Madagascar - Mineral Resources Governance Project

Document of The World Bank Report No: 25777 PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF 23.2 SDR(US$32 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A MINERAL RESOURCES GOVERNANCE PROJECT APRIL 17 2003 Oil, Gas, Mining and Chemicals Department (COCPD) Madagascar, Comoros, Mauritius and Seychelles (AFC08) Africa Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective January 29, 2003) Currency Unit = Malagasy Franc (FMG) US$1 = FMG6,200.00 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APSM Mining Sector Promotion Agency ASM Artisanal and Small-scale Mining BAM Mining Administration Bureau BPGRM Mmeral Resources Governance Base BCCMM Madagascar Mining Cadastre Bureau CAS Country Assistance Strategy CDD Community Driven Development CDP Community Development Plan 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 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 UNDP United Nations Development Program USAID United States Agency for International Development 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 MINERAL RESOURCES GOVERNANCE PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context I. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 13 4. Institutional and implementation arrangements 13 D. Project Rationale 1. Project alternatives considered and reasons for rejection 15 2. Major related projects financed by the Bank and/or other development agencies 16 3. Lessons learned and reflected in the project design 17 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 18 E. Summary Project Analysis 1. Economic 19 2. Financial 19 3. Technical 19 4. Institutional 19 5. Environmental 21 6. Social 22 7. Safeguard Policies 24 F. Sustainability and Risks 1. Sustainability 25 2. Critical risks 25  3. Possible controversial aspects 26 G. Main Conditions 1. Effectiveness Condition 26 2. Other 26 H. Readiness for Implementation 27 I. Compliance with Bank Policies 27 Annexes Annex 1: Project Design Surmmary 28 Annex 2: Detailed Project Description 33 Annex 3: Estimated Project Costs 40 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 41 Annex 5: Financial Sumnmary for Revenue-Earning Project Entities, or Financial Summary 43 Annex 6: Procurement and Disbursement Arrangements 44 Annex 7: Project Processing Schedule 59 Annex 8: Documents in the Project File 60 Annex 9: Statement of Loans and Credits 61 Annex 10: Country at a Glance 63 Annex 11: Letter of Sectoral Policy 65 MAP(S) IBRD 22395R  MADAGASCAR MINERAL RESOURCES GOVERNANCE PROJECT Project Appraisal Document Africa Regional Office COCPD Date: April 17, 2003 Team Leader: Paulo De Sa Sector Manager/Director: Peter A. Van Der Veen Sector(s): Mining and other extractive (60%), Central Country Manager/Director: Hafez M. H. Ghanem government administration (40%) Project ID: P076245 Theme(s): Decentralization (P), State enterprise/bank Lending Instrument: Specific Investment Loan (SIL) restructuring and privatization (P), Environmental policies and institutions (S), Civic engagement, participation and community driven development (S), Small and medium enterprise support (S) [lProject Financing Data . [ ] Loan [XI Credit [ I Grant [] Guarantee ] Other: For Loans/Credits/Others: Amount (US$m): $32.00 Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.0 - 0.5% Service charge: 0.75% FinahncingglPIan,(US$m): Source - - - Local Foreign . Total' BORROWER 4.45 0.00 4.45 IDA 13.96 18.04 32.00 US: AGENCY FOR INTERNATIONAL DEVELOPMENT 0.00 1.00 1.00 (USAID) FRANCE: FRENCH AGENCY FOR DEVELOPMENT 0.00 1.20 1.20 Total: 18.40 20.24 38.65 Borrower: REPUBLIC OF MADAGASCAR Responsible agency: MINISTRY OF ENERGY AND MINES Unite de Coordination du Proj et Minier (UCPM) Address: B.P. 280 Ampandrianomby -Antananarivo 101 - Madagascar Contact Person: RAMAROLAHY Jonasy Tel: 261.20.22.418.73 Fax: 261.20.22.418.73 Email: mem.prsm@dts.mg Estimated Disbursements ( Bank FY/US$m): FY 2003 21004 205 2006 - 2007 o2008- 2009 Annual 0.27 3.85 5.50 6.80 7.50 7.20 0 88 Cumulative 0.27 4.12 9.62 16.42 23.92 31.12 32.00 Project implementation period: 2003 - 2008 (5 years) Expected effectiveness date: 08/15/2003 Expected closing date: 12/31/2008  A. Project Development Objective 1. Project development objective: (see Annex 1) The overall objective of the project is to assist the Government of Madagascar in implementing its strategy to accelerate sustainable development and reduce poverty in Madagascar through the strengthening of governance and transparency in the management of mineral resources, with special emphasis on small-scale and artisanal mining. 2. Key performance indicators: (see Annex 1) The performance indicators are specified in Annex 1. They include: (i) Strengthening of accountability and transparency in the mining sector: (a) Four institutional mechanisms (BAM) established by the government to control tax collection, environmental issues and smuggling of gemstones. (b) Creation of a one-stop shop for exports of gemstones; (c) Declared production by legally-established small scale and artisanal miners by 50% by the mnid-term review and by 100% at the end of the project. (ii) Key institutional reforms for the decentralized management of mineral resources. (a) At least ten community development plans including the management of mineral resources; (b) Collection rate of mining royalty increases from 10% today to 50% by mid-term review and 80% at the end of the project. (c) Decentralization of mining administration increases fiscal revenues from mining for provinces and communes by 50%. (iii) Promotion of private investments and value added in mining: (a) Average annual investments in mining increase from about US$ 10 million today to US$ 30 million by mid-term review, and US$ 85 million at the end of the project; (b) Annual declared exports of gold and gemstones from small scale mining increase from about US$ 21 million today to US$ 30 million by mid-term review, and US$ 50 million at the end of the project. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16249 Date of latest CAS discussion: January 17, 1997 The last Madagascar CAS was presented to the Board in November 1997 and is centered around building investor confidence in order to unleash Madagascar's export and growth potential. The public sector has a pivotal role in creating and maintaining an enabling investment climate through the formulation of adequate policies and the implementation of reforms, while the private sector has been assigned a pivotal role in sector led growth. A new CAS was initially planned for fiscal year (FY) 02 together with the presentation of the full Poverty Reduction Strategy Paper (PRSP). However, the completion of the PRSP was delayed due to the political crisis that affected the country. Thus, an interim strategy was put in place to limit the impact of the crisis on the poor and to support Govemment's recovery program. An interim Country Assistance Strategy (I-CAS), approved on October 23, 2002, outlines the planned Bank response to the post-crisis environmnent. A new CAS would be prepared in consultation with the Government and development partners, to be presented to the Board based on the full PRSP around September 2003. - 2 -  The Mining Sector Reform Project (MSRP), approved on June 1998, was designed to support private-sector growth in mining, in line with the CAS' main objective. The MRSP was designed as a Learning and Innovation Loan (LIL) focusing on legal and regulatory reform, environmental management and a limited number of pilot projects testing an integrated approach to include small scale and artisanal mining in the formal economy. The proposed Mineral Resources Governance Project has strong links to the new I-CAS and the full PRSP as it will assist Government in launching a series of quick initiatives to improve governance and enforce anti-corruption measures in the management of mineral resources, one of the most prospective sectors for broad based economic growth in Madagascar. The I-CAS puts good governance at the core of the strategy for rapid development in the country, and the new CAS will make the argument that the best way to support poverty reduction in Madagascar (and the implementation of the PRSP) would be to focus on improving governance in the country. The PRSP identifies a number of priority reform areas, which include service delivery improvements through institutional reform and decentralization, improved governance, and more efficient revenue and expenditure management, in particular in key sectors vital for poverty reduction (social sectors, agriculture, and mining). The proposed project targets two of the PRSP's three pillars i.e.(i) the Implementation of a governance and institutional reform strategy; and (ii) the adoption of policies to attain higher and more sustainable rates of economic growth that reach the poor, especially in rural areas. To achieve these goals, the project will focus on the establishment of an adequate regulatory and institutional framework to improve governance in the management of mineral resources, the promotion of increased value added in mineral production through private investment, the decentralization of the public administration for the management of mineral resources, the improvement of tax revenues from the sector, and the establishment of mechanisms to share the revenues of mining projects with the affected communities. 