Guinea

A Holistic Approach to Extractive Industries

April 2010

The World Bank

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ContentsAcronyms and Initialisms.......................................................................iiiAcknowledgements...............................................................iv1. Executive Summary..........................................................12. Introduction.....................................................................1

2.1 Significance of the Issue.....................................................................................12.2 Recent Progress...................................................................................................12.3 Remaining Problems...........................................................................................2

3. Analysis of the Issues........................................................23.1 Extractive Industries in Guinea — Past, Present, and Future.............................2

3.1.1 Prospects 23.1.2 Economics of mining and past experience 5

3.2 Options for Dealing with the Issues....................................................................73.2.1 Contracting with mining companies 7

TAX ISSUES..............................................................................................8LICENSING RULES.....................................................................................9STATE SHARES.......................................................................................11INSTITUTIONS, CAPACITY, AND ANTI-CORRUPTION...............................11THE WAY FORWARD...............................................................................12

3.2.2 Mining and infrastructure 133.2.3 Governance, sustainability, and broad-based growth 15

LOCAL DEVELOPMENT...........................................................................15MAXIMIZING BUSINESS LINKS................................................................17PROTECTING THE ENVIRONMENT, HEALTH, AND SAFETY......................19GROWTH POLES......................................................................................20MACRO-FISCAL FRAMEWORK.................................................................20EXPENDITURE MANAGEMENT................................................................21DEALING WITH DUTCH DISEASE AND SUPPORTING AGRICULTURE.........22

4. The Way Forward............................................................234.1 Short-term priorities..........................................................................................234.2 Medium-Term Priorities...................................................................................25

Annex 1. Cost Estimate for Identified Priorities.....................31Annex 2. Current World Bank Support to the Mining Sector.........32Annex 3. Some Government Priority Actions and Their Urgency. . .33Annex 4. Guinea Mineral Sector Historical Development.....................35

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FiguresFigure 1. Mineral resources in Guinea....................................................3Figure 2. Mining exports and Government revenue, 1991 to 2009.....................................................................................6Figure 3. Mining company procurement during the construction phase

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TablesTable 1. Mineral potential in Guinea.......................................................5Table 2. Build revenue collection capacity and improve coordination within and between the Ministries of Mines and Finance...............................................................................23Table 3. Finalize the review of conventions according to a pre-announced calendar, which should be preceded by a professional assessment of mining agreements....................23Table 4. Clarify the institutional framework, and reduce the role of institutions not mandated to directly manage EIs in Guinea................................................................................24Table 5. Finalize the legal framework by updating the mining and petroleum codes and regulations and adjusting the model convention..........................................................................24Table 6. Conduct a quick study of the comparative advantages of the various options that can allow financing of infrastructure development..................................................24Table 7. Initiate public-private-civil society dialogue.............25Table 8. Initiate detailed assessment of projects where current analytical information available is insufficient.......................25Table 9. Laws, regulations, and institutions..........................26Table 10. Capacity building and governance.........................26Table 11. Institutions for accountability and transparency.....27Table 12. Infrastructure financing.........................................27Table 14. Environmental and social management..................28Table 15. Regional harmonization........................................................29

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Acronyms and Initialisms

ACG Alumina Company of GuineaACGF Africa Catalytic Growth FundASM Artisanal and Small-Scale MiningBHP BHP Billiton Ltd.BOT Build Operate TransferCBG Compagnie des Bauxites de GuinéeCBK Compagnie des Bauxite de KindiaCPIA Country Policy and Institutional AssessmentCVRD Companhia Vale do Rio DoceDP Development partnerECOWAS Economic Community Of West African StatesEHS Environmental, health, and safetyEI Extractive industryEITI Extractive Industries Transparency InitiativeFDI Foreign Direct InvestmentFIAS Foreign Investment Advisory ServiceGDP Gross Domestic ProductGoG Government of GuineaHIPC Heavily Indebted Poor CountriesMC Mining companyMDRI Multilateral Debt Relief InitiativeMTEF Medium-Term Expenditure FrameworkPACV Village Communities Support ProgramPFM Public Financial ManagementPPIAF Public-Private Infrastructure Advisory FacilityPPP Public-Private PartnershipPRGF Poverty Reduction and Growth FacilityPSD Private Sector DevelopmentSME Small and Medium EnterprisesTA Technical assistanceWBG World Bank Group

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AcknowledgmentsThis report was prepared by Boubacar Bocoum (COCPO) and Ishac Diwan (AFCW1) following a 2008 mission that reviewed opportunities for applying a holistic approach to the mineral sector in Guinea.

The report is prepared as part of a series of Policy Notes commissioned by the World Bank Country Management Unit (AFCW1) managed by Peter Kristensen (Sector Leader, AFTEN). Overall strategic guidance for these notes was provided by Ishac Diwan (Country Director), and peer reviewers for the concept of the series of Policy Notes were Habib M. Fetini (Country Director AFCF1), Vivien Foster (Lead Economist, AFTSN), and Douglas Porter (Senior Public Sector Specialist, EASPR).

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1. Introduction

2.1 Significance of the Issue1. The extractive industries have been a significant feature of the Guinean economy since the 1950s. Even before independence, one of the first alumina plants in Africa was developed in Fria in 1957. The subsequent development of bauxite operations by the Compagnie des Bauxites de Guinée (CBG) in 1973 and the Compagnie des Bauxite de Kindia (CBK) in 1974 established the mining sector as the predominant industry early in the life of independent Guinea.

2. The country hosts some of the largest global resources of bauxite and iron ore, sizable gold and diamond deposits, and a potential for development other metals, oil, and gas. The combination of a conducive market for commodities, availability of investment capital for both exploration and project development, and significant geological resources have created momentum to expand mining ventures. In addition, increasing transport costs are driving the development of alumina plants closer to bauxite mines.

2.2 Recent Progress3. Guinea is now the preferred destination for foreign direct investment (FDI) in minerals in Africa, with a possible US$ 12 billion over the next three to four years and a potential for an additional US$ 8 billion thereafter. These expected investments will likely bring extractive industries (EIs) to more than 50 percent of GDP by 2015 from the current estimate of about 20 percent. If Guinea’s potential for oil and gas is to be realized, the EI share of the economy would grow further.

4. Mineral development has not grown to its full potential, which has severely limited its impact on socioeconomic development and poverty reduction. Despite its mineral riches, most of Guinea's 9 million people live in desperate poverty. Fewer than one-third of adults are literate according to the U.N. Human Development Report, which ranks Guinea 160 out of 177 countries. Unless appropriate policies and institutions are developed, mineral development will not become a source of economic development, instability will remain a dominant factor, and investments will taper off before the country’s full potential is realized.

5. Guinea’s strengths, besides its large mineral resources and proximity to markets, is the recent entry of some of the largest mining companies (MCs), many of which are recognized as leaders in promoting sustainable mining practices. There is an increased understanding among global MCs that unless mining benefits the host country, their investments would not be assured for the long term, and operating costs would remain higher than necessary. Other positive factors include civil society’s demonstrated awareness and understanding of mineral development paradigms, several new international initiatives to which Guinea subscribed (such as EITI and the Kimberley process), and donor willingness to support country efforts for better governance and

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transparency. These factors can allow the EI to indeed become an engine for faster growth and development in Guinea.

2.3 Remaining Problems6. Guinea also shows vulnerabilities. It is ranked among the last countries in Africa by Transparency International, and has a low CPIA and human development indicator. Guinea’s weak governance, a slow political transition to democracy, and the lack of capacity and institutions have not allowed it to have the strategic vision, policy controls, and ability to implement the policies needed to take advantage of its mining wealth. Moreover, the newness and overwhelming size of potential FDI compared to the size of its economy (GDP of US$ 3.1 billion in 2006) and the difference in capacity between the administration and sponsors of large mining projects make the challenge more formidable.

7. To take advantage of its current mining investment opportunities and lift its development prospects, Guinea will have to operate carefully within a coherent and holistic multi-prong strategy. Such a strategy would need to include: (i) stable and balanced legal and fiscal relations with MCs that protect the country’s interests in an effective way and maximize state revenue; (ii) taking advantage of mining-related investment and activities to develop its infrastructure, local services, and private sector while preserving the environment; (iii) a unified community development framework, including a pragmatic and fair revenue redistribution mechanism coupled with transparent and participatory systems for use of redistributed revenue; and (iv) maintaining macroeconomic stability and reducing the negative impact of the resulting Dutch disease. At the heart of the challenges is development of local capacity in the EI sector and finding ways to align the incentives of bureaucrats and institutions with those of the state.

8. Given existing weaknesses, realistic plans need to include both some level of gradualism and the type of early action that can establish Guinea’s credibility to sustain large investments over time in ways that can benefit both its population and the MCs.

