PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6350 Project Name Sierra Leone Extractive Industries TA - Additional Financing Region AFRICA Sector Mining and other extractive (60%);Public administration- Energy and mining (40%) Project ID P124633 Borrower(s) GOVERNMENT OF SIERRA LEONE Implementing Agency Ministry of Mineral Resources Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared February 8, 2011 Date of Appraisal January 24, 2011 Authorization Date of Board Approval April 21, 2011

1. Country and Sector Background

Country and Strategic Context

Sierra Leone is well endowed with natural resources and is classified as a resource-rich country. If in the past Sierra Leone was largely associated with mining (diamonds were first discovered in 1930), the 2009 discovery of oil off-shore of Sierra Leone has also put the country on the map as a potential future oil producer. Extractive industries, as a term, in case of Sierra Leone now include both mineral resources and oil and gas. Sections below provide more detail background by each sub-sector separately given their peculiarities, however, it is emphasized that extractive industries reform will need to have an integrated approach in order to achieve the GoSL’s ultimate objective towards developing Sierra Leone’s natural resources in the best interests of the nation.

Mining Sector. Sierra Leone is well endowed with mineral resources and is a leading producer of diamonds, rutile, and bauxite. During the 1960s and 1970s, the mining sector accounted for more than 70 percent of the country’s export earnings, 20 percent of GDP, and 15 percent of fiscal revenue. The sector experienced a decline in the 1980s and came to standstill during the 1990s due to the decade-long civil war (1991-2001). The mining sector has three major segments: (a) large-scale production of diamonds; (b) large-scale production of bulk minerals; and (c) artisanal and small-scale production of diamonds, and to a much lesser extent gold. During 2010, the Government of Sierra Leone (GoSL) signed two large-scale mining development agreements for iron ore development in Marampa and Tonkolili with London Mining and African Minerals Ltd, respectively. More companies are exploring in the country, and several investment projects are expected in the foreseeable future, including a large-scale gold mine. The main thrust of EITAP is to address bottlenecks towards efficient and sustainable development of industrial scale mining.

Petroleum Sector. In September 2009, an offshore well drilled by Anadarko Petroleum Corporation encountered petroleum, confirming the existence of an active petroleum system within the Sierra Leone-Liberia basin. In November 2010, Anadarko announced an apparently significant deepwater discovery at the Mercury exploration well. Although the Mercury well looks encouraging, Anadarko’s drilling program still carries high risk and commerciality is unlikely to be declared until 2012 at the earliest. Thereafter, the time line to first production would be at least four years.

Sector Reform Framework

Mining Sector. Following a World Bank Sector Review of mining in Sierra Leone in 2005, several donors (including DfID, EU, USAID, and UNDP) supported reforms in the legal, regulatory, fiscal, and institutional arrangements of mining. Over the past few years, Sierra Leone has passed some important laws and regulations and provided an enabling policy framework for the growth of the mining sector. These reforms led to a recovery of the sector, particularly diamond mining and rutile production from early to mid- 2000s, and more importantly, they opened potential for new development.

Notwithstanding progress made to-date, the institutional capacity to manage sector, negotiate agreements, enforce regulations, and monitor compliance remains weak. The government has recently set up an inter-ministerial committee to handle all negotiations relating to the mining sector. The team comprises a member of the Strategy and Policy Unit (SPU), the Attorney General, the Director of Geology, the Director of Mines, the Law Officer’s Department, and the Ministry of Finance and Economic Development. The need remains to clarify roles and responsibilities going forward in a sustainable manner.

Petroleum Sector. The reforms are still fairly new and evolving. Upstream oil and gas activities are governed by the Petroleum Exploration and Production Act of 2001. A Model Petroleum Agreement implementing the terms of the Petroleum Act formed the basis of negotiation for the individual Petroleum Agreements with investors. Fiscal conditions are determined through the Petroleum Agreements and by the Income Tax Act of 2000. The Petroleum Resources Unit (PRU), in operation since 2004, was established as the regulator of the sector as per the terms of the Petroleum Act. During the licensing phase, PRU’s role consisted mainly of providing technical input to the negotiating teams, but more recently, PRU has been attempting to move towards its long-term enforcement and monitoring role.

