Uganda - Reconstruction Credit Project

Document Of The World Bank FOR OMCIAL USE ONLY Repwt No. 5703 PROGRAM PERFORMANCE AUDIT REPORT UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) June 12, 1985 Operations Evaluation Department T document has a restricted dishributlem and my be used by recipients emly in the performance of h ir eacdal dude. Its coateis may et therwise be dsdosed without Word Bank authoialo. ABBREVIATIONS CTB - Central Tender Board DCA - Development Credit Agreement ICB - International Competitive Bidding OED - Operations Evaluation Department PCR - Program Completion Report PPAH - Program Performance Audit Hemorandum PR - President's Report (Report No. P-2671a-UG) SITC - Standard International Trade Categories FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) TABLE OF CONTENTS Page No. Preface................................... - Basic Data Sheet . .............. ... it Highlights .............................. ...... ii PROGRAM PERFORMANCE AUDIT MEMORANDUM I. COUNTRY NEED AND BANK RESPONSE ... 1 Background ...... 1 Early Reconstruction Efforts ............................. 2 The Bank's Response ... ........................ 3 The First Reconstruction Credit ........................ 3 Other Bank Assistance .................................. 4 II. THE FIRST RECONSTRUCTION CREDIT .......................... 4 Objectives and Design .................................... 4 Procurement and Disbursement ........................... 5 Policy Cooditions ...................................... 5 Implementation of the Program ............................ 7 Use of the Credit......................................... 8 Disbursements .......................................... 8 Procurement ............................................ 8 Allocation by Beneficiary .............................. 8 Use of the Proceeds .................................... 9 III. ACHIEVEMENTS AND CONSTRAINTS .................. 9 Introduction ............................................. 9 Resource Transfer ........................................ 9 Production Achievements .................................. 12 Policy Achievements ...................................... 14 IV. SELECTED ISSUES AND CONCLUSIONS ......................... 14 Feasibility ............................................... 14 Use of Conditionality ................................ .. .15 Role of the Bank ....................................... 16 IDA Administration and Coordination ........... ... 17 Conclusions ............................... ..... 18 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. TABLE OF CONTENTS (Continued) Page No. Attachments: 1. Uganda First Reconstruction Credit: Disbursements by Supplying Country ..................... 20 2. Comments from the Cofinanciers ........................... 21 PROGRAM COHPLETION REPORT I. Introduction ............................................. 23 II. Background to the Reconstruction Program ................. . 23 III. The First Reconstruction Program ......................... 24 IV. Implementation of the Program ......................... 26 Annexes: 1. Final List of Beneficiaries Under the First Reconstruction Credit ............................ 34 2. Status Report on Category "B- Customers ................. 36 PROGRAM PERFORMANCE AUDIT REPORT UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) PREFACE When the military regime (1972-1979) in Uganda was ousted in April 1979, the new government faced the task of reconstructing an economy that had been virtually destroyed by a decade of economic mismanagement, political disruption and war. The Bank Group was quick to respond to the government's appeal for emergency support and to reestablish the close working relationships that had existed in the 1960s. This report sets out to assess the First Reconstruction Credit to Uganda for US$72.5 million that was approved by the Executive Directors on February 19, 1980 and became effective on May 1, 1980. The IDA credit, including a participation of US$17.5 million from the Government of the Netherlands, was disbursed in two tranches. IDA also administered an EEC Special Action Credit of approximately US$20 million equivalent, and a grant of Can$3 million by Canada. Subsequently the OPEC Fund provided a loan of US$5 million in support of the program, making a total of approximately US$100 million available to the Government of Uganda. The audit consists of a Program Performance Audit Memorandum (PPAM), prepared by the Operations Evaluation Department and a Program Completion Report, dated July 24, 1984, prepared by the Eastern and Southern Africa Regional Office. The PPAM is based upon a review of relevant Bank documents, interviews with Bank staff and a visit to The Hague. Following customary OED procedures, copies of the draft audit were sent to the Borrower and cofinanciers for comments in February 1985. No comments were received from the Borrower; the comments received from cofinanciers are reproduced in Attachment 2. The report must be considered as a preliminary evaluation. The First Reconstruction Credit has been followed by two further credits, and a fourth is under consideration, and any assessment of the impact of the Bank's support of the reconstruction program can only be made when there is more experience of this series of operations. The report does raise some issues, however, which will be addressed more fully on a subsequent occasion. PROGRAM PERFORMANCE AUDIT REPORT UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) BASIC DATA SHEET LOAN AND CREDIT DATA (Amounts US$ Million) As of 01/31/84 Original Disbursed Cancelled Repaid Outstanding Cr. 983 IDA Credit la 72.5 72.5 - 17.5 55.0 Cr. 54 Special Action Credit 20.0 (equiv) 14.9 5.1 /b - - CIDA Grant 2.6 (equiv) 2.6 - - - OPEC Fund Loan 5.0 5.0 - - 5.0 CUMULATIVE DISBURSEMENTS Special OPEC IDA Credit Action CIDA FUND 983 /a Credit Grant Loan Total Planned - FY81 72.5 20.0 2.6 5.0 95.0 Actual- FY81 3.0 0.2 - - 3.2 FY82 33.9 14.0 2.6 4.6 55.1 FY83 72.5 14.9 2.6 5.0 95.0 IDA DATA Original Actual or Credit Date Re-estimated Negotiations 12/19/79 12/19/79 Board Approval 02/19/80 02/19/80 Credit Agreement 04/02/80 04/02/80 Effectiveness 06/02/80 05/01/80 Closing 12/31/80 12/31/82 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Identification 07/79 2 3 6 08/79 (Initiating Memo) Appraisal 09/79 2 3 6 12/79 (Draft PR) Supervision 07/80 1 3 3 07/25/80 FOLLOW-ON PROGRAM OPERATIONS US$70.0 a Second Reconstruction Program, Cr. 1252-UG, approved on May 25, 1982. US$50.0 m Third Reconstruction Program, Cr. 1474-UG, approved on May 15, 1984. /a Includes the Netherlands grant of US$17.5 m. 7-b Balance of grant was used for exchange rate adjustments. - iii - PROGRAM PERFORMANCE AUDIT REPORT UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) HIGHLIGHTS After the overthrow of the military regime in April 1979, the new Government acted with commendable speed to set about the daunting task of reconstructing an economy that had been all but destroyed by years of eco- nomic mismanagement and social and political strife (PPAM, paras. 1-4, PCR, paras. 3-5). In October 1979, the Government adopted a two-stage strategy for recovery. The first stage, which concentrated on restoring essential productive activities, services and exports, served as the basis for the Bank's first reconstruction credit and the cofinancing associated with it. The Government backed up its statement of intentions with a series of positive actions during its first few months in power, including agricul- tural price increases, initial moves towards restoring public administration, and setting up the machinery to process the claims of expropriated businesses (PCIL, para. 10, PPAM, paras. 8-10). These actions were sufficient for the Bank to approve the first tranche of the quick-disbursing credit, but the release of the second tranche was made conditic .al upon further progress being made in implementing the reconstruction program, particularly in regard to adjustments in the exchange rate (PPAM, paras. 19-23). Implementation proved difficult from the start (PCR, paras. 14-22, PPAM, para. 24). Shortly after the financing package was approved, the Government was overthrown by a military commission, and the Bank temporarily suspended disbursements under all operations. It was then realized that the process of rehabilitation would be more complex and lengthy than previously thought, and when disbursements were resumed they were at first restricted to specific items that could be verified by review missions (PCR, para. 19). It was not until June 1981, after the newly-elected Uganda Peoples' Congress Government had negotiated a new stabilization program with IF, that the Association released the balance of the financing package, including the second tranche. The PPAR takes the view that a full assessment of the impact of the Bank's support for Uganda's reconstruction efforts can only be made when the experience of the subsequent reconstruction credits is reviewed. Neverthe- less, it reaches the following preliminary conclusions about the impact of the first credit: - The credit failed to achieve its primary objective of providing quick-disbursing foreign exchange in support of the first six-month period of reconstruction, since nothing was disbursed during this period, and the credit was not fully disbursed until June 1983 (PPAM, paras. 30-32). Disbursements were slower than expected because of the unforeseen political changes, and also because the original expectations were unrealistic and the procurement proce- dures chosen for the credit were not conducive to rapid disburse- ment (PPAK, paras. 33-37). Nevertheless, the credit still succeeded in providing resources faster than was achieved through resumed project lending. - While the evidence is slim, it does appear that the credit contrib- uted in some measure to increased capacity utilization in target industries and to an expansion in agricUtural output (PCR, paras. 31-36.). However, production was critically constrained not only by the scarcity of foreign exchange but also by many other factors, such as the shortage of local transport, services, finance and man- power, that the credit was not designed to address (PPAM, paras. 40-41. - Although the direct impact of the credit was limited, this first in the series of reconstruction credits did provide a significant amount of foreign exchange, including the induced flow from cofi- nanciers, and provided a valuable opportunity to initiate a dia- logue on a wide range of economic policies and management decisions that has been carried forward into subsequent operations and extended into the Bank's projects and economic and sector work (PPAM, para. 54). The audit raises several issues and suggests some lessons of rele- vance to future operations of this kind. First, it concludes that the credit was not well targeted and, by focusing on the provision of foreign exchange, without being able to affect other equally important constraints, was over- optimistic. It is suggested that the Bank should be realistic about what can be achieved in such circumstances and about what it can reasonably contribute (PPAM, paras. 43, 47-48 and 55). Second, the audit draws attention to the potential trade-off between the dual objectives of rapid disbursement and policy or institutional reforms pursued within the same operation, and cau- tions against the use of conditionality that is overly broad in scope (PPAM, paras. 44-46 and 55). Finally, the audit examines complaints received by cofinanciers concerning the Bank's administration of their funds, and concludes that while some of the problems reported have since been overcome or alleviated, there may well be a case for a more general review of the Bank' s procedures for handling cofinancing (PPAM, paras. 49-52). - 1- PROGRAM PERFORMANCE AUDIT MENDRANDUM UGANDA - FIRST RECONSTRUCTION CREDIT (CREDIT 983-UG) I. COUNTRY NEED AND BANK RESPONSE Background 1. * This audit covers the Bank's first operation to support the recow- struction of the Ugandan economy immediately after the overthrow of the mili- tary regime in April 1979. The final war and subsequent looting caused considerable damage and even greater social disruption. But the new govern- ment was not just faced with the need to repair the physical damage and restore law and order; it faced the much more daunting task of rebuilding a society that had been shattered by a long period of economic decline, admin- istrative decay and social and political strife. 