Guinea - Second Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15164 PROJECT COMPLETION REPORT REPUBLIC OF GUINEA SECOND STRTJCTURAL ADJUSTMENT CREDIT (CREDIT 1926-GUI) DECEMBER 6, 1995 Country Operations Division Western Africa Department Africa R-gion This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Annual Average, Guinean Francs per US Dollar) 1986 GF 345 1987 GF 428 1988 GF 475 1989 GF 592 1990 GF 661 1991 GF 754 1992 GF 902 1993 GF 956 1994 GF 985 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I -- December 31 ABBREVIATIONS AND ACRONYMS AfDF African Development Fund BCRG Banque Centrale de la Rdpublique de Guinde CCEF Comite de Coordination Economique et Financiere DAAF Financial and Administrative Management Directorate ESAF Enhanced Structural Adjustment Facility IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MEF Ministry of Economy and Finance MID Ministry of Interior and Decentralization MPCI Ministry of Plan and International Cooperation MRAFP Ministere de la Reforme Administrative et de la Fonction Publique PAGEN Economic Management Support Project PFP Policy Framework Paper PIP Public Investment Program PREF Economic and Financial Reform Program OECF The Overseas Economic Cooperation Fund of Japan SAC Structural Adjustment Credit SECAL Sectoral Adjustment Loan or Credit SDR Special Drawing Rights SJF Special Joint Financing  FOR OFFICIAL USE ONLY The World Bank Washington. D.C 20433 I) S A Office of the Director-General Operations Evaluation December 6, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report (PCR) on Guinea: Second Structural Adjustment Credit (Credit 1926-GUI) Attached is the Project Completion Report (PCR) for the Guinea Second Structural Adjustment Credit (SAC 11; Credit 1926-GUI. approved in FY88 and closed in FY94) prepared by the Africa Regional Office. The borrower 's evaluation of SAC 11 (Part 11 of PCR) is not available. The objective of SAC 11 (US $65.1 million) was to continue to support the Government's economic reform program toward a market-oriented economy as the foundation for sustained growth. SAC 11 was designed to address the constraints of the Government's weak capacity for economic and financial management through (1) rationalization of the civil service; (2) implementation of resource mobilization and financial management measures; (3) continuation of public enterprise reforms: (4) further legal and institutional measures to promote private sector development; and (5) development of a comprehensive social policy. SAC If was prepared in haste after the release of the second tranche of SAC I (Credit 1659-GUI, approved in FY86 and closed in FY89) to bridge the borrower's financing gap. Project implementation was slow and stretched over a period of five-and-a half years as opposed to eighteen months contemplated in the loan document. Some of the reforms carried out in the initial two years were subsequently reversed. For example, after an initial period of minor retrenchment of the civil service, in 1991 about 5,000 civil servants were hired as "temporary personnel" which in 1995 still remain on the payroll. Modest gains were made in public enterprise reform through privatization and price liberalization but no significant progress was made in achieving the remaining objectives. Therefore, the project outcome is rated as "marginally unsatisfactory". The project's institutional development impact is rated as negligible and sustainability as uncertain. A number of factors contributed to the project failure. First, the project design failed to consider weak institutional capacity and government commitment to reform. Second, while the borrower commitment to carry out fundamental reform was suspect, the project conditionality failed to specify objectively verifiable performance indicators for use in the release of funds. Third, the Bank provided additional credit under a parallel sectoral adjustment project which eased the pressure on public finances and may, therefore, have contributed to delay in the implementation of SAC 1I reforms. The PCR draws several important lessons from the project's experience. First, adjustment lending operations that simply bridge fiscal gaps and do not accomplish structural reforms compound a country's debt burden and thereby accentuate its economic woes in the long run. Second, feasibility of reform and its sequencing is critical for project success. Finally. tranche release conditions that are couched in terms of outconies rather than promulgation of legal measures, can serve as aids to effective project management. The PCR is of satisfactory quality. No audit is planned. Atlachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY CONTENTS PREFACE .........................................................................i KEY PROJECT DATA ........................................................................ iii EVALUATION SUMMARY .........................................................................v PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE ...................................I A. PROJECT IDENTITY ........................................................................1I B. THE ANTECEDENTS OF SAC 11 .........................................................................1 The First Republic ........................................................................1I The Initial Phase of Adjustment .........................................................................2 C. PREPARATION, APPRAISAL AND APPROVAL OF SAC II .................... .............................. 3 D. PROJECT OBJECTIVES AND DESCRIPTION ......................................................................... 3 E. IMPLEMENTATION AND MONITORING OF THE PROGRAM ................. ...........................6 General Comments .........................................................................6 Impact of SAC II .........................................................................7 F. CONCLUSIONS AND LESSONS OF SAC II ........................................................................ 12 PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ...................... 15 ANNEX A: BASIC CREDIT DATA ........................................................................ 17 TABLE A-1: RELATED CREDITS INFORMATION .................................................................... 19 TABLE A-2: PROJECT TIMETABLE ........................... ............................................. 19 TABLE A-3: CREDIT DISBURSEMENT ........................................................................ 19 TABLE A-4: GUINEA SAC II DISBURSEMENT SCHEDULE ................................................... 20 TABLE A-5: BANK MISSION DATA ........................................................................ 21 TABLE A-6: BANK RESOURCES: STAFF INPUTS .................................................................... 21 TABLE A-7: STATUS OF LEGAL COVENANTS ........................................................................ 22 ANNEX B: KEY ECONOMIC INDICATORS ........................................................................ 23 TABLE B- 1: KEY MACROECONOMIC INDICATORS ................................................. .............. 25 This document has a restricted distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization.   i PREFACE This is the Project Completion Report (PCR) for the Second Structural Adjustment Credit in Guinea for which Credit 1926-GUI in the amount of SDR 47 million Nvas approved by the Executive Directors in June 1988. The Credit became effective on Marchl 2, 1989. The Credit was amenided in May 1993 to provide additional assistance in the amount of SDR 70 thousanid (IDA reflow). Credit closing, originally anticipated for December 3 1. 1990. was extended three times to December 31, 1993; the initial Credit amount was fully disbursed in September 1993 and was kept open until December 1993 to allow disbursement of the supplemental allocation. ii. This PCR was prepared by staff of the Country Operations Division of the Western Afr-ica Department (AF5CO). Guineani authorities have been formally requested' to undertake an evaluation of the program (Part 11). When the Borrower's completion report is finalized. it will be included In the Project file. In view of the close cooperation betweeni Bank stalf and the Governmeit durinig the SAC II period, this assessment is not expected to differ significantly from that of the Bank. iii. This report is based, inter alia. on the Report and Recommeniedationi of the President to the Executive Directors. the Letter of Developmenit Policv. the Development Credit Agreemenit. supervision reports, the memoranidum to the Executive Di-ectors recomimlenidinig release of the second tranche, correspondence between the Bank and the Borrower. discussions with the Resident Missioni and interinal Bank memoranda. The letter announcing the formal closing of the credit dated April 22, 1994 included a reminder of the obligations of the borrower to submit to the Association a certified audit of expenditures financed under the Credit as vwell as its evaluation of the implementation of the program. The authorities were reminded of these legal ouligations during the 1994 Annual Meeting and in an aide-inemoire in December 1994.   'ii KEY PROJECT DATA Credit 1926-0 Borrower: Republic of Guinea Amounts: IDA Credit; SDR 47 million Terms: Standard IDA with 40 years maturity Cofinancing: African Development Fund: UA 10 million (USSI2 million equi valent) Government of Japan OECF: Credit; Y l,000 million (USS7.9 million eq.) Grant; Y 425 million (US$3.3 million eq.) Credit 1926-1 Supplemental IDA Allocation of SDR 70,000 (IDA Reflow)   v EVALUATION SUMMARY INTRODUCTION 1. A First Structural Adjustment Credit2 (SAC I) in the amount of US$ 42 million was approved for Guinea on February 11, 1986 and became effective on May 15, 1986. Due to a weakening of the pace of reform implementation from mid-1986 to late 1987, the second tranche release was delayed until January 15, 1988, or about 18 months later than initially scheduled. The credit closed on December 31, 1988. 