Zambia - Second Economic and Social Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 18092 IMPLEMENTATION COMPLETION REPORT REPUEILIC OF ZAMBIA SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT (Cr. 2910-ZA) June 25, 1998 Macroeconomics I 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: Zambian Kwacha (K) US$ 1 = 1750 Kwacha (Exchange rate of April 1997) WEIGHT AND MEASURES Metric system FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOZ Bank of Zambia CBoH Central Board of Health CEM Country Economic Memorandum CG Consultative Group for Zambia CIR Country Implementation Review ESAC Economic and Social Adjustment Credit ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product GOZ Government of Zambia IBRD International Bank for Reconstruction and Development IDA International Development Association: IMF International Monetary Fund. MCDSS Ministry of Community Development and Social Services MOE Ministry of Education MOH Ministry of Health MPU Ministerial Procurement Units NEDC National Economic and Development Committee PER Public Expenditure Review PFP Policy Framework Paper, PIRC Privatization and Indu$trial Reform Credits PTA Preferential Trade Agreement PWAS Public Welfare Assistance Scheme. VAT Value Added Tax ZCCM Zambia Consolidated Copper Mines ZESCO Zambia Electricity Supply Qpmpany ZNTB Zambia National Tender Board ZIMCO Zambia Industrial and Mining Corporation ZPA Zambia Privatization Agency ZRA Zambia Revenue Authority Vice President: Callisto Madavo Country Director: Phyllis Pomerantz Staff Member: Hinh Dinh  FOR OFFICIAL USE ONLY REPUBLIC OF ZAMBIA SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT (Cr. 2910-ZA) IMPLEMENTATION COMPLETION REPORT TABLE OF CONTENTS Preface Evaluation Summary ................................................... i-iii Part I. Project Implementation Assessment A. Background .. B. Statement/Evaluation of Objectives .1 C. Achievement of Objectives .2 D. Major Factors Affecting the Program ..10 E. Project Sustainability .1 F. Bank Performance . 1 G. Borrower Performance ..12 H. Assessment of Outcome ..12 I. Future Operations .15 J. Key Lessons Learned .15 Part II. Statistical Tables Table 1. Summary of Assessments .17 Table 2. Related Bank Loans/Credits .18 Table 3. Project Timetable .19 Table 4. Credits Disbursements: Cumulative Estimated and Actual . 1 9 Table 5. Key Indicators for Project Implementation and Operation .20 Table 6. Status of Legal Covenants .21 Table 7. Bank Resources: Staff Inputs .22 Table 8. Bank Resources: Staff Missions .23 Annexes I. ICR Mission's Aide-Memoire .24 II. Borrower Assessment .33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  REPUBIIC OF ZAMBIA SECOND ECONOMIC AN]D SOCIAL ADJUSTMENT CREDIT (Cr. 2910-ZA) IMPLEMENTATION COMPLETION REPORT 'REFACE This is the Implementation Completion Report (ICR) for the Zambia Second Economic and Social Adjustment Credil (ESAC II), for which Credit 2910-ZA in the amount of SDR 62.4 million (US$ 90 million equivalent) was approved on August 1, 1996, and made effective on October 17, 1996. The First Tranche of the Credit (SDR 31.2 million) was disbursed upon effectiveness. IDA approved release of the Second Tranche, SDR 31.2 million, on December 9, 1997. The Credit was closed on December 31, 1997 The ICR was prepared by Hinh I)inh (Principal Economist, AFTM1) and David Greene (Consultant). The draft ICR was reviewed by Phyllis Pomerantz (Country Director) and Ataman Aksoy (Technical Manager), Africa Region. Preparation of this ICR started during IDA's completion mission of April/May 1998. The ICR is based on material in the project file, including the Memorandum of the President (MOP), the Development Credit Agreement (DCA), and supervision reports. The Borrower contributed to the preparation of the ICR by supplying the views reflected in the ICR mission's aide-memoire and commenting on the draft ICR. The Task Managers for ESAC II were John Todd and Sudhir Shetty.  REPUBLIC OF ZAMBIA SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT (Cr. 2910-ZA) IMPLEMENTATION COMPLETION REPORT EVALUATION SUMMARY i. The objective of the Second Economic and Social Adjustment Credit (ESAC II) was to support Zambia's economic reform program and to aid in the reduction of poverty by promoting broad-based, private sector-led growth and improving the delivery of vital social services. Key elements of the program supported by ESAC II were measures to: (1) ensure a stable macroeconomic environment; (2) foster private sector growth by continuing the privatization process and rationalizing effective protection; (3) strengthen factor markets, by accelerating the implementation of land and labor market reforms; and, (4) improve the delivery of vital social services by strengthening budget priorities for social sector ministries and by further development and implementation of policy reforms. ii. Considerable progress was made in implementing the ESAC II program during 1996-1997. Fiscal management continuecl to improve and inflation decelerated. The process of privatization of state enterprises, including the state mining company, ZCCM, continued. The Government took positive steps toward improvement of the public procurement system. Tariffs were reduced, its structure rationalized and exemptions limited. Action was taken to implement the new Land Act, simplify and speed up procedures for converting customary tenure to leasehold land, and regularize informal urban settlements in Lusaka. Amendments to the Industrial and Labor Relations Act were enacted allowing collective bargaining at the enterprise level. Budgetary allocations for vital social services were protected. A national drug policy was issued. A study on the National Commission for Food and Nutrition was completed. Finally, consultations with NGOs to foster improved collaboration were underway. iii. The reform program began to have a positive impact on the economy during 1996-97: private investment increased, nontraditional exports surged and per capita GDP rose. Survey data suggest that there was a decline in the incidence of poverty between 1993 and 1996. iv. Performance of the Government has been satisfactory, given the complexity of the reform program and its limited administrative capacity. All of the specific actions listed in the Development Credit Agreement were accomplished although some took longer than originally expected, resulting in a delay in the release of the Second Tranche by about 11 months. Part of this delay was caused by the several months' delay in credit effectiveness and first tranche release due to several Board members' concerns on  - 11 - governance and economic performance. Not all the actions included in the Letter of Development Policy have been completely or perfectly implemented, but there have been significant accomplishments. The