Document ofThe World Bank

Report No: 19347-RO

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$44.5 MILLION EQUIVALENT

TO THE

GOVERNMENT OF ROMANIA

FORA

MINE CLOSURE AND SOCIAL MITIGATION PROJECT

August 6, 1999

Energy Sector UnitEurope and Central Asia Region

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CURRENCY EQUIVALENTS(Exchange Rate Effective August 12, 1999)

Currency Unit = Leu (plural Lei)1,000,000 Lei = US$ 74.07

US$1 = 15,937

FISCAL YEARJanuary 1 to December 31

ABBREVIATIONS AND ACRONYMS

CGMC - Central Group for Mines ClosureDFID - Department For International Development (UK)

EU - European UnionFMS - Financial Management SystemsICB - International Competitive Bidding

IS - International ShoppingLACI - Loan Administration Change InitiativeLCC - Local Consutative CommitteeLRP - Labor Redeployment ProgramMFI - Micro-Finance InstitutionsMIS - Management Information System

MOWFEP - Ministiy of Water, Forests and EnviromnentalProtection

MOF - Ministry of FinanceMOIC - Ministry of Industry and Commerce

MOLSP - Ministry of Labor and Social ProgramsMTRIs - Mining Technical and Research Institutes

NAD - National Agency for Programs Development andImplemencation for the Reconstruction of the MiningRegions

NAMR - National Agency for Mineral ResourcesNBF - Non World Bank FinancingNCB - National Competitive BiddingNGO - Non-Government OrganizationNMC - National Mining Company

NS - National ShoppingPIU - Project Implementation Unit

PMRS - Project Management Reporting SystemPMRs - Project Management ReportsPMU - Project Management Unit

REPA - Romanian Environmental Protection AgencySA - Special Account

SEA - Sector Environmental AssessmentSMW - Social Mitigation ProgramSOE - Statement of Expenditures

Vice President: Johannes LinnCountry Director: Andrew Vorkink

Sector Director Hossein RazaviSector Manager: Henk Busz

Task Team Leader: John Strongman

RomaniaMine Closure and Social Mitigation Project

Project Appraisal DocumentEurope and Central Asia Region

Date: August 6, I999 Team Leader: John StrongmanCountry Director: Andrew Vorkink Sector Director: Hossein RazaviProject ID: 56337 Sector Leader: Henk BuszSector: Mining Program Objective Category: PVLendinglnstrument: SIL Program of Targeted Intervention: [] Yes [X] No

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RomaniaMine Closure and Social Mitigation Project

TABLE OF CONTENTS

A. Project Development Objective ................................................................. 1

1. Project development objective and key performance indicators ................................... 1

B. Strategic Context ................................................................. 2

1. Sector-related CAS goal supported by the project ....................................................... 22. Background, main sector issues and Government strategy .......................................... 23. Sector issues to be addressed by the project and strategic choices ............................... 7

C. Project Description Summary ................................................................. 8

1. Project components ................................................................. 82. Key policy and institutional reforms supported by the project ..................................... 93. Benefits and target population ................................................................ 104. Institutional and implementation arrangements .................................................. 1....... I

D. Project Rationale ................................................................ 15

1. Project alternatives considered and reasons for rejection ........................................... 152. Major related projects financed by the Bank and/or other development agencies ....... 163. Lessons learned and reflected in proposed project design .......................................... 164. Indications of borrower commitment and ownership ................................................. 18:5. Value added of Bank support in this project .............................................................. 18

E. Summary Project Analyses ................................................................. 18

1. Economic ................................................................ 182. Financial ................................................................ 193. Technical ................................................................ 194. Institutional ................................................................ 205. Social ........................... 206. Environmental assessment ........................... 207. Participatory approach ........................... 21

F. Sustainability and Risks ............................ 221. Sustainability ........................... 222. Critical risks ........................... 233. Possible controversial aspects ........................... 24

G. Main Loan Conditions ................................................ 251. Effectiveness Conditions ................................................ 252. Other Conditions ................................................ 25

H. Readiness for Implementation ................................................ 25

I. Compliance with Bank Policies ................................................ 26

Annexes

Annex 1. Project Design Summary .27Annex 2. Project Description .29Table A. List of Mines included under the Project .35

Annex 3. Estimated Project Cost .37Annex 4. Cost-Benefit Analysis Summary .38Annex 5. Financial Summary .40Annex 6. Procurement and Disbursement Arrangements .41Table A. Summary of Proposed Procurement Arrangements .43Table B. Procurement Plan .44Table B 1. Thresholds for Procurement Methods and Prior Review ....................................... 46Table C. Procurement Information .47Table D. Allocation of Loan Proceeds .48

Annex 7. Project Processing Budget and Schedule .49Annex 8. Documents in Project File .50Annex 9. Statement of Loans and Credidts .51Annex 10. Country at a Glace .53Annex 11. Financial Management Action Plan ................................................ 55Annex 12. Social Assessment of Mining Sector Reconstruction ............................................. 56

Attachment: Government Strategy and Restructuring Program of theRomanian Mining Sector ................................................ 58

Map IBRD 30443

A: Project Development Objective

1. Project development objective and key performance indicators (see Annex 1):

The development objective of the project is to support the Government's efforts to reduce the burden on thenational budget by permanently closing uneconomic mines in a socially and environmentally sustainablemanner and to provide support to the modernization of the sector's administrative framework. This objectivewould be achieved through support for the following three components:

* closure of 29 uneconomic mines and the environmental remediation of mine sites;* financing of social mitigation initiatives to help diversify the local economy in support of the

Government's restructuring program for the mining sector; and* technical and institutional assistance for modernizing the administration of mineral rights

This project is conceived as the first step in the Bank's support of the restructuring of the Romanian miningsector. As such, this project aims at:

* developing effective procedures for a technically and environmentally sound approach to theformal closure of uneconomic mines,

* identification of measures that would be most effective in mitigating the social hardships resultingfrom the restructuring of the sector, and assistance in creating diversified employmentopportunities for redundant labor, and

* strengthening the agencies involved in restructuring the sector and introducing a modern mininglicensing system.

It is important to recognize that the proposed project constitutes only the first phase in the restructuring of theRomanian mining sector and is, by its very design, essentially a mine-focused regional social mitigationproject. It provides some urgently needed initial steps in capacity building for sector institutions that couldbe deepened and broadened in a subsequent operation. In the implementation of the Mine ClosureComponent, contractors will have every incentive to use as much local labor as is technically feasible. Thefunds allocated to this component will thus primarily benefit local labor and the communities where thiswork is carried out. As such, this component will complement the one-time financial support the Govermnentprovided to miners taking voluntary redundancies. It also will enhance the professional capabilities of therecently established Central Group for Mine Closure (CGMC). The Social Mitigation Component willsupport the Government's efforts to revitalize depressed mining areas through investments for support ofsmall enterprises, re-training and job creation through a more diversified local economy. In the areas wheremines are to be closed, this will be complemented by short-term employment for the labor-intensive mineclosure and environmental remediation program. It will strengthen the National Agency for ProgramsDevelopment and Implementation for the Reconstruction of the Mining Regions (NAD), building its capacityas a coordinating and facilitating agency dedicated to social mitigation and revitalization of the miningregions. These measures will complement the Government's efforts to attract investors to the mining regionsthrough fiscal incentives. Thirdly, the Institutional Strengthening Component will support modernizationof the administrative framework for the sector and will enhance the professional staff capabilities of theNational Agency for Mineral Resources (NAMR). As noted above the Mine Closure and Social Mitigationcomponents include support for strengthening CGMC and NAD respectively. In view of the urgency toachieve results on the ground, CGMC and NAD will be supported by technical advisors.

Key performance indicators are:* Number of mines closed and enviromnentally remediated;* Amount of budget subsidies for production, capital investment and exploration;* Amount of budget subsidies for redundancies, social mitigation, mine closures and environmental

improvements;* Number of beneficiaries from employment and training incentives scheme;* Number of small businesses able to access credit through the project;

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* Number of Businesses established in workspace centers,* Number of people from mining communities who are economically rehabilitated, either through

new jobs created in mining areas or through successful relocation;* Completion of studies and implementation of findings;* Progress in the implementation of a modem mining licensing system; and* Amount of exploration and investment by private investors in the mining sector.

B: STRATEGIC CONTEXT

1. Sector-related CountryAssistance Strategy (CAS) goal supported by the project (seeAnnex 1):

CAS document number: 16559-RO Date of latest CAS discussion: June 3, 1997.

The Bank's country assistance strategy for Romania has four major objectives: (a) to promote structuralreforms and private sector development; (b) to alleviate poverty and develop human capital; (c) to promotereform of the public sector; and (d) to protect the environment. The proposed project contributes to theseobjectives as follows:

Promoting Structural Reforms and Private Sector Development. The project will providesupport for (a) the development of a modem mining licensing system to help facilitate privateinvestment into the mining sector; (b) the institutional strengthening of the agencies involved inthe closure of mines, the environmental remediation of mine sites, and the management oflicensing system; and (c) preparation and implementation of studies regarding legal reforms,subsidies, additional mine closures, SOE reform and environmental improvements.

* Alleviating Poverty and Development of Human Capital. The project will: (a) provide technicalassistance to NAD, which is the agency established to coordinate efforts to revitalize affectedmining regions and organize social mitigation for mining communities; and (b) help financeNAD's support to specialized agencies and service providers to help them create jobs and assist ex-miners and other unemployed in the mining regions in finding alternate sources of income.

* Promoting Public Sector Reform. The project will support establishment of a Department ofMines to administer the mining sector within NAMR, which has become responsible foradministering the mining sector in addition to the petroleum sector.

* Protecting the Environment. The project will support: (a) the preparation of a comprehensiveSector Environmental Assessment, which would create base line data for the mining regions,identify the main environmental issues arising from mining activities, and define priority areas forfuture environmental remediation efforts; and (b) financing of the environmental remediation ofthe specific mine sites whose closure is supported under this project.

2. Background, Main sector issues and Government strategy:

BACKGROUND. Romania has sizeable reserves of metals (gold, silver, combined metals, copper) as well assalt, uranium, lignite and hard coal. However, the selection of the reserves for development has been poorand the mining conditions are difficult. In its drive for economic self-sufficiency, the previous regimedecided to develop all deposits where this was technically feasible. The relatively high wages of the miningindustry attracted labor from all over the country. The state-owned mining companies directed their effortsprimarily to increasing production, irrespective of costs and environmental consequences. This resulted in amuch larger mining sector than was economically justified and extensive budgetary support was required. In1989, when output reached its peak, there were 278 mines in operation. At that time, the mining sectorprovided a livelihood for almost 10% of the population and covered about 17,500 hectares of land.

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In 1998, the production of major minerals in Romania in terms of metal content of different products wasabout 1.8 tons of gold, 20,300 tons of copper, 18,000 tons of lead, 30,500 ton of zinc, 238,800 tons of ironore, 24.2 tons of molybdenum, 23.2 million tons of lignite, 341 million tons of brown coal, and 4.6 milliontons of hard coal. Copper, lead, and zinc were produced in concentrate form. About 90% of all miningactivities in Romania are carried out by six state-owned National Mining Companies (NMCs). (see Table 1)whose status was converted from state-owned enterprises to national joint stock companies during 1998/99.There is also a state-owned salt mining company and a state-owned mineral water company. In addition,there are nine technical and research Mining Institutes (MRTIs) that provide mine design and engineeringservices and eleven joint stock exploration companies. The NMCs used to be obliged to use the services ofthese institutes and exploration companies, who had no incentive to maximize efficiency since they weresubsidized by the State. As a result, the NMCs were often obliged to develop uneconomic and riskydeposits, adding to the drain on the State budget. However, all MRTIs were converted into joint stockcompanies in 1998 and two of them have been privatized. They now operate on a commercial basis. In 1998the six NMCs received total subsidies of about US$176 million, including about US$119 million inproduction subsidies.

Table 1: Romanian Mining Companies in 1998

Name Main Products Number Sales Losses Totalof Em- (MUS$) (MUS$) Subsidies

________________ ployees _(MUS$)

Societatea Nationala a Lignite, brown 10,145 61.7 47.3 19.7Carbunelui - Ploiesti coalCompania Nationala a Brown coal, 23,496 160.8 295.8 43.4Huilei - Petrosani hard coalCompania Nationala a Lignite 23,124 318.4 106.7 14.0Lignitului Oltenia - TarguJiu _ _

Compania Nationala Min- Copper, lead, 17,174 99.2 85.3 46.1vest - Deva zinc, gold, iron

ore, molybde-num

CompaniaNationala Re- Copper, lead, 13,460 102.7 0.4 43.8min - Baia Mare zinc, gold, iron

oreCompania Nationala a Uranium 3,728 20.5 3.5 9.4Uraniului - BucurestiTotal of 6 companies _ 91,127 763.3 539.0 176.4

Exchange rate - 8,500 LEI per 1 US$ in 1998

Source CGMC, MOIC.

In 1996, Government support to the mining industry for production subsidies was about US$385 million. Tostop the hemorrhage of funds, the Government decided to: (i) stop all mining activities in mines that operatedin dangerous working conditions or where reserves were close to becoming exhausted; (ii) reduce the laborforce in the mining industry by offering miners generous separation packages of up to 20 months of wages(Ordinance #22); and (iii) increase investments to modernize production in mines that were considered to bepotentially profitable. In 1998 production subsidies were reduced to US$119 million and are expected to befurther reduced to US$100 million in 1999, as shown in Table 2.

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Table 2: Annual production subsidies for the mining sector from 1990 to 1999

Year Subsidy (MUS$)1990 528.41991 295.51992 489.91993 386 91994 331.51995 402.51996 384.91997 145.51998 118.91999 100.0 est.

Source: CGMC, MOCI.

By December 1998, about 83,000 miners (out of a total of about 173,0000) left the industry. About 70,000had accepted the voluntary redundancy package and another 13,000 left because of retirement or becausetheir service enterprises were spun off from the mining company The number of mines in which productionwas stopped stood at 160 as of March 31, 1999. However, of the remaining 118 producing mines no morethan 35 are likely to be economically viable.

T-he layoff of so many workers precipitated a sharp decline in general economic activity in the miningregions, adding to the unemployment in these regions. Despite promises of active labor redeployment andinvestment measures for the mining regions made to the labor unions when the redundancy package wasnegotiated in August 1997, efforts to mitigate the social hardships of layoffs and to stimulate the economiesof the mining regions have been quite inadequate. By January 1999, labor unions began to foster seriousunrest and marched on Bucharest. The Government has contained this unrest for the moment and is keen toexpedite social mitigation measures to help relieve the pressure in the mining regions. It recognizes thatsolutions have to be found outside the mining sector. Even if the Government succeeds in attracting privateinvestments for mining ventures, those will only be able to absorb a fraction of the workers laid off frompublic mines.

THE GOVERNMENT'S STRATEGY. In response to this situation, the Government issued in 1998 acomprehensive strategy for restructuring the mining sector (see Attachment). In this strategy statement, theGovernment made a commitment to:

* put the mining industry on a sound commercial footing;* phase out the Government's direct involvement and seek private sector investment;* ensure that mining activities are carried out in an environmentally sustainable manner; and* provide comprehensive support to: (a) mitigate the social hardships caused by the closure of

uneconomic mines; and (b) revitalize the economies of the mining regions.

IMPLEMENTATION ISSUES. In implementing this strategy, the Government faces several major issues:

* Completing the permanent closure of at least 174 mines in an environmentally acceptable manner;* Undertake social mitigation actions for 50,000 of the 70,000 workers who took voluntary redun-

dancy from the mining sector and who are in the active labor market but have been unable to findemployment;

* Preparing for and undertaking a further round of mine closures and mitigate the social consequencesfor the miners that are employed at those mines;

* Preventing further environmental harm caused by presently operating mines and set priorities forreducing the stock of historical environmental liabilities;

* Strengthening the CGMC, NAD and NAMR so that they are able to implement the closure andreform programs competently;

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* Improving the legal and fiscal regime and removing obstacles to mine closure and privateinvestment;

* Progressively reducing subsidies for operating losses, employee social allowances, detailedexploration and new investments and phasing them out to exploration enterprises by the end of 2000and to mining enterprises by the end of 2001 and increasing subsidies for mine closure,environmental remediation and social mitigation, while gradually phasing out all subsidies;

* Reforming and privatizing, where feasible, or closing down the state owned exploration companies;* Developing and implementing a reform program (including financial restructuring) for the

coal/lignite National Mining Companies taking into account the phasing out of subsidies, so that lowcost mines/companies can be privatized and uneconomic mines/companies closed;

* Developing and implementing a reform program (including financial restructuring) for the non-fuelminerals National Mining Companies so that low cost mines/companies can be privatized,unexplored lands and undeveloped deposits offered to the private sector, and uneconomicmines/companies closed.

Each of these issues is discussed in more detail below.

CLOSURE OF UNECONOMIC MINES. The Government has instructed the Ministry of Industry and Trade(MOIC) to prepare a time-bound program for the 'technical closure' of 174 uneconomic mines and theenvironmental remediation of the surrounding areas. To facilitate this process, the Government has set up aCentral Group for Mine Closures (CGMC) within MOIC which will take over and close the mines. MOIChas asked for the assistance of the World Bank and other international donors to assist in the effort to closeuneconomic mines. MOIC has prepared a time bound program for the final technical closure of 174uneconomic mines and the environmental remediation of the surrounding areas.. MOIC is under pressure toimplement this program as quickly as possible, since the mining companies have to provide "care andmaintenance" for mines in which production has been stopped, but which have not been permanently"technically closed and properly environmentally rehabilitated." This is a specific provision in the 1998Mining Law, which requires that staff be at hand to maintain services such as ventilation to avoid the build-up of methane, and the pumping of water to avoid the flooding of the mine, incidents that could endangerneighboring mines. The annual costs of such 'care and maintenance' are substantial: for 1999, theGovernment has budgeted Lei 108 billion (about US$7.2 million) at May 1999 exchange rates for thispurpose. The UK Department for International Development (DFID) will provide about US$0.85 million inco-financing to provide specialist expertise for technical assistance for CGMC.

SUPPORT TO PEOPLE ADVERSELY AFFECTED BY MMNE CLOSURE. The loss of employment for 70,000miners resulted in a sharp decline of economic activity in mining areas, since the redundancies triggeredfurther unemployment in local service industries. Although miners who opted for voluntary redundancyreceived attractive financial compensation, the depressed macro-economic environment provided littlealternate opportunities for employment. The Government is pursuing a two-pronged strategy to mitigate thesocial hardships caused by the closure of uneconomic mines. It consists of: (a) assistance to miners andothers living in mining areas to find alternative employment; and (b) revitalizing economic activity in themining regions through fiscal incentives and support to potential investors and new entrepreneurs.

To coordinate these social mitigation efforts, the Government established the National Agency for ProgramsDevelopment and Implementation for the Reconstruction of the Mining Regions (NAD). The establishmentof this specialized agency was one of the conditions for voluntary redundancy negotiated with the laborunions in August 1997. NAD works with local governments and communities, mining companies and tradeunions to provide accurate and timely information on social support measures available to the unemployed inthe mining regions. It has local offices in 14 of the mining regions. Although NAD has 72 of its projected117 staff in place, it currently lacks the resources and the institutional capacity to carry out its mandateeffectively. The Government's strategy calls for strengthening the capacity of NAD to operate in cooperationwith the Ministry of Labor and Social Protection (MOLSP), other private sector and Govemnment agencies,NGOs, and the National Council for Regional Development. Over the past year, NAD has gradually been

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strengthening its staff capacity and has successfully organized broad-based Local Consultative Committees(LCCs) in the 14 mining regions.

With the assistance of the LCCs, NAD has been able to develop proposals and attract substantial resourcesfor public works from the Labor Redeployment Programn (LRP) administered by MOLSP for the miningregions. The social mitigation program (SMP) is designed to finance complementary activities not coveredby the LRP - micro-credit, work spaces at restored mine sites to be business incubators, on-the-job trainingand social dialogue. NAD has identified buildings at mine sites in 14 regions to be renovated for workspaces. The Government has approved the transfer of building properties at closing mines in two regions tothe state private ownership of MOIC and has provided assurances that the latter will make selected buildingsavailable to NAD for the establishment of business workplace centers for social mitigation. The Governmenthas requested further technical assistance for NAD and the additional finances for the social mitigationprogram coordinated by NAD. The British Department for International Development (DFID) is providingabout US$3.4 mnillion in co-financing to provide expertise for technical assistance to NAD.

