Document of The World Bank FOR OFFICIAL USE ONLY Report No: RES12832 INTERNATIONAL DEVELOPMENT ASSOCIATION RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF MINING SECTOR INSTITUTIONAL STRENGTHENING TECHNICAL ASSISTANCE PROJECT CREDIT/GRANT June 26, 2008 TO MONGOLIA December 18, 2013 Oil, Gas and Mining Unit Sustainable Energy Department Sustainable Development Network Country Department EACCF East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS EIA Environmental Impact Assessment EMGL Erdenes MGL (Mongolia) ETT Erdenes Tavan Tolgoi FA Financing Agreement IMF International Monetary Fund IPO Initial Public Offering MINIS Mining and Infrastructure Project financed by the World Bank (P118109) including Additional Financing (P145439) MMRE Ministry of Mineral Resources and Energy (now Ministry of Mining) MoEGD Ministry of Environment and Green Development (formerly Ministry of Environment and Tourism) MoF Ministry of Finance MoM Ministry of Mining (formerly Ministry of Mineral Resources and Energy) MRPAM Mineral Resources and Petroleum Authority of Mongolia (now Mineral Resources Authority of Mongolia) MRAM Mineral Resources Authority of Mongolia (formerly Mineral Resources and Petroleum Authority of Mongolia) MSISTAP Mining Sector Institutional Strengthening Technical Assistance Project MTA Mongolian Tax Authority MTR Mid-Term Review OECD Organization for Economic Co-operation and Development OHS Operational Health and Safety OP Operational Manual PAD Project Appraisal Document PDO Project Development Objective PIU Project Implementation Unit PSC Project Steering Committee SESA Strategic Environmental and Social Assessment SWF Sovereign Wealth Fund TA Technical Assistance TT Tavan Tolgoi Regional Vice President: Axel van Trotsenburg Country Director: Klaus Rohland Country Manager: Coralie Gevers Sector Manager: Christopher Sheldon Task Team Leader: Ekaterina Mikhaylova 2 MONGOLIA Mining Sector Institutional Strengthening Technical Assistance Project CONTENTS A. SUMMARY 5 B. PROJECT STATUS 6 C. PROPOSED CHANGES 7 ANNEX 1: RESULTS FRAMEWORK AND MONITORING 16 ANNEX 2: SAFEGUARDS 29 3 DATA SHEET Mongolia Mongolia Mining Sector Technical Assistance Project (P108768) EAST ASIA AND PACIFIC SEGOM . Report No: RES12832 . Basic Information Technical Assistance Project ID: P108768 Lending Instrument: Loan Regional Vice President: Axel van Trotsenburg Original EA Category: Partial Assessment (B) Country Director: Klaus Rohland Current EA Category: Partial Assessment (B) Sector Director: Subramaniam V. Iyer Original Approval Date: 26-Jun-2008 Christopher Gilbert Sector Manager: Current Closing Date: 31-Dec-2013 Sheldon Team Leader: Ekaterina Mikhaylova . Borrower: Responsible Ministry of Finance Agency: . Restructuring Type Form Type: Full Restructuring Paper Decision Authority: Board Approval Restructuring Level 1 Level: . Financing ( as of 10-Nov-2013 ) Key Dates Revised Approval Effectiveness Original Project Ln/Cr/TF Status Signing Date Closing Date Date Closing Date Date P108768 IDA-44890 Effective 26-Jun-2008 07-Oct-2008 04-May-2009 31-Dec-2012 31-Dec-2013 P108768 IDA-H4110 Effective 26-Jun-2008 07-Oct-2008 04-May-2009 31-Dec-2012 31-Dec-2013 Disbursements (in Millions) Undis- % Dis- Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed bursed bursed P108768 IDA-44890 Effective XDR 3.15 3.15 0.00 2.07 1.08 66 P108768 IDA-H4110 Effective XDR 2.57 2.57 0.00 2.15 0.42 83 4 . Policy Waivers Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] Does the project require any policy waiver(s)? Yes [ ] No [ X ] . A. Summary of Proposed Changes This proposed level 1 restructuring seeks approval of the Board to revise the Project Developmental Objective (PDO) for the Mining Sector Institutional Strengthening Technical Assistance Project (MSISTAP, P108768). The restructuring package also includes (i) extension of the Project closing date from December 31, 2013 to March 31, 2015; (ii) updates to the project design, including revision of the results framework; (iii) an update of the safeguards arrangements (triggering OP/BP 4.12); (iv) revision of the disbursement categories; and (v) restructuring of the non-standard legal covenants. MSISTAP remains crucial in building capacity of the Government of Mongolia to regulate an important and rapidly expanding mining sector. The proposed restructuring will reflect the changing political economy and address the deficiencies of the original project design. An extension of the closing date will ensure completion of project activities and the higher level of achievement of its development objectives. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ X ] No [ ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ X ] No [ ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ X ] No [ ] Change in Loan Closing Date(s) Yes [ X ] No [ ] Cancellations Proposed Yes [ ] No [ X ] Change to Financing Plan Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ X ] No [ ] Change in Disbursement Estimates Yes [ X ] No [ ] Change to Components and Cost Yes [ X ] No [ ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ X ] No [ ] Change in Implementation Schedule Yes [ ] No [ X ] Other Change(s) Yes [ ] No [ X ] Appraisal Summary Change in Economic and Financial Analysis Yes [ ] No [ X ] Appraisal Summary Change in Technical Analysis Yes [ ] No [ X ] Appraisal Summary Change in Social Analysis Yes [ X ] No [ ] Appraisal Summary Change in Environmental Analysis Yes [ X ] No [ ] Appraisal Summary Change in Risk Analysis Yes [ X ] No [ ] . 5 B. Project Status The Mining Sector Institutional Strengthening Technical Assistance Project, Grant No H411-MN and Credit No 4489 MN, was approved on June 26, 2008, and became effective on May 4, 2009. The current closing date is December 31, 2013 (after a one year extension approved on July 2, 2012 following the Mid-Term Review). Project disbursements as of November 2013 are USD $6.52 million out of USD $8.7 million (or 75% of the total). At the project’s appraisal, the mining sector was recognized as a key and rapidly growing part of Mongolia’s economy. In 2007, mining directly accounted for about 20 per cent of real GDP, 56 per cent of gross industrial output, 69 per cent of exports, and 36 per cent of government revenue. At the time, the World Bank estimated that the mining sector had the potential to “increase output substantially over the next decade and is projected to double or even triple from 2005 levels by 2010" under the right conditions. In 2013, the mining sector is still a crucial part of the Mongolian economy. Despite the slowing of commodities demand from China (Mongolia’s primary consumer), the sector experienced 8.9 per cent annual growth in 2012, up from 7.3 per cent growth in 2011. Although the mining sector’s share of GDP has been decreasing since 2009 (15.7 per cent of GDP in 2012), other industries associated with mining industry investment (construction, transportation and other services) are increasing, and there has been a 17.9 per cent growth in mining sector employment since 2010. Much of Mongolia’s mineral potential remains untapped – only 15 per cent of the country is fully mapped, and only 17 per cent is under exploration. Underlying these statistics is the reality that commodity demands will increase over the long term, and the enormous potential of Mongolia’s mineral resources will remain valuable. Overall, MSISTAP remains very relevant to the economic development of Mongolia, given the prominence of the mining industry and the pace of the reforms it is reaching, albeit with a delay. Mongolia is currently developing a mining policy, updating its mining legislation, and working towards updating its capacity to manage and supervise the mining sector in line with its potential. At the same time, the government is engaged in startup of one of the largest mining projects in the world (the Oyu Tolgoi copper project by Rio Tinto with financing approved from IFC, MIGA and private banks), and assessing options for developing its strategic mineral assets, all of which will require strong capacity to structure the deals and attract investment. Increasing benefits to the local population from mine development and related infrastructure while mitigating negative impacts of mine development on environment and livelihoods are being given high priority. To date, MSISTAP’s top achievements included: • Support to the Ministry of Finance (MoF) and Mongolian Tax Authority (MTA) has enabled the establishment of a mineral taxation unit, and refined the Sovereign Wealth Fund (SWF) framework. Tax treaties and the taxation regime were updated, resulting in higher collections and revenues. However, it is noted that political issues which were not within the control of the project also drove macro-fiscal policies to their low point in 2012-2013. • A modern computerized mining cadastre system has been developed in the Mineral Resources Authority of Mongolia (MRAM), and is accessible on-line for information purposes. The Mining cadastre is a major milestone in upgrading and streamlining the management of mining licenses and improving transparency and data access. While there is still an on-going ban on new exploration licenses (see sections that follow) the cadastre system is in use to administer existing licenses, and is fully set up to start issuing licenses once the ban is lifted. The procedures for mineral assets tendering have also been uploaded and are ready to be activated once the new law is in force. • The state owned mining company, Erdenes MGL, has received extensive training and technical support, as well as advice on corporate strategy and assessment of some of its mineral assets, including detailed studies of Tavan Tolgoi coal deposits and Shivee Ovoo coal, with the latter not resulting in follow up action or investments, while TT proceeding to development. • While many of the project outcomes to-date were meaningful, and the project was rated Moderately Satisfactory for progress toward PDO and implementation from its commencement to early 6 2013, both of these ratings were downgraded to Moderately Unsatisfactory in March 2013. The downgraded ratings stem from the following factors: • the underestimated influence of the electoral cycle in Mongolia on mining sector reforms. Prior to elections, mining and its economic impacts tend to become the center piece for debate, making decision- making by the relevant ministries that manage the sector difficult. MSISTAP experienced two election cycles during its implementation period – the 2008 elections, which postponed effectiveness by a year, and almost a year of inactivity around the 2012 elections, including changes in political direction and the restructuring of the ministries following the elections; • the original project design did not adequately account for the strength of influence of the political situation on mining reform, and was overly optimistic and ambitious in terms of the institutional reforms that could be realistically achieved within the project life-time. This included an ambitious PDO and results framework combined with limited flexibility of the project to address the changing political economy, and the postponement of an institutional review of mining governance until the last phase of the project, which de facto triggered the postponement of many policy-level decisions; • as an update of the Mining Law has been pending since 2010, the Government has suspended the issuance of new exploration licenses and has banned the transfer of licenses between companies, which strongly impacted the full roll out of the mining cadastre component; this delay with the Law also impacted the regulatory component, which was designed to prepare the supporting regulations of the Law and is subject to a consultative process; • restrictions by the Security Council on the disclosure of geological data negatively impacted project components related to the update of the geological database. This restructuring paper addresses the timing issues and updates the political economy considerations and risks following the 2012 elections; it also reflects some of the recommendations of the mid-term review of 2011. The Government has made meaningful progress during 2013 in regards to MSISTAP. There is strong ownership by the updated Project Steering Committee (PSC), which meets regularly and ensures timely decisions. The Ministry of Mining assumed leadership of the implementation of the core components. The implementation and fiduciary responsibilities remain within the Ministry of Finance which, in addition to the implementation of Component 1 of the project, provides high level oversight and guidance for the entire project. The 2013 Procurement Plan for MSISTAP was an example of proactivity and realism, which led to more timely and efficient decision-making, with most of the activities planned for the extension period reaching pre-contract signing stages at this time (with signing pending approval of project restructuring). A 15-month extension will enable the Project to come closer to achieving its PDO. The restructured project will better reflect the priorities and linkages between project activities and outcomes, and will better align with its technical assistance nature. This proposal meets the criteria of OP/BP 10.00 for extension of closing dates; it continues to support actions leading to improved economic development and contributes to poverty reduction by improving governance of one of the most prominent economic growth sectors in Mongolia. Although the Development Objective and Implementation Progress ratings are ”Moderately Unsatisfactory” at this time as mentioned above, the new government is committed to the project’s objectives and to improving its implementation performance as illustrated in the paragraph above. Implementation arrangements will remain unchanged; the Project Implementation Unit under the Ministry of Finance has proved to be effective and project management and fiduciary ratings for MSISTAP are consistently satisfactory. There are no outstanding audit reports or audit reports not satisfactory to the Bank. There are no disbursement related issues or suspensions. With the revised PDO, the project’s objectives will be achievable. Under the revised timetable and procurement plan, MSISTAP is well placed to complete all its planned activities by December 2014, leaving an additional three months for the government to undertake monitoring and evaluation activities for the project. . 7 Development Objectives/Results Project Development Objectives (P108768 - Mongolia Mining Sector Technical Assistance Project) Original PDO The project development objective (PDO) for this first phase of support is to assist the Government to develop further the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of government, industry, and civil society. This includes the operation of Erdenes MGL LLC according to good international practice associated with a commercial entity. Change in Project's Development Objectives Please describe the change and explain the reason for change Based on the country perception and the Bank’s assessment, the first part of the PDO remains fully relevant and is sustainable on its own merit. It clearly links with the project scope and is achievable; to a large extent support for commercializing Erdenes MGL (the second part of the PDO, which starts with “this includes”) is already captured within the wording of the first part of the PDO. The new PDO, therefore, proposes to drop the objective of fully commercializing Erdenes, MGL as redundant and overly ambitious time-wise. Erdenes MGL is a state-owned holding company which controls the government’s shares in strategic mineral assets in Mongolia, including mega projects such as the Oyu Tolgoi copper, gold and molybdenum deposit (the state part of the project is managed by the project company Erdenes Oyu Tolgoi, LLC) and the Tavan Tolgoi coking coal project (managed by the project company Erdenes Tavan Tolgoi, LLC), as well as older mining projects including Erdenet copper (run jointly with Russia since 1974). The company was conceived prior to MSISTAP in 2007, and its charter was approved in May 2012 (MSISTAP supported assessment of options and other preparatory work). Erdenes MGL remains a strong political asset for the Government of Mongolia and the 2012 elections resulted in an increase of the state’s control over Erdenes MGL operations; the company’s charter is in need of an update at this time due to these recent changes. This reflects the company’s importance as a key government instrument to manage state equity in mineral development projects but also highlights the risks and at times fluidity of the situation with this state owned enterprise. In view of the above, this part of the original PDO is assessed, in addition to being redundant, as having been overly ambitious and prescriptive at the on-set of the project given the political nature of the mining sector and state ownership in particular. While Erdenes MGL makes progress on improving its governance to be able to operate as a commercial entity, it is unlikely that it can reach full OECD compliance within the project’s lifetime. Despite the change in the PDO, the company’s importance to the mining sector and the regulatory framework is such that its inclusion in the project remains meaningful and relevant. It is acknowledged that MSISTAP as a technical assistance project is not a suitable instrument to influence this policy-level decision, but it is well placed to provide technical assistance to the company and the government to inform the decision making. The final phase of the project will continue supporting Erdenes MGL governance reforms, including the financing of a business strategy, an update of its legal statutes and charter as well as of the project agreements with its subsidiaries, establishment of a modern information management system to ensure better transparency and accountability between the holding and its project companies. The company remains committed to the earlier agreed path of development, but the pace of the reforms has to remain commensurate to policy decision-making and market conditions. Proposed New PDO The Project’s objective is to establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry, and civil society. 