Ghana - Mining Sector Rehabilitation Project

Document of The World Bank FOR OFFICLAL USE ONLY Repot No. P-4814-GH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 29.3 MILLION TO THE REPUBLIC OF GHANA FOR A MINING SECTOR REHABILITATION PROJECT May 10, 1988 IThs doemut ha a resbicted distibuton and may be used by recipiet only in the perfomane of the rofficMi dute. Its content my not otherwi be dicosd withot World Bank authodzation.  CURRENCY AND EQUTYALENT UNITS Currency Name - Cedi US$1.00 = 175 cedi Cedi 1.00 - US$.006 SDR 1.00 - US$1.36642 WEIGHTS AND MEASURES 1 troy ounce (oz) a 31.1 grams 1 gram (g) a .032 troy oz 1 metric tonne (mt) - 32,151 troy oz - 2,205 lbs 1 short ton (T) - 2,000 lbs 1 carat (ct) - 0.2 gram 1 gram - 5 carats ABBREVIATIONS ADB - African Development Bank RIB - European Investment Bank ERP - Export Rehabilitation Project ERPTA - Export Rehabilitation Technical Assistance Proedct GCD - Ghana Consolidated Diamonds GNNC - Ghana National Manganese Company ICB - International Competitive Bidding LIB - Limited International Bidding RIC II - Reconstruction Import Credit II SGMC - State Gold Mining Corporation UNDP - United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OFmIClUL USE ONLY GHANA MINING SECTOR REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Ghana Beneficiaries: State Gold Mining Corporation Ministry of Lands and Natural Resources Minerals Commission Ghana Consolidated Dimonds Corporation Ghana National Manganese Corporation Small-scale Miners Ghana Consolidated Diamonds Corporation Amount: SDR 29.3 million (US$40 million) Terms: Standard, with 40 years maturity Onlending Termsi The Government will onlend up to US$35.85 million to SGMC, at an 8.5Z interest rate, for 20 years, with a six year grace period. SGYC would bear the foreign exchange risk. The Govermuent will make available US$3.24 million to the Ministry of Lands and Natural Resources, US$0.55 million to the Minerals Commission, and US$0.36 million to the Ghana National Manganese Corporation. Financing Plan: SGMC US$28.5 million Government .3 million IDA 40.0 million Cofinanciers 34.7 million Joint venturefcommercial 16.5 million Total US$120.0 million Economic Rate of Return: 29% (SGMC rehabilitation only) Staff Appraisal Report: Report No. 7039-GH gilPs: IBRD 18470R1 IBRD 21011 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Be"'. ..horization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF C-HANA FOR A MINING SECTOR REHABILITATION PROJECT 1. The following memorandum and recommendation on a proposed development Credit to Ghana for SDR 29.3 million (US$40 million equivalent) is submitted for approval. The proposed Credit would be on standard IDA terms with 40 years maturity and help linance a mining sector rehabilitation project. The project is expected to have several cofinanciers, including the European Investment Bank (EIB), the African Development Bank (ADB) and the United Nations Development Program (UNDP). In addition, private sector participation is very likely. 2. Background. Ghana's mining sector accounts for roughly 17? of export earnings and employs around 24,000 persons. The main product, gold, accounts for over 85Z Qf the total value of mineral exports. It is mainly produced by two companies, Ashanti Goldfields Corporation and State Gold Mining Corporation (SGMC) plus some small-scale production. Ghana also produces bauxite, manganese ore, and diamonds. Following a steady decline for a number of years, the outlook for mining has improved recently with the adoption by Ghana of a more realistic currency exchange rate regime, availability of retention accounts for foreign exchange, and the partial rehabilitation of the transport infrastructure. Output of the mines is now rising though most of the mines ne"d considerable rehabilitation. Goverment agencies dealing with the sector need strengthening, since they generally lack equipment and skilled personnel. Foreign investors are showing increased interest in Ghana's gold prospects with three new joint venture gold mines having just been established. The Government, aware of the economic potential of the mining sector to greatly increase output, is giving high priority to its rehabilitation and expansion. 