ENVIRONMENTAL REMEDIATION. Although Romania has a new regulatory framework to addressenvironmental impact issues, the administration of these regulations is fragmented and environmentalagencies lack the capacity to monitor the implementation of environmental remediation measures. In orderto deal effectively with the environmental degradation that has occurred in mining areas, the Government'sstrategy proposes to carry out an environmental impact assessment, see page 21. This assessment, whichwould be carried out by suitably qualified and experienced international consultants, would cover the entiremining sector, and would become the basis for the environmental remediation programs associated with mineclosures.

INSTITUTIONAL REFORM AND CAPACITY BUIDING IN THE MINIG SECTOR. NAMR takes the lead assector 'administrator and regulator', coordinates the enforcement of laws and regulations in the miningsector, monitors environmental liabilities, provides geological information and issues licenses for thedevelopment of mineral resources. The Government recognizes that NAMR presently lacks the necessaryexpertise and capacities to fully carry out these responsibilities and has asked for technical assistance underthe proposed project.. More specifically, the Government plans to:

* Strengthen and rationalizing the mining cadastal function of NAMR, to properly administer explorationand exploitation concessions, especially an accurate mapping system and comprehensive mineralresource assessment files;

* Strengthen the environmental monitoring function of NAMR and to enhance NAMR's capacity tocoordinate sector-specific environmental policies and regulatory instruments with central authority at theMinistry of Environment;

* Assist NAMR in the development of a management information system (MIS), with compilation andcataloguing of mining data for monitored dissemination of such information to private sector and publicinstitutions.

LEGAL AND REGULATORY REFORMN The Parliament passed the new Mining Law in March 1998.Regulations to implement this law were also issued by Government throughout 1998. This Law, togetherwith norms and regulations, forms the legal foundation for the Government's efforts to restructure the miningsector. The Law contains several positive features in that it requires that all exploration and mining activitiesbe based on licenses or concessions. National Mining Companies are required to apply for licenses in areasthey are currently active in and relinquish all other areas. Areas relinquished by the mining companies willbe redemarcated and offered through competitive bidding to Romanian and foreign investors However, theMining Law has several limitations, two of which are likely to affect the attractiveness of mining in Romaniain the short term. The first limitation is caused by the provisions which establish the necessity forcompetitive bidding for exploration licenses. It would be more attractive to have an open scheme based onthe principle of "first come, first served" and to limit the bidding processes to those specific properties wherethe amount of information available justifies it. The second problem refers to the provisions which establish

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the confidentiality of the NAMR mineral resource database, which should be designed to be more open topublic access. Other weaknesses of the law relate to the security provided to the investor and thetransferability of the concessions. Given the importance of an effective legal, regulatory and institutionalframework for the sector, technical assistance will be provided to review present arrangements. It wasa,areed that NA. LoLjether with relevant entities, will complete a review of the Mining Law andassoc-iated laws and regeulations and mining sector institutional arrangements and by December 31. 1999.review with the Bank the findings and actions to be taken.

sUBSIDIEs. In 1998 there were US$ 166 million of production-related subsidies to cover operating losses,employees social allowances, investment and care and maintenance expenditures for National MiningCompanies and US$10 million of subsidies for mine closure and social mitigation. The Government iscommitted to progressively increasing the share of subsidies for mine closure and social mitigation andreducing the share of production-related subsidies but does not have a specific plan to accomplish this. Thisis a complex and politically sensitive task because of the likely need to downsize or close some miningenterprises and the need to ensure that good mines and operations are not used to cross-subsidize loss makingmines and operations as production related subsidies are reduced. A highly contentious issue will be theamount of budgetary funds allocated to finance exploration and investment budgets for state miningenterprises. It was a*reed that MOIC will prepare and review with the Bank, by March 31. 200. andimplement thereafter takitag into account the Bank's comments a timetable tor phasing out subsidiestogether with a time-bound action plan for reducing the share ef production-related subsidies (to coveroperating losses. emDloyee social allowances, exyploration expenses and investments) and increasing theshare of subsidies for mine closure, environmental protection and remediation, and social mitization. Theproject will provide technical assistance for this important task.

MIINING COMPANY REFORM AND PRIVATIZATION. The Government's strategy statement explicitlycommits to: (i) phasing out State involvement in mineral exploration, and (ii) the privatization of theNational Mining Companies. The Government has already converted these enterprises into national jointstock companies. The exploration and engineering service enterprises have also been converted intoindependent commercial companies, which need to sell their services to all interested mining companies on acommercial basis in order to survive. However, the Govermnent has not yet made a final determination ofhow many mines and operations are economic, what will be involved in mining sector reform and how theeconomic mines can be privatized. It was agreed that MOIC will prepare and submit to the Bank. byMarch 31, 2000, a reLorm program for National Mning Companies and state-owned explorationcompanies, includingz a five-year business program for each company and, thereafter, implement theprogram taking into account the Bank's comments. The project will provide technical assistance for thisimportant task. This program would address the impact of the reduction of operating subsidies, theintroduction of measures to avoid profitable operations being used to subsidize unprofitable operations andfinancial restructuring of debts that cannot be repaid. It would examine the linkages of the metal mines todownstream processing plants and industries in Romania and linkages of the coal/lignite mines to powerplants.

3. Sector issues to be addressed by the project and strategic choices:

The most pressing issues the Government faces in carrying out such a massive restructuring effort are to: (a)close mines and reduce subsidies to the mining industry; (b) mitigate the social hardships in the miningregions caused by the layoffs of miners; and (c) make the remainder of the mining sector attractive to privateinvestors. Considering the rather lengthy delays in the implementation of other projects in Romania, thisproject has been designed as a pilot project that would meet two urgent priorities:

Financing for the physical closure and environmental remediation of a first group of 29underground mines where operations have been stopped. The Bank would also assist in attractingadditional financial support from other donors for closure of additional mines.

* Technical assistance for the:* physical closure of mines;* environmental remediation of closed mine sites;* social mitigation for adversely affected people;* economic revitalization of affected mining regions;* creation of a new mining licensing system;* assessment of the environmental performance of the mining sector;* preparation of a plan to reduce production-related subsidies and increase the share for mine

closure, social mitigation and enviromnental protection subsidies, while gradually phasingout all subsidies;

* preparation of a restructuring plan for state-owned mining and exploration companies in thelight of the changes in subsidies; and

* studies of key regulatory and institutional reform measures necessary to implement sectorreform and attract private investment.

Given the lack of local experience with the technical closure of mines and the related envirornentalremnediation of abandoned mine areas, the project will rely on the use of international consultants withextensive experience in these disciplines. These consultants, who will be co-financed by DFID, will preparethe technical specifications of bidding documents and certify the implementation of the mine closures andenvironmental remediation activities, which will be carried out by contractors with solid experience in thistype of work. Operational management and financial control will be delegated to the senior internationaltechnical specialists and contractors, in order to minimize the risk of implementation delays. By establishingcredibility, this is also the most effective approach to obtaining financial support from other donors.

C: Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

The project consists of a mine closure component, a social mitigation component and an institutionalstrengthening component. The 29 mines selected for final closure under the project were chosen on the basisof contiguity (to enable packaging into a small number of contracts) and the fact that they were undergroundmines. The latter require major environmental remediation, in which the Romanians do not have experience.Hence, this component would have an important demonstration effect for the Romanian Government, as doesthe social mitigation component. Only 688 miners still work in the 29 mines to be closed undertaking careand maintenance work. Hence, the social mitigation component covers far more than just assistance to theworkers in these mines or those mining areas. Project costs are summarized below:

Table 3: Estimated Project Costs and Bank Financing

Component Category Cost Incl. % of Bank- % ofContingencies Total financing Bank-

(IS$M) (US$M) financing

Mine Closure Component 34.78 56.5% 26.49 59.5%Closure works Works 33.14 25.85Technical Advisor Service 0.85 0.00

Training Services 0.54 0.44Equipment and Vehicles for CGMC PIU Goods 0.25 0.20

Social Mitigation Program 20.78 33.7% 13.84 31.1%

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Component Category Cost ncl. % of Bank- % ofContingencies Total financing Bank-

(US$M) (US$M) financing

Technical Advisor Services 3.40 0.00

Micro credit Credit 4.29 3.93

Workspace Centers Goods/Works 4.92 3.78Enterprise Support Services Services 2.01 1.65Employment and Training Incentives. Incentives 3.02 1.87

Public Information & Social Dialogue Services 1.45 0.88MIS & Social Impact Monitoring Goods 1.47 1.21

Vehicles Goods 0.22 0.17

Institutional StrengtheningSupport to NAMR Services/Goods 3.07 5.0% 2.52 5.7%

Study ComponentSubsidy and NMC Studies Services 0.54 0.9% 0.44 1.0%

Miscellaneous 2.37 3.9% 1.21 2.7%PMU/PIU Operating Costs Misc. 1.71 1.40

Auditor Services 0.22 0.17Front End Fee Misc. 0.445 0.00

Totals 61.54 44.50

2. Key poicy and institutional reforms supported by the project:

* OBJECTIVES. In line with the project's development objective of reducing the burden of themining sector on the national budget by closing mines in a socially and environmentallyacceptable manner and laying the foundation for opening the sector to private investors, thisproject aims to: (a) provide technical assistance to strengthen the institutions involved in theclosure of mines and associated social mitigation; and (b) further adapt the sector's regulatory andinstitutional framework to the requirements of a market economy.

* INSTITUTIONAL STRENGTHENING. Since the process of the restructuring of the mining sector hasjust recently been initiated by the Government, the agencies involved lack experience in theclosure of mines, social mitigation and the promotion of mining concessions to private investors.This project is designed to assist in strengthening these capabilities in CGMC, NAD and NAMR.

* SUPPORT TO THE UNEPLOYED. The project will also establish mechanisms for employmentpromotion under the social mitigation program to assist those who lost their livelihood as a resultof mining sector restructuring. These include: (a) micro-credit schemes for the mining regions tobe administered by NGOs as intermediary micro-finance institutions; (b) the establishment ofworkspace centers as business incubators in buildings at the mines to be closed in the 14 miningregions, where NAD has its offices; (c) an enterprise support program; (d) employment andtraining incentives scheme; and (e) public information and social dialogue. By their very naturethese programs will need to be flexible and iterative and will require intensive supervision.Compared to the physical closure of mines, they will require a longer gestation period and longer

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duration for successful implementation. These activities are not covered by any existing programs.Despite valuable collaboration on public works, MOLSP lacks the field presence necessary tosustain such an intensive program. Hence, the Bank's assistance to NAD is critical to the future ofthe mining communities.

* LEGAL AND REGULATORY REFOM The project would assist NAMR together with relevantentities in the review and revision of the legal and regulatory framework for: (a) the closure ofmines, in particular the regulations for the environmental remediation of mining areas that are nolonger used for mining purposes; and (b) reducing barriers to private investment in the sector.

* BUIDI1NG OF PARTNERSHIPS. Taking into account the Government's preference to use grantfunding for technical assistance, the Bank is facilitating the Government's access to grants. Theproject promotes partnerships at: (a) the sectoral level, with international donor agencies for thesocial mitigation and mine closure programs; and (b) the implementation level, with NGOs andservice providers for sub-components of the social mitigation program. The DFID will beproviding an estimated UK2.5 million pounds sterling (US$4.25 million equivalent) over threeyears in technical assistance to NAD and CGMC under parallel co-financing arrangements underthe project. The EU allocated ECU 2.1 million in 1998 from the EU-Phare program for regionaldevelopment studies and quick response measures in the most-affected mining regions: Jiu Valleyand Gorj County. Another ECU 10 million (ECU 4 million for SMEs and ECU 6 million forinfrastructure development) has been earmarked in 1999 from the EU-Phare program for these tworegions.

3. Benefits and target population:

X PRojECT BTENEITS. An important benefit of the proposed project will be a boost to employmentin the economically depressed mining regions, as close to 80% of the estimated expenditures formine closures are for the environmental remediation of the associated mining areas. For economicreasons contractors are expected to use local labor extensively. Thus, the physical closure programis equivalent to a large temporary public works program. Further stimuli for the economicrecovery of these regions will come from the support - from the Bank as well as other donors - forthe social mitigation program. This will help the Government to deal constructively with thepolitically volatile situation that has been created by the sharp reduction of mining outputs and thelayoff of about 70,000 miners. Other short term benefits are: (a) reduction of financial losses bythe closure of uneconomic mines and reduction of state subsidies; (b) improvement of an efficientlicensing system for the industry; (c) efficient public mining institutions in charge of regulatingand monitoring mining activities; (d) establishment of comprehensive environmental guidelines forthe protection of the mining environment; and (e) creation of alternate income generatingopportunities in the mining areas to help stabilize those seeking to emigrate from mining areaswith lesser alternatives.

* The induced benefits over the longer term are: (a) possible private sector investment in bothexisting and future exploration and mining operations, resulting in a strong and sustainable miningindustry consisting of internationally competitive metal mining operations and low cost lignite andcoal operations; (b) diversification of income generating opportunities in the areas heavilydependent on mining to minimize adverse impact of sector restructuring; and (c) betterenvironmental control of the mining industry.

* TARGET POPULATION IN THE MaNING AREAS. The local benefits from mining have historicallybeen proportionately larger than the size of the local mining labor force. Miners were privilegedwith higher wages and non-wage benefits as compensation for difficult working conditions. Theirincomes thus supported a significant secondary service economy in the mining areas. Restructuringof the mining sector, initiated through voluntary redundancies starting in August 1997, has had anegative ripple effect on the involved local economies, particularly in the Jiu Valley and GorjCounty, where the largest number of miners were employed. Benefits will also accrue to otherresidents in the mining communities who have also been affected by the related downturn in thelocal economy through possible participation in diversified enterprise development activities.Women will be targeted especially through the micro-credit and enterprise support programs.

NGOs will be active partners in the micro-credit, enterprise support, and social dialogue sub-components of the social mitigation program. Other targeted beneficiaries are: (a) national andprovincial mining authorities; (b) small to medium scale local and foreign ancillary industryentrepreneurs; and (c) local service providers.

4. Institutional and implementation arrangements:

Project implementation period: The mine closure component will be implemented over a period of threeyears starting September 1, 1999. The social mitigation component is expected to take five years. Theproject completion date will be December 31, 2004 and the Loan closing date will be June 30, 2005.

Implementing agencies: The project will be implemented by three agencies comprising: (i) the CentralGroup for Mine Closures (CGMC); (ii) the National Agency for Mineral Resources (NAMR); and (iii) theNational Agency for Programs Development and Implementation for the Reconstruction of the MiningRegions (NAD). Each agency will have a Project Implementation Unit (PIU). A Project Mangement Unit(PMU) will provide overall coordination.

Project administration: Each of the three implementing agencies would has a Project Implementation Unit(PIU) responsible for the implementation of their respective components. Each PIU is headed by a Directorwho is responsible for the overall coordination and management of its component of the project and whoreports to the Head of the PMU. The PlUs have qualified and experienced staff. The PIUs will providequarterly progress reports to the Project Management Unit. Each PIU will be responsible for: (i) its ownprocurement, including preparation of bid documents and entering into contracts for civil works, goods, andconsultant services; and (ii) progress monitoring, evaluation and reporting. In addition, the NAD PIU will beresponsible for partnership building with NGOs and the international donor community and local communityoutreach and for a microcredit program and an employment and training incentives scheme. Due to thelimited experience of current staff in these responsibilities, the CGMC and NAD PIUs will have expatriateconsultants to assist them in managing, monitoring and evaluating the progress of the components. CGMC,NAMR and NAD have each appointed a PIU director with satisfactory experience and qualifications andhave established a PIU with staff and initial equipment satisfactory to the Bank. The Government hasprovided assurances that it will provide budgetary financing satisfactory to the Bank for the PMU, the threePIUs, and the counterpart financing requirements.

Project Coordination and Financial Management Systems: To ensure proper project implementation andcoordination between these three separate implementing agencies, the Project Management Unit (PMU),which includes the Project's Financial Management Systems (FMS) Group, will oversee the progress ofproject implementation and handle all financial aspects of the project, including accounting, financialmanagement, auditing and reporting. During project preparation it was agreed that this Project ManagementUnit will report to the Minister of Industry and Commerce in his position as a cabinet member. TheGovernment has issued clear and binding instructions to all relevant entities that they shall report to theMinister of Commerce and Industry in all matters related to the preparation and implementation of thevarious components of the Project. The Government has appointed a PMU Director with satisfactoryexperience and qualifications and has established the PMU, including the Project's Financial ManagementSystem Group, with initial staff and equipment satisfactory to the Bank. The Directors of each of the threePIUs report to the PMU Director. Contracts will be co-signed by the Director of the relevant PIU and theDirector of the Project Management Unit. The PMU Director provides general coordination of projectimplementation, administers the Special Account, and ensures that both the Bank and the Government areregularly appraised of the progress of the three project components.

A brief analysis of each implementing agency follows:

* Central Group for Mines Closure (CGMC): This Group was created by ministerial decree withinMOIC in 1998 to be responsible for mine closures and associated environmental rehabilitation. It islocated in Bucharest and currently has eleven employees with experience in mining. It is expected to

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employ additional staff with expertise in legal, economic, and environmental rehabilitation disciplines. Ifits activities increase sufficiently when the pace of mine closures picks up it is expected to be convertedinto an autonomous agency. Being new, it has limited experience regarding mine closures andenvironmental rehabilitation. While it will require technical assistance to implement this component, ithas started the process of closing other mines using existing Romanian mine closure procedures. Inaddition to the funds to be provided under the project, technical and financial assistance will be receivedfrom UK DFID as well as other donors to help in the training of its staff. For 1999, 308 billion lei(US$20 million) was allocated to CGMC from the State budget through MOIC budget, of which Lei 200billion for mine closures and environmental remediation and Lei 108 billion for care and maintenance,to close an approximate number of 20 mines, included in the mines closure program, financed from theState budget The government has provided assurances that CGMC may close several mines using onesingle contract. It was agreed that CGMC will prepare and submit bv March 31. 2000 a mine closureprocedure manual for the project. The procedures for closing mines not included under the project willbe updated using the manual.

* National Agency for Mineral Resources (NAMR): This agency was created by the Government in1993 and is responsible for the administration of all activities in the mineral sector. Its initial purviewwas the petroleum sector, but under the new Mining Law of 1998, it became responsible for monitoringand regulating the activities in the mining sector as well. It is expected to review and approve documentsfor mines to be closed, issue licenses for mining exploration concessions and promote private sectorinvestment in the mining sector. It reports directly to the Prime Minister's Office. It has a staff of about120 people consisting of petroleum engineers, geophysicists, mining engineers, and economists, drillingengineers, lawyers and environmental specialists. The Chairman is supported by a vice president andfour general directors who oversee the activities of the staff. Its headquarters is located in Bucharest (66staff), with 22 regional offices in the petroleum and mining areas of the country (54 staff). Under theBank-financed Petroleum Sector Rehabilitation Project (Loan 3723-RO), NAMR developed acomprehensive geologic database with the assistance of consultants. In order to facilitate the monitoringand regulation of mining activities, the computer facilities for the geologic/petroleum data base would beexpanded and upgraded. Under the project, NAMR would be responsible for: (a) developing andmaintaining a computerized database for the mining sector; (b) implementing a mining explorationpromotion program; and (c) developing a mining and cadastral book (Mining Book).

* National Agency for Programs Development and Implementation for the Reconstruction of theMining Regions (NAD): NAD was created as an autonomous agency in February 1998 for the purposeof facilitating social mitigation and development programs in the mining areas, based on an agreementbetween the Government and the mining labor unions when the terms of the voluntary redundancy werebeing negotiated. The creation of NAD stems from the recognition that many of the mining regions arecurrently heavily dependent on the mining industry. NAD's role is justified on the following grounds.Firstly, without special attention diversification of the local economy will not take place and laid-offworkers will not be able to move to other occupations. The majority of mining sector workers werebrought in and settled in the mining areas from other regions, half of them in the Jiu Valley and GorjCounty alone, where alternate economic opportunities were not developed. The depressed Romanianeconomy and housing constraints prevent labor mobility from the mining regions. Secondly, NAD hascollaborated well with MOLSP and already demonstrated that without its local organizational capacityMOLSP would not have been able to achieve what it has done so far. During the past year, NAD's fieldpresence enabled the mining communities to organize themselves into Local Consultative Committeesand effectively tap resources available for public works from the LRP administered by MOLSP. Thissource is drying up because the mining regions have already drawn 60% of the funds disbursed by LRP,while MOLSP would like to distribute its resources nationwide. However, disbursements by MOLSPhave been very slow in other regions where NAD does not have a field presence. Thirdly, MOLSP doesnot offer the social mitigation services being proposed by NAD. Finally, NAD will function as acoordinator and enabler of social mitigation activities, most of which will be undertaken by otheragencies and service providers including MOLSP.

