Zambia - Privatization and Industrial Reform Technical Assistance Credit Project

Document of The World Bank FOR GiFIclAL USE ONLY MICROFICHE COPY Report No. P- 5804-ZA Type: (PR) DAFFERN, E/ X34507 / J11097/ AF6IE RoitNo. P-5804-ZA MEMORANDUM AND RECOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO US$10 MILLION TO THE REPUBLIC OF ZAMBIA FOR A PRIVATIZATION AND INDUSTRIAL REFORM TECHNICAL ASSISTANCE CREDIT JUNE 3, 1992 This document has a restricted distribution and may be used by recipient only in the performance of their official duies. Its contents msy nOt otherwise be disclosed witbout World Bank authorization.  CURRENY EQUIVALENTS Currency Unit = Zambian Kwacha (K) US$1 = 130K (May 1992) 1 million K = $7,700 ABBREBATIONS BOZ - Reserve Bank of Zambia EEC - European Economic Community ERC - Economic Recovery Credit GIZ - Deutsche Geses t Fur Technische Zusanmmenarbeit MMD - Movement for Multi-Party Democracy NORAD - Norwegian Agency for Development Cooperation PFP - Policy Framework Paper PIRC - Prdvazation and Industrial Reform Credit SDR - Special Drawing Rights UNDP - United Nations Development Program USAID - United States Agency for bnternational Development zCCM - Zambia Consolidated Copper Mines ZESCO - Zambia Electric Supply Corporation zIMCO - Zambia Idustrial and Mining Corporation FISCAL YEAR Government lamnary to December Zimco Parastatals April to March  FOR OFMCL USE ONLY ZEBIA PRIVATIZATION AND INDUTTRIAL 1111K TSECUNICAL ASSISTANCE CREDIT CREDIT AND PROJECT SUI4ARY Borrovers Republic of Zambia Beneficiary: Republic of Zambia Credit Amount: SDR 7.3 million (US$10 million equivalent) Terms: Standard IDA terms with a 40-year maturity, including 10 years of grace. -Fiancing Plan: IDA US$10 million Government US$ 1 million Economic Rate of Return: Not applicable Staff APpraisal Report: None This document has a restricted distribution and may be used by recipients only in the performane j of thett official duties. Its contents may not otherwise be disclosed without Word Bank authorizatjn.  MEMDRAUDUM AND RECOW MENDATION OF TIE PRESIDENT OF TEE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO ZAMBIA POR A PRIVATIZATION AND INDUSTRIAL REFORM TECENICAL aSSISTANCE CREDIT 1. I submit for your approval the following memorandum and recommendation on a development credit to the Government of Zambia for SDR7.3 million, the equivalent of US$10 million, on standard IDA terms with a maturity of 40 years to help finance a project for Privatization and industrial Reform Technical Assistance. This project provides support for the implementation of policies and activities that the Government of Zambia has pledged to undertake, in its Letter of Development Policy to the Bank of May 28, 1992, and that form the object of the Privatization and Industrial Reform Adjustment Credit (PIRC) that is beitg processed concurrently. 2. Background. Zambia's economy suffers from severe distortions that will require a major adjustment effort over an extended period. Its major characteristic is heavy dependence on copper, and the dualistic structure that has grown up around this dependence. In addition, as a legacy of its past policy of nationalization, the economy is now dominated by parastatals. For the first decade after independence rising copper prices helped the economy to grow at an average rate of four percent. Since 1975 however, falling copper prices, deterioration in the terms of trade, and failure to develop a diversified economy caused overall economic decline. Attempts to support continued consumption through borrowing failed to contribute to economic growth and created an exceptionally severe debt problem. Per capita GDP is now more than a third below its 1978 level. 3. After several unsuccessful efforts, in the late 1970's and early 1980's, at reforming the economy, Zambia adopted a comprehensive adjustment program in 1985 with Bank and IUF support. This too ran into difficulties. In 1987 Government abandoned it and reversed many of the reforms undertaken in the previous two years; continued economic decline and foreign exchange shortages led Government to stop most external debt service; consequently the Bank suspended disbursements to Zambia. After a hiatus, dialogue with the IMF and the Bank resumed in late 1988, and in a major shift in policy, Government in June 1989 abolished all price controls except those on mealie meal, maize, fertilizers, petroleum and public utilities. Agreement with the Bank and IMF on a PFP (for 1989-91), and a Fund monitored program for 1990, followed. A second PFP (for 1991-93) was reviewed by the Conmittee of the Whole in March 1991 when Bank arrears were cleared. A new Economic Recovery Credit (ERC) for US$210 million was approved on March 5, 1991. Also, Zambia began a rights accumulation program that was approved by the IMF Board in April 1991. In response to public pressure, a new constitution was introduced allowing for multi-party elections. However, in the run-up to the elections, Government adherence to the agreed economic reforms began to slacken. Informal price controls were introduced and public expenditure got out of control. Because of poor performance donor support for Zambia was delayed, Government defaulted on its payments to the Bank and as a result disbursements were again suspended in September 1991. 