Document ofThe World Bank

Report No: 20266-PNG

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$10 MILLION EQUIVALENT

TO THE

INDEPENDENT STATE OF PAPUA NEW GUINEA

FOR

A MINING SECTOR INSTITUTIONAL STRENGTHENINGTECHNICAL ASSISTANCE PROJECT

May 5, 2000

Energy and Mining Sector Development UnitEast Asia and Pacific Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 2, 2000)

Currency Unit = Kina1 Kina = US$ 0.39

US$ 1.00 = 2.56 Kina

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyCQ Consultant QualificationsDoM Department of MiningDoNPM Department of National Planning and MonitoringFMH Financial Management HandbookFMS Financial Management SystemGIS Geological Information SystemICB International Competitive BiddingIRC Internal Revenue CommissionIS International ShoppingLCS Least-Cost SelectionMMAJ Metal Mining Agency of JapanNBF Non-Bank FinanceNGOs Non-Govermnental OrganizationsNS National ShoppingOEC Office of Enviromnental and ConservationPBDT Procurement and Disbursement TargetPCIU Project Co-ordination and Implementation UnitPCD Project Concept DocumentPEAK Porgera Environmental Advisory KomitiPMR Project Management ReportPNG Papua New GuineaPOM Procurement Operations ManualQCBS Quality- and Cost-Based SelectionQBS Quality-Based SelectionSBD Standard Bidding DocumentsSFB Selection Under a Fixed BudgetTA Technical Assistance

Vice President: Jemal-ul-din KassumCountry Manager/Director: Klaus Rohland

Sector Director: Yoshihiko SumiTask Team Leader/Task Manager: John Strongman

MINING SECTOR INSTITUTIONAL STRENGTHENING TA

CONTENTS

Page

A. Project Development Objective 2

1. Project development objective 22. Key performance indicators 2

B. Strategic Context 3

1. Sector-related Country Assistance Strategy (CAS) goal supported 3by the project 3

2. Main sector issues and Government strategy 43. Sector issues to be addressed by the project and strategic choices 7

C. Project Description Summary 7

1. Project components 72. Key policy and institutional reforms supported by the project 93. Benefits and target population 104. Institutional and implementation arrangements 10

D. Project Rationale 12

1. Project alternative considered and reasons for rejection 122. Major related projects financed by the Bank and other development

agencies 123. Lessons learned and reflected in proposed project design 134. Indications of borrower commitment and ownership 145. Value added of Bank support in this project 14

E. Summary Project Analysis 14

1. Economic 142. Financial 153. Technical 154. Institutional 165. Environmental 166. Social 187. Safeguard Policy 19

CONTENTS (cont'd)

PageF. Sustainability and Risks 19

1. Sustainability 192. Critical risks 203. Possible controversial aspects 20

G. Main Loan Conditions 20

1. Effectiveness Condition 202. Other 21

H. Readiness for Implementation 22

I. Compliance with Bank Policies 22

Annexes

Annex 1: Project Design Surmmary 23Annex 2: Project Description 27Annex 3: Estimated Project Costs 33Annex 4: Cost-Effectiveness Analysis Summary 35Annex 5: Financial Summary 36Annex 6: Procurement Arrangements 37Annex 7: Disbursement, Project Financial Management, Financial Reporting

and Monitoring, and Implementation Planning Arrangements 45Annex 8: Environmental and Social Issues in the Mining Sector 52Annex 9: Project Processing Schedule 59Annex 10: Documents in the Project File 60Annex 11: Statement of Loans and Credits 61Annex 12: Country at a Glance 63

MAP IBRD 30894

Papua New GuineaMining Sector Institutional Strengthening Technical Assistance Project

Project Appraisal DocumentEast Asia and Pacific Region

Date: May 5, 2000 Team Leader: John Strongman

Country Manager/Director: Klaus Rohland Sector Manager/Director: Yoshihiko SumiProject ID: P060330 Sector(s): NN - Mining & Other ExtractiveLending Instrument: Technical Assistance Loan (TAL) Theme(s): Institutional Strengthening

Poverty Targeted Intervention: Yes

Project Financing Data:[X] Loan [l Credit [] Grant [] Guarantee [] Other (Specify)

For Loans/Credits/Others:Amount (US$m): 10.0

Proposed Terms: [ To Be Defined [ Multicurrency [X] Single Currency Fixed Spread

[] Standard Variable [] Fixed [X] LIBOR BasedGrace period (years): 5Years to maturity: 20Commitment fee: 0.85% of the undisbursed amount for the first four years and 0.75%

thereafterService charge: 0.0%Front end fee on Bank loan: 1.00% capitalized

Fi~~~ia~~ci~~,g .lu -or -~ a l - . ;n Total B.Government 1.53 0.00 1.53IBRD 3.38 6.62 10.00IDAOther (specify)Total: 4.91 6.62 11.53Borrower: Independent State of Papua New GuineaGuarantor: noneResponsible agency: Department of Mining and Internal Revenue CommissionAddress: Department of Mining (DoM)Private Mail Bag, Port Moresby, N.C.D. Papua New GuineaContact Person: Mr. Graeme Hancock, Director of Mining DivisionTel: +675-322-7624 Fax: +675-321-3701 Email: graeme hancock(&,mineral.gov.pgAddress: Internal Revenue Commission (IRC)P.O. Box 777 Port Moresby, Papua New GuineaContact Person: Mr. Iru V. Loi, Assistant CommissionerTel: +675-322-6870 Fax: +675-321-4002 Email: none

200DAnnual 1.0 3.0 3.0 2.0 1.0

Cumulative 1.0 4.0 7.0 9.0 10.0Project implementation period: July 1, 2000 - June 30, 2005 (5 years)Expected effectiveness date: 09/01/2000 Expected closing date: 12/31/2005

OCS PAD F.m Rel Ma[, =20

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The main objective of the proposed project is to strengthen institutional capacity within theDepartment of Mining (DoM) and the Internal Revenue Commission (IRC) to administer andregulate exploration and mining projects and to thereby contribute to socially and environmentallysustainable private mineral investment in the Papua New Guinea (PNG) mining sector.

The project will provide technical assistance to:

* review and develop mineral policy and regulations;* improve the mining development contract;* strengthen the interface between public and private mining sectors, NGOs, and local

communities;* review the organizational structure of DoM;e conduct technical and safety field audits of exploration and mining projects;* improve environmental compliance and sustainable development benefits from mining;* address the issue of mine closure and its impact on local communities and the broader macro

economy;* improve mine safety and investigate accidents;* improve the availability of geological data for potential mineral investors;* conduct tax audits of mining and petroleum companies; and* establish effective inter-relationships between different government agencies regarding tax

collection, environment management, and so forth.

If successfully implemented, the project will assist the Government of PNG to:

- attract more high risk exploration and mining development capital expenditures frominternational and domestic private investors;

* improve the benefits to the nation especially through increased employment and skills transfersespecially to rural areas;

* improve environmental and social performance of mining operations;* achieve safer exploration and mining operations; and* increase tax collections at a time when revenue collection is a critical country priority.

Mining sector experience could be especially helpful for the country in learning how to investigate,audit, regulate, manage, and promote other natural resources related sectors. Therefore, valuablelessons for other sectors, especially, logging, and fisheries, are also expected.

2. Key performance indicators: (see Annex 1)

1) Strengthen present mineral policy to maintain and increase private investment andexports:

* increased annual investments in exploration and in new mining projects relativeto 1999 level;

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* increased annual mineral exports relative to 1999 level;* number of mineral spin-off businesses;* enactment of legislation on offshore mining, mining safety, and revision of the

Mining Act 1992 and establishment of the Mineral Resources Authority;* preparation of a revised standard mining contract; and* completion of eight seminars or workshops on environmental, engineering,

social and development issues associated with mining operations.

2) Increase capacity of DoM/IRC to investigate, audit, regulate and manage the miningindustry:

* new social impact assessment guidelines for mining;* new social monitoring guidelines for mining;* number of annual DoM full technical and mine safety audits for each mining

operation (five operations at present);* number of IRC full tax audits on mining and petroleum companies resulting in

increased related revenue;* environmental and social practice and compliance statistics;* mine safety statistics;* mineral-related taxes collected; and* number of geological thematic maps issued.

The number of private investors involved in exploration and mining is expected to increase, andannual investments for exploration are expected to increase several fold over the next five to tenyears. However, little improvement is expected in year 2000 regarding the performance indicatorsrelating to annual mineral exports and investments as a result of the current downturn in globalcommodity markets and because of the lead time to develop new projects. As the project willfocus on strengthening the institutional capacity of DoM to administer the industry and of IRC toaudit mining companies, the govermment will be better able to (a) support the revitalization of theprivate industry led mining sector; (b) ensure that mining contributes to sustainable development,in particular for rural communities in PNG; and (c) increase tax revenues from mining projects.The country, therefore, should be in a position to more fully benefit from mining as a result of theproject.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project:(see Annex 1)

Document number: 19590-PNG Date of latest CAS discussion:10/21/99

The country assistance strategy (CAS) for Papua New Guinea (PNG) aims to support a concertedeffort to reduce poverty and improve the quality of life of the people in PNG. The primaryobjective for this CAS period is to assist PNG in improving the foundation for a capable state thatcan be responsive to its people by addressing human and economic development challenges in atransparent and accountable manner. The CAS objective will be pursued through the

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implementation of an operational strategy that will support: a) improvements in the governanceframework for sustainable development, and b) enhanced rural development. The need to focus ongovernance issues is overwhelming. The basic public sector operations intended to provideservices to rural areas are not working properly. Poor services delivery is not due to a lack of

government financial resources, but is a direct result of public sector mismanagement, pooraccountability mechanisms and unwillingness to make service delivery a priority in practice.Improved governance is at the core of the service delivery challenge and it must be pursuedthrough a judicious set of policy and public sector reforms. In its effort to regain control of theeconomy and reestablish growth, PNG will face challenges to maintain a transparent fiscaldiscipline for the remainder for 1999 and 2000 budget, and to prevent further deterioration of thefiscal situation that could spill over into the financial sector.

The proposed project supports the following CAS objectives:

(i) Improvements in the Governance Framework for Sustainable Development

The government realizes that insufficient institutional capacity for the mining sector is the majorobstacle to attracting new private mineral investment and to ensuring that mining takes place in asustainable manner. The proposed assistance will strengthen the capacity of the relevantgovernment departments to

- attract, regulate and monitor new private investment (including improving mining licensingarrangements, reducing a backlog of technical and safety audits, and making available moregeological information to potential investors);

- improve the sustainability of mining activities in PNG (including supporting government totake a more pro active role regarding improving environmental and social aspects of miningand building greater interaction between key stakeholders).

(ii) Enhanced Rural development

Mining typically takes place in rural areas and the proposed project will help improve the transferof benefits of mining development to local communities especially in rural areas. The projectshould also help increase fiscal receipts from the minerals sector which will better improve thegovernment's budgetary position which should permit more support for rural development.

2. Main sector issues and Government strategy:

Background: Papua New Guinea has favorable geology which is located at the eastern extensionof mineral belt of the Indonesian archipelago. The country has tremendous potential for copper,gold, and nickel. Following the discovery and development of the Bougainville copper project inthe mid-1960s, the countrybenefited from an active mineral exploration and mining industry. Thisled to the discovery of the Ok Tedi copper and gold deposit and the Frieda copper deposit soonafter Bougainville in the late 1960s. In the 1970s, the target of mineral exploration shifted to gold.This led to active exploration program resulting in discoveries in many areas including Porgera,Misima, and Hidden Valley. The exploration success continued up until the late 1980s with thediscovery of Lihir, Wafi, Simberi, Tolukuma, Mt Sinivit, and Mt Kare.

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Four world class mines - Ok Tedi copper and gold mine and the Porgera, Misima and Lihir goldmines; plus a small gold mine at Tolukuma were subsequently developed in 1980s and 1990s andare presently in production. Mining Development Contracts have been signed by the investors foreach project. These include social and environmental protection plans which are generally welldesigned and implemented. There are also several mechanized alluvial gold mines and around20,000 artisan level alluvial gold operations.

All of these achievements, however, had occurred at a time when the government institutionalcapacity for mining was reasonably good. However, as the institutional capacity of thegovernment, both DoM and IRC today, has eroded over the past ten years, DoM and IRC lack astrong presence at the mining sites. The Govermment, therefore, is presently facing difficulty inattracting new mining investment into the country and ensuring the maximum contribution to thenational economy. There were three main constraints in the Government related to:

* a lack of strategy on new topics (e.g., sustainability, small scale mining, offshore mining, andmine closure);

• insufficient capacity in public mining institutions (especially DoM) to take a proactive roleregarding emerging social and environmental issues and take the lead to negotiate newagreements and audit, regulate, and administer the mining industry; and

* inability to update and provide geological data needed to attract new exploration.

Investments for mineral exploration in the country have steadily declined over the past decade.from US$ 83.2 million in 1988 to US$ 12.0 million in 1999 (Table 1.)

Table 1: Private Sector Exploration Expenditures in PNG in million US$

_______________________ 1988 1989 1990 1991 1992 1993Exploration Expenditures 83.2 74.8 59.2 53.3 39.3 41.3

1994 1995 1996 1997 1998 1999 est.Exploration Expenditures 37.8 34.6 31.7 32.6 14.3 12.0

Source: Department of Mining, Papua New Guinea

Gold and copper production from 1987-1999 are presented in Table 2. The decline in copper andgold production in 1997 and 1998 largely reflects reduced production at the Ok Tedi Mine due to asevere drought.

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Table 2: Production of Copper and Gold 1987-1999.

Copper Gold('000 tonnes) (tonnes)

1987 217.7 34.91988 218.6 34.61989 203.8 25.41990 170.2 32.31991 204.5 59.81992 193.4 69.21993 203.2 60.11994 209.3 58.71995 212.7 51.71996 186.7 51.61997 111.5 48.51998 101.8 58.41999 187.9 65.7

Source: Department of Mining, PNG

Government's Strategy: The strategy of the Government of Papua New Guinea is to develop themining sector by encouraging socially, environmentally, technically, and financially responsibleprivate sector exploration and development of PNG's mineral resources. More recently thestrategy has evolved to: (a) encourage private sector mining development that is environmentallyand socially sustainable; and (b) develop rural areas by overseeing and facilitating small-scalemining to take place in an orderly way.

However, the major constraint to further sector growth is the lack of the institutional capacity ofDoM and IRC to administer and oversee the sector. In particular, DoM and IRC need to establisha stronger presence at the mining sites, and DoM needs to:

* produce position papers on certain key topics (such as small scale mining and mine closure),* negotiate new project development agreements for new private sector mining investment that

encourage sustainable development, and* promote private sector mineral exploration and facilitate infrastructure development by

updating and publishing new geological and geochemical maps, reports, and database products.

Therefore, the government is seeking to remove the constraints to new private mineral investmentsthrough (a) filling in key gaps in mining policy; (b) improving its ability to provide timely andreliable regulatory oversight for the mining sector; (c) developing the capability to be more proactive regarding social and environmental issues; and (d) updating and providing geological data toattract potential investors.

