Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 43233-SL

PROJECT APPRAISAL DOCUMENT

PROPOSED GRANT

IN THE AMOUNT OF SDR 2.6 MILLION (US$4.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF SIERRA LEONE

FOR A

MINING TECHNICAL ASSISTANCE PROJECT

November 3,2009

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 1,2009)

A fDB ASM BP BNPP CASM CQS DACDF DFID EC DG HRMO DG Mines EC ECOWAS EI EIA EITI ESMF ESMP EU FAD FIAS FM FY GDP GEF GGDO GRGG GSD IC ICB IDA IFR IMF IMF-FAD IT J4P LCS MCP

Currency Unit = Leone Leone 3,507.00 = US$1

US$0.64 = SDR 1

FlSCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

African Development Bank Artisanal and Small-scale Mining World Bank Business Procedure Bank-Netherlands Partnership Program Community and Artisanal and Small-scale Mining Selection Based on Consultants' Qualifications Diamond Area Community Development Fund Department for International Development of UK Government European Community Director General of Human Resource Management Office Director General for Mines European Commission Economic Community of West African States Extractive Industries Environmental Impact Assessment Extractive Industries Transparency Initiative Environmental and Social Management Framework Environmental and Social Management Plan European Union Fiscal Affairs Department of the International Monetary Fund Foreign Investment Advisory Service Financial Management Fiscal Year Gross Domestic Product Global Environment Facility Government Gold and Diamond Office Governance Reform and Growth Grant Geological Survey Department Individual Consultants International Competitive Bidding International Development Association Interim Financial Report International Monetary Fund International Monetary Fund - Fiscal Affairs Division Information Technology Justice for the Poor Least-Cost Selection Mine Closure Plan

FOR OFFICIAL USE ONLY

MDAs M&E MMA MMRPA MoFED MRU NCB MTAP NMA NPV NRA OP PDO PFM POM PP PPF PPP PST QCBS RPF SDB SESA SIA SRL SSS TA UNDP USAID WAMSSA

Ministries, Departments and Agencies Monitoring and Evaluation Mines and Minerals Act Ministry of Mineral Resources and Political Affairs Ministry of Finance and Economic Development Mano River Union National Competitive Bidding Mining Technical Assistance Project National Minerals Agency Net Present Value National Revenue Authority World Bank Operational Policy Project Development Objective Public Financial Management Project Operations Manual Procurement Plan Project Preparation Facility Public-Private Partnership Project Support Team Quality and Cost-Based Selection Resettlement Policy Framework Standard Bidding Documents Strategic Environmental and Social Assessment Social Impact Assessment Sierra Rutile Limited Single-Source Selection Technical Assistance United Nations Development Programme United States Agency for International Development West African Mineral Sector Strategic Assessment

Vice President: Obiageli Katryn Ezekwesili Country Director: Ishac Diwan Country Manager Engilbert Gudmundsson Sector Manager: Paulo de Sa

Task Team Leader: Ekaterina Mikhaylova

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

CONTENTS

Page ............................................................................... I . STRATEGIC CONTEXT AND RATIONALE 1

A . Country and sector issues ................................................................................................................. 1 B . Rationale for Bank involvement ...................................................................................................... 7 C . Higher-level objectives to which the project contributes ................................................................ 7

II . PROJECT DESCRIPTION ......................................................................................................... 8 ........................................................................................................................ A . Lending instrument 8

B . Program objective and phases .......................................................................................................... 8 C . Project development objective and key indicators ........................................................................... 8 D . Project components .......................................................................................................................... 9 E . Lessons learned and reflected in the project design ....................................................................... 11

.......................................................................... F . Alternatives considered and reasons for rejection 12 ................................................................................................................. m . IMPLEMENTATION 12

.............................................................................................................. A . Partnership arrangements 12 ............................................................................. B . Institutional and implementation arrangements 13 ............................................................................. C . Monitoring and evaluation of outcomes/results 14 .

D . Sustainability .................................................................................................................................. 15 ............................................................................ E . Critical risks and possible controversial aspects 16

........................................................................................... F . Loadcredit conditions and covenants 1 8 ...................................................................................................... IV . APPRAISAL SUMMARY 1 9 ................................................................................................. A . Economic and financial analyses 1 9

........................................................................................................................................ B . Technical 20

........................................................................................................................................ C . Fiduciary 20 . D Social .............................................................................................................................................. 20

................................................................................................................................... E . Environment 21 . .......................................................................................................................... F Safeguard policies 22 . G Policy exceptions and readiness ..................................................................................................... 23

Annex 1: Country and Sector or Program Background ........................................................................ 24 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies ................................ 32 Annex 3: Results Framework and Monitoring ....................................................................................... 34 Annex 4: Detailed Project Description .................................................................................................... 38 Annex 5: Project Costs .............................................................................................................................. 38 Annex 6: Implementation Arrangements ........................................................................................... 4 4 Annex 7: Financial Management and Disbursement Arrangements ................................................... 47 . ................................................................................................ Annex 8: Procurement Arrangements 5 6

............................................................................................ Annex 9: Economic and Financial Analysis 62 .......................................................................................................... Annex 10: Safeguard Policy Issues 64

................................................................................ Annex 11: Project Preparation and Supervision 6 6 Annex 12: Documents in the Project File ............................................................................................. 6 7 Annex 13: Statement of Loans and Credits ............................................................................................ 69 Annex 14: Country a t a Glance ............................................................................................................... 70 Annex 15: Map (37324) ............................................................................................................................. 73

SIERRA LEONE MINING TECHNICAL ASSISTANCE PROJECT

PROJECT APPRAISAL DOCUMENT AFRICA

Date: November 3,2009 Team Leader: Ekaterina Mikhaylova Country Director: Ishac Diwan Sectors: Mining and other extractive (100%) Sector ManagerIDirector: Paulo De Sa Themes: Administrative and civil service reform

(23%); Regulation and competition policy (22%);Participation and civic engagement (22%);Decentralization (22%);Environmental policies and institutions (1 1%)

Project ID: PO99357 Environmental category: Partial Assessment (B) Lending Instrument: Technical Assistance Loan

BORROWERJRECIPIENT International Development Association (IDA) Total:

Borrower: Ministry of Finance and Economic Development Ministerial Building, George Street Freetown, Sierra Leone Tel: 232-22-222-2 1 1

Responsible Agency: Ministry of Mines and Mineral Resources Youyi Bldg., 5th Fl., Brookfields Freetown, Sierra Leone Tel: (232-22) 240-142; Fax: (232-22) 235-234 komba~ernrnanuel@yahoo.co.uk http://www. slmineralresources.org/

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I - - * / - ' . g" " ">I a FY Annual Cumulative Project implementation period: Start December 3 1,2009 End: December 3 1,201 3 Expected effectiveness date: March 1,201 0 Expected closing date: December 3 1720 13 Does the project depart from the CAS in content or other significant respects? Re$ PAD LC. [ ]Yes [XI No

Does the project require any exceptions from Bank policies? Re$ PAD IK G. [ ]Yes [XI No Have these been approved by Bank management? [ ]Yes [XI No Is approval for any policy exception sought from the Board? [ ]Yes [XI No Does the project include any critical risks rated "substantial" or "high? Re$ PAD III.E. [ ]Yes [XI No

Does the project meet the Regional criteria for readiness for implementation? Re$ PAD IK G. [XIYes [ ]No

Project development objective Ref: PAD II. C., Technical Annex 3 The objective of the Project is to build the Recipient's capacity to improve the management and regulation of the mining sector.

Project description [one-sentence summary of each component] Re$ PAD II.D., Technical Annex 4 Component A. Overarching Legall regulatory frameworks for mineral sector: to close regulatory gaps in the minerals sector through development of technical regulations for underground mining, environmental and social regulations and precious minerals and diamonds trading licenses regulations.

Component B. Institutional Strengthening: to ensure good sector governance guided by the principles of transparent non-discretionary and efficient minerals administration through provision of capacity building and equipment to Geological Survey Department (later National Minerals Agency), selection of areas for future land reclamation, and building capacity of MMR for donor funded project implementation.

Component C - Project Management Which safeguard policies are triggered, if any? Ref: PAD IKF., Technical Annex 10 OP 4.01. Category B. Terms of Reference for Environmental and Social work to be completed under the Project were developed and disclosed prior to appraisal.

Significant, non-standard conditions, if any, for: Re$ PAD III. F. Board presentation: None

Loanlcredit effectiveness: None

10 0.50 0.50

11 1.60 2.10

12 1.20 3.30

13 0.70 4.00

Covenants applicable to project implementation:

Standard IDA grant terms and fiduciary covenants regarding Eligible Expenditures, Procurement, Financial Management, Financial Reports and Audits, Anti-Corruption Guidelines, etc., will apply. In addition, the following conditions have been identified:

Other legal covenants (i) Establish a computerized financial management system acceptable to IDA by June 30, 2010. (ii) Project implementation progress reports to be submitted to the Bank bi-annually, and a

Mid-Term Review to be submitted 24 months after project effectiveness. (iii) Government to maintain the PST for the duration of the project with staffing, functions,

and resources acceptable to IDA. (iv) MMRPA to appoint the auditors for the project under terms of reference and with

selection satisfactory to IDA within six month of effectiveness. (v) MMRPA to develop legal instruments, including relevant amendments to legislation and

regulations, for the management of environmental and social impacts of mining sector activities satisfactory to the Bank, within 24 months after project effectiveness.

(vi) Until the adoption of legislation and regulatory instruments referenced above, the Recipient shall apply standards and measures acceptable to the Bank to ensure the environmentally and socially sustainable management of all industrial mining operations commenced or materially revised subsequent to the effectiveness date of this Agreement.

(vii) Following adoption of the legislation and regulatory instruments referenced above, the Recipient shall notify the Bank in writing at least two months prior to any proposed amendment, abrogation, or waiver of the said legislation and regulatory instruments or any provision therefore, and shall exchange views with the Bank prior to effecting any such amendment, abrogation, or waiver, taking into account the Bank's views on the matter.

(viii) Provision of Annual Work Plans and Budgets by December 15 of each year. (ix) Implementation of the project in accordance with the Project Operations Manual.

Disbursement conditions

For Part B(ii) of the Project - Civil Service Salaries (i) The Government includes the four new positions with MMRPA/NMA (two geologists,

an IT engineer, and an environmentalist) into the organogram, and obtains approval of the Director General of the Human Resource Management Office.

(ii) The Government adopts an overall policy, in form and substance acceptable to IDA, for the development of sustainable human resource capacity within MMRPA/NMA.

(iii) The Government provides an implementation and financing plan or each fiscal year in which salaries are to be financed under the project, in form and substance acceptable to IDA, including details on the numbers, names, conditions of service, salaries, and other benefits for MMRPALNMA staff proposed to benefit fiom temporary support under the nroiect.

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

Background

1. Sector collapse 1991-2001. Sierra Leone, a leading producer of diamonds, has a rich endowment of precious, base, and ferrous metals, as well as rutile and other industrial minerals. In the 1960s and 1970s, the mining sector provided the country with more than 70 percent of foreign exchange earnings, 20 percent of Gross Domestic Product (GDP), and 15 percent of fiscal revenue. During the civil war (1991-2001), mining operations came to a standstill. Large- scale mining ceased, with the destruction of plant equipment at the rutile, bauxite, and iron mines, and "Conflict Diamonds" came to characterize the systemic breakdown of the sector.

2. Recovey efforts since 2002. After the end of the civil war in January 2002, the Government initiated actions to reform its mining sector. The diamond mining sector received special attention, given its role in Sierra Leone's conflict, and as a result, the United Nations embargo on the export of rough diamonds out of Sierra Leone was lifted in June 2003. Subsequently, with the commencement of industrial-scale mining exports, diamond exports increased to US$126.65 million in 2004 - an increase of 67 percent over 2003. The mining contribution to GDP increased from less than 1 percent in 2005-06 to a projected 17 percent in 2007.' Sector revenues remain modest as of 2008, at about US$10.5 million per year (includes royalties, taxes, fees, rents), with limited production volumes by a few existing mining operations. Revenues comprise mostly various types of license fees. When more mines move into production and the older mines regain their up-front investment costs, in about 5- 10 years, royalties and income taxes will comprise the largest share of revenues from the industry. It is estimated that with comprehensive reforms, the value of mining exports could rise to as much as US$1.2 billion in year 2020, adding 1.2 percent additional annual GDP growth and US$250-500 million per year through 2020. However, if no new investment takes place in the mining sector, revenues from mining could decline by 70 percent within 10 years.2 In September 2009, offshore oil and gas prospects were identified, indicating that future extractive industries growth in Sierra Leone could also include oil and gas.

3. Present mining situation. Today, there are four large-scale mining projects in Sierra Leone- diamond operations by Koidu Holdings and African Minerals, formerly known as Sierra Leone Diamond Corporation; the rutile operation of Sierra Rutile Ltd., which resumed its operations in 2006 with support from a European Union redi it,^ and a bauxite operation led by Sierra Mineral ~ t d . ~ A number of industrial-scale exploration licenses are active, with some preparing for mining operations, and several active explorations for bauxite. It is estimated that large-scale mining and quarrying presently provide a livelihood for up to 300,000 people and

Poverty Reduction Strategy Paper Completion Report, draft June 2008. Adam Smith Institute estimates, draft October 2007. ' The European Union has provided a Euro 25 million credit to Sierra Rutile Ltd, to restart its operations. Repayments fi-om the credit (interest payments are starting in mid-2008) will be made to the Government of Sierra Leone and will be utilized for mineral sector development programs and growth strategies in mining areas.

Sierra Rutile Ltd. and Sierra Mineral Ltd. both are part of the Titanium Resources Group (TRG), a Texas-based mining fm.

employ about 14 percent of the total labor force, directly or indirectly. There are also somewhere between 100,000 and 300,000 artisanal and small-scale (ASM) miners.' Thus, taking into account the dependants of ASM miners, between 1 and 2 million people are dependent on mining.

4. Under-investment. Mining operations on an international scale are modest in size. Conflicts around mining communities and the poor reputation of Sierra Leone's mining sector, both domestically and internationally, persist and continue to undermine reform efforts. The situation will need to improve if the mining sector is to attract and retain any significant number of quality investments. Sector suffers from under-invested with limited exploration activities not yielding healthy competition from the private sector to explore and develop mineral resources.

Sector challenges

5 . Challenge of extractive industries development. Properly managed, oil, gas, and mineral resources provide opportunities for lifting people out of poverty and contribute to sustainable development. Mining industries create jobs both directly and indirectly, transfer technologies and knowledge, and generate significant foreign exchange earnings, thus providing governments a financial base for the development of infrastructure and the provision of social services. Unfortunately, however, many governments in resource-rich countries have weak revenue management systems and have fallen prey to "the resource curse," whereby poor policy choices coupled with corruption have exacerbated the cycles of poverty and conflict.

6 . Integrated approach. An integrated approach extends the goal of sound management and transparency along the full spectrum of the extractive industries management chain, from the awarding of licenses and contracts, to the monitoring of operations, to the collection of taxes, to the sound equitable distribution of revenues, and finally to the implementation of sustainable development projects as pictured in Figure 1.

Non-renewable Resources Sustainable Development

Sustainable Developmen

licenses management

Figure 1: Chain of Management of Natural Resources

7. Sustained economic development from the extractive industries emerges from the concept of "beginning with the end in mind" - a recognition that non-renewable resources must be transformed into sustainable activities beyond mines closures and that mine development should be accompanied by diversification and decentralization of the economy. Sustainable development investments in social and physical infrastructure must be lasting and rely on a

The Community and Artisanal and Small-scale Mining (CASM) Kimberly Process Certification Scheme report provides an estimate of 100,000-250,000 ASM miners (page 6); and the Common Fund for Commodities 2008 ASM Regional Workshop report provides estimates of "300,000 ASM workers and 28.6 percent of the population depending on ASM."

sound overarching macro-fiscal framework, in line with the country's development and poverty reduction strategy.6 A Core Mineral Policy was adopted by the Government of Sierra Leone as part of sector reforms launched in 2003; the Mineral Policy is now being updated, and the final draft is expected to take into consideration key elements of sustainable sector development and economic linkages.

8. Main sectoral and governance deficiencies. As a post-conflict economy moving toward becoming a transition economy, Sierra Leone seeks to integrate mining development into economic planning to ensure that it contributes to economic growth and poverty alleviation. However, the sector faces significant governance challenges in terms of contract awards and licensing; regulation and monitoring and mining cadastre; and collection of taxes and design of the minerals fiscal regime. As a result of sector dialogue and broad consultations, the main deficiencies of sector management and governance in Sierra Leone were identified as follows:

Contract awards and licensing: weak mineral development agreements that do not yield revenues commensurate with underlying potential; Regulation and monitoring and mining cadastre: poor sector governance and regulatory enforcement, including a weak mining cadastre with insufficient geodata, and significant environmental and social impacts of mining that are not being adequately addressed; Collection of taxes andpscal regime for mining: the fiscal and regulatory regimes for mining are regarded as non-transparent and inconsistent with international best practices; Revenue distribution and management: very limited impact of mining activities on economic development in the country; and Sustainable development: artisanal mining7 is not organized and remains an inefficient activity, resulting in a lack of benefits to and sustainable development for local communities.

9. Regional context. In addition to country-specific challenges, the mining sector across West Africa has trans-boundary issues, as prospective mineral belts that host large deposits cross national borders. Historical ties, as well as smuggling of diamonds and gold, led to economic interconnectivity among Sierra Leone, Guinea, Liberia, and Cote d'1voire8 within the Mano River Union (MRU), and neighboring countries, including Ghana, and Mali. Regional challenges include the need for harmonization9 of fiscal, legal, and regulatory regimes to avoid unhealthy competition among the countries. There is also a need to introduce measures that capture and promote cross-country synergies from the development of regional deposits, mining-sector driven infrastructure, and service clusters. In addition, transparency measures need to be integrated into the regional reform agenda.

Extractive Industries Value Chain - An Integrated and Comprehensive Approach to Developing Extractive Industries,- a 2009 publication by the World Bank Oil, Gas and Mining Policy Division.

A 2006 World Bank poverty assessment, identifies artisanal mining, despite difficult working conditions, as a vocation that can reduce poverty. Thus there is continued strong demand for mining jobs. 8 Cote d'Ivoire joined Mano River Union in mid-2008.