4. In the October 1991 elections, the opposition MMD party (Movement for Multi-party Democracy) was elected to office with a strong mandate for a reform program that includes moving to a market economy, privatization of virtually the entire parastatal sector and restructuring the utilities that will remain in  -2- public ownership. The new Government has made a dei -mined start in the 1992 budgets comprehensive reforms have been adopted aimed a 'inging the budget into balance, encouraging exports, liberalizing the economy, :utting back the civil service and privatizing most of the parastatal sector. As a result donor support for Zambia has resumed: arrears to the Bank have been cleared, the suspension lifted and the second tranche of the ERC disbursed. 5. Rationalization of the parastatal sector, through a comprehensive program of reforms and privatization, and the development of a dynamic private sector, through restricting Government's role in the economy to the provision of essential services and the creation of an appropriate enabling environment, are the key parts of the Government's economic strategy. Zambia's industrial and commercial sector is dominated by parastatals; they account for 50 percent of industrial (non-mining) output. Many are inefficient, quasi-monopolies. The Zambia Industrial and Mining Corporation (ZIMCO), the state holding company, is responsible for some 120 parastatals, ranging from the giant mining company Zambia Consolidated Copper Mines (ZCCM) to small enterprises. There are also parastatals outside ZIMCO, but none is significant. Most ZIMCO parastatals became profitable after the 1985 reforms but then their performance deteriorated; between 1985 and 1989 the ZIMCO group received hidden subsidies of about US$455 million, compared with dividends paid to the Government of US$22 million. Government's strategy for rationalizing the sector is to divest itself of those activities which the private sector can do at least as well and to limit parastatals to a core of about six public utilities, together with some copper interests, and to take measures to improve their performance. Government's plans for privatization are well advanced. A privatization law, to be presented to Parliament before effectiveness of the proposed Credit, establishes a Privatization Agency to be responsible for the sale of companies; the Agency would operate independently but under Government supervision. A technical committee has been at work for several months preparing companies for sale. Also, some parastatals have started to reduce staff and two of the non-viable companies have been liquidated. The state mon,jpoly in insurance has been partially abolished; those in pensions and housing loans will be abolished soon. 6. Zambia has a sizeable private sector which, with proper support, could be vibrant. The Government recognizes that to reinvigorate the economy, it needs to improve the environment for the private sector. First priority is to modernize business-related laws, curb monopolies, and implement new investment laws that define clearly the rights and obligations of investors and limit Government's role to issues of providing essential infrastructure and services, safety, environment and social safeguards. Export promotion activities require effective implementation. While Zambia has a relatively well functioning banking system, it is important that the financial sector be deepened and that a stronger capital market, that can mobilize term investment resources, be developed. 7. Lessons Learned from Previous Bank/IDA Experience. To date there have been three freestanding Technical Assistance Projects in Zambia. The first (Cr. 873 approved in December 1978 for US$5.0 million) aimed to strengthen Government's planning and project preparation capability; this was expanded during project implementation to assist improve general economic management. After a slow start, project implementation picked up and the project was completed in 1987. The second TA Credit (Cr. 1679 approved in April 1986 for SDR7.3 million) was designed to assist Government enhance its capacity to carry  - 3 - out macro-economic analysis, and to strengthen its planning and budgeting system and its management and accounting skills. Project scope was later broadened to include assistance in parastatal reform. While TA II provided critical support to Government in all the intended areas, its implementation suffered from the repeated suspensions in disbursements. Funds under this Credit are now almost fully committed. A Technical Assistance Credit to the mining sector, approved in June 1991, aimed at improving efficiency of ZCCM. The lessons of these operations reveal that there i4 a needt (i) to focus the scope on a limited number of related areas; (ii) to ascertain Government's commitment to project objectives and design; and (iii) to agree at the outset on clear arrangements for responsibility for implementation. The experience of other countries, incorporated in the proposed project, also indicates that comprehensive privatization programs take a long time to implement successfully, that they require highly specialized skills and expartise, often depending on the specific companies being privatized, and that this needs to be taken into account in the design and costing of these projects. 