Ghana - Private Investment and Sustained Development Promotion Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14827 PROJECT COMPLETION REPORT GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) JULY 3, 1995 Country Operations Division Central-Western Africa Department Africa Regional Office 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.  CURRENCY EQUIVALENTS (Cedis per US$1.00) 1988 1989 1990 1991 1992 1993 Annual average 202.3 270.0 326.3 367.8 437.1 630.1 End of year 224.9 303.0 344.8 390.6 520.8 822.0 ABBREVIATIONS AND PRINCIPAL ACRONYMS ASYCUDA - Automatic System of Customs Data Entry, Control and Management ERP - Economic Recovery Program ESAF - Enhanced Structural Adjustment Facility Fl - Financial Institution GIC - Ghana Investment Center GLSS - Ghana Living Standards Survey GOG - Government of Ghana HPAEs - High performing Asian Economies IMF - International Monetary Fund IRS - Internal Revenue Service KtW - Kreditanstalt fuer Wiederaufbau MFEP - Ministry of Finance and Economic Planning MSD - Management Services Division NRS - National Revenue Secretariat OECF - Organization of Economic Cooperation Fund PAB - Public Agreements Board PAMSCAD - Program of Actions to Mitigate the Social Costs of Adjustment PCR - Project Completion Report PEP - Public Expenditure Program PFP - Policy Framework Paper PIB - Prices and Incomes Board PIP - Public Investment Program PSAG - Private Sector Advisory Group SAC - Structural Adjustment Credit SAF - Structural Adjustment Facility SAP - Structural Adjustment Program SDR - Special Drawing Rights SEC - State Enterprise Commission SIDA - Swedish International Development Agency SOEs - State-Owned Enterprises VAT - Value Added Tax FISCAL YEAR January I - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General July 3, 1995 Operations Evaluation MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Ghana - Private Investment and Sustained Development Promotion Credit or Third Structural Adjustment Credit (Credits 2236. 2236-1. 2236-2-GH) Attached is the Project Completion Report (PCR) for the Ghana Private Investment and Sustained Development Promotion Credit (Credits 2236, 2236-1, 2236-2-GH), prepared by the Africa Regional Office. The Borrower did not prepare a Part II. This credit, also known as the Third Structural Adjustment Credit (SAC III), was approved in May 1991 in the amount of US$120 million and closed in July 1993. The project's principal objective was to improve Ghana's enabling environment for private investment. It focussed on measures (i) to improve incentives for private savings and investment by liberalizing the regulatory framework and rationalizing indirect taxes; and (ii) to reduce the size and improve the efficiency of the public sector through divestments, civil service reform, and improved public expenditure and public enterprise management. Moreover, the maintenance of macroeconomic stability was rightly regarded as a sine qua non for raising private investment. The PCR provides a balanced and insightful review of how and why the project came to have its mixed results. The PCR identifies some weaknesses in project design, e.g., inadequate specification of divestiture targets and processes, and unrealistic assumptions about the pace at which key institutional reforms could be achieved. With regard to implementation, good progress was achieved in improving the regulatory framework and in rationalizing taxes. But there was disappointingly slow progress in public enterprise and civil service reform and in improving public expenditure management. More importantly, the SAC's implementation period was marked by the reappearance of macroeconomic imbalances which still remain to be fully corrected. Release of the second tranche was delayed by the "coming off track" of the stabilization program in the latter half of 1992 owing to election-related overruns on government expenditures and shortfalls in revenues. This slippage in fiscal discipline led to increased inflation, exchange rate depreciation, increased interest rates, and other effects that led in turn to the decline of private investment, which fell to a low 4 percent of GDP over the project period, rather than rising as targeted. The PCR notes that release of the second tranche was arguably still premature as it was based upon Government undertakings to effect fiscal corrections only partially achieved during the project period. The main lesson is that maintaining a stable macro framework is critical for ensuring adequate private sector savings and investment. Mainly because of the slippage in fiscal discipline and the related fall in private investment, the project outcome is rated as marginally unsatisfactory. The institutional development impact is rated as modest. The PCR finds that the project's benefits, mainly in terms of reforms in the regulatory framework, appear likely to be sustained in the near term. Thus, sustainability is rated as likely. No audit is planned. Attachment This documcnt 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 PROJECT COMPLETION REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) PREFACE .................................................... i EVALUATION SUMMARY ...................................... iii PART 1. WORLD BANK REVIEW OF SAC III ......................... 1 A. Credit Identity ........................1.............. B. Background ................. 1 C. The Credit .................................. 2 1. Objectives ........................ 2 2. Design ........................ 3 3. Ownership ........................ 3 D. Implementation ................................. 4 1. Promotion of Private Investment and Savings ..... ............ . 4 a. Macroeconomic Framework .......................... 4 b. Tax Policies and Administration ........................ 5 c. Regulatory Framework ............................. 6 2. State-Owned Enterprise Reform ............... 6 a. Performance Contracts .............................. 6 b. Divestiture and Reduction in Size of SOE Sector .... ......... 7 3. Public Expenditure and Poverty Alleviation ..... ............. . 7 a. Expenditure Allocations ............................. 8 b. Poverty Alleviation ................................ 8 c. Budget Procedures, Expenditure Control, and Monitoring .... .... 8 4. Civil Service Reform ........................ 9 a. Civil Service Productivity ............................ 9 b. Personnel and Payroll Management ...................... 9 c. Improving Economic Policy Formulation ................. 10 E. Program Impact and Sustainability ...................... ... 10 1. Results .................... ..................... 10 2. Sustainability ..................................... 11 F. Bank Performance ................................... 12 G. Borrower Performance ................................. 13 H. Lessons Learned ..................................... 13 TWs octuen.thas a restzcted distuibutdon and may be used by recipients only in the pezforumice of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authonzadon. l  - 2 - PART II. PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE (NOT SUBM TED) ................................... 15 PART m. STATISTICAL INFORMATION ........................... 16 A. Related ]DA Credits ................ .................. 16 B. Credit Position ............ .......................... 17 C. Credit Timetable .................................... 17 D. Staff Inputs . ........................................ 18 E. Mission Data ....................................... 18 ANNEXES Annex 1. Letter of Development Policy ............................... 19 Annex 2. Policy Matrix ......................................... 33  PROJECT COMPLETION REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) PREFACE 1. This is the Project Completion Report (PCR) for the Private Investment and Sustained Development Promotion Credit, also called the third Structural Adjustment Credit (SAC III) of the International Development Association (IDA) to the Republic of Ghana. The Credit (2236-GH) of SDR 84.6 million (US$120 million equivalent) was approved on May 7, 1991, signed on June 10, 1991, and became effective on July 19, 1991. It was disbursed in two tranches. The first supplement (Cr. 2236-1-GH) of SDR 4.7 million (US$6.1 million equivalent) was approved on November 26, 1991, signed on February 7, 1992, and became effective on July 22, 1992. The second supplement (Cr. 2236-2-GH) of SDR 4.7 million (US$6.5 million equivalent) was approved on December 23, 1992, signed on January 26, 1993, and became effective on July 6, 1993. These credits supported the Government of Ghana's program to promote private investment and sustained development, described in Annex 1. 2. The first tranche of US$60 million equivalent was released upon effectiveness. Release of the second tranche, which had been scheduled some eight months after effectiveness, was delayed by almost twelve months, until February 1993. The delay was due initially to delays in implementing some of the reform measures and later to the re-emergence of large fiscal imbalances. The latter was due partly to by exogenous factors, such as falling cocoa prices, but more significantly to election-related slippages in expenditure and revenue targets. The Credit, including supplements of IDA reflows, was fully disbursed by August 1993. 3. Japan's Organization of Economic Cooperation Fund (OECF) and Germany's Kreditanstalt fuer Wiederaufbau (KfW) co-financed the Credit with loans of T6.3 billion and of DM 20 million, respectively, released by February 1993. The Swedish International Development Association (SIDA) also supported the program with a grant of SKr 10 million (US$1.6 million equivalent) under the Fifth Dimension to cover debt-servicing by the Republic of Ghana on IBRD loans. 4. The PCR was prepared by the Country Operations Division, Central-Western Africa Department, Africa Region, (Preface, Evaluation Summary, Parts I and m, and the Annexes). On several occasions, the Borrower was requested to present its own evaluation but none has been received. Thus, Part II is not included. 5. Preparation of this PCR is based on the Initiating Memorandum, the President's Report, the Credit Agreement, relevant Country Economic Memoranda, supervision reports, correspondence between the Bank and the Borrower, other internal Bank documents, as well as discussions with Bank and IMF staff and with Government officials.   - iii - PROJECT COMPLEMION REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) EVALUATION SUMMARY A. Introduction 1. Ghana is well endowed with a broad range of natural resources. It has traditionally depended on production and exports of primary products, especially cocoa and gold. Agriculture employs 60 percent of the labor force; it accounts for 48 percent of GDP. The service sector employs 25 percent of the labor force; it accounts for 36 percent of real GDP, largely in trade and public sector services. The industrial sector accounts for about 16 percent of both GDP and employment; it is relatively diverse and well-developed by Sub- Saharan African standards. Inappropriate economic policies and deteriorating external terms of trade led to substantial declines in GDP in the 1970s and early 1980s. Between 1970 and 1983, import volumes fell by a third, real export earnings declined by 52 percent, and domestic savings and investment declined from 12 percent of GDP to less than 6 percent. The annual inflation rate exceeded 100 percent. 2. The Government's gradualist adjustment strategy, adopted in 1983 under the Economic Recovery Program (ERP), turned the economy around. In the 10 years prior to the introduction of the ERP, real GDP fell by 2 percent per annum; in the years since its introduction, real GDP has risen by 5 percent per annum. The ERP enjoyed substantial donor support, including financial assistance from the IMF and other multilateral and bilateral donors. The IMF, under various facilities, provided assistance totalling SDR 763.8 million and the Bank provided nearly US$1 billion in quick disbursing adjustment loans. 3. By the eve of Board approval of the Third Structural Adjustment Credit (SAC III) in 1991, the ERP had moved Ghana from a grossly overvalued multiple exchange rate system to a market-determined system; from a quantitatively controlled trade regime to a low tariff import regime; and from an economy with price controls to one without. The financial sector had been partially reformed; however, much more remained to be done to enhance financial intermediation. Reform of the tax regime, investment regulations, public enterprises, public expenditure management, and the civil service remained to be started. 4. SAC III was cofinanced by Japan's Organization of Economic Cooperation Fund (OECF), Germany's Kreditanstalt fuer Wiederaufbau (KfW), and Sweden's International Development Agency (SIDA). The IMF supported the program through an ongoing Enhanced Structural Adjustment Facility (ESAF) covering the period of November 1988 to March 1992 and subsequently through an Enhanced Surveillance Program.  - iv - B. Objectives and Design 5. The broad objective of SAC III was to support the Government's program to promote higher levels of private investment and savings in the economy, as a basis for faster growth and poverty reduction. The Credit's specific objectives were: (i) to maintain a stable macroeconomic environment that facilitates private investment and savings; to improve incentives for private investment and savings; to promote a more dynamic supply response to the program; and to expand economic opportunities for private initiative; (ii) to improve efficiency and financial performance; to increase accountability; and to reduce the size of the public sector; (iii) to ensure that public expenditures are consistent with the macroeconomic framework; to improve allocations for operations and maintenance; to increase efficiency of public spending and improve the focus on poverty alleviation; and to strengthen budget procedures, and expenditure control and monitoring; and (iv) to improve effectiveness of public administration; to enable the Government to attract and retain qualified staff; and to strengthen personnel and payroll management. The Government's Letter of Development Policy (attached as Annex 1), and the Policy Matrix (Annex 2) set out the program's objectives and the concrete measures needed to achieve them. 6. The Credit suffered from several weaknesses in design. First, its coverage was too broad, and it lacked depth and specificity in some areas. As a result, although tranche release conditions were met, substantive progress was not always apparent. Second, the private investment and savings targets were too ambitious, in terms of both the speed and the size of the response. Third, the projected implementation period was overly ambitious-only eight months had been allowed between Credit effectiveness and second tranche release. During this period, a number of complex institutional measures were to have been taken-on involving the private sector in formulating an action program, on divestiture, on civil service personnel and payroll management, and on public expenditure management. Fourth, several components were imprecisely defined. The targets and processes for the divestiture program could have been better specified, and the details of the pay and grading reform of the civil service could have been spelled out. This also would have helped to define "satisfactory progress" and for purposes of second tranche release, thus making a definitive assessment of the status of compliance with program undertakings more straightforward. C. Implementation 7. Nor did implementation of the program proceed as planned. To a large extent, this was simply the flip-side of the optimistic design. But serious delays also occurred as a result of setbacks in macroeconomic performance during 1992. Because of an 80 percent wage increase granted to civil servants in late 1992, during the run-up to presidential and parliamentary elections, there were substantial overruns on government expenditures. There were also major election-related slippages in budgetary revenue collections and in other program measures. The second tranche was released in February 1993, almost 12 months later than projected in the implementation schedule. The decision to release the tranche was based on agreement with the Bank and the Fund on the macroeconomic framework for 1993; in the event only one half the fiscal correction was actually implemented. The other half of the needed correction looks likely to be implemented in 1994. D. Results 8. Significant progress on SAC III's private sector development components was achieved. Many restrictive regulatory provisions were repealed and most of the restrictive  - v - clauses in the 1985 Investment Code were amended. The number of industries reserved exclusively for Ghanaians was reduced (from 20 to 4); minimum foreign capital requirements were reduced (from US$60,000 to US$10,000 for joint ventures, and to zero for export trading enterprises); and the investment license requirement was eliminated. The program also resulted in significant reductions in, and rationalization of, corporate tax and import tax rates. The top marginal corporate tax rates were reduced from 55 and 50 percent to 35 percent for all sectors, making Ghana one of the lowest corporate tax-rate countries in the developing world-similar to many East Asian and Caribbean countries. In addition, the non- uniform special import sales tax of 1040 percent, was reduced to a single uniform rate of 10 percent. The overall import duty structure was reduced to three tiers of 0, 10, and 25 percent-from the previous four tier structure of 0, 10, 20, and 25 percent. 