Government's ability to maintain macroeconomic stability has been hampered by the volatility of the international copper market, less than optimal climatic conditions for agriculture during 1996-97 and by the decision of bilateral donors to suspend program lending because of their concerns about governance issues. v. Performance of the Bank was also satisfactory. The program was complex, involving actions by eight different ministries, and required substantial Bank staff input. Nevertheless, identification, preparation and appraisal were expeditious, and supervision was good. Other donors were kept informed of the project goals and the progress of its execution. vi. Project sustainability is an important issue. The sustainability of the reforms under this operation and indeed, of the whole adjustment program, will depend on the Government's ability to carry on the remaining adjustments, and to obtain adequate external financing. Sustainability will also require expeditious sale of ZCCM's remaining major assets, as well as a serious effort on the part of the Government to address the governance issues that have been of major concern to bilateral donors and the Bank. vii. Several important lessons were learned from this operation: v Adjustment for low income countries, especially those facing external shocks like Zambia, is a long and arduous process. ESAC II was an important operation to consolidate the hard-earned adjustment gains, but its sustainability will depend on further policy actions. * While ESAC II was not unduly complex compared to similar operations in other countries, implementation of its conditions, which involved actions by eight different ministries, taxed the Government's administrative capacity to its limit. Future operations should aim at fewer, and probably more critical, conditions, particularly in an election period. * It may be important in adjustment operations such as ESAC II to identify at the design stage the likely implementation bottlenecks and to provide, for instance through a Technical Assistance loan, the resources needed to help enhance implementation capacity of the Government. * The nature of NGOs as a heterogeneous group and the complexity of the Government/NGO relationship make it difficult for adjustment lending to be an effective instrument for dealing with Government/NGO issues.  - iii - * Although it is important to protect social expenditures during the adjustment process, it has proved more difficult to do so than had been anticipated. Due to the cash budget system under which releases of expenditures by the line ministries were made dependenit on actual revenue collections, the line ministries were not able to adhere to their expenditure plans. Future IDA operations will have to give more attention to issues of budgetary planning and management if expenditures for social programs are to be protected.  PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Background 1. For the first quarter century after its independence in 1964, Zambia's economic policy was characterized by pervasive state intervention in factor and product markets and by large-scale state ownership of productive assets. State intervention resulted in price distortions and inefficient allocation and use of resources. The effects of these inefficiencies were, however, not immediately evident because the country had use of the resources generated by production and export of copper. However, as the world copper price declined, these inefficiencies became more evident, as domestic incomes and output came under increasing downward pressure. The Government attempted to offset the decline in copper earnings by borrowing heavily abroad. This was insufficient to halt the economic decline and Zambia's economny and income levels declined rapidly during the 1 980s, while, at the same time, the counitry became heavily indebted. 2. The Zambian Government that took office in 1991 launched a program of economic stabilization and liberalization designed to reverse the country's economic decline and put it on the path of sustainable growth. The objectives of the stabilization program were to reduce the fiscal deficiit, bring down domestic inflation and restore external balance. The privatization and liberalization program aimed at curtailing public sector ownership of productive assets and eliminating price distortions. Because of the country's heavy debt burden and the problematic prospects for its major export, copper, the international donor community provided extraordinary balance of payments assistance to permit maintenance of acceptable levels of income and employment to ease implementation of these reforms. 3. IDA has supported the Government's program through a series of adjustment operations, of which ESAC II was the sixth. IDA has also helped mobilize and coordinate external assistance through the Consultative Group process. The government's program has been broadly successful. Prices have been decontrolled and subsidies eliminated, inflation has been brought down significantly, market forces have been allowed to determine the exchange and interest rates, quantitative restrictions on imports have been eliminated; and the tariff structure has been compressed and simplified. An ambitious privatization program is underway. The country now has one of the most open, market-oriented economies in sub-Saharan Africa. The key question now is whether gains under the reform process can be sustained and translated into concrete benefits for the nation's poor. B. Statement/Evaluation of Objectives 4. ESAC II was designed to suppcrt continuation of Zambia's macroeconomic and structural policy reforms and to aid in the reduction of poverty by promoting broad-based, private sector-led growth and improving the delivery of vital social services. The credit  -2 - followed up on many of the elements supported by the first Economic and Social Adjustment Credit of 1994. The broad objectives of the ESAC II program were to: (1) ensure a stable macroeconomic environment; (2) foster private sector growth by continuing the privatization process and rationalizing the tariff structure; (3) strengthen factor markets by accelerating the implementation of land and labor market reforms; and, (4) improve the delivery of vital social services by strengthening budget priorities for social sector ministries and by further developing and implementing reforms in health, education and social welfare programs. C. Achievement of Objectives 5. The ESAC II program has been implemented satisfactorily. Progress on macroeconomic stabilization and structural reforms continued during 1996 and 1997. Fiscal management has continued to improve and the budget deficit was minimal. Monetary targets have been met and inflation decelerated. The process of privatization of staite