The term "harmonization" in this case does not imply that regimes for mining have to be identical. Rather, the regimes should be adjusted taking into account the impact of other regimes on the regimes in these countries and vice versa.

Sector reforms

9. Sector governance and reform initiatives. Development partners, including the World Bank and International Monetary Fund (IMF), Department for International Development of UK (DFID), European Union (EU), United Nations Development Programme (UNDP), and United States Agency for International Development (USAID), have been continuously engaged in policy dialogue with the Government of Sierra Leone on mining sector development. With regard to key governance issues, DFID and UNDP have been addressing contract awards and licensing, regulation and monitoring and mining cadastre; and the IMF has been addressing collection of taxes and design of the fiscal regime for mining. However, the limited progress to date reinforces the need for a more integrated and coordinated approach to support future mining development and stimulate broader economic impacts from mining activities.

10. Extractive Industries Transparency Initiative. Sierra Leone became an Extractive Industries Transparency Initiative (EITI) candidate country in February 2008, and has been working toward the preparation of its first reconciliation report.

11. Mineral Sector Development Framework. In April 2009, the Government completed a Mineral Sector Development Framework, setting out the ongoing reform activities and relevant development assistance requirements aligned to framework objectives; and requested World Bank assistance with its implementation, in coordination with other development partners. Set within the context of the Mineral Sector Development Framework, the primary focus of this Mining Technical Assistance Project (MTAP) is to provide technical assistance toward making operational a National Minerals Agency (NMA). The NMA Transformation Plan, including staffing plans and budget, was approved in 2009 by the Cabinet's Subcommittee. The proposed NMA would work alongside the Ministry of Mineral Resources and Political Affairs (MMRPA)" as a technical regulatory organization, and would have the resources to attract and retain senior professional staff supporting a much smaller but more effective MMRPA. NMA would assume responsibility for the technical and operational management of geological information (regulated precious minerals trading), and for the consistent application of a transparent mineral rights licensing system. Table 1 below summarizes the proposed new organizational structure.

Geological survey ( I 5) Precious minerals trading (2 1)

Mineral sector regulations (8) Finance & Management Services (1 9) Finance and administration (23) Regional services (4) -

o Makeni (23) o Kambia (8)

10 The MMRPA would continue to be responsible for development and adoption of mining policies and relevant legislation and regulations; and would also focus on broader community, economic, and infrastructure development. " Transformation Plan for the National Minerals Agency, March 2009, MMRPA.

o Kenema (26) o Bo(18) o Zimmi (9) o Kono (35)

Source: Transformation Plan for the National Minerals Agency, March 209, MMRPA

12. Table 2 summarizes the MTAP assistance requested by the Government, along with the support for mining sector governance reform being provided by development partners.

agreements I - assistance with review of mining agreements and re- negotiation of selected agreements (UNDP)

Regulation and Monitoring and Mining - establishment of a mining cadastre system (UNDP)'~ Cadastre: - a weak mining cadastre with

insufficient geodata and weak license enforcement

- unaddressed environmental and social impacts of mining

- assistance for restructuring of the Ministry of Mineral Resources and Political Affairs and establishment of a National Minerals Agency (D~ID) '~

- MTAP - capacity building for N W G S D data, investment promotion, post-mining rehabilitation and procurement, Jinancial management, andproject management capabilities

- Strategic Environmental and Social Assessment (World ~ a n k ) ' ~

- MTAP -preparation of an Environmental and Social regulations, Code of Practice, and associated en~ironrnental/sochl regulations

Collection of Taxes and Fiscal Regime - development of internationally competitive fiscal regime for Mining: for mining (IMF)'~, Foreign Investment Advisory Services - non-transparent and inconsistent (FIAS), transparency principles (EITI)'~

fiscal regime for mining - MTAP - monitoring of outcomes

Revenue Management and - country economic work and dialogue (World Bank - Distribution: proposed Regional Mineral Governance Project in - insufficient impact of mining coordination with other partners)

activities on economic - IMF development in the country

Sustainable Development: - Core Minerals Policy being updated (UNDP in - linkage with broader economic coordination with other donors)

l2 Under DFID-funded programs. 13 Included as a policy trigger under the Second Governance Reform and Growth Grant (GRGG); implemented in coordination with the UNDP Sierra Leone Information System program, which assisted in the development of a mining cadastre pilot in Kono district. l4 Functional Management Review of MMRPA, 2005. l5 Sierra Leone Mining Sector Reform: A Strategic Environmental and Social Assessment, World Bank, 2007. l6 Included as a trigger under GRGG; recommendations based on Sierra Leone Mineral Taxation: The Way Forward, International Monetary Fund-Fiscal Affairs Department (IMF-FAD), 2004, updated 2006. l7 Sierra Leone became an Extractive Industries Transparency Initiative (EITI) candidate country in February 2008.

development - insufficient community benefits - artisanal mining (ASM)

unorganized and inefficient

Source: World Bank staff

- MTAP will support improved community benefits - Analysis o f ASM issues (DFID) and support for ASM

(USAID), ASM regulations drafted (DFID) - Economic linkages and diversification (EC - future loan

repayments by SRL; World Bank Regional Mining Governance Project)

- MTAP -preparation of trading license regulations

13. Table 2 shows that different agencies will take the lead in providing support to the Government on key aspects of the minerals chain, as follows:

Contract awards and licensing: DFID and UNDP; Regulation and monitoring and mining cadastre: UNDP, DFID, and World Bank (MTAP); Collection of taxes andfiscal regime for mining: IMF, FIAS, EITI Revenue management and distribution: World Bank (macroeconomic dialogue), IMF Sustainable development: UNDP, DFID, USAID, EC, and World Bank (MTAP).

14. Present support. Although a substantial part of necessary mining sector reforms still have not been undertaken, donor support for the mining sector is scaling down. Dfl D's support for the Director General for Mines (DG Mines) within the MMRPA (financing that started in 2007, has been extended through December 2009, but DG Mines position was terminated in 2008) will complete DFID's work in the sector. USAID's mandate remains focused on artisanal mining areas. UNDP produced a gap analysis for the existing mining cadastre system, and also contributed to the review and negotiations of mining concessions in Sierra Leone within its Regional Project for Capacity Development for Negotiating and Regulating Investment ~ontracts,'' UNDP is currently in discussions with the Government to revise its Core Mineral Policy. Repayments under the EU Sierra Rutile Ltd. credit were to commence in 2010, after being rescheduled from 2008 due to problems at the mine; but due to continuing global financial crisis and problems at the mine to restart its operations, future repayments remain uncertain. According to the SRL agreement, the repayments are expected to finance selected activities including geological data collection, capacity building for MMRPA, and environmental and social aspects related to mining and infrastructure deve l~~ment '~ . Annex 2 summarizes donor assistance in the sector and how that assistance relates to areas to be covered under the proposed project.

15. Role of MTAP. The proposed Mining Technical Assistance Project will supplement the above activities by providing support in two high-priority areas - improvement of sector regulations, and improvement of sector governance and administration - by providing capacity building support to MMRPA and the prospective National Minerals Agency.

l8 The UNDP launched the Regional Project for Capacity Development for Negotiating and Regulating Investment Contracts at a high-level event in Monrovia in May 2008. l9 The terms and conditions of the use of Sierra Rutile credit repayments are specified in the Credit Agreement document between the EU and the Government of Sierra Leone.

16. It is generally accepted that national-level reforms need to be coordinated across the West Africa region. Regional-level integration was initiated in February 2008, through the Regional Mining Forum in Conakry, Guinea. As a result of these regional discussions, the Bank has proposed to launch an Africa Regional Mineral Governance ~rojec t ,~ ' which will focus on cross-regional aspects of mining development and the mitigation of common risks. The regional- level project will reinforce country-specific activities under the MTAP to address capacity bottlenecks.

B. Rationale for Bank involvement

17. Operationalizing reform The project builds on extensive sector dialogue and donor partnership with DFID, EU, UNDP, and USAID, which have been involved in the initial efforts to bring about sector reform. The Bank's assistance comes at a crucial moment to make reforms operational and to broaden the economic impact of sector development. Given the Bank's technical expertise in the mining sector, the Government has requested further Bank assistance to build on progress so far, and to support relevant institutions to improve the governance, effectiveness, and contribution of the sector to national development.

18. Comparative advantage. The Bank's comparative advantage is its long-term engagement and depth of knowledge of Sierra Leone's mining sector, combined with international mining sector experience and practice. IDA'S experience with development more generally, and especially with local institutions and community programs, social safeguards, and the demand side of governance, also brings new perspectives to the governance and sustainable mining development aspects of sector reform, and can assist in linking these aspects to future work on local economic development. Through engagement in public expenditure management, IDA is well-placed to integrate mining sector reform with broader macroeconomic and fiscal management issues and ensure positive cross-sectoral spill-overs. IDA'S involvement and value added in mining is recognized and welcomed by other development partners in Sierra Leone.

C. Higher-level objectives to which the project contributes

19. Higher-level objective. The proposed project will support the Bank's Country Assistance Strategy (FY 06-09) objective of "improving governance, security and peace" by (a) strengthening the Government's capacity to administer and monitor the mining sector; and (b) supporting anti-corruption measures applicable to the sector. It is also aligned with new World Bank, International Finance Corporation and African Development Bank Joint Assistance Strategy for Sierra Leone (for FY10-13, expected to be presented to the Board by early 2010). These high level objectives will be supported through implementation of a non-discretionary mining cadastre system to help make licensing decisions more t r an~~aren t ,~ ' in conjunction with EITI initiatives toward greater transparency of extractive industries' revenues. The project is in line with the objective of the Poverty Reduction and Strategy Paper (PRSP, 2009), recently prepared by the Government, which identifies mining as one of the priority sectors to be developed in the country. MTAP will form a nexus of ongoing complementary activities by: (a)

20 The new project has been proposed and is expected to be included in the lending program as an FY 10 deliverable. 2' Supported through a UNDP project, which is developing the software, and DFID, which is financing the preparation of licensing regulations.

being coordinated with the broader reform framework in the country (including the ongoing development policy grants); (b) continuing to build upon and align with other donors' efforts, most notably in the implementation of a five-year institutional reform and capacity building plan developed with DFID's support; and (c) ensuring that mining sector reform fits within the regional context and is aligned with regional objectives (such as Mano River Union, and, on a broader scale, the Economic Community of West African States (ECOWAS), and the Africa Action Plan.

20. Africa Action Plan. The project supports the objectives of the Afkica Action Plan: increasing growth and enhancing competitiveness; improving governance and reducing conflict by focusing on potential growth scenarios through mining sector development; and ensuring that local populations benefit from this development. Special attention will be paid to community consultation and benefit sharing, which is seen as one of the key ways of reducing conflicts in mining areas.

11. PROJECT DESCRIPTION

A. Lending instrument

21. Technical assistance. The project will provide sector-specific technical assistance implemented by the Government of Sierra Leone through the Ministry of Mineral Resources and Political Affairs. The technical assistance grant instrument was therefore chosen.

B. Program objective and phases Not applicable.

C. Project development objective and key indicators

22. Project developmental objective. The project's development objective is to build Government's capacity to improve management and regulation of the mining sector.

23. Project outcomes. Indicators are: (a) mining licenses issued in compliance with revised regulations adopted by MMRPA (percent); (b) MMRPA (and NMA, when it becomes operational) implements its human resource policy and trains and retains qualified staff (yeslno); and (c) geodata are readily available and accessible through the web (yes/no).

24. Project bene3ciaries. The primary beneficiaries will be the Government of Sierra Leone, through increased revenues; and the Ministry of Mineral Resources and Political Affairs, the Ministry of Environment and Environmental Protection Agency, and other government entities involved in extractive industries sector administration and oversight, through institutional reform and capacity building. The people of Sierra Leone, and mining communities, in particular, will also benefit from improved environmental protection, the mitigation of social impacts, and attention to the distribution of benefits from mining operations, including access to infrastructure and potential employment. The international investment community will also benefit through improvements to the regulatory regime that enables foreign direct investment. The Results Framework, including project indicators, is provided in Annex 3.

D. Project components

25. Project components. The project is expected to be financed through an IDA grant of US$4.0 million equivalent. The project will finance 100 percent of project costs ( except for the Salary Support category) and will be funded as specified in the project's Annual Work Plan and Budget for the respective fiscal year. Project components are described in Annex 4; cost information is included in Annex 5.

Component A. Overarching regulatory frameworks for the mining sector (US$0.29 million)

26. The objective of this component is to improve the regulation of the mining sector. This component will finance preparation and related consultations of the following frameworks and technical regulations: (i) Development of environmental and social regulations related to the EIAJSIA process

as they apply to the mining sector for both large-scale and mechanized small-scale mines, including:

Providing government officials managing the mining sector with an environment and social screening processlguidance that will enable the Government to identify, assess, and mitigate potential negative environmental and social impacts of downstream projects at the planning stage. Setting up requirements and mechanisms for the preparation, approval, monitoring, and enforcement of

i. Environmental Impact Assessments (EIAs), . . 11. Social Impact Assessments (SIAs), iii. Resettlement Action Plans (RAPs), iv. Mine Closure Plans (MCPs), and v. Environmental and Social Management Plans (ESMPs).

Strengthening the disclosure and consultation requirements and policies for EIAsISIAs, RAPs, MCPs, and ESMPs, with clear, understandable description of the legal obligations and commitments of mining companies to a variety of stakeholders (e.g., local community representatives, mediators, and the judiciary). Developing pro-forma terms of reference for EIAs, SIAs, RAPs, and MCPs for future mining development, which investors will be required to submit for specific mining projectslareas; and developing related management and mitigation plans to respond to environmental and social issues as they arise. Developing procedures for benefit sharing, including improved linkages between large-scale mining and broader economic planning, to support mining communities and local sustainable development.

(ii) Preparation of a mining sector Code of Practice, to include recommendations, beyond regulations, for environmental management practices, relationships with the communities, standards for environmental management tools, environmental performance indicators, standards for monitoring and inspection of environmental management facilities, etc.

(iii) Preparation of underground mining regulations. Although there are no underground mining operations in Sierra Leone at this time, there is a need to put such regulations in place to govern future underground mine operations.

(iv) Preparation of trading license regulations for precious minerals and diamonds. The Trading Bill (including regulations for compliance with the Kimberley Process) was drafted under a DFID project and submitted for legislative processing in mid-2009. It is currently undergoing review and consultation. Trading license regulations will be developed to support the proposed new law and operationalize its implementation.

Component B. Institutional Strengthening (US$2.86 million)

27. The objective of this component is to ensure good sector governance guided by the principles of transparent, non-discretionary, and efficient mining sector administration. This component will implement the following activities:

Support to the MMRPA and the prospective National Minerals Agency (NMA): Technical assistance to the Geological Survey Department (GSD) of MMRPA (prospectively to be transferred to NMA) to evaluate reports and plans and manage geological data; Geochemical surveys for mapping and resource assessment in selected areas; Building the Government's capacity to run a modern mining agency by equipping NMA with vehicles, computers, building refurbishings; Provide capacity building towards investment promotion by: - training officials to prepare for events focused on mining investment promotion; - financing the participation of Government officials in international events for

exploration and mining.

(ii) Temporary salary support for MMRPAhJMA. The Government will hire four senior public servants to join MMRPAhJMA (two geologists, one information technology and data manager, and one environmentalist) for the duration of project implementation, and will retain them on the Government's payroll after project completion. These positions are included in the NMA Transformation Plan (2009), but until NMA is established, they will need to be included in the MMRPA organograrn to be approved by the Director General of the Human Resource Management Office (DG HRMO) prior to the Bank providing this salary support. MMRPA will adopt a sustainable human resource policy for MMRPA and NMA, and will commit to retaining these staff after the project is completed. Salary support financing from the project will be provided on a declining basis, based on annual implementation and financing plans to be agreed with the Bank each year of project implementation. The financing plans will specify percentage of project financing requested and would need to demonstrate that the government's contribution to salaries is increasing while project support is decreasing and phasing out by the end of the project. The public service staff positions will be filled following a process established by the Government under the new (draft) Civil Service Rules and Regulations.

(iii) Support for a post-mining rehabilitation program (through MMRPAI GSD). The activities will include:

Geochemical surveying of 3-5 pilot areas requiring assessment before further decision to rehabilitate the land; Associated technical studies of pilot areas; Identification of alternative livelihood options in pilot areas.

(iv) Strengthen the capacity of MMRPA to manage donor-financed projects and day-to-day administration, including building skills for procurement, financial management, and project management and monitoring.

(v) Work with other donors and MMRPA to monitor key governance-related outcomes for the mining sector, such as transparency of licensing and implementation of a fiscal regime for mining improvements. This will include developing a monitoring and evaluation system and benchmarking progress through over the life of the project.

Component C. Project Management (USS0.24 million)

28. This component will provide support to MMRPA to implement the project activities, in accordance with the Bank's fiduciary and other guidelines, including incremental operating costs, equipment for the project support team (PST), training, and audits.

Project Preparation Facility refinancing category (US$0.40 million)

29. The pro'ect will include a Project Preparation Facility (PPF) refinancing (US$0.4 22 million). The PPF supported preparation of safeguards documents; procurement of information

technology (IT) and office equipment for the PST; and preparatory steps for project implementation, including preparation of the Project Operations Manual, first year Annual Work Plan and Budget, and commencing procurement.

E. Lessons learned and reflected in the project design

3 0. Lessons have been learned from global initiatives as well as from ongoing capacity building operations for the sustainable management of the mining sector in other African countries (Burkina Faso, Ghana, Mali, Mauritania, Mozambique, Madagascar, Nigeria, Tanzania, Uganda. and others) and other regions (Latin America, Europe, South Asia, and East Asia). The project benefits directly from the results of the Management Response to the Extractive Industry Review, in particular with reference to improving transparency and governance in the management of rents coming from extractive industries.

3 1. One of the key lessons is the importance of undertaking a strategic environmental and social assessment (SESA) of the mining sector to inform the project design. Such an assessment is particularly important for post-conflict economies to ensure that projects are designed in such a way as to benefit the population and fbture generations. A mining sector SESA for Sierra

22 The PPF Letter of Agreement (Q573-SL) was signed by the Bank on April 25,2007 and countersigned by the Government on May 24,2007.