After the Venus discovery in 2009, the President appointed a petroleum task force from a wide spectrum of government agencies. Under the leadership of the Task Force, a new petroleum policy has been drafted, adopted by cabinet and submitted to parliament. The task force is also overseeing the preparation of a new petroleum law. Assistance in developing the policy and the law has been received from an Advisory Group made up of representatives from Norad, the Commonwealth Secretariat, Revenue Watch Institute, and the African Center for Economic Transformation, an Accra-based NGO.

Overall. Sierra Leone has been an Extractive Industries Transparency Initiative (EITI) candidate country since 2007. After a difficult start, the first reconciliation report was produced in 2010 and the validation process is underway for the first year audit to comply with the benchmarks set forth by the EITI Committee in Oslo. With the EITI framework and baselines now in place, the country will greatly benefit from stronger capacity to monitor extractive industries revenues to ensure sustainable and transparent sector governance and revenue management. The GoSL emphasizes the need to substantially improve its negotiations and regulatory capacity in the extractive industries sector.

The proposed scaled-up project remains aligned with the World Bank, International Finance Corporation and African Development Bank Joint Assistance Strategy for Sierra Leone (for FY10-13) and with the GoSL’s Poverty Reduction and Strategy Paper (PRSP, 2009), which identify mining as one of the priority sectors to be developed in the country. The original project focuses primarily on the Regulations and Monitoring link of the Extractive Industries Value Chain, while the additional financing will widen and deepen this support by scaling up legal and regulatory reform and by also including activities to support two additional Value Chain links – Award of Contracts and Licenses, and Collection of Taxes and Royalties.

The project forms a nexus of ongoing complementary activities by: (a) being coordinated with the broader reform framework in the country on macro and strategic level (private sector development, budget support operations and analytical work); (b) continuing to build upon and align with other donors’ efforts, most notably in the implementation of an institutional reform and capacity building plan developed with DfID’s support and UNDP support for the development of the computerized mining cadastre system and assistance with mining contracts renegotiations; (c) reinforcing, through better transparency and monitoring and understanding of environmental and social impacts management requirements, support provided through the Bank-administered Japanese grant to support artisanal mining communities; and (d) ensuring that mining sector reform fits within the regional context and is aligned with regional objectives (such as Mano River Union, and, on a broader scale, the Economic Community of West African States (ECOWAS), and the Africa Action Plan.

2. Objectives

The Project Development Objective for the project is to build government’s capacity to manage and regulate the minerals sector, and will be updated to “build government’s capacity to manage and regulate the extractive industries sector” with the scale-up. The project name is being revised and will become Extractive Industries Technical Assistance Project (EITAP) after the approval of the additional financing.

3. Rationale for Bank Involvement

This is an additional financing project to scale-up activities of Mining Technical Assistance Project (MTAP), approved in 2009.

4. Description

Part A: Extractive Industries Sector Regulatory Frameworks

1. Provision of capacity building to the Recipient to improve the regulation of the extractive industries sector through the updating, or preparation of where applicable, and the carrying out of related consultations on, new or revised regulatory instruments including inter alia: (a) the Mines and Minerals Act and supporting mining regulations, (b) development of a regulatory framework for the Recipient’s National Minerals Agency (NMA) including operating procedures; and (c) the Petroleum Act and supporting petroleum and gas regulations.

2. Support to the Recipient in establishing and managing the policy level dialogue and strategy formulation for the environmental and social aspects of the oil and gas sector development.

3. Cover cost overrun for preparation of mining sector environmental and social regulations, regulations for underground mining and regulations for mineral trading licenses, supported under the original project.