8. Project Objectives. The proposed Privatization and Industrial Reform Technical Assistance Credit (PIRTC) provides complementary support for the reforms to be undertaken under the PIRC, by strengthening rhe capabilities of the ministries and other institutions responsible for the parastatal reforms and privatization program, and for the macro-economic and institutional reforms needed to improve the environment for a thriving private sector, and by assisting in training Zambians in these areas. 9. Prolect Description. The proposed Credit would finance consultants' services, training, equipment and services for the following components: (i) technical assistance and equipment for the development and implementation of a program of privatization of about 105 parastatals; this includes for preparation and restructuring of companies to be sold, valuation and establishing a realistic sale price; and negotiations for sale; (ii) technical assistance and eqiipment to introduce measures for development of the private sector in the country; including introduction of new laws, policies and programs and the establisbment of new, and strengthening of existing, institutions and improvements of the legal system; (iii) technical assistance and equipment to develop and implement reforms in the six utilities which will remain in the public sector; (iv) technical assistance and equipment to formulate and carry out a Social Action Plan to provide a safety net for those affected by the reforms under PIRC; and (v) training of Zambian officials in the relevant aspects of this program. Detailed descriptions of the project components are provided in Annexes IA and B. 10. A breakdown of costs and the financing plan is shown in Schedule A. Amounts and the method of procurement, and the categories and schedule of disbursements are shown in Schedule B. A timetable of key project processing  - 4 - events and the status of Bank Group Operations in Zambia are given in Schedules C and D, respectively. 11. Proect Implementation. The Ministry of Finance, through the Economic Analysis and Reports Unit, will have the overall responsibility for administering the Credit and coordinating activities supported by it and by the PIRC: the agreement of Government to strengthen the unit by an internationally recruited advisor was confirmed at negotiations. The Ministry of Commerce, Trade 'md Industry will be in charge of the aspects relating to parastatal reform and will oversee the Technical Committee for Privatization which, pending the establishment of the Privatization Agency, will have primary responsibility for all work on privatization. A cross-ministerial task force, including the Ministry of Commerce, Tradie and Industry and the Ministry of Legal Affairs, has been established to coordinate the work on legal reform. These arrangements, as well as draft TORs for the main tasks supported by the Credit, were confirmed and agreed upon at negotiations. 12. Project Sustainabillty. The project provides limited long term assistance and training to Government to support its program of privatization (which is expected to take about five years to accomplish) and parastatal reform, and for t'he reforms necessary for private sector development. The bulk of the funds out of the Credit however are expected to be used to hire short-term specialist expertise for the valuation and sale of individual companies. 13. Rationale for IDA Involvement. The PIRC provides critical support to the main thrust o. the Government's economic strategy, i.e., the need to curb sharply and redefine Government's role in the economy, and spur efficiency in the productive sector, by a compiehensive program of privatIzation and parastatal reform. The proposed Credit will enable Government to obtain the expertise and assistance required to implement this program effectively and to prepare for the following phases of the economic restructuring plan. The project design incorporates lessons from past experience to ensure that transfer of know-how takes place. Together with the training and studies, this will provide the foundation for the development of efficient institutions and capable management in Zambia. Finally. IDA's involvement will help ensure consistency between the objective of the PIRC program and the technicail assistance program. 