Document of The World Bank PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN TO THE FOR. May 5, 2000

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No: PNG Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN Public Disclosure Authorized IN THE AMOUNT OF US$10 MILLION EQUIVALENT TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A MINING SECTOR INSTITUTIONAL STRENGTHENING TECHNICAL ASSISTANCE PROJECT Public Disclosure Authorized May 5, 2000 Energy and Mining Sector Development Unit East Asia and Pacific Regional Office

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 2, 2000) Currency Unit = Kina 1 Kina = US$ 0.39 US$ 1.00 = 2.56 Kina FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS CQ DoM DoNPM FMH FMS GIS ICB IRC IS LCS MMAJ NBF NGOs NS OEC PBDT PCIU PCD PEAK PMR PNG POM QCBS QBS SBD SFB TA Country Assistance Strategy Consultant Qualifications Department of Mining Department of National Planning and Monitoring Financial Management Handbook Financial Management System Geological Information System International Competitive Bidding Internal Revenue Commission International Shopping Least-Cost Selection Metal Mining Agency of Japan Non-Bank Finance Non-Govermnental Organizations National Shopping Office of Enviromnental and Conservation Procurement and Disbursement Target Project Co-ordination and Implementation Unit Project Concept Document Porgera Environmental Advisory Komiti Project Management Report Papua New Guinea Procurement Operations Manual Quality- and Cost-Based Selection Quality-Based Selection Standard Bidding Documents Selection Under a Fixed Budget Technical Assistance Vice President: Country Manager/Director: Sector Director: Task Team Leader/Task Manager: Jemal-ul-din Kassum Klaus Rohland Yoshihiko Sumi John Strongman

3 MINING SECTOR INSTITUTIONAL STRENGTHENING TA CONTENTS A. Project Development Objective 2 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 3 1. Sector-related Country Assistance Strategy (CAS) goal supported 3 by the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 7 C. Project Description Summary 7 1. Project components 7 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population Institutional and implementation arrangements 10 D. Project Rationale Project alternative considered and reasons for rejection Major related projects financed by the Bank and other development agencies Lessons learned and reflected in proposed project design Indications of borrower commitment and ownership Value added of Bank support in this project 14 E. Summary Project Analysis Economic Financial Technical Institutional Environmental Social Safeguard Policy 19 Page

4 CONTENTS (cont'd) Page F. Sustainability and Risks Sustainability Critical risks Possible controversial aspects 20 G. Main Loan Conditions Effectiveness Condition Other 21 H. Readiness for Implementation 22 I. Compliance with Bank Policies 22 Annexes Annex 1: Project Design Surmmary 23 Annex 2: Project Description 27 Annex 3: Estimated Project Costs 33 Annex 4: Cost-Effectiveness Analysis Summary 35 Annex 5: Financial Summary 36 Annex 6: Procurement Arrangements 37 Annex 7: Disbursement, Project Financial Management, Financial Reporting and Monitoring, and Implementation Planning Arrangements 45 Annex 8: Environmental and Social Issues in the Mining Sector 52 Annex 9: Project Processing Schedule 59 Annex 10: Documents in the Project File 60 Annex 11: Statement of Loans and Credits 61 Annex 12: Country at a Glance 63 MAP IBRD 30894

5 Papua New Guinea Mining Sector Institutional Strengthening Technical Assistance Project Project Appraisal Document East Asia and Pacific Region Date: May 5, 2000 Country Manager/Director: Klaus Rohland Project ID: P Lending Instrument: Technical Assistance Loan (TAL) Team Leader: John Strongman Sector Manager/Director: Yoshihiko Sumi Sector(s): NN - Mining & Other Extractive 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 Based Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.85% of the undisbursed amount for the first four years and 0.75% thereafter Service charge: 0.0% Front end fee on Bank loan: 1.00% capitalized Fi~~~ia~~ci~~,g.lu -or-~ a l -. ;n Total B. Government IBRD IDA Other (specify) Total: Borrower: Independent State of Papua New Guinea Guarantor: none Responsible agency: Department of Mining and Internal Revenue Commission Address: Department of Mining (DoM) Private Mail Bag, Port Moresby, N.C.D. Papua New Guinea Contact Person: Mr. Graeme Hancock, Director of Mining Division Tel: Fax: graeme hancock(&,mineral.gov.pg Address: Internal Revenue Commission (IRC) P.O. Box 777 Port Moresby, Papua New Guinea Contact Person: Mr. Iru V. Loi, Assistant Commissioner Tel: Fax: none 200D Annual Cumulative Project implementation period: July 1, June 30, 2005 (5 years) Expected effectiveness date: 09/01/2000 Expected closing date: 12/31/2005 OCS PAD F.m Rel Ma[, =20

6 2 A. Project Development Objective 1. Project development objective: (see Annex 1) The main objective of the proposed project is to strengthen institutional capacity within the Department of Mining (DoM) and the Internal Revenue Commission (IRC) to administer and regulate exploration and mining projects and to thereby contribute to socially and environmentally sustainable 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 from international and domestic private investors; * improve the benefits to the nation especially through increased employment and skills transfers especially 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, valuable lessons 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 and exports: * increased annual investments in exploration and in new mining projects relative to 1999 level;

7 3 * 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 mining industry: * 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, and annual investments for exploration are expected to increase several fold over the next five to ten years. However, little improvement is expected in year 2000 regarding the performance indicators relating to annual mineral exports and investments as a result of the current downturn in global commodity markets and because of the lead time to develop new projects. As the project will focus on strengthening the institutional capacity of DoM to administer the industry and of IRC to audit mining companies, the govermment will be better able to (a) support the revitalization of the private 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 the project. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: PNG 10/21/99 Date of latest CAS discussion: The country assistance strategy (CAS) for Papua New Guinea (PNG) aims to support a concerted effort to reduce poverty and improve the quality of life of the people in PNG. The primary objective for this CAS period is to assist PNG in improving the foundation for a capable state that can be responsive to its people by addressing human and economic development challenges in a transparent and accountable manner. The CAS objective will be pursued through the

8 4 implementation of an operational strategy that will support: a) improvements in the governance framework for sustainable development, and b) enhanced rural development. The need to focus on governance issues is overwhelming. The basic public sector operations intended to provide services 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, poor accountability 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 pursued through a judicious set of policy and public sector reforms. In its effort to regain control of the economy and reestablish growth, PNG will face challenges to maintain a transparent fiscal discipline for the remainder for 1999 and 2000 budget, and to prevent further deterioration of the fiscal 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 major obstacle to attracting new private mineral investment and to ensuring that mining takes place in a sustainable manner. The proposed assistance will strengthen the capacity of the relevant government departments to - attract, regulate and monitor new private investment (including improving mining licensing arrangements, reducing a backlog of technical and safety audits, and making available more geological information to potential investors); - improve the sustainability of mining activities in PNG (including supporting government to take a more pro active role regarding improving environmental and social aspects of mining and 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 transfer of benefits of mining development to local communities especially in rural areas. The project should also help increase fiscal receipts from the minerals sector which will better improve the government'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 extension of 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 in the mid-1960s, the countrybenefited from an active mineral exploration and mining industry. This led to the discovery of the Ok Tedi copper and gold deposit and the Frieda copper deposit soon after 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 the discovery of Lihir, Wafi, Simberi, Tolukuma, Mt Sinivit, and Mt Kare.

9 5 Four world class mines - Ok Tedi copper and gold mine and the Porgera, Misima and Lihir gold mines; plus a small gold mine at Tolukuma were subsequently developed in 1980s and 1990s and are presently in production. Mining Development Contracts have been signed by the investors for each project. These include social and environmental protection plans which are generally well designed and implemented. There are also several mechanized alluvial gold mines and around 20,000 artisan level alluvial gold operations. All of these achievements, however, had occurred at a time when the government institutional capacity for mining was reasonably good. However, as the institutional capacity of the government, both DoM and IRC today, has eroded over the past ten years, DoM and IRC lack a strong presence at the mining sites. The Govermment, therefore, is presently facing difficulty in attracting new mining investment into the country and ensuring the maximum contribution to the national 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, and mine closure); insufficient capacity in public mining institutions (especially DoM) to take a proactive role regarding emerging social and environmental issues and take the lead to negotiate new agreements 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$ Exploration Expenditures est. Exploration Expenditures Source: Department of Mining, Papua New Guinea Gold and copper production from are presented in Table 2. The decline in copper and gold production in 1997 and 1998 largely reflects reduced production at the Ok Tedi Mine due to a severe drought.

10 6 Table 2: Production of Copper and Gold Copper Gold ('000 tonnes) (tonnes) Source: Department of Mining, PNG Government's Strategy: The strategy of the Government of Papua New Guinea is to develop the mining sector by encouraging socially, environmentally, technically, and financially responsible private sector exploration and development of PNG's mineral resources. More recently the strategy has evolved to: (a) encourage private sector mining development that is environmentally and socially sustainable; and (b) develop rural areas by overseeing and facilitating small-scale mining to take place in an orderly way. However, the major constraint to further sector growth is the lack of the institutional capacity of DoM and IRC to administer and oversee the sector. In particular, DoM and IRC need to establish a 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 investments through (a) filling in key gaps in mining policy; (b) improving its ability to provide timely and reliable regulatory oversight for the mining sector; (c) developing the capability to be more pro active regarding social and environmental issues; and (d) updating and providing geological data to attract potential investors.

11 7 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 scale mining, offshore mining, mine safety and health, mine closure and sustainable mining development; * the capacity of DoM to work closely with Office of Environment and strengthening Conservation (OEC) to take a pro active role on social and environmental issues in the mining sector working with provincial govermments, other government departinents, local communities, land owner groups, NGOs and mining investors; * preparation of a standard mining development contract that encourage sustainable mining development; * strengthening the institutional capacity of DoM and IRC through training and operational support 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 for DoM 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 mine development, small scale mining, offshore mining, mine safety and health, mine closure and sustainable mining development. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The proposed project consists of the following components: a) policy and regulatory institutional strengthening for the Department of Mining; b) development of capacity to monitor and execute technical audits of mining and exploration projects; c) strengthening of mineral tenements management; d) development of project coordination and environment assessment capacity for sustainable development in mining project areas; e) institutional strengthening of the Geological Survey and development of geological information system capabilities; and f) institutional strengthening and capacity building for the Internal Revenue Commission. Project costs are summarized in Table 3 overleaf. Of the proposed Bank financing of US$ 10 million, about US$ 0.2 million will be required for retroactive financing of project-related start-up costs including consultant services and goods. These funds will be used to advance the commencement of the project.