8 Change in Results Framework Explanation: The original results indicators are complex and some of them cannot be fully attributed to the project. Based on the progress-to-date and in view of the revision of the PDO and the need to simplify the design, the indicators are proposed to be revised. Annex 1 provides details, and the two major changes include: a. The indicator “Increased number of outreach and education programs for artisanal and small scale miners on technology, safety, and environmental issues” will be dropped, because the corresponding sub-component was dropped (see section Components below). b. Reflecting the change in the PDO in relation to Erdenes MGL, the PDO-level indicator “Establishment of good practice internal management systems and standard operating procedures for state equity holding company Erdenes MGL” has been dropped, and a modified indicator is added to the intermediate indicators (“Erdenes MGL financial reports are provided quarterly to the Board of Directors”). While meaningful progress is expected to be made in many instances of improving of Erdenes MGL governance, with only 12 to 15 months left to complete the project, and given that steps towards adopting new structures and documentation for Erdenes MGL will require internal governmental processing and approvals which are outside of control of the project, MSISTAP will be conservative in estimating its achievements and will instead rely on report details in the Implementation Completion Report. . Compliance Change in Safeguard Policies Triggered Explanation: As part of this Project restructuring, the Bank reviewed safeguards arrangements for the Project and found deficiencies which are being addressed as part of the package. Details are provided in Annex 2 and in summary key safeguards issues are as follows: a. At the project appraisal, no specific mineral deposit level work was envisaged and no mechanism was created for management of environmental and social risks that might have resulted from studies and assessments, which in hind-sight was a deficiency of the original design. b. In 2010, MSISTAP financed a pre-feasibility study for East Tsankhi mine - a project of Erdenes Tavan Tolgoi (ETT), a state-owned mining company under the Erdenes MGL holding company, which continues to be in operation. The study assessed the geological potential of the coalfield and technical issues to start up the operation of a 15 million ton per annum 30 year mine-life mine; the study was also in part intended to define targets for the planned (at that time) initial public offering for ETT. With hindsight, safeguard policies should have been applied to the study. c. OP/BP 4.12 (Involuntary Resettlement) was not triggered at appraisal, but at the time of this restructuring the project recommends to trigger this safeguard. This is triggered for the pre-feasibility study for East Tsankhi where relocations of two winter shelters took place in 2010 and more resettlements may be taking place as ETT project expands (not related to MSISTAP or East Tsankhi study). See Annex 2 for more details. d. OP/BP 4.01 (Environmental Assessment) and Category B (partial assessment) classification assigned at appraisal remain relevant for both the earlier envisaged technical advice to improve enabling environment for future investments in the mining sector, as well as for additional safeguards work to be completed in view of the East Tsankhi study. As part of MSISTAP restructuring, the Recipient committed to an Action Plan (see Annex 2) which will help to ensure follow up and compliance with the World Bank requirements of the possible effects of pre- feasibility study carried out for ETT, including (i) carrying out of cumulative impact assessment for ETT (to be funded under the Mining Infrastructure Investment Support (MINIS) project ), (ii) updating ETT’s 9 environmental and social management system (funded through MSISTAP), and (iii) preparing of a Resettlement Policy Framework (RPF) and Resettlement Action Plan (RAP) for ETT (funded through MSISTAP). The Recipient is committed to implementing the Action Plan in close collaboration with the Bank. The Restructured project will ensure that adequate resources will be provided to implement the activities set forth in the Action Plan. The resources needed to implement the activities will be determined more precisely and confirmed during the implementation of the restructuring based upon the ToRs to be developed in line with achieving the objectives of the Action Plan. Strategic Environmental and Social Assessment (SESA) for mining sector. The project is also undertaking a SESA of the mining sector. It aims to diagnose the key environmental and social problems and opportunities associated with the rapid growth of Mongolia’s mining sector, identify the policy, legal, regulatory, and institutional adjustments and capacity-building actions needed to minimize the adverse environmental and social impacts of mining operations and associated infrastructure development, while enhancing the positive impacts; and propose specific measures that Government of Mongolia can implement to improve the environmental and social sustainability of mining. The scope of SESA was developed in a consultative manner with the Government, CSOs and private sector. It is in the contracting stage pending approval of MSISTAP restructuring. This strategic and consultative guidance of SESA will, inter alia, inform further EIA-related work by ETT as well as other mines to comply with their legal and regulatory obligations. SESA will include GIS mapping of cumulative impacts from mining and related infrastructure country wide. SESA is expected to be completed by November 2014. Current and Proposed Safeguards Policies Triggered: Current Proposed Environmental Assessment (OP) (BP 4.01) Yes Yes Natural Habitats (OP) (BP 4.04) No No Forests (OP) (BP 4.36) No No Pest Management (OP 4.09) No No Physical Cultural Resources (OP) (BP 4.11) No No Indigenous Peoples (OP) (BP 4.10) No No Involuntary Resettlement (OP) (BP 4.12) No Yes Safety of Dams (OP) (BP 4.37) No No Projects on International Waterways (OP) (BP 7.50) No No Projects in Disputed Areas (OP) (BP 7.60) No No . Change in Legal Covenants Explanation: Several dated covenants are proposed to be restructured in conjunction with the changes to the PDO and updated targets for capacity building. In addition, new covenants are proposed to be added to reflect updates to the safeguards arrangements. Finance Date Ln/Cr/TF Agreement Description of Covenant Status Recurrent Frequency Action Due Reference Established/adopted corporate systems, legal framework and structure Not IDA- Schedule II, 30-Jun- acceptable to the complied Revised H4110 Section V, 1 2010 Association, consistent with with those of a commercial entity operating under 10 OECD Principles of Corporate Government Erdenes MGL completed review of options and recommendations for the revision of its corporate systems, legal framework and structure with an Not IDA- Schedule II, objective to make its 30-Jun- complied Proposed H4110 Section V, 1 structure more consistent 2014 with with those of a commercial entity operating according to OECD standards or similar as accepted by the Association for corporate governance. Commenced, and thereafter continue, with the preparation and public Not Marked IDA- Schedule II, 30-Jun- disclosure of quarterly complied for H4110 Section V, 1 2010 activity reports in a manner with Deletion and substance acceptable to the Association Commenced, and thereafter continue, with preparation and public disclosure of annual reports Partially Marked IDA- Schedule II, 30-Jun- documenting the complied for H4110 Section V, 1 2010 company’s activities and with Deletion financial condition (including audited financial statements), Completed the preparation of a strategy and implementation plan, in a manner and substance Not Marked IDA- Schedule II, 30-Jun- satisfactory to the complied for H4110 Section V, 1 2011 Association, for the listing with Deletion of shares of the company on the Mongolian Stock Exchange Select and engage the services of an external independent auditor for IDA- Schedule II, the Project under terms of 31-Mar- Complied No H4110 Section V, 2 reference and with 2009 with Change experience and qualifications acceptable to the Association Cause MOF and MRPAM to develop and furnish to Not IDA- Schedule II, the Association for 29-Jan- complied Revised 44890 Section I, C comments, by no later than 2010 with January 31, 2010, a set of draft model investment 11 contracts for the extractive industries in Mongolia, in form and substance satisfactory to the Association Recipient to cause MoF to develop and furnish to the Association a set of draft model Stabilization Agreement or equivalent Not IDA- Schedule II, 30-Jun- for mining and draft model complied Proposed 44890 Section I, C 2014 Production Sharing with Agreement or equivalent for petroleum, in form and substance satisfactory to the Association Thereafter, by no later than March 31, 2010, draw up final drafts of such model Not Marked IDA- Schedule II, 31-Mar- investment contracts, complied for 44890 Section I, C 2010 taking into consideration with Deletion the comments provided by the Association. Complete and