Tanzania Sustainable Management of Mineral Resources ProjectImplementation Support Mission

andExtractive Industry Transparency Initiative Implementation

October 18 – 29, 2011

AIDE MEMOIRE FOR FINAL REVIEW

Introduction

1. A World Bank mission led by Mr. Christopher Sheldon, Lead Mining Specialist, and including Messrs./Mmes. Katherine Heller, Social Development Specialist, Natasha Cherevatova, Operations Analyst, Vedasto Rwechungura, EITI and Mining Consultant, and Abdul Omar, Regional EITI Coordinator, Sustainable Energy Department, Oil Gas and Mining Unit (SEGOM); Gisbert Kinyero, Procurement Specialist (AFTPC); Mercy Sabai, Sr. Financial Management Specialist, Geoffrey Shoo, Financial Specialist (AFTFM) visited Dar es Salaam from October 18 - 28, 2011 to conduct a supervision mission of the Sustainable Management of Mineral Resources Project (SMMRP) and to support the Ministry of Energy and Minerals (MEM) on the implementation of the Extractive Industry Transparency Initiative (EITI).

2. The mission would like to express its appreciation for the support extended by the Government, particularly the Ministry of Energy and Minerals, its Project Management Team (PMT), and Tanzania EITI Secretariat. This Aide Memoire documents the findings of the mission, agreements reached with Government, and is subject to management approval.

3. The objectives of the mission were to:

to review an overall progress of the project activities across the components with a particular focus on agreed actions from the previous missions in March/April 2011and subsequent sequencing of the next actions, including fiduciary aspects of the project;

to provide support to the Ministry of Energy and Minerals in implementation of the Extractive Industry Transparency Initiative in Tanzania.

4. The mission also participated in the International Mining and Energy Conference and Exhibition (TMECE 2011) that took place in Arusha on October 19-20, 2011.

Project Implementation Progress

5. Despite the slow start project implementation is now progressing well and is rated satisfactory. Procurement progress has also improved since the previous mission and there are now no major procurement delays or issues. The mission commends the project implementation team for the improvements since the March 2011 mission.

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Results

6. Although in the early stages of implementation the project is achieving some excellent results. License rents have increased by 164% (to TSh 7 billion) since the project commenced and royalties are up 129% (to TSh 77 billion). Outstanding prospecting license applications have decreased from 10,000 to 6,000 and average processing time has reduced by 2 months. The first EITI report has been published and the reconciliation process for the second report is underway. Mine audits have increased by 42%. Digitization of geological maps is ahead of schedule with 51% of maps now digitized.

7. There are some challenges. The uncertainty around the new mining law led to a drop in the policy attractiveness ranking of Tanzania, although the geological attractiveness has increased. Despite improvement, the processing of mining licenses is behind schedule and still at an unacceptable average of 18 months. The mission has agreed to short term support measures to the Mining Cadastre and Information Management System to improve the licensing system.

8. Tanzania continues to attract investors. At the TMECE investors presented ongoing exploration projects in gold, nickel, diamonds and uranium.

Major Issues for Attention

SMMRP

9. Benefits Study, Local Economic Development and Local Procurement. The Benefits study is now complete and shows that while there are positive socio-economic benefits from mining in Tanzania the overall perception at the local level is negative in terms of benefits received and in the level of participation in how these benefits are distributed. The most important benefits for local communities were jobs and business opportunities. To help address this, the Local Economic Development planning and the Local Procurement analysis subcomponents will be prioritized for implementation.

10. Participatory Budgeting. At present, companies make a $200,000 payment to impacted mining districts. In many districts, this money is then divided evenly among the wards, but ward officials have discretion in the use of these funds. According to the recently completed Benefits Study, however, only 12% of respondents felt that they were involved in determining how this money is allocated. A participatory budgeting program would help to inform and engage citizens about how the mining money is being spent, will help them to see direct benefits from mining, and ideally promote a sense of accountability that might then be supported in other aspects of governance. Next steps for promoting this program will include gaining buy-in from senior management of the MEM, as well as the Ministry of Regional Administration and Local Authorities; working with these authorities to select pilot districts; gaining buy-in from district and ward authorities, and then designing a pilot activity in which local authorities and communities would jointly determine funding priorities, as well as ongoing participation and accountability mechanisms. This activity will also be designed to complement ongoing company-funded programs, such as Resolute Mine’s participatory planning program, and ongoing communication campaigns to inform communities about the district level payments.

