Ghana - Private Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18638 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (Cr. 2718-GH) November 30, 1998 Private Sector and Finance Economic Management and Social Policy Department AFRICA REGION 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 Currency unit: Cedi US$1 = Cedi 2,320 (February, 1998) Weights and Measures Metric System Fiscal Year of Borrower January 1-December 31 Abbreviations and Acronyms BOG - Bank of Ghana BPEMS - Budget and Public Expenditure Management System DCA - Development Credit Agreement DIC - Divestiture Implementation Committee EDP - Entrepreneurship Development Program ERP - Economic Recovery Program ERSO - Economic Reform Support Operation GPTC - Ghana Posts and Telecommunications Corporation KFW - Kreditanstalt fur Weideraufbau IDA - International Development Association ME - Micro Enterprise MOF - Ministry of Finance MRH - Ministry of Roads and Highways MTEF - Medium Term Expenditure Framework MWH - Ministry of Works and Housing PEPTA - Public Enterprise and Privatization Technical Assistance PETA - Public Enterprise Technical Assistance PSAC - Private Sector Adjustment Credit PSD - Private Sector Development PUFMARP - Public Financial Management Reform Project SEC - State Enterprises Commission SHC - State Housing Corporation SIC - State Insurance Corporation SME - Small and Medium Enterprise SOE - State-owned Enterprise Vice President Jean-Louis Sarbib Country Director Peter Harrold Sector Manager Thomas W. Allen Task Team Leader Gerard Byarn  REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) TABLE OF CONTENTS PREFACE EVALUATION SUMMARY ................................................i -iv PART I: PROGRAM IMPLEMENTATION ASSESSMENT .............................1 A. Background ...............................................1 B. Statement of Project Objectives and Evaluation of Design ................ ............2 C. Achievement of Project Objectives ................................................4 D. Major Factors Affecting the Program ...............................................X7 (a) Implementation Capacity ...............................................X7 (b) Defects in the original design ................................................8 E. Implementation Record ................................................9 F. Program Sustainability ...............................................9 G. Bank Performance ............................................... 10 H. Borrower Performance ............................................... 10 I. Assessment of Outcome ............................................... 10 J. Future Operations ............................................... 11 K. Key Lessons Learned ............................................... 11 PART II: STATISTICAL ANNEXES ............................................... 13 Table 1: Summary of Assessments ............................................... 13 Table 2: Related Bank Loans and Credits ............................................... 14 Table 3: Project Timetable ............................................... 15 Table 4: Credit Disbursements: Cumulative Estimated and Actual Disbursements ................ ............................... 16 Table 5: Key Indicators for Project Implementation ......................................... 16 Table 6: Status of Legal Covenants ............................................... 17 Table 7: Bank Resources: Staff Inputs ............................................... 19 Table 8: Bank Resources: Missions ............................................... 19 PART III: APPENDXES ............................................... 20 APPENDIX I ............................................... 21 APPENDIX II ............................................... 24 APPENDIX III ............................................... 34 MAP ............................................... 40  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) PREFACE This is the Implementation Completion Report (ICR) for the Private Sector Adjustment Credit in Ghana for which IDA Credit 2718-GH in the amount of SDR 46.9 million (US$70 million equivalent) was approved on July 25, 1995 and made effective on September 20, 1995. The credit was closed on April 30, 1998. As of April 30, 1998, the credit was fully disbursed. The credit was co-financed by Japan, through OECF, with a grant of US$59.9 million and by the Federal Republic of Germany with a credit from Kreditwnstalt fur Weideraufbau (KFW) for approximately US$26.8 million. The ICR was prepared by John Byamukama with the guidance of Gerard Byam, Task Manager for the Private Sector Adjustment Credit (PSAC) project, and Oliver Campbell -White. It is based on material in the project files. In addition to commenting on the draft ICR, the Borrower also contributed its own evaluation of the project's preparation and execution, which is attached as an appendix to the ICR. The memorandum for the release of the third tranche is also attached as an appendix.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) EVALUATION SUMMARY Project Objectives 1. The objectives of PSAC were to: (i) accelerate the divestiture of state-owned enterprises (SOEs); (ii) create a macroeconomic environment that would generate the investment necessary to raise real GDP growth to 5.5 percent in 1997 and to attain an annual inflation rate not exceeding 5 percent; and (iii) support the improvement of public expenditure management, including the poverty-orientation of public expenditure. 2. The objectives of PSAC were adequate and responsive to tfhe needs of Ghana, especially at a time when the Government sought to further reduce its role in the services and productive sectors and to signal its strong commitment to enhancing the role of the private sector in the economy. Although the program design had specific and quantifiable targets set for the different stages of project implementation upon which the release of the second and third tranches were based, a major setback was the lack of emphasis on the quality of the privatization transactions and the definition of what constituted a successful divestiture. Implementation Experience and Results 3. The Borrower made satisfactory progress in improving the macroeconomic framework, in accelerating the pace of privatization, and in improving the management and poverty-orientation of public expenditure. The Government's main policy focus was to improve fiscal performance and by 1997 there was improved budgetary and monetary management which led to a significant fiscal turnaround. This helped in slowing down inflation, improving the macroeconomic environment and advancing the structural reform agenda. The domestic primary surplus reached 3.3 percent of GDP and inflation was brought down to 28.5 percent from 45.6 percent in 1996. Non-wage expenditures in primary health care, basic education and rural infrastructure were raised in real terms by 288 per cent, 103 per cent and 266 per cent, respectively, in the 1994-1996 period. In  - ii - addition, the Ministry of Roads and Highways introduced in May 1996 a computer-based monthly Contract Information System to strengthen the management of its multi-year contracts. 4. A limited expenditure monitoring system envisaged by PSAC was also introduced and this has since evolved into an integrated public financial management system with sub-systems covering budget preparation, budget implementation, accounting, cash management, debt management, revenue management, auditing and procurement. This more comprehensive system is supported by the IDA-financed Public Financial Management Reform Project. The process involved is complex and long term, but the initial steps have been taken and progress on implementing that project is satisfactory. Under PSAC, a medium-term expenditure framework (MTEF) for priority sectors which will form the basis for annual budgeting was prepared and had been launched by June 1998. In addition, a new computer-based budget and public expenditure management system (BPEMS' has been designed and invitations to tender for software have been sent out. 5. The privatization component ran into unforeseen implementation delays. Of the 149 enterprises that were handed over to the Divestiture Implementation Committee (DIC) for divestiture, 50 enterprises had been privatized or liquidated as of February 1998 (see Appendix III), of which 16 were medium sized. Although this was in line with the F'SAC target of selling or liquidating at least 48 small and medium SOEs during the pirogran period, of which 14 were medium sized, it took a year longer to achieve. Among the four large and strategic enterprises, only Ghana Telecom was privatized. DIC decided in early 1998 to outsource the divestiture of Mim Timber following the collapse of negotiations with the original owner of Mim Timber for the return of the property. At the same time, private firms were contracted to prepare State Housing Corporation (SHC) and State Insurance Corporation (SIC) for privatization and the transactions are expected to be completed before the end of 1998. The outsourcing of Mim Timber, SIC and SHC shows that the Government has begun an irreversible divestiture process, with the outsourcing contracts covering the full process from enterprise appraisal to completion of sales contracts. 6. The estimated cost of the project was US$143 million of which IDA was to provide US$70 million, Japan was to provide a grant of about US$56 million through CIECF, and the Federal Republic of Germany was to provide a credit for approximately US$17 million from Kreditanstalt fur Weideraufbau (KFW). The actual cost of the project was US$156.7 million of which US$70 million was provided by IDA, US$59.9 million was from OECF and US$26.8 million was from KFW The IDA Credit became effective on September 20, 1995 upon which the first tranche of US$30 million was released. The second tranche of US$15 million which was supposed to be released 10 mLonths later was released in December 1996 due to the unfavorable macroeconomic  - 111 - conditions and delays in completing the number of divestitures specified in the Development Credit Agreement (DCA). The third and last tranche of US$25 million was released in April 1998. Because of the delays in releasing the second and third tranches, the closing date of the Credit was extended from October 31, 1997 to April 30, 1998. Three IDA reflows of SDR 3.2 million, SDR 2.4 million and SDR 1.7 million in October 1996, July 1997 and August 1998 respectively were associated with this Credit. 