2. Analysis of the Issues

3.1 Extractive Industries in Guinea — Past, Present, and Future

3.1.1Prospects9. Guinea has been labeled a “geological scandal” because of its rich mineral resources. With the recent development of global markets for bauxite/alumina and iron ore in particular, it is poised to become the preferred destination for new investments to become the next very largest exporter of these products. Its current exports of about US$1 billion could increase 10-fold within five years if investments that are currently being considered by some of the world’s top players are realized. This huge potential can be divided into several distinct ongoing “games” with different characteristics.

Figure 1. Mineral resources in Guinea

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10. The western bauxite corridor. From the West to the center of the country lie the largest and highest grade bauxite deposits in the world. This area is attracting the largest players in the sector as well as companies from China, Iran, and South Africa. These firms have announced investment plans of about US$ 13 billion over the next three to five years. This includes the development of two new alumina plants by Alcoa/Rio Tinto (1.5 million tonnes) and Global Alumina/BHP-Billiton (5.4 million tonnes), and the extension of the (only) existing alumina refinery in Kindia by ACG (700 kilotonnes). Other bauxite/alumina projects in the pipeline include the Dian-Dian projects by Russki (13.4 million tonnes of bauxite and 2.8 million tones of alumina in the short term, and plans for an aluminum plant in the longer term); and the 1-million-tonne alumina SBDT project sponsored by IMIDRO (Iran). Several companies, including BHP-Billiton and CVRD, are also actively drilling in this region to confirm existing reserves with the possibility of further developing bauxite/alumina projects.

11. If all these projects materialize, approximately 12 million tonnes of alumina would be produced starting about 2012, 25 times the current output. This could help increase the low rate of value-added — currently Guinea produces 12 percent of the world’s bauxite, but only 1.4 percent of global alumina (and no aluminum). The value of alumina is two to seven times higher than that of the bauxite it contains. At current prices, exports of

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Carte d’Implantation desSociétés Minières

Carte d'implantation des sociétés minières

Gold

Diamant

BHP-BillitonAlcoa/Alcan

Nzerekore Pole

Boke PoleCarte d’Implantation desSociétés Minières

Carte d'implantation des sociétés minières

Gold

Diamant

BHP-BillitonAlcoa/Alcan

Nzerekore Pole

Boke Pole

bauxite and alumina would rise from the current level of about US$ 660 million to a US$ 4 to 5 billion range.

12. The development of all these projects is not assured. While the western zone has the potential to become a highly attractive area for alumina production, it would require large new infrastructure investments — transport, a new port, energy, more effective town planning, provision of services in newly created alumina towns, and a more effective private sector to supply the new towns with goods and services at affordable prices. The “game” in the West is a progressive one — the current state of infrastructure and services will allow for some growth, but good policies could lead to much higher, and more pro-poor, growth.

13. The iron ore eastern corridor. Southeast Guinea includes the world class iron ore deposit of Mont Nimba, and the Simandou iron ore deposit estimated at several billion tonnes (with a concentration of more than 60 percent). Simandou is currently the largest non-developed iron ore deposit in the world. Feasibility studies are underway (Rio Tinto) and the mine development and associated port and railway are estimated to cost close to US$ 7 billion, producing up to 150 million tonnes a year. The Mont Nimba project is also undergoing a feasibility study by Newmont and BHP-Billiton and is expected to require investments of about US$ 1.3 billion, producing 20 million tonnes per year. The potential value of iron ore exports from these two mines ranges between US$ 9 and 11 billion per year over the coming several decades.

14. Investing in a railway backbone. Reaping the benefits from the potential of the eastern corridor presents challenges that are different from those in the western corridor. Playing “the game” constructively in a world of imperfect competition involves convincing MCs to make huge and irreversible investments in building a national railway backbone, and creating incentives for them to exploit these reserves rapidly, rather than to sequester them and thus deny access to their competitors.

15. Other potential. Guinea also possesses other potential as well (Table 1):

Several hundred tonnes of gold reserves, but current production of 15 tonnes mined by three companies, or about US$ 340 million in 2007, could easily double within five years.

Several million carats of diamonds are available, but current production is l million carats per year from artisanal miners and one industrial producer, or about US$ 50 million of exports, which could double within five years.

Gold and diamonds are also mined by artisanal methods that employ several thousand workers.

Guinea also has significant potential for uranium, nickel, calcium, and granite.

The Gulf of Guinea offers potential for oil and gas, where exploration is underway.

16. The key will be to improve competitiveness in these sectors with new infrastructure, a better investment climate, and support for the graduation of artisanal mining into profitable SMEs.

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Table 1. Mineral potential in Guinea

Commodity

Base case scenario Average long-term unit price

(US$/metric tonne)

Export value

(million US$)

Current status of project

Production rate (million

tonnes)

Estimate of capital cost (billion US$)

Bauxite/aluminaBHP/GAC 3.5 4.5 223 781 Feasibility

studiesAlcoa/RT 1.5 2.5 223 335 Pre-feasibilityACG ext. 0.7 0.3 223 156 Feasibility doneDian-Dian 223 Advanced

projectSBDT Advanced

ProjectIron ore

Simandou 150 7.0 55 8,300 On-going pre-feasibility

Mt Nimba 20 1.3 55 1,100 Feasibility studies to start this year

Uranium ExplorationNickelOil ExplorationGas Exploration

3.1.2Economics of mining and past experience 17. Mining has several characteristics that point to both the difficulties for a host country to fully benefit, and the challenges it must confront to improve revenue.

18. Mining is an extremely capital-intensive industry. Capital is needed for (i) machinery and infrastructure to dig, move, and transport bulky products to ports; and (ii) to transform the product into higher-value products, thereby saving transport costs (bauxite into alumina or aluminum, iron ore into pellets or iron). The difficulty in attracting capital to long-term investments means that countries will typically operate below their desired capacity. Two examples in Guinea give a sense of the magnitude. At current production capacity (a level that has been relatively stable for the past three decades), it would take 2,000 years to deplete bauxite reserves. Iron ore, which requires huge investments for transport, presents an even more extreme case — while reserves have been known for at least 50 years, there is no capacity at the moment. The key implication is that the state must be able to guarantee long enough periods of safe return to attract large up-front investments. So far, Guinea has only been able to attract two sizable firms to mine bauxite/alumina, and more recently, two in the gold sector.

19. Industrial mining does not create lots of jobs. Currently, mining employs about 10,000 workers — a value-added of about US$ 100 million, or about 10 percent of exports. Most of these jobs are in the alumina sector, with alumina plants operating like small towns. More jobs can be created if SMEs can replace imports needed to operate the mines — from international best practice, we know that value-added can rise to about 30 percent. Of course there are also multiplier effects. Value-added can be larger during the

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investment phase. for example, the construction of a 1,000 kilometers of railway to the eastern corridor could create tens of thousands of good jobs for several few years, especially if labor intensive methods were used. This would require that local SMEs become more competitive, and that the investment climate and local services improve markedly.

20. The main channel for country gains is taxation and pro-poor spending. This third and important factor, an implication of the arguments above, is that the main channel for country gains is through taxation and pro-poor spending. But so far, revenue from the mining industry in Guinea is below internationally accepted norms. Government revenue from mining exports stood at about 12 percent of export value in 2007 (or about US$ 130 million). The share of mining revenue in total revenue is only about 25 percent, slightly more than the share of mining in GDP (which is 15 percent). Importantly, these averages also hide a low and deteriorating tax performance. Out of the six MCs currently operating in Guinea, one company (CBG), with 49 percent Government ownership, pays about 85 percent of total government revenue. The other firms yield tax rates between 3 and 5 percent of their gross sales. This is far below the international average of 15 percent. But even if these tax rates were to rise, there is no guarantee that citizens would benefit — the share of pro-poor spending by the Government is estimated to be lower than the African average of 40 percent.

Figure 2. Mining exports and Government revenue, 1991 to 2009

Mining Export & Government Revenues (USD)

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Expo

rt, U

SD -

Mill

ions

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Gvn

mt R

even

ue -

USD

Mining export RevenueGvnmt Mining Revenues

Source: IMF staff

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Source: IMF Staff

21. Improving the future. In the remainder of this note, we will cover each of the dimensions that needs to be improved for Guinea to benefit more from future mining — contracting with mining companies, creating the investment infrastructure, improving business links, and maximizing local benefits. In each case, we also describe current efforts, support provided by various donors, and gaps that need to be filled.

3.2 Options for Dealing with the Issues

3.2.1Contracting with mining companies22. Guinea has been in the mining business for decades. A mining code is embedded in its body of laws; it has signed exploitation conventions with about 10 large producers (these are cleared by Parliament) and hundreds of prospecting conventions; it owns shares in several MCs that operate locally; it has varying capacity and experience in the Ministry of Mines and an energetic minister; and its main university produces skilled geologists.

23. The Guinean Government has become a much more active player, pushed by pressures from civil society, discontent about past performance, and the hope for a major expansion of the sector in the future. It has focused its efforts on two fronts — to renegotiate its existing conventions while at the same time trying to attract new investors at better terms than in the past. This is certainly a challenging posture. Defaulting on old contracts often reduces a country’s credibility, and thus its ability to attract new investments. But reasonable renegotiations can also produce more sustainable and thus more credible contracts. The difference is thin and probably resides in a country’s ability to convince the market of its concern about the long term. This must necessarily involve a degree of caring about the financial viability of its long-term partners.

