Madagascar - Mining Sector Reform Project

Document of The World Bank Report No: 17788-MAG PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 3.8 MILLION (US$5.0 MILLION EQuJIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A MINING SECTOR REFORM PROJECT JUNE 2, 1998 Private Sector Finance (AFTP1) Comoros, Madagascar, Mauritius, Seychelles, Djibouti (AFC08) Africa Region (AFR)  CURRENCY EQUIVALENTS (Exchange Rate Effective June 2, 1998) Currency Unit = Malagasy Franc (FMG) US$ 1.00 = FMG5442.63 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy DCPE Document Cadre de Politique Economique (Policy Framework Paper) DG General Directorate of Mines DCA Development Credit Agreement EIS Environmental Information System EIS Environmental Impact Statement GIS Geographical Information System ICR Implementation Completion Report MEM Ministry of Energy and Mines NGO Non Governmental Organization OMNIS Office des Mines Nationales et des Industries Strategiques PAD Project Appraisal Document PATESP Private Sector Development and Capacity Building Project PMIs Public Mining Institutions SIGM Geological and Mining Information System TA Technical Assistance UCP Project Coordinating Unit Vice President: Mr Callisto Madavo Country Director: Mr Michael Sarris Sector Manager: Mr Thomas Allen Task Team Leader: Mr Paulo de Sa  REPUBLIC OF MADAGASCAR MINING SECTOR REFORM PROJECT CONTENTS Page No. A. Project Development Objective ................................................................2 1. Project development objective and key performance indicators ............................... 2 B. Strategic Context .................................................................3 1. Sector-related CAS goal supported by the project ..................................................... 3 2. Main sector issues and Government strategy ............................................................. 5 3. Sector issues to be addressed by the project and strategic choices ............................. 7 C. Project Description Summary .................................................................9 1. Project components .................................................................9 2. Key policy and institutional reforms supported by the project .................................. 10 3. Benefits and target population ................................................................ 11 4. Institutional and implementation arrangements ......................................................... 11 D. Project Rationale ................................................................ 12 1. Project alternatives considered and reasons for rejection ........................................... 12 2. Major related projects financed by the Bank and/or other development agencies ..... 13 3. Lessons learned and reflected in proposed project design ......................................... 13 4. Indications of borrower commitment and ownership ................................................. 14 5. Value added of Bank support in this project ............................................................. 14 E. Summary Project Analyses ................................................................ 14 1. Economic ................................................................ 14 2. Financial ................................................................ 15 3. Technical ................................................................ 15 4. Institutional ................................................................ 15 5. Social ................................................................ 15 6. Environmental assessment ................................................................ 16 7. Participatory approach ................................................................ 16 F. Sustainability and Risks ................................................................ 16 1. Sustainability ............................................................. 16 2. Critical risks ............................................................. 17 3. Possible controversial aspects ............................................................. 17  G. Main Loan Conditions ................................................................. 18 1. Effectiveness conditions .................. 18 2. Other ............................................................ 18 H. Readiness for Implementation ................................................................ 18 I. Compliance with Bank Policies ................................................................ 19 Annexes Annex I Project Design Summary .20 Annex 2. Detailed Project Description .22 Annex 3. Estimated Project Costs .27 Annex 4. Economic and Financial Assessment Summary .29 Annex 5. Financial Summary. 3 1 Annex 6. Procurement and Disbursement Arrangements .32 Table A - Project Costs by Procurement Arrangements .34 Table Al .- Consultant Selection Arrangements .35 Table B.- .Thresholds for Procurement Methods and Prior Review 36 Table C.- Allocation of Loan Proceeds ........................................................ 37 Annex 7. Project Processing Budget and Schedule ........................................................ 38 Annex 8. Documents in Project File ........................................................ 39 Annex 9. Table 1- Statement of Loans and Credits ............................................. 40 Table 2- Madagascar Statement of IFC's ............................................. 41 Annex 10 Country at a Glance ............................................. 42 Additional Annex: Mining Sector Policy.Letter (May 28, 1998) ........................................ 44 Map  Project Appraisal Document Page I Mining Sector Reform Country: Madagascar Learning and Innovation Loan REPUBLIC OF MADAGASCAR MINING SECTOR REFORM PROJECT Project Appraisal Document Africa Region Comoros, Madagascar, Mauritius, Seychelles, Djibouti (AFC08) Date: June 2, 1998 Task Team Leader: Paulo de Sa Country Director: Michael Sarris Sector Manager: Thomas W. Allen Project ID: MG-PE-56487 Sector: Mining Program Objective Category: Private Sector Development Lending Instrument: Learning and Innovation Loan Program of Targeted Intervention: [ ] Yes [X] No Project Financing Data [ Loan [X ] Credit [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (SDRm): 3.8 (US$5.Om equivalent) Proposed terms: standard IDA [X] Multicurrency [ ] Single currency, specify Grace period (years): 10 [] Standard Variable [ ] Fixed [] LIBOR-based Years to maturity: 40 Commitment charge: 0.0 - 0.5% Service charge: 0.75% Financing plan (US$m): Source Local Foreign Total Government 0.35 0.35 IDA 1.40 3.60 5.00 Cooperation Francaise (parallel financing) - 2.40 2.40 Total 1.75 5.00 7.75 Borrower: Republic of Madagascar Guarantor: N/A Responsible agency(ies): Ministry of Energy and Mines Estimated disbursements (Bank FY/US$M): 1999 2000 2001 Annual 0.8 2.5 1.7 Cumulative 0.8 3.3 5.0 Retroactive financing of up to SDRO.2 million (US$0.25 million equivalent; about 5% of the Credit amount) for eligible expenditures incurred after January 1, 1998. Project implementation period: 3 years Expected effectiveness date: 9/30/98 Expected closing date: 3/31/2002 OSD PAD Form: July 30,1997  Project Appraisal Document Page 2 Mining Sector Reform Country: Madagascar Leaming and Innovation Loan A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The broad objective of the proposed project is to significantly increase investment and growth in Madagascar's minin1g sector. More precisely, its Development Objective is to help the Government of Madagascar address key needs (policy, institutional, environmental) in the mining sector, through a set of prerequisite steps that will lay the ground for future private investment and whose implementation will provide a training ground for Madagascar in exploiting, over the long term and in a developmentally sound manner, the significant potential of its natural resources. The proposed project aims to: (a) complete sector reforms ained at establishing an enabling environment to both promote foreign direct investment in mining and integrate small-scale and artisanal activities into the formal economy, which would ensure a real and sustainable contribution to economic growth; (b) build institutional capacity to effectively enforce laws and regulations, administer mining titles, monitor sector developments, and make geological information available to potential investors; (c) establish capacity in the country, by means of pilot projects, to identify and address environmental as well as social impacts from mining; and (d) identify and adopt appropriate mechanisms to facilitate the development of small-scale mines and to improve the social, welfare, health and environmental conditions of artisanal miners. The project has been designed to provide a solid learning ground for the country, the Bank, and investors with respect to the minini1g sector but also for doing business in other sectors. Learning will relate to: the process of negotiating contracts, including interface between public and private sectors and communities; dealing with foreign investors, meeting investor needs; understanding cross-sectoral dynamics in the context of regional development, and establishing effective inter-relationships with Environment agencies; conducting baseline environmental studies and social assessments prior to introducing mining operations in an area; and understanding better the issues involved in mainstreaming small-scale miners, including those related to environimental and fiscal impact. Valuable lessons for other sectors, especially tourism and fisheries, are also expected from the LIL. Mining sector experience could be especially helpful in learning h1ow to administer the cadastre, with lessons for allocating beach sites and managing fishing rights, and overall, hiow to facilitate investments. Key indicators: 1) Encourage Private Investment in Mining: (a) Sustained average annual investments in mining would increase from US$10 million currently to $85 million between 2000 and 2010, assuming no new major discoveries and realization of one of the two large mining projects being considered. In the high-case scenario (good policies, strong export demand), investment could reach US$200 million. (b) Sustained average annual minerals exports would increase from US$20 million (1996) to about US$500 million in 2010 Principal output indicators: - Cadastral backlog reduced by 80%, 12 months AE - Cadastral management system operational 24 months AE - OMNIS mining titles sold or returned to public domain 18 months AE 2) Increase fiscal revenues: The project will help strengthen tax assessment and collection procedures for statutory royalties, license fees, income, dividend, and other direct and indirect taxes. The  Project Appraisal Document Page 3 Mining Sector Reform Country: Madagascar Learning and Innovation Loan objective is to increase fiscal revenues from mining from around US$2 million today to US$80 million by 2010. 3) Set the base for the creation of an Environmental and Social Management for Mining: (a) Pilot baseline studies and environmental audits available 36 months AE (b) Application of consultative processes at EoP Principal output indicators: - Environmental baseline data in selected pilot areas available 36 months AE - Consultative procedures implemented at EoP - Environmental monitoring system operational 36 months AE 4) Mainstream small-scale mining into the formal economy: Increase reported production of gold and gemstones by small-scale miners from about $5 million in 1996 to $40 million by 2010. 5) Improve technical and environmental practices by small-scale miners: Decrease by 50% the area covered by existing claims that have not reported activity or do not comply with the law, 36 months AE. 6) Improve Geological and Mining Information System Output indicators: Geological and Mining Information System (SIGM) operational and available to potential investors, 24 months AE. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16249-MAG - Date of latest CAS discussion: February 18, 1997 Since 1996, the Government of Madagascar has been implementing a wide range of policy, economic and sectoral reforms under its structural adjustment program. The 1997 Country Assistance Strategy (CAS) emphasizes several themes to carry forward the reform program needed for poverty alleviation and sustained growth. The proposed project supports the following CAS objectives: (i) Poverty Reduction and Human Capital Development: the project would improve the conditions to develop private sector-led mining activities especially in regions where mining is one of the few feasible options for economic activity, and help increase income-generating opportunities in the medium term, either at the mine sites or as a spin-off effect within the region (see for example the QIT case in the Fort- Dauphin area). The socio-economic program included in the project would help optimize the benefits from mining activities to local communities over a long-term horizon. (ii) Broad-based growth led by private, foreign investment: foreign-led private sector investment in mining be instrumental in opening up the economy to investment and competition, effectively supporting macroeconomic stability and structural reform. The project will contribute to unlocking the country's good geological potential through enhanced access to foreign technology and financing, while promoting the development of sound small-scale mining practices and their integration in the formal economy. (iii) Strengthening of Public Sector in its new role and improving the performance and institutional capacity of government to deliver key social, infrastructure and environmental services: the project will allocate most of the resources for institutional development to public mining institutions, including particularly the environmental protection agencies, as a basis for the sound and sustainable development of the mining industry. This includes improved administration, rationalization of staff and divestiture of remaining state provincial interests in mining. The project will help widen and deepen reform, and better  Project Appraisal Document Page 4 Mining Sector Reform Country: Madagascar Learning and Innovation Loan link federal and provincial sector activities. In addition, it will help establish environmental safeguards in selected pilot areas and support the sustainable development of the mining sector. Environmental baseline studies would also help improve management of renewable natural resources. The table below highlights the links between the project's development