1,461 3.8 Technical Assistance 1,142 3.0 Maintenance 845 2.2 Other Administrative & Selling 1,698 4.5 Subtotal 5,146 13.5 Total Operating Costs 15,085 39.7 Financial Expenses 8,446 22.2 Depreciation 5,484 14.4 Total Ex-factory Costs 29,015 76.3 Rail Transport to Lome Port 770 2.0 FOB Port Costs 29,785 78.3 Shipping Costs 2,186 5.8 CIF Abidjan or Accra Costs 31,971 84.1 a/ US$1 - CFAF 380 (average for the year). - 88 - Excluding depreciation and financial expenses, delivered costs of clinker were CFAF 18,041 per ton, higher than the CFAF 13,000 per ton CIF price of imported clinker, but lower than the average CFAF 23,200 CIMAO selling price for the year. 6.03 CIMAO's cash flow did not of course enable it to service its debt to colenders which started maturing in mid-1981. The colenders had to call on the joint guarantee from the three states to be paid. Out of the eight maturities of the Bank loan, amounting each to about US$3.5 million, four were paid directly by Ivory Coast and one by Togo. Three were paid by CIMAO but one of them was in fact financed by Ivory Coast through the bridge financing received from French banks that Ivory Coast had to repay (para 4.05). VII. ECONOMIC PERFORMANCE 7.01 With a delivered cost of CFAF 31,971 per ton for CIMAO's clinker, compared to a CIF price of international clinker of about CFAF 13,000 per ton, there is no return to the original CIMAO project. At appraisal, a 10.2% return wus projected. Even by excluding depreciation and financial expenses, the cost of CIMAO's clinker was about CFAF 18,041 per ton and there is also no return on the restructuring project. The appraisal report projected a 17% return (para 4.14). 7.02 When CIMAO was forced to shut down due to electricity shortages (para 5.05), a study was launched aimed at determining the most economic alternative for the three shareholder states. Three basic alternatives were reviewed: (i) continue CIMAO's operations as soon as electric power is available (option I); (ii) close CIMAO temporarily for about two years (option II); or (iii) close CIMAO permanently and dispose of its assets in the best available manner (option III). Under options I and II, the alternative ot reducing CIMAO's operating costs by conversion of the kilns from fuel oil firing to coal firing was also studied. Since under all alternatives, the three states had to service CIMAO's existing debt, the plant was again considered as a sunk investment. The study was performed by SCF, CIMAO's technical assistant. After reviewing the study, the Bank concluded that option III was the least costly for the economies of the three states. Over a ten-year period, the present value of the costs of option I under the fuel oil alternative would exceed the costs of option III by about CFAF 49 billion (US$107 million). X coal conversion requiring an investment of about CFAF 4.4 billion (US$10 million) would bring substantial savings to CIMAO but this alternative would still cost, on a present value basis over ten years, CFAF 34 billion (US$76 million) more than the option of closing down the plant. The costs of the options are shown in Annex 10. The analysis was based on the assumption that when CIMA0 would produce, all the three countries would meet their total requirements of clinker from CIMAO and would actually pay the price set by CIMAO. This could be considered as optimistic in view of the past history (paras 2.24-2.25 and 2.27), and there was a considerable risk that actual costs would be higher. - 89 - 7.03 The study was also based on the assumption that CIF prices of imported clinker would remain constant in 1984 terms at CFAF 13,000 per ton. With freight costs at about US$10 per ,on, this price corresponds to an FOB European price of CFAF 8,500 (US$18.9) per ton. At such a price, European plants do not cover their full costs but variable costs are fully covered and there is a contribution to fixed costs. Due to the small proportion of clinker sold at this price, European producers can afford to price clinker at less than full costs (para 2.20). 7.04 The production of clinker is energy intensive and CIMAO does not have any comparative advantage in this area since fuel oil or coal has to be imported. At the produLtion level of 770,000 tons in 1985, as projected in the study, CIMAO's ex-factory costs of clinker, excluding depreciation and financial expenses, were projected at CFAF 16,019 (US$35.6) per ton. After a coal conversion, the costs would be reduced to CFAF 13,664 (US$30.4) per ton. The latter would include the depreciation and financial expenses related only to the coal conversion investment. A review of a few European plants indicated a range of ex-factor7 costs, including full depreciation and financial expenses, of US$22 to US$36 per ton with an average cost of about US$26 per ton. Annex 11 shows details of CIMAO's costs and of an average European plant. 