9. More limited results were achieved on public enterprise reform, civil service reform, and public expenditure management. On divestiture, 28 State Owned Enterprises (SOEs) were divested between 1991 and 1993. Sales contracts were signed for another 16 SOEs, but sales were not consummated. In the absence of physical targets for divestiture under the Credit, there was no objective basis to relate actual performance to what was expected under the program. Nor were there process benchmarks for evaluating how the divestitures were accomplished. The performance contracts signed with 13 priority SOEs had positive effects on profits; however, their efficiency-increasing effects were muted by continuing Government controls on pricing and procurement. On civil service reform, there was only limited progress in revising the pay grading structure. On public expenditure management, there were some improvements, including the preparation of a rolling three-year public investment program and increased attention paid to recurrent cost implications of the investment program. But very significant gaps in overall expenditure management remain. 10. The program's bottom-line impact on private investment and savings was much smaller than targeted under the Credit. (See Below.) The projected increase in private investment and savings did not materialize. On the contrary, both private investment and savings declined during the program period. In part this was because the targets were too ambitious. But the larger reason was the macroeconomic instability in 1992 that carried over into 1993. Indeed, the large election-related fiscal shock (in terms of much higher civil service pay and benefits) and political uncertainty had a negative effect on private savings and investment. Investment & Savings: Actual vs. Target 1990 1991 1992 1993 (Percentages of GDP) Gross Investment Actual 14.4 15.9 12.8 13.9 Target 16.9 17.8 19.0 Private Investment Actual 7.6 8.1 4.3 4.0 Target 8.8 9.8 10.6 National Savings Actual 7.4 9.3 4.2 0.2 Target 9.1 11.5 13.5 Private Savings Actual 5.8 6.1 6.4 1.2 Target 5.5 7.5 13.5  - vi - E. Sustainability 11. SAC III's private sector achievements on taxation and regulatory framework appear likely to be sustained. They have been locked-in by administrative changes. And since the Credit closed, the Government has taken a number of important steps that also point towards sustainability. On regulations, the Government is in the process of approving into law a new, more liberal Investment Act. On taxation, it has prepared a value added tax (VAT) to be introduced in 1995. Preparation of this component of the Credit helped to develop substantial private sector ownership through the establishment of, and discussions in, the Private Sector Advisory Group (PSAG). The establishment of PSAG has since spawned other groups (with wider participation) for public sector-private sector interactions, such as the new Private Sector Roundtable and the Private Enterprise Foundation. The process set in train under SAC III thus helped to empower the private sector in the policy formulation process. Arguably, this was SAC III's most important achievement. 12. For public enterprise reform, civil service reform, and public expenditure management, ownership remained weak throughout the program period. However, there is considerable evidence that ownership is now developing, and that the reform process is beginning to build momentum. On privatization, the Government has passed an omnibus bill converting statutory corporations into joint-stock companies, thereby facilitating their sale. In an important step, it has recently sold some of its shares in the largest state-owned company, Ashanti Goldfields, and in seven minority holding companies traded on the stock exchange. On civil service restructuring, it has established two steering committees (with high-level leadership) to examine public service reform and capacity building in Government. On public expenditure management, it has for the first time completed its own public expenditure review and is developing a medium-term strategy for improving public expenditure management. F. Lessons Learned 13. The main lessons to be learned from SAC III are: * Maintaining a stable macroeconomic framework is critical for ensuring adequate private sector savings and investment. This requires appropriate fiscal and monetary policies. Looking to the future, the Ghanaian Government should focus on establishing the structural foundations for sustained macroeconomic balance. Without this, the desired private sector response may not be forthcoming, and faster growth will not be achieved. * Broad-based stakeholder participation and ownership speeds implementation. Good program design requires intensive preparatory work and significant inputs from those who will be called on to implement program measures. Without it, the risks of slippages in a time-bound program are larger than they need be. Substantial up-front actions at the onset of the program are an effective test of stakeholder ownership and participation. * Realistic projections prevent unnecessary disappointments. In designing an adjustment credit, care should be taken to be realistic about the projected speed of the economic response to the reform program; otherwise, the credit may raise expectations that cannot be met. Confidence in reform may be undermined.  - vii - * Clearly defined tranche release conditions facilitate implementation and supervision. They establish a more objective basis for assessing whether actual performance is in line with program undertakings. * Follow-up enhances sustainability. Divestiture, public expenditure management, and restructuring of the civil service are critical areas where dialogue and reform must continue if Ghana is to achieve faster growth.   PROJECT COMPLEIMON REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDIS 2236, 2236-1, 2236-2.-GED PART 1: WORID BANK REVIEW OF SAC IH A. Credit Identity Credit Name: Private Investment and Sustained Development Promotion Credit (SAC III) Credit Numbers: 2236, 2236-1, 2236-2-GH RVP Unit: Africa Region (AF4CO) Country: Ghana Sector: Macroeconomic B. Background 1. In 1983, following a decade of decline, Ghana introduced sweeping reforms under the Economic Recovery Program (ERP). Enhanced revenue collections, complemented by substantial external aid, enabled the Government simultaneously to rebuild the country's social and physical infrastructure and to restore fiscal balance. The improved fiscal balance in turn facilitated monetary restraint. Inflation was brought down from 123 percent in 1983 to 40 percent in 1990. The official exchange rate was devalued substantially, and a foreign exchange auction was introduced. The extensive price control system was progressively dismantled, and interest rates were liberalized. Quantitative import restrictions were phased out. The ERP was supported by substantial IDA financial assistance, as well as financial assistance from the IMF and other multilateral and bilateral donors. The IMF, under various facilities, provided assistance totalling SDR 763.8 million, and the Bank provided nearly US$1 billion in quick disbursing adjustment credits. 2. SAC III was intended to support Government efforts to deepen the adjustment process. It complemented ongoing sector adjustment loans in agriculture and finance and supported the Government's stabilization program described in Policy Framework Paper (PFP) 1991-93.' It was also a logical follow-up to two previous adjustment operations (SAC I and II), and earlier Economic Recovery Program Credits. Stabilization of the economy was a major goal throughout the reform period, but the program's focus on structural measures had increased over time. From 1983 to 1986, the policy focus had been on macroeconomic stability and trade and exchange rate reforms. Between 1986 and 1991, the focus broadened Joint Government of Ghana, Bank, and IMF. Ghana: Policy Framework Paper January 1992-December 1994.  - 2 - to include structural reforms-starting with industry and education in 1986, and followed by financial sector reform in 1988 and agricultural reform in 1991. 3. When SAC III was being designed in 1990, Ghana's savings and investment rates were 7 and 14 percent respectively. Though substantially higher than at the start of the ERP, they were still low-even by Sub-Saharan African standards. It was thus recognized that if Ghana was to grow faster, it would need to save and to invest more. Since public investment was expected to grow more slowly than in the past, growth in private investment would need to lead overall investment. This would require restraint on the fiscal deficit to ensure that the resources would be available for the private investment, coupled with measures to ensure the efficiency of public expenditures and public enterprises. Given the private sector's apparent uncertainty about Government intentions, the Government also needed to move toward greater openness, less intervention in private economic decisions, a more transparent legal and regulatory system, and better dissemination of information on the economy and on policies and greater assurances about the Government's commitment to private-sector-led growth. Given the very strong presence of the Government in the enterprise sector,2 public enterprise reform and privatization were also seen to be key areas. C. The Credit 1. Objectives 4. SAC III's broad objectives were to support the Government's program to promote higher levels of private investment and savings in the economy, as a basis for faster growth and poverty reduction. Its specific objectives were: (i) to maintain a stable macroeconomic environment that facilitates private investment and savings; to improve incentives for private investment and savings; to promote a more dynamic supply response to the program; and to expand economic opportunities for private initiative; (ii) to improve efficiency and financial performance of State-owned Enterprises (SOEs); to increase accountability; and to reduce the size of the public sector; (iii) to ensure that public expenditures are consistent with the macroeconomic framework; to improve allocations for operations and maintenance; to increase efficiency of public spending and improve the focus on poverty alleviation; and to strengthen budget procedures, and expenditure control and monitoring; and (iv) to improve effectiveness of public administration; to enable the Government to attract and retain qualified staff; and to strengthen personnel and payroll management. The Government's Letter of Development Policy (attached as Annex 1), and the Policy Matrix (Annex 2) set out the program's objectives and the concrete measures needed to achieve them. 5. SAC III was co-financed by Japan's Organization of Economic Cooperation Fund (OECF), Germany's Kreditanstalt fuer Wiederaufbau (KfW), and Sweden's International Development Agency (SIDA). The IMF supported the program through an ongoing Enhanced Structural Adjustment Facility (ESAF) covering the period of November 1988 to March 1992 and subsequently through an Enhanced Surveillance Program. SAC III plus related co- 2 Private manufacturing accounted for only a small share of the total, consisting of mostly very small enterprises. According to the 1987 industrial census, some 92 percent of 8,351 recorded Ghanaian private enterprises had fewer than 30 workers; medium- and large-scale enterprises constituted only 8 percent of the total; and only 52 firms (some 0.6 percent of the total), employed more than 500 workers. The public sector dominated manufacturing in 1990, even after seven years of reform. The Govemment still had majority ownership in more than 230 small and medium State-Owned Enterprises (SOEs) and 17 large and strategic SOEs, which accounted for 60 percent of employment and 66 percent of value added in the sector.  - 3 - financing helped fill the balance of payments gap for the 1991-93 period. This was a central topic of discussion at the Consultative Group Meetings in 1991 and 1993. 2. Design 6. To achieve these objectives the Government's program focussed on maintaining macroeconomic stability as a sine quo non of a sustained supply response, and on: * reducing and rationalizing direct and indirect tax rates and liberalizing the regulatory framework for private investment; * rationalizing the SOE sector through divestment and through increased efficiency of core enterprises; * reforming the civil service; and * improving the management and poverty orientation of public expenditures. 7. The thinking behind the Credit's design was as follows. Maintenance of macroeconomic stability would build private sector confidence in the incentive framework, while reductions in corporate tax rates, liberalization of the regulatory framework, privatization, and continuing commitment to a market-determined exchange rate and a liberal trade regime, were expected to signal Government's strong commitment to a hospitable environment for private investment. Emphasis on public expenditures for poverty alleviation (through increased spending on primary health and education and better provision of public goods and services) would strengthen the country's human capital and better allocation to infrastructure and operations and maintenance would help crowd-in private sector growth. Finally, cutbacks in the size of the civil service and reforms in its pay and grading were expected to increase its effectiveness and reduce the budgetary cost of the civil service. 8. The Credit had two tranches. The first was made available on effectiveness. The second was be made available after a satisfactory review of progress that depended on eight specific conditions as well as implementation of the overall program. The program was back- loaded. Most of the measures were to be implemented after approval of the Credit. Indeed, even agreement on many of the specific measures was to follow approval of the Credit. A few changes in tax rates were implemented up front. 3. Ownership 9. The content and design of the program was developed through policy dialogue between the Bank and a few Government ministries, including the Ministry of Finance and Economic Planning. The Ghanaian private sector also participated in formulating parts of the program. Credit design was based on diagnostic work carried out collaboratively with the Government and Bank staff to ascertain the impediments to private investment. The dialogue between the Government and private sector through the establishment of the Private Sector Advisory Group (PSAG) was instrumental in developing specific measures to remedy the identified problems. A joint IDA/Government report entitled "Towards a Dynamic Investment Response", prepared in 1990, had identified the key areas where reform was required to promote private investment. The PSAG, consisting of representatives from Ghana's private sector, was then asked to develop a consensual set of recommendations in respect of the regulatory framework and the tax regime. Though the latter's recommendations took longer than expected-they were made nearly a year after approval of the Credit-the consensus and ownership that developed as a result of PSAG's discussions no doubt contributed to their implementation and sustainability.  -4 - 10. Ownership of the various components was uneven. While reforms of the tax regime and the regulatory framework had stronger Ghanaian ownership and greater depth, the same was not true for areas involving SOE reform, civil service reform, and public expenditure management. The greater attention to involving private sector stakeholders no doubt contributed to the greater ownership of the private sector components. This involvement and ownership was lacking for the other components. Indeed, the very broad scope and lack of specificity for those components provided early clues about their limited ownership. Had stakeholders been involved, the targets and processes for the divestiture program would most likely have been specified and the details of pay and grading reform of the civil service spelled out. This would have helped to define more clearly what is meant by "satisfactory progress" and "progress in implementation" in reform areas that constituted second tranche conditions, thereby making a definitive objective assessment of "satisfactory progress" easier. D. Implementation 11. The second tranche was released almost al year later than scheduled. The slow pace of implementation of legal and regulatory reforms, of divestiture, and of civil service reform was accompanied by increased macroeconomic instability, especially in terms of a higher fiscal deficit. The latter was mostly election-related, reflecting an 80 percent increase in salaries for civil servants, but it also reflected slippages in revenue collections, from a fall in international prices for Ghana's major exports-cocoa, gold, and timber. 