Documentof The World Bank FOR OFFICIAL USEONLY Report No. 43256-PG PROJECTAPPRAISALDOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR 10.4MILLION (USS17 MILLIONEQUIVALENT) TO THE INDEPENDENT STATE OF PAPUANEW GUINEA FORA SECOND MINING SECTOR INSTITUTIONAL STRENGTHENING TECHNICAL ASSISTANCE PROJECT April 21,2008 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS Exchange Rate Effective March31,2008 Currency Unit = Kina (PGK) SDR = US$1.65 US$ = SDR0.61 1Kina US0.34 US$ = Kina2.94 FISCALYEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS ABG Autonomous Bougainville Government ADB Asian Development Bank A S M Artisanal and Small-scale Mining AusAID Australian Agency for International Development CAS Country Assistance Strategy CASM Communities and Small-scale Mining CBO Community Based Organization CDD Community DrivenDevelopment DoCD Department o f Community Development DoEC Department of Environment and Conservation D o M Department o f Mining DoMPGM Department o f Mineral Policy and Geo-Hazard Management DoNPM Department o fNationalPlanning and Monitoring DOPE Department o fPetroleumand Energy E1 Extractive Industries (includes oil, gas and mining) EITI Extractive Industries Transparency Initiative EU EuropeanUnion GAP Gender Action Plan GIS Geological Information System IEC Information, Education, and Communication IRC Internal RevenueCommission JSDF Japanese Social Development Fund LICUS Low Income Countries Under Stress LLG Local Level Government L S M Large scale mining MRA Mineral Resources Authority MTDS MediumTerm Development Strategy MWAs MineWomen's Associations NCW National Council o f Women NGO Non-governmental Organization PNGSDP Papua New Guinea Sustainable Development ProgramLtd. SESA Strategic Environmental and Social Assessment SPU Special Projects Unit(of MU) UNDP United Nations Development Programme W I M TC Women inMining Technical Committee Vice Presidents (EAPBDN): James AdamsKatherine Sierra Country Director: Nigel Roberts Country Manager BensonAteng Sector Manager: Paul0 De Sa Task Team Leader: Graeme Eric Hancock FOROFFICIAL USE ONLY PAPUANEW GUINEA SecondMiningSector InstitutionalStrengtheningTechnicalAssistance Project CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. 5 A . Country and Sector Issues................................................................................................... 5 B HigherLevelObjectives to Which the Project Contributes................................................ . 8 C. LendingInstrument............................................................................................................. 9 D. Project Development Objective andKey Indicators........................................................... 9 E. Lessons Learned andReflectedinthe Project Design ...................................................... 12 F . Alternatives Considered andReasons for Rejection......................................................... 13 I1. IMPLEMENTATION .................................................................................................... 13 A . Partnership Arrangements (ifapplicable) ......................................................................... 13 B Institutional andImplementationArrangements .............................................................. . 13 . . . C . Sustainability ..................................................................................................................... 14 D Critical Risks andPossibleControversialAspects . ........................................................... 15 E . Loadcredit Conditions and Covenants ............................................................................ 17 I11 . APPRAISAL SUMMARY ............................................................................................. 17 A. Economic andFinancial Analyses .................................................................................... 17 B Technical.. ......................................................................................................................... . 18 C . Social ................................................................................................................................. 19 D Environment ...................................................................................................................... 20 D. Safeguard Policies............................................................................................................. 21 E. Policy Exceptions andReadiness ...................................................................................... 21 Annex 1:CountryandSector or ProgramBackground ......................................................... 23 Annex 2: Major RelatedProjectsFinancedby the World Bank. IDA and/or other Agencies ....................................................................................................................................................... 32 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 34 Annex 5: ProjectCosts ............................................................................................................... 48 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Annex 6: ImplementationArrangements ................................................................................. 49 Annex 7: FinancialManagementandDisbursementArrangements ..................................... 52 Annex 8: ProcurementArrangements ...................................................................................... 59 Annex 9: EconomicandFinancialAnalysis ............................................................................. 66 Annex 10: SafeguardPolicyIssues ............................................................................................ 68 Annex 11: ProjectPreparationand Supervision ..................................................................... 71 Annex 12: Documentsinthe ProjectFile ................................................................................. 72 Annex 13:StatementofLoansandCredits .............................................................................. 73 Annex 14: Country at a Glance ................................................................................................. 74 Annex 15: Maps........................................................................................................................... 76 PAPUANEW GUINEA PGSECOND MININGSECTOR INST STRENGTHENING TA PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC COCPO Date: April 15,2008 Team Leader: Graeme Eric Hancock Country Director: Nigel Roberts Sectors: Miningand other extractive (100%) Sector Manager/Director: Paul0 De Sa Themes: Other public sector governance (P);Gender (P);Other environment and natural resources management (S);Export development and competitiveness (S) Project ID: P102396 Environmental screening category: Partial Assessment Lending Instrument: Technical Assistance Loan Project Financing Data [ ]Loan [XI Credit [ ]Grant [ ]Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 17.00 Proposed terms: The Maximum Commitment Charge Rate payableby the Recipient on the Unwithdrawn FinancingBalance shall be one-half o f one percent (1/2 o f 1%) per annum. The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three-fourths o f one percent (3/4 o f 1%)per annum. The Payment Dates are June 15 and December 15 in each year commencingDecember 15 2018 and ending on June 15 2043. The Borrower: ~~ ~~ ~ The IndependentState of PapuaNew Guinea PapuaNew Guinea ResponsibleAgency: MineralResources Authority (MM) Papua New Guinea 4nnual 1.00 4.50 4.50 4.00 2.00 1.00 zumulative 1.00 5.50 10.00 14.00 16.00 17.00 Expected effectiveness date: August 15, 2008 Expected closing date: December 31,2013 Does the project depart from the CAS incontent or other significant respects? Re$ PAD I.C. [ No Does the project require any exceptions from Bankpolicies? Re$ PAD I K G. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD IILE. [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD IKG. [XIYes [ ]No Project development objective Re$ PAD II.C. TechnicalAnnex 3 , The project development objective is to improve the benefits from Extractive Industries (EI) to the nationalbudget and to miningaffected communities andto mitigate mining's healthand safety risks for ASM miners. This will be achieved through improving effectiveness o fkey E1 sector institutions, supporting E1communities to bebetter able to monitor the delivery o f community programs-&d services, empowering disadvantaged groups including women and youth inextractive industries affected areas, and improving accountability o f the sector and for management and use o fmining-related revenues. The primarytarget groups are the institutions involved inthe miningsector, the communities inthe vicinity o fboth large-scale and artisanahmall scale miningoperations and the recipients andmanagers o f miningbenefits streams. Project description [one-sentence summay of each component] Re$ PAD II.D., Technical Annex 4 Component 1:Strengthening the Policy andRegulatory Frameworks for the MiningSector. (Estimated Total Cost: US$2.09 million; IDA:US$1.90million). The principal target group for this component i s DoMPGM staff, who will be supported to establish and implement an effective policy development forum process for coordination and cooperation with other agencies. Key Outputs will include the completion o f several keypolicies and legislative Acts including a Sustainable MiningDevelopment Policy, with mine closure andresettlement guidelines, and an Offshore MiningPolicy and associated legislation; a Small-Scale Mining Occupational Health andSafety Act; anew MiningSafetyAct; andareview o f and amendments to the MiningAct 1992. Component 2: Strengthening Mining Sector Governance, Regulation, and Sustainable Development Outcomes (Estimated Total Cost: US$9.01million; IDA:US$8.19 million). The principal target group for this component i s MRA staff, who will be given support to strengthen MRA's ability to undertake its mandated role inthe followingareas: Strengthen Governance andAccountability inMiningSector Institutions. Activities in this sub-component strengthen institutional accountabilitybysupportingthe development, implementation andmonitoring o f an Anti-Corruption Action Plan for MRA andby puttingin place mechanisms to monitor compliance with and outcomes o f the policies and regulations developed by DoMPGM, especially regarding impacts on the most vulnerable groups inmining communities. The sub-component will also support establishment o f internal systems for financial management and transparency. To address broader sector governance and accountability, the ongoing dialogue on EITIwill be supported through activities inother sub- components inrelation to community participation, transparency o fbenefits management, and use o f MRA's web site. Promote, License, Control, andMonitor MiningSector Development. This sub- component focuses on buildingMRA's capacity to carry out its technical role inpromoting PNG's miningsector, licensing, controlling, andmonitoring the industry. Activities will support several MRA units, with the objective o f establishing a cohesive and functioning institution capable o f sustaining its role beyond the Project, and include: o Strengthening MineralTenements Management, o Improving the Quality and Availability o f Geological Information, o Strengthening Information Management andMarketing o Implementing an Information and Communications Program to keep stakeholders informed, especially on Bougainville, o fMRA and MSISTAP I1project activities Improving Sustainable Development Outcomes from the MiningSector. Activities in this sub-component include o Establishing HighStandards for MitigatingNegative Environmental and Social Impacts o f Mining. o Improving the Health, Safety, andEffectiveness o f Small-scale Miners. o Coordinating and Improving the Management o f MiningBenefits including recruitment o f community facilitators by MRA at each o fthe mine sites o Monitoring Social and Environmental Outcomes from MiningActivities including preparation o f a Strategic Environmental and Social Assessment (SESA) o Keeping all stakeholders and especially Bougainville communities informed, so that they understand bothMRA's role andproject objectives and activities Key Outputs will include internal systems for MRA, an MRA Anti-Corruption Plan, an MRA e-commerce system, a fully computerizedmineral tenements management system, reduced time for issuingmining and exploration licenses, a national Geological Information System(GIs), an ASM data base, an A S M registration andidentitycard system, safer andmore environmentally friendly A S M miningpractices, environmental and social guidelines including resettlement and community consultation, a Measurement and Evaluation (M&E) Framework for E1community- related services, E1community participatory planningprocedures, Local Level Mining Community Development Plans, Benefits Streams Reports for miningcommunities, a national Women inMining(WIM) Action Plan, a youth internship program to be implementedby MRA, a review o f all miningMemoranda o f Association (MOAS), publication o f EI-related payments bycompanies to government, a Strategic Environmental and Social Assessment (SESA) andan information dissemination andcommunications program. Component 3: Improving revenue collection and audits o f the sector (Estimated Total Cost: US$4.65 million; IDA:US$4.22 million). The principal target group for this component i s IRC's Resources MonitoringDivision staff, who will be supported to review and drafi mineral tax legislative amendments, conduct revenue risk assessments, and carry out miningandpetroleum project audits. The component will support the establishment o f four E1tax audit teams, two with a main focus on highpriority, complex audits andtwo for less complex audits with a strong focus on staff training. Key Outputs will include for the E1sector tax legislation amendments, tax-related risk assessments, tax audit reports, tax assessments andtax collections. Component 4: Strengthening the foundations for a conflict-free miningsector inBougainville (Estimated Total Cost: US$2.21 million; IDA: US$2.01 million). The principal target group for this component i s ABG's future D o M staff, who will be supported to establish the organizational framework for the department and implement an effective policy andregulatory environment for mineral exploration and development inBougainville. Key outputs include transitional arrangements (to facilitate granting o f exploration andmininglicenses untilminingpowers are transferred to ABG), issuance o f exploration andmininglicenses for Bougainville, a Bougainville Sustainable MiningPolicy, operation o f a functioning ABG Department o f Mining, a Bougainville MiningAct, a Bougainville MiningSafety Act and enabling regulations, hiringo f professional staff for the ABG MiningDepartment, twinningo fABG MiningDepartment staff into MRA and DoMPGM or other appropriate organizations, anddevelopment o f A S M support services and outreach on Bougainville. Component 5: Project Management (Estimated Total Cost: US$0.74 million; IDA: US$0.67 million), The principal target group for this component i s MRA's Special Projects Unit (SPU) staff, who will be supported to monitor, supervise, andprovide technical and administrative management control o f the Project. Keyoutputs will be project procurement documents, financial accounts, andproject-relatedreports. Which safeguard policies are triggered, ifany? Re$ PAD IKF., Technical Annex 10 The project i s rated as category B for environmental purposes. The project will not involve direct investment inminingactivities but through its policy andregulatory strengthening it could have indirect environmental impacts by encouragingincreased commercial scale mining and A S M activities inthe future. The project will support a Strategic Environmental and Social Assessment o f the mining sector inorderto identifypolicy andregulatorygaps which mayneedto be addressedinconsultation with the Government. Duringproject implementation further consultationwill take placewithNGOs, landowners, and industry representatives regardingmining sector environmental issues. Project performance indicators include mine safety, environmental and social compliance statistics as reported to MRAandDoEC. There will be no construction inthe project andhence no resettlement or acquisition o f land or assetswill take place. Hence the resettlement policy i s not triggered. However, the project will include activities to set a process inplace to develop standard resettlement guidelines for implementation inmine affected areas. With respect to the IndigenousPeople's policy, the regulatory frameworks inplace inPNG, especially with regardto land and consultations with traditional landowners, andthe strengtho f the indigenous landowner groups, already ensures that any ethnic groups affectedby mining activities, for whom the Bank's policy would apply, are treated ina way that more than complies with the Bank Policy. The policy would not inany casebe triggered byproject activities, and related issues would be covered by the proposedwork on developing standard practices for addressing social issues, and socio-economic frameworks. N o other safeguards policies are triggered by the project. Significant, non-standard conditions, if any, for: Re$ PAD III.F. Boardpresentation: The project does not require any exceptions from bank policies. The project meets regional requirements for readiness for implementation. Loadcredit effectiveness: Inaddition to the standard conditions for Negotiations, BoardPresentation, andEffectiveness, following are proposednon-standard conditions and dated covenants: Negotiations Condition: Receipt by IDA o f the signed outstanding audit report for the MSISTAP I, project. Effectiveness Conditions: (a) The Subsidiary Agreement has been executed and delivered and all conditions precedent to its effectiveness (other than the effectiveness o f this Agreement) have been fulfilled. (b) The Project Steering Committee has been established with terms o freference and ;omposition acceptable to the Association (c) The Recipient has includedthe financing o fthe Project inits national budget. (d) A procurement advisor for the project andan internal auditor havebeenappointedwithin MRA, with skills, qualifications, experience and terms o freference satisfactoryto the 4ssociation. (e) A Project Implementation Manual acceptable to the Association has been adopted for the Project (9 MRAhas establisheda financial management system for the Project, including software mdreportingformats, acceptable to the Association. Condition o f Disbursement for Grants Program: Receipt by IDA o f an Operations Manual for the Small GrantsProgram for Women's Groups satisfactory to IDA. Covenants applicable to project implementation: Two dated covenants are proposed as follows: The Recipient shall no later than December 31,2008, appoint an external auditor for the Project under terms o f reference andwith experience and qualifications acceptable to the Association. Preparationby MRAwith support fkom DoEC o f a Strategic Environmental and Social Assessment to be completed anddiscussed with IDAby December 31,2009 and recommendations implementedthereafter. I. STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues 1. Background. Papua New Guinea i s a relatively young country having gained independence in 1975. Since then minerals have been the backbone o f the economy. However, the country remains a weak state that has made only modest progress intransforming its mineral wealth into poverty reduction andbetter living conditions for its people. Duringthe 1990s social welfare indicators fell and poverty actually increased so that by 2005 an estimated 39 percent o f the six million population lived below the poverty line. Government-provided health and education systems are weak and ineffective and central budget allocations for social and development programs are not reaching the majority o f the population, who live inremote rural locations. Infrastructure provision per capita is amongst the lowest in the East Asia and Pacific Region: only 7 percent o f the population has access to electricity and there are only 0.04 kilometers (km) o f roads per square kmo fterritory (0.003km per capita). 2. Extractive Industries Contribution to the Economy. In recent years Extractive Industries (EI) i.e. mining, oil and gas have accounted on average for about 20 percent o f government receipts, 25 percent o f GDP, and about two thirds o f exports. With the recent runup in commodities prices, E1accounted for about 40 percent o f taxes (PGK2 billion, equivalent to about US$0.7 billion) and about 80 percent o f exports in2006 as shown inTable 1, with copper accounting for about 34 percent o f total exports (about PGK4.3 billion) and gold and oil about 24 percent each (about PGK3 billion each). Formal employment provided by commercial E1 projects is modest-about 15,000 jobs, equivalent to 5 percent o f formal employment (see Annex 1for further information). Table 1. E1MacroeconomicImpacts, 2004-2006 Year E1share of exports (YO) E1share of fiscal receipts(YO) 2004 73.1 21 2005 75.4 32 2006 82.2 42 Source: Bank of Papua New Guinea 3. Governance Context As the World Bank Management Report to the Extractive Industries Review (September 17, 2004) emphasized, translating E1operations into development and poverty reduction i s a major challenge. This i s a key focus o f the recent PNG CAS (Report no. 41571-PG) presented to the Board on December 18, 2007 which focuses on achieving better development outcomes from Government expenditures by (i) promoting and maintaining sound economic and natural resource management; and (ii) improving livelihoods and service delivery, especially for the rural poor. With respect to E1revenues management, the CAS proposes to support the Government regarding possible adoption and implementation o f the Extractive Industries Transparency Initiative (EITI). As outlined in the CAS, this project will build on the progress achieved under the first Mining Sector Institutional Strengthening Technical Assistance Project (MSISTAP I)(Report No. 20266-PNG, May 5, 2000) and aims at strengthening sector governance and improving outcomes from social expenditures for mining communities. The project will also provide support to the Autonomous Bougainville Government (ABG) to build the capacity to manage the reestablishment o f exploration and miningactivities on Bougainville. 5 4. Large Scale Mining (LSM). PNG has favorable geology for mineral deposits with tremendous potential for copper, gold, and nickel. Following a slow down over the last decade, rising commodity prices have prompted anincrease inmine development activity, with four new mines (Ramu, Hidden Valley, Sinivit, and Simberi) under development, in addition to five existing copper andor gold developments (Ok Tedi, Porgera, Lihir, Kainantu, and Tolukuma). Only one mine, Misima, closed (in 2004) having exhausted its reserves. On the island o f Bougainville mining activities were halted in 1989 when disputes over mining benefits distribution contributed to a resurgent secessionist movement; which led to a decade o f civil war from which the island i sjust emerging. 5. Artisanal and Small-scale Mining (ASM). There are an estimated 100,000 full time and part time artisanal and small-scale miners inPNGand, after agriculture, small-scale miningis the largest generator o f rural incomes, supporting an estimated 500,000 people, including the miners and their family members. Thus, close to 10 percent o f the population derive direct or indirect cash benefits from small-scale mining. The number o f miners continues to rise as other alternative rural livelihoods fail to materialize or as infrastructure for market access for agricultural goods deteriorates. However, income benefits from the sector must be balanced against potentially high environmental and community health costs. The miners generally have low levels o f education, engage in dangerous mining practices, and liberally use mercury (for gold extraction) without understanding the impacts on their own health or on the natural environment. 6. Government Mining Sector Strategy. The Government's strategy for large-scale mining i s to encourage environmentally and socially sustainable private sector-led mineral exploration, development, and production that contributes to poverty reduction and economic development at the national level through exports and taxes and at the local level through improved linkages to the local economy and benefit sharing and risk mitigation for local communities. The Government's strategy towards A S M i s to increase rural incomes while reducing harmful health, safety, and environmental impacts through on site training and extension services to support improved miningpractices and equipment. 