Sierra Leone - Review of public enterprises

Report No. 5252-SL Review of Public Enterprises in Sierra Leone March 8, 1985 Western Africa Region FOR OFFICIAL USE ONLY ,, ,S . - - . , -; -: - .. - ,. *~ ~ ~ - .. - - \) .' . ;}, - ~ ~ . ... .,: , -: ~ ~ ~ ~ - - : ', '..r -.7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Document of the World Bank This document has a restricted distribution and may be used by recipients only in the.performance of theirofficial duties. Its contents may not otherwise be disdosed without World Bank authoriation. ; , ~ ~ ~  CURRENCY EQUIVALENTS US$1 = Le 6.00 Leone 1 US$0.1667 WEIGHTS AND MEASURES (Metric System) 1 hectare = 2.47 acres 1 kilometer (km) = 0.62 miles 1 kilogram (kg) = 2.2 pounds 1 metric ton (ton) = 2,205 pounds 1 liter - 1,507 U.S. quart ABBREVIATIONS BP British Petroleum DIMINCO National Diamond Mining Company FIC Forest Industries Corporation GVWC Guma Valley Water Company IMF International Monetary Fund NDB National Development Bank NIC National Insurance Company NPA National Power Authority NSC National Shipping Company NTC National Trading Company NWS National Workshop PEC Public Enterprise Commission PEMU Public Enterprise Monitoring Unit RTC Road Transport Corporation SILETI Sierra Leone Timber Industry and Plantation Company SLA Sierra Leone Airlines SLCB Sierra Leone Commercial Bank SLBC Sierra Leone Clay and Bricks (now Bricks and Ceramics) SLET Sierra Leone External Telecommunications SIPA Sierra Leone Port Authority SLPMB Sierra Leone Produce Marketing Board SLPRC Sierra Leone Petroleum Refining Company SWAL Seaboard West Africa Limited TBRD Torma Bum Rice Development Authority WDL Wellington Distilleries Limited FISCAL YEAR Government of Sierra Leone: July 1 - June 30 Public Enterprises: Varies among enterprises Note: Annual accounts of public enterprises refer to their respective fiscal years.  FOR OMCIAL USE ONLY REVIEW OF PUBLIC ENTERPRISES IN SIERRA LEONE Table of Contents Page SUMMARY AND RECOMMENDATIONS ........ i-sv I. INTRoDUCTION 0*.......**....**....***.........*....m.........m... 1 II. THE ROLE AND RATIONALE OF PUBLIC ENTERPRISES .................... 3 1. Introduction 3 C .......................... ............... ... 3 2. A Brief Description of the Public Enterprises ............... 3 3. Rationale for Establishing Public Enterprises ............... 6 4. Conflicts Between Objectives ................................ 11 III. FINANCIAL PERFORMANCE AND IMPACT OF PUBLIC ENTERPRISES .......... 16 1. Introduction ................................................ 16 2. Aggregate Financial Performance ........ ..................... 16 3. Financial Performance of Selected Enterprises ............... 18 4. sources of Finance and Investment ........................... 26 5. Government Support for Public Enterprises ................... 27 6. Support from Financial Institutions ......................... 29 7. The Impact of Public Enterprise Debt on the Economy ......... 30 IV. THE MACROECONOMIC ENVIRONMENT AND THE CONSEQUENCES OF GOVERNMXNT POLICIES .. m... ... ....... ....... 36 1. Introduction ............ .................. ......... .. me.. . .. 36 2. The Macroeconomic Environment ............................... 36 3. Financial Consequences of Government Policies on Public Enterprises ............................ 38 4. Recommendations ......... ............ *.. ....... ....... 47 This report is based upon the findings of a mission to review public enterprises that visited Sierra Leone in January 1984. The mission consisted of Messrs. Rashid Faruqee (mission chief) and Pervaiz Rashid from the World Bank, and Messrs. David Bovet, Roger de Clerk, A. Samad and Harry Garnett (consultants) JJ D- Okrafo-Smart was a local consultant. The draft of the report was discussed with the Government of Sierra Leone in November 1984. This ocunent h a resrct distribution and may be used by recipients only in the performance Of their ofiial duties. Its contents may not otherwise be disclosed without World Bank autborization.  - ii - Table of Contents (continued) V. INTERNAL MANAGEMENT OF PUBLIC ENTERPRISES ....................... 49 1. Introduction . . ...... . .. .. . * ......** * , 49 2. Corporate Planning . . .... . ............. 49 3. Management Training 50 4. Staff Situation of Selected Public Enterprises .............. 51 5. Financial Control . .. .. ...................... 55 6 . Cost Control . . .... .. . . ... ... .. ... 56 7. Recommnendations . .. . ...... ..... . 58 VI. GOVERNMENT-PtUBLIC ENTERPRISE RELATIONSHIPS...... 59 1. Introduction .5........ P..*..... .... 59 2. The Variety of Formal Relationships . 59 3. Centralized Decision-Making ... 60 4. Informality in the Relationships 62 5. The Impact of External Conditions on Government-Enterprise Relations.. 63 6. Recommendations .......... ............ 63  - iii - Tables and Figures Tables Table II-1 Sierra Leone: List of Public Enterprises ....... 4 Annex II-1 Economic Characteristics of Public Enterprises.o.e....o.& ... o..*15 Table III-1 Average Pre-Tax Return on Net Worth, All Public Enterprises .........17 Table III-2 Profit Before Tax As a Percentage of Net Worth of a Sample of Public Enterprises, 1979-82....19 Table III-3 Sales of Selected Public Enterprises, 1979-82 ... 21 Table III-4 Comparison of Average Annual Sales and Costs, Percentages from 1979 to 1982 (in constant 1979 prices) ..................22 Table III-5 Liquidity Ratios of a Sample of Public and Private Sector Enterprises . .. 