Report No. 26141-SL Sierra Leone Tapping The Mineral Wealth for Human ProgressA Break With The Past July 25, 2005 Poverty Reduction and Economic Management Sector Unit 4 Africa Region Document of the World Bank Table of Contents PREFACE ................................................................................................................................................. EXECUTIVE SUMMARY .................................................................................................................... ...i 111 I STATUSOFTHEMININGSECTOR . ......................................................................................... 1 A INTRODUCTION ............................................................................................................... ............................................................................................................. 1 B.. SIGNIFICANCE 2 C MINERAL ENDOWMENT .................................................................................................... ............................................................................................... 3 D SECTOR STRUCTURE 5 E CURRENT INSTITUTIONAL, REGULATORYAND FISCALFRAMEWORKS .................................................................................. ..................... 7 F ASSESSMENTPERFORMANCE OF 9 G IN DIAMONDMININGAND TRADING H ENVIRONMENTAL, HEALTH AND SOCIAL IMPACTS .................................................. ................11 16 I POTENTIAL .. ..... INCOMEGENERATION ARTISANAL ................................................................................................................. 17 I1 . ROLE OF THE MININGSECTORINPOST-WARRECOVERY ........................................ 19 A 19 B. . VISION AND POLICYOB~F, C~IVES .............................................................................. DEVELOPMENTANINTEGRATEDNATIONAL .............................................................................................................. OF MINERAL POLICY FRAMEWORK 20 c MACROECONOMIC AND TRADEPOLICIES 21 D FISCALFRAMEWORK ................................................................................................. ................................................................. 22 E LEGAL REGULATORYFRAMEWORK AND .................................................................. 23 F INSTITUTIONAL FRAMEWORK ADMINISTRATIVE CAPACITY AND ............................ 24 29 I11 RECOMMENDATIONSAND ACTION PLANSFORACHIEVINGSECTOR .G ..... ENVIRONMENTAL SOCIALMANAGEMENT AND ......................................................... GOALS ........................................................................................................................................... 32 A LARGE-SCALE MININGSUB-SECTOR ........................................................................ 32 B.. ARTISANALAND SMALL-SCALE MININGSUB-SECTOR ............................................ 33 Tables Table 1: Key MiningSector Indicators.............................................................................................. 2 Table 2: RegisteredMineralExports ................................................................................................. 2 Table 3: RegisteredMineralExports ................................................................................................. 3 Table 4: License Fees for DiamondDealers and Exporters............................................................... 9 Table 5: Estimates o f Artisanal Diamond Miners and their Dependents......................................... 11 Table 6: Breakdown of Diamond Costs and Revenuesbetween Principal Stakeholder Groups .....12 Table 7: Sierra Leone MiningPotential........................................................................................... 18 .Table 8: Sierra Leone Time Frame and Actions for MiningSector Revival and Development......36 Table 9: Fees to be Paid Prior to Award of an Artisan Diamond MiningLicense .......................... 37 Table 10: Fee Structure for Diamond Dealers and their Agents........................................................ 38 Table 11: Fee Structure for Diamond Exporters and their Agents.,................................................... 38 Table 12: Official Exports of Diamonds from Sierra Leone, 1999-2001.......................................... 40 Table 13: Monthly Diamond Exportsunderthe Terms o f the Certificate of Origin Scheme............41 Table 14: Destination o f Diamond Shipments underthe Certificate of Origin Scheme.................... 41 Annexes Annex 1: Artisanal. Small.Scale. Dealer and Export License Regulations 38 Annex 2: The Certificate o f Origin Scheme for rough diamond exports .................................... ................................. 40 Annex 3: Alluvial Diamond MiningIndustry 44 Annex 4: Diamond Exports ......................................................................................................... ............................................................................. 47 Annex 5: Reward Share inAlluvial Diamond Mining ....................................................................................... ................................................................ 48 Annex 6: The Mines and Minerals Act Annex 7: Mining Sector Workshop - Summary o f Findingsand Recommendations ................S52 O References..................................................................................................................................... 59 This report was preparedby a team ledin2002 by PreetiArora (AFTP4) which included Leo Maraboli (COCPD). Jack Gamett (consultant .legal and regulatory issues). and Donald Sutherland (consultant .artisanal diamonds) The team worked closely with the Government . Task Force o n the MiningSector. jointly chaired by Mr . A. C. Wurie (Director. Geological Survey) and Mr . A. Wurie (Director. Mines Department) and wishes to thank all members o f the Task Force for their support and active participation The quality assurance team . comprised Emmanuel Akpa (Sector Manager). Peter van der Veen and Paulo de Sa (Peer Reviewers) . TAPPINGTHEMINERALWEALTHFORHUMAN PROGRESS A BREAKWITH THE PAST PREFACE The original version of this report was issued inDecember 2002. A new edition o f the report has been reissued in light of strong continued interest in the minerals and metals sector in Sierra Leone and continuedprogress by Government in sector reforms. The study, undertaken jointly by the Government o f Sierra Leone and World Bank staff, provides an assessment and analysis of the economic and social importance o f the mining sector and its impact on economic outcomes. It makes recommendations and identifies an action plan for mining sector revival and development. Relevant international agencies, associations and organizations participant to mineral sector initiatives, and representatives o f USAID and DFID have been consulted. The Government presented this report to the stakeholders, including its international development partners, at a workshop in May 2003. The outcome o fthe discussions andrecommendationsis reflectedinthe report. The resulting report was subsequently discussed ina second national workshop duringJanuary 2004. At the time this report was written inlate 2002, the Government intended to create a national policy framework for sustainable development of the mineral sector. The Government has begun that work and has identifiedthe following priorities and challenges: stimulate investment in the sector by establishing an enabling environment which promotes private participation; ensure that mineral wealth supports sustainable economic and social development o f the communities, and specially improve the living conditions of artisanal miners and their dependents; regularize and improve artisanalminingthrough security o f tenure for licenses and leases; minimize and mitigate the adverse social and environmental impacts o f existing mineral activities and further mineral development; encourage and promote technology transfer; and harmonize policy with those of competing and neighboring countries to discourage smuggling and encourage trading through official channels. The Government has made progress towards these goals. Since January 2003, the Ministryo f Mineral Resources has focused on a number o f fronts including: o formation o f a core mineral policy, informed inpart by the findings o f the original version of this report, approvedby Cabinet inlate 2003; 0 deepening the policy work through a review o f the mineral and regulatory framework with assistancefrom DFID; 0 efforts to improve the development o f basic mapping geo-information in collaboration with UNDP andprivate firms; 0 completion o f the initial work required for the improved administration and management of mineral rights through a cadastre system based on a computerized geographic information system with data from global positioning satellites. The initial application of this system would be inthe Kono area, to be subsequently expanded nation wide. This work was initiated under the World Bank's ThirdEconomic Rehabilitation and Recovery credit (ERRC 111) in collaboration with DFID and UNDP and i s being continued under the Fourth Economic Rehabilitation and Recovery grant (ERRG IV); 0 improvements in productivity, safety and environmental conditions o f mining activities through the expanded provision of mining sector extension services. This work was also initiated under the ERRC I11and i s beingcontinuedunder ERRGIV; 0 increased transparency in mineral sector revenues through the Extractive Industries Transparency Initiative (EITI) and Kimberley Process; and 0 improved social conditions in the mining areas through a variety of means including the encouragement of cooperatives, capacity building and training, including initiatives such as the Peace Diamonds Alliance. These efforts have led to positive results. Among the most notable is the sharp rise in diamond exports at 691,757 carats in2004 (37 percent larger than exports o f 2003 at 506,723 carats), with a mechanized kimberlite project already started and showing progress, while a second kimberlite based operation i s expected to start soon. Additionally, the rehabilitation o f a rutile mine was initiated in May 2005; the possible reactivation o f the existing bauxite mine during 2005 is being currently assessed; and a significant increase in mineral exploration i s being noted throughout the country. .. 11 EXECUTIVESUMMARY A. BACKGROUND 1. Sierra Leone i s gradually remaking itself into a stable and growing nation, and in so doing, it i s making a visible break with its troubled past. After independence in 1961, Sierra Leone suffered from major ethnic strife, civil war, institutional instability and poor governance. An initial annual growth of four percent after independence was followed by acute deterioration of economic and social conditions since the 1970s. This was largely the result o f inappropriate government policies and poor governance. Political instability and lack o f an enabling and internationally competitive environment conducive to attracting investments particularly affected the mining sector. Excessive government control and attempts to raise higher foreign exchange and fiscal revenues from artisanal diamond activities were detrimental to artisanal miningdevelopment. 2. The civil war which ended in January 2002 had particularly profound negative impacts on agricultural and mining activities. Real GDP declined at annual rates above 6 percent during 1995-2000. Mechanizedmining, excluding small-scale diamond miningcame to a standstill, with the large-scale rutile and bauxite mines closed since the rebel attacks near the mines inearly 1995. Production dived duringthe conflict, and most output from artisanal mining flowed into unofficial marketing channels. Sierra Leone emerged from the civil war with its large-scale miningsector closed down, and with small-scale alluvial miningat much lower levels o f production than duringpre-war period. 3. With the conflict over, there i s an opportunity and a need for realizing the potential of the sector to contribute to growth and development. Quick reactivation of closed mines followed by new investments in large-scale mining can provide much needed government revenues and foreign exchange earnings to support the reconstruction efforts o f the government. Improved conditions for artisanal mining will lead to higher incomes and a better quality o f life for rural areas dependent on mining activities. Revival o f the mining sector i s a key component o f the Government's post-conflict growth and development strategy as laid out inits I-PRSP. The Government has initiated policies and programs aimed at achieving these broad objectives. These include the preparation o f amendments to the 1996 Minerals Act; and strategies to regulate and administer artisanal and small-scale diamond mining to increase benefits to miners, local communities and the economy. However, the design and implementation o f programs for mineral sector development i s complex, and given the past history o f poor governance, it will be a very challenging task in post-conflict Sierra Leone. Additionally, the formulation o f such programs i s made more difficult by the weakness o f the underlyingdatabase on both the potential and impacts. This report attempts to use existing experience o f international best practice and the fragmented database to provide a knowledge base that could guide future development o f the sector. B. THEMINING SECTOR 4. Sierra Leone i s well endowed with mineral resources and produced diamonds, rutile, bauxite and gold until the conflict. Its rutile deposits are world class and Sierra Leone had been a major source o f high quality rutile for the global market. Other identified minerals include iron ore, platinum, chromite, lignite, clays, and base metals (copper, nickel, molybdenum, lead and zinc). Sierra Leone's dependence on the miningsector i s reflected by its high contribution to GDP (20 %) and registered exports (90%) throughout most o f the ... 111 1990s. Fiscal revenues peaked at about 8 percent o f GDP in 1990 and declined steadily to less than 2 percent after the closure of the two large-scale mines in 1995. Duringthe 199Os, miningand quarrying provided livelihood for over 250,000 people, and employed about 14 percent o f the total labor force, directly or indirectly. 5. By international standards, the size o f the mining sector in Sierra Leone is modest. Further, its structure i s complex relative to that o f some other countries with successful mining sectors. The latter are typically characterized by large mining sectors focused on a single commodity and comparatively larger mines. Therefore, the experiences and lessons learned from the development o f their mining sectors need to be adjusted and adapted to the particular conditions prevailing inSierra Leone. 6. The mineral sector in Sierra Leone is made up o f three sub-sectors: a) large-scale production o f non-precious minerals - rutile and bauxite; b) large-scale production of precious minerals - diamonds; and c) artisanal and small-scale production o f precious minerals - mainly diamonds, and to a much lesser extent gold. Large-scale mining operations in the non-precious minerals sub-sector were foreign owned and included Sierra Leone Ore and Metal Company (SIEROMCO) for bauxite and Sierra Rutile Limited (SRL) for titanium minerals. Large-scale production o f diamonds was fully state owned from 1984 onwards. Following severe deterioration in its performance leading to a steep decline in production by 1992, the Government initiated the liquidation o f the National Diamond Mining Company (NDMC)'. Rudimentary artisanal mining continues to be fully private, with a few mid-size companies, and with foreigners and resident Lebanese and Gambians having key roles, particularly in financing and marketing. Additionally, an extensive but little known medium-scale mechanized diamonds sub-sector appears to be emerging along the borders with Liberia and Guinea. 7. Formal diamond production has declined steadily since the early 1980s. Attempts to force the trade o f alluvial diamonds into official channels were unsuccessful, and efforts to tighten controls and enforce foreign exchange surrender requirements resulted in increased smuggling. Nevertheless, partner country trade data indicates that the overall volume (legal and illegal) o f diamond exports appeared to remain stable, as the declining output o f the state owned company was largely compensated with production from artisanal miners exported through illegal channels. As a consequence o f this switch from formal to informal channels, fiscal revenues from this sub-sector became insignificant. 8. Other minerals experienced fluctuating earnings due to instability in international mineral prices. Rutile experienced sharp growth during 1980s and early 1990s, but further increase in production required new investments, which were being formulated when the attacks on the mine forced its closure. As to bauxite, production also increased substantially during the 1980s, as a result o f high demand that was met by significant investments during the first half of the decade. Output later declined, as investments leveledoff with demand. 9. Sierra Leone has good potential for additional discoveries o f mineral deposits. The general geology suggests that (i) endowments exceed what i s known and i s being worked; and (ii) under the right conditions, new exploration and development would open new mines. Within a decade, the successful realization o f the large-scale mineralpotential of the country -indiamonds, gold, rutileandbauxite-canresultintheestablishment offournewminesin addition to the reactivation o f the existing three mines. As a result, total annual mineral export revenues could easily top US$370 million. Direct and indirect employment in these 'Most of the assets ofNDMCwere sold by 1994, but it remains as a dormant companyinthe public portfolio iv mines could amount to about 38,000 people. An estimated 300,000 people (including dependents and extended families) could derive their livelihood from these mines. Additionally, with an improvement in the environment for artisanal mining, alluvial diamond and gold production could increase due to higher resource recovery and processing efficiency. An improved governance framework could increase the flow o f these minerals through the official channels. C. SECTOR GOALS AND POLICY OBJECTIVES 10. The Government's goals for large-scale mining are to increase output, employment, fiscal revenues and foreign exchange through: (i) reactivating existing rutile, bauxite and diamonds mines; (ii) promoting the development of an existing pipeline o f identified promising deposits; and (iii) promoting exploration of favorable geological target areas to ensure developing and maintaining an adequate pipeline of promising prospects that can be proposed to potential investors. 11. Inthe considerably more extensive small-scale and artisanal mining sub-sectors, the Government's goal i s to improve the overall standard o f living o f the involved communities, through: (i)modernizing the licensing o f all mineral rights using a first-come-first-serve approach with rapid and transparent processing - incorporating an integrated cadastral system, supported by satisfactory monitoring, administration and enforcement of rights; (ii) facilitating mechanization through the establishment of a credit or revolving fund scheme to enable the purchase, rent or lease o f equipment, which in turn would reduce the dependence o f miners on existing financing arrangements that have often resulted in patronization and continued poverty; (iii) providing extension services to assist minersin selecting best areas to mine in their mineral concession areas, planning mining activities, processing the ores adequately, ensuring sound environmental and safety conditions, and administering excavating work with adequate mechanisms to identify diggers with license holders through tagging arrangements; and (iv) providing a level playing field for the license holders as well as diggers through training to enhance their product evaluating capabilities. 12. The Government envisions that successful mineral development will be led by the private sector and will require continued peace and stability; stable macroeconomic environment; predictable and transparent legal and fiscal frameworks to attract foreign and local investment in exploration and mineral development; and strengthened capacity o f the Government to provide adequate geological data, and monitor and regulate the sector. Therefore, the Government's strategy i s to define and enact clear, non-discretionary, and consistent policies for the sector; to promote private initiatives and investments; to administer mineral rights; to gather and provide basic geological information; and to ensure that mining development i s environmentally and socially sustainable. Other activities o f operational and productive nature, such as exploration, development, exploitation, beneficiation, smelting and refining, as well as miningand support services will be left to the private sector. 13. In line with the foregoing, the Govemment plans to develop a national policy framework for the mineral sector around the following sectoral goals: (i) stimulate investment in the sector by establishing an enabling environment which promotes private participation; (ii) ensure that mineral wealth supports sustainable economic and social development of the communities, and specially improve the living conditions o f artisanal miners; V (iii) regularize and improve artisanal mining through security o f tenure for licenses and leases; (iv) minimize and mitigate the adverse social and environmental impacts of existing mineral activities and further mineral development; (v) encourage and promote technology transfer; and (vi) harmonize policy with those of competing and neighboring countries to discourage smugglingand encourage trading through official channels. D. DEVELOPMENTANINTEGRATEDNATIONAL OF MINERAL POLICY (INMP) FRAMEWORK 14. The main objective of the INMP framework is to promote the country's mineral sector as a socially responsible and economically important engine o f growth. Development of an INMP framework takes time and involves the following steps: (i) Formulation and approval o f a National Mineral Policy, which i s internationally competitive and sensitive to the social and environmental impacts o f mining; (ii) Drafting o f mining legislation and regulations based on the policy directives; (iii)Building and/or restructuring linkages between different levels o f government to facilitate the effective administration o f the legal provisions; (iv) Buildingcapacity - institutional and human; and (v) Establishing liaison and networking systems among stakeholders to ensure transparency, effective decision-making, accountability, and facilitation of smooth sectoral activity. 15. Key factors that determine successful mineral development are: (i)sound macroeconomic and trade policies that provide a stable environment, access to foreign exchange, and few restrictions or controls on mineral exports or needed imports of plant, machinery, services or related supplies; (ii)a fiscal package that i s equitable for the concerned stakeholders; (iii)a legal framework, including environmental laws and regulations, that i s transparent and adequately defines the investors rights and obligations; (iv) security o f tenure; and (v) institutional capacity to respond to the needs of the private investors in an efficient and transparent manner. 16. The Government of Sierra Leone has undertaken significant economic reforms during most of the 1989-02 period despite the destabilizing influence of the civil war. To attract private investment in general, and in mining in particular, the Government recognizes that maintenance o f macroeconomic stability and creation o f a sound trade environment are critical, To achieve this, it will have to staunchly implement its economic program prepared for 2002-05. Monetary policy is aimed at controlling inflation. Foreign exchange auction, introduced in February 2000 has led to a significant reduction in exchange market segmentation. However, the process needs to be further strengthened to ensure easy access and better availability o f foreign exchange. Sierra Leone will also needto complete its trade reforms to bringits tariff rates inline with those o f its neighboring countries. 17. As in the case o f many successful miningcountries, private investment inminingin Sierra Leone can be considerably enhanced by a stable2 and internationally competitivefiscal framework for taxation, royalties, rentals, fees, duties and incentives. Establishing a competitive fiscal package to induce investments in mineral exploration and mine development will require detailed work that can be executed intwo phases. Inthe first phase, a comparative assessment o f the fiscal regime o f Sierra Leone with those o f other mining countries such as Ghana, Tanzania, Angola, Peru and Papua New Guinea should be ~~ ~~ See resultsin"Mining Sector ReformandInvestment,Results o f a Global Survey byThe WorldBank Group and MetalMiningGroupof Japan, 2001. vi undertaken to understand and raise stakeholder awareness on what has worked well and why. This assessment, conducted by the Government with support from international experts, will determine areas where Sierra Leone i s non-competitive, and identify options for enhancement. The second phase of work should involve the detailed modeling and evaluation o f alternative fiscal scenarios and adoption o f the regime that best meets the Government's objectives. 