7. The Bank's performance in the preparation and supervision of PSAC was satisfactory. The Bank allowed intensive Borrower participation at the design stage, even though this was a time-consuming process. It also carried on continuous dialogue with the Borrower during the implementation period, putting in 21 weeks of supervision for the period September 1995 to February 1998, of which 3 weeks were spent in the field. Effectively, PSAC received considerably more than the documented 21 weeks of supervision as the privatization component was also being reviewed during the Public Enterprise and Privatization Technical Assistance Project (PEPTA) supervision missions. However, the Bank could have been more specific at the design stage by spelling out what it considered a completed (and successful) divestiture rather than merely focusing on the number of completed divestitures. The Bank was also not coordinated in its policy regarding the preparation of enterprises for privatization. For example, while the PSAC was focusing on the privatization of the State Insurance Corporation (SIC), the Non-Bank Financial Institutions Project was proposing to finance the restructuring of the SIC. This gave conflicting signals to the Borrower. 8. The performance of the Borrower at the preparation stage was satisfactory as evidenced by the useful feedback they provided during program design. The Borrower's performance in the implementation of the macroeconomic policy framework component was also satisfactory, however, after significant delays. The Borrower's performance in the implementation of the privatization component of the program was less than satisfactory. The implementation capacity was weak leading to delays both in the appointment of outsourcing consultants and initiating actions on the preparation of the large strategic enterprises for sale. 9. The outcome of PSAC is rated satisfactory because the project achieved its objectives. Despite some delays in the divestiture process, all the components of the project were effectively implemented resulting in a substantial reduction of government ownership of commercial enterprises and improved public expenditure management. Furthermore, the project has signaled stronger government commitment to enhancing the role of the private sector in the economy. Actions implemented under PSAC are likely to be sustainable.  -iv - Fquture Operations 10. The Economic Reform Support Operation (ERSO) program was approved by the EBoard in June 1998. It provided balance of payments support and created the foundations for the next phase of difficult and complex reforms in the areas of privatization, public sector reform, public expenditure management, and restructuring of the energy and cocoa sectors. Specifically, under the privatization component, the focus to the divestiture of the large economically significant enterprises. This will be followed by another adjustment credit (ERSO II) which wou!d address the remaining agenda in privatization and the restructuring of both the cocoa and energy sectors. Key Lessons Learned 11. Several main lessons can be drawn from the experience of this operation: (i) Emphasizing the need for quality privatizations. The success of a privatization program should not only be measured by the number of divestitures completed, but also on the quality of the divestitures. To the extent that quantitative privatization targets will be required for these operations, distinct improvements are required in defining, and agreeing in advance, how performance is to be measured specifically. The implementing agency should also ensure that the p.ocess is widely publicized so as to generate a lot of interest and thus attract as 'many competitive bidders as possible. The selected buyers should be committed to returning the enterprises to viability. At the same time, the buyers should be capable and willing to meet their outstanding obligations arising out of the sale transactions. Compliance on payment obligations can be achieved by writing default clauses into the sales contracts and invoking these clauses when default occurs. This mechanism would minimize the number of divestitures that would need to be canceled, an action which sets tht privatization clock backwards, and would also save on the resources spent on the supervision of the project. (ii) Privatization is a complex process. Privatization of SOEs is a complicated process that involves many facets. These include, among others, the management of the privatization process, development of implementation capacity, capital market development, creating political consensus on the benefits of privatization and ironing out policy issues that could hamper the progress of privatization.  (iii) Privatization requires more intense supervision. Being a complex process, privatization requires more intense supervision than other adjustment operations. The combination of PSAC and PEPTA was very helpfiul as the two projects were conducted and coordinated as one operation with some mutual conditionalities, which effectively meant more supervision time for the PSAC privatization component. (iv) PSAC as a catalyst for moving the privatization program ahead. Decisions about privatization can cause political controversy and are therefore politically difficult to make. However, those decisions are not impossible to make. PSAC was basically a balance of payment support operation, but it gave the Government the necessary incentive to build political consensus about the need to push ahead with the privatization program.  PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) PART I: PROGRAM IMPLEMENTATION ASSESSMENT A. Background 12. The Private Sector Adjustment Credit (PSAC) provided balance of payments financing in support of the Government's program to promote private sector growth by accelerating the pace of privatization and by maintaining an appropriate macroeconomic policy framework. The latter included improved management and poverty-orientation of public expenditures. The program was aimed at increasing the efficiency and level of investment in the Ghanaian economy and thus permitting an acceleration of growth. While PSAC was aimed at providing the incentive and a conducive environment for private sector development, a parallel operation, the Public Enterprise and Privatization Technical Assistance (PEPTA), was set up to support the actual implementation of the privatization program. The two operations were designed to build on the groundwork laid by the Public Enterprise Technical Assistance Project (PETA) which supported the restructuring of state-owned enterprises into viable entities and provided advisory services for implementing the first phase of the divestiture program. 13. Although Ghana's Economic Recovery Program enjoyed substantial success in the seven years following its adoption in 1983, higher than planned public spending in 1991 worsened fiscal imbalances and increased inflationary pressures. The fiscal balance which had shown a surplus of 1.5 percent of GDP in 1991 deteriorated to a deficit of 10.4 percent of GDP in 1996 and the domestic financing of the budget rose to 5.1 percent of GDP, which increased interest payments and kept nominal and real interest rates high. Annual inflation also rose from 18.0 percent in 1991 to 45.6 percent in 1996. Table 1: Selected Economic Indicators, 1991-97 (in percent) Indicator FY91 FY92 FY93 FY94 FY95 FY96 FY97 GDPgrowthrate 5.3 3.9 5.0 3.8 4.5 5.2 3.0 Budget deficit (percent of GDP)' 1.5 -10.4 -9.3 -6.7 -10.4 -8.6 Annual inflation (period average) 18.0 10.1 25.0 24.9 59.5 45.6 28.5 M2 growth 27.2 50.3 27.4 46.2 37.5 34.3 36.9 Source: Government of Ghana Including grants  14. In 1988 the Government initiated a program to divest 260 state-owned enterprises (SOEs) that were either owned directly by the Government or through state-owned banks where the Government had majority shareholding. Between 1989 and March 1995, only 74 SOEs were divested; a pace that was due mainly to weak administrative capacity within the Government, slowness in taking necessary administrative decisions, and an ad hoc and non-transparent divestiture process. As a result, transaction costs were high and outcomes were unpredictable, undermining investor interest. There were no clear procedures for selecting SOEs for divestiture or for determining the role of ministries or algencies in the implementation proc. 3s. The Secretariat for the Divestiture Implementation Committee (DIC), charged with implementing divestiture, lacked sufficient staff and skills to implement the process more expeditiously. In addition, the Government initially saw divestiture as a means of reducing the fiscal burden by liquidating SOEs. Subsequently, there was a gradual recognition that the sale of SOEs to private sector entrepreneurs could also improve efficiency and promote the growth of the private sector. This led to a desire to accelerate the pace of divestiture. 15. Following the 1996 elections, the Government formulated a new economic program which focused on improving fiscal perfornance. As a result, macroeconomic performance improved in 1997. Real GDP grew by 3.0 percent in 1997, the fiscal deficit (excluding grants) w,as reduced to 11. I percent of GDP in 1997 and inflation was brought down to 28.5 percent. 16. In 1998, the Government began implementation of the next phase of policy reforms with the support of an Economic Reform Support Operation, a new adjustment credit, that was approved by the Board in June 1998. This new phase will include difficult and complex reforms in the areas of public sector reform, public expenditure management, infrastructure (to promote increased private participation) and the cocoa sector. In February, two major policy initiatives were implemented: (i) legislation for the implementation of a value added tax (VAT) was passed; and (ii) the newly created Public Utilities Regulatory Commission announced a 90 percent adjustment in water and electricity tariffs. B. Statement of Project Objectives and Evaluation of Design 17. Statement of Objectives. PSAC was a three tranche adjustment credit which aimed to support the Government's program to promote private sector growth by accelerating the pace of privatization and by maintaining an appropriate macroeconomic framework, including improvements in the management and poverty-orientation of public expenditures. The first tranche was to be released upon effectiveness of the credit. The second and third tranches were to be released at 1 0-month intervals following effectiveness, subject to the fulfillment by the Government of specific conditionalities laid out in the Development Credit Agreement.  -3 - 18. Specifically, the objectives of PSAC were: * Improved public expenditure management. This would involve the rationalization of the development budget in order to improve the overall efficiency and growth of the economy, including a public campaign about the quality and targets of the public investment programme. There would also be better planning of the recurrent budget along with the introduction of variance analysis to assess the departure of actual from budget allocations, and thus facilitate quick corrective actions. The comprnhensive public expenditure management would be supported by the IDA-financed Public Financial Management Reform Project (PUFMARP). * Accelerated divestiture of SOEs. This would include a more transparent set of procedures for divestiture of SOEs (fully disseminated to the public), the use of private firms to implement privatization on behalf of the Divestiture Implementation Committee (DIC) and the Government, the use of uniform procedures by both DIC and the private implementing firms and the greater participation of all Ghanaians in the divestiture process. Divestiture targets were set to include the sale or liquidation of a total of 48 small and medium SOEs out of the pre-specified list of 110 enterprises and the pre- privatizdtion preparation for four large and strategic SOEs, of which three would be offered for sale within the program period2. In addition, the divestiture component sought to develop Ghanaian consensus on private participation in cocoa export marketing and on ways to introduce such participation. The program included a study on the scope, method and potential impact of cocoa export liberalization. - To generate the investment necessary to raise real GDP growth to S.5 percent in 1997 and to attain an annual inflation rate not exceeding 5 percent. The Government realized that a stable and viable macroeconomic policy framework is a pre-condition for sustained private sector growth. This stability would be achieved through further fiscal adjustment, including revenue raising measures, reduction of the civil service while training and emunerating the retained staff better, introduction of expenditure monitoring system and poverty-orientation of expenditures. 19. Evaluation. The concept and design of PSAC were adequate and in line with the Flank's country assistance strategy which aimed at helping the Government to achieve its objectives of faster growth and poverty reduction. The Government hoped to achieve these objectives through restoration and maintenance of macroeconomic stability and implementation of the unfinished policy agenda for private sector development. Thus, PSAC was designed as the first of three adjustment operations planned to support the policy reform agenda for private sector development. The subsequent two operations would support further privatization, the restructuring of the cocoa and petroleum sectors, public service restructuring and the remaining financial sector reforms. 2 The original PSAC list consisted of 114 enterprises: 46 medium-size SOEs, 64 small SOEs, and 4 large and strategic SOEs. The large SOEs included Ghana Telecom, State Insurance Corporation, State Housing  -4 - 20. Over the last eight years, the Government has changed its attitude towards the private sector and has sought them out as partners. The initial relationship between the Government and the private sector was one of mutual suspicion. A public/private sector dialogue was initiated under the Private Sector Advisory Group in 1991 and the dialogue has been broadened and strengthened through the Private Sector Roundtable. The latter comprised of representatives from Government, Ghanaian entrepreneurs and academia who met regularly to discuss relevant policy issues; areas discussed include, among others, macroeconomic stability, privatization, technology development, human capital development, financial sector liberalization, and legal and financial infrastructure development. The p licy reforms supported by PSAC were identified as a result of this dialogue. 21. A significant number of up-front actions were required prior to negotiations of the Credit as proof of Government's commitment to the actions stated in its Letter of Development Policy. In addition, specific and quantifiable targets were set for the different stages of project implementition upon which the release of the second and third tranches were based. While this was meant to make the monitoring of program implementation easy, a major weakness was the lack of emphasis on the quality of the privatization transactions (including the economic impact) and the definition of what constituted a successful divestiture. As a result, monitoring of program implementation proved cumbersome as the Government and the Bank disagreed on the definition of a completed divestiture. 22. The risks facing the program were identified at the design stage, taking into account Ghana's past experience with adjustment operations. The risks were evaluated and deemed to be manageable. Most notable was the expected resistance to privatization from SOE workers. At the design stage, this risk was considered manageable in view of the large end-of-service benefits for SOE workers, the ease with which the retrenched ci il servants in 1990 and 1991 were absorbed into the economy, and to a lesser extent, the assumption that most SOEs would be sold as going concerns and many would retrench only a small part of their workforce. However, there were no specific provisions for the funding of end-of-service benefits. Generally, the design of PSAC underestimated the difficulties involved in achieving the privatization targets and there was no estimation of the economic impact of the privatization. For example, there was no estimate of the economic value of the enterprises to be privatized or the number of employees whose services could be terminated following the divestitures. An impact assessment study ex postfacto was included in the PEPTA project and is ongoing. C. Achievement of Project Objectives 23. Overall, the objectives of the project were achieved. The Borrower made satisfactory progress in improving the macroeconomic framework, in accelerating the Corporation and Mim Timber. During the course of PSAC's implementation, the divestiture list was expanded to 149 enterprises.  -5- pace of privatization, and in improving the management and poverty-orientation of public expenditure. 24. Attaining macroeconomic stability. Ghana's political liberalization during 1992- 96 was marked by growing fiscal difficulties. Higher than planned public spending worsened fiscal imbalances and increased inflationary pressures. The domestic primary balance deteriorated from a surplus of 0.8 percent of CDP in 1994 to 0.3 percent in 1996 causing a crowding out of private sector access to credit. Annual inflation increased from 25 percent in 1994 to 45.6 percent in 1996. Against this macroeconomic setting, the Government began to formulate a new economic program after the 1996 elections. 25. Beginning in 1997, the Government's main policy focus was to improve fiscal performance. The year recorded improved budgetary and monetary management which led to a significant fiscal turnaround. This helped in slowing down inflation, the improvement of the macroeconomic environment and advancing the structural reform agenda. The domestic primary surplus reached 3.3 percent of GDP and inflation was brought down to 28.5 percent. Macroeconomic stabilization was achieved largely through expenditure restraint, with non-interest spending falling by 4.6 percentage points of GDP and the wage bill declining by 0.5 percent of GDP. In addition, the Government continued to improve the efficiency and buoyancy of the tax system. Specifically, it removed the number of exemptions, advising that any customs exemptions must be approved by Parliament, and duty-free imports under public and donor-funded projects were substantially reduced. Nevertheless, revenue fell by 1.6 percentage points of GDP, mainly on account of lower collections of petroleum taxes and, to a lesser extent, due to a drop in cocoa export duties because of a decrease in the volume of exports. In February 1998 a Value Added Tax (VAT) law was passed by Parliament and effective December 1998, VAT will replace the present sales and services tax. 26. In 1996, Bank of Ghana (BOG) discontinued its practice of issuing Treasury Bills in retail auctions and, in 1997, discontinued the practice of tapping sales for small investors. Government paper is instead being issued in wholesale auctions and BOG is developing a network of primary dealers. Monetary policy continued to be dominated by the Government's large financing requirements and broad money increase was estimated at 41 percent. However, the Government's domestic financing needs for 1998 are projected to be much lower than in 1997 and broad money is expected to grow by about 18 percent and in line with the growth of the economy thereafter. Based on these projections, annual inflation is expected to decline to about 19 percent by the end of 1998. 27. In the external sector, declining export receipts from cocoa and gold in 1997 were more than offset by lower import levels resulting from tighter financial policies. The current account deficit (excluding grants) as a share of GDP narrowed from 8.3 percent in 1996 to 6.7 percent in 1997 and is projected at 7 percent in 1998. Increased external grants and positive net capital flows during 1997 led to a small surplus in the overall balance of payments (US$25 million). However, gross international reserves fell below three months of imports equivalent as the BOG reduced its external liabilities.  - 6 - 28. Public expenditure management. Non-wage expenditures in primary health care, basic education and rural infrastructure were raised in real terms by 288 per cent, 103 per cent and 266 per cent, respectively, in the 1994-1996 period. Data for 1997 are not yet available. However, the 1997 budget provided for a maintenance of expenditures at 1996 levels. The Ministry of Roads and Highways introduced in May 1996 a computer-based monthly Contract Information System to strengthen the management of its multi-year contracts. The new contracting system has been implemented with the publication of a notice formally increasing tender board limits. In addition, a limited expenditure monitoring system envisaged by PSAC was introduced and this has since evolved into an initegrated public financial management system with sub-systems covering budget preparation, budget implementation, accounting, cash management, debt management, revenue management, auditing and procurement. This more comprehensive system is supported by the IDA-financed Public Financial Management Reform Project. The process involved is complex and long term, but the initial steps have been taker. and progress on implementing that project is satisfactory. 29. A medium-term expenditure framework (MTEF) for priority sectors which will form the basis for annual budgeting was prepared and had been launched by June 1998 . In addition, a new computer-based budget and public expenditure management system (]3PEMS) has been designed and invitations to tender for software have been sent out. Phased implementation will begin in 1998 with the start of software customization and training of staff, and the BPEMS is expected to be fully operational for the budget cycle for the calendar year 2000. 30. Accelerated privatization. The privatization component ran into unforeseen irnplementation delays. Of the 149 enterprises that were handed over to DIC for divestiture, 50 enterprises had been privatized or liquidated as of February 1998 (see Appendix III), of which 16 were medium sized. Although this was in line with the PSAC target of selling or liquidating at least 48 small and mediunm SOEs during the program period, of which 14 were medium sized, it took a year longer than had been envisaged. Among the four large and strategic enterprises, a strategic investor acquired a 30% stake in, and management control, of Ghana Telecom. Separately, the Government also granted a license to a second national operator for the private provision of basic telephony services. These two developments, taken together, meant the effective privatization of Ghana's telecom services even though the offer for sale of Ghana Telecom was not strictly in accordance with the agreed definition of the term (i.e. the sale, through competitive bidding, of at least 51% of the Government's shares). 31. Progress on the divestiture of the other named strategic enterprises, Mim Timber, SIC and SHC, was slower than expected. The divestiture of Mim Timber was outsourced at the beginning of 1998 following the collapse of negotiations with the original owner for the return of the property. The divestiture of SIC and SHC has also been outsourced but, because of the size of both companies and the complicated legal issues that needed to be addressed as part of their divestiture, the privatizations will not be completed before the second half of 1998. Some of these complications had not been fully appreciated at  -7- the time of appraisal. However, the outsourcing of SIC and SHC shows that the Government has begun an irreversible divestiture process, since the outsourcing contracts cover the full process from enterprise appraisal to completion of sales contracts. 32. The study on the external marketing of Ghana's cocoa was carried out in 1995/96 and presented to the Government in June 1996.3 The study was intended to provide the basis for policy and institutional reforms concerning cocoa exports. It assessed the existing export marketing arrangements in Ghana, compared these with arrangements in other major cocoa and coffee exporting countries, and presented several options for consideration by policy makers. Since then, the share of the FOB price going to farnners has been increased several times, and additional private operators have been licensed to engage in domestic cocoa marketing. Seeking to embed decisions on cocoa export policy in a broader sectoral context than that provided in the 1996 study, the Government has recently established a task force to review all aspects of the Ghanaian cocoa industry with the objective of defining a longer-term strategy for the subsector. D. Major Factors Affecting the Program 33. The key factors which affected the implementation of the program were largely due to the weak capacity to manage the divestiture process and, to some extent, defects in the original design of PSAC. (a) Implementation Capacity (i) Weak Organization at DIC. Although the DIC received technical assistance personnel from the UK's DFID (formerly the ODA) and other technical assistance from the IDA-financed PETA and PEPTA, the overall capacity to manage the program remained weak. Specifically, the assistance provided by PEPTA was not as effective as expected. It was very difficult to get data on completed transactions, transaction files were not readily available and in many cases enterprises counted as completed divestitures by DIC were found to be incomplete by supervision missions. In addition, sales agreements for many divestiture transactions were not signed by the Chairman of the DIC Board as required by law. From the outset, DIC did not have a mechanism in place to ensure timely payments of the agreed installments by the buyers and immediate follow-up in the case of default. As such, a lot of buyers were in default for a number of years and DIC only hired a collection lawyer at the end of 1997 to enforce compliance. In addition, routine public reporting on the diVestiture progress was inadequate. These factors contributed to the delay in meeting some of the conditions for the release of both the second and third tranches. LMC International, "The External Marketing of Ghana's Cocoa" (2 vols.). Prepared for the Ministry of Finance; Oxford, England, June 1996.  - 8 - (ii) Systemic issues. The design of PSAC had envisaged that private sector companies (merchant banks, consulting companies, legal and auditing firms) would implement most of the privatization transactions on contract to the Government. However, the appointment of outsourcing consultants to carry out the divestiture process on behalf of DIC took much longer than originally envisaged. Although the register of consultants to be used in outsourcing was compiled in mid-1995, the first divestiture consultancy appointments were made in the second quarter of 1996 and the first outsourced divestiture was completed in January 1998. This was not in line with the program design, where the outsourcing process was supposed to be an effort to harness the drive and energy of the private sector's marketing capacity. As it turned out, for the first two years, DIC took on the divestiture process almost single-handedly, a task for which it did not possess the required capacity. Moreover, the DIC legislation did not give DIC sufficient powers as the body with the sole responsibility for divestiture of SOEs. Another systemic problem was that of legal and land title issues. Many transactions involved transfer of land and although some of the buyers paid to acquire the land and took possession, legal documentation to support the transfer of title was frequently not available. This constrained the work of DIC and later, the outsourcing consultants. The land title problem is a system wide issue and was difficult to handle on a transaction by transaction basis. The Government should have addressed this problem upfront as a matter of policy. (iii) Failure to follow the agreed divestiture procedures. Although the new divestiture procedures manual was introduced on April 22, 1996, there were subsequent divestitures where these procedures were not followed. (b) Defects in the original design (i) Emphasis on number of completed divestitures without regard to quality. The design of the program focused primarily on the number of completed divestitures without sufficient regard to the quality of the transactions. The design did not ensure that there would be measures to stimulate interest in the process, attract as many competitors as possible in the bidding and ascertain the willingness and ability of the winning bidders to invest in the enterprises. As a result, there was a rush on the part of the Borrower to complete transactions in order to meet the conditionality on the number of divestitures completed. A large number of transactions have ended up with the buyers defaulting on payments; some buyers have been in default for several years. This has meant that DIC could not complete post divestiture actions, and some of the divestitures which had been considered complete  -9 - during the second and third tranche releases have since been suspended4. Additionally, in an effort to satisfy the 'numbers' requirement, the Borrower presented the sales of subsidiaries or branches of companies as separate divestitures. In most cases, only the parent company had been listed in the original PSAC list, the assumption being that the sale of the company and its subsidiaries or branches would constitute a single divestiture. The process of sorting out which divestitures were acceptable to IDA as per the DCA definition consumed a lot of staff time during the supervision missions. The focus on meeting quantitative targets diverted much of DIC's activities and resources into completing small, troublesome sales and away from preparing for the larger, more important ones. The PSAC conditions arguably inserted some distortions into DIC's own allocation of effort and resource, though it is possible that DIC's performance might not have been any better without the conditions in place. E. Implementation Record 34. As ment' -ned earlier, the project called for a significant number of up.lont actions prior to negotiation of the Credit. Most of these were agreements on policy issues or action plans which were taken care of prior to the negotiations. The rest were completion of sale of 10 enterprises to the private sector and invitation of bids to register private firms for award of contracts to implement the divestiture of SOEs. 35. The second tranche of the Credit(of US$15 million) whose release had originally been scheduled for July 1996, ten months after the Credit became effective, was released in December 1996. The release of the third tranche (of US$25 million) which should have been in October 1997 (ten months after December 1996), was not effected until April 1998. The slippages resulted from weak macroeconomic performance, delays in completing the targeted number of divestitures and issues that emerged in the divestiture process for the completed transactions. F. Program Sustainability 36. PSAC's sustainability is measured by the irreversibility of the reforms it supported. The macroeconomic and public sector reform components are directly linked. The Government's ability to maintain its e--penditure targets in the social sectors and for poverty related initiatives will depend to a large extent on macroeconomic performance. Adherence to the targets will be difficult if unplanned expenditures begin to strain the fiscal budget. Improvements in the management and poverty-orientation of public expenditure are supported by a parallel technical assistance credit, the Public Financial 4 Among the suspended divestiture transactions are the sale of Automotive and Technical Services (Sabat Motors).  - 10- Management Reform Project. The divestiture component of PSAC is sustainable since it entails a once and for all (and irreversible) transfer of assets to the private sector. G. Bank Performance 37. The Bank's performance in the preparation and supervision of PSAC was satis:factory. There was intensive Borrower participation at the design stage, even though this was a time-consuming process. It also carried on continuous dialogue with the Borrower during the implementation period, putting in 21 weeks of supervision for the period September 1995 to February 1998. Effectively, PSAC received considerably more than the documented 21 weeks of supervision as the privatization component was also being reviewed during PEPTA supervision missions. 38. However, the Bank could have been more specific at the design stage by spelling out what it considered a completed (and successful) divestiture rather than merely focusing on the number of completed divestitures. For example, the DCA should have state,d upfront that for a divestiture to be considered complete, the buyer must have paid at least 50 percent of the purchase price. In addition, the Bank did not discuss and agree with the Government on the composition of the original list of 114 enterprises. As it turned out, there were only 108 actual enterprises and the rest were duplications. There was also lack of coordination within the Bank. For example, while PSAC required the immediate divestiture of the State Insurance Corporation (SIC), a parallel technical assistance credit was financing its restructuring. H. Borrower Performance 39. The performance of the Borrower at the preparation stage was satisfactory. The Borrower's performance in the implementation of the macroeconomic policy framework component was generally satisfactory, although there were some fiscal slippages in 1996 and the first half of 1997. Measures were taken beginning with the second half of 1997 to reverse this situation. However, the Borrower's performance in the implementation of the privatization component of the program was less than satisfactory. As mentioned above, implementation capacity was weak leading to delays both in the appointment of outsourcing consultants and initiating actions on the preparation of the large strategic enterprises for sale. The issue of implementation capacity is to be addressed during the mid-term review of PEPTA which is scheduled for early 1999. I. Assessment of Outcome 40. The outcome of the Credit is rated satisfactory because the project achieved its objectives. Despite some delays in the divestiture process, all the components of the project were effectively implemented resulting in substantial reduction of government ownership of commercial enterprises and the associated fiscal saving. Furthermore, the project has signaled stronger government commitment to enhance the role of the private  - 11 - sector in the economy. This satisfactory rating is also augmented by the fact that there are already other projects in place to build on the achievements under PSAC. J. Future Operations 41. The Government approached the Bank seeking assistance for an Economic Reform Support Operation which would provide balance of payment support as the Government pursues its privatization program. The ERSO program was approved by the Board in June 1998. Specifically, under the privatization component, the focus shifted to the divestiture of the large economically significant utilities and enterprises. The ERSO will be followed by another adjustment credit which would address the remaining agenda in the privatization of SOEs and the restructuring of both the cocoa and energy sectors. K. Key Lessons Learned 42. Based on the experience of this Credit, several lessons can be drawn: (i) Emphasizing the need for quality privatizations. The success of a privatization program should not only be measured by the number of divestitures completed, but also on the quality of the divestitures. To the extent that quantitative privatization targets will be required for these operations, distinct improvements are required in defining, and agreeing in advance, how performance is to be measured specifically. In the case of PSAC, privatization was set as a target but not specifically defined. Definition is required in several domains. PSAC progress was hampered by ambiguity in several key areas: (a) the composition of the list of 114 enterprises was not agreed upon and the list ended up with several duplications and inconsistencies in classification; (b) proportion of proceeds required to be received to constitute a privatization; and (c) extent of management control transfer required, and the extent to which this could substitute other criteria. The implementing agency should ensure that the process is widely publicized so as to generate a lot of interest and thus attract as many competitive bidders as possible. The selected buyers should be committed to returning the enterprises to viability. At the same time, the buyers should be capable and willing to meet their outstanding obligations. Compliance can be achieved by writing default clauses into the sales contracts and invoking these clauses when default occurs. This mechanism would minimize the number of divestitures that would need to be canceled, an action which sets the privatization clock backwards, and would also save on the resources spent on the supervision of the project. (ii) Privatization is a complex process. Privatization of SOEs is a complicated process that involves many facets. These include, among others, the management of the privatization process, development of implementation capacity, capital market development, creating political consensus on the benefits of privatization, and ironing out policy issues that could hamper  - 12- the progress of privatization. In Ghana, PSAC assumed that process issues could be resolved in a shorter period of time and the outsourcing process was oversimplified. This led to unforeseen delays in implementing the divestiture program. There were fundamental issues, like the legalities involved in the transfer of land titles, which should have been addressed on a system wide basis by the DIC instead of expecting the outsourcing consultants to address them during the course of their duties. (iii) Privatization requires more intense supervision. Being a complex process, privatization requires more intense supervision than other adjustment operations. The combination of PSAC and PEPTA was very helpful as the two projects were conducted and coordinated as one operation with some mutual conditionalities, which effectively meant more supervision time for the PSAC privatization component. (iv) PSA C as a catalyst for moving the privatization program ahead. Decisions about privatization can cause political controversy and are therefore politically difficult to make. However, those decisions are not impossible to make. PSAC was basically a balance of payment support operation, but it gave the Government the necessary incentive to build political consensus about the need to push ahead with the privatization program.  - 13 - PART II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible NA Macro Policies / Sector Policies / Legal Objectives V Institutional Development / Poverty Objectives V Gender Issues V Other Social Objectives . Environmental Objectives V/ Public Sector Management V Private Sector Development / Other B. Project Sustainability Likely Unlikely Uncertain v C. Bank Performance Highly Satisfactory Unsatisfactory Satisfactory Identification V/ Preparation assistance / Appraisal Supervision , D. Borrower Performance HS S U Preparation V Implementation v Covenant compliance v E. Assessment of Outcome HS S U HU Vi' NA: Not Applicable; HS: Highly Satisfactory, S: Satisfactory; U: Unsatisfactory; HU: Highly Unsatisfactory.  -14- Table 2: Related Bank Loans and Credits Loan/Credit Title Purpose CY of Status approval 1. Structural Adjustment Loan (SAL) * To support the Government's structural adjustment 1987 Closed program, which aimed to: (i) establish an incentive framework that stimulates growth, encourages savings and investment, and strengthens the balance of payments; and (ii) improve resource use, particularly in the public sector, while ensuring fiscal and monetary stability . 2. SAC 11 * To support the second phase of the Government's 1989 Closed structural adjustment program (1989-90) which aimed to maintain an average GDP growth rate of at least 5% per year, raise investment to 16% of GDP by 1990 and raise national savings to 8.5% of GDP. 3. Public Enterprises Technical * To provide technical assistance/institutional support to 1987 Closed Assistance the SEC and DIC for the implementation of the public enterprise reform program. It included: design and implementation of performance monitoring and evaluation system including performance agreements based on corporate plans and for assessment and development of SOE policy, institutional and legal reform, and advisory services for implementing the divestiture program. In addition, project funds were available to finance an SOE restructuring fund to assist SOEs to identify restructuring measures required to implement operational and managerial improvements. - 4. Industrial Sector Adjustment Credit * To support reform of incentive policies, provision of 1986 Closed finance for industrial inputs, rehabilitation and new investments, strengthening of policy planning and project implementation capabilities in Ministries of Industry and Finance, Bank of Ghana, and support institutions. 