Guinea Mining and Infrastructure

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Guinea Mining and Infrastructure February 2010 The World Bank 72373

2 Acknowledgements This Note was prepared by a team including Boubacar Bocoum (Senior Mining Specialist, COCPO), Boutheina Guermazi (Senior ICT Specialist, CITPO), Dana Rysankova (Senior Energy Specialist, AFTEG), Jane Hopkins (Senior Agriculture Economist, AFTAR), Katharina Gassner (Senior Economist, FEUFG), Pascal Dooh-Bill (Finance Specialist, WBIPP), Peter Kristensen (Sector Leader, AFTEN), and Silue Siele (Senior Transport Specialist, AFTTR). A consultant team in Guinea including Habib Diallo for the energy sector, Ibrahima Soumah for the mining sector, and Bahna Sidibe for the transport sector researched and compiled available sector data in the country which formed the basis for the analysis undertaken in this Note. World Bank Country Manager, Siaka Bakayoko, provided guidance to the team and facilitated interaction with the Government Authorities, and Koffi Ekouevi kindly provided comments to the final version. Among many others, the team would like to particularly thank the many participants who took part in the two-day workshop convened by the Government on December 10 and 11, 2009 focusing on Mining and Infrastructure. 2

3 Contents Executive Summary Guinea s Mining and Infrastructure Challenge Country Overview Infrastructure in Guinea and the link to development The role of the private sector The Mining Sector in Guinea Overview Guinea s mining potential Harnessing the mining sector for infrastructure investment Mining and Energy The potential for hydro power The importance of national and regional interconnection Recommendations Mining and Transport The transport needs Recommendations Using Guinea s mining sector as platform for infrastructure development De-enclaving existing infrastructure The mining sector as provider of financing for new infrastructure Using royalties to fund public infrastructure Recommandations Using Infrastructure as a Vehicle for Sustainable Development Addressing Economic Geography questions Addressing the role of Agriculture Addressing sustainable development questions: environment and social inclusion Addressing Governance, Transparency, and Anti-corruption Next steps Annex A1 Additional resources Annex A2 World Bank Contacts Annex B: Maps

4 Executive Summary Guinea has exceptional subsoil potential. The bauxite deposits of Guinea are estimated at about one third of the world s known reserves. Guinea has also about 3 billion tons of high grade iron ore deposits, gold, potential of 30 million carats of jewelry-quality diamonds, and several important deposits of silver, zinc, uranium, and platinum, as well as a potential for oil. The mineral sector has an excellent opportunity to serve as driver for growth in the country, and the infrastructure required for developing the mineral sector could well serve for developing other sectors, including agriculture and forestry, for which the country has also high potential and natural endowments. In the past, and still today, the infrastructure supporting the mineral sector has mainly been purpose-built by private mining companies, but is lacking the integrated vision that would enable economic growth and social development for the broader population, such as access to roads for agricultural and trade purposes and multi-purpose power stations. Investment prospects in the mining industry are announced to be considerable, including by new partners such as China. Depending on commodity prices and the investment risklevel of the country, potential investments have been estimated to be as much as US$15 to 20 billion. But, there is very little fiscal space in the Government s own budgets to initiate major investments. In this situation, it seems appropriate to explore options for the government to enter into partnership with the private sector to harness the potential for mining infrastructure to serve multiple purposes. In order to achieve public-private partnerships, a number of issues need to be addressed even once agreement on collaboration in principle has been achieved. The identification of potential multi-purpose infrastructure projects requires clear articulation of a strategy forward and the setting out of capacity needs and service specification on public and private side. For the Government, this calls for planning and prioritization of projects and for preparing and committing to a supporting legal and regulatory framework. For the private companies, information sharing and willingness to start a dialogue with the Government are the starting points. Incentives for the private sector to assume the additional risks of constructing and (where relevant) maintain and operate multi-purpose infrastructure assets need to be found and addressed early on. In the particular context of Guinea, options for cross-border solutions to infrastructure challenges need to be incorporated into all forward planning and project identification activities. The importance of cross-border infrastructure stems from the potential for large-scale projects, in particular hydro generation, and the location of the country which favors transit transport, notably from land-locked neighboring countries to the sea ports 4

5 on the coast. In a recent Africa wide study, the benefits from regional power integration alone were estimated at $2 billion/year for the continent. 1 The way forward for infrastructure development in Guinea requires an open discussion of governance issues, in particular given the large role played by extractive industries in the country. The overall country risk matters, in particular after recent events, but there are a number of initiatives Guinea benefits from regarding the governance agenda including the Governance of the Mineral sector Value chain approach (see separate report), and the West Africa Mineral Sector Strategic Assessment WAMSSA (see separate report). More generally, supporting improved public administration and management beyond infrastructure should be a strategic aim for the re-engagement of the international community in Guinea. In setting out the way forward to initiate the infrastructure debate, it is useful to distinguish short- and longer-term activities. Table ES1 gives a summary view of the recommended approach. Key points can be summarized as follows: Short term activities: 1. Focus on high impact/high feasibility projects In the short term, the Government and development partners should concentrate public resources and donor assistance on infrastructure projects which satisfy the twin-conditions of (i) having a high growth and/or development impact, and (ii) display advanced preparation and reasonable ease of implementation. Among these projects are a) The Western Bauxite Corridor (Boke Pole) o Rail and port infrastructure (new rail tracks and interconnection with Anaim rail line; new port facilities in Kamsar) o Thermal generation plant associated with new planned aluminium plant (Sangaredi, Kamsar, Dian-Dian) o Hydro-generation plant Kaleta b) The Iron Ore Eastern corridor (Nzerekore Pole), in particular discussions surrounding the Trans-Guinean rail (very long-term), and more importantly the recent announcement of BHP Billiton and Arelor Mittal about a possible joint venture related to iron ore in southern Guinea and Northern Liberia, which is expected to become effective in August c) In addition, known bottlenecks should be added to the list of high impact projects. Among these are, for example, o road links connecting the country with Cote d Ivoire, Liberia and Sierra Leone; 1 World Bank (2009) Africa s Infrastructure: A time for transformation, Overview. 5

6 o power transmission lines to tap into the regional network and the West Africa Power Pool. 2. Initiate dialogue with mining companies on sharing infrastructure Given the limited resources available to the government from its own budget and donors, entering into dialogue with private mining operators regarding opening and possibly expanding purpose-built infrastructure is recommended. This requires at a minimum i) a discussion of options for exchanging and using mining royalties to fund infrastructure, and ii) the preparation of the legal and regulatory framework to implement a mining-infrastructure PPP (public-private partnership). Shared power generation plant, benefitting mining purposes and local communities, are relatively tractable projects that can lend themselves to narrowly-defined negotiations and contracts between the private and public sector. Nonetheless, it should be envisaged that only the construction, and not the long-term maintenance and operation of the infrastructure will be taken on by the private sector until the stability of the political situation and government commitment to public-private contracts is tested further. 3. Issue a strong policy statement showing commitment and a credible plan forward Finally, it is highly recommended that the government issues a strong policy statement in the short term, setting out a credible approach to the infrastructure challenge and showing its active engagement on the issue. Medium to long term activities 4. Develop sector investment plans In parallel with addressing the investment needs sketched out above, it is recommended that the government agree on a medium to long-term national infrastructure policy and associated investment plan in the different sectors. Spelling out the government s policy objectives explicitly will allow prioritizing among the many investment needs the country faces and provide the basis for preparing the medium to long-term infrastructure project pipeline. A national infrastructure strategy for Guinea should also be aware of the opportunities offered by regional initiatives, such as regional power pools harnessing the region s potential for large scale hydro generation, and increased road and rail connectivity with neighboring countries to enhance trade channels. The implementation of the medium- to long-term strategy requires securing needed funds from internal and external public and private sources, and capacity building in the government to ensure appropriate planning, execution and monitoring of policy objectives and investment projects. 5. Addressing performance gaps of existing infrastructure service providers 6