7. Mining Sector Development Constraints. While good progress has been made in starting the progress o f strengthening sector institutions and regulatory framework under MSISTAl,the following constraints regarding regulatory issues and development outcomes still need to be addressed: 8. Regulation, Control, and Risk Mitigation Further strengthening o f mining sector regulatory and policy frameworks and institutional capabilities so that L S M can be monitored, audited, regulated, and administered in a fully effective manner and so that the widespread use o f unsafe and environmentally damaging ASMminingpractices canbereduced Lack o f standard procedures and guidelines that would ensure new companies entering the sector utilize existing best practices to address environment and social aspects o fmining; Lack o f mininginstitutional and regulatory frameworks for Bougainville, which is now under administration o f the newly formed ABG; 6 Incomplete digital geological information system, which presently only covers about half o f the country; 9. Improving Development Outcomes Lack o f transparency and accountability in the management o f mining royalties and other mining related income that are provided to provincial and local level governments and to landowner groups; Limited participation o f communities, including women and youth, in development planning and inmonitoringthe outputs from miningrevenues; Missed opportunities for revenue collection from existing mining and oiVgas operations. 10. Government Response. The Government took a major step in 2005 to address the constraints above by establishing two new mining sector institutions: the Mineral Resources Authority (MRA), which is responsible for sector administration and licensing, and the Department o f Mineral Policy and Geohazard Management (DoMPGM), which i s responsible for sector policy making and legal and regulatory framework. Inaddition, the ABG has recently established its own Department o f Mining (DoM) on Bougainville but with a very small number o f staff and limited equipment and facilities at present. The existing PNG mining regulatory framework includes: the Mining Act 1992 and a draft Sustainable Mining Development Policy, which outlines a comprehensive strategy to address the impacts of mining and improve management and effectiveness o f mining revenues and benefit streams. With support from several sources, including the MSISTAP I,two Japanese Social Development Fund (JSDF) grants, and the European Union (EU), pilot activities have been undertaken to improve A S M activities, address E1gender inequalities, and undertake E1tax audits. Rationalefor Bank Involvement 11. Bank Supportfor the Sector. Much o f the current regulatory and institutional progress, and the mining fiscal regime and tax collection from the mining sector, was supported under MSISTAP I, which closed in2006. The Bank has also increased engagement by accessing trust funds to supplement the strategic support provided under MSISTAP Iand has supported pioneering activities on A S M and on a Women in Mining (WIM) initiative to improve the impacts o f mining on women in local communities. This work has placed the Bank as the leading donors in the mining sector, and the Government has requested further Bank assistance to build on progress so far and support relevant institutions to improve the governance, effectiveness, and contribution o f the sector to national development. 12. Comparative Advantage. IDA'Scomparative advantage i s its long-term engagement and depth o f knowledge o f PNG's mining sector, combined with international mining sector experience andpractice. IDA's experience with development more generally, and especially with local institutions and community programs, gender, social safeguards, and the demand side o f governance, also brings new perspectives to the governance and sustainable miningdevelopment aspects, and can help to link this to other fbture work on local level governance. Through engagement in public expenditure management, IDA is well-placed to integrate mining sector reform with broader macroeconomic and fiscal management issues and ensure results are shared 7 with other sectors. There are no other sources o f assistance in PNGthat can have such broad, cross-sectoral impacts. Moreover, IDA'Sinvolvement and value added in mining is recognized by other development partners in PNGwho have confirmed that the proposed Project fits well with their activities andapproaches. B. HigherLevelObjectivesto Which the ProjectContributes 13. The higher level objectives to which the project contributes are to improve the benefits and mitigate the risks o f E1inPNG. The project Development Objective is provided inpara. 18, Section D. By focusing on EI, where PNG has a clear comparative advantage, and on helping improve governance and development outcomes from the sector, the Project i s well aligned with the Government's poverty reduction and development strategy as presented inits MediumTerm Development Strategy (MTDS). Key elements o f the MTDS include good governance, export- driven economic growth, rural development, poverty reduction, and empowerment through human resource development, with priority on pro-poor expenditures. The project will support E1communities to bebetter able to monitor the delivery o fcommunity programs and services. It also aims at empowering disadvantaged groups such as women and youth in E1affected areas. The project's support for women and youth enhances the poverty alleviation focus o f the Project The A S M focus will help to improve rural livelihoods and the welfare o f a significant number o f the rural poor. 14. EITI and Other Objectives.. EITIhas the potential to improve the governance o fmining revenues at the national and sub-national levels. The Government has taken initial steps to examine potential benefits o f EITI. In coordination with the Asian Development Bank, the Project will support efforts to build consensus within the government in favor o f EITI adoption. Other government objectives supported by the Project include (a) improving gender equality, by focusing on preparing mining sector Gender Equality Guidelines and supporting the implementation o f the Government's 2007-2012 Women InMining (WIM) Action Plan which was prepared with support for MSISTAl and JSDF funding; and (b) community empowerment, by increasing the involvement and participation o f communities and helping translate mining benefits into social welfare outcomes, including for women and youth. 15. Country Assistance Strategy. The proposed Project is in line with and supports the objectives o f the new PNG Country Assistance Strategy (CAS), which was presented to the Board on December 18, 2007. The Project's focus on strengthening sector governance, improving sector management, and promoting effective and socially and environmentally sustainable sector activities i s in line with the first CAS pillar. The Project contributes to the second CAS pillar by supporting mining communities to attain improved development outcomes from mining benefits (which include mining company community-related expenditures and mining-related funds received by sub-national governments and mining area landowners associations) and enhanced rural livelihoods through improved A S M activities. The Project is part o f the CAS approach that favors using a variety o f instruments to forward the dialogue on key topics. This Project incorporates several instruments to address governance, gender, and environment and social impacts. 16. The work on mining also has relevance for the oil and gas sectors and the Project will include (a) support for the Internal Revenue Commission (IRC) to audit oil and gas as well as 8 miningcompanies; and (b) support for women and youth in oil and gas communities, including training and access to a grants program for women's projects that will be available to women in all E1communities. As Project implementationproceeds, the findings o f the miningwork will be shared with the Department o f Petroleum and Energy (DOPE)and with oil and gas companies through the PNG Chamber o f Mines and Petroleum, with a view to exploring whether comparable activities, where feasible and appropriate, can be developed inthe oil and gas sector. With this inmind, the PDOis not limitedto mining,but refers to E1more broadly. PROJECTDESCRIPTION C. LendingInstrument 17. The lendinginstrumentis a Technical Assistance Credit. This was selected because the project focuses on capacity buildingandinstitutional strengthening. D. ProjectDevelopmentObjectiveandKey Indicators 18. The projectdevelopment objectiveis to improve the benefits from Extractive Industries (EI) to the national budget and to mining affected communities and to mitigate mining's health and safety risks for ASM miners. This will be achieved through improving effectiveness o f key E1sector institutions, supporting E1communities to be better able to monitor the delivery o f community programs and services, empowering disadvantaged groups including women and youth in extractive industries affected areas, and improving accountability o f the sector and for management and use o f mining-related revenues. The primary target groups are the institutions involved in the mining sector, the communities in the vicinity o f both large-scale and artisanaVsmal1 scale mining operations and the recipients and managers o f mining benefits streams. Further details are given inTable 2 (overleaf) andAnnex 3. F. ProjectComponents 19. The Project consists of five components: (a) strengthening the policy and regulatory frameworks for the mining sector; (b) strengthening mining sector governance, regulation, and sustainable development outcomes; (c) improving revenue collection and audits o f the sector; (d) strengthening the foundations for a conflict-free mining sector in Bougainville; and (e) Project management. 20. The CAS emphasizes that a longer-term view should be taken, recognizing that successhl institution buildingi s likely to take several years. Thus, Project support to MRA and DoMPGM i s the next phase o f institutional support started under MSISTAP I. completion o f On the Project, an assessment o f progress will be made to determine whether further Bank support i s warranted. 21. Summary information regarding the Project components i s provided below, with more detail inAnnex 4; detailed costs information i s included inAnnex 5. 9 Table 2. Project Development Objective, Outcomes, and Key Indicators Improvethe benefits 0 Increased E1Tax Assessments from Extractive 0 More Local Level MiningCommunity Development Plans Industries (EI) to the Increased fbnding o f Local Level MiningCommunity Development national budgetandto 0 Plansbyminingbenefit streams miningaffected communities and 0Safer A S M miningpractices mitigation of ASM 0Improved ASM mercury use management health andsafety risks Improved 0 Miningpolicies, laws, andregulationsare approvedenacted, effectiveness ofkey implemented andmonitored E1sector institutions 0 License processing time i s reduced 0 E1tax audits are completed 0 Exploration licenses are issued for Bougainville E1Communities are 0 Miningcompanies usethe M&E framework developed byMR4and supported to be discuss their M&Ereports with communities better able to 0 Miningcommunity groups are established to monitor delivery of monitor the delivery community programs by miningcompanies and by local governments of community inminingcommunities programsand services Disadvantaged 0 The priorities o fwomen andyouth are reflected inmore Local Level groups including MiningCommunity DevelopmentPlans women and youth in 0 Women and youth are included inmore miningcommunity groups extractive industries that monitor delivery o f services affected areas are Women and youth groups report being satisfied by their participation empowered inminingcommunity groups monitoring services delivery Improved 0 M UprovidesminingcommunitieswithBenefit Streams Reports accountability of the anddiscussesthemwith bothcommunity members and companies at sector and for miningsites management and use E1companies publiclydisclose payments at national, sub national and of mining-related 0 revenues community level 0 M Ucompletes, implements, monitors andreports onthe outcomes o f its Anti-Corruption Action Plan 0 MRAmonitors andreports onthe outcomes from newmining policies and regulations 22. Component 1: Strengthening the Policy and Regulatory Frameworks for the Mining Sector. (Estimated Total Cost: US$2.09 million; IDA: US$1.90 million). The principal target group for this component is DoMPGM staff, who will be supported to establish and implement an effective policy development forum process for coordination and cooperation with other agencies. Kev Outputs will include the completion o f several key policies and legislative Acts including a Sustainable Mining Development Policy, with mine closure and resettlement guidelines, and an Offshore Mining Policy and associated legislation; a Small-scale Mining 10 Occupational Health and Safety Act; a new MiningSafety Act; and a review o f and amendments to the MiningAct 1992. 23. Component 2: Strengthening Mining Sector Governance, Regulation, and Sustainable Development Outcomes (Estimated Total Cost: US$9.01million; IDA: US$8.19 million). The principal target EI-OUD for this component i s MRA staff, who will be given support to strengthen MRA's ability to undertake its mandatedroleinthe following areas: Strengthen Governance and Accountability in Mining Sector Institutions. Activities inthis sub-component strengthen institutional accountability by supporting the development, implementation and monitoring o f an Anti-Conuption Action Plan for MRA and by putting in place mechanisms to monitor compliance with and outcomes o f the policies and regulations developed by DoMPGM, especially regarding impacts on the most vulnerable groups in mining communities. The sub-component will also support establishment o f internal systems for financial management and transparency. To address broader sector governance and accountability, the ongoing dialogue on EITI will be supported through activities in other sub-components in relation to community participation, transparency o f benefits management, and use o f MRA's web site. Promote, License, Control, and Monitor Mining Sector Development. This sub-component focuses on building Mu's capacity to carry out its technical role in promoting PNG's mining sector, licensing, controlling, and monitoring the industry. Activities will support several MRA units, with the objective o f establishing a cohesive and functioning institution capable o f sustaining its role beyond the Project, and include: o Strengthening MineralTenements Management, o Improvingthe Quality andAvailability o fGeological Information, o Strengthening Information ManagementandMarketing o Implementing an Information and Communications Program to keep stakeholders informed, especially on Bougainville, o f MRA andMSISTAP I1project activities Improving Sustainable Development Outcomesfrom the Mining Sector. Activities inthis sub-component include o Establishing High Standards for Mitigating Negative Environmental and Social Impacts o fMining. o Improvingthe Health, Safety, andEffectivenesso f Small-scale Miners. o Coordinating and Improving the Management o f Mining Benefits including recruitment o f community facilitators by MRA at each o f the mine sites o Monitoring Social and Environmental Outcomes from Mining Activities including preparation o f a Strategic Environmental and Social Assessment (SESA) o Keeping all stakeholders and especiallyBougainville communities informed, so that they understand both MRA's role andproject objectives and activities Key Outputs will include internal systems for MRA, an MRA Anti-Conuption Plan, an MRA e- commerce system, a fully computerized mineral tenements management system, reduced time 11 for issuingmining and exploration licenses, a national Geological Information System (GIs), an A S M data base, an A S M registration and identity card system, safer and more environmentally friendly A S M miningpractices, environmental and social guidelines including resettlement and community consultation, a Measurement and Evaluation (M&E) Framework for E1community- related services, E1 community participatory planning procedures, Local Level Mining Community Development Plans, Benefits Streams Reports for mining communities, a national Women inMining (WIM) Action Plan, a youth internship program to be implemented by MRA, a review o f all mining Memoranda o f Association (MOAS),publication o f EI-related payments by companies to government, a Strategic Environmental and Social Assessment (SESA) and an information dissemination andcommunications program. 24. Component 3: Improving revenue collection and audits of the sector (Estimated Total Cost: US$4.65 million; IDA: US$4.22 million). The principal target woup for this component i s RC's Resources MonitoringDivision staff, who will be supported to review and draft mineral tax legislative amendments, conduct revenue risk assessments, and carry out mining and petroleum project audits. The component will support the establishment o f four E1tax audit teams, two with a main focus on high priority, complex audits and two for less complex audits with a strong focus on staff training. Kev Outputs will include for the E1sector tax legislation amendments, tax-related risk assessments, tax audit reports, tax assessments and tax collections. 25. Component 4: Strengthening the foundations for a conflict-free mining sector in Bougainville (Estimated Total Cost: US$2.21 million; IDA: US$2.01 million). The principal target group for this component i s ABG's future D o M staff, who will be supported to establish the organizational framework for the department and implement an effective policy and regulatory environment for mineral exploration and development in Bougainville. Kev outputs include transitional arrangements (to facilitate granting o f exploration and mining licenses until mining powers are transferred to ABG), issuance o f exploration and mining licenses for Bougainville, a Bougainville Sustainable Mining Policy, operation o f a functioning ABG Department o f Mining, a Bougainville Mining Act, a Bougainville Mining Safety Act and enabling regulations, hiring o f professional staff for the ABG Mining Department, twinning o f ABG MiningDepartment staff into MRA and DoMPGM or other appropriate organizations, and development o fA S M support services and outreach on Bougainville. 26. Component 5: Project Management (Estimated Total Cost: US$O.74 million; IDA: US$0.67 million). The principal target woup for this component is MRA's Special Projects Unit (SPU) staff, who will be supported to monitor, supervise, and provide technical and administrative management control o f the Project. Kev outputs will be project procurement documents, financial accounts, andproject-related reports. E. LessonsLearnedandReflectedinthe Project Design 27. This Project builds directly on MSISTAP Iand the Project components were largely identified as MSISTAP Iwas being completed. The project design takes full account o f lessons learned from the first Project. This includes taking a holistic, integrated approach to sector reform, with carefully and tightly designed components that have clear outputs and outcomes; and integrating stakeholder concerns into Project design and placing strong emphasis on engaging with women and youth groups as a way to help achieve improved development 12 outcomes from mining. Further details are given in Annex 2. Similar mining TA projects were and are being implemented in several other countries, with satisfactory or generally satisfactory ratings. The main lessons learned from such projects and reflected in MSISTAP I1 include: (a) the requirement to establish a sector-specific focus and improvements with clear delineation o f authority and responsibility o f various ministries and agencies involved in the sector; (b) strong beneficiary participation inproject preparation, organization, and coordination at the field level; (c) sustainability o f project components built around institutional champions for different components; and (d) strong ownership and political commitment to project objectives. F. AlternativesConsideredandReasonsfor Rejection 28. There were two alternatives considered. The first alternative considered was an investment credit, but the project is not an infrastructure-type project; rather, it i s institutional strengthening and capacity buildingproject. The second alternative was the possibility o f other grant funding or support from other donors. However, the scope o f work was considered too large for grant funding and support for mining sector institutional strengthening i s not a specific focus o fmost development partner's activities. 11. IMPLEMENTATION A. PartnershipArrangements(if applicable) 29. Development Partners. The project has been developed with strong linkages to the activities o f development partners, in particular, the EU, AusAID, ADB and the PNG Sustainable Development Program Ltd (PNGSDP). The support for A S M under the Project dovetails well with EU mining sector assistance since the Project will provide institutional strengthening and capacity building for MRA and training and extension services for artisanaVsmal1-scale miners and mining communities which complements EU support o f construction and initial equipping o f a new building for MRA and construction o f two A S M training centers with trainers for artisanal and small-scale miners, one each in Wau and Porgera andconstruction o fa Women's Community Centre at Porgera. Support for ABG's D o Mis being coordinated with and is complementary to overall institutional and capacity buildingprovided to the ABGbyAusAID andUNDP. Support for EITIis being coordinatedwith ADB andAusAID. Project support for a wide range o f mining communities complements PNGSDP's support to mining communities impacted by the Ok Tedi operation in Western Province. The Project is leveraging Bank administered trust funds, in particular JSDF to support capacity building and training for Women's associations and groups inE1areas and support to ASM communities; and institutional the Low Income Countries Under Stress (LICUS) Trust Fund and Gender Action Plan (GAP) for additional assistance to Bougainville, especially for women. During implementation opportunities will be identified for other interested donors to build on Project activities. B. InstitutionalandImplementationArrangements 30. Implementing Role.: The MRA has moved into newly constructed offices and recruited 90 percent o f the staff initially proposed. MM's SPU will be responsible for overall Project 13 coordination and implementation, including all fiduciary operations. SPU will be directly responsible for implementation o f the MIL4 component and will provide substantial support to the ABG component since the ABG D o Mis still ina formative stage and currently has only one mining specialist. Responsibility for achievement o f outputs and objectives o f the DoMPGM component will lie with DoMPGM management, and for the IRC component with IRC management. Both agencies have the necessary capabilities and a demonstrated track record under MSISTAP I,and will coordinate closely with SPU. Institutional champions for each component include the CEO, MRA; the Secretary DoMPGM; the Assistant Commissioner, IRC Resource Monitoring; and the CEO o f ABG's Department of Mining. The MRA has already appointed a gender coordinator who will be the key liaison with the WIM TC and will lead the MRA work on gender and youth in close coordination with other government departments. Further details on implementation arrangements are provided inAnnex 6 andProject preparation and supervision arrangements inAnnex 11. C. MonitoringandEvaluationof Outcomes/Results 31. Data Sources. The MRA will be the primary source o f information for monitoring and evaluation and will prepare monitoring data based on inputs from DoMPGM, IRC, ABG, the WIM TC, the Mine Women's Associations (MWAs), local governments, provincial governments, and mining companies. MRA will collect A S M community baseline information for 2009, including community information which will include social, gender and youth aspects and disparities as well as economic aspects. The Project will also assist the industryto improve their monitoringandevaluation frameworks relating to community development activities. More details are given inthe Arrangements for Results MonitoringTable inAnnex 3 C. Sustainability 32. Borrower Ownership and Commitment. The Government demonstrated very strong ownership o f MSISTAP Iand has shown the same strong commitment in the identification and preparation of MSISTAP 11. The request for further assistance from IDA to ensure successful, early operation of the MRA and DoMPGM is a strong sign not only o f the Government's ownership of the Project, but also the Government's commitment to sustainability. The Government i s sustaining progress made under MSISTAP Ithrough preparation of the Government's 2007 -2012 Women in Mining Action Plan and by continued support for a specialist tax advisor at the IRC. These actions provide a very positive indication that further support for the MWAs and scaling up o f assistance to IRC will also be sustainable. The design o f the three Project components for the DoMPGM, MRA, and IRC has been based on initial submissions and extensive work with the management and staff o f each institution as a result o f which there i s very substantial ownership of and commitment to the components at all levels in each o f the institutions. The success o f ongoing JSDF-supported ASM activities provides positive indications that the A S M activities will be well received. The discussions with and the separate requests from the Government and from ABG are strong evidence o f commitment on both sides to the ABG component, which has subsequently been included in the intergovernmentalJoint SupervisoryBody resolution andwork program. 