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NAD operates under the auspices of the Prime Minister's office. It has a staff of 72 (22 in Bucharest, 50in its 14 regional offices), which is expected to grow to 117 when full-scale implementation commences.Romania had no prior experience in social mitigation. NAD has received technical assistance from theBank for strategy and organizational development and has benefited from study tours to the U.K.Substantial technical assistance, co-financed by the British DFID, is envisaged to develop NAD'scapacity to implement the Social Mitigation component of the project. NAD's mandate includes: (i)facilitation and promotion of social mitigation measures in Romania's mining cominunities; (ii)dissemination of information on Government policy and actions towards social mitigation to miners inthe mining regions; (iii) promotion of participation and information exchange among stakeholders; (iv)facilitation of business development in affected regions including enterprise support and enabling localaccess to capital for enterprise development; (v) coordination of government and donor support inaffected regions; and (vi) systematized social dialogue and social impact monitoring of mining sectorrestructuring. NAD management recognizes that Romania has limited experience in the above activities.Technical assistance is being provided by DFID for consultancy services to develop NAD'smanagement and administrative capacity and to train the staff of NAD to implement the social mitigationprogram. In addition, it was agreed that the Government will. bE December 31, 1999. formulate inagLreement with the Bank criteria for the selection of credit providers, and will issue necessary licensesto at least three qualified NGOs that will be allowed to act as Micro-credit Finance Institutions, to beselected to administer the micro-credit sub-component of the social mitigation component. It was alsoggreed that NAD will prepare and submit by December 31, 1999 an operatinmna saisfctor tothe Bank including guidelines, procedures, and documents for (a) the micro credit program and (b)the training and employment incentive scheme and will implement the micro-credit program and theincentive scheme usinga those kuidelines, procedures, and documents.

Procurement and Disbursement. Except for NAMR, the other two entities are not familiar with theprocurement procedures of the Bank. Therefore, initiatives are being taken to assist the staff of the PLUs ofCGMC and NAD in the preparation of selected tender documents, bid evaluations, etc. for the first year ofproject implementation. In parallel, training is being provided for their procurement staff. Initial biddingpackages have been prepared. With regard to mine closure, the technical specifications and bid documentsfor mine closure and environmental rehabilitation will be prepared by a qualified procurement firm to behired by CGMC. These specifications will be reviewed by the Bank prior to implementation of the biddingprocess. Annex 6 contains a summary of the arrangements covering procurement of civil works, goods andconsultant services, as well as disbursements. Because expertise in the closure of mines and environmentalrehabilitation is absolutely critical for the success of this program, selection of the foreign consultant or firmwill be on the basis of quality alone. This consultancy would also be required to assist CGMC in theevaluation of the bids and the selection of the international contractor that would effect the mine closure andenvironmental rehabilitation. Similar procurement assistance would be provided to NAD for its procurementrequirements. NAMR would be expected to prepare its own bidding documents for all items to be procuredunder the project. The Bank would review all bidding documents. All civil works and procurement ofgoods, whether under ICB, LIB or NCB, will be subject to prior review by the Bank. It was ageed that theGovernment. through PMU. will submit to the Bank. by June 30 of each year startine in 2000. aprocurement and disbursement Plan for the project components during the next fiscal year. and agreewith the Bank on these Plans by September 30 of each year. By November 30 of each year theGovernment will include counterpart funding for CGMC. NAMR and NAD in the pro osed Budget for thenext fiscal year. in accordance with the aereed Procurement and disbursement plans.

Planning and Budgeting. An estimate of the project cost is provided in Annex 3. Each PIU, with theassistance of the technical consultant will prepare annual budgets and work plans for each activity. CGMC,NAMR and NAD have prepared estimates of counterpart financing requirements for the year 2000 Theywill also prepare estimates of the funding required from the Government's budget and call on counterpartfunds as project implementation progresses.

Accounting, Financial Reporting and Auditing Arrangements. The Financial Management System Groupwill be headed by a Financial Controller who will be responsible for all FMS aspects under the project. A

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Finance Manager and a Manager of Audit report to the Financial Controller. The Finance Manager isresponsible for all accounting and financial management matters, and the Manager of Audit is responsible forall internal control and audit matters. The overall responsibility for the FMS lies with the FinancialController, including staffing and equipping the unit.

In addition to operation of the Special Account, FMS would, among other things, mean maintaining thebooks of accounts in respect of the project, preparation and dissemination of financial information throughstatements and reports, as well as, making arrangements for the timely audit of these financial statements.The project financial statements will be prepared in accordance with International Accounting Standard. Thefinancial and accounting system will be computerized. There are several software packages available in themarket which would meet the FMS requirements and which could be customized to meet the specific needsof the Project. Software modules for preparing Project Management Reports (PMRs) to meet the Bank'sLoan Administrative Change Initiative (LACI) requirements will be developed using available software inthe market. It is expected that at least three personal computers would be required for this purpose, whichwould be financed under the Loan. Assistance of a qualified accounting firm will be used for designing andinstalling the computerized accounting system with required customization for the PMU. This firm is alsohelping with the preparation of the chart of accounts and accounting procedures manual.

Chart of Accounts and Accounting Procedures Manual. The chart of accounts will be linked to thecategory schedule of the Loan Agreement and the program of activities so as to provide the necessaryinformation for the preparation of the quarterly project monitoring report. The accounting proceduresmanual will include a detailed section covering the accounting function for the component; the overallresponsibilities for the chief accountant and the bookkeepers; the desired education and experience of thestaff, the reporting formats for the quarterly accounts; the chart of accounts, monthly general ledgers closingprocedures; internal control procedures; and guidelines for the operation of the banking and paymentssystem. Each procedure manual will be prepared by the financial controller under the guidance of the projectfinancial management specialist. Updates to the manual will be carried out periodically during projectimplementation. It was greed as a Conditon o ectiveness that the PMU will establish a finanimangg,gment system satisfactory to the Bank. This system will encoqmpass a reliable accounting sysewith documented procedures, chart of accounts, procedures manual, timely reporting and rood internalcontrols satisfactory to the Bank. It was further agreed that under a time-bound action plan this sysewill evolve into a full-hedged Pro;ect Management Reporting System satisfactory to the Bank bvDecember 31. 2000.

Disbursements and Special Account. Once the loan is declared effective, the PCU will maintain oneSpecial Account (SA) for the whole project in a Romanian bank, satisfactory to the Bank, in which theproceeds of the loan will be deposited for each component. The SA would be managed on behalf of the threePIUs by the FMS Group within the PCU. Traditional disbursement procedures will apply. The size of theSA for the first 12 months will be about US$4.0 million; thereafter the size will be determined by theforecast of project expenditure as indicated in the Quarterly PMRs. All bank accounts associated with thisproject will be reconciled on a quarterly basis.

Audit Requirements. The annual audit of the project accounts for each component will be carried out by afirm of independent auditors to be appointed by each entity for its own component of the project. The auditwill be carried out in accordance with International Auditing Standards. It was agreed (a) that theGovernment will, by December 31, 1999 appoint independent auditors with qualifications and terns ofreference satisfactory to the Bank for the purpose of uditing h Project account, and (b) that the

Government will submit to the Bank no later than five months after the end of each fiscal year theindependent auditors rorts of the proect accounts These will include an opinion on the status of theoperation of the SA together with a management letter, together with comments of MOF and the PMU onthe matters raised in the management letter and proposals for implementing those recommendations. Eachentity should ensure that the accounts and supporting documentation are kept in sufficient detail to facilitatethe auditing of the project accounts and project supervision

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Project Oversight. Project oversight is provided by the PMU Director who holds regular meetings with theheads of the PIUs on the progress of each component. Furthermore, the PMU Director is responsible forensuring that both the Government and the Bank are kept informed of the progress of all components of theproject and for providing policy guidance, facilitating coordination and overseeing project implementation.The Bank's supervision team will also provide oversight and quality control. A review of the progress of theproject will be conducted at the end of each year, a mid-term review will be undertaken by September 30,2001 and an Implementation Completion Report will be prepared six months after the final disbursement ofthe credit. It was greed that the Government and the Bank will undertake a mid-term review of thProLect by September 30. 2001.

Monitoring and Evaluation Arrangements. The mine closure and environmental rehabilitation of themine sites are highly sensitive activities with respect to population, health and safety. They must be carefullyplanned, designed and carried out to maintain a high degree of authenticity. In order to keep a tight scheduleduring project implementation a project Management Information System (MIS) suited to the project will bedesigned by a specialist, appointed by PMU, to serve as the key project-monitoring tool. Each PIU will beresponsible for monitoring progress against specific performance and impact monitoring indicators. Thesewill include detailed benchmarks covering the progress of procurement activities, implementation ofcontracts, institutional arrangements, and utilization of funds and disbursements.

Social Mitigation is an activity whose success will depend on its responsiveness to local conditions. By itsvery nature this requires an efficient social impact monitoring system and beneficiary participation forregular feedback into program implementation. NAD will establish and maintain a special MIS for the socialmitigation component, with a comprehensive database of unemployed redundant mining sector workers andidentity cards to track their participation rehabilitation activities. Routine monitoring of project outputs willbe conducted by NAD. Under the project, an independent research consulting firm or institute will becontracted to undertake monitoring and evaluation, prepare half-yearly progress reports, and conduct anannual impact evaluation.

D: Project Rationale

1 Project alternatives considered and reasons for rejection:

Three alternative project designs were considered. The first alternative was to support the Government'srestructuring program for the mining sector as part of an adjustment operation. A second alternative was todesign a traditional investment operation that would provide more direct support to the agencies involved incarrying out the restructuring program. A third alternative was to design the investment operation as anadjustable program loan.

The first alternative had the advantage that it would have provided the Government relatively quickly withaccess to urgently needed financial support. However, it would have made it more difficult to provide thetechnical assistance for the strengthening of the agencies involved in the implementation of the restructuringprogram. As indicated, one of the main issues the Government faces in this effort is the lack of experiencedimplementing agencies. While an adjustment loan would focus on strengthening the policy and regulatoryenvironment - through appropriate conditionality - and thus facilitate private investments in the sector, itwould not be the most effective instrument to address the Government's concerns about the lack ofexperience of its agencies with the closure of mines, environmental remediation of mining areas and theimplementation of effective social mitigation. Since these are the top priority at this stage, a decision wastaken to make this an investment operation.

Both the second and the third option, a traditional investment loan versus an adjustable program loan, wereconsidered. However, in view of the absence of a clear Government strategy on sector restructuring and theneed to move quickly with this first operation, it was decided that a traditional investment loan would be thebest vehicle.

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In addition to the type of lending instrument, considerable attention was given to the project implementationarrangements and whether to have one PIU or three. Following extensive discussion it was concluded thatbecause of the sector institutional structure it is not feasible to have a single PIU. Therefore, NAMR, NADand CGMC will each have their own PIU, while coordination is provided by the PMU.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingand planned):

Sector issue Project Latest Supervision (Form 590)Ratings

(Bank-financed projects only)Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financedRestructuring and Rehabilitation of the Oil and Gas Rehabilitation U SPetroleum Sector ProjectFinancial Sector Restructuring, Price Financial and Enterprise HU HULiberalization and Restructuring and Structural AdjustmentPrivatization of EnterprisesPower Sector Rehabilitation Electric Power Sector U S

Rehabilitation ProjectLabor Redeployment Program Employment and Social S S

Protection Project

Other development agenciesEU-PHARE Social MitigationEU-MARR Social Mitigation

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

In designing this project the lessons learned from implementation of the two ongoing Romania energy sectorprojects as well as the labor redeployment program were applied. In energy sector projects, the Bank attachedconditionalities to its investment loans that exceeded the more limited purpose of the projects. Such broadconditionalities, related to sector restructuring and privatization, should in future be attached to sectoral or multi-sectoral adjustment lending operations. Lessons learned from the Labor Redeployment Program component of theEmployment and Social Protection Project and applied in the design of the proposed project are that nationwideprograms are by nature dispersed and cannot deliver the concentrated attention and effort necessary to make socialmitigation in a specific high priority sector a success. Lessons from micro credit programs in other ECA countriesalso points to advantages in using a specialized agency. Hence, dedicated institutions need to be established, suchas NAD. The Bank is helping finance similar mining restructuring programs in the Ukraine, Poland, and Russia.While the approach taken under each of these operations differed, they all had the following objectives: (a) to assistthe Government, where required, in the closure of uneconomic mines in a environmentally sound manner thatprotects above all the health and safety of the people that remained in the affected mining areas; (b) where closuresoccurred, to cushion the social hardships, the decline of living standards and the deterioration of social assets, suchas hospitals and schools; and (c) to encourage the creation of a fiscal, legal and administrative structure that wouldattract private investment. The Bank has also considerable experience with mining sector technical assistancereform operations to create an enabling environment for private sector mining investment in countries such asBolivia, Ghana, Mexico, Peru, Argentina, Mongolia and Tanzania.

The following lessons can be drawn from the above projects, most of which are still under implementation:

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* STRONG COMMITMENT ON THE PART OF TIE GOVERNMENT IS ABSOLUTELY ESSENTIAL. Mining, inparticular underground mining, is a difficult and dangerous profession that creates its own culture. Thewages and social benefits of miners tend to be higher than those of comparative professions. Miners aretypically organized into powerful unions and strikes can severely disrupt economic activity, as hashappened in Romania. The success of mining sector downsizing efforts depends therefore on thecommitment and strength of the Government to follow through with politically sensitive reforms. Thiscommitment to reform by the highest levels of Government needs to be fully supported by the agenciesassigned to implement such restructuring programs. In Russia and Ukraine the results have beendiscouraging, mainly because Governments lacked the resolve to implement the required policy reformsand to exercise the necessary control to keep the reforms on track.

* ADEQUATE FUNDiNG While the actual physical closure of mines is relatively inexpensive,environmental mine site remediation and compensation and social mitigation programs to lay off minerscan be extremely costly. Thus, the success of restructuring programs in the mining sector dependscritically on the availability of counterpart funds. Lack of funds and/or ineffective transfer mechanismscan be a major cause of project implementation delays and the reason why projects do not fully achievethe intended results.

* IMPLEMENTING AGENCIES MUST BE EFFECTIVE. It is clearly difficult and politically sensitive toimplement a project that leads, at least initially, to massive layoffs and a general decline of regionaleconomic activity. Implementing agencies, therefore, need to be staffed with highly respectedprofessionals that have the confidence of the miners, the trade unions and local authorities, in addition tothe full support of the Government. Experience with similar operations in other countries is usuallyhelpful, and the proposed project provides extensive training and consultancy services to learn fromsimilar restructuring efforts around the world.

* PROJECTS REQUIRE SPECIALISED AND CLOSE SUPERVISION. Almost none of the agencies involved inthe implementation of restructuring programs has any previous experience with the various tasksinvolved. This is one of the main reasons why most Governments seek Bank and other externalassistance. However, this adds, at least initially, to the need to use specialized consultants and to the costof supervising the implementation of projects.

* IMPORTANCE OF LOCAL ORGANIZATIONAL CAPACITY. The experience of the Labor Redeploy-ment Program has demonstrated the value of local organizational capacity in making nationwide pro-grams effective. Without NAD's field presence, MOLSP would not have been able to disburse most ofits LRP funds. Enhancing NAD's technical capacity to implement and coordinate a social mitigationprogram will be a significant factor in alleviating the crisis created in the mining regions.

* RELIANCE ON SPECIALIZED AGENCIES IS ESSENTLAL FOR MICRO-CREDIT PROGRAMS. The experienceof micro-credit programs in ECA (e.g. Bosnia, Albania) demonstrates the value of relying on specializedagencies with outreach capacity and technical skills to administer micro-credit programs. This is not arole which is easily performed by the formal banking sector. Public agencies can play a more useful rolein supervising micro-credit programs than in implementing them.

* NEED FOR SOCIAL lMPACT MONITORING. Previous experience demonstrates that regular social impactmonitoring, intensive supervision and flexibility in project design to adapt to local and changingconditions, is critical to the success of social mitigation activities.

* A FUTURE RESTRUCTURING PROGRAM MUST BE COMPREHENS1VE. The proposed project supportsprimarily mine closure, social mitigation and institutional restructuring. However, as a building blocktowards sector restructuring it will also assist in preparing a sector environmental assessment, analyzingthe need for regulatory improvements, and preparing a subsidy strategy and an associated stateexploration and mining company reform and privatization strategy. It is expected that the present projectwill be followed by a more substantial Bank-financed project to support the Government inimplementing a comprehensive mining sector reform program. Such support must cover legal reform,institutional reform, social and environmental reform, enterprise reform and privatizationsimultaneously. The aim is to create an integrated environment enabling a country to establish a positiveinternational profile for the mining sector that attracts private investment.

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4. Indications of borrower commitment and ownership:

The Government's strong commitment to the project objectives of closing the 29 mines and strengthening thesector administration is evidenced by the steps it has taken so far:

* Preparation of the October 1998 Strategy Statement;* Approval of the technical closure and environmental remediation of 174 mines;* Implementation of Ordinance #22, allowing voluntary reduction of the labor force by 70,000

miners;* Enactment of a new Ordinance for Disadvantaged Regions enabling the Government to provide

fiscal incentives to investors in the mining regions;* Creation of NAD as the agency to implement social mitigation measures in the mining regions;* Enactment of a new Mining Law and associated norms and regulations, which opens the door to

private investment;* Expansion of NAMR's authority to include administering the Mining Law; and* Establishment of the PMU and PIUs.

S. Value added of Bank support in this project:

The Bank has the world-wide experience to assist the Government in ensuring the success of this operation.The Bank's involvement would facilitate implementation of the project in a timely and efficient manner. Itwould also ensure that the Government maintains its focus on the objectives of the project. NAD has alreadybeen able to leverage over US$2 million in funds from the Labor Redeployment Program administered byMOLSP for social mitigation measures in the mining regions. The Bank's involvement would have acatalytic effect in attracting additional funds and support from bilateral donors, particularly for theimplementation of the social mitigation measures. This would enable the Borrower to gain experience indealing with such situations, which will continue to arise through mining sector as well as other industrialrestructuring. It would also provide further encouragement for private sector investment.

E: Summary Project Analysis

L. Economic (see Annex 4):

[X] Cost-Benefit Analysis:

The proposed project will create few new assets. Its primary purpose is to reduce the losses to the economygenerated by the mining sector and thus reduce the need for further expenditures from the budget for: (a) thecostly 'care and maintenance' of uneconomic mines, in which operations have ceased but which have notbeen formally closed and whose sites have not been properly remediated; and (b) the mining companies'increase in liabilities to creditors. The total direct budgetary support in 1998 to the six state-owned miningcompanies amounted to amounted to Lei 1,499.6 billion (US$ 176.4 million) as shown in Table 4.

Table 4 - Subsidies to the Six State Minin2 ComDanies 1998-1999US$ millions

Year Production Employees social Capital Environment TotalAllowances Allowance Improvement

1998 115.0 29.7 21.4 10.3 176.4Proposed 1999 72.6 24.9 17.8 9.9 125.2

Note: Lei figures converted to US$ at the following exchange rate per I US$ - 8,500 LEI in 1998; and10,000 LEI in 1999.

Source: CGMC, MOIC.

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The level of subsidies for the mining sector in 1998 was 0.44% of the Gross Domestic Product (GDP), 2.28%of the total state subsidies, and 13.22% of the Government budget deficit.

The project would assist the Government in designing a subsidy program that gradually phases out subsidiesto the mining industry. This would be achieved through an initial increase in subsidies for voluntaryredundancies and social mitigation measures, while reducing subsidies for exploration, production andinvestments. The project provides, in addition, other important socio-economic benefits. They include:

* Final technical closure of underground mines increases safety of production in neighboring mines;* Mine site environmental remediation enhances the health and safety of the population in the area;* Many mine site remediation add to the land available for agricultural and recreational uses;* New jobs created by social mitigation measures will assist in revitalizing the regional economies that

have been depressed by the massive layoffs of miners; and* Support for geoscientific research will identify new exploration and mining potential attractive to

both local and foreign investors.

The lack of reliable statistical data for the activities supported by the project makes it difficult to estimate anoverall economic rate of return. However, as part of project monitoring and evaluation, an appropriatemethodology for an in-depth semi-quantitative assessment of the economic and financial benefits of theclosure and environmental remediation and social mitigation activities would be developed. While aneconomic rate of return is not presented, the project is the least cost approach to meeting the objectives ofclosing the mines in an environmentally sound manner and providing social mitigation initiatives to supportunemployed workers in the mining communities.