7 Assessing the performance of existing service providers, in particular of EDG in the power sector, and developing a program to address the most pressing shortcomings should be an integral piece of the strategy forward. Strengthening the technical and financial capacities of EDG will also allow the company to assist in activities of national planning of the power grid and generation capacity and be a partner in the negotiations with the private sector. 6. Know your terrain Spatial analysis A spatial analysis can assist the government with setting priorities by formulating the trade-offs involved in policy choices such as concentrating resources in a small number of mining areas compared to a strategy aimed at enhancing spatial equity Institutional, legal and regulatory framework It is necessary to review the existing legal and institutional framework to gain a clear picture of the available options for engaging the private sector in provision of infrastructure other than via mining companies. This could imply o private participation in form of Independent Power Producers (IPPs), or water and power concessions, in particular to maintain and operate infrastructure built by mining companies whose core strength is not in operation of utility services; o the possibility of agribusiness engaging in a PPP arrangements for irrigation or feeder roads At the beginning of the engagement with the private sector, is possible to achieve a limited number of contracts on a one-by-one basis, often with the private sector being able to dictate the conditions under which it will engage in a joint project with the government. It is likely that the first public-private contracts concluded in the country will imply a significant risk premium for the private sector to compensate for political and economic risk and the risk of an untested government represents. If the situation improves going forward, the one-by-one approach is costly and inefficient and a coherent legal and regulatory framework allowing the preparation of a project pipeline should be developed. 8. Governance framework The political situation following the December 2008 events has increased the risk profile of the country and led to a slow-down or halt of planned infrastructure projects. Moreover, addressing the infrastructure challenge is made more difficult by the three-fold crisis of food, fuel and financial crisis having reached developing countries in A team experienced in assisting with this kind of analysis could be mobilized within a short timeframe from the World Bank s Spatial Team. The GIS platform assembled for a host of African countries (including Guinea) under the Africa Infrastructure Country Diagnostic AICD initiative could be used as starting point for this endeavor. See 7

8 Previous crisis have shown that infrastructure is among the expenditure categories cut most severely by governments under financial stress. 3 But such behavior comes at great development cost as subsequent rehabilitation of facilities is exponentially more costly than regular maintenance; in the medium and long term, inadequate infrastructure slows economic development and hinders poverty reduction. The discussion and recommendations provided in this note help identify priorities and next steps as the country gets back on development track following anticipated 2010 elections. 3 World Bank and IMF Global Monitoring Report 2009; World Bank SDN INFRA note

9 Table ExSum 1: Roadmap for the Way Forward Overarching Objective Next steps (short term activities) Medium to Long term activities Strategy Provide policy direction and framework Issue policy statement on highest level: set out planned government approach to infrastructure challenge; articulate a credible strategy going forward; demonstrate commitment to meeting objectives Develop sector strategies for each infrastructure sector Planning Identify infrastructure needs and develop national investment plan Identify infrastructure bottle-necks the easing of which would have high impact in terms of growth Review existing Advanced planning Identify potential for multi-purpose infrastructure for these Earmark scarce public funds for Identification of high-impact projects Spatial analysis to identify growth corridors and priority investment Private sector dialogue Achieve mutually beneficial long-term partnership with private sector Initiate dialogue Determine mutual standpoint Legal and regulatory framework Reduce investment uncertainty Engage technical assistance for one-off contractual Review Doing Business environment and develop action plan Governance Enhance Transparency and accountability in the mining sector Engage technical assistance to implement a EITI++ approach Provide TA for negotiation of new mineral sector agreements Establish a social accountability mechanism Build capacity of government agencies

10 1. Guinea s Mining and Infrastructure Challenge After a brief general overview, this note will concentrate on the mining, energy and transport sectors. This is due to the importance of the extractive industry for economic growth in Guinea and the energy and transport infrastructure needs associated with mining activities. Energy and transport have broad areas of influence on growth and social development but also carry risk in terms of environmental and social impacts. Guinea is a country of about 10 million inhabitants that is regarded as one of the potentially richest countries in West Africa, thanks to its abundant subsoil potential and natural endowment for agriculture, as well as for its hydro resources. Recent civil unrest in Guinea has interrupted the strategic approach to the country s development challenges. The country is now in the process of reengaging with development partners and private investors. Presenting a challenge for any growth strategy formulated going forward, Guinea has sparse infrastructure networks, which are currently incapable of providing a broad platform for economic resurgence. Figure 1: Administrative Map of the Republic of Guinea

11 1.1 Country Overview The last Country Assistance Strategy the World Bank published for the Republic of Guinea expired in FY06. 4 Similar to today, the growth potential of Guinea was identified as lying in its abundance of minerals, its excellent conditions for agriculture and its strategic location that favors trade. Internal and external constraints were identified as keeping Guinea from realizing its potential, including an inhospitable investment climate due to a weak regulatory framework, institutional and regulatory constraints on trade and regional integration, and overall weak governance. Exogenous factors increasing the country s vulnerability to shocks included the continued instability in the sub-region and heavy dependence on a single commodity, bauxite, for export revenue. Recent political developments including the 2008 coup d état has put the development of the country on partial and temporary hold. Past events notwithstanding, once the political situation has improved sufficiently to attract investors, the country could catalyze growth in several areas, including: Mining Guinea has exceptional subsoil potential. The bauxite deposits of Guinea are estimated at about one third of world s known reserves. Guinea has also about 3 billion tons of high grade iron ore deposits, Gold, potential of 30 million carats of jewelryquality Diamonds, and several important deposits of silver, Zinc, Uranium, and Platinum, as well as a potential for oil. Agriculture and water resources Guinea has an abundant natural endowment for agriculture, forestry and tree crops. The variety of geographic regions and climate endows Guinea with strong agricultural potential: Guinea enjoys among other things large areas of arable lands, heavy rain falls and immense water resources which can be harnessed for power generation. In addition, Guinea has 300km of sea coast that offer transportation facilities and fisheries. 1.2 Infrastructure in Guinea and the link to development Guinea faces infrastructure challenges linked to it being a low-income, post-conflict and resource-rich country, a situation aggravated by low population density and disperse habitat. Reliable and affordable infrastructure services are critical for sustainable development, and a necessary condition for reaching economic, social and environmental goals. Infrastructure has received considerable attention in the context of reducing poverty and inequality for example, Dercon et al (2007) estimate that changes in access to quality roads increased consumption growth in rural Ethiopia by 16% and reduced poverty by 7%. 5 Indirectly, infrastructure influences the achievement of most MDGs, be they related to outcomes in health, education, gender or income poverty, through its 4 World Bank Country Assistance Strategy for The Republic of Guinea, June 10, Dercon, Stephan, Daniel Gilligan, John Hoddinott and Tassew Woldehanna (2007), The Impact of Roads and Agricultural Extension on Consumption Growth and Poverty in 15 Ethiopian Villages, CSAE WPS , University of Oxford, UK

12 effect on household opportunities. Each year 529,000 women die due to childbirth complications. Most of these deaths could be prevented through timely access to essential childbirth-related care, for which road access is crucial. 6 In Guinea, infrastructure accessible to the population at large is lagging due to years of unrest and instability. A recent report on the state of infrastructure in 28 African countries finds that by just about every measure of infrastructure coverage, African countries lag behind their peers in other parts of the developing world. 7 There is however considerable diversity within the continent and it is helpful to classify countries into types according to their income level, their political stability and their access to natural resources which provide foreign currency income to governments. A difference between low- and middle-income countries can be expected in terms of the state of their infrastructure sectors. It is striking, however, to what extent the resource-rich countries lag behind others in their infrastructure endowment, despite their greater wealth. Guinea finds itself in this category of countries. In recent years, resource-rich countries have devoted their additional wealth not to infrastructure development but to paying off their debt. The governance challenges in a resource-rich environment may also prevent the transformation of this wealth into infrastructure. Table 1 below shows summary statistics illustrating the infrastructure gap 8 experienced by low-income Sub-Saharan countries, and in particular the category of resource-rich countries and fragile countries which have been or still are experiencing conflict, such as has been the challenge for Guinea. It is interesting to note that oil-exporting countries have worse infrastructure indicators, in particular in the transport sector than their peers, suggesting that revenue from natural resources do not necessarily get invested in these sectors. Countries in conflict fare predictably worst on most indicators. 6 Wagstaff, A., Cleason, M. 2004, The MDGs for Health: Rising to the Challenges, World Bank, Washington DC. 7 Africa Infrastructure Country Diagnostic (AICD) 2009, 8 Africa Infrastructure Country Diagnostic (AICD) 2009, Guinea specific information on Infrastructure gap is in preparation and expected to be available in late

