Equatorial Guinea - Rehabilitation Import Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10863 PROGRAM PERFORMANCE AUDIT REPORT EQUATORIAL GUINEA REHABILITATION IMPORT CREDIT (CREDITS 1690-EG AND AO-15-EG) JUNE 30, 1992 mr. Operations Evaluation Department This document has a restricted distribution and may be used by recipients rnly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency unit: CFA Franc Year Currency unit CFA Franc (period avg.) 1985 US$1.00 449 1986 US$1.00 346 1987 US$1.00 301 1988 US$1.00 298 1989 US$1.00 319 1990 US$1.00 272 1991 US$1.00 282 DEFINITIONS AND ABBREViATIONS BCD Banco de Credito y de Desarrollo (Credit and Development Bank) BEAC Banque des Etats de l'Afrique Centrale (Bank of the Central African States) BIAO Banque Internationale pour l'Afrique de l'Ouest (International Bank of West Africa) ENERGE Empresa Nacional Electrica (National Power Company) EPKWELE The name of Equatorial Guinea's currency prior to the country's entry into CFA zone. PPAR Program Performance Audit Report PCR Project Completion Report PIP Public Investr,,-nt Program PFP Policy Framework Paper RIC Rehabilitation Import Credit SDR Special Drawing Rights UDEAC Central African Customs and Economic Union Fiscal Year = Calendar Year January 1-December 31 THE WORLD BANK F OFFICIAL USE ONLY Washington, D.C. 20433 U.S.A. Offce of DiectorCAetal Opeatmnn (valuation June 30, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Equatorial Guinea Rehabilitation Import Credit (Credits 1690-EG and AO-15-EG) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Equatorial Guinea - Rehabilitation Import Credit (Credits 1690-EG and AO-15-EG)" prepared by the Operations Evaluation Department. Yves Rovani by H. Eberhard Kdpp Attachment This document has a restricted distribution and may be used by recipients only In the prformance of their offcial duties. Its contents mtay not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT EQUATORIAL GUINEA RECONSTRUCTION IMPORT CREDIT (CREDITS 1690, AO-15-EG) Table of Contents Page No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Basic Data Sheet........................................... iii Evaluation Summary ....................................... v PROGRAM PERFORMANCE AUDIT REPORT I. Country Background ..................................... 1 II. Design and Implementation of the Rehabilitation Import Credit ........... 4 Structure of RIC 6........................................6 Effectiveness Conditions .................................. 6 Second Tranche Conditions .......................... 7 Implementation of RIC ................................... 8 Emergency Rehabilitation ................................. 8 Technical Assistance ........ ............................. 9 Stabilization and Strengthening of the Balance of Payments ............. 10 Structural Reform ...................................... 11 III. Issues and Recomendations ................................ 12 Weak Borrower Ownership of Policy Conditionality .................. 12 Flawed Loan Design: Combining Rehabilitative and Structural Reform Components ............................ 13 Lack of Private Sector Access to Loan Proceeds .................. 13 Inadequate Supervision of the RIC ........................... 14 Inadequate Macroeconomic Support .......................... 14 Unlikely Sustainability .................................. 15 Excessive Complexity of RIC Conditionality ...................... 16 Weaknesses in Procurement ............................... 16 The RIC Committee (RICC): Problems in Institution Building ............................. 17 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont.) Page Uo. Donor Coordination..................................... 18 Economic Impact of the RIC ................................ 19 Lessons from the RIC . . . . . . . . . ...........................19 Annexes Letter from the Minister of Planning & International Cooperation.............................. . . . ..23 PROJECT COMPLETION REPORT PART 1: PROJECT REVIEW FROM BANK'S PERSPECTIVE ............ 29 I. Project Identity ..... ....................................... 29 II. Background .......................................... 29 Introduction......................................... 29 Initial Economic Reconstruction Efforts (1980-1984) ................ 29 The 1985 Rehabilitation Program and the RIC ................... 30 Macroeconomic Performance under the Program ................... 30 Policy Framework Paper (PFP) .... .......................... 31 m. Project Objectives and Description ..................... ......... 31 Objectives ........................................... 31 Credit Conditionalities .................................. 32 Loan Effectiveness and Project Start-up......................... 32 Revised Objectives .................................... 32 IV. Project Design and Organization ............................ 33 Project Design ......................................... 33 Project Financing ...................................... 33 V. Project Implementation and Results ........................... 33 Project Activities ....... ................................. 33 Other Project Activities .................................. 34 Tabe of Content (Cont.) Page No. Second Tranche Release.............................. . ..35 Aid Coordination....................... ..... . . . . . . . ..35 Procurement . . . . . . . ................. ........ ........35 Disbursements......................... ..... . . . . . . . ..35 Audits ...................... ....... .... ...... .....36 Consulting Services........................... . . . . . . . ..36 VI. Impact and Sustainability of the Project............... . . . . . . ..36 Impact of Project....................... ...... . . . . . . ..36 VII. Bank Performance................................. . . ..37 VIII. Borrower Performance.......................... . . . . . . ..38 IX. Conclusion......................... ....... . . . . . . . ..39 Lessons Learned ...................................... 39 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ....... 41 I. Brief Summary of the RIC Project ........................... 41 II. Components of the RIC Project ............................. 42 II.1 Agriculture ......................................... 42 11.2 Small and Medium Enterprises (SMEF) ........................ 43 11.3 Infrastructure Rehabilitation ............................... 44 11.4 Preventive Medicine .................................... 47 11.5 Public Sector Reforms .................................. 47 11.6 Financing Gap ........................................ 48 III. RiC Coordinating Committee .............................. 48 IV. Operational Aspects .................................... 49 Table of Contents (Cont.) Page No. Delays and Alternations ........................................ 49 Operational Indicators ........................................ 49 Unfinished Programs............................ . . . . . ..50 V. Conclusions..... ............................... ..... 50 PART III: SUMMARY -)F STATISTICAL DATA................. . ..52 Tables 1. Related Bank Loans ...... ................................... . 52 2. Project Timetable ....................................... 52 3. Credit Disbursement . .................................. . 53 4a. Project Costs ......................................... 53 4b. Project Financing ....................................... 53 5a. Use of Bank Resources A. Staff Inputs by Stage of Project Cycle in Staffweeks .............. 54 B. Mission Data by Stages of Project Cycle ..................... 55 6. Project Results Studies .................................... 56 7. Compliance with Loan Covenants ............................. 59 8. Summary: Economic and Financial Rehabilitation Program ............. 62 1 PROGRAM PERFORMANCE AUDIT REPORT EQUATORIAL GUINEA REHABILITATION IMPORT CREDIT (CREDITS 1690-EG Ul.AO-15-E-) PREFACE 1. This is a Program Performance Audit Report (PPAR) on the Rehabilitation Import Credit to Equatorial Guinea. The principal objectives of the loan were to support the Government's 1985 Rehabilitation Program, to provide emergency import financing to rehabilitate the country's infrastructure, production, and social structure, to alleviate short-term balance of payments and budgetary difficulties, and to initiate certain structural reforms. Loan 1690-EG in the amount of SDR 5.4 million and Special Africa Credit Facility Loan AO-15-EG in the amount of SDR 3.6 million were approved on May 8, 1986. The credits closed on December 31, 1989, eighteen months behiTd schedule. Th& last iisosement was on February 7, 1993. 2. The PPAR was prepared by the Operations Evaluation Department (OED). The Project Completion Report (PCR) was prepared jointly by the Country Operations Division of the Occidental and Central Africa Department of the Africa Regional Office (Preface, Evaluation Summary, Pats I and III), and the Borrower (Part II). The PCR provides a good and detailed assessment of the project experience, including a review of the performance of the Bank and the Borrower. The PPAR is based on the attached PCR, the President's Reports, the loan documents, a study of project files, and discussions with Bank staff. An OED mission visited Equatorial Guinea in November 1991, and discussed the effectiveness of the Bank credit with former members of the RIC Committee and other former and current Governmental officials connected to the project. The interviews were coordinated by Mr. Lucas Ongwomo, the Project Administrator for the Bank's Technical Assistance Project. The extensive cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. Comments received from the Minister of Planning and International Cooperation are reproduced as an attachment. Ill PROGRAM PERFORMANCE AUDIT REPOR EQUATORIAL GUINEA RECONSTRUCTION IMPORT CREDIT (CREDITS 1690-EG AND AO-15-EG BASIC DATA SHEET LOAN POSITION (Amounts in US$ Million) As of Dec. 31. 1991 Qiginal Disbursed anl BMi O u Loan 1690-EG 6.0 7.4 - - 7.4 Loan AO-15-EG 4.0 4.9 - - 4.9 CUMULATIVE ESTIMATED AND ACTIAL DISBURSEMENTS Loan 1690 E Appraisal Estimate (US$ M) 6.0 Actual (US$ M) 2.5 7.4 Actual as % of Appraisal (%) Date of Final Disbursement February 7, 1990 Loan AO-15 EMI EM Appraisal Estimate (US$ M) 4.0 Actual (US$ M) 4.4 4.9 Actual as % of Appraisal (%) Date of Final Disbursement: February 7, 1990 iv PROGRAM DATES Loans 1690 & AO-15 Initiating Memoranduam 3/15/85 Appraisal 4/85 2oard Approval 5/8/86 Signing 5/23/86 Effectiveness 4/6/87 Second Tranche Release 7/88 Loan Closing 12/31/89 STAFF INPUTS (staff weeks) Loans 1690 & AO-15 FY85 FlY6 FM7 FY88 FY89 FY90 1ota P,eappraisal 1.5 1.5 Appraisal 3.0 30 Negotiations 5 5 Supervision 2.5 10 16 8 36.5 Other - - - - - - - Total 31.5 5 2.5 10 16 8 73 OTHER PROGRAM DATA Borrower/Executing Agency: Republic of Equatorial Guinea Follow-on Operations: Project: Agricultural Exports Project Loan No.: 2181 - EG Amount: SDR4.7 million Board Date: October 30, 1990 V PROGRAM PERFORMANCE AUDIT REPORT EQUATORIAL GUINEA REHABILITATION IMPORT CREDIT (CREDITS 1690-EG AND AO-15-EG) EVALUATION SUMMARY Country Background 1. Equatorial Guinea is a small country infrastructure. Unfortunately, macroeconomic with a population of about 350,000. The policies were not conducive to reestablishing country is divided into two parts with sustained growth and investment priorities different economic bases and tenuous were misplaced. Ultimately, this first administrative and communications links. recovery effort failed (para. 1.5). Most of the population still lives in subsistence. The economy is based primarily 5. A second effort was undertaken in on agriculture, including fishing and forestry, 1985. The Rehabilitation Program was to be which accounts for about 53 percent of GDP supported by an IMF Standby, the RIC, and and 60 percent of exports. Manufacturing is the widespread contributions of bilateral negligible. Construction, public works, dor,:-.. A key feature of the Program was commerce, and other services account for the Equatorial Guinea's entry into the CFA Franc remainder of GDP (paras. 1.1 and 1.2). Zone. This occurred at a time when neither the Government nor the private sector were 2. During the early 1960s, Equatorial prepared for the strict discipline required by Guinea had one of the highest per capita this new monetary arrangement. By December incomes in Sub-Saharan Africa. But during 1985, the Government could no longer meet the reign of Macias Nguema (1968-79), the terms of the IMF standby, which was political misrule and economic suspended (paras. 1.6-1.9). mismanagement led to collapse (para. 1.3). 6. In early 1986, the only two 3. In many ways, the country has been commercial banks became insolvent, leaving struggling to recover ever since. The Equatorial Guinea without a functioning country's physical infrastructure suffered from banking system for more than a year. This years of neglect. An entire generation of triggered a fiscal crisis and an increase in children were deprived of education because external payments arrears (para. 1.10). schools had been closed. Basic public services are available to only a small fraction of the 7. Macroeconomic performance improved population (para. 1.4). sharply in 1987, with a marked reduction in the fiscal deficit, agreement with IDA on a 4. Initial reconstruction efforts in the three-year Public Investment Program which 1980-84 period sought to revitalize eliminated some economically-inviable agricultural production and rehabilitate projects, establishment of a new commercial poliieswerenotcondciv to eesablihin vi bank, and : ihi;. I II a1nimil export Equatorial Guinea initiate reforms in public taxes. .*u111CW:1' In b t, III, capital health, utility tariffs, procurement, public inflows, spint by n i n Iw linlg of the investment programming, and finance (paras. Wtountry' hil:IWCc. I. wil dJi (q'd tile 2.1 -2.3). import conI:J,1 a n uts to be lestockTi aw n I nth 'elerate 10. The Government's Rehabilitation (pa.Program began to go off track months after it had been approved in June 1985. By 8. On this 061dg;, lhiI stabilization December, the credit ceiling had been program was lat, i <: i1 cr 1988. but transgressed; by April 1986, the IMF staff it, too, m"r, %wti (, an) , plagued by informed IDA management that, by MULual adverse itnns of tiaI Jrioloenls as well agreement with the Government, the Standby as setiotis ii Jlmnv~d vdiness in would be allowed to lapse in June. p1 ~ ~ ILlowucrat Nevertheless, the RIC was presented to the reforms. /\si('( :t,n difficulties in IDA Board in May 1986 on the expectation imp1encnta:turin, m(am to of this and other that a new stabilization program would son adjustnct piogat., S Tedeled difficult be prepared. However, widespread loan due to the iack of basic data and adequate defaults, a collapse of the commercial banking Systems Cf acCountr. a Thioughout this period system, massive capital flight, and a fiscal and up to the pre t, export growth has crisis ensued, forcing an effective remained limited, domestic savings renegotiation of the RIC conditionality and a mobilization weak, and the external debt postponement of effectiveness until April burden o\er whelming. In December 1991, the 1987. The agricultural line of credit was Government )eahced a foiuth agieemnent with abandoned in the wake of the trustee bank, the IMF on a ShoctmMl Adjustment Facility the requirement for a satisfactory budgetary &:pected to cox er fl)-th 'd of 1.992--94 and external debt program was waive, (paras. 1.12-15). iehabilitation funds had to be reallocated, since some of the key projects intended to be financed by the RIG were covered by other Design and inicklinttation of the RIC donors, a Governmental commitment to eeal with the banking crisis was added, and a new 9. Prior to the RIC. 1 'A hd made only requirement for a medium-term sectoral four loans to F-quatoial Guinea for highway development program was incorporated maintenance, petroleum technical assistance, (paras. 2.4-2.9) technical assistance for economic planning and investment, inud rehabiliation of cocoa 11. Of the key objectives of the RIC, only production. The RIC was origitally designed that of emergency rehabilitation was satisfied. to support the 198 Rehabi1ittion Program by The RIG made possible a significant, but providing urgently-needed for eign exchange to temporary, improvement in the quality of life, import equipment and inouts 11eeded to revive mainly for the inhabitants of the country's the country's decrepit infrastructure, two major urbanized areas. Garbage production, and social stctors. Agriculture collection, water distribution, and road was to have the hihest yiority. In a. broader conditions mproved significantly, but were shet, the Rarfs prcuetndcd to huelp vii allowed to fall into disrepair, once project will i t h (pa1us. funds ran out (paras. 2.10-2.16). 2.22 2 12. Technical assistance was divided into 14. two components: (a) short-term consultants targetv il J,cilelaI, too responsible for specific sectoral studies, and c1iij the Shori-tofi (b) long-term consultants responsible for framev,, I. dbur,-ig loaa, administration of the RIC. Of the two, it may particuL i i er whos. well be that the contribution of the short-term commitAw1li 'i .' viur were consultants will have the greatest and most seriously i. enduring impact. Three of the four sectoral studies--cocoa, fisheries, and health--have led either to concrete Governmental reform s a commitments or are under serious review. With respect to the long-term consultants, the 15. 'fic Idriiie.d mcWde weak record was decidedly less positive. The borrowet, couditlitality (para. administrator-economist established an 3.1-3.6), cotibining of short- excellent rapport with a narrow group of term rehabilitalloo fe-,tius with long-term advisors, and was eventually forced out of the strucalai It'iI'1 . 1 iis the loan country by political intrigues. The design (para. 3.6), tfe la-I of pfivate sector procurement advisor had the requisite access to the procekds of the RIC (paras. 3.7- expertise, but came on board too late to avert 3.8), i,,uptision of the RIG serious shortcomings in the procurement (paras. 3.9-3.10), the lack of a supportive process which resulted in mismatched good , macroezonoinic -6amework for the loan underemphasis on the needs of agriculture, (paras. 3.11-3,12), twil:ely sustainability and serious delays which undermined the (paras. 3.13-3.14), complexity of emergency character of the rehabilitation loan coadniolml (p3ias 3.15-3.16), assistance. The roads engineer was let go weaknesses in the pro,,ure.Ient process after one year for poor performance, and (paras. 3.1.-3.19), pjobteis in the RIC other planned technical hires, such as needed Committee suiuctu . and operAtions (paras. mechanics, were never consummated (paras. 3.20-3.23), and unsustaincd donor 2.17-2.21). coordination (pa-a.. -I) 13. As for the RIG objective of supporting econorcic stabilization and strengthening the n_E4ghgoir balance of payments, this aim was frustrated originally by the collapse of the 1985 16. i ,!r i ,cb rawod so a Rehabilitation Program. After the more than 4 htameal rate, and aforementioned improvement in private per caplta CoSUaItin the l macroeconomic performance during 1987, averaged ealy 13 pictut annually, duia IDA agreed to release the second tranche of the o wt pe s1 yeo rh of maximun the RIG in July 1988. Yet, just eight months disbursement, 9deu / sX iio output grwC after second tranche disbursement, a new slowed to an a Neo tily abou a Loa f Structural Adjustment Facility Program signed percent yearly fuig 1989 91, and private viii per capita income actually contracted by procedures and improve project selection, nearly 2 percent yearly (paras. 3.25-3.26). might have been more manageable (para. 3.29). 17. The RIC and other international financial institution funds were very 20. An extended period of intense successful in mobilizing a considerable technical assistance and patient institution- increase in long-term foreign capital inflows, building will bee needed before Equatorial which rose to the equivalent of around 40 Guinea is ready to tackle the complex reforms percent of GDP during 1988-90. IFI support of a typical structural adjustment loan (par. was also influential in persuading Paris Club 3.30). creditors to grant significant debt rescheduling to the country in 1986. But the evidence 21. IDA should satisfy itself that there suggests most of the funds were not investee exists sufficient support for policy reforms wisely, with the result that the external debt among the diverse tribal and other interest and arrearage problems remain as serious groups in the country before proceeding with today as they were seven years ago, while per future policy-based lending, since the absence capita incomes in the country have barely of such consensus appears to have played a increased. Only the prospect of significant material role in the breakdown of the RIC new revenues from offshore oil drilling offers (para. 3.31). any prospect of medium-term relief from Equatorial Guinea's crushing debt burden and 22. A principal flaw in the design of the weak export and current account performance RIC was the decision to combine short-term (para. 3.27). rehabilitation features with longer-term structural adjustment measures. The inability of the Borrower to satisfy structural reform Lessons Learned requirements delayed the flow of import finance for rehabilitation, thereby 18. The presentation of the RIC to the undermining the emergency character of the IDA Board should have been postponed in c edit. Conversely, the pressure to move 1986 to allow time for staff and management ahead with critically-needed rehabilitation to take full account of the deteriorating projects induced IDA to cut corers in macroeconomic situation. Future policy-based verifying compliance with structural and operations requiring a supportive stabilization components of conditionality macroeconomic framework should require (para. 3.32). some period of satisfactory compliance with a stabilization program as a prerequisite to 23. IDA erred in leaving the supervision Board presentation (para. 3.28). of such a complex project largely in the hands of an economist and an operations assistant 19. The conditionality of the RIC was of (para. 3.33). a complexity which far exceeded the Borrower's capacity for, and commitment to, 24. Technical assistance provided in the reform. A straightforward emergency form of well-focussed sectoral studies rehabilitation credit, with ample technical prepared by short-term consultaus has proven assistance to strengthen maintenance to be of greater lasting value than the ix contributions of the long-term consultants 27. Procurement suffered from long delays (para. 3.34). in hiring an expatriate advisor and from his lack of knowledge of Spanish prior to arriving 25. The work of the RIC Committee was in the country (para. 3.37). not adequately disseminated to other parts of the Government, and decisionmaking was 28. The Government should have been concentrated excessively in the hands of the required to make adequate budgetary Administrator/Economist who was a foreigner provisions for repair and maintenance of the (para. 3.35). rehabilitation projects being supported by the RIC to assure their sustainability (para. 3.38). 