Guinea - Mining Sector Investment Promotion Project

Document of The World Bank Report No. 15291-GUI STAFF APPRAISAL REPORT REPUBLIC OF GUINEA MINING SECTOR INVESTMENT PROMOTION PROJECT May 10, 1996 Industry and Energy Division Western Africa Department Africa Region  CURRENCY Curiency Unit Franc Guineen (FGN) US$1.00 = FGN 1.000 FGN I million US$1,000 WEIGHTS AND MEASURES I ton = 1,000 kilograms (kg) or 32,154 troy ounces (oz.) I troy ounce (oz.) = 31.1 grams (g) I carat (ct.) = 0.2 grams (g) ABBREVIATIONS AND ACRONYMS ANAIM Agence ANationale d'Aminagement des Infrastructures lUinieres Aredor Aredor Guinee S.A. BNED Bureau National d 'Expertise des Diamants BSMM Bureau de Strategie et de Marketing Minier CBG Compagnie des Bauxites de Guinee FRIALCO Consortium of international aluminum companies which invested in Friguia Friguia Guinean alumina production company (operation near city of Fria) GDP Gross Domestic Product GIS Geographical Information System HALCO Harvey Aluminum Company of Delaware (consortium of international aluminum companies which invested in CBG) MEE Ministere de l 'Energie et de 'Environnement MF Ministere des Finances MMG Ministere des Mines et de la Geologie MRNEE Ministere des Ressources Naturelles, de l 'Energie et de l 'Environnement OBK OJJice des Bauxites de Kindia OFAB Office d'Amnenagement des Bauxites de Boke PESTAP Public Enterprise Technical Assistance Project PPF Project Preparation Facility SAG Societe Aurifere de Guin~e SBK Societe des Bauxites de Kindia SMD Societ Miniere de Dinguirave tpy metric tons per year FISCAL YEAR January I - December 31  REPUBLIC OF GUINEA MINING SECTOR INVESTMENT PROMOTION PROJECT TABLE OF CONTENTS CREDIT AND PROJECT SUMMARY .............................................. iii 1. INTRODUCTION I 2. SECTORAL BACKGROUND I A. Mineral Resouices and Miiiing Operations .I Minieral Resources ..............................................2 Mininig Operations .............................................2 B. Thle Role of the Minilig Sector in the National Econoiy ............................................. 4 External Trade .............................................4 Domiestic Impact ..............................................5 C. Sector Issues ............................................5 Mining Policies .............................................6 Legal Framekwork .............................................7 Ilnstittiolns .....7..........................................7 Infrastructure .............................................7 D. Goverinment Strategy ..............................................8 E. Tlle Bank Group's Role ............................................8 3. THE PROJECT ......................................................................................................................10 A. Pro ject Ob jectives and Rationale ............................................. 0 B. Project Description ............................................ I I C. Pro ject Costs and Finanicinig Plan ............................................ 14 D. Economic Analysis ............................................ 15 E. Project Implemenitationi ............................................ 18 F. Proculerilem lt ............................................ 19 G. Disbursemilenits ............................................. 20  ii H. Accounting, Auditing and Reporting ...................................................... 21 1. Environimenit ...................................................... 22 4. PROJECT BENEFITS AND RISKS ........................................................ 22 A. Benefits ...................................................... 22 B. Risks ...................................................... 23 5. AGREEMENTS TO BE REACHED AND RECOMMENDATION .. 23 ANN EXES 1. Recent Developments in the Guilleani Mininig Sector 2. Project Description 3. Traininig Program 4. Cost Estimates 5. Economic Evaluation 6. Key Project Activities and lImplementation Schiedule 7. Project Managemenit 8. Supervision Plan 9. Environimenital Managemilenlt Plan and Data Sheet MAP IBRD 26931 This operation was prepared by a team consisting of Messrs. H. Harald Burmeister. David Jones (AF5IE), Heiniz Henidriks (IENIM), T. Mpoy-Kamulayi (LEGAF). Cherif Diallo (AFlGUI). Loup Brefort (PSD), James Moose (EC I IN), Alighani Alikhani (Consultant) and Claude Ginet (Consultant). Mr. Birger Fredriksen (AF5DR) and Ms. Silvia Sagari (AF5IE) are, respectively, the Acting Department Director and the managing Division Chiet for the operation. Mr. Francois Laporte is thc Lead Economist and Mr. Emmerich Scliebeck the Project Advisor.  iii REPUBLIC OF GUINEA MINING SECTOR INVESTMENT PROMOTION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Guinea Beneficiary: Ministry of Mines and Geology Credit Amount: SDR 8.3 million (US$19 m2 illion equivalent) Terms: Standard IDA terms, with 40 vears maturity Onlending Terms: Not applicable Project Objectives and Description: The project objectives are: to strengtheni the Government's capacity to act as facilitator and regulator of mining activities; and to help attract private investments for mining sector development. The project comprises: (i) a legal componient. aimed at improving the overall legal and regulatory framework for the mining sector; (ii) a data component, aimed at furnisling essential intormation. including a mining data bank and a geological map; (iii) an institutional component, aimed at strengtheniing the Governmenit's capacity to facilitate private investment and applv regulatioins in the mining sector; and (iv) a restructUring componenit, assisting the Governmenit in selecting options and preparing detailed plans for restructuring, privatization or liquidation of those mining enterpr-ises in whiclh it still holds a major interest. In addition, the project provides for traininlg and equipmnenit to support the four main componenits. Project Benefits: The project will help open the doors to private investment in the mining of bauxite. alumina, gold and diamonds, and possibly other minerals. As a result. Guinea could further consolidate its leading role in world bauxite exports. strengtheni its role as an alumina exporter, and become a significant regional producer of gold. The total export value  iv of minerals could be expanded to a level of US$600-800 million per year, and Government revenues from mining maintained at annual levels of US$ 100 millionl. Risks: Despite assurances and good intenitionis demonstrated so far, there is a risk that the Government may not follow- through on implementing all measures which the project is designed to develop. This risk is believed to be low because of the demonstrated Government ownership of the project and because the Government has recognized that it would incur heavy financial losses if the measures were not implemented. Economic Rate of Return: 23 - 55%  v Table 1: Estimated Project Costs (In USS million, including taxes and duties) Local Foreign Total 1. Legal Component 0.2 1.1 1.3 2. Data Component 2.8 6.2 9.0 3. Institutional Component 0.8 1.4 2.2 4. Restructuring Component 0.3 1.3 1.6 5. Training 0.1 0.3 0.4 6. Project Preparation - 0.5 0.5 Total Base Costs 4.2 10.8 15.0 Physical Contingencies 0.3 0.7 1.0 Price Contingencies 0.2 0.6 0.8 Total Project Costs 4.7* 12.1 16.8 * includinig US$3.0( millioni taxes and duties Table 2: Financing Plan (in US$ million equivalent) Local Foreign Total Government 4.6 - 4.6 IDA 0.1 12.1 12.2 Total 4.7 12.1 16.8 Table 3: Estimated Credit Disbursements (in USS million equivalent) FY96 FY97 FY98 FY99 FY00 Total 0.7 4.2 3.1 2.4 1.8 Cumulative 0.7 4.9 8.0 10.4 12.2   REPUBLIC OF GUINEA MINING SECTOR INVESTMENT PROMOTION PROJECT 1. INTRODUCTION 1.1 The Government of the Republic of Guinea has requested IDA's assistance in financing a project designed to strengtheni the Government's capacity to act as facilitator and regulator of mining activities and to attract private investments for mining sector development. 1.2 Total project costs are estimated at about US$16.8 million equivalent, including taxes and duties, of which IDA would finance about US$12.2 million equivalent, and the Government would contribute about US$4.6 million equivalent. 2. SECTORAL BACKGROUND A. MINERAL RESOURCES AND MINING OPERATIONS 2.1 Recent developments in the Guinean mining sector are presented in Annex 1. Guinea is the world's leading exporter of bauxite (with a share of 40% in world trade), the first African country to operate an alumina plant, and a known (albeit small) producer of gold and diamonds. Historically, mining has provided about 80% of Guinean exports, 70% of Government fiscal revenues and 20% of GDP. Though its share in fiscal revenues has now dropped to below 30%, the sector is still economically very important and may be considered to be underperforming. Presently, three bauxite/alumina companies continue operating and one small new gold mine started production (Societe Miniere de Dinguiraye - SSMD), while industrial diamond operations have halted production. Of the bauxite/alumina companies, one (Socie&j dies Bauxiles de Kindia - SBK. a bauxite producer created under a bilateral agreement with the ex-Soviet Union) was affected by the collapse of the Eastern Bloc market and is now incurring heavy losses, another is struggling chronically in the border zone of profit and losses, and only the third one (Compagnie des Bauxites de Guinee - CBG, a large bauxite producer with international partners) is making substantial profits. The poor overall status of the sector contrasts with Guinea's good geological potential. Agriculture and mining are singled out in the Bank's Country Assistance Strategy presented to the Board in April 1994 as the two sectors with good potential for future growth. With sound policies and competent administration, mining could become a driving force in the national economy.  2 Mineral Resources 2.2 Guinean identified bauxite reserves are the largest in the world. While the exceptional high-grade reserves of the Sangaredi plateau are now almost depleted, the remaining reserves are of a quality similar to that of other important bauxite producing countries. Gold is Guinea's second most important mineral resource. The West African Birimian rock formation. which is the basis for gold mining in neighboring Mali, Burkina Faso and Ghana, covers also a portion of Guinea. Each of these neighborinig countries produce 2-6 times more gold than Guinea. Most past gold mining in Guinea hias been on alluvial deposits; the industrially more interesting primary deposits lhave yet to be explored. Based on the successful exploration of primary deposits in neighboring countries, the prospects for new gold discoveries in Guinea are therefore good. The known diamond deposits of Guinea are also alluvial, and exploration for the industrially more interesting primary kimberlite pipe deposits may be attractive to some investors. Guinea's Mount Nimba and Simandou iron ore deposits contains ore of excellent quality and large quantity. However, for economic, political and envirotinmenital reasons, these deposits can presently not be developed. Mining Operations 2.3 From 1989 to 1993. the aggregate revenues of Guinea's three bauxite/alumina companies dropped from US$555 million to US$422 million. During the same period, aggregate profits dropped from about US$230 million to US$85 million (Table 2. 