Uganda - Agricultural Sector Adjustment Credit Project

Document of The World Bank FOR OFRCIAL USE ONLY Z,9 CCG - Report No. P-5431-UG REPORT AND RECO MENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 69.5 MILLION TO THE REPUBLIC OF UGANDA IN SUPPORT OF AN AGRICULTURAL SECTOR ADJUSTMENT CREDIT NOVEMBER 27, 1990 Thbis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed witbout World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Uganda Shillings (USh) US$1 - USh 510 UShl = US$.0020 US$1 - SDR 0.6950 SDR1 - US$ 1.4388 WEIGHTS AND MEASURES Metric System GOVERNMENT FISCAL YEAR July 1 - June 30 COFFEE SEASON (CS) October 1 - September 30  FOR OMCIAL USE ONLY ABIREVIATIONS AtND ACRONYMS ADP Agricultural Development Project AGSEC Agricultural Secretariat AIDS Acquired Zamume Deficiency Syndrome APC Agricultural Policy Committee ARP Agricultural Rehabilitation Project ASAC Agricultural Sector Adjustment Credit BOU Bank of Uganda CCB Consortium of Commercial Banks CG Consultative Group CIF Cost. Insurance and Freight CMB Coffee Marketing Board cNU Coffee Subsector Monitoring Unit CS Coffee Season CSB Coffee Subsector Budget CSM Coffee Subsector Management EEC European Ecoaomic Coinunity ERC Economic Recovery Credit ERP Economic Recovery Program ESA" Enhanced Structural Adjustment Facility FAO Food and Agricultural Organization of the United Nations FY Fiscal Year GDP Gross Domestic Product HARE Head-Start Program for Agricultural Research and Extension ICB International Competitive Bidding IFC International Finance Corporation IMF International Monetary Fund LCB Local Competitive Bidding LMB Lint Marketing Board LPRP Land Policy Research Program m Million HAIF Ministry of Animal Industry and Fisheries MISR Makerere Institute of Social Research MOA Ministry of Agriculture MOF Ministry of Finance MPED Ministry of Planning and Economic Development WGO Non-Governmental Organizations NRC National Resistance Council ODA Overseas Development Administration OGL Open General Licensing PAPSCA Program for Alleviation of Poverty and the Social Cost of Adjustment PASP Program for Strengthening of Agriculture Sector Planning PCU Project Coordination Unit PEC Presidential Economic Council PER Public Expenditure Review PFP Policy Framework Paper PIU Project Implementation Unit PMB Produce Marketing Board RDP Rehabilitation and Development Plan SAC Structural Adjustment Credit SAF Structural Adjustment Facility SDR Special Drawing Rights SIP Special Imports Program SPA Special Program of Assistance SPPF Special Project Preparation Fkcility UNDP United Nations Development Program USAID United States Agency for Interr.?ticr'l Development UTGC Uganda Tea Growers Corporation This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be dislosed without World Bank authorization.  UGANDA AGRICULTURAL SECTOR ADJUSTMENT CREDIT TABLE OF CONTENTS CREDIT AND PROJECT SUMMARY . .............................. ......... i-iii PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY .......... 1 A. Background .....**................................... 1 B. The Economic Recovery Program FY88-90. 2 C. The Policy Framework ......... . . ....... .....4 D. Experience in Past Lending ................. ... 9 E. Bank Assistance Strategy and Lending Operations . .11 F. Relations with the IMF ......15 G. Sumary Assessment .... ..... .15 PART II - THE AGRICULTURAL SECTOR . ................................ 16 A. Introduction .................................... .17 B. Recent Performance ..17 C. The Coffee Subsector and Financial Stabilization ........... 18 D. Growth Opportunities, Development Constraints and Strategy ................ .................................. 21 PART III - THE AGRICULTUJRAL SECTOR ADJUSTMENT PROGRAM ....... ........... 24 A. Coffee Crop Financing and Marketing Reform ....... .......... 25 B. Pricing and Marketing of Other Agricultural Products ....... 29 C. Sectoral Management ................ ........................ 31 PART IV - THE AGRICULTURAL SECTOR ADJUSTMENT CREDIT .................... 32 A. Origin, Objectives and Main Features .... 32 B. Costs and Financing ... . 37 C. Disbursement. . . 39 D. Procurement ... ........40 E. Implementation and Monitcring ....42 F. Environmental Impact ....................... ...... 44 PART V - IMPACT AND RISKS ........ ..................................... 44 PART VI - SUMMARY OF AGREEMENTS AND CREDIT CONDITIONS ....... ........... 47 PART VII - RECOMMENDATION .... ............................................. 49 TABLES 1. Sector Adjustment Actions to be Monitored under the Credit ....... 35-36 2. Summary of Cost of Investment Component ..** ...................... 37 3. Financing Plan for Investment Component ..... ..................... 38 4. Procurement Methods for the Project Investment Component .41  ANNEXES 1. Uganda Country Data Table 1s Economic Indicators Table 2: External Financing Table 3s Balance of Payments 2. Status of Bank Group Operations in Uganda 3. Supplementary Data Sheet 4. Draft Letter of Agricultural Policy and Matrix of Policy Actions under ASAC 5. Draft List of Eligible Items under ASAC Import Support Component 6. Summary Desription and Cost Estimates of the Investment Component 7. Disbursement Schedule and Allocation of Credit by Disbursement Categories 8. Supervision Plan 9. Implementation Schedule 10. Project Management Structure (Chart) 11. List of Documents in Project File WORKING PAPERS IN TECHNICAL SUPPORT VOLUME 1. Organizational, Financial and Institutional Restructuring of CMB 2. Financial and Organizational Retsructuring of Cooperative Unions 3. Marketing Strategy for the Coffee Subsector 4. Strengthening of Sectoral Planning 5. Research Support for Land Use and Policy Development 6. Head-Start Program For Agricultural Research and Extension  UGANDA AGRICULTURAL SECTOR ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: The Republic of Uganda Amounts IDA Credits SDR69.5 M (US$100.0 H equivalent) Beneficiaries$ Agricultural producers, agro-industry. marketing agents, and traders of agricultural inputs and outputs. Terms: Standard for IDA, with 40 years maturity Onlending: The Government would pass on as grants US$0.8 H to Makerere Institute for Social Research for land policy research, and US$1.4 M to Coffee Marketing Board for technical assistance in organizational restructuring. ProJect and Proaram ObJectives: Under the Second Economic Recovery Credit the Government has initiated macroeconomic and cross-sectoral policies to meet the stabilization targets of the Economic Recovery Program. The proposed project broadens and deepens the agricultural sector components of these policies. It emphasizes reforms in the coffee subsector because of the subsector's dominant position as earner of foreign exchange, user of credit, and source for Government revenue. Specifically, the project supports the objectives of the Government's Sectoral Adjustment Program (hereinafter referred to as the Program). The objectives are as follows: (a) to facilitate financial stabilization by controlling credit expansion through improved institutional arrangements for financing coffee crop procurement, and financial restructuring of marketing intermediaries; (b) to promote agricultural growth and diversification by creating competitive systems for processing and marketing of export crops through reform of marketing institutions, enhanced coffee export incentives, more efficient public spending, and strengthened agricultural research and extension institutions and sectoral management. Prolect Description: The project is a hybrid: it has an adjustment component and a complementary investment component. Under the adjustment component the credit would finance agricultural sector recurrent imports in support of significant policy reforms in the sector. The credit would retroactively finance up to US$17 M of imports to assist the Government in meeting essential imports and its cash financing gap during the early months of 1991. Actions to be monitored under the credit include transfer of the responsibility for crop financing from the Central Bank to commercial banks, restructuring of the Coffee Marketing Board (CMB) as a commercial marketing organization within a competitive marketing system, rehabilitation of cooperative unions, broadening of private sector participation in coffee exports, reforms of the export taxation system to introduce trade incentives, and establishment of a semiautonomous national agricultural research organization. Under the investment component the credit would fund (a) a Head-Start Program for Agricultural Research and Extension to implement high priority adaptive research and extension activities with relatively quick effects on agricultural growth and diversification, (b) support for a program for land  - ii - policy research, (c) a program to strengthen agricultural sector planning, (d) technical assistance for coffee subsector management, including CMB restructuring, and (e) institutional support for project coordination and monitoring. Benefits. The Government's Sectoral Adjustment Program is expected to affect favorably the stabilization and growth objectives of the Economic Recovery Program. Coffee crop finance reforms will increase the efficiency in the allocation and use of credit, reduce overall credit requirements and the inflationary pressures, and also help rationalize the financial sector. Restructuring of CMB will increase accountability and improve operational efficiency. This in turn, will contribute to a more efficient use of public resources and a lower fiscal deficit. Project-induced growth is expected from (a) an increased supply of agricultural inputs, (b) more competitive systems for processing and marketing export crops through privatization or reorganization of parastatals, and strengthening of cooperative union processors, (c) better price and tax incentives for capturing higher export values, (d) more efficient sectoral investment, (e) an improved organizational structure for an agricultural research program to address constraints on diversification of agricultural production, (f) funding of high priority research and extension activities, and (g) strengthened sectoral management. The Program is not expected to affect any specific population group adversely. Risks. Program and project implementation entails risks related to slippage in the macroeconomic reform program and the Government's implementation capacity. Program objectives and sustainability of reforms depend Gn the Government's adherence to its macroeconomic policy framework, particularly in the context of external shocks and lower than anticipated aid receipts. Failure to pursue a realistic exchange rate policy would increase the tax burden on coffee producers and reduce exports of the main foreign exchange earning commodity. The sustainability of crop finance reforms depends on the liquidity in the financial sector. This sector needs to be supported by monetary and credit policies that promote private savings and efficiency in the use of financial resources. Delays in civil service reform would postpone benefits from the proposed organizational structure for agricultural research and restrain progress toward the diversification of agriculture production and exports. The second-tranche release of the proposed credit would be subject to the Government's continued adherence to the macroeconomic framework as per the Policy Framework Paper and the DWF's Enhanced Structural Adjustment Facility. While the above risks remain real, they need to be taken since overall progress toward stabilization and growth depends on agricultural sector reform. Weak implementation capability is a concern in all Bank operations in Uganda. The Public Expenditure Review and civil service reform initiatives should help strengthen ministerial implementation capabilities. The credit includes technical assistance, emphasizing training, to strengthen sectoral management and implementation capability in key ministries and parastatals.  - iii - Estimated Costs (US$ M): Local Foreian Total Sectoral Adjustment Component 85.0 85.0 (agricultural inputs) Investment Component Agricultural Research and Extension 2.3 3.7 6.0 Land Policy Research .5 .6 1.2 Sectoral Planning .2 2.6 2.7 Coffee Subsector Management - 1.5 1.5 Project Coordination and Monitoring .5 2.3 2.8 Total Baseline Cost 3.5 10.8 14.2 Physical Contingencies .3 1.0 1.3 Price Contingencies .3 .8 1.1 Total Cost (Investment Component) 4.1 12.5 16.6 TOTAL PROJECT COST 4.1 97.5 101.6 (Note: Figures are rounded off and therefore do not necessarily add up to totals.) Sectoral Financing Plan (US$ M): Adjustment Investment Total Government _ 1.6 1.6 IDA 85.0 15.0 100.0 Total 85.0 16.6 101.6 Estimated Annual Disbursements (US$ M) FY91 PY92 FY93 FY94 FY95 Annual - Adjustment Component 35.0 36.0 14.0 - - - Investment Component 2.0 4.9 3.8 2.5 1.8 Cumulative 37.0 77.9 95.7 98.2 100.0 APpraisal Report: This is a combined President's and Staff Appraisal Report. Economic Rate of Return: Not calculated.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON AN AGRICULTURAL SECTOR ADJUSTMENT CREDIT TO THE GOVERNMENT OF UGANDA 1. I submit the following report and recommendation on a proposed credit to the Government of Uganda of SDR 69.5 million (US$100.0 million equivalent) in support of its program for agricultural sector policy adjustment. The proposed credit would help finance a hybrid operation consisting of an agricultural sector adjustment component focusing on reforms mainly in the coffee subsector and an investment component supporting improved agricultural research and extension and sectoral management and planning. PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Background 2. When the present Government of Uganda assumed power in January 1986, it inherited an economy that had been devastated by wars and economic mismanagement over a period of a decade and a half. Political institutions had broken down, and economic activity had been strangled by rampant inflation and shortage of foreign exchange. Major trunk roads had deteriorated for years, and much of the vehicle fleet was either destroyed or stolen. Most manufacturing plants had closed, and productive agricultural areas had been ravaged. The new Government slso :nherited a considerable external debt burden with arrears on medium- and long-term debt amounting to US$54 million (M). 3. The new Government moved quickly to build a broad based government and to restore peace and security to most parts of the country. The success in achieving political stability was, however, initially not matched with success in the economic arena. Despite a modest recovery of agricultural output, conditions worsened throughout 1986. Transportation bottlenecks and lack of foreign exchange, coupled with expansioi.ary fiscal and monetary policies, resulted in extreme supply shortages and accelerated inflation rates. 4. In early 1987, the Government recognized that a major reappraisal of economic policies was required and approached IDA and the International Monetary Fund (IMF) for assistance in the design and financing of an Economic Recovery Program (ERP) to arrest the economic decline and set the basis for sustained development. The first phase of ERP was initiated in May 1987 when the IMP and IDA announced strong policy initiatives in the context of a Policy Framework Paper (PFP) (1987188 - 1989190). In support, the Fund Board in June 1987 approved Uganda's request for an arrangement under the Structural Adjustment Facility (SAF), and an IDA Economic Recovery Credit (ERC I) and an African Facility Credit were approved in September 1987, with cofinancing from a number of multilateral and bilateral agencies. To accelerate implementation of reforms, the Government sought and obtained in 1989 an Enhanced Structural Adjustment Facility (ESAF) 't.iom the Fund and a Second Economic Recovery Credit (ERC II) from IDA. The ES'J ?upports further demand management initiatives, while ERC II supports a fu -thfgr deepening of the structural measures, emphasizing those that impinge on the stabilization objectives. To help bridge the external financing gap while ERC II was being prepared, an ERC I  Supplemental Financing request was approved by the Bank's Board on April 21, 1989, and a Second Supplemental Financing was approved on December 18, 1989. A fourth PFP (1990191 - 1992/93) that focused on the structural and stabilization measures was approved by the Committee of the Whole on September 4, 1990, and, along with a second-year ESAF, by the Fund Board on September 10, 1990. B. The Economic Recoverv Program FY88-90 Performance 5. The ERP has three principal aims: to bring about internal financial stability and lower the rate of inflation, to reduce the imbalances in the external accounts, and to promote economic rehabilitation and growth. The results of ERP, now entering its fourth year, have been increasingly positive. Substantial progress has been made in reviving economic activity and creating a climate for growth. During its first year of implementation (FY88), the annual year-end cumulative inflation rate stood at 240 percent. This rate during FY89 was reduced to 86 percent (the target was 55 percent), and at the end of FY90 it was reduced to 29 percent (the target was 30 percent). The Government's increasing success in reducing the rate of inflation reflects a greater ability to effectively control its expenditures, and progress in restraining the surge in private sector demand for credit, notably that for crop finance. 6. The initial efforts to restore fiscal and monetary discipline were hampered by external shocks. The major shock was the collapse of the International Coffee Agreement in 1989 and the subsequent precipitous fall in international coffee prices. Consequently, foreign exchange earnings and government tax revenues relative to targets declined dramatically. The negative impact of these events was exacerbated by weak implementation capacity and reluctance by the Government to take unpopular corrective actions (for example, exchange rate adjustments or expenditure cuts) in a timely manner. Nevertheless, progress made in controlling inflation over the pait year demonstrates the Government's intent to pursue the stabilization goal with vigor. Since November 1989, the Government has implemented monthly exchange rate adjustments to avoid any real appreciation in the exchange rate. Monetary policy was tightly programmed for PY90, and while monetary growth is expected to be larger than targeted, the targets for both the overall credit and government repayment to the banking system are expected to be met. On the fiscal side, the deficit (excluding grants) is expected to be well within the revised program target for the year. 7. The most important achievements during the past three years have been the restoration of peace and security, the reestablishment of political institutions, and the introduction of a measure of discipline in the public service. As a result, confidence in the private sector has improved. The environment for the private sector also has improved significantly as a result of the dismantling of price controls, the liberalization of the trade regime through the creation of an Open General Licensing (OGL) System followed by a Special Imports Program which made foreign exchange available on a first-come  - 3 . first-served basis. the abolition of some parastatal export and distribution monopolies, the suspension of the foreign exchange surrender requirements for noncoffee exports, and most recently the legalizing of the parallel market and the establishment of foreign exchange bureaus. Recognizing the critical importance of improvements in infrastructure and transportation, the Government has pursued with considerable energy and success the reclamation of water supply and sewerage systems, the rehabilitation of major trunk roads and railways, and repair and replacement of the country's vehicle fleet. S. Policy reforms and exchange rate adjustments have led to progress toward more realistic relative prices. The real effective exchange rate depreciated by 47 percent relative to its June 1989 level. Moreover, with the liberal policy on "no-forex, imports, a sizable amount of imports comes in at the parallel market exchange rate, and all noncoffee exports receive an effective exchange rate close to the parallel market rate. As a result of these positive developments, there has been a significant supply response. GDP data suggest an impressive annual growth rate averaging 6.6 percent in the first three years of the program, allowing a rise in per capita GDP of nearly 3 percent per year. 9. In snmiary, the program of economic reforms, after a shaky start, is beginning to take hold with increasingly positive results, and the ERP is being implemented in steadily improving country environment. The Government is demon..trating a strong commitment to the economic and social well-being of the Ugandan people, and is making a concerted effort to rebuild a consensus on the economic policy agenda. However, the macroeconomic situation while characterized by greater stability remains fragile and vulnerable to external shocks. Maior Development Issues 10. Uganda faces major structural, institutional, and financial problems that must be addressed during the next three years. First, underlying structural problems, principally in the financial and coffee sectors, continue to impede stabilization. Second, although government expenditures have increased somewhat in recent years, government revenues and expenditures are still very low. As a result, resources for economic and social services remain inadequate. Thus, increased efforts to strengthen revenue mobilization are a priority. Third, while the program has succeeded in reducing inflation, more has to be done to reduce inflationary pressures. Fourth, the sharp decline in the export prices of coffee during the past 18 months and the recent increase in petroleum prices following the Gulf war have highlighted once again Uganda's vulnerability to adverse external developments. Its export base must be diversified. Fifth, a stepped-up program of institutional strengthening, including parastatal and financial sector reforms, is required. Sixth, a major reform of the civil service is urgently needed to achieve a streamlined, efficient, effective, and manageable service. The policy framework for the Government's Economic Recovery Program over the next three years, reviewed below, addresses these issues.  - 4 - C. The Policy Framework Medium-Term Economic Obiectives and Strategy 11. Building on the results obtained during 1989/90, the Government's macroeconomic objectives over the period 1990/91-1992/93 are: (a) to sustain an annual real GDP growth rate of 5 percent, allowing per capita income to rise by at least 2 percent per year; (b) to reduce the annual inflation rate to below 10 percent by the end of the program period; and (c) to strengthen the balance of payments sufficiently to permit an improvement in the net foreign assets of the Bank of Uganda, (key macroeconomic indicators for the period 1990/91-1992/93 in Annex 1). The achievement of these objectives in a deteriorating external environment depends on strong policies to reduce financial imbalances and improve resource allocation. External financial support for ERP also must be increased. 12. To this end, the program includes measures: (a) to improve incentives for expansion and diversification of exports and efficient import substitution, through exchange rate policy, exchange and trade liberalization, price incentives, and adequate support services and infrastructure; (b) to increase domestic savings through incentives for private savings and by reducing the fiscal deficit and the operating losses of parastatals and marketing boards, and actions to further develop and improve the operations of the banking industry; Cc) to improve the efficiency of the public sector; and td) to strengthen tax administration and broaden the tax base to effect a s,:stantial increase in revenues. To help sustain economic performance, runabilitatien of the devastated transportation and power supply systems will continue to be emphasized, and major improvements in the delivery of health care services and education will be needed. The Government also intends to press ahead with the implementation of a program designed to alleviate the plight of the most vulnerable and disadvantaged social groups. Macroeconomic Policies 13. The program aims at establishing a market-clearing exchange rate system by the end of 1991. This system would reflect a more liberal trade and payments system. To this end, the Government will continue to implement the basket peg system with monthly reviews to prevent a real appreciation of the shilling. It also will review on at least a semiannual basis, the exchange rate policy in light of developments regarding Uganda's external competitiveness and progress in achieving market-clearing exchange rates. This policy should make it possible to provide better incentives to coffee growers without compromising the contribution of the coffee sector to the budget. In addition, it should increase the flow of foreign exchange from noncoffee exports into the banking system. Pending the establishment of a market-clearing exchange rate, noncoffee exporters are free to sell their export proceeds to foreign exchange bureaus at freely determined rates. The additional incentives created by the bureaus should greatly facilitate the diversification of the export base and the flow of resources into the banking system.  . 5 - 14. Regarding trade and payment systems, the Government wants to expand the OGL import system as the availability of foreign exchange improves. The initial access under the system will continue to be restricted to avoid reversals due to irregular supply of foreign exchange. Such reversals would undermine the private sector's confidence in the system. The Special Imports Program will continue to play a buffer role in allocating foreign exchange whenever import support flows exceed OGL requirements. A strategy and timetable for achieving full liberalization of the trade regime, consistent with the envisaged exchange rate policies has been established. Given the severe shortage of foreign exchange, the Government will review its barter commitments that are not tied to the importation of essential imports. With respect to commitments for which goods and services have already been received, the Government is reviewing the outstanding obligations with creditor governments and institutions. It expects to reschedule them on favorable terms. With respect to coffee barter, the Government will strictly limit new commitments. Any barter export of coffee will be additional to a minimum of 220,000 bags a month sold for cash, with an annual limit to total barter coffee exports of 240,000 bags (less than 10 percent of projected total coffee exports) for 1990191. 15. The Government will implement a sustainable growth-oriented fiscal program during the three-year period to promote private sector activities. Budgetary policies have several goals: improving revenue collection through reforms of the taxation system and improvements in tax administration, allocating resources to produce better and expanded economic and social services, contributing to the rehabilitation and expansion of the economy's productive capacity, building an enhanced structure of economic incentives, and increasing public sector efficiency. To achieve the programmed deceleration in the inflation rate, the fiscal program will try to reduce Government liabilities to the banking system during the three-year period. Revenue and expenditure targets will result in an initial increase in the overall deficit (excluding grants) as a percentage of GDP from an estimated 5.7 percent in 1989190 to 6.5 percent in 1990/91, followed by a decline to 6.2 percent in 1992/93. 16. The Government is committed to pursuing monetary and credit policies that will strengthen Uganda's net foreign asset position. stabilize inflation at low levels, and contribute to the mobilization of domestic savings, while simultaneously providing adequate financing for key sectors to sustain economic growth. To these ends, the Government will strengthen the capacity of financial institutions to contribute to the development of the economy, and it will implement a domestic monetary program to support a steady and significant decline in the inflation rate. A programmed substantial increase in private sector credit should ensure adequate financing for the productive and trading sectors. Crop financing operations of the banking system will be kept under review to ensure that they are in line with the targeted level of credit expansion. The Government proposes to begin the process of transferring crop financing operations, including the financing of the Coffee Marketing Board, to commercial banks from the 1990191 crop year. Furthermore. positive real interest rates will be maintained to encourage private savings and to improve efficiency in the use of financial resources.  - 6 - 17. Sustained economic growth requires a broadly based and efficient financial infrastructure, including a strong supervisory and regulatory banking system, and a good statistical base for monitoring key financial indicators and the performance of individual institutions. Accordingly, the Government plans to strengthen the capability of the Bank of Uganda to formulate, monitor, and implement monetary policy, and to supervise the other banks. Actions to this effect will be developed from the Government's review of the financial sector study recently carried out in conjunction with the World Bank. Other aspects of the financial system to be addressed during 1990191 include financial restructuring of the problem banks, compliance of commercial banks with prescribed cash and liquidity ratios, and accounting and managerial practices in the banking sector and financial institutions. Sector Strategies and Policies 18. Agriculture. The Government's goals are to diversify agricultural production, processing, and the export base, while achieving food self- sufficiency and improving the well-being of the rural population. Increased resource productivity is a primary objective. Future production increases will have to come from increased yields rather than expansion of area cultivated. Export diversification is required to reduce the vulnerabllity of the economy to a volatile international coffee market. While nontraditional exports gradually develop, the coffee subsector needs to perform strongly and in a manner that supports the stabilization objective. The attainment of these objectives is constrained by inadequate producer incentives, inefficient marketing systems and institutions, a poor infrastructure, weak agricultural support services, inefficient use of public resources in the agricultural sector, and a weak agricultural sector planning capability. Therefore, Government's development strategy is to establish an efficient incentive and regulatory environment, to strengthen agricultural support services, to improve the infrastructure supporting transport, processing, and marketing, to pursue coffee subsector policies that help keep the economy on the stabilization track, and to improve the efficiency of the public expenditure program and sectoral planning. This strategy and its associated policies are reviewed in Part II, Chapter D. 19. Industry. The Government's industrial sector strategy is to encourage private sector participation by improving the policy and regulatory environment for industrial and business enterprises, and to promote industrial development linked to agricultural production. To this end, the Government is reviewing the industrial licensing system with a view to simplifying it. The Government also will seek further improvements in the business environment in the areas of regulations governing business operations and labor markets, foreign trade and payments regime, internal trade and price controls, financial sector operations, and the investment code. Parastatal reform, to be implemented through action plans commencing in 1990/91, aim at increasing the efficiency of statutory boards and public enterprises and reducing public sector losses through divestiture and liquidation of industrial public enterprises, rationalizing and strengthening management of enterprises retained in the public sector, and improving the monitoring of parastatals and implementat'on of public enterprise reform.  20. Infrastructure. In the transport sector the Government's strategy includes continued rehabilitation of highways, railways, and feeder roads decimated by years of neglect and civil war. To eliminate transport bottlenecks that limit agricultural production, rural feeder roads and road maintenance will be emphasized. Priorities for investments and appropriate policy measures to sustain maintenance will be determined through a Transport Sector Review (para. 36). The deterioration of power and telecommunications infrastructure is also constraining economic activities. The immediate energy constraints are being addressed through rehabilitation of the Owen Falls Power Station and associated transmission and distribution systems. To meet the growing energy demands, the Government intends to exploit the country's hydropower potential in A way that is consistent with a least-cost expansion plan and environmental constraints. Through pricing and other policies, the Government also will try to ensure operational efficiency. Significant progress has been made in providing safe water to the six major towns, but the situation elsewhere remains critical. To begin addressing these needs, the Government intends to increase the budgetary allocations for the maintenance of existing systems while exploring suitable technologies for water supply and sanitation services to small towns and rural communities. 21. Human Resources Development. The Government's most urgent challenge is to restore institutional capacity and strengthen the human resource base. The AIDS epidemic, the impact of which is being felt throughout Ugandan society, adds a special crisis dimension to this challenge. The Government's strategy for controlling AIDS involves intensifying AIDS education, improving blood screening and epidemiological surveillance, medical treatment for patients and control of sexually transmitted diseases. It recognizes, however, that the strategy demands a multisectoral approach rather than a too narrow focus on the health aspects. The severity of the AIDS epidemic is dramatically increasing the demand on the limited health services. More generally in the health sector, where resources have been largely devoted to hospital-based curative care, the Government's strategy is to meet recurrent costs for drugs, medical supplies, and maintenance; to improve access to foreign exchange by public and nongovernmental organizations; to introduce user charges, and to gradually reallocate expenditures toward primary health care. The decline in the quality of education has resulted in a scarcity of skills throughout the economy. To produce the best use of limited resources the Government intends initially to concentrate increased resource allocations on enhancements to quality of primary and secondary education and on strengthening management capacity, while reducing expenditures for non-instructional activities. This strategy would be followed by increased support to salaries and other operational expenses. 22. Environment. The breakdown of civil order and public services during the past 15 years has resulted in extensive encroachment on forest lands, deterioration of water supply and sanitation systems, resurgence of human and animal diseases, and a decline in the wildlife population. The Government recognizes that protection of the environment, including the resource base that supports agricultural production, is a necessary condition for sustainable development. It is committed to the preparation of a National Environmental Action Plan to promote a more balanced and sustainable use of its renewable natural resources.  - 8 - 23. Public Sector Management. The Government has started to address weaknesses in its system of planning and budgeting expenditures. The integration of Recurrent and Development Estimates has been strengthened through a common classification system and joint review procedures. The Government will address the fundamental question of expenditure priorities through an Issues Paper on Government Expenditure. The paper will guide the preparation of the 1991/92 budget by recommending expenditure priorities and by addressing the roles of the public and private sectors. Within the public sector the relative roles of the Central Government, public enterprises, and local authorities will be examined. To improve financial management, the Government intends to implement a budget reform program in 1990191 that will make budget preparation and implementation more efficient. The Rehabilitation and Development Plan (RDP), which is Uganda's equivalent of a public investment program, will be tailored to the implementation capacity of the Government and the parastatals. Ongoing projects will be reassessed in the light of the Government's new priorities, and new projects will be included only if they meet selection criteria based on economic and social rates of return or cost effectiveness. 24. The Government is making progress toward revitalizing the civil service. A permanent information system has been established involving an Establishment Register, a payroll number scheme to prevent salary payments to unauthorized personnel, and computerized staff lists to verify payroll numbers. This system has resulted in considerable savings in the Government wage bill through identification of ghost' workers. In addition the Government has decided to reduce the number of daily wage workers in all ministries and departments by 50 percent as of August 1990. The establishment of a comprehensive information system for the civil service is a prerequisite for the design and implementation of a comprehensive package of civil service reforms. Such reforms will be recommended by a Public Service Review and Reorganization Committee which is about to issue its report. They are expected to cover the reorganization of the civil service into a smaller and more efficient service, the raising of pay levels, and the consolidation of allowances and benefits. Taking these recommendations into account, the Government will begin to implement a comprehensive reform package in 1991/92. 25. Poverty Alleviation. The Government's strategy to reduce poverty is three-pronged. First, economic growth supported by policies described above promote the productive use of labor, the poor's most abundant asset. Revitalization of agricultural production and diversification of sources of cash income to agricultural producers are key elements in this strategy. Second, through its program of health and education the Government seeks to provide basic social services to the poor, with emphasis on family planning, nutrition and primary education. This will require increasing expenditures in these areas consistent with improvements in the implementation capacity of Government ministries. Third, the impact on poverty and social displacement of the last two decades of civil disturbances has created the urgent need for a special program to address the victims of the wars - widows, orphans, disabled etc., and to bring them into the recovery process. To this end, the Government, assisted by the Bank, has prepared a Program for Alleviation of Poverty and the Social Cost of Adjustment (PAPSCA). The program recognizes that the implementation of ERP places immediate and heavy demands on the  -9- Government's limited resources. It therefore attaches priority to the involvement in implementation of local communities and non-governmental organizations. It also initiates an urgently required program to strengthen the statistical data base for monitoring household living conditions and poverty indicators. D. Experience in Past Lending 1J 26. IDA and the IMF supported an initial effort at economic stabilization and recovery during the early 1980s. In June 1981, the Government adopted a comprehensive Recovery Program. IDA committed the Reconstruction 1I and III credits in 1982 and 1984, respectively, and also an Industrial Rehabilitation credit (1982) and an Agricultural Rehabilitation credit (1983). These credits financed imports and reinforced policy measures adopted under the IMF agreements and institutional development efforts under IDA and UNDP technical assistance projects. Initial experience was encouraging, both in terms of stabilization and recovery of output. However, in 1984 the economic program went off track, and security conditions began to deteriorate once again. Inflation accelerated to 125 percent in 1985, and the recovery effort was overwhelmed by the intensification of civil strife. 