2. Preparation of SAC II coincided with the release of the second tranche of SAC I. An Initiating Memorandum was issued on January 11 1988. The subsequent rapid schedule of preparation, appraisal and negotiations led to Board approval of SAC 11 on June 16. 1988. The credit became effective on March 2, 1989. OBJECTIVE OF THE CREDIT 3. The objective of SAC 11 was to continue to support the Government's economic reform program toward a market-oriented economy as the foundation for sustained growth. SAC II was designed to address the constraints of the Government's weak capacity for economic and financial management through: (1) the rationalization of the civil service; (2) the implementation of resource mobilization and financial management measures; (3) the continuation of public enterprise reforms; and (4) further improvements in the legal and institutional incentives framework to encourage private sector initiative and investments. The program also aimed at the development of a comprehensive social policy. 4. Given the weak institutional capacity of the country, the objectives of SAC II were overly ambitious. The creation of an efficient, motivated and qualified civil service was considered necessary to improve the management of the national economy but this implied changes in procedures and mentalities which were difficult to achieve within the two-year timeframe of the program. In addition, most of the conditions for tranche release did not represent effective benchmarks of progress toward the objective as they were overwhelmingly biased toward expenditure control to the detriment of revenue enhancement, improved civil service management and an enhanced legal and institutional framework. Remaining conditions were narrowly sector specific and of limited macroeconomic impact. 5. In view of a growing discrepancy between the Government's rhetoric and actions toward reforms, a key issue in the preparation of SAC II should have been obtaining firm commitment from the Government to the reform process as mentioned in the Initiating Memorandum3. However, risks to program implementation were only identified as: (i) a decline in the international aluminum price which would have a negative impact on the projected improvement of Guinea's external and fiscal balances; and (ii) the weak ability of the administration to execute the program effectively and in a timely manner. As mid-1987 projections indicated a financing gap of US$ 80 million for 1988 and 1989, the logic of gap-financing added a measure of urgency to the preparation of SAC II and contributed to the relative neglect of the need for commitment to implement reforms. 2 Credits No. 1659-GUI and No. SFA AOl Il 3 "Guinea: Initiating Memorandum for a Proposed Second Structural Adjustment Credit (SAC-II)". January 11, 1988.  vi IMPLEMENTATION EXPERIENCE AND RESULTS 6. Program implementation was extremely slow: the credit disbursed over five-and-a-half years instead of the expected eighteen months as conditions for effectiveness and for second tranche release met with significant delays. The program made only marginal progress toward its reform objectives and some of this progress was partially eroded after the release of the second tranche. 7. Domestic revenue mobilization improved from 4.5 percent of GDP in 1988 to 7.1 percent in 1993 but remained well below the potential and failed to compensate fully for the decline in mining revenue. As a result, fiscal revenue at the end of 1993 represented only 11.6 percent of GDP versus the 14 percent targeted in the program. Progress in reform of public enterprises was uneven. Petroleum products imports and resale activities were fully privatized. Two key public utility companies in water and electricity distribution passed under private management contracts But progress on other publicly- owned companies has been extremely slow as the official statements were not matched by specific actions. During the period of the program, the consolidation of market reforms continued with most prices being market-determined or, when administered, set at close to true cost. In the financial sector, reforms were marked by the increasing market influence in the determination of key rates and the gradual removal of the last restrictions oni foreign exchange holdings and transactions. An information system for the management of the civil service was established and the personnel rolls were cleaned up. But the impact of this tool on civil service management has been marginal. as the system serves largely an expost function of recording hiring and promotion decisions with little evidence of a more substantive contribution to the management of the civil service. 