Mali - Mining Sector Capacity Building Project

t l v ' ~- L i , / / -/ Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10577- MLI Report No. 10577-MLl Type: (SAR) MENEZES. I/ X35038 / J9-073/ AF5IE STAFF APPRAISAL REPORT REPUBLIC OF MALI MINING SECTOR CAPACITY-BUILDING PROJECT MAY 18, 1992 ndustry and Energy Division ahelian Department .frica Region Jocument has a restricted distribution and may be used by recipients only in the performance of official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY Currency Unit = CFA Franc (CFAF) US$ 1.00 = CFAF 274.8 CFAF 1 million US$3,639 1 French Franc kMFF) = 50 CFAF SYSTEM OF WEIGHTS AND MEASURES Metric System 1 tonne = 1000 kilograms (kg.) 1 tonne = 32,154 troy ounces (oz.) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BHIP-UTAH The BHP-U'1AH Minerals International Group of the Broken Hill Proprietary Company BRGM Bureau de Recherches Geologiques et Minieres CIS Commonwealth of Independent States CSO De Beers Consolidated Diamond Mines' Central Selling Oiganisation DNGM Direction Nationale de la Geologie et des Mines EDF European Development Fund FAC Fonds d'Aide et de Cooperation GDP Gross Domestic Product GIS Geographic Information Systems LAEA International Atomic Energy Agency IAPSU United Nations Development Program's Inter-Agency Procurement Services Unit IFC International Finance Corporation IMF International Monetary Fund LCB Local Competitive Bidding IMME Ministare des Mines, de l'Hydraulique et de l'Energie PANGIS Pan African Network for a Geological Information System PDRM Programme pour le Developpement des Ressources Minieres SOE Statement of Expenditures SOGEMORK Societe de Gestion et d'Exploitation des Mines d'Or de Kalana SOMILO Societe Minibre de Loulo SOMISY Societ6 Miniere de Syama SONAREM Societe Nationale de Recherche et d'Exploration Miniere UNDP United Nations Development Program UNDTCD United Nations Department of Technical Cooperation for Development UNESCO United Nations Educational, Scientific and Cultural Organization This report is based on the findings of a World Bank mission that visited Mali from Febniary 1 to 15, 1992 consisting of Micheline Mescher (AFTIE); Ignatius A. Menezes (AF5SE); Peter Nixon (Consultant-Geologist); and Gotthard Walser (Consultant-Geologist). Mr. Paul I. Dyson (ASTEG) acted as peer reviewer, and Mr. John E. Strongman (AFTIE) as adviser. Ms. Silvia B. Sagari and Ms. Katherine Marshall are the managing Division Chief and Department Director, respectively, for the operation.  FOR OFFICIAL USE ONLY REPUBLIC OF MALI M INING SECTOR CAPACITY-BUILDING PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. CREDIT AND PROJECT SUMMARY ............................. i I. SECTORAL BACKGROUND .............. .. ............... I A. Introduction ....................................... I B. Mineral Resources and Exploration ......................... 2 C. Production . . ....................................... 3 D. Sector Institutions .................................... 5 E. Legal and Fiscal Framework ............................. 8 F. Government Strategy and IDA's Role ....................... 9 H. PROJECT ...10 A. Project Objectives ................................... 10 B. Project Description ................................... 10 C. Project Costs and Financing Plan .......................... 16 D. Project Implementation ................................ 17 E. Procurement ....................................... 17 F. Disbursements ...................................... 19 G. Accounting, Auditing and Reporting ........................ 20 H. Environment, Health and Safety ........................... 20 I. Benefits and Risks ................................... 20 HI. AGREEMENTS REACHED AND RECOMMENDAION ...... ...... 21 A. Agreements Reached ................................. 21 B. Recommendation .................................... 22 ANNEXES 1. Mali's Geological Potential 2. History of Geological Prospection in Mali 3. Artisanal Gold Mining 4. The World Market for Gold and Diamonds 5. Letter of Mining Sector Development Policy 6. Mali's Mining Tax Regime 7. Training Program 8. Project Activity Timetable 9. Supervision Plan 10. Implementation Contracts 11. Terms of Reference MAPS IBRD 23625 Mali: Known Mineral Occurrences andDposits IBRD 23626 Mali: Geology This document has a restricted distribution and may be used by recipients or!y in the performance of their official duties. Its contents may not otherwise be disclosed without 'World Bank authorization.  - i - REPUBLIC OF MALI MINING SECTOR CAPACITY-BUILDING PRO.ECT CREDIT AND PROJECT SUMMARY Bo-'Qwer: Government of Mali Benefidary: Ministry of Mines, Hydraulics and Energy Credit Amount: SDR 4.4 million (US$6.0 million equivalent) Terms: Standard IDA Terms, with 40 years maturity and DyisDctin: The main objectives of the project are: to strengthen the capacity of the Government to attract more investment in the mining sector and to help develop a vibrant industry consisting of large as well as small- and medium- scale mines financed with both foreign and local capital. The proposed project will comprise two main components. The Policy and Strategv Component will consist of several studies, audits, and advisory services to help the Government of Mali design and implement a new policy and strategy for the mining sector. The studies will cover the legislative, economic, fiscal, institutional, artisanal, and environmental aspects of the mining sector. Implementation of the strategy will involve restructuring the institutional framework of the sector, revising relevant legislation and procedures, and closing and/or selling public enterprises and their holdings in the sector to private investors. Strategy implementation will also involve strengthening the Ministry of Mines, Hydraulics and Energy through the provision of a long- term expert, and training Government officials in mining finance and economics, negotiating techniques, metallurgy, and mine management, operation, and technology. The Investment Promotion Component will consist of financing consulting services, equipment, and some works to: (a) organize the documentation center's information and rehabilitate its facilities; (b) synthesize existing geological data and improve tho- geological information system; (c) fill the gaps in the geochemical data coverage of prospective mining areas of the country; and (d) promote specific mineralized areas to potential investors.  - ii - and Risks: The activities financed by the project will help strengthen the institutional capacity in the country for a sector that has a promising potential. They are also expected to result in increased foreign and local investment devoted to mining in Mali in the medium term. Available geological information reveals that the country has the potential to increase gold production beyond the 4.3 tonnes of gold it produced in 1990, provided private sector investment is forthcoming in exploration and development. (Rough estimates for resulting exports within the next 5 to 10 years range from 10 to 15 tonnes of gold per year, whose value would represent 34% to 51% of Mali's total 1990 exports.) There is also a potential for the production of diamonds. Mining could thus become an important source of foreign exchange and tax revenue for Mali's economy. Furthermore, helping artisanal miners, many of whom are women, could reduce poverty over a large rural population in the western and southern regions of the country. While the Government has made the commitment to pursue private sector development, an important project risk involves its implementation by sector institutions that operate in a "government-control" mode. The p.oject is designed .o address this concern through its emphasis on capacity building. The on-the-job training that will result from the project's implemention will contribute substantially to human resource development in the sector. There is also the risk that promotional efforts would not succeed in attracting investors. Although the sector is known to be of interest to foreign mining companies, several potential investors are holding back due to lack of confidence in the policy environment and sector institutions. The work on mining policy, capacity-building, and improvement of geological data will help establish an enabling environment that will lower that risk.  - iii - Local Foreign Total (in US $ 000's equivalent) Estimated Project Costs 1. Policy and Strategy Development * Management consultancy -- 835 835 * Training -- 500 500 * Expert long-term consultant 120 -- 120 * Local personnel 70 -- 70 * Operational support 255 50 305 * Vehicles and equipment -- 260 260 Sub-total 445 1645 2090 2. Investment Promotion * Geological data synthesis and thematic mapping -- 2600 2600 * Investment promotion -- 450 450 3 Local personnel 60 -- 60 * Vehicles and equipment -- 50 50 * Civil works 70 70 Subntotal 130 3100 3230 Total Base Costs 575 4745 5320 3. Contingencies A Physical 70 405 475 A Price 95 610 705 Sub-total 165 1015 1180 Total Project Costs 740 5760 6500 FinancinLi Plan Local ForeiEn Total * Government 500 -- 500 * IDA 240 5760 6000 Estimated Disbursements (IDA) FY93 FY94 FY95 FY96 FY97 Total 500 1,000 2,500 1,500 500 Cumulative 500 1,500 4,000 5,500 6,000 Economic Rate of Return Not Applicable  REPUBLIC OF MALI MINING SECTOR CAPACITY-BUILDING PROJECT I. SECTORAL BACKGROUND A. Introduction 1.1 Mali is a resource-poor country with nearly 80 percent of its population dependent on agriculture, which accounts for roughly half of GDP and two-thirds of exports. Its other resources include minerals, in particular gold and possibly diamonds that, if developed, could make an important contribution to the economy. Considerable geological work has be-en undertaken in Mali, largely financed with foreign aid, confirming that Mali has promising mineral potential. This potential has not been developed, however, because not enough exploration and development investment by the private sector has been forthcoming, largely due to deficient government policies and weak sector institutions, and because the large amount of geological data generated has not been properly organized, synthesized and made readily available to potential investors. At present, the country produces about 4 tonnes of gold per year and no diamonds. Gold is being produced by artisanal miners and by an industrial-scale mine financed and run by a foreign investor. Small- and medium-scale mines financed and run by local entrepreneurs, "the missing-middle", do not exist in Mali. 1.2 Artisanal gold mining is important in Mali, as it has been for centuries, and is a source of living for an estimated 100,000 seasonal miners, a large proportion of whom are women. However, artisanal miners operate under unsafe conditions, with very rudimentary methods and equipment that now leave more than 50 percent of the gold in the ground. They are constrained by a lack of more efficient and safer technology and cannot benefit from commercial-scale gold discoveries that they cannot mine on their own because they are not eligible to hold mineral rights under the current legislation. 1.3 Industrial or commercial mining, on the other hand, has been stymied by lack of a clear mining policy and strategy, by dysfunctional public enterprises, by an inadequate mineral database, and by sector institutions that have been guided by an outdated interventionist philosophy and weakened by corruption. It was only in the late 1980s that the sector was opened to foreign private invest,rs. One such investor, a well-known multinational mining company BHP-Utah Minerals International Group (BHP-Utah), opened a gold mine at Syama in southern Mali in 1990. The mine produces 2.5 tonnes of gold per year, resulting in exports worth approximately US$30 million annually, representing 8.5% of Mali's total exports in 1990. This promising start is a result of considerable promotional efforts by the Ministry of Mines, Hydraulics and Energy (MMHE), bu. much more needs to be done by the Government to promote the vigorous growth of the sector. This includes successful implementation of macro-economic adjustment programs and effective private- sector-oriented policies that would allow for stable and transparent regulations, a competitive and well structured tax regime, and easy access to good and well organized geological data. The Government has launched an adjustment program supported in part by IDA, and is preparing a project that would primarily focus on fostering the development of the private sector. The Ministry of Mines, Hydraulics and Energy, which is responsible for the sector through its Direction Nationale de la G6,ologie et des Mines (DNGM), is committed to taking more vigorous actions to stimulate private  investment in the sector, but it operates with no clear, detailed policies or strategy to guide it. Moreover, it is not organized to actively promote mining to the private sector. The Mining Sector Capacity-Building Project will complement the proposed Private Sector Development Project and is focussed on attracting local and foreign investment to mining through the modification of the institutional and legal framework, provision of better geological information, and strengthening of the Government's institutional capacity. B. Mineral Resources and Exploration 1.4 Geological Potential. Mali has good geological potential (Annex 1), and much geological prospecting has been undertaken since the mid-1950s (Annex 2). This confirms the existence of greenstone belts with a promising potential for gold mineralization in western Mali including Loulo, Sadiola, Seroto-Saboussire, Bakolobi, Moralia, and Sausanto, and in southern Mali at Syama, Misseni, Nampala, and Darabougou (see maps.) Two additional belts of mineralized sedimentary rocks in eastern Mali are also favorable for gold deposits as well as base metals, phosphates, manganese, uranium, and fossil fuels. Kimberlite pipes, a primary source of diamonds, have been found in the Kenieba region of western Mali, but they have not proven to be sufficiently diamondiferous to be economically expl!itable. There is little doubt that other clusters of kimberlites remain to be discovered in the craton further east within Mali. In addition, 1.2 billion tonnes of bauxite (aluminum) have been proven to exist in Mali but the country's landlocked situation makes transportation costs exorbitantly expensive and the deposit not commercially viable. 1.5 &ploration. Much of the mineral exploration conducted in Mali has been financed with multilateral and bilateral assistance suc,h as the United Nations Development Program (UNDP)/United Nations Department of Technical Cooperation for Development (UNDTCD), the European Development Fund (EDF), the Bureau de Recherches Geoiogiques et Winieres (BRGM--a French state enterprise), the former Soviet Government, and the Belgian Government. This has resulted in the identification of several deposits and has led to the development of two gold mines, one at Kalana and the other at Syama. Although this work has confirmed the mineral potential of the coun ry, the sector's potential is far from being developed because few private investors have followed up with detailed exploration of specific target sites. 