18. The legal and regulatory framework o f Sierra Leone needs to compare favorably with the frameworks of other miningcountries which reformed their miningsectors recently, placing emphasis on administration, access and transferability o f rights, security o f tenure, operating obligations and rights and penalties. This will require executing comprehensive comparative reviews of the existing framework in Sierra Leone with those of the recently reformed mining countries in order to determine specific areas o f disadvantage and options for improvement. The 1996 Minerals Act offers a good basis in several areas, including fiscal and environmental considerations as well as certain administration aspects. However, considerable work needs to be done to update and modernize the framework to adapt it to the global operating environment in the 21Stcentury. In the case of Sierra Leone, particular emphasis will need to be given to the incorporation o f cadastral procedures and technology into the provision, administration, transfer and enforcement of mineral rights. This i s particularly important to enable the regularization and improvement o f transparency in the vast artisanal mining industry. It i s also important to address legal constraints related to: a) dissemination of information, including areas available for licensing and status o f mineral licenses issued; b) excessive discretionary power o f authorities; c) strength o f mineral rights and their possible transfer and mortgage on commercial basis without specific approvals from ministerial authorities; and d) requirements to proceed from exploration to miningincluding conditions on performance o f obligations, discovery o f an exploitable mineral and technical and financial capabilities vis-a-vis alternatives based on the submission o f professionally credible feasibility studies. Another key area that will require continuing attention, in line with international practice and trends, concerns the introduction of measures to ensure that local communities benefit from, and are consulted in a participatory manner about mining operations both, when advanced exploration i s planned, and when active mining operations have been approved. 19. The institutional capacity o f the Ministry of Mineral Resources (MMR) needs to be strengthened. It needs to be restructured and reorganized to administer more effectively and efficiently a new private sector oriented Mineral Policy and its inter-ministerial imperatives. The reactivation o f existing mines, improvement o f artisanal mining, and initiation of meaningful activities for mineral sector development will require the adoption of a phased approach to restructure MMR. This i s warranted by the existing scarcity o f material resources, and need to avoid over-extending its present weak setup. Initial emphasis should be on establishing a Mining Investment Policy and Planning Department, and a Mineral License Application and Registry Office with clearly defined mandates and roles. Subsequent emphasis should be on strengthening the structure of the Geological Survey Department (GSD), and the Inspectorate, Monitoring and Extension Services. These efforts should proceed inparallel from the outset with comprehensive capacity building. Inthe short term, this phased approach will expedite the adoption o f both a cadastral system for matters on mineral rights and a "one-stop-shop" for investment promotional initiatives and inter- agency linkages. It will also make possible the compilation of geo-databases with information presently available at GSD, and the initiation o f pilot extension services with existing field staff. Additionally, it will allow incorporating the results o f such pilots in the formulation o f improved structures for GSD, and for the Inspectorate, Monitoring and vii Extension Services. Capacity building, in the short term, would largely involve participating in: a) relevant international events, seminars, conferences and short-courses; b) local seminars and short-courses conducted with assistance of expert consultants, and suppliers such as those involved with aerial surveys, geological information systems (GIS) and cadastral systems; and c) targeted study-tours to mining countries principally through bilateral collaborations. E. THEWAY FORWARD. 20. In the large-scale mining sub-sector, the immediate prospect is to revive activities that were discontinued during the 1990s. The most immediate possibility relates to the resumption o f rutile mining. Negotiations and preparations for resumption o f rutile production have proceeded to an advanced stage. The remaining step i s the finalization o f a financing package, in order to proceed to mine rehabilitation and related preparatory activities to start production. Other important prospects include production o f bauxite and diamonds from a kimberlite deposit. Preparations for reactivation o f the latter are underway. The timely resumption o f these activities i s important not only for the direct benefits of income, foreign exchange and government revenue flows, but also for sending a strong signal to potential investors that Sierra Leone i s once again in business as an appropriate and attractive site for large-scale miningoperations. 21 I Following these early activities, attention should shift to other identified minerals. This would have to be pursued through attracting investments to exploit these mining opportunities. To encourage mining companies to take advantage o f the positive environment offered, the Government should demonstrate a willingness to negotiate new mining agreements in a speedy and businesslike fashion on realistic terms, in line with international competitive standards. In addition, to build momentum in mineral sector development over time it will be necessary to substantially enhance the institutional capacity o f MMR and other agencies and departments related to mineral development as identified above. 22. The artisanal and small-scale mining sub-sector would be handled differently. Essentially, this would consist o f (i)improving the administration o f the diamonds sub-sector to limit the possibilities o f illicit diamonds being used as a source o f funding for those promoting civil disorder; (ii) improving enforcement of mineral rights; and (iii) empowering mining communities. Since the completion of the disarmament and demobilization of ex- combatants, there has been enhanced accessto all areas o f the country during 2002, including the diamond rich areas in the eastern regions. Even though the ex-combatants are not provided any direct support for mining activities under the Government's Disarmament, Demobilization and Reintegration (DDR) program, many ex-combatants and internally displaced people have self-reintegrated inthe miningareas. With more people coming back to the mining communities, there i s a critical need to continue to bring order to the mining areas by providing adequate security for legitimate licensed miners, and heightened supervision to minimize illegal mining. Additionally, implementation o f the Certificate of Origin scheme should intensify, by strengthening the system o f internal controls necessary to make the Government Gold and Diamond Office (GGDO) the effective import-export authority as recommended by the Kimberley Process. Once the immediate security issue has beenresolved, the Government should initiate actions to: ... Vlll e consolidate the laws and regulations governing the sub-sector; take steps to install a GIS and GPS-based mining cadastre that will provide the basis for effective administration and enforcement o f mineralrights; e increase efficiency and openness of trading by addressing bottlenecks in the banking system to provide immediate availability o f foreign currency transferred for diamond exports and marketing operations and thus minimize the recourse to the parallel market for obtaining foreign exchange; e initiate pilot extension services to improve the identification o f best reserve areas in existing concessions, enhance mine planning and processing activities, and assist on activities of reclamation and rehabilitation of mined out areas; 0 initiate the establishment o f equipment rental/lease arrangements for artisanal miners to fund their miningoperations. e conduct a phased series o f regional participatory workshops in strategically selected mining areas involving MMR, Chiefdoms, miners, dealers and relevant stakeholders, to examine existing constraints, options and potential for collective business activities, cooperation and practical operationaltraining; and e formulate and effectively implement plans, including the Diamond Area Community Development Fund (DACDF) to use the proceeds from the sale o f diamonds for communityprojects aimed at enhancing their welfare; 23. These initiatives would aim to establish a trading system where: (i) returns to the mine-workers and to miners are maximized through a competitive, open and transparent system o f trade in diamonds and gold; (ii)the bargaining position of miners and the productivity o f their workers i s enhanced through greater access to finance, on reasonable terms and from sources other than traders and exporters; and (iii)a liberal regime i s established inrelation to direct taxes and financial controls, to ensure maximum transparency in the trade, and to encourage a more open and competitive market, which would benefit artisanal and small-scale miners and their workers. 24. Over the long term, the -interventions for improving the artisanal and small-scale miningsub-sector shouldfocus on: a) improvingquality o flife of those living and working in diamond fields; b) rehabilitating the environment and improving agricultural productivity; c) upgrading regional infrastructure; d) improvingminingproductivity and safety; e) prolonging life o f mining in line with resource endowment; f) maximizing use o f legitimate diamond marketing channels; g) encouraging general economic growth via multiplier effect o f mining activity and infrastructure improvement; h) ensuring adequate institutional capacity to manage the industry; i)ensuring that relevant legislation and regulations are appropriate for the good functioning of the industry; and j) promoting the industry and its contribution to local and national economies. 25. The following tables summarize: a) the main actions required in the short, medium and long term to facilitate the reactivation and development o f the miningsector within sound technical, environmental and social conditions, and b) the key performance indicators to monitor its development. ix Summary Table 1: Time Frame and Actions for Mining Sector Revivaland Development Short-Term Mid-Term .ong-Term 1, Undertakecomprehensive 1. Adopt the newly 'roductionfrom: mining comparative review ofthe .evised frameworks. : rutilemines existingframeworkin Sierra 2. Raiseawareness ! bauxitemines Leonewiththose ofrecently mddisseminate rules !kimberlitemines reformedminingcountries. 3 f the game locally ! goldmines 2. Basedonthis knowledge, mdinternationally. initiatedevelopment of 3. Active Promotion sustainable frameworks. 3 f newprojectsin - 3. Review andregularize rutile(at Rotihnk), existingmineralrights bauxite(atPort (explorationand mining) Loko), goldand 4. Complete SRL financing diamonds. arrangement. 4. Disseminatebasic 5. Startpromotinginvestment in promotionalgeo- Bauxiteand Kimberlite. information. 5. Designand implementSRL communitypilotplan. 6. Designaninvestment promotionplan. 7. Initiate: compilationofgeo- databases aerialsurvev Small-scaleand 1. Use existing frameworks 1.Active extension 1. Continuedtraining. artisanalmining 2. Continue implementation services provided. 2. Routinecadastre o f the Certificate o f Origin 2. Active training. operation. Scheme 3. Cadastre infull 3. Privatebased 3. Initiate: operation. renulease of satellite imagery 4. Implementpilot equipment. pilotextension services social plansfor 4. Incorporatebest andtrain field staff communitiesand practices and resultsof preparationof database disseminatebest pilot social initiatives. of existingmineralrights practicesandresults. installationof cadastre 5. Pilottest selected enforcement of optionsfor free mineralrights markettrading of design equipment diamonds. redleasearrangements 6. Implementthe identifyand assess chosenoptionfor free options for free market markettradingo f trading of diamonds diamonds. 4. Deviseeffectiveplansto use 7. Disseminate geo- DACDF. information. 5. Designand initiatesocial pilot planfor selected artisanal communities. X Summary Table 2: Sierra Leone Mining Sector Revival and Development Harrative Summary Key PerformanceIndicators rargets/Timeframe donitoring Development 3bjectives Privatesector led 1. Number ofprivateoperators 20-30 privateoperators dinistry of growthinmining involvedinexplorationand ictivein explorationin dineral sector andpoverty mining. :henext five years. tesources. dleviation in areas of small-scaleand 2. Investmentsin explorationand 4nnual investment dinistry of artisan mining. mining. :xpenditures between dineral LJS$15-30million inthe Cesources. next five years. 3. Productionand legal exports Annual mineral exports hade statistics. o f minerals. betweenUS$250-350 millionthroughofficial :hannels inthe nextten years. 4. Fiscalrevenues from mining. Annual fiscal mining 3ovemment fiscal revenuebetween 3tatistics. US$15-35millioninthe next ten years. 5. Numberof legallyregistered 2,500 licensedartisanal Ministry of artisanal miners. minersintwo years. Mineral Resources. 6. Reportedcases of diseases and Reductioninreported HIV/AIDS diseasecases; Environmental HIV/AIDS awareness iudits; health campaigns inall mining purveys. areas. Key Elements Adoptionof 1. Number of exploration 20-30 private operators Ministry of competitive legal, licensesand investment active in exploration in Mineral regulatory and fiscal agreements. the next five years.At Resources. frameworks for least three new mining mining. investmentagreements shouldbe signed over the next three years. 2. Mineral sector investment. Annual investment Ministry of expenditures between Mineral US$15-30millioninthe Resources. next five years. 3. New Mining Law and Shouldbe adopted Parliamentary Regulations. within two years. approval. 4. Artisanalgold and diamond Miningcadastre Ministry of mininglicenses. developed inone year. Mineral Resources. xi Summary Table 2: Sierra Leone Mining Sector Revival and Development (contt) Ionitoring ~ Narrative Summary Key PerformanceIndicators rargets/Timeframe Key Elements (contd.) Establishment o f 1. Cross-sectoral coordination 3nvironmental and nvironment and environmental and mangements for social databases fully ocial assessments. social management mvironmental and social iperational within frameworks for mineral managementof the mineral :wo years. Sectoral activities. sector. iatabases interfaced withcorresponding information systems inother ministries. 2. Days requirei to process Thirty to sixty days. linistry of Mineral Environmental applications and Lesources. regional authorizations for :xploration and mining permits. 3. Operational adoption of Consultative 4edia reports, participatory consultative approaches and Neneficiary processes. procedures adopted ssessments. by 3 investment projects to permit local and regional exploration or mine development activities. Improvement o f 2. Geological maps. Completed geological dinistryofMineral geological and mining map coverage, at a Lesources. information systems. 1:50,000 scale, o f areas with strong mineral potential within two years. 3. Geo-chemical analyses Fully operational dinistry ofMineral executed. geo-scientific iesources information system within three years. xii SummaryTable 2: Sierra Leone:Mining Sector RevivalandDevelopment(cont') Narrative Summary Key PerformanceIndicators TargetdTimeframe Monitoring Key Elements (contd.) Strengthening o f 1. days required to issue an 180 days. vIinistry o f Mineral institutional capacity o f exploration license. tesources. MMRandrelated agencies. 2. days requiredto issue a 60 days Ministry o f Mineral miningtitle. iesources. 3. steps neededto issue an Core steps Ministry o f Mineral exploration license and a undertakenon legal, iesources. miningtitle. technical, environmental and social aspects. 4. staff trained annually. At least 50 staff of Ministryof Mineral MMRtrained over Resources. 5. extension services for the nextthree years small-scale miners. to: i)compile geological information, prepare maps, conduct geo- surveys; ii)prepare investment promotional brochures and conduct promotional activities; iii) administer regulatory and fiscal aspects, mineral sector management, monitoring and enforcement functions, and contract negotiations; and iv) ensure best practices for small- scale minerson geological, mining, processing and environmental matters xiii I.STATUSOFTHEMININGSECTOR A. INTRODUCTION 1. After achieving annual growth rates of nearly four percent duringthe first decade of independence3, Sierra Leone experienced sharp deterioration o f its economic and social conditions during the 1970s through the mid-1980s. External developments were a factor underlying this trend, but more fundamentally the decline resulted from a combination of inappropriate government policies and poor governance. Political instability and the lack o f an enabling environment conducive to attracting investments particularly affected the mining sector. Excessive government control and attempts to raise higher foreign exchange and fiscal revenues from artisanal diamond activities have been detrimental to mining development. This situation has been worsened by cycles o f depressed international prices for most minerals minedinSierra Leone (except diamonds). 2. The conflict which ended in January 2002 caused widespread economic disruption. The negative impacts on agricultural and mining activities were particularly profound. Real GDP declined at annual rates exceeding 6 percent between 1995 and 2000. Modem mining activities, excluding small-scale diamond mining, have come to a standstill, with the large- scale `rutile4 and bauxite' mines still closed since the rebel attacks near the mining areas in January 1995. Mineralproduction dwindledduring the conflict, and virtually all output from artisanal mining flowed into unofficial marketing channels. Thus, Sierra Leone emerged from the civil war with its large-scale mining sector closed down, and with small-scale alluvial miningat much lower levels of productionthan inthe pre-war period. 3. Sierra Leone has a widely recognized potential as a producer o f rutile and bauxite, and diamonds from alluvial and hard-rock deposits. It also has considerable untapped potential for gold. With the conflict over since January 2002, the Government has initiated policies and programs aimed at reactivating the miningsector. These include the preparation o f amendments to the 1996 Minerals Act; and formulation o f strategies to regulate and administer artisanal small-scale diamond mining to increase benefits flowing to miners, local communities and the national economy. However, the formulation o f development plans for the mineral sector i s made difficult by a very weak underlying database - on both the geological potential and the economic, social and environmental impacts of mining. Additionally, mineral sector development i s recognized as an inherently complex task even in successful mining countries. Given its past history o f poor governance, the formulation and SierraLeone gained independencein 1961. Rutile is a preferred raw material to produce pigments of high quality as well as titanium metal. Rutile pigment supplantedlead due to its non-toxic and inert characteristics, leadingthe world pigment market due to optical features, which are pre-eminent in whiteness, brightness and opacity. Over 90 percent of rutile productionis usedfor pigments and the balancei s usedto producetitanium metal, and weldingrodcoatings and fluxes. Rutile is also preferred for metal production because of its low contents of metallic impurities that inhibit metallurgicalprocessing. A less preferredraw materialfor producingpigments is ilmenite, which is also obtained as a by-product of rutile production in Sierra Leone. Titanium metal is favored in the aerospace industrybecauseof its low weight, high strength, andresistanceto heat and corrosion. Bauxite is the principal input for alumina production, which in turn i s used to produce aluminum metal. Bauxitemineralizationin Sierra Leone is tri-hydrate gibsonite. Its exports have an alumina content of over 50 percent and very low organic substances, which account for their widely aknowledged high quality as raw materialsmelting. implementation of mineral development plans will be very challenging inpost-conflict Sierra Leone. At the same time, consolidating and extending the fundamental databases will remain a key priority in the medium term to facilitate a better utilization of the full potential o f the sector. B. SIGNIFICANCE 4. Context. Mining has been an important economic activity in Sierra Leone since the 1930s. Initially it involved gold, iron and alluvial diamonds. Later it also includedplatinum group metals. Mining o f bauxite and rutile commenced in the 1960s. Sierra Leone's heavy dependence on the sector prior to the conflict i s reflected by its high contribution to GDP (20 %), exports (go%), and fiscal revenues (4 %). Miningand quarrying provided livelihood for over 250,000 people, and accounted for about 14 percent o f the total direct and indirectlabor force. However, the comparatively small size of the mining sector, combined with a widespread perception o f high risk for investors as well as an.establishedtrend of unrealized miningpotential accounted for the insignificant influence of Sierra Leone inthe international markets of the minerals produced inthe country. Table 1: Key Mining Sector Indicators Source: Ministry o f Mineral Resources, Staff estimates 5. Levels. In 1993, total registered mineral exports amounted to about US$108 million, and it was widely estimated that additionally about US$l50 million o f diamonds and gold were exported illegally. Rutile and ilmenite accounted for the largest share informal mineral exports with about US$61 million. The bauxite exports were second amounting to about US$24 million. Diamonds ranked thirdwith formal exports o f approximately US$20 million. Comparatively, the registeredexports o f gold were minor at about US$1.6 million. Table 2: RegisteredMineral Exports (US$millions) */ Includes Ilmenite. Source: Ministry of Mineral Resources (1987-2001); Central Statistics Office (1980/81). 6. Trends. Official mineral output has shown a downward trend during the 1980s and 1990s, paralleling the poor overall performance o f the economy. Formal diamond production showed declining output by the National Diamond Mining Company (NDMC) - 2 - and sales through the state owned Gold and Diamond Office (GGDO). By FY1987/88, the production o f NDMC was less than a tenth o f the output achieved in FY1980/81, which led eventually to its liquidation. Attempts to force the trade of alluvial diamonds into official channels were largely unsuccessful. The tightening of the foreign exchange surrender requirements resulted in increased volumes o f diamonds exported through illegal channels. However, partner country trade data show that the overall volume of total diamond exports through legal and illegal channels appeared to have remained stable, as the declining output o f N D M C was largely compensated with production from artisanal miners exported through illegal channels. This downward trend has been reversed since the introduction o f the certificate of origin scheme in October 2000, with production and exports reaching over 350,000 carats in2002. Table 3: RegisteredMineralExports Source: Ministry of Mineral Resources. 7. Additionally, the situation o f other minerals displayed a wide fluctuation o f eamings due to variations ininternational mineral commodity prices. Further,during periods o f high price levels, with the exception o f rutile exports, little fiscal benefit accrued to Sierra Leone from mining, owing to predominant illegal trading o f diamonds and gold. Eventhough the production of bauxite increased substantially during the 1980s, as a result o f investments during the first half o f the decade, subsequently it declined due to lack o f replacement investments. On the other hand, registered production o f gold had yet to reach significant levels, although typically, most producers had avoided govemment controls and restrictions. Annual output was generally considered as a significant source o f income for artisanal miners, and estimated at about three times the amount of 17,900 ounces exported officially in FY1984/85. C. MINERAL ENDOWMENT 8. Sierra Leone is well endowed with various mineral resources. Until the conflict, it produced diamonds, rutile, bauxite and gold, and continues to have abundant artisanal diamond mining activities. Platinum mining was discontinued long ago due to lack o f ore, but new exploration could take place under the right conditions. Iron ore mining was also discontinued for lack o f reserves, and it is geologically unlikely that iron deposits can be delineated, with size and quality adequate for mining in viable economic terms. Other recognized minerals include lignite, clays, base metals (copper, nickel, molybdenum, lead and zinc), and chromite. 9. The basic informationavailable on the mineral potential of Sierra Leone is very poor. The geological data i s incomplete and outdated. Over the last four decades, limited investigations were performed by GSD assisted by international and bilateral institutions.6 They included regional geological surveys and delineation o f rutile, bauxite and gold Main intemational assistance came from UNDP; some equipment and technical assistancewas provided by Germany, and rehabilitationof laboratories was financed by EEC. prospects, under rather difficult working conditions, with little equipment and technical resources. During the 1980s, private companies initiated limited amounts of gold exploration, which were eventually discontinued due to difficulties o f enforcing concession rights. 10. Rutile and ilmenite continue to represent a large and immediate mining potential in Sierra Leone. In 1995, rutile had proven reserves for about 14 years at 150,000 tonnes per year, and mineral resources for over 30 years. Production o f rutile was from laterite-clay deposits at the concessions o f SRL in the Moyamba and Bonthe districts, at about 180 km south-east o f Freetown. Considerable additional potential had also been delineated at Rotifunk, outside o f the concessions o f SRL (at about 60 km from SRL operations). 11. Bauxite also offers substantial potential for mineral development in Sierra Leone. Existingresources are inthe concessions previously minedby SIEROMCO inthe Moyamba district at about 150 km south-east o f Freetown, and at about 80 km north-east of Freetown, near Port Loko. SIEROMCO had developed sufficient proven ore reserves to support mining operations for about 10 years at production rates o f 1.4 million tonnes per year. It also had established lower grade resources for mining another 10 years. Favorable results were obtained from studies o f the latter duringthe late 1970s, butproposals for a mine and alumina plant project were not implemented. 