Madagascar - Mining Sector Reform Project

Document of The World Bank Report No: 26161 IMPLEMENTATION COMPLETION REPORT (IDA-31110) ON A CREDIT IN THE AMOUNT OF 5 US$ MILLION TO THE REPUBLIC OF MADAGASCAR FOR A MINING SECTOR REFORM PROJECT June 17, 2003 Oil, Gas, Mining and Chemicals Deparetment (COCPD) Madagascar, Comoros, Mauritius and Seychelles (AFC08) Africa Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective May 20, 2003) Currency Unit = Malagasy Franc (FMG) FMG 1000 = US$ 0.1675 US$ 1 = 6427.80 FMG FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ASM Artisanal and Small-scale Mining BAM Mining Administration Bureau BCCMM Madagascar Mining Cadastre Bureau CAS Country Assistance Strategy CDD Community Driven Development CNM National Committee on Mines DCPE Document Cadre de Politique Economique DCA Development Credit Agreement DG General Director of Mines DGEM General Directorate of Energy and Mines DMG Mines and Geology Directorate DIR Regional Directorate EA Environmental Assessment EIS Environmental Impact Statement EMP Environmental Management Plan GIS Geographical Information System ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Agency LIL Learning and Innovation Loan MEM Ministry of Energy and Mines MRGP Mineral Resources Governance Project MSRP Mining Sector Reform Project NCB National competitive Bidding NGO Non Governmental Organization PAD Project Appraisal Document PRSP Poverty Reduction Strategy Paper SAC Structural Adjustment Credit SEA Sectoral Environmental Assessment TA Technical Assistance UPCM Mining Project Implementation Unit ZAES Special Economic Activity Zone Vice President: Mr. Callisto Madavo Country Manager/Director: Mr. Hafez Ghanem Sector Manager/Director: Mr. Peter van der Veen Task Team Leader/Task Manager: Mr. Paulo de Sa  MADAGASCAR MINING SECTOR REFORM PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 9 6. Sustainability 10 7. Bank and Borrower Performance 11 8. Lessons Learned 12 9. Partner Comments 13 10. Additional Information 15 Annex 1. Key Performance Indicators/Log Frame Matrix 16 Annex 2. Project Costs and Financing 17 Annex 3. Economic Costs and Benefits 19 Annex 4. Bank Inputs 21 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 22 Annex 6. Ratings of Bank and Borrower Performance 23 Annex 7. List of Supporting Documents 24 MAP IBRD 22395R  Project ID: P056487 Project Name: MINING SECTOR REFORM PROJECT Team Leader: Paulo De Sa TL Unit: COCPD ICR Type: Core ICR Report Date: June 17, 2003 1. Project Data Name: MINING SECTOR REFORM PROJECT L/C/TF Number: IDA-31110 Country/Department: MADAGASCAR Region: Africa Regional Office Sector/subsector: Mining and other extractive (79%); Central government administration (21%) Theme: Regulation and competition policy (P); Other environment and natural resources management (P); Small and medium enterprise support (S); Environmental policies and institutions (S) KEY DATES Original Revised/Actual PCD: 12/10/1997 Effective: 10/28/1998 01/25/1999 Appraisal: 04/01/1998 MTR: 05/05/2000 05/05/2000 Approval: 06/30/1998 Closing: 03/31/2002 12/31/2002 Borrower/Implementing Agency: REPUBLIC OF MADAGASCAR/MINISTRY OF ENERGY AND MINES Other Partners: STAFF Current At Appraisal Vice President: Callisto E. Madavo Callisto E. Madavo Country Director: Hafez M. H. Ghanem Michael N. Sarris Sector Manager: Peter A. van der Veen Thomas Allen Team Leader at ICR: Paulo De Sa Paulo De Sa ICR Primary Author(s): Claude Ginet 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome:S Sustainability:L Institutional Development Impact:SU Bank Performance:S Borrower Performance:S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The overall objective of the project was to increase investment and growth in Madagascar's mining sector, through the implementation of reforms and actions that will lay the ground for future private investment and exploitation, over the long term and in an environmentally sound manner, of the significant potential of its natural resources. The specific objectives comprised : (a) complete sector reforms aimed at establishing an enabling environment to both promote foreign direct investment in mining and integrate small-scale and artisanal mining activities into the formal economy, which would ensure a real and sustainable contribution to economic growth; (b) building institutional capacity to effectively enforce laws and regulations, administer mining titles, monitor sector developments, and make geological information available to potential investors; (c) establishment of capacity in the country, by means of pilot projects, to identify and address environmental and social impacts from mining; and (d) identification and adoption of appropriate mechanisms to facilitate the development of small-scale mines and to improve the social, welfare, health and environmental conditions of artisanal miners. The objectives of the project continue to be realistic and relevant for the country. They continue to match the mining policy of the Government for the development of the country's mineral resources, as stated in 1997 during project preparation. The project contributed to improving governance in the mining sector - an objective still endorsed by the Government, which is core to the