24. What are the main sources of discontent with the “old way” of doing business in Guinea? Three complaints are repeatedly voiced by policymakers: (i) the “freezing of reserves”; (ii) low revenue; and (iii) a desire for a “big push” on infrastructure (transport and hydropower) that would also serve the population. An underlying and recurrent theme is the need to strengthen capacities and institutions to improve state performance.

25. “Frozen reserves” is the main driver of the will to renegotiate. For MCs to control more reserves than they could ever mine may have made sense in the past when there was little demand for investing in Guinea because the state had no other means to attract them. But with the current boom in demand, moving to a system with many more players and a closer connection between MC reserves and the speed at which they will extract resources becomes an imperative.

26. Low revenue is perceived as both related to poor terms and poor implementation of those terms. Existing conventions are criticized for their unduly long concession periods and very long tax holidays.1 Some MCs are criticized for hiding their real profits by using creative accounting. Solutions need to include reforming the mining code, developing and implementing the regulations required to apply it, and building the capacities of the Finance and Mining ministries to play their contracting, monitoring, and 1 . It is sometimes stated that the concessions were signed in non-transparent ways as a result of

uncoordinated interventions from institutions that command political power, but not directly mandated to deal with licensing.

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control roles effectively. Good governance and transparency are seen as central, but there seems to have been less focus at this stage on developing precise plans to strengthen these functions (besides signing on to the EITI).

27. Financing the future. In looking at the future, the state sees mining as the most promising way to attract infrastructure financing. Currently, several large and highly complex proposals are on the table at various stages of readiness. The topic is very current and needs urgent attention. Infrastructure for licenses may make sense given the limited access by the Government to international capital, but having to reach joint deals on large mining concessions and infrastructure also complicates deal making enormously.

28. There are also other sub-themes in the public debate, related to a desire to move up the value chain and add more domestic value; the need for the state to “own” a larger share of new concerns in order to have more control over decisions; and also a need to find ways to involve local entrepreneurs more centrally in the sector.

TAX ISSUES 29. The limited fiscal revenues from MCs seems largely related to poor application of existing rules, which has allowed MCs to systematically avoid paying their income and profit taxes. This is often related to long tax holidays provided to companies during project development (up to 15 years), which seem to be automatically extended when MCs undertake extensions of operations. But it is also related to accounting practices through the use of transfer pricing for outputs and sometimes inputs, and smart use of depreciation methods.2

Unfair transfer pricing. This issue applies mainly to bauxite, which is part of the very integrated bauxite-aluminum industry. The same companies mining bauxite produce alumina and then aluminum, and can transfer costs between the elements of the value chain and only show profitability where tax payments are minimized. Guinea has thus far not been able to come up with an effective response to this problem in its current legislation and practices. A related issue is the difficulty of assessing the real costs that MCs incur in transferring their products from mine to refinery.

Depreciation methods. Guinea uses negotiated ad hoc accounting principles in each agreement.

Tax advances and payment requests from the Government to companies at unknown interest rates and the lack of unified management of these requests have also been problematic.

30. To date there have been no audits of the financial statements of the mining companies. This is about to change. The Government is planning an audit of these accounts for the period 2000 to 2006.

31. While it is clear that the overall level of revenue in Guinea is low, and that at least part of the problem relates to the application of current rules (and in particular, the very 2 . The extractive industries licensing requirements were not clarified in the 1995 legislation and the

lack of regulations in the legislation complicates management of licenses. It has left MCs with the latitude to interpret this key document in a variety of ways. This has resulted in a lack of predictability in the fiscal results of negotiated terms.

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low payment of income taxes), it is not clear if the tax rates found in existing contracts are below the international norm. For larger contracts, part of the difficulty is that there is not good information about the profitability of ongoing concerns (besides CBG). MCs are subject to all sorts of other taxes, explicit and implicit. They contribute to local development, rents on infrastructure owned by the state, and sometimes take charge of certain community needs to “pacify” them and improve their security environment.3

32. Smuggling. It is probably true that the difference in fiscal framework for artisanal mining between Sierra Leone, Liberia, Guinea (and beyond) is creating incentives for the smuggling of diamonds and gold.

33. To maximize revenues and minimize corruption, the Government needs to:

Define and apply uniform accounting principles. These principles should detail how to account for costs in income statement calculations, how to compute depreciation allowances, clear use of interest rates on advances, etc.

Adopt legislation and procedures against unfair transfer pricing.

Eliminate regional incentives for smuggling and harmonize the fiscal and legal framework as intended by the Mano River Union, West Africa Economic and Monetary Union, and ECOWAS.

Collect income tax from MC employees.

34. Efforts have been initiated in all these areas. The Government of Guinea (GoG), with World Bank support (an IDF grant), has completed an assessment of the fiscal regime in its mining code compared to those found in other countries. This assessment will be used in drafting the new model mining agreement in ways that avoid ad hoc approaches in setting and enforcing tax rates and tax holidays. A study on transfer pricing is being completed (also supported by the IDF grant), with a goal of introducing new legislation and processes to curb this practice. The enactment of the new mining code being sponsored through FIAS will address some of the accounting issues. To reduce incentives for contraband, efforts at harmonizing these rules within the Mano River countries have started, supported by the Bank and the African Development Bank.

LICENSING RULES35. From exploration to exploitation. While auctions seem at face value as the best system countries can use to maximize their gains when dealing with MCs, such systems do not work given the uncertain information and large size of potential deals, especially in the bauxite and iron ore sectors. Instead the standard system is to award an exploration contract over a given period of time (typically five years) during which an MC gets to study its field and prepare a proposal. The state protects itself against the freezing of its reserves by reducing the size of the bloc over time, until a convention is signed. In effect, exploration rights are an option to negotiate a concession agreement, and to test whether a company has the means to secure its financing. This places all the burden at negotiation, where the state tries to extract various commitments from the MC (tax rate, 3 . A quick look at existing contracts reveals some cause for concern. The three gold mines pay a 5

percent royalty, the diamond mine pays 10 percent, and artisanal miners pay 3 percent. Bauxite is more tricky — while the CBG takes 65 percent of profits (all inclusive), ACG and CBK pay US$ 1 per ton of bauxite exported, and US$ 0.5 per ton of bauxite used for local alumina.

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servicing state infrastructure, building new infrastructure, contribution to local development).

36. The size of concessions and the rules for unused reserves are being discussed. The current Government is trying to align reserves in each concession to the operational capabilities of the MC, with an objective to reduce the potential “freezing” of mineral resources. A conventional way of achieving this objective is in the updated legislation to align future concession sizes with desired operational capacity of MCs.

37. It is also important to develop the capacity to closely monitor existing exploration licenses, and to ensure that the application of statutory periodic relinquishment (every three years one-half of the area licensed to a company must be relinquished unless economic resources are identified). Important progress has been achieved in the recent past. A review of all existing exploration licenses last year allowed the Government to cancel the titles for permits for which holdings requirements were not fulfilled. This allowed new companies to receive licenses for exploration.

38. But there are also considerations for “unfreezing” some of the reserves that were already granted in the past, not only for bauxite (in the distant past), but also for offshore oil exploration (these were more recent). But altering existing licenses is a departure from accepted international practices and can significantly increase exploration and development risks. Guinea had already gone that route once before in the recent past and should be very careful with any such actions, especially if unilateral. Viable reserves can be sold by MCs to other MCs, and the reserves are part of their valuation on stock exchanges. To recoup reserves that were awarded in the past requires proper compensation.

39. The current lack of a well functioning mineral cadastre office is a constraint that has received less attention to date. The office is responsible for administering the mining conventions and for verifying MC compliance with their agreed requirements. The cadastre is also responsible for cartographic control of the geographic location and time validity of mining rights. It normally publishes cadastral maps and/or lists of current/pending mineral rights with coordinates and other non-confidential information, thus ensuring transparency in the management of mining concessions.

40. What is being done and what needs support:

Update the mining and petroleum codes. Work is underway to prepare for the update of the mining code through FIAS funding. An application has been made to the Licus trust fund to update the petroleum.

Audit all MCs and renegotiate existing licenses. The Guinean Government has benefited from IDF funding to train the members of the Inter-Ministerial Review Committee and potential future mineral agreement negotiators. It nevertheless requires resources for audits and support to the negotiation process through additional professional backing by qualified and experienced transaction support firms or individuals.

Development of a model concession agreement. This has been achieved for the mining sector (through an IDF grant) and is pending cabinet approval. Development of a model agreement has not yet been addressed for oil and gas.

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Updating and equipment for the cadastre. This activity is not currently supported by donors.

STATE SHARES41. The current discussions consider state participation in extractive industries equities, and setting up “strategic reserves” for future contracting.