Leone was prepared by the Bank early during the project preparation period (financed by a grant and with the objective of supporting implementation of triggers under the Bank's budget support program). The project takes account of key recommendations of the SESA aimed at ensuring broader support and understanding of the proposed reforms by stakeholders. Most importantly, the SESA will also provide input to the environmental and social regulations for mining to be prepared under the project.

F. Alternatives considered and reasons for rejection

32. The project is formulated as a technical assistance operation. The main alternatives considered included a budgetary support operation or an investment operation.

33. A general or sector-specific budget support operation was not considered appropriate, as budget support in 2007 included policy triggers for select reforms of mining licensing and revision of the fiscal regime for mining; the triggers were not fully achieved, given financial shortfalls in the overall budget. An investment operation was not considered appropriate since the project provides technical assistance to support capacity building.

111. IMPLEMENTATION

A. Partnership arrangements

34. Department for International Development of UK. There is a strong ongoing partnership between the Bank and DFID in such areas as institutional reform and the development of mining policy and regulations. DFID financed the preparation of the revised Mines and Minerals Act and the Trading Bill (Kimberley Process compliance), artisanal and small-scale mining regulations, and the development of institutional set-up and transformation plan for the National Minerals Agency. DFID will continue its engagement through December 2009 by finalizing regulations for artisanal and small-scale mining, licensing regulations, and community development agreements. MTAP will, therefore, focus on the immediate institutional and regulatory reforms regarding the creation of NMA, and on capacity building for both NMA and MMRPA, which will complement and follow on from DFID's efforts.

35. European Union. MTAP will coordinate activities with the European Union's technical assistance, which will be b d e d through the repayments of the Sierra Rutile Ltd. (SRL) credit. Based on the current needs assessment and in line with the SRL Agreement, which identified seven areas eligible for support under the EU project, including (a) geological data collection, interpretation, and mapping; (b) strengthening of MMRPA and its regional offices through the provision of equipment; and (c) possible assistance with development of public- private partnerships (PPPs) and growth poles around mining. These activities will be coordinated and carried out jointly with the Bank project to ensure no duplication of effort.

36. United Nations Development Programme. UNDP is providing support to the Government to strengthen its capacity to review and negotiate mining concession agreements, thus the project will coordinate with the proposed UNDP Regional Project for Capacity Development for Negotiating and Regulating Investment Contracts. MTAP will also closely coordinate with UNDP as that agency continues its support for development of the mining

cadastre and inventory and archiving of mining licenses. MTAP will work with UNDP to monitor the outcomes of the cadastre work to determine whether mineral rights are being issued in a transparent manner, in line with good international practice.

37. Other Bank-Financed Projects. MTAP will closely coordinate with the following Bank-financed projects and activities:

a. Governance Reform and Growth Credit (GRGC); b. Extractive Industries Transparency Initiative (EITI) Trust Fund Grant; c. Institutional Reform and Capacity Building Project; d. Integrated Public Financial Management Reform Project; e. Global Environmental Facility (GEF) Biodiversity Conservation Project, which will

include capacity building for the Government for environmental regulations and their enforcement, and the development of regulations on protected areas.

f. Work being undertaken regarding structuring frameworks for PPPs; g. Justice for the Poor (J4P) program; h. Proposed Africa Regional Mineral Governance Project, vlrhich will focus on

harmonization of regimes for mining in the subregion, and on building economic linkages around large-scale mining areas.

B. Institutional and implementation arrangements

38. Overview. The project will be implemented over a period of four years, with a closing date of December 3 1, 201 3. The Ministry of Mineral Resources and Political Affairs (MMRPA) will be responsible for overall project coordination and management. MMRPA has set up a Project Support Team (PST), which reports to the Minister of MMRPA. The PST has been operational since September 2007, and has developed capacity and experience in project management through project preparation activities. The PST comprises MMRPA staff. However, given the PST's limited experience, as well as staff time constraints (members of the PST have also to perform their regular duties in the Ministry), a capacity building firm has been engaged to provide capacity building assistance for at least the two first years of project implementation (the firm has been selected and the contract signed). MMRPA provides the physical office space and supporting institutional frameworks for effective management of the PST, which carries out day-to-day project management, including procurement, disbursement, financial management, and monitoring and evaluation for the project. The PST would assist MMRPA in ensuring that the project activities are carried out in accordance with agreed project objectives and performance targets. When NMA becomes operational, it will become a beneficiary under the technical assistance program, while project management and coordination will continue to be handled by the MMRPA's PST.

39. Composition of the Project Support Team, The core PST includes a Project Coordinator, Procurement Specialist, and Financial Management Specialist/Accountant. These three positions have been filled with competent civil service staff. During the first two years of project implementation, the PST will also include a team of consultants provided by the capacity building firm, who will assist with procurement, financial management and monitoring, and training of Ministry staff to enable them to undertake these tasks independently over time.

40. Project Operations ManuaL The Project Operations Manual was prepared by the PST with the assistance of the capacity building consultants prior to project negotiations in accordance with good practices, and includes detailed descriptions of the logistics regarding (a) coordination between stakeholders and other donor-funded projects in the sector; (b) the appropriate level of authority delegated to the PST; (c) document flows; (d) procurement procedures; (e) financial management procedures and reporting; (f) disbursement procedures; (g) format and procedures for processing of annual work plans and budgets; and (h) environmental and social management guidelines. Changes to the Manual will be subject to the Bank's prior review and approval.

41. Annual Work Plans and Budgets. The Government, prior to negotiations, prepared the Annual Work Plan and Budget for the first year of project implementation. The Work Plan includes an updated procurement plan, training plan for the forthcoming year, activities to be implemented under the project during the year with a timeline, estimated operating budget, and other costs to be incurred during the year. The format for the Annual Work Plan was developed with the help of capacity building consultants, and forms a part of the Project Operations Manual. Going forward, Annual Work Plans and Budgets will be due by December 15 of each calendar year for the period covering January 1 - December 3 1 of the following year. They will be prepared by the PST and approved by the MMRPA before submission for approval by IDA. Changes to finalized Annual Work Plans and Budgets will require prior approval by IDA.

C. Monitoring and evaluation of outcomes/results

42. Reporting requirements. The PST will be responsible for monitoring and evaluation of project implementation according to the indicators and benchmarks included in the Project Operations Manual, the Annual Work Plans, the Project Appraisal Document, and the Financing Agreement. Not later than 45 days after the end of each quarter, the PST will submit to IDA quarterly progress reports covering all project activities, including a procurement progress report and a financial summary report. Bi-annual reviews, the first one to take place six months after effectiveness, will provide detailed analysis of implementation progress toward development objectives, and will include an evaluation of financial management as well as a post-review of procurement matters. A Mid-Term Review of the project will be undertaken about two years into project implementation, and will evaluate implementation progress and propose, if deemed necessary, any changes to project design and implementation.

43. Monitoring and evaluation. The monitoring and evaluation system for the project has the following components: (a) impact evaluation and beneficiary assessment, to track both overall progress toward indicators specified in the PAD, and progress within each of the project components.

44. Data sources. The MMRPA will be the primary source of information for monitoring and evaluation and will prepare monitoring data based on inputs from the Ministry of Finance and Economic Development (MoFED); the National Revenue Authority; the Government Gold and Diamond Office (GGDO)~~ of the National Revenue Authority; the Ministry of Lands,

23 GGDO, according to the NMA Transformation Plan of 2009, is expected to be subsumed by NMA after the transformation is complete.

Country Planning and Environment; the Environmental Protection Agency; the Ministry of Trade and Industry; local authorities; mining companies; other private and government stakeholders; and local communities. More details are given in the Arrangements for Results Monitoring table in Annex 3.

D. Sustainability

45. Government commitment. A key parameter for the sustainability of project outputs is the Government's commitment to support the reform agenda for the sector. The prospects for strong Government commitment are high because the mineral sector has been identified by the Office of the President as one of the priority growth sectors to bring about development and improvement of socio-economic conditions in the country. Mining is one of the crucial industries in Sierra Leone, and the PRSP includes a set of actions that the Government intends to undertake to improve sector performance and revenues. The project components have been strategically developed to sustain the upward trend brought about by mining sector reforms since 2003.

46. Synergies with other activities. The project is a part of the overall development program for Sierra Leone, and will benefit fiom synergies with other operations in the country. The project will be coordinated with the broader reform framework in the country, including the GRGC; will build upon and align with other donors' efforts; and will help ensure that the mining sector reform fits within the regional context and is aligned with regional development objectives.

47. Capacity of the Project Support Team The PST will benefit from capacity development and will be responsible for day-to-day project management, including procurement, disbursement, financial management, and monitoring and evaluation. In order to ensure knowledge transfer and ownership within the MMRPA, these activities have been mainstreamed within MMRPA's core business strategy as deliverables.

48. Modernization of the sector. The project will strengthen MMRPA's capacity to build an effective and modem mining sector that can be an engine for national economic and regional development. The project will focus on enabling the Government to develop modern regulations in keeping with international best practice models. It will also build the Government's capacity to attract and retain professionals by providing technical assistance to establish the proposed National Minerals Agency. NMA will focus on the transparent and accountable management of technical and operational issues in the areas of licensing, geological services, and precious minerals and diamonds trading. MMRPA will develop a sustainable human resource policy for MMRPA/NMA and will commit to retaining professional staff on a permanent basis. Financing of salaries will be carried out on a declining basis in accordance with annual implementation and financing plans, to ensure that appropriate skills are developed and retained with the Ministry beyond the project.

49. Africa Regional Mineral Governance Project. The project's linkages with the proposed Africa Regional Mineral Governance Project will also ensure sustainability at the national level. The regional project will focus on the creation of regional fiscal, legal, regulatory,

and policy frameworks, with the aim of bringing about sustained regional cooperation within the sector.24

50. Economic sustainability. In the long run, the mining sector will provide sustained revenues that will contribute both to maintaining systems put in place by the project (such as mining cadastre and regional mining offices), and to sustainable development projects. With the frameworks for benefit sharing put in place within regulations, support of local economic development is expected to be routinely required of future mining operations.

E. Critical risks and possible controversial aspects

51. The overall project risk is considered Moderate. The main risks include:

Table 3: Risk Assessment Matrix Description of Risk

Country and macro Risk

Country risk assessment includes overall government capacity, corruption index, commitment to reforms, business development indicators.

Technical The project is a technical design assistance grant and has no

Implementatio n capacity and sustainability

technical &sign issues. There is a substantial risk that government entities are too weak to fulfill their functions, implement project activities, or comply with Bank's environmental, social and fiduciary safeguards. Project Support Team staff are inexperienced in implementing World Bank projects and require substantial capacity building in project management, procurement, and financial

Mitigation Measure

working with government through a variety of projects and programs to improve overall governance capacity and reduce corruption risks in the

Rating after I

World Bank and other partners are

country. Project design minimizes technical I N

mitigation H

risks. I I

The project includes substantial strengthening of staff and institution- wide procurement, financial management, and project management capabilities. It will also strengthen capacity to prepare and implement follow implementation of environmental and social regulations and frameworks.

The PST consists of competent personnel which is in the process of building experience and are

management Financial

Substantial due the weaknesses in governance and technical capacity of public institutions, coupled with the slow pace of public financial management reforms. At the entity level, the risk is also

building for project-related financial management systems and capabilities, and for the new NMA, which will base its overall financial management system on the project systems. On-the-job training will be

management. At the country level, the risk is

24 Deficiencies within Sierra Leone's mining sector can be attributed in part to a lack of regional harmonization in fiscal and regulatory regimes.

supported by a team of consultants. The project will provide capacity S

Procurement

Social and environmental safeguards

Mining cadastre, licensing, and contracts

Mining fiscal regime

Mining sector governance

Substantial, primarily because of the inexperience of the MMRPA in managing Bank-funded projects. Key challenges include providing adequate technical support to the PST during implementation. The key issues and risks concerning procurement include (i) weak capacity in the MMRPA to manage procurement; (ii) limited experience of PST staff in the management of Bank-funded projects; and (iii) and limited experience of PST staff with World Bank procurement policies and procedures . Environmental and social problems are not addressed satisfactorily in any type of mining activity, even where regulations exist. Frameworks for environmental and social safeguards are not in place, and monitoring is largely undertaken by local and international NGOs, often informally due to lack of resources and inaccessibility of sites. There is a risk that licenses may be issued and contracts signed that are overly advantageous to investors and do not provide a fair reward to the country for the use of a non-renewable national resource.

Recommendations to improve the fiscal regime have been prepared by the IMF, the World Bank, and other donors, but may not be implemented. The mining sector has poor overall administrative and governance capacity.

provided to NMA financial staff.

The project will provide capacity building for project-related procurement systems and capabilities, and also for the new NMA, which will base its overall procurement system on the project systems. On-the-job training will be provided to NMA procurement staff

The project will support preparation of environmental and social regulations for future mining investments.

Capacity building and technical assistance is taking place under various projects to put in place effective licensing procedures and regulations, strengthen government negotiating capabilities, and improve the transparency of contracts and licence awards. The project will monitor licensing and contract practices. Implementation of the fiscal regime for mining is part of the core country dialogue. The project will monitor implementation of fiscal regime recommendations. Many of the reform measures that have been developed by the Government and the donor community are aimed at strengthening mining sector administrative capacity and

M

S

S

S

S

F. Loadcredit conditions and covenants

52. Standard IDA grant terms and fiduciary covenants regarding Eligible Expenditures, Procurement, Financial Management, Financial Reports and Audits, Anti-Conuption Guidelines, etc., will apply. In addition, the following conditions have been identified:

Lack of interest from private sector

Opposition to mining from local population

IV. Overall Risk

Board presentation condition None

of occurrence and magnitude of potential adverse impact.

governance. The project will contribute to this process by building fiduciary capacity at NMA and by monitoring key aspects of sector performance. The project will support better geo data and promotional initiatives to attract investors. The successful implementation of the various mining sector reform initiatives by the donor community should contribute to reducing both actual and perceived risks for potential investors.

The project design will be informed by the Strategic Environmental and Social Assessment, and include mechanisms for dialogue around community-level benefit sharing.

Moderate, Low - according to the

There is a risk that foreign investors may not respond to sector reforms and promotion due to other daunting challenges such as low human capital, weak infrastructure, and high perceived rate of corruption and security risks. Emphasis on transparency, accountability, and a sound regulatory environment may to some extent mitigate this risk. Mining communities may oppose changes in the sector if they are not well informed and consulted, if social and environmental risks are not well mitigated, and if benefits do not accrue at the local level.

Effectiveness conditions

M

M

M likelihood "Rating of risks on a four-point scale - High, Substantial,

Only standard conditions for receipt of a legal opinion on the Financing Agreement will apply.

Other legal covenants

(x) Establish a computerized financial management system acceptable to IDA by June 30, 20 10. (xi) Project implementation progress reports to be submitted to the Bank bi-annually, and a

Mid-Term Review to be submitted 24 months after project effectiveness.

(xii) Government to maintain the PST for the duration of the project with staffing, functions, and resources acceptable to IDA.

(xiii) MMRPA to appoint the auditors for the project under terms of reference and with selection satisfactory to IDA within six month of effectiveness.

(xiv) MMRPA to develop legal instruments, including relevant amendments to legislation and regulations, for the management of environmental and social impacts of mining sector activities satisfactory to the Bank, within 24 months after project effectiveness.

(xv) Until the adoption of legislation and regulatory instruments referenced above, the Recipient shall apply standards and measures acceptable to the Bank to ensure the environmentally and socially sustainable management of all industrial mining operations commenced or materially revised subsequent to the effectiveness date of this Agreement.

(xvi) Following adoption of the legislation and regulatory instruments referenced above, the Recipient shall notify the Bank in writing at least two months prior to any proposed amendment, abrogation, or waiver of the said legislation and regulatory instruments or any provision therefore, and shall exchange views with the Bank prior to effecting any such amendment, abrogation, or waiver, taking into account the Bank's views on the matter.

(xvii) Provision of Annual Work Plans and Budgets by December 15 of each year. (xviii) Implementation of the project in accordance with the Project Operations Manual.

Disbursement conditions

For Part B(ii) of the Project - Civil Service Salaries (i) The Government includes the four new positions with MMRPA/NMA (two geologists, an

IT engineer, and an environmentalist) into the organogram, and obtains approval of the Director General of the Human Resource Management Office.

(ii) The Government adopts an overall policy, in form and substance acceptable to IDA, for the development of sustainable human resource capacity within MMRPA/NMA.

(iii) The Government provides an implementation and financing plan or each fiscal year in which salaries are to be financed under the project, in form and substance acceptable to IDA, including details on the numbers, names, conditions of sewice, salaries, and other benefits for MMRPA/NMA staff proposed to benefit from temporary support under the project.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

53. Benefits. The project provides technical assistance and, as such, does not lend itself easily to quantitative investment analysis or to the calculation of net present value (NPV) or economic rate of return. While any figure must be considered highly speculative, it is expected that with appropriate sector reforms and consequent sector investment, the value of exports will rise from the current US$175 million per year (in 2006) to US$1.2 billion per year by 2020. An additional 1.2 percent in GDP growth through 2020 can also be reasonably expected. Revenue from the mining sector, which currently is about $10.5 million per annum, mostly from various license fees, can potentially increase to at least $500 million (with companies starting to pay royalties and income taxes within 5-10 years). The realization of these revenues will depend on the exploration results, future production volumes by the industry, and the behavior of commodity markets over time. If no new investment comes into the sector, a 70 percent decline in revenues over 10 years is projected (Annex 9).

B. Technical

54. The project does not include any investments and there are no technical issues.

C. Fiduciary

55. Public financial management reform. The Government has introduced a number of proactive reforms in public financial management (PFM), including public procurement reforms meant to reduce the opportunities for corruption. The implementation of the Public Procurement Law enacted in 2004 is part of the PFM reforms component of the Bank-financed Institutional Reform and Capacity Building Project and the Integrated Public Financial Management Reform Project, both of which are being implemented by the Ministry of Finance and Economic Development and the Ministry of Local Government.