enterprises, including ZCCM, has continued, although it has not been completed. The public procurement system has been improved. -Significant trade reforms have been made: the level of tariffs has been reduced, the tariff structure has been rationalized and most exemptions have been eliminated. Amendments to the Industrial and Labor Relations Act have been enacted to allow collective bargaining at the enterprise level, rather than industry-wide. Action has been taken to implement the new Land Act. Informal urban settlements are being regularized. Targets for budgetary outlays to protect key social services have been established. The policy framework for delivery of these social services has been improved by issuance of a national drug policy, completing a stuidy on the National Commission for Food and Nutrition, and beginning consultations with NGOs to foster improved collaboration in the delivery of social services. The reform program began to have a positive impact on the economy during this period: private investment increased, nontraditional exports grew and per capita GDP rose. Survey data suggest that there was a beginning trend towards a decline in the incidence of poverty. 6. The program supported by ESAC II was described in the Government's Letter of Development Policy. Critical elements of that program were designated as conditions of release of the second tranche of the Credit. These included maintenance of a satisfactory macroeconomic environment, improvement of the public procurement system, satisfactory progress toward privatizing ZCCM, limitation of customs duty exemptions, steps toward implementation of the new Lands Act, improving the efficiency of processing leasehold applications, regularization of informal settlements, presentation of amendments to the Industrial and Labor Relations Act which would permit collective bargaining at the enterprise level, protection of certain social sector budgetary expenditures, and progress in strengthening social sector policies (specifically pharmaceuticals policy, the role of the National Commission on Food and Nutrition and collaboration with NGOs). These conditions will be discussed in detail below.  -3 - 7. Sustaining Sound Macroeconomic Management. Despite some fiscal relapses, macroeconomic management was generally satisfactory during 1996-97. Fiscal and monetary targets for 1996 consistent with reduction of inflation were developed in the context of an ESAF program approved by the IMF in December 1995. However, a Fund mid-term review mission in February 1996 was unable to conclude its discussions, because fiscal performance was below expectations on both revenue and expenditure accounts. Preparation of ESAC II was delayed for this reason. Policy adjustments were then made by Government, which resulted in a strengthening of macroeconomic performance. A Fund mission in late April 1996 then completed the Article IV consultations and the IMF Board gave its approval in July 1996. The program was successfully concluded in February 1997. However, by May 1998, the Fund still had not yet been able to present a program for the second year of the ESAF program to its Board, largely due to uncertainties regarding needed bilateral financing for balance of payments support. Subsequent to a successful May 1998 Consultative Group Meeting, new uncertainties have emerged surrounding the ZCCM privatization which have further delayed presentation of the program. Although a formal Fund program has not been in place since early 1997, the Government and the Fund have agreed on indicative fiscal and monetary targets and the Government has met them. 8. Strengthening the Public Procuarement System. Strengthening and streamlining public procurement was an important pErt of the ESAC II program because of the need to obtain more and better public services for the money spent, to ensure that suppliers compete on the basis of price and quality, and reassure donors that their assistance is being used carefully. Under ESAC II, the Government initiated a revision of the public procurement system to improve its timeliness, transparency, and accountability. A Procurement Action Plan establishing a schedule for implementing specific measures to improve the quality and speed of public procurement was developed with SIDA and World Bank support. The plan called for decentralizing the implementation of public procurement to individual ministries and local governments, training and institutional strengthening of Zambia National Tender Board (ZNTB) and the Ministerial Procurement Units (MPUs), and providing stronger and more effective oversight of major procurement decisions. 9. Implementation of the program is progressing well. Procurement units have already been established in six Ministries and several other agencies, standardized bidding documents have been prepared, and procedures have been simplified. The National Tender Board (ZNTB) is being transformed into an oversight agency. The ZNTB will review awards on contracts aLbove K25 million (K300 million when procurement units are operating satisfactorily) and propose procurement policy changes. Procurement Units are being established in the Ministries and responsibility is being shifted as quickly as staff can be recruited and trained. Thus far, procurement units have been established in the six ministries and three other agencies--including Ministries of Agriculture, Health, Education, Works, ]Finance, Transport and Communications, the Science and Technology Agency, the Zambia Revenue Authority, and the Food Reserve Agency. A World Bank Country Procurement Assessment Review issued in June 1997  - 4 - foumd that implementation progressed well and that, when the reform is completed, Zambia will have a good public procurement system. Perhaps more importantly, the project has succeeded in drawing the Government's attention to public procurement issues. 10. Progress of ZCCM Privatization. The most important component of the privatization program over 1996-1997 was the sale of ZCCM, which was a major focus of the Economic Recovery and Investment Promotion Credit (ERIP), the adjustment loan prior to ESAC II. Like ERIP, the ESAC II program required satisfactory progress in carrying out the action plan for the privatization of ZCCM but the sale of ZCCM was not made a condition in order to keep the playing field level for the Government and potential buyers. For the purpose of privatization, ZCCM assets were split into nine packages, of which the NkanalNchanga, Chambishi Plant, and Chingola Refractory Ores (AGLCo) package was the largest (about 60% of total assets). 