Document of The World Bank Report No: 25777 PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF 23.2 SDR(US$32 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A MINERAL RESOURCES GOVERNANCE PROJECT APRIL 17 2003 Oil, Gas, Mining and Chemicals Department (COCPD) Madagascar, Comoros, Mauritius and Seychelles (AFC08) Africa Regional Office CURRENCY EQUIVALENTS (Exchange Rate Effective January 29, 2003) Currency Unit = Malagasy Franc (FMG) US$1 = FMG6,200.00 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APSM Mining Sector Promotion Agency ASM Artisanal and Small-scale Mining BAM Mining Administration Bureau BPGRM Mmeral Resources Governance Base BCCMM Madagascar Mining Cadastre Bureau CAS Country Assistance Strategy CDD Community Driven Development CDP Community Development Plan CNM National Committee on Mines DCPE Document Cadre de Politique Economique DCA Development Credit Agreement DG General Director of Mines DGEM General Directorate of Energy and Mines DMG Mines and Geology Directorate DIR Regional Directorate EA Environmental Assessment EIS Environmental Impact Statement EMP Environmental Management Plan GIS Geographical Information System ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Agency LIL Learning and Innovation Loan MEM Ministry of Energy and Mines MSRP Mining Sector Reform Project NCB National competitive Bidding NGO Non Governmental Organization PAD Project Appraisal Document PRSP Poverty Reduction Strategy Paper SAC Structural Adjustment Credit SEA Sectoral Environmental Assessment TA Technical Assistance UPCM Mining Project Implementation Unit UNDP United Nations Development Program USAID United States Agency for International Development ZAES Special Economic Activity Zone Vice President: Mr. Callisto Madavo Country Manager/Director: Mr. Hafez Ghanem Sector Manager/Director: Mr. Peter Van Der Veen Task Team Leader/Task Manager: Mr. Paulo de Sa MADAGASCAR MINERAL RESOURCES GOVERNANCE PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context I. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 13 4. Institutional and implementation arrangements 13 D. Project Rationale 1. Project alternatives considered and reasons for rejection 15 2. Major related projects financed by the Bank and/or other development agencies 16 3. Lessons learned and reflected in the project design 17 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 18 E. Summary Project Analysis 1. Economic 19 2. Financial 19 3. Technical 19 4. Institutional 19 5. Environmental 21 6. Social 22 7. Safeguard Policies 24 F. Sustainability and Risks 1. Sustainability 25 2. Critical risks 25 3. Possible controversial aspects 26 G. Main Conditions 1. Effectiveness Condition 26 2. Other 26 H. Readiness for Implementation 27 I. Compliance with Bank Policies 27 Annexes Annex 1: Project Design Surmmary 28 Annex 2: Detailed Project Description 33 Annex 3: Estimated Project Costs 40 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 41 Annex 5: Financial Sumnmary for Revenue-Earning Project Entities, or Financial Summary 43 Annex 6: Procurement and Disbursement Arrangements 44 Annex 7: Project Processing Schedule 59 Annex 8: Documents in the Project File 60 Annex 9: Statement of Loans and Credits 61 Annex 10: Country at a Glance 63 Annex 11: Letter of Sectoral Policy 65 MAP(S) IBRD 22395R MADAGASCAR MINERAL RESOURCES GOVERNANCE PROJECT Project Appraisal Document Africa Regional Office COCPD Date: April 17, 2003 Team Leader: Paulo De Sa Sector Manager/Director: Peter A. Van Der Veen Sector(s): Mining and other extractive (60%), Central Country Manager/Director: Hafez M. H. Ghanem government administration (40%) Project ID: P076245 Theme(s): Decentralization (P), State enterprise/bank Lending Instrument: Specific Investment Loan (SIL) restructuring and privatization (P), Environmental policies and institutions (S), Civic engagement, participation and community driven development (S), Small and medium enterprise support (S) [lProject Financing Data . [ ] Loan [XI Credit [ I Grant [] Guarantee ] Other: For Loans/Credits/Others: Amount (US$m): $32.00 Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.0 - 0.5% Service charge: 0.75% FinahncingglPIan,(US$m): Source - - - Local Foreign . Total' BORROWER 4.45 0.00 4.45 IDA 13.96 18.04 32.00 US: AGENCY FOR INTERNATIONAL DEVELOPMENT 0.00 1.00 1.00 (USAID) FRANCE: FRENCH AGENCY FOR DEVELOPMENT 0.00 1.20 1.20 Total: 18.40 20.24 38.65 Borrower: REPUBLIC OF MADAGASCAR Responsible agency: MINISTRY OF ENERGY AND MINES Unite de Coordination du Proj et Minier (UCPM) Address: B.P. 280 Ampandrianomby -Antananarivo 101 - Madagascar Contact Person: RAMAROLAHY Jonasy Tel: 261.20.22.418.73 Fax: 261.20.22.418.73 Email: mem.prsm@dts.mg Estimated Disbursements ( Bank FY/US$m): FY 2003 21004 205 2006 - 2007 o2008- 2009 Annual 0.27 3.85 5.50 6.80 7.50 7.20 0 88 Cumulative 0.27 4.12 9.62 16.42 23.92 31.12 32.00 Project implementation period: 2003 - 2008 (5 years) Expected effectiveness date: 08/15/2003 Expected closing date: 12/31/2008 A. Project Development Objective 1. Project development objective: (see Annex 1) The overall objective of the project is to assist the Government of Madagascar in implementing its strategy to accelerate sustainable development and reduce poverty in Madagascar through the strengthening of governance and transparency in the management of mineral resources, with special emphasis on small-scale and artisanal mining. 2. Key performance indicators: (see Annex 1) The performance indicators are specified in Annex 1. They include: (i) Strengthening of accountability and transparency in the mining sector: (a) Four institutional mechanisms (BAM) established by the government to control tax collection, environmental issues and smuggling of gemstones. (b) Creation of a one-stop shop for exports of gemstones; (c) Declared production by legally-established small scale and artisanal miners by 50% by the mnid-term review and by 100% at the end of the project. (ii) Key institutional reforms for the decentralized management of mineral resources. (a) At least ten community development plans including the management of mineral resources; (b) Collection rate of mining royalty increases from 10% today to 50% by mid-term review and 80% at the end of the project. (c) Decentralization of mining administration increases fiscal revenues from mining for provinces and communes by 50%. (iii) Promotion of private investments and value added in mining: (a) Average annual investments in mining increase from about US$ 10 million today to US$ 30 million by mid-term review, and US$ 85 million at the end of the project; (b) Annual declared exports of gold and gemstones from small scale mining increase from about US$ 21 million today to US$ 30 million by mid-term review, and US$ 50 million at the end of the project. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16249 Date of latest CAS discussion: January 17, 1997 The last Madagascar CAS was presented to the Board in November 1997 and is centered around building investor confidence in order to unleash Madagascar's export and growth potential. The public sector has a pivotal role in creating and maintaining an enabling investment climate through the formulation of adequate policies and the implementation of reforms, while the private sector has been assigned a pivotal role in sector led growth. A new CAS was initially planned for fiscal year (FY) 02 together with the presentation of the full Poverty Reduction Strategy Paper (PRSP). However, the completion of the PRSP was delayed due to the political crisis that affected the country. Thus, an interim strategy was put in place to limit the impact of the crisis on the poor and to support Govemment's recovery program. An interim Country Assistance Strategy (I-CAS), approved on October 23, 2002, outlines the planned Bank response to the post-crisis environmnent. A new CAS would be prepared in consultation with the Government and development partners, to be presented to the Board based on the full PRSP around September 2003. - 2 - The Mining Sector Reform Project (MSRP), approved on June 1998, was designed to support private-sector growth in mining, in line with the CAS' main objective. The MRSP was designed as a Learning and Innovation Loan (LIL) focusing on legal and regulatory reform, environmental management and a limited number of pilot projects testing an integrated approach to include small scale and artisanal mining in the formal economy. The proposed Mineral Resources Governance Project has strong links to the new I-CAS and the full PRSP as it will assist Government in launching a series of quick initiatives to improve governance and enforce anti-corruption measures in the management of mineral resources, one of the most prospective sectors for broad based economic growth in Madagascar. The I-CAS puts good governance at the core of the strategy for rapid development in the country, and the new CAS will make the argument that the best way to support poverty reduction in Madagascar (and the implementation of the PRSP) would be to focus on improving governance in the country. The PRSP identifies a number of priority reform areas, which include service delivery improvements through institutional reform and decentralization, improved governance, and more efficient revenue and expenditure management, in particular in key sectors vital for poverty reduction (social sectors, agriculture, and mining). The proposed project targets two of the PRSP's three pillars i.e.(i) the Implementation of a governance and institutional reform strategy; and (ii) the adoption of policies to attain higher and more sustainable rates of economic growth that reach the poor, especially in rural areas. To achieve these goals, the project will focus on the establishment of an adequate regulatory and institutional framework to improve governance in the management of mineral resources, the promotion of increased value added in mineral production through private investment, the decentralization of the public administration for the management of mineral resources, the improvement of tax revenues from the sector, and the establishment of mechanisms to share the revenues of mining projects with the affected communities. 2. Main sector issues and Government strategy: Madagascar is one of the poorest countries in the world with per capita income of US$260 (in 2000), 70 percent of the population in poverty and half of the children malnourished. After decades of economhic stagnation and downturn the country has sustained four years of positive real growth and low inflation, and the public deficit is under control. After having been one of the most rapidly growing African economies in recent years, Madagascar plunged into a deep political crisis at the beginning of 2002, following contested first-round elections in December 2001. The political crisis ended in July 2002, but the social and economic impact is extremely pronounced. The direct negative impact on national income for 2002 is estimated at half a billion dollars. The total economic cost is probably much larger, taking into account the loss of confidence, foregone direct investments, foregone exports, physical destruction. Activity in several sectors, including tourism, transport, export processing industries, and mining came to an almost complete stop. Madagascar is very rich in minerals and precious stones and 2300 operators are active in the sector today, generating direct and stable employment for about 100,000 workers and an additional up to half a million seasonal jobs. Since 1996, official mining exports have increased from US$16 million to US$37 million in 2000, largely in precious stones trading. But poor governance and corruption in the sector have discouraged many formal investors and have led to a smuggling of precious stones out of Madagascar with very little value added created in the country. Illegal exports are a multiple of official exports and estimates put the value of trafficking in precious stones ranging from a minimum of $200 million to the maximum of US$500 million (or 10 percent of GDP) per year. Although severe governance problems have characterized Madagascar's mining sector for years, the crisis offers the possibility to decisively reduce illegal activities in the sector. As a result of the crisis as well as anti-corruption announcements - 3 - of the Govemment, illegal activities have slowed down and there is now a short window of opportunity to reverse the situation and promote their integration in the formal economy. Quick action is necessary, though, before the illegal activities restart in full strength. Also, improving governance in the sector, and thereby formalizing mining operations, is one of the most important actions to improve internal revenue generation in Madagascar, much needed to extend basic services and expenditures for anti-poverty programs. The Mining Sector Reform Project assisted Government in setting up a legal and regulatory framework conducive to private investment in the area of mineral resources, in line with its overall policy, defined in 1998 in the Document Cadre de Politique Economique (DCPE), whose key objectives are shifting the role of the State from operator to regulator and promoter of sustainable minerals development, and opening up of the sector to private, including foreign, investment. Reforms, supported by the MSRP, include: (i) a new mining code and its regulations, that have established an adequate legal and regulatory framework to attract private investment into mining, including joint environmental regulations for mining, published jointly by the Ministry of Environment and the Ministry of Energy and Mines; (ii) a special law for large-scale mining investments, defining an attractive special investment regime for FDI in mining in Madagascar, and providing for a fair share of revenues between the Government and the private sector, an adequate cut for the Provincial Governments; and (iii) improved governance through the establishment of a nondiscretionary and transparent system to grant, manage and cancel mining permits, the Mining Cadastre. Success in the implementation of these reforms - that were included as sector conditions in the Second Structural Adjustment Credit (SAC H) - triggered the scale-up of the Mining Sector Reform Project, designed as a Learning and Innovation Loan (LIL) to the current project. Inspite of the overall improvement in the legal and regulatory framework, Madagascar continues to be confronted with significant governance issues in small-scale and artisanal mining, namely as a result of a series of rushes in the gemstones area. The dynamism and complexity of informal small scale mining activities is aggravated by the deforestation and soil erosion that are a result of frequent cyclones and slash-and-burn ("tavy") practices, especially on the East coast. According to the Ministry of Environment, Madagascar has lost 80 percent of its original forest cover, more than half of this in the past 40 years alone, while deforestation is continuing at a rate of about 200,000 hectares per year. Between 1987 and 1997 the area under primary forests is reported to have shrunk by one-third. Soil erosion is estimated at 200-400 tons/ha/year. Soil erosion, associated with an increasing ability to identify gemstones by the rural population is at the origin of the intensification of the rushes on semi-precious stones that Madagascar has known over the recent years. Because of a lack of institutional capacity of the mining administration, the new mining code is not being consistently enforced and, as a result, most of the small-scale and artisanal mining is being conducted outside the formal channels, with insufficient linkages to the rest of the economy, damage to environment, social conflicts, and substantial loss of fiscal revenues. Government is now seeking to implement a series of measures of strong impact aimed at combating smuggling and corruption in this area, and creating an enabling environment for the production, trade, cutting and polishing of gemstones. As part of the project preparation, Government has submitted to the Bank before negotiations a Letter of Sector Policy including arrangements to improve governance in small scale mining of gold and gemstones, an action plan for the decentralization of the institutional framework for the public mining institutions. In addition, aftern negotiations, Government also submitted an Annex to the Letter of Sector Policy, which includes an action plan and implementation calendar. The measures to improve governance in the management of mineral resources constitute the core of the - 4 - short term policy program of the Government. Among the priority measures that could be implemented over the one year period are: (i) the establishment of a one-stop shop for mineral exports; (ii) the set-up of a certification and evaluation infrastructure for gemstones; (iii) the creation of a gemstone exchange in Antananarivo; and (iv) the launching of a training program in cutting and polishing of gemstones. The private sector is expected to take the lead in the implementation of all these steps, both through direct investment in the marketing and cutting of gemstones, and management contracts to run the soon to be created Gemological Institute of Madagascar, and the gemstone exchange in Antananarivo. These measures are seen as the fist step for full private sector management and ownership of the sector, and will be complemented with Govemment efforts and linkages with the main customers of Malagasy gemstones aiming at regulating the trade of gemstones. Over the medium term, Government's strategy for the sector is based on the recognition that the sustainable development of mining can not be achieved without a decentralized administration and a deep involvement of the affected communities. In concrete terms, this strategy calls for: (i) capacity building of the Provincial mining administration, with the establishment of a better alignment between core central public sector functions and the implementation of their mandates at the Provincial level; (ii) increase of fiscal revenues to the communes, including the decentralization of tax collection; and (Im) definition of effective ways and means for community empowerment and participation, including the establishment of public/private partnerships with responsible mining companies willing to invest part of their profits in human resources capacity building, social, and physical infrastructure. A key element of this strategy would be the provision of technical assistance to community associations and municipal governments for the integration of mineral resources management in their participatory development plans. The Government is convinced that its central objective of reducing poverty through accelerated growth can only be accomplished through institutional and administrative reforms that refocus the role of the State, remove inefficient and discretionary regulations, and build a strong partnership between the State, the private sector, and the civil society at large. Based on international experience, the proposed project would look at relevant experiences related to partnerships between mining companies and small scale mining organizations and/or communities for the delivery of services. These experiences could be of particular interest and relevance to Madagascar as they provide an opportunity to resolve a number of existing constraints simultaneously, as mining companies typically provide technical assistance, infrastructure, and access to markets in these schemes. In implementing its strategy, Government expects to increase the environmental and social awareness among the stakeholders involved in minerals development, and obtain a fairer distribution of revenues to the affected population. A major challenge associated with this strategy is improving good governance and transparency of revenue expenses by the communes. The focus of the actions to be supported by the project at the community level includes capacity building for decision making and planning of economic activities to be implemented with the revenues arising from mining, including conflict resolution and analysis of alternative economic opportunities, and linkages to other community-driven networks for the access to "business" services allowing them to benefit from other economic opportunities. 3. Sector issues to be addressed by the project and strategic choices: The two key sector issues to be addressed by the project are capacity building and improved governance in the management of mineral resources at the Provincial and the commune levels. By reducing the discretionary power of Government, increasing transparency, and improving security to potential investors, the new Mining Code has provided the adequate legislative framework for regulating -5- and monitoring large industrial activities in the sector, and to attracting foreign investments into mining. Of particular importance to provide a sense of security for potential investors is the stabilization of the legal, fiscal, and institutional arrangements prevailing at the time of the investment. However, Government's institutional apparatus has not yet adapted to its new role of regulating economic activities and promoting poverty reduction in a market-oriented economy. The Government is aware that an inappropriate institutional framework, weak administrative capacity, and a civil service that lacks accountability and incentives to adopt up-to-date work practices have contributed to inefficiencies and mismanagement of public resources, which in turn has restrained the development of a dynamic private sector. The challenges brought about by this situation will only become more acute in the context of Government's policy of transfer of competences to the provincial and municipal levels. An institutional audit was carried out under the Mining Sector Reform Project and a plan for the reorganization and institutional strengthening of the mining administration at the Central and Provincial levels has been agreed upon. In the case of mineral resources, the major institutional constraints identified are: (i) absolute lack of financial resources that prevents the Ministry from monitoring the real developments in the mining areas; (ii) insufficiency of qualified human resources and lack of technical skills; (iii) limited availability of geologic information, stored in poor physical conditions; (iv) excessive centralization at the manager's level and inefficient procedures and flow of information; and (v) poor relations with other line ministries. The project will support a wide variety of capacity building measures. At the Govemment level, the measures will focus on improving capacity building for environmental management of mineral resources and inspection of mining activities at the Provincial level. Because Government is in no position to provide business development services, the Minister of Mines is planning to have an extension services agencies - the Promotion Agency (APSM) - organized as a limited liability company, with private companies as shareholders. At the municipal level, the strategic choice made by Government is to focus the capacity building on efforts to increase the tax revenues of the communes through the decentralization of tax collection mechanisms. A reform of the mining fiscal regime supported by the project (in coordination with the Ministry of the Economy, Finance and Budget), is expected to substantially increase fiscal revenues from mining in resource rich communes, and to channel resources directly to them. Empowering local communities to local management of mineral resources through their integration in CDD-type development strategies and the preparation of Local Economic Development plans will be an effective tool in the process of managing economic and social development, and reducing and refocusing the State's role while creating the conditions for increased private sector participation. A prerequisite for success in the implementation of this strategy is the urgent strengthening of governance in the small-scale and artisanal mining sector, namely in the area of gemstones. Small scale and artisanal mining activities in Madagascar impact a wide range of stakeholder organizations, institutions and communities. Central Government is thus particularly ill-equipped to deal with the complexity of the problem. However, with 84 percent of all poor people living in extreme poverty, and taking into account the overarching poverty reduction goals of the PRSP, there is no doubt that small scale and artisanal mining has a role to play in linking sector policies with national poverty reduction goals. A basic constraint to implementing reforms has been the lack of capacity to collaborate among local governments, private sector and communities in the task of making coordinated decisions. Close coordination and cooperation among these stakeholders is essential to rationalizing mining activities, and to avoiding the negative outcomes that accompany current unregulated practices. The immense variation of Madagascar's geological and environmental conditions implies that there is no standard solution for the problem. This implies that local institutions and structures should be empowered to directly deal with the problems they face and propose solutions to which public policy and investments should respond accordingly. The on-going decentralization process provides a unique opportunity to effectively - 6 - put rural communities in the driver's seat and tailor public policy