42. A good investment? Guinea has traditionally been interested in state participation in MCs. Based on current practices, a case can be made that there is some merit to this. CBG, in which the state has 49 percent of equity, pays 85 percent of all the Government revenue from the mining sector, and unlike all other companies, it pays both income tax and dividends. A counterargument is that even while it is a large shareholder in CBG, the state has not been able to push for more dynamic management. Indeed, this lack of dynamism may have been due in part to the inability of the state to finance new investments in relation to its shares. Participation is other existing MCs has been smaller, but no dividends have been paid so far because these firms have not shown profits.4

43. The idea of strategic reserves is new. It emerged from the early success of the state in recouping reserves from MCs that were in default on their exploration conventions. More dynamic management of resources became possible by collecting and assessing exploration data on resources identified by defaulting companies. When subsequent MCs are interested in acquiring some of these resources/reserves, the state can more closely mimic auction mechanisms because information on each potential lot can be made more transparent at the outset of negotiations.5

INSTITUTIONS, CAPACITY, AND ANTI-CORRUPTION 44. In many ways, these are the central issues.

45. Institutions. Institutions involved in concession decisions and deal making are well defined by the mining code. These include mainly the Cabinet through the Ministry of Mines, which depending on the title could send conventions for ratification by the Parliament before the Presidency signs the decree. In practice, there is little accountability because these institutions do not have sufficient information to play their roles effectively. At present, unlike many other mineral or oil producing countries, there is no special mechanism that governs the mobilization, tracking, and allocation of mineral revenues. These are handled like any other tax receipts. Moreover, there is limited information sharing and coordination among the several technical ministries involved in management of the mining sector. Both factors have reduced the effectiveness of Government institutions in their engagement with the MCs.

4 . The state owns 8.5 and 15 percent of SMD and SAG, respectively.5 . A more financial interpretation of the concept of reserves arose after the phenomenal rise in the

stock price of Rio Tinto after it announced the signing of its exploration convention with Guinea. As expressed by the PM, the vision would be to park un-concessioned reserves in a fund that would be floated in major stock exchanges. This would allow the state to price the reserves, and initiate new deals with MCs based on balance sheet considerations (rather than the current income statement). Through such deals, the state would acquire shares in the local and the parent mining companies, and would be able to derive income by managing this portfolio in more effective ways than through bilateral negotiations with the MC..

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46. Capacity. Significant weaknesses exist in the capacity of the state to monitor the payment of mineral revenues and assess the extent to which these payments are in line with provisions in the mining conventions and internationally recognized norms. In particular, Government institutions lack the capacity to assess the operating costs of mining companies. The control and monitoring institutions in the Ministries of Mines and Environment also have limited capacity and resources. Both ministries have lost many of their most qualified and experienced staff in recent years because of inadequate pay and incentives, several of whom are now holding senior managerial positions with mining companies

47. Transparency. Guinea has made inroads in EITI implementation but progress has stalled lately. The way forward for Guinea involves dealing with the inefficiencies of the EITI Secretariat, which is not only preventing EITI from advancing, but is depriving Guinea of a valuable instrument to improve benefits from and management of the mining sector.

48. To improve capacities, the GoG needs to:

Strengthen the capacity of exiting institutions at the Ministry of Finance and Ministry of Mines to assess the financial statements of the mining companies and play a more effective role in monitoring financial flow.

Promote and strengthen cooperation and coordination among the technical agencies involved in mining revenue collection and management.

Strengthen the control and monitoring capabilities of the Ministries of Mines and Environment to ensure compliance with accepted technical, environmental, health, and safety guidelines and standards.

Strengthen the cadastre to ensure compliance of title holders with requirements and improve transparency and security of tenure.

Consider a revenue management law to frame the collection, utilization, and allocation of mineral revenues.

Disclose the financial details of concession agreements in addition to prices and tax revenues.

Strengthen the EITI Secretariat and the process in Guinea.

49. The IDF grant has proceeded with some capacity building and the Licus application aims at building more, but much more needs to be done in all of ministries involved in management of EIs in Guinea.

THE WAY FORWARD If the GoG decides to renegotiate existing mining conventions, it should do so

rapidly; uncertainty is slowing new investments.

Renegotiate first, or draw new code first? A new convention has been drafted and provided to the Government so that it could enter into balanced agreements and provide a reference document during the review process that is underway. In parallel, a new mining code is being drafted.

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Big push on capacity? It is becoming imperative to develop an elite corps in the short term while working on institutional development in a more comprehensive way for the medium and long terms.

3.2.2Mining and infrastructure50. The current state of national infrastructure is very poor. This not only taxes general economic development (including agriculture), but also reduces the ability of the country to take full advantage of its mining potential.

51. The transport infrastructure was neglected following independence, although some improvements were achieved in the 1980s and 1990s. Significant improvements are needed to ease year-round access to vast areas of the country such as the southeast, which is currently cut off during the rainy season.

52. Electricity supply is limited. Only 18 percent of the population receives unreliable electricity, of which a large share is produced by MCs. All electricity is thermal and high cost. Paradoxically, Guinea has been described as the water tower of West Africa, where some of the largest West African rivers originate, creating a hydropower potential of several thousand megawatts. Some of the existing plans for hydropower include Souapeti (515 megawatts for a capital cost US$ 700 million), Kaleta (209 megawatts for US$ 300 million), Amaria (360 megawatts for US$ 400 million), and Cogon (90 megawatts for US$ 200 million).

53. The Government recognizes the need to develop infrastructure but has been severely constrained by scarce financing. Guinea is an over-indebted country with no access to the international financial markets. Its access to ODA is limited — about US$ 224 million was disbursed by its development partners in 2007.6 But with the increase in MC interest in Guinea, the situation is changing and financing should become more available. The main challenge is not just how to attract infrastructure, but rather, how to do so in ways that are as favorable as possible to the country. The typical enclave pattern in the past has not benefited the population design, and other MCs are excluded for competitive reasons.

54. Financing options are few for the moment. The most obvious is to ask MCs to take care of their infrastructure needs, or more broadly, the concession for infrastructure model. Examples include the eastern railways in the case of iron ore, and hydropower against bauxite in the West and central parts of the country. The main risks with this approach are to end up with an enclave infrastructure that only benefits the MCs, or to unnecessarily increase the cost of doing business for the MCs by either pushing then outside their areas of expertise, or by not being able to take advantage of possible synergies among their needs. These problems can in principle be partly improved with smart state planning to allow the assets to be used in non-exclusive ways by all the MCs, and to the extent feasible, by the population at large as well. But these are not easy solutions to manage.

55. Changing the model. Negotiating with MCs to convince them to depart, to some extent, from a pure enclave model can make sense. These departures will to some extent increase costs because they would tend to reduce the share that the MC is willing to pay

6 . http://www.africaneconomicoutlook.org

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to the state. The extra expense may or may not be worth it. A case in point concerns the eastern railway. Unlike the bauxite corridor in the West, infrastructure and transport to the East is completely lacking and needs to be built to extract the iron. The state has been trying to push for the development of a railway that would run the length of the country (about 700 kilometers, plus a new port) rather than to use the much closer route through Liberia (200 kilometers and no port). (There are also national security arguments for an all national solution.) The infrastructure cost for this corridor is estimated to be over US$ 6 billion. So far, while the state seems to have convinced the MC to take a Guinean route, it has only been able to secure a commitment for a southern route. It is still not obvious that this is a mutually optimal option given that the Government is really looking for ways to develop a northern route to open up the agricultural potential of the poor North. A southern route is less valuable from an economic perspective.

56. The state can also push two MCs to work together — force coordination to lower operational costs and thus its share of a larger pie. The western railway is again a case in point. Ideally, it would also be used by other MCs operating in the West. Discussions are ongoing with BHP in Mount Nimba to connect with the RT railway. Another case concerns the port that Global is planning to build in the West. The guarantee provided by the AfDB may have made all the difference in ensuring open access.

57. Where infrastructure has been developed by the MCs themselves, there are incentives for the Government or the community to open its access beyond original plans. A case in point involves water and energy. MCs currently have been pressured to distribute some of the water and energy they generate for their own needs to the population around their sites. But operating as independent producers is not their area of specialization or comparative advantage. They are unable to collect revenue from the population, and thus incur losses which reduce the ability of the state to tax them more effectively. When they reduce services, they end up with riots (as in Kamsar and Fria in 2008).

58. There are other financing solutions that would not involve making deals with MCs so they amend their infrastructure plans. At the other extreme, the state could develop a national plan of infrastructure development meant to both serve its population and make its mining sector competitive, and finance it by through international capital (sovereign debt, or FDI). This is what an ideal high equilibrium (a Norwegian model) would look like, with the state taking the lead in planning a national backbone in transport (roads and railway), ports, energy (preferably cheap hydro solutions), and water (including urban) within a tight timeframe (four to five years). The challenge would require optimizing the approaches to railway (East) and hydropower (West) infrastructure to reduce duplication and maximize synergies for the benefit of the whole economy. But Guinea is struggling to benefit from the HIPC and MDRI initiatives at the moment, and it will have to exercise caution in rebuilding its debts in unsustainable ways after it receives debt reduction. Also, the required capacity to execute such an ambitious program are missing. For example, the national water and energy utilities can barely maintain the existing minimal assets they control.