1.6 There are currently twelve exploration permits outstanding, covering some 14,500 km2 of territory in southern and western Mali. Three have been granted to local companies, the remainder to foreign ones. The granting of mineral exploration and exploitation permits has been done in a haphazard manner, and there has been no strict enforcement of the agreements with investors. As a result, only two of the twelve recipients of exploration permits are currently actively exploring and meeting their work commitments. Furthermore, and for reasons not entirely clear, the Government has not claimed back the acreage from investors whose permits have expired. Hence, there remain large tracts of prospective territory that are not available to new entrants. Agreement has been reached during negotiations that the Government will promptly free all of the acreage that it legally can by September 1993 and make that acreage available for exploration to other interested parties. It has also been agreed that exploration and mining permits will be awarded using a transparent, competitive approach to be designed and put into effect under the project by January 1994. 1.7 Geologiical Data Availability. The extent and state of geological data are extremely important factors in attracting foreign investment. Mali has good geological, geochemical, mineral location, and geophysical data coveing much of its territory. However, less than 35% of Mali's territory is covered by modern, detailed geological or photogeological maps. The majority of the available geological and mineral information is scattered and in different formats. It needs to be  organized and synthesized, and gaps in the data need to be filled. A geographic information systems (GIS) integrated mapping approach is needed to put all of the available data into a single format that can be used to attract investors.1/ C. Production 1.8 Mali's mining sector currently produces primarily gold for export and a negligible amount of phosphate for the domestic market. It has been estimated that Mali produced between 2 and 4 tonnes of gold metal per year in the past (see Table 1). However, the production statistics are not reliable since the extent of smuggling in and out of the country cannot be estimated. In Mali, as in most Sub-Saharan African countries, gold is being produced either by local artisanal miners or by foreign or Government-run commercial mines. The smal' medium-scale mines (producing 500 kg. of gold per year or less), the "missing middle", have y co be developed. Until 1990, most of the gold in Mali was produced by artisanal miners. Since 1990, Mali's first private, foreign-run commercial gold mine has begun production and has become the country's principal source of gold exports. Table 1: MALI GOLD PRODUCTION ESTIMATE Production 1987 1988 1989 1990 (in tonnes) Artisanal 3.2 2.8 1.8 1.4 Production Estimates Kalana Mine 0.3 0.3 0.2 0.4 Syama Mine - - - 2.5 Total 3.5 3.1 2.0 4.3 Average Gold 446 437 381 384 Price (US$/oz.) Calculated 50.2 43.6 24.5 53.1 Revenues (million US$) Souse: Ministy of Mines, Bamako, November 1991. 1.9 Artisanal Mining. Artisanal gold mining is important in Mali, as it has been for centuries, and is a complementary source of revenue for an estimated 100,000 rural farmers who mine on a seasonal basis at more than 250 sites located in southern and western parts of the country: (a) the Bambouck area in the Keni6ba zone (74 sites); and (b) the BouiT6 area in the Kangaba (80 sites), Kalana-Yanfolila (84 sites), and Bagod-Kekoro (18 sites) zones. It is estimated that, on A GIS is a computer system that can hold and use data describing features at and beneath the earth's surface.  4 - average, each miner derives approximately the equivalent of US$400/yr. from her/his mining activity (Annex 3). 1.10 The social and environmental problems usually associated with "gold rush" type artisanal mining in other countries seem to be minimal among the artisanal miners in Mali because they are well organized under their customary village structure and laws. Howevor, underground artisanal gravel mining is dangerous and has been estimated to be less than 50 percent efficient due to poor mining practices (pillars of ore are left underground to support the galleries of underground mines). Artisanai miners need better methods to support mine walls so as to reduce the number of accidental deaths and better tools so that they may mine ore beyond the reach of their handtools. However, air hammers, pumps, and other appropriate small-scale mining equipment, which many miners can afford to buy, are not available in the local area. Some desirable equipment is not available anywhere in the country. 1.11 A very important barrier to development in this industry is the legal treatment of artisanal mining in the mining code. It currently does not allow artisanal miners to apply for mining permits or receive legal mining title to their discoveries. Hence the miners have no negotiable instrument capable of providing them benefits from the discovery beyond the return they receive from their manual labor in the mine. They don't have sufficient resources to develop a more sophisticated mine in cases where the discovery may warrant a mine larger than they can mine on their own, and they cannot seek a buyer or joint venture partner as they cannot lay legal claim to the property. Moreover, they are liable to be expelled from the property when it is granted to a legal permit holder. 1.12 Under the project, an anthropological/legal/economic study will be undertaken to determine, among other: the method by which mineral rights can be awarded to ?rtisanal miners all the while respecting their traditional laws and institutions, so that they may attract investment in their discoveries; and how health hazards can be reduced and safety improved. It has been agreed during negotiations that the Government would take steps towards facilitating the acquisition of mineral rights by artisanal miners by January 1994. It has also been agreed that, to safeguard the environment from future damage and to safeguard the miners' safety and health, the Government would prepare environmental, health and safety regulations and norms and implement them by September 1994. The project will finance a local promotional campaign to increase local awareness of opportunities in small- and medium-scale mining, and provide the initial contacts which could lead to joint ventures between local investors and artisanal miners. Through training of DNGM officials, the project will help improve the technical assistance that the Government can provide to artisanal miners and local investors in the areas of small-scale mine evaluation, operation, and technology. 1.13 CQ-i jercial Production. Kalana was the first modern gold mine to have been developed in Mali. The mine was opened in 1983 and was exploited by the Government (see Para. 1.20) with Soviet technical assistance. Due to significant errors in grade evaluation and mining operations and equipment, the mine produced less than 500 kg. of gold per year rather than the 2 tonnes/yr. that had been expected. The mine is now inoperative and flooded during most of the year. 1.14 The only other modern mine, Syama in southern Mali, was developed by a multinational mining company (BHP-Utah). In its first year (1990) the open-pit mine produced 2.5 tonnes of gold and has already had an important impact on both the local and national economies: it spends almost US$1 million equivalent per month in Mali and has paid more than US$5 million of taxes in the last two years. Extensive drilling of the underlying orebody suggests that the area may contain reserves of over 90 tonnes of gold. Requiring an additional investment of US$80 million to exploit those  reserves, the joint venture has negotiated the entry of the IFC in a second phase of the operations. This investment is expected to result in a production of 5 tonnes of gold per year for at least another 5 years, followed by a third phase. 1.15 The Syndicat Or, a joint exploration venture between the Government and BRGM, discovered a third gold deposit at Loulo in western Mali. As a result, a joint mining venture, Societe Miniere de Loulo (SOMILO), was created between the Government (51%) and BRGM and an exploitation permit was awarded to it in 1988. SOMILO has not yet developed the deposit, however. The Syndicat Diamant, which was created as a joint venture between the Government (20%), MINERSA (40%) and BRGM (40%), has found some kimberlite pipes but none have proven commercially viable. It's exploration permits, awarded in 1986, are now expired. 