56. Public procurement. The Public Procurement Act of 2004 is comprehensive and covers all procurement in the public sector (central ministries, departments and agencies; metropolitan, municipal, and district councils; as well as parastatal organizations and state- owned enterprises). The Public Procurement Act created the National Public Procurement Authority, an autonomous regulator empowered to set rules and oversee procurement practices by all public sector bodies. In turn, the National Public Procurement Authority has issued standard bidding documents and regulations to ensure open, competitive procurement across all levels of government. The procurement plans of central ministries, departments, and agencies are tied to the budgeting process. Challenges currently being addressed include capacity building, development of a procurement cadre within the public sector, and the auditing of public entities. Progress is being monitored under the multi-donor budget support program for Sierra Leone.

57. Rkk mitigation. In summary, while the risk matrix (Table 3) indicates some very real governance risks, the authorities have been making tangible progress that is being supported and deepened with the assistance of the donor community. Government and the key budget support donors, including the Bank, DfI D, UNDP, ADB and EU, have agreed on a well-defined program of governance reforms, backed by a harmonized approach to reform and monitoring. These reforms and other measures will help reduce the currently high fiduciary risks faced by all projects supported by the donor community.

58. Risk rating. Financial management and procurement assessments of the project implementing entity. The Bank has concluded that although there are systems in place that satisfy the Bank's minimum requirements (including OP/BP10.02), these systems are weak and require regular supervision and improvements. The project's overall financial management risk after mitigation is rated as Moderate and procurement risk ratings as substantial. The capacity building firm will assist with bringing in needed skills and experience to progressively build the capacity within the PST and MMRPA needed to improve the situation.

D. Social

59. Improved procedures. The project does not directly support mining sector investments and does not invest in physical infrastructure. Technical assistance is targeted towards building the Government's frameworks to manage existing and future investments in mining. With this in mind, the Government will engage in ongoing consultations with stakeholders to ensure that (a) social and poverty aspects of mining sector activities are incorporated into appropriate laws and regulations in accordance with best international practices; and that (b) capacity is in place and institutionalized to manage the effects of mining sector development on both central and local government and local communities.

60. Opportunities and risks. The project is supported by environmental and social impact assessments and is reinforced by an overarching Strategic Environmental and Social Assessment (SESA), which informs and promotes pro-poor mining policy reforms in Sierra Leone (see below). The SESA underscores that there are both opportunities and risks for local communities affected by large-scale, artisanal, and small-scale mining activities in the country. The opportunities include direct and indirect employment from large-scale and artisanal mining; mining-related financial transfers; and improved access to health, education, and other social services in mining communities put in place by mining companies. The risks relate to conflicts between surface ownership and the holders of mineral rights, and loss of land for agriculture due to the lack of land reclamation activities. Special consideration will need to be given to vulnerable groups, including women and children.

61. Benefits for communities. In keeping with the SESA, the project will increase community-level benefit sharing by incorporating sound consultation processes into applicable regulations. This will be achieved through the development of appropriate consultations and updated environmental and social regulations for mining sector administration, within Component A.

E. Environment

62. Strategic Environmental and Social Assessment. A Strategic Environmental and Social Assessment of the mining sector in Sierra Leone was carried out by the World Bank in 2007 in response to the Government's request for assistance in developing its Minerals Policy. While the SESA does not satisfy the Bank's safeguards requirements, it served as an important tool to guide policy reforms in relation to Euture mining activities, and in formulating the project components. The SESA informs longer-term country development objectives by integrating environmental and social considerations into mining sector reform. Environmental and social priorities for mining reform were identified by the stakeholders in four regions of the country. More details on the SESA and its recommendations are provided in Annex 10. Some of these recommendations will be implemented under the project.

63. Safeguards Category B. Although the proposed project is limited to the provision of technical assistance and will not directly result in any direct environmental or social impacts, it has been classified as Category By triggering OPIBP 4.01 (Environmental Assessment), because of the potential impacts of follow-on investments in the mining sector of Sierra Leone. No specific environmental or social assessment will be prepared and submitted to the InfoShop for this project in advance; instead, the terms of reference for the development of frameworks and

legal instruments for environmental and social aspects of mining have been developed by the Bank, and were disclosed in the InfoShop and in-country prior to appraisal (appraisal completed October 20,2009).

64. SESA recommendations. The project incorporates the following SESA recommendations:

Strengthen the regulations related to the EIA/SIA process. Prioritize monitoring and evaluation of EIAs and SIAs for large-scale and mechanized small-scale mines, focusing on community and other stakeholder priorities - water, sanitation, deforestation, and soil degradation. Require EIAs/SIAs to be presented in a manner that is understandable to local community representatives, mediators, and the judiciary, and that clearly identifies the legal obligations and commitments of mining companies and how they will be fuljilled. Strengthen the ability of local governments and civil society to investigate and motivate legal procedures against mining operations with poor environmental and social performance.

65. Environmental and social regulations for mining. To build upon the results and recommendations of the SESA, the project will assist with development environmental and social regulations for mining. These regulations and associated frameworks will be made an integral part of the future licensing mechanism; and investors will be required to conduct their own environmental and social impact assessments and develop environmental and social management plans for the individual projects - all using the template terms of reference that will be developed for such purposes under the project.

66. The project will assist the Government to design regulations and frameworks to manage environmental and social impacts of future mining activities in Sierra Leone.

Prior to proiect approval. Terms of reference for the environmental and social sector work to be completed under the project were disclosed prior to appraisal. During project implementation. Component A of the project will include activities to (i) prepare environmental and social regulations; (ii) Component B will undertake technical assessments of candidate areas for land reclamation and development of alternative livelihoods (land-related work to be carried out under different source of funding). Safeguards compliance. The project is in compliance with all World Bank safeguard requirements.

F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPIBP 4.01) [XI [ 1 Natural Habitats (OPIBP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OPIBP 4.1 1) Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OPIBP 4.10) [ 1 [XI Forests (OP/B P 4.36) [ 1 [XI Safety of Dams (OP/BP 4.37) [ 1 [XI Projects in Disputed Areas (OPIBP 7.60)* [ 1 [XI Projects on International Waterways (OPBP 7.50) [ 1 [XI

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on disputed areas.

67, It is recognized that Sierra Leone's policy framework regarding managing environmental and social impacts of mining falls short of international good practice. There are no sound regulations and practices, and limited capacity to enforce existing policies. The project will assist the Government in developing appropriate frameworks, and provide technical assistance in finalizing and adopting these frameworks.

G. Policy exceptions and readiness

68. The project does not require any exceptions from Bank policies. The project meets regional requirements for readiness for implementation, including:

- MMRPA established the Project Support Team (completed in September 2007) and contracted with a consulting firm to support implementation and build capacity.

- MMRPA and World Bank agreed on an 18-month procurement plan and a first year work plan and budget.

Annex 1: Country and Sector or Program Background SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJEXT

Mining sector background

1. Sierra Leone is well endowed with mineral resources and is a leading producer of diamonds, rutile, and bauxite. Its rutile deposits are world class and the country continues to be a major source of high- quality rutile for the global market. Other identified minerals include iron ore, platinum, chromite, lignite, clays, and base metals (copper, nickel, molybdenum, lead, and zinc). Mining has been an important economic activity - considered second only to agriculture - in Sierra Leone since the 1930s. Initially it involved gold, iron ore, and alluvial diamonds. Later it also included platinum group metals. In the 1960s and 1970s, the mining sector provided the country with more than 70 percent of foreign exchange earnings, 20 percent of GDP, and 15 percent of fiscal revenue. During the civil war (1991-2001), mining operations came to a standstill. Large- scale mining ceased, with the destruction of materials and equipment at the rutile, bauxite, and iron ore mines. "Blood Diamonds" became an international issue.

2. By international standards, the size of the mining sector in Sierra Leone is modest. Its comparatively small size, combined with a widespread perception of high risk for investors as well as an established trend of unrealized mining potential, accounted for the insignificant influence of Sierra Leone in the international markets of the minerals produced in the country.

3. Sierra Leone's mining sector is made up of three subsectors: (a) large-scale production of diamonds; (b) large-scale production of non-precious minerals - rutile and bauxite; and (c) artisanal and small-scale production of diamonds, and to a much lesser extent gold. Large-scale mining operations in the non-precious minerals subsector continue to be foreign owned and formerly included Sierra Leone Ore and Metal Company for bauxite and Sierra Rutile Ltd. (SRL) for rutile and ilmenite (titanium minerals). Large-scale production of diamonds was fully state owned from 1984 onwards. Following severe deterioration in its performance, leading to a steep decline in production by 1992, the Government initiated the liquidation of the National Diamond Mining Company. Rudimentary artisanal mining continues to be fully private, with a few mid-size companies, and with foreigners and resident Lebanese and Gambians having key roles, particularly in financing and marketing. Presently, large-scale mining operations are owned by Sierra Rutile Ltd. in rutile, Sierra Minerals Ltd. in bauxite, and Koidu Holdings Ltd. and Afiican Minerals in diamonds. There are about 20 small-scale mines in the country and somewhere between 100,000 and 300,000 artisanal miners - 80 percent of mining in Sierra Leone is artisanal. Direct and indirect employment in the large-scale mines could amount to about 38,000 people, with an estimated 300,000 people (including dependants and extended families) deriving their livelihoods from the large-scale mines. Taking into account the dependants of artisanal and small-scale miners, between 1 and 2 million people (possibly as much as one third of the population) are dependent on mining.

4. Formal diamond production has declined steadily since the early 1980s. Attempts to force the trade of alluvial diamonds into official channels were unsuccessful, and efforts to tighten controls and enforce foreign exchange surrender requirements resulted in increased smuggling in 1980s. Nevertheless, partner country trade data indicate that the overall volume

(legal and illegal) of diamond exports appears to have remained stable, as the declining output of the state-owned company was largely compensated with production from artisanal miners exported through illegal channels. As a consequence of this switch fiom formal to informal channels, fiscal revenues fiom this subsector became insignificant. Other minerals experienced fluctuating earnings due to instability in international mineral prices. Rutile experienced sharp growth during 1980s and early 1990s, but further increase in production required new investments, which were being formulated when the attacks on the mine forced its closure. Bauxite production also increased substantially during the 1980s, as a result of high demand that was met by significant investments during the first half of the decade. Output later declined, as investments leveled off with demand.

5. Currently, the mining sector is beginning to recover. Exports of diamonds are increasing ($212 million in 2005 - an increase of 42 percent over 2003). Diamonds, rutile, and bauxite are currently being mined by major mining companies, after the interruption from 1995 to 2005 due to the civil war. The country's established diamond fields cover more than one- quarter of the country, mainly in the east and southeast. Sierra Leone has good potential for additional discoveries of mineral deposits. The general geology suggests that (a) endowments exceed what is known and is being worked; and (b) under the right conditions, new exploration and development would result in new mines. It is estimated that within a decade, the successful realization of Sierra Leone's large-scale mineral potential could result in an annual production above US$370 million. Large-scale and, to a much lesser extent, mechanized small-scale mining companies do contribute directly to social and economic benefits in mining areas through employment, development of infrastructure, and some limited provision of social services. Additionally, with an improvement in the environment for artisanal mining, alluvial diamond and gold production could increase due to higher resource recovery and processing efficiency. Further growth is expected this year with the continued expansion of large-scale mining of rutile and proposed new investments in bauxite and iron ore mining. The MMRPA expects that there will be four to five large-scale mines operating by 2008.

Registered Mining Exports (US$ millions) 1 1987 1 1993 1 1997 1 1999 1 00' 1 01' 1 02' 1 03' 1 04' 1 05' 1

Diamonds 1 23.4 1 20.2 1 10.5 1 1.25 1 10.1 26.0 41.7 149.9 183.1 212.3 Bauxite 1 22.6 1 25.2 1 0.5 1 - - - K U ~ I ~ 141.3 10v.y 1 - I - I - - I - I - I I Gold 13.7 11.6 1 - - -

I Total 1 97.0 1 107.9 1 11.0 1 1.25 1 10.1 1 26.0 1 41.7 1 149.9 1 183.1 1 212.3 1 Source: Sierra Leone Ministry of Mineral Resources and Political Affairs.

Sector reforms needs

6. After the end of the civil war in January 2002, mining sector reforms were initiated largely in an ad hoc manner. The diamond mining sector received special attention given its role in Sierra Leone's conflict. As a result, the United Nations embargo on rough diamonds was lifted in June 2003; subsequently, diamond exports increased and transparency of the sector continued to improve. Rehabilitation of rutile mining, with the support of a European Union credit, was also successful. However, sector governance reforms, including legal and regulatory frameworks, revenue management, and improved benefits to the communities have been less

coherent. Conflicts around mining communities and the poor reputation of Sierra Leone's mining sector, both domestically and internationally, persisted and continued to undermine efforts to revive the sector, which so far not been able to attract and retain a significant number of quality investments.

7. Sector dialogue and broad consultations confirmed the main deficiencies of sector management: (a) fiscal and regulatory regimes for mining are regarded as non-transparent and discretionary, and therefore inconsistent with international best practices; (b) MMRPA requires capacity building and restructuring to be able to provide services and manage the mining sector; (c) the available geodata are insufficient; (d) significant environmental and social impacts of mining are not being addressed adequately; and (e) artisanal mining is not organized and remains an inefficient activity. As a post-conflict economy moving towards a transition economy, Sierra Leone seeks to integrate mining development into broader national economic planning to ensure that it contributes to economic growth and poverty alleviation. Mining is a temporary land use and should be started only as a path towards long-term sustainable development. Mining activities should be strategically focused on supporting sustainable development.

7. The management of Sierra Leone's mineral resources is within the purview of MMRPA. Despite the importance of mining to the economy the capacity of the MMRPA is grossly inadequate. Although revenues from licenses are substantial (estimated at about US$7 million in 2007), financial support to the Ministry is far short of meeting its operational requirements. The project will provide assistance in strategic areas such as licensing functions, regulations, development of inspectorate functions, and environmental and social monitoring of mining activities.

Regional-level sector reform

8. In addition to country-specific challenges faced by Sierra Leone, the mining sector in West Afiica is trans-boundary, as prospective mineral belts that host large deposits trend across border areas. Historical ties and smuggling of diamonds and gold led to economic interconnectivity among Sierra Leone, Guinea, Liberia, and Cote dYIvoire within the Mano River Union (MRU), and neighboring countries, including Ghana and Mali. Regional challenges include (a) harmonization of fiscal, legal, and regulatory regimes, to avoid unhealthy competition among the countries to attract mining investments, and to minimize opportunities for arbitrage by mining companies created by varying rates of royalties and other taxes on the same minerals; and (b) introduction of measures at the regional level to capture cross-country synergies from mining sector-driven infrastructure development and industrial service clusters, to promote sustainable growth and poverty reduction. Transparency measures should also be approached from the regional perspective and integrated into the reform agenda.

9. Since early 2007, the World Bank has supported a regional dialogue in West Africa targeted at the harmonization of mining regimes to ensure that countries benefit fiom mining activities in a sustainable manner. In February 2008, a regional West Africa Mining Forum took place in ~ o n a k r ~ . * ~ Following the Forum, the MRU member countries (Guinea, Liberia and

25 Organized by the World Bank, ECOWAS, the West Afiica Economic and Monetary Union, the Afiican Development Bank, and the Agence Franqaise de Dbeloppement.

Sierra Leone) requested that the World Bank take the lead, with regional and sub-regional organizations, in preparation of a regional Mining Governance Project. The identified way forward included a comprehensive approach to managing the entire chain of natural resources- from access to mineral rights, to controlling and monitoring operations, collecting revenues, redistributing benefits, managing the sector in an integrated way, and spending resources effectively for sustainable growth and poverty reduction.

10. While regional-level integration has been initiated in the subregion, these interventions need to be reinforced with country-specific activities to address immediate needs. These activities need to be focused on (a) capacity building to improve governments' ability to handle ongoing and forthcoming mining developments, including entering into mineral development agreements, monitoring and assessment of those agreements, and collection of payments due; (b) revision of legal and regulatory frameworks for the mining sector to conform with good international practices; and (c) beginning to address the social and environmental issues related to mining.

Ongoing reforms

11. Sierra Leone has been actively engaged in developing its mining sector since the end of its civil war. With the support of the international donor community, the activities that have taken place since 2003 include (a) country participation in the Kimberly Process Certification Scheme to ensure that exported diamonds are free from "conflict"; (b) development of a core mineral policy, with assistance from DFID; (c) basic geo-data collection and dissemination, with assistance from DFID, UNDP, and private firms; (d) review of the fiscal regime for mining by the International Monetary Fund Fiscal Affairs Department (IMF- FAD)^^; implementation of the recommendations became a trigger under the Bank's budget support program27; (e) improved administration and management of mineral rights in Kono on a pilot which also became a trigger under the Bank's budget support program; (e) budget support programs to improve productivity, safety, and environmental mining conditions through extension services and capacity building and training; (f) establishment of a Diamond Area Community Development Fund, which is being run with the assistance of Peace Diamond Alliance and USAID; (h) completion of a strategic environmental and social assessment for the mining sector in July 2007, supported by the World Bank.

12. During 2006-2007, the Government's Law Reform Commission reviewed the Mines and Minerals Act (MMA), and in November 2007 developed drafting instructions for proposed changes to the legislation. Also in 2007, DFID engaged an advisory team to assist in capacity building and institutional reform at the Ministry of Mineral Resources and Political Affairs. In June 2006, the Government confirmed its commitment to begin implementation of the Extractive Industry Transparency Initiative (EITI). Technical assistance was provided by DFID to execute this process. As a result, the Government has included legal provisions to support EITI in the drafting instructions of the MMA, and has set up a committee to oversee EITI implementation.

26 See the IMF-FAD report of 2004 (updated in 2006), "Sierra Leone: Mining Taxation-An Update and a Way Forward." 27 The Programmatic Governance Reform and Growth Grant (GRGG). 28 Financed through UNDP's Sierra Leone Information System Program.

Sierra Leone has received international pre-validation status and has been internationally endorsed as a candidate country to implement EITI.

13. While positive results have been achieved as a result of these activities, including an increase in diamond exports since 2003~', major reforms are needed to improve sector governance, increase transparency, and mitigate corruption. To support this continued effort, the proposed project will focus on strengthening the institutional and regulatory framework for mining; support institutional reform; develop a uniform and non-discretionary mining cadastre system; facilitate linkages between large-scale mining development and broader economic planning; and support sustainable development on the local level.