1). Table 2.1: Key Financial Results of Mining Companies (ill US$ illillioll) Revenue Profit (before tax) 1989 1993 1989 1993 CBG 331 289 183 92 Friguia 140 109 36 0 SBK 84 24 11* -7* Total 555 422 230 85 * estimated Source: Mining compunies 2.4 Compagnie des Bauxites de Guinee. CBG is by far Guinea's most important and successful mining company, with a dominant impact on the country's balance of payment and the Government's budget. The company is owned 51% by a consortium of major international aluminum producers (HALCO), and 49% by the Government. Its operations are based on the high-grade bauxite reserves of the Boke area. The company operates a large surface mine (production capacity: 12 million metric tons per year - tpy), a captive railway and the port of Kamsar. While railway and port were built especially for the mining operation, they are owned by the Government and were administered by Office  3 d'Amenagemenl des Bauxites tie Boke (OFAB). which also was responsible for housing and municipal services. Due to international price developments, decreasing ore grades and increasing production costs. CBG's financial results have been decreasing. As part of a program to reduce costs and increase efficiency, the Government dissolved OFAB in May 1995. and decided to transfer most of its assets to a new agency named Agence Ncationale d Amenageement des Infrastructures Minieres (ANAIM). CBG already operates and maintains the railway and port. The elaboration of appropriate plans for the transfer of ANAIM's social assets is included in the proposed project. 2.5 Friguia. Friguia is the country's only and Africa's first alumina producer. While small by international comparison, the operation is important locally and has become the object of national pride. The company is owned 51% by a consortium of international alumilum producers (FRIALCO), and 49% by the Governmenit. Its operations are based on the relatively low-grade bauxite reserves of the Fria area. The company operates a surface mine, an alumina plant (production capacity: 0.7 million tpy), a captive railway and a dedicated port section in Conakry. Due to the low-grade bauxite and the plant's small size, the company has beeni struggling chronically to achieve positive financial results. As a consequence. two of the four partners in FRIALCO have been contemplating pulling out of the venture. To improve the company's results, the Government plans to gradually transfer municipal services presently provided by the company (in particular electricity, water and road maintenance) to the city of Fria. While the financial impact on Friguia would be limited, the action would provide a positive signal for foreign investors. Technical assistance for the transfer of services is included in the proposed project. 2.6 Societe des Bauxites de Kindia. SBK is Guinea's only fully state-owned mining company, created under an agreement with the former Soviet Union as a counterbalance to the Western-dominated CBG. Compared to CBG, SBK is small in terms of bauxite exports. Its operations are based on the low-grade bauxite reserves of the Kindia area. The company operates a surface mine (production capacity: 3 million tpy, but actual production less than 2 million tpy). a captive railway and port at Conakry. Due to the changes in the former Soviet Union, the market for SBK's low-grade bauxite collapsed, at the same time, SBK experienced major managerial problems and incurs major financial losses. To regain a positive cashflow from operations, managerial improvements and significant personnel reductions are required. The elaboration of appropriate plans for such changes is included in the proposed project. 2.7 Other industrial mining activities. Until recently, Guinea had an alluvial gold mining operation. Soc0ete Aurifer de Guinee (SAG), and an alluvial diamond mining operation, Aredor. IFC was a partner in both ventures but subsequently withdrew from Aredor. The private partners stopped SAG's operation in 1992 and Aredor's in 1994. Depleting deposits and lack of profitability were important reasons for halting the production. SAG's mineral rights were acquired by an Australian mining company with the intention to conduct exploration for primary ore. IFC has been instrumental in this acquisition. The Government started negotiations with international diamond producers to get a similar arrangement for Aredor's mineral rights. A Norwegian group recently  4 invested in a small heap leaching gold operation near Dinguiraye, Societe Miniere de Dinguiraye (SMD). The operation started production in the first half of 1995. Several other small foreign groups hold gold and diamond exploration permits, without engaging in active field exploration. 2.8 Artisanal and Small-Scale Mining. Artisanal and small scale gold and diamond mining was legalized in mid-1992. Registered production, in particular of diamonds, increased rapidly. The sub-sector employs a large number of people and is therefore politically important. However, economic and social benefits are more difficult to assess for this type of operations than for industrial operations and there are significant social, safety, environmental and regional development issues connected with it. It is believed that, mainly due to tax evasion, only a portion of all artisanally mined diamonds is being sold through official channels. Also, industrial mining has often been hampered by artisanal mining. An analysis of the sub-sector with a view to better harmonize, regulate and follow-up its various aspects and impacts is included in the proposed project. B. THE ROLE OF THE MINING SECTOR IN THE NATIONAL ECONOMY External Trade 2.9 Value of Exports. The value of mining sector exports declined by 34 % over the last four years, although the sector is still dominating exports with an estimated share of 79 % in 1994. The decline of sector exports is mainly determined by the dominant bauxite/alumina sub-sector. The decline of the bauxite/alumina sub-sector is mainly caused by a deterioration of aluminum world market prices; quantities exported remained essentially the same (Annex 1). A significant increase of cartisanally mined diamonds since 1992 did not lead to any increase in the total export value of the diamond/gold sub- sector since the decline of the sub-sector's industrial activities has more than offset the quantity gain (Table 2.2). Table 2.2. Mining Sector Exports (in USS million) estimated 1990 1992 1994 Total Exports 817 657 626 Mining Sector 756 577 499 Bauxite/Alumina 613 449 375 Diamonds/Gold 143 128 124 Source: IMF 2.10 Foreign Exchange Earnings. It is estimated that the net foreign exchange earnings of the mining sector represent about 40% of the sector's export value, or gross foreign exchange earnings, and that the sector's contribution to the country's total net foreign exchange earnings presently is about 45%.  5 Domestic Impact 2.11 Fiscal Revenues. The Government's fiscal revenues from the mining sector dropped by 66 % in the period 1990-1994. As explained above, the decline is attributed mainly to the bauxite/alumina sub-sector, which suffered from a drop in world market prices and an increase in production costs. Despite the decline, recent fiscal revenues from the mining sector still represent about 30 % of the country's total fiscal revenues (Table 2.3). Table 2.3: Mining Sector Fiscal Revenues (in US$ million) 1990 1992 1994 Total Govt. Revenue 445 400 351 thereof from Mining Sector 299 180 101 Source: IMF 2.12 GDP Contribution. The GDP contribution of the mining sector has been constant at 22% since 1990 (Taible2.). Table 2.: Mining Sector GDP Contribution (in US$ million) 1990 1992 1994 Total GDP 2,818 2,974 3,395 Sector GDP 626 661 740 Sector as % of total GDP 22.2% 22.2% 21.8% Source: IMF 2.13 Employment and Local Economy. As mining is a capital-intensive industry, the sector plays a limited role in national employment; in fact, the industrial mining sector directly employs less than I % of the country's total labor force. Guinean mining operations continue to function as enclaves. The local population and authorities benefit from by-products, such as free or subsidized municipal services (electricity, water, road maintenance), subsidized food allocations, and low-cost imports of consumer goods. C. SECTOR ISSUES 2.14 The country is still benefiting from the major foreign mining investments of the late 1950s and 1960s when first, Friguia, and then CBG and the Soviet-owned Office de Bauxites de Kindia (OBK - now SBK) were created in the bauxite/alumina sub-sector, and Aredor and SAG in the gold/diamond sub-sector. No new major investments have  6 been made after these early bauxite and alumina projects. CBG turned into a singular success, and efforts of the Government were concentrated on retaining maximum revenues from this operation, while the full geological potential of the sector has not been adequately utilized. The reasons are foremost, Government policies which have been an obstacle rather than an incentive for private investments, a legal framework with significant shortcomings, poorly performing institutions and a lack of infrastructure. Mining Policies 2.15 Non-competitive and unstable policies are a major obstacle for mining development in Guinea. The framework under which the mining industry operates is to a large extent a legacy of the country's centralist policies of the 1960s and 1970s. At that time, the Government argued that the value of a mineral deposit is equal to the equity a private partner puts into a mining venture and that the state therefore would be entitled to a 50% free ownership. The Government has been applying this formula to all mining operations, except to SBK, which was politically driven and ruled by special arrangements. In today's competitive mining world, this practice has become outdated and short-sighted. While the Government decided to reduce Guinea's 'free participation' from the traditional 50% to 15% in new agreements, many other countries have a lower or no free participation. In addition to participation, Guinea has been imposing various taxes at high rates on mining ventures. 2.16 Since the late 1980's, sectoral policy changes were introduced in a piecemeal way and without consistency. In 1991, the Government published a mining policy paper calling for a reduction of the State's role as owner/operator of mining ventures and a strengthening of its role as facilitator/regulator. However, no changes were made in the ownership and management of existing enterprises, and attempts to strengthen the State's facilitator/regulator functions were ad hoc and had no major impact. So far, Guinea has been concentrating its efforts on attracting new investors in gold and diamond mining, and facilitating artisanal and small scale mining of these minerals. But the bold actions needed to secure and improve the results of the dominant bauxite mining sub-sector, such as reduction of redundant staff and service units, have not been taken. A clear and consistent vision of where to go and plans of how to get there is required. However, commitment to change is now growing and significant first steps in a new direction have been made (para. 2.22). 