1.16 Buying, selling and exporting gold and oth-r minerals in Mali is legal and uncontrolled by the Government. Annex 4 provides background information on the world market for gold and diamonds. Gold is freely exported and there have been no market constraints. At present, this liberal policy is benefitting the country since vome gold inflows from surrounling countries, principally from Burkina Faso, are being exported through Mali thereby earning the Governrment some revenues. The extent of cross-border trade, however, is not known. D. Sector Institutions 1.17 The Government is committed to taking vigorous steps to stimulate private investment in the sector and has confirmed its commitment in a policy letter submitted to the Association (Annex 5). However, it operates without a clear, detailed sector policy or strategy to guide it and with dysfunctional public enterprises and institutions that have been guided by an outdated interventionist philosophy and weakened by corruption. 1.18 The overall responsibility for the mining sector lies with the MMHE and four institutions/public enterprises reporting to it, as shown in Figure 1. The institutional structure is characterized by entities that tend to evolve with the flow of donor aid that finances exploration activity in the sector. New entities have been created without dismantling old ones. The functions and responsibilities of the institutions overlap, and are redundant and outdated in the current environment of economic liberalization. In addition, conflicts of interest arise between administrative and operational functions, and procedures lack transparency and effectiveness. The staff is neither experienced in- nor equipped for- promoting investment, monitoring mining activity, or providing local investors with technical support. 1.19 The oldest of the institutions is the Societe Nationale de Recherche et d'Exploitation Miniere (S 3t'AREM). Created soon after independence, it was given the responsibility of managing the mining sector and a monopoly on the exploration and exploitation of t6le country's mineral resources. Between 1963 and 1969, SONAREM was active in exploring and mapping Malian territory with Soviet assistance. The large amount of geological data generated, however, has not been properly organized or synthesized. With the promulgation of Mali's first mining code in 1970, however, SONAREM's public policy functions and hegemony over the sector ended. While it still exists legally, and its 297 employees are on the Government payroll, it has not done any exploration work for a decade. The institution's sole function in the last few years has been to sell explosives and to do a limited amount of water drilling.  hi aI I jaS SM S r~~~~~~~~~a ta  1.20 SONAREM has entered into some mining ventures but was never able to capitalize on them due to ineffective management and an inability to operate as a commercial entity. It was responsible for developing, with Soviet assistance, the Kalana gold mine, which opened in 1983. The mine was transferred to a public enterprise, Societe de Gestion et d 'Exploitation des Mines d 'Or de Kalana (SOGEMORK), which ran the mine since its first year of production in 1985. The enterprise has recently been liquidated after having amassed debt equivalent to US$86 million. The Government has decided to propose early retirement to the 585 civil servants who are employed at the mine. It was agreed during negotiations that, as part of the project, the Government would privatize the Kalana mine. SONAREM has also created and retains, in the name of the Government, participation in: (a) a phosphate company at Tilemsi, SEPT S.A. (32% participation), which was developed with German technical assistance; (b) Mali-Marbres (20% participation); and (c) Eaux Minerales du Mali (5% participation). All of these activities are now inoperative, yet some still have employees on the Government payroll. 1.21 In 1967, SONAREM's public policy functions were transferred to the Direction Nationale de la GCologie et des Mines (DNGM). The DNGM is responsible for mining policy, regulates the sector and, at the same time, is involved in exploration and mining as manager of the Government's participation in mining ventures.2/ Similarly, it has access to privileged information, being responsible for the geological survey function and for granting mining permits as well. This situation has developed the same conflicts of interest the DNGM was created to resolve in SONAREM's operations. The DNGM's most important activity is to grant, monitor, and relinquish mining permits but the procedures it uses lack transparency. In some cases, functions it should be handling are being delegated to others. For example, although the DNGM is best placed to organize and lead negotiations with private investors, the negotiations typically have been handled on an ad hQ basis, involving representatives from many Ministries who are unfamiliar with the matter at hand. There is little institutional memory to help propel the negotiations forward, as the participants change from one negotiation to another. 1.22 The DNGM is also the home of the documentation center, which is the repository for all geological information and maps generated by the DNGM itself as well as by private firms and donor aid agencies. At present, the center cannot accommodate investors' needs for information. The physical facilities are in need of repair, the data need to be organized and missing data must be retrieved, in particular from SONAREM, foreign donors and private companies that have explored the Malian territory. Although the Center received French foreign aid from the Fonds d'Aide et de Cooperation (FAC) between 1980 and 1985, the equipment it received has deteriorated because the center has no operating budget. For example, since 1989 it has received less than US$4,000 equivalent to finance operating costs. The International Atomic Energy Agency (IAEA) is helping the Government organize the center's information on uranium. This IDA project will help the Government extend the methods developed by the UIEA to all other minerals. 1.23 In order to sustain both human and technical assets acquired as a result of a gold exploration project (Or Bagoe) financed by the UNDP, the Government created a semi-independent entity in 1990, the Programme pour le Developpement des Ressources Minieres (PDRM). The PDRM acts as an executing agency and is an integral part of the DNGM, but this creates significant Z/ The Government is technically a partner in all new exploration ventures since, according to the mining code, it receives a minimum of 10 percent free equity in all mining ventures in Mali.  - 8 - conflicts of interest because it also provides profit-making drilling and laboratory services to private investors and donor agencies. The PDRM is well staffed and equipped but its operations are currently being maintained with UNDP assistance, which will terminate in December 1992. The UNDP is considering providing new support to the sector. 1.24 With over 1000 employees, the sector is overstaffed, particularly the public enterprises. Moreover, most of the professionals are geologists without direct mining, metallurgy, or mine management experience and little experience in legal and financial matters. The sector's heavy wage bill does not leave enough resources for adequate financing of other operating costs to ensure the sustainability of the institutions: in 1991, salary payments represented 75% of the Government's total budget expenditure of US$4.2 million equivalent for the sector (see Table 2). Agreement has been reached that under the project, the institutions will be restructured and rationalized by January 1994, resulting a significant reduction in personnel, and that a retirement scheme will be instituted by September 1993 for staff who cannot be absorbed in the new structure of the institutions. Agreement was also reached on the availability of adequate operating budgets after the new institutions are in place, and subject to the findings of the mid-term review. Table 2: MALI - MINING SECTOR BUDGETS. 