Project Name. Region Sector. Project ID Borrower(s) Implementing Agency. Republic of Madagascar Madagascar

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2949 Additional Financing for the Mineral Resources Governance Project AFRICA Mining and other extractive (50%); Central government administration (40%);Oil and gas (10%) P REPUBLIC OF MADAGASCAR Republic of Madagascar Madagascar Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 7, 2007 Date of Appraisal March 23, 2007 Authorization Date of Board Approval May 22, Country and Sector Background Madagascar is geologically rich and has good mining potential for gold, industrial minerals such as titanium, ilmenite, iron ore, and nickel, bauxite, and coal. It is also famous for its rich gemstones deposits. Historically, small-scale mining dominated the Malagasy minerals sector. Large-scale mining operators, while interested in the country s mining sector potential, were deterred by unstable and opaque regulatory and legal frameworks. The Malagasy Government, with the assistance from the World Bank and other donors, set to develop and reform its minerals sector in the 1990s. A new, investor-friendly mining law was passed in 1999 and updated in A Large-scale mining investment law was adopted in 2002 and amended in 2004 to promote large-scale mining in Madagascar. Furthermore, Madagascar set up a world class mining cadastre service, which is currently considered to be the best in Africa. A core unit of the geological service with a wealth of data is also available. The first large-scale mining company to proceed with its investment is Rio Tinto/QMM, influenced by not only investor-friendly regulatory and legal framework, but also the world commodities boom. After 15 years of preparation in the Fort Dauphin region, the decision to undertake the QMM ilmenite project was taken in Other investors shortly followed suit currently, Dynatec, in association with Sumimoto Corporation, a consortium of Korean companies and SNC Lavalin, is constructing a cobalt/nickel mine in Ambotavy, on Madagascar s east coast. The investment is estimated at US$2.5 billion and is expected to go into production in The investment would include the set up of a refinery in Tamatave and the improvement of associated port facilities. Kumba Resources is developing a Tolear mineral sands project on the country s west coast through its Ticor subsidiary. Also, the Canadian giant Alcan in association with the Malagasy Access Madagascar is evaluating the possibility of

2 building a bauxite mine and an aluminum smelter in Manantenina in the south-west part of the country. In 2006, the Strategic Decision Meeting, focused on oil and large-scale mining was held, and a follow-up small-scale mining Strategic Decision Meeting is planned for As a result, the Malagasy minerals sector strategy has been carefully outlined and fully thought out. 2. Objectives In December 2002 the Government of Madagascar, with the support from the World Bank, designed the Mineral Resources Governance Project (PGRM) with the following objectives: (i) strengthening of accountability and transparency in the mining; (ii) promotion of key institutional reforms for the decentralized management of mineral resources; and (iii) promotion of private investments and value-added in the sector. The objectives of the project under Additional Financing would remain unchanged. 3. Rationale for Bank Involvement In January 2007, following the Presidential elections, the Ministry of Energy and Mines was split into two entities, Ministry of Mines and Ministry of Energy, thus giving mining sector more focused attention. The Ministry of Energy concentrates on administering the petroleum sector, which has also experienced an increase in investor interest. Currently, a number of companies hold on-shore and off-shore exploration permits. While the originally identified project activities dealt with overall mineral sector issues (including promotion of large-scale operations in mining), there was a clear focus on field work related to artisanal and small-scale mining (ASM), which was then the main Government objective. A number of critical successes have been registered in relation to this issue since then, including an increasing formalization of the ASM sector. In June 2005 the sector strategy was adjusted, and the project activities re-focused, to respond to the recent surge of large-scale mining projects in Madagascar. In addition, as a response to increasing oil prices, oil exploration in Madagascar surged. The overall mining and energy institutional structure thus faced more pressure and, in spite of earlier successful reforms (i.e. the Mining Cadastre, Environmental Mining Cells and the Mines-Forest Committees), currently needs more comprehensive restructuring, including modifications to the oil (upstream) sector and a fine-tuned strategy of a key parastatal entity (OMNIS). The Government of Madagascar recognizes the importance of the extractive industries sector. The mining sector features prominently in the Madagascar Action Plan MAP, the Government s development strategy for The Challenge 7 of the MAP ambitiously specifies that the sector should contribute around 30% of GDP in 2011, up from the estimate of 4% in The MAP also states that Madagascar will help current mining projects enter the