2. The Ugandan economy, rich in natural and human resources, had experienced a period of rapid development during the 1960s. Much of this progress was reversed during the 1970s as a result of prolonged mismanagement by Government, exacerbated by external factors, including the deterioration in the terms of trade and the break up of the East Africa Community. The degenerative process was cumulative and interactive. In 1970, even before the military take-over, the Government had taken majority participation in a large number of banks and other companies, without the means to manage them effectively. Following the change in regime, this policy was intensified under the "economic war,- when many more foreign-owned businesses were nationalized. In 1972, most Ugandans of Asian origin were expelled and their businesses nationalized or allocated to Government nominees. 3. Under the arbitrary and inept rule of the military regime, events followed a predictable downward course (PR, paras. 3-10, PCR, paras. 3-5). Lacking trained manpower and experience, the newly-created state enterprises and small businesses floundered and became heavily indebted to the banks. Declines in production and fiscal indiscipline helped to fuel rapid infl.-y tion, falling real incomes and a major black market. A dramatic fall in exports, tourist earnings and capital inflows forced a severe cutback in imports of raw materials, parts and consumer goods. Lacking either the incentive or means to continue commercial production, many farmers retreated into subsistence agriculture. In Government, many experienced officers were expelled or left on their own accord, while those who remained were demoral- ized by a breakdown in public service discipline and a drastic fall in living standards. 4. By the end of the war, the monetary economy had all but come to a halt. Shops were empty, industries idle, agricultural e:tates deserted, - 2 - infrastructure destroyed or run down, and basic services barely operating. Law and order had broken down, black market operations and smuggling were rife, and the new Government had few resources and little experience to apply to the task of halting the downward spiral and starting on the long process of recovery. It was clear that the job of reconstruction would not be easy, and that Uganda would need a great deal of external help to succeed. Early Reconstruction Efforts 5. The new Government acted with commendable speed. Its first action was to invite a Commonwealth team to suggest priorities for reconstruction. The report of the teaml/ recognized that reconstruction would have to be a sequential process, requiring not only injections of financial resources and foreign exchange but strong political leadership to restore stability, a rebuilding of the institutional framework of the country, and fundamental changes in the policies and economic management system inherited by the new Government. 6. In October 1979, the Government adopted a two-stage strategy for reconstruction, largely based on the Commonwealth team's proposals. In the first phase, estimated to last six months, the priority was to restore essential services and imports, break crucial bottlenecks, and restore the production and sale of major export crops. The second phase of reconstruc- tion provided for the initiation of a medium-term investment program to rehabilitate the key productive sectors and social infrastructure. 7. In October 1979, the new Government issued an economic and social policy statement which formed the basis for the reconstruction program supported under the First Reconstruction Credit. The statement outlined the Government's general economic philosophy and indicated the directions in which it hoped to move. The program outlined a comprehensive strategy for reviving the productive sectors, alleviating bottlenecks and addressing the more serious administrative and policy problems, particularly fiscal policy and the overvalued currency, which had been inherited from the previous regime (PR, paras. 20-38). While in many areas specific policies had still to be firmed up, the Bank appraisal mission considered that the new Government's rehabilitation strategy was generally sound. 8. The Government also backed up its policy statements with a number of actions during the first few months of its rule. Agricultural producer prices for export crops were increased in July 1979, a National Planning Commission was established, and the Government set up a task force to review parastatals. The Government also appointed a Compensation Committee to investigate and negotiate the claims of expropriated businesses, and reestab- lished systems for allocating foreign exchange and regulating public procure- ment to eliminate the serious abuses that had occurred under the previous regime. 1/ The Rehabilitation of the Economy of Uganda, Commonwealth Secretariat, London, June 1979. - 3 - 9. Uganda faced a formidable task in finding the foreign exchange needed for reconstructing the economy. It was estimated that over US$1,000 million imports would be required to support the first phase of reconstruc- tion, and that a large proportion of these would have to be financed through quick-disbursing forms of assistance. However, the Bank estimated that commitments of external assistance were sufficient to finance only about two-thirds of Uganda's projected requirements, and that the first phase of reconstruction would almost certainly prove to be more protracted than originally planned (PP, para. 43). 10. The Government made early use of IMF facilities. Ia June 1979, Uganda drew its gold tranche (SDR 5.6 million) and in August SDR 5 million under the Compensatory Financing Facility. In December 1979, a comprehensive budget and financing plan were prepared and reviewed by IMF (PCR, para. 26). This enabled Uganda to draw a further SDR 55.5 millicn under the First Credit Tranche, Trust Fund and Compensatory Financing Facility early in 1980. The Bank's Response2/ 11. At the invitation of the new Government, a Bank reconnaissance mission visited Uganda in July 1979 to identify assistance needs. The Government requested Bank Group support in five areas: - a reconstruction credit to provide emergency foreign exchange; - the reactivation of the project pipeline, - assistance in coordinating aid; - assistance in development planning and project preparation; - establishment of a resident mission in Kampala. 12. The First Reconstuction Credit. The Bank acted quickly on the request for program assistance. The reconnaissance mission was followed by an appraisal mission in September 1979, which confirmed the need and justification for quick-disbursing assistance until normal project lending could start to have an impact, and recommended an initial IDA credit of US$50 million. Subsequently, the Bank was able to put together a much larger assistance program, in collaboration with other donors. The IDA contribution was increased to US$55 million and a participation by the Netherlands Government, equivalent to US$17.5 million, expanded the credit approved by the Executive Directors in February 1980 to US$72.5 million. In addition, the IDA credit was supplemented by a Special Action Credit (equivalent to about US$20 million at the time of agreement) a grant of Can$3 million (an equivalent of US$2.6 million) from the Government of Canada, and a loan from 2/ The term "Bank- is used throughout the audit to refer to both the Bank and the Association. the OPEC Fund of US$5 million. In total, therefore, the Bank had a mandate to administer a package of over US$100 million of concessional finance.3/ 13. Other Bank Assistance. In addition to its rapid processing of the First Reconstruction Credit, the Bank Group also attempted to respond to the Go-ernment's other requests for assistance (see para. 11). To help rehabili- tate key sectors of the economy and rebuild a pipeline of projects, a number of Bank projects staff visited Uganda in 1979 and 1980, with the result that a total of six new projects were approved by the Executive Directors through FY83, in agriculture, industry, mining, water supply, posts and telecommuni- cations, and education. The Bank also provided two technical assistance projects and resumed responsibility for executing a UNDP-financed project to provide assistance to the Ministry of Planning and Economic Development.4/ Finally, to help coordinate a wider assistance effort, the Bank convened a Consultative Group meeting of donors in November 1979 and appointed a resi- dent representative in Kampala in July, 1982. II. THE FIRST RECONSTRUCTION CREDIT Objectives and Design 14. According to the President's Report, the first credit had three objectives: - To provide a quick-disbursing source of assistance to help meet Uganda's urgent short-term foreign exchange needs. The report endorsed the Commonwealth team's view that the lack of foreign exchange was the most immediate constraint facing the country, and concluded that "project or sector lending could not accomplish the rapid resource transfer which is required for short-term recor- struction; only flexible program lending can meet the urgent reha- bilitation needs of the economy" (PR, para. 50). - To support the revival of the productive sectors of the economy, by reestablishing the flow of essential imports of inputs, and thus lead to "increases in the output of agricultural export crops and basic consumer goods for domestic consumption" (PR, para. 50). - To support the Government's reconstruction program by "strengthen- ing the capacity of the Government to carry out further policy 3/ In the case of the OPEC Fund loan, the Bank's administration was limited to the review of documentation on behalf of the Fund. 4/ Total commitments by the Association during the period FY79-83 were US$309 million, of which US$125 million were for program lending and US$8 million for free-standing technical assistance credits. reforms." In particular, it was suggested that an improved supply of imports would "enable the Government to carry out an exchange rate adjustment in the near future" (PR, para. 51). 15. The "project" supported by the financing package was defined as the implementation of a program, including the provision of the requisite foreign exchange, for the importation into Uganda of essential capital and intermediate goods and raw materials, as more particularly set forth in the Economic Reconstruction Program" (DCA, Schedule 2). 16. Procurement and Disbursement. To allow maximum flexibility in the use of the financing package, five broad SITC categories of imports were made eligible, subject only to a negative list of items (DCA, Schedule 1). In an attempt to ensure rapid disbursement, ICB was limited to contracts of over US$2 million. All other procurement was based on existing Government procedures for competitive bidding or price and quality review of bids (PR, paras. 60-61, PCR, para. 24). The Canadian grant and IDA credit (including the Dutch participation) were available for financing imports from any Bank Group member country and Switzerland; procurement under the Special Action Credit was tied to EEC Member States and developing country members of IDA. 17. Disbursements were to be made against full documentation, including invoices paid by the Bank of Uganda or commercial banks or under existing procedures controlling the allocation of foreign exchange which had been reviewed by the Bank. All major government imports had to be approved by the Central Tender Board which reviewed prices and quality standards and assessed priorities. A similar function was performed in respect of parastatals and private importers by the Uganda Advisory Board of Trade. The Foreign Exchange Allocation Committee of the Bank of Uganda reviewed the recommenda- tions of both these bodies before issuing a foreign exchange license. 18. It was agreed that the Bank of Uganda would be responsible for collecting the necessary documentation, submitting withdrawal applications and maintaining accounts. Since the import requirements of the items eligible for disbursement were estimated to amount to almost US$400 million in the first phase of reconstruction, no difficulty was foreseen in identifying eligible items. Having reviewed the procurement and disbursement arrangements, Bank staff estimated that the funds provided by the financing package would be disbursed in 3-4 months. 