1991 (In 000's of US $ equivalents) Institution Number of Salaries Total budget civil servants expenditure DNGM/PDRM 147 420 1,270 SONAREM 297 790 990 SOGEMORK 585 1,850 1,850 Tilemsi 47 130 130 Phosphates Co. TOTAL 1,076 3,190 4,240 Sourv: Woldd Bait estitates ting DNGM, PDRM and SONAREM 1991 taitcs. E. Ial and Fiscal Framework 1.25 Mining in Mali is governed by a mining code initially adopted in 1970. It has been revised and the changes have been promulgated in 1991 as part of a policy improvement package supported by IDA and other donors, under a structural adjustment program. The new mining code recognizes three types of mining activities: (a) orpaillage or artisanal mining; (b) small-scale mining and (c) commercial or large-scale mining. Accompanying the new mining code is the model agreement, which reduces the need for lengthy negotiations between the investor and the Government, and considerably accelerates the process of awarding mining permits. The model agreement must be signed by both small-scale and large-scale mining concerns with the Government. It fixes the fiscal obligations (including income taxes, exemptions, depreciation allowances, royalties, etc.) for the duration of the mining activity (Annex 6). In addition, the Government gets a free carried interest of 10 percent, with the possibility of buying an additional 10 percent for a maximum of 20 percent  - 9 - participation in any private sector exploration venture. The new mining code, however, has a number of drawbacks, and will need some adjustments. For example: (a) Artisanal mining is recognized but the artisanal mining regime does not confer mineral rights; (b) mining permits for the small-scale mine regime are not transferrable. Hence, a small- scale mine investor who finds a deposit too large for her/him to exploit alone, cannot sell it to a larger firm and benefit from the discovery; and (c) discrepancies and contradictions occur within and among the three texts of the mining law-the mining code, the model agreement, and the accompanying regulations. For example, whereas it is stated, in the mining code, that the Government will be limited to a 20 percent participation in any exploration and exploitation venture, it is also mentioned, in the model agreement, that the Government will have the right to develop, on its own, a deposit found to be commercially viable on a property if the holder of the permit does not wish to develop it. 1.26 The mining tax regime embodied in the new mining code improves the investment conditions in the mining sector. However, it involves some aspects that still need to be evaluated, such as: (a) the mining tax regime in Mali gives tax breaks-a 5-year tax holiday and 27.5% depletion allowance-which are not especially valued by investors and unnecessarily reduces tax revenues to the Government, while it imposes a relatively high royalty/production tax to which investors are extremely sensitive; (b) there are ambiguities that cannot be firmly clarified by the legal documents or the authorities on such points as the dividend withholding tax exemption and the determination of accelerated depreciation rates; and (c) the code is not internally consistent with respect to fiscal matters nor is it consistent and cross-referenced with the model agreement, its accompanying regulations, Mali's general tax code, the customs code, or the international agreements to which Mali is a signatory. 1.27 It was agreed during negotiations that the mining code and the model mining agreement would be revised to reflect the new mining sector policy and strategy by January 1994. F. Government Strategy and the IDA's Role 1.28 It was only recently that the private sector was acknowledged to be important to economic growth in Mali. The state-dominated development strategy pursued until the early 1980's led to severe distortions in economic incentives, which impeded growth throughout the economy. In 1988, after a series of budget crises resulted in the generalized bankruptcy of the public enterprise sector and the national development bank, Mali began to redress the public sector bias in its economy. The aim was to increase private sector participation in production, trade, and employment. For the past few years, therefore, Mali has been implementing an adjustment program, supported by the IMF, IDA, and other bilateral and multilateral donors, to restructure and reduce the bloated and inefficient public enterprise sector and introduce appropriate policies to improve the environment for  - 10- private initiative, including a better incentives system. Policy improvements under the adjustment program include the liquidation or rehabilitation of public enterprises involved in mining. 1.29 The project complements the actions initiated under the adjustment operations supported by IDA and the proposed Private Sector Development Project. The Government attaches high priority to the search for minerals that have commercial potential as a means of diversifying the economic activities in the country. After years of relying on the State, the Government is evolving to a more liberal philosophy, leaving mineral exploration and extraction to the private investor, both foreign and local. To accelerate the pace of exploration activities, the Government has decided to undertake a number of studies that will provide it with the basis for defining a comprehensive policy that will define the contractual/legislative framework for mining exploration and production, and for its implementation. It has also decided to provide timely and updated geological information to investors. IDA's continued involvement is needed to ensure that the private sector is indeed encouraged to invest in the sector and to help resolve sensitive institutional and organizational issues. II. THE PROJECT A. Project Objectives 2.1 The main objectives of the project are to strengthen the capacity of the Government of Mali to attract more investment to the mining sector and to help develop a vibrant industry consisting of both large mines as well as small- and medium-scale mines financed with both foreign and local capital. Specifically, work done under the project will help the Government develop and implement a strategy for the mining sector that will lead to improvement of the institutional, legal and fiscal framework for the sector. It will also involve the provision of better geological information to potential investors and an improved negotiation process. B. Proiect Description 2.2 The project will have two main components: a Policy and Strategy Component and an Investment Promotion Component. The Policy and Strategy Component will include studies, consulting services, equipment, and materials to assist in the design and implementation of a new mining policy and strategy and to strengthen the institutions through training and technical assistance. The Investment Promotion Component will provide the Government with management consulting services, equipment, and some works to: (a) develop an adequate geological data base; (b) support the organization and rehabilitation of the documentation center, which is the Government's repository of geological data and maps; and (c) assist in organizing a promotion campaign. 