8. The macroeconomic impact of the program is mixed. GDP growth over the period averaged 4.1 percent as targeted in spite of a downturn in 1991 and 1992 caused by political uncertainty. However, the increase in private investments on which it had been predicated did not materialize. Instead, large flows of external financial assistance helped boost domestic demand and supported growth. The low response of private investments initially helped improve the level of the current account deficit toward the targeted 4 percent of GDP. After 1990, the decline in mining exports revenue and increased capital imports by mining companies contributed to a widening of the current account deficit to 7.8 percent of GDP in 1992 and 7.0 percent in 1993. After a brutal drop in 1988, caused by the conjunction of a decline in mining exports and a surge in imports, the stock of foreign reserves increased rapidly and reached the targeted level in the program by 1990. Control of inflation proved to be more difficult than expected: the objective of reaching a level of inflation equal to the one of Guinea's main trading partners was not reached until 1994, about 4 years behind schedule. SUMMARY OF EXPERIENCE AND FINDINGS 9. Conclusions. The delays in effectiveness and in second tranche release point to serious problems in implementation of SAC 11. Although signs of a weakening commitment to pursue forcefully the adjustment program became evident throughout 1987, the release of SAC I second tranche in early 1988 was taken as a sign of renewed commitment and led to what in hindsight turned out to be a too optimistic assessment of the progress which could be achieved under SAC 11. Furthermore, as a financing gap of US$ 80 million was projected for 1988 and 1989, the urgency of gap-fill financing to preserve past gains and macroeconomic stability also contributed to insufficient attention being given during the preparation of SAC 11 to the strength of Government commitment to the reform program. In this context, the concurrent existence of two adjustment operations. SAC 11 and the Private Sector  vii Promotion SECAL, alleviated the pressure on public finances. This may have contributed to the delays experienced in the implementation of the reforms under SAC 11. 10. The program supported by SAC 11 was overly ambitious as it encompassed almost all elements of economic management. Rationalization of civil service management, mobilization of resources, public enterprises reforms and further progress in the legal and institutional incentive framework are all necessary elements to achieve sustained growth in a market economy. However, given the weak institutional capacity of the country, it was unlikely that such a broad program of reform could be successfully implemented simultaneously. In particular, the feasibility of achieving sustainable reforms in civil service management within the time frame of the program was highly questionable. However, in view of the prospects of decreasing mining sector revenue, the mobilization of domestic fiscal resources should have been given higher priority. Thus, the program failed to prioritize the reforms areas according to their feasibility within the given timeframe and their urgency. 11. The nature of the tranche release conditions was not conducive to effective implementation of the program as they were overwhelmingly based on the promulgation of measures rather than on outcomes. Implementation of the measures did not necessarily follow. As an example, although the condition of the creation of a central corporate taxpayer file was fulfilled in 1991, the lack of significant improvement in the performance in the collection of corporate taxes led Bank and Fund missions in 1993 and 1994 to require the updating of the file and the creation of a corporate tax unit within the Tax Directorate. Conditions were also biased toward expenditure reduction rather than the broader aspect of improved management of the civil service and of state finances. Thus, the tranche release conditions did not represent effective benchmarks for measuring progress toward program objectives. 12. This discrepancy between the objectives and the benchmarks set in the condition leads to a somewhat ambiguous assessment of SAC 11. On the one hand, since all conditions were eventually met, SAC 11 could be considered a success, though a qualified one as the delays in implementation in all likelihood weakened the impact of the program. On the other hand, an evaluation of the situation in Guilea at end- 1994 presents by and large the same characteristics as those prevailing in 1988, namely low domestic revenue mobilization, weak a priori expenditure control, an inefficient civil service and, as evidenced by the persistent low rate of private formal investments, an unsatisfactory incentive framework. Measured by these criteria, the impact of SAC 11 would be assessed as marginal. 