59. There may be other financing options that need to be examined more closely. A recent example concerns a recent offer by China to provide a loan to finance a dam in exchange for a mining concession. Guinea has also been exploring the possibility of

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various BOTs, with rental fees by MCs to ensure financial viability. These sorts of solutions can be particularly fitting in the West where many separate MCs operate and need to use the same roads and ports to remain competitive.

60. Development partners include the World Bank and could be critical in making these solutions work better —supporting the development of the overall plans; structuring the deals; providing capacity building for negotiations; and facilitation/possible partial participation in the financing.

3.2.3Governance, sustainability, and broad-based growth 61. MCs activities affect communities in three major ways: (i) payment of local taxes; (ii) social investments in basic infrastructure and services, including for environmental, health and safety (EHS), and resettlement actions; and (iii) operational activities, which include local procurement of goods and services and local employment. While the focus is frequently on activities specifically funded by the company or the Government, perhaps the largest potential for the MCs to affect local communities is through their operations.

LOCAL DEVELOPMENT62. MCs need to live at peace with the communities in which they operate. Alumina plants create small towns that need to deliver services to citizens. Environmental impacts and congestion effects often need to be mitigated. Depending on the circumstances, this creates various pressures on MCs to get involved more closely with the communities.

63. If the state functioned well, MCs would simply be taxed for their externalities, and the state would also develop social and infrastructure services where needed. In the absence of state capacity, however, MCs have incentives to become a substitute and deliver all kind of services to the communities where they operate. This creates two problems — MC operating costs rise, and incentives for state development become weaker.

64. The current system is a mix of the two extremes discussed above. This results in distribution of revenue (taxes and royalties) to the regional and local level that is complex and opaque. Taxes specifically allocated for community development are negotiated separately for each project. Community earmarked funds include 1 percent revenue for diamonds in Kerouane to 0.4 percent for operating gold mines, US$ 450,000 for CBG, etc. New projects tend to dedicate about US$ 500,000 to community development. For GAC it goes up to US$ 1 million per year at year 15. Simfer Sa.’s convention assigns 0.75 percent of revenue to communities. Collectively the mining companies have paid about US$ 1.7 million in 2007. But in addition, MCs are also drawn to provide direct services to the population. For example, they are estimated to have contributed over US$ 15 million to provide water and electricity.

65. Local revenues are expected to increase dramatically in some regions and communities with the mega projects (GAC, Rio Tinto, and Alcan/Alcoa). Simfer Sa. estimates its community development payments to reach US$ 10 million per year starting in 2013. Community payments in Boke will also increase significantly with the new projects planned to be completed by 2012.

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66. The increased revenue can be a blessing for local development, but also raises challenges for local government absorption capacity, transparency and governance, and community representation and participation. The ability of the local administration to identify community priorities, manage budgets, and develop and manage projects will be critical and affect the extractive industries companies’ temptation to intervene directly to preserve the “social license to operate.” This in turn might lead to ad hoc interventions and unsustainable practices by companies trying to replace the state.

67. The lack of local government capacity to manage large revenue from extractive industry projects is a common phenomenon around the world as revenue processes continue to decentralize. In Guinea, two participatory community development models have been piloted in recent years — the Village Communities Support Program (PACV), a World Bank sponsored project with CBG, and the AngloGold Ashanti approach in Siguiri. Both models involve capacity building and transparent approaches. The PACV/CBG model is one year old and had to be stopped because all community earmarked funds were allocated to power generation in Kamsar. The Siguiri model lasted several years and has visible effects through paved roads, provision of electricity, schooling, medical facilities, etc.

68. Other contributions to the local community are investments in basic services and infrastructure. There are some good practice examples of companies addressing health issues, often as an integrated part of business operations, including SAG, Guinea (health monitoring for communities); HIV/AIDS initiatives, including Guinea Chamber of Mines and international good practice (Anglo American and De Beers in South Africa, IFC Against Aids initiative), Rio Tinto Palabora Foundation (South Africa).

69. In Guinea, the IFC CommDev has co-sponsored, with the Government, the World Bank, and the Chamber of Mines, a study on community development experience and created a set of guiding principles for a unified future approach. Follow-up work is underway both from IFC and FIAS funding to complete the development of a unified participatory and transparent mechanism for community benefit sharing and investments.

70. Priority actions for the future include:

Appropriate urban planning to accommodate increased in-migration fueled by prospects of employment in the mines, and

Development of model agreements for community development.

71. To address community risks, the Government needs to draw lessons from existing experience and provide and apply a consistent legal framework together with strong dialogue with companies, civil society, and donor partners. Donor partners need to facilitate public-private dialogue at local and regional levels, and help build capacity to enable such dialogue for local governments and communities, companies, and civil society. This process also has to be consistent with national poverty reduction strategies and an on-going decentralization process.

MAXIMIZING BUSINESS LINKS 72. The procurement of local goods and services is an essential channel through which extractive industries can maximize their beneficial impact to the economy and generate

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employment. Mining company procurement needs to peek sharply during construction and gradually decline and stabilize during operations (Figure 3). During the initial construction phase, the company typically uses a foreign company. At this time, despite potential cost savings, companies often do not pay sufficient attention to opportunities to develop procurement procedures and systems to facilitate local procurement.

Figure 3. Mining company procurement during the construction phase

Construction

Activity Level ($)

Duration

Local Content

Foreign Content

Production

Construction

73. Few local suppliers. Unfortunately, very few of the operating companies in Guinea today have a local procurement policy and are actively working with local partners to find local suppliers. A study conducted with a bauxite mine in 2005 found that about 10 percent of total goods and services are procured in Guinea, much lower than in a country like Tanzania where it is 50 percent.

74. This is also a result of the unfavorable environment to enable businesses. Guinea ranks 166 out of 178 economies on the 2008 Doing Business Index and scored particularly poorly on starting a business, protecting investors, dealing with licenses, and paying taxes. Guinea scores slightly better on the “getting credit” indicator (135), however, accessing credit is still a problem for suppliers in Guinea. The current VAT policies also currently favor foreign suppliers over domestic ones because foreign suppliers are exempt. The situation is poised to improve with the significant effort that sponsors of new projects in Guinea are making to increase local content in construction and operations.

75. Employment. Mining company employment needs follow the same pattern as the graph for procurement. It is estimated that the mega projects in Guinea (GAC, Rio Tinto, and Alcan/Alcoa) will need up to an estimated 12,000 semi-skilled workers during construction, a number that will decline to about 4,000 once operations start in 2012/13. Associated infrastructure projects will need additional labor. Indirect job creation can provide approximately one job for every US$ 1,000 spent on local procurement. Efforts are currently underway by a number of development partners (AFD, IFC, others), the Government, and companies to assess the current labor and skill needs and develop

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vocational, technical, and business skill institutes to address these needs. Currently, mining is the second employer after the Government, with about 10,000 permanent jobs in the sector and a multiplier effect estimated at about three.

76. The VAT refund in Guinea has proved problematic because the state is incapable of refunding the VAT that the companies pay on local contracts. The current system favors foreign providers of goods and services compared to local companies. Customs duties have the same issue.

77. To encourage domestic value-added:

Refineries, ports, railways should be taxed according to unified FDI rules, which should be different from mining, and

Apply VAT rules in similar ways for both local and international firms

78. Local employment and value-added would rise with more local changes, but this requires the availability of minimum services — energy and water, town planning, and social services. Currently, Boke, the seat of the CBG mines, offers an example of state limitations and the costly responsibilities imposed on the CBG with an estimated US$ 2 million spent annually to provide water and electricity to a small portion of the community. Rusal (the only current producer of alumina) reportedly spent US$ 10 million in 2007 to provide water and power to the inhabitants of Fria. MCs do not have a comparative advantage recovering costs. A good solution would be for independent providers to buy energy and water from the MCs, and sell to the local population.

79. Providing power. A PPIAF-funded study on the options for power and water infrastructure development in the Boke Region, was co-sponsored by CBG and carried out with participation by national electricity and water companies, the governor of Boke, the Ministries of Mines, Energy, and Interior, sponsors of existing and new mining projects in the Boke region, and community representatives. The study identified a strategy to provide utilities in the region by employing professional private utility providers, but in the short term using generators to address urgent power needs. In the medium term the mining companies will act as independent power producers and sell their excess power to the community, and in the long run the cheaper option is to develop hydropower. It is worth noting that CBG has done its part by buying US$ 2 million worth of generators that are currently not being used because the Government has yet to authorize intervention by a professional utilities provider.

