28357 NUMBER 48 *E Preci's Operations Evaluation Department June 1993 Coal for Power Generation Projects recently audited by OED* Approach requires a large inventory of some in Indonesia, Thailand, and Turkey 14,000 different parts, but the mine is shared the goal of developing coal for The Bukit Asam project, the first so remote that parts and equipment use in electricity generation, either to major coal project in Indonesia, was are difficult to obtain. Shortages of reduce the need for imported oil or, in an ambitious undertaking for foreign currencies also caused delays Indonesia, to save oil for export. agencies with little mining experi- in obtaining parts. The risks of using ence. The Bank took an unusually BWE in the rainy climate of Bukit While the Mae Moh lignite prominent role in supervising the Asam were underestimated, leading projects in Thailand were successful, design, engineering, development, to serious shortfalls in the excavation the Elbistan project in Turkey and the and analysis of the project. Several rate. A shovel-truck-conveyor Bukit Asam coal project in Indonesia early decisions strongly influenced system would have been a better were not. Elbistan, a very large the project's unfortunate outcome. choice. investment, has also been particularly disappointing to date. All the projects Management: Though the main Prices and production costs: The require follow-up action to mitigate parties in the project broadly agreed economic value of Air Laya coal in their effects on the environment. on the goals for mine development 1991 was only 28 percent of the and coal transport, they did not appraisal estimate. Coal prices have In all three countries, the quality of resolve important differences over fallen by about 70 percent in real project management was crucial. The organizational and procurement terms since the project was appraised, experiences offer lessons for the future. procedures. Authority for the project remained dispersed across three Pefrac Audit Report, Indonesia entities-the mine company, the I7nesia: Cad A Iinand railway company, and the shipping Trnot Pr/t.BklAan In the early 1980s the Bank company-which were under the Coal Mining Developntentand supported Indonesia's move to jurisdiction of different ministries, Transport Project, Coal E xploration diversify its energy sources. Greater and the project lacked strong man- Engineering Project", Report No. domestic use of coal would release agement. Despite the Bank's con- 10829, fune 1991: Perforiance oil for export, helping to sustain cern, based upon prior experience in Audil Report, 77ailand: Aie Aloh foreign exchange earnings. A loan Indonesia and elsewhere, about the Lignite Projectand Second Mae for $185 million (1982) supported the government's ability to coordinate Moh Li nite Project'. Reprt No development of the Air Laya mine at such a complex project it did not 1 "Perf6rianct Bukit Asam in South Sumatra, to make the loan conditional on an supply coal for power generation at effective management structure. P Second Tek Tra,si,sion Suralaya, and the construction of a HLtdroptwer related transport facilities. Plans to Technology choice: A bucket- Project, Thirdka n develop the mine were synchronized wheel excavation system (BWE) was with those for the Suralaya power selected before conclusive data were Pruject, lbistaneroject". station, its "captive" customer, whose available on the characteristics of the Pr1 c3 development was separately sup- coal seam. In retrospect, BWE was Report are Aail to9an ported by the Bank. Initial plans the wrong technology for Bukit Eeports ire andilato from were for lignite production of 3 Asam: it is an inflexible system te Dorsnd snit frim million tons a year (mtpy) by 1987, to requiring a high degree of organiza- supply Suralaya's first two 400MW tion and planning, and technical staff from Regional Itrinition Seivices h adancedraing ICenter. untswhageance trtlaining experi- Hence the same consultants could be Box: Environmental Issues involved with both the engineering/ feasibility and subsequent construc- Bukit Asam times higher than in the reservoirs. tion phases. Close supervision is Environmental staff may need to be needed in such cases, to eliminate the The main environmental concern strengthened to enable EGAT to risk of biased recommendations. during project appraisal was to monitor and manage pollution prevent damage to water resources, problems at the mine. Risks associated with important and PBTA agreed to prepare guide- features of the project were either lines on water pollution control and to EGAT sets aside about 1 percent of poorly defined or significantly meet pollution control guidelines at revenue for an impressive ongoing understated; more thorough analysis the mine site and shipping terminal. plan to return the land disturbed by would have yielded significant Yet borrower and Bank paid little mining to a better-than-original state. doubts on the viability of the project attention to environmental protection The plan includes reforestation, a as designed. during the construction phase. plant nursery, and cultivation Improvements have been made since programs. Results then. Dams at the dump site prevent mud and water runoff, topsoil is being Elbistan spread on reclaimed areas, and fast- After a four-year delay in com- growing trees have been planted. Under normal crcumstances, plant pletion, the mine was producing 20 Water quality is adequate in the operation at Elbistan complies with percent below its 3 mtpy goal. The settling ponds. Effluent discharge Turkey's and the Banks environmen- high investment cost of developing needs more thorough monitoring. tal standards in force at the time the the Air Laya mine, and the continuing project started. Fly-ash emissions wide gap between its design capacity Mae Moh from the power station are sometimes and actual rates of operation, means above maximum limits; if the lignite that its financial rates of return will Lignite from Mae Moh has very received were of consistent quality, continue to be negative. high sulfur and ash content, and there would be no problem complying though the later power units have with environmental regulations. PTBA suffered mounting losses higher stack heights, sulfur dioxide on account of falling coal prices, the levels may have reached the maxi- Progress on afforesting the substantial shortfall in coal produc- mum permitted by