Ghana - Mining Sector Rehabilitation Project

 Mining Sector Rehabilitation Report No: ; Type: Report/Evaluation Memorandum ; Country: Ghana; Region: Africa; Sector: Mining & Other Extractive; Major Sector: Mining; ProjectID: P000898 The Ghana Mining Sector Rehabilitation Project, supported by Credit 1921-GH for SDR 29.3 million, was approved in FY88. The credit was closed in FY97 with three years of delay. The Implementation Completion Report was prepared by the Africa Regional office. The Borrower’s contribution is included as an appendix. Against the background of sharply declining gold output and exports since the early 1960s, the Government of Ghana (GOG) and IDA agreed to design a project supporting the rehabilitation of the mining sector in general, and the gold mining subsector in particular. The objectives of this project were to: (i) rehabilitate the economically viable mines of State Gold Mining Corporation (SGMC) at an estimated cost of US$114.5 million; (ii) attract private investors; (iii) improve and strengthen sectoral agencies; and (iv) support increased small scale mining of gold and diamonds. Each of these objectives was supported by a component of the project which financed the rehabilitation and the respective technical assistance. The project ran into several problems during implementation. The credit became effective ten months after approval because the GOG failed to fulfill the necessary conditions. Pending the search for project venture partners for individual mines, the rehabilitation process moved very slowly with the result that no significant improvement in gold production was achieved for several years. By the first half of 1991 (i.e. three years into the project implementation) some cofinanciers were showing reluctance to proceed with the project as financial losses accumulated and none of the joint venture proposals came to fruition. While it was decided that the economic and financial viability of the project should be revisited, the cofinanciers agreed to carry on with a holding operation in respect of rehabilitation, but continue with the other sub-components of the project. In addition, it was decided that the project should address the environmental, health and safety problems at the mines. The problem of finding a joint venture partner was finally resolved by mid–1992. As a result of a bidding process among several bidders, an agreement was entered into with Gold Fields (a South African mining conglomerate) for the reconnaissance of two of SCMC’s three mines - Tarkwa and Prestea. This was followed by a definitive Project Development Agreement, effective first of July 1993, for the privatization of the Tarkwa mine. Two years later, the Dunkwa mine was privatized and by June 1996 all three mines had been divested to the private sector. Although the rehabilitation component was eventually completed, the physical results have not measured up to expectation (production from the three mines stood at 85,000 ounces in 1996 compared with 129,000 ounces expected at appraisal). After accumulating very large losses, the GOG had to assume all the liabilities, the lay-off expenses and even the debts related to the rehabilitation project before privatization. On the positive side, however, production of gold has been on the upswing since 1992 and the Tarkwa operation has been profitable since 1994, contributing until the end of 1996 around US$3.5 million in royalties and taxes to the Treasury. In addition, the other objectives of the project have been substantially achieved. Not only has the project helped improve and strengthen sectoral agencies, but it has also provided the support for removing sectoral distortions and enhancing the regulatory framework. Moreover, the project resulted in the progressive liberalization of the trading of gold and diamonds. All the three privatized companies have plans to expand their operations. At Tarkwa, exploration has indicated a total reserve of 13 million ounces in a part of the concession area and a US$300 million development project has been announced. The environmental, health and safety issues have been thoroughly addressed. Out of the thirteen completed studies, four have been environmental impact assessments of the three mines and the small scale mining, and two have addressed the issue of land reclamation. The most noteworthy achievement of this project was that, through intensive and continuing dialogue with the Borrower, a more investment friendly environment has been created in the mining sector, leading to privatization and sizable new investments. OED agrees with the ICR on all ratings except for the outcome which is rated as satisfactory (highly satisfactory in the ICR), because the physical and financial outcome of the project prior to privatization was below expectations. The sustainability of the project is rated as likely and its institutional development impact as substantial. Bank performance is rated as satisfactory. A key lesson of this project is that, for lasting results, the Bank policy dialogue with the country needs to continue over an extended period of time. Another lesson is that an appropriate policy, legal and institutional framework is indispensable to the sustainable development of the mining sector. The ICR is of satisfactory quality. No audit is planned.