12 8 Table 3 - Cost for Project omponents Indicative Bank- % of Sector Costs % of financing Bank- Component 1US$M) Total (US$M) financing 1. Policy and Regulatory Institutional Institutional Strengthening: review and development Development of future structure of DoM, mineral policy, strategy, and regulation for promotion of exploration; small scale mining; offshore mining; mine safety and health; and mine closure. 2. Development of DoM Capacity to Institutional Monitor and Execute Technical Audits of Development Exploration and Mining Activities: preparation of monitoring and auditing strategies; implementation of new institutional arrangements including organization, staffing, and work methodology; and training and operational support. 3. Strengthening of DoM Mineral Institutional Tenements Management: development of Development a strategic action; execution of field assessments; lease boundary definitions; and development of a mineral tenements management database. 4. Development of DoM Project Institutional Coordination and Environmental Development Assessment Capacity for Sustainable Development in Mining Project Areas in conjunction with Office of Environment and Conservation (OEC): policy formulation and strategic planning, training and workshops and conferences with all interested stakeholders and other departments including OEC so that government can take a more pro active role regarding mining project sustainability and integration of mining projects into broader regional development frameworks. 5. Institutional Strengthening of the Institutional Geological Survey and Development of Development Geological Information System (GIS) Capabilities: remote sensing, geophysical data interpretation, and development of a national litho-stratigraphic database; and

13 9 compilation of geological information; upgrading of information system and facilities; and on the job training. 6. Institutional Strengthening and Institutional Capacity Building for IRC: upgrading Development equipment; implementation of new institutional arrangements including organization, staffing, and tax audit and work methodology; and on the job training and operational support. 7. Project Coordination, Monitoring, and Evaluation: hiring, supervising staff; managing procurement; contract accounting and auditing; preparing quarterly annual reports and annual operation plans; and monitoring progress and evaluate results. Others (Auditors Fee) Total Project Costs Front-end fee Total Financing Required Numbers may not add up due to rounding. Table 4: Financing Plan Estimated Costs Local Foreign Total Base cost Contingencies Total Cost Financing Plan Government of Papua New Guinea IBRD Total Key policy and institutional reforms supported by the project: The project will involve four key institutional reforms. These are (a) to examine whether DoM should become a statutory agency, which could give DoM greater independence and the ability to retain some of the license fees it collects and thereby better match its operating budget to its operational activities; this is presently being deliberated by Government; (b) to prepare a standard mining development contract for new mining projects, which will reduce the time and effort needed to prepare new contracts and will emphasize sustainable development including helping

14 10 maximize skills transfer, spin off businesses and other benefits to local communities; (c) to provide DoM with a digital GIS System; and (d) to provide IRC long term auditing capacity to enhance the country'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, and tax payment; and (b) other economic benefits like creation of employment opportunity and spin-off business, infrastructure development, etc. will be provided to local communities. (ii) as a direct result of the project: (a) establishment of a modem, consistent, and homogeneous mining policy and regulatory framework that will contribute to sustainable development especially regarding small scale mining, offshore mining, mine safety and health, and mine closure; (b) development of a standard mining development contract which increases benefits to local communities; (c) improvement in the efficiency in public mining institutions (DoM, IRC and the Office of Environment and Conservation - OEC) to investigate, audit, regulate, and manage exploration and mining projects; and (d) development of geological thematic maps with GIS to improve information services to the potential mineral investors. Mining is a key sector for further 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 like logging 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 five years starting July 1, The project completion will be June 30, 2005 and the Loan closing would be December 31, The Office of Environment and Conservation (OEC) would also be involved 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 and Implementation Unit (PCIU) has been established within DoM for the implementation and coordination of all project components. Project administration: A DoM/IRC Steering Committee for the proposed loan has been established to oversee the project. DoM has two operating divisions - a Mines Division and a Geological Survey. The Secretary DoM is the Chairman of the Steering Committee and the

15 11 Commissioner General IRC, the Deputy Chairman. The membership includes the Directors of the Mining 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 established within DoM. It will be staffed by a PCIUJ Director, Procurement Specialist and Project Accountant. The positions have been advertised and applications received. The staff of the PCIU will be selected on a competitive basis with qualifications and experience, terms and conditions (including performance criteria and evaluation procedures) satisfactory to the Bank. The PCTU Director will report to the Secretary DoM as Chairman of the DoM/IRC Steering Committee. The PCIU will be responsible for (a) preparation and submission of procurement to the World Bank for review and approval, (b) project monitoring, reporting, and evaluation, (c) the contractual relationship with the Bank, and (d) financial record keeping, the Special Account and disbursements. The PCIU will provide regular reports to the Steering Committee and to Department of National Planning and Monitoring. 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 the projects valued above 60,000 kina per contract. The PCIU Director 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 and the guidance provided in the OCSPR memorandum of August 11, 1998, together with the findings of the 1999 draft Country Procurement Assessment Report, has been utilized in the preparation of the Procurement Capability Assessment Report of DoM (see Annex 6). A Procurement Plan has been prepared and a Procurement Operations Manual is being prepared and will be issued by the PCIU by December 31, The Steering Committee will oversee the evaluation and selection of winning bidders. According to the nature of the procurement activity, the relevant division in DoM or IRC will take the lead role in bid evaluation supported by the PCIU which will provide the executive function. Consultants hired under the project will be supervised by the Director of the Mining 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 (Project Component 6). By June 30 of each year starting in 2001, the PCIU will prepare and submit to the Bank, an updated procurement and disbursement plan for the project components during the next fiscal year, and agree with the Bank on these plans by September 30 of each year. Each year the Govenunent 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 project financial management arrangements (accounting, financial management, and reporting) and for managing the Special Account and making disbursements of World Bank loan proceeds. The Project Accountant will be supported by a local accounting firm that will assist in the preparation of monthly, quarterly and annual Project Management Reports. A Financial Management Handbook will be issued prior to loan effectiveness. A computerized financial management system will be developed to produce Project Management Reports as required pursuant to Bank's Project Finance Management Manual. The traditional Statement of Expenditure Procedures will be used for disbursement. Within one year from loan effectiveness a review will be conducted to determine the feasibility of adopting PMR based disbursement. The project accounts will be audited annually by a private accounting firm engaged under the project in accordance with arrangements agreed with the Auditor General. A short list of acceptable firms has been prepared by 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

16 12 the purpose of auditing the Project accounts. The Government will submit to the World Bank annual financial statements and the independent auditor's report of the Project accounts by June 30 of each year Monitoring and Evaluation: Not later than 45 days after each quarter, the PCIIJ will submit to the Bank quarterly progress reports covering all project activities, including procurement, and a financial summary report. Further details of monitoring arrangements are given in Annex 7. A Mid-Term Review, 24 months after effectiveness, would provide detailed analysis of implementation progress towards development objectives, including performance to date on selected indicators of project benefits (see 3-i and 3-ii). Baseline data on these indicators will be gathered prior to the Mid-Term review and used in the assessment. The Mid-Term review will address 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 sector institutions in Papua New Guinea, two main altematives were examined: a Technical Assistance Credit 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 following opportunities for learning and innovation: (a) work to develop and transfer an understanding and capacity to innovate public administrative services to the mining sector - for which solutions and examples of good practice are not readily available elsewhere; and (b) pilot activities to: (i) prepare policy 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) establish geological 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 careful deliberation that they did not fully meet the requirements for a LIL (e.g. contain a hypothesis or Pilot arrangements to be tested, the results of which could be mainstreamed into other sectors easily). 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-scale mining expert financed by AusAID. The Bank has similar mining sector TAs in nine other countries. The experience in the PNG Petroleum TA and the other mining TA projects has been used in designing this TA.

17 13 Latest Supervision fpsr) Ratings Implementation Development Bank-financed Project Progress (IP) Objective (DO) Support regarding exploration data Petroleum Exploration S S management and exploration promotion Technical Assistance Project (Credit No PNG) Institutional strengthening to promote Petroleum and Exploration S S the petroleum sector and Development Technical Assistance Project (Loan No PNG) Other development agencies None IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) It is not expected that there will be any co-financing for the project. However, the European Union are also expected to provide assistance to DoM regarding small scale mining. The project design, therefore, does not include a small-scale mining component. Preliminary discussions have also taken place with the Japan International Cooperation Agency (JICA) and the Metal Mining Agency of Japan (MMAJ) regarding possible assistance to the DoM Geological Survey Division. Any such possible assistance would be complimentary to the assistance requested under this loan. The IRC is expecting assistance from the Australian Treasury who have been informed of the proposed assistance for field audits of minerals companies from the World Bank under this project. The IRC representatives informed the Project Appraisal Mission that the assistance requested under the World Bank Mining TA Project will not conflict with or duplicate the 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 Petroleum Technical Assistance projects where the importance of an adequate recurrent budget has been highlighted. Lessons from projects from other countries where the Bank has financed mining technical 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 in Latin America (A Mining Strategy for Latin America and the Caribbean, World Bank Technical Paper 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 of different ministries and agencies involved in the sector; (b) strong beneficiary participation in project preparation, and organization and coordination at the field level; (c) supervision by technical specialists; and (d) ownership and political commitment to project objectives and to ensure strong local leadership and availability of counterpart funds.

18 14 Experience in other countries indicates that improving the enabling environment can increase the ability of a country to attract and retain appropriate private investment. For instance, Ghana in late 1980s undertook significant reforms, supported by the Bank and other donors, to improve the enabling environment for private sector investment in mining. The result has been a four fold increase in gold production, a mining investment climate that is consistently ranked among the best in the world by investors, and privatization of state owned mining enterprises. Argentina in the 1990s undertook similar reform and now attracts more exploration from international mining companies than Canada. 4. Indications of borrower commitment and ownership: Commitment of the Borrower is demonstrated by DoM and IRC already having established the Steering Committee, published the General Procurement Notice, advertised the positions for the PCIU 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 operation for mining. Staff of both DoM and IRC are enthusiastic about the learning and professional development 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 rated satisfactory. The Bank can thus provide extensive and positive experience regarding mining sector reform in other countries. In addition, the Bank is in a unique position to integrate mining sector reform with broader macro economic and fiscal management issues and ensure results are shared with other sectors. The Bank has followed the development of the PNG mining sector over the past decade and knows both DoM and IRC very well and is positioned to ensure that institutional strengthening takes place 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 quantitative investment 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 present performances, such as amount of the annual investment for exploration by mining companies, and annual value of exports and fiscal revenues coming from the sector.

19 15 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 million (about US$ million) in direct government revenue each year. On the exploration front, there are currently 120 Exploration Licenses in force, and these licenses spent approximately US$ 12 million for exploration in As mineral exploration is essential to the long term stability of the sector to contribute to the national economy, an important indicator for the project is the amount of the investment for exploration. If the project will be successfully implemented, the exploration spending by private investors is expected to increase by 2005 from the current US$ 12 million per year 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 lend itself easily to quantifiable analysis. Fiscal Impact: The project should result in increased fiscal revenues from the sector. In the next 1-3 years these would be from tax audits (any figure must be considered highly speculative but US$5-25 million would 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 the Internal Revenue Commission (IRC) and their regulatory environment to administer and regulate exploration and mining projects and to achieve socially and environmentally acceptable private mineral 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 including interface 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.