19. Policy Conditions. Although the appraisal mission emphasized the need for emergency aid and considered the progress made by the Government sufficient to justify such assistance, Bank management was concerned to ensure that additional policy reform would be undertaken, particularly on the exchange rate. In its discussions with the Government during the preparation and appraisal of the credit, the Bank's staff concentrated on three key policy areas in which satisfactory progress would be required: - the need for a satisfactory overall economic and social policy framework to guide reconstruction; - 6 - - the need for firm steps to be taken to restore fiscal accountability; and - the need to deal promptly with the distortion in the exchange rate. 20. The Bank was generally satisfied with the progress made in dealing with these first two subjects. The Government's overall strategy for reconstruction, largely based on the Commonwealth team's proposals, had been formally stated in a "White Paper- and backed up by encouraging actions, particularly in price adjustments and measures to reestablish the machinery of government (para. 8 above). Moreover, by the time the credit was negotiated, the Government had prepared a comprehensive adjustment program, including an exchange rate policy and a budget and financing plan, that was satisfactory to IMF. 21. However, on the exchange rate issue, the position of the Bank gradually hardened during the course of 1979. The appraisal mission, while stressing the importance of an exchange rate adjustment, accepted the Govern- ment's position that devaluation should be carried out as part of a package of reconstruction measures. It recommended that devaluation should not be made a condition of the proposed credit, but that Government should be urged to declare its intention on exchange rate adjustment in a letter of intent and advised that a devaluation would have to be carried out before a second credit (in FY81) could be considered. 22. This strategy was endorsed by regional management, but during negotiations in December 1979 the Government's draft letter of intent was felt to be not sufficiently precise on the size and timing of adjustment, and management requested clarification of the Borrower's intentions before the credit was processed further. In a subsequent, supplementary negotiation, senior Bank management presented the Borrower with three options: to take satisfactory measures on the exchange rate before the credit; to agree to a tranching formula for the credit, with the second tranche tied to exchange rate action; or to schedule two separate, smaller operations, where the second credit would similarly be tied to exchange rate action. 23. The Borrower subsequently agreed to a tranching arrangement. Thus, while the full amount of other cofinancing was eligible for disbursement upon effectiveness, the IDA credit (including the Dutch participation) was to be disbursed in two tranches to provide for a mid-term review of the Govern- ment's progress in implementing the program of policy reforms. The first tranche of US$30 million was available upon effectiveness; the second tranche of US$42.5 million would be released only if "the Association is satisfied with respect to the progress achieved by the Borrower in carrying out the reconstruction of the Ugandan economy" (DCA, Schedule 1, para. 2[f]). (See also paras. 44-45) -7- Implementation of the Program 24. The First Reconstruction Credit was approved by the Executive Directors on February 19, 1980 and declared effective on May 1, 1980. Almost immediately after this, the Ugandan Government that had drawn up the recon- struction program and negotiated the financing package was overthrown by a Military Commission, and on May 23 the Association informally suspended dis- bursements under all effective credit agreements. This poor start heralded a long and difficult implementation period for the credit. In summary, the chronology of events as detailed in the PCR was as follows: - July, 1980. A senior Bank staff mission visited Uganda for discussions with the new administration. It reported that the economy was in a poor state (PCR, paras. 15-18), that there was as yet no effective policy framework for the management of the economy, and that the process of rehabilitation would be a much more complex and time-consuming task than originally envisaged. In view of these circumstances, the Association proposed to the cofinanciers that the use of the credits and grant should be limited to a list of specific items, which could be verified by review missions ,5/ and that disbursements should be temporarily limited to US$25 million. It was agreed that both restrictions should be reviewed after the elections scheduled to be held before the end of 1980. - May-June, 1981. Following the elections of December 1980, the new Uganda Peoples' Congress Government agreed with IMF on a comprehen- sive economic stabilization program, irtluding the introduction of a floating exchange rate, producer price increases, fiscal reforms and other measures (PCR, para. 20). As a result, the Association agreed on June 15 to release the balance of the credits and grants, including the second tranche of the IDA credit. - October, 1981. A Bank supervision mission reported that less than US$19 million had so far been disbursed, with another US$25 million committed. From this point on, the supervision process focussed on the procurement and allocation procedures, and on measures to accelerate disbursements and assess the impact of the credit. - January, 1982. A full supervision mission, including a senior pro- curement advisor and a disbursement specialist, thoroughly reviewed procurement and disbursement procedures, and agreed upon improve- ments. - June, 1982. The credit was fully committed. - December, 1982. The credit was closed, after two extensions, and fully disbursed by the end of FY83. 5/ See PCR, para. 19 and footnote for list of specified beneficiaries. -8- Use of the Credit 25. Disbursements. Disbursements were much slower under the financing package than had been hoped for. Total disbursements were as follows: IDA Credit /a Special Action Canadian OPEC Fund 983-UG Credit 54-UG Grant Ln. 172-PG Total Us$ million US$ million US$ million US$ million US$ million (equivalent) (equivalent) (equivalent) FY80 - - - FY81 3.0 0.2 - - 3.2 FY82 30.9 13.8 2.6 4.6 51.9 FY83 38.6 0.9 - 0.4 39.9 Total 72.5 14.9 /b 2.6 5.0 95.0 /a Including participation of the Netherlands. 7T The US dollar equivalent of the EEC credit, that had been denominated in a basket of seven currencies, fell to US$14.9 million, following the appreciation of the US dollar. 26. Procurement. Most goods financed under the financing package were procured under local competitive bidding procedures. Procurement by supply- ing country is shown in Attachment 1. Over 60 percent of goods procured under the IDA credit were supplied by three countries - United Kingdom, Germany and Kenya.6/ 27. Allocation by Beneficiary. The proceeds of the financing package were allocated to over 60 beneficiaries in the private and public sectors (PCR, Annex 1). The audit was unable to obtain full information on the allocation of the proceeds. However, a partial analysis of actual disbursements shows the following distribution by type of beneficiary: Sector No. of Disbursements Z of beneficiaries (US$ million) total Agriculture and agro-processing 15 34.2 47.4 Beverages 4 4.8 6.6 Textiles, clothing, shoes 9 6.8 9.4 Wood and paper 4 3.6 5.0 Construction and building supplies 8 7.5 10.4 Metal industries 9 8.5 11.8 Public utilities 2 2.0 2.8 Chemicals 3 2.9 4.0 Other 7 1.9 2.6 Total 61 72.2 100.0 Source: information supplied by Eastern & Southern Africa Regional Office. 6/ The same three countries accounted for even larger proportions of the Special Action Credit (84%) and the Canadian grant (70%). - 9 - Some of the largest beneficiaries were: sugar enterprises (US$9.6 million), Coffee Marketing Board (US$6.8 million), manufacturers and textiles (US$6.7 million), beverages (US$5.7 million), cigarettes (US$4.3 million) and clothing (US$4.0 million). 28. Use of the Proceeds. The audit was unable to obtain a full break- down of the goods financed under the financing package according to SITC. According to partial information provided by the Government, about 50 percent of the funds were used to import spare parts and capital ioods and about 40 percent was used to finance raw materials and other inputs.'/ III. ACHIEVEMENTS AND CONSTRAINTS Introduction 29. It is difficult to assess the achievements of this first credit for two reasons. First, as described earlier, the credit was only the initial step taken by the Bank to support Uganda's reconstruction program and has been followed by further reconstruction credits and other assistance. It is clear, therefore, that only preliminary conclusions can be reached at this stage and that a more meaningful evaluation of the Bank's non-project lending to Uganda should be made later in the series. Second, it has to be recog- nized that the circumstances that existed at the time the credit was approved were unusual. The need for external assistance-and for the Bank to take a lead in providing such assistance-was urgent. Yet with the economy in ruins and the Government trying to rebuild its own capacity, Uganda was clearly unlikely to make optimum use of such assistance. In such circumstances, the criteria for evaluating project success may be rather different from those normally applied. Resource Transfer 30. The credit quite clearly failed to meet its original intention of supporting the first stage of reconstruction (envisaged as lasting six months), since nothing was disbursed during this period. Nor did the credit achieve its more general objective of providing a quick-disbursing source of foreign exchange, since it took a full three years to disburse the credit, compared with the four months originally expected (PR, Summary of Proposed Project). 31. The relative contribution made by the proceeds of the IDA credit to Uganda's foreign exchange requirements is shown in the following chart. 7/ Survey on the Impact on the Economy of the First IDA Reconstruction Credit, Ministry of Finance and Economic Development, July 1983. - 10 - ZAD 22D 2eD - Current Account Deficit 7.0 220- 200 ISO o 8a 140- I 12D IMF Withdrawals 0 1 00 - 60-0 40- .0.1.,ac._DsUree,t 79 80 a1 82 3 Cal rder Yepr:z Source: data derived from Table 3.1 of Report No. 4733-UG, plus Bank disbursement data (on FY basis). 32. Disbursements under the financing package made the largest contri- bution to Uganda's resource gap in 1982, when they accounted for nearly 30 percent of the current account deficit. The first credit and its associated cofinancing were relatively unimportant as a source of foreign exchange in other years. 33. The main reason for the slow rate of disbursement, apart from the initial informal suspension, is to be found in the procurement and disburse- ment procedures followed under the project. A rapid disbursement of a program loan is normally achieved by separating procurement and disbursement procedures: that is to say, that the proceeds of the loan or credit should be used to r-imburse the costs of imports procured under previously approved contracts. However, in the Uganda case, it was decided for special reasons (see para. 35) to disburse only against goods procured under new contracts approved after loan signing. This procedure inevitably slows up the rate of disbursement, at least in the start up period. Even under favorable country circumstances, it may take many months from the time an importer applies for a foreign exchange allocation for an import item, until the item arrives and the foreign exchange cost is reimbursed. - 11 - 34. Although the need to delink the procurement and disbrsement procedures was recognized during the preparation of the project_/, the actual procurement procedures used under the financing package were in fact tied to the issuance of import licenses and the local tendering procedures of the Central Tender Board (CTB). Apart from the delays inherent in this kind of ex ante approval, the local procedures themselves exhibited various weaknesses which further delayed the Implementation of the project (see also PCR, paras. 24-28): - the procedures for obtaining import licenses were over-elaborate; - the CTB lack experienced staff, and its capacity was further strained when it took over responsibility for procurement of sup- plies for parastatals as well as central government; - there was no minimum threshold set for CTB's activities, with the result that it was inundated with many small contracts for review and tender; - Ugandan officials and importers were unfamiliar with Bank pro- curement rules-including the "negative list" applied to this project-and in some cases attempted to procure ineligible items; - many importers preferred to continue using "traditional" supplies, including local stockists, rather than use competitive bidding; - the competitive bidding process was itself difficult under the circumstances existing in Uganda at that time, particularly since international advertising was not always feasible and many suppliers refused to quote on a CIF Kampala basis; and - severe transport bottlenecks-at the port, on the railways, and in road transport-seriously delayed supplies and further impeded the rate of disbursement under the project. 