12. Substantial gold potential exists along streams, which drain several schist belts. These include the Loko Hills belt, Sula Mountains - Kangari Hillsbelt, and the God, Kambui and Niminibelts. Prior to the conflict, it was estimated that 50,000 ounces o f alluvial gold were minedannually (legally and illegally), and currently, artisanal minerspan for gold along streams in several areas o f the country. Preliminary geological investigations in the 1960s identified very favorable geological conditions for the existence o f hard-rock gold minerals. These are presently widely recognized by the presence o f abundant greenstone strata, a condition which accounts for major gold mines in several counties. Nevertheless, the potential for gold mining still remains virtually undetermined, in quantitative terms, due to lack of systematic exploration. 13. Finally, inthe early 1990s it was incorrectly believed that alluvial diamonds hadbeen substantially depleted. Remaining reserves were estimated at only about 6-7 million carats by the GSD, sufficient for less than 10 years at existing production levels. However, such estimates were based on incomplete geological evidence from earlier mining work. Currently, it i s well established that existing resources are considerably greater. Based on partner country trade data, output since 1993 has exceeded considerably GSD forecasts, even on a conservative basis. Two types o f alluvial diamond miningcan be envisaged inthe future -large-scale, relatingtodepositswithdeepoverburdenandartisanoperations. Itisgenerally speculated that diamond deposits o f economic potential are likely to be within or adjacent to existing diamond bearing rivers. In a recent report commissioned by DFID,' it i s estimated that five to ten year production potential i s likely to be in the range o f 250,000 - 400,000 carats, which if an annual average price o f US$200 per carat i s used, gives a possible annual output in the range o f $50-80 million. Additionally, it has been established that substantial further miningpotential for diamonds inthe form o f kimberlitepipes exists. Two pipes have been identified, and preliminary studies have delineated reserves o f about five million carats. According to recent Government estimates, kimberlite deposits are o f the order o f 20 to 30 millioncarats. ~ ~~ ~~ This reportwas commissionedin2002 to look at policyoptionsfor the diamondindustry. - 4 - D. SECTOR STRUCTURE 18. The mineral sector comprises three sub-sectors: a) large-scale production of non- precious minerals - rutile and bauxite; b) large-scale production of precious minerals - diamonds; and c) artisanal and small-scale production o f precious minerals - mainly diamonds, and to a much lesser extent gold. Iron ore miningwas discontinued in the early 1980s, due to reserve depletion, and from 1982-84 was resumed unsuccessfully from stockpiled tailings. Domestic consumption o f mined products i s negligible, with almost 100 percent o f the output exported. 19. Large-scale mining - non precious minerals. Until 1992, large-scale mining in this sub-sector included bauxite and titanium minerals (rutile and ilmenite). These mining operations were foreign owned. 20. The sole bauxite miningproducer inthe country was the Sierra Leone Ore and Metal Company (SIEROMCO), a subsidiary o f Alusuisse. It was only a small player on the world market, producing only about 1 percent o f world bauxite, with about 1.19 million tonnes in 1991, valued at about US$25 million. In 1992, the mine faced critical need for rehabilitation o f existing installations and equipment. Then it had to face low international prices in 1994, which led to stoppage o f production. There were also disputes with the Government regarding possible controversies over the practice o f transfer pricing. Under these circumstances, when the bauxite mines were closed in January 1995 due to existing disadvantages - including decay o f installations, relatively small size o f the mine, high risk perception and dire financial situation o f SIEROMCO - the parent company withdrew from Sierra Leone. Renewed efforts to reopen the mines have been pursued only recently following the evolution o f the peace process. 21. Rutile was produced exclusively by Sierra Rutile Limited (SRL), formed in 1971, by Nord Resources and ARMCO, both from USA. Ownership o f the company changed hands several times since then. Nord Resources played a key role and finally gave up its control in 1999. From May 2001, MIL Investments and U S Titanium Inc. are the two shareholders owning 75 percent and 25 percent o f SRL. SRL experienced sharp growth during 1980s and early 1990s. SRL initiated production o f ilmenite in 1988, as a by-product o f its rutile processing activities. The prices of rutile and ilmenite depend principally on demand from the construction and aerospace industries. SRL was the leading producer o f rutile, with about 33 percent of world output. In 1991, the production of S R L was 156,000 tonnes o f rutile and 57,000 tonnes o f ilmenite, valued in aggregate at about US$86 million. It provided employment to nearly 2,250 workers, making it the largest private employer in Sierra Leone. However, from an international perspective, SRL was a high-cost producer in spite o f a US$71 million investment program for rehabilitation and modernization, with a US$15 million participation o f the International Finance Corporation (IFC) approved in 1992. Further plans to expand rutile production, by 40,000 tonnes per year, were shelved due to difficulties in obtaining necessary financing because of risks associated with the civil war. Efforts are now being made to obtain the necessary financing for rehabilitation and expansion o f the mine, and to reopen it and start production. 22. Large-scale mining -precious minerals. Diamonds were produced by the National Diamond MiningCompany8 (NDMC). NDMC was an important source o f foreign exchange and tax revenues during the 1960s and 1970s, while still under private management. The company was under private management o f Sierra Leone Selection Trust. - 5 - Operating conditions, production and financial performance deteriorated rapidly after 1984, as the state owned Precious Metals Marketing Corporation (PMMC) took over management from the private operator. Output declined from 163,000 carats in FY1983/84 to about 10,000 carats by the end o f the decade. During 1992, production stopped, and most o f the workers turned to artisanal mining on the concession areas of NDMC. NDMC was subsequently liquidated in 1994. Kimberlite concessions o f NDMC were transferred to private investors, while alluvial concessions are beingoperated by artisanalminers. 23. Artisanal mining. This type o f rudimentary mining in diamonds and gold was and remains fully private. The production value and the benefits associated with artisanal mining have traditionally been substantial because o f the general lack o f better rewarding activities available for skilled and unskilled workers in the rural areas. The annual value of artisanal production has been repeatedly quoted at between US$150-200 million, with the majority coming from diamonds. Gold output i s estimated at about 50,000 ounces annually valued at approximately US$15 million. Most o f the diamond production and practically all of the gold has been traded and exported illegally. Because o f the huge extent o f the illicit activities, it i s difficult to determine the exact size and main characteristics o f artisanal mining trade. Available information suggests the following setup for alluvial diamond and gold mining. 24. Alluvial Diamonds. Key players inartisanal miningo f alluvial diamonds are diggers; holders o f mining licenses (generally referred to as miners); licensed dealers (and their agents); and licensed exporters. Diggers are usually unskilledworkers, possessing little or no equipment. They work for miners, who provide them with food and tools. The minersmay have the original license or may sublease land from a license holder. The dealers and their agents buy diamonds from the miners and sell them to the exporters at prices which are negotiated among them on a case-by-case basis. The dealers usually provide funding to the miners. The dealers often also play an active role inmanagement and supervision o f mining work, either personally or through employees because o f the high risk o f theft o f diamonds and supplies. On the other hand, the license holders often play a passive role, mostly dealing with the authorities, paying license fees, and collecting their share o f production values. The export o f diamonds continues to be formally conducted by licensed exporters. Inprinciple, exporters are not supposed to be involved in mining or related supporting activities. However, they constitute a usual source of funding for mining. 25. Upon settlement and (often crude) valuation o f the production o f diamonds, the direct operating costs are deducted, and in a typical arrangement the remaining value is split at one thirdeach among the dealers, holders ofmininglicense and diggers. Overall, this system has been one generally well established, operating in a stable manner, and functioning with reasonable efficiency and little government interference. However, there i s a clear need to provide a level playing field for the license holders as well as diggers through (i) training to enhance their product evaluating capabilities and improve their realized trading prices; and (ii)adequate monitoring, enforcement and compliance to allow only license holders to sell only to authorizedbuyers, and vice versa. 26. Alluvial Gold. Artisanal mining o f alluvial gold deposits has been widespread as a seasonal activity. However, very little i s known about such mining and trading during the 1990s, as the Govemment was mostly focused on diamonds. Formal gold exports were to be channeled through the Bank o f Sierra Leone, which until 1992, had the exclusive right to purchase and export gold, but admittedly it handled only a very small proportiono f the trade. Inretrospect, the issues affecting artisanal goldminingwere quite similar to those inartisanal - 6 - diamonds. A main objective was to establish a mechanism for GOSL to collect a reasonable share of production values, without imposing costly controls and/or involving detrimental effects on sectoral development. However, the insignificant gold sales to the Bank o f Sierra Leone demonstrated that control based marketing procedures enforced by the Government mightnot be effective. E. CURRENT INSTITUTIONAL, REGULATORY AND F!ISCALFRAMEWORKS 27. The institutional arrangements in the mining sector inSierra Leone have changed little since the colonial times, with only minor modifications. The experience of other countries suggests that a number o f changes would be beneficial, such as the introduction of the concept o f a "one stop shop" which facilitates the processing o fprospective investments. 28. Institutional Framework. Management o f the mineral sector i s under the responsibility o f the Ministry o f Mineral Resources (MMR), which includes the Geological Survey Directorate (GSD) and the Directorate o f Mines (DM). Additionally, an inter- ministerial Advisory Board, chaired by the Director o f Mines, advises the Minister on all matters o f mining and mineral policy. Furthermore, the state owned Government Gold and Diamond Office (GGDO) has responsibility for operational activities related to diamonds exports, which mainly concem sorting, valuations prior to exporting, and collection of duties on behalf o f GOSL. MMR i s the lead agency for mineral sector management. The functions o f an effective mineral sector lead agency involve principally: (i)maintenance o f stakeholder dialogue inthe determination o f national mineral policy; (ii) formulation, implementation and enforcement of mining legislation and regulations; (iii) geo-scientific research, data capture and promotion o f national mineral potential; (iv) mineral commodity statistical analysis, and domestic and international investment research; and (v) inter-jurisdictional consultation, liaison, coordination and public relations. The effectiveness o f the MMR i s constrained by the severe shortage of human resources and equipment. This i s exacerbated by the inability o f the staff to set the mainpriorities for the ministry. 29. Geological Suwey. The main activities o f the GSD include regional geology, mapping, general prospecting, and monitoring o f geological prospecting and exploration conductedby private parties. It i s responsible for the collection, compilation, publication and dissemination of geological and mineral resource data o f Sierra Leone, and for the preparation and provision o f reliable geological maps. However, GSD is seriously affected by lack of staff, equipment and funding. While adequately structured to fulfill its mandate, the professional staff i s over-extended and unable to carry out minimum duties. The Geological Survey i s constrained by the inadequacy o f office logistics and equipment and instrumentsfor geological regionalreconnaissance work. As a result, the Survey is providing little support to miningdevelopment inSierra Leone. 30. Directorate of Mines. The DM consists o f field inspectorate, administration and accounting units. It i s mainly involved in: a) processing and granting prospecting, exploration and mining licenses; b) collecting license fees; c) inspecting and monitoring mining activities; d) maintaining sectoral statistics; and e) awarding licenses for dealers and exporters. Inaddition, it i s involved in sectoral policy and strategy matters. Its field offices are located inthe four major miningareas. Its field activities are critically understaffed, with only about 40 percent o f positions filled. This lack o f capacity prompted the introduction of ad hoc measures, such as the award o f artisanal mining licenses through paramount chiefs, which i s a disincentive to potential investors. The lack o f mine wardens i s o f major concem because o f their broad responsibility coverage including field monitoring, health and safety - 7 - aspects, enforcement of regulation, and extension services, all which require substantial training. 31. Regulatory and Fiscal Framework. The mining sector functions under the Mining Act 1998, which is now under review. This i s supported operationally by supplementary guidelines issuedby the MMR,which address new policy measures related to small-scale and artisanal mining, marketing of precious minerals, and details on licensing procedures includingdetailed lists o fthe various applicable license fees. 32. This framework evolved from legislation prepared in 1994 called the Mines and Minerals Act, 1994 - M M N 9 4 (enacted as an NPRC decree and subsequently adopted as an Act o f Parliament in 1996). The original design reflected experiences o f other mining countries, customized to the conditions o f Sierra Leone at that time. Detailed regulations to implement the provisions o f the Act were drafted in 1995, but were not promulgated due to the war. In December 1998, amendments to W 9 4 were enacted by Parliament to add provisions on sale o f precious minerals by license holders, unlawful possession o f precious minerals and smugglingof precious minerals from Sierra Leone. Further improvements inthe Act dealt with increased transparency and procedural simplification for awarding mineral rights and reduced discretionary powers and attributions o f the mineral authorities. The fiscal provisions and incentives framed on a project specific basis, with large-scale operators included through the Agreement provisions o f MMN94, were also reasonable by intemational standards. The environmental management provisions specified in M M N 9 4 and the draft regulations comply with the intent o f Environmental Protection Act, 2000 (EPA/2000), but arrangements for mine-site environmental inspection and effective co- ordination between MMR and the Department o f the Environment have yet to b e established. The subsequent development of the regulatory framework was impactedby the conflict. 33. Licensing. Current licensing procedures are covered by: (i) the Mining Act, 1996, (formally referred as DecreeN o 5 o f 1994); (ii) the Details ofNew PolicyMeasures Relating to Small-scale and Artisanal Mining and Marketing of Precious Minerals, referred as New Policy Measures; and (iii) the Mining Act, 1998. All licenses for mining, dealing or exporting are awarded by MMR (with the exception o f the awards by Paramount Chiefs mentioned above). Dealer licenses are awarded by the Director of Mines, with appeal resolutions under the Minister. Export licenses are awarded by the Minister, on recommendation from the Director o f Mines (details on artisanal, small-scale, dealer and export licenses are provided in Annex 1). About 75 percent o f licensed dealers are Sierra Leonean citizens. In 2001, Lebanese and other non-Sierra Leonean nationals accounted for over 80 percent o f official exports. Attempts to increase the involvement o f Sierra Leone citizens inthe diamond export trade has resulted ina series o f measures within the regulatory framework to favor domestic companies, such as: (i) the limitationof export licenses to seven groups, one of which was reserved for Sierra Leonean citizens; and (ii) the lower license fees applicable to Sierra Leone citizens to encourage them to participate. However, domestic expohers only managed a small percentage o f exports in2001, This approach has not been a success so far, and has not added to Sierra Leone's image as a place where business can be done freely and fairly. There is need to update mineral law and regulations to ensure intemational competitiveness inrespect o f granting and administering mineral rights ina fair and transparent setup. - 8 - Table 4: License Fees for Diamond Dealers and Exporters License Fee ($) Exporter, Sierra Leonean 5,000 Exporter, non-Sierra Leonean 30,000 Dealer, Sierra Leonean 1,000 Dealer, Ecowas citizen 1,500 Dealer, non-Sierra Leonean, non-Ecowas 3,000 Dealer's agent 500 34. Banking guidelines for diamond exporters were issued by the Ministry o f Finance in December 2000, and by the Bank of Sierra Leone in February 2001, and June 2002. They direct exporters to channel the inflows o f US.Dollars into Sierra Leone through the banking system. Central Bank regulations require exporters to deposit foreign exchange generated by overseas diamond sales with the commercial banks. Exporters complain about weaknesses in the banking system, which makes it difficult to withdraw the foreign exchange deposited in the commercial banks. 35. The structure and enforcement of the current mineral framework has allowed continued channeling of alluvial diamonds and gold through unofficialchannels. F. ASSESSMENTPERFORMANCE OF 36. Sierra Leone vs. Successful Mining Countries. The performance o f the mining sector, interms o f investments and expansion as well as interms o f the sector's contribution to sustainable development, has been disappointing despite the country's attractive mineral resource endowment. As mentioned above, stagnation had already taken hold prior to the onset o f the conflict, mostly because o f a lack o f an enabling environment attractive to investors. Investments in mining, if any, were limited to operational, capacity and cost targets, mainly to ensure continuity o f production. The situation was aggravated by government's tendency for excessive control and attempts to raise fiscal revenues through higher taxation in the 1980s. As a result, a major part o f mineral production from alluvial diamond and gold mining was traded outside the formal economy. Illegal exports o f diamonds are estimated at 70%-80% o f total production throughout most o f the 1980s and 1990s. This tendency contrasted with the pragmatic steps undertaken globally by many other miningcountries, inparticular inAfrica, where new investment frameworks were established since the late 1980s. These frameworks encouraged investment into exploration and mineral production and ledto enhanced international competitiveness and lower production costs. 37. Output, Exports and Fiscal Revenues. The operating environment worsened for the mining sector as a consequence of the conflict. All mining activities by SRL and SIEROMCO ceased, together with gold and official diamonds mining, which were conducted solely by artisanal miners. SRL tried to reactivate production briefly on the basis of stockpiles in 1996 and 1999, and i s presently considering new investments to reactivate production and rehabilitate existing installations. SIEROMCO exported its remaining stockpiled material during 1996-97, and finally ceased operations in 1998. It eventually transferred existing facilities and mineral rights to the Government. Formal gold exports have been negligible from the early 1980s. Formal diamonds exports decreased from US$28.3 millionin 1996, to a bottom o f US$2.2 million in 1999 and then started to increase after the adoption o f the Certificate o f Origin scheme in October 2000. Official diamond exports exceeded US$40 million in 2002. However, activities in small-scale and artisanal informal diamond miningcontinue to be significant. - 9 - 38. As a consequence, the average share of the mining sector in GDP decreased from a peak of 30 percent in 1992 (based on recorded exportsg) to less than 20 percent (including unrecorded diamond exports) between 1997 and 2000. While the average share of mining in total exports remained above 80 percent from 1992-2000, the share o f unofficial mining exports (largely diamonds) represented more than 50 percent o f total exports during the period 1993-2000. Estimates o f diamonds exported annually range between US$70-$250 million"; however, only a fraction o f that passes through formal export channels. These have been smuggledout and the proceeds have been used to finance rebel activities inthe region, money laundering, arms purchases, and funding o f other imports such as rice. With mining sector exports at the low levels, Sierra Leone has seen the emergence o f a large current account balance inthe last decade which raised the need for significant additional foreign aid to finance basic imports and meet other fiscal obligations. 39. The failure to combat illicit miningand widespread smugglingof gold and diamonds in addition to the closure of rutile and bauxite mines has significantly reduced public revenues from the sector. Consequently, average annual government revenue to GDP decreased from 7.2 percent from 1990-92 to 1.3 percent from 1993-2000. The poor performance o f the mining sector has also contributed to a weak growth pattern. The average real annual GDP growth, already negative before the conflict (minus 6.9 percent over 1990- 1992), continued to be negative, standing at an average o f minus 4.6 percent over the period 1995-2000. 40. Employment. In 1991, production o f rutile directly involved 2,250 workers, making it the largest single private employer in Sierra Leone. Direct employment in bauxite production was about 1,000, With the closure of these mines in 1995 and delays in starting upkimberliteproduction, employment inthe large-scale miningsector hasbeennegligible. 41. There is no reliable survey information inrecent years about the numbers involved in artisanal diamond mining. A labor force survey conducted by the Government during 1988- 89, estimated that artisanal mining involved over 250,000 people. Subsequent assessments estimated the workforce o f artisanal diamond mining comprised o f between 20,000-40,000 formal diggers, involving a regular working core o f about 20,000-25,000 diggers, and seasonal peaks with 30,000-40,000 diggers. The associated population o f immediate family dependents could include 100,000-200,000 people. In the absence o f concrete industry data that would allow estimation o f forward and backward linkages, and based on fragmentary data from local records, it i s roughly estimated that about the same number would be indirectly dependent on this industry. This represents a total number o f about 200,000- 400,000 people dependent on artisan diamond minin for the greater part o f their livelihood, meaning that between4 % and 8% o f the population o f Sierra Leone i s directly or indirectly If Unrecordedexports were not estimated inthe early 1990s. lo In 1999,De Beersreviewed activities ofdiamonddealers involvedintrade from SierraLeone and estimated awide rangeof likely production level for that year - betweenUS$35-100 million, with US$70 million consideredas a "best guess". '* The UNDemographicYearbook (2001) estimatedthepopulation of SierraLeonein 1999at 4,717,000 people. This appears a reasonableestimate underthe current circumstances,although the impact of 10 years of war, with relateddisplacementsoflarge sectionsof the population, family breakdown and diredindirect increases in deathrates is not known. - 10- dependent on artisanal and small-scale alluvial diamond mining. This number couldpossibly double ifwe include illegal diamondmining.l2 Table 5: Estimates of Artisanal Diamond Miners and their Dependents "Employment statistics" G. INCOME GENERATION ARTISANALDIAMONDMINING AND TRADING IN 42. The population dependent on miningsector i s large. However, as the analysis below shows the rewards, in terms o f income generated, are not very high compared to the per capita income. Thus, while miningi s a good entry point for the large number of unemployed people, it is in the best interest of the people o f Sierra Leone to look towards other income generating activities in agriculture (away from subsistence), manufacturing and the service estimated to be low - primarily because o f their large numbers and low productivity, rather sector. The analysis shows that per capita returns to artisanal miners in Sierra Leone are than the share o f rewards they receive as a group. 43. In an economy with generalized unemployment and under employment, the usual expectation i s that workers would make themselves available for returns slightly above rural subsistence incomes. However, inthe case o f diamond miningthere i s an additional gamble factor, as entry into the industry will be motivated not only by pay levels, but also by the subjective estimate on possibilities o f large benefits, from sharing returns from big finds. Over the years, this might account for more labor committed to the industry thanjustified by actual returns. 