World Bank Document of The World Bank FOR OFFICLAL USiE ONLY Report No. 12790 PROJECT COMPLETION REPORT MADAGASCAR ILHENITE MINING ENGINEERING PROJECT (CREDIT 1928-MAG) FEBRUARY 25,

Document of

The World Bank

FOR OFFICLAL USiE ONLY

Report No. 12790

PROJECT COMPLETION REPORT

MADAGASCAR

ILHENITE MINING ENGINEERING PROJECT(CREDIT 1928-MAG)

FEBRUARY 25, 1994

Industry and Energy Operations DivisionSouth-Central and Indian Ocean DepartmentAfrica Region

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

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CURRENCY AND EOUIVALENT UNITS

Currency Unit = Malagasy Franc (FMG)US$1.00 = FMG 1,250 (March 1988)US$1.00 = FMG 1,795 (October 1993)

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

BP - British PetroleumEIAS - Environmental Impact Assessment StudyOMNIS - National Military Office for Strategic IndustriesMIEM - Ministry of Industry, Energy and MinesDGM - Department of Geology and MinesBRGM - Office of Geological and Mining Research (FRANCE)QIT - QIT - Fer et Titane Inc. (CANADA)QMM - QIT Madagascar Minerals Ltd. & Co.RTZ - Rio Tinto Zinc

FISCAL YEAR

January I - December 31

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Madagascar - Ilmenite MiningEngineering Project (Credit 1928-MAG)

Attached is a copy of the report entitled "Project Completion Report on Madagascar - IlmeniteMining Engineering Project (Credit 1928-MAG)" prepared by the Africa Regional Office. The Borrowerhas prepared Part II. It also contains an unusual and interesting section prepared by the private sector jointventure partners of the Borrower.

The PCR is of satisfactory quality. The project was a link in the chain of activities which would haveled to the development of a large deposit of ilmenite (a titanium compound ore) in Madagascar. At theinception of the project, it was expected that the output of the project would come into the market at a veryopportune moment in the supply/demand cycle. In the event, a drastic upward revision in the estimatedcost of the development project (from $194 million in 1987 to $260 million at the end of 1988) derailedthe implementation of the project as much time was spent between the Bank, the Borrower (NationalMilitary Office for Strategic Industries (OMNIS)) and the foreign private sector joint venture partner (QIT- Fer et Titane Inc. - Canada) in resolving the issue of financing. As a result, the major objective ofadvancing the engineering phase of the project was not met, though some funds were utilized for technicaland legal assistance to OMNIS. An Environmental Impact Assessment was also partially completedthrough QIT and financed by funds other than the IDA credit.

Although the current market situation may not support the implementation of the development project,these ilmenite reserves remain among the most prospective for titanium production. It is, therefore, likelythat these engineering studies will have to be pursued in some future date. As for this project, the outcomeis rated as unsatisfactory since it did not achieve its major relevant objectives. The sustainability of theproject is uncertain given the cloudy market prospects for ilmenite. On the other hand, the project has hadsubstantial institutional impact through technical and legal assistance.

No audit is planned.

R. Picciottoby H. Eberhard K6pp

Attachment

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

FOR OFFICIAL USE ONLY


MADAGASCAR

nLMEMNTE MaNING ENGINEERING PROJECT(Credit 1928-NAG)

TABLE OF CONTENTS

Page No.

PREFACE ..............................................

EVALUATION SUMMARY ................................... ii

PART I: PROJECT REVIEW FROM THE WORLD BANK'S PERSPECTIVE ... 1

I. Project Identity ............. .................2. Background .....................................3. Project Objectives and Description. . . . 34. Project Design and Organization. . . . 35. Project Implementation. . . . 46. Project Results. 57. Project Sustainability. . . . 68. Bank Performance.... 79. Borrower Performance. . . . 710. Project Relationships ...... ........................ . 811. Consulting Services ...... ........................ . 812. Lessons Learned ....... ......................... . 8

PART II: REVIEW OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE 9

1. Acknowledgements ................................. 92. Introduction ..................................... 93. General Evaluation ................................. 94. Prospects ....................................... 115. Borrower's Performance .126. Bank's Performance .127. Relationship between Borrower and Bank .138. Performance of Consultants and Contractors .139. OMNIS' Comments on the Bank's Part of the Report .13

PART III: STATISTICAL INFORMATION ......................... 15

ANNEXES:

Comments by QIT on Part I of the Report ...................... 21

Comments by QIT on the term environment;l Impact Study ...... ..... 25

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


MADAGASCAR

ILMENITE MINING ENGINEERING PROJECT(Credit 1928-MAG)

PREFACE

This is the Project Completion Report (PCR) for the Ilmenite Mining EngineeringProject, for which Credit 1928-MAG in the amount of SDR 6.2 Million was approved on May25, 1988. The Credit was closed on June 30, 1993 and the undisbursed amount of SDR 3.7cancelled. Only SDR 2.5 were disbursed and the last disbursement was in March 1993.

The PCR was prepared by the Industry and Energy Operations Division of the South-Central and Indian Ocean Department of the Africa Regional Office (Preface, EvaluationSummary, Parts I and III). The Borrower's comments have been incorporated as PART II andcomments from QIT, the foreign private investor, as an Annex.

Preparation of this PCR was based, inter alia, on the Staff Appraisal Report; the Credit andProject Agreements; supervision reports; correspondence between the Bank and Borrower andinternal Bank memoranda.

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MADAGASCAR


EVALUATION SUMMARY

Objectives

1. The primary objective of the Engineering Project was to support the acquisition ofall information needed to complete the feasibility study and basic engineering for an ilmenitemining project in Madagascar. Credit 1928-MAG, financing this project, was designed to enableits beneficiaries, the Government of Madagascar and OMNIS, the agency entrusted withpromoting the development of Madagascar mineral and petroleum resources, to carry out theobligations OMNIS had entered into in its Joint Venture with a well qualified foreign privateinvestor, QIT-Fer et Titane Inc. (QIT) of Canada, for the development of important ilmenitedeposits located in the southeast of Madagascar. Mining of these deposits would provideMadagascar with substantial foreign exchange income and provide an important source ofemployment and export diversification. The successful participation of a reputable internationalfirm in the mining project was also considered an attractive feature for the promotion of foreigninvestments in Madagascar, as part of a policy promoting a more open economy.

2. The project was expected to finance the following activities: preliminary and basicengineering; the setting-up of pilot plant; capital and operating cost estimation; market analysis;some detailed drilling; improvement of site access; and an environmental study.

3. The completion of an Environmental Impact Assessment Study (EIAS) on theNatural Environment was a significant component as the mining operations would be carried outover an area with tracts of littoral tropical rain forest which is a fragile ecosystem. AsMadagascar's rich but seriously threatened endemic biodiversity attracts worldwide attention forits preservation, the proposed mining project provided an opportunity to test the feasibility ofsustainable development and diversification of the export base in a very poor country trying toimprove the well being of its people. The EIAS was the first of its kind for Madagascar andbecame, in itself, a very important component of the project (para 3. 1).

