Madagascar - Mining Sector Reform Learning and Innovation Loan Project

Report No. PID9444 Project Name Madagascar-Mining Sector Reform Learning... and Innovation Loan Region Africa Sector Mining Project ID MGPE56487 Borrower Republic of Madagascar Implementing Agency General Directorate for Mining Ampandrianomby Antananarivo, Madagascar Tel: +261.20.22.403.19 Fax: +261.20.22.325.54 Date this PID prepared March 20, 1998 Projected appraisal date April 20, 1998 Projected Board date/ Vice-President Approval June 1998 1. Country and Sector Background. Since 1996, the Government of Madagascar has been implementing a wide range of policy, economic and sectoral reforms under its structural adjustment program. The Government's economic reform program presented in the DCPE (Document Cadre de Politique Economique, 1996- 1999) calls inter alia for the liberalization of the mining sector through the withdrawal of the State as an operator of mining assets and the implementation of a strategy to encourage a private-sector led mining industry. A recent Bank Mining Sector Review showed sector performance (about 3t of GDP and 2t of total exports) is far below the country's potential. As a result of previous State intervention in the development of mineral resources in Madagascar, the Government is directly involved in mining projects and, through OMNIS, controls the most promising mining rights. The complex structure of the mining concession management system (the mining cadastre) and the weakness of Government institutions have resulted in a situation whereby other prospective areas are being tied up for many years without any productive work being performed. Government is already in the process of taking new initiatives aimed at creating an enabling institutional and regulatory framework to attract private investment to the sector. It has recently decided to redefine its role in the promotion of minerals development in Madagascar, renouncing to future State participation in commercial activities and any request for mandatory participation in new ventures. Proper mineral legislation and competitive tax regimes are under preparation, with Bank's assistance, but they will be only of value in attracting investors if they are administered in a professional and transparent manner by an appropriate supervisory institution. The institutional structure in charge of the sector remains inadequate and unfocussed, with a notable lack of inter-institutional cooperation and frequent duplications of effort. Given a conducive environment, Madagascar's mineral resources could be developed in an efficient, sustainable and environmentally sound manner contributing to foreign exchange earnings, tax revenues and employment. Potential long term export revenues by the year 2010 could be in the US$ 400-700 million range. Mining's potential contribution to GDP could reach 15t by 2010, while potential long term export revenues could represent 25t of total exports.  2. Project Objectives. The objective of the proposed project is to develop and support, through institutional development T.A., the governments' policy, regulatory and institutional reforms which encourage the expansion of private investment in mining in an environmentally sound way. Specific programs aim at: (a) establishing an enabling environment to both promote private investment in mining and ensuring real and sustainable contribution to economic growth; (b) providing institutional capacity building to effectively administer regulations and to monitor sector developments; (c) establishing capacity in the country for environmental and information management, and develop the understanding of and the capacity to address social impacts from mining; and (d) identifying and adopting appropriate mechanisms to facilitate the development of small scale mines and to improve the social, welfare, health and environmental conditions of artisanal miners. 3. Project Description. The Project has two components. (i) A Policy Implementation Component, providing consultancies to support the completion of the sector's regulatory reform and the strengthening of the administrative capacity and installations of the sector agencies, including their cadastral and registry systems, a minerals data bank, and the mechanisms to monitor and enforce environmental and social management related to mining activities. It would also finance relevant skill transfer, training and divestiture efforts; the project would also support efforts to integrate small-scale and artizanal mining into the formal economy and to improve their technical, environmental and social performance; (ii) A Project Coordinating Unit (UCP) to oversee Project implementation. The Project finances consulting services and contract works, computer equipment and software, field and office equipment and vehicles, training, incremental recurrent costs and the necessary upgrading of facilities. 4. Project costs and financing. Total costs of the Project is estimated at US$7.75 million equivalent, of which 69% is foreign exchange. A Bank credit of US$5.0 million is contemplated, with expected parallel financing from the French Cooperation and Government contribution to finance local costs. 5. Implementation Arrangements. The Project would be implemented over a period of 24 months. The Project completion date would be July 31, 2000 and the Loan closing date would be December 30, 2000. The General Directorate of Mines (DG/MME) would be responsible for the implementation of the project. DG will establish a Project Coordination Unit (UCP) to coordinate project implementation, and manage (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 the Bank, and (d) financial record keeping, the Special Account and disbursements. 