12. Major structural reforms were implemented during the program that were aimed at promoting private sector growth. These reforms can be divided into four categories: promotion of private savings and investment, state-owned enterprise reform, public expenditure management, and civil service reform. 1. Promotion of Private Investment and Savings 13. Maintenance of macroeconomic stability amd exchange rate reform, rationalization of taxes, and liberalization of the regulatory framework were to help promote private investment and savings. a. Macroeconomic Framework 14. Following steady improvements in macroeconomic management from 1986 to 1991, there was a sharp reversal in 1992. None of the Government's macroeconomic targets were met. Performance in the real economy was also worse than projected. Real GDP growth has been targeted at 5 percent; only 3.9 percent was achieved. Poor performance in agriculture, where cocoa production fell, and in the manufacturing sector were major contributors. 15. But the major problem was fiscal policy. During the run-up to the elections, civil servants demanded and obtained a 80 percent wage increase in October 1992, which was made retroactive to July 1992. The Government also agreed to pay out to all employees of SOEs and subvented organizations, end-of-service benefits that had accrued up to (and had been frozen) in 1990 when a pension scheme was adopted. Workers began receiving cash payouts from accumulated funds, starting with 20 percent for workers at SOEs and 25 percent for subvented organizations in 1992. These payments alone amounted to some (120 billion, or 6.5 percent of GDP in 1992. The balance was to be given in three equal installments at an interest rate of 16 percent, to be paid semi-annually. On the revenue side, there were serious  collection shortfalls in both direct and indirect taxes; part of the cocoa tax shortfall was due to the decline in world cocoa prices. 16. The fiscal slippages overwhelmed monetary policy. Broad money grew by 52 percent in 1992, with most of the growth coming in the last quarter of the year. While inflation for 1992 averaged 10.1 percent (as against 18 percent in 1991), there was excessive liquidity in the monetary system. As a result, the average inflation rate for 1993 was 24.4 percent. 17. Management of the exchange rate system was broadly satisfactory during the program period. The Government's program to ensure and maintain market-determined exchange rates was successful. The foreign exchange markets, unified in April 1990 with the introduction of a weekly wholesale auction of foreign exchange, were strengthened in 1991 by a change permitting all export proceeds, except for cocoa and gold, to be sold to banks and bureaus. This gave commercial banks a larger share of export proceeds. In March 1992, the Bank of Ghana terminated its weekly wholesale auction of foreign exchange and replaced it with an interbank market. 18. During 1991, the cedi's nominal value depreciated by 12 percent against the U.S. dollar, but the real effective exchange rate remained broadly stable. Throughout 1992, the cedi's external value declined (particularly during the final quarter) as financial policies became increasingly expansionary. Consequently, on an end-period basis, the real effective exchange rate depreciated by 15 percent in 1992. There was further depreciation in 1993. Although the Central Bank tried to exert moral suasion to keep the exchange rate steady, it gave up this effort after July 1993, when the exchange rate depreciated substantially in response to the expansionary monetary policies of 1992 and 1993. b. Tax Policies and Administration 19. The rationalization of the tax regime was a major achievement of SAC III. The 1992 and 1993 budget helped merge personal and corporate income tax rates, harmonize rates across sub-sectors, eliminate the super sales tax, and make the non-uniform special import sales tax rate unifonn at 10 percent. 20. The top marginal tax rate on personal income was reduced from 55 percent at the end of 1990 to 40 percent in 1992, reducing the difference between the top marginal tax rates on personal and corporate income. By lowering corporate tax rates on financial institutions, and printing or publishing businesses, differences in corporate tax rates among different businesses were also reduced. The top marginal rate on financial institutions was reduced from 50 to 45 percent in 1991 and to 35 percent in 1993. For printing, publishing, and commerce, the top rate was reduced from 50 percent to the standard 35 percent in 1992. Progress was also made in negotiating agreements with principal trading partners to avoid double taxation. The period for carryover of losses was extended, and the withholding tax on dividends was reduced from 15 to 10 percent. 21. There was also a rationalization of the indirect tax regime. The "super" sales tax on imports was eliminated, and the special sales tax on imports was made uniform at 10 percent in 1992. The four-tier import duty structure was reduced to three-tier with duty rates of 0, 10, and 25 percent. The standard rate of sales tax was reduced from 22.5 percent to 17.5 percent with a drop in the concessional rate from 10 percent to 7.5 percent in 1991 and the standard rate was lowered to 15 percent in the 1993 budget.  - 6 - c. Regulatory Framework 22. The Government repealed several acts and decrees and amended a few others. Although liberalization had to await the recommendations of the PSAG, which was available in April 1992, the reforms were quite substantial. By early 1993 the regulatory framework became as liberal as the Credit and the diagnostic report had initially envisaged. Private investors are expected to benefit significantly from these changes. 23. In the event, the Government repealed the Manufacturing Industries Act (1971), the Price Control Decree (1974) and the Control of Sale of Specific Goods Decree, (1976). The Government also amended or removed restrictive aspects of a number of other Acts and Decrees, including the Industrial Relations Act (1956 and 1965), and Labor Decree (1967), so that firms with paid-up capital of US$10,000 to US$100,000 would be allowed to hire up to two expatriates automatically, and firms with US$100,000 and above, could hire four. 24. Several amendments were made to the 1985 Investment Code and Regulations. Industries reserved exclusively for Ghanaians were reduced from 20 to 4 and the minimum foreign capital requirement was lowered from US$60,000 to US$10,000 for joint ventures and to zero for export-trading enterprises. Payment of royalties and fees to foreign firms and requirements for investment licenses were liberalized from the end of 1992. The Government has now drafted a new, more liberal Investment Act, which incorporates these amendments and intends to make the Ghana Investment Centre a promotional rather than a regulatory body. 2. State-Owned Enterprise Reform 25. The overall objective of the SOE reform was to improve efficiency and financial performance by increasing accountability and to reduce the size of the sector. Though there was progress under the program, much more needs to be done in this area. a. Performance Contracts 26. The State Enterprise Commission (SEC) monitors the performance of state owned enterprises. Accordingly, thirteen performance agreements were executed during the life of this Credit between the Government and "core" enterprises. These agreements were expected to improve SOE efficiency, by identifying specific responsibilities of both parties and by establishing performance targets. 27. The following thirteen core enterprises reached agreement with the Government on updated corporate plans: Volta River Authority, The Electricity Corporation of Ghana, Ghana Water and Sewerage Corporation, Posts and Telecommunication Corporation, Ghana Airways, Ghana Railway, The State Shipping Corporation, The Ghana Cocoa Board, The Ghana Italian Petroleum Corporation, The Ghana National Petroleum Corporation, The Ghana Supply Commission, Ghana National Procurement Agency, and Ghana Oil Company Limited. Though some utilities were nominally given tariff-setting authority under their performance agreements, they were not allowed to raise their tariffs. 28. These companies' after-tax profits rose considerably over this period. But there appears to have been little sustained impact of the performance contracts on efficiency. In part this was because pricing and procurement decisions did not actually shift to the SOEs. There  has been some increase in tax payments by SOEs. Nor did the envisaged separation of commercial and non-commercial operations materialize. b. Divestiture and Reduction in Size of SOE Sector 29. Ghana's divestiture program, aimed at reducing the size of the public sector, has progressed slowly, in part because of the time needed for initial preparation but mainly because of nontransparent procedures used for implementing divestiture. Of the more than 263 or so majority-owned public enterprises in 1988, only 64 had been divested by end- 1993-that is either liquidated or sold to the private sector with more than 50 percent of the proceeds collected. Of this, only 28 were divested between 1991 and 1993, the programn period for the Credit. Though sales contracts were drawn up for another 16 enterprises during that period, little or no payments were made by the prospective buyers. These numbers do not include the recent sale of government shares in the Ashanti Goldfields Corporation, the largest mining company in Ghana, and in seven minority-owned companies listed on the Ghana Stock Exchange. 30. In the absence of specific targets under the SAC III program, it is difficult in retrospect to judge whether the divestiture of 28 SOEs during the program period was satisfactory, but in any event, the pace of divestiture was clearly slow. The lack of a codified set of procedures for divestiture and the use of non-transparent processes by the Divestiture Implementation Committee (DIC) for implementing divestiture raises questions about the design of the divestiture under the Credit. 31. DIC practices for obtaining bids and selecting the winner were not transparent. There were no standardized contracts, or bid documents, and selection criteria for tenders. Tender documents did not specify non-price terms up front. Thus price bids could not be compared because they came with different non-price terms. Post-bid negotiations were carried out with most or all bidders simultaneously, on both price and non-price terms, instead of being pursued first with the highest bidder. Thus selection of winners has been a slow and non- transparent process contrary to international norms, even when there were a sufficient number of bids. Reservation prices were based on replacement value instead of market value of SOE or liquidation value of its assets, making for fewer bids. 32. This ad-hoc and non-transparent process must have reduced investor interest because of both high transaction costs and a highly uncertain outcome. Bidders were too few and where there were many, most of them were not serious investors, as is evident from the large number of sales contracts for SOEs that were not consummated during the program period and after. Bid prices were not optimal so as to leave room for further negotiation. And many bids were placed without the backing of financial support, which was possible because of the absence of a bid-bond requirement. 3. Public Expenditure and Poverty Alleviation 33. The primary objectives of the public expenditure component of SAC m were to ensure that public expenditures were consistent with the macroeconomic framework; to improve allocations for operations and maintenance; to focus more on alleviating poverty; and to strengthen budget procedures, and expenditure control. While election pressures thwarted efforts toward the first objective, some progress was made on the others.  - 8 - a. Expenditure Allocations 34. Ghana and IDA were to agree on the 1992 allocatiore for recurrent expenditures and on the 1992-94 Public Investment Program (PIP) as one of the conditions for tranche release. Although election-year expenditure pressures caused slippages, which shifted the balance of expenditures toward remunerations, the Government has subsequently made considerable efforts to re-establish the pattern of expenditures that prevailed prior to 1992. Furthermore, in keeping with the progress made in internalizing the public expenditure review process that has taken place over the years, the Government has taken the lead in carrying out the 1994 Public Expenditure Review. Increasing attention has been paid to recurrent cost implications of the PIP through improved information and budgetary processes. The PIP continued to emphasize improvements in economic and social infrastructure. Improved fiscal information and better integrated oversight of development and recurrent budgets were expected to help meet the recurrent costs of the investment program. These important areas of progress notwithstanding, the question of actual spending and its intersectoral allocation were not addressed by the Credit, or by its implementation. b. Poverty Alleviation 35. The 1992 development budget included regional information on expenditures, which helped adjust social sector expenditure allocations to reflect regional priorities for poverty alleviation. The Government made commitments to ensure that the development budget would focus on services of most benefit to the poor. It incorporated poverty concerns in the budget by analyzing the distribution of actual expenditures in 1991 and by assessing actual experience in the use of poverty guidelines-including proposals for possible adverse modifications and extensions. In the 1993 budget-to counteract possible income distributional effects of the higher petroleum prices in the budget-C10 billion was set aside for an expanded program of social infrastructure rehabilitation and development in rural areas and in densely populated urban areas aimed at improving sanitation, water supply, and education and health facilities for the poor. Weaknesses in expenditure reporting procedures however, make it difficult to assess whether the shift in expenditures toward poorer regions and toward these programs actually took place. Nevertheless, the regional exercise generated considerable interest. Because of this work, poverty-related information is now contributing to discussions during Ghana's budget preparation. c. Budget Procedures, Expenditure Control, and Monitoring 36. As one of the conditions for tranche release, the Government revised the contract approval process. Biannual expenditure reports were prepared, but their data remained provisional. To further strengthen the expenditure monitoring system, the Government is preparing the introduction of a comprehensive commitments-based expenditure monitoring system. 37. Also, starting with the 1992 budget, there has been very substantial progress towards presenting the budget in a "broad-based" format and including regional information in the development budget. These innovations represent a significant enhancement in budgetary presentation. They make the budget more meaningful as a gauge of public spending financed by taxation and borrowings. The broad-based budget expenditure concept includes not only 3 With the carryover of the tranche release to 1993, the review also considered the 1993 budget and expenditure allocations.  -9- narrow budget expenditures, which are the sum of recurrent budget, and the domestically financed portions of the development budget and net lending, but also externally financed expenditures. Though progress was made in presenting a government budget that includes donor-financed development expenditures, there is still a long way to go before donor- financed projects become an integral part of the budget process. 4. Civil Service Reform 38. Key objectives of the Credit were to improve the effectiveness of public administration, to enable the Government to attract and retain qualified staff, and to strengthen personnel and payroll management. Notwithstanding the substantial increase in civil service salaries in 1992 and several interventions designed to improve public sector effectiveness, public servants spent most of their time and effort learning how to work within new, representative institutions. a. Civil Service Productivity 39. The program aimed to improve civil service efficiency over the medium term. Steps to reduce overstaffing and to improve the pay and grading framework were taken as planned in 1991 and 1992, and closer links were established between the management services and budget divisions of the Government. Gross redeployment numbers for the civil service were on target during 1991 and 1992. 