Sierra Leone - Sectoral programs and expenditures of the government

Doumment of The World Bank FOR OMCAuL USE ONLY Report No. 5885-SL SIERRA LEONE SECTORAL PROGRAMS AND EXPENDITURES OF THE GOVERNMENT September 13, 1985 Western Africa Region This document ba a resukttd dRlbtbon amd may be nused by rcipients ly In the peformance of their officad duies. is otmtenS may not oderwie be ;dsed withutd World Ebak saholrztia.  CURRENCY EQUIVALENTS US$1 = Le 6.00 Leone 1 = US$0.1667 WEIGHTS AND MEASURES (Metric System) 1 hectare = 2.47 acres 1 kilometer (km) 0.62 miles 1 kilogram (kg) 2.2 pounds 1 metric ton (ton) 2,205 pounds I liter = 1,507 U.S. quart ABBREVIATIONS BADEA - Banque Arabe pour le Developpement Economique en Afrique DIMINCO - Diamond Mining Company IADP - Integrated Agricultural Development Project MANR - Ministry of Natural Resources MOH - Ministry of Health MOTC - Ministry of Transportation and Communications MOTCA - Ministry of Tourism and Cultural Affairs MOW - Ministry of Works NPA - National Power Authority RTC - Road Transport Corporation SALHOC - Sierra Leone Housing Corporation SLEC - Sierra Leone Electric Corporation SLET - Sierra Leone Externai Telecommunications SLPA - Sierra Leone Ports Authority SLPMB - Sierra Leone Produce Marketing Board FISCAL YEAR July I - June 30  This report is a complement of a Bank report, Sierra Leone: Review of the Public Expenditure Program, Report No. 5513-SL. The report is based on the findings of World Bank missions which visited Sierra Leone in 1984-85 to work with the Goverment to prepare a structural adjustment program. The missions were led by Rashid Faruqee and the members included H. Garnett, Y. Huang, D. Salehi-Isfahani, R. Jaisaard, C. Mena, P. Nicholas, N. Ozfirat, S. Pannagides, V. Reswant, H. Baghdadi, and M. Soykar.. P. Isenman and D. Reese each joined a mission and participated in the policy discussions with the Government. F. Sarraf, IMF budget adviser, helped the Bank missions in the field and P. Sauve helpeui in preparing this report.  SIERRA LEONE: SECTORAL PROGRAMS AND EXPENDITURES OF THE GOVERNMIENT Table of Contents Page Chapter I AGRICULTURE Performance 1 Agricultural Strategy and Policies 3 Pricing Policy Issues 4 Institutional Issues 6 Budgetary Issues 6 Conclusions 12 Chapter II MINING AND MANUFACTURING A. Mining Performance 14 Government Intervention 15 Major Projects 17 Mining Prospects 19 Conclusions and Recommendations 21 B. Manufacturing Performance 23 Government Intervention 24 Government Objectives 24 Majrr Projects 28 Public Expenditures in Manufacturing 28 Public Enterprises in Manufacturing 29 Pricing and Foreign Exchange Policies 31 Industrial Finance and Financial Institutions 31 Conclusions and Recommendations 32 Chapter III INFRASTRUCTUR- A. Energy Performance 34 Major Government Projects 35 Government Intervention 36 Conclusion and Recommendations 40 B. Transport and Communications Performance 41 Major Projects 42 Government Intervention 42 Conclusions and Recommendations 46  Chapter IV SERVICE SECTORS A. Tourism Overview 49 Facilities and Performance 49 Government Intervention 51 Conclusions and Recommendations 52 B. Education Performance 55 Government Intervention and Reform 56 Major Projects 60 Conclusions and Recommendations 61 C. Health Performance 63 Major Government Programs and Projects 64 Management Issues 64 Budgetary Issues 66 Conclusions and Recommendations 70 D. Housing Performance 72 Government Intervention 72 Major Projects 75 Conclusions and Recommendations 76  Tables Page Table 1.1 Yields of Rice, Coffee and Cocoa Production, 1974176-1980/82 2 Table 1.2 Percent of Recurrent and Development Expenditures on Agriculture, Selected Developing Countries, Selected Years 8 Table 1.3 Ministry of Agriculture and Natural Resources, Actual Recurrent and Development Expenditures, 1979/80-1983/84 9 Table 1.4 Recommended Core Program Project List for 1984/85-1987/88 13 Table 2.1 Ministry of Mines, Actual Recurrent and Development Expenditures, 1979/80-1983/84 16 Table 2.2 Sierra Leone-Survey of Selected Private Enterprises 25-27 Table 2.3 Ministry of Trade and Industry, Actual Recurrent and Development Expenditures, 1979/80-1983/84 30 Table 3.1 Ministry of Energy and Power, Actual Recurrent and Development Expenditures, 1979/80-1983/84 39 Table 3.2 Percent of Recurrent and Development Expenditures on Transport and Communications, Selected Developing Countries, Selected Years 43 Table 3.3 Transportation and Communications, Actual Recurrent and Development Expenditures, 1979/80-1983/84 45 Table 3.4 Recommended Core Program Project List for 1984/85-1987/88 48 Table 4.1 Ministry of Tourism and Cultural Affairs, Actual Recurrent and Development Expenditures, 1979180-1983/84 50 Table 4.2 Major Lease Agreements of Two Hotels 53 Table 4.3 Ministry of Education, Actual Recurrent and Development Expenditures, 1979/80-1983/84 57 Table 4.4 Percent of Recurrent and Development Expenditures on Education, Selected Developing Countries, Selected Years 58 Table 4.5 Ministry of Health, Actual Recurrent and Development Expenditures, 1979/80-1983/84 67 Table 4.6 Percent of Recurrent and Development Expenditures on Health, Selected Developing Countries, Selected years 68 Table 4.7 Recommended Core Program Project List for 1984/85-1987/88 71 Table 4.8 Housing Sector, Actual Recurrent and Development Expenditures, 1979/80-1983/84 74  PREFACE This report complements another Bank report, Sierra Leone: Review of the Public Expenditure Program, and surveys the key sectoral issues in Sierra Leone's public expenditures. In all, nine sectors are covered: agriculture, energy, mining, manufacturing, transport and communications, tourism, education health and housing. The survey addresses several points: (1) recent sectoral performance; (2) the scope, nature and effectiveness of Government intervention; (3) the identification of the major Government programs and projects; (4) institutional/managerial problems; (5) recent trends in the allocation of recurrent and development expenditures by sector; and (6) policy reform. Although Governmental intervention in Sierra Leone's principal sectors of economic activity has varied in both nature and importance, it can, for purposes of reviewing public expenditures, be seen as falling into two broad categories. One involves direct Government intervention in the provision of goods and services, mainly those that are public in nature or are subject to externalities. Transpcrt (road mainterance), education and public health are sectors where such intervention occurs. The Government, moreover, is involved in the provision of productive activities, public utilities and services, as well as financial activities, through the public sector enterprises, as we noted in chapter V of the Bank report noted above. Of the total number of enterprises (26), 10 are involved in directly productive activities, 13 provide services, and 3 are engaged in financial activities. The second category is indirect Government intervention in the sense of the induced effects of economic policy. Government decisions in the areas of pricing and foreign exchange, as well as subsidization, export taxation, marketing and investment code legislation, provide what might be called the "incentives framework." It exerts a central influence on both the sectoral composition and profitability of productive activities. As will be seen in the sectoral surveys, such policy interventions further determine the financial health of Sierra Leone's public enterprises, most notably in the agricultural, energy, mining, and transport and communications sectors.  Chapter I AGRICULTURE Performance 1. Agriculture, including forestry and fishing, is the key sector of the Sierra Leonean economy, accounting for about 75% of total employment, 30% of GDP and 30-40% of export earnings. Rice, the major food crop, occupies 65% of the cultivated area. Coffee, cocoa and palm kernels together constitute the major export crops and are the principal source of cash income for the rural population. Production is handled mainly by small-scale farmers, and on average less than 40% of their production enters the monetized economy. 2. As Table 1.1 points out, the average yield of both rice and coffee production in Sierra Leone, defined in terms of kilograms per cultivated hectare, is high by West African standards (and by world standards in the case of coffee), 1/ while that of cocoa is generally lower than in neighboring countries. 3. The contribution of the agricultural sector to GDP began to decline in the late 1970s. During that decade, the real value of total agricultural production had been rising by 1.1-2.2% a year. However, the average population growth rate was 2.5Z. Thus there was a slight decline in per capita production over the decade. After 1980, performance deteriorated further, and between 1979/80 and 1982/83 the estimated real value of production declined by an average of 3.0% a year. 4. From 1979/80 to 1982/83, purchases of coffee and cocoa by the Sierra Leone Produce Marketing Board (SLPNB) declined by about 401 and 4%, respectively. The principal reason was that the buying agents and farmers took advantage of the price differential that existed between Sierra Leone and Liberia by diverting sales from official channels. Rice production fell by nearly 15% over the same period, leading to the import of 50,000 tons in 1980-81 and 95,000 tons in 1982-83. The latter figure represented nearly 20Z of total domestic consumption. 