13 Table 1: Africa s Infrastructure Deficit Normalized units Sub-Saharan oil-exporting countries Sub-Saharan countries conflict status in Sub-Saharan lowincome countries low- Other income countries Density of paved road network Density of total road network Mainline density Mobile density Internet density Electrical generating capacity Electricity coverage Water access household Sanitation household access Note: Road density is in road kilometers per 1,000 kilometer squared (2001); mainline, mobile and internet density is in subscribers per thousand population (2004); electrical generating capacity is in megawatts per million population; electricity, water and sanitation coverage are in percentage of households with access. Source: Yepes, T., Pierce, J. and Foster, V Making Sense of Sub-Saharan Africa s Infrastructure Endowment: A Benchmarking Approach. AICD Working Paper 1, World Bank, Washington, D.C. In addition to lack of availability of infrastructure in general, Guinea also suffers from low quality of available services which in turn represent a high cost of doing business for enterprises. Figure 2 shows the result of enterprise surveys with participating firms reporting that there are significantly more power outages per month in Guinea than in other comparable countries in SSA; that firms lose more sales revenue due to outages; and that the delay in obtaining a mainline telephone connection in Guinea is longer that the average of Sub-Saharan Africa. 13

14 Figure 2: Quality of Infrastructure in Guinea Number of Power Outages in a Typical Month Value Lost Due to Power Outages (% of Sales) Delay in Obtaining an Electrical Connection (days) Average number of Incidents of Water Insufficiency in a Typical Month* Delay in Obtaining a Water Connections (days) Delay in Obtaining a Mainline Telephone Connection (days) Source: Enterprise Surveys, Lack of financial resources hampers the expansion of capital-intensive infrastructure networks and in many low-income countries, governments already spend significant shares of their GDP on infrastructure and their needs still outstrip existing capacity. 9 Geography and population patterns play a role in the particularly challenging situation of infrastructure in the sub-region in general, and Guinea s low population density makes the country more particularly representative of the challenge of geography. The low economic density makes transport networks and power grids which exhibit economies of scale and density more expensive to build and maintain (Figure 3). 10 Eberhard et al (2008) report that 21 of 48 Sub-Saharan countries have national power systems that fall below the minimum efficient scale of 200MW for electricity 9 Each year developing countries require between 7% and 9% of their GDP for both maintaining existing infrastructure and augmenting it to respond to pressing development needs, yet only half of the required amount is actually spent. See World Bank (2008) Sustainable Infrastructure Action Plan FY Ramachandran Vijaya, Alan Gelb, Manju Kedia Shah (2009), Africa s Private Sector What s wrong with the Business Environment and what to do about it, Center for Global Development, Washington DC. 14

15 generation. 11 As a result, their operating costs are relatively higher (US$0.25 per kilowatt hour compared with US$0.13 found in the continent s larger power systems). Figure 3: Link between economic density and infrastructure GDP($) per 1,000 sq. km High Income India China LICs SSA Guinea Source: World Development Indicators 2008 Edition. But challenges not related to capital spending are of equal importance in addressing the future of infrastructure: inadequate sector policies and planning capacities slow investment programs; service providers are plagued by systematic inefficiencies and low quality of service; below-cost tariffs make revenue streams insufficient to support even the operation and maintenance of existing assets; weak governance and regulatory frameworks lead to misuse of resources; subsidies supposed to address affordability concerns are ill targeted. Box 1 summarizes the messages on funding needs and efficiency gaps from a recent comprehensive study of Infrastructure in Africa the Africa Infrastructure Country Diagnostic (AICD). 11 Eberhard, A., Foster, V., Briceño-Garmendia, C., Ouedraogo, F., Camos, D. and Shkaratan, M Underpowered: The State of the Power Sector in Sub-Saharan Africa. AICD, Background Paper, World Bank, Washington, D.C. 15

16 Box1: The Africa Infrastructure Country Diagnostic an initiative to build the knowledge base for effective action Modern infrastructure is the backbone of an economy and the lack of it inhibits economic growth. This report shows that investing more funds without tackling inefficiencies would be like pouring water into a leaking bucket. Africa can plug those leaks through reforms and policy improvements which will serve as a signal to investors that Africa is ready for business. Obiageli Ezekwesili, World Bank Vice President for the Africa Region The 2009 Africa Infrastructure Country Diagnostic (AICD) is a study conducted with broad multi-donor support in 24 African countries. It shows that the poor state of infrastructure in Sub-Saharan Africa - its power, water, roads, and information and communications technology (ICT) - cuts national economic growth by 2 percentage points every year and reduces business productivity by as much as 40 percent. Africa has the weakest infrastructure in the world, but ironically Africans in some countries pay twice as much for basic services as people elsewhere. The report estimates that US$93 billion are needed annually over the next decade, more than twice what was previously thought. Almost half of this amount is needed to address the continent s current power supply crisis that is hindering Africa s growth. The new estimate amounts to roughly 15 percent of the continent s gross domestic product (GDP), comparable to what China invested in infrastructure over the last decade. The study found that existing spending on African infrastructure is much higher than previously known, $45 billion a year. Also surprising was the fact that most of this is domestically financed by African tax payers and consumers. The study also found that there is also considerable wastage to address; a number of efficiency improvements could potentially expand the available resources by a further $17 billion. However, even if major efficiencies are gained there is still a funding gap of $31 billion every year, much of it for power and water infrastructure in fragile states. Relative to the size of their economies, the funding gap is daunting for the region s low-income countries (who would need to spend an additional 9 percent of their GDP) and particularly for the region s fragile states (who would need to spend an additional 25 percent of their GDP). Resource-rich countries like Nigeria and Zambia face a more manageable funding gap of 4 percent of GDP. Particularly now with the global financial crisis, investing in African infrastructure is critical for Africa s future. The report recommends addressing the $17 billion annual efficiency gap and closing the remaining $31 billion annual funding gap for African infrastructure. Closing the efficiency gap requires improving management of utilities, ensuring adequate maintenance, promoting regional integration, recovering costs while recasting subsidies to enable broader access, and improving allocation and spending of public resources. To close the funding gap a wide range of sources will need, including public budgets, resource rents, local capital markets, private sector and non-oecd finance, as well as traditional donor assistance. Countries with the greatest infrastructure needs are often the least attractive to investors. Many of the countries in Africa will probably take longer than a decade to catch-up on infrastructure and will probably have to use lower cost technologies. But action is needed urgently, the report argues, and the global financial crisis is underscoring the need for a massive effort to overhaul Africa s infrastructure. 16