objectives, its learning aspects and performance indicators: Objectives Component Learning aspects Indicators/Outputs Monitoring and evaluation Develop and test Normalization Develop and test capacities - Increased formal sector share - Midterm review Integrated of small-scale and procedures to implement of small scale mining as (MTR), Implementation Approach to mining management of small scale reflected by increased reported Completion Report mainstreaming mining activities in selected production of gold/gemstones (ICR) and continued small-scale locations which will, in an by small-scale miners monitoring by an miners, and integrated manner: -- reduced area covered by independant consultant. Mining (i) provide technical advice, claims that don't report activity - Statistical data. Directorate geological information and and/or comply with law - Follow-up studies capacity to extension services to small -- small scale miners actively testing a better provide scale miners; using gemstone cutting facility understanding of legal extension (ii) monitor performance of and lab services framework by services small scale miners and - environmental/social communities. (through pilots improve compliance with assessments, surveys and audits - Environmental audits in selected environmental rules, indicate reduced environmental and social impact areas) (iii) improve tax collection harm and increased incomes for surveys showing reduced procedures regarding small- communities from small-scale damages on environment scale mining mining by small-scale miners. (iv) develop and test commu- -- increased sector fees from - Surveys on nication campaign to support small scale mining and tax unemployement rate in participatory approaches to collections in mining districts. small-scale mining implement reformed regula- -- Promotional materials regions (by comparison tory framework including prepared and distributed with results from base interface between community - Surveys indicate improved line studies). /public/ private sectors community understanding of legal framework Develop and test Environmentai Pilot work to develop and - Environmental Monitoring. - MTR, ICR and methodologies Information test System operational. continued monitoring by and capacity to System-EIS/ (i) methodologies for - Baseline data and studies in an independant conduct Sector envt./social assessment of selected areas. consultant and by MEM environmental/ Environmental mining; - Environmental audits in Environmental Unit. social Control and (ii) capacities to assess, selected areas. - Statistical data. assessment Assessment monitor and follow-up - Procedures for EIS for small- - Reports on social (through pilots environmental/ scale mines defined. studies, environmental in selected economic/social impact of - Procedures for the systematic audits and base line areas) mining on communities; (iii) application of consultative information. participatory approaches processes defined and - Communities impact with communities regarding implemented. surveys. impacts and spin-off benefits. - Systematic application of consultative processes Develop Institutional Develop State capacity to - New sector institutional set-up - Quaterly and annual institutional Reform and implement its new role as - Mining cadastre management technical performance capacity in Capacity sector regulator/promoter system operational. reviews, MTR and ICR. preparation for Building (not operator) including - No mining titles backlog and - Statistical data. forthcoming (i) coordinating environment no delays in the processing of - Monitoring of the large-scale monitoring /enforcement w/ applications. Mining Cadastre mining other gov. agencies and - Cadastre management registers by an operations autonomous provinces; experiences transferred to independant consultant. (ii) oversee small-scale mines another sector. - Periodic reports from integration w/ national - Effective inter-agencies/ the Mining Cadastre. economy; ministeries and centre /local  Project Appraisal Document Page 5 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Objectives Component Learning aspects Indicators/Outputs Monitoring and evaluation (iii) non-discretionary coordination on environmental granting of mining titles; matters. (iv) contracts negotiations - Geological and Mining with foreign investors Information System operational. - State and OMNIS mining titles The sector governmental relinquished. institutions develop their - Negotiation of at least one new capacity to provide timely, mining investment project reliable and transparent according to the new Investment administrative services. Agreement Model. - Increased exploration expenditures and mining investments. - Increased minerals exports and inceased contribution of mining to GDP and State budget 2. Main sector issues and Government strategy: Sector Background. Madagascar is known to contain an extremely diverse suite of minerals, as it represents a structural extension of the mineral provinces of Southein Africa. Nevertheless, the country's geological potential can still be classified as vastly unknown due to the paucity of continued high-quality exploration activity. Chromite and graphite are the most significant minerals produced in Madagascar. In 1975, Government nationalized all mineral resources, with the exception of graphite and mica. Mining parastatals include chromite producer KRAOMA and two others that produce industrial minerals. Most small-scale mining, focused on gold and gemstones, has taken place in the informal sector and production has been smuggled out of the country. Some 1,500 persons are directly employed in the formal industrial sector while as many as 50,000 to 100,000 derive at least a part of their income from small-scale mining. Two recently discovered world-class deposits confirm Madagascar's mining potential and have attracted the interest of two major mining companies: (a) QIT-Fer et Titane Inc. (QIT), a subsidiary of UK-based Rio Tinto Corporation has conducted extensive studies on a proposed mining project for titanium mineral sands in southern Madagascar since 1987. The capital cost (first phase, including for infrastructure) is estimated at US$ 500 million. Total annual export revenues are estimated at US$80 million (and US$ 150 million in the second phase), with direct permanent employment expected to reach 500. A Mining Agreement was signed in 1997 and ratified by Parliament in February 1988. A comprehensive social/environmental review process (including elaboration of a Regional Development Plan) will precede mining works. (b) After conducting technical, financial and environmental studies, Phelps Dodge started negotiations with Government in December 1997 for a mining agreement to develop nickel-cobalt deposits at Moramanga. Estimated capital costs exceed US$ 500 million, which would make it the largest ever private investment in Madagascar. Total annual export revenues are estimated at US$ 300 million. Given weak domestic savings and access to mining technology, only private foreign investment could finance large-scale mining in Madagascar. However, foreign investments have yet to materialize because of continued state intervention in the sector, cumbersome regulations, and the lack of incentives for developing mining operations on an industrial scale. Serious institutional problems include overlapping mandates and responsibilities, inadequate definition of functions, conflicts of interest, and political interference in administrative and technical work. Private small-scale mining remains dynamic in Madagascar, but the continued spread of informal activity and the concomitant tax evasion severely undermine the technical and environmental performance of small mining companies. Government Policy and Strategy. The Government's economic reform program calls inter alia for liberalization of the mining sector through withdrawal of the State as an operator of mining assets, and the  Project Appraisal Document Page 6 Mining Sector Reform Country: Madagascar Learning and Innovation Loan implementation of a strategy to encourage a private-sector led mining industry. The Government's medium- term strategy for the sector as agreed with the Bank and IMF in the 1996-99 Policy Framework Paper (PFP) / DCPE (Document Cadre de Politique Economique) has the following elements: (i) definition and enforcement of revised norms and regulations (Mining Code and Investment Regime); (ii) improvement of the administration of mining rights (Cadastre); (iii) redefinition of the role and status of OMNIS (Office des Mines Nationales et des Industries Strategiques); (iv) establishment of a database of reliable technical information; (iv) promotion of small-scale mining through joint ventures with experienced partners; (v) privatization of the parastatals of the sector; and (vi) administration at the local level of mining rights for small concessions under a decentralized regime and promotion of participatory approach in local communities. The 1998-2000 PFP, currently being drafted, also calls for the preparation and adoption of application decrees of the proposed new Mining Code. As a result of previous State intervention in the development of mineral resources in Madagascar, the Government is still directly involved in mining projects and, through OMNIS, controls the most promising mining rights. The complex structure of the mining concession management system (the mining cadastre) and the weakness of Government institutions have resulted in a situation whereby prospective areas are being tied up for many years without any productive work being performed. In addition, the regulatory framework of the sector does not provide a favorable environment to attract new investments: in the absence of clear rules, mining companies have found little security for their mining rights and faced huge difficulties in doing business in the country. On the fiscal side, the overall tax regime is complex and cumbersome and represents a strong handicap for the competitiveness of the country's mining operations. The Government is already taking steps aimed at attracting private investment to the sector. It has recently decided to redefine its role in the promotion of minerals development in Madagascar, renouncing future State participation in commercial activities and any request for mandatory participation in new ventures. Proper mineral legislation and competitive tax regimes are under preparation, with Bank's assistance, but will be of value in attracting investors only if administered in a professional and transparent manner by an appropriate supervisory institution. The institutional structure in charge of the sector remains inadequate and unfocussed, with a notable lack of inter-institutional cooperation and frequent duplication of effort. After several years of budgetary reductions, Government institutions lack the human and financial resources to enforce the law, especially in the context of decentralization. Many of their critical sector support activities such as the licensing and administrations of mineral rights, provision of technical assistance to small-scale miners, and monitoring and enforcement of environmental, health and safety regulations have virtually ceased. No geological surveying work has been done for a considerable time and there is a resulting lack of technical data available to investors. Government institutions need to be restructured in order to use the most skilled people, and trained to perform their new mandates. Preparation for mining sector reform started under the Private Sector Development and Capacity Building Project (PATESP). PATESP has helped the government to prepare a sector policy declaration, and is funding the carrying out of an Institutional Audit (including the setting-up of the minerals Registry System - Mining Cadastre) as well as the drafting of a new Mining Code. The present mining law is focused on small-scale mining, leaving uncertain the treatment of large industrial investments. The draft new Mining Code is designed to reduce the discretionary power of Government, increase transparency, and provide adequate security to potential investors. Its main contribution will be thereby to attract two or three major industrial investments into the sector, and to mainstream small-scale mining in the formal economy, namely for gold and gemstones. The mining sector policy and strategy is modem and follows international best practices, and has been approved by the Government on May 28, 19981. This policy is in conformity with the current economic I The official endorsement by the Government and presentation to the World Bank of the Mining  Project Appraisal Document Page 7 Mining Sector Reform Country: Madagascar Learning and Innovation Loan reform program and sends the right signals to investors, clearly defining the respective roles of the State and of the private sector, including their rights and obligations. It includes inter alia the following commitments: (i) reform of the legal and regulatory framework; (ii) reform of the public mining institutions, restricting the role of the State to that of a regulator, including the release or transfer of state- controlled mining rights not bound by valid former agreements with third parties; as well as the establishment of a proper mining cadastre and strengthening of the mining environmental office; and (iii), reform of the public gold agencies ("Filiere Or") into a sector promotion and information entity. A transparent framework with well defined rules of the game will also reduce the overall suspicion regarding foreign investment. The proposed Mining Sector Reform project will help the Government to implement this strategy and will provide the necessary financial and technical resources for sector reform 3. Sector issues to be addressed by the project and strategic choices: The main issues to be addressed by the proposed Project are: (i) creating an enabling environment for private sector-led mining development; and (ii) improving and modernizing the capacity of Government institutions to enforce the law, negotiate large mining projects with foreign investors and integrate small- scale miners into the formal economy. The Project will help government: (i) adapt mining sector policy to recent economic reforms emphasizing growth led by private (and foreign) investment, through the design and implementation of a mining sector reform policy and strategy clearly defining the respective roles, rights and obligations of the State and of the private sector; (ii) restructure Government institutions, based on: a clear definition of objectives and scope of