44. The analysis is made onthe followingpremises: 0 Diggers are engaged on the basis o f receiving subsistence from the artisanal mining license holder during the period o f work. They are financially rewarded with fifty percent o f any eventual diamond sales, over and above the working costs incurred by the license holder; 0 The license holder employs up to 30 diggers on any one license; '* Although more conservative, these estimates are generally consistent with assessments derived from the number of authorized licenses. Current legislation enables an artisanal mining license holder to employ up to 50 workers within the area of a license. Available historical data between the late-1950s and early-l970s, indicate an average actual worker usage at apparently 15-30 workers per license. On such basis, given the existence of about 800 artisanal licenses in mid-2001, it is likely that between 12,000-24,000 people were employed. However, as of early 2002, the Kono and Tongo Fields areas had not yet beenbrought back within the licensed mining setup following the war-time disruption. Hence all the digging in those areas, which constitute the best mineralized zones in the country, was illicit and may involve a similar number of illicit miners. - 11- An average margin of around 3-5 percent for exporters, and margins inthe region of 5-8 percent for dealers has been used based on widespread reports by exporters and dealers; The share derived by the government from export tax and license, and fees on exporters, dealers and miningrights holders approximates to 6 percent; The share of local communities derives from a portionof the export tax, and the local access fees including ground rentals, which are paid at the time of the award of a license. It approximates a total o f 0.83 percent, which i s a portion o f the 6 percent share o f the government. Table 6: BreakdownofDiamond Costs and RevenuesbetweenPrincipalStakeholder Groups (50:50) Licenseholders 36.5-12 9.125-3 500-800 18,000-4,000 Diggers 36.5-12 9.125-3 20,000 450-150 45. Based on 2001 data, an estimate of the basic division o f reward between the various players in the sector i s given in Table 613 (a detailed explanation of these estimates i s provided inAnnex 5). 46. The principal conclusion suggested by the analysis is that the diggers as a group, do not receive a disproportionately small share o f the rewards inthe sector. This conclusion i s re-emphasized when it i s appreciated that a significant part o f the working costs inthe model relates to the diggers' food and other needs during the period they are actively mining. However, because they are very numerous, their ultimate average per capita share i s close to, or evenbelow the subsistence income levels inthe rural economy. 47. The standard of living o f diggers might be improved through the use of improved technology and recovery techniques. The achievement of such gains will be crucially dependent upon: (i) improving the knowledge and skills base o f the miningparticipants; and (ii)improvingaccessto the necessaryfinance. Onthefirst issue, currently, thelevelof technical training among the participants in the artisan mining industry i s very low. Improved technical training would not only lead to more efficient mining, but also to better safety and environmental practices. This matter needs consideration at both the regulatory and the operational levels. At the regulatory level, artisan mining licenses and Mine l3 It is to benotedthat there are substantialuncertaintiesabout the figures usedinthe model. Higher exports would entaila larger number ofindustryparticipantsat all levels. However, the final columnon Rewardper Capitaprovides a range of estimates, which are plausibleintheir approximateabsoluteandrelativevalues. The broad implicationsthat can be drawn from the model are likely to berobust - 12- Managers' Certificates are presently issued without any significant requirement of qualifications or experience. However, these constitute the clear path to introduce higher standards in the field. The award and/or renewal o f licenses and certificates should be made dependent upon acquiring adequate levels of qualification and/or experience. Nevertheless, such a change in license requirements should not be imposed abruptly, but should be based on the establishment o f a satisfactory training program. Accordingly, technical training courses should be developed for industry participants. The initial targets for technical training should be staff o f MMR zonal offices including superintendents and wardens, and industry participants includingmines managers and license holders. Other groups who would benefit from appropriate training are specialized workers such as mechanics and machine operators. As a first step towards initiating training programs, MMR should establish a database o f people qualified to provide training. 48. On the second issue related to access to capital, it i s to be noted that artisanal mining operations received substantial support during the 1960s, from the American Aid Revolving Loan Fund. It operated by purchasing equipment and re-selling it, at near cost to holders of mininglicenses, or by extending credit through loans or hire-purchase agreements. Surplus o f funds were invested. This scheme was popular with miners because it freed them from financial dependence from dealers and other sponsors, which could establish prior claims on their production. MMR would like to re-establish such a scheme, oriented to supply larger equipment items such as bulldozers and draglines, on a rental basis to the miningindustry. A preliminary proposal included estimates for initial investments o f about US$3 million, to be operated by the private sector. This proposal involves a very high risk, but the general concept has merit if developed on a private sector basis, and requires further study on the range o f equipment required, the likely market for such equipment, the respective financial return on investment, and the potential sources o f financing. 49. direct revenue^'^. This, however, understates the contributions from the diamond industry to The local communities derive less than 1percent o f the total diamond production in the host communities. For example, traditionally a residence tax has been imposed by chiefdoms and the increased populations o f the diamond-producing chiefdoms give rise to higher residence tax revenues. Nevertheless, it is widely acknowledged by the Government and the mining industry that local communities do not receive a proportionate share of the diamond revenues. This i s being partially addressed through the establishment o f the Diamond Area Community Development Fund (DACDF). In the context of efforts to increase decentralization and strengthen local government, it i s appropriate to increase the revenue share going to local communities. This has the merit o f increasing the incentive for communities to promote local mining activities. In addition to the strictly economic justification, the distribution o f mining revenues favoring communities also brings political and social stability reducing the chances o f renewed conflict. 50. Factors affecting the performance of the diamond industry. Three fundamental characteristics of artisanal mining o f alluvial diamonds have traditionally made it very difficult to monitor and control their production and trade, while facilitating and/or inducing smuggling activities. First, diamonds have very high value to weight and volume ratios. l4It is to be notedthat while 1percent maynot seem like a significantamount under the current low levelof official exports, the absolute amount will become significant if official diamondexports increasesharply from $25 million to $100 or $150 million. InGhana, for example, miningcompaniespay a tax on netprofit o f at least 25 percent. Ofthis, 80 percentis retainedbythe Treasury, 10percent is givento the mineralinstitutions andthe remained 10percent is allocatedfor the communities. However,appropriatemechanismsare only now beinginstitutedto effectively usethese resourcesat the community level. - 1 3 - Second, the mining sites involve diffuse configurations, which are widespread and easy to work with simple and even crude technology. Third, the economic and social organization - with many actors, intricate divisions of labor, and informal business relationships - seldom reflects the existing regulatory setup, and its formal rules-of-the-game. 51. To encourage regularization o f diamond trade through official channels, the Government introduced a low export tax and a liberalized foreign exchange regime during the early 1990s. The only taxation, other than the normal standard income tax assessments to which the participants in the diamond trade in Sierra Leone are subject, i s the 3 percent export tax. N o other turnover or profits taxes are levied. As the cost o f smuggling i s generally estimated at 2-3 percent o f revenues, the present level o f taxation i s not a decisive factor in Sierra Leone. Some o f the other factors that affect the efficient functioning o f the diamond market and encourage smugglingare: . The banking ~ystem'~. Diamond exporters presently use the banking system only to clear the foreign exchange, which i s required under the Certificate o f Origin Scheme16. The hard currency i s imported physically and traders normally use the parallel market for other foreign exchange transactions. The internal market dealers do not use the banking system. The banking system i s affected by a) lack of reliable supply of foreign currency; b) fees, commissions and exchange rates that are perceived as uncompetitive by the diamond industry; and c) insufficient level of capitalization to support credit requirements. A more efficient banking systemwould be very useful for the diamond trading business. Tumaround times can be decreased significantly, ifhard currency i s readily available from the commercial banks inSierra Leone. Currency availability i s crucial when the market i s on a spike and traders need to buy quickly. Additionally, banks have a significant role in reducing physical risk . involved intransporting large amounts o f currency. Access to capital, particularly working capital. Miners typically seek funds from traders and exporters, which provide working capital, equipment for hire, food items, and in some cases housing. The cost o f their support i s deducted from the mineral sales. The breakdown o f cost o f a typical artisanal operation based on a low level o f mechanization i s shownbelow: (i) Costofacquiringlicense $ 200.00 (ii) Landclearance,useofbulldozerfor $ 500.00 8 hours for digging area (iii) Stripping:$1000/acrea/dayfor5days $5,000.00 (iv) Extraction (water pumps) $8,000.00 (v) Miscellaneous $1,000.00 -----_------ Total (approx.) $15,000.00 ''In the past, insistence on using Leones has encouraged smugglinginorder to acquire foreign exchange. It has also squeezed the margins o f diamond traders tryingto operate through legitimate channels. Leones acquired through parallel channels, either by black market currency purchase or through the gray market imports o f essential goods, canbe usedto raise local purchase prices squeezing legitimate traders out o fthe market. This difficulty has disappeared, as inprinciple, exporters have gained access to foreign exchange under a liberalized foreign exchange regime. l6See Annex 2 for details on the Certification o f Origin Scheme. - 14- However, working capital supplied through the banking system i s mainly available from few banks which specialize in diamonds business and have built up in-house trade knowledge to appraise credit related to such business. This credit i s not readily available to domestic participants in Sierra Leone, in contrast with external participants that have access to bank credit abroad, inimportant market locations such as Antwerp. . License Fees. The existing license fees appear modest by the standards o f the diamond trade. However, official exports reached US$26 million during 2001, with about 140 licensed dealers operating by mid-year. The average turnover for each dealer was about US$185,000. With a typical margin o f about 7 percent for each dealer, their respective average gross profit would be around US$13,000. Therefore, license fees at betweenUS$l,OOO-3,000 constitute a significant cost for most dealers, . which accounts for the significant number o f unlicensed dealers. Collusion between exporters. Collusion between principal exporters often eliminates price competition for given parcels o f diamonds, or for stones considered o f special quality. This places the miners and dealers at a disadvantage. Concerned about low prices offered by exporters, dealers are advocating for reactivation o f the Diamond BuyingCorporation and reduction of exporter license fees, to increase the number of . exporters and foster competition. Lack of overseas contacts. Entry to export trade by domestic groups i s hindered by the lack of necessary trading contacts in overseas markets, particularly in Antwerp. Several participants are at disadvantage by a lack o f immediate knowledge o f . international price trends. These trends are relayed to the domestic internal market through the exporters. Security. By'mid-2000, most dealers were located inFreetown, Kenema and Bo, due to security concerns. Easier movement by dealers and their agents would increase competition to purchase diamonds from the miners, possibly leading to higher . rewards to miners. Bureaucratic delays, and uneven application, compliance and enforcement of the law. Slowness and unevenness o f application o f law in situations where breaches are apparent generate inequalities between participants in the diamond market, and induces a systematic bias against legitimate trading, in favor o f illicit dealing. Institutional weaknesses as well as limited capacity o f the staff o f the MMR, unless addressed systematically, will continue to provide a fertile breeding ground for corruption and smugglingo f these precious minerals. 52. To limit the access of rebel groups to revenues diamond sales, the Certificate of Origin Scheme was introduced in October 2000, in accordance with the Resolution 1306 (2000) o f the United Nations Security Council. The resolution imposed sanctions against rough diamonds imported from Sierra Leone (and Angola) without certification. The Kimberly Process is a separate response to the same issue (see Annex 2). It aims to introduce a transparent international diamond trading regime through certification (to be launched in January 2003) and publication o f trade information. Participation inthe process i s voluntary, and includes governments, firms involved in activities related to diamonds, intemational agencies and relevant NGOs. - 15 - H. ENVIRONMENTAL, HEALTH SOCIALIMPACTS AND 53. Artisanal mining i s wasteful as currently practiced. Both, in mining and in processing, it has negative impacts on the environment, and has poor health and safety characteristics. Inthe years before the conflict, there hadbeen some increased mechanization o f artisanal diamond diggings. Overburden strippingwas increasingly done with bulldozers, or alternatively with small draglines in areas of deeper overburden cover. Bulldozers and front-end loaders were also used for coffer-dam construction along rivers. Additionally, river dredging was conducted with bank-sited or pontoon-mounted suction pumps. On the other hand, the processing end was less mechanized although locally manufactured small gravity basedjigs were widely used. Few larger jig plants were also introduced in the early 199Os, but their preparation of feed-supply was quite rudimentary. Furthermore, small companies were formed to support the mechanization endeavors. However, the uncertainty and unrest created by the rebel war cut short these activities. 54. The legacy o f ahisan diamond mining includes widespread environmental degradation. The main environmental and social impacts from alluvial mining in Sierra Leone include: Land and soil degradation as a result o f rudimentary and inefficient mining and processing methods, including effects o f uncontrolled pit-digging with no routine backfilling; destruction o f vegetation and topsoil removal; River bank erosion affecting gravel and soils, with adverse downstream impacts on health as well as agriculture; Deterioration of water, and breeding o f mosquitoes and micro organisms through disruption o f natural drainage and silting o f drainage courses; Discharge from machines, including seepage and pollution of residual oils to water and soil; Creation o f irregular spoil heaps, and generally uncontrolled disposal o f waste. Use o f child labor and resultant lost opportunities for schooling; Erosion o f traditions and indigenous cultures; Drugaddiction Overcrowding in mining areas, intensifying the health and sensitization problem and creating an insecure environment for the young Highexpectations from mininglead them to ignore the potential from agriculture and other activities. 55. There are also concerns regarding the physical safety of the mine workers. Many accidents occur due to poor safety consciousness both in pit construction and use o f machinery. Ore haulage over long distances to processing sites also poses safety problems. Additionally, there i s a typical lack o f protective clothing in mining operations. Physical danger i s also high during mine undercutting under conditions o f poor pit stability, which could lead to pit collapse endangeringthe lives o f workers. 56. Negative environmental and health impacts are not only borne by the artisan miners but also by neighboring communities. Negative health impacts from artisan mining include increased water-borne diseases; diseases propagated by overcrowding, poor housing and poor sanitary provisions. Disrupted drainage and extended exposure to water tum open pits into breeding grounds for mosquitoes, spreading diseases like malaria and bilharzias. Exposure to - 1 6 - HIV/AIDS has become a major risk in the mining communities, as more disarmed ex- combatants have resettled inthese communities. 57. Environmental matters have been addressed in the Mines and Minerals Act o f 1996, and inthe National Environment ProtectionAct, 2000 (NEPN2000). The latter establishes a National Environment ProtectionBoard to facilitate coordination among Ministries, agencies and local authorities in all areas relating to environmental protection. EPN2000 also specifies the responsibilities o f the Department o f the Environment charged with coordinating all environmentally related activities and "promoting the establishment of national environmental standards". It also addresses the necessity to obtain an environmental impact assessment (EIA) license for certain projects, to be determined as subject to EIA provisions. It provides guidance about the conditions under which EIA license applications will be required, and about the general contents o f an EIA. A National Environmental Fundhas been established with resources provided by Government and donations, grants and bequests. The objective o f this fund i s to support environmental research, analysis, and public education programs. However, considerable concerns exist on the adequacy o f regulation, and on the institutional capacity and setup to effect the legislation. An artisanal license holder is required to pay a rehabilitation fee before receiving a license. A small-scale license holder, on the other hand, can opt either to carry out effective rehabilitation o f hismined-out areas, to the satisfaction of the Director o f Mines and the Environmental Department, or to pay a rehabilitation fee to the Rehabilitation Fund. Currently, the fund has Le 80 million in treasury bonds, and L e 40 millionincash inthe bank, A Cabinet sub-committee has been set upto manage the fund. 58. Additionally, there i s an Agricultural Development Fund intended to support the development o f agricultural schemes in communities associated with large-scale mining. However, despite the establishment of these funds, rehabilitation o f mined out areas has not yet been conducted. Furthermore, to addresshealth and social needs o f miners, and to provide alternate livelihood schemes, the Government has set up the Mining Area Community Development Fund, which i s supported from diamond export taxes. I. POTENTIAL 61. The above sections provide an assessment o f performance o f the mining sector within the current institutional, regulatory and legal framework. Contribution o f the sector to GDP, export earnings, employment and revenues is based on the verified geological endowment. The true potential o f the sector can be attained by following a two-track approach: (i) fully exploiting the potential that exists - currently identified as well as that requiring further geological investigation and analysis; and (ii) revising the mineral frameworks to attract potential investors in large-scale mining and create better living conditions for artisanal miners. 62. The main identified prospects in the non-precious, large-scale mining include rutile and bauxite -the existing concessions as well as those identified at Port Loko for bauxite and Rotifunk for rutile. While the demand for bauxite and rutile has not shown strong upward trends in the past two years, the high quality o f ore for both the minerals and the expected pick up in demand in 2003 and beyond" augers well for the Sierra Leone mining industry. Identified prospects in the precious mineral sub-sector include: (i)alluvial diamonds and gold; (ii)non-alluvial diamonds on terraces; (iii) diamond bearing kimberlite pipes; and (iv) "TZMineralsInternationalprojectsthattitaniumdioxidepigmentdemandwillgrowby4percentin2003. - 17- hard rock gold. Further geological investigations and analysis i s needed to confirm and quantify: (i) titanium minerals in several regions including areas near the Mabole and Little Scarcies Rivers, and with combined ilmenite and rutile minerals containing col-tan in the Sula Mountains; (ii) deposits in the Moyamba and Bonthe districts; (iii) kaolin platinum in the Freetown igneous complex; and (iv) graphite mined earlier at Moselolo, which appears to compare favorably with grades currently mined successfully inother countries. 63. The development of existing mineral potential will require reversingthe present low levels o f exploration. From international experience, it i s observed that a growing mining sector requires annual exploration investments o f about 10 percent o f the value of mineral production. In Sierra Leone, this would imply exploration investments o f about US$15-40 million annually. The lower amount reflects formal export levels, while the higher amount also accounts for illegal exports. However, even the lower amount i s considerably higher than pre-conflict exploration expenditure levels in Sierra Leone, estimated at less than US$1 million annually, which was mainly to maintain production at existing levels. 64. The mineral frameworks in Sierra Leone - fiscal, legal, institutional and environmental - have not kept pace with the changing international business environment, largely due to the disruptions and setbacks caused by the civil war. At the same time, administrative capacity o f the key miningsector agencies has weakened. 65. Within a decade, the successful realization of the large-scale mineralpotential of the country can result inthe establishment o f four new minesinaddition to the reactivation o f the existing three mines, and the development o f two already identified deposits - rutile and bauxite. Annual production could amount to U S 3 7 0 million. Direct and indirect employment in these mines could amount to about 38,000 people. An estimated 300,000 people (including dependents and extended families) could derive their livelihood from these mines. Creation of a better operating environment for the artisanal miners will lead to productivity gains and better living conditions for these miners and their dependents. It will also provide a favorable environment for channeling alluvial gold and diamond exports through official channels. Mines Annual production Productionvalue Direct Indirect US$ million Employment Employment 2 rutile mines 330,000 tons 138.6 2,500 7,500 2 bauxite mines 2,500,000 tons 65.0 2,000 6,000 2 kimberlite mines 450,000 cts 76.5 2,000 6,000 3 gold mines 300,000 oz 90.0 3,000 9,000 Total 370.1 9,500 28,500 - 1 8 - 11. ROLE OFTHE MININGSECTORINPOST-WARRECOVERY A. VISIONAND POLICY OBJECTIVES 66. With the war over and security and peace restored throughout the country, the Government's vision for the mineral sector i s to have a strong, vibrant, and well-organized private sector led large and small-scale (including artisanal) mining industry. The industry will operate within a safe and environmentally sound framework that is cognizant of the social and cultural issues facing Sierra Leone. It i s envisaged that the sector will contribute to post war recovery and sustainable economic and social development by creating employment and income opportunities, particularly for the rural communities and the demobilized ex-combatants; social and economic infrastructure development; foreign exchange earnings; and revenues for the government budget. 67. The Government's goals for large-scale mining are to increase output, employment, fiscal revenues and foreign exchange through: (i) reactivating existing rutile, bauxite and diamonds mines; (ii)promoting the development o f an existing pipeline o f identified promising deposits; and (iii) promoting exploration o f favorable geological target areas to ensure developing and maintaining an adequate pipeline o f promising prospects that can be proposedto potential investors. 68. Inthe considerably more extensive small-scale and artisanal miningsub-sectors, the Government's goal i s to improve the productive activities and overall standard o f living of the involvedcommunities, through: (i) modernizing the licensing o f all mineralrights usinga first-come-first-sere approach with rapid and transparent processing - incorporating an integrated cadastral system, which i s duly supported by satisfactory monitoring, administration and enforcement o f existing rights; (ii) facilitating mechanization through the establishment o f a credit or revolving fund scheme to enable the purchase, rent or lease o f equipment, which in turn would reduce the dependence of miners on existing financing arrangements that have often resulted inpatronization and continued poverty; (iii) providing extension services to assist miners in selecting best areas to mine in their mineral concession areas, planning the mining activities, processing the ores adequately, ensuring sound environmental and safety conditions, and administering excavating work with adequate mechanisms to identify diggers with license holders through tagging arrangements; and (iv) providing a level playing field for the license holders as well as diggers through training to enhance their product evaluating capabilities. With adequate monitoring, enforcement and compliance o f the rules o f the game, this will improve their realized trading prices. 