80. Artisanal and small-scale mining is an expanding and disorganized sector. With between 150,000 and 300,000 diggers of gold and diamonds, most are subsistence artisanal miners living below the national poverty line, and include a significant number of vulnerable groups, such as migrant workers and women (up to 70 to 80 percent). There is a distinct lack of access to appropriate technology and access to credit, and poor working conditions. The supply chain is also highly fragmented with many middlemen concentrated in the down-stream export facilities in Conakry. In the gold areas, conflicts between large-scale mining operations and small-scale miners are common because of land issues. For many large-scale mining operations, this growing conflict has become their greatest social challenge. Guinea is a member of the Kimberley Process and is benefiting from support to artisanal mining from USAID.

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81. Community expectations for local employment are often high and are a major reason for discontent among the population. Programs aimed at improving skill levels of the local community and increasing employability will be important. These elements would help to increase the multiplier effect from the mining industry:

Doing Business Reform Program. Create an enabling environment for business activities by reducing administrative barriers, including taxes, licenses, business start-up procedures; reform social security and labor laws.

Develop enabling conditions for professional private provision and distribution of utilities.

VAT reform. Develop policies equalizing import duties and VAT treatment between foreign and local suppliers.

Facilitate access to financing. Develop matching grant mechanism (donor, company).

Develop business skills training. Build on current joint donor and company initiatives, and involve other education institutions, etc.

Support artisanal activities. Efforts should include establishing legal status of ASM in mining code; supporting miners with tools, technical and valuation skills; and strengthening internal control mechanisms of the Kimberly Process.

PROTECTING THE ENVIRONMENT, HEALTH, AND SAFETY82. Concerns about the negative environmental impacts of mining include loss of access to cultivable and productive land, loss of forest cover, water pollution, noise, and dust. Reforestation and rehabilitation of open pit mines are most urgent in the gold and diamond industry, including artisanal activities. Three operating companies have ISO 14001 environmental certification. Priority actions to improve environmental performance and harmonize company practices include:

Closer analysis of the cumulative impact of mining and refineries on the environment.

Harmonization between different laws related to the environment and mining (mining, environmental, and water codes, and forestry).

Capacity building in the Ministry of Environment to monitor operations, administer and follow up on EIAs of mining operations, refineries, and infrastructure.

Participatory environmental monitoring by community and civil society.

Mine closure plans and funds set aside for rehabilitation.

83. Mining health and safety current practices and priority actions. Not much is known about health and safety practices in the mines and refineries in Guinea. The situation is likely to be most urgent in the artisanal mining sector. But practices in the large-scale operations are very much dependent on companies’ internal systems. Legislation about health and safety is lacking, manuals need to be developed and capacity enlarged to harmonize company practices.

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84. Resettlement current practices and priority actions. Resettlement is a significant issue in a context that lacks adequate regulations. Ad hoc approaches and community discontent are currently common. The Government needs to develop clear legislation and guidance notes to companies, which should reflect international best practices, for example, the IFC Performance Standards.

GROWTH POLES85. In addition to facilitating the procurement of local goods and services and hiring local labor, the expanding mining and refinery industries in Guinea have the potential to serve as a catalyst for broader growth, including other sectors of the economy. With the strong concentration of mega projects in two main areas — Boke/Sangaredi in the northwest and Nzerekore/Nimba in the southeast — “growth poles” have the potential to develop if enabling measures are taken. Donor partners have an important role to play in this process as facilitators.

86. The growth pole approach will help the Government and companies to maximize spill-over effects from the mining industry to other industries by identifying and stimulating sectors of the local economy with comparative advantages. It is a highly participatory and dynamic approach involving central and local government, local communities, companies, and civil society. It aims to (i) identify opportunities for the growth of other sectors of the economy, including agriculture, fisheries, and tourism; (ii) develop short-, medium-, and long-term growth scenarios and cost them; and (iii) develop investment plans and mobilize public, private, and donor funding to implement projects.

87. Projects can include basic services to facilitate the growth of other sectors as well as infrastructure. It is fortunate that the sponsor of mega projects (Rio Tinto) was involved in the development of growth poles elsewhere in Africa (Madagascar) and is willing to replicate the process in Guinea. DPs are also interested in supporting the development of economic activities around Boke and Nzerekore. The Ministry of Mines has already initiated a proposal to create a growth corridor in the northeast of the country, and a workshop to consult on these plans will be organized in June.

MACRO-FISCAL FRAMEWORK88. The PRGF program (2008-2010), currently under implementation, sets out Guinea’s medium-term macroeconomic fiscal framework. The program aims to stabilize the economy and create conditions for long-term growth. Fiscal policy is currently geared toward greater mobilization of revenue to bring the deficit to sustainable levels. The Government recognizes that in the next years, the bulk of fiscal revenue will continue to come from the non-mining sectors, with taxes on domestic production and trade as the main sources. But over time, as mineral production expands in response to new investments and ongoing legal reforms, the mining sector is expected to become a major source of Government revenue and a significant share of GDP. Mining investments are already affecting GDP growth — the IMF now predicts that large mining investments will push economic growth to 4.5 percent in 2008 from a sluggish 1.8 percent the previous year. The anticipated increase in mineral revenue will greatly increase the challenges to manage these funds to finance public expenditures.

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EXPENDITURE MANAGEMENT89. Guinea’s difficult political situation, coupled with important development needs and expectations of significant benefits from mineral revenues, is likely to place significant pressure on the Government to rapidly spend any revenue increases. The new Government formed in March 2007 has taken a number measures aimed at restoring fiscal discipline. It has cut expenditures, increased control, and strengthened cash management. These efforts will need to be maintained.

90. Despite the implementation of several PFM reforms over the last decade, public expenditure management has only started to improve. Critical weaknesses include:

Legal framework — inconsistent and outdated finance law and public accounting regulations.

Budget preparation — (i) lack of a clear medium-term macroeconomic framework establishing the costs of sector policies and alternative programs; (ii) limited capacity for assessing sector needs, evaluating and planning projects; (iii) lack of a link between the investment and operational components of the state budget, considering recurrent costs generated by capital expenditures; (iv) weak information system and poor budget negotiation processes, detrimental to the reliability of budget estimates; and (v) failure to set ceilings for sector budgets in the budget guidelines circular letter.

Budget presentation — existence of extra-budgetary operations, inadequate budget documentation.

Budget execution and internal controls — ineffective a priori review of expenditures by financial controllers, regular abuse of procurement regulations, loose internal controls.

Accounting — outdated chart of accounts, lack of compliance with accrual principles and standards, ad hoc and inconsistent accounting entries.

Cash management — excessive fragmentation of bank accounts, unsatisfactory bank reconciliation processes.

Internal and external oversight — inefficient internal oversight due to limited means and capacity; lack of activity of external oversight.

Local authorities PFM — out of date legal framework, weak and uneven capacity.

91. The markets for primary products are known for their instability. In the case of mineral commodities, this volatility arises because demand fluctuates greatly over the business cycle. In recent years as the share of mineral revenue in total revenue has stagnated, the volatility of revenue has been limited. However, the anticipated increase in mineral revenue will induce greater volatility in Government revenue. Unpredictable revenue profiles would make it very difficult for the Government to pursue a prudent fiscal policy. This in turn will create problems in the economy ranging from aggravating investor uncertainty to unstable spending policies. To deal with income volatility, efforts would have to be made to stabilize spending.

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92. Investing in the future. Similarly, a good case can also be made for annual savings of some revenue from the extractive industries to preserve equity for future generations, given that mineral resources are non-renewable. The amount that should be saved every year, as opposed to financing the non-extractive fiscal deficit, depends on the level of that deficit. This level can be approximated using the permanent income hypothesis, however, due consideration should also be given to Guinea’s investment needs in human and infrastructure capital, as well as to its absorptive capacity. Once the level of desirable yearly savings from extractive resources has been determined, various technical solutions are available to ensure that this level is met, including establishing an extractive resources fund. Should such a fund be established, international experience strongly suggests that it should be as fully integrated in the national PFM system in terms of budgeting, cash management, expenditure management, accounting, reporting, and auditing.

93. Future reforms of the budget process and administration need to deepen the reforms initiated in the 1990s. Over the short- to medium-term, it is recommended that the authorities implement the PFM priority action plan that is being finalized with assistance from the IMF and the Bank.

DEALING WITH DUTCH DISEASE AND SUPPORTING AGRICULTURE94. Agriculture has always been an important sector and major employer. Guinea’s agricultural and ecological resources are very favorable. The country’s climate is ideal for a range of agricultural products, livestock, fisheries, and forestry; and arable land is available in large quantities Existing studies point to a variety of agricultural export possibilities, but while agricultural potential is high, productivity remains low with limited technology and capital to pursue intensive crop production.

95. A mineral boom may adversely affect the development of agricultural potential. A sudden influx of foreign exchange may affect exchanges rates and damage other exports and hence slow economic growth (Dutch disease). Typically, domestic wages rise as the booming mineral sector is forced to offer workers higher salaries to attract the labor it needs and mineral exports cause a sharp appreciation of the real exchange rate. Both of these developments will harm the agricultural sector, impede economic diversification, and increase dependence on the mineral markets.