13. Weak management capacity was identified as a risk for the implementation of the SAC 11- supported reform program. As the weak capacity was considered to be largely technical in nature, the problem was addressed through the preparation of a parallel technical assistance project, PAGEN 11 (Credit 1963-GUI), the signature of which was a condition for SAC 11 effectiveness. However, according to its project completion report, PAGEN 11 itself suffered from implementation problems caused by factors such as too broad a spread of activities and too many financing sources. Under this TA operation, technical assistants largely substituted themselves to their Guinean counterparts to design the measures necessary to fulfill tranche release conditions with little resulting improvement in the institutional capacity of the Government. More fundamentally, the experience of SAC 11 shows that technical assistance cannot be a palliative for weak Government commitment to the reform program 14. The sustainability of some of the reforms remains doubtful. The weakening of the mobilization of non-mining revenues in 1993 as compared to 1992, the continued deficient management of the civil service despite the existence of management tools and the erosion evident in the quality of presentation of the PIP give cause for concern that some of the gains of the program cannot be sustained without continued pressures from the international community.  VIii 15. Lessons. Four lessons may be drawn from SAC Il. First, SACs can be powerful instruments for supporting policy reforms. However, SACs generally have the dual objective of supporting ambitious new reform programs as well as bridging existing or emerging financing gaps, thus preserving macroeconomic stability and past reform gains. In the case of weak or uncertain commitment to reform as in Guinea, the need to achieve a proper balance between gap-filling and implementation of targeted reforms becomes of overriding importance for the success of the program. Gap-filling without significant adjustment only increases the country's debt burden with little long-term economic gains. 16. Second, the reforms supported must be properly sequenced and must be achievable within the time frame of the program. By these criteria, the reform areas covered under SAC [I should probably have been reduced to domestic fiscal resource mobilization and government financial management, which were both urgent areas of concern given the forecast decline in mining revenue. Although important, civil service management reform --by its lesser immediate economic impact and its low probability of significant sustainable progress under the timeframe of the program-- would not have been included under the SAC but could have been the object of another credit. Similarly, public enterprise reform is better pursued through instruments other than adjustment lending. By narrowing the focus of the operation on a set of key interrelated issues, the risk of dispersion of scarce capacity would have been lowered and the potential for better implementation improved. 17. Third, the development of the reform program should be based on solid economic and sector work to, inter alia, help define tranche release conditions in terms of outcomes rather than in terms of promulgation of legal measures. In particular in cases where the level of Government commitment is weak, the link between the adoption of measures and their effective implementation can be very tenuous. 18. Finally, by offering alternative sources of quick disbursements, concurrent adjustment operations can seriously affect the implementation of a reform program. Thus, in cases when more than one adjustment operations are to be implemented within roughly the same timeframe, greater attention should be given to the potential negative impact on the implementation of their respective reform agenda.  I PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE A. PROJECT IDENTITY Project Name Second Structural Adjustment Credit Credit Number 1926-GUI Date Approved June 16, 1988 Amount : SDR 47 million Date Effective March 2, 1989 Date Closed : December 31, 1993 Region : Africa Country Guinea Sector : Structural Adjustment B. THE ANTECEDENTS OF SAC II The First Republic 1. In 1958, Guinea became the first independent nation of the former French West Africa and the country inherited a rudimentary infrastructural base which deteriorated considerably over time due to a lack of maintenance. By 1964, the government had moved to a fully centrally-planned development model and nationalized all formal private activity. Economic policy was driven primarily by government efforts to accelerate economic growth and development through increased state-ownership of productive activities. The private sector was largely displaced by a pervasive network of state enterprises in all sectors of the economy, and private sector activity went underground. The once dynamic agricultural sector regressed to subsistence production and the mining sector replaced the rural sector as the supporting pillar of the economy. However, as mines operated in enclaves with limited either forward or backward linkages with the rest of the economy, the importance of the contribution of the mining sector to the economy was limited to the financing of state employment and of necessary imports. 2. From 1960 to 1974, GDP grew by only 2.4 percent per annum, representing a total decline of 9 percent in per capita terms over the period. With the start-up of major new bauxite mining operations, the GDP growth rate rose to 3.5 percent during 1975-80, but declined to an estimated 1 percent after 1980 as the new mines reached full capacity. Despite Guinea being generally recognized as well endowed in agricultural, mineral and energy resources, GDP per capita in 1985 was only US$ 375 and the country had some of the worst socio-economic indicators in Sub-Saharan Africa. 