and investments to local reality, thereby increasing their relevance. The Government has decided to work with 10 pilot municipalities in this initiative. These communes have been defined at appraisal, in close liasion with the governance, rural development, environment, and CDD/FID Bank task teams. This definition should be based on community assessments made by the FID, as well as UNDP experience on capacity building at community level, in order to review where the communes stand in Community Development Plans, and public financial management issues. Lessons learned during the implementation of MSRP have conducted the Govemrnment to choose a new approach to address these issues based on transparency in the allocation of mining rights, liberalization of trade and incentives to increase the value added of exports. Three main axes have been included in a short term program announced by the new Government aimed at improving govemance and reducing corruption in the area of mineral resources: a) the fight against fraud and corruption in the commercialization of gemstones: Although the legal and regulatory framework is attractive to large scale investments, it needs to be adapted to the specificity of artisanal mining in Madagascar. The procedures for the granting of mining titles need to be simplified to provide equal opportunity in the access to mineral resources to the poor miners, while the marketing and commercialization mechanisms need to be completely revamped, as they provide incentives to speculators, not to those that actually mine the resources. Transparency in the commercialization of gemstones will be promoted through the simplification of administrative procedures, and the creation of a one-stop shop for gemstone exports. Rather than having to deal with four different agencies, certified dealers in gemstones will have a single entry point to handle all the legal, fiscal and administrative procedures related to the export of gemstones. This initiative will be supported by a program for the certification and quality control of Malagasy gemstones, and the creation of exchanges for rough gemstones. In order to set,up the new regulatory framework, Government plans to work essentially with foreign private institutions like the Gemological Institute of America (GIA). As during appraisal no private sector institution was identified to invest in the institituions mentiones above, it was agreed that the proposed Institute of Gemology of Madagascar (IGM) will be run by a foreign private agency like GIA, on a management contract basis. The gemstone exchange will be essential in increasing transparency and building.trust in the system. Without it there will not be enough raw material to be sourced legally to feed a cutting facility. Under a PHRD Japanese Grant approved for project preparation, the Government has engaged a consultant to prepare the request for proposals for a tender that would give the concession to operate the exchange to a private company. The consultant is also defining the minimum basic conditions for the operation of the exchange, including premises, and minimum services (financial, telecommunications, security, etc.). Government plans to install the one-stop-shop for exports either in the premises of the exchange or at the IGM. b) the promotion of private investments that will add value to the mineral exports (cutting and polishing of gemstones): Due to interventionist policies and a heavy dominance of the state in productive activities, the sector of cutting and polishing of gemstones has failed - with very few exceptions - to reach the professional level required by the export markets. Structural adjustment measures since 1995 have created an enabling macro-environment and corresponding incentive structure but have not stimulated yet a convincing supply response by the private sector. Despite its poor track record, lack of appropriate sector policy guidance and institutional fragmentation, there is the general consensus that Madagascar's rich endowment of mineral resources coupled with its relatively cheap labor costs provide genuine opportunities for adding value to mineral resources. Madagascar's success in certain gemstones, such as sapphire and rubies, where it is consolidating a position of world leadership, are clear examples of this potential. With the proper level of financial resources and management, Madagascar could become one of the world's most important producers of cut gemstones, following a world trend in which the suppliers - 7 - of raw materials minerals endeavor to integrate downstream and establish domestic processing facilities. Often this is done in further conjunction with jewelry manufacturing and, to gain an added premium. For example, some countries promote their specific gemstone as a "brand", such in the case of Tanzania. Manufacturing generally is more labor intensive than mining and capital investment per worker is generally lower than in mining. Therefore, the impact on the country's economy is much more obvious, with virtually no constrains imposed by the country's deficient infrastructure. In terms of labor, no specific prior skills are required. The country's free trade zones offer an adequate framework for the development of gemstones' cutting and polishing activities. However, because of the special fiscal status, it is of utmost importance that domestic lapidaries/jewelry manufacturers located in free trade zones pay the international competitive price for raw materials. This means that the rough gemstones should be auctioned, and that international bidders should be invited. If the domestic manufacturers do not want to match the price for which international parties are willing to buy the rough, then the rough should be exported. This would secure the integrity of the transfer pricing and, at the same time, guarantee that the Madagascar would get the highest possible foreign currency revenue and taxation out of its gemstone resource. If Madagascar adopts a sensible, non-distortionary, and internationally competitive taxation regime, then a lot of the incentives to smuggle gemstones would disappear. In order to improve the regulatory framework for the development of these activities in Madagascar, Government plans to get assistance essentially from foreign private institutions like the American Gem Trades Association (AGTA). c) Finally, the update of the country's geological information is a key step in promoting Madagascar geological potential to private investors and to try to anticipate areas potentially vulnerable to future rushes on gemstones. Although this is an expensive investment, this is seen by Government as a major long term tool to prepare the country for a sustainable development of its mineral resources. There are clear links between the provision and broad dissemination of geo-scientific information and the physical and institutional prerequisites to establish a comprehensive development framework as well as for good govemance. The availability of updated and reliable geo-scientific information - airborne geophysics, geological mapping and geochemical information - is a key factor for the development and natural resources management capacity of a country. Today, the available technology and interpretation capacity of integrated geo-scientific data provide information useful not only for the development of the mineral sector, but also in areas such as health, environment, natural hazards, water resources and land-use management, including protected areas and conflict resolution. For example, the generation of maps showing the distribution of areas for potential future gemstones rushes would contribute to improve mineral resources management and land-use conflict resolution. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project which would be implemented over a period of five years and consists of four components: Component 1 - Strengthening transparency and governance in mining. This component would support quick measures with great impact aimed at improving governance in the management of mineral resources and reducing the smuggling of gemstones, and more specifically: (i) adjustment of the sector's legal and regulatory framework; (ii) support for the establishment of mining administration offices close to exploitation sites, the Bureaus de l'Administration Miniere (BAM); (iii) establishment of a certification program for gemstones; the creation of a one-stop shop for gemstone exports, and a gemstones exchange; and (iv) strengthening of private sector associations. Component 2 - Key institutional reforms for the decentralized management of mineral resources. This component would support Government's decentralization strategy for transfer of competences to the provincial and municipal levels and empowerment of local communities. Community level effort would include extending access to Cadastre information on the municipal levels, streamlining of tax collection, and of Directorate of Mines and Geology operations. The project would form six provincial-level offices in cooperation with the Ministry of Enironment to oversee environmental management on the provincial level. Also, ten communes would be selected for implementation of decentralized management of mineral resources, and especially tax collection on the provincial levels. Four studies in the pilot regions, focusing on strategic impact of mining activities will be sponsored in order to build capacity in the mining sector and to define sector strategy. A key aspect of this component is a training program aimed to raise human resource capacity in the sector. The component would also sponsor a communication campaign geared to raise awareness of mining sector reform in local communities. The set-up of an Intranet and Internet network within the mining administration is another part of this component, which would facilitate communication with all stakeholders, private and public. Component 3 - Promoting private investments and value-added in the sector. Madagascar's geological potential is little known, and small scale mining methods widely employed in the country lead to a waste of resources and damage to the environment. A large portion of the minerals production is smuggled out of the country with little fiscal and economic impact. This component would address the current situation by (i) establishing the Mining Sector Promotion Agency and (ii) strengthening the Geo-scientific Information Infrastructure. Creation of the Mining Sector Promotion Agency would improve the Government's capacity to attract private sector investment by coordinating certification procedures, administering a Small Grants program, establishing a database of geological and geophysical information on the country's mineral resources, and designing and implementing environmental awareness campaigns. The project would also work in coordination with the ongoing Multisectoral STIVHIV/AIDS Prevention Project to undertake pilot activities for HIV/AIDS prevention on the commune level. The second sub-component would finance the geo-physics campaign and conduct geological and geochemical mapping. Both of these activities would increase the avaliability of mineral resources information to investors by creating a Mineral Resources Governance Database and thus facilitate private sector investment in the long-run. Component 4 - Project coordination and management. Project management would build upon the existing Project Implementation Unit (UCPM) that has shown proven skills in project procurement, financial management and reporting. The UCPM would be responsible for a monitoring and evaluation program for the activities of the project and coordinate its efforts with a Steering Committee, composed of representatives from various ministries and charged with strategic and financial management. - .;. n ,- , Indicative Bank- %'of - Component,. i, Costs % of financing Bank- (US$M) Total (USSM) financing 1. Strengthening transparency and governance in mining 6.22 16.1 4.43 13.8 2. Key institutional reforms for decentralized management 8.63 22.3 7.26 22.7 of mineral resources 3. Promoting private investments and value-added in the 20.18 52.2 17.19 53.7 sector 4. Project coordination and management 2.67 6.9 2.17 6.8 5. PPF 0.95 2.5 0.95 3.0 Total Project Costs 38.65 100.0 32.00 100.0 Total Financing Required 38.65 100.0 32.00 100.0 -9- 2. Key policy and institutional reforms supported by the project: The Project would be a continuation of the successful Mining Sector Reform Project (MSRP) that has closed in December 2002. It would support the strengthening of four key sets of policy and institutional reforms: (i) the first is the fight against fraud and corruption in gemstones. The primary impetus for mining sector reform in Madagascar has been the sector's sub-optimal contribution to national economic development goals, and a range of negative environmental and social impacts. Lacking mechanisms to reliably capture the tax revenues that should accrue from mining activities to the Central Budget and to the affected communities, the Government of Madagascar has been unable to plan for, or prevent the anarchic rushes on gemstone mining. Government is now seeking ways to address these issues more effectively, through a strategy based on three main axes: (i) transparent rules granting equal opportunity in the access to resources; and (ii) combat smuggling of rough gemstones and improve the working conditions for the trade, cutting and polishing of gemstones. An essential aspect of the previous Government's strategy was a reformed regulatory framework known as the Zone d'Activite Economique Speciale (ZAES), which created special financial and legal parameters for small scale and artisanal mining activities. Articles 205 and 2184 of Law 99.022 of the Mining Code, established in August of 1999, supported by Article 3 of Decree 2001/093 (which modified Decree 2000-607 of August 2000), helped establish the special financial framework for the first ZAES in Vatomandry. Yet without more rigorous oversight, sector strategic planning, and a systematic approach to multi-stakeholder coordination, there is a risk that this framework will not prove capable of harmonizing the conflicting interest of stakeholders currently involved in the sector. The extreme fragmentation of the sector ministries at the national level (there are seven ministries involved in the issues related to the ZAES), coupled with governance issues in the gemstone area (smuggling and tax evasion and, to a lesser extent, transparency in allocation of concessions and enforcement of the legal obligations involved), suggest that the current institutions are not optimally aligned and positioned to provide the necessary support and enabling environment that are needed to attain the poverty reduction and sustainable growth objectives as laid out in the PRSP. However, the eventual failure of the ZAES, as currently constituted, to put in place more coherent and sustainable mining practices could result in foregone development opportunities for the rural poor and the Government. Lack of transparency in the allocation of mining rights and reduced tax revenue could further weaken the Government's ability to adequately monitor or regulate social and environmental impacts, and will deprive local communities of the development opportunities that should flow from this important resource. In place of ZAES, the Government is promoting the setup of another framework, the Bureau de l'Administration Miniere, (BAM) to take charge of mining sector governance issues, tax collection and environmental management issues. The BAM would operate under the auspices of the Ministry of Finance in the four pilot regions for the duration of the project. The BAM would employ international and national consultants in order to raise human resource potential of mining administration. The normalization of the upstream activities in the supply chain will be completed by the streamlining of commercialization procedures and the set-up of a impact program to combat smuggling of rough gemstones and improve the working conditions for the trade, cutting and polishing of gemstones. Quick impact programs will be implemented in three areas, with strong involvement and management by the private sector : (i) the establishment of a one-stop shop for mineral exports; (ii) the set-up of a certification and evaluation infrastructure for gemstones; and (iii) the creation of a gemstone exchange in Antananarivo. - 10- (ii) The second is fiscal reform to regulate the sharing of benefits arising from mining activities with the affected communes, and to enable Municipalities to collect specific taxes from mining operations. Local taxes in Madagascar have traditionally been split between various recipients, through either: (i) the introduction of additional tax fees levied on existing taxes (i.e. centimes additionels for the property tax and annex to professional tax); (ii) or by direct sharing of taxes between various recipients, such as various consumption taxes and licensing rights (i.e. licenses on market rights, and the sale of alcoholic beverages, television sets, festivities, bicycles and motorcycles, fees for the issuing of official documents related to the Etat Civil, registration of life-stock, etc.), as well as duties (ristournes) on cattle, agricultural, forestry, and mining products. Rural communes have so far failed to gain from the decentralization of revenue authority. The taxes that have been assigned to communes generally yield low revenue, and are difficult to collect as there is a strong tradition of tax evasion. Local revenue administrations are inefficient. Even though property tax revenues slightly increased over the last years, property tax recovery lagged far behind the expectations, and were frequently surpassed by revenues from potentially minor taxes. Government has recently launched a number of reforms to render this overly complex system more efficient, such as the full assignment of the property tax to communes or the recent creation of the imp6t synthetique which would merge the professional taxes, centimes additionels and business taxes. The Mining Code defines basic revenue sharing arrangements for the minerals royalty and the surface rental fees collected by the Mining Cadastre, according to the table bellow. The mining royalty due from the mining operators in 2002 totalled US$ 1.9 million, although Govemment estimates point out that this amount could be increased tenfold by applying adequate mechanisms. Nevertheless, because of cumbersome procedures and lack of cooperation between the mining and the tax administrations, only about 10% of this amount was effectively collected. In 2001, the Mining Cadastre collected the equivalent to about US$ 450,000 in fees. However, because of the lack of adequate mechanisms, it has not been able to transfer the 30% of revenues due to the Provinces (and communes), and the equivalent of 40% of the revenues has been transferred to the Central Govemment. Sharing of mining revenues: Mining Cadastre fees Royalties (2% of first transaction) Center 10% 10% Province 30% 70% Commune [1/3 of provincial revenue] [1/3 of provincial revenue] Cadaster Office 60% 15% Gold Agency I__ 5% Given the high revenue potential of mining-related taxes, the proposed project will support reforms to increase the collection of the mining royalty through refinements in the collection methodology, introduced as part of the studies funded by the legal reform sub-component, and greater involvement of the affected communes in its collection. In this regard, it will specifically strengthen coordination between the central and provincial revenue administrations, and provide training and technical assistance to carry out the transfer of competences for revenue collection to the commnunes. It will remove inconsistencies of the current and future legal-institutional framework, and increase the administrative capacity of communes, and their financial management. (iii) The third is the involvement of the communes in the decentralized management ("gestion de proximite') of mineral resources. The decentralization process in Madagascar has started with the - 11 - creation of communes in 1995. Today, communes provide the only formal institutional governance framework at the local level and play an increasing role for service delivery and the coordination of local development initiatives. Their role, however, is still limited. The financial foundations and the administrative capacity of communes are very weak, as commune budgets rely to a large degree on government subsidies. Donors increasingly recognize this new function of communes and are trying to incorporate municipal governments along all steps of the project cycle. Important initiatives at this moment include: (i) the elaboration of community development plans (Plan Communal de Developpement, CDP), which identify local development priorities and coordinate future donor engagements at the communal level; (ii) the Social Fund Project (FID-IV) which, for the first time, will begin to systematically include communes in the identification, implementation, finance, and monitoring of local development projects; (iii) efforts to harmonize procedures for community-level projects in the National Donor Group on rural development and decentralization (SMB) and under the Bank's Community-Driven-Development (CDD) initiative; and (iv) efforts to address and support regional development issues through municipal associations (OPCI). These initiatives are based on the assumption that municipal governments should play a substantially stronger role in the coordination of local development projects. Most communes have already started to prepare their municipal development plans, yet in many cases mayors and commnunal staff lack the necessary expertise and information to channel this exercise through participatory decision-making processes and to build CDPs on well defined action plans and budgets. Various donor-funded capacity building and training programs are under way to overcome these constraints. Yet, in spite of recent efforts by the previous Government to coordinate these activities, the quality and preparation of CDPs will be a function of the administrative, planning and financial capacity of the communes. In order to use the limited resources in a most cost-effective manner, there is a need to improve the way municipal governments engage in the identification, planning, implementation, monitoring, and maintenance of development projects. The output of this effort would be to assist in the coordination among mining sector stakeholders so as to enhance community involvement in the management of mineral resources, through: (i) the integration of mining activities and revenues on their Community Development Plans and, more broadly, on Regional Development Plans; (ii) the capacity of local government agencies and affected communities to monitor compliance with various environmental plans and regulations; and (iii) capacity to facilitate, mediate, avoid and resolve conflicts over mining development as opposed to other alternative economic activities. (iv) Finally, private sector investment, will be actively promoted for all activities under the project, whether to assist the communes to better manage their mineral revenues, or for the increase in the value added of mineral production. Revenues arising from the exploitation of mineral resources will provide opportunities for villagers for greater access to goods, basic services and financing to empower their direct participation in economic development. Given Madagascar's considerable potential, mining can also de turned into an entry point for growth of employment and incoming-earning opportunities through enterprise development. For the small artisans, however, capacity building is needed to enable them to access market opportunities and to allow small firms to fully benefit from the flow of information and know how. This is needed at several levels, starting from individual business and financial skills to manage self-employment and micro-enterprises, through enterprise private and collective learning mechanisms (e.g. matching grants schemes), to partnerships at the local and national levels. Training, marketing assistance, infrastructure development, and legal/regulatory reform to improve the investment climate are among the actions to be supported by the proposed project. technical assistance will be provided to communities to assist them in selecting community-level investments in productive infrastructure, such as market centers, or mineral transformation and processing, leveraged by their share of fiscal revenues arising from mining. Such investments may be funded through existing social funds, or private-public sector partnerships. Building on pilot projects implemented under the MSRP, access to - 12 - microcredit will also be provided through a strategic partnership with local microcredit institutions, rather than by creating a new window. The proposed project will also support the creation of a special agency within the Ministry of Energy and Mines to promote private investments, Mining Sector Promotion Agency (APSM). The ASPM will act as one stop shop for the certification of investments under the law of Large Scale Mining Investments, and be the coordination arm of the promotion of the mining sector abroad. It will also support the decentralized public mining institutions in the provision of extension services for small scale miners and non financial services for mining communities. Nonfinancial services to be provided by the APSM range from "social intermediation" to build social capital and basic skills within the commumty, to "business development services" for entrepreneurs. APSM will also operate a Small Grants program to provide individuals and firms with necessary funding for training and business development purposes in the minerals sector. Social intermediation can help poor and marginalized groups take advantage of economic opportunities, through training in literacy or basic financial skills, group capacity-building efforts, and providing information on financial services available. Business Development Services will focus on entrepreneurs and/or potential entrepreneurs, and address constraints to business creation and growth, including: (i) training, guidance, and advisory services; (ii) providing market information through market agents, databases, publications, visits, and other mechanisms; (iii) linking entrepreneurs with potential buyers and markets; (iv) building business networks and linkages to promote inter-firm cooperation; and (v) supporting higher value-added activities. 