27. Since resuming lending to Uganda in FY87, IDA has provided 14 credits totaling US$565.7 M. (In addition, a Livestock Services Project (US$21 M) was recently approved by the Board.) Of this amount, two IDA credits and an African Facility credit totaling US$255 M (or 45 percent of the lending program for FY87 to FY90) were in the form of fast-disbursing assistance in support of the Government's Economic Recovery Program. Through a technical assistance credit (FY88), IDA has strengthened the administrative and institutional capacity of the key ministries responsible for implementing the recovery program. Other credits have assisted in the rehabilitation of Uganda's essential infrastructure. They have improved productive capacity and bolstered basic social services. Annex II contains a summary statement of Bank Loans, IDA Credits, and IFC investmente in Uganda as of June 30, 1990. 28. Implementation of IDA-financed projects, which had slowed down during the civil disturbances in 1985 and 1986, has shown a steady improvement with the return of peace and stability to much of the country. Disbursements rose to US$77.7 H in FY86, declined slightly to US$63.3 M in FY87, and then increased sharply to US$107.1 M in FY88, reflecting the more rapid disbursements under ERC I. Disbursements in FY89 were US$ 99.9 M, rising to US$164.9 M in FY90. The lending program for Uganda increased dramatically from one operation in FY87 to five in FY88, six in FY89, and five in FY90, including two supplements to ERC I and the Second Economic Recovery Credit. 29. Economic Recovery Credits. Experience under ERC I and ERC II has been satisfactory, despite delayed progress in meeting the objectives of the 1/ Annex 2 summarizes the status of Bank Group Operations in Uganda as of September 30, 1990.  - 10 _ stabilization program. As the program progressed, the Government acquired a greater understanding of how various policy measures affected the economy. ERC I supported policy measures taken under the first two years of the Economic Recovery Program; specifically, a limited OGL System was introduced to improve foreign exchange allocation, a Public Sector Investment Program was prepared consistent with available resources and economic priorities, and an action plan for the restructuring and divestiture of public enterprises was agreed with IDA and initiated. Under ERC II, the key measures implemented by the Government have been a restructuring of public expenditures, tax and tariff reform, coffee export marketing liberalization, and civil service reform. The economy has generally responded favorably to these initiatives, but initial expectations of the speed at which economic stabilization could be achieved were unrealistic in light of the devastation, including that of essential government institutions, caused by the civil war. 30. Agricultural Sector Credits. In the recent past, IDA assistance for agricultural development has consisted of a broad-based sector operation, the Agricultural Rehabilitation Project (ARP) (US$70 M); two area deve'lopment projects, the Agricultural Development Project (ADP) (US$10 H) and the Southwest Region Agricultural Rehabilitation Project (US$10 M); a Forestry Rehabilitation Project (US$13 M); a Sugar Rehabilitation Project (US$24.9 M); and most recently a Livestock Services Project (US$21 M). The ARP was successful in rehabilitating export crop processing facilities, and it financed a large part of agricultural input imports over the past six years. The establishment of an institutional capability to support and rationalize policy making in pricing of export commodities was a major project contribution. Policy initiatives for crop marketing reforms could not be successfully pursued however, due to political instability. The two area development projects aim at increasing farmer productivity in the southwest, northern, and eastern parts of the country through distribution of agricultural inputs, reestablishing extension services, and rehabilitation of rural roads. Progress in implementation has been slow due to political instability, inadequate counterpart funding, lack of supporting infrastructure, and limited project implementation capabilities in the agricultural sector ministries. For similar reasons progress on the Forestry Rehabilitation Project has been slow. Implementation of the Sugar Rehabilitation Project, aimed at restoring sugar production at the Kakira Sugar Estate to historical levels, is proceeding satisfactorily under private sector management. The Livestock Services Project is not yet effective. 31. The above IDA assistance has been complemented by extensive support from other donors. USAID assistance focuses on private sector development and export diversification with ongoing projects promoting nontraditional agricultural exports, food crops research and agricultural training, and cooperatives. EEC assists in the establishment of seed distribution and support services for smallholder tea farmers, and has also financed importation of agricultural inputs. Assistance from the African Development Bank, DANIDA and German bilateral aid has concentrated on strengthening of livestock support services and dairy development. UNDP together with FAO is supporting the Agricultural Census, agricultural research and extension in numerous relatively small projects focusing on individual crops or product groups. IhAD is cofinancing two regional development projects with IDA.  - 11 - 32. IPC Operations. IFC has a total investment of US$12.0 million in four companies -- Sugar Corporation of Uganda, Uganda Tea Corporation, Toro and Mityana Tea Company, and the Development Finance Company of Uganda -- with US$0.4 million in equity and US$11.5 million in loans. All committed amounts were fully disbursed by June 1988. Arrears to IFC are currently over $3 million and, as a result, no new IFC investments are being contemplated at this time. In view of the important role that IFC could play in the privatization process in Uganda, the Bank strategy is to work toward a solution of the arrears problem so that IFC could once again become an active partner in Uganda's development. E. Bank Assistance Strategy and Lending Operations 33. A candid and open dialogue on policy issues has contributed a shared view of the reform agenda and an appropriate policy umbrella for Bank assistance. The Bank will continue to play a leading role in assisting the Government to design and implement its Economic Recovery Program, steer the economy towards sustainable long term growth, and mobilize the required financial resources to support the program. It undertakes this role by supporting its policy dialogue through economic and sector work, on key components of ERP, designing and implementing a lending program which combines adjustment and investment lending, and improving aid coordination. The Lendins Program and Economic and Sector Work 34. The planned volume of lending over the period FY91 to FY95 averages US$180 M per year (essentially unchanged from the FY88-90 period) involving about four new operations every year. The emphasis on quick-disbursing lending (about 50 percent) will continue because of Uganda's strained balance of payments which has been aggravated by the sharp decline in world coffee prices and, more recently, the rise in oil prices. Structural adjustment lending is required to support the continued implementation of the policy agenda for sustainable macroeconomic stability and structural reforms. Hence, two planned structural adjustment credits would sequentially provide essential import support based on the Government's satisfactory implementation of its program of reforms in the areas of macroeconomic policies (para. 12-17), civil service (para. 24), and public expenditures (para. 23). Reform initiatives in the latter area are being defined under the Public Expenditure Review. 35. Progress toward stabilization facilitates a deepening of reforms in key sectors that in turn will pave the way for investments in agriculture and industry and the rehabilitation of the social and economic infrastructure. A significant part of the quick-disbursing lending over the next five years will be channeled through adjustment operations in the agricultural, financial, industry, education, and transport sectors. The sectoral policy agendas for this lending will be developed through intensified economic and sector work. 36. An ongoing Financial Sector Review focuses on linkages between macroeconomic stability and financial sector performance and will prescribe a detailed reform agenda including strengthening of bank supervision and restructuring of financial institutions. Support for strengthening of the  - 12 - financial sector will initially be included under the first of the two structural adjustment credits. This will be followed by additional support under a planned Financial Sector Adjustment Credit based on the Government's satisfactory implementation of financial sector reform. In the transport sector, the planned adjustment operation will support implementation of policy initiatives to restore road maintenance capacity, and to improve expenditure allocations and cost recovery. These policy issues and associated investment priorities are being addressed under the ongoing Transport Sector Review. The Private Sector Assessment Study will lead to a program of policy, regulatory and institutional reform to maximize private sector development. In the education sector, the policy agenda, to be supported by an adjustment operation, is being defined through a dialogue based on the Government's recent review of education policy. It focuses on reducing education costs, increasing budget allocations for primary education, cost recovery, and institutional reforms in the Ministry of Education. 37. While the Government under ERC II initiated macroeconomic and cross- sectoral policies to meet ERP's stabilization targets, the proposed Agricultural Sector Adjustment Credit addresses the agricultural sector underpinnings for these policies. Thus, the proposed credit would involve support for agricultural sector imports based on satisfactory progress in implementation of the agricultural policy agenda. Further quick-disbursing assistance under a second agricultural sector adjustment operation would be based on progress in the implementation of policy measures and reforms to support diversification of agricultural production and exports. In support thereof, a planned Agricultural Sector Memorandum will review the incentive and regulatory environment and its effect on diversification of production and exports. 38. The investment part of the lending program supports the Government's strategy to restore the productive base through investments in agriculture, industry, and the economic infrastructure designed to stimulate increased participation of the private sector in the economic process. Simultaneously, it focuses on the restoration of the social infrastructure and longer term development priorities including poverty alleviation, management of the environment and the natural resource base, and the development of human resources and institutions to sustain the delivery of the Government's programs. 39. In the agricultural sector (para. 18). the Bank will support the Government's strategy to increase resource productivity and diversify production through improvements in agricultural services, including extension, research, land management, and credit. The proposed credit would initiate the rebuilding of these services and improve the efficiency of the public sector agricultural investment program and sectoral planning. In addition, IDA will continue to support the Government's initiatives to prepare investment operations designed to: (a) support the comprehensive strengthening of agricultural research, extension and agricultural training institutions, (b) promote rural agricultural enterprises and services, (c) strengthen the delivery systems for agricultural credit, and (d) encourage private sector participation in the marketing of milk. Complementary support for the rehabilitation of rural infrastructure will be necessary. In the industrial  - 13 - sector (para. 19) the planned adjustment lending will be complemented by lending supporting the the program for divestiture or closure of public enterprises including those affected by ownership disputes, and restructuring and managerial strengthening of viable public enterprises that are not ready for privatization. 40. In the transport sector, the Bank's main objective is to support sectoral policy adjustments (para. 36), and help mobilize donor support for such initiatives and an associated prioritized investment program, in which emphasis will shift from exportlimport routes, where rehabilitation progress has been good, to rehabilitation of rural roads. Lending for other economic infrastructure would support rehabilitation of urban infrastructure services, extensions to the electricity generating, transmitting and distributing capacity to meet medium-term demands, and improvements to rural water supply. 41. The Bank's investment lending in the education and health sectors supports the Government's strategy of restoring basic social services. In the health sector lending will aim to strengthen the primary health care education and delivery systems, with emphasis on the AIDS epidemic, and to improve their financial performance through better planning and budgeting and the development of alternative financing schemes. In support thereof, a study will be undertaken to evaluate the likely economic impact of AIDS assuming the continuation of present trends. In the education sector, the Bank's assistance focuses on the restoration of high-quality education through more efficient use of available resources. Investment lending, to follow the planned sector adjustment operation, would support improvements in the overall quality of education. 42. Longer-term Development Priorities. A key aspect of the Bank's assistance to Uganda is suppport of the Government's strategy for sustainable and equitable long term development. This strategy addresses the alleviation of poverty and meeting the urgent needs of vulnerable population groups (para. 25), effective protection of the environment and the natural resource base (para. 22), and manpower development and the building of institutions to increase the efficiency of public sector interventions and maximize private sector participation (para. 21 and 24). 43. With regard to poverty alleviation, the Bank's assistance strategy has the following four elements. First, the above lending program in promoting growth and diversification will offer opportunities for productive use of labor, including that available within the poorer groups of society. Second, through the dialogue on the public expediture program the Bank will support Government stepping up expenditure allocations for basic social services in the health and education sectors. Third, to enable public institutions to effectively expand the delivery of such services the Bank, through policy dialogue and lending, will support the strengthening of social sector ministries. Finally, the Bank is supporting the Government's special program for the alleviation of poverty and social cost of adjustment. Also, it will work with other donors and NGOs to provide short-term assistance with an impact on the most vulnerable groups in the population, and monitor the impact of the adjustment program on the poor through the Social Dimensions of Adjustment initiative.  - 14 . 44. While the pressure on the environment is not as high in Uganda as in other Sub-Saharan countries, it is increasing and needs to be addressed to sustain economic growth. The Bank supports the Government's strategy of preparing an Environmental Action Plan, including the strengthening of public institutions involved in environmental management and monitoring. As a first step, it will provide technical assistance to help the Government establish an appropriate institutional and legal framework for environmental protection and to develop cost-effective information systems to meet priority needs of resource users, planners and decision makers. The Bank also supports the development an environmental policy related research capacity at the Makerere University in Kampala. 45. Institutional weaknesses limit the Government's ability to implement the policy agenda and impede project implementation. Issues of capacity building and institutional reform therefore figure prominently in the dialogue and planned lending operations. The Bank's strategy is to address central policy measures in the context of structural adjustment lending. Complementary assistance to improve the government's capacity for economic and financial management and implementation of reforms at the sectoral level will be provided through technical assistance through freestanding operations or attached to individual sector operations. Also. a major study will guide the development of an action plan to remove constraints within the civil service to the effective use of available talent, prepare a medium and long term training program to address key skill gaps, and elaborate a strategy and framework for future Bank initiatives in capacity building. Aid Coordination 46. The Bank will continue to play the lead role in mobilizing external assistance for Uganda. This will be done principally in the context of the Consultative Group (CG) for Uganda and the Special Program of Assistance to debt-distressed low-income countries. The CG meetings have been effective in raising donor support and building consensus around the ERP and its policy agenda. IDA expects to continue to schedule them at 12- to 18-month intervals. Aid coordination meetings at the project level have been reasonably successful; those held at the sector level have been less so, largely because the Government has not been able to present the donors with clearly articulated sector strategies. The Bank's Resident Mission in Kampala will continue its regular meetings of local donor representatives to exchange views on government priorities, major new donor initiatives, and ERP implementation. Aid coordination efforts could be improved, however, if tbe Government were to chair periodic meetings with the local donor community. Overall, the Government's own aid coordination efforts need to be strengthened, and an effective intergovernmental coordination mechanism needs to be established. The Government's role in donor coordination would be enhanced by the development of an accurate and up-to-date data base on donor commitments and disbursements. Assistance to the Government in this important area will be an integral part of the Bank's capacity-building initiative.  - 15 - F. Relations with the IMF 47. The Fund has supported the Government's ERP since June 1987 when the first Structural Adjustment Facility was approved. Since then, the Bank and the Fund have synchronized their support for the program (paras 3-4). Under the three-year arrangement for the Enhanced Structural Adjustment Facility, now in its second year, quantitative benchmarks for domestic credit, the budget deficit, nonconcessional lending, external arrears, and international reserves have been established. They will be closely monitored over the current fiscal year along with structural benchmarks for exchange rate adjustments, reconciliations of the Government's accounts with CMB and BOU accounts, and limitations of barter sales of coffee. The appraisal and supervision of the IDA Economic Recovery Credits have been closely coordinated with the Fund's ESAF missions. Given the importance of the coffee subsector in the economy, Bank and Fund staff since 1987 have maintained a regular dialogue on the subject of coffee subsector policy to ensure consistency between policy measures and the macroeconomic framework. This dialogue is expected to intensify under the proposed credit. G. Summary Assessment 48. Despite the gains achieved during the first three years of ERP, Uganda faces major challenges. The inflationary pressures, now under better control, need to be reduced. Structural reforms in the financial and coffee sectors are required to consolidate stabilization. Strengthened revenue mobilization is required to provide resources for critical economic and social services. The sharp decline in the export price of coffee underscores the need for Uganda to diversify its export base. Civil service reform is urgently required to achieve a streamlined, and manageable service, and the parastatal and financial sector reform programs need to be stepped up. These challenges are reflected in the Government's PFP for the next three years, as well as in the Bank's assistance strategy over the next five years. This strategy has three main elements. First, through its economic and sector work, the Bank will deepen the policy dialogue in key areas of ERP -- namely, financial intermediation, public expenditures, civil service reform, export diversification, and environmental management. Second, the Bank will support the Government's implementation of policy reforms in these and ancillary areas through structural and sectoral adjustment lending. Third, through investment lending, the Bank will assist the Government's continued effort to rehabilitate the country's infrastructure and essential public services. 49. Progress in strategy implementation will be evaluated on the basis of the following three criteria. The first is the Government's ability to implement macroeconomic policies (primarily monetary, fiscal, and exchange rate policies) and sectoral reforms (financial sector reforms and coffee subsector policies) that can accomplish and sustain the financial stabilization objective as measured against the targets for inflation, the fiscal deficit, and credit expansion. The second criterion is the government's capacity to restructure public expenditures to place greater emphasis on primary education, primary health, road maintenance, and agricultural support services, and to implement a comprehensive reform of the  - 16 - parastatal sector and the civil service. The third and final criterion is future growth and diversification of the economy (measured by the dependence of the economy on coffee for export earnings and government revenues). The policy environment should encourage private sector investment and continued progress in the rehabilitation of the economic infrastructure. PART 1I - THE AGRICULTURAL SECTOR A. Introduction 50. Agriculture dominates Uganda's economy. It accounts for over two- thirds of the GDP, 99 percent of export earnings, 80 percent of employment, and 40 percent of government revenues. Its contribution to the economy is even larger if one considers that agriculture is the economic base for much of the manufacturing and service industries. The country is endowed with some of the best agricultural land in Sub-Saharan Africa. It has a benign climate with good rainfall and low temperature variability. Some 85 percent of a total arable land area of 6.3 million ha is cultivated, predominantly by smallholders and with prominent participation by women. A cultivated area per capita of about 0.4 ha indicates that pressures on arable land resources are not as severe as in many other Sub-Saharan countries. 51. The 'low-resource agricultural system uses labor as the principal input, involves relatively low cash costs and productivity per unit of labor and land, and produces a limited marketed surplus (30 percent of food crop production is marketed). Farmers reduce risks by diversifying their crops and integrating farming with livestock keeping. Food crops dominate agricultural production in terms of contribution to GDP as well as land under cultivation. Coffee, by far the most important cash crop, accounted for over 95 percent of all export earnings in 1989. Uganda's reliance on this single crop for export earnings is more pronounced today than it was 15 to 20 years ago. The economy's extreme vulnerability to external shocks was amply demonstrated in 1989 when the International Coffee Agreement collapsed, prices plummeted, and Uganda's export revenues dropped by US$100 M from programmed levels. Consequently, the Government attaches highest priority to the diversification of the agricultural export base. 52. The agricultural sector under the Economic Recovery Program is recovering from the devastation of two decades of political instability and economic mismanagement. However, the production levels generally remain below 1965-70 levels. Further growth in production depends on a policy environment that is conducive to private sector initiative and is supported by adequate infrastructure. Sound agricultural support services also are important. While the agricultural sector remains the main engine of growth for the economy, its performance, particularly that of the coffee subsector, directly affects financial stabilization. Developments over the past two years have demonstrated that the performance of the domestic coffee industry has major implications for monetary and fiscal objectives through the demand for crop finance and generation of foreign exchange and export duty revenue. Hence,  - 17 - the Government in September 1989 began implementing coffee subsector policies designed to safeguard the objectives of the stabilization program (para. 55). B. Recent Performance 53. Over the period 1981 to 1989 the agricultural sector (including crops, livestock, forestry, and fishing) contributed on average 70 percent of GDP at factor costs. Food crops accounted for 76 percent; livestock products 16 percent; cash crops, 4.5 percent; and forestry and fishing, 3.5 percent. During the same period, GDP growth in agriculture averaged about 2 percent per annum, with the rate of growth rising to an everage of 5.5 percent per year over the period 1986 to 1989. While real output of cash crops showed marginal growth over the past decade, that of food crops has grown at an average rate of 2.7 percent since 1981 and by 6.1 (over 10 percent for the marketed surplus) since 1986. The growth registered over the past four years comes primarily from the improved security situation and an improved transport system. It also reflects better availability of agricultural inputs, brought about by the liberalized trade and foreign exchange allocation regimes and increased donor-funded import support. 54. The recovery of food crop production since 1986 represents an expansion in the area cultivated rather than increased yields. It was facilitated by the rural population's rehabilitation and cultivation of abandoned or new lands, improved security and economic opportunities enabling a more dynamic labor market. restoration of rural marketing services, and the removal of obstacles to trade in food crops through the simplification of licensing regulations and the opening up of export trade to the private sector. Also, distortions in the producer incentive structure (para. 56) have drawn labor from cash crops into food crop production. The slow recovery of production in the livestock subsector has been primarily caused by the animal population declining by 30 percent over the past fifteen years due to looting and deteriorating disease control. A reversal of this trend is a high priority. 55. Of the cash crops, coffee, sugar, and tobacco production grew significantly in the past four years. The reactivation of the once flourishing cotton industry in Uganda has been hampered by the late return of security to the north, lack of producer incentives as determined through the administered pricing of seed cotton, inadequate seed supply and distribution systems, and an inefficient and financially weak processing sector suppressing primary production. Under these circumstances, the Government's decision to liberalize internal marketing of lint has had little impact. Production of tea remained stagnant until 1989, when Government introduced trade incentives through foreign exchange retention privileges for exporters, and international tea prices simultaneously started to recover. 56. These differentials in subsectoral growth reflect a biased incentive structure. The bias is caused by distortions in export crop prices introduced through the pricing system and the overvalued exchange rate. The distorting effect of the overvalued exchange rate on the prices for cotton and tea was removed in March 1989, when exporters of these commodities were no longer  - 18 - required to surrender their export receipts at the official exchange rate. Coffee, however, remains heavily taxed. An official export tax on coffee is retrieved as the difference between the export price and the sum of the fixed producer price and processing and marketing margins. The total export tax levied on the producer has fluctuated over the past six years between 75 and 90 percent and presently stands at 65 percent. 21 The effective tax on coffee farmers is even higher considering that the fixed processing and marketing margins reflect inefficiencies of the marketing agents (para. 60). Prices for food crops, on the other hand, remain freely determined by the market. C. The Coffee Subsector and Financial Stabilization Recent Developments 57. The amount of coffee procured annually by the Coffee Marketing Board increased by 20 percent between 1986 and 1989 as farmers sold off coffee stored during the civil disturbances. Favorable rains contributed to the substantial increase in CMB's purchases in 1989. As of end May 1990, procurement during the current crop season (starting October 1, 1989) was about 30 percent below the corresponding level in 1989. This is the effect of Government's policy decisions in September 1989 to enforce higher quality standards and exercise tighter control on crop finance credit. It also reflects the Government's policy to contain producer prices in order to reduce crop financing requirements, the budget deficit, and inflation. The large fall in the world market price of coffee since 1989 has reinforced these concerns. Thus, between 1986 and 1989 incentives to coffee farmers fell dramatically, as the Government-controlled producer price was reduced by over 50 percent in real terms. The fact that coffee supplies to CMB under these circumstances did not decline reflects in part a relatively low price elasticity of supply in the short run. In the longer term, however, falling real prices will have a large effect on production levels as farmers neglect proper cultivation practices, thus reducing the productivity of coffee trees; fail to replace overaged trees with new ones; and adjust their farming strategies to changing relative prices. 'While the analytical base does not allow quantitative conclusions regarding supply behavior, it is generally considered that the fall in coffee deliveries to CMB during 1990 in part reflects such long-run adjustments by farmers. To mitigate against these developments, the Government needs to substantially increase coffee prices to farmers. Crop Finance Demand 58. The economy depends on coffee for foreign exchange, government revenue, and cash income for the rural population. Therefore, subsector policies need to be consistent with macroeconomic objectives, particularly the 21 Measured as the difference between the producer price and the export price calculated at the market exchange rate (net of marketing costs).  - 19 - stabilization objective. Given that demand for coffee crop finance constitutes a substantial share of overall credit requirements (27 percent of total domestic credit and over 40 percent of private sector credit over the past three years), effective management of such demand is critical for financial stability. This was amply demonstrated by the credit expansion and the dramatic rise in inflation during the latter part of FY89. 59. Coffee crops must be financed because of the lag between procurement from farmers and export shipment by CMB.3/ Financing has traditionally been met by commercial banks, with marketing boards on-lending to cooperative unions and to primary societies. Demand for crop financing has increased steadily wn real terms in recent years. Between the coffee year 1985186 (CS86) and CS90, crop finance utilized by procurement agents per ton of coffee handled ard by CMB per ton of coffee exported increased in real terms by over 250 and 80 percent, respectively. As a result, coffee crop finance has doubled its share of total credit issued by the banking system, reaching 35 percent in FY90. The increase in the demand for credit indicates growing inefficiency in the use and allocation of credit. 60. Underlying these developments are the following structural problems. First coffee crop financing depends heavily on institutional credit. As a statutory board, CMB the main borrower is unable to raise its own funds under present pricing arrangements. Moreover, the generally poor financial situation of cooperatives, to which extensive war losses and excessive diversification of activities have contributed, precludes significant internal financing. Second inefficiencies in CMB and the cooperatives increase the financing needed to hold and process stocks. CMB suffers from inadequate financial management and inventory control procedures. Cooperative uni-ns operate at low levels of capacity with excessive overheads, and their weak management structures are often subject to political interference. Third primary, secondary, and tertiary buyers all draw cash advances from the Bank of Uganda (the Central Bank) or commercial banks to finance their coffee crop purchases. This puts excess liquidity in their hands and has enabled cooperative unions to divert crop finance funds to purposes other than crop procurement. Fourth BOU's direct financing of CMB has led to inefficient negotiation of export bills and has increased CMB's short-term demand for credit. Finally the Government maintains a policy of unlimited coffee procurement. If exports do not expand along with procurement, such a policy automatically raises crop finance requirements. Institutional Arrangements for Crop Finance 61. Concerns about delayed payments to farmers, poor liquidity in commercial banks, marketing board loans to noncreditworthy cooperative unions, and the commercial banks' apprehension about deteriorating financial management of CMB led the Government in December 1988 to direct BOU to assume sole responsibility for providing crop finance at all levels of the marketing 3I The term 'crop finance' refers to financing required for the purchase, transport, processing and marketing of export crops. Coffee accounts for more than 80 percent of overall crop finance demand.  - 20 - chain. BOU's advances were made either directly to CMB or through commercial banks to intermediaries at the processing stage (cooperative unions) and the procurement level (primary cooperative societies). Private processors continued to receive credit directly from commercial banks. These measures caused crop finance credit to expand more than coffee stocks warranted, thereby contributing substantially to the unprogrammed expansion of overall credit that caused the inflationary pressures during the latter part of FY89. There were several reasons for this. First, the new system eliminated farmers' contributions to the financing of crop procurement by substituting cash payment on delivery for chits issued by primary buyers. Second, BOU gave CMB an unlimited overdraft facility, which encouraged CMB's continued inefficient use of credit. The main reason for the surge in credit, however, was the Government's failure to pay CMB promptly for large quantities of coffee diverted for barter trade. 62. In response to these developments, the Government in September 1989 began implementing measures to help keep credit within the ESAF monetary benchmarks. These measures, supported under ERC II, included: (a) the enforcement of stricter quality standards for coffee sold to CMB, which was expected to slow down coffee procurement, and (b) the establishment of a Coffee Subsector Budget (CSB) for CS90. The CSB set targets for crop finance credit (based on physical and financial benchmarks reflecting better performance standards), export proceeds and tax revenues, and CMB's exports and stock-holding -- all to be supported by a comprehersive monitoring system. For barter trade, the Government has agreed under the second annual ESAF arrangement, (that is, for PY91), to limit barter sales of coffee to 60,000 bags a quarter or a cumulative total for the fiscal year 1990191 of 240,000 bags. It has also agreed to pay CMB before any barter shipments of coffee take place and to settle its debts to CMB on a quarterly basis. 63. The above initiatives were designed to bring the growing demand for coffee crop finance under better control. However, the performance of the coffee subsector as recorded over the first three quarters of the CS90, (up to June 30, 1990) indicates that such control has not been fully achieved. Notably, coffee crop finance credit outstanding (USh 21.2 billion on May 30, 1990) exceeded that at the end of the last coffee year (USh 20.6 billion on September 30, 1989). During the same time, procurement prices remained unchanged, procurement dropped 30 percent, and exports dropped by 20 percent. CMB's stocks were reduced by more than 50 percent. As a result, the amount of crop finance utilized per ton of coffee procured and exported rose significantly in real terms. These developments illustrate two things. First, the Government needs to establish an effective system for monitoring the implementation of the CSB to ensure that credit delivery conforms to approved benchmarks. Efforts to accomplish this are being implemented under ongoing IDA credits and will be further monitored under the proposed credit. Second, the Government's coffee subsector policy actions initiated in September 1989 did not address the structural problems that cause inefficient use, and increased demand for credit (para. 60). These problems will be addressed under the coffee crop finance and marketing interventions of the proposed credit.  - 21 - D. Growth Opportunities, Development Constraints, and Strategy Growth Sources and Constraints 64. While seeking to diversify the economy, the Government is looking to the agricultural sector as the main source of growth. Such growth is required to boost foreign exchange earnings and to meet increasing domestic consumption as population and incomes rise. If agricultural technologies currently practiced in Uganda were to prevail, the country by the year 2000 would run short of arable land to support domestic food crop demand. This would leave little or no room for producing export crops to earn foreign exchange, and the pressure on land resources would increase. With improved production technologies and current long-term projections for crop prices, Uganda's comparative advantage remains with the traditional export crops: coffee, cotton, and tea. 4/ Of the food crops presently produced, some are regionally competitive. International competitiveness, however, is limited by high transport and handling costs resulting from Uganda's landlocked position. 65. In the short to medium term, prospects for recapturing of lost export markets for the traditional export crops offer important opportunities for growth. Tea exports in 1989 represented about 20 percent of annual exports in the early 1970s; with less than half of the country's 20,000 ha planted with tea being cultivated. Improved prospects for international prices and recent actions to liberalize tea exports and grant foreign exchange retention privileges should encourage rehabilitation of tea estates and smallholder gardens as well as the reintroduction of known yield-improving husbandry practices. The remaining constraints are inadequate incentives to smallholders (that is, export incentives need to be passed on to smallholders), weak leaf collection and extension services for smallholders, inefficient and financially bankrupt parastatals owning and managing tea factories, and unresolved issues of ownership of expropriated estates. 