Implementation Experience

4. Implementation of a major portion of the engineering project was held in abeyanceat an early stage of the Credit for a number of reasons. These included change in ownership ofthe private sector partner; a rapidly chlanging market outlook for the product; and revised costfigures for the mining complex which rendered its economic feasibility marginal. An activeinteraction then developed between the parties in the Joint Venture and between them and theBank to redesign the mining project by looking into measures to reduce the investment costand/or increase output. At the same time, as new policies in NMadagascar were aiming to reduceState intervention in the economy, the dialogue was also directed to changing the formula of

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OMNIS/QIT share participation and the legal statutes of the Joint Venture, the objective beingto increase the private sector share.

5. Only one, albeit important, component of the engineering project, the EIAS, wasimplemented. However the EIAS was financed by QIT from its own resources in an effort toavoid possible delays associated with Bank procurement guidelines. The Credit financed technicaland legal consultants who assisted OMNIS in the evaluation of project alternatives and in frequentnegotiations with QIT. The Credit also financed OMNIS travel activities to advance the miningproject with QIT and the Bank.

6. After a two-year extension to allow the continuation of the technical and legalassistance to OMNIS, the Credit was closed on June 30, 1993. Only SDR 2.5 were disbursed andundisbursed amounts (SDR 3.70 or 60% of the original Credit) have been cancelled.

7. While efforts to redesign the mining project had not yet come to a final conclusionby Credit closing, the parties in the Joint Venture and the Bank continue discussions on projectissues mentioned above. In late 1991, OMNIS and QIT decided to incorporate the Joint Ventureand to reduce OMNIS share to 20%. Ratification of these decisions by the Government ofMadagascar was delayed during the recent process of political transition and it is awaited beforeproject preparation can continue. Although this transition has caused delays in finalizingagreements that would have helped accelerate project implementation, much of the difficultyseems to be related to the apparent need to put in place project-specific arrangements acceptableboth to OMNIS and QIT (e.g. tax and foreign exchange arrangements) rather than rely on theoverall investment and mining codes.

Results

8. Only limited results have been obtained from Credit 1928-MAG as a consequenceof the reasons stated above which have delayed further expenditures for preparation of the miningproject. The most important achievements of the Credit have been (1) the completion of a high-quality Environmental Impact Assessment Study (EIAS), on the Natural Environment which isa prerequisite to continue the feasibility work for the ilmenite mining complex once other projectissues have been properly dealt with and (2) a very important dialogue concerning the nature ofthe Joint Venture. The preliminary agreements reached in this respect represent importantprogress and constitute a solid basis under which the preparation of the mining project couldproceed.

Sustainahility

9. The technical and legal assistance, financed under the Credit, have had a positiveinstitution building impact on OMNIS. The assistance has been well internalized and should allowOMNIS to perform its role in the Joint Venture once project preparation resumes. Even if thisparticular project does not eventually prove teasible, Madagascar is now better prepared to dealwith foreign mining houses and the principle of majority private sector participation is firmlyestabl ished.

Lessons Learined

10. The lessons learned f'roim this project primarily relate to the interaction between theBank and a private shareholder who is a partner with a beneficiary of an IDA Credit. While

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every effort was made by the Bank to inform QIT, the private partner and project manager, ofBank procurement guidelines and generally acceptable economic parameters for the project, ittook time for QIT to appreciate the realities of working with the Bank. With regard toprocurement, QIT elected to forego IDA funds rather than undertake what they consideredarduous and time consuming procedures. This suggests that the possibility of other procurementprocedures consistent with Bank guidelines but more suited to private sector ventures should havebeen explored such as sole source procurement in the case where the beneficiary's private partnerhas a long established relationship with a consulting group and/or supplier.

11. In summary, there is a very important role for the Bank in stimulating private sectorinvestment, but it is critically important to realize that private sector investors are far removedfrom Bank procedures. While Bank staff went to great lengths to explain the requirements toQIT, a cooperative partner, there was also much to learn about private sector practices by bothOMNIS and the Bank.


MADAGASCAR


PART I: PROJECT REVIEW FROM THE WORLD BANK'S PERSPECTIVE

1. Project Identitv

Name Ilmenite Mining Engineering Project

Credit Number : 1928-MAG

RVP Unit Africa

Country Madagascar

Sector Industry

Subsector Mining

2. Background

2.1 Madagascar has many mineral resources consistent with its geological continuitywith the southern Africa continent. The primary minerals produced for export have beenchromite, graphite, and mica, but a wide variety of other minerals have also been produced inthe country, i.e. gold, industrial beryl, monazite, garnet, feldspar, kaolin, barytes, quartz, anda full range of carbonate rocks. There has also been significant production of ornamental andsemi-precious stones. Many other mineral resources have been identified, but remainunexploited. Nevertheless the value of the mineral production has not been significant in theoverall economy of Madagascar. The mineral sector now accounts for only 3 percent of theexport revenues, down from 5 percent in 1978. The sector has been adversely affected by theinterventionist economic policies of the Government in the mid 1970's and the early 1980's.

2.2 The presence of heavy mineral sand deposits in southeastern Madagascar wasestablished in 1952 and commercial quantities of monazite were produced in the area during theearly 1960s. Detailed exploration campaigns were conducted by a number of private companies,including US Steel, in the early 1970s along the eastern coast of Madagascar. These programsestablished the presence of signiticant reserves of ilmenite as well as commercially importantquantities ot zircon and monazite. The US Steel program conducted in 1974-75 outlined a 25million metric tons reserve of ilmenite in the southeast corner of Madagascar, in the Fort-Dauphin area.

2.3 At the time this Credit was consi(lered, the mining sector was at a stage where anopen policy for private foreign and domestic investment needed to be supported. TheEngineering Credit was designed to help prepare tor a large scale mineral sands project developed

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between the Office Militaire National des Industries Strategiques (OMNIS) and a Canadian firm(QIT), a major player in the titanium dioxide slag industry, controlling about 40 percent of theworld's market. At that time, QIT was wholly owned by BP Minerals. BP Minerals, includingQIT, were subsequently purchased by Rio Tinto Zinc (RTZ) an international mining group. QIThad acquired the US Steel geological data and associated feasibility studies and had formed in1986 an unincorporated Joint Venture with OMNIS (OMNIS 51 percent, QIT 49 percent) withQMM (QIT Madagascar Minerals, a subsidiary of QIT created under Malagasy law) as theoperator. The Joint Venture was established to explore, develop and market the titanium-bearingsands on the east coast. The proposed project was to produce approximately 600,000 tons ofilmenite and smaller quantities of the co-products rutile, zircon, and monazite. Very preliminaryestimates in 1987 placed the investment cost at around $130 million.

2.4 llmenite, a mineral combining titanium and iron oxides, occurs widely throughoutthe world in rock deposits and as a beach sand. Ilmenites from rock deposits contain 36-44%titanium dioxide and those from beach sands contain 45-64% titanium dioxide. Canada, Norway,Australia and South Africa are the four major producers of ilmenite. The main end use for TiO2bearing minerals is in the manufacture of titanium pigment which consumes about 3,000,000 tonsof contained TiO2 annually.