3. Benefits and target population: Benefits: The following benefits are expected: (i) induced by the project: (a) Increased foreign and local direct investment in mining and increased export revenues; (b) development of private capacity in services areas to the mining industry, such as exploration and drilling services, environmental impact studies, laboratories, mining construction works and earth removal, maintenance and others; (c) development of infrastructure related to mnining and with a strong local and regional development impact (e.g. roads, energy); (d) increased income-generating opportunities in areas of strong incidence of artisanal mining, increased quality in the delivery of education and health services, and reduced migration outflow; (e) contribution to a better regional distribution of productive activities; (f) sustainable development and fair distribution of benefits to local communities located around mining areas. (ii) as a direct result of the project: (a) strengthening of a modem, consistent and homogeneous mining legal and regulatory framework and of Government's capacity to implement it; (b) better understanding of how Govemment, private sector, communities and donors can work together dealing with the integration of small scale and artisanal mining in the formnal economy; (c) improved efficiency in public mining agencies at a decentralized level (e.g. faster and nondiscretionary administration of mining rights and improved understanding of issues involved in managing such rights), and improved enforcement capacity of environmental, health and safety regulations; (d) improved security of tenure for mining rights through nondiscretionary procedures and accurate - 13 - geological location of concessions, and prevention and contention of gemstone rushes; (e) improved knowledge of existing environmental and socioeconomic conditions, as a basis for improved management and participation of local communities; (f) protection of the environment from potential damage caused by mining and a better grasp of how to design future environmental protection measures in the sector; (g) generation of baseline regional information that can be used by all sectors (e.g. water resources, agriculture). Target Populations and Sectors While the proposed project will benefit the entire private (foreign and local) mmning investors community, it will also contemplate targeted actions to improve the standards of living of rural populations and reduce environmental damages in small-scale and artisanal mining areas. The proposed project will provide technical assistance, legal rights, security of tenure, improved access to markets, environmental and health awareness, and will facilitate access to basic services. It will also address gender and infant labor issues in artisanal mining. 4. Institutional and implementation arrangements: Project Implementation Period The proposed project would be implemented over a period of 5 years. Project completion date would be August 15, 2008 and the Credit closing date would be December 31, 2008 Executing agency The Ministry of Energy and Mines (MEM) will be responsible for the implementation of the project. Project management The Ministry of Energy and Mines (MEM), through the existing UCPM (Mining Project Coordination Unit) will be responsible for the overall implementation of the project. The UCPM will continue to operate and will (i) be responsible for the execution of the Project Implementation Plan (PIP); (ii) manage (a) procurement - including all contracting for works and purchases of goods - and the hiring of consultants, (b) Project monitoring, reporting and evaluation, (c) the contractual relationship with the Bank, and (d), financial record keeping, the Special Account and disbursements; and (iii), establish communication and/or coordination links between MEM and the different sectors involved in the Project. The Project will also establish a Steering Committee, composed of representatives from MEM, Ministry of the Environment, DMG, BCMM, CNM. The Steering Committee will be chaired by the Director General of MEM and will oversee financial, management, and strategic issues. Accounting, financial reporting and audits A financial management assessment has been carried out during pre-appraisal (see Annex 6), and procedure adjustments to comply with Bank norms have been agreed with MEM. A computerized financial management system will be set up. The UCPM will maintain accounts and payments. A summary financial report will be included in the quarterly progress reports. Project accounts, the Special Account, all procurement and compliance with the financial and legal covenants of the Credit Agreement and all procurement, including Statements of Expenditure will be audited annually by independent auditors satisfactory to the Bank. The terms of reference of the audit have been reviewed by the financial management specialist of the Bank/IDA. The auditors will be required to carry out a comprehensive review of the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report will be submitted to IDA not later than 6 - 14 - months after the end of each fiscal year. Funds Flow The flow of funds from IDA credit and the government is presented as follows: World Bank Government (Credit funds) (Counterpart funds) UCPM: Special Account Suppliers of goods, works and services To ensure timely and reliable flow of funds, a special account will be opened in a local commercial bank under conditions satisfactory to IDA. The special account would be replenished on the basis of documentary evidence, provided to IDA by UCPM, of payments made from the account for works, goods and services that are eligible for financing under the credit. All supporting documents will be retained by UCPM and made available for review by periodic Bank supervision missions and external auditors. The counterpart funds from the government will be used for the purpose of defraying the cost of expenditures not financed by the credit and necessary for the execution of the project. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed project's emphasis is put on strengthening governance in the management of mineral resources and enhancing management capacity of public mining institutions at the Provincial and Municipal level. It is essentially a continuation of the Mining Sector Reform Project, a Learning and Innovation project that closed in December 2002. Although a SIL is a natural follow-up to a LIL (that has been designed to test pilot approaches that could later be mainstreamed on a bigger operation), many alternatives have been considered for the project. Options which have been considered include: (a) the inclusion of mining sector reform conditionally as a part of a programmatic adjustment operation; (b) the inclusion of a mining component in a larger operation to promote private sector development in Madagascar, like the Second Private Sector Development Project (PATESP 2); (c) the inclusion of a mining component on a bigger programmatic lending operation to promote governance and decentralization (PAIGEP 2). - 15- Option (a) was considered following the introduction of mining related conditionality on SAC n, but has been rejected given: (i) the urgent requirement for capacity building and technical support for institutional strengthening in order to launch a quick program aimed at improving governance and fighting smuggling in the area, as well as to control the increasing phenomena of devastating rushes on gemstones; and (ii) that the transfer and consolidation of modem procedures regarding administration and management of mineral resources and environmental protection would generate a greater synergy effect in terms of sector development, especially in Provinces with an important potential for small-scale mining. Option (b) has been rejected given: (i) that although the Second Private Sector Development Project has an institutional building component, it focus more on public/private partnerships than on building capacity of public institutions; (ii) its implementation arrangements are not suited to the innovative approach used for small-scale mining, through integrated programs covering management, legal, technical, environmental and social issues that is being tested in Madagascar, with its links to a CDD-type strategy of implementation. Project preparation began under Option (c), the proposed project being one of the original components of the Poverty Reduction & Institutional Development Technical Assistance Project. However, during the project's PCD Review meeting, it was decided to split the proposed project in two, to enhance consistence of the proposed actions and facilitate the implementation of the planned tasks. Timing is critical in the implementation of the project, and for that reason it was included in the k-CAS. Among the compelling reasons for supporting this project at this time in Madagascar, the following should be referred the poverty links of small scale mining because of lack of economic alternatives, and the window of opportunity to increase governance in a key and sensible sector. The proposed project is part of a new generation of mining projects focusing on revenue management and sustainability, and has a multisector focus, addressing a series of cross-cutting issues that have strong links to the natural resources management/ environment strategy of the country. In addition, CDD and capacity building focus are very strong in the Madagascar agenda, and mining has a strong link to them. Governance is also the main pillar of the new CAS. 2. Major reRated projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latett Supervision Sector Issue Project (PSR) Ratings (Banh-financed projects only Implementation Development Bank-financed Progress (IP) Objective (DO) Mining Sector Reform Mining Sector Reform Project S S (completed) Decentralization, governance Poverty Reduction & Institutional Development TA Project (planned) Privatization, private sector Second Private Sector development Development and Capacity Building Project (ongoing) Economic Policy and Governance Second Structural Adjustment S S Credit (SAC LI) - 16 - Sustainable management of natural Second Environmental Project S S resources (EP II) -, Third Environmental Project (planned) Health Multisectoral STI/HIV/AIDS Prevention Project (ongoing) Other development agencies French Cooperation PAEPEM- Promotion of cutting and polishing of Gemstones USAID PAGE-Environmental management training and capacity building USAID PACT- Govemance improvement IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) A Japanese PHRD grant has been approved for project preparation. 3. Lessons learned and reflected in the project design: Lessons have been learned from the Mining Sector Reform Project and other ongoing projects being implemented in Madagascar, from other countries where the Bank has financed similar capacity building operations for mining (e.g., Algeria, Burkina Faso, Ghana, Guinea, Mali, Mauritania, Mozambique and Tanzania), as well as from a Bank review on mining sector reform in Latin America (A Mining Strategy for Latin America and the Caribbean, 1996). Experience in Madagascar shows that although Govemment is committed to policy reform and to improvements in the legal and regulatory framework, enforcement of the new regulations can be blocked by govemance issues and institutional shortcomings. In addition, the general trend towards a state that withdraws from direct participation in economic activities and the operational aspects of implementing public policy requires systematic thinking on how to improve the interface between the public and private sector for the purpose of generating a more dynamic mining sector, in such a way that will allow the affected communities to benefit directly from the surge in activities. Lack of detailed baseline information and adequate institutional capacity make improving govemance in the small-scale mining area through technical assistance a particularly difficult task. Experience with capacity building and public sector reform under the MSRP and economic and sector work conducted under the project show that leaming through the implementation of pilot projects is crucial to achieve results on the ground. In addition, giving the generalized level of poverty and the shortfalls in institutional capacity, public/private partnerships are particularly adapted to the situation of Madagascar. The counterpart, at the policy level, of this strategic choice, is that policy implementation has to stress incentives to private economic activity rather than indiscriminate economic repression. Similar experience in other World Bank projects in the country suggests that emphasis on beneficiary participation in project preparation and supervision, organization and coordination in the field are critical for timely and effective implementation. Given the limited availability of highly skilled staff, ownership and political commitment to project objectives are key to ensuring strong local leadership, and clear delineation of ministerial authority and responsibilities. Experience in other countries indicates that improving the enabling environment increases the ability of a country to attract and retain appropriate private investment. The last 25 years have seen significant - 17 - changes in the international mining industry, in large measure because of the liberalization of economic and mining policies of previously restrictive governments in mining countries. These reforms have had three broad objectives, to improve sector performance and growth and the contribution of mining to the national economies, to ensure the sustainability of the mining industries in the developing countries, and to ensure that the host countries and local populations get a fair share from the benefits of growth of the sector. Work Bank involvement in the reform process of successful mining countries shows that, for this to happen, the enactment of the necessary legal, fiscal and environmental policies and the establishment of strong mining institutions to implement and administer them have proven to be the keys to success. This includes: (i) a background of sensible economic policies and a coherent general legal framework; (ii) a mining law providing security of tenure, clarity and transparency and access to land (including the release of reserved areas held up by the State and full transferability of concessions to remove all barriers to the entry of investors) , and an investment framework providing access to foreign exchange and a stable and equitable fiscal regime; (iii) public mining institutions that apply properly the sector policies; (iv) a sensible environmental management system; and (v) clear incentives and mechanisms to associate the local communities to the management of mineral resources and to make them benefit of the revenues arising from the mining activity. 4. Indications of borrower commitment and ownership: Commitment of the Borrower is demonstrated by the priority given to natural resources and the mining sector in the overall strategy to increase growth and reduce poverty in the country (I-PRSP). At the sector level, commitment can be seen in the effort put by the new Government into the irnmediate approval of the Law on Large Scale Mining Investments, a major milestone in the improvement of the legal and regulatory framework for the sector. In addition, even during the crisis, Government did in such a way to guarantee the adequate operation of the Mining Cadastre, the main guarantor of security of tenure in the sector. Government has announced a major plan to increase governance and fight corruption in the area of gemstones and is counting on the project's assistance to implement it. Other stakeholders are also committed to the project. At the decentralized level, Provincial Governors and Mayors are waiting for a more clear definition on their role and their share of revenues in minerals development and they believe that the project will provide the appropriate tools to support the right decisions. The private sector appreciates the priority given by the new Government to mining but wants to be involved in the decision-making and implementation mechanisms needed to improve governance in the sector. The private operators are seeing the project as the adequate instrument to achieve these goals. NGO's are counting on the support provided by the previous mining project to involvement of the communes in the management of small-scale mining to the build up of their operations in the area. Both private sector and NGOs have participated informally in project preparation but will be formally involved in the Steering Committee to oversee project implementation. Ownership: Government ownership is indicated by the successful implementation of MSRP, the ability to meet all the mining related conditions of SAC II, and the seriousness of its participation in the preparation of the project so far, including passing legislation in improving governance in small-scale mining, and organizing seminars and workshops dealing with in-depth analysis of sector reforms to be supported by the project. The definition of the project scope is the result of a five year long dialogue between MEM and the Bank, and based on the planned and on-going activities of the Ministry. 5. Value added of Bank support in this project: Bank's competitive advantage in mining. The Bank has been the leading provider of assistance to mining - 18- sector reform in African and Latin American countries during the last decade and in this capacity has contributed to an upsurge in mining activities in both continents. The Bank has been leading the policy dialogue in mining in Madagascar, and is the only donor capable of providing an integrated approach to the technical assistance to the given to Government for institutional development and regulatory reform designed to encourage the expansion of private investment in mining in a socially and environmentally sound way. Bank involvement will also be catalytic in attracting additional funds and support from bilateral donors particularly for the implementation of the social mitigation measures, and in providing the environment for encouraging private sector investment. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): o Cost benefit NPV=US$ million; ERR % (see Annex 4) o Cost effectiveness * Other (specify) See Annex 4 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) N/A Fiscal Impact: See Annex 4 3. Technical: The introduction and use of straightforward state-of-the-art technology are successful under the previous mining project, particularly within the fields of data processing and information management (e.g. GIS and related data bases). The best example is represented by the use of IT to manage the mining title system. The installation of similar IT will be extended under the proposed project to manage environmental permits and monitoring, as well as the geological information infrastructure. 4. Institutional: The institutional and implementation arrangements for the proposed operation are detailed in the Project Description Summary. The Project Coordination Unit (UCPM) is handling the Mining Project and has experience and capacity. The UCPM was placed within the Direction des Mines one of MEM department. There will be close collaboration between UCPM and the MEM during the preparation of the present operation. It is also crucial for the success of the project that there is close collaboration with the MEM because the project will help in the accomplishment of its program. An institutional capacity assessment was undertaken (the full document is available in project files). The assessment evaluated the capacity of existing institutions, and suggests improvement in view of the new project. Particular attention was paid to inter-organizational relationships, communication, incentives, bottom-up accountability and management capacity. The implementation set-up was designed based on the recommendations of this report and project team. 4.1 Executing agencies: The project will be implemented by the Ministry of Energy and Mines (MEM), and the existing Project Coordination Unit (UCPM), will be responsible for the overall implementation of the project. - 19- 4.2 Project management: MSRP's exiting Mining Project Coordination Unit (UCPM) will continue to operate, coordinating project implementation, and managing: (a) procurement - including all contracting for works and purchases - and the hiring of consultants; (b) project monitoring, reporting and evaluation; (c) the contractual relationship with IDA; (d) financial management, the Special Account and disbursements. To ensure an early implementation of project activities, key staff (the national coordinator, , the financial management specialist) is already in place. In order to cope with the additional work load induced by the proposed Project, UCPM will be reinforced by a procurement officer, and a Monitoring and Evaluation Specialist. UCPM's new staff and other replacements will be selected on a competitive basis, under TORs approved by IDA and enumerated like private sector employees. have to be hired. All key members of the UCPM will be recruited on a contractual basis in line with Bank Guidelines and contracts will be extended year by year based on performance. 4.3 Procurement issues: A Procurement Code was issued in 1998 and the Bank ascertained that deficient features identified in the 1995 CPAR have been properly addressed. Bank standard bidding documents (SBDs) are widely used and have helped ensure that any unacceptable features do not affect Bank-financed procurement. However, one area of concern is that the Government's approval process for contract signing is cumbersome and involves an excessive number of bureaucratic steps causing unnecessary delays. In addition, insufficient programming and procurement planning contribute to delays in project implementation resulting slow disbursement. To mitigate risks of delays for the proposed project, proper prerequisites for the use of Bank standard bidding documents, including evaluation reports for National Competitive Bidding procedures (NCB) have been agreed on with the Government during negotiations and the existing MSRP procedures manual is being updated as a part of the PIP and its up-date satisfactory to IDA guidelines is a condition of effectiveness. A Procurement Capacity Assessment of the UPCM, including training needs and arrangements, was undertaken by an experienced procurement specialist as part of appraisal. On the basis of the assessment, an action plan was agreed upon to address areas where the UPCM needs to be strengthened to meet good performance criteria for procurement. The action plan includes (i) the recruitment of a procurement officer; (ii) a specific section on procurement in the Project Implementation Manual to be finalized before effectiveness; (iii) the organization of the filing of procurement-related documents; (iv) procurement training sessions for project staff; and (v) the financing of independent procurement and technical audits to be carried out on a regular basis (see Annex 6 for details). To ensure that procurement does not become a bottleneck for disbursement, a good procurement procedures manual must be designed and Credit funds should provide for implementation assistance and ex-post reviews. Since a large portion of the Credit funds will be used for technical assistance and consulting assignments, early attention will be given to advance planning of recruitment and timely search for expressions of interest through international advertising to obtain the best possible pool of candidates from which strong short lists can be compiled. 4.4 Financial management issues: The assessment carried out during the pre-appraisal stage by an IDA accredited specialist determined that the project satisfies the Bank's minimum financial management requirements. However the implementation of a short-term action plan is needed to strengthen the financial management system in place and to build its capacity to produce quarterly Financial Monitoring Reports (FMRs) with the - 20 - designed format provided in the Annex A of the FMRs Guidelines for World Bank-financed Projects. The following measures will be taken prior to effectiveness to strengthen the project's financial management system: i) review of the project's Chart of accounts to reflect components and activities outlined in the PCD/PAD to satisfy reporting requirements; ii) update of the current accounting manual of procedures in order to include the job description of the new staff to be recruited, the new chart of accounts and the content and format of FMRs that will be prepared by the project; iii) recruitment, on a competitive basis, of an accounting assistant, a procurement specialist and a monitoring and evaluation specialist; iv) adjustment of the accounting software acquired by the project to allow the production on a quarterly basis of Financial Monitoring Reports required by IDA; v) recruitment of an audit firm acceptable to IDA to audit the project accounts. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. There are no investments in mining operations under the Project. However, the Project would stimulate private investment in mining, and identified environmental issues regarding environmental management and control by public mining authorities include: (i) Government is having problems in the implementation of the environmental regulations applicable to mining, especially with regards to small scale and artisanal activities; (ii) the Minister of Energy and Mines has yet to fully staff and provide adequate budget to the existing Environmental Unit of the Mining Directorate and the skills have to be decentralized at the provincial level; (iii) environmental baseline data for key mining areas has started to be developed under the MSRP but is still inadequate to monitor the development impact of mining activities or to provide adequate information to the private sector for the preparation of environmental assessment (EA) studies; (iv) public participation in mining projects is embrionary; (v) there is little experience in evaluating socio-economic impacts of mining projects. The project will form the Consultative Committee, which will be composed of MRGP representatives, concerned NGOs and environmental management organizations. The Consultative Committee will focus on informing concerned parties on project activities, engaging stakeholders in dialogue, and reporting to the Steering committee on its decisions. In order to address these issues, an update of the Sector Environmental and Social Assessment (SESA) will be carried out as part of the project, focusing on the: (i) review of the present status of the environmental legal, regulatory and institutional frameworks; (ii) evolution of the mining sector, including a description of most of the mining projects in operation or under development; (iii) potential physical and socio-economic impacts of sector activities on the environment and on the communities, including indigenous populations; (iv) identification of protected areas and areas of high value biodiversity restricted to mining activities, and prospective areas for mining development where environmental baseline studies will be prepared, in order to assess natural, social and sector background data; (v) preparation of pilot socio-economic baseline studies aiming at the definition and implementation of consultation procedures, training requirements and programs, ad hoc institutional strengthening, altematives for revenue sharing with local communities, and other related measures. 5.2 What are the main features of the EMP and are they adequate? The project is categorized as "B" without a separate EA, but a separate EMP was prepared and disclosed at the World Bank Infoshop and in the country. Measures taken in the previous mining capacity building - 21 - projects and the environmental management projects were spelt out. The annex outlines the capacity building initiatives being taken to ensure that the regulatory framework that has been put in place is enforced, and how the proposed project intends on bringing small scale and artisanal miners into the economic mainstream as a way of applying the rules of the game for environmental management among other management issues. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: EMP: 10/02/2002 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Because of the crisis, intensive consultation could not be carried out during the preparation of the Environmental Management Plan. Formal consultation began with the disclosure of the plan in the country, on October 2002. Associations of small-scale miners, non governmental organizations, private mining companies and representatives of the central, provincial and municipal administration were invited to the meetings. Consultation with local NGOs took place during project appraisal. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The EMP includes quantifies performance indicators that will be monitored and evaluated during project implementation. A dedicated person is being recruited at the Project implementation unit level to coordinate the M&E process. He/she will rely on with similar efforts being developed on other Bank project in Madagascar and liaise with non governmental organizations, mayors of communities, associations of small-scale miners, private mining companies and representatives of the central, provincial and municipal administrations. A special committee regrouping MEM, the Ministry of Forestry (Eaux et forets) and NGOs will be created to steer the implementation of the EMP and serve as a conciliator for eventual conflicts between the two sectors. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Traditionally, assessment of the economic impact of a mining project has been at the level of the national economy, in terms of fiscal revenues, export earnings, GDP, gross capital investment, value added, and other parameters. These impacts can be measured using well-developed statistical and other techniques. However, the socio-cultural impacts of mining on local communities are receiving growing attention, and the parameters, methodologies, and techniques used to assess these impacts are only now being developed, in contrast to macro-economic impact assessment. Fundamentally, social assessments involve identifying for each group of stakeholders the balance of positive and negative impacts, devising numeric or other objective indicators, and recommending measures to maximize positive outcomes and attenuate negative effects. Experience has shown that consultation and involvement of local communities in these assessments is critical and forms the basis for subsequent action programs. However, assessment of the impacts and involvement of the local community in the consultation process is still at an early stage, due principally to lack of familiarity with the techniques and practices of social assessment as well as an inadequate institutional and regulatory framework to provide for such assessments. In the context of large mining projects, the interest of local communities can be properly taken into account through the establishment of public/private partnerships supported by the project's sponsor. In the case of small scale mining, capacity building is required in areas like local economric development and community - 22 - enpowerment. The project's social impact is expected to be substantial. It will focus on building links among the mining, rural development, and environmental management sectors, as an engine for inclusive growth and poverty reduction. The draft full-PRSP, which was presented in November 2001, rightly highlights the importance of generating enabling conditions for more inclusive economic growth that particularly benefits the rural poor. The rural sector represents a critical part of the Malagasy economy, representing 43% of GDP in 2000 (including agriculture, livestock, fishing, forestry and downstream agro-industries). About 75% of the population, or about 2 million households derive their livelihood from agriculture. However, poverty indicators for agricultural households are worse in comparison with other socioeconomic groups, including rural households that depend on nonfarm activities. Thus the importance of the potential contribution of nonagricultural revenues (e.g. mining and eco-tourism), to reduce poverty in the rural world. The project will provide practical tools for the decentralization process and as such will help modernize life for the rural population and assist the urban population by the continued availability of low-cost materials of mineral origin. This impact can be measured by improvements in living conditions, health and hygiene, and education in areas of small-scale mining. In order to maximize its social impact, the proposed project will liaise closely to proposed Community Development (CDP) and Rural Development Support (RDSP) Projects that are currently under preparation. Both will provide, through participatory approaches, assistance at community level for respectively social development and income generating, with a focus on agriculture, water, sanitation, and village specific solutions. Both will offer a financing mechanism for village type activities, either through a matching grants program or a more commercial mechanism. The support structure to be created by these two projects can be accessed by the villages for the preparation and the implementation of their Development Plans. 6.2 Participatory Approach: How are key stakeholders participating in the project? The reform of the mining sector has been discussed at length at various occasions and in several rounds of public discussions with different stakeholders. The National Council of Mines (a sort of embrionary Chamber of Mines) has been closely associated with MSRP implementation and will be deeply involved in project preparation. Small-scale and artisanal miners and a certain number of mining associations have been directly involved in the implementation of the small scale mining pilot projects under the MSRP. They will be directly associated with project preparation through the creation of the Consultative Committee, which will put NGOs in touch with the MRGP and environmental protection programs. A number of selected villages will prepare their own plans for mineral resources; the methodology was developed and is being tested under the MSRP, with full collaboration of the villagers. A few NGO's and private firms participated to provide training and carry out studies. They will be involved in the discussions during preparation, mainly from the environmental and social areas. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Consultation on environmental and social issues is mandatory under the new mining law and will be a permanent feature of the project. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Continuous monitoring, surveys and questionnaires will be carried out during project implementation. A M&E sub-component is also being included into project design. - 23 - 6.5 How will the project monitor performance in terms of social development outcomes? Community consultation, surveys and questionnaires. Monitoring committees involving environmental and development NGOs and CSOs. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the pro ect? t x§4 o>z>;;?-Psw -s Poicy 'f - ' ' ,r, - Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) L Yes ( No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) ( Yes U No Forestry (OP 4.36, GP 4.36) (9 Yes 9 No Pest Management (OP 4.09) O Yes ( No Cultural Property (OPN 11.03) U Yes U No Indigenous Peoples (OD 4.20) (9Yes () No Involuntary Resettlement (OPIBP 4.12) U Yes J No Safety of Dams (OP 4.37, BP 4.37) ( Yes U)No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) () Yes U No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* ( Yes ( No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Under the proposed project, methodological and on-the-job training on safeguard policies and their application would be provided to the public entitites responsible for environmental and social management of the mining public administration. During project implementation, emphasis will be put on ELAs assessment capacity as well as the development and implementation of consultation procedures. In addition, monitoring committees involving all involved stakeholders, including environmental and development NGOs and CSOs, have been already established. They will monitor the project performance during implementation. - 24 - F. Sustainability and Risks 1. Sustainability: Madagascar has good geological potential as 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 governance issues are addressed and reforms to decentralize the mineral resources management that have already begun are deepened and completed. If transparent management, proper regulations and enforcement mechanisms as well as a competitive 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. Without substantial improvement of governance in the sector, the continuation of rushes on gemstones could destroy the social and environmental tissue in huge extension of the East coast without material contribution to the region's development. The project will contribute to the institutional strengthening of the Government of Madagascar in key areas of the mining sector (policy, institutional, environmental, social), through a set of prerequisite steps that will lay the foundation for future private investment. Project implementation will provide a sound basis for Madagascar in exploiting, over the long term and in a developmentally sound manner, the significant potential of its natural resources. Sustainability will be enhanced through the project's strong emphasis on institutional capacity building, training, human capital development and environmental awareness in the public as well as private sectors. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Government continued commitment to S The new Government has confirmed the reform priority of the mining sector in its strategy of rapid growth. The immediate approval of the Law on Large Scale Mining Investments confirms commitment to reforms. The performance of the Mining Cadastre, an advanced indicator of governance in the sector, will continue to be monitored during the project. Delays in decentralization reforms; M Preparatory work was conducted under the condensed timing to build-up capacity to MSRP. The project contemplates substantial manage the sector by the central and amounts of capacity building and training and Provincial mining institutions assistance will be phased and prioritized so as not to overburden the relevant government departments and selected communities. Reasonably stable world minerals market M Although the general trend in mineral prices conditions and prices will continue to be flat or downward over the long term, it is expected that as a result of the project potential investors will find promising targets that will allow them to position themselves favorably in the next minerals investment cycle. Lack of capacity at the community level S Provision of capacity building services that go to enforce accountability requirements along with transfer mechanisms for mineral that come with increased empowerment resources management. - 25 - Transparent management of regulation S Advisory services and sufficient project and enforcement supervision throughout the project. Continued staff ownership regarding M Provision of necessary staff, resources and project objectives conditions to effectively implement the reforn. From Components to Outputs 3. Staff stability and continued ownership M Provision of necessary staff, resources and regarding project objectives conditions to effectively implement the institutional reform. Participative processes to implement the institutional reform and introduce new work methods Staffing of the UCPM M Recruitment of a procurement specialist, a M & E specialist and an accounting assistant to ensure appropriate segregation of duties. Quality of External Audit S - Local auditors who intend to audit the financial statements of Bank financed projects were invited to enter into partnership with international auditing firm to strengthen their capacity. - Recruitment of auditors based on QCBS method; - Reinforcement of the accounting profession by creating a component under the "Poverty Reduction and Institutional Development Technical Assistance". Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: None. G. Main Loan Conditions 1. Effectiveness Condition Financial Management effectiveness condition: Project account opened and counterpart fund deposited. Project coordinator selected through public advertisement and contracted. Project Implementation Plan manual adopted by the Government and acceptable to IDA 2. Other [classify according to covenant types used in the Legal Agreements.] Condition of Board presentation : - Final version of the Letter of Sector Policy submitted to the Bank, including arrangements to improve governance in small scale mining of gold and gemstones, and an action plan for the decentralization of the institutional framework for the public mining institutions. Financial Covenants: o The UCPM shall maintain or cause to be maintained records and accounts to reflect in accordance with sound accounting practices the operations , resources and expenditures; o Records, accounts, special accounts, SOEs shall be audited by independent auditors acceptable to - 26 - improve governance in small scale mining of gold and gemstones, and an action plan for the decentralization of the institutional framework for the public mining institutions. Financial Covenants: * The UCPM shall maintain or cause to be maintained records and accounts to reflect in accordance with sound accounting practices the operations , resources and expenditures; * Records, accounts, special accounts, SOEs shall be audited by independent auditors acceptable to IDA; * Production ofK quarterly FMRs. H. Readiness for Implementation r] 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Z 1. b) Not applicable. 2 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. OL 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies 3 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Paulo tre Sa er A. Van Der Veen afez M. H. Ghanem Team Leader Sector Manager/Director Country Manager/Director - 27 - Annex 1: Project Design Summary MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT Key-Performance 2 Data Collectdon Strategy Hierarchy of Objectiyes Indicators, . Critical Assumpt!ons Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) 1. Improved governance in Declared production of National statistics, sector Continued Government the management of mineral gemstones by statistics collected by the commitment resources. legally-established artisanal Directorate of Mines and muners increases by 50% by Geology. the mud-term review and by 100% at end of the project to reach US$40 million in 2008. 2. Higher and more Approval of at least one large National statistics, sector Basic economic and relevant sustainable rates of growth mining investment by a private statistics collected by the political stability maintained. that reach the poor. firm. Directorate of Mines and Stable sector policy Geology environment 3. Natural resource Increase in per capita revenues Household surveys, Political commitment and management to reduce of populations in small scale Consultants' reports, financial support at the central environmental degradation. and artisanal mining areas supervision reports, and decentralized level to Reduction in the number of Implementation Completion pursue policies in favor of the uncontrolled gemstone rushes. Report (ICR). communes Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: 1. Strengthen transparency Four BAM (Mining Sector statistics, surveys of Government policies and governance in mining. Administration Bureaus) stakeholder groups. remain in line with the created. Creation of a one-stop strategic objectives of the shop for exports of gemstones. PSRP. Policies and strategies in mining sufficiently address problems in the sector. 2. Promote key institutional Collection rate of mining M&E reports. Reasonably stable world reforms for the royalty increases from the minerals market decentralized management average of 10% today to 80% conditions/prices. of mineral resources at the end of the project, as a result of the decentralized tax collection procedures. Number of community Project implementation Environmental control development plans that reports. procedures are enforceable. include management of mineral resources (minimum of 10); decentralization of mining administration increases fiscal revenues from mining for provinces and communes by 50%. - 28 - 3. Promote private Annual exports of gold and Midterm review. investments and value-added gemstones from small scale in the sector. mining increase from about US$ 21 million today to US$50 million at the end of project. Average annual investments in Implementation Completion mining increase from about Report (ICR). US$ 10 million today to US$ 85 million at the end of project - 29 - -'<'' ','' " , ^;; '| ¢ KeyFPeqformance Data Col0ection Sratigy .. r i, 6rchyof Objectiv' s - Indicators - itical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Legal and regulatory Special regime for gemstones Surveys of stakeholder groups. Policy environment framework improved to to improve access to the provides strong leadership and increase transparency in the resource, liberalize marketing, continues to actively support commercialization of gold and and facilitate normalization of the implementation process. gemstones. small-scale mining. 2. Set-up of four Bureau BAM created in four target Sector statistics, M&E reports. Stakeholders, public sector d'Administration Miniere areas. Each BAM will possess agencies, beneficiaries, and (BAM) to administer mining an outreach program and will the political level are tax collection, environmental conduct communication responsive to the envisaged management, and campaigns with local changes, they collaborate and communication with communities. encourage the implementation communes of the reforms 3. Program for the certification Creation of small exchanges Mining Cadastre data base. Stakeholder groups (NGOs, and quality control of for gemstones, and one-stop etc.) have sufficient political gemstones shop for the export of clout to influence the gemstones. Set-up of implementation of reforms. certificates of origin for Malagasy gemstones. 4 Fiscal reform to allow for Collection of mining taxes Sector statistics Government commitment, the decentralized collection of rising from an average of 10 % legislation and regulatory part of the sector's taxes. in 2000 to 80% by 2008. framework in place. 5. Increased human resource Training and certification of Sector statistics, consultant Stakeholders' commitment and capacity in the mining sector. smallscale miners in modem implementation reports. stable legislative environment. gem processing techniques. At least 20 individuals certified each year of project implementation. 6. Decentralized management Six Environmental Units Sector statistics and studies Stable regulatory framework, of mineral resources applied in established in the Provinces government commitment. the pilot regions. SESA completed by Mid-term review. Four studies completed in the pilot regions by project end. 7. Increased production and Declared exports of gold and Sector statistics. Govemrnment leadership and exports from small-scale gemstones at US$50 million application of existing mining areas. by 2008. legislation. 8. Increase of cutting and Percentage of value added to Midterm review Government commitment and polishing of gemstones in the gemstones in the country. stable legislation. country. 9 Effective operations of the Backlog of overdue Sector statistics. Stable legislation, govemment Mining Cadaster Office application not exceeding 5% commitment of all permits. - 30 - 10 Improved environmental Territorial conservation Implementation Completion Engagement between the conditions in small-scale practices in smaliscale mining Report. community and the miners. mining areas. areas. Restitution of previous environmental conditions after the end of mining exploration period. - 31 - F - ffi , [ Key Perfbrmance Data Collection Strategy | _Hierarchy of'Objectives Indicators . . | 'Critical Assumptions Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Strengthening of US$6.22 Autonomous provinces transparency and constructively collaborate with governance. other levels of government I 1. Adjustment of the Legal US$0 57million Studies on decentralization of Central administration and Regulatory Framework tax revenues and collection in accept the devolution of the sector authority to decentralized levels of government. 1.2 Support to Decentralized US$1.66 million Baseline study on cutting and Rules and regulations are Management of Mineral polishing of gemstones. adequately applied, Resources non-application will be dealt with accordingly. 1.3 Establishment of a US$3 74 millon Contracts, procurement Reform proposals are certification program for records, Consultants' reports, developed and implemented gemstones. monitoring reports, technical based on a participatory and training performance approach to generate and evaluation reports, manuals, maintain necessary financial reports and audits. stakeholder support. 1.4. Strengthening of private US$0.25 million Project quarterly and annual Improved institutional sector associations. reports. coordination. Four studies completed in the Continued commitment to pilot regions reform; 2. Strengthening of the US$8.63 million Continued project ownership; decentralized mining administration 2.1. Institutional adjustment US$7.06 million Update of sector No political interference. and capacity building of the environmental and Social decentralized public mmning Assessment. institutions. 