activity; redefinition of the mandates and statutes of OMNIS to transform it into a sector promotion organization providing a good base of sound geological information; consolidation of an environmental group within the Ministry to develop environmental baseline information and ensure that mining operations are conducted in compliance with sound environmental practices; and preparation and implementation of a program which provides adequate human resources, financial and logistical means to guarantee proper and efficient execution of the Government functions, including enforcement of law; (iii) establish proper computer-based cadastre and mine-reporting systems as well as explicit criteria and non-discretionary procedures for the granting and foreclosing of mining rights; (iv) provide for the compilation, treatment, and updating of geological information, and its integration into a computerized database to be made readily available to potential investors. In addition, pilot projects will be financed in order to: (v) develop baseline environmental data, implement adequate procedures and guidelines for the preparation of environmental impact studies in mining, conduct environmental audits in selected areas, define sector specific environmental regulations and standards, including the procedures for the rehabilitation of the area after mine closure, develop health and safety provisions, and enhance the Ministry of Mines monitoring capacity; and (vi) support an integrated management and technical assistance program that could achieve a "win-win" situation of enhancing technical yields, reducing the current serious adverse impact on the environment, and substantially increasing tax revenues. Pilots will likely include three for environmental assessment and two for social impact assessment (projects to be selected during appraisal). The reform agenda is quite comprehensive and ambitious, considering the current state of the sector in Madagascar, especially in terms of the informality of most small-scale mining operations and the disorganization of Public Mining Institutions (PMIs). Foreign direct investment is essential to unlock the sector's potential, and two large foreign investments (which would represent the two largest private investments ever in the country) are at an advanced stage of preparation. Mining could thus be a pioneer sector for further foreign investment in the country, and lessons learned during the negotiating of contracts and in the process of creating an enabling environment for foreign investment could be later put into use for other sectors such as tourism and fisheries. Because foreign investment will not materialize unless PMls are able to efficiently administer and manage the Sector Policy Letter represent a condition for presentation of the project loan documents to the Board.  Project Appraisal Document Page 8 Mining Sector Reform Country: Madagascar Learning and Innovation Loan sector, a strategic decision was taken to use an integrated approach to sector reform and develop pilot projects in selected areas to test Government commitment and PMI capacity to implement it. These pilot projects -- to do environmental baseline studies and audits, provide integrated technical assistance to small-scale miners, and assess social impact of mining projects and participatory approaches -- will assist Government and the Bank in defining with more precision future needs for the sector.  Project Appraisal Document Page 9 Mining Sector Refonn Country: Madagascar Learning and Innovation Loan C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Categoiy Cost Incl. % of Bank- % of Contingencies Total financing Bank- (US$M) (US$M) financing A. - Policy Implementation A. I - Normalization of Small-Scale Institution- 3.10 40.0 0.95 19.0 Mining: support an integrated building, management and technical assistance Physical program in selected areas to enhance technical yields, reduce the current serious adverse impact on the environment, and increase tax revenues; support the Mining Directorate to design and deliver technical advice, geology information, and extension services to small-scale miners; strengthen the minerals laboratory, and support the creation of a cutting center. A.2 - Environmental Information Institution- 0.95 12.3 0.95 19.0 System/ Sector Environmental Control building, and Assessment: (i) carry out Physical environmental baseline studies over selected mining and potential mining districts; (ii) strengthen the capacity of the Mining Environmental Management Unit for the monitoring and enforcement of environmental regulations, and the setting up of procedures for the processing of Environmental Impact Statements in mining; (iii) carry out socio-economic baseline studies over selected mining districts as a basis for development of methodology and capacity to assess and monitor social, cultural and economic impacts of mining on local communities, and develop consultation and participatory procedures; and (iv) develop a Environmental Information and Management System (EIMS). It includes: training of staff in environmental and socio-economic management related to mining; provision of infrastructure, field and data processing (hardware and software) equipment A.3 - Institutional Reform and Capacity Institution- 3.00 38.7 2.50 50.0 Building: building, (i) Reform and strengthen the public Physical mining agencies, based on the  Project Appraisal Document Page 10 Mining Sector Reform Country: Madagascar Learning and Innovation Loan institutional model developed under the PATESP. This includes: organization and staffing of key administrative units, setting-up of efficient work procedures; training of staff, provision of adequate office and field equipment; and rehabilitation of facilities. (ii) communication campaign (following passage of code expected in 9/98),both to promote wide understanding and acceptance of reforms (including among entrenched interests) and to attract external investors to the country's mining sector; promotion material; seminars; and legal advice. (iii) Mining Cadastre and Registry System: establish proper computer based cadastre and registering procedures, and clear up the backlog of pending concession applications. (iv) Geological and Mining Information System: development of a data base, providing for the compilation, catalogation, treatment, and updating of geological information. This includes: purchase of information, provision of hardware and software, connection to Internet; creation of a data room; training of staff. B. Project Coordination. A Project Project 0.70 9.0 0.60 12.0 Coordinating Unit (PCU) will be Management responsible for the implementation of the project and will be strengthened accordingly. The PCU will monitor, supervise and provide management control for all components and for the overall Project. The PCU will manage procurement, including all contracting for works and purchases, and the hiring of consultants, the contractual relationship with the Bank and the project's overall administration and accounting. Total 7.75 100 5.00 100 2. Key policy and institutional reforms supported by the project: Policy reform. The Project will help the government (i) create an enabling environment for an economically, socially and environmentally sound development of the sector; and (ii) strengthen its capacity as a regulator - in a transparent and non-discretionary manner - of mining activities. Institutional reform. The new role of the public mining institutions (PMIs) is being defined in detail under the Private Sector Development and Capacity Building Project (PATESP), including the respective role  Project Appraisal Document Page 11 Mining Sector Reform Country: Madagascar Learning and Innovation Loan of the public and the private sectors as well as inter-institutional relationships and mandates. The institutional reform will be implemented in the context of this project. 3. Benefits and target population: Benefits: The following benefits are expected: (i) induced by the project: (a) Increased foreign and local direct investment in mining projects and increased export revenues; (b) development of capacity in private services to the mining industry, such as exploration and drilling services, environmental impact studies, laboratories, mining construction works and earth removal, maintenance and others; (c) development of infrastructure related to mining and with a regional development impact (e.g. roads, energy); (d) increased income-generating opportunities in areas with high unemployment, increased education opportunities and reduced migration outflow; (e) contribution to the decentralization and to a better regional distribution of productive activities; and (f) sustainable development and fair distribution of benefits for local communities located around mining; and, (ii) as a direct result of the project: (a) establishment of a modern, consistent and homogeneous mining legal and regulatory framework; (b) better understanding of how govemment, private sector, communities and donors can work together, especially in the context of a large industrial project, dealing with foreign investors, and the contract negotiations process; (c) improved efficiency in public mining institutions (e.g. faster and non-discretionary administration of mining rights) and improved understanding of issues involved in managing such rights, and improved enforcement capacity of environmental, health and safety regulations; (d) improved security of tenure for mining rights through non-discretionary procedures and accurate geological location of concessions; (e) improved knowledge of existing environmental and socio-economic conditions, as a basis for improved management and participation of local communities; (f) protection of the environment from potential damage caused by mining and a better grasp of how to design future environmental protection measures in the sector; (g), generation of baseline regional information that can be used by all sectors (e.g. water resources); and (h) greater participation in the formal economy by small-scale miners in the targeted areas, with attendant lessons on how to develop similar programs nationwide. Target Populations and Sectors: - Private foreign and local mining investors; - National and provincial mining authorities; and - Local communities in mining districts. - Small-scale miners 4. Institutional and implementation arrangements: Project implementation period: The Project would be implemented over a period of 3 years. The Project completion date would be September 30, 2001 and the Credit closing date would be March 31, 2002. Executing agency: The Ministry of Energy and Mines (MEM) would be responsible for the implementation of the project. Implementing agency: The General Directorate of Mines (DG/MEM), through an officially designated coordinator, will be responsible for the overall implementation of the project. MEM's line units will be established and/or strengthened to include a Mining Cadastre and Registry unit, an Environmental Affairs  Project Appraisal Document Page 12 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Unitl and a Geological and Mining Information System (SIGM). Project Administration: DG/MEM will maintain and strengthen a Project Coordination Unit (UCP) to (i) coordinate project implementation, and (ii) manage (a) procurement - including all contracting for works and purchases - and the hiring of consultants, (b) project monitoring, reporting and evaluation, (c) the contractual relationship with the Bank, and (d) financial record keeping, the Special Account and disbursements. The establishment of the UCP is an effectiveness condition. Accounting, financial reporting and audits: The UCP will contract a private accounting firm to maintain accounts and process payments. Terms of reference for the firm will be prepared by the Region's Financial Management expert to ensure adequate attention to financial management issues, including organizational setup, accounting procedures, internal controls and audit requirements. A summary financial report would be included in the quarterly progress reports. Project Accounts, the Special Account and all procurement, including Statements of Expenditure, would be audited annually by independent auditors satisfactory to the Bank and appointed for three years. Audit reports would be submitted to the Bank not later than six months after the end of each calendar year. The selection of auditors represents an effectiveness condition. Monitoring and Evaluation. Not later than 45 days after each quarter, the UCP will submit to the Bank quarterly progress reports covering all project activities, including procurement, and a financial summary report. A Mid-Term Review, 18 months after effectiveness, would provide detailed analysis of implementation progress towards development objectives, including performance to date on selected indicators. D: Project Rationale 1. Project alternatives considered and reasons for rejection: The project's emphasis is put on reforming the regulatory framework of the mining sector and enhancing management capacity of public mining institutions to implement reforms. Options which have been considered include: (a) inclusion of a mining component as a part of a structural adjustment operation, and (b) implementation of a stand-alone operation on a larger scale after completion of the mining sector reform activities ongoing under the PATESP. Option (a) was rejected in part because of timing. Whereas the timing of a prospective SAC is tied to several factors and therefore uncertain, the need for institutional strengthening to enforce the new Mining Code is urgent. It was judged that progress in mining, where policy reform has been moving forward, should not be restrained by slower developments in other sectors. In addition, a SAC, as an instrument to include activities that go beyond policy reforms, was seen to provide limited flexibility; and it was believed that, given government commitment, extending Bank assistance beyond policy areas was warranted, to include sector modernization (e.g., administration of mining rights) and efforts to address environmental and social concerns, which would generate synergy and contribute importantly to the sector's overall development. Rejection of Option (b) mostly reflects the emphasis placed on keeping the scope manageable to ensure 'getting it right' and to facilitate the crucial learning process. Specific considerations were: (i) the low- level of capacity of sector public institutions in Madagascar to implement at a larger scale some of the key activities in the proposed projects (environmental audits and baseline studies, that are to be conducted at a pilot level only); progress made under these activities will be carefully monitored against benchmarks I The appointment of the higher level staff of the Environmental Affairs Unit is an effectiveness condition.  