5. Owing to the declining output in its principal agricultural exports (and in the face of depressed world prices for these commodi- ties), and owing as well as to the substantial increases in the level of 1/ It should be noted that the data on area and therefore yield are uncertain.  Table 1.1: YIELDS OF RICE, COFFEE AND COCOA PRODUCTION IN SELECTED WEST AFRICAN COUNTRIES, 1974/76 AND 1980/82 (Kg per ha) Rice Coffee Cocoa 1974/76 1980 1981 1982 1974/76 1980 1981 1982 1974/76 1980 1981 1982 Sierra Leone 1,452 1,251 1,250 1,375 278 507 465 535 125 142 140 200 Ivory Coast 1,233 1,108 1,022 1,087 297 239 296 222 466 580 636 557 Liberia 1,220 1,234 1,238 1,278 267 455 336 400 280 232 269 200 Ghana 963 781 952 1,000 199 185 185 192 269 208 192 158 Senegal 1,385 963 1,443 1,429 - - - - - - - - Benin 1,750 1,071 1,118 1,118 386 250 500 500 - - - - Togo 1,290 1,200 1,050 1,100 436 385 317 433 445 444 412 444 WORLD 2,471 2,761 2,837 2,871 495 473 575 499 337 351 350 332 AFRICA 1,798 1,774 1,742 1,752 382 331 360 336 297 299 305 274 Source: FAO Production Yearbook, 1982.  - 3 - rice imports, Sierra Leone's trade balance for agricultural commodities has registered persistent deficits. 2/ The deficit reached a peak of Leones (Le) 23.5 million in 1981-82, approximately 24% of the total current account deficit. 6. The low level of agricultural production and resulting reduced exports have affected Government revenue, since a large proportion comes from taxes on agricultural exports. Proceeds from the taxes on exports on agricultural commodities declined by 43Z between 1977/78 and 1981/82. On a relative basis, they declined from 13% of total Government revenue in 1977-78 to 6% in 1981-82. Agricultural Strategy and Policies 7. The slow growth of agricultural output during the i970s and the sector's worsening record in recent years can be attributed in large part to the Government's macroeconomic policies. Although the first National Development Plan (1974/75-1978/79) assigned a high priority to agricultural development, investment in the sector was comparatively low-only about 10% of the development budget during the 1970s. Moreover, the combined expenditures on annual development and recurrent activities in agriculture were less than the receipts from the annual tax on agricultural exports during this period. The main instrument in the development strategy was the Integrated Agricultural Development Project (IADP). 8. The second plan (1983/84-1985/86) places still more emphasis on agriculture. Overall, the Government's main objective is to reverse the present economic stagnation and to strengthen the production base of the economy, to be achieved through an emphasis on sectoral policies. In agricultuv.e the objective is to expedite completion of ongoing investment projects and to initiate quick-yielding new ones. This plan, unlike the prev-:ous one, allocates a major part of public expenditure to agriculture (26;: versus the approximately 10Z during the 1970s). 9. This redirection, while commendable, might prove difficult to accomplish. For one, the sector's absorptive capacity is already weak because of serious bottlenecks in the infrastructure and in the input and output distribution systems, the result of the deteriorating condition of the country's roads, vehicles and ports. Institutional shortcomings are also a problem. Second, the redirection of resources toward agriculture may in practice be limited by financial problems. The Government is already experiencing difficulty in meeting its obligations with respect to the foreign exchange costs of crucial 2/ The trade balance for agricultural commodities was in deficit throughout the 1972-83 period, with the exception of 1978-79, when coffee and cocoa prices were at their highest levels in recent years.  -4- imported inputs such as fertilizers, spare parts and fuel, as well as with its local currency contributions to ongoing development projects in the sector. 10. Past Government intervention-in pricing, marketing, export taxation, and the subsidization of inputs and services-has been one of the principal causes of the structural constraints affecting agriculture. In all these areas, Government measures have tended to have strong adverse effects on production. The overall impact of the various forms of intervention has been low producer prices that provide little or no incentive to increase production. Pricing Policy Issues 11. In the area of pricing and marketing intervention, the Government has given the main responsibility for executing its agricultural policies to the Sierra Leone Produce Marketing Board CSLPMB). The SLPMB was set up in 1949 to import rice, export major commodities (i.e., cocoa and coffee), collect export taxes and provide services to agriculture. 12. Based on its accomplishments to date, the SLPMB has not been successful in achieving its principal objectives. Ever since the 1950s, Sierra Leone has experienced continuous deficits in rice. The Government, through the SLPMB, has intervened by importing rice, which it has distributed at low prices to the armed forces, hospitals and prisons and through commercial channels. It has also engaged in the procurement of domestic rice at low administered prices. Jn both counts, the net impact has been to depress severely the incentives to grow rice domestically. 13. The regulation of imports has had the greatest effect on producer prices, which have been depressed by the subsidized retail price in towns. The major cause of this problem has been the exchange rate policy. Despite a 100Z devaluation in July 1983, the Leone was still substantially overvalued. Imported rice, which has had a resulting artificially low price, has therefore continued to depress the domestic price of rice. Moreover, the failure of the Government to adjust the fixed retail price to reflect fully the recent devaluation has resulted in continuing losses for the SLPMB and is a further depressant to producer prices. To alleviate these problems, the Government decided in 1983 to privatize the importation of rice for the most part. The SLPMB _s now allowed to bring in a maximum of 25,000 tons a year, although only for the purpose of creating a strategic stock. The private sector will now be able to obtain import licenses, and the fixed retail price of rice is expected to be raised. Unless - is price is allowed to rise sufficiently and private izporters are dllowed adequate access to foreign exchange, however, the desired response from the private sector may not materialize. In that case, the Government will be forced to rely again on SLMPB imports. 14. The Government's price intervention has had an equally negative impact on Sierra Leone's major export crops-coffee and cocoa.  - 5 - Producer prices of both crops have in the past been severely depressed by the overvalued exchange rate. In addition, their prices have been further lowered by a 30% export tax. The buying prices that the SLPMB has offered producers of these commodities have been so low as to discourage farmers from increasing production and using new production techniques. This effect seems to be reflected in the declining level of efficial exports (although there is some doubt as to the extent of the export diversion away from official channels and, therefore, of the overall production effect). 15. The SLPMB has taken steps to increase its purchase of produce from farmers. In mid-1983 it introduced a system of purchasing directly from farmers in border areas, thereby avoiding the intermediation of buyir.g agents and reducing the opportunity for smuggling. Following the devaluation in July 1983, the SLPMB announced increases of 82% in the producer prices for coffee and palm kernels, of 93% for cocoa and of 15% for ginger. Although these price increases are in the right direction, they are still probably far below the prices obtainable in the parallel market at the Liberian border. 16. Government intervention at the production level has included subsidization of inputs-fertilizers, improved seeds and mechanical services-as part of its overall agricultural development program and the provision of extension services. Since all fertilizer in Sierra Leone is imported and sold to farmers at subsidized prices, it has been a burden on the Government's budget. As a consequence, under the Agricultural Sector Support Project, the Government has agreed to reduce the fertilizer subsidy to 10% by June 1987. This move may eventually evolve into a policy of leaving the supply of fertilizers and chemicals to the private sector. 