2. Main sector issues and Government strategy: Madagascar is one of the poorest countries in the world with per capita income of US$260 (in 2000), 70 percent of the population in poverty and half of the children malnourished. After decades of economhic stagnation and downturn the country has sustained four years of positive real growth and low inflation, and the public deficit is under control. After having been one of the most rapidly growing African economies in recent years, Madagascar plunged into a deep political crisis at the beginning of 2002, following contested first-round elections in December 2001. The political crisis ended in July 2002, but the social and economic impact is extremely pronounced. The direct negative impact on national income for 2002 is estimated at half a billion dollars. The total economic cost is probably much larger, taking into account the loss of confidence, foregone direct investments, foregone exports, physical destruction. Activity in several sectors, including tourism, transport, export processing industries, and mining came to an almost complete stop. Madagascar is very rich in minerals and precious stones and 2300 operators are active in the sector today, generating direct and stable employment for about 100,000 workers and an additional up to half a million seasonal jobs. Since 1996, official mining exports have increased from US$16 million to US$37 million in 2000, largely in precious stones trading. But poor governance and corruption in the sector have discouraged many formal investors and have led to a smuggling of precious stones out of Madagascar with very little value added created in the country. Illegal exports are a multiple of official exports and estimates put the value of trafficking in precious stones ranging from a minimum of $200 million to the maximum of US$500 million (or 10 percent of GDP) per year. Although severe governance problems have characterized Madagascar's mining sector for years, the crisis offers the possibility to decisively reduce illegal activities in the sector. As a result of the crisis as well as anti-corruption announcements - 3 -  of the Govemment, illegal activities have slowed down and there is now a short window of opportunity to reverse the situation and promote their integration in the formal economy. Quick action is necessary, though, before the illegal activities restart in full strength. Also, improving governance in the sector, and thereby formalizing mining operations, is one of the most important actions to improve internal revenue generation in Madagascar, much needed to extend basic services and expenditures for anti-poverty programs. The Mining Sector Reform Project assisted Government in setting up a legal and regulatory framework conducive to private investment in the area of mineral resources, in line with its overall policy, defined in 1998 in the Document Cadre de Politique Economique (DCPE), whose key objectives are shifting the role of the State from operator to regulator and promoter of sustainable minerals development, and opening up of the sector to private, including foreign, investment. Reforms, supported by the MSRP, include: (i) a new mining code and its regulations, that have established an adequate legal and regulatory framework to attract private investment into mining, including joint environmental regulations for mining, published jointly by the Ministry of Environment and the Ministry of Energy and Mines; (ii) a special law for large-scale mining investments, defining an attractive special investment regime for FDI in mining in Madagascar, and providing for a fair share of revenues between the Government and the private sector, an adequate cut for the Provincial Governments; and (iii) improved governance through the establishment of a nondiscretionary and transparent system to grant, manage and cancel mining permits, the Mining Cadastre. Success in the implementation of these reforms - that were included as sector conditions in the Second Structural Adjustment Credit (SAC H) - triggered the scale-up of the Mining Sector Reform Project, designed as a Learning and Innovation Loan (LIL) to the current project. Inspite of the overall improvement in the legal and regulatory framework, Madagascar continues to be confronted with significant governance issues in small-scale and artisanal mining, namely as a result of a series of rushes in the gemstones area. The dynamism and complexity of informal small scale mining activities is aggravated by the deforestation and soil erosion that are a result of frequent cyclones and slash-and-burn ("tavy") practices, especially on the East coast. According to the Ministry of Environment, Madagascar has lost 80 percent of its original forest cover, more than half of this in the past 40 years alone, while deforestation is continuing at a rate of about 200,000 hectares per year. Between 1987 and 1997 the area under primary forests is reported to have shrunk by one-third. Soil erosion is estimated at 200-400 tons/ha/year. Soil erosion, associated with an increasing ability to identify gemstones by the rural population is at the origin of the intensification of the rushes on semi-precious stones that Madagascar has known over the recent years. Because of a lack of institutional capacity of the mining administration, the new mining code is not being consistently enforced and, as a result, most of the small-scale and artisanal mining is being conducted outside the formal channels, with insufficient linkages to the rest of the economy, damage to environment, social conflicts, and substantial loss of fiscal revenues. Government is now seeking to implement a series of measures of strong impact aimed at combating smuggling and corruption in this area, and creating an enabling environment for the production, trade, cutting and polishing of gemstones. As part of the project preparation, Government has submitted to the Bank before negotiations a Letter of Sector Policy including arrangements to improve governance in small scale mining of gold and gemstones, an action plan for the decentralization of the institutional framework for the public mining institutions. In addition, aftern negotiations, Government also submitted an Annex to the Letter of Sector Policy, which includes an action plan and implementation calendar. The measures to improve governance in the management of mineral resources constitute the core of the - 4 -  short term policy program of the Government. Among the priority measures that could be implemented over the one year period are: (i) the establishment of a one-stop shop for mineral exports; (ii) the set-up of a certification and evaluation infrastructure for gemstones; (iii) the creation of a gemstone exchange in Antananarivo; and (iv) the launching of a training program in cutting and polishing of gemstones. The private sector is expected to take the lead in the implementation of all these steps, both through direct investment in the marketing and cutting of gemstones, and management contracts to run the soon to be created Gemological Institute of Madagascar, and the gemstone exchange in Antananarivo. These measures are seen as the fist step for full private sector management and ownership of the sector, and will be complemented with Govemment efforts and linkages with the main customers of Malagasy gemstones aiming at regulating the trade of gemstones. Over the medium term, Government's strategy for the sector is based on the recognition that the sustainable development of mining can not be achieved without a decentralized administration and a deep involvement of the affected communities. In concrete terms, this strategy calls for: (i) capacity building of the Provincial mining administration, with the establishment of a better alignment between core central public sector functions and the implementation of their mandates at the Provincial level; (ii) increase of fiscal revenues to the communes, including the decentralization of tax collection; and (Im) definition of effective ways and means for community empowerment and participation, including the establishment of public/private partnerships with responsible mining companies willing to invest part of their profits in human resources capacity building, social, and physical infrastructure. A key element of this strategy would be the provision of technical assistance to community associations and municipal governments for the integration of mineral resources management in their participatory development plans. The Government is convinced that its central objective of reducing poverty through accelerated growth can only be accomplished through institutional and administrative reforms that refocus the role of the State, remove inefficient and discretionary regulations, and build a strong partnership between the State, the private sector, and the civil society at large. Based on international experience, the proposed project would look at relevant experiences related to partnerships between mining companies and small scale mining organizations and/or communities for the delivery of services. These experiences could be of particular interest and relevance to Madagascar as they provide an opportunity to resolve a number of existing constraints simultaneously, as mining companies typically provide technical assistance, infrastructure, and access to markets in these schemes. In implementing its strategy, Government expects to increase the environmental and social awareness among the stakeholders involved in minerals development, and obtain a fairer distribution of revenues to the affected population. A major challenge associated with this strategy is improving good governance and transparency of revenue expenses by the communes. The focus of the actions to be supported by the project at the community level includes capacity building for decision making and planning of economic activities to be implemented with the revenues arising from mining, including conflict resolution and analysis of alternative economic opportunities, and linkages to other community-driven networks for the access to "business" services allowing them to benefit from other economic opportunities. 