Project Appraisal Document Page 13 Mining Sector Reform Country: Madagascar Learning and Innovation Loan to identify at an early stage any eventual difficulties; (ii) the innovative approach used for small-scale mining, through integrated programs focusing on soft issues like organizational and legal aspects, management techniques, environmental and social issues, rather than the classic approach focused on technical matters and equipment supply; this approach is being tested in Bank financed projects in Latin America, so far with encouraging results, but has not been applied yet in projects in Central and Southern Africa; considering the role of small-scale mining in Madagascar, the conditions seem adequate to try this innovative approach in selected areas of the country; and (iii) the fact that, in spite of the commitment to reform - a critical factor - and political support shown by the new Government, Madagascar still needs to reestablish the credibility of its economic policies and convince international investors of sustained economic opening. It is expected that lessons learned in mining in terms of promoting and managing private sector investments could be used in other sectors of the economy. In the mining sector, Government's ability to make small-scale and artisanal miners comply with the law will be critical for the materialization of foreign investment. It is expected however that if the implementation of the project goes according to schedule, a follow-up operation would be considered focusing on the extension to the entire country of the success stories achieved under the current LIL. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) IDA-financed Extend market liberalization to sectors Private Sector Develop- S S still under state control (mining, ment and Capacity agriculture, and infrastructure); prepare Building Project and implement a PE divestiture (Cr.1555, ongoing) program; implement a tax reform program Other development agencies n/a IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Lessons have been learned from the ongoing activities being carried out under the PATESP, as well as from other countries where the Bank has financed similar mining technical assistance projects (e.g. Bolivia, Ghana, Peru and Tanzania) and from a recent Bank review on mining sector reform in Latin America (A Mining Strategy for Latin America and the Caribbean, 1996). Experience in other countries indicates that improving the enabling environment increases the ability of a country to attract and retain appropriate private investment. For instance, Ghana in the late 1980s undertook significant reforms, supported by the Bank and other donors, to improve the enabling environment for private sector investment in mining. The result has been a four fold increase in gold production, a mining investment climate that is consistently ranked among the best in the world by investors, and the privatization of state owned mining enterprises. Experience with establishing capacity for environmental management in other countries, namely Latin America, indicates that the central  Project Appraisal Document Page 14 Mining Sector Reform Country: Madagascar Learning and Innovation Loan agency mandated with environmental responsibility needs to adopt an integrated approach and establish close linkages with sectoral agencies in implementing environmental policies and regulations. While a participatory approach needs to be adopted, especially to take into account the social dimensions of mining, too little attention has been given to"softer" dimensions of the issue, like organizational matters, training to comply with legal requirements and for greater use of the banking sector, etc. Experience in Madagascar with technical assistance as, for instance, the Private Sector Development and Capacity Building Project, suggests that emphasis on beneficiary participation in project preparation, intensive supervision, organization and coordination at the field level are critical for timely and effective implementation. Ownership and political commitment to project objectives are key to ensuring strong local leadership, availability of counterpart funds, and clear delineation of ministerial authority and responsibilities. 4. Indications of borrower commitment and ownership: Commitment of the Borrower is shown by the impressive effort put into the preparation of a new Mining Code (with Bank's assistance, through the PATESP), and on agreed changes in institutional arrangements for the sector, namely on the future role of OMNIS which will be renouncing all commercial activity in mining. At the same time, the ratification of the QIT mining investment agreement after 5 years of negotiation reveals progress in Government commitment to increased opening to foreign investment. Ownership: the Borrower took initiative in requesting the preparation of a stand-alone operation for mining. Government ownership is indicated by the seriousness of its participation in the preparation of the project so far, including the creation of a task force and the realization of several workshops dealing with in-depth analysis of sector reforms to be supported by the project. 5. Value added of Bank support in this project. The Bank has been the main provider of assistance to mining sector reform in African and Latin American countries during the last decade and in this capacity has contributed to the present mining "boom" in both continents. Since 1997, Madagascar is making good use of the Bank's experience in sector reform, particularly with respect to sector policy and modernization of its institutional and legal frameworks. Given its experience and established presence in the country, the Bank will be instrumental in the success of the reform, particularly through policy and technical assistance. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [ ] Cost-Benefit Analysis: NPV=US$ million; ERR= % []Cost Effectiveness Analysis: [X] Other (Comparison of economic indicators) The Project is a Technical Assistance operation and, as such, does not lend itself easily to quantitative investment analysis. However, a number of economic indicators can be projected and compared. According to Bank estimates, the value of currently reported mining production is about $35 million or about I percent of Madagascar's GNP of US$3.058 billion (1996). Madagascar's total exports in 1996 were about US$ 600 million, of which $20 million (3 percent) corresponded to minerals exports. Most of the foreseeable expansion is in metallic minerals and gemstones, and the majority of this production will be exported and generate foreign exchange. Mining investments data is not available, but they are estimated to average $10 million a year. To test the robustness of the possible contribution of mining to the economy, two scenarios (low and high case) have been constructed (based on an evaluation prepared in 1997 by the Bank for the Country Economic Memorandum). These projections are based on projects  Project Appraisal Document Page 15 Mining Sector Reformn Country: Madagascar Learning and Innovation Loan currently in an advanced stage of development (QIT - Fort Dauphin and Phelps Dodge - Moramanga) as well as assumptions about smuggled production. The results of this analysis, projected to the year2010 are: Scenario Gross Production Gross Export Value Average Annual Investment Value(US$ million) (US$ million) Current 35 20 10 Low 450 400 85 (2000-10) High 700 600 200 (2000-10) 2. Financial (see Annex 5): NPV= n/a ;FRR= n/a Fiscal impact. The fiscal reform will aim at introducing a fiscal regime for mining consistent with what is considered international good practice. Unfortunately, the investment agreement for the first large-scale project provides for rather generous tax exemptions and fiscal holidays. The impact of the project on fiscal revenue can be estimated to be in the range of US$30 to 80 million per year, depending on the scenario. 3. Technical: The project will establish an enabling institutional and regulatory environment to help attract and sustain mining investment. Expert technical assistance will help the Government to avoid mistakes in dealing with private companies which could result in forgone revenues. The project will help strengthen tax assessment and collection procedures for statutory royalties, license fees, income, dividend, and other direct and indirect taxes. The project will also help put into place environmental regulations, procedures, and monitoring capacity to minimize damage to the environment from mining operations. The project provides training and extension services to support the development of small scale mining as well as to help improve social, health, safety and environmental conditions in the artisanal mining community. 4. Institutional: a. Executing agencies: The experience and implementation capacity of the sector agency is limited. However, on the basis of the experience gained up to now with the PATESP, there would not be any major capacity problems in terms of human resources to implement the planned reform and technical programs. Key factors for success will be to develop the awareness about the need and benefits of the reform as well as ownership with respect to the programs. To ensure awareness and ownership, a detailed assessment and concientization campaign will be carried out at project inception by the institutional coordinating unit. b. Project management: The Project's Coordinating Unit (UCP) will be an extension of the management team created to coordinate the mining activities under the PATESP, which is performing in a satisfactory manner. UCP will be strengthened in terms of personnel, to respond to the increased volume of work. UCP will manage procurement and supervision of works and consulting services. 5. Social: Traditionally, assessment of the economic impact of a mining project has been at the level of the national economy, in terms of fiscal revenues, export earnings, GDP, gross capital investment, value added, and other parameters. These impacts can be measured using well-developed statistical and other techniques. However, the socio-cultural impacts of mining on local communities are receiving growing attention, and the parameters, methodologies, and techniques used to assess these impacts are only now being developed, in contrast to macro-economic impact assessment. Fundamentally, social assessments involve identifying for each group of stakeholders the balance of positive and negative impacts, devising numeric or other objective indicators, and recommending measures to maximize positive outcomes and attenuate  Project Appraisal Document Page 16 Mining Sector Reform Country: Madagascar Learning and Innovation Loan negative effects. Experience has shown that consultation and involvement of local communities in these assessments is critical and forms the basis for subsequent action programs. Substantial investment in mining exploration is expected in Madagascar as a result of the project, and two large projects are in early stages of development (QIT at Fort-Dauphin and Phelps Dodge at Moramanga), which will result in socio-economic impacts on the local community. However, assessment of the impacts and involvement of the local community in the consultation process is still at an early stage, due principally to lack of familiarity at the provincial level with the techniques and practices of social assessment as well as an inadequate institutional and regulatory framework to provide for such assessments. A Subcomponent of the Project has been designed and aims to address these issues (see Annex 2). 6. Environmental assessment.- Environmental Category [ ] A []B [X] C The project is a technical assistance operation that will not involve direct investment in mining activities. It is, therefore, classified as category "C". The project is expected to have a positive impact on the environment by building capacity in the country for environmental management at the national level and within the mining sector. A comprehensive Sector Environmental Assessment (SEA) will be carried out as part of the project, including the: (i) review of the present status of the environmental legal, regulatory and institutional frameworks; (ii) evolution of the mining sector, including a description of most of the mining projects in operation or under development; (iii) potential physical and socio-economic impacts of sector activities on the environment and on the communities, including indigenous populations; (iv) preparation of environmental baseline studies, to assess natural, social and sector background data in selected areas of each of the participating Provinces; (v) preparation of pilot socio-economic baseline studies aiming at the definition and implementation of consultation procedures, training requirements and programs, ad hioc institutional strengthening and other related measures (see annex 2). 7. Participatory approach a. Primary beneficiaries and other affected groups: the basic preparatory legislative and regulatory work addressing mining activities has been carried out in consultation and coordination with industry branch organizations, trade associations, and NGOs. This approach, including media coverage informing the public, will continue with the proposed project. b. Other key stakeholders: other stakeholders have been involved in and/or informed about the preparation of the Project, and coordination has been ensured. They include, i.a. Provincial and Municipal Governments in mining areas, universities, and related extra- sectoral public agencies (for example water, energy and transport agencies). F: Sustainability and Risks 1. Sustainability Madagascar has excellent geological potential as is evidenced by the interest major international mining companies are showing in the country. However, the Government will encounter difficulty in sustaining this interest and in ensurinig the maximum contribution to economic development unless the major reforms which have already begun are completed and deepened. Sustainability will be enhanced through the project's strong emphasis on institution building, training, human capital development and environmental awareness in the public as well as private sectors. Foreign consultants will be expected to work closely with local public and private sector counterparts and required to transfer knowledge, technical skills, and know-how. If proper regulations and enforcement mechanisms as well as a competitive environment are put into place, minerals exploration and development of mines will become self-sustaining to provide a continual revenue stream and other economic benefits to the country.  