3. At the time of the death of President Sekou Toure in 1984, the economy of Guinea was on the brink of collapse. Emphasis on state-led development had not achieved the desired modernization and industrialization. Non-mining tax revenues had shrunk and serious distortions, most notably the overvalued exchange rate, created disincentives to export. An inability to mobilize domestic savings led to an increasingly heavy debt burden. State bank and public enterprises became insolvent. The incentive framework was hostile to private activity, as farmers living at subsistence level were forced to make compulsory sales to the State and movement of goods and people were severely constrained. Urbanization had accelerated as farming became unprofitable and productive activities were increasingly shifted from the rural to the urban sector but no significant investments in urban infrastructure had been made. Infrastructure in roads, electricity, water distribution deteriorated for lack of maintenance. Many  2 of the countries intellectuals and best entrepreneurs had emigrated in vast numbers during the first two decades of Guinea's independence to escape repressive policies. Traditional values had been displaced by ideological doctrine. The legal system was in shambles as arbitrary authority substituted for due process and ineffectual public institutions proliferated to absorb an inflated civil service, whose remuneration consisted largely of official rations, notably rice. The Initial Phase of Adjustment 4. The military Government which came to power in 1984 took significant and courageous steps to fundamentally reform Guinea's economy by implementing an Economic and Financial Reform Program (PREF) in 1985 which promoted the principles of a market economy and initiated an economic stabilization and adjustment program. In a first phase of reform under the Second Republic, the Government corrected the most important distortions by: (a) the introduction of a new currency at a rate which implied a fifteen-fold depreciation; (b) the liberalization of internal and external trade; (c) the privatization of banking and other commercial activities. (d) reductions in the size of the civil service; (e) the rehabilitation of social services; and (f) the rebuilding of the infrastructure. By its decisive actions in trade liberalization, the Government demonstrated its intention to rely increasingly on private sector initiative in all activities previously under the monopoly of state-owned enterprises. Guinea's reform program and transition to a more open and pluralist society was rapid and was supported by a First Structural Adjustment Credit (SAC 1)4 approved in February 1986 and a Stand-By Arrangement from the IMF. 5. The initial reforms, and the pace at which the Government implemented them constituted a major achievement. These reforms yielded visible results: agricultural output and marketing increased, as did small-scale manufacturing and services in the urban areas. The economy grew by an estimated 6 percent in 1987 or roughly 3 percent per capita. Inflation rate declined from over 30 percent in 1986 to 21.7 percent in 1988. But the fiscal deficit (excluding external grants) worsened from 7.7 percent of GDP in 1986 to 9.8 percent in 1988 due to slippages in financial discipline and a persisting weakness in the management capacity of the Ministry of Finance. The external current account (excluding public transfers) deteriorated from 6.6 percent of GDP in 1986 to 13.2 percent in 1988 as a consequence of high internal demand and lower export value from mining. By mid-1987, SAC I supervision reports indicated a weakening in the progress of reforms and an increasing discrepancy between the rhetoric of the Government and its actions: the second tranche of SAC I was not released until January 1988, about 18 months behind schedule. 6. Despite the comprehensive deregulation and liberal policies, private investment by local or foreign investors did not increase significantly except in the trade and housing sectors. The significant achievements since the onset of the program nevertheless needed to be completed by substantial further reforms to achieve the transformation of the Guinean economy into a market economy generating sustained growth. Key identified weaknesses were the economic and financial management capacity of the Administration and the public institutional framework which impaired the efficiency of reform implementation. 4 Credit No. 1659-GUI (SDR 22.9 million) and SFA No AOl I (SDR 15.6 million).  3 C. PREPARATION, APPRAISAL AND APPROVAL OF SAC II 7. The foundation for the Second Structural Adjustment Credit (SAC 11) was laid in the context of the achievements of the first phase of the PREF. Borrower participation in program design and preparation was considered fundamental to successful implementation. The second phase of the Govemment's program was largely prepared during a workshop held in Guinea in December 1987, with high-level Guinean civil servants and participants from the university, labor unions, and the Chamber of Commerce. 