5. Private Investment Promotion * The credit supported the Government's program to 1991 Closed promote higher levels and more efficient investment in the economy in order to achieve an average growth rate of about 5 percent per year, raise investment to 18 percent of GDP by 1992, and raise national savings to 12 percent of GDP. 6. Economic Management Support * To improve analytical and administrative capability in 1991 Project is still ongoing the core economic management agencies: the Ministry of Finance and Economic Planning, National Revenue Service, Controller-Accountant General, Office of the Head of Civil Service, Audit Service, and the Ghana Statistical Service. 7. Enterprise Development Project * To provide foreign exchange for export finance and 1993 Project closed on March 31, develop a credit enhancement program to encourage the 1998 owing to unsatisfactory inclusion of incremental exporters in the effort to expand performance non-traditional exports. 8. Private Sector Development * To foster the development of a competitive private 1994 Mid term review was completed sector by: (a) assisting the Government in its efforts to in June 1998 and project is to be restructure, reform and commercialize its technical research restructured and development along competitive and demand-driven principles; (b) providing a broad segment of the private sector with the necessary financial and technical assistance to support the development of commercially bankable projects by improving their feasibility and quality; (c) supporting efforts by the export industry to improve their I_________________________________ design and the promotion of their products; and (d) assisting  - 15 - Loan/Credit Title Purpose CY of Status approval the Government in developing a program to upgrade the delivery of legal services to the commercial and manufacturing sectors. 9. Public Enterprise and Privatization * Public Enterprise Reform: To strengthen management 1996 Mid term review planned for TA of the SOE reform program, develop capacity to manage November 1998 declining portfolio of loans and investments in SOEs, and reform policies and regulations in key sectors. * Privatization: To transfer ownership and management of commercial SOEs to the private sector, and build and sustain public and stakeholder support and investor confidence 10. Public Finance Management * To promote efficient fiscal management. This will be 1996 Mid term review scheduled for achieved through better monitoring and control of public late 1999. expenditures, improved allocation of resources consistent with national priorities, and enhanced accountability and transparency in the use of public resources. 11. Economic Reform Support * To support completion of an important phase in the 1998 Ongoing. Was approved by the Operation Ghanaian reform program and lay the foundations for the next Board in June 1998 phase of difficult and complex reforms. The later phase includes a comprehensive public sector reform program, public expenditure management, deepening the privatization program and restructuring the energy and cocoa sectors. * To provide external financing requirements of Ghana in the context of a vulnerable external position and low level of external reserves Table 3: Project Timetable Steps in Project Cycle Date Planned Actual Date Identification September 1993 Preparation October 1993-July 1994 Appraisal September/October 1994 Negotiations March 23-24, 1995 Letter of Development Policy March 24, 1995 Board Presentation May 9, 1995 Signing July 25, 1995 Effectiveness May 31, 1995 September 20, 1995 First Tranche Release May 31, 1995 September 20, 1995 Mid-term Review N.A N.A. Second Tranche Release March 31, 1996 December 1996 Third Tranche Release January 31, 1997 April 1998 Project Completion April 30, 1997 April 30, 1998 Loan Closing October 31, 1997 April 30, 1998  - 16- Table 4: Credit Disbursements: Cumulative Estimated and Actual Disbursements (US $ million) FY95 FY96 FY97 FY98 Appraisal Estimate 0.00 30.00 45.00 70.00 Actual5 0.00 34.71 49.26 75.02 Actual as a % of Estimate 0.0 115.7 109.5 107.2 Date of Final Disbursement: April 28, 1998 Table 5: Key Indicators for Project Implementation Programmed Actual (i) Approve, at the Cabinet level, the accelerated divestiture program This was done before Board presentation and the selection of the 110 small and medium SOEs and the 4 large strategic SOEs (ii) Approve, at the Cabinet level, the procedures for divestiture and This was done before Board presentation disseminate them to the public. (iii ) Cornplete sale of 10 enterprises to the private sector This was done before Board presentation (iv) Agreed on an action plan for pre-privatization preparation of the This was done before Board presentation four strategic enterprises: Ghana Telecom, SIC, SHC, Mim Timber. (v) Agreed on the terms of reference of the cocoa export marketing This was done before Board presentation study (vi) Adopted an action plan for implementing a satisfactory This was done before Board presentation accounting and expenditure monitoring system as well as a new contracting system over the program period (vii) Agreed on a Policy Framework Paper (PFP) for 1995-97 This was done before Board presentation It Condlde*for seownd fr. 'anchemeles 4 ' (i) Ensuring macroeconomic policy framework of the Borrower consistent * Borrower satisfied the quantitative macroeconomic with the objectives of the Program and satisfactory performance in criteria and benchmarks incorporated in the PFP agreed carrying cut the Program jointly by the Borrower, the IMF and the Bank. (ii) Complete sale or liquidation of at least 14 enterprises, including at * This was achieved with some delay of 5 months least 4 medium-sized enterprises (iii) Increase by FY95, by at least 10% in real terms based on FY94, actual * This was achieved in FY95 expenditures on both (i) recurrent non-wage expenditures and (ii) development expenditures for basic education, primary health and rural infrastructure. (iv) Complete and deliver to IDA the study regarding the liberalization of * The study was delivered to IDA in June 1996 cocoa export marketing (v) Complete the assessment of the contracting system employed by the * This was achieved before second tranche release Ministry of Roads and Highways (MRH) and Ministry of Works and Housing (MWH) and design a revised contracting system, satisfactory to IDA. 5 These include the IDA Reflows  - 17 - Programmed Actual (vi) Implement an expenditure monitoring system in six pre-specified * This was achieved before second tranche release ministries, satisfactory to IDA (vii) Design an accounting system, satisfactory to IDA, meeting the * This was achieved before second tranche release objectives set out in the Program for use by the six ministries mentioned in condition (vi) above (i) Ensuring macroeconomic policy framework of the Borrower consistent * The macroeconomic policy framework which had with the objectives of the Program and satisfactory performance in suffered some slippages in FY96 was put back on track in carrying out the Program FY97 and performance under the PSAC Program was satisfactory (ii) Complete the sale or liquidation of at least 24 enterprises provided that * This was achieved after a six month delay such 24 enterprises taken together with the 14 enterprises divested by the second tranche release, include at least 14 medium-sized enterprises (iii) Offer for sale: (a) the company to which the assets of the * Only (a) was achieved. A waiver was sought for (b) Telecommunications Division of GPTC have been transferred; and (b) at on the basis that action to prepare the enterprises for sale least two of the other three strategic SOEs--Mim Timber, SIC and SHC had been initiated. (iv) Increase by at least 20 percent, in real terms, recurrent non-wage * This was achieved in FY96 expenditure and development expenditure on social sectors in FY 1996 based on FY94. (v) Implement in the MRH and MWH the revised contracting system * This was achieved before the third tranche release referred to above (vi) Implement the expenditure monitoring system in at least another 10 * This was achieved before the third tranche release ministries responsible for at least 30% of allocations of the annual budget (vii) Implement the new accounting system (referred to above) in the first * This was achieved before the third tranche release six specified ministries Table 6: Status of Legal Covenants Development Credit Agreement 2.03 3 Closing date | CD | 10/31/1997 |4/30/1998 |Delays in meeting tranche | . l l l | ~~~~~~~~~~~~~~~~~~~~~~release conditions led to 1 l l l | ~~~~~~~~~extension of closing date. | 3.01 4 Exchange of views with IDA on | progress on the program C Continuous 3.03 1,4 Preparation of financial records June 30, every and audit reports year I C_I_I_1_11 Sch. 1 2 Withdrawal of proceeds C Continuous Sch. 2 2 Procurement of goods C Continuous Sch. 3, A (1) 5 Complete the sale of at least 14 Second tranche The outsourcing program enterprises, including at least 4 release for private consultants was medium-sized ones CD delayed Sch. 3, A (2) 5 Complete and deliver to IDA Second tranche study on liberalization of cocoa release export marketing C Sch. 3, A (3) 5 Increasing recurrent non-wage Second tranche  - 18- expenditures and development release expenditures in social sectors byre 10% (in real terms) during FY95 C Sch. 3, A (4) 5 Assess the existing, and re-design, Second tranche the contracting system used by the release MRH and MWH Cl Sch. 3, A (i5) 5 Introduce expenditure monitoring Second tranche T system in six ministries specified release f p in the Programl Sch. 3, A (2a) 5 Design an accounting system for Second tranche use by the six ministries above release _ _ _ _ _ _ _ _ _ G T CC I__ _ _ _ Sch. 3, B (21) 5 Completr fse sale of another 24 Third tranche The outsourcing prografo enterprises, including 14 medium- release for private consultants was sized ones CD delayed. Sch. 3, B (2a) 5 Offer for sale the Third tranche Telecommunications division of release GPTC Cl Sch. 3, B (2b) 5 Offer for sale at least two of Mim Third tranche The offer for sale of 2 of Timber, SIC and SHC release these 3 strategic CP enterprises was delayed. i A waiver was