69. Role of Public and Private Sectors. Successful private sector led mineral development will require continued peace and stability; stable macroeconomic environment; predictable and transparent legal and fiscal frameworks to attract foreign and local investment in exploration and mineral development; and strengthened capacity of the Government to provide adequate geological data to monitor and regulate the sector. Therefore, the Government's strategy i s to define and enact clear, non-discretionary, and consistent policies for the sector; to promote private initiatives and investments; to administer mineral rights; to gather and provide basic geological information; and to ensure that mining development i s environmentally and socially sustainable. Other activities, such as exploration, development, exploitation, beneficiation, smelting and refining, as well as mining and support services are left to the private sector. The private sector, in partnership with the communities, will also develop credible opportunities to benefit the economy and improve the social life o f these mining communities. - 19- 70. With this understanding, the Government's mineral policy framework sets out to provide conditions conducive to attract new investment for exploration and mining development for large-scale mining operations and encourage indigenous entrepreneurs to develop small-scale artisanal mining. Accordingly, the Government's mineral policy framework sets out to: stimulate investment in the sector by establishing an enabling environment which promotes private participation; ensure that mineral wealth supports sustainable economic and social development of the communities; regularize and improve artisanal mining through security o f tenure for licenses and leases; minimize and mitigate the adverse social and environmental impacts o f mineral development; encourage and promote technology transfer; harmonize policy with those o f competing countries to discourage smuggling and encourage trading through official channels. DEVELOPMENTAN INTEGRATEDNATIONAL OF MINERAL POLICY FRAMEWORK When immediate issues of reconstruction and government capacity building have been addressed, the Government will proceed to formulate an Integrated National Mineral Policy (INMP) Framework. Its key objective i s to promote the country's mineral sector as a socially responsible, and economically important engine o f growth. Development of the INMP framework takes time and involves the following steps: Formulation, in a widely participatory manner, and ensuing formal approval of a National Mineral Policy, which i s realistic inthe national and international economic context, and i s sensitive to the social and environmental impacts o f mining; Drafting o f mininglegislation and regulations based on the policy directives; Buildingand/or restructuring linkages between central, regional and local authorities to facilitate the effective administration o f the legal provisions and prescribed regulatory requirements; Strengthening o f professional capabilities at key positions responsible for implementing,monitoringand enforcing the legal and regulatory regime; and Building liaison and networking systems between government agencies, private sector, local communities and advocacy groups, to ensure transparency, effective decision-making, accountability, and facilitation of smooth sectoral activity. Full implementation of this agenda will take some years. Sierra Leone has certain advantages which will allow it to proceed quickly with initial reform measures, while moving along to develop the longer term cross-sectional development o f a National Mineral Policy. That advantage is the existing Mines and Minerals Act, 1996, which already has some o f the fundamental international best practice principles necessary to build a balanced investment- friendly, socially responsible mineral sector management framework. MMR has further improved the act with additional draft social and investment amendment, largely related to the artisanal mining sub-sector. This represents an important positive step, since the development o f balanced core mining legislation i s a complicated, time consuming, and critical buildingblock inany national mineralpolicy reform sequence. - 20 - 73. The key factors that determine successful mining development are: (i)sound macroeconomic and trade policies that provide a stable environment, access to foreign exchange, and few restrictions or controls on mineral exports or needed imports o f plant, machinery, services or related supplies; (ii)a fiscal framework that i s equitable for the concerned stakeholders; (iii)a legal and regulatory framework that i s transparent and adequately defines the investors rights and obligations; (iv) an institutional framework and administrative capacity that responds to the needs o f the private investors in an efficient and transparent manner; and (v) appropriate environmental and social management policies. These factors underpinthe development o f a comprehensive mining strategy. The remainder o f this section provides an analysis o f these principal factors based on international experience and best practice to guide the development o f a sustainable miningsector strategy for Sierra Leone. c. MACROECONOMIC AND TRADE POLICIES 74. Sound macroeconomic and trade policies have a strong influence in shaping the performance of the miningsector. Inflation, exchange rate policies, government expenditures and the balance of payments affect private sector development and investment in mining. Eventhough the sector's linkage to local industries in Sierra Leone i s limitedbecause mining products are exported and many o f the inputs are imported, these linkages are especially important for large-scale mining. Mining companies need access to foreign markets as well as foreign exchange funds to pay for imports. Restrictions on the availability o f foreign exchange in the 1970s and 1980s resulted in a large part o f diamonds being traded in the parallel market. Ceterus paribus, a sound trade environment that provides an unrestricted right to export and assurances to import the necessary items, including foreign currency i s more attractive for private companies to invest in. 75. Recognizing this, the Government o f Sierra Leone has undertaken significant economic reforms during most o f the period from 1989-96 despite the destabilizing influence o f the civil war. Exchange and trade systems were liberalized; price controls were lifted; revenue collection and expenditure management were strengthened; financial regulations and the banking sector were reinforced; and key actions in the areas o f public sector and civil service reform were undertaken. The military coup d'Ctat o f May 1997 interrupted this process. The achievements inmacroeconomic stabilization were partially reversed under the junta regime. However, with the restoration o f democratic institutions, Sierra Leone i s starting to rebuildits economy all over again. To attract private investment ingeneral, and in mining in particular, the Government recognizes that the maintenance of macroeconomic stability and a sound trade environment is critical. To achieve this, it will have to faithfully implement its economic program prepared for 2002-05. Monetary policy i s aimed at controlling inflation. Low inflation will relieve pressure on prices of basic commodities and will contribute to the establishment o f a stable environment for the recovery o f economic activity, and thereby o f improving income opportunities. Foreign exchange auction, introduced in February 2000 has led to a significant reduction in exchange market segmentation. However, the process needs to be further strengthened to ensure easy access and better availability o f foreign exchange. Sierra Leone will also need to complete its trade reforms to bring its tariff rates inline with those o f its neighboring countries." l8To this end, Sierra Leonebeganimplementationof the ECOWASCommonExtemalTariff in2005. -21 - D. FISCAL FFUMEWORK 76. Large-scale miningrequires the commitment o f large amounts o f capital to activities, which are inherently risky. Profitability and success i s based, in part, on fluctuating international prices beyond the control o f the mining company, and in part on the fiscal regime prevailing in the host country. A mining company considering an investment views the existingtaxation regime as a cost of doing business. As done inother successful mining countries, private investment in mining can be considerably enhanced by a stable, and internationally competitive fiscal framework for taxation, royalties, rentals, fees, duties and incentives. Mining companies prefer tax systems that: permit an early payback on invested capital; are responsive to realized profitability; are stable, predictable and transparent; preserve incentives for the company to invest in improvements over time as well as encourage exploration risk taking to find new deposits. Governments typically desire tax systems that: support macroeconomic stability by providing predictable and stable tax revenues; can be effectively administered with low costs; maximize the present value of revenuereceipts; and capture windfalls from highprofit projects. 77. A difficult but important achievement i s establishing a balance between government objectives and what the mining industry i s seeking. The general principles that should be taken into consideration when establishing a tax regime are": (i)profit taxes are more attractive to investors and will cause less distortion than input or output related taxes such as customs duties and royalties; (ii) mineral taxes should be consistent with domestic tax arrangements; (iii) mineral taxes should be stable over the long term; (iv) the tax regime should be non-discriminatory, applying equally to foreign and local investors and private and state owned enterprises; (v) double taxation should be minimized; and (vi) arrangements for rapiddepreciation should be considered for rapidrecovery o f exploration expenditures. 78. The increased global nature of mining investment, coupled with the very limited capacity at the MMR has posed significant challenges to the policy makers in the GOSL. They are currently unable to make informed decisions to determine what types and levels of taxation can or should be applied to mineral projects. The Government has recently negotiated a fiscal package with Sierra Rutile2' that includes turnover tax, payroll taxes, royalty, import and export duties, surface rental, mining lease, and supplementary payments related to the Agricultural Development Fund, Inspection fees, and harbor dues. 79. Recommendation. Establishment o f a competitive fiscal package will induce investments in mineral exploration and mine development in Sierra Leone. This can be executed in two phases. Inthe first phase, a comparative assessment o f the fiscal regime o f Sierra Leone with those o f other miningcountries such as Ghana, Tanzania, Angola, Peru and PapuaNew Guinea should be undertakento understand what has worked well and why. This assessment, conducted by the Government with support from international experts, will determine areas where Sierra Leone is non-competitive, and identify options for enhancement. The second phase o f work should involve the detailed modeling and evaluation o f alternative fiscal scenarios and adoption o f the regime that best meets the Government's objectives.2 ' 19Strategy for AfricanMining, 1992. 2oLargelydrivenbythe miningcompany. 21As part o f a recent agreementwiththe InternationalMonetaryFundunder the PRGF, the adoptionof a fiscal frameworkis a pre-requisitefor any new mineralinvestments inSierra Leone. - 22 - E. LEGAL REGULATORYFRAMEWORK AND 80. As mentioned earlier, the existing Mines and Minerals Act, 1996, enshrines some of the fundamental international best practice principles necessary to build a balanced investment-friendly, socially responsible mineral sector management framework. MMR has further improvedthe act with additional draft social and investment amendments. However, the global operating environment for the miningindustry has undergone significant changes inthe past few years. Consequently, while adequate inessence, the core of existing mineral legislation and related draft regulations need to be updated and enhanced, inorder to induce new mineral exploration, mine development and production by attracting private sector investment. These need to compare more adequately with regulatory frameworks o f other mining countries inAfrica that recently reformed their mining sectors, placing emphasis on administration, access and transferability o f rights, security o f tenure, operating obligations and rights and penalties. In this respect, there i s a particular need to: explicitly formalize license application procedures based on a first come - first served approach; adopt firm time- frames for adjudication, approval and rejection o f mineral title applications; avoid potential for administrative delays; and enhance approval procedures by those institutions and agencies involved inthe process. These main aspects are summarized below. 81. Administration. The main administrative institution upon which a private sector-based mining industrydepends i s the mineral license registry office. All players inthe sector must have confidence that the licensing office will function reliably, effectively in a transparent manner in accordance with objective standards and procedures. To provide such assurance, modem mining laws usually provide for an independent license registry unit. While the creation of autonomous licensing office outside of the MMR i s an option, a more suitable option for Sierra Leone i s the establishment o f a distinct departmental unit within the Ministry, with a reporting structure separate from that of any state agency or department directly or indirectly involved inexploration or mining. 82. In order to improve transparency of licensing processes, it is important that the regulatory setup: (i)includes the objective criteria to be applied for the issuance22 and renewal o f all types o f licenses within prompt and specified timeframes, and eliminate the possibility o f conflicting licenses; (ii) promotes a rigorously defined competitive bidding process for existing mineral deposits under the Ministry; and (iii)makes provision for decisions o f the licensing agency denyingapplications to be inwriting. 83. Access and Transferability of Rights. Land i s generally available for mineral exploration and mining in Sierra Leone, without any fundamental impediments to private access to mineral rights. However, specific informationto potential investors i s lacking on: geographical areas available for licensing; criteria and procedures for obtaining rights in available areas; and current status of all minerallicenses issued. 84. To provide this information, the Government needs to establish the legal basis for a modem mining cadastre. Mineral laws based on an accurate, reliable and transparent mining cadastre will provide potential investors with important information on areas available for licensing, while acknowledging and protecting existing licenses. The mineral cadastre will constitute the foundation for the mining code in Sierra Leone. The mining law should also accommodate the financial community's need for liquidity by permitting greater freedom to " mineralinvestorshaveadistinctpreferenceforlicensingsystemsthatarebasedontheprincipleknownas "first come, first served", - 23 - transfer exploration and mining rights. However, care should be taken to ensure including requirements for the transferee to assume all o f the obligations o f the license being transferred. 85. Security of Tenure. Given the highrisk nature o f investment in mineral exploration, security o f tenure i s a fundamental requirement o f private investors. The mineral law must provide the security o f tenure necessary to induce the execution o f high risk investments in exploration, which may lead to eventual discoveries of minerals that can be subsequently developed and brought into production in viable technical and economical terms. The exploration and mining rights should be exclusive for all minerals, thus allowing only one license at a time over any area. 86. Operating Obligations and Rights. The operating obligations o f licensees must be clear, economically sensitive and practical. A distinction should be made between operating obligations, which are conditions for conducting surface or underground operations, and maintenance obligations for maintaining mineral rights in effect. In general, the obligations o f the various license holders are usually underdeveloped, with a lack of differentiation on the requirements applicable to different types of license. These situations typically arise on the rapidly evolving incorporation of environmental and social aspects, where "comprehensive studies" required as prerequisites o f reconnaissance and initial exploration will discourage even the best financed companies from investing. On the other hand, it i s fully realistic and reasonable to require such studies prior to commencing clearly defined "advanced exploration" programs involving initiation o f significant ground disturbance activities. 87. The comprehensive reform o f the existing legal and regulatory framework in Sierra Leone will require executing comprehensive comparative reviews o f the existing framework inorder to determine specific areas of disadvantage and options for improvement. The 1996 Minerals Act offers a solid foundation, however, considerable work needs to be done to update and modernize the framework. 88. Recommendation. Inthe case o f Sierra Leone, particular emphasis needs to be given to the incorporation o f cadastral procedures and technology into the provision, administration, transfer and enforcement of mineral rights. This i s important to enable the regularization and improvement o f transparency in the vast artisanal mining industry. It i s also important to address legal constraints related to: a) dissemination o f information, including areas available for licensing and status o f mineral licenses issued; b) excessive discretionary power o f authorities; c) strength o f mineralrights and their possible transfer and mortgage on commercial basis without specific approvals from ministerial authorities; and d) requirements to proceed from exploration to mining including conditions on performance o f obligations, discovery o f an exploitable mineraland technical and financial capabilities vis-A- vis alternatives based on the submission o f professionally credible feasibility studies. Another key area that will require continuing attention, inline with international practice and trends, concerns the introduction o f measures to ensure that local communities benefit from, and are consulted in a participatory manner about mining operations both, when advanced exploration i s planned, and when active miningoperations have been approved. F. INSTITUTIONAL FRAMEWORK ADMINISTRATIVECAPACITY AND 89. The MMR needs to be restructured and reorganized to administer more effectively and efficiently a new private sector oriented Mineral Policy and its inter-ministerial - 24 - imperatives. There i s a need to initiate the establishment o f a new organizational framework, to be responsive to new developments inthe mineral sector, through the basisprovided by the existing organizational separation o f MD and GSD at MMR. At the same time the administrative capacity needs to be strengthened to buildan effective organization capable of implementing and maintaining the complex elements o f a reformed mineral sector management framework. 90. A basic premise for Sierra Leone's mineral sector promotional initiatives i s that "for any prospective investor there should only be one agency to deal with". Reinforcement of this "one stop shop" concept i s a basic element for restructuring the current organizational framework o f MMR to attract foreign and local private investors. The international merit of this structure remains based on the fact that it represents the current institutional framework for the successful miningjurisdictions o f many Latin-American countries includingChile and Peru. It also represents the historic institutional framework for the most successful mining States in Australia and Provinces in Canada over the first 70 years o f the past century, which i s a period when mining development in these countries made them pre-eminent as mining jurisdictions inthe world. 91. Institutional Framework. Based on international best practices, institutional restructuring along the lines mentioned above would involve establishing four distinct departments in the MMR: (i)Mining Investment Policy and Planning Department; (ii) Geological Survey Department; (iii) Mineral License Application and Registry Office; and (iv) Inspectorate, Monitoringand Extension Services. 92. Mining Investment Policy and Planning Department. The strategic objective of this unit is to stimulate and encourage investment inmineral resources by the private sector. In this regard, it must act as the coordinator of the focused activities of the other units within MMR, and consolidate the information and statistics into policy position papers and promotional presentations for both senior Government and local and foreign investment leaders. A professional team should maintain updatednational and international perspectives on legal, technology, processing, marketing and commodity developments as they relate directly to the mineral sector imperatives o f Sierra Leone. It must play the central role in internal and inter-ministry coordination and private sector liaison in order to effectively establish MMR's one stop shop credibility with industry and the public. In this context it would be responsible for packaging and adjudication o f mineralrelatedcompetitive bids. 93. Geological Survey Department. The basic functions o f this department will be to develop and maintain a reliable national earth science database. This database will be essential indocumenting the geological formations and structures favorable to the occurrence o f metallic and non-metallic mineral deposits. As such, it represents the key contribution to the promotion o f the mineral resources o f Sierra Leone. An equally important function i s the identification o f geo-ecological processes, hazards and water resources that impact on the social and economic well-being o f the nation. It requires leadership by senior, highly respected professionals with the ability to motivate a diversified team o f geoscientists. The work and results emanating from this department must be made available to the public in a timely and open manner, 94. Mineral License Application and Registry OfJice. This autonomous unit must be completely independent from any Government entity, with authorization to issue and administrate licenses under the mineral law and respective regulations. Its focused responsibility i s to be the official registry o f all licenses and license transactions and - 25 - notifications directly or indirectly related to the provisions o f the regulatory framework. It must therefore contain expertise in the development and maintenance of a standardized cadastral system, accurate cartographic map control, and clerical efficiency in acceptance, processing and notifications related to the holding, renewal, rejection, cancellation and amendment o f all mineral licenses. Proficiency inbasic computer processingi s also required. The subsequentandor relatedmaps, databases and registries of such documentationmust be open to the public. Additional data and submissions specified as confidential by law must also be securely controlled by this unit. It must be headed by a trustworthy professional with education and experience in surveying, cartography and/or technical engineering. This unit constitutes the first step into MMR for many prospective local and foreign licensees. ProposedStructurefor the Ministryof MineralResources Finance, Personneland AdministrationUnits I GeologicalSurvey MiningInvestment MineralLicense Inspection Officefor Department Policy and Planning Applicationand Explorationand Mining 1 I regional surveys and - mapping - mineral technology, - miningcadastre quality control processing, standards mineral area studies marketing and - mineral license commodity studies registry - environmental environmental protection geoscientific studies mineral investment L mineral titles and promotion: administration - worker and public mining-related water competitive bids health and safety resources studies - legal and public - mine closure and rehabilitation technical support relations - inter-ministry - production and analytical lab coordination performance guarantee monitoring computer center - Indushy liaison (one stop shop) mineral inventory libraryiarchive database coordination - 2 6 - 96. Inspectorate, Monitoring and Extension Services. This unit will be responsible for the monitoring and oversight of exploration and mining activities in order to ensure compliance and enforcement of activities authorized' under the regulatory framework. It is also responsible for providing extension services to artisanal miners, with emphasis on reserve determination, mining, processing, and disposal o f waste material. Although specialized in nature, these exploration and mining activities must also conform to national standards of worker health and safety and environmental protection. This unit should be formally designated as the coordinating agent for inspection responsibilities pertaining to these institutions and agencies. 97. This responsibility requires education and experience in applied exploration and miningprograms inaddition to the necessary knowledge of related environmental, labor and health and safety legislation. Regular communication i s essential with all authorities where exploration and mining activities may have an impact is essential. It should be headed by a senior mining engineer with good credibility as a fair arbiter o f proper mining conduct. All staff must develop comparable reputation to successfully fulfill the duties o f this difficult, essential public service. 98. Administrative Capacity. The existing MMR line units for Administration, Mines and Geological Survey provide a good frame to re-structure and strengthen its professional capabilities, as lead agency for the sector. However, all three units have suffered serious depletion o f qualified professionals and technicians. Building an effective organization capable o f implementing and maintaining the complex elements o f a reformed mineral sector management framework will take many years and will require substantial external financial and technical support. MMRhas a core group o f knowledgeable and dedicated senior mining professionals, which can formulate and coordinate appropriate programs, as demonstrated by work done on the framing o f M W 9 4 and subsequent practical amendments and policy measures. However, a matter o f growing concern i s the ability to ensure continuity o f such staff. Accordingly, a program for systematic capacity development to address identified weaknesses should include activities that will enhance mineral rights administration, inspectorate functions, geological survey and will promote mineral investments. A detailed breakdown o f priority areas for action under each o f these categories is provided below. 