24 Table III-6 Debt/Equity Ratio of Selected Public Enterprises, 1979-82.. ....... . .....a... .....25 Table III-7 Sources and Uses of Funds for the Year 1981 and 1982 .....27 Table III-8 Government Contributions to Public Enterprises, 1982-83 (millions of Leones).....28 Table III-9 Distribution of Commercial Bank Loans and Advances (millions of Leones) ................. 30 Annex III-1 Ratio and Profit (Loss) Before Taxes to Sales ... 31 Annex III-2 Current Ratios for Selected Non-Financial Public Sector Enterprises, 1979-82 .32 Annex III-3 Quick Ratios for Selected Non-Financial Public Sector Enterprises, 1979-82 .33 Annex III-4 Indirect Subsidies to Public Enterprises 1982-83 ............34 Annex III-5 Public Enterprise Loans Assumed or Guaranteed by the Government of Sierra Leone .35 Table IV-1 Sierra Leone Petroleum Refinery Company Profit and Loss Summary (Le Million) .......... 39 Table IV-2 National Power Authorit-, Income Statements ..... 42 Table IV-3 Sierra Leone External Telecommunications, Profit and Loss ........... ...............44 Table IV-4 Road Transport Corporation, Financial Performance 1978-81 .45 Table IV-5 Guma Valley Water Company, Financial Performance 1978-82 ........... .. .. 46 Table V-1 Operating Costs of Selected Public Enterprises .58 Annex VI-1 Public Enterprise Institutional Characteristics ......... ...... . ....... . 71  -iv- Figures Figure II-1 Interrelationships Among Public Enterprises Objectives ......... *6e**SSW............. . 12 Figure II-2 An Example of Conflicting Objectives-SLPRC.....14 Figure IV-1 Relationship Between Average Cost or Crude Oil Imports and the Price Charged by SLPRC ........40 Figure V-1 Staff Situation of Selected Public Enterprises ......V2 DMN Oprto...:M e * atues . *0ee** .52 Figure V-2 DIMINCO Operations: Major Features .........................57  SUMKA.RY AND RECOMMENDATIONS 1. This review focuses on the overall performance of public enterprises in Sierra Leone and on their impact on the economy, and assesses the status of key individual enterprises. The report presents analysis of data collected through visits to Sierra Leone and through a questionnaire survey carried out by a local consultant. It is designed to serve as an aid in developing useful programs for financial and technical assistance to public enterprises in the context of a structural adjustment program. (Greater detail on the enterprises is provided in a separate informal report, Profiles of Selected Enterprises in Sierra Leone, World Bank, 1985.) 2. The main findings are: - The financial situation of many public enterprises is critical. - Difficult economic conditions domestically and worldwide, and conse- quent Government actions taken to limit access to foreign exchange and bank credit, pose major problems for the public enterprises at present. - Price coutrols and ad hoc policy-making by the Government have constrained some public enterprises. Government-public enterprise relations have allowed a healthy degree of management autonomy, but improved policy guidance and monitoring of performance are in order. Internal management of public enterprises varies considerably in quality; it is fairly capable in a few cases, but in a majority, needs to be substantially improved, especially in planning, training and accounting. The Role of Public Enterprises in the Economy 3. The origin of :ublic enterprises in Sierra Leone has been pragmatic rather than doctrinaire. Public enterprises have been established in response to particular needs or opportunities as they arose. This contrasts with other nations in West Africa and elsewhere, which have set up a public enterprise sector as a matter of basic political philosophy. 4. This aspect of the public sector in Sierra Leone is positive and will facilitate reform. However, it has also resulted in a lack of clarity in and quantification of objectives. Moreover, the failure to trace the consequences of conflicting objectives has contributed toward poor performance in the sector in recent years. Although the Sierra Leone Government does regard public enterprises as vehicles for implementing public policy, there is a growing feeling that some may be a net burden on the nation. 5. The importance of the 26 public enterprises to the economy is greater than that implied by their small contribution to GDP, investment and  - ii - employment. Some control key national resources. Taken together, they represent a high proportion of the modern as opposed to the traditional segment of the economy. Over the years they have provided a high proportion of Sierra Leone's foreign exchange earnings. 6. The reasons for setting up public enterprises--as expressed in the enabling acts and ministerial statements of policy, and as obtained from interviews with senior Government officials and enterprise managers--are similar to those in many other countries: to generate revenue for the Govern- ment; to prevent the creation of private monopolies; to influence prices; to improve access to foreign equity or loans; to provide commercially unprofit- able but socially necessary services; and to start up new commercial activities. Financial Performance and Impact of Public Enterprises 7. Few public enterprises have performed well in relation to the various objectives. Financial performance has been particularly weak, with only a few instances of reasonable profits in recent years. In 1983, the Government's total dividend revenue from public enterprises was only Leones (Le) 250,000. Many companies have been so unprofitable that the Government has had to waive their turnover and excise tax liabilities, and some have required large subsidies to cover operating costs. Almost every public enterprise has benefitted from an indirect subsidy in the form of improved access to foreign equity and loans through Government ownership or shareholding. Price controls are frequently the origin of the financial losses. 