Bank standards. reclaimed mine area is satisfactory Future power units will require more and the plant and mine effluents are y sophisticated measures to contain properly disposed of. Much of the interest due on the loans used to sulfur dioxide. water pumped from the mine is used develop the mine and related facil- for irrigation, ties. Its operations in the region are EGAT is reviewing the arrange- being restructured, with the gover- ments for ensuring water quality at In 1992, environmental quality in ment assuming a much higher Mae Moh. Contaminant levels in the the plant area at large was not proportion of its debts. reservoirs are higher than permitted adequately monitored; the Bank by World Bank and/or National should follow up on the actual levels The failure of the Air Laya mine Environmental Board standards for of pollution and the availability of to meet its output targets led PTBA to surface water, and those in waters pollution monitoring equipment expand production in other mines at associated with the mine are several originally installed under the project. Bukit Asam with the help of private __________________________________________________ contractors using shovel/truck-based techniques. These other mines are and the economic analysis at Contractors' performance: Con- highly profitable, with a production appraisal underestimated the tractors were often selected without cost only 29 percent of that at Air downside price risks. Neither did it regard for ability or experience, and Laya. compare costs in similar mines some were chosen just to obtain elsewhere. Such analysis might small cost savings. Components Thailand have led to an in-depth review and involving rail line upgrading, bridge subsequent revision of the project. rehabilitation, mine service facilities, In Thailand, the Bank supported Investment costs per unit of capaci- and rail service facilities suffered as a two highly successful projects to help ty were 4 - 5 times higher at Air result. the Electricity Generating Authority Laya than those of mines in coal of Thailand (EGAT) expand lignite exporting countries. Combined Consulting services for feasibili- production for power generation at with the difficulties the mine has ty studies, design, and construction Mae Moh. The projects supported a had in attaining production targets, supervision were provided by a joint national energy development strategy the cost of production of Air Laya venture of firms and subcontractors to reduce Thailand's heavy depen- coal is about twice the net sale price, with different areas of expertise. dence on imported fuel. June 1993 The first project ($72 million, increase in staff numbers was worth- million in 1974 to the Turkish Elec- approved 1980), helped finance the while, because it provided a core of tricity Authority (TEK) and the expansion of lignite output to 2.8 trained personnel to serve the next Turkish Coal Authority (TK), to mtpy, to support the growth of the stage of mine expansion. support a 4 x 300 MW power plant, Mae Moh power station to 375 MW. transmission lines, and an opencast The second project ($59 million, Low production costs: Production mine supplying up to 18 million approved 1984) was designed to raise costs of lignite at Mae Moh fell during mtpy of lignite to the power plant. lignite production to 5 mtpy, to project implementation and are now increase generation capacity at Mae lower than f.o.b. prices for Australian Implementation Moh to 825 MW. coal. In most producer countries, opencast lignite mining under over- The Elbistan loan became Approach burden conditions like Mae Moh's effective two years after approval, in cannot compete with opencast coal 1976, but large cost overruns led the Management: Projects were mining. Lower production costs have loan to be drawn down much in implemented on schedule, and EGAT not only benefitted EGAT and its advance of progress on construction, showed a high level of initiative and customers, but have also made more despite major delays. Five years into vision. The Mine Department was set of the lignite deposits economically the project, the mine was only 15 up as a separate implementing unit recoverable. percent completed, and its commis- and profit center within EGAT. This sioning was delayed by seven years. gave the department enough authori- Bank's role: The Bank played a Some 20 years after construction ty to operate successfully and to be significant role in supporting design began, the power plant is still not financially viable, and it has formed a and engineering work at appraisal. It working satisfactorily. The disap- core of trained and experienced helped in the creation of profit centers pointing outcome reflects both technical and supervisory staff. For and lignite pricing guideines within repeated shortages of funds and poor the second project, overall responsibil- EGAT, and ensured that the long-term project management. ity was entrusted to the directorate of mine management plan and power the department, with management plant development program were Progress on the project was responsibility delegated to the deputy carried out. strongly affected by the political director, an engineer with long environment and by Turkey's experience at Mae Moh. Results economic performance, which in turn was affected by national and global Private sector involvement: During Both projects achieved most developments, especially the oil price implementation, EGAT engaged production targets within appraised increases of 1973 and 1979. The domestic private contractors for much costs. The lignite produced had government that came to power in of the overburden removal and somewhat higher calorific value than 1975 defaulted on agreements the transport operations. This greatly expected. At the time of audit, the previous government had reached reduced costs and the concomitant power station had reached a generat- with the Bank. In response the Bank need for Bank financing; 75 percent of ing capacity of 1,725 MW, some 900 postponed the effectiveness of the second loan was canceled. MW greater than that foreseen by the approved loans and interrupted the mining projects. The mine has enough processing of operations in the Technology choice: EGAT's choice proven economically mineable lignite pipeline. A foreign exchange crisis in of technology was conservative but to support the planned expansion to the later 1970s limited the