17. A further element in the Government's attempts through subsidies to induce farmers to change their agricultural practices was a crash program that was undertaken through the Ministry of Agriculture and Natural Resources (MANR) in 1981 to provide mechanized cultivation to farmers at subsidized rates. It was specifically directed at raising rice production and self-sufficiency. However, the program had only minimal impact, partly because of a shortage of fuel and spare parts for the tractors purchased for the scheme. As a result, the Government is liquidating the operation by selling the rehabilitatable machinery to the private sector. 18. In summary, while the Government once believed in the past that the subsidized provision of commodity and service inputs, and even its direct participation in production, were necessary interventions, it has now changed direction in important ways. The stbsidies have been a significant drain on the Government budget, and the enterprises performing these functions have often operated inefficiently. At present the Government recognizes that these functions can in many cases be carried out more efficiently by private entrepreneurs. Hence there is a need to create a policy environment that facilitates private operations.  -6- Institutional Issues 19. The MANR is responsible for the agricultural sector. Formerly it was composed of two ministries-the Ministry of Agriculture and Forestry and the Ministry of Natural Resources-that were merged in December 1983. The main services provided by the MANR are extensian, research, plant protection, produce inspection and input supply. Of these, extension is the major activity in terms of the budget and employment. 20. Unfortunately, the MANR extension and other services are ineffective because of unclear objectives, inappropriate priorities, poor allocation of funds, lack of facilities, inadequate training and poor organization. The Government has been greatly concerned over this deficient performance. The creation of the MANR, as well as the formulation of the Agricultural Sector Support Project, constitute the first steps in improving the efficiency of the Government's agricultural services. 21. Another improvement will be the integration of the Eastern IADP into the ministry at the end of the project. A similar merger is expected at the end of each other IADP project. In many instances, the IADP extension and other programs parallel programs carried on by the MAKR, but are superior in the eyes of ministry staff, because the personnel are better paid, are generally better trained and have better logistical support. The integration of the IADP extension units into the MANR would provide an important source of trained extension workers. 22. The important issues in the reorganization of the Ministry o: Agriculture are to determine where the major inefficiencies are and the best way to reallocate resources so as to improve productivity. A central task to be undertaken as part of the Agricultural Sector Support Project will be to improve the planning and policy-making functions of the ministry. Budgetary Issues 23. Expenditures in the agricultural sector, 3/ both recurrent and developmental, make up a significant portion of total Government expenditures (see Table 1.2). Recurrent spending amounted to Le 8.9 million in 1979/80 and Le 15.8 million in 1983/84, accounting for 7.3% of total recurrent spending in the latter period. Development expenditures in the sector have been sizable, accounting for a much larger share of the national total than on the recurrent side. They totaled Le 8.7 million in 1979/80, or 24.4% of the Government's total development spending. In 1983/84, development spending in the agricultural sector was estimated at Le 53.8 million, roughly 32% of 3/ Almost entirely by the MANR, which is composed of four subsectoral departments: Agriculture, Forestry, Fisheries and Veterinary.  total development expenditures. A comparison with other developing countries reveals that Sierra Leone spends generally more in the agricultural sector, particularly for development (Table 1.2). 24. The major issue related to current expenditures is the large share going to salaries and wages, which accounted for 86% of total recurrent expenditures (excluding interest payments) in 1983/84, a level that left only 14% for operating costs and other charges. Of the 81% total for wages and salaries, the former accounted for 56%, the latter 30%. Of the 14% for operating costs and other charges, expenditures for fuel and oil, furniture and equipment, travel, rent and supplies accounted for only 3%. The other 11% was spent on contributions to international programs 4/ and other international charges. 25. In recent years, wages and salaries have increased rapidly, from Le 6.3 million in 1979/80 to 13.5 million in 1983/84, a rise of 114% over the four-year period. There is also a problem concerning the distribution of expenditures between salaries and wages, that is, Letween permanent and temporary (daily wage) workers. Only one-third of the expenditures were for salaries. Temporary employment, then, is the major employment category of the MANR (56% of total expenditures). Moreover, even though the problem has been recognized at all levels since as early as mid-1981, actual expenditures on daily wages increased by 39% during the past four years, substantially more than the budgeted increase of 20%. 20. The problem of overstaffing is clear in all MANR divisions. These wage expenditures are supporting personnel whose functions are ill-defined aud whose productivity is minimal and in some cases negative. Typical is the situation revealed in a manpower survey in the Eastern Region that looked at the ratio of manpower to phyeical resources. In the division offices of the M4NR in the Kenema and Kailahun districts, for instance, there was an average of 14 drivers per vehicle. In the Kono district, there were 10 drivers but no vehicle or tractor. Evern w',.ere there were vehicles, they were seldom operable because of the lack of fuel and spare parts. Also in the Kenema and Kono district, there were 12-15 typists per typewriter. Many of the few typewriters did not have functional ribbons, and paper was in very short supply. 27. The composition of the ministry's permanent staff is also highly distorted. The preponderance of personnel in the lowest (junior ungraded) category is rather conspicuous--at present, fully 87% of the permanent employees at headquarters are in this category. The senior and intermediate grades together accounted for only 6%. A similar or worse pattern pertains in the regional offices. In the Kenema district 4/ Such as the World Food Program, the Commonwealth Agricultural Bureau, etc.  - 8 - Table 1.2: PERCENT OF RECURRENT AND DEVELOPMENT EXPENDITURES ON AGRICULTURE, SELECTED DEVELOPING COUNTRIES, SELECTED YEARS Z of Recurrent Z of Development Expenditures on Expenditures on Country Year Agriculture Agriculture Ghana 1979/80 11.9 14.1 Liberia 1981/82 5.8 13.2 Nigeria 1981 0.8 5.1 Sudan 1979/80 4.3 26.1 Sri Lanka 1981 3.6 8.9 India 1981 4.5 11.5 Pakistan 1980/81 4.1 10.7 Sierra Leone 1981/82 7-3 28.1 1982/83 6.5 46.5 1983/84 7.3 36.0 Source: Various World Bank reports; IMF, Government Finance Statistics; Government of Sierra Leone, Development Estimates and Estimates of Revenue and Expenditure.  - 9 - Table 1.3: MINISTRY OF AGRICULTURE AND NATURAL RESOURCES, ACTUAL RECURRENT AND DEVELOPMENT EXPENDITURES, 1979/80-1983/84 (Le millions and percentages) Z of Total % of Total Recurrent Recurrent Development Development Year Expenditures Expenditures a/ Expenditures Expenditures 1979/80 8.85 3.40 (4.68) 8.77 24.41 1980/81 13.71 4.73 (6.51) 22.73 28.11 1981/82 15.22 5.28 (7.34) 20.89 28.10 1982/83 14.17 5.21 (6.45) 38.83 46.48 1983/84 20.82 - (7.98) 49.80 35.91 Sources: Ministry of Agriculture and Natural Resources, development estimates. a/ Figures in parentheses exclude public debt charges.  - 10 - office, for example, senior agricultural instructors accounted for only 3% of the total permanent workforce. The low ratio of senior to junior staff creates problems of supervision and administration, especially in cases where the senior staff offices are distant from the field sites. The reason that the MANR has hired so many low skill, low productivity laborers is essentially the "grace and favor" system, which operates widely throughout West Africa and which a government administrator ignores at his or her peril. When instructed to provide employment for the relatives or proteges of influential people, no matter how counterproductive they may be, bureaucrats have no choice bni.t to comply. 28. It is clear from the expenditure pattern that the MANR has spent its recurrent resources disproportionately on labor versus operating costs and that the current allocation to operating costs is far from sufficient to maintain the ministry's activities. As part of the Agricultural Sector Support Project, the Government has agreed to reduce real expenditures on dally wages by 35% from the July 1983 level. This reduction is to occur gradually-at 10% a year during 1984-86 and at 5% in 1987. When the real daily wage bill has declined by 35%, the MANR will save Le 3.9 million a year. This amount will principally be used to recruit additional high-level personnel, of which there is currently a shortage. Le 1 million will also be used for operations and maintenance, both necessary logistical support for the ministry. 