8. Nevertheless, there are some examples of strong financial perfor- mance. Although governments typically expect to lose money on wholly owned public utilities obliged to supply services to low-income groups, the Guma Valley Water Company (GVWC), a public enterprise supplying water to Freetown, makes reasonable profits and does not require subsidies. 9. The financial performance of the public enterprises has deteriorated in recent years. Taken together, their net worth has declined, and small profits have turned into losses--over half the enterprises reported pre-tax losses in 1982. This situation deteriorated still further in 1983. In relation to a sample of private enterprises, the mission found that the public enterprises had much lower rates of return on net worth. The enterprises engaged in production rather than in service or financial activities have suffered particularly badly. 10. Falling sales, rising costs and reduced profitsbility have led to liquidity problems. As a whole the enterprises suffered a 14 percent per year reduction in sales (in constant Leone terms) between 1979 and 1982. This and the lack of foreign exchange to purchase spare parts and other inputs have caused unit costs to rise. Quick and current ratios, which measure liquidity, have both fallen to very low levels, particularly for production companies. 11. Because of losses compounded by high rate of inflation, many public enterprises have suffered so much erosion of their capital bases that they have not been able to carry out essential investment programs using internally  - ili - generated resources. As a result, many public enterprises sought and often obtained substantial financial support from the Government. In 1983, direct support (operating subsidies) was Le 16 million, indirect support (waived taxes and duties), Le 14 million. The Government also assumed principal and iaterest payments on foreign debt amounting to Le 5 million. 12. Unlike the case in some other countries, little of the burden of the unprofitability of the public enterprises is borne by the commercial banking system (several foreign banks and one state-owned bank). Public enterprises in Sierra Leone have traditionally not relied on commercial banks for short- or medium-term finance. 13. The rising external debt of public enterprises has had an adverse impact on the balance of payments. The total debt outstanding and disbursed to the public enterprises that was guaranteed and assumed by the Government at the end of 1983 amounted to $68 million, or 15 percent of total foreign debt. The Macroeconomic Environment and the Consequences of Government Policies 14. In terms of national economic development, many key public enter- prises are highly dependent on world trading conditions over which they have no control. Those conditions have not favored economic activities in either the public or private sectors. 15. At the same time, a significant part of the poor financial perfor- mance of public enterprises can be attributed to policies under Sierra Leone's control. The Government's price control and foreign exchange policies have had a significantly adverse impact on profitability. The Government frequently asserts control over pricing but sometimes delays for many years the price increases necessary to maintain profitability. Foreign exchange is in short supply because of declining official exports and an official exchange rate that is about half the parallel market rate. To ease the scarcity of foreign exchange, the Government recently introduced a partial adjustment of the exchange rate allowing exporters of precious metals to sell their foreign exchange through the newly established Precious Minerals Marketing Corporation (PMHC) at a market determined price. This quasi-legal foreign exchange market helped the private importers to some extent, but gave no relief to the public sector including the public enterprises. Subsequently the Government agreed in principle to a managed float system and at the time of the issuance of the report, the situation remains in flux. The Government has announced that it is conducting discussions with the Fund for a new standby program. Another problem is that the simultaneous pursuit by the public enterprises of combinations of objectives covering revenue maximization, price control, access to foreign finance, provision of non-profitable services, control of monopoly power and generation of new commercial activities makes it very difficult for managers to set operational objectives and for boards and others to monitor their performance. This is particularly so when there is a lack of clarity in, and quantification of, those objectives, as is invariably the case.  - iv - Management of Public Enterprises 16. The unprofitability of most public enterprises has been significantly caused by factors outside the control of management and staff, as outlined earlier. But management performance should and could be improved in a number of areas. 17. Corporate planning is weak. Very few enterprises set down annual targets, develop plans for operations and review activities systematically. There is a general need to upgrade middle management and in many enterprises, the technical staff as well. Financial management skills are in short supply, while accounting, budgeting and cost accounting systems are in some instances inadequate. Billing control is almost invariably poor, and there is little internal auditing. The law itself does not reflect the current need for more disclosure of corporate financial performance and for upgrading accounting standards. 