11. Progress was made in the sale of four smaller packages and two packages, including AGLCo, were awarded to the successful bidders, subject to contract. Unfortunately, the sale of AGLCo was not completed on schedule. As of the date of the ICIR mission (April/May 1998) agreement had not been reached. The extended negotiations did not help ZCCM's production and finances, which continued to deteriorate. Although the delay cannot be attributed to the Government alone, progress of ZC'CM privatization at this time cannot be considered satisfactory. 12. Limiting Customs Duty Exemptions. Significant progress has been made in rationalizing the trade regime. An integrated package of customs duty reductions and the rernoval of most exemptions was approved with the 1996 Budget. This package of changes removed many of the anomalies that had crept into the trade policy environment and restored the move towards a more outward-oriented growth strategy. The new tariff structure provides duties of zero to 5 % for most capital goods and basic materials, 15 % for intermediate goods, and 25 % for final products. These tariffs provide exporters with access to inputs at near-world market prices, thereby improving their competitiveness. 13. Most existing tariff exemptions were eliminated in 1996: there will be no more investment exemptions, and existing ones are being allowed to lapse. Ad hoc exemptions provided in 1995 were also allowed to lapse, and custom duty exemptions and refunds have been limited to exporters, mining companies, firms that can prove damage from tariff anomalies, and approved providers of health, education, and humanitarian services. Under ESAC II the Government was to limit new customs duty exemptions. Very few new exemptions were provided in 1996-97, and the Bank was satisfied with the justifications for granting them. 14. Implementing the New Land Act and Speeding-Up Applications for Conversion Customary to Leasehold Land Tenure. The Government has recognized that slow processing of land transfers and of applications for conversion from customary land to leasehold status hampered the development of the land market. With the support  - 5 - of ESAC I, the Government adopted meaLsures aimed at providing a short-term stimulus to developing land markets on state land while building up institutional capacity for longer-term reforms. As part of these measures, Parliament passed a new Land Act in 1995. Regulations have been issued for the implementation of the Lands Act. A Land Development Fund has been established to enable the Ministry of Lands and local councils to improve infrastructure, such as feeder roads, needed to facilitate the development of land not yet under cultivation. A Lands Tribunal dealing with grievances and disputes involving land has been established. Members of the Lands Tribunal were appointed in 1996. The Tribunal has adopted and published its rules and procedures and has met several times. 15. The Government's program provided for the administrative performance of the Ministry of Lands in processing leasehold. applications to be. The main causes of slow processing of lease applications were identified and a plan to resolve the bottlenecks was to be implemented. A review of records aLt the Lands Department undertaken at the time of release of the second tranche indicated that there had been an improvement in the efficiency of processing leasehold applications and an increase in the number of title deeds issued. However, at the time of this ICR mission, the Ministry of Lands had not kept updated information on progress in improving efficiency. The Government recognizes the importance of improving the efficiency of processing and granting leasehold operations and has committed itself to making further significant improvements by the end of 1998, in the context of the Policy Framework Paper 1998-2000. 16. Regularizing Urban Settlements. In 1996, 70 % of Lusaka residents lived in informal urban settlements where formal litle was not available to the inhabitants. Very few residents in these areas have had access to vital services such as water, electricity and roads. Actions to speed up regularization of informal settlements were a condition of second tranche release. The Government issued a circular in December 1996, encouraging urban councils to speed up the process of regularizing informal settlements. The Lusaka council has begun the process of legalization of the informal settlements. Perimeter surveys have been carried out and field reports and socioeconomic surveys have been completed. The Council has issued a resolution regularizing all informal settlements. Following their certification by the Surveyor General, these will go to the Ministry of Local Government and Housing for review and issuance of the appropriate statutory instruments. The process was to be completed by end 1997. However, technical problems have resulted in delays. Nevertheless, the process of legalization has already had positive results. An NGO (Care), with the assistance of the British aid program and with community participation, has recently launched a project to provide water and sewerage to most of the Lusaka settlements. 17. Increasing Efficiency of Labor Alarkets. Improvements have been made in labor laws to increase the efficiency of the labor market. The recommendations of a Tripartite Council (comprising Government, employer, and union representatives) on labor legislation have been reflected in a bill passed by Parliament in late 1997. This bill amended the Employment Act, repealed the article providing for the provision of housing  -6 - or housing allowances and relaxed the definition of casual labor to accommodate intermittent and geographically shifting demand for labor by such industries as construction. Amendments to the Industrial and Labor Relations Act have also been passed by Parliament. These amendments permit enterprise level collective bargaining, as opposed to the sector-wide bargaining previously mandated. Wages and benefits can now be negotiated between unions and individual firms. 18. Protecting Social Sector Budgets As in the first ESAC project, budgetary outlays for vital social services were protected. The Government retained the overall share of the social sectors--health, community development, education, and water and sewerage--in the national budget in 1996 at the 1995 level, 34% of non-interest domestic expenditure. It also earmarked kwacha allocations for priority items, such as drugs, the recurTent costs of running district clinics, books and study materials for schools, chemicals for the treatment of water, program for the National Food and Nutrition Commission, and funds for the Public Welfare Assistance program. Release of funds by the Ministry of Finance was monitored and it was determined that a total of 35.8% of the budget was actually released by the Ministry of Finance to the responsible ministries in 1996. Moreover, with the exception of school desks, release of funds for the key subsectors met the targets. The Ministry of Finance continued to monitor releases for the social sector ministries in 1997. The total releases were 34.3%, in line with the 1996 target. However, actual releases of kwacha amounts for specific subsectors in 1997 were generally less than the amounts budgeted. 