26. Stronger IDA management pressure on key bilateral aid decisionmakers to not break Government Comments on the PPAR ranks with IDA while RIC effectiveness was being justifiably delayed might have helped 29. The Government's comments on a avert the disintegration of donor coordination draft of this PPAR expressed full agreement which occurred during that period (para. with its conclusions (Attachment A). 3.36). PROGRAM PERFORMANCE AUDIT REPORT EQUATORIAL GUINEA REHABILITATION IMPORT CREDIT (Credits 1690-EG AND AO-15-EG) I. COUNTRY BACKGROUND 1.1 Equatorial Guinea is a small country situated in the southern corner of the Gulf of Guinea in West Africa, with a land area of 28,000 km2 and a population of about 350,000 growing at the rate of approximately 2.4 percent annually. The country is divided into two parts, a mainland territory, Rio Muni, wherein resides 80 percent of the population, and five islands dominated by the largest, Bioko, on which is located the national capital, Malabo. The two areas have different economic bases and are connected by tenuous communications and administrative links. Rio Muni is predominantly rural, with a heavy emphasis on subsistence food crop production, including bananas, pineapples, and palm oil. Bioko is more developed and urbanized, with a greater emphasis on cash crop production. 1.2 Agriculture, including fishing and forestry, accounts for about 53 percent of GDP and 60 percent of all exports. Timber, cocoa, and coffee are major sources of monetary income, foreign exchange, and government revenues. Manufacturing plays a very minor role in the economy, mainly involving wood and cocoa processing. Recent oil discoveries have significantly improved the country's export outlook. Construction, public works, and other services account for about 40 percent of GDP, and commerce for the remaining 7 percent. 1.3 During the early 1960s, Equatorial Guinea had one of the highest per capita incomes in Sub-Saharan Africa. But, following independence in 1968, political misrule, including egregious human rights violations, as well as economic mismanagement during the reign of Macias Nguema (1968-79), led to economic, political, and social collapse. Health services, public utilities, roads, and ports were neglected and allowed to deteriorate severely. Mass executions targeted the most educated sectors of the adult population. The educational system was closed, leaving a whole generation of children unschooled. Foreign investment halted and the state- controlled trading system ceased to function. By 1979, when Macias Nguema was deposed, Equatorial Guinea had become isolated from the rest of the world. The production of cocoa, coffee, and forestry, the three principal agricultural crops, had plummeted by 82, 92, and 86 percent, respectively, from their pre-independence levels. And Equatorial Guinea's per capita income had dropped from US$260 equivalent to an estimated US$175, both in current dollars, making it one of the poorest countries, not just in Africa, but indeed in the whole world. 1.4 In many ways, the country has been struggling to recover ever since from the tragic consequences of the Nguema era. It suffers from a shortage of skilled persons at all levels, weak public institutions, widespread corruption, a road network in dire need of repairs, the absence of reliable, regular transport to connect the islands with the mainland, and the unavailability of 2 even the most basic public services, such as water, sewer and electricity, to a very large share of th_ population. 1.5 Initial reconstruction efforts during the period of 1980-84 sought to revitalize agricultural production and rehabilitate the country's infrastructure. Unfortunately, macroeconomic policies were not conducive to establishing sustained growth. Public finances were in disarray, with only sporadic recording of transactions and the haphazard collection of revenues. The large fiscal deficits were financed through rapid money creation and the accumulation of external debt, which became huge even by African standards. Inflationary pressures and a lagging real exchange rate led to mounting balance of payments difficulties. Moreover, the Government's rehabilitation and development efforts were misdirected. For example, evaluation and programming of investments were non-existent, with the result that non-priority construction projects were carried out, while key infrastructural components were left unrepaired. And the failure to formulate sectoral development strategies rendered foreign aid coordination all but impossible. Ultimately, this first experiment with adjustment proved to be a failure. 1.6 Hoping to correct the mistakes of the first adjustment effort, the Government launched a second Rehabilitation Program in 1985. The principal aims of this new program were to spur agricultural export growth, reduce the budgetary deficits, and strengthen the balance of payments. The measures to achieve these objectives included removing basic price distortions, particularly the overvalued exchange rate, cutting expenditures, strengthening public revenue collection, improving investment programming, introducing an external debt management system, implementing sectoral reforms in agriculture and public utilities, and rehabilitating key infrastructure. 1.7 The 1985 Rehabilitation Program was negotiated as an IMF Standby covering the period July 1985 to June 1986 and supported by the IDA-financed Rehabilitation Import Credit (RIC). A key feature of that program was Equatorial Guinea's entry into the Franc Zone as the first step leading to eventual full integration into the Central African Customs and Economic Union (UDEAC), which the country had joined in 1983. Under the new monetary arrangement, Equatorial Guinea's central bank (BEG) was replaced by its regional counterpart, the Bank of the Central African States (BEAC). The national currency was changed from the epkwele, pegged to the Spanish peseta, to the CFA Franc (CFAF) pegged to the French Franc. The conversion into the new currency was accomplished at a rate which implied a de fame devaluation of 82 percent in foreign currency terms. 1.8 Equatorial Guinea's entry into the CFA zone occurred at a time when neither the Government nor the private sector were prepared for the strict discipline required by this new monetary arrangement. As a result, a severe liquidity crisis ensued. The non-financial public sector had long been accustomed to receiving essentially unlimited overdrafts from the previous national central bank. But under the new scheme, credit from BEAC to the central government was limited to 20 percent of the previous year's fiscal revenues. At the same time, a large portion of the assets carried on the balance sheets of the country's banks was not recognized by the new monetary authority on the grounds of dubious collectability. 3 1.9 As for the private sector, cocoa producers could no longer rely on the past easy profits gained from exchange rate speculation and cheap imports, but were obliged suddenly to become internationally competitive. This was a changeover they could not accomplish in the short term, particularly in the face of highly adverse climatic conditions during the 1985/86 crop season, high export taxes, the continued appreciation of the CFA against the US dollar, and the simultaneous decline of international cocoa prices. Widespread defaults ensued. The liquidity squeeze on the private sector was exacerbated by the Government's decision to impose a special tax on deposits, which, together with a general decline of confidence in the domestic banking system, led to massive capital flight. By December 1985, Equatorial Guinea could not longer meet the terms of the IMF Standby, which was suspended. 1.10 In early 1986, the only two commercial banks, BCD and Guinextebank, themselves became insolvent. In effect, during roughly half of 1986 and 1987, Equatorial Guinea no longer had a functioning banking system. The collapse of the banks led to a near total breakdown of the payments system, including the payment of taxes, triggering a fiscal crisis as well as an increase in external payments arrears. 1.11 After a hiatus of nearly a year, macroeconomic performance began to improve over the course of 1987. Spurred by improved collections of tax arrears and a sharp reduction of expenditure, the budget shifted from a deficit equivalent to 6.4 percent of GDP in 1986 to a surplus of 0.6 percent in 1987. The Government agreed with IDA on a three-year Public Investment Program, eliminating in the process various inviable projects. Financial liquidity began to recover after the establishment of a new commercial bank, BIAO-GE, to replace the two which had failed. Export taxes on agricultural exports were reduced. The adoption of a convertible currency, combined with a significant recovery in net long-term capital inflows during 1987, including the benefits from an earlier large rescheduling of Equatorial Guinea's external debt by the Paris Club creditors, eased the import constraint, allowing consumer prices to decline, markets to be restocked, and economic output growth to accelerate from 0.3 percent in 1986 to 4.6 percent in 1987. In early 1988, the Government took the first steps toward liquidating the two insolvent commercial banks. 1.12 On this basis, a third stabilization program, underwritten by an IMF Structural Adjustment Facility (SAF), was launched in December 1988. But this program, too, went off track only three months after it had begun. From the outset, the SAF was plagued by adverse terms of trade developments and an excessive burden of external debt which triggered a continuous accumulation of arrears. In addition, there were serious policy siippages, including a relaxation in budgetary discipline and tardiness in implementing promised structural reforms in areas such as public investment planning, resource mobilization, deregulation of the private sector, and reform of the banking sector. 1.13 Throughout this period and up to the present, export growth has remained limited, domestic savings mobilization weak, and the external debt burden overwhelming. In December 1991, the Government reached a new agreement with the IMF on its fourth stabilization effort over the past twelve years. This SAF will cover the 1992-94 period. 4 1.14 Equatorial Guinea's future efforts to restore fiscal and balance of payments equilibrium may be hampered by its extremely high debt service burden (although the prospect of significant new revenues from oil beginning in early 1992 could mitigate this problem, bringing in an estimated US$4 million yearly through 1994, and average of as much as US$10 million per year during the period of 1995-2000). Official aid flows have grown rapidly since 1985, averaging the equivalent of 40 percent of GDP during the period of 1988-90, and the Government was accorded significant debt rescheduling from the Paris Club in 1986. However, the economic and social returns on the development spending made possible by these measures have been disappointing, as education and health indicators have failed to improve. Meanwhile, the current account deficit of the balance of payments, excluding public transfers, rosc from 13 percent to 52 percent of GDP. (In 1991, it rose to the record level of 78 percent of GDP.) At the end of 1990, external debt was equivalent to 142 percent of GDP, or about 5.5 times the value of annual exports of goods and services. This does not include external arrears amounting to US$36 million, equivalent to 85 percent of exports of goods and non-factor services in that year. In 1991, external debt service payments falling due represented 90 percent of government revenue, and are projected to be about 70 percent of total revenues during the 1992-94 period. In view of this heavy debt burden, the Government has requested a comprehensive rescheduling of debt from the Paris Club and other bilateral official debtors. 1.15 It should also be noted that the monitoring of successive economic adjustment programs has been rendered difficult, due to the lack of basic economic data and an adequate system of public sector accounts. For example, the Treasury Department was established only in 1984; the national accounts and consumer price index date from 1985; and reliable statistics on the subsistence, service, and manufacturing sectors are largely unavailable. II. DESIGN AND IMPLEMENTATION OF THE REHABILITATION IMPORT CREDIT 2.1 During the 1970's, when Equatorial Guinea was virtually isolated from the outside world, IDA made only one loan in the amount of US$2 million for highway maintenance, which was canceled in 1981 at the Government's request. After the fall of the Macias Nguema government in 1979, IDA proceeded to approve three more loans. The Petroleum Technical Assistance Project was approved in 1982, and has closed. The First Technical Assistance Project, approved in 1984, provides technical assistance .ia expatriate specialists to formulate a medium-term development strategy and investment program and to strengthen the necessary institutional framework. It has been extended several times, and is currently scheduled to close at the end of 1992 following the planned liquidation of two commercial banks which have been insolvent since 1986 (see discussion below). The third, a Cocoa Rehabilitation Project, was approved in February 1985, and closed in 1990. 2.2 The Rehabilitation Import Credit (RIC) was originally designed as a quick-disbursing operation in support of the 1985 Rehabilitation Program and the concurrent IMF Standby. The emergency rehabilitative component of the Credit was intended to provide urgently-needed 5 foreign exchange to import equipment and inputs needed to revive the country's decrepit infrastructure, production, and social sectors. Among the production sectors, agriculture was to be accorded the highest priority. Private farmers were to have access to a special account in the BCD equivalent to US$0.5 million for the development of non-cocoa output. Technical assistance to the Government in the areas of credit administration, procurement, and utilization of the items imported was expected to ensure prudent use of the proceLds of the loan. 2.3 In a broader sense, the Credit was intended to help Equatorial Guinea weather its short- term budgetary and balance of payments difficulties and to initiate reforms in the areas of public health strategy, utility tariffs and procurement, public investment programming, and the banking sector. 2.4 As noted earlier, the IMF Stand-by of SDR 9.2 million began to go off track months after it had been approved in June 1985. However, staff did not originally view this non- compliance as a major problem, as evidenced in a December 1985 staff memorandum to the IDA Loan Committee. In this memo, it was explained that, according to an IMF review mission which had visited the country in November 1985, only the credit ceiling had been transgressed (by 12 percent) in the fourth quarter, and that, in light of satisfactory compliance with other Standby targets, the Fund mission expected to recommend to its management that compliance on that particular performance criterion be waived. On this basis, the Loan Committee decided to move ahead with loan presentation. 2.5 In April 1986, the IMF staff informed IDA management that deviations from certain Standby targets persisted, and that, as a result, the Government had agreed to allow the agreement to lapse. Relying on the Government's commitments expressed during its 1985 Article IV Fund Consultations to the effect that it would continue to adhere to its 1986 budgetary targets and carry out other reform program measures, including the reduction of arrears, and because it believed a new IMF program would be put into place in the near future, IDA management once again decided in May 1986 to proceed, presenting the RIC to the Board. 2.6 In reality, a new IMF program did not materialize for another two-and-one-half years, because of the onset of the banking and macroeconomic crisis discussed above. The bankruptcy of the BCD added a nettlesome complication in that it was to have served as the financial agent for administering the Special Account for agricultural credit. 2.7 There was also a prolonged disagreement between IDA and the Government on the 1986 Public Investment Program (PIP). The government's proposed PIP took no note of recommendations to refocus investment priorities and eliminate projects of dubious economic feasibility made by the RIC appraisal mission. The PIP was also considered by IDA to be too ambitious, given the country's limited absorptive capacity. 2.8 The unforeseen and dramatic nature of the macroeconomic and banking crises forced, in effect, a renegotiation of the RIC's conditionality after Board approval, resulting in an eleven- month delay in declaring loan effectiveness to April 1987. To facilitate this declaration, IDA 6 agreed to waive two of the previous conditions for effectiveness, modify two, and add two more. 2.9 Under the terms of the Revised Loan Agreement, as set out, in part, in a March 1987 Letter of Intent signed by the Equato-Guinean Government, IDA agreed to: (a) waive the requirement that the Government establish a Special Account for agricultural credit to the private sector in the BCD, on the grounds that the bank was no longer solvent; (b) waive the requirement for a satisfactory budgetary and external debt program, a condition which had been originally conceived of within the framework of the ill-fated IMF Standby; (c) modify the condition requiring the hiring of various specialists prior to effectiveness so as to exclude a procurement specialist, on the grounds that the search for a suitable candidate was underway and that further delay in declaring effectiveness would not be desirable in light of the country's urgent foreign exchange requirements; (d) modify the condition requiring IDA review of the PIP so as to cover the years 1987-89, rather than 1986, as originally specified, on the grounds that the passage of time had made the original condition irrelevant; (e) reallocate the proceeds of the loan, so as to finance a larger program of emergency road repairs in Rio Muni from the funds freed up by the elimination of the Special Account and by the takeover of certain planned RIC projects by bilateral donors; (f) add a condition requiring the Government to pursue appropriate policies to resolve the banking sector crisis; and (g) add a condition requiring the elaboration of a medium-term sectoral development program aimed at removing structural bottlenecks in areas such as budgetary management, investment programming, the financial sector, and the incentive and regulatory framework. Structure of RIC 2.10 Listed below are the original effectiveness conditions of the RIC, as per the May 1986 Loan Agreement, and the revisions set out in the April 1987 declaration of effectiveness: Effectiveness Conditions: 1. Establish a Special Account in the Malabo branch of BEAC to be used by the Borrower to make payments for imports under the credit. [Retained] 2. Open an account with BEAC in the name of the BCD bank of at least US$250,000 from the proceeds of the local currency counterpart obtained from the sale of foreign exchange provided under the credit, and cause BCD to lend these funds to private sector agricultural entities. [Waived] 3. Open a second Counterpart Funds Account with BEAC to receive those local currency funds not deposited in the BCD agricultural account. Use this excess counterpart to finance the public investment program. [Retained] 7 4. Hire specialists, including an economist/credit administrator to be assigned to the Ministry of Finance; a procurement specialist to be assigned to the Ministry of Industry and Commerce; a civil engineer to be assigned to the Ministry of Public Works' Malabo office; a consultant engineering firm to be assigned to the Ministry of Public Works' Bata office; and two mechanics, one each in Malabo and Bata. [Modified to allow hiring of the procurement specialist after effectiveness] 5. Establish a Coordination Committee (referred to as the RIC Committee or RICC) comprised of the Ministers of Finance, Planning, and Industry. Ministers responsible for the other economic sectors related to the project were to be admitted as adlinQ members. [Retained] 6. Furnish satisfactory programs to manage public finances and external debt. [Waived] 7. Adopt appropriate policies to resolve the banking crisis, including the accelerated establishment of BIAO, the new commercial bank. [Added] 8. Develop a medium-term sectoral program to correct infrastructural deficiencies and policy constraints in areas such as budgetary management, investment programming, the financial sector, and the private sector incentive and regulatory framework. [Added] 2.11 The April 1987 declaration of effectiveness also made significant changes in the schedule of second tranche conditions, as indicated below: Second Tranche Conditions: 1. Progress achieved in carrying out of the 1986 Public Investment Program (PIP) and Rehabilitation program. [Replaced by Condition 3 below] 2. Prepare a public investment program (PIP) for 1987. [Replaced by Condition 3 below] 3. Limit PIP expenditures for the 1987-89 period to a maximum of US$33.6 million annually. [Added] 4. Apply the proceeds from the IDA credit and cofinancing from the African Facility Fund in accordance with the Implementation Program set out in the Agreement. [Modified to allocate more funds for mainland emergency road repairs] 5. Raise tariffs on electricity, telecommunications and water so that they cover at least operating and maintenance costs. [Retained] 8 6. Undertake new external borrowing only on concessionary terms. [Retained] 7. Cause agencies and departments to adopt adequate maintenance of vehicles, equipment and facilities. [Retained] 8. Establish in the Ministry of Public Works regional units responsible for performing periodic maintenance and repair of the water supply and sanitation networks in Malabo and Bata. [Retained] 9. Negotiate a loan from Spain to shore up the liquidity position of Guinextebank. (Added] 10. Initiate discussions with Spain about recapitalizing Guinextebank. [Added] 11. Complete an audit of Guinextebank by the end of May 1987. [Added] 12. Pursue prudent credit policies in cooperation with BEAC. [Added] 13. Prohibit new lending to any domestic borrower identified as being in arrears on previous loans. [Added] Implementation of RIC 2.12 Earlier, it was noted that the RIC had key objectives in the areas of (a) emergency rehabilitation, (b) technical assistance, (c) economic stabilization and the strengthening of the balance of payments, and (d) structural reforms. Of these four key aims, progress was greatest in the first (albeit not sustained in many areas), modest in the second, and negligible in the third and fourth. Emergency Rehabilitation 2.13 RIC rehabilitation funds made possible a significant, but temporary, improvement in the quality of life, mainly for the inhabitants of the capital, Malabo, and the country's principal mainland municipality, Bata, for roughly a two-year period starting in early 1988. The nearly two-year delay in getting large-scale procurement underway was attributable in no small part to the collapse of the economy, and the attendant pressures on the Government, but might have been ameliorated somewhat had the procurement specialist, whose assistance was desperately needed by a government short of skilled personnel, been brought on board before mid-1988 and been fluent in the local language from the outset of his employment. Undoubtedly, the difficulty of living conditions in the country was a strong disincentive for many potentially-qualified Spanish-speaking specialists to apply, thus prolonging the recruitment process. In any event, the delay in establishing strong technical procurement assistance may also help explain the 9 procurement of items under the loan not always acceptable to end-users, or mismatched in terms of brands and models, particularly prior to mid-1989. 