18. There is some overstaffing, but in general the public enterprises have handled major reductions in staff operating levels well. Two have model redundancy schemes. Goverment-Public Enterprise Relationships 19. There Is considerable variety in the formal relationanips between the Government and the public enterprises. Some are public corporations estab- lished by special acts of Parliament, while others are limited companies registered under the Companies Act. The Government wholly owns most but not all of the public corporations and has shareholdings in the limited liability companies ranging from 25 to 70 percent. Some boards of directors draw their membership among Cabinet officials, others from the civil service and still others from the private sector, from which the Government nominstes represen- tatives. 20. Decision-making tends to be centralized. Pricing and investment decisions almost invariably go to the Cabinet and are often finally resolved at the State House. Ministers and on occasion the Cabinet Itself determine the selection of enterprise executives down to middle-management levels. However, informality also characterizes the relationship between the Govern- ment and public enterprises. Legal rights and obligations often count for far less than personal relationships, and even financial support frequently bypasses the official budgetary processes. Many matters are resolved on the basis of a close relationship between the public enterprise's chairman or general manager and powerful members of the Cabinet. 21. In recent years, external conditions have complicated these relation- ships. For example, world trading conditions have, as noted, removed much of the freedom of public enterprise managers and their political supporters. Managers, ministers and civil servants have had to focus on immediate crises caused by the lack of foreign exchange, rising import costs and falling markets. As such, they may not have paid sufficient attention to setting the clear objectives and targets needed to motivate management In public enter- prises to ope-ate with increased efficiency. For instance, the impact of  price controls on financial viability has almost never been made explicit in evaluating the performance of public enterprises. Major Reco-mendation, 22. The problems noted in this report require action at both the Govern- ment and enterprise levels. External resources in the form of technical and financial assistance can play a constructive role in implementing a public enterprise reform program to address these key issues. 23. The Government has announced its determination to improve public enterprise performance and has begun to act accordingly. It has agreed to the principle of clarifying public enterprise targets and has accepted the need to privatize wherever appropriate. It has introduced private sector interest. into the management of the Government-owned hotels and National Workshop. It supports the idea of a more effective Government review of public enterprise performance through a public enterprise monitoring unit. SLPRC and NPA recently obtained the price increases they required to improve cost recovery. 24. However, much remains to be done: financial performance is in many instances deteriorating; accountlng systems are Inadequate; price controls are too inflexible; there are many complaints about the social as well as economic impact of some enterprises; not many enterprises are turning to the parallel market to solve their foreign exchange problems, while many are operatlng at well below full capacity. 25. The mission believes that a reform program with IDA assistance could mke a useful contribution toward resolving some of the problems faced by Sierra Leone's public enterprlses. Discussion of the present report with the Government served as a basis "or designing policy measures, technical assistance and financial support for enterprises within the framework of a SAL. The following paragraphs sumarize the key recommendations for change at the sectoral and enterprise levels, and the design of an assistance program. Sector Policies 26. The recomendations in this report can be summarized under 4 cate- gories. First, the Government should rationalize the size of the public enterprise sector. An analysis of the role and rationale of public enter- prises in Sierra Leone indicates that there Is no economic rationale for public ownership of many enterprises. The Government of <terra Leone is involved in a variety of enterprises-mining, agricultural production and marketing, fisheries, bricks and ceramics, forest industries, distillery, botels, commercial banking and so on. The Government's stated objectives in owning shares in these enterprises are seldom achieved, and some are contradictory. Moreover, there are alternative ways of achieving even a concrete objective such as controlling a natural monopoly: it can be achieved by regulation rather than by public ownership. 