3. Sector issues to be addressed by the project and strategic choices: The two key sector issues to be addressed by the project are capacity building and improved governance in the management of mineral resources at the Provincial and the commune levels. By reducing the discretionary power of Government, increasing transparency, and improving security to potential investors, the new Mining Code has provided the adequate legislative framework for regulating -5-  and monitoring large industrial activities in the sector, and to attracting foreign investments into mining. Of particular importance to provide a sense of security for potential investors is the stabilization of the legal, fiscal, and institutional arrangements prevailing at the time of the investment. However, Government's institutional apparatus has not yet adapted to its new role of regulating economic activities and promoting poverty reduction in a market-oriented economy. The Government is aware that an inappropriate institutional framework, weak administrative capacity, and a civil service that lacks accountability and incentives to adopt up-to-date work practices have contributed to inefficiencies and mismanagement of public resources, which in turn has restrained the development of a dynamic private sector. The challenges brought about by this situation will only become more acute in the context of Government's policy of transfer of competences to the provincial and municipal levels. An institutional audit was carried out under the Mining Sector Reform Project and a plan for the reorganization and institutional strengthening of the mining administration at the Central and Provincial levels has been agreed upon. In the case of mineral resources, the major institutional constraints identified are: (i) absolute lack of financial resources that prevents the Ministry from monitoring the real developments in the mining areas; (ii) insufficiency of qualified human resources and lack of technical skills; (iii) limited availability of geologic information, stored in poor physical conditions; (iv) excessive centralization at the manager's level and inefficient procedures and flow of information; and (v) poor relations with other line ministries. The project will support a wide variety of capacity building measures. At the Govemment level, the measures will focus on improving capacity building for environmental management of mineral resources and inspection of mining activities at the Provincial level. Because Government is in no position to provide business development services, the Minister of Mines is planning to have an extension services agencies - the Promotion Agency (APSM) - organized as a limited liability company, with private companies as shareholders. At the municipal level, the strategic choice made by Government is to focus the capacity building on efforts to increase the tax revenues of the communes through the decentralization of tax collection mechanisms. A reform of the mining fiscal regime supported by the project (in coordination with the Ministry of the Economy, Finance and Budget), is expected to substantially increase fiscal revenues from mining in resource rich communes, and to channel resources directly to them. Empowering local communities to local management of mineral resources through their integration in CDD-type development strategies and the preparation of Local Economic Development plans will be an effective tool in the process of managing economic and social development, and reducing and refocusing the State's role while creating the conditions for increased private sector participation. A prerequisite for success in the implementation of this strategy is the urgent strengthening of governance in the small-scale and artisanal mining sector, namely in the area of gemstones. Small scale and artisanal mining activities in Madagascar impact a wide range of stakeholder organizations, institutions and communities. Central Government is thus particularly ill-equipped to deal with the complexity of the problem. However, with 84 percent of all poor people living in extreme poverty, and taking into account the overarching poverty reduction goals of the PRSP, there is no doubt that small scale and artisanal mining has a role to play in linking sector policies with national poverty reduction goals. A basic constraint to implementing reforms has been the lack of capacity to collaborate among local governments, private sector and communities in the task of making coordinated decisions. Close coordination and cooperation among these stakeholders is essential to rationalizing mining activities, and to avoiding the negative outcomes that accompany current unregulated practices. The immense variation of Madagascar's geological and environmental conditions implies that there is no standard solution for the problem. This implies that local institutions and structures should be empowered to directly deal with the problems they face and propose solutions to which public policy and investments should respond accordingly. The on-going decentralization process provides a unique opportunity to effectively - 6 -  put rural communities in the driver's seat and tailor public policy and investments to local reality, thereby increasing their relevance. The Government has decided to work with 10 pilot municipalities in this initiative. These communes have been defined at appraisal, in close liasion with the governance, rural development, environment, and CDD/FID Bank task teams. This definition should be based on community assessments made by the FID, as well as UNDP experience on capacity building at community level, in order to review where the communes stand in Community Development Plans, and public financial management issues. Lessons learned during the implementation of MSRP have conducted the Govemrnment to choose a new approach to address these issues based on transparency in the allocation of mining rights, liberalization of trade and incentives to increase the value added of exports. Three main axes have been included in a short term program announced by the new Government aimed at improving govemance and reducing corruption in the area of mineral resources: a) the fight against fraud and corruption in the commercialization of gemstones: Although the legal and regulatory framework is attractive to large scale investments, it needs to be adapted to the specificity of artisanal mining in Madagascar. The procedures for the granting of mining titles need to be simplified to provide equal opportunity in the access to mineral resources to the poor miners, while the marketing and commercialization mechanisms need to be completely revamped, as they provide incentives to speculators, not to those that actually mine the resources. Transparency in the commercialization of gemstones will be promoted through the simplification of administrative procedures, and the creation of a one-stop shop for gemstone exports. Rather than having to deal with four different agencies, certified dealers in gemstones will have a single entry point to handle all the legal, fiscal and administrative procedures related to the export of gemstones. This initiative will be supported by a program for the certification and quality control of Malagasy gemstones, and the creation of exchanges for rough gemstones. In order to set,up the new regulatory framework, Government plans to work essentially with foreign private institutions like the Gemological Institute of America (GIA). As during appraisal no private sector institution was identified to invest in the institituions mentiones above, it was agreed that the proposed Institute of Gemology of Madagascar (IGM) will be run by a foreign private agency like GIA, on a management contract basis. The gemstone exchange will be essential in increasing transparency and building.trust in the system. Without it there will not be enough raw material to be sourced legally to feed a cutting facility. Under a PHRD Japanese Grant approved for project preparation, the Government has engaged a consultant to prepare the request for proposals for a tender that would give the concession to operate the exchange to a private company. The consultant is also defining the minimum basic conditions for the operation of the exchange, including premises, and minimum services (financial, telecommunications, security, etc.). Government plans to install the one-stop-shop for exports either in the premises of the exchange or at the IGM. b) the promotion of private investments that will add value to the mineral exports (cutting and polishing of gemstones): Due to interventionist policies and a heavy dominance of the state in productive activities, the sector of cutting and polishing of gemstones has failed - with very few exceptions - to reach the professional level required by the export markets. Structural adjustment measures since 1995 have created an enabling macro-environment and corresponding incentive structure but have not stimulated yet a convincing supply response by the private sector. Despite its poor track record, lack of appropriate sector policy guidance and institutional fragmentation, there is the general consensus that Madagascar's rich endowment of mineral resources coupled with its relatively cheap labor costs provide genuine opportunities for adding value to mineral resources. Madagascar's success in certain gemstones, such as sapphire and rubies, where it is consolidating a position of world leadership, are clear examples of this potential. With the proper level of financial resources and management, Madagascar could become one of the world's most important producers of cut gemstones, following a world trend in which the suppliers - 7 -  of raw materials minerals endeavor to integrate downstream and establish domestic processing facilities. Often this is done in further conjunction with jewelry manufacturing and, to gain an added premium. For example, some countries promote their specific gemstone as a "brand", such in the case of Tanzania. Manufacturing generally is more labor intensive than mining and capital investment per worker is generally lower than in mining. Therefore, the impact on the country's economy is much more obvious, with virtually no constrains imposed by the country's deficient infrastructure. In terms of labor, no specific prior skills are required. The country's free trade zones offer an adequate framework for the development of gemstones' cutting and polishing activities. However, because of the special fiscal status, it is of utmost importance that domestic lapidaries/jewelry manufacturers located in free trade zones pay the international competitive price for raw materials. This means that the rough gemstones should be auctioned, and that international bidders should be invited. If the domestic manufacturers do not want to match the price for which international parties are willing to buy the rough, then the rough should be exported. This would secure the integrity of the transfer pricing and, at the same time, guarantee that the Madagascar would get the highest possible foreign currency revenue and taxation out of its gemstone resource. If Madagascar adopts a sensible, non-distortionary, and internationally competitive taxation regime, then a lot of the incentives to smuggle gemstones would disappear. In order to improve the regulatory framework for the development of these activities in Madagascar, Government plans to get assistance essentially from foreign private institutions like the American Gem Trades Association (AGTA). c) Finally, the update of the country's geological information is a key step in promoting Madagascar geological potential to private investors and to try to anticipate areas potentially vulnerable to future rushes on gemstones. Although this is an expensive investment, this is seen by Government as a major long term tool to prepare the country for a sustainable development of its mineral resources. There are clear links between the provision and broad dissemination of geo-scientific information and the physical and institutional prerequisites to establish a comprehensive development framework as well as for good govemance. The availability of updated and reliable geo-scientific information - airborne geophysics, geological mapping and geochemical information - is a key factor for the development and natural resources management capacity of a country. Today, the available technology and interpretation capacity of integrated geo-scientific data provide information useful not only for the development of the mineral sector, but also in areas such as health, environment, natural hazards, water resources and land-use management, including protected areas and conflict resolution. For example, the generation of maps showing the distribution of areas for potential future gemstones rushes would contribute to improve mineral resources management and land-use conflict resolution. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project which would be implemented over a period of five years and consists of four components: Component 1 - Strengthening transparency and governance in mining. This component would support quick measures with great impact aimed at improving governance in the management of mineral resources and reducing the smuggling of gemstones, and more specifically: (i) adjustment of the sector's legal and regulatory framework; (ii) support for the establishment of mining administration offices close to exploitation sites, the Bureaus de l'Administration Miniere (BAM); (iii) establishment of a certification program for gemstones; the creation of a one-stop shop for gemstone exports, and a gemstones exchange; and (iv) strengthening of private sector associations.  Component 2 - Key institutional reforms for the decentralized management of mineral resources. This component would support Government's decentralization strategy for transfer of competences to the provincial and municipal levels and empowerment of local communities. Community level effort would include extending access to Cadastre information on the municipal levels, streamlining of tax collection, and of Directorate of Mines and Geology operations. The project would form six provincial-level offices in cooperation with the Ministry of Enironment to oversee environmental management on the provincial level. Also, ten communes would be selected for implementation of decentralized management of mineral resources, and especially tax collection on the provincial levels. Four studies in the pilot regions, focusing on strategic impact of mining activities will be sponsored in order to build capacity in the mining sector and to define sector strategy. A key aspect of this component is a training program aimed to raise human resource capacity in the sector. The component would also sponsor a communication campaign geared to raise awareness of mining sector reform in local communities. The set-up of an Intranet and Internet network within the mining administration is another part of this component, which would facilitate communication with all stakeholders, private and public. Component 3 - Promoting private investments and value-added in the sector. Madagascar's geological potential is little known, and small scale mining methods widely employed in the country lead to a waste of resources and damage to the environment. A large portion of the minerals production is smuggled out of the country with little fiscal and economic impact. This component would address the current situation by (i) establishing the Mining Sector Promotion Agency and (ii) strengthening the Geo-scientific Information Infrastructure. Creation of the Mining Sector Promotion Agency would improve the Government's capacity to attract private sector investment by coordinating certification procedures, administering a Small Grants program, establishing a database of geological and geophysical information on the country's mineral resources, and designing and implementing environmental awareness campaigns. The project would also work in coordination with the ongoing Multisectoral STIVHIV/AIDS Prevention Project to undertake pilot activities for HIV/AIDS prevention on the commune level. The second sub-component would finance the geo-physics campaign and conduct geological and geochemical mapping. Both of these activities would increase the avaliability of mineral resources information to investors by creating a Mineral Resources Governance Database and thus facilitate private sector investment in the long-run. Component 4 - Project coordination and management. Project management would build upon the existing Project Implementation Unit (UCPM) that has shown proven skills in project procurement, financial management and reporting. The UCPM would be responsible for a monitoring and evaluation program for the activities of the project and coordinate its efforts with a Steering Committee, composed of representatives from various ministries and charged with strategic and financial management. - .;. n ,- , Indicative Bank- %'of - Component,. i, Costs % of financing Bank- (US$M) Total (USSM) financing 1. Strengthening transparency and governance in mining 6.22 16.1 4.43 13.8 2. Key institutional reforms for decentralized management 8.63 22.3 7.26 22.7 of mineral resources 3. Promoting private investments and value-added in the 20.18 52.2 17.19 53.7 sector 4. Project coordination and management 2.67 6.9 2.17 6.8 5. PPF 0.95 2.5 0.95 3.0 Total Project Costs 38.65 100.0 32.00 100.0 Total Financing Required 38.65 100.0 32.00 100.0 -9-  2. Key policy and institutional reforms supported by the project: The Project would be a continuation of the successful Mining Sector Reform Project (MSRP) that has closed in December 2002. It would support the strengthening of four key sets of policy and institutional reforms: (i) the first is the fight against fraud and corruption in gemstones. The primary impetus for mining sector reform in Madagascar has been the sector's sub-optimal contribution to national economic development goals, and a range of negative environmental and social impacts. Lacking mechanisms to reliably capture the tax revenues that should accrue from mining activities to the Central Budget and to the affected communities, the Government of Madagascar has been unable to plan for, or prevent the anarchic rushes on gemstone mining. Government is now seeking ways to address these issues more effectively, through a strategy based on three main axes: (i) transparent rules granting equal opportunity in the access to resources; and (ii) combat smuggling of rough gemstones and improve the working conditions for the trade, cutting and polishing of gemstones. An essential aspect of the previous Government's strategy was a reformed regulatory framework known as the Zone d'Activite Economique Speciale (ZAES), which created special financial and legal parameters for small scale and artisanal mining activities. Articles 205 and 2184 of Law 99.022 of the Mining Code, established in August of 1999, supported by Article 3 of Decree 2001/093 (which modified Decree 2000-607 of August 2000), helped establish the special financial framework for the first ZAES in Vatomandry. Yet without more rigorous oversight, sector strategic planning, and a systematic approach to multi-stakeholder coordination, there is a risk that this framework will not prove capable of harmonizing the conflicting interest of stakeholders currently involved in the sector. The extreme fragmentation of the sector ministries at the national level (there are seven ministries involved in the issues related to the ZAES), coupled with governance issues in the gemstone area (smuggling and tax evasion and, to a lesser extent, transparency in allocation of concessions and enforcement of the legal obligations involved), suggest that the current institutions are not optimally aligned and positioned to provide the necessary support and enabling environment that are needed to attain the poverty reduction and sustainable growth objectives as laid out in the PRSP. However, the eventual failure of the ZAES, as currently constituted, to put in place more coherent and sustainable mining practices could result in foregone development opportunities for the rural poor and the Government. Lack of transparency in the allocation of mining rights and reduced tax revenue could further weaken the Government's ability to adequately monitor or regulate social and environmental impacts, and will deprive local communities of the development opportunities that should flow from this important resource. In place of ZAES, the Government is promoting the setup of another framework, the Bureau de l'Administration Miniere, (BAM) to take charge of mining sector governance issues, tax collection and environmental management issues. The BAM would operate under the auspices of the Ministry of Finance in the four pilot regions for the duration of the project. The BAM would employ international and national consultants in order to raise human resource potential of mining administration. The normalization of the upstream activities in the supply chain will be completed by the streamlining of commercialization procedures and the set-up of a impact program to combat smuggling of rough gemstones and improve the working conditions for the trade, cutting and polishing of gemstones. Quick impact programs will be implemented in three areas, with strong involvement and management by the private sector : (i) the establishment of a one-stop shop for mineral exports; (ii) the set-up of a certification and evaluation infrastructure for gemstones; and (iii) the creation of a gemstone exchange in Antananarivo. - 10-  (ii) The second is fiscal reform to regulate the sharing of benefits arising from mining activities with the affected communes, and to enable Municipalities to collect specific taxes from mining operations. Local taxes in Madagascar have traditionally been split between various recipients, through either: (i) the introduction of additional tax fees levied on existing taxes (i.e. centimes additionels for the property tax and annex to professional tax); (ii) or by direct sharing of taxes between various recipients, such as various consumption taxes and licensing rights (i.e. licenses on market rights, and the sale of alcoholic beverages, television sets, festivities, bicycles and motorcycles, fees for the issuing of official documents related to the Etat Civil, registration of life-stock, etc.), as well as duties (ristournes) on cattle, agricultural, forestry, and mining products. Rural communes have so far failed to gain from the decentralization of revenue authority. The taxes that have been assigned to communes generally