66. The potential for growth in cotton production lies in increasing the present low average yield (around 400 kglha) and the area under cultivation. Yield improvements are achievable with existing cotton seed varieties, provided the farmers' price for cotton is raised relative to prices for competing food crops. Other key constraints are a seed distribution system that has ceased to function and financially weak and inefficient cooperative unions that control ginning. These unions remain tied to the Lint Marketing Board for sale of their lint. The development of improved seed varieties with prospects of yields beyond 1000 kg/ha represents another longer term source of growth. To realize it, the necessary adaptive research needs to be initiated now. In the case of coffee, the sources of growth are improved quality and increased yields from better husbandry practices and the replanting of coffee trees. Overaged robusta coffee trees should be replaced with the higher valued arabica species wherever feasible. The main constraints are the 41 Given present low level of farming technology and depressed international prices for its traditional export crops, Uganda's comparative advantage in the short term lies with food crops such as bananas and beans.  - 22 - noncompetitive export trade, inadequate export trade incentives, distorted producer prices, and the shortage of suitable replanting material. 67. Sustained sectoral growth depends on farmers adopting improved production technologies and the development of nontraditional exports, including horticultural products. Improved technical messages are already available for some crops, such as maize and beans, and can substantially raise yields provided the extension system is made more efficient. To this end, constraints related to funding, fragmentation of extension services, and the dilapidated state of supporting facilities will have to be addressed. To help producers raise productivity further, an expanded program for food crop research is essential. Such a program needs to develop appropriate technologies and practices for seeds and planting material, soil management, weed management, pest control, postharvest handling, storage, and marketing. The main impediment is the absence of an organizational structure within which a prioritized national agricultural research plan can be cost-effectively implemented. 68. The development of nontraditional exports is being encouraged under the recently introduced export-import scheme for noncoffee products. The key constraints on export diversification, apart from the weak agricultural research and extension services, are the political and financial environments and the inadequate infrastructure for moving agricultural products from primary production centers to the international transport network. While considerable progress has been made toward restoring the private sector's confidence in the Government's ability to manage the economy, the private sector remains hesitant and uncertain about the Government's intentions and policy initiatives. Growing stability and economic progress will establish the required confidence. 69. Growth with diversification involves import substitution as well as export diversification. Prospects for import substitution include dairy, sugar, tobacco, and edible oil production. In dairy, the key constraint is the inefficiency of the fresh milk collection and processing system, controlled and operated by a parastatal agency. Growth in sugar p-oduction is dependent on the completion of the rehabilitation of sugar estates, timely access by sugar companies to the necessary foreign exchange, and a pricing policy that ensures efficient import substitution. The development of domestic production of edible oil depends on increased domestic production of oilseeds. To pave the way for the rehabilitation of oilseed mills, the Government must resolve issues of ownership of these assets. 70. Adoption of improved agricultural practices and diversification in production and exports involve adjustments by farmers of production strategies as well as investments in new technology. Such decisions and investments must be supported by effective agricultural support services, including research and extension, as well as by efficient markets for transfer of land ownership. The effectiveness of agricultural research and extension has been eroded by destruction of infrastructure, loss of skilled manpower due to inadequate wage incentives, and totally inadequate operating funds. The challenge is to create a lean and sustainable organization for research and extension to address the main technical constraints facing farmers. Complex land tenure  - 23 - systems and the abolition in 1975 of all freebolds of land have limited the ability of progressive farmers to acquire land. Other negative consequences include deforestation and encroachment on reserve lands as well as abuses in land management. Revisions to the present legislation and the rehabilitation of the land administration system are being initiated with Bank assistance. Implementation of land reform requires an improved understanding of the performance of land markets, the relationship between tenure systems and productivity, and the feasibility of policies determining access to common resources. Investments in the above areas of agricultural research and sectoral management are therefore indispensible and immediate complements to the Government's Agricultural Sector Adjustment Program (Part III). Public Expenditures and Sectoral Management 71. Expenditures in the agricultural sector are spread over production, marketing, and service activities, thus reducing the effectiveness of interventions. The allocation of recurrent expenditures heavily favors salary costs primarily because of serious overstaffing in the unskilled ranks. This allocation renders the essential support services inoperative. The agricultural sector investment program, which accounts for about 25 percent of the Rehabilitation and Development Plan, needs to be revised to ensure compatibility with objectives for public sector interventions and implementation capacity, including the availability of funding for recurrent costs. 72. Weak institutions for agricultural sector planning, project implementation, and monitoring contribute to low returns on public expenditures in the sector and constrain agricultural development. Responsibility for sectoral management is fragmented, and the central planning agency (the Ministry of Planning and Economic Development) is unable to provide the necessary leadership and coordination. The fundamental problems, however, are those facing the country's civil service as a whole -- namely, inadequate salaries, shortage of skilled personnel, overstaffing in unskilled ranks, and insufficient funding of operating and maintenance costs. The solution depends on successful economic recovery and comprehensive civil service reform, including rationalization of ministerial functions and programs (para. 24). Since economic recovery depends on improved public sector efficiency, it is essential for the Government, anticipating progress in civil service reform, to strengthen agricultural sector planning by upgrading planning skills. The Government also needs to improve coordination between the central planning ministry and the four agricultural line ministries (Ministry of Agriculture, Ministry of Animal Industry and Fisheries, Ministry of Cooperatives and Marketing, and Ministry of Environment). Sectoral Development Strategy 73. The Government's strategy for agricultural development addresses the tecbnical, economic, and institutional constraints referred to above and the sectoral objectives reviewed earlier (para. 18). Hence, as spelled out in its Letter of Agricultural Policy (Annex 4), the Government intends to:  - 24 - (a) establish and maintain an efficient incentive and regulatory environment built on the principles of market-determined prices and reduced public sector involvement in marketing, (b) strengthen its agricultural support services, particularly in the areas of research, extension, and educatior, (c) pursue coffee subsector policies consistent with the stabilization objectives, (d) improve the efficiency of the public expenditure program and concentrate public investments and expenditures in areas where the private sector cannot directly capture the returns such as agricultural research and extension, preventive veterinary services, and natural resource conservation, (e) strengthen sectoral planning and project implementation by upgrading planning skills and coordinating the planning process. 74. The Government will continue to improve the infrastructure supporting transport, processing, and marketing of agricultural products. The Government's medium-term program for the implementation of these strategies is described in Part III. PART III - THE AGRICULTURAL SECTOR ADJUSTMENT PROGRA( 75. The Agricultural Sector Adjustment Program (the Program) is presented in the Government's Letter of Agricultural Policy (Annex 4). The Program sets out the reform agenda for implementation of the Government's agricultural sector strategy. It complements the Government's macroeconomic and cross-sectoral policies to promote ERP's stabilization and growth objectives. The Agricultural Sector Adjustment Program has two objectives. The first is to support financial stabilization (by controlling credit expansion through improved institutional arrangements for financing coffee crop procurement and restructuring marketing intermediaries). The second objective is to promote agricultural growth and diversification (by creating competitive systems for processing and marketing export crops through institutional reform, enhancing coffee export incentives through price and tax reform, making public spending more efficient, and strengthening agricultural research and extension institutions and sectoral management). 76. The Program emphasizes reform of the coffee subsector. This reflects the importance of consolidating and improving the stabilization gains already made. The close link between the coffee subsector and the stabilization objective (Part II, Chapter C) will remain until the agricultural sector and the economy have diversified. In addition to revising the institutional arrangements for coffee crop financing, the reform program involves opening up coffee exports to the private sector, converting CMB into a commercial marketing organization, and a gradual freeing up of the administered pricing system, initially by rationalizing the system of coffee  - 25 - taxation. To be effective, these initiatives have to go forward jointly in an orchestrated manner. A. Coffee Crop Financing and Marketing Reform Coffee Crop Finance Reform 77. The structural problems underlying the increasing demand for crop finance and the inefficient use of crop finance credit were reviewed earlier (para. 60). The Government is addressing these problems by revising the institutional arrangements for coffee crop financing and simultaneously restructuring the coffee marketing system and its marketing intermediaries. Specifically, the Government has taken actions to transfer the full responsibility for direct lending for coffee crop financing from BOU to the commercial banks. The actions are designed to regularize crop finance lending on a commercial and sustainable basis. 78. The principles underlying the revised arrangements are as follows: lending by commercial banks should be supported by a minimum level of internal financing by marketing intermediaries (corresponding to the base working capital required), and BOU should provide refinancing of commercial bank loans in case of need. Lending will meet financing requirements over and above the minimum finance required during the year (the base working capital). The BOU and commercial banks, through a Memorandum of Understanding have agreed on principles governing extension of credit for CS91, lending terms and conditions, arrangements for sharing of export bills, and monitoring by BOU. BOU has issued to commercial banks guidelines for refinancing coffee crop finance loans starting with CS91. Lending by commercial banks will be on regular commercial terms at interest rates set within ceilings determined by the Government. At the current rate of inflation, these interest rates are positive in real terms. Under the ongoing ESAF arrangement, the Government has agreed with the Fund on a formula for adjustment of interest rates to ensure that they remain positive. As a condition for the release of the second tranche, the Government will, in the context of the macro-economic framework as set out in its PFP for FY91-93, continue to apply policy measures to ensure that positive real interest rates on commercial bank loans, including crop finance loans, are maintained. 79. In the case of the Coffee Marketing Board, the transfer of crop finance lending from BOU to the commercial banks has been facilitated by the following actions. First, based on a reconciliation of CMB's net trading assets, the Government has settled its outstanding debt to CMN which occurred on account of barter sales and excess duty recovered. The ESAF arrangement provides for future prompt settlement of Government transactions and debts with CMB (para. 62). Second, using the proceeds of the sale of foreign exchange from the proposed credit, the Government has decided to provide CMB with equity capital to enable it to internally finance its base working capital requirements for CS91 'estimated at USh 9.5 billion) and CS92. Pending the realization of such proceeds, BOU has deferred CMB's repayment of its outstanding debt, equivalent to the base working capital required by CMB for CS91. CMB's repayment of such debt to BOU has been guaranteed by the  - 26 - Government, pending the intended settlement by the Government of such debt with BOU on behalf of CMB using counterpart funds to be generated under the proposed credit. Third, on the basis of the above arrangements, BOU has formally terminated its crop finance facility for CMB, thereby allowing CMB to conclude a crop finance agreement with commercial banks. As a condition of second tranche release, the Government will inject additional equity capital into CMB to meet CMB's incremental base working capital for CS92. The amount required will be determined in the context of the Coffee Subsector Budget by projected levels of procurement and the magnitude of future adjustments of producer prices and processing margins. It will also reflect CMB's ability to meet any incremental base working capital requirements from retained profits, that is from the profit element which, starting with the CS9l, has been included in the fixed margin for coffee exporters. After CS92, CMB is expected to finance its incremental working capital requirements through retained trading surpluses. 80. The Government is strengthening the system for coffee subsector budgeting and monitoring. A Coffee Subsector Monitoring Unit (CMU) has been established in the Agricultural Secretariat of the Bank of Uganda. The CMU, following annual work plans, will prepare annual CSBs, monitor subsector performance relative to CSB targets, analyze actual versus targeted outcomes, report quarterly on its findings, and recommend appropriate revisions to targets and corrective policy measures. The Government's Economic Monitoring Committee is responsible for initiating appropriate policy decisions based on its review of CMU's reports. The annual review of ongoing CSBs and the adoption of new CSBs, including work plans for their implementation, will be undertaken in consultation with IDA prior to the start of each coffee crop season. Based on a detailed review of the implementation of the Coffee Subsector Budget (CSB) for CS90, the Government has established a CSB for CS91 with an accompanying work plan. To help CMB implement the plan, arrangements have been completed, with financing from ERC II, for recruitment and training of staff and the installation of a computer-based monitoring system. As a condition of release of the second tranche of the proposed credit, the Government will implement the coffee subsector budgeting and monitoring system according to the adopted work plan and establish a CSB for CS92 that is satisfactory to IDA. Restructuring of the Coffee Marketing Board 81. The export monopoly and coffee procurement monopsony enjoyed by CMB for 20 years have been abolished (para. 87). However, until the private sector has firmly established its capability to competitively handle Uganda's exports, CMB will play a major role as exporter. To enable CMB to perform this task in a cost-effective way and within a competitive marketing system, the Government has begun a program to restructure CMB into a commercial marketing organization capable, inter alia, of retaining trading profits, generating own funds for financing base working capital requirements, and paying its employees adequate incentives. 82. During the first phase of the restructuring program, the following measures have been completed. First, CMB's regulatory functions have been transferred to the Ministry of Cooperatives and Marketing, pending the  - 27 - establishment of a separate regulatory body. Second, within the framework of the Coffee Marketing Act, the Government has ensured that CMB is able to retain trading profits and receive equity from the Government. Third, CMB management has completed key actions toward improved inventory, financial, and marketing controls. These actions include the establishment of standardized procedures for stock reporting, cash budgeting consistent with the Coffee Subsector Budget, and monitoring of such a cash budget -- all satisfactory to CMB's financiers. A marketing plan for CS9l has been adopted based on a detailed review of its commitments, stocks and expected procurement. The plan is consistent with the cash budget and the overall limits for barter sales as per the ongoing ESAP arrangement (para. 62). Finally, an international firm of auditors has initiated an audit of CMB's balance sheet as of September 30, 1990, based on terms of reference satisfactory to IDA. The auditors have completed an initial assessment of CMBI's coffee stocks and net trading assets, which is a prerequisite for commercial banks to assume the financing of CMB. The audit will also provide a basis for the detailed financial restructuring of CMB. 83. The Government intends to complete the program for financial and institutional restructuring of CMB before the start of the CS92. CMB's financial, inventory, and marketing controls will be further strengthened according to an agreed work plan and with the help of consultants financed under an ongoing IDA technical assistance credit and the proposed credit. Also, the Government will formalize as equity its capital injections to support CMB's base working capital (para. 79). As a condition of release of the second tranche, the Government will complete the financial and institutional restructuring of CMB consistent with the findings of the Balance Sheet Audit Report for CMB's fiscal year 1989/90. This restructuring will include the formal contribution of the Government's injections of working capital in CMB for the coffee seasons starting on October 1, 1990 and October 1, 1991 respectively, as equity capital in CMB. It will also include the strengthening of institutional arrangements for development and regulation of the coffee industry consistent with the Government's coffee export liberalization strategy (para. 87). The above restructuring program will allow CMB to operate as a commercial coffee trading organization. In addition, the Government intends to register CMB under the Companies Act to facilitate possible future divestiture of Government ownership. The extent and timing of such divestiture will be determined by the competitive market forces of the liberalized coffee marketing system. Restructuring the Cooperative Unions 84. Some fifteen cooperative unions are engaged in coffee operations. They suffer from worsening liquidity, are under-capitalized, and return little to their shareholders. Because crop finance loans by commercial banks to cooperative unions are no longer backed by BOU guarantees, many unions have difficulty obtaining crop finance. In principle, the Government leaves it to the free market forces to determine the participants in the coffee industry. It acknowledges, however, that the poor state of affairs in the cooperative sector in large measure has resulted from factors outside the direct control of the cooperatives. The Government has interfered in union management, and  - 28 - compensation for substantial losses and damages to assets during the civil disturbances has not been made. 85. The Government has a strong political comnitment to the cooperative movement in Uganda. It supports a program to help the cooperatives regain creditworthiness and financial viability. The Government also intends to hold the unions to performance standards through effective monitoring and auditing and (in the case of coffee) by adopting crop finance benchmarks. The Uganda Cooperative Alliance (the apex organization of the cooperative movement), with assistance from USAID and the Swedish Cooperative Center, is already implementing program components for managerial strengthening and accounting. 