19. Although it is important to protect social expenditures during the adjustment process, it is more difficult to do so than had been anticipated. Budgeting appropriate levels of outlays and actual release of budgeted funds by the Ministry of Finance to the social sector ministries does not insure that the funds will be spent as intended. It is a relatively simple matter for ministries to get permission from the Ministry of Finance to reallocate funds within their budgets. In fact, a Bank mission determined that only 60% of the funds released to the Ministry of Health for drugs, grants to mission hospitals and district boards (which include district hospitals), the National Food and Nutrition Commission and the Food Management Unit, were used for these purposes. This was probably the result of a very tight cash budget under which releases for ministry expenditures depended on actual revenue collections. Line ministries such as MOH were not able to forecast their cash revenues and their limited capability in fiscal planning and manaegement made it difficult, if not impossible, to adhere to their expenditure plans. Future IDA operations will have to give more attention to issues of budgetary planning and rnanagement if expenditures for social programs are to be protected. 20. Improving Delivery of Social Services. The improved delivery of social services depends on clear policies and specific plans for their implementation. Three areas of policy were of particular concern in the ESAC II program: inefficiencies in procurement and distribution of drugs; institutional weaknesses and inadequate funding of nutrition institutions, and the effectiveness of government collaboration with NGOs.  -7 - 21. Issuance of a National Drug Policy. A National Drug Policy paper was issued in October, 1996. The objective of the policy is to ensure that Zambians have access to good quality, safe and efficacious drugs that are affordable and rationally used. I[t addresses the issues of drug legislation and regulation, quality assurance, financing, procurement, storage and distribution, local production of pharmaceuticals, rational drug use, training, research and development and traditional medicines. A comprehensive public health logistics system, the Essential Drug and Medical Supplies Store, has been established. A Drug and Supply Fund has been created and all supplies will be procured through competitive bidding. 22. Reviewing the National Commission on Food and Nutrition. The Government has carried out a study of the functioning of the National Commission for Food and Nutrition (NCFN). A Technical Committee drew up recommendations and a timetable for their implementation, which was subsequently approved by the Minister of Health. 23. Improving Collaboration with NGOs. Prior to ESAC II, the Government had collaborated with NGOs in the provision of public services, but the relationship between the Government and NGOs had been difficult at times. In order to improve this relationship and to fully benefit from the presence of NGOs, particularly in the provision of welfare and safety net programs, the ESAC II program called for the Government to adopt a policy document aimed at improving its collaboration with NGOs. Adoption of such a policy document was understood to mean approval by the Cabinet. 24. This specific condition was met. In October 1996, the Cabinet approved a NGO policy paper developed after a series of consultations between the Government and NGO representatives. However, while the adoption of such a policy paper is a positive step in improving collaboration between the Government and the NGOs, the complexity of the NGO sector and the complexity of Government-NGO relationship called into question the use of adjustment lending to build a favorable environment for the operation of NGOs in Zambia and to enhance their capacity to contribute effectively to development. 25. The over 500 NGOs in Zambia have a wide variety of mandates and programs and do not constitute a homogeneous group. Moreover, the Government and some of the NGOs had different expectations about what the outcome of the consultation process would be. Some NGOs expected the outcome of this process, and therefore, of the ESAC II conditionality, to be the approvzd of acceptable legislation that spelled out the Government's policy on NGOs. Other NGOs opposed such legislation because they felt it could be used by the Government to restrict their activities. For the Government, the outcome was expected to be a policy paper aimed at improving its collaboration with NGOs. Such paper would eventually lead to appropriate legislation. This more limited outcome was also the Bank's expectation. In the event, some NGOs were not aware of the Cabinet decision in October 1996 and thought that the conditionality was ignored by the Bank and by the Government. For its part, the Government was frustrated that it could not achieve consensus among the NGOs.  -8 - 26. Because of these differences in expectations, there was some unhappiness with the process on both sides, and with the role of IDA. Although the consultations have produced a better appreciation of the role and concerns of each partner and have pushed the process ahead, out of which a policy paper and appropriate legislation would eventually emerge, this experience also illustrates the difficulties of dealing with complex issues such as Government/NGO relationships through adjustment lending. 27. The Letter of Development Policy also contained a number of measures to be implemented. These measures include privatization of parastatals, restructuring public health care, strengthening the housing market, rationalizing teacher deployment, and improving the social safety net 28. Privatizing Parastatals. Substantial progress has been made by the Zambia Privatization Agency (ZPA) in privatizing Zambia's parastatal sector. ZPA has almost completed the disposal of its current working portfolio. As of the end of March 1997, 220 firms/units in ZPA's working portfolio of 331 had been privatized. Of the remainder, 41 were ready for or under negotiation, 26 would probably be liquidated, 12 were being litigated, and 10 were no longer being handled by ZPA, mostly state-owned farmsn for which there were no title deeds. This leaves only 22 units under preparation. Most of these are small tourist camps in national parks or sawmills owned by the Forest Service. These should be ready for privatization in the near future. 