17 1.3 The role of the private sector The private sector appears in two roles in the infrastructure market: as user and as provider. Infrastructure is an important part of the investment climate enabling the emergence and success of private entrepreneurs: readily accessible, reliable and affordable infrastructure allows goods and services to reach markets and consumers in less time and at lesser cost, resulting in a positive impetus on business development through higher productivity, greater output and higher demand. Project analysis often finds that infrastructure projects have high social rates of return. Economic Rate of Returns of World Bank infrastructure projects have been shown to average above 20% since the 60s and have been as high as 35% in recent years. 12 However, in the context of Guinea, it is the potential of the private sector as provider of infrastructure that stands out. Budget-conscious governments often turn to private companies with the expectation to share the investment burden for the sector. The involvement of the private sector in infrastructure takes a number of forms, spanning the range from simple service contractor over concessionaire to full owner of assets. Several general points are worth noting before discussing the particular situation of Guinea: Private funding of infrastructure remains limited: 70% of infrastructure investment in the period originated from governments and state-owned enterprises (SOEs), only 22% from private sector and 8% from official development aid. In low-income IDA countries, only 10% of infrastructure is funded from the private sector. The success of private sector involvement is strongly reliant on good institutional and regulatory framework. Quality regulatory framework means not only that rules have been legislated for, but that there is political commitment to them and that they are enforced. Surveys of private infrastructure companies show that the political risk is considered most important by them, outstripping market or macroeconomic risks. 13 Private financing does not change the fundamentals of infrastructure provision: customers or taxpayers (domestic or foreign) must pay for the investments, and cost-covering tariffs with or without supplementing subsidies to address any real affordability gap remain the center-piece of all sustainable infrastructure provision, public or private. Even without explicit investment role, the private sector can significantly mitigate the efficiency gap observed in public service delivery. In a recent global study 12 World Bank (2006), Infrastructure at the Crossroads Lessons from 20 Years of World Bank Experience. 13 Von Klaudy Stephan, Apurva Sanghi, and Georgina Dellacha (2008), Emerging Market Investors and Operators A New Breed of Infrastructure Investors, PPIAF Working Paper No

18 comparing public and private operators in water and electricity distribution, private operators were shown to bring about significant efficiency gains over and above comparable public enterprises: a 12% increase in residential connections for water utilities, a 19% increase in residential coverage for sanitation services, a 45% increase in electricity bill collection rates, a 11% reduction in distribution losses, as well as significant higher labor productivity measures. 14 Private investment in infrastructure has undergone two large cyclical movements in the past couple of decades: after being hailed as the solution to the infrastructure gap in developing countries in the 1990s and rising to a peak in 1997, it dropped dramatically at the beginning of this decade. Only in 2004 did private investment in infrastructure accelerate again to reach a similar volume in 2007 as a decade earlier. 15 An interesting feature of the last recovery of private investment in infrastructure was that there were many more South-South transactions, with private investors coming from India, Brazil, China, Russia or the Philippines. A recent survey of Emerging Market Investors and Operators (EMIOs), defined as companies domiciled/incorporated in low- and middleincome countries, found that for infrastructure projects reaching financial closure in , these investors mobilized about 44% of private funds. 16 From 2008 onwards, the private infrastructure market has suffered from the global credit crisis and its impact is likely to be felt for some time into the future. The crisis has made it more difficult for governments across the world to access finance and what funds are available are more expensive: emerging market spreads reached their highest levels in six years at the end of October While private infrastructure projects in late stages of preparation were still closing in 2008 and 2009, they did so with higher spreads. Countries with deep local financial markets, such as India, were turning to domestic debt. However, in most developing countries, private infrastructure projects are already facing liquidity constraints in reaching closure and rolling over debt. The financial crisis is expected to reduce not only private investment, but also public aid flows from bilateral and multilateral donors and IFIs. Even if ODA flows remain steady or even increase, competing demands have risen. In initiating a new phase in its infrastructure development, Guinea is adopting a strategy building on its existing strengths: its wealth in natural resources. Given the scarcity of resources it faces at this point in time, both due to is recent emergence from civil unrest and the global situation, the Government is exploring the options of linking the development of its mining industry with infrastructure service provision, in particular in the energy and transport areas. 14 Gassner Katharina, Alexander Popov, and Nataliya Pushak (2008), Does Private Sector Participation Improve Performance in Electricity and Water Distribution?, PPIAF Trends and Policy Options No For detailed information on private participation in infrastructure in all developing regions and sectors, visit the PPI database: 16 Von Klaudy Stephan, Apurva Sanghi, and Georgina Dellacha (2008) as quoted in Footnote

19 2. The Mining Sector in Guinea 2.1 Overview Guinea has ample subsoil resources and its mining sector has long acted as main source of revenue for the government. Figure 4 illustrates the country-wide distribution of various minerals. Figure 4: Mining Resources in Guinea Source: Consultant Report E.CO.GES Bureau d études, de conseil et de gestion (2008), Réalités et Perspectives du Secteur Energétique. Private mining concessions are exploited by a series of large international firms. Companies investing in iron include BHP Billiton, Rio Tinto, Areva and Rio Tinto. Primary investors in bauxite and alimina include Alcan, Alcoa, Rusal and Mitsubishi, while Anglo Gold focuses on gold and De Beers on diamonds. 19

20 New partners such as China are playing an increasingly important role in the mineral sector in Africa. According to a recent World Bank Report 17, China s natural resource imports from Sub-Saharan Africa reached US$22 billion in Petroleum alone accounts for almost 80 percent of this trade, with the balance being timber and minerals. As a result, China now depends on Africa for around 30 percent of its oil imports, 80 percent of its cobalt imports and 40 percent of its manganese imports. Overall, Angola is by far the largest trading partner, followed by Republic of Congo, Equatorial Guinea, Sudan and South Africa. 2.2 Guinea s mining potential According to consultant reports, there are 12 known mega projects in the mining sector discussed in the country, as listed in Table 2. These projects represent possible investment of the magnitude of US$15-20 billion, subject to fluctuation of commodity prices, cost of energy/oil prices, availability of financing, and the level of risk investors are willing to take in Guinea (in the recent past, the political risk has outweighed the appetite of investors). Figure 5 presents a map of the location of the projected investments. 17 Building Bridges: China s Growing role as Infrastructure Financier for Sub-Saharan Africa, World Bank

21 Table 2: Prospected mining investment in Guinea (mega- projects only) Project Resource Strategic Partner Capacity (million tons per year) Aluminum plant Sangarédi Aluminum Global 3 3 Alumina/Bhp Billiton Aluminum plant Kamsar Aluminum Alcan/Alcoa Aluminum plant Dian Dian Aluminum Rusal Possible investment ($billion) Extension of aluminum plant ACG Frigula Aluminum Rusal Integrated hydro dam and aluminum smelter project Konkouré Hydro dam Souapiti Kaléta and aluminum smelter 700 MW Project Simandou Iron ore Rio Tinto Project Nimba Iron ore Bhp Billiton 25 1 Transguinean rail and deep sea port Iron ore transport Rio Tinto and Bhp Billiton 70 5 Project bauxite alumina Bauxite Government of 4 SBDT Iran Project bauxite Bauxite AMC 3 gaoual/koumbia Cement factory Souguéta Limestone German and 1 Danish Project BOT Cogon TOTAL 17.4 Source: adapted and translated from Consultant Report E.CO.GES Bureau d études, de conseil et de gestion (2008), Réalités et Perspectives du Secteur Energétique, Annex A. 21

22 Figure 5: Guinea s mining poles and projected mega projects Carte d Implantation des Boke Pole Sociétés Minières Alcoa/Alcan BHP-Billiton Gold Diamant Carte d'implantation des sociétés Nzerekore minières Pole Source: Consultant Report E.CO.GES Bureau d études, de conseil et de gestion (2008), Réalités et Perspectives du Secteur Energétique, Annex A. The potential socio-economic benefits from well-governed mining projects are large. The various projects identified in Table 2 would certainly need to undergo further feasibility studies and vetting procedures, but a well managed and governed mineral sector can represent a catalyst for the future development of the country. According to the available estimates reproduced in Table 3, over 50,000 jobs could be created in the construction phase, and about 18,000 permanent jobs result from full operations. Alongside with a unique opportunity, such development prospects pose evidently a challenge of building and maintaining a skilled work force in the mining sector. In terms of revenue generated from the prospective projects, the Government could receive monies to the order of magnitude of US$ 1.5 billion annually. With such 22