14. The project will form a nexus of ongoing complementary activities by (a) coordinating with the broader reform framework in the country (including the GRGC); (b) continuing to build upon and align with other donors' efforts, including the implementation of a five-year institutional reform and capacity building plan developed by DFID; and (iii) ensuring that mining sector reform fits within the regional context and is aligned with regional objectives (such as the Mano River Union and ECOWAS).

29 It is noted that from the beginning of global financial crisis in 2008, diamond exports dropped globally including in Sierra Leone.

I Legislation I ~ e v i e w and -consolidate Mines and I Consolidated Act incorporating international best 1 DFID (DG Mines I

Mines and Minerals Act 2009

Minerals Act (MMA)

I I I I I Diamond Trading Act 2009

practices (addressing needs of community, investor climate, government accountability)

I I I I I National Minerals Agency Act 2009

Mining Regulations

Mining Cadastre

Preparing regulations based on

Rolling out mining cadastre system (expanding Kono area pilot) nationwide

Transparent and consistent procedures resulting from regulations issued under the proposed mineral rights, artisanal mining, and diamond trading

Fill regulatory gaps in the governance framework, with focus on developing and implementing regulations for diamond trading and mining operations (specifically underground); and environmental and social regulations and procedures (including community information dissemination and consuItation, resettlement of communities affected by mining, and mine closure and reclamation) Computerized mining cadastre system used nationwide for all types of mining activities

DFID

World Bank (MTAP)

DFID (business process review of licensing and inspections)

UNDP (gap analysis of cadastre system)

tracking table, and change manage- ment strategy

Develop implementation plan and Restructured MMRPA to bring clarity to key implement reforms hnctions and improve accountability

I Establishment of National Minerals I Physical Infrastructure (vehicles, equipment, I World Bank (MTAP)

Completed

Planned completion date in 2009

DFID project focuses on institutional aspects/completed in June 09, and is developing regulations for mining licensing, ASM, and community agreements

1" year of implementation

December 2008 I January 2009; system to be rolled out nation-wide in 201 0

2"* year of project implementation

events focused on mining investment promotion and providing support to participate in international events for exploration and mining

orld Bank Institutional Under implementation; new project

Geological database

Geological laboratory and MMO equipment

Records management

Professional development of MMRPA/NMA staff

Technical assistance to Geological Survey Department

Develop services by Geological Survey Department laboratory

Develop system and mechanisms

Technical support to MMRPA's Geological Survey Department to collectfmanage geological information and evaluate reports

Development of modem human resource unit

Training program for officials in

Undertake geophysical surveying and mapping

Establish geological database to encourage exploration and investor climate

Undertake geochemical surveying and mapping

Modem equipment enabling MMRPA, including Geological Survey Department, to carry out core functions Audit trail (tracking of correspondence) within MMRPA

Technical management leading to transfer of knowledge

Technical Assistance to Geological Survey Department to evaluate reports and plans and manage geodata, and for geochemical surveys for mapping and resource assessment in selected areas

Increase supply of skilled workers by using modem human resource practices

Technical and administrative knowledge transfer;

EU (SRL loan repayment)

World Bank (MTAP, selected areas) DFID

EU (SRL loan repayment) DFID

World Bank (MTAP)

DFID

Program under preparation but delayed due to rescheduling SRL credit

DFID to focus on institutional reform; program under preparation but delayed due to rescheduling SRL credit ThroughJune2009

Through June 2009

World Bank (Public Expendi- ture Review); World Bank PFM will support activities at

to mining to improve regional economic development

Community engagement Ensure that communities benefit from mining

Development of new formula (improved accountability) for the Diamond Area Community Development Fund (DACDF)

Dfl D

World Bank (MTAP)

EITI

USAID (through Diamond Area Community Development Fund)

Build frameworks, integrate into regulations and mining agreements, and community agreements

Monitoring of compliance and consultation with communities

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Projecthitiative I Comments

World Bank

1. Review of Mining Sector of Sierra Leone 2. Governance Reform and Growth Credit (GRGC)

3. Strategic Environmental and Social Assessment (SESA) for mining sector 4. Extractive Industries Transparency Initiative 5. Institutional Reform and Capacity Building Project

6. Integrated Public Financial Management Reform Project 7. GEF Biodiversity Conservation Project

Completed in 2004

The credit included conditionality related to mining sector reform - adoption of fiscal regime for mining in line with the IMF-FAD recommendations and adoption of nationwide mining cadastre system, completed 2007-08 Completed in 2007

The EITI multi-donor bust fund grant was made available in 2008 to support implementation of EITI Decentralization project has includes Public Financial Management component to address local government (and other government institutions) capacity to manage public resources in an inclusive, transparent, and equitable manner; under implementation Approved in 2009

Under preparation

Other Donors

Project 1 . Review of Fiscal Regime for Mining and Recommendations 2. Diamond Sector Projects I and I1 3. Director General for Mines, MMRPA

4. Governance Reform Secretariat 5 . Law Reform Commission - drafting of

Donor IMF-FAD

DFID

DFID

DFID

DFIDI Govt.

Comments Report completed in 2004 and updated in 2006

Focused on developing diamond sector, including setting up Diamond and Gold Office; completed in 2007 A consulting firm works with the MMRPA on reorganization and capacity building and implementation of Functional Review of MMRPA from 2007 and assisted with development of the new Mines and Minerals Act, licensing regulations, the Precious Minerals Trading Bill, artisanal and small-scale mining regulations, setting up MMRPA's website, and information management. Functional review of MMRPA; completed in 2006

Drafting of new Mines and Mineral Act; completed in 2007

regulations for mining 6. Sierra Rutile credit

7. Technical Assistance to MMRPA 8. Sierra Leone Information Systems Project

9. Regional Project for Capacity Development for Negotiating and Regulating Investment Contracts 10. Management of Diamond Area Community Development Fund 1 1. Training of Artisanal Miners

EU

EU

UNDP

UNDP

USAID

USAID

€ 24.5 million grant to the Government, provided in the form of loan to Sierra Rutile. Repayments to be used for TA needs, including geodata collection, institutional capacity building, and environmental and social matters € 1 million to assist MMRPA in the implementation of the Core Mineral policy ; completed 2008 Development of mining cadastre software, Kono cadastre pilot, preparatory work completed for expansion of mining cadastre system nationwide Under implementation from 2008

Program focuses on distribution of Diamond Area Community Development Fund at the community level

Training program for ASM in alliance with Global Witness

Annex 3: Results Framework and Monitoring SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Use of Project Outcome Information

Determine whether MMRPA is operating in a satisfactory manner

Use of Intermediate Outcome Monitoring

Better mine safety, environmental and social performance. Improved community and investor perception of the sector through disclosure of reports on regulatory

Confirms to community that field inspections are taking place to help ensure that operations are in compliance with regulations

Government to select specific areas to promote to interested investors

Government to select areas for new land uses

Interested investors to select specific areas for exploration

Project Development Objective

To build capacity of the Government to improve management and regulation of the mining sector

In$errnediate Outcomes

Increased compliance of mining operations with new regulations

Regional and central departments of MMRPA (NMA when it operational) efficiently perform field work

Targeted promotion of mineral resources

Praject Outcome Indicators

Mining licenses issued in compliance with revised regulations adopted by MMRPA (%) MMRPA (NMA when it becomes operational) implements its human resource policy, and trains and retains qualified staff (Yes/No)

r Geodata are easily available and accessible through the web (YesINo) Intermediate Outcome Indicators

Regulations for environmental and social management for mining, underground mining and precious minerals trading are developed and adopted by the MMRPA (Number) MMRPA (NMA when it becomes operational) monitor and report annually on enforcement of EIAISIA regulations for industrial-scale mining projects (YesINo) MMRPA monitors and reports annually on production and revenue of the sector (YeshJo) New equipment used for field work (Y es/No) Field inspections to monitor compliance of mining operations (Number) Geochemical surveying and mapping of selected areas completed (Number) Based on geochemical surveys and mapping of selected areas, Government selects candidate areas for sector promotion (Number) Government selects areas for further actions to develop other land use (outside the project) (Number) Government participates in annual events to present information to potential investors (Number) Geodata website is regularly updated and accessible (Yes/No)

human resource

ground mining, and

mapping of selected areas, Government selects candidate

Annex 4: Detailed Project Description SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

The project will be financed through an IDA Grant of US$4.0 million equivalent, A Project Preparation Facility (PPF) has been used to support project preparation over the past two years.30 The project comprises three main components and will finance 100 percent of project costs. The components are described below:

Component A. Overarching Legal and Regulatory Frameworks for the Mining Sector (US$0.29million)

The objective of this component is to improve the regulation of the mining sector. This component will finance preparation and related consultations of the following frameworks and technical regulations:

(v) Development of environmental and social regulations related to the EIAISIA process as they apply to the mining sector for both large-scale and mechanized small-scale mines, including:

Providing government officials managing the mining sector with an environment and social screening process/guidance that will enable the Government to identify, assess, and mitigate potential negative environmental and social impacts of downstream projects at the planning stage. Setting up requirements and mechanisms for the preparation, approval, monitoring, and enforcement of

i. Environmental Impact Assessments (EIAs), ii. Social Impact Assessments (SIAs),

iii. Resettlement Action Plans (RAPs), iv. Mine Closure Plans (MCPs), and v. Environmental and Social Management Plans (ESMPs).

Strengthening the disclosure and consultation requirements and policies for EIAs/SIAs, RAPs, MCPs, and ESMPs, with clear, understandable description of the legal obligations and commitments of mining companies to a variety of stakeholders (e.g., local community representatives, mediators, and the judiciary). Developing pro-foma terms of reference for EIAs, SIAs, RAPs, and MCPs for future mining development, which investors will be required to submit for specific mining projects/areas; and developing related management and mitigation plans to respond to environmental and social issues as they arise. Developing procedures for benefit sharing, including improved linkages between large-scale mining and broader economic planning, to support mining communities and local sustainable development.

30 The PPF Refmancing Category will be reconciled at the Effectiveness Date based on actual disbursements fiom the PPF. The PPF refinancing will equal the amount disbursed tiom the PPF, and the balance will revert back into the project and will become available to finance project activities.

(vi) Preparation of a mining sector Code of Practice, to include recommendations, beyond regulations, for environmental management practices, relationships with the communities, standards for environmental management tools, environmental performance indicators, standards for monitoring and inspection of environmental management facilities, etc.

(vii) Preparation of underground mining regulations. Although there are no underground mining operations in Sierra Leone at this time, there is a need to put such regulations in place to govern future underground mine operations.

(viii) Preparation of trading license regulations for precious minerals and diamonds. The Trading Bill (including regulations for compliance with the Kimberley Process) was drafted under a DFID project and submitted for legislative processing in mid-2009. It is currently undergoing review and consultation. Trading license regulations will be developed to support the proposed new law and operationalize its implementation.

Developing

Component A Cost Estimates

environmental/ social

Activity

regulations Underground mining regulations

Trading license regulations (for diamonds and precious minerals

Description

trading) Total

Estimate US$

Consultant services to develop regulations and a Code of Practice for mining

200,000

I

Component B. Institutional Strengthening (US$2.86 million)

Consultant services to develop regulations

Consultant services to develop regulations

The objective of this component is to ensure good sector governance guided by the principles of transparent, non-discretionary, and efficient mining sector administration. For implementation of this component, the MMRPA will assign relevant Ministry staff to work closely with the consultants to ensure knowledge transfer and on-the-job training. Senior staff will be engaged as public servants (see part (ii) below) to build capacity during project implementation and will be retained by the MMRPA/NMA as civil servants after completion of the project. This component will implement the following activities:

45,000

45,000

(i) Support to the MMRPA and prospective National Minerals Agency (NMA): a. Technical assistance to Geological Survey Department (GSD) to evaluate reports and

plans and manage geodata. b. Geochemical surveys for mapping and resource assessment in selected areas.

c. Building the Government's capacity to run a modem mining agency by equipping NMA with vehicles, computers, building refurbishings.

d. Provision of capacity building towards investment promotion by: i. training officials to prepare for events focused on mining investment

promotion . . 11. international events for exploration and mining

(ii) Temporary salary support for MMRPAINMA. The Government will hire four senior local contractors to join MMRPANMA as public servants (two geologists, one information technology and data manager, and one environmentalist) for the duration of project implementation, and will retain them on the Government's payroll after project completion. These positions are included in the NMA Transformation Plan (2009), but until the Act is adopted and NMA is established, they will need to be included into the MMRPA organogram to be approved by the DG HRMO prior to the Bank providing this salary support. The MMRPA will adopt a sustainable human resource policy for MMRPA and NMA and will commit to retain these staff after the project is completed. Salary support will be provided on a declining basis, based on annual implementation and financing plans to be agreed with the Bank. The financing plans will specify percentage of project financing requested and would need to demonstrate that the government's contribution to salaries is increasing while project support is decreasing and phasing out by the end of the project. The public service staff positions will be filled following the process established by the Government under the new (draft) Civil Service Rules and ~ e ~ u l a t i o n s . ~ '

(iii) Support for post-mining rehabilitation program (through MMRPNGSD). The activities will include: a. Geochemical surveying of 3-5 candidate pilot areas requiring assessment before

decision to rehabilitate the land. b. Associated technical studies of candidate areas. c. Identification of alternative livelihood options for candidate areas.

The activities described above, including collecting samples and carrying out tests, are expected to be performed by local staff and consultants to the extent possible (with guidance from international and senior consultants, as needed). The key output -the framework and manual for such assessments - will be developed and tested in the pilot areas and later will be used by MMRPA for similar assessments in other areas (under different source of funding).

(iv) Build capacity of Ministry of Mineral Resources and Political Affairs to manage donor-funded projects, as well as effectively manage administrative processes within the Ministry. This will include building skills and tools for public procurement, financial management, project management, and monitoring and evaluation of project results.

(v) Work with other donors and MMRPA to monitor key governance-related outcomes for the mining sector, such as the transparency of licensing and the implementation of a

--

3 1 The pay structure will be comparable to that of civil servants contracts being developed for NMA (estimated at $1,000 per month).

fiscal regime for mining sector improvements. This will include developing a monitoring and evaluation system and benchmarking progress of the project.

E ui ment for NMA tee--

Component B Cost Estimates

Investment romotion , Activity

Support for capacity building of National Minerals Agency

Social employment and rehabilitation baseline studies

Description

TA to Geological Survey Department to evaluate reports and plans and manage geodata Geochemical surveys for mapping and resource assessment in selected areas Salary support for MMRPA

Estimate US$

380,000

400,000 200,000

Vehicles, computes, minor works 1,000,000

International events for exploration and mining

3-5 pilot areas will be studied, focusing on identifying mined-out artisanal mining areas, assessment of water table, suitability for closure, and development of alternative livelihoods

Component C. Project Management (US$0.25 million)

100,000

500.000

Capacity building for MMR

Monitoring and Evaluation

TOTAL

This component will provide support to MMRPA required to implement the project activities, in accordance with the Bank's fiduciary and other guidelines, including incremental operating costs, equipment for the Project Support Team (PST), training, and audits.

Implementation capacity building, including building skills and tools for procurement, financial management, and project management and monitoring

Developing M&E system, benchmarking progress, and preparing M&E reports at Mid-Term Review and at the project completion

250,000

30,000

2,860,000

Component C Cost Estimates Activity

Project Support Team costs

I I

Description

Operating costs, training, ITIoffice equipment, consultancies to support project implementation Project audit

Total

Estimate US$

2 10,000

40,000

250,000

PPF Refinancing Category (US$0.4 million)

The roject will include a Project Preparation Facility (PPF) refinancing (US$0.4 million). The 3P PPF supported preparation of safeguards documents; procurement of information technology (IT) and office equipment for the PST; and preparatory steps for project implementation, including preparation of the Project Operations Manual, first year Annual Work Plan and Budget, and commencing procurement.

32 The PPF Letter of Agreement (Q573-SL) was signed by the Bank on April 25,2007 and countersigned by the Government on May 24,2007.

Annex 5: Project Costs SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

I Amount CUSS I

I Total Baseline Cost I 3.80 I

Project Cost By Component and/or Activity Component A: Overarching Mining Regulatory Frameworks for Mining

Component B: Institutional Strengthening

Component C. Project Management

PPF refinancing

I Physical and Price contingencies I

0.20

million) 0.29

2.85

0.26

0.40

I Total Project Cost I 4.00 I Taxes are eligible for project financing.

Disburseme ~t Categories*

Description Consultants' services, goods, minor works, training, workshops and study tours, and operating cost

Salary support under Part B(ii)

Refinancing of PPF

TOTAL

Amount (in US$) Eligible

100%

Such percentage as shall be specified in the Annual Work Plan and Budget for the respective fiscal year

Payable pursuant to Sec 2.07 of the General Conditions

*~isbursement conditions will apply to Category 2.

Annex 6: Implementation Arrangements SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Proiect Implementation Period

1. The project will be implemented over a period of four years (2010-2013). The project completion date is to be December 31, 2013. Expected project effectiveness is March 1, 2010 (the financing agreement is expected to be signed in December 2009, deadline for meeting effectiveness conditions is set at 90 days).

implement in^ Agency

2. Overall project coordination and management will be the responsibility of the Ministry of Mineral Resources and Political Affairs (MMRPA).

Proiect Management

3. The MMRPA has set up a Project Support Team which reports to the Minister of MMRPA through the Director General for Mines (DG Mines). The PST has been operational since September 2007, and has built early capacity and experience in project managing in launching project preparation activities. The PST currently comprises only the MMRPA staff, and a team of consultants provided by a firm to support PST operations and build the ministry's capacity for implementation of projects and project administration (including procurement, financial management and disbursements, and monitoring and evaluation). The MMRPA provides the physical office space and supporting institutional frameworks for effective management of the PST. The PST carries out day-to-day project management including procurement, disbursement, financial management, environmental and social management in relation to Project, and monitoring and evaluation for the project. The PST will assist the MMRPA in ensuring that the project activities are carried out in accordance with agreed project objectives and performance targets, including implementation guidelines for each component.