40. After the 1991 salary adjustment, a simpler grading structure was expected to be introduced in 1992 supported by SAC III. This grade structure was to improve equity by removing anomalies in the existing system, relate pay to skills, establish a cadre of managers with its own pay and career provisions, reduce the number of occupational groupings to simplify management and improve mobility, and provide a better foundation for career development generally. The number and overlap of grades was to be reduced, and relativities between grades improved, with higher skill categories being granted larger percentage increases than lower skilled workers. 41. As noted, during 1992, the Government granted an 80 percent salary increase to civil servants, which was intended to reduce the still-substantial disparities between the civil service and the rest of the public sector; the increase was made retroactive to July 1, 1992. Along with the general salary increase, the Government also pushed forward with its program of pay reform. First, it introduced a revised grading system in the Traditional civil Service designed to simplify personnel management by reducing the number of grades and decreasing the currently extensive overlap between them. Second, through the pay increase, the relativities across grades were improved; higher skill categories were granted larger percentage increases than lower-skilled workers. However, it was clearly not a cost-effective way to improve pay relativities; only 10 percentage points of the 80 percent increase can be attributed to pay and grading revisions. b. Personnel and Payroll Management 42. Government efforts to strengthen personnel and payroll management were sustained. Over the years the Management Services Division (MSD) of the Office of the Head of the Civil Service has played a key role in bringing about improved efficiency. It has instituted ongoing job inspections and management reviews and has tried to streamline organizations and reduce duplication of functions. It has also played an important role in annual manpower  - 10 - budgeting carried out by the Finance Ministry. As a condition of tranche release, an integrated personnel and payroll management information system was developed. 43. Work on the computerized personnel and payroll management system has progressed well. Personnel and payroll data for all civil servants and education service employees are now being computerized centrally, and the system is expected to become operational after a period of testing-18 months behind the original schedule-by September 1994. c. Improving Economic Policy Formulation 44. The role of the Policy Analysis Division in the Ministry of Finance and Economic Planning (MFEP) is to help improve the implementation of economic policy reform and to ensure better coordination with related sector programs. A study was undertaken by the Government on how to strengthen its organization, operation, and staffing. E. Program Impact and Sustainability 1. Results 45. The results of the program supported by the Credit were mixed. Reforms in all areas were implemented broadly as programmed. But in some areas the impact was small because the program's measures did not address the central problem. In other areas, the impact of the program's measures was undermined by the election-related fiscal shock in 1992. 46. Private investment and savings, instead of rising as projected under the program, was substantially lower in 1992 and 1993 than in the previous two years. Table 1 shows that private investment fell from 8 percent of GDP in 1991 to around 4 percent in the subsequent two years. This was largely because the election-related fiscal shock and political uncertainty had a negative effect on private investment behavior. Private savings (as a share of GDP) fell sharply in 1993. Table 1. Investment & Savings: Actual vs. Target 1990 1991 1992 1993 (Percentages of GDP) Gross Investment Actual 14.4 15.9 12.8 13.9 Target 16.9 17.8 19.0 Private Investment Actual 7.6 8.1 4.3 4.0 Target 8.8 9.8 10.6 National Savings Actual 7.4 9.3 4.2 0.2 Target 9.1 11.5 13.5 Private Savings Actual 5.8 6.1 6.4 1.2 Target 5.5 7.5 13.5 47. Private Sector Development. As noted, the regulatory framework was substantially liberalized and tax rates were significantly reduced and rationalized. Success in these areas was due in large measure to the consensus-building carried out under the PSAG. By the time  - 11 - SAC III closed, segments of the private sector still had doubts about Government intentions for private sector development; but the private sector/public sector dialogue had clearly begun. 48. SOE Reform. Though 28 SOEs were divested between 1991 and 1993 and transferred to buyers, no codified set of guidelines on Divestiture Procedures was called for or developed under the program. Performance contracts were signed between Government and 13 SOEs to improve their efficiency, but pricing and procurement decisions continued to be made by the Government Ministries rather than SOEs. Efficiency improvements in those SOEs thus remain limited. 49. Public Expenditure Management. The program succeeded in ensuring that budgetary allocations were in line with Government objectives to increase recurrent expenditures for operations and maintenance as well as development and recurrent expenditures for education and health. The program, however, was unable to ensure that actual expenditures were in line with those allocations. This was largely because of basic weaknesses in Ghana's budget execution, accounting, and monitoring systems, which were not a focus of the program. These issues are now being addressed. The recently completed Government-led Public Expenditure Review has provided a candid analysis of the problems that need to be addressed; the Government is now preparing strategy and action plan to address them. 50. Civil Service Reform. The planned civil service reform measures were mostly implemented. But by themselves they were not sufficient to raise the productivity of the service and thus to achieve the program's objectives. A new information system on the payroll and a limited new pay and grading system were adopted; there was also limited redeployment. But no significant restructuring or downsizing of the civil service was planned under the program; nor was it achieved. Nor were the objectives of improving productivity of the service and of recruiting better trained professionals met. Recruiting and retaining better trained professionals and managers with higher pay have not been feasible fiscally, given the large size of the service and the election-related pay increase that was granted to all civil servants. Nor could significant downsizing and restructuring of the civil service-necessary for raising productivity-have taken place without taking much more time to develop Ghanaian consensus on the appropriate role, scope, and size of the civil service. This process is now beginning to get underway. 2. Sustainability 51. While the results of the program were mixed, the direction of the reforms initiated under the Credit has been maintained. Indeed, the Credit has set in train a number of processes that appear likely to improve over time. Many of the implemented reforms involved institutional changes that will be difficult to reverse. Liberalization of the regulatory framework and rationalization of the tax code involved legislative changes and their reversal would require considerable prior political debate. Similarly, actual transfer of SOEs to private buyers cannot be reversed without confiscations. Government also is considering further actions in key areas. In addition, the establishment of the PSAG has given the private a reserved seat at the policy table; this will be difficult to reverse. 52. SAC III's private sector achievements on taxation and regulatory framework appear likely to be sustained. They have been locked-in by administrative changes. And since the Credit closed, the Government has taken a number of further steps that also point towards  - 12 - sustainability. On regulations, the Government is in the process of approving into law a new, more liberal Investment Act. On taxation, it has prepared a value added tax (VAT) to be introduced in 1995. It is noteworthy that preparation of the Credit helped to develop substantial private sector ownership through the establishment of, and discussions in, the Private Sector Advisory Group (PSAG). The establishment of PSAG has since spawned other groups (with wider participation) for public sector-private sector interactions, such as the new Private Sector Roundtable and the Private Enterprise Foundation. The process set in train under SAC III thus helped to empower the private sector in the policy formulation process. Arguably, this was SAC III's most important achievement. 53. For public enterprise reform, civil service reform, and public expenditure management, ownership remained weak throughout the program period. However, there is considerable evidence that ownership is now developing, and that the reform process is beginning to build momentum. On privatization, the Government has passed an omnibus bill converting statutory corporations into joint-stock companies, thereby facilitating their sale. In an important step, it has recently sold some of its shares in the largest state-owned company, Ashanti Goldfields, and in seven minority holding companies traded on the stock exchange. On civil service restructuring, it has established two steering committees (with high-level leadership) to examine public service reform and capacity building in Government. On public expenditure management, it has for the first time completed its own public expenditure review and is developing a medium-term strategy for improving public expenditure management. F. Bank Performance 54. The Bank played a key role in the design of the SAC. But in retrospect, the design of the program had. some weaknesses. First, it covered too many reform areas, and lacked depth and ownership in some areas. Second, several components could have been better specified. The targets and processes for the divestiture program could have been specified, and the details of pay and grading reform of the Civil Service could have been spelled out. This would have helped to define "satisfactory progress" and "progress in implementation" in the various reform areas that constituted second tranche conditions, thus making a definitive assessment of "satisfactory progress" easier for purposes of tranche release. Third, the performance targets for private investment were too ambitious in terms of both the speed and the size of the investment response by the private sector. 55. The projected implementation period was overly ambitious-some eight months had been allowed between Credit effectiveness and second tranche release. During this period, a number of difficult institutional measures were to have been taken. It took more time than planned to establish the PSAG, to implement the divestiture plan, to institute changes in civil service personnel and payroll management, and to improve expenditure management. 56. There was excessive turnover of task managers for the Credit. There were three during the two years between appraisal and second tranche release. Notwithstanding the discontinuities in task management, economic expertise at the Resident Mission in Accra throughout the period averted any lapse in supervision of the program's structural reforms. But the lack of continuity no doubt contributed to the Bank's limited monitoring of the fast- changing macroeconomic situation in 1992. Still, it is unlikely that closer monitoring by the Bank could have prevented the large wage-award, which was dictated by internal political dynamics within Ghana.  - 13 - 57. Arguably, the second tranche should have been held up until at least the first half of 1993 so that the macroeconomic outturn could be compared with the 1993 budget. However, it was judged that the tranche should be released against Government undertakings, given the strength of Ghana's past track record. Also, reserves were low, the terms of trade were deteriorating, and further delay, given the associated delay it would mean for donor co- financing, risked destabilizing the macro-economic situation. Also, the newly elected Government had adopted a very tough budget and had agreed on the macroeconomic program for 1993 with Fund and Bank staff. In the event, however, only half the programmed fiscal correction in 1993 was actually achieved, as the newly installed Parliament strongly advised against the implementation of the large second-round petroleum price rise that underpinned the budget estimates. The remaining half of the fiscal correction looks likely to be achieved in 1994. 58. Sixty-four staff weeks in FY92 and FY93 were recorded for SAC III supervision in the Bank's Time Reporting System. These figures do not include time spent on the Public Expenditure Review, the Economic Management Support Project, and the Policy Framework Paper, all of which contributed to the SAC III dialogue with the Government. G. Borrower Performance 59. Borrower performance, in terms of implementation of the reform package was satisfactory in 1991 but not in 1992, especially on the macroeconomic front. It was effective in respect of the liberalization of the regulatory framework and the reduction of corporate tax rates. However, it was slower than expected in the reform of the civil service, public enterprises, and public expenditure management. The Government's inability to move expeditiously and more directly in these areas suggests some ambivalence in parts of the Government about the pace of these reforms. This was probably a reflection of the timing of the measures, which coincided with the preparations for the elections. However, from the vantage point of increasing private savings and investment, the larger difficulty was the major slippage on the stabilization front; this was also election-related. H. Lessons Learned 60. The main lessons to be learned from SAC III are: * Maintaining a stable macroeconomic framework is critical for ensuring adequate private sector savings and investment. This requires appropriate fiscal and monetary policies. Looking to the future, the Ghanaian Government should focus on establishing the structural foundations for sustained macroeconomic balance. Without this, the desired private sector response may not be forthcoming, and faster growth will not be achieved. * Broad-based stakeholder participation and ownership speeds implementation. Good program design requires intensive preparatory work and significant inputs from those who will be called on to implement program measures. Without it, the risks of slippages in a time-bound program are larger than they need be. Substantial up-front actions at the onset of the program are an effective test of stakeholder ownership and participation. * Realistic projections prevent unnecessary disappointments. In designing an adjustment credit, care should be taken to be realistic about the projected  - 14 - speed of the economic response to the reform program; otherwise, the credit may raise expectations that cannot be met. Confidence in reform may be undermined, with negative "externalities" for other operations and programmes. * Clearly defined tranche release conditions facilitate implementation and supervision. They establish a more objective basis for assessing whether actual performance is in line with program undertakings. * Follow-up enhances sustainability. Divestiture, public expenditure management, and restructuring of the civil service are critical areas where dialogue and reform must continue if Ghana is to achieve faster growth.  - 15 - PART Il: PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE The Bank has requested the Ghanaian authorities to submit their own evaluation of SAC III, but this document has not been received.  - 16 - PART III: STATISTICAL INFORMATION A. Related IDA Credits Year of Loan title Purpose approval Status Reconstruction Import (RIC 1) Emergency imports for the 1983 CompLeted (Cr. 1393-GH) agricultural and transport $40.0 M sectors. Export RehabiLitation Partial emergency assistance 1984 Completed (Cr. 1435-GH) to road transport and port $40.0 M subsectors. Export Rehabilitation Strengthening institutional 1984 Completed (Cr. F009-GH) capacities of key organiza- $35.9 M tions in export sector. Export Rehabilitation T.A. Strengthening institutional 1984 Completed (Cr. 1436-GH) capacities of key organiza- $17.1 M tions in export sector. Second Reconstruction Imports Credit Import requirements for 1985 Completed (RIC 11) agriculture, transport, mining (Crs. 1573-GH & A003-GH) and manufacturing sectors. $60.0 M Industrial Sector Adjustment To complement various reforms 1986 Completed (Crs. 1672-GH & A013-GH) in the incentives framework. $53.5 M Structural Adjustment Credit (SAC I) Trade liberalization, cocoa 1987 CompLeted Crs. 1777, A025-0, A025-1) sector, public expenditure, $125.8 M reform of SOEs, public sector management. Education Sector Adjustment To improve pedagogic effec- 1986 Completed (Cr. 1744-GH) tiveness and recast financing $34.5 M to make public and private expenditures cost effective and affordable. Financial Sector Adjustment Credit To support ongoing reforms in 1988 Completed (FINSAC) financial system. (Crs. 1911-GH, 1911-1-GH) $106.6 M SAC II To improve incentives for sav- 1989 Completed (Crs. 2005-GH, 2005-1-GH, 2205-2-GH) ings and investments. $134.0 M To strengthen balance of payments. Education Sector Adjustment II To support ongoing education 1990 Scheduled to close (Cr. 2140-GH) sector reform. Dec. 31, 1994. $50.0 M Financial Sector Adj. II To support ongoing reforms in 1991 Scheduled to close (Cr. 2318-GH) financial system. Mar. 30, 1995. $100.0 M  - 17 - B. Credit Position As of November 30, 1993 (in US$ Million) Outstand- Credit original Disbursed * Canceled Repaid ing . 2236 120.00 115.19 - - 117.16 2236-1 6.10 6.79 - - 6.37 2236-2 6.54 6.59 - - 6.54 Cumulative Estimated and Actual Disbursements a FY92 FY93 FY94 Cr. 2236 Appraisal estimate (USS) 60.00 120.00 - ActuaL (USS) 56.96 115.19 - Actual as % of appraisal (X) 95% 96% - Date of final disbursement: Apr. 14, 1993 Cr. 2236-1 AppraisaL estimate (US$) 6.10 6.10 - Actual (USS) - 6.79 - Actual as % of appraisal (%) - 111% - Date of final disbursement: Apr. 2, 1993 Cr. 2236-2 Appraisal estimate (USS) - - 6.54 Actual (US$) - 6.59 ActuaL as X of appraisal (X) - 101X Date of finaL disbursement: Aug. 27, 1993 a The credits were fully disbursed. Disbursed and outstanding totals differ from the original amount of the credits in terms of US dollars because of changes in the USS/SDR exchange rate. C. Credit Timetable OriginaL date Actual Initiating HemorandLxn 1D/15/90 10/15/90 Appraisal 10/10/90 10/10/90 Negotiations 03/08/91 03/08/91 Letter of Development PoLicy 04/06/91 04/04/91 Board Approval 05/28/91 05/07/91 Loan Signing 06/10/91 06/10/91 Effectiveness 07/01/91 07/19/91 Second Tranche Release 07/05/92 02/22/93 Closing Date 07/31/93 07/31/93  - 18 - D. Staff Inputs (staff-weeks) FY89 FY90 FY91 FY92 FY93 FY94 Total Preparation/preappraisal 1.0 17.3 27.1 - - - 45.4 Appraisal - - 32.3 - - - 32.3 Negotiations/Board approval - - 14.2 - - - 14.2 Supervision - - 4.1 33.1 25.4 1.3 63.9 TotaL 1.0 17.3 77.7 33.1 25.4 1.3 155.8 As of January 4, 1994. E. Mission Data Month/ No. of No. of Staff- Mission type year weeks persons weeks Date of report Preparation 9/90 1.5 4 6.0 Sep. 1990 Pre-negotiation 1/91 2.0 4 8.0 Jan. 24, 1991 Appraisal 10/90 2.0 8 16.0 Nov. 1990 Supervision 1 10-11/91 2.5 2 5.0 Nov. 1991 Supervision 2 5/92 3.0 3 9.0 May 20, 1992  -19- Annex 1 Page 1 of 13 PROJECT COMPLETION REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) Letter of Development Policy Mr. Barber B. Conable President The World Bank Washington, D.C. USA Dear Mr. Conable: Re: Ghana's Program to Promote Private Investment and Sustained Development 1. As part of its Structural Adjustment Program (SAP), the Government of Ghana is implementing a wide range of economic reforms in the economy. By this letter, the Government of Ghana requests from the International Development Association an adjustment credit to support a program to promote private investment and sustained development. To this end, let me briefly recapitulate our experience with the reforms that we have introduced, and then describe in some detail the objectives and further actions that we intend to implement in 1991-92. Accompanying this letter is a matrix that presents a timetable for these actions. Background 2. Ghana's Economic Recovery Program (ERP) has, since 1983, led to considerable improvements in economic growth and development. We have made progress on many of the broad objectives set out at its inception. The country's economic and social infrastructure have been rehabilitated; fiscal and monetary discipline have been largely restored; and investment has increased substantially, although the response from the private sector so far has been disappointing. 3. The major policies underpinning the efforts since 1983 have included the achievement of a more realistic exchange rate, prices have been deregulated across a wide range of product markets, accompanied by trade liberalization which increasingly enabled international competition to discipline the price setting behavior in domestic markets. Improvements in government revenue mobilization and the removal of subsidies in many areas contributed to a movement of the government budget from large deficits into surpluses. Public sector employee-incomes have increased, though modestly, funded in part by savings from the redeployment program. Improved development spending contributed to rehabilitation in several areas including transport  -20- Annex 1 Page 2 of 13 infrastructure, and the cocoa, timber and mining sectors. Increased budgetary support has also been provided for education and health. 4. Since 1987, the ERP has been implemented through a Structural Adjustment Program (SAP), supported by two IDA credits and cofinancing from bilateral and multilateral sources, that sought to consolidate the gains of the initial phase of the ERP. The adjustment reforms have focused on stimulating growth, savings and investment; strengthening the balance of payments position; and improving resource mobilization and utilization. 5. The structural reforms initially focused on macroeconomic policy issues relating to trade and exchange rate management and restoration of fiscal and monetary discipline. From about 1986, however, emphasis has shifted to growth oriented structural initiatives. Programs and projects have been implemented within the productive areas of agriculture and industry and the social sectors of health and education. 6. Economic performance over the reform period has generally been satisfactory. While the annual growth of real GDP per annum has averaged 5.3 percent in the period to date, it has not been even, besides inflation rates and current account deficits remain high. Domestic savings and investment levels, particularly from the private sector, are, however, still inadequate to sustain growth at even current rates. 7. Under the ERP, the problem of poverty has been addressed through increased growth, improved rural terms of trade, and more efficient allocation of public expenditures. While the impact of the ERP on the poor has been by and large beneficial, there is still some cause for concern. Further efforts are also required to maintain and further enhance the rural terms of trade. It has to be recognized that increases in revenue as a share of GDP will now naturally taper off, once the large gains from improved administration are exhausted. This means that prospects for public expenditure growth will be more limited, and greater attention will have to be paid to the growth focus of these expenditures. Objectives 8. The fundamental objective of macro-economic policy is attainment of sustainable growth with development through commitment to market-based resource allocation. Fluctuations in production have also exposed the fragility of the economy and underscore the need for continued structural reforms and investment to improve the ability of the economy to adjust to changes in the internal or external environment. Within the medium term framework specific objectives for 1991-92 include: ensuring a real GDP growth of about 5 percent per annum; reducing the average annual inflation rate to 8 percent by 1992; generating sizeable overall balance of payments surpluses; and ensuring the improvement of living standards through poverty alleviation measures. 9. The maintenance of real GDP growth rates at 5 percent per annum calls for increased savings and investment efforts. While public effort must be maintained at the relatively high current levels, the need for private sector efforts to assume the dominant share in both savings and investment is crucial for the achievement of these targets. Incentives encourage savings and investment must include maintenance of a market-determined exchange rate system, positive real interest rates and flexible agricultural producer prices.  - 21 - Annex 1 Page 3 of 13 10. Increased availability of investment opportunities would provide incentives for holding cedi-denominated assets. Revived support for the productive sectors should be visible in the implementation of the corporate restructuring program and the on-going Small and Medium-Scale Enterprises (SME) project. In addition, the increasing budgetary allocation for rehabilitating and expanding economic and social infrastructure and support for agricultural extension and research would provide an impetus to private sector activities. 11. To achieve the inflation targets, continued tight fiscal and monetary policies and supply enhancing policies will be pursued. Fiscal policy will be directed at further increasing government savings. Monetary policy will be implemented within the framework of increased reliance on open-market liquidity management. 12. The external payments position still remains weak. The thrust of policy will shift from reliance on receipts from traditional exports to non-traditional exports. Development efforts will increasingly focus on our capacity to diversify production and exports, based on efficient production practices and maintenance of a realistic, competitive exchange rate. Private sector initiatives will be supported to achieve the intended investment and production goals. 13. The sustainability of the program crucially depends on the equitable distribution of the benefits of the reform program. While physical infrastructure has been improved significantly over the period, there is a need to enhance the quality of human capital. Parallel sectoral programs in agriculture, health, population and education will be implemented and, together with the specific PAMSCAD programs incorporated in the PIP, will help alleviate poverty. 14. The next phase of the reforms consists of continued implementation of macro-economic policies that strengthen the incentive framework for savings, investment and production and ensure macroeconomic stability. We will emphasize measures to improve the enabling environment for private investors through tax reform and revisions in the legal and regulatory framnework. Further progress will be made on state enterprise and civil service reforms. Public expenditure will support activities in key productive sectors and social services. Exchange Rate Policies 15. Exchange rate policy has been driven by the need to deal with the severe price distortions and the inadequate foreign exchange supply. In the wake of the unification of the foreign exchange markets achieved in the second quarter of 1990, the policy focus will seek to ensure the maintenance of a realistic exchange rate in the evolving inter-bank system. 16. Policy actions during the program period will, therefore, include further widening of the market to accommodate more participants, and deepening through the complementary development of flexible open market operations in domestic currency. Monetary policy will continue to be reinforced by fiscal policy. 17. Over the medium term the focus will be on increased private capital inflows and production for exports; although we will continue to need concessional loans and grants. In furtherance of development of a unified foreign exchange market, the surrender of export proceeds from goods other than cocoa and gold will be shifted from Bank of Ghana to the deposit banks by the middle of this year.  - 22 - A x1 Page 4 of 13 Private Sector 18. The private sector's role in achieving the growth targets of the economy is crucial. Increased activity will satisfy three key objectives - higher investment, production, and employment generation. Limited government budgetary resources for increased public investment and the continuing modest response to date of the private sector underscore the need for fresh and expanded efforts. 19. Further economic incentives will include the commitment to maintain a flexible exchange rate system. In addition, supportive policies that will ensure a stable macro-economic environment will continue to be implemented. This will include maintenance of low rates of inflation, higher budget surpluses and a sustainable balance of payments position. The banking restructuring exercise currently under implementation will improve the effectiveness of the financial intermediation process, lead to reduction in costs of credit and provide greater access to longer term financing for investment. 20. Tax policies will also be employed to stimulate a more vigorous savings and investment effort. Efforts will therefore be made to rationalize taxation of capital and investment income to remove the bias against equity investment, and reduce the marginal effective tax rates on new investment. Mergers and acquisitions will also be encouraged. The burden of high company tax, the dividend income tax and capital gains tax has been lowered in the 1991 budget. 21. Delays in the approval process, caused by multiplicity of institutions, overlapping jurisdiction, and other procedures, practices and provisions that run counter to the spirit of liberalization will be addressed. Recommendations made relating to: improvements in financial internediation; necessity to revise laws which do not facilitate private investment; harmonization of business establishment procedures; and improvements made to tax administration processes aimed at promoting efficiency and equity, have been accepted by Government for implementation. 22. The Laws to be revised will include the Exchange Control Act (1961 as amended in 1966), the Industrial Relations Act (1965), the Labor Decree (1967), Manufacturing Industries Act (1971), the Investment Code (1985) and amendments to it. Government will be guided by the need to reduce delays and the number of steps in the investment approval process and to achieve transparency in the general body of laws. It is envisaged that most of the technical work for revising the relevant laws and procedures will be completed by the end of 1991, for Government approval during the early part of 1992. Measures will also be taken to streamline administrative requirements relating to transfer of foreign exchange, import/export procedures, technology transfer, granting of expatriate quotas and reducing restrictions on foreign ownership of business. 23. The Ghana Investments Center (GIC) will shift its emphasis from approvals to investment promotion. It will produce a manual of benefits and requirements for potential investors to enhance ready accessibility of information. Furthermore the Ghana Statistical Service will be strengthened to ensure production of current economic and statistical data for the general public. 24. The Govermment has set up an Advisory Group on Private Sector Development. Its members are drawn largely from the private sector and include the current presidents of the Association of Ghana Industries and the Ghana Chamber of Commerce. The group is supported by a team of experts with backgrounds in law, banking and finance.  - 23- Annex 1 Page 5 of 13 Tax Policy and Administration 25. The thrust of government's tax policy has been to improve the mobilization of adequate local resources to finance higher levels of expenditures. Declining commodity prices, and the unfavorable prospects for mobilizing concessionary resources externally, make local resources crucial for sustaining the momentum of the recovery program. While tax policy will continue to address the need for efficient revenue mobilization, in the future the focus will be on ensuring that the tax regime promotes economic growth through a more favorable climate for investment. The strategy will be to strengthen the implementation of existing policy while seeking ways to introduce new measures based on recent studies. 26. The agenda as relates to direct taxes includes broadening of the tax base, reducing the tax rate on personal income, dividends, corporate income and capital gains; and initiating the process of international tax harmonization. The implementation of the policy to broaden the tax base through inclusion of allowances and in-kind benefits in total income will be strengthened. The valuation of in-kind benefits would be improved to provide the basis for realistic assessment. 