yield low revenue, and are difficult to collect as there is a strong tradition of tax evasion. Local revenue administrations are inefficient. Even though property tax revenues slightly increased over the last years, property tax recovery lagged far behind the expectations, and were frequently surpassed by revenues from potentially minor taxes. Government has recently launched a number of reforms to render this overly complex system more efficient, such as the full assignment of the property tax to communes or the recent creation of the imp6t synthetique which would merge the professional taxes, centimes additionels and business taxes. The Mining Code defines basic revenue sharing arrangements for the minerals royalty and the surface rental fees collected by the Mining Cadastre, according to the table bellow. The mining royalty due from the mining operators in 2002 totalled US$ 1.9 million, although Govemment estimates point out that this amount could be increased tenfold by applying adequate mechanisms. Nevertheless, because of cumbersome procedures and lack of cooperation between the mining and the tax administrations, only about 10% of this amount was effectively collected. In 2001, the Mining Cadastre collected the equivalent to about US$ 450,000 in fees. However, because of the lack of adequate mechanisms, it has not been able to transfer the 30% of revenues due to the Provinces (and communes), and the equivalent of 40% of the revenues has been transferred to the Central Govemment. Sharing of mining revenues: Mining Cadastre fees Royalties (2% of first transaction) Center 10% 10% Province 30% 70% Commune [1/3 of provincial revenue] [1/3 of provincial revenue] Cadaster Office 60% 15% Gold Agency I__ 5% Given the high revenue potential of mining-related taxes, the proposed project will support reforms to increase the collection of the mining royalty through refinements in the collection methodology, introduced as part of the studies funded by the legal reform sub-component, and greater involvement of the affected communes in its collection. In this regard, it will specifically strengthen coordination between the central and provincial revenue administrations, and provide training and technical assistance to carry out the transfer of competences for revenue collection to the commnunes. It will remove inconsistencies of the current and future legal-institutional framework, and increase the administrative capacity of communes, and their financial management. (iii) The third is the involvement of the communes in the decentralized management ("gestion de proximite') of mineral resources. The decentralization process in Madagascar has started with the - 11 -  creation of communes in 1995. Today, communes provide the only formal institutional governance framework at the local level and play an increasing role for service delivery and the coordination of local development initiatives. Their role, however, is still limited. The financial foundations and the administrative capacity of communes are very weak, as commune budgets rely to a large degree on government subsidies. Donors increasingly recognize this new function of communes and are trying to incorporate municipal governments along all steps of the project cycle. Important initiatives at this moment include: (i) the elaboration of community development plans (Plan Communal de Developpement, CDP), which identify local development priorities and coordinate future donor engagements at the communal level; (ii) the Social Fund Project (FID-IV) which, for the first time, will begin to systematically include communes in the identification, implementation, finance, and monitoring of local development projects; (iii) efforts to harmonize procedures for community-level projects in the National Donor Group on rural development and decentralization (SMB) and under the Bank's Community-Driven-Development (CDD) initiative; and (iv) efforts to address and support regional development issues through municipal associations (OPCI). These initiatives are based on the assumption that municipal governments should play a substantially stronger role in the coordination of local development projects. Most communes have already started to prepare their municipal development plans, yet in many cases mayors and commnunal staff lack the necessary expertise and information to channel this exercise through participatory decision-making processes and to build CDPs on well defined action plans and budgets. Various donor-funded capacity building and training programs are under way to overcome these constraints. Yet, in spite of recent efforts by the previous Government to coordinate these activities, the quality and preparation of CDPs will be a function of the administrative, planning and financial capacity of the communes. In order to use the limited resources in a most cost-effective manner, there is a need to improve the way municipal governments engage in the identification, planning, implementation, monitoring, and maintenance of development projects. The output of this effort would be to assist in the coordination among mining sector stakeholders so as to enhance community involvement in the management of mineral resources, through: (i) the integration of mining activities and revenues on their Community Development Plans and, more broadly, on Regional Development Plans; (ii) the capacity of local government agencies and affected communities to monitor compliance with various environmental plans and regulations; and (iii) capacity to facilitate, mediate, avoid and resolve conflicts over mining development as opposed to other alternative economic activities. (iv) Finally, private sector investment, will be actively promoted for all activities under the project, whether to assist the communes to better manage their mineral revenues, or for the increase in the value added of mineral production. Revenues arising from the exploitation of mineral resources will provide opportunities for villagers for greater access to goods, basic services and financing to empower their direct participation in economic development. Given Madagascar's considerable potential, mining can also de turned into an entry point for growth of employment and incoming-earning opportunities through enterprise development. For the small artisans, however, capacity building is needed to enable them to access market opportunities and to allow small firms to fully benefit from the flow of information and know how. This is needed at several levels, starting from individual business and financial skills to manage self-employment and micro-enterprises, through enterprise private and collective learning mechanisms (e.g. matching grants schemes), to partnerships at the local and national levels. Training, marketing assistance, infrastructure development, and legal/regulatory reform to improve the investment climate are among the actions to be supported by the proposed project. technical assistance will be provided to communities to assist them in selecting community-level investments in productive infrastructure, such as market centers, or mineral transformation and processing, leveraged by their share of fiscal revenues arising from mining. Such investments may be funded through existing social funds, or private-public sector partnerships. Building on pilot projects implemented under the MSRP, access to - 12 -  microcredit will also be provided through a strategic partnership with local microcredit institutions, rather than by creating a new window. The proposed project will also support the creation of a special agency within the Ministry of Energy and Mines to promote private investments, Mining Sector Promotion Agency (APSM). The ASPM will act as one stop shop for the certification of investments under the law of Large Scale Mining Investments, and be the coordination arm of the promotion of the mining sector abroad. It will also support the decentralized public mining institutions in the provision of extension services for small scale miners and non financial services for mining communities. Nonfinancial services to be provided by the APSM range from "social intermediation" to build social capital and basic skills within the commumty, to "business development services" for entrepreneurs. APSM will also operate a Small Grants program to provide individuals and firms with necessary funding for training and business development purposes in the minerals sector. Social intermediation can help poor and marginalized groups take advantage of economic opportunities, through training in literacy or basic financial skills, group capacity-building efforts, and providing information on financial services available. Business Development Services will focus on entrepreneurs and/or potential entrepreneurs, and address constraints to business creation and growth, including: (i) training, guidance, and advisory services; (ii) providing market information through market agents, databases, publications, visits, and other mechanisms; (iii) linking entrepreneurs with potential buyers and markets; (iv) building business networks and linkages to promote inter-firm cooperation; and (v) supporting higher value-added activities. 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 and increased export revenues; (b) development of private capacity in services areas 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 mnining and with a strong local and regional development impact (e.g. roads, energy); (d) increased income-generating opportunities in areas of strong incidence of artisanal mining, increased quality in the delivery of education and health services, and reduced migration outflow; (e) contribution to a better regional distribution of productive activities; (f) sustainable development and fair distribution of benefits to local communities located around mining areas. (ii) as a direct result of the project: (a) strengthening of a modem, consistent and homogeneous mining legal and regulatory framework and of Government's capacity to implement it; (b) better understanding of how Govemment, private sector, communities and donors can work together dealing with the integration of small scale and artisanal mining in the formnal economy; (c) improved efficiency in public mining agencies at a decentralized level (e.g. faster and nondiscretionary 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 nondiscretionary procedures and accurate - 13 -  geological location of concessions, and prevention and contention of gemstone rushes; (e) improved knowledge of existing environmental and socioeconomic 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, agriculture). Target Populations and Sectors While the proposed project will benefit the entire private (foreign and local) mmning investors community, it will also contemplate targeted actions to improve the standards of living of rural populations and reduce environmental damages in small-scale and artisanal mining areas. The proposed project will provide technical assistance, legal rights, security of tenure, improved access to markets, environmental and health awareness, and will facilitate access to basic services. It will also address gender and infant labor issues in artisanal mining. 