1. Policy and Strategy Component 2.3 The work done under the Policy and Strategy Component of the project will assist the Government to define more clearly its mining sector policy (i.e., to redefine its role in the sector, the role of foreign investment, and the role of the local miners, now predominantly artisanal) and to ensure adequate environmental, health, and safety measures for the sector. This work will also assist the Government in defining a strategy consistent with its policy decisions. The strategy will determine: (a) how and how much the Government will share in the wealth derived from mineral extraction; (b) the rights and obligations of foreign and local investors; and (c) how the Government will ensure that the rules of the game are upheld. Undei the project, the Government will be assisted in implementing the strategy through: (a) restructuring the institutions and their procedures; (b)  - 11 - improving the mining law; (c) privatizing state mining enterprises; (d) training Government officials so that they may become more efficient in carrying out the policy and in implementing the law; and (e) providing technical assistance to the MMHE in organizational and project management. 2.4 The project will provide consultancy services to carry out the following activities: (a) Analysis of Policy Alternatives. Six studies will be undertaken to provide the background information on policy alternatives and serve as a basis for policy formulation. They will also pay particular attention to identifying barriers to entry of private capital in the mining sector. The studies will involve the following topics: the policy and legislative implications of a reduced Government role and of a greater private sector participation in mining; revision of the sector's institutional structure and procedures; international mining cost competitiveness; international comparative mining tax regimes; artisanal mining/local industry development; and safeguarding the environment, and the health and safety of the miners. (i) As a result of the roles of Government and private sector study. alternative policies and their attendant laws and regulations defining the relationship between the state and the private sector in the business of mining will be presented and assessed. (ii) The second study will deal with restructuring the institutions of the mining sector, in particular the MMHE, the DNGM, the PDRM, and SONAREM. The objective is to define a more efficient and less costly institutional framework that can be more appropriate to the development of mining activities. It is particularly important to clearly define the role of each institution, separating the different functions (and to define operating procedures and norms) to avoid conflicts of interest relating to: 3 administration of mining permits and land management, * production and storage of geological information, * investment promotion, * provision of commercial drilling services, - management of the state's participation shares in joint ventures, * assistance to- and negotiation with mining investors, and * provision of extension services to artisanal miners. It will also be important to da ermine: an appropriate level for the operating budgets and their sources of financing; the number and qualifications of personnel needed; and the relations among institutions. (iii) As part of the international mining cost competitiveness study, the cost structure of mining in Mali will be comped to that of ot' -r countries in the Sahel region as well as to that of other gold mining countrie round the world. (iv) The international comparative tax study will involve the comparison of the fiscal regimes cf countries offering investment opportunities comparable to those of Mali's mining sector. The effective tax burden currently implied by Mali's mining tax regime (for gold, diamonds, and base metals) will be compared to that of the other countries, and the pros and cons of the tax instruments used will be  - 12 - analyzed. As part of this study, the mining code's tax regime will be "harmonized" with the general tax code, the customs code and any international commercial agreements to which Mali is a signatory. (v) Work done under the artisanal mining/local industry development study will assist in determining how a local small- and medium-scale gold mining industry can be developed on the basis of local investment funds, a free local mineral rights market, and artisanal miners' experience and gold discoveries. It will provide information on the traditional socio-economic structure of artisanal mining geared toward designing a legal entity that can preserve its important features and yet be recognized by Mali's legal code. It will also research and propose the type of mineral rights that can be granted to this legal entity of local miners that will both attract investment to those operations and be feasible from an administrative and legal point of view. (vi) The sixth study will involve the establishment of environmental safeguards and the development of environmental criteria for the mining sector. The study will involve an assessment of the current mining activity's impact on the environment, on the health and security of the miners, and on the country's archeological cultural property. Recommendations will be made on the types of environmental, health and safety regulations and norms that should be put into effect, and on the appropriate methods for monitoring them. It will also recommend a program of surveying and protection of the archeological sites found in mining areas. (b) Policy Deliberations. Shortly following the completion of the studies, the consultants will organize and conduct workshops where the main aspects of a mining policy and strategy (mainly the topics researched in the studies) are initially explained by experts in the field to the workshop attendees, and then discussed. This process will approximate the customary method of evaluating policy options and create the consensus needed for effective and lasting policy change within the Malian context, the Oftats genbraux. The workshops will include expert panelists, such as representatives of different mining companies, geologists, mining lawyers and mineral economists from various mining countries of the world, including other African countries with important mining experience and IDA. Representatives of the concerned Ministries and interested local leaders will be invited to participate. A first workshop will deal with the general issues regarding mining policy and strategy-the relative roles of the state, foreign investors, and the local industry; and the competitive position of Mali's mining sector vis-a-vis the international mining industry. In the second workshop, the mining taxation workshop, the results of the comparative tax study will be discussed with mining taxation experts. Issues of alternative taxation schemes, which affect foreign as well as local investors, will be discussed. The third workshop will involve the development of artisanal mining as the basis for a local mining industry. It will be based on the results of the study and will involve a discussion of the alternative ways to grant mineral rights to artisanal miners, the creation of a local mining title market, and the alternative ways to attract local investment in mining. A fourth workshop will deal with mining- related environmental, health, and safety issues. The discussions will center on the measures to be taken to minimize environmental damage, and health and safety risks to miners. Environmental experts and representatives of NGO's will be invited to discuss the results of the study.  - 13 - (c) Policy and Strategy Paper. The consultants will organize committees among the MMHE and the other government ministries concerned to bring the workshop discussions to fruition and to define a consensus. Each committee will be charged with detailing the strategy and implementation plan for one of the subjects debated in the workshops. A policy and strategy paper will be written, clearly defining the consensus reached in the process of formulating mining sector policy and strategy at the workshops and subsequent govermment meetings held for that purpose. This activity will lay the foundation for the process of translating this statement into laws and regulations (para 2.4f) and to begin implementing the strategy. (d) Institutional Reform. The consultants will assist the MMHE in putting into place an appropriate structure for the sector institutions and in revising their procedures. Their work will be based on the Government's policy and strategy declaration and the results of the institutional structure study, on which IDA will have been consulted. The aim of the restructuring will be to increase the efficiency of the institutions by reducing conflicts of interests and improving the flow of information among and between the institutions. The reorganization will touch on the various functions of the sector institutions: (a) commercial prospecting and drilling services; (b) investment promotion and analysis of industry trends; (c) project economics, finance and taxation; (d) legal services; (e) mining administration, including mining permit and land management; (f) extension services to artisanal miners; (g) geological survey activities; (h) safeguarding miners' health, mine safety, and the environment; and (i) negotiating with investors. It is also important that: (a) the institutions be provided with an adequate operating budget; (b) a retirement scheme be instituted for staff who cannot be absorbed in the new structure of the institutions; (c) a transparent and fair method of awarding mining permits be instituted; (d) a negotiating procedure be defined to simplify and standardize all negotiations with potential mining investors; and (e) possibly that a "guichet unique" be instituted to simplify the acquisition of exploration permits. It is extremely important that the restructuring strengthen the coordinating offices that determine the relationship between the institutions concerned with the mining sector, in particular, the mining offices of the Ministry of the Budget and the Ministry of Economy and Finance, and the finance office of the MMHE. (e) Privatization of Public Enterprises. In addition, the consultants will help the Government sell or close the Kalana mine (SOGEMORK) and the Tilemsi Phosphate mine (SEPT S.A.), and possibly the other holdings of SONAREM, i.e., Mali Marbres and Eaux Mindrales du Mali. The consultants will synthesize the existing information and supplement it as needed so that a full technical and economic evaluation (a "duc diligence" study) is available on each of the entities that are still in the Government's portfolio. The consultants will present detailed plans for either privatizing the mines completely or closing down these entities, depending on the results of the audits. (f) ILal Reforan. The mining code and model agreement will be modified as necessary and environmental regulations prepared. The consultants will help the MMHE modify the legislation, consistent with the policy and strategy that emerge. They will help draft whatever new or modified regulations will be needed to put into effect the mining sector strategy including the decrees that specify the statutes of the sector's new institutions and their operating procedures. For example, the project will make available resources to help draft appropriate environmental, health and safety regulations, the norms against -which mining operations will be monitored, and the decrees granting the institutions the  - 14 - power to implement that p0icy. The consultants will also make the mining code consistent and cross referenced with the model agreement, the code's regulations, the general tax code, the customs code and any international commercial agreements entered into by Mali. In addition, the consultants will help Mali enter into double taxation treaties with the major investment exporting countries, and formulate the proper documents to harmonize with those new commitments. 2.5 Training. A specialist consultancy, such as an educational facility specializing in mining, will manage the human resource development sub-component, which will reinforce the reorganized mining sector institutions. The training will provide: (a) the officials of the MMHE, the negotiating unit, the Ministry of Economy and Finance, and the Ministry of the Budget with knowledge and experience in mining finance and economics; (b) the negotiating team with knowledge of negotiating proc dures and negotiating skills; (c) the extension service and others (e.g., geologists enticed to take voluntary retirement, unemployed young geologists coming from foreign schools) with knowledge of metallurgy and experience in small mine operation and technology; and (d) the individuals charged with the mine environmental, health, and safety safeguard functions with some experience on international norms, environmental damage control, and mine safety. In particular, the project will finance: (a) in-country seminars, given at the local geological college, in mining economics, financial analysis of mining projects, and techniques in effective negotiation (basic level in the first year, higher levels each year thereafter); (b) short-term courses, possibly abroad, in mining operations, metallurgy, mine management, mining techn,ology, mine safety, and environmental damage mitigation; and (c) internships in small-scale mines in selected countries, possibly Zimbabwe, Mexico, and Chile. A detailed training program was submitted (Annex 7) and discussed at the time of credit negotiations. 2.6 Managerial Assistance to the The services of an expert will be provided to assist the MMHE to coordinate the activities under the project. In particular, this consultancy will provide financial and organizational management, and recordkeeping services. Operational support, vehicles, and some equipment to assist in the coordination of the project activities will also be financed under the project. 2. Investment Promotion Component 2.7 A consultancy services contract will be awarded to international consultants experienced in the use of GIS in geological/geophysical mapping and mineral exploration for the preparation of an improved geological data base. The consultants will assist the Govermnent to: perform a specific synthesis of regional data on western and southern Mali including filling in gaps in geological, geochemical and geophysical ground coverage; compile and synthesize country-wide data; and organize and modernize the documentation center. A separate contract will be awarded to international consultants or mining sector promoters who will help the Government to: produce promotional materials, organize promotional campaigns, and evaluate the feasibility and promote the development of the gold refining and goldsmithing industries. Geological PData 2.8 Specifically, the consultants will train five Malian geologists while performing the following tasks using a two-phased approach. Phase I will include: (a) Undertaking a detailed synthesis of data on the western and southern regions of Mali. This will illustrate the relationship of the geology and structure to the location of known  - 15 - ore bodies in order to identify potential areas of further exploration (possibly new aeromagnetic surveys to be performed outside the scope of this project). The work will involve: (i) digitizing and integrating existing data bases; (ii) compiling new data for use in a GIS format by filling in gaps in the geological- geochemical-geophysical ground coverage of the two regions; and (iii) producing 10 GIS mineral anomaly maps of 1:200,000 scale. (b) Phase II will involve integrating country-wide data by: (i) combining 55 images of LANDSAT data with existing geophysical information (gravity and aeromagnetic) to produce 28 sheets of geological maps at 1:500,000 scale to extrapolate and interpolate structures and geological boundaries and provinces; (ii) making