furnish to the Association for discussion, by no later than June 30, Not IDA- Schedule II, 2010, the mining sector 30-Jun- complied Revised 44890 Section I, C institutional assessment 2010 with study in form and substance satisfactory to the Association Recipient to complete and furnish to the Association for discussion the mining Not IDA- Schedule II, 31-Mar- sector institutional complied Proposed 44890 Section I, C (a) 2014 assessment study in form with and substance satisfactory to the Association Thereafter, implement the Not IDA- Schedule II, study recommendations as No complied Yearly 44890 Section I, C discussed with the Change with Association Recipient to carry out & publicly disclose an assessment of compliance of ETT’s operation of the East Tsankhi mine with Not IDA- Schedule 2, Bank standards or similar 31-May- complied New 44890 Section D (a) standards acceptable to the 2014 with Association practices for environmental & social safeguards and recommendations on update to the EMS 12 Recipient to prepare and publicly disclose a RPF and Not IDA- Schedule 2, 31-Mar- RAP for the East Tsankhi complied New 44890 Section D (b) 2014 Mine in form and substance with acceptable to the Bank . Financing Change in Loan Closing Date(s) Explanation: An extension of the closing date will ensure completion of project activities and the higher level of achievement of its development objectives. Original Closing Current Closing Proposed Closing Previous Closing Ln/Cr/TF Status Date Date Date Date(s) IDA- Effective 31-Dec-2012 31-Dec-2013 31-Mar-2015 31-Dec-2012 44890 IDA- Effective 31-Dec-2012 31-Dec-2013 31-Mar-2015 31-Dec-2012 H4110 Reallocations Explanation: To simplify administrative arrangements, two new "catch-all" categories are proposed to be created (one for the credit-financed components and one for the grant-financed components) to replace the old four categories. The old categories will close with balances as of the date of the approval of restructuring, while the balances left will be reallocated to the new categories. This will simplify administration for the PIU. Current Category of Disbursement % Ln/Cr/TF Currency Allocation Expenditure (Type Total) Current Proposed Current Proposed IDA-44890 XDR PTs.1,2 &4, CS,TR & WS 1,930,000.00 1,039,545.00 100.00 100.00 PT3, CS,TR & WS 860,000.00 426,070.00 100.00 100.00 DISB - GOODS 270,000.00 226,610.00 100.00 100.00 DISB - OPERATING 90,000.00 51,573.00 100.00 100.00 COSTS Designated Account 0.00 0.00 0.00 0.00 General 0.00 1,406,202.00 0.00 100.00 Total: 3,150,000.00 3,150,000.00 IDA-H4110 XDR PTs.1,2 &4, CS,TR & WS 2,470,000.00 1,742,815.00 100.00 100.00 DISB - OPERATING 100,000.00 81,920.00 100.00 100.00 COSTS Designated Account 0.00 0.00 0.00 0.00 General 0.00 745,265.00 0.00 100.00 Total: 2,570,000.00 2,570,000.00 Disbursement Estimates Change in Disbursement Estimates 13 Explanation: As of November 26, 2013, approximately US $6.52 million out of US $8.7 million was disbursed, with a disbursement rate of approximately 75%. It is anticipated that the project will fully disburse all remaining funds by the end of calendar year 2014. It is noted that due to foreign exchange fluctuations the USD equivalent of the combined credit and grant reduced from $9.3 million at Board approval to $8.7 million by November 2013. To reflect the current situation, the Client Connection data is being used for the purpose of this Restructuring Paper. Fiscal Year Current (USD) Proposed (USD) 2009 1,300,000.00 0.00 2010 2,500,000.00 1,878,335.02 2011 3,000,000.00 1,651,946.45 2012 2,500,000.00 1,273,666.70 2013 1,431,028.73 2014 1,465,023.10 2015 1,000,000.02 Total 9,300,000.00 8,700,000.00 . Components Change to Components and Cost Explanation: Project Components. The Project consists of four components: (a) Strengthening the Capacity to Manage Mining Revenues and Develop Economic and Sector Policies, (b) Improving Regulatory Capacity to Manage Mining Sector Development, (c) Developing the Capacity for Management of State Equity, and (d) Project Management. Project component design in essence remains the same with one update: Drop of Artisanal and Small Scale Mining Sub-component 2(e). This update recommendation originates with the Mid-term Review of 2011. The project initially included a sub-component to support artisanal and small-scale mining sector reform, which was later taken on by the dedicated Sustainable Artisanal Mining Project, funded by the Swiss Development Corporation and implemented by the Ministry of Mining. The MSISTAP Project Steering Committee decided that this work was best undertaken solely by the dedicated project, and that it was best to avoid duplication. That decision was accepted by the World Bank during the Mid-Term Review. As such, the Financing Agreement for MSISTAP will be amended to formally drop the ASM sub-component. Proposed Current Cost Proposed Current Component Name Action Component Name (US$M) Cost (US$M) Strengthening capacity to 4.10 4.10 No Change manage mining revenues Improving regulatory capacity to manage mining sector 3.00 3.00 No Change development Development of capacity to 1.40 1.40 No Change manage State Equity Project Management 0.80 0.80 No Change Total: 9.30 9.30 14 . Other Change(s) Change in Procurement Explanation: The project followed old guidelines and old thresholds for procurement prior-review as per the original Financing Agreement. In view of the update of the procurement thresholds and procedures for Mongolia portfolio in 2012, the Paragraph D of Section III of Schedule 2 of the Financing Agreement shall be deleted completely and replaced with the following: “D. Review by the Association of Procurement Decisions The Procurement Plan shall set forth those contracts which shall be subject to the World Bank’s prior review. All other contracts shall be subject to post review.” 22. Appendix: Definitions of the Financing Agreement shall be amended as follows: Paragraph 1 shall be replaced with the following: “Anti-Corruption Guidelines” means the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006, and revised in January 2011. Paragraph 3 shall be replaced with the following: “Consultant Guidelines” means the “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers,” published by the Bank in January 2011. Paragraph 16 shall be replaced with the following: “Procurement Guidelines” means the “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” published by the Bank in January 2011. . Change(s) in Appraisal Summary Appraisal Summary Change in Social Analysis Explanation: OP/BP 4.12 (Involuntary Resettlement) was not triggered at appraisal, but at the time of this restructuring the project recommends to trigger this safeguard. This is triggered due to the pre-feasibility study for East Tsankhi where relocations of two winter shelters took place in 2010 and more resettlements may be taking place as ETT project expands (not related to MSISTAP or East Tsankhi study). As part of MSISTAP restructuring, the Recipient committed to an Action Plan which will help to ensure follow up and compliance with the World Bank requirements of the possible effects of pre-feasibility study carried out for ETT, including on the social side preparation of a Resettlement Policy Framework (RPF) and Resettlement Action Plan (RAP) for ETT (funded through MSISTAP). Appraisal Summary Change in Environmental Analysis Explanation: OP/BP 4.01 (Environmental Assessment) and Category B (partial assessment) classification assigned at appraisal remain relevant for both the earlier envisaged technical advice to improve enabling environment for future investments in the mining sector, as well as for additional safeguards work to be completed in view of the East Tsankhi study. Under the Action Plan, which will help to ensure follow up and compliance with the World Bank requirements of the possible effects of the pre-feasibility study carried out for ETT, on the environmental side, the client will carry out a cumulative impact assessment for ETT 15 (to be funded under the Mining Infrastructure Investment Support (MINIS) project), and (ii) update ETT’s environmental and social management system (funded through MSISTAP). Appraisal Summary Change in Risk Analysis Explanation: The initial project appraisal rated the project’s overall risk as Substantial. This project restructuring does not create any additional risks beyond those identified in the initial appraisal. Several of these risks still remain relevant, as do the appropriate strategies for mitigation. The removal of Erdenes MGL from the PDO reduces the project’s risk profile to some extent, as risks associated with Erdenes MGL were rated as High in the initial appraisal. The risks associated with Erdenes Tavan Talgoi are largely reputational. With review of the case completed and an action plan in place, MSISTAP has a reasonably manageable strategy to mitigate this risk. While financing from MINIS was agreed at the project level, there is a risk of delays or disagreements between the projects’ Steering Committee on this activity support. Since there is a commitment on both the Bank and the client side to implement this activity, however, the financing gap risk is small. The overall Substantial risk rating remains appropriate for the Project. 