27. The Government should rationalize the size of the public enterprise sector by (1) liquidating unviable commercial enterprises and (2) gradually privatizing viable commercial enterprises. Marampa Iron Ore Company should be  - vi - liquidated. That process has already started for National Trading Company and should be expedited. Purely commercial enterprises such as the hotele, Sierra Laone Fishing Company, Wellington Distilleries, Forest Industries, Sierra Leone Commercial Bank and National Insurance Company are good candidates for gradual privatization. The Grovernment should initiate appropriate financial monitoring and technical studies to establish for each enterprise to be gradually privatized, the price of the enterprise, and the value of Government shareholding in it. Since the number of wealthy local enterpreneurs who are potcntial buyers is limited and the financial market is narrow and segmented, large scale sale of public enterprises and assets will be difficult or will cause substantial financial lose to the Government. The Government should, therefore, take steps to foster competition among the potential local buyers and also identify possible foreign enterpreneurs or shareholders to participate in the ownership and management of selected enterprises. 28. Second, the Government should bring a commercial environment to the enterprises In which it retains ownership after the rationalization program. This should be done by removing price controls; by adjusting the exchange rate to make foreign exchange available at an appropriate price, (and if the exchange rate is out of line, as it is now) by encouraging public enterprises to use the parallel market for foreign exchange; by making enterprise management boards completely autonomous, including removal of Government interference in internal management decisions (with regard to investment, for example); and by discontinuing Government subsidies, but fully paying Govern- ment dues, to public enterprises. 29. Third, the Government should introduce the following sector-wide institutional changes. a. Clarify public enterprise objectives, distinguishing between financial, economic and social ones, and set appropriate annual, medium- and long-term targets. b. Ownership patterns should be revised. There should only be a Government shareholding if there is a threat of a monopoly and regulation of the monopoly through public policies is not effective, if the enterprise provides mainly social services, or if Government participation is needed for foreign equity or loan support. Even then, shareholding by the Government could often be reduced (proposals for particular enterprises are summarized in page viii). c. Review agreements between public enterprises and foreign and local private sector partners to ensure profitable returns to the Government. d. Establish a Public Enterprise Commission (PEC) as a Cabinet Sub- committee, consisting of the Ministers of sponsoring departments and chaired by the Finance Minister, to set standards and to advise on improved performance. PEC should have some associate members from public enterprise chairmen and private businessmen.  - vii - e. Establish a Public Enterprise Monitoring Unit (PEMU) as a secretariat to PEC, to advise on the design of measures of performance and to collect, analyze and circulate data on overall and individual enter- prise performance. PEMU should be attached to the Ministry of Finance but its head should have a statutory, autonomous status (such as that of Accountant General), reporting directly to the PEC chairman (Finance Minister). PEMU will work closely with the ministries sponsoring public enterprises. PEMU, under the overall guidance of PEC, will take the lead in the rationalization program outlined in page v, including carrying out technical studies and assessment to determine the value of the Government shares in enterprises to be privatized, identifying possible local and foreign buyers of Government interests and establishing procedures to liquidate unviable commercial public enterprises. PEMU will also take a lead in developing programs such as a training of managers and accountant (in collaboration with Institute of Public Administration and Management) for the benefit of the public enterprises. f. Encourage an immediate focus on improved financial performance in the current difficult economic circumstances by establishing incentives for senior managers. g. Place more private sector managers on the boards of public enterprises. 30. Fourth, at the enterprise level, the Government should focus on certain key enterprises that are relatively large, that have significant financial and operating problems, that may not be achieving their social objectives and that continue to suffer from a lack of clarity on Government- erterprise relations. Brief smnmaries of suggested enterprises are given below; full profiles are included in a separate report.  - viii - Enterprise-Specific Recommendations Sierra Leone External Telecommunications (SLET) 31. Although SLET has been quite profitable, it currently suffers from a lack of foreign exchange, a foreign partner reluctant to increase its financial risk, unclear Government policies and objectives, problems with technical interface, slow billing procedures and an uneasy relationship with its sponsoring ministry. 32. Support should be given to SLET's management training program and to the development of a well-planned computerized management information system. Forei-n exchange should be made available to purchase vital spare parts or it should be permitted to purchase foreign exchange from the parallel market (SLET's equipment has between 10,000 and 20,000 components). 