6. Madagascar has excellent geological potential as is evidenced by the interest major international mining companies are showing in the country. However, the Government will encounter difficulty in sustaining this interest and in ensuring the maximum contribution to economic development unless the major reforms which have already begun are completed and deepened. Sustainability will be enhanced through the project's strong emphasis on institution building, training, human capital development and environmental awareness in the public as well as private sectors. Foreign consultants will be expected to work closely with local public and private sector counterparts and required to transfer knowledge, technical skills, and know-how. If proper regulations and enforcement mechanisms as well as a competitive -2 -  environment are put into place, minerals exploration and development of mines will become self-sustaining to provide a continual revenue stream and other economic benefits to the country. 7. Lessons learned from past operations in the country/sector. Lessons have been learned from the ongoing activities being carried out under the Private Sector Development and Capacity Building Project (PATESP), as well as from other countries where the Bank has financed similar mining technical assistance projects (e.g. Bolivia, Ghana, Peru and Tanzania) and from a recent Bank review on mining sector reform in Latin America (A Mining Strategy for Latin America and the Caribbean, 1996). Experience in other countries indicates that improving the enabling environment increases the ability of the country to attract and retain appropriate private investment. For instance, Ghana in the late 1980s undertook significant reforms, supported by the Bank and other donors, to improve the enabling environment for private sector investment in mining. The result has been a four fold increase in gold production, a mining investment climate that is consistently ranked among the best in the world by investors, and the privatization of state owned mining enterprises. Experience in Madagascar with technical assistance as, for instance, the PATESP, suggests that emphasis on beneficiary participation in project preparation, intensive supervision, organization and coordination at the field level are critical for timely and effective implementation. Ownership and political commitment to project objectives are key to ensuring strong local leadership, availability of counterpart funds, and clear delineation of ministerial authority and responsibilities. 8. Poverty Category. N/A 9. Environmental Aspects. The project is expected to have a positive impact on the environment by building capacity in the country for environmental management at the national level and within the mining sector. A comprehensive Sector Environmental Assessment (SEA) will be carried out as part of the project, including 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) preparation of environmental baseline studies, to assess natural, social and sector background data in selected areas of each of the participating Provinces; (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 and other related measures. 10. Program Objectives Category. Private sector Development. Foreign-led private sector investment into mining could play an instrumental role in opening the country's economy to investment and competition, effectively supporting the on-going macroeconomic stability and structural reforms. The project will contribute to unlock the country's good geological potential through an enhanced access to foreign technology and financing, while promoting the development of sound small-scale mining practices and their integration in the formal economy. 11. Project Benefits. (i) induced by the project: (a) Increased foreign and - 3 -  local direct investment in mining projects and increased export revenues; (b) development of private service capacity 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 mining and with a regional development impact (e.g. roads, energy); (d) increased income- generating opportunities in areas with high unemployment, increased education opportunities and reduced migration outflow; (e) contribution to the decentralization and to a better regional distribution of productive activities; and (f), sustainable development and fair benefits for local communities located around mining; and (ii) as a direct result of the project, i.a.:(a) establishment of a modern, consistent and homogeneous mining legal and regulatory framework; (b) improved efficiency public mining institutions (e.g. faster and non-discretionary administration of mining rights) and improved enforcement capacity of environmental, health and safety regulations; (c) improved security of tenure for mining rights through accurate geographical location of concessions; (d) improved knowledge of existing environmental and socio-economic conditions, as a basis for improved management and participation of local communities; (e) protection of the environment from potential damages caused by mining; and (f), generation of baseline information that can be used by all sectors (e.g. water resources). 12. Project Risks. The overall risk of the Project is estimated to be moderate. The main identified risks and their minimization measures included in Project design are: (i) Government's continued commitment to reform: Government's program for mining sector reform is on schedule and was confirmed and reinforced during negotiations for Bank's next Adjustment Operation. Key Performance Indicators are part of legal covenants pertaining to SAC operations; (ii) condensed timing to build-up to build-up capacity to manage cadastral data by Mining Cadastre Office and Provincial off-shoots: in order to avoid excessive concentration, technical assistance will be phased and prioritized so as not to overburden the relevant government departments and the international consultants engaged will work alongside local counterparts; and (iii) continued staff ownership regarding project objectives: this risk will be mitigated by proven strong advisory capacity by consultants to guide and support the development of managerial and administrative capacities, combined with a participative processes to implement the institutional reform and introduce new work methods. 11. Contact Point. The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 This PID processed by the InfoShop during the week ending August 25, 2000 - 4 -