35. Two factors seem to have influenced the decision to use these procedures. The first was the need to exercise some degree of control over the use of the proceeds of the credit-both to direct foreign exchange to the 8/ During a visit to the Bank's regional office in Nairobi, a senior official of the Bank of Uganda was warned that "if the Bank were to agree to earmark funds for specific orders at the time they are placed under our direct payment procedure, or by guaranteeing letters of credit....... the first substantial disbursements from the credit would take place about one year later." He was advised that "it is therefore imperative that we are not concerning ourselves with orders to be placed.... but concentrate on goods for which orders have been placed already and which would enter the country during the next twelve months." (Undated memo to files circa. October 1979) - 12 - highest priority uses as well as minimize misdirection or misuse of imported goods. The second was the fear that there might not be an adequate flow of imports eligible for reimbursements, despite the assurance provided in the PR (see para. 18 above). Whatever the reasons, it is clear that the expected rate of disbursement was unrealistic. 36. An additional objective of the project was to provide a faster resource transfer than could be effected through conventional project lending. This objective was clearly attained, as illustrated by the following figures: Total IDA Disbursements FY80-FY84 USS millions FY80 FY81 FY82 FY83 FY84 Total 1st Reconstruction Credit - 0.69 33.25 38.56 - 72.50 2nd Reconstruction Credit - - - 7.88 26.75 34.63 Total Non-Project Lending - - 33.25 46.44 26.75 107.13 Project Lending - - 1.52 2.72 12.30 16.54 Total All Disbursements - 0.69 34.77 49.16 39.05 123.67 % non-project - 100 96 94 69 87 37. Non-project lending, including both the first and second recorr- struction credits, accounted for nearly the whole resource transfer from the Association in the first four years after the resumption of Bank Group opera- tions, and still accounted for nearly 70 percent of disbursements in FY84. Thus while disbursements under the first credit were disappointingly slow, those under the reconstructed project pipeline were even slower; hence the basic justification for non-project lending was clearly substantiated. Production Achievements 38. A major goal of the credit was to facilitate the revival of produc- tive sectors and thereby increase exports and the supply of consumer goods (see para. 14). Much progress has been made since 1980. There was an upsurge in industrial value added in 1982, although this was not maintained in 1983 and 1984. In monetary agriculture, value added grew by over 10 per- cent in real terms in 1981/82 and 1982/83. The index of agricultural exports grew from 33.3 in 1980 to 48.6 in 1983, compared with the base of 100 achieved in the 1970s. Even faster recovery was achieved by foodcrops which, as a group, had by 1983 reached 85 percent of the peak output levels of earlier years.9/ 39. It is difficult to know how much of this progress towards rehabili- tation to attribute to the first credit. The Government estimated that the 9/ Agricultural Sector Memorandum: The Challenge Beyond Rehabilitation, Report No. 5044-UG, Appendix 1.1. - 13 - financing package financed 64 percent of the value of inputs used by benefi- ciaries during the period 1981-82.10/ This clearly helped to increase capacity utilization in many cases. Some of the increases in the production of strategic materials were impressive: for example cement over 100 percent or roofing sheets 1,000 percent (PCR, para. 32). In some specific cases in agriculture too, production increases can be directly linked to imports financed under the credit (e.g., coffee bags procured by the Coffee Marketing Board). However, the Government survey estimated that the overall capacity utilization of beneficiaries increased by only about 7 percent between the first half of 1981 (when disbursements under the financing package started) and the second half of 1981. By the end of this period, only 5 beneficiaries were operating at more than 50 percent capacity and the majority were operat- ing at less than 25 percent capacity. 40. While a final judgement on impact would seem to be premaLure, it may be questioned on two grounds whether the credit, as designed, could have had a major impact on production in the absence of other supporting mea- sures. First, it appears that under the operating procedures used to allo- cate the proceeds of the financing package, the amount received by beneficia- ries was in general too small to allow them to resume full production. The Government impact survey revealed that in many cases beneficiaries received only part of their requirements of capital replacement equipment or parts, or were unable to import the raw materials needed to bring a rehabilitated plant back into production. 41. Second, it appears that foreign exchange was not the only con- straint--and perhaps even not the major constraint-facing the reconstruction of the economy. Several problems, in addition to the scarcity of foreign exchange, stood in the way of increased production: - Creditworthiness. An important obstacle to using the resources of the credit was the scarcity of local funds and the creditworthiness of the firms; particularly following devaluation (PCR, para. 35). Creditworthiness assumed major importance as a criterion for allo- cating foreign exchange, but the most creditworthy enterprises (e.g., cigarettes) did not necessarily have the highest priority in reconstruction. - Management Problems. Many government enterprises, parastatals and private firms did not have the capacity to benefit from the credit because of weak management or shortage of experienced manpower. The industrial and agro-processing sectors were particularly badly affected by the exodus of Asian managers and professional staff in the 1970s. On the other hand, the smallholder agriculture sector was better placed to begin the recovery process because the basic stock of agricultural experience and entrepreneurial talent had been preserved. 10/ Survey on the Impact on the Economy, oR. cit. - 14 - - General Country Constraints. It appeared from all the accounts available that foreign exchange alone was not sufficient to restart the engines of growth. The productive sectors were faced with a multiplicity of constraints-including transport, communications, water supply and basic living conditions for their staff-which the credit was not designed to relieve. It is hoped that these questions will be more carefully examined in a future audit when the impact of the series of reconstruction credits can be more fully assessed. Policy Achievements 42. Perhaps the most valuable achievement of the first credit was in supporting critical policy decisions both before credit approval and after- wards. It should be recognized of course that the Uganda Government is pri- marily reponsible for the major policy decisions taken since 1981. However, the first and subsequent reconstruction credits provided the Bank with a means to support and encourage the agents of change within Uganda, and it appears that the Bank was able to help shape and accelerate many of these decisions, in close collaboration with IMF. IV. SELECTED ISSUES AND CONCLUSIONS Feasibility 43. In presenting the credit to the Executive Directors, the Bank's management emphasized its importance in effecting a rapid resource transfer to help meet the urgent rehabilitation needs of the economy, and projected a disbursement period of four months. In retrospect, this objective was obvi- ously over-optimistic, and it was later realized that the process would be much more difficult and protracted than originally thought. However, the objective of such rapid disbursement had perhaps never been feasible-even without the subsequent political upheavals-for the following reasons: - The original credit, which permitted the procurement of a wide range of goods, subject only to a negative list, was not well tar- geted. A liberal procurement system can be expected to facilitate rapid disbursements under normal conditions, when a large ongoing program of imports is eligible for reimbursement. However, this was not the case in Uganda. Despite the fact that the -project" was legally defined as "the implementation of a program... for the importation into Uganda of essential capital and intermediate goods and raw materials" (DCA, Schedule 2), no such program was in exis- tence at the time the credit was approved, or for some time after. The effect of the procurement arrangements was to disperse the proceeds over too many beneficiaries and thus reduce the overall impact. - 15 - - Despite the urgent need to obtain foreign exchange, both the Ugandan authorities and the Bank tended to place emphasis on restoring discipline to the foreign exchange allocation and pro- curement procedures, which had virtually been destroyed during the previous regime. This decision by itself made it very unlikely that the goal of rapid disbursement could be achieved (see also paras. 33-35). - While the PR focussed attention on the urgent need for foreign exchange to stimulate a renewed flow of essential imports, it was apparent that foreign exchange alone was not sufficient to restart the economic machine. The economy also faced major bottlenecks-- including transport, management and local credit funds--all of which acted as a brake on the reconstruction process. Yet these bottlenecks were not directly confronted under the first recon- struction credit; nor could project lending have any immediate impact on such factors during the crucial first stage of rehabili- tation. - A particularly serious constraint was the institutional capacity, in terms of experienced manpower, management ability, procedures, etc., in both the public and formal private sectors. Recognizing this need, the Association approved a technical assistance project in December 1980 and served as executing agency of the UNDP Planning Assistance project signed in January 1982. However, the implementation of both projects was slow. The first major subpro- ect under the TA credit was approved only in February 1982.1 Given the difficult circumstances in Uganda, these delays were only to be expected. But even had there been no delays, these projects would have not been able to provide technical assistance when it was most needed in support of the early reconstruction efforts. The first TA project was approved only in December 1980--when the first reconstruction project had originally been forecast to close--and could not reasonably have been expected to have had any noticeable impact until late 1981 or 1982. Use of Conditionality 44. The project was first conceived by the Bank staff as an emergency operation, similar to a -reconstruction after disaster" project, and justi- fied on the basis of (a) obvious need, (b) steps already taken by the Govern- ment to initiate reconstruction activities, and (c) a statement of intention to initiate further action. However, during the preparation, review and negotiation of the credit, it progressively took on aspects of a policy-based project, including tranching tied to "the progress achieved by the Borrower in carrying out the reconstruction of the Uganda economy" (DCA, Schedule 1, para. 2[f]). Il/ The Second Reconstruction Program, supported under Credit 1252-UG, also provided technical assistance to help improve the rate of utilization. - '6 - 45. This use of conditionality in the reconstruction credit raises two separate issues. First, there is a potential trade-off in pursuing the dual objectives of rapid disbursement and policy reforms within the same project. Bank policy recognizes that emergency operations, such as disaster or reconstruction projects, are generally not -suitable vehicles for policy reform or institutional development.- 12/ For this reason it might have been more realistic to have planned two separate operations, as originally proposed by the Bank staff. 