16 ANNEX 1: Results Framework and Monitoring Revisions to the Results Framework Comments/ Rationale for Change PDO Current Proposed (if any) To establish key pieces of the policy, fiscal, legal, To establish key pieces of the policy, Achievement of the second part of the PDO is highly regulatory and institutional framework for the fiscal, legal, regulatory and institutional unlikely and beyond the scope of the project. There are mining and extractive sector that meet needs of the framework for the mining and extractive priority steps that need to be completed by the Government public sector, industry, and civil society, including sector that meet needs of the public including updates of Erdenes MGL mandate and processes the operation of Erdenes MGL LLC according to sector, industry, and civil society. which will be supported during the remaining phase of the international standards associated with Project. commercial entities. PDO Indicators Annual budget decisions to replenish or withdraw The Fiscal Stability fund is implemented Criteria for the operation of the SWF are established by the from the newly established Sovereign Wealth in line with the Fiscal Stability Law with Fiscal Stability Law, so this is suitably referenced in the Fund are made based on agreed macro-economic appropriate guidelines, procedures and modified PDO indicator. The existing Fiscal Stability Fund criteria. organizational support. framework was established independent of MSISTAP, largely driven by the IMF’s response to the 08-09 financial crisis. MSISTAP has since worked to provide advice on improving the structure of the sovereign wealth fund. Level of mining related transfers from national No change This target remains relevant but challenging. Dialogue on government to Aimag and Soum authorities is revenue management is active but with a lot to go. known and publicly disclosed. Mining pilot tax audits are completed and No change. assessments raised. Clear authority and responsibilities for No change. This target remains relevant but challenging to achieve, Government mining sector management largely due to political economy dimensions rather than institutions, especially regarding environmental technical or capacity related constrains. Functional and social aspects associated with mining management review of MoM and SESA are expected to be activities. completed to provide set of recommendations to clarify and improve authorities and responsibilities but implementation of these recommendations will likely take place only after MSISTAP completion. The project will assess the level of success and sustainability of this part of the assistance at closure. 17 Current Proposed (if any) Mineral licensing procedures streamlined and Cadastre system in place and publicly The government’s moratorium on issuing licenses has processing times reduced. accessible at the MRAM. created a significant challenge in this area. The ongoing review of the Minerals Law (2006) has also resulted in uncertainty MSISTAP has funded work to develop a cadastre system, including hardware and software. While the system is ready, its final release is delayed. This component is fundamental to the success of the sector and as such will be retained as an indicator. Geological information is digitized and published No change. This indicator will be challenging to complete given and readily available in user friendly digital restriction on the geodata disclosure by Security Council. formats. But given the relevance of this activity for mineral sector, MSISTAP will remain to support this part of the project. Establishment of good practice internal Remove and replace with a new indicator Due to political economy and the complexity of the issue management systems and standard operating added to the intermediate indicators. of state ownership of mineral assets, the project has limited procedures for state equity holding company control over such decisions. As such, the indicator is Erdenes MGL revised to reflect what the project has influenced and was able to achieve. A new indicator is added to the intermediate indicators (see intermediate indicators section below). Companies and civil society express satisfaction Companies and civil society participate in The original indicator did not have a baseline in PAD and (through surveys) that pieces of legislation and consultation for pieces of legislation and was not tracked as well as unclear. This indicator will be regulation reflect their concerns and needs as per regulation for mining sector through (a) replaced by a measurable indicator of participatory the outcomes of the participatory process. (p. 49 of public fora arranged by the government. consultation process for policy, legal and regulatory acts in the PDA – not included in MTR). mining sector and (b) an additional intermediate indicator is being inserted to reflect the consultation and engagement process undertaken as part of the SESA which partially will respond to the issue of raising awareness and facilitating participatory processes. 18 Intermediate Results indicators Component 1 Current Proposed change (if any) Sovereign Wealth Fund or alternative mineral No change. This part of the project is also receiving parallel support from revenue stabilization mechanism established. other WB and ADB projects. Preparation and adoption of good practice draft Preparation of draft model Stabilization MSISTAP funded the drafting of a model agreement which Model Mining Investment Agreements. Agreement or equivalent for mining and was provided to Erdenes MGL. The agreement was used for draft model Production Sharing Erdenes TT but no single standardized agreement has yet been Agreement or equivalent for petroleum. adopted. The highly contentious nature of such agreements and the ongoing debate over this area makes it impractical for a draft agreement to be widely accepted before the new law is in place and new regulations. It’s not yet fully agreed if a single agreement will serve as a basis for discussions, given the wide range of mineral resources and sites under consideration and political economy in Mongolia. MSISTAP will be funding work in 2013 to develop model stabilization agreements for MoF, reflecting a focus on long term tax/regulation stabilization. Preparation, adoption and publication of a good Remove. This work is outside the project’s remit however it is being practice policy statement on State equity supported in part under a separate activity by the World Bank participation in the mining sector. – advice to Ministry of Mines on preparation of the Mineral Policy. Draft mineral policy is submitted for consultation in June 2013 but it is outside of MSISTAP scope. Ministry of Mining policies reviewed MSISTAP has previously funded extensive work on a strategy and revised, such as industrial to support industry development in country, including development, coal, unconventional oil refining/value add operations. In the coming year MSISTAP and gas, iron ore, and communications. also plans to fund contracts providing policy advice on coal and other minerals. Establishment of an independent, local policy Support establishment of mechanisms for The creation of a Think Tank activity has been replaced by “Think Tank” which disseminates professional preparation and dissemination of supporting existing non-governmental organizations by quality mining sector economic and policy independent professional mining sector providing funding for specific pieces of work/policy analysis. reports. economic and policy reports. The change was largely driven by the complexity, cost and long term nature of establishing a new specific think tank. Income tax laws on mining amended and Income tax laws on mining amended and supporting regulations drafted, enacted, and supporting regulations drafted. implementation started. 19 Current Proposed change (if any) GDNT tax audit staff trained and competent to No change. The tax office continues to receive support from MSISTAP, carry out mining company tax audits. and is progressing towards the ability to undertake audits. Options study prepared based on review of No change. Double Taxation Treaties Component 2 Modern company reporting requirements No change. This target is unlikely to be fully achieved and the project will regulations are prepared, promulgated, assess the level of success at closure. implemented, and monitored Modern mining cadastre regulations are No change. This target is unlikely to be fully achieved and the project will prepared, promulgated, implemented and assess the level of success at closure. monitored. Modern occupation, health and safety Modern occupation, health and safety Impacted by the ongoing review of the Minerals Law (2006). regulations are prepared, promulgated, regulations prepared and promulgated. MSISTAP is currently organizing for a contractor to provide implemented and monitored. advice on this area, but it’s unlikely that there is time remaining in the project (assuming that the Mineral Law is finalized by mid-2013) for regulations to be fully implemented and monitored. Socio-economic Impact assessment and social A strategic environmental and social Impacted by the ongoing review of the Minerals Law (2006). mitigation provisions including resettlement and assessment (SESA) undertaken, areas for MSISTAP is funding a SESA to examine areas for reform in compensation regulations are prepared, improvement in social (including gender legislation/regulation. promulgated, implemented and monitored. aspects) and environmental regulation are identified and recommendations made for updating laws and regulations. Consultation with a range of The original indicator model included a PDO indicator on stakeholders including civil society, company/civil society satisfaction (see above). The restated community members and the private PDO level indicator will focus on general consultative sector undertaken as part of a social and approach to legislative and regulatory matters. The environmental strategic assessment intermediate indicator will reflect the SESA process. process. 