2.17 The tax regime for mining companies is determined ad hoc and a consistent, comprehensive and stable regulatory framework for taxation does not exist. On several occasions, special taxes and export taxes not foreseen in original mining agreements were introduced. Overall, the level of taxes is not competitive with those of other important mineral exporting countries. Under recently negotiated gold exploration and mining agreements, Guinea reduced the income tax pertaining to operations covered by these agreements, but introduced at the same time a royalty. However, in a positive development, in early 1995, the Government reduced taxes payable by Friguia to improve that company's financial viability.  7 Legal Framework 2.18 A major revision to Guinea's first Mining Code of 1986 was discussed and adopted in principle by the Government in June 1995 (new Code). The old Code had shortcomings with regard to exclusiveness and extension of mining rights and provided for too large discretionary powers of the MMG. In particular, the old Code neither provided for exclusiveness of mineral rights for any tract of land nor for automatic extension of mining rights after successful exploration. However, these important safeguards for security of tenure, which most investors insist on, were only partly incorporated into the new Code. Establishment of a clear, non-negotiable and internationally competitive tax regime, anchored in the investment and mining codes and possibly supported by a model contract, is another feature important to investors which would be addressed under the proposed project. Finally, appropriate environmental legislation and control, which has become important for mining ventures around the world, is weak in Guinea. Under the proposed project, a review of the latest Guinean laws and regulations pertaining to mining, the fiscal regime and the environment would be undertaken, and steps to enact and apply amendments and new legal instruments would be defined and prepared. Institutions 2.19 Until October 1994, mining was part of the Ministry for Natural Resources, Energy and Environment (MRNEE) which was split into two new ministries: the new Ministry of Mines and Geology (MMG); and the new Ministry of Energy and Environment (MEE). In December 1994, all senior positions within MMG were newly assigned. The former Bureau de Stratigie et de Marketing Minier (BSMM) under MRNEE, was dissolved and replaced by two new units within MMG: one for promotion of mining development and the other for management of State participation in mining ventures. These two units are considered to be important and their heads have the rank of Directeur National. Apart from these two units, there are two conventional Directions Nationales: one for mining, administering the granting of mining rights, and one for geology, in charge of the Geological Survey. In addition, there are two ministerial advisors (one for legal and fiscal matters and one for technical matters), a Secretaire General (with rank and function of Deputy Minister) and an Inspecteur Gene'ral. The new organizational structure is compatible with international practice and need not be a constraint to administrative efficiency. 2.20 The new mining administration wants to address existing issues of institutional efficiency through training, capacity building and restructuring. The proposed project would support the needed measures. Infrastructure 2.21 While well endowed with mineral resources, Guinea lacks an adequate transport infrastructure for new high-volume mining projects. The few operating railway sections  8 and ports are all dedicated to the existing bauxite/alumina companies (CBG, Friguia, SBK). Road density is among the lowest in Africa. Power is generated by mining companies for their own consumption. Capital costs for new industrial construction are at least 50% higher than in other bauxite/alumina producing countries, such as Australia, Brazil or India. This is due to the lack of local industrial supplies and qualified construction contractors in Guinea, a serious disadvantage compared to competitors. Guinea's economy cannot afford public investment in new infrastructure for mining; such infrastructure has to be financed as part of mining projects. Therefore, to compensate for its lack of infrastructure, Guinea has to offer attractive fiscal and other terms to potential mining investors. Despite the poor infrastructure, Guinea offers good prospects in two segments of mining: (a) in expansion of bauxite/alumina operations; and (b) in new gold/diamond mining. As railways and ports for the existing bauxite/alumina operations are in good condition and probably could be adapted to higher throughput rates at relatively low cost, expansion of bauxite and alumina production based on use of the existing transport infrastructure may be financially attractive. For new gold/diamond mining operations, due to the high value and low volume of the product, the lack of major transport infrastructure is normally not a critical impediment. D. GOVERNMENT STRATEGY 2.22 The Government's basic strategy of shifting its role from an owner and operator to that of a facilitator and regulator was declared in its mining policy paper of 1991 (para. 2.16). This strategy, however, was not implemented because of the earlier lack of will to analyze the sector's issues and to address them appropriately. Recently, the Government has recognized the serious deterioration of Guinea's competitiveness in international mining and the shortcomings of its legal and institutional framework. It demonstrated resolve to implement its previously declared strategy by improving the mining code (para. 2.18), reducing Friguia's tax burden (para. 2.17), abolishing OFAB (para. 2.4), starting public stakeholder discussions on mining policy issues (para. 2.26) and changing the mining administration (para. 2.19). 2.23 The sectoral development strategy fits both the Government's and IDA's goal to promote sustainable economic growth in Guinea. As Guinea's balance of payment problems are growing, it becomes increasingly important to secure benefits from mining. The tax revenues gained from mining can help to sustain programs directed at reducing poverty. Given the significance of mining, improved procedures and changed attitudes in the sector might have a spill-over effect for the economy at large. An improved mining sector could thus become a driving force for the country's economic development. E. THE BANK GROUP'S ROLE 2.24 Past Involvement. In the late 1 960s, the Bank financed infrastructure investments for the CBG Project (Loan 557-GUI), and thus was pivotal in making this project happen which financially became one of the most successful mining projects ever financed by the Bank. In 1986, the Bank approved a Mineral Sector Management Project (Credit 1637-  9 GUI) to improve institutional capabilities and the investment climate. This project enabled the Government to negotiate with HALCO on increased bauxite exports by CBG. However, due to insufficient Government commitment at that time, the project did not achieve its objectives regarding institutional strengthening and investment promotion. It is felt that the Government has changed its attitude towards the sector and is now determined to implement the strategy introduced in 1991 (para. 2.22). 2.25 Lessons Learned. The lessons learned from the Bank's previous involvement in Guinean and and West African projects in the industrial and mining sectors concern mainly the lack of Government commitment and counterpart funding, and the lack of adequate cost accounting and auditing. During preparations for the proposed project, the Government has demonstrated significant commitment to its objectives (para. 2.22). It conducted a workshop in March 1995 with the participation of all Government agencies involved in the sector, private investors, and the public in order to develop a consensus on the required policy reform measures. The program to be supported by this project is designed to prepare and facilitate execution of such measures. Appropriate procedures for the timely availability of counterpart funding and arrangements for accounting and auditing will be established. Agreement has been obtained on payment of annual counterpart funds at the beginning of each year (Para. 3.31). 2.26 Rationale for Present Bank Involvement. The Bank's Country Assistance Strategy for Guinea, discussed by the Board on March 3, 1994, identified agriculture and mining as the two important sectors for economic growth. A project preparation facility for a mining sector management project (PPF 756-GUI) was approved in 1992, but its utilization was initially delayed due to insufficient Guinean commitment. However, in the second half of 1993, the previous line ministry invited the Bank to assist in analyzing the sector's issues. Early in 1994, during a mission to update the sector review, a number of possible actions were discussed with the Bank to remove rigidities in mining legislation and existing mining enterprises, and to develop the sector's potential. In October 1994, the new Minister of Mines and Geology expressed his resolve to act and requested Bank assistance to implement reforms in the mining sector. Thereafter, the Government demonstrated its commitment to implement its new policies on several occasions (para. 2.22). Given this commitment, the sector's potential and continuing significance for the economy, and the Bank's experience from past involvement in Guinean and other mining projects, the Bank is well positioned to provide support for a project aimed at refining and implementing new and better policies fostering the sector's development. 2.27 IFC and MIGA. The Bank's involvement in the project which has been discussed with IFC and MIGA is requested to be beneficial in helping implement IFC's and MIGA's strategies for Guinea. Both institutions have recently shown an increasing interest in the Guinean mining sector. IFC was instrumental in attracting the first major private investment in gold mining exploration Societe Aurifere de Guinee (SAG), would like to become a partner in this venture when it goes into operation and is also considering to become in the future involved in the bauxite/alumina sub-sector. MIGA has received several enquiries regarding the mining sector in Guinea and applications for  l0 insurance coverage from three gold/diamond ventures. Guinea became a member of MIGA in October 1995. 