46. Second, while de facto the primary policy concern of the Bank was to accelerate action on the exchange rate, the de jure conditions for the release of the second tranche included in the DCA went much further, by requiring that the Association should be satisfied with the progress achieved by the Borrower "in carrying out the reconstruction of the Ugandan economy- (DCA, Schedule 1, para. 2[f]). Such a provision has the effect of giving the Association wide discretionary powers, while failing to specify either the precise terms on which IDA financing will be provided or the timing of such financing.13/ Role of the Bank 47. The experience under the credit raises certain questions about the appropriate role of the Bank in circumstances similar to those existing in Uganda in mid-1979. First, the Bank is not well suited to give emergency relief, either in physical or human resource terms. In this case there was reason to question whether the minimum conditions were in place to ensure the proper use of IDA funds, and in the event it took three years before there was a net positive flow of resources from the Bank Group. Second, the Bank is not as flexible as other donors in providing technical assistance personnel, and the supporting infrastructure and services needed for their operation, quickly and efficiently. Third, it appears that the Bank's capacity in the 1970s was not commensurate with Uganda's urgent and complex needs. Bank staff have pointed out, for example, that the regional office had no economists or loan officers assigned to the Uganda desk on a full-time basis during the preparation/appraisal period. 48. For these reasons, it is difficult even in retrospect to suggest what might have been done differently. It is possible that more selective targeting of the proceeds of the credit-in support of a smaller but 12/ See Operational Policy Note No. 10.07, para. 24. 13/ An earlier OED report, in criticizing such legal conditions, recommended that a covenant should define "specific actions concerning the execution or operation of the project that relate to basic project objectives, that can be stated in precise terms and are firmly agreed to be undertaken within a reasonable time period." Operational Policy Review: Compliance With Loan Covenants, Report No. 4090, September 1, 1982, para. 3.07(c). - 17 - well-defined action program--might have helped to allocate the funds to priority uses from the beginning, and to ensure greater impact. It might also have been possible for the Bank to have provided staff technical assis- tance, in conjunction with other donors, to assist the Government in defining a first phase reconstruction program. Following the general strategy pro- posed by the Commonwealth team, this might have: - determined the key agencies that warranted priority and identified the most urgent needs for their initial rehabilitation (including equipment, materials, credit and manpower); - initiated actions to alleviate key bottlenecks (including trans- port, water, and housing and other services for TA personnel); - Initiated immediate procurement of the most obviously needed goods; and - identified an initial set of documents for early reimbursement under the credit. IDA Administration and Coordination 49. The audit raises certain questions about the responsibilities of the Bank Group in regard to the funds it administers on behalf of other financiers. An examination of the files suggests only sporadic attempts by Bank staff to keep other donors informed on progress or to consult with them before taking actions. Compared with the frequency and intensity of internal clearance procedures, contacts with cofinanciers were few and not in propor- tion to their contribution. This led to a complaint by the Government of the Netherlands during implementation that the Bank was not providing it with supervision reports and other materials. 50. It appears that communications have improved considerably in subse- quent operations, partly because of improved donor coordination at the coun- try level. However, much seems to be left to the initiative of individual Bank staff whether or not documents are made available to cofinanciers, or to the cofinancier to request such documents. Given the increased importance of cofinancing in the Bank's overall operations, this position cannot be regarded as satisfactory, and it is suggested that a more formal and systema- tic procedure for communication and consultation with cofinanciers should be considered. In particular, to avoid subsequent misunderstandings, it might be useful to specify what documentation will be provided to each cofinancier, either in the relevant umbrella agreement or in a project-specific exchange of letters. 51. Another issue concerns the efficiency with which the Bank disburses and accounts for the funds it administers under cofinancing agreements. Some cofinanciers have pointed out the need for better financial reporting (see Attachment 2), particularly in regard to the timeliness of reports, and that there have been delays in the draw-down of funds they provided. Since not - 18 - all donors require the same level of reporting, this is another matter that might be addressed in more detail when cofinancing arrangements are being discussed and clearly defined in the agreement or supplemental letter. How- ever, these complaints further suggest that there may be systemic problems within the Bank arising from the increasing administration of cofinancing funds, particularly since the administrative costs of accounting and report- ing are at present borne entirely by the Bank. While this subject was beyond the scope of the audit, it appears that a wider review might be desirable. 52. The audit also investigated a complaint by the Dutch Government which relates to the denomination of its contribution in terms of US dol- lars. Following the appreciation of the US dollar, the Government found itself committed to provide a substantially larger Guilder contribution than it had budgeted for. This was a departure from the normal practice in cofi- nancing arrangements for cofinanciers to denominate their contributions in their own currencies, and its acceptance was apparently an oversight on the part of the Dutch Government, possibly because it was expected that the credit would be disbursed in a few months. Conclusions 53. The achievements of the first credit may appear modest in terms of the expectations that the Bank set for it. But it became clear soon after the credit was approved that these original expectations were over-optimistic and that the process of rebuilding the Ugandan economy would be much more difficult and time consuming than first thought. In particular, it was not possible to achieve the rapid transfer of resources which, according to the PR, was the primary goal of the first credit. 54. However, the credit should be judged against the reality of the situation in Uganda in the early 1980s. The approval of a relatively large sum for this first credit was an act of faith by the Bank Group which has been justified by the progress subsequently made by Uganda in reconstructing its economy, even though this progress has been uneven and at times hesitat- ing. A full assessment of its impact cannot be made at this time, both because it constituted only the first in a series of reconstruction credits, and because it has to be seen in the context of the Bank's much larger pro- gram of project lending, country and economic sector work and aid coordina- tion activities. However, as an initial contribution to the reconstruction process, the first reconstruction credit clearly had benefits that cannot be easily quantified. First, despite the delays in disbursements, the financing package did provide valuable foreign exchange and thereby bought time both for the Uganda Government to get to grips with its problems and for the Bank to put together a pipeline of project-related investment financing and tech- nical assistance. Second, it helped to establish the Bank's credibility with the new government and provided an opportunity to initiate a dialogue on a wide range of economic policy and management decisions. Third, by committing a large sum of IDA funds, in association with substantial commitments from its cofinancirag partners, the Bank lent credence to its leadership of the consultative group. - 19 - 55. The challenge that faced the Bank in Uganda in 1979 was unusually difficult. However, the experience under this credit does suggest some les- sons that might apply to other emergency reconstruction projects, even in less desperate situations: - the Bank needs to be realistic about what can be achieved in any given time period and what it can reasonably contribute; - individual allocations to beneficiaries under the project should be sufficient to meet all their requirements; - if foreign exchange is not the only major constraint, a more com- prehensive program may have to be supported by the Bank to ensure success; - it should be recognized that there are trade-offs between providing short-term assistance and longer-term policy and institutional changes, and between rapid disbursement and effective control over the use of funds; these risks should be assessed explicitly and a determination of priority made; and - the Bank may have to find some way to make TA available quickly, either directly or in conjunction with other donors. - 20 - Attachment 1 UGANDA FIRST RECONSTRUCTION CREDIT: DISBURSEMENTS BY SUPPLYING COUNTRY Disbursements IDA Credit Canadian Grant EEC Credit OPEC Fund Loan (US$1,000) (Can$1,000) (US$1,000) (US$1,000) equivalent Country United Kingdom 18,364 2,101 5,120 1,022 Fed. Rep. of Germany 15,257 - 5,582 51 Kenya 10,375 - 1,906 136 Switzerland 8,239 - - - Belgium 6,020 - - - Japan 2,511 - - - Sweden 2,279 - - - Netherlands 2,005 69 - 1,400 India 1,465 144 933 - United States 1,202 363 - Turkey 1,100 - - Italy 701 - 991 Bangladesh 684 - - France 667 - 23 - Denmark 174 - 339 2,384 Canada 7 W0 - - Sub-Total 71,050 2,677 14,894 4,993 Other suppliers 1,450 323 /a 35 - Total 72,500 3,000 14,929 lb 4,993 'c /a Including Can$300,000 from Canada. /b The balance of US$5.1 million equivalent was accounted for by charges in the US$ value of the original basket of currencies. /c Commitment data. - 21 - Agmnce canadienne de Canadian I t ATTACMNT 2 d6veloppement nWemational Development Agency AAM T Page 1 A M*M* L. OUM= Comments from the Co-Financier camft cNaft .February 19, 1985 0". reWde Our ft 942/10801 (with attach) Mr. Yukinori Watanabe 942/10799 Director Operations Evaluation Department THE WORLD BANK 1818 H Street N.W. WASHINGTON, D. C. U.S.A. 20433 Dear Mr. Watanabe: Thank you for your letter dated February 4, 1985 and the draft program performance audit report on the IBRD First Reconstruction Credit to Uganda (Cr. 983-UG). The audit report is quite comprehensive in its analysis and points out the problems in implementation of the project experienced by all donors. I doubt that there are more matters to list or recommendations to make. I would, however, like to see a more forceful recommendation [see para. to IBRD management regarding the development of improved reporting 51 of PPAM] between IBRD and contributory donors; as well as a more detailed recommendation on improved financial record maintenance and reporting. I know that the Reconstruction II credit which was provided by IBRD to Uganda attempted to provide increased technical assistance to Uganda (see para. to improve the speed of utilization. While I realize your audit was 43 limited to Reconstruction , believe that a preliminary review of and foot- the second credit would show this and it would seem appropriate to note 10] reflect this in the present audit. I should be grateful if you would forward to me a copy of the final audit for our files. Yours very truly, S.M. Jenkyns Country Program Director Kenya/Uganda Program Anglophone Africa Branch Canad" ATAChaENT Z - 22 - Page 2 Comments froa the Co-Financier como OF THE EUROPEAN COsMMES _ _s. 2Bruss_eL_5 fl..o.ir ownlopment Mr. Y. Watanabe Director Operations Evaluation Department The World Bank 1818 H. Street N.. Washington D.C. 20433 U.S.A. Dear Mr. Watanabe, Re Audit of First Reconstruction Credit Uganda (CR. 983-UG) Thank you for your Letter of February 4, 1985 and for the copy of the"draft audit report on this programme, addressed to Mr. Lester. The report is in general useful. The problems of slow disbursement related to the weakness of the central tender board on the one hand, and patchy availability of Local cover on the other, are reviewed in a way which pro- vides some insights for future activity. The problem of reconciling the objectives of rapid disbursement and policy [now para. guidance (paragraph 53) is also helpfully identified. Technical assistance 55 of to ease this constraint can perhaps be of use : the central tender board PPAM] would appear to be a useful focus for such help. In terms of the traditional role of auditing, the report is satisfactory with respect to the IDA credit. It is of course not yet complete with respect to the Special Action Credit. When this aspect has been covered in the same manner as the IDA credit, the report will be reasonably complete. This observation is echoed by the concern expressed in paragraph 49; it is [see para. made more pertinent by the incomplete information in attachment 1, which 25 of ppAM raises doubts as to the use of the balance of disbursements over and above and foot- the US S 14,929 miLLion for which the supplying country is identified. note (b) added to Yours sincerely, Attachment 1] G. Livi Director cc : Mr. Lester Prowsonal adress Rue de la Lom 20. 