20 Current Proposed change (if any) Modern mine closure and post closure Modern mine closure and post closure Impacted by the ongoing review of the Minerals Law (2006). regulations are prepared, promulgated, regulations are prepared and MSISTAP funded advice in this area, which was provided to implemented and monitored. promulgated the Ministry of Mining. Responsibility for this area subsequently moved to the Ministry of Environment and Green Development (following the 2012 change of government). There is a strong interest in MEGD and MSISTAP will support this work going forward. Increased number of outreach and education Remove. The Project Steering Committee determined early in the programs for artisanal and small scale miners on project’s life that this area would be addressed by another technology, safety, and environmental issues. project (funded by Swiss Development Agency). This was formally confirmed by the World Bank during the project Mid-Term Review. Corresponding sub-component is being dropped from the project. Component 3 Erdenes MGL financial reports are Added to balance the removal of an Erdenes MGL indicator provided quarterly to the Board of from the PDO indicators. Due to political economy and Directors. complexity of the issue of state ownership of mineral assets, the project has no control over decisions about corporate structures/systems. As such, the indicator is revised to reflect what the project has influenced and was able to achieve. Establishment of appropriate legal structure and No change. This target was in part met during establishment of Erdenes preparation and adoption of suitable corporate MGL in the beginning of the project. However the charter and reporting arrangements for Erdenes company’s charter and mandate are being expanded and MGL. require an update as of 2013. The project will support this update and will assess level of success at closure – taking into account the early success. Provision of management-related and No change. governance related training events to build capabilities needed within Erdenes MGL. 21 REVISED PROJECT RESULTS FRAMEWORK Project Development Objective (PDO): To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meet needs of the public sector, industry, and civil society. Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency N=New, Core Baseline PDO Level Results Progress to Date (2012) Original Project Indicators Start (2009) 2013 2014 The Fiscal Stability Human The Fiscal Stability Law Fiscal Stability Supporting Annual. Annual MoF/PIU Fund is implemented Development will come into force Law operation, organization report. in line with the Fiscal Fund established (2013), regulating deposits enforced. established for the Stability Law with but deficient into and withdrawals from Fiscal Stability Yes/No appropriate without defines the Fiscal Stability Fund. Fund, including R guidelines, operating criteria Work is ongoing to refine guidelines and procedures and the Sovereign Wealth Fund procedures. organizational framework, including support improving the existing regulations and structure Level of mining Not disclosed. The Integrated Budget Law Share of total Breakdown of Mid-term Survey. MoF/PIU related transfers from of December 2011 revenues of Aimag Aimag and Soum and end national government addresses financial flows to and Soum budgets by of project to Aimag and Soum and uses of funds at sub- governments, functional and reviews. Yes/No authorities is known national level. Since 2010 including those economic and publicly C Mongolia is compliant with from mining- classifications disclosed. EITI and the reporting related sources, published template includes published regularly. disclosure of mineral regularly. revenue transfers to sub- national governments. Mining pilot tax No tax audits MSISTAP has provided Training in mining 2 audits Mid- Review. MoF/PIU audits are completed completed. support to develop a tax auditing and completed. Term and Yes/No and assessments mineral tax audit unit the audits commences. end of C raised Mongolian Tax Authority, project and training has been reviews. provided. 22 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Intermediate Results and Indicators Clear authority and Roles confused, A combination of factors Complete Action Plan to Mid Review. PIU responsibilities for resulting in gaps means that authority and Functional implement Term Government mining and conflict. responsibility for mining Management recommendation of and end sector management sector regulation is still Review of Functional of institutions, especially relatively unclear. The Ministry of Mines Management project Yes/No regarding change of government Review is adopted reviews. C environmental and has resulted in significant social aspects restructuring. Policies associated with continue to be developed, mining activities. including the ongoing review of the Minerals Law (2006). Cadastre system in No cadastre Pilot work has been Hardware, System operational, Annual. Annual report. MoM/PIU place and publicly system in place. undertaken to develop cadastre system in used for licensing Yes/No accessible at the R systems, and hardware place at the mining operations. MRAM. for a cadastre server is Ministry of currently underway. Mining. Geological Very limited The Mineral Authority of 100,000 data 200,000 data Annual. Annual report. MoM/ information is data availability. Mongolia is currently points. points. PIU Yes/No digitized and exploring options to published and readily C digitize geodata and available in user integrate it with mining friendly digital cadastre. formats. Establishment of good No formal MSISTAP has provided NA NA NA NA NA practice internal procedures. support on establishing management systems corporate policies for Yes/No and standard Erdenes MGL. D operating procedures for state equity holding company Erdenes MGL Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Companies and civil No data No comprehensive Consultations Consultations Annual Annual report MoM/ society participate in available. surveying has been taking place for taking place for PIU consultation for undertaken. MSISTAP policy, each piece policy, each piece Yes/No pieces of policy, has funded consultation of legislation and of legislation and legislation and R with key stakeholders regulation regulation regulation for mining over new legislation sector thru public for an arranged by the government. Component 1 Objective: Strengthening the capacity to manage mining sector revenue and develop economic and sector policies Sovereign Wealth Human MSISTAP has funded an Work funded to Fund operational, Annual Annual report MoF/ PIU Fund or alternative Development international expert to prepare the legal systems in place. mineral revenue Fund established review the sovereign framework for the stabilization but deficient wealth fund framework Sovereign Wealth mechanism without defined and provide Fund. established. operating recommendations. A Yes/No criteria. workshop was held with C key Parliamentary figures in attendance to build high level consensus. Additional support was provided under Multi-sectoral TA Project (also under WB support) Preparation of draft First draft Translation into Work undertaken Advice provided to End of Meeting with PIU model Stabilization prepared. Mongolian of the Model to review and government. project stakeholders. Agreement or Mining Development provide advice on Implementation Yes/No equivalent for mining Agreement, prepared by investment initiated for the and draft model R the International Bar stabilization recommendations Production Sharing Association. Prepared agreements. which are accepted. Agreement or contracts for individual equivalent for deposits for Erdenes petroleum. MGL. 24 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Preparation, adoption Work started Work has not progressed NA NA NA NA NA and publication of a on this item, reflecting good practice policy the ongoing debate at a statement on State Parliamentary level on equity participation in the Government’s Yes/No the mining sector. involvement in the D mining sector. This in part is being addressed under another operation by the World Bank (support for mineral policy drafting). Ministry of Mining - Some work has been Policy advice Government adopts Annual PIU to meet MoM/ policies reviewed and undertaken to review the provided on iron recommendations with key PIU revised (such as Ministry’s strategic ore, fluorite, coal, in the form of personnel in industrial communications plan. and the Ministry’s policy statements. the Ministry of Yes/No development, coal, MSISTAP has also strategic Mining to unconventional oil N funded advice on how to communications assess and gas, iron ore, and best develop the mining plan. progress. communications) industry, including opportunities for downstream processing in Mongolia. Support establishment None. Discussions were taking Complete Produce first report Annual PIU to report MoM/ of mechanisms for place on appropriate selection of the on progress PIU preparation and structure. ToRs for the existing institution Yes/No dissemination of format of mechanism to provide this R independent were prepared and agreed support professional mining by the Project Steering sector economic and Committee policy reports. 