2.14 Moreover, procurement was channeled largely into improvements of city services, such as rehabilitating the water system, roads, and garbage collection in Malabo and Bata. In principal, the heavy investment in inter-urban road construction and, to a lesser extent, rural road rehabilitation, should have provided major benefits to agriculture, facilitating the marketing of agricultural products. But, as noted in the PCR (para. 25), "the roads rehabilitation program was one of the least successful of the RIC-sponsored rehabilitation efforts in the long-term". Many of the rehabilitated rural reads were washed out during the rainy season, due to the use of inadequate materials and other violations of standard rehabilitation practices. The only procurement targeted solely for agriculture, which under the RIC was to have been the priority production sector, were a half-dozent imported trucks for the use of several farm cooperatives. Other productive sectors were largely overlooked from a procurement standpoint, although this was not the case as far as thb studies component of technical assistance is concerned. 2.15 Complicating the picture was the fact that the Credit included no budgetary commitment from the Government to provide adequate maintenance for the rehabilitated works. IDA had originally planned to resolve this problem through coordination with other aid donors, and devoted considerable effort during project appraisal to the lining up of suitable commitments from other donors to support projects, once the funds in RIC ran out. However, during the period of delay in effectiveness, the bilateral donors moved ahead with their own projects, largely cutting off the linkages with the investment program supported by RIC. As a result, severe deterioration in the system of roads, garbage collection, and water sanitation has occurred since the RIC funds ran out in early 1990. 2.16 On the other hand, once on board, the procurement specialist was instrumental in preparing draft national procurement guidelines during 1988-89, which the Government approved in 1991. The ultimate benefit of these guidelines cannot be known until they actually begin to be implemented. Technical Assistance 2.17 The technical assistance was divided into two components: (a) short-term consultants responsible for preparing specific studies of key sectoral issues, and (b) longer-term consultants responsible for administering various aspects of the credit allocation and disbursement. Of the two, it may well be that the contribution of the short-term consultants will have the greatest and most enduring impact. 2.18 Among the sectoral studies produced were high quality reviews of cocoa, the transport sector, fisheries, and health. Of these, two--cocoa and health--have led to concrete Governmental policy commitments supported by corresponding IDA projects (the Crop Diversification Project of 1990 and the Health Improvement Project of 1992). A third, the fisheries study, helped the 10 Government negotiate more favorable terms in its fishing agreements with the FFC. aod define a sectoral development strategy. Currently, the Government is working on :t talcticil plAn for its implementation. The fourth, transport, has had essentially no impact on Gu'vc-irnt ehavior to date. 2.19 With respect to the longer-term consultants, the record is decidcdly less positive. Of the experts which, according to the plan at appraisal, needed to be re,cruite.J, only the administrator/economist, the procurement expert, and the civil road engineer were actually hired. The RIC Committee erroneously concluded that the proposed civil engineering consuiting firm and the two mechanics could be replaced by local expertise. However, the only ro.ds expert. the civil engineer performed poorly and was eventually terminated. While IDA staff m.de every effort to convince the Government of the need to recrvit a replacement, ione was hiVed, in part because of a change in IDA lending strategy following internal reorganization. As a result, a framework for the roads rehabilitation program and a pilot Project for ioads maintenanic were never finalized, contributing to the eventual non-sustainability of the project expenditues in this area. 2.20 The procurement advisor, once on board, materially assisted in accelerating the procurement of urgently-needed equipment, but was unable to overcome some of Jie key shortcomings in sectoral allocation, equipment suitability, and timeliness noted above, 2.21 Perhaps most successful, at least in the short run, was the administrator/economist, who established an extraordinary rapport with the ministers comprising the RIC Committee and played a major role in teaching these officials the fundamentals of strategic economic planning and project evaluation. Unfortunately, political upheaval led to replacement of the RIC Committee members in 1988, and, with it, a repudiation f most of the plans which the Administrator/Economist had promoted. Stabilization and Strengthening of the Balance of Payments 2.22 The RIC was originally conceived as a key element of support for the Government's 1985 Rehabilitation Program. But by the time RIC came before the Board in May 1986, that Program was in disarray. The IMF Standby, which crystallized the stabilization strategy to be followed, had been canceled. 2.23 Adapting to circumstances, IDA staff and management sought to refashion the conditionality so as to cope with the emergent banking crisis and support a hoped-for follow-on Structural Adjustment Facility which would place greater emphasis on formulating a medium- term development strategy to go hand-in-hand with stabilization. By mid-1988, IDA judged that release of the second tranche would be justified because, during the preceding fourteen months, the Government had achieved a major improvement in the fiscal balance, had established a replacement commercial bank, and had presented to the IMF and IDA a medium-term economic strategy paper (albeit one largely conceived by IDA's Administrator/Economist expert). Yet, 11 eight months after second tranche disbursement, a new SAF program also went off track, as the fiscal situation deteriorated sharply and the external payments position weakened. 2 24 Despite considerable success in mobilizing a sharply rising volume of external resources during the 1987-89 period, the RIC and associated IMF programs were unsuccessful itn persuading the Government to follow investment planning and project selection procedures which would have assured a prudent use of this finance. Thus, in many respects, Equatorial Guinea'- external payments position was considerably weaker in 1990 than it had been thre4, years previously, with the current account deficit considerably larger and payment arrears accumulating rapidly. According to a February 1992 IDA President's Report, preparation of a possible follow-up structural adjustment operation to the RIC will be started in 1993 at th- earliest. Structural Reform 2.25 The key structural reforms sought were (a) initiating a process of public investment programming, (b) resolving the banking crisis, (c) developing a strategy of cost-effective preventative health care, and (d) reforming rate-setting for the major public utilities so as to cover operating and maintenance costs. 2.26 Reference has already been made to the issue of public investment programming. After the failure of the Government's proposed 1986 PIP to take into account IDA staff recommendations on investment priorities, the Government presented a new three-year PIP agreement for 1987-89 covering the period of 1987-89, which was also unacceptable because ii proposed expenditures above the agreed ceilings and included projects not previously reviewed by IDA. This disagreement led to prolonged delays in second tranche disbursement. After protracted discussion, tr Government did accede to revised PIP ceilings which were considered to be more in line with appropriate sectoral priorities and the economy's absorptive capacity. Also, several projects of dubious economic justification, such as the Bata airport project and the Luba refrigeration plant, were eliminated from the PIP. However, once second tranche disbursement had occurred, the Government did not comply with any of the negotiated PIP expenditure ceilings, and, as noted in the PCR (para. 11), "little progress was achieved ... with respect to the strengthening of project preparation and implementation ..." 2.27 The RIC should certainly be given a share of the credit (aJong with the offer of possible follow-on IMF financing) for having induced the Government to address its severe banking crisis. Regrettably, six years later, the banking sector has yet to emerge fully from the 1986 collapse of BCD and Guinextebank. The process of liquidating these two insolvent commercial banks and recovering outstanding credits from delinquent borrowers has been painfully slow, and remains incomplete. Recovery of the CFAF 3.8 billion in potentially-salvageable credits had barely begun at the time of the OED mission visit in late 1991. BIAO, the sole active commercial bank, performs a highly circumscribed intermediary role and, given the lack of competition, has little incentive to offer a wider array of potentially higher-return, but riskier, 12 banking services. The continued low level of private sector confidence in the financial system translates into a narrow deposit base, while private sector demand for credit remains largely unsatisfied. For this reason, interest rates, now under the control of the regional monetary authority, BEAC, remain at high real levels, with the maximum real lending rate having averaged roughly 20 percent annually in 1991. 2.28 As for the health sector, the study financed by the RIC has led to a new Governmental commitment to give greater emphasis to a preventative health care strategy, as embodied in the 1992 Health Improvement Project. Actual changes in policy remain to be verified. 2.29 Finally, while the Government proceeded to raise tariffs for electricity and telecommunications, these were insufficient to achieve the objective of covering operating and maintenance costs. Moreover, the power company has yet to order meters, so that the basis for applying tariffs to consumers is largely discretional. As for water, tariffs were never increased. Water meters were ordered and financed under the RIC, but never installed. III. ISSUES AND RECOMMENDATIONS Weak Borrower Ownership of Policy Conditionality 3.1 The Government was initially strongly committed to the RIC, which it viewed primarily as a source of finance for emergency finance for rehabilitation. As for the policy content of the loan, the Government anticipated that conditionality would be altered fluidly in response to the changing economic environment and the Government's own priorities, notwithstanding the terms of the loan agreement (see paragraph 27 of Part II of the PCR). The crisis of 1986, including the collapse of the Rehabilitation Program, was perceived by the Borrower as just such a contingency, which should have brought about a rapid redefiniten of policy conditionality and a relatively prompt declaration of effectiveness. Consequently, the Government felt that the eleven-month delay in loan effectiveness was excessive, and par ially defeated the original purpose of the loan to provide emergency rehabilitation finance. 'his, in turn, may have weakened Governmental commitment to the RIC, since credit flows were held up just during the period (early 1986 to early 1987) when the Government perceived its teed for fresh resources as being most acute. 3.2 Notwithstanding this contretemps, the Government made rapid use of the proceeds of the loan for the various reconstruction efforts elucidated above. But at the core of the RIC conditionality revised in early 1987 was a new emphasis on elaborating a medium-term economic strategy. This strategy was to be defined by a small group of policymakers (Finance, Planning, and Industry) ensconced on the RIC Committee, supported by an expatriate Administrator/Economist. The latter provided de facto the major inspiration for the economic plan. 13 3.3 By mid-1988, the Government had entered into a period of increased political uncertainty, including rumors of a possible coup. The RIC Committee and its proposed economic strategy were perceived by some advisors close to the regime leadership as an infringement on sovereignty as well as a possible threat to the privileged economic and political position of the ruling Esangui Clan. In November 1988, the President replaced two of the three ministerial members of the RIC Committee. The expatriate advisor felt compelle I to leave the country soon thereafter, as charges of "corruption", never established in fact, swirled about the names of the former Committee members. The medium-term strategy formulated by the. old Committee was repudiated. 3.4 As for the rehabilitation efforts, no provision was ever made during the 1987-91 period for a budget to maintain these works. One reason may be that the Minister of Public Works, who is chiefly responsible for maintaining public infrastructure, was not an original member of the RIC Committee, and did not support the choice of projects it made prior to the change in its membership. 3.5 Hence, neither the Government's initial mindset about the continuity of policy commitment nor the structure of decisionmaking built into the RIC Committee were conducive to the Government's assumption of ownership of the Credit's policy conditionality. Flawed Loan Design: Combining Rehabilitative and Structural Reform Components 3.6 The decision to combine short-term rehabilitation features with longer-term structural adjustment measures in a single loan proved to be a major flaw in the loan design. To achieve maximum effectiveness from the standpoint of rehabilitation of the existing production assets, the credit needed to disburse promptly and continuously. But because of the structural adjustment and sectoral reform components, disbursement became hostage to some extent to (a) developments in the larger economy (which was undergoing radical change as a result of the entry into BEAC), (b) the Borrower's instititional, political, and administrative constraints which blocked progress on reforms, and (c) the shecr complexity of the reforms themselves, many of which could not be addressed appropriately within the framework of a quick-disbursing loan. Moreover, concerns about the progress of the medium-term economic strategy and the advance of various sectoral reforms diverted the energy of the RIC Committee and IDA staff from the rehabilitative aspects of the Credit, to the detriment of rehabilitation. Conversely, the urgency of alleviating serious infrastructural deficiencies pressured IDA at both the effectiveness and second tranche disbursement stages to waive or dilute certain key reform conditions, so as not to stall rehabilitation. Lack of Private Sector Access to Loan Proceeds 3.7 Originally, the RIC was planned as a fast-disbursing import financing credit wherein small and medium-sized enterprises would obtain access to around 30 percent of the proceeds. 14 However, the actual loan was transformed into essentially a public infrastructure rehabilitation project. In the process, the Government assumed monopoly control of the import finance through the mechanism of the RIC Committee, on which there were no private sector representatives. 3.8 It was especially unfortunate that the only component of direct benefit to private entrepreneurs, the revolving agricultural Special Account, was canceled on account of the bankruptcy of the trustee commercial bank. For the sake of the beleaguered private sector, unable during much of 1986 and 1987 to tap any fresh banking system credit, it was imperative that staff find some viable alternative. In fact, the BCD itself could have been continued as trustee, since its liquidation did not imply the need to cease all operations. Indeed, even after bankruptcy, the BCD continued to administer an account of the IDA Cocoa Rehabilitation Credit in a satisfactory manner, as noted in an IDA memo dated February 1988. The Region has noted that the continued functioning of the Cocoa Rehabilitation Account in the BCD required heavy investments in technical assistance which, in its view, would not have been justified in a fast- disbursing operation like the RIC. Nevertheless, the end result of such a judgment is that resources desperately needed to provide direct support for the privately-owned production apparatus were, instead, absorbed entirely by a public sector noted for its inefficiency and corruption. Inadeuate Supervision of the RIC 3.9 Undoubtedly, conditions in Equatorial Guinea for conducting adequate supervision are among the most difficult faced by IDA staff anywhere in the world. At the time of the RIC appraisal, shortages of basic consumer items were so severe as to require visiting staff to bring with them virtually all basic items. Air transport ties were scarce and unreliable. Housing conditions were stark. These factors should be kept in mind in assessing the quality of supervision. 3.10 Nevertheless, the decision to leave supervision largely in the hands of a junior economist and an operations assistant, given the complexity of the project (two geographic areas, seven sectors, rehabilitation and stabilization components), would appear to have been ill-advised. Critical decisions, such as the composition of membership on the Committee and the sectoral allocation of import procurement, were left by default to the RIC Committee. Some of the RIC Committee decisions in these matters had detrimental consequences for the development impact of the RIC, which have been elaborated elsewhere in this report. Inadeuate Macroeconomic Support 3.11 Given the fact that the RIC took as one of its central rationales the offering of support for the Government's 1985 Rehabilitation Program, and given that IDA was aware by April 1986 that the Standby Program had gone off track, it is surprising that IDA management decided, nevertheless, to proceed with loan presentation to the Board the following month 15 without firsi undertaking an independent and in-depth appraisal of the future viability of the adjustment pogram. It is unclear how a loan which had been designed in early 1985 in one set of economic circumstances, i.e., in a troubled, but still functioning, economy whose policymakers were contemplating the adoption of a new adjustment strategy, could be presented to the Board without modification under an entirely different set of circumstances, i.e., after the collapse of Equatorial Guinea's economic program and its banking system. It may well be that IDA staff did not fully appreciate the gravity of this new economic crisis, as reflected in the fact that there appears to have been no major discussion of these problems at headquarters around the time of loan presentation. But then, it would have behooved staff to visit the country and see for themselves, rather than rely entirely on the judgment of a sister institution. (In fact, between January 1986 and February 1987, a period of cataclysmic change in the economy, no IDA missions visited the country.) 3.12 Similarly, the decision to release the second tranche in July 1988, following a pattern of improved macroeconomic performance, but prior to the definition of a comprehensive replacement stabilization strategy, and without a trial period to gauge the depth of Governmental commitment, could be seriously questioned. Unlikely Sustainability 3.13 The sustainability of the changes brought about by the RIC seems doubtful in several respects. The reliance on long-term consultants and a narrow circle of top-level policymakers to run key aspects of the credit left little room for the development of indigenous decisionmaking capacity, created resentment among excluded groups, and slowed internalization of the reform commitment process. The Borrower's unwillingness to commit adequate long-term budgetary support for maintenance of the rehabilitation projects, including coordination with other donors, allowed many of these projects to deteriorate from neglect. Similarly, neither of the two economic stabilization programs supported by the Credit lasted for more than a few months. 3.14 The one exception to this picture was the results of the sectoral studies, which, with one exception (transport), appear to have evolved gradually into broader Governmental commitments. 16 Excessive Complexity of RIC Conditionality 3.15 A sharper RIC focus on a one or two achievable policy goals would have enabled the Borrower to more fully assimilate the conditionality attached to the credit. Instead, RIC branched out to cover a wide array of complex policy areas. These included a satisfactory program to manage the fiscal accounts and external debt; the establishment of a public investment program; adjustment of tariffs on water; electricity, and telecommunications; and the periodic planning and monitoring of maintenance and repairs of equipment and machinery at all agencies. When the underlying economic conditions underwent fundamental change, new and even more complex requirements were added, such as a reform of the banking system and the development of a medium-term economic strategy. 