3 production phase quickly while respecting the communities and the environment. It will unleash its extractive potential by attracting more explorers and promoting its natural assets. 1 Madagascar has stated its intention to joint the EITI during the EITI event in Oslo, Norway in October A formal letter of intent and a request for assistance from the Government of Madagascar was received in March The EITI Trust Fund to assist Madagascar in implementing EITI is currently under preparation. 4. Description The operation was prepared in form of scaled up activities under existing project components. The proposed Additional Financing will cover the following five areas of focus in its activities: (i) policy, legal and regulatory framework; (ii) institutional restructuring and strengthening of the Ministry of Mines; (iii) Support to integration of large-scale mining projects to regional development; (iv) Management of potential conflict between environmental protection and largescale mining; and (v) Improved government and management capacity of small-scale mining activities. All of these activities fit into the three technical assistance components of the original credit. The policy, legal and regulatory framework changes under the scaled up credit will reinforce activities under Component 1 of the original credit (Strengthening transparency and governance in mining). The focus of this work will be on formulating an updated mining and petroleum policy, based on results from the September 2006 Strategic Decision Meeting, the Madagascar Action Plan, the continuous dialogue with the Bonne Gouvernance/Good Governance initiative under the Presidency and the regional and central-level authorities. The fiscal framework for the mining and petroleum sectors will also be assessed and legal adjustments that would optimize the Malagasy growth potential and sector contribution to the national and regional/local economies would be proposed. The sector regulatory framework will be further developed, including: (i) a revision/reformulation of the hydrocarbons law and model production sharing contract on the basis of a streamlined institutional structure, eliminating potential conflicts of interest and regulatory gaps and (ii) adjustments to the mining legal and regulatory framework, including possibly an revision of the 1999/2005 Mining Code and the Law on large-scale mining investments. The petroleum sector work will be done in coordination with the Norwegian Government Petroleum Governance Initiative. The first component of PGRM would also be reinforced through institutional restructuring and strengthening of the extractive industries institutions. A number of studies financed PGRM have arrived at the solutions to institutional reform to streamline sector administration. Restructuring of the upstream hydrocarbons institutional framework would be the focus of the Additional Financing, and would be carried out by i) transferring of upstream hydrocarbons regulatory functions to the Ministry of Energy and ii) transferring the oil and gas-related geo-information data bans to the Geological Service entity created under scale up to Component 3. Restructuring of OMNIS (a parastatal agency, which currently combines both, business and regulatory 1 The Madagascar Action Plan, Commitment 6, High Growth Economy, Action 7. p 092.

4 functions in the extractive industries) would also be undertaken under the scaled up Additional Financing. These two activities (restructuring of OMNIS and upstream hydrocarbons institutional framework restructuring) would be undertaken by NORAD in close cooperation with the World Bank. The Madagascar Gemological Institute (IGM), already established under the PGRM, would continue to benefit from support under the proposed additional financing. A sustainable support mechanism would be created to formalize IGM and ensure its sustainability beyond the life of the project. Activities aimed at improved governance and management capacity in small-scale mining under the proposed Additional Financing would reinforce the second component of the PGRM. The new activities would focus on implementing of the new action plan for improved governance and capacity building in the small-scale mining sector, which was developed by the Ministry of Mines. The following new activities will be included: (i) Monitoring and evaluation of small-scale mining practices; (ii) familiarization of small-scale miners with applicable legal and regulatory texts and procedures; (iii) technical assistance and capacity building, especially best practice training ; (iv) increased push on small-scale mining sector formalization and legalization, registration services, rapid response to mining rush situation; and (v) community development. Activities aimed at integration of large-scale mining projects into regional development will be added under the proposed Additional Financing to reinforce the third component of PGRM (promoting private investments and value-added in the sector). Under PGRM and in cooperation with the I2G project, a series of activities in the Anosy region (Fort Dauphin area) have been developed to support the integration of large-scale mining into local, regional and national economies. It is critical to continue implementation of the Anosy region program and to extend them to two other areas where (i) large-scale mining exploitation is planned and (ii) the existing community and municipal management are in need of capacity reinforcement to optimize smooth integration of such programs. The following activities are planned to be added under component 3 of PGRM in this context: Anosy region/fort Dauphin/QMM ilmenite project. In coordination with the I2G project and other donors, continued support for: Local Coordination Committee set-up and implementation Chief of Region Office: implementation, monitoring and update of regional community development plans; Community Development Fund (cooperation with Commdev, a joint IFC-World Bank service to support communities in extractive industries areas) Ambatoby (Dynatec/Nickel mine) and Tulear (Kumba/ilmenite) regions would benefit from the following activities under the Additional Financing: Dynamic Natural Resources Management platform; Capacity building at municipal and community levels; Consultative and participatory processes, Community Development Plan formulation and set-up of community development funds; Set-up and support to Local Coordination Committee(s).