33. Other Groups. A new area that will be challenging is the engagement o f MRA with mining companies who have indicated a strong interest in working with the Project to develop 14 standard practices and an effective monitoring and evaluation system for community programs that can be applied to all community programs regardless o f the source o f fimding. Shared interests will help ensure sustainability especially as new players emerge in the sector. An area that may prove more challenging for sustainability i s the proposed engagement o f MR4 with some mining area local governments with the aim o f improving the use o f funds that are channeled back to mining areas and thereby improving the impact o f government supported social programs and the quality o f service delivery. This will involve establishing a collaborative and effective working relationship between the MRA staff and local government officials. Finally, the engagement o f MRA with mining area landowner associations to see ifthe development outcomes can be improved from funds they receive will also be challenging. Modest pilot activities are proposed inthe latter two areas to test whether progress can be made. D. CriticalRisksand PossibleControversialAspects 34. Critical Risks. Critical risks and actions to mitigate the risks are presented in Table 3 (overleaf). Three factors, namely the success o f MSISTAP I,steady improvement inthe overall Bank-country relationship, and strong Government and other stakeholder support for the proposed Project provide positive indications that Project risks can be managed and mitigated and the Project implemented successfully. Nevertheless, PNG remains an unpredictable environment and, as with MSISTAP I,the Project will require close monitoring and supervision to ensure successful implementation. 35. Possible Controversial Aspects. Mining i s a controversial sector as evidenced by the EIR. The Project draws on the lessons learned from the EIR to ensure that it follows a sound approach. In the case o f PNG, any controversial aspects are also reduced by the strong and positive dialogue that was developed under MSISTAP Ibetween the Bank and the MWAs, which led to the preparation o f the WIM program. Consultations with civil society and, in particular, women's groups during both Project preparation and CAS preparation indicated positive support for the Project. The possible re-establishment o f mining activities in Bougainville will have critics and has the potential to reignite conflict in some areas if not managed appropriately. The Project will include development o f a communications program to ensure that all stakeholders are informed o f the Project objectives and activities, particularly in Bougainville. 15 Table 3. RiskAssessmentTemplate Risk Mitigation Measures with Mitigation The project finds were not included inthe MRAcanfundminor start upcosts fromits own H Governments 2008 budget as approved by resourcesbutprovisionwill needto be made in Thereremainrisks that conflicts could recur at The focus on improving local governance and H Bougainville due to increasing inequalities, and accountability, training for local stakeholders in r' lack o f visible improvements on the ground. conflict and disputeresolution and, inthe case o f Also conflict could occur at other mining sites Bougainville, support from a LICUS grant due to disputes over benefit sharing.. program for state building and conflict resolution to be implemented through women's associations that will help reduce these risks. MRAstaff do nothave any experience ofIDA will receive strong consultancy procurement procedures which could slow support and intensive early supervision. project implementation. MRAfinancial systems andcapabilities have yet staff and the to be demonstrated which could cause systems established under difficulties for project implementation hadunqualified audit systems andpractice. The new M R A andDoMPGM may not operate The managements o fbothDoMPGMandMRA L ieffectively and may compete rather than have worked very well inproject preparationand collaborate which could interfere with project the project team will work closely with both to implementation ensure strong mutual trust and collaboration /Projectimplementation and effectiveness may An informationand communications programfor M be reduced ifthere is opposition due to a lack o f the project and MRA will make sure that all information about the project and intended interestedparties, and especially communities on outcomes. Bougainville, are well informed about the objectives, scope, activities and outcomes o fthe project - II_ pverallrisk -- Note: H-High; S- Substantial; M-Medium; L Low risk - 16 E. Loadcredit ConditionsandCovenants 36. In addition to the standard conditions for Negotiations, Board Presentation, and Effectiveness, following are proposed non-standard conditions and dated covenants: NegotiationsCondition: Receipt by IDA o fthe signed outstanding audit report for the MSISTAP I, project. EffectivenessConditions: 0 The Subsidiary Agreement has been executed and delivered and all conditions precedent to its effectiveness (other than the effectiveness o fthis Agreement) have been fulfilled. 0 The Project Steering Committee has been established with terms o f reference and composition acceptable to the Association. The Recipient has includedthe financing o f the Project in its national budget. A procurementadvisor for the Project and an internal auditor have been appointed within MRA,with skills, qualifications, experience and terms o freference satisfactory to the Association. A Project ImplementationManual acceptable to the Associationhas been adopted for the Project. MRA has established a financial management system for the Project, including software and reporting formats, acceptable to the Association. Conditionof Disbursementfor GrantsPropram: 0 Receipt by IDA o f an Operations Manual for the Small GrantsProgram for Women's Groups satisfactory to IDA. DatedCovenants: 0 Appointment by MRA in consultation with Auditor General o f an Auditor for the Project within six months o f Effectiveness under terms o f reference, experience and qualifications satisfactory to IDA. 0 Preparation by MRA with support from DoEC o f a Strategic Environmental and Social Assessment to be completed and discussed with IDA by December 31, 2009 and recommendations implementedthereafter. 111. APPRAISAL SUMMARY A. Economicand FinancialAnalyses 37. The Project provides technical assistance and, as such, does not lend itself easily to quantitative investment analysis or to the calculation o f Net Present Value (NPV) or Economic Costs o f Return. However, some macroeconomic indicators can be projected and compared with present performance, in particular annual investment for exploration by mining companies and increased fiscal revenues from the increased sector exploration activities, increased investment, increased A S M production, and increased tax assessments from the tax audits. While any figure 17 must be considered highly speculative, an estimate o f US$2-10 million per year additional government revenues seems a feasible range from the tax audits alone, which would result in a financial rate o f return from the Project from 11-60 percent {Annex 9). There are no major financial issues for the Project, and counterpart funding for taxes i s being included inthe agency budgets. B. Technical 38. The Project will strengthen institutional capacity within the MRA, DoMPGM, IRC, and ABG DoM. The main technical aspects are (a) the establishment o f management information systems, GIS and electronic mineral tenements management capabilities, and electronic fee payments for MRA; (b) establishment by MRA of an electronic database system for monitoring ASM; and (c) establishment o f basic management and licensing systems for ABG (such systems exist elsewhere and design and implementation should not present any undue difficulties). C. Fiduciary 39. Financial. Although the MRA has recruited competent financial management staff (including those that are familiar with MSISTAP I), it is operating insomewhat o f a vacuum as systems and procedures are yet to be established. Pending the establishment o f adequate corporate systems there will be a need to develop, as a condition of effectiveness, documented financial procedures and a Financial Management System for use by the Project (the system used by MSISTAP Iwill be updated to suit the needs o f this Project). Part o f the IDA Credit will be placed into a designated account managed by the SPU in association with the Department o f Finance and Treasury. Direct Payments, Special Commitments, and reimbursement will also be allowed. An initial allocation will be provided to MRA which will be replenished subject to the presentation o f replenishment requests comprising Statements o f Expenditures and Summary Sheets. Retroactive financing o f up to 10% o f the IDA Credit is provided for eligible project- related expenditures incurred prior to project effectiveness. MRA will retain full control, responsibility and accountability for project procurement, financial management, reports and financial audits, and will sign all contracts for goods and services. DoMPGM, IRC, and ABG (with assistance from MRA) will prepare terms o f reference and undertake bid evaluations for consulting services and specifications for goods. Further details on financial management arrangements are provided inAnnex 7. 40. Procurement. An assessment o f the capacity o f the Implementing Agency (MU) to implement procurement actions for the Project was carried out in November 2007. The assessment reviewed the organizational structure for implementing the Project and the interaction between the staff responsible for procurement and other national agencies. The overall Project risk for procurement is "high", consistent with the Country Procurement Assessment Report (CPAR). Issueshisks concerning the procurement component for implementation o f the Project have been identified as: MRA's lack o f procurement expertise and lack o f understanding by MRA o f recent changes in the national procurement regulations. The MRA staff have very limited experience with IDA or other international agency procurement systems. The SPU has recruited a procurement officer to carry out procurement operations, but the officer will need substantial training to be able to independently manage procurement in accordance with IDA'Srequirements. The SPU will also recruit an international Procurement 18 Specialist for the first 12-24 months o f the Project, or longer according to the Project procurement load, who will undertake procurement activities and provide MIL4 staff with on- the-job training. MIL4 staff will also attend courses on Bank financed procurement procedures. Furtherdetails onprocurementarrangements areprovidedinAnnex 8. C. Social 41. Opportunities and Risks. There are both opportunities and risks for local communities affected by both large-scale mining (LSM) and A S M activities. The opportunities relate to the benefits o f mining which typically consist o f direct and indirect LSM and A S M employment, mining-related financial transfers, and improved access to employment opportunities and services including inparticular health and education services. The risks relate to environmental harm, loss o f gardens and land for subsistence agriculture, loss o f traditional livelihoods, social disruption, increased crime, domestic violence, and cultural harm. A gender bias exists whereby the bulk o f the benefits accrue to men whereas the bulk o f the risks fall upon women and children. Youth also tend to be disadvantaged inthat miningdevelopment raises expectations o f mining employment and careers but in practice there are relatively few job opportunities available which results indisappointment and frustration because of unfulfilled expectations. 42. The key social challenges are the following: Procedures and Monitoring. Currently PNGboasts some o f the best practices interms o f E1 company community development programs. However, with new companies appearing, the current high and improving standards may not be maintained without stronger government intervention in setting standards and monitoring performance and compliance with such standards. The Project provides support to develop the institutional and procedural capacity as well as the monitoring and evaluation frameworks to address these concerns. Risk of Conflict. PNG E1 sites are subject to occasional conflict - often over benefits sharing. The focus on improving local governance and accountability is expected to help mitigate this risk. The Project will also support training for local stakeholders in conflict resolution. Local Governance and AccountabiliQ. A lack o f capacity and transparency at local levels contributes to unease as well as resulting inlimited development outcomes resulting from the miningrevenues. The Project will work at the national level, through its support o fthe EITI, to improve the transparency o f mining-related budget processes, and at the local levels by providing training to local governments as well as developing awareness in communities o f governance and accountability. Specifically, the Project will work with youth and women's groups to help them participate in local governance activities to broaden participation, and increase accountability. Building Knowledge and Redressing Grievances. If women and youth and other disadvantaged groups are going to be empowered then they will need to have access to relevant sector information, training on how to use it, andredress through the legal system to correct grievances. The MRA component includes (a) establishment o f an MRA web site that would be used to disseminate key information and documents about the sector to 19 communities and civil society groups; and (b) preparation and publication o f documents (in both English and Melanesian Pidgin) that would also provide needed information about miningto local communities. PNGhas a well developedjustice system at boththe local and national levels to redress grievances. At the local level, villagers are able to bringcomplaints and disputes either to village level court proceedings or, inthe case o f mining-license related issues, to mining warden's hearings, which take place at local sites. Both processes have a good reputation for addressing grievances in a responsive and effective manner. At the national level, the judiciary has a strong reputation for independence from political influence and freedom from corruption, and has worked well to deal with civil society concerns and complaints relating to mining. 43. GenderEquality. Gender indicators inPNGare particularly low andthere has been little progress in closing gender gaps. Women are persistently excluded from opportunity or decision- making. While mining companies have tried to include women in their activities, they do not have the authority o f the state to change age old traditions and cultures. By working with senior women in national government, WIM activities have developed this authority as it comes both from the women o f PNG as well as from within state institutions. The Project will continue to support the implementation o f the WIM Action Plan and the preparation o f gender equality guidelines, and build on this support at the national and local levels to strive to improve the status o f women in PNG. If the momentum gained under MSISTAP Ican be sustained, the Project stands to have substantial flow-on effects and could even have a national level impact on gender equality inPNG. D Environment 44. Environmental Issues. As a technical assistance initiative, the Project will not finance any direct exploration or exploitation o f mineral resources. However, the Project i s being implemented in a sector which is known to be controversial with respect to environmental and social issues. The environmental problems associated with mining in PNG relate primarily to river and ocean based mining waste and tailings disposal and pollution resulting from mineral processing. An updated review o f environment issues in the mining sector was prepared by the government and submitted to IDA. In addition, an SESA will be prepared by MRA with the support o f DoEC. The SESA will examine if any policy and regulatory gaps exist. It will also identify ifthere is adequate compliance monitoring andwhether additional resources are required or ifstandardized procedures are needed to mitigate the risks. 45. Environmental Regulatovy Framework. The PNGmining sector regulatory framework for Environmental Safeguards i s well developed. Implementation capacity problems remain, particularly with the financial resources available to DoEC in the past to monitor compliance. Environmental legislation was reviewed and updated in accordance with international good practice in 2000 and subsequent regulations prepared and approved in 2002. The environmental legislation recognizes the mining sector o f as one o f the main sectors which impacts on the environment. The mining sector i s categorized into three different impact levels (with Level 1 low impact and Level 3 highimpact) based on the scale o f production and activities carried out. There is a legal requirement to prepare an Environmental Impact Assessment (EIA) for mining projects that are categorized into level 2 or 3 activities. In the approval process for the EIA, public reviews and consultation are required. The Environmental Act also provides grievance 20 mechanisms which are accessible to interested parties. Capacity buildingprograms are in place being financed by UNDP to strengthen the DoEC capacity. 46. Benefits of Project Activities. The Project will support workshops with major stakeholders and professional development training for both MRA and DoEC staff, which i s expected to have a positive impact on the environment as these activities will improve skills and capabilities o f MRA and DoEC staff to conduct field audits o f miningprojects, investigate mine safety and environmental compliance, and work with mining companies to improve the environmental and social sustainability o f the operations. The Project-related A S M interventions should have positive environmental impacts through both improved mining methods and improved equipment, especially retorts to capture mercury vapor and thereby reduce mercury pollution. D. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP4.01) [ XI [I Natural Habitats(OP/BP 4.04) [I [ XI Pest Management(OP 4.09) [I [ XI Physical Cultural Resources (OPIBP 4.11) [I [ XI Involuntary Resettlement(OP/BP4.12) 11 [ XI IndigenousPeoples (OPBP 4.10) [I [ XI Forests (OPBP 4.36) [I [ XI Safety of Dams (OPBP 4.37) [I [ XI Projects inDisputedAreas (OP/BP 7.60)' [I [ XI Projects on International Waterways (OPBP 7.50) [I [ XI 47. The Project rated category B for environmental purposes. The Project will not involve direct investment in mining activities, but through its policy and regulatory strengthening could have indirect environmental impacts by encouraging increased commercial scale mining and A S M activities. During Project implementation W h e r consultation will take place with NGOs, landowners, and industry representatives regarding mining sector environmental issues. There will be no construction inthe project and hence no resettlement or acquisition o f landor assets will take place. Hence the resettlement policy is not triggered. No other safeguards policies are triggered by the project. Further information about safeguards issues is presented inAnnex 10. E. Policy ExceptionsandReadiness 48. The Project does not require any exceptions from IDA policies. The Project is expected to meet regional requirements for readiness for implementationwith the following exceptions: 0 MRA is considered to have the necessary staffing inplace to start Project implementation, with the exception o f hiring a Procurement Specialist for which the process has commenced and who will be funded by MRA from its own budget untilIDA finds are available; * By supporting the proposed project, IDA does not intend to prejudice the final determination of the parties' claims on the disputed areas. 21 0MR4 has modifiedthe MSISTAP IProject implementationmanual, includingprocurement and financial management procedures, for use by the MSISTAP 2 project and providedthe updated documents to the team who have provided comments which are presently being includedinthe documentswhichwill thenbere-submittedto thetask team for approval. 22 Annex 1: CountryandSector or ProgramBackground PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 A. Backwound Explorationand Mineral Geology. PapuaNew Guinea has favorable geology for minerals, oil and gas. The discovery o f the world class Panguna copper and gold deposit on the island o f Bougainville in the mid-1960swas followed by the discovery o f the Ok Tedi copper and gold deposit and the Frieda copper deposit in the late 1960s, and gold deposits at Porgera, Misima, andHiddenValley inthe 1970s,and Lihir, Wafi, Simberi, Tolukuma, Mt Sinivit, and MtKare in the 1980s and 1990s. In the late 1990s and early 2000s, seabed mineral deposits were identified and are now being explored. With the Bougainville Peace Accord and the establishment o f the Autonomous Government o f Bougainville, Bougainville could again become a prime destination for mineral exploration. Government's Strategy and Main Developments. The Government's strategy is to develop the E1sector by encouraging socially, environmentally, technically, and financially responsible private sector exploration and development o f PNG's mineral and hydrocarbon resources. The Panguna copper and gold mine started production in the early 1970s, during a copper market boom, and was extremely profitable, providing important balance o fpayments and fiscal benefits for PNG as a whole at independence. Production ceased in 1989 following an armed uprising which subsequently lasted over a decade and the mine remains closed today, although peace has now been restored on the Island. Four world class mines-Ok Tedi copper and gold mine and the Porgera, Misima and Lihir gold mines-were subsequently developed in the 1980s and 1990s. There are also small gold operations at Tolukuma, andKainantu, with HiddenValley and Simberi currently under construction. A world-class nickel project i s also under construction at Ramu. The Kutubu oil operation was developed in the early 1990s with additional oil developments at Gobe and Moran inthe late 1990s. Production. The main E1production at present is oil, copper and gold-almost all o f which are exported. The volumes and values o f E1exports are as shown inTable A-1. TableA-1: ProductionandExportsof Copper, Gold, and Oil 2000-2006 Year Copper ('000 tons) Gold (tons) Oil(millionbbls) 2001 170.1 69.1 21.3 2002 170.1 59.1 15.4 2003 230.6 68.4 14.9 2004 173.9 67.3 12.5 2005 226.1 70.5 13.3 2006 216.7 56.7 14.5 Source: Bank of PapuaNew Guinea 23 Copper production, which is primarily from Ok Tedi, has fluctuated between 170,000 and 230,000 tons per year depending on operating conditions, and inrecent times there has also been copper production from new smaller mines. Declining gold production at Misima, which closed in 2004, and Porgera, where reserves are declining, has been largely offset by increased production at other mines. Investments for mineral exploration and development in PNG steadily declined in the 1990s from US$ 83 million in 1988 to US$ 12 million in 1999 but, supported by the first PNGMiningand Institutional Strengthening Technical Assistance Project, have since recovered to US$ 30 million in 2006. Ok Tedi has a limited life with production ending possibly as early as 2013. Porgera would likely have another 10-20 years production depending on ore reserves and gold prices and Lihir thirty years or more. Oil production has declined from over 21 million bbls in2001 to just over 14 million bbls in2006 due to declining reserves. Oil and gas exploration has surged with increased commodity price and a revision o f oil and gas fiscal incentives, but oil production will continue to decline unless new accumulations are discovered. Gas production will increase substantially because PNG has extensive major gas reserves which are yet to be developed. Two LNG projects are currently under consideration. Economic Importance of EI: Extractive industries have been a major part o f the formal economy inPNG since colonization, and inrecent years have accounted for about twenty percent o f government receipts, one-third o f GDP, and about two thirds o f exports. With the recent commodities price boom this share o f the economy has increased and in 2006 E1accounted for about 40% o f taxes (2 billion kina equivalent to about US$0.7 billion in 2006) and about 80% o f exports with copper accounting for about 34% o f total exports (about US$4.3 billion) and gold and oil about 24% each (about US$3 billion each). Formal employment provided by commercial E1projects is rather modest - about 15,000jobs, equivalent to 5 percent o f formal employment in PNG. Table A-2: E1MacroeconomicImpacts2004-2006 Year E1share of exports (YO) E1share of fiscal receipts(YO) 2004 73.1 21 2005 75.4 32 2006 82.2 42 Source Bank of Papua New Guinea Artisanal and Small-scaleMining(ASM). There are an estimated 100,000 artisanal andsmall- scale miners in Papua New Guinea, o f which approximately 25,000 live inthe area around Wau and Bulolo, Morobe Province. AAer agriculture, small-scale mining is the largest generator o f rural incomes in Papua New Guinea supporting an estimated 500,000 miners and family members-thus, close to 10 percent o f the population o f Papua New Guinea derive either direct or indirect cash benefits from small-scale mining, which i s often the only source o f cash income available to remote rural communities. Furthermore, the number o f miners continues to rise as other alternative livelihoods fail to materialize or as infrastructure for market access for agricultural goods deteriorates. However, the income benefits from the sector must be balanced against the potentially high environmental and community health costs. The miners in general have low levels o f education and liberally use mercury and occasionally other toxic chemicals without adequately understanding the impacts on their own health or the general environment. 