Madagascar - Ilmenite Mining Engineering Credit Project

Document of The World Bank FOR OFFICLAL USiE ONLY Report No. 12790 PROJECT COMPLETION REPORT MADAGASCAR ILHENITE MINING ENGINEERING PROJECT (CREDIT 1928-MAG) FEBRUARY 25, 1994 Industry and Energy Operations Division South-Central and Indian Ocean Department Africa Region This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EOUIVALENT UNITS Currency Unit = Malagasy Franc (FMG) US$1.00 = FMG 1,250 (March 1988) US$1.00 = FMG 1,795 (October 1993) WEIGHTS AND MEASURES Metric System ABBREVIATIONS BP - British Petroleum EIAS - Environmental Impact Assessment Study OMNIS - National Military Office for Strategic Industries MIEM - Ministry of Industry, Energy and Mines DGM - Department of Geology and Mines BRGM - Office of Geological and Mining Research (FRANCE) QIT - QIT - Fer et Titane Inc. (CANADA) QMM - QIT Madagascar Minerals Ltd. & Co. RTZ - Rio Tinto Zinc FISCAL YEAR January I - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Madagascar - Ilmenite Mining Engineering Project (Credit 1928-MAG) Attached is a copy of the report entitled "Project Completion Report on Madagascar - Ilmenite Mining Engineering Project (Credit 1928-MAG)" prepared by the Africa Regional Office. The Borrower has prepared Part II. It also contains an unusual and interesting section prepared by the private sector joint venture partners of the Borrower. The PCR is of satisfactory quality. The project was a link in the chain of activities which would have led to the development of a large deposit of ilmenite (a titanium compound ore) in Madagascar. At the inception of the project, it was expected that the output of the project would come into the market at a very opportune moment in the supply/demand cycle. In the event, a drastic upward revision in the estimated cost of the development project (from $194 million in 1987 to $260 million at the end of 1988) derailed the implementation of the project as much time was spent between the Bank, the Borrower (National Military Office for Strategic Industries (OMNIS)) and the foreign private sector joint venture partner (QIT - Fer et Titane Inc. - Canada) in resolving the issue of financing. As a result, the major objective of advancing the engineering phase of the project was not met, though some funds were utilized for technical and legal assistance to OMNIS. An Environmental Impact Assessment was also partially completed through QIT and financed by funds other than the IDA credit. Although the current market situation may not support the implementation of the development project, these ilmenite reserves remain among the most prospective for titanium production. It is, therefore, likely that these engineering studies will have to be pursued in some future date. As for this project, the outcome is rated as unsatisfactory since it did not achieve its major relevant objectives. The sustainability of the project is uncertain given the cloudy market prospects for ilmenite. On the other hand, the project has had substantial institutional impact through technical and legal assistance. No audit is planned. R. Picciotto by H. Eberhard K6pp Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MADAGASCAR nLMEMNTE MaNING ENGINEERING PROJECT (Credit 1928-NAG) TABLE OF CONTENTS Page No. PREFACE .............................................. EVALUATION SUMMARY ...................................ii PART I: PROJECT REVIEW FROM THE WORLD BANK'S PERSPECTIVE ... 1 I. Project Identity ............. ................. 2. Background ..................................... 3. Project Objectives and Description. . . . 3 4. Project Design and Organization. . . . 3 5. Project Implementation. . . . 4 6. Project Results. 5 7. Project Sustainability. . . . 6 8. Bank Performance.... 7 9. Borrower Performance. . . . 7 10. Project Relationships ...... ........................ . 8 11. Consulting Services ...... ........................ . 8 12. Lessons Learned ....... ......................... . 8 PART II: REVIEW OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE 9 1. Acknowledgements ................................. 9 2. Introduction ..................................... 9 3. General Evaluation ................................. 9 4. Prospects ....................................... 11 5. Borrower's Performance .12 6. Bank's Performance .12 7. Relationship between Borrower and Bank .13 8. Performance of Consultants and Contractors .13 9. OMNIS' Comments on the Bank's Part of the Report .13 PART III: STATISTICAL INFORMATION ......................... 15 ANNEXES: Comments by QIT on Part I of the Report ...................... 21 Comments by QIT on the term environment;l Impact Study ...... ..... 25 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.   PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) PREFACE This is the Project Completion Report (PCR) for the Ilmenite Mining Engineering Project, for which Credit 1928-MAG in the amount of SDR 6.2 Million was approved on May 25, 1988. The Credit was closed on June 30, 1993 and the undisbursed amount of SDR 3.7 cancelled. Only SDR 2.5 were disbursed and the last disbursement was in March 1993. The PCR was prepared by the Industry and Energy Operations Division of the South- Central and Indian Ocean Department of the Africa Regional Office (Preface, Evaluation Summary, Parts I and III). The Borrower's comments have been incorporated as PART II and comments from QIT, the foreign private investor, as an Annex. Preparation of this PCR was based, inter alia, on the Staff Appraisal Report; the Credit and Project Agreements; supervision reports; correspondence between the Bank and Borrower and internal Bank memoranda.  I  ii PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) EVALUATION SUMMARY Objectives 1. The primary objective of the Engineering Project was to support the acquisition of all information needed to complete the feasibility study and basic engineering for an ilmenite mining project in Madagascar. Credit 1928-MAG, financing this project, was designed to enable its beneficiaries, the Government of Madagascar and OMNIS, the agency entrusted with promoting the development of Madagascar mineral and petroleum resources, to carry out the obligations OMNIS had entered into in its Joint Venture with a well qualified foreign private investor, QIT-Fer et Titane Inc. (QIT) of Canada, for the development of important ilmenite deposits located in the southeast of Madagascar. Mining of these deposits would provide Madagascar with substantial foreign exchange income and provide an important source of employment and export diversification. The successful participation of a reputable international firm in the mining project was also considered an attractive feature for the promotion of foreign investments in Madagascar, as part of a policy promoting a more open economy. 2. The project was expected to finance the following activities: preliminary and basic engineering; the setting-up of pilot plant; capital and operating cost estimation; market analysis; some detailed drilling; improvement of site access; and an environmental study. 3. The completion of an Environmental Impact Assessment Study (EIAS) on the Natural Environment was a significant component as the mining operations would be carried out over an area with tracts of littoral tropical rain forest which is a fragile ecosystem. As Madagascar's rich but seriously threatened endemic biodiversity attracts worldwide attention for its preservation, the proposed mining project provided an opportunity to test the feasibility of sustainable development and diversification of the export base in a very poor country trying to improve the well being of its people. The EIAS was the first of its kind for Madagascar and became, in itself, a very important component of the project (para 3. 1). Implementation Experience 4. Implementation of a major portion of the engineering project was held in abeyance at an early stage of the Credit for a number of reasons. These included change in ownership of the private sector partner; a rapidly chlanging market outlook for the product; and revised cost figures for the mining complex which rendered its economic feasibility marginal. An active interaction then developed between the parties in the Joint Venture and between them and the Bank to redesign the mining project by looking into measures to reduce the investment cost and/or increase output. At the same time, as new policies in NMadagascar were aiming to reduce State intervention in the economy, the dialogue was also directed to changing the formula of  iii OMNIS/QIT share participation and the legal statutes of the Joint Venture, the objective being to increase the private sector share. 