25 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Income tax laws on Income tax law MSISTAP has funded Final modifications Annual. PIU to meet MTA/ mining amended and for mining several consultants to to tax laws with key PIU supporting regulations deficient. provide support to the submitted to personnel in Yes/No drafted. Mongolian Tax Parliament for the Ministry of R Authority and the consideration. Finance to Ministry of Finance in assess developing tax policy progress. and regulation. GDNT tax audit staff No staff trained MSISTAP has funded 8 staff trained and 10 staff trained and Annual Progress MTA/ trained and competent to international extensive training for a 2 staff led tax 2 staff led tax report. PIU Number to carry out mining C standards. number of MTA audits. audits. company tax audits. officials. Options study Treaties exist but MSISTAP has funded Options study Work completed on Annual. MSISTAP PIU PIU prepared based on Government contractors to provide prepared. double taxation to meet with review of Double dissatisfied with advice on double taxation treaties – key personnel Taxation Treaties options. treaties since 2011. That Government in the Ministry Yes/No work is ongoing, but has satisfied with of Finance to C already resulted in the current position on assess removal of those treaties double taxation progress. perceived to be the most treaties. disadvantageous to Mongolia. Component 2 Objective: Improving regulatory capacity to manage mining sector development Modern company None. Work has been delayed Regulations issued, Annual. PIU to meet PIU reporting by the delay in finalizing enforced. with key requirements the major piece of personnel in Yes/No regulations are mining legislation the Ministry of C prepared, (Minerals Law 2006). Mining to promulgated, assess implemented, and progress. monitored 26 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Modern mining Regulations MSISTAP has funded Cadastre hardware Cadastre system Annual. PIU to meet PIU cadastre regulations under work to develop cadastre installed at the operational, used with key are prepared, preparation. regulations, and is Mineral Resources for public tendering personnel in promulgated, currently funding a major Authority of for mineral the Mineral implemented and piece of work to Mongolia licenses. Resources Yes/No monitored. implement a server at the Authority of C Mineral Resources Mongolia to Authority of Mongolia. assess But overall – the progress. regulations will be pending the new Mineral Law be in place Modern occupation, None. Work not yet started. Work undertaken Legislation passed, Annual. PIU to meet PIU health and safety ToRs are in draft, to develop the authorities actively with key regulations prepared reviewed by the Bank legislative monitoring health personnel in Yes/No and promulgated. and are under revision framework and and safety practices the Ministry of R regulation for based on new Mining to mining sector regulations. assess occupation health progress. and safety. A strategic No systematic ToRs prepared and Social and Results presented, Annual. MSISTAP PIU environmental and review of discussed in the open Environmental Government monitoring social assessment legislation consultation in October Strategic responding to key SESA (SESA) undertaken, governing 2012. Procurement of Assessment findings. progress. areas for environmental/ consultants’ services at (SESA) underway. Yes/No improvement in social social impacts the RfP stage. Work R and environmental undertaken. expected to commence regulation are mid- 2013 subject to identified and extension of MSISTAP recommendations made for updating laws and regulations. 27 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Consultation with a A range of First consultations for SESA underway. SESA Consultation Annual. MSISTAP PIU range of stakeholders stakeholders SESA scope completed. process completed. monitoring including civil dissatisfied with Working local SESA society, community engagement engagement tools progress. Yes/No members and the mechanism, (models) evolved private sector N government undertaken as part of approaches to a social and consultation. environmental strategic assessment process Modern mine closure None. MSISTAP has previously Advice on mine Mine closure Annual. PIU to meet PIU and post closure funded work to advise closure regulations regulations with MoM and regulations are the Ministry on mine prepared. prepared, finalized. Ministry of Yes/No prepared, and closure regulations. Environment R promulgated. Currently a number of and Green different models are Growth to being considered by the assess Ministry. progress. Increased number of 0 This component has been NA NA NA NA NA outreach and dropped from MSISTAP. education programs No ASM work was Yes/No for artisanal and small carried out due to D scale miners on availability of other technology, safety, funding and environmental issues. Component 3 Objective: Developing the capacity for managing state equity Erdenes MGL Corporate Financial reports are now 4 reports (2013). 8 reports Annual. PIU to meet PIU financial reports are systems in the provided quarterly to the (cumulative, 2013- with key Number provided quarterly to process of being Board of Directors. 2014). personnel in N the Board of established. Erdenes MGL Directors. to assess progress. 28 Cumulative Target Values Responsibility for Unit of Measure Data Collection C= Continue, Methodology Data Source/ D=Dropped, Frequency Baseline N=New, Core PDO Level Results Original Progress to Date (2012) Indicators Project Start (2009) 2013 2014 Establishment of Established in MSISTAP completed the Revision of Charter in line with Annual. PIU to meet PIU appropriate legal 2007. original charter charter underway. good practice. with key structure and documents for Erdenes personnel in Yes/No preparation and MGL and its Erdenes MGL adoption of suitable C incorporation. That to assess corporate charter and charter will be revised in progress. reporting 2013. arrangements for Erdenes MGL. Provision of MSISTAP has funded a 8 training events/ 16 training events/ Annual. Annual Report Erdenes management-related wide range of training attendance at attendance at MGL Number and governance sessions and attendance conference. conferences. related training events C at international training to build capabilities events for Erdenes needed within personnel. Erdenes MGL. 29 Annex 2 Mongolia Mining Sector Institutional Strengthening Technical Assistance Project (MSISTAP) Environmental and Social Safeguards 1. MSISTAP is a Category B project (partial assessment) under OP 4.01. At appraisal a "safeguards note" was disclosed (in lieu of an Environmental Impact Assessment) providing a description of environmental and social issues in regard to mining. Given the technical advice under the Project, which was expected to lead to future investments in the mining sector, the MSISTAP Project has triggered safeguard policies OP 4.01 (Environmental Assessment). At the time of this restructuring, Category B remains relevant and no changes are proposed in the arrangements. 2. At the time of appraisal, OP 4.12 (Involuntary Resettlement) was not triggered as the project is a technical assistance and no people were being affected. However, at the time of this restructuring the Project recommends to trigger OP 4.12 given the deposit level study undertaken for the Erdenes Tavan Tolgoi mine in South Gobi (see para. 4 of this Annex). Consideration was given to triggering OP4.10 (Indigenous People), but the only geographic area that was specifically affected by MSISTAP (the South Gobi area of Tavan Tolgoi coal field) has no indigenous people present according to interviews with the stakeholders. While there are indigenous peoples in other areas of Mongolia, MSISTAP did not (and will not) undertake any specific work in these geographic locations. As such, OP4.10 does not apply to this project. 