8-1049 Brusafe - Telephone 2511i1i - Telegraphoc addren: -COMEUR Brugseeit Telex."-COMEU B 21677r - 23 - PROGRAM COMPLETION REPORT UGANDA - FIRST RECONSTRUCTION PROGRAM (IDA CREDIT 983-UG/EEC-54-UG) I. Introduction 1. In response to a request by the Government for emergency foreign exchange relief support, discussions between the Bank Group and the Ugandan authorities were initiated in June 1979. The program to be financed was appraised in September 1979; negotiated in December 1979; approved by the Executive Directors in February 1980; and became effective on May 1, 1980 as the First Reconstruction Credit to Uganda (IDA Credit 983-UG of US$72.5 million)1/. Cofinancing was provided by the EEC (Special Action credit of US$2O.U million), and the Canadian Government (a grant of Can$3.0 million). The OPEC Fund also provided a loan of US$5.0 million in support of the Government's reconstruction efforts. 2. The credits and the grant were originally expected to be fully disbursed within three months. However, during the nine months following approval by the Executive Directors there was a dramatic deterioration in the political situation in Uganda. The original Closing Date was extended twice for a total of 24 months; the credits were closed on December 31, 1982. II. Background to the Reconstruction Program2, 3. When the military regime (1971-79) was ousted in April 1979, the Ugandan economy was in ruins. This period was characterized by the departure of many of the country's skilled citizens and an overextension of the parastatal sector due to the Government's seizure and control of properties of expelled Asians. The monetary sector was undermined by adverse external factors such as the post-1973 oil price increases and the breakup of the East African Community in combination with internal maladministration. The dramatic decline in export production and the supply of foreign exchange gave rise to a flourising -magendo- (black market) economy. Real GDP stagnated from 1970-79, with real per capita incomes declining bj about 30%. The savings rate fell sharply to less than 8% of GDP during 1971-78 and with very limited external capital inflow, new investments were curtailed and hardly any development projects were started. Plant and equipment became obsolete and existing infrastructure and productive assets were not maintained. 4. The country's poor balance of payments during these years reflected the deterioration in the economy. During 1970-75, the 1/ Including US$17.5 million Netherlands Government participation. 2/ Details in World Bank: Uganda, Country Economic Memorandum 1982, and Dudley Seers, et al: The Rehabilitation of the Economy of Uganda, a report by a Commonwealth team of experts, June 1979. - 24 - purchasing parity of exports declined by more than 60%. Net capital inflows declined from US$30 million per year in 1971 and 1972 to US$12 million in nominal terms in 1975/76. By 1978, agricultural exports had declined to 40% of their 1970 level. Tourism (the third foreign exchange earner after coffee and cotton) virtually ceased while the military regime spent freely on Government imports through cash payments and short-term credits. The cumulative balance of payments deficit during 1970-78 amounted to US$130 million of which US$100 million were arrears. Despite these arrears, import volumes in 1978 were less than half their 1971 level. The coffee boom in 1977 brought about an improvement in the balance of payments and caused the partial lifting of import restrictions; however, with the fall in coffee prices in 1978 import restrictions were reimposed. 5. The pervasiveness of "magendo" and the decline in production in the monetary economy severely eroded the central Government's financial position in the 1970s. Total revenues increased from USh. 1.3 billion in 1970/71 to USh. 3.4 billion in 1976/77, but expenditures rose from USh. 1.9 billion to USh. 5.2 billion during the same period. Government operations were totally devoid of fiscal responsibility and routine expenditure control; the deficits were financed from borrowings from the banking system. Net domestic financing increased from USh. 350 million in 1970/71 to USh. 1.6 billion in 1976/77. III. The First Reconstruction Program 6. A Commonwealth team of experts was invited by the new Government in April 1979 to review the economy and advise on appropriate reconstruction measures. The team proposed a phased program of rehabilitation based on improved import supply and administration and policy reforms. The lack of foreign exchange was identified as the most critical bottleneck in the short term rehabilitation effort3/. 7. The key areas identified for urgent Government action in the first phase (six months) were: (a) to improve export performance, producer prices should be increased, and measures taken to relieve existing transport and marketing constraints; (b) to ensure that the limited foreign exchange available was allocated effectively, the foreign exchange budgeting and import licensing procedures needed to be strengthened; (c) to reduce leakages into the "magendo- economy, price controls were to be relaxed with the Government capturing windfall profits through devaluation or a combination of foreign exchange auctioning and higher taxes. 8. The second phase (18 months) of reconstruction was to consist of medium-term investments to rehabilitate key productive sectors and social infrastructure. 3/ Dudley Seers et al, op. cit. - 25 - 9. A Bank Group reconnaisance mission which visited Uganda in July 1979 reported that, in view of the recommendations by the Commonwealth team, there was need for the Government to issue a clear economic policy statement and move quickly to establish an effective institutional mechanism for the utilization of external assistance. The Government subsequently issued its policy statement as a White Paper on the Commonwealth team's report. The Bank Group considered the White Paper and the Commonwealth team's report as an adequate basis to proceed with appraising the program credit in September 1979. In addition, during the last half of CY79, the Bank's Project staff visited Uganda to identify rehabilitation projects in the agriculture, DFC, highways, railways, water supply, education and urban sectors. The Bank Group further agreed to revive the UNDP Planning Assistance project, for which it had been the executing agency, in order to improve the country's capability to prepare pre-investment studies. Finally, the Bank Group actively participated in donors' conferences held in Kampala and Paris in September and December 1979 respectively. 10. The appraisal mission which visited Uganda in September noted that the Government's policy statement emphasized rapid economic growth, improved income distribution, equitable regional development and improved social services, as objectives. It also clarified the respective roles of Government, the Cooperatives and the private sector in what would eventually be a mixed economy. The planning machinery was being re-established and a National Planning Commission was to be constituted. It also reported that immediate steps had been taken to increase producer prices and to ease transport bottlenecks; and a Foreign Exchange Allocation Committee had been established in the Bank of Uganda (BOU). 11. The Government had estimated US$1,030 million would be required for imports during the first six months of the reconstruction program (originally July to December 1979). This amount equalled the cost of 1970/71 imports, in real terms, but was considered inadequate to move the economy to the 1970/71 level of production. In 1980, the Government estimated exports to earn US$450 million with US$767 million required as immediate import support from all sources. In the opinion of the Bank Group, however, a more realistic import level for 1980 was US$695 million, including approximately US$434 million in official aid. The proposed IDA credit was to finance replacement equipment for manufacturing enterprises, raw materials and spare parts, agricultural implements and inputs, vehicles and vehicle spare parts in accordance with the Government's foreign exchange budget. 12. The mission recommended that, (i) as a condition for negotiations, a reasonable fiscal and financial program was to be prepared; and (ii) as a condition for a follow-up program credit, the exchange rate should be adjusted. Finally, the mission acknowledged that while its assessment of the capabilities of Ugandan institutions to effectively monitor and utilize the credit proceeds were incomplete, an injection of foreign exchange would improve production. 13. During negotiations, it became evident that significant differences still remained between the Bank Group and the Ugandan authorities on the urgency and timing of the exchange rate adjustments. - 26 - Consequently, the Bank Group.decided to disburse the credit in two tranches; US$30 million at effectiveness and the balance after satisfactory progress had been made in the implementation of the program which included a significant devaluation. The tranching did not apply to the EEC Special Action Credit nor to the Canadian grant. When, however, the Bank Group informally suspended Uganda's right to withdrawal under its credit in May 1980, after the fall of the first civilian government, withdrawal rights under the Special Action Credit and the grant were also suspended. IV. Implementation of the Program A. Summary 14. The implementation of agreed policy and institutional reforms under the program can be said to have been satisfactory (given political events in Uganda during 1980/81). While the speed wlith which the foreign exchange proceeds were utilized was less than satisfactory, the economic impact of the funds was generally positive. B. Policy and Institutional Reforms 15. The Bank informally suspended disbursements to Uganda under all credits after the government was ousted in May 1980 by the Military Commission. A senior level Bank review mission visited the country in July 1980 and reported that the economy was in a -poor state-, having achieved only a "slight increase" in subsistence production. Industry had continued to stagnate with average capacity use estimated to be 20Z. Imports in 1979 were reported to be -nowhere near -the USh 6.0 billion" (US$810 million) which the Commonwealth experts indicated was essential for the first phase of reconstruction. The 1979/80 budget had a huge deficit (USh 3.2 billion; almost two and one -ialf times the forecast). The mission noted that very little effort had been devoted to dealing with the institutional weaknesses in tax administration and expenditure control along the lines recommended by the Bank and the IMF, and concluded that these deficiencies reflected the weakness of leadership and the shortage of qualified staff in the Ministry of Finance. It recommended that unless the Ministry was strengthened, financial planning and control would continue to be problem areas. 16. Regarding price policy reformb, the mission found that attempts to arrest price increases, through administrative controls, had been feeble and largely ineffective." Consequently, -magendo" had "spread to the point where the majority of all economic transactions take place outside of the official market and without any contribution to Government revenues. The mission recommended that, given the prevailing large price distortions, a significant devaluation of the Uganda shilling had become "more urgent if the economy is to be brought back on the course of progressive rehabilitation." 17. The review mission found that the limited foreign exchange that was available to the Government was being allocated prudently by the Bank of Uganda and in accordance with the priorities established by the National Planning Commision. The disbursement of official aid was, however, slow. - 27 - 18. Finally, the mission concluded that much of the momentum of the Government's reconstruction efforts had been lost and was unlikely to be restored before the elections scheduled for later that year. It was hoped that the results would produce a government capable and willing to take critical economic policy decisions. The mission felt that a formal suspension of the reconstruction credits until a new government had been formed, however, would discourage the initiative still left in the country and undercut the commendable efforts made by the Government (the Bank of Uganda in particular) to restore the country's creditworthiness through a cautious and conservative administration of available foreign exchange resources. 