3.16 Experience showed that this extensive agenda went well beyond the Borrower's willingness to commit as well as its capacity for change. Had the program focused entirely on the sustainable rehabilitation of the water, sewer, garbage, and roads infrastructure of the country, it would have taken on a major, but possibly manageable, task. With, perhaps, additional technical assistance in how to prepare, implement, and monitor a high quality PIP, and in how to design and budget for an effective program of maintenance for equipment and facilities, the RIC might have had far greater chances of success. Weakness in Procurement 3.17 At the start of RIC, the Government had no comprehensive framework for conducting public procurement, although national procurement guidelines were drafted, but not approved, during the lifetime of the loan. The expatriate advisor eventually gave valuable assistance, but arrived late in the loan process (just before second tranche disbursement), and did not initially speak the local idiom. 3.18 The procurement process also encountered other difficulties. First, machinery and equipment for public works were purchased from different manufacturers and were not always suitable for the needs of the end-user. For example, the equipment imported for garbage removal turned out to be excessively sophisticated, and the system of placing containers for pick-up in various parts of Malabo did not work well. Also, spare parts were acquired from different suppliers, and were sometimes not compatible, thus adding to the burden of maintaining adequate inventory. Secondly, the Borrower encountered frequent delays in getting merchandise delivered, in part due to the country's remoteness from regular international shipping lanes. 17 Tbla1: RIC EXPENDITURES Amount Percent (mil, CFAF) Structure Agriculture 80.3 2.2 Technical Assistance 280.4 7.8 Infrastructure: Water and Trash 211.3 5.8 Public Works 1,374.8 38.2 Preventive Medicine 37.3 1.0 RICC 25.0 0.7 External Debt 1,527.4 42.3 RIC-Administrative 62.6 1.7 Financial Expenses 11.7 0.3 Total 3.610.7 100,0 3.19 Thirdly, as shown in Table 2, approximately 44 percent of the proceeds from the credit went to improvements in the roads, water, and garbage collection in Malabo. These infrastructure projects had a very positive, albeit temporary, effect on the community. However, procurement for other sectors, such as agriculture, were mostly symbolic. Thus, the production sectors received little benefit from the project. The RIC Committee (RICC): Problems in Institution Building 3.20 As pointed out in the Project Completion Report, the RICC was unique in that, for the first time, Equatorial Guinea had a public body with the financial means and technical know-how to identify and solve national economic problems. The Governmental members of the Committee during its first phase from April 1987 to October 1988 were the Ministers of Finance, Industry and Commerce, and Planning. The expatriate Administrator/Economist assumed the formal position of Secretary of the Committee, but de facto often played a more active leadership role. 3.21 The Committee spent the better part of its first year of operation developing a multi-year plan for the economic development of the country. It was also responsible for deciding how the RIC funds were to be allocated among different projects. Each of the relevant ministries was 18 approached to provide a list of its needs and projects, from which the Committee derived a priority funding list. 3.22 However, in the view of the former Minister of Finance, who chaired the RICC during this first phase, the Committee did not adequately disseminate its work, or share the decisionmaking process, with other parts of the Government. Indeed, as noted in the PCR, the Committee generally acted in an autocratic manner. The seminars conducted by the Administrator/Economist on how to formulate overall economic and sectoral strategies, how to identify and program investment projects, etc. were often for the benefit of the three minister- members, with limited or no involvement by their support staff or by representatives from other ministries. This created resentment and, eventually, political and bureaucratic opposition to the projects and plans the RICC was trying to promote. 3.23 These resentments, complicated by fears within the Government of a new effort to overthrow the leadership, exploded into a direct attack on the RICC in mid-1988, supported by the Head of Government. In the wake of never-proven accusations of corruption against members of the RICC, two ministers were removed and replaced by the Prime Minister, as Chairman, and the Minister of Public Works, who had long objected to his exclusion from the Committee. Needless to say, the agenda of the new Committee differed sharply from that of its predecessor, reflecting in part the views of previously dissenting ministries and in part the desire of the new members distance their agenda as much as possible from that of the previous one. Donor Coordination 3.24 The 1985 Malabo Conference sponsored by the United Nations Development program elicited a moderately positive response from the bilateral donors concerning their willingness to coordinate investments with the RIC. The idea was that key complementary investments to the core rehabilitation projects financed by the RIC would be taken up by the bilateral donors, and that, after RIC funds ran out, funding of the RIC projects themselves would be assumed by other donors. IDA staff worked diligently and painstakingly to piece together the requisite commitments from other donors. However, once RIC effectiveness was delayed by the breakdown of the Rehabilitation Program, the other donors went their own way, frequently taking over some key projects which the RIC was supposed to have financed. By the time project effectiveness was declared, most of the other donors were fully committed to their own projects, and IDA was thus left to find replacement projects which did not always have the same high priority. Lack of donor coordination after effectiveness also contributed materially to the non- completion or non-sustainability of many RIC projects, for lack of follow-on finance for complementary investments, maintenance, and repairs. 19 Economic Impact of the RIC 3.25 The economic impact of the RIC appears to have been largely short-run, since the rehabilitation works have, in many cases, fallen into disrepair, the stabilization programs which the RIC supported did not thrive, and the structural reforms that were supposed to have strengthened the country's long-run development potential did not materialize. About 88 percent of RIC funds were disbursed during 1987-88, sufficient to finance 14 and 9.5 percent, respectively, of annual imports for those years. This increase in imports coincided with a significant acceleration of economic activity, as demonstrated by the average GDP growth rate of 4.4 percent during those two years, compared with 0.3 percent in 1986 (the first year available in the data series). Real per capita private consumption growth averaged nearly 13 percent yearly in 1987-88, compared with 19 percent in 1986. 3.26 After 1988, the economic impact appears to have diminished, as the funds from the RIC ran out and the 1988 SAF supported by the Credit broke down. The economy averaged real GDP growth of only one-half percent yearly during 1989-91, while real per capita private consumption actually declined by nearly two percent annually. 3.27 The RIC and loans from the international financial institution were very successful in mobilizing a considerable increase in long-term foreign capital inflows, which rose to the equivalent of around 40 percent of GDP during 1988-90. IFI support was also influential in persuading Paris Club creditors to grant significant debt rescheduling to the country in 1986. But the evidence suggests most of the funds were not invt sted wisely, with the result that the external debt and arrearage problems remain as serious today as they were seven years ago, while per capita incomes in the country have barely increased. Only the prospect of significant new revenues from offshore oil drilling offers any prospect of medium-term relief from Equatorial Guinea's crushing debt burden and weak export and current account Izrformance. Nevertheless, in the absence of meaningful structural changes, it appears that the RIC will not produce the desired long-run positive effects from the structural adjustment conditions in the Agreement. If the Government were to adopt some of these reforms in the future, and to sustain their implementation, then it would be possible to consider the RIC a partial success in bringing about a long-term benefits. But even then, it may not be possible to separate the growth contribution that could originate from RIC reforms, if taken in the future, from other factors influencing the economy. The most notable of these other factors is the recent development of oil production, which is expected to provide a significant boost to the economy in the future. Lessons from the RIC 3.28 In light of the failure by 1986 of one previous stabilizaton program, and evidence of potentially-severe compliance problems with a second on-going program, the presentation of the RIC to the Board should have been postponed to allow time for a thorough appraisal of the direction of Governmental adjustment efforts and the state of the economy. Future policy-based 20 operations dependent on a satisfactory macroeconomic adjustment framework should require some period of satisfactory policy performance as a prerequisite to Board presentation. 3.29 The conditionality of the RIC was of a complexity which exceeded the Borrower's capacity for, and commitment to, policy reform. A straightforward emergency rehabilitation credit, with ample technical assistance to strengthen maintenance procedures and improve project selection, might have been more manageable. 3.30 An extended period of intense technical assistance and patient institution-building is likely to be needed before Equatorial Guinea is ready to tackle the complex reforms of a typical structural adjustment loan. 3.31 IDA should satisfy itself that there exists sufficient dialogue and consensus-building among the Government and other key interest and tribal groups in the country to ensure the implementability and sustainability of the kinds of policy reforms IDA wishes to support in future policy-based operations, since the absence of such a consensus appears to have hampered materially the progress of the RIC. 3.32 A principal flaw in the design of the credit was the decision to combine short-term rehabilitation features with longer-term structural adjustment measures in a single loan. The failure to satisfy structural reform requirements delayed the flow of imports for rehabilitation, undermining the emergency character of the Credit. On the other hand, the urgency to move ahead with critically-needed rehabilitation projects pressured IDA to cut corners in verifying compliance with the structural and stabilization components of conditionality. 3.33 Notwithstanding the rigors of launching supervision missions to Equatorial Guinea, IDA erred in leaving the supervision of such a complex project (seven sectors, two geographic areas, rehabilitation cum structural reform and technical assistance components) largely in the hands of an economist and an operations assistant. Certain actions taken by the RIC Committee in the field, such as the excessive emphasis on formal economic planning during the first year of operation, the inadequate support for private-sector-determined import needs, and the exclusion of key operating agencies from a direct voice in the allocation of loan proceeds, might have been challenged in timely fashion by a supervision mission composed of more experienced members with more diverse specializations. 3.34 Overall, the technical assistance provided by short-term consultants brought in to perform specific sectoral studies has proved of greater lasting value than the contributions of the long- term consultants. 3.35 The work of the RIC Committee was not adequately disseminated to other parts of the Government. In particular, the technical assistance provided by the Administrator/Economist was targeted mainly at the three minister-members, and largely came to naught when they fell out of political favor. Key officials, instrumental for the purposes of the Credit, such as the Minister of Public Works, should have been fully involved in choosing projects from the outset. For the 21 future, institution building might be more successful if technical assistance is extended downward to include the technical cadres of the Government, who may remain in their posts after policymakers, for whatever reason, have moved on. Also, decisionmaking on project selection and other key aspects of loan implementation should be kept squarely in the hands of local policymakers, so as to lessen the perception of outside interference. While the results may not always be to the liking of external donors, this approach is more likely to bring about a healthy internalization of the policy reform process. 3.36 Donor coordination was not forthcoming, due in part to delays in project effectiveness and in part to the reluctance of other donors to tie their own decisions on assistance to the actions of IDA and the IMF. IDA efforts to coordinate aid locally appear to have been extensive and effective during loan preparation, but were sharply reduced following the delays in declaring loan effectiveness. In retrospect, closer IDA management ties with high-level aid policymakers in the donor countries during this period might have deterred at least some of the donors from breaking ranks, as they did, and undermining the coherence and sustainability of the externally- financed rehabilitation program. 3.37 Procurement suffered from delays in hiring an expatriate advisor. 3.38 Inadequate budgetary provisions were made for repair and maintenance expenditures to assure the sustainability of the rehabilitation projects. 22. Tae2: SELECTED ECONOMIC INDICATORS 1985 1986 1987 1988 1989 1990 GDP (Millions of 1984 CFA francs) 40617 40739 42613 44445 44267 45640 Growth (%) NA 0.3 4.6 4.3 -0.4 3.1 Inflation (%) NA -17.8 -12.8 2.6 5.3 1.4 As % of Current GDP Consumption 99.0 97.1 101.3 107.2 103.4 105.4 Investment 9.3 12.7 24.2 21.0 21.3 24.3 Exports of Goods & NFS 26.7 33.7 37.3 39.5 33.2 28.2 Imports of Goods & NFS 35.0 43.4 62.8 67.7 57.9 57.8 Balance of Payments: Current Account Deficit 3.3 2.0 21.0 11.4 10.0 12.5 (Excl. Transfers) 13.0 25.3 45.1 49.9 47.3 51.5 Budget: As 9 of Current GDP Revenues 19.1 16.9 23.2 17.7 14.8 18.5 Expenditures 21.3 23.3 22.6 24.4 21.2 20.7 Current Deficit 2.2 6.4 -0.6 6.7 6.4 2.2 Public Investment 10.1 9.1 16.8 16.5 15.9 17.2 External Debt: External Debt (millUS$) 164.8 169.8 189.1 197.7 209.0 Debt Service (As % of Exports of G&NFS) 93.5 48.2 39.6 34.7 37.0 36.2 Outstanding Arrears (millUS$) 3.5 5.8 13.4 23.1 Interest 2.4 1.3 4.0 9.8 Principal 1.1 4.5 9.4 13.3 Memo Items: Terms of Trade Index 102.3 99.6 95.3 86.5 NA NA Export Volume Growth (%) 9.0 -0.4 3.8 -0.5 NA NA Import Volume Growth (%) -12.4 -10.1 10.0 -4.7 7.9 NA Money & quasi-M. (bil, CFAF) 9.0 10.5 9.4 6.2 3.8 Chng. in Debt Arrears (milUS$) -30.1 +3.6 +5.7 +9.8 +6.8 +10.7 Attachment A 23 92E0620 June 12, 1992 Spanish (Equatorial Guinea) OEDD2 JCB:uh Republic of Equatorial Guinea Ministry of Planning and International Cooperation The Minister Mr. Mark Baird Malabo, June 1, 1992 Division Chief, OED IDA Washington, D.C. Re: Your letter of May 8, 1992 Equatorial Guinea: Rehabilitation Import Credit (Credits 1690-EG and AO-15-EG) PPAR Dear Mr. Baird: I write to let you know how interesting I found your report on the Rehabilitation Import Project, and to assure you of my absolute agreement with all of the points and chapters it contains. In reply, therefore, rather than commenting on a report with which I fully concur, I simply intend to reflect the wealth of lessons contained in it, all of which are of vital importance in that the guidance they offer will be very valuable to us if we apply it to the formulation of realistic policies and objectives and to the preparation of programs with adequate budgets and control mechanisms and strict supervision. This will enable us to remedy any deviations as they arise, so that at no time will our projects' conditions of effectiveness or structural framework be affected. Bearing this in mind, and as part of the effort to formulate a balanced development policy, one of the priority activities I have taken on since my appointment as Minister of Planning and International Cooperation is to ensure that the Planning Department acquires substantial coordinating capacities and the ability to precisely monitor macroeconomic data. This will Translator's Note: Much of the Spanish original is poorly drafted. Since most of the paragraphs are not subdivided into sentences, it is virtually impossible to know where one train of thought ends and another begins. While the English version represents the Translator's best guess at what the writer intended to say, it was not always possible to avoid reflecting the inzoherence of the original. 24 guarantee proper performance of the commitments and conditionalities of projects and programs, whether executed directly through the Ministry of Planning or through the various international and bilateral cooperation agencies and institutions, as well as those designed and formulated within the country. To provide this guarantee, the first step was to draw up a plan for the hiring and training of human resources capable of bringing much-needed inspiration to the design and formulation of programs and projects, so that rehabilitation can be combined or coordinated with components of a structural adjustment strategy, through the simultaneous initiation of a set of mutually complementary projects that will break down the old inertia afflicting our agencies, accustomed as they are to isolated initiatives. Despite the gap created by the disappearance of the only two banks operating in the country, the active presence of a strengthened BIAO-GE and the services that could be furnished by the financial department of the Crop Diversification and Agricultural Services Project (DICSA), as depositary, could very well make up for this lack, since the project's accounting services could ensure that the revolving funds of the Special Account were incorporated perfectly easily and at virtually no cost. This would allow for a system of budgeting, accounting and cost control, as well as ensuring DICSA's collaboration in manufacturing and marketing programs, leading, with the mobilization of funds, to promotion of the appropriate and coordinated use of private investments. To my understanding, a way of avoiding possible deviations under the RIC program would be to restructure the responsibilities of the Committee, so that it would be chaired by one member, assisted by its Secretary (the Economist/Credit Administrator), both of whom would, jointly and exclusively, review the other members' proposals, without a Committee vote, in order to guarantee policies, the correction of deviations, and adaptation to current economic circumstances. Those circumstances would then not adversely affect the objectives and goals, which would be subject to a macroeconomic development policy, including administrative planning, designed to strengthen the functional capacity of the administrative apparatus and enable it to perform the role assigned to it, especially at this time, when the question of the environment is on everyone's minds, adding more commitments and restrictions to the already complex and difficult tasks that development entails. These are the theoretical aspects that my Government wishqs to tackle, and which would have automatically been at the basis of the original design of the RIC project. It is here that the IMF standby credits would find their justification and be the most effective, being based much more on the idea of examining and restoring the validity of the organizational and functional structure of the body responsible for effective use of the funds, than on the partial and secondary objective of monitoring their end use, since the pricing mechanism permits the Government to dispense with import monitoring through the use of RIC mechanisms. Thus the people are assured of access to the credits for uses geared to their actual needs, thereby regaining the status of citizens able to influence their own future and thus likely to offer the Government the popular support mentioned in the report. Where there is no reslect for the rights of the individual, there will be no popular support. 25 Although I sincerely admit to the shortage of specialized personnel capable of tackling the difficulties of this extremely aabitious multidisciplinary project, which embraces our country's entire society, I do firmly believe that it is absolutely fair and completely necessary to undertake it all at once, since time is short, and without the project it seems impossible to direct public operations to match present demands in terms of participation and discussion. What is needed is a solution to the problem of organizing a public apparatus that will guarantee the effectiveness and continued existence of the projects, and lead to the institution of a new type of community life with its own development framework, for which reason I propose a full and thorough study, which, while departing as little as possible from our traditional customs, would offer a balanced system of relations. Should these general ideas merit your attention and approval, we are at your entire disposal to expand on any points on which you may require clarification, and to carry out a joint study with IDA and with all others concerned of a new Rehabilitation Import Program in support of the IMF's standby credits and the World Bank's long-term credits. This should help remove the obstacles preventing us from obtaining an overall view of organization in general and of the appropriate setup for the public apparatus, expanding this into a systematic unit that will provide consistent interpretation to the public and to the Government, thereby ensuring that the latter will find the public support that will direct it in its efforts for the Nation's future and in the projects and action programs that will be implemented in the years to come. Thanking you most sincerely for your letter, I ask that you acknowledge receipt of these comments by telex, ane I hope they will elicit a positive reaction at the Bank in terms of consideration of a new project. Very truly yours, /s/ Anatolio NDONG MBA Minister of Planning and International Cooperation 27 REPUBLIC OF EQUATORIAL GUINEA Rehabilitation Import Credit (Credit Nos. 1690-EG and AO-IS-EG) Project Completion keport June 27, 1991 Country Department I, Africa Region Country Operations Division 29 EOUATORIAL GUINEA REHABILITATION IMPORT CREDIT (RIC) (CREDITS 1690-EG AND AO-15-EG) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Proige identity Name Rehabilitation import Credit (RIC) Credit Nos. 1690-EG and AO-15-EG Credit Amount : US$12 million equivalent RVP Unit Africa Region Country Equatorial Guinea Sector Macroeconomic and sectoral I. Background 1. Introduction. Equatorial Guinea (EQG) is a small and sparsely populated country of 28,051 km2, with a population of 350,000. The country is situated on the southern corner of the Gulf of Guinea and consists of two parts: Continental Guinea and Insular Guinea. Insular Guinea comprises Bioko, where the capital, Malabo, is located, and four smaller islands. Malabo is 450 km from Bata, the major city in the continental area, and communications are difficult and costly. 2. Following its Independence from Spain in 1968, the country suffered for eleven years under the dictatorship of President Macias Nguema. When the present Government came to power in late 1979, the ecoromy was devastated and a large part of the population either had been killed or fled the country. The rest of the population was surviving at a subsistence level; cocoa, coffee and timber production and exports had fallen to only a fraction of pre- Independence levels. Infrastructure was dilapidated: the country was virtually cut off from the outside world with unreliable telecommunications links and transport was in many parts of the country virtually nonexistent. The impact of misrule and misgovernance on EQG's economy under Macias Nguema was widespread devastation. Although in 1968 EQG had one of the highest per-capita incomes in sub-Saharan Africa, it now is classified as one of the least developed countries. 3. Initial Economic Reconstruction Efforts (1980-1984). The Government's first economic reconstruction program covered the period 1980-84 and aimed at revitalizing domestic food production, stimulating exports of cash crops, and rehabilitating basic infrastructure. Macroeconomic policies during this period were not conducive to establishing sustained growth. The lack of a well-defined, centralized system to control expenditures, and the haphazard and intermittent collection of revenues led to budget deficits averaging about 50 percent of budgetary revenues during the period 1980-84, financed through money creation and a rapid accumulation of external debt. As a result, the country's debt burden increased very rapidly, and became huge even by African standards. By 1984, the ratio of debt service to officially recorded exports was 107 percent. The monetization of the budgetary deficit, coupled with overly expansive policies regarding credit to the private sector, led to inflationary pressures and balance of payments difficulties. The exchange rate became highly overvalued over the period 1980-1984. 30 4. The Government's rehabilitaion and development efforts during this period were also misdirected. principally because investment evaluation and programming were inexistent. The inappropriate macroeconomic framework and the lack of sectoral strategies provided donors with little indication of priority areas and Government's aid coordination was extremely weak. It is not surprising that the Government's first efforts to rehabilitate the cocoa sector in 1980 proved unsuccessful, and that, while non-priority construction projects were carried out, key infrastructure was left unrepaired. 5. The 1985 Rehabilitation Program and the RIC. In view of these difficulties, the Government embarked on a more comprehensive program designed to remove the principal obstacles to a revival of economic activities. The principal objectives of this program were to increase growth through an expansion of agricultural exports, while improving the balance of payments and budgetary deficits. These objectives were to be achieved by removing basic price distortions, in particular the overvalued exchange rate, reducing the budgetary deficit by enhancing revenue collection and reducing expenditures, improving investment programming, introducing better external debt management, implementing sectoral reforms, especially in agriculture and public utilities, and rehabilitating key infrastructure. 6. The first element of this program was an eighteen-month stabilization program beginning in January 1985 with entry into the Franc zone; the national currency, the epkwele, was replaced by the CFA Franc at a rate that implied a de facto devaluation of 82 percent in foreign currency terms. The stabilization program, supported by an IMF Stand-by, aimed at reducing EQG's balance of payments and budgetary deficits through expansion of agricultural exports, expenditure restraint and budgetary control. This program was complemented by a number of additional macroeconomic and sectoral reforms, as well as key rehabilitation activities, to be supported by the RIC. 7. Macroeconomic Performance under the Program. In 1985-1986, the country faced a severe liquidity crisis stemming in part from the vast economic changes of 1985. There were several contributing factors. Upon devaluation of the epkwele, the Government imposed a special tax on deposits, thereby severely limiting the liquidity of many private sector companies. Weaknesses in the cocoa sector became more apparent with the new currency. Cocoa producers who in the past had access to hard currency could no longer benefit from the differential between the official and black market exchange rates or procure imported inputs at the overvalued official rate. They had to become competitive to survive. Many were not able to become efficient producers, particularly in the wake of the extremely bad weather of 1985/86 which took its toll on cocoa production. As a result, the two local banks BCD and Guinextebank, which had provided credit to many of these producers, were unable to recover many of their loans to the cocoa sectot. The widespread default of cocoa producers together with the bad quality of the remainder of the portfolio caused the banks themselves to fail and depositors no longer had access to their savings. For all practical purposes, EQG was without a banking system for part of 1986 and 1987. S. Overall economic performance deteriorated during 1985-86 with the result that the end-1985 IMF performance criteria could not be met, specifically the reduction in arrears. Notwithstanding this negative development, the RIC was approved by the Board in April 1986 because it was believed that a new IMF program would be put in place soon. However, the economic situation continued to deteriorate. The budgetary outcome of 1986 was especially disappointing with cash revenue declining sharply as tax payments being made through checks drawn on commercial banks did not clear and expenditures increasing because of lax control 31 procedures. Under these circumstances, it proved impossible to negotiate a new IMF program and RIC effectiveness was delayed for about one year. 9. In 1987, macroeconomic performance began to improve. In particular. the budgetary outcome. despite the decline in the terms of trade, improved as a result of Government collection of the 1986 tax arrears and the sharp reduction in expenditures. The establishment of a new commercial bank in 1987, the improved budgetary outcome, the agreement on the public investment program (PIP) (see para. 27), and the preparation under the RIC of a medium-term economic strategy permitted the Government to negntiate a PFP for the period 1988-91 and a first year structural adjustment facility (SAF) program with IMF assistance in July 1988. The second tranche of the RIC was also released in July 1988. 10. Policy Framework Pa2er (PFP). Key macroeconomic elements of the SAF program were to improve public investment programming and enhance budgetary management and resource mobilization. The program's sectoral priorities focused on assuring the provision of adequate infrastructure. including that related to agriculture. Measures were to be taken to boost confidence in the private sector by removing regulations in the productive sectors, and, most importantly, through the reform of the banking sector. The Government hoped that this program of action would attract skilled foreign labor and capital. 11. Performance under this program also fell far short of expectations. There were serious slippages in policy implementation, especially expenditure management, and administrative capacity remained weak. These deficiencies, coupled with exogenous shocks, especially a further deterioration in the terms of trade, resulted in the Government's inability to meet most financial targets and objectives of the program. In addition, many of the structural reforms envisaged under the PFP fell behind schedule, mainly because they proved to be too ambitious in relation to the country's administrative and technical capacity. Little progress was achieved under the lP wit.respec.o.thsr reara and implementation, and serious delays were registered in liquidating the two insolvent banks. As ; result, the program went off track three months after it began. III. Project Objectives and Description 12. Objectives. The Government's inconsistent economic management had a major impact on the design and execution of the RIC. In order to support the Government's efforts at economic reform, the RIC was designed as a quick-disbursing operation to: (a) help EQG to weather its budgetary and balance of payments difficulties; (b) ensure that key prerequisite for the reactivation of the major productive sectors, especially agriculture, were in place; (c) intra..ce several policy reforms in the areas of public health strategy, tariff reform, public procurement policy, and public investment programming that would complement and reinforce the IMF program. The Credit was meant to provide the Government with foreign exchange to import equipment and inputs needed for emergency rehabilitation of productive and social sector infrastructure. The counterpart funds created by the sale of foreign exchange to the private sector were to be allocated in part (US$0.5 million) to a special account at BCD to provide credit at commercial terms to the private sector, especially for developing non-cocoa agricultural activities. In addition, the RIC was tailored to be complementary to the actions of other aid agencies. As discussed below, these objectives were later revised in view of changing circumstances. 32 13. Credit Conditionalities. Credit Effectiveness was conditioned on the following: (i) the Government opening the counterpart funds accounts: (ii) the recruitment of an Administrator/Economist and the procurement adviser; (iii) the establishment of an inter- ministerial committee, coordinating RIC activities (the RIC Committee) 1/; and (iv) the adoption of a satisfactory program for the management of public finances and external debt. The first tranche (sixty percent of the Credit amount) was to be released upon satisfaction of effectiveness conditions. Release of the second tranche was conditioned on: (i) satisfactory implementation of the 1986 public investment program as agreed with IDA; (ii) presentation of the public investment program for 1987 acceptable to IDA; (iii) confirmation of proper utilization of RIC funds; (iv) timely implementation of the Government's rehabilitation program. and (v) significant progress towards establishing appropriate tariff levels for water and electricity consumption. 14. Loan Effectiveness and Project Start-up. Credit effectiveness was delayed by a year due to the Government's inability to prepare a budgetary and external debt management program acceptable to IDA. As explained before (para. 8), the weak macroeconomic policy performance also impeded agreement with the IMF on the stabilization program. The RIC was declared effective in April 1987 on the basis of a Letter of Intent of March 1987 where inter ali the Government reaffirmed its commitment to reducing the banking sector crisis. 15. Revised Objectives. The collapse of the banking sector and in general the weak economic performance of 1985 and 1986 led the Government and IDA to reassess the country's development strategy and revise and expand project objectives and activities. First, an important additional objective of the project was to devise a medium-term economic program to promote sector development by addressing not only infrastructural deficiencies but also structural policy constraints, especially in the areas of budgetary management, investment programming, the financial sector, and the incentive and regulatory framework. It was hoped that this strategy would eventually become the basis for a full-fledged structural adjustment. Second, the second tranche conditions regarding investment programming were amended to refer to the 1987-89 PIP while an additional condition was added addressing the need for the Government to pursue appropriate policies to address the banking sector crisis. These changes to the second tranche conditions were spelled out in the March 1987 Letter of Intent (para. 14). Finally, the collapse of the banking sector and the subsequent closure of the BCD led in April 1987 to an amendment in the Credit Agreement, since the creation of a revolving fund in the BCD, established for the purpose of lending to the private sector, was no longer possible. 16. The delay in effectiveness also resulted in other donors carrying out some of the rehabilitation activities to be carried out by the RIC, for example, the access to the port of Bata. This freed further funds in addition to those of the revolving BCD fund. It was agreed that the Government would use these funds for additional emergency road repairs in the continental region. Approximately 350 km of roads in both Bioko and Rio Muni were identified for repair. 1/ The Committee was made up of the Minister of Finance as president, the Minister of Planning, the Minister of Industry and Commerce, and the Administrator/Economist of the RIC as secretary. Other ministers and high head officials would be asked to participate as adJhoc members from time to time. 33 IV. Project Desin and Organization 17. Project Lesign. The RIC was designed as a quick-disbursing operation to allevia;e the country's shortage of foreign exchange and to provide the Government the means to finance private sector imports. Project concept and design at appraisal were appropriate to ensure that priority was given to the country's economic rehabilitation program. The hard currency provided would be allocated in two ways. One portion of the foreign exchange would be allocated to various government ministries for high-priority imports mainly for infrastructure rehabilitation purposes. The other portion of the foreign exchange would be sold at the official exchange rate to the private sector for urgently needed imports for the productive sectors. The local currency generated through this sale of foreign exchange would go into special Government counterpart fund accounts. 18. The allocation of the RIC's foreign exchange across and within the public and private sectors-and the allocation of the government's counterpart funds would be decided by the RIC Committee. Project management and implementation were to be implemented by the RIC Committee with the assistance of a RIC Administrator/Economist, an expatriate advisor, who was also responsible for the project's financial management and shared signatory powers with the Minister of Finance. 19. Project Financing. IDA's contribution amounted to SDR 5.4 million. This envelope was supplemented by an additional credit under the Special Facility for Africa for an amount of SDR 3.6 million. The credits were to be released in two tranches with 40 percent of credit proceeds allocated to the second tranche, and a mid-term review was to assess policy progress made under the first tranche before the second tranche could be released. V. Project Implementation and Results Project Activities 20. The RIC Committee had three primary objectives: (i) the design and implementation of a strategy for economic rehabilitation; (ii) the fulfillment of specific policy conditions in the Credit Agreement: for example, electricity and water pricing; maintenance of the water supply system; a maintenance strategy for vehicles; a preventive health strategy; an acceptable public investment program; and (iii) the optimum use of RIC funds to promote economic development and rehabilitation. 21. The RIC Committee represented a novel approach to economic management in Equatorial Guinea and fulfilled its role by formulating an economic strategy that later served as the basis for the PFP. The RIC Committee, unlike the economic ministries for which it substituted, had a reliable and generous source of funds with which to finance and implement the economic strategies it was formulating. The total amount of funds available under the RIC, approximately US$12 million at the then prevailing exchange rates, represented about 14 percent of the Government's budget over the project's disbursement period. Under the circumstances, and given the high calibre of the expatriate advisor to the RIC Committee, and the receptivity of the ministers involved, the RIC had every opportunity to meet the objectives ascribed to it. For the first time in Equatorial Guinea, there was a public body which had the financial means and the technical know-how, backcd-up by Bank staff, to identify and solve problems on a national level. 34 22. However. serious problems began to surface during the strategy's execution phase which ultimately limited the Committee's achievements. The RIC Committee set about implementing d.tined strategies in a systematic and, with the benefit of hindsight, at times autocratic manner. In addition, the RIC reform program and its rehabilitation activities had not been sufficiently internalized by the administration. All of this sometimes led to clashes with other heads of public agencies, who resented the Committee's relative efficiency and ability to impose its will and who were frustrated by their inability to tap directly into RIC funds. In a move to oust some of the ministers who made up the RIC Committee, charges of corruption were leveled against the Committee members and new members were appointed in late 1988. As a result, some RIC activities such as garbage removal in Malabo suffered heavily from this sudden change in project management. These new members were also reluctant to advance or implement sensitive policy reforms such as the enforcement of debt repayment to the banks, and commitment to the economic reform program weakened significantly. 23. Other Project Activities. In addition to the medium-term program, other policy measures concerned a public investment programming, banking sector reform, a preventive health strategy and management of the electricity, telecommunications and water supply utilities, including adjusting tariffs so as to cover operating and maintenance costs. The first two are discussed below (paras. 27-28). A preventive health strategy was prepared with the assistance of consultants from China, financed through the counterpart funds generated under the credits. In addition, the acquisition of medicines/drugs needed to complement efforts being made by other donors was financed. With respect to improving the management of the electricity and telecommunications utilities, the Government signed management contracts with private French companies and the Caisse Centrale de Coopdration Economique (CCCE) provided financing to upgrade existing facilities. 24. Regarding the use of the proceeds of the credit, the original intent of the project was to: (i) provide funds to import agricultural inputs of all kinds complementing other development efforts in agriculture being financed by IDA and other donors; and (ii) finance imported equipment, materials and services for the rehabilitation needs of selected infrastructure (roads, water supply/sanitation, electricity, telecommunications, and health). With respect to the water supply/sanitation sector, minimal needs of equipment for garbage removal in Malabo and for the emergency repair of the municipal water supply system in Malabo and Bata were identified and purchased. New water tubing and pipes were laid in Malabo, thereby eliminating one of the main sources of water contamination there and the project also contributed to garbage collection and street cleaning in Malabo. In the agricultural sector, a fleet of vehicles was purchased to improve food marketing by agricultural cooperatives. This was done in collaboration with the Cooperative League of the United States of America (CLUSA), a non-governmental organization. However, the elimination of the BCD revolving fund precluded further purchases of agricultural inputs. 25. Despite heavy investment of project funds totalling nearly CFAF 3 billion to purchase equipment and materials, the roads rehabilitation program was one of the least successful of the RIC-sponsored rehabilitation efforts in the long-term. One of the fundamental reasons for this lack of success was the inability of the roads expert to ensure that adequate systems and standard practices were executed (para. 34). Delays by the Government in authorizing the replacement of this expert also contributed to this result. In addition, Bank supervision was mainly carried out by one economist and an operations assistant with little technical expertise in this area. Due to the use of inadequate materials, some of the rehabilitation works carried 35 in this area. Due to the use of inadequ.,! materials. some of the rehabilitation works carried out under the RIC in the continental region were washed out during the rainy season. 26. Finally, the project made a major impact on alleviating the financial burden of servicing the country's foreign debt. Approximately CFAF 1.5 billion of counterpart funds generated under the credits were used to pay the debt. 27. Second Tranche Release. The revised second tranche conditions were: (i) satisfactory implementation of the 1986 public investment program as agreed with IDA. Following the delays in project implementation, this condition was revised, though without formal amendment of the Credit Agreements, as follows: (i) presentation of a three-year public investment program for 1987-89 acceptable to IDA; (ii) proper utilization of RIC funds; (iii) timely implementation of the government's rehabilitation program; (iv) significant progress toward.s establishing appropriate tariff levels for water and electricity consumption, and (v) adoption of appropriate policies to address the crisis in the barking sector (see paras. 14-15). 28. Disagreement over the PIP led to serious delays in the release of the second tranche. Despite the previous agreements with the Bank in the context of the RIC, the Government presented a PIP for 1987-89 which proposed expenditures above the agreed-upon ceilings, and included projects not previously reviewed by the Bank. With Bank staff assistance, a PIP more in line with sectoral priorities and the absorptive capacity of the economy was eventually agreed upon. The project further led the Government to face the severe banking crisis in the country by accepting to liquidate Guinextebank and rehabilitate the BCD. The second tranche was released in July 1988 once it was established that Government had made good progress in implementing its rehabilitation program, and in addressing the banking crisis, and improving budgetary management. 29. Aid Coordination. At identification, it was intended that the RIC would be a vehicle for improving aid coordination in EQG. The identification mission discussed the operation with several donors with the view of stimulating interest in cofinancing. However, many of the donors decided to postpone their decisions until after appraisal of the operation, and in the end, chose not to participate in the financing but rather to pursue individual interventions in areas of interest to them. For example, the EIB with the CCCE participated in the financing of the Riaba Hydroelectric plant. More importantly, in view of the country's weak administrative capacity, some RIC activities were to be followed up through longer term intervention by other donors. Some of these interventions failed to materialize thus compromising the medium- to long-term sustainability of these activities. Thus, the project failed to meet some of its aid coordination objectives. More success was achieved, however, in coordinating with the policy reform initiatives supported by the IMF. Bank staff participated in all IMF missions during the RIC implementation period. 30. Procurement. Procurement proceeded satisfactorily. In general, Bank guidelines were complied with. The project benefitted from the presence of an experienced procurement agent as one of the principal project advisors. This consultant, with advice from IDA, assisted the Government in preparing a draft national procurement guidelines. The document was cleared by the Head of State and is expected to be adopted in 1991. 31. Disbursements. Disbursements were slower than anticipated due to the delays in credit effectiveness and project implementation. Consequently, the first disbursement did not take place until April 1987, immediately following Credit effectiveness. The second tranche 36 was not released until July 1988. The original closing date was July 31, 1988: but the credits were closed on December 31. 1989. after two extensions of the closing date, of twelve and six months, respectively. All credit proceeds were disbursed as of February 7, 1990. 32. AUdi. The first tinancial audit of the Credit was carried out more than one year late. The project's accounting system was so weak that the auditors had first to set up the accounts before proceeding with the audit. Nonetheless. the auditors were able to certify the accounts and made recommendations for improving the accounting system. These were successfully implemented and subsequent audits were satisfactorily carried out. 33. ConsUlting Seryices. Of the experts expected to be recruited at appraisal to assist the RIC Committee in the execution of this program-namely, a procurement expert, a civil engineer, a civil engineering consulting firm, and two mechanics-only the procurement expert and the civil engineer were hired by decision of the RIC Committee. The Committee felt, wrongly, as it turned out, that available local capacity could be used to replace the consulting firm and the two mechanics. 34. The presence of highly qualified advisors to the Government was instrumental in some of the successes recorded under the RIC--namely, the well-defined strategies for carrying out the economic rehabilitation program. The principal driving force behind the Committee was the Administrator/Economist who guided the Committee in iWt work by teaching its members strategic planning and preparing the analytical work leading to strategy formulation. The Procurement Advisor also played a major role in the actual implementation of these strategies. The least successful consultant was the roads engineer, who left without finalizing the roads rehabilitation program nor the maintenance pilot project. The project further benefitted from the contribution of excellent short-term consultants who prepared the cocoa study, the private sector, transport sector, fisheries and health studies. VI. Impact and Sustainability of the Proiect 35. Impact of Proiect. The overall impact of the project was below expectations. The project's objectives were predicated on what proved to be an overly optimistic assessment of EQG's short-term recovery prospects. When the project was designed, it was believed that exports and economic growth would recover sharply if the Government implemented forcefully its macroeconomic reform program, crucial infrastructure was rehabilitated and the shortage of trained manpower was alleviated through the provision of technical assistance. Exports were projected to grow at an annual average rate of 12 percent between 1986 and 1988 and no serious financing gap was foreseen during this same period; in the medium-term both the overall balance of payments and the budget were projected to be in equilibrium. Economic developments since 1986 proved otherwise: exports have only grown by 4 percent between 1986 and 1990 and budgetary and current account deficits have soared. While the Government's weak implementation of the macroeconomic reform program contributed to these disappointing results, obstacles of a structural nature proved to be more important. 36. Recognizing this, the RIC Committee with IDA assistance allocated a significant amount of time and resources to developing a medium-term recovery strategy. However, this strategy was not effectively executed primarily due to weaknesses in the institutions responsible for economic management. Likewise, the policy package prepared by the Committee has not had the desired impact over the medium-term due to a wavering Government commitment to its goals resulting from the lack of internalization of the proposed 37 policies by key officials not participating in the RIC Committee. Political events. which resulted in a change in the composition of the RIC Committee underscores the fragility of introducing and ensuring long-term application of economic reform policies in EQG. 37. The RIC carried out rapidly and successfully a substantial number of rehabilitation activities that are believed to have had a significant impact on economic activity and living standards. However, there is a serious danger that many RIC-sponsored activities may not be sustainable. Because of the lack of skilled manpower, the country's institutions have proved too weak to follow-up on many RIC activities without intensive Bank supervision and technical assistance. For example, because of administrative difficulties and liquidity constraints, the Government did not allocate funds to finance the recurrent costs of many RIC activities. Poor aid coordination also contributed to this problem, since some donors financing parallel activities in sectors assisted by the RIC did not necessarily follow-up on activities begun by the project. Hence, important RIC achievements such as street cleaning and garbage removal and road patching and emergency infrastructure repairs by the municipalities of Bata and Malabo may not be sustainable over time. Although the RIC was clearly intended to be an emergency operation, many of its benefits would only be realized if RIC-sponsored activities are maintained and improved upon. 38. The RIC's recommendations for fostering agricultural development of non-traditional food exports and improving extension and marketing met with some success and led to the development of a national agricultural strategy which incorporated these recommendations. The recently approved Agricultural Services and Exports project (October 1990) embodies many of the aspects of this strategy and includes a key feature of the RIC-financed cocoa sector study in that it reduces the emphasis formerly placed on cocoa production. One of the project's most significant benefits was budgetary support to the Government at a time when it was facing severe liquidity problems. VII. Bank Performance 39. In addition to the incorrect assessment of the project's impact, Bank staff also understated the likelihood and magnitude of the project's risks. The President's Report correctly identified two of the major risks to be the possibility that the Government's commitment to the economic reform program would weaken and that the operation would suffer from the dearth of qualified local staff. These two risks proved to be significant. As explained above, the ups and downs of the economic reform program had a major impact on project activities, delaying project start-up and disbursements and weakening sustainability. The considerable delays in project implementation, or at least their negative impact on the project, could have oeen minimized if the Bank had anticipated the administrative and political obstacles that exist in EQG. During supervision, these obstacles were obscured by the initial effectiveness of the RIC Committee. Regarding the second risk, the lack of trained local staff was significantly more detrimental than anticipated to the quality and timeliness of some RIC- sponsored activities (para. 25) and especially to its sustainability (para. 37). While the provision of technical assistance mitigated somewhat these negative impacts, it proved impossible for the experts, some of whom proved to be of doubtful quality, to substitute for well trained and motivated locals. 2/ a/ Although the RIC was an emergency operation with short-term objectives, the use of intensive technical assistance of a substitution nature resulted in little institution building. 38 40. With the benetit of hindsight, project design was too complicated for a country such as EQG. In addition to being a policy-based fast disbursing operation, project activities involved not only two geographical areas and seven sectors, some as different as health and road infrastructure, but also a multitude of non-governmental and public institutions as well as foreign donors. Implementing such a program even in a country significantly more developed than EQG would be difficult; the RIC Committee and the project's main foreign experts should be commended for the successes achieved under such difficult circumstances. However, mistakes were made that could have been avoided if the project had been simpler, and project components such as the health sector activities had been eliminated. Improving health sector services and delivery would require actions of a more medium- to long-term nature incompatible with the short-term nature of the project and would have been more appropriately addressed in a different operation. 41. There were also contradictions/trade-offs between the fast-disbursing policy based component of the RIC and its infrastructure rehabilitation aspects. The RIC Committee, and for that matter IDA supervision missions, allocated a significant amount of time and effort to the policy reforms to the detriment of the rehabilitation aspects. Not only were these reforms critical for economic recovery, but delays in their implementation resulted in the paralysis in the other components of the project for lack of funds. In fact, the delays in disbursements resulting from the Government's procrastinations in meeting conditionality led to complaints and difficulties for the institutions carrying out rehabilitation activities. 42. Supervision of the RIC proved to be very difficult for Bank staff. As explained above, an economist and an operations assistant were mainly responsible for supervision with little technical expertise in many of RIC-sponsored activities. In addition, taking into account the complex project structure, the need for Bank staff to intensively supervise the policy reform aspect of the project which was off-track during most of the project implementation period, and the heavy administrative burden placed on Bank staff by the weak Equato-Guinean administration, too few resources were allocated to supervision. Limited resources and coordination difficulties with the other divisions with the technical expertise required for effectively supervising the project's multiple components led to some project activities not being supervised in an optimal manner. More would have been achieved if the composition of the supervision team had permanently included an infrastructure expert, perhaps with shared task management. VIII. Borrower Performance 43. The Government initially manifested a great deal of enthusiasm for the RIC and its prospect of assistance for economic management. For its part, the Committee identified areas in urgent need of rehabilitation and allocated the required funds. A significant number of rehabilitation activities were carried out successfully and rapidly. The RIC also invited collaboration with other donors in several areas, namely in the areas of water supply, electricity and health and sponsored several important studies in cocoa, Malabo's municipal finances, and the transport sector. 44. Political upheavals resulted in the RIC losing its momentum during its final phase of execution due to the removal of the key ministers on the RIC Committee in October 1988. Those ministers instrumental in the earlier phase, the Minister of Finance and the Minister of Plan, were removed from office. The Minister of Industry and Commerce was faced with proving his innocence of the alleged misuse of RIC funds. These allegations were later 39 cleared and verified to be groundless in the audit report. The former ministers were replaced by the Prime Minister, the new Minister of Finance and the Minister of Public Works. It soon became apparent, however, that the new Committee was not willing to advance the economic program. Rather, the new members criticized the development strategies and decisions taken by the former RIC Committee with respect to rehabilitation activities. This resulted in a politically charged atmosphere and placed the local staff of the project in danger. The counterparts of the Administrator/Economist and of the Procurement Advisor were both arrested on unclear corruption charges but were later released. The RIC Committee's work on the economic strategy was perceived to be a failure particularly following the derailing of the PFP in late 1988. In addition, the new Committee had little understanding of project objectives and design. As a result, some project activities nearing completion were not fully carried out. Also in this regard, the new Committee clearly misunderstood the revisions that had been carried out to project design during project appraisal regarding financial assistance to the private sector after the EQG's entry into the Franc Zone (part II, para. 5). 45. The project documents stressed the need to ensure the sustainability of project activities and the recurrent and maintenance costs of investments, but the authorities, and the RIC Committee in particular, did not pay enough attention to sustainability of RIC activities, nor in some cases to the technical norms followed in some of the RIC activities, for example road repairs. This is an important failure of the project, because lack of maintenance and repair activity has been a recurring issue that needs to be addressed to increase the efficiency of public investment in EQG. IX. CONCLUSION 46. Lessons Learned. The principal lessons learned are summarized below: (a) In a volatile political environment such as EQG's, the establishment of a powerful institution such as the RIC Committee with multiple mandates overlapping with those of other public institutions needs careful consideration. Care should be taken to include not only the core economic ministries, but also those which project activities most impinge upon. While the effectiveness of the Committee may be reduced with larger membership, some of the political problems that had such a negative impact on project activities could have been avoided. (b) The RIC experience underscores once again the importance that a macroeconomic reform program be effectively internalized before the Bank provides financial assistance for its implementation. In this regard. the Government, including the RIC Committee, never agreed with and understood the Bank's insistence for the need to develop a public investment program in agreement with the country's absorptive capacity and including only those projects with appropriate economic, financial and social rates of return with the resulting difficulties in releasing the second tranche. The internalization of the program should not only be limited to the core economic ministries, but should include other key officials. In the case of the RIC, the expansion of the Committee to include the Minister of Public Works would have been particularly positive in helping avoid the long delays to meet policy conditionality regarding the investment program. (c) Project objectives and design should be carefully measured against local institutional capacity for implementation. RIC projects whose objectives are to carry out emergency rehabilitation activities in diverse sectors and geographical areas must be designed 40 with great care in countries such as Equatorial Guinea with very weak institutional capacity. Not only may some activities be carried out inappropriately, but the lack of technical. financial and management follow-up capacity may also result in project benefits not being sustainable. RIC type projects require from the Bank special and intense supervision. If these conditions can not be met, it may be best to carry out the rehabilitation at a slower pace through more classical investment projects. (d) Also ii this regard. RICs may not be the more appropriate instrument to support macroeconomic policy reforms. Disbursement delays resulting from the authorities not meeting policy conditionalities may result in serious implementation problems for the rehabilitation activities. (e) To ensure transparency in financial management, arrangements should be made e,' .y in project design, and certainly no later than appraisal, to set up adequate accounting and audit procedures. Although adequate procedures were set up during project implementation. this improvement only took place after Second Tranche release. In view of the repeated charges of misuse of public funds made against project management, it would have been very useful if appropriate accounts had been available in a timely manner. 41 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE (Translation) 1. BRIEF SUMMARY OF THE RIC PROJECT 1. In 1984, when the possibility of implementing a RIC Project for Equatorial Guinea was being considered, the country's economic situation was extremely critical, one indicator of this being the severe problems surrounding the importation of consumption goods. Private sector access to foreign exchange was insufficient to ensure imports of inputs and spare parts needed for productive activities. Paradoxically, the fact that the national currency was overvalued by some 400 percent, instead of making imports cheaper. made them more difficult to obtain because of the shortage of foreign exchange, whose allocation to the private sector gave rise to abuses and all kinds of accompanying economic distortions. 2. Meanwhile Equatorial Guinea, in comparative terms, had a very substantial international debt, the ratio between official exports and debt service requirements being 1.07 in 1984. Put another way, GNP did not even cover half of external debt service needs (interest and principal). 3. The critical situation of the economy was also evident in the deplorable condition of Equatorial Guinea's infrastructure. particularly as regards telecommunications, highways, electricity and water supplies and rural transportation services for both passengers and freight, all of which were so inadequate that the country was on the verge of a general collapse. 4. The Government was of the opinion, and IDA agreed, that only a project of the RIC type, involving a quick-disbursing, program-type loan, could help solve these critical problems, provided that the Government initiated certain policy changes. The Government therefore committed itself, in the Credit Agreement, to take concrete steps regarding the rehabilitation and maintenance of transportation systems and public works, to prepare a preventive health strategy, to link electricity and water prices to their production costs and to establish a Coordinating Committee to manage the RIC (Article 1(e) of Section 1.02 of the Credit Agreement). 5. As already noted, the RIC Project was prepared in 1984 when the currency of Equatorial Guinea - - the Bikuele -- was not convertible. However, the Credit Agreement was signed in 1986, a year after Equatorial Guinea had become a member of the BEAC, which has a common currency, namely the CFA franc. The project amount was initially to be US$6 million, but in the report prepared by the appraisal mission which visited Equatorial Guinea in May 1985 it was proposed, and confirmed in the Credit Agreement, that the final amount of the project should be SDR9 million, equivalent to US$12 million. These developments led to certain changes and delays in the implementation of the RIC, as follows: (a) The CFA franc being a convertible currency, the principal motive for the RIC (foreign exchange constraint) disappeared, since private sector agents now had the resources they needed to import inputs without having to apply to the Government for access to the very limited share of foreign exchange allocated to the sector, with all the abuses and inefficiencies that this situation had previously entailed. (b) Many of the projects regarded as urgent in 1984, such as the access road to Port of Bata, the inadequate water and electricity supplies in the cities of Malabo and Bata, and the poor telecommunications network, etc., were taken up by other donors interested in 42 implementing specific solutions to the problems in these sectors. Thus the Port of Bata road was rehabilitated by Italian Cooperation, electricity supply and telecommunication problems were addressed by French Cooperation, and the African Development Bank helped to improve water supplies in Malabo and Bata. (c) Given the delay before the Credit Agreement was signed and the first disbursement made (April 1987), the RIC Project, planned as an emergency response to a specific situation, lost much of its original character and instead became an effort aimed at the structural adjustment of Equatorial Guinea's economy. (d) The amount of the credit doubled to include other rehabilitation actions not initially included. II. COMPONENTS OF THE RIC PROJECT 6. Originally the RIC Project, considered on its own, did not form part of an investment program to promote long-term development. Among the objectives and targets contained in the Credit Agreement were a number of emergency measures designed to resolve the serious economic difficulties experienced by Equatorial Guinea in 1984 and the immediately following years, but these were not linked to other national or regional projects, although the RIC was part of a program to develop Equatorial Guinea. Therefore, to the principal objective of assisting the Government's rehabilitation program were linked goals that determined the main components of the RIC Project, namely: (1) To promote economic development; (2) To assist small and medium-sized businesses; (3) To improve the country's infrastructure, especially its roads; (4) To focus health efforts on preventive medicine; (5) To tackle the problems of incentives in the public sector; (6) To find a short-term solution for the financing gap. 11.1 AGRICULTIRE 7. The pre-project situation in the agriculture sector can be described as follows: (a) Insufficient and perhaps inappropriate public and private investment, insofar as the greater part of public investment went to cocoa; (b) Inadequate and spasmodic exploitation of fisheries; (c) An inadequate transportation system for moving agricultural products from rural areas; (d) Major difficulties in exporting agricultural products; 43 (e) Rural extension services that had little impact on agricultural production and diversification. 