1) MineralRightsAdministration a GIS based mineral rightscadastre a Cartographic control a Mineral rights registry a Mineral rights administration a Regional coordination a Transparent public access 2) MinesInspectorate a Mineral rights monitoringand inspection a Mine statistics and data management a Operations and financial performance a Mine-site environmental management e Regional inspectorate setup a Public health and safety a Mine closure, reclamation and rehabilitation - 27 - 3) GeologicalSurvey a Mapping a Geo-research projects 0 Geological andmineraloccurrence inventories a integration o f mineral rights, mine statistics and geo data bases a mineralpotential/landuse a regionaydistrict geology offices a mineraldeposit modeling a geophysicaVgeochemica1 survey coordination a hydro-geology, geo-hazards analysis 4) MineralInvestment a Mineral marketing and export research a Investmentpromotion a Legal analysis and advisory services a Mineral commodity analysis a Inter-jurisdictional coordination a Public liaison and education a MMRpublication anddissemination of information 99. Little work has been conducted on environmental hydrogeology and geo-hazard documentation so far, however, it i s well recognized in the country that: (i) the role of the Government in a private-sector-led mining industry includes ensuring that mining development i s environmentally and socially sound; (ii) comprehensive and objective the methodology to formulate and implement mining sector reform must contain environmental and social protections which foster the sustainable development o f the surrounding communities; (iii) the institutional units responsible for the inspection of mineral activities mustmake certainthat exploration and miningwork conforms to national and internationally acceptable environmental, social, worker healthhanitary, safety and living standards; and (iv) the application of bedselected environmental practices and procedures must include adequate inter-ministry and inter- agency linkage, coordination and cooperation. 100. Recommendation. The reactivation o f existing mines, improvement o f artisanal mining,and initiationofmeaningful activities for mineral sector development will require the adoption of a phased approach to restructure MMR. This i s warranted by the existing scarcity of material resources, and need to avoid over-extending its present weak setup. Initial emphasis should be to establish a MiningInvestment Policy and Planning Department, and a Mineral License Application and Registry Office. Subsequent emphasis should be assigned to strengthen the structure of the Geological Survey Department (GSD), and the Inspectorate, Monitoring and Extension Services. These efforts should be paralleled from the outset with comprehensive capacity building. In the short term, this phased approach will expeditethe adoption of both, a cadastral system for matters on mineral rights, and a "one- stop-shop'' for investment promotional initiatives and inter-agency linkages. It will also make possible the compilation of geo-databases with informationpresently available at GSD, and the initiation o f pilot extension services with existing field staff, Additionally, it will allow incorporating the results of pilots in the formulation o f improved structures for GSD, and for the Inspectorate, Monitoring and Extension Services. Capacity building, in the short term, would largely involve participating in: a) relevant international events, seminars, conferences and short-courses; b) local seminars and short-courses conducted with assistance - 28 - o f expert consultants, and suppliers such as those involved with aerial surveys, GIS and cadastral systems; and c) targeted study-tours to mining countries principally through bilateral collaborations. G. ENVIRONMENTAL SOCIALMANAGEMENT AND 101. Environmental Management. An important observation, from international experiences with mining sector reform during the 1990s, i s that most successes were achieved in those countries that undertook a comprehensive approach, including legal, fiscal, institutional and enterprise reform, together with the development of appropriate environmental regulations for the sector. Serious investors prefer clear, consistent and realistic environmental policies reflected in workable legislation, as the absence of clear environmental policies increases their difficulty to raise financing in international capital markets. Thus, the global nature of the markets for financing mineral resource projects facilitates the enforcement o f responsible environmental performance. Additionally, an effective public administration with competent agencies, and adequate regulations has become indispensable for enabling a proper environmental management. Ministries and agencies responsible for mining and environment need to work closely on issues related to: (i) compatibilityofthenationalenvironmentalstandardswithinternationallyestablished the mining sector specific standards; and (ii)the consolidation of professional inspection procedures and personnel to avoid overlap, duplication and contradiction in the activities related to monitoring, compliance and enforcement o f mine-site environmental management and protectionregulations. 102. These involve the provision o f detailed operating rules and standards, and the monitoringo f compliance by miningcompanies with those rules and standards. There are two extreme approaches for the regulation of environmental aspects concerning the mineral sector: (i) the central approach, with environmental legislation and enforcement institutions common to all economic sectors; and (ii)the sector approach, with environmental responsibility delegated to the individual ministries, which results in assigning the Ministry accountable for mining with responsibility for environmental standards, assessment evaluation, monitoring and enforcement within the mining industry. In practice, many mining countries have adopted a hybrid approach based on central responsibilities under a main environmental agency for environmental policy, strategy and regulatory aspects, and with operational field monitoring, compliance and enforcement conducted through close coordination and linkages with sectoral ministries. 103. Such an approach i s recommended for Sierra Leone. Care should, however, be taken to avoid potential situations o f conflict o f interests, between activities for promotion o f investments and matters o f control and enforcement o f compliance, which could result in lesser stringency on environmental matter inorder to pursue investment goals. 104. In respect of artisanal diamond mining, emphasis needs to be placed on: (i)an assessment o f environmental degradation resulting from past and present diamond mining; (ii)an introduction ofpractical measuresto minimize current and future environmental impacts; (iii)identification and rehabilitation o f worked-out areas which constitute environmental hot-spots; and (iv) the return of presently degraded land to agricultural production, and improvement o f water quality inthe diamond fields. 105. Social Aspects. Social and cultural base-line studies are now established as necessary design components for large-scale mining projects, to be initiated preferably at early pre- - 2 9 - feasibility stage. All reputable large-scale mining firms now include both EIA and SIA, as basic elements o f final feasibility analysis, to determine whether a mineraldeposit i s viable or not. Accordingly, provisions for social and cultural base-line studies, social management plans and local community enhancement programs need to be incorporated into the draft Mines and Minerals Act, 1998 - M M N 9 8 document and respective regulation amendments o f 1998. 106. At present, social impacts need to be addressed at points well in advance of commercial mineralproduction, reflecting a combination o f modem trends o f public demand, govemmental reaction, and private sector commitment. This indeed reflects the first steps in the formulation o f a new global paradigm for natural resources investment initiatives, involving the delegation o f centralized powers back down to people at the regional and local levels. It represents a sensitive and sometimes controversialpolicy change inmost counties, with many options towards the involvement of local communities. It also raises problems of earmarking certain tax revenues and fees for specific purposes, thus reducing the national treasury's flexibility to shift spending in response to changing communal needs. Additionally, it raises the need to establish adequate fiscal and administrative capability, in regions where no such capacity existed. Moreover, it requires improved mechanisms for the accountability o f local representatives to their constituents. Finally, inthe specific context o f mining operations, it raises issues on equalization payments to mineral have-not regions, balanced against the short-term wind-fall advantages and long-term environmental disadvantages accruing to those regions with exceptionalmineral endowment. 107. Local Community Partnerships. These partnerships are a relatively new component for the model framework o f large-scale mining projects. Their success requires: (i) meaningful dialogue with the local community regarding the complex exploration/feasibility/commercial production sequence that a private sector investor must undertake, particularly as it relates to the low probability that high risk exploration expenditures will lead to profitable mining operations; and (ii)clarification that such partnerships can only be realistically delineated when a commercial viability o f a project has been established, and then must be based on "shared responsibility" between local community authorities, regional and central government representatives and the private sector represented by the corporate mine operator. Some main evolutionary consequences arising from these premises are addressedbelow. 0 The private sector is responsible for initial dialogue with local authorities during the exploration phase o f a mining project. While there should be no inflated local expectations of long-term benefits at this investigative phase, the private sector can commit to employment o f part-time local workers and use o f local goods and services for the exploration program. 0 The determination of a credible mine development opportunity through the exploration program, particularly in locations without known previous mineral deposits, will tigger the private sector developer to prepare a community development assessment. This will be presented to a more formally constituted Community Development Authority (CDA) composed of local, regional and central government members, headed by a locally appointed representative, and also includinga liaison representative o f the developer. Ifa positive feasibility study i s established, then relevant options for local economic development opportunities should be identified and prioritized for initiation, under the support o f the next phases o f private sector investments, which are increasingly expensive and still speculative. - 30 - a Upon a final positive feasibility decision by the private sector operator, a local economic development plan and annual budget allocation should be approvedby CDA. This budget should reflect involvement o f all three participating factions of CDA, with an earmarked percentage o f revenue to be generated from operator taxes and royalties, and earmarked expenditures derivedfrom annual regional and central government budget allocations. 108. The initiatives undertakenby these partnerships should be determined by assessments o f the local community, on the basis o f social, cultural and talent-based imperatives. Their objective should aim partly to address support for mine required goods and services. 109. Given the importance o f artisanal mining o f diamonds in Sierra Leone, they should also place emphasis on ensuring: (i) secure, legitimate environment for diamonds mining, trading and exporting; (ii) community involvement in creating a secure environment; local (iii) integration o f various government agencies responsible for diamond industry security; and (iv) reduction o f illicit diamond mining and trading. However, a big-bang approach i s not realistic to resolving the complex and sensitive social dimensions o f artisanal diamonds mining and trade. This is because there is a lack of basic information, the difficulties are complex and inter-related, and there i s insufficient capacity in both infrastructure and personnel to support a major program. Nevertheless, there i s an urgentneed to determine and apply an overarching conceptual strategy to approach the problems o f this sub-sector, with long-term aims and integratedmanagement strategies oriented to: a upgrade quality o f life o f those living and working inthe diamond fields; a rehabilitate the environment and improve agricultural productivity; a upgrade regional infrastructure; a improve miningproductivity and safety; a prolong life o f mininginline with resource endowment; a maximize use of legitimate diamond marketing channels; a encourage general economic growth via multiplier effect o f mining activity and infrastructureimprovement; a ensure adequate institutional capacity to manage the industry; a ensure that relevant legislation and regulations are appropriate for the good functioning o f the industry; a promote the industryand its contribution to local and national economies. 110. However, a main purpose should be to ultimately create and reinforce diversified business, service and educational opportunities not related to mining, which should continue well beyond the life o f the mine. International models for such partnerships are available for furtheranalysis. - 3 1 - 111. RECOMMENDATIONS ANDACTION PLANSFORACHIEVING SECTOR GOALS 111. Sierra Leone's wide variety of natural resources can provide a good basis for growth if managed with sustainable approaches. Its mineral potential and the large investments requiredto exploit them are well knownby the international miningindustry,which is keenly following the evolution process for reactivation of rutile production as a signal that mining business can be conducted again in Sierra Leone, Artisanal diamond mining has been a constant source of income for hundreds o f thousands o f poor Sierra Leoneans in the rural areas, even duringthe protracted conflict. 112. The steps necessary to formulate and implement an integrated National Mineral Policy, that will establish Sierra Leone as a fully functional internationally competitive miningproducer, will take several years. This will require comprehensive strategic planning, conditional action plans, professional commitment, externally supported budgets and expertise, and time. It i s possible to jump-start the realization of this long term objective, with immediate constructive actions because of existing groundwork constituted by the presence of: 0 an initial mining law and draft regulations, which form a credible basis for establishing an internationally competitive miningenvironment; 0 a fiscal regime generally reasonable and flexible for large-scale operations; 0 regulatory amendments and policy measures incorporating some o f the main social and institutional elements o f international best practice and management principles for the mineralsector. 113. However, the interventions needed to enable the development o f the large-scale mining sub-sector will be different from those required to improve the artisanal and small- scale miningsub-sector. A. LARGE-SCALE MININGSUB-SECTOR 114. The immediate prospect i s to revive activities that were discontinued between the 1980's - 1990's. The most immediate possibility relates to the resumption o f rutile mining. Negotiations and preparations for resumption o f rutile production have proceeded to an advanced stage, only requiring finalization o f a financing package, in order to proceed to minerehabilitationandrelatedpreparatory activities to start production. Two other areashad large-scale operations producing bauxite and diamonds from a kimberlite deposit, whose reactivation should be pursued. The timely resumption o f these activities i s important not only because o f the direct benefits o f income, foreign exchange and. government revenue flows, but also because resumed activity would send a strong signal to potential investors that after a long period o f economic disruption and civil disorder, Sierra Leone i s once again in business as an appropriate and attractive site for large-scale miningoperation. 115. Following these early activities, it is important to attract investment and to identify and exploit other miningopportunities. To encourage miningcompanies to take advantage of the positive environment offered, the Government should demonstrate the willingness to negotiate new mining agreements in a speedy and businesslike fashion on realistic terms, in - 32 - line with international competitive standards. However, to build momentum in mineral sector development over time it will be necessary to substantially enhance the institutional capacity o f MMR and other agencies and departments related to mineral development as identified above. B. ARTISANALAND SMALL-SCALE MININGSUB-SECTOR 116. Somewhat different considerations apply for interventions to improve this sub-sector. Over the short term, there i s an immediate need to create conditions that encourage hitherto informal sector diamond mining to become formal. This could be approached in two ways: (i) extending security to areas not yet fully secure, to enable the miners to operate without need for "protection"; and (ii) establishing support services that attract informal operators to come out from underground. Since the completion o f the disarmament and demobilization of ex-combatants, there has been enhanced access to all areas of the country during 2002, including the diamond rich areas in the eastern regions. Even though the ex-combatants are not provided with any direct support for mining activities under the Government's Disarmament, Demobilization and Reintegration (DDR) program, many ex-combatants and internally displaced people have self-reintegrated in the mining areas. With more people coming back to the mining communities, there i s a critical need to continue to bring order to the mining areas by providing adequate security for legitimate licensed miners, and heightened supervision to minimize illegal mining. Once the immediate security issue has been resolved, the Government should initiate actions to: 0 consolidate the laws and regulations governing the sub-sector; take steps to install a GIS and GPS based mining cadastre that will provide the basis for effective enforcement of mineral rights; 0 increase efficiency and openness of trading by addressing bottlenecks inthe banking system to provide immediate availability o f foreign currency transferred for diamond exports and marketing operations and thus minimize the recourse to the parallel market for obtaining foreign exchange; 0 initiate pilot extension services to improve the identification o f best reserve areas in existing concessions, enhance mine planning and processing activities, and assist on ' activities o f reclamation and rehabilitation of minedout areas; 0 initiate the establishment o f equipment rental/lease arrangements for artisanal miners to fundtheir miningoperations. Additionally, emphasis shouldbe given to: 0 continue implementation o f Certificate o f Origin, by strengthening the system o f internal controls necessary to make GGDO the effective import-export authority as recommendedby the KimberleyProcess; 0 conduct a phased series o f regional participatory workshops in strategically selected mining areas involving MMR, Chiefdoms, miners, dealers and relevant stakeholders, to examine existingconstraints, options andpotential for collective business activities, cooperation andpractical operational training; and - 33 - 0 formulate and effectively implement plans to recycle parts of the proceeds from the sale of diamonds into the communities for their welfare. The Diamond Area Communi this front. 2DevelopmentFund(DACDF) provides a good basis for proceeding on 117. The above mentioned initiatives would aim at establishing a trading system where: (i) the returns to mine-workers and to miners are maximized through a competitive, open and transparent system of trade in diamonds and gold; (ii) the bargaining position o f miners and the productivity of their workers i s enhanced through greater access to finance, on reasonable terms and from sources other than traders and exporters; and (iii) a very liberal regime i s established in relation to direct taxes and financial controls, both to ensure the maximum transparency in the trade, and to encourage a more open and competitive market, which i s likely to be o f benefit to the artisanal and small-scale minersand their workers. Additionally, monitoring and extension services would aim at achieving greater sustainability and reduce environmental damage and health risks. However, existing capacity to monitor and provide extension support i s very limited. Consequently, there i s an urgent need to build capacity in the Ministry and the environmental agency over the mediumterm, to pursue effectively, the compliance and enforcement o f applicable laws and regulations. 118. Finally, over the long term the interventions for improving the artisanal and small- scale mining sub-sector should focus on: a) continuously upgrading quality o f life o f those living and working in diamond fields; b) rehabilitating the environment and improving agricultural productivity; c) upgrading regional infrastructure; d) improving mining productivity and safety; e) prolonging life o f mining in line with resource endowment; f) maximizing use o f legitimate diamond marketing channels; g) encouraging general economic growth via multiplier effect o f mining activity and infrastructure improvement; h) ensuring adequate institutional capacity to manage the industry; i)ensuring that relevant legislation and regulations are appropriate for the good functioning o f the industry; andj) promoting the industryand its contribution to localand national economies. 119. The achievement of these results will require that these initiatives be supportedwith a comprehensive program of identifiedhighpriority activities summarizedbelow. Geological Survey: 0 Identification and characterization o f areas with potential diamond resources. Execution o f diamond source investigations. 0 Geological mapping, basic survey and delineation o f water resources. 23A workshop conductedbythe DCDAF CoalitionandUSAID inJanuary 200223 discussedextensivelythe managementofthis Fund. Several shortfalls exist as it is currentlymanagedincluding lack oftransparency in the use of funds; lack ofprioritization;inadequateconsultationsbythe CommunityDevelopmentCommittees (CDCs) with key communitygroups like the youthandwomen inmakingdecisions about the use of funds; and perceivedinequality inthe distribution o f funds that is linkedto the number of licensesheldina chiefdomrather thanthe volume of diamondsminedinthe chiefdom. The participantsidentifiedkeyprioritiesto strengthenthe managementof the fund, includingtrainingfor membersof CDCs; community sensitizationabout the policies as well as the fund; developingmonitoringmechanismsthroughcommunity involvement. It i s imperativethat steps be takento makethis fund an effectivemechanismfor transferringsome ofthe rewardsfrom diamondsto the communities; - 34 - Environment: 0 Assessment o f environmental degradation from past andpresent diamond mining. 0 Introduction o f measures to minimize currentand future environmental impacts. 0 Identificationof worked-out areas andpilot rehabilitation of hot-spots. 0 Return o f selected land which i s presently degraded to agricultural production. 0 Improvement o f water quality inthe diamond fields. Mining and Processing: 0 Establishment o f a smaller butbetter trained andbetter rewarded workforce. 0 Achievement o f safer working conditions. Health: 0 Lowering incidence o f water-borne diseases. 0 Improvement o f sanitation conditions. 0 Improvement of living conditions by reducing over crowding. Infrastructure: 0 Rehabilitation of rural roads. 0 Renovation o f war-damaged community buildings. Security: 0 Ensuringsecure and legitimate environment for diamonds mining,trading and exporting. 0 Local community involvement increating a secure environment. 0 Integration o f various government agencies responsiblefor diamond industry security. Diamond marketing: 0 Enforcinguse o f legitimate channels for diamonds exports. 0 Minimizing entry barriers for diamonds dealing and exporting. 0 Promoting a transparent dealing and marketing system. Institutional capacity: 0 Effective regulation and administration o f alluvial diamond industry. 0 Identification o f positions, numbers and responsibilities o f individuals necessary to administer, regulate and improve the artisanal diamond industry. 0 Providingtraining and skills development opportunities to ensure efficient execution o f responsibilities. 0 Provision o f adequate material resources to ensure efficient execution o f institutional activities. 120. The following table summarizes the main actions required in the short, medium and long term to facilitate the reactivation and development of the mining sector within sound technical, environmental and social conditions. - 35 - Table 8: Sierra Leone Time Frame and Actions for Mining Sector Revivaland Development Short-Term Mid-Term ,ong-Term .arge-scale I.Undertakecomprehensive I.Adoptthenewly 'roduction from: nining :omparative reviewofthe .evisedframeworks. !rutilemines :xisting frameworkin Sierra 2. Raiseawareness !bauxitemines ,eone withthose ofrecently mddisseminaterules !kimberlitemines .eformedminingcountries. 2 f the game locally I goldmines l. Basedonthis knowledge, mdinternationally. nitiatedevelopmentof 3. Active Promotion sustainableframeworks. 2 f newprojectsin - 3. Review andregularize rutile(at Rotifink), :xisting mineralrights bauxite (at Port :explorationandmining) Loko), gold and $. Complete SRL financing diamonds. irrangement. 5. Startpromotinginvestment in Bauxite and Kimberlite. 5 . Design andimplementSRL :ommunity pilotplan. 5. Design an investment promotionplan. 7. Initiate: compilationof geo- databases aerial survey Small-scale and 1.Use existingframeworks 1. Active extension 1.Continuedtraining. irtisanal mining 2. Continue implementation services provided. 