7.05 In September 1984, the shareholders decided to keep the plant closed for & period of 29 months during which the market prospects and a coal conversion would be studied. They asked the private owners of the grinding plants in the three countries to review CIMAO's operations, evaluate the potential for cost reductions to make it competitive and consider the possibility of taking over CIMAO's operations under a selling or leasing arrangement. Cost reductions on coal, technical assistance and administrative expense might be achievable by an experienced private operator but it is doubtful that the cost reductions would be sufficient to reduce CIMAO's delivered cost of clinker to the international price level. As of now, the grinders have not made a proposal for taking over the plant. VIII. BANK'S ROLE AND LESSONS LEARNED A. Bank's Role 8.01 The Bank help d the Borrowers considerably in completing the financing plan for this complex project. However, the Bank did not hold its original line of requesting an integration of the clinker plant and the grinding mills by having a cross-ownership between them. This possible safety guard being removed, the Bank was overoptimistic in considering the market as captive and in its assessment of international prices of clinker. 8.02 The Bank helped the Borrowers in following up the implementation of the project. Considering the complexity of the project, the physical implementation proceeded rather well. The Bank was also helpful in identifying the management problems during that period, although it stopped short of recommending more drastic remedies. The Bank was instrumental in helping CIMAO to identify early its financial problems and help it to find - 90 - solutions. It eve. jecame so involved in the project that there was at one time a pervasive feeling by the Borrowers that this was "the Bank's [and other colenders'] project," although it Is clear from the early history of the project that Togo and Ivory Coast were the leading forces behind it. B. Lessons Learned 8.03 Optimizing the design of a plant to arrive at the lowest investment costs is a difficult task which requires applying much pressure on the designers toward reducing excessive safety margins and providing less expensive technical solutions. The party who is in the best position to do so is an experienced owner-manager that knows both design and production and commits its own money to the project. In a project such as CIMAO, where a new organization was created with no financial link to an experienced operating company, an owner representative, in fact the technical assistant, was appointed. However, such an assistant does not have the motivation to reduce safety margins, his main objective being that the plant operate without problems. The need to have an owner-manager can be satisfied by having an experienced operating company own a substantial share of the project and operate it. 8.04 A crucial element in the proper implementation and operation of a project is a strong and competent management. This can also be best solved by the above arrangement in the first few years during which competent local nationals will be trained. A management contract with an operating company may be a second best solution, if experienced local management is not available.. 8.05 When the possibility of installing production capacity in step is available (e.g. kiln by kiln), the advantages/disadvantages of the alternatives should be closely examined. Although installing a smaller capacity will result in higher production costs per unit in the initial stage and also higher investment costs in total, the binefits of getting operating experience on a smaller unit and identifying problems which can be corrected before or when expanding capacity may outweigh the added costs. C. The Future of CIMAO 8.06 After several unsuccessful attempts to interest private investors with grinding plants in the Ivory Coast and Togo to take over the CIMAO facilities on an operating contract basis, it is now evident, that given the present and potential