20 16 4. Institutional: 4.1 Executing agencies: DoM and IRC are well managed. However, the experience and implementation capacity of the two agencies is limited. There is a major need for technical transfer at all levels, including project management and implementation. The project includes a substantial provision to hire national staff who will be in charge of the implementation of specific project sub-components. The project cost estimate includes a budget for incremental operating costs (including travel, per diem, vehicle operating costs, office materials, workshops, seminars and conferences) in order to finance these expenses. 4.2 Project management: The Project Coordination and Implementation Unit (PCIU) will be created and will manage procurement 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 emerging from this analysis. (a) Issues. As a technical assistance initiative, the project will not finance any direct exploration or exploitation of mineral resources. However, the project is being implemented in a sector which is known to be controversial with respect to environmental and social issues. The environmental problems associated with mining in PNG relate to river and ocean based mining waste and tailings disposal and pollution resulting from mineral processing. A review of environment issues in the mining sector was prepared in 1992 by World Bank specialists 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 well as regulatory and institutional capacity building needs. An updated review of these issues was carried out as part of project preparation (February 2000). This consultant review noted progress in the context of several projects but noted that, for the sector as a whole, there is still room for improvement in the regulatory and institutional oversight arrangements. Such improvements would be the focus of some of the training and consultative workshops to be supported by the project

21 17 The project would help provide additional institutional strengthening which is expected to have a positive impact on the environment. This includes project support for environmental workshops, consultative conferences with major stakeholders and professional development training for both DoM and OEC staff. These activities will improve skills and capabilities of DoM and OEC staff to conduct field audits of mining projects, to investigate mine safety and environmental compliance, and to work with mining companies to improve the environmental and social sustainability of the operations. Annex 8 provides further details regarding environmental issues, institutional and legal framework, role and capabilities of DoM and OEC and institutional strengthening that will be provided under this project which is expected to have a positive impact on 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 the direct investment in mining activities but through its policy and regulatory strengthening it could have 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 the environment which will remain controversial. Since there is no direct on the ground investment there 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 Assessment Capacity Building component. This component will provide $1.1 million US to support professional development training and consultative workshops on environmental issues and through improvements in the DoM capacity to monitor and execute technical audits on mining activities. (d) Status of category A assessment N/A (e) Proposed actions: The project will finance an environmental capacity building component to address professional development training and institutional strengthening in the DoM and the OEC. (f) Status of environmental studies. No separate EA was prepared for this project. During project appraisal a environmental consultant prepared a review of the progress made on environmental issues since a 1992 Bank sector analysis. Issues raised in the consultants report would be the subject of institutional capacity building and professional development training initiatives to be supported under the project. (g) Local groups and NGOs consulted WWF; Ikraft; representatives of landowner associations; representatives of Chamber of Mines and petroleum (h) (i) Resettlement N/A Borrower permission to release EA -N/A

22 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/A Date 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 noted above in Section 5(g), consultations were held during the environmental screening stage with various NGOs, landowner and industry representatives. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During project implementation further consultation will take place with NGOs, landowners, and industry representatives regarding mining sector environmental issues. Project performance indicators will include 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 social development outcomes.. Mining projects have significant social impacts and mining companies have been progressively learning how to take into account the views of local communities and how to improve their abilities to work with local communities to maximize the benefits from mining activities. 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 been prepared for all of the projects and concluded that these represented serious professional efforts to identify and mitigate social impacts associated with the projects. There has been no involuntary relocation in mining projects, but the report also found that progress on the ground in dealing with social issues was limited at that time and that monitoring has been ineffective. Since then, mining companies have considerably increased their attention to implementation and monitoring of social impacts of mining projects, although the parameters and methodologies used to assess the impacts are still evolving. A social review of the mining sector conducted during project preparation found that while there remains considerable room for further improvement, overall a good amount of progress has been made regarding social issues and today the landowners are very well organized and well able to deal with project developers and operators. The project will help to improve social aspects of mining projects in PNG, especially regarding social impacts by providing workshops with all the major stakeholders and by providing training for both DoM and OEC staff on social issues. Further details are provided in Annex 8.

23 Participatory Approach: How are key stakeholders participating in tle project Representatives from NGOs and local communities which are affected by mining projects were consulted in preparing the project and have agreed to provide inputs to DoM regarding the design of 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 the following are not applicable. Applicability of Safe2uard Policies Policy Environmental Assessment (OP 4.01, BP 4.01, G-P 4.01) Natural habitats (OP 4.04, BP 4.04 GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement tod 4.38) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) Applicability Yes - see Section 5 above No No No No No No No No No F. Sustainability and Risks 1. Sustainability: The successful establishment of the strategy and development of the institutional capacity should result in increased mineral investments for exploration and better tax collection. Increased fiscal revenues 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 a highly cyclical industry and recovery can be expected in the next 3-4 years. The project thus will help position the country to take full advantage when that upturn occurs. The project will help strengthen 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 need to improve the recurrent budget for DoM to carry out its activities and examine the benefits of DoM being able to retain part of the fees they collect.

24 20 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective 1. Weak international commodity markets M 1. By positioning well now, government can benefit from next market upturn 2. Political interference in the mining sector M 2. Bank involvement in the sector 3 Lack of commitment to reform and to N 3. Support and oversight of bank and being responsive to needs of private other donors as part of overall country investors economic dialogue 4 Inadequate recurrent budgets for the two M 4. Government commitments under the mineral sector institutions project 5. Poor access to geological data needed to N 5. Good access is ensured by provisions build-up the GIS data base of exploration licenses From Components to Outputs 1. Continued project ownership. N 1. DoM and IRC have shown strong ownership in project design 2. Satisfactory performance by contracted M 2. Good supervision by DoM and IRC consultants. 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 is facing a highly controversial situation regarding the future of the Ok Tedi Mine and may use technical 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 the projects valued above 60,000 kina per contract; * The PCIU Director will be delegated authority to sign project related contracts up to 60,000 kina per contract;

25 21 * 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 for the 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 accounts to reflect project expenditures and original project cost estimates for the implementation period using the Bank's project management reporting (PMR) system; * The Government will, by December 31, 2000, appoint independent auditors with qualifications and 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 of adopting PMR based disbursement. * The Government will submit annual financial statements and the independent auditor's report of 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, an updated procurement and disbursement plan for the project components during the next fiscal year, 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 the Project. H. Readiness for Implementation [ ] l.(a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X ] (b) Not applicable. [X ] 2. The procurement documents for the first year's activities are substantially complete and ready for the start of project implementation. [X ] 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] 4. The following items are lacking and are discussed under loan conditions (Section G):

26 22 Readiness (a) The project implementation, procurement and disbursement arrangements (Annex 6) have been planned and submitted to the Bank for clearance. (b) The DoM has defined steps for project commencement (see Annex 6 Project Launch) and is 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 Rohiad Team Leader Sector Manager/Director Country Manager/Director

27 23 Annex 1: Project Design Summary PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA Hierarchy of Objectives Key Performance Monitoring & Critical Assumptions Indicators Evaluation Sector-related CAS Goal: Sector Indicators: Sector/ country (from Goal to Bank reports: mission) 1. Sustained and sustainable - Increase export of - Economic reports strong international minerals sector growth led mineral commodities. - Bank of PNG Reports commodity markets by private and foreign investment 2. Improved governance and - no backlog of mine no political interference greater efficiency of the safety investigation and in mineral sector public service regular tax audits. Project Development Outcome / Impact Project reports (from Objective to Goal) Objective: Indicators: Improve government capacity to regulate and administer the mining sector so that: 1. Investment environment - increased annual - Economic report. - DoM committed to become more attractive to exploration and mineral Sector report. implementing reform high risk exploration and investment and being responsive to mining investment investors. 2. Exploration and mining - more spin off - Mining company projects contribute to businesses started reports sustainable development benefits to local - improved communities increase in environmental and social terms of more outsourcing of compliance mining activities to local communities resulting in and - sustainability improved emphasized in new technology/knowledge mining development transfers to local contract and addressed communities at workshops and conferences organized 3. Exploration and mining with key stakeholders - DoM reports - Adequate recurrent projects become safer and other government government budget for departments. DoM and IRC. - preparation of regional

28 24 development plans for one or two mining regions with full participation of provincial governments and all stakeholders. - improved safety statistics 4. Benefits to the nation - Increase tax revenues - IRC reports - Satisfactory mining increase in terms of higher from mining projects. development agreement. tax collections Output from each Output Indicators: Project reports: (from Outputs to component: Objective) 1. a, Preparing and approval - DoM issues position - Project monitoring - Continuing project of policy, strategy, and papers based on report, midterm ownership by DOM and regulatory documents on consultants reports evaluation, and ICR. IRC. small scale mining; offshore regarding mineral mining; mine safety and policy, strategy, and health; and mine closure regulations for small scale mining; offshore mining; mine safety and health; and mine closure. 1. b, Preparation of standard - Government introduces - Satisfactory mining development new mining supervision of contract. development contract in consultants by DOM and negotiation for next IRC. projects which includes more pro active government role regarding social issues, social service delivery, regional development impacts, monitoring of social and environmental impacts, and strategy for eventual mine closure. 2. Improve DOM capacity - DOM undertakes - Satisfactory for investigations and technical audits and performance by technical audits to provide documents mineral contracted consultants. timely and reliable reserve and production administrative services to the estimates for 10 mining sector. exploration and mining projects.

29 25 - DOM reduces backlog of mine safety inspections to 3 months. 3. Improve IRC capacity for - IRC undertakes tax investigations and tax audits audits of 5 mining and to increase fiscal revenues petroleum companies. from mining. 4. Improved geological data - 7 sheets of geological base. thematic maps prepared and issued. Project Components / Sub- Inputs: (budget for Project reports: (from Components to components: each component) Outputs) 1, Policy and Regulatory 1, Policy and Regulatory Consultant reports on Institutional Strengthening: Strengthening: US$ 1.64 mineral policy and review and development of million regulation mineral policy, strategy, and regulation for promotion of exploration; small scale mining; offshore mining; mine safety and health; and mine closure. 2, Development of 2, Institutional Consultant reports on Departmental Capacity to Strengthening and DOM progress in Monitor and Execute Capacity Building for implementing Technical Audits of monitoring and auditing: institutional Exploration and Mining US$ 1.05 million improvements Activities: preparation of monitoring and auditing strategies; implementation of new institutional arrangements including organization, staffing, and work methodology; and training and operational support. 3, Strengthening of DoM 3, Mineral Tenements Consultant reports on Mineral Tenements Management System: mineral tenements Management: development US$ 0.84 million of a strategic action; execution of field assessments; lease boundary definitions; and development of a mineral tenements management database. 4, Development of Project 4, Institutional Consultant reports on Coordination and Strengthening and sustainable development Environmental Assessment Capacity Building for and training materials Capacity for Sustainable sustainable

30 26 Development in Mining development: US$ 1.10 Project Areas: policy million formulation and strategic planning, training and workshop. 5, Institutional Strengthening 5, Institutional Consultant reports on of the Geological Survey and Strengthening of the mineral resources and Development of Geological Geological Survey: US$ GIS. Information System (GIS) 4.31 million. Capabilities: remote sensing, geophysical data interpretation, and development of a national litho-stratigraphic database; and compilation of geological information; upgrading of information system and facilities; and on the job training. 6, Institutional Strengthening 6. Institutional Consultant reports on and Capacity Building for Strengthening and IRC progress in IRC: upgrading equipment; Capacity Building: implementing implementation of new US$1.22 million institutional institutional arrangements improvements including organization, staffing, and tax audit and work procedures and methodology; and on the job training and operational support. 7, Project Coordination, 7. Project Coordination, Quarterly and annual Monitoring, and Evaluation: Monitoring, and reports, contracts and hiring supervise staff; Evaluation: US$ 1.22 procurement records, managing procurement; million monitoring reports, contract accounting and technical and training auditing; preparing quarterly performance evaluation annual reports and annual reports, manuals, and operation plans; and financial reports and monitoring progress and audits. evaluate results.