23 potential revenue generation, the country would need to set up appropriate programs for investing and stabilizing the income generated so as to establish a consistent annual revenue stream which could be invested to benefit sustainable development projects, including further investments in to the mineral sector. Table 3: Job creation and revenue potential of prospective mining projects Project Estimated # of jobs created in construction phase Estimated # of permanent jobs during operation Estimated turnover ($ billion) Aluminum plant Sangarédi 10,000 3, Aluminum plant Kamsar 5,000 2, Aluminum plant Dian Dian 5,000 2, Estimated revenue for Guinea ($billion) Extension of aluminum plant ACG Frigula Integrated hydro dam and aluminum smelter project Konkouré 2,000 1, ,000 3, Project Simandou 5,000 2, Project Nimba 3,000 1, Transguinean rail and deep sea port 15,000 3, TOTAL 55,000 18, Source: adapted and translated from Consultant Report E.CO.GES Bureau d études, de conseil et de gestion (2008), Réalités et Perspectives du Secteur Energétique, Annex A. 2.3 Harnessing the mining sector for infrastructure investment So far, private mining companies have acted as engine of growth in the infrastructure sector and have successfully self-provided infrastructure facilities necessary for the profitable exploitation of mining licenses. The government has in the past explored options for harnessing the presence of the private sector further and possibilities exist for linking mining and infrastructure services for greater use of the public. Exploiting the mining industry in Guinea with mega-projects as sketched out in Table 2, will require the construction of several new rail lines and several thermal power plants, as well as the upgrade and expansion of the road network, including a significant number of bridges over rivers draining the rainfall in excess of 1800 mm/year over the country. 23

24 Table 4 illustrates the projected energy and transport infrastructure needs for the projects in Table 2. While the projections date from 2008 and information needs to be updated to reflect current thinking, the table showcases the additional infrastructure needed to fully realize the mining potential of the country. In the event, the global mining sector has been significantly impacted by the international financial turmoil and the related global economic downturn. Mineral commodity prices (copper, iron ore, zinc, etc) have fallen significantly in 2008, and the combination of lower demand for commodities, lower prices, and higher costs is resulting in production downsizing from existing operations all over the world. For Guinea specifically, the cancellation of the takeover bid of Rio Tinto by BHP- Billiton, and the ensuing negative impact on Rio Tinto stocks (minus over 35%) combined with the high country risk might put at risk plans for linking mining and infrastructure plans such as the plans for the Trans-Guinean rail. This global situation means specifically for Guinea that the large projects are likely to be delayed until the global economic outlook is improved. Project sponsors are currently reviewing their plans and budget to adapt to the evolving situation. This, in turn, might provide a window of opportunity to address some of the current systemic constraints in the mining sector in Guinea if donors are practical and rapid in their support/facilitation. 24

25 Table 4: Energy and Transport Needs of Planned Mining Projects Project Development stage of projects* Energy needs Aluminum plant Sangarédi Start of construction Thermal generation plant 330MW Aluminum plant Kamsar Feasibility study ongoing Thermal generation plant 165MW Aluminum plant Dian Dian Feasibility study Thermal generation completed plant 200MW Extension of aluminum plant ACG Frigula Feasibility study ongoing 33MW Transport needs 20km of new rail line; new jetty at Kamsar port Interconnection with Anaim rail line 112km of new rail line; new port facility 40km north of Kamsar Integrated hydro dam and aluminum smelter project Konkouré Concept study ongoing 700MW Existing rail link Iron Ore Project Simandou Feasibility study ongoing NA Trans-Guinean Iron Ore Project Nimba Feasibility study ongoing NA 100km of new rail to interconnect with Trans-Guinean Transguinean rail and deep sea port (Iron Ore) Project bauxite alumina SBDT Feasibility of variants ongoing Feasibility study completed NA NA NA 325km of pipeline Refitting of 20ha of Port Autonome de Conakry Project bauxite Feasibility study ongoing NA NA gaoual/koumbia Cement factory Souguéta NA ton of coal Road link to CBK rail for calcinations 6MW sourced from EDG Project BOT Cogon NA NA NA Notes to table: * 2008, NA = information not available. Source: adapted and translated from Consultant Report E.CO.GES Bureau d études, de conseil et de gestion (2008), Réalités et Perspectives du Secteur Energétique, Annex A. 25

26 3. Mining and Energy 3.1 The potential for hydro power The mining sector potential represents both opportunities and challenges for the electricity supply system in Guinea, both on the national and local level. At national level, the share of electricity demand from mining companies is growing rapidly. Current installed capacity, including mining companies, is about 250MW. According to estimates, the mining sector electricity demand could increase over 10-fold over the next 10 years, driving the overall electricity demand well over 1,000MW (see Table 4 for projections of energy needs from planned mega projects). The mining companies currently auto-generate but could be potential buyers of electricity if it could be produced and delivered at competitive prices and on reliable terms. Such existing demand could facilitate development of vast hydro-electric resources in Guinea, with generation potential estimated to be as high as 6,000MW. At present, most mining projects utilize thermal energy sources of which the total capacity is around 139 MW. Repartition on the various existing projects is as follows: - ACG-l Friguia generates it own energy with 50MW and 17MW thermal diesel - CBC has 50 MW installed capacity - SBK is connected to the public network and has also a 5MW thermal plant - Aurifère in Siguiri has 30 MW installed capacity - Société minière de Dinguiraye has 30 MW installed capacity Given the location of the mining sites across the country, and the abundance of water resources in the country, hydropower is a possible important addition to the pool of power sources in the country, even while considering that this potential for hydro would be constituted of relative smaller hydro plants. The key watersheds zones with their existing and numerous potential sites for hydro generation are: The North-West Basin (Boffa, Boké, Fria, Telimele, Gaoual), which is the principle bauxite zone and also includes the existing rail, has the highest potential for hydro energy due to the Konkouré river which has the following hydro-energy potential: - Garafiri (75MW), - Kaleta (228MW), - Souapiti (515MW), and - Amaria (capacity to be determined). The following mining companies could potentially benefit from the development of these resources: Compagnie des bauxites de Guinée (CBG), ACG in Fria, CBK in Kindia, and new projects including sponsored by BHP-Billiton, Alcoa, Rusal, and Mitsubishi. 26

27 The Central Region includes part of the bauxite and iron mining zone (Dabola, Tougué, Mamou, Faranah, Pita). It is close to the existing hydro plants of - Tinkisso (1.5MW), - Boureya (161MW), and - Koukoutamba (281MW). This area includes the following mining companies: CVRD (Brazil), Dabola Bauxite Company (Iran), and CHALCO (China). The Nort-East Region (Kouroussa, Kankan, Siguiri) has an equally good potential with possible dams at - Fomi (90MW) and - Diaoya (148MW). In this area, companies include Ashanti Goldfield, Dinguiraye (Guinea), and Semafo (Morocco and Canada). The Southern Zone (Kérouané, Beyla, Macenta, and even N Nzérékoré) has several good potential sites including - Morissanako (100MW, currently planned for 2016), - Gozoguézia (48MW), and - Zébéla (48MW). This region has diamonds, but is better known for its high grade iron ore. Aredor is present in Kérouané for diamonds, Simfer-Rio Tinto in Simandou and Euro Nimba in Lola for mega iron projects. In summary, Guinea has vast potential for hydro generation but has so far lacked the strategy and resources to unlock this potential. Figure 6 highlights the wealth of the country in this area by setting out all potential hydro generation sites which have been identified and were at some point examined for their feasibility; in a number of cases, advanced project plans have already been elaborated. 27

28 Figure 6: Guinea s potential in hydro power Applying selection criteria including (i) demand from mining companies, (ii) demand for other commercial interests, industrial and non-mining sectors, and taking into account domestic priorities of reducing imports of oil, and utilizing the regional potential in energy trade, the most important sites for hydro development emerge as summarized in Table 5. Indicative construction dates pre-date the recent period of political turmoil. Table 5: Priority hydro power development sites Site Capacity (MW) Estimated construction date (pre-dating 2008) Kaleta Souapiti Morissanannko Kassa Amaria Gozoguezia Total 1,691 28