long term excess supply of cement, particularly to the West African market. There is little hope for the restart of CINAO operations in the near term. The Governments have de facto decided to mothball the facilities until a suitable buyer can be found, or until market prospects improve. Given the slim chances of the latter event, the basic remaining option appears to be to find a suitable buyer, willing to dismantle the plant for possible reinstallation in some other growing market. However, as of this date the mothballing has not been carried out thereby further diminishing the options available to the owners. Possible areas of interest would be mainly in the Asian region, with continued short supply of cement and growing cement demand. A properly structured sale could provide the Governments with sufficient cash to cover a major part of the debt burden. -91 - ANNEX 1 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Cement - Clinker European Data a/ (excluding Eastern Europe) (Million tons) 1978 1979 1980 1981 1982 1983 Capacity N.A. 260.9 268.0 N.A. 263.3b/ 264.6b/ Total Production 214.8 213.0 212.2 209.3 202.4 197.6 Exports Outside Europe Clinker 5.2 4.6 3.5 4.0 2.5 2.3 Cement 18.5 17.4 18.0 22.8 24.8 24.7 Total 23.7 22.0 21.5 26.8 27.3 27.0 -mx - = vMv:= =MI Capacity Utilization (%) N.A. 82 79 N.A. 77 75 Export as % of Production 11.0 10.3 10.4 12.8 13.5 13.6 a/ Source CEMBUREAU. b/ Includes estimates for Belgium, Germany, Greece, Turkey. Industry Department August 1985 - 92 - AN1NEX 2 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-AF/1296-TO/1297-IC/1298-GH) CIM&O RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-G0) Clinker Consumption ('000 t) Actual Projected 1970 1975 1977 1979 1981 1982 1983 1984 a! 1985 1990 Togo 64 113 162 192 168 169 175 162 150 162 Ghana 420 631 553 236 380 246 238 210 210 227 Ivc%ry Coast 405 618 865 1,072 812 755 627 455 380 411 Total 889 1,362 1,580 1,500 1,360 1,170 1,040 827 740 800 a/ Estimate. Industry Departmnt August 1985 93 - ANNEX 3 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Allocation of Funds (US$) Category Allocation Disbursements Equipment 8,600,000 8,945,298.48 Civil Works 29,400,000 40,343,953.18 Consultants' Services 4,700,000 5,422,602.09 Staff Training 1,800,000 1,751,284.02 Interest & Other Charges on the Loan Accrued On or Before June 30, 1980 5,500,000 3,536,871.23 Unallocated 10,000,000 0.00 Total 60,000,000 60,000,000.00 Industry Department August 1985 -94 - ANNEX 4 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Project Cost Appraisal a/ Actual b/ CFAF US$ CFAF US$ Million Million Million Million Industrial Complex Packages A : Quarry Equipment 2,140 9.5 2,290 10.5 B : Crusher 810 3.6 1,510 6.9 C1 : Prehomo 1,440 6.4 1,745 8.0 C2 : Foundations Prehomo - - 413 1.9 C3 : Roof Prehomo - - 779 3.6 D : Kiln 15,460 68.7 13,460 61.5 E : Handling Equipment 470 2.1 302 1.4 Fl : Electric Equipment 3,400 15.1 1,654 7.6 Gi, G2: Laboratory & X-Ray 90 0.4 124 0.6 E1,2,3: Workshop Equipmenz 400 1.8 568 2.6 J : Control Equipment 675 3.0 536 2.5 X1, 2 : Cranes 110 0.5 50 0.2 Li : Civil Works 13,415 59.4 16,687 76.2 L2-L7 : In-plant Terminal - - 633 2.9 N1-N7 : Misc. Small Lots - - 847 3.9 Subrotal Plant & Equipment 38,410 170.5 41,598 190.3 Training 1,010 4.5 781 3.6 Technical Assistance 565 2.5 737 3.4 Engineering 1,170 5.2 1,533 7.0 Pre-operating Expenses 2,900 12.9 4,366 19.9 Subtotal Project Costs 44,055 195.2 49,015 224.2 Interest During Construction 3,460 15.4 2,074 10.1 Working Capital 1,985 9.0 2,050 9.8 Total Financing Required by CIMAO 49,500 220.0 53,139 244.1 Infrastructure Power 787 3.5 750 3.4 Township 1,293 5.7 1,850 8.5 Railway 6,862 30.5 6,950 31.7 Port Terminal 5,143 22.9 5,950 27.2 Subtotal Fixed Assets 14,085 62.6 15,500 70.8 Interest During Construction 315 1.4 400 1.8 Total 14,400 64.0 15,900 72.6 Total Project Cost c/ 58,140 258.4 64,515 295.0 Total Financing Required d/ 63,900 284.0 69,039 316.7 a/ US$1 - CFAF 225. b/ US$ - CFAF 219 (average rate). c/ Excluding working capital and interest during construction. 