8. The most recent Country Economic Memorandum (CEM) predated the end of the First Republic5 Aside from staff appraisals reports (SARs) for operations being prepared, economic and sectoral work during the first phase of the PREF had been limited to population6 and energy7. As a new CEM was not scheduled until FY89, Bank staff had to rely for the preparation of SAC 11 on the experience gathered from supervision missions of SAC I and inputs from technical assistance in place in the country. However, the radical changes under the first phase of the PREF would seem to have warranted a more in- depth preparation for the second phase of the adjustment program. 9. The initiation of the preparation of SAC 11 coincided with the release of the second tranche of SAC I in mid-January 1988. As a back-to-office report in April 19878 projected a residual financing gap of US$ 80 million for 1988 and 1989 which "[could] be covered with a second Structural Adjustment Credit of an equivalent amount", it seems that the preparation of SAC 11 was at least partly driven by the urgency of resource transfer at the cost of a better analytical understanding of the sequencing of the actions needed to overcome the constraints to accelerated growth. 10. SAC 11 was prepared by the Government with Bank assistance and appraised in March 1988. Negotiations were completed in May 1988 and Board approval took place on June 16, 1988. The credit was signed on June 29, 1988, and became effective on March 2, 19899. On December 23, 1992, a credit amendment for a supplementary allocation of SDR 70,000 under IDA reflow was approved by the Board, signed on May 7, 1993, and became effective on December 15, 1993. 11. The IDA credit of SDR 47 million was accompanied by significant direct cofinancing amounts. The African Development Fund supported the second structural adjustment program with a loan of UA 10 million (US$12 million equivalent), while the Government of Japan contributed Y I billion (US$7.9 million equivalent) in loan and Y 425 million (US$3.3 million equivalent) in grant. In addition, the approval of the credit by the Board of the World Bank made available to Guinea similar financial support from France (US$23 million equivalent), the European Community (US$14 million) and the United States (US$8 million). Thus, programmed assistance to the adjustment program linked to SAC 11 amounted to US$ 135 million. D. PROJECT OBJECTIVES AND DESCRIPTION 12. Project Objectives. The objective of SAC II was to continue to support the Government's reform program toward a market-oriented economy as the foundation for sustained growth. The Report No. 4690-GUI, February 1984. 6 Report No. SR-6229-GUI, May 1986, "Population, Health and Nutrition". Report No. SR-6137-GUI, November 1986, "Issues and Options in the Energy Sector". 8 K.M. Larrecq and T. Manuelyan Atinc to R.F. Skillings (WA2DD), April 17, 1987. The causes of the delays for effectiveness are addressed in paragraph 20 below.  4 operation was designed to address the constraint of the Government's weak capacity for economic and financial management through: (I) the rationalization of the civil service; (2) the implementation of resource mobilization and financial management measures; (3) the continuation of public enterprise reforms; and (4) further improvements in the legal and institutional incentives framework to encourage private sector initiative and investments. The program also aimed at the development of a comprehensive social policy. 13. Loan Conditionalityfor Tranche Disbursements. SAC 11 was expected to be disbursed over 18 months in two tranches. The first tranche, to be made available at effectiveness, was to be released upon the following specific conditions being met satisfactorily: * adoption of the revised organizational structures of the Central Administration; * promulgation of the legal texts governing civil service employment: O ending the administrative reserve status for employees who could not be placed in the new public organization structure by December 1988 and eligibility to the voluntary departure scheme of public employees on administrative reserve, O defining the severance package for employees not retained within the civil service either because of testing results or restructuring of public enterprises, O extending the voluntary departure scheme to civil servants wishing to leave public employment prior to testing: * revision of the decree on cement production and imports toward an elimination of licensing and specific surtaxes; * ratification of the agreement setting up the new joint venture petroleum company, the Societe Guineenne de Petrole (SGP); * promulgation and publication of the Public Procurement Code and the Guinean General Accounting Law; * application of full cost pricing formula for imported food aid rice; * signature of the proposed Second Economic Management project (PAGEN 11). In addition, it had been agreed during negotiations that the central departments of the Ministries of Economy and Finance (MEF), of Planning and International Cooperation (MPCI) and of the Administrative Reform and Civil Service (MRAFP) would be reorganized and their staff confirmed in their new positions by December 31, 1988. 