19. It was agreed between the Government and the Bank Group that disbursements would be limited to US$25.0 million (including shared portions of cofinanciers) to finance specific items related to a number of high-priority reconstruction projects which could be verified by Bank Group missions as serving agreed purposes4/. These arrangements were to remain in force until the Bank (and presumably the cofinanciers) were satisfied that an effective reconstruction strategy, consistently implemented by the Government, had been established. 20. General elections were held in December 1980 and won by the Uganda Peoples Congress (UPC) with ex-President Milton Obote as leader. The immediate problems faced by the new government were the restoration of law and order, which had seriously deteriorated, and the rehabilitation of directly productive sectors of the economy. In early June 1981, the Government adopted a comprehensive economic and financial program of measures intended to stabilize the economy, establish a framework for rational resource allocation, and provide impetus to the reconstruction effort. These measures included a shift to a floating exchange rate, large increases in producer prices for exports (particularly coffee and cotton), a relaxation of price controls of a number of essential consumer goods, significant tax and other measures to reduce the budget deficit, and restrictions on public sector credit. 21. Following these measures, the Bank Group lifted restrictions on withdrawals and released the balance of tae first tranche of the IDA and EEC credits (US$30.0 million). The second tranche (US$40 million) was also subsequently released. The Government's program was further supported by a 13-month IMF stand-by arrangement for $135 million. In addition, a number of bilateral donors announced increased levels of assistance to Uganda. 4/ Specified beneficiaries were the Coffee Marketing Board (US$6.8 million for trucks and rehabilitation of central processing unit); the Prisons Department (US$1.5 million for agricultural tools); the Ministry of Education (US$2.5 million for educational equipment and materials); the rehabilitation of two tea factories (US$2.5 million), two sugar factories (US$4.0 million), Nyanza Textiles (US$1.0 million), African Textiles (US$0.8 million), Pamba Textiles (US$1.0 million), the P&T (US$2.3 million for equipment), and the Cement Factory (US$2.6 million for equipment and spares). - 28 - 22. Devaluation was the only significant policy condition for this first reconstruction credit and this was finally fulfilled in Jime, 1981 with the introduction of the financial program. C. Speed of Utilization of Credit Proceeds 23. Several problems adversely affected timely use of the funds under the Credit. During July 1980-June 1981 disbursements were limited to US$25.0 million for both specific goods and beneficiaries. After June 1981 when the Bank Group lifted restrictions on the use of the credit resources the 3overnment cont-inued to administratively allocate the funds. Credit proceeds to various beneficiaries were allocated by inter-ministerial committees which used such criteria as the potential to earn or save foreign exchange, contribution of GDP and impact on revenue. The credit was thus allocated before there was information available on either the type of intended import (i.e. minor or major capital items, raw material or spares) or the adequacy - the allocation relative to the requirement of the beneficiary. a clear priority of imports or beneficiaries was not established. In several cases, amounts allocated were too small to provide for inputs required to increase production. The final list of beneficiaries is attached as Annex I. 24. The procurement process is central to the rate at which any program credit is utilized. In Uganda, this process encountered several problems which produced long delays in the receipt of urgently required imports. Goods in excess of US$2.0 million were to be procured through international competitive bidding; local competitive tendering procedures were to govern imports valued at less than $2.0 million. The Uganda Advisory Board of Trade (UABT) was given responsibility for procurement by parastatals and the private sector which were required to produce quotations from at least three reputable suppliers. The Central Tender Board (CTB) which initially procured only for Government ministries became responsible for all procurement after June 1981. Most of the goods procured were under local regulations and less than 2% were under international competitive bidding. 25. Ugandan officials and importers were unfamiliar with Bank procurement regulations and required practices. For example, the Government sought reimbursement for several items which were ineligible for financing under the credits e.g. food and hops and barley for breweries. Importers preferred generally to procure from agents, middlemen, traditional- suppliers, etc. and not through competitive bidding. Bid or performance bonds were often not required of suppliers. Thus, attempts were regularly made by importers and suppliers to re-negotiate prices and other items after awards had been made. Many importers frequently could not determine the prime sources of their requirements nor were they able to prepare specifications needed for advertisements. 26. Both advertising and tendering were undertaken by the CTB which lacked adequate and experienced staff. This shortage of capable manpower made it impossible for all bids to be evaluated. In addition, many beneficiaries, when required to evaluate bids, did not know how to undertake technical and financial evaluation of bids. These problems were compounded by the lack of advertising space in the irregularly issued local - 29 - newspaper and the lack of foreign exchange restricted international advertising to the Development Forum. In the absence of information on harbour charges at Mombasa (Kenya) and overland freight costs to Uganda, several suppliers were unwilling to take any risks by quoting their prices CIF Kampala. The Bank Group staff therefore spent a significant amount of time in assisting to resolve procurement and disbursement bottlenecks (para. 38). 27. The devaluation of the currency in June 1981, and the shift to a floating exchange rate system during the procurement cycle very significantly increased costs to many importers and, in some eases, reduced demand. This led to the cancellation of orders by some suppliers. At the request of the Government, the Uganda Commercial Bank (UCB) provided credit to a number of non-creditworthy (Category B) parastatals to enable them to pay for foreign currency (para. 35). This access to scarce foreign exchange resources by financially non-viable beneficiaries, when combined with many of the problems described above, significantly reduced the fiscal and productive impact of the credits. The non-government owned commercial banks were unfamiliar with World Bank reimbursement/disbursement procedures (particularly QARS) and thus were unwilling to take risks by assisting clients who had been allocated funds under the credits. 28. The issuance of import licences was woven into the procurement process and resulted in the re-iew of documents more than once by UABT and BOU. This "overview" caused delays. Documents were often abandoned at the UABT by importers if they could not raise adequate local cover as they saw no point in paying the required 1% commission to UABT. The deliberate decisions taken in -iid-1980 to stop or delay disbursements as well as the initial tranching of the credits can also be said to have interrupted normal utilization of the proceeds. 29. The problems above were to a large measure responsible for the slow rate at which goods were imported. In a Government conducted survey of 59 of the beneficiaries under the credits, it was estimated that, based on CIF values, only 25% of raw materials and 37% of spare parts and capital goods had been ordered during 1981. Thirty-eight percent of spare parts and capital goods were not ordered until during the second half of 1982. At the end of 1982 when about 95% of spare parts and capital goods had arrived, only 50Z of these had been installed.5/ This unsatisfactory rate of utilization of imports could also have been7due to the fact that imported items sometimes were not the key production constraints. 30. The delays above notwithstanding, the reconstruction credits by providing urgently needed foreign exchange for spare parts and raw materials helped increase manufacturing production in Uganda between 1981 - mid-1983. Given the circumstances prevailing when allocation decisions were taken and implementation began, e.g. rapidly changing prices, exchange rate and market uncertainties, new management in many enterprises and the inexperience of newly established governmental machinery, some of these problems were inevitable.6/ The policy reforms that the credits supported 5/ MPED, survey on the impact on the economy of the First IDA Recon- struction Credit, July 1983, p.3, Table 2. 6/ Imports under the second credit began arriving in the country in mid-1983. - 30 - (devaluation was the only condition) have also evolved an environment appropriate for positive economic growth. The details of the impact of the first reconstruction credits are discussed below. D. The Economic Impact of the Reconstruction Credit 31. The industrial sector, to which most of the reconstruction resources (approximately USS70 million equivalent) were allocated made a dramatic but somewhat uneven recovery in 1982 compared to 1981. Strong growth was recorded in agro-processing and food manufacturing (41%) with notable production increases achieved for beer, cigarettes, soap, iron sheets and cement. Value added in the sector increased from 14.3% to 17% (compared to the 8.7% decline in 1981/80). However, the sector's share of GDP remained slightly under 5%, compared to more than 11% in the early 1970s. 32. A Government survey of 59 of the beneficiaries of the Credit showed that Credit funds financed about 64% of the total imports utilized by these beneficiaries during 1981-82. Since these beneficiaries constitute the majority of industrial enterprises in Uganda, they account for much of the improved performance of the whole industrial sector. They provide an important indication of the clearly positive macroeconomic impact of the credit. It is estimated that for 38 firms included in the survey, average capacity utilization had increased from 6.4% in 1981 to 21.7% in 1982. Production increases achieved by some of the key beneficiaries are: cigarettes - from 231 million cigarettes in 1981 to 745 million cigarettes in 1982 (221% increase); and cement production from 8,052 tonnes in 1981 to 16,509 tonnes in 1982 (105% increase). Uganda Fishnet Manufacture Limited increased production between 1981 and 1982 from 12,263 nets in 1981 to 37,735 nets in 1982, an increase of over 207%. Nile Breweries Limited commissioned the most modern bottling line in East and Central Africa, early in 1982, and production of beer in this factory rose from 1.4 million litres registered in 1981 to 3.8 million litres in 1982, a rise of over 173%). Uganda Baati Limited imported raw materials with reconstruction resources and the factory, which had produced only 150 tonnes of roofing sheets in 1980 and 180 tonnes in 1981, dramatically increased production to 1,920 tonnes by the end of 1982. This was a rise of nearly 1,000Z. The Lint Marketing Board oil and soap industries also increased the production of oil from 2,867 tonnes in 1981 to 10,338 tonnes in 1982 (an increase of nearly 260%). Madhvani Soap Industry produced only 32.5 tonnes of soap in 1980, but by 1982 production had risen to 2,000 tonnes. Associated Paper Industries Limited which manufactures packing papers for the cement and sugar industries were able to increase production from 382,711 bags in 1980 to 1,797,460 bags in 1981 and 2,940,000 in 1982. The increased availability of these products, as consumer goods, constituted important incentives for rural producers and urban wage and salary earners. 