29. Besides reducing the daily wage staff, significant changes will be made in the agricultural extension service. For this purpose a staff development unit is to be established to analyze manpower require- ments and trends, maintain personnel records and provide liaison with the EstablisTiment Secretary's office (the civil service hiring unit). 30. There are 49 projects and programs in agriculture, of which 19 are active, 14 are moderately active, 5 are new and 11 are inactive. Active projects are ones that have continuous activities and are usually externally funded. Moderately active projects involve activities only in certain years. Typically, they tend to be externally funded during those periods. Inactive projects are ones that received no allocations during FY83 and FY84. The Government has retained most of these in the hope of future funding. In other divisions of the MANR, notably Forestry and Veterinary, the proportions of inactive and moderately active projects are still higher. 31. There appears to be a serious misallocation of the limited Government development funds in the MANR's 1983/84 budget. Le 4.5 million out of a total of Le 11.4 million in domestic resources were allocated to moderately active and new projects. Thus, only 60% of the available local funds were used productively. The remaining 40% was spread thinly over dozens of moderately active and new projects, which are unlikely to reach their objectives because of a lack of adequate funding. 32. The Government could have furthered its development objectives if it had used these resources on the active projects, for example, to  - 11 - meet the counterpart obligations to the active projects mostly funded by external sources. 33. Overall, during the past five years the development program of HANR has also been seriously distorted because a substantial amount of the funds that have been allocated have gone to projects of little or no merit, while good projects were deprived of full funding. A part of the MANR development fund was diverted away from well-designed projects into (1) poorly designed major projects, (2) many small ineffective projects and (3) project preparation expenditures. Moreover, during the past several years, the Government has invested in several major projects that have been unsuccessful. Together, these large projects have used up a major percentage of the Government's development budget in agriculture. Even after the failures became apparent, in a number of cases the Government continued to allocate large amounts of money to them. The most prominent of these was the ambitious "Rice Crasi Program." It was set up in 1980 to provide mechanical cultivation services for the whole country. It was supposed to prepare 600,000 acres of land a year, but at its peak in 1981 it prepared only 10,500 acres. The program ran into various problems, starcing with inappropriate machinery compounded by the lack of spare parts and fuel. The machines were therefore frequently idle and inoperative. The program, which was discontinued in 1982 after three years of inefficient operations, cost the Government Le 1.17 million in the development budget during the period. Despite this poor performance, the 1983/84 budget nevertheless allocated Le 730,000-about 5% of the entire MANR development budget--to rehabilitate this one project with its uncertain prospects. 34. In the 1983/84 budget, the MANR stopped funding of some unproductive smaller projects. In other years, however, the development budget partly funded many small unproductive projects instead of dropping them totally. For example, over 20 projects that are regarded as unrehabilitatable in any meaningful economic sense still received about Le 1.2 million in 1982-84. 35. While underfunding its ongoing projects, the Government has been budgeting substantial development expenditures for the preparation of new projects, such as the Rhombe Swamp Development Project (to be presented to African Development Bank and the Saudi Arabian Government), the Upland Crop Storage Project (to be funded by a Canadian international organization), the World Food Program Storage and Distribution Project (to be funded by the FAO), and the Coconut Development Project (submitted to the CDC). While project development is in general a worthwhile activity, and the investment of local funds may ultimately attract international resources, the opportunity costs may be high, the payback period long and the prospects of successfully attracting funds uncertain. Reallocating some of this expenditure to underfunded ongoing projects may be a much better investment for the MANR. 36. The real cost of the misallocation of the MANR development budget is that a number of well-designed projects were substantially  - 12 - underfunded in the 1983/84 budget and unable to function at the levels they were designed for. Two examples are the Intensive Rice and Vegetable Production Project and the Onion Growing Scheme (both formerly finavced and operated by the Chinese Government). These projects operaced reasonably well when they were under foreign supervision and financing, but now typically operate well below potential, because the Government currently does not provide sufficient funds. At present the two projects are operating at only 30Z of their previous level. The budget maintains the staff but finances only minimum activities. 37. As mentioned in chapter III of the Bank report, Sierra Leone: Review of Public Expenditure Program (Report No. 5513-SL), the Government needs to reevaluate its investment program in agriculture. The most important projects need to be selected on the basis of economic, financial and social criteria, and made part of a "core investment program"' that would be guaranteed funding. The project list suggested in chapter III of the Bank report referred to above, from which a core program would be chosen, includes 16 agricultural sector projects out of a total of 74. Their total cost to the period 1984/85-87/88 is projected at Le 409 million in 1983/84 prices, or 44% of the total for the whole project list; domestic spending would be Le 32 million, or 25% of the domestic total for the project list. Details are given in Table 1.4. Conclusions 38. This brief review of public intervention and expenditures in the agricultural sector yields the following conclusions: (1) The overall effect of past Government intervention in agri- cultural prices and marketing has been low producer prices that provide little or no incentive to increase production. In fact, production levels have been declining in recent years. (2) The current institutional structure of the MANR is not appropriate for effectively carrying out the agricultural development program. (3) A highly disproportionate percentage of the MANR's recurrent expenditures is being allocated to unskilled labor. Potentially effective programs are being starved for necessary inputs Gf skilled labor, equipment and supplies. (4) Scarce local development funds, which would be better used to meet local counterpart obligations on active projects, are being misallocated to projects that are inactive or only moderately active.  Table 1.4: RaMFN)1O1) COE PWOflW PR(IRCT l1IST FOR 19P.4/85-1987/88 ('C000 leane In 1983/Fv, prices) Mieber of 1984/85 19857876 -198-6/87 1987/88 Nare of Project Projects Danestic Foreign Total DIkmat1c Foreogn Total Dbmestlc ForemEn Total DmastiC Foeign Total RIaJLnIREu: SM.RI 28 8,102 123,178 131,280 8,833 1l1,045 109,878 7,053 R8=38 88,991 7,557 71,712 79,269 ARMMOMUME 16 6,538 117,281 123,819 6,923 96,739 IM3,662 6,266 78 257 84,523 6,951 71 712 78,663 Easteni TADP II 630 22,248 22,8 800 14,4M1 15,200 4n0 0 4. 14,800 50 18,00 0 1,50 Peimu 300 4,560 4,860 400 2,400 1,800 300 2,400 2,700 205 1,637 1,842 Nbrtlwne TAM 11 700 30,480 31,180 500 22,800 23,300 400 16,8W 17,200 245 10,301 10,546 Mbgw IADP 600 9,l20 9,720 500 10,320 10,820 300 2,400 2,700 1,670 5,208 6,878 Klinalogu LAI)P 11 600 11,040 11,6d40 500 12,240 12,740 576 6,365 6,941 - - - o/PleielLm WMP 11 1,300 9,120 10,420 1,200 8,640 9,840 1,600 10,800 12,400 2,OO0 13,500 15,500 Kncbia LAW 50D 3,360 3,860 600 4,320 4,920 700 5,280 5,980 55 415 470 Rdaohr Rlce Research Pmject 158 84 242 1,830 876 1,976 1,640 984 2,624 1,873 1,128 3,000 WF1' lnlwx Water Sw9i 11 33 799 833 - - - - - - - - - EKtensitn Tra1nfn Progran gV 75 499 574 170 1,152 1,322 240 1,608 1,853 278 1,848 2,126 txzabe 9wmp [vlopment 42 - 42 - 3,730 - 5,220 - 5,963 Torum &u Project, &2tar Cane 125 5,335 5,460 80 3,336 3,416 110 4,680 4,796 125 5,364 5,489 Acre Project 833 499 1,333 - - - - - - (bcen Xldttvat1ao TrainT ng 100 1,632 1,732 35 583 618 - - - _ _ _ Mbymiba TAP, liue I 292 7,999 8,291 153 4,224 4,377 - - - Agrlcultire Sector Iqply 1 250 10,500 10,750 155 6,648 6,803 - - - - - - Fidleries 6 112 3,098 3,210 100 1,414 1,514 88 391 479 88 0 88 w Tn-ls"d Flahries S-5 187 -22 i .