27. The 1991 budget statement addressed some of these by introducing a number of tax measures as part of a renewed effort to revitalize the private sector. The corporate tax rate, applicable to agriculture, manufacturing, real estate, construction and services, was reduced from 45 percent to 35 percent; the withholding tax on dividends was reduced from 30 percent to 15 percent; the capital gains tax was reduced to a maximum of 5 percent, while income from publicly traded shares and mergers and acquisitions is exempted from tax. Capital allowances provided under the Investment Code have been extended to all enterprises in the manufacturing sector. 28. The Government intends to take additional actions in this area having regard to the overall objective of stimulating a 'strong investment response and achieving a high growth rate. The company income tax rate applicable to financial intermediaries and the printing sector and all dividend income taxation, albeit reduced to 15 percent, have been criticized as unduly high and Government is giving this matter close attention. The range and types of allowances to be permitted for tax purposes and the whole question of fiscal incentives as investment promotional devices is under active consideration. 29. In the area of indirect taxes, the policy focus will continue to be on encouraging greater tax compliance and broadening the tax base. The credit system (a limited form of value added tax, VAT) which has been under study as a pilot project is expected to provide the basis for determination,of an appropriate VAT system for the country. Continued efforts would be made to reduce the variation in incentives across industries and to eliminate any anti-export bias of protective taxes. The government will also reduce the scope of duty exemptions, and streamline the duty drawback system to encourage non-traditional exports. The study on the effect of trade liberalization on domestic industry will be completed by June 1991 and its recommendations studied for early implementation. 30. Much progress has been made in the area of tax administrations a lot, however, remains to be done in areas of manpower development and institutional strengthening. Expanded in- country training programs for staff of IRS and CEPS will be implemented side by side with public education campaigns. As part of the general scheme to improve tax administration, a unique tax identification number for individuals will be introduced this year.  -24- Annex 1 Page 6 of 13 31. To speed up customs clearance processes, CEPS will implement the decision to merge into one exercise the physical inspection of imports now conducted separately by CEPS, the Ghana Port and Harbours Authority and the security services. In addition, in order to iiize the problem of congestion at the ports, CEPS will encourage the processing of documents to start before the arrival of goods. On computerization within CEPS, efforts will be made to expand the ASYCUDA system to the other ports of entry, and with the appropriate modifications, if necessary, to cover all the direct and indirect taxes, by December 1991. 32. The IRS will streamline procedures for filing returns and payment of arrears, particularly for the self-employed. Steps have been taken to address the concern of the private sector arising from customs clearance procedures and from the use of tax clearance certificates. A significant relaxation of the TCC was announced in January 1991, with only four categories of transactions remaining on the required list. The Government intends to continue to review the requirements for TCC. Public Expenditure Policy 33. Public expenditure policy will continue to be guided by the need for increased efficiency in resource use. In the medium term, the objectives are to increase domestic savings; to pursue prudent wage policy while ensuring that the professional classes are adequately remunerated. Public investment programs will continue to be directed toward the rehabilitation of infrastructure guided by the needs for the priority sectors of agriculture, health and education. 34. Considerable efforts have been made to improve resource allocation through the three year rolling public investment programming process and the development of norms for non-wage recurrent expenditures in key ministries. Continuing efforts will be made to improve budgetary procedures and strengthen expenditure monitoring and control. Activities will focus on timeliness of budget preparation, improved budget formulation and coverage and strengthening of the Audit Service and the Controller and Accountant General's Department to discharge their responsibilities more efficiently. In addition, the quest for increased cost-effectiveness requires that social infrastructural needs of the poor are carefully integrated in the public expenditure program. 35. In order to enable implementation to commence early in January, it is planned to announce the budget in the last week of December. The budget document will be more comprehensive and will incorporate more information on external aid commitments and disbursements. In this connection, improvements will be sought to enable implementation of a broad based budget by 1992. Preparatory work on systems development will be undertaken in 1991, to facilitate full implementation in 1992. In the meantime, in order to enhance implementation capacity, more attention will be paid to establishing a commitments-based budgeting system. 36. The inadequate costing of services and other costs associated with project implementation have contributed to higher realized costs. Besides, untD recently, returns on actual costs were not systematically analyzed. These weaknesses wIll be remedied through improved budgeting and accounting procedures. In addition, budget information on planned and actual expenditures will be fully computerized to facilitate analysis. In addition, the Government intends to review the contract approval process with the view to reducing delays.  - 25 - Annex 1 Page 7 of 13 37. The three-year PIP will continue to be prepared annually within a macro-economic framework which will be updated periodically. The PIP will also continue to emphasize the rehabilitation and expansion of economic and social infrastructure to support private sector activities as well as addressing the needs of the poor. The recurrent cost implications of the PIP will be given serious consideration. In order to improve the poverty focus, analyses by region and program (basic education, primary health care, agricultural extension) of the distribution of current and capital expenditure have begun. On the basis of these, budget guidelines will be developed to increase the relative share of expenditure going to poorer regions; and to programs benefitting the poor. 38. Budgetary allocations for agriculture will support work mainly in extension and research. Problems of low productivity, high post harvest losses, and inadequate and inefficient infrastructure have plagued the sector. Activities of both applied and basic research at the agricultural research institutions and of extension services will, therefore, be adequately supported by increased supply of physical inputs to provide the impetus and enabling environment for sustained growth and efficient and competitive agriculture. The details of agricultural policy measures and activities outlined above are contained in the IDA supported Agricultural Sector Adjustment Program (AGSAP) and the government's medium term agricultural development programs (MTADP). 39. For the industrial seC, the strategy requires the rehabilitation of potentially viable enterprises in processing especially in the agro-based (including forestry) sector. In this, however, Government intends to play a limited di=c role and consequently will encourage the growth of a vigorous private sector. Government's intention of stimulating private sector development is to be advanced through minority participation with the private sector. This will help to establish the proposed Enterprise Restructuring Fund envisaged under the ERP. In addition, government will support management and technical manpower development institutions. These institutions will be expected to provide extension-type support in industry. 40. Like most developing countries, systematic analysis of our enviromental problems began only recently. Problems of deforestation, poor sanitation in urban areas, industrial pollution and soil degradation are quite common. In order to address these, a National Environmental Action Plan (NEAP), a National Plan of Action to Combat Desertification and a National Conservation Strategy are being prepared. The recently completed draft of the NEAP envisages proposals to improve the quality of national life. These proposals cover such areas as a land use plan, envirommental education programs, community forestry programs, and an environmental impact assessment mechanism in the country and implementation of an industrial waste management program. 41. While the EPC is to provide overall coordination of this effort, several institutions such as the Forestry Commission, Factory Inspectorate Department and the National Energy Board, will be directly involved in the implementation of the proposed programs. In addition, district environmental management committees will be set up for monitoring and coordinating activities at the district level. Poverty Alleviation 42. As indicated in the earlier sections of this letter, the Government's economic management policies will be driven by the concerns for improving private sector development and reducing  - 26 - Annex 1 Page 8 of 13 poverty. The following section will address issues related to poverty alleviation under the headings of health and population, education and other social sector issues. 43. The main thrust of government's health plicy is to increase access to quality health delivery services through the implementation of an effective primary health care program. The strategy is to consolidate the program under implementation through better delivery of services and to expand the coverage. 44. This commitment to expand health delivery services entails considerable provision of infrastructure, at all levels. To meet this need, including rehabilitation requirements, the government will match resources and manpower mobilized at the community level. Government will provide for a regular maintenance of buildings, plants and equipment to improve health services. Measures to ensure efficient and equitable use of drugs and dressings through a cash and carry system; institutional restructuring, involving reorganization of the health system leading to decentralization of operational responsibilities, activities and control of resources; and, in addition, manpower improvement plans, will be implemented. 45. The government's RoRulation policy aims at securing higher living standards for the people. The immediate aim is to reduce the population growth rate of about 3 percent. Current activities are therefore geared toward strengthening the institutional capacity for effective coordination of population programs. The recently established Population Policy Implementation Assessment Committee (PPIAC) will help to put in place, by the end of 1991, a National Population and Human Resources Commission (NPHRC) which will be responsible for advising government and monitoring population programs. The health and population sector project, which will be implemented during 1991-95, will promote greater sectoral consistency in population programs and projects. In addition, the 1969 policy program will be revised to incorporate emerging issues such as youth problems, teenage and adolescent pregnancies, drug addiction, the problems of the aged and environmental issues. 46. Institutional restructuring measures being taken to complement the physical improvements in the sector include decentralization and manpower improvement plans. The Ministry of Health is being reorganized with a view to decentralize its operational responsibilities, activities and control of resources. In order to provide qualified staff to manage such plans, the strengthening of hospital management teams has become urgent. The recent appointment of Boards for the two teaching hospitals is the first step; and this will be replicated over the system. The need for qualified managers will be met from Health Services administrators' upgrading courses which will be mounted through seminars and formal courses. The government's efforts will be aided by effective co-ordination of NGOs involved in health service delivery activities. 47. By the middle of this decade on-going programs involving immunizations will aim at reducing infant mortality rates from the current level of 77 per 1000 births to 67 per 1000. Pre- and post-natal services will be geared to reducing the maternal mortality rate from 10 per 1000 deliveries to 8 per 1000. Increased use of modern contraceptives will be promoted to double the current usage rate for women aged 15 49. 48. The first phase of the educational reform program which was implemented in 1987-89 focused on the implementation of the Junior Secondary school (JSS) program which reduced the length of pre-university education, reformed the curriculum, and provided more textbooks and instructional materials. Teacher training facilities expanded to support the program.  -27- Annex 1 Page 9 of 13 49. In the second phase the restructuring and expansion of Senior Secondary Schools (SSS), is being emphasized. The objectives are to improve access, quality and relevance of education; diversify school curriculum to cater for different talents and skills; and ensure sustainability of the reforms through cost-effectiveness and cost-recovery schemes. 50. The curriculum broadening and deepening processes will be implemented to prepare students for a wide range of occupations. To improve efficiency, the frequency and quality of classroom supervision will be raised; while efforts will be made to ensure increasing use of professionally qualified tutors. Quality of educational staff will be improved through a continuing program of massive in-service training courses for teaching, management, and supervisory staff. In order to secure a sustainable program, cost recovery measures and cost effectiveness of expenditures would continue to be pursued. Such measures would include increased utilization of local materials where appropriate, operating a revolving fund for book replenishment based on collections from book user fees, eliminating the direct subsidy for school feeding, reducing the number of non-teaching staff and close monitoring of procurement and disbursement procedures to minimize waste. 51. The efforts made and the successes achieved under ERP have led to a lessening of the extent of economic hardships experienced in the period immediately preceding ERP. Supply of goods and services including social infrastructure and facilities in health, education and housing have been improved. However, the search for a lasting reduction in poverty continues. This is because continuing hardships are being faced by vulnerable groups such as non-cocoa, small-scale farmers, retrenched workers, underemployed and unemployed workers in the urban informal sector and children. 52. Securing higher living standards in our environment essentially means increased generation of productive employment. In this connection, the efforts to improve savings and investment will support improved living standards through higher production. Well coordinated support for small-scale agriculture and other small-scale economic ventures, mainly in mining and manufacturing, will be provided through the PIP with credit in the form of revolving funds and extension-type technology diffusion support. Other funding sources including IFAD's small- holder program facilities, IDA sponsored rural finance and SME credits, together with the improved services expected from restructured rural banks will be geared to stimulating small- scale production and income generating activities. 53. The short term benefits of the ERP will continue to be secured through PAMSCAD. While these programs have come to be seen as government's immediate response to the plight of the poor, they have also, in a number of cases, become major sources of local resource mobilization. Several lessons have been learnt from PAMSCAD; and projects and programs such as the community initiative projects (CIP), small-scale agricultural programs, hand-dug wells, low cost sanitation and non-formal education that have proved successful will be incorporated in the PIP. State Enterprise Reforms 54. The objectives of the state-owned enterprises reform program have been to improve efficiency and profitability; reduce the financial burden on the government budget; increase managerial autonomy and accountability; and mobilize additional financial and entrepreneurial resources. In the medium term the activities of the reform program wIll continue to be geared toward strengthening management and financial performance, and streamlining the sector through  -28 - Annex I Page 10 of 13 restructuring and divestiture. In this context, the program will ensure expansion of the private sector role in commercial activities, while government concentrates its resources and efforts on providing basic services. 