4. Institutional and implementation arrangements: Project Implementation Period The proposed project would be implemented over a period of 5 years. Project completion date would be August 15, 2008 and the Credit closing date would be December 31, 2008 Executing agency The Ministry of Energy and Mines (MEM) will be responsible for the implementation of the project. Project management The Ministry of Energy and Mines (MEM), through the existing UCPM (Mining Project Coordination Unit) will be responsible for the overall implementation of the project. The UCPM will continue to operate and will (i) be responsible for the execution of the Project Implementation Plan (PIP); (ii) manage (a) procurement - including all contracting for works and purchases of goods - 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; and (iii), establish communication and/or coordination links between MEM and the different sectors involved in the Project. The Project will also establish a Steering Committee, composed of representatives from MEM, Ministry of the Environment, DMG, BCMM, CNM. The Steering Committee will be chaired by the Director General of MEM and will oversee financial, management, and strategic issues. Accounting, financial reporting and audits A financial management assessment has been carried out during pre-appraisal (see Annex 6), and procedure adjustments to comply with Bank norms have been agreed with MEM. A computerized financial management system will be set up. The UCPM will maintain accounts and payments. A summary financial report will be included in the quarterly progress reports. Project accounts, the Special Account, all procurement and compliance with the financial and legal covenants of the Credit Agreement and all procurement, including Statements of Expenditure will be audited annually by independent auditors satisfactory to the Bank. The terms of reference of the audit have been reviewed by the financial management specialist of the Bank/IDA. The auditors will be required to carry out a comprehensive review of the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report will be submitted to IDA not later than 6 - 14 -  months after the end of each fiscal year. Funds Flow The flow of funds from IDA credit and the government is presented as follows: World Bank Government (Credit funds) (Counterpart funds) UCPM: Special Account Suppliers of goods, works and services To ensure timely and reliable flow of funds, a special account will be opened in a local commercial bank under conditions satisfactory to IDA. The special account would be replenished on the basis of documentary evidence, provided to IDA by UCPM, of payments made from the account for works, goods and services that are eligible for financing under the credit. All supporting documents will be retained by UCPM and made available for review by periodic Bank supervision missions and external auditors. The counterpart funds from the government will be used for the purpose of defraying the cost of expenditures not financed by the credit and necessary for the execution of the project. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed project's emphasis is put on strengthening governance in the management of mineral resources and enhancing management capacity of public mining institutions at the Provincial and Municipal level. It is essentially a continuation of the Mining Sector Reform Project, a Learning and Innovation project that closed in December 2002. Although a SIL is a natural follow-up to a LIL (that has been designed to test pilot approaches that could later be mainstreamed on a bigger operation), many alternatives have been considered for the project. Options which have been considered include: (a) the inclusion of mining sector reform conditionally as a part of a programmatic adjustment operation; (b) the inclusion of a mining component in a larger operation to promote private sector development in Madagascar, like the Second Private Sector Development Project (PATESP 2); (c) the inclusion of a mining component on a bigger programmatic lending operation to promote governance and decentralization (PAIGEP 2). - 15-  Option (a) was considered following the introduction of mining related conditionality on SAC n, but has been rejected given: (i) the urgent requirement for capacity building and technical support for institutional strengthening in order to launch a quick program aimed at improving governance and fighting smuggling in the area, as well as to control the increasing phenomena of devastating rushes on gemstones; and (ii) that the transfer and consolidation of modem procedures regarding administration and management of mineral resources and environmental protection would generate a greater synergy effect in terms of sector development, especially in Provinces with an important potential for small-scale mining. Option (b) has been rejected given: (i) that although the Second Private Sector Development Project has an institutional building component, it focus more on public/private partnerships than on building capacity of public institutions; (ii) its implementation arrangements are not suited to the innovative approach used for small-scale mining, through integrated programs covering management, legal, technical, environmental and social issues that is being tested in Madagascar, with its links to a CDD-type strategy of implementation. Project preparation began under Option (c), the proposed project being one of the original components of the Poverty Reduction & Institutional Development Technical Assistance Project. However, during the project's PCD Review meeting, it was decided to split the proposed project in two, to enhance consistence of the proposed actions and facilitate the implementation of the planned tasks. Timing is critical in the implementation of the project, and for that reason it was included in the k-CAS. Among the compelling reasons for supporting this project at this time in Madagascar, the following should be referred the poverty links of small scale mining because of lack of economic alternatives, and the window of opportunity to increase governance in a key and sensible sector. The proposed project is part of a new generation of mining projects focusing on revenue management and sustainability, and has a multisector focus, addressing a series of cross-cutting issues that have strong links to the natural resources management/ environment strategy of the country. In addition, CDD and capacity building focus are very strong in the Madagascar agenda, and mining has a strong link to them. Governance is also the main pillar of the new CAS. 2. Major reRated projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latett Supervision Sector Issue Project (PSR) Ratings (Banh-financed projects only Implementation Development Bank-financed Progress (IP) Objective (DO) Mining Sector Reform Mining Sector Reform Project S S (completed) Decentralization, governance Poverty Reduction & Institutional Development TA Project (planned) Privatization, private sector Second Private Sector development Development and Capacity Building Project (ongoing) Economic Policy and Governance Second Structural Adjustment S S Credit (SAC LI) - 16 -  Sustainable management of natural Second Environmental Project S S resources (EP II) -, Third Environmental Project (planned) Health Multisectoral STI/HIV/AIDS Prevention Project (ongoing) Other development agencies French Cooperation PAEPEM- Promotion of cutting and polishing of Gemstones USAID PAGE-Environmental management training and capacity building USAID PACT- Govemance improvement IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) A Japanese PHRD grant has been approved for project preparation. 3. Lessons learned and reflected in the project design: Lessons have been learned from the Mining Sector Reform Project and other ongoing projects being implemented in Madagascar, from other countries where the Bank has financed similar capacity building operations for mining (e.g., Algeria, Burkina Faso, Ghana, Guinea, Mali, Mauritania, Mozambique and Tanzania), as well as from a Bank review on mining sector reform in Latin America (A Mining Strategy for Latin America and the Caribbean, 1996). Experience in Madagascar shows that although Govemment is committed to policy reform and to improvements in the legal and regulatory framework, enforcement of the new regulations can be blocked by govemance issues and institutional shortcomings. In addition, the general trend towards a state that withdraws from direct participation in economic activities and the operational aspects of implementing public policy requires systematic thinking on how to improve the interface between the public and private sector for the purpose of generating a more dynamic mining sector, in such a way that will allow the affected communities to benefit directly from the surge in activities. Lack of detailed baseline information and adequate institutional capacity make improving govemance in the small-scale mining area through technical assistance a particularly difficult task. Experience with capacity building and public sector reform under the MSRP and economic and sector work conducted under the project show that leaming through the implementation of pilot projects is crucial to achieve results on the ground. In addition, giving the generalized level of poverty and the shortfalls in institutional capacity, public/private partnerships are particularly adapted to the situation of Madagascar. The counterpart, at the policy level, of this strategic choice, is that policy implementation has to stress incentives to private economic activity rather than indiscriminate economic repression. Similar experience in other World Bank projects in the country suggests that emphasis on beneficiary participation in project preparation and supervision, organization and coordination in the field are critical for timely and effective