2. Financial Analysis and Fiscal Impact (see Annexes 4 and 5): NPV=US$ 8.0 million; FRR= 16.5%

FINANCIAL ANALYSIS. Annexes 4 and 5. The financial rate of return has been calculated by taking thelabor cost and related benefits as savings and the severance payments, social initiatives, institutionalstrengthening and mine closure works as costs. The calculation does not attempt to quantify the benefit ofthe microcredit and incentive schemes which, if taken into account, would increase the rate of return.

FISCAL IMPACT. The losses of the National Mining Companies will be further reduced as a result of themines to be closed under this project. The subsidies and national mining and exploration companies studiesshould ensure that subsidies are phased out in an orderly manner and that the share of subsidies for socialmitigation, mine closure and environmental protection is progressively increased and the share of subsidiesto cover operating losses is progressively reduced.

3. Technical:

In line with the main objectives, this project will:

* provide expert technical assistance for the preparation of appropriate mine closure andenvironmental remediation plans;

* strengthen CGMC to implement an international bidding process, select experienced contractorsand supervise implementation of the mine closure and environmental remediation programs;

* assist CGMC in gaining a deeper understanding of the environmental issues and, more specifically,the remediation measures that would need to be adopted to protect the health and safety of thepeople remaining in the mining areas (see Section 6 below).

* The SEA will, inter alia, provide the necessary inputs for the development of environmentalregulations for the mining sector including the closure of mines;

* support the creation of an institutional and regulatory framnework to attract and sustain privateinvestment into the mining sector. Specifically, assistance will be provided to strengthen NAMR,

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the lead agency responsible for the administration of mineral rights, taxes, royalties and licensefees and their collection.

4. Institutional:

Project Management: The experience and implementation capacity of the sector agencies is limited.However, through the appointment of the PMU Director, and provision of expert technical assistance, theinstitutional capacity of these agencies would be upgraded to the level necessary for the implementation ofall aspects of the project.

Stakeholder Involvement: At the local level, NAD has facilitated the formation of Local ConsultativeCommittees (LCCs) consisting of members of the local administration, mine managers, local entrepreneurs,labor unions, and NGOs. The LCCs play an important role in NAD's outreach to the mining communities,help to identify and prioritize projects, and provide feedback to NAD about the social mitigation program(see also Section 7 (b) below).

5. Social:

The social issues include the high unemployment in the mining areas due to the recent voluntary redundancyprogram launched by the Government in September 1997. In 1997, 74,000 mining sector workers left theindustry, and another 9,000 left in 1998. Sector restructuring is expected to lead to additionalunemployment. In most of the mining regions, mining was the dominant economic activity. Redundanciesin the mining sector have had substantial adverse impacts on the local economy. Although redundantworkers received generous severance payments, promised support for re-training and job creation was notforthcoming. The resulting discontent led to major strikes during the winter of 1998-99.

In order to address social issues, the Bank provided assistance the Government in 1998 to undertake a SocialAssessment. The Social Assessment examined the social impact of restructuring, the measures undertakento deal with these impacts, the coping behavior of redundant workers, the opinions of mining communitiesabout the layoff process, and alternative development possibilities. It established a baseline for social impactmonitoring that would identify the main social issues in addition to the unemployment problems, andrecommended necessary actions to be taken. NAD, the agency established to focus on implementing socialmitigation measures, lacks experience, expertise and funds. During project preparation, assistance has beenprovided to NAD to develop and implement a strategy for addressing the social issues. NAD is expected tofocus on providing avenues for retraining the miners in other economic activities; facilitating theaccessibility of funds to entrepreneurs to undertake investment in mining regions; and providing informationto miners on job opportunities within the mining areas as well as in other regions.

6. Environmental assessment: Environmental Category [ ] A [X1 B [I C

The project is expected to have a positive impact on the environment by building professional expertise inthe country for environmental management at the national level and within the mining regions, and thephysical improvements of mine site environmental rehabilitation. Existing environmental remediationguidelines in Romania are inadequate to address the above issues comprehensively. Therefore the designand implementation of the mine closures and environmental remediation program of the areas around the 29mines to be closed would be performed by experienced contractors under terms of reference to be reviewedby the Bank. In parallel, a comprehensive Mining Sector Environmental Assessment (SEA) will beundertaken, with assistance from consultants, as part of the project. The study would: (i) review the status ofthe existing environmental legal, regulatory and institutional frameworks and recommend actions forimprovement; (ii) undertake an analysis of the impacts of sector activities on the environment and thecommunities; (iii) estimate the costs of environmental rehabilitation of areas in which the mines would beclosed; and (iv) establish appropriate environmental policies and monitoring procedures, including theimplementation of consultation procedures, training requirements and programs. It was ag'reed that NAMfR.to-gether with relevant entities, will prepare and submit to the Bank. for its review and review by other

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stakeholders. a mining Sector Environmental Assessment by March 31, 2000 and an action plan toimplement these recommendations and promptly thereafter implement the action vlan. NAMR will takethe lead regarding the SEA. The work will be supervised in close cooperation with MOWFEP and MOIC.The project will provide technical assistance for this important task.

Environmental category (B) is justified for this project by the fact that: (i) the environmental remediation willbe performed by experienced international contractors who would to this work in line with industrystandards; (ii) an internationally known environmental auditor/firm would be selected, under terms ofreference to be reviewed by the Bank, to assist CGMC to certify that the remediation has been donesatisfactorily; and (iii) an SEA would be undertaken simultaneously to establish the environmental standardsand guidelines to be followed for future mine closure activities. The project would have a positive impact onthe environment by ensuring that the integrity of the ground water system is maintained, polluted land isreturned to economic use, and the environmental management capacity of the institutions (CGMC, NAMR,MOIC and MOWFE) that are involved in monitoring environmental protection in mining areas isstrengthened

7. Participatory approach:

a. Primary beneficiaries and other affected groups: Primary beneficiaries within the mining regions con-sist of current and ex-workers of the mining sector who will benefit from the improved economic viability ofthe mining sector in the long run and the Social Mitigation Program (SMP) in the short- and medium-term. Insome mining regions, such as Gorj, women have been targeted for redundancy by mine management as theirrole was considered less vital to the industry. Sector restructuring has also adversely affected non-miningworkers in mining communities due to the reduced demand for secondary industries and services and in-creased competition for scarce jobs. At the same time, the increasing trend towards decentralization of re-sponsibility for social assets and services to local governments has placed an added burden on local govern-ments which weakens the quality of social services to the communities in the mining regions. On the otherhand, in the long run mining communities will benefit from elimination of subsidies for operating losses andcare and maintenance of non-functioning mines, since this will free up budgetary resources for productiveinvestments and essential social services. The SMP will assist the Government in dealing with the adverseimpacts and in attracting investment to benefit key stakeholders in the mining regions.

b. Other key stakeholders: The participation process has operated at three levels. Within the mining re-gions, NAD has catalyzed the formation of Local Consultative Committees consisting of local governmentfunctionaries, and representatives of public agencies, local entrepreneurs, mine management, labor unions,and NGOs. The LCC is a useful interlocutor between the Govermnent and mining communities. The LCCsreview identify opportunities for investment and determine priorities for project development. They havebeen instrumental in preparing the projects financed by the LRP, in formulating proposals which are part ofthe EU's regional development plans for Jiu Valley and Gorj County, and in designing the SMP. At theanalytical level, key stakeholders have been consulted through a systematic social assessment process meas-uring the impact of mass redundancies and investigating priorities for social mitigation. At the nationallevel, donors, NGOs, labor unions, research institutes, and staff of relevant government agencies have par-ticipated in two seminars to discuss mining sector restructuring and to consider proposed social mitigationmeasures. The SMP design responds to the various inputs received from this wide range of stakeholders.The status of consultation and collaboration with different stakeholders is summarized below.

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Stakeholders Info Sharing Consultation Collaboration

Ministry of Finance Yes Yes Yes

Ministry of Labor and So- Yes Yes Yescial Protection

NAD, CGMC and NAMR Yes Yes Yes

NAD field staff Yes Yes Yes

Local government Yes Yes Yes

Local communities in Yes Yes Plannedmining areas

NGOs Yes Yes Planned

Independent Research con- Yes Yes Plannedsultants

Local service providers Yes Yes Planned

Mass media Yes No Planned

European Union Yes Yes Planned

UK Department for Inter- Yes Yes Yesnational Development(DFID)

Although lacking its own program funds in 1998, NAD has been quite effective in coordinating and attract-ing additional resources helping local communities identify and local governments prepare micro-projects fordonor financing. In each of the 14 mining regions, NAD has organized LCCs as a mechanism for socialdialogue with mining communities. As a result, 79 of the 202 active measures financed by the Bank-fundedLabor Redeployment Program administered by MOLSP (almost 40% of committed LRP funds) have beenundertaken in mining areas. NAD has also been pursuing vigorously other financing sources, particularly theEU and the DFID. The DFID is expected to co-finance the project providing grant financing for the entiretechnical assistance sub-component for NAD. The EU is already providing parallel financing for small andmedium enterprises and infrastructure investments in the Jiu Valley and Gorj County, the mining areas mostaffected by restructuring.

F: Sustainability and Risks

1. Sustainability:

* REQUIRES FURTHER IMPLEMENTATION PLANNING AND CONTINUED FINANCIAL SUPPORT.Although the Government is currently committed to the downsizing of the mining sector, it is alsoaware that this is a costly undertaking that will continue to require sizeable budgetary support foryears to come, in addition to the assistance the program receives from multinational and bilateraldonors. A timetable for phasing out subsidies will be prepared under this project.

* REQUIRES CONTINUED POIMCAL SUPPORT. Government will face resistance from vestedinterests to reducing subsidies to cover operating losses and replacing them with subsidies for mineclosure and social mitigation. By increasing the latter kind of subsidies, Government will providedirect support to deal with the health and safety problems caused by the destructive miningpractices of the past. It will also benefit unemployed miners, who have already received morefinancial compensation than other workers when they lost their jobs. This should help buildminers' union support for the program.

* REQUIRES THAT THE SOCIAL MITIGATION PROGRAM QUICKLY SHOWS TANGIBLE RESULTS.Support for the restructuring program is predicated on the assumption that it will be effective in

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revitalizing the depressed economies of the mining regions. Few miners have been able to relocatesuccessfully from the mining regions so far. Since little would be gained from a massive relocationof miners to other parts of Romania, the Government is primarily focused on creating alternativeemployment opportunities in the mining regions.REQUIRES COMPETENT INSTITrUTIONS AND FURTHER REGULATORY REFORM. The institutionalframework remains very complex and NAMR, NAD and CGMC each report to a differentauthority. Although significant first steps have been taken through the new Mining Law, furtherreform is needed and technical assistance for this will be provided under the project.

2. Critical Risks (reflecting assumptions in thefourth column of Annex 1):

Mining sector restructuring is a very difficult task as demonstrated by experience in many other countriesand will not be an easy task in Romania. The main project-related risks are outlined below, together withmeasures to minimize them. In particular, the project includes several highly innovative social mitigationinitiative for which there is very limited or no prior experience in Romania and progress in implementingsuch initiatives will be carefully monitored and support provided as necessary to make corrections orimprove implementation. It should also be noted that project implementation could also be adverselyaffected in the event of significant deterioration in Romania's macroeconomic situation. While almost all ofthe risks are considered to have a modest rating on an individual basis, the likelihood of a combination of therisks occurring cannot be discounted, therefore given the many and varied risks faced by the project, it isgiven an overall rating of substantial risk.

Risk RiskRating Risk Minimization Measure

1. Government's continued M Development of a satisfactory Government strategy for thecommitment to sector reform. mining sector. Technical assistance will support the

Government to develop more specific strategies to addressmnine closures, social mitigation, institutionalimprovements, regulatory reform and restructuring andprivatization of National Mining Companies.

2. Considerable time may be needed M The Government has been successful in attracting wellto build up adequate institutional qualified and experienced staff to the senior positions in thecapacity to manage and regulate the PMU and PIUs. Technical assistance will be provided insector. phases and prioritized so as not to overload the relevant

Government departments. Special training has alreadybeen provided on Bank procurement procedures. Thetechnical advisors to NAD and CGMC will have sharedresponsibility for successful implementation and will workclosely alongside local counterparts.

3. Commitment to mine closure and M CGMC has been established with a clear and transparentimplementation of environmental mandate and has already started work on closing otherrehabilitation may weaken. mines not included under the project. The technical

advisors should help maintain CGMC's the resolve to closemines promptly and effectively.

4. The institutional environment M Development of micro-credit law introduced ascontinues to hamper access to credit conditionality of PSALfor small enterprises

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Risk Risk Rating RiskMinimization Measure

5. Project staff do not have the S While there is only limited or little experience with thesenecessary experience to successfully types of initiatives in Romania, project staff have beenimplement the various social selected with the most relevant experience available. NADmitigation measures (micro credits, will prepare an operating manual specifying the rules andemployment and training incentives, guidelines for the micro credit program and the training andworkspace creation etc.) in the employment incentives scheme. Study tours and trainingRomanian context. will be provided. Strong support will be provided by the

technical advisors and through related assistance from otherdonors. The social area will be given very high priority induring project supervision and a social specialist in theResident Mission will be strongly involved in providing onthe spot support to NAD as needed..

6. Continued staff ownership of the M The PMU and PIU staff have already demonstrated strongproject, and the Govenument and commitment to the project during preparatory work. Thestaff commitment to project project launch workshop will further strengthen ownershipobjectives and implementation of the project and will include the technical advisors forprogram. both CGMC and NAD. Proven strong advisory capacity by

consultants to guide and support the development ofmanagerial and administrative capacities of the mininginstitutions. Participative processes to implement theinstitutional reforms; introduction of new work methodsand accountabilities.

7. Staff stability M Selection of qualified staff with market-based salariesshould encourage staff stability.

S. Political interference M A change in Government could result in reduced supportfor the project and interference in project implementation.Project agreements, together with good implementationprogress, will help reduce this risk.

9. Performance of consultants and M Selection, supervision and monitoring functions would becontractors. carefully designed on the basis of project objectives and

expected outputs.

10. Lack of interest of private M. Improvements in the law and strengthening NAMR'sinvestors in the Romanian mining capabilities to administer and regulate the sector, includingsector. setting up a properly working mining cadastre, will help

increase the attractiveness of the mining sector to privateinvestors.

Overall Risk Rating SRisk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

3. Possible Controversial/Aspects:

The proposed project components face no significant controversial aspects related to employment orsafeguard policies due to the limited number (688) of miners affected by the final closure of the 29 mines,the environmental remediation work and the extensive social mitigation measures provided to economicallydepressed mining regions. However, the mining sector in general has high visibility in Romania and hasbeen the cause of considerable political unrest. There is also considerable international NGO interest inmining sector restructuring. Hence, the project will remain under close scrutiny from many quarters.

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G: Main Loan Conditions

1. Effectiveness Conditions:

* The PMU will establish a financial management system satisfactory to the Bank. This system willencompass a reliable accounting system with documented procedures, chart of accounts, proceduresmanual, timely reporting and good internal controls satisfactory to the Bank. Under a time-bound actionplan this system will evolve into a full-fledged Project Management Reporting system within 12 monthsafter Loan effectiveness (page 14).

2. Other conditions:

* The Government will, by December 31, 1999, issue necessary licenses to at least three qualified NGOsto operate as Micro-credit Finance Institutions, to be selected to administer the micro-credit sub-component of the social mitigation component (page 13);

* The Govermnent will submit to the Bank, by June 30 of each year starting in 2000, a procurement anddisbursement plan for the project components during the next fiscal year, and agree with the Bank onthese plans by September 30 of each year. By November 30 of each year the Government will includecounterpart funding for CGMC, NAMR and NAD in the proposed Budget for the next fiscal year, inaccordance with the agreed procurement and disbursement plans (page 13);

* The Government will, by December 31, 1999 appoint independent auditors with qualifications and termsof reference satisfactory to the Bank for the purpose of auditing the Project accounts (page 14);

* The Government will submit the independent auditor's report of the Project accounts by May 31 of eachyear (page 14);

* The Government and the Bank will undertake a mid-term review of the Project by September 30, 2001(page 15); and

* Completion of the following actions:(a) NAMR, together with relevant entities, will complete a review of the mining law and associated

laws and regulations and mining sector institutional arrangements and by December 31, 1999review with the Bank, the findings and actions to be taken (page 7);

(b) MOIC will prepare and review with the Bank, by March 31, 2000, and implement thereafter takinginto account the Bank's comments, a timetable for phasing out subsidies and a time-bound actionplan for reducing the share of production-related subsidies (to cover operating losses, employeesocial allowances, exploration expenses and investments) and increasing the share of subsidies formine closure, environmental protection and remediation, and social mitigation (page 7);

(c) MOIC will prepare and submit, by March 31, 2000, a five-year business and reform program forall national mining companies and state-owned exploration companies and thereafter implement,taking into account the Bank's comments (page 7);

(d) CGMC will prepare and submit by March 31, 2000 a mine closure procedure manual (page 12);(e) NAD will prepare and submit by December 31, 1999 an operating manual including guidelines,

procedures, and documents satisfactory to the Bank for the micro credit program and for thetraining and employment incentive scheme and will implement the micro-credit program and the

training and employment incentive scheme using those guidelines, procedures, and documents(page 13); and

(f) NAMR, together with relevant entities, will prepare and submit, by March 31, 2000, for reviewby the Bank and other stakeholders, a Sector Environmental Assessment and an action plan toimplement the findings thereof and implement them promptly thereafter (page 20).

R. Readiness for Implementation

[ I The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. [ ] Not applicable.

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Preliminary closure design specifications and cost estimates were prepared in 1997 by Romaniantechnical institutes for the 29 mines to be closed under the project. These design specifications and costestimates will be updated and finalized in line with international good practice by the technical advisorsto be financed by DFID. The technical advisors are expected to be mobilized by late August and shouldhave the design specifications for the first group of mines (Contract 4) completed in September 1999.

[ ] The procurement documents for the first year's activities are complete and ready for the start of projectimplementation.

* The first six procurement packages have been issued and the next six are in advanced stage ofpreparation.

[X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality.

[ ] The following items are lacking and are discussed under loan conditions:

I. Compliance with Bank Policies

This project complies with all applicable Bank policies.

Team Leader: John Strongman

Sector Director: Hosy n Razavi

Acting Country D 5uman Mehra

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Annex 1

Project Design Summary

Hierarchy of Objectives Key Performance Indicators Monitoring and Critical AssumptionsEvaluation

Sector-related CAS Goal Sector Indicators (Goal to Bank Mission)(a) Promote structural reforms 1. GNP per capita increases IM and Country *Macro economic stabilityand private sector 2. Decrease in the number and Economic Reports *Establishment of a moredevelopment; (b) alleviate economic importance of State effective system of socialpoverty and develop human Operating Enterprises. protectioncapital; (c) promote reform of *Enhancement of competitionthe public sector, and (d) in key economic sectors.protect the environment. *Establishment of a policy and

institutional frameworkconducive to efficient andequitable private sector ledsustainable growth.*Establishment of a morerational system of deliveringbasic social services.

Project Development Outcome/Impact Indicators Critical AssumptionsObjective: (Objective to Goal)

Provide support for the 1. Number of mines closed and Quarterly Project *Continued political support forGovernment's efforts to reduce environmentally remediated. Reports by the PIUs the Government's restructuringthe burden of mining on the 2. Amount of budget subsidies for and the PMU. program for the mining sector.national budget by closing production, capital investment *Interest by private investors inuneconomic mining capacity in and exploration. the Romanian mining sector.an economically, socially and 3. Amount of budget subsidies for *Improvement in mining lawenvironmentally sustainable voluntary redundancies, social and regulations.manner. mitigation, mine closures and *Improvement in mining

environmental remediation. institutional anrangements.4. Number of small businesses *Preparation andable to access credit under the implementation of a plan toproject. increase the share of subsidies5. Number of people from mining for social, environmental andcommunities who are mine closure purposes andeconomically rehabilitated eventually phase out all6. Progress in the implementation subsidies.of a modem mining licensingsystem.