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11. Mining Cadastre and Information Management System (MCIMS). While the number of outstanding licenses has been reduced from 10000 to 6000, there is still a significant delay of 18 months. The mission agrees to the proposal from MEM to hire a cadastre consulting firm on an urgent basis to address short term implementation issues while the consultant for the longer term MCIMS is being procured.

12. Counterpart Funds and MEM Budget. The mission is concerned that the budget ceilings imposed by the Ministry of Finance on MEM will result in insufficient funds being available for project activities. While this has not been a problem to date, because of the past procurement delays, the action plan for the next 12 months has had to be scaled back to fit the available funding.

13. New Mining Law and areas of uncertainty. The mission attended the TMECE in Arusha. The mission noted that the lack of clarity around the percentage of Government participation in mining investments was a common concern of investors as it allowed for uncertainty as there was no clear sense of the level of Government participation or a maximum ceiling. Government advised that the flexibility is needed for situations where the state mining entity, Stamico, has an existing license area and enters into an agreement with an investor.

EITI

14. Closing of the First Grant and Second Grant Application. The current grant expires in March 2012 and it is important that funds are utilized by that date. A second grant application is expected thereafter.

15. Tight Timeline and Looming Validation Deadline. In order to be validated under the current EITI rules, Tanzania needs to complete the second reconciliation report, agrees the issues raised by the EITI Secretariat in Olso, and request validation before December 31, 2011. This is a very tight timetable and requires support and cooperation from MEM to be achieved.

16. Controller Auditor General (CAG) reconciliation and explanation of discrepancy. We understand the unreconciled difference of US$35 million under the first report has now been largely explained and reduced to around $500,000. However the CAG has not yet issued its findings and as a result the issue is not resolved for stakeholders.

17. MEM Financial Management and Reporting System. The perceived lack of reliable royalty data was one of the challenges of the first EITI report. MEM had proposed to introduce changes in the royalty reporting system in order to provide timely and accurate data. However is it not clear that these changes have been effected.

18. Civil Society Engagement and Workshop. As a part of the World Bank’s global program to provide increased direct support to CSOs to strengthen their engagement in the EITI process, a civil society consultation was hosted on October 26 by the TEITI Secretariat and the Multi-Stakeholder Group. The objective of this consultation was to inform civil society about the findings of the first EITI report, and the outline of the second report, and then to provide a forum for civil society to consult amongst themselves to identify their top priorities and proposed activities for improving their engagement in EITI. Following a presentation by BDO East Africa on the first and second reports, the World Bank presented the EITI Direct Support Program. This then led into a closed session discussion for civil society, in which civil

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society identified priority areas for World Bank support to strengthen their engagement in EITI. These priorities will then be translated into key activities, which the World Bank will then recruit vendors to fulfill (i.e., hiring trainers, communication assistance, etc – in line with CSO identified priorities).

Disbursements

19. 10.88% of the total loan amount is disbursed (see the table below for more detailed information). Part of the low disbursement rate is attributed to delays in the procurement process. However, the mission noted that the procurement of several major activities, including the large geological consultancies, are at the completion stage and will increase disbursement rates within months.

Table 1. Disbursements as of October 26, 2011

Allocated (SDR) Disbursed (SDR) Disbursed (%) Undisbursed (SDR)

33,500,000.00 3,643,562.23 10.87 29,856,437.77

Financial Management

20. The mission conducted a financial management review of the SMMRP and EITI. The review of SMMRP identified some issues for attention but the overall project financial management rating remains Satisfactory and the overall FM rating assigned to the Project remains Moderate.