86. Interim arrangements have been completed for reorganizing and financing the coffee operations of the three main unions that have entered the coffee export trade. Individual business plans for coffee operations have been established for CS91. They cover procurement, processing and trading operations as autonomous profit centers. To strengthen the financial standing of the unions, a sum of Ush 1 billion, generated from the US PL 480 Import support program, has been made available to the Cooperative Bank for onlending to cooperative unions as term loans. On the strength of their business plans and improved financial standing, the three unions have secured crop finance for CS91. To support these measures, the Government is amending its legislation governing regulatory functions in respect of cooperative societies so as to allow cooperative unions to operate their business independently. To this end, a Cooperatives Societies Bill has been tabled with the National Resistance Council, which is expected to enact it during the 1991 session. The above measures will be followed by the implementation of a comprehensive program for financial and managerial restructuring of the cooperative unions. The responsibility for such a program rests with the cooperatives themselves which are expected to sell off nonproductive assets, cut down overhead costs, strengthen management, increase capital contributions from shareholders, and take other measures to improve their capital base and liquidity. The Government will support the program through appropriate policy action including legal reforms, measures to support mobilization of funds, and compensation for agreed war losses and damages. Under its overall tax reform program the Government will address taxation regulations affecting the cooperative sector. Liberalizing Coffee Marketing 87. As envisaged under ERC TI, the Government has adopted a comprehensive strategy for liberalizing export marketing. As a first step, the Government in September 1990 issued export licenses to three cooperative unions based on their compliance with licensing criteria related to processing capacity, financial standing, and managerial competence. These unions have now started to export coffee. During the second half of the coffee year ending September 30, 1991, the Government intends to broaden participation in exports to also include private sector parties outside the cooperative movement. The Government envisages that the future roles and market shares of CMB and other exporters in coffee marketing will be determined by their ability to procure and export coffee. As a condition for release of the second tranche, the Government will issue coffee export licenses to at least  - 29 - two private sector entities other than cooperatives, qualifying as per adopted criteria for coffee export licensing. It also will take appropriate measures to facilitate a significant increase in the share of coffee exports handled by the private sector. Coffee Taxation and Pricing 88. As the procurement and marketing system becomes more competitive, the Government intends to gradually replace the administered system of pricing with a system in which prices are freely determined by the international market. As a first step, the Government intends to revise the residual system for taxing export revenues (para. 56). This system fails to reward quality improvements and maximization of sales prices, prevents exporters from realizing trading profits, and discourages entry into the export trade. In place of this system, the Government has decided to introduce by the start of FY92, i.e. by July 1, 1992, a system of taxation designed to reward exporters for maximizing export quality and price while safeguarding the Government's revenue objective. With the export tax reform, the fixed marketing margins for exporters will be abolished. The export price less the aggregate of Government tax, producer price, and margins payable to processors will then accrue to exporters as trading profits. Pending the introduction of such a system, the Government has revised the margin for coffee exporters to include a profit element based on the opportunity cost of capital to the exporter. It will monitor the adequacy of this incentives relative to entry into the export trade. 89. The administered margins for processors and fixed producer prices will be abolished once a competitive procurement and marketing system ensures that the farmer receives an equitable share of the export price of coffee. In the meantime, upward adjustments of coffee producer prices are necessary to prevent a decline in coffee production and improve the quality of coffee produced (para. 56-57). Adjustments will provide adequate incentives to induce farmers to adopt yield-improving husbandry and replanting practices. Wherever possible, robusta coffee will be replaced with the higher-value arabica coffee. Price adjustments will also reflect the objective of returning a competitive price and an increasingly larger share of the long- term export price to the farmer and to reward farmers and processors for producing high-quality grades of coffee. They will take into account movements in international prices and the exchange rate, progress in reducing processing and marketing margins through efficiency gains, the development of alternative sources of Government tax revenues, and progress in financial stabilization. Based on these principles, the Government, in consultation with IDA, will twice yearly adjust coffee prices and margins. Hence, the Government, following its devaluation of the USh in November 1990, increased the producer price by 60 percent, the processing margin by 24 percent, and the export margin by 6 percent. 90. As a condition for release of second tranche, the Government will ensure that the profit elements in the fixed export margins are maintained at levels which are adequate to induce entry into the trade and allow exporters to internally raise working capital, and revise the coffee price-grading system to provide incentives for maximization of quality and sales value.  - 30 - Also, the Government will adopt an action plan to implement, by July 1, 1992, a new coffee export taxation system desi8ned to further strengthen the export trade incentives while safeguarding fiscal objectives under the stabilization program. Design and implementation procedures will be based on a study of the implications for government revenues, producer and marketing incentives, and tradeoffs between fiscal objectives and incentives to the subsector. The study, to be financed under the ongoing Second Economic Recovery Credit, will be undertaken by the Government in consultation with IDA and IMF. B. Pricing and Marketing of Other Agricultural Products Pricing 91. It is government policy for agricultural input and output prices to be determined by market forces. However, pending improved access by producers to markets the Government will continue to fix producer prices, and where applicable processing and marketing margins, for the traditional export crops. A major objective is to halt the decline of real producer prices for the traditional export crops and to establish the necessary incentives for farmers to rehabilitate tea production and reactivate cotton production. In line with the 100 percent retention scheme for noncoffee exports, the Government will increase the share of the export price going to producers of cotton, tea, tobacco, and cocoa. Pending price liberalization, the Government will carry out twice yearly reviews and adjustments of producer prices. These reviews will be done in consultation with IDA based on an already agreed methodology. With increased competition in procurement and export marketing of cotton, tea. cocoa, and tobacco, the Government intends to review the rationale for fixing producer prices for these crops and to allow them to be freely determined in the market. Marketing Liberalization and Parastatal Reform 92. The Government has reduced its control of the marketing of agricultural products and inputs in an effort to promote competitive marketing systems that will reduce marketing costs, expand trade, and help diversify production. The Government intends to deepen and broaden these initiatives and couple them with reforms of the marketing parastatals. In the area of food crop marketing, the export monopoly of the Produce Marketing Board (PMB) has been abolished in favor of opening up the export trade to private sector initiatives. Incentives for such participation have been established under the Agricultural Non-Traditional Export Promotion Program in the form of 100 percent foreign exchange retention privileges and associated import entitlements. Based on an ongoing study on the future role and organization of PMB, the Government will restructure it to cost-effectively implement a reduced mandate in food crop marketing and storage. 93. In the area of tea processing and marketing, the Government has abolished the export monopoly of the Uganda Tea Authority. It has also decided to restore the Uganda Tea Growers Corporation (UTGC) as an outgrower service organization financed through cost recovery from outgrowers and to return the ownership and management of UTGC's tea factories to the private  - 31 - sector. The detailed modalities for implementing these initiatives, which will involve financial restructuring of UTGC and its factory companies, are presently being finalized. In cotton marketing, the Government has taken steps to liberalize the internal trade in seed cotton and lint. Farmers are no longer required to sell through the cooperative union ginneries. Ginneries, presently all owned by cooperative unions, are allowed to sell lint directly to local textile mills or for export, rather than through the Lint Marketing Board (LMB), provided they are free of debt to LMB. The operations of LMB will be streamlined, taking into account the recommendations of an ongoing study. In dairy marketing, the Government will gradually reduce the -role of the Dairy Corporation in favor of private sector participation. This initiative will initially lead to ownership and management of district milk collection centers by farmers' organizations. It will be implemented under a National Dairy Development Plan that defines strategies for milk shed development. The plan, including its projected investment requirements will be completed by the end of 1990. It is envisaged that the implementation of the policy agenda in the above areas would be supported under an IDA operation following the proposed credit. C. Sectoral Management Agricultural Research and Extension 94. Agricultural growth and diversification of exports depend largely on the implementation of a program that would reactivate agricultural research and extension services to develop and disseminate new technologies (para. 70). Such a program is urgently needed. Implementation requires reform of the institutional framework for research and extension as well as funding of facilities and individual program elements, some of which are ready for implementation and will have a relatively quick effect on the sector's supply response. The Government is preparing a national agricultural research plan with IDA financed assistance from the International Service for National Agricultural Research. It intends to establish a semiautonomous national agricultural research organization to manage the implementation of the research plan. Detailed arrangements for the establishment of such an organization are expected to be finalized by March 1991. As a condition for release of the second tranche, the Government will establish a semiautonomous National Research Organization to plan and oversee the implementation of a national agricultural research program satisfactory to IDA. 95. The Government also intends to adopt and implement a strategic plan for reorganizing and managing sustainable agricultural extension services. Proposals for such a plan are being prepared with assistance from UNDP, FAO, and IDA. The Government relies on continued broad support from the donor community for the implementation of these initiatives. To this end, the Government has requested financing from IDA for a proposed National Agricultural Technology Development and Training Project.  - 32 - Public Expenditures 96. In the context of ERC II, the Government is consulting with IDA on the size and composition of the overall Rehabilitation and Development Plan for the period FY91 to FY93, the composition of recurrent expenditures, and appropriate levels of nonsalary operating and maintenance expenditures in key sectors. Measures to strengthen expenditure control and monitoring and improve efficiency of public investment will be based on the findings of the Public Expenditure Review (paras. 23 and 34). The outcome of this review is expected to be discussed with the Government in January 1991. 97. The Government recognizes the need to improve the efficiency of government expenditures in the agricultural sector (para. 71). It will regularly review the agricultural RDP to ensure that projects conform with criteria for public sector intervention (para. 73) and that investment priorities reflect subsector development strategies, the implementation capacity of Government ministries, and the availability of funds to support recurrent costs. New projects will be added to RDP only when all priority projects within the sector are fully funded. The annual budget process will ensure adequate funding for recurrent expenditures to support effective implementation of priority projects. Action will be taken to enhance and target the recurrent budgets of the agricultural sector ministries to priority areas of public intervention. In particular, the Government will adopt an agricultural RDP for FY92 to FY94 that identifies high priority projects, with a recurrent budget allocations for FY92 reflecting: (a) progress by the Ministry of Agriculture and Ministry of Animal Industry and Fisheries in privatizing state-farms and commercial marketing and service activities and adjusting the extent of land and number of group employees retained to a level that is consistent with the national research program; and (b) an increase in real terms in the allocation for non-wage operating expenditures for selective high-priority research and extension activities compared with FY91 allocations. PART IV - TEE AGRICULTURAL SECTOR ADJUSTMENT CREDIT (ASAC) A. Orisin, Obiectives and Main Features Oriain 98. In September 1988 the Government asked IDA to finance a broad-based agricultural project to enhance the agricultural sector's supply response under the Economic Recovery Program. Such a credit would complement IDA assistance under the Economic Recovery credits by financing the importation of agricultural inputs in support of the Government's implementation of its agricultural policy agenda. This agenda was broadly defined in the Government's Policy Framework Paper for 1988/89 to 1990191, and it was updated in subsequent PPPs. Developments during the first half of 1989 demonstrated the urgen\.y of establishing a package of coffee subsector policies to promote stabilization (Part II, Chapter C). The Government and the Bank in November 1989 agreed on a first set of such policy measures under ERC II. These  - 33 - measures needed to be followed by more comprehensive coffee subsector reforms, emphasizing revisions to the institutional arrangements for crop finance and associated restructuring of CMB. Preparatory work for such reforms proceeded under the guidance of the Agricultural Policy Covmittee (APC) with close involvement of the Bank of Uganda, the Ministry of Cooperatives and Marketing, and the Coffee Marketing Board. An IDA mission in March 1990 reviewed this work. Ar. IDA mission to appraise the Agricultural Sector Adjustment Credit (ASAC) took place in May 1990. Objective and Main Features 99. The proposed ASAC supports the objectives of the Government's Agricultural Sector Adjustment Program (para. 75) and responds to the need for balance of payment support to help reduce Uganda's projected external financing gap (Annex 1, Table 2). The project is a hybrid consisting of a sector adjustment component and a complementary investment component. 100. The adiustment component of the project, supported by quick- disbursing funds equival-ent to US$85 M for importation of essential sector inputs including fuel, would monitor government actions that are critical to achieving the objectives of the Program, in particular its stabilization objective. Actions by the Government to implement the Program as well as actions to be completed as conditions for release of the second tranche were discussed in Part III. They are summarized below (Table 1) and are also shown in the policy matrix attached to the Government's Letter of Agricultural Policy (Annex 4). The Working Papers in the Technical Support Volume elaborate on the background to and justification for the above reforms. 