7/ Including working capital and interest-during construction. Industry Department August 1985 - 95 - ANNEX 5 PROJECT COMPLETION REPORT TOGO /GHANA/IVORY COAST CIMAO REGICNAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Cumulative Disbursement Schedule of IBRD Loans a/ (US$ million) Year Quarter Appraisal Actual 1977 I - - II 5.0 - III 10.0 - IV 13.8 - 1978 I 20.0 - II 26.3 8.3 III 31.4 14.4 IV 37.4 22.6 1979 I 43.0 23.2 II 50.5 29.6 III 51.1 41.5 IV 51.1 41.5 1980 I 51.1 47.8 II 54.5 56.4 a! Excluding interest during ;.onstruction estimated at US$5.5 million at appraisal and actually disbursed US$3.6 million. Industry Department August 1985 -96 - ANNEX 6 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Restructuring Project Costs For- For- ei a Local Total eign Local Total ---(CFAF million)--- -(US$ million) a/- Fuel Oil 5,308 1,076 6,384 15.6 3.2 18.8 Technical Assistance 634 - 634 1.9 - 1.9 Spare Parts 270 - 270 0.8 - 0.8 Equipment 480 240 720 1.4 0.7 2.1 Base Cost 6,692 1,316 8,008 19.7 3.9 23.6 Physical Contingencies 414 81 495 1.2 0.2 1.4 Price Contingencies 477 99 576 1.4 0.3 1.7 Total costs 7,583 1,495 9,079 22.3 4.4 26.7 Working Capital 305 1,024 1,329 0.9 3.0 3.9 Unpaid Bills 1,039 3,984 5,023 3.0 11.7 14.7 Suppliers' Credit Due 1,218 - 1,218 3.6 - 3.6 Interest During Project Implementation 377 630 1,007 1.1 1.9 3.0 Total Financing Required 10,522 7,134 17,656 30.9 21.0 51.9 a/ US$1 - CFAF 340. Industry Department August 1985 - 97 - ANNEX 7 Pi.aJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1127-GH) Restructuring Project - Equity Lending Allocation (US$ million) ID1A %CCE EIB Total Togo 5.7 3.5 2.4 11.6 Ghana 9.3 - 2.3 11.6 Ivory Coast - 9.3 2,3 11.6 Total 15.0 12.8 7.0 34.8 Industry Department August 1985 - 98 - ANNEX 8 PROJECT COMPLETION REPORT TOCO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Restructuring Project - Allocation of IDA Credits ($'000) Catexor_ Allocation Disbursements Fuel 11,950 - Technical Assistance 1,350 - Spare Parts 700 - Unallocated 1,000 - Total 15,000 Industry Department August 1985 - 99 - ANNEX 9 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Production on One Kiln from July 1983 to December 1983 July Aug. Sept. Oct. Nov. Dec. Production ('000 t) 56.7 40.2 59.0 64.1 55.5 58.3 Production per Day (t) 1,829 1,295 1,903 2,067 1,791 1,882 Capacity Utilization a/ (%) 91.5 64.8 95.1 103.4 89.6 94.1 a/ On basis of guaranteed capacity of 2,000 tpd. Industry Department August 1985 - 100 - ANNEX 10 PROJECT COMPLETION REPORT TOGO/GHANA/IVORY COAST CIMAO REGIONAL CLINKER PROJECT (LOANS 1295-WAF/1296-TO/1297-IC/1298-GH) CIMAO RESTRUCTURING PROJECT (CREDITS 1326-TO/1327-GH) Cost of Options a/ (CFAF billion) Option I Option II Option Continue Close for III Operations 2 Years Permanent Fuel Coal Fuel Coal Closure Cost of Clinker b/ 136.1 115.5 128.7 112.4 94.8 Investments c/ 4.6 8.8 3.2 6.6 (0.4) Working Capital Requirements 2.2 4.4 2.9 4.8 - Total 142.9 128.7 134.8 123.8 94.4 Incremental Costs over Option III 48.5 34.3 40.4 29.4 - Incremental Costs Expressed in US$ million d/ 107 76 90 65 a! Present value at 127 p.a. of annual costs (in current terms) from 1984 to 1994. b/ Production costs of CIMAO excluding financial expenses and depreciation when CIMAO is producing. International prices otherwise at CFAF 13,000 in constant 1984 terms. c/ Routine capital investment plus coal conversion if applicable. d/ US$1 - CFAF 450. Industry Department August 1985 - 101 - ANNEK 11 PaC COM MOPIEfION PETR 10/GHWIor CasT CIDW REGIONIAL CLDEE ROEC (IDANS 1295-WAF/1296-1/1297-IC/1298-E) CIMA RESIWMRING PmECt (CREDIIS 1326-0/1327-GI) Production Costs (1984 Prices) Average Furopean CIMAO a/ Producer Kiln Operation: Fuel Oil Coal Coal CFAF/ton $/ton b/ CFAF/ton $/ton b/ ton b/ Production (000's t)/ Capacity Utilized (%) 770,000/64% 75% Variable Costs Fuel 9,099 20.22 5,976 13.28 7.6 Electricity 1,747 3.88 1,747 3.88 2.7 Supplies 657 1.47 657 1.47 3.3 Fa-factory Variable Costs 11,503 25.57 8,380 18.63 13.6 Fixed Costs Salaries 1,354 3.01 1,354 3.01 Technical Assistance 866 1.92 866 1.92 Mintenance 847 1.88 847 1.88 Other Admitistr-tive & Selling 1,449 3.22 1,449 3.22 Subtotal Fixed Costs 4,516 10.03 4,516 10.03 7.6 Total Operating Costs Ex-Factory 16,019 35.60 12,896 28.66 21.2 Depreciation on Coal Investment - - 396 0.88 3.9e/ Interest on Coal Investment - - 372 0.83 1.2c/ Total Production Costs Ex-factoty 16,019 35.60 13,664 30.37 26.3d/ Transport to 1ort of Shipomt 770 1.71 770 1.71 1.2 PUB lbrt of Shipment 16,789 37.31 14,434 32.08 27.5 Shipping Cost of CDIAO to Gus & Ivory Coast 2,475 5.50 2,475 5.50 CIF Costs of CDW CLinker 19,264 42.81 16,909 37.58 CIF International Price 13,000 28.89 13,000 28.89 a/ 1985 projected production. b/ US$1 - CFAF 450. c/ Total plant depreciation and interest. d/ Review of a few plants indicates a range from US$22 to US$36. Industry Departnent August 1985