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3. Sector issues to be addressed by the project and strategic choices:

The main issues to be addressed by the proposed project are:

* review and development of policy, strategy, and regulatory materials regarding small scalemining, offshore mining, mine safety and health, mine closure and sustainable miningdevelopment;

* the capacity of DoM to work closely with Office of Environment and strengtheningConservation (OEC) to take a pro active role on social and environmental issues in the miningsector working with provincial govermments, other government departinents, localcommunities, land owner groups, NGOs and mining investors;

* preparation of a standard mining development contract that encourage sustainable miningdevelopment;

* strengthening the institutional capacity of DoM and IRC through training and operationalsupport to provide timely and reliable administrative services to the mining sector;

* improving compliance of projects with environmental performance standards;* reducing backlog of DoM mine safety audits;* reducing backlog of IRC tax audits to increase fiscal revenues from the mining sector; and* development of geological thematic maps through the development of a Geological

Information System (GIS).

The Project will help government to update the mandates and develop institutional capacity forDoM and IRC to:

* update the mining policy and regulations;* to audit and administer the mining sector in the country;* interface with public and private sectors and communities to help them meet their respective

needs, based on a clear definition of objectives and scope of activities for new minedevelopment, small scale mining, offshore mining, mine safety and health, mine closure andsustainable mining development.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailedcost breakdown):

The proposed project consists of the following components: a) policy and regulatory institutionalstrengthening for the Department of Mining; b) development of capacity to monitor and executetechnical audits of mining and exploration projects; c) strengthening of mineral tenementsmanagement; d) development of project coordination and environment assessment capacity forsustainable development in mining project areas; e) institutional strengthening of the GeologicalSurvey and development of geological information system capabilities; and f) institutionalstrengthening and capacity building for the Internal Revenue Commission. Project costs aresummarized in Table 3 overleaf.

Of the proposed Bank financing of US$ 10 million, about US$ 0.2 million will be required forretroactive financing of project-related start-up costs including consultant services and goods.These funds will be used to advance the commencement of the project.

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Table 3 - Cost for Project omponentsIndicative Bank- % of

Sector Costs % of financing Bank-Component 1US$M) Total (US$M) financing

1. Policy and Regulatory Institutional Institutional 1.64 14.2 1.43 14.3Strengthening: review and development Developmentof future structure of DoM, mineralpolicy, strategy, and regulation forpromotion of exploration; small scalemining; offshore mining; mine safety andhealth; and mine closure.2. Development of DoM Capacity to Institutional 1.05 9.1 0.91 9.1Monitor and Execute Technical Audits of DevelopmentExploration and Mining Activities:preparation of monitoring and auditingstrategies; implementation of newinstitutional arrangements includingorganization, staffing, and workmethodology; and training and operationalsupport.3. Strengthening of DoM Mineral Institutional 0.84 7.3 0.70 7.0Tenements Management: development of Developmenta strategic action; execution of fieldassessments; lease boundary definitions;and development of a mineral tenementsmanagement database.4. Development of DoM Project Institutional 1.10 9.5 0.96 9.6Coordination and Environmental DevelopmentAssessment Capacity for SustainableDevelopment in Mining Project Areas inconjunction with Office of Environmentand Conservation (OEC): policyformulation and strategic planning,training and workshops and conferenceswith all interested stakeholders and otherdepartments including OEC so thatgovernment can take a more pro activerole regarding mining projectsustainability and integration of miningprojects into broader regional developmentframeworks.5. Institutional Strengthening of the Institutional 4.31 37.4 3.74 37.4Geological Survey and Development of DevelopmentGeological Information System (GIS)Capabilities: remote sensing, geophysicaldata interpretation, and development of anational litho-stratigraphic database; and

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compilation of geological information;upgrading of information system andfacilities; and on the job training.6. Institutional Strengthening and Institutional 1.22 10.6 1.05 10.5Capacity Building for IRC: upgrading Developmentequipment; implementation of newinstitutional arrangements includingorganization, staffing, and tax audit andwork methodology; and on the job trainingand operational support.7. Project Coordination, Monitoring, and 1.22 10.6 1.07 10.7Evaluation: hiring, supervising staff;managing procurement; contractaccounting and auditing; preparingquarterly annual reports and annualoperation plans; and monitoring progressand evaluate results.Others (Auditors Fee) 0.05 0.4 0.04 0.4

Total Project Costs 11.43 99.1 9.90 99.0

Front-end fee 0.10 0.9 0.10 1.0Total Financing Required 11.53 100.0 10.00 100.0

Numbers may not add up due to rounding.

Table 4: Financing Plan

Estimated Costs Local Foreign TotalBase cost 4.26 6.06 10.32Contingencies 0.51 0.70 1.21Total Cost 4.77 6.76 11.53

Financing PlanGovernment of Papua New Guinea 1.53 0.00 1.53IBRD 3.38 6.62 10.00Total 4.91 6.62 11.53

2. Key policy and institutional reforms supported by the project:

The project will involve four key institutional reforms. These are (a) to examine whether DoMshould become a statutory agency, which could give DoM greater independence and the ability toretain some of the license fees it collects and thereby better match its operating budget to itsoperational activities; this is presently being deliberated by Government; (b) to prepare a standardmining development contract for new mining projects, which will reduce the time and effortneeded to prepare new contracts and will emphasize sustainable development including helping

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maximize skills transfer, spin off businesses and other benefits to local communities; (c) to provideDoM with a digital GIS System; and (d) to provide IRC long term auditing capacity to enhance thecountry's fiscal revenue base.

3. Benefits and target population:

The following benefits are expected from the proposed project:

(i) induced by the project: (a) increased mining sector investments, exports, employment, andtax payment; and (b) other economic benefits like creation of employment opportunity and spin-offbusiness, infrastructure development, etc. will be provided to local communities.

(ii) as a direct result of the project: (a) establishment of a modem, consistent, andhomogeneous mining policy and regulatory framework that will contribute to sustainabledevelopment especially regarding small scale mining, offshore mining, mine safety and health, andmine closure; (b) development of a standard mining development contract which increases benefitsto local communities; (c) improvement in the efficiency in public mining institutions (DoM, IRCand the Office of Environment and Conservation - OEC) to investigate, audit, regulate, andmanage exploration and mining projects; and (d) development of geological thematic maps withGIS to improve information services to the potential mineral investors. Mining is a key sector forfurther foreign investment in the country, and lessons learned how to investigate, audit, regulate,manage, and promote mining sector in the country could be later put into use for other sectors likelogging and fisheries.

Target Population and Sectors:

* Private foreign and domestic exploration and mining investors;* National mining authorities;* Small scale miners;* Local communities and land owners; and* Staff of DoM, IRC and OEC.

4. Institutional and implementation arrangements:

Project implementation period: The proposed project would be implemented over a period of fiveyears starting July 1, 2000. The project completion will be June 30, 2005 and the Loan closingwould be December 31, 2005. The Office of Environment and Conservation (OEC) would also beinvolved in work regarding environmental compliance and sustainable development.

Implementation agency: Department of Mining (DoM) and Internal Revenue Commission (IRC)would be responsible for the implementation of the proposed project. A Project Coordination andImplementation Unit (PCIU) has been established within DoM for the implementation andcoordination of all project components.

Project administration: A DoM/IRC Steering Committee for the proposed loan has beenestablished to oversee the project. DoM has two operating divisions - a Mines Division and aGeological Survey. The Secretary DoM is the Chairman of the Steering Committee and the

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Commissioner General IRC, the Deputy Chairman. The membership includes the Directors of theMining Division, DoM, the Geological Survey Division, DoM, the Resource Monitoring Division,IRC and the Director OEC as well as a representative of DoNPM. The PCIU has been establishedwithin DoM. It will be staffed by a PCIUJ Director, Procurement Specialist and ProjectAccountant. The positions have been advertised and applications received. The staff of the PCIUwill be selected on a competitive basis with qualifications and experience, terms and conditions(including performance criteria and evaluation procedures) satisfactory to the Bank. The PCTUDirector will report to the Secretary DoM as Chairman of the DoM/IRC Steering Committee. ThePCIU will be responsible for (a) preparation and submission of procurement to the World Bank forreview and approval, (b) project monitoring, reporting, and evaluation, (c) the contractualrelationship with the Bank, and (d) financial record keeping, the Special Account anddisbursements. The PCIU will provide regular reports to the Steering Committee and toDepartment of National Planning and Monitoring. The Secretary DoM and the CommissionerGeneral IRC will be delegated authority by the Minister for Treasury and Finance to sign contractsfor their respective components of the projects valued above 60,000 kina per contract. The PCIUDirector will be delegated authority to sign project contracts up to 60,000 kina per contract.

Procurement Planning: The procurement capability of the DoM was assessed during appraisal andthe guidance provided in the OCSPR memorandum of August 11, 1998, together with the findingsof the 1999 draft Country Procurement Assessment Report, has been utilized in the preparation ofthe Procurement Capability Assessment Report of DoM (see Annex 6). A Procurement Plan hasbeen prepared and a Procurement Operations Manual is being prepared and will be issued by thePCIU by December 31, 2000. The Steering Committee will oversee the evaluation and selectionof winning bidders. According to the nature of the procurement activity, the relevant division inDoM or IRC will take the lead role in bid evaluation supported by the PCIU which will provide theexecutive function. Consultants hired under the project will be supervised by the Director of theMining Division, DoM (Project Components 1-4), the Director of the Geological Survey Division,DoM (Project Component 5), and the Director of the Resource Monitoring Division, IRC (ProjectComponent 6). By June 30 of each year starting in 2001, the PCIU will prepare and submit to theBank, an updated procurement and disbursement plan for the project components during the nextfiscal year, and agree with the Bank on these plans by September 30 of each year. Each year theGovenunent will include counterpart funding for the project in the Budget for the next fiscal year,in accordance with the agreed procurement and disbursement plans.

Project Financial Management Arrangements: The PCIU will also be responsible for projectfinancial management arrangements (accounting, financial management, and reporting) and formanaging the Special Account and making disbursements of World Bank loan proceeds. TheProject Accountant will be supported by a local accounting firm that will assist in the preparationof monthly, quarterly and annual Project Management Reports. A Financial ManagementHandbook will be issued prior to loan effectiveness. A computerized financial managementsystem will be developed to produce Project Management Reports as required pursuant to Bank'sProject Finance Management Manual. The traditional Statement of Expenditure Procedures will beused for disbursement. Within one year from loan effectiveness a review will be conducted todetermine the feasibility of adopting PMR based disbursement. The project accounts will beaudited annually by a private accounting firm engaged under the project in accordance witharrangements agreed with the Auditor General. A short list of acceptable firms has been preparedby the PCIU and approved by the Auditor General. The Government will, by December 31, 2000,appoint independent auditors with qualifications and terms of reference satisfactory to the Bank for

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the purpose of auditing the Project accounts. The Government will submit to the World Bankannual financial statements and the independent auditor's report of the Project accounts by June 30of each year

Monitoring and Evaluation: Not later than 45 days after each quarter, the PCIIJ will submit to theBank quarterly progress reports covering all project activities, including procurement, and afinancial summary report. Further details of monitoring arrangements are given in Annex 7. AMid-Term Review, 24 months after effectiveness, would provide detailed analysis ofimplementation progress towards development objectives, including performance to date onselected indicators of project benefits (see 3-i and 3-ii). Baseline data on these indicators will begathered prior to the Mid-Term review and used in the assessment. The Mid-Term review willaddress the sustainability of DoM activities under the project.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

When considering the most appropriate instrument to strengthen the public mining sectorinstitutions in Papua New Guinea, two main altematives were examined: a Technical AssistanceCredit or a Learning and Innovation Loan (LIL).

At the PCD stage the project was proposed as a LIL on the basis that it provides the followingopportunities for learning and innovation: (a) work to develop and transfer an understanding andcapacity to innovate public administrative services to the mining sector - for which solutions andexamples of good practice are not readily available elsewhere; and (b) pilot activities to: (i) preparepolicy position papers on new topics (e.g., small scale mining; offshore mining; and mine closure);(ii) develop and transfer DoM and IRC field investigation and audit capabilities; (iii) establishgeological thematic maps with GIS; and (iv) help DoM to become a statutory agency.

These were discussed at some length at the PCD review and it was concluded after carefuldeliberation that they did not fully meet the requirements for a LIL (e.g. contain a hypothesis orPilot arrangements to be tested, the results of which could be mainstreamed into other sectorseasily). As a result, the TA approach was selected.

2. Major related projects financed by the Bank and/or other development agencies(completed, ongoing and planned).

The only other related projects in PNG are two Bank-financed TAs for the Petroleum Sector.Donor assistance to the mining sector is very modest presently consisting of one small-scalemining expert financed by AusAID. The Bank has similar mining sector TAs in nine othercountries. The experience in the PNG Petroleum TA and the other mining TA projects has beenused in designing this TA.

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Latest SupervisionfPSR) Ratings

Implementation Development

Bank-financed Project Progress Objective(IP) (DO)

Support regarding exploration data Petroleum Exploration S Smanagement and exploration promotion Technical Assistance Project

(Credit No. 1279-PNG)Institutional strengthening to promote Petroleum and Exploration S Sthe petroleum sector and Development Technical

Assistance Project (LoanNo. 3670-PNG)

Other development agenciesNone

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (HighlyUnsatisfactory)

It is not expected that there will be any co-financing for the project. However, the EuropeanUnion are also expected to provide assistance to DoM regarding small scale mining. The projectdesign, therefore, does not include a small-scale mining component. Preliminary discussionshave also taken place with the Japan International Cooperation Agency (JICA) and the MetalMining Agency of Japan (MMAJ) regarding possible assistance to the DoM Geological SurveyDivision. Any such possible assistance would be complimentary to the assistance requestedunder this loan. The IRC is expecting assistance from the Australian Treasury who have beeninformed of the proposed assistance for field audits of minerals companies from the World Bankunder this project. The IRC representatives informed the Project Appraisal Mission that theassistance requested under the World Bank Mining TA Project will not conflict with or duplicatethe expected assistance from Australian Treasury.

3. Lessons learned and reflected in the project design:

Lessons have been learned from the ongoing activities being carried out under the PNG PetroleumTechnical Assistance projects where the importance of an adequate recurrent budget has beenhighlighted. Lessons from projects from other countries where the Bank has financed miningtechnical assistance projects (e.g., Mali, Burkina Faso, Guinea, Ghana, Tanzania, Madagascar,Mauritania, Ecuador, and Argentina) and from a recent Bank paper on mining sector reform inLatin America (A Mining Strategy for Latin America and the Caribbean, World Bank TechnicalPaper No. 345, 1996).

The main lessons learned from similar projects and reflected in the project design include: (a)sector-specific focus and improvements with clear delineation of authority and responsibility ofdifferent ministries and agencies involved in the sector; (b) strong beneficiary participation inproject preparation, and organization and coordination at the field level; (c) supervision bytechnical specialists; and (d) ownership and political commitment to project objectives and toensure strong local leadership and availability of counterpart funds.

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Experience in other countries indicates that improving the enabling environment can increase theability of a country to attract and retain appropriate private investment. For instance, Ghana in late1980s undertook significant reforms, supported by the Bank and other donors, to improve theenabling environment for private sector investment in mining. The result has been a four foldincrease in gold production, a mining investment climate that is consistently ranked among the bestin the world by investors, and privatization of state owned mining enterprises. Argentina in the1990s undertook similar reform and now attracts more exploration from international miningcompanies than Canada.

4. Indications of borrower commitment and ownership:

Commitment of the Borrower is demonstrated by DoM and IRC already having established theSteering Committee, published the General Procurement Notice, advertised the positions for thePCIU and prepared terms of reference for the consulting services proposed under the project.