availability had the virtue of flexibility and a 4,425 MW peak generating capacity. of funds for the project, and the proven operating record. Excavation project's own cost overruns com- in the first project used a truck/shovel Turkey pounded the funding problem. By and lignite conveyor system similar to the early 1980s, when government, that already used at Mae Moh; in the The Elbistan mining and power the IMF, and the Bank were collabo- second project, a truck/shovel system project was one of several projects the rating closely over a series of success- was successfully combined with semi- Bank supported in the 1970s and 1980s ful structural adjustment programs, mobile crusher and conveyor systems. to increase Turkey's power generation TK enjoyed the benefits of im- and transmission capacity, using non- proved power tariffs. But in the later In the early stages, frequent exportable resources (hydropower 1980s, fiscal discipline weakened as breakdowns of equipment depressed and lignite). These projects also elections loomed, and TK was production. Some difficulties also sought to strengthen Turkey's power technically bankrupt by 1990. arose from lack of operating skill and agencies, improving their personnel inexperienced maintenance. They policies, financial performance and Issues were rectified by hiring more staff management, project management with theoretical knowledge and capability, and training. For Elbistan, Management: Adding to the giving them hands-on training. The the Bank approved a loan of $148 difficult political and economic tED Prrsis circumstances were a number of the problem, but TKI has no financial suitable for the geophysical condi- shortcomings: incentive to do this. A new supply tions, but also for the level of exper- contract is needed between TEK and tise of people who will use it, the * Two entities (TEK and TKI) T that would include bonuses or weather conditions, and the ease of shared responsibility for an integrat- penalties for positive or negative procuring parts for maintaining ed project, and arrangements for departures from a specified fuel equipment. coordination between the two were quality. set too high above the working level. Organizational arrangements: Results Before loan approval, agreement * Site managers were allowed needs to be reached on an organiza- very little authority by either agency. Elbistan has cost roughly $2.5 tional structure for project implemen- The extreme centralism prevented billion in current terms: 258 percent tation that will provide for effective the effective use of the-much of the original cost estimate. At the management and control. Projects needed-expertise of the engineer- completion of disbursements on the that involve major physical facilities ing consultants. Bank loan, the economic rate of should have a detailed implementa- return of 3 percent was much lower tion plan, to which the borrower and * Both TEK and TKI had to apply than the 18 percent expected at Bank are firmly committed, spelled rigid government salary scales appraisal. Cost overruns in real out at the outset. which were too low to attract the terms were 100 percent, 75 percent, highly qualified staff needed to and 100 percent respectively for the Procurement: Simple, fair, and implement such a demanding power plant, the mine, and the expeditious procurement procedures project. transmission components. are a key requirement for successful implementation. The institutional goals of the The lignite mine should have project were not achieved. By the ample reserve capacity when the fuel Use of private contractors: Mae early 1990s TEK was still highly requirements of the power plant Moh's successful experience shows centralized. It lacked adequate reach their maximum. The excava- how the use of private contractors for capacity for power system planning tion equipment is working satisfacto- major operations can add needed and for project management; its rily; the mining equipment is well flexibility when labor needs vary over internal coordination was poor and maintained; and, unusually for a time, or when there are important its procedures cumbersome. It Turkish public enterprise, TKI's procurement needs throughout a lacked autonomy in financial and managers at the mine seem to have project. personnel matters. Several of these reasonable spending authority. problems were taken up again by However, the mining equipment is "Borrower ownership": Borrowers follow-on projects. underused, and TKI suffers losses on and their implementing agencies the mining operation equivalent to need to "on not only the physical Risks were underrated. The about 15 percent of revenues, goals of the project, and arrange- excavation technology chosen was ments for implementation, but also entirely new to Turkey. Arrange- Lessons the associated goals and arrange- ments for managing the project were ments for strengthening institutions. known to be too centralized. Other Information: Experience at Bukit Experience at Elbistan emphasizes risks associated with TEK's institu- Asam and Elbistan emphasizes that that centralism, competition among tional weakness-especially con- large and complex mining projects bureaucracies, and reluctance to cerning the availability of enough need exhaustive preparation. Thor- delegate authority can negatively qualified staff-were underestimat- ough ground investigation needs to affect the outcome of a project and ed. be done before feasibility studies, or cannot be easily be altered. evaluations of alternative mining Fuel quality: An important systems and equipment, are begun. Supervision: Project supervision reason for the poor performance of should include frequent site visits, the power plant is that the lignite Technical risks: A design or since the perspective of people close TKI supplies varies widely in technology needs to be evaluated in to a project often differs widely from quality. Better mixing of lignite the context in which it is to be used. that of senior officials in government before it leaves the mine could solve Excavation technology needs to be or utility companies. Evions Evaluation Department of the World Bank to help disseminate recent evaluation findings to conrac is& nede betweend TEK and tieofpopewhrilasei,th development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments or enquiries to the managing editor, Rachel Weaving, E-1204, World Bank, telephone 473-1719. June 1993