3. THE PROJECT A. PROJECT OBJECTIVES AND RATIONALE 3.1 Project Objectives. The overall project objectives are to strengthen the Government's capacity to act as facilitator and regulator, and to attract private investment for mining sector development. For this purpose, the proposed Credit would provide financing for technical and capacity building services needed to: (a) revise the legal and regulatory framework; (b) furnish adequate geological information to private investors; (c) improve the efficiency of the administration; and (d) restructure existing mining operations in line with the new policies and regulations. 3.2. Project Rationale. The proposed project would provide technical assistance for capacity-building and improvement of the Government's legal and institutional framework, as well as for redefinition of the State's role in existing mining enterprises. The project is founded on Guinea's historic role as an important mineral exporter, its decreasing competitiveness in an increasingly competitive international mining scene, and its relatively good mineral potential. Worldwide, mining investors search for favorable geology and competitive government policies, even in countries with poor infrastructure, such as prevailing in Guinea. The country is clearly underperforming in relation to its mineral.potential. Its geology is favorable, but its policies and practices are insufficiently competitive. The priority needs to turn this situation around are increased capacity building and improvement of the legal and institutional framework. Actions in this direction are particularly important for Guinea because of its poor infrastructure. Accordingly, the project would support a two part strategy. The first element of the strategy is to attract investment for new mining projects for those minerals which have a relatively good geological potential but which is under-utilized or not utilized at all. New gold ventures are preferred investment targets, regardless of a country's status of mining development. In addition, prospects exist for diamonds and, possibly, iron ore. The second element of the strategy is to improve the governmental and public framework in which existing companies operate, in order to make them more competitive and clear the ground for eventual expansion and modernization driven by private partners. The two elements of the strategy are linked since usually mining investors look closely at the success of existing operations, in particular for investments in large-volume operations, which are the target of many international mining firms. Alternative project designs which have been considered principally as selected include variations of the size and scope of the data component (described in detail in para 3.5 below) which accounts for about 54% of the total project cost. To aresult, the project strategy and package of project components as selected were found to be the most cost effective option to assist the development of the mining sector and the promotion of investments therein; the project thus would finance only the mapping of the more promissing regions of Guinea and  exclude training of MMG personnel to do mapping themselves. The legal agreements are designed in a way to ensure that the project implementation will be linked to Government actions which show its continued commitment to the objectives of its sectoral reforms. B. PROJECT DESCRIPTION 3.3 The proposed project comprises: (i) a legal component. aimed at improving the overall legal and regulatory framework for the mininig sector; (ii) a data component, aimed at furnishing essential information for investors and public administration, such as a mining data bank and a geological map; (iii) an institutional component. aimed at strengthening the Government's capacity to facilitate private investment and apply regulations in the mining sector; and (iv) a restructuring component, aimed at preparing the restructuring of existing mining enterprises. A full description of these components and their sub-components is provided in Annex 2. Terms of reference for consulting services and service contracts described in the following paragraphs are provided in the Project Implementation Manual of March 25, 1996. MMG will use such terms of references in accordance with review procedures acceptable to the Bank (para. 3.26). 3.4 Legal Component (US$1.3 million). This component would finance the services of an experienced international firm to provide assistance to improve legal and regulatory framework for the mining sector so as to put Guinea at par vis-a-vis its competitors for mining investment. The component is central to the country's development strategy as discussed in the Country Assistance Strategy paper of April 1994. International mining companies prefer countries with clear laws and regulations which leave little room for negotiations. Guinea's new mining code will be examined in this regard. Cross references to related codes, such as the investment and environmental codes, will be checked for consistency. Regulations will be reviewed. All tax regulations applicable to mining will be reviewed for consistency and also with regard to competing countries. A model mining investment contract will be prepared. based on the mining code and consistent with the fiscal regime. Environmental legislation and control pertaining to mining will be brought up to modern standards. An investigation will be made of the labor code and the collective labor agreement for the mining industry to determine if these are hindering efficient management of mining operations. This assistance will be provided by a grouping of law/accounting consultants who will give in-the-field assistance to Guinean counterparts. The work will be coordinated by a small working group whichl includes representatives from other ministries and which is headed by MMG's Legal and Fiscal Advisor. It is anticipated that the working group will submit proposals for any suitable amendments to the Mining Code and regulations to an inter-ministerial commission for review and approval by June 1997. The Government agreed to: prepare by March 31, 1997, draft implementation decrees and legislation aimed at harmonizing codes relevant to mining; submit by June 30, 1997, such draft legislation to the Bank for review and comments; and, by December 31, 1997, take all measures required on its part to improve its mining legal and regulatory framework.  12 3.5 Data Component (US$9.0 million). In the absence of suitable local expertise, this component would finance service contracts with internationally experienced engineering consultants to be executed under the supervision of experts from an experienced geological survey agency under a twinning arrangemenit. The objective of the component is to efficiently furnish essential geological informatioll of public domaill. This is an important service customarily maintainied by the responsible government agencies in all competitive mining countries, to allow them to attend to the needs of private investors and to keep a register of the country's mineral resources. There is ample evidence that mining investors prefer to work in countries with well developed geological data systems rather than in countries with poor data systems. The Bank has been supporting the acquisition of geological and mining data banks in other countries, including Argentina, Bolivia, Ecuador and Tanzania. In view of the high costs of' such data banks, several alternatives were considered for Guinea. including reduction of the geographical area to be covered, the density of the data and the scope of the field work. It was concluded that in Guinea two important tasks have priority: (a) installation of a modern mining cadastre linked with the Geographical lnformation System (GIS); and (b) mapping of only the northeastern part of the country, whiclh despite good mineral potential has never been mapped in the past, at a scale of 1: 200,000, the minimum scale internationally considered useful for this purpose. In designing these tasks, care has been taken to find a reasonable compromise between the need to keep costs low and the likely success rate for investment attraction, high. As one way of achieving this, existing satellite images and aerial photography would be evaluated before proceeding with field work for mapping. Also, to reduce costs, limited geophysical data would be collected by overflying the area with a small aircraft equipped with instrumentation to measure anomalies of the earth's magnetic field. on an as wide as possible grid, ahead of field work on the ground. A comparison, done with the help of outside sources, with similar work executed in Bolivia, Ecuador and other countries shows that costs of the methods selected are well within the international norm of US$80-150 per square kilometer, when expectations of good results are better than average. While a direct cost recovery of this component is not possible, the work is an important integral part of a package of components which is expected to yield high returns in the form of Government revenues from future mining activities (paras 3.13-3.19). Due to the highly technical nature of the services to be furnished under this component, the firms to be engaged to do this work would have to be prequalified. For cost efficiency, the work would be broken down into three separate service contracts for (i) airborne geophysical survey, (ii) geologic mapping and (iii) installation of a modern mining and geological data system. Each service contract would be awarded on a competitive basis to a prequalified firm with the requirement to deliver complete end-products. Coordination and supervision would be provided by an experienced foreign geological survey agency to be engaged under a twinning arrangement with MMG. It has been agreed that experts will be engaged under such twinning arrangement with a foreign geological survey firm to assist in the prequalification and contracting of firms for the service contracts, the supervision of contract execution, and the training of key Guinean staff for maintaining the data system.  13 3.6 Institutional Component (US$2.3 million). This component would finance consulting services to help increase the efficiency of MMG's core administrative activities and divest or reduce its non-essential or commercializable activities. This objective is fully compatible with the country's and the Bank's goal to form efficient institutions for execution of government policies. The key administrative functions of g,ranting mining rights and keeping an independent public register (mining cadastre) would be made more automatic and fully transparent. Appropriate parameters to monitor such change are included in the list of project performance indicators (para. 3.22). MMG's controlling function with regard to environment, safety and health in mining operations (mine inspectorate), would be strengthened. With regard to artisanal mining, the consultant would focus on administrative and organizational aspects to clearly define central versus regional responsibilities, to separate and protect industrial from artisanal small scale mining, and to adequately address the environmental, healtlh, safety, social and regional development problems of artisanal mining. The promotional role of MMG to attract private investment for industrial mining would be strengthened. The role of the State in administering its interests as a shareholder in mining enterprises would be better defined and appropriately institutionalized. The Government's laboratory services and the applied geology services would be reduced and, to the extent feasible, separated from MMG. commercialized and offered for sale to private investors. In line with the terms of reference described in the Implementation Manual, MMG wants to prepare by October 31, 1997, for review and comments by the Bank, a draft action plan to commercialize these services, and finalize the action plan not later than December 31. 