2.5 Originally, the pigment industry consumed only raw ilmenite. Over the last severaldecades, the pigment industry has rapidly increased its demand for upgraded ilmenites with lowiron contents. Today, more that 50% of TiO2 feedstocks consumed by the pigment industry arein the form of upgraded ilmenite, principally as titanium slag, but also as synthetic rutile. QITis the leading producer of titanium slag and would convert raw ilmenite from Madagascar intoa high grade titanium slag to be sold to the pigment industry.

2.6 The ilmenite mining project was (and still is) central to Madagascar's medium termdevelopment strategy which aims to diversify exports and encourage private sector participation.Successful implementation of the project was critical in demonstrating that Madagascar's mineralpotential could be realized with the participation of private foreign investment. This would haveestablished credibility for other sectors as well. World Bank participation was also intended toprovide an approach coupling the project to country policy and institutional reform strategy. TheBank's involvement was further designed to ensure that the delicate environmental questionsposed by this project would be thoroughly considered and appropriate implementation optionsselected.

2.7 In mid-1987, following a Bank Mining Sector Mission that visited Madagascar earlythat year, the Government requested Bank financing of technical assistance to enable OMNIS toperform adequately in its partnership with QIT, for the preparation of an Ilmenite Mining Project.A Project Preparation Facility (PPF) of $750,000 was granted in October 1987 to financetechnical and legal consultants to assist OMNIS. Funds were also provided for the purchase ofminor laboratory test equipment and for OMNIS overseas promotional activities of miningproj ects.

2.8 Prior to 1987, Qll had provided all the financing for Phase I and Phase If of projectpreparation. This included explouiatory work to confirm quantity and grades ot the ore body anddetailed drilling work in ordetr to select a mining plan for the next 20 years. It was concludedthat preparation work should proceed to Phase 111. The objective of Phase III was to produce allnecessary information, including the environmental impact study required to carry out the finalfeasibility study ot the mining operation.

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2.9 In Phase III, OMNIS would need to step up its financial contribution to projectpreparation. This was interpreted as being the requirement of the terms of the Joint VentureAgreement in order to match funds already spent by QIT during Phases I and II of thepreparation. Since the PPF amount would be insufficient for that purpose, the Governmentrequested further Bank financing, which ultimately was granted through Credit 1928-MAG forSDR 6.2 million ($8.55 million equivalent), approved by the Bank's Board in June 1988.

3. Project Objectives and Description

3.1 The primary objective of the engineering project was to develop the informationrequired for the final feasibility study of the ilmenite mining operation. Besides financingOMNIS's share of Phase III of project preparation, the Engineering Credit was designed to enableOMNIS to negotiate and fully participate in important project decisions with QIT, who hadextensive experience in ilmenite production and marketing. Preparation of a satisfactory EIAS,given Madagascar's unique environmental profile, became in itself an important component ofthe Engineering project.

3.2 The Engineering Credit was to finance the OMNIS share of Phase III components,namely: (1) setup of a Wet Pilot and Mineral Separation Pilot Plant to optimize flowsheetsdeveloped during Phase II; (2) completion of basic engineering for the mineral separation plant,power plant, dredge and concentrator plant, and dock/harbor facilities; (3) completion of anenvironmental impact assessment study. Also included were some complementary drilling, orebody delineation, limited infrastructure development, market studies, and product/pilot plant testwork.

3.3 If the project were found to be economically viable and environmentally sound, theCredit was to be used to finance preparation of bid documents, prequalification of contractors,and evaluation of bids. The project scope also included technical and legal assistance for OMNISand project promotion activities by OMNIS. The total cost of the Phase III activities wasestimated at US $16.2 million equivalent, of which 94 percent (US$15.2 million) representedforeign costs. A total of US $8.55 million was to be financed by the Credit, including US$700,000 for project promotion and technical assistance to OMNIS and US $750,000 for therefinancing of the PPF. Price contingencies based on annual worldwide inflation of 5 percentand physical contingencies of 15 percent of all costs were included.

3.4 The Government agreed to make the proceeds of the Credit available to OMNISwho in turn would make them available to QMM as its contribution to the Joint Venture. Oncethe final decision had been made by the partners of the Joint Venture as to whether to proceedwith the ilmenite mine and associated facilities, the Government and OMNIS would decide theterms and conditions of arrangements for settlement of the advance. QIT was to continue tofinance its share of foreign and local costs through its equity contribution.

4. Project Design and Organization

4.1 Within the framework of the unincorporated joint venture, QIT-MadagascarMinerals (QMM), a subsidiary of QIT created under Malagasy law, was assigned to be theoperator for the Joint Venture. QMM operated under the supervision of a Committee constitutedwith OMNIS and QIT representatives. The Bank had considered that the unincorporatedarrangement for implementing the mining project was adequate and also accepted the unusualarrangement of a private company, QMM, being made responsible for the execution of these

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components of the Engineering Credit which were related to the Joint Ventures activities. Thisissue was not well clarified during the appraisal and only at negotiations for the Credit was itagreed that OMNIS would have to enter into an Implementation Agreement with QIT and QMM,acceptable to the Bank. The Agreement was to specify, a) the financial contribution to be madeby each of them to carry out the project, and, b) QMM's responsibilities regarding theimplementation of the Project, procurement of goods and consulting services, reporting andpreparation of documents and evidence required for disbursements requests and replenishmentof the Special Account. Signing of this agreement was made a condition of effectiveness for theCredit.

5. Project Implementation

5.1 The Credit was signed in July 1988 and declared effective in December 1988.Effectiveness conditions included the conclusion of a Project Implementation Agreement betweenOMNIS, QIT and QMM; and finalization of terms of reference for the Environmental ImpactAssessment Study.

5.2 While Credit effectiveness was achieved rather promptly, the first Bank supervisionmission to Madagascar in October 1988 was presented with substantially revised cost estimatesfor the ilmenite mining project. In effect, while at the time of appraisal of the Engineering Creditthe investment cost had been estimated on a preliminary basis at around $194 million (includingworking capital and contingencies as well as pre-investment expenditures), for a production of600,000 tons/year, firmer estimates now indicated the investment cost to be $260 million.Accordingly, the economic rate of return was revised to 10% down, from 13%.

5.3 Since the economic viability of the mining project including all infrastructurerequirements had become marginal, QIT, proposed to split the project into a mining componentcosting $160 million and an infrastructure component of $100 million. Under QIT's proposal,the mining component would be financed by the Joint Venture and the infrastructure cost wouldbe born totally by the Government. The Bank argued that the initial project concept had beenradically modified, among other things by increasing the Government's required financing from$65 to $180 million. Furthermore the Bank argued that, regardless of the structure and sourcesof financing, the economic evaluation of the project would have to consider an adequate rate ofreturn for the entire investment including infrastructure. If the infrastructure cost were to befinanced by Government, a reasonable cost recovery fee would have to be charged to the miningconcern. It was pointed out that clear economic viability was an essential requirement for furtherBank support to this project.