55. In order to accelerate the pace of divestiture, several options, namely outright sale, public or employee share issue, leasing, management contracts and liquidation are being actively adopted. By January 1991, 37 SOEs had been divested. The program also envisages a divestiture of 25 enterprises in 1991. Progress on implementation will be monitored on the basis of nine identified key action steps. These include preparation of a list of SOEs to be divested, updating financial statements, valuation, preparation of company dossiers, advertising and identifying investors, evaluation of investors' proposals, negotiating with selected investors, approval of divestiture by DIC and conclusion of transactions. Subsequently, yearly targets will be set within the context of government's policy for raising additional equity capital, infusing new management expertise, and/or technology. In any particular year, the necessary provision for liabilities of divested enterprises will be made in the budget after off-setting resources gained from previous divestment. The allocation for 1991 is C3.5 billion. Liquidations have accounted for a fairly large proportion of divestment until 1989 since then, however, the focus has shifted to privatizations. 56. For the SOEs, mainly utilities, which remain in the government's portfolio, strengthening of management capabilities and financial and operating performance is of prime concern. Apart from specific manpower development programs to improve professionalism of staff, institutional restructuring will be accelerated. Selected enterprises which now prepare Corporate Plans will continue to update their plans yearly. In addition associated performance agreements will be prepared and signed yearly for 13 priority enterprises. Government's financial support to enterprises which are reflected in the budget will also be explicitly captured in the enterprise corporate plan and performance agreement. The outcome of these agreements will be closely monitored. To support this and generally aid the management process, preparation and publication of timely audited financial accounts will be ensured. Public Sector Managenent 57. The increasing demands of the reform program on the management expertise of the public sector, especially the Civil Service, has imposed strains. The shortage of skills has not only affected typical administrative personnel but also the technical professional classes. The current program seeks improved efficiency by the creation of better incentives. 58. As part of the efficiency and productivity increasing drive, reduction of excess labor, particularly at the lower echelons, will be continued and at the same time skill shortages in critical areas will be relieved. The Management Services Division (MSD) will continue its systematic job inspection exercises and define optimum staffing levels for ministries, GES and subvented organizations through annual manpower hearings, as was done during the 1991 budget preparations. 59. Meanwhile the redeployment program is being extended to subvented organizations. For 1991, the Government will maintain a redeployment target of 12,000. The year-end net redeployment for the civil service will be at least 2500 and would permit selective recruitment to fill vacancies at higher levels. Achievement of the target will be monitored on a monthly basis through PPMD'S manpower data base. For 1992, the Government will set appropriate new year- end targets for redeployment and for employment levels.  - 29 - Annex 1 Page 11 of 13 60. Provision of incentive wages/salaries has remained a thorny national issue but particularly so in the civil service. Government policy is to provide a pay structure that generally ensures that efficiency and productivity are duly rewarded. The Prices and Incomes Board will prepare an Incomes Policy and Guidelines which will form the basis of the tripartite discussions on salaries. The 1991 pay package combined a general pay increase and a further stretching of pay relativities. Progress was made from the 1990 level of 9.4:1 to achieve 10.1:1 gross relativities for 1991. However, this understates the progress made. After taking into account the impact of the consolidation of major allowances into the basic wage and revisions in the personal income tax structure, the after tax ratio rose from 6.7:1 in 1990 to 9.2:1 in 1991. Government remains committed to the medium term target of 13.4:1 (pre-tax), the establishment of a uniform incremental date and regrading of all civil service posts into a reduced number of occupational classes. 61. Current plans are to develop a 12-grade structure for senior staff and a much reduced number of job classes at junior levels, all based on systematic job evaluations. When the processes of job evaluations and costing proposals are also completed for the junior levels by mid-1991, it would be possible to detail an implementation program for introducing the new grading structure at the start of 1992. Performance appraisal systems which are being developed will be finalized to serve as the basis for introducing a system of merit pay by 1992. 62. Efforts underway to strengthen civil service management will continue throughout the program period. MSD will continue to play an essential part in helping to bring about efficiency improvements. In addition to ongoing job inspections, it will put increasing emphasis on management reviews, with a view to rationalize organizations and reduce wasteful duplication of functions. As a further means of improving efficiency, the possibility of privatizing services such as security, cleaning and facility maintenance will be explored. This will be done on an experimental basis at first. 63. PPMD will pursue its efforts to reinforce its ability to maintain data on manpower levels and flows, and carry out manpower planning exercises, for which its Manpower Planning Unit will play an increasingly important role. A focused effort will be made to address the needs and succession planning requirements at management levels in the Civil Service. PPMD will also assist Ministries seeking to establish manpower planning units. PPMD and Ministerial capacities will be considerably enhanced in this respect with the development of an integrated personnel/payroll information management system. 64. The Training and Manpower Development Division (TMDD), in addition to managing ongoing training activities, will produce a civil service training strategy which will serve as a basis for the planning of training activities in the next few years. Financial Sector Policies 65. The need to strengthen the financial sector so that it discharges effectively its responsibility of facilitating the implementation of business activities under ERP/SAP, led to the design of a Financial Sector Adjustment Program, (FINSAP). The broad objectives of FINSAP have been to establish a well functioning and broadly based financial sector with a viable and effective banking system at its core; and to design a financial system that remains sensitive and responsive to national development priorities. In line with these, measures such as liberalization of interest rates and removal of sectoral credit ceilings have been undertaken. As part of the overall measures to enhance the soundness of banking institutions, the legal and regulatory  -30- Annex 1 Page 12 of 13 framework has been improved and supervision strengthened, while management, institutional and financial restructuring of the banks is being implemented. The two-prong strategy now is to strengthen implementation of the on-going reforms in the commercial banks, as well as to diversify and strengthen the financial sector. 66. The turn around plans specific to each bank, which address management, institutional and financial weaknesses, are being implemented with positive results. Apart from internal development of, and search for competent managers, external recruitment within the context of twinning arrangements with reputable international financial institutions have been organized. Where twinming arrangements were not possible, individual experts and professionals are being recruited to fill key posts. 67. A Non-Performing Assets Recovery Trust (NPART) has been set up together with its special judiciary tribunal; and is now fully operational. Side by side with NPART a corporate restructuring program for potentially viable enterprises will be launched to revive real sector activities. The NPART activities in terms of work-outs for distressed enterprises will complement the corporate restructuring program and provide the banking sector with healthier clients. The activities in the corporate sector and private sector development, in general, are expected to be further strengthened by the operations of the newly established stock exchange which commenced trading business in November 1990. 68. To facilitate the implementation of the financial sector reforms, the Bank of Ghana will be recapitalized and its foreign currency losses reflected in revaluation losses are being transferred to the government. Its operational capacity in terms of procedures and techniques will be improved to enhance its effectiveness in the supervision of commercial banks and other financial institutions and in implementing monetary policy. A healthy and stable non-bank financial sector will be developed. 69. The reforms in the financial sector especially those relating to the commercial banks and the program for strengthening BOG should lead to greater availability of resources for the private sector, higher efficiency in financial intermediation and help to reduce costs thereby contributing to a reduction in the spread between lending and deposit rates. Monitoring 70. Implementation and monitoring of the reform activities are becoming more and more challenging over time. This is partly due to the increasing number of activities and programs and the growing complexities of project design requiring installation of new systems and procedures. This has meant an increasing input of technically sound professionals and experienced management teams. 71. Ensuring effective implementation and monitoring of programs will involve strengthening of institutions, and streamlining of procedures and processes. In addition, availability of timely and adequate information/data will be important for close and effective monitoring. Institutionally, the co-ordinating role of Ministry of Finance in the management of World Bank projects will be further strengthened. In this respect, the recently established World Bank Desk will serve as a link between the implementing agencies and IDA and its resident mission. The implementing agencies will establish a systematic reporting format and liaise with the World Bank Desk. At least once in every quarter there shall be a project review exercise and implementing agencies will report on their activities. In between, the SAP Monitoring Unit at Ministry of  -31- Annex I Page 13 of 13 Finance and Economic Planning will collect monthly reports on the status of implementing agencies' activities. The World Bank Desk will also serve as the Secretariat of the SAP team which will continue to oversee the management of the program. Conclusion 72. In view of the initiatives taken by Government in the formulation and implementation of the next stage of reforms, the Government of Ghana requests your favorable consideration for the extension of an adjustment credit in the amount of at least US$120 million to support a program to promote private investment and sustained development. Yours sincerely,   PROJECT COMPLETION REPORT REPUBLIC OF GHANA PRIVATE INVESTMENT AND SUSTAIND DEVELOPMENT PROMOTION CREDIT OR THIRD STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2236, 2236-1, 2236-2-GH) Procy Matrix Overview Secmul Phase (By Secord Tranche Key Refoarm Arema First Phase (By Effectiveness) Reltea) CcetsStatu A. PflIIOTIOU OF PRIVATE SAVI19S AM1 INVESTlN T 1. Maintenance of macroeconomic Agree on macroeconomic framework In Adhere to agreed upon macroeconomic Major stippages ckiring 1992 caused stability, context of PFP. framework. by election-related expenditure pres- sures and adverse external economic conditions. 2. Change tax poticies and adainis- Reduce capital and personal Income Further reduce tax rates and Tax reforms were Implemented on tration to improve irnesteent taxes and consolfdated allowances rationalize tax structure. schedule. climate and mobilize revene. 3. shift regulatory framework from Eliminate or simplify some licenain Further simplify legal requirements Satisfactory progress made, after a direct controls to market-based requfrements, sifpiffy forex transac- and regulatfonr related to private delay. mechanisms. tions procedures. Investment. B. STATE-oSAIW ENDTM UISES 4. Acceterate state enterprise Agree on corporate plns and Complete 1991 divestiture program, Substantial progress made. reform to improve efficiency of performance agreements for 13 core and agree with IDA on 1992 divesti- state enterprises producing pub- public enterprises. ture progrm. lic goods. Progressively disen- gag from prodcutf0n of other Complete 1990 divestiture program nd goods and services, agree on work program for 1991-92. C. PULIC EXPEITtRE 5. Improve pbilc expenditure man- Agree on 1991-93 Pubtic Investment Agree on 1992-94 PIP and Implement Reforms were implemented as antici- agewnt, targeting econormic and Program (PIP) and publc procurement agreed measures to Improve efficIency peted, although with soa delays. social Infrastructure nd im- procedures. of public procuramant procedures. proved ff f cincy. 6. Poverty alleviation. Agree to analyze poverty focus of Asse poverty orientation of 1992 Progress made in Increasing 1991 budget and use results to budget on basis of guldelines formu- availability of relevant data. formulate guidelines for 1992 budget lated from analysis of 1969, 1W990 allocations. md 1991 budgets. Decide strategy for 1992. 1 o R -J  Second Phase (By Second Tranche Key Reform Areas First Phase (By Effectiveness) Release) Comments/Status D. CIVIL SERVICE REFORM 7. Economic Policy and Productivity. Agree to further decompress salary Civil service reform through salary Satisfactory progress made. Civil scale and reduce civil service scale decompression and reduction in service numbers were on target. numbers. civil service numbers. 8. Personnel Payroll. Improve personnel and payroll manage- Improved personnel and payroll man- Installation of personnel and payroll ment. agement. management system delayed but in progress. Matrix of Actions Taken and to be Taken (1991-92) A. Promotion of Private Savings and Investment objectives: To maintain stable macroeconomic environment that faciLitates private Investment and savings, as well as to improve incentives for same, to promote a more dynamic supply response to the program, to expand economic opportunities for private initiative. Area of reform Actiors taken or to be taken before Actiors to be taken before Warch 1992 Implementation Status hay 1991 (Effectiveness) 1. Macroecnom ic conditions: Sig- Agreed on PFP covering 1991-93. Continued implementation of macroeco- 1991 program was implemented as nificant progress In restoring Inflation decelerated to 27X by 2/91, nomic program as outlined In PFP, agreed. There were substantial sip- macro stability despite sharp In part due to implementing an adjusted as necessary in consultation pages In 1992, with the result that terms-of-trade deterioration. increase in the BOG rediscount rate with IDA and IMF. no macro condition of IMFs Enhanced Public savings averaged 2.5X of and Intensified open market Surveillance Program was met. GDP, compared with 0.1X in 1985. operations. Several lending rates External arrears eliminated, turned positive In real terms. Debt service ratio fell from 67X to 39X between 1988 and 1990. Inflation, after decelerating from 142X to 27X between 1983 and 1988 (end period basis), in- creased to 41X In 9/90. 