2.2 Communication campaign US$0 30 million Staff stability 2.3 Training program US$0.72 million Satisfactory performance by contracted consultants. 2.4 Set-up of an Intranet and US$0.55 million Adequate WB supervision. Internet network within the mining administration 3.Promoting private investment and value-added US$20.18 million in the sector 3.1. Assistance to the creation US$3.30 million Number of firm certifications Stable legislation and of the Mining Sector and requests processed by government commitment Promotion Agency (APSM) APSM. 3.2. Strengthening of' US$16.87 million Sector infrastructure updated, Adequate WB supervision Geo-scientific Information and number of maps International firm recruitment. Infrastructure published. 4. Project Management and US$2.67 million Coordination - 32 - Annex 2: Detailed Project Description MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT By Component: Project Component I - US$6.22 million Strengthening transparency and governance in mining. This component supports measures aimed at improving governance in the management of mineral resources, with special emphasis on gemstones and small-scale mining. The objective is to reduce the anarchic development of the small-scale mining sector and to increase value added, in order to enhance the sector contribution to Government revenues and to the local and national economies. The activities of the component are grouped into four sub-components: (i) adjustment of the sector's legal and regulatory framework; (ii) support for the establishment of mining administration offices close to exploitation sites, Bureaus de l'Administration Miniere (BAM); (iii) establishment of a certification program for gemstones; the creation of a one-stop shop for gemstone exports, and a gemstones exchange; and (iv) strengthening of private sector associations. 1.1. Adjustment of the Legal and Regulatorv Framework - US$ 0.57 million (1.5% of total project costs). The key aspects of the legal reform have been set up during the previous Mining Sector Reform Project. The follow-up consists of: (i) publication of the remaining regulations, (arretes, directives, etc.); (ii) update of the existing framework to take into account the on-going decentralization, namely in terms of the fiscal regime; and (iii) adaptation of existing regulations to the new Government policy in regard to gemstones, focused on equal opportunity in access to resources, trade liberalization and export promotion. In order to strengthen governance in small-scale and artisanal mining, specific regulations will be prepared and promulgated for gold and gemstones. The reforms will include simplification of procedures for the granting of mining titles, establishment of a transparent regime for the commercialization of gold and gemstones, and prevention of smuggling. 1.2. Support to Decentralized Management of Mineral Resources - US$ 1.66 million (4.3% of total project costs). During the Mining Sector Reform Project, the Government of Madagascar selected the Zones d'Activites Economiques Speciales (ZAES) as the key policy instrument to contain the proliferation of gemstones rushes, to avoid smuggling, and to mitigate negative environmental and social impacts on affected communities. The first ZAES was created in Vatomandry, but, due to the recent political crisis, the expenence could no be fully developed, partially with respect to environmental and social aspects. The ZAES caused conflicts, mainly due to confrontation with the Mining Code. In order to avoid the deficiencies observed, and despite some advantages demonstrated by the Vatomandry ZAES, sector authorities have elected to create another institution, incorporating some aspects of the original ZAES. The newly proposed structure is Bureau de l'Administration Miniere (BAM), which will be established under the auspices of the Ministry of Finance to ensure collection of local taxes imposed on the sales of mining production (i.e. precious stones, gold), supervision of mining sector activities, and environmental management. BAM will be created in the four pilot regions - Ilakaka (Fianarantsoa), Ambondromifehy (Antsiranana), Andilamena (Toanasina), and Bezaha-Ejeda (Tulear). The BAM will coordinate closely with community and communes on the establishment of local mining offices, participate in the formation of cadres, and conduct communication campaigns to educate local villagers on mining office administrative activities. The Project will finance evaluation and follow-up of BAM by an independent NGO. 1.3. Establishment of a certification program for gemstones. creation of a one-stop-shop for gemstone - 33 - exports, and of a gemstones exchange - US$ 3.74 million (9.69% of total proiect costs). This sub-component will assist in the set up of a national program for the certification and quality control of gemstones, supported by the creation of a Gemology Institute in Madagascar (IGM) in order to increase the exports of cut stones, which are currently very low. The Gemology Institute will be run by the private sector under a management contract. It will house national evaluators of gemstones, promote intemational standards for cutting and polishing, and will be associated with the one-stop-shop for gemstones export in order to simplify marketing channels and to fight smuggling and fiscal evasion. Transparency in gemstones commercialization will be promoted through simplification of administrative procedures for export, their organization in a single government institution, and creation of rough gemstones exchanges run by the private sector. Development of a program for the certification and quality control of Malagasy gemstones will be supported by partnerships with international gemstone evaluation services and laboratories, and academic institutions. The Gemology Institute will also coordinate a national training program for gemstones cutting. The one-stop-shop will be in charge of certification, evaluation, export and visa services for processed, unprocessed gems, and for jewelry. The agency will have its own communication budget to carry out a press campaign and will be run by a private enterprise, assisted by the customs administration, the Ministry of Mines, and the Ministry of Finance. Government is planning to install it in the Gemology Institute or in the gemstone exchange to be created in Antananarivo and run by the private sector. 1.4. Strengthening of private sector associations - US$ 0.25 million (0.65% of total project costs). Created under the previous Mining Code, The National Council of Mines (CNM) is a public/private institution for policy consultation in the mining sector. The CNM continues to operate under the current Mining Code, but seldom meets, and its operating procedures are in need of an update. The upcoming decentralization requires support to the continuation of the set-up process of Provincial Mining Councils. This sub-component will assess the current status of existing private sector organizations ("chambre de metiers", associations, cooperatives, groups of local producers) and offer demand-oriented support for institutional strengthening. Project Component 2 - US$8.63 million Key institutional reforms for the decentralized management of mineiral resources. This component supports measures aimed at strengthening the decentralized management of mineral resources through re-organization and capacity building of mining public administration at the provincial and communal level, and the empowerment of communities for the management of their mineral resources. The focus of the project on the community level includes decentralization of tax collection; increased responsibility for environmental management and monitoring; capacity building in decision making and development of economic activities and infrastructure to be implemented with the revenues arising from mining, including conflict resolution and analysis of alternative economic opportunities, and linkages to other community-driven networks for access to "business" services, which allow communities to benefit from different economic opportunities. These activities are grouped into four sub-components as follows: 2.1. Institutional adjustment and capacity building of the decentralized public mining institutions - US$ 7.06 million (18.3% of total project costs). This component will act on three levels: central, provincial, and community/commune. On the central level, the project will direct its efforts to work with the Directorate of Mines and Geology (DMG), MEM's environmental group, "cellule environnementale miniere" (CEM), and the Mining Cadastre (BCMM.) Access to BCMM information will be extended to the municipal level to facilitate regular and effective exchanges of information between the central Cadastre office and the communities on issuance and availability of mining titles in the community. - 34 - The Direction Provinciale des Mines (DIR) will be responsible for environmental management on the provincial level. Created under PRSM on the central level, CEM will work in cooperation with the Ministry of Environment, and will create six provincial CEM, Cellule Environnementale Miniere Provinciale, (CEMDIR). MRGP will sponsor four studies in the pilot regions selected by CEM in three following categories: (i) strategic studies to measure impact and create an overarching environmental management strategy; (ii) environmental audit; (iii) social and environmental impact of mining activity to assess positive and negative results of social, economic, cultural, macro- and micro-economic and fiscal results of the sector, to provide indicators to monitor the socio-economic performance of the sector and to propose mechanisms to improve the relationship between mining and the community, and (iv) to update the national sector environmental and social assessment (SESA) conducted in 1996. The aim of the studies is to build mining sector capacity and to define sector strategy. On the communal and community levels, the MGRP will focus on decentralization, NGO work, governance, management reinforcement, and fiscal system efficiency. About ten communes will be selected to test the implementation of decentralized management of mineral resources. Each community program will focus on raising the level of administrative training and integrating mining sector activities. An NGO will support local authorities on decentralized tax collection management, and in particular, l'imp6t synthetique, composed of the professional tax, income tax, and others. L'imp6t synthetique is levied on persons and small enterprises and producers, with annual income less than about USD2,000, and is used to finance regional investments. A participative diagnostic will take place on the commune and village levels to determine community needs in terms of natural resource management and development. On the basis of the participatory diagnostic, community level activities that can be financed by mining enterprises will be determined in order to maintain a harmonious relationship within the mining sector. Local procurement will be improved through the introduction of Community Development Plans (PCD). Multiple sectors will participate in the process (roads infrastructure, health, education and forestry), and will thus require inter-industry coordination. In addition, synergies with local projects funded by the Bank and other donor institutions (USAID, UNDP, and govemmental organizations) will require coordination of activities. Coordination with USAID on forestry activities will require a harmonization of efforts. The key objective of this community-level component is to establish a dialogue between administration and the miner and to bring to the table environmental issues. An NGO, together with BCMM, will apply the Mining Code, incorporate community demands and inform the authorities on the mining permit activities. 2.2. Communication campaign - US$ 0.30 million (O. 78% of total project costs). On-going mining sector reform requires a clear understanding of its objectives and implications by the administration, the private sector and the affected communities. In order to achieve consensus over a broad spectrum of stakeholders, including the population of the mining areas, communication campaigns will be organized through the local press, radio, and television in liaison with national and provincial media, opinion leading journalists, specialists in small-scale and artisanal mining, governmental organizations, and NGOs. Madagascar's regional diversity requires that each campaign be targeted to fit local community needs. The campaign will be carried out in two stages - definition of the communication strategy, and its realization. The second part of the sub-component will finance publication of promotional material, (printed and video presentations) for international events and international magazines in order to communicate with the international mining community. The preparation stage of the communication campaign will take no more than six months, and the execution of the campaign is planned to start within - 35 - a year of the beginning of the project. 2.3. Trainina program - US$ 0.72 million (1.87% of total proiect costs). MRGP will finance a specialized training program to raise human resources capacity and improve mineral resources governance. Commune authorities and DIR will address the training program as their priority. Travel studies to Latin America and to other African countries will be financed by the project component. The training program will have the following components: (i) on-the-job training during each component; (ii) workshops throughout Madagascar; (iii) basic and specialized training courses carried out by public and private institutions; (iv) short-term internships and training courses abroad; (v) participation in international conferences and seminars. International training will take place primarily in European, North American institutions or in other African and South American countries to assimilate experience gathered during similar projects. 2.4. Set-up of an Intranet and Internet network within the mining administration - US$ 0.55 million (1.43% of total proiect costs). This sub-component will create an information system to facilitate optimum communication among all mining sector stakeholders, private and public. The web server will link the Mining Cadastre, Gemology Office, APSM, DIRs, and external partners. Intranet communication is previewed for some, while other organizations, located further away, will be connected by a web server. Mining Cadastre and BPGRM information access will be restricted to subscribers. Fees generated by the subscriptions will be used for system maintenance. Representation on the Internet will ensure communication and exchange of information with different sector stakeholders. Project Component 3 - US$ 20.18 million Promoting private investment and value-added in the sector 3.1. Assistance to the creation of the Mining Sector Promotion Agency (LAPSM - US$ 3.30 million (8.56% of total proiect costs). The main objective for the creation of the Mining Sector Promotion Agency (APSM) is to improve the Government's capacity to attract private sector investment by allocating resources for promotional programs. The APSM will coordinate one-stop-shop certification procedures under the Law on Large Scale Mining Investments (LGIM), and Government interventions with respect to artisanal mining in general, to BAM in particular, as well as support to cutting and polishing of gemstones. In addition, the APSM will manage the communication program on behalf of the Ministry of Energy and Mines, receive a budget for promotional activities, and assist in the creation of value-added with small scale mining production in Madagascar. The APSM will also operate a Small Grants program, which will fund training and promotional activities of individuals and firms in the minerals sector to aid management, production, marketing, and commercialization. The APSM programs will be multi-disciplinary in approach and include assistance to the following activities: (i) small-scale enterprise organization, management and accounting, including the provision of assistance to encourage small-scale miners to form cooperatives, improve their access to micro-finance, and identify suitable, well-organized private companies who would be interested in joint-venture operations; (ii) legal and fiscal matters related to mining and provision of assistance to legalize informal operations and to enforce the new mining law; (iii) formnation of BPGRM, Base de Promotion de Gouvernance des Ressources Minerales - a database of geological and geophysical information on Madagascar's mineral resources, which will integrate geological and mineral resources with environmental data and serve as a statistical resource for private sector investment, responsible for dissemination of efficient, safe and environmentally acceptable technologies for small-scale mining: mining methodology, geology, metallurgy (mineral processing, infrastructure, simple mining economics and environmental safeguards); (iv) design and implementation of an environmental sensitization, awareness and prevention campaigns targeted at artisanal miners; (v) establishment of pilot training - 36 - centers for small scale miners and for the cutting and polishing of gemstones; (vi) civil management of a program of matching grants to private operators and communes; and (vii) coordination of efforts with the on-going Multisectoral STI/HIV/AIDS Prevention Project to improve health conditions within small scale and artisanal mining communities. Because Government is in no position to provide business development services, Government is planning to have the APSM organized as a limited liability company, with private companies as shareholders. 3.2. Strengthening of Geo-scientific Information Infrastructure - US$ 16.87 mtllion (43.75% of total proiect costs). The main objective of this component is to provide basic and reliable geo-scientific information necessary to facilitate private investment promotion in the mining sector and to support the planning of social-economical development of the country. In order to achieve this goal, the Project will finance the following activities: (a) Airborne Geophysics (US$4.86 million). Airborne geophysics represents a key methodological, cost- and time-efficient tool for providing information on surface and sub-surface rocks characteristics and geology, particularly over areas covered by forest and lateritic soils. The proposed Project will finance magnetometric and spectometric airborne coverage of the four areas (see Figure below) where geological mapping has been planned. The areas to be flown will amount to a total of about 600,000 line kilometers. Purchase and installation of specialized software, as well as training of counterparts in collecting and processing of airborne data will be included in this works contract. Considering the present low level of airborne geophysics experience in Madagascar, a separate, long-term training program will be implemented. The survey will be carried out at the earliest stage of project implementation in order to provide timely data support to the geological mapping activity. (b) Geological and geochemical mapping (US$10.19 million). The project will finance mineral resources and environmental management data collection over the most important from the geological perspective parts of the country, covering about 435,000 square kilometers or 75% of the territory, which will be surveyed at a 1:500,000 scale. Four sub-areas (see figure below), amounting to about 200,000 square kilometers have been prioritized with respect to natural resources management, and will be mapped at a scale of 1:100,000 (airborne surveys will cover the same four areas). Geochemical stream sediment sampling will be carried out in the northern and eastern areas of Madagascar. Geological and geochemical field data will be integrated with information from the airborne geophysics survey and satellite images interpretation, and incorporated into the BPGRM, Base de Promotion de Gouvernance des Ressources Minerales, or Mineral Resources Governance Database. BPGRM outputs will include thematic maps, images, databases or reports, produced on a client demand basis under varying formats (digital print out, CD or others). The project will finance the 1:500,000 activities and the 1:100,000 survey of three of the selected areas, including geochemistry, while the mapping of the fourth sub-area will be funded by French Cooperation. Particular emphasis will be given at the inception of the activities to the training of DMG counterparts in modern field and desk techniques, and up-to-date geological concepts. The project will finance ten investigations addressing issues related to project activities, to be carried out by students. - 37 - EJLevis g6opi,ysiques VoLtes-~~0etg6logiue Rserves et zones prot6gies Map showing the distribution of areas selected for mapping at 1:100,000 scale and protected areas. (c) Mineral Resources Governance Promotion Database (US$.89 million). The set-up and management of an efficient information system will link the wealth of geo-data to be assembled during the scope of the project with its potential clients. The proposed project will finance the contracting of a consulting firm which will be responsible for the modernization of the existing information system, including information policy definition, institutional set-up and training, and the purchase of software (including an updated GIS) and hardware. In particular, the firm will develop within DGEM the capacity to process and disseminate geo-scientific on-demand data to multi-sectoral clients. All relevant information will be collected, digitized and stored into the Base de Promotion de Gouvernance des Ressources Minerales, (BPGRM). Optimized use of the information for development purposes will depend largely on technical capacity of the counterparts, sustainability of system maintenance, and distribution of information. (d) Technical coordination and supervision (US$0.83 million). The Project will finance the engagement of supervising consultants, with experience in contracting/supervising geophysical airborne surveys, geological mapping, remote sensing, and establishment and operation of mineral information systems, who will oversee the technical activities to be carried out within the present component. These supervisors will oversee the works, evaluate the product's quality and advise the Project Management Unit, evaluate bidding documents, assist in the coordination of training programs to strengthen the capacity of institutional technical staff, and disseminate products and information generated by the project. (e) Consultation and information related to geo-scientific infrastructure (US$0.1 million). With the financial support of the project, a consultative committee will be established, to integrate representatives - 38 - from the UCPM and the different Project components, the Ministry of Environment, ONE, ANGAP and NGOs active within the different regions of the country in order to optirmize the potential developmental benefits of geological information application. The aforementioned committee will inform and consult the communities on the scheduled mapping activities and their potential impacts. The committee will define the channels to distribute the available data to potential clients and to the general clients in the appropriate formats - publications, papers, CD-ROM, and the Internet. Data monitoring will take place to avoid misuse of information, which could cause negative social or environmental impacts (e.g. exploration in protected areas). Proper coordination will be established among the different concerned governmental entities. Project Component 4 - US$2.67 million Project Coordination and Management. The Mining Project Coordination Unit (UCPM) established as the management structure for the Mining Sector Reform Project shall continue to administrate and supervise the proposed Project's activities. The UCPM will be responsible for: (a) procurement, including all contracting for works and purchases, and the hiring of consultants, (b) project monitoring, reporting and evaluation, (c) the contractual relationship with IDA, and (d) financial record keeping, the Special Account and disbursements. The Project shall finance the recurrent costs (salaries of UCPM staff and operation costs), extemal auditing and accounting assistance (consultants), short term consultants for the assistance to the UCPM for the supervision of the Project, equipment and vehicles and training of the UCPM staff in World Bank procedures. The adequate operation of the UCPM is a key factor for the implementation of the Project. The UCPM shall ensure the coordination between the different institutions participating in the Project as well as other state and private institutions stakeholders in the Project's objectives. The UCPM shall also be the direct link to the World Bank concerning the Project implementation. In addition, the project will set up a Steering committee, composed of MEM, the Ministry of Budget and Decentralization, Ministry of the Environment, the Mining Cadastre, and others. The members of the committee will represent the interests of their respective institutions, coordinate Project activities, and approve annual budgets, work plans and financial audits. - 39 - Annex 3: Estimated Project Cosis MADAGASCAR: MINERAL RESOURC ES GOVERNANCE PROJECT -'Local - Foreign Total Project CostCBy Com0nentI-, US$m1ilioii U<$rilion US.