* - 440 40 ) i - 72 I Bo/Pujdem Fisherlse.Cmonent 20 - 20 20 - 20 20 20 36 - 36 IIygbe IIFAD/lADP 5 60 65 5 60 65 10 60 70 6 - 6 Tcabo Pilot Project 17 1,721 1,738 17 1,022 1,039 - - - - - - E E KoibIs Project 18 331 349 18 331 349 18 331 349 Japanese JErA Project 17 799 816 - - - - - - - - Veterinry 3 685 - 666 650 - 650 l5l - 151 155 - l55 Stre%gthening of Dingroais Facilities 75 - 75 S0 - 60 _60 -7_ 75 Increasing livcstock ProIiction 590 - 590 580 - 580 70 - 70 80 - 80 Veterinary CUiic 20 - 20 20 - 20 21 - 21 - - - Forestry 3 767 2,644 3,611 1,160 2,892 4,052 548 3,290 3,838 363 - 363 Wildjllfe Developrent 50 50 60 - 60 80 - 80 100 - 100 RLbber Processing Plant 200 2,844 3,044 200 2,892 3,092 228 3290 3,518 - _ - Afforcstation Pogran 517 517 900 - 900 240 - 240 263 _ 263  - 14 - Chapter II MINING AND MANUFACTURING A. Mining Performance 39. Sierra Leone is endowed with a variety of mineral resources, of which diamonds, bauxite, rutile, iron ore and gold are presently being extracted. Economic growth in Sierra Leone has traditionally depended heavily on the mining sector. In the early 1970s, the mining sector accounted for about 161 of GDP, provided more than 702 of the country's foreign exchange earnings and was a major source of Government revenue. In addition, it contributed significantly to employment and generated a great deal of the demand for energy and transportation. However, starting in the mid-'70s, in part because of the global economic depression, most mineral production (especially that of diamonds and iron ore) has declined Steadily. Another factor was the closure of the iron ore mine at Marampa in 1975. 40. The decline has continued through 1983. From an output of 1,377 thousand carats of diamonds in 1975, production reached its lowest level-302 thousand carats-in 1982, an annual drop of 16%. Bauxite has had a rather stable production pattern over the period 1975-82, recording an annual average increase of 1.2%. Rutile increased at an annual rate of 482 between 1979 and 1983. The Marampa iron ore facility, which reopened in 1983, produced 440 thousand tons of ore that year. 41. The steady decline in the production of diamonds and the closure of the iron ore mine during 1975-82 resulted in a substantial drop in the share of mining in GDP-from a high of 16% in 1975 to a low of 5.7% in 1983. During 1978-83, however, and despite the fall in the output of diamonds, the share of the mining sector in GDP fluctuated only slightly, between 5.5Z and 7.7%. 42. Since the mid-1970s, Sierra Leone's balance of payments has weakened as a result of the unprecedented rise in oil prices, the erosion of the export base and the expansionary domestic financial policies. The decrease in export earnings in recent years reflects the drop in output of alluvial diamonds and the falling prices of all the country's mineral exports. The declining trend in diamond and gold exports has been aggravated by smuggling, encouraged by the strong parallel market, an unrtalistic exchange rate and the failure to enforce the surrender of export receipts. The mining sector nevertheless has remained the country's most significant source of foreign exchange earnings, providing about 70% of the 1983 total.  - 15 - 43. The deteriorating export performance of the mining sector has had a major impact on revenues. Total Government revenue as a proportion of GDP declined from 16.4Z in 1978/79 to 10.91 in 1983/84. This decrease resulted from large declines in overall corporate income and profits taxes, as well es taxes on all international transactions (import and export duties). Sierra Leone's main sources of tax revenue have been direct taxes on income and profits, indirect taxes on goods and services and international transactions. DIMINCO's (Diamond Mining Company) corporate income and profit taxes, which accounted for about 8.6% of total Government revenue in 1978/79, declined to less than 12 in 1982/83, owing mainly to the deterioration in the diamond industrv's profitability. Diamond export duties as a percentage of total Government revenue dropped concomitantly-from 1.1% to 0.4%-over the 1978/79-1982/83 period. 44. Over the period 1973/74-1980/81, employment declined by 3,894 workers (from 9,668 to 5,774, or over 40% from the 1973/74 level). Between December 1981 and 1982, DIMINCO also retrenched its labor force by about 1,000 workers because of the continued depressed Level of production. Total employment in the mining sector, however, was much higher than officially reported because those data are limited to estab- lishments having six or more workers. By contrast, a large portion of mining in Sierra Leone is small-scale or individual and is not accounted for officially. Based on previous official estimates, a total of 20,000-30,000 may be engaged in mining. Government Intervention 45. Management of the mining sector, although nominally under the Ministry of Mines, is in fact widely dispersed. The Ministry of Fi- nance, the Diamond Buying Office and the Bank of Sierra Leone are all responsible for various aspects of gold and diamond mining and market- ing, while the Ministries of Trade and Industry and of Economic Develop- ment have been involved in som- liscussions of mining policy and in the application of the Development of Industries Act. Moreover, the State House is often involved directly. 46. The Ministry of Mines consists of two divisions: Mines and Geological Surveys. Both are highly centralized and tend not to cooperate or to disseminate information between themselves. The inefficient functioning of the ministry is further aggravated by a lack of planning, definition of objectives, follow-up programs and technical expertise. Material difficulties compound the problems: office equipment is deficient, laboratory equipment inadequate and largely inoperative, and field equipment and vehicles are generally out of service for lack of maintenance and spare parts. The relatively large technical staff lacks experience and motivation and is underutilized. 47. The mining sector's importance in the Government budget becomes particularly clear from a review of expenditures. Recurrent expenditures, which have amounted to 21%, 16% and 14% of GDP respectively over the past three years, in fact went to other sectors to a large extent. The recurrent budget of the Ministry of Mines is quite  - 16 - insignificant, accounting for well below 1% of total current Government expenditures during the period 1978/79-1982/83. Of that, about 80% over the past five fiscal years on average has been spent on the salary and wage bill. The share of the Government's capital expenditures in GDP increased from 3% to 8.5% between 1978/79 and 1983/84. The share of actual mining investments in development expenditures has fluctuated considerably, amounting to less than 1% in 1979/80 and rising to 12% in 1980/81. It has been decreasing since, with the estimates for 1982/83 and 1983/84 again below 1% (Table 2.1). Table 2.1: MINISTRY OF MINES, ACTUAL RECURRENT AND DEVELOPMENT EXPENDITURES, 1979-80-1983/84 (Le millions and percentages) Recurrent % of Total Development % of Total Year Expend. Recurr. Expend. a/ Expend. Dev. Expend. 1979/80 2.74 1.05 (1.51) 0.31 0.85 1980/81 2.76 0.95 (1_31) 7.78 12.18 1981/82 3.24 1.12 (1.56) 6.06 8.10 1982/83 1.24 0.46 (0.56) 0.12 0.15 1983/84 1.46 - (0.68) 0.33 0.24 Sources: Ministry of Mines; and development estimates. a! Figures in parentheses exclude public debt charges. 48. Since the mining sector is dominated by a few commercial activities, the essential element in the policy in the past has been the design of agreements setting forth rules for exploitation righcs, repatriation of dividends, Government involvement in management, allocation of foreign exchange receipts and the contribution of taxes and royalties to the Government's budget. However, the related policies have not been very clear and have resulted in varying involve- ment by the Government tb-ough ownership (DIMINCO and Marampa) and diverging regulations for royalties and the retention of foreign exchange. The rules have not been geared to a consistent development program and have not served to encourage priority investments. For example, the Marampa iron ore project was initiated despite unfavorable prospects. Moreover, the Government has had to assume full ownership of  - 17 - the implementing company, which has incurred substantial operating losses. 5/ Diverging statements of Government interest in direct participation by others have probably discouraged potential investors. The outdated mining code and the failure to apply it have been additional factors affecting foreign participation, even though that participation is becoming increasingly important, given the shortcomings of local and international financing. The lack of systematic exploration efforts in the past have further prevented the identification of viable project possibilities. 