5.4 The Bank also recommended that evolving economic policies in Madagascar, underwhich the Government had decided to divest itself from direct productive activities, suggested thatthe Government share in the Joint Venture should be reduced. Finally, since the revised highercapital cost would require (if the project would be found feasible) borrowing from severalsources, the Bank also recommended that the Joint Venture should be incorporated.

5.5 As the basic assumptions underlying the Engineering Credit had been substantiallymodified, a substantial portion of the Credit designed to finance preliminary and final engineeringof the mine and corresponding infrastructure could not be utilized until a new, acceptable projectconfiguration emerged. The attention of the Bank from then on focused, logically, on the JointVenture efforts to produce an acceptable project.

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5.6 In 1989, responding to concerns about economic viability the project concept wasredesigned into two phases. Phase 1, with a total cost of $270 million to produce 625,000 tonsof ilmenite by end 1992, and Phase II with an additional investment of $135 million to increaseannual production to 1.2 million tons. At the same time the Government accepted the Bankrecommendation and proposed to reduce the OMNIS share in the Joint Venture to 40%,requesting that IFC should participate with 11 %.

5.7 Under the redesigned, phased project the economic viability remained marginal.To improve it, QIT proposed in 1991 a new project design for the export of partially upgradedilmenite, a design that would reduce infrastructure requirements and project costs to $166 million.QIT also proposed to become the sole shareholder of the mining operation. OMNIS made acounterproposal to export fully upgraded ilmenite at a project cost of $279 million and a OMNIS38 percent/QIT 62 percent share in the Joint Venture.

5.8 Despite an unstable political situation in Madagascar and depressed markets forilmenite, OMNIS and its partner QIT continued intensive negotiations to find a project conceptagreeable to all parties. At the end of 1991 an agreement was reached between OMNIS and QITunder which the Joint Venture would become an incorporated company in Madagascar (QMMS.A.) and the OMNIS share would be reduced to 20% with QIT retaining the remaining 80%.The 80/20 ratio was very much in line with the policy decision made by the Government for itsparticipation in mining ventures in general which proposed that the Government participate upto 20% in a mining project if that participation was requested by the private investor, which wasthe case in the llmenite Project.

5.9 Since early 1992, the parties have worked on legal documents to reflect the newagreement. Several side agreements needed to be drafted, including an Investment Convention,Shareholder Agreement, Contracts for the Sale of llmenite, Contract for the Sales Agent,Technical Assistance Contract and the statutes of QMM S.A.

5.10 While substantial progress has been made in drafting all documents as of the dateof this PCR, it has not been possible due to the political transition to obtain from the Governmentof Madagascar an approval of the basic agreement between OMNIS and QIT. In addition,several ministries have not commented on specific clauses in the various drafts, including themining concession and the request of QMM S.A. to deposit the export revenues in an overseasaccount. QIT still awaits Government ratification of the new legal agreements to create QMMS.A. and the Government's response to the EIAS recommendations submitted in February 1993.Only then can engineering work required to complete the feasibility study for a final investmentdecision be completed.

6. Project results

6. 1 Project implementation was adversely affected by several factors soon afterimplementation of the Credit project started. Phase III of project preparation was almostcompletely suspended, a situation prevailing until today. Only two components of the Creditproject were carried out, namely the project promotion and consultants assistance to OMNISfinanced under Credit 1928-MAG and the EIAS, financed by QIT.

6.2 Environmental Impact Assessment Study. A key issue for the proposed miningproject, identified during appraisal, was how to minimize the environmental impact to theMandena area, situated at approximately 10 km north of Fort-Dauphin, where mining for mineral

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sands was expected to commence by late 1992. The Mandena area includes one ot the fewremaining tracts of littoral tropical forest. It was necessary to assess the ecological significanceand biodiversity value of that ecosystem; the impact that different mining alternatives could haveon it; and the mitigating measures that could be adopted to minimize that impact. It wasimportant, as well, to asses the socioeconomic impact of the project.

6.3 The Bank played an important role assisting QMM in the preparation of the EIASterms of reference. Given the importance attached to the EIAS, final approval of the terms ofreference by the Bank was a condition of effectiveness of the Engineering Credit.

6.4 While financing for the EIAS was included in Credit 1928-MAG, QIT decided tofinance the study itself. A reputable Environmental Consulting firm from Australia was selected.The Consultant engaged an excellent team of highly skilled professional scientists who completeda painstaking inventory of the areas' flora and fauna which includes many endemic plant andanimal species. The environmental impact assessment study for the natural environment has beencompleted and was submitted to Government in February 1993. The study does an excellent jobdescribing the existing environment and proposes clear mitigating measures, conservation of amaximum amount of littoral forest and methodologies to revegetate the mined site. The Bankplayed a key role in helping draft terms of reference for the EIAS and commenting in detail onits various drafts. The Bank review considers the study to be outstanding and a credit to thecountry, the company and the consultants.

6.5 Utilization of Credit 1928-MAG. As explained in the above paragraphs, utilizationof the Credit funds remained limited to financing the technical assistance consultants and OMNIS'overseas missions to promote the ilmenite project. The Credit has also financed some computerequipment for OMNIS to be used in project follow-up. The consultants' technical and legalsupport was considered essential by OMNIS in its dialogue with its partner, QIT, a dialogue thatwas pursued beyond the original Credit closing date of June 30, 1991. At OMNIS request, theclosing date was extended twice until June 30, 1993. The Bank did not agree, however, toextend the closing date a third time for the Credit category for Consultants, as desired byOMNIS, since it was considered that during the period of political transition in Madagascar, itcould not reasonably be expected that the Administration would be able to handle the complexlegal and financial issues of the revised agreements reached between OMNIS and QIT. Furtherconsulting services, therefore, would not be productive. The Credit was closed on June 30,1993.

7. ProJect Sustainability

7.1 The Engineering project was designed to assist OMNIS in the preparation of theilmenite mining project. Included in the assistance to OMNIS were the provision of technical andlegal advice to enable it to understand and negotiate complex management, technical, marketingand tinancial issues ot' ilmenite mining. OMNIS and the Government have acquired expertise inthis area which will certainly be uset'ul in the futule when turther implementation of the ilmeniteproject can proceed. Even it' this particular project does not eventually materialize, Madagascaris now better prepared to deal with toreign mining houses and the principle of majority privatesector participation is tfirrnly established.

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8. Bank Performance

8.1 Underlying the strategic importance of the project for the development ofMadagascar, the Bank responded promptly to the Government and OMNIS requests for support.During project preparation and design, however, the Bank did not pay adequate attention to thedefinition of the key role of QMM in project implementation. At negotiations the Bank insistedthat a Project Implementation Agreement between OMNIS, QIT and QMM clarifying theirrelationship had to be negotiated and signed as a condition of effectiveness of the Credit. Whilethis document was signed by the parties, QIT argued later that Bank procurement procedureswere not adequate for efficient project implementation and decided to use its own funds for thefew project items that were implemented, in particular the EIAS. The Bank did not have anycontractual relationship with QIT or QMM and at OMNIS insistence, any communication betweenQIT/QMM and the Bank had to be done through OMNIS. This arrangement was not helpful forproject implementation, particularly since QIT had not had any previous experience of workingwith the Bank and initially had no knowledge of Bank procurement and disbursementsprocedures.