29. There are several important parastatals, including large enterprises in the communications, power, hydrocarbon, transport and financial sectors that have not yet been privatized. The Letter of Development Policy emphasized improving the perfo;rmance of public utilities by increasing their autonomy and concluding performance contracts. The 1998 Budget Speech of the Minister of Finance also committed the Government to privatization of the last tranche of large parastatals, including these utilities. However, it was not until June 1998 that the Cabinet approved this last tranche. 30. Restructuring Public Health Care. The Zambian health care system is undergoing a fundamental restructuring designed to make health care available to all, through provision of a basic health care package at all levels of the health care delivery system. The WVorld Bank has cooperated closely with Government in the formulation of this strategy and is supporting its implementation. A National Health Strategy Paper has been issued which calls for: (1) decentralization of services from tertiary care in large hospitals to primary care in districts; (2) redirection of funding from centrally managed projects to activities defined by communities and district and from higher to more cost effective lower levels of the referral system; (3) defining an essential package of services and interventions; (4) introduction of user fees to influence health seeking behavior to appropriate referral levels; (5) increasing community involvement and ownership by establishing neighborhood health committees; (6) opening the sector to wider private sector participation; and (7) donor coordination in support of the Health sector investment program.  - 9 - 31. The Central Board of Health (CBoH) was established in October 1997 as the agency responsible for running the health sector and spearheading the reforms proposed in the National Health Strategy Paper. Implementation is moving ahead, but there is the possibility that transitional problems might leave some temporary gaps in services. 32. Rationalizing Teacher Deployment. The process of decentralization of the education system started in 1994. H[owever, the Ministry of Education has found it difficult to control the number of trained and untrained teachers in its employ, and to contain and budget adequately for personal emoluments. In the Letter of Development Policy, the MOE undertook to improve collection and maintenance of teacher records, monitoring the establishment register, and is attempting to apply pupil/teacher norms in the creation of new posts and is considering methods of rationalizing deployment of teachers already in post. This process is underway. However, the administrative capacity of the Ministry is weak and problems have arisen and the reassignment or dismissal of teachers is proving difficult 33. Strengthening the Housing MIarket. Zambia has'a long tradition of employer- provided housing and other mandated fringe benefits. This tends to impede labor mobility and discourage the development of a private housing market. In 1996 the Ministry of Local Government and lIousing, together with the Ministry of Works and Supply, established the modalities for the disposal of the Government's housing stock. However, the ICR mission was unable to ascertain the status of these modalities. Sales are taking place, but the process does not seem to be well regulated, there have been reports of irregularities and the sale of government housing has become an intensely political issue. 34. Improving the Social Safety Net. The Ministries of Education and Health have formulated policies to ensure that poDr families are not denied access to education and health services. These policies are being implemented by the Ministry of Community Development and Social Services, through the Public Welfare Assistance Scheme (PWAS). However, because of budgetary constraints PWAS was only able to allocate K 192 million (about $110,000) for health care fees and K 48 million for education costs in 1997. 35. An evaluation of the PWAS was carried out in 1996, taking into account government policies, NGO experiences, community views and suggestions and the capabilities of district and national institutions. The PWAS system is being restructured, as a result of this review. The guiding principles for the restructuring are that communities themselves are best able to identify the destitute and determine the best means of supporting them; communities must be able to make their choices freely within known budgetary ceilings, and their decisions should be transparent. PWAS assistance must supplement and not replace that of families and communities, including NGOs and churches. The PWAS is being converted into a three-tier system, with welfare assistance committees at the community level, area coordinating committees, and district welfare assistance committees. The PWAS will provide essential goods to the destitute, provide  - 10- exemptions from health care fees, and assist in meeting cost of primary education. Responsibility for selecting PWAS recipients lies with the community. A matrix-based client screening form has been designed to facilitate decision making. 36. Although the new structure of PWAS is exemplary, the MCDSS and its PWAS program are severely under funded. The decentralized structure, making use of lay people and serving scattered communities, requires at least a minimum of professional personnel for supervision and training. However, the entire 1998 budget of the MCDSS is only K 10.4 billion; of this only K 1.8 billion is available for the PWAS, K 0.3 billion for administration and K 1.5 billion for assistance benefits. This means that the PWAS is providing only the equivalent of about US$ 800,000 per year is to assist Zarnbia's neediest population. D. Major Factors Affecting the Program 37. Dependence on Copper. The volatility of the international price copper has added to the difficulty of balance of payments and fiscal management. The export price of copiper dropped from an average of US$ 1.19 per lb. in 1995 to 0.85 in 1996 and to .70 in mid 1998. ZCCM's poor technical and financial performance have compounded the problem. Copper exports dropped from 341,000 Mt in 1995 to 301,000 Mt in 1997, and from US$ 851 million in 1995 to US$ 643 million in 1997. ZCCM's finances have deteriorated severely. The company has been incurring substantial domestic and international arrears, leading some suppliers to reduce delivery of essential inputs. 