Project Appraisal Document Page 17 Mining Sector Reform Country: Madagascar Learning and Innovation Loan 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure Annex I, cell "from Outputs to Objective" la. Government continued commitment to sector M la. Government's program for mining reform sector reforn is on schedule and was lb. Government commitment to overall reform confirmed and reinforced during (investment will not materialize unless overall negotiations for Bank's next Adjustment macro/business climate shows sustained Operation. Key Performance Indicators are imarolbusiness climate shows sustained part of legal covenants pertaining to SAC improvement operations. I b. Sustain policy dialogue in context of 1998-00 PFP, future SAC/ESAF (IMF) 2. Condensed timing to build-up capacity to manage M Technical assistance will be phased and cadastral data by Mining Cadastre Office and Provincial prioritized so as not to overburden the off-shoots relevant government departments and the international consultants engaged will work alongside local counterparts. Annex 1, cell "from Components to Outputs" 1. Continued staff ownership regarding project M Proven strong advisory capacity by objectives consultants to guide and support the development of managerial and administrative capacities. Participative processes to implement the institutional reform and introduce new work methods. 2. Staff stability M Provision of necessary staff, resources and conditions to effectively implement -the reform to be defined by Institutional Audit carried out under PATESP. 3. Political interference M Project implementation guidelines included in the General Agreement aim at minimizing political interference 4. Performance by contracted firms and consultants M Selection, supervision and monitoring functions have been carefully designed, on the basis of positive experience from PATESP. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: The designed Project is mainly dealing with generally accepted institutional reforms and the establishment of technical methodologies. However, it might get indirectly involved - through the activities of implementing agencies participating in the Project and fulfilling their functions - in controversial issues such as the evaluation of potential environmental damages or social impacts by mining operations. Because very little official information exists on small-scale mining in Madagascar, the publication of information from the environmental and social baseline studies could eventually have controversial aspects. The emphasis put on the development of transparent and reliable procedures, including public consultation and information, should minimize the effect of such controversies.  Project Appraisal Document Page 18 Mining Sector Reform Country: Madagascar Learning and Innovation Loan G: Main Loan Conditions 1. Conditions of presentation to the RVP - Presentation to the Bank of the Mining Sector Policy Letter. 2. Effectiveness Conditions: - The Project Implementation Manual has been duly approved by the Association, and adopted by the Borrower. - The Borrower has selected the auditors referred to in Article IV of the Development Credit Agreement (DCA), in accordance with Section II of Schedule 3 to the DCA. - The Project Account has been duly opened, and the amount of the initial depositl referred to in Section 3.04 (b) (i) of the DCA has been paid therein. - The higher level staff of the Environmental Affairs unit referred to in paragraph 2 (a) of Schedule 4 to the DCA have been duly apppointed. - UCP has been established and the Project Coordinator and procurement expert referred to in paragraph I (c) of Schedule 4 to the DCA have been duly recruited in accordance with Section II of Schedule 3 to the DCA. - The Borrower has made satisfactory progress in the implementation of its action plan to renounce mining rights adopted pursuant to the Annex to the Mining Sector Policy Letter 3. Other: Implementation covenants: - Standard conditions. Financial covenants: - Standard conditions. H. Readiness for Implementation [ The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. [X] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [] The following items are lacking and are discussed under loan conditions (Section G): 'Section 3.04 (b) (i) of the DCA states: "the Borrower shall make an initial deposit of $60,000 into the Project Account;.."  Project Appraisal Document Page 19 Mining Sector ReforTn Country: Madagascar Learning and Innovation Loan I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. [ ] [The following exceptions to Bank policies are recommended for approval: n/a. The project complies with all other applicable Bank policies.] Task Team Leader: Paulo de Sa Sector Manage ho Allen Country Director: Michael Sarris  Project Appraisal Document Page 20 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 1 Project Design Summary Madagascar: Mining Sector Reform Project Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) I. Enhance social development, - Increased GDPs per capita in - Midterm evaluation, - Continued neutral including poverty reduction and mining areas. Implementation Completion macroeconomic and human capital development - Reduced rate of unemployment Report (ICR) and continued sectoral policy environment related to the development of mining monitoring; statistical data operations. 2. Broad-based growth led by private, - Negotiation of at least one mining foreign investment agreement with foreign investor. 3. Improve the performance and - No backlog of unprocessed institutional capacity of govemment to concession applications or EIS deliver key social, infrastructure and - Systematic application of environmental services consultative processes Project Development Objective: (Objective to Goal) I. Encourage Private Investment in - Average annual investments in - ICR and continued monitoring - Stable, long-term Mining mining increase from $10m now to by DG/MME. politically neutral SS5 m betwn 2000-10 - ICR and statistical data. macroeconomic and - Average annual minerals exports - Baseline and monitoring sectoral policy environment would increase from S20m (1996) to reports, midterm evaluation, ICR - Reasonably stable world S500 m (2010) and continued monitoring by minerals market 2. Mainstreaming small-scale mining - Increase reported production of DG's Environmental Group. conditions/prices into formal economy gold/gemstones by small-scale - Environmental control miners from 55m now to S40 m 2010 procedures are enforceable - Reduce by 50% area covered by and community existing claims that have not reported consultative processes are activity or do not comply with law, applicable. 36 months AE 3. Increase Fiscal Revenues - Fiscal revenues from mining would grow from S2mil now to S80 million by 2010. 4. Develop Environmental and Social - Define procedures for EIS for Management for Mining small-scale mining. - Systematic application of consultative processes - SIGM in place 24 months AE 5. Improve Geological and Mlining Information System (SIGM) Outputs: (Outputs to Objective) 1. Govemment institutions in capacity - Environmental monitoring system - Quarterly and annual technical - Continued comnmitment to to provide timely, reliable and operational 36 months AE. - Baseline performance reviews, ICR reform transparent administrative services to data in selected areas available 36 - Baseline studies reports, ICR - Timing to build-up the sector. months AE. - Mining Cadastre logbooks. Mining Cadastre Office and 2. Establishment of a modem. updated - OMNIS mining titles sold or - Mining Cadastre data base, Provincial off-shoots' and accurate Mining Cadastre. retumed to public domain 18 months technical monitoring, quarterly capacity to manage 3. Improved social awareness. AE and annual technical performance cadastral data according to conditions for consultative processes - Cadastral backlog reduced by 80%, review, schedule. and community participation in the 12 months AE. - Pilot baseline studies reports. development of mining projects. - Cadastral management system - Annual social assessment operational 24 months AE. reports, ICR. - Pilot baseline studies available 36 months AE. .__ _  Project Appraisal Document Page 21 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions - Consultative procedures implemented at end of project Project Components/Sub-components: Inputs: (budget for each component) (Components to Outputs) (see Annex 2 for project description) A. Policy Implementation A. Policy Implementation: US$7.05 million A. I - Normalization of Small-Scale A. I Normalization of Small-Scale A. I Contracts, procurement A. 1: - Staff continued Mininz: Mining: US$3.1 million. records, monitoring reports, environmental-social A. 1. I Integrated management and technical and training awareness related to mining T.A. program to enhance technical performance evaluation reports. - Staff stability yields, environmental performance, - Continued project and increase tax revenues. ownership A.2.2. Mining Directorate program of - No political interference extension services to small-scale - Satisfactory performance miners. by contracted consultants. A.2.3 Strengthening of minerals laboratory. A.2.4 Cutting center. A.2 Environmental Information A.2 Environmental Information A.2 Contracts, procurement A-2: - Line staff continued Svstem-EIS/' Sector Environmental System-EIS: USS0.95 million records, monitoring reports, environmental/social Control and Assessment technical and training awareness related to mining A.2. I Environmental baseline studies: performance evaluation reports. - Staff stability pilot baseline studies. - Continued project A.2.2 Environmental Management ownership Capacity Building: training and - No political interference institutional strengthening. - Satisfactory performance A.2.3 Socio-economic impact of by contracted consultants. mining: pilot studies, development of consultative procedures and assessment criteria, training and institutional strengthening A.2.4 Implementation of the EIS; upgrading of facilities. A.3 Institutional Reform and Capacity A.3 Institutional Reform and A.3 Institutional model A.3: - Continued Buildine Capacity Building: US$3.0 million (organizational charts, staffing, commitment to reform A.3.1 Implementation of the new implementation schedule), - Continued project institutional model: organization, contracts and procurement ownership staffing, financial resources and work records, monitoring reports. - No political interference methodology; equipment and works: upgrading of facilities. A.3.2 Policy dialogue and consensus building: communication campaign, seminars and roundtables. A.3.3 Mining Cadastre and Registry System: equipment. upgrading of facilities: implementation of the Cadastral Mvlanagement System. A.3.4 Geological and Mining Information System: upgrading of the information system: upgrading of facilities: training; repatriation of documentation and data. B. Project Coordination, B. Project Coordination: US$0.7 B. Quarterly and annual reports, B.: - Staff stability Monitoring and Evaluation million contracts and procurement - No political interference - Hire and supervise staff records, financial reports and - Manage procurement audits. - Contract accounting and auditing - Prepare quarterly and annual reports and annual operation plans - Monitor progress and evaluate rslts.  Project Appraisal Document Page 22 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 2 Mining Sector Reform Project Project Description Project Component A: Policy Implementation - US$7.05 million (91.0% of project total costs) Project Subcomponent A.1: Normalization of Small Scale and Artisanal Mining - US$3.1 million (40.0% of total Project costs). Artisanal and small-scale mining activities represent an important source of direct and indirect income for a relatively large rural population. However, such activities usually generate a number of technical, legal, environmental and socio-economic problems. From a regional perspective, the medium term socio-economic balance could be negative, and costs greater than benefits, in terms for example of use of a non-renewable resource, environmental impacts, health conditions or of diversification of economic activities when the deposits are exhausted. Experience in other countries shows that these problems have to be addressed by multi-faceted assistance programs aimed at promoting the development of small-scale and artisanal mining on a technically, environmentally and socially sound basis, and providing for the sustainability of these activities. The Subcomponent will: (i) support an integrated management and technical assistance program to enhance technical yields, reduce the current serious adverse impact on the environment, and increase tax revenues; (ii) support the Mining Directorate to design and deliver technical advice, geology information, and extension services to small-scale miners; (iii) strengthen the minerals laboratory; and (iv) support the creation of a cutting center. The Subcomponent includes four Programs: A. 1.]: Integrated Management Program - US$1.1 million (about 14.2% of total Project costs). The Program is intended to improve the general awareness of small-scale and artisanal miners on ways to improve their technical and environmental performance and the overall impacts of their activity on the local communities. The program would be multi-disciplinary in its approach and includes the following training (on-the-job and workshops) and assistance activities: (i) small-scale enterprise organization, management and accounting, including the provision of assistance to encourage small-scale miners to form cooperatives and in the identification of suitable, well organized private companies which would be interested in joint-venture operations with present workers and owners; (ii) legal and fiscal matters related to mining and provision of assistance to legalize informal operations; (iii) technical assistance: mining methodology, geology, metallurgy (mineral processing), infrastructure, simple mining economics and environmental safeguards; (iv) design and implement an environmental sensitization and awareness campaign targeted at artisanal miners; (v) investigate and identify health hazards originating directly or indirectly from mining and promote remediation measures; (vi) promote the implementation