5. Only one, albeit important, component of the engineering project, the EIAS, was implemented. However the EIAS was financed by QIT from its own resources in an effort to avoid possible delays associated with Bank procurement guidelines. The Credit financed technical and legal consultants who assisted OMNIS in the evaluation of project alternatives and in frequent negotiations with QIT. The Credit also financed OMNIS travel activities to advance the mining project with QIT and the Bank. 6. After a two-year extension to allow the continuation of the technical and legal assistance to OMNIS, the Credit was closed on June 30, 1993. Only SDR 2.5 were disbursed and undisbursed amounts (SDR 3.70 or 60% of the original Credit) have been cancelled. 7. While efforts to redesign the mining project had not yet come to a final conclusion by Credit closing, the parties in the Joint Venture and the Bank continue discussions on project issues mentioned above. In late 1991, OMNIS and QIT decided to incorporate the Joint Venture and to reduce OMNIS share to 20%. Ratification of these decisions by the Government of Madagascar was delayed during the recent process of political transition and it is awaited before project preparation can continue. Although this transition has caused delays in finalizing agreements that would have helped accelerate project implementation, much of the difficulty seems to be related to the apparent need to put in place project-specific arrangements acceptable both to OMNIS and QIT (e.g. tax and foreign exchange arrangements) rather than rely on the overall investment and mining codes. Results 8. Only limited results have been obtained from Credit 1928-MAG as a consequence of the reasons stated above which have delayed further expenditures for preparation of the mining project. The most important achievements of the Credit have been (1) the completion of a high- quality Environmental Impact Assessment Study (EIAS), on the Natural Environment which is a prerequisite to continue the feasibility work for the ilmenite mining complex once other project issues have been properly dealt with and (2) a very important dialogue concerning the nature of the Joint Venture. The preliminary agreements reached in this respect represent important progress and constitute a solid basis under which the preparation of the mining project could proceed. Sustainahility 9. The technical and legal assistance, financed under the Credit, have had a positive institution building impact on OMNIS. The assistance has been well internalized and should allow OMNIS to perform its role in the Joint Venture once project preparation resumes. Even if this particular project does not eventually prove teasible, Madagascar is now better prepared to deal with foreign mining houses and the principle of majority private sector participation is firmly establ ished. Lessons Learined 10. The lessons learned f'roim this project primarily relate to the interaction between the Bank and a private shareholder who is a partner with a beneficiary of an IDA Credit. While  iv every effort was made by the Bank to inform QIT, the private partner and project manager, of Bank procurement guidelines and generally acceptable economic parameters for the project, it took time for QIT to appreciate the realities of working with the Bank. With regard to procurement, QIT elected to forego IDA funds rather than undertake what they considered arduous and time consuming procedures. This suggests that the possibility of other procurement procedures consistent with Bank guidelines but more suited to private sector ventures should have been explored such as sole source procurement in the case where the beneficiary's private partner has a long established relationship with a consulting group and/or supplier. 11. In summary, there is a very important role for the Bank in stimulating private sector investment, but it is critically important to realize that private sector investors are far removed from Bank procedures. While Bank staff went to great lengths to explain the requirements to QIT, a cooperative partner, there was also much to learn about private sector practices by both OMNIS and the Bank.   PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) PART I: PROJECT REVIEW FROM THE WORLD BANK'S PERSPECTIVE 1. Project Identitv Name Ilmenite Mining Engineering Project Credit Number : 1928-MAG RVP Unit Africa Country Madagascar Sector Industry Subsector Mining 2. Background 2.1 Madagascar has many mineral resources consistent with its geological continuity with the southern Africa continent. The primary minerals produced for export have been chromite, graphite, and mica, but a wide variety of other minerals have also been produced in the country, i.e. gold, industrial beryl, monazite, garnet, feldspar, kaolin, barytes, quartz, and a full range of carbonate rocks. There has also been significant production of ornamental and semi-precious stones. Many other mineral resources have been identified, but remain unexploited. Nevertheless the value of the mineral production has not been significant in the overall economy of Madagascar. The mineral sector now accounts for only 3 percent of the export revenues, down from 5 percent in 1978. The sector has been adversely affected by the interventionist economic policies of the Government in the mid 1970's and the early 1980's. 2.2 The presence of heavy mineral sand deposits in southeastern Madagascar was established in 1952 and commercial quantities of monazite were produced in the area during the early 1960s. Detailed exploration campaigns were conducted by a number of private companies, including US Steel, in the early 1970s along the eastern coast of Madagascar. These programs established the presence of signiticant reserves of ilmenite as well as commercially important quantities ot zircon and monazite. The US Steel program conducted in 1974-75 outlined a 25 million metric tons reserve of ilmenite in the southeast corner of Madagascar, in the Fort- Dauphin area. 2.3 At the time this Credit was consi(lered, the mining sector was at a stage where an open policy for private foreign and domestic investment needed to be supported. The Engineering Credit was designed to help prepare tor a large scale mineral sands project developed  2 between the Office Militaire National des Industries Strategiques (OMNIS) and a Canadian firm (QIT), a major player in the titanium dioxide slag industry, controlling about 40 percent of the world's market. At that time, QIT was wholly owned by BP Minerals. BP Minerals, including QIT, were subsequently purchased by Rio Tinto Zinc (RTZ) an international mining group. QIT had acquired the US Steel geological data and associated feasibility studies and had formed in 1986 an unincorporated Joint Venture with OMNIS (OMNIS 51 percent, QIT 49 percent) with QMM (QIT Madagascar Minerals, a subsidiary of QIT created under Malagasy law) as the operator. The Joint Venture was established to explore, develop and market the titanium-bearing sands on the east coast. The proposed project was to produce approximately 600,000 tons of ilmenite and smaller quantities of the co-products rutile, zircon, and monazite. Very preliminary estimates in 1987 placed the investment cost at around $130 million. 2.4 llmenite, a mineral combining titanium and iron oxides, occurs widely throughout the world in rock deposits and as a beach sand. Ilmenites from rock deposits contain 36-44% titanium dioxide and those from beach sands contain 45-64% titanium dioxide. Canada, Norway, Australia and South Africa are the four major producers of ilmenite. The main end use for TiO2 bearing minerals is in the manufacture of titanium pigment which consumes about 3,000,000 tons of contained TiO2 annually. 