implementation. Given the limited availability of highly skilled staff, ownership and political commitment to project objectives are key to ensuring strong local leadership, and clear delineation of ministerial authority and responsibilities. Experience in other countries indicates that improving the enabling environment increases the ability of a country to attract and retain appropriate private investment. The last 25 years have seen significant - 17 -  changes in the international mining industry, in large measure because of the liberalization of economic and mining policies of previously restrictive governments in mining countries. These reforms have had three broad objectives, to improve sector performance and growth and the contribution of mining to the national economies, to ensure the sustainability of the mining industries in the developing countries, and to ensure that the host countries and local populations get a fair share from the benefits of growth of the sector. Work Bank involvement in the reform process of successful mining countries shows that, for this to happen, the enactment of the necessary legal, fiscal and environmental policies and the establishment of strong mining institutions to implement and administer them have proven to be the keys to success. This includes: (i) a background of sensible economic policies and a coherent general legal framework; (ii) a mining law providing security of tenure, clarity and transparency and access to land (including the release of reserved areas held up by the State and full transferability of concessions to remove all barriers to the entry of investors) , and an investment framework providing access to foreign exchange and a stable and equitable fiscal regime; (iii) public mining institutions that apply properly the sector policies; (iv) a sensible environmental management system; and (v) clear incentives and mechanisms to associate the local communities to the management of mineral resources and to make them benefit of the revenues arising from the mining activity. 4. Indications of borrower commitment and ownership: Commitment of the Borrower is demonstrated by the priority given to natural resources and the mining sector in the overall strategy to increase growth and reduce poverty in the country (I-PRSP). At the sector level, commitment can be seen in the effort put by the new Government into the irnmediate approval of the Law on Large Scale Mining Investments, a major milestone in the improvement of the legal and regulatory framework for the sector. In addition, even during the crisis, Government did in such a way to guarantee the adequate operation of the Mining Cadastre, the main guarantor of security of tenure in the sector. Government has announced a major plan to increase governance and fight corruption in the area of gemstones and is counting on the project's assistance to implement it. Other stakeholders are also committed to the project. At the decentralized level, Provincial Governors and Mayors are waiting for a more clear definition on their role and their share of revenues in minerals development and they believe that the project will provide the appropriate tools to support the right decisions. The private sector appreciates the priority given by the new Government to mining but wants to be involved in the decision-making and implementation mechanisms needed to improve governance in the sector. The private operators are seeing the project as the adequate instrument to achieve these goals. NGO's are counting on the support provided by the previous mining project to involvement of the communes in the management of small-scale mining to the build up of their operations in the area. Both private sector and NGOs have participated informally in project preparation but will be formally involved in the Steering Committee to oversee project implementation. Ownership: Government ownership is indicated by the successful implementation of MSRP, the ability to meet all the mining related conditions of SAC II, and the seriousness of its participation in the preparation of the project so far, including passing legislation in improving governance in small-scale mining, and organizing seminars and workshops dealing with in-depth analysis of sector reforms to be supported by the project. The definition of the project scope is the result of a five year long dialogue between MEM and the Bank, and based on the planned and on-going activities of the Ministry. 5. Value added of Bank support in this project: Bank's competitive advantage in mining. The Bank has been the leading provider of assistance to mining - 18-  sector reform in African and Latin American countries during the last decade and in this capacity has contributed to an upsurge in mining activities in both continents. The Bank has been leading the policy dialogue in mining in Madagascar, and is the only donor capable of providing an integrated approach to the technical assistance to the given to Government for institutional development and regulatory reform designed to encourage the expansion of private investment in mining in a socially and environmentally sound way. Bank involvement will also be catalytic in attracting additional funds and support from bilateral donors particularly for the implementation of the social mitigation measures, and in providing the environment for encouraging private sector investment. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): o Cost benefit NPV=US$ million; ERR % (see Annex 4) o Cost effectiveness * Other (specify) See Annex 4 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) N/A Fiscal Impact: See Annex 4 3. Technical: The introduction and use of straightforward state-of-the-art technology are successful under the previous mining project, particularly within the fields of data processing and information management (e.g. GIS and related data bases). The best example is represented by the use of IT to manage the mining title system. The installation of similar IT will be extended under the proposed project to manage environmental permits and monitoring, as well as the geological information infrastructure. 4. Institutional: The institutional and implementation arrangements for the proposed operation are detailed in the Project Description Summary. The Project Coordination Unit (UCPM) is handling the Mining Project and has experience and capacity. The UCPM was placed within the Direction des Mines one of MEM department. There will be close collaboration between UCPM and the MEM during the preparation of the present operation. It is also crucial for the success of the project that there is close collaboration with the MEM because the project will help in the accomplishment of its program. An institutional capacity assessment was undertaken (the full document is available in project files). The assessment evaluated the capacity of existing institutions, and suggests improvement in view of the new project. Particular attention was paid to inter-organizational relationships, communication, incentives, bottom-up accountability and management capacity. The implementation set-up was designed based on the recommendations of this report and project team. 4.1 Executing agencies: The project will be implemented by the Ministry of Energy and Mines (MEM), and the existing Project Coordination Unit (UCPM), will be responsible for the overall implementation of the project. - 19-  4.2 Project management: MSRP's exiting Mining Project Coordination Unit (UCPM) will continue to operate, coordinating project implementation, and managing: (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 IDA; (d) financial management, the Special Account and disbursements. To ensure an early implementation of project activities, key staff (the national coordinator, , the financial management specialist) is already in place. In order to cope with the additional work load induced by the proposed Project, UCPM will be reinforced by a procurement officer, and a Monitoring and Evaluation Specialist. UCPM's new staff and other replacements will be selected on a competitive basis, under TORs approved by IDA and enumerated like private sector employees. have to be hired. All key members of the UCPM will be recruited on a contractual basis in line with Bank Guidelines and contracts will be extended year by year based on performance. 4.3 Procurement issues: A Procurement Code was issued in 1998 and the Bank ascertained that deficient features identified in the 1995 CPAR have been properly addressed. Bank standard bidding documents (SBDs) are widely used and have helped ensure that any unacceptable features do not affect Bank-financed procurement. However, one area of concern is that the Government's approval process for contract signing is cumbersome and involves an excessive number of bureaucratic steps causing unnecessary delays. In addition, insufficient programming and procurement planning contribute to delays in project implementation resulting slow disbursement. To mitigate risks of delays for the proposed project, proper prerequisites for the use of Bank standard bidding documents, including evaluation reports for National Competitive Bidding procedures (NCB) have been agreed on with the Government during negotiations and the existing MSRP procedures manual is being updated as a part of the PIP and its up-date satisfactory to IDA guidelines is a condition of effectiveness. A Procurement Capacity Assessment of the UPCM, including training needs and arrangements, was undertaken by an experienced procurement specialist as part of appraisal. On the basis of the assessment, an action plan was agreed upon to address areas where the UPCM needs to be strengthened to meet good performance criteria for procurement. The action plan includes (i) the recruitment of a procurement officer; (ii) a specific section on procurement in the Project Implementation Manual to be finalized before effectiveness; (iii) the organization of the filing of procurement-related documents; (iv) procurement training sessions for project staff; and (v) the financing of independent procurement and technical audits to be carried out on a regular basis (see Annex 6 for details). To ensure that procurement does not become a bottleneck for disbursement, a good procurement procedures manual must be designed and Credit funds should provide for implementation assistance and ex-post reviews. Since a large portion of the Credit funds will be used for technical assistance and consulting assignments, early attention will be given to advance planning of recruitment and timely search for expressions of interest through international advertising to obtain the best possible pool of candidates from which strong short lists can be compiled. 