sought from f the Board a Sch. 3, B (3) 5 Increase recurrent non-wage Third tranche expenditure and social sectors release expenditure (in real terms) in c FY96 by 20% based on FY94 Cl Sch. 3, B (4o 5 Implement the revised contracting Third tranche system IC MRcI and MWH C release Sch. 3, B Flo 5 Implement expenditure monitor Third ranche system in another 10 ministries releasel responsible for at least 30% ofl allocations in the annual budget Cl Sch. 3, B (6) 5 Implement accounting system Third tranche referred to in Sch. 3, A (6) in the releasel six ministries mentioned in Sch.l 3, A(5) C Covenant types: Present status: 1: Accounts/Audits C: covenant complied with. 2: Flow and utilization of project funds CD: complied with after delay 3: Management aspects of the projectlexecuting agency CP: complied with partially 4: Monitoring, review and reporting NC: not complied with 5: Project implementation not covered by categories 1-4  -19- Table 7: Bank Resources; Staff Inputs Stage of Project Cycle Weeks USS '000 Preparation to appraisal 148.1 452.2 Appraisal 27.0 84.3 Negotiations through Board approval 9.0 23.1 Supervision 20.3 91.3 Completion (to be added) TOTAL 204.4 650.9 Table 8: Bank Resources : Missions Month/Year No. of No. of Staff skills Performance rating Types of problems Persons Weeks represented Implementation | Development Status ! Objectives Identification Pre-Appraisal July 1994 3 2.5 PS Appraisal Supervision I April 1996 l Supervision 11 July 1996 Supervision III Feb. 19976 3 2 EC, PS Supervision IV Sept. 1997 3 1.6 EC, PS S S Delays in starting divestiture of the 2 large Supervision V Feb.9987 4 2 EC,PS S S Staff Skills: EC - Economist PS - Private Sector Specialist Performance Rating: I - Minor Problems,; 2 - Moderate Problems; 3 - Major problems, actions taken; U - Unsatisfactory; S - Satisfactory 6 This was a combined PSAC and PEPTA supervision mission 7 This was also a combined PSAC and PEPTA supervision mission  - 20 - REPUBLIC OF GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) PART III: APPENDIXES  - 21 - GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) APPENDIX I BORROWER'S CONTRIBUTION TO THE IMPLEMENTATION COMPLETION REPORT  - 22 - GHANA PRIVATE SECTOR ADJEUSTMENT PROGRAMME GOVERNMENT'S IMPLEMENTATION COMPLETION REPORT Introduction The Private Sector Adjustment Programme was negotiated between the Government of Ghana ((iOG) and the Interational Development Association (IDA) in May. 1995. The Development Credit Agreement was signed on 25th July, 1995 and the credit became effective on 20th September, 1995. Programmne 04Jectivg The pnimary objective of the pfogtamwe aiuhed at promoting rapid private sector growth through sustenance of macroeconomic stability, accelerating divestiture of SOEs and improving management and poverty-orientation of public expenditures. The credit which was meant to provide balance of payment support was designed as a three tranche operation, the first to be released upon effectiveness. The second and third tranches were to be released at 10-month intervals subject to the fulfillment by GOG of specific condirionalities agreed with IDA and outlined in the Development Credit Agreement. Conditioalitics The conditionalities were designed to ensure that the programme will be implemented to achieve the programme objectives. The conditionalities included macroeconomic targets, expenditure management reforms, poverty reduction expenditures and privatisation targets. The difficulties encountered during the implementation of the programme, especially the privatisation component, delayed the fulfillment of these conditionalities and for that matter tranche releascs. The second tranche was released 15 months (instead of 10) after the first, whilst the third tranche was released 16 months after the second. Achievernent of Project Objectives The Govemment of Ghana did achieve very significant success with regard to project objectives. By the end of December 1997, domestic primary surplus has increased from 0.3% of GDP in 1996 to 3.3% of same. Inflation slowed from 45.6% in 1996 to 28.5% by end of 1997. The Government also increased in real terms budgetary allocations in favour of poverty- reduction programmes - primary health care, basic education and rural infrastmcture. It is also  - 23 - improving its expenditure management through the IDA- financed Public Financial Management Reform Project. The priva;isarinn rargerm were achieved ro a very large exrenr. Over SO small and medium enterprises were privanised or liquidated during the duration of the project. Of the 4 large/strategic enterprises agreed under the project. only Ghana Telecom was privatised and the Government therefore requested for a waiver of the conditionaIity relating to this component. Imillementaiion Problems Apart from the privatisaiion programune. all the other components of the programme were implemented without significant problems. The numerical targets set under the privatisation programme to a large excent affected the pace and quality of the progranme leading to tranche release delays. During the appraisal and credit negotiations, the GOG delegation repeatedly advised against the use of numerical targets to measure the success of privatisation. The advise was based on experiences and problems encountered with previous privatisations in the country. The delegation suggested the use of qualitative measures such as overall government comimitrnent, the economic importance of SOEs on sale, cumulative sales revenue among others, to measure the success. This suggestion was not accepted by the IDA team and the GOG delegation reluctantly accepted the numerical targets in order not to jeopardize the negotiations. It was assumed that the use of private consultants (including merchant banks), in addition to the Divestiture Implementation Committee (DIC), to undertake the pnvatisation on behalf of government will accelerate the programme. Though several private consultants were mourced for the privati.cation of over 20 SQEc, only one enterprise had been completely privatised by these firms at the close of the project. The rest were completed by DIC through its in-house programme. One masor. for the failure of the ousourcing programme to deliver the expected numbers was the late commencement of the programme due to the time it took to develop aa appioptiaLe Pzcedufes Manual. The unfanmiliarity with the process required extensive consultations in the attempt to develope the appropriate rules and procedures to stand the test of time. The second sct of problems that affccted the privatisatioon programTme were; none availability of land itles, legal challenge by SOE workers and lack of appr,. riate records on SOEs. Furthermore, there were occasional delays in securing 'no objection' from the TDA to procure consultants. Co.clus.ron Oa the whole the PSAC programme did achieve the sec objectives. It is however advieu' that in future programmes, the IDA team should lend its ear to suggestions which are particularly based on experience and knowledge of unique local conditions-  - 24 - GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (CR. 2718-GH) APPENDIX II THIRD TRANCHE RELEASE MEMORANDUM  -25 - Intemational Development Assc(ciation FOR OFFICIAL USE ONIL, X IDA/R98-41 From: The Secretary April 7, 1998 GHANA - Private Sector Adjustment Credit (PSAC) (Credit 2718-GH) Release of the Third Tranche - Waiver of One Condition 1. Attached is a Memorandun from the President entitled "Ghana: Private Sector Adjustment Credit (Credit 2718-GH) - Release of the Third Tranche - Waiver of One Condition" dated April 1, 1998. 2. In the absence of objections (to be communicated to the Secretary by the close of business on April 16, 1998), the recommendation contained in paragraph 22 of the Memorandum will be deemed approved and so recorded in the minutes of a subsequent meeting of the Executive Directors. 3. Questions on this document may be referred to Mr. Gerard Byam (ext. 34159). Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA 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.  - 26 - FROM: The President April 1, 1998 GHANA PRIVATE SECTOR ADJUSTMENT CREDIT (Credit 2718-Gl) RELEASE OF THE THIRD TRANCHE - Waiver of One Condition I. INTRODUCTION 1. The purpose of this memorandum is to inform the Board that the third tanche of SDR 16.7 rillion is available for disbursement. The memorandum summarizes: (a) features of the Private Sector Adjustment Credit (PSAC); (b) recent macroeconomic developmnits and the current outloo]k; and (c) the progress made in meeting the criteria established for the release of the Credit's third and final tranche as set out in Paragraph 4 (b) of Schedule 1 and Section B of Schedule 3 of the Development Credit Agreement (DCA). II. BACKGROUND 2. On May 9, 1995, the Board of Executive Directors approved Credit mumber 2718-OH in the amount of SDR 46.9 million (US$70 million equivalent) for the Republic of Ghana to support the Government's private sector adjustmnt program. The program is described in a Lr= of Developnat Policy datod March 24, 1995. The Development Credit Armnent (DCA) was signed on July 25, 1995. The Credit was declared effictive on Septmber 20, 1995, and the first tranche of SDR 20.1 million was released upon effectiveness and disbursed in October and Novmber 1995. The second tranche of SDR 10.1 million was disbursed in December 1996. 3. The Private Sector Adjusta.z Credit (PSAC) is a three twance opeato and provides financal support for the Govement's program to promote private sector growth. Te Government hopes to achieve this partly trwough: (i) acceleating the pace of privaition; and (ii) maintaining an appropriate oi c policy fiamework, including improved managent and poverty-orientation of public expenditures. The Credit, one of the three envisaged in the country assistance strategy of 1995, sought to deepen and strengthen policy reforms implemented under previous adjustment and investment operations. 