24 Sector Organization. There are five main organizations that administer the E1sector. The Mineral Resources Authority (MRA) was approved inlate 2005 and established in 2007 and has taken over responsibility for licensing, monitoring, and enforcement o f license and contract conditions from the old Department o f Mining (DoM). A newly formed Department o f Mineral Policy and Geohazard Management (DoMPGM) i s responsible the development o f Mineral Policy and Legislation and for monitoring o f volcanic and earthquake-related risks. Oil and gas are administered by the Department o f Petroleum and Energy (DOPE),which i s responsible for licensing, monitoring, and enforcement o f license and contract conditions including health and safety regulations. The Internal Revenue Commission (IRC) is responsible for income tax collection and enforcement. The Department o f Environment and Conservation (DoEC) i s responsible for environmental monitoring and enforcement o f social and environmental safeguards and compliance criteria for all economic sectors and activities. The DevelopmentForum. PNGhas established is own unique and highly effective process for E1project approval. At the time a license application is made for mineral exploitation or oil and gas production, the development proposal and other key documentation are circulated to all interested government departments and involved parties (and in particular landowner groups). These documents are then considered at a Development Forum where the project developer presents the proposed project to all interested parties and departments and, following due deliberation and resolution o f issues raised by the various parties, a government decision i s taken to approve the project (or not) with all conditions specified. The conditions are then placed in legally binding documents including a Development Contract which is signed between the investor and the government for each project as well as subsidiary agreements between the investor and the landowners regarding compensation, and a multiparty agreement between the investor, government, and the landowners concerning the sharing o f mineral royalties, local economic development, etc. Included in these agreements are social and environmental protectionplans. Environmental and Social Impacts. E1 projects have significant environmental impacts. These tend to be more severe for mining than oil and gas because mining causes greater ground disruption and requires more waste rock disposal than oil and gas. The most significant mining impacts inPNG involve the disposal o f waste and tailings at Ok Tedi and Porgera into the local river system and at Lihir into the ocean. There are serious environmental legacy issues at both the Panguna and Ok Tedi mines, where tailings disposal in the local river systems will likely involve significant impacts over a long period o f time. E1projects also have substantial social impacts, but these have been better managed in PNG than in many other countries. This is because due to customary land ownership and usage rights, the landowners have both de facto and de jure control over what happens on their land. Thus, with the exception o f the armed uprising on Bougainville, PNG has avoided the more severe human rights incidents that have occurred in some other countries. However, local communities suffer from a number o f negative social impacts including the creation o f "haves" and "have riots"-the latter typically include the poorest members o f the population (especially single mothers and children), who often find their gardens and income sources shrinking while the arrival o f new people for mine employment drives up food costs. Other impacts include the creation o f shanty areas populated with people who are attracted to mining sites but unable to find employment; a breakdown infamily cohesion and relationship; and unfulfilled expectations for young people who anticipate better employment opportunities but do not find them. 25 E1Project Ownership. All o f the E1operations in PNG are majority owned and operated by private sector investors with the sole exception o f the Ramu nickel project, where the majority owner and operator is a Chinese state-owned company. The GoPNG policy i s to reserve the right to take up a minority share (up to 30% o fthe equity inall miningprojects, and 22.5% inoil and gas projects) at cost on a contributing basis, and the state has taken a minority shareholding in most of the larger projects. Part of the state equity has been passed on to landowners and provincial governments on a carried interest basis. Major international investors and operators include ExxonMobil (Kutubu oil), BP (Hides gas), and Barrick (Porgera). Rio Tinto was the original operator at Lihir and BHP Billiton the original operator and majority owner o f the Ok Tedi. The Ok Tedi operation was subject to significant opposition due to its negative environmental impacts, especially for communities downriver o f the mines where flooding was severely damaging agriculture, forests, and associated livelihoods. Ina 2001 agreement with the Government, BHP Billiton placed its shares (which comprised 52 percent o f total shares) intrust for the local people inreturnfor indemnity for environmental and other liabilities. These shares are now held by the PNG Sustainable Development Program, Ltd. (PNGSDP). PNGSDP is responsible for overseeing the use o f dividends and income for both present and fbture generations, including landowners in the vicinity o f the areas o f impact o f the project, the population o f Western Province, and the population o f the country as a whole according to a contractually defined formula. B. DeveloDmentIssues MacroeconomicManagementof E1Revenues. Countries with large E1sectors relative to the rest o f the economy face three main macro economic challenges. The first challenge is to use the E1revenues to develop other non-E1 economic sectors in parallel with the E1sector and to the extent possible diversify the economy in order to avoid over dependence on E1and the risks o f "Dutch disease." Over the past twenty years, PNGhas not been successful in growing the non- E1sectors o f the economy relative to EI. The second challenge is to manage potentially large swings inEI-related government receipts relating to the volatility o f commodity prices. Twenty years ago, PNGhad a Mineral Resources Stabilization Fund(MRSF), which was instrumental in partially cushioning the national level economic impacts o f the closure o f the Panguna mine, However, the MRSF was discontinued. The third challenge i s to successfully use the income from E1 to support improved development outcomes including, in particular, health and education. But, over the past twenty years, health and education outcomes have tended to deteriorate not improve. At the present time PNG i s experiencing a significant upswing in government receipts from the world commodity boom. The Government's policy at present i s to use the surpluses to pay down its international debt, which i s basically a sound policy, providing that adequate funds are available for the Government's recurrent budget needs. However, the challenge o f developing the non-E1 sector remains significant. The sound use o f E1income to diversify the economy and improve development outcomes, while at the same time managing volatile income streams, is a key focus o f the IDA'Smacroeconomic and development dialogue with the GoPNG, including the Country Economic Memorandum, the Public Finance Review, and the Public Expenditure Tracking Survey. In addition, this project seeks to improve the development impacts o f EI-related income. MitigatingEnvironmentalRisks. All o fthe E1operations inPNGoperate incompliance with government regulations and contract terms and conditions, which are generally based on good 26 international practice with the exception o f the controversial methods related to waste disposal (i.e. disposal o fmine overburdenandconcentrator tailings) used at the larger mine sites. The use o f riverine waste disposal methods at Ok Tedi and Porgera i s generally considered unacceptable practice today. Inthe past the substantial harm downriver from the Ok Tedi mine was not well addressed or compensated, but this been recognized and better addressed in the past ten years and improvement has been made in reducing the down river impacts through dredging. The present arrangements at both Ok Tedi and Porgera are generally well accepted by both the affected landowners and the Government, and preferred to the alternative o f closing down the operations, which would have severe adverse impacts for the local communities, the province, and the national economy. Ocean disposal o f tailings and waste, which is used at Lihir, is also controversial, though potentially less harmful than riverine disposal providing disposal is undertaken at depth and consistent with best practice. At Lihir, the alternative would be to have waste disposal sites on land, but the island is so small that deep ocean disposal i s preferred by both landowners and the Government. Deep-sea tailings disposal was also usedat Misima along with regular monitoring by DOEC, and the impacts were considered acceptable. Deep sea tailings placement in PNG is currently the subject o f a major environmental study being funded by the European Union Sysminproject. MitigatingHealth andSafetyRisks. Minehealth and safety standards are also generally inline with good international practice although there was a major explosion in the explosives preparation plantwith loss o f life at Porgera in 1994. Though mine health and safety inspections were previously inadequate, support for improvements was provided through the first Mining TA project. Mitigating Social Risks and Improving Social Impacts. The strong voice o f the landowners having de jure control over development in their areas, combined with the Development Forum process, has helped local communities to receive substantial benefits from the E1 sector. In addition, E1 companies have made significant efforts to increase local sourcing o f goods and services in order to reduce the enclave nature o f the E1sector as compared to twenty years ago. This has been achieved partly through the agreements that are signed with local people, and partly through the recognition by E1 companies that positive relationships with local communities and outsourcing business to local companies is notjust good for development but i s also good for business. While communities can gain benefits from EI, it i s only in the past decade that the disparities insocial benefits and risks between different groups have started to be well recognized and addressed in PNG. Work on gender issues under the first Mining TA project has identified that men take a disproportionately large share o f the benefits o f E1projects (in particular employment, income, and compensation) whereas the bulk of the social and environmental risks fall upon those least able to represent themselves-mostly women and children. 2007-2012 Women in Mining (WIM) Action Plans: With support from the National Government, the Mine Women's Associations (MWAs) at each o f the main mining sites have prepared five-year Women inMining (WIM) Action Plans for 2007-2012 that address the needs o f women and children. The former Department o f Mining (DoM) and the Department o f National Planning and Monitoring (DoNPM) have been strongly involved in and supportive o f the WIM Action Plans and have merged them into a National Five Year Women in Mining Action Plan which i s being submitted to the National Executive Council for endorsement. The 27 action plans are now being prepared for implementation by the MWAs with monitoring and support by the newly formed MU, DoMPGM andDoNPMwith initial implementation funding available from the Japanese Social Development Fund (JSDF). There are also women's programs at some o f the oil and gas sites. All o f these programs include specific actions to improve the positive impacts o f miningandreduce the negative impacts for women and families. There are no known major humanrights abuses or violations associated with E1projects inPNG. Some NGOs have raised concerns that local people's views are not sufficiently taken into account by E1 operators, but this concern has not been raised by landowners per se. To the extent that there are rights issues, they largely relate to the impact o f E1on women which i s being addressesthe rough the gender work inthis project. TheMining TA2 project will support improved benejts and reduced risks of EI operations for women, children, and youth through support to the DoMPGM Policy Division for Jinalizing and issuing its Sustainable Mining Development Policy (which has a strongfocus on community level issues) and through support to the MRA Coordination Department for working with MWAs to implement the Women in Mining Programs. The Mining TA2 projects includes a Small Grants Program for Women's Groups which will cover mining communities that have not yet prepared their own Women in Mining programs such as Misima and will also support women's activities in oil and gas communities. The Mining TA 2 project will also support the MRA Coordination Department to develop and implement a strategy and engagementprogram to improve the impacts of miningfor youth and theMRAASM Department to improve livelihoodsfor youthfrom ASM. MitigatingSocial Risks: Closureof E1Operations. Closure o fE1operations can result inloss o f income and employment and significant contraction o f the local economy. This happened at the Misima mine when it closed, and the Government i s concerned to see the impacts managed as well as possible at both the Ok Tedi and Porgera mines, both o f which may close within the next decade due to exhaustion o f presently known reserves. The Government intends to put in place good practice mine closure and oil/gas decommissioning policies supported by sound planning and solid implementation procedures. Some initial work on mine closure was conducted under the first MiningTA. TheMining TA 2 proiect will support additional workfor improved planning and implementation of mine closure activities including assistance to MRA and DoMPGM for a Misima Mine Closure Review and to DoMPGM for preparing a Mine ClosurePolicy and associated regulations to better manage mine closure impacts. Sustainable Local Community Development. If E1 are to make a greater contribution to development in PNG, then sustainable institutions will need to be established in mining and petroleum affected communities. The government i s presently considering how E1development can be better integrated with community-driven development (CDD), and the Mining TA 2 proiect will provide support to the MRA Coordination Department for pilot work to integrate mining and community development includingsupportfor the community related activities of the MWAs and support for development of joint programs by the MWAs with local/district level government agencies. Improving the Development Impacts of Artisanal and Small-scale Mining (ASM). ASM brings considerable benefits interms o f rural incomes but also significant health and safety risks and environmental harm. The Government, with the support o f a Japanese Social Development Fund (JSDF) grant, has taken a number o f initiatives including developing training materials, supporting training and outreach initiatives, and developing a database for the collection o f basic 28 statistics on small-scale miners by the newly formed Small Scale Miners Association (to include exploration, mining and processing methodologies, mercury usage, and the health and education status o f miners and their families) in order to bring more order to A S M and to build the knowledge and capabilities o f the A S M miners so that they can operate in a more sustainable manner. The project has been successful in taking a holistic approach to the sustainable development o f A S M communities by addressing how to increase livelihoods through improved mining techniques, and by providing support for addressing education, health, environmental, and social issues associated with small-scale mining. The Mining TA 2 Proiect will take this effort further by providing support to MRA's ASM Department to expand the availability of information and to expand the reach and scope of technical assistance services, training and development activities on a pilot basis to other small-scale mining areas in Papua New Guinea, through support of NGO's andfor the newlyformed Small ScaleMiners Association. C GovernanceIssues E1 Revenue Transparency. The larger E1operations are all operated in a fully commercial manner by multi-national mining or oil companies, and the smaller operations by well-qualified, competent listed companies. All produce and publish financial accounts, and there i s good transparency regarding payment by companies to all levels o f government-although there i s little dissemination or public discussion o f such payments and no publicly available reconciliation o fwhat the companies say they pay with what Government says it receives. There i s also good transparency regardingtransfers o f E1and other funds by the national government to provincial governments, which include not only general budgetary funds but also mineral royalties and special support grants to mineral producing provinces. There is little or no indication o f corruption inthe minerals sector at the national level. However, there is very poor transparency regarding the receipt and use o f funds at the provincial and local government levels due to lack o f published budgets, lack o f published accounts, and lack o f audits o f sub-national government funds. Improving the transparency o f collection and use o f E1 funds to support greater financial accountability o f E1revenue flows at national, provincial, anddistrict levels will be addressed through the Bank's macroeconomic and development dialogue, including AAA work on public expenditure management which will also support the Government's possible participation inEITI. E1Licensing. One o f the most important E1governance issues is licensing arrangements. As indicated previously, PNG has a sound system for licensing E1projects, but the institutional capacity o f the government ingeneral and both D o M and DoPE inparticular has eroded over the past ten years, and recurrent budgets for D o M and DoPE have been inadequate to support effective oversight o f E1operations. The establishment o f the MRA is helping improve mineral licensing. First, because the MRA i s self-funding from mining sector fees, it should be able to attract sufficient staff who have good qualifications and experience (which was a problem for D o M which lost some o f its best staff to more attractive employment elsewhere but was held back from filling vacancies by the Department o f Personnel Management and insufficient recurrent funding to undertake necessary mine site visits and inspections. Second, the MRA's governance structure has a clear separation between Board membership and management, and Board members are appointed by different constituencies (which prevents the Board from being politically influenced). A mining administration will also need to be established for Bougainville. The Mining TA 2 proiect will support efforts to strengthen the institutional 29 structure of E I sector agencies and their capacity to license and administer the sector (including in Bougainville) in an eficient, transparent and well governed manner. E1Fiscal Regimeand Tax Assessment and Collection. With the exception o f Ok Tedi, all o f PNG's miningprojects are subject to a common miningfiscal regime and the oiVgas projects are subject to a common oiVgas fiscal regime that are in line with good international practice. By having a sound and competitive mineral fiscal regime, PNG is able to prevent attempts by individual companies to negotiate special deals which can be costly to the economy in terms o f reduced tax collections and also can require considerable institutional time and effort to respond to such approaches. The one exception to this practice was the recently approved RamuNickel project where a ten year tax holiday was granted by the Government. Tax holidays for E1 projects are considered highly undesirable because they create the risk o f distorted production decisions whereby an operator will maximize production prior to the expiration o f the tax holiday, resulting in sub-optimal development o f the ore body and sacrifice o f lower-grade resources. The Mining TA 2 project will assist DoMPGM in encouraging the Government to rebuff attempts by investors to get special tax deals and tax holidays. The PNG fiscal regime i s implemented through well designed tax regulations which are generally well enforced by the IRC, with the important exception that the IRC lacks sufficient staff and skills to conduct field audits o f E1companies. As a result, there are missed opportunities for revenue collection from existing mining and petroleum operations. Some pilot work carried out under the first Mining TA project resulted in significant additional assessments, and it is expected that E1tax revenues would increase substantially if the IRC were able to conduct field audits o f all companies lodging income tax returns. The Mining TA 2 project will provide additional substantial support to build the IRC capabilities to undertake field tax assessments and audits of E I companies. Distribution of E1Royalties and Compensationto Landowners. There are concerns about the distribution and use o f landowner royalties, with a reported tendency for men to keep the bulk o f the income and compensation for themselves and spend it on their own priorities rather than use it to the benefit of their families. The situation is most severe regarding landowner compensation for oil and gas, which i s paidto landowners not at the sites near their homes but in Port Moresby, and stories abound o f landowners returning with most o f the funds already dissipated on good living in the capital's hotels. The Mining TA 2 will provide support to the Policy Division of DoMPGM to improve the transparency and accountability systems for the transfer of mining compensation and benefits to landowners which may also be useful for the oil and gas sector. Table A.3 provides a Summary o f Priority E1Issues to be Addressed under the CAS and inthe MiningTA 2 Project 30 TableA.3 Summaryof PrioritvE1Issues to beAddressedunderthe CAS andinthe MininpTA 2 Proiect Issue CASResponse Instrument Sustaining sound macro- Macroeconomic and Public Finance Review economic management o f E1 development dialogue to Country Economic Memorandum income support and sustain sound use Public Expenditure Tracking Survey o f mining income Mitigating E1Social Risks and Lendingto support improved Mining TA 2 support to (i)DoMPGM Improving E1Social Impacts benefits and reduced risks o f Policy Divisionfor fmalizing E1operations for women, Sustainable Mining Development children and youth Policy and (ii) to MRA Coordination Department for Women inMining Mitigating local and provincial Lending to support improved Mining TA 2 support to (i)DoMPGM impacts o f mine closure planning and implementation and MRA for MisimaMine Closure o f mine closure activities Review and (ii)to DoMPGM for preparing Mine Closure Policy Increasing sustainable local Lending to support joint Mining TA 2 support to MRA community development programs between the Mine Coordination Department for Women's Associations and implementing Women inMining local governments and Program Landowners Associations. Improving development and Lending to support provision Mining TA 2 support to MRA local impacts o f artisanal and o fTA services to ASM miners Artisanal and Small Scale Mining small scale mining Department to provide TA Programs to ASM miners and ASM mining communities Improvingtransparency o f Macroeconomic and Public Finance Review collection anduse of E1funds at development dialogue Country Economic Memorandum national, provincial and district including EITIto support Public Expenditure Tracking Survey levels greater financial accountability o fE1revenue flows Strengthening institutional Lending to support capacity Mining TA 2 support to DoMPGM, structure and capacity o fE1 building for E1sector MRA,andto Autonomous sector institutions, to license institutions BougainvilleGovernment andadminister the sector including an institutional structure for Bougainville. [mproving E1revenue Lendingto support IRC to Mining TA 2 support to IRC Resource :ollection buildE1sector fieldaudit ManagementDivision capacity [mproving distribution o f Lending to support improved Mining TA 2 support to DoMPGM Royalties and Compensationto accountability for transfer Policy Divisionto improve benefits Landowners mechanisms policy and mechanisms 31 Annex 2: Major RelatedProjectsFinancedby the WorldBank,IDA and/or other Agencies PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 The only project to have beenundertaken inthe miningsector by the World Bank Group and its development partners i s the first mining sector Technical Assistance and Institutional Strengtheningproject. (Also the EUhas supported construction o f the MRA building, two ASM miningcenters and one Women's Community Centre and an environmental review o f deep sea tailings disposal). The first Mining TA project addressed the following issues identified previously inAnnex 1: MitigatingE1 social risks and improving E1social impacts and increasingsustainable localcommunity development. The Sustainable MiningComponent inthe first TA led to a significant empowering o f community women who now seek a role to engage with mining companies to improve the benefits and reduce and mitigate the risk o f mining activities for them. The "Women inMining" activities also built a very strong constituencyo f support for the Bank among women's groups inPNG. 