$nmillion 1. Strengthening transparency and governance in mining 3.45 2.57 6.02 2. Key institutional reforms for the decentralized management 6.20 2.07 8.27 of mineral resources 3. Promoting private investments and value-added in the sector 6.08 13.34 19.42 4. Project Coordination and Management 2.05 0.55 2.60 PPF 0.00 0.95 0.95 Total Baseline Cost 17.78 19.48 37.25 Physical Contingencies 0.14 0.28 0.42 Price Contingencies 0.28 0.70 0.98 Total Project Cos 18.20 20.46 38.65 Total Financing Required 18.20 20.46 38.65 ,, ., t : ;,;; ;4 -,.. 24, 1 . ,^ - t ., Lo'ca. i Foreign ' Total Project Cost By Category, " US $million - US $miilion US $million Goods 0.92 2.15 3.07 Works 1.05 4.65 5.70 Services 11.30 10.37 21.67 Training 0.73 1.35 2.09 Recurrent costs 3.19 0.00 3.19 Small Grants Program 0.60 0.00 0.60 PPF 0.00 0.95 0.95 Contingencies 0.42 0.98 1.40 Total Project Costs1 18.20 20.46 38.65 Total Financing Required 18.20 20.46 38.65 Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 38 65 (US$m) Therefore, the project cost shanng ratio is 82 79% of total project cost net of taxes. - 40 - Annex 4 Economic and Financial Assessment Summary MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT Madagascar's total exports in 2000 were about US$829 million, of which 4.5 percent were minerals exports (equivalent to US$37 million). Three minerals - chromite, graphite, and mica represent 37% percent of minerals exports. Precious stones take up a majority of Madagascar's exports, totaling 56% of declared mining production in 2000, while gold production and exports go largely unreported. The most feasible projected investment in mining and minerals exploitation is expected from QMM Ilmenite Project in the Fort Dauphin region. The QMM Ilmenite Project investment would take place in 2005, with production starting in 2006. Another investment, by Phelps Dodge, has been discussed near Moramanga, but remains less likely. Madagascar's rich mineral deposits continue to attract interest from foreign firms, with a surge in interest in exploration after the political crisis. To test the possible contributions of mining to the economy, two scenanos have been constructed, base-case and best-case. The projections are based on the projects currently in advanced preparation stages and on assumptions about smuggled production. The results of this analysis compare the last year for which production and exports indicators are available, 2000, with the last year of the project - 2008. Projections for mining production by the end of the project in year 2008 can be done under two scenarios: Base case scenario. I large-scale project => mining production: US$ 143 million. Best case scenario: 2 large-scale projects => mining production: US$ 378 million. Madagascar Mineral Production Projections under the Base-Case and Best-Case Scenarios by 2008 (US$ million) Scenario 2000 2008 (base-case) 2008 (best-case) Gold 0.15 10 20 Gemstones 21 40 80 Graphite 7.5 7.5 7.5 Chromnite 6. 6. 6.0 Mica 0.48 0.48 0.48 Ilmenite ( 80 80 Nickel L _ _X 185 Key Assumptions: 1. QMM - Total investment: $500 million (2005-2008), including mine and related infrastructure; Annual Exports of $80 million after 2006. 2. Phelps Dodge - Total investment: $500 million (2006-2008), leading to Annual Exports of nickel rising from 0 to $185 million. - 41 - 3. Gold - Current declared production rests at the mere US$150,000 a year. It is anticipated that the actual production is much higher, and much of the production goes unreported. Best-case scenario: Average reported production increases to US$20 million (2 tonnes) a year. Base-case scenario: Reported production increases to US$10 million (I tonne) a year by 2008. 4. Gemstones - Under the Best-case scenario, it is expected that the declared production of gemstones by artisanal miners will increase to US$ 80 million. The increase in production value will be achieved from value added. -42 - Annex 5: Financial Summary MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT Years Ending December 31 | IM!PLEMNTATI n - , Year 1 Year 2 | Year 3 | Year 4 | Year 5| Year 6 Year 7 Total Financing Required Project Costs Investment Costs 0.3 4.5 6.1 7.4 8.1 7.7 1.2 Recurrent Costs 0.2 0.6 0.6 0.6 0.6 0.4 0.4 Total Project Costs 0.5 5.1 6.7 8.0 8.7 8.1 1.6 Total Financing 0.5 5.1 6.7 8.0 8.7 8.1 1.6 Financing IBRD/IDA 0.3 3.9 5.5 6.8 7.5 7.2 0.9 Govemment 0.3 0.7 0.7 0.7 0.7 0.7 0.7 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.5 0.5 0.5 0.5 0.2 0.0 User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 0.6 5.1 6.7 8.0 8.7 8.1 1.6 Main assumptions: - 43 - Annex 6: Procurement and Disbursement Arrangements MADAGASCAR: MINERAL RESOURCES GOVERMANCE PROJECT Procurement General 1. A new Procurement Code was issued in 1998 and the Bank ascertained that deficient features identified in the 1995 CPAR have been properly addressed. No special exceptions, permits or licenses need to be specified in the Credit documents for international competitive bidding since Madagascar procurement practices allow IDA procedures to take precedence over any contrary provisions of local regulations. Use of Bank Guidelines 2. Goods and works financed by IDA will be procured in accordance with IDA Guidelines for Procurement under IBRD Loans and IDA Credits dated January 1995 and revised in January 1996, August 1996, September 1997, and January 1999. Bank Standard Bidding Documents (SBD), and Standard Evaluation Report (SER) will be used for both International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procedures. NCB advertised locally will be carried out in accordance with the Madagascar's procurement laws and regulations, acceptable to IDA provided that they assure economy, efficiency, transparency, and broad consistency with key objectives of the Bank Guidelines. For NCB procedures, the Government gave assurance during negotiations that the following principles would be adhered to: (i) all bids would be submitted in one envelope to be opened publicly; (ii) point systems would not be used for bid evaluation for works; (iii) the award of contracts would be announced to all bidders; (iv) any bidder would be given adequate response time (at least four weeks) for preparation and submission of bids; (v) bid evaluation and bidder qualification criteria would be clearly specified in bidding/pre-qualification documents and will not be applied arbitrarily; (vi) eligible firms would not be precluded from participation; (vii) no preference margin is granted to domestic contractors and suppliers; (viii) contracts would be awarded to the lowest evaluated bidder in accordance with predetermined and transparent methods; (ix) bid evaluation reports would clearly state the reasons to reject any non-responsive bid and (x) prior to issuing the first call for bids, draft standard bidding documents prepared as annexes to the Procedures Manual would be submitted to and found acceptable by IDA. 3. Consultancy services financed by IDA will be procured in accordance with IDA Guidelines for the Selection of Consultants by World Bank Borrowers dated January 1997, revised in September 1997 and January 1999. The Standard Request for Proposals (SRP) as developed by the Bank will be used for the selection of consulting firms. Simplified contracts, acceptable to the Bank, will be used for short term assignements, i.e. those not exceeding six months, or for those costing less than USD200,000. The Government has been briefed during appraisal as well as negotiations about the features of the most recent consultants Guidelines, in particular with respect to advertisement, proposals opening and the various steps of IDA review. Procurement methods (Table A) 4. Procurement of Works. The project will finance works contracts for an estimated total amount of USD5.96 million equivalent, of which IDA will finance USD5.73 million, including (i) civil works related to the rehabilitation and improvement of existing facilities to provide adequate office space to the sector institutions; (ii) publication of promotion and educational materials, scientific documents and maps; and (iii) an airborne geophysical survey. Considering the small value amount of each of the - 44 - planned rehabilitation and improvement contracts, civil works procurement, representing an aggregate amount of USD0.97 million, shall be carried out through National Competitive Bidding (NCB) procedures. Contracts for publications, each estimated to cost less than USD50,000 and representing an aggregate amount of USD160,000, will be procured through quotations procedures (NCB procedures would be applied in the case - at present unscheduled - a contract with an estimated cost greater than USD50,000 would be necessary). The contract related to the airborne geophysical survey represents an estimated cost of USD4.92 million and will be procured according to International Competitive Bidding (ICB) procedures, with post-qualification. 5. Procurement of Goods. The project will finance the purchase of goods for an estimated total amound of USD3.19 million equivalent, of which IDA will finance USD2.88 million, including (i) gemologic equipment, (ii) office and field equipment and furnitures, (iii) hardware and software, (iv) vehicles and (v) sector-related scientific, technical and financial books and documentation. Most of the goods will be procured as packages through (a) ICB procedures when costing more than USD250,000 per package, for a total aggregate of USD1.31 million, and including vehicles (2 packages for an estimated total of USD0.84 million); precious and semi-precious stones processing equipment (1 package at an estimated total cost of USD0.26 million) and mineralogical and geochemical sample preparation equipment (1 package at an estimated cost of USD0.20 million); (b) NCB when costing between USD250,000 and 50,000, to a total aggregate of USD1.24 million, including vehicles (1 package at an estimated cost of USDO.125 million), office equipment (4 packages at an estimated cost of USD0.36 million), field equipment (1 package at an estimated cost of USD0.12 million), instruments (1 package at an estimated cost of USD0.07 million), and hardware and software (4 packages at a total estimated cost of USD0.55 million); and (c) National Shopping (NS) procedures acceptable to the Bank, based on the evaluation of at least three price quotations and in accordance with provisions of paragraph 3.5 and 3.6 of the Guidelines, for items costing less than USD50,000, to a total aggregate of USD0.64 million, including office equipment, furniture, training materials, office supplies and documentation. Part of the specialized instruments (estimated cost of USD0.16 million) to equip the planned Gemology Institute will be purchased using credit proceeds within the framework of the parallel financing agreement with USAID regarding the involvement of the Gemology Institute of America. 6. Consultancy Services and Training. The project will finance the contracting of consultancy services for studies, technical assistance and training up to an estimated total amount of USD24.61 million, of which USD19.06 million will be financed by IDA. Firms. Firms will be recruited on the basis of the Quality and Costs Based selection (QCBS) method, for an estimated aggregate of USD13.48 million, using the Bank's Standard Request for Proposals, to provide services including (i) the update of the new mining legislation; (ii) the technical assistance for the institutional set-up and strengthening, and for the launching of the certification program for gemstones; (iii) the contracting of assistance for the decentralized management of mineral resources; (iv) environmental and socio-economic studies, (v) geological information infrastructure related services and (vi) the project's auditors. Exceptions to the QCBS method, for an estimated aggregate of USD2.02 million, will include the use of Selection Based on Consultant's Qualification (SBCQ) for the contracting of ONGs and/or consultants to assist the government to update the regulatory framework and to set-up the BAMs; and of Single Sourcing to (i) extend the contract of firms contracted under the PPF (using as a rule QCBS) to assist the government in designing and supervising specific sub-components and (ii) to contract the Geological Surveys of the United States and of South Africa, within the framework of bilateral project financing agreements with both countries. For contracts based on a short list of consultants estimated to cost USD50,000 or less per contract, the short list may consist entirely of national consultants if a minimum of three qualified ones are available. Individuals. Individuals will be recruited in cases where a firm is not needed. Such individuals will be selected and recruited on the basis of qualification and experience in accordance with Bank - 45 - Guidelines, for an estimated aggregate amount of USD4.87 million. 7. Small grants. Small grants for a total aggregate of USD0.63 million equivalent will be awarded to artisanal and small-scale mining (ASM) organizations/enterprises - from exploitation to processing and commercialization -, and to organizations working with ASM communities or communities affected by ASM, to carry out projects aiming at the improvement of livelihood, environmental and/or working conditions in relation with this sub-sector activities. Financing would not exceed USD10,000 equivalent per project and they will have a maximum duration of 6 months. They will be implemented by the beneficiaries themselves. On the basis of periodical invitation to present proposals (about three times a year), the projects would be filtered, selected and approved through a three steps procedure, involving a technical and institutional evaluation by a committee involving representatives from the MEM, from the Civil Society, external experts and the Bank. Criteria and procedures are defined in the Fund Manual of Procedures (FMP), acceptable to IDA, and part of the PIP. The implementation may involve a mixture of force account by the beneficiaries, consultancy services, small civil works with artisans, purchase of equipment or materials and/or expenditures related to training. These activities would come under a Grant Agreement between the MRGP Coordinating unit (and, once established, the Agence de Promotion du Secteur Minier - APSM) and the beneficiary. Procurement of services, works and goods under these contracts would follow the procedures defined in the FMP. Monitoring and ex-post audits will be carried out by the MRGP Coordinating Unit and, on a selective basis, by the Bank. 8. Incremental Recurrent Costs. The project would finance incremental recurrent costs up to an amount of USD3,31 million equivalent. Incremental recurrent cost would include (i) expenditures for the contracting of auxiliary personnel required for the implementation of the project, to a total aggregate of USD0.62 million); (ii) expenditures and supplies for the operation and maintenance of facilities required for the implementation of the project (such as expenditures for office supplies, rental fees, services, operation and maintenance of equipment financed out of the proceeds of the Credit), as well as for domestic and international travel and per diems related to project implementation activities, to a total aggregate of USD2.69 million. All procurement within this category shall be done according to the Project Implementation Plan manual. The approval by IDA and the adoption by MEM of this manual is a condition of effectiveness of the Credit, and any amendment to such manual will have to be also acceptable to IDA. Advertising 9. A general procurement notice (GPN) will be prepared and issued upon Board Approval in the United Nations Development Business listing all contracts above US$ 500,000 for works and US$ 250,000 for consultants. It would be updated annually for any outstanding major procurement. Specific Procurement Notices for works to be procured by ICB will be advertised in the national press of wide distribution and internationally. Requests for expression of interest will be published in local newspapers and in the UNDB for consultancy contracts estimated to cost more than US$ 250,000. Responses will be recorded in a register established at the UCPM. Since a large portion of the Credit funds will be used for technical assistance and consulting assignments, early attention will be given to advance planning of recruitment and timely search for expressions of interest through international advertising to obtain the best possible pool of candidates from which strong short lists can be compiled. The related bidding documents, as applicable, will not be released - or the short list for consultant services will not be prepared - before eight weeks after the GPN has been published. Specific procurement notices will be advertised in the national press of wide circulation and internationally for large contracts. Sufficient time will be allowed to obtain bid documents and to prepare bids. IDA Review 10. All contracts for construction of civil works above US$500,000 and for goods above US$250,000 will be subject to IDA's prior review procedures. The use of IDA's standard bidding - 46 - documents will considerably expedite the prior review process as IDA review will primarily focus on invitations to bid, bid data sheets, contract data, technical specifications, bill of quantities/schedule of requirement and other contract specific items. The review process would cover about 80 percent of the total value of the amount contracted for works. Procurement post review of contracts awarded below the threshold levels will apply and should cover 20% of contract in term of number, in the event samples of post reviews indicate major problems, additional reviews, financed by the Borrower, should cover the remaining portion of contracts. Draft standard bidding documents for NCB will be reviewed and agreed upon with IDA prior to Credit effectiveness. 1l. For consultant services, prior review will include the review of budgets, short-lists, selections procedures, terms of reference, letters of invitation, proposals, evaluation reports and draft contracts. Prior IDA review will not apply to contracts for the recruitment of consulting firms and individuals estimated to cost less than US$ 100,000 and US$ 50,000 equivalent respectively. However, IDA prior review will apply to the Terms of Reference of such contracts, regardless of value, to single-source hiring, to assigm-nents of a critical nature as determined by IDA or to amendments of contracts raising the contract value above the prior review threshold. For consultant contracts estimated above the US$ 100,000, opening the financial envelopes will not take place prior to receiving the Bank's no-objection to the technical evaluation. For contracts estimated to cost less than US$ 100,000 and more than US$ 50,000 the borrower will notify IDA of the results of the technical evaluation prior to opening the financial proposals. Documents related to procurement below the prior review thresholds will be maintained by the borrower for ex-post review by auditors and by IDA supervision missions. The Project Unit will be required to maintain all relevant procurement documentation for subsequent review by IDA. The Project Unit will submit to IDA periodic procurement schedules detailing each procurement package in progress and completed as part of the normal project reporting exercise. Procurement Implementation Arrangements 12. Procurement responsibility for the project rests with the respective services within UCPM. UCPM will be responsible for the quality of these procurements and adherence to Bank procedures. The tasks of UCPM will comprise: (a) maintaining a register of all interested bidders; (b) maintaining a detailed list of technical specifications of goods and services to be financed by the project; (c) preparation of the procurement plan and calendar; (d) preparation and/or finalization of pre-qualification /bidding documents and requests for proposals; (e) bid evaluation and preparation of evaluation reports; (f) contract approval process; (g) receipt of goods and services and dispatching; and (h) processing intemational and local price quotations. Procurement Capacity Assessment 13. A procurement capacity assessment was conducted during project's appraisal, and the findings are highlighted in the table below. During appraisal, assurance was given thaL UCPM will (a) recruit a procurement specialist; (b) submit a draft procurement plan for the first year acceptable to IDA; and (c) give assurance that it will (i) apply the agreed procurement procedures and arrangements; (ii) use standard bidding documents acceptable to the Bank (annexed to the Manual of Procedures of the PIP), and (iii) annually review the procurement plan with IDA. Action Plan to Strengthen UCPM's Procurement Management Capacity Tasks Responsability Due Date Finalization of project Manual UCPM Prior to project effectiveness of Procedures Establishment of filing system UCPM Prior to project effectiveness Recruitment of Procurement UCPM Completed -47 - | Officer(s) for UCPM l Procurement Plan 14. The Procurement Plan for works, goods and services to be procured by UCPM during the first implementation year of the project has been agreed between the Government and the Bank during negotiations. It will be part of the Project Implementation Plan (to be approved by Government and acceptable to the Bank before credit effectiveness). For each subsequent year, the procurement plan related to the agreed Annual Work Program will be updated and submitted to the Bank for review and approval. These plans show and will show the step-by-step procedures for procurement, contract packages for goods, works and consultants services and training, estimated cost and the procurement/selection method, the activities which follow procurement, such as manufacture, shipment, delivery and installation of goods; mobilization, construction and completion of works. It is mandatory that all procurement be carried out in accordance with the formally agreed procurement plan (original and formally up-dated). Therefore, for the purpose of this project, agreed Procurement Plans will determine procurement methods and it is not necessary to set up aggregate total amounts. Table A: Project Costs by Procurement Arrangements (US$ million equivalent) . , > . . ,,, '~> . Procurernent 1thod' ', -" Expenditure Category IC. . , t Tta Cost 1. Works 4.83 0.97 0.16 - 5.96 (4.83) (0.77) (0.13) - (5.73) 2. Goods 1.31 1.24 0.64 - 3.19 (1.31) (1.03) (0.54) - (2.88) 3. Services - 20.27 2.16 22.43 - - (16.92) - (16.92) 4. Training - 2.14 0.04 2.18 - (2.14) - (2.14) 5. Small Grants - 0.63 - 0.63 - - (0.63) - (0.63) 6. Incremental recurrent - - 3.31 - 3.31 costs - (2.75) - (2.75) 7. P.P.F. - 0.95 - 0.95 - - (0.95) - (0.95) Total 6.14 2.21 28.10 2.20 38.65 (6.14) (1.80) (24.06) - (32.00) i/ Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies 2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing -48 - the project, and (fi) re-lending project fimds to local government units. -49 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) S--lzcion Cdz aod Consultant SGr,ices - Euponditure Category GCBS OBS S'-$L - LCS . 0 ; 1 hg- lH.B.F. Total Coea A. Firms 13.48 0.00 0.00 0.00 0.87 1.15 2.06 17.56 (11.33) (0.00) (0.00) (0.00) (0.71) (0.97) (0.00) (13.01) B. Individuals 0.00 0.00 0.00 0.00 4.77 0.00 0.10 4.87 (0.00) (0.00) (0.00) (0.00) (3.91) (0.00) (0.00) (3.91) Total 13.48 0.00 0.00 0.00 5.64 1.15 2.16 22.43 _ (11.33) (0.00) (0.00) (0.00) (4.62) (0.97) (0.00) (16.92) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Credit. - 50 - Prior review thresholds (Table B) Goods costing more than US$ 250,000 and works costing more than US$ 500,000 per contract per contract will be subject to prior review by IDA. All other contracts will be subjected to post review. All procurement documents for consulting contracts with firms for amounts exceeding US$ 100,000 per contract selected on the basis of a short list and any contract involving individual consultants exceeding US$50,000 per contract will be subject to prior review by IDA. In addition, for consultant contracts with firms exceeding US$ 100,000 per contract, the technical evaluation report will also be required by IDA for prior review. All other contracts will be subjected to post-review. Table B: Thresholds for Procurement Methods and Prior Review - -'--' , Contract Value I ' r' . Coifrtacts Subject.to '1Thresho'ld rc u'Prbc6'fent- r.'.T, PriorReview. Expen-diture Category (US$ thousands). - , IMethod '- * -S$ m U illion 1. Works >500 ICB All/4.9 50-500 NCB None <50 Price quotations None 2. Goods >250 ICB All/1.31 50-250 NCB None <50 National Shopping None 3. Services Consultants, training, workshops and other services: >100 QCBS, Other All/14.65 Firms <100 CQ, Other None Individuals >50 CQ All/1.1 <50 LCS None 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous Total value of contracts subject to prior review: USD 22.0 million Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits) 'Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 51 - Disbursement Allocation of credit proceeds (Table C) The credit would be disbursed over a period of 60 months (the Project completion date would be June 30, 2008 and the Credit closing date is December 31, 2008), as follows: (i) 100 percent of foreign and 80 percent of local expenditures for contract works; (ii) 100 percent of foreign and 80 percent of local expenditures for goods; (iii) 85 percent of foreign and 75% of local expenditures for consultancies (including audits); (iv) 100 percent for training and seminars; (v) 100 percent of expenditures for small grants, and (vi) 90 percent for incremental operating costs. Disbursement of Credit proceeds would be made against six categories (base costs): (i) contract works (USD5.47 million); (ii) goods (USD2.74 million); (iii) consulting contracts (USD16.16 million); (iv) training and workshops (USD2.05 million); (v) small grants (USD0.60 million), and (vi) incremental operating costs, including audits (USD2.63 million). A Project Preparation Facility was requested for an amount of USD0.95 million. Unallocated contingency allowances amount to about 4 percent of total project base costs. Table C: Allocation of Credit Proceeds Expenrditure?category' AMount in US$nmillion .