4. The Head of the PST will be a Project Coordinator who will report to the Minister through the DG Mines and will be responsible for:

a. the execution of the Project based on the Project Operations Manual; b. managing procurement activities including all contracting for consultant services

and purchases of goods, project contract monitoring, reporting and evaluation; c. financial management, record keeping, management of the Designated Account,

disbursements; and financial reporting; d. maintenance of communication and coordination between the MMRPA and the

various beneficiary government agencies and other stakeholders involved in the project

e. monitoring and evaluation of project activities, outputs and outcomes

5. The PST is composed of:

a. the Project Coordinator (PC), responsible for the overall management of project activities and compliance with its objectives, and for ensuring proper coordination between the various government agencies;

b. the Project Accountant (PA), responsible for budget preparation and follow-up, financial management including operation of the Special Account, disbursement, financial reporting and financial management.

c. A Finance Manager who will report to the Project Accountant will be responsible for the day to day processing of financial data

d. the Procurement Specialist (PS) responsible for carrying out procurement activities consistent with procedures approved by IDA, for managing ongoing contracts, and reporting on the progress of procurement activities and deliverables under contract.

e. For the first two years, capacity building consultants who will work closely with the PC, PA and PS and support them in undertaking their activities and met their responsibilities.

6. Project Operations Manual. The Project Operations Manual was completed by the time of project negotiations. It was prepared by the PST with the assistance of the capacity building consultants in accordance with good practices, and includes detailed descriptions of the logistics regarding project implementation, including: (a) coordination among stakeholders and with other donor-funded projects in the sector; (b) appropriate level of delegation of authority to the PST; (c) document flows; (d) procurement procedures; (e) financial management procedures and reporting; (f) disbursement procedures; (g) format and procedures for processing Annual Work Plans and Budgets; (h) environmental and social management; (i) project monitoring and evaluation. The Manual is subject to the Bank's prior review and approval, which will also be required for any updates or changes.

7. Annual Work Plans and Budgets. The MMRPAPST is responsible for preparing and submitting to IDA for approval Annual Work Plans and Budgets for project implementation. The plans will include an updated procurement plan, training plan for the forthcoming year, activities to be implemented under the project during the year with a timeline, estimated operating budget, and other costs to be incurred during the year. The format and procedures for processing of the Annual Work Plan were developed with the help of the capacity building consultants, and form a part of the Project Operations Manual. The plans will be due to be submitted to IDA and approved by December 1 of each calendar year for the period covering January 1 -December 3 1 of the following year. Changes to finalized Annual Plans and Budgets will require prior approval by IDA. The first year Annual Work Plan was prepared by PST prior to negotiations and approved by the Bank.

8. Accounting, financial reporting, and audits. A financial management assessment of MMRPA has been carried out, and procedures to comply with Bank norms have been agreed with the MMRPA. A computerized financial management system will be established in a format acceptable to IDA within six months after project effectiveness. The project accountant will maintain (a) records of accounts, including records of all receipts and payments; and (b) an asset register of all goods procured under the project. A monthly financial report, including bank reconciliation, will be prepared, along with statements of expenditure and summary sheets, as

required by IDA for replenishment of the Designated Account. The report and supporting documentation will be provided to the Project Coordinator, the Minister of Mineral Resources and Political Affairs, and Director General for Mines. A quarterly summary financial report will be included in the quarterly progress reports of the project in a form satisfactory to IDA. The project accountant will retain all records of payments and receipts, and make such records available for annual audit or such internal audit as may be required by MMRPA andfor the Auditor General. Statements of expenditure will be audited annually by independent auditors under terms of reference satisfactory to IDA. The audit reports will be submitted to IDA not later than six months after the end of each calendar year. The audit of the PPF will be prepared as part of the first year audit of the project accounts.

9. Procurement. A procurement assessment has been carried out, and procedures to comply with Bank procurement procedures have been agreed upon with MMRPA. The PST includes a procurement specialist. The PST will also engage a consultant with experience and qualifications and under terms of reference satisfactory to IDA, suitably experienced in World Bank procurement procedures, to train and mentor the local procurement specialist already on staff in the PST. Procurement of training activities will be subject to prior review, and such activities will be approved by MMRPA. An Evaluation Committee will be established by the MMRPA that includes relevant technical expertise as well as members of the PST. The Evaluation Committee, which will be chaired by the MMRPA, will be responsible for review and approval of expressions of interest, preparation of short lists, evaluation of proposals and bids, and recommendations for contract awards. The PST will prepare procurement reports in a format and content acceptable to IDA, based on the decisions made by the Evaluation Committee.

10. Monitoring and evaluation. The PST will be responsible for monitoring and evaluation of project implementation according to the indicators and benchmarks included in the Project Operations Manual, the Project Appraisal Document, and the Financing Agreement. Not later than 45 days after the end of each quarter, the PST will submit to IDA quarterly progress reports covering all project activities, including a procurement progress report and a financial summary report. Bi-annual reviews, the first one to take place six months after effectiveness, will provide detailed analysis of implementation progress toward development objectives, and will include an evaluation of financial management as well as a post-review of procurement matters.

Annex 7: Financial Management and Disbursement Arrangements SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Introduction

1. In accordance with the Financial Management Practices Manual issued by the Bank's Financial Management Sector Board on November 3, 2005, a financial management assessment was carried out to assess the adequacy of MMRPA's financial management capacity for the Mining Technical Assistance Project. The objective of the assessment was to determine whether (a) MMRPA (including its PST) has adequate financial management arrangements to ensure project funds will be used for purposes intended in an efficient and economical way; (b) the project's financial reports will be prepared in an accurate, reliable, and timely manner; and (c) the project assets will be properly safeguarded.

Country Issues

2. Emerging from 10 years of conflict in 2001, Sierra Leone continues to make a strong recovery from the effects of the civil war, with real GDP growth consistently above 6 percent over the last 5 years. In 2005, the Government set out its policy strategy to promote economic growth, food security, and job creation in its Poverty Reduction Strategy Paper. According to this plan, one of the foundations for sustained pro-poor growth is the maintenance of macroeconomic stability and continued improvement in public financial management.

3. The civil war had a devastating impact on public financial management, especially in terms of loss of skilled personnel. Since 2001, however, the Government has made significant progress in rebuilding and strengthening public expenditure systems, with support from the international community. In 2002, a limited scope Country Financial Accountability Assessment was undertaken, and since then, the regulatory framework for public financial management has been transformed by a number of new laws, including:

The Government Budgeting and Accountability Act, 2005 Financial Administration Regulations, 1998 (currently under revision) National Revenue Authority Act, 2003 Local Government Act, 2004 Public Procurement Act, 2004.

4. The Government of Sierra Leone is implementing a wide-ranging PFM improvement program, and several development partners are providing ongoing technical and financial support to this program. The World Bank, European Commission (EC), DFID, and the African Development Bank (AfDB) have provided financial and technical support to strengthen PFM in Sierra Leone. MoFED's PFM Reform Unit is supported by the World Bank, while DFID is funding a resident advisor to support implementation of the National Public Financial Management Action Plan and PFM aspects of budget support. Other donor interventions include institutional strengthening of the Ministry of Finance and Economic Development, supported by EC and AfDB; support to the National Revenue Authority by DFID; support to the Office of the Auditor General by DFID and AfDB; and support for the implementation of an Integrated

Financial Management Information System and decentralization of that system by the World Bank, DFID, and the EC-funded Institutional Reform and Capacity Building Project.

5 . The World Bank-financed Integrated Public Financial Management Reform Project managed by the Public Financial Management Reform Unit, includes sub-components covering:

improvements to the legal and regulatory framework; the implementation of a new Integrated Financial Management Information System and the design of interim financial management systems for local government; a strengthened Medium-Term Expenditure Framework; procurement reform; and associated monitoring and evaluation arrangements.

6. Budget execution (payment) and supervision are through the Treasury and the Accountant General, although there are Vote Controllers and Chief Financial Officer in each of the ministries, departments, and agencies (MDAs), who are the first line of responsibility for PFM at the MDA level. The Government Budgeting and Accountability Act (2005) established the requirement for MDAs to establish and maintain internal audit units that meet international standards. These units are supervised by MoFED7s Internal Audit Department. External audit is carried out through the Office of the Independent Auditor General, whose report is scrutinized and commented upon by the Public Accounts Committee of Parliament.

7. In the areas of accounting, recording, and reporting of public funds, Public Expenditure Tracking Surveys have been undertaken bi-annually since September 2007. These surveys are regarded as a central component of the monitoring system, especially in terms of their ability to address a range of issues relating to accountability, transparency and eff~ciency under the Good Governance Pillar of the Government's Poverty Reduction Strategy Paper.

8. As highlighted in the PEFA (2007), aggregate financial discipline has improved over time, yet there are some emerging features in recent years that cause concern. There has been a tendency to overestimate expected revenues relative to actual revenue. Budget support from donors is not predictable, and is not guaranteed to make up any shortfall in domestic revenue. On the positive side, the PEFA report indicated that there are now 14 separate internal audit units functioning. These units function independently from the MDA's finance department and report directly to Vote Controllers. The MoFED Internal Auditor has statutory authority to coordinate and manage the internal audit cadre, set standards, and monitor performance.

9. In the long run, these improvements in the quality of public financial management can have a positive impact on aggregate fiscal discipline, the strategic allocation of resources, and the efficiency of public service delivery. They have already reduced the fiduciary risks associated with poor budget formulation and made budget preparation more efficient. Significant progress has also been made in ensuring that the risk associated with lack of clear rules and regulations has been reduced. However, the process of implementing new rules and ways of working takes time and requires changes in attitude, continued capacity building, and widespread demand for greater accountability. This is the key challenge of donor interventions.

Project Risk Assessment and Mitigation

10. The objectives of the project's financial management system are to: ensure that h d s are used only for their intended purposes, in an efficient and economical way; ensure that funds are properly managed and flow smoothly, adequately, regularly, and predictably in order to meet the objectives of the project; enable the preparation of accurate and timely financial reports; enable project management to monitor the efficient implementation of the project; and safeguard the project's assets and resources.

11. The table below summarizes the risks, as identified during the financial management assessment, which may hinder the achievement of project objectives, along with recommendations for mitigating those risks.

Entity Level Weak FM capacity at MMRPA for project implementati~n~and lack of experience in managing Bank- funded projects, may result in poor implementation of project activities and failure to comply with Bank's environmental, social and fiduciary safeguards

Inherent Risk Strengthening the role of public institutions in FM capacity building through ongoing reforms in the public financial management system

Country Level Weaknesses in public financial management by state institutions, including issues of accountability and transparency

Use of a Project Support Team staffed with competent and qualified professionals (accountants, etc.)

H

Periodic training of fiduciary team (financial management and procurement)

Close monitoring by the FM team in Freetown by the Bank

Project Level As the first Bank project in MMRPA, there is the risk associated with inexperience and lack of coordination

Overall IR

No S

Control Risk Budgeting Delays in preparing detailed budget estimates and Annual Work Plans

Accounting Accounting staff do not have any experience in Bank disbursement and procedures

Weak technical skills of accounting staff

Internal Controlsnnternal Auditing Risk of non compliance with internal control procedures.

Weak capacity of MMRPA Internal Audit Unit.

S

H

Support to Project Support Team by capacity building consultants and MoFED, and oversight from the Internal Audit Unit of MMRPA

S

S

S

Yes

No

Yes

The Project Operations Manual will provide clear guidelines on budget cycle and procedures to ensure timeliness and completeness of budgets

The first year budget and Annual Work Plan, to be largely based on the agreed Procurement Plan, were ready before negotiations Staff to be trained by the Bank FM team on Bank policies and procedures

Regular review of staff capacities during missions; engagement of a dedicated accounting staff to support implementation

Training needs will be assessed and appropriate training program developed to help equip staff with required skills

Project Operations Manual, developed by negotiations, will provide guidelines on policies and procedures; manual will be reviewed and updated regularly

Internal controls will be in line with Government's operational policies

Internal Audit function to be monitored for its effectiveness during supervision, and necessary remedial action taken

M

M

S

Delays in processing withdrawal applications

Funds Flow

Financial Reporting Quality and timeliness in submitting interim unaudited financial reports (1UFRs)and other reports

during project implementation Staff to be trained in processing

Auditing Delays in the submission of audit reports, and the timeliness of management follow- up on audit issues

Overall Risk

H - High S - Substantial

withdrawal applications

Delays in processing withdrawal applications are a systemic problem being addressed by MoFED FM staff will be trained in the preparation of IUFRs and other reports

IUFR formats were prepared prior to negotiations and agreed upon with accounting staff to ensure that they can report on

I project expenditures I To enstwe timeliness of audit

compliance, an external auditor acceptable to the Bank will be engaged 6 months after effectiveness

Supervision missions will follow up on compliance with audit recommendations

MMRPA is encouraged to establish an audit committee to

M - Moderate L - Low

12. In order for the Bank to obtain reasonable assurance on the use of funds, the following features of a strong financial management system should be in place:

MMRPA should have an adequate number and mix of skilled and experienced staff, especially in project management, financial management, and procurement; The internal control system should ensure the conduct of an orderly and efficient payment and procurement process, and proper recording and safeguarding of assets and resources; The accounting system should support the project's requests for funding and meet its reporting obligations to fund providers, including the Government of Sierra Leone, the World Bank, and other donors; An independent, qualified auditor should be appointed to review the Project's financial statements and internal controls;

MMRPA is highly encouraged to set up an audit committee as a sub-committee of the ministry.

Strengths and Weaknesses of the Financial Management System

Strengths

13. The project's financial management is strengthened primarily by the involvement of MoFED and PST in implementation. MoFED has been actively involved with donor-funded projects and can provide guidance to MMRPA. The oversight responsibility of MMRPA's Internal Audit Unit will also help to strengthen fiduciary compliance, although the unit's supervisory capacity will have to be enhanced to ensure regular supervision. By establishing an audit committee as a sub-committee of the MMRPA, governance under the operation will be enhanced; the committee will also add value to MMRPA's own institutional governance arrangement.

Weaknesses

14. The major weakness is due to MMRPA's limited experience in implementing donor- funded projects and limited knowledge in World Bank procedure and processes. This limitation can lead to delays, errors, and non-compliance with eligibility criteria and other financial convents. To address this weakness, the Bank will organize periodic training for the financial management staff and also provide technical support during implementation and supervision missions.

Project Financial Management

15. The project will be implemented by in close collaboration with the staff of the Project Support Team.

16. The Principal Accountant of the MMWA will assume overall responsibility for financial management, including consolidation of reports from all implementing agencies. The project's financial management will be guided by the policies, rules, and procedures on budgeting, financial reporting, funds disbursement, and monitoring and control to be outlined in the Project Operations Manual.

Budgeting Arrangements

17. The budgeting process for the project is driven by the Annual Work Plans and fully integrated into the planning process of the Ministry. Planned activities in the budget contain details of objectives, expected outcomes, and performance indicators. Following the preparation of sub-level work plans by PST, annual budgeting meeting are held for the entire ministry, and these individual plans are agreed upon and consolidated into the Ministry's Budget. The first year budget and workplan for this project was finalized prior to negotiations.

Accounting Arrangements

18. The Financial and Accounting Unit of MMRPA, headed by the Principal Accountant, will be responsible for overall financial management of the project; however, the day- to-day processing of financial data will be handled by the Finance Officer of the PST. The Finance Officer is a certified accountant with relevant experience but has not been involved in managing World Bank projects. This limitation will be addressed through training and regular supervision.

19. Currently, the Financial and Accounting Unit relies on mostly a combination of manual records and Excel spread sheets to capture and record transactions. A review of existing reports indicates that the system should be able to generate reports for the project. There is no need to procure a specific accounting package, since the Government is in the process of deploying an integrated financial management system in various ministries.

20. Under the project, MMRPA will be purchasing an accounting software package (Sunsystem), which will both serve the project's financial management and accounting needs, and be adopted by MMRPA for its regular operations. The system will be made operational within six months after project effectiveness, and in the interim, the PST will use manual records and Excel spreadsheets to record transactions.

Internal Control and Internal Auditing

21. The project's internal control procedures, including processes for recording and safeguarding of assets, are documented in the Project Operations Manual and were cleared by the World Bank prior to adoption of the Manual. The Project Operations Manual will be a working document that can be updated to strengthen the internal control system when the need arises. In addition to the Project Operations Manual, project implementation will follow Government financial regulations for approval and authorization of expenditures

22. The Project Operations Manual details all aspects of the accounting system, including the major transaction cycles of the project; funds flow processes; the accounting records, supporting documents, filling requirements, and specific accounts in the financial statements involved in the processing of transactions; the accounting processes from the initiation of a transaction to its inclusion in the financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements; financial and accounting policies for the project; budgeting procedures; procurement and contract administration monitoring procedures; procedures undertaken for the replenishment of the Special Account; and auditing arrangements.

23, The Project Operations Manual was finalized and adopted prior to negotiations.

Internal Audit

24. The MMRPA's Internal Audit Department will be involved in project implementation to ensure compliance with government procedures. Procedures for internal audit are documented in an Internal Audit Manual. The duties of the Audit Department involve reviewing the internal

control systems of the Ministry, and conducting supervision missions and special investigations. Project implementation will benefit from the Audit Department's responsibility to conduct regular reviews of operations and financial transactions for the entire ministry, including both budgetary and donor-funded activities.

Fund Flow Arrangements

25. The project is expected to be financed through IDA Grant of SDR 2.6rnillion (US$4.0 million equivalent), to be disbursed over a four-year period. Disbursements and payment processing will be managed centrally by the MMRPAIPST in order to ensure control and financial monitoring. The MMRPA has an account that was used for the PPF, and this will be used as the project's Designated Account. All approvals and processing of payments will be done at the PST level, and there will be no transfer of funds to any other implementing agencies.

26. Releases into the Designated Account will be through the submission of approved withdrawal applications for the initial deposit and subsequent replenishment. Activities that will be implemented by NRA or MoFED will be executed as approved in the overall work plan. Invoices and supporting documents will be submitted to the MMRPAIPST for payments.

Disbursement Arrangements

27. The project will use transaction-based disbursement against full documentation (Statements of Expenditure) and in line with the thresholds as stated in the Disbursement Letter. Supporting documentation will be retained by the implementing agencies for review by Bank supervision missions and external auditors. Acceptable methods of disbursement include the use of an advance allocation for the initial ceiling, as detailed in the Disbursement Letter; and also the use of direct payment to pay third parties involved in implementation. If ineligible expenditures are found to have been made from the Designated Account, the Government will be obligated to refund these expenditures. The Bank will have the right, as reflected in the Financing Agreement, to suspend disbursement of the funds if reporting requirements are not complied with.