96. The main concern about Dutch disease is that non-mining exports (mainly agriculture) will be squeezed, thereby affecting a major source of growth and poverty reduction. The impact of Dutch disease may be attenuated, however, if mining proceeds are properly invested as part of a national development strategy rather than used to finance consumption. In particular, if mining earnings are invested in raising the productivity of smallholder farmers, the overall effect may be a decline of the relative price of non-tradable foodstuffs, which will benefit the economy.

97. Avoiding the resource curse will require the pursuit of a prudent fiscal policy to prevent excess mineral revenue from immediately translating into greater aggregate demand and inflation. This may entail the design and implementation of fiscal rules or guidelines. Formulating and implementing long-run growth should focus on an investment strategy that emphasizes infrastructure development which enhances productivity in the private sector, especially in agriculture and export industries.

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3. The Way Forward98. Guinea is facing an historic opportunity to leverage large mining investments in ways that create tangible and large benefits for its population. It should aim not only to integrate this sector into the economy, but increase the benefits of EIs to the overall economy. Important goals also include increased revenue for both the Government and local communities, and the efficient use of these revenues to drive diversification. But the country faces challenges in the management of natural resources within a context of limited resources. It is therefore important to adopt a sequenced approach. Efforts are needed to strengthen three sets of institutions — at the core, the Ministries of Mines and of Finance, the supporting ministries in charge of infrastructure, PSD and local development, and the institutions and processes needed to strengthen transparency and accountability. Short- and medium-term priorities along with required resources are outlined in the tables below.

4.1 Short-term prioritiesTable 2. Build revenue collection capacity and improve coordination within and between the Ministries of Mines and Finance

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Enhance mineral revenue collection, recording, and analysisAssess and improve skills in the relevant finance and mining departmentsBuild auditing skillsEnhance coordination between institutions managing mining and hydrocarbons

US$ 1 million for each year

Advisor in the Finance Ministry provided for in the LICUS applicationCapacity building provided under the ACGF application for Guinea (US$ ~500,000)

US$ 400,000

Table 3. Finalize the review of conventions according to a pre-announced calendar, which should be preceded by a professional assessment of mining agreements

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Analytical assessment of each of the agreements under review for the identification of potential upside/downside.Capacity building

US$ 2.75 million (US$ 250,000 per agreement)

Government’s own financing of US$ 250,000LICUS application providing for Capacity building for another US$ 288,000

US$ 2.25 million

Table 4. Clarify the institutional framework, and reduce the role of institutions not mandated to directly manage EIs in Guinea

In this context it is especially important to address rumors of discussions about actions that will violate the sanctity of mining titles in the country by imposing unilateral expropriations

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Table 5. Finalize the legal framework by updating the mining and petroleum codes and regulations and adjusting the model convention

Drafting the regulations and eliminating the latitude from all mineral stakeholders to interpret at will the provisions of the new law will be important. This process should also be coordinated with the ongoing regional Mano River harmonization initiative.

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Update the mining code, and draft its regulationsUpdate the standard mining conventionDraft a model community development conventionDraft the petroleum law and production sharing agreement

US$ 1.5 million FIAS funding of US$ 650,000 to update the mining code and a model community development conventionLICUS application to draft mining regulations and a petroleum law for US$ 305,000

US$ 600,000

Table 6. Conduct a quick study of the comparative advantages of the various options that can allow financing of infrastructure development

An immediate issue is whether building infrastructure in exchange for mineral assets can be a good option. How to improve on such options, and how to value the mineral assets being used as collateral, is essential and should be correctly assessed.

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Assessment of infrastructure needsDraft/update an integrated infrastructure development plan with a definition of short-, medium-, and longer-term prioritiesDefine available alternative financing schemes with their strengths and weaknessesPrepare transparent road map and processes for infrastructure financing/development.

Estimate: US$ 700,000

Discussions underway for PPIAF financing of infrastructure assessment. Potential funding about US$ 400,000

US$ 300,000

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Table 7. Initiate public-private-civil society dialogue

Civil society should play its role to review and influence mining sector strategies, including issues of state accountability, community development, and the environment. Donor partners have an important role in facilitating this dialogue. The creation of a forum for discussions and coordination among the MCs and the private sector is also key.

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Strengthen demand for accountability on mining and hydrocarbon managementFacilitate public, private, and civil society dialogue on community impacts and benefits

Estimate: US$ 500,000

ACGF funding (US$ 250,000)

US$ 250,000

Table 8. Initiate detailed assessment of projects where current analytical information available is insufficient

Includes project feasibility for the main pieces of infrastructure being considered, and plans for the development of growth poles.

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Data compilation and broad (pre-feasibility) assessment of key current infrastructure constraintsSpatial and socioeconomic assessment of the most prospective economic activities and growth centres

Estimate: US$ 2 million

ACGF US$ 1.25 million

US$ 0.75 million

4.2 Medium-Term Priorities99. The urgent actions described above will improve prospects for realization of current potential investments. But a sustained effort is needed over time to address the central vulnerabilities that relate to capacity, incentives, coordination, and cooperation among stakeholders. Efforts can be divided into the components below.

100. Laws, regulations, and institutions. There will be a need to consolidate and finalize implementation after enactment of updated mining legislation and regulations. It will also be important to strengthen the alignment between the legislation applied to extractive industries, including those related to environment, social health and safety, as well as infrastructure and others (Table 9).

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Table 9. Laws, regulations, and institutions

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Mining/hydrocarbon health, safety and security standardsAlignment between mining/ hydrocarbon laws and regulations with those of other sectorsRegional harmonization and definition of accounting standardsNational and regional transparency legal frameworksDrafting and harmonization of national/regional PPP/BOT laws

US$ 4 million IDA funding for FY09 along with the regional mining governance program (US$ 1 million)

US$ 3 million

101. Capacity building and governance. A sustained multi-year effort is needed to train central government officials on how collect, administer, monitor, and audit mining revenues, with the objective of ensuring that agreed-upon levels of royalties and taxes are collected and transferred to regional and local entities. Some analytical work is also needed to identify how to better assess the accrual of revenue from mining in the future, and how in due time to apportion revenue between spending and savings to compensate for depletion of non-renewable resources and stabilize revenue across price cycles. Capacity is also needed in other public institutions, including the cadastre, the mining inspectorate, and environmental protection (Table 10).

Table 10. Capacity building and governance

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Revenue collection Analysis of expenditure management options Mining cadastre Mining Inspections, control, and monitoring Artisanal miningCreation and strengthening of National Petroleum Regulatory bodySector promotionLocal and regional capacity building.Integration of mining and other sectorsCapacity building of other institutions managing mining and hydrocarbons

US$ 20 million IDA funding for FY09 along with the regional mining governance program (US$ 3 million)

US$ 17 million

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102. Institutions for accountability and transparency. Clarify the accountability framework and strengthen agencies to ensure the conformity of EI management to accepted financial, technical, environmental, and social guidelines and standards. Actions must be undertaken to create awareness among private and non-governmental stakeholders of the transfer mechanisms and strengthen civil society’s demands for accountability (Table 11).

Table 11. Institutions for accountability and transparency

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

EITISetting regional extension services of main mining management institutionsCapacity building in public internal and external oversight institutionsMining district information centersFramework to enhance Government and private company dialogue Enhancing demand for accountability

US$ 5 million IDA funding for FY09 along with the regional mining governance program (US$ 500,000)EITI Trust Fund (~US$ 200,000 undisbursed)

US$ 4.1 million

103. Infrastructure financing. The state would get more involved in planning, facilitating the financing, and ensuring proper execution for several large infrastructure projects, including transport, energy, water, and urban development. Private solutions will be sought whenever possible, including for small independent utilities, but within coherent plans and with proper regulation and supervision (Table 12).

Table 12. Infrastructure financing

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Finalize an integrated infrastructure development frameworkCreate enabling conditions for infrastructure developmentIdentify sustainable financing options for infrastructuretPromote and facilitate infrastructure development

US$10 million US$ 10 million

104. Economic impact of EI and growth poles. Several parallel efforts must be undertaken to improve the development of business links. Using MC input, various actions would seek to increase local procurement by improving the investment climate, offering training opportunities, and facilitating access to financing. The infrastructure and credible demands created by MCs will be used to enable development and/or expansion of other sectors such as agriculture, fisheries, forestry, and tourism. Plans should include

33

needed investments in conservation, restoration, as well as physical and social infrastructure. They should be sensitive to potential conflicts, compatibilities, and constraints (Table 13).

Table 13. Economic impact of extractive industries and growth poles

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Create growth poles enabling environmentThematic growth scenarios and staged regional growth strategies and investment plansFacilitate access to financingCapacity building, vocational training, and standards enhancement for SME and link development

US$ 50 million ACGF funding: US$ 15 million

US$ 35 million

105. Environmental and social management. Work is needed to address the lack of specific environmental and social guidelines and standards in the extractive industries, and to clarify requirements for SEAs and EIAs (Table 14).