31 27 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 and have remained unresolved. A priority objective of the Government is to review the existing mining policy and legislation and to develop new strategies and regulatory documents on these new 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 and regional 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 by potential investors. Materials prepared will be prepared in such a manner to facilitate distribution to the mineral industry and potential explorers clarifying all of the major issues impacting 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 of Exploration and Mining Activities The technical capacity of the Department of Mining to effectively monitor and audit the activities of exploration and mining companies requires strengthening following the departure of experienced expatriate staff in the early to mid 1990's. The objective of this project component is to strengthen the capacity of the Department of Mining to audit existing mining and exploration

32 28 projects to determine appropriate compliance with legal, safety, contractual, and policy obligations. These include technical and expenditure reporting for exploration tenements, reserves and resource reporting and the reporting of production, exports, commodity prices and royalties on production tenements. Mine safety audits are also required to deal with a backlog of investigations. This Project component will be implemented through a participatory approach and on-the-job training and include the establishment of efficient procedures for monitoring and auditing of company reports and activities, and the participation of national staff in technical, commercial and legal training courses. This Project component will support Department of Mining to: 1) prepare appropriate monitoring and reporting strategies for exploration and mining companies; 2) prepare audit strategies and train staff in the identification of key issues for audit inspection; 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 for dealing with issues of non-compliance; and 7) prepare cases for punitive action under the Mining Act, 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 repealed Act, be converted to new leases. There exists, however, a large backlog in tenement conversions due to the limited capacity of the Department to survey the old leases for the transfer. This has significantly affected new exploration and mine development investments in some areas, because new leases cannot be issued until the location of existing leases can be defined by survey. This component entails: 1) development of a strategic action plan for lease conversions; 2) execution of field assessments to determine whether existing leases are active and effectively utilizing the states mineral resources; 3) cadastral boundary survey definition will be carried out to meet the requirements of lease transfer for those leases which are to remain in force; 4) lease boundary definitions 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 computer database for plotting. Updating into an integrated lease management system linked to the Departments central GIS is required in order to facilitate lease management into the future. This component also involves: 1) development of a mineral tenements management database with sufficient security features to ensure data integrity which incorporates all aspects of tenement administration required under the Mining Act 1992; and 2) integration of the tenements database into the departmental GIS system. Mining Wardens are responsible for the collection of public input into the licensing procedure and for the determination of the quantum of payments to be made in compensation claims against exploration and mining companies. The Wardens are required to have a working knowledge of mining and land law as well as a knowledge of appropriate values for damages in addition to skills such as investigation of claims and judicial inquiries. The Wardens require training and exposure to established systems to assist in strengthening their ability to deliver the required services in Papua New Guinea.

33 29 Provisions of this component will include the financing of a land surveying company to carry out lease boundary surveys; incremental operating costs related to travel and training; purchase of specialized survey software and computer and plotting equipment. Project Component 4 - US$1.10 million (including contingencies) Development of Project Coordination and Environmental Assessment Capacity for Sustainable Development in Mining Project Areas Mining projects cause significant social, economic, and environmental change in often remote rural areas where land ownership is under customary title. Managing this change and ensuring that project benefits are channeled into ultimately sustainable development activities which can sustain local communities beyond mine life is the function of the Project Coordination Branch of the Department of Mining. The provision of advice on the environmental effects of mining and their impacts on these same social issues is the function of the environmental resource scientists in the Project Assessment branch of the Department. Managing the process of social change and maintaining an harmonious operating environment for the mine developer are critical to the long term success and continuity of all mining projects. This requires that coordinators have a wide range of skills including basic social and economic knowledge of exploration and mining projects, environmental impacts, negotiation and mediation, land management, communication, business management, 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 order for the environmental effects of mining on communities to be adequately appreciated and accommodated in the development process. This project will develop project coordination and environmental 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 project coordinators, resource scientists and liaison officers in basic social and economic knowledge of exploration and mining projects, environmental impacts, negotiation and mediation, land management, communication, business management, accounting and financial skills, and a knowledge of development economics; (iii) meetings on the environmental, engineering, social and development issues associated with mining operations. Provisions of this component will include the financing of international and local consultants and trainers, environmental workshops with an international component, and incremental operating costs related to travel and training. The component will also support retreat, seminars, workshops and conferences (including a follow-up to the 1999 Madang Conference on Mining and the Community). Department of Mining 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 in addressing how mining development can better contribute to poverty alleviation and rural development in PNG. Studies will also be undertaken to see the extent to which compensation benefits reach the most needy members of the community and all segments of the community are adequately 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 manner involving local communities and provincial government officials. These activities should lead to the strengthening of government institutional capacity in this regard so that mining development is better integrated into overall rural and regional development.

34 30 Project Component 5 - US$4.31 million (including contingencies) Institutional Strengthening of the Geological Survey and Development of Geological Information System (GIS) Capabilities Institutional development of the PNG Geological Survey is required to provide high quality geological data products to other government institutions and Industry. This component is 1) to strengthen the capacity of the PNG Geological Survey to contribute to and benefit from the newly available data sources and digital mapping capability; and 2) to develop a Geological Information System (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 geological interpretation of Papua New Guinea. This sub-component requires the acquisition of remote sensing data and the introduction of software and training to enable the integration of remote sensing techniques into the mapping and interpretation of the geology of PNG. Principal data sets required include Radarsat SAR, Landsat, Spot, and if available, Seasat. Training in remote sensing will include the use of imaging software and the integration of digital remote sensing images into the GIS and thematic mapping and geological interpretation. The main objective of this subcomponent is: 1) to acquire digital and analogue remote sensing data and images; 2) to assist Department of Mining to establish an appropriate software suite to manipulate a remote sensing database to allow a structural reinterpretation of the geology of Papua New Guinea; 3) to assist Department of Mining in geohazard mapping for infrastructure and land use planning. Provision of 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 train national 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 surveys carried out by both the government and mineral and petroleum exploration companies. This data is currently somewhat disjointed and has not been integrated to assist the routine geological interpretation of PNG. The objective of this sub-component is to: 1) assist Department of Mining to develop an integrated geophysical data set using available meta data; and 2) to develop the geophysical 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 a program to digitise the existing 1:250,000 and 1:100,000 series geological maps of Papua New Guinea are essential. To date the Australian Geological Survey Organization (AGSO) has digitized the PNG lithological polygons from the 1:250,000 map series. Structural and point data remain to be digitized. This process has highlighted a considerable number of map boundary mismatches showing different geological units which need to be rationalized prior to the completion of a nationwide digital geology of PNG. This project sub-component will necessarily

35 31 involve: 1) the development of a national lithostratigraphic lexicon and database; 2) completion of digitization of the 1:250,000 geological map series; 3) the production of a national standard for geological map legends; 4) resolution of the existing edge-matching problems in the existing geological 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 determnine the 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, enviromnental management activities and, more generally, in society development is open and efficient access to accurate and reliable geological information. Today, this can be best achieved through modem information technology, including electronic comnmunication and development of an integrated set of GIS-related geo-data banks. Department of Mining holds a large number of maps, technical reports and geological, geochemical and geophysical data generated by the institution or by mining companies. However, most of the information is in a hard copy format and is not easily available to potential users. This has negatively affected the information services the Department should provide to its clients, including mining investors. In order to achieve this development goal, this component will make use of state of the art technology to gather, store and provide information to a wide range of clients in a timely fashion. It will help Department of Mining to (i) develop an information policy and its implementation strategy; (ii) set-up the institutional information management framework, including the identification of human and financial resources to sustain its development and maintenance; (iii) design and build-up an integrated geological and mining information 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 users at different levels in information, database and network management as well as in processing and output of thematic maps and customized products; (v) input of relevant existing data according to priorities defined under (i). This component will provide for the financing of (a) international and local consultants; (b) works and equipment including, software and hardware specifically dedicated to the system functions, communications devices and accessories; software requirements would include programs in administrative system and database management, processing, communications and editing; subscription to international and national electronic databases and internet; some rehabilitation work, in particular network cabling and connections, upgrading of electrical 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 out audits 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 the conditions which apply to the companies in the country. In order to provide IRC with long term auditing 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 to their results; (iii) carry out full audits as directed by IRC; and (iv) prepare draft guidelines for future audits; (v) carry out other duties of IRC as relevant to the mining and petroleum sector.

36 32 This Project component will be implemented through a participatory approach and on-the-job training and include the financing of: consultants; incremental operating costs related to travels and training; 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 provide technical and administrative management control of the Project. The PCIU will manage procurement, including all contracting works and purchases, and the hiring of consultants, the contractual relationship with the Bank and the Project's overall administration and financial management, which includes accounting, reporting, managing the Project's Credit Account and its other funding. PCIU will be responsible for preparing and submitting to the Bank quarterly reports dealing with Project implementation, and for contracting under Terms of Reference acceptable to the Bank, the yearly audits of the Project including the timely submission of such audit reports to the Bank. The Project will finance the contracting within the PCIU of a PCIU Director, PCITJ Accountant, and PCIJ Procurement officer, and administrative support staff Funding is provided for the unit's operating costs, as well as some operational equipment.