21. The financial review of EITI identified some basic financial management issues that need urgent attention and the overall financial management rating assigned to the EITI project is Moderately Satisfactory , and the overall FM risk assigned to the project is Moderate. Details are provided in Annex 1

Procurement

22. The Mission reviewed and discussed with the SMMRP Project Management Team on the status of implementation of the procurement activities for the project. Progress has been made in the implementation of procurement activities under the project whereby procurement of vehicles (1st batch), office furniture has been completed. The procurement of consumables for the Mines Inspectorate Section at HQ have been completed and the goods have been delivered. Similarly, procurement of ICT equipment for Legal Unit, Environmental Management Unit in MEM, and ZMOs/RMOs are completed and some lots have already been delivered while the remaining lots are on the way.

23. Following the Bank’s clearance of the bidding documents for supply of the second batch of vehicles, prospective bidders will be invited for participation in the tender. Also the

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bidding process for supply of 12 transportable demonstration units for gold, gemstones mining and processing and demonstration equipment is in progress.

24. Regarding consultancy services, the baseline study on investment benefits from large scale mining was completed and the findings of the study were presented by the MEM at the workshop “Gold for Development”, organized by the World Bank in collaboration with the World Gold Council in Washington on October 13, 2011. The assessment and mapping of artisanal and small scale miners has been completed and the final draft report will be submitted by end of October, 2011. The assessment of available mining statistics, institutional capacity and management for data acquisition, followed by preparation of strategy and action plan is in progress.

25. The consultancy services for supervision of implementation of the second phase development strategy for Arusha Gemstone Carving Center had to be re-advertised due to initial poor response. The technical evaluation report for (i) supervision of airborne geophysical survey; (ii) mining cadastre information management system; and (iii) SESA are under the Bank’s review. Comments on the reports will be sent to MEM shortly after completion of the review process. The TORs for ASM demonstration centers, ESM database, strategic planning, skills development, small grants program, inspection manuals development have been discussed with the SMMRP PMT and will be sent shortly. The remaining TORs which are currently with the Bank’s will be reviewed and comments sent to MEM shortly.

26. The Procurement Plan is updated to include the additional packages, as sequenced in the Action Plan. The consultancy package on providing services to strategically link LSM and LGRAs plans have been separated into three packages, particularly, mainstreaming mining into local strategic development planning, integration of the ASM sub-sector into budgetary framework of the Local Government Authorities, and lastly, empowering communities in selected mining areas to invest into provision of goods and services to the mining companies that enable focusing profoundly on each activity while doing them in parallel. MEM has submitted a revised Procurement Plan that incorporates the new packages which is currently being reviewed by the Bank. After completion of the review and approval of the Plan, it will be sent to the MEM and its abridged version will be posted on the World Bank external website for a public access.

Environmental and Social Issues

27. Strategic Environmental and Social Assessment. Technical Evaluation of the consultant has been submitted to the Bank for review. The mission discussed the SESA with the Tanzania Chamber of Minerals and Energy (TCME), who advised they are developing environmental guidelines for mining investors. The mission advised that during preparation of the SESA the consultants will consult with TCME.

28. Uranium mining and the Selous National Park. The mission understands that uranium mining has been proposed for an area currently within the Selous National Park and that Government is making a request to UNESCO to remove this area from the World Heritage Site but that it will remain within the Game Reserve and be subject to stringent controls.

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Government advised an EIA has been submitted and is under review and that there is a proposal to offset the World Heritage Site area affected with another area in the Game Reserve. The mission noted that it is extremely important that major environmental matters such as this are dealt with in a consultative and transparent manner and the Government agreed to keep the Bank informed on progress.

29. EITI Activities: The MDTF Grant approaches its closure on March 30, 2011. It is important to complete the outstanding activities, funded by the MDTF Grant with the remaining balance of USD 200,000, by that date. The Procurement Plan will be updated to include newly identified packages and submitted for the Bank’s review and approval.

30. Post Procurement Review (PPR): The PPR was carried out in June 2011 for contracts which are a subject of post review procured under the project. The review exercise was aimed at determining whether the procurement and contracting arrangements were carried out in accordance with the legal agreements for the post review contracts. The findings of the PPR will be shared with the Ministry once they are finalized together with recommendations on the improvements required in the processing of contracts.