8.2 Confronted, at the beginning of project implementation, with revised cost estimatesfor the mining project which reduced its profitability, the Bank correctly insisted that a solutionhad to be found in a more efficient project design, not by excluding related infrastructure fromthe project cost as requested by the promoters. Some progress in redesigning the project wasachieved, first by staging the production in two phases to achieve ultimately an annual output of1.2 million tons instead of the 600,000 initially foreseen, and second, by proposing to change thenature of the final product in order to reduce cost. Despite this progress, the economic viabilityof the project remains to be clearly demonstrated.

8.3 Given the higher revised cost estimates and a changing climate in economic policyin Madagascar in favor of the private sector, the Bank insisted that the State should reduce itsdirect financial participation in the project. The Bank also insisted as well that the initial legalunincorporated status of the Joint Venture should be changed to "incorporated" to facilitateproject financing by lenders and possible participation of other private investors. The finalagreement between OMNIS and QIT, still to be ratified by the Government of Madagascar,reflects these two important objectives: the Joint Venture is to be incorporated under Malagasylaw and QIT share is to be increased to 80%.

8.4 The Bank played also an important positive role in helping draft terms of referencefor the EIAS, ensuring that proper attention was given to mitigating the physical impact of miningon the fragile ecosystem of the project area and of assessing the socio-economic effects of theproject in the inhabitants of the region. These objectives were achieved and the EIAS final reportis considered to be a path setting model.

9. Borrower Performance

9.1 As it did during previous Bank financed projects project (Petroleum ExplorationPromotion Project, Credit 1016-MAG and Tsimiroro Heavy Oil Exploration Project, Credit 1298-Mag), OMNIS vigorously pursued the implementation of this project. With the assistance of theconsultants financed under the Credit, OMNIS was an active partner in the Joint Venture. Attimes the insistence by OMNIS that they should maintain an active role in project managementfollowing mine development was counter-productive to advancement of the contractualarrangements with their partners. Further, the insistence of OMNIS that all communications

8

between QIT/QMM and the Bank had to be done through OMNIS, while not constituting anunsurmountable obstacle, was not helpful for project implementation.

10. Project Relationships

10.1 Relations between Bank staff at all levels with OMNIS and QIT officials wereexcellent. Besides Bank missions to Madagascar, several discussion meetings were held inWashington and in QIT's offices in Montreal. A spirit of cooperation prevailed among theparties at all times, searching to define an economically viable project and an ownership structurewith a majority share for the private investor.

11. Consulting Services

11.1 The Credit financed three technical assistance contracts for OMNIS. They relatedto (a) the assessment of the mining and market potential of the Sakoa coalfield; (b) legalassistance for the ongoing negotiations with QIT; and (c) advice regarding market prospects andprice structures for ilmenite and associated minerals. The Bank was actively involved insupervision of the consultants and overall their performance can be rated satisfactory. Morespecifically the consultants working on the Sakoa coalfield development did a good job withregard to technology transfer and training aspects of the project. Personnel of OMNIS gaineda much better understanding of the requirements which have to be met if one is to establish aviable operating coal mine. The legal assistance, while undoubtedly of value to OMNIS in theircomplex negotiations with QIT, is more difficult to assess in view of the failure of the parties toreach agreement on many of the topics under consideration. While it might have been possibleto advance the project further had OMNIS and their consultant been more positive in theirnegotiations, the continued trust in the consultant demonstrated by OMNIS would suggest thatlegal support received was needed and satisfactory. The assistance provided on the ilmenitemarket provided a valuable input to negotiations between QIT and OMNIS which enabled OMNISto establish a fair transfer price for ilmenite exported by the joint venture to QIT. This was oneof the critical steps for both OMNIS and the Government as it provided a basis to analyzepotential benefits for both parties.

12. Lessons Learned

12.1 The lessons learned from this project primarily relate to the interaction between theBank and a private shareholder who is a partner with a beneficiary of an IDA Credit. Whileevery effort was made by the Bank to inform QIT, the private partner and project manager, ofBank procurement guidelines and generally acceptable economic parameters for the project, ittook considerable time for QIT to appreciate the realities of working with the Bank. With regardto procurement, QIT elected to forego IDA funds rather than undertake what they consideredarduous and time consuming procedures. This suggests that the possibility of other procurementprocedures consistent with Bank guidelines but more suited to private sector venture should havebeen explored such as sole source procurement in the case where the beneficiary's private partnerhas a long established relationship with a consulting group and/or supplier.

12.2 In summary, there is a very important role for the Bank in stimulating private sectorinvestment, but it is critically important to realize that private sector investors are far removedfrom Bank procedures. While Bank staff went to great lengths to explain the requirements toQIT, a cooperative partner, there was also much to learn about private sector practices by bothOMNIS and the Bank.

9


MADAGASCAR


PART II: REVIEW OF THE PROJECT FROM THE BORROWER'S PERSPECTIVE

1. Acknowledgements

1.1 The National Military Office for Strategic Industries (OMNIS), representing theGovernment in the Joint Venture Agreement with the Canadian company QIT for the exploration,development and marketing of mineral sands in Madagascar, wishes to express its sincere thanksto the International Development Association for providing part of the funding required for theengineering phase of the ilmenite development study and for the advice and guidance it has givenOMNIS in the preparation of the project.

1.2 We wish to express our special appreciation to the World Bank's Industry andEnergy Division for its active contribution and would like to acknowledge the efforts andexpertise of all the foreign consultants who have assisted OMNIS over the course of the project.

2. Introduction

2.1 In its efforts to revive the national economy, the Government of the Republic ofMadagascar has assigned priority to the development and exploitation of its mineral resources.One of its aims is to promote projects that will generate foreign exchange, such as the ilmeniteproject.

2.2 The International Development Association was requested by the Government ofMadagascar to provide financial assistance for an engineering study in connection with theexploitation and marketing of mineral sands in Madagascar.

2.3 The Credit Agreement, in the amount of SDR 6.2 million, was signed by the twoparties on July 18, 1988.

2.4 OMNIS, the Government's executing agency for the promotion of mining projects,has prepared the present report, offering a retrospective analysis of project implementation, aswell as an evaluation of its own role and of that of the Bank during project implementation andan assessment of the relationship established with the Bank.

3. General Evaluation

3.1 The credit was efficiently prepared and put in place, thanks to OMNIS' experiencewith the earlier IDA credits (1016-MAG and 1298-MAG) granted for petroleum projects, and tothe determination of the Bank's experts and the Malagasy officials to ensure the successful

10

implementation of a project of the scale proposed, a project expected to serve as a driving forcefor private investment in Madagascar's mining sector.

3.2 The fact that OMNIS, as the government agency responsible for the promotion ofmining projects, applied for an IDA credit to finance part of the engineering and feasibilitystudies phase bears witness to its determination to expedite implementation of the ilmenite projectand to arrive as soon as possible at the production and export phase, initially scheduled for1992/93.