49. Future policies should be determined by the constraints and issues in the mining sector. The design of future policy should take into account that (1) the Government cannot reverse a generally declining trend (diamonds); (2) the Government does not have sufficient means or capacity to be involved directly; and (3) private foreign capital remains essential for continued operations, particularly since the most important investment possibilities (gold and diamonds) are high risk and unlikely to fit into a public investment program. M4ajor Projects 50. One of the most crucial issues facing the Sierra Leonean Government is how tc arrest the current decline in mining output and maximize the sector's contribution to economic growth. Although the Government's long-t'rm objective is to reduce the country's dependence on diamond mining, medium-term projections leave no doubt that in the immediate future the economy will have to rely on the mining sector to generate additional foreign exchange earnings. Accordingly, the mining sector component of the second Five-Year Development Plan is structured around the following basic objectives: (1) Increased export earnings through mineral exports; (2) Increased value added through local processing; 5/ The survival of Marampa (now wholly Government-owned) is in serious jeopardy, as it is technically unable to reduce its operating costs to a satisfactory level and will continue to require Government support unless market conditions improve considerably, an unlikely prospect. Marampa is likely to go under within the next two years. While the financial position of DIMINCO (in which the Government has a 51Z shareholding) is still strong in some respects (almost no debt and a high current ratio of assets to debts), it is facing severe liquidity problems. As a result, it is currently unable to finance the surface mining equipment required to maintain operations at the present level without substantial external funding. It may still have a technical life of about 10 years if appropriate steps are taken. Such adverse developments have rekindled debate over the appropriateness of Government ownership in the mining sector.  - 18 - (3) Promotion of mineral exploration; (4) Generation of employment; (5) Increase in local participation in mining; and (6) A higher Government share of mining income. 51. The strategy proposed to achieve these objectives focuses on the following areas: (1) The relationship between the Government and foreign interests, particularly the evaluation of foreign participation, the revision of mining legislation, preparation of an investment guide, and establishment of a planning and evaluation unit, including training of local staff. (2) The improvement of areas of mineral exploration such as strengthening the Mines and Geological Survey Divisions; establishment of an adequate assay laboratory; implementation of an airborne survey; centralization of exploration data from both public and private sources; and revaluation of diamond deposits. (3) Continuation of DIMINCO's existing activities and implementation of the proposed Kimberlite project. 6/ (4) Promotion of more systematic small-scale mining through the provision of credits and foreign exchange to cmall miners; support of a small mines revolving fund, and development of mechanisms to control smuggling. 52. In line with this strategy, the Government has proposed an investment program estivated at Le 86.7 million in current prices, representing about 9% of the investments envisaged under the Second Development Plan. Of the total, 76% is accounted for by the Kimberlite project, another 11% for continuing investments in diamond mining by DIMINCO; only a modest 13% (about uS$4.5 million) is assigned to all earmarked investments unrelated to DIMINCO. Approximately 93% of the total costs are in foreign exchange, with about 11% of the total costs to be financed by private sources and 89Z by the Government. 6/ With capital costs (excluding interest payments) currently estimated at US$112 million, the Kimberlite project is the largest investmenc effort in the mining sector. It will involve the production of diamonds from a combination of open cast operations and underground mining. To be undertaken because alluvial diamonds are coming to an end, the project's capacity will be 525,000 short tons of kimberlite, yielding about 226,000 carats a year (at an assumed grade of 0.41 carats a short ton) over a 20-year period.  - 19 - 53. This investment program is questionable because it consists to a large extent of high-risk ventures and does not address the main issues facing the sector. For instance, it fails to recognize that there are no new minerals to diversify to. Production of rutile is already at a maximum, and Marampa is losing money on every ton it sells (thus, it would incur greater losses by selling more). The foreign prizate sector needs Sierra Leone much less than vice-versa. Safeguards are required, and past agreements have to be renegotiated cautiously. Moreover, under the best of circumstances no partners will be found if benefits do not accrue to both sides. The illicit trade in diamonds and gold cannot be prevented by police action. It can only be controlled by removing the economic incentives from smuggling. Moreover, with 87Z of the total sectoral allocation slotted for the diamond subsector alone, the investment program is not consistent with the strategy stated above or the objectives in the plan. On the whole, a recent Bank mission found that only 2 programs out of 10 could generate positive results: the establishment of the assay laboratory and the evaluation of old diamond deposits. Some of the other proposals, while having merit as proposed and funded, have little chance of success. The strategies for the mining sector have to be reassessed and priorities established anew. MIining Prospects Diamonds 54. The diamond subsector will be influenced by decisions relating to DIMINCO and its surface mining and the proposed Kimberlite project. Surface mining has declined because of the depletion of deposits. In recent years, this situation has been compounded by insufficient investment and by a scaling down of operations as part of a restructuring program. If no further investments are undertaken in the coming years, surface mining of diamonds is likely to disappear by 1990. Alternatively, if investments in new equipment are undertaken, surface mining could continue at a rate of production of about 150,000 carats a year for about 10 years. 55. Another option is implementation of the proposed Kimberlite project. The most recent estimates of the project's costs are about US$112 million. Although feasibility studies have been undertaken, substantial uncertainty persists as to the amount of kimberlite available and the diamond content and quality. Thus, the total risks remain high. Moreover, given current economic conditions, it is unlikely the Government could include the project in the public investment program without sacrificing safer investment options in other sectors. Diamond production would also benefit from measures to liberalize illegal mining and trade, so that the proceeds from this production can be channeled through t'ae legal economy. Measures might include the application of a parallel market exchange rate for diamond purchases and abandoning the legally existent although seldom applied mining fees.  - 20 - Bauxite 56. Although world market conditions are very poor at present, bauxite production is probably the most stable and competitive component of the sector. Production will peak at 1.2 million tons a year in 1985, equal to about US$28 million in 1984 terms. It should remain at more or less that level for 15 or more years. Government resources from bauxite have been relatively small, but by 1988 could be brought up to perhaps US$5 million a year (including import duties) in 1984 terms. 57. There are two leng-term possibilities for this subsector: the Port Loko and the Mokt-ji deposits. What makes these two deposits worth considering when the market has improved is their proximity to the sea, the existing infrastructure and labor forLe and the good quality of the ore as compared with that in other potential new areas in West Africa. Rutile 58. The rutile mining operation was very close to death in 1982 and is barely recovering. It still needs to be handled with great care. There is no hope that production will ever increase beyond the nominal capacity of 100,000 tons a year because the reserves are too small to justify such an expansion. Even then, the reserve recovery will probably be significantly less than expected at its inception. In the long run, sales should average 80,000 tons a year (worth US$20-24 million a year in 1984 terms) during the next 20 to 25 years, depending on dredge transfer times and final reserve recovery. Government revenues from rutile could progressively be brought up to a level of US$2-3 million a year when the subsector recovers, which will .probably not occur until 1986 at the earliest. Iron Ore 59. Production of iron ore resumed in 1983 after being abandoned in 1975. Although the Government is the owner of the company (Marampa), the foreign contractor (Austro Minerals) has for all practical purpcses assumed management and financial responsibility. It has become clear that the ill-conceived Marampa project is neither financially nor economically viable. The company is having so many difficulties and has so little hope of overcoming them that the most likely scenario, as stated earlier, is a final shutdown within the next two to three years. Doing so will, however, put a financial drain on the sector, as eventually the Government will have to repay the outstanding debt of about US$22 million in a proportion difficult to assess in advance. If collapse does not occur, the best that can be expected is maintenance of the significant employment in the Marampa area; neither profits nor dividends can realistically be expected in the foreseeable future. Gold 60. Small-scale gold mining is widespread in Sierra Leone, with most production exported illegally. As in the diamond subsector, liberalization measures would provide additional incentives for this  - 21 - activity and would probably rechannel part of the production into the legal economy. 