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Project Outputs Output Indicators Monitoring and Critical AssumptionsEvaluation (Outputs to Objective)

1. Technical closure and 1. Establishment of a national Quarterly Project *Government continuesenvironmental remediation of agency for the closure of Reports by the PIUs comnutment to sector reform.29 mines. unecononuc mines with legal, and the PMU. *Reduction of the time to build2. Implementation of eight financial and managerial up adequate institutionalsocial mitigation initiatives. autonomy. capacity to manage and3. Implementation of a 2. Preparation of a time-bound regulate the sector.program of technical support to program for the closure of *Commitment to mine closureNAMR to implement a new uneconomic mines and phasing and implementation ofmining licensing system out of subsidies. environmental rehabilitation.4. Technical and institutional 3. Number of mines closed and *Improvements in theassistance for modernizing the environmentaRly rehabilitated. institutional and regulatoxysector's legal and 4. Number of persons obtaining environment to improve accessadministrative structure. micro-enterprise loans. to credit for small enterprises5. Technical Assistance for 5. Number of businesses *Continued staff andSector Envirommental established through the Enterprise Government project ownership.Assessment and Studies of Support Program and Workspace *Staff stabilitySubsidies and NMCs. Centers. *No political interference

6. Number of beneficiaries from *Good performance oftraining and employment incen- consultants and contractors.tives scheme.7. Completion of the SectoralEnvironmental Assessment andimplementation of itsrecommendations.8. Completion of Subsidies Plan.9. Completion of NMC'sbusiness and reform plans.

Project Components Project Inputs (US$ million) Monitoring and Critical Assumptionsincluding Contingencies Evaluation (Components to Outputs)

Mine Closure 34.78 All inputs will be *Continued support by theSocial Mitigation 20.78 monitored and Government in general and byInstitutional Strengthening 3.07 evaluated through the Miistry of Industry andStudy Component 0.54 regular progress and Commerce in pardcular.Operating Costs 1.92 disbursement reports. *Smooth implementation ofFront end Fee 0.45 Bank's procurement procedures

Total 61.54

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Annex 2

Project Description

The project consists of three main components:

A. The Mine Closure Program: Packages I - 9 (USS 31.69 million estimated base cost)

CGMC is responsible for the final technical closure of mines and required envirownental remediation. It hasGovernment approval for the closure of about 120 mines. Included in these are the 29 underground mines tobe closed under the Bank project. The list of mines in Annex 2 shows the location and type of mine. In mostof them production was suspended in 1997. The others in 1998. They belong to four NMCs, two for coaland two for metal mines. About 688 workers who have taken severance packages have been rehired for careand maintenance work. International contractors with extensive experience in the closure of mines and theassociated environmental mitigation, financed by DFID, will assist CGMC with the technical closure of themines by designing and supervising the implementation of the mine closure activities. To keep the cost lowand improve the utilization of the equipment, mines located close to each other have been grouped together.

MINE CLOSURE AND ENVIRONMENTAL MITIGATION: Four contracts (Packages 1-4) will be offered:1. Seven non-ferrous metal mines of the Remin Baia Mare company in the north of Romania plus

two iron ore mines under R.A.C. Deva in Caras;2. Eleven lignite mines of Carbune Ploiesti at Gorj, Vilcea and Arges in the south of Romania;3. Three brown coal mines also belonging to Carbune Ploiesti in Bacau;4. Five lignite mines belonging to Carbune Ploiesti in Covasna and Prahova.

TlHE MINE CLOSURE PROCESS: The 1998 Mining Law stipulates that a mining concessionaire may stopmining as soon as this activity becomes uneconomic. However, the actual closure of a mine requiresGovernment approval. To obtain this, the concessionaire has to submit an application which includes plansfor the environmental remediation of the mining area, the social protection of the staff and the process ofvacating the land. More specifically, the concessionaire needs to:

* get approval of REPA for the environmental remediation program;* prepare a plan for the technical closure of the mine and submit this plan, together with the

environmental remediation plan, to MOIC for review;* obtain approval of NAMR, which has to advertise the mine for 30 days in the 'Official Monitor' to

ascertain that no other investor is interested in this mining operation; and* keep the mine 'under care and maintenance' until all the necessary approvals have been obtained.

During this time, the concessionaire can remove all plant and machinery worth salvaging.

TECHBICAL CLOSURE. There are various types of mine access entrances - vertical or inclined shafts, orlevel drifts. The type and strength of sealing of mine entrances will vary. Every mine plan has also to bechecked to identify the possible danger of inundation that may impact on a neighboring mine. This couldoccur from accumulation of acid underground water building up pressure as the water level increases at thesealed mine, which may lead to bursting the barrier between two underground mines. If such danger exists,dams have to be constructed on both sides of mine barriers. It may be necessary to treat acid water before itis released in order to prevent possible pollution to local drainage channels. Measures may also be needed toprevent contamination of subterranean acquifers if the mine fills up with water and water pressure builds up.

The process of the final "technical" closure of underground mines includes some or all of the followingmeasures:

* permanent sealing of underground workings and all mine openings in line with industrystandards, prevention of water and gas leakage that could cause adverse impacts to neighboringmines or to the environment.

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* removal of all material and equipment lying on the surface;* demolition of surface buildings and structures unless there is a productive use for them;* all steps necessary to ensure the safety of tailings and slurry ponds, spoil heaps, waste dumps

and, any other surface features that might pose an environmental or human hazard; and* clearing areas formerly used for the mine surface facilities (but excluding the mine workings in

the case of large surface and opencast mines).

Since many of the mines are very shallow, past mining operations have caused extensive subsidence at thesurface. These collapsed areas are not easy to deal with. Since no heavy earth moving machinery can goover such areas it is better to leave them untouched until the subsidence has stabilised. Once theunderground voids fills up with water, further subsidence is unlikely. The soil carried by surface rain orother drainage water will gradually seal cracks and, over time, the surface will again become suitable for re-vegetation.

ENVRONMENTAL REMEDIATION. The Environmental Law requires that mining companies restore lands tothe condition that existed before the environmental damage occurred. This condition is impractical, since itwould mean that an opencast mine would have to be filled in, which would be extremely expensive.Separately, the Land Law requires that mining companies return "vacant lands" (land that is part of a minewhich has been formally closed) to agricultural or forest use within two years of cessation of operations.Apart from the fact that the Land Law is potentially inconsistent with the Environmental Law and that landon which the mine is located may not be suitable for either agricultural or forest use, this requirementimposes again an unreasonable burden on mining companies. These issues will be addressed in theenvironmental and legal studies. It is best international industry practice to establish environmentalremediation plans and financial guarantees in a "Mining Plan" (i.e., business plans) before mining workstarts. Modifications may be required as mining proceeds. Thus, the physical and financial implications of amine site's environmental remediation would be clearly quantified before the start of mining operations.This requirement would thus become an essential factor in determining the financial viability of a mine.However, this has not been the case in Romania. Consequently, CGMC will, with the assistance of aconsultant, prepare Mine Closure and Environmental Remediation Plans that meet minimum modern healthand safety standards, as well as the concerns of the affected communities which will be the primarybeneficiaries of the restored lands. The Bank will reimburse 78% of the expenditures for environmentalremediation works applied to actual mine sites. The remaining 22% will be financed out of counterpartfunds.

In general, all mine sites' environmental remediation will include:* Demolition of surface service buildings and restoration of surface land, including: clean-up of the

premises; leveling the ground; fertilization of the soil; and planting of some soil cover;* Protection of waste dumps against mud slides or failure of dump slopes; including construction of

protective dams; strengthening of slope stability; and vegetation of slopes and plantation of trees forstabilizing the slopes;

* Rehabilitation of waste dumps, including: draining of dump ponds; redesign of slopes; construction ofsupport walls; construction of garland drains; and planting of trees around the sites;

* Restoration of land affected by mining subsidence including refilling/leveling of the affected ground,wherever feasible; fertilizing the soil; and planting of trees;

* Rehabilitation of water courses directly affected by mining operations;* Collection and treatment of polluted effluents from the mines, including acid waters;* Protection of oil pipelines traversing the areas;* Treatment of surface soil wherever affected by mining activities to create useful post-mining end uses;

and* Monitoring the results for a specified period after the completion of remediation.

IMPLEMENTATION OF THE MINE CLOSURE COMPONENT (PACKAGES 5-9): Romania has no regulationsthat clearly define the steps that need to be taken to physically close a mine. Hence, CGMC will use the

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services of a consulting company with extensive international experience in the closure and environmentalremediation of coal and metallurgical mines, both opencast and underground, to prepare the specificationsfor the closure of the mines in line with best industry practices. This assistance will be financed by DFID(Package 5). The consultant will assist CGMC in the selection of the contractors that will carry out theactual closure and remediation of the mining areas. Furthermore, they will audit the work of the contractors,and payments will only be released if the work is performed in line with the specifications and standardsstipulated in the mine closure contracts. The technical consultant and auditor will involve staff of the CGMCin all phases of their work and so provide valuable on-the-job training. Funding will be provided from theBank's loan for additional training and study tours to familiarize the staff of the CGMC with the bestindustry practices (Package 6) and for office equipment (computers, faxes and copiers etc. ) and furniture andtwo vehicles for the PIU (Packages 7-9).

B. Social Mitigation Program: Packages 10-24 (US$ 20.78 million estimated base cost)

The Govermment faces serious opposition to further layoffs in the mining sector from labor unions. A SocialAssessment was carried out to determine the needs to the people affected by the closure of mines. The mainconclusions of this assessment are:

* the rush to accept voluntary redundancy in the mining sector, in response to Ordinance #22,greatly exceeded the expectations of the Government and the trade unions;

- while men opted for redundancy voluntarily, one-third of the women (especially from Gorj)reported that management exerted some pressure on them to accept the offer of 'voluntary'redundancy;

- in spite of the fact that the financial remuneration offered under the redundancy package for themining sector is about twice as large as that for other sectors, the lack of alternative employmentopportunities remains a source of considerable discontent;

* measures for the restoration of livelihoods were not in place when Ordinance #22 was issued,and are only now slowly becoming available; as a result few of those who have opted forvoluntary redundancy have been able to use their severance pay productively;

* there is considerable demand for micro-credit: more than 705 of those interviewed are seekingcredit of less than US$5,400 equivalent each for starting up of businesses;

* the absence of an enabling framework for micro-credit, and the restrictive rules of the bankingsystem for loans to existing enterprises from the unemployment fund are a major bottleneck toenterprise development and job creation;

* restoration of livelihoods is a much slower process than mine closure. It has to start earlierthrough pre-redundancy counseling and nurtured for a much longer time;

* job training in the mining regions should be correlated with demand for skills establishedthrough regular consultations with local representatives of the Tripartite Commission(Government, business associations and unemployed worker associations), facilitated by NAD.

The social mnitigation component under this project has two objectives: (1) to augment the Government'sefforts to bring economic relief to mining regions that have been affected most seriously by the cessation ofproduction of mines; and (2) to test the effectiveness of a comprehensive social mitigation strategy inRomania. This strategy will provide assistance in finding alternative employment for those that have losttheir jobs as a result of the Government's ongoing restructuring program in the mining sector. Whileconsiderable experience exists around the world in the physical closure of mines and the associatedenvironmental remediation, post-closure support to the affected labor force is highly country-specific. Thedesign of the project takes this into account by providing financial support for the following range ofmeasures (sub-components), whose effectiveness in creating employment will be carefully monitored.

* Enhancing the Effectiveness of NAD (Package 10). NAD requires considerable technicalassistance on a continuing basis to implement the social mitigation program. TA has not beenbudgeted under Bank financing since the British DFID is providing USS $3.4 million for financinginternational consultant for this sub-component for the social mitigation program.

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* Micro-Credit Fund for the Mining Regions (Packages 11 and 12). The proposed fund respondsto the articulated need for micro-credit to encourage micro-enterprises in an environment wherecredit is severely constrained by unrealistic collateral requirements. The fund will be administeredby one or more non-governmental micro-finance institutions (MFIs), selected on a competitivebasis from existing qualified service providers, whose track record is found satisfactory to theBank. It is expected that selected NGOs will be licensed under the project to do micro-creditlending in Romania. It is expected that this will enable provision of loans to 2,000 borrowers intwo cycles during the project period.

* Establishing Workspace Centers and Enterprise Support Program (Packages 13-17).Additional support is planned for start up businesses through provision of premises and pooling ofmanagement services at business centers which will be established on the premises of mines beingclosed in the 14 mining regions. The buildings at closing mines are being transferred to localgovernment and will be dedicated to this purpose. The project will finance building repairs andinfrastructure development, and provide furniture and equipment for the centers. This sub-component replaces an earlier proposal to finance public works since financing is expected fromthe European Union for that purpose. Consultancy services will be obtained from one or moreNGOs specializing in enterprise development to assist small entrepreneurs in business planningand business start-ups. Enterprise support services will facilitate the implementation of the micro-credit and the business workspace programs.

- Employment and Training Incentives (Packages 18-20). Demand for re-training under the WorldBank Labor Redeployment Project has been less than satisfactory. One of the major constraintsidentified is that the training offered does not guarantee jobs or is not always relevant to the kindsof jobs available. Building on the existing mechanism to encourage placement of universitygraduates, the project will underwrite the cost of on-the-job training by providing entrepreneurswilling to hire unemployed people an employment and training incentive of US$500 per personrecruited for one year. The entrepreneur will be responsible for providing on-the-job training.Bank financing is designed to generate 3,000 jobs. NAD is proposing to invest US$1.0 millionfrom its program funds to create another 2,000 jobs through the same mechanism.

* Social Dialogue Program Public Information Centers (Package 21). One or more NGOs wiU becontracted to assist NAD in community outreach and social dialogue. This will include support forthe public provision of pre- and post-redundancy services and career counseling to unemployedworkers in the mining regions. The NGOs will assist NAD and CGMC regarding stakeholderconsultations for the 29 mines to be closed. The project will also finance a public informationconsultant to design a public information strategy to facilitate communication with primarybeneficiaries and other stakeholders in the mining regions. The Consultant will also producematerials for NAD, in accordance with that strategy. The materials will be disseminated by NADand made available at the Public Information Centers at the 14 regional offices of NAD.

* Management Information System (MIS) and Social Impact Monitoring Program (Packages 22and 23). Social impact monitoring consists of two parts: establishment of a ManagementInformation System (MIS) to track social outcomes of the redundancy process An independentagency, either a consulting firm or a research institute will be recruited to assist NAD inmonitoring and to conduct annual impact evaluation.

* Vehicles (Package 24). Six jeeps and one mini bus to support NAD's field activities.

C. Institutional Strengthening Program (Packages 25-34). (US $2.79 million estimated base cost).

The objective of this component is to strengthen NAMR, so it can effectively carry out its responsibilities forthe administration and regulation of the 1998 Mining Law. This Law represents an important step forward ineliminating the direct role of the Government in mining activities and transfers such activities to the privatesector. While the Law still has many flaws, it is a clear indication of the Government's commitment to thisobjective. Under the project, major technical assistance will be provided to strengthen NAMR's ability toproperly carry out its responsibilities. The following sub-components have been designed for this purpose:

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* Mining Cadastre Control and Mining Titles Registry (Packages 25 and 26). This will financethe establishment of a computerized mining cadastral control system. This will complement theexisting petroleum-oriented computer capabilities and database development in NAMR. It willinclude procurement of computer hardwares and softwares compatible with the system alreadyexisting in NAMR, in order to develop the geological and mineral resources database. On-the-joband foreign training are included. Consulting and training will be provided to NAMR to receiveapplications and register all licenses, permits and other titles transactions and notifications in theofficial cadastral file.

* Exploration and exploitation concession inspection (Packages 27 and 28). The Mining Lawmandates NAMR to inspect mineral license and permit areas in order to ensure proper conduct ofthe operators, from exploration through exploitation to official closure, in accordance with the Lawand its Norms and Regulations. Training, study tours concentrated on exploration concession andmine-site assessments for NAMR mining inspectors will be part of this sub-component. Thepurchase of on-site monitoring and equipment for communications between field offices and theirheadquarter are included.

* Study of Mining Law, associated Laws and regulations and Institutional Arrangementsincluding collection of mineral fees, taxes and royalties (Packages 29 and 30). External legalanalysis, consulting and training will be provided to NAMR staff regarding the legal proceduresand linkages with other legislation and regulations of the various provisions of the Mining Law,e.g. concession contracts, competitive bids, environmental guaranties, joint ventures, licensetransfers and other transactions. The study will include an assessment of institutional arrangementsfor the sector including the provision of data and maps to potential investors. It will also include asurvey of how private sector investors perceive the mining legal and institutional frameworks.Financial consulting and in-house training will focus on the ability of NAMR professionals toassess, approve and collect royalty submissions, fees, guarantees and other financial transactions.Design of clear forms and approval time frames for such submissions is an importatnt first step.

* Mining sector environmental management (Packages 31 and 32). Consulting and traininginvolving NAMR environmental management specialists and REPA mining sector personnel willbe conducted. The main elements of this sub-component are to: (i) design appropriateenvironmental rehabilitation regulations and manuals for the mining sector; and (ii) improve theprofessional capability of NAMR inspectors and environmental specialists, and REPA andMOWFEP sectoral specialists, to asssess and monitor the submissions from applicants and licenceholders, as required by the Mining Law. Coordination with and involvement of REPA andMOWFEP is critical to the success of this sub-component. Workshops will be provided fordeveloping awareness amongst NAMR and REPA inspectors on the application of environmentalrules and regulations.

* Mining Sector Investment Study (Package 33). Assistance will be provided for a mining sectorinvestment study. This study aims to promote private investment through advertisement ininternational mining related journals and on the Internet.

* Mining Sector Environmental Assessment (Package 34). Agreement has been reached with theGovernnent on the need to carry out a comprehensive assessment of the environmental issues inthe mining sector (SEA). The assessment will establish priorities and provide appropriatemonitoring procedures and cost estimates for environmental remediation. The NAMR will hireconsultants for the preparation of this assessment and closely involve MOWFEP and MOIC in allphases.

D. Study Program (Packages 35-36) US $0S.53 million estimated base cost.

* Mining Sector Subsidies Plan (Package 35). The present situation regarding transfer to the MiningSector will be examined and direct, indirect and hidden subsidies estimated including crosssubsidies. Assistance will be provided to prepare a plan for progressively increasing the share ofsubsidies for mine closure, environmental mitigation and social mitigation and reducing the share

- 34 -

of subsidies for operating losses, exploration and capital investment and subsequently to phase outsubsidies altogether

Mining Sector Enterprise Reform Program (Package 36).. Assistance will be provided to preparea program for prepare five year operating plans as the basis for reforming the NMCs and stateexploration companies so that they are able to operate in a viable manner and be privatized or elsebe closed. The operating plans will take into account any presently available reform plans and theresults of the mining sector subsidies plan. They will specifically address the competitiveness ofeach company and possible strategies and preparatory steps for privatization including the need forfurther capacity and employment reductions and financial restructuring.

E. Others (Packages 37-42) US $ 1.75 million estimated base cost.

Assistance will be provided to cover PMU and PIU incremental operating costs, furniture, equipment andvehicles for the PMU, consulting services to help prepare the Financial Management System and auditor'sfee. Part of the goods and services will be procured using funds under a US$0.5 million Project PreparationFacility.

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Annex 2

Table A: List of Mines Included Under the Project

Name of Companies Types of Estimated Costs (1997) Location Remarksand Mines Mineral (million lei)

Physical Env. TotalClosure Rehab.

Contract No. 1

REMI4NSA BAIA MARE

1. Lesu Ursului (Piriul Ciinelui) Copper 65 2,148 2.363 Suceava Closed before '97

2. Lesu Ursului Copper 156 10,359 10,515 Suceava Closed before '97

(Piriul Ursului Isipoaia)

3. Lesu Ursului South (Pazdra) Copper 6 1,533 1,539 Suceava Closed before '97

4. Magura II (Baia Borsa) Polyinetal 347 1,278 1,625 Maramures Closed before '97

5. Burloia Vest Arinis Polymetal 20 218 238 Maramures Closed before '97

6. Burloia Cental Polymetal 2,505 3,983 6,488 Mamures Closed before '97

(South & East)

7. Burloia (Dealul Bucatii Vest) Copper 956 528 1,484 Maramures Closed before '97

R A C Deva

8. Ruschita (Virful Boului) Iron 4,456 297 4,753 Caas-Severm Closed before '97

9. Ruschita(Pifiul cuRaci) Iron 457 189 646 Caras-Severin Closed before '97

Sub-total 8,968 20,535 29,503

(SI.20 m) (S2.74 m) (S3.94 m)

Contract No. 2Olenia Tg. Ju10. Rosiuta 1 Lignite 6 534 540 Gori Closed 1997

11. Lupoia I Lignite 10 3,089 3,099 Gorj Closed before '97

12. RogejuluP3 Lignite 21 3,781 3,802 Gorj Closed 1997

13. Barbesd Lignite 26 4,316 4,342 Vilcea Closed before '97

14. Cucesti Lignite 41 2,270 2,311 Vilcea Closed before '97

15. Cema Lignite 27 2,168 2,195 Vilcea Closed before 97

16Arinasesti Lignite 257 364 621 Vilcea Closed 1997

17 & 18. Slanic (N & S) Lignite 1,574 7,026 8,600 Arges Closed before '97

19. Godeni Lignite 1,305 5,730 7,035 Arges Closed before '97

20. Aninoas Lignite 98 21,086 21,184 Arges Closed before '97

21. Berevoiesti Lignite 1,094 3,581 4,675 Arges

Sub-total 4,418 53,945 58,363

I_ (S0.59 in) (S7.19 m) I(S7.78 m)

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Name of Companies Types of Estimated Costs (1997) Location Remarksand Mines Mineral (million lei)

Physical Env. TotalClosure Rehab.