37 33 Annex 3: Estimated Project Costs PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA Project Cost By Component Local Foreign Total US $million US $million US $million Policy and Regulatory Institutional Strengthening Development of Departmental Capacity to Monitor and Execute Technical Audits of Exploration and Mining Activities Strengthening of DoM Mineral Tenements Management Development of Project Coordination and Environmental Assessment Capacity for Sustainable Development in Mining Project Areas Institutional Strengthening of the Geological Survey and Development of Geological Information System (GIS) Capabilities Institutional Strengthening and Capacity Building for IRC Project Coordination and Implementation Unit (PCIU) Auditors Fee Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Front-end fee Total Financing Required

38 34 Project Cost By Category Local Foreign Total US $million US $million US $million Services Training Goods Incremental Operational Costs PCIU Operating Costs Physical Contingencies Price Contingencies Total Project Costs Front-end fee Total Financing Required

39 35 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, copper and gold. In the mid-1960s, following the discovery and development of the Bougainville copper project, the country benefited from an active mineral exploration and mining industry. This led to the discovery of the Ok Tedi copper and gold deposit and the Frieda copper deposit soon after 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 the discovery 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 a small gold mine at Tolukuma were subsequently developed in 1980s and are in production. The production of these two metals had constantly increased in 1970s to 80s because of the development of Ok Tedi, Porgera, and Misima. After the closure of the Bougainville copper mine, however, the copper production in the country began to decrease. There was a major increase in gold production in the early 1990s with the opening of the Porgera mine. The PNG mining sector has exported about US$ 1 billion worth of copper and gold products annually and US$100 million million in tax transfers and direct community benefits each year. Project Benefits: As mineral exploration is essential to the long term stability of the sector to contribute to the national economy, one of the most important indicators of the project is the amount of the investment for exploration. If the project will be successfully implemented, the exploration spending by private investors is expected to increase by 2005 from the current US$ 12 million to the 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 mining sector, the mining sector in the country can also improve environmental performance and achieve safer exploration and mining operations and increase tax collections at a time when revenue collection is a critical country priority. The Project will cost the Government about US$11.5 million. The additional tax collections from the IIRC component are likely to be anywhere from double or more that amount. The additional benefits to Government and communities of additional mining exploration and mine development could range from US$ 1-2 million from a modest exploration venture to tens of millions of dollars benefiting local communities and hundred of millions of dollars benefiting the national economy from just one additional world class mining development.

40 36 Annex 5: Financial Summary PAPUA 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 Required Project Costs Investment Costs Recurrent Costs Total Project Costs Front-end fee Total Financing Financing IBRD/IDA Government Central Provincial Co-financiers User Fees/Beneficiaries Others Total Project Financing I OPERATIONAL PERIOD (START 07/01/00) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Financing Required Project Costs Investment Costs Recurrent Costs Total Project Costs Front-end fee Total Financing Financing IBRD/IDA Government Central Provincial Co-financiers Others Total Project Financing

41 37 1 Guidelines Annex 6: Procurement Arrangements PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA Procurement of goods and works, and consultant services funded wholly or partly by Bank Loan will be carried out in accordance with Bank procurement guidelines ("Guidelines for Procurement under 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 of Consultants by World Bank Borrowers" of January 1997 revised September 1997 and January 1999 (the Guidelines). There are several conflicts between the procurement procedures of the Government of Papua New Guinea 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 to citizen or national companies; * to reserve all construction contracts valued between K 5.0 million and K 10.0 million to joint 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 all consulting contracts up to K 100, to citizen companies only; and, that bidders (contractors and consultant firms) must be registered with the association of national contractors or consultants in order to participate in bidding. The Government confirmed at negotiations that these provisions are not applicable to this project and that World Bank procurement rules will apply. The proposed Procurement methods are summarized in Tables A and Table A Summary of the Assessment of the Agency Procurement Capacity. Assessment of the procurement capacity of the DoM which (through the PCTU) is responsible for all the of the procurements under the project, was carried out in accordance with the World Bank Office Memorandum from the Manager of OCSPR, dated August 11, The assessment involved 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 DoM adhere to the principles of competition and are intended to promote economy, efficiency and transparency. However, certain provisions of the Public (Finances) Management Act No. 35 of 1995, the Financial Instructions of January 1987, and the GoPNG related decisions in NEC 66/92 and NEC 41/95 are unacceptable to the Bank. Despite close relationship between DoM and Department of Petroleum, which is currently implementing the Petroleum TA project, there is presently nil capacity at DoM to undertake procurement under Bank financed project, hence it is required that procurement technical assistance be undertaken under the project as part of the DoM and IRC institutional capacity

42 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 manage project implementation. 3 Methods All Procurement under the project will be carried out by the PCIU within DoM following agreed procedures and using the appropriate Standard Bidding Documents (SBD) and Standard Request for Proposals (SRP) of the Bank. Procurement under the project consists largely of consultancy services and a few number of small goods contract intended to (i) improve the DoM's capacity for developing, negotiating and managing mining exploration and operations, (ii) institutional strengthening and capacity building for the IRC, and (iii) establishment of PCIU to be based at the DoM A. Goods: (US$ 1.43 million). Goods envisioned under this component, include purchase and delivery 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 following International Competitive Bidding (ICB) using the appropriate Bank's Standard Bidding Documents (SBDs), up to a maximum aggregate cost of about US$ 0.25 million. This consists of one 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 done following International Shopping (IS) procedures as defined in paragraphs 3.5 and 3.6 of the Guidelines, 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 and establishing a GIS system (for Component 5) which is highly specialized and only available from a small number of specialized international suppliers (c) Goods contracts estimated to cost less than US$ 50,000 equivalent will be done following National Shopping (NS) procedures as defined in paragraphs 3.5 and 3.6 of the Guidelines, up to a maximum aggregate amount of US$ 0.31 million. (d) Goods Contracts estimated to cost between US$ 50,000 and US$ 100,000 equivalent each up to a maximum aggregate value of about US$ 0.6 million will be done following Direct Contracting procedures as defined in paragraph 3.7 of the Guidelines for digital and analogue remote sensing satellite data and image which is only available from single sources for the GIS system (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 hard and soft wares, commissioning and on-the-job training; technical assistance (regarding mining sector administration, social and environmental protection, and fiscal auditing); training and organizing study tours abroad. Selection of Consultants and their contracts will be based on the Standard Request for Proposals issued by the Bank.

43 39 (a) Selection of consultants up to aggregate amount of US$ 4.62 million equivalent, will be carried out following Quality and Cost Based Selection (QCBS) Method, in accordance with the World Bank Consultant Guidelines Section II, paragraph 3 of Appendix I thereto, Appendix 2 thereto, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to quality- and costbased selection of consultants. (b) Selection of consultants up to aggregate amount of US$ 1.94 million, will carried out following Quality Based Selection (QBS) Method, as described in paragraphs of the Consultant Guidelines because these are complex and specialized assignments where the client expects 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 Guidelines shall be procured under contracts awarded to individuals in accordance with the provisions of paragraphs 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 out following Selection under a Fixed Budget (SFB) method as defined in paragraph 3.5 of the Consultant 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 out following Consultant Qualifications (CQ) method as defined in paragraph 3.6 of the Consultant Guidelines for the appointment of the PCIU staff and for certain training assignments including workshop 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 selected and procured in accordance with the provisions of paragraphs 3.8 through 3.11 of the Consultant Guidelines. (g) Selection of Auditors, estimated at US$ 0.05 million, will be carried out is following the least-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 of individual trainers or training institutions who have provided training in the past, satisfactory to the Bank. 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 not limited to expenditures for travel, per diem, operating costs for vehicles, including vehicle insurance, communications, meetings (such as retreats, seminars, workshops and conferences), and office materials required for project implementation) will be provided in accordance with existing Government prescribed limits and procedures acceptable to the Bank.

44 40 4 Prior Review. The procedures set forth in Paragraph 2 of Appendix 1 to the Guidelines shall apply 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 all contracts awarded through ICB; (c) Consultants services with firms valued at US$ 100,000 equivalent or more, and contracts with 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 set forth 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 the Borrower may be granted a margin of preference in accordance with and subject to the provisions of Paragraphs 2.54 and 2.55 of the Guidelines and Annex 2 thereto. 7. Advance Contracting and Retroactive Financing. To accelerate project implementation, the DoM has proceeded with the initial steps of drafting the TOR, bidding documents, RFPs in accordance with Paragraph 1.9 of the Guidelines. PCIU staff are planned to be mobilized by May, Award recommendation is expected to be submitted to the Bank before mid April, Advance contracting and retroactive financing up to US$ 0.2 million will be included in the project. 8. Procurement Improvement Action Plan: To ensure that procurement under the project will be carried out efficiently and institutional capability will be strengthened within DoM and IRC, the following will be undertaken: (i) Advance project readiness and minimize start up difficulties - will be accomplished through establishment of PCIU ahead of effectiveness, to be staffed with a Project Director, a Procurement Specialist and an Accounting Specialist with satisfactory qualifications and experience in carrying out project coordination and implementation, in accordance with TOR acceptable to the Bank. The PCIU will be mainly responsible in carrying all aspects of procurement (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 the milestones for all procurement vis-a-vis the resulting projected disbursement. The PBDT should be based on the enclosed procurement plan (Attachment 1) agreed with the DoM during appraisal and finalized at negotiations. The PCIU, along with the National Planning and Monitoring Department, will review, monitor and update progress on the PBDT periodically every twelve months.

45 41 (iii) Strategic Direction and Oversight - a DoM/IRC Project Steering Committee has been established which will provide overall strategic direction for the project, review project progress and solve any inter-agency issues or problems that may arise. (iv) Capacity building - DoM and IRC staff will undergo integrated training on procurement and financial management by about effectiveness of the Loan. As mainstreaming of PCIU tasks into the DoM is required for sustainability of operations including the required transfer of technology, the DoM and IRC should provide middle level DoM national professionals to work closely with the PCIU (v) Procurement Operations Manual (POM) - A POM embodying principles of efficiency and transparency will be issued and operationalized within six months of effectiveness. The manual, which should be based on current Bank guidelines, should provide DoM clear procurement steps, procedures and detailed instructions regarding the different stages of the procurement processes, the activities in each process, the staff responsible for an activity and the length of time allotted to the staff to complete an activity.

46 42 Procurement Methods - Table A Table A: Project Costs by Procurement ArrangementsI (US$ million equivalent) Expenditure Category 1CB NCB Other 2 N.B.F. Total Cost 1. Works (0.00) (0.00)_ (0.00) (0.00) (0.00) 2. Goods (0.22) (0.00) (1.07) (0.00) (1.29) 3. Services (0.00) (0.00) (7.50) (0.00) (7.50) 4. Training (0.00) (0.00) (0.54) (0.00) (0.54) 5. Front-end fee (0.00) (0.00) (0. 10 ) (0.00) (0. 10) 6. Incremental Operating Costs (0.00) (0.00) (0.49) (0.00) (0.49) 7. PCIU Operating Cost (0.00) (0.00) (0.08) (0.00) (0.08) Total (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 include contingencies 2/ Includes goods to be procured through international and national shopping, consulting services, 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 million Bank financing) satellite data and images for the geological infornation system to be procured by direct contracting; US$0.27 million (US$ 0.23 million Ban-k financing) goods to be procured by International Shopping and US$0.31million (US$ 0.28 mil][ion Bank financing) to be procured by National Shopping

47 43 Table Al: Consultant Selection Arrangements 1/ (US$ million equivalent) Consultant Services Selection Method Expenditure Category QCBS QBS SFB LCS CQ SS N.B.F. Total Cost, A. Firms (4.20) (1.77) (0.04) (0.04) (0.00) (0.00) (0.00) (6.05) B. Individuals ((0.00) 0.00) (0.00) 1.26) (0. 19 (0.00) (1.45) Total (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 Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications SS = Single Source Selection N.B.F. = Not Bank-financed

48 44 Prior review thresholds (Table B) On the basis of the procurement capability assessment, the prior review thresholds will be as follows. Table B: Thresholds for Procurement Methods and Prior Review 1 Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works no works contracts n.a. n.a. 2. Goods 100 and above ICB/DC 1/ IS 2/ NS 3/ Services Firms 100 and above QCBS/QBS/SFB/LCS 17/ and all terms of reference None applicable to the respective values Individuals 50 and above 1/ CQ/SS None and all terms of reference applicable to the respective 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 (includes special procurement supervision for post-review/audits) Procurement Plan A Procurement Plan for the project has been prepared. It identifies all the packages for each project component and provides key steps. The start and end times of each task relate to the first year of project implementation. For subsequent years, the tasks would remain the same but the start and end times (not possible to ascertain at this stage as these would also be need based) would be different. I Thresholds generally differ by country and project. Consult OD "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance.