2. Routinecadastre of the Certificate o f Origin 2. Active training. operation. Scheme 3. Cadastre in full 3. Privatebased 3. Initiate: operation. renuleaseof satellite imagery 4. Implementpilot equipment. pilot extension services social plans for 4. Incorporatebest andtrain field staff communitiesand practicesand resultsof preparationof database disseminatebest pilot social initiatives. of existingmineralrights practicesandresults. installationo f cadastre 5. Pilottest selected enforcement of optionsfor free mineralrights markettrading of designequipment diamonds. rentilease arrangements 6. Implementthe identifyand assess chosenoptionfor free optionsfor free market markettrading of trading of diamonds diamonds. 4. Deviseeffective plansto use 7. Disseminate basic DACDF. promotionalgeo- 5. Design and initiatesocial pilot information. planfor selectedartisanal communities. - 3 6 - ANNEX1: ARTISANAL, SMALL-SCALE, DEALER EXPORT AND LICENSE REGULATIONS 121. Artisanal Mining Licenses. Such licenses can only be awarded to Sierra Leone nationals, cooperatives, or wholly-owned Sierra Leone registered companies. Cooperatives and companies must register with MMR prior to applying for an artisanal mining license. New policy measures allow licensed dealers and exporters to finance artisanal mining. However, such measures present potential conflicts with Section 78 (2) (a) o f the MiningAct, for situations where the financier i s not a Sierra Leonean, as occurs presently with several dealers and exporters. Prior to award o f a license, applicants must have paid all requiredfees as summarized below. Table 9: Fees to be PaidPrior to Award of an Artisan DiamondMining License I Fee I Amount I 122. The size o f artisanal mininglicenses is approximately 1acre according to the Act, and normalpractice. The new policy measures mentioned above allow up to 5 acres. However, in practice all licenses issued in recent years are conventionally considered in the 1 acre category. The new policy measures also allow an initial period of license validity o f two years, with renewals for periods not exceeding one year at a time. Such renewals are procedurally automatic subject to satisfying the license conditions during the previous period o f validity. Historically, license renewals have presented major problems, upon the discovery o f rich zones, as smaller operators can be squeezed-out by more influential ones. It i s understood that legislation i s being drafted with stipulations to address and clarify such matters. Some o f the main legal stipulations regarding artisanal mining are summarized below. The Act requires license holders to rehabilitate mined out areas, but the new policy measures offer the optionto pay a RehabilitationFee inlieu o f actual rehabilitation. Local land rental i s chargedto compensate local community for loss o f land use while mining activities are conducted. It is collected by the MMR and disbursed to Chiefdom authorities. License holders must notify local authorities prior to initiation o f miningand at end o f mining. Whenlicense holders cannot bepersonallypresent duringminingactivities, a certified MineManager mustbe employed andpresent onsite. Separate license i s required prior to mining by dredge in any river, water course or lake. N o such dredging license has been issued so far. Artisanal mining license holders may sell their diamond output to either a licensed dealer or a licensed exporter, butmay not export their output directly. - 37 - 123, Small-scale Licenses. The procedures and conditions for small-scale miningare very similar to those for artisanal mining, although fees are typically doubled. In addition to the general qualifications for holding artisanal mining licenses, some specific stipulations for small-scale miningare summarizedbelow. 0 A small-scale mininglicense can also be heldby companies incorporatedinSierra Leone, but with the requirementof having a minimumo f 25 percent of Sierra Leone shareholding. 0 A small-scale mininglicense can cover between5-25 acres. Validity can extend between 2-5 years, andmay be renewedon application, for periods not exceeding two years at a time, subject to having met the conditions o f the license. 0 A small-scale mininglicenseholder may sell hisdiamonds output to either a licensed dealer or a licensed exporter. Also, he may export these diamonds directly through official channels, upon payment of a royalty o f 3 percent o f the export value, according to the new policy measures. 124. Dealer Licenses. Holders o f diamond dealers' licenses may purchase diamonds from licensed miners. They may sell diamonds to other licensed dealers, or to licensed exporters, but may not export diamonds. Dealers can be of any nationality, and may employ up to five buying agents. Buying agents must be of Sierra Leone nationality. The fee structure for dealers and their agents i s summarizedbelow. Fee AnnualAmount Sierra Leone citizens US$1,000 Other ECOWAS citizens US$1,500 Non-citizen; non-ECOWAS US$3,000 Agent's certificate US$500 Monitoring US$400 Standard income tax assessment, citizen Le 240,000 Standard income tax assessment, non-citizen Le 360,000 125. Export Licenses. Holders o f export licenses may buy diamonds from mininglicense holders, licensed dealers or other licensed exporters. They must export diamonds using procedures under the Certificate o f Origin Scheme. Fees o f 3 percent o f the export value must be paid. A diamond exporter can be an individual, or a registered company of any nationality. Exporters may employ agents. If the exporter i s a company, up to four agents may be registered without payment of any fees. If the exporter i s an individual, then fees must be paid for all agents. The new policy measures require each exporter to employ and train at least one Sierra Leone national as a diamond valuator. The fee structure for exporters and respective agents i s summarized below. Table 11: Fee Structurefor DiamondExporters and their Agents Amount Exporter license - Sierra Leone citizen Fee US$5,000 Exporter license- Foreigner US$30,000 Exporter agent certificate US$5,000 Agent standard income tax assessment Le 950,000lyear - 38 - ANNEX2: THECERTIFICATE OFORIGINSCHEMEFORROUGHDIAMOND EXPORTS Background. The Certificate of Origin Scheme was introduced in October 2000, in response to United Nations Security Council Resolution 1306 (2000). It was the second such scheme, following introduction o f a first scheme in Angola. Their overall objective, in conjunction with UN sanctions against rough diamonds being imported from either Sierra Leone or Angola without certification, was to limit the access o f rebel groups to revenues from diamond sales. The Kimberley Process is a separate response to the same issue. It was initiated in South Africa, at a conference in May 2000. It has support from UnitedNations General Assembly Resolution 55/56. Participation i s voluntary and includes governments o f diamond trading countries, diamond trade organizations, companies with interests in diamond mining and trading, and NGOs with interest inissues on conflict diamonds. Its strategy i s to introduce a transparent international diamond-trading regime, based on certification and publication o f trade statistics. Subject to further negotiations among participants, the scheme was initially planned to become operational in June 2002. Sierra Leone i s a full participant in the Kimberley Process. The Kimberley Process has made significant progress since its inception in 2000. In November 2002, representatives from 35 countries and the EuropeanUnion agreed to launch a certification scheme for rough diamonds in January 2003. However, trade monitoring and the lack o f a system for regular independent monitoringo f all national control systems remain important constraints for the effectiveness of the scheme. Other unresolved issues concern sovereignty and customs procedures. Further, the whole process would be seriously undermined, if any one o f the major diamond mining or related downstream manufacturing countries fails to participate effectively. Trade and Certification. Since its inception in October 2000, the Certificate of Origin Scheme has coincided with a steady increase in both volume and value o f Sierra Leone's official rough diamond exports. Between 2000 and 2001, diamond exports have increased about 200 percent in carat terms and around 160 percent in value. Although this increase may be in part due to operational sanctions, including sanctions against the import o f diamonds from Liberia, and the introduction o f the Certificate of Origin Scheme, other factors were also significant. Since mid-2000 there has been a progressive extension of UNAMSIL and GOSL control throughout the country. Then, by early-2002, the official disarmament went forward o f most factions in the country. As consequence, the diamond trade has begun to return to a semblance o f normality, with steady increase in licensed diggings. Diamond dealers and agents are also able to move more freely between diamond mining areas and Freetown. Under such occurrence, it is clear that irrespective of certification schemes, the official diamond exports would have increased during this period, and cannot unequivocally be attributed to the scheme, given that other significant factors have affected the market at the same time. In addition to little factual evidence about the scheme resultinginsignificant export increases o fbetter quality diamonds from Sierra Leone, there i s growing concern about these being still predominantly smuggled. 24. Other main areas o f apprehensions include: ~ 24 The key test will be when licensedminingi s extended to Kono Districtwhere a highproportion of the best- quality diamonds are mined. - 39 - widespread criticism of bureaucracy and lengthy procedures involved on the Certificate of Origin Scheme, which will clearly grow as immediate concern on conflict diamonds recedes; 25 continued complains of exporters about difficulties with clearance and subsequent availability o f foreign currency through commercial banks, which i s reflected in that diamond dealers do not generally use commercial banking for hard currency needs, preferringthe parallel market, inadditionfunds generated by diamond trading; loopholes that cannot be easily correctedinthe Certificate of Origin Scheme, which i s virtually `open' at the mining end, as diamonds can be reported as coming from a licensed digging while they can actually originate from elsewhere. Such a practice i s not uncommonbecause characterization o f diamonds, even within Sierra Leone, i s too imprecise to determine physically, inpractical manner; evolution o f integrated local activities, with diamonds being cut, polished and smuggled, apparently with equipment and skilled personnel left over from an earlier diamond cutting facility.26 The average unit value o f shipments, interms o f US Dollars per carat, declined slightly over the last two years. The average decline was greater than indicated by data for 2001, because significant amounts of lower quality diamonds were withheld from the market, and exported only in January 2002 (Table 12). If considering them as part o f 2001 exports, then average value o f decline experienced between 2000-01 amounted to about 15 percent. However, the decline evolved structurally from the low average price received from official exports, due partly from poor international diamond markets during most o f 2001, and from low proportions o f high-quality diamonds, in the price categories above US$2,000 per carat. Normally Sierra Leone would produce much larger quantities o f such diamonds. But their absence from official statistics suggests they were smuggled. Further, their continuing absence in 2001, despite large increases of quantities exported, implies a significant diamonds smuggling activity, despite the Certificate o f Origin Scheme. Table 12: Official Exports of Diamondsfrom Sierra Leone, 1999-2001 Year IExports (ct) Exports ($) Unit value (Wt) I II 1I 1999 9,320 1,244,825 134 2000 77,372 10,066,92 1 130 2001 222,520 26,022,492 117 25Although such comments must be placedin the context in which they are given, and against the background of continuingsmuggling 26 The development evolved from the recent detention o f an Americancitizen at Lungi airport, inpossession of a parcelo f cut diamonds, and from ensuing documentationreleasedontheir source -40- Table 13: MonthlyDiamond Exports underthe Terms ofthe Certificateof OriginScheme Month 1No. shipments 1Carats 1Value ($) 1Unit value ($/ct) I I I I " I Table 14: Destinationof DiamondShipments under the Certificate ofOrigin Scheme 1Destination I Shipments ICarats IValue IUnitvalue Most shipments, in terms o f both volume and value, have been traditionally to Belgium. However, there are numerous other formally reported destinations for smaller quantities, which appear rather unlikely. These generally involve small shipments, with some o f high- value diamonds as a reported shipmentto Ukraine at $729 per carat. While GGDO i s willing to consign shipments to any country, procedures under the existing Certificate of Origin Scheme require electronic acknowledgement o f shipment receipt from the importing country, and subsequent physical return o f counterfoil on the certificate; but only Belgium and Israel are fully integrated to this scheme. In this context, it i s a moot point whether shipments to countries that cannot fully comply with the certification scheme are ineffect inbreach o f UN sanctions. In fact, where countries have not responded, the diamonds in question have virtually disappeared from the system. -41 - It has been suggested that tightening of the certification scheme could be addressed by increasing the numbers of stakeholders inthe industry involved in the procedures associated with the scheme. This includes consideration about diggers themselves as witnesses in declaring diamonds as been recovered from their digging. The further down the diamond pipeline, however, the greater the proportion o f poorly educated participants. The scheme i s widely perceived as a bureaucratic and procedural top-down based system introduced from above. There i s growing evidence of resistance to requirements o f the scheme i s evolving at lower levels o f the diamond pipeline, and attempts to increase procedural steps or number o f participants involved in procedures will likely increase this resistance. Its longer-term acceptability to grass-roots participants i s highly questionable, with the consequence that procedures are likely to be by-passed and/or followed to justify desired outcomes, possibly evolving as a revenue source. Licenses. In2001, the number of exporters was inprinciple restricted to seven licenses. In practice, these could be shared within groups, with a single export license fee split among involved individuals or companies, which conducted business separately. In 2002, the system was changed enabling individuals to apply for export licenses, with a differential fee o f US$5,000 for indigenous exporters, and US$30,000 for other exporters. Additionally, in respect o f such licenses, some Sierra Leone citizens o f Lebanese extraction were categorized as non-indigenous. However, until early-2002, only a small number o f export licenses had been taken, which was attributed to the early part of the year, and soft state o f diamond markets. Valuation. An integral part of the scheme i s the independent valuator, whose role i s to confirm the value placed on the exported diamonds as close to world market prices. This not only ensures that appropriate level o f tax i s paid by the exporter, but also acts as a check, on the use of funds imported to Sierra Leone, for official diamond purchases. The valuator is paid from 0.5 percent o f the export value, which was approximately US$130,000 in2001. As the valuator cost i s largely fixed, should the volume o f official exports rise, with reductions in smuggling, it may be prudent to amend the valuator contract, to incorporate a base fee to cover agreed costs and expenses, plus a smaller percentage. A fee tied at least inpart to the value o f the exports could be advantageous, as it would encourage the valuator to press for a highexport valuation. - 42 - ANNEX3: ALLUVIALDIAMONDMINING INDUSTRY Data Requirements Technical Data. The examination of issues and benefits about the artisanal and small-scale miningsub-sectors hasbeentraditionally affected, inserious manner, by a widespreadlack of basic information. This deficiency accounts for adverse effects in relevant analysis, policy and decision making, which has beenbased virtually at the levels of anecdote and rhetoric. It i s important to prepare and inventory of existing information, and to determine the availability o f required data and identify means and priorities, to address the critical information shortfalls. The quality o f information i s crucial for proper formulation and assessment o f policy and strategy, and for planning specific development steps for these sub- sectors. Adequate information from areas where artisanal and small-scale mining activities have been conducted, or are being pursued, should be compiled and built into a GIs, to be operated by MMR. Close coordination would be required within MMR, GSD and MD, as well as with the Environment Department, and the Ministry o f Local Government and Rural Development. Main required information can derive from various sources including but not limited to: Satellite Imagery. Artisanal mining outside active river channels results in the clearing o f vegetation cover and eventual exposure (typically in excavation spoil) of relatively clay-rich, light-toned basal alluvial sediment and decomposed bedrock. These can be identified visually as well as through satellite imagery. By this means an overall picture o f current activity could be established rapidly. The use of images from different periods could also enable the identification o f mining activity at different times, back to the 1970s. 0 Mining licenses. Hundreds o f mining licenses have been issued over the last year, while licensing o f artisanal mininggoes back to the 1950s. Inprinciple, the location o f each license i s established, and should be plotted unequivocally. However, in practice, this has not done. Basic relevant information remains held in regional mining offices, and only in synthesized form at Chiefdom levels, which raises difficulties to identify available land, resolve disputes, and process new applications. The current low cost and easy-to-use availability o f GPS systems should be used to establish a national cadastre for all mineral licenses, as done in most successful miningcountries for processing, administration and control o fmineralrights. 0 Geological survey. The interpretation o f satellite imagery will require cross-check through ground calibrations and verifications. Reports o f new diamond discoveries also require confirmation and ensuing assessments. Both of these functions should be carried out by the Geological Survey. A standardized database to inventory and report alluvial diamond mining sites should be established, including information on the nature, extent andthickness of diamond-bearing deposits. 0 Existingdocumentation, including files from Hall (1969) and SLST/NDMC, as well as reports from exploration companies contain valuable information, on specific locations where diamonds have beenidentified, and where mininghas been conducted inthe past. Suchinformationcouldvery usefulifsynthesized adequately. - 43 - Number of Miners. There almost no current factual andor reliable information on the number o f people involved directly and indirectly in artisanal and small-scale mining activities. Under MD, some initial steps should be undertaken expeditiously, to develop reasonable and factual estimates on the basis of: 0 License Holder Returns. The holders of artisanal mining licenses are required to provide monthly returns on their activities to MMR. These retums appear to be filed currently in the regional offices. Their routine analysis, would enable to improve estimates on miningactivities and amount of miners involved, at least within licensed miningareas, on a monthlybasis. 0 Field Survey. Field surveys couldbe conducted incertain areas, to check on license holder returns, estimate the amount of illegal miners, and develop basic descriptive relevant information on the miners. Locations for sample surveys could be established inconjunction with other activities addressed above. EnvironmentalImpacts. Certain aspects of environmental impact issues are suitable for initial study on a regional basis, with relatively low-cost and simple approaches, such as the conduction o f water quality surveys. However, most mineralrelated environmental problems tend to be complex, inter-related, and difficult to understand inisolation. Therefore, it will be necessary to establish appropriate survey methodologies suitable for particular conditions in artisanal and small-scale mining in Sierra Leone, in order to identify and categorize the environmental issues, prior to attempt activities based on regional synthesis. Inthis context, consideration should be given to conduct initial pilot studies, with a view to develop such a methodology, possibly in one or two mining areas, which should be selected as typical and representative, in terms o f mineral related environmental issues. Additionally, the location data above addressed could also be useful for extrapolations and generalizations in conjunction with these case studies. The proposed environmental work necessarily and primarily should involve the Environmental Department. However, this department i s seriously constrained with a dire scarcity o f staff, and extreme o f lack resources without fieldwork budget and transport. It also lacks significant practical experience. Under such circumstances, the proposed initiative based on a manageable pilot study, could constitute a valuable instrument to help capacity development for this department. Health Surveys. Basic health surveys are required throughout the artisan mining areas. Suchinformation will enable assessingthe impact of artisanminingon the health o f the local populations, including both miners and host communities, which so far remain virtually unknown. The survey work should primarily involve the Ministry o f Healthin collaboration with the Environmental Department, and in coordination with the Ministry o f Local Govemment and Rural Development as well as with MMR. Three main sources of information may be identified. 0 In the short-term, it may be possible to gain valuable information from various resettlement and basic food and shelter programs currently underway. This would require close coordination with health authorities. However, such data may not be readily available, and i s likely to be unsystematic and not focused on main issues relatedto artisanal mining. - 4 4 - Inthe medium-and long-term, regional studies with standard methodology should be conducted. The adoption of a pilot phased approach appears attractive because o f the area size and need to develop appropriate methodology. The potential significant overlap o f health and certain environmental issues suggest the use of common pilot project areas for both aspects. 