38. Importance of External Assistance. Zambia's problematic export prospects and its heavy debt burden combine to make external assistance, especially program-type aid, essential. In fact, the excessive dependence of Zambia on external aid requires the country to maintain a high level of commitment to the reform program. However, bilateral donors suspended the provision of program assistance to Zambia in 1996-1997 because of their concern about governance issues, although they continue to provide project assistance. These concerns led to a delay in the effectiveness of this operation and resulted in less-than-optimal funding for the program during the period. Substantive progress related to governance concerns is essential to ensuring that the external financing gap in the government's program can be filled. 39. Dependence on Rain-fed Agriculture. Maize is Zambia's major food crop, and a major component of the Zambian diet. In part due to poor weather and in part to the new, improved incentive system that encourages the production of other crops, maize production dropped from about 16 million tons in the 1995/96 season the 11 million tons in 1996/97. Shortfalls in domestic production raise domestic prices and require import of maize meal. Weather conditions continued to be unfavorable in 1997/98, with adverse consequences for domestic prices and the balance of payments. 40. Limited Implementation Capacity Although Government's capacity to implement economic reforms has improved over the past few years, it has not been able to catch up with the increasing complexity of the reform effort. Early stabilization and  - 11 - liberalization efforts mostly required political will, but were not administratively demanding. As the process continued, administrative complexity increased. ESAC II has proved to be a severe test for the Government's implementation capacity, which now appears to be stretched to the limit. ][t may be important in adjustment operations such as ESAC II to identify at the design stage the likely implementation bottlenecks and to provide, for instance through a Technical Assistance loan, the resources needed to help enhance implementation capacity. To help the Government build up this capacity, the next adjustment operation will focus on enhancing the performance of the public service by reforming pay and employment practices and by improving management controls. E. Project Sustainability 41. At the time of the ICR mission in late April-early May 1998, sustainability of Zambia's hard-won gains appeared to depend on several factors. First, it depends on the Government's continuing commitment to stabilization and structural reform. This commitment has been demonstrated over the years but, given the country's high dependence on external aid, needs to be maintained at a high level and even strengthened. Second, sustainability depends on an expeditious completion of the ZCCM privatization. ZCCM's production and finances have continued to deteriorate and its declining contribution to the balance of payments and the budget and its increasing domestic and international arrears could pose a threat to macroeconomic stability. Completion of the sale of ZCCM's assets would enhance production and efficiency of the mining sector, as well as providing a positive signal to potential investors. Third, sustainability of the reform program depends on adequate external financing which in turn, depends on the Government's ability to address the concerns of bilateral donors on governance issues. F. Bank Performance 42. Bank performance has been generally satisfactory. The program devised was complex and demanding. The appraisal mission was large, consisting of eight Bank staff, and required close consultation with colleagues in the health and education sectors. The program required action by no less than eight government ministries and several agencies and had eleven conditions for second tranche release. Yet, almost all the immediate objectives of the project were accomplished, the second tranche was released, albeit with some delay, and the project closed on schedule. 43. Project supervision was good. Supervision missions were able to provide timely and useful advice to the Government, Discussions with the Government indicate that the Bank has done a good job in preparing and supervising the project. However, because of the complexity of the project, and lirrmited staff resources, supervision missions had to concentrate on progress in implementling the specific conditions for second tranche release rather than a complete review of progress of the reform as a whole, as presented in the Letter of Development Policy.  - 12 - G. Borrower Performance 44. Implementation of the program by Government was satisfactory. Especially noteworthy is the fact that Government met the macroeconomic benchmarks established in consultation with the Fund, even though there was no formal program. The potentially troublesome issue of defining relations with NGOs has been handled well by the Government. All of the specific actions listed in the Development Credit Agreement were accomplished although some took longer than originally expected, resulting in a delay in the release of the Second Tranche by about 11 months. The sale of government housing remains an area where performance has been less than satisfactory and there remain questions about the improvements in efficiency of conversion of land to leasehold tenure. H. Assessment of Outcome 45. Evaluation of the impact of this project is difficult. First, Zambia's economic progress reflects the cumulative impact of the reforms undertaken since 1991 and these have been supported by six IDA adjustment operations. Second, most the actions supported by ESAC II largely involve legal and institutional changes, the effects of which will take some time to show positive results. 46. Annex H of the Memorandum of the President for ESAC II includes 14 performance indicators to be used to assess the operation, both during supervision and at completion. Most of the indicators of macroeconomic management and economic growth were readily available (Table 1). However, most of those relating to institutional changes and social development (e.g., speed of processing applications for land conversion to leasehold status, backlog in surveying land, school participation rates, geographic distribution of school fee exemptions, unit costs of essential drugs and consistency of payroll and establishment registers of the Ministries and Education and health) were not available on a regular basis. 