49 45 Annex 7: Disbursement, Project Financial Management, Financial Reporting and Monitoring, and Implementation Planning Arrangements PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA A. Disbursement Table A: Allocation of Proceeds Expenditure Category Amount in Financing Percentage US$million Equipment and Materials % of foreign expenditures, 100% of local expenditures (exfactory) and 85% of expenditures for other items procured locally Consultant Services and Training % Incremental Operating Costs 0.41 declining balance 80% through 2002; 60% 2003; 40% 2004; 20% 2005 thereafter PCIU Operating Costs % of foreign expenditures, 100% of local expenditures (exfactory) and 85% of expenditures for other items procured locally Unallocated 1.04 Total Project Costs 9.90 Front-end fee 0.10 Total 10.00

50 46 A.1 Implementation Period: The implementation period for the project is estimated at four years starting July 1, Annual disbursement based on the implementation schedules are estimated as follows: Implementation Year Year One Year Two Year Three Year Four Year Five Disbursement (US$ million) A.2 Disbursement Schedule: On the basis that the loan becomes effective in September 2000, the disbursement schedule in the Bank financial years would be as follows: Bank Financial Year Disbursement (US$ million) A.3 Disbursement Procedures. Disbursements would be made either directly by the Bank or through a Special Account. In the latter case, the PCIJ through the DoM will open a Special Account with a reputable commercial bank upon the authority of the Department of Treasury. The account will be maintained in Kina. An initial deposit in Kina equivalent to US$ 500,000 will be made into the account as an advance from the loan; this represents the four-month average of project expenditures to be financed through the Special Account. All expenditures are expected to 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 withdrawal application for payment outside the Special Account (i.e. Direct payment). Replenishment applications should be submitted on a monthly basis. Disbursements for goods contracts less than US$200,000 and consultants' services contracts less than US$ 100,000 for firms and less than US$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 for incremental operating costs and for training-related disbursements. All documentation in respect of SOE disbursements will be maintained by the PCIU and will be subject to periodic review by the Bank. Direct payments, however, will be permitted for such small amounts on application to the Bank if required and justified. Nevertheless, to the extent possible, payments would be channeled through the Special Account. For payments of amounts of the value of US$200,000 and above, direct payments will be made on application to the Bank. A.4 The project will finance incremental operating costs for DoM, IRC, and the PCIU. Funds will be disbursed on a declining balance for the DoM and IRC incremental operating costs in order to ramp up the government contribution so that it is sustainable after the project is completed. But PCIU operating costs will be funded as a flat percentage since the PCIU will not continue to operate once the project is completed. A.5 Special Account. To facilitate disbursements against eligible expenditures, a US$ 500,000 Special Account will be established. The Government will establish, maintain and operate the special account under conditions acceptable to the Bank. Payments under 20% of the authorized allocation to the special account will be made from the special account. Replenishment applications will be submitted quarterly.

51 47 B. Project Financial Management B.1 Finanical Management Assessment. An assessment of the financial management systems of the DoM and IRC was carried out. The accounting system used by the DoM is the computerized PNG Government Accounting System (PGAS). The system has comprehensive expenditure control and reporting functions for expenditures made under the Consolidated Revenue Fund (CRF), which is appropriated under the Recurrent 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 seem adequate. The DoM has little experience with management of donor-funded projects. The two AusAID funded projects being implemented by the DoM are managed by private contractors employed by AusAID and there has been little administrative input from DoM in their management. This situation requires establishment of a project management unit with experienced and qualified staff. It is envisioned that financial management and procurement of both the DoM and the IRC component will be handled by the Project Coordination and Implementation Unit based in DoM. B.2 Project Financial Management System. In order to ensure that the project financial management system adheres to the GoPNG statutory procedures and the Bank's project financial management and reporting requirements, it is envisioned that project financial management system will essentially be a manual system with the addition of a standard Microsoft Excel spreadsheet to record sufficient transactions in order to generate required reports. A project accountant will be appointed, and it is proposed that accounting support be provided through a reputable accounting firm to provide end-of-month accounting and reporting services. It is expected that, once the Action Plan to establish the project financial management system is completed, it will address weaknesses identified in the assessment 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 will reference applicable Bank and Government financial procedures for project implementation providing clearly mapped guidelines. It is expected that PMR reporting will be generated by December 31, The project will use traditional SOE disbursement procedures. However, feasibility of adopting the PMR-based disbursement procedures will be reviewed by the end of December, B.3 Oversight. In order to enable the project to be implemented in a timely and prudent manner, a DoM/IRC steering committee will be established to oversee the project. The Secretary DoM will be the Chairman and the Commissioner General of IRC will be the Deputy Chairman. A project Coordination and Implementation Unit (PCIU) will be established within DoM and will be responsible for project financial management and for managing the Special Account and making disbursements of loan proceeds. The PCIU will consist of a director, a procurement specialist, and a project accountant. The DoM will develop, by the date of effectiveness of the loan, a project financial management handbook which will reference applicable Bank and Government financial

52 48 policies and procedures for project implementation. It will also develop an appropriate project financial management system satisfactory to the Bank in order to produce the PMR reports as outlined in the LACI Implementation Handbook, by December 31, B.4 Audit Arrangements The Borrower will be required to have the project financial statements audited for each fiscal year by independent auditors acceptable to the Bank and make such audited statements available to the Bank within six moths after the end of each fiscal year. The terms of reference for the audit will be provided 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 By I. Organization and Staffing a. Appointment of DoM/IRC Steering GoPNG Completed March 3, 2000 Committee to oversee financial management and reporting of the project. b. Establishment of PCIU DoM (PCIU) Completed March 3, 2000 c. Appointment of Project Director, DoM (Steering Effectiveness Procurement Officer and Project Accountant Committee) II. Accounting System and Procedures a. Issuance of a Financial Management System DoM (PCTU) Effectiveness Handbook acceptable to the Bank b. Issuance of a Procurement Operations Manual DoM (PCIUJ) December 31, 2000 acceptable to the Bank c. Establishment of Project Financial PCIU December 31, 2000 Management 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 in the physical implementation of the project and to assess the project's budgetary and financial status. The following quarterly financial, project progress, and procurement management reports as specified 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 will commence 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 input data, the project progress reports require the use of output data to measure development

53 49 effectiveness. Identification of output measures will involve the measurement of outcomes to assess overall project development effectiveness. The broad output indicators include the following 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 output indicators: ACTIVITY PMR UNIT PLANNED OUTPUT On-the-Job Training Man-years of training 50 Short Courses Course 20 Management Training Course 10 Post Graduate Studies Study years 6 Industry Conferences Events 2 Promotional Packages Package 2 Exhibitions Exhibition 8 Seminars/workshops Seminars 20 Publications Publications 3 Institutional Study Study 2 Remote sensing data acquisition US$ spent 550,000 Equipment acquisition US $ spent 350,000 All of the above activities are readily measurable except for equipment and data acquisition which are presented in expenditure terms. In determining, the appropriate PMR unit to measure the output of the on-the-job training activity, regard was given to the availability of professional staff and experts' time as inputs on the basis that each expert has one counterpart staff member at all times, total on the job training would be approximately 50 man years. Equipment that is envisaged comprises: books, industry reports and journals to support studies, exhibition, seminar and promotional materials, computer hardware and software, office equipment, etc. The activity in this case is the acquisition of equipment, which due to its variety is not readily measurable per unit acquisition. Therefore, the output measure for this activity is by value only. Outcomes in the longer term, over and above the project outputs, that may contribute to development effectiveness are development of the DoM into an independent and autonomous Government Authority and increased social and environmental performance of the sector. These may not be measurable against input costs and activities, but may represent sector development milestones with, or otherwise subsequent to, implementation. D. Implementation Planning D.1 Project Launch In order to optimize project implementation, the DoM needs to be prepared for project commencement. This will involve: establishing the organization, procedure/guidelines, financial preparations and procurement processing as well as training in financial management and procurement processing well head of loan effectiveness. These requirements have already been identified in this Implementation Plan and are summarized as follows:

54 50 PREPARATORY ACTIONS Organizational Establish Steering Committee Establish PCIU Structure within DoM Engage PCIU Staff Engage accounting firm to support PCIU accountant APPROXIMATE TIMING Done Done Three months prior to loan effectiveness By loan effectiveness Procedural Prepare Financial Management Handbook By Loan Effectiveness Prepare Project Implementation Manual (including Three months prior to loan effectiveness Procurement) Prepare PMR reporting forms By loan effectiveness Training Procurement Processes Two months prior to loan effectiveness Financial Management Two months prior to loan effectiveness Disbursement Processes Two months prior to loan effectiveness Accounting and Reporting Systems Two months prior to loan effectiveness Audit Requirements Two months prior to loan effectiveness Financial Management Preparation Obtain Trust Authority for bank accounts Two months prior to loan effectiveness Open project bank accounts One month prior to loan effectiveness Engage consultant/accounting firm to establish Aprin/May 2000 Financial Management System Establish project Financial Management System December 31, 2000 Engage outside accounting firm to provide end-of- Two months prior to loan effectiveness month services Preparations for Procurement: Year 1 Activities (Commencement of precursory steps per implementation schedules) On-the-job training Two months before loan effectiveness Terms of reference for first year's consulting services end March 2000 Technical specifications for equipment procurement end March - end June 2000 TOR for DoM organizational study end March 2000 TOR for IRC Institutional Strengthening end April 2000 TOR for Policy and Regulatory Strengthening end April 2000 Studies Training Program for Sustainable Development end May 2000 Plan for Workshops and Conferences end May 2000 TOR for Technical Audits end May 2000 TOR for Mineral Tenements Management end June 2000 TOR for Institutional Strengthening of Geological end June 2000 Survey Plan for GIS Development end July 2000 Office Equipment and Vehicles Procurement Bid documents issued by end April 2000