3. Rationale for IDA Involvement. The rehabilitation of Ghana's mining sector is vital for increasing export earnings, an important objective of Ghana's recovery program. IDA is involved in this sector through prior credits; the Export Rehabilitation Project (ERP), the Export Rehabilitation Technical Assistance Project (ERPTA), and the second Reconstruction Import Credit (RIC II). These Credits helped to begin the rehabilitation of SGMC. IFC is also involved in the sector through a US$27.5 million loan to the joint venture Ashanti Goldfields Corporation, and equity investment in a new joint venture, Canadian Bogosu Resources Corporation. Continuation of IDA involvement both financially, and through policy and technical advice would help to: (i) ensure continued development of the mining sector through rehabilitation and restr-ucturing, (ii) encourage its opening to private sector participation; and (iii) mobilize both public and private co-financing. 4. Proiect Obiectives. The proposed project aims to: (i) rehabilitate SGMC's mines with as much private participation as possible; (ii) develop Ghana's gold mining potential by attracting private investors;  (iii) strengthen Government agencies dealing with the mining sector; and (iv) increase benefits from small-scale gold mining activities. 5. Project Description. The Project would: (i) continue the ongoing rehabilitation of the SGMC mines (Tarkwa, Prestea, Dunkwa), started under prior credits, to increase their output and reduce safety hazards, by repairing or replacing much of their equipment; (ii) assist in attracting capital by financing evaluation studies of SGMC, Ghana Consolidated Diamonds (GCD) and Ghana National Manganese Company (GNMC) to be used to attract joint venture partners and, in addition, help fund mineral exploration mainly oriented at establishing gold prospects and promoting them to potential investors; (iii) provide technical assistance to the major governmental institutions dealing with mining (Minerals Commission, Ministry of Lands and Natural Resources), to strengthen them and assist them in dealing with private investors; and (iv) improve the operations of small-scale miners through technical assistance. The Project, to be carried out over four years, provides funds for new equipment, repairs and replacement of existing equipment, shaft sinking, technical assistance, training, vehicles and working capital. The total cost of the Project is estimated at US$120 million equivalent-with a foreign exchange component of US$113 million (94Z). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Ghana are given in Schedules C and D respectively. A map is also attached. The Staff Appraisal Report No. 7039-GH dated May 10, 1988, is also attached. 6. ARreed Actions. The Government and SGMC have agreed on the following actions: (i) a four year rehabilitation plan for SGMC including a strategy for implementing this plan by seeking joint venture partners (a condition of effectiveness is satisfactory progress in establishing management and financing aJrangements for the rehabilitation of the three mines while the conclusion of such arrangements is necessary for tranche release); (ii) a study to be carried out by December 31, 1988 of ways to raise salaries in the Mines Department; (iii) the relocation of the Chief Inspector of Mines to Accra as soon as office space and housing are available but no later than Decamber 31, 1989; (iv) the Mines Department to be responsible for monitoring the quality of underground air at the major underground mines; (v) the tailings ponds at Tarkwa and Prestea to be fenced by December 31, 1988 and farming prohibited within their boundaries; (vi) a plan for monitoring effluents at the SGMC mines to be developed by September 30, 1988 with monitoring to begin by June 30, 1989, and a plan to control effluents by March 31, 1990; (vii) a report on reclamation of surface mines by July 1, 1989, to be reviewed by IDA, which will be used by the Government to formulate, not later than July 1, 1990, appropriate reclamation regulations; (viii) conversion of SGMC's older debt to the Government into equity (also, a condition for tranche release) and a study by December 31, 1988 of methods to convert SGMC's debt to VRA and Ghana Commercial Bank into equity or near equity; (ix) an action plan to be implemented by June 30, 1989 providing legal and competitive sales channels for Ghana's small scale gold miners; (x) half of the funds provided by IDA and CIDA to the Government and on-lent to SGMC under the ERP to be converted to equity; (xii) SGMC to revalue its assets by June 30, 1989 and establish estimated useful lives for the assets to be acquired under the  -3- project acceptable to IDA; (xiii) a gold exploration company to be set up by December 31, 1988 under terms and conditions acceptable to IDA; and (xiv) the adherence by SGMC after rehabilitation to certain financial requirements including a minimum current ratio. 