4. In accordance with Section 3.03 (b) (ii) of the DCA, the Borrower has fumished certified audit reports for the fiscal years ending June 96 and June 97. Vice President: Jean-Louis Sarbib Country Director: Peter C. Harmold Technical Manager Thomas Allen Task Team Leader: Gerard Byam  -27 - III. RECENT ECONOMIC DEVELOPMENTS Macroeconomic Situation 5. Ihe Ghanaian authorities have pursued a number of important econamic refonns with a medium-term perspective. An important recent developmet was Parliament's enactment in February 1998 of a value added tax (VAT). Other economic reforms aim to encourage: (i) a comprehensive overhaul of expditure nitormg and control; (ii) control of reseve money growh to provide the nominal anchor necessary to reduce infation; (iii) market determination of the exchange rate, with the Bank of Ghana's itervention policy directed toward smoothing short term fluctuaions; (iv) the strgting of bank supnvsmin and enforcement of bankng regulations; and (v) structr;al reforms that include the coaiung divesire of public enterprses and the refomi of the public service. These policies and related reforms are presented in the Governmt of Ghana's Policy Framework Paper for 1998-2000, being circuld to the Executive Directors at the same tme as this document. 6. Following the December 1996 elections and the formation of a new cabinet, the Ghanaian authorites made a commitment to regain the mometum of adjustnment and reduce inflation. Ghana's econormic and financial performance in 1996 had reflected an unsustanable combination of financial policies. The new Govemment realized that lapses in discipline on public expenditu could not be allowed to recur. 7. Real GDP grew by an estimated 5.2 percet in 1996 (compared to 4.5 percent in 1995) as a result of a good harvest, strong export growth (due to a bumper cocoa crop) and a vibrant trade and serices sector. The return to a nornal cocoa crop and attempts to reduce the govenment deficit slowed the growth of GDP to an estimatd 3 pernt in 1997, but a rebound to more than 5 percent is projected for 1998. nflation, on an end-of-year basis feil fiom 71 perent in Dcember 1995 to 33 percent in December 1996 anmf to 21 percent in December 1997. The significant decline in 1996 reflected the efFtcts of a good harvest and a policy of wage restaint. Central bank intervention to support the cedi, and Go srnmcnt's decision not to raise retail petroleum prices, also contributed to a decline in inflation. The automatic pricing mecanism of petroleum products, implemented in June 1996, was supended when its application (in the context of sing intemational oil prices) called for an incrase in petrolum prices. The reluctance to raise petroleum prices and the central bank's support of the exchange rate resuld in lowr than expected govemment revenues and a decline in foreign exchange reserves respectvely. Howev, it should be noted that recent developments in the petroleum market permitted the re-introduction of the automatic pricing formula for petroleum products, permitting a drop in ex-refinety prices and an increase in retail petroleum prices. 8. Ghana's present ESAF-supported program, which was formul in 1995 under a background of strong inflationary pressures, had an uneven implementation record under the first annual arrangement during 1996. There were substantial slippages in fiscal performance during the second half of 1996. The government budget recorded a deficit on a comwitmt basis of 10.4 percent of GDP or about 6 percentage poits of GDP higher than progammed. Ghana's balance of payments position also deteriorated in 1996, with the currant accout deficit (including pants) widening to 5 percent of GDP from 2.3 percent in 1995 and gross internaional reserves doclining to 3.4 months of imports. lle prograsn targets were 3.4 percent and 4.7 months of imports respectively. As a result of the implementation of tight financial policies in 1997, the governent's deficit fell to 8.6 percent of GDP, with the primary surplus improving by 3 percentage points of  - 28 - GDP and with total expenditure declining by 5.4 percentage points. At dte same time, the curent accunt deficit improved to 3.3 percent. On March 23, 1998, the IMF's Executive Directors approved Ghana's requet for the second annual aragement under the ESAF. At dte heart of the new arrangement are continued fiscal refomxs, expected to reduce the fiscal deficit to under 4 percent of GDP in the year 2000, not least as the result of lower interest payments. 9. The Ninth Consultative Group on Ghana met in Paris in November, 1997. Commitments of some S1.6 billion of exemal assistance were given to Ghana at this meefing. While this was similar to the esinated needs in total, there was a shortfall of some $150 million in the requested level of balance of payments support of $600 million. A number of donors, icluding the Bank, are therefore considering incrental adjustment assistance to Ghana over e next 2-3 years to fill this gap, especially in the light of Ghana's decision not to seek additionl debt reschdulng or access to the HIPC nitiative. Dveldopments in the Private Sector 10. Tlhe Goverment's efforts to facilitate private investment encountered mixed results in 1997. Th=e were two positive developments following the adoption of legislation to allow private partcipation in telecommunications. First, a stategic investor purchased a 30% stake in Ghana Telecom and assumed management control. Second, a license was granted to a second national operator for the provision of basic telephony services. Efforts to improve the regulatory environment and encourage private invesnent in infrastuctire were strngthnd with the establishment of an iependet Public Utilities Regulatory Commission. In a first step to restore economic viability to the utilities, the Commission raised both electricity and water tariffs by over lOID percent. However, the program to divest state-owned banks suffeed a setback when, as a result of the Asian financial crisis, the stategic ivestor i Ghana Commercial Bank was unable to finalize the sale by the deadline of December 31, 1997. 11. There was a series of confierences during 1997, with strong representation by the private sector, to discuss the difficult choices facing Ghana if it is to achieve the objectives of "Ghana- Vision 2020. "' A workshop sponsored by the Private Enterprise Foundation of Ghana (PEF) in Akosombo in March 1997, idenified a number of critical issues that need to be addressed urgently if the objectives are to be achieved. The participants agreed that PEF would organize a follow-up mecting for private and public sector leaders aimed at forging a consens on an appropriate straltegy. 12. The subsequent confce was convend in Chapel Hill North Carolina in June 1997 and, in addition to private participants, was atended by Ghana's Vice President, Minister of State, and Menbers of Parliament. The cornce concluded that an average growth rate of 8 percent fiom 1995 to 2020 would be required for Ghana to achieve Vision 2020, and that the present policy fianework in Ghana impeded such accelerated and susanable economic growth. In order to pronote broad-based and sustinable growth, Ghana needed to commit itsdf to achieving international competitiveness. The policy impedimnts to competitiveness were discused and recommnations fonmulated under the headings: (i) macroeconomic instabilitr; (i) dysfimctional financial markets; (iii) low productivity of labor, and (iv) re-energizing the private sector with pohcies to link the lauge informal sector to the formal sector (by addressing the maket filures) Vision 2020 is di catchword for Ghana's aspirations to become a middle income country by the year 2020.  -29 - and frming an ntgtd natioal ecmomy-the "Push-Pull straty. lhe cofrec agreed that the pubLUc/private partersip forgod neoded to hold consutatin fireqety in an iformed, respectful, andid, polite and inclusive manner. 13. The first such consultation was held at the National Econonic Forum in Accra on September 2-3, 1997 with a theme of "Achieving national consensus on policy measures for accelerated economic growth within the framework of Ghana-Vision 2020 ". The forum brought together representatives of the private sector, public sector (Govermment), labor and academia. The forum made recommendations on policies necessary to support macroeconomic stability, manufacturing gro- , agricultural growth, and employment and human development. It also drew up an action plan for the implementation of recommendations on each of these four issues. A post- forum comnuttee composed of the major stakeholders was established to synthesize and harmonize the recommendations on the four major issues, and to produce a comprehensive Forum Report, which has been widely circulated in Ghana. Outlook 14. The Govemment recognizes that restoring financial discipline and bringg inflation under control are necessary for achieving higher private sector led growth. Thus, over the next two years, the authorities intend to reduce monetary growth to rates conistent with single digit inflation and increase the domestic prmary surplus of the govemment to nearly 5 percent of GDP. The policies, which would be associated with an ncrease in govermnent savings, are expected to encourage private inwvestet and unprove the extenal currnt accot. Annual real GDP growth should excoed 5 percent, approaching 2.5 perce on a per capita basis. In the next two years, Ghana's extemal situation is projectod to remai vulnerable, owing to smaller cocoa crops, lower gold prices and reduced aid fiom bilateral donors while gross international reserves ar expectod to remain slightly below the equivalent of 3 months of imports. At the same time, assuming that the Government does not undertke any new external borrowing on non-concessional terms and that it strictly adheres to tight financial policies, the debt-service ratio is projected to fall to 29 percent by 1999 and to decline thereafter without any need for rescheduling. 15. The Governnent will continue to implement structural and institutional reforms in order to encourage pnvate investment and improve resource allocation. These reforms include expansion of the divestiture program to include state-owned utilities, enlarging the scope for private sector activity by continuing to modify the regulatory framework for private participation, reforming the public service, and improving tax adminion and public expenditure managment. Other structural reforms aimed at curaging growth and reducing poverty will include improving agriculture and the envirounent, strngteing infistrucure (especially in the rural areas) and developing human resources. The Government's new agricultural growth policy will emphasize decentraliztion of the delivery of social services, improvement in post-harvest fcilities, increasing the fanner's share in the f