Ownership: the Borrower took initiative in requesting the preparation of a stand-alone operationfor mining. Staff of both DoM and IRC are enthusiastic about the learning and professionaldevelopment opportunities that the project will provide.

5. Value added of Bank support in this project:

The Bank has a strong track record for mining sector reform TA projects. As of December 31,1999 the portfolio consisted of nine mining sector reform TA projects, all of which were ratedsatisfactory. The Bank can thus provide extensive and positive experience regarding mining sectorreform in other countries.

In addition, the Bank is in a unique position to integrate mining sector reform with broader macroeconomic and fiscal management issues and ensure results are shared with other sectors. TheBank has followed the development of the PNG mining sector over the past decade and knowsboth DoM and IRC very well and is positioned to ensure that institutional strengthening takesplace in a fully consistent manner and is integrated with larger institutional reforms in PNG.

The Bank's presence will also help protect DoM and IRC from possible political interference.

E. Summary Project Analysis

Economic (see Annex 4):

NPV=US$ [N/Al million; ERR = [N/Al % (see Annex 4)

The project provides technical assistance and, as such, does not lend itself easily to quantitativeinvestment analysis or to the calculation of Net Present Value (NPV) or Economic Costs of Return(ECR). However, a number of economic indicators can be projected and compared with presentperformances, such as amount of the annual investment for exploration by mining companies, andannual value of exports and fiscal revenues coming from the sector.

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The mining sector in the country is exporting in excess of K 2 billion (about US$ 800 million)worth of mining products annually and generates K 200-300 million (about US$ 80-120 million) indirect government revenue each year. On the exploration front, there are currently 120Exploration Licenses in force, and these licenses spent approximately US$ 12 million forexploration in 1999. As mineral exploration is essential to the long term stability of the sector tocontribute to the national economy, an important indicator for the project is the amount of theinvestment for exploration. If the project will be successfully implemented, the explorationspending by private investors is expected to increase by 2005 from the current US$ 12 million peryear to the level of early 1990s (which was in the range US$50 to 60 million per year).

2. Financial (see Annex 5):

NPV=US$ [N/A3 million; FRR = [N/Al % (see Annex 5)There are no financial issues. The project provides technical assistance and as such does not lenditself easily to quantifiable analysis.

Fiscal Impact:

The project should result in increased fiscal revenues from the sector. In the next 1 - 3 years thesewould be from tax audits (any figure must be considered highly speculative but US$5 - 25 millionwould seem a feasible range) and in the longer term from new investment.

3. Technical:

The project will strengthen institutional capacity within the Department of Mines (DoM) and theInternal Revenue Commission (IRC) and their regulatory environment to administer and regulateexploration and mining projects and to achieve socially and environmentally acceptable privatemineral investment in the PNG's mining sector. In line with the main objectives, this project will:

* review and develop mineral policy, regulations, and mining development contract includinginterface between public and private mining sectors, NGOs, and local communities;

* examine whether DoM should become a statutory authority;* conduct technical field audits of exploration and mining projects;* improve mine safety and environmental compliance and investigate accidents;* improve the availability of geological data for potential mineral investors;* collect taxes and conduct tax audits of mining and petroleum companies; and* establish effective inter-relationships between different govermnent agencies for tax collection,

environment management, and so forth.

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4. Institutional:

4.1 Executing agencies:

DoM and IRC are well managed. However, the experience and implementation capacity of thetwo agencies is limited. There is a major need for technical transfer at all levels, including projectmanagement and implementation. The project includes a substantial provision to hire nationalstaff who will be in charge of the implementation of specific project sub-components. The projectcost estimate includes a budget for incremental operating costs (including travel, per diem, vehicleoperating costs, office materials, workshops, seminars and conferences) in order to finance theseexpenses.

4.2 Project management:

The Project Coordination and Implementation Unit (PCIU) will be created and will manageprocurement and supervision of works and consulting services.

4.3 Procurement issues:

None

4.4 Financial management issues:

None

5. Environmental: Environmental Category: B

5.1 Summarize the steps undertaken for environmental assessment and EMP preparation(including consultation and disclosure) and the significant issues and their treatment emergingfrom this analysis.

(a) Issues.

As a technical assistance initiative, the project will not finance any direct exploration orexploitation of mineral resources. However, the project is being implemented in a sector which isknown to be controversial with respect to environmental and social issues. The environmentalproblems associated with mining in PNG relate to river and ocean based mining waste and tailingsdisposal and pollution resulting from mineral processing.

A review of environment issues in the mining sector was prepared in 1992 by World Bankspecialists which raised concerns regarding the environmental impacts of the Ok Tedi operation.The report also pointed out the need for improvements relating to environmental legislation as wellas regulatory and institutional capacity building needs. An updated review of these issues wascarried out as part of project preparation (February 2000). This consultant review noted progressin the context of several projects but noted that, for the sector as a whole, there is still room forimprovement in the regulatory and institutional oversight arrangements. Such improvementswould be the focus of some of the training and consultative workshops to be supported by theproject

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The project would help provide additional institutional strengthening which is expected to have apositive impact on the environment. This includes project support for environmental workshops,consultative conferences with major stakeholders and professional development training for bothDoM and OEC staff. These activities will improve skills and capabilities of DoM and OEC staffto conduct field audits of mining projects, to investigate mine safety and environmentalcompliance, and to work with mining companies to improve the environmental and socialsustainability of the operations. Annex 8 provides further details regarding environmental issues,institutional and legal framework, role and capabilities of DoM and OEC and institutionalstrengthening that will be provided under this project which is expected to have a positive impacton the environment.

(b) Environmental Category [ A [X I B [ ] C

(c) Justification Rationale for Summary Rating

The project was rated as a category B for environmental purposes. The project will not involve thedirect investment in mining activities but through its policy and regulatory strengthening it couldhave indirect environmental impacts by encouraging increased mining activities in the future.Also, projects in the sector, such as Ok Tedi, are known to have significant impacts on theenvironment which will remain controversial. Since there is no direct on the ground investmentthere is no resettlement involved in this project nor is there any requirement for an IPDP.

The project would likely have environmental benefits through the Environmental AssessmentCapacity Building component. This component will provide $1.1 million US to supportprofessional development training and consultative workshops on environmental issues andthrough improvements in the DoM capacity to monitor and execute technical audits on miningactivities.

(d) Status of category A assessment N/A

(e) Proposed actions: The project will finance an environmental capacity buildingcomponent to address professional development training and institutional strengthening in theDoM and the OEC.

(f) Status of environmental studies. No separate EA was prepared for this project. Duringproject appraisal a environmental consultant prepared a review of the progress made onenvironmental issues since a 1992 Bank sector analysis. Issues raised in the consultants reportwould be the subject of institutional capacity building and professional development traininginitiatives to be supported under the project.

(g) Local groups and NGOs consulted WWF; Ikraft; representatives of landownerassociations; representatives of Chamber of Mines and petroleum

(h) Resettlement N/A

(i) Borrower permission to release EA -N/A

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5.2 What are the main features of the EMP and are they adequate? N/A

5.3 For Category A and B projects, timeline and status of EA: N/ADate of receipt offinal draft: N/A

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b)draft EA report on the environmental impacts and proposed environment management plan?Describe mechanisms of consultation that were used and which groups were consulted? As notedabove in Section 5(g), consultations were held during the environmental screening stage withvarious NGOs, landowner and industry representatives.

5.5 What mechanisms have been established to monitor and evaluate the impact of the projecton the environment? Do the indicators reflect the objectives and results of the EMP? Duringproject implementation further consultation will take place with NGOs, landowners, and industryrepresentatives regarding mining sector environmental issues. Project performance indicators willinclude mine safety, environmental and social compliance statistics as reported to DoM and OEC.

6. Social

6.1 Sumnmarize key social issues relevant to the project objectives, and specifj' the project's socialdevelopment outcomes..

Mining projects have significant social impacts and mining companies have beenprogressively learning how to take into account the views of local communities and how toimprove their abilities to work with local communities to maximize the benefits from miningactivities. A review in 1992 by Bank specialists (Environmental Aspects of the Mining Sector,World Bank draft report, September 1992) found that Social Impact Assessments have beenprepared for all of the projects and concluded that these represented serious professional efforts toidentify and mitigate social impacts associated with the projects. There has been no involuntaryrelocation in mining projects, but the report also found that progress on the ground in dealing withsocial issues was limited at that time and that monitoring has been ineffective.

Since then, mining companies have considerably increased their attention to implementationand monitoring of social impacts of mining projects, although the parameters and methodologiesused to assess the impacts are still evolving. A social review of the mining sector conductedduring project preparation found that while there remains considerable room for furtherimprovement, overall a good amount of progress has been made regarding social issues and todaythe landowners are very well organized and well able to deal with project developers andoperators. The project will help to improve social aspects of mining projects in PNG, especiallyregarding social impacts by providing workshops with all the major stakeholders and by providingtraining for both DoM and OEC staff on social issues. Further details are provided in Annex 8.

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6.2 Participatory Approach: How are key stakeholders participating in tle project

Representatives from NGOs and local communities which are affected by mining projects wereconsulted in preparing the project and have agreed to provide inputs to DoM regarding the designof participatory workshops and conferences to be undertaken as part of the project.

7. Safeguard Policies (check applicable items):

This is a TA project and no investment or infrastructure development is involved hence all of thefollowing are not applicable.

Applicability of Safe2uard Policies

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, G-P 4.01) Yes - see Section 5 aboveNatural habitats (OP 4.04, BP 4.04 GP 4.04) NoForestry (OP 4.36, GP 4.36) NoPest Management (OP 4.09) NoCultural Property (OPN 11.03) NoIndigenous Peoples (OD 4.20) NoInvoluntary Resettlement tOD 4.38) NoSafety of Dams (OP 4.37, BP 4.37) NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) No

F. Sustainability and Risks

1. Sustainability:

The successful establishment of the strategy and development of the institutional capacity shouldresult in increased mineral investments for exploration and better tax collection. Increased fiscalrevenues to the govermment will benefit all public sector institutions including DoM and IRC.While international metals prices and exploration and investment are presently low, this is ahighly cyclical industry and recovery can be expected in the next 3-4 years. The project thus willhelp position the country to take full advantage when that upturn occurs. The project will helpstrengthen the capabilities of DoM and IRC and better enable them to resist political interference.The study of whether or not DoM should become a statutory authority will help address the needto improve the recurrent budget for DoM to carry out its activities and examine the benefits ofDoM being able to retain part of the fees they collect.

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2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating Risk Minimization MeasureFrom Outputs to Objective1. Weak international commodity markets M 1. By positioning well now, government

can benefit from next market upturn2. Political interference in the mining sector M 2. Bank involvement in the sector3 Lack of commitment to reform and to N 3. Support and oversight of bank andbeing responsive to needs of private other donors as part of overall countryinvestors economic dialogue4 Inadequate recurrent budgets for the two M 4. Government commitments under themineral sector institutions project5. Poor access to geological data needed to N 5. Good access is ensured by provisionsbuild-up the GIS data base of exploration licenses

From Components to Outputs1. Continued project ownership. N 1. DoM and IRC have shown strong

ownership in project design2. Satisfactory performance by contracted M 2. Good supervision by DoM and IRCconsultants.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

The project itself should not involve any controversial aspects. However, the Government isfacing a highly controversial situation regarding the future of the Ok Tedi Mine and may usetechnical assistance under the operation to help address the situation.

G. Main Loan Conditions

1. Effectiveness Condition

* Appointment of key PCIU staff according to agreed procedures* Issuance of a Project Financial Management Handbook (FMH) acceptable to the Bank

2. Other [classify according to covenant types zused in the Legal Agreements.]

Project Execution* The Secretary DoM and the Commissioner General IRC will be delegated authority by the

Minister for Treasury and Finance to sign contracts for their respective components of theprojects valued above 60,000 kina per contract;

* The PCIU Director will be delegated authority to sign project related contracts up to 60,000kina per contract;

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* Prior to September 30, 2000, DoM will undertake a study of its future operational status,discuss the results with the Bank and present the findings to Government for implementation;and

* Each year the Government will include counterpart funding for the project in the Budget forthe next fiscal year, in accordance with the agreed procurement and disbursement plans; and

Financial Reporting, Monitoring, and Auditing

* Maintain and provide the Bank with quarterly progress reports, with unaudited project accountsto reflect project expenditures and original project cost estimates for the implementation periodusing the Bank's project management reporting (PMR) system;

* The Government will, by December 31, 2000, appoint independent auditors with qualificationsand terms of reference satisfactory to the Bank for the purpose of auditing the Project accounts;

* Within six months from effectiveness issuance of a Procurement Operations Manual (POM)acceptable to the Bank

* Within one year from effectiveness a review will be conducted to determine the feasibility ofadopting PMR based disbursement.

* The Government will submit annual financial statements and the independent auditor's reportof the Project accounts by June 30 of each year;

* By June 30 of each year starting in 2001, the PCIU will prepare and submit to the Bank, anupdated procurement and disbursement plan for the project components during the next fiscalyear, and agree with the Bank on these plans by September 30 of each year; and

- By March 31, 2003 the Government and the Bank will undertake a mid-term review of theProject.

H. Readiness for Implementation

[ ] l.(a) The engineering design documents for the first year's activities are complete and readyfor the start of project implementation.

[X ] (b) Not applicable.

[X ] 2. The procurement documents for the first year's activities are substantially complete andready for the start of project implementation.

[X ] 3. The Project Implementation Plan has been appraised and found to be realistic and ofsatisfactory quality.

[ ] 4. The following items are lacking and are discussed under loan conditions (Section G):

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Readiness

(a) The project implementation, procurement and disbursement arrangements (Annex 6) havebeen planned and submitted to the Bank for clearance.

(b) The DoM has defined steps for project commencement (see Annex 6 Project Launch) andis capable of undertaking these steps in a timely manner.

Business Policies (check applicable items):

X Financing of recurrent (OMS 10.02)

Cost sharing above country 3-yr average (OP/BP/GP 6.30)

Retroactive financing above normal limit (OP/GP/BP 12.10)

X Financial management (OPIBP 10.02)

Involvement of NGO's (GP 14.70)Other (provide necessary details)

I. Compliance with Bank Policies

[X] 1. This project complies with all applicable Bank policies.[ ] 2. The following exceptions to Bank policies are recommended for approval. The

project complies with all other applicable Bank policies.

John Strongman Klaus RohiadTeam Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design Summary

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

Hierarchy of Objectives Key Performance Monitoring & Critical AssumptionsIndicators Evaluation

Sector-related CAS Goal: Sector Indicators: Sector/ country (from Goal to Bankreports: mission)

1. Sustained and sustainable - Increase export of - Economic reports strong internationalminerals sector growth led mineral commodities. - Bank of PNG Reports commodity marketsby private and foreigninvestment2. Improved governance and - no backlog of mine no political interferencegreater efficiency of the safety investigation and in mineral sectorpublic service regular tax audits.

Project Development Outcome / Impact Project reports (from Objective to Goal)Objective: Indicators:Improve governmentcapacity to regulate andadminister the mining sectorso that:1. Investment environment - increased annual - Economic report. - DoM committed tobecome more attractive to exploration and mineral Sector report. implementing reformhigh risk exploration and investment and being responsive tomining investment investors.

2. Exploration and mining - more spin off - Mining companyprojects contribute to businesses started reportssustainable developmentbenefits to local - improvedcommunities increase in environmental and socialterms of more outsourcing of compliancemining activities to localcommunities resulting in and - sustainabilityimproved emphasized in newtechnology/knowledge mining developmenttransfers to local contract and addressedcommunities at workshops and

conferences organized3. Exploration and mining with key stakeholders - DoM reports - Adequate recurrentprojects become safer and other government government budget for

departments. DoM and IRC.