47. Macroeconomic Outcomes. Zambia has made significant progress toward economrric stabilization during the period of implementation of the ESAC II program during 1996 and 1997. Budgetary management has improved and the Government ran small cash deficits in 1996 and 1997. The combination of relative fiscal balance and cautious monetary policy led to a deceleration of inflation. As measured by the CPI (end of period), inflation declined from 48% in 1995 to 18.6% in 1997. Moderating inflation has had a favorable impact on interest rates: the official bank rate fell from 51.5% at end- 1995 to 23.5% at end-1997, and the treasury bill rate fell from 42% at the end of 1995 to 13% at the end of 1997. Exchange rates remained fairly stable, with the market rate depreciating only 9% relative to the dollar in 1997, compared to a depreciation of almost 30% the previous year. 48. Growth and Poverty Alleviation. The stabilization and liberalization of the Zambia economy began to have positive effects on growth in 1996. After declining by 2.3% in 1995, real GDP increased by 6.4% in 1996 and, despite a decline in agricultural  - 13 - output due to relatively poor weather, by 3.5% in 1997. Growth in 1997 was broad based, with all sectors other than agriculture and financial services expanding. Gross domestic investment rose from 13.9% of GDP in 1995 to 15 % in 1997. The private sector accounted for all of the increase in investment, as public investment actually declined. 49. The shift towards a pro-export policy orientation has helped make the export sector more dynamic. The value of non-traditional products increased by 26% in 1997, reaching a record level of about US$ 300 million, accounting for 28 % of total exports in 1997 and including an expanding range of agricultural, non-metal mining, agro-industrial and engineering products. Table 1 Macroeconomic Indicators 1992 1993 1994 1995 1996 1997 Real GDP growth -1.7 6.8 -8.6 -4.3 6.4 3.5 % Shares of GDP Consumption Government 16.2 27.9 14.8 14.6 12.6 10.8 Private 82.1 78.1 76.3 77.6 78.5 77.8 Investment 11.9 15.0 13.4 13.9 14.9 15.0 Gross Fixed Capital 11.4 14.6 13.0 13.6 14.5 14.7 Public 6.7 4.5 4.2 5.4 5.7 5.2 Private 3.8 7.0 5.6 4.5 8.8 9.5 External Debt (US$ Mn) 6,943 6,788 6,496 6,770 6,349 7,262 Fiscal Performance (% of GDP) Revenues and Grants 28.5 23.9 26.9 26.6 26.0 24.0 Expenditures and Net Lending 31.0 29.4 33.7 31.2 28.5 26.2 Overall Balance (accrual) -2.5 -5.6 -6.8 -4.6 -2.5 -2.3 Increase in Consumer Prices (annual average) 197.4 189 55.6 34.9 43.1 24.4 Exports (US$ Mn) 1,120 994 1,066 1,186 993 1,101 o/w metals 1,020 870 910 984 754 806 Imports -1,302 -1,019 -1,003 -1,194 -1,055 -1,150 Debt Service Due 683 522 542 590 453 376 Copper Export Volume ('000 MT) 409 402 360 341 327 301 Source: Bank of Zambia and Ministry of Finance. 50. ESAC II may have had a positive impact on poverty. Increases in the MOH's allocation for drugs and related targets for health expenditures in rural districts should  - 14 - increase the availability of basic and supplementary drugs at district hospitals and clinics. Increases in the allocation to the PWAS in the MCDSS have allowed a larger number of people to receive needed care in local clinics and reduce the number of children who do not go to school due to inability to pay school fees. Policy and institutional reforms in the social sectors will help the Government to create an institutional environment where the poor can be helped more effectively, but it may be some time before the impact of thosc improved services can be measured. Regularization of informal settlements is already leading to investment in vital infrastructure. Finally, consultations with NGOs in preparation of the policy paper seem to be improving relationships and bode well for future cooperation. Table 2: Social Indicators Nutritional status of the under five population 1991 1996 Stunted Growth 40 42 Underweight 22 22 Access to Safe Water 50 50 Health indicators 1989-91 1994-96 Total fertility Rate 6.5 6.1 Infant Mortality Rate 107 109 Child Mortality Rate 94 98 Education indicators (%) 1990-93 1995-96 Literacy Rate 83 78 Gross Primary Enrollment Rate 97 93 51. According to a Government study based on a 1991 survey and the Living Conclitions Monitoring Surveys in 1993 and 1996, the incidence of poverty, which had increased from 69.7% of the total population in 1991 to 73.8% in 1993, declined to 69.2%YO in 1996.  - 15 - I. Future Operations 52. Zambia's precarious balance of payments position, and need to complete its reform agenda, suggest that IDA sltructural adjustment credits will be required for some time to come. The next adjustment operation contemplates supporting rationalization and reduction of the public service. This will be a major, difficult undertaking. The difficulties encountered in rationalization of deployment of teachers encountered in the ESAC II project highlight the weakness of administrative capacity within government. Rationalization requires, as a starting point, accurate records of who is employed and where. It also requires definition of the terms of reference of the various units of Government, and some notion of the personnel required to carry them out. Finally, it requires a plan and adequate financial resources for retrenching surplus employees in a humane manner. J. Key Lessons Learned 53. The preparation and implernentation of ESAC II provide some important lessons: * Adjustment for low income countries, especially those facing external shocks like Zambia, is a long and arduous process. ESAC II was an important operation to consolidate the hard-earned adj ustment gains, but its sustainability will depend on further policy actions. * While ESAC II was not unduly complex compared to similar operations in other countries, implementation of its conditions, which involved actions by eight different ministries, taxed the Government's administrative capacity to its limit. Future operations should aim at fewer, more critical, conditions. T It may be important in adjustment operations such as ESAC II to identify at the design stage the likely implementation bottlenecks and to provide, for instance through a Technical Assistance loan, the resources needed to help enhance implementation capacity of the Government. * The nature of NGOs as a heterogeneous group and the complexity of the Government/NGO relationship make it difficult for adjustment lending to be an effective instrument for dealing with Government/NGO issues. * Although it is important to protect social expenditures during the adjustment process, it has proved more difficult to do so than had been anticipated. Due to the cash budget system under which releases of expenditures by the line ministries were made dependent on actual revenue collections, the line ministries were not able to adhere to their expenditure plans. Future IDA operations will have to give more attention to issues of budgetary planning and management if expenditures for social programs are to be protected.  - 16 - PART II - STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of Objectives B. Program Sustainability C. Bank Performance D. Borrower Performance E. Assessment of Outcome Table 2: Related Bank Operations Table 3: Project Timetable Table 4: Disbursements Table 5: Key Indicators for Project Implementation and Operation Table 6 Status of Legal Covenants Table 7: Bank Resources - Actual Staff Inputs Table 8: Bank Resources - Missions  iCzpJesiWSUfln XI1q!H |X