2.5 Originally, the pigment industry consumed only raw ilmenite. Over the last several decades, the pigment industry has rapidly increased its demand for upgraded ilmenites with low iron contents. Today, more that 50% of TiO2 feedstocks consumed by the pigment industry are in the form of upgraded ilmenite, principally as titanium slag, but also as synthetic rutile. QIT is the leading producer of titanium slag and would convert raw ilmenite from Madagascar into a high grade titanium slag to be sold to the pigment industry. 2.6 The ilmenite mining project was (and still is) central to Madagascar's medium term development strategy which aims to diversify exports and encourage private sector participation. Successful implementation of the project was critical in demonstrating that Madagascar's mineral potential could be realized with the participation of private foreign investment. This would have established credibility for other sectors as well. World Bank participation was also intended to provide an approach coupling the project to country policy and institutional reform strategy. The Bank's involvement was further designed to ensure that the delicate environmental questions posed by this project would be thoroughly considered and appropriate implementation options selected. 2.7 In mid-1987, following a Bank Mining Sector Mission that visited Madagascar early that year, the Government requested Bank financing of technical assistance to enable OMNIS to perform adequately in its partnership with QIT, for the preparation of an Ilmenite Mining Project. A Project Preparation Facility (PPF) of $750,000 was granted in October 1987 to finance technical and legal consultants to assist OMNIS. Funds were also provided for the purchase of minor laboratory test equipment and for OMNIS overseas promotional activities of mining proj ects. 2.8 Prior to 1987, Qll had provided all the financing for Phase I and Phase If of project preparation. This included explouiatory work to confirm quantity and grades ot the ore body and detailed drilling work in ordetr to select a mining plan for the next 20 years. It was concluded that preparation work should proceed to Phase 111. The objective of Phase III was to produce all necessary information, including the environmental impact study required to carry out the final feasibility study ot the mining operation.  3 2.9 In Phase III, OMNIS would need to step up its financial contribution to project preparation. This was interpreted as being the requirement of the terms of the Joint Venture Agreement in order to match funds already spent by QIT during Phases I and II of the preparation. Since the PPF amount would be insufficient for that purpose, the Government requested further Bank financing, which ultimately was granted through Credit 1928-MAG for SDR 6.2 million ($8.55 million equivalent), approved by the Bank's Board in June 1988. 3. Project Objectives and Description 3.1 The primary objective of the engineering project was to develop the information required for the final feasibility study of the ilmenite mining operation. Besides financing OMNIS's share of Phase III of project preparation, the Engineering Credit was designed to enable OMNIS to negotiate and fully participate in important project decisions with QIT, who had extensive experience in ilmenite production and marketing. Preparation of a satisfactory EIAS, given Madagascar's unique environmental profile, became in itself an important component of the Engineering project. 3.2 The Engineering Credit was to finance the OMNIS share of Phase III components, namely: (1) setup of a Wet Pilot and Mineral Separation Pilot Plant to optimize flowsheets developed during Phase II; (2) completion of basic engineering for the mineral separation plant, power plant, dredge and concentrator plant, and dock/harbor facilities; (3) completion of an environmental impact assessment study. Also included were some complementary drilling, ore body delineation, limited infrastructure development, market studies, and product/pilot plant test work. 3.3 If the project were found to be economically viable and environmentally sound, the Credit was to be used to finance preparation of bid documents, prequalification of contractors, and evaluation of bids. The project scope also included technical and legal assistance for OMNIS and project promotion activities by OMNIS. The total cost of the Phase III activities was estimated at US $16.2 million equivalent, of which 94 percent (US$15.2 million) represented foreign costs. A total of US $8.55 million was to be financed by the Credit, including US $700,000 for project promotion and technical assistance to OMNIS and US $750,000 for the refinancing of the PPF. Price contingencies based on annual worldwide inflation of 5 percent and physical contingencies of 15 percent of all costs were included. 3.4 The Government agreed to make the proceeds of the Credit available to OMNIS who in turn would make them available to QMM as its contribution to the Joint Venture. Once the final decision had been made by the partners of the Joint Venture as to whether to proceed with the ilmenite mine and associated facilities, the Government and OMNIS would decide the terms and conditions of arrangements for settlement of the advance. QIT was to continue to finance its share of foreign and local costs through its equity contribution. 4. Project Design and Organization 4.1 Within the framework of the unincorporated joint venture, QIT-Madagascar Minerals (QMM), a subsidiary of QIT created under Malagasy law, was assigned to be the operator for the Joint Venture. QMM operated under the supervision of a Committee constituted with OMNIS and QIT representatives. The Bank had considered that the unincorporated arrangement for implementing the mining project was adequate and also accepted the unusual arrangement of a private company, QMM, being made responsible for the execution of these  4 components of the Engineering Credit which were related to the Joint Ventures activities. This issue was not well clarified during the appraisal and only at negotiations for the Credit was it agreed that OMNIS would have to enter into an Implementation Agreement with QIT and QMM, acceptable to the Bank. The Agreement was to specify, a) the financial contribution to be made by each of them to carry out the project, and, b) QMM's responsibilities regarding the implementation of the Project, procurement of goods and consulting services, reporting and preparation of documents and evidence required for disbursements requests and replenishment of the Special Account. Signing of this agreement was made a condition of effectiveness for the Credit. 5. Project Implementation 5.1 The Credit was signed in July 1988 and declared effective in December 1988. Effectiveness conditions included the conclusion of a Project Implementation Agreement between OMNIS, QIT and QMM; and finalization of terms of reference for the Environmental Impact Assessment Study. 5.2 While Credit effectiveness was achieved rather promptly, the first Bank supervision mission to Madagascar in October 1988 was presented with substantially revised cost estimates for the ilmenite mining project. In effect, while at the time of appraisal of the Engineering Credit the investment cost had been estimated on a preliminary basis at around $194 million (including working capital and contingencies as well as pre-investment expenditures), for a production of 600,000 tons/year, firmer estimates now indicated the investment cost to be $260 million. Accordingly, the economic rate of return was revised to 10% down, from 13%. 5.3 Since the economic viability of the mining project including all infrastructure requirements had become marginal, QIT, proposed to split the project into a mining component costing $160 million and an infrastructure component of $100 million. Under QIT's proposal, the mining component would be financed by the Joint Venture and the infrastructure cost would be born totally by the Government. The Bank argued that the initial project concept had been radically modified, among other things by increasing the Government's required financing from $65 to $180 million. Furthermore the Bank argued that, regardless of the structure and sources of financing, the economic evaluation of the project would have to consider an adequate rate of return for the entire investment including infrastructure. If the infrastructure cost were to be financed by Government, a reasonable cost recovery fee would have to be charged to the mining concern. It was pointed out that clear economic viability was an essential requirement for further Bank support to this project. 