Contract No. 3

Carbune Ploiesti

22. Vernesti Brown coal 110 15,331 15,441 Bacau Closed 1997

23. Rafira-Lumina Browm coal 103 36,864 36,967 Bacau Closed 1997

24. Leorda East Brown coal 991 11,534 12,525 Bacau Closed 1997

Sub-total 1,204 63,729 64,933

Contract No. 4Carbune Ploiesi

25. Virghis Lignite 739 1,475 2,214 Covasna Closed before '97

26. Bodos Lignite 588 11,756 12,344 Covasna Closed 1997

27. Baraolt 1 East Lignite 100 2,357 2,457 Covasna Closed before '97

28. Magureni-Tufeni Lignite 58 3,206 3,264 Prahova Closed before 97

29. Margineanca Veche Lignite 41 11,982 12,023 Prahova Closed 1997

Sub-total 1,526 30,776 32,302

Grand Total 16,116 168,985 185,101

Exchange rate USS I = Romanian Lei 7,500 (1997)

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Annex 3

Estimated Project Cost - USS millions

L. Mine Closure Component Fordgn Local Total

1. Mine Closure &EnvironmentMitigationGroupI 2.51 2.30 4.812. Mine Closure & Envirownent Mitigation Group II 4.96 4.54 9.503. Mine Closure & Environment Mitigation Group m 5.52 5.05 10.574. Mine Closure & Environment Mitigation Group IV 2.74 2.51 5.255. Technical Assistance (DFID financed) 0.85 0 0.856. Training 0.34 0.15 0.49

7-9. Equipment for CGMC PIU and vehicles 0.13 0.09 0.22Sub-total 17.07 14.62 31.69

2. SocialMidgation Component10. Technical Assistance (DFID financed) 3.40 0.00 3.40

11-12. Micro Credit 3.82 0.08 3.9013-17. Workspace Centers and Enterprise Support Program 3.65 2.54 6.1918-20. Employment and Training Incentives 1.67 1.07 2.74

21. Social Dialogue Public Information 0.69 0.29 0.9822. Management Information System 0.57 0.41 0.9823. Social Impact Monitoring 0.22 0.15 0.3724. Vehicles 0.12 0.08 0.20

Sub-total 14.12 4.63 18.753. Institution Strengthening Component

25-26. Mining Cadastre Control and Mining Titles Registry 1.1 0.61 1.7127-28. Exploration and Exploitation Concession Inspection 0.13 0.08 0.2129-30. Mining law, Legal Requirements and Institutions 0.15 0.05 0.2031-32. Environment Management and Inspection 0.13 0.06 0.19

33. Mining Sector Investment Study 0.08 0.04 0.1234. Sectoral Environmental Assessment Study 0.26 0.11 0.37

Sub-total 1.84 0.96 2.80It Sector Studie

35. Mining Sector Subsidy Plan 0.08 0.04 0.1236. MiningSectorEnterpriseReformProgram 0.26 0.11 0.37

Sub-total 0.34 0.15 0.495. Other

3742. PMU/PIU incremental operating expenditures, PMU 1.32 0.42 1.74equipment, furniture and vehicles, Auditors Fees, FMS

FRONT END F0 ° 0.445 0.445

Sub-total 1.32 0.86 2.18Total Base Cost 34.66 21.26 55.92Contingencies 3.48 2.14 5.62

. 1. TOTAL COST (USS MILLIONS) 38.14 23.40 61.54

Note: numbers may not add up due to rounding

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Annex 4

Cost-Benefit Analysis Summary

Amounts in US$ 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Totalmillion

1. Benefits

Labor Cost Savings 7.19 7.01 6.83 6.66 6.49 6.33 6.17 6.02 5.87 5.72 5.58 5.44 68.13

Social Benefit 2.87 2.80 2.73 2.66 2.60 2.53 2.47 2.41 2.35 2.29 2.23 2.18 27.25Savings

Benefits 10.06 9.81 9.56 9.33 9.09 8.87 8.64 8.43 8.22 8.01 7.81 7.62 95.38

2. Costs

Severance Payments 10.35 10.35

Social Costs 5.70 7.00 4.50 2.00 1.50 20.70

Mine Closure Costs 12.56 13.80 9.50 4.00 0.50 40.36

Total cost 10.35 18.26 20.80 18.00 6.00 2.00 61.06

Net Benefits (0.29) (8.45) (11.24) (4.67) 3.09 6.87 8.64 8.43 8.22 8.01 7.81 7.62 34.33

NPV $8.0 million

FIRR 16.5 %

Summary of benefits and costs: The benefits consist of the savings in wages and social benefits for4,451 workers who were made redundant at the 29 mines to be closed under the project. Theaverage gross wages are estimated at US $140 per month and the social benefits at 35% of grosswages. Annual attrition of 2.5% has been assumed for future years. The costs consist of severancepayments plus the investment and recurrent costs under the project (excluding financing charges).Specific estimates of the reduced negative value added of the mining operations were not available.If such estimates were included the FIRR would be increased.

Main Assumptions: $140 per month gross salary35% benefits2.5% attritionUS $34.8 million mine closure costs inc. environmental rehabilitationUS $20.8 million social mitigation expenditures

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Sensitivity analysis I Switching values of critical items:

Following are the switching values that reduce the NPV to zero at a 10% discount rate:

Base Case Switching Value Change

Attrition 2 5% 4.65% 86%Labor Cost Savings $68.13 m $58.66 m -13.9%

Mine Closure Costs $40.36 m $50.14 m 24.25%Social Costs $20.70 m $30.64 m 48.0%

and at a 12% discount rate.

Base Case Switching Value Change %

Attrition 25% 4.0% 60.0%Labor Cost Savings $68.13 m $61.99 m -9.75%

Mine Closure Costs $40.36 m $46.91 m 16.25%Social Costs $20.70 m $27.32 m 32.0%

-40 -

Annex 5

Financial SummaryYears Ending June 30

1999 US$ Million

Implementation Period2000 2001 2002 2003 2004 Total

Proiect Costs

Investment Costs 16.9 19.3 12.6 5.2 1.5 55.5

Recurrent Costs 1.4 1.4 1.4 0.9 0.5 5.6

Total Project Costs 18.3 20.7 14.0 6.1 2.0 61.1

Front End Fee 0.445 0.445

Total Costs 18.7 61.5

Financing

IBRD 13.2 15.2 10.4 4.4 1.3 44.5

DFID 0.9 1.1 1.1 0.8 0.4 4.3

Government 4.6 5.4 2.5 0.9 0.3 12.7

TotalFinancingAvailable 18.7 20.7 14.0 6.1 2.0 61.5

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Annex 6

Procurement and Disbursement Arrangements

Procurement

SUMMARY OF PROCUREMENT PROCEDURES

The proposed procurement arrangements are summarized in Table A. Procurement of works, goods andservices of the Bank financed components would be procured in accordance with the Bank procurementguidelines. The project components not financed by the Bank would be procured in accordance with the na-tional regulations or according to the procurement regulations of the United Kingdom Department for Inter-national Development (DFID). A procurement plan detailing the packaging and estimated schedule of themajor procurement actions is presented in Table B. All other procurement information, including capabilityof the of the implementing agency, estimated dates for publication of the Special Procurement Notice and theBank's review process is presented in Table C.

PROCUREMENT CAPACITY. The CGMC, NAD and NAMR have set up their respective PIUs andprocurement cells. They will have to appoint expatriate consultants conversant with Bank procurementprocedures. The consultants will assist in the preparation of bid documents, bid invitation, bid evaluation andsigning of the contracts. CGMC also requires help in the technical audit of completion of jobs. The Bank willalso try to provide as much procurement training as possible for the procurement staff involved inimplementation of the project.

PROCUREMENT OF GOODS AND WORKS

Goods and works will be procured in accordance with the provisions of the Guidelines for Procurementunder IBRD Loans and IDA Credits. Whenever applicable, the appropriate Standard Bidding Documentsissued by the Bank will be used with minimum changes acceptable to the Bank.

PARTICIPATION OF STATE OWNED ENTERPRISES (SOES) IN PROCUREMENT OF GOODS AND WORKS. SOEswilling to participate in procurement of works, goods and services financed by IBRD in this project shouldmeet the Bank's eligibility criteria: they should be financially and legally autonomous and operate undercommercial law in Romania. SOEs should properly clarify their status before participating in any bid underthis project.

PROCUREMENT OF CIVIL WORKS (US$ 36.91 MILLION). Civil works are required for environmentalmitigation works at the mine sites identified for closure, repairs to building for workspace centers, and publicworks for the construction/paving of approach roads, water and electric supply anrangements and sewerworks.

* INTERNATIONAL COMPETITIVE BIDDING (ICB). ICB procedures will be used for works contract,estimated to cost US$200,000 or more. There are about seven such contracts with an estimatedtotal value of US$ 36.91 million.

PROCUREMENT OF GOODS (US$ 3.57 MILLION). There are about fifteen packages for procurement ofgoods. These packages include computer hardware and software, printers, scanners, copying machines andother office equipment, office furniture and fittings, and motor vehicles. The following methods ofprocurement will be used:

* INTERNATIONAL COMPETIT1VE BIDDING (ICB). Goods contracts estimated to cost US$200,000or more will be procured through ICB. There are about six such packages with an estimated totalvalue of US$ 2.94 million.

- 42 -

* INTERNATIONAL SHOPPING (IS). Goods contracts estimated to cost less than US$200,000 butmore than US$ 75,000 will be procured through International Shopping. There are three suchpackages with an estimated value of US$0.60 million.

* NATIONAL SHOPPING (NS). Goods estimated to cost less than US $75,000 will be procuredthrough National Shopping. There are four such packages with an estimated value of US $0.16million.

PROCUREMENT OF SERVICES (US$ 8.21 MILLION). The Borrower will award contracts for consultants'services in accordance with the provisions of the Guidelines for the Selection and Employment ofConsultants. The estimated value of US$8.21 million includes US$0.27 million under the PPF. The servicesto be financed under the loan are: workspace centre design and management; implementation of employmentand training incentives; design of financial management system; organizing micro-credit disbursement;designing and equipping two data base centers with computer hard and soft wares, commissioning and on-the-job training; project implementation and works supervision; technical assistance (regarding mining sectoradministration, environmental protection and state mining companies); organizing study tours abroad; andsocial dialogue with unemployed people and monitoring impact of social mitigation programs. Selection ofConsultants and their contracts will be based on the Standard Request for Proposals issued by the Bank withminimal necessary modifications as agreed by the Bank. Some of the jobs are suitable for NGOs. They maycompete in the selection process, provided that their qualifications are found satisfactory to both theGovernment and the Bank. There are about 29 packages for procurement of services

* SELECTION OF FIRMS: Quality and Cost Based Selection process will be applied in about 21contracts with an estimated value of US$ 6.70 million. Another eight contracts with anestimated value of US$ 1.29 million are earmarked for Quality Based Selection. Most of theindividual contracts in the latter category are of less than US$200,000 in value. One contract(for auditors) will be least cost selection (value about US$0.22 million).

Procurement methods (Table A)

Review by the Bank of Procurement Decisions.

* GOODS AND WORKS: CGMC and NAD will appoint consultants to assist them in allprocurement processes. These consultants will be financed by the UK DFID. All bid documentsfor works and goods procured under ICB plus the first two contracts under IS and NS would besubject to prior review by the Bank.

* CONSULTANTS: All documents are subject to review by the Bank. In the case of contractsestimated to cost more than US $50,000 for consulting firms and US $25,000 for individuals,Terms of Reference (TOR), letters of invitation and award of contracts to service providersconsultant firms, institutions and individuals will be subject to Bank's prior review.

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Annex 6

Table A: Summary of Proposed Procurement Arrangements(in US$ million equivalent)

Expenditure Category Procurement Method

ICB IS/NS Other NBF Total Cost(inccontingencies)

1. Works for mine closure and work snaces 36.91 36.91(28.78) (28.78)

2. Goods 2.94 0.63 3.57(2.36) (0.50) (2.86)

3. Services 7.94 4.25 12.19(6.21) (0.00) (6.21)

4. Microcredit 3.96 3.96(3.60) (3.60)

5. Employment and TraininT Incentives 1/ 1.65 1.10 2.75(1.65) (0.00) (1.65)

6. Incremental Oneratine Costs 1.10 1.10(0.90) (0.90)

7. PPF Refinancin2 0.13 0.48 0.61(0.11) (0.39) (0.50)

8. Front end Fee 0.445 0.445(0.00) (0.00)

Total 39.85 0.76 15.13 5.80 61.54

TotalBankfinanced (31.14) (0.61) (12.75) (0.00) (44.50)

'In accordance with IBRD consultant guidelines.Note: numbers may not add up due to rounding

Figures in parentheses indicate Bank financed amounts.

1/ Mcrocredits and Employment Training Incentives will be disbursed using SOEs on the basis of operatinggwudelines to be prepared by NAD and approved by the Bank.

Note - Annex 6 Table B is an Excel Attachment

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Annex 6Table B: Procurement Plan

PackageNo. Description Category No. of Procurnnt. Estimated Docs. Invitation Contract Contract

Packages Method Total cost to Bank to Bid Signing Completion(US$ m)

I Mines Closure Component

1 Mine Closure and Environmental Mitigation I CW 1 ICB 5,29 jun-00 Jul.00 nov-Oo 01-dic

2 Mine Closure and Environmental Mitigation II CW I ICB 10,45 mar-00 abr-00 sep-00 01-oct

3 Mine Closure and Environmental Mitigation IlIl CW 1 ICB 11,63 nov-99 ene-O0 may-00 01-jun

4 Mine Closure and Environmental Mitigation IV CW 1 ICB 5,78 sep-99 oct-99 ene-O0 01-abr

6 Training TR I QBS 0,54 sep-99 oct-99 dic-99 jun-00

7 Equipment for PIU GD I IS 0,11 jul-99 ago-99 oct-99 dic-99

8 Furniture GD I NS 0,03 jul-99 ago-99 oct-99 dic-99

9 Vehicles GD 1 IS 0,11 jul-99 sep-99 11/01199 feb-00

11 Social Mitigation Component

12 Mcrocredit Service Charges TA I to 6 QCBS 0,33 ene-00 feb-GO may-00 Jun 04

13 Workspaces Centers Management/ Enterprise Support TA I to 6 QCBS 2,01 10/01/99 11/01/99 feb-00 Jun 04

14 Workspaces Centers, Repairs CW I to6 ICB 3,76 ene-00 feb-00 jun-00 dic-OO

15 Workspace Centers, Design TA I QCBS 0,27 oct-99 11/01/99 feb-00 abr-00

16 Workspace Centers, Equipment GD I to 6 ICB 0,67 jun-00 ago-00 nov-00 01-mar

17 Workspace Centers, Furniture GD I ICB 0,22 jun-00 ago-O0 nov-00 01-mar

20 EmploymenV Trg. Incentive Scheme- Services TA I to6 QCBS 0,27 feb-00 mar-00 jun-00 Jun 02

21 Social dialog/Public Informnation TA I to 6 QCBS 1,45 11/01/99 ene-O0 abr-00 Jun 04

22 Management Information Systems (MIS) GD I ICB 1,07 jun-99 sep-99 ene-00 jun-00

23 Social Impact Monitorng TA 1 QCBS 0,40 ago-99 feb-00 may-00 Jun 04

24 Vehicles GD 2 IS 0,22 jun-99 sep-99 ene-O0 mar-00

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Ill Institutional Strengthing Component

25 Mining Cadastral Control, Equipment GD 1 ICB 0,98 ago-99 oct-99 feb-00 Sept 0226 Mining Cadastral Control, TA TA 1 QCBS 0,90 jun-99 ago-99 nov-99 Sept 0227 Exploration and Exploitation Concession Inspection GD I IS 0,16 jul-99 sep-99 ene-99 Sept 0228 Exploration and Exploitation Concession Inspection TR 1 QBS 0,07 gram submitted - 10/9929 Mining Law, Institutions and Fees, Taxes and Royalties TA I QBS 0,16 jun-99 ago-99 oct-99 dic-9930 Mining Law, Institutions and Fees, Taxes and Royalties TR 1 QBS 0,05 gram submitted - 11/9931 Mining Sector Environmental Management TA I QBS 0,08 nov-99 dic-99 mar-00 sep-0032 Mining Sector Environmental Management TR 1 QBS 0,13 abr-00 may-00 ago-00 Jul 0133 Private Sector Investment Study TA I QBS 0,13 dic-99 feb-00 abr-00 jul-0034 Sector EnvironmentalAssessment TA I QCBS 0,40 sep-99 oct-99 dic-99 mar-00

IV Study Component

35 Mining Sector Subsidy Plan TA 1 QBS 0,13 jul-99 ago-99 oct-99 dic-9936 State Mining Enterprise Reform Study TA 1 QCBS 0,40 sep-99 oct-99 dic-99 mar-00

V Others

38 PPF-Equipment for PMU GD 1 NS 0,06 ago-99 sep-99 oct-99 oct-9939 PPF-Fumiture for PMU GD I NS 0,01 ago-99 sep-99 oct-99 oct-9940 PPF-Vehicles for PMU GD 1 NS 0,06 ago-99 sep-99 oct-99 oct-9941 PPF-FMS Services TA 1 QCBS 0,27 ago-99 sep-99 nov-99 nov-99

43 Auditors Fee LCS I LCS 0,22 jun-99 jul-99 sep-99 dic-99

Total 48,82

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Annex 6

Table B1: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contractsfor PriorCategory Threshold Method Review/Estimated Value

(US $ million) for Prior Review(US $ million)

1. Works .2 ICB All/36.91

2. Goods .20 and above ICB A1112.94

0.075 -0.2 IS 2/0.26

0 - 0.075 NS 2/0.10

3. Services .05 for Firns QCBS/QBS All/7.94

.025 for Individuals

Total value of contracts subject to prior review 48.65

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Annex 6

Table C: Procurement Information

Section 1: Procurement ReviewElement ICB NCB IS NS Consultants Other methods

1. Procurement method thresholds US$200,000 goods None below US$200,000 Below Below US $50,000 AllUS$500,000 works goods USS$75,000 finns and US

goods $25,000 individu-

2. Prior Review All 2 2 All All

3. Ex-post Review About 5 shopping packages and SOESection 2. Capacity of the Implementing Agency in Procurement and Technical Assistance Requirements4. Brief statement Consulting firms will be appointed (one each for NAD and CGMC PlUs) for assisting in their preparation, invitation, evaluation and

I award of contracts..5. Country Procurement Assessment Report or Country Procurement Strategy Paper status: 6. Are the bidding documents for the procurement actions of the first yearUnder preparation ready by negotiations? First six documents are approved and next six well

advanced. The preparation of bid documents for mine closure will start onlyafter the consultants are appointed under the project.

Section 3. Training, Information and D pveloment on Procurement7. Estimated date of Project 8. Estimated date of 9. Indicate if contracts are 10. Domestic Preference for Goods 11. Domestic Preference for Works,Launch Workshop publication of General subject to mandatory SPN if applicable

Procurement Notice in Development Business Yes. No.P0/01/99 06/15/99 Yes.