3.3 Under the Joint Venture Agreement signed by OMNIS and QIT-Fer and ratified bythe National Assembly, the Government was not to provide financial support for the ilmeniteproject until the parties have decided to proceed with the investment.

3.4 The granting of the credit by the Bank and the joint preparation of the creditutilization program bear witness to the mutual confidence of the parties to implement the projectwithin schedule.

3.5 However, the objectives set at the time of project appraisal have not all beenachieved, for the following reasons:

- The assumption of the infrastructure financing by the promoters, asrecommended by the Bank, heightened the difficulty of finding an attractivealternative for project development. A 51 % participation by OMNIS in theinvestment proved too high for the Government's finances. Especially sincethe IMF, like the World Bank, had recommended a ceiling on Governmentdebt.

- This financing problem led to the lengthening of project implementation anddelays in the utilization of Credit 1928-MAG.

- With an unstable titanium pigment market different options were studied toimprove the profitability of the ilmenite project.

- The private partner's reports indicated that the ilmenite project is highlycapital-intensive, and that operating costs have little effect on its profitability.Being uncertain as to the volume of capital required, the parties wereendlessly involved in analyses of different development scenarios.

- This unsettled situation has been perpetuated by the private partner, who hasheld discussions with OMNIS and the Bank as and when it pleases.

- QIT felt that the ilmenite project missed a "window of opportunity"anticipated for 1992/93, and it has maintained an indecisive approach to theplanning of project-related activities. Pending the possible appearance ofanother "window of opportunity" in 1996/97, it has proceeded to strengthenwith operations of Richard Bay/Minerals (South Africa).

- Moreover, the private partner wanted too many concessions from theGovernment. While retaining the benefits accorded by the Joint VentureAgreement, it also insisted that the project deviates from almost all current

laws and regulations concerning investment, taxation and the use of publicproperty.

- One of QIT's demands was that it be guaranteed access to additional areasfor exploration as strategic reserve.

- The endless negotiations and discussions with the private partner held up theprogress of the project.

- The change of ownership of QIT, from British Petroleum to Rio Tinto Zinc,proved to be quite an upheaval on the ilmenite project's strategy andimplementation.

- This change, and the sensitivity of international opinion to issues ofenvironmental preservation and conservation, resulted in the project takingon a larger environmental dimension than initially planned.

- An evaluation of the environmental impacts and the obtaining of Governmentauthorizations became prerequisites for QIT's launching of the engineeringstudies for the project.

- ''The political transition in Madagascar represented a case of force majeurebeyond the control of either party, and as such slowed down the progress ofthe project.

3.6 The private partner showed no real interest in the funds provided for the project byIDA, and instead used its own funds, particularly in order to finance the Environmental ImpactStudy (EIAS).

3.7 QIT was determined to postpone some of the works planned for Phase III of theCredit Agreement. QIT made the carrying out of the basic engineering studies conditional to theagreement among the parties on the new structure of the ilmenite project and on the developmentplan.

4. Prospects

4.1 In light of the financing constraints, OMNIS had agreed to reduce its participationand to revise the structure of the ilmenite project in order to achieve rapid consensus among theparties and get the project moving. It has recently agreed to a 20% share.

4.2 The Government has never minimized constructive proposals, but intends to limitthe incessant requests tor conlcessions on its rights, which have turned into demands on the partof the investors.

4.3 Despite a global context favorable to private initiative, free enterprise andgovernment divestiture from the produLctive sector, investors are required to act within the currentlegal and regulatory tramework.

4.4 Unfortunately tor Madagascar, the various postponements have had adverse effectson the project with world market, especially since similar projects designed well after the

12

Malagasy project have come into being in the same region (NAMACKWA Project in SouthAfrica, and KENMARE in Mozambique), with partners of considerable standing in miningcircles, not forgetting RTZ's ongoing Richard Bay operation.

4.5 The execution of an Environmental Impact Assessment Study on such a large scalerepresents a first for Madagascar, and will serve as a precedent for all major projects.

5. Borrower's Performance

5.1 With the experience gained with the preceding IDA credits, OMNIS was able to putthe credit in place within a relatively short period.

5.2 For project implementation and follow up, OMNIS provided all necessary andproperly qualified human resources.

5.3 With OMNIS training courses, seminars and exposure to international negotiations,employees were able to consolidate their technical knowledge and professional skills.

5.4 OMNIS was unable to assess the overall return on the ilmenite project, which wouldhave included processing of the ilmenite and marketing of its co-products by QIT.

6. Bank's Performance

6. 1 The Bank gave OMNIS all necessary advice concerning project implementation.

6.2 The Bank was understanding for the parties and of the context of the ilmeniteproject, accepting requests for extensions and for changes in budget allocations.

6.3 However, the Bank's procedures were too rigid and represented a handicap to aprivate partner attempting to utilize the credit.

6.4 The opening of a Special Account, into which the credit proceeds were regularlydeposited and for which the Borrower was accountable, facilitated utilization of the funds fromthe credit. However, there was a time lag in the transfer of the initial deposit.

6.5 The World Bank also took action to improve procedures, offering seminars ondisbursements to representatives of the executing agencies.

6.6 The fact that it was the Bank's intention to make this ilmenite project into a pilotproject designed to revive private investment in Madagascar actually held up the project'sprogress, since it meant the Malagasy side had to be extremely careful in its approach and in thedecisions it needed to take.

6.7 The Bank's decision to close the credit came at a crucial moment, despite the factthat the parties wanted to continue with the project.

6.8 Nevertheless, OMNIS appreciated the fact that the Bank had given it the opportunityto upgrade its facilities, notably through the purchase of computer equipment for the purpose ofimproving its project monitoring capabilities.

13

7. Relationship between Borrower and Bank

7.1 The relations between OMNIS/QIT and the Bank were satisfactory, both during thesupervision and evaluation missions in Madagascar, on the occasion of meetings between theparties, and during project implementation.

7.2 Nevertheless, it sometimes seemed during negotiations that the Bank was somewhatmore sensitive to the viewpoint of the private partner than to that of OMNIS, which often meantthat OMNIS was forced to revise its positions.

7.3 OMNIS, as representative of the Borrower's Government, to which it is solelyaccountable, is the Bank's principal contact for matters regarding the credit, and it wouldtherefore have preferred that QIT not approach the Bank directly. This did not prevent QIT fromhaving regular contacts with the Bank.

8. Performance of Consultants and Contractors

8.1 The services of the consultants working with OMNIS were on the wholesatisfactory.

8.2 In particular, the assistance of the legal consultant enabled OMNIS to obtainexperience in the legal area and in the field of international mining contract negotiations.

8.3 However, the Stolberg consultants encountered various difficulties, due principallyto QIT's failure to provide them with certain information.

8.4 Also, the performance of the various contractors was satisfactory, reflecting therigor required of the members of their profession.

9. OMNIS' Comments on the Bank's Part of the Report

A. Background

9.1 The purpose of having OMNIS participate in the financing of the engineering phasewas to expedite project implementation, even if this was not required under the Joint VentureAgreement.

B. Project Implementation

9.2 In addition to financing the technical assistance consultants, the credit also financedthe purchase of such items as spare parts for the drilling equipment, laboratory equipment, rollingstock and computer equipment, as well as the provision of training for OMNIS project monitoringstaff.