33. A major determinant of increased production appears to have been creditworthiness. In a survey carried out by Bank staff in October 1983, of a representative sample of 17 creditworthy firms, average capacity utilization had increased from 17% in 1981 to 30% in 1982, mnstly as a result of foreign exchange provided under the First Reconstruction Credit. On the other hand, 19 financially weak beneficiaries of Bank Group funds - 31 - with a 10% average capacity utilization in 1981 were, for reasons outlined below, only able to maintain output levels and performed no better than a third group of 14 larger firms that did not receive Bank Group support. However, without the support of the reconstruction credits, their production would almost certainly have declined. 34. The policies introduced by the Government in June 1981 and reinforced in 1982 had positive impact on the industrial sector varying, however, according to subsector, product and enterprise. There was significant liberalization of price controls and higher prices were paid to export crop producers, but the most important policy reform during 1981/82 affecting industry were the adjustments made in the exchange rate. From an official rate of USh 8/$1, the rate was depreciated to USh 80/S1 in July 1981. In August 1982, in order to cope with the "magendo- market for foreign exchange (black markets), the Government, at the recommendation of the IMF, introduced a dual exchange rate system, to be operated through two windows". The first window, for which an exchange rate of USh 120-130/$1 was established initially, governed essentially all official aid flows to Uganda. All other transactions had to be conducted at the second window, the exchange rate for which were established through weekly auctions. Throughout the regime of the two window system, the second window rate was around USh300/US$1. In May 1984, the two windows merged and since then the unified exchagne rate applicable to all foreign exchange transactions, is being established through auctions. 35. The magnitude of the exchange rate changes significantly increased the working capital and domestic credit costs of firms. Also important were the uncertainties concerning ownership of various enterprises and the impact of this uncertainty on collateral, revaluation of assets and the reqairements for financial restructuring of several enterprises. Banks were therefore in several cases, unable to extend credit; and consequently, the use of foreign exchange resources was delayed. As a result, the Government decided to on-lend the foreign exchange resources to non-creditworthy (Category B) enterprises through the UCB. No formal on-lending agreements, however, were drawn up at the time and it was not until March 1984 that these arrangements were regularized (Annex II). As of June 30, 1984, approximately US$10 million equivalent in local currency arrears from these firms was still owed on the First Reconstruction Credit account with the BOU. An audit report on the credit account has not as yet been submitted to the Bank Group, as required under the Credit Agreement. 36. An evaluation of the first reconstruction credit in terms of the net foreign exchange impact, linkage effects and other macro-economic paramaters cannot easily be undertaken for lack of reliable data. Information on the management, financial and marketing constraints on industrial enterprises in Uganda also remain inadequate. To improve the basic information in this regard, the Government plans to undertake an industrial sector survey (which will form the basis for a Bank Group Industrial Sector Memorandum during 1984/85), as well as a parastatal accounting study. - 32 - E. Performance of the Government 37. Paradoxically, there was greater willingness by the governments in Uganda during 1980-82 to implement what might be considered controversial or politically difficult policy reforms than to undertake the seemingly simpler administrative actions. The present Government which came into power in December 1980 initiated bold economic and financial policies. These policies have been implemented against the background of a difficult security environment. Resolving administrative issues relating to procurement, aid allocation and monitoring under the program, however, often proved difficult. To a large extent, these difficulties reflected the extent to which the Government machinery and every other fabric of society had decayed under the military regime. Strong management, technical and organization capacity have continued to be lacking. In policy discussions, however, senior Ugandan officials demonstrated sophistication and technical competence but these attributes were scarce below the top levels. Inter-unit coordination was weak and political considerations continued to be pervasive influences. Many ministers were new to political office in Uganda and several were inexperienced. Power seemed diffused and while the President, after November 1980, was officially the Finance Minister, leadership in the economic sphere seemed fragmented. F. Performance of the Bank 38. This was the Bank Group's first assistance to Uganda after nearly a decade. The operation was not designed as a comprehensive reform package but was aimed at assisting with urgent reconstruction imports, with devaluation as its only condition. There was not much effort by the Bank Group to appraise the ability of Government institutions to implement the program. The capacity of intended beneficiaries to effectively and efficiently utilize the resources also was not assessed in detail. Consequently an unrealistic time horizon for implementation (6 months) Tas established. Under the circumstances, however, few other options existed for the Bank. To overcome these constraints, the credit and the program were very closely supervised from both Headquarters and RMEA. Much assistance was provided in procurement matters and the Bank was flexible in approving funds to cover such items as exchange fluctuations and freigt- costs from Mombasa.7/. 39. Bank staff also appeared to have developed excellent professional relationships with several senior Ugandan officials. Whenever the security and political climate allowed, the Bank systematically fielded projects and economic missions in Uganda. This greatly improved the Bank's overall knowledge of the Ugandan economy and its reconstruction needs. It was on this foundation that more comprehensive second and third reconstruction programs were to be established after 1982. 7/ A total of 15 man weeks were spent on supervision. Between May 1980 - June 1981, the Bank imposed an informal ban on missions to Uganda, due to the risky security situation. - 33 - G. Collaboration with Cofinanciers and IMF 40. The Bank Group maintained close contact with cofinanciers; however there is little evidence chat consultations took place prior to the Bank Group making decisions regarding such key issues as tranching, postponement of closing dates and restrictions on disbursements. Once decisions were reached, however, these were promptly transmitted to cofinanciers by telex and through staff visits. On one or two occassions, the Netherlands Government complained to Lhe Bank Group about the lack of substantitive consultation. The Bank participated actively in the Kampala and Paris Donor Conferences called by the Ugandan authorities in September and December 197S respectively. The IMF provided general guidance on exchange rate policy and domestic resource mobilization efforts. A Bank supervision mission overlapped with the IMF appraisal mission for the stand-by program and at Headquarters, efforts through numerous discussions ensured that both programs were complementary. - 34 - PROGRAM COMPLETION REPORT UGANDA - FIRST RECONSTRUCTION PROGRAM ANNEX I (IDA CREDIT 983-UG/EEC-54-UG) Page 1 of 2 Final List of Beneficiaries Under the First Reconstruction Credit (Credit 983-UG) African Textile Mills Ltd. Associated Battery Mfrs. Ltd. Associated Match Company Associated Paper Industries Ltd. Berger Paints Ltd. Cable Corporation of Uganda Ltd. Casements (Africa)- Ltd. Central Cooperative Union Dairy Corporation Dunlop E.A. Steel Products East African Distilleries Ltd. East African Steel Corp. Ltd. EMCO Oil Refineries Ltd. International Paints Ltd. Jubilee Ice and Soda World Ltd. Kalamx Ltd. Lake Victoria Bottling Company Lango Development Co. Leyland Paints Ltd. Lint Marketing Board Madhvani Oil and Soap Mills Mbale Steel Wire Ind. Ltd. Ministry of Agriculture Ministry of Animal Industry and Fisheries Ministry of Commerce Moon Enterprises Ltd. Mukisa Foods Ltd. National Sugar Works, Kinyala Na:ional Tobacco Corp. National Tobacco Corp. Nile Breweries Nyanza Textile Industries Ltd. Pambo Textiles Ltd. PAPCO Industries Ltd. Printpak (Uganda) Ltd. S. Engineering Industries Ltd. Sadolins Paints Ltd. Star Trading Co. The Uganda Cooperative Central Union Uganda Baati Ltd. Uganda Bags and Hessian Mills Uganda Bata Ltd. Uganda Blanket Mfrs. Ltd. 35 - ANNEX I Page 2 of 2 Uganda Breweries Uganda Clays Ltd. Uganda Electricity Board Uganda Fishnet Manufacturers Ltd. Uganda Garments Ltd. Uganda Grain Milling Uganda Leather and Tanning Industry Ltd. Uganda Metal Industries Ltd. Uganda Metal Products and Enamelling Company Ltd. Uganda Oxygen Uganda Pharmaceuticals Uganda Rayon Textile Manufacturers Ltd. Uganda Tea Growers Corp. UGA Engineering United Cement Industry United Garment Industry Ltd. Vitofoam Ltd. Wood Industries Corp. -36 - ANNEX II Page 1 of 2 March 31, 1984 Kampala, Uganda PROGRAM COMPLETION REPORT UGANDA - FIRST RECONSTRUCTION PROGRAM (IDA CREDIT 983-UG/EEC-54-UG) IDA I - Reconstruction Credit STATUS REPORT ON CATEGORY -B" CUSTOMERS Uganda Commercial Bank, as agent of Uganda Government, handles the on-lending arrangements for all Category "B" beneficiaries. The first stage was for U.C.B. to enter into a formal understanding with the Treasury that the following conditions and terms will apply to all the Category "B" on-lending arrangements:- (i) Repayment Period: Each Category -B" beneficiary to enter into a loan agreement with UCB with a specific repayment programme/period. Each case would be treated on its own merit. (ii) Interest: Customers to be charged 15% p.a. It was agreed that 7.5% p.a. be paid to Government and 7.5% paid to U.C.B. (iii) Exchange Risk: Government to bear the full foreign exchange risk. (iv) Project Account: Uganda Commercial Bank expects to credit to Project Account at Bank of Uganda at quarterly intervals after co=luding Loan Agreements and as beneficiary firms sell their products. (v) It was agreed that in the unexpected event of Category "B- beneficiary failing to repay a loan within the ant -cipated repayment period, e.g. Madhvani Sugar (Kakira), the Treasury would be responsible for crediting the Project Account. The second stage was for U.C.B. to enter into Loan Agreements with each Category "B" beneficiary. U.C.B. confirms that all beneficiaries have signed Loan Agreements for both IDA I and IDA II. - 37 - ANNEX II Page 2 of 2 NAME OF CUSTOMER IDA I IDA II TOTAL REPAYMENT PERIOD (US$m) (US$m) (US$m) 1. Cable Corporation 0.30 0.70 1.00 4 years 2. E.A. Steel Corp. 0.60 1.15 1.75 4 years 3. EMCO Oil Refineries Ltd. 1.50 0.30 1.80 4 years 4. Uganda Cement Indus. Lts. (Hima) - 2.50 2.50 5 years 5. Madhvani Soap Industry Ltd. - 0.35 0.35 2 years 6. Madhvani Sugar Works 3.50 0.81 4.31 6 years 7. Mkisa Foods Ltd. - 0.20 0.20 2 1/2 years 8. National Sugar Works (Kinyala) 1.00 1.31 2.31 6 years 9. Pamba Textiles Ltd. 1.20 0.40 1.60 3 years 10. Sugar Corporation of Uganda (Lugazi) 5.33 0.81 6.14 6 years 11. Uganda Electricity Board 2.25 1.63 3.88 2 1/2 years 12. Uganda Hoes Ltd. - 0.75 0.75 3 years 13. Uganda Industrial Machinery Ltd. - 0.25 0.25 1 1/2 years 14. Uganda Leather & Tanning Industry 0.20 0.20 0.40 2 years 15. Uganda Pharmaceuticals Ltd. 2.00 1.20 3.20 3 years 16. Uganda Posts and Telecommunication 2.30 1.49 3.79 7 years 17. Uganda Press Trust Ltd. - 0.10 0.10 6 years 18. Uganda Railways 0.80 2.50 3.30 7 years 19. Uganda School Supplies Ltd. - 0.20 0.20 6 years 20. Uganda Spinning Mill Ltd. - 0.20 0.20 3 years 21. E.A. Distilleries Ltd. - 0.20 0.20 3 1/2 years 22. Uganda Tea Authority - 0.50 0.50 3 years 23. Uganda Tea Growers - 0.03 0.03 3 years 24. UGATIONERS Ltd. - 0.40 0.40 3 years 25. UGHA Engineering Corporation 1.67 1.27 2.94 6 years 26. Jubilee Ice and Soda Works Ltd. 1.00 0.10 0.10 4 years 27. Uganda Blankets 1.00 0.30 1.30 2 years 28. Uganda Cement Industry Ltd. (Tororo) 4.60 - 4.60 6 years 29. Wood Industry Corporation 0.70 - 0.70 6 years 30. Uganda Metal Industries Ltd./MILP 1.00 - 1.00 5 years 31. PAPCO Industries Ltd. 3.33 0.40 3.73 5 years 32. Lango Dev. Co. Ltd. 0.20 0.20 0.40 6 years 33. Uganda Motors Ltd. - 3.00 3.00 2 years 34. TUMPECO Ltd. 1.00 0.20 1.20 2 years 35. Uganda Grain Milling Co. Ltd. 2.67 - 2.67 3 years 36. Uganda Feeds Ltd. - 0.30 0.30 3 years 61.40