29 3.2 The importance of national and regional interconnection Any construction of new generation plant needs to be accompanied by development of the transmission and distribution network in order to counteract the current tendency of economic islands developing in proximity to mining activity. Mining companies are often involved in service provision for surrounding communities, but the fragmented structure increases costs at a national level and creates disparities between regions and communities. The partnership with private mining companies in the provision of essential services such as water and electricity should be embraced; nonetheless, significant benefits are likely to come from the integration of private initiatives into a national long-term investment plan. In terms of transmission backbone, the map below represents a schematic view of the network that would cover the country and provide interconnection with the neighboring states. Figure 7: Existing and planned transmission lines 29

30 3.3 Recommendations Comparatively low cost hydro electricity, if developed, could serve both mining companies and domestic and sub-regional consumption. To benefit from these opportunities, Guinea needs to develop its transmission backbone, particularly through the interconnection with the neighboring countries in the framework of WAPP; develop a limited number of large-scale hydro-electric projects, demonstrating the potential for private sector involvement and PPPs. The preparation of the following projects is currently being actively pursued under the WAPP umbrella: (i) OMVG energy project including Guinea s interconnection with Senegal and Guinea Bissau, and Kaleta hydro plant (240MW) on the Konkuré river, (ii) Souapiti hydroelectric plant (500 MW) on the same river, (iii) Fomi (90MW) developed in the framework of the Niger basin, and (iv) CLSG project, including Guinea s interconnection with Liberia, Sierra Leone and Cote d Ivoire. The OMVG and CLSG transmission lines would intersect mining areas in Guinea s north-west and south-east. develop an enabling framework for the private sector investment in new hydro generation, including (i) a clear and stable policy, legal and regulatory framework (PPAs for sales to the regional and national grids, rights to sell energy to third parties and/or retail sales through a mini-grid etc.). The framework should also target medium, small and mini-hydro projects which could be also harnessed for electricity access expansion (see below); and (ii) active promotion and development support (e.g. matching grants supporting feasibility studies). continue institutional, financial and technical strengthening of EDG, so that EDG converts itself into a viable buyer, able to deliver the new power supply to the final users. At the local level there are two scales of issues and recommendations, for mining companies and village level electrification. Mining companies are currently auto-producing energy and in many cases are supplying power to their workers and their communities, in some cases for free. Given EDG s lack of capacity to expand the network, the pressures are increasing on the mining areas to provide electricity supply to rapidly growing mining towns and communities. The mining sector is in general interested in contributing to the electrification of the areas of their intervention, but they are not well suited to provide retail service. There is, however, a good potential to develop partnerships among the mining companies and private operators to co-finance electrification projects, with the mining companies playing a facilitator role, while distancing themselves from the system operation. Government/donors could support further expansion of such systems to the surrounding communities. First experiences are already emerging (Siguiri, Kamsa) and should be followed closely for lessons learnt. 30

31 For the village-level electrification, an innovative model, employing local SMEs, has already been developed by BERD (Bureau d Electrification Rural Decentralisée) and could be directly applied to the mining communities. The electrification projects are financed through a mix of grants, loans and equity contributions, balancing carefully the rural users capacity to pay, subsidy minimization and the provision of incentives to the developers for efficient operation. New pilots are currently being developed for renewable energy, including micro-hydro and solar PV. This model, however, suited only for villages and smaller towns, and is not suited for larger mining towns. In order to benefit from these opportunities, Guinea should develop an enabling framework for the private sector investment in independent mini-grids beyond the BERD level. This, in particular, includes opening up the areas where EDG has a concession and is not providing the service to new entrants, clarify regulatory oversight, including tariff setting, provision and/or facilitation of financing for the access expansion (in some countries, for example, output-based subsidies are used to provide incentives to the private sector operators to further expand access), support to renewable energy generation etc. institutionalize BERD - BERD is currently a project implementation entity of a World Bank program, and unless the agency (BERD) and the fund (FERD) are institutionalized and replenished, they will not be able to finance projects beyond community outreach a very good communication and community outreach strategy needs to be developed for the mining communities targeted by the new PPP model, through which capacity and willingness to pay needs to be carefully assessed and the necessity to pay for electricity carefully explained, so that sustainable service can be provided which can benefit a larger share of population in the mining influence areas. Building alliances with CRDs is of outmost importance. 4. Mining and Transport 4.1 The transport needs Similar to other African countries, Guinea is facing a deficit in all modes of transport infrastructure (road, rail, port- and air-traffic), mainly due to a lack of funding. The road network has progressively deteriorated, traffic is often interrupted and roads impassable during the rainy season. The maritime port sector suffers from insufficient allocation of land and other resources, and lacks adequate equipment and stevedoring services. Because of these shortages, the port of Conakry is not taking advantage of its strategic location on Africa s West coast and the opportunity to serve as hub for landlocked regions and other countries is not exploited. Finally, rail services are functioning at adequate levels only in the mining areas. The rail link Conakry-Kankan has deteriorated over the years and can only support services on a stretch of approximately 40km at present. The failure of transport services across all sub-sectors has clear negative impact on Guinea s economy. Without functioning transport network, the potential offered by 31

32 the rich mineral and agricultural resources of the country cannot be exploited in any meaningful and effective manner. In order to circumvent the lack of public infrastructure in a sector which suffers in addition from planning and coordination failure between a number of public agencies, the mining companies active in the country are building their own rail and road links and are putting in place purpose-built port infrastructure. Similar to what is happening in the power sector, these privately motivated initiatives are taking place outside any national development policy or long-term infrastructure investment plan. There is thus a lack of coordination and failure to capture any economies of scale or scope which might exist. In addition, the needs of the population at large remain unanswered, and economic activity other than mining remains excluded from the benefits of access to transport services and therefore trade. Regarding transport services in the North East and Center regions of the country via the Trans-Guinean rail link, the government of Guinea has expressed its wish to undertake construction with help of the international community, including the World Bank, and with participation of the mining companies active in these regions. The Government s support of this project is driven by concerns that the political situation makes the use of Sierra Leone s port facilities undesirable, as well as the discovery of iron deposits expected to yield up to 10 billion tons of ore in the center of the country. Given the size of the rail investment foreseen and the additional need for associated new port investments to fully operationalize the Trans-Guinean rail link, a full feasibility study to gain a clear picture of all technical and financial requirements necessitated by the project are the necessary next step. All available options to satisfy the transport needs of the country should remain open before taking final decisions. 32

33 Figure 8: Medium-term National Road Plan 4.2 Recommendations More generally, the following points are put forward for the way forward for Guinea s transport sector: In order to avoid a multiplication of privately owned and operated rail and road services, which does not allow to capture economies of scale and scope inherent in transport services, the government is urged to develop a national transport policy. This would integrate purpose-built mining infrastructure in a regional and national system which can make facilities available to the population at large given proper consideration the needs of and compensation for the private sector. The possibility of establishing a rail fund (similar to a road fund) is put forward for further consideration. Such a fund would receive contributions from all users of rail services, including mining companies. A commission representing all stakeholders private companies, national and regional government, and users from the general public - could be put in charge of supervising the fund. The recruitment of a 33

34 management team receiving the vote of confidence from all groups is an option to be considered. Based on the example of collaboration that occurred between CBG, GAC and Rio Tinto in the Kamsar region, the Government should encourage the sharing of transport infrastructure between mining companies. Regarding the existing Kamsar collaboration, a formalization of the arrangement with an integration of the port of Kamsar under a PPP contract is submitted for consideration. The government is encouraged to undertake social and environmental impact studies for infrastructure projects going forward in order to ensure that future investment leads to long-term sustainable development of the country in the future. 34