Status of EITI Implementation

31. The mission and the government discussed progress towards EITI implementation in Tanzania. During the visit, the mission followed-up on the discrepancies between company payments and government revenues from the extractive sector in Tanzania’s first EITI reconciliation report. The Secretariat of the Tanzania Extractive Industries Initiative (TEITI) noted that the discrepancies have been referred to the Office of Controller and Auditor General (CAG) and that a follow-up would be undertaken by both the Ministry of Energy and Minerals (MEM) and Mr. Mark Bomani, Chairman of the Tanzania EITI Multi-stakeholder Group. The mission conveyed to the government the importance of addressing the discrepancies, as various stakeholders in Tanzania are interested in the findings of the Office of Controller and Auditor General. As recommended by the EITI Board, the mission hopes that the report of the CAG on discrepancies will be available on a priority basis.

32. The TEITI Secretariat reported that Tanzania’s second EITI reconciliation report is due to be completed before the end of the year. Tanzania is currently in the process of completing a study establishing the extractive companies and government agencies to be covered by the second report. Early indications from the study suggest the difficulties of obtaining data on the revenues collected by MEM in an organized and timely manner. The mission recognizes that this challenge had played a major role in contributing to the discrepancies in the first EITI report. The mission therefore encouraged MEM to provide good data on revenues for the scoping study and the second reconciliation report. In addition, the mission drew attention to the requirement of the EITI that reporting government agencies should provide financial data extracted from accounts audited to international standards and certified by the Office of the Controller and Auditor General.

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33. The mission and MEM discussed the validation of Tanzania’s EITI implementation. On August 19, 2011, the EITI Board, based on the validation report finalized in May 2011, declared that Tanzania has made meaningful progress and remains as an EITI candidate country. The Board noted that Tanzania may request a waiver to undergo a second Validation provided that the remedial actions necessary for achieving compliance can be undertaken by end of this year. The TEITI Secretariat informed the mission that Tanzania’s EITI Multi-Stakeholder Group will be discussing a request for a waiver from the second EITI validation exercise.

34. The mission commends the TEITI Secretariat for advancing EITI implementation in Tanzania, particularly for reaching out to key stakeholders. During the visit, the mission attended a training workshop for extractive companies and government agencies on EITI reporting in an effort to improve the quality of Tanzania’s EITI reconciliation report. In November, TEITI Secretariat scheduled to hold dissemination workshops on the first EITI report in the mining communities, particularly Geita, Kahama and Tarime.

35. The mission noted that the first MDTF Grant is approaching its closure in 5 months and all the outstanding activities funded by this Grant must be completed by March 30, 2012.

36. The mission also discussed with the TEITI Secretariat whether the GoT will need further financial assistance from the MDTF Facility, administered by the World Bank, after closure of the first MDTF Grant. During this discussion, it was noted that if the GoT intends to apply for the second MDTF Grant and avoid discontinuation of the World Bank supported activities, the application for the second MDTF Grant should be submitted to the World Bank by end of this calendar year.

Next Mission

The next supervision mission is tentatively planned for April 2012.

Disclosure

37. Under the Bank’s Access to Information Policy introduced on July 1, 2010, the Aide Memoire may be made public, if the Government and Bank agree. MEM agreed to publicly disclose this Aide Memoire in the interests of transparency.

Table 2: Tanzania Sustainable Management of Mineral Resources Project (SMMRP). Next Steps

Action Item By When By WhomMCIMS Short Term Consultancy Nov 30 MEMASM Study Oct 31 MEM

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Table 3: Tanzania Extractive Industry Transparency Initiative (EITI). Next Steps

Action Item By When By Whom

Training for extractive companies and reporting government agencies on EITI reporting

October 28 (completed)

Reconciler

Selection of reporting extractive companies and government agencies in the second EITI report and approval of the reporting template

October 28 (completed)

Tanzania EITI Multi-stakeholder Group

Distribution of reporting templates to reporting extractive companies and government agencies

November 1 (completed)

Reconciler

Dissemination workshops in Geita, Tarime and Kahama

November 1-15 TEITI Secretariat

Return of reporting templates from reporting extractive companies and government agencies

November 21 Extractive companies and government agencies

Produce draft second EITI reconciliation report

November 30 Reconciler

Produce final second EITI reconciliation report

December 9 Reconciler

Submission of the revised Procurement Plan

By December 5 (completed)