folow-up Mineral Resources Governace Project (MRGP). Substantial results have been accomplished, leading the Government to redefine its role in the development and promotion of the minerals industry in Madagascar, withdrawing from future operational and commercial activities and not requesting mandatory participation in new mining ventures. This objective still belongs to the top priorities of the present Government (refer to the MRGP Project Appraisal Document, report No 25777, April 17, 2003). The first specific objective was relevant considering that since 1996 the Government has been implementing a wide range of policy, economic and sectoral reforms under its structural adjustment program. The Government's economic reform program presented in the DCPE (Document Cadre de Politique Economique, 1996-1999) calls for, inter alia, liberalization of the mining sector through the withdrawal of the State as an operator of mining assets and the implementation of a strategy to encourage private sector participation in the mining industry. The implementation of the reform program required a comprehensive sector reform aimed at establishing an enabling environment to both promote foreign direct investment in mining and integrate small-scale and artisanal activities into the formal economy. The project activities enabled the Government to modernize the legal and regulatory framework and ensure that Madagascar was open to private investments in mining. The relevance of the second specific objective was underscored by the incipient institutional capacity of the sector for which the project ensured considerable progress regarding the mining title registry and environmental management of mining activities. Institutional development continues to be relevant, and the Government intends to pursue effort in this field, in accordance with the institutional reform designed under the project. Environmental concerns are a continuous concern for the Government and for civil society, as Madagascar is world famous for its biodiversity. The fact that only environmentally sustainable activities should be carried out on national territory imposes strong pressures on environmental management and control, justifying the specific objective of establishing environmental management capacity in the country by means of pilot projects to identify and address environmental and social impacts resulting from mining activities. - 2 -  As in most developing African countries, small scale mining provides economic resources to a wide range of the poor and rural population. In spite of the adverse social and environmental impacts of small scale mining, this activity represents an important social and economical component of poverty reduction. Innovative ways for the formalization of small scale and artisanal mining activities and mitigation of its environmental and social adverse impacts were designed and tested with support from the project, especially with regards to the fight against smuggling of gemstones. Their implementation is now part of the Government's top priorities. The project was consistent with the Country Assistance Strategy, as presented to the Board in November 1997. The project also has strong links with the World Bank's Interim Country Assistance Strategy (I-CAS), which was published on October 23, 2002 to provide the planned Bank response to the post-crisis environment in Madagascar. The newly approved Mineral Resources Governance Project continues to support the I-CAS. The I-CAS encourages good governance and poverty reduction in the country, and both projects have made clear efforts to uphold these objectives. The project directly supported the Government's economic reform program presented in the DCPE (Document Cadre de Politique Economique, 1996-1999), developed with the assitance of the World Bank, which stressed the need to facilitate and attract private investment by making Madagascar internationally competitive. The project made a significant contribution to the divulgation, implementation and enforcement of the new Mining Law approved in 1999 which was the corner stone for the sector development, particularly in terms of governance in providing mining rights, restricting discretionary powers, strengthening environmental management for mining, and creating equal opportunities for national and international investors. The Bank's involvement in the project enhanced the Government's ability to administer and enforce the Law, help restructure sector institutions and bring international experience to the implementation of its new mining program, especially in matters of environmental concern. In this sense, the project was responsive to the needs of the Borrower. The project was designed to strengthen the mining administration for the implementation of the Government policy specifically regarding the control and formalization of small scale and artisanal mining activities, as well as the mitigation of the social and environmental impacts of these activities. The project was designed as a Learning and Innovation Loan (LIL) because of the complexity of the issues being addressed and the risk that Government committment would gradually disappear during its implementation. It was demanding and complex for