5.4 The Bank also recommended that evolving economic policies in Madagascar, under which the Government had decided to divest itself from direct productive activities, suggested that the Government share in the Joint Venture should be reduced. Finally, since the revised higher capital cost would require (if the project would be found feasible) borrowing from several sources, the Bank also recommended that the Joint Venture should be incorporated. 5.5 As the basic assumptions underlying the Engineering Credit had been substantially modified, a substantial portion of the Credit designed to finance preliminary and final engineering of the mine and corresponding infrastructure could not be utilized until a new, acceptable project configuration emerged. The attention of the Bank from then on focused, logically, on the Joint Venture efforts to produce an acceptable project.  5 5.6 In 1989, responding to concerns about economic viability the project concept was redesigned into two phases. Phase 1, with a total cost of $270 million to produce 625,000 tons of ilmenite by end 1992, and Phase II with an additional investment of $135 million to increase annual production to 1.2 million tons. At the same time the Government accepted the Bank recommendation and proposed to reduce the OMNIS share in the Joint Venture to 40%, requesting that IFC should participate with 11 %. 5.7 Under the redesigned, phased project the economic viability remained marginal. To improve it, QIT proposed in 1991 a new project design for the export of partially upgraded ilmenite, a design that would reduce infrastructure requirements and project costs to $166 million. QIT also proposed to become the sole shareholder of the mining operation. OMNIS made a counterproposal to export fully upgraded ilmenite at a project cost of $279 million and a OMNIS 38 percent/QIT 62 percent share in the Joint Venture. 5.8 Despite an unstable political situation in Madagascar and depressed markets for ilmenite, OMNIS and its partner QIT continued intensive negotiations to find a project concept agreeable to all parties. At the end of 1991 an agreement was reached between OMNIS and QIT under which the Joint Venture would become an incorporated company in Madagascar (QMM S.A.) and the OMNIS share would be reduced to 20% with QIT retaining the remaining 80%. The 80/20 ratio was very much in line with the policy decision made by the Government for its participation in mining ventures in general which proposed that the Government participate up to 20% in a mining project if that participation was requested by the private investor, which was the case in the llmenite Project. 5.9 Since early 1992, the parties have worked on legal documents to reflect the new agreement. Several side agreements needed to be drafted, including an Investment Convention, Shareholder Agreement, Contracts for the Sale of llmenite, Contract for the Sales Agent, Technical Assistance Contract and the statutes of QMM S.A. 5.10 While substantial progress has been made in drafting all documents as of the date of this PCR, it has not been possible due to the political transition to obtain from the Government of Madagascar an approval of the basic agreement between OMNIS and QIT. In addition, several ministries have not commented on specific clauses in the various drafts, including the mining concession and the request of QMM S.A. to deposit the export revenues in an overseas account. QIT still awaits Government ratification of the new legal agreements to create QMM S.A. and the Government's response to the EIAS recommendations submitted in February 1993. Only then can engineering work required to complete the feasibility study for a final investment decision be completed. 6. Project results 6. 1 Project implementation was adversely affected by several factors soon after implementation of the Credit project started. Phase III of project preparation was almost completely suspended, a situation prevailing until today. Only two components of the Credit project were carried out, namely the project promotion and consultants assistance to OMNIS financed under Credit 1928-MAG and the EIAS, financed by QIT. 6.2 Environmental Impact Assessment Study. A key issue for the proposed mining project, identified during appraisal, was how to minimize the environmental impact to the Mandena area, situated at approximately 10 km north of Fort-Dauphin, where mining for mineral  6 sands was expected to commence by late 1992. The Mandena area includes one ot the few remaining tracts of littoral tropical forest. It was necessary to assess the ecological significance and biodiversity value of that ecosystem; the impact that different mining alternatives could have on it; and the mitigating measures that could be adopted to minimize that impact. It was important, as well, to asses the socioeconomic impact of the project. 6.3 The Bank played an important role assisting QMM in the preparation of the EIAS terms of reference. Given the importance attached to the EIAS, final approval of the terms of reference by the Bank was a condition of effectiveness of the Engineering Credit. 6.4 While financing for the EIAS was included in Credit 1928-MAG, QIT decided to finance the study itself. A reputable Environmental Consulting firm from Australia was selected. The Consultant engaged an excellent team of highly skilled professional scientists who completed a painstaking inventory of the areas' flora and fauna which includes many endemic plant and animal species. The environmental impact assessment study for the natural environment has been completed and was submitted to Government in February 1993. The study does an excellent job describing the existing environment and proposes clear mitigating measures, conservation of a maximum amount of littoral forest and methodologies to revegetate the mined site. The Bank played a key role in helping draft terms of reference for the EIAS and commenting in detail on its various drafts. The Bank review considers the study to be outstanding and a credit to the country, the company and the consultants. 6.5 Utilization of Credit 1928-MAG. As explained in the above paragraphs, utilization of the Credit funds remained limited to financing the technical assistance consultants and OMNIS' overseas missions to promote the ilmenite project. The Credit has also financed some computer equipment for OMNIS to be used in project follow-up. The consultants' technical and legal support was considered essential by OMNIS in its dialogue with its partner, QIT, a dialogue that was pursued beyond the original Credit closing date of June 30, 1991. At OMNIS request, the closing date was extended twice until June 30, 1993. The Bank did not agree, however, to extend the closing date a third time for the Credit category for Consultants, as desired by OMNIS, since it was considered that during the period of political transition in Madagascar, it could not reasonably be expected that the Administration would be able to handle the complex legal and financial issues of the revised agreements reached between OMNIS and QIT. Further consulting services, therefore, would not be productive. The Credit was closed on June 30, 1993. 7. ProJect Sustainability 7.1 The Engineering project was designed to assist OMNIS in the preparation of the ilmenite mining project. Included in the assistance to OMNIS were the provision of technical and legal advice to enable it to understand and negotiate complex management, technical, marketing and tinancial issues ot' ilmenite mining. OMNIS and the Government have acquired expertise in this area which will certainly be uset'ul in the futule when turther implementation of the ilmenite project can proceed. Even it' this particular project does not eventually materialize, Madagascar is now better prepared to deal with toreign mining houses and the principle of majority private sector participation is tfirrnly established.  