Part B: Institutional Strengthening

1. Support governance of the extractive industries sector through:

(a) Strengthening the technical, institutional, and management capacity of the Ministry of Mineral Resources (MMR) and, upon its establishment, NMA including, inter alia, collection and management of geological and geochemical data for selected sites, carrying out targeted geochemical surveying, mineral resource assessment and mapping of selected sites, and carrying out investment promotion activities,

(b) Strengthening regulatory enforcement capacity of the MMR;

(c) Provision of transitional salary support to MMR and, upon its establishment, NMA for selected civil service staff for carrying out geological, data management, and monitoring and evaluation of mining operations functions;

(d) Developing a secure geodata management and information system in MMR and, upon its establishment NMA, including web-based tools and promotion materials;

(e) Strengthening the procurement, financial management, project management and monitoring capacity of the MMR to manage donor-financed projects;

(f) Developing and strengthening a monitoring and evaluation and reporting system for the extractive industries sector;

(g) Supporting the Government’s Diamond Office through training, advisory services and capacity building;

(h) Providing capacity building to MMR, and, upon its establishment, NMA, and Ministry of Environment, Sierra Leone Environmental Protection Agency and Civil Society Organizations on implementation of environmental and social regulations for the extractive industries sector, including monitoring and evaluation tools, reporting, and consultation processes; and

2. Strengthening the institutional and management capacities of the MMR, Strategy and Policy Unit and the Recipients’ Negotiations Committee for extractive industries contracts negotiations, including financial and economic modeling, review of technical and feasibility reports, updating model agreements for specific commodities, and developing negotiations strategies.

3. Provision of capacity building to the Petroleum Resources Unit, through: (a) purchases of software licenses and hardware to allow PRU to store and analyze geological and geophysical data; (b) financing the international advisor who will deliver hands-on training to PRU staff, establish capacity to perform core functions relating to licensing and exploration, and advise the PRU, the Petroleum Task Force and other officials on policy decisions as needed; and (c) workshops, training and study tours.

4. Covering cost overrun of the original project for carrying out targeted geochemical surveying.

Part C. Project Management

Provision of technical and financial support to MMR for the management, procurement, financial management, monitoring and evaluation and audit of the Project, all through provision of technical advisory services, Training and Operating Costs.

5. Financing Source: ($m.) BORROWER/RECIPIENT 0.0 International Development Association (IDA) 4.0 Department for International Development of UK 3.4 Total 7.4 6. Implementation

The implementation arrangements for the scaled-up project will remain unchanged. Project management responsibilities will continue to be handled by a Project Support Team (PST) within the MMR staffed with a project coordinator, a procurement specialist, and a financial management specialist, all of which are civil servants. The PST is supported during the initial two years of project implementation by a consultant’s team which is tasked to build general capacity within the MMR (PST in particular) to manage donor projects and carry out procurement and financial management; this implementation support is expected to be extended by about one year. The government has agreed to undertake a number of measures to ensure that the PST is stable (all within its broader public sector reform actions).

For the oil sector technical assistance activities, the PST will provide procurement, financial management and disbursement support to the PRU. The PRU, however, will be responsible for the technical aspects, including (i) developing Terms of Reference for consultants’ services under this component and participating in short-listing and consultants’ selection process; (ii) monitoring of consultants’ performance and reporting on progress; and (iii) keeping track of oil and gas related indicators. The PST will assist at all stages as needed and will prepare all procurement documentation and contracts, as well as process payments. The government has adopted a Project Operations Manual (POM) for the purposes of the implementation of the original project; the POM focuses on processes and procedures for the project implementation, monitoring, and reporting. The POM will continue to be used for the scaled up operation, and will require an update of the project description to reflect the scaled up activities, and also it will need to add the clear procedures to be applied to the oil and gas sector activities implementation. Annual Work Plan (AWP) and Budgets for each year of the project implementation are being developed by the government, and this arrangement will remain without changes for the scaled-up project. The updated AWP for the current year and 18-months Procurement Plan will be required by negotiations to reflect the new project activities.

Financial management functions for the project will remain unchanged from the original project and will continue to be managed through the PST in full coordination with the Treasury, the Accountant’s General office, and the Chief Financial Officer under the supervision of the Ministry of Finance and Economic Development internal audit department (for internal audit) and the Office of the Independent Auditor General (for external audit).

Procurement arrangements for the project will remain unchanged; the same procedures will apply to both the original grant and additional financing credit in line with the financing agreements.