ground-truth observatio.is in key areas to provide target areas for further development; and (iii) producing lithospheric thickness maps at 1:1,500,000 scale to determine diamondiferous kimberlite provinces. Documentation Center 2.9 Assisted by a team of Malian specialists, the consultants will organize the documentation center in order to make readily available to potential investors the valuable unpublished material relating to geological and prospecting activities and the geological and photogeological maps that it houses. This will involve: (a) reorganizing the documentary materials and maps for all minerals, and cataloguing them using a system compatible with- and linked to the bibliographic method already developed for uranium by the IAEA; (b) transferring to the center the materials and data currently being stored in other buildings, notably with the PDRM and SONAREM; (c) acquiring data from overseas; (d) training staff in modem methods of documentation; and (e) collaborating with the Pan-African Network for a Geological Information System (PANGIS) (created within the Association of African Geological Surveys at the initiative of UNESCO) to share information and establish a documentation system. Investment Promotion Camrpaig 2.10 Working closely with the MMHE's promotion officials, the consultants will organize a marketing campaign that will involve the following activities:  - 16 - (a) producing a set of promotional materials using the results of the geological data syntheses and targeting it to specific niches of likely investors; (b) disseminating those materials; (c) promoting specific prospective areas to individual investors, including the state-owned assets that are to be sold, and holding investor conferences abroad, and one in Mali; (d) organizing a local campaign to raise local investors' awareness of investment opportunities in the mining sector. This campaign will be aimed at likely investors such as commerVants (traders), public officials taking early retirement, and Malians living overseas; and (e) evaluating and appraising mining related activities, in particular gold refining and goldsmithing, and assessing the methods and feasibility of promoting investment in those activities. 2.11 In addition, the project will assist the documentation center by providing some funds to rehabilitate its office and storage space, and some office equipment and a modern computer system to facilitate the organization of the information and maps that it houses. C. Project Costs and F_nandng Plan 2.12 A summary of project cost estimates is presented in Table 3 below. Table 3: ESIIMATED PROJECT COSTS (in 000's of US S equivalent) LAL FOREIGN .TOTAL 1. Poliey and Strategv Develonment * Mnagemaent consultancy - 835 835 * Taining - 500 500 * Expert long4-ern consultant 120 - 120 * Local personnel 70 - 70 * Operational support 255 50 305 * Vehicles and equipment - 260 260 Sub-towK 544S 1645 2090 2. Investment Promotion * Geological data synthesis and thematic uapping - 2600 2600 * Investment pomotion - 450 450 * Local personnel 60 - 60 * Vehicles and equipment - 50 50 * Civil works 70 - 70 Sub-totM F130 3100 3230 Total Base Costs 575 4745 5320 3. Contlecise * Physical 70 405 475 * Price 95 610 705 SAO-1ta 165 1015 1180 Total Prolect Costs 740 5760 6500  - 17 - 2.13 The total cost of the project, net of taxes and duties, is estimated at US$6.5 million equivalent, with a foreign exchange component of US$5.8 million (90%). Cost estimates are based on 1991 prices, with about 10% added for physical contingencies and 2.8% for price escalation for 1992, 3.9% for 1993 and 1994, and 3.8% for 1995 onwards. 2.14 The financing plan includes an IDA Credit of US$6.0 million equivalent which will finance all of the foreign exchange costs and some of the local costs (US$0.24 million equivalent). The Government will finance the remainder of the local costs, or approximately US$0.5 million equivalent. D. Project Implementation 2.15 The project will be executed in 4 years (see Annex 8 for the timetable of project activities). The Government is targeting a short implementation period and the procurement arrangements are also designed to reduce the implementation period, using predominantly 5 major contracts. The MMHE will be responsible for project implementation. The Ministry has had experience with implementation of projects financed by IDA, UNDP and others with a reasonable amount of success. It has a large pool of well-trained geologists, geophysicists and other technicians. It does lack, however, financial and organizational management skills to manage the activities of the project. It was agreed during negotiations that the project will therefore finance one long-term consultant to provide the Ministry with assistance in coordinating the activities of the project. Appointment of the long-term consultant as well as the nomination of counterparts for the first activities of the project are conditions of credit effectiveness. It was also agreed during negotiations that supervision will include annual performance reviews and an in-depth mid-term review in September 1994, which will be conducted jointly between the Government and IDA to: (a) review progress made to-date; (b) establish a program for the remaining activities of the Project; (c) monitor the performance of the contractors; (d) agree on any modifications to project design and/or contracting arrangements, if necessary; and (e) agree on the financial resources to be provided by the Government to cover the operating costs of the sector institutions. A detailed supervision plan is presented in Annex 9. Key consulting contracts, especially of larger duration, will be monitored closely. They will be subject to joint annual performance reviews by the Government and IDA, where the transfer of know-how will be a major factor in the evaluations (see contract arrangements in Annex 10). E. Procurement 2.16 Procurement under the project will cover the cost of consultant services for technical assistance, training, equipment, and operational support. The procurement arrangements are summarized in Table 4 below. To facilitate management of the project activities and the procurement process, predominantly 5 contracts will be used to cover: (a) the policy and strategy development process and its implementation, (b) the training and internship program, (c) the geological data work and the improvement of the documentation center, (d) the production of promotional material and the promotional campaigns, and (e) the expert assistance to the MMHE to coordinate the project. Consultants and technical assistance personnel to be financed by IDA will be appointed in accordance with the Bank Group's Guidelines: Use of Consultants by World Bank Borrowers and by the World Bank as an Executing Agency (Washington, D.C., August 1981), and will be employed on terms and conditions satisfactory to IDA. Vehicles, equipment, and other material (US $360,000) will be procured through Local Competitive Bidding (LCB). All consulting contracts and contracts for goods for amounts of US$50,000 equivalent or more will be subjected to IDA's prior review. This will  - 18 - result in more than 90% of contracts under prior review. Other contracts will be subject to selective post-award review. Table 4: PROCUREMENT ARRANGEMENTS (in US S million equivalent) Procurement Method Project Component LCB Other Total Cost 1. Policv and StrateQv: * Management consultancy 1.00 1.00 (1.00) (1.00) * Training 0.70 0.70 (0.70) (0.70) * Expert long-term consultant 0.12 0.12 (0.12) (0.12) * Local personnel 0.08 0.08 (0.00) (0.00) * Operational support 0.45 0.45 (0.22) (0.22) * Vehicles and equipment 0.30 a} 0.30 (0.30) (0.30) 2. Investment Promotion * Geological data synthesis and mapping 3.00 3.00 (3.00) (3.00) * Investment promotion 0.60 0.60 (0.60) (0.60) * Local personnel 0.09 0.09 (0.00) (0.00) * Vehicles and equipment 0.06