33. To support SLET, co-financir.g with the EEC should be considered, as the EEC is already supporting telecGmmunications in Sierra Leone. The British firm, Teleconsult, has just submitted its national telecommunications study, which recommends the progressive privatization of all telecommunications in Sierra Leone, the first step being to determine the real operating costs of domestic telecommunications, now a department of the Ministry of Transport and Communicet ions. Transforming the Posts and Telephone Department into a public enterprise and the eventual merger of SLET and the domestic telecom- munications, and their establishment as a private venture, should be considered. Road Transport Corporation (RTC) 34. RTC has not been profitable and in recent years has had difficulty even covering fleet operating costs. Within a highly competitive market, it is supposed to be commercially viable, although it is also asked to regulate passenger transportation prices in the market as a whole and to carry school children at half price during peak hours. A high proportion of its fleet of larger Daimler-Benz buses is out of action because of a lack of Q--:re parts. If foreign exchange cannot be allocated to RTC for such urgent needs, the enterprise should be encouraged to buy foreign exchange from the parallel market. 35. Recently, the Government has permitted the local purchase of small poda-poda buses suitable for Freetown's narrow and congested streets. RTC will eventually have over 100 of these mini-buses, giving the compa.y a sizable portion of the market (prior to the poda-poda purchases, its share was only 3 percent). 36. The Government should grant RTC more autonomy. According to the enabling act, it has the right to set prices and appropriate routes. RTC should prepare a plan for fully commercial operations, charging the prices the market will bear. The subsidies on imported spare parts and fuel should be removed. Subsidies could be given for socially important but unprofitable services (e.g. subsidized transportation for school children) if these services are still required from RTC on the ground that other means of  - ix - attaining the same social goals are inefficient. Consideration, however, should be given to privatizi-ag RTC in part or entirely with provision of subsidy only for specific operations required by the Government for socially important objectives. National Development Bank CNDB) 37. NDB has been facing acute problems of liquidity and recovery of arrears. In December 1982, provision for losses was the equivalent of 30 percent of its total loan and equity portfolio, and there were also considerable arrears of unpaid interest, amounting to Le 0.6 million, of which Le 0.4 million were considered unrecoverable. No new funds of any significance have become available in recent years. 38. The Government should consider disbanding NDB and replacing it with new institutional arrangements for development financing with a narrower mandate (and perhaps with participation of the private sector). Alternatively, if the required financial as well as managerial resources can be found and medium term financial viability of NDB can be demonstrated, the Government could completely restructure the NDB with new equity and debt and by writing off the irrecoverable loans. It might be wise for the restructured NDB to withdraw from the agricultural sector-which has represented 30 percent of its portfolio in the past-and to concentrate on industry. Diamond Mining Company (DIMINCO) 39. Because it is now reworking old alluvial diamond mining areas, DIMINCO's output is falling and unit costs and rising. The introduction of the Survival Plan, which closed one plant and drastically reduced the labor force, has limited its financial losses. 40. DIMINCO now provides only about 20 percent of Sierra Leone's diamond exports. Much of the balance is exported illegally through the parallel market. Assuming that the sccpe of surface mining will decline further, the future of DIMINCO depends on the success of the Kimberlite Project, about which there is considerable uncertainty. The extent and quality of diamonds will remain largely unknown until expensive shafts have been sunk into the rock and crosscuts made. There will be a large net outflow of Government funds into this project for some years. It is understood that agreement has been reached on the financial structure of the project, which involves a Goverment equity stake of 60 percent, with BP Minerals holding the balance of the shares and loans to come from international banks and diamond buyers. 41. The Government's representatives on DIMINCO's board may require independent expert support to assess the financial risks to the Government of the technologically unfamiliar Kimberlite Project. The Government's risks are of a different nature to those of its foreign partner. The latter can treat the Kimberlite Project as a venture capital enterprise and can therefore accept that, for example, several such projects can be marginally profitable while one will make enormous profits. The Government has no such opportunity  to spread the risks, and thus requires careful advice on likely risks and returns. Sierra Leone Produce Marketing Board (SLPMB) 42. SLPMB's dual objectives, as set out in the enabling act, are "to secure the most favorable arrangements for the purchase, export, and marketing of Sierra Leone produce...(and) to assist in the development of the agricultural industry of Sierra Leone for the benefit and prosperity of the producers and the areas of production."' 