7 8. Bank Performance 8.1 Underlying the strategic importance of the project for the development of Madagascar, the Bank responded promptly to the Government and OMNIS requests for support. During project preparation and design, however, the Bank did not pay adequate attention to the definition of the key role of QMM in project implementation. At negotiations the Bank insisted that a Project Implementation Agreement between OMNIS, QIT and QMM clarifying their relationship had to be negotiated and signed as a condition of effectiveness of the Credit. While this document was signed by the parties, QIT argued later that Bank procurement procedures were not adequate for efficient project implementation and decided to use its own funds for the few project items that were implemented, in particular the EIAS. The Bank did not have any contractual relationship with QIT or QMM and at OMNIS insistence, any communication between QIT/QMM and the Bank had to be done through OMNIS. This arrangement was not helpful for project implementation, particularly since QIT had not had any previous experience of working with the Bank and initially had no knowledge of Bank procurement and disbursements procedures. 8.2 Confronted, at the beginning of project implementation, with revised cost estimates for the mining project which reduced its profitability, the Bank correctly insisted that a solution had to be found in a more efficient project design, not by excluding related infrastructure from the project cost as requested by the promoters. Some progress in redesigning the project was achieved, first by staging the production in two phases to achieve ultimately an annual output of 1.2 million tons instead of the 600,000 initially foreseen, and second, by proposing to change the nature of the final product in order to reduce cost. Despite this progress, the economic viability of the project remains to be clearly demonstrated. 8.3 Given the higher revised cost estimates and a changing climate in economic policy in Madagascar in favor of the private sector, the Bank insisted that the State should reduce its direct financial participation in the project. The Bank also insisted as well that the initial legal unincorporated status of the Joint Venture should be changed to "incorporated" to facilitate project financing by lenders and possible participation of other private investors. The final agreement between OMNIS and QIT, still to be ratified by the Government of Madagascar, reflects these two important objectives: the Joint Venture is to be incorporated under Malagasy law and QIT share is to be increased to 80%. 8.4 The Bank played also an important positive role in helping draft terms of reference for the EIAS, ensuring that proper attention was given to mitigating the physical impact of mining on the fragile ecosystem of the project area and of assessing the socio-economic effects of the project in the inhabitants of the region. These objectives were achieved and the EIAS final report is considered to be a path setting model. 9. Borrower Performance 9.1 As it did during previous Bank financed projects project (Petroleum Exploration Promotion Project, Credit 1016-MAG and Tsimiroro Heavy Oil Exploration Project, Credit 1298- Mag), OMNIS vigorously pursued the implementation of this project. With the assistance of the consultants financed under the Credit, OMNIS was an active partner in the Joint Venture. At times the insistence by OMNIS that they should maintain an active role in project management following mine development was counter-productive to advancement of the contractual arrangements with their partners. Further, the insistence of OMNIS that all communications  8 between QIT/QMM and the Bank had to be done through OMNIS, while not constituting an unsurmountable obstacle, was not helpful for project implementation. 10. Project Relationships 10.1 Relations between Bank staff at all levels with OMNIS and QIT officials were excellent. Besides Bank missions to Madagascar, several discussion meetings were held in Washington and in QIT's offices in Montreal. A spirit of cooperation prevailed among the parties at all times, searching to define an economically viable project and an ownership structure with a majority share for the private investor. 11. Consulting Services 11.1 The Credit financed three technical assistance contracts for OMNIS. They related to (a) the assessment of the mining and market potential of the Sakoa coalfield; (b) legal assistance for the ongoing negotiations with QIT; and (c) advice regarding market prospects and price structures for ilmenite and associated minerals. The Bank was actively involved in supervision of the consultants and overall their performance can be rated satisfactory. More specifically the consultants working on the Sakoa coalfield development did a good job with regard to technology transfer and training aspects of the project. Personnel of OMNIS gained a much better understanding of the requirements which have to be met if one is to establish a viable operating coal mine. The legal assistance, while undoubtedly of value to OMNIS in their complex negotiations with QIT, is more difficult to assess in view of the failure of the parties to reach agreement on many of the topics under consideration. While it might have been possible to advance the project further had OMNIS and their consultant been more positive in their negotiations, the continued trust in the consultant demonstrated by OMNIS would suggest that legal support received was needed and satisfactory. The assistance provided on the ilmenite market provided a valuable input to negotiations between QIT and OMNIS which enabled OMNIS to establish a fair transfer price for ilmenite exported by the joint venture to QIT. This was one of the critical steps for both OMNIS and the Government as it provided a basis to analyze potential benefits for both parties. 12. Lessons Learned 12.1 The lessons learned from this project primarily relate to the interaction between the Bank and a private shareholder who is a partner with a beneficiary of an IDA Credit. While every effort was made by the Bank to inform QIT, the private partner and project manager, of Bank procurement guidelines and generally acceptable economic parameters for the project, it took considerable time for QIT to appreciate the realities of working with the Bank. With regard to procurement, QIT elected to forego IDA funds rather than undertake what they considered arduous and time consuming procedures. This suggests that the possibility of other procurement procedures consistent with Bank guidelines but more suited to private sector venture should have been explored such as sole source procurement in the case where the beneficiary's private partner has a long established relationship with a consulting group and/or supplier. 12.2 In summary, there is a very important role for the Bank in stimulating private sector investment, but it is critically important to realize that private sector investors are far removed from Bank procedures. While Bank staff went to great lengths to explain the requirements to QIT, a cooperative partner, there was also much to learn about private sector practices by both OMNIS and the Bank.  9 PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) PART II: REVIEW OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE 1. Acknowledgements 1.1 The National Military Office for Strategic Industries (OMNIS), representing the Government in the Joint Venture Agreement with the Canadian company QIT for the exploration, development and marketing of mineral sands in Madagascar, wishes to express its sincere thanks to the International Development Association for providing part of the funding required for the engineering phase of the ilmenite development study and for the advice and guidance it has given OMNIS in the preparation of the project. 1.2 We wish to express our special appreciation to the World Bank's Industry and Energy Division for its active contribution and would like to acknowledge the efforts and expertise of all the foreign consultants who have assisted OMNIS over the course of the project. 2. Introduction 2.1 In its efforts to revive the national economy, the Government of the Republic of Madagascar has assigned priority to the development and exploitation of its mineral resources. One of its aims is to promote projects that will generate foreign exchange, such as the ilmenite project. 2.2 The International Development Association was requested by the Government of Madagascar to provide financial assistance for an engineering study in connection with the exploitation and marketing of mineral sands in Madagascar. 