35 5. Using Guinea s mining sector as platform for infrastructure development Infrastructure brought about by mining projects can facilitate the provision of essential services such as electricity or all-weather roads to communities around the mining sites. Public-private service provision schemes should be explored by the Government in this context. There are essentially three different channels through which mining development and infrastructure development can be linked: De-enclaving existing mining infrastructure and making it accessible to other users; Upgrading/expanding infrastructure with the help of mining companies under a PPP model; and Using mining royalties to fund publicly provided infrastructure at national level 5.1 De-enclaving existing infrastructure The idea behind de-enclaving is to use existing infrastructure built and operated by the mining industry for mining purposes for a wider use. This involves offering the surplus output of mining power plants to commercial and household users, making private roads accessible to broader traffic, and opening dedicated mine railways and ports to third-party traffic. The attraction of de-enclaving is that it makes use of existing infrastructure and avoids long planning and construction delays. Moreover, it takes advantage of the presence of a private party that has a proven track record in the reliable provision of electricity or transport services. De-enclaving therefore has the potential to make services essential for development available within a short time frame. When considering implementing deenclaving several questions need however be carefully considered: Is there excess capacity in the existing infrastructure so that a broader demand can be satisfied? Are existing facilities technically compatible with other traffic? What is the basis of negotiation with the current provider? In other terms, what are the incentives that would make the private sector open its infrastructure? Will additional infrastructure need to be provided (e.g. feeder roads, port storage and stevedoring services, power transformer stations, etc) in order to make the existing infrastructure accessible? The provision and operation of additional infrastructure, and the adapting and upgrading of existing facilities leads to considering the different roles of the private and public sector in infrastructure. The next subsection discusses this in greater detail. How is necessary adaptation and additional infrastructure going to be provided and construction paid for? How will maintenance be provided and paid for? (again, this is a PPP question - see next sub-section) How will the services provided to the broader public be costed, priced and user revenues collected (where appropriate)? 35

36 If there is insufficient or unsuitable existing capacity to satisfy additional demand to the desirable degree, is the expansion, adaption or upgrade of existing capacity at the same location preferable to considering the construction of new capacity at a different location? For example, the existing mining plant might not be anywhere near the utility s transmission network. Or the mining railway bypasses densely populated areas. Addressing these issues leads to questions of spatial efficiency and national planning of investments. 5.2 The mining sector as provider of financing for new infrastructure If the mining companies accept to take responsibility for the expansion of their existing infrastructure platform and the provision of additional capacity of the country, a series of policy questions needs to be addressed regarding the responsibilities of the private and the public sector for the construction, maintenance and operation of the facilities. A range of options is open, from pure private provision, to public-private partnerships (PPPs), to the private sector only acting as construction overseer (for upgrading of rural roads, for example). PPP options vary in the demand they impose on the government in terms of planning, negotiation, implementation and supervision. Skills and expertise develop slowly over time and a gradual approach to complex schemes is recommended. In order for the Government to come to a mutually beneficially agreement linking private mining interests with public infrastructure objectives it is necessary that the provisions for such a PPP arrangement exist. Despite of a tradition of private involvement in the mining sector, private participation in Guinea has so far lacked a transparent framework and common legal approach. Successful private participation is occurring, such as in the recent negotiations involving the Conakry-Kankan rail link. But as a general rule, negotiations with the government have mostly occurred on a bilateral basis and have used opaque evaluation and selection criteria for the issuance of licences and contracts. Instances of reneging on contracts from the part of the Government are known. Such an environment raises the country risk perceived by potential entrants. Several institutional layers dilute accountability mechanisms and hinder coordination between agencies. A national strategy for the infrastructure sectors is lacking. Finally, skilled and experienced staff is scarce on the government side. One way in which the mining companies could be incentivized to take on infrastructure responsibilities is by offering a royalities versus infrastructure swap. This can be an attractive proposal for the mining companies as they will essentially be paid to provide additional commercial activity the construction and maintenance of a road might not be their main business but it can be an additional lucrative activity in which the inputs in terms of skills, labor and capital are compensated at a reasonable rate. On the government side, drawing on the expertise of the private sector allows to mitigate capacity shortages in the public sector in terms of skill and human resources. It also represents a solution to annual budget constraints, although in the event of an exchange of infrastructure against (a share of) mining royalties what is occurring is not a budget expansion, but rather a deliberate allocation of state resources to a given sector. 36

37 Finally, governance issues associated with the public management of revenues earned on natural resources are avoided by engaging in a swap (see also discussion of governance issues further in the note). Key issues to consider in negotiations of a partnership between the government and the private sector are: the costing of the services to be provided a balance needs to be struck between the government receiving an appropriate quantity and quality of infrastructure services and the mining company having a incentive of entering into the swap with the government. Too much money paid (or retained) by the private company means the government has less money to spend on other causes; too little return offered on the risk taken, and the private sector will not enter into the partnership. External controls and audits of the investment and construction plans submitted by the private company are necessary. Worth considering is also the delivery principle underlying Outputbased Aid (OBA). OBA is based on the principle of payment for delivery of a verified functioning service output (i.e. a certain number of commercial or household power connections, or a fixed number of well-maintained road or rail kilometers), rather than input payments (eg, $$$ investment in a transmission line). long-term optimal planning- as mentioned earlier in this note, existing infrastructure might only have a limited potential to respond to the national need for essential transport and energy services. Moreover, once the demand considered is of regional or national scale rather than for a mining operation only, other technologies might become attractive (economies of scale will make high initial capital cost options competitive). Thermal plants developed by the mining industry might be more costly than large-scale hydro plant which serve a larger population and a mix of industrial, commercial and residential users. If larger scale projects for mixed purpose are being considered, mining companies might co-finance hydropower development with the government as they have an interest in getting future access to lower cost power. That said, given the recent tumultuous period, it is prudent to start any public-private partnership effort with a small number of tractable projects rather than complex mega projects with require great expertise and extensive preparation. 5.3 Using royalties to fund public infrastructure Under regular circumstances, governments receive the revenue from the exploitation of their natural resources alongside other tax revenues. These public funds are then reallocated in the budget across all services a government provides for its citizens, including hospitals, schools, water treatment plant and other infrastructure. Even if the policy decision is taken that a significant share of mining royalties will be re-invested by the government in physical infrastructure such as roads, power plants and, this is a way to distribute the revenues earned from the exploitation of natural resources to areas outside of the mining areas. In this manner, disparities between communities and regions can be attenuated and different growth areas and sectors supported (eg, Guinea can also build up its agribusiness). Infrastructure services in which it seems unlikely mining companies will be interested (nor have the same competitive advantage), such as irrigation and roads 37

38 construction outside the mining corridors, could be funded from a national Infrastructure Fund. While such a fund would be alimented by mining royalties, the government is not bound to consider mining interests as main focus of where investments funded from the fund would be located, or which services they concern. Among the chief challenges to consider in the case of setting up purpose-specific funds, such as an infrastructure fund, are the following: governance and anti-corruption issues any fund set up with dedicated revenues (eg, royalties from mining operations) and set apart from the regular budgeting process requires stringent governance, control and audit mechanisms in order to avoid misuse of funds; reduction of government room for maneuver - ring-fencing a share of government revenues from the annual budget cycle safeguards long-term investment projects and avoids costly rescheduling and delays caused by the overall workings of government. Security of multi-year funding is very important for long-term infrastructure investment projects but it also means that the government has less head room in the budget to make discretionary decisions from year to year. If all public funds are tied up from the start, then budgeting for new items is not possible and reallocations which are a necessary feature of planning are complicated. capacity for medium-and long-term planning and budgeting in order to effectively utilize the fund, medium and long-term budget and project planning is required. In countries where there are limited capacities, the creation of additional centers for rare skilled personnel alongside existing ministerial planning departments might aggravate shortages in all cases. On a smaller, one-project scale, a model that might be emulated and in which donors have a role to play is enclave infrastructure project financing in which the infrastructure is build using non sovereign funding guaranteed through a dedicated account in which mining companies pay lease/usage fees along the model of ANAIM in which the WB was the financier, or the current discussions between GAC and the African Development Bank on transport infrastructure in Kamsar. 5.4 Recommandations Review of the legal framework and the options it allows for participation of the private sector in infrastructure provision. Such an assessment of the existing legal structures needs to take central and decentralized functions into account. Establishment of a legal framework for public private partnership in infrastructure following best practice. This would involve where possible the adaptation of existing laws and institutions rather than the creation of new legal structures. Implementation of the PPP framework with the possible establishment of a PPP Unit in the government (with the Ministry of Finance as most likely line ministry) A reference document recommended for its pragmatic way of summarising the approach to PPP specifically for Africa is contained in the «Attracting investors to African public 38