14. Second tranche release was contingent on the following conditions being met: * enactment of financial regulations and procedures governing central government financial transactions; * adoption of the 1989 budget with effective implementation of a public accounting system and submission of a report on the implementation of the 1988 budget; * adoption of a satisfactory 1989-91 public investment program; * adoption of the new organizational structure of the decentralized administration; * completion of the testing and selection process and implementation of decisions concerning retained and laid-off staff for all ministries but the teaching staff of the Ministry of National Education; * effective implementation of a central payroll service file at the Ministry of Economy and Finance and establishment of a permanent personnel and salary monitoring and control mechanism;  5 * establishment of a central corporate taxpayer file on the basis of a census of corporate taxpayers: * enactment of the loi-cadre governing State relations with the public enterprise sector. 1 5. Evaluation of Conditionalities. The conditions for disbursement of SAC 11 warrant several comments. First, there is a great variance in the expected macroeconiomiiic impact of the conditions: although the conditions related to rice and cement are valid and important for the developmenit of their respective sectors, their contribution to the global objectives of the program can only be considered at best marginal. Second, both the Memorandum of the President (MOP) and the Letter of Development Policy of the Govermilenit identified a sequencing of actions which would contribute to the long term sustainability of the reform process. "[The creation] of an efficient, motivated and qualified civil service" was considered the necessary condition for ilmprovements in the maniagemilenit of the nationial economy which included revenue enhanicemilenit, control over expenditures and public enterprise reforimi. In manly ways, the conditionis selected as bencihimiarks of progress under the program do not reflect this approach. With the exception of the creation of a central corporate taxpayer file, most conditionis, in particular those dealing with civil service. relate fundamentally to expenditure control if not outright expenditure reduction thus affecting the intenided balance in the reform program. The reforimi of the civil service is by nature an institution building exercise which would be unlikely to be completed within the short expected time frame of SAC 11 even with a supporting economiiic management project"0. Nevertheless the conditions overemphasized the cost reduction aspect of civil service reform at the cost of broader reforms aiming at the rationalization of its managemenit. Third. only one conditioni related to the promulgation of the General Accounting Law dealt specifically with the broad legal and institutional framework for private sector activities. Althoughi an important element, it is unclear whetlier this condition could help boost private investments when reports identificd the poor implemenitation of existing laws, notably the investmenlt code. as key constraints to the development of private sector activities. 16. The macroeconomic objectives for the program were: (i) an average aniual growvth rate of about 4 percent through 1993, predicated on a strong response from the private sector to the improved environment; (ii) a level of inflation by 1990 equivalent to that in Guinea's main trading partners: (iii) the mailiteniance of a constant real effective exchange rate over the period, (iv) the restoration of the level of available foreign exchange reserves to the equivalent of 16 weeks' imports (excluding imports related to the mining companies or the public investment program): (v) the steady increase in the rate of nationlal savings from 13 percent of GDP to about 18 percent by 1993; and (vi) the reduction of the external current account deficit to less than 4 percent of GDP starting in 1989 (despite the forecast drop in bauxite earnings and a projected rise in the share of gross domestic investment from 18 percent of GDP in 1988 to almost 21.5 percent in 1993). 17. Identified Risks. Two main risks were identified at the onset of the program: (i) a sharp expected decline in the international aluminum price which would have a negative impact on the projected improvement of Guinea's external and fiscal balances, (ii) the weak ability of the admniistration to execute the program effectively and in a thimely manner whilch was to be mitigated by the provision of technical assistance under PAGEN 11 (para. 19) and the appointment of a Technical Secretariat for the Co,niie de Coordlination7 Economique et Fmanci