C. Borrower Performance

9.3 OMNIS does not share the Bank's viewpoint that its insistence on maintaining anactive role in project management following mine development was counter-productive toadvancement of the contractual arrangements with the partners.

14

9.4 OMNIS, as a Government agency, is bound to protect the Government's interestsby exerting a certain control over project execution. With a small participation, OMNIS felt itwas reasonable to have a clause to protect minority shareholders, to avoid dilution of its shareduring the investment decision process. In our opinion, this does not in any way implyinterference in project management, which remains entirely under the responsibility of theoperator, QMM.

D. Statistical Information

9.5 Cumulative Estimated and Actual Disbursements (Section 3).

9.6 For 1993, a single replenishment of the Special Account took place, in theamount of US$506,658.

9.7 Thus the figure of 3.33, representing the total amount disbursed from the creditaccount, should be replaced by 0.50 for the year 1993.

9.8 An error of calculation was also detected for 1991 concerning the 2.83 percentage,which should read 11.24%.

9.9 Project cost and financing plan (Sections)

9.10 We should like to have some explanation of the figures appearing under headings7, 8 and 9 of the Project Costs table in the column "Actual Foreign," since, according to ourrecords, only US$1.72 million was spent out of the initial US$8.55 million, while US$3.33 wasdisbursed out of the principal credit account.

15


MADAGASCAR


PART III: STATISTICAL INFORMATION

1. Related Bank Loans and/or Credits

There are no other Credits related to the Credit.

2. Proiect Timetable

Date Date DateItem Planned Revised Actual

Identification Feb. '87 Feb. '87 Rb. '87Preparation July '87 July '87 afy '87Appraisal Mission Feb. '88 Feb. '88 Rb. '88Credit Negotiations May '88 May '88 MELy '88Board Approval June '88 July '88 Jrne '88Credit Signature July '88 Aug. '88 JUly '88Credit Effectiveness Oct. '88 Dec. '88 Dac. '88Credit Closing June '91 June '92 j1 '93Credit Completion Dec. '90 Dec. '92 at. '93

3. Cumulative Estimated and Actual Disbursements

Bank's Fiscal Year 1989 1990 1991 1992 1993L%4(USS '000)

Appraisal Estimate 4.45 4.10 7.03 8.55 --Actual 2.03 - 0.79 - 3.33*-Actual as % of Estimate 46.0 - 2.82 - --

* Some additional disbursement expected through October 31, 1993.

16

4. Proiect Implementation

Indicators Appraisal Estimate Actual

(a) Completion of December 1988 Completeinvestigations,metallurgical andEnvironmental ImpactAssessment (on theNatural Environment) andupdate of prefeasibilityestimate and economics

Completion of EIA on the Partially completeSociological Environment (50%)and EIS October 1993

(b) Completion of basic October 1989 Deferredengineering

(c) Approval to proceed with March 1990 Not expected in neardetailed design and futureconstruction

(d) Initial ilmenite November 1992 Not expected prior toproduction 1996 at earliest

(d) 75% production capacity April 1994 Not expected prior toachieved 1999/2000 at earliest

Project Costs and Financing Plan

(A) Project Costs 1/(USS million)

Appraisal Estimate Actual

ITEM Local Foreign Total Local Foreign Total

1. Basic Engineering: 6.3 6.3Wet Plant/Dry PlantDock/HarborDredgePower PlantInfrastructure

2. Complementary Drilling and Orebody 0.2 0.9 1.1Delineation

3. Logistical Support Activities 0.2 0.5 0.7

4. Market Studies - 0.2 0.2

5. Product/Pilot Plant Testwork - 0.3 0.3

6. Heavy Equipment and 0.3 3.2 3.5Infrastructure and Construction

Base Cost 0.7 11.4 12.1

Physical Contingencies 0.1 1.7 1.8

Price Contingencies - 0.6 0.6

Joint-Venture Project Cost 0.8 13.7 14.5

7. Technical Assistance OMNIS - 0.5 0.5 - 2.38 2.38

8. OMNIS Internal Project Cost 0.2 0.2 0.4 0.2 0.20 0.40

9. Refinancing of PPF - 0.75 0.75 - 0.75 0.75

Total OMNIS Cost 0.2 1.45 1.65

Total Project Cost 1.0 15.15 16.15

NOTE: Actuat Costs for Items 1-6 to extent implemented wholly borne by OIT. Information not available.

1/ Exclusive of taxes and duties.

(B) Financing Plan

Appraisal Estimate Actuat

ITEM Local Foreign Total Local Foreign Total

OMNIS 0.2 - 0.2 0.2 - 0.2

QIT 0.8 6.6 7.4 Unknown Unknown Unknown

IDA - 8.55 8.55 - 3.33 3.33

Total 1.0 15.15 16.15

6. Project Results

A. Direct Benefits

The direct benefits of job creation, revenue increases andpoverty alleviation to be indirectly supported through thecredit have been delayed. oo

B. Economic Impact

No economic rate of return was calculated in the President'sReport.

C. Financial Impact

No financial rate of return was calculated in thePresident's Report.

D. Studies

A study of the ilmenite market was completed.

19

7. Status of Covenants

Credit Agreement Status

Section 2.01(b). The Borrower shall open In complianceand maintain in dollars a special accountin its Central Bank for the purposes ofthe Project.

Project Agreement

Section 4.01 (a). OMNIS shall maintain In compliancerecords and accounts in accordance withsound accounting practices.

(b)(i). OMNIS shall have its records, In compliance.and the records of the Project, auditedin accordance with appropriate auditingprinciples consistently applied byindependent auditors acceptable to theAssociation.

(b)(ii). OMNIS shall furnish to the In complianceAssociation as soon as available, butin any case not later than six monthsafter the end of such year:(A) certified copies of its financialstatements for such audit by said auditors.

20

8. Use or Bank Resources

(A) Staff Inputs (Staffweeks)

Stage ofProject Cycle Planned Revised Final

Through Appraisal 60 50 55

Appraisal throughBoard Approval 30 20 10.2

Board Approval throughEffectiveness 10 8 5

Supervision 68 30 20

PCR 8 8 8

(B) Missions

Stage of Days Number StaffProject Cycle Date in Field of persons Days

Through Appraisal Feb '87 10 2 20May '87 2* 3 6Dec. '87 2** 2 4

Appraisal Jan. '88 8 2 16

Board approval throughEffectiveness Oct. '88 6 3 18

Nov. '89 2* 3 6

Supervision Jan. '89 6 1 6June '89 3* 3 9June '89 8 2 16Aug. '89 2** 2 14July '90 2* 3 13Nov. '90 6 2 12Oct. '91 2* 3 13May '92 3* 3 9Apr. '93 2* 3 6

* Visits of OMNIS and QIT delegations to Washington, D.C.* Bank mission to meetings in Montreal, Canada.

21 ANNEX


MADAGASCAR


Specific Comments by QIT on Part I of the Report

2. Background

It may be helpful for the readers of this report if a bit more project specific backgroundwas developed with respect to the manner in which marketing issues unfolded in 1989/90 for thetwo key TiO2 products namely ilmenite and rutile.