12. Retroactive financing. No 13. Advanced procurement No.14. Explain briefly the Procurement Monitoring System and Information System: All three P[Us are being equipped with the necessary computers and software to enable

them to monitor and record procurement implementation. Monthly progress reports will be sent to the Bank electronically to update procurement implementation progress.Section 4. Procurement Staffing

15. Indicate name of Procurement Staff as part of the Project Team responsible for the procurement in the project:Name: Sadhan Chattopadhya (Consultant) - PreparationName: Leonid Vanian - Implementation Extension: 8479616. Explain briefly the expected role of the Field Office in Procurement: Members of the WB Bucharest Resident Mission staff would interact with the PlUs (one for

CGMC and NAMR and one for NAD). The staff will act as the PlUs' primary liaison to review procurement documents for completeness and submit them for transmittalto headquarters electronically or through the Bank's pouch service as appropriate. This staff would also participate in all supervision missions, and alert the Project TeamLeader to any procurement-related issues regarding respective project components.

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Annex 6

Disbursement

Table D: Allocation of Loan Proceeds

Expenditure Category Amount Financing Percentage(US$ million)

Civil Works 26.2 78%

Equipment and mateials 2.5 100% of foreign expenditures,100% of local expenditures (ex-

factory) and 85% of expendituresfor other items procured locally

Consultant services and 5.3 100%training

Microcredit Program 3.6 100%

Employment and 1.5 100%Training IncentivesScheme

Incremental Operating 0.8 100% except for locally producedExpenses goods - 85%

PPF Refinancing 0.5 100%

Unallocated 4.1

Total 44.5

Use of statements of expenses (SOEs):

Disbursements would be made against Statement of Expenditures (SOEs) for works contracts less thanUS$200,000, goods contracts less than US$200,000 and consultants' services contracts less than US$50,000for firms and US$25,000 for individuals. In additions, SOEs will be used for incremental costs, microcreditand employment and training incentives.

Special account:

To facilitate disbursements against eligible expenditures, a US$1,000,000 Special Account will beestablished. The Government will establish, maintain and operate the special account under conditionsacceptable to the Bank. Payments under 20% of the authorized allocation to the special account will be madefrom the special account. Replenishment applications will be submitted quarterly.

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Annex 7

Project Processing Budget and Schedule

A. Project Budget (US$) Planned Actual

US$178,000 US$143,000

B. Project Schedule Planned Actual

Time taken to prepare the project (months) 15 15

First Bank mission (identification) 3/15/98 3/15/98

Appraisal mission departure 5/3/99 5/3/99

Negotiations 6/2/99 6/2/99

Planned Date of Effectiveness 10/31/99 / I

Prepared by: Ministry of Industry and Commerce (MOIC), CGMC, NAMR and NAD

Preparation assistance: PHRD Grant Trust Fund (US$348,000)

Bank staff and consultants who worked on the project included:

Name Specialty

John Strongman Task Team Leader (from 5/3/99)

Peter K. Pollak Principal Economist

Akin Oduolowu Principal Economist

Sadhan Chattopadhya Procurement Specialist

Anis Ahmad Damn Senior Social Development Specialist

Peter Van Der Veen Manager, Mining Sector Division

Felix Remy Principal Mining Specialist

Koh Naito Mining Specialist

Peter Whitford Principal Environmental Specialist

Arabela Negulescu Project Officer

Doina Visa Enterprise Development Specialist

Bogdan Constantinescu Financial Management Specialist

Patricia Hackman Operation Analyst

David Merrick Mine Closure Consultant

Pavel Adamek Mine Environmental Rehab. Consultant

John Garnett Mining Institution Specialist

Mazy Louise Vitelli Institutional Development Specialist

Claes Fjellner Financial Management Specialist

Atur Varadarajan Financial Management Specialist

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Annex 8

Documents in the Project File

1. Project Implementation Plan

2. Bank Staff Assessments:* List of uneconomic mines in Romania* Back to Office reports of Bank Missions* Social Assessment of Mining Sector Restructuring in Romania* Project Cost tables and Financial Analysis* Terms of Reference: Mining Sector Environmental Assessment Study* Assessment of Procurement Capacity of Borrowers Implementing Organization

3. Other reports* Consultants studies on the Romanian Mining Sector3 Regional Development Study for the Mining Region of Jiu Valley, Hunedoara County, Romania* Assessment of Current Socio-economic Situation and Future Potential of Gorj* Romania: Private Small and Medium Enterprise Survey* Mining Law• Government Strategy and Restructuring Program of the Romanian Mining Sector.

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Annex 9

Statement of Loans and CreditsAs of 23 July 99

Difference Betweenexpected

Original Amount in US$ Millions and actualFiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Canc Unidisb Orig Frms Rev'd

Number of Closed Projects: 39

Active ProjectsRO-PE-39251 1999 Romania PBIL 25.00 0.00 0.00 25.00 0.00 0.00RO-PE-49200 1999 Romania Social Develop. Fund 10.00 0.00 0.00 10.00 1.80 0.00RO-PE-58284 1999 Romania Cultural Heritage 5.00 0.00 0.00 4.96 0.46 0.00RO-PE-64853 1999 Romania PSAL 300.00 0.00 0.00 300.00 0.00 0.00RO-PE-34213 1998 Romania General Cadastre 25.50 0.00 0.00 24.82 0.82 0.00RO-PE-44614 1998 Romania Schools Rehabilitati 70.00 0.00 0.00 69.69 14.79 0.00RO-PE-55495 1998 Romania Child WelfareReform 5.00 0.00 0.00 4.80 1.10 0.00RO-PE-8788 1998 General Inspectorat Telecommunication 30.00 0.00 0.00 28.52 7.52 0.00RO-PE-39250 1997 Romania Second Roads 150.00 0.00 0.00 98.25 -14.25 0.00RO-PE-8778 1997 Romania Bucharest Water Supp 25.00 0.00 0.00 16.00 11.99 0.00RO-PE-8793 1997 Romania HigherEducation 50.00 0.00 0.00 42.55 42.55 5.55RO-PE-8795 1997 Romania ASAL 350.00 0.00 0.00 150.00 0.00 0.00RO-PE-36013 1996 SNCFR Railway 120.00 0.00 0.00 81.10 51.11 0.00RO-PE-8794 1996 Renel Power Sector Rebab. 110.00 0.00 0.00 101.88 99.89 0.00RO-PE-8776 1995 Romania Emplot. & Soc. Protect 55.40 0.00 0.00 46.16 37.58 0.00RO-PE-8774 1994 Romania Industrial Developme 175.00 0.00 0.00 117.74 111.74 95.24RO-PE-8777 1994 Romania Petroleum Sector Reh 175.60 0.00 0.00 103.95 103.96 0.00RO-PE-8784 1994 Romania Education 50.00 0.00 0.00 29.19 19.88 0.00

Total 1,731.50 0.00 0.00 1,248.6 490.94 100.79

Active Proiects Closed Projects TotalTotal Disbursed (IBRD and IDA) 482.91 3,351.38 3,834.29

of which has been repaid 0.00 2,329.95 2,329.95TotalnowheldbylBRDandIDA 1,731.50 1,180.62 2,911.12Amount sold 0.00 19.78 19.78

Of which repaid 0.00 19.78 19.78TotalUndisbursed 1,241.00 9.60 1,250.60

a. intended disbursements to date minus actual disbursements to date as projected at appraisal.Note: Disbursement data is updated at the end of the first week of the month and is currently as of 23-July 99.

-52 -

Annex 9(cont'd)

Statement of IFC'sCommitted and Disbursed Portfolio

As of 28-Feb-99(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1992 Alcatel 0.00 0.00 .69 0.00 0.00 0.00 .69 0.001994/98 Ronlease 3.96 .75 0.00 0.00 3.96 .75 0.00 0.001996 Danube Fund 0.00 2.00 0.00 0.00 0.00 .80 0.00 0.001997 Efes Brewery 12.34 0.00 5.00 8.00 12.34 0.00 3.76 8.001997 Mobil Rom 40.00 0.00 10.00 160.00 30.00 0.00 10.00 120.001997 Rambox 1.95 2.00 0.00 0.00 1.95 2.00 0.00 0.001998 Banc Post 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.001998 Bilstein Compa 2.82 0.00 0.00 2.82 2.34 0.00 0.00 2.341998 Demir Romania 5.00 3.20 0.00 0.00 0.00 2.55 0.00 0.001998 FCR Fund 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.001998 Garanta 0.00 .20 0.00 0.00 0.00 .20 0.00 0.001998 Krupp Compa 7.88 0.00 0.00 3.38 0.00 0.00 0.00 0.001998 Small Bus. Loan 5.00 .02 0.00 0.00 1.00 .02 0.00 0.00

Total Portfolio: 78.95 18.17 25.69 174.20 51.59 16.32 24.45 130.34

Approvals Pending Commitment

Loan Equitv QOuasi Partic

Total Pending Comnitment: 0.00 0.00 0.00 0.00

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Annex 10

Romania at a glance

Europe & Lower-POVERTY and SOCIAL Central middle-

Romanla Asa Income Development dlamond*

Population mid-1997 (millions) 22.5 478 1.125GNP per capita 1997 (Atlas method, US$) 1.420 2.200 1.740 Life expectancyGNP 1997 (Atlas method, USS billions) 32,1 1.050 1.962

Average annual growth, 1991497

Poplation (%) -0,5 0,3 1,4 GNP GrosLabor force (%) 0,0 0,5 17 per prima

Most recant estimate (latest year available since 1990) capita /nroiment

Poverty headcount index (% of population) 22Urban population (% of total population) 57 66 56Life expectancy at birth (years) 69 68 67Infan mortality (per 1,000 live births) 22 24 40 Access to safe waterChid malnutrition (% of children under S) 6Access to safe water (% of population) .. .. 75Initeracy (% of population age 15+) .. .. 20 -RomaniaGross primary enrollment (% of school-age population) 94 100 104 Lower mkddi-incrx group

Matle 94 101 107 -oe-kieIcm ruFemale 93 100 101

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1995 1996 1997

UUiW (billnS US) .. 47,6 35.5 35,2 34,8 Economic ratlos*Gross domestic investmentlGDP 40,4 33,0 25,6 23,1 19,2 Opn ofExports of goods and servics/GDP .. 22,9 27,4 27,4 28,2 pen of economyGross domestic savings/GDP .. 37,2 21.1 18,9Grossnationalsavings/GDP .. 35,9 21,4 18,8

Current account balance/GDP .. 2,9 -4,9 -7,3 -7,1kIterest paymrnts/GDP .. 1,1 0,5 1,0 Savings InvestmentTotal debt/GDP .. 14,7 18,8 23,6 23,9Total debt service/exports 0.0 18.7 11,5 12,2 21,8Present value of debt/GOP .. .. .. 22,3present value of debttexports .. .. .. 78,0 Indebtedness

197-845 19866 1995 1996 1997(average annual gowth) -RonaGOP 4,8 -3,4 7,7 3,9 -6,6 Lower- e-kkle-one groupGNP per capita 4,0 -3,3 13,7 3,5 -2,7Expots of goods and services .. 0,2 30,7 2,6 2,0

STRUCTURE of the ECONOMY1975 1986 1996 1996 1997

(% efGOP) Growt raes o output and Invetment (%)Agriculture .. .. 18,5 18,1 18,0 30Industry .. .. 32,9 34,2 35,6

Manufacturing .. .. .. .. ..Services .. .. 48,6 47,7 46,4 S 6 e

Private consumption .. 58,9 66,6 70,2 75,1General government consumption .. 3,9 12,2 10,9 10,1 - GD -*GDPImporisorgoods and services .. 18,7 31,9 31,6 32,6

197648 1986-96 1996 196S 1997(average annua/ gowth) Groth ratef exports and imports (%)Agriculture .. 2,4 4,9 -2,4 2,2 oIndustry .. -6,5 6,8 6,8 -5,0 40 A

Manufacturing .. .. .. .. .Servies .. -5,0 11,1 10,5 -82 20-

Prlvateconsumption .. 0,7 12,93 04 95 sO 97General government consumption .. 4,0 -2,4 -7,5 -11,0Gross domestic investment .. -3,2 1,5 3,9 -15,9 0

importsofgoodsandservices .. 2,7 45,4 10,6 -1,1 -Epors -mporsGross national product 4,7 -3,5 13,1 3,8 -3,0

Note: 1997 data are preliminary estimates. Aggregate data are to 1996. Figures in italics are for years other than those specified.The diamonds show four key indicators in the country (in bold) compared with its income-group average. n data are missing, the diamond vWill be complete.

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PRICES and GOVERNMENT FINANCE1976 1986 19S6 1s9s6 1997

DomesUc pdcres Inftion (%)(% chaG) 40Consumer prices 32,0 38,8 154,881JImplicit GDP deflator 0,4 35,7 44.6 148,7 20

Govwnment finance 100(% of GOP) oCurrent revenue 48,9 32.0 29,6 30,4 9 92 9J 94 95 96 97Current budget balance 29,7 2,7 1,4 ., -GOW W CPSOvemall surplusldefdcit . 12,1 -2.6 -39 -3.6

TRADE1975 1S85 1996 1996 1997

(nWilions US$) Export and Import levelk |mIll USS)Total exports (fob) .. 10.174 7.910 8.085 8.429 15000Textils 2.065 1.734 1.941Metals 1.513 1266 1.556Chemicals 1.W1 882 745 .00o .

Total imports (di). 8.402 9.487 11.435 11.275Food .. 160 818 772 596 i.00i_ _iliFuel and energy 4.753 1.160 1.037 838Capital goods 3.489 7.509 8211 7.930 o

Export price index (1993=100) 106 108 91 92 93 94 95 96 97

Import price index (1993=100) 105 104 NExpOus ElmportsTerms of trade (1993=100) 102 104

BALANCE of PAYMENTS1976 198S 1995 1996 1997

(OlHones USS) Current account balance to GOP ratio ()Exports of goods and services 5.812 10.920 9.404 9.648 9.842Imports of goods and servces 5.858 8.926 11.306 12.503 12.371Resource balance -46 1.994 -1.902 -2.855 -2.529

Net incorme 89 -613 -241 -309 -376Net current transfers 0 0 369 593 419 2111* 111Current account balance.

before official capital transfers -135 1.381 -1.774 -2.571 -2.486

Financing items (net) 103 -1.698 1.583 3.451Changes In net reserves 32 317 191 -80

Nemno:Reserves including gold (rn/i/. USS) 904 1.447 2.625 3.145 4.671Conversion rate (loc8l4JSS) .. .. 2.033,4 3.082,6 7.167,9

EXTERNAL DEBT and RESOURCE FLOWS1975 1986 1996 1996 1997

(millio0s USS) Compostilon of total debt, 1996 (mnll. USS)Total debt outstanding and disbursed 211 7.008 6.666 8.291 8.313

IBRO 19 1.633 844 1.009 1.391 G AIDA 0 0 0 0 0 815 1009

Total debt service 1 2.064 967 1.230 1.833 cIBRD 0 274 53 63 389IDA 0 0 0 0

Composition of net resource flows F DOfficial grants 0 0 34 105 0 2785 1037Official creditors 30 -61 707 1.224 4.381Private creditors 0 -645 267 1.540 1.542Foreign direct investment 0 0 419 263 1.224 EPortfolio equity 0 0 1 1 1 830 1994

World Bank programCommitments 180 0 340 475 625 A -IBRD E - B/etsrDisbursements 19 49 129 228 182 B-IDA D -Othwermultatr F - PrrvPrincipal repayments 0 146 0 0 14 C - IMF G - SholtrttmNoet fas 19 -97 129 228 168Interest payrents 0 127 53 63 65Net transfers 19 -225 76 165 103

Note: 1997 data are preliminary estimates. 07/10/98

* Includes privatization revenues

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Annex 11

Financial Management Action Plan

Action Start date Completion dateRecruitment of the chief accountant (final) 8/9 9/15

Release vacancy announcement (2nd) 8/9 8/11Prepare short list of candidates 8/16 8/23Interviews 8/23 8/30Final selection 8/30 9/1No objection notice and appointment 9/1 9/15

Appointment of External Auditors 8/9 12/31Design terms of reference 8/9 8/30Prepare local bidding documents 8/16 8/30

... Invite bids 9/1 9/29Assess bids 9/29 10/15Shortlist of auditors 10/18 10/28Final selection 10/28 11/12

... Bank's no objection 11115 11/30- Appointment 12/1 12/31

Preparation of Final Procedures Manual 8/9 10/23Job descriptions 8/9 10/23Chart of accounts 8/9 10/23Internal controls 8/9 10/23Monthly procedures 8/9 10/23Quarterly procedures 819 10/23Banking and payments 8/9 10/23

Computerization of Accounting Records 8/16 11/15Invite prospective suppliers 8/16 8/31Assess various options for: 9/1 9/30

Cost 9/1 9/30Software support and maintenance 9/1 9/30multi currency options 9/1 9/30security 9/1 9/30flexibility with chart of accounts 9/1 9/30

Systems adaptation 10/1 10/31Full scale implementation 10/1 10/31Trial run 10/1 10/31No objection notice 11/1 11/15

Output Monitoring Report and 10/1 11/15Procurement Management Reports _

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Annex 12

Social Assessment of Mining Sector Restructuring

A Social Assessment was undertaken in three mining regions (Jiu Valley, Gorj county, and Deva) tostudy the process of mass layoffs initiated in 1997. The objective of the Social Assessment was to assessimplementation progress and social impact of restructuring and the social protection measures undertaken,analyze behavioral responses and coping behavior of redundant workers, obtain opinions of miningcommunities about the layoff process and alternative development possibilities, and establish a baseline forsocial impact monitoring. The Social Assessment combined data from a household sample survey, andhousehold budget data with qualitative data obtained from focus group discussions and key informantinterviews.

The mining industry is the most heavily subsidized sector in Roniania receiving an estimated 56% ofthe subsidies provided to state owned industries in 1997. The sector employed around 173,000 workers inAugust 1997. Under pressure from the mining unions to undertake sector restructuring, the Governmentpromulgated - Ordinance No. 9 in April 1997, for restructuring of all industries, and Ordinance No. 22, inAugust 1997, giving miners the right to seek voluntary redundancy in exchange for higher severancebenefits. At that time, a protocol was also signed with the labor unions wherein agreement was reached to(a) create a specialized agency for social mitigation and job creation in the mining regions; (b) enact a speciallaw declaring the mining regions disadvantaged regions and providing a tax incentive to future investors; and(c) initiate active measures to create jobs for mine workers. While the Norm under Ordinance No. 9 was 6months severance pay, mining sector workers were entitled to 12-20 months severance. The base rate wasalso higher, being derived from the average wage in the mining industry (twice as high as the averagenational wage). Ordinance No. 22 also provided the severance pay in a lump sum with the intention ofenabling workers to invest their severance productively in exchange for not seeking employment within thesector for the next 12 months.

Following the issuance of Ordinance No. 22, around 40% workers accepted the package nation-widewithin four months, compared to the Government expectation of around 15% workers leaving the industry.In the study areas, a total of 45,530 workers (38%) were laid off in the last four months of 1997 out of119,385 employed in August 1997. Nation-wide, an estimated 74,000 workers were laid off in 1997. Latestestimates put the numbers laid off under Ordinance No. 22 to be 83,000 by end 1998. The large number ofvoluntary layoffs caught the Government by surprise and unprepared to provide the supplementary supportfor re-training and job creation they had promised the labor unions. Since then, the government has madeefforts to respond to those promises by creating a specialized agency (NAD) to promote and coordinatesocial mitigation measures in the mining areas, and by deploying some funds already available in theongoing Bank-financed Labor Redeployment Program. To date, active measures have benefited 5,164workers from mining areas.

Six months after redundancy, the Social Assessment found that most workers had been under theillusion that after the industry would be restructured they would find jobs in a restructured mining sector,since Ordinance No. 22 prohibited them from seeking jobs in the sector for a period of one year only. Mostworkers have consumed the severance pay unproductively, on household consumption, purchase ofappliances, or repayment of past debts. Only 5% had attempted to start their own business, while 30% stillhad some savings from the severance pay. Although 64% had been seeking jobs, only 5% had found jobs.Mining being the dominant activity, slowdown in the sector had adversely affected all related industries.

The responses of workers depended on alternatives in their locality. The highest rate of despondencyand, consequently, militancy was in the Jiu Valley where there were very few jobs outside the mining sectorand where 95% of workers had migrated and settled from other parts of the country. A few of them tried toreturn to their original homes but did not find economic opportunities there. Most were compelled to returnto Jiu Valley where they owned an apartment. In Gorj County, 60% of the population was from the

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surrounding villages and owned or shared small plots of agricultural land. Redundant workers hadsomething to fall back on. Overall 5% had migrated out of Jiu Valley but less than 3% from Gorj. In Deva,other industries provided alternative opportunities to laid-off workers.