7. Sustainability

EITAP implementation has been moving satisfactorily. The annual M&E assessment of the Word Bank’s Africa Development Effectiveness Unit rated the M&E of the project as Highly Satisfactory. The project is establishing a regulatory framework and institutional structure to the mining sector and, with additional financing, to an emerging petroleum sector. Project design takes into account sustainability issues and lessons learnt from similar sector reforms globally. Going forward, special attention during the implementation of the additional financing credit will be paid to (i) measures to ensure that all new functions as well as expanded capacity of existing institutions are fully covered under the government funding before the end of the project and that professional development of staff continues after the project is completed; enabling legal and regulatory frameworks to assist with this transition towards sustainable operation of the sector are a part of the project design; and (ii) ensuring that existing (non-confidential) as well as new geodata acquired under the project is available to the investors and regularly promoted to attract private sector investment into further exploration and mining.

8. Lessons Learned from Past Operations in the Country/Sector

The Project builds on experience gained from similar mining sector technical assistance operations in many countries, especially in Africa. This includes countries with long traditions of industrial mining like DRC, Zambia and Mauritania, and countries where mining has only recently emerged like Madagascar, Mozambique and Tanzania. Lessons learned are regularly captured in SEGOM analytical work and publications. Recent examples include technical papers on mining cadastres and guidelines for community development agreements in mining areas (see www.worldbank.org/mining). The EITI++ approach used in the Bank’s current programs on extractive industries has been instrumental in highlighting the critical need to integrate interventions aimed at improving extractive industries sector performance with those related to the management of resource rents generated by the sector. This approach is reflected in the PDO and Project design.

Project implementation experience has demonstrated that Government ownership is crucial at the policy and project design level for successful outcomes. Consultations were designed to ensure that the project is fully in line with the Government’s development goals and vision, and responds to the expectations of the private sector and civil society.

9. Safeguard Policies (including public consultation)

By the way of background, a mining sector Strategic Environmental and Social Assessment (SESA) for Sierra Leone was prepared in 2007 and its core recommendations were incorporated into the original project. In 2010, as part of preparation of the regional mining project, the Bank financed preparation of a West Africa Minerals Sector Strategic Assessment (WAMSSA). While most of the recommendations of WAMSSA target regional level reforms, the scaled-up EITAP will, inter alia, contribute to the goals of (i) strengthening environmental governance; and (ii) improving social accountability and mineral sector governance.

The project will maintain safeguards category “B” triggering OP/BP 4.01. The scaled-up project does not trigger any additional policies and remains a technical assistance project. The Integrated Safeguards Data Sheet (ISDS) for the additional financing is being disclosed prior to appraisal to confirm the category, safeguards management approach, and to reflect additional activities as noted in the paragraph below. The Terms of Reference for preparation of environmental and social regulations for mining sector and related capacity building that were disclosed prior to the original project appraisal (October 2009) remain valid and the work has already commenced with an expectation to be completed by 2012.

The additional financing will (i) scale-up capacity building activities to MMR, Ministry of Environment, Sierra Leone Environmental Protection Agency (SLEPA) and CSOs to monitor environmental and social compliance of the extractive industries operations (the sector specific regulations, as well as sector guidelines and code and practice for mining, are being prepared with the support of the original project); and (ii) initiate and support policy dialogue among the Government and stakeholders to foster the development of policy frameworks and strategies to support environmentally sustainable and socially equitable development of Sierra Leone’s oil and gas sector.

9. List of Factual Technical Documents

Project Appraisal Document for Sierra Leone Mining Technical Assistance Project, dated November 3, 2009 (Report No: 43233-SL)

The Transformation Plan for the National Minerals Agency, March 2009, MMRPA

Sierra Leone Mining Sector Reform: A Strategic Environmental and Social Assessment, World Bank, 2007. West Africa Mineral Sector Strategic Assessment for the Development of the Mineral Sector in Mano River Union, the World Bank, March 31, 2010.

Sierra Leone Mining Technical Assistance project, Environmental and Social Management Framework, Terms of Reference, September 24, 2009

Sierra Leone Mining Technical Assistance Project, Terms of Reference for Preparation of Environmental and Social Management Framework, October 2009.

10. Contact point Contact: Ekaterina Mikhaylova Title: Sr Mining Spec. Tel: (202) 473-4482 Fax: Email: [email protected]

11. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop