Bolivia - Second Reconstruction Import Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY CR Jg2<-z Report No. P-4532-BO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO SDR 36.1 MILLION (US$47.1 MILLION EQUIVALENT) TO TH. REPUBLIC OF BOLIVIA FOR THE SECOND RECONSTRUCTION IMPORT CREDIT June 2, 1987 I This document has a restrictd distribution and may be used by recipients only In the performance of their offiklal duties. lIts ontents may not aherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit - Bolivian Peso ($B) - until 12/31/86 = Boliviano ($B) - after 01/01/87 $b 1,923,000.00 = US$ 1.00 - on 12/31/86 $b 2.00 = US$ 1.00 - on 04/30/87 SDR 1.00 = US$ 1.305 - on 04/30/87 US$ 1.00 = SDR 0.766 - on 04/30/87 MEA5URES AND EQUIVALENTS 1 hectare (ha) - 10,000 m2 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km2) = 100 ha 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds GOVERNMENT FISCAL YEAR January 1 to December 31 ABBREVIMONS AND ACRONYMS BAB - Bolivian Agricultural Bank BD - Barrels per day BISA - Industrial Development Bank BAMIN - Bolivian Mining Bank CAO - Camara Agricola Oriente CB - Central Bank of Bolivia COMIBOL - National Mining Corporation GEOBOL - Geological Survey of Bolivia ENDE - National Power Company ENFE - National Railways Corporation FI - Financial Institution ICB - International Competitive Bidding IDB - Inter-American Development Bank LPG - Liquid Petroleum Gas NEP - New Economic Policy OECF - Overseas Economic Co-operation Fund (Japan) PIP - Public Investment Program RIC - Reconstruction Import Credit SAC - Structural Adjustment Credit SAL - Structural Adjustment Loan SNC - National Road Service SBA - Stand-By Agreement SOE - Statement of Expenses TGN - Tesoro General de la Nacion (the Treasury) YPFB - Bolivian Petroleum Corporation  FOR OFFICIAL USE1 ONLY BOLIVIA SECOND RECONSTRUCTION IMPORT CREDIT CREDIT AND OPERATION SUMMARY Borrower: The Republic of Bolivia Beneficiaries: State enterprises; private sector producers and exporters in agriculture, agro-based industry and manufacturing. Amount: SDR 36.1 Million (US$47.1 Million Equivalent) Terms: Standard IDA terms Relending Terms: (i) State enterprises: 8.5%, 15 years and 3 years of grace. (ii) Private sector: up to 13.5%, maximum of 1 year with 3 months of grace. Operation Description: The Second Reconstruction Import Credit (RIC II) aims to maintain the momentum of reform at the macroeconomic and sectoral levels and provide critically needed financing to restore economic growth. It would follow directly from the First Reconstruction Import Credit, approved in May 1986, which was aimed at providing quick disbursing financing for priority imported equipment, spare parts and other inputs needed in mining, agriculture, industry, energy, power and transport. RIC 11 would (i) aim to deepen the action programs for export promotion and economic reactivation in the energy, agriculture, and industrial sectors; (ii) facilitate railway and road transport operations that provide essential support to the production sectors; and (iii) provide the framework for strengthening public investment programming and managenent as well as a definition of an appropriate policy response to the social problems linked to the period of hyperinflation and subsequent adjustment. The Credit proceeds would finance priority equipment, spare parts and other imported inputs in the energy and transportation sectors, provide foreign exchange for imports for producers in agriculture, finance essential locally purchased inputs needed by the private manufacturing and agro-based entities, and finance technical assistance to facilitate the restructuring of the 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.  - ii - railway sector. A Credit facility would be established in the Central Bank through which funds would be onlent to YPFB and ENFE, transferred to SNC as a grant, disbursed against documented payments for imports of producers in agriculture, or onlent to the private sector producers through financial intermediaries. The foreign exchange risk would be borne by the public enterprises (in the case of YPFB and ENFE), the private sector sub-borrowers, and the Government (in the case of SNC). Estimated Disbursements: FY88 FY89 ~~~~ ~~~(Uis$Million)3 20 27.1 Risks: With economic stabilization on track, the Government's economic program is now explicitly focused on achieving a rapid resumption of growth. While the Government's record to date bodes well for the future, the major risk continues vo be the fragility of the economy, ravaged by hyperinflation and by terms of trade shocks for its two major exports. A further risk relates to possible delays resulting from the Government's weak administrative system. In order to minimize the risks and ensure timely actions in response to changing circumstances, IDA would monitor the implementation of the economic program and would conduct a medium-term review within six months of Credit effectiveness. Appraisal Report: No staff appraisal report has been prepared for this project. Map: IBRD 16591  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 36.1 MILLION (US$47.1 MILLION EQUIVALENT) TO THE REPUBLIC OF BOLIVIA FOR A SECOND RECONSTRUCTION IMPORT CREDIT 1. I submit the following report and recommendation on a proposed Second Reconstruction Import Credit to the Republic of Bolivia for SDR 36.1 million (US$47.1 million equivalent) on standard IDA terms. PART I - THE ECONOMY 2. An Updating Economic Memorandum (No. 6455-BO) was distributed to the Executive Directors in January 1987. The following discussion is based on that report and the findings of several missions which visited Bolivia after the Government adopted its economic stabilization and reform program. Country data sheets are presented in Annex I. Background 3. The Government of President Paz Estenssoro, which took office in August 1985, faced a country in acute economic crisis. Real GDP was contracting for the fifth consecutive year, shortages were widespread, and the annual rate of inflation reached almost 24,000% in the twelve months preceding August 1985. The external payments situation was characterized by extreme currency overvaluation, the virtual depletion of usable international reserves, and rapid accumulation of external payments arrears. The new Government initiated a far-ranging stabilization and adjustment program in late August 1985, termed the New Economic Policy and embodied in Supreme Decree No. 21060. The primary objectives of the program were to reduce inflation rapidly, to restore external and internal financial balance, and to lay the foundations for sustained economic recovery. Centered on a sharp reduction of the deficit of the nonfinancial public sector, the program was designed to accomplish stabilization and reform with minimal controls, reducing the state's role and encouraging a free market economy. 4. The Government inherited an economy that presents particular development challenges. Bolivia is one of the poorest countries in Latin America and per capita income has declined sharply in recent years (by over a third in the period 1980-86). Bolivia's landlocked position and mountainous terrain render transport costs high and access difficult. Both internal communications and links to neighboring countries are poorly developed. The population density is rather low with about 6-1/2 million inhabitants living within an area of 1.1 million square kilometers. Population is growing at 2.8% a year. About one-half of the economically active population is employed in agriculture, but primarily on the  - 2 - highlands of the altiplano where subsistence farming predominates and potential for growth is limited. The vast, sparsely populated lowlands have good potential for agricultural production, but difficult access, lack of infrastructure, and a poor policy environment have dampened development and growth in the past. The mountains are rich in minerals but the major product--tin--has poor prospects and there has been insufficient exploratory work to exploit other minerals in the short term. Bolivia has important hydrocarbon resources, especially natural gas, but export prospects are uncertain. The manufacturing sector is small and dominated by a few agro-industrial enterprises. Sharp increases in coca production and processing during the 1980s have altered the structure of the economy, favoring the development of illicit activities and giving rise to domestic social problems. The Government has recently embarked on a comprehensive program to reduce cocaine production. 5. Buoyant commodity prices and relative political stability provided easy access to foreign financing in the 1970s. Gross investment increased to almost 25% of GDP in the middle of the decade. The growth of investment reflected primarily large-scale public investment projects, many highly questionable. Investment declined in the late 1970s but private and public savings declined more rapidly, thus leading to increased recoarse to external financing (including an increaeing share of commercial bank lending). The result was a rapidly mounting external debt. By the early 1980s, severe internal and external imbalances had become apparent. Real GDP began to contract and investment and national savings declined. External financing sources dried up, and net international reserves became depleted. A major cause of the mounting problems was a sharp drop in Government revenues, from 21% of GDP in 1980 to less than 5% of GDP in 1984. Public sector finances deteriorated rapidly; the General Government deficit widened from near balance in 1980 to 23% of GDP in 1984. Increasing reliance on domestic credit expansion to finance th4s deficit fueled inflation, which ran at almost 24,000% in the 12 months ending in August 1985. Bolivia's external public medium- aud long-term debt increased to about US$3.2 billion by the end of 1984, equivalent to close to four-and-one-half times merchandise exports. Servicing the external debt had become a serious problem by 1982 and external payments arrears amounted to about US$1 billion in mid-1985. Naintenance of a fixed exchange rate led to a sharp overvaluation of the peso and a very wide (20 times at one point) gap between official and parallel market rates. This led to massive misallocation of resources and stifled export growth. 6. Behind the poor economic performance of the early 1980s lay deep-seated structural problems. Of primary importance were the increased role of the state and its declining effectiveness. After the 1952 revolution, the share of Government in the economy assumed large proportions. Numerous state enterprises, active in many fields including mining, manufacturing, and transport, operated in a confused policy environment without controls or support. Most declined steadily in efficiency over the past decade. Frequent changes of governments exacerbated uncertainties about the overall policy framework, organization, and procedures. Public sector management was exceptionally weak. These problems accounted in large measure for declining Government revenues, uncontrolled current expenditures, and poor investment project selection  - 3 - and implementation performance. Developments in the financial system were characterized by a decreasing level of resource mobilization, distorted credit allocation to finance the public sector, growing solvency problems of the commercial banks, and increasing decapitalization of the state banks. The environment for private investment was poor, leading to the formation of a private sector that focussed on trading and other short-term activities rather than on entrepreneurship and production. Capital flight was substantial and capacity was underutilized by widening margins. PART II THE NEW ECONOMIC POLICY Recent Economic Developments and Performance 7. The Government's economic program introduced in late August 1985, was designed not only to arrest hyperinflation, a symptom of the underlying disorientation of the economy and of the break-down of discipline, but more importantly to eradicate the root causes of economl- disintegration and to return the Bolivian economv to the path of growth. The program, named the New Economic Policy, is far-ranging and has been carried out with vigor over the past 20 months. In Appendix I, we present the key features of the program as it now stands, reflecting both the framework initially established in Decree Law No. 21060 of August 1985 and subsequent developments. The presentation of the program in Appendix I is almost identical to that in the Medium-term Economic and Financial Policy Framework paper presented by the Government of Bolivia to the meeting of the Consultative Group for Bolivia in December 1986. Stabilization 8. Probabl, the most visible accomplishment of the Government in the initial phase of the program has been a drastic reduction of inflation. In the past 12 months inflation averaged less than 2% per month while the exchange rate has been unified and stable. This was achieved by a draconiantightening of the fiscal policy, an accompanying tight monetary policy, and a freeing of the exchange rate, interest rates and most internal prices. The Government achieved a near equilibrium on the fiscal side (in fact there was a small surplus in the non-investment/operational budget in 1986) by spending no more than it was collecting and by freezing the funds of public sector agencies. In the process the Government may be building arrears which if it continues is not a sustainable way to finance government expenditures. The situation continues to be monitored by a Control Commission which makes inter-agency transfers to meet priority expenditure r luirements within the limits set by revenues, strictly limited monetary emission and, in the case of investment, the availability of external financing. The tight fiscal policy is complemented by a similar monetary policy. This has resulted in a redirection of most of the available credit to the private sector, albeit at high real interest rates. The high rates have helped increase demand deposits and reverse capital flight, both of which have in turn helped reduce interest rates, on boliviano denominated loans, gradually over the past 12 months (from 5-6% per month a year ago to about 3% per month now).  - 4 - 9. Economic reactivation, however, has been slow in coming. Preliminary estimates indicate that GDP fell by 3% in 1986 (a decline for the sixth consecutive year), in contrast to the 0% growth that had been expected at the time the first Reconstruction Import Credit was being processed a year ago. The terms of trade losses from the October 1985 halving of tin prices practically paralyzed COMIBOL, the state mining company; as a result GDP originating in the mining sector fell by 35% in 1986. Prices of gas exports to Argentina were negatively affected by the collapse in oil prices in the first half of 1986 and petroleum production continued to fall. Droughts in the altiplano and floods in the lowlands depressed agricultural output. Activity in the supporting sectors such as transportation, power, commerce and finance was therefore also subdued. And agriculture and domestic industry were not helped by the large differences between official and parallel exchange rates in the neighboring countries, particularly Brazil. Dollar value of imports rose by 30% between 1985 and 1986. 10. The demand side reflected the continued weakness on the output side. With activity down, and given the squeeze on public sector wage bills, real incomes continued to fall, depressing private consumption. Public consumption also declined given the tight fiscal policy. On the other hand, non-traditional exports increased from US$24 million in 1985 to US$92 million in 1986 and the sharp fall in export revenues from traditional exports reflected a fall in prices and not in volumes. Total volume of exports in fact increased over 5%. Industrial capacity utilization, although low (40% by some estimates compared to a maximum achieved in the past of 80%), was beginning to rise as was industrial employment. Although manufacturing fell by 1% during 1986, it reportedly grew by over 10% in the second half of the year. Mining sector production may have bottomed out and some metal and mineral prices have improved in recent months. Finally, for the first time in years national accounts for 1986 may record an increase in investment (of about 3%). If these positive developments continue, there is a fair chance that the economy will finally turn the corner and that we will see an increment in GDP in 1987. From Stabilization to Longer Term Growth 11. Stabilization measures that brought the successes on the inflation and exchange rate side were flanked by various other policy actions which, typically, take a longer time to yield results. First, controls on exports and quantitative restrictions on imports (except for the continued prohibition on imports of sugar and cement) have been removed. A 20% uniform import tariff has been imposed with no exemptions except for wheat which, too, will stop in a few months. This has put producers that use a large proportion of imported inputs at a disadvantage vis-a-vis their competitors and consideration is being given to a reintroduction of a uniform rebate of customs duties and indirect taxes to exporters. There are also complaints that the Boliviano is again becoming overvalued when compared to its value a year ago. These feazs should be allayed somewhat by the slow slide of the Boliviano which since February has been devalued to Bs 2 per US$ from Bs 1.92 per US$ (a rate at or around which it had traded for almost a year). The authorities are probably being cautious about too rapid an adjustment, if it indeed is still needed, because of fear of reigniting inflation. This fear may appear curious in a country with 40% capacity utilization and falling real wages (for most of  the labor force), but the memory of hyperinflation has not receded yet and the Government probably has to continue to err on the side of caution for some time to come. 12. Second, the Government has made strenuous efforts to regularize its relations with creditors. In June 1986 the Paris Club agreed on a re- scheduling of US$400 million of bilateral debt on generous terms. After some delay the follow-up bilateral agreements with the creditor Govern- ments involved have recently been negotiated except with Argentina and Brazil. Talks with these two countries are to start soon. Bolivia will need to return to the Paris Club in the summer of 1987 and probably in mid-1988 and mid-1989 as well. There are also ongoing negotiations with commercial banks. The face value of the commercial bank debt is about US$650 million which, depending on how one treats accumulated interest and penalties, could total close to US$1 billion. This debt has not been serviced since 1984. Recently, the Government started moving on an offer to buy back this debt at a discount and to explore the possibility of debt-equity conversions. It is too early to speculate about the outcome of this initiative but it is one more indication of the Government's determin- ation to regularize its relationship with all creditors, despite the country's almost desperate external financial situation. 13. Bolivia has worked closely with the IHF (Part VI). Among the other multilateral institutions involved in Bolivia, the Inter-American Development Bank (IDB) is the most important, with programs that are larger than either the World Bank or the IMP. The IDB maintained an active presence in Bolivia even during the period of limited Bank involvement (1980-85) which is reflected in its current large project porttvAlo that stands at about US$450 million in undisbursed commitments. Bolivia has continued to service its debt to the IDB as it has done in the case of the World Bank. 14. Third, in line with the policy of changing the role of the state and raising the executing capacity of the public sector, there has been a concerted effort to cut public sector employment and cap the wage bills of the ministries and public sector entities. So far major changes have occurred at the Central Bank which reduced its labor force from 1,200 to under 300 people since February, and in COMIBOL, the state mining company, which now has only about 7,000 employees, down from 27,000 in 1985. Changes elsewhere have been slower, but capped wage bills have forced a number of ministries and public entities to shed labor and use the result- ing savings to raise the remuneration of its best people that otherwise might have gone to better-paying jobs in the private sector. Other mea- sures that are being considered to make the public sector more efficient include installation of better information, auditing and financial control mechanisms, readjustment of the cost and tariff structure of entities in the transportation, communication and power sectors, raising the level of cost recovery and improving management techniques and train appropriate staff. Most of these measures are still at the stage of distussion due to the urgency of many other problems that also need to be solved and the great dearth of skilled people. 15. The r.eed for trained manpower and for much higher investment, on the other hand, probably means an increase in the commitment of public resources in stIme important areas in the medium term. Without considerably larger and higher quality inputs of both physical and human capital, it is  -6- unlikely that an increase in longer-term growth to a rate that would significantly improve living standards of most Bolivians within their lifetimes can be achieved. Sustained growth rates of 6-7% have typically meant overall investment levels of 20-25% of GDP, mostly channelled through the public sector. They have also meant major additional investments in education and health of the population over long periods of time. Both of these mean incomparably higher savings rates than exist in Bolivia today and a much more efficient, better targeted and also, for a long period of time, probably a larger public sector. 16. Room will therefore have t^ be made in the domestic budget for major and sustained increases in public expenditures on education and health and on paolic investment. Bolivia now spends, and has done so for years, a much smaller percentage on education than its neighbors or than might be required to build a solid human capital base for future development. Even these expenditures are biased toward higher education, the return to which is probably lower than to primary and secondary education, and in which the main beneficiaries are people who could afford to pay a good portion of it. Teacher quality in primary and secondary schools is low, they are poorly paid, yet almost all of the expenditures in education go towards teacher salaries, leaving little for teaching materials, equipment, not to speak of improvement in facilities. The result of this neglect is reflected in some of the worst drop-out and non-completion rates in Latin America (and they are disastrous in rural areas where most of Bolivians live). Statistics on the health care and the health status of the population are just as discouraging. The urgency of these problems has worsened in the last 6 years of economic crisis as shrinking incomes had to be spent on food, driving out less immediate necessities. In the short run such a situation will continue to provide fuel for social tensions which could undermine political support for the reform program. In the longer run neglect of Bolivia's human capital is bound to have a negative impact on growth. The social sectors in Bolivia, therefore, need immediate attention which must be backed up by a serious and sustained increment in firancial resources (see Action Program in Appendix 2). 17. Public investment turned out to be only 4% of the shrinking GDP in 1986 (with private investment adding another 3 percentage points). The total of 7% is a far cry from the 20% that might have a chance of producing 6% GDP growth and short even of the 15% ratio that would arrest the slide in consumption per capita. What we know of the public investment process in Bolivia today also suggests that this investment is very largely a carry-over from the pre-NEP days. It, therefore, responds to old priori- ties rather than being defined away from tin mining and exports, towards agriculture, efficient import-substituting industry and appropriate supporting infrastructure. It could hardly be otherwise as the new sectoral directions and priorities are still in an infant stage of formulation. Yet a formulation of the new sectoral strategies would permit the Government to develop a better targetted public investment program which, in turn, would signal to the private sector the new areas of potential expansion. And a larger role for the private sector is one of the announced intentions of the Government besides being the area, in addition to the informal economy, in which most of new future employment will be generated. Even if most of the ongoing investment program were still relevant its implementation is seriously hampered by an acute  - 7 - shortage of skilled middle-level people. As a result the leading people are ofton drawn into day-to-day implementation problems rather than thinking about longer term strategies and about the obstacles that might stand in the way of their implementation. The returns to such thinking are likely to be high since it is as yet far from clear how Bolivia's successful stabilization effort can be converted into a long-term, sustainable expansion. 18. To support an expanding public investment program and a strong program of expenditures in the social sector to build human capital, and still leave room for growth in private investment will require a major re- source mobilization effort. Domestically a beginning has been made. In 1986 Bolivia promulgated a new Tax Law shifting from the old concept of taxiag iucomes to taxing consumption and wealth. A package of six taxes was designed to accomplish this purpose: (a) a tax of 10% on value added (VAT) on all business operations inoluding, to the extent possible, those in the informal sector; (b) a tax complementary to the value added to be levied on all incomes, including dividends, interest and rental receipts, professional honoraria, stock or bond liquidations, and returns from abroad (to encourage compliance, including by the informal sector, taxpayers will be able to include as payment of this tax 10% of the amount of purchases subject to the VAT); (c) a tax on manufacturing and on imports of luxury consumer goods such as alcohol, cigarettes, perfumes and cosmetics, precious gems and jewels (rising to between 30% and 50% within 3 years); td) a transactions tax of 1% on all sales, constructions, services and rentals; (e) 2% annual tax on additions to net worth of enterprises (replacing the current profit tax); and (f) a tax on rural and urban real estate, boats, automobiles and airplanes. 19. To implement the system, Subsecretariat of Tax Collection in the Ministry of Finance was given the status of a new Ministry of Taxation as of January 1987. It is to be reintegrated into the Finance Ministry once the new system is successfully implemented. Creation of a new ministry is meant to underline the government's political commitment to implementing the reform and to contribute to rebuilding the image of the tax administra- tion tarnished by heavy corruption in the past. As another move to win back public confidence, as well as to collect some revenues and broaden its .ax base, the government instituted a one-time regularizaticn tax (on wealth of companies and individuals), replacing income taxes due through 1985 and providing to those who complied amnesty through December 31, 1985. This measure was unexpectedly successful, providing some US$25 million of extra revenues in 1986. Finally, to speed processing and to minimize contact between officials and taxpayers (which in the past, be- sides the poor pay of tax administrators, was a leading eause of corrup- tion), the taxes will be collected via the commercial banks which in lieu of payment will be allowed to use this money for 10 days (perhaps longer at first). 20. These measures, along with import tariffs (minus export rebates), should in a few years match the revenues from YPFB, the national petroleum company, bringing total revenues to about 16% of GDP. The problem is that the government's recurrent expenditures, including increased efforts in the social sectors and interest payments on external debt of about 5% of GDP are likely to claim about 12% of GDP. This leaves only 4% of GDP for  -8- public investment. If a public investment program of 8-9% of GDP is to be carried out on a sustained basis, complemented by private investment of about 6% of GDP, and if private domestic savings stay near their historic level of 8-9% of GDP, a major portion of the public investment (2-3% of GDP) will have to be financed from abroad for the foreseeable future. Assuming that foreign funds of this magnitude will be forthcoming and assuming that they are efficiently used, Bolivia might achieve a GDP growth rate of about 4% per year. Once population growth and interest payments on past loans are taken into account, 4% GDP growth rate represents virtual stagnation in per capita consumption. After a prolonged and severe decline, mere stagnation in the standard of living may not be a politically acceptable outcome. Outlook 21. Tt should be clear from the previous section that Bolivia faces difficult, if not insurmountable, prospects over the medium-term. It is burdened by the structural problems of the size of the debt it has inherited, and by the concentration of its legal exports in two commodities which pose special problems, tin and natural gas. Its accrued external debt, estimated to be over US$4 billion at the end of 1986 if interest payments and arrears are included, represents over 600% of its exports of goods and services, and is about equal to its GDP (depending on which estimate of GD? is used). Interest on the debt is accruing at 7% of GDP. Tin and natural gas accounted for 90% of Bolivia's merchandise exports in 1985. With the collapse of the tin market in October 1985, the effective price of tin has dropped to less than half of what it was before. The sharp decline of international oil prices in early 1986 left the price of Bolivian natural gas sold to Argentina higher than oil equivalent levels. Even after a 12% cut in the gas price effective for 1986, the gas was priced at a level equivalent to about US$22-US$23 per barrel of oil, while the average world price for oil in 1987 is projected at US$16-17. Further downward pressure on prices of natural gas exported to Argentina is thus possible. 22. The stabilization has set the stage for a recovery of the economy. As alluded to earlier (para. 10) there are some signs of economic revival (See Table 1). However, even to attain a rate of growth of GDP of just 4% per annum over the next 3-4 years presumes that Bolivia will be able to overcome a number of problems. To keep its balance of payments manageable exports other than tin will have to increase at about 7% per year to keep the overall volume of exports growing at 4-5%; import growth will have to be constrained to 6-7% per year; debt coming due will need to be rescheduled on favorable terms; net disbursements for medium- and long- term debt will need to average around US$400 million a year; and, as pointed out earlier domestic savings rate will need to be raised sharply. If all this were accomplished it would represent an achievement that would have been impossible under the Government policies of before August 1985. Nevertheless, even these efforts, great as they are if successfully achieved, are likely to prove insufficient in the 1990s. Beginning in 1990. Bolivia will, on present assumptions, face a large, unfinanced gap in its external balances, because of debt repayments that will become due and because of uncertainties sui.rounding its gas exports to Argentina after the  - 9 - TABLE 1: BOLIVIA - KEY NACROECONONIC INDICAIORS AND BALANCE OF PAYNENTS,1985-1995 --Actual-- --Estieuted- ------ ----------------------Fojected------------- 1985 1986 1987 1988 1989 1990 19?1 1995 KEY NACRUEONON1C INDICATORS SOP Growth Rate -2.1 -2.9 3.2 3.4 4.2 4.0 4.0 4.0 6DY/capita Growth Rate -2.5 -9.4 -0.9 0.8 1.6 1.3 1.3 1.4 Consumption/capita Growth Rate -5.2 -4.7 -4.7 0.1 0.6 0.5 0.4 0.3 Debt Service (in USS) 517.6 378.3 381.9 392.9 420.3 576.1 646.1 989.9 Debt Service/X6S 68.1 54.1 56.2 54.3 52.9 66.1 67.5 77.5 Debt Service/6DP 13.7 9.5 8.6 8.3 8.3 10.6 11.2 13.8 Bross Investment/5DP 6.5 6.9 9.3 10.9 11.8 12.6 13.1 14.5 Domestic Savingsl/DP 6.8 6.0 10.8 11.2 11.8 12.4 13.0 12.6 National Savings/SDP -3.7 -2.4 3.6 3.6 4.3 4.9 5.7 3.6 Public Investment/6SP 3.3 4.0 5.0 6.0 6.6 7.2 7.6 8.3 Public Domestic Savings/GDP -7.6 1.0 0.3 3.0 3.6 4.0 4.3 4.3 Ratio of Public/Private Investment 82.1 105.5 116.2 126.4 132.2 134.6 138.3 137.0 Export Growth Rate -9.8 5.6 -3.1 2.5 5.6 5.2 6.0 7.6 Exports/SDP 1Y.1 20.7 19.5 19.3 19.6 19.8 20.2 19.1 Import Growth Rate 14.0 12.2 -14.1 8.8 7.1 6.5 5.6 4.4 Imports/SDP 18.8 21.7 18.1 19.0 19.5 20.0 20.3 21.0 Current Account/SDP -10.2 -13.5 -11.1 -12.4 -12.4 -12.5 -12.1 -13.2 BALANCE OF PAYMENTS ( millions of $Us) Resource Balance 11.3 -200.0 -173.0 -227.4 -247.9 -270.3 -277.5 -308.3 Exports of SNFS 721.2 660.5 625.5 667.6 738.9 811.7 893.8 1199.4 Imports af 6NFS 709.9 860.5 798.5 895.0 986.8 1082.0 1171.4 1507.7 Factor Service Receipts 24.5 22.1 34.3 34.0 32.0 34.0 35.0 42.0 Factor Service Payments 434.9 373.5 371.7 410.7 435.5 466.4 484.7 718.0 Private Current Transfers (net) 14.5 17.0 20.0 22.0 24.0 26.0 28.0 36.0 Current Account Balance -384.6 -534.4 -490.4 -582.1 -627.4 -676.7 -69.3 -948.3 Official Transfers 65.5 82.0 95.0 101.0 106.0 111.0 117.0 142.0 Direct Foreign Investment 10.0 20.0 20.0 35.0 45.0 50.0 55.0 75.0 Net Disbursement on NLT Debt 120.7 346.4 316.5 394.7 402.4 354.4 322.0 150.9 Short Term Debt 24.5 118.5 13.8 11.8 15.0 15.0 15.0 15.0 Use of IMF Resources -12.4 86.2 18.6 39.4 14.9 -64.5 -83.3 0.0 Changes in Reserves 1 -:increase) -33.7 -125.4 0.0 0.0 0.0 -80.0 -100.0 -30.0 Errors and Omissions 210.0 6.7 0.0 0.0 0.0 0.0 0.0 0.0 6apfil 0.0 0.0 26.5 0.2 44.1 290.8 373.6 595.3 Source: Central Bank of Bolivia and mission estimates. May 29, 1987  - 10 - 20-year contract expires in 1992. Furthermore, on the same assumptions, the ratios of debt service to exports and of debt service to GDP deteriorate sharply over the period. 23. The solution to this dilemma of the 1990s will necessarily involve a broad-based approach to develop exports further, to mobilize additional external finance at concessional terms and obtain fi ther debt relief, and to significantly raise domestic savings. CalculaL ns of what would be needed along the lines of such a broad-based approach indicate that i. would be necessary to: (a) raise the rate of growth of exports other than tin and gas from 7% per annum to 13-14% per year starting in 1989-90, (b) accelerate the rate of domestic resource mobilization to enable investment to reach 15% of GDP by 1990-91 (from 7% of GDP in 1986), (c) raise net external disbursements on medium- and long-term debt to the level of US$450 million per year, and (d) obtain further debt relief. If this scenario materializes the financing gap projected for the 1990s could be closed without a negative impact on growth. Also under such a scenario, standard debt ratios would stop worsening and would eventually be set on an improving trend. 24. This is undoubtedly an immense task and such an outcome will require actions well beyond those achieved thus far. The major issues that the Government will have to tackle in order to succeed include: (a) implementing in practice Government's announced intention of changing radically the role of the state; (b) designing an efficient public sector investment program that supports well-articulated sectoral strategies as well as opens up new possibilities for the emerging private sector; (c) designing and executing an effective social service program to address Bolivia's deep-seated social problems which, if not addressed, threaten to derail the new economic program; (d) generating resources to finance these needed investments and current expenditures by substantially raising the domestic savings effort; (e) making a major effort to improve the public sector's capacity to manage these processes; and (f) making the necessary institutional changes and investments to reduce transport, communications and energy costs, thereby helping improve competitiveness of the Bolivian economy. If the Government manages to address these issues in a satisfactory manner, Bolivia should, by the mid-1990s, be on its way to developing an economy flexible enough to withstand the shocks of the international environment and a diversified export base increasingly capable of carrying its large and continuing debt burden. PART III - THE FIRST RECONSTRUCTION IMPORT CREDIT 25. The first Reconstruction Import Credit (RIC I-Cr. 1703-BO) was approved by the Executive Directors on May 20, 1986. It was the first Bank/IDA operation for Bolivia approved since 1980. The Credit, for SDR 48.4 million (US$55 million equivalent at the time of Credit approval), was designed as an emergency operation to help reactivate the economy, after almost five years of economic decline. The operation was in support of the stabilization and adjustment measures introduced by the Government in August 1985, and was closely associated with the IMF Standby operation, which was approved on June 19, 1986. RIC I was signed on June 2, 1986 and became effective on October 14, 1986.  - 11 - 26. The approach under the RIC was to focus on financing critical imports for the sectors which were key to recovery of the economy and specifically of exports. The operation was to be quick-disbursing, with most funds committed within 10 months after Credit effectiveness. Most actions provided under the Credit were thus linked to the specific sectors (except for conditionality calling for a mid-term review of the overall economic program). The sectors were: (a) Mining, US$14.5 million for COMIBOL subject to substantial progress in restructuring its operations, and US$6.5 million for private mining enterprises; (b) Energy, US$11.0 million for critical imports for the state petroleum company, YPFB; (c) Power, US$1.8 million for the state power company, ENDE, subject to conditions on ENDE's tariffs and capital improvement program; (d) Transport, US$4.5 million for ENFE, the state railway company, for critical imports, subject to action on cost and tariff studies; (e) Agriculture, US$7.2 million for imports of agricultural inputs for private farmers and traders; and (f) Industry, US$4.5 million for manufacturing and agro-based industry, providing inputs needed by qualified industrial exporters. US: million was unallocated to give some flexibility to take into account different progress rates and to provide a basis for program modification in the event of deviation from the program overall. 27. RIC I was designed as six separate subprojects, to allow each sector program to advance independently of the others. The implementing agencies thus had primary responsibility for ensuring that execution proceeded as planned. The Ministry of Finance and the Central Bank shared responsibility for implementation and administration of the Credit overall. Credit proceeds were made available to the Central Bank under a subsidiary agreement with the Government. Funds were onlent by the Central Bank to COMIBOL, YPFB, ENFE, and ENDE under financing agreements. For the private sector component, a Project Coordinating Committee in the Central Bank was to oversee implementation and establish and administer a rediscount facility for eligible financial intermediaries (private banks). For most components, the approach was a positive list of imports, with appropriate procurement procedures. In all cases, a negative list was also provided. 28. Central features of the RIC were its emergency character, strong sectoral focus and directed sectoral investments, which distinguished it from a SAL/SAC (although in the Board discussion it was characterized as a 100% front-loaded SAC, given the Government's exceptional economic program and record of action). Further, there was no general statement of economic policy along the lines of a Letter of Development Policy or its equivalent. The strategy was to follow the RIC I with further credits designed both to support continuation and deepening of the economic program overall, and the implementation of the specific sectoral programs. 29. A medium-term review of the implementation of the National Economic Policy (which was the policy basis of the RIC I), and the progress of RIC I was undertaken in February/March 1987. A detailed analysis of the NEP implementation was discussed in Part II of this report. On the whole, Government policies and programs have continued to complement and reinforce those that justified RIC I. The results are satisfactory notwithstanding the adverse effects of unforeseen external developments. RIC's implementation is progressing satisfactorily after experiencing initial  - 12 - start-up problems related primarily to unfamiliarity of Government officials with IDA procedures, lack of clear coordinating responsibility to follow up progress on a daily basis; internal procurement problems in some public enterprises, and the significant reorganization of COMIBOL. Disbursements are now projected to pick up rapidly in the last quarter of FY87 because finds allocated to YPFB, ENFE and ENDE have been almost fully committed and private sector subloans to purchase domestically-produced goods have been overcommitted. A Credit reallocation to meet the additional financing requirement under the latter components was approved in March 1987. The Credit funds are expected to be about 80% committed and about 30% disbursed by June 1987. This is still within the expectations expressed in the RIC I President's Report which anticipated full commitment within 10 months of Credit effectiveness (i.e. by August 1987) and full disbursements by June 1988. 30. In contrast to other subprojects, progress registered by COMIBOL and the private sector import subloans for mining, industry and agriculture has been slow. The principal reason for COMIBOL is the drastic reorganization that the company accomplished in late 1986/early 1987 leading to the closure of uneconomic mines and laying off of about 20,000 miners. COMIBOL has been transformed into a holding company with five subsidiary companies. COMIBOL proposed, and IDA agreed to, a reduced import plan based on the new set up. With regard to the import subloans for the private sector, the low demand can be attributed to continued decline of production in mining and very slow recovery in manufacturing in the face of large underutilized capacity. Increasing the utilization of this capacity implied a greater need for working capital especially raw material inputs which are largely domestically-produced. Hence, there is stronger demand for subloans for local inputs particularly from non-traditional export industries (e.g. processing of coffee, soybeans, and wool). In the case of agriculture, RIC I was not effective in time for the funds to be available for the 1986-87 crop season. The Central Bank plans to launch a promotion campaign to increase potential subborrowers' awareness of the availability of these import subloans. PART IV - THE PROPOSED OPERATION Background 31. An IDA Mission visited Bolivia in November, 1986 to discuss follow-up emergency financing to RIC I in support of the expansion of reforms launched in a number of sectors and to assist in the reactivation of the private sector. Further discussions between IDA and the Government on this matter were held during the Consultative Group Meeting in Paris in December 3-4, 1986. These discussions led to the appraisal of the proposed RIC II operation in February 1987. During appraisal, public investment programs and import requirements for three critical sectors were reviewed; priority requirements to reactivate private sector activities were identified and implementation arrangements including administrative set-up, procedures of on-lending to major public enterprises and the private sector, procurement and disbursement were elaborated. Negotiations were  - 13 - held in Washington during the May 18-28, 1987 period. The Bolivian delegation was headed by the Minister of Finance, Mr. Juan Cariaga. There is no separate appraisal report for the proposed Credit. A Credit Summary is presented at the front of this report and supplementary data and information are presented in Annex III. Objectives 32. The proposed operation would address the urgent actions needed to maintain the momentum of the reform at the macroeconomic and sectoral levels and provide critically needed financing to restore economic growth. Following the goals of the first RIC, the proposed operation would aim to deepen the action programs for export promotion and economic revival in the critical sectors (focusing on energy, transportation, agriculture and industry) and to provide explicit action programs for two critical issues for economic management in the years ahead: strengthening of public investment programming and management; and definition of an appropriate policy response to the social problems linked to adjustment programs. Specifically, the operation's objectives may be summarized as follows: (a) to assist in the continued rehabilitation and structural adjustment of the energy sector, the principal source of Bolivia's foreign exchange earnings; (b) to support actions to remove bottlenecks in the transport sector and to finance critical imports for the sector; (c) to provide foreign exchange for critical imports for the agricultural sector to ensure its continued recovery and growth; (d) to provide working capital financing for locally purchased inputs in order to help reactivate private sector production and exports; (e) to help improve the efficiency and increase the level of public investment through definition and implementation of a sound public investment program; and (f) to define an appropriate policy framework for addressing social issues within the medium-term economic program. 33. The proposed RIC II, complementing the objectives and activities of RIC I, is a centerpiece of IDA's operational strategy for Bolivia. The underlying objective of this strategy is to support the revival of public and private investment and help assure an effective response to the urgent social problems confronting the Government. In line with this objective, this operation would provide fairly quick disbursing external and local financing to sectors vital for economic recovery. Economic growth has yet to resume; hence, the Government must move effectively and rapidly with measures geared to boosting growth. The operation would also provide an effective vehicle to advance IDA's policy dialogue to help sustain the momentum of reforms, draw up rational public investment programs and support the definition and execution of action programs in the priority sectors of energy, transport and agriculture. These sectors require  - 14 - fundamental adjustments in policy and investments and offer prospects of fueling growth in the medium term. Assurance was obtained during negotiations that a mid-term review of the Government's economic program and the implementation progress of the Credit operation would be held within six months after Credit effectiveness, and at other times at the request of IDA. 34. The sectoral action programs under RIC I and RIC II are being complemented by adjustment and investment programs in other critical sectors to be supported by IDA credits. For instance, the proposed power rehabilitation project (FY87) and mining sector rehabilitation operations (FY89) reflect this approach. The proposed RIC II would likewise be complemented by the action programs envisioned under the proposed financial sector adjustment credit operation (FY88). It focuses specifically on urgent reforms of the banking system which are crucial to a resumption of credit operations on a significant scale and, hence, key to resuscitating private investment. Looking ahead, specific adjustment and development programs for transport, agriculture and social services sectors are being prepared. This operational strategy reflects our assessment that specific support for sector action programs and investments is the best way to help the Government in the step-wise design and implementation of a coherent macroeconomic program and medium-term strategy. Operation Description 35. The proposed Credit would cover (a) priority equipment, spare parts, supplies, materials and other imported inputs needed by the energy (hydrocarbon) and transportation sectors; (b) foreign exchange needed by the importers of inputs for the agriculture sector; (c) working capital requirements of private producers and exporters; and (d) technical assistance to facilitate the restructuring and rehabilitation of the railway subsector. The indicative Credit allocation to each of the sectors resulted from an analysis of specific import needs based on production and efficiency targets and priorities for short-term recovery. The Credit proceeds would be onlent in the case of YPFB, ENFE and the private sector producers and exporters thus helping ease their shortage of own funds or local credit for the purchase of imports and local inputs. In the case of agriculture foreign exchange funds would be disbursed on the basis of documented import payments (with any needed boliviano-denominated financing having been covered from other sources). Finally, the funds needed by the SNC (an office within the Ministry of Transportation) for emergency road rehabilitation works would be transferred as a grant. 36. The proposed operation takes into account the implementation ex- perience and lessons learned from the first RIC. First, it is focused on a smaller number of sectors aiming to intensify reform implementation in these sectors; second, the implementing mechanism is simplified, taking advantage of the onlending agreements and coordinating mechanisms already established under RIC I; third, an interim procurement procedure (e.g., hiring of procurement agents) eliminating the cumbersome Government regulations will be followed until the new procurement law is in effect; and fourth, clear lines of responsibility and accountability within the principal implementing agencies have been established. 37. The proposed RIC II is designed as a package of separate subprojects to allow for independent progress in each sector program. The tentative allocation of Credit proceeds by sector is as follows:  - 15 - Tentative Allocation of IDA Credit Funds Sector Beneficiary US$ Million Equivalent Public Sector: - Energy YPFB (State Petroleum Co.) 13.0 - Transport (i) ENFE (State Railway Co.) 7.0 (ii) SNC (Nat'l Road Service) 3.6 Private Sector: -Agriculture Producers in Agriculture 8.0 -Industry Manufacturing, Agro-based Industries 7.0 Technical Assistance ENFE (State Railway Co.) 0.5 Procurement Manage- ment Contract 1.0 Unallocated 7.0 Total IDA Credit 47.1 38. The foregoing allocation would be reviewed periodically to ensure that funds are directed to those sectors that have the capacity to utilize funds effectively. Also 15% of the Credit proceeds are in the unallocated category to allow for a mechanism to facilitate reallocation of funds to sectors which prove themselves most efficient in using resources as the operation progresses. Of the total Credit proceeds, about 51% would go to the public sector, 32% to private producers and exporters, 2Z would be spent on procurement and the remainder falls in the unallocated category. The proposed import plans for YPFB, ENFE and SNC, and a list of goods eligible to be imported by the agriculture sector were agreed to in negotiations. In the event of Government's failure to implement the action program (Appendix II), both the above Credit allocation mechanism and the mid-term program review would allow a reassessment of the operation and appropriate action during implementation. The operation would be completed on or before December 31, 1989. Detailed Features The Public Expenditure Program 39. Efficient use of scarce public resources is central to putting Bolivia on a sustainable longer term growth path (see discussion in Part II). This pertains not only to the resources devoted to public investments but to all public resources, including recurrent expenditures for health, education, other social services and the day-to-day operations of ministries and public entities. For this reason the Bank's lending strategy for Bolivia is organized around the needs of Bolivia's medium and longer term public expenditure program.  - 16 - 40. The issues surrounding public investment have been discussed at length with the Government in recent months, and a Memorandum covering Bolivia's 1986 Public Investment Program and probable medium term financing requirements was discussed at the December 1986 Consultative Group meeting in Paris. It was agreed that the 1987 and (partly) the 1988 menus of projects to be executed were still largely driven by commitments made prior to the launching of the New Economic Policy. The problem was thus less one of selection among competing projects and more a question of efficient use of the existing commitments, but with an eye on possible "white elephants" in the portfolio. It was also agreed that to speed the slow pace of disbursement of the existing portfolio, the creditors will look at possible bottlenecks in their procedures and the Government of Bolivia would undertake all possible actions to speed the implementation of ongoing projects and press on with reforms in procurement and project supervision procedures, and consider ways of strengthening the staff involved in the implementation process. Finally, in order to make the 1988 public investment program the first that would reflect the new NEP priorities in an important way, it was deemed crucial that the Government elaborate its sectoral priorities more explicitly. The Government is now developing a detailed public expenditure program for 1988 and more general programs for 1989-90. The Government's presentations to the next Consultative Group, planned for October-November 1987, should reflect these efforts. 41. The Action Program related to RIC II (see Appendix II) reflects the importance that the Government and the Bank attach to Bolivia's public expenditure program. The Program outlines a set of actions proposed by the Government to strengthen the overall public investment process, followed by investment-strengthening and recovery-related actions in each of the subsectors to be funded by this Credit. In order to begin the process of broadening the emphasis from a public investment to a public expenditure focus, a definition of the Government's longer term priorities in the social sectors is also being proposed, and within that there is a call for a detailed design of the Emergency Social Fund. The initial phase of the Emergency Social Fund program is to be supported through a separate Credit (of US$10 million equivalent); the program represents an extremely important initiative by the Government of Bolivia to begin to alleviate the social costs of adjustment. 42. The Action Program supporting the strengthening of the Public Investment Process is focussed on implementation issues: (a) monitoring of the detailed 1987 Public Investment Program, now in execution, and agreement on a more general program for 1988-89, including some progress in the definition of the underlying sectoral priorities; (b) annual presentation by the Government (in a letter to IDA) of a detailed public expenditure program for the subsequent year with special emphasis on sectors covered by this Credit and on the social sectors; (c) appointment of a Subsecretary in charge of Public Investment and International Cooperation in the Ministry of Planning to ensure high level direction to the implementation of the Public Investment Program and to the coordination of external financial help; (d) agreement on measures to speed Government procurement under projects; and (e) presentation of the revised Procurement Law to Congress. 43. Action measures designed to strengthen the overall public investment process are bolstered with further measures for each of the  - 17 - sectors included in this Credit. In hydrocarbons, for example, it has become clear that resources budgeted for investment for 1987 (about US$160 million), even if they actually become available, may be insufficient to stem falling liquid hydrocarbon production. The Action Program, therefore, indicates a series of actions that would focus the available public investment funds on boosting production from existing fields in the immediate future, rationalize domestic consumption and attract private capital into exploration and development to ensure continued increases in production in the future. 44. In the transport sector investment program the Government's key problems pertain to the choice of mode that is to be emphasized in any given part of the transportation network and the particular port/town that will be used most heavily in the next few years. At the moment, for example, a rail route to Matarani in Peru, a road and a rail route to Arica in Chile and a rail route to Antofagasta in Chile, are all to be developed under current plans. In the short term the country only has the resources to improve one of these routes. If attempts are made to develop all of them at the same time, the result might be that none of them will be improved for many years. A decision in favor of one of the alternatives would husband the resources and increase the overall rate of return. Choices must also be made between maintenance and new investment. In the case of roads, doing preventive maintenance now could avoid much more expensive reconstruction later. Similarly in rail transport. Finally, availability of external funds for lower priority projects could siphon off domestic physical and human resources to less productive uses. Of particular concern here are repeated indications that bilateral sources are willing to fund construction or rebuilding of certain airports or to build the rail link between Santa Cruz and Cochabamba thus connecting Bolivia's western and eastern rail systems. Another indication are pressures to construct a road on the import/export corridor between Santa Cruz and Yacuiba (border with Argentina) where a railway line already exists. If implemented, the road would only share the small traffic with ENFE. It is to the Government's credit that its policy is to resist these pressures and concentrate on improving the railroad and build only a network of feeder roads. Hopefully, the broader Government policy of carefully comparing the benefits from spending scarce domestic resources on the various transportation projects, to the benefits from alternative uses, will continue to be implemented. 45. The agricultural investment budget presents particularly difficult problems. There are over 300 projects in inventory (under execution, programmed and proposed) at the moment of which about 100 are in the US$75 million proposed public investment budget for 1987. Another 100 are financed entirely from external, extra-budgetary resources (principally NGOs). With such fragmentation it is hard to arrive at a meaningful overall course of action. However, by a series of aggregations and a closer look at some of the largest among them, IDA's staff concluded that there is an over-emphasis on projects in rural development and irrigation in the proposed MACA program, neither of which meet Bolivia's short- or even medium- term requirements of quick returns on investment. Continued strong efforts to formulate the strategy for this sector and establish priorities are, therefore, essential.  - 18 - 46. Effective action to address mounting social problems linked to the economic crisis and adjustment program is a priority for the Government. The Government describes the present situation as tense-- social discontent is widespread and unrest is mounting, visible most clearly in an active and vocal mining sector. Here, the work force of COMIBOL, the public mining enterprise, has been reduced over the past 18 months from close to 30,000 to about 6,000. Termination payments are providing temporary relief, but further action is called for. In addition, the long period of economic turmoil followed by tight fiscal constraints over the past year and a half have sharply eroded Bolivia's already weak social services. Examples are seen in the closure of 30% of the nation's health posts and sharp declines in educational and health expenditures. A physicians' strike brought on by low wages in public health limited services for eight weeks in 1986. The Government argues that unless effective action is taken to address the immediate and most severe problems of unemployment and decay of social services the economic program may not survive the rising social tensions. These arguments have merit and it is important that larger resources be allocated to the social sectors in accordance with the overall longer term social sectors policy. 47. The Government launched in December 1986 an Emergency Social Fund (ESF) to finance a range of social relief measures and employment- generating activities. We are working closely with the Government on establishing and defining objectives for the ESF. Briefly, the intent is to support employment/income generating projects (about 75% of funds channeled through the ESF), and health, food relief, and educational assistance efforts. P:ojects under consideration include road repair and construction, forestation, irrigation and flood control, and support for job training, health posts and mother and child feeding centers. Projects would be submitted and executed by church and community groups, NGOs, unions and other grass-roots organizations, as well as the responsible government authorities. Supervising agents would be in most instances the public agency (national or local) responsible for the sector, a minimal condition being that no new employees are required. The Fund, having addressed a temporary emergency need, is to be terminated after three years of operation. The design and action plan of the ESF are being closely reviewed under a parallel IDA-supported operation that is being processed at the moment. Longer term priorities in the social sectors, of which the ESF would be part, would be reviewed with IDA by November 30, 1987. Sectoral Action Programs 48. 'Hydrocarbons. The hydrocarbons sector is vital to Bolivia's economy. Hydrocarbons in 1986 represented about 6% of GDP and 50% of the country's exports, and in 1987 YPPB, the national oil company, is expected to provide 60% of the Central Government's fiscal revenues. Continued successful operation of YPPB is, therefore, essential to the twin goals of keeping in check the budget deficit without further reductions in public expenditures as well as to improving the balance of payments. The Government is fully aware of the sector's importance. In its economic program the Government initiated some fundamental structural reforms in the sector aimed at reducing the public sector role, reducing domestic subsidies, and achieving institutional reforms in the major sector institutions. It has also initiated a series of studies, including the  - 19 - design of a comprehensive long-term national energy pl8n, that would provide a basis for the design and implementation of specific policy measures. These should bear fruit in the medium term. 49. However, there are also problems that require and are scheduled to receive prompt attention by the Government. It is these measures that this Credit supports. The most important relate to solving the following problems: (a) the decline in petroleum liquid reserves and production; (b) the limited Government/YPFB funds for investment; (c) the low utilization of the abundant natural gas in the domestic market; (d) the probable termination of the gas export contract to Argentina in 1992; and (e) the low participation of private resources in the petroleum sector. 50. Liquid hydrocarbon output peaked in 1973 at 47,400 BD (barrels per day) and declined continuously thereafter to 20,800 BD in 1985 and 18,500 BD in 1986. This was primarily the result of (a) YPFB's insufficient investment in the development of new fields to compensate for the depletion of various producing fields and (b) the reduced activity of private producers (Tesoro and Occidental) whose production declined from its peak of 8,500 BD in 1982 to 5,200 BD in 1986 in response to contract instability and delayed payments from YPFB. This declining trend for both YPFB as weil as the private producers needs to be reversed. Already in 1987 the estimated domestic demand is about 20,000 BD. If ways are not identified immediately of boosting petroleum production, Bolivia could soon become a petroleum importer. This would be a major setback for a country that has the potential of and great need for revenues from the export of petroleum. 51. A way to solve the problem is via a judicious allocation of the Government/YPFB funds available for investment while at the same time attracting private capital into the petroleum sector. For 1987, YPFB had calculated that in order to increase production to cover estimated demand as well as to expand its exploration activities to build up reserves (and ensure future production), the hydrocarbon industry, both public and private, would need an investment budget of close to US$300 million. The proposed 1987 budget recently approved by congress, allocates only US$160 million to the hydrocarbons sector which is still optimistic given the financial constraints of YPFB. Thus, to maintain production, YPFB will have to concentrate its resources on production while taking serious actions to encourage an inflow of private capital (mostly foreign) into exploration and production. The seriousness of the capital constraint in this sector is such that external financial help, including this Credit, is likely to show a very high rate of return. 52. Some help could also come from conservation and interfuel substitution measures. Prices of hydrocarbons (LPG being so far the key exception) have, under the NEP, been adjusted to reflect more closely those in the world markets. This should help rationalize consumption and discourage smuggling as well as stimulate production. Substituting gas for liquid petroleum products in the domestic market also needs to be pursued whenever economically justified, but that market is not likely to be large. The identification of a major new export market for gas thus becomes central for two reasonc. First, since Bolivia is a gas-prone country, to attract new foreign investors into petroleum exploration, the market for this gas must be clearly established. The side benefit of this  - 20 - would be increased liquid petroleum production since about 80% of Bolivia's gas resources are associated with oil and condensate. Second, the loss of foreign exchange earnings from a potential (and probable) termination of the gas export contract to Argentina in 1992 needs to be offset. The Government of Bolivia has been discussing possible future gas exports to Brazil with the Brazilian authorities and has requested IDA assistance to study the potential market in Brazil as well as the contractual and pricing issues related to an export agreement. Consultant work is expected to start in the next few months. 53. The utilization of private capital in the petroleum sector could be increased by measures such as: (a) a revision of the 1972 hydrocarbon law to authorize joint ventures between YPFB and private companies; (b) an attractive, flexible and competitive production sharing and fiscal framework; (c) a revision of the current Bolivian fiscal regime to enable potential foreign investors to deduct their payment of taxes in Bolivia from those in their home countries; (d) regulation of the balances outstanding with the existing private producers; (e) reasonable assurances to the private investors that they will receive exportable petroleum or timely payment in foreign exchange; and (f) a flexible contractual framework to give discoverers of gas the right to retain the undeveloped gas discoveries until a market for gas is identified. In the short and medium term new exploration contracts with the private sector would reduce investments outlays otherwise required by YPFB in exploration. The savings from YPFB's reduced exploration activities would be used to increase its production activities whether conducted directly by YPFB or in association with the private sector. In the short term, additional production contracts with private local/foreign companies would allow the country to overcome capacity constraints in YPFB to meet domestic petroleum products requirements and embark on a program of petroleum exports as quickly as possible. In fact, there is a strong case for Bolivia taking advantage of its already explored but undeveloped areas by structuring package deals that make private exploitation rights in known reservoirs contingent on new exploration activities. In the longer term, once the results of private exploration contracts materialize, YPFB would participate in development of new discoveries and increase its production accordingly. Such a program of soliciting private sector participation in exploration and production would require a suitable set up for dealing with area selection, bidding procedures, and contract negotiation and monitoring, for which experts' work would be required. This would be achieved through the exploration promotion program referred to above. 54. The Bank has been involved in an active dialogue on these issues and has helped with studies in all of the areas of importance. This Credit would assist the process of reform in this sector. In operational terms the US$13 million firancing under the proposed Credit would continue the rehabilitation of YPFB's productive capacity started under RIC I. It would cover about 35% of YPFB's import requirements and related services, spare parts, supplies and materials and equipment for 1988 and 1989. The Government has been working intensively on a comprehensive National Energy Plan which is now almost completed. This Plan will address most of the issues raised above. Actions of particular interest to IDA, within the context of this operation, that the Government has indicated it will take are to: (a) present to Congress new comprehensive legislation for the hydroarbons sector by March 31, 1988 (draft to be furnished to IDA for  - 21 - comment by January 31, 1988); (b) present to IDA for review and comment by November 30 of each year (starting in 1987) for the subsequent year the proposed investment budget, the underlying physical action program and the accompanying f;nancial plan; (c) raise local LPG price to its opportunity cost (the plan of action and the implementation timetable to be made available to IDA by December 31, 1987 with the plan then to be executed according to an agreed schedule); (d) inform IDA, by October 31, 1987 and semiannually thereafter, of the status of negotiations, agreements reached and implementation of such agreements with respect to payments on contracts with foreign investors in ths. petroleum sector in Bolivia; (e) present to IDA, for its review, YPFB's action program on the distribution and marketing of natural gas within Bolivia (by October 31, 1987); and (e) carry out a study, according to terms of reference agreed to with IDA during negotiations, a study to improve YPFB's accounting, budgeting, financial control and management information systems. 55. Transport. The transport sector accounts for 5.5% of GDP and about the same proportion of employment, rather less than in other comparable countries of Latin America. The apparently small share of GDP belies the relative importance of transport to the economy and is in any case an underestimate of the real contribution of transport to GDP. Bolivia is a land-locked country with long or difficult access routes to sea ports through adjoining countries. Much of the cost of the transport of Bolivia's external trade, both imports and exports, appear in the transport component of GDP of those adjoining countries rather than of Bolivia's GDP. For most external trade, the external transport cost represents more than half of the total. The high cost of transport for external trade results in a relatively low producers surplus for exporters. For many agricultural products, the transport cost to a sea port represents more than 60% of the value of the product. For minerals the proportion is closer to 30% and for manufactured goods, which are usually imported, the cost of transport from the port to the consumer represents up to 25% of the final price. Internal transport costs are high because of the difficult terrain, poor infrastructure and relative inefficiency of some of the transport modes. Unit transport costs for road and rail transport are higher than in other Latin American countries. Since all agricultural, mineral (except gas) and manufactured products make use of transport services to reach their consumers, the efficiency of the transport system is important in determining the efficiency of production in general. The high incidence of transport costs in total production costs or consumer prices is a better reflection of the importance of transport to the economy than its contribution to GDP. In order to induce the reduction of road freight costs, the Government has introduced free contracting and uncontrolled tariff policies. 56. The current level of operational efficiency of the sector is low, following several years of underinvestment in maintenance. The state of the basic infrastructure is poor for the same reason. The condition of the road infrastructure is possibly the worst in Latin America. Much of the basic network is still in an undeveloped state and the developed network is suffering from a chronic lack of maintenance. There are only 1,350 kms of paved roads and of these or.ly 21% are classified in good condition. Many parts of the network are without drainage and many rivers are crossed by fords instead of bridges. In the three-month rainy season many of these crossings are impassable for long periods of time. Also, the truck fleet,  - 22 - comprised mostly of two axle trucks which are easily overloaded, causes accelerated road pavement deterioration. The issue of adequate road maintenance is thus of great economic importance to the country. 57. The estimated requirement to bring the road network up to an acceptable standard is of the order of US$200 million. This is clearly unachievable in the short term and some priority projects need to be defined. A start is being made with the definition of sub-components of a potential IDA financed labor Intensive road rehabilitation project. This project identifies a core part of the secondary road network where the benefits of reconstruction or rehabilitation or provision of basic facilities (such as bridges) would provide the greatest economic rate of return. It is also, by design, aimed at helping alleviate the severe unemployment (and hence poverty) situation in the altiplano region and represents a part of IDA's effort to help the Emergency Social Program. The proposed RIC II funding of about US$3.6 million for the importation of basic road maittenance spare parts, supplies and materials and machinery would help to ensure that essential parts of the network would not deteriorate further or begin an accelerated deterioration after reconstruction through lack of maintenance capacity. To ensure that adequate attention is given to road maintenance, assurances would be sought during negotiations that SNC would indicate by no later than November 30 of each year (for the subsequent year) the proportion of road network investment budget allocated to maintenance of existing network versus the proportion of investment for its improvement and amplification. 58. The rail network, which had been maintained in good condition until 1982 is also now suffering from insufficient maintenance. The low cost construction methods used for most of the Eastern part of the network have made the infrastructure very susceptible to deterioration when maintenance is not undertaken. The Western network infrastructure is now very old and in parts is suffering from excessive wear. The current availability of railway locomotives is very low, at 55% for Western network and 67% for Eastern network, with a corresponding lack of transport .capacity. Wagon availability could be further improved with better planning and train operations. It is estimated that railway operational capacity is at least 12% below demand. Assurances were given during negotiations that by December 31, 1988, ENFE would (a) increase locomotive availability in the Western network system to 75% and the Eastern network system to 85 percent; (b) increase locomotive utilization to at least 105,000 km per year; and (c) improve wagon availability to 80% for both networks. 59. In the past decade there have been ups and dotns in the financial situation of the railway . In mid-1970s, ENFE enjoye a sound financial condition. Thereafter, the situation started deteriorating due to substantial increases in wages and deterioration in operating performance. In 1984, the ratio of working expenses to operating revenues (working ratio) was as high as 1.39. The galloping inflation caused the prices to rise sharply thereby aggravating the financial condition. Tariffs were falling behind. In 1985, ENFE increased tariffs considerably. ENFE's revenues now fully cover the total operating costs as well the interest charges on its debts. ENFE has therefore surpassed the working ratio target of 1.0 as specified in the loan documents for RIC I. Under RIC II it would bring this ratio down to 0.90 by December 31, 1988, and further thereafter.  - 23 - 60. ENFE's present freight tariffs are high and passenger fares are low. While the railway freight tariffs of about US 5.5 cents per ton-km on the export corridors are lower than truck rates, they are still comparatively much higher than other railways (e.g, about USl.9 cents per ton-km in USA). The Government, in order to promote exports and partly on the basis of a study completed under RIC I, is presently considering reducing further the freight tariffs by taking over the railway debts so that ENFE finances are not adversely affected . The Association will be informed of the Government's decision in the near future. The Government would present by December 31, 1987, a plan of action to restructure the freight tariffs and fully implement the restructuring by no later than December, 1988. Passenger fares in most cases do not cover even the shortrun marginal costs. For instance, the second class fare between Santa Cruz and Pto. Quijarro (660 km) is only US$2.50. Here too, the Government has indicated that it would take appropriate actions. During negotiations IDA was informed that: (a) fares would be increased substantially in real terms by July 31, 1987; and that (b) fares would subsequently be further adjusted to cover at least the longrun marginal costs. A plan of action on point (b) would be presented to IDA by March, 1988 and carried out subsequently according to a set schedule. 61. In order to improve financial performance of the railway, assurances were given during negotiations that ENFE would: (a) complete the revaluation of its fixed assets by December 31, 1987 and incorporate the results in preparing its 1988 balance sheets; and (b) unless otherwise financially and economically justified, ENFE would refrain from new investments beyond those included in RIC I and II (including possible cofinancing) and those that have already been committed up to December 1986. The Association would be given the opportunity to review and comment on such new investments on the occasion of the annual review of Bolivia's entire public expenditure program. Furthermore, to facilitate 8NFE's restructuring and rehabilitation, the Credit would finance consultant services to assist ENFE to: (a) restructure and implement freight tariffs based on the railway costing study completed under RIC I; (b) draw up bidding specifications and facilitate other procurement, administrative and procedural requirements especially for locomotive rehabilitation; (c) carry out a diagnostic study of railway organization, operation and management; and (d) finalize the fourth phase of the railway rehabilitation program. 62. The problems in the river and air transport have not yet been studied as extensively by IDA staff. However, given Bolivia's difficult terrain, it seems plausible that air transport could be of great importance in a number of uses. Equally, developing river traffic could be important in the tropical lowlands and as an opening for agricultural exports down the Paraguay river to the Atlantic. None of these problems, however, can be usefully addressed by this Credit because of its short-term orientation. 63. Finally, IDA will continue to support the Government in its development of a medium term public investment program in transportation. The primary criterion for inclusion of a project in a modal investment plan, at the moment, is the availability of funding, usually external. This argument applie3 to all transport modes. The achievement of a political balance of expenditure between different regional Departments is also important. The economic merits or otherwise of the project seem to be of little or no relevance. The overall sector investment plan is merely a summation of the individual modal proposals. The result is a confused mixture of good and bad projects with many examples of competing projects  - 24 - in the same corridor. The inclusion of the preparation of a coherent transport public investment program into the Action Program under this Credit should help improve the situation. 64. Agriculture. Agriculture's share of GDP continues to show an increasing trerl in the 1980s due in part to the continuing decline in the importance of mining and manufacturing sectors. It now accounts for 20% of GDP. Agriculture has traditionally employed more than 45% of the economically active population and will continue to do so in the foreseeable future. Agricultural exports, while steadily increasing throughout the decade of the 1970s, began to decline in 1981. The small recovery in 1985 and 1986 was mostly due to the dramatic increase in the world market price of coffee which now accounts for about 50% of the value of agricultural exports. Agriculture as a whole made a remarkable recovery from the disastrous effects of El Nino induced flooding in the lowlands and drought in the highlands in 1983 (which resulted in shortages of food during the 1983-84 period). Bolivia is once again self-sufficient except for traditional large imports of wheat and milk products. Production of most food and industrial crops increased in 1985 and although final figures are not available, crop production in 1986 was also good in comparison to recent pre-1985 years. 65. Bolivia's agriculture is divided into two distinct geographic regions and production systems: the Altiplano-Valleys region--where more than two-thirds of the rural population lives--dominated by smallholdings using low technology (not mechanized) production systems, and the lowland plains used for mechanized crop and extensive livestock production. While a large part of the highlands agriculture is subsistence, nevertheless, the region produces a substantial portion of foods (potatoes, vegetables, wheat, and maize) for the population centers concentrated in the highlands. The lowlands produce all the industrial crops (oilseeds, cotton and sugarcane) as well as most of the rice, sorghum, soybeans, plantain, bananas, peanuts, beans (except broad-beans), cassava, and 75% of the country's cattle population is in the Departments of Beni and Santa Cruz. Two-thirds of the present 1.25 million hectares under crop production is located in the highlands where much of it suffers from poor soil and climatic conditions, has little potential for expansion (in terms of area cultivated) and where obtaining yield increases has proven difficult. While land resources are limited and poorly maintained in the highlands, the lowlands have an abundance of good potential agricultural soils and favorable climatic conditions that could be exploited if markets become more favorable. However, physical and structural problems have limited development in the lowlands. The land-locked nature of Bolivia makes importation of inputs and exportation of production both difficult and costly. The vast areas in the lowlands, suitable for intensive agricultural production, are far from ports for export and isolated from the internal markets of the principal population centers by rugged terrain, long distances, and lack of an adequate transport and communications system, which makes agricultural products more costly for the consumer and reduces the return to the farmers. 66. Due to the long dominance of the mining sector, agriculture has never received adequate Government support and in spite of the NEP and the increased importance of the sector, the Government has still to formulate an agricultural strategy and investaeut priorities. While the former  - 25 - restrictive price policies have largely been removed, the new 20% across-the-board import tariff and increase in the price of gasoline and diesel fuel have increased costs of production while farm-gate prices have remained stable and, in some cases, even declined. With the absence of a clear strategy and priorities, increased costs of production, low world market prices and stable local prices, farmers are facing uncertain conditions that have resulted in a decline in area planted for the 1986-87 crop season. The result, perhaps ironically, will be that agricultural production may fall further in 1987 (after a small decline in 1986) in a policy environment that was supposed to be a major improvement over the past. 67. However, these should prove to be transitional problems. First, fertilizer consumption in Bolivia is the lowest among countries in the region (less than 5 kg per hectare) and even what is used is employed largely in potato and vegetable production. The high cost of transport, low levels of use that preclude importing in bulk and local mixing, and low farm-gate prices for most commodities, all conspire to making fertilizer currently too expensive for local use. It should, however, be possible to overcome some of these impediments. Second, the investment per hectare is still very low and imports of equipment for agriculture (when compared to the stock of agricultural equipment and machinery) suggest that decapitalization of agriculture i8 still occurring. These trends too could be reversed. Most of the measures that would help are likely to be medium to long term such as reducing che cost of transport, improving marketing infrastructure, making credit widely available and timely, improving research and extension work, developing better seed varieties and building feeder roads. Other measures, such as a reduction of import tariffs, provision of production incentives, or some offset to what is considered by farmers to be an overvalued Boliviano (particularly vis-a-vis Brazil's parallel cruzado rate), could all contribute to reviving production in the shorter run. A very important incentive would also be a rapid development of a longer term agricultural strategy by the Government to enable the agricultural producers (and particularly the potential exporters) to believe that their entrepreneurship will be backed up by a Government commitment to help build the necessary infrastructure. Along these lines, IDA expects the Government to show its increased commitment to this sector via an allocation of investments to agriculture commensurate with the new, more important role of this sector in Bolivia's medium and long term strategy. The Government will also present, for review and agreement by IDA, a plan to set up within the Ministry of Agriculture a Central monitoring unit to follow up and coordinate project preparation and execution of various agencies involved in the sector. 68. The total amount of financing for the agricultural sector in 1985 was US$36.5 million of which about US$29 million went for working capital and US$7.5 million for investment. The major portion of investment credit was used for the purchase of farm tractors and machinery and very little was available for on-farm investments (land clearing, irrigation, farm storage, etc.) and for the livestock sector. The data regarding the amount of credit granted for 1986 are not yet available. IDA's estimates, however, suggest that the demand for credit for 1985 and 1986 at the prevailing levels of production is at least US$70 million. Thus only about 50% of the demand is being met from institutional sources. However, the IDB loan of US$100 million that has just become effective should largely overcome this constraint at the same time increasing the demand for  - 26 - yield-increasing inputs and production machinery. Imports of these two categories should thus increase to well above their 1986 level of US$70 million (estimated to be US$50 million through official and US$20 million through contraband channels). The allocation of US$8 million under RIC II for imports forproducers in agriculture will thus fill an important need. 69. Manufacturing and Agro-based Industry. In 1981 before the economic crisis began, the industrial sector accounted for 14% of GDP, 10% of employment, almost 10% of total exports. While a major part of manufacturing industry produces for the domestic market, agro-industries (processed and semi-processed products), such as coffee, sugar, meat, wood and wood products, are responsible for 75% of non-traditional exports which also include textiles, chemical and metal alloys, and non-metal products. Since 1980 the industrial sector went through a period of rapid deterioration and many enterprises were forced to stop or slow down production. The sector share in GDP dropped to 10% in 1986 as industrial production was cut in half and new investment virtually ceased. Because of the prolonged recession and severe exchange rate distortions, the share of non-traditional exports in total exports dropped to well below 5% by 1986. Exports of metalotechnic and artisan producers virtually stopped (at least through legal channels). Imports of intermediate goods and raw materials used in production also declined by about 40%. 70. Incomplete data suggest that manufacturing probably bottomed out in 1986 and agro-based industry may have registered some growth. There was a surge in non-traditional exports. Imported inputs also registered a strong increase. However, credit for working capital, for local inputs and labor, is in really short supply. And whatever capital is available is being lent at high interest rates, running at 3.0% (or higher) per month with inflation now in the 1-1.5% per month range. Moreover, these loans are available for extremely short periods, rarely extending beyond 90 days. Existing and potential exporters and producers are thus facing serious difficulties in finding working capital on reasonable terms. If pre-recession ratios of working capital to production are any indication of demand, and if production is to recover even half-way to its former share of GDP (10% today, 15% in 1980), Bolivian private industry could use an additional US$80 million of working capital. The US$7.0 million allocation of such funds for industry would thus cover less than 10% of the needed amounts. These funds could be used for both imported and locally-produced input requirements of industrial producers. Only qualified exporters and producers, as verified by the eligible financial intermediary and the Central Bank, would have access to this financing. Implementation 71. The Central Bank (CB) would be responsible for the administration of the proposed Credit. The CB would establish a Credit facility through which it would onlend the funds to YPFB and ENFE, pass on as a grant the funds for SNC, disburse foreign exchange against documented import payments for agricultural goods, and onlend funds for working capital through financial intermediaries to the private sector. The Credit proceeds would be made available to the Central Bank under a subsidiary agreement between the Borrower and the CB. The signing of the subsidiary agreement would be a condition of Credit effectiveness.  - 27 - 72. The CB would channel the Credit proceeds up to the amount allocated a priori to YPFB and ENFE under a financing agreement with each of these enterprises. The onlent funds would be denominated in dollars and would carry an 8.5% interest rate, unless otherwise agreed by IDA. Repayments to the Central Bank would be made in 15 years with three years of grace at the exchange rate prevailing at the time of payment. The signing of at least one of the financing agreements between the CB and any one of YPFB or ENFE is a condition of Credit effectiveness. 73. The CB would onlend the Credit proceeds to the private sector through a rediscounting mechanism for eligible financial intermediaries (PI), i.e., those banks that are in good standing with the CB. CB would enter into a participating agreement with the eligible FI's under terms and conditions satisfactory to IDA. The signing of a participating agreement with each eligible FI is a condition of disbursement. The funds onlent to the private sector would be denominated in dollars and would carry an interest rate of about 13.5%, unless otherwise agreed by IDA. The FIs would retain a spread of up to 5% to cover the operating expenses and credit risk. CB would retain a fee of 0.5% to cover its administrative costs. 74. The import plans (positive import lists) of YPFB, ENFE, SNC, and the list of eligible imports for agriculture to be financed by the Credit funds were reviewed and agreed upon during negotiations. The agreement includes import related technical services. The CB would disburse Credit funds to YPFB, ENFE and SNC based on approved import plans, provide foreign exchange for eligible imports for producers in agriculture and disburse funds for working capital to the private sector against a list of ineligible goods. 75. The Project Coordinating Committee set up in the CB to oversee the implementation of RIC I will continue to discharge its functions in RIC II. This Committee which is currently composed of three members of the CB Board of Directors, the manager of the Gerencia Pinanciera and Chief of the Department of Public Enterprises Committee is responsible for final review of credit/subloan proposals and is assisted by a small Commission for Coordination, Control and Supervision (likewise established under RIC I). This Commission is responsible for the day-to-day implementation, conrdination and supervision. The Commission is currertly headed by the Chief of the Department of Public Enterprises and is coinposed of 5 staff members from this Department. The ongoing CB reorganization, however, may result in some modifications in the membership of the Project Coordinating Committee and the Commission. In addition, during negotiations, the Government informed IDA that it plans to include as members of the Project Coordinating Committee representatives from the Ministry of Planning and the Ministry of Finance to ensure coordination of the Credit's activities with broader economic concerns. The confirmation of the composition of the Project Coordinating Committee and the Commission for Coordination, Control and Supervision and the appointment of their respective chairmen and members are conditions of effectiveness. Cofinancing 76. The Government of Bolivia intends to exert a major effort to secure cofinancing for the proposed Credit. Along this line, the Government has requested the Overseas Ecoaomic Cooperation Fund (OECF) of  - 28 - Japan to cofinance the proposed Credit with an amount of about US$50 million. Cofinancing assistance will be directed mostly to the energy and transportation sectors which have considerable import requirements. Also, cofinancing arrangements would permit IDA to almost double the unallocated category which would increase the flexibility of allocating these funds later to where they can be used most effectively. The table below shows the alternate financing scheme assuming cofinancing can be secured: RIC II Alternative Financing Scheme (In million of US Dollars) Component IDA Cofinancier Total Foreign Local Foreign Local _. Public Sector a. YPFB (State Petroleum Co.) 10.0 - 28.0 - 38.0 b. ENFE (State Railway Co.) 4.0 - 13.0 - 17.0 c. SNC (National Road Service) 3.6 - 9.0 - 12.6 II. Private Sector a. Imports for Agriculture 8.0 - - - 8.0 b. Manufacturing and Agro-Based Industries - 7.0 - - 7.0 III. Technical Assistance 0.5 - - - 0.5 IV. Procurement Management Contract 1.0 - - - 1.0 V. Unallocated 13.0 - - - 13.0 TOTAL 40.1 7.0 50.0 - 97.1 Disbursements 77. The proposed Credit is expected to be fully committed 10 months after the date of Credit effectiveness and fully disbursed by June 1989. The disbursements against a positive list for imports for agriculture are expected to be completed within one year of effectiveness. Disbursements of the CIF costs of eligible imported goods and related installation services would be made against normal documentation for imported goods. Disbursements against a Statement of Expenditures (SOEs) whose corresponding documentation would be retained by the CB would be made for amounts not exceeding US$100,000 equivalent. Disbursements for  - 29 - expenditures above this amount would require submission of full documentation to IDA. To facilitate disbursements for imports for agriculture and subloans for locally purchased inputs, a special account would be established in a commercial bank acceptable to IDA. An amount of US$3 million of the Credit proceeds would be disbursed tco the special account upon effectiveness of the Credit Agreement. CB would maintain sub-accounts to reflect thc Credit allocation for imports for agriculture and for private sector subloans. In the case of imports for YPFB, ENFE and SNC, which will be procured through a procurement agent chosen by the Government, a revolving fund would be established in a commercial bank of the procurement agent, acceptable to IDA, to facilitate disbursements of the proposed Credit to the suppliers. Reimbursements would be permitted for goods for agriculture that are imported but not paid for prior to the date of the Credit Agreement. Procurement 78. To help ensure that the procurement of goods to be financed out of the proceeds of the proposed credit is handled in the most expeditious manner and that goods to be imported by YPFB, ENFE and SNC reach Bolivia with the minimum of delay, the Government would hire a procurement agent acceptable to IDA for theie entities. The cost of the procurement agents estimated at $1.0 million (assuming 4% agent fee for goods to be imported by the public sector) would be financed out of the proposed Credit. Procurement under the proposed Credit would be in accordance with the "Guidelines for Procurement under World Bank Loans and IDA Credits". Public sector purchases of US$1 million and above would be subject to international competitive bidding (ICB). Public sector purchases below US$1 million but above US$100,000 would be purchased through limited international bidding (LIB) from at least three suppliers from two countries eligible under the Guidelines. Pub?lc sector purchases below US$100,000 would require a comparison of price quotations from at least three suppliers eligible under the Guidelines. Spare parts and materials for the public sector, which would be used in especially designed systems and for equipment already installed and operating (sole source and proprietary goods), as well as specialized services such as drilling, logging, cementing, wireline, acidizing, fracturing and other highly technical services, may with IDA's approval, be procured on the basis of direct contracting. Purchases of imports for agriculture and locally purchased inputs by the private sector would be done according to normal commercial practices which are acceptable to IDA. Consultant services for the technical assistance for ENFE would be hired in accordance with IDA guidelines. Subject to IDA's review, advance contracts for eligible imports would be allowed after Credit negotiations. Estimated values of expected transactions and methods of procurements are shown in Table 2. Accounts, Audit and Reports 79. The CB would maintain records and separate accounts in respect of the project and have these accounts, the SOEs and the Special Account audited each fiscal year by auditors acceptable to IDA. These reports would be furnished to IDA not later than four months after the end of each fiscal year. Within six months after the Closing Date the Borrower would prepare and submit to IDA a project completion report following Guidelines provided by IDA.  - 30 - TABLE 2: BOLIVIA -- RIC II Method of Procurement (In Million US Dollars) Expenditure Items Procurement Method Total Cost ICB LIB Others 1, Spare Parts, Equipment, Supplies and Materials - YPFB (Energy) 2.0 9.0 2.0 13.0 - ENFE (Railway) 1.5 3.7 1.8 7.0 - SNC (Road) 2.4 0.7 0.5 3.6 Imports for Agriculture 8.0 8.0 Manufacturing and Agro-based Industries (private sector subloans for locally procured goods) 7.0 7.0 Consultant Services 2/ 0.5 0.5 Procurement Agent 1.0 1.0 SUBTOTAL 40.1 Unallocated 7.0 TOTAL 47.1 1/ Direct contracting, local and international shopping, and for the private sector purchases other normal commercial channels satisfactory to IDA. 2/ Consultants will be hired in accordance with IDA guidelines. Social Impact 80. The major objective of the proposed operation is to reverse the downward spiral of the economy and lay the basis for sustained growth. This renewed growth offers the best prospect for addressing both the short term, immediate poverty consequences of Bolivia's recent economic problems and the longer term problems stemming from the decline in social services in recent years. In addition to this general framework, the operation and IDA's program more broadly, aim to support the Government's efforts to address short term social problems through the employment generation and relief activities envisaged through the Emergency Social Fund. Futher, as  - 31 - part of the Public Investment Program preparation and review, concerted efforts will be made to plan for redevelopment of. social services, notably for health, education, and water supply. Benefits and Risks 81. The proposed Credit would provide a major support to the Government's economic program which is now explicity focused on achieving a resumption in growth. By providing critically needed financing for priority imported spare parts, supplies and equipment, as well as for working capital, and foreign exchange to purchase imports for agriculture, the proposed Credit would help strengthen Bolivia's production and export capacity while continuing institutional rehabilitation and reforms started with the first RIC. While the Government's record to date bodes well for the future, the major risk continues to be the fragility of the economy which is undergoing a major transformation following a hyperinflation and a sudden sharp deterioration in the terms of trade of its major exports. A further risk relates to possible delays resulting from the Government's weak administrative system. In order to minimize the risks and ensure timely actions for changing circumstances, IDA would monitor the economic program very closely, conduct a medium-term review within six months of Credit effectiveness and provide intensive supervision especially during the start-up phase. PART V - BANK GROUP OPERATIONS IN BOLIVIA 82. The Bank Group has been actively involved in Bolivia since 1964. Total lending to date stands at about US$465 million; 16 credits, 15 loans, and one blend operation have been approved. Of this, US$380.5 million is outstanding and, as of March 31, 1987, US$79.0 million was undisbursed (see Annex II). Bolivia was an IDA country until 1975 (except for the Gas Pipeline loan), then borrowed for several years on Bank terms until the economic situation began to deteriorate around 1978. An ill-fated structural adjustment loan was made in 1980 and its failure, combined with worsening creditworthiness for the country and deterioration of economic management, led to the cessation of Bank and IDA lending between FY81 and FY86. As a result, our present portfolio (leaving aside the two operations approved in late FY86) is very small, consisting essentially of small remaining parts of old projects, most of which have had a troubled history. They were designed in a different era and were implemented during a period of economic turmoil; Bank/IDA disbursements stopped several times as Bolivia failed to service its obligations. The undisbursed balance on this portfolio stood at US$15.5 million as of January 31, 1987, and a large part is likely to be cancelled before the end of this fiscal year. By FY88, none of these older projects will be under implementation. 83. Past Bank lending has been quite far-ranging and diverse, with an active involvement in several sectors, notably transportation (26% of total lending) and hydrocarbons, where the Bank played a key role in developing Bolivia's gas export potential. Other sectors where the Bank has been  - 32 - actively involved are power, mining (largely credit operations for the private sector), water supply, and urban. Our record in agriculture has been mixed, with some successful operations in earlier years focussed on the livestock sector; three more recent rural development projects have, however, faced serious implementation problems. Execution of many on-going projects was affected adversely by the general economic and political instability, the shortage of local funds, changes in Government personnel, and periodic suspension of Bank disbursem~ents. As a result, the conclusions of recent Project Preparation Appraisal Reports (PPARs) have been quite negative, notably for the 1980 Structural Adjustment Loan. 84. While no new operations were approved between 1980 and May 1986, the Bank provided substantial technical assistance through its economic and sector work which was focussed on critical impediments to Bolivia's development. Many recommendations resulting from these efforts provided the basis for the current Government's stabilization and structural reform program and underpin specific programs now under active preparation. Specific efforts included a 1981 comprehensive study on rehabilitation of COMIBOL, the state mining company, proposals for mining tax reform, analyses of mining investment laws and fiscal reserve, a proposed reorganization of the troubled Agricultural Credit Bank (BAB), studies on pricing issues for agriculture, a sector paper on transport, an energy assessment, and a program proposing a full overhaul of auditing and procurement practices. These have provided background for our present efforts to support the Government's adjustment program and to start to rebuild our lending program. 85. The Bank responded quickly to the new policy initiatives launched in August 1985. During FY86 two IDA-financed operations-the Reconstruction Import Credit for US$55 million to finance imports for key sectors, and the Vuelta 'rande Project for US$15 million--were approved. A program of project preparation (supported by five new PPFs) and economic and sector work was launched. The Resident Mission in Bolivia has been reactivated with the appointment of a new Resident Representative in October 1986. Finally, the Bank resurrected the Bolivian Consultative Group (dormant since 1977) with a first meeting in December 1986. The meeting successfully met its objectives of providing participants a deeper understanding of economic issues for Bolivia and exchanging views on Bolivia's economic program and external financing requirements. Improving project implementation was a focal point of discussion during the meeting. The Government is taking steps to assure adequate funding and remove procedural bottlenecks. A second meeting of the Consultative Group is planned for October-November 1987, at which time a full public investment program for 1988-90 and a review of priorities and issues by the Bank should be completed. 86. Our strategy is to assist the Government to: (a) sustain the implementation of the macroeconomic stabilization program and carry through structural adjustment reforms including specifically a change in the role of the state; (b) rehabilitate and restructure the agriculture, mining, and hydrocarbon sectors with the view to diversifying exports and achieving efficient import substitution; (c) reconstruct and rehabilitate essential infrastructure to minimize bottlenecks to increased production and to  - 33 - support increases in private investment; (d) support major increases in public and private investment notably through strengthening the public investment program, enhancing the private investment climate through appropriate policy measures, and reforming the financial sector; (e) alleviate the direct social impact of the economic adjustment program, especially on lower income groups; and (f) reintroduce discipline in public sector management and administration to support the effective execution of the economic reforms and management of the economy. 87. Our assistance strategy in the immediate future is aimed at minimizing bottlenecks at the sectoral level through rationalization of sectoral policies and rehabilitation of sectoral productive capacity. This effort started under the First Reconstruction Import Credit (RIC I) approved in May 1986 and is now being extended by this Credit as well as a Power Rehabilitation Project, and a Financial Sector Adjustment Credit. Preparations for possible future operations in the mining, transportation and agriculture sectors are underway. 88. Also, a major objective of our assistance program is to support the Government's effort to redefine the role of the State and to improve the public sector implementation capability; institution-building projects will be a major feature in the next few years. A first operation will focus on financial management systems for the Ministry of Finance, the Central Bank and the Controller General's office and/or support for the implementation of the tax reform. This operation is being complemented by a project aimed at strengthening the financial management and administrative set-up and processes at the municipal level. The need to improve public investment programming, monitoring and evaluation has also been identified. 89. Our assistance program will also aim to support Government's efforts to address the mounting social problems linked to the economic crisis and economic adjustment program. The Government launched in December 1986 an Emergency Social Fund (ESF) to finance a range of social relief measures. However, an effort is needed to define an appropriate policy framework for this program and to establish its operating procedures and criteria for selection of subprojects and other specific action measures. We are working on assisting the Government in this endeavor through a phased approach in order to help build a social action program that would result in lasting gains. In the medium-term, this support should give way to sectoral operations in the areas of health and education. 90. The foregoing operations will be complemented by our current focus on the public investment programming process which entails a definition of sectoral strategies and analysis of ongoing and planned sector investments. A Public Expenditure Review for 1987-90 by the Bank and the Government is in process, designed to support the elaboration of a more comprehensive medium-term program and improvements in the process of public investment programming and review. 91. IFC has not been active in recent years, but has recently resumed its operations in Bolivia with the approval of a US$800,000 loan and US$400,000 equity convertible loan for a silver recovery project in the Cerro Rico de Potosi mines. Also, a US$10 million credit line through BISA, a private development bank, is under consideration. IFC plans to  - 34 - continue its promotion efforts and has so far identified a number of potential mining projects. Other priority areas include: hydrocarbons, in particular oil and gas exploration and associated activities such as transport and downstream processing facilities (an oil and gas production project with Tesoro Petroleuim has been preappraised); industry, with emphasis on export-oriented projects; and development banks. It will also explore possible use of innovative investment approaches that would particularly benefit medium-size investors. PART VI - COLLABORATION WITH THE IMF 92. Bolivia has established good relations with the IMF. A one-year standby arrangement was approved on June 19, 1986. The midterm review was approved by the IMF Board on December 15, 1986 and there is reason to believe that the end-March 1987 performance targets have also been achieved. An exception relates to arrears which are linked to delays in reaching agreement with commercial banks. On December 15, 1986 the IMF Board also approved access to the Compensatory Financing Facility (SDR 64.1 million). On the same day the IMF Board discussed a joint World Bank/IMF/Government three-year Medium Term Policy Framework Paper (also discussed previously by the Bank Board on November 25, 1986) and approved a drawing for the first year program under INF's Structural Adjustment Facility (SDR 18.1 million). Discussions with the IMF on an Extended Fund Facility or a Second Standby arrangement are due to begin in mid-June. PART VII - LEGAL INSTRUMENTS AND AUTHORITY 93. Special conditions of the Credit are listed in Annex III, Section III. The Conditions of effectiveness are: (a) execution of the Subsidiary Agreement between the Borrower and the Central Bank; (b) execution of at least one satisfactory financing agreement between the Central Bank and YPFB or ENFE; tc) establishment of the Credit Facility satisfactory to the Association; and (d) confirmation of the membership of the Project Coordinating Committee and of the Commission for Control, Monitoring and Supervision in the Central Bank. The conditions of disbursement are: that YPFB and ENFE would enter into the relevant procurement and financing agreement; that SNC would enter into a procurement and grant agreement, and that each Financial Intermediary would enter into a Participating Agreement with the Central Bank.  - 35 - PART VIII - RECOMMENDATION 94. I recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments June 2, 1987 Washington, D.C.  - 36 - APEIIDIX 1: BOLIVIA - Summary and Status of Impleaentation May 29, 1907 of Principal Measures Under the U.. Economic Policy Page I of 6 Policy Areas Objeoctives and Actions Strategiee and Measures Status 1. External Seotor a. BEchange rate poleiy (a) Mainttain flexible exchange - Conduct foreign exohange In place. wat6 auction$ - Maintain unreatricted In pl8co. Public sector access to anction market agjicies muet stay witbin budget liits. - Limit net foreign In piace. excharge sales to net official international reserve targets b. Esternal trade and payaonts (a) Liberal tfade and payments - Avoid introduction of In place. Iiuor policy systea exenange and trade excepticne: sugar and restrictions cement imports are not allowed (b) Uniform import tariff - Maintain uni foP import In place. without duty exemptions tsriff of 20 percent - Reduce and possibly By August 1987 for wheat. eliminate import duty exemptions (c) Promote export growth and - Rebate custome duties and Decree being finalized. divereifioation indirect taxes to exporters at a uniform rats (proposed tax neiburseasntfor up to 10% of the volume of exports) - Provide unsubsidised pre- Ongoing, e'1ltionel and poet- shipment oredit finnacing rsquired. - Refrain from eXpOrt In plaoe. quotas and probibitions - Establish competitive See 3.d. freight rates for exports c. External borrowing (a) Restore iaternational - Borrow at conoessional Ongoing. creditworthiness terme Only (b) Inoreass amounts, - Revive Consultative Group Meeting Dec. 1986. coordinate mi and iaprove meetings annually thereafter. terms of external finuacing (c) Improve debt monitoring - Negotiate and implement Accomplished except with bilateral agreeenuts in Argentina and Bradl accordanoe with the 1986 Paris Club Agreement - Obtain further debt re- Annual Paris Club lief Zro official bilat- meetings in mid-1987, eral creditors mid-1988, and mid-1989. - Restrecture comerial Ongoin negotiations. bank debt Debt repurobase and/or equity oonversion are being considered.  - 37 - APPEIX I1: BOLMA - S_mry and Status of Implementation May 29, *987 of Prinoipal Measures Under the Nov looncaio Policy (ooatinued) Page 2 of 6 Polioy Areas Objectives and Actions Strategies and Mtssure. Status - Establieh monitoring and To be implemented as part control systec for short- of ongoing Central Bank 2. Publio Sector e.aent and tere external public debt restructuring. Rfficienoy of Resouroe Allocation a. Public seotor mnigemnt (a) Reduce size and iprove - Cut public sector employ- Workforoe of COMIBOL and quality of oivil servioe sent the Central fank and state enterprise staff drastically reduced; PTM's retoil network privatised, thus reducing YPFB's workforce by 3000 people. Other adjust- ments under way. - Introduce incentive pay Being studied. scales for specialists and top-level managers (b) Raise executing capacity - Reorganize public sector Major adjustments already entities and enterprises, made in the Central Bank in particular the Minis- and COlIBOL; other enti- trie of finanfe nd of ties being reorganized at Plannig and Coordina- varying speeds. tion. the Central Bank, Yw, COMIOL, UD1, B, and the mnicipali- ties - Target better and deliver Ongoing; the establish- efficoent social servioes sent of a general social policy framework has started with the creation of an EImergency Social Fund. - Gsenerate after-tax etate 1988-1989, except in y118 enterprise savings for which already generates local counterpart finen- the bulk of the reserves ciao of invest_mt of the Treasury. through pricing policy and oost cutting b. Public tAvestnent (a) Rebuild public iiveatmast - Establish a "core, Being defined. peline in order to help investment proam improve and expand basic infrastructure - Establish shree-year Being defined. investment progrm and review it annrly - Update accounts and Being implemnted with establish besic finanaal IDA assistance. control vstem (b) Incouraeg private - Define national nedium- Under preparation. investment tern stratey (a) Improve planning, project - 8dmine loan coitments Being defined. screening, and monitoring and ongoing projeot to capacity ensure the attainent of priority objectives. - Remove eonstrints to Ongoing. implementation capacity (d) Improve sid coordination . Arrange con*eesional Conultative Group finanoing eetinge to be held annually.  - 3- APP1IX 1: 5OLInI - Summary and Status of Implmentation May 29, 1987 of Principal Ieasuree Under the Raw Uoonomic Policy Page 3 of 6 Policy Areas Objectives and Actions Strategies and Meawures Status c. Private investgent (a) Support inorease in - Stimulate investment Ongoing. private ivevtment, tbrough flexible prioes, espeoeally for export collective bargaining, freedom to hire and fire. unrestricted acoess to mineral rights, unlimited profit remittanees, inrmstment guarantees, joint ventures in certain area, infrastracture investment, finanoial sector reform, and a stable regulatory framework - Revise investment code To be ,3ompleted during and simplify approval 1987. procedures - Prepare sector policy To be prepard based on statements the work of the ongoing sectoral strategy workshops (Fall 1987) 5. 8ectoral policies a. &griculture (a) Increase output and - Redefine Ministry of Under consideration. iaprove productivity Agriculture's role in support of sector (b) Promote exports and - Reduce transport costs Being implemented. efficient import substitution - Provide export financing Being implesented. - Improve transport Beiag implemented. infrastructure - Strengthen research. Being implemented. extension and training services - Unsure input availability Ongoiag. (c) Provide alternatives to - Provide agricultural Ongoing; pace to pick up coca leaf production cerdit and omplementary once oovernment's anti- services narcotics plan starts being implemented (d) Raise farm income, - Support unemployed minera Ongoing. land grante especially in the and farm workers through especially in 1987. altiplano land grants and service progras b. Mining (a) Increase mining - Restructure CONIBOL COlIBOL transformed into production, particularly holding cmpany with five of nontiu minerals subsidiaries. - Revise mining code Beiag studied. - Implement the mining tax Being studied. system - Lower freifht rates See 3.d.(c) below. - Support geological work Being implemented as higb and exploration priority activity. activities - Initiate nev investments, Provis.ion of appropriate including joint ventures incentives being considered.  - 39 - APPEISfl It BOLIVA - Sumery and status of Implecentation May 29. 1987 of Principal Measures Under the 3ev Econowi Policy Page 4 of 6 Policy Aresg Objectives and Actions Stretegies and Measures Status c. Energy (a) Increase production ef Couplete ongoing mFb Duting 1951-88. liquid petroleum. domestic projects consumption of ratursl gas, and exports oC hydrocarbons (b) Lower the dependence on - Analyse options for a gas Ongoing; consultants gas exports to Argentina export agreeamnt vith being hired. tasil on the basis of an exsting agreement With the World BSank - Negotiate gas export Ongoing, to be completed agreement witb Brsail by 1988. - Set domestic prices so as legal basis to be to conserve energy established; part of RIC II action program. - Obtain agreements with Legal basis to be foreign companies to esteblished; part of RIC prowte joint ventures II action program. - Transfer part of YM In place. retailing and distribution operations to the private sector (c) Improve the efficiency of - Improve the distribution Revision of pricing electricity generation and of electricity by linking policy being considered. distrit' ion Santa Cnus to the ustional network asd revise priciag policy d. Transport (a) Create efficient export - Rehebilitate, modernise, Being studied. corridors and upgtrde road ad ratlvay syste- With priority for export corridors (Santa Crux-Corunba railrod. river trnsportation to Argentina, rail and road links to Chile and Peru) (b) Promte national - Continue the construction Oagoing. lntegration of the national road system - Repair and maintain toads Ongoing. (c) lower transport costs, - Deregulate trucking Full contracting and especially for exports industry and some railway uncontrolled tariffs lines and/or adopt other introduced in road 4seures to reduce transport. In rail freight tariffs. transport there is a study of the coats and Its findings WIll be reflected in the tariffs by December 31, 1981. Possible reductions in railway freight tariffe for export commoditiee are being studied by the Government amd ENPI.  - 40 APPENDIX Zi BOLIVIA - Sumary and Status of Implentation May 29. 1987 of Principal IMeasures Under the New Economic Policy Page 5 of 6 Policy Areaa Objectives and Actions Strategies ead Measures Status 4. Fiscal policy (a) Raise tax revenue while - Implement the tax reforms Being implemented. lowering the dependence on by issuing guidelines and Enforcement of all taxes the hydrocarbon sector enforcing the new tamxs in the course of 1987. (b) Rationalize expenditure so - Limit expenditure through Ongoing. as to make room for improved budgeting and inwestunt, social expenditure control apending. and domestic procedures arrears reduction (c) Reduce nonfinancial public - Avoid subsidies Ongoing. sector deficit to 5 1/2 - 6 percent of CDP - Maintain tight wage Ongoing. policy - Introduce special pay To be completed during scale for qualified 1987. personnel - Increase investment Ongoing. spending - Provide for well Ongoing. targeted social spending, especially education and health - Reduce public sector Ongoing. arrears - Limit overall deficit to Ongoing. available foreign financing - Achieve a small domestic 1988, 1989 financing surplus 5. Financial sector policy (a) Reform banking law - Submit bill to Congress By mid-1987. a. Institutional reform (b) Reduce the role of the - Create superintendency of By 1987. Central Bank in the banks resource allocation proceas - Eliminate approvals of Originally planned for Individual development early 1987; delay due to loans by the Central Bank Central Bank restructuring. (c) Rehabilitate state and - Reform the Bsco Agricola During 1987. private banks - Reform or liquidate the During 1987. Banco del Estado - Study the cteation of a Under consideration. national securities exchange (d) Simplify accounting and - Currency reform In place. transactions in the economy - Improve the functioning Ongoing. of the interbank money market - Improve the Central Ongoing. Bank's accounting system b. Interest rate policy (a) Increase domestic resource - Maintain market determin- Ongoing. mobilization while ation of interest rates encouraging lover real interest rates  - 4k - APPWIX I: BOLIVIA - Summary and Statue of Impleumtation May 29. 1987 of Principal ISeasures Under the New Econmdc Policy Page 6 of 6 Policy Areas Objectives and Actions Strategies and Iteeutrs Status (b) Improve efficiency of - Permit bank. to Issue By mid-1987, ceneurrent intermediation via loeer bearer certificates of vith banking lav. spreads depoSit c. Credit policy (a) Reduce concentration of - Limit credit allocatione Ongoing. credit to public sector to the public sector 6. Social sector policy (a) Alleviate poverty effects - Iplement action plAne Ongoing. of the economic cristi for the social ministries (including employment programs) to improve eff iciency, target pro- gracs, and assure budget allocatione. - Implemnt targeted work During 1987-89. programs to alleviate unemployent tb) Strengthen Investment in - Monitor the poverty honitoring mechanism yet human capital impact of the economic to be 4easigod. crisis - Strengthen the education D1fficult even to start system until greater resourcee can be made available. Sectoral policy definition readied for Fall 1987 sbould help focue attention on this problem. (c) Reduce infant mortality - Implement emergency During 1987-88. health programs with the assistance of nongovernmental organizations  APPENDIX II - 42 - Page I of 7 RIC II PROPOSED ACTION PROGRAM Problem Area Status and Recent Actions Action Program Timin I. PUBLIC EXPENDITURE PROGRAMMING a. Public Major sectoral analyses 0 Present a letter By November 30 of Investment. sponsored by Government are to IDA, for each year through Low levels of underway as is a revision of IDA's review and Project completion public in- the National System of Pro- agreement, de- beginning on vestment. jects. tailing the pro- November 30, 1987. Public In- posed public ex- vestment Pro- There is a large pipeline of penditure budget gram for undisbursed external commit- for 1988, with 1988-89 is ments. Public investment special emphasis still embryo- budget execution levels on sectors nic. Public appear to be running well covered by this Investment under 50% of those budgeted, Credit and on procedures and investment levels are the social sec- are unclear near historical lows. There tors (see I.B., and execution is a need to coordinate II.a, III.a and capacity external financial help as IV.a below). A appears weak. well as to identify and similar letter remedy implementation to be sent by bottlenecks. November 30, 1988 covering the proposed 1989 budget. 0 Appoint a Action taken. Subsecretary for Public Investment and International Cooperation in the Ministry of Planning to provide high level direction to the implementation of the public investment program and to the coordination of external financial help.  APPENDIX II - 43 - Page2 of 7 Problem Area Status and Recent Actions Action Program Tig Procurement procedures are 0 Agree on aea- Action taken. slow and cumbersome. sures (i.e. competitive selection of procurement agents) to speed up Government procurement under projects. o Execution of Before a procurement Disbursement. contract satisfactory to IDA be- tween a pro- curement agent and YPFB, ENFE or SNC. o Present January 31, Procurement 1988. Law to Congress; IDA to be given an opportunity to review and comment on the proposed Law (by November 30, 1987) beforehand. b. Recurrent Public RIpen- Over the past few years 0 Government to November 30 of ditures. there has been a consider- state longer each year Sigh social able deterioration in health term priori- through Project cost of con- and education status of the ties in the completion tinued population as well as in social sec- beginning on economic conditions of employment and tors, lnclu- November 30, crisis. pay. While reversal of the ding an indi- 1987. fundamental trends is a cation of the longer term process to be level of re- addressed via an overall sources (rel- social sector policy and ative to GDP) supported by an increase in to be devoted the relevant ministerial annually in budgets (by raising recur- the period rent and to some extent pub- 1988-89 (part lic investment expendi- of I.a above) tures), some action is needed to redress the impact  APPENDIX I1 - 44 - Page 3 of 7 Problem Area Status and Recent Actions Action Program Tlmi of the recent stabilization 0 Design of the Action measures and large terms of Emergency Social taken. trade shocks. The Fund and the Government has established plan of action an Emergency Social Fund to to be agreed address the cyclical upon under this problem. credit opera- tion. II. HYDROCARBON SECTOR a. Lack of clear YPFB has put together a 0 During negotia- Action investment 1987 proposed investment tions the Gov- taken. priorities and program which seems ernment would funds for over-optimistic given present to IDA critical funding constraints, for discussion investment However, the Government is and agreement areas. now in the final stages of YPFB's 1987in- preparing a comprehensive vestment budget. National Energy Plan. 0 For subsequent November 30 years, YPFB's of each year investment through budget, physical Project action program completion and financing beginning on plan would be November 30, presented to IDA 1987. for review (part of I.a above). b. Declining Exploration has been low, 0 Present to March 31, Hydrocarbon while exploitation Congress new 1988. Reserves. increased. Very limited hydrocarbons Government/YPFB funds are legislation that available for exploration. the Government is in the process of designing in order to address the key problems in this sector. o Furnish IDA January 31, proposed draft 1988. of new hydrocarbon legislation (above) for its review and comment.  APPENDIX II 45 Page 4 of 7 Problem Area Status and Recent Actions Action Program Timing 0 Inform IDA on October 31, the status of 1987 and negotiations, semi-annually agreements thereafter reached and through implementation Project of such completion. agreements with respect to payments on contracts with foreign investors in the petroleum sector in Bolivia. c. Need for LPG Domestic consumption is 0 Agree with IDA December 31, export revenues. relatively high, possibly on a timetable 1987. cutting into exportable and schedule surplus. of gradual increases to raise domestic LPG price to reach opportunity cost. o Agree with IDA October 31, on an action 1987. program concerning the distribution and marketing of natural gas within Bolivia in order to free up LPG for export.  - 46 - APPENDIX II Page 5 of 7 Problem Area Status and Recent Actions Action Program Timing d. YPFB contributes Substantial studies 0 Agree on the Action taken. the major por- regarding its reorganiza- terms of refer- tion of the tion have been carried out ence and on the Government's but implementation is implementation revenues and is lagging (although there timetable for a by far the most have been some reductions program to important earner in staff, from 9,200 to improve YPFB's of export reve- 6,900, mostly due to the accounting, nues. Its effi- leasing of retail outlets budgeting, ciency and the to the private sector). A financial transparency of key component to help speed control and its operations up this process would be to management are critical. make the financial information sys- situation of the company tems. more easily comprehensible. III. AGRICULTURE a. Public sector Budget allocations for 0 The proposed November 30 expenditures for public sector investments public of each year agriculture are and operations are low and expenditure through not consistent will not provide a stimulus budget for 1988 Project with the empha- for development of agricul- would reflect completion sis and priority ture. There are over 100 the government's beginning on attributed to projects in the 1987 budget commitment ot November 30, the sector, in totalling about $75 million the new, more 1987. part because the and 100 or more minor important role sector's public projects (principally being assigned sector invest- financed by NGOs) not to agriculture nent program is included in the budget. (part of I.a fragmented and above). lacks clear priorities. b. Lack of a cen- At least eight ministries, 0 The Government October 31, tralized moni- the Regional Development would establish 1987. toring of pro- Corporations and many other within the ject preparation agencies independently Ministry of and execution. plan, prepare and execute Agriculture a projects. central monitor- ing unit to follow up and coordinate pro- ject preparation and execution of various agencies involved in the sector*  APPENDIX II - 47 - Page 6 of7 Problem Area Status and Recent Actions Action Program Tis IV. TRANSPORT a. Investment Primary criterion for 0 Prepare a November 30 priorities as inclusion of a project in a coherent and of each year between modes modal investment plan is detailed through and as between still the availability of investment plan Project maintenance and funding, usually external, for 1988 for completion upgrading and discussion and beginning on expansion of ths agreoment with November 30, transportation IDA (part of I.a 1987. network still above). unclear. b. Righ level of A study of the costs of 0 Present a plan December 31, costs and transport on Bolivia's of action to 1987 for plan freight tariffs. railroads has been restructure of action; completed but Its findings freight tariffs implements- have not yet been reflected and fully tion in a in the tariff structure. implement them timely manner based on a thereafter. railway cost study recently completed as part of an agreement with IDA under the RIC I operation. Efficiency of ENFE's 0 ENPE's ratio of December 31, operations needs to be total working 1988. Improved. expenses to to- tal operating revenues would be reduced to at least 0.90 and further thereafter. 0 ENIE would December 31, complete its 1987 revaluation of fixed assets and use the results in preparing its 1988 balance sheets. c. Lack of Although a locomotive reha- 0 Increase locomo- December 31, locomotives; low bilitation plan now exists, tive availabil- 1988. efficiency in traffic continues to be ity in the the use of rejected due to lack of western network available tractive power, to at least 75S locomotives. particularly on and in the import/export corridors. eastern network to 852.  APPENDIX I1 -48- Page o77,7 Problem Area Status and Recent Actions Action Program 0 Increase loco- December 31, motive utiliza- 1988. tion to at least 105,000 km. per year. Wagon rotation ooor by