TEITI Secretariat

Completion of the activities funded by the first MDTF Grant

By March 30, 2012 TEITI Secretariat

List of Annexes

1. Financial Management Report SMMRP2. Financial Management Report EITI

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Annex 1

Financial Management Contribution to the Aide Memoir - SMMRP

The mission reviewed the financial management arrangements of the Sustainable Management of Mineral Resources Project (SMMRP) at their offices in the Ministry of Energy and Minerals (MEM). The mission’s scope included the (i) assessment of the continued adequacy of FM arrangements, namely: budgeting, accounting, internal controls, funds flows, financial reporting and auditing, (ii) review of the recommendations made during the previous supervision mission of March-April 2011, (iii) follow up on implementation of recommendations made in the CAG on project annual financial audits for FYE 2009/10 and (iv) review of a sample of transactions IFR covering May 2011 to September 2011. The mission also met with the Chief Internal Auditor of MEM.

Major findings:

Key progress made:

a) Satisfactory IFRs have been submitted on time.b) Draft financial statements for FY 2010/11 were submitted to CAG within the deadline of 30

September 2011 c) Imprest that have been retired have been allocated to their expenditure/activity codes.

Key outstanding issues and weaknesses

a) One of the accountants has not received training on IDA financial management and disbursement procedures

b) The disbursement rate remains at 10.88% due to slow progress on the procurement processc) Lack of adequate and timely counterpart funds will affect the implementation of planned

activities. In 2009/10 the project received Tsh 660 million against a budget of Tsh 2,600 million. The project has not received any funds for 2011/12 although there is an approved budget of Tsh 2 billion.

d) Planned activities for 2011/12 required USD 10.2 million of credit funds but the budget ceiling is USD 6 million even though funds are available.

Disbursement

The funds disbursed from the Credit as at October 17, 2011 is shown in the Table below:-

Category Category Description Allocated Disbursed Undisbursed Disbursed

USD USD USD %

Totals 52,780,925.00 5,740,614.47 47,040,310.53 10.88

1 Wks,Gds,CS,Trng,OC A1-A4a,b, A5- D

45,690,950.00 796,582.40 44,894,367.60 1.74

2 Grants Art small scale 4,253,985.00 0.00 4,253,985.00 0.00

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min Part A4c

3 PPF REFINANCING 630,220.00 145,894.76 484,325.24 23.15

4 UNALLOCATED 2,205,770.00 0.00 2,205,770.00 0.00

DA-B Designated Account 0.00 4,798,137.30 -4,798,137.30

DA-P Designated Account 0.00 0.00 0.00

There has not been any disbursement since the last mission in March/April 2011. The IDA disbursement rate is only 10.88% and 44% of the project life is has lapsed.

Status of External Audit

The draft annual financial statements for the FY 2010/2011 were submitted to the National Audit Office (NAO) on 30 September 2011 within the deadline date of 30 September 2011

Based on the above findings the overall project financial management rating remains Satisfactory and The overall FM rating assigned to the Project remains Moderate.

Outstanding actions from previous Action Plan.

Action on the previous action plan is as explained in the table below:

Agreed Actions By WhomBy When Action

takenNew deadline

1. Project accounting unit staff are not fully conversant with the Banks financial management and disbursement procedures

Project accounting staff should undergo further training on the Bank’s financial management and disbursement procedures.

PMT December 31, 2010.

Training was not been provided because the accountant was relocated and a replacement made.

As soon as IDA training is available

The Sage Accpac has so far not met the expectations of

The supplier of the package should give firm undertaking of when the accounting package

PMT June 30th 2011

Supplier failed to deliver

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Agreed Actions By WhomBy When Action

takenNew deadline

the project. will be fully operational failure of which remedial action should be taken

Availability of counterpart funds should be guaranteed

PMT to make concerted effort in following up counterpart funds from the Treasury

MEM and PMT

Monthly On going On going

New Action Plan

Agreed Actions By Whom By When

Treasury ceiling on credit funds

PMT should request the Treasury to lift the ceiling on credit funds so that planned activities can be carried out fully.