2.3 The Credit Agreement, in the amount of SDR 6.2 million, was signed by the two parties on July 18, 1988. 2.4 OMNIS, the Government's executing agency for the promotion of mining projects, has prepared the present report, offering a retrospective analysis of project implementation, as well as an evaluation of its own role and of that of the Bank during project implementation and an assessment of the relationship established with the Bank. 3. General Evaluation 3.1 The credit was efficiently prepared and put in place, thanks to OMNIS' experience with the earlier IDA credits (1016-MAG and 1298-MAG) granted for petroleum projects, and to the determination of the Bank's experts and the Malagasy officials to ensure the successful  10 implementation of a project of the scale proposed, a project expected to serve as a driving force for private investment in Madagascar's mining sector. 3.2 The fact that OMNIS, as the government agency responsible for the promotion of mining projects, applied for an IDA credit to finance part of the engineering and feasibility studies phase bears witness to its determination to expedite implementation of the ilmenite project and to arrive as soon as possible at the production and export phase, initially scheduled for 1992/93. 3.3 Under the Joint Venture Agreement signed by OMNIS and QIT-Fer and ratified by the National Assembly, the Government was not to provide financial support for the ilmenite project until the parties have decided to proceed with the investment. 3.4 The granting of the credit by the Bank and the joint preparation of the credit utilization program bear witness to the mutual confidence of the parties to implement the project within schedule. 3.5 However, the objectives set at the time of project appraisal have not all been achieved, for the following reasons: - The assumption of the infrastructure financing by the promoters, as recommended by the Bank, heightened the difficulty of finding an attractive alternative for project development. A 51 % participation by OMNIS in the investment proved too high for the Government's finances. Especially since the IMF, like the World Bank, had recommended a ceiling on Government debt. - This financing problem led to the lengthening of project implementation and delays in the utilization of Credit 1928-MAG. - With an unstable titanium pigment market different options were studied to improve the profitability of the ilmenite project. - The private partner's reports indicated that the ilmenite project is highly capital-intensive, and that operating costs have little effect on its profitability. Being uncertain as to the volume of capital required, the parties were endlessly involved in analyses of different development scenarios. - This unsettled situation has been perpetuated by the private partner, who has held discussions with OMNIS and the Bank as and when it pleases. - QIT felt that the ilmenite project missed a "window of opportunity" anticipated for 1992/93, and it has maintained an indecisive approach to the planning of project-related activities. Pending the possible appearance of another "window of opportunity" in 1996/97, it has proceeded to strengthen with operations of Richard Bay/Minerals (South Africa). - Moreover, the private partner wanted too many concessions from the Government. While retaining the benefits accorded by the Joint Venture Agreement, it also insisted that the project deviates from almost all current  laws and regulations concerning investment, taxation and the use of public property. - One of QIT's demands was that it be guaranteed access to additional areas for exploration as strategic reserve. - The endless negotiations and discussions with the private partner held up the progress of the project. - The change of ownership of QIT, from British Petroleum to Rio Tinto Zinc, proved to be quite an upheaval on the ilmenite project's strategy and implementation. - This change, and the sensitivity of international opinion to issues of environmental preservation and conservation, resulted in the project taking on a larger environmental dimension than initially planned. - An evaluation of the environmental impacts and the obtaining of Government authorizations became prerequisites for QIT's launching of the engineering studies for the project. - ''The political transition in Madagascar represented a case of force majeure beyond the control of either party, and as such slowed down the progress of the project. 3.6 The private partner showed no real interest in the funds provided for the project by IDA, and instead used its own funds, particularly in order to finance the Environmental Impact Study (EIAS). 3.7 QIT was determined to postpone some of the works planned for Phase III of the Credit Agreement. QIT made the carrying out of the basic engineering studies conditional to the agreement among the parties on the new structure of the ilmenite project and on the development plan. 4. Prospects 4.1 In light of the financing constraints, OMNIS had agreed to reduce its participation and to revise the structure of the ilmenite project in order to achieve rapid consensus among the parties and get the project moving. It has recently agreed to a 20% share. 4.2 The Government has never minimized constructive proposals, but intends to limit the incessant requests tor conlcessions on its rights, which have turned into demands on the part of the investors. 4.3 Despite a global context favorable to private initiative, free enterprise and government divestiture from the produLctive sector, investors are required to act within the current legal and regulatory tramework. 4.4 Unfortunately tor Madagascar, the various postponements have had adverse effects on the project with world market, especially since similar projects designed well after the  12 Malagasy project have come into being in the same region (NAMACKWA Project in South Africa, and KENMARE in Mozambique), with partners of considerable standing in mining circles, not forgetting RTZ's ongoing Richard Bay operation. 4.5 The execution of an Environmental Impact Assessment Study on such a large scale represents a first for Madagascar, and will serve as a precedent for all major projects. 5. Borrower's Performance 5.1 With the experience gained with the preceding IDA credits, OMNIS was able to put the credit in place within a relatively short period. 5.2 For project implementation and follow up, OMNIS provided all necessary and properly qualified human resources. 5.3 With OMNIS training courses, seminars and exposure to international negotiations, employees were able to consolidate their technical knowledge and professional skills. 5.4 OMNIS was unable to assess the overall return on the ilmenite project, which would have included processing of the ilmenite and marketing of its co-products by QIT. 6. Bank's Performance 6. 1 The Bank gave OMNIS all necessary advice concerning project implementation. 6.2 The Bank was understanding for the parties and of the context of the ilmenite project, accepting requests for extensions and for changes in budget allocations. 6.3 However, the Bank's procedures were too rigid and represented a handicap to a private partner attempting to utilize the credit. 6.4 The opening of a Special Account, into which the credit proceeds were regularly deposited and for which the Borrower was accountable, facilitated utilization of the funds from the credit. However, there was a time lag in the transfer of the initial deposit. 6.5 The World Bank also took action to improve procedures, offering seminars on disbursements to representatives of the executing agencies. 6.6 The fact that it was the Bank's intention to make this ilmenite project into a pilot project designed to revive private investment in Madagascar actually held up the project's progress, since it meant the Malagasy side had to be extremely careful in its approach and in the decisions it needed to take. 6.7 The Bank's decision to close the credit came at a crucial moment, despite the fact that the parties wanted to continue with the project. 6.8 Nevertheless, OMNIS appreciated the fact that the Bank had given it the opportunity to upgrade its facilities, notably through the purchase of computer equipment for the purpose of improving its project monitoring capabilities.  