3. At the project appraisal, no specific mineral deposit level work was envisaged and no mechanism was created for management of environmental and social risks that might have resulted from studies and assessments, which in hind-sight was a deficiency of the original design. To ensure the project’s consistency with the World Bank’s requirements, in particular in view of the support provided for the feasibility study for the East Tsankhi mine, the project team reviewed compliance with safeguards as part of its due diligence for this project restructuring. 4. Baseline as of September 2013: The project has undertaken a limited number of deposit level technical expert assessments which were largely advice on geological, legal, economic, and financial aspects - these activities in scope were consistent with the legal arrangements for MSISTAP and had no direct effect on the environment. The one assignment that went deeper was a feasibility study undertaken in 2010 for the Eastern Tsankhi Coalfield1 – a project of Erdenes Tavan Tolgoi (ETT), a state-owned mining company under the Erdenes MGL holding company, which continues to be in operation. The feasibility study assessed the geological potential of the coalfield and technical issues to start up the operation of a 15 million ton per annum 30 year mine-life mine; the study was also in part intended to define targets for the planned (at that time) initial public offering for ETT. With hindsight, safeguard policies should have been applied to the study. It is noted that the study qualifies rather as pre-feasibility and it clearly recommends ETT to proceed with an EIA as soon as possible as well as carry out public consultation, in particular to understand impact on herders, and assess in detail impacts on water. After the study was completed, the ETT completed the Environmental Impact Assessment (EIA) 1 It is noted by the project team, that since ETT is a state run mine and was not looking for project funding at that time, the intention and scope of this study was rather that of a “pre-feasibility”. The report does not in substance qualify for a bankable feasibility study, however, it was labeled by the consultant as a “feasibility study”. in accordance with Mongolian law and the former Ministry of Environment and Tourism2 formally approved the EIA Report for East Tsankhi in 2011. 5. Environmental Safeguards Review of East Tsankhi Mine (May 2013). To review that MSISTAP-generated information at the ETT site was adequate from a safeguards point of view (even if post-factum in the absence of a clear mechanism at the time the work had been undertaken in 2010), an environmental safeguards mission took place in May 2013. The mission visited Ulaanbaatar and the mine site in the South Gobi region and met with the Ministry of Environment and Green Development, and mine management and local staff. Based on the review of documentation and interviews, the mission concluded that while the general legal requirements for EIAs in Mongolia were followed, there were a number of shortcomings that need to be addressed including: (i) lack of assessment of the critical cumulative impacts related to the development of coal resources in the sub-region; (ii) lack of information on disclosure and consultation and; and (iii) limited capacity within ETT (and local level) to manage environmental and social risks of mine development. 6. Based on the assessment, environmental Category B remains an appropriate rating for the project, and MSISTAP supervision will include regular updates on the Action Plan. 7. Social Safeguards Review of East Tsankhi (September 2013). A social review was conducted in relation to the study financed by MSISTAP on the Erdenes Tavan Talgoi (ETT) East Tsankhi. The mission met with staff from the Ministry of Mines, the Ministry of Labor, the Ministry of Environment and Green Development, the Omnugovi Aimag, and the Tsogttsetsii Soum, and with field and head office based staff of ETT. The mission visited the site of both East and West Tsankhi mines and interviewed the ETT community officer and two affected households. In general, the review noted that Mongolian standards and practices on resettlement and land acquisition are not in compliance with international standards, including those of the World Bank. There are no standard documents, procedures or guidance on these matters, and the investors and local population are left to negotiate between themselves. There is no involvement from the soum authorities apart from assigning new land for the resettled party. 8. Indigenous Population. The mission concluded that no indigenous people group was found in the project soum. There is no further action required. 9. Involuntary Resettlements. Following the example of more recent Bank-financed projects supporting mining sector governance reforms, the sensitivity of the mineral sector in general and the work supported earlier for the Erdenes Tavan Tolgoi project, the restructured MSISTAP will trigger OP 4.12. A report will be prepared on the resettlements’ process, including the consultations and compensation process, followed in the Eastern Tsankhi Coalfield and any actions to be taken on board by ETT going forward. A Resettlement Policy Framework (RPF) and Resettlement Action Plan (RAP) for East Tsankhi mine will be developed by ETT with assistance from consultants and in consultation with the Bank and Erdenes MGL. 10. The review identified that the resettlement in East Tsankhi was generally implemented following domestic laws and regulations, but the procedures were below Bank safeguard standards; the lack of a paper trail in the company in regards to compensation is noted. It is acknowledged that ETT was able to produce a list of affected businesses, people and winter shelters for cattle and had clear coordinates for each party on the property. The two winter shelters that were removed prior to mine construction in 2010 resulted in compensation to the 2 Ministry of Environment and Tourism was superseded by Ministry of Environment and Greed Development (MoGD) after 2012 31 (two) owners based on oral agreements, however, no records of these agreements were found; lack of documentation appears to be a systemic issue with the soum government and local companies, and most agreements still appear to be oral. As the mine develops, ETT will need to remove several more winter shelters as well as some of the registered and unregistered business entities on their license area. This will be done gradually as the mine grows. With this, it will be required for ETT to develop an RPF and RAP and have it agreed with the Bank. Based on discussions with the CEOs of both Erdenes MGL (the holding company) and Erdenes TT (the project company operating East Tsankhi), there is a full commitment to follow the World Bank recommendations to improve social safeguards management. 11. In consultation with the Erdenes MGL and Erdenes TT, the Project prepared an Action Plan to ensure follow up and compliance of the ETT part of the project with World Bank requirements, which is provided in Table 1 below. The Recipient is committed to implement the Action Plan in close collaboration with the Bank. 12. The Restructured project will ensure that adequate resources will be provided to implement the activities set forth in the Environment and Social Safeguard Action Plan. The resources needed to implement the activities of the Action Plan will be determined more precisely and confirmed during the implementation of the restructuring based upon the ToRs to be developed in line with achieving the objectives of the Action Plan, with the amount provided in the Table 1 below being indicative. 32 Table 1. Environmental and Social Safeguards Action Plan Recommendation Agreed Action By when By whom Cost and financing source 1. Undertake a MINIS will finance a cumulative by MINIS Project. $200,000 - cumulative impact impact assessment study for the November MINIS assessment of coal mine area under ToRs to be agreed with 2014 MoEGD will lead with projects on groundwater the Bank. support from Erdenes and impacts associated MGL and ETT. The facilities (e.g. coal study will be publicly transportation) on disclosed by ETT/ biodiversity and on the EMGL livelihood of local communities and herders in the region. 2. Update ETT’s MSISTAP will finance by May This activity will be $60,000 – environmental consultancy services to review the 2014 managed by Erdenes MSISTAP management system. environmental and social MGL as project management system of ETT and beneficiary under develop a set of recommendations relevant component. to ensure compliance of the system MoEGD will ensure that with the laws and regulations of the recommendations are Mongolia as well as comply with compliant with the World Bank procedures. ETT’s government’s management will adopt the requirements recommendations. 3. Prepare RAP and RPF RPF and RAP will be prepared by March EMGL/ETT $60,000 - for the resettlement and under EMGL’s component and 2014 MSISTAP land acquisition in East will be subject to review and Monitoring will be a part Tsankhi. approval by the Bank and will be of MSISTAP supervision publicly disclosed and consulted under Bank Budget. on. Implementation will be responsibility of ETT and this activity will go beyond MSISTAP implementation Total Cost MSISTAP - $120,000 MINIS - $200,000 33