- preparation of regional

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development plans forone or two miningregions with fullparticipation ofprovincial governmentsand all stakeholders.

- improved safetystatistics

4. Benefits to the nation - Increase tax revenues - IRC reports - Satisfactory miningincrease in terms of higher from mining projects. development agreement.tax collections

Output from each Output Indicators: Project reports: (from Outputs tocomponent: Objective)1. a, Preparing and approval - DoM issues position - Project monitoring - Continuing projectof policy, strategy, and papers based on report, midterm ownership by DOM andregulatory documents on consultants reports evaluation, and ICR. IRC.small scale mining; offshore regarding mineralmining; mine safety and policy, strategy, andhealth; and mine closure regulations for small

scale mining; offshoremining; mine safety andhealth; and mine closure.

1. b, Preparation of standard - Government introduces - Satisfactorymining development new mining supervision ofcontract. development contract in consultants by DOM and

negotiation for next IRC.projects which includesmore pro activegovernment roleregarding social issues,social service delivery,regional developmentimpacts, monitoring ofsocial and environmentalimpacts, and strategy foreventual mine closure.

2. Improve DOM capacity - DOM undertakes - Satisfactoryfor investigations and technical audits and performance bytechnical audits to provide documents mineral contracted consultants.timely and reliable reserve and productionadministrative services to the estimates for 10mining sector. exploration and mining

projects.

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- DOM reduces backlogof mine safetyinspections to 3 months.

3. Improve IRC capacity for - IRC undertakes taxinvestigations and tax audits audits of 5 mining andto increase fiscal revenues petroleum companies.from mining.4. Improved geological data - 7 sheets of geologicalbase. thematic maps prepared

and issued.Project Components / Sub- Inputs: (budget for Project reports: (from Components tocomponents: each component) Outputs)1, Policy and Regulatory 1, Policy and Regulatory Consultant reports onInstitutional Strengthening: Strengthening: US$ 1.64 mineral policy andreview and development of million regulationmineral policy, strategy, andregulation for promotion ofexploration; small scalemining; offshore mining;mine safety and health; andmine closure.2, Development of 2, Institutional Consultant reports onDepartmental Capacity to Strengthening and DOM progress inMonitor and Execute Capacity Building for implementingTechnical Audits of monitoring and auditing: institutionalExploration and Mining US$ 1.05 million improvementsActivities: preparation ofmonitoring and auditingstrategies; implementation ofnew institutionalarrangements includingorganization, staffing, andwork methodology; andtraining and operationalsupport.3, Strengthening of DoM 3, Mineral Tenements Consultant reports onMineral Tenements Management System: mineral tenementsManagement: development US$ 0.84 millionof a strategic action;execution of fieldassessments; lease boundarydefinitions; and developmentof a mineral tenementsmanagement database.4, Development of Project 4, Institutional Consultant reports onCoordination and Strengthening and sustainable developmentEnvironmental Assessment Capacity Building for and training materialsCapacity for Sustainable sustainable

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Development in Mining development: US$ 1.10Project Areas: policy millionformulation and strategicplanning, training andworkshop.5, Institutional Strengthening 5, Institutional Consultant reports onof the Geological Survey and Strengthening of the mineral resources andDevelopment of Geological Geological Survey: US$ GIS.Information System (GIS) 4.31 million.Capabilities: remote sensing,geophysical datainterpretation, anddevelopment of a nationallitho-stratigraphic database;and compilation ofgeological information;upgrading of informationsystem and facilities; and onthe job training.6, Institutional Strengthening 6. Institutional Consultant reports onand Capacity Building for Strengthening and IRC progress inIRC: upgrading equipment; Capacity Building: implementingimplementation of new US$1.22 million institutionalinstitutional arrangements improvementsincluding organization,staffing, and tax audit andwork procedures andmethodology; and on the jobtraining and operationalsupport.7, Project Coordination, 7. Project Coordination, Quarterly and annualMonitoring, and Evaluation: Monitoring, and reports, contracts andhiring supervise staff; Evaluation: US$ 1.22 procurement records,managing procurement; million monitoring reports,contract accounting and technical and trainingauditing; preparing quarterly performance evaluationannual reports and annual reports, manuals, andoperation plans; and financial reports andmonitoring progress and audits.evaluate results.

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Annex 2: Project Description

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

The project consists of seven main components:

Project Component 1 - US$1.64 million (including contingencies)

Policy and Regulatory Institutional Strengthening

A number of legal issues and new policy topics (i.e., promotion of exploration, small scale mining,offshore mining, mine safety and health, and mine closure) have arisen since independence andhave remained unresolved. A priority objective of the Government is to review the existingmining policy and legislation and to develop new strategies and regulatory documents on thesenew topics. This Project component will support the Department of Mining to:

- prepare a study of the future organization of DoM;- propose appropriate amendments of the existing Mining Act 1992 to reduce ambiguity and

improve its functioning;• review the draft Standard Mining Development Contract, with a view to incorporating all of

the new policy initiatives listed above and to see that mine closure strategies are outlined andregional development aspects considered;

* draft new mining occupational health and safety legislation;• prepare an offshore mining bill to accommodate the requirements of offshore mineral leasing

arrangements;* prepare a mine closure and rehabilitation policy paper to ensure an orderly and acceptable mine

closure and draft new legislation as required;• provide training to national officers in project negotiating skills; and* prepare investment promotion materials including Mineral Policy Handbook, Strategic

Geological Potential of Papua New Guinea and develop a web site for ready access bypotential investors. Materials prepared will be prepared in such a manner to facilitatedistribution to the mineral industry and potential explorers clarifying all of the major issuesimpacting on the development of mineral resources in Papua New Guinea.

Provisions of this Component will include the financing of: international and local consultants;incremental operating costs related to travel and training; purchase of basic core office equipment,legal and technical literature, printing costs and vehicles.

Project Component 2 - US$1.05 million (including contingencies)

Development of Departmental Capacity to Monitor and Execute Technical Audits ofExploration and Mining ActivitiesThe technical capacity of the Department of Mining to effectively monitor and audit the activitiesof exploration and mining companies requires strengthening following the departure ofexperienced expatriate staff in the early to mid 1990's. The objective of this project component isto strengthen the capacity of the Department of Mining to audit existing mining and exploration

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projects to determine appropriate compliance with legal, safety, contractual, and policyobligations. These include technical and expenditure reporting for exploration tenements, reservesand resource reporting and the reporting of production, exports, commodity prices and royalties onproduction tenements. Mine safety audits are also required to deal with a backlog ofinvestigations. This Project component will be implemented through a participatory approach andon-the-job training and include the establishment of efficient procedures for monitoring andauditing of company reports and activities, and the participation of national staff in technical,commercial and legal training courses. This Project component will support Department ofMining to: 1) prepare appropriate monitoring and reporting strategies for exploration and miningcompanies; 2) prepare audit strategies and train staff in the identification of key issues for auditinspection; 3) execute prospect and project audits and reviews; 4) carry out mine safety audits; 5)prepare assessments of degree of compliance; 6) develop decision point analysis and strategies fordealing with issues of non-compliance; and 7) prepare cases for punitive action under the MiningAct, or prosecution as required. Provisions of this component will include the financing of:international and local consultants; incremental operating costs related to travel and training;purchase of basic core office equipment, legal and technical literature, and vehicles.

Project Component 3 - US$ 0.84 million (including contingencies)

Strengthening of Departmental Mineral Tenements Management

The Mining Act 1992 requires that old leases, which had been issued under the previous repealedAct, be converted to new leases. There exists, however, a large backlog in tenement conversionsdue to the limited capacity of the Department to survey the old leases for the transfer. This hassignificantly affected new exploration and mine development investments in some areas, becausenew leases cannot be issued until the location of existing leases can be defined by survey. Thiscomponent entails: 1) development of a strategic action plan for lease conversions; 2) executionof field assessments to determine whether existing leases are active and effectively utilizing thestates mineral resources; 3) cadastral boundary survey definition will be carried out to meet therequirements of lease transfer for those leases which are to remain in force; 4) lease boundarydefinitions will be input into the departmental database for plotting and verification.

The Department of Mining presently maintains these lease documentation in paper registers.Some information including lease boundary descriptions are entered into an antiquated computerdatabase for plotting. Updating into an integrated lease management system linked to theDepartments central GIS is required in order to facilitate lease management into the future. Thiscomponent also involves: 1) development of a mineral tenements management database withsufficient security features to ensure data integrity which incorporates all aspects of tenementadministration required under the Mining Act 1992; and 2) integration of the tenements databaseinto the departmental GIS system.

Mining Wardens are responsible for the collection of public input into the licensing procedure andfor the determination of the quantum of payments to be made in compensation claims againstexploration and mining companies. The Wardens are required to have a working knowledge ofmining and land law as well as a knowledge of appropriate values for damages in addition to skillssuch as investigation of claims and judicial inquiries. The Wardens require training and exposureto established systems to assist in strengthening their ability to deliver the required services inPapua New Guinea.

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Provisions of this component will include the financing of a land surveying company to carry outlease boundary surveys; incremental operating costs related to travel and training; purchase ofspecialized survey software and computer and plotting equipment.

Project Component 4 - US$1.10 million (including contingencies)

Development of Project Coordination and Environmental Assessment Capacity forSustainable Development in Mining Project Areas

Mining projects cause significant social, economic, and environmental change in often remoterural areas where land ownership is under customary title. Managing this change and ensuring thatproject benefits are channeled into ultimately sustainable development activities which can sustainlocal communities beyond mine life is the function of the Project Coordination Branch of theDepartment of Mining. The provision of advice on the environmental effects of mining and theirimpacts on these same social issues is the function of the environmental resource scientists in theProject Assessment branch of the Department. Managing the process of social change andmaintaining an harmonious operating environment for the mine developer are critical to the longterm success and continuity of all mining projects. This requires that coordinators have a widerange of skills including basic social and economic knowledge of exploration and mining projects,environmental impacts, negotiation and mediation, land management, communication, businessmanagement, accounting and financial skills, and a knowledge of development economics.Training is required in all of these areas for project coordinators and liaison officers.Environmental resource scientific staff also require assistance and training opportunities in orderfor the environmental effects of mining on communities to be adequately appreciated andaccommodated in the development process. This project will develop project coordination andenvironmental assessment capacity for sustainable development in mining project areas through:(i) the carrying out of a training needs analysis; (ii) training and skills development of projectcoordinators, resource scientists and liaison officers in basic social and economic knowledge ofexploration and mining projects, environmental impacts, negotiation and mediation, landmanagement, communication, business management, accounting and financial skills, and aknowledge of development economics; (iii) meetings on the environmental, engineering, socialand development issues associated with mining operations. Provisions of this component willinclude the financing of international and local consultants and trainers, environmental workshopswith an international component, and incremental operating costs related to travel and training.The component will also support retreat, seminars, workshops and conferences (including afollow-up to the 1999 Madang Conference on Mining and the Community). Department ofMining will take the lead in organizing such events to involve all interested stakeholders,provincial governments and other government departments. In particular, this will support DoM inaddressing how mining development can better contribute to poverty alleviation and ruraldevelopment in PNG. Studies will also be undertaken to see the extent to which compensationbenefits reach the most needy members of the community and all segments of the community areadequately represented in consultation and negotiations with project developers and operators.Regional plans for one or two mining areas will be developed in a fully participatory mannerinvolving local communities and provincial government officials. These activities should lead tothe strengthening of government institutional capacity in this regard so that mining development isbetter integrated into overall rural and regional development.

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Project Component 5 - US$4.31 million (including contingencies)

Institutional Strengthening of the Geological Survey and Development of GeologicalInformation System (GIS) Capabilities

Institutional development of the PNG Geological Survey is required to provide high qualitygeological data products to other government institutions and Industry. This component is 1) tostrengthen the capacity of the PNG Geological Survey to contribute to and benefit from the newlyavailable data sources and digital mapping capability; and 2) to develop a Geological InformationSystem (GIS).

5.1 Institutional Strengthening of the Geological Survey(a) Remote Sensing

Currently the Geological Survey has no remote sensing data to assist in the geologicalinterpretation of Papua New Guinea. This sub-component requires the acquisition of remotesensing data and the introduction of software and training to enable the integration of remotesensing techniques into the mapping and interpretation of the geology of PNG. Principal data setsrequired include Radarsat SAR, Landsat, Spot, and if available, Seasat. Training in remote sensingwill include the use of imaging software and the integration of digital remote sensing images intothe GIS and thematic mapping and geological interpretation. The main objective of this sub-component is: 1) to acquire digital and analogue remote sensing data and images; 2) to assistDepartment of Mining to establish an appropriate software suite to manipulate a remote sensingdatabase to allow a structural reinterpretation of the geology of Papua New Guinea; 3) to assistDepartment of Mining in geohazard mapping for infrastructure and land use planning. Provisionof this sub-component will include the acquisition of available remote sensing data for PNG,appropriate software and necessary computer hardware, and the provision of a consultant to trainnational staff in remote sensing data management techniques and map generation.

(b) Geophysical data interpretation

The PNG Geological Survey has copies of meta data provided by previous geophysical surveyscarried out by both the government and mineral and petroleum exploration companies. This datais currently somewhat disjointed and has not been integrated to assist the routine geologicalinterpretation of PNG. The objective of this sub-component is to: 1) assist Department of Miningto develop an integrated geophysical data set using available meta data; and 2) to develop thegeophysical interpretation skills of national staff.

(c) National Lithostratigraphic Lexicon and Map Rectification

Rationalization of the geological units present in Papua New Guinea and the completion of aprogram to digitise the existing 1:250,000 and 1:100,000 series geological maps of Papua NewGuinea are essential. To date the Australian Geological Survey Organization (AGSO) hasdigitized the PNG lithological polygons from the 1:250,000 map series. Structural and point dataremain to be digitized. This process has highlighted a considerable number of map boundarymismatches showing different geological units which need to be rationalized prior to thecompletion of a nationwide digital geology of PNG. This project sub-component will necessarily

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involve: 1) the development of a national lithostratigraphic lexicon and database; 2) completionof digitization of the 1:250,000 geological map series; 3) the production of a national standard forgeological map legends; 4) resolution of the existing edge-matching problems in the existinggeological map series; and 5) primarily training in the production of geological thematic maps.This will require field mapping and checking of map boundary areas on the ground to determninethe most appropriate geological units to be used.

5.2 Development of a Geological Information System

An essential tool for public institutions in mining as well as in other land use, enviromnentalmanagement activities and, more generally, in society development is open and efficient access toaccurate and reliable geological information. Today, this can be best achieved through modeminformation technology, including electronic comnmunication and development of an integrated setof GIS-related geo-data banks. Department of Mining holds a large number of maps, technicalreports and geological, geochemical and geophysical data generated by the institution or by miningcompanies. However, most of the information is in a hard copy format and is not easily availableto potential users. This has negatively affected the information services the Department shouldprovide to its clients, including mining investors. In order to achieve this development goal, thiscomponent will make use of state of the art technology to gather, store and provide information toa wide range of clients in a timely fashion. It will help Department of Mining to (i) develop aninformation policy and its implementation strategy; (ii) set-up the institutional informationmanagement framework, including the identification of human and financial resources to sustainits development and maintenance; (iii) design and build-up an integrated geological and mininginformation system, including the purchase of software and hardware, installation of a LAN,development of a Web site and connection to internet; (iv) training of Department of Mining usersat different levels in information, database and network management as well as in processing andoutput of thematic maps and customized products; (v) input of relevant existing data according topriorities defined under (i). This component will provide for the financing of (a) international andlocal consultants; (b) works and equipment including, software and hardware specificallydedicated to the system functions, communications devices and accessories; software requirementswould include programs in administrative system and database management, processing,communications and editing; subscription to international and national electronic databases andinternet; some rehabilitation work, in particular network cabling and connections, upgrading ofelectrical supply and computer security in DM offices; and (c) training.

Project Component 6 - US$1.22 million (including contingencies)

Institutional Strengthening and Capacity Building for IRC

The Internal Revenue Commission (IRC), through the Resources Monitoring Division, carries outaudits of mining and petroleum companies to collect revenues. The current capacity within IRC,however, restricts it to undertaking assessments of financial records of the companies as provided.No field audits are carried out. Significant legislative work has been done to cope with theconditions which apply to the companies in the country. In order to provide IRC with long termauditing capacity to enhance the country's revenue base, this Project component supports IRC to:(i) determine matters to be scrutinized and its effect to the revenue; (ii) carry out pilot audits totheir results; (iii) carry out full audits as directed by IRC; and (iv) prepare draft guidelines forfuture audits; (v) carry out other duties of IRC as relevant to the mining and petroleum sector.

32

This Project component will be implemented through a participatory approach and on-the-jobtraining and include the financing of: consultants; incremental operating costs related to travels andtraining; and purchase of basic core office equipment, vehicles, and technical literature.

Project Component 7 - US$1.22 million (including contingencies)

Project Coordination and Implementation Unit (PCIU)

The Project Coordination and Implementation Unit (PCIU) will monitor, supervise, and providetechnical and administrative management control of the Project. The PCIU will manageprocurement, including all contracting works and purchases, and the hiring of consultants, thecontractual relationship with the Bank and the Project's overall administration and financialmanagement, which includes accounting, reporting, managing the Project's Credit Account and itsother funding. PCIU will be responsible for preparing and submitting to the Bank quarterly reportsdealing with Project implementation, and for contracting under Terms of Reference acceptable tothe Bank, the yearly audits of the Project including the timely submission of such audit reports tothe Bank. The Project will finance the contracting within the PCIU of a PCIU Director, PCITJAccountant, and PCIJ Procurement officer, and administrative support staff Funding is providedfor the unit's operating costs, as well as some operational equipment.

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Annex 3: Estimated Project Costs

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

Local Foreign TotalProject Cost By Component US $million US $million US $million

Policy and Regulatory Institutional Strengthening 0.21 1.25 1.46

Development of Departmental Capacity to Monitor and 0.64 0.29 0.93Execute Technical Audits of Exploration and MiningActivities

Strengthening of DoM Mineral Tenements Management 0.40 0.35 0.75

Development of Project Coordination and Environmental 0.28 0.71 0.99Assessment Capacity for Sustainable Development in MiningProject Areas

Institutional Strengthening of the Geological Survey and 1.23 2.66 3.89Development of Geological Information System (GIS)Capabilities

Institutional Strengthening and Capacity Building for IRC 0.76 0.33 1.09

Project Coordination and Implementation Unit (PCIU) 0.76 0.33 1.09

Auditors Fee 0.04 0.00 0.04

Total Baseline Cost 4.32 5.92 10.24Physical Contingencies 0.29 0.40 0.69Price Contingencies 0.21 0.29 0.50

Total Project Costs 4.82 6.61 11.43Front-end fee 0.10 0.10

Total Financing Required 4.82 6.71 11.53

34

Local Foreign TotalProject Cost By Category US $million US $million US $million

Services 3.21 3.90 7.11Training 0.21 0.60 0.81Goods 0.12 1.16 1.28Incremental Operational Costs 0.72 0.24 0.96PCIU Operating Costs 0.06 0.02 0.08

Physical Contingencies 0.29 0.40 0.69Price Contingencies 0.21 0.29 0.50

Total Project Costs 4.82 6.61 11.43Front-end fee 0.10 0.10

Total Financing Required 4.82 6.71 11.53

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Annex 4: Cost Effectiveness Analysis Summary

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

Cost Effectiveness - Sector Financial Contribution:

Mineral production in Papua New Guinea has consisted essentially of two commodities, copperand gold. In the mid-1960s, following the discovery and development of the Bougainville copperproject, the country benefited from an active mineral exploration and mining industry. This led tothe discovery of the Ok Tedi copper and gold deposit and the Frieda copper deposit soon afterBougainville in the late 1960s. In the 1970s, the target of mineral exploration shifted to gold. Thisled to active exploration program resulting in discoveries in many areas including Porgera,Misima, and Hidden Valley. The exploration success continued up until the late 1980s with thediscovery of Lihir, Wafi, Simberi, Tolukuma, Mt Sinivit, and Mt Kare. Four world class mines -the large Ok Tedi copper and gold mine and the Porgera, Misima and Lihir gold mines; plus asmall gold mine at Tolukuma were subsequently developed in 1980s and are in production. Theproduction of these two metals had constantly increased in 1970s to 80s because of thedevelopment of Ok Tedi, Porgera, and Misima. After the closure of the Bougainville coppermine, however, the copper production in the country began to decrease. There was a majorincrease in gold production in the early 1990s with the opening of the Porgera mine. The PNGmining sector has exported about US$ 1 billion worth of copper and gold products annually andUS$100 million - 200 million in tax transfers and direct community benefits each year.

Project Benefits:

As mineral exploration is essential to the long term stability of the sector to contribute to thenational economy, one of the most important indicators of the project is the amount of theinvestment for exploration. If the project will be successfully implemented, the explorationspending by private investors is expected to increase by 2005 from the current US$ 12 million tothe level of the early 1990s (which was approximately US$ 50 to 60 million per year).

Through increasing its ability to provide timely and reliable regulatory oversight for the miningsector, the mining sector in the country can also improve environmental performance and achievesafer exploration and mining operations and increase tax collections at a time when revenuecollection is a critical country priority.

The Project will cost the Government about US$11.5 million. The additional tax collections fromthe IIRC component are likely to be anywhere from double or more that amount. The additionalbenefits to Government and communities of additional mining exploration and mine developmentcould range from US$ 1-2 million from a modest exploration venture to tens of millions of dollarsbenefiting local communities and hundred of millions of dollars benefiting the national economyfrom just one additional world class mining development.

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Annex 5: Financial SummaryPAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

IMPLEMENTATION PE RIOD (S TART 07/01/00)Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Total Financing RequiredProject CostsInvestment Costs 0.7 3.2 3.2 2.0 0.8 0.0 0.0Recurrent Costs 0.3 0.3 0.3 0.3 0.3 0.0 0.0

Total Project Costs 1.0 3.5 3.5 2.3 1.1 0.0 0.0

Front-end fee 0.1 0.0 0.0 0.0 0.0 0.0 0.0Total Financing 1.1 3.5 3.5 2.3 1.1 0.0 0.0

FinancingIBRD/IDA 1.0 3.0 3.0 2.0 1.0 0.0 0.0Government 0.1 0.5 0.5 0.3 0.1 0.0 0.0

Central 0.1 0.5 0.5 0.3 0.1 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Project Financing I 1.1 3.5 3.5 2.3 1.1 0.0 0.0

OPERATIONAL PERIOD (START 07/01/00)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Total Financing RequiredProject Costs

Investment Costs 0.7 3.2 3.2 2.0 0.8 0.0 0.0Recurrent Costs 0.3 0.3 0.3 0.3 0.3 0.0 0.0

Total Project Costs 1.0 3.5 3.5 2.3 1.1 0.0 0.0

Front-end fee 0.1 0.0 0.0 0.0 0.0 0.0 0.0Total Financing 1.1 3.5 3.5 2.3 1.1 0.0 0.0

FinancingIBRD/IDA 1.0 3.0 3.0 2.0 1.0 0.0 0.0Government 0.1 0.5 0.5 0.3 0.1 0.0 0.0

Central 0.1 0.5 0.5 0.3 0.1 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.00.0 0.0 0.0 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Project Financing 1.1 3.5 3.5 2.3 1.1 0.0 0.0

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Annex 6: Procurement Arrangements

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

1 Guidelines

Procurement of goods and works, and consultant services funded wholly or partly by Bank Loanwill be carried out in accordance with Bank procurement guidelines ("Guidelines for Procurementunder IBRD Loans and IDA Credits" of January 1995 revised January and August 1996,September 1997 and January 1999, and the "Guidelines for Selection and Employment ofConsultants by World Bank Borrowers" of January 1997 revised September 1997 and January1999 (the Guidelines).

There are several conflicts between the procurement procedures of the Government of Papua NewGuinea and those of the World Bank. These include but are not limited to:

* to reserve all construction contracts valued between K 1.0 million and K 5.0 million tocitizen or national companies;

* to reserve all construction contracts valued between K 5.0 million and K 10.0 million tojoint ventures and consortium group where the overseas partner has a maximum of 50%share;

* to open for general bidding only for contracts valued above K 10.0 million; to award allconsulting contracts up to K 100,000.00 to citizen companies only; and, that bidders(contractors and consultant firms) must be registered with the association of nationalcontractors or consultants in order to participate in bidding.

The Government confirmed at negotiations that these provisions are not applicable to this projectand that World Bank procurement rules will apply. The proposed Procurement methods aresummarized in Tables A and Table A. 1.

2 Summary of the Assessment of the Agency Procurement Capacity.

Assessment of the procurement capacity of the DoM which (through the PCTU) is responsible forall the of the procurements under the project, was carried out in accordance with the World BankOffice Memorandum from the Manager of OCSPR, dated August 11, 1998. The assessmentinvolved review of the procurement policies and procedures adopted and implemented in the DoM.In general, the law, rules and regulations relating to procurement being implemented by the DoMadhere to the principles of competition and are intended to promote economy, efficiency andtransparency. However, certain provisions of the Public (Finances) Management Act No. 35 of1995, the Financial Instructions of January 1987, and the GoPNG related decisions in NEC 66/92and NEC 41/95 are unacceptable to the Bank.

Despite close relationship between DoM and Department of Petroleum, which is currentlyimplementing the Petroleum TA project, there is presently nil capacity at DoM to undertakeprocurement under Bank financed project, hence it is required that procurement technicalassistance be undertaken under the project as part of the DoM and IRC institutional capacity

38

strengthening. The early establishment of a Project Coordination and Implementation Unit (PCIU),will help DoM minimize project start up difficulties, advance project readiness and better manageproject implementation.

3 Methods

All Procurement under the project will be carried out by the PCIU within DoM following agreedprocedures and using the appropriate Standard Bidding Documents (SBD) and Standard Requestfor Proposals (SRP) of the Bank. Procurement under the project consists largely of consultancyservices and a few number of small goods contract intended to (i) improve the DoM's capacity fordeveloping, negotiating and managing mining exploration and operations, (ii) institutionalstrengthening and capacity building for the IRC, and (iii) establishment of PCIU to be based at theDoM

A. Goods: (US$ 1.43 million). Goods envisioned under this component, include purchase anddelivery of computers, office equipment software, geological data (satellite images) vehicles,supplies, office furniture and fittings.

(a) Goods packages with cost in excess of US$ 100,000 will be procured followingInternational Competitive Bidding (ICB) using the appropriate Bank's Standard BiddingDocuments (SBDs), up to a maximum aggregate cost of about US$ 0.25 million. This consists ofone package of vehicles for project components 1, 2, 3 and 5.

(b) Goods contracts estimated between US$ 50,000 and US$ 100,000 equivalent will be donefollowing International Shopping (IS) procedures as defined in paragraphs 3.5 and 3.6 of theGuidelines, up to a maximum aggregate amount of US 0.27 million for remote sensing image,software and equipment acquisition needed for strengthening the Geological Survey andestablishing a GIS system (for Component 5) which is highly specialized and only available froma small number of specialized international suppliers

(c) Goods contracts estimated to cost less than US$ 50,000 equivalent will be done followingNational Shopping (NS) procedures as defined in paragraphs 3.5 and 3.6 of the Guidelines, up toa maximum aggregate amount of US$ 0.31 million.

(d) Goods Contracts estimated to cost between US$ 50,000 and US$ 100,000 equivalent eachup to a maximum aggregate value of about US$ 0.6 million will be done following DirectContracting procedures as defined in paragraph 3.7 of the Guidelines for digital and analogueremote sensing satellite data and image which is only available from single sources for the GISsystem (Components 5).

B. Consultant Services (US$ 7.94 million). The services to be financed under the loan are:policy and regulatory review, designing and equipping two data base centers with computer hardand soft wares, commissioning and on-the-job training; technical assistance (regarding miningsector administration, social and environmental protection, and fiscal auditing); training andorganizing study tours abroad. Selection of Consultants and their contracts will be based on theStandard Request for Proposals issued by the Bank.

39

(a) Selection of consultants up to aggregate amount of US$ 4.62 million equivalent, will becarried out following Quality and Cost Based Selection (QCBS) Method, in accordance with theWorld Bank Consultant Guidelines Section II, paragraph 3 of Appendix I thereto, Appendix 2thereto, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to quality- and cost-based selection of consultants.

(b) Selection of consultants up to aggregate amount of US$ 1.94 million, will carried outfollowing Quality Based Selection (QBS) Method, as described in paragraphs 3.1-3.4 of theConsultant Guidelines because these are complex and specialized assignments where the clientexpects the consultants to demonstrate innovation in their proposals.

(c) Individual Consultants. Selection of individual consultants up to aggregate amount of US$0.94 million, meeting the requirements set forth in paragraph 5.1 of the Consultant Guidelinesshall be procured under contracts awarded to individuals in accordance with the provisions ofparagraphs 5.1 through 5.3 of the Consultant Guidelines.

(d) Selection of consultants up to an aggregate amount of US$ 0.05 million will be carried outfollowing Selection under a Fixed Budget (SFB) method as defined in paragraph 3.5 of theConsultant Guidelines for certain training and support related assignments.

(e) Selection of consultants up to an aggregate amount of US$ 1.26 million will be carried outfollowing Consultant Qualifications (CQ) method as defined in paragraph 3.6 of the ConsultantGuidelines for the appointment of the PCIU staff and for certain training assignments includingworkshop and conference leaders and facilitators.

(f) Single source selection. Short term consultants, which are estimated to cost less than$100,000 equivalent per contract up to an aggregate amount of US$ 0.29 million, will be selectedand procured in accordance with the provisions of paragraphs 3.8 through 3.11 of the ConsultantGuidelines.

(g) Selection of Auditors, estimated at US$ 0.05 million, will be carried out is following theleast-Cost Selection (LCS) method in accordance with Paragraph 3.6 of the Consultant Guidelines.

(h) Training. Procurement of training will be carried following comparison of qualifications ofindividual trainers or training institutions who have provided training in the past, satisfactory to theBank.

C. Incremental Operating Costs (US$ 1.16 million). Support for project management,operation, and supervision activities for both the DoM and IRC programs (including, but are notlimited to expenditures for travel, per diem, operating costs for vehicles, including vehicleinsurance, communications, meetings (such as retreats, seminars, workshops and conferences), andoffice materials required for project implementation) will be provided in accordance with existingGovernment prescribed limits and procedures acceptable to the Bank.