2. Exchange Rate: Retail forex auc- Maintenance of market determined Maintenance of market-determined ex- Policy of market-determined exchange tion and bureau markets unified, exchange rate system. change rate system. Increase share rate system was maintained. In March Most remaining exchange restric- of export proceeds surrendered to 1992, weekly forex auction, coordi- tlons on current account transac- commercial banks. nated by Bank of Ghana was replaced tions lifted. Spread between by Interbank market. Also In 1992, bureau and wholesale auction processing of Import requests rates eliminated. Auction ex- transferred from Bank of Ghana to panded to include service pay- commercial banks. ments on approved private exter- nal borrowing. Transformation of auction from retail to wholesale market with expanded role for commercial banks. However, lim- ited base for Interbank exchange market because of surrender re- quirements to Bank of Ghana. hd D a)  Area of reform Actions taken or to be taken before Actions to be taken before March 1992 Implementatlon Status May 1991 (Effectiveness) 3. Trade Regime: Complete unifica- Rate of supersales tax reduced from (a) Complete study on effect of trade (a) study was done. tion of tax rates between compa- range of 75-500X to 10-100X. liberalization on domestic industry. rable imported and domestically (b) comnittee was estabifshed to produced goods. Lower both Im- (b) Estabtish procedures and criterfa review procedure and criteria. port duty rate on semi processed to review rates of duty on particular goods and special tax on textile products. imports. Import duties range {c) Special import tax ranging from between 0, 10, 20. and 25X with a (c) Eliminate special Import taxes 40-10X was rationalized and reduced special import sales tax of 10- except for beer, spirits and tobacco to uniform rate of 10X and 1993 40X. (Variations in effective products, where they wfil be reduced budget eliminated duty rate of 202. protection remain malnly because to 10X. Thus the Import duty rates are now 0, of special Import taxes and duty 10, and 25X plus an across-the-board exemptions.) (d) Reduce scope of duty exemptions Import sales tax of 10X. and streamline duty drawback system. (d) Super sales tax was abolished. Taxes and duties on passenger cars revised. Import duties and sales taxes on tvs reduced to 0O for black- and-white and 7.5X for color. 4. Direct Taxes: Level of personal Reduced corporate Income and personal (a) Reduce differences between top (a) Implemented. Top marginal Income tax raised. Some loop- income tax, dividend tax and capital marginal tax rates on personal and corporate tax rates on finance holes with respect to non-taxable gains tax. Further raised level of corporate Income mainly by lowering lowered from 50 to 35X; on commerce, allouances closed, Withholding relief on personal income taxes. rates for finance and printing printing and publishing from 50 to tax on dividend payments con- Distinction between salary and non- Industries, standard 35X; top marginal personal verted to final tax. Company taxable allowances removed. Imple- tax rate Is also 352. income tax rate lowered and mented other measures to decrease the capital gains tax modified, tax burden on equity finance. (b) Make further progress on double (b) Done. taxation agreement negotiations with principsl trading partners. (c) Implement further steps to (c) Done - tax brackets adjusted. rationalize base, rate, nd bracket See (a) above. structure. (d) Extend limit on tarry-over period (d) Limit extended nd dividend for losses and further reduce taxation reduced withholding tax on dividend taxation, dividends reduced from 152 to 10X. (e) Expand base to include cash nd (e) Done. In-kind benefits that remain tax- exempt or under value. 5. Indirect Taxes: Reduction in Reduced sales tax rate from 22.5 to Further reduction In sales tax rate Sales tax reduced to 17.5% In 1992 sales tax rate from 252 to 22.52. 17.52 If VAT is introduced, otherwise as and to 152 In 1994. Introduction of inconsistencies eliminated in resources permit. VAT planned for January 1995 wnd determining base for excise and prep rations for VAT on track. sales taxes. Taxation on petrol- eum products and vehicles In- Acree with IDA on changes in tax Tax changes anounced In 1992 budget, creased. structure and anmounce in 1992 as agreed. Underlined actions are conditions of second tranche release. 0 w  Area of reform Actions taken or to be taken before Actions to taken before March 1992 Implementation Status May 1991 (Effectiveness) 6. Tax Administration: ASYCDA Contiroed Installation of ASYCUDA for Complete comprehensive review of Preparation for VAT progressed system to Improve collection of customs taxes. Cornenced operation design options and feasibilfty of a satisfactorily; VAT implementation custom taxes being Inrtalled, of Tax Appeals Tribunal. Improved VAT. platwed for January 1995. Unique company taxpayer Identifi- administration permitted elimination cation number Introduced. Sales of 9 of total of 13 TCC requIrements. Complete installatfon of ASYCUDA for ASYCW DA working but Inadequate tax administration study cm- Streemll ed customs procedures. custom taxes and extend to other staffing prevents its full use. pleted. Pilot study on feauibil- direct and ndirect taxes. Ity of replacing current system with a VAT. Tax Appeals Tribunal Introduce unique taxpayer Unique taxpayer identificatfon number set up. Tax clearance certifi- identification nusber for for individuals being Introduced as cates Introduced to improve col- Individuals, pert of VAT. lectfors. Contirue reforms to encourage voluntary compliance, including Reforms for voluntary compirance, further review of need for TCCs. including review of need for TCCs, ongoirg. 7. Regulatory Fraamewrk: GOG ex- Process uider way to harmonlze df- Progress in receatina or revfsfng, f Done. Government formulating recown panded dialogue with private verse business registration form,s narier satisfactory to IDA, Exchange mendations on labor Issues, Including sector, Conference held to pro- expected to lead to elimination of ControL Act. n rtial Retati Industrial Relations Act and Labor mote direct foreign Invvestment. requirement to obtain mvnufacturing Act. Labor Decree nd Marwfacturinn Decree. simplified forex procedures Foreign direct Investment in and Invvestment policy Licenses. Pol- Industries Act. Make Drogress In re- advertised by BOG. Nanufacturing mining grouwng. Reform of banking Icy AdvIsory Group drawn from prIvate viain v Investment Code. with view to industries Act 1971 repealed. Other system started. However, level sector. established to gufde review reducing steps in lenathy swovat Laws relating to price control re- of private Investment Inadequate of legal regulations affecting pri- !rocess and to eliminating most fis- pealed, including Price control to support growth objective. vate investors. Agreed an prinri- es. Satisfactory lrog- Decree 1974, and Amendment, 1977, and Regulatory framework not codified ples, process and implementation ress on other aspects of work Proraim Control of Sale of Specific Goods to reflect ERP's liberalization schedule for review of legal reguLa- To re lea regulations- Decree, 1976. Amendments to Invmest- of economy. Flscal Incentives not tions affecting private Inve tors. ment Code and Regulations Implemented effective In attracting Invest- Government to finalize guidelines on In 1992: (a) reduced number of ment. technology transfer agreements. Industries reserved exclusively for Ghanaians from 20 to 4; (b) reduced Ease and meke more automatic imeigra- minimum foreign capital requirements tion procedures for expatriate tech- from USS60,000 to USS10,000 for Joint nical and managerial staff, ventures, and 0 for export trading enterprises; (c) withdrew requirement for Investment Policy License wfth effect from December 4, 1992 and consolidated various forms. Board of GIC allowed to meke suitable amendments relating to technology transfers. Firms with USS10,000 to USS100,000 In paid up capital automatically allowed to hire two expatriate workers, and firms with USS100,000 and above, four. Wo f  B. Slae-owned Enterprises Area of reform Actions taken or to be taken before Actions to be taken before March 1992 implementation Status May 1991 (Effectiveness) Objectives: To improve efficiency and financial performance, increase accountability, reduce size of sector. 1. lnvrove EfficlencY and Financial Corporate plans updated and perform- aodte coroorate olans for 3 Done. Performance agreements were Performnce: Efficiency and ance agreements for 1991 signed for orlority enterDCises and finalize igfred with 13 prfority SOEs: State financial perforasnce agreements 13 priority enterprises. Performance egrformance asreements. Shipping Corp; Ghana Airways: Ghana signed for 13 priority based incentive system finatized. Cocoa Board; Ghana Supply Cownission; enterprises, based on updated Begin to implement performance based Ghana Oil Company Ltd; Ghana National corporate plans. Performance lmplement action plan. incentive system. Petroleum Corporation; Volta River based Incentive system developed Authority; Electricity Corporation of by SEC. Completed review of studies and pre- Implement action ptan. Comptete study Ghana; Tems oil Refinery; Ghana Water pared action plan, including ration- of legislative and Institutional & Sewerage Corporation; Ghana Ports Studies completed on pricing, alizing collective bargaining agree- framework of state enterprises and Harbors Authority; Posts and staffing, rmmeration, and ments. Ensured that performance relative to that for private sector Telecommunications Corporation; Ghana procurement practices of SOEs. agreements take account of steps to status. Railways Corporation. clear any cross debts between Cross debt study completed and Government and SOEs. Efforts urder way to separate non- arrears between Government and commercial from commercial opera- mjor utility companies settled. tfons, both new and ongoing. Greater efforts to pay taxes and dividends. Some enterprises making large prof- Its. (Volta Power Authority, P&T), are still tax exempt. 2. Reduce Size of Sector: 13 SOEs 10 additional enterprises divested. asfactor convIetfon of 1991 Various steps were taken to divest liquidated (in addition to 10 In Agreement on 1991 work progrm for divestiture Drogram and asreement on SOEs Including the adoption In July 1988) and 5 sold. divestiture. 1992 Proram. 1992 of a divestiture program for 1992 acceptable to IDA. Only 28 SOEs Moratorium on creation of new moratorium to remain in effect for were divested during 1991-93 period SOEs in effect. duration of program except as agreed in the sense that mst of proceeds with IDA and subject to existing were collected; for another 16 SOEs, laws. no payments have been made by the buyer though sales contracts have been signed. Most of these will have to be re-offered for sale. o 9J -J  C. Public Expenditures and Poverty Alleviation Area of reform Actions taken or to be taken before Actions to be t&iken before March 1992 Implementation Status May 1991 (Effectiveness) Objectives: To ensure puiblic expenditures are consistent with macroeconomic framework; to improve atlocations for operations and maintenance; to increase efficiency of pubtlc spending and improve focus on poverty alleviation; and to strengthen budget procedures, and expenditure control and monitoring. 1. Ncroscowmic Frmework: Macro- Agree on PFP covering 1991-93. Update macroeconomic framework twice 1991 program was imtplemented as economic framework updated for a year. agreed. There were substantial slip- PFP and review of 1990-92 PEP. pages in 1992. with the result that none of the macro targets was met. 2. Efficiency of Public Expendi- Agree with IDA on TOR for design of Budget document to include Informa- Starting with the 1992 budget, sub- tures: Draft guidelines on budget informtlon system. which tion on development expenditures, stantial progress was mde in pre- recurrent expenditure allocations would link information on PIP and aid including foreign financing. senting budget in "broad based" for- for health, educaton, and agri- flows with budget. mat, although it was not published, a culture, used to prepare 1989 and mjor objectives of the reform. 1990 budgets. PIP needs to better address recurrent cost lmplica- tions of projects. PIP Task Force was incorporated Agree with IDA on 1991 recurrent Asreement with IDA on 1992 current Done. Government reached agreement into lnvestwent Projects Analysis allocations nd 1991-93 PEP. expenditures and 1992-94 PIP, with IDA on 1992 atlocations for Division of FEP. Work uidertaken recurrent expenditure, and on 1992-94 to mtch classification of PIP PIP. and budget accounts. Need to incorporate PIP more fully into budget. 3. Poverty Alleviationm PANSCAD Work under way to evaluate poverty Adjust spatial distribution of social 1992 development budget included being implemented. Budget allo- focus on public expenditure. sector PEP expenditures to account regional information. cations for social sectors have for needs in poorest areas Ensure risen. Need to use public ex- focus on services of most benefit for penditures more effectively to poor. Review progress on incorporat- alleviate poverty. Ing poverty concerns into PEP, by analyzing actual expenditure distri- bution In 1991, nd assessing experl- ence in use of guidelines. Make pro- posals for necessary modifications and possible extension. 4.. Buget Procedires, Exe_diture (a) Enforced compliance with sectorat Issue budget circular by 6/91. Sec- Budget circutar for 1992 was issued Control, wd Nonitoring: Sec- ceilings and allow sufficient review tor ministries to be given indicative In timely mnner, with Indicative toral allocation for recurrent within sector ministry. sectoral allocations for recurrent sectoral allocations including and capital expenditures provided and capital expenditures. Budget external project assistance. in budget circular for 1991 bud- Cb) Amrour.cement of 1991 budget as expended to include external project get. Coverage of budget incom- agreed with IDA. assistnce, and summary pubilshed. Suomary budget document was not, plete, as external project assis- Agreed 1992 budget announced. Com- however, pubilished as agreed. tance not Included. Preparation (c) Steps taken to reduce delays in mitments based monitoring system of biannual reports on actual ex- contract approval process. implemented. Biannrul reports on 1992 budget agreed with IDA, but no penditures on development budget. actual non-rate and Interest current progress on producing commitment- Establishment of Expenditure Mon- expenditures, broken down at line and based monitoring system or biannual itoring Unit In MFEP. Design of sector ministry level, wd develop- reports. commitments based monitoring sys- ment budget for 1991. tem, but data on recurrent ex- penditures inadequate. Also, Imlmentation of actions to revise Done. control and monitoring of commit- contract approval Process In order to ments inadequate, and financial reduce delaysie procedures cumbersome. o S  D. Civil Service Reform Area of reform Actions taken or to betaken before Actions to be taken before March 1992 Implementatfon Status May 1991 (Effectiveness) Objectives: To improve effectiveness of poblic wdhinistratfon, to enable Goverrinent to attract and retain qualified staff, and to strengthen personret and payroll mnagement. 1. Econmic Poticy: Establishment Comfission consultancy to develop Take steps to strengthen PAD. Very littLe accomplished In 1992 in of Economic Policy Division in organization and operation of Policy part because It was difficult to MFEP. Incorporation of SAP sec- Analysis Division (PAD), recruit and retain trained retarfat Into NFEP and assigrnment professional in civil service. of staff to coordinate economic reform and retated sector pro- gram. However, economic policy making still week, because of lack of trained staff nd uncer- tainty on priorities. 2. Civil service Prodictivity: Completed job evaluation for Junior Iwlement =av & grading restructuring Done. In parallel, and using pay and Civil service pay raises In 1989 and senior posts. Implemented pay in 1992 budset grading as the rationale a large and 90 Increased salary differ- restructuring to further decompress (80X) salary increase given that had ences between highest and lowest salary structure. Implement program very little to do with the pay and paid. Job evaluation of senior prepared for Introduction of new grading exercise. and Junior posts in progress, grading structure. 14,000 staff redeployed in 1989 Redeployment targets set for 1991. Implement of 1991 redeployment pro- Done. and 12,000 In 1990. Management Prep. by GOG of report anslyzing gram and targets for 1992. Further Services Division of OHCS carries ilpact of redeployment problem expansion of mnagement reviews out Job inspections and through 1990. Agreement on including closer links with Budget management reviews. Average of additional management reviews to be Division. 10,000 job inspections being car- Included In work progrem of NSD. rled out per sinu. Two manage- ment revfews carried out. 3. Persotl awd Payroll 1_ tagInmt: Approval of contract for requfrements Sufficient oroaress on installation Sufficient progress made. Feasibility study conpleted for study for integrated personnel/ of intesrated oersomel and Davroll integrated personelJ/peyroll man- payroll mgement system. management system. agement system. Goverrvnent approval to install system. Systems of marpower ceillngs and Implement new performance appraisaL other measures to Increase control system throughout civil service. Payroll data Improved to provide over recruitment establifshed. more information on stafffng Prepare and implement merit pay levels. PiLot testing of new system. performance appraisal system. Underlined actions are cornditions of second tranche release. o fi -J  I   1! 9AC,' . II tl; -1 r~1'. I l r: 'I II "- It II I. . F, Ir ,. . V( !-