101. The investment component of the project, at a total cost of US$16.6 M, would support the Program's growth and diversification objectives and strengthen the Government's capacity to implement the Program. The focus of the component is therefore on strengthening agricultural research and extension services, development of land policy reform through support for land policy research, and institutional and human resources development to improve sectoral management. The emphasis on support for agricultural research and extension would bring the key role of science and technology in the agricultural development process into sharper focus at the highest level of economic management within Government, and it would help to broaden the ownership of the sectoral reform program. The Investment Component 102. The investment component would consist of the following programs and support activities (details in Annex 6 and the Technical Support Volume). All of the costs below refer to base costs. (a) A Read-Start Program for Agricultural Research and Extension (US$6.0 M). HARE would implement high-priority adaptive research and extension activities through a series of subprojects. The activities would focus on production constraints and adaptive research to fine-tune technologies and improve their dissemination. The Program would involve selective renovation and minor construction of research facilities, office facilities, and District Farm Institutes; acquisition of vehicles and equipment; payment of staff allowances  - 34 - and incentives; training of research and extension staff as well as farmer training; and technical assistance. (b) A Program for Strengthening of Agriculture Sector Planning (US$2.7 M). The aim of PASP is to improve the efficiency of development project implementation, policy reform implementation, and project preparation and appraisal. The program would rationalize responsibilities among central and sectoral planning agencies, introduce improved planning procedures, and develop planning skills. The program also would provide for local and overseas training, planning specialist services, office and logistical support, and incremental operating costs including local staff allowances. (c) Land Policy Research Program (US$1.2 M). LPRP would complement ongoing USAID-financed efforts to enhance the capacity of the Makerere Institute for Social Research (MISR) for sustained applied research in land access and policy development. The link between this research and policy formulation and implementation would be reinforced by strengthening the role of the Agricultural Secretariat in research planning and in disseminating research findings. LPRP would upgrade the skills of MISR staff through overseas training, rehabilitation of office and housing facilities, logistics support (transport and equipment), and workshops and study tours for research staff and policymakers. (d) Support for Coffee Subsector Management (US$1.5 H). CSM would assist the Coffee Marketing Board in implementing its restructuring program and the Government in the detailed design of subsector policy reforms. The support to CHB (US$1.2 H) would be for management advisory services, a training program for senior technical staff, consulting services to establish a management information system, and improvements in communication facilities. Consultant services for design of coffee subsector reform and implementation modalities would include Coffee Export Taxation Study and advisory services for the Agricultural Policy Committee (US$0.3 4). (e) Support for Project Coordination and Monitoring (US$2.8 M. This includes a Project Preparation Facility Advance of US$1.3 M, provides for staffing, logistics facilities, and operating costs of a Project Coordination Unit, and support for the Agricultural Policy Committee's oversight function.  UGAIQA AOttCaL1UlAL SEC=iYRDJUSTWENT CREDIT TABUE 1 - ACTIONS TO BE MOrnIORED UWDER TW CREDIT SUBSECTOR ACTIONS COMPLETED PRIOR TO 80ARD PRESENTATION CONDITIONS OF SECOND TRANCHE RELEASE Coffee Crop (a) Satisfactory Implementation of the Coffee Subsector (c) In the context of tho macroeconomic framework as Finnnce Budgeting and Monitorlng System for the coffee year 1989/90 set out in the Government's Policy Froamwork Paper (CS90), and adoption of a Coff-e Subector Budget for CS91, (FY91-FY93) continua to apply policy measures to Including a work plon for tho Coffee Subsector Monitoring Unit ensure thot positive real interest rates on to monitor ite implemntotion (pore 80). 1/ coemercinl bank loons, including crop finnnce loans are maintained. (b) Execution of a Memorandum of Understanding between the Bank of Uganda (QBO) and Coemercial Banks to fund coffee crop (b) Progruos in implementotion of the Coffee finance requirement for CS91, and iswue by BOU of It. Subsctor Budgeting and Monitoring System for the guidelimne for refinancing crop finaonc loans (pars 78). CS91. according to an agreed work plan. and adoption by the Government of a Coffee Subcector Budget for (c) Settlemnt by Government of its due to the Coffee CS92, satisfactory to IDA (parn 80). Morketing Board (CMH) (par* 79). (d) Injection of fresh capital in CMB by the Government, adequate to cover CMb's bas working capital requiremnto for CS91 (pare 79). (e) Termination by CCU of it. crop finance facilitu with CMB, thereby allowing cemercial banks to assume CMB financing (pore 79). CMB Restructuring (f) Separotion of regulatory from trading functions (pars. 82). (c) Complete the financial ond institutional restructuring of CMB satiefactory to IDA, consistent (9) Satisfoctory progress by CMB on implemetation of an with the findings of the CMB Balance Sheet Audit organizational restructuring program in respect of finoncial, Report, including formalizing Covernant's injection inventory and morketing controls (pars. 82). of working capital to CS91 so contribution to CM8'e equity, providing additional equity capital, so (h) Ensure that CMB is epmpered to obtain crop finance from required, to meet CMB's Incremental bas working co"mercial banks, retain trading profits, and receive equity capital requirements for CS92, ond strengthening fro the Government (pars. 82). institutional orrangements for developmenot *nd regulation of the coffe industry consistent with (i) Initiation by an intornotional firm of auditors of audit of tho Govoenment's coffee export liberolization CMB'e balance sheet as of September 30, 1990 (pars 82). strategy. (paers 79 and 63). g/ The Coffee Subsector Budget e stblihes monthly torgete for: (i) crop finance credit based on physical and financial benchmrks, reflecting expected performance standards; (ii) *xport proceeds and tax revenues; and (iii) CMB performance with respect to exports and stockholdings. Monitoring of actual performance relative to CSS targets will enable Governmnt toidentify in a timely fashion appropriote corrective policy interventions required to ensure consistency of coffee eubsector performonce with macro-economic objective.  E CTOA CTION1 COMETED PRIOR TO OA PSEWITATION CONDITIONS OF SECOND TRAIOCE ELSE C.peetiue Unto (I) Put Is plae 11- orr we te_. te reee ganeti.n mgstre.tering end and fINeWclio et of coffe. eOps: l.eiding viAl, business upevieiee Plane for coopertive maim lieseed to enter the export tred. (vote U). a" Prelng (d) lIss. cettoe espeort lIc..es to et leat twe privatO sector partes othe tha ceop twee aN npiemet usest to e lgliticatly l rcre_s the saor, of the cottfa *sporto by the private eot., byt (1) ensring adequate pretit *lewen. to * Vorters' fiae margins; Dw (11) ..t.blia.le n price gradiog etrectas. few coffee to sexteai qualitr and "Ii. value. Adop as Ation Plan to inplenet a NW cottee exprt taxatle estm to I tarthwr inc_se tre incentve. slto eag*toardln w fietOl objectilw unde the stabi*Iaatian pror. 4 ReeseWrebAgriouiturat Reemreb Orgesiatian to plan * d eVrsee the splea11_ tet ieof a n pleti agrlculteurl reserch progr. stiesectery to MA (pora P4).  - 37 - B. Costs and Financing Cost Estimates 103. The proposed project costs would be US$101.6 M, including a quick- disbursing credit of US$85 H to finance importation of agricultural inputs, and the costs of the investment component amounting to an estimated US$16.6 M. including physical and price contingencies. 104. Investment Component. The total cost of the investment component. exclusive of duties and taxes, is estimated at US$16.6 M, of which US$12.5 M, or 75 percent, would be foreign exchange. The estimated costs of the individual parts of the component are summarized below (Table 2) with details in Annex 6 (Attachment 2). Baseline costs refer to June 1990. Physical contingencies of 10 percent have been applied to all cost items. Price contingencies, equivalent to 7 percent of the baseline costs, reflect projected local and international inflation rates and a continuous adjustment of the exchange rate in line with maintaining a constant purchasing parity exchange rate (Annex 6, Attachment 2, Table 5). Table 2 - Sunmary Cost of Investment Component --------USh ail -------- ------- 000 --------- Foreian Foreign Activity Local Exchange Total Local Exchange Totsl Agricultural Resarch & Extension(HARE) 16s.6 1869.6 3056.2 2291.4 3705.1 6990.6 Land Policy Rnsearch (LPRS) 264.7 323.8 509.2 619.1 644.8 1183.9 Sectoral Planning (PASP) 79.1 1322.0 1401.1 155.0 2592.2 2747.2 Coffee Subsctor Management (CSU) 5.1 762.9 786.0 10.0 1635.0 1545.0 Project Coordination 251.0 1166.2 1419.2 492.1 2290.6 2782.7 Base Cost 1788.5 5491.5 7260.0 8467.7 10767.6 14236.3 Physical Contingencie 163.6 496.6 660.2 820.8 973.7 1294.C Price Contingencies 710.9 1913.9 2624.6 28M.9 794.6 1083.5 Total Including Contingncies 2643.1 7901.9 10545.0 4077.4 125U5.6 16613.3 Financing lOS. Of total project costs of US$101.6 M, IDA would finance US$100.0 M, including US$85 M as quick-disbursing funds and US$15.0 M (or 90 percent) of the cost of the investment component. Under the adjustment component retroactive financing would be allowed for expenditures incurred after September 1, 1990 up to a maximum of US$17 M. The Government faces an extremely tight foreign exchange cash flow situation, including a very low level of foreign exchange reserves. This situation has been exacerbated by the recent oil price shock which has almost doubled Uganda's monthly import bill for petroleum and petroleum products. Retroactive financing under ASAC will provide the Government with cash resources to meet essential imports and reduce the foreign exchange cash financing gap during the early months of 1991.  - 38 - 106. The annual agricultural sector import requirements (petroleum excluded) are estimated to be about USS80 H. The quick-disbursing part of the proposed credit net of the ceiling amount for petroleum products (para. 109) is US$68 K. This would be sufficient to finance 22 percent of the agricultural sector import requirements in FY91, 45 percent in FY92, and 17 percent in FY93. The total quick-disbursing funds (US$85 M) would meet 40 percent of Uganda's projected external residual financing gap in FY91 (impact of oil price increase considered), 48 percent in FY92, and 29 percent in FY93 (Annex 7, Table 2). 107. The Government's contribution to project financing would amount to US$1.6 H. It would meet 39 percent of the local expenditures under the investment component. The financing plan for the investment component is further detailed in Table 3 below. Table 3 - Financing Plan for the ASAC Investment Component (US$ H) Foreign Cost Local Cost Total Component Part IDA GOU IDA GOU IDA GOU TOTAL RARE 4.4 - 1.6 1.1 6.0 1.1 7.1 LPRP .8 - .3 .3 1.1 .3 1.4 PASP 3.1 - .1 .1 3.2 .1 3.3 CSH 1.8 - - - 1.8 - 1.8 Project Coordination 2.5 - .4 .1 2.9 .1 3.0 Total 12.5 - 2.6 1.6 15.0 1.6 16.6 108. The Government would use the proposed IDA credit as follows. US$85 H would be made available to BOU for the foreign exchange allocation scheme. It would retain US$12.8 H of the credit to help finance the implementation of: (a) the Head-Start Program for Agricultural Research and Extension through the agricultural sector ministries (US$6.0 H), (b) the Program for Strengthening of Agricultural Sector Planning by the Hinistry of Planning and Economic Development (HPED) and the agricultural sector ministries (US$3.2 H), (c) AGSEC's responsibilities under the Land Policy Research Program (US$.3 H), (d) technical assistance for implementation of coffee subsector reform through HPED (US$.35 H), (d) ASAC project management (US$ 1.7 H), and (e) refinancing the Project Preparation Facility Advance (US$1.25 H). The balance of the credit, US$2.2 H, would be passed on as grants to the Hakerere Institute for Social Research (US$800,000) for its Land Policy Research Program and to the Coffee Harketing Board (US$1.4 H) for its technical assistance program in  - 39 _ support of restructuring. An assurance to this effect was obtained during negotiations. Given the importance of CMB restructuring in the Government's Agricultural Sector Adjustment Program, which underpins the proposed credit, the execution by the Government of a subsidiary grant agreement with CMB, satisfactory to IDA. would be a condition of credit effectiveness. Execution of a subsidiary 8rant agreement with MISR, satisfactory to IDA, would be a condition of disbursement under the LPRP part of the investment component. C. Disbursement 109. The quick-disbursing part of the IDA credit (US$85 M) would be disbursed in two tranches. The first tranche of US$50 M would be released upon credit effectiveness (expected in February 1991) and the second on fulfillment of agreed conditions (expected in October 1991). Total disbursements related to the importation of petroleum and petroleum products would be subject to a ceiling of 20 percent (US$17 M). IDA funds for the investment component (US$15.0 M) would be disbursed over four years. A schedule of projected disbursements and a proposed allocation of the IDA credit by disbursement categories are presented in Annex 7. 110. Special Accounts. To facilitate disbursement, the Government would establish three special accounts: one for the quick-disbursing component (Special Account A), one for the HARE part of the investment component (Special Account B), and one for the remaining parts of the investment component (Special Account C). All special accounts would be opened by the Government in a commercial bank through the Bank of Uganda in US dollars on terms and conditions satisfactory to IDA. At credit effectiveness, IDA would make an initial deposit of US$15.0 M into Special Account A. Upon fulfillment of the conditions of disbursement for the investment component, the Borrower would ask IDA for an initial deposit of US$450,000 into Special Account B and US$650,000 into Special Account C. The special accounts and statements of expenditure would be audited periodically by an independent auditor. lll. Special Account A would be replenished monthly up to the limit of the amount of each of the two tranches on the basis of procedures similar to those agreed under ERC II - namely, fully documented reimbursement applications for contracts exceeding US$100,000, and statement of expenditure for items below US$100,000. The Bank of Uganda would retain all relevant supporting documentation (invoices, customs declaration, and evidence of payment) for review by supervision missions. 112. Special Accounts B and C would be replenished at least quarterly upon receipt of satisfactory evidence that all expenditures were eligible for financing, together with a bank statement reconciled with invoices or statements of expenditure submitted. Disbursements would be made against full documentation except for payments under US$20,000 equivalent, which would be made against statements of expenditure with all supporting documentation (invoices, customs declaration, and evidence of payment) being retained for review by IDA supervision missions and the project auditors. Assurances that the Borrower would operate the two special accounts according to these procedures were obtained during negotiations.  - 40 - 113. Proiect Accounts. To ensure counterpart funds and facilitate disbursement in local currency, the Government would establish in the Bank of Uganda two Project Accounts in Uganda Shillings, one for the HARE program and one for the remaining parts of the investment component. The Government would make initial deposits on those accounts totalling USh28 M and USh3t H respectively, equivalent to the projected average of quarterly local expenditures under the investment component to be met by the Government during the first three project years. An assurance to this effect was given during negotiations. The establishment by the Government of the two Project Accounts with an initial deposit totalling USh 65 M would be a condition of disbursement under the investment component. D. Procurement 114. Adiustment Component. The quick-disbursing part of the credit would finance 100 percent of the CIF costs of eligible goods according to a positive list (Annex 5). Contracts for goods to be imported by the Government or the private sector, each estimated to cost the equivalent of US$2M or more, would be awarded following a simplified International Competitive Bidding (ICB) procedure using a standard bidding document to be cleared with IDA. Imports of goods estimated to cost the equivalent of less than US$2H would be awarded: (a) in the case of imports by the Government, on the basis of the standard procurement procedures of the purchasing institutions satisfactory to IDA, involving three price quotations; (b) for private importers, in accordance with standard commercial practice provided that, whenever possible quotations from eligible suppliers from at least two countries would be sought. Single source purchase would be used only for proprietary equipment or where compatibility with existing equipment would call for standardized equipment and spare parts. IDA would carry out an ex-post review of all contracts awarded according to the simplified ICB. Procedures and contracts under the simplified ICB threshold would be reviewed by IDA supervision missions on a sample basis. 115. Trade verification procedures are in force in Uganda. The Government has appointed Societe Generale de Surveillance S.A. to certify the quality and quantity of goods and the price of shipments. Except for ICB, all other procurement under this credit would be subject to price verification. 116. Investment Component. Procurement procedures for the investment component are summarized in Table 4 below.  - 41 - Table 4 a Procureat Methods for the Protect investment CouDoent (US$ M4) Proirest lethod CateO../Itm ice LCB Other b/ N.A. c. TOTAL ---f ------ - ----- Civl works 0.n0 0.39 (0.60) (.80) Eql_pmet and SIles 1.07 0.47 0.64 2.06 (1.0?) (.47) (.54) (2.03) Vehicles 0.60 0.15 1.14 (.69) (.15) (1.12) C.e.wlte..y Serc 6.30 6.30 (6.80) (0.30) Trs aig 2.90 2.90 (2.53) (t2.53) permaesl end Opertlag Cost 3.22 3.22 (2.10>) (2.16) MAL 2.06 1.80 9.n .22 10.61 (2.1) (1.3) (0.4) (2.2) (15.0) of Figus In peab_ees are .stlssted to be floaeefd wder the priped IDA edilt b/ Includes procuremss% of censetent sevvic following IDA guld.lin.s locl procdure Involving supoiers qu_11 tles VW direst Orde. Ales, Includes P prtocurasat of vehicles am 8 0.16.), siequi_ment (U15 0.26) NW ceseltent services (65U 0.696). ci None-prcrsmst ceteqy. 117. About 11 conttracts for civil works individually small in value and spaced in tim (rehabilitation and minot now construction) totaling US$0.9 M, would be awarded through Local Competitive Bidding (LCB) in accordance with procedures acceptable to IDA. Procurement of vehicles, equipment, and supplies totaling US$2.1 M vould be grouped 4herever possible Into bid packages of at least US$100,000 for procurement through SCB. Contracts for supplies and equipment estimted to cost less than US$100,000 but more than US$25,000, aggregating to US$0.5 1 would be awarded on the basis of LC8 procedures acceptable to IDA. Contracts of US$25,000 or less, aggregating to US$0.5 M, would be procured through direct competitive shopping based on at least three price quotations. Consultants (US$6.3 M) would be recruited in accordance with IDA guidelines for the bmploymsnt and Use of Consultants (Annex 6, Attachment 4). Overseas and local training (US$3.0 M) would be by direct placement in consultation with IDA based on agreed training programs. Other procurement expenditures such as staff allowances and recurrent operating costs vould follow local government procedures.  - 42 - 118. Under the investment component all bidding packages for civil works estimated to cost the equivalent of US$100,000 or more, bidding packages for goods equivalent to US$50,000 or more, all contracts for appointment of consultants, and overseas training placements would be subject to prior IDA review of procurement documentation. This would result in a coverage of about 90 percent of total contracts under the investment component (Annex 6. Attachment 2). The balance of contracts would be subject to postreview by InA during supervision missions. E. Implementation and Monitoring Management of the Agricultural Sector Adijustment Credit (Annex 10) 119. The Minister of Finance on the Government's behalf has appointed the Agricultural Policy Committee (APC) to manage the implementation of the Agricultural Sector Adjustment Program (Annex 4). The Committee which reports to the Presidential Economic Council, has served as the Government's agricultural policy advisory body since 1982. Its membership includes the Permanent Secretary from MPED (chair), the Ministry of Finance, the Permanent Secretaries from the four agricultural ministries, the Ministry of Industry and Technology, the Ministry of Commerce, the Governor of the Bank of Uganda, the Chairman/Managing Director of the Uganda Commercial Bank and the General Secretary, Uganda Corporation Alliance. The Committee would meet every three months to review implementation of the adjustment program under ASAC. The APC would appoint an ASAP Coordinator and an ASAP Financial Advisor with responsibility for ensuring that the Program proceeds as per the Letter of Agricultural Policy (Annex 4) and ASAC implementation schedule (Annex 8). 