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4 Prior Review. The procedures set forth in Paragraph 2 of Appendix 1 to the Guidelines shallapply to:

(a) first two contracts per year for goods procured following shopping procedures

(b) Each contract for goods estimated to cost in excess of US$ 200,000 equivalent, and allcontracts awarded through ICB;

(c) Consultants services with firms valued at US$ 100,000 equivalent or more, and contractswith individuals valued at US$ 50,000 equivalent or more; and

(d) Terms of Reference for all consultant services and individual services.

5. Post Review. With respect to each contract not governed by Para 4 above, the procedures setforth in Paragraph 4 of Appendix I to the Guidelines shall apply. Ratio shall be 1: 6 contracts.

6. Domestic Preference. For ICB procurement, goods manufactured in the territory of theBorrower may be granted a margin of preference in accordance with and subject to the provisionsof Paragraphs 2.54 and 2.55 of the Guidelines and Annex 2 thereto.

7. Advance Contracting and Retroactive Financing. To accelerate project implementation, theDoM has proceeded with the initial steps of drafting the TOR, bidding documents, RFPs inaccordance with Paragraph 1.9 of the Guidelines. PCIU staff are planned to be mobilized by May,2000. Award recommendation is expected to be submitted to the Bank before mid April, 2000.Advance contracting and retroactive financing up to US$ 0.2 million will be included in theproject.

8. Procurement Improvement Action Plan: To ensure that procurement under the project willbe carried out efficiently and institutional capability will be strengthened within DoM and IRC, thefollowing will be undertaken:

(i) Advance project readiness and minimize start up difficulties - will be accomplishedthrough establishment of PCIU ahead of effectiveness, to be staffed with a Project Director, aProcurement Specialist and an Accounting Specialist with satisfactory qualifications andexperience in carrying out project coordination and implementation, in accordance with TORacceptable to the Bank. The PCIU will be mainly responsible in carrying all aspects ofprocurement (i.e. drafting bidding documents and reviewing TORs, etc).

(ii) Improved planning and monitoring - will be accomplished through advance planning,establishing a Procurement Benchmark and Disbursement Target (PBDT) which details themilestones for all procurement vis-a-vis the resulting projected disbursement. The PBDT should bebased on the enclosed procurement plan (Attachment 1) agreed with the DoM during appraisaland finalized at negotiations. The PCIU, along with the National Planning and MonitoringDepartment, will review, monitor and update progress on the PBDT periodically every twelvemonths.

41

(iii) Strategic Direction and Oversight - a DoM/IRC Project Steering Committee has beenestablished which will provide overall strategic direction for the project, review project progressand solve any inter-agency issues or problems that may arise.

(iv) Capacity building - DoM and IRC staff will undergo integrated training on procurementand financial management by about effectiveness of the Loan. As mainstreaming of PCIU tasksinto the DoM is required for sustainability of operations including the required transfer oftechnology, the DoM and IRC should provide middle level DoM national professionals to workclosely with the PCIU

(v) Procurement Operations Manual (POM) - A POM embodying principles of efficiencyand transparency will be issued and operationalized within six months of effectiveness. Themanual, which should be based on current Bank guidelines, should provide DoM clearprocurement steps, procedures and detailed instructions regarding the different stages of theprocurement processes, the activities in each process, the staff responsible for an activity and thelength of time allotted to the staff to complete an activity.

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Procurement Methods - Table A

Table A: Project Costs by Procurement ArrangementsI(US$ million equivalent)

Expenditure Category 1CB NCB Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00)_ (0.00) (0.00) (0.00)

2. Goods 0.25 0.00 1.18 0.00 1.43(0.22) (0.00) (1.07) (0.00) (1.29)

3. Services 0.00 0.00 8.23 0.00 8.23(0.00) (0.00) (7.50) (0.00) (7.50)

4. Training 0.00 0.00 0.61 0.00 0.61(0.00) (0.00) (0.54) (0.00) (0.54)

5. Front-end fee 0.00 0.00 0.10 0.00 0.10(0.00) (0.00) (0. 10 ) (0.00) (0. 1 0)

6. Incremental Operating Costs 0.00 0.00 1.07 0.00 1.07(0.00) (0.00) (0.49) (0.00) (0.49)

7. PCIU Operating Cost 0.00 0.00 0.09 0.00 0.09(0.00) (0.00) (0.08) (0.00) (0.08)

Total 0.25 0.00 11.28 0.00 11.53(0.22) (0.00) (9.78) (0.00) (10.00)

1/ Figures in parenthesis are the amounts to be finarced by the Bank. All costs includecontingencies

2/ Includes goods to be procured through international and national shopping, consultingservices, services of contracted staff of the project management office, training,technical assistance services, and incremental operating costs.

3/ Numbers may not add up due to rounding.

Note: the "Other" procurement category for goods consists of US$ 0.6 million (UJS$ 0.56 millionBank financing) satellite data and images for the geological infornation system to be procured bydirect contracting; US$0.27 million (US$ 0.23 million Ban-k financing) goods to be procured byInternational Shopping and US$0.31million (US$ 0.28 mil][ion Bank financing) to be procured byNational Shopping

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Table Al: Consultant Selection Arrangements 1/(US$ million equivalent)

Consultant Services Selection MethodExpenditure

Category QCBS QBS SFB LCS CQ SS N.B.F. Total_______ Cost,

A. Firms 4.61 1.95 0.05 0.05 0.00 0.00 0.00 6.66(4.20) (1.77) (0.04) (0.04) (0.00) (0.00) (0.00) (6.05)

B. Individuals 0.00 0.00 0.00 0.00 1.36 0.21 0.00 1.57((0.00) 0.00) (0.00) 1.26) (0. 19 (0.00) (1.45)

Total 4.61 1.95 0.05 0.05 1.36 0.21 0.00 8.23(4.20) (1.77) (0.04) (0.04) (1.26) (0.19) (0.00) (7.50)

Note: Figures in parenthesis are the amounts to be financed by the Bank.

l\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsSS = Single Source Selection

N.B.F. = Not Bank-financed

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Prior review thresholds (Table B)

On the basis of the procurement capability assessment, the prior review thresholds will beas follows.

Table B: Thresholds for Procurement Methods and Prior Review 1Contract Value Contracts Subject to

Threshold Procurement Prior ReviewExpenditure Category (US$ thousands) Method (US$ millions)

1. Works no works contracts n.a. n.a.2. Goods

100 and above ICB/DC 1/0.2550 -100 IS 2/0.240- 50 NS 3/0.93

3. ServicesFirms 100 and above QCBS/QBS/SFB/LCS 17/5.97

0 -100 and all terms of reference Noneapplicable to therespective values

Individuals 50 and above 1/0.120 - 50 CQ/SS None

and all terms of referenceapplicable to therespective values

4. Miscellaneous n.a.

Total value of contracts subject to prior review: US$7.51million(82%)

Overall Procurement Risk Assessment: Average

Frequency of procurement supervision missions proposed: One every six months (includesspecial procurement supervision for post-review/audits)

Procurement Plan

A Procurement Plan for the project has been prepared. It identifies all the packages for eachproject component and provides key steps. The start and end times of each task relate to the firstyear of project implementation. For subsequent years, the tasks would remain the same but thestart and end times (not possible to ascertain at this stage as these would also be need based) wouldbe different.

I Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Annex 7: Disbursement, Project Financial Management, Financial Reporting andMonitoring, and Implementation Planning Arrangements

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

A. Disbursement

Table A: Allocation of Proceeds

Expenditure Category Amount in Financing PercentageUS$million

Equipment and Materials 1.16 100% of foreign expenditures,100% of local expenditures (ex-

factory) and 85% of expendituresfor other items procured locally

Consultant Services and Training 7.21 100%Incremental Operating Costs 0.41 declining balance 80% through

2002; 60% 2003; 40% 2004; 20%2005 thereafter

PCIU Operating Costs 0.08 100% of foreign expenditures,100% of local expenditures (ex-

factory) and 85% of expendituresfor other items procured locally

Unallocated 1.04

Total Project Costs 9.90

Front-end fee 0.10

Total 10.00

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A.1 Implementation Period: The implementation period for the project is estimated at fouryears starting July 1, 2000. Annual disbursement based on the implementation schedules areestimated as follows:

|Implementation Year Year One Year Two Year Three Year Four Year Five

Disbursement (US$ million) 1.0 3.0 3.0 2.0 1.0

A.2 Disbursement Schedule: On the basis that the loan becomes effective inSeptember 2000, the disbursement schedule in the Bank financial years would be asfollows:

Bank Financial Year 2001 2002 2003 2004 2005Disbursement (US$ million) 1.0 3.0 3.0 3.0 1.0

A.3 Disbursement Procedures. Disbursements would be made either directly by the Bank orthrough a Special Account. In the latter case, the PCIJ through the DoM will open a SpecialAccount with a reputable commercial bank upon the authority of the Department of Treasury. Theaccount will be maintained in Kina. An initial deposit in Kina equivalent to US$ 500,000 will bemade into the account as an advance from the loan; this represents the four-month average ofproject expenditures to be financed through the Special Account. All expenditures are expectedto be financed through the Special Account, however, if related individual payment is large, i.e.exceeds 20% of the Special Account balance, PCIU , at their option, may submit withdrawalapplication for payment outside the Special Account (i.e. Direct payment). Replenishmentapplications should be submitted on a monthly basis. Disbursements for goods contracts less thanUS$200,000 and consultants' services contracts less than US$ 100,000 for firms and less thanUS$100,000 for individual contracts will be made on the basis of Statements of Expenditure(SOEs) for payments made from the Special Account. In addition, SOEs will be used forincremental operating costs and for training-related disbursements. All documentation in respectof SOE disbursements will be maintained by the PCIU and will be subject to periodic review bythe Bank. Direct payments, however, will be permitted for such small amounts on application tothe Bank if required and justified. Nevertheless, to the extent possible, payments would bechanneled through the Special Account. For payments of amounts of the value of US$200,000and above, direct payments will be made on application to the Bank.

A.4 The project will finance incremental operating costs for DoM, IRC, and the PCIU. Fundswill be disbursed on a declining balance for the DoM and IRC incremental operating costs in orderto ramp up the government contribution so that it is sustainable after the project is completed. ButPCIU operating costs will be funded as a flat percentage since the PCIU will not continue tooperate once the project is completed.

A.5 Special Account. To facilitate disbursements against eligible expenditures, a US$ 500,000Special Account will be established. The Government will establish, maintain and operate thespecial account under conditions acceptable to the Bank. Payments under 20% of the authorizedallocation to the special account will be made from the special account. Replenishmentapplications will be submitted quarterly.

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B. Project Financial Management

B.1 Finanical Management Assessment.

An assessment of the financial management systems of the DoM and IRC was carried out. Theaccounting system used by the DoM is the computerized PNG Government Accounting System(PGAS). The system has comprehensive expenditure control and reporting functions forexpenditures made under the Consolidated Revenue Fund (CRF), which is appropriated under theRecurrent Budget. However, the PGAS can not provide the financial reports required by the Bank.The manual systems and procedures , including the internal controls supporting the PGAS seemadequate. The DoM has little experience with management of donor-funded projects. The twoAusAID funded projects being implemented by the DoM are managed by private contractorsemployed by AusAID and there has been little administrative input from DoM in theirmanagement. This situation requires establishment of a project management unit with experiencedand qualified staff. It is envisioned that financial management and procurement of both the DoMand the IRC component will be handled by the Project Coordination and Implementation Unitbased in DoM.

B.2 Project Financial Management System.

In order to ensure that the project financial management system adheres to the GoPNG statutoryprocedures and the Bank's project financial management and reporting requirements, it isenvisioned that project financial management system will essentially be a manual system with theaddition of a standard Microsoft Excel spreadsheet to record sufficient transactions in order togenerate required reports. A project accountant will be appointed, and it is proposed thataccounting support be provided through a reputable accounting firm to provide end-of-monthaccounting and reporting services. It is expected that, once the Action Plan to establish theproject financial management system is completed, it will address weaknesses identified in theassessment of the financial management systems of the implementing agencies. The PCIU will

compile, by the effectiveness of the loan, a project financial management handbook which willreference applicable Bank and Government financial procedures for project implementationproviding clearly mapped guidelines. It is expected that PMR reporting will be generated byDecember 31, 2000. The project will use traditional SOE disbursement procedures. However,feasibility of adopting the PMR-based disbursement procedures will be reviewed by the end ofDecember, 2001.

B.3 Oversight.

In order to enable the project to be implemented in a timely and prudent manner, a DoM/IRCsteering committee will be established to oversee the project. The Secretary DoM will be theChairman and the Commissioner General of IRC will be the Deputy Chairman. A projectCoordination and Implementation Unit (PCIU) will be established within DoM and will beresponsible for project financial management and for managing the Special Account and makingdisbursements of loan proceeds. The PCIU will consist of a director, a procurement specialist, anda project accountant. The DoM will develop, by the date of effectiveness of the loan, a projectfinancial management handbook which will reference applicable Bank and Government financial

48

policies and procedures for project implementation. It will also develop an appropriate projectfinancial management system satisfactory to the Bank in order to produce the PMR reports asoutlined in the LACI Implementation Handbook, by December 31, 2000.

B.4 Audit Arrangements

The Borrower will be required to have the project financial statements audited for each fiscal yearby independent auditors acceptable to the Bank and make such audited statements available to theBank within six moths after the end of each fiscal year. The terms of reference for the audit will beprovided to the independent auditors prior to their engagement.

B.5 Financial Management Action Plan

The following action plan has been agreed with DoM for the financial management of the project.

Actions to be taken Responsible Group Completed ByI. Organization and Staffinga. Appointment of DoM/IRC Steering GoPNG Completed March 3, 2000Committee to oversee financial management andreporting of the project.b. Establishment of PCIU DoM (PCIU) Completed March 3, 2000c. Appointment of Project Director, DoM (Steering EffectivenessProcurement Officer and Project Accountant Committee)II. Accounting System and Proceduresa. Issuance of a Financial Management System DoM (PCTU) EffectivenessHandbook acceptable to the Bankb. Issuance of a Procurement Operations Manual DoM (PCIUJ) December 31, 2000acceptable to the Bankc. Establishment of Project Financial PCIU December 31, 2000Management System acceptable to the Bank

C. Financial Reportin2 and Monitoring

C.1 Project Progress Reports

The project will be using the project management reporting (PMR) system to monitor progress inthe physical implementation of the project and to assess the project's budgetary and financialstatus. The following quarterly financial, project progress, and procurement management reports asspecified in the LACI Implementation Handbook will be produced: Model Reports IA, 1B, ID,IE, IFI 1F2, 2A, 2B, 3A, 3B, 3C and 3D as required. Production of these quarterly reports willcommence after the end of the first quarter following the date of loan effectiveness.