The layoffs were not gender neutral. In the Jiu Valley, laid off male and female workers were roughlyproportional to their size in the mining labor force (laid off women 17.3% out of the 18% female laborforce). However, in Gorj County, 53% of female employees were discharged while only 33% of the men leftthe labor force. Women in Gorj reported management pressure to accept voluntary redundancy. Womenwere less mobile and had no alternatives, but were desperate to find sources of income and expressed ahigher preference for agricultural work and micro-enterprises as coping strategies. The absence of creditopportunities remains a major constraint. Credit available through commercial banks is prohibitivelyexpensive requiring collateral of 150%. Even larger enterprises find it difficult to obtain credit. Moreaccessible credit is essential for employment generation.

There is considerable dissatisfaction with the Govermment's ability to respond to the needs of themining regions and the slow pace of delivery on the commitments made in the protocol. Although NAD wascreated in February 1998, it was not provided with any program funds. The Disadvantaged Areas Ordinancewas issued finally in September 1998, and active labor market measures have been very slow and have notachieved outcomes commensurate with the scale of the problem. Job re-training opportunities organized bythe Department of Labor have not been very popular, as they have not been related to job availability thusincreasing skepticism about the value of this training. To be successful, training opportunities should belinked to future jobs.

The Government has succeeded in attracting donor interest in the mining regions. The Bank-financedLabor Redeployment Program has invested almost 40% of its funds in the mining regions. The EU haspledged ECU 2.1 million and 10 million under two separate programs for infrastructure and enterprisedevelopment, and the British Department for International Development is considering co-financing theBank's social mitigation component. Within the mining regions, however, a major effort on publicinformation dissemination needs to be undertaken both to educate people about the economic necessity toeliminate mining subsidies, and about the active measures which are somewhat belatedly beginning to havegreater impact in the mining regions.

The findings of the Social Assessment have been discussed with stakeholders within the miningregions and at national workshops. The social mitigation component has been designed from the SocialAssessment results and from the recommendations arising out of these stakeholder workshops.

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Attachment

GOVERNMENT STRATEGY AND RESTRUCTURING PROGRAMOF THE ROMANIAN MINING SECTOR

The Romanian subsoil has solid mineral reserves located in a great number of deposits (owned by the state)spread all over the country ( with the biggest concentration in 23 counties ).

The geological solid useful mineral reserves - different stages of known reserves - possible to be exploitedwith the present mining technologies are about 3 billion. tons for lignite and coal, 1 billion tons for open-pitcoal, 40 million. tons of gold and silver ores, 0 90 million tons of polymetallic ores, 900 million. tons ( out ofwhich 800 tones are low quality) copper ores and more than 4 billion tons of salt.

In the above mentioned polymetallic ores, there are 3.3 million. tons copper, 1.6 million. tons zinc, 0.9 mil-lion. tons lead, as well as silver, gold and other elements ( cadmium, bismuth, selenium, molybdenum, wolf-ram sulfur and others).

In the Romanian subsoil, there are also, but not in such big quantities, deposits of radioactive minerals, ferro-managanes, bauxite, as well as a diversity of nonmetallic rocks used in industry ( calcars, dolomite, bento-nite, nisipuri cuartoase, argile refractare si caolinoase, creta, roci cu sulf activ si altele ), and in constructionmaterials.

Comparing to the deposits of useful solid minerals that are exploited worldwide, the geological-mining andmineralogic characteristics of Romanian deposits are complex and they are inferior as quality ( low qualitylignite, low quality open pit coal, and low grade nonferrous ores ).

The extraction industry covers presently internal needs of energy coal, nuclear fuel and, partially, nonferrousmetals, coal for coke and a great part of nonmetallic ores. 500 thousand tons of salt are exported annually.The production capacities that can be used are: 52 million. tons for coal, 21 million tons for ores, 8 milliontons nonmetallic substances, and 4.3 million tons of salt. Only half of the mining capacity is operational to-day.

OBJECTIVES

The main objectives of the Government strategy for the mining sector are to:

* promote an environmentally sustainable and financially viable Romanian mining sector with strong pri-vate sector involvement;

* comprehensively address poverty alleviation in the mining region through implementation of social miti-gation measures and regional development programs.

OUTLINE

The basic elements of the Mining Sector Strategy comprise:

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a) establishment of an enabling legal and regulatory framework that would facilitate the promotion of pri-vate mining enterprises and improve the capacity of the public mining institutions ( PMIs ) to enforce thelaws and regulations, administer mining titles and monitor overall sector development in a transparent,efficient and non-discriminatory manner;

b) strengthening and rationalizing the role the role of the state by converting the current involvement of thestate from that of owner and operator of mining assets to that of a regulator and administrator;

c) reducing financial losses in the sector by eliminating direct or indirect involvement of the state in explo-ration, by reducing and eventually eliminating state financing for this kind of operations;

d) protecting and enhancing the environment through the development of a comprehensive program for ad-dressing environmental issues, increasing environmental awareness, safety and health protection;

e) alleviating poverty and developing human capital by allocating resources for social mitigation and re-gional development and establishing a framework that would promote business opportunities in themining regions.

ACTIONS TO ACHIEVE OBJECTIVES

The following actions are already ongoing:

A. Establishing of a legal and reeulatorv framework:

A new mining law and regulations to implement the law have been approved by the Parliament ( MiningLaw 61/1998 ). This law and the accompany regulations are aimed at providing the legal basis for the re-structuring of the sector and to facilitate the development of a private sector in the mining industry. In ac-cordance with the requirements of this law, all mining activities will be based on licenses and administrationor concessions. All enterprises with ongoing mining exploitations and exploration activities would regular-ize their situation by applying for licenses on areas where they are currently active and would be required torelinquish all other areas which will be re-demarcated by the competent authority to be promoted competi-tively to Romanian and foreign investors. The National Agency for Mineral Resources has been appointedas the competent authority in the extraction field. NAMR has the competency to manage on state's behalfmineral resources of the country and to enforce the provisions of the Mining Law concerning the explorationand utilization of mineral resource deposits.

The Ministry of Industry and Commerce issues and enforces Government policy in the mining field and en-sures the administration and monitoring of the public property in the field of mineral resources. The Minis-try is involved in the direct coordination of the state owned mines.

B. Institutional Reforms and capacity buildins in the minins sector

Romania has had a long tradition of mining characterized by large scale employment, strong trade unions,strong involvement of the state, limited private sector involvement and major envirozunental degradation.

In time, the mining sector, for a variety of reasons that include operational inefficiencies and uneconomicmines, has become financially unsustainable and has continuously contributed significantly to the endemicproblems of losses and arrears, which have undermined macroeconomic stabilization efforts of the Govern-ment.

In 1997, subsidies to the mining sector amounted to about 1518.8 bill. lei ( equivalent to about USD 209mill. ), out of which 1048.5 bill. lei production subsidies, 281.8 bill. lei for social protection expenses and188.5 bill. lei for investments. The operational losses in 1997 for the subsidized mining companies were of1758 bill. lei. The exploitation of the salt and lignite in open pit mines is profitable.

Even with these subsidies the enterprises have large losses. Major structural reforms are urgently required.

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Mining activities in Romania consist of two main parts:- coal sector with about 130 underground and open pit mines for lignite ( poor quality soft coal and highthermal quality hard coal )- ores and salt sector with about 145 mines ( mostly underground mines ) for metallic and non metallic de-posits ( Cu, Au, Ag, Pb, Zn, uranium and salt).

For these minerals the production activities are carried out by state operators ( companies or regies auto-nomes ), out of which: three for coal ( RA for Pitcoal Petrosani, National Company for Lignite Oltenia, Na-tional Company for Coal Ploicsti), two for non ferrous metals extraction ( RAC Deva and CNMPN BaiaMare), one for uranium ( CN Uraniului) and one for salt and industrial minerals ( SN Sarii Bucuresti). Inaddition to these seven large production enterprises there are seven mining commercial companies, 9 re-search mining institutions and 10 commercial companies for geological research which undertake workscomprised in the National Program of Geological Research and services for the mining and oil exploitations.

The institutional and structural reforms to be implemented under the strategy would consist of:

(i) Rationalizing the role of the state by eliminating the involvement of the state owned nmn-ing exploration and development institutions.

The strategy of the Government calls for the reduction of the state involvement in mining exploration, byleaving the financing of high cost, risky exploratory activities to the private sector. The insurance of obtain-ing basic geological information ( through prospecting work ) will be done by financing the National Pro-gram of Geological Research that will be executed by specialized commercial companies.

The 10 commercial companies presently carry out a lot of activities and are to be privatized by the StateOwnership Fund.

About mining production companies, the Government has already initiated the transformation of the RAs incompanies/joined stock national societies as a first step towards their privatization. RAs from Petrosani andDeva are being reorganized in national companies at present.

fii) Strengthening and modernizing the public institutions ( PMls ) involved in monitoringand regulating mining activities.

The PMIs are: the Ministry of Industry and Commerce, the National Agency for Mineral Resources, theGeological Institute which fulfill the role of the state as administrator and regulator for the mineral resourcesof the country, and whose performance in the discharge of their services and responsibilities ( such as en-forcement of laws and regulations, provision of reliable geologic data base, administration of mineral rightsand monitoring environmental liabilities ) are critical in the efficient operation of the mining sector and in theprivatization process.

It is realized that, at present, these institutions are deficient in their level of expertise, capabilities and do nothave adequate equipment to undertake their functions. Furthermore, they are poorly funded and have limitedexperience in dealing with the private sector. Under the strategy, these institutions will be provided technicalassistance for tmining of staff and for procurement of equipment to strengthen their capabilities.

Analysis undertaken by the Government of the economic performance of the mining operations in Romaniahave shown that the majority of the mining operations both for coal and metallic mining are uneconomic andshould be diminished by closing unviable mines and supporting those that can become efficient for theirmodernization. In the projected decline in the demand for coal by CONEL ( ex RENEL), the main consumerof coal in Romania, it is considered that the current capacity of the largest lignite pit coal mines, which arealso the lowest cost coal producers in Romania, can support the annual projected demand of coal of 35 mil-lion tons. Furthermore, the Government plans to restructure the power sector to encourage private sector

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investment in power generation and reduce pollution. In this regard, it is envisaged that the private powergenerating companies would be more inclined to switch from coal to combined cycle plants.

Under the strategy, the current state-owned coal producers would be required to concentrate on the open pitmines and wherever economically and socially justifiable, continue the operation of the underground coalmines. In this regard, subsidies for operating underground mines would be reduced and later eliminatedcompletely and the enterprises, once converted to joined stock commercial companies would be encouragedto restructure themselves to eliminate high cost underground coal mining operations. Also incentives wouldbe provided to encourage private sector joint venture arrangements for the operation of the open pit mines asa mean to further reduce production costs.

As a new restructuring solution for the coal and mining sector, actions for the development of integratedsystems with coal and energy producers were initiated, within the global energy sector strategy.

Unlike coal, it is envisaged that the private sector would be interested in metallic mining because concen-trates and metals are internationally tradable. In this regard, enabling legal and regulatory framework will bedeveloped that would be conductive to attracting private sector interest in metallic mining either directly orthrough joined ventures with the state owned metallic mining companies. These actions would be comple-mented with a promotional effort to make available economically viable mines for privatization or throughjoined venture with the private sector.

For the improvement of the technical and economical performances on the long run, priority projects wereelaborated for introduction of new technologies for the viable mines and open pit mines as follows:

* Technology modernization at Rosia de Jiu, Jilt Sud, Rosiuta, Lupoaia, Rovinari open pit mines fromOltenia, with aid from KRUPP for improving the technologies for electrical action systems for excava-tors;

- modernization of Racos Sud open pit mine from lignite deposit Capeni;* technological improvements at Lupeni, Livezeni si Paroseni, as well as updating the the ambulance cen-

ter in Petrosani and thermal plants from Valea Jiului mines;• reintroducing the lands affected by mining activities in the agricultural circuit and the reconstruction of

the households affected also by mining activities from Oltenia.

For metallic ores

* introduction new technologies and modernizing the open pit mines for copper in Rosia Poieni andMoldova Noua and tecnological improvements for the installations for preparing non ferrous ores andestablishing mixed companies with foreign parteners;

* introduction of new technologies at gold mines in Baia Sprie and Sasar;* modernizing the Suior mine and introducing a new technology for gold pyrites, cu continut de arsen;* a new cooper recovering installation for low content cooper ores at Rosia Poieni by biotechnological

procedures ( lesie bacteriana).

For rare metals:

* changing the hidro metallurgic extraction technologies of uranium and increasing extraction efficiency to95% for the preparation of uranium ores in RI plant Feldioara.

For salt:

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* construction and starting operations for salt production installation by evaporation at Ocna Mures saltmine.

(*ii) closure of uneconomic mines

The strategy calls for the reduction of financial losses in the short term through the closure of uneconomicmines. In this regard, about 160 mines ( out of which 25 areas in an advance stage of exploitations ) havebeen identified as uneconomic and should be closed. Production activities from these mines have been, inmost cases, closed and except for workers required for care and maintenance prior to closure, all otherworkers have been either laid off or redeployed to more economically viable mines.

The Government has initially allocated for 1998, almost 500 bill. lei for these closures. In order to executethe closure of these mines in a timely and efficient manner, the Central Group for Mines Closure (CGMC)was created through Ordin 1670/ September 25, 1998 within the Ministry of Industry and Commerce. Thisgroup will lead the mining closures, will manage the funds and will hire on contractual basis private or stateowned commercial companies which will be responsible of the physical closure and of environmental reha-bilitation works. The mines closure contractors will employ people that have been laid off (miners, electri-cians, mechanics, foremen, engineers).

The mine closure will start in 1998 with the initial works for the closure of 5-10 mines, for the remainingmines the initial works will start in the next 2-3 years.

The Central Group for Mines Closure will be also responsible, as provided by the legal framework, of theassets of the closed mines.

As about some of the assets, buildings or other utilities that can be used for initiating new business, theirdestination will be established, following the provisions of the law, by the CGMC together with NAD. Theassets may be used by the laid off miners as an alternative for new job creation program in the areas were themining activities was stopped. The specialist from the GCMC, even if with a good professional experience,have never been involved in mine closure and environment rehabilitation programs. We think that theyshould attend as soon as possible (in 1998) training programs in countries with experience in this field in or-der to learn the methods used by these countries for mines and open pit mines closures.

The annex attached presents the list of the mines proposed for closure, as provided by the Mining Law. Forsome of these mines the activity was closed since 1997.

D. Protecting and enhancine the environment

Although a legislative and regulatory framework exists to address environmental impact assessment issues,the procedures for the execution of these regulations are fragmented and the institutions lack the capability tomonitor and address the environmental problems efficiently. As a consequence, considerable environmentaldegradation has occurred in the mining areas.

In order to asses the gravity of the problem, the Government strategy calls for the implementation of a com-prehensive environmental impact assessment study of the mining sector as a whole, which would provide thebasis for the environmental rehabilitation programs for the mines to be closed and the environmental abate-ment measures to be implemented in the mining areas. Under the strategy, assistance would be provided toupgrade the capabilities of the institutions responsible for monitoring and regulating environmental pollutionincluding developing appropriate monitoring procedures and costs for environmental rehabilitation. Thestudy will be conducted in cooperation with the staff of the Romanian Protection Agency ( REPA ).

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Romanian Government Strategy on Social MitigationMeasures in Mining Regions

Romanian Government is committed to supporting social mitigation efforts in mining regions during thisimportant but difficult time of mining reform. In order to assure that adequate " social safety net " provisionsare in place during this time, the Government is taking measures to provide information, coordination andassistance to people in these regions. The role of local and regional government will be very important inproviding necessary assistance to mine closures.

The Government strategy for supporting social mitigation efforts in mining regions has been developed inresponse to a growing number of unemployed in these regions, most of whom took advantage of Ordinance22 in 1997 which permitted voluntary redundancy. The majority of the 76,000 people who took advantage ofthese packages remain unemployed with little to no prospect for finding employment. Additionally, as themine closing process continues throughout Romania, it is anticipated that more people will be laid off in thecoming years. The Government recognizes that mining regions often lack significant alternative employ-ment opportunities for the unemployed, and is committed to measures that will assist people immediately,but also help to develop local economic activity including job creation, public works programs and training.It is important that the proper economic and informational foundations be established to ensure that sustain-able local economic growth will result.

IMMEDIATE MEASURES FOR 1998

I. The National Agency for Development and Implementation of the Reconstruction of theMining Regions ( NAD ):

In February 1998, the Government created the National Agency for Development and Implementation of theReconstruction of the Mining Regions ( NAD ). This Agency has been created to facilitate information andcoordination of assistance efforts for unemployed mine sector workers. NAD operates under the auspices ofthe Ministry of Industry and Commerce ( MOIC ) and is based in Bucharest as well as 14 regions: Petrosani,Tg. Jiu, Ploiesti, Voivozi, Comanesti, Anina, Deva, Alba lulia, Moldova Noua, Baia Mare, Baia Borsa,Balan, Rodna, Gura Humorului.

NAD works with local governments and communities, mine sector operators and trade unions to provide ac-curate and timely information on social support measures available for unemployed workers. NAD willidentify regions where special assistance is required and modify Government strategy as needed.

II. Ongoing Assessment of Emergency Situations:

In order to safeguard the social needs of people facing emergency living situations, the Government will ini-tiate and will conduct an ongoing assessment of urgent situations, primarily focused on elderly, children, dis-abled and remote mine communities. This assessment will allow the Government and local communities torespond in an immediate and necessary manner in the provision of food, electricity, heating, clothing, hous-ing and other basic needs which may be required. This assessment will be monitored by the NAD regionaloffices and coordinated with local unemployed offices, local government and NGOs which are assisting insupporting the social sector.

ONGOING MEASURES 1998 - 2000

I. Social Impact Monitoring:

The Government has designed and is implementing a social impact monitoring program through which pre-cise and timely data on the economic and social well-being of mine communities will be revealed. Throughthe systematic collection of data from local and government sources, it will be possible to track critical in-

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formation for mining communities including: standard of living, costs for local products, local job opportu-nities, health status, training and education, and emergency needs. This ongoing tracking will provide criti-cal information for formulating and improving social assistance programs for mining regions.

II. Access to Business Training/Support and Local Capital:

Through NAD, the government will begin active measures aimed at providing capital in mining regions forthe development and support of small and medium business, training and consulting for private and publicsector structures. The government expects that beginning in 1998 and through 1999, a number of BusinessTraining and Consulting Centers will be established in mining regions. Where such centers already exist, thegovernment is committed to enhancing their equipment and staff. It is expected that these centers will oper-ate independently of NAD, but in coordination with NAD.

III. Assets to Support Local Business Development:

The Government has committed to reform the entire mining sector which includes training and other mine-related facilities. The Government will assure that assets such as buildings and furniture which result fromreducing staff or closing enterprises will be given first priority for local business development activitieswhich will directly benefit unemployed mine sector workers attempting to build or start new businesses.

IV. Public Works Program:

The Government will identify a limited number of communities where local and government funds maycontribute to small, medium and large scale public works programs. Identification of these programs will bemade by local communities and will be aimed at creating immediate, short-term employment. Some projectswhich may be considered include municipal clean-up projects, development of parks, construction of mu-nicipal buildings and roads, river clean up and repair and maintenance of apartment and other buildings.

V. Emergency Assistance to Communities in need:

The Government will continue assessment and provision of special services as required to populations incritical need. Distribution of assistance to these communities will be conducted with local partners includinggovernment, NGOs and other organizations able to provide emergency support.

VI. Pre-Redundancy Support:

As needed, the Government will supplement already existing pre-redundancy activities conducted by theMinistry of Labor and Social Protection for mine sector workers. This may include psychological, eco-nomic, job search or other counseling as well as the provision of information on where an individual can re-ceive additional social support. The Government is developing criteria for pre-redundancy support to be of-fered to mine sector workers.

VII. Program for Youth in Mining Regions:

Where necessary, the Government will provide training prograrns for youth toward business or social serviceorientation.

VIII. Support for I Social Contracts":

Through NAD, the Government will commence a more active program of linking local government with ex-isting NGOs, trade unions and other activity which collectively may contribute toward positive economicgrowth within the community. Where possible, the Government will encourage " social contracts" betweenlocal government and organizations which can carry out local activities. An example of this could be food

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distribution, municipal clean-up or training; instead of the municipality having to carry on all of these ac-tivities, it may contract out to existing organizations ( private, NGO ) to do the work.

IX. Subsidized Living Costs:

Where necessary, the government will provide subsidies or goods to support heating, housing, electricity,food, clothing and other critical expenditures should the cost of living exceed the benefits or access to cashwhich unemployed people in mining regions have.

MAP SECTION

IBRD 30443

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