61. Apart from small-scale mining, industrial gold mining could be an attractive new activity in the future. Again, as with diamonds, considerable risks attach to gold mining, nor has any really systematic exploration been undertaken. Because of the high risks, inclusion of gold mining in the public investment program does not seem justified. The Government should therefore aim at attracting pri rate risk capital for gold exploration and, if prospects are favorable, for gold mining. Conclusions and Recommendations 62. The principal aim of the public investment program must be to maintain the importance of the mining sector in the economy. Because of the predominance of diamond mining and the potential benefits of gold extraction, the highest priorities should be (1) decisions on investments related to diamonds (DIMINCO surface mining and the Kimberlite project) and (2) promotion of mineral exploration, particu- larly in the gold subsector. Decisions to invest in diamonds and gold are to a large extent dependent on the availability of financing. Although gold and diamond mining cannot a priori be excluded from the public investment program, foreign financing under this program is likely to be scarce, particularly as other investment options probably entail much lower risks and are therefore more appropriate. 63. Since the Government has no options in the bauxite, rutile and iron ore sectors, it should try to encourage foreign partners to continue their activities. Moreover, the Government should avoid direct invc lvement, particularly in the iron ore subsector. 64. A second priority area is small-scale mining and illicit trade. Potential reforms include a liberalization of small-scale mining and of trade, a link between internal prices and international market prices and assistance to small-scale miners. 65. A third priority includes measures to reassess existing regulations, practices avid legislation within the context of a consistent mining policy. Particular areas to be reassessed are the tax laws and the provisions for retention of foreign exchange for dividends and imports. Related are measures to clarify and improve the Govern- ment's role in this sector by focusing on the ownership issue and by strengthening the institutional framework necessary to design and implement a revised sector policy. 66. The two diamond-related investments represent the largest financing requirements. The financing needed for the remaining program is uncertain, since it has not been adequately studied. Because of the risks involved and special and unknown financing needs, the total size of the diamond-related investment program remains uncertain. 67. If the principal activities are financed entirely by private foreign sources, the Government's contribution to investment in the  -22 - remaining activities would be small. The care investment program project list suggested in chapter III of the Bank's main report on the public expenditure review (Report No. 5513-SL) includes only the Assey Laboratory, with a cost for the period 1984/85-1987-88 in 1983/84 prices of Le 5.5 million, and the Mineral Survey Project, with a cost of Le 1.3 million; domestic spending on the two projects would be Le 1.7 million or 1.4 percent of the domestic total for the project list. As for the recurrent budget, only strengthening the Assay Laboratory, small-scale mining efforts and improvement of the ministry will have an impact. Since the Ministry is already overstaffed, the only incremental recurrent expenditures would be the increased operating and maintenance costs of vehicles and equipment. The share of this item in total recurrent expenditures could rise from its current level of 15% to its former level of 30%. Since the ministry's recurrent budget constitutes less than 1% of the Government's total recurrent expenditures, that increase would result in an increase of about 0.1% in total recurrent expenditures for the Government. This level is feasible even for a strained budget.  - 23 - B. Manufacturing Performance 68. The manufacturing sector in Sierra Leone is small but import- intensive and has a rather narrow base on which to diversify, as almost 50% of the enterprises are engaged in food processing and beverages. The sector provides employment for about 11Z of the labor force and accounts for 7% of GDP. Of this, the traditional sector provides 86% of the sector's total employment (approximately 45,000 people) and contributes about 55% of the value added. About 126 medium and medium-to-large size manufacturing industries contribute the remaining 45% of the value added and provide employment for about 14% of the total for the sector (approximately 7,000 people). It is estimated that only 9 manufacturing enterprises employ more than 250 workers, while 366 employ 6 workers or more. Large-scale enterprises (those emtJoyLng 20 workers or more) are concentrated almost exclusively in and around Freetown, as are the small manufacturing establishments. 69. Between 1974 and 1981, the large-scale subsector grew at an average rate of about 4% a year, while the small-scale and handicraft subsectors did not grow at all. The overall performance and competitiveness of the manufacturing sector have deteriorated in recent years. Production in most subsectors fell by more than 10% in 1982/83, and the capacity utilization rate has been less than 40%. 71 The basic causes of unused capacity have been shortages of imported raw materials, spare parts and electric power. These shortages now constrain production even in industries relying primarily on domestic materials such as wood processing and palm oil. Other reasons include the small size of the Sierra Leonean market, competition with illegal imports of similar products, the shortage of working capital, transportation and communications and defective equipment, as well as a lack of modernization. Moreover, production costs are high, owing to the low capacity utilization, overcapitalization, investment packages requiring large foreign loan repayments, uncompetitive and inappropriate technologies and high salaries paid to expatriate employees. 70. The three group subsectors (food, beverages and tobacco, textiles and wood and wood processing) represent 57% of the total manufacturing output. The highest value added is in the wood and wood processing subsector (57% of output), followed by textiles and apparel (55%), and food, beverages and tobacco (40%). The subsectors with some potential for growth from the point of view of domestic demand and value added are generally the agro-based and small-scale industries. 7/ A recent survey of 10 enterprises in the manufacturing sector yielded an average capacity utilization rate of 36% in 1983; the expectation for 1984 was 35%. As recently as 1979, the average rate had been 63%.  - 24 - There seems to be very little economic justification for most other import substitution industries because of the very limited domestic market, low value added, lack of price competitiveness and generally limited comparative advantages. 71. Table 2.2 presents the economic characteristics of selected private enterprises. The survey indicates, as noted, that production costs are high. The main reasons are overcapitalization, low capacity utilization, investment packages that include large, expensive foreign loans, non-competitive enterprises as a result of inefficient factor use and inappropriate technology, and high salaries to expatriate employees. Government Intervention 72. The manufacturing sector of Sierra Leone developed in the absence of local organized institutions, local entrepreneurship, local capital and local mnnagerial and technical personnel. Instead, initiative and direction came from foreign investors and the expatriate communities settled in Sierra Leone. After 20 years of independence, the situation has not changed. The lack of national entrepreneurship as well as the absence of any institution to promote industrialization has forced the Government, through the Ministry of Trade and Industry (MTI), to participate actively in industrial planning and development. Government Objectives 73. During the last five years, che manufacturing sector has grown much more slowly titan anticipated. In order to encourage and promote significant domestic and foreign private investment, the Parliament prepared and approved the Development of Industries Act in 1983. It provides the initial legal infrastructure and gives the MTI responsibility for creating a physical and institutional infrastructure. 