of projects aiming at the diversification of economic activities, through the development of an information and assistance network. A.1.2: Extension Services to small-scale miners by the Mining Directorate - US$1.50 million (about 19.3% of total Project costs,Cooperation Francaise parallel financing). This Program is aimed at improving the Mining Directorate's ability to monitor small-scale mining and artisanal activities on the field, and to provide incentives to their legalization design and delivery of technical advice, geology information, and extension services to small scale miners. In close cooperation with the small-scale  Project Appraisal Document Page 23 Mining Sector Reform Country: Madagascar Learning and Innovation Loan mining industry, the Program would: (i) design workable solutions and implement demonstration projects to improve mining safety and mitigation of environmental damages; and (ii) promote the identification, development and dissemination of small scale mining equipment through private sector delivery mechanisms. A.1.3: Strengthening of the Minerals Laboratory - US$0.30 million (about 3.9% of total Project costs, Cooperation Francaise parallelfinancing). This Program is specifically directed at the reinforcement of MEM's technical laboratory in order to strengthen its ability to provide services for the private sector. A.1 .4: Creation of a Cutting Center - US$0.20 million (about 2.6% of total Project costs, Cooperation Francaise parallel financing). This program will focus on the support to the creation of an artisanal cutting center for gemstones to be managed by the private sector. Project Subcomponent A.2: Environmental Information System/Sector Environmental Control and Assessment - US$0.95 million (12.3% of total Project costs). The general objective of this Subcomponent is to set up a preventive environmental protection system for mining activities. This system should bring together the mining administration agency with other public and private environment entities. The Subcomponent will: (i) carry out environmental baseline studies over selected mining and potential mining districts; (ii) strengthen the capacity of the Environmental Affairs Unit at the MEM for the monitoring and enforcement of environmental regulations, and the setting up of procedures for the processing of Environmental Impact Statements in mining; (iii) carry out socio-economic baseline studies over selected mining districts as a basis for development of methodology and capacity to assess and monitor social, cultural and economic impacts of mining on local communities, and develop consultation and participatory procedures; and (iv) develop a Environmental Information and Management System (EMS). It includes: training of staff in environmental and socio-economic management related to mining; provision of infrastructure, field and data processing (hardware and software) equipment. The Subcomponent includes four Programs: A.2. 1: Environmiental Baseline Studies - US$0.25 million (about 3.2% of total Project costs). Baseline studies are carried out to obtain comprehensive information regarding the existing natural and social conditions of a given area. This Program will: (i) provide the specific information and data for the formulation, establishment and adaptation of realistic environmental norms and standards, and to support decision-making regarding the location of infrastructure, mining and processing facilities; (ii) develop multidsiciplinary research methodologies to be applied in environmental analysis; and (iii) strengthen the research capacity and human resources in environmental issues related to mining activities. The program will finance environmental baseline studies for pilot areas and will prepare a schedule of priority areas which will be determined by the location of protected areas and potential mining operations. Work will make selective use of existing data from available sources, through field and source compilation, revision, update, and comprehensive interpretation of such data. Such work will include, i.a., (i) the study and determination of water resources: watershed areas, rain statistics, resource modeling, and water sampling and analysis (results will also be documented in and be compatible with Geographical Information System (GIS) being strengthened in the SIGM); (ii) evaluation of the areas' environmental vulnerability; and (iii), determination of mining impacts regarding existing or past operations. Close cooperation with the National Environmental Agency (ONE) is expected. Provisions include the financing of international and local consultancy services contracts. A.5.2: Strengthening of the Environmental Affairs Unit at the MEM - US$0.25 million (about 3.2% of total Project costs). This Program aims at strengthening the capacity of the emerging Environmental Affairs Unit at the MEM as a federal coordinating unit responsible for the development of an adequate and consistent nation-wide environmental regulatory and monitoring framework, as well as to deal with  Project Appraisal Document Page 24 Mining Sector Reforn Country: Madagascar Learning and Innovation Loan the supervision of the base line and socio-economic studies to be carried out under the Project. Provisions include the financing of international and local consultants, administrative support, training and minor purchases of equipment (office equipment, hardware and software). A.2.3. Training and Institutional Strengthening in Assessment of Socio-Economic Impacts of Mining Investments - US$0.18 nillion (about 2.3% of total Project costs). Substantial investment in minerals exploration is expected in Madagascar as a result of the Project, while at least two large projects (QIT in the Fort-Dauphin area and Phelps Dodge in Moramanga) are in the process of development. Development of these projects has focused attention on the likely socio-economic impacts on the local community. However, the process of assessing these impacts and involving the local community in the consultation process is in its beginning. This is due principally to lack of familiarity at the provincial level with the techniques and practices of social assessment as well as an inadequate institutional and regulatory framework to provide for such assessments. This component aims to remedy these deficiencies. Pilot baseline studies will be conducted in selected provinces to; i) identify the likely social, cultural, macro and micro economic, financial, fiscal, and other impacts of mining; ii) identify principal groups of local and regional stakeholders in the project; iii) devise statistical and other performance indicators to objectively assess the costs and benefits of the impacts for each stakeholder; iv) evaluate and assess the key questions and issues to be addressed; and v) make concrete recommendations and devise an action plan for subsequent activities. The baseline studies in the selected areas will serve as templates for subsequent work in other areas. Part of the concrete output of the studies will be recommendations and proposals pertaining to consultation procedures, training requirements and programs, institutional strengthening, and monitorinig and feedback of performance of the operations. A series of training programs and seminars will be conducted nationally and provincially, for public and private sector participants. This training will focus on consultation procedures and continual monitoring and evaluation of socio-economic impacts using numeric and other performance indicators. A2.4: Environmental Information System - US$0.27 million (about 3.5% of total Project costs). This Program is specifically directed at the implementation of a unified Environmental Information and Management System, an inter-related set of data bases to help administer licensing procedures as well as compile and process base line and monitoring data . Three Subprograms are included: (i) works and equipment which will upgrade office and field facilities (rehabilitation works, purchase of vehicles and office and field equipment); and (ii) consultant services to design the system and (iii) provide training. Project Subcomponent A.3: Institutional Reform/Capacity Building - US$3.0 million (38.7% of total Project costs). The broad institutional framework reform will be designed in the context of an institutional audit being carried out Linder PATESP, and as part of the policy to reduce the role of the State and to adapt public mining agencies to better-defined functions, eliminating most of their past widespread overlapping of functions and modernizing their capacity to administer the sector. The respective role of such agencies and of the private sector and their inter-relationships will be identified. As a result, a detailed institutional model and implementation plan will be designed and implemented under the proposed Project. Four programs are included: A. 3. 1: Implementation and Adjustment of the New Institutional Model Program - US$1. 11 million (14.3% of total Project costs). This program aims at specifically adjusting the overall institutional model defined under the PATESP and implementing it. The model will be adjusted through a Participative process (workshops and seminars) and implemented through on-the-job training. Work will include the detailed and ad hoc design of the institutional model, including organization, staffing, budget and identification of long-term finanicial sources for core responsibilities; the setting up and implementation of efficient work procedures; and on-the-job training of staff in policy, legal and management matters. Work includes also a detailed inventory of the infrastructure needs (facilities and equipment). Provisions include the financing of international and local consultants, of incremental recurrent costs related to travels and to  Project Appraisal Document Page 25 Mining Sector Reformn Country: Madagascar Learning and Innovation Loan training, of office rehabilitation, of purchase of basic core office equipment, of vehicles and of legal and technical literature, and of publication of information and legal and administrative procedures. A. 3.2: Policy Dialogue and Consensus Building on the reform agenda - US$0.20 million (2.6% of total Project costs). This program aims at the organization of a communication campaign to build ownership of mining reform and a number of seminars and roundtables on this topic to broaden the participation of key stakeholders. A. 3.3: Mining Cadastre and Registry System - US$0.83 million (10. 7% of total Project costs). A priority objective of the Government's mining sector policy is to establish a well-informed, uniform and interactive cadastral system. Based on the audit carried out under PATESP, the proposed Project will finance the transformation of the physical registries of the Mining Directorate into a proper mining cadastre. The cadastre will provide reliable information about the precise location of mining rights in the territory. The procedures required in order to apply the cadastre process will be transparent, public, of general application and non-discretionary. In addition, the cadastre will cover both the mining rights requested and granted after it becomes effective, and already existing ones as well as the ones that have been simply requested. Hence the cadastral procedure will have stages, instances and resources to allow owners of acquired mining riglhts to adequately defend their rights in accordance with the provisions of the Mining Code. Older rights which are not inserted into the new cadastre must be legally canceled in order for the information resulting from the cadastre to be correct and useful in practice. The two scheduled subprograms include (i) the purchase of modern hardware and software, topogeodetic instruments (including GPS instruments), vehicles and the provision and furnishing of adequate field and office facilities for the cadastre and registry functions; and (ii), the implementation of the computerized Mining Cadastre System; on-the-job and external training will be included under this subcomponent. A. 3.4: Minerals Information System - US$0.87 million (11.2 % of total Project costs, partial parallel financing by the Cooperation Francaise). An essential tool in the development of private sector mining and the correct administration of the sector is rapid and efficient access to accurate information. An integrated information data bank - the Geological and Mining Information System (SIGM) - is currently being developed with the assistance of the French Cooperation. The Subcomponent aims to strengthen the information management unit; systematize the collection and interpretation of sector information into a data base, making use of state of the art technology to gather, store and provide the information to interested parties in a timely fashion; and repatriate relevant geological information on Madagascar available overseas. It includes: provision of hardware and software, installation of the LAN and connection to Internet, purchase of information and training of staff in information, data bases and network management. This program includes four activites: - SIGM Upgrade. The Program will be coordinated and implemented by a specially designed task force of specialists located within the General Direction. Provisions will include the financing of international and local consultants, as well as of communications fees. - Works and Equipment. Equipment to be procured includes, i.a., hardware and software specifically dedicated to the SIGM functions, communications devices and accessories. Software requirements include programs in administrative system and database management, processing, communications and editing. In addition, subscriptions to various local and provincial electronic databases, and Internet will be funded. Some rehabilitation work, in particular network cabling and connections, up- grading of electrical supply and computer security in government offices will be provided. - Training. A training program focused on the implementation and use of the SIGM will be carried out.  