1997 by taking into account the Bank's comments. The role of consultants in all above mentioned areas would be to assist the Government in elaborating detailed proposals for the improvement of organization and procedures, and training key Guinean staff. The costs of the Institutional Component include a provision for the operation of a temporary unit to coordinate the project (para. 3.21), as well as for annual assessments on project implementation progress. (para. 3.20). 3.7 Restructuring Component (US$1.4 million). This component would finance consulting services required to select the most appropriate measures (such as rehabilitation, privatization, or liquidation) to be implemented with regards to the following State-owned mining companies: Aredor, SBK, CBG and Friguia. One of the goals of such actions is to give a strong signal to potential investors that the Government is committed to implementing its new policies. As a preparatory step, a preliminary assessment of the technical, operational and financial situation of Aredor and SBK is being conducted by qualified consultants with financing under PPF 756-GUI. The Government agreed to: submit to the Bank by October 31, 1996, the results and recommendations of the preliminary assessment of Aredor's and SBK's operations for review and comments; undertake, by December 31, 1996, detailed diagnostic studies under terms and conditions satisfactory to the Bank for the most appropriate restructuring schemes for SBK, CBG and Friguia; submit to the Bank by June 30, 1997, the results and recommendations of such studies for review and comments; and thereafter, implement action plans in accordance with modalities and schedules agreed with the Bank. While MMG will be the executing agency for all studies and proposals relating to divestiture, it  14 will closely cooperate with other government agencies involved, such as the Comite de Privatisation and the Direction des Marches Publics et du Portefeuille de l 'Etat under the MF. 3.8 Training (US$0.4 million). This component would finance the cost of local seminars, workshops and basic training courses, as well as the cost of participation by selected MMG staff in seminars abroad which would complement local on-the-job training, an integral part of the consultants' assignments. The local workshops would further consolidate consensus-building, covering important and broad issues on which several expert opinions would be obtained. In addition to the training financed under this component, special courses would be held under the consultant contracts for the four major project components. An outline of the program for training activities is presented in Annex 3. 3.9 Project Preparation (US$0.5 million). This component comprises the refinancing of the Project Preparation Facility (P756-GUI), which was established in 1992 for the preparation of a Mining Sector Management Technical Assistance Project in an amount of US$0.25 million and augmented in 1995 by a second advance of the same amount. C. PROJECT COSTS AND FINANCING PLAN 3.10 The total cost of the project which would be implemented during the period 1996 to 1999 is estimated at US$16.8 million equivalent. The foreign exchange component is US$12.1 million (72%). Local costs are estimated at US$4.7 million equivalent (28%); they include taxes and duties (US$3.0 million equivalent), project management costs (US$0.4 million equivalent), and local supplies and services acquired under the project (US$1.3 million equivalent). Cost estimates are based on 1995 prices, with 8% added for physical contingencies and 2.5% for annual domestic and international price escalation in 1996, 1997, 1998 and 1999. Project costs are presented in Annex 4. 3.11 The financing plan includes an IDA Credit of US$12.2 million equivalent which would finance US$12.1 million, or 100 % of the foreign exchange costs, and US$0.1 million, or 2%, of the local costs. The share of local cost-financing by IDA has been calculated on the basis that: (a) IDA would not finance local taxes and duties; and (b) the Government would contribute 10% of total project costs net of taxes and duties. Local costs financed by IDA represent a portion of local supplies and services to be furnished as part of larger service contracts. The Government would finance US$4.6 million equivalent (of which US$3.0 million are taxes and duties, and US$1.6 million other local expenditures). The availability of possible cofinancing by other donors has been investigated, but no opportunities have been identified.  15 D. ECONOMIC ANALYSIS 3.12 The purpose of this economic analysis is to give an indication of the Project's probable net impact on Guinea's economy. Appraisal of the Project's costs and benefits has shown that its potential rewards are considerable. The Project's main components focus on capacity building and technical assistance. Economic analysis of such projects always bears the potential of significant errors since there is only a probabilistic relationship between inputs and outputs, and since the outputs are heavily dependent on intangible factors like the Government's commitment and its reputation in business circles. The guiding principle of this analysis has therefore been to see whether the proposed investment is worthwile from the country's viewpoint, on conservative assumptions. The economic and fiscal analysis has been carried out over a notional (conservative) 15-year project life. 3.13 Fiscal Impact And Cost Recovery. The Project involves public spending and both public and private benefits. Incremental fiscal revenues would mainly come from: (i) taxes and royalties from new mining exports by private investors; (ii) taxes on incremental exports of bauxite and alumina by CBG, SBK and Friguia; (iii) elimination of subsidies to cover SBK's operating losses; (iv) dividends paid to Government by companies remaining with public shareholding, or proceeds from the sale of Government's shares in the companies to be divested; and (v) taxes levied on new private sector activities peripheral to the new mining areas. To ensure sustainability of the mining operations which would provide these recoveries, relevant incentives, including tax incentives, will be provided in the new mining code to secure private investors' long- term interest in Guinea's mining sector. This analysis assumes competitive future tax rates which are lower than present rates. The results of the fiscal impact analysis are shown in Table 3.1 below. Table 3.1: Fiscal impact (15 -year project life) (Present Value* in US$ million) Project costs 12 Fiscal revenues Government's revenues * from new mines 8 (low) - 36 (high) * from existing mines (incremental) 40 Elimination of subsidies I I Dividends n.d.** Privatization proceeds n.d. Taxes on periphal activities n.d. * Present Value: based on constant 1995 prices, tuture payments discounted 12% annually over a period of 10 years after project completion * n.d.: not determined  16 3.14 The portions of the Project that do not directly lead to recoverable revenues include the Government's capacity building and the improvement of the mining sector's legal and regulatory framework. These activities are required as first steps of a permanent reform process involving the policy changes (e.g., changes in tax structure) necessary for competitive positioning of Guinea's mining sector in the international market. The expected incremental fiscal revenues amply cover the project costs, including the non-recoverable portions. 3.15 Cost-Benefit Analysis. The Project follows two strategic approaches: (i) development of new mining exports by attracting foreign investments for new mining ventures, in particular for gold and diamonds, and (ii) restructuring and divestiture, and expansion of the existing bauxite and alumina operations of CBG, SBK and Friguia. The two approaches are closely linked, since investors want to see success in existing operations before deciding on new investments. For the Government, the combined costs of the two approaches are fully reflected in the total project costs. The assumptions underlying this analysis are given in paragraphs 3.16 and 3.17. 3.16 The main benefits taken into account for new mining ventures are: (a) royalties and taxes paid to the Government by new private investors as proceeds for the sale of the country's natural resources, and (b) new employment at wages that yield more than the opportunity-cost of labor. Private investors' capital and operating costs, which originate from abroad, are not included in the Project's costs. Similarly, their after-tax profits are excluded from the benefits of the Project, since these profits are assumed to be freely expatriated. Some of the profits may in fact be reinvested locally, however, since the amounts of reinvested funds are unpredictable, they are not taken into account in this analysis. The high scenario for output from new mines assumes the discovery and development of two or three medium-sized primary gold deposits and of one primary diamond deposit. Given the proven occurrence of gold and diamonds in Guinea and based on exploration and mining results in other West African countries, this assumption appears reasonable. However, all mining ventures carry an unavoidable geological risk and to account for it, a low output scenario assumes that only one gold operation of the size of SAG's previous operation would be restored, as well as a diamond operation half the size of the previous Aredor operation. Other new mineral ventures, such as development of the high-grade Mt. Nimba iron ore deposit and any base metal or industrial mineral deposit, have not been taken into account, although their development could be facilitated by the Project. Profits of new local private enterprises created in the vicinity of new mining areas, and the incremental wages generated by these enterprises, although part of the Project's benefits, are being ignored because no safe estimate can be made of their magnitude. 