8. Equatorial Guinea, being a predominately agricultural country, indeed almost a monoculture, was seeking to solve the critical problems mentioned above; the RIC Coordinating Committee therefore decided to implement the following activities in the agriculture sector: (1) Evaluate the role of cocoa as motor of the economy in the long term. As noted above. the greater part of public investment was allocated to cocoa despite the lack of any real consideration of the future of this product. The services were therefore contracted of the consultant, who at the end of his mission produced a report on the long-term role of cocoa. This recommended an intensive strategy of diversifying agricultural production, given that cocoa's role as the motor of development was already declining. The consultant's recommendations are being used by the Government. (2) Study the most important alternative strategies for the fisheries sector. A fisheries expert was contracted and he produced a detailed technical report on the (enormous) potential of this sector. His recommendations have been well received by the Government, which fully intends to implement them. (3) Support the USAID program for the promotion of cooperative activities in Equatorial Guinea, through the acquisition of six trucks for the transportation of rural production to the city. (4) Support the agricultural extension program, little known among farmers, by offering incentives to extension workers as a short-term experiment. There has been a significant increase in output of food products, specifically in the Continental Region. 11.2 SMALL AND MEDIUM ENTERPRISES (SMEs) 9. When the RIC Credit agreements were signed, SMEs were suffering from the following problems: (a) Lack of credit; (b) Inadequate management training; (c) The burden of taxation and corruption; (d) Lack of technical assistance and support from nongovernmental organizations; (e) Lack of business organization. 10. The combination of the national austerity program and trade liberalization has resulted in advantages for foreigners over nationals of Equatorial Guinea, since the austerity program makes credit difficult to obtain while the liberalization policy facilitatet, access to international markets. In both areas - - credit and markets - foreigners enjoy competitive advantages and are therefore playing a more significant role in Equatorial Guinea's economy. In the long term this situation could lead to inequalities 44 and perhaps to a nationalist reaction. 11. The RIC Coordinating Committee was anxious to avoid this outcome and its negative consequences by promoting balanced growth among small and large enterprises. For this reason, the director of the Central American Institute of Business Administration, was invited to visit Equatorial Guinea to study the situation of SMEs. This specialist produced a report analyzing the current situation of the SMEs and suggesting appropriate measures to improve it. In addition, with support from UNDP and USAID, public/private sector dialogues were arranged on the above-mentioned problems and possible solutions to them. Statistical surveys were also organized. 11.3 INFRASTRUCTURE REHABILITATION 12. Infrastructure presents a complex problem because it affects a number of sectors; hence, the principal obstacles to the implementation of the agriculture component in the project are the result of infrastructure-related problems. It was impossible, for example, to make the promotion of nontraditional exports part of an economic strategy in the absence of transportation resources, nor could these vehicles - - even if they existed - be utilized without roads for them to run on. For this reason the infrastructure component was a major recipient of RIC resources, amounting in all to CFAF 1,586,054,732, distributed between the Ministry of Public Works, Housing and Transportation (CFAF 1,374,779,467) and the Malabo and Bata municipalities (CFAF 211,275,265). 13. The Coordinating Committee began d;,cussions regarding roads with the Ministry of Public Works in November 1986. One year later agreement was reached on the nature of the problems and the equipment and reorganization required to overcome them. In the light of the consultant's report the following rehabilitation program was approved: 45 CODE DESCRIPTON OF WORK LOCATION O.P I Routi.e maintenance Malabo OP 2 Maintenance by communities Same O.P 3 Patching of streets Same O.P 4 Asphalting of streets Same O.P 5 Rehabilitation of road to city dump Same OP 6 Maintenance by private sector Same O.P 7 Routine maintenance Bata O.P 8 Maintenance by communities Same O.P 9 Patching of streets Same OP 10 Asphalting of streets Same O.P 11 Maintenance by private sector Same O.P 12 Repairs to road Bata-Ebebiyfn O.P 13 Repairs to road Bata-Bicomo O.P 14 Repairs to bridge over river Membiong Micomiseng. This program also included the acquisition of spare parts and equipment and stressed the development of quality standards and technical abilities within the MOPU, in addition to aiming at an experimental comparison of private sector and public sector performance as regards the maintenance of four similar sections of road. It also entailed the strengthening of maintenance systems and of MOPU's control of machinery and spare parts. 14. Of the program activities listed above, some were carried out as planned while others were changed for reasons discussed below. Those carried out were as follows: O.P. 1: routine maintenance, involving normal maintenance work to streets in Malabo, with incentive payments to MOPU personnel that were linked to the improvements realized. O.P.3: funds were allocated to repairing potholes and sidewalks and other activities. O.P.4: an activity linked to those mentioned above, consisting of asphalting the road 46 sections that were repaired. 0.P.5: the rehabilitation of the road leading to Malabo's main dump. This activity was carried out at the same time as the removal of junk, garbage, boulders, old trees, old telegraph posts and piles of litter from all over the city. This task had been declared an indispensable preliminary to any later programs such as those indicated at O.P.3 and 4 above. The cleaning up of the city of Malabo was carried out satisfactorily by two local companies. However, the patching and asphalting, like other road maintenance work performed during rainy periods, was not done as consistently as it should have been, which meant that within a very short period it had to be redone. Similar work to that carried out in Malabo under codes O.P.1, 0.P.3 and 0.P.4 was performed in Bata. in the Continental Region of Equatorial Guinea under codes 0.P.7, 0.P.9 and O.P.10, respectively. Repair work was also carried out as per codes 0.P.12, 0.P.13 and 0.P.14. Item O.P.12 refers to the 102km stretch of road from Bata to Nkue; another 126km remain to be rehabilitated to cover the full distance to Ebebiy(n, work currently being halted by heavy rains. Item O.P. 13 consisted of repairs to the Bicomo road, 17km long and leading to the new hydroelectric power plant supplying Bata. This work was carried out in two phases, the first involving grading and digging ditches and the second the gritting of the entire section and construction of a number of drainage tubes. The third item, O.P. 14, relating to repairs to the bridge over the Membiong river, has not yet been executed; the necessary material has been collected but a start will not be made until the dry season arrives, when work should proceed more smoothly. 15. Among programs not implemented as planned are those involving maintenance by communities and private sector efforts, both in the continental and island region. In the latter case, the MOPU's explanation was that current circumstances made it impossible to rely on the communities for rehabilitation and maintenance of the designated roads, since there was no guarantee that this would be done quickly enough to meet the deadline (the fact that the Head of State was going to inaugurate the Riaba hydroelectric plant reduced the amount of time for the work). Nor could maintenance work be entrusted to the private sector as planned, since its prices were up to three times higher than the budget allocations made by the Coordinating Committee. This fact, and the need to finalize the work before the closing date for the RIC project, obliged the MOPU to carry out this work itself, using the personnel and machinery acquired through the RIC. In other words, the work was done, but not by the agents originally intended. 16. The municipality of Malabo faced a critical situation in that its potable water and sewerage installations were obsolete, leading to the complete collapse of potable water supplies in 1986 and 1987, and to the appearance of raw sewage in the streets that was not only evil-smelling but a source of diseases such as malaria. Since the city also lacked a regular trash collection service, large numbers of informal dumps sprang up, acting as breeding grounds for flies. The Coordinating Committee regarded this as an emergency situation requiring immediate action, viz. to repair the potable water distribution network in the city, mend drains broken as a result of neglect and introduce a regular trash collection service using proper methods, along with the establishment of teams of street-cleaners. 17. Similar steps were taken in Bata municipality as regards trash collection. In both municipalities, 47 RIC programs have solved the problems referred to. 18. In line with the emphasis in the Credit Agreement on the importance of maintenance in general, the Committee in 1988 invited a transportatior specialist to analyze possible alternative uses for the large workshops constructed by the Russians, as part of a national vehicle maintenance strategy. The consultant submitted an important report which concluded that privatization of the workshops was not currently feasible and recommended the establishment of a national vehicle maintenance program. The report also proposed employing an expatriate mechanic for the machinery to be acquired under the road maintenance program. The Committee decided to hold a national competition for this mechanic, which was completed in October 1988. 11.4 PREVENTIVE MEDICINE 19. The level in Equatorial Guinea of endemic diseases such as malaria is among the highest in the world. Meanwhile public health is poor, which not only causes suffering but restrains economic growth. 20. The RIC Coordinating Committee therefore began discussions with the Ministry of Health with a view to determining strategies to improve public health. The Committee also invited experts from the Academy of Preventive Medicine in China to work with the Government to identify alternatives for improving preventive medicine. Their report is with the Government and measures are being adopted to implement its recommendations. 21. In addition, the Coordinating Committee financed purchases of medicines for the sector. The Ministry of Health reached agreement with the RIC Committee on the distribution of these medicines, as follows: (a) 60 percent allocated for sale in the private sector, thereby generating and maintaining a revolving fund enabling the Ministry of Health to replenish at any moment its stocks of basic drugs. (b) 40 percent for Equatorial Guinea's hospitals on a donation basis. Total resources allocated to the health sector were CFAF 37,357,936. 11.5 PUBLIC SECTOR REFORMS 22. The authorities fully share the current concern of all public administrations to improve the performance of public institutions. In this area any methodology may be acceptable if it helps to solve problems. The RIC Coordinating Committee, as evidence of its concern over public sector performance, chose the following options: (a) improving incentives in the public administration; (b) ensuring that contracts are performed; and (c) controlling corruption. 23. As regards incentives, the Committee ordered an experiment in the public enterprise ENERGE, whose particularly poor performance seemed to offer potential for improvement. Certain guidelines designed to enhance performance were introduced and thresholds established which, when achieved, would trigger the payment of incentives to personnel. This experiment was a failure, since not even the lowest threshold was ever achieved (a number of adverse factors made any change in ENERGE's performance impossible). Thus no performance-related incentives were paid, although the very low wages in the enterprise provided grounds for believing that the reaction to the incentives would have been 48 more positive. 24. As regards the fulfillment of contracts. reference was made to the need for full and clear respect for property rights, and the non-payment of debts of high level officials which has a multiplier effect on others, leading to general nonpayment of debts. As regards controlling corruption, no concrete action was taken. 11.6 FINANCING GAP 25. On a per capita income basis, Equatorial Guinea is one of the most indebted countries in the world. An agreement with the IMF, renegotiation of debts with the Paris Club and a Structural Adjustment Loan from the World Bank are important steps for preventing financial disaster. They are, however, long-term steps, while Equatorial Guinea was facing a short-term crisis. For this reason the RIC Coordinating Committee decided to pay those urgent debts which, if not reimbursed, would have led to the cancellation of a number of on-going projects, thereby delaying negotiations. The total amount of debt paid was CFAF 1,527,360.009. III. RIC COORDINATING COMMITTEE 26. The Coordinating Committee, the unit established to manage the RIC Project, is defined in Article 1(e) of Section 1.02 of the Credit Agreement. Its composition at the start of project operations was: (1) Minister of Finance, (2) Minister of Planning and Economic Development, (3) Minster of Industry, Trade and Business Promotion, as permanent members, together with ministers responsible for other economic sectors involved in the project as ad hoc members. This was the Committee's membership until November 1988, at which time, as the result of a government decision, the Ministers of Planning and Economic Development and of Industry, Trade and Business Promotion were replaced by the Prime Minister and the Minister of Public Works, Housing and Transportation, the Minister of Finance retaining his position. 27. Although the Credit Agreement established the objectives and goals of the RIC Project, these were of a contingent nature in that they could be amended during project execution, which indeed occurred. To rationalize RIC programs and make them efficient, a high-level national entity was required. This led to the establishment, within the framework of the Credit Agreement, of a Coordinating Committee appointed by the Government to manage the RIC and to take decisions regarding the eligibility of sectors applying for RIC resources. 28. It is clear that given the nature of the Credit, which was to promote the economic rehabilitation of Equatorial Guinea, with a particular focus on imports, the three permanent members of the Committee needed to be the ministers initially appointed as agreed, since these three ministries were closely involved with project execution. This criterion was also taken into account when the original membership of the committee was changed, it being for this reason that the Prime Minister was appointed, as responsible for the country's economic sector, along with the Minister of Public Works, in whose sector 38 percent of total RIC resources had been applied. 29. The Coordinating Committee began work in June 1987. Initially it had to define its mode of operation, and to this end it established three fundamental objectives: (1) To design an economic rehabilitation strategy for the country. It was expected that this 49 strategy would in due course serve as the basis for a Structural Adjustment Loan from the World Bank. (2) To attain the goals specified in the Credit Agreement. (3) To import items that would play a catalytic role in infrastructure rehabilitation and would be complemented by appropriate maintenance and control systems. 30. The first point was very important for the Committee. There had been no such strategy previously in Equatorial Guinea, despite the existence of a draft national plan. As a result, the Committee worked on a number of aspects of an economic strategy during a series of meetings. As intended, this strategy served as the basis for negotiations on a stand-by agreement with the International Monetary Fund and, it is expected, for a Structural Adjustment Loan from the World Bank. IV. OPERATIONAL ASPECTS 31. Delays and Alternations. One of the main problems encountered by the RIC project was the delay in start-up until June 1987, a year after the Credit Agreement was signed. This delay had several effects, one of which was evidently that disbursement, instead of being quick, was slow, which meant that the project was less an emergency response than an effort toward the structural adjustment of Equatorial Guinea's economy. 32. Another consequence was that to some extent the RIC Project's mode of operation became obsolete. Equatorial Guinea's entry into the franc zone in 1985 rendered the basic idea behind the RIC inapplicable, namely that the Government would sell scarce foreign exchange to eager purchasers in the private sector at an official and undervalued rate. Another important change was to allocate 42 percent of total RIC resources to closing the financing gap, which provided temporary relief from the external debt burden. Finally, mention should be made of the fact that the delay led to successive postponements of the closing date of the project. 33. Operational Indicators. The Government regards the impact of the RIC Project as highly positive when the following operational indicators, which are proof of its efficiency, are taken into account: (a) All the garbage in the streets of Malabo, which was responsible for outbreaks of endemic diseases, has been removed. (b) The street-cleaning service is now keeping Malabo clean, giving it an appearance hitherto unknown. (c) There is now a regular trash collection service using vehicles and containers that will ensure its continuation. (d) Potable water supplies to the various parts of the city have been regularized, so that one no longer sees a mass of people in the streets anxiously looking for water to meet their daily needs. (e) Sewage has very largely disappeared from the streets, the consequence being a significant improvement in the public health situation. 50 (f) There is sufficient machinery and equipment to guarantee infrastructure maintenance work. (g) There are stores of material and parts in the public works department at Malabo and Bata. and in the municipality of Malabo, with appropriate stock control systems in place. (h) The Government's problems relating to payment of interest and principal on the foreign debt have been eased. (i) The transportation of agricultural products has improved, especially in the Continental Region. (j) The Ministry of Public Works is now in a position to ensure continuity in the area of infrastructure maintenance works. 34. To guarantee the continuity of certain programs initiated under the RIC, the Ministry of Economy, Trade and Planning has introduced a modest surcharge on the prices of petroleum products sold to the public. The receipts will provide funds to finance expenditure incurred on the Malabo and Bata city cleaning programs. 35. Unfinished Programs. One target not achieved as a result of project implementation is the establishment of a link between the costs of and charges for water supplies in Malabo. To this end the RIC financed the purchase of water meters to measure private consumption, as a basis for recovering costs from consumers. Thus far these meters have not been used. The municipality of Malabo states that they are being held back until the start-up of the African Development Bank Project for water supplies in Bata and Malabo; for this reason the RIC withdrew from the sector, while suggesting to the responsible municipal officials that the meters could be installed now for utilization later in conjunction with the other project, to provide a reliable source of funds for the municipality of Malabo. 36. The Credit Agreement provided for the establishment of a revolving fund in the Credit and Development Bank for loans to the private sector. The collapse affecting the banking sector has made it impossible to implement any program of this kind. This situation has had very serious repercussions on any attempt to support small and medium-sized enterprises, for the reasons indicated in paragraph 11 above. V. CONCLUSIONS 37. In conclusion, the Economic Rehabilitation Project in Equatorial Guinea has, in the Government's assessment, made satisfactory progress. However, the following points should be borne in mind. (i) Equatorial Guinea has experienced two economic upheavals in the 1980s. The first crisis occurred before 1985, while the national currency was still the Bikuele. The second crisis, with different origins, occurred after the economic reforms of 1985. The RIC Project was planned during the former period but executed during the latter. This meant that some project objectives and operating methods had to be changed. The experience acquired under the RIC has taught us something about what would be necessary in the future for Equatorial Guinea's economy to achieve self-sustaining growth, and for this growth to benefit the rural population. 51 (ii) Some of these lessons provide grounds for optimism. The Government has taken decisive steps to create a favorable macroeconomic context for economic growth. The country is relatively rich as regards land, water and fisheries. The population is relatively well-trained and, as a result of its experience in years past, knows what markets and money are. Furthermore, it will in the future be possible to exploit Equatorial Guinea's petroleum and mineral resources. 