39 private partnerships: a project preparation guide», World Bank ICA PPIAF It provides helpful advice to governments engaged in PPPI, while being clear on the challenges involved in the process of negotiating a contract that satisfies all parties needs and withstands the challenge of time. Figure 9 provides a schematic view of the roadmap governments face. 18 Figure 9: Practical implementation of Infrastructure PPPs 18 Another reference document more specifically for the rail sector: Review of selected railway concessions in Sub-Sahara Africa: World Bank

40 6. Using Infrastructure as a Vehicle for Sustainable Development 6.1 Addressing Economic Geography questions The notion of growth poles emerges as relevant topic in the case of Guinea given the geographically concentrated location of mining activities. The policy question at the core of economic geography is the following: given the availability of $1 of infrastructure investment, where will the highest return be from that $1? Will it be if the $ is invested in the areas where there is already active mining activity (to enhance existing production), or will it be if the $ is invested in areas so far neglected (to foster the emergence of diverse economic activity)? Will the answer differ if the government pursues a strategy of highest growth versus a strategy of poverty reduction and balanced development? Development in the country has so far largely followed a corridor approach, with mining activities being the driving force. While this can make sense in terms of favoring the growth areas, it also leaves the country more vulnerable to shocks such as the drop in commodity prices experienced in A more diversified investment strategy in terms of growth poles and spatial equity, for example through new emphasis on providing good infrastructure services for agricultural areas, might be considered medium- to long-term. The Ministry of Mines and Geology has initialized in 2008 a series of infrastructure planning seminars starting with the Kamsar-Boke-Sangeredi corridor. Seminars for corridor or growth pole regions will follow. The World Bank has established a Spatial Team for the purpose of analyzing the linkages between spatial allocation of resources and growth and development. It is recommended that the government undertake a spatial analysis which will help formulating the trade-offs involved in policy choices such as concentrating resources in a small number of mining areas compared to a strategy aimed at enhancing spatial equity Addressing the role of Agriculture The National Policy for Agricultural Development - Vision 2015 (Politique Nationale de Developpement Agricole (PNDA) Vision 2015) was adopted in July The strategy has three pillars: (i) reinforce food security through increased productivity and diversification of food staples; (ii) increase agricultural revenue through the development of economic opportunities and improved market access; (iii) improve the enabling environment. To implement this strategy, the government identified the following programs: (i) enhancing food crop production/productivity including through water management infrastructure; (ii) agricultural export promotion of industrial crops (coffee, cashew, oil palm, rubber, cotton and cola nut) and horticultural crops (mangoes, pineapples, bananas, 19 See the World Developing Report 2009: Reshaping Economic Geography for a general discussion of the topic. For an example of how spatial analysis is being used to aid the government policy making and investment prioritization process, see also Lall, Schroeder and Schmidt (2009), Identifying spatial efficiency equity trade-offs in territorial development policies. Evidence from Uganda, World Bank Policy Research Working Paper, No WPS

41 vegetables); (iii) development of market access infrastructure (rural roads, warehouses, cold storage facilities, markets, transformation facilities, ); (iv) input market development; (v) support for advisory services and capacity building of producer organizations; and (vi) agricultural finance. The main issue is that large scale infrastructure (roads, rails, dams, energy) planning in Guinea is primarily considered for the mining sector and less to other development objectives, including the potential for agriculture, food security, and economic growth from other sectors. If a national transport and energy plan is developed as discussed earlier in this note, the main arteries for the agriculture sector should be included in the mapping of infrastructure and projects with converging interests be prioritized. In any event, assistance is needed with strategic planning and prioritization of objectives within the agriculture sector, including phasing/sequencing of specific interventions. The possibility of PPP in infrastructure has been discussed earlier in this note. If the legal and institutional framework for such partnerships can be established in the country, agriculture projects present a further opportunity for the public and private sector to collaborate on service delivery. Among the priority projects related to agriculture, water management (irrigation) and market access infrastructure in the lower part of the Kamsar- Boke-Sangaredi corridor stand out. To have the intended impact on agricultural productivity and economic growth, this infrastructure needs to be accompanied by appropriate technological packages, quality advisory services and market information, functioning input market/distribution systems, agricultural financial services, and actors capable of responding. 6.3 Addressing sustainable development questions: environment and social inclusion The mining, energy and transport sectors have broad areas of influence, including in terms of environmental and social impacts; however, the latter should be treated in their own right in separate documents. The West Africa Minerals Sector Strategic Assessment (WAMSSA) has identified policy, institutional and regulatory adjustments required for integrating environmental and social considerations into mining sector development in West Africa. Priority issues to be dealt with are listed in the graphic below: 41

42 West Africa Mineral Sector Strategic Assessment Regional Validation Workshop WAMSSA Recommendations 1. Adopt strategic, cluster focused, permanent multi-stakeholder framework for addressing mineral sector policy and development decisions Assess priority regional and national mineral clusters to become the primary focus of mineral sector infrastructure and governance improvements Create permanent regional, national and local multi-stakeholder bodies to help develop appropriate policy frameworks 2. Strengthen environmental governance Address mining-induced deforestation, loss of biodiversity, and pollution of water Reduce mining-induced land degradation and increase reclamation of mining lands 3. Increase local-level benefits in mining areas Integrated mineral sector projects into local development plans in order to address poverty Create training, employment, local supplier and sustainable alternative livelihood opportunities 4. Improving social accountability and mineral sector governance Eliminate lack of transparency and consistency in policy formulation and decision-making Provide capacity building and institutional strengthening to all stakeholder groups (government, civil society, industry, etc.) Minimize disenfranchisement of community from development decision-making processes Reduce rent-seeking behavior and conditions that lead to distorted benefitsharing 42

43 6.4 Addressing Governance, Transparency, and Anti-corruption The main initiative to improve the governance dimension related to extractive industries such as mining at the global level is the Extractive Industries Transparency Initiative (EITI) which the World Bank has supported since its launch in It seeks to help resource-rich countries maximize the development gains from the exploitation of their oil, gas, and mineral resources by encouraging greater EI revenue transparency. Through the verification and full publication of company payments and government revenue from oil, gas, and mining, EITI helps to safeguard against corruption and provides a powerful illustration of voluntary engagement of governments, industry, civil society and other stakeholders to establish a locally implemented global standard. However, the EITI does not cover all the challenges that the EI bring to developing countries. Public reporting of EI revenue, though extremely valuable, represents only one step in improving sector governance and maximizing development outcomes throughout the EI value chain. How these resources are actually developed and how the revenue generated ultimately is spent will determine a country s success in achieving long-term growth and sustainable development. The World Bank, with other development partners, is stepping up its efforts to provide a more integrated and comprehensive approach to natural resource management along the full value chain, including all the steps of EI development and impact. The EI value chain encompasses awarding contracts, monitoring operations, collecting taxes, distributing revenue in a sound manner, and implementing sustainable development projects (see Figure 10). The value chain approach aims to support countries in their efforts to translate natural resource wealth into sustainable development. It can be integrated into the World Bank's Country Assistance Strategies (CAS) for resource-rich client countries and serve countries with great resource potential that decide to address the resource curse issues at an early stage of development. This approach is being piloted in Sub-Saharan Africa, where the significant rise in commodities prices until 2008 has brought substantial windfall revenue to resource-rich countries. While high prices present unique opportunities, the weak institutional capacity in many countries leaves them more vulnerable to the resource curse. A report on EITI++ has been prepared as additional policy note for dialogue with the Government of Guinea. The process of establishing an EITI++ Office was launched in September 2008 and the future institutional setup of such an office is currently under discussion. 43

44 Figure 10: The Extractive Industry Value Chain 44