0 Strengtheninginstitutionalstructure and capacity of E1sector institutions. The project supported the Department o f Mining through what was a very difficult period where it suffered many staff shortages and lack o f budget. It resulted in the establishment o f both the MRA and the DoMPGM and also strengthened the IRC. The success of the GIS data digitization project has been outstanding in terms o f the interest it has generated within the private sector and how it has impacted on exploration and licensing activities. The areas where the GIS work was completed on average received 5 times the number o f new license applications than elsewhere. Improving E1revenue collection. The pilot activities for IRC resulted in generating new tax assessments from industrywhich have to date netted K70 million from companies, which more than offsets the entire cost o f the first Technical Assistance Loan. Inaddition there has been a compliance effect where companies have voluntarily paidmore tax inanticipation that there lodgedreturns will be more vigorously scrutinized. Lessons Learned. The ICR for the first Mining TA notes in the lessons learned that (i) Technical Assistance and Capacity Buildingare a multi-year activity that may not be completed and all the available development outcomes achieved within the life o f a single project; and (ii) engaging with Women's groups can help achieve improved development outcomes in a sector such as mining. First, the women's groups identified some negative social impacts which were not previously well recognized (such as social stress and family violence) and measures were identified that communities, governments and mining companies could take to reduce and mitigate these negative impacts. Second, the women's groups also identified benefits which were not previously well recognized (such as support to start small businesses and initiatives to improve literacy rates among adult women) and measures were identified that communities, governments and mining companies could take that would help to increase and enhance such positive aspects. Third, the women's groups identified new ways inwhich hnding for company community programs and payments by government to landowner groups could be used which would contribute to reducing poverty and improving development outcomes for the community and, inparticular, the most vulnerable groups inthe community. 32 With regard to design issues the ICR notes that Technical Assistance projects can have significant outputs andoutcomes ifwell designed and that the success o fthe first project was due inpart to have components that were each was very carefully and tightly designed with clear outputs and outcomes inmind. The ICR also notes that technical assistance projects also need to be realistic and not too ambitious in scope and that the first project provides a good example o f the importance to approach sector reform in an integrated, instead o f a piecemeal way. By having a broad range o f different components the project was able to not only improve the investment environment and help revive exploration but also help translate into mining activity into better development outcomes. The main risks were identified as (i) political interference in the mining sector; (ii)inadequate recurrent budgets for the two mineral sector institutions; and (iii) satisfactory performance o f consultants. These risks were generally adequately mitigated although the project was impacted by staff shortages inD o Mwhich reduced the effectiveness o f training under the project. A key to risk mitigation and sustainability was that the project was prepared in a highly participatory process which resulted in strong Government ownership o f the Project being fostered during project preparation and appraisal, which substantially facilitated implementation and contributed to achieving the project outcomes. The Department o fMiningwas a partner from the conception stage, and continued to play this role throughout project implementation. Terms o f reference for each project component were drafted by the recipient branches within the Department o f Mining and the Internal Revenue Commission. This facilitated understanding and buy-in from the majority o f D o M and IRC staff. The success o f the "Women in Mining" work also reflected a highly participatory approach with civil society in general and women in the mining communities inparticular. Follow Up: The ICR itself notes that as a sign o f the positive results achieved by the Project, the PNG counterparts in the D o M and the IRC, with the support o f the Department o f National Planning, expressed their desire to have a follow-up project. that would focus on (i) capacity buildingfor the MRA; (ii) support to DoMPGM on some policy issues such as offshore further miningwhere development could start as early as 2009; (iii) capacity buildingfor the MRA and support to the Autonomous Govemrnent o f Bougainville to develop local capacity to manage mineral development in Bougainville, (iv) additional support to scale up the audit work by the IRC, (v) building up the capacity o f civil society groups in the affected communities, including in particular women's organizations and youth, (vi) completion of the activities that were not completed under this project due to budget constraints (including, finalization and enactment o f newly drafted legislation, completing the digitization o f geological data and publicationo f digital chemical and geological maps for the remainder o f the country), and (vii) providing support to artisanal and small-scale mining as a scale-up and follow-on to the JSDF supported work but with a particular emphasis on youth aspects. The Mining TA 2 project responds to these demands and embodies the lessons learned from the first project. Project Ratings: The overall project, the Bank's performance, the Borrower's performance and the ImplementingAgencies performance were all rated as satisfactory byboth the ICR and IEG. 33 Annex 3: ResultsFrameworkandMonitoring PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 Table A.4 ResultsFramework PDO ProjectOutcomeIndicators Use of ProjectOutcome Information To improve the benefits Increased Tax Assessments from IRC Government i s able to from Extractive audits increasebudget expenditures Industries(EI) to the and/or reduce budget deficit national budget and to and pay down debt miningaffected communities and to Miningcommunity representatives Communities are empowered mitigate mining'shealth participate inpreparation o f Local Level and their livelihood and safety risks for MiningCommunityDevelopmentPlans improved. Artisanal and small-scale (ASM) miners Extent to which Local Level Mining Improved community CommunityDevelopment Plans are capacity to get better financed by miningbenefit streams development outcomes from including miningcompany community E1activities expenditures A S M communities are Safer A S M miningpractices healthier as a result o f improved mitigation o f A S M Improved A S M mercury use negative health and safety management impacts IntermediateOutcomes Use ofIntermediate OutcomeMonitoring Improved Miningpolicies, laws, andregulations Capacity o f the main effectiveness of k e y E1 are prepared, approved/enacted, government players inthe sector institutions implemented and monitored miningsector improved Mininglicense processingtime is reduced E1tax audits are completed Legal, regulatory and fiscal framework for the mining Exploration licenses are issued for sector improved including on Bougainville Bouczainville E1communities are Miningcompanies use the M&E Miningcompany programs supported to b e better framework developed by MRA and improved able to monitor the discuss their M&Ereports with delivery o f community communities programs and services, Miningcommunity groups are established to monitor delivery o f community programs by mining companies and by local governments in Service delivery by local miningcommunities government improved Most disadvantaged Local Level MiningCommunity Youth and women's 34 groups including DevelopmentPlans reflect priorities of organizations are socially and women and youth in women-andyouth economically empowered extractive industries Miningcommunity groups that monitor affected areas are delivery o f services include youth and empowered women Women and youth groups report are being satisfied by their participation in miningcommunity groups monitoring services delivery Improved accountability MRAprovidesreports onbenefit Revenues from the extractive o f the sector and for streamsto E1communitiesand industriessector are management and use of discussesthem with both community transparently disclosed to the mining-relatedrevenues members and companies at E1sites benefit of people o f PNG E1companies publicly disclose payments at national, sub national and Monitoringand evaluation community level reports beingused at E1sites Progress ofMRA Anti-Corruption Action Plan implementation and monitoring 35 ;;il 42 %f? ks ss -----I m " $ j \o I 0 0 0 0 0 0 4 4 6 4 B Y 4 0 m w v ) m w w w w \ o w w $ 8 E ;3E 3 d d w d w w E w m m - 3z 3 N Nd N d d E $E 3 g g c p0 0 N - N N c m c N N N - 3 0 0 0 3 0 0 3 0 0 Annex 4: ProiectDescription PAPUANEW GUINEA: MiningSector InstitutionalStrengtheningTA 2 The project consists o f five main components: (i) Strengthening the Policy andRegulatory Frameworks for the Mining Sector (ii)Strengthening mining sector governance, regulation, and sustainable development outcomes; (iii) Improving revenue collection andaudits o f the sector; (iv) Strengthening the foundations for a conflict-free mining sector inBougainville; and (v) Project Management. Project Component 1 Strengthening the Policy and Regulatory Frameworks for the Mining - Sector; (EstimatedTotalCost:US$2.09 million;IDA:US$1.90 million) A number o f legal issues and emergingpolicy topics @e., small scale mining safety, offshore mining, and mine closure) have arisen and remain to be fully addressed. In addition a number o f initiatives commenced under the previous Technical Assistance Project where substantial progress was made but require some additional support to achieve completion. A priority objective o f the Government i s to complete a review o f the existing mining policy and legislation and to develop new strategies and regulatory documents on these new topics. The principal target group for this component i s the staff o f the Department o f Mineral Policy and Geohazard Management. The DoMPGM in its current form i s new, as are many o f the staff and the Department needs to be strengthened to develop its role in policy and regulatory role and build the capacity for on-going and iterative improvements to the frameworks inplace based on experience. The project will help to establish both the soundpolicy foundation, plus the capacity to continuously review progress and impacts o f implementation and make revisions, through an effective policy development forum process for coordination and cooperation with other agencies, prepare new mining-related policies and legislationandreview institutional infrastructure arrangements. The key outputs will be: Legislative andPolicy Activities: 0 MiningAct 1992completion ofreview andamendments; 0 Sustainable MiningDevelopment Policy completed and adopted, including; o Mine Closure Policy and regulations prepared and incorporating lessons learned from Misima; o MineResettlement guidelines; o Assessment o fminingbenefit streams management; 0 Offshore MiningPolicy and Act; 0 Preparation o f a new Small-scale Mining Occupational Health and Safety Act; 0 Completion and enactment o fnew Mining Safety Act; Other supporting activities: 0 Miningpolicydevelopment forum process inplace; 0 Mineral Policy Handbook; 0 Assessment o f the potential benefits o f participating in the Extractive Industries Transparency Initiative (EITI); 38 The kev inputs will be consulting services, goods including core office equipment and computer hardware and software, training, workshop and incremental operating costs. Project Component 2: Strengthening Mining Sector Governance, Regulation and Sustainable DevelopmentOutcomes (EstimatedTotal Cost: US$9.01million; IDA: US$8.19 million). This component will strengthen the Mineral Resources Authority (MRA) ability to undertake its mandated role. The MRA i s a new institution established in early 2007 and i s still recruiting staff and developing its systems and procedures. However, many o f the MRA staff moved from the old Department o f Mines from where MRA has inherited much o f its functional mandate, including the coordination with mining companies and national and sub-national government stakeholders, acting on behalf o f the government in negotiating contracts for new mining developments, and inspection and control o f the industry, including improving the safety and impacts o f Small Scale Mining.MRA also includes a Sustainable Development Team in the Coordination Unit which also has the role o f secretariat for the Women in Mining Technical Committee in implementation o f the National WIM Action Plan. The project i s designed to support the development o f MRA's capacity to become effective in the following three functional areas: i)Strengthen governance and accountability in the mining sector, ii)Promote, license, control, and monitor mining sector development, and iii)Improve sustainable development outcomes from the miningsector. 2.1 Strengthengovernanceand accountabilityin the mining sector MRA's role will need to be strengthened to help improve governance and accountability inthe broader mining sector, as well as internally. This will include strengthening institutional accountability by supporting the development, implementation and monitoring o f an Anti-Corruption Action Plan for MRA and by puttinginplace mechanisms to monitor compliance with and outcomes of the policies and regulations developed by DoMPGM, especially regarding impacts on the most vulnerable groups inminingcommunities. The broader governance o f the sector will include on-going dialogue on EITI and will also be supported through activities in other sub-components such as the emphasis on community participation, and transparency o f benefit management in sub-component 2.3 below, and through use o f the website developed insub-component 2.2 below to disseminate strategic information to improve transparency and accountability. Therefore the project activities under this sub-component relate specifically to improving the internal governance and accountability o f MRA and aims to build strong corporate governance, internal capacity, and essential operating systems within the MRA. Specifically the project will provide assistance to the Managing Director, Corporate Services Division and the MRA Board to: develop best practice corporate governance practices including fiduciary arrangements and internal audit procedures and establishment o f anticorruption management systems (Ombudsman's Office); develop, implement andmonitor the outcomes o f an anti-corruption plan for MRA put in place mechanisms to monitor compliance with and outcomes o f the policies and regulations developed by DoMPGM, especially regardingimpacts on the most vulnerable groups inminingcommunities. design and deliver internal management information systems, and integrated financial management and humanresources software; 39 0 design and implement institutional electronic document management and archiving arrangements; 0 establish an e-commerce system for receipt o f payments from mining companies and other entities to MRA; 0 develop procurement and contracts management systems. The kev inputs will be consulting services, goods including computer software and hardware specifically dedicated to the system functions, scanning and communications devices; training, workshops and incremental operating costs. 2.2 Promote, license, control, and monitor mining sector development This sub-component focuses on buildingthe institutional capacity andresources for MRA to carry out its technical role inpromoting the mining sector inPNG, and inlicensing, controlling and monitoring the industry. The sub-component activities will support several units in MRA with the overall objective o f establishing a cohesive and functioning institution capable o f sustaining its role beyond the life o f the project. The activities include the following: Strengthening of Mineral Tenements Management through development o f a fully computerized mineral tenements management system with sufficient security features to ensure data integrity and which incorporates all aspects o f tenement administration and processing required under the Mining Act 1992. The new system will be linked to the MRA central GIS andavailable for web-based on-line lease. This will replace the existing exploration and mining lease documentation system which i s a combination o f paper registers and computerized databases. Design work for a new integrated lease management system was prepared under the last project. 0 Improving the quality and availability of Geological Information: This component is to strengthen the capacity o f the PNG Geological Survey to contribute to and benefit from the newly available data sources and digital mapping capability. Activities include: i)Map rectification and development o f a national standard stratigraphic nomenclature: ii)ongoing Development o f Geological Information Systems iii)Technical Assistance for Geothermal Resource Survey and Low Carbon Electric Power Promotion: iv) Geotechnical Laboratory Development. Activities include: o Map rectification and development of a nationalstandard stratigraphic nomenclature: Rationalization o f the geological units present in Papua New Guinea and map edge rectification of the digital 1:250,000 geological map series o f Papua New Guinea are essential. Geoscience Australia has digitized the PNG 1:250,000 geological map series which are available at the Geological Survey. This process has highlighteda considerable number o f map boundary mismatches showing different geological units which need to be rationalized prior to the completion o f a nationwide seamless digital geological map o f PNG. Activities include the development o f a national standard nomenclature and stratigraphic column and database; and resolution o f the existing edge-matching problems inthe existing geological map series. This process will require field mapping and checking o f map boundary areas on the ground to determine the most appropriate geological units to be used inmap rectification. o Technical Assistance for Geothermal Resource Survey and Low Carbon Electric Power Promotion: The construction and successful operation o f a 56MW geothermal power station on Lihir Island has demonstrated the potential for this technology inPNG and opens up opportunities for geothermal power development in other parts o f PNG. This 40 initiative could substantially reduce PNGs dependence on oil fired power generation, particularly in the New Guinea Islands region. Not only is this seen as a contribution to reducing greenhouse gas emissions, but also as an opportunity to substantially reduce generation costs. The Geological Survey has in the past undertaken some preliminary scoping studies on geothermal resources and now wishes to extend this work and link it to possible opportunities for commercialization. The project will assist the geological survey to prepare an updated scoping study and develop links with commercial developers to find feasibility studies. o Geotechnical Laboratory Development: The Geological Survey Division includes an engineering geology/geotechnics group which requires a modem laboratory in order to perform engineering test work on soils and rocks. Activities include technical assistance to support the establishment o f commercial functions for field and laboratory activities, identify essential equipment needs and prepare equipment specifications, and undertake staff technical training. Strengthening Information Management and Marketing: The information and marketing division o f the MRA i s responsible for management and sales o f maps and data products and for the development o f materials to promote the mineral potential o f Papua New Guinea. The component will: 1) complete the development o f a Geological Information System (GIS) with full national coverage; 2) develop and maintain a web site to provide detailed information to stakeholders increasing the transparency o f the activities o f the mineral industry o f Papua New Guinea; and 3) develop the capacity to perform on-line orders and sales o f data products. The component will support MRA staff with: o Ongoing Development of the GeologicalInformation System. MSISTAP I(2000-2006) supported commencement o f the development o f a national geological and geochemical database and GIS through supporting the digitization o f geological point data derived from mineral exploration reports. This completed coverage o f approximately 60% o f the country and digitized over 500,000 discrete data points. Activities include: completing the digitization o f open file data, and digitizing closed file data and drill holes in open file reports. o Development and maintenance of a web site to provide detailed information to stakeholders increasing the transparency o f the activities o f the mineral industry o f Papua New Guinea. The web site will also include the capacity to perform on-line orders and sales o f data products. Key inputs for the above sub-components will include international and local consultants to design the Tenements Administration System, and programmers and data entry consultants to complete system development, enter existing lease information and geological data, other international and local consultants, staff development and training in use and management o f the new systems, incremental operating costs for field work and travel, and goods including specialist software and hardware, including website software, web servers and high speed communications equipment, and the hostingo f a Geothermal Resources workshop. 