38. Other lessons indicate that some changes need to be made in previous policies and practices, such as: (a) Establishing a reliable system of accounting right from the start of projects to oversee and rationalize the use of the resources made available to us. In the case of the RIC this was done very late in the day. (b) Giving less emphasis to cocoa, which previously was the motor of our economic development. The fertile soils of Bioko or the Continental Region must be used for a variety of new crops. Technical assistance, currently concentrated in the noneconomic cocoa sector, must help us to identify products offering larger returns and the markets for them. (c) While the Government pursues its austerity and economic liberalization program, new efforts must be launched to promote small and medium businesses. The principal need is credit and the most beneficial forms of providing it are technical assistance projects operating at the community level. It is also important to redefine the roles of the Ministry of Industry and Business Promotion and the Official Chamber of Commerce, Agriculture and Forestry. (d) Non-traditional exports - foodstuffs and fish - can be not only a motor of growth but also a way to guarantee that economic benefits reach the rural population. The macroeconomic framework is appropriate for promoting these exports, but problems remain regarding roads, transportation, bureaucracy and the agricultural extension network. Many RIC Project activities were targeted at removing these constraints, but much remains to be done. 39. Finally, according to opinions expressed in response to survey questions, the RIC Project was the first effort that produced tangible results for the community; therefore a second phase of the Project is requested, in order to continue what has been started. Malabo, November 30, 1989 For a better Guinea: the Coordinating Committee Cristino Seriche Bioko Malabo, Prime Minister Antonio Fernando Nve, Minister Responsible for Financial Affairs in the Office of the President. Alejandro Envoro Ovono, Minister of Public Works, Housing and Transportation. 52 PART III SUMMARY OF STATISTICAL DATA Table 1: Related Bank Loans Loan Title Purpose Approved Status Comments Technical To elaborate a medium-term 1984 Ongoing Closing date extended to Assistance I development strategy and 12-31-92 to allow for investment program and to completion of the strengthen the necessary liquidation of the two institutional framework. bankrupt banks. Cocoa To alleviate the constraints to the 1985 Completed Rehabilitation increased production of cocoa. Project Table 2: Project Timetable Item Date Planned Date Revised Aetual 1. Initiating 3/15/85 3/15/85 3/15/85 Memorandum 2. Preparation 4/85 4/85 4/85 3. Appraisal 4/85 4/85 4/85 Mission 4. Loan 9/85 2/86 2/86 Negotiations 5. Board Approval 10/85 5/8/86 5/8/86 6. Loan Signature 5/23/86 5/23/86 5/23/86 7. Effectiveness 12/31/86 2/28/87 4/6/87 8. Closing Date 7/31/88 7/31/89 12/31/89 9. Completion Date 1/31/88 1/31/88 1/31/88 Comments: Issues Raised at each stage of project cycle The delays encountered in declaring the RIC effective were primarily due the government's inability to identify a satisfactory solution to the country's banking sector crisis. Given that the Government would need time to address the major issues in the sector, the Bank finally accepted a Letter of Intent dated March 13, 1987 as proof of the Government's willingness to find a solution to the severe liquidity crisis caused by the failure of the country's two principal banks. Second tranche release was delayed by several months due to the Government not meeting specified conditions-namely, the slow implementation of the rehabilitation program and lack of progress on the closing of the 53 PART III SUMMARY OF STATISTICAL DATA Guinextebank and restructuring of the BCD. The second tranche was finally released on July 31, 1988. the original date of the poject's closing. To allow for project completion. the closing date was extended twice to December 31, 1989. Table 3: Credit Disbursement Amounts (USS 12.0 million equivalent) Amount Date Cr. 1690-EG Cr. AO-15-EG Total First tranche 4/87 2.50 4.40 6.90 Second tranche 7/88 4.90 0.50 5.40 Total 7.40 4.90 12.30 Table 4a: Project Costs As this was a fast-disbursing operation, this table does not apply. Table 4b: Project Financing (US$ million equivalent) Source of Funds Planned Revised Final IDA 6.0 NA 6.0 Africa Facility NA NA 4.0 TOTAL 10.0 Both credits were used to finance imports of goods and services and to replenish the Special Account. The ceilings established for the Africa Facility Credit under various types of expenditures were lower than those of the IDA Credit to proportionately reflect the financing being provided under each credit. 54 PART III SUMMARY OF STATISTICAL DATA Table Sa: Use of Bank Resources A. Staff Inputs by Stage of Project Cycle in Staffweeks Stage of Project Cycle Planned: HQ Field Revised: HQ Field Final: HQ Field Through Appraisal NA NA NA NA 64.6 NA Appraisal-Board Approval NA NA NA NA 3.2 NA Board Approval- NA NA NA NA 9.7 NA Effectivness Board Approval- NA NA NA NA 33.6 NA Effectiveness NOTE: HQ figures covering appraisal to effectiveness were estimated from MIS data which date back to FY86. Field supervision figures were estimated based on actual mission information contained in the files. 55 PART Il SUMMARY OF STATISTICAL DATA B. Mission Data by Stageø of Project Cycle Mission Month/Year No. of persons Staffweekg Performance in Field _/ Statýu by MEN Activity b/ Ident./Appraisal 8/84 1 (LO) 1.5 Appraisal 4/85 10 (LO, ECON., 30.0 Eng., Cone.) Poet-Appraisal 11-12/85 2 (ECON.) 5.0 TOTAL 36.5 G P M F SPN I 03/87 2 (ECON.,LO) 1.0 1 na 1 i SPN II 06/87 1 (ECON.) 1.5 2 na 1 1 SPN III 11/87 2 (TA, GE) 4.C 1 na 1 1 SPN IV 02/88 3 (GE, ECON., TA) 6.0 2 2 2 2 SPN V 07/88 1 (ECON.) 2.5 2 na 1 1 SPN V 12/88 2 (ECON., TA) 7.0 2 2 2 2 SPN VI 03/89 2 (ECON., TA) 4.0 2 2 2 2 SPN VII 04/89 1 3.0 2 2 2 2 (Trans.Specialist) SPN VIII 07/89 1 (TA) 2.0 2 2 2 2 SPN IX 12/89 2 (ECON., TA) 4.0 2 2 2 2 SPN X 04/90 1 (TA) 2.0 TOTAL 37.00 j/ ECON.=Economist; TA=Technical Assistance; ENG.= Engineer; LO- Loan Officer; Trans. Specialist=Transport Specialist; GE= General / G-General; P=Procurement; M=Management; F=Financial 56 PART III SUMMARY OF STATISTICAL DATA Table 6: Project Results Studies Purpose as Defined at Status Impact of Study Appraisal Cocoa Sector Study NA Completed, but not The study led to both adequately tested yet IDA's and the Government's rethinking of the strategy in the cocoa sub-sector. The study's recommendations to place more emphasis on other agricultural products such as foodstuffs and other non- traditional exports, and away from the cocoa sub- sector, led to the formulation and preparation of an agricultural exports project with IDA financing. Health Study Develop a preventive Completed, but not yet The study, which was health stragegy fully internalized by the carried out by staff of the Government Chinese Health Prevention Institute, correctly places emphasis on health prevention rather than curative health care. However, the Government has not made full use of the conclusions and recommendations of the Study in the strategy for the health sector, which is to be presented to donors at a follow-up donors' conference in the sector, to be organized in CY9 1. 57 PART III SUMMARY OF STATISTICAL DATA Table 6: Project Results Studies Purpose as Defined at Status Impact of Study Appraisal Fisheries Sector Study Completed. The results The study concluded that of the study helped the Equatorial Guinea's Government negotiate fisheries sector has great more favorable terms in development potential their fishing agreements since the country is with the EEC. However, endowed with very rich the Government has not waters. yet carried out a full-scale implementation of the study's recommendations Transport Sector Study Completed but The study concluded that recommendations were not privatizing Russian-built adopted vehicle workshops in Malabo and Bata would not be feasible at the time and that the Government urgently needed a national program of vehicle maintenance. The report recommended the hiring of an expatriate mechanic under the project, which the Government never carried out. .be RIC sponsored considerable research in the cocoa sector. The conclusions of this research were discouraging. Without a dramatic and very unlikely increase in cocoa prices, the strategy of trying to rehabilitate abandoned cocoa farms on Bioko would prove very uneconomical. It was estimated the :P 'rly half of Bioko's farmers did not earn the minimum wage of CFAF I1,000/month for ten months when the purchase price was at CFAF 300/kg as was the case for 1988. By the time the study was completed in September 1988, the world price had dropped another 20-25 percent. At that price, active cocoa farms would not be profitable, let alone rehabilitated abandoned farms. It was therefore concluded that subsidies were not efficient as it diverted enormous resources from aid flows to this sector. As a result, the RIC Committee decided to move away from cocoa and p:opose a strategy of diversification and exports of non-traditional foodcrops. To further promote agricultural development, the RIC helped design and funded an experiment to provide financial incentives to agricultural extension agents depending on measurable outcomes of their farmers. 58 PART III SUMMARY OF STATISTICAL DATA The Committee also sponsored other small-scale studies to refine strategies being formulated in each sector. For example. case studies were carried out in August-September 1987 of the export of cocoyam (malanga) as an illustration of the obstacles facing exporters. Collaborative studies with other donors were also undertaken of city finances and needs in the areas of water supply, sewerage, and garbage collection. In addition, the RIC sponsored an assessment of the Ministry of Public Works' needs for machinery and spare parts. The result was a program in road rehabilitation that apart from purchases of spare parts and road maintenance equipment emphasized (i) the development of quality standards and technical capability within the Ministry, (ii) experiments pitting the public and private sectors in the maintenance of -imilar stretches of roads, and (3) a strengthening of the Ministry's systems for maintenance and control. A storeroom was set up for space parts and a system was developed for logging in vehicles and equipment and planning for their routine maintenance. However, there was little progress made in the strengthening of the quality of the Ministry's systems for maintenance and control. To promote small-scale enterprises, the RIC sponsored two surveys of the small workshops of Malabo, in order to better understand their problems and economics. In addition, the former rector of the Central American School of Management. INCAE, was invited to assess SMEs in Equatorial Guinea and government strategies for it. The report concluded that the principal obstacles to SME development are: (i) lack of credit, even informal credit is scarce; (ii) taxation and corruption; and (iii) price controls and burdensome regulation. The report concluded that needed reforms must be concentrated on the Ministry of Industry and Commerce and would include a reduction in the number of licenses, variable incentives for the Ministry's employees based on success in promoting SMEs and non- traditional exports, and the development in the Ministry to provide technical assistance and market information to SMEs. None of these reforms have yet been implemented. 59 PART Ill SUMMARY OF STATISTICAL DATA Table 7: Compliance with Loan Covenants Section Covenant Comments No. 3.01 The Borrower shall: (c)(i)(A) open a counterpart funds account at Complied with. BEAC in the name of the BCD (the BCD counterpart funds account) on the terms and conditions satisfactory to the Association (c)(i)(B) Deposit in the BCD counterpart Superseded by the crisis in the funds account at least $250,000 banking sector. With BCD and equivalent out of the local currency Guinextebank facing bankruptcy, obtained by the Borrower from the the Credit Agreement was amended sale of the foreign exchange in April 1987 to remove this provided under the Credit as a covenant. contribution of the Borrower to ________BCD's capital_________________ (c)(i)(C) Cause BCD to lend the proceeds of Superseded by the same events the BCD counterpart funds account indicated in 3.01 (c)(B) above. bkto private sector entities (c)(ii)(a) Open a counterpart funds account at Complied with. ______BEAC (c)(ii)(B) Deposit in the BEAC account Complied with. remainder of local currency obtained by Borrower. (c)(ii)(C) Finance public investment program; Complied with Finance debt service; Complied with Make credit to the private sector Superseded by events in the where counterpart funds in BCD are banking sector as stated in not enough to cover demand. 3.01(c)(B) above 3.02 Procurement of goods, works and Complied with. consultants' services to be financed out of the proceeds of the Credit according to provisions in Legal eAgreement and Bank guidelines. banking_sector_as_stated_in 60 PART III SUMMARY OF STATISTICAL DATA Table 7: Compliance with LAmn Covenants Section Covenant Comments No. 3.03 Employment of: a) An Economist/Administrator Complied with. b) A Procurement Specialist Complied with but with several months' delay. c) A Civil Engineer Complied with but with more than a year's delay. d) A consultant engineering firm for Not complied with. Ministry of Public Works in Bata e) Two mechanics, one at CLUSA Not complied with. in Bata and the other at CLUSA in Malabo 3.04 Information to be furnished on a quarterly basis: (a) Import requirements Not complied with. (b) Progress made to strengthen credit Not complied witb. agencies and import channels (c) Prepare, adopt, and apply Partly complied with. A draft procurement regulations and national procurement guidelines has procedures been prepared and reviewed by the President. A decree promulgating this draft into law is expected in CY91. 3.05 (a) Review adequacy of Covenant not applicable because creditworthiness conditions and BCD component of project was credit being applied by BCD in cancelled. extending credit to the private sector. (b) Credit made under the Cocoa Covenant not applicable because Rehabilitation Project BCD component of project was cancelled. 61 PART III SUMMARY OF STATISTICAL DATA Table 7: Compliance with Loan Covenants Section Covenant Comments No. _ 4.01 (a) Maintain separate records of Complied with but with accounting considerable delays. 4.01 (b) The Borrower shall: (b)(i) Have accounts audited Complied with. (b)(ii) Have certified copy of audit report Complied with but with some not later than four months after end delays. of each year (b)(iii) Furnish other information Complied with. concerning the accounts and audit. 5.01 Limit borrowings to loans and Complied with although date limit credits granted on concessionary was postponed due to long delays terms and conditions until January in declaring the Credit effective. 31, 1988. 5.02 Content of PIP before October 31, Date superseded due to delays in 1986 declaring the Credit effective. Complied with new dates. 5.03 Water meters to be installed for all Not complied with although the commercial water users. water meters were financed with project funds. 5.04 (a) Maintain existing vehicles, Partly complied with. The equipment and facilities. equipment in Bata was maintained with the assistance of a mechanic provided by the Spanish Cooperation. 5.04 (b) Not later than June 30, 1986, Partly complied with. Emergency maintenance and repair of water repairs were carried out in Malabo supply and sanitation networks of but not in Bata. Malabo and Bata. 62 Table 8: Summary: Economic and Financial Rehabilitation Program The failure of the measures introduced in 1980.84 to restore financial equilibrium and stimulate production led the Government to formulate a comprehensive and far-reaching economic rehabiitation program with IMF support under a Stand-by arrangement of SDR 9.2 nillion (approved on June 28. 1985). The program which contained the elements which are listed in the first three columns of this table were already in place by Board approval in May 1986. The last column describes the measures adopted by the Government under the Stand-by and the RIC. Hence, the matnx lists momutorable actions by both the IMF and the Bank in the third column. The last column focuses on progress made primarily on actions to be momutored under the RIC. Tabie 8: Summary: Economic and Financial Rehabilitation Program POLICY ELEMENT MEASURES OBJECTIVE/RESULT MEASURES TAKEN DURING RIC/IMF PROGRAMS Monetary Reform Devaluation of currency Full correction of the epkwele .L/ and entry in BEAC exchange rate and consistent monetary zone on January with IMF proposal in connection 1. 1985. with Government's program. Creation of appropriate environment for producer incentives. Export promotion. Price Policy Since January 1985 cocoa Appropriate level of coffee Done producer prices are being producer price to be set after set in light of production conclusion of ongoing study; costs, world market prices, prices in neighboring Appropriate reference price for To be carried out in 1991 countries as agreed in the timber to be set in consultation Cocoa Rehabilitation with the Bank with the aim of Project. Cocoa producer enlarging tax basis; price has been set at CFA 500/kg for 1985-86, implying a significant price increase in real terms compared to previously prevailing prices in Bikuelebes Increase of average prices Periodic adjustment of prices of Done of petroleum products from petroleum products to reflect f CFAF 206/liter (on import and domestic distribution average) in June 1985 costs. To be mnited by the IMF during regular staff visits; I/I Exchange of national currency at the rade of Bipkwele 4 = CFAF 1 (compared with former official exchange rate of Bipkwele 100 = CFAF 137, which amounts to a 82 percent devaluation in foreign currency terms). 63 Table 8: Summary: Economic and Financial Rehabilitation Program POLICY ELEMENT MEASURES OBJECTIVE/RESULT MEASURES TAXEN DURING RIC/IMF PROGRAMS Prices of other services by Tariffs for electricity and Establishment of mixed public and mixed enterprises telecommunications will be set to enterprises under private sector to be raised on basis on cover operating and a management has led to conclusions of taxation costs. Water meters wll be improved tarification and study installed and a marginal charge collection of ar-eurs. tfor water established. Abolishing of price controls To be monitored by IMF during To be carred out in 1991. and maintaining complete regular staff visits. price liberalization Public Enterprises Liquidation of the state Further reforms are being enterprise which had the contemplated at present in monopoly on importing and pricing and procurement of distribution petroleum petroleum products. products and replacement by mixed enterprise with private foreign capital participation in August 1984. Public commercial distribution company was replaced by two mixed enterprises with private foreign capital participation in July 1985 Major public enterprises are Conversion of national airline Done. However, national being studied by taxation and shipping companies into airline once again went review committee mixed enterprises underway. bankrupt and had to be Study for restructuring of liquidat. electricity company completed and conversion into mixed company is being studied in connection with provision of bilateral technical assistance; Public Finance Introduction of reference list Further change to cocoa and Revenues pice system for taxing cocoa coffee pricing system were and coffee exports and introduced in 1987 and have increases of tax rates in proven to be satisfactory. January 1985. Enforcement of existing system of taxation of timber exports 64 Table 8: Summary: Economic and Financial Rehabilitation Program POLICY ELEMENT MEASURES OBJECTIVEIRESULT MEASURES TAKEN DURING RIC/IMF PROGRAMS Preliminary taxation survey has been completed and final report and recommendations have been incorporated in the revised 1986 budget Restructuring duty on Petroleum pricing and taxation imports of petroleum system needs to be simplified products. Surcharge and revised. announced in June 1985. Review of the tax system Tax system remains too aimed at simplifying the complicated and collections system and raising weak. selectively various taxes Expenditure Introduction of a system of Controlled by the Office of Expenditure control proved to strict expenditure control Financial Control created in be ineffective in 1988. In 1989 through application of January 1985 and monitored by and 1990, the Goverment has quarterly ceilings on current the IMF been more successful in expenditure commitments, maintaining expenditures within excluding interest payments targets. on external debt. Limitation of wage bill in public administration to CFAF 1,000 million in 1985 and 1986. Prior authorization for purchases of petroleum products introduced in April 1985. Strict limitation of capital expenditure (CFAF 600 million in 1985 and CFAF 1.000 million a projected for 1986)Controlle Reform of the civil service, Discussion of civil sewice repo New census Of Public with the aim of reducing within Government. Further employees being completed. number from 5,500 to 3,000 reduction in number of civil over a three-year period, servants with assistance from Census of high-level World Bank. employees and reclassification of personnel completed in July 1985. Reduction in number of civil servants by 500 employees and 65 Table 8: Summary: Economic and Financial Rehabilitation Program POLICY ELEMENT MEASURES OBJECTIVEIRESULT MEASURES TAKEN DURING RICIMF PROGRAMS Reduction of domestic Establishing of timetable for Domestic arrears continue to be arrears of public sectoc by liquidatson of the outstanding a problem. CFAF 400 million during balance of CFAF 935 million. first half of 1985 To be monitored by IMF. Money and Credit Domestic credit ceilings. Monitored by IMF. Expansion for overall domestic credit programmed to be 56% in 1985, and 122% for private sector. Adoption of new interest rate strucrure in May 1985 Public Debt Creation of public debt Further strengthemng of debt Actions under T.A. Project agency in late 1984. recording, and scheduling of have improved debt monitorng Systematic recording and debt service payments, and although system stil requires reporting of public debt evaluation of debt contracting. further refinement. underway. Regular Monitored by World Bank under payments of monthly TA. Project. external debt service as established during Paris Club meeting. Amendment of statutes of Public Debc t _________________Agency. Public Investment Review of PIP for 1986 by Review of 1986 PIP Second trache condition. Program Bank. PIP has been performance and of the 1987 This condition was meA as adjusted to realistic size, PIP to be undertaken in October progress was achieved in the and doubtful projects are 1986 as part of the RIC interim preparation of the PIP during being reviewed by review and in connection with RIC implementation. However. Government the UNDh Round Table Meeting major improvements are still scheduled for late 1986 required to bring the PIP in line with development priorities and introduce the budgeting of Srecurrent costs of development and doubfulpproectstar June 28, 1991 AFICO