C.2 Output Indicators

Whilst the financial reports and the procurement management reports clearly recognize inputdata, the project progress reports require the use of output data to measure development

49

effectiveness. Identification of output measures will involve the measurement of outcomes toassess overall project development effectiveness. The broad output indicators include thefollowing training outputs, studies, conferences, publications and data and equipment acquisition.For the purpose of the Simplified Model Report 2B, the following have been selected as outputindicators:

ACTIVITY PMR UNIT PLANNED OUTPUT

On-the-Job Training Man-years of training 50Short Courses Course 20Management Training Course 10Post Graduate Studies Study years 6Industry Conferences Events 2Promotional Packages Package 2Exhibitions Exhibition 8Seminars/workshops Seminars 20Publications Publications 3Institutional Study Study 2Remote sensing data acquisition US$ spent 550,000Equipment acquisition US $ spent 350,000

All of the above activities are readily measurable except for equipment and data acquisition whichare presented in expenditure terms. In determining, the appropriate PMR unit to measure theoutput of the on-the-job training activity, regard was given to the availability of professional staffand experts' time as inputs on the basis that each expert has one counterpart staff member at alltimes, total on the job training would be approximately 50 man years. Equipment that is envisagedcomprises: books, industry reports and journals to support studies, exhibition, seminar andpromotional materials, computer hardware and software, office equipment, etc. The activity in thiscase is the acquisition of equipment, which due to its variety is not readily measurable per unitacquisition. Therefore, the output measure for this activity is by value only. Outcomes in thelonger term, over and above the project outputs, that may contribute to development effectivenessare development of the DoM into an independent and autonomous Government Authority andincreased social and environmental performance of the sector. These may not be measurableagainst input costs and activities, but may represent sector development milestones with, orotherwise subsequent to, implementation.

D. Implementation Planning

D.1 Project Launch In order to optimize project implementation, the DoM needs to beprepared for project commencement. This will involve: establishing the organization,procedure/guidelines, financial preparations and procurement processing as well as training infinancial management and procurement processing well head of loan effectiveness. Theserequirements have already been identified in this Implementation Plan and are summarized asfollows:

50

PREPARATORY ACTIONS APPROXIMATE TIMING

OrganizationalEstablish Steering Committee DoneEstablish PCIU Structure within DoM DoneEngage PCIU Staff Three months prior to loan effectivenessEngage accounting firm to support PCIU accountant By loan effectiveness

ProceduralPrepare Financial Management Handbook By Loan EffectivenessPrepare Project Implementation Manual (including Three months prior to loan effectivenessProcurement)Prepare PMR reporting forms By loan effectivenessTrainingProcurement Processes Two months prior to loan effectivenessFinancial Management Two months prior to loan effectivenessDisbursement Processes Two months prior to loan effectivenessAccounting and Reporting Systems Two months prior to loan effectivenessAudit Requirements Two months prior to loan effectivenessFinancial Management PreparationObtain Trust Authority for bank accounts Two months prior to loan effectivenessOpen project bank accounts One month prior to loan effectivenessEngage consultant/accounting firm to establish Aprin/May 2000Financial Management SystemEstablish project Financial Management System December 31, 2000Engage outside accounting firm to provide end-of- Two months prior to loan effectivenessmonth servicesPreparations for Procurement: Year 1 Activities(Commencement of precursory steps perimplementation schedules)On-the-job training Two months before loan effectivenessTerms of reference for first year's consulting services end March 2000Technical specifications for equipment procurement end March - end June 2000TOR for DoM organizational study end March 2000TOR for IRC Institutional Strengthening end April 2000TOR for Policy and Regulatory Strengthening end April 2000StudiesTraining Program for Sustainable Development end May 2000Plan for Workshops and Conferences end May 2000TOR for Technical Audits end May 2000TOR for Mineral Tenements Management end June 2000TOR for Institutional Strengthening of Geological end June 2000SurveyPlan for GIS Development end July 2000Office Equipment and Vehicles Procurement Bid documents issued by end April 2000

51

D.2 Implementation The main project activities and associated responsibilitiesare detailed below.

Activity: Procurement Processing ResponsibilityPreparation of terms of reference for expertise and Procurement Officer and relevant DoMspecifications for equipment Directors and IRC as appropriatePreparation of tender/bid documents Procurement OfficerTender/bid evaluation Steering Committee & PCIU DirectorContract negotiation & finalization Procurement Officer & PCIU Director

Activity: Financial Control and Audit ResponsibilityProject accounts Project AccountantPreparation of end-of-month financial reports Outside accounting firmInternal audit Steering Committee and PCIU DirectorExternal audit Independent Auditor

Activity: Studies and Policy Papers ResponsibilityManagement of expertise appropriate DoM Division or IRC DirectorManagement of study appropriate DoM Division or IRC DirectorStudies Coordination, Assessment and Review PCIU Director

D.3 Schedule The overall project implementation schedule is provided in the ImplementationManual.

D.4 Supervision. Project supervision involves a project launch mission, two field supervisionmissions per year as well as a full-fledged implementation review mid way through theimplementation. The skill mix of the Supervision Task Team should be the same as that for theProject Preparation Team. The timing, duration in weeks, and skill mix of the field supervisionmissions should be along the following lines.

Mission No Time TTL MS PS ESS1 6/01 X X2 10/01 X X X X3 4/02 X4 10/02 X X X X5 4/03 X __ ___

6 10/03 X X X X7 4/04 X8 10/04 X X X X

TTL: Task Team LeaderMS: Mining SpecialistPS: Procurement SpecialistESS: Environmental and Social Specialist

52

Annex 8: Environmental and Social Issues in the Mining Sector

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

A. Environment

1. Introduction

This technical assistance project is rated as a Category B for environmental purposes. Theproject will not involve any direct investment in mining activities. However, while the projectwill have no direct impacts, it may have indirect impacts by encouraging increased miningactivities. Also the sector itself does have significant impacts on the environment and in the caseof OK Tedi these remain highly controversial. Typically institution building projects such as thisare recommended as Category C under the OP/BP/GP 4.01. The team decided to upgrade thecategory to B to reflect general concerns about environmental and social issues in the sector. Theproject does not involve resettlement nor will trigger actions under any of the Bank's safeguardpolicies.

No separate environmental assessment was prepared for this project. However, as part ofproject preparation, an independent environmental consultant was retained to reviewenvironmental issues in the mining sector. The consultant prepared a background note whichreviews recent performance in the sector, current and proposed, legislation and regulations,institutional responsibilities, and training priorities.

2. Environmental issues in the mining sector

The major environmental impacts for mining projects in PNG relate mostly to river and/orocean based mining waste and tailings disposal, processing and refining and smelting plants. Allof the large mining projects in PNG are subject to specific contractual and regulatoryenvironmental performance requirements. The contractual requirements are included inagreements between the project sponsor and the Government which are typically negotiatedduring the mining license approval process (when there is a "Forum" between all of the interestedGovernment Departments and the investor).

In general, investors have prepared detailed environmental plans to high standards for all ofthe large mining projects in PNG. There has been a relatively high degree of informationdisclosure and consultation with affected peoples ("land owners") in PNG mining projects. Theseprojects are operated by international mining companies who operate in line with goodinternational practice and face not only regulatory penalties but also serious reputational risk ifcompliance is not achieved with agreed requirements.

A 1992 review by World Bank specialists (Environmental Aspects of the Mining Sector,World Bank draft report, September 1992) did not identify any serious concerns regarding impactsin highly sensitive protected ecological areas, or site selection and management. However, thereport did raise concerns regarding the environmental impacts of the Ok Tedi operation andpointed out the need for all potential options for waste and tailings disposal at Ok Tedi to bereconsidered and re-examined. The report also identified a number of areas for improvementrelating to environmental legislative and regulatory aspects and institutional capacities.

53

An updated environmental review was undertaken in January 2000 as part of the projectpreparation and appraisal. With the exception of the special case of Ok Tedi, the recent reviewnoted generally satisfactory environmental performance for the different projects. In particular,the Porgera project has taken a very positive approach by establishing an environmentalmonitoring committee with civil society and NGO representatives. However, for the sector as awhole, there is still much room for improvements in the regulatory and institutional arrangementsand oversight.

3. Institutional and Legal Framework

There are at present four laws directly related to environmental management in PNG.These are: The Environmental Planning Act (1978) which contains the requirements for anEnvironmental Plan (environmnental impact assessment) and an environmental monitoring plan.The Environment Contaminants Act (1978) which is aimed at controlling air and water pollutionfrom effluent producing developments. The Water Resources Act (1982) which is primarilydirected at the use and allocation of surface and ground waters in PNG. The Conservation AreasAct (1978) which allows for the setting up of the National Conservation Council to advise on thelocation, design and approval of any development in or reasonably near an area declared as a'conservation area'.

Both the Ok Tedi mine and the Bougainville mine have their own legislation and areexcluded from the Environmental Planning Act. These are the Mining (Bougainville CopperAgreement) Act (1976) and the Mining (Ok Tedi Agreement) Act (1976). This came aboutbecause both these projects were granted approval prior to the enactment of the EnvironmentalPlanning Act (1978) or the Mining Act (198?)

The draft new Environment Bill has been drawn up under the auspices of an AusAid projectto OEC. Under this initiative, or in parallel with it, thirteen new policies, regulations andguidelines have been established. These are all still in draft form and are discussed below. Thenew Environment Bill is designed to replace the existing the Environmental Planning Act, theEnvironmental Contaminants Act and the Water Resources Act and it repeals these Acts.

The new Environmental Bill is a positive development in bringing environmental legislationin PNG up to date. However, there are a number of issues that are cause for concern both toexisting mining operations and future projects. The PNG Chamber of Mines and Petroleum, inAugust 1999, produced a set of suggested amendments to the new Act. These are far morecomprehensive than anything that could be done in this report and cover most of the issues raisedabove. Several additional issues are discussed in the consultant's report (February 2000).

The new Environment Bill takes a very democratic approach to management of theenvironment with an Environment Council being appointed by a committee and being advised by aWorking Committee and an Environment Consultative Group. At present, there is only one fulltime committee related to the environment. This is the Water Resources Board, which onlymanages to meet sporadically, in spite of a legislative requirement for it to meet four times a year.It is therefore difficult to believe that an additional layer of committees will be any moresuccessful. This could create significant delays in obtaining environmental permits and approvals.

54

The requirement in the new Bill for an Environmental Impact Assessment for level 3activities is in line with international best practice. However, level 2 activities 'which pose athreat of serious environmental harm' are also required to carry out a full Environmental ImnpactAssessment whether that 'threat' is large and small. The interpretation of this is that any miningprojects, however small they might be, would still be required to do a full Environmental ImpactAssessment. The new Bill should include some provision for a lesser requirement for a smallerproject. The new Environmental Bill only refers to air quality in the section on EnvironmentalContaminants. This area needs to be dealt with in more detail.

4. Department of Mining

The Department of Mining (DoM) incorporates the Mining Division which includes theMining Co-ordination Branch and the Mineral Project Assessment Branch. The role of thecoordinators is to ensure effective liaison between government departments and mining companiesand to monitor company performance. There are at present eight coordinators based in PortMoresby and five liaison officers based on mine sites.

The role of the Mineral Project Assessment Branch is to provide independent assessmentand expert advice on the technical and legal aspects of mineral projects. The branch has a seniorresource scientist and a resource scientist. The job descriptions for both resource scientistsincludes reviewing minerals development proposals to evaluate the environmental impacts ofprojects and assess the environmental aspects of minerals policies. However, they make nomention of any on-going environmental monitoring role for mining projects.

The environmental work that the resource scientists are currently involved in includes on-going monitoring and negotiations for the Ok Tedi mine, the Ramu project environmental planapproval, the Simberi project, discussions regarding the new environmental legislation, drafting ofthe proposed Mine Decommissioning and Rehabilitation Policy Framework and producing thedepartmental quarterly reports. One officer also sits on the PEAK (Porgera EnvironmentalAdvisory Komiti), an external advisory/reference group that was established in 1996 to address theenvironmental concerns of the community and environmental groups at the Porgera mine.

All the major mining project produce quarterly environmental reports as required by theOEC. Copies of these reports are sent to the project coordinators. The project coordinators alsoattend quarterly meeting to discuss these environmental reports. However, these environmentalreports are not provided to the resource scientists for their comments on a regular basis, nor do thesenior scientists normally attend the meetings.

5. Office of Environment and Conservation

In 1997 the Department of Environment and Conservation was changed to the Office ofEnvironment and Conservation (OEC): a move that many see as a down-grade. At the time of thechange the departmental budget was cut by 50 % and the nunmber of positions reduced from 159 to89. The OEC budget for 2000 is K 4.5 million (US$ 1.5 million). The lack of capacity both interms of staff and finance severely limits the ability of the OEC to carry out its work efficiently.The OEC has also moved offices and the present filing system can best be described asdisorganized, especially in respect to archiving reports and documents relating to mining projects.

55

The OEC has recently been the recipient of two aid funded projects. An EU funded projectprovided two consultants to work with OEC to strengthen the mine monitoring unit and to preparethe Environmental Code of Practice for the Mining Industry. The latter of these two projects isstill on-going. An AusAid funded project provided one consultant to work on the preparation ofthe new Environment Bill and related legislation. The consultant also organized the library in thenew offices and started the cataloguing of reports but this work was not completed. This projecthas now finished, even though the legislation has not been completed, and there are no immediateplans to provide any additional funding in this area.

The Environment Division is responsible for the assessment of environmental impactstatements, or environmental plans, and the overall environmental management of all miningprojects in PNG with the exception of Ok Tedi and Bougainville. These latter two are the legalresponsibility of the Department of Mining (DoM) though the OEC are involved in all negotiationsand decisions. The Environment Division currently has a staff of 18 working at the offices in PortMoresby as well as field officers at the Porgera, Lihir and Misima mines. The quality of the stafffrom this division that were present at meetings was remarkably good though, in the main, theylack the relevant training that would enable them to carry out their work efficiently. The mainstrength of the division is in the area of water resources and chemistry.

The OEC particularly lacks skills in a number of critical aspects of the environmentalmanagement of mining projects. These shortfalls include basic mining training, overallenvironmental management of a project, the ability to assess monitoring plans and quarterlyreports so that issues as well as compliance are addressed, air quality monitoring, acid rockdrainage and rehabilitation. This lack of knowledge was particularly evident with the site officersat Porgera and Lihir mine sites.

6. Recommendations from Environmental Consultant Report (Feb. 2000)

(i) Legislation

A large percentage of the new environmental legislation that is currently being drafted by theOEC is relevant to the mining industry. In addition, the DoM are currently in the process ofdrafting a Mine Decommissioning and Rehabilitation Policy. Since the completion of the AusAidproject that was assisting with this work, the two departments have been carrying on this workinternally. However, there is concern that the new Environment Act, and the raft of policies,regulations and guidelines that are being drafted to support it, have the potential to makeunderstanding the environmental requirements and their implementation extremely complex.

This Technical Assistance Project will facilitate DoM and OEC working together moreclosely to make the proposed legislation more applicable for the mining sector and completing theMine Decommissioning and Rehabilitation Policy.

56

(ii) Government Co-ordination and Liaison

Co-ordination between the Department of Mining project co-ordinators and the resourcescientists in regard to support of environmental monitoring for the existing mines, with theexception of Ok Tedi, appears to have broken down. Co-ordination between the DoM project co-ordinators and the OEC is also limited. At the same time the shortage of resources, both in theform of manpower and financing, is reducing the capacity of the government to comprehensivelymonitor and manage the environmental impact of existing mines.

This Technical Assistance Project can assist DoM to undertake a review of the co-ordinationbetween the project co-ordinators and the resource scientists and, with the co-operation of theOEC, between DoM and OEC.

(iii) Government on Mine Site

The presence of three levels of government on each operating mine site, and the lack of co-operation and co-ordination between them, is reducing the effectiveness of the monitoring andmanagement role of the government. The government loses credibility by failing to present aunited face to the company and the landowners. This is very frustrating for the company and hasthe potential to create problems with the landowners. In addition, the lack of governmentresources reduces the ability of any of the officers to carry out their roles efficiently.