7. Benefits. The Project has several major benefits for the country. First, it will lead to a major increase in gold output, exports and foreign exchange earnings of SGMC. Second, the Project will help attract private investors to Ghana's minerals sector by: (i) providing assistance for attracting joint venture partners for SGMC mines; (ii) strengthening the Government agencies dealing with private investors and improving their ability to work with investors- (iii) helping develop prospects; and (iv) through the evaluation studies, creating a framework for considering joint ventures for the diamond and manganese mines. Private sector participation in turn would lead to an inflow of private capital and provide access to management and technical skills needed for sector developmen;. Third, the Project will benefit Ghana by improving the operations of small-scale miners. Finally, it will considerably improve the safety and environmental conditions at SGMC mines, and ultimately throughout the mining sector by helping formulate environmental regulations. 8. Risks. The Project faces four major risks. The first is that the increase in production at the SGMC mines would be less than expected or slower than e-'ected as a result of a lack of skilled personnel or operating problems at the mines. This risk is, however, substantially reduced by the requirement that prior to credit effectiveness, SGMC should have made arrangements satisfactory to IDA to strengthen its operating management, by the rehabilitation program which includes training and by the inflow of private capital with attendant management skills. The second major risk relates to the possible lower price of gold, but the assumption used (US$400/oz) appears conservative. A third major risk is that it may not be possible to attract private investors for the SGMC mines. This risk is, however, limited since private investors have shown interest in Ghana, the Government is showing flexibility in its negotiations, and IDA should be in a position to encourage cooperation between the Government and private investors. Finally, there is a risk cofinancing will not be available. However, tentative commitments by cofinanciers are currently sufficient to fund the project even with substantial cost overruns. 9. Recommendations. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, DC May 10, 1988  Schedule A REPUBLIC OF GHANA MINING SECTOR REHABILITATION PROJECT Estimated Costs and Financing Plan Foreign Local Total (US$ million equivalent) Estimated Project Costs 11 SGMC Mines Rehabilitation Tarkwa .42.3 2.0 44.3 Prestea 38.7 3.0 41.7 Dunkwa 16.1 1.2 17.3 Total 97.1 6.2 103.3 Sectoral Promotion 2.9 0.1 3.0 Strengthening of Agencies 1.8 0.1 1.9 Small Scale Mining 0.5 0.1 0.6 Total Base Cost 102.3 6.5 108.8 Physical Contingencies 8.0 0.2 8.2 Price Contingencies 2.5 0.5 3.0 Total Project Costs 112.8 7.2 120.0 1/ Net of duties and taxes Financing Plan IDA 40.0 - 40.0 SGMC (cash flow) 21.6 6.9 28.5 Government _ 0.3 0.3 Cofinanciers 34.7 - 34.7 Joint venturesicommercial 16.5 - 16.5 Total 112.8 7.2 120.0  Schedul- B REPUBULC OF CHANA MINING SECTOR REHABILITATION PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Projoct Element ProCC3-Ocu t Method Total lD LiT$ OTve-r Cost ------LiSt miliow--- 1. SOMC Rehabilitation Equipment *nd *pare 41.2 46.0 9.6 96.8 (9.4) (12.2) (8.9) (26.6) Management, tech. east. and training - - 17.7 17.7 _ _ (10.9) (10.0) 2. Strengthenino of Government Anencies 1.6 9.2 0.1 1.9 (1.1) (0.2) (-) (1.8) S. Technical Assistance for Sectoral Promotion 6.3 0.7 2.0 8.0 (091) (0.7) (1.9) (2.7) 4. Assistance for Small Scale Mines 9.6 - 0.1 6 - ~ ~~~ M0 6) -) - .) Total 48.8 46.9 . 29.6 120.0 (11.1) (18.1) (15.8) (49.0) Note: Figures in parenthesis are th, respective mount financed by the Association. Disbursements Catenory Amount X Equipment, spares 28.4 69 1WX (of and materials fgreign expenditures) 091 (of local expenditurs) Management, tech, ast.e and consulting i2.1 8o 10e(0Of Una Iloc ted 4.6 11 Estimated IDA Disbursements IDA Fiscal Year - - 69 99 91 92 98 94 Annual 4.5 11.1 11.4 --.1 .0 2.9 Cumulative 4.5 15.6 27.0 84.1 -7.1 49.0  -6- Schedule C REPUBLIC OF GHANA MINING SECTOR REHABILITATION PROJECT Timetable of Key Proiect Processing Events (a) Time taken to prepare One year (b) Prepared b7 Government with IDA assistance (c) First IDA mission May 1987 (d) Appraisal miss-on departure September 1987 (e) Negotiations February 1988 (f) Planned Date of Effectiveness August 15, 1988 A  _ 7~ _SCHEDULE D Page 1 of 3 GHANA MINING SECTOR REHABILITATION PRDJECT THE STATUS OF BANK GROUP OPERATIONS IN GHANA STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 30 1988) Loan or Credit Fiscal Amount Less Number Year Borrower Purpose Cancellation Undisburse* a/ ----------(US$ milIon)