Table 14. Environmental and social management

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Mining/hydrocarbon environmental and social guidelines and standardsResettlement guidesMine/hydrocarbon closure guidelinesEnvironmental laboratory and equipmentEnvironmental and social control and monitoring

US$ 5 million IDA funding for FY09 along with the regional mining governance program (US$ 1 million)

US$ 4 million

106. Regional harmonization. The optimization of EI benefits in Guinea cannot be achieved in isolation from neighboring countries. The West Africa Mining Forum and the Mano River countries meeting in February 2008 recognized the benefits of regional approaches to EI development and intend to: (i) promote harmonized approaches to mineral sector governance; (ii) reduce fiscal distortions between individual countries leading to increased smuggling and the race to the bottom between countries to attract FDI in EI; (iii) enable optimal development of infrastructure linked to benefits from mineral investments; (iv) efficiently manage environmental and social impacts, especially for the numerous projects located close to national borders; and (v) improve trade,

34

commerce, and collective growth potential based on EI and comparative advantages in individual countries in the sub-region (Table 15).

Table 15. Regional harmonization

Activities to be undertakenOverall estimated resources

Currently available/application

Gaps in resources

Mano River Union regional harmonizationCapacity building and governance strengtheningRegional geological data collectionDevelopment of growth polesRegional mitigation of social and environmental impacts of mining

US$ 40 million IDA Country allocation (US$ 10 million including US$ 5 million for Guinea for FY09) IDA Regional allocation (US$ 20 million) Other donors (US$ 10 million)

IDA country allocation (US$ 5 million)IDA regional allocation (US$ 10 million) Other donors (US$ 10 million)

107. Role of development partners. Realizing the potential of Guinean extractive industries will require support from donors. Current support for the reform agenda comes from the World Bank, IFC, AFD, AfDB, USAID, and others (see Annex 2). More support will be needed in the future to address the gaps identified in this report. Improved coordination among DPs around a well-defined Government plan will be key. The importance of the current EI prospects needs to be reflected in Guinea’s priorities and programs. The World Bank Group (WBG) could play a significant role in enabling the realization of current mineral development prospects by supporting capacity development, improved donor coordination, and helping to improve the enabling environment for coherent infrastructure finance.

35

36

Annex 1. Cost Estimate for Identified Priorities

Activities to be undertaken

Overall estimated resources

(million US$)

Currently available/ application (million

US$)

Currently available/pipeline

description

Gaps in resources,

(million US$)

Short-term priorities

1 Building revenue collection capacity

1 0.7 Licus US$ ~200,000, ACGF US$ 500,000

0.3

2 Finalizing the review of conventions

2.75 0.5 Gnmt~ US$ 250,000, Licus US$ 250,000

2.25

3 Updating the legal mining and hydrocarbon frameworks

1.5 0.9 FIAS US$ 650,000, Licus US$ 300,000

0.6

4 Comparative study on infrastructure development

0.7 0.4 Possible PPIAF funding US$ 400,000

0.3

5 Initiate public-private-civil society dialogue

0.5 0.25 ACGF: US$ 250,000 0.25

6 Detailed assessment of infrastructure projects and growth poles

2 1.25 ACGF: US$ 1.25M 0.75

Subtotal 8.45 4 4.45

Medium-term priorities

7 Laws, regulations and institutions

4 1 IDA FY09: US$ 1M 3

8 Capacity building and governance

20 3 IDA FY09: US$ 3M 17

9 Institutions for accountability and transparency

5 0.5 IDA FY09: US$ 0.5M 4.5

10

Infrastructure finance 10 0 10

11

Economic impact and growth poles

50 13 ACGF: US$ 14.25M 37

12

Environmental and social 5 1 IDA FY09: US$ 1M 4

13

Regional harmonization 10 5 IDA FY09: US$ 5M leveraging US$ 10M regional

5

Subtotal 100 22.5 77.5

Total 108.45 26.5 81.95

37

Annex 2. Current World Bank Support to the Mining Sector

Existing GrantsIDF grant (US$ 476,000). The leadership of Cabinet members has been strengthened for managing the mining sector and negotiating mining contracts, and a standard mining agreement for all mining contracts has been agreed. The first mining agreements signed after capacity building on negotiating have an effective tax rate (ETR) of 30 percent, which is certainly better than the 19 percent for the previous contract.7 In comparison, however, the global average of ETR for mining (only) operations is about 40 percent, so Guinea still needs to improve. This grant closed in June 2008.

EITI grant (US$ 576,000). The Bank has also been supporting Guinea in EITI implementation. Guinea has made significant progress and now has a seat on the EITI board. The grant will close in December 2009.

FIAS (US$ 650,000). The Bank Group (FIAS) has recently provided Guinea with a grant to update its mining code, address constraints to the development of value-added activities in the mining chain, and reinforce corporate social responsibility.

Grant Applications That Are Being ConsideredACGF Grant (US$ 15 million). This grant aims to stimulate economic growth through the demands and opportunities created by expected large investments in the mining sector. The grant is in the final stages of approval and aims to: (i) increase fiscal revenues from the mining sector resulting from increased capacity of the Government to collect and administer taxes and royalties, (ii) increase local procurement of goods and services by international mining companies, and (iii) increase employment opportunities in key mining regions as a result of employment multiplier effects.

LICUS Grant (US$ 723,000). This grant aims to bridge the gap between the closing time of the IDF grant and the expected IDA mining technical assistance in FY09. It aims to complete the mining legal framework, draft a petroleum law, and build the capacity of the mining agreement review committee. It is expected to be presented anew to the LICUS Committee in the coming fortnight.

7 . The effective tax rate (ETR) is a measure, expressed as a percentage of the effective net cash flow, of all amounts payable by a company to the Government (including dividends in the case of a free carried Government equity share). ETR is calculated by summing the present value of all taxes and other payments to the Government during each year then dividing that sum by the present value of the total effective annual cash flow.

38

Annex 3. Some Government Priority Actions and Their Urgency

Issues Legal reform

Capacity building (HR and equipment)

Coordination (public-private and intra-government)

DP involved

Adequacy of funding

Access to natural resources

Mining code and regulations, including clear regulation regarding titling

High High High WBG Sufficient

Petroleum code and regulations, including clear regulations regarding titling

Medium Medium Medium Licus application

Insufficient

Fiscal regimeProvisions against transfer pricingTax holidays and other incentivesVAT

High NA NA WBG Sufficient

Contract negotiations High WBG InsufficientMining cadastre High High WBG InsufficientState equity and share High HighGeological survey Medium Medium MediumKimberly Process Medium Medium Medium USAID Insufficient

Monitoring of operations/enforcement/ implementation of legislation and regulations

Environmental monitoring High MediumSocial monitoring High Medium

Economic auditing High High

Reconcile payments with contractual obligations

High High WBG Insufficient

VAT refund High High

Tax administration High High High Licus application/ ACGF

Barely sufficient

Assess operating cost of mining companies High High

39

Issues Legal reform

Capacity building (HR and equipment)

Coordination (public-private and intra-government)

DP involved

Adequacy of funding

Revenue management and redistribution of EI revenues

Expenditure management to ensure population benefits and avoid Dutch disease

Medium Medium

Investment budget High High

METF Process Consistency with the macro- and medium-term expenditure framework (MTEF)

Medium Medium

Decentralization Medium Medium WBG ???

Governance and accountability High High WBG Insufficient

Savings decisions Medium High

Oversight – EITI High High WBG Sufficient until Dec 09

Sustainable development

Decentralization/revenue distribution High High WBG Insufficient

Business enabling environment Medium MediumLocal procurement High MediumLocal employmentLabor rigiditySocial security

High Medium

Environment High High HighMine health and safety Medium Medium MediumResettlement High High HighMine closure Medium Medium MediumBasic services (education, community health)

High High High WBG/AFD/ UNDP, etc

Insufficient

Basic infrastructure (roads, water, electricity)

High High High WBG Insufficient

Growth poles High High High WBG InsufficientArtisanal and small-scale mining High High Medium USAID InsufficientLarge-scale infrastructure High High High AFDB Insufficient

40

Annex 4. Guinea Mineral Sector Historical Development

Bauxite & Alumina Production

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,00019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2,00

5

2006

2007

Years

Tons

of B

auxi

te e

xpor

ted

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Tons

of A

lum

ina

prod

uctio

n

Alumina Production (t)Total Bauxite Production

Gold Production in Kg

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2,00

5

2006

2007

Years

Indu

stria

l Gol

d in

kg

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

USD

Industrial Gold Production

Industrial Gold Revenue - USD

41

Diamond Export & Revenue

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2,00

5

2006

2007

Years

USD

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Car

ats

Valeur des ventes de diamant ($)Total diamond export - Carats

Artisanal Gold Mining and Revenue

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2,00

5

2006

2007

Years

Kg

of G

old

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

USD

Artisanal Gold ProductionArtisanal Gold Revenue - USD

42