14. Actions Agreed. At negotiations agreements were reached/confirmed on the following: (a) administrative arrangements for the proposed project, including the hiring of an internationally recruited advisor to the Economic Analysis and Reports Unit; (b) draft TORs for the main studies and the long-term consultants proposed to be financed out of the project; (c) procurement of technical assistance and related equipment required to implement project components, accounting, disbursement and reporting requirements for the Credit; (d) regular (yearly) reviews of progress in implementing the privatization program and on targets set for the next year; (e) assignment of counterpart staff to every long term consultant employed under the project; and (f) Conditions of Effectiveness--the recruitment of the advisor to the Economic Analysis and Reports Unit of the Ministry of Finance and enactment of the Privatization Act. A mid-term review would be held by end-1993 to assess progress in achieving project objectives; this would also review (i) progress in implementing the privatization program; (ii) the effectiveness, and ability of the Privatization Agency to operate independently and with transparency; (iii) the status of the  - 5 - various legal reforms initiated under the PIRC; and (iv) the achievements in transferring knowhow from the long term consultants to local counterparts. 15 Environmental Aspects. Preparation of each company for privatization would include an assessment of its potential environmental impact; funds out of the Project could be used to finance such studies. The Project itself has no direct environmental impact. 16. Program Oblective Categories. The project provides critical support for parastatal reform and privatization, to enhance efficiency and reduce the burden on Government, and for private sector development. These are the key elements of the Government's strategy for stabilizing the economy and reviving growth. 17. Justification and Risks. The project will help improve the Government's capacity to manage complex economic reforms and assist in implementing a comprehensive program of restructuring and privatization of a large parastatal sector. Without the project, on-time satisfactory implementation of PIRC would face difficulties. The operation faces some risks given Zambia's history of weakness in program implementation and the enormous burden PIRC will place on Government's limited resources. These risks are mitigated by the steps Government is taking to strengthen its central coordination, and monitoring and implementation review process. Regular meetings are being set-up and the technical and other steering committees are being strengthened considerably. Organizational arrangements are being put in place in the implementing agencies to ensure that Zambia can benefit fully from the technical assistance to be provided under the project. 18. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Lewis T. Preston President Attachments Washington D.C. June 3, 1992  -6- SCHEDULE A PRIVATIATZOR AND INDUST9X&L BFOR TUCWNUCAL ASSISTANCE PROJECT ESINT3 COSTS AND IRRUCING PL&W Forelgn Local A. Project Costs: Cost Cost Total - (s5$ min.) - Private Sector Development 0.9 0.3 1.2 Privatization 7.5 1.0 8.5 Parastatal Reforms 0.6 0.3 0.9 social Action Program 0.2 0.2 0.4 Total Costs 1*% D. FinancPS Plans foreiqu Local Total IDA 9.2 0.8 10.0 Government 0.0 1.0 11.0  -7- 8CHEDULE B Page 1 of 2 2-ZA PRSV3TIXSTZO AND MM RM01 TSCUICAL MSSISTANC PROJ3CT iaoc_uSmm ImEQD AIID D18USNUTs1 A. Procturent Projet CaLtegries e ethod ICDN LCDc1 le Other Total Technical Assistance 10.0 10.0 (9.0) (9.0) Vehicles, Services and Iquipment 0.3 0.3 0.4 1.0 10.3) (0.3) (0.4) (1.0) TOAL 0.3 0.3 0.4 10.0 11.0 (0.3) (0.3) (0.4) (9.0) (10.0) 11 IDA contribution shown in parentheses 2/ Figures have been rounded. 8t International Competitive Bidding t/ Local Competitive Bidding 6/ International Shopping 6J Local Shopping  8CIEULD B Page 2 of 2 a-IA PRXVATS&!TIOSI AND RUt1!IA 1M4 TUCBWIOAL ASSISTANOE PROJ3C1T D. Disbursements Amount of Credit Percentage of xpenditures (Us$ ailion) to be f.nacd Technical AssLitance and TraLning 9.0 100% of expenditures Vehicles, Equipment & Services 1.0 100% of expenditures Total Credit Amoun;. 10.0 Estimted IDA Disburmeints IDA Fiscal Year 1993 1994 1995 1996 1997 -, (S$ mn) .) Annual 2.0 3.0 2.5 1.5 1.0 Cumulative 2.0 5.0 7.5 9.0 10.0  -9- SCHEDULE C Timetable of key Project Processing Events (a) Time taken to prepares Nine months (b) First IDA Mission: August 1991 (c) Appraisal Mission Departures March 1992 (d) Negotiations: May 1992 (e) Planned Date of Effectiveness: July 1992 (f) List of Relevant PCRs and PPARas Technical Assistance Project - PCR - 9702 The Project was prepared bys Mr. Eric Daffern, Principal Energy/Ind. Specialist Task Manager Mr. Victor Agius, Principal Financial Specialist Mr. S. Al Habsy, Counsel Mr. J. Xaruga, Consultant  - 10 - SCHEDULE D (a) ZNWA Statw Of Bnk Graw Oprttomn In ZABIA PFOfR25 - Suury Statent Of Leaos an IDA Credits (LA data as of 4/30/92 - MIS data as of 06/03/92) .................................................. ........................................................ By Cmtry Country: ZWBIA Amont in US millicn (tless caellatim) Lowm or Fiscal tkdis- Closing Credit No. Year Sorrower Purpse B.n IDA bwsed Date ~~~~~~~~~~~~~~ ........ .... ...... .... .... ....... ..... ...... ....... Credits 19 Credits(s) clse 46.76 C14370-ZAN 1984 ZIAIIA FORESTRY III 22.40 7.79 09130/92(3) C15290-ZAN 198S ZAVIA FISNERIES 7.10 7.73 12/31/91(R) C15SO-ZAW 19S ZAMBIA RUWS.IV 20.00 23.8S 063O0/92(t) C16790-ZAN 1986 ZA1BIA TAS it 8.00 6.96 12/31/92 C17430-ZA 1987 ZAMBIA WFFEE It 20.40 22.48 06/30/95 Ci?460.ZAN 1987 ZAKBIA AGt. RES.& EXT. 13.00 13.29 12V31/95 C17530-ZAN 1987 ZAK9IA D0Z III 10.00 11.37 06/30/92 C22690-ZAN 1991 Z4MBIA MIHING TAS 21.00 20.37 06/30/97 C22730-ZAN 1991 ZAMBIA SOCIAL RE!CERT PNW 20.00 16.16 07/31/97 TOTAL neatrw Credits u 9 141.90 130.00 Lou 28 Lout(s) cLosed 5S2.13 All closed for ZAMBIA TOTAL nseatr Lu t 0 TOTAL"* 582.13 609.66 of WAich repaid 355.58 1.06 TOTAL held by Sai* & IDA 22.55 608.60 Armmt sold 28.5S8 of tidch repaid 28.58 TOTAL undisbwlas 130.00 Notes: ..................... * Not yet offectiwe lNot yet sined Total Aproaed, Repamts, ad Wutstandifg blt rqeent both ctive ad Inactive Lom ad Cred .s. (3) fndicates for.lty rwised Closing Date. CS) indicat SALISECAL Loa s d Credits. The not Aprovd ed SaB R _p)wut are historical wlvue, ll othws am rket valtu. The Stping, Effective, wd Closing dates e d u pn the Lao epawUnt offical dat ad re rat tam from th Task Budet file.  - 11. - SCHEDULE D (b) ZAMBIA Statement of IFC Irvestnrnts as of March 31. 1992 Invest Type of Number FY Obligor Business Loan Equity Total ..........................U.................... US$ Million . ---.- 216.ZA 1972 250-ZA 1973 Zambia Bata Shoe Shoes 2.1 0.2 2.3 307-ZA 1975 394-ZA 1978 Century Products Ltd Plastic Wrap 0.9 0.2 1.1 324-ZA 1976 Dev't Bank of Zembia Dev't Finance 0.5 0.5 483-ZA 1980 600-ZA 1982 Z C C N Mining 53.2 53.2 527-ZA 1980 721-ZA 1985 Kafue Textiles Textiles 10.7 10.7 632-ZA 1982 Ethanol Co of Zambia Chem/Petrochem 3.7 0.6 4.3 1984 1991 Zasbfa Hotel Prop Tourism 22.4 22.4 743-zA 1985 Mpongwe Dev't Co Food/Food Proc 1.8 0.3 2.1 1001-ZA 1988 Gweabe Valley Dev't Food4Food Proc 3.7 0.8 4.5 1132-ZA 1989 Hasetock (Zeabia) Food/Food Proc 8.2 8.2 Total Gross Commitments 106.7 2.6 109.3 Less: Cancellat1ins, terminatons, exchange adjustments. repaynents, write-offs, and sales 63.7 1.6 65.3 Total commitments held by IFC 43.0 1.0 44.0 Total Undisbursed 6.5 0.0 6.5 Total DIsbursed 36.5 1.0 37.5  - 12 - ANNEX S Page 1 of 7 TECUNICAL ANMEXES TO THE MEMORANDUM AND RECOMM4NDATION OF THE PRMSIMIET FOR A PRIVATIZATION AND INDUSTRIAL R$FOXM TICCNICAL ASSISTANCE PROJECT Section A. Detailed Project DescriDtiol 1. The Government of Zambia has embarked on an ambitious program of public enterprise reform, including privatization of most of its industriallcommercial portfolio (about 105 companies) with the aim of reducing the fiscal and management burden of Government and of enhancing overall sector efficiency and competition. As a corollary, Government recognizes the urgent need to improve the general business environment, to attract new investment, spur exports and in general improve the performance of the industrial sector. This will necessitate modernizing much of the existing laws relating to business, strengthening and deepening the financial markets and developing the necessary institutional infrastructure. Given its limited capacity, Government has requested the support of IDA and other donors for assistance in the areas outlined below: Parastatal Reforms 2. Government has clearly stated its intention to reduce sharply its involvement in business activities; thus, except for essential utilities, all existing parastatals eventually would be privatized or liquidated. In the interim, only essential repair type investments in these would be sanctioned. Considerable work on the parastatal reform program is either already underway or about to commence. A review of the relationship between ZIHCO and its subsidiaries is now almost complete. The study's main recommendation calls for liquidation of ZIMCO and its subsidiaries as parastatals, except for the six utilities which would be retained in the public sector. The proposed project will support the implementation of these recommendations. Studies for restructuring the Post and Telecommunications Corporation and Zambia Railway are being financed under other existing IDA Credits. A study for strengthening Zambia Electricity Supply Corporation (ZESCO), financed by HORAD, is expected to conmmence by mid-1992. The on-going activities under the parastatal reform program would be supplemented under the Credit by provision of technical assistance to help prepare business plans and performance standards for the six utilities. The Credit would also provide funds for preparing an overview, and a plan of action, for dealing with non- ZIMCO parastatals. The Government of Zambia would provide the resources needed for revaluation of assets of the utilities. One of the major reforms supported under PIRC is the establishment of a public utilities regulatory commission and systems of automatic price adjustment for the utilities. The proposed TA Credit will finance the necessary studies and the foreign exchange costs of establishing the commission.  - 13 - ANNEX I Page 2 of 7 Privatization 3. Preparation for the privatization program has been underway for sometime. To manage the program, the Government has established two committees; a Steering Committee responsible for formulating, directing and overseeing the implementation of the privatization program, and a Technical Ccmmittee which essentially constitutes the management team responsible for day to day activities of the program. These interim arrangements will be replaced with an organizational setup to be provided through legislation in the form of a Privatization Act. The Act would provide, inter alia, for a new agency which would be fully responsible for undertaking all activities related to the process of privatizing state-owned enterprises. It is expected that this legislation would be enacted in June 1992. (At negotiation it was confirmed that the enactment of the Privatization Bill would be a condition of effectiveness of the proposed Credit.) When established, the new agency will replace the Steering Committee and, at that time, the Technical Committee would be given a new identity. 4. ZIMCO is to be transformed into an investment holding company whose task would be to prepare the companies for sale by reducing, and if necessary cleaning-up, the contractual, financial and legal obligations of the companies to be privatized. Pending establishment of the new privatization agency, ZIMCO will provide funding and other support to the existing committees. 5. The process of privatization will demand large amounts of financial and manpower resources. Based on the expected privatization timetable (some 105 enterprises to be privatized over a five-year period) estimates of manpower resources required to carry out the privatization activities have been made. These estimates also reflect the analysis of the privatization process into various functions and divisions. 6. The starting point for the privatization program will be the establisbment of plans and timetables for the privatization (or possibly liquidation) of individual companies. Once a company has been identified for sale it would need to be prepared for divestment; this would involve establishment of a fair value and, in some cases, financial restructuring and/or division into operating units that may be sold separately. The sale process itself would be handled in a variety of ways; (i) through flotation of shares on the stock exchange; (ii) by direct negotiations to a single or a group of individuals or an organization; (iii) through management buyouts; and (iv) sale to employees or other individuals. All of these activities would require expert knowledge in many different areas of management, technical, and support services. 7. The technical assistance package would include provision for long term advisors, and short term experts, as follows: (i) an advisor to the Economic Analysis and Reports Unit, which is responsible for overseeing the coordination and implementation of  - 14 - ANNEX x Page 3 of 7 all aspects of the PIRC and the PIRTC; this advisor would provide the assistance needed to ensure timely implementation, follow-up and reporting on all aspects; (ii) a privatization Manager/Advisor to guide and direct the program; (iii) a Corporate Finance/Merchant Banker to assist in financial restructuring of companies to be sold and advising on appropriate method of sale; (iv) an accounting and valuation specialist who would be responsible for arranging company valuations, preparing prospectuses and evaluating bids received; and (v) short term experts and consultancy for company (and asset) valuation, sale negotiations and public flotations, legal affairs, management/employee buyouts, publicity and other fields related to privatization implementation. 8. In addition to the funds earmarked under the Credit, several donors are also providing parallel funding for diverse aspects of the privatization effort. UNDP would finance some of the local staff support to the Privatization Agency. GTZ has undertaken to prepare 15 companies for divestment. UK and EC are providing technical assistance for restructuring Zambia Airways. USAID is contributing towards expert services and equipment for preparing and restructuring companies for sale, for valuation of their assets and for securing the advisory services of an Investment Bank as needed. Private Sector Development 9. The overall business environment in Zambia in the years following independence has been quite inimical to the development of the private sector. The new Government is aware that much needs to be done in this area, to ensure the development of a thriving and vibrant private sector and that this will require many changes in the relevant policy and institutional framework. The Credit would provide funds for the followings (a) most of Zambia's commercial laws are outdated and have little relevance to present-day commercial needs. Thus it is necessary to review the existing laws and recommend suitable changes based on current business practices and requirements. Consultant services are being provided under the Credit to review applicable laws including the Companies Act, the Exchange Control Act, Taxation Act and the Banking Act, and recommend suitable modifications; (b) consultants would be engaged to determine the extent to which the business