3.17 With regard to the improvement and expansion of existing operations, net benefits to the national economy result from: (a) the incremental production of expansion projects; and (b) efficiency improvements of the three companies. Similarly to new projects, incremental production from existing operations yields incremental royalties and taxes,  17 and also provides some incremental jobs, albeit to a lesser degree than a new venture. The efficiency increases will release labor for other economic output (valued in this analysis at the shadow cost of labor) and eliminate Government subsidies to SBK. The investments required would be solely provided by the private partners. The costs and benefits to the private partners are not considered in this analysis. It is assumed that bauxite production at CBG would be expanded by 40 percent and that one additional alumina production line would be added at Friguia, two likely events if the restructuring supported under the Project is carried out. Withdrawal from non-performing social activities by the three companies is a benefit and essential for sustainable regional development, but has not been economically evaluated for the purpose of this analysis. 3.18 Based on these principal assumptions, and considering the opportunity cost of capital at 12% and the project life limited at 15 years, the net present value of the project is US$91 million equivalent for the low scenario of new mine development and US$180 million for the high scenario of new mine development. The corresponding internal rates of return are 55% for the low and 70% for the high scenario. Details of the assumptions and calculation are presented in Annex 5 and the main results in Table 3.2 below. Table 3.2: Cost and Benefits (in constant 1996 US$ million, future payments discounted 12% aniLtially) Cost 1 2 lo11w h10 Benefits 103 192 Net Benefits 91 180 IRR 55% 70% 3.19 Sensitivity Analysis. If no new mine development is assumed, the rate of return would be reduced to 48%. If no incremental benefits from the existing operations are assumed, and only the low output scenario for new mines would be achieved, the rate of return would be reduced to 23%. If costs and benefits of the private investors are included in the return calculation, the base case return (low output scenario for new mines) would drop to 17% (this is assuming that the capital invested for new mines and expansion of existing operations would yield a return of about 15%). Table 3.3 summarizes the results of the analysis. Table 3.3: Sensitivity of Economic Rate of Return Economic Rate of Return Base case (low new mines scenario) 55% No new mines 48% No incremental benefits from existing mines 23% Private investors included 17%  18 E. PROJECT IMPLEMENTATION 3.20 Timing. The project would be executed over a period of four years and is estimated to be completed by December 31, 1999. A summary of key project activities and their estimated tilming is shown in Annex 6. Detailed implementation schedules, cost estim-iates and training plans were prepared as part of the Project Implementation Manual with assistance from a consultant financed under PPF 756-GUI. Adoption of this Manual by the Government is a condition of effectiveness. Assistance from consultants engaged under short-term contracts would be needed throughout the project implementation period, due to the highly specialized nature of the work to be conducted under the project, ilcluding the annual assessments of progress achieved in project implementation. In line with details specified in the Project Implementation Manual, MMG will prepare project implementation progress assessments, with assistance from consultants financed by the Bank. 3.21 Project Management. MMG would be responsible for managing project implementation which is to be fully financed from the Government's budget. The Minister. MMG, has appointed a local Project Coordinator who has high-level managerial experience in the mining industry and has been involved in the project since its identification. The Coordinator is responsible for coordination of all project activities, conducting the contracting of consultants and all other procurement activities, assisting the provision of logistical support, and communicating with the Bank. He has direct access to the Minister and the Ministry's logistic support. Each component is headed by a manager who reports directly to the Project Coordinator for the execution of the project. Thlese managers have been assigned from among the highest-level officials of MMG directly in charge of the respective functions (Annex 7). The managers will appoint local counterparts for each foreign expert and, in consultation with the Project Coordinator, propose to the Minister which staff is to receive training. All contacts with other local and foreign agencies will be facilitated by the Project Coordinator. The execution of the Data Component, sub-contracted to qualified firms on a competitive basis, will be assisted by a foreign geological survey agency under a twinning arrangement acceptable to the Bank (Para. 3.5). MMG agreed that the execution of any parts of the Project will be headed at all times by staff with qualifications and experience acceptable to the Bank. 3.22 Performance Indicators. MMG. assisted by a consultant and in consultation with the Bank, selected ten annually set performance indicators to gauge progress achieved in project implementation. These indicators refer partly to the timely execution of consulting services and partly to timely decisions and actions to be taken by the Government. The agreed performance indicators are included in the Project Implementation Manual of March 25, 1996. MMG agreed to implement the project in accordance with the Manual and not to modify the Manual in any way which, in the opinion of the Bank. may adversely affect the execution of the project. 3.23 Project Sustainability. Important features supported by the institutional and restructuring components (para. 3.6 and 3.7) relate to an increase of the efficiency of  19 existing mining companies and the divestiture or liquidation of non-essential services. Such measures are important for the sustainability of the Project. The Government agreed to carry out a mid-term review by December 31, 1997, and promptly thereafter adopt on the basis of this review a program for the continuation of project execution and implement any measures required to sustain the Project's achievements. Continued broad support for such measures would be strengthened through local workshops conduLcted as part of the project under the training component (para. 3.8). and a continued participation in conceptualization and design of further measures to improve the mining sector is expected. The Government agreed to hold workshops annually, with topics and other arrangements. including proposed budgets and lists of participants, acceptable to the Bank. Further measures aimed at increasing sustainability are the training of key staff and development of specific instructions and procedures for efficient administration. MMG agreed to submit, not later than 6 months after the project closilng date, an operational plan satisfactory to the Bank for mining sector management following project completion. 3.24 Project Supervision. A Supervision Plan is slhowni in Annex 8. Supervision missions are scheduled at four-months intervals during the first year of project implementation and semi-annually thereafter. F. PROCUREMENT 3.25 Procurement would cover consulting services, service contracts, training and workshops. A procurement plan acceptable to the Bank is presented in the Implementation Manual of March 25, 1996. Among consulting services, the largest contract would be for assistance in improving institutional efficiency, whiclh includes, in addition to special studies and advice, training and materials needed for efficient contract execution. Other contracts for short-term consulting services are foreseeni for legal and restructuring matters. Consultants would be appointed in accordance with the Bank Group's Guidelines for the Use of Consultants (August 1991). Among service contracts, the largest would cover the preparation of the geological map of the southeastern part of the country. Other service contracts would cover an airborne geoplhysical survey of the area to be mapped and the installation of a modern mining cadastre and inlormation system. Service contracts which are listed in Annex 5 would be procured under ICB rules with prequalification based on Bank standard documents. The training category would cover the cost of conducting local seminars, courses and workshops (hionioraria, travel and transportation of training personnel. conference room rental, refreshiments/meals, video and copying equipment and communications), as well as the cost foi participation by selected MMG staff in courses and seminars abroad (fees, travel costs and subsistence). These services would be procured through prudent shopping and selection of individual consultants in accordance with the Bank's Guidelines. Table 3.4 summllarizes the procurement arrangements. 3.26 All contracts for amounts of US$100,000 equivalent and more, as well as all contracts above the equivalent of US$100.000 and US$50.000 respectivelv for consulting  20 firms and individual consultants would be subject to IDA's prior review. However. for all consultant service contracts, terms of reference, single source hiring, assignments of a critical nature and contract amendments raising the value above the threshold would be subject to IDA's prior review and approval. The threshold corresponds to a desirable percentage coverage of the total estimated value of all contracts. Tahle 3.4: Procurement Arrangements (in LJSS million equivalent, includiing contiiigecies) Project Elements Procurement Methods 1CB Other Not IDA- Total Financed4"' Costs I Consultant Services - 5.8(2) (6 5( (3 (4.6) (4.6) 2. Service C(onitacts 9.6 ('2 - 9.6 (6.7) (6.7) 3. Training - (1.4 - 0.4 ((1 4) ((0.4) 4. PPF Reflinancing - (1 5 - 0.5 ((1.5) ((1.5) Total 9.6 6.7 ().5 16.8 (6.7) (5.5) (12.2) Note: Figures in parentheses are' the amc un zslts to he jinanced hY //),. (1) Locail taxes ntd co(unteLrpart lu1nds. (2) Includingp/)F/ject inanagemient. 3.27 Delays in procurement have been a major problem in other projects in Guinea. To reduce the risk of such delays, terms of reference, shortlists and letters of invitation for all major consultant contracts have been prepared prior to negotiations. The appointment of a project coordinator with industrial management experience, which has been effective since early- 1995, is further reducing the risk of excessive delays for this project. G. DISBURSEMIENTS 3.28 The proposed project is expected to be completed over a four-year period; funds are expected to be disbursed over four and a half years. The Bank's standard disbursement profiles do not provide a suitable basis for comparisoni, due to the special nature of this project. The disbursement categories and the percentages of expenditures to be financed by the IDA credit are shown in Table 3.5. Table 3.5: Allocation of IDA Credit (in US$ million equivalent) Category Amount 'Yo of Expenditures to be financed I. Consultant Services 4.2 100%* 2. Service Contracts 6.1 85% * 3. Training and Workshops 0.4 100% of foreign and 85% of local 4. Refinancing of PPF 756-GUI 0.5 5. Unallocated 1.0 Total 12.2 * net of local taxes and duties  21 3.29 All disbursements of the proposed Credit would need to be fully documented. Expenditures against contracts of less than US$ 100,000 equivalent and training programs costing less than US$ 50,000 equivalent would be made against statements of expenditures (SOEs). MMG would be responsible for preparing withdrawal applications. The documentation for withdrawals under SOEs will be retained at MMG for review by Bank supervision missions and for regular and semi-annlual audits. The Credit would refinance PPF 756-GUI. 3.30 To facilitate disbursement, the Government would establish a Special AccouLnt In a commercial bank to cover Bank's share of eligible expenditures. Out of an authorized allocation of US$500,000, an amount of US$500,000 would be made available from the Credit upon effectiveness. Once SDR 670.000 has been disbursed under the Credit, the balance of the initial deposit (US$250,000) would be advanced to the special account. IDA would replenish the Special Account upon receipt of satisfactory proof of incurred eligible expenditures, accompanied by a bank statement and reconciliation of the Special Account. 