13 7. Relationship between Borrower and Bank 7.1 The relations between OMNIS/QIT and the Bank were satisfactory, both during the supervision and evaluation missions in Madagascar, on the occasion of meetings between the parties, and during project implementation. 7.2 Nevertheless, it sometimes seemed during negotiations that the Bank was somewhat more sensitive to the viewpoint of the private partner than to that of OMNIS, which often meant that OMNIS was forced to revise its positions. 7.3 OMNIS, as representative of the Borrower's Government, to which it is solely accountable, is the Bank's principal contact for matters regarding the credit, and it would therefore have preferred that QIT not approach the Bank directly. This did not prevent QIT from having regular contacts with the Bank. 8. Performance of Consultants and Contractors 8.1 The services of the consultants working with OMNIS were on the whole satisfactory. 8.2 In particular, the assistance of the legal consultant enabled OMNIS to obtain experience in the legal area and in the field of international mining contract negotiations. 8.3 However, the Stolberg consultants encountered various difficulties, due principally to QIT's failure to provide them with certain information. 8.4 Also, the performance of the various contractors was satisfactory, reflecting the rigor required of the members of their profession. 9. OMNIS' Comments on the Bank's Part of the Report A. Background 9.1 The purpose of having OMNIS participate in the financing of the engineering phase was to expedite project implementation, even if this was not required under the Joint Venture Agreement. B. Project Implementation 9.2 In addition to financing the technical assistance consultants, the credit also financed the purchase of such items as spare parts for the drilling equipment, laboratory equipment, rolling stock and computer equipment, as well as the provision of training for OMNIS project monitoring staff. C. Borrower Performance 9.3 OMNIS does not share the Bank's viewpoint that its insistence on maintaining an active role in project management following mine development was counter-productive to advancement of the contractual arrangements with the partners.  14 9.4 OMNIS, as a Government agency, is bound to protect the Government's interests by exerting a certain control over project execution. With a small participation, OMNIS felt it was reasonable to have a clause to protect minority shareholders, to avoid dilution of its share during the investment decision process. In our opinion, this does not in any way imply interference in project management, which remains entirely under the responsibility of the operator, QMM. D. Statistical Information 9.5 Cumulative Estimated and Actual Disbursements (Section 3). 9.6 For 1993, a single replenishment of the Special Account took place, in the amount of US$506,658. 9.7 Thus the figure of 3.33, representing the total amount disbursed from the credit account, should be replaced by 0.50 for the year 1993. 9.8 An error of calculation was also detected for 1991 concerning the 2.83 percentage, which should read 11.24%. 9.9 Project cost and financing plan (Sections) 9.10 We should like to have some explanation of the figures appearing under headings 7, 8 and 9 of the Project Costs table in the column "Actual Foreign," since, according to our records, only US$1.72 million was spent out of the initial US$8.55 million, while US$3.33 was disbursed out of the principal credit account.  15 PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) PART III: STATISTICAL INFORMATION 1. Related Bank Loans and/or Credits There are no other Credits related to the Credit. 2. Proiect Timetable Date Date Date Item Planned Revised Actual Identification Feb. '87 Feb. '87 Rb. '87 Preparation July '87 July '87 afy '87 Appraisal Mission Feb. '88 Feb. '88 Rb. '88 Credit Negotiations May '88 May '88 MELy '88 Board Approval June '88 July '88 Jrne '88 Credit Signature July '88 Aug. '88 JUly '88 Credit Effectiveness Oct. '88 Dec. '88 Dac. '88 Credit Closing June '91 June '92 j1 '93 Credit Completion Dec. '90 Dec. '92 at. '93 3. Cumulative Estimated and Actual Disbursements Bank's Fiscal Year 1989 1990 1991 1992 1993L%4 (USS '000) Appraisal Estimate 4.45 4.10 7.03 8.55 -- Actual 2.03 - 0.79 - 3.33*- Actual as % of Estimate 46.0 - 2.82 - -- * Some additional disbursement expected through October 31, 1993.  16 4. Proiect Implementation Indicators Appraisal Estimate Actual (a) Completion of December 1988 Complete investigations, metallurgical and Environmental Impact Assessment (on the Natural Environment) and update of prefeasibility estimate and economics Completion of EIA on the Partially complete Sociological Environment (50%) and EIS October 1993 (b) Completion of basic October 1989 Deferred engineering (c) Approval to proceed with March 1990 Not expected in near detailed design and future construction (d) Initial ilmenite November 1992 Not expected prior to production 1996 at earliest (d) 75% production capacity April 1994 Not expected prior to achieved 1999/2000 at earliest  Project Costs and Financing Plan (A) Project Costs 1/ (USS million) Appraisal Estimate Actual ITEM Local Foreign Total Local Foreign Total 1. Basic Engineering: 6.3 6.3 Wet Plant/Dry Plant Dock/Harbor Dredge Power Plant Infrastructure 2. Complementary Drilling and Orebody 0.2 0.9 1.1 Delineation 3. Logistical Support Activities 0.2 0.5 0.7 4. Market Studies - 0.2 0.2 5. Product/Pilot Plant Testwork - 0.3 0.3 6. Heavy Equipment and 0.3 3.2 3.5 Infrastructure and Construction Base Cost 0.7 11.4 12.1 Physical Contingencies 0.1 1.7 1.8 Price Contingencies - 0.6 0.6 Joint-Venture Project Cost 0.8 13.7 14.5 7. Technical Assistance OMNIS - 0.5 0.5 - 2.38 2.38 8. OMNIS Internal Project Cost 0.2 0.2 0.4 0.2 0.20 0.40 9. Refinancing of PPF - 0.75 0.75 - 0.75 0.75 Total OMNIS Cost 0.2 1.45 1.65 Total Project Cost 1.0 15.15 16.15 NOTE: Actuat Costs for Items 1-6 to extent implemented wholly borne by OIT. Information not available. 1/ Exclusive of taxes and duties.  (B) Financing Plan Appraisal Estimate Actuat ITEM Local Foreign Total Local Foreign Total OMNIS 0.2 - 0.2 0.2 - 0.2 QIT 0.8 6.6 7.4 Unknown Unknown Unknown IDA - 8.55 8.55 - 3.33 3.33 Total 1.0 15.15 16.15 6. Project Results A. Direct Benefits The direct benefits of job creation, revenue increases and poverty alleviation to be indirectly supported through the credit have been delayed. oo B. Economic Impact No economic rate of return was calculated in the President's Report. C. Financial Impact No financial rate of return was calculated in the President's Report. D. Studies A study of the ilmenite market was completed.  19 7. Status of Covenants Credit Agreement Status Section 2.01(b). The Borrower shall open In compliance and maintain in dollars a special account in its Central Bank for the purposes of the Project. Project Agreement Section 4.01 (a). OMNIS shall maintain In compliance records and accounts in accordance with sound accounting practices. (b)(i). OMNIS shall have its records, In compliance. and the records of the Project, audited in accordance with appropriate auditing principles consistently applied by independent auditors acceptable to the Association. (b)(ii). OMNIS shall furnish to the In compliance Association as soon as available, but in any case not later than six months after the end of such year: (A) certified copies of its financial statements for such audit by said auditors.  20 8. Use or Bank Resources (A) Staff Inputs (Staffweeks) Stage of Project Cycle Planned Revised Final Through Appraisal 60 50 55 Appraisal through Board Approval 30 20 10.2 Board Approval through Effectiveness 10 8 5 Supervision 68 30 20 PCR 8 8 8 (B) Missions Stage of Days Number Staff Project Cycle Date in Field of persons Days Through Appraisal Feb '87 10 2 20 May '87 2* 3 6 Dec. '87 2** 2 4 Appraisal Jan. '88 8 2 16 Board approval through Effectiveness Oct. '88 6 3 18 Nov. '89 2* 3 6 Supervision Jan. '89 6 1 6 June '89 3* 3 9 June '89 8 2 16 Aug. '89 2** 2 14 July '90 2* 3 13 Nov. '90 6 2 12 Oct. '91 2* 3 13 May '92 3* 3 9 Apr. '93 2* 3 6 * Visits of OMNIS and QIT delegations to Washington, D.C. * Bank mission to meetings in Montreal, Canada.  