community is receiving Government cooperation and support, and based on experience elsewhere, recommend a suitable  - 15 - ANNEX I Page 4 of 7 program of action to bring about improvements in the capacity of Government to meet the legitimate needs of the business community; (c) some work has already been done to define the objective and scope of a possible competition law. Further support is being provided under the Credit to engage consult%nts to conclude this work. Specifically, the consultants would (i) identify existing monopolies and recommend actions for their removal: and (ii) if considered appropriate, recommend the establishment of a monopolies commission; and (iii) identify the staffing and equipment needs of such a commission; (d) a sound banking and financial system will be critical for the development of the private sector and of the newly privatized companies. The Credit would provide for technical assistance to assist in redrafting the Bank of Zambia (BOZ) Act to give BOZ the necessary authority in the area of prudential regulation and supervision of all the banking and other financial institutions. Technical assistance would also be provided to strengthen BOZ's own capability to undertake effectively its enhanced supervision and monitoring role. There is also a need to review the extent to which the non-bank financial sector should be regulated and controlled. Funds are being provided for a study of the non-bank financial sector. drafting of new laws as necessary, and to design and recommend an appropriate regulatory framework; (e) Government intends to promote the development of a Stock Exchange as early as possible. However it is unlikely that this will be in place in time to handle the first public issue of shares. Thus, an interim arrangement to meet the immediate needs is necessary. Under the Credit expert assistance would be provided for the establishment of arrangements for the sale and purchase of shares; it is expected that initially this would be through commercial banks. Technical assistance would be needed also to foster the development of money markets and capital markets and prepare a *rule book*, to provide guidance on matters such as rights of investors (particularly minorities), role of stockbrokers and provide for supervision by BOZ. 10. In addition to the technical assistance being provided under the Credit, donor financing is being made available for technical assistance to: (i) make the Investment Center, established in 1991, fully operational to enable it to handle effectively investment licenses and carry out investment activities; (ii) prepare laws, rules and regulations for establishment of a stock exchange;  - 16 ANNEX I Page 5 of 7 (iii) introduce measures to promote small-scale enterprises; this includes by strengthening the Small Industries Development Organization and improving credit accessibility to a wider section of small entrepreneurs; (iv) identify the causes for poor performance of the Export Board and determine what, if anything, can be done to make its operations more successful; and (v) develop options for further compression of tariffs, with the objective of eliminating protection ultimately, and to examine alternative sources of revenue. Social Action Program 11. One of the critical aspects of privatization and other reforms envisaged under PIRC is the effect the program will have initially on vulnerable groups. The Credit would therefore fund consultant services to reinforce and assist in implementing a social action plan to provide an adequate safety net for those affected by the reforms. It would also finance the design and provide initial materials for counselling guidance and re- orientation associated with the redundancy programs. Section D. Proiect Administration and Implementation 12. Administration. The Ministry of Finance, through the Economic Analysis and Reports Unit, will have overall responsibility for the administration of the Credit and for coordinating all activities supported by it and also by the PIRC; the agreement of Government to strengthen this unit by an internationally recruited advisor was confirmed at negotiations. The Technical Committee for Privatization, pending the establishment of the Privatization Agency, will be in charge of drawing up detailed terms of reference for the consultants, shortlists and, as necessary, the preparation of bid documents for the consultant services related to privatization. The Ministry of Commerce and Industry (which oversees the Technical Committee) will also be in charge of those aspects relatirg to parastatal reform (in collaboration with ZIMCO). This Ministry will also work closely with the Ministry of Legal Affairs for the assistance relating to changes in the legal framework. A cross-ministerial task force has been established for this purpose. These arrangements will be confirmed at negotiations. Draft TORs for the main studies to be supported under the Credit were reviewed and agreed at negotiations. These are attached. 