I think it is important that one should recognize that the proposed scale of the initialoperations (some 600,000 MTPA of ilmenite and 30,000 MTPA of rutile) represent nearly 10%of the world annual consumption of TiO2 minerals and as such requires not only the backing ofa substantial project investor to mount the project, but also requires a substantial marketopportunity to meet revenue stream objectives needed to service project loans and shareholderinvestments especially in the first critical years of development of the project. Two additionalparagraphs proposed as follows might be considered to cover these points:

2.10 The project concept is for a major world scale undertaking within the context ofmining and production of Ti0A industrial minerals. The contemplated scale wouldrepresent some 8-10 % of the world supply for TiO2 minerals. This large scale forinitial market entry is considered a necessity in order to generate sufficientproduct sales revenues and financial cash flows to cover the significant investmentneeded for project infrastructures and other costs associated with this projectlocated in a largely underdeveloped, environmentally sensitive area ofMadagascar.

2.11 At the time the Credit was initiated in 1988, it was stated by QIT (and understoodby the Bank?) that the project was attempting to meet a very specific window ofmarket opportunity in the 1990/92 time period. QIT for its part was willing topurchase all the ilmenite produced at market related prices and as this representedover 60% of the prospective revenue stream from the project, these ilmenitepurchase contracts would have represented an important component of the projectlenders' security packages. In the event, the project, for a variety of factorsdescribed below, did not materialize as hoped in 1988 and QIT in fact had to alterits development strategy by expanding an alternative facility to meet the marketopportunity it had identified.

22

5. Project Inplementation

In line with the above, QIT suggests that a new paragraph be inserted between 5.6 and5.7 of the current text as follows:

"In light of the deteriorating economic returns from those initially envisioned, theincreasing capital risk and the proposed restructuring of the project legal and ownershipstatus, it was recognized by mid-1989 by both the Bank and the project sponsors, thatexpenditures under Categories 1 and 2 of the Credit MAG 1928 would be inappropriatepending resolution of project legal structure issues between QIT, OMNIS, and theGovemment. "

6. Project Results

In paragraph 6.1, perhaps mention could be made that CIDA provided an importantamount of funding assistance for QIT's continuing EIAS Studies.

Also in paragraph 6.1, QIT did in fact during 1989 revise the project plan such thatvarious project activities were brought to a logical conclusion at what might be described apreliminary engineering level of definition. The sentence below would reflect this status andmight be added to paragraph 6.1.

"QIT also completed at its own expense during 1989/90 metallurgical, orebodydelineation and engineering study activities needed to complete a preliminary designassessment of the project."

8. Bank Performance

The emphasis of QIT's reluctance to accept Bank procedures really were related to theneed to shorten decision making chains in order to meet a tight schedule imposed on the Projectby the market opportunity identified by QIT. QIT regards the checks and balances required bythe Bank as being essentially the same as its own intemal procedures. The insistence by OMNISand the Government of Madagascar that they also exercise a degree of control just lengthenedthe time that would be needed to effect contractual commitments for the project under the Credit.Also, QIT felt such procedures were inconsistent with the implied performance responsibilityplaced on the Operator (QMM) to complete the Project.

It is clear that any future financing arrangement between QIT/OMNIS/Government ofMadagascar and the Bank will need to specifically address this issue of delegation of authority

23

and once this is established, set project schedules and apportion performance responsibility forproject completion accordingly.

By way of a footnote, QIT did utilize a CIDA grant in the amount of US $ 2.2 millionduring the 1989/90 period in question. CIDA's procedures for dispersal are very similar tothose of the Bank's but of course by that time, it was evident to QIT the market pressures onthe Madagascar project were diminished and this, together with shorter lines of delegatedauthority and a clear definition of QIT responsibility for performance, resulted in a successfulrelationship with CIDA. All this is to say QIT per se is not resistive to Bank procedures butthe learning experience from our interactions involving the 1988 Credit and ImplementationAgreements is that QIT will insist on better definition of the respective roles of the parties thenext time around. I'm sure the Bank would also support this.

12. Lessons Learned

The statement "QIT elected to forego IDA funds rather than undertake what theyconsidered arduous and time consuming procedures" perhaps is an overstatement in light of mycomments above.

Rather the Bank might consider the following as alternative text:

"QIT elected to forego IDA funds in light of the imprecise definition of contractualresponsibility for performance as represented in the QIT/OMNIS/QMM ImplementationAgreement, the absence of satisfactory delegation of authority from OMNIS and theGovernment of Madagascar and finally, the radically charged project circumstances thatwere evident by mid 1989.

Statistical Information Item 4

A reformulated Table 4 is suggested overleaf.

24

4. Project Implementation

Indicators Appraisal Estimate Actual

(a) Completion of December 1988 Completeinvestigations,metallurgical andEnvironmentalImpact Assessment(on the NaturalEnvironment) andupdate of pre-feasibility estimateand economics

Completion of EIA Partially completeon the Sociological (50%)Environment and EIS October 1993

(b) Completion of basic October 1989 Deferredengineering

(c) Approval to proceed March 1990 Not expected in nearwith detailed design futureand construction

(d) Initial ilmenite November 1992 Not expected prior toproduction 1998 at earliest

(e) 75% production April 1994 Not expected prior tocapacity achieved 1999/2000 at earliest

25


MADAGASCAR

ILN\ENITE MIMNG ENGINEERING PROJECT(Credit 1928-MAG)

QIT Comments on the term Environmental hnpact Study (EIS)

In reading the above project completion report there may be some confusion as to theactual level of completeness of the project's Environmental Reviews. QIT foresees three stagesof Environmental reviews on, the project, namely

1. Completion of Environmental Impact Assessment Studies by the project proponent(QMM). So-called EIAS.

2. Regulatory reviews and calls for comments and preparation of a CommentsReport by the project proponent.

3. Completion of the final Environmental Impact Statement (EIS) for the project forfinal approval by the regulatory authorities in Madagascar.

QIT has completed to date an EIAS on the Natural Environment. The EIAS on theSocio-Economic Environment remains to be completed as does steps two and three in the fullprocess leading to an EIS. This is because the regulatory framework for Step 2 is only in theformative stage in Madagascar for major investment projects and QIT was reluctant to proceedwith the EIAS on the Socio-Economic Environment until a regulatory review process isestablished. In this way it is felt that any public reviews which must be there nature take placein advancing the Socio-Economic studies for the project would be conducted in the widerframework of a full public review process for the project.

The Bank reports refer to QIT having completed an EIS. It is suggested that in generalterms reference should be made to QIT having completed the EIAS on the Natural Environment,not an EIS for the project. A marked up copy of the full text is attached with specific notationsfor references to the terms EIS/EIAS.

Documents

World Bank Document of The World Bank FOR OFFICLAL USiE ONLY Report No. 12790 PROJECT COMPLETION REPORT MADAGASCAR ILHENITE MINING ENGINEERING PROJECT (CREDIT 1928-MAG) FEBRUARY 25,