21 ANNEX PROJECT COMPLETION REPORT MADAGASCAR ILMENITE MINING ENGINEERING PROJECT (Credit 1928-MAG) Specific Comments by QIT on Part I of the Report 2. Background It may be helpful for the readers of this report if a bit more project specific background was developed with respect to the manner in which marketing issues unfolded in 1989/90 for the two key TiO2 products namely ilmenite and rutile. I think it is important that one should recognize that the proposed scale of the initial operations (some 600,000 MTPA of ilmenite and 30,000 MTPA of rutile) represent nearly 10% of the world annual consumption of TiO2 minerals and as such requires not only the backing of a substantial project investor to mount the project, but also requires a substantial market opportunity to meet revenue stream objectives needed to service project loans and shareholder investments especially in the first critical years of development of the project. Two additional paragraphs proposed as follows might be considered to cover these points: 2.10 The project concept is for a major world scale undertaking within the context of mining and production of Ti0A industrial minerals. The contemplated scale would represent some 8-10 % of the world supply for TiO2 minerals. This large scale for initial market entry is considered a necessity in order to generate sufficient product sales revenues and financial cash flows to cover the significant investment needed for project infrastructures and other costs associated with this project located in a largely underdeveloped, environmentally sensitive area of Madagascar. 2.11 At the time the Credit was initiated in 1988, it was stated by QIT (and understood by the Bank?) that the project was attempting to meet a very specific window of market opportunity in the 1990/92 time period. QIT for its part was willing to purchase all the ilmenite produced at market related prices and as this represented over 60% of the prospective revenue stream from the project, these ilmenite purchase contracts would have represented an important component of the project lenders' security packages. In the event, the project, for a variety of factors described below, did not materialize as hoped in 1988 and QIT in fact had to alter its development strategy by expanding an alternative facility to meet the market opportunity it had identified.  22 5. Project Inplementation In line with the above, QIT suggests that a new paragraph be inserted between 5.6 and 5.7 of the current text as follows: "In light of the deteriorating economic returns from those initially envisioned, the increasing capital risk and the proposed restructuring of the project legal and ownership status, it was recognized by mid-1989 by both the Bank and the project sponsors, that expenditures under Categories 1 and 2 of the Credit MAG 1928 would be inappropriate pending resolution of project legal structure issues between QIT, OMNIS, and the Govemment. " 6. Project Results In paragraph 6.1, perhaps mention could be made that CIDA provided an important amount of funding assistance for QIT's continuing EIAS Studies. Also in paragraph 6.1, QIT did in fact during 1989 revise the project plan such that various project activities were brought to a logical conclusion at what might be described a preliminary engineering level of definition. The sentence below would reflect this status and might be added to paragraph 6.1. "QIT also completed at its own expense during 1989/90 metallurgical, orebody delineation and engineering study activities needed to complete a preliminary design assessment of the project." 8. Bank Performance The emphasis of QIT's reluctance to accept Bank procedures really were related to the need to shorten decision making chains in order to meet a tight schedule imposed on the Project by the market opportunity identified by QIT. QIT regards the checks and balances required by the Bank as being essentially the same as its own intemal procedures. The insistence by OMNIS and the Government of Madagascar that they also exercise a degree of control just lengthened the time that would be needed to effect contractual commitments for the project under the Credit. Also, QIT felt such procedures were inconsistent with the implied performance responsibility placed on the Operator (QMM) to complete the Project. It is clear that any future financing arrangement between QIT/OMNIS/Government of Madagascar and the Bank will need to specifically address this issue of delegation of authority  23 and once this is established, set project schedules and apportion performance responsibility for project completion accordingly. By way of a footnote, QIT did utilize a CIDA grant in the amount of US $ 2.2 million during the 1989/90 period in question. CIDA's procedures for dispersal are very similar to those of the Bank's but of course by that time, it was evident to QIT the market pressures on the Madagascar project were diminished and this, together with shorter lines of delegated authority and a clear definition of QIT responsibility for performance, resulted in a successful relationship with CIDA. All this is to say QIT per se is not resistive to Bank procedures but the learning experience from our interactions involving the 1988 Credit and Implementation Agreements is that QIT will insist on better definition of the respective roles of the parties the next time around. I'm sure the Bank would also support this. 12. Lessons Learned The statement "QIT elected to forego IDA funds rather than undertake what they considered arduous and time consuming procedures" perhaps is an overstatement in light of my comments above. Rather the Bank might consider the following as alternative text: "QIT elected to forego IDA funds in light of the imprecise definition of contractual responsibility for performance as represented in the QIT/OMNIS/QMM Implementation Agreement, the absence of satisfactory delegation of authority from OMNIS and the Government of Madagascar and finally, the radically charged project circumstances that were evident by mid 1989. Statistical Information Item 4 A reformulated Table 4 is suggested overleaf.  24 4. Project Implementation Indicators Appraisal Estimate Actual (a) Completion of December 1988 Complete investigations, metallurgical and Environmental Impact Assessment (on the Natural Environment) and update of pre- feasibility estimate and economics Completion of EIA Partially complete on the Sociological (50%) Environment and EIS October 1993 (b) Completion of basic October 1989 Deferred engineering (c) Approval to proceed March 1990 Not expected in near with detailed design future and construction (d) Initial ilmenite November 1992 Not expected prior to production 1998 at earliest (e) 75% production April 1994 Not expected prior to capacity achieved 1999/2000 at earliest  25 PROJECT COMPLETION REPORT MADAGASCAR ILN\ENITE MIMNG ENGINEERING PROJECT (Credit 1928-MAG) QIT Comments on the term Environmental hnpact Study (EIS) In reading the above project completion report there may be some confusion as to the actual level of completeness of the project's Environmental Reviews. QIT foresees three stages of Environmental reviews on, the project, namely 1. Completion of Environmental Impact Assessment Studies by the project proponent (QMM). So-called EIAS. 2. Regulatory reviews and calls for comments and preparation of a Comments Report by the project proponent. 3. Completion of the final Environmental Impact Statement (EIS) for the project for final approval by the regulatory authorities in Madagascar. QIT has completed to date an EIAS on the Natural Environment. The EIAS on the Socio-Economic Environment remains to be completed as does steps two and three in the full process leading to an EIS. This is because the regulatory framework for Step 2 is only in the formative stage in Madagascar for major investment projects and QIT was reluctant to proceed with the EIAS on the Socio-Economic Environment until a regulatory review process is established. In this way it is felt that any public reviews which must be there nature take place in advancing the Socio-Economic studies for the project would be conducted in the wider framework of a full public review process for the project. The Bank reports refer to QIT having completed an EIS. It is suggested that in general terms reference should be made to QIT having completed the EIAS on the Natural Environment, not an EIS for the project. A marked up copy of the full text is attached with specific notations for references to the terms EIS/EIAS.