both Government and sector mininstry because of the magnitude of sector reforms, the development of new capacities, in particular concerning the transparent granting of mining permits and environmental management, and the innovative and learning aspects of the planned activities in reference to the reduction of gemstones smuggling and the integration of informal small scale mining activities into the national economy. For the Ministry of Energy and Mines (MEM) in particular, the project was demanding and complex because of the institution's lack of capacity and required skills at project start, and because the project involved a complete change in the role of public mining institutions for the implementation of the mining policy and the withdrawal of the State as an operator of mining assets. 3.2 Revised Objective: There was no formal revision of the original project objectives, as stated in the MOP and the Loan Agreement. - 3 -  3.3 Original Components: The project included two components that were balanced and geared to achieving project objectives and implementation. Component Project Costs (US$ million) Costs % Rating Appraisal Actual Appraisa Actual /(co-financing) /(co-financing) l A - Policy Implementation 7.05 4.34 91 84 S A.1 Normalization of 3.00 /(2.00) 0.91 /(0.00) 40 18 S Small-scale Mining A.2 Environmental 0.95 0.90 12 18 S Management A.3 Institutional Reform 3.00 /(0.40) 2.53 /(0.00) 39 48 S B - Project Coordination 0.70 0.81 9 19 S Total Project 7.75 5.15 100 100 S Table 1. Summary of project components and their respective costs. The difference between expected and actual project costs corresponds to the non effectiveness of parallel financing, lowering the total project financing to US$ 5.15 million instead of the expected US$7.75 million. A. - Policy Implementation A. I - Normalization of Small-Scale Mining: (i) support an integrated management and technical assistance program in selected areas to enhance the technical yield, reduce the existing adverse impact on the environment, and increase tax revenues; (ii) support the Mining Directorate to design and deliver technical advice, geological information, and extension services to small-scale miners; and (iii) strengthen the minerals laboratory, and support the creation of a cutting center (with parallel financing). A.2 - Environmental System/ Sector Environmental Control and Assessment: (i) carry out 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 an Environmental Information and Management System (EIMS), which 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 Building: (i) Reform and strengthen the public mining agencies, based on the institutional audit developed during project preparation; this included : 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 approval of the new Mining Code in 1999), both to promote wide understanding and acceptance of reforms (including among entrenched interests) and to attract external investors to the country's mining sector; this included : preparation of promotion material, seminars, and legal advice; (iii) Mining Cadastre and Registry System: to establish proper computer-based cadastre and registering procedures, and clear up the backlog of pending concession applications; and (iv) Geological and Mining Information System: development of a database, providing for the compilation, cataloguing, treatment, and update of geological information; this included : purchase of information, provision of the necessary hardware and software, - 4 -  Internet connection; creation of a data room, staff training (with parallel financing). B. Project Coordination. A Project Coordinating Unit (PCU) has been responsible for the implementation of the project. The PCU monitored, supervised and provided management control for all components and for the Project as a whole. The PCU managed procurement, including all contracting for works and goods, selection and hiring of consultants, the contractual relationship with the Bank and project administration and accounting. 3.4 Revised Components: None of the components was formally revised. However, some of the components were scaled down because of the failure of co-financing arrangements. The sub-components affected by this scaling down were: A.I Normalization of Small-Scale Mining, extension services to small-scale miners; strengthen the minerals laboratory, and support the creation of a cutting center and A.3 Institutional Reform and Capacity Building: Geological and Mining Information System. The corresponding activities could not be carried out. 3.5 Quality at Entry: The project objectives were consistent with the CAS and the borrower's needs. The project appropriately took into consideration the Bank's Safeguard Policies, and met the critical needs of the mining sector. Lessons learned from the preparatory work conducted under the previous Private Sector Development and Capacity Building Project (PATESP), and the major risk factors that could affect project implementation were considered and incorporated into project design. Nonetheless, it is apparent that insufficient attention was given to securing parallel funding from French Cooperation. Failure to secure this funding resulted in non-execution of the activities planned under