55 51 D.2 Implementation The main project activities and associated responsibilities are detailed below. Activity: Procurement Processing Preparation of terms of reference for expertise and specifications for equipment Preparation of tender/bid documents Tender/bid evaluation Contract negotiation & finalization Activity: Financial Control and Audit Project accounts Preparation of end-of-month financial reports Internal audit External audit Activity: Studies and Policy Papers Management of expertise Management of study Studies Coordination, Assessment and Review Responsibility Procurement Officer and relevant DoM Directors and IRC as appropriate Procurement Officer Steering Committee & PCIU Director Procurement Officer & PCIU Director Responsibility Project Accountant Outside accounting firm Steering Committee and PCIU Director Independent Auditor Responsibility appropriate DoM Division or IRC Director appropriate DoM Division or IRC Director PCIU Director D.3 Schedule The overall project implementation schedule is provided in the Implementation Manual. D.4 Supervision. Project supervision involves a project launch mission, two field supervision missions per year as well as a full-fledged implementation review mid way through the implementation. The skill mix of the Supervision Task Team should be the same as that for the Project Preparation Team. The timing, duration in weeks, and skill mix of the field supervision missions should be along the following lines. Mission No Time TTL MS PS ESS 1 6/01 X X 2 10/01 X X X X 3 4/02 X 4 10/02 X X X X 5 4/03 X 6 10/03 X X X X 7 4/04 X 8 10/04 X X X X TTL: Task Team Leader MS: Mining Specialist PS: Procurement Specialist ESS: Environmental and Social Specialist

56 52 A. Environment 1. Introduction Annex 8: Environmental and Social Issues in the Mining Sector PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA This technical assistance project is rated as a Category B for environmental purposes. The project will not involve any direct investment in mining activities. However, while the project will have no direct impacts, it may have indirect impacts by encouraging increased mining activities. Also the sector itself does have significant impacts on the environment and in the case of OK Tedi these remain highly controversial. Typically institution building projects such as this are recommended as Category C under the OP/BP/GP The team decided to upgrade the category to B to reflect general concerns about environmental and social issues in the sector. The project does not involve resettlement nor will trigger actions under any of the Bank's safeguard policies. No separate environmental assessment was prepared for this project. However, as part of project preparation, an independent environmental consultant was retained to review environmental issues in the mining sector. The consultant prepared a background note which reviews 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/or ocean based mining waste and tailings disposal, processing and refining and smelting plants. All of the large mining projects in PNG are subject to specific contractual and regulatory environmental performance requirements. The contractual requirements are included in agreements between the project sponsor and the Government which are typically negotiated during the mining license approval process (when there is a "Forum" between all of the interested Government Departments and the investor). In general, investors have prepared detailed environmental plans to high standards for all of the large mining projects in PNG. There has been a relatively high degree of information disclosure and consultation with affected peoples ("land owners") in PNG mining projects. These projects are operated by international mining companies who operate in line with good international practice and face not only regulatory penalties but also serious reputational risk if compliance 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 impacts in highly sensitive protected ecological areas, or site selection and management. However, the report did raise concerns regarding the environmental impacts of the Ok Tedi operation and pointed out the need for all potential options for waste and tailings disposal at Ok Tedi to be reconsidered and re-examined. The report also identified a number of areas for improvement relating to environmental legislative and regulatory aspects and institutional capacities.

57 53 An updated environmental review was undertaken in January 2000 as part of the project preparation and appraisal. With the exception of the special case of Ok Tedi, the recent review noted generally satisfactory environmental performance for the different projects. In particular, the Porgera project has taken a very positive approach by establishing an environmental monitoring committee with civil society and NGO representatives. However, for the sector as a whole, there is still much room for improvements in the regulatory and institutional arrangements and 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 an Environmental Plan (environmnental impact assessment) and an environmental monitoring plan. The Environment Contaminants Act (1978) which is aimed at controlling air and water pollution from effluent producing developments. The Water Resources Act (1982) which is primarily directed at the use and allocation of surface and ground waters in PNG. The Conservation Areas Act (1978) which allows for the setting up of the National Conservation Council to advise on the location, 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 are excluded from the Environmental Planning Act. These are the Mining (Bougainville Copper Agreement) Act (1976) and the Mining (Ok Tedi Agreement) Act (1976). This came about because both these projects were granted approval prior to the enactment of the Environmental Planning Act (1978) or the Mining Act (198?) The draft new Environment Bill has been drawn up under the auspices of an AusAid project to OEC. Under this initiative, or in parallel with it, thirteen new policies, regulations and guidelines have been established. These are all still in draft form and are discussed below. The new Environment Bill is designed to replace the existing the Environmental Planning Act, the Environmental Contaminants Act and the Water Resources Act and it repeals these Acts. The new Environmental Bill is a positive development in bringing environmental legislation in PNG up to date. However, there are a number of issues that are cause for concern both to existing mining operations and future projects. The PNG Chamber of Mines and Petroleum, in August 1999, produced a set of suggested amendments to the new Act. These are far more comprehensive than anything that could be done in this report and cover most of the issues raised above. Several additional issues are discussed in the consultant's report (February 2000). The new Environment Bill takes a very democratic approach to management of the environment with an Environment Council being appointed by a committee and being advised by a Working Committee and an Environment Consultative Group. At present, there is only one full time committee related to the environment. This is the Water Resources Board, which only manages 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 more successful. This could create significant delays in obtaining environmental permits and approvals.

58 54 The requirement in the new Bill for an Environmental Impact Assessment for level 3 activities is in line with international best practice. However, level 2 activities 'which pose a threat of serious environmental harm' are also required to carry out a full Environmental Imnpact Assessment whether that 'threat' is large and small. The interpretation of this is that any mining projects, however small they might be, would still be required to do a full Environmental Impact Assessment. The new Bill should include some provision for a lesser requirement for a smaller project. The new Environmental Bill only refers to air quality in the section on Environmental Contaminants. 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 the Mining Co-ordination Branch and the Mineral Project Assessment Branch. The role of the coordinators is to ensure effective liaison between government departments and mining companies and to monitor company performance. There are at present eight coordinators based in Port Moresby and five liaison officers based on mine sites. The role of the Mineral Project Assessment Branch is to provide independent assessment and expert advice on the technical and legal aspects of mineral projects. The branch has a senior resource scientist and a resource scientist. The job descriptions for both resource scientists includes reviewing minerals development proposals to evaluate the environmental impacts of projects and assess the environmental aspects of minerals policies. However, they make no mention of any on-going environmental monitoring role for mining projects. The environmental work that the resource scientists are currently involved in includes ongoing monitoring and negotiations for the Ok Tedi mine, the Ramu project environmental plan approval, the Simberi project, discussions regarding the new environmental legislation, drafting of the proposed Mine Decommissioning and Rehabilitation Policy Framework and producing the departmental quarterly reports. One officer also sits on the PEAK (Porgera Environmental Advisory Komiti), an external advisory/reference group that was established in 1996 to address the environmental concerns of the community and environmental groups at the Porgera mine. All the major mining project produce quarterly environmental reports as required by the OEC. Copies of these reports are sent to the project coordinators. The project coordinators also attend quarterly meeting to discuss these environmental reports. However, these environmental reports are not provided to the resource scientists for their comments on a regular basis, nor do the senior scientists normally attend the meetings. 5. Office of Environment and Conservation In 1997 the Department of Environment and Conservation was changed to the Office of Environment and Conservation (OEC): a move that many see as a down-grade. At the time of the change the departmental budget was cut by 50 % and the nunmber of positions reduced from 159 to 89. The OEC budget for 2000 is K 4.5 million (US$ 1.5 million). The lack of capacity both in terms 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 as disorganized, especially in respect to archiving reports and documents relating to mining projects.

59 55 The OEC has recently been the recipient of two aid funded projects. An EU funded project provided two consultants to work with OEC to strengthen the mine monitoring unit and to prepare the Environmental Code of Practice for the Mining Industry. The latter of these two projects is still on-going. An AusAid funded project provided one consultant to work on the preparation of the new Environment Bill and related legislation. The consultant also organized the library in the new offices and started the cataloguing of reports but this work was not completed. This project has now finished, even though the legislation has not been completed, and there are no immediate plans to provide any additional funding in this area. The Environment Division is responsible for the assessment of environmental impact statements, or environmental plans, and the overall environmental management of all mining projects in PNG with the exception of Ok Tedi and Bougainville. These latter two are the legal responsibility of the Department of Mining (DoM) though the OEC are involved in all negotiations and decisions. The Environment Division currently has a staff of 18 working at the offices in Port Moresby as well as field officers at the Porgera, Lihir and Misima mines. The quality of the staff from this division that were present at meetings was remarkably good though, in the main, they lack the relevant training that would enable them to carry out their work efficiently. The main strength 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 environmental management of mining projects. These shortfalls include basic mining training, overall environmental management of a project, the ability to assess monitoring plans and quarterly reports so that issues as well as compliance are addressed, air quality monitoring, acid rock drainage and rehabilitation. This lack of knowledge was particularly evident with the site officers at 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 the OEC is relevant to the mining industry. In addition, the DoM are currently in the process of drafting a Mine Decommissioning and Rehabilitation Policy. Since the completion of the AusAid project that was assisting with this work, the two departments have been carrying on this work internally. 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 make understanding the environmental requirements and their implementation extremely complex. This Technical Assistance Project will facilitate DoM and OEC working together more closely to make the proposed legislation more applicable for the mining sector and completing the Mine Decommissioning and Rehabilitation Policy.

60 56 (ii) Government Co-ordination and Liaison Co-ordination between the Department of Mining project co-ordinators and the resource scientists in regard to support of environmental monitoring for the existing mines, with the exception of Ok Tedi, appears to have broken down. Co-ordination between the DoM project coordinators and the OEC is also limited. At the same time the shortage of resources, both in the form of manpower and financing, is reducing the capacity of the government to comprehensively monitor and manage the environmental impact of existing mines. This Technical Assistance Project can assist DoM to undertake a review of the co-ordination between the project co-ordinators and the resource scientists and, with the co-operation of the OEC, 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 cooperation and co-ordination between them, is reducing the effectiveness of the monitoring and management role of the government. The government loses credibility by failing to present a united face to the company and the landowners. This is very frustrating for the company and has the potential to create problems with the landowners. In addition, the lack of government resources 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 relationship between the national, provincial and local government on existing mining sites and the liaison between 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 that the OEC are having trouble keeping up with the enforcement of the environmental legislation and the overall environmental management. This is due, in the main, to a lack of capacity in the form of manpower and financing. The result is that there are a number of critical enviromnental issues that have not been dealt with adequately. This Technical Assistance Project, with the co-operation of OEC, will facilitate improved environmental 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 project coordinators and the resource scientists, and the OEC, which impact their ability to carry out their respective 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 in mining and anything they do know has been learnt on the job. Their knowledge is therefore extremely limited.