120. A Project Coordination Unit (PCU), consisting of a Project Coordinator and a Financial Controller, would be established within the Agricultural Secretariat, which already serves as the Agricultural Policy Coumittee's secretariat. It would be responsible for overall implementation of the ASAC investment component, including planning, procurement and financial control, and coordination of activities carried out by Project Implementation Units (PIUs) that handle various programs under the investment component (details in Annex 6). The establishment of the PCU and the appointment of a Project Coordinator and a Financial Controller would be a condition of disbursement for the investment component. 121. Two interministerial committees would act as review committees for project activities under ASAC's investment component. A Subcommittee on Agricultural Research and Extension would be established by APC to approve work plans and budgets under the Head-Start Program for Agricultural Research and Extension, oversee the work of the HARE/PIU, and monitor and evaluate the progress and effects of individual subprojects. Under ASAC's support for land policy research, the existing Land Reform Committee, serving as a coordination committee, would approve proposals, prepared by the Makerere Institute of Social Research and the Agricultural Secretariat, for annual land policy research programs and associated work programs. Terms of reference for the Agricultural Policy Committee and its Program Coordinator and Financial  - 43 - Advisor, the Project Coordination and Implementation Units and their respective key staff, and the two coordination committees specific to HARE and LPRP were agreed at negotiations (Annex 6, Attachment 6). The establishment of an APC Subcommittee on Agricultural Research and Extension and the HAREIPIU, including the appointment of a qualified PIU Head and Senior Agricultural Services Advisor on terms satisfactory to IDA, would be conditions for disbursement for HARE. 122. Administration of funds. The allocation of foreign exchange for importation of agricultural inputs would be managed by BOU under its Special Imports Program. Procedures under ERC II would be followed except that eligibility would be determined on the basis of a 'positive' list (Annex 5). The local funds generated by the foreign exchange sales of ASAC would be placed in a separate Government of Uganda account in the Bank of Uganda. The Government proposes to use part of these funds to inject equity capital in the restructured Coffee Marketing Board. Under the investment component, the PCU would be responsible for administration of project funds, including authorization of all withdrawals from the Special Account C. The HARE, because of the size and range of its activities and location away from Kampala, would have its own financial administration (including its own Special Account and Project Account) to ensure that funds are passed on to agencies responsible for individual subprojects in accordance with agreed budgets and work programs. Monitoring and Reporting 123. Because of the scope and complexity of the Program and Government's limited administrative capacity, close monitoring would be required. The APC would monitor the implementation of the Program and the effectiveness of policy actions taken thereunder. It would submit semiannual progress reports to IDA, one month after the end of each six-month period. The reports would monitor the implementation and impact of measures to reform coffee crop finance arrangements and decontrol coffee marketing, including restructuring of marketing agencies. They also would monitor marketing liberalization and parastatal reform in the noncoffee sector, reorganization of agricultural research and extension institutions, and rationalization of the public expenditure program (Part III). The purpose is to assess whether the Government's policy actions are effective in meeting its stabilization and growth objectives, and to identify obstacles in a timely manner. Implementation of the investment component would also be monitored by the Agricultural Policy Committee. The Project Coordination Unit would prepare for APC review, and later submission to IDA, quarterly progress reports based on reports by the project implementing agencies. 124. Assurances were given at negotiations that the Government would prepare for IDA semiannual progress reports on the Program and quarterly progress reports on the implementation of the investment component, in formats and on a time schedule acceptable to IDA. The first reports would be due by August 1, 1991, covering the period up to June 30, 1991. 125. IDA missions to review project implementation would be scheduled to coincide with the review of key steps in the implementation of the Program  _ 44 - (Project Implementation Schedule In Annex 8). Because of the strong links to the macroeconomic program, staff from the Country Operations Division and the Resident Mission in Kampala would participate in these relatively frequent missions. An ASAC Supervision Plan is shown in Annex 9. Mid-Term Review 126. At the beginning of the third project year, a Mid-Term Review would be carried out of the investment component. The review would be carried out jointly by the Government and IDA with the Project Coordination Unit responsible for preparatory arrangements and coordination. The main purpose of the review will be to assess progress accomplished toward institutional objectives for sectoral management, and on the basis of such an assessment establish work program priorities with an associated plan for utilization of project resources for the remainder of the project period. Accounts and Audits 127. For quick-disbursing funds supporting the adjustment component, BOU would maintain separate accounts, including those for Statements of Expenditures and the Special Account A. Under the investment component, the Financial Controller of PCU would be responsible for maintaining project accounts. Also, CMB, following sound accounting practices, would maintain records and accounts adequate to reflect its operations and financial condition. These annual accounts would be audited by independent auditors acceptable to IDA. The audited accounts and the audit report would be submitted to IDA not later than six months after the close of each fiscal year. Assurances on these arrangements were given during negotiations. F. Environmental Impact 128. The HARE would contribute to conserving the agricultural resource base bys (a) demonstrating appropriate crop rotation practices and soil and water conservation techniques; (b) introducing high-yielding varieties of crops with pest and disease resistance, thereby minimizing heavy dependence on chemical pesticides; (c) promoting the use of crop and animal residues for the production of organic compost; (d) introducing postharvest handling and storage techniques to minimize losses of food grains and horticultural crops; (e) developing the necessary techniques for the utilization of plantation forests to lessen the pressure on dwindling natural forest stands; and (f) establishing fisheries management practices (for example, fish capture methods, types of fishing gear, and fishing frequency) to conserve the fisheries resources on inland lakes. 129. The Land Policy Research Program supported under ASAC would constitute a necessary first step to create a policy environment that would promote rational land use and management. It would focus on the urgent need to protect forest and wildlife reserves, and on incentives for accessing land in the vicinity of forest and game reserves, thereby limiting pressures on these reserves and encouraging cooperation with protection efforts. The  - 45 - research program would support the development of policies of accessing couimual grazing lands of northern Uganda which promote sustainable land use. 130. The project would finance agricultural inputs including pesticides and fertilizers. An assurance was given by the Government during negotiations that the procurement of pesticides and other agricultural and agro-industrial chemicals will be restricted to material considered appropriate under Bank Guidelines. Fertilizer usage is not expected to pose significant environmental problem in Uganda since the level of application is relatively low because of the natural fertility of the soil. PART V - IMACT AM) RISK impact of Adiustment Component 131. Government actions under the Agricultural Sector Adjustment Program, monitored under the proposed project, are expected to have a favorable effect on the stabilization and growth objectives of UP. With respect to stabilization, the coffee crop finance reforms will increase the efficiency in the allocation and use of credit for coffee crop procurement. This will help reduce overall credit rcquirements and the inflationary pressures on the economy. The transfer of lending for crop finance from the central bank to the commercial banking system is essential for rationalizing the financial sector and strengthening financial intermediation. The revised institutional arrangements for crop financing are predicated on improving the financial management and control system of the Coffee Marketing Board. Through increased accountability and operational efficiency, such improvements will lead to more efficient use of public resources and a reduced fiscal deficit. Actions under the Program to rationalize operations of other marketing boards are expected to reinforce this effect. 132. The adjustment component would support the achievement of the annual sectoral growth target of 5 percent. Project-induced growth is expected as a result of: (a) an increased supply of agricultural inputs; (b) more competitive and efficient systems for processing and marketing export crops through privatization or reorganization of parastatals, and strengthening of cooperative union processors; (c) better incentives for capturing higher export values through a revised export tax system and price-grading structure for coffee; (d) more efficient sectoral investment; and (e) the creation of an organizational framework for management of an agricultural research program that would address constraints on diversification of agricultural production. 133. Incremental gains in production are expected in export and food crops. Production gains should be more substantial for tea and cotton for which land requires rehabilitation or intensive preparation. Broadening of private sector exports, parastatal reforms, and improved trade incentives in the coffee subsector will establish a competitive environment for procurement and export of coffee. Such an environment, coupled with a gradual restoration of real producer prices, is expected to improve the quality and export prices of coffee, boost production volume, and help prevent a decline in the  - 46 - productivity of the coffee resources. A process is in place to safeguard farmers' incentives for traditional export crops by adjusting producer prices according to an agreed-upon methodology. This, together with an emerging competitive input distribution system, should suppozt effective demand for agricultural inputs. 134. Social impact. ASAC-supported measures are not expected to adversely affect any specific population group. A competitive marketing system and enhanced incentives for export crops favor the rural population in income distribution. The restructuring of marketing parastatals could displace staff. The need for compensatory measures would be addressed under the Government's initiatives to support income-generating activities for displaced civil servants. These initiatives are being developed under the Government's Program for the Alleviation of Poverty and the Social Cost of Adjustment. Impact of Investment Component 135. Activities under the investment component address the objectives of growth and diversification, or they support the effective implementation of the adjustment component. Strengthened agricultural sector planning is expected to promote growth by making the use of public resources in agricultural development more efficient. Land policy research will help implement land reforms and establish institutions that promote tenurial security and efficient land markets. The goal is more productive land. 136. The Head-Start Program for Agricultural Research and Extension will demonstrate at the pilot level the relatively quick production response that can be derived from improved production technologies. The subproject on technology dissemination through better extension will demonstrate in four districts the immediate beneficial effect of improved technologies on agricultural production and diversification. Support for research and production development for cotton, groundnuts, and simsim is expected to yield or test improved seed varieties and to demonstrate associated production effects for smallholders in selective areas. A subproject on smallholder dairy productivity is expected to demonstrate production gains from improved management practices. In the forestry subsector, demonstration of proper techniques for production, harvesting, and utilization of timber will promote efficient use of forest plantations and increase the productivity of the agro- forestry systems. Experience from implementation of HARE will provide essential guidance for the organization and implementation of effective extension services on a national scale. Risks 137. The achievement of these benefits entails some risks. They relate to slippage in implementation of the macroeconomic reform program, and the Government's implementation capacity. 138. The sustainability of Program reforms and the attainment of their objectives depend on the Government's adherence to its macroeconomic and cross-sectoral policy framework (para. 11-17). For example, failure by the  - 47 - Government to pursue a realistic exchange rate policy would, other things being equal, increase the already excessive tax imposed on the coffee farmer. The same consequence, albeit with less severity, would follow from delays in implementing tax reforms to reduce the dependence on the coffee tax for government revenue. Such developments would likely suppress or reduce production and exports of the commodity on which the Government in the short to medium term so heavily depends for its foreign exchange. While crop finance reforms should reduce demand for institutional crop finance credit, their sustainability depends on the liquidity of the commercial banks. Such liquidity could be jeopardized if the Government were to pursue monetary and credit policies that do not promote private savings and efficiency in the use of financial resources. 139. Among ERP's many cross-sectoral policies, civil service reform (para. 24) is the key intervention required to sustain agricultural support services, such as agricultural research and extension. These services need to be provided by the public sector, but can only be extended effectively if the civil servants are paid a living wage and adequately supported by operational funds. Both of these conditions depend on civil service reform. Postponement of reform implementation would threaten to negate the benefits from the new organizational structure for agricultural research proposed under the Program, render the activities to be initiated under HARE less sustainable, and generally delay progress toward the objective to diversify agriculture production and exports. 140. The Government's commitment to an appropriate macroeconomic policy framework has been demonstrated in its recent Policy Framework Paper. The delivery on such a commitment on occasion has been slow, but it has nevertheless progressed in a deliberate fashion. The second-tranche release of the proposed credit would therefore be subject to the Government's continued adherence to the macroeconomic framework as set out in the PFP for the period 1990191 to 1992193. 'While the above risks remain real, they need to be taken at this stage. Postponing support for agricultural sectoral adjustment until further progress is made on the macroeconomic program is not an alternative, given that overall progress towards stabilization and growth depends on agricultural sector refori. 141. Weak imnlementation is a concern in all Bank operations in Uganda. Actions expected to emerge from the PER review, together with civil service reform initiatives, should strengthen ministerial implementation capabilities. In addition, the proposed credit has a technical assistance component that should improve sectoral management and implementation capability in key ministries and parastatals. PART VI - SIM'ARY OP AGREEMENTS AND CREDIT CONDITIONS 142. The following agreements and assurances were abtained during negotiations: (a) The Government will open and operate three special accounts, according to procedures satisfactory to IDA (para. 110-112).  - 48 - (b) Terms of reference for the Agricultural Policy Committee Including its Program Coordination and Financial advisor, the Project Coordination Unit, the Project Implementation Units, and the two coordination committees of the Head-Start Program for Agricultural Research and Extension and the Land Policy Research Program were agreed (para. 121). (c) Procedures for progress reporting, satisfactory to IDA, will be followed (para. 124). (d) Accounting and auditing procedures, satisfactory to IDA, will be followed (para. 127). (e) Procurement of pesticides and other agricultural or agro-industrial chemicals will be restricted to material satisfactory to IDA (para. 130). 143. As a condition of effectiveness, the Government will execute a Subsidiar7 Grant Agreement with CMB (para. 108). 144. As a condition for the release of the second tranche of the quick- disbursing component of the credit, the Government will implement the measures described in the policy action matrix attached to the Government's Letter of Agricultural Policy and summarized in Table 1 (pages 35-36). 145. Conditions of disbursement under the investment component would include the followings (a) a deposit by the Government of a total of USh65 N into the two Project Accounts as a contribution to project costs (para. 113). (b) The establishment of Project Coordination Unit, including the appointment of a Project Coordinator and a Financial Controller (para. 120). 146. Additional conditions of disbursement for Individual parts of the investment component ares (a) in the case of the Head-Start Program for Agricultural Research and Extension, the establishment of an APC Subcommittee on Agricultural Research and Extension and the appointment of a qualified VIV Head and Senior Agricultural Services Advisor with qualifications and on terms satisfactory to IDA (para. 121); (b) in the case of the Land Policy Research ProRram, execution by the Government of a subsidiary grant agreement with the Makerere Institute for Social Research (para. 108).  - 49 v PA2 VTII - ionOSD&?IOE 147. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. I recomiend that the Executive Directors approve the proposed IDA Credit. Attachments Washington, D.C. Barber B. Conable November 27, 1990 President  - 50- .%NX t Table I UM: KEY MDUCECM SIC INOICATUlS. 1984/8519V93 0st . ".. Projec i " Ito 1i8s 19Wl8 196/ 197W88 198 1 90 1990/91 1991/92 19Vi3 Grsh Rates SOP (FWtor Cat) -9.3 1.2 3.3 6.6 6.9 6.3 5.0 5.0 5.0 Gross Oowstic 1ii (00Y) -4.7 -2.8 -0.4 6.0 5.6 3.7 5.3 4.6 4.5 MYV pe cPlta -7.3 -5.3 -3.1 3.2 2.7 0.9 2.4 1.7 1.? Private CtAstlonr cmita -6.8 -7.5 3.2 4.5 4.6 -0.2 0.1 0.2 0.1 Debt Service 1/ 0Dt Service (1BS mill ion) 186.2 201.5 217.4 207.0 238.2 113.7 183.9 172.0 143.1 ohw Interest (USS OIllItI) 53.0 44.0 47.0 57.0 08.0 64.0 61.0 60.0 56.0 Debt SrvicelXo 2 42.0 41.2 42.9 46.6 54.2 61.9 56.0 45.0 31.7 Oebt Servic