- 'Fina ncing Percentage 1. Works 5.47 100 percent of foreign and 80 percent of local expenditures 2. Goods 2.74 100 percent of foreign and 80 percent of local expenditures 3. Consultants' Services and Audits 16.16 85 percent of foreign and 75 percent of local expenditures 4. Training 2.05 100 percent of expenditures 5. Incremental recurrent costs 2.63 90 percent of expenditures 6. Small Grants 0.60 100 percent of expenditures 7. PPF refinancing 0.95 8. Unallocated 1.40 Total Project Costs 32.00 Total 32.00 Disbursement Arrangements: Method of Disbursement. The borrower will use transaction-based disbursements (traditional mode) in accordance with procedures outlined in the Bank's Disbursement Handbook. Minimum Application Size. The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments is $400,000, representing 20% of the special account authorized allocation. Use of statements of expenditures (SOEs): Disbursements will be made against Statement of Expenses (SOEs) for contracts and goods not requiring the Bank's prior review. Therefore disbursements for all contracts for: goods of less than US$ 250,000, for works of less than USD500,000, for consulting services, training and publications by firms and individuals of less than US$100,000 and US$50,000 respectively; and all incremental operating expenses, training, and small grants would be made on the basis of SOEs and certified by the UCPM. - 52 - SOE statements will be audited annually by independent auditors acceptable to the Bank. All SOEs supporting documentation will be kept therefore by the UCPM and made available for review by bank supervision missions and external auditors. Special account: Payments from the Credit proceeds would be administered by the UCPM from a Special Account. The Special Account would be maintained in US dollars in a commercial bank selected by the Borrower and acceptable to the World Bank. The authorized allocation, sufficient for about four months of eligible expenditures, would be USD 2,000,000; however, the initial allocation would be limited to USD 1,000,000 until the aggregate amount of withdrawals from the Credit Account plus the total amount of all outstanding special commitments entered into the Bank shall be equal to or exceed SDR 2,200,000. The Special Account would be managed by the UCPM which would be responsible for preparing disbursement requests. These requests would be submitted on a monthly basis. Replenishment requests would be submitted on a monthly basis and would be supported by reconciled bank statements and other required documents. Disbursements will be made under the authorized signature from a designated representative of the Borrower. The Special Account would be audited annually by independent auditors acceptable to the Bank. Financial Management Assessment Country issues. The capacity of the accounting profession in Madagascar remains weak. A number of accounting firms were operating below the international standards due to the lack of regulatory framework, proper accounting and auditing standards, clearly defined guidelines and procedures for systematic peer reviews, continuing education requirements, quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness of the local auditing firms, the following measures have been taken: i) inclusion of a component "Reinforcement of the accounting profession" in the Poverty Reduction and Institutional Development Technical Assistant Project which will be presented to the Board in 2003; ii) obligation for local auditors to enter into partnership with international accounting firms while auditing Bank/IDA financed projects in order to improve the quality of audit reports and ensure practical training and real transfer of methodology in the areas of organization and execution of audit assignments; iii) the use of QCBS method rather than Least Cost for the recruitment of auditors. The assessment carried out during the pre-appraisal stage by an IDA accredited specialist determined that the project satisfies the Bank's minimum financial management requirements. However the implementation of a short-term action plan is needed to strengthen the financial management system in place and to build its capacity to produce quarterly Financial Monitoring Reports (FMRs) with the designed format provided in the Annex A of the FMRs Guidelines for World Bank-financed Projects. The following measures will be taken prior to credit effectiveness to strengthen the project's financial management system: i) review of the project's Chart of accounts to reflect components and activities outlined in the PAD to satisfy reporting requirements; ii) update of the current accounting manual of procedures in order to include the job description of the new staff to be recruited, the new chart of accounts and the content and format of FMRs that will be prepared by the project; iii) recruitment, on a competitive basis, of an accounting assistant, a procurement specialist and a monitoring and evaluation specialist; iv) adjustment of the accounting software acquired by the project to allow the production on a quarterly basis of Financial Monitoring Reports required by IDA; v) recruitment of an audit firm acceptable to IDA to audit the project accounts. - 53 - Organizational structure. The organizational structure in place defines the lines of responsibilities and authority that exist and seems appropriate for planning, directing and controlling operations. However the mission noticed that there are vacancies both in procurement and monitoring and evaluation. In addition, the number of the accountant in place (only one) is not enough to ensure proper segregation of duties in financial management area. These shortcomings were addressed before negotiations as it is clear that no project can run efficiently without an adequate number of skilled and experienced staff. Accounting and budgeting system. The accounting system in place uses journals, ledgers and trial balances to enter and summarize transactions. It operates on a double entry accrual principles and follows generally accounting standards acceptable to the Bank. However the current chart of accounts must be reviewed to ensure timely production of both financial statements and FMRs in compliance with IDA requirements. For this purpose the project's expenditure should be classified by useful categories such as by components and activities needed to carry out the project as reflected in the PAD. To help the accounting staff in performing their duties, the existing accounting manual of procedures must be also updated to include the new chart of accounts and the model of FMRs to be prepared by the project. The existing computerized system used by the UCPM allows different functions such as record-keeping, bank reconciliation, budgeting (including tracking variances between actual and planned cost and activities), fixed assets management and preparation of the project financial statements. But it can't produce yet quarterly Financial Monitoring Reports (FMRs) with the designed format presented in the Annex A of the FMR Guidelines issued in November 30, 2001, by the World Bank. To allow timely production of quarterly FMRs, the UCPM is invited to ask the manufacturer to bring necessary adjustments to the accounting software in place. The review of the chart of accounts, the update of the accounting manual of procedures, the implementation of the new computerized system and users training should be completed before effectiveness. Internal control. The mission noted that the project has a good internal control system: proper authorization to initiate and execute transactions, budgeting system, adequate measures for safeguarding assets (fixed assets, furniture, cash and bank balances). An accounting manual of procedures is also available, describing (i) the previous project organizational structure and staff job description; (ii) the accounting system: charts of accounts, cost accounting and budget coding, accounting standards to be applied for the project, flowcharts of the accounting transactions and recordings, the document flow (with format and content) and timing of the project's financial statements; (iii) the various operational procedures including budget management (planning, execution, and monitoring) fixed assets management, procurement of goods and services, disbursement etc.; and (iv) internal control procedures. However this manual must be updated in order to include the new chart of accounts, the job description of the new staff to be recruited and the content and format of FMRs that will be prepared by the project The accountant in place is qualified and has relevant experience in accounting but the number is not enough (only one) to ensure adequate separation of duties in financial management area. The mission considers therefore appropriate the recruitment of a second accountant. Significant Weaknesses Resolution Chart of accounts not reflecting yet project Review of the chart of accounts to reflect new components and activities outlined in the components and activities outlined in the PAD. PCD/PAD. Incapacity of the project financial management Invitation of the manufacturer of the existing system to produce quarterly FMRs. accounting software to bring necessary adjustments and put in place a computerized - 54 - system capable of producing quarterly FMRs. Update of the existing accounting manual o procedures to reflect changes in the project Char of accounts and present the models of FMRs to be prepared by the project. Users training. Inadequate number of the accounting staff and Recruitment of a procurement specialist, a M & absence of proper separation of duties in financia E specialist and second accountant to permit an management area. Vacancies in procurement and appropriate separation of duties in financial monitoring & evaluation. management area (record-keeping, control, supervision). Absence of acceptable arrangement in Recruitment of an accounting firm acceptable t auditing. IDA to carry out the audit of project accounts. Implementinj Entities: The Ministry of Energy and Mines, through the existing UCPM ( Mining Project Coordination Unit) will be responsible for the overall implementation of the project. The UCPM will continue to operate, coordinating project implementation, and managing procurement, financial management, disbursement, project monitonng, reporting and evaluation. Funds Flow: The flow of funds from IDA credit and the government is presented as follows: World Bank Government (Credit funds) (Counterpart funds) UCPM: Special Account Suppliers of goods, works and services To ensure timely and reliable flow of funds, a special account will be opened in a local commercial bank under conditions satisfactory to IDA. The special account would be replenished on the basis of documentary evidence, provided to IDA by UCPM, of payments made from the account for works, goods and services that are eligible for financing under the credit. All supporting documents will be retained by UCPM and made available for review by periodic Bank supervision missions and external auditors. The counterpart funds from the government will be used for the purpose of defraying the cost of expenditures not financed by the credit and necessary for the execution of the project. - 55 - Accounting Policies and Procedures. The Project is required to maintain records and books of accounts in accordance with Generally Accepted Accounting Principles. The accounting system operates on an accrual basis. The financial statements are prepared under the historical cost convention. Project accounts will be maintained in Malagasy currency (FMG). As a result, the opening and closing balances of the SA held in $ US should be translated therefore at the rate ruling on the opening and closing dates, respectively. Expenditures made out of the SA should be stated at the rate ruling on the transaction dates. The actual exchange rates used should be disclosed. Fixed assets bought for use by the UCPM are depreciated at the following rates: o Furniture and equipment: 20% o Vehicles: 20% o Computers: 30% Consumable stores are written off on purchase. Internal 4udit. Given the size of the project and since its organizational structure is centralized, an internal audit function is not really needed at the present time. However, to ensure the efficient use of funds, the Chief accountant of the UCPM in collaboration with Monitoring & Evaluation specialist could play the role of internal auditor. For this purpose he will assure the supervision of the project financial management and make sure that the project is complying with all specific procedures (on procurement, financial management disbursement) and agreements described in the procedures manualU DCA. External Audit. The project financial statements will be audited annually by independent and qualified auditors acceptable to IDA, in accordance with Intemational Standards of Auditing. The auditors will provide separated opinion on the financial statements, the special accounts and statements of expenditures. The auditors will be also required to carry out a comprehensive review of the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report will be submitted to IDA not later than 6 months after the end of each fiscal year. The auditors should be recruited prior to effectiveness. The terms of reference of the audit will be reviewed by the financial management specialist of the Bank/IDA. Reporting and Monitoring. The UCPM shall put in place a computerized financial management system capable of producing the following reports: 1) Annual financial statements comprising and not being limited to: a) Summary of sources and uses of funds by components/ project activities with a balance sheet; b) Special Accounts statements; c) Statement of Expenditures; d) Other relevant financial report required for the project management. 2) Ouarterly FMRs. The objective of the FMRs is to provide the Bank with sufficient information to determine whether: (i) funds disbursed to the project are being used for the purpose intended; (ii) project implementation is on track; and (iii) budgeted costs will not be exceeded. The FMRs comprises a financial reports, physical progress reports and procurement reports to facilitate project monitoring. The FMR should be submitted to TL within 45 days of the end of the reporting period (quarter). Models of these reports were determined during project appraisal and were agreed at negotiations. Their content and format will be presented in the project accounting manual of procedures. - 56 - Information Systems. The project will use a computerized and integrated financial management system capable of recording and producing in a timely manner financial reports required for managing and monitoring project activities. This computerized system would in particular facilitate: annual programming of activities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management of the project, fixed assets management, procurement management, follow-up of project implementation progress, monitoring of key indicators to assess the results and impact of the project, preparation of quarterly Financial Monitoring Reports as required by the Bank/IDA. The TORs of the consultant in charge of the adjustment of the existing computerized system, as well as the implementation of the new one will be reviewed by the Bank Financial Management Specialist. A fully functioning financial management system capable of producing FMRs is a condition of negotiations. Impact of procurement arranzements. Procurement arrangements present substantial risk since the staff in charge of the procurement is not in place yet. The Bank staff will carry out periodic SOE reviews to ensure the use of funds in conformity with Bank procedures. Action Plan. The present action plan agreed with the borrower describes main actions to be taken to strengthen the UCPM financial management system and to build its capacity to produce quarterly Financial Monitoring Reports. Actions Date due by Responsible 1 Agreement on terms of reference for key staff Completed UCPM/ IDA (accountant, procurement specialist, M&E specialist), extemal auditor and Consultant in charge of the update and implementation of the accounting manual of rocedures and MIS. 2 Bid package for transmission to the consultant Completed UCPM (manufacturer of the existing accounting software) in charge of the update and implementation of the accounting manual of procedures and MIS. 3 Reception of bid, evaluation, negotiation and signature Completed UCPM/Consultant of contract with the consultant in charge of the update and implementation of the accounting manual of rocedures and MIS. 4 Consultant starts the update of the accounting manual of procedures and adjustment of the existing computerized system: * First draft of the manual for IDA comments Completed Consultant * Final draft incorporating IDA comments; * Adjustment and installation of a computerized Completed Consultant financial management system Completed Consultant 5 Appointment of a second accountant, a procurement Completed UCPM specialist and a M&E specialist. Implementation of the manual of procedures and users Completed Consultant - 57 - training. l 6 Recruitment process of external auditors: o Finalization of bidding documents; Completed UCPM o Reception of bids, evaluation, selection. Completed UCPM o Appointment of external auditors Completed UCPM 7 System testing to ensure compliance with management's expectations and IDA specifications: o Prepare test data and expected results; Completed o Perform tests and analyze results; Completed Consultant o Correct problems and retest; Completed o Complete users training and start operating the Completed system; o Obtain user acceptance and approval 05/29/2003 UCPM 8 Production of the first FMRs (July, August, 10/30/2003 UCPM September 2003) and submit them to the Bank. - 58 - Annex 7: Project Processing Schedule MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT Projec Schedu,iet -,1 L. ,. Plane-,, T'- ' ' ActuaI~ Time taken to prepare the project (months) 9 18 First Bank mission (identification) 02/07/2001 07/02/2001 Appraisal mission departure 11/24/2002 11/24/2002 Negotiations 02/07/2003 02/10/2003 Planned Date of Effectiveness 11/15/2003 Prepared by: The World Bank Oil, Gas, Mining and Chemicals Department jointly with the Ministry of Energy and Mines and the Mining Sector Reform Project Coordination Unit. Preparation assistance: PHRD Grant for project preparation Bank staff who worked on the project included: Name Speciality Paulo de Sa Task Team Leader Gotthard Walser Senior Mining Specialist Raj Soopramanien Senior Counsel Slaheddine Ben-Halima Senior Procurement Specialist Sylvain Auguste Rambeloson Procurement Specialist Peter Van Der Veen Manager (quality enhancement) Irene Xenakis Operations Advisor (quality enhancement) Didier Fohlen Senior Environmental Specialist (peer reviewer) Wolfgang Fengler Economist (peer reviewer) Guenter Heidenhof Senior Public Sector Specialist (peer reviewer) Gervais Rakotoarimanana Financial Management Specialist Michael Fowler Senior Finance Officer Alexandra Pugachevsky Operations Analyst Claude Ginet Institutional Consultant Obinna Okoye Temporary -59 - Annex 8: Documents in the Project File* MADAGASCAR: MINERAL RESOURCES GOVERRNANCE PROJECT A. Project Implementation Plan Project Implementation Plan, November 2002 B. Bank Staff Assessments Draft Financial Management Plan, March 2002 C. Other Analyse diagnostic de la gestion environnementale dans le secteur minier, Cabinet GLW, March 2002. Etude d'impact environnemental strategique de l'exploitation miniere dans la Zone d'Activite Economique Speciale (ZAES) de Vatomandry, PAGE, November 2001. Plan de Gestion Integree de la petite exploitation miniere a Madagascar, ITC/Project Consult, October 2001. Conditions legales et economiques pour la petite exploitation miniere et les industries en aval A Madagascar, Dr. Wolfgang Wetzenstein, August 2001. Etude diagnostique sur 1'exploitation miniere A petite echelle A Madagascar, Jean-Luc Camileri, May 2001. Formulation d'une politique environnementale miniere a Madagascar, Geosum/Dinika, November 1996. Environmental Management Plan, GLW, October 2002 Including electronic files - 60 - Annex 9: Statement of Loans and Credits MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT 26-Mar-2003 Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel Undisb Orig Frm Revd P080345 2003 MG Emergency Economic Recovery Credit 0 00 50 00 0 00 0 00 36 72 -2 92 0 00 P073689 2003 Rural Transport Project - APL - Phase 2 0 00 80 00 0 00 0 00 84 08 1 28 0 00 P072160 2002 Second Pnvate Sector Development Projec 0 00 23 80 0 00 0 00 24 86 7 82 0 00 P072987 2002 Mulusectoral STUHIVMAIDS 0 00 20 00 0 00 0 00 19 64 -1 68 0 00 P051922 2001 MG - Rural Development Support Project 0 00 8905 0 00 0 00 87 17 -8 26 0 00 P055166 2001 COMMUNITYDEVELOPMENTPROJECT 000 11000 000 000 8620 -215 000 P062628 2000 Regional Development 0 00 4 60 0 00 0 00 4 08 3 55 0 00 P052208 2000 Transport Sector Reform and Rehabilitat 0 00 65 00 0 00 a 00 37 42 11 17 0 00 P051741 2000 Second Health Sector Support Project 0 00 40 00 0 00 0 00 27 58 9 55 0 00 P052186 1999 MICRO FINANCE 0 00 16 40 0 00 0 00 861 5 37 0 00 P001559 1998 EDUCATION SECTOR DEV 000 6500 0 00 0 00 36 25 3689 3 69 P001568 1998 NUTRITION II 0 00 27 60 0 00 0 00 6 45 4 33 0 00 P001564 1998 RURAL WATER SEC PILO 0 00 17 30 0 00 0 00 9 80 10 04 0 00 P040596 1997 ENVIRONMENT 11 0 00 0.00 810 0 00 3 00 1 86 0 00 P048697 1997 URBANINFRASTRUCTURE 000 3500 000 000 1772 1869 911 P001533 1996 MG ENERGY SECTOR DEVELOPMENT PROJECT 0 00 46 00 0 00 0 00 7 44 10 84 0 00 Total- 000 68975 810 000 49703 10639 1281 - 61 - MADAGASCAR STATEMENT OF IFC's Held and Disbursed Portfolio Jun 30 - 2002 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1991 BNI 0.00 2.61 0.00 0.00 0.00 2 61 0.00 0.00 2000 BOA-M 0.00 0.82 0 56 0.00 0.00 0.82 0.56 0 00 1983/89 Nossi-Be 0.00 0.14 0.00 0.00 0.00 0 14 000 000 1990/91 AEF FIARO 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 1997 AEF GHM 0 67 0.00 0.00 0.00 0.67 0 00 0.00 0.00 1995 AEF Karibotel 0.22 0 00 0.00 0 00 0.22 0.00 0.00 0.00 1992/93/95 AQUALMA 0.71 0.00 0.00 0.00 0.71 0.00 0.00 0.00 Total Portfolio: 1.60 3.76 0.56 0.00 1.60 3.76 0 56 0 00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 Besalampy 15.23 0 00 0.00 0 00 2001 COTONA III 7.76 0.00 0.00 0.00 Total Pending Commutment. 23.00 0 00 0 00 0.00 - 62 - Annex 10: Country at a Glance MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT Sub- POVERTY and SOCIAL Saharan Low- Madagascar Africa income Development diamond- 2001 Population, mid-year (millions) 16 0 674 2,511 Life expectancy GNI per capita (Atlas method, US$) 260 470 430 GNI (Atas method, US$ billions) 4 1 317 1,069 Average annual growth, 1995-l Population (%J 31 2 5 19 Labor force I%) 31 2 6 23 GNI 3, Gross per ~~~~~primary Most recent estimate (latest year available, 1995-01) capita r enrollment Poverty (% of populatlon below natlional poverty line) Urban population (% of total population) 30 32 31 Life expectancy at birth (years) 55 47 59 Infant mortallty (per 1,000 live births) 84 91 76 Child malnutrition (% of children under 5) 40 Access to improved water source Access to an Improved water source (%6 of population) 47 55 76 Illiteracy (% of population age 15+) 33 37 37 Grossprimaryenrollment (%of'school-agepopulation) 102 78 96 Madagascar Male 104 85 103 Low-income group Female 100 72 88 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2000 2001 Economic ratlos- GDP (US$ billions) . 2 7 3 9 4 5 Gross domestic Investment/GDP 8.2 15 0 17 8 Trade Exports of goods and services/GDP 17.9 30 7 24.3 Gross domestic savingslGDP 0 7 7 8 7 7 Gross national savings/GDP 0 1 9 4 9 5 Current account balance/GDP -8.1 -5.6 -5.8 Domestic Investment Interest payments/GDP 2.5 savings Total debt/GDP 146 0 106 2 91 6 s Total debt service/exports 27 4 29 1 Present value of debVGDP 77 0 Present value of debWexports 247.1 Indebtedness 1981-91 1991-01 2000 2001 2001-C5 (average annual growth) GDP 1.8 2.9 4.8 59 Madagascar GDP per capita -0.9 -0.1 1 6 2 8 --- Low-income group Exports of goods and services 1 2 4 9 15.6 -9 0 STRUCTURE of the ECONOMY 1981 1991 2000 2001 Growth of lnvestment and GDP (%) (% of GDP) Agncufture 331 33 0 34 9 34.9 Industry 14 1 14.2 13.1 13.1 40 Manufacturing 11.8 20- Services 52.8 52 8 52 0 52.0 o Private consumption 90.6 831 85.5 -20 s6 97 9r 99 - o General government consumption 8.7 9.2 6.8 GDI GDP Imports of goods and services 25 4 37.9 34 4 1981-91 1991-C1 2000 2001 Growth of exports and Imports I%) (average annual growth) Agriculture 2 7 2 0 0 8 4.3 30 Industry 2.5 3 2 5.6 8 9 Manufactunng 1 5 1 2 15 Services 08 3.5 7.0 62 Private consumption 0.1 2 6 8 5 10 6 r 57 B 5 oo 0 General government consumption 0 3 4 5 6.4 -21 5 -15 Gross domestic investment 6 8 7 5 -9 9 38 9 Exports import Imports of goods and services -3.6 7.4 21 2 12.8 Note 2001 data are preliminary estimates The diamonds show four key indicators in the rountry (in bold) compared vwth Its income-group avenage If data are rissing, the diamond viil be incomplete - 63 - Madagascar PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Inflaln -- Domestic pricesInlto (X change) s0 Consumer prlcs 8 5 11 9 7 4 40 Implicit GDP deflator 13.9 7 1 7 3 20 Government finance (% of GDP, mncludes curmnt grants) 0 --_---- - - Current revenue .. 