Report-Based Disbursement

28. The current weaknesses in the FM systems of the implementing agencies, as identified by the FM assessment, led to the decision to use transaction-based disbursement. In order for the project to move from transaction-based to report-based disbursement, MMFWA will be required, during implementation, to (a) sustain a satisfactory financial management rating during supervision; (b) submit Interim Unaudited Financial Reports consistent with the agreed form and content within 45 days of the end of each reporting period; and (c) submit all expected audit reports by the due date, along with a Management Letter that does not include any significant internal control or accountability issues.

29. The Bank's FM team will periodically assess the adequacy of the implementing agencies' financial management systems, and these assessments will form the basis of any change in disbursement methods.

Financial Reporting Arrangements

30. The Principal Accountant working with the Finance Officer of the Project Support Team will be responsible for generating quarterly Interim Unaudited Financial Reports and any other financial reports as may be required during implementation. These reports should clearly show, at a minimum: sources and uses of funds, use of funds by project activitylcomponent, expenditure summary by category code, and cash flow forecast, as well as bank statements showing the activities of the Designated Account. Financial reporting under the project will be based on transactions; therefore, proper record keeping is essential for generating accurate Statement of Expenditure returns. Accurate IFRs will be prepared for each quarter depicting the budgeted or planned expenditures against the actual expenditures as indicated above. The IUFRs will be submitted to the Bank within 45 days after the end of each quarter.

31. Formats of the various periodic financial monitoring reports to be generated fiom the financial management system were developed and discussed with the client prior to negotiations. The financial reports were designed to provide relevant and timely information to the project management, implementing agencies, and various stakeholders monitoring the project's performance. The FM assessment indicates that the systems currently in place will be able to generate these reports.

Auditing

32. The Auditor General of Sierra Leone has primary responsibility for the external auditing of all government projects. However, due to capacity constraints, the audits of donor-funded projects are usually subcontracted to private firms. Under the project, this arrangement will be followed subject to the Bank's necessary procurement guidelines and technical clearance of the terms of reference for the engagement of the audit firms.

33. The appointment of external auditors for the project, under terms of reference and with selection satisfactory to the Bank, should be finalized within six months of effectiveness in order to comply with audit covenants and ensure timely audit of project expenditures. The TORS for Audit have been drafted and agreed with the Bank prior to negotiations.

Conclusion

34. The Bank's assessment of the project's financial management arrangements, as documented in the preceding paragraphs, indicates that the systems satisfy the Bank's minimum requirements under OP/BP 1 0.02,

35. At the country level, the financial management risk is judged to be Substantial due the weaknesses in governance and technical capacity of public institutions, coupled with the slow pace of public financial management reforms. At the entity level, the FM risk is rated as Substantial, primarily because of the inexperience of the MMRPA in managing Bank-funded projects; and this rating also influences the project-level and control risk. Key challenges will be to provide adequate technical support to the PST during implementation and engaging all

stakeholders to help achieve project objectives. Overall, the project financial management risk is rated as Substantial,

Supervision Plan

36. During the first two years of implementation, intensive FM supervision will be required, and will be conducted at least twice a year based on the current risk assessment. The FM supervision mission's objectives will include that of ensuring that strong financial management systems are maintained throughout project tenure. A major focus of supervision will be to review the technical competence of the accounting staff in preparing accounts and generating credible reports that can be substantiated by the records; and to review of the role of internal audit in ensuring compliance. Additionally, based on findings of the supervision missions and reviews of audit reports and Management Letters, the risk rating and frequency of missions will be adjusted accordingly.

Annex 8: Procurement Arrangements SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank's Guidelines: Procurement Under IBRD Loans and IDA Credits, dated May 2004 and revised in October 2006; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers, dated May 2004 and revised in October 2006; and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the grant, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframe are agreed between the Government and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity.

2. Procurement of works. Only minor works contracts are anticipated under the project. These will include rehabilitation of office premises. The procurement will be done using the Shopping method, as per the Public Procurement Act 2004 and its regulations. Contracts estimated to cost less than US$100,000 equivalent per contract would be procured using shopping procedures based on a model request for quotations satisfactory to the Bank. Direct contracting may be used where necessary, but will be subject to the Bank's no objection.

3. Procurement of goods. Goods procured under the project will include vehicles, motorcycles, office and IT equipment The procurement will be done using the Bank's Standard Bidding Documents (SBDs) for all International Competitive Bidding (ICB), and using National SBD agreed with or satisfactory to the Bank for non-ICB contracts. Contracts below US$500,000 but equal to or above US$50,000 equivalent per contract may be procured under NCB. Contracts estimated to cost less than US$50,000 equivalent per contract will be procured using shopping procedures, based on a model request for quotations satisfactory to the Bank. Direct contracting may be used where necessary, subject to the Bank's no objection.

4. Procurement of non-consulting services. Non-consulting services may include services such as transportation; insurance; installation, commissioning, and initial maintenance of equipment; and training. Bidding documents to be used in such cases will be agreed upon with the Bank.

5. Selection of consultants. Consulting firms and individuals will be required for, inter alia, project management, development of fiscal and regulatory frameworks for mining, mining regulatory services, capacity building, and project audit. Contracts for consulting services, each estimated to cost US$100,000 equivalent or more, will be awarded following the procedures for Quality and Cost-Based Selection (QCBS). Procedures for Single-Source Selection (SSS) will be followed for assignments which meet the requirements of paragraphs 3.10-3.12 of the Consultant Guidelines. Consulting services estimated to cost less than US$100,000 per contract may be procured following the procedures of Selection Based on Consultants' Qualifications (CQS). Procedures for Selection of Individual Consultants (IC) will be followed for assignments

which meet the requirements of paragraph 5.1 and 5.3 of the Consultant Guidelines. Least-Cost Selection (LCS) will be used for selecting the auditors. For all contracts to be awarded following QCBS and LCS, the Bank's Standard Request for Proposals will be used.

6. Operating costs. Incremental recurrent expenditures during project implementation, including maintenance of vehicles, fuel, equipment, office supplies, rental charges, utilities, consumables, banking charges, advertising expenses, insurance, travel, per diems, and accommodations, but excluding salaries of civil and public servants, will be procured using the implementing agency's administrative procedures reviewed and found acceptable by the Bank. All training programs, seminars, workshops, etc., will be procured based on the annual training plans (part of the annual work plan and budget) subject to the Bank's review.

7. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be presented in the Project Operations Manual to be developed by the capacity building firm. The Project Operations Manual was finalized and approved prior to negotiations.

8. Exceptions to National Competitive Bidding procedures. The following provisions shall apply to procurement under National Competitive Bidding procedures: (a) foreign bidders shall be allowed to participate in National Competitive Bidding procedures; (b) bidders shall be given at least 28 days to submit performance securities; and (c) no preference shall be given for domestic bidders and for domestically manufactured goods. Further, (d) in accordance with paragraph 1.14(e) of the Procurement Guidelines, each bidding document and contract financed out of the proceeds of the Grant shall provide that: (i) the bidders, suppliers, contractors, and subcontractors shall permit the Bank, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract, and to have said accounts and records audited by auditors appointed by the Bank; and (ii) the deliberate and material violation by the bidder, supplier, contractor, or subcontractor of such provision may amount to an obstructive practice as defined in paragraph 1,14(a)(v) of the Procurement Guidelines.

B. Assessment of the Agency's Capacity to Implement Procurement

9. An assessment of the capacity of MMRPA to implement procurement for the project was carried out by Tsri Apronti, the Bank's Procurement Specialist, on March 19, 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's Procurement Officer and the Ministry's relevant central unit for administration and finance.

10. The key issues and risks concerning procurement are as follows: (i) h e procurement unit has only one officer. Other staff must be identified for training and transfer of knowledge; and (ii) the ministry has limited experience in the management of Bank-supported projects (through PPF implementation only).

1 1. The corrective measure is the competitive contracting of a capacity building firm, which has been recruited and will (i) second qualified staff to manage procurement; and (ii) build capacity within the ministry to take over the procurement function within two years. The terms

of references and contract for the firm include (i) establishment of procurement entity, as per the Public Procurement Act's provisions, procurement unit and procurement committee; (ii) staffing of the procurement unit with trained procurement officers; (iii) the preparation of procurement manuals for the management of procurement; and (iv) establishment of a sound procurement filing system. Consultants have been in place with the Project Support Team since August 2009.

12. The overall project risk for procurement is Substantial.

C. Procurement Plan

13. The Government, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan was agreed with the Government on October 26, 2009 and is available at the World Bank Office in Sierra Leone. It will also be available in the project's database and o the Bank's external website. The procurement plan will be updated in agreement with the PST annually, or as required to reflect actual project implementation needs and improvements in institutional capacity.

ThreshoI(1s-for P~o~~_orementMeth?ds~n=!iorRevi~~--. - .. .. ._.; ..__ _ . .. ... _ _ . ..- .___.

I 1 Procurement Contracts Subject to 1 Expenditure j Threshold** ! category S$)

i Method Prior Review (US$) L 1 III_ -2 L- : 5

i I i I

I i

i ICB I I I

i 1 1 Worb

/ lOO,OOO=~C~,OOO,OOO NCB 8

All contracts

Specified contracts as I would be indicated in

procurement plans (PPs) !

Shopping 1 None

Goods and services (other than consulting services)

i ICB All contracts i

._A ..._.__-.-...l ." "."lll.l" _ll_ll.ll._llll-

1 NCB I I ; Specified contracts as I : would be indicated in the i PPs i UN Agencies :

i Shopping j

i None

I i All values Direct All contracts

I

' contracting .L "iiiiiii..- -. -"

1 Consulting i C>= 200,000 firms I QcBs 1 All contracts -I / services I I

..-." --_---. "l_"._"-l_l.l_ "" 1-

7-''9000 =<CQOO,OOo j QCBS, FBS, oonbacts ; firms ' CQS

- -- - - - , - - - - - - * - - -- -- - -

I C~100,000 CQS, FBS, LCS (for Audit) Only TORS

1 - - - - - - - - - + * - - - - - -+ --- - - - -- - -- - - - - 1 ~>=50,000 individuals I I IC

, All contracts I

+ iii- L . I C < 50,000 individuals I I IC i TOR

/ AII Values / Single source 1 All contracts I selection -A --

1 Training, j ! To be based on j

i workshops, Study Tours

1 Annual Work 1 Plans& i

11 be revised periodically based on re-assessment of risks.

D. Frequency of Procurement Supervision

14. In addition to the prior review supervision to be carried out by the Bank, the capacity assessment of the implementing agency has recommended three (3) supervision missions each year. Annual post review of procurement actions will be carried out.

E. Details of the Procurement Arrangements Involving International Competition

I . Goods, works, and non-consulting services

(a) List of contract packages to be procured following ICB and direct contracting:

No

1

2

3

4

5

Description of Goods

Lot 1) Supply of 4WD Double cabin pickup trucks Lot 2a) Supply of Station Wagon (Large) Lot 2b) Supply of Station Wagon (small) Supply of Motorcycles with 2pcs crush helmets Supply and installation of Computers and Accessories Supply and installation of diesel engine Generator Supply and delivery of Office Furniture

Estimate (USD)

480,000

55,000

2 10,000

176,000

339,000

80,000

100,000

Procureme nt method

ICB

11

99

NCB

NCB

NCB

NCB

Pre- Qualificati

on

NA

NA

NA

NA

NA

Prior Review

1 St

contract

1 st contract

NO

NO

NO

Domestic Preference (YesINo)

No

No

No

No

No

Issuance of Bidding

Documents Jan- 1 0

,Y

,¶

Jan-10

Jan- 10

Jan- 10

Jan- 10

(b) ICB contracts estimated to cost above US$500,000 per contract, and all direct contracting, will be subject to prior review by the Bank.

2. Consulting services

(a) List of consulting assignments with short list of international firms:

Consultancy services estimated to cost above US$100,000 for firms and US$50,000 for individuals per contract, all single source selection of consultants, and contract for project auditors will be subject to prior review by the Bank.

#

1

2

3

4

5

6

(c) Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Description of Consulting Sewices

Audit of Project accounts

Developing environmental/social regulations

Underground mining regulations

Trading Licenses regulations (for precious minerals and diamonds) Support for capacity Building of National Mineral Agency - Evaluate reports, plans and manage geodata Implementation Capacity Building

Estimate (USD)

10,000

200,000

45,000

45,000

380,000

400,000

Selection method

LCS

QCBS

IC

IC

QCBS

QCBS

Review by Bank

(Prior/Post)

Prior

Prior

Prior

Prior

Prior

Prior

Preparation and issuance of

Request for Proposal(lWP)

Nov- 10

Feb-09

Apr- 10

Apr- 1 0

Jun-10

Contract signed in July 2009 (under PPF)

Annex 9: Economic and Financial Analysis SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Background

1. By international standards, the size of the mining sector in Sierra Leone is very modest. Further, its structure is complex relative to that of some other countries with successful mining sectors. The latter are typically characterized by large mining sectors focused on a single commodity and comparatively larger mines. The mining sector in Sierra Leone is made up of three subsectors: (a) large-scale production of non-precious minerals, particularly rutile and bauxite; (b) large-scale production of diamonds; and (c) artisanal and small-scale production of diamonds, and to a much lesser extent, gold. Sierra Leone's dependence on the mining sector is reflected by its high contribution to GDP (20 percent) and registered exports (90 percent) throughout most of the 1990s. During the 1990s, mining and quarrying provided livelihoods for over 250,000 people, and directly or indirectly employed about 14 percent of the total labor force.

2. Mining is currently Sierra Leone's second most important sector, after agriculture, for employment and income generation, with estimates of up to 300,000 persons directly employed in the sector today.

Economic Analysis: NPV=US$ FJIA] million; ERR = [NIA] %

3. The project provides technical assistance and, as such, does not lend itself easily to quantitative investment analysis or to the calculation of Net Present Value (NPV) or Economic Rate of Return. As noted in Annex 1, extractive industries have always been a major part of the formal economy in Sierra Leone, and before the civil war had accounted for 90 percent of registered exports and 20 percent of GDP. Exports of rutile and bauxite recommenced in 2006, with an estimated value that year of US$31 million for rutile and US$24 million for bauxite. Rutile production in 2006 was 73,801 metric tons, and projected production for 2007 is 101,544 metric tons. The rutile mine also produced 13,820 metric tons of ilmenite, valued at US$l million in 2006.

4. Some economic indicators, such as government revenues, can be projected and compared with present performance. Current revenues from the mining sector are estimated at about US$lO million per year (includes royalties, taxes, and fees). With improved enforcement of contractual obligations from the mining companies and better tax assessment and collection capacity of the government, combined with an improved fiscal regime for mining, revenues are expected to at least double in two to three years, even with a very modest increase in mine production. An additional US$lO million revenue per year by the end of project implementation would seem a feasible estimate.

5 . While any figures for the next 10 years must be considered highly speculative, it is expected that with appropriate sector reforms and consequent sector investment, the value of

mining sector exports could rise from the current US$175 million per year (in 2006) to as high as US$1.2 billion per year by 2020. An additional 1.2 percent GDP growth through 2020 can also reasonably be expected. With such an increase in exports, the value of future annual revenues from royalties and taxes could reach as high as $300-500 million per year within a 10-year period. The increase in mining activities that would contribute to a substantial increase in this revenue base will take, on average, 5-10 years from the commencement of reforms and will also be influenced by other factors, such as commodity prices and economic development in the region and globally. However, if no new investment comes into the sector, a 70 percent decline in revenues over 10 years is projected.

Financial Analysis: NPV=US$ NIA; FRR = NIA

Other Project Benefits

6 . The additional benefits to Government and communities from additional mining exploration and mine development expenditures and investments could range from US$1-2 million for a modest exploration venture, to tens of millions of dollars benefiting local communities and hundreds of millions of dollars benefiting the national economy from just one additional world-class mining development.

Annex 10: Safeguard Policy Issues SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

1. This annex presents an analysis of social and environmental sustainability issues in the Mining Technical Assistance Project.

2. On the environmental and social side, the project serves as implementing instrument for the Strategic Environmental and Social Assessment (SESA), prepared by the World Bank in 2007, In addition, the project will take account of the recent Regional West Afica Mineral Sector Strategic Assessment (WAMSSA), which is supported under a Bank-Netherlands Partnership Program (BNPP) Trust Fund grant and will be finalized in late 2009. The SESA and WAMSSA both recommend a range of actions that the Government should implement as it strengthens its mining sector.

3. The project's development objective is to build Government's capacity to improve management and regulation of the mining sector. Expected indirect benefits of this TA include the likelihood of increased revenues to the Government as the sector expands and attracts more investments. It is also expected that administration of the sector will be improved through institutional reform and capacity building at the Ministry of Mineral Resources and Political Affairs (MMRPA) and other government entities involved in the mining sector.

4. During project implementation, the Government will prepare environmental and social regulations for industrial-scale mining operations (artisanal and small-scale mining regulations are being developed with the assistance of the DFID project) that set out the Government's approach to dealing with environmental and social issues, including resettlements, that already exist and could occur as a result of increased mining sector activities. Terms of reference for such work have been prepared and were disclosed33 by appraisal (in the InfoShop on September 18, and in-country on September 29, 2009), in order to alert any stakeholder or interested party as to how environmental and social issues will be handled by the project.

5 . SESA identified an extensive list of priorities and recommendations for the Government to address in the context of sector reforms, including those related to organizing and improving artisanal and small-scale mining, developing training programs and services for such miners, formalizing middlemen, developing strategies for handling mining rushes, establishing targeted programs for innovative initiatives, and supporting alternative livelihoods. However, given the project's focus on the most urgent needs in mining sector reform and its limited funding, the project will address only the two major SESA recommendations:

(a) Strengthening the regulations related to Environmental and Social Impact Assessments (EIAsISIAs), Resettlement Action Plans (RAPS), Environmental and Social Management

33 They were disclosed as "TORS for Environmental and Social Management Framework (ESMF)," covering activities to be addressed under the project. At the procurement stage, the terms of reference will be broadened toward developing the legal and regulatory framework for mining.