Project Appraisal Document Page 26 Mining Sector Reform Country: Madagascar Learning and Innovation Loan - Repatriation of documentation and data. This Program is aimed at collecting and updating geological information on Madagascar available in foreign countries. The Project will finance incremental recurrent costs and the purchase of documents. Project Component B: Project Coordinating Unit (UCP) - US$0.7 million (9.0% of total Project costs). The Project was prepared with the strongly committed support of the coordinating team of PATESP's mining component which will be strengthened and continue to operate throughout implementation of the Mining Sector Reform Learning and Innovation Loan. The UCP will link with MEM's line agencies, OMNIS and ONE and, during implementation, will monitor, supervise and provide management control, by Components, Subcomponents and Programs and for the Project as a whole. The UCP will be strengthened accordingly and will manage procurement - including all contracting works and purchases - and the hiring of consultants, the contractual relationship with the Bank and the Project's overall administration and accounting - which includes managing the Project's Loan Account and its other funding. UCP staff will attend Bank procurement seminars. An accounting firm will be retained with UCP funds to carry out the main accounting tasks during Project implementation. The UCP will be responsible for preparing and submitting to the Bank quarterly reports dealing with Project implementation, and for contracting under Terms of Reference acceptable to the Bank, the yearly audits of the Project including the timely submission of such audit reports to the Bank. The Project will finance the contracting within the existing UCP of a General Coordinator, an assistant in charge of monitoring and control, project and administrative support. Funding is also provided for the unit's operational costs, as well as some minor additional office equipment.  Project Appraisal Document Page 27 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 3 Mining Sector Reform Project Estimated Project Costs Project Component Local Foreign Total -----------------------US $ thousand------------------ A. Policy Implementation: A.1 Normalization of Small-scale Mining 190 2810 3000 Consultant Services 50 400 450 Equipment and Consumables 60 340 400 Training 80 70 150 Consultant Services *900 *900 nEquipment and Consumables *500 *500 Training *100 *100 SC -1 MP I 0 5 5 Consultant Servi.ces 40 20 2700 | InstitutEqoipment and Consumables *250 *250 W: t 11d4dj t Consultant Services . *50 *50 Equipment and Consumables *150 *150 | A.2 Environmental Information System /Sector 160 790 950 |Environmental Control and Assessment Consultant Services 10 240 250 Consultant Services 120 130 Training 60 60 120 Consultant Services 30 90 120 Training I10 50 60 Consultant Services 40 230 2700 A.3 Institutional Reform / Capacity Building 860 2140 3000 Consultant Services 100 200 300 Training I20 60 180 Contract Works 300 300 Equipment and Consumables 40 280 320 Consultant Services 80 70 150 Equipment and Consumables 50 50  Project Appraisal Document Page 28 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Consultant Services 60 670 730 Training 80 20 100 * Consultant Services (parallelfinancing) *400 *400 Contract Works 50 50 Equipment and Consumables 20 50 70 Training 10 20 30 Documentation 320 320 B. Project Coordination Unit 650 50 700 Equipment and Consumables 90 10 100 Incremental recurrent Costs 290 290 Consultant Services 160 160 Training 50 50 Total Baseline Cost 1750 5800 7550 Contingencies and unallocated 200 200 Total Project Cost 1750 6000 7750  Project Appraisal Document Page 29 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 4 Mining Sector Reform Project Economic and Financial Assessment Summary The gross value of minerals production currently reported in Madagascar is about US$35 million (1996) and represents about I percent of Madagascar's GNP of US$3.058 billion (1996). Of the total value of production, about 70 percent is represented by three minerals (chromite, graphite, and mica). There are two projects in an advanced feasibility study stage (QIT, in the Fort-Dauphin region, and Phelps Dodge, near Moramanga) which could be in operation - all financed and operated by the private sector - over the next five years. In addition, an increasing number of foreign companies have established or are considering to develop exploration programs in the country which could result in the discovery of a new major deposit. Madagascar's total exports in 1996 were about US$ 600 million, of which 3 percent corresponded to minerals exports (equivalent to US$20 million). Most of the foreseeable expansion is in metallic minerals and gemstones areas, and the majority of this production will be exported and generate foreign exchange. Average annual investments in mining do not make object of regular statistics in Madagascar, but they can be estimated to be about the US$ 10 million. Other economic benefits of mining include the development of support industries (manufacture of mining equipment, provision of consulting services, development of capital and commercial markets), transfer of technology and management know-how, and limited direct job creation. These benefits have not been quantified. To test the robustness of the possible contributions of mining to the economy, two scenarios (low and high case) have been constructed based on an evaluation prepared in 1997 by the Bank for the Country Economic Memorandum. These projections are based on projects currently in an advanced planning stage as well as assumptions about smuggled production. The results of this analysis, projected to the year 2010, are as follows. Table A.5 - 1: Madagascar Mineral Production and Export Projections by 2010 (US$ million) Scenario Gross Production Gross Export Value Average Annual Value Investment Current 35 - 20 10 Low 2000 40 25--25 Low2010 450 400 2000-2010: 85 High2000 50 3 0 High 2010 700 600 2000-2010 : 200 Low Case Scenario. No new major deposit is discovered and one of the two large mining projects under consideration fails to materialize. In addition to the integration of small-scale mining activities in the formal economy, one new medium sized gold project and two new small-medium sized gemstones mines are opened by 2005.  Project Appraisal Document Page 30 Mining Sector Reform Country: Madagascar Learning and Innovation Loan High Case Scenario. Given the right policy environment to encourage investment and vigorous external markets for Madagascar's mineral products, the high case scenario is plausible. However, the development of a third large scale project is only indicative. Between 1998 and 2010, QIT, Phelps Dodge, two new medium-sized gold mines, and two medium-sized gemstone mines would be opened. Key Assumptions: 1. QIT- Total investment: $500 million (2002-2005), including mine and related infrastructure; Annual Exports: $80 million (2005-2015), and $150 million thereafter. 2. Phelps Dodge- Total investment: $500 million (2001-2004); Annual Exports: $350 million. 3. Gold- Current reported production: virtually none. Low Case Scenario: Average annual investment: $10 million (2000-2010); Annual Exports: $ 5 million in 2005, and $ 10 million by 2010; High Case Scenario: Average annual investment: $20 million (2000-2010); Annual Exports: $ 10 million in 2005, $ 25 million by 2010. 4. Gemstones - Average annual investment: $ 20 million (2000-2010); Low Case Scenario: Average annual investment: $ 15 million (2000-2010); Annual Exports: $ 15 million in 2005, and $ 25 million by 2010; High Case Scenario: Average annual investment: $ 40 million (2000-2010); Annual Exports: $ 25 million in 2005, and $ 50 million by 2010.  Project Appraisal Document Page 31 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 5 Mining Sector Reform Project Financial Summary Years Ending December 31 (US$ thousands; 1998 base year) Implementation Period Operational Period 1998 1999 2000 Total Project Costs Investment Costs 1100 3000 3350 7450 Recurrent Costs 60 150 90 300 Total 1160 3150 3440 7750 Financing Sources (% of total project costs) IDA 94.8 55.6 62.5 64.5 Parallel-financiers 38.1 34.9 31.0 Government 5.2 6.3 2.6 4.5 Total 100.0 100.0 100.0 100.0 Main assumptions:  Project Appraisal Document Page 32 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 6 Mining Sector Reform Project Procurement and Disbursement Arrangements Procurement A. General Goods and works financed by IDA will be procured in accordance with IDA Guidelines for Procurement under IBRD and IDA Credits dated January 1995 and revised in January 1996, August 1996 and September 1997. Consultancy services financed by IDA will be procured in accordance with IDA Guidelines for the Selection of Consultants by World Bank Borrowers dated January 1997 and revised in September 1997. The Project Coordination Unit of the Ministry of Energy and Mines, the executing agency for the project will be responsible for procurement. This agency will be reinforced to ensure that it is adequately staffed to manage the procurement arrangements. At negotiations, assurances will be obtained from Government that the following procurement arrangements will apply for the implementation of the project. In addition, a General Procurement Notice (GPN) is to be transmitted to IDA for publication in the United Nations Development Business to advertise for major consulting assignments and goods contracts. This notice is to be updated every year during the execution of the project uintil all the contracts have been procured. No ICB works contracts are expected to be procured. Procurement methods and prior review arrangements are indicated in Tables A and B of this Annex. B. Civil Works and Goods Civil Works. Civil works to be carried out under the project consist of the rehabilitation of small office and buildings. In view of the small cost of each contract, the works contracts each costing between US$30,000 and US$100,000 for an aggregate amount of US$200,000 will be procured under National Competitive Bidding (NCB) procedures and those costing less than US$30,000 for an aggregate amount of US$150,000 will be procured on the basis of three quotations from eligible contractors. Goods. Goods consisting of vehicles, instrumentation, field and office equipment will be procured under International Competitive Bidding (ICB). Furniture as well as smaller quantities of office equipment costing US$30,000 or more but less than US$100,000 for an aggregate amount USS200,000 will be procured under NCB procedures. Other smaller items of office equipment, furniture, training materials, and office supplies and documentation purchase costing less than US$30,000 per contract for an aggregate of US$430,000 will be procured on the basis of national or international shopping procedures (minimum of 3 quotations from eligible suppliers). Prior Review Arrangements. Goods and works contracts costing more than US$100,000 per contract will be subject to prior review by IDA. All other contracts will be subjected to post review. C. Consultancy Services and Training Recruitment offirms. Consultancy services for studies, technical assistance and training requiring the recruitment of firms will be procured in accordance with Bank Guidelines. Most of these services will be recruited on the basis of the Quality and Cost based Method (QCBS). Exceptions to the QCBS method will include the use of (i) the Least Cost Selection Method (LCS) for the contracting of financial audits (aggregate amount US$150,000) and (ii) the Selection Based on Consultants'  Project Appraisal Document Page 33 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Qualifications (CQ) for contracting of assistance in the technical supervision of larger contracts under the A.1, A.2 and A.3 (c) subcomponents of the Project (aggregate amount US$230,000). For contracts based on a shortlist of consultants estimated to cost US$ 50,000 or less per contract, the shortlist may consist entirely of national consultants if a minimum of three qualified ones are available. Recruitment of Individuals. Individuals will be recruited in cases where a firm is not needed. Such individuals will be selected and recruited on the basis of qualification and experience in accordance with Bank Guidelines. Prior Review Arrangements. All procurement documents for consulting contracts with firms for amounts exceeding US$100,000 per contract selected on the basis of a shortlist and any contract involving individual consultants exceeding US$50,000 per contract will be subject to prior review by IDA. In addition, for consultant contracts with firms exceeding US$200,000 per contract, the technical evaluation report will be also be required by IDA for prior review. All other contracts will be subjected to post-review. Disbursement Allocation of credit proceeds (Table C): The credit would be disbursed over a period of 36 months (the Project completion date would be September 30, 2001 and the Credit closing date is March 31, 2002) , as follows: (i) 100 percent for consultancies, audits and training; (ii) 80 percent for contract works; (iii) 100 percent of foreign and 80 percent of local expenditures for goods; (iv) 80 percent for incremental recurrent costs. Disbursement of Credit proceeds would be made against four categories (base costs): (i) consulting contracts (US$3.1 million); (ii) contract works (US$0.3 million); (iii) goods and documentation (US$1.2 million); (iv) incremental recurrent costs (US$ 0.3 million). Unallocated contingency allowances amount to about 5 percent of total project base which is deemed to be sufficient considering the life period of the Project. Retroactive Financing. Eligible expenditures incurred after January 1, 1998 would be retroactively finaniced up to a maximum equivalent of SDRO.2 million (US$0.25 million equivalent; about 5% of the Credit value). Use of statements of expenses (SOEs). Disbursements will be made against Statement of Expenses (SOEs) for contracts and goods not requiring the Bank's prior review. Therefore disbursements for all contracts for: goods and civil works of less than US$100,000; consulting services, by firms and individuals of less than US$100,000 and US$50,000 respectively; and all incremental recurrent expenses and training, would be made on the basis of SOEs and certified by the UCP. Special Account. Payments from the Credit proceeds would be administered by the UCP from a Special Account. The Special Account would be maintained in a commercial bank selected by the Borrower and acceptable to the World Bank. The authorized allocation, sufficient for about four months of financeable expenditures, would be US$0.7 million; however, the initial allocation would be limited to US$0.5 million until the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding special commitments entered into the Bank shall be equal to or exceed SDRO.8 million. The Special Account would be managed by the UCP which would be responsible for preparing disbursement requests. These requests would be submitted monthly or when the Special Account has been drawn down by a third of the initial deposit, whichever occurs first. Replenishment of the Special Account would follow Bank procedures. Disbursements will be made under the authorized signature from a designated representative of the Borrower. The Special Account would be audited annually by independent auditors acceptable to the Bank.  