10.1 12.4 11.1 0M 97 Be 03 00 01 Current budget balance -0.1 3 2 1.7 - GDP deflator e CPI Overall surplus/deficit -6 5 -5 7 -6.4 TRADE (USS millions) 1981 1991 2000 2001 Export and Import levels (USS mlil.) Total exports (fob) 313 334 829 947 1.250 Coffee 112 28 8 14 VanIlla 9 47 37 26 1,000 Manufactures 159 486 59 750 Total Imports (clf) 608 518 1,029 1,095 s mill Food 99 35 67 54 Fuel and energy 127 71 214 226 250 Capital goods 191 165 168 182 o Export price Index (1995=100) 93 82 87 87 Import price Index (1995=100) . 89 92 94 1Export OImportG Terms of trade (1995=100) . 92 95 93 BALANCE of PAYMENTS (US$ millions) 1981 1991 2000 2001 Current account batance to GDP (YO) Exports of goods and services 394 480 1,186 1,321 0 Imports of goods and services 785 681 1,467 1,668 Resource balance -391 -200 -280 -346 -2 Net income . -195 -74 -90 4- I ' Net current transfers 12 179 135 172 I Current account balance .. -216 -219 -265 Financing items (net) .. 232 247 344 8 Changes In net reserves -17 -28 -80 10 Memo: Reserves including gold (USS millions) . 90 301 396 Conversion rate (DEC, locallUSS) 271.7 1,835 4 6.767 5 6,588.5 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Composltion of 2000 debt (US$ mill) Total debt outstanding and disbursed 1.613 3,908 4,117 4,147 IBRD 31 23 0 0 G 301 IDA 155 881 1.378 1,409 F 3 Totaldebtservice 110 161 .Aa 1,378 IBRD 3 5 2 0 IDA 1 9 27 20 Composition of net resource flows E 1,534 - Officlalgrants 59 113 147 212 Official creditors 189 161 Pnvate creditors 63 -11 .. 105 Foreign direct investment . PortfolIo equity . . 0 796 World Bank program Commitments 30 51 A - IBRD E - Bilatoral Disbursements 34 106 94 97 B - IDA D - Othor multilateral F - Private Principal repayments 1 6 17 10 C - IMF G- Short-term Net flows 34 100 77 87 Interest payments 3 8 12 11 Net transfera 30 92 65 76 UeveTopment iconomics /I 141(U - 64 - Additional Annex 11: LETTER OF SECTORAL POLICY MADAGASCAR: MINERAL RESOURCES GOVERNANCE PROJECT REPUBLIC OF MADAGASCAR MINISTRY OF ENERGY AND MINES DECLARATION OF MINING POLICY Owing to its geological circumstances, Madagascar has significant mining potential that is poorly identified and underexploited owing to the inadequacy of baseline geological and mining information, explaining the rarity of intemational caliber large-scale mining operations. Recent discoveries of precious stones deposits and the systematic mining rush phenomenon to which they have led, call for a specific strategy as well as for rigorous integrated management of these nonrenewable resources, in terms of extraction, processing, and marketing, so as to derive the maximum amount of value added. The government's mining policy is among the ongoing reforms initiated in the context of the Mining Sector Reform Project (MSRP) with the adoption in 1998 of the Policy Framework Paper (PFP) on mining which decisively refocused the government's mining policy, shifting the state from the role of operator to that of a facilitator of pnvate investments and regulator of mining activities as it disengages from productive activities. The implementation of this mining policy led in 1999 to the preparation and adoption of a new and modem Mining Code that meets the requirements of the sector. Subsequently, MSRP activities have made it possible to update the regulatory framework for the mining sector, by means of an interministenal decree as well through as the approval by the National Assembly on November 23, 2001 of a law establishing a special regime for large-scale mining investments (LGIM). This Law was passed by the Senate in September 2002. These sweeping reforms establish the path for development of the mining sector through the promotion of private investment. However, the direct and concrete effects of these reforms on growth in the sector continue to be attenuated by the absence of other complementary components that would make it possible to implement the legal and regulatory framework at all levels. It follows that the sector's contribution to Madagascar's economic and social development is still quite limited. However, the objective is to make a palpable impact on the mining sector's contribution to the national economy. The government's strategic activities aimed at allowing for improved exploitation of the country's mining potential consistent in: (i) Improving governance and transparency in the mining sector; (ii) Providing support to artisanal operators; and (iii)Promoting private investment in mining throughout the territory, and the decentralized management of mining resources. In this sense, the government's mining policy is based on the following key components: - 65 - 1. lImprovement and application of the legal and regulatory framework To improve govemance and transparency in the mining sector, the legal and regulatory framework for the mining sector will be updated. Particular attention will be devoted to improving implementation through various actions by the government and the agencies involved in the mining sector. The main improvements in the legal framework to be envisaged on a priority basis relate to: o Finalization of the implementing provisions called for under the Mining Code or its implementing decree, as well as those called for under the Law on Large-Scale Mining Investments. o Evaluation of the applicability and effectiveness of the provisions already adopted, and the introduction of improvements as necessary; o Improvement of the regulations relating to the marketing of mining products; o Strengthening of the linkages and coordination between institutions in the sector and those under the auspices of other ministries concerned with mining activities (Water and Forests, National Office for the Environment (ONE), etc.); o Tax incentive measures: (i) for exports of cut gemstones and imposing penalties for exports of rough stones (financial incentive) on the basis of technical definitions prepared by the Madagascar Gemology Institute-IGM (see A.3.2.); and (ii) for imports of equipment and inputs for jewelry manufacturing (lapidary) activities; o Social legislation for the mining sector and improved protection of classified zones (environmental management of the mining sector at the decentralized level); and o Simplification of the export procedures for gemstones by the establishment of a buying/selling counter and one-stop Mining/Customs shop for export operations. 2. Grassroots managnement of crisis situations and rushes on arecious materials In Madagascar, artisanal and small-scale mining exploitation (precious stones and gold washing) represents an important economic and social undertaking for the rural population. However, the lure of exceptional profits when new deposits of stones or precious metals are found leads to large-scale and disorderly population migration which has become impossible for the competent authorities to control. These population shifts amount to genuine rushes in some areas with new discoveries, such as Ilakaka, Sakaraha, Vatomandry, Ambondromifehy, Andranondambo, and Andilamenta, with disastrous consequences on the environment, the cultural and social development of local communities, and the health of indigenous populations. In view of the importance of their impact on the country's economic fabric, these informal mining activities have a primordial role in the national mining policy. The dynamism of precious stone exploitation in Madagascar makes it necessary to implement grassroots management of such activities, encompassing the tax, environmental, and social aspects as well as the formalities required for small mining operations. In this regard, the government has decided to develop a solution which makes it possible to minimize the drawbacks associated with anarchistic population movements, while taking the steps necessary to ensure the maintenance of order, environmental protection, and the combat against smuggling. The new arrangement proposed for the grassroots management of such situations in the mining sector is based on the establishment of Mining Administration Bureaus (BAMs) in mining-intense areas, - 66 - including local representation of the Ministry of Finance, to ensure collection at the local level of mining royalties, the observance of regulations on the marketing of gemstones, and the management of the social and economuc aspects of mining operations. In the context of this arrangement, the suppression of smuggling and the maintenance of order are carried out in collaboration with the Ministry of Defense, and environmental rehabilitation with the Ministry of Environment. The establishment of grassroots management will require great efforts to inform local communities at the commune and village levels. If village-level miners are to accept and assume ownership of the BAM system, a number of problems will have to be overcome. These activities will require public awareness campaigns in local and regional communities which will be effective only if they entail a participatory approach through local workshops and seminars. NGOs will be mobilized to assist with carrying out this program. 3. Certification and control of eem marketing Madagascar enjoys a privileged position in terms of its mineral resources, and has an impressive variety, quality, and quantity of precious and semiprecious stones. These commodities are the basis for small-scale and artisanal mining activities, which represent an important social component owing to their job creation, even though the impact of these activities on the national economy is still relatively modest in comparison with the amount of mineral resources available. Despite this currently extremely limited economic impact, mining production remains one of the main options for Madagascar's development policy and its poverty reduction efforts. The potential value of the substances mined, as well as the sector's contribution to employment through intensive informal activities, make it one of the major components of the national economy. Mining operations consist principally of precious and semiprecious stones in the rough state. This state of affairs represents a significant loss of income for Malagasy producers as well as for government tax receipts. Indeed, the value of rough stones is significantly lower than that of the same stones after they have been cut and polished. But the jewelry making industry is still not very dynamic in Madagascar. While Malagasy artisans have a remarkable knack for this kind of work, the poor quality of gem finishing work suggests the need to acquire more refined skills in the techniques used. It is therefore necessary not only to enhance the technical skills of gemstone cutters and polishers so that their production continues to be competitive internationally, but also to formally apply science and technology to gems. Imparting broader knowledge about gems and the cutting and polishing of gems would certainly have an impact on multiplying mining activity, on improving processing quality, and on the value added of export products. The government's objective is to promote the development on site of the cutting and polishing of precious and semiprecious stones in accordance with international standards to replace exports of rough products. For this reason, it is planned to establish the Madagascar Gemology Institute (IGM) in order to make it possible to develop national expertise in gemstone cutting and polishing and in product quality. The responsibilities of the IGM will include: - 67 - o Establishing national expertise in gemology and gemstone cutting and polishing; o Dissemninating to producers and artisans in the sector the international standards governing the marketing of precious stones; o Promoting modern techniques for the cutting and polishing of precious stones; o Coordinating training activities for jewelry making artisans; o Certifying precious stone exports, allowing for the certification of stone quality and the placement of a quality label on stones cut and polished in Madagascar, as well as promoting this quality label abroad; o Valuing exports for tax purposes and ensuring their proper taxation, thereby contributing to the fight against smuggling and tax avoidance; and o Facilitating the marketing of rough stones at the national level on the grounds of their cut and polish. The IGM's expertise will be used as the basis for training jewelry making artisans and thereby promoting enhanced professionalism in the trade, with a view to achieving improvement in the short term in the quality and cut and polish of stones in Madagascar. The marketing and export channels for precious and semiprecious stones in Madagascar are complex and require that numerous formalities be observed. In particular, the buying/selling process is inhibited by the lack of organization and formal assistance services. This situation leads to a lack of security, as well as numerous difficulties with contacts between producers, buyers, and sellers (dispersion of production sites throughout national territory); in addition, the growth in informal assistance with exports by foreigners makes the collection of the royalties due under the mining code even more difficult. The complexity of the circuit makes it impossible to effectively control smuggling, and represents a disincentive for legal exporters or potential investors in gemstone processing activities. In this regard, the government is on the verge of introducing a channel for enhancing security and simplifying procedures in the context of a one-stop shop, and establishing control and trade monitoring measures based on the payment of a guarantee by foreign buyers. Selling, buying, and tax payment operations will also be organized in the framework of a counter established specifically for gemstones. Operation of the "counter" and "one-stop shop" will be entrusted in a concession or franchise arrangement to a private enterprise selected on the basis of competitive bidding. 4. Institutional strengthening of the decentralization of mining administration Decentralized management of mining resources will be initiated, on the one hand, by strengthening the decentralized administrative units in regions with intense mining activities and, on the other hand, by launching pilot programs on the integration of mining activities into community-level management of natural resources. Moreover, small-scale mining operations will be developed by integrating them into official channels, while improving hygiene and safety conditions and respecting environmental concerns. The key focus of the strategy for the institutional strengthening of mining administration will be the commune-level management of mineral resources. Good governance in respect of the use for local development of the resources collected at the commune level is an essential condition for the efforts to reduce poverty. - 68 - At present, mining operations, largely at the artisanal level, may constitute an obstacle to community-level development owing to their negative social and cultural impact as well as environmental degradation, without making any significant contribution to regional development. However, mining activity, whether artisanal or industrial, can in the short and medium term become an effective tool for combating rural poverty through the integration of mmning activities into community-level developrnent. The government's strategy entails the integration of mining activities into community-level development on the basis of a development partnership established between grassroots communities, including artisanal producers, the decentralized and localized mining and environmental administration, and mining companies in the case of industrial operations. The Ministry of Energy and Mines (MEM) will be the agency promoting participation in this partnership on the part of mining companies, by presenting to these companies the advantages of guaranteeing stability and social calm in mining areas. The relationship between grassroots communities and mining companies will have to evolve from the current system of competing for natural resources to one based on a partnership for development. Given that the level of preparation of commune-level authorities is quite uneven, an integrated approach will be needed, including training and supervision of local elected leaders in order to improve commune governance and the communes' capacity to manage mineral resources. The training and supervision will include: * Public management at the commune level, including budgeting and the monitoring of budget execution; * Decentralized collection of mining taxes at the commune level; * Improved provision of public services; * Monitoring and supervision of small-scale artisanal mining operations, and the formalization thereof; * Integration of mining activity into commune-level development; * Good governance of the use of resources derived from the mining sector; and * Preparation and execution of Commune Development Plans (PCDs). The central mining adrninistration offices, however, must provide technical supervision and coordination of the decentralized entities in the sector so as to preserve the homogeneity of administration nationally while decentralizing decision-making. Consequently, it is essential to strengthen the central levels in order to give them the capability of assisting with the decentralization of mining administration even as they coordinate the various levels of that administration. The institutional strengthening of mining administration will thus include building the capacity for decentralized management of the environment together with the conduct of pilot studies as well as the strengthening of mining inspection and the gathering of mining statistics in the provinces. 5. Promotion of private mining investment The aim of the government's policy is to create the conditions necessary for promoting pnvate investment in Madagascar, both national and foreign, through improved knowledge about the country's geology, dissemination internationally of the country's mining potential, and the promotion of its potential for the processing of precious stones. The results and recommendations of the institutional audit of MEM have revealed the sector's lack of capacity for promoting private investment. The institutional audit recommends the creation of a - 69 - Mining Sector Promotion Agency (APSM) whose mission would be to define and implement the sectoral promotion policy. Pursuant to this recommendation, the APSM would be responsible for carrying out global promotion activities for the mining sector for all mineral resources regarded as promising, as well as for ensuring the promotion of small-scale mining operations and marketing targeted products and services. The APSM will replace the Gold Agency referred to in the Mining Code, which has never been operational. The principal functions of the APSM will be as follows: o One-stop shop and secretariat for implementation of the Law on Large-Scale Mining Investments; o Promotion of Madagascar's mining potential internationally, promotion of private investment in the sector, and in particular promotion of the quality label for stones cut and polished in Madagascar; o Administration, use, and dissemination of the data base for promoting the governance of mineral resources (BPGRM); o Provision of information on the development of the international mineral market; and o Extending services for small-scale mining activities and formalization of artisanal mining operation, and related grant program. One important activity of the APSM with respect to mining communities, mining artisans, and jewelry makers is a program of small grants associated with a matching contribution on the part of the applicant. Such grants will be awarded on a nonreimbursable basis to encourage initiatives to develop the sector in regard to both extraction and processing activities. 6. Strengthening of geological infrastructure and updating of geoscientific information The aim of the government's policy is to update and strengthen the basic geological and mining information necessary for the promotion of private investrnent as well as the sustainable social and economic development of Madagascar. Production of the baseline geological infrastructure is an important public service that is performed by the state in all countries and has benefits in a number of different sectors (in mining, infrastructure construction, water resource management, territorial and land use planning, and environmental studies). The available geological cartography will be reinterpreted in its entirety from the structural standpoint and the standpoint of geochronological data, so as to update and make the most of knowledge about the Precambrian geology and mining potential of Madagascar. The priorities in this area include: o Aerbome geophysical surveys; o Field work and verifications making it possible to reinterpret and modernize the findings of the aforementioned surveys; and o Development of the capacity for using remote detection techniques in support of cartographic activities, but also in identifying plant cover, the administration of protected areas, and environmental assessments. Thanks to these efforts, the government hopes to revitalize the Malagasy mnining sector and to make a decisive contribution to achieving the objectives set by the government in the context of poverty reduction, in particular, the institution of frameworks conducive to private investment in the sector and increasing the value added of mining activities. - 70 - Annex to Declaration of Mining Policy Action Plan and Timetable To implement the new mining policy, the government undertakes to carry out a program of actions with three (3) components: - Improvmg transparency and governance in the mining sector; - Institutional reforms for the decentralized management of mineral resources; and - Promotion of private mining investment. (A) IMPROVING TRANSPARENCY AND GOVERNANCE IN THE MINING SECTOR This component includes: Al- Improving and implementing the legal and regulatory framework A2- Grassroots management of crisis situations and rushes on precious materials. Support for the grassroots management of crisis situations A3- Gem quality certification and control program A3 1. Support for the creation of the Madagascar Gemology Institute (IGM) A32. Assistance with enhancing the sector's professionalism A33. Gemstone counter and one-stop shop for export operations A4 -Strengthening of private entities in the sector (B) INSTITUTIONAL REFORMS FOR THE DECENTRALIZED MANAGEMENT OF MINERAL RESOURCES This component includes: B1- Institutional strengthening of the decentralization of mining administration B 1.2. Reform and institutional strengthening of the decentralization of mning administration B 1.3. Strengthening of environmental management at the provincial level B 1.4. Decentralized management of mineral resources B2- Strategy on national and regional dissemination of the objectives of mining policy B3- Training program B4- Intranet/Extranet network for the mining administration (C) PROMOTION OF PRIVATE MINING INVESTMENT This component includes. Cl- Creation of the Mining Sector Promotion Agency - 71 - C2- Strengthening of geological infrastructure and updating of geoscientific information C2. 1. Geophysical survey C2.2. Geological survey C2.3. Basis for promoting governance of mineral resources C2.4. Supervision and evaluation (D) COORDINATION AND PROJECT MANAGEMENT EXECtJTION TIMETABLE ACTnVrY 20 2004 2005 20i 2007 2008 A ENi1ANCED TRANSPARENCY AND GOVERNANCE OF ThE Al Improvement andappicationofagalandreagulatwryfran,work…_ A2Grwrooto management ocrioo CotDution Oend ruDheo on precIous matefrialsai T A3 Gemquality certification and control progrmr A31 Stmpod for aon of dscar Geonlogy Ins,lute ftGM) A32 AssIstance forenhandngprisslonolsm of sector 33 I,noducindrcouniondorA-stopaxpodwndow_ AS Srenihenod privateentitiea Inco _| B INSTITUTIONAL REFORMS FOR DECENTRALIZED MANAGEMdENT OF MINERAL RESOURCES BI Insotutional otenrgtning of inring ndrrdnlobalton docontralization B12 Rforma, and insiuta sfiengehnlgof minAmnga dnlstraff__ _ decenIolzaL'on B13 Slrenglhfenvimnzmenal managemordma1ndd rl _t pr ial l B14 Docenfraidnmnagomenlofrmnr nwresourcas B2 Strategy on nadIonala and regional dloenlnon of mining policy B3 Training prograrm B4 IntrsnlExuaW NcIworkiformining adminscmion(Inotalcclonrnd mairstrance)I C PROMOTION OF PRIVATE MiNING INVESTMENT Cl CeationofMiningSectorPrmotIonAgancy C2 Strengtmnad geologica Inftuctumre and updarting of gaoscienttc Informa ton C21 GGophyaYSC sLruy C22 Gsologcal ssvoy C23 S.sta frprOorlira r goa a o ,at ,osvomnTes C24 Suprion and evratan_l_ o COORDlNA11ON AND PROJECT MANAGEMENT LEGENr D l] Maln aWaMy stSuMbaly Antananarivo, 14 March 2003 Signed by the Minister of Energy and Mines J. 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