3.31 Lack of counterpart funds has been a major problem in other projects in Guillea. Budgetary provisions for local costs would be inscribed annually in the operating budget of MMG. The Government agreed to open and maintain a separate project accouLnt and to deposit in the said account by January I of each year amounts agreed upoIn with the Balnk as counterpart funding for the relevant year (Para. 5.1). Assurances have also been obtained that funds deposited in the Project Account will be used only for the purposes of the Project. Deposit of the counterpart funds for the first year of project implementation in an amount to be agreed at negotiations is a condition of credit effectiveness. H. ACCOUNTING, AUDITING AND REPORTING 3.32 MMG will establish and maintain a project accounting and finanicial management system satisfactory to the Bank. A qualified auditing/accountinig consultanlt will assist in establishing the project accounting system and audit the project's finanicial statemelnts in the years 1996 through 1999 with financing under PPF 756-GUI. The establishmelnt of this system is a condition of credit effectiveness. Agreement has been reaclhed on the terms of reference for performance of audits by independent auditors acceptable to the Bank of the project accounts in accordance with appropriate auditing practices and in such detail as the Bank may request. Audited reports will be submitted to the Bankl not later than 6 months after the end of each year. Appointment of the auditors under a multi- year contract is a condition of credit effectiveness. In addition, the Special Account and Statements of Expenditures will be audited annually and audit reports submitted six months after the end of each fiscal year. 3.33 MMG agreed to submit to the Bank: (a) not later than one month after the end of each quarter, a project implementation progress report; (b) not later than October 3 1 of each year, for the Bank's review and comments, annual draft work programs and budgets  22 for the following year acceptable to the Bank; and (c) an implementation completion report within six months of the credit closing date. 1. ENVIRONMENT 3.34 The project is rated as a category B project. An environmental management plan and data sheet are attached as Annex 9. An environmenital audit of all existing mining operations will be conducted as part of the project. Improvement of mining-related environmental laws and regulations is an important task under the legal component of the project. The new regulations would address appropriate reclamation of land disturbed by mining and protection of waters from leachates and waste from mining activities. A special focus will be on regulations to control the impact of small scale mining on environimenit, health and safety. Use of mercury for gold amalgamation and of cyanide for gold leaching may only be permitted for qualified mining enterprises which can comply with the required safety and health standards. Consultants will identify the improvements of the institutional framework needed to allow an appropriate execution of the Governimenit's regulatory function for environment, healtlh and safety. The Government agreed to have the environmental audit of the sector conducted by independent consultants and completed by October 31, 1997, under terms of reference acceptable to the Bank and with financing provided under the project. 4. PROJECT BENEFITS AND RISKS A. BENEFITS 4.1 The principal benefits of the project are incremental mineral exports, tax revenues, employment and regional development, as well as efficiency improvements in the sectoral administration. The economic analysis shows that even if the project is only modestly successful in attaining conservative objectives, it is likely to have been fully justified from an economic viewpoint. The project would help open the doors to new private investment in bauxite, alumina, gold and diamond mining, and possibly other minerals. As a result, Guinea could further consolidate its leading role in world bauxite exports. strengthen its role as an alumina exporter, and become a significant regional producer of gold. The total export value of minerals could be expanded from the present level of US$500 million per year and Government revenues from mining could be stabilized at or increased beyond US$100 million per year. 4.2 Without the reforms supported by the Project, there would be a high risk that the Government's fiscal revenues from the mining sector could further decline. No new private investment might be made in, and existing investors could withdraw from, this sector in Guinea. Public and semi-public mining companies' profitability would be likely to continue to decline, requiring further subsidies to cover their operating losses. Without  23 the reforms, other benefits expected under the Project would be unlikely to occur, including Government's capacity building, in-depth reforms of the mining legal and regulatory framework, and expansion of operations of existing mining companies. Mining activities could then turn to a burden on the Guinean economy. Without the reforms, the Data Component may still be useful in leading to a new mineral discovery and eventual investment; however, the probabability of this to happen would be greatly reduced. B. RisKs 4.3 Although projected internal rates of return are high and robust under several assumptions, there are limited risks which could endaniger the long-run prospects of the sector and the successful implementation of the project. These risks are mainly seen in three areas: geological, political and financial. The geological risk consists of not finding mineral deposits which will be sufficiently attractive in the future world mining scene, a fundamental risk of mineral exploration in general, which is carried essentially by mining companies except for the cost, borne by the Government, of the initial geologic mapping. This risk has been mitigated by restricting the mapping work to a promising area and by not incurring any costs with exploration activity. The political risk consists of the Government not following through on implementinig all the restructuring measures which the project is designed to develop. This risk, however, is believed to be small because of the demonstrated commitment by the Government to the program, as evidenced by its initiatives to improve the mining code, reduce export taxes, abolish OFAB and start public stakeholder discussions on mining policy issues, and because the Government has recognized that it would incur heavy revenue losses by not implementing the program. The financial risk consists of the possibility that counterpart funds will not be available when needed. To reduce this risk, appropriate budgeting procedures will be established and annual advance payments required. 5. AGREEMENTS REACHED AND RECOMMENDATION 5.1 Agreement has been reached that the Government will: (a) prepare by March 31, 1997, draft implementation decrees and legislation aimed at harmonizing codes relevant to mining: submit by June 30, 1997, such draft legislation to the Bank for review and comments; and. by December 3 1, 1997, take all measures required on its part to improve its mining legal and regulatory framework (para. 3.4): (b) conclude contractual arrangements satisfactory to the Bank for twinning with a reputable international geological survey firm to assist in the  24 prequalification and contracting of firms to execute the service contracts, the supervision of service contracts execution, and the training of Guineall staff for maintaining the data system (para. 3.5); (c) submit to the Bank by October 31, 1996, the results and recommendations of the preliminary assessment of Aredor's and SBK's operations for review and comments; undertake, by December 31. 1996, detailed diagnostic studies under terms and conditions satisfactory to the Bank for the most appropriate restructuring schemes for SBK. CBG and Friguia; submit to the Bank by June 30, 1997, the results and recommendations of suchI studies for review and comments; and thereafter, implement action plans in accordance witl modalities and schedules agreed with the Bank (para. 3.7); (d) ensure that the execution of any parts of the Project will be headed at all times by staff with qualifications and experience acceptable to the Bank (para. 3.21); (e) implement the project in accordance witlh the Project Implementation Manual and not modify the Manual in any way which, in the opinion of the Bank, may adversely affect the execution of the project (para. 3.22); (f) by not later than December 31, 1997, carry out jointly with the Bank a mid- term review and promptly thereafter adopt on the basis of this review a program of actions as required to remedy any deficiencies in the execution of the project and to further sustain the continuation of project execution (para. 3.23). Prior to the review, the Government would furnish to the Bank a draft action plan to remedy identified deficiencies; (g) carry out workshops annually on topics under arrangemenits, includinig proposed budgets, qualification of selected speakers and lists of participants, agreed upon with the Bank (para. 3.23); (h) not later than 6 months after the project closing date. submit an operational plan satisfactory to the Bank for mining sector management following project completion (para. 3.23); (i) deposit counterpart funds into the project account by the first day of each calender year. in accordance with the draft work program and budget agreed upon with the Bank for each year, and use these funds only for the purposes of the Project (para. 3.31 ); (j) in accordance with terms of reference acceptable to the Bank, have audits of (i) accounts and records and (ii) statements of expenditure performed by independent auditors, acceptable to the Bank, in accordance with appropriate auditing practices, and submit the corresponding reports to the Bank not later than six months after the end of each year (para. 3.32):  25 (k) submit to the Bank: (i) not later than one month after the end of each quarter, a project implementation progress report: (ii) not later than October 31 of each year, annual draft work programs and budgets for the following year, and finalize said work program, investment proposals and related budget by November 30 of each year by taking inlto account the comments and recommendationis made by the Bank and carry them out promptly thereafter: and (iii) an implemiientation completion report withini six moniths of the credit closing date (para. 3.33); and (I) not later than August 31, 1997. submit to the Bank an environimental audit of the mining sector by independent consultants, under terms of reference acceptable to the Bank and thereafter adopt the recommendationis of this audit (para. 3.34). 