parallel funding, but it did not affect the project's overall development objectives. Because the project was prepared in a very short period of time, not enough attention was paid before effectiveness to procurement management capacity issues. This resulted in a disbursement lag of about six months in the first stages of project implementation. Project design underestimated the potential spreading, magnitude and impact of the rushes on precious stones that started and affected the sector a few months after effectiveness. Finally, long term political risks were underestimated. A political crisis paralyzed the country during the first half of 2002 and resulted in the blockage of the project for several months, leading to the extension by six months of the closing date. The lag in implementation partially affected the completion of the environmental activities, and had a partial adverse impact on the final outcomes of the project. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project achieved significant results in terms of its learning objectives. Legal and institutional frameworks were reformed according to international best practice, taking into consideration Madagascar specificities. Both frameworks positively compare with the frameworks in other countries in terms of sector management capacity and investment environment. Learning results have been incorporated into the project throughout its implementation. The project has provided a valuable learning ground for the government, the Bank and for the investors. Legal framework and enabling environment for private investments: A series of laws and corresponding regulations providing a sustainable and competitive framework for the development of the mining sector, were prepared with the support of the project, including a modern Mining Law in December 1999, and its regulations in April 2000. A special regime providing a stable and competitive framework for the development of large industrial mining projects was established under the Law on Large-scale Investments, - 5 -  approved in October 2002. The reformed legal framework removed the state from operations of mining assets and encouraged the implementation of private-sector led mining industry. With respect to environmental management, inter-ministerial regulations providing clear rules and definitions of responsibilities, as well as an improved integration between the mining and environmental administrations have been approved in October 2000. The institutional framework has been reformed and an independent and economically sustainable Mining Cadastre has been established on May 15, 2000 with the elimitation of the backlog of pending applications and the cancellation of all permits held by the State or in the individual name of OMNIS, a state-owned exploration organization. Permits held by the private sector that were no longer valid were also cancelled. The project created regional cadastre offices that facilitated the granting of permits to small scale miners in remote areas. Despite the political crisis in 2002, the Mining Cadastre was able to keep operating without major delays. The institutional reform also allowed the definition of a new institutional organization for the public mining administration. Improved enforcement of the new regulations has been achieved through a consensus between the administration and the private sector, made effective by the creation of the National Council of Mines and Provincial Councils of Mines, partner institutions that disccuss and agree on major sector reforms. Significant progress has been achieved in establishing the capacity in the country to address environmental as well as social impacts from mining through the realization of pilot environmental studies and the creation of a mining environmental unit at the Mining Directorate, as well as the development of procedures for Environmental Impact Assessments (EIAs) within the mining sector. The Mining Environmental Unit is now fully operational and equipped with a computerized environmental management and information system. Improved management of small scale mining activities and precious stone rushes have been accomplished through carrying out pilot assistance projects and the creation of special reserved areas (ZAES) and local mining offices in small scale mining areas, as part of a support mechanism to contain the impacts of rushes on gemstones. Though all specific project objectives were achieved, continued efforts beyond project closure should be fulfilled and strengthened. The anticipated increase of mining production, fiscal revenues and diversification were not achieved by 2002 largely due to external factors, such as the low market price of mining commodities and the severe political crisis, both of which influenced the last year of project implementation. The project team was able to raise its awareness of mining activities in the country and has been able to learn about particular aspects of small scale mining activities throughout project implementation. 4.2 Outputs by components: - 6 -  A. - Policy Implementation The major outputs of policy implementation are reflected in the reform of the legal and regulatory framework with the Declaration of Mining Policy, Decree 98