Plans (ESMPs), and Mine Closure Plans (MCPs) as they apply to both large-scale and mechanized small-scale mining; and

(b) Strengthening the disclosure policies for EIAs/SIAs, RAPS, ESMPs, and MCPs, with clear identification of the legal obligations and commitments of mining companies to a variety of stakeholders (e.g., local community representatives, mediators, and the judiciary) in a manner that is understandable.

6 . In terms of potential safeguard issues arising from the project, which is expected to increase future mining activities, the most important is the need to ensure that adequate environmental screening is carried out 'for new mining operations. This will be addressed through environmental and social regulations (see para. 4 above). The project will provide technical assistance to the Government to design an EIAISIA, RAP, ESMP, and MCP process, including preparation of pro-forma terms of reference to be used by investors for relevant assessments and plans for their operations. This effort will require:

(a) Building the Government's capacity in the mining sector, including new and regulatory amendments and establishment of laws and operational requirements, review and license approval and monitoring of mine compliance and performance. Specific safeguard measures will include appropriate standards, clauses, and guidelines for social and environmental management in mining operations, decommissioning and reclamation.

(b) Preparing guidelines for mine closure for large-scale, artisanal and small-scale operations. These guidelines will include provisions for occupational health and safety, environmental impact and social impact assessments, mine closure and remediation procedures, and monitoring of environmental and social compliance. This will be used as the new standards nationally for future mining operations and be applied to current operations in a phased in approach.

7. Public Disclosure. The MTAP has been categorized as a Category B project. The terms of reference for the environmental and social work to be undertaken under the project were disclosed by appraisal both at the InfoShop and in-country (announcement was published in three major local newspapers providing website for the TORS and contact details). A consultation period of 20 days took place prior to appraisal.

Annex 11: Project Preparation and Supervision SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Planned Actual Project Concept Note review October 2006 February 2007 1ni;al Project information Document to October 2006 FebruG 2007

World Bank's Public Information Center

Initial Integrated Safeguards Datasheet to October 2006 February 2007 Public Information Center

Appraisal September 2009 October 20,2009 Negotiations October 14,2009 October 26,2006 Board approval December 1,2009 Planned date of effectiveness March 1,2010 Planned date of Mid-Term Review December 201 1 Planned closing date December 20 1 3

Key institutions responsible for preparation of the project: Ministry of Mineral Resources and Political Affairs, Min.istry of Finance and Economic Development, National Revenue Authority

Bank staff and consultants who worked on the project include: Name Title Unit

Ekaterina Mikhaylova Michael Stanley Allison George Peter Kristensen Tsri Apronti Samuel Bruce-Smith Manush Hristov Rajiv Sondhi

St. Projects Officer, TTL COCPO Lead Mining Engineer COCPO

Consultant Sector LeaderISDN AFTEN

Procurement Specialist AFTPC Financial Management Sp AFTFM

Sr. Counsel LEGAF Sr. Finance Officer CTRFC

Bank funds expended to date on project preparation: 1. Bank resources: US$468,000 2. Trust funds: NA 3. Total: US$468,000.

Estimated approval and supervision costs: 1. Remaining costs to approval: US$20,000 2. Estimated annual supervision cost: US$120,000.

Annex 12: Documents in the Project Pile SIERRA LEONE: MINING TECHNICAL ASSISTANCE PROJECT

Details of New Policy Measures Relating to Small-Scale and Artisanal Mining and Marketing of Precious Minerals, 1998.

Functional Management Review of Ministry of Mineral Resources and Political Affairs, Governance Reform Secretariat, Freetown, 2005,

Mineral Resources Development Policy for Sierra Leone, 1998, Government Notice 140, Sierra Leone Gazette, 3 0 ~ July 1998.

Mines and Minerals Act, 1996 (formerly Decree Number 5 of 1994).

Mines and Minerals (Amendment) Act, 1998.

Mines and Minerals Act (revised - consultation version), 2009

Report by Law Reform Commission of Mines and Minerals Act, August 2007.

Resettlement Policy Framework, July 2008 (draft).

Sierra Leone. Diamond Policy Study. Report for the Department for International Development, UK Government. Prepared by AMCO Robertson Mineral Services for DFID, 2002.

Sierra Leone Environmental and Social Impact Assessment, July 2008 (draft).

Sierra Leone: Institutional Reform of MMRPA - Implementation Plan, Adam Smith Institute, 2007 (draft).

Sierra Leone: Mining Sector Reform: A Strategic Environment and Social Assessment, the World Bank, July 2007

Sierra Leone: National Minerals Agency Transformation Plan, MMRPA, 2009

Sierra Leone: Mining Taxation-An Update and a Way Forward, IMF-FAD report, 2004 and Update of 2006.

Sierra Leone: Tapping the Mineral Wealth for Human Progress-A Break with the Past, World Bank, July 2005.

Poverty Reduction Strategy Paper Completion Report, draft June 2008

Transformation Plan for the National Minerals Agency, March 2009, MMRPA.

The Credit Agreement document between the EU and the Government of Sierra Leone

The Poverty Reduction and Strategy Paper (PRSP, 2009)

The PPF Letter of Agreement (Q573-SL) was signed by the Bank on April 25,2007

Annex 13: Statement of Loans and Credits

Difference between exoected and actual

Project FY Purpose Original Amount in US$ Millions disbursements

IBRD IDA SF GEF Cancel. Undisb Orig. Frm. ID Rev'd

PI13757 2010 SL-Decentr. Serv. Del. Program (FYIO) 0.00 20.00 0.00 0.00 0.00 20.58 0.00 0.00 SL-Public Financial Management TAL

PI08069 2009 (FY09 0.00 4.00 0.00 0.00 0.00 4.31 0.00 0.00

PO96105 2007 SL-Rural Dev & Priv Sec Dev SIL 0.00 30.00 0.00 0.00 0.00 26.79 7.48 0.00

PO78389 2006 SL-IDP Transp (FY06) 0.00 55.00 0.00 0.00 0.00 38.40 14.46 5.77

PO86801 2005 SL-Burnbuna Env. and Social SIL (FY05) 0.00 12.50 0.00 0.00 0.00 1.62 1.18 0.38

PO87203 2005 SLPower & Water SIL (FY05) 0.00 35.00 0.00 0.00 0.00 11.77 9.87 0.00

PO74128 2003 SL-Health Sec Reconstr & Dev (FY03) 0.00 28.00 0.00 0.00 0.00 4.27 -6.63 -2.13

PO79335 2003 SL-Natl Soc Action (FY03) 0.00 35.00 0.00 0.00 0.00 0.01 -2.94 -2.94

Total 239.50 108.56 21.60 -0.74

SIERRA LEONE STATEMENT OF IFC's

Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed Outstanding

**Quasi *GT/ Partici **Quasi *GT/ Partici

2007 Celtelsierraleon 24.05 0 0 0 24.05 7.4 0 0 0 7.4

Total Portfolio: 24.05 0 0 0 24.05 7.4 0 0 0 7.4

* Denotes Guarantee and Risk Management Products ** Quasi Equity includes both loan and equity types.

Annex 14: Country at a Glance

Sierra Leone a t a glance 1Y3109

Sub- Saharan

Africa Key Development Indlcators Sierra

Leone Agedlstrlbutlon, 2007

Mae Female

75+

6064

46-48

3 0 3

1 9 s

Od

20 10 0 10 20

p e r m d tdal pqdabm

LOW income

Population, rnid-year (millions) Surface area (thousand sq. krn) Populat~on growth (YO) W a n population (%of total populatio

GNI (Atlas method. US$ billions) GNIpercaplta (Atlas method.US$) GNI percapita (PPP, international 5 )

GDP growth (%) GDP per capita growlh (Oh)

(most recenr estimate, 2003-2008)

Poverty headcount ratio at $1.25a day (PPP,%) Poverty headcount ratio at $2.00 a day(PPP. %) Life expectancy at birth (years) Infant mortality (per 1.000live blrths) Child malnutrition (%of children under 5)

Under4 mortality rate (per 1,000)

350

300

250

200

150

100

50

0

1990 1995 ZOO0 2007

OSIem Leon* mSubSahamn Alned

Adult literacy, rnale(%of ages f? and older) Adult literacy,female (%of ages Band older) Gmss primary enrollment, male (%of age group) Gross prirnaryenrollment.fernale (%of age group)

Access to an improved water source (Wof population) Access to improved sanitatton facltities (%of population)

N e t A ld Flows

(us$ mini0 ns) Net ODA and official aid Top 3 donors (in 2007): United Kingdom European Commission Netherlands

Growth olGDP and GDP per capita (X)

30

20

10

0

-1 0

-20

-30

95 05

-C GWP - GDP Per capla

Aid (%of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumerprices (annual %change) GDP Implicit deflator (annual %change)

Exchange rate (annual average, local per US$) Terms of lrade index (2000 = DO)

1980-90 1990-2000 2000-08 (average annual gm wih 96)

Population. rnid-year(milli0ns) bl GDP (US5 millions)

4.1 4.5 649 636

(%Of GDPJ

Agriculture Industry

M anufactunng Services

Household final consumption expenditure General gov't final consumption e?pndlture Gross capital formation

~ q o r t s of goods and services hnpons of goods and services Gross savings

Note Flgures In ~tallcs are for years otherthan those SpeClfled 2008 data are prehminary lndlcates data are not available a Ald data are for2007 b Populat~on data are prellmlnaryestlmates Development Economics, Development Data Group (DECDG)

Sierra Leone

Balance o f Payments and Trade 2000 2008

Governance indicators, 2000 and 2007

Vuce and ~~cwntabl~ty

Pdabcd steblllty

Regulalay quality

Rule of lew

Control of cwryltron

0 25 50 75 100

02007 Carrtryls percdle renk (Dl031 02000 higher values rmpvbtn6r mmp

Source Kauhann-Kmay Mastrum. Wodd Bank

(US$ rnil~io ns) Total merchandiseexports (fob) Total merchandise imports (fob) Net trade in goods and services

Current account balance as a %of GDP

Workers'remittances and compensation of employees (receipts)

Reserves. including gold

Central Government Finance

(%of GDP) Current revenue (including grants)

Tax revenue Current expenditure

Technology and Infrastructure 2000 2007 Overall surplusldeficit

Paved roads (%of total) Fixed line and mobile phone

subscribers (per *I0 people) High technology exports

(%of manufactured exports)

Highest marginal tax rate (%) Individual Corporate

External Debt and Resource f l o w s Envlronmant

(US$ millions) Total debt outstanding and disbursed Total debt sewice Debt relief (HlPC. M DRI)

Agricultural land (%of land area) 38 40 Forest area (%of land area) 39.8 38.5 Nationally protected areas (%of land area) .. 2.1

Total debt (%Of GDP) Total debt service (%of exports)

Freshwater resources percapita (cu. meters) 32,493 27,358 Freshwaterwithdrawal (billion cubic meters) 0.4

Fore~gn direct investment (net inflows) Portfolio equity (net inflows)

C02 emissions per capita (mi) 0.B 0.77

GDP perunit of energy use (2005 PPP $ per kg of oil equivalent)

Composition oftotal external debt, 2007

Shortterm 30

lateml. 564

USmil l iw

Energy use per capita (kg of oil equivalent)

(US$ millions)

IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Interest payments 0 0

IDA Totel debt outstandlng and d~sborsed 354 492 Disbursements 70 Ki

Pr lvate Sec to r Development 2000 2008 Total debt sewlce 4 11

Time required to start a business (days) Cost to start a business (%of GNIpercapita) Time required to register pmperty (days)

IFC (f~scal yea0 Total d~sbursed and outstanding portfolio 2 0

of wh~ch IFC own account 2 0 Dlsbursements for IFC o w account 0 0 Portfoho Sales,prepayments and

repayments for iFC own account 1 0 Ranked as a major constraint to business

(%of managers surveyed who agreed) n.a. n.a. M iGA

Gross emosure Stock market capital~zation (%of GDP) Bank capital to asset ratio (46)

New guarantees 0 0

Note. Figures in italics are for years other than those specified. 2008 data are preliminary. W3109 ..indicates data are not available -indicates observation is not applicable.

Development Economies, Development Data Group (DECDG)

Millennium Develo~ment Goals Sierra Leone

With selected targets to achieve behueen 1990 and 2015 (estimate cbsest to date shom, +'- 2years)

G o a l I. halve the rates f o r extreme poverty and malnutr i t ion 1995 2000 2007 Poverty headcount ratlo at $125 aday (PPP,%of populat~on) 62 8 53 4 Poverty headcount ratlo at national poverty llne (%of populat~on) 82.8 702 Share of Income or consumption to the poorest qunltlle (%) 22 Prevalence of malnutrit~on (%of ch~ldren under 5) 28 7 272

G o a l 2: ensure that children are able t o complete pr imary schoo l ing Pnmafyschool enrollment (net.%) 43 Pnmafycomplet~on rate (%of relevant age group) Secondaryschool enrollment (gross, %) 1B 26 Youth l~teracy rate (%of people ages 15-24)

Goal 3: eliminate gender dlspartty i n educat ion and empower women Ratlo of girls to boys ~n pnmaryand secondaryeducat~on (%) 67 71 74 Women employed In the nonagncultural sector (%of nonagncultural employment) 21 Pmport~on of seats held bywomen ~n national padlament (YO) 6 9 15

Goa l 4: reduce under-5 mortal i ty by two-thirds Under-5 mortal~ty rate (per 2000) Infant mortal~ty rate (per 1,000 llve births) Measles lmmunlzatlon (pmportton of one-yearolds Immunized. %)

Goa l 5: reduce maternal mor ta l i ty by three-fourths Maternal mortaldy ratlo (modeled estimate, per XX),OOO l~ve births) 2,000 107 7 Births attended by skilled health staff (%of total) 42 Contraceptive prevalence (%of women ages 15-49) 4

G o a l 6: hal t and begin t o reverse the spread o f HIVIAIDS and o the r major diseases Prevalence of H N (%of population ages 15-49) 0 2 10 t2 17 lnc~dence of tuberculos~s (per TJOp00 people) 224 443 Tuberculosis cases detected under DOTS (Oh) 28 34 36

Goa l 7: halve the propor t ion o f people without sustainable access t o baalc needs Access to an ~mproved water source (%of populat~on) 47 Access to ~mproved san~tat~on fac~l~ties (%of population) 30 Forest area (%of total land area) 42 5 39 8 38 5 Nat~onally protected areas (%of total land area) 2 1 C02 emlsslons (metnc tons per caplta) 0 1 0 1 0.1 0 2 GDP per un~t of energy use (constant 2005 PPP $ per kg of 011 equivalent)

G o a l 6: develop a global partnership f o r development Telephone malnllnes (per lo0 people) Moblle phone subscribers (per XI0 people) lntemet users (per 100people) 0 0 0 0 0 2 Personal computers (per XI0 people)

Education indicators (%)

25

I: k 2000 2002 2004 2006 2007

-.91 Pdmary net enmlmtnt talo (.)

d- Ratio of girls to bqr in prlnan( 6 psmn&r( educabon

Measles immunization (%of I-year olds)

100

75

50

25

0

1990 1895 2000 2007

DSiem Leone OSub4ahamn AMm

ICT indicators (per 100people)

1 l&d+#- ZOO0 2002 2004 20062007

l f i x s d + rnohls subsmbsrsOlnternet users

~- -

Note: Figures in italics are foryears otherthan those specified. ..indicates data are not available. 1Y3/09

Development Econornics,Development Data Group(DECDG).

72

Bintimani(1948 m)

Gor

iH

i l ls

Lom

aM

ts.

SherbroIsland

Wara

WaraMts.

KAMBIAB O M B A L I

K O I N A D U G U

T O N K O L I L I

K O N O

KAILAHUNK E N E M AB O

P U J E H U N

B O N T H E

M O YA M B A

P O R T L O K O

WESTERNAREA F.R.

Gre

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Little

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Mongo

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LakeMape

LakeMabesi Mano

Pendembu

Lunsar

Mano

Rotifunk

SongoYonibana

Masiaka

Waterloo

Sembehun

Kamakwie

Fadugu

BumbunaAlikalia

Kayima

Gandorhun Koindu

Buedu

Kurubonla

Kamaron

Tefeya

Yengema

Panguma

Lago

Pendembu

Daru

Njaiama-Sewafe

Joru

Zimmi

Fairo

Potoru

Kribundu

SumbuyaMatru

Blama

Momaligi

Bendugu

Falaba

Binkolo

Yana

Gbinti

Batkanu

Pepel Masingbi

Matotoka

Yele

Mongeri

Dambara

Mange

MadinaJunction

Makeni

Bo

Kenema

Kambia

Port Loko

Moyamba

Bonthe

Pujehun

Kailahun

Sefadu

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KAMBIAB O M B A L I

K O I N A D U G U

T O N K O L I L I

K O N O

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P U J E H U N

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M O YA M B A

P O R T L O K O

WESTERNAREA F.R.

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Rotifunk

Songo

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Sembehun

Kamakwie

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Kayima

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Panguma

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Daru

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Binkolo

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Yele

Mongeri

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MadinaJunction

Makeni

Bo

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Kambia

Port Loko

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YawriBay

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To Monrovia

Gor

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SherbroIsland

TurtleIslands

BananaIslands

Wara

WaraMts.

Bintimani(1948 m)

13W

12W 11W

12W13W 11W

7N

9N

10N

8N

9N

10N

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 20 40

0 20 40 50 Miles

60 Kilometers

IBRD 37324

OCTOBER 2009

SIERRA LEONEMINING TECHNICAL

ASSISTANCE PROJECTSELECTED CITIES AND TOWNS

DISTRICT CAPITALS

NATIONAL CAPITAL

RIVERSMAIN ROADS

RAILROADS

DISTRICT BOUNDARIES

INTERNATIONAL BOUNDARIES

ALGERIALIBYA

NIGER

NIGERIA

CHAD

SUD

AN

CAMEROON

GABONSÃO TOMÉ AND PRÍNCIPE

EQUATORIAL GUINEA

CONGO

DEM.REP. OFCONGO

CENTRAL AFRICANREPUBLIC

MALICAPE VERDE

THE GAMBIASENEGAL

GUINEA-BISSAU

LIBERIA

SIERRALEONE

GUINEA

CÔTED’IVOIRE GHANA

TOG

OBE

NIN

BURKINAFASO

MAURITANIA

FORMERSPANISH

SAHARA

A T L A N T I C O C E A N

SIERRALEONE

AT

LA

NT

I C

OC E A N