5.2 Effectiveness of the proposed credit is subject to the following conditionis: (a) adoption of a Project Implementation Manual satisfactory to the Bank (para. 3.20). (b) deposit of an initial amount of US$300,000 equivalent into the project account (para. 3.31 ); (c) establishmenit of an accountinig and finanicial management system for the project satisfactory to the Bank (para. 3.32): and (d) appointmiient of indepenident auditors under a mUlti-year agreemiient, acceptable to the Bank. who will audit annually the accounts and records of the project (para. 3.32). 5.3 Recommendation. Subject to the above terms and conditions, the proposed project would be suitable for an IDA credit of SDR 8.3 million (US$12.2 million equivalent) to the Republic of Guinea. on standard IDA terms.  26 ANNEX I Page I of 5 REPUBLIC OF GUINEA MINING SECTOR INVESTMENT PROMOTION PROJECT RECENT DEVELOPMENTS IN THE GUINEAN MINING SECTOR Selected Economic Indicators Exports 1. The value of miniing sector exports declined by 34 % during the period 1990-1994 (Table 1). The total sector's decline is mainly determined by the decline of thle dominianit bauxite/aluminia sub- sector. The decline of the bauxite/alumina sub-sector is mainly caused by a deterioration of aluminum world market prices; quantities of bauxite and alumina exported remained essentially the same, or even increased slighitly for the major producers . A significanit increase of artisanally mined diamond since 1992 did not lead to any increase in the export value of the diamond/gold sub- sector; decline of the sub-sector's industrial activities, whichi achieve much higher uinit prices 2 more tiian offset the quantity gain.' 2. Guinea has been relatively well protected from a sharp decline of interinationial aluminum prices, whiich amounted to about 60% for the period 1990 to 1994. Thie protection is provided by complex pricing formiulas which have production cost componenlts as well as interinationial commodity price componenits related to the preceding year. Despite recent temporarv production cuitbacks of major aluminum producers to reverse a price decline, structural surplus production capacities will probably persist for a longer period. Production from the CIS will probably contilnue to enter world markets and keep long-tern aluminum prices ulider pressure. Table 1: GUINEA - Mining Sector Exports (in IIS$ million) estim. estilml. chUnge 199( 1991 1992 1993 1994 94/90 Total Sector 756 719 577 575 499 -34% Bauxite & Alumina 613 589 449 433 375 -39% CBG 367 359 316 289 260 -29% Friguia 166 154 106 109 103 -38% SBK 80 76 26 35 12 -85% Diamonds & Gold 143 130 128 142 124 -4-% Industrial 65 56 48 34 i -1/00% ............................................... ................................................................................ .................... Aredor 45 40 31 34 n -Io)"% SAG 20 15 17 0 0 -/00% Artisanal 51 40 44 50) 61 ......0 C)iam. 2 26 36 36 . 60% Gold 26 14 8 14 21 -19% ......................... . ........ ........ 6................. k................ .............. Central Bank 27 35 36 58 63 /33% Source. 14IF I/ Since 1990, CBG and Friguia increased their export quantities by about 5% and 1%. respectively, wihile export quantities of the small producer SBK dropped by more than 60%. 2/ The average value of industrially mined diamonds was about 350$/carat. of artisanallN mined diamonds about 75$/carat. 3/ The Bank's International Trade Division forecasts aluminium prices (in constant terms) to remain at the present level for thc following 10 years. This level is about 25%,o lower than the 1989 lcvel.  27 \NNEX I Palte 2 otf 3. Fiscatl Reveenies. 'I'he goveriinenit's fiscal revenules frol the inning sector dropped by 66 % since 1990. The decline cani be attributed lainily to thle hauxite/a tim 1.ima suil-sector: diamionld anid gold mining lhad almost no imipact on the declilc'. Despite the declinle total tiscal re\enuies from the iiiiining sector are still high in relation to the COuLtry's total fiscal revenliues and the in iniii sectors turnover. In 1994. total taxes paid by the Guilnean mnillilnl secto r still represented ahoLit 3i0 % of all Guinean fiscal revenues anid 20 % of the minintg sector's sales revenluies (\\Iile internlationally exporters of bulk mninerals ty picall pav less tlhanl 0 %taxes in relationi to tleir sales-). 4. Other Economi7ic Indlicators. GDP ( Conrihillion. Since 1990. tle G[)P conitr-ibuitioll of thle m ining sector remainied stable at aboLut 20 %. Bank staff estimiate thiat the sector's GDP conltribution is tin likely to grow in future. In the nedcCilini-term, ani inicrease of alum mum prices, anld hience also protits fromii bauxite mining and (iDP conitribLItiol. imaN bIllepossible. loever in tIle lon0g-rull miii iiing contribution to GDP will probably decline tor two ilia'or reasons (a) metal priccs are likely to conitinile to decline in real terilis: and (b) Gulinea nieeds and is HUi\ely to achileve, economic diversification Outsicde ininill. 5. AeNet Foreign Exchange Earnings. AlthoLighi deciing. it is estimaited thlat the miniing sector's contribuition to the country's niet foreigii exchange earnings is still in thle range of 40-50 %. Mainly dLie to the higoi taxation of tle sector, the ratio of net to gross toreign exchange earning.ts remainied at a high and constanit level. Government Policies, Legal Framework ani( Institutions Mining Policies 6. Recent mining policies lhave been directed towards recliced inivolveimenit of the state anld diversification ot the sector. In 199 1. the Governimlent adopted a nii in ing policy paper whichi was pirepared bv MRNEE and preceded by the Baik's sector reviev. A first miajor aclieveimentt, vhich cani be largely contributed to this policy slift. was the signinig of exploration agreeients witlh two imnportant internlationlal mininlg firms. Cyprtus of the U.S. and Golden Slhamrock of Aistralia, in November 1993. To diversify and expanid inining actiities, the government legalized anid regulated artisanal diamond minii ig in mid-1992. and at the same timie extenlclecd tile regulation. with in inor imodificationis, to small scale gold and diamiiond mines. As a result, registered Otitpiut from artisanal diamond miniing increased shiarply. However. dtie to lower liidistrial activity, the value of total gold anid diamondci mining did not increase. 1I'iIull o1, nit II aLI I is'iil Il LiiaImIIolld InIiIlioI" incrca.lcL ihtarpl\ it ltiln oIII\ il ilaCl imIpaCt oC I iscal IrC'CflLICS. Iaclcd on a t\lpical profit margill ohl 15 ".. ncomtC ia\ ri ol 4(0 ", and n1cgliiblc or l-no il /nxpolr taxes or royaltics. Recently, Cyprus sold its explorationi anid miining rights.  '-8 ANNEX I Page 3 of 5 7 Despite reduction of the state's free participation In the recently negotiated agreements, the contract conditions appear still to be not t'ully comipetitive in interniationial coinparison. In the new aoreeimen,ts. the Governlmenit reduced its traditionial 'free participation4' fiom 50% to 15%, wlhile sub jecting the companies to norimal Guilleani imsport taxation. ManY couLitries have a lower or no free participation of the state. Interinationially, a compelitive tax package tOr mining comipailies may consist of 1-3% royalties, 35-45% incomile tax, and exemliptioni froim ilmport tax if the product is exported. In Guineia, according to thie o ld practice, mining comiipaniies are typically subjected to 65- 85% income tax and 5.6% import tax. Under the recentliy negotiated agreements, Guinea reduced the incomile tax to 30%, but at the same timile itinoduced a royalty (export tax) of 5-7% and significalitly raised the import tax together with a mulItitudle of' smaller cduties, although Guinleani miniing companies export their total produtction. 8. Legal Fram7ework. In April 1992, two laws vere adopted: (a) a law permitting the artisanal miililig of diamonds and other gemstonies and their mar-kleting throLIgh authorized sales agencies only; and (b) a law providing special small conicessioni areas for snmall scale minies for any minieral, ulicler special slhort-terimi renewable permillts. The law on artisanial diamonid minlilng was suppleinenited bv a decree creating an office for official estlimationi of the value of exported diamonds. Besides this legislation, a law creating a mininig development fuLid was adopted In July 1992 (so far without practical implications). A new mininig code, aimed at attactingi more private interest, has been adopted inl jLuly 1995. A water code, rescinding tihe right to ftree water for any Guineani. hlas been diafted but still nieeds parliainenit approval (the code would allow mining coinpanies to charge for water supplied by themn to the p)Liblic). A new labor code is also inder preparatioll. 9. Inslitutions. In mid-1992, the Gioverinmemit created a Bur-eazu NValtiontal dl'Experfise des Dicaannts (BNED). with the role to estimiate the valuie of exported diamonids. The bureau became part of MRNEE, but is located In the Cential Bank building. Accordinig, to statistics of Antwerp purchiases of diamonids originating, from] West Africa. a significant amoulnlt of Guineani diamonds appears to be bypassing BNED. In August 1993, a new limnspection GL)/iwrle dles Mines was created and added to MRNEE as an additional Ullit in the rank of a D)iricciion Gcnrale. The new Inspection ('c)I>rule hias extremely wide-rangilng functionis and finds it difticult to cooperate with other services ulider MRNEE. Its maini manldiate is conitiol of all activities of MRNEE to assure efficiency and conformilityv with rules. Overlap and interferenice with othel- uLits of MRNEE are considerable. Recognizilig its weaknesses. MRNEE contracted technical assistaiice services to address its organizational problems6. The work had only limited iilpact. In October 1994. MRNEE was split-up into two new miniistries: the Ministry of' Mllines and Geology; and the Ministry of Energy and Environmiiienit. In tlle Sekou l'oure era, the: value o' thc miicrali deposit (cooitributcui I\ tlhe stIte) \Vas considceted to he 5() % ol total pro ject cost, and served to justifv higher dividends'taxcs tbr the go\ Crnment. Ihis Guincan practice is unique and non-competitive in intiernational .nining. Stratcgy for African Minimnt. The W\orld Bank. ii ,- Coiltraci sviyith 'I raclehel from Belgiurn. OlnalcL`d h'e Al In,1n l )cx (,lpmeC1 Banlo.  ANNEXI PNco 4 of5 Industrial Mining Operations (BG 10. CBG's exports represent abotit 60