4.4 Financial management issues: The assessment carried out during the pre-appraisal stage by an IDA accredited specialist determined that the project satisfies the Bank's minimum financial management requirements. However the implementation of a short-term action plan is needed to strengthen the financial management system in place and to build its capacity to produce quarterly Financial Monitoring Reports (FMRs) with the - 20 -  designed format provided in the Annex A of the FMRs Guidelines for World Bank-financed Projects. The following measures will be taken prior to effectiveness to strengthen the project's financial management system: i) review of the project's Chart of accounts to reflect components and activities outlined in the PCD/PAD to satisfy reporting requirements; ii) update of the current accounting manual of procedures in order to include the job description of the new staff to be recruited, the new chart of accounts and the content and format of FMRs that will be prepared by the project; iii) recruitment, on a competitive basis, of an accounting assistant, a procurement specialist and a monitoring and evaluation specialist; iv) adjustment of the accounting software acquired by the project to allow the production on a quarterly basis of Financial Monitoring Reports required by IDA; v) recruitment of an audit firm acceptable to IDA to audit the project accounts. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. There are no investments in mining operations under the Project. However, the Project would stimulate private investment in mining, and identified environmental issues regarding environmental management and control by public mining authorities include: (i) Government is having problems in the implementation of the environmental regulations applicable to mining, especially with regards to small scale and artisanal activities; (ii) the Minister of Energy and Mines has yet to fully staff and provide adequate budget to the existing Environmental Unit of the Mining Directorate and the skills have to be decentralized at the provincial level; (iii) environmental baseline data for key mining areas has started to be developed under the MSRP but is still inadequate to monitor the development impact of mining activities or to provide adequate information to the private sector for the preparation of environmental assessment (EA) studies; (iv) public participation in mining projects is embrionary; (v) there is little experience in evaluating socio-economic impacts of mining projects. The project will form the Consultative Committee, which will be composed of MRGP representatives, concerned NGOs and environmental management organizations. The Consultative Committee will focus on informing concerned parties on project activities, engaging stakeholders in dialogue, and reporting to the Steering committee on its decisions. In order to address these issues, an update of the Sector Environmental and Social Assessment (SESA) will be carried out as part of the project, focusing on 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) identification of protected areas and areas of high value biodiversity restricted to mining activities, and prospective areas for mining development where environmental baseline studies will be prepared, in order to assess natural, social and sector background data; (v) preparation of pilot socio-economic baseline studies aiming at the definition and implementation of consultation procedures, training requirements and programs, ad hoc institutional strengthening, altematives for revenue sharing with local communities, and other related measures. 5.2 What are the main features of the EMP and are they adequate? The project is categorized as "B" without a separate EA, but a separate EMP was prepared and disclosed at the World Bank Infoshop and in the country. Measures taken in the previous mining capacity building - 21 -  projects and the environmental management projects were spelt out. The annex outlines the capacity building initiatives being taken to ensure that the regulatory framework that has been put in place is enforced, and how the proposed project intends on bringing small scale and artisanal miners into the economic mainstream as a way of applying the rules of the game for environmental management among other management issues. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: EMP: 10/02/2002 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Because of the crisis, intensive consultation could not be carried out during the preparation of the Environmental Management Plan. Formal consultation began with the disclosure of the plan in the country, on October 2002. Associations of small-scale miners, non governmental organizations, private mining companies and representatives of the central, provincial and municipal administration were invited to the meetings. Consultation with local NGOs took place during project appraisal. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The EMP includes quantifies performance indicators that will be monitored and evaluated during project implementation. A dedicated person is being recruited at the Project implementation unit level to coordinate the M&E process. He/she will rely on with similar efforts being developed on other Bank project in Madagascar and liaise with non governmental organizations, mayors of communities, associations of small-scale miners, private mining companies and representatives of the central, provincial and municipal administrations. A special committee regrouping MEM, the Ministry of Forestry (Eaux et forets) and NGOs will be created to steer the implementation of the EMP and serve as a conciliator for eventual conflicts between the two sectors. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. 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 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. 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 with the techniques and practices of social assessment as well as an inadequate institutional and regulatory framework to provide for such assessments. In the context of large mining projects, the interest of local communities can be properly taken into account through the establishment of public/private partnerships supported by the project's sponsor. In the case of small scale mining, capacity building is required in areas like local economric development and community - 22 -  enpowerment. The project's social impact is expected to be substantial. It will focus on building links among the mining, rural development, and environmental management sectors, as an engine for inclusive growth and poverty reduction. The draft full-PRSP, which was presented in November 2001, rightly highlights the importance of generating enabling conditions for more inclusive economic growth that particularly benefits the rural poor. The rural sector represents a critical part of the Malagasy economy, representing 43% of GDP in 2000 (including agriculture, livestock, fishing, forestry and downstream agro-industries). About 75% of the population, or about 2 million households derive their livelihood from agriculture. However, poverty indicators for agricultural households are worse in comparison with other socioeconomic groups, including rural households that depend on nonfarm activities. Thus the importance of the potential contribution of nonagricultural revenues (e.g. mining and eco-tourism), to reduce poverty in the rural world. The project will provide practical tools for the decentralization process and as such will help modernize life for the rural population and assist the urban population by the continued availability of low-cost materials of mineral origin. This impact can be measured by improvements in living conditions, health and hygiene, and education in areas of small-scale mining. In order to maximize its social impact, the proposed project will liaise closely to proposed Community Development (CDP) and Rural Development Support (RDSP) Projects that are currently under preparation. Both will provide, through participatory approaches, assistance at community level for respectively social development and income generating, with a focus on agriculture, water, sanitation, and village specific solutions. Both will offer a financing mechanism for village type activities, either through a matching grants program or a more commercial mechanism. The support structure to be created by these two projects can be accessed by the villages for the preparation and the implementation of their Development Plans. 6.2 Participatory Approach: How are key stakeholders participating in the project? The reform of the mining sector has been discussed at length at various occasions and in several rounds of public discussions with different stakeholders. The National Council of Mines (a sort of embrionary Chamber of Mines) has been closely associated with MSRP implementation and will be deeply involved in project preparation. Small-scale and artisanal miners and a certain number of mining associations have been directly involved in the implementation of the small scale mining pilot projects under the MSRP. They will be directly associated with project preparation through the creation of the Consultative Committee, which will put NGOs in touch with the MRGP and environmental protection programs. A number of selected villages will prepare their own plans for mineral resources; the methodology was developed and is being tested under the MSRP, with full collaboration of the villagers. A few NGO's and private firms participated to provide training and carry out studies. They will be involved in the discussions during preparation, mainly from the environmental and social areas. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Consultation on environmental and social issues is mandatory under the new mining law and will be a permanent feature of the project. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Continuous monitoring, surveys and questionnaires will be carried out during project implementation. A M&E sub-component is also being included into project design. - 23 -  6.5 How will the project monitor performance in terms of social development outcomes? Community consultation, surveys and questionnaires. Monitoring committees involving environmental and development NGOs and CSOs. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the pro ect? t x