2.3 Improving sustainable developmentoutcomesfrom the mining sector Mining projects cause significant social, economic, and environmental change in often remote rural areas where land ownership is under customary title. Managing this change and ensuring that project 41 benefits are channeled into ultimately sustainable development activities which can sustain local communities beyond mine life is the function o f the Development Coordination Division o f the Mineral Resources Authority. The role o f MRA inimproving sustainable development outcomes from the miningsector has already been expanded and institutionalized with the establishment o f a Sustainable Development Team under the CoordinationUnit. Already three staff are inplace, and the proposal is to increase this. This team will work closely with the Coordinators and the Mine Liaison Officers. The role o f the latter will be strengthened through the recruitment o f Community Facilitators at each o f the mine sites. Other target groups for this component are the MRA (Artisanal and Small Scale MiningDepartment), the WIM TC, Women's associations, LLGs and landowners.. In developing the role o f MRA in this respect the project will include activities to i)establish high standards for mitigating negative environmental and social impacts o f mining; ii)improve the safety and effectiveness o f small scale mining; iii)coordinate and improve the management o f mining benefits including trust funds, and monitor and assess the positive and negative environmental and social impacts o f mining. The component will assist MRA staffto Establish high standardsfor mitigating negative environment and social impacts of mining: The Sustainable Development team o f MRA in consultation with DoEC and DoCD will be assisted to prepare standard guidelines and procedures for environmental and social management including, for example, resettlement guidelines, and guidelines for consultations. Environmental awareness and technical training activities such as water quality, Acid Rock Drainage, Tailings management, mine closure andrehabilitation, and environmental monitoring will beprovided to bothMRA and DoEC staff, Improve the health, safety and effectiveness of Small-Scale Miners Improvements in mining technologies and safety training will be targeted at youth who are more willing to adopt new practices and technologies. MRA will undertake or support : o a detailed surveyand statistical information collection inconjunctionwith CBOs andNGOs o f artisanal and small scale miningareas (including GIS o fresource base andworkings) and demographic data collection (including not only economic data, but also social andwelfare data) regardingthe present role o fwomen, youth and children inA S M and documentationo f any gender and age group disparities o trials o f mercury management equipment (retorts) and other gravity separation equipment; o training o fyouth inimprovedASM methods andmine safety with retorts as a course completionbonus; o establishment and full implementation o f a small scale miners registration and identity card system; and o technical assistance and support to examine the technical and financial feasibility o f establishing a gold assay laboratory for A S M gold. Internationaljewelry companies are looking for andpreparedto pay a premium for "fair traded" A S M gold (like "fair traded" coffee) andthis component will also support the Communities and Small Mines (CASM) Secretariat to engage with PNG A S M miners to inform them about what would be needed to upgrade their social and environmental practices so that they could become 42 eligible to be certified for environmentally and socially responsible "fair traded" gold production. Coordinate and improve the management of mining benefits including trustfunds, Initially, a full review will be undertaken to map out the different benefit streams, assess the different procedures being used, identify best practices and lessons learned, and identify ways to improve accountability andtransparency. Community facilitators will be recruited ineach o f the mine sites to work along side the existing Mine Liaison Officers to provide training and outreach to LLGs, Landowners, and youth and women's groups and to coordinate and monitor implementation o f the WIM Action Plan and oversee implementation o f a small grants program for women's groups. External expertise inparticipatory planningwill be sought to help develop participatory planning procedures and prepare Local Level Mining Community Development Plans inconsultation with Local Level or District Level Governments where appropriate. End- user beneficiaries, including women and youth in the mining areas, will be trained to understand more about the mining benefits and to monitor the use o f the funds. An important element o f this component i s the implementation o f the WIM Action Plan for which the MR4 Gender Coordinator will provide the secretariat function. Activities will include: 0 preparation o f an-Information, Communication and Education strategy for buildingthe division's capacity to work with communities and local level government; 0 development and publication o f booklets promoting community development and good governance o f miningbenefits in mining impacted communities; as well as integrating gender into the activities and materials o fMR4; 0 buildingo fMRA coordination and liaison capacity (train the trainer) to implement local government training and development programs, including hiring community facilitators; 0 training for local government officials to improve their capabilities to plan, implement andmonitor development project activities inminingareas; 0 capacity building o f local women's and youth groups to participate more effectively in community development, as community facilitators; 0 supporting Women in Mining Technical Committee (WIM TC) monitoring o f the implementation o fthe WIM Action Plan 0 preparation o f an operational manual for a small grants program for women's groups that will support women's groups' activities including implementation of the National WIM Action Plan. Inparticular, the Small Grants program financed under the project will support activities innew sites not included inthe preparation o f the National WIM Action Plan and sites where the f h d s for women's activities are limited. Such sites include Misima, Simberi, Sinivit and Wau. 0 development o f a youth internship program to develop community development skills and positive leadership skills for youth fiom miningcommunities; 0 organization o fworkshops and conferences related to women andminingprograms 0 development o f a fiameworklguide for women's representation in proposals and decisions relating to the use o f mining-related Trust Funds and other institutional structures at each o f the mines; 0 preparation o f a review o f all project MOASand preparation o f a handbook on all agreements relating to women and youth for fast reference in negotiating for funds and assistance for women and youth projects; 43 o preparation o f a review o f good practice lessons from the activities o f the Porgera Development Authority (which has successfully used mining related income to support improved health outcomes at Porgera) and from benefit sharing arrangements at Ok Tedi, Lihir and Kainantu which include benefit sharing arrangements with women's groups for women's projects. These tasks will also contribute to building more robust local institutions ready to take on responsibility for sustaining development progress after mine closure. Monitor Social and Environmental outcomesfrom mining activities Monitoring and evaluation systems for determining the value and effectiveness o f community development activities carried out by both government and mining companies i s weak. Social baseline data is thin and as a result it i s difficult to assess whether particular initiatives achieve their statedobjectives. Activities will include: o preparationo fthe Strategic Environmental and Social Assessment to identify policy and regulatory gaps which may need to be addressed inconsultation with the Government; o preparation o f guidelines for measurement and evaluation o f the impacts o f community development programs; o implementing community development andenvironmental surveys; o developing and delivering training workshops to field officers, including those o f the respective agencies represented inthe WIM TC; o preparationo fguidelines on gender equality inminingcommunities; Establish an Information Dissemination and CommunicationsProgram An Information Dissemination and Communications Program will be prepared and implemented to inform key stakeholders, and inparticular mining communities on Bougainville, o f project objectives, activities and achievements. The program will also inform about MRA's overall communications activities so that it will continue after the project is completed. Inthis way, all stakeholders will be well informed about the project and the benefits it will bring for them and for the people o f PNG, especially those on Bougainville Key inputs for this component will include international and local consultants to design the Tenements Administration System, and programmers and data entry consultants to complete system development, enter existing lease information and geological data, consultants for communications strategy, staff development and training in use and management o f the new systems, incremental operating costs for field work and travel, and goods including specialist software and hardware, including website software, web servers and high speed communications equipment, and the hosting o f a Geothermal Resources workshop; international and local consultants and trainers, workshops with an international component, and incremental operating costs related to travel, training, internships and workshops all related to miningcommunity activities. The component will also support retreats, seminars, workshops and conferences (including follow-up events to the WIM conferences and a Youth in Mining Conference). MRA will take the lead in organizing such events to involve all interested stakeholders, provincial governments and other government departments. Inparticular, this will support MRA in addressing how miningdevelopment can better contribute to poverty alleviation andrural development in PNG. The participation of local government officials in these activities should lead to mining development being better integratedinto overall rural andregional development. 44 2.6 StaffDevelopmentandTraining Permeating all o f the above project components will be on-the-job training and staff development. In addition the project will support participation informal training activities, conferences and workshops. Project Component 3 Improvingrevenue collection and audits of the sector; (Estimated Total - Cost: US$4.65 million; IDA: US$4.22 million) The principal target group for this component is the staff o f the Resources Monitoring Division o f the Internal Revenue Commission (IRC) who will be provided support to review and make needed mineral tax legislative amendments, conduct risk assessments to determine matters to be scrutinized and its effect to the revenue; carry out full mining andpetroleumproject audits and other duties o fIRC as relevantto the naturalresources sector. The Internal Revenue Commission (IRC), through the Resources Monitoring Division, carries out audits o f mining and petroleum companies to collect revenues. The current capacity within IRC, however, restricts it to undertaking assessments o f financial records o f the companies as provided and to a limited number o f audits. Only two field audits have ever been carried out. Audits performed under the last MiningSector TA project have identified a number o f issues inthe Income Tax Act with respect to tax treatment o f rehabilitation and closure costs as well as community development expenditures. Inordertoresolvelegislativedeficiencies andtoprovideIRCwithlongtermauditcapacity to enhance the country's revenue base, this Project component supports IRC to develop staff capacity to: 0 review and make legislative amendments to resolve issues related to rehabilitation and closure costs and remedy other identified deficiencies in the legislation relating to mining and petroleum sector tax administration; 0 conduct tax-related risk assessments to determine matters to be scrutinized and its effect to the revenue; 0 carry out full miningand petroleum company tax audits; and carry out other duties o f IRC as relevantto the E1and natural resources sectors. This Project component will be implemented through a participatory approach and on-the-job training. The kev inputs will be consulting services; goods including basic core office equipment, and technical literature, training and incremental operating costs. Project Component 4 - Strengthening the foundations for a conflict-free mining sector in Bougainville(EstimatedTotal Cost: US$2.21million; IDA: US$2.01 million). The principal target group for this component i s the staff who will be appointedto form a Mining Departmentfor the ABG. These staff will be provided with support to establish an interim regulatory framework, prepare new mining-related policies and legislation and review institutional infrastructure and housing arrangements. The former North Solomons Province o f PNG (now known as the Autonomous Bougainville Region) was granted special Autonomous Government status in 2005 potentially giving it powers over natural resource development inthe Region. Inorder to exercise these powers local capacity must be built so that the Autonomous Bougainville Government can manage the development o f the mining sector. A 45 request for support for capacity buildinghas been received from the ABG to develop a Department of Mining as well as guiding policy, legislation and regulations to guide mineral development in the region. The ABG has appointed a Minister for Mines and a CEO o f a Department o fMining,but otherwise has no legislative basis or institutional capacity to manage mining. Bougainville formerly hosted a very large copper mine, which was closed in 1989 following an uprising by local communities and an ensuing civil war within the region. The restoration o f peace and the establishment o f political autonomy has led to a decision by the ABG to reconsider opening up the region to mineral exploration anddevelopment. The project will support the following activities: 4.1 DevelopingTransitionalArrangements Development o f transitional arrangements to allow for lifting the exploration moratorium and grantingo fexploration licenses, including responsibilities for approval and grant. 4.2 Developingthe MiningRegulatoryEnvironment Preparation o f a Bougainville Sustainable Mining Policy (including consideration o f community consent andbenefits sharing arrangements); and Preparation and enactment o f a Bougainville Mining Act, Mining Safety Act and enabling regulations. 4.3 InstitutionalDevelopmentandCapacityBuildingfor the ABG DoM Provision o f specialist advisors on miningand mineral policy; Study tours to modern miningsites; Institutional analysis and design for the ABG Dept o f Mining(examination o f staffing requirements and organizational structure); On the job training o fABG miningstaff andtwinning o fABG MiningDepartment staff into MRA and DMPGMor other appropriate organizations; Development o f small-scale miningsupport services and outreach; and Vehicles and office equipment for ABG MiningDepartment. Key inputs for this project component will include international and local consultants and training, goods including office equipment and vehicles and incremental operating costs for staff twinning into other relevant functioning regulatory agencies. Project Component 5 - (Estimated Total Cost: US$0.74 million; IDA: US$0.67 mil1ion)The principal target group for this component i s the staff o f the Special Projects Unit (SPU) o f the MRA who will be provided support to monitor, supervise, and provide technical and administrative management control o f the Project. The key outputs will be project procurement documents, financial accounts and reports. The Project will be implementedthrough the Special Projects Unit (SPU) o f the MRA. It will monitor, supervise, and provide technical and administrative management control o f the Project. The SPU will manage procurement, including all contracting works and purchases, and the hiring o f consultants, the contractual relationship with IDA and the Project's overall administration and financial management, which includes accounting, reporting, managing the Project's Designated Account (Special Account) 46 and its other fhding. SPU will be responsible for preparing and submitting to IDA, quarterly reports dealing with Project implementation, and for contracting the annual audits of the Project including the timely submission of such audit reports to IDA. The key inputs will be consulting services for specialists to mentor in-line SPU staff in particular for procurement but also for other activities as required, goods includingoperational equipment andincremental operating costs. 47 Annex 5: ProjectCosts PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 Table A.6 ProjectCosts by Component Project Cost By Component andor Activity Local Foreign Total U S $million U S $million U S $million Component 1-Policy and Legal Support for 0.17 1.73 1.90 Department o fMineral Policyand Geohazard Management Component 2 -Institutional Strengthening and 0.74 7.45 8.19 Development ofMineral ResourcesAuthority Component 3 -Institutional Strengthening and 0.38 3.84 4.22 Capacity building for IRC Component 4 -Institutional Development and 0.18 1.83 2.01 Capacity Building for the BougainvilleDepartment of Mining Component 5 -Project Management 0.06 0.61 0.67 Total Baseline Cost 1.55 15.45 17.00 Physical Contingencies 0.05 0.52 0.57 Price Contingencies 0.10 1.03 1.13 TotalProjectCosts' 1.70 17.00 18.70 TotalFinancingRequired 17.00 18.70 'Identifiable taxes and duties are US$M 1.7 andthe total project cost, net of taxes, is US$m 17.0 Therefore, the share o fproject cost net oftaxes is 100%. 48 Annex 6: ImplementationArrangements PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 Proiectimplementationperiod The project will be implemented over a period o f five and one half years (2008-2013). The project completion date is to be December 31,2013. ImplementingApency The Mineral Resources Authority (MRA) will be responsible for the implementation o f the Project. The MRA will manage the project on behalf o f beneficiaries in four agencies, being: the MRA, Department o f Mineral Policy and Geohazard Management (DoMPGM), Internal Revenue Commission (IRC), andthe ABG Department o f Mining Proiect manapement The MRA will maintain and strengthen the Special Projects Unit (SPU) already established within the Authority which will be responsible for the implementation o f the project. The Manager SPU reports to the Managing Director o f the MRA andwill: (i) responsiblefortheexecutionoftheProjectbasedontheProjectImplementationManual; be (ii)manage procurement activities including all contracting for consultant services and purchases of goods, project contract monitoring, reporting and evaluation; (iii)financial management, record keeping, management of the Special Account, disbursements; and financial reporting; (iv) maintenance of communication and coordination between the MRA and the various beneficiary government agencies andother stakeholders involved inthe project. The SPU i s composed o f a minimumof: (a) the Project Manager, responsible for the overall management o f project activities and compliance with its objectives, and for ensuring proper coordination among the various government agencies; (b) the Project Accountant, responsible for budget preparation and follow-up, financial management including operation o f the Special Account, disbursement, financial reporting and financial management o f the Small Grants Program. (c) the Procurement Specialist responsible for carrying out procurement activities consistent with procedures approved by IDA, for managing ongoing contracts, and reporting on the progress o fprocurement activities and deliverables under contract. The MRA, DoMPGM, IRC and ABG D o M will each have one or more technical officers responsible for technical completion o f relevant project components and sub-components and be the in-house champions in their organization for component implementation and ensure the achievement o f contractual objectives and deliverables by consultants. AccountinP. financialreportinpandaudits. A financial management assessment has beencarried out during pre-appraisal, and procedures to comply with Bank norms have been agreed with the MRA.A computerized financial management system will be established based on the system used by the previous Technical Assistance project in the Department o f Mining. The project accountant will 49 maintain (i) o f accounts including records o f all receipts and payments; (ii) asset register o f records an all goods procured under the project; and (iii) records of Small Grant requests and disbursements. A monthly financial report including bank reconciliation will be prepared along with statements o f expenditure and summary sheets as required by IDA for replenishment o f the Special Account and provided to the Manager SPU andthe Managing Director o f the MRA. A quarterly summary financial report will be included in the quarterly progress reports o f the project in a form satisfactory to IDA. The project accountant will retain all records o fpayments andreceipts andmake such records available for annual audit or such internal audit as may be required by the Managing Director or Board o f the MRA andor the Auditor General. Statements of expenditure will be audited annuallyby independent auditors under terms o f reference satisfactory to IDA. The audit reports will be submitted to IDA not later than six months after the end o f each calendar year. Procurement. The SPUwill engage the services o f a qualified consultant procurement specialist with experience and qualifications and under terms o f reference satisfactory to IDA, suitably experienced in World Bank/IDA Procurement Procedures to train and mentor the local procurement specialist already on staff inthe SPU. All procurement activities will be consistent with World Bank/IDA Procedures as laid down in the "Guidelines: Procurement Under IBRD Loans and IDA Credits" and comply with all legal covenants o f the financing agreement. Procurement o f training activities will be subject to prior review and such activities will be approved by the relevant Executive within each beneficiary agency being: the Managing Director o f the MRA; the Commissioner General o f the IRC; the Secretary for Mineral Policy and Geohazard Management; and the Chief Executive Officer o f the Bougainville Department o f Mining. In such cases where an agency has given responsibility for training to an institutional Training Committee the approval of the Chairman o f the relevant Training Committee will be required for each training activity. Monitoring and evaluation. The SPU will be responsible for monitoring and evaluation o f project implementation according to the indicators and benchmarks included in the Project Implementation Manual, the Project Appraisal Document, andthe financing agreement. Not later than 45 days after the end o f each quarter, the SPU will submit to IDA quarterly progress reports covering all project activities, including a procurement progress report and a financial summary report. Bi-annual reviews, the first one to take place six months after effectiveness, will provide detailed analysis o f implementation progress toward development objectives, and will include an evaluation of financial management as well as a post-review o fprocurement matters. Project Oversight. The project will be supervised by a Project Steering Committee comprised o f representatives of each o f the beneficiaries as well as members from the Department o f Treasury and Departmento fNational Planning andMonitoring. Membership o f the Steering Committee will be as follows: 0 Managing Director o f the MRA (Chairman) or Alternate 0 Secretary for MineralPolicy and Geohazard Management or Alternate Commissioner General o fthe IRC or Alternate 0 ChiefExecutive Officer o f the Bougainville Department o f Mining 0 Secretary for Treasury or Alternate 0 Secretary for National PlanningandMonitoringor Alternate 50 0 Manager MRA Special Projects Unit 0 Other ad hoc members as appointed by the Chairman with the endorsement o f the Committee duringevaluation o ftenders relatingto specific entities. The Steering Committee will act as the Tenders Board for the project and will be responsible for signing resolutions for the award of contracts and supervision o f procurement activities by the SPU. The Steering Committee will approve all contracts for consultant services and goods in excess o f a threshold of US$50,000 and will review a list o f all contract awards by the SPU at each o f its regular scheduled meetings. The Steering Committee will approve all Short Lists, Requests for Proposal and Evaluations. Evaluations o f tenders may be carried out by procurement sub-committees appointed by the Steering Committee comprising staff o f the SPU supplemented by technical staff from the relevant beneficiary agencies and functional groups. All contract awards below the threshold will be executed by the MRA Managing Director following completion o f evaluation reports by the procurement sub- committee, and the results reported to the Steering committee at its next regular meeting. A register o f training activities supported by the project will also be presented to each Steering Committee meeting. The Steering Committee will meet each quarter or more frequently as required to ensure timely achievement of project procurements and activities and not less than quarterly throughout the project duration. The Steering Committee will review the quarterly progress reports as submitted to IDA. Minutes of the steering committee meetings will be taken, and a copy o f the minutes signed by the Chairmanwill be provided to the Task Team Leader at the IDA within 14 days o f the meeting. 51 Annex 7: FinancialManagementandDisbursementArrangements PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 Introduction The desired outcomehesult o f project financial management (FM) arrangements i s that project funds, including counterpart funds where applicable, would be used for the purposes intended. The identified financial management risk is o f the credit proceeds not being used for the purposes intended, and i s a result o f a combination o f country, sector andproject specific risk factors. Taking into account the risk mitigation measures proposedthe FMrisk rating for this project is substantial. The Financial Management Assessment was undertaken according to Financial Management Practices inWorld Bank Investment Operations (Guidelines to staff) issuedbythe FinancialManagement Sector Board inNovember 2005. The proposedfinancial management arrangements would meet the minimum requirements as stipulated inOPh3P10.02. ImplementingAgency The Mineral Resources Authority (MRA) would be the institution that implements the project on behalf o f GoPNG. The MRA was established under an Act o f Parliament (promulgated in 2005 - however the MRA was not established until 2007) with the intention that it operates as a corporate body. The Act o f Parliament which establishes the MRA contains various provisions concerning the governance o f the MRA, including requirements for financial management, auditing and reporting. The MRAhas yet to formulate satisfactory operational procedures andpolicies for its day to day operations and is only just beginning the process o f defining its requirements for FM and other systems. Given that the MRA i s operationally independent o f GoPNG, and that its operations are not subject to the direct approval o f Parliament (through the normal GoPNG budget cycle) the governance arrangements for the Agency as set out in the Act must operate effectively. In addition the MRA must ensure that oversight agencies (such as the Auditor General) are actively engaged so as to promote transparency andaccountability.' The project would be implemented in an environment which has substantial risks. The country has had a poor record o f fiscal management and difficulties in containing its volatile expenditure patterns. Although in the last three years the government has made significant improvements, the Transparency International corruption perception index for year 2006 ranks the country on number 130 out o f 163 on its list. MRAwould be the primaryagent for managingfundtransfers from the nationalbudget (from GoPNG own resources and also financed by IDA).MRA would be directly responsible for the implementation o f all components and project management arrangements are designed such that the beneficiaries I The Act provides for anaudit ofM Ufinancial statementsby areputable private sector company, however constitutionally the Auditor General is responsible for oversight o f all statutory agencies - the M Uneeds to facilitate the Auditor General inthe discharge o f their statutory responsibilities. 