5 Component 3 of PGRM will also be reinforced with activities aimed at management of potential conflicts between environmental protection and large and small-scale mining. Following the Durban Declaration (September 2003) by the President of Madagascar and the decision by the Government to triple the size of the protected areas, the potential conflicts with large, artisanal and small-scale mining have increased. A number of mining permits overlap with such areas or potential ones and initial successful efforts to manage this issue need to be systematized and strengthened. To respond to this situation, activities to be implemented include: Strengthening of capacity of the established Inter-ministerial Mines-Forests Committee ; Establishment and capacity building of a proper mining inspectorate unit (see point 2 above); Mapping and prioritization of areas that may pose potential conflicts, and development and implementation of an action plan to solve such conflicts optimizing both conservation and development goals; Clear identification of no go zones; Management of ASM in relation to protected areas (based on earlier success stories); Coordination with National Environmental Agency (ONE) and National Park Agency (ANGAP). Finally, activities aimed at strengthening of mining entities and agencies that fall under the Ministry of Mines would also be added to reinforce component 3 of the original credit. A Geological Survey/Data Banks/Promotion entity based on the Promotional Database for Mineral Resources Governance (BPGRM) already established through the PGRM and the Geological and Mining Information System (SIGM) established through the French AFD funded Malagasy Mining Institutional Strengthening Project will be set up. A Mining Inspectorate agency, based on the example of the Directorate of Geology and Mines (DGM), including the Environmental Mining Cells already established through PGRM, would be organized and supported. 5. Financing Source: ($m.) BORROWER/RECIPIENT.8 International Development Association (IDA) 8 Total Implementation The implementation mechanisms would be the same under the Additional Financing as under the PGRM. Implementation of PGRM has been successful. 7. Sustainability

6 8. Lessons Learned from Past Operations in the Country/Sector Lessons learned through PGRM implementation have been incorporated into Additional Financing credit design. More open concentration regarding EI Need to get exposure and political support for EI projects and strategy. Increased focus on legal/regulatory changes to support LED around mining projects 9. Safeguard Policies (including public consultation) The Borrower has been successfully implementing the existing credit since The project has a number of safeguards issues, which the Borrower was able to address under the Environmental Management Plan disclosed in April, The environmental classification of the Additional financing remains Category B. The mission undertaken in February 2007 analyzed the various environmental tools available in the current phase of implementation. The mission determined and agreed with the Borrower that: (i) the Borrowers will lay out and strengthen a structure responsible for management of environmental and social risks in the Mining sector (ii) an environmental manual will be available and used in the sector. A sectoral environmental assessment was carried out during the project Phase 2 preparation. The environmental structure in charge of managing the safeguard aspects of the mining sector works under the supervision of the National office for the Environment, department in charge of the environmental assessments and the Environmental impact studies in Madagascar under the supervision of the Environmental and Forest Ministry. An environmental audit on the management and an environmental analysis of the project components with the existing environmental management tools and their sufficiency was carried out prior to project appraisal. The results of this audit give an institutional evaluation in the sector, an analysis of sufficiency and coherence of the environmental tools available in the sector, a proposal of measurements of mitigation and the recommendations on the management and the monitoring environmental in the sector. This study reviewed and approved by the Bank on March 12, 2007, and disclosed on March 25, Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ x] [ ] Natural Habitats (OP/BP 4.04) [ ] [ x] Pest Management (OP 4.09) [ ] [ x] Physical Cultural Resources (OP/BP 4.11) [ ] [ x] Involuntary Resettlement (OP/BP 4.12) [ ] [ x]

7 Indigenous Peoples (OP/BP 4.10) [ ] [x ] Forests (OP/BP 4.36) [ ] [ x] Safety of Dams (OP/BP 4.37) [ ] [ x] Projects in Disputed Areas (OP/BP 7.60) * [ ] [ x] Projects on International Waterways (OP/BP 7.50) [ ] [ x] 10. List of Factual Technical Documents 11. Contact point Contact: Gotthard Walser Title: Sr Mining Spec. Tel: (202) Fax: Gwalser@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

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