61 57 (b) Overall Environmental Management: Most of the staff of both departments do not have any training in the overall environmental management of a mining project. This limits their ability to understand 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 limited awareness 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 have a 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 a limited awareness of rehabilitation planning, methods and procedures and subsequent monitoring. This Technical Assistance Project will, with the co-operation of OEC, provide a series of training workshops that will address the above issues. The Technical Assistance Project will also include a study and workshop regarding possible methods of mine waste disposal (tailings and waste rock) that would be applicable to PNG, covering all aspects of land, river and ocean disposal options. 7. Actions Proposed under the Project While a new environmental law has been drafted with assistance from AusAid this is a complex 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 a positive impact on the environment. This includes environmental-related workshops and conferences with major stakeholders and training activities for both DoM and OEC staff. These activities will improve the skills and capabilities of DoM and OEC staff to conduct technical field audits of mining projects, to investigate mine safety and environmental compliance, and to work with 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 NGOs and concerned stakeholders. These groups included: World Wildlife Fund (WWF), IKraft, representatives of Landowner Associations; representatives of the Chamber of Mines and Petroleum; and other local NGOs B. Social Mining projects have significant social impacts and mining companies have been progressively learning how to take into account the views of local communities and how to improve their abilities to work with local communities to maximize the benefits from mining activities. 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 impact assessment; second, the assessment should then form the basis for designing subsequent social

62 58 action programs; third, is implementation of the action programs; and, fourth, is monitoring to ensure that the programs are properly implemented. 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 been prepared for all of the projects and concluded that these represented serious professional efforts to identify and mitigate social impacts associated with the projects. There has been no involuntary relocation in mining projects. For each project, there are project-related social and environmental agreements bilaterally between the company and the landowners and the Government and the landowners (as well as agreements between the Government and the company). These agreements address matters such as employment, contracting from local sources, project impacts, compensation, provision of infrastructure and social services. While these agreements provide a potentially useful framework for addressing social impacts of mining projects, the report also found that progress on the ground in dealing with social issues was limited at that time and that monitoring has been ineffective. Since then, mining companies have considerably increased their attention to implementation and monitoring of social impacts of mining projects, although the parameters and methodologies used to assess the impacts are still evolving. A conference on Mining and the Community was organized in Madang, PNG in 1998 cosponsored by the World Bank, Metal Mining Agency of Japan, Government of PNG and the PNG Chamber of Mines and Petroleum. The case studies presented at this conference demonstrated that Papua New Guinea is moving to the forefront of dealing with social and community-related issues in mining projects and with designing benefit and infrastructure delivery schemes. At the Misima project, the mine provides a service delivery mechanism for certain medicines not only on Misima Island 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 Social Concerns into Private Sector Decision Making, January 1998 as an example for good practice for community identification although the revenue distribution and compensation scheme do not provide sufficiently broad based benefits, especially for women and children. A social review of the mining sector conducted during project preparation found that while there remains considerable room for further improvement, overall a good amount of progress has been made regarding social issues and today the landowners are very well organized and well able to deal with project developers and operators. In particular, the arrangements for the Ramu Project (which was submitted to the Government for approval in late 1999) which include establishment of a Ramu Regional Planning Committee seem very promising. The project will contribute to improve social aspects of mining projects in PNG, especially regarding social impacts by providing workshops with all the major stakeholders 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 of social issues.

63 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 08/15/98 Appraisal mission departure 01/24/ /24/2000 Negotiations 04/03/ /28/2000 Planned 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 John Strongman Koh Naito Noel Sta. Ines Rarnanie Kunanayagam Behdad Nowroozi Robert Cohen Meredith Sassoon Claude Ginet loannis John Balafoutis Hilarion Bruneau Draft PAD reviewed by: Maurice Le Blanc Hung Kim Phun Glenn Morgan Speciality Mining Advisor Mining Specialist Procurement Specialist Social Specialist Financial Specialist Financial Consultant Environmental Consultant Implementation Consultant Financial Officer Financial Management Specialist Procurement Disbursement Enviromnent

64 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 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

65 61 Annex 11: Statement of Loans and Credits PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA Original Amount in US$ Millions Difference between expected And actual Disbursementsa Project ID FY Borrower Purpose IBRD IDA Cancel Undisb. Orig Frm SECOND GAZELLE P Papua New Guinea RESTORATION PROJECT P Papua New Guinea EMERGENCY EL NINO P PapuaNew Guinea PETROLEUM DEVT T.A P Papua New Guinea PG-EDUCATION DEVELOPMENT P Papua New Guinea POPULATION PROJECT Rev'd Total: Active Closed Total Projects Projects Projects Projects Total Total Disbursed (IBRD and IDA): Of which has been repaid: Total now held by IBRD and IDA: Amount sold: Of which repaid Total Undisbursed Actual disbursements to date minus intended disbursements to date as projected at appraisal

66 62 PAPUA NEW GUINEA STATEMENT OF IFC's Held and Disbursed Portfolio 31-Jul-1999 hi Millions US Dollars Committed IFC Disbursed IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Total Portfolio: Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Total Pending Conmuitment:

67 63 Annex 12: Country at a Glance PAPUA NEW GUINEA: Mining Sector Institutional Strengthening TA (see next page)

68 64 Paoua Easit Lower- POVERTY and SOCIAL New Asia, & middle... Guinea Pacific income Development diamond* 1998 Pooulation. mid-vear (millions) 4, Life expectancy GNP oer caoita (Atlas method. USS) t710 GNP (Atlas method. US$ billions) 4.1 i Averaae annual orowth, Pooulation 1%) Labor force (1%) i GNP Gross Most recent estimate tlatest:vear availabie per 7 primary capita. r nrnimp.nt Povertv t% of oooulation below natfonal ooverfv line) Urban oooulation 1% oftotaf ooulafioni Life exoectancy at birth (veats) Infant mortalitv four 7.OOOlivebiths) f Child malnutrtion 1% of children under Access to safe water Access to safe water (f of oooulation) Illiteracy (% of oooulation aoe f51.. :1 14 Gross orimarvenrollmert (%ofschoolaae oooulationl f3 PapuaNewGuinea Male Lower-middle-income group Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1977 : Economic ratios* GDP fus billions) 1.6 3,1 4.8 '3.7 Gross domestic investment/gop Exoorts of ooods and services/gop Trade Gross domestic savinas/gdp :28.3 Gross national savinos/gop 28,7 : Current account balance/gop 6.0 * Domestic. m Interest oavments/gdp Savings Total debt/gdp Total debt service/exdorts i Present value of debt/gdp Present value of debt/exoorts.-. 70,4 Indebtedness (averaoe annual arowthl. GDP Papua New Guinea GNP cer caoita , Lower-middle-income group Exoorts of ooods and services T STRUCTURE of the ECONOMY Growth rates of output and investment (%) (% of GDP) so Aoaculture Industrv Manufacturino o Services Private consumotion General oovemment consumdtion GDI GDP Imoorts of aoods and services Growth rates of exports and imports (%) (averaoe annual orowth) Aoriculture Industrv Manufacturino Services Private consumotion General oovernment consumotion Gross domestic investment Imoorts of ooods and services Exports e-imports Gross national oroduct 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 will be incomolete.

69 65 Papua New Guinea PRICES and GOVERNMENT FINANCE Inflation (%) Domestic prices (% change) 20 Consumer prices Implicit GDP deflator Government finance (% of GDP, includes current grants) a Current revenue S Current budget balance GDP deflator CPI Overall surplus/deficit TRADE (US$ mililons) Export and import levels (US$ millions) Total exports (fob).. 1,259 2,192 1,843.0O0 Gold Copper OD Manufactures. Total imports (cif) ,289 Food Fuel and energy Capital goods o Exoort odrice index (1995=100), Imoort Doce index (1995=100) Terms of trade f1995=100) BALANCE of PAYMENTS t Exports U Imports (US$ millions) Current account balance to GDP ratio (%) Exports of goods and services 721 1,306 2,507 2, Imports of goods and services ,396 1,956 1 Resource balance Net income Net currentransfers Current account balance Financing items (net) Changes in net reserves Memo: Reserves includino oold IUS$ millions) Conversion rate (DEC. local/tjss) EXTERNAL DEBT and RESOURCE FLOWS (US$ mittions} Composition of total debt, 1998 (USS millions) Total debt outstanding and disbursed 676 2,276 2,272 2,349 IBRD G:154 A 267 IDA Total debt service IBRD C4 IDA Composition of net resource flows F:843 Offidial grants Official creditors D:487 Private creditors Foreign direct investment Portfolio equity E: 452 World Bank program Commitments A - IBRD E - Bilateral Disbursements IDA D- Other multilateral F Pnvate Principal repayments C - IMF G - Short-term Net flows Interest payments Net transfers Development Economics 9/16/99

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71 IBRD I 145' Monuo LoreMIINGSECORINSTITUTIONAL TI V IR SIL ldt~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o MINING SECTOR ~~~~~PAPUA NEW GUINEA STRENGTHENING TECHNICAL ASSISTANCE PROJECT 155' C/) DO AitTpe ~ ~ ~ ~ ~ ~ ~ I/O' K-ooi-g ESTGFURENA loallroads kekoed *Sim i SMALL VALOR PROVINCIA, ROIICALROD ROADS~~~~~~~~~~~~~~~~~~~~~~~~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~ * * ~~~~~~~~~~~~~~~~~~~LARGE RIVERS 00. MATARA L-hir ELECEED TOWERA AD VILLAGEE Wenook ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ PROVNCECARTAG~~~~~~~~~~~~~~~~~~~~~~~~~~~~~VIC APTL Nomolonol ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I ATIGNAL CAPITAL N~~~~~~~~~~~~~LA' WWPR AN,5RRwS4,~~~~~~~~~~ - - holw~~~~~~~~~~d~~ Rokoul EPOVINCE TOONDAR ES~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ REGION ROOPoDARES~~~~~~~~~REON OUDAIE POTEDA 00-ALL BODNOARITI~~~~~~~~~~~~~~~~~~~~~~~~ Z Nenca 'CU, *- Porg era RANTATM.d-E - OKTedi u Wobo >R-mu MtA(a~~~~e Mt5Snhi /s/an hfd Arow, Gooo Hoogo~~~~~~~~~~~~~~~~~~~~~~ N~~~~~ o o i ~ ~~~~~~~~~~~~~~~~~~~~~~(non-op '/NTEND 'TIMED TAD/TNT 0' 1 " lands 'C -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ KLik-~ W..11 o, Hidden E Valley ~~~~~~~~~~~~~~~~~'0 ~~ISLANDS.e' ~~~~~~~~~~~SOLOMO Telukuma D-0- - ~~~~~~~~~~~~~~~PORT MORESB Capital (ENDEREAtoo r Rp HEAE o~~~~~~~~. Wood!ark TA eno ooo n,oanon ~~~~~~~~~~~~~~~~~~~~~ * ~~~M5sima NWGIE d nd 00,6,0 oaooio 0k h0 AUSTRALIP~ 145' IV 1 5T' ISV MlAY OS