13. Procurement. Consultants and consulting firms will be recruited internationally on the basis of shortlisting. Their selection, qualifications, experience and terms of employment will be subject to standard IDA review procedures dS set out in World Bank Guidelines.  - 17 - ANNEX I Page 6 of 7 Vehicles, equipment and services are xpected to cost, in the aggregate, about US$1 million. Of these the vehicles (US$0.3 million) will be procured under contracts awarded on the basis of International Competitive Bidding. At least US$0.3 million of the equipment and services would be packaged and procured under contracts awarded on the basis of Local Competitive Bidding and the rest ($0.4 million) on the basis of International Shopping (where comparison of price quotations will be obtained from at least three suppliers from not less than two countries) or alternatively, for contracts below US$50,000, on the basis of Local Shopping. The method of procurement is shown in Schedule B. All terms of reference, short lists, consultant contracts, and contracts with a value of US$100,000 or more will be subject to prior IDA review and approval. Items not subject to prior review will be subject to selective post-review during supervision missions. Post award procurement documentation for all contracts will be forwarded to IDA, as set out in the Guidelines, prior to disbursement. A total of about 90 percent of procurement would be subject to prior IDA review. 14. Disbursements. Disbursement will be mnde against standard Bank documentation. The proceeds of the Credit will be disbursed against 100 percent of foreign expenditures for experts and consultant services, training, equipment and supplies. Up to US$0.8 million of the Credit would be available for disbursement against 100 percent of local expenditures for the local costs of experts and for locally procured supplies and services. In order to ensure the timely provision of funds available to finance the costs of services and goods to be procured under the project, the Ministry of Finance will open a Special Account in a banking institution acceptable to IDA in the smount of US$500,000. Funds in the special account will be available to finance only eligible expenditures under the project. The Special Account would be replenished regularly on the basis of documentary evidence as to payments made from the account for goods and services required for the proposed project. Expenditures for less than US$25,000 would be based on statements of expenditures. These arrangements were confirmed at negotiations. The estimated schedule of disbursements is shown in Schedule B. The project is expected to be completed by June 30, 1997. The closing date is set for December 31, 1997. 15. Advance Contracting and Retroactive Financing. Initial costs, for preparation of the privatization program, have been funded out of a PPF approved in 1991; these costs will be reimbursed out of the proceeds of the proposed Credit. Retroactive financing is not anticipated under this Credit. 16. Accounting, Auditing and Reporting. Auditing would be required on a yearly basis for expenditures related to the Project with particular attention to expenditures reimbursed against statements of expenditures. Audits would be performed by qualified auditors acceptable to IDA and would be sent to IDA within six months of the end of each financial year. Furthermore, the Ministry of Finance will submit quarterly reports on project implementation progress, and a final evaluation report on implementation  -18 - ANNEX I Page 7 of 7 experience and project results within six months of the Credit closing. These arrangements were confirmed at negotiations. 17. Aareements Reached. At negotiations agreements were reached/confirmed on the following: (a) administrative arrangements for the proposed project, including the hiring of an internationally recruited advisor to the Economic Analysis and Reports Unit; (b) draft TORs for the main studies and the long-term consultants proposed to be financed out of the project; (c) procurement of technical assistance and related equipme:.t required to implement project components, accounting, disbursement and reporting requirements for the Credit; (d) regular (yearly) reviews of progress in implementing the privatization program and on targets set for the next year; (e) assignment of counterpart staff to every long term consultant employed under the project; and (f) Conditions of Effectiveness--the actual engagement of the advisor to the Economic Analysis and Reports Unit of the Ministry of Finance and enactment of the Privatization Act. A mid-term review would be held by end-1993 to assess progress in achieving project objectives; this would also review (i) progress in implementing the privatization program; (ii) the effectiveness, and ability of the Privatization Agency to operate independently and with transparency; (iii) the status of the various legal reforms initiated under the PIRC; and (iv) the achievements in transferring knowhow from the long term consultants to local counterparts.  - 19 - Annex I-C(i) Terms of Reference for Privatization Manager/Advisor The Privatization Manager/Advisor would occupy a key position in the privatization unit, respons