PMT 30 November 2011

The Sage Accpac has so far not met the expectations of the project

Invoke remedies provided in the contract with software package supplier and procure a competent consultant who can make the package produce required reports.

PMT 31 December 2011

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Financial Management Contribution to the Aide Memoir – EITI

The mission reviewed the financial management arrangements of the Extractive Industries Transparency Initiative (EITI) at their offices in the Ministry of Energy and Minerals (MEM). The mission’s scope included the (i) assessment of the continued adequacy of FM arrangements, namely: budgeting, accounting, internal controls, funds flows, financial reporting and auditing, (ii) review of the recommendations made during the previous supervision mission of March-April 2011, and (iv) review of a sample of transactions IFR covering May 2011 to September 2011. As a result, a project’ Financial Management Rating (FMR) was prepared in line with the fiduciary guidelines.

Major findings:

Key progress made

a) Credit disbursement rate has increased from 47% in Aril to 80.04% in October 2011. The project closing date is five months away and there is a balance of 84,828.40. The balance in the Designated Account is 123,137.99. Therefore unspent funds amount to 207,966.39. These funds should be committed before the closing date of the project.

b) Timely submission of IFR for the quarter ending 30 September 2011 on 25 October 2011. c) Timely submission of draft financial statements for the FY 2010/2011 to NAO on

September 30, 2011. The Trust Agreement requires audit to be done at the end of the project implementation period. The last audit will therefore be for the remaining of nine months.

Key outstanding issues and weaknesses

a) The Project Accountant has not had training on IDA financial management and disbursement procedures as recommended in the last mission.

b) Late submission of IFR for the quarter ending 30 June 2011. IFR for quarter ending 30 June 30, 2011 was due on 14 August 2011but was submitted late on 25 October 2011.

c) Inadequate counterpart funding. Approved counterpart fund budget of Tsh 500 million for FY 2011/12 is much less that the amount of Tsh 1.6 billion requested for to carry out planned activities.

d) Weak internal control and supervision. e) Internal audit unit of MEM has not audited the activities of the project since its

effectiveness.

Disbursement: The total funds disbursed from the grant account is USD 340,171.60 and overall disbursement rate is 80.04% according to Client Connection as 17 October 2011 as illustrated in the table below.

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Allocated (USD)

Disbursed (USD)

Undisbursed (USD)

% Disbursed

425,000 340,171.60 84,828.40 80.04

As at 17 October 2011 the balance in the Designated account was USD 123,137.99. Therefore total funds available to be used before the project closing date of 31 March 2011 amount to USD 207,966.39

External audit

According to the Trust Grant Agreement only one audit of the financial statements will be carried out after the closing date of the project, that is, March 2012. However, the project management has submitted a draft financial statement for the FY 2010/11 to the National Audit Office on 30 September 2011.

The overall financial management rating for the EITI project is downgraded from Satisfactory to Moderately Satisfactory due to late submission of IFR and weak internal controls resulting into failure to maintain the accounting records up to date. The FM risk assigned to the project remains as Moderate.

Outstanding actions from last mission Action Plan

Agreed Actions By WhomBy When Action

taken

The Project Accountant has no experience on World Bank reporting and disbursement procedures

Project Accountant should be trained and given support on World Bank reporting and disbursement procedures.

TEITI Secretariat Head and IDA

September 30th , 2011

Not done

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New Action Plan

Issue Agreed Actions By Whom By When

The Project Accountant has no experience on World Bank reporting and disbursement procedures.

Accountant to attend a structured World bank training and network with MEM staff experienced in IDA procedures.

TEITI Secretariat

As soon as IDA training is available

Weak internal controls

Supervision on the Project Accountant should be improved to ensure that project books are maintained properly.

Chief Accountant and Chief Internal Auditor

Immediately

Imminent closing date of the project.

Management to prepare project activities which would utilize all the available funds before the closing date.

TEITI Secretariat

30 November 2011

Correct IFR

Project Accountant to improve on the IFR for June 2011 and September 2011

Project Accountant

Immediate

Internal audit unit has not audited the project

Internal audit unit to audit the project activities Chief

Internal Auditor

15 November 2011-10-26

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