43. While SLPMB administrative and other costs have increased fourfold over the 1979-1983 period, producer prices for palm kernels, coffee and cocoa have fluctuated but were generally lower in 1982/1983 than in 1978/1979. In 1981/1982 no price support was given, and the decline in the export price was passed on to the producers. SLPMB's purchases of coffee and palm kernels in 1982/83 were far below the levels of previous years (although this is partly attributable to smuggling in response to the overvalued Leone). SLPMB has not only failed to stimulate agricultural production and productivity, but has itself had losses in recent years. 44. A review of SLPM2B's role in national agricultural development is required, including the development of a program of collaboration with the Ministry of Agriculture to boost production and secure markets. National Power Authority (NPA) 45. NPA suffers from rising operating costs (largely the result of the lack of spare parts), slow and ineffective billing, an excess of unskilled tradesmen and shortages of skilled tradesmen. The services it provides the provinces require Government subsidies even to cover operating costs. Utilization of generator capacity at King Tom is not only well below firm capacity, but is falling, thus causing frequent power stoppages. Energy and financial losses are serious. 46. Planned donor support in the supply of spare parts should help overcome the short-term supply problems, while the recent tariff increase is too little too late and will only slightly reduce operating losses. However, an effective system of strategic management will have to be introdaced to help NPA cope with its large development projects, integrate its plans into the National Development Plan, and address the issues of financial ancu social accounting. NPA has serious liquidity problems that will not be solved by the recent inadequate tariff increase. Consideration should be given to increasing NPA's liquidity not through further subsidies, but in the form of short-term loans or the issue of short-term securities. Sierra Leone Petroleum Refining Company (SLPRC) 47. SLPRC has been forced into unprofitability by price controls, highly priced crude (purchased by the Government), the lack of foreign exchange to repay a debt of $33 million to the oil companies that originally s lpplied crude oil, and low capacity utilization of the refinery. Agreement has now  - xi - been reached on repaying the debt, and product prices have been increased to a level that allows costa to be recovered. A large net loss before taxes of Le 20 million was recorded in the 1982/1983 financial statement. 48. A study should be carried out of the basic economics of continuing to operate the refinery, now possibly close to the end of its physical life, fersus importing refined products. Products were imported in the years before the refinery was constructed in 1970. National Workshop (NWS) 49. National Workshop, which is at the moment legally neither a public corporation nor a limited company but a Government department, has con- sistently required operating subsidies. Almost half its staff are trainees. iWS should reduce the number of apprentices, as suggested in a recent consultant's report, and aim at fully commercial operations, with a substan- tial private sector shareholding and with professional management. Such arrangements are currently under negotiation. The Government's equity stake should include the value of the assets of this former railway workshop. 50. A particularly urgent need is for initial support from a management expert who has experience in setting up commercially viable manufacturing businesses in small, low-income developing countries. A management services arrangement (similar to Warportman's with SLPA) could be desirable. Marampa Iron Ore Company 51. larampa, which is a wholly Government-owned limited liacility company, is a prime candidate for liquidation. It lost Le 3 million last year and is expected to lose Le I million this year. Ore produced at a cost of US$0.24 a ton, excluding depreciation, is being sold for US$0.19 a ton. A major cause is the highly variable quality of the mine tailings being processed by the company. Reworking the mine itself has been introduced to make up for shortfalls in planned output from the tailings. Production has been very costly, and costs can be expected to rise as very old machinery has to be replaced. Sierra Leone Airline (SLA) 52. All of Sierra Leone Airline's international and domestic services are highly unprofitable. It is very difficult to see how the national airline, which has a 60 percent Government shareholding, can become profitable. Although some of the private and foreign shareholders benefit from service agreements with the airline, the Government receives no financial return from its investment. 53. Consideration should be given to selling the airline and route landing rights to foreign private sector interests. Another alternative is to contract with a foreign carrier to serve Sierra Leone.  - xii - Other Enterprises 54. Although the Government should initially focus on key enterprises, it should consider reducing its shareholding in, or completely privatizing some, of the smaller public enterprises as they outgrow the need for direct support. The Government should eventually sell its shares in Wellington Distillery and National Shipping Company (which is now in effect a shipping and forwarding agent, in competition with several others). The tourist hotels are now being leased to private Sierra Leonean interests, which in turn have entered into management services agreements with foreign companies. Since the public sector's most appropriate role in tourist development is to provide infrastructure (reliable power and water supply, for example), plans should be drawn up to transfer ownership of these hotels to the private sector (foreign or domestic). Although Government involvement in Forest Industries has been an important precondition for a German loan, its shareholding should be reduced from 100 percent to a minority position once this fairly large company is on a firm footing. Other sector-specific recommendations are recorded in a separate report 1/ and are summarized in Figure 1. Design of Public Enterprise Reforms 55. IDA could support these objectives by financing studies, investment programs, technical assistance at the Government and enterprise levels, and management training. Rationalizing the size of the public enterprise sector and the sectorwide policy changes could form some of the conditions of the first Structural Adjustment Loan, with funds allocated for the Public Enter- prise Monitoring Unit. Rehabilitation of a few selected enterprises could be undertaken as part of subsequent SALs or through a public enterprise project developed alcng with SALs. 56. The Government and the mission agreed that IDA support should be action-oriented. Technical assistance should be given to the Ministry of Finance not only to design the Public Enterprise Commission and Monitoring Unit, but also to help operate PEMU in its early years and establish an effective relationship between PEMU and PEC and the public enterprises themselves. Bank staff should work with the Government in preparing the detailed support program for selected enterprises, including introduction of lines of credit, specific technical assistance and management training. 57. Direct assistance to selected enterprises would be disbursed in accordance with the enterprise support programs agreed upon. IDA funds could be disbursed by the Government as equity, operating subsidies or loans to the enterprises for the purpose of providing equipment for modernization or expansion, importing spare parts and other inputs and providing working capital. 58. The funds available under an IDA line of credit would be clearly limited. Criteria are therefore necessary to determine which enterprises would be assisted. The mission's view is that the enterprises to be assisted should have a reasonable chance of profitable operations with financial 1/ Profiles of Selected Enterprises in Sierra Leone, World Bank, 1985.  - xiii - restructuring; that the only exceptions be enterprises with dominant social objectives; that they, too, be given clear financial targets; and that the Government be willing to consider policy changes deemed essential for efficient operations. The choice of enterprises would be determined on the basis of these criteria and on Government priorities. 59. The technical assistance component of the proposed first Structural Adjustment Loan (with focus on public enterprise reforms) should be operationally oriented and provide resident assistance, with limited support from highly specialized short-term advisors. In the case of almost every enterprise, the design and implementation of better accounting and auditing systems are a top priority. Funds should be provided to permit the hiring of experienced Sierra Leonean managers from the private sector. 60. IDA support for improved management of public enterprises could also include financing of training programs. 61. Further specific recommendations for selected enterprises are summarized in Figure 1.  - xiv - lgtre 1: SlMW OF INDIVIMlJL FMt Sl:EC1l ErTZR Type of 1ercenta ployment Enterprise Plibc Enterprse Govt. Oieship (end 1982) a idatiaos Production 1. DIMINXD 51 2,294 Teclmical eqxetise to support GovNer t revir of (a) possibLlty of contirafrg diad snfam ming and (b) tehial and finencial rissl of Kinberlite Project. 2. SLI1 100 1,318 Revier role In agricultarml development and itqact mn farzurs' ientive; review loss- ukIx~g activities and sel xdeulized assets frchxfrg tw palm oil of isI 3. SLERC 50 137 Study basic ecorud.cs of car- tiinuing to operte the refinery VS*. imqortirg products. 4. Nationaml Wb^rksp 100 341 Sell to the private secto, if possible. If not, retain ujuority Govimment sharholdizig with private sector g; tbe nmwbers of appFntces wM1 hale to be redued dratically. 5. Mrama 100 - Arran l3iquatti. 6. SL Bricks & Camics 25 230 Sef Government hbares. 7. SL Fishizg 25 1,034 Eventml sale of Government shares. 8. Forest Industries 100 468 Reduce Goverrment slmeuoldivg to uiirity. 9. SIiETI 25 110 Sel Goverment shames. 10. WeUingt Dstillaries 70 46 Reduce Gowient sbareholi to mimority or privatize totally.  - xv- 1 (ctd) servic 11. Hotels 100 700 Csider private awrership, than ratber than leasirg to private sector. 12. SJrI 51 251 H u g nI tralnfg; auputrized info system; foreip ex.harge for spare pats; lrmom Wlig. 13. HE 100 379 Mm to fully omercial opera- tio; reduce Govermit Aare- holdirg; provide foreign iuehare for spae parts; ir eveua privatization. 14. NPA 100 1,950 Introduce strategic t; mase wrLgcapdtal thro shlort-to la or issw of sM e securities; inprove financia m ntl 15. Qm Valley %ter 91 370 TN nmjor rebmdatioai. 16. SL Parts Aihority 100 1,970 to 1ii redu ndancy scbeme; reduc ferrzy 1sses by edIze frequeKy of service. 17. Seaboard 40 100 Sell GDvenzm shares. 18. SL Airlines 60 311 Omsider liquidation ard sale of route/lar4in rights to foreign private sector. 19. Ntioml, Rippi% 100 160 Institute redunancy scha; sel to private sector or arraoie Financial 2D. NDIB 80 45 Financial restrturing; withw frmi sl agricultural loam; impwuem system. 21. S