This Technical Assistance Project will assist DoM to help strengthen the relationshipbetween the national, provincial and local government on existing mining sites and the liaisonbetween the government and the company and the landowners.

(iv) Environmental Audits

It became evident during the project preparation and visits to two of the operating mines thatthe OEC are having trouble keeping up with the enforcement of the environmental legislation andthe overall environmental management. This is due, in the main, to a lack of capacity in the formof manpower and financing. The result is that there are a number of critical enviromnental issuesthat have not been dealt with adequately.

This Technical Assistance Project, with the co-operation of OEC, will facilitate improvedenvironmental audits of the existing mining projects and provide advice on procedural issues.

(v) Training Priorities

There are a number of skill shortages both within the DoM, in respect to the projectcoordinators and the resource scientists, and the OEC, which impact their ability to carry out theirrespective roles effectively. These include, but are not limited to, the following aspects:

(a) Basic Mining: Many of the staff of both departments do not have any formal training inmining and anything they do know has been learnt on the job. Their knowledge is thereforeextremely limited.

57

(b) Overall Environmental Management: Most of the staff of both departments do not have anytraining in the overall environmental management of a mining project. This limits their ability tounderstand the environmental aspects of a project and to identify or address issues when they arise.

© Air Quality: The resource scientists in DoM and the staff of OEC appear to have a limitedawareness of air quality issues and their management and monitoring.

(d) Acid Rock Drainage: The resource scientists in DoM and the staff of OEC appear to havea limited awareness of the issues related to acid rock drainage and its management and monitoring.

(e) Rehabilitation: The resource scientists in DoM and the staff of OEC appear to have alimited awareness of rehabilitation planning, methods and procedures and subsequent monitoring.

This Technical Assistance Project will, with the co-operation of OEC, provide a series oftraining workshops that will address the above issues. The Technical Assistance Project will alsoinclude a study and workshop regarding possible methods of mine waste disposal (tailings andwaste rock) that would be applicable to PNG, covering all aspects of land, river and ocean disposaloptions.

7. Actions Proposed under the Project

While a new environmental law has been drafted with assistance from AusAid this is acomplex set of legislative proposals which do not address mining-specific issues or social impacts.The overall environmental framework for Papua New Guinea is beyond the scope of this project,however, the project would help provide institutional strengthening which is expected to have apositive impact on the environment. This includes environmental-related workshops andconferences with major stakeholders and training activities for both DoM and OEC staff. Theseactivities will improve the skills and capabilities of DoM and OEC staff to conduct technical fieldaudits of mining projects, to investigate mine safety and environmental compliance, and to workwith mining companies to improve the environment sustainability of the operations.

8. Consultation

As part of project preparation the project team held consultative meetings with local NGOsand concerned stakeholders. These groups included: World Wildlife Fund (WWF), IKraft,representatives of Landowner Associations; representatives of the Chamber of Mines andPetroleum; and other local NGOs

B. Social

Mining projects have significant social impacts and mining companies have beenprogressively learning how to take into account the views of local communities and how toimprove their abilities to work with local communities to maximize the benefits from miningactivities. The process for effectively addressing social issues in a project context should involve,first, consultation and information sharing with local communities leading to a social impactassessment; second, the assessment should then form the basis for designing subsequent social

58

action programs; third, is implementation of the action programs; and, fourth, is monitoring toensure that the programs are properly implemented.

A review in 1992 by Bank specialists (Environmental Aspects of the Mining Sector, WorldBank draft report, September 1992) found that Social Impact Assessments have been prepared forall of the projects and concluded that these represented serious professional efforts to identify andmitigate social impacts associated with the projects. There has been no involuntary relocation inmining projects. For each project, there are project-related social and environmental agreementsbilaterally between the company and the landowners and the Government and the landowners (aswell as agreements between the Government and the company). These agreements address matterssuch as employment, contracting from local sources, project impacts, compensation, provision ofinfrastructure and social services.

While these agreements provide a potentially useful framework for addressing social impactsof mining projects, the report also found that progress on the ground in dealing with social issueswas limited at that time and that monitoring has been ineffective. Since then, mining companieshave considerably increased their attention to implementation and monitoring of social impacts ofmining projects, although the parameters and methodologies used to assess the impacts are stillevolving.

A conference on Mining and the Community was organized in Madang, PNG in 1998 co-sponsored by the World Bank, Metal Mining Agency of Japan, Government of PNG and the PNGChamber of Mines and Petroleum. The case studies presented at this conference demonstrated thatPapua New Guinea is moving to the forefront of dealing with social and community-related issuesin mining projects and with designing benefit and infrastructure delivery schemes. At the Misimaproject, the mine provides a service delivery mechanism for certain medicines not only on MisimaIsland but to the population on the mainland and on dozens of islands in Milne Bay Province.

The Lihir project is presented in World Bank Discussion Paper 384, Integrating SocialConcerns into Private Sector Decision Making, January 1998 as an example for good practice forcommunity identification although the revenue distribution and compensation scheme do notprovide sufficiently broad based benefits, especially for women and children. A social review ofthe mining sector conducted during project preparation found that while there remainsconsiderable room for further improvement, overall a good amount of progress has been maderegarding social issues and today the landowners are very well organized and well able to dealwith project developers and operators.

In particular, the arrangements for the Ramu Project (which was submitted to theGovernment for approval in late 1999) which include establishment of a Ramu Regional PlanningCommittee seem very promising. The project will contribute to improve social aspects of miningprojects in PNG, especially regarding social impacts by providing workshops with all the majorstakeholders and by providing training for both DoM and OEC staff on social issues. In addition,the work on a standardized mining development contract should also improve the treatment ofsocial issues.

59

Annex 9: Project Processing Schedule

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

Project Schedule Planned Actual

Time taken to prepare the project (months)First Bank mission (identification) 08/15/98 08/15/98Appraisal mission departure 01/24/2000 01/24/2000Negotiations 04/03/2000 04/28/2000Planned Date of Effectiveness 09/15/2000

Prepared by:

Department of Mining, Internal Revenue Commission

Preparation assistance:

Office of Environment and Conservation

Bank staff who worked on the project included:

Name Speciality

John Strongman Mining AdvisorKoh Naito Mining SpecialistNoel Sta. Ines Procurement SpecialistRarnanie Kunanayagam Social SpecialistBehdad Nowroozi Financial SpecialistRobert Cohen Financial ConsultantMeredith Sassoon Environmental ConsultantClaude Ginet Implementation Consultantloannis John Balafoutis Financial OfficerHilarion Bruneau Financial Management Specialist

Draft PAD reviewed by:Maurice Le Blanc ProcurementHung Kim Phun DisbursementGlenn Morgan Enviromnent

60

Annex 10: Documents in the Project File*

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

A. Project Implementation Plan

* Project Implementation Plan, draft March 2000.

B. Bank Staff Assessments

* Financial Management Assessment, draft report December 1999;* Financial Management Assessment, Final Report March 2000;* Procurement Assessment, January 2000;* Mining Sector draft Environmental Assessment, 1992;* PNG Mining Sector - Social Aspects, draft March 2000;* PNG Environmental Issues in the Mining Sector, draft February 2000* Various Mission Back to Office reports* Appraisal Aide Memoire, February 2, 2000

C. Other

* Mineral Resources Authority - draft Plan September 1999* Geological Surveys in Developing Countries - Strategies for Assistance, British

Geological Survey 1998* Draft Terms of References for Consultancy Services, Department of Mining, April

2000

*Including electronic files

61

Annex 11: Statement of Loans and Credits

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

Difference between

expected

Original Amount in US$ Millions And actual

Disbursementsa

Project ID FY Borrower Purpose IBRD IDA Cancel Undisb. Orig Frm

Rev'd

SECOND GAZELLE

P054328 2000 Papua New Guinea RESTORATION PROJECT 25.26 0.00 0.00 25.26 0.00 0.00

P055446 1998 Papua New Guinea EMERGENCY EL NINO 5.00 0.00 0.00 4.25 2.52 0.00

P004391 1994 PapuaNew Guinea PETROLEUM DEVT T.A. 11.00 0.00 0.00 0.17 0.17 0.00

P004392 1993 Papua New Guinea PG-EDUCATION DEVELOPMENT 35.00 0.00 0.00 17.31 17.31 0.00

P004399 1993 Papua New Guinea POPULATION PROJECT 6.90 0.00 0.00 3.24 3.24 0.00

Total: 110.16 0.00 0.00 64.40 37.41 0.00

Active Closed Total

Projects Projects

Projects Projects Total

Total Disbursed (IBRD and IDA): 62.66 585.06 632.42

Of which has been repaid: 9.35 282.71 292.06

Total now held by IBRD and 94.61 306.99 388.04

IDA: 0.00 15.39 15.39

Amount sold: 0.00 15.39 15.39

Of which repaid 51.69 0.00 42.12

Total Undisbursed

Actual disbursements to date minus intended disbursements to date as projected at appraisal

62

PAPUA NEW GUINEASTATEMENT OF IFC's

Held and Disbursed Portfolio31-Jul-1999

hi Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Conmuitment: 0.00 0.00 0.00 0.00

63

Annex 12: Country at a Glance

PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA

(see next page)

64

Paoua Easit Lower-POVERTY and SOCIAL New Asia, & middle. . .

Guinea Pacific income Development diamond*1998Pooulation. mid-vear (millions) 4,6 1.817 90 Life expectancyGNP oer caoita (Atlas method. USS) 890 990 1t710GNP (Atlas method. US$ billions) 4.1 i.802 1.557

Averaae annual orowth, 1992-98 TPooulation 1%) 2.3 1.2 1.1Labor force (1%) 2.3 1.8 1.i GNP Gross

per 7 primaryMost recent estimate tlatest:vear availabie. 1992-981 capita . r nrnimp.nt

Povertv t% of oooulation below natfonal ooverfv line) Urban oooulation 1% oftotaf ooulafionI 1 7 35 58Life exoectancy at birth (veats) 58 69 68Infant mortalitv four 7.OOOlivebiths) f1 37 33Child malnutrtion 1% of children under 51 30 20 Access to safe waterAccess to safe water (f° of oooulation) 31 77 75Illiteracy (% of oooulation aoe f51 .. :1 14Gross orimarvenrollmert (%ofschoolaae oooulationl 80 117 10f3 PapuaNewGuinea

Male 87 119 105 Lower-middle-income groupFemale 74 113 100

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 :1987 1997 1998Economic ratios*

GDP fUS billions) 1.6 3,1 4.8 '3.7

Gross domestic investment/GOP 21.6 20.5 27.1 30.3Exoorts of ooods and services/GOP 45.0 43.2 53.6 68.2 TradeGross domestic savinas/GDP 20.3 14.0 23.0 :28.3Gross national savinos/GOP 28,7 : 1 18.0 21.5

Current account balance/GOP 6.0 *13.9 -4.7 -1. Domestic 6 . mInterest oavments/GDP 2.0 4.9 1.7 1.9 SavingsTotal debt/GDP 41.2 72.4 47.7 62.7Total debt service/exDorts 14.3 24.8 14.3 7.9 iPresent value of debt/GDP .. .. 38.7Present value of debt/exoorts -. . 70,4

Indebtedness197747 19884-8 1997 1998 199943

(averaoe annual arowthl .GDP 1.6 4 4.6 2.5 1.4 Papua New GuineaGNP cer caoita -0.8 2,0 4.6 0.0 4.7 - Lower-middle-income groupExoorts of ooods and services 3.6 9.1 -1.2 10.4 2.8

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and investment (%)

(% of GDP) soAoaculture 33.0 29.9 27.4 24.4 40Industrv 26.1 31.7 36.6 42.3 20 -

Manufacturino 7.7 9.4 9.5 9.0 oServices 40.9 38.5 36.0 33.3 0

-20 9 96 97 98

Private consumotion 53.7 63.6 54.7 51.0 -40General oovemment consumDtion 26.0 22.4 22.3 20.7 -GDI ¢ GDPImoorts of aoods and services 46.3 49.7 57.6 70.2

197747 1988-98 1997 1998 Growth rates of exports and imports (%)(averaoe annual orowth)Aoriculture 2.2 2.8 -4.2 -6.4 40

Industrv 3.2 8.4 -14.2 18.9 30

Manufacturino 0.7 3.8 5.2 -0.1 20 Services 2.0 2.8 6.0 -5.5

Private consumotion 1.6 2.6 -3.6 9.4 10General oovernment consumotion -1.5 0.8 8.4 -13.6 94 9 96 97 93Gross domestic investment 0.1 3.7 -7.8 4.1 10Imoorts of ooods and services 1.0 4.8 3.9 13.4 Exports e-importsGross national oroduct 1.4 4.3 -5.5 2.3

Note: 1998 data are preliminary estimates.

The diamonds show four kev indicators in the countrv (in bold) comoared with its income-orouo averaae. If data are missino. the diamond willbe incomolete.

65

Papua New Guinea

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998 Inflation (%)

Domestic prices(% change) 20

Consumer prices 4.5 3.4 4.0 13.6 15 -

Implicit GDP deflator 7.4 8.0 3.4 10.3 10 -

Government finance(% of GDP, includes current grants) aCurrent revenue .. 22.9 27.7 24.2 93 94 95 93 97 9S

Current budget balance 3.1 1.0 -0.9 -GDP deflator CPIOverall surplus/deficit -7.5 -4.4 -7.4

TRADE1977 1987 1997 1998 Export and import levels (US$ millions)

(US$ mililons)Total exports (fob) .. 1,259 2,192 1,843 .0O0

Gold .. 466 501 607Copper .. 310 226 323 2OD

Manufactures .

Total imports (cif) . 12292 12895 1,289Food 9203 244 196 9 95 7

Fuel and energy14 20 12Capital goods .. 390 763 519 o

Exoort oDriCe index (1995=100) , 64 100 79Imoort Doce index (1995=100) .. .. 103 99

t Exports U ImportsTerms of trade f1995=100) .. .. 97 80

BALANCE of PAYMENTS

(US$ millions) 1977 1987 1997 1998 Current account balance to GDP ratio (%)Exports of goods and services 721 1,306 2,507 2,141 20

Imports of goods and services 743 1.462 2,396 1,956 1Resource balance -22 -157 111 185

Net income -51 -177 -303 -237Net current transfers 7 1 32 - 5

Current account balance 99 -438 -224 -58 053 94 95 98

Financing items (net) 39 420 138 -103Changes in net reserves -138 18 86 161 -101

Memo:Reserves includino oold IUS$ millions) 427 437 355 194Conversion rate (DEC. local/tJSS) 0.8 0.9 1.4 2.1

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(US$ mittions} Composition of total debt, 1998 (USS millions)Total debt outstanding and disbursed 676 2,276 2,272 2,349

IBRD 51 148 270 267 G:154 A 267

IDA 31 117 101 100

Total debt service 111 356 374 178IBRD 5 19 47 45 C4

IDA 0 1 3 3

Composition of net resource flows F:843

Offidial grants 243 271 185Official creditors 17 109 -2 -14D:487

Private creditors 22 7 -57 -14Foreign direct investment 20 93 200Portfolio equity 0 0 0 E: 452

World Bank programCommitments 19 74 . 0 0 A - IBRD E - Bilateral

Disbursements 12 33 48 14 6-IDA D- Other multilateral F PnvatePrincipal repayments 1 10 31 31 C - IMF G - Short-term

Net flows 10 23 18 -17Interest payments 3 11 19 17Net transfers 7 12 -2 -34

Development Economics 9/16/99

IBRD 30894

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