52 (ABG, IRC, DoM, MRA) have appropriate inputs into technical issues and a channel through which implementation issues can be addressed. The MRA has as one o f its functions under the Act implementation o f projects on behalf o f the GoPNG and has established a unit for this specific purpose -the Special Projects Unit(SPU). Staffinthis unithavetransferred fromthe former Departmentof Mines and have experience in the implementation o f Bank financed projects under the previous Technical Assistance Loan. In addition the finance department o f the MRA i s led by the finance manager for the former Bank financed project which provides the MRA with further institutional memory. ProjectDescription The project consists o f the following five components: Policy and Regulatory Institutional Strengthening for the Department o f Mineral Policy and Geohazard Management (DoMPGM); Institutional Capacity Building for the Mineral Resources Authority (MRA), Institutional Strengthening and Capacity Buildingfor the Internal Revenue Commission (IRC), Capacity Building for the Department o f Mining o f the Autonomous Bougainville Government (ABG), and Project Management. I Total project costs are estimated at US$ 17.0 million excluding contingencies and US$18.7 including contingencies. Table A.7 indicates the amounts allocated andthe percentage o fproject expenditures financed by IDA under disbursement categories. Table A:7 Allocationof Proceeds Disbursement IDA National Percentage I Others I Total I Category Allocation Govern - US$ financing million by IDA Equipment and 1.48 0.15 100% o f foreign 0 1.63 Materials expenditures, 90% o f local expenditures 1.29 90% 0 14.17 0.02 100% 0 0.22 Incremental 0.08 90% 0 0.92 Operating Costs I 0.84 PCIUOperating 0.05 0.01 100% o f foreign 0 0.06 costs expenditures, 90% o f local expenditures Unallocated 0.15 0 1.70 TotalProject 1.70 0 18.7 costs 53 Component 2 includes establishment and implementation o f a Small Grants Program. Financial Management Arrangements for implementation of the Small Grants Program will b e prepared for inclusion in the Operational Manual for the Small Grants Program and will b e assessed separately prior to the Bank approvingthe manualandbefore any disbursements canbe made for this purpose FinancialManagementRiskAssessment TableA.8 indicates the financial management risk assessment TableA.8 Financialmanapementrisk assessment Risk Risk RiskMitigationMeasuresIncorporated RiskAfter Rating intoProjectDesign Mitigation Conditionof Negotiation, Boardor Effectiveness InherentRisk Country level: High Frequent supervision High Overall Governance Synergies with PERRprocess environment i s weak at a country level EntityandProject Substantial Appropriate Audit TOR(see also below) Moderate level: Funds may not be used efficiently and economically and for purposes intended OverallInherent High substantial Risk ControlRisk 1. Budgeting substantial Projectto be included as part o f GoPNG Moderate N o funds have been 2008 budget as condition o f effectiveness budgeted as yet by GoPNG for this project 2. Funds Flow L o w L o w 3. Staffing substantial Training more than one staff member in Moderate Although there are bank procedures adequate staff in terms o f numbers and capabilities the project will be vulnerable to staff turnover 4. Accounting Policy High RingFencingBank Finance substantial &Procedures Written FMprocedures for Bank financing The MRA i s a new as a condition o f effectiveness 54 Risk Risk RiskMitigationMeasures Incorporated RiskAfter Rating into Project Design Mitigation Condition of Negotiation, Board or Effectiveness organizationthat has Compliance with MRA legislationto not yet implemented appoint an internal auditor as a condition of a FMsystem or effectiveness developed operating procedures 5. External Audit High Receipt of outstanding Audit reports as a Substantial There i s no track condition o fNegotiations record for MRA as it Agree TORand scope of Audit by i s a new entity. Effectiveness There are Appoint Auditor within 6 Months of outstanding audit Effectiveness reports from the previous TA project 6.Reporting & High Agreed Report Formats agreedas condition Substantial Monitoring of effectiveness EnsureAuditor General is includedas part o f Governance arrangements Regular compliance monitoringwith MRA Act as part of quarterly reporting 7. Information High TORfor development ofMRA system Substantial Systems specifications by effectiveness Project FMsystems upgraded by effectiveness Overall Control High Substantial Risk FinancialManagementArrangements StufJng - It is evident that the MRA is in the early stages o f establishing itself. Staff recruitment continues, although most key positions that will directly relate to the project have been appointed. The Special Projects Unit will have overall responsibility for implementation and the incumbent managing the unit is held in high regard. The manager is supported by an accountant and procurement officer. The unit i s already managing a large EU project and have access to Staff that were involved in the previous Mining TA Bank financed project. The Special Projects Unit i s supported in its work by the Finance and Corporate Services division, this division i s managed by an experienced finance professional that has solid WB project finance knowledge which the Special Projects Unit can draw upon. Accounting Systems Statutory Authorities in PNG use a variety o f commercial accounting software - packages including Attache, M Y O B and Sybiz. Unfortunately there has been a problematic history with a poor record in financial management and compliance. With uncertainty surrounding an IFMS under development by GoPNG and the vexed history o f other statutory authorities, the selection and implementation o f a robust system with appropriate controls i s a key issue to the MRA. As an interim 55 measure the MRA i s using MYOB but this package i s seen by the MRA as being as very `open' and affording few controls. When seen alongside the desire o f the MRA to utilize e-commerce for the receipting o f fees and levies the process by which MRA implements its IFMIS solution becomes critical. At present MRA i s considering a custom designed solution but is doing so inthe absence o f a full analysis o f their business needs. As part o fthe assistance to be provided to MRA the development o f specifications for their corporate information and systems needs should be highon the agenda. Awaiting the development o f MRA systems would not be an acceptable approach for management o f the Bank financed project since the delays in implementation would be unacceptable. The MRA has available to it the FMIS developed for the first Mining TA bank financed project, which with some further amendment, could be deployed for use on this project. The system provides for comprehensive reporting and accounting for the Bank financed project but should be seen in the context o f a medium to longer term desire to integrate project activities with the main MRA FMIS. InternalControl At present the MRAhas not developed a financial procedures manual, the requirement for Directors o f the Board sign all cheques i s perhaps a reflection o f the nervousness felt by the Board, however such a centralized approach will inevitably impact on efficient operations and conflicts with the Board o f Directors governance role. As part o f the enabling act the MRA is required to have an Internal Auditor who i s to report not less than quarterly to the Board, this person has yet to be recruited. The Act also requires the Agency to adopt generally accepted accounting practice (the standards adopted in PNG are, in general, in alignment with international standards). The project cannot operate in a vacuum o f internal control and therefore as a condition o f effectiveness financial management procedures, acceptable to the Bank, will need to be documented for the Bank financed activities. In addition the recruitment o fthe internal Auditor should be seen as a requirement for effectiveness. Budgeting- the MR4is required to submit their budget for the fiscal year to the Board for approval and then to the Secretary o f Treasury - the MRA budget is not subject to Parliamentary oversight and the proper functioning o f the Board inGovernance issues will be important to the success o fthe MRA. As the Bank finance will first flow through the GoPNG there is a requirement to ensure that the funds are properly reflected inthe GoPNGbudget for 2008 andthis i s a condition for effectiveness. DisbursementandFundsFlow Arrangements A Subsidiary Agreement will be signed between the Borrower and MRA,which defines the terms and conditions under which the Credit funds would be made available to MRA as the implementing agency. MRA would open a single Designated Account (DA) to receive IDA funds in any commercial bank o f its choice. The currency o f such a designated account would be Kina with a suggested designated ceiling o fK3.0 million. The project could use four disbursement methods: (a) advances into the DA, (b) direct payment from the credit account (c) special commitment and (d) replenishment. Where direct payment i s used, this would be subject to the IDA'Sno objection prior to signature on the contract; it would only be usedfor large payments or when payments are incurrencies that the borrower may have difficulty obtaining. Inthe DA advance method, following the initial advance from the project Credit account, MRAwould subsequently make requests for further advances into the DA upon accounting for the equivalent 56 amount advanced andused, with appropriate reconciliation ina defined format as per the Disbursement Letter andDisbursement Guidelines. Inrequesting disbursements into the DA for expenditures incurred, MRAwould make extensive use of a Statement o f Expenditure (SOE) record. The SOE could be used for (a) goods contracts costing less than US$lOO,OOO equivalent each; (b) service contracts for individual consultants costing less than US$50,000 equivalent each and for firms costing less than US$lOO,OOO; (c) training, workshops; (d) operating costs; and (e) grants. All withdrawal applicationswould need to beprocessedbythe Ministry o fFinancewho would bejoint signatory on the Withdrawal Application. This would allow the Ministry o f Finance to capture the necessary information to update their Debt Management and accounting systems (all expenditure under the project would be financed through GoPNG budget although this may be shown as sums paid to MRA). ReportingandMonitoring Required reports for financial monitoring would include (a) Interim Financial unaudited Reports (IFRs), and (b) annual audited financial statements. The IFRs are required to be submitted every quarter within 45 days after the end o f each period (inthose quarters where a project progress report i s required, the IFRs would be an annex to this report). As the Interim financial unaudited reports would also be used as a monitoring tool, it should report project progress with adequate description and explanation and analysis o f variances. The IFRs would include a report on sources and uses o f funds, the project financial position, project expenditures, physical progress compared with plan, and a procurement monitoring report. The IFRs would not be subject to audit. A consolidation o f such reports at the end o f the fiscal year may form the basis o f annual project financial statements which would be subject to an audit. The format o f these reports would be incorporated into the PIM. The format could be based on the existing reports prepared by MRA and modified to link financial information with the projects physical progress. The project's monitoring system would collect data that would synchronize it with the financial data. ExternalAudit The project financial statements would be audited by an independent auditor acceptable to the Auditor General and to IDA based on terms o f reference acceptable to the Auditor General and IDA. The audit terms o f reference would require the auditor to undertake an annual review o f internal controls in the project and provide for any draft reports to be provided directly to IDA. The audit report would be submitted within six months after the end o f the fiscal year. The cost o f the audit would be financed from IDA funds as an eligible expenditure provided that audit services had been procured in accordance with bank procedures. MRA may choose to finance the audit from their own resources given that they will appoint their own auditor for the MRA financial statements -inthis case the Bank will still need to satisfy itself as to the capability o f the Auditor and the TORto which the auditor is operating. There i s an outstanding audit report from the previous Mining TA project which will need to be submitted to the Bank as a condition o fnegotiations. 57 TableA.9 SummaryFinancialManagementImprovementAction Plan No. Action to beundertakenby MRA Datebywhich action required r;1. Submission o f OutstandingAudit Reports for the previous project. Negotiations Project budgetedas part o f GoPNG budget estimates for 2008 Byeffectiveness 3. Financial Management operational procedures for Bank Financed Byeffectiveness expenditures to incorporate agreed report formats I 4. I Project FinancialManagement Software installed I BYeffectiveness I Appointment o f MRA Internal Auditor Byeffectiveness TORfor development o fM Ucorporate systems By effectiveness Development o f Audit TORacceptable to the Bank inconsultation By effectiveness with the Auditor General Appointment o f Auditor inconsultation with the Auditor General Within six months o f effectiveness 9. Operational Manual for Small Grants Program Condition o f sub- - component disbursement SupervisionPlan This is a substantial risk project which would require twice yearly FMsupervisionmissions inthe first years o f implementation andthereafter on the basis o f updatedrisk assessments. 58 Annex 8: ProcurementArrangements PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated M a y 2004, revised October 2006; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the financing agreement. The general description o f various items under different expenditure categories i s presented below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame would be agreed between the Borrower and IDA project team in the Procurement Plan. The Procurement Plan would be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. I. ProcurementofGoods(US$1.63million,US$1.48CreditandUS$O.l5Government Financing) 2. Goods required for the project would comprise o f vehicles, IT equipment (hardware and off- shelf software), office equipment and furniture. a. InternationalCompetitiveBidding(ICB): The project is expected to include at least one ICB contracts (Le. contracts estimated to cost more than US$200,000), for the supply o f servers for the document management system to be implementedby the MineralResources Authority (MRA).The estimate aggregate amount under this method i s US$0.65 million. b. NationalCompetitiveBidding(NCB): Contracts estimated to cost US$200,000 or lessbutmore thanUS$50,000 wouldbeprocuredunder NCB. Those contracts wouldbe adopted for items such as vehicles and software. Standard BiddingDocuments would be developed and agreed with IDA. The estimated aggregate amount under this method is US$0.75 million. c. Shopping:Goods estimated to cost less thanUS$50,000, such as cars, computers office equipment, may be procured through Shopping. The estimated cost o f goods to be procured through this method is US$O.Smillion. d. Procurementfrom the Inter-AgencyProcurementServices of the UnitedNations(IAPSO): Vehicles, computers andrelated equipment may be procured through IAPSO. 11. Selectionof Consultants(US$12.32 million,US$11.20CreditandUS$1.12 Government Financing) 3. As a Technical Assistance type o f project, most contracts would involve consulting services. They would consist o f services in diverse areas, reflecting the needs o f the different institutions supported by the project. There would be a need o f legal advice to be provided by consulting firms on preparation review o f legislation and policies. For instance, Department o f Mineral Policy and Geohazard Management would be provided support to complete a review o f the existing miningpolicy and legislation (e.g. Mining Act or Offshore Mining), establish and implement effective policy development forum process for coordination and cooperation with other agencies, prepare new 59 mining-related policies and legislation and review institutional infrastructure and housing arrangements. Systems development (e.g. E-commerce) and management/governance advice (e.g. Anti-Corruption Plan) represent other areas where specialized support would be required. In this case, MRAwouldbeprovided support to establish and/or strengthen as needed governance and institutional systems, project management capacity, small-scale miningoutreach and extension services, tenements management, geological survey capacity, community outreach, and information and marketing activities. The Internal Revenue Commission (IRC) would not only need legal advice (review tax legislation), but would need support to conduct risk assessments to determine matters to be scrutinized andits effect to the revenue and to carry out full miningand petroleum project audits and other duties o f IRC as relevant to the natural resources sector. The Department o f Mining o f the Autonomous Bougainville Government (ABG) would need assistance to complete a review of the existing mining policy and legislation, establish and implement effective policy development forum process for coordination and cooperation with other agencies, prepare new mining-related policies and legislation and review institutional infrastructure and housing arrangements. The ceiling for short-lists o f consultants composed entirely of national consultants would be US$lOO,OOO. In the event that sufficient numbers o f qualified national firms are not available for effective competition, then the short-list would consist of both national and international consultants. Under the Small Scale Mining Extension Services the required demographic survey and outreach is likely that the short-list would be composed o fNon-Government Organizations (NGOs). a. Quality Cost Based Selection (QCBS): With regardto the assignments where the scope o fwork o f the assignment can be precisely defined andthe Terms o fReference are clear and well specified (such as Data Input Training and Supervision-US$l.1million- under the Institutional Strengthening of the Geological Survey and GIS Development subcomponent) the recommended method is QCBS. b. Quality Based Selection (QBS): For legal advice qualified consultants would be selected through QBS. The scope o f services and its durationrequire a degree o f flexibility, as opposed to QCBS's rigidity,because o fthe complexity ofthe assignment. c. Least-Cost Selection (LCS): A contract to be selected under this methodwould be for the audit o f the project accounts (US$O.19 million). The assignment i s of standardnature. d. Selection Based on Consultants' Qualifications (CQS): Regardingsmall assignments (below US$200,000) o f a routine nature, such as training and/or facilitation, a qualified consultant firm may be selected through CQS method. e. IndividualConsultants: Internationalconsultants, as well as local ones, may be appointed by MRAto assist inproject implementationandto providetechnical assistance. They shouldbe selected through a comparison o f qualifications o f at least three qualified consultants among those who have expressed interest inthe assignments or have beenapproached directly by MRA, IRC andDoMPGM. Inaddition, with appropriatejustifications and after concurrence by IDA, individual consultants may be selected on a sole-source basis inexceptional cases, such as: tasks that are continuation ofprevious work that the consultants have carried out and for which the consultants were selected competitively; assignments lasting less than six months; andwhen the individual consultant i s the only consultant qualified for the assignment. 60 111. Grants (US$0.22 million,US$0.20 Credit andUS$0.02 GovernmentFinancing) 4. Local women's groups in mining communities who will be provided support to participate more effectively in community development and to implement and monitor outcomes o f the Women inMiningAction Planthrough a grants program to beadministeredbyMU.Possible actions include: improvement o f access to labor, product and financial markets; human resource development; or improvement o f the welfare o f vulnerable women. It's expected that most grants would be inthe range o f USDSOO - USD10,000, however larger grants might be possible for exceptional applications. The type o f expenditures may include payments for literacy training, educational courses, repairs or improvements to community infrastructure, books and publications. The selection criteria and the process for allocation, sample agreements, procurement and disbursement o f the grants would be in accordance with Operations Manual acceptable to IDA and it would follow Community Participation procedures for procurement. IV. IncrementalOperatingCosts (US$0.98 million,US$0.89 Credit andUS$O.O9 Government Financing) 5. This item would include communications, utilities, stationary, transportation, accommodation and allowances (e.g., review meetings). The procurement o f such items would follow the implementing agency's administrative procedures. V. Others (US$1.85 million,US$1.68 Credit and US$0.17 GovernmentFinancing) 6. Training would involve financing o f courses, workshops, conferences, degrees professional development activities and twinningprograms. B. Assessment of the apencv's capacityto implement procurement An assessment o fthe capacity o fthe Implementing Agency (MRA)to implement procurement actions for the Project was carried out in November 2007. The assessment reviewed the organizational structure for implementing the Project and the interaction between the staff responsible for procurement and other national agencies. The overall Project risk for procurement i s "high", consistent with the CPAR. Most o f the issues/ risks concerning the procurement component for implementation o f the Project have been identified as: MRA's lack o fprocurement expertise and lack of understanding by MRA o f recent changes in the national procurement regulations. The following action plan has been adopted: 61 Table A.10 Prc urement PerceivedRisks a I Risk MitigationMeasures Action Timeframe Several legal provisions do not Inclusion o f Special Procedures Duringnegotiations conformto WB's policy for National Competitive Bidding regarding NCB: into the project's Legal Agreements. (i) Insufficient bidpreparation time; Provisions to be reflected in bidding documents approved by During implementation (ii) otherthanpricethat Criteria the WB are not specified inbid documents canbe used for bid MRAto update the project Byeffectiveness evaluation; implementation manual adopted by the previous project (iii) awardmaynotbe Contract (P060330), including made to lowest evaluated procurement and financial qualifiedand responsive bidder management procedures (iv) price negotiations conducted with "winning" bidders prior to contract signature; (v) No requirement for public notice o f contract awards; (vi) Ineffective bidprotest mechanism; (vii) N oprovisions relatedto resolving contractual disputes PerceivedRisk Action Timeframe Widespreadperception o f Project auditing would be Duringimplementation corruption and weak capacity o f conducted by an external fm oversight agencies constraints to carry their mandate. Specific MRAto establish steps ofthe risks: membership selectionprocess By effectiveness and minimumqualifications for (i) selectionofthe fragile members tendedevaluation committees and other teams responsible for MRAto prepare detailed decision making; and estimates for all major contracts Duringimplementation (ii)Inadequate preparationo f estimates for procurement Strong verification procedures, packages particularly inthe prior review o f packages . (iii)BidlProposal evaluation: Duringimplementation collusion betweentender Appropriate sanctions against committee andbidders; delay in tender committees and others Duringimplementation evaluation process that would who have failed intheir duties or benefit certain deliberately abused their powers bidder(s)/consultant(s); proposals are rejected for reasonsunrelated 62 to the capacity o f the bidders in carrying out o f the I contracts/services; False informationabout the information providedby the bidders Project implementation delays as Preparationo f a draft Draft plan was received during procurementplanning i s not fully procurementplan appraisal adopted by MRA. Mu's procurement capacity is Procurement Training November 2007 weak. Consultant to assist MRA on During implementation procurement Consultant to assist (selection as condition for MRAonprocurement for a effectiveness) period o f time commensurable with the project procurement load Implementation o frecent changes MRA's Procurement Specialist to December 2007 inthe nationalprocurement undertake CSTB training. regulations Unclear procedures for selection The AG, MRA and CSTB to December2007 o f auditing fm,given the role o f details for the procurement the AG. process C. ProcurementPlan 8. MRA, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan was agreed between MRA and the Project Team duringappraisal and finalized inDecember 2007 andis available at MRA's headoffice. Itwould also be available in the Project's database and in the Bank's external website. The Procurement Plan would be updated in agreement with the Project Team annually or as required to reflect the actual project implementationneeds andimprovements ininstitutional capacity. D. Freauencvof ProcurementSupervision 9. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended twice a year supervision missions to visit the field to carry out post review of procurement actions. Subject to satisfactory performance, in consultation with the Regional Procurement Manager, this frequency o f supervision may be reduced to once a year. E. PriorReview Thresholds a. Goods would include: (a) all contracts awarded on the basis o f ICB; (b) contracts estimated to cost US$lOO,OOO or more awarded on the basis ofNCB; and (c) first three contracts awarded on the basis o f Shopping. All other contracts would be subject to post review on a sample basis. 63 b. Consultant services would involve the prior reviewo f (a) contracts greater than US$lOO,OOO equivalent for consultant services provided by firms, and (b) selected contracts for individual consultants (on an exceptionalbasis andbased on a specific request from the TTL and indicated in theprocurementplan). All other procuremento fconsultant services wouldbe subject to post review on a sample basis. c. All the prior review contracts would be stated inthe Procurement Plan. 64 Attachment1to Annex 8 Detailsof the ProcurementArranpementsinvolvinginternationalcompetition Goods andWorks List of contract Packageswhich would beprocured following ICB: TableA.ll- Packapesfor ICB Procurement Contract Description EstimatedCost Procurement Bank's Expected (USD'OOO) Method Review BidOpening Computer Servers for Documant Management 1 220 ICB Prior Ju~-2009 ConsultingServices List o f ConsultingAssignments with short-lists o f international firms TableA.12 ConsultinPServices Packapes Estimated Bank's Expected Descriptionof Assignment cost Selection Review Proposal (us!§'ooo) Method (Prior /Post) Submission Consultant Services - Legal and Policy (Mining Act Review, including Mine Closure) Prior Jan-2009 Consultant Services - Legaland Policy (Offshore Mining) Prior Ju~-2009 Consultant Services- Policy (Sustainable Development 264 Prior Jan-2009 Consultant Services - Legal and Policy (Transitional 1 1 Jan-2009 Arrangements) 198 Prior Consultant Services - E-Commerce Systems 297 QCBS Prior Ju~-2009 Development Consultant Services- IntegratedComputerized System 495 QCBS Prior Ju~-2009 Consultant services Data InputTraining and 1,199 QCBS Prior Jan-2009 Supervision 65 Annex 9: EconomicandFinancialAnalysis PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 EconomicAnalysis : NPV=US$ [N/A] million; ERR= [N/A]% EconomicIndicatorsThe project provides technical assistance and, as such, does not lend itselfeasily to quantitative investment analysis or to the calculation o fNet Present Value (NPV) or Economic Costs o f Return (ECR). As noted in Annex 1, extractive industries have always been a major part o f the formal economy in PNG and in recent years have accounted for about twenty percent o f government receipts, one-third o f GDP, and about two thirds o f exports. With the recent commodities price boom, in2006E1accounted for about 40% oftaxes (2 billionkinaequivalentto about US$0.7billionin2006) and about 80% o f exports with copper accounting for about 34% o f total exports (about US$4.3 billion) and gold and oil about 24% each (about US$3 billion each). With regard to the impact o f the project in the next five years, the main economic indicator which can be projected and compared with present values i s the annual investment for exploration by mining companies which has increased in recent years to about US$ 50 million per year at present. Mineral exploration i s an important indicator for the project since it is essential to the long term stability o f the sector to contribute to the national economy, and if the project is successhlly implemented, the exploration spending by private investors is expected to increase by from the current US$ 50 million per year to the level o f US$60 to 100 millionper year) over the next five years. 2. Financial(see Annex 5): NpV=US$ [N/A] million; FRR= [N/A] % FRR The project should result inincreased fiscal revenues from the sector but any estimates must be considered highly speculative. An FRR has been estimated based on an estimate o f US$2 - 10 million per year would seem a feasible range from the audits alone which would result in a financial rate o freturn from the project inthe range o f 11-60%and a payback inthe rangeo f 2-8 years. Other Project Benefits: The additional benefits to Government and communities o f additional mining exploration and mine development could range from US$ 1-2 million from a modest exploration venture to tens o f millions o f dollars benefiting local communities and hundred o f millions o f dollars benefiting the national economy fromjust one additional world class miningdevelopment. Funding of Sector Institutions The recurrent funding and staffing for DoMPGM and the proposed ABG D o Mwill need to bemonitored to ensure that adequate funds are available to ensure participation by counterpart staff and to pay taxes estimated at 10% o f project costs. The financial position o f the MRA is considered satisfactory. MRA's receipts consist of (i) and levies from the sector and (ii) fees government budgetary allocations for public investment projects - which will include this project. The levies will fluctuate with commodity prices and production levels and as a result pose a slight risk in terms o f longer term viability in the event that there i s a very sharp decline in either production or 66 prices or both. IRC i s also in a satisfactory financial position since it has received its entire budgetary request for 2007 and 2008. DoMPGM has recently received approval to recruit its full complement o f staff and advertisements have been placed. It has received a budget allocation for 2008 o f PGK5.9 million which i s adequate to meet its basic operating requirements. Funding sources will need to be identified for ABG DoMonce it i s ready to be established. 67 Annex 10: SafeguardPolicyIssues PAPUA NEW GUINEA: PGMiningSector Inst StrengtheningTA 2 1. Rating: Inconcurrence with EAPCO Safeguards Unit, the project has been assigned Category B (Partial Assessment). The basis for this rating is that as a technical assistance initiative, the project will not involve direct investment in mining activities but through its policy and regulatory strengthening it could have indirect environmental and social impacts by encouraging increased commercial scale mining and A S M activities inthe future. 2. Environment Regulatory Arrangements: All mining activities are subject to the Environmental Act 2000 and associated regulations. Department o f Environment and Conservation has the main responsibility in enforcing the environmental legislation requirements, including the Environmental Improvement Plans. All o f the large miningprojects in PNG are also subjected to specific contractual environmental performance requirements. The contractual requirements are included in agreements between the project developers and the Government which are negotiated during the mining license approval process through a Development Forum between all interested Government Departments and the investor. The Forum i s triggered by submission o f mining development proposal to the Mineral Resources Authority (MU) (previously to the Department o f Mining- DoM) by project proponents. An update review o f environment issues inthe mining sector was prepared by the government and received by the Bank on November 26, 2007 and was used for the preparation o f this section. The Environment Act (2000), Section 118 also calls for the appointment o f Analysts or Authorized Officers to undertake Audit and/or environmental inspection on behalf o f the Director o f DEC. Thus infbture the two environmental scientists would be legally appointed by DEC under this provision to take on that responsibility. 3. Environmental impact assessments. Detailed environmental impact statements, prepared to high standards, are required for all o f the large-scale mining projects in PNG and are a prerequisite for obtaining mininglicenses from MRA.Information disclosure and consultations with affected communities and landowners take place as part o f the licensing process. The mining projects are typically operated by international mining companies that come under public scrutiny, in both their home country and in the countries where their operations are located, to comply with good international practice and face regulatory penalties and reputational risk ifthey fail to do so. 4. Social Safeguards:Resettlement andland acquisition is subject to bothcultural andlegal rights and to some degree, the strength o f the traditional rights in and o f itself brings about correct application o f environmental and social procedures. The laws in PNG dictate that prior and informed consent o f the affected community must be obtained by the investor prior to mining project approval. Powerful landowner associations ensure that this requirement i s implemented and PNG's history o f disputes and conflicts inthe mining sector (including the Ok Tedi mine's environmental conflicts and the conflict which closed the Panguna mine on Bougainville) has raised awareness and ensures that people's rights are observed. 5. M U Role. The MRA was established by an act o f parliament, the Mineral Resources Authority Act 2005 and took over the regulatory and management functions o f the mining sector from the DoM, on behalf o f the PNG Government. . There are at present eleven MRA 68 project coordinators based in Port Moresby and five liaison officers based on mine sites. The MRA Environment Unit is established in the Regulatory Operation Division with a Senior Environmental Scientist and an Environmental Scientist. The Unit i s tasked to provide advice to the Executive Manager Regulatory Operation and to the Managing Director o f MRA with matters relating to environmental issues associated with mining companies and to assist the Department o f Environment & Conservation (DEC)undertake ongoing environmental monitoring o f mining projects. The MRA Mining Coordination and Development Division which includes the Coordination, Exploration and Sustainable Development Branches are responsible for ensuring effective liaison between government departments and mining companies and to monitor company performance against social obligations as spelled out inthe development contract. The incorporation o f the Sustainable Development Section within the Coordination Division will establish guidelines and procedures for resettlement and consultation and will boost coordination between all relevant stakeholders in mine closure planning. The MRA Regulatory and Operation Division, whose main mandate is to issue licenses to miningcompanies, includes the Mine InspectionBranch and Tenement Branch. The role of the MRA Mine Inspectorate Branch i s to administer the MiningSafety Act (1978) and to ensure that mining companies comply with the requirements o f the Act. The Tenement Branch includes a Tenement Register and Warden Sectionthat assessesmining license applications 6. Risk Mitigation The Borrower has requested support to improve their ability to minimize and mitigate potentially adverse impacts o f mining, not only o f this TA project, but also o f the overall mining industry through improved environmental and social legal and regulatory framework for mining as well as through improving the enforcement capacity of the relevant authorities involved in the sector. The support will include assistance in the preparation o f regulatory frameworks, a Strategic Environmental and Social Assessment, establishment o f a monitoring and evaluation framework for social outcomes, improved guidelines andprocedures including for resettlement, mining related consultations, and training, and procedures to mitigate impacts inSmall Scale Mining. 7. Policy and Regulatory Frameworks: The project will support the development o f several policies aimed at improving mitigating the environment and social outcomes, including Sustainable Development Policy; for each policy, the regulations and guidelines for implementationwill also be prepared. 8. Strategic Environmental and Social Assessment The project will support a Strategic Environmental and Social Assessment (SESA) o f the mining sector in order to identify policy and regulatory gaps which may need to be addressed by the Government. The SESA will examine ifpolicy and regulatory gaps exist and ifthere i s adequate compliance monitoring, and whether additional resources and standardized procedures are needed to mitigate the identified risks. Based on this analysis, the SESA will identify: (i) institutional strengthening actions to deal with environmental and social impacts associated with the growth and development o f the mining sector (including artisanal and small scale mining); (ii) measures to overcome the policy, institutional and budgetary constraints that result in limited enforcement and implementation capacity; (iii) to improve an already strong and comprehensive public ways participation process o f land owners in the negotiation and review o f mining project Memoranda o f Agreement. 69 9. Small Scale Mining: The project activities related to small-scale miningwill positively impact the sector through (a) the formalization o f the A S M operations, including A S M miners' registration to increase their access to services and financing; (b) increased awareness A S M communities on environmental and health impacts o f mercury use; (c) provision o f alternative technologies (retorts and gravity separation equipment) to minimize the use and loss o fmercury to the environment; and (d) increased awareness o f safety hazards and mitigation measures. 10. Engagementwith civil society and communities.During project implementation, procedures will be developed for on-going consultation processes that involve NGOs, landowners, and industry representatives in dialogue on mining sector environmental and social issues. Under the sustainable development subcomponent, an Education, Information and Communication (EIC) strategy will be prepared, including preparation o f information materials, booklets, etc for promoting community development and good governance o f mining benefits in mining impacted communities and integrating gender into the activities and materials o f MR4. In parallel, a communication strategy for the project will be developed. 70 Annex 11: ProjectPreparationandSupervision PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 Planned Actual PCNreview 05/22/2007 05/22/2007 InitialPID to PIC 05/29/2007 05/31/2007 InitialISDS to PIC 05/29/2007 10/23/2007 Appraisal 12/14/2007 12/21/2007 Negotiations 03/10/2008 Board/RVP approval 05/15/2008 Planned date o f effectiveness 07/01/2008 Planned date o fmid-tern review 3/31/2011 Planned closing date 12/31/2013 Key institutionsresponsiblefor preparationof the project: Mineral ResourcesAuthority (MRA) Internal Revenue Commission (RC) Department of MineralPolicy and Geo-Hazard Management (DoMPGM) InternationalDevelopment Association (IDA) Autonomous Bougainville Government (ABG) Bankstaff andconsultantswho worked on the projectincluded: Name Title Unit Graeme Hancock Senior Mining Specialist and COCPO Task Team Leader John Strongman Consultant/Mining Advisor COCPO Adriana Eftimie ConsultantMning Specialist COCPO Gillian Brown Senior Social Development EASSO SpecialistRegional Gender Coordinator Cris Nunes Procurement Specialist EAPCO David Chandler Senior Financial Management EAPCO Specialist Sheila Braka Musiime Lawyer LEGES Bank funds expendedto dateonproject preparation: (US$OOO) 1. Bankresources: 134 2. Trust funds: 100 3. Total: 234 EstimatedApproval and Supervision costs: (US$OOO) 1. Remaining costs to approval: 60 2. Estimatedannual supervision cost: 150 71 Annex 12: Documentsinthe ProjectFile PAPUANEW GUINEA: PGMiningSectorInst StrengtheningTA 2 1. MissionReports andAide Memoirs 2, CorrespondenceWith Government 3. Minutes of the SafeguardConsultation Meeting 4. Minutesof the Quality at Entry Review Meeting 5. Minutes o f the Decision Meeting 6. Government's Environmental Assessment 7. Country Assistance Strategy 8. Government's MediumTermDevelopment Strategy 9. Report ofthe Evaluation o f Women andMining Program 10. Environment New Strategic Directions 11.Letter on discussionsonthe transfers ofpowers and functions inrelations to mininginABG 12. Joint record o fAgreement on discussionsbetween ABG officials andnational government officials intransfer of functions andpowers 13. SustainableDevelopment BranchMatrix andWork Program 14.MR4GenderUnitMatrix 15. PorgeraMine Closure Consultation Document 16. Ok Tedi Closure Report 72 Annex 13: Statementof LoansandCredits PAPUANEW GUINEA: PGMiningSector InstStrengtheningTA 2 Closed Projects 43 IBRDllDA * Total Disbursed(Active) 33.75 of which has been repaid 0.65 Total Disbursed(Closed) 785.22 of which has been repaid 596.30 Total Disbursed(Active + Closed) 818.97 of which has been repaid 596.96 Total Undisbursed(Active) 74.69 Total Undisbursed(Closed) 0.00 Total Undisbursed(Active+ Closed) 74.69 Active Proiects DifferenceBetween Expectedand Actual OrlalnalAmount in US$ Millions Disbursements Project ID Project Name FiscalYear IBRD IDA GRANT Cancel. Undisb. Orlg. Frm Rev'd PO04397 PG-ROAD MAINT. & REHAB 2002 40 37.31 46.98 6.25 1 PO79140 PNG-Smallholder Agriculture Development 2008 27.5 27.72 Overall Result 40 64.81 74.69 6.25 1 PAPUA NEW GUINEA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUSDollars Committed DisbursedOutstanding "Quasi -Partlci "Quasi - Partlcl FY A ~ ~ r o v a l Comany Coan Eaultv Eaultv *GT/RM Dant -Loan Eaultv EauiW "GTIRM Dant 2008 Digicelpng 40 0 0 0 0 40 0 0 0 0 05/05/2005/05 Png microfinance 0 4.8 0 0 0 0 3.28 0 0 0 Total Portfolio: 40 4.8 0 0 0 40 3.28 0 0 0 DenotesGuarantee and Risk Management Products. *' Quasi Equity includes both loanand equitytypes. 73 Annex 14: Countryat a Glance PAPUANEW GUINEA: PGMiningSector Inst StrengtheningTA 2 PamaNew Guinea at a dance Papua East POVERTYand SOCIAL New Asla 8 Low. Guinea Paclflc Income JeveloDmentdlamond. 2006 Population. mid-year (millions) 8.0 1,000 2,403 GNI percapita (Atlasmethod, US$) 770 1,883 650 Life expectancy GNI (Atlas method, US$ billions) 4.6 3.539 1,562 - Average annual growth, 2000.06 Population(%) 2.1 0.9 1.9 Laborforce (%) 2.8 1.3 2.3 Gross prima0 Most recent estlmate (latest year available, 200048) capita enrollmenl Poverty(% ofpopulationbelownationalpovertyline) Urbanpopulation (% of totalwpulation) 14 42 30 Lifeexpectancyat birth(years) 58 71 59 infant mortality(per 1,OOOlive births) 55 26 75 Childmalnutrition(% ofchildren under 5) 15 Access to improvedwater source - Access to an improvedwater source (% ofpopulation) 39 79 75 Literacy(% ofpopulation age 75+) 57 91 61 Gross primaryenrollment (% ofschool-agepopulation) 75 114 102 Papua NewGuinea Male 80 115 108 Low-incomegroup Female 70 113 98 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1WE 1996 2005 2006 Economicratios. GDP (US$ billions) 2.6 5.2 4.9 5.7 Gross capitalformatiordGDP 19.7 22.7 ,,1,, Exportsof goods and servicedGDP 43.6 52.0 Trade Gross domestic savingdGDP 12.0 31.0 Gross nationalsavingdGDP 14.2 25.6 CurrentaccountbalancdGDP -7.1 2.9 3.8 7.4 Interest paynents/GDP 5.0 1.9 1.2 Capital TotaldebVGDP 74.9 48.1 37.4 savingsDomestic formation Total debtservice/exports 21.3 16.1 Presentvalueof debtiGDP 36.1 Presentvalueof debtiexports Indebtedness 1986-96 1Q9846 2005 2006 2008-10 (average annualgrowth) GDP 5.8 1.1 3.3 2.6 4.1 -Papua NewGuinea GDP percapita 3.2 -1.2 1.3 0.7 2.5 - - Low-incomegroup Exports of goodsand services 8.3 STRUCTURE of the ECONOMY I (% of GDP) "" Igg8 2005 2o06 Growthof capltaland GDP ('A) I Agriculture 35.3 Industry 31.2 Manufacturing 10.9 Services 43.3 Householdfinal consumptionexpenditure 65.1 49.1 General gov't final consumptionexpenditure 23.0 19.9 Importsof goods and services 51.4 43.6 -GCF - O ' G D P (averageannualgrowth) 1Q86-98 19Q646 2005 Agriculture 5.1 0.9 Industry 9.5 -1.6 Manufacturing 3.0 -1.7 Services 3.1 -0.7 Householdfinal consumptionexpenditure 0.8 General gov't final consumptionexpenditure 2.8 Gross capitalformation 4.1 -Expork -O'lmports Importsof goodsand services -0.6 Note: 2008 data are preliminaryestimates. This tablewas producedfrom the DevelopmentEconomicsLDB database. * The diamonds showfour keyindicators in the country(in bold) comparedwith its incomegroup average. If data are missing, the diamond will be incomplete. 74 Papua New Guinea PRICES and GOVERNMENT FINANCE I 1986 1998 2005 2008 lnflatlon(%) Domestlcprlces (% change) Consumer prices 5.5 11.6 1.7 ImplicitGDPdeflator 1.4 8.5 17.4 9.7 Government flnance (% of GDP, includes currentgrants) 1,1 Y Current revenue 30.6 27.6 34.6 36.4 - 01 02 03 04 Current budget balance 2.2 4.2 12.1 15.0 I GDPdeflator -0'CPI I Overall surplus/deficit -2.6 0.5 0.0 2.5 TRADE I 1986 1996 2005 2006 (US$ millions) Export and import levels (US$mill.) Total exports(fob) 1,053 2,602 3,278 4,453 Gold 410 587 914 1,012 Copper 161 294 805 1,417 4.m Manufactures 3.w Total imports(cif) 1,112 1,521 2,462 2,970 Food 185 229 2.000 Fueland energy 115 154 1.w Capitalgoods 384 549 1 "I 0 Export price index (2W0=100) 00 47 01 02 03 04 D5 Importprice index (2000-100) mExports .Imports Terms of trade (2000=100) BALANCEof PAYMENTS 1988 I996 2005 2006 (US$ millions) Current account balanceto GDP(%) Exportsof goods and services 1,120 2,957 lo T Importsof goods and services 1,317 2,278 Resourcebalance -197 679 142 651 Net income -125 -477 -386 -584 Net currenttransfers 134 -53 Current account balance -188 150 190 420 Financingitems (net) 0 194 -380 -1,105 Changes in net reserves 188 -344 190 685 Memo: Reservesincludinggold (US$ millions) 428 587 765 1,451 Conversionrate (DEC, locaVUS$) 1.o 1.3 3.1 3.1 EXTERNAL DEBT and RESOURCE FLOWS 1986 1906 2005 2006 (US$ millions) :omposition of 2005 debt (US$mlll.) Total debt outstandingand disbursed 1,984 2,507 1,849 IBRD 99 270 249 246 IDA 112 105 78 76 G: lg5 A: 249 Total debt service 322 489 388 IBRD 14 50 32 37 IDA 1 3 4 4 Compositionof net resourceflows Officialgrants 233 195 131 Officialcreditors 61 41 -44 Privatecreditors 209 116 -164 Foreigndirect investment (net inflows) 91 111 34 Portfolioequity (net inflows) 0 0 0 Wodd Bank program Commitments 19 0 0 14 i-IBRD E Bilateral - Disbursements 15 21 20 19 B IDA - D Other mltilateral . F Private - Principalrepayments 6 32 26 28 IC-IMF G Short-teri ~ Net flows 9 -11 -7 -9 Interestpayments 9 21 10 13 Nettransfers 1 -32 -17 -22 Note: This table was produced fromthe DevelopmentEconomicsLDB database. 75 142°E 144°E 146°E 148°E 150°E 152°E PAPUA NEW 0° GUINEA 0 100 200 Kilometers SOUTH PACIFIC OCEAN SELECTED CITIES AND TOWNS 0 50 100 150 Miles PROVINCE CAPITALS M A N U S Mussau Island N E W NATIONAL CAPITAL RIVERS Lorengau I R E L A N D 2°S Admiralty Momote MAIN ROADS Islands Kavieng Vanimo PROVINCE BOUNDARIES B i s m a rk A rc hi New Ireland INTERNATIONAL BOUNDARIES p Aitape e la Laefu g o Lumi Wewak SANDAUN Namatanai 156°E Maprik Bismark Sea 4°S Angoram 4°S Sepik Ambunti Awar Rabaul E A S T M A D A N G W E S T C e n t r a l S E P I K B O U G A I N V I L L E WESTERN Maliom Nantamba R a n g N E W B R I TA I N e HIGHLANDS Lemankoa Tabubil ENGA Madang Talasea Ewase Koroba Bismark Ramu Gloucester Wabag North Mt. Wilhelm Saidor Kimbe Hoskins E A S T INDONESIA Tari Mount Hagen Range (4509 m) Solomons 6°S Kiunga Strickland Goroka N E W B R I TA I N 6°S Mendi Kundiawa Kainantu Sialum Arawa New Britain SOUTHERN Nadzab Kandrian CHPurari IMBU EASTERN Aropa HIGHLANDS HIGHLANDS Lae Finschhafen Lake Kikori Buin Murray M O R O B E Bulolo Kikori Solomon SOLOMON W E S T E R N Aramia Wau Morobe Sea ISLANDS 8°S Fly Balimo Kerema 8°S To Merauke Weam G U L F N O R T H E R N Bereina Trobriand Losuja Morehead Popondetta Island Kokoda Woodlard Goodenough Island Sibidiri Daru Gulf of PORT Island Bula Papua MORESBY Owen Kulumadau Wanigela Fergussson NATIONAL Island CAPITAL Stanley Esa'ala PAPUA NEW 10°S Kupiano Range D'Entrecasteaux Normandy Islands GUINEA Coral Sea Abau Island Arafura C E N T R A L Alotau Misima M I L N E Island Sea Samarai B AY Bwagaola This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information Rossel FEBRUAR shown on this map do not imply, on the part of The World Bank Island IBRD Group, any judgment on the legal status of any territory, or any AUSTRALIA endorsement or acceptance of such boundaries. Tagula Island 33463 Y 2005 12°S 12°S 142°E 144°E 146°E 148°E 150°E 152°E 154°E 156°E