74. The Government's major objectives in the sector are: (1) to initiate and sustain a process of rapid industrial growth; (2) to mobilize domestic and foreign resources and technology for industrial development; (3) to establish backward linkages toward the development of raw materials and local processing; and (4) to develop entrepreneurial, managerial and labor skills. 75. The Government intends to rely primarily on private domestic and foreign investors to establish and operate industries, as reflected in the Development of Industries Act, which provides a host of investment incentives for the private sector. 8/ 8/ The act provides guarantees against nationalization, offers protection of foreign investment rights on capital, profits and dividends and calls for various fiscal incentives, such as exemptions from custom duties and preferential treatment for various imported inputs, capiLal allowances and tax relief.  Table 2.2: SIRMA LENE-SURVEY OF SE=II= PRIVATE ENl1RPRISES X of imports Capacity Total MYt. in Utilization Net Profit Cost of Total Valhe Nsne and Activity of Rate (%) Sales (Losses) Prod. Ccats Added Bcports Capital Fnterprise Production (CUR) La 000 Le 000 La '000 Production Le 1000 US$000 Ownership 1. ALRE. TOBAW D ORP. JIMD. MAufacturing of tobacco products 1959 1,035 48 48,955 3,966 16,711 20 11,450 2,007 87 Foreign 1983 951 44 39,380 3.044 12,364 34 9,700 897 13 SL 1981 1,478 63 39,900 2,041 11,270 46 9,540 140 1979 1,530 59 27,637 1,705 10,451 44 4,870 24 2. WEILDNGKON DISTIILERIES Ltd. Crude spirits, distilling, Ln blenling & bottling, gin, num, vodka, etc.(liters) 1962 72,500 26 1,460 146 900 50 350 - 83 Govt. 27 Foreign 1983 72,500 26 1,460 146 900 50 350 - 1981 122,778 45 945 111 760 50 300 - 1979 227,484 84 1,380 131 1,106 50 350 - 3. NAlTNAL ONOtEI'ONERY nAWv 11M. Mazufacturirig of biscuits and hard-boiled weets 1968 4,200,000 40 7,000 50 6,300 70 880 300 60 Priv. SL 40 Forelp 1983 4,796,C00 50 7,505 4 6,9O5 70 1,024 218 1981 6,284,000 67 8,951 6 7,641 72 907 130 1979 5,375,000 67 6,319 7 4,236 71 384 89  Table 2.2 (conthiied) Capacity Total % of imqorts Utilization Net Profit Cost of Hat. in Value Rate (%) Sales (TAsses) Prod. Total Cost of Added Exports Capital NLue Production CUR Le'000 e'000 Le 'oo000 Prodhuction iL'OO US$000 Uwnershlp 4. BATA SHOE 00. S.L. LID. Shoe manufacturing- plastic shoes, sardals, etc. (pairs) 1969 80,000 9 2,500 - 1,250 70 450 - 65 foreign 35 SL 1983 61,000 7 1,539 (117) 769 70 375 - 1981 468,000 53 3,550 (222) 1,775 70 800 30 1979 875,000 100 3,506 452 1,750 70 500 - 5. CHANRAI GHEMICAIS LID. Soap mmnufacturing (tons) 1976 2,116 14 4,000 60 - - - - 95 foreign 1983 5,209 35 7,480 82 4,466 60 1,852 97.5 5 SL 1981 5,624 38 6,555 66 3,580 71 1,742 - 1979 3,851 26 3,267 12 1,830 79 1,160 4.8 6. CNANRAI CHEMICALS LID. Plastic films and bags 1970 132 36 1,200 - - 75 - 12.5 95 foreign 5 SL 1983 261 73 1,219 125 2,253 75 926 31.7 1981 259 72 867 98 1,798 79 871 87.0 1979 279 78 826 16 904 80 580 64.0 7. STRLING PRm0cf LID. Maruf. of Tharmaceuticals (tabs In mLUion) 1977 73.9 53 3,800 1,013 1,053 80 1,200 - 100 foreign 1983 57.4 41 2,994 910 934 80 1,100 70 1981 56.1 165 2,235 911 581 80 880 249 1979 23.3 67 1,023 7 157 80 420 15  Table 2.2 (continued) Capacity Total % of 1n,orts Utilitatlon Net Profit CDst of Mat. In Value Rate (Z) Sales (Losses) Prod. Total Cost of Added Ekports Capital Name Production CUR Le'000 Le'000 Le '000 Production Le'000 US$0 Owership 8. SIERRA LEONE BREWERY Production of beerOectl.) (1963) 75,000 62 - - - 80 - - 89 Eoreign 11 SL 1983 72,000 60 - - - 80 - - 1981 114,000 95 - - - 85 - 1979 108,000 90 - - - 90 - - 9. SIERRA INDUSTRIAL VES1NI11S oo. LID. (SIVQ) LID) (19/2) 900.000 30 400 - - - - - 100 SL private Mmmufacturing of Readymade Garments 1983 600,000 20 241 (29) 173 31 120 - 1981 1,500,000 50 21" (84) 213 40 110 123 1979 2,100,000 70 348 63 187 34 174 - 10. SIERRA LE3 KNITrTIG MLLUS LID. Marufact. of knitted fabrics knittwear ard textiles (pieces) 1965 450,000 15 1,000 - - 40 - - 100 Foreign 1983 300,000 10 250 (110) 350 40 125 9 1981 900,000 30 350 ( 40) 390 40 175 - 1979 1,500,000 50 550 ( 20) 570 40 275 - 1984 projected  - 28 - Major Projects 76. During the current investment plan (1983/84-1985/86), the development expenditures for the manufacturing sector were projected to be Le 21.6 million, of which 27% (Le 5.8 million) was expected to come from domestic resources. The proposed public sector projects to be implemented during the plan period can be divided into two categories: (1) Ongoing projects, which include strengthening the Industrial Development Department and the National Bureau of Standards and Metrification. (2) New projects, which include: (i) rehabilitation of the palm oil industries; (ii) rehabilitation of the National Workshop; (iii) industrial feasibility studies; (iv) a small-scale industrial development program; (v) rural industrial estates; and (vi) establishment of an investment/export promotion mechanism. 77. The FY84 development budget allocated no money for the ongoing projects. The private sector has recently purchased some shares in the National Workshop and palm oil industries. As such, they will have to be eliminated from the public investment program. 78. The two major components of the investment program are the industrial feasibility study and the small-scale industrial development effort. Both projects would have a long-term impact on the national economy by identifying potential areas in which to invest and competitive areas to stress. Of equal importance is the establishment of the basic institutional infrastructure necessary to promote both large- and medium-scale industries. These institutions and feasibility studi's are presently lacking and are deterrents in attracting new investments in the sector. Public Expenditures in Manufacturing 79. During the period 1979-83, total public expenditures in the manufacturing sector were not important. Including those of the MTI and the direct and indirect spending of the public manufacturing enterprises (Table 2.3), they represented only 0.2-0.3% of the total Government budget. In 1983, the expenditures of the MTI and the public manufacturing enterprises amounted to Le 0.96 million and Le 0.6 million, respectively. The 1984 program predicted an increase in the ministry's figure to Le 2.27 million, but total expenditures did not exceed Le 1.0 million by the end of the fiscal year. 80. Between 1979 and 1982, recurrent expenditures represented 70-80% of total expenditures, and in the last two years practically 100% of all expenditures. The recurrent expenditures are composed of salaries and wages, fuel and transportation, furniture and equipment and field research. The furniture and equipment expenditures were often incorporated in development expenditures, and in many cases the  - 29 - recurrent and development expenditures were not clearly separated. Between 1979 and 1984, wages and salaries represented 49-75% of total recurrent expenditures. 81. The MTI has obtained technical assistance from the UNDP/UNIDO for the last four-and-a-half years to initiate a program of industrial development and to train Sierra Leoneans. Overall, the MTI has a pipeline of external assistance of Le 6.1 million for 1984-85, subject, however, to the condition that the Government establish the institu- tional capacity to absorb the assistance and implement an industrial development program. Public Enterprises in Manufacturing 82. There are seven public enterprises in Sierra Leonets manufac- turing sector, roughly a quarter of all the public enterprises in the economy. This subsector includes some of the largest companies in the country, in fields such as forest and metal industries. Some are capital-intensive: Sierra Leone Petroleum Refining Company has a staff of only 134, share capital of Le 2.25 million and sales of Le 122 million. Others are small and capital-intensive: Wellington Distilleries has a staff of only 26, Seabord Milling a staff of 100. Some are quite large and labor-intensive: Sierra Leone Clay and Ceramic has a staff of 238, while Palm Oil Mills (Daru and Gambia-Mlattru) has 180. Forest Industries has 468 and the National Workshop 341. 83. The economic health of public manufacturing enterprises in Sierra Leone has been deteriorating faster than that of private enterprises. In 1983, production decreased more than 15%, while the average capacity utilization rate was only 23%. The same rates were 10% and 35%, respectively, in the private sector. Profit ratios in the public manufacturing enterprises are significantly lover than in private enterprises. Behind this discouraging picture are the Government's price controls and an interference in investment and personnel policies, as discussed in the Bank report on public expenditure review (Report No. 5513-SL). 84. In spite of their diversity, all of Sierra Leone's public manufacturing enterprises suffer from a common set of problems attributable to the current economic situation and the resulting austerity program. The lack of foreign exchange is particu