Project Appraisal Document Page 34 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 6 Table A: Project Costs by Procurement Arrangements1 (in US$ thousands equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB Other N.B.F 1. Works 200 150 350 (IDA) (160) (120) (280) 2, Consultancy services, 3390 15001 4890 training and audits (IDA) (3210) (3210) 3. Goods 690 200 430 9001 2220 (IDA) (690) (170) (420) (1280) 4. Operative costs 290 290 (IDA) (230) (230) Total 690 400 4260 24001 7750 (690) (330) (3980) (5000) I Financed by the French Cooperation Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit 'For details on presentation of Procurement Methods refer to ODI 1.02, "Procurement Arrangements for Investment Operations." Details on Consultant Services can be shown more easily in the Table Al format (additional to Table A, where applicable).  Project Appraisal Document Page 35 Mining Sector Reforn Country: Madagascar Learning and Innovation Loan Annex 6 Table Al: Consultant Selection Arrangements (optional) (in US$million equivalent) Selection Method Total Cost Consultant Services (including Expenditure Category contingen cies) QCBS QBS SFB LCS CQ Other N.B.F. A. Firns 2730 150 230 1500 4610 B. Individuals 280 280 Total 2730 150 230 280 1500 4890 Note: QCBS = Quality- and Cost-B3ased Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan.  Project Appraisal Document Page 36 Mining Sector Reformn Country: Madagascar Learning and Innovation Loan Annex 6 Table B: Thresholds for Procurement Methods and Prior Reviewl Expenditure Contract Value Procurement Contracts Subject to Category (Threslhold) Method Prior Review / Estimated Total Value Subject to Prior Review US $ thousands US $ millions 1. Civil works 30-100 NCB None <30 Price quotations None (shopping) 2. Consultants' services, training and audits Firms > 100 All; amount 1.3 < 100 None Individuals > 50 All; amount 0.5 <50 None Audits All; amount 0.15 2. Goods > 100 ICB All; amount 0.8 30 - 100 NCB None <30 Shopping None Total value of contracts subject to prior review: 2.75 'Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance.  Project Appraisal Document Page 37 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 6 Table C: Allocation of Credit Proceeds Expenditure Category Amount in SDR Financing Percentage 1. Civil works 210,000 80 % 2. Consultants' services, training and audits 2,350,000 100 % 3. Goods 910,000 100% F 80% L 4. Operating costs 180,000 80% 5. Unallocated 150,000 Total 3,800,000  Project Appraisal Document Page 38 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 7 Mining Sector Reform Project Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At final PCD stage) B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) First Bank mission (identification) 9/12/1997 9/12/1997 Appraisal mission departure 04/18/1998 4/18/1998 Negotiations 04/27/1998 04/30/1998 Planned Date of Effectiveness 07/31/1998 / /1998 Prepared by: General Directorate of the Ministry of Energy and Mines Preparation assistance: PPF from the Private Sector Development and Capacity Building Project (PATESP) Bank staff who worked on the project included: Name Specialty Paulo de Sa Task Team Leader Gotthard Walser Environment Raj Soopramanien Legal Bertrand Ah-Sue Procurement David Freese Disbursement Claude Ginet (Consultant) Mining T.A. Manorama Gotur Operations Analyst  Project Appraisal Document Page 39 Mining Sector Reformn Country: Madagascar Learning and Innovation Loan Annex 8 Mining Sector Reform Project Documents in the Project File* A. Project Implementation Plan B. Bank Staff Assessments White Cover Paper on Mining Sector Issues C. Other PATESP Memorandum of the President, Aide-memoires, BTOs PFP Matrix SAC Memorandum of the President Mining Investment Agreement (following approval by Parliament) *Including electronic files.  Annex 9 Table I -Statement of Loans and Credits Status of Bank Group Operations in Madagascar IBRD Loans and IDA Credits in the Operations Portfolio Difference Between expected Original Amount in US$ Millions Ind actual Loan or Fiscal / _ _ disbursements a/ Project ID Credit Year Borrower Purpose No. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Number of Closed Loans/credits: 70 Active Loans MG-PE-1564 IDA30250 1998 GOVERNMENT RURAL WATER SEC.PILO 0.00 17 .30 0.00 17.02 0.00 0.00 MG-PE-1537 IDAN0090 1997 REPUBLIC OF MADAGASCAR ENVIRON. II 0.00 30.00 0.00 26.01 -.84 0.00 MG-PE-1555 IDA29560 1997 GOVERNMENT PRIV SECT DEV & C.B. 0.00 23.80 0.00 21.53 -1.71 0.00 MG-PE-40019 IDA29110 1997 GOVERNMENT CAPACITY BUILDING 0.00 13.83 0.00 9.29 1.11 0.00 MG-PE-48697 IDA29680 1997 GOVERNMENT OF MADAGASCAR URBAN INFRASTRUCTURE 0.00 35.00 0.00 33.02 .89 0.00 MG-PE-1533 IDA28440 1996 GOVT OF MADAGASCAR SCAR ENERGY SECTOR DEV PR 0.00 46.00 0.00 39.44 3.69 0.00 MG-PE-35669 IDA27780 1996 GOVT MADAGAS/FOND D'INTER SOCIAL FUND 2 0.00 40.00 0.00 18.24 -3.38 0.00 MG-PE-1522 IDA26440 1995 GOVT. OF MADAGASCAR IRRIGATION II 0.00 21.20 0.00 15.24 4.20 0.00 MG-PE-1563 IDA27290 1995 GOVERNMENT AG.EXTENSION PROJECT 0.00 25.20 0.00 14.73 3.24 0.00 MG-PE-1558 IDA25380 1994 GOVERNMENT PET SEC REFORM 0.00 51.90 13.26 34.44 42.05 0.00 (Q MG-PE-1583 IDA25910 1994 MTP/MUT URBAN WORKS PILOT 0.00 18.30 0.00 .01 -1.68 0.00 m MG-PE-1550 IDA24970 1993 GOVT OF MADAGASCAR FINANCIAL INSTITUTIO 0.00 6.30 0.00 3.21 2.74 0.00 MG-PE-1553 IDA24740 1993 GOVERNMENT FOOD SECURITY & NUTR 0.00 21.30 0.00 3.84 2.35 0.00 - MG-PE-1552 IDA23820 1992 GOVERNMENT VOC. EDUCATION 0.00 22.80 0.00 6.73 4.83 -.20 MG-PE-1520 IDA22510 1991 GOVERNMENT NAT HEALTH SECTOR 0.00 31.00 0.00 8.55 7.02 0.00 MG-PE-1549 IDA22430 1991 GOVERNMENT LIVESTOCK 0.00 19.80 0.00 5.79 5.30 0.00 MG-PE-1512 IDA21170 1990 GOV.OF MADAGASCAR TANA PLAIN DEV 0.00 30.50 0.00 19.42 18.17 0.00 MG-PE-1515 IDA20940 1990 GOVT. EDUC SECT REINF 0.00 39.00 .64 .94 -2.92 -4.81 MG-PE-1540 IDA21040 1990 GOVT. FIN SECTOR/APEX 0.00 48.00 0.00 14.74 11.33 0.00 MG-PE-1546 IDA20420 1989 AGRIC RES 0.00 24.00 12.31 2.16 13.40 1.01 Total 0.00 565.23 26.21 294.35 109.79 -4.00 Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 241.01 1,061.15 1,302.16 of which has been repaid: 0.00 95.86 95.86 Total now held by IBRD and IDA: 539.02 913.15 1,452.17 Amount sold : 0.00 6.86 6.86 Of which repaid : 0.00 6.86 6.86 Total Undisbursed : 294.35 .57 294.92 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS = highly Satisfactory, S - satisfactory, U - unsatisfactory, HU - highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Note: Disbursement data is updated at the end of the first week of the month.  Project Appraisal Document Page 41 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Annex 9 Table 2 - Madagascar - Statement of IFC's Committed and Disbursed Portfolio As of 30-Apr-98 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equit Quasi Partic Loan Equit Quasi Partic y y 1983/89 Nossi-Be 1.47 .24 0.00 0.00 1.47 .24 0.00 0.00 1985/89 COTONA .31 0.00 0.00 0.00 .31 0.00 0.00 0.00 1990/91 AEF FIARO 0.00 .47 0.00 0.00 0.00 .47 0.00 0.00 1991 BNI 0.00 2.61 0.00 0.00 0.00 2.61 0.00 0.00 1992/93/95 AQUALMA 5.04 .61 0.00 0.00 5.04 .61 0.00 0.00 1995 AEF Karibotel .30 0.00 0.00 0.00 .30 0.00 0.00 0.00 1996 AEF Indosuma .90 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 AEF GHM 1.04 0.00 0.00 0.00 1.04 0.00 0.00 0.00 Total Portfolio: 9.06 3.93 0.00 0.00 8.16 3.93 0.00 0.00 Approvals Pending Commitment Loan Equit Quasi Partic 1997 AEF JUS .96 (Y.00 0.00 0.00 1998 BANQUE SBM 0.00 .75 0.00 0.00 Total Pending Commitment: .96 .75 0.00 0.00  Project Appraisal Document Page 42 Mining Sector Reform Country: Madagascar Leamning and Innovation Loan Annex 10 ... S.................. ....... .. .... .. .......... ........ .. ... ... ... . ..... ...... .. . . . 6_ . .............. .. ....... .__.-........... ..... _ .. .._ . ... .... . .__ Madagascar at a glance 8/28S7 Sub- POVERTY and SOCIAL Saharan Low- Madagascar Africa Income Development diamond- Population mid-1996 [millions) 14.1 600 3.229 GNP per capita 1996 (US$) 240 490 500 Life expectancy GNP 1996 (billions US$1 3.4 294 1,601 Average annual growth. 1990-96 Population (%) 3.1 2.7 1.7 GNP Gross Labor force I%J 3.1 2.6 1.7 per pross Most recent estimate (latestyearavailablesince S98W) capita enrollmen Poverty: headcountindex (% of populatdonJ Urban population /% of totalpopula don) 27 31 29 Life expectancy at birth (years) 52 52 63 Infantmortality (per 1,000live births) 89 92 69 Access to safe water Child malnutrition (% of children under 5) 32 Access to safe water (% of population) 32 47 53 Illiteracy /% of population age t5e) 20 43 34 Gross primary enrollment (% ofschool-agepopulation) 73 72 a05dagascar Male 75 78 112 ----Lovincome group Female 72 65 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1995 1996 E conom ic ratios- GDP (billions US$) 2.3 2.9 3.2 4.1 Gross domestic investmentGDP 8.1 8.5 08 Openness of economy Exports of goods and services,GDP 15.9 11.6 23.3 18.2 Gross domestc savings,GDP 3.1 1.3 2.7 4.0 Gross national savings)GDP 5.0 0.2 0.4 3.1 r Currentaccountbalance,GDP -2.4 -8.7 -9.9 -5.8 Interestpayments,GDP 1.3 1.4 0.7 1.4 Savings e -- -- Investmen Total debtGDP 39.7 88.1 134.5 Total debtserviceJexports 19.6 42.5 9.2 Presentvalue of debtGADP 0.0 0.0 99.7 Presentvalue of debtfexports 0.0 0.0 420.9 Indebtedness 1975-85 1986-96 1995 1996 1997.05 (average annual gprow7 Madwagascar GDP -0.3 0.9 1.8 2.0 -Madagascar GNP per capita -3.3 -1.9 -1.4 0.4 --- owicomegroup Exports of goods and services -5.0 5.8 3.2 9.7 STRUCTURE of the ECONOMY (% of GDP) 1975 1985 1995 1996 Growth rates of output and InveatmentI Agriculture 34.0 35.1 33.8 34.7 60 Indusiry 15.8 13.3 13.5 13.1 *o Manufacturing 11.5 12.5 12.3 20 Services 50.1 51.5 52.7 52.1 .9 3 -40 \/ Private consumpton 86.1 89.0 90.6 896 -o General governmentconsumption 10.8 9.8 6.6 6.4 Imports of goods and services 20.9 18.9 31.4 24.2 | GDI GDP 1975-85 1986-96 1995 1996 (average annual growthl Growth rates of exports and Imports 1%l Agriculture 0.8 2.2 2.7 3.8 40 Industry -2.7 0.6 1.3 0.8 Manufacturing 1.5 18.3 1.7 20 Services -0.4 0.9 1.4 1.2 Private consumption -0.5 0.5 1.4 -0.3 General governmentconsumption 2.8 -1.7 2.2 -3.6 t Gross domestic investment -2.0 0.1 0.8 5.5 20 Imports of goods and services -4.1 2.7 1.1 -1.9 Expom - ports Gross national product -0.7 1.2 1.6 3.5 Note: 1996 data are preliminary estimates. The diamonds showfour key indicators in the county (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.  Project Appraisal Document Page 43 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Madagascar PRICES and GOVERNMENT FINANCE 1975 1985 1995 1996 Domestieprices Inflation (%) (% change) 60 Consumer prices 8.3 10.6 49.0 19.8 Implicit GDP deflator 4.7 10.4 46.8 21.1 Government finance 20 (% of GOP) 0 Current revenue 13.3 8.6 9.0 01 02 93 94 90 96 Current budget balance 2.1 -2.5 -1.1 Overall surplus/deficit -3.9 -6.1 -47 -GDP del. CPI TRADE 1975 1985 1995 1996 (millions US$) Export and Import levels (mill. USS) Total exports (fob) 291 502 513 a8o Coffee .. 103 93 69 Food Z35 1 7 So Manufactures .. 37 132 161 Total imports (cif) 466 739 740 40 A Food so 6 67 46 Fuel and energy .. 85 81 97 200 Capital goods .. 98 141 174 L Export price index (1987=100) 94 105 92 go 91 92 03 94 0 96 Import prce index (1987=100) , 86 122 121 Terms of trade (1987= 100) 110 86 76 EiExports etmports BALANCE of PAYMENTS 1975 1985 1995 1996 (millions US$) Current account balance to GDP ratio (%) Exports of goods and services 382 350 748 797 Imports of goods and services 480 569 987 1,002 00 +1 92 0 43 9 90 05 Resource balance -98 -219 -241 -205 Net income -17 -129 -167 -155 9 1 Net current transfers 60 98 92 120 _ Current account balance, before official capital transfers -56 -260 -316 -240 -10 Financing items (net) 24 234 376 375 Changes in net reserves 31 16 -60 -134 -15 Memo: Reserves including gold (mill. US$) .. Conversion rate (loca/US$) 214.3 662.5 4,265.6 4,061.3 EXTERNAL DEBT and RESOURCE FLOWS (millions US$) [ Composliton of total debt, 1995 (mill. USS) Total debt outstanding and disbursed 906 2,518 4,302 IBRD 24 28 12 7 G A IDA 54 316 1,110 1,147 F 538 12 B Total debt service 76 150 70 77 [ 1110 IBRD 1 3 5 5 , IDA 0 3 15 17 Composition of net resource flows -- C Official grants 34 0 0 .. 73 Official creditors 128 128 61 38 Private creditors -1 5 -6 D . D Foreign direct investment 5 0 10 E 564 Portfolio equity 0 0 0 1928 World Bank program Commitments 6 73 65 60 A - IBRD E - Bileral Disbursements 27 58 76 78 8 - IDA D - Other muttilateral F - Private Principal repayments 0 2 11 13 C - IMF G - Short-term Net flows 27 56 65 85 Interest payments 1 4 9 9 Net transfers 26 52 56 55 Development Economics 8128/97  Project Appraisal Document Page 44 Mining Sector Reform Country: Madagascar Learning and Innovation Loan Additional Annex Mining Sector Policy Letter May 28, 1998 REPUBLIQUE DE MADAGASCAR Tanindrazana - Fahafahana - Fandrosoana MINISTERE DE L'ENERGIE ET DES MINES DECLARATION DE POLITIQUE MINIERE Madagascar, du fait de son contexte geologique presente un potentiel minier analogue a ceux des pays qui connaissent un essor de l'activite miniere. Mais les regimes miniers qui se sont succedes depuis les debuts d'exploitation jusqu'a nos jours, n'ont pas connu de succes quant a la contribution du secteur concerne au developpement economique du pays. Aussi, les enseignements du passe ainsi que l'evolution des conditions economiques et techniques mondiales ont-ils incite le Gouvernement malgache a redefinir sa politique minibre. Cette redefinition est issue de I'analyse du contexte socio-economique, des problemes specifiques au secteur et de l'identification des principes qui permettent d'orienter ladite politique. I.- HISTORIQUE. 1.1. Evolution du secteur minier. Madagascar n'est pas un pays de tradition miniere. Cependant, des le 15ime siecle, on lui a deja reconnu une activite extractive portant sur l'or, les pierres precieuses et les pierres fines. Cette activite a connu ]'expansion au cours de la periode coloniale et s'est etendue aux substances a vocation industrielle (graphite, phlogopite, minerais radioactifs, mineraux de pegmatite, quartz...). Actuellement, quatre grandes substances dominent les exploitations du secteur: le quartz, le graphite, la chromite et le mica. 1.2. Administration du Secteur Minier. 1.2.1. Cadre juridigue. Le secteur minier a e regi successivement par la loi du 31 Juillet 1896, les ordonnances n