0 The records of MMR, and those of other ministries including Health and Local Government, as well as press reporting should serve to delineate safety issues and trends in the industry, including accidental casualties due to poor mining practice involvingpit collapse, equipment misuse, and asphyxiatioddrowning. - 45 - ANNEX4: DIAMONDEXPORTS IYEAR ICARATAGE I VALUE $ IMONTHLY - 4 6 - ANNEX5: REWARDSHAREINALLUVIAL DIAMONDMINING Explanatory notes to table: For the model, the total o f diamond exports has been taken as US$25,000,000, which in order o f magnitude i s the official diamond export value for 2001. The estimates are derived from a simple industrymodelas follows: An artisanal mininglicense holder recruits a team of laborers or tributors, which work for a share o f the production and their subsistence needs, which are fully met by the license holder duringthe period o f operations ; Once the diamonds are sold, the license holder's expenses, particularly mining costs, are deducted and the balance i s then split 50:50 between the license holder on one side, and the tributors on the other; A license holdermay legally employ upto 30 tributors on any one license; The license holder typically sells his production to a dealer or his agent, and the dealer then sell to an exporter, each o f these traders taking a margin; The dealers and exporters have costs, which, in terms o f this simple model, are covered by their trading margins By mid-2001, a total o f 139 dealer licenses hadbeenissued, with a total of 85 certificates for dealer's agents. Some dealers have no agents while others have several. The use of agents i s regarded as part of the dealer's costs. The mid-year figure represents a good approximation of the number of dealers active during the year, which was duly rounded to 140. As with the exporters, it i s highly likely that a number of the dealers will have very small turnovers, because of having been almost inactive inthe market. It i s quite likely therefore that average returns o f active dealers are underestimatedinthe model. Operating costs were derived from various sources. There appears to be some consensus on that a single artisan operation would involve expenditures betweenUS$5000-20,000, with the lower end more typical than the upper end, consistent with the current low level o f mechanization. There are several variables that affect these costs, partly relating to the geology o f the deposits, and partly to the degree o f mechanization o f the operations. More information i s undoubtedly needed. Nevertheless, one o f the sources for informationon costs realistic value and analysis. . involved a dealer presently supporting about 30 separate operations, which enhanced their These operating costs have been transformed into percentages through the following sequence. The average production per license in the model i s slightly over $30,000. The minimum average working cost would therefore be around 16%. The upper limit must be loo%, as it i s evident that some workings will have operating costs that exceed the value of the diamonds recovered. However, for the purposes of examining the implications of the model, an upper limit to a range o f possible average working costs has been placed at 50% o f the value o f the diamonds recovered. It may be noted that in the instances where working costs exceed diamond recoveries, the only people to gain from the operation may be the tributors, which will have had their subsistence needs met for the duration o f the operation. The number of licenses and tributors used inthe model are those inthe legalized sector. It i s known that there are many thousands o f diggers and substantial production outside the legal sector. It i s therefore an important assumption o f the model that legal and illegal parts of the diamond trade in Sierra Leone operate independently o f each other. This i s almost certainly wrong, but there are no reliable figures for the illegal sector. If there i s a significant error in that the smuggling o f the better-quality diamonds from the legitimate sector has led to a serious underestimation o f the total exports from that sector, this would not necessarily mean that there would be a shift in the balance of benefits to any one category o f participant, for although the trading margins on the `missing' diamonds can be expected to be better for the dealers and exporters, with fixed operating costs, license holders and the diggers will also benefit. There were around 800 artisanal mining licenses inuse in2001. However, each license does not necessarily represent a single license holder, as an individual may hold several licenses. Information on the number of license holders should be available, but is presently distributedthrough various regionaloffices. Itis therefore assumed at this stage that there are between 500 and 800 license holders. The number o f diggers is uncertain, even in the licensed sector. According to legislation, a license holder may use up to 50 tributors on a single license. With 800 licenses, this would provide a theoretical maximum o f 40,000 tributors. However, not all licences are in production at the same time, or for the whole year, or employ the maximum number o f tributors. Some licensees, however, will employ, at peak times, more than 50 tributors on their property. The figure of 20,000 tributors used in the model provides an order-of- magnitude estimate for analysis. - 48 - ANNEX6: THE MINES AND MINERALSACT MINING LEASE ENVIRONMENTAL IMPACT ASSESSMENTAND ACTION PLAN The EIA i s an essential component o f the Feasibility Study, which i s the key document for the Programfor Development and Mining Operations appended to the lease. The nature, extent and details required in EIAs depend on the type, location, environmental sensitivity and scale o f the proposed mining operation, and the explicit nature and magnitude o f its operational impacts, as determined through documentation and evaluations o f the approved Program of Exploration Operations, and analysis of advanced exploration base-line surveys provided by the lease applicant to the Director o f Mines (DM). All mining lease applications and subsequent approved programs for development and miningrequire an EIA containing part or all of the following elements, as determined by the DM. Base-line Survey. Will be initiated at the outset o f advanced exploration, and at discretion o f DM will include all or parts o f 1) surface and groundwater water analysis; 2) soil and silt analysis; 3) plant and animal inventory; 4) present land use, water use analysis; 5) present socio-economic analysis. Environmental Management Plan (EMP) - applicants will propose to DM details of operating procedures and devices related to above survey, to protect from degradation related to mining, which DM may require to alter, delete, or expand, as necessary to ensure environmental protection - issues o f concern at discretion o f MMR Minister will include: 1) management and control o f surface water, mine water, and process water; 2) prevention and/or control o f seepage; 3) protection o f aquatic and terrestrial eco-systems; 4) control o f aerial emissions; 5) noise and vibration control; 6) backfilling plans; 7) rehabilitation and landscapingplans; 8) storage o f fuels and disposal o f lubricating oils; and 9) on site storage o f chemicals and hazardous material - Reclamation and rehabilitation work will conform to EMP, and whenever possible on a parallelbasis with mining. - rehabilitated land will be vegetated with permanent vegetative cover or stabilized to satisfaction o f Minister o f MMR - upon EMP analysis and approval, DM may require posting a reclamation and rehabilitation bond, determined on basis of costs outlined by applicant, which can be submitted sequentially on basis o f satisfactory implementation o f EMP elements. Such costs and required security will include estimated aggregate current cost for labor, equipment, supplies and services to conduct restoration activities involving: 1) removal o f buildings and plant facilities; 2) protective capping o f pits, adits, declines and shafts; 3) stabilization o f tailings, steep rock faces, drainage containment areas; 4) surface re-contouring; and 5) re-vegetation - 49 - - bond forms will include cash, letter o f credit fiom internationally accredited bank, surety or other negotiable bond, or other approved security, with amounts of bond components reviewed and adjusted every two years 8 Environmental Monitoring - Applicants will conduct monitoring programs specified by DM on quantity and quality o f effluents discharged or emitted, and respective environmental effects - Monitoring programs will include at DM discretion: 1) effluent quantity and quality; 2) surface and groundwater water quantity and quality; 3) groundwater hydrology; 4) atmospheric quality; 5) sound and vibration; and 6) monitoring of aquatic and terrestrial eco-systems Off-site Activities - Applicants will provide DMwith details of all associated off-site activities - Executionwill comply with good environmentalpractices and relevant law Specific items will include: 1) transportation; 2) traffic patterns and density; 3) road construction and maintenance; 4) sewage disposal and water supply; 5) product storage - 50 - ANNEX7: SIERRALEONE-MINERALSECTORWORKSHOP SUMMARY OF MAIN"DINGS AND RECOMMENDATIONS MAY 12,2003 The Government and staff o f the World Bank recently completed a study entitled "Tapping the Mineral Wealth for Human Progress - A Break from the Past". This study provides an assessment and analysis o f the economic and social significance o f the mineral sector and its potential impact on economic outcomes. It also provides recommendations and identifies a road map for mineral sector revival and development. During the workshop emphasis was placed on a) preparing a mineral sector development program for Sierra Leone, based on the mentioned road map and the findings and recommendations from the workshop, b) maintaining close linkages and collaboration with donors during program preparation, ensuring their awareness on resulting program components; and c) the role that the World Bank could play to include mining in the agenda o f donors meetings, to raise further awareness, address the way forward, and ensure that sustainable miningdevelopment receives donor recognition, endorsement and support. The workshop was opened by the Vice-president o f Sierra Leone, and included the participation o f the Minister o f Finance, and the Minister o f Mineral Resources. It was attended by members o f the Government's Task Force for mineral sector development, and by officials of several ministries including Lands and Environment, Trade and Industry, Development and Economic Planning, Local Government, Attorney General's Office, and ' departments and agencies o f the Government including Customs, Income Tax, and Bank o f Sierra Leone. Stakeholder participation included representatives of embassies, international andbilateral organizations; miningand exploration companies, and small-scale miners; traders and exporters; and communities, NGOs and academia. It was generally acknowledged by all working groups that Government participation through equity, has not been effective in the diamond industry.Inline with ongoing country policies for privatization and divestiture, workshop consensus was reached to recommend avoiding Government involvement in holding interests and managing commercial ventures, without exceptions for the mining sector. At most, it was agreed that free-carried interest in mining operations should be minor, and in any case restricted to 10% o f shareholding, entitled to dividendsequally with other shareholders. Onthe other hand, the role of the Government was widely supported for aspects o f mineral policy, strategy, licenses, fiscal payments, regulatory aspects, administration and provisiono f extension services to artisanal and small-scale miners. Emphasis was placed on the need to concentrate particularly on creating and maintaining an enabling environment, and a level playing field by establishingadequate regulatory, fiscal and institutional frameworks, in line with international trends, to start the transformation of the miningsector. The workshop was organized into four main groups to address the main themes that underpin the development of a comprehensive miningpolicy and strategy, which can allow the sector to develop as a socially responsible, and economically significant engine o f growth. These are: (i) Regulatory and Fiscal FrameworksGroup; Legal, (ii)Institutional Framework and Administrative Capacity Group; (iii) Financial and Commercialization Aspects Group; and - 5 1 - (iv) Social and Environmental ManagementPolicies Group. The groups analyzed the current situation o f the mineral sector, highlightedthe principal issues that need to be addressed, and identified the main existing problems with respective causes and associated constraints affecting such issues. They also identified options for addressing main issues, and made recommendationsto formulate an action plan on the way forward. Each group was also asked to examine the issue o f government equity participation in the sector. Group I.Legal, Regulatory and FiscalFrameworks - (LRFF) 1. Main Issues. The main issues discussed included: a) the past mismanagement o f the mineral sector and resultingunbearable living conditions in the mining areas; b) the adverse consequences of earlier Govemment participation in the diamond mining industry; c) the inadequacy o f past policy, legal and regulatory frameworks not geared to improve the conditions o f populace in the miningareas, with emphasis given to earlier rutile agreements; d) the land tenure system, with significant difficulties on the surface rights under Local Administrations vis-a-vis mineral rights under Central Government; and e) the protracted process o f decisions to establish a fiscal regime, which i s acceptable and attractive for Sierra Leone and for investors. 2. Options for Solution. The main options for solution were examined along the establishment of competitive fiscal conditions to attract investments for mineral exploration and mine development, and the improvement of the existing Minerals Act o f 1996, which would facilitate creating an enabling environment for attracting the required investments, whilst ensuring that the sector remains socially responsible. 3. Main Requirements. The LRFFframework must: 0 Benefitthe miningcommunitiedareas. 0 Beattractive to potential investorsfor mineral explorations and/or mine development. 0 Builduponthe current mineral Act, bymodernizing andupdating it. 0 Incorporate effective control and monitoringmeasures. 0 Incorporate an adequate fiscal regime to enable a satisfactory share o fbenefits among all stakeholders; and 0 Ensure that Governmentparticipation i s limitedto policy, regulatory, administrative, monitoring and enforcement functions. Areas of Emphasis 0 Procedures for licensing shouldbe streamlined into a one-stop agency. 0 Systems formulatedenacted shouldbe o f proven, practical and workable nature. 0 Formulations and structure of LRF should aim at avoiding conflicts. 0 Possibility should be considered for incorporating sector specific investment conditions. - 52 - 4. Actions Short Term - within 12months e ReviewexistingmineralLRFF. e Reflect respective regional and international trends andpractices from other mining countries (Ghana, Guinea, Liberia, Tanzania, South Africa, Peru, Chile). Incorporate environmental and social dimensions. e Promote community interest and participation e Address compliance through enforcement of penalties for violations. MediumTerm within 24 months - e Complete update reviewhevision o f LRFFinline with contemporary best practice. e Establishinstitutional capability to effectively implement the LRFF. Long Term beyond 24 months - e Establishmechanism for LRFFreviewhpdateinline with contemporary frameworks. Group 11. InstitutionalFrameworkandAdministrativeCapacity Ministry of Mineral Resources - MMR, which includes principally the Directorate of 1. Main Issues. The management of the mineral sector is the responsibility of the Geological Survey, the Directorate of Mines, and an inter-ministerial Advisory Board. However, since colonial times the institutional setup has changed little, with only minor modifications. The effectiveness of MMR i s thus constrained by its outdated nature, with severe shortages o f human resources and equipment, and i s virtually unresponsive to the modemrealities o f settingpriorities, leading and administratingmineral sector development. 2. Options for Solution. The main options for solution were examined along the reorganization of MMR, to enhance its capacity for administration, monitoring, enforcement and investment promotion, including the development of promotional geo-information. The restructuring and reorganization o f MMR would mainly enable to: a) apply more effectively and efficiently a new mineral policy, with a private sector orientation and increased inter- ministerial linkages; b) enhance the responsiveness of MMR to the developments of a growing mineral sector; c) enable the compilation and dissemination o f basic geo-data for investment promotion and extension service purposes; and e) improve security in the mining areas. 3. Main Requirements. The improvement of institutional performancerequires the following: Modemize arrangements to provide and administrate mineral rights for all scales of mining, with emphasis on artisanal and small-scale mining, through computerized cadastral systems. e Improve the existing dual systems for provision o fmineral rights licenses. - 53 - 0 Establish a one-stop integratedinstitutional set up to facilitate investment processing. 0 Support investment processing and promotion with the development of an integrated mineral informationand database system. 0 Develop further basic geo-information for investment promotion, through airborne geophysical surveys, geo-chemical and geological mapping, preparation o f maps and promotional brochures. 0 Engage inimage buildingand investment promotion campaigns. e Ensure security in mining areas, and thus alleviate perceptions o f significant country risk. 0 Improve currently ineffective Mine Monitoring Officers - MMO, through effective recruitment and selection, as well as provisiono f adequate conditions of service. 0 Improve institutional performance by placing emphasis on capacity building and enhancement o f cross-institutional and cross-departmental linkages. 0 Formulate and implement a mineral institution reform plan along modern approaches, with well formulated and streamlined interactions between Central and Local Governments. 4. Actions Short Term within 12months - 0 Establishment o f a GIS basedcomputerized cadastral system for mineral rights, and initiation of mineraland geological databasepreparation. 0 Integration o f main institutions and departments into a one-stop shop system for providing licenses and investment processing. 0 Formulation, fundingand initiationof aprogram for human resource development. 0 Improvement o f local security arrangements and institutions as UNAMSILpresence i s reduced. 0 Conduction o f mineral investmentpromotionactivities, includingdevelopment o f promotional material through initiation o f airborne geophysical and regional ground surveys. MediumTerm- within 24 months 0 Continued improvement o f local security arrangements and institutions. 0 Furtherintegrationof institutionsand departments. - 54 - 0 Establishment of better employment and remunerationconditions o f mine monitoring officers (MMOs), to improve their effectiveness. 0 Continuation of promotional activities to attract potential investors for exploration and mine development, including, includingpreparation of promotional material through execution of airborne geophysical and regional ground surveys. 0 Establishment o f mineral relatedtraining/education incollaboration with the national University. Long Term - beyond 24 months 0 Establishment of a comprehensive mineraland geological database system. 0 Decentralization o f Geological Survey to the district level to facilitate gathering o f geo-information andprovision o f extension services. 0 Continuation of regional geological mapping andpreparation o f respectivemaps and promotional brochures. Group 111. Financial and CommercializationAspects 1. Main Issues. The ongoing funding of small-scale/artisanal miningis rather informal and usually involves three parties as: a) workers/miners/diggers; b) supporters; and c) bush owners/license-holders /dealers, with revenues split three ways among them. The dealers regularly provide most of the funding to bush owners/license holders, through rather fragile written agreements that can be withdrawn at their caprice, which often results inconflict due to resulting fragmented support then sought from several parties. Additionally, commercial banks are not in a position to assist, reflecting the highrisk nature o f these miningactivities, and difficulty to justify corporate policies for such assistance. Further considerations on support relationships are summarized below: - formal support involves supply o f capital goods includingdozers and draglines, subject to formal arrangements betweenthe license holder and supporter, whereby the former purchases diamonds from the workers, compensates the landowner, and sells diamonds to the - supporter.o incases fdisagreementbetweenlicense holder and supporter, diamondsare soldto a third party dealer, and incurred supporter expenses are deducted, with balances shared on a 50/50 -basis. miners use insome cases various supporters for a single venture, but disputes arise as supportbecomes more complex. 2. Main Requirements. Access to financing and a level playing field for trade are needed to reduce the current costly dependence on supporters, and to improve the share of benefits for miners and diggers. Inparticular there i s need for: 0 Government leadership to fund artisanal and small-scale mining. 0 Establishment of revolving loadcredit fundingwith initial capital provided by the Government. 0 Support o f cooperative mining through some anticipatedbilateral support and initiatives. - 55 - 3. Actions Short term - within 12months Initiate arrangements along lines o f an earlier USAIDrevolving fund, to provide equipment and machinery to artisanal miners, at reasonable cost over long repayment periods. Raise emphasis to create and maintain an enabling environment and level playing field for artisanal and small-scale miners by improving respective regulatory and institutional setups. Begin supporting schemes that will allow: a) access to finance, b) technology improvement through extension services, c) provision of level trading field through decreased dependence on supporters and market liberalization, and d) improvement of operational structure, via cooperative approaches to raise critical-mass momentum and offset operational disadvantages affecting individual miners, in situation o f acute poverty. e Streamline linkages between license holders, diggers, trader and exporters. Group IV. Social and EnvironmentalAspects 1. MainIssues.Consensus was established onthat current artisanal and small-scale mining are not sustainable in social and environmental terms. Many issues were identified, with social concerns covering child labor, erosion o f traditions and indigenous culture, and resulting fertile grounds for prostitution, HIV/AIDS and drug addiction. Some positive aspects were also recognized including the better incentives and benefits pay offered by larger mining operations, with associated economic benefits. On environmental matters, a lack o f clear operational framework and extensive legacies of widespread environmental degradationinheritedfrom artisanal diamond miningwere duly recognized. 2. Social Issues/Constraints e Insecurity and overcrowding inthe miningareas. e Precarious living conditions o f miners and communities. e Poor safety o f miners and poor health conditions o f communities. 0 Diseases due to lack of clean drinkingwater. e Fertile grounds for HIV/AIDS, drug addiction and prostitution. e Significant numbers o f child labor. e Lack o f education and resulting loss o f social values. e Erosion o f traditions and indigenous culture. 0 Focus on miningwith agriculture virtually ignored. e Better incentiveshenefits from large firms vs. drain o f teachers and skilled staff. - 5 6 - 3. Environmental Issues 0 Pollution o f air, water and land. 0 Creation o f stagnant water which can breed diseases. 0 Lack o f reclamation. 0 Loss o f biodiversity. 0 Adverse impacts on infrastructure. 0 Facilitation of land slides, flooding and deforestation. 0 Degradation o f land. Sectoral Issues 0 Weak administration without provisions for the welfare o f people. 0 Extensive illegalminingwithout adequate monitoringand control. 0 Poor skills without emphasis onjob creation and opportunities. 0 Unfair arrangements with unbalanced economic benefits for diggers and miners. 0 Lack o f integrated arrangements for miners- cooperatives. 0 Inadequate opportunities for women at all levels. 0 Earlier agreements with miningcompanies not explicit on community matters. 0 Needto address relocation o f displacedpeople. 0 Existence of important legacy for reclamation and rehabilitation, and degradation effects involving erosion, effluent disposal, top soil and water. Main Requirements 0 Make primary education free and compulsory. 0 Foster skills and vocational training at miningareas. 0 Providejob opportunities for women. 0 Sensitize communities on HIV/AIDS at grass-root levels. 0 Introduce environmental management, and initiate reclamation aimed to diversify into agro and non-mining activities at community levels. 0 Improve relationship among license holder, diggers and traders. 0 Provide security and recreation areas. Actions 0 Prepare comprehensive social and environmental management frameworks, including organizational setup, regulatory and monitoring aspects, education and capacity building. 0 Establish effective monitoringsetup for all scales o f miningoperations. 0 Incorporate environmental assessmentsand mitigation plans for large-scale mines. 0 Improve coordinationwith other ministries and agencies, includinghealth, transport, 0 education and labor. Improve coordination with other ministries and agencies, includinghealth, transport, education and labor. 0 Strengthen monitoring at Government and community levels, usingenforcement incentives. 0 Initiate sensitization at grass-root levels on health issues and preventionmeasures. 0 Apply fees collected for landreclamation. 0 Involve communities intracking down illegal miners. 0 Design and implement pilot programs for community improvements o f artisanal and large-scale mining. 0 Design and implement pilot programs for agriculture development on reclaimed lands - 57 - REFERENCES GovernmentStatutes and other Documents The Mines and Minerals Act (1996) (Formerly DecreeNumber 5 of 1994). The Mines and Minerals (Amendment)Act 1998. Details o f New Policy Measures Relating to Small-scale and Artisanal Miningand Marketing o f Precious Minerals (1998). Mineral Resources Development Policy for Sierra Leone (1998). Government Notice 140, Sierra Leone Gazette 30thJuly 1998. The Commission for the Management of Strategic Resources, National Reconstruction and Development Act (1999). The Environment ProtectionAct (2000). Other Works Anon. 1965. 1963 Population Census o f Sierra Leone. 3 Volumes. Central Statistics Office, Freetown. Anon. 1997. Assistance to artisanal miners (small-scale diamond and gold miners). Unpublishedreport, Mines Division, MinistryofMineralResources, Freetown. 12pp. Barry, J and Schonfield, R. 2000. Sierra Leone chiefdom vulnerability study for the Northern and Eastern Provinces, December 1999. 2 Volumes. Unpublishedreport for the Ministry o f Agriculture, Forestry and Marine Resources, Freetown. Blair, J A S. 1981. Migrant Miners: economic consequences of labour movement to the Sierra Leone diamond mines. 2 Volumes. UnpublishedPhD Thesis, University o f Glasgow. Coxon, A M. 2000. Suggestions for the renaissance o f the diamond market in Sierra Leone. Conflict diamonds quantified and suggestions for their control. Assistance from De Beers. Unpublishedreport. 1lpp. DFID. 2002. Sierra Leone. Diamond Policy Study. Report for the Department for Intemational Development, UK Government. Prepared by AMCO Robertson Mineral Services. 13lpp. Dumba, S. 1977. Rehabilitation o f the NDMC (SL) Ltd leased areas in Kono and Tongo. Unpublished project proposal outline. 6pp. Fithen, C. 1999. Diamonds and War in Sierra Leone: cultural strategies for commercial adaption to endemic low-intensity conflict. UnpublishedPhD Thesis, University o f London. Goreux, L.2001. Conflict Diamonds. World Bank Africa Region Working paper Series N o 13. 29pp. - 58 - Hall, P K. 1969. The diamond fields o f Sierra Leone. Geological Survey of Sierra Leone Bulletin5. 133pp. Kpundeh, S J. 1999. The fight against corruption in Sierra Leone. In: Stapenhurst, R and Kpundeh, S J (eds.), Curbing Corruption. Toward a Model for BuildingNational Integrity. World Bank ED1Development Studies. p207- 234. Reno, W. 1996. Corruption and State Politics inSierra Leone. Cambridge University Press, New York. Smillie, I,Gberie, L and Hazleton, R. 2000. The Heart o f the Matter. Sierra Leone, diamonds and human security. Partnership Africa Canada. 89pp. Thomas, A C. 1983. The population of Sierra Leone. An analysis o f population census data. Demographic Research and Training Unit,FourahBay College, Freetown. 299pp. UNPanel of Experts.2000. Report of the Panelof Experts Appointed Pursuant to Security Council Resolution 1306 (2000), Paragraph 19, in Relation to Sierra Leone. UnitedNations Document S/2000/1195.44pp. UN Panel of Experts. 2001. Report of the Panel of Experts pursuant to Security Council Resolution 1343 (2001), Paragraph 19, Conceming Liberia. United Nations Document S/2001/ 101.5. 129pp. Van der Laan, H L. 1965. The Sierra Leone Diamonds. An economic study covering the years 1952-1961. Oxford University Press. 234pp. World Bank, 1994. Sierra Leone: Initial Assessment of Environmental Problems. World Bank Industry and Energy Division, Western Africa Department. Report No.: 11920-SL. 87PP. - 59 -