Burundi - Private Sector Development Project

Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10184-BU Type: (SAR) Report No. 10184-BU DIOP, M / X34369 / J-7069/ AF3IE STAFF APPRAISAL REPORT REPUBLIC OF BURUNDI PRIVATE SECTOR DEVELOPMENT PROJECT MARCH 31, 1992 Industry and Energy Operations Division South-Central and Indian Ocean Department Africa Region This document has a restricted distibution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency unit = Burundi franc (FBu) 1991 US$1 = FBu 20C (as of December 1991) Period Ayerg: 1990 US$I = FBu 171 1989 US$1 = FBu 159 1988 US$I = FBu 140 1987 US$I = FBu 124 WEIGHTS AND MEASURES Metric International Standard System I meter (m) = 3.3 feet I hectare (ha) = 2.47 acres I kilometer (km) = 0.62 mile I sq kilometer (km2) = 0.39 sq mile (sq mi) i kilogram (kg) = 2.2 pounds Ob) I liter (1) = 0.26 US gallon (gal) I metric ton (m ton) = 2,204 lb GLOSSARY OF ABBREVIATIONS AfDB = African Development Bank AGCD = Administration Generale de la Cooperation au Ddveloppement (Belgian Aid Agency) APEE = Agence de Promotion des Echanges Extdrieurs BANCOBU = Banque Comsnerciale du Burundi BBCI = Banque Burundaise de Credit et d'lnvestissement BCB = Banque de Credit de Bujumbura BEST = Burundi Enterprise Support and Training BNDE = Banque Nationale de Ddveloppement Economique (Development Bank) BRB = Banque de la Rdpublique du Burundi - Central Bank CADEBU = Caisse d'Epargne du Burundi CAMOFI = Caisse de Mobilisation et de Financement CCCE = Caisse Centrale de Cooperation Economique (French Aid Agency) CCIB = Chamber of Commerce and Industry of Burundi CEC = Commission of European Communities COOPECs = Cooperatives d'Epargne et de Credit EDF European Development Fund EIB = European Investment Bank ESAF Enhanced Structural Adjustment Facility FAC = Fonds d'Aide et de Cooperation (French Aid Agency) FNG = Fonds National de Garantie FOSIP = Fonds de Soutien a l'lnvestissement Prive FPHU = Fonds de Promotion de l'Habitat Urbain IFC = International Finance Corporation ILO = International Labor Organization IMF = International Monetary Fund KfW = Kreditanstalt fMr Wiederaufbau (German Aid Agency) MBB = Meridien Bank of Burundi MCI - Ministry of Commerce and Industry MPWUD = Ministry of Public Works and Urban Development OGL = Open General Licensing PCU = Policy Coordinating Unit PE = Public Enterprise PFI = Participating Financial Intermediaries PMU = Project Management Unit PSD = Private Sector Development PTA = Preferential Trade Agreement SAL = Structural Adjustment CredittLoan SBF = Societe Burundalse de Financement SCEP = Public Enterprise Reform Office SOCABU = Socete d'Assurances du Burundi SOFIDHAR = Societe de Financement de l'Habitat Rural SSE/APEX = Small-Scale Enterprise Project TT = Tumover or Transaction Tax UCAR = Union Commerciale des Assurances au Burundi UTNDP = United Nations Development Program UNIDO = United Nations Industrial Development Organization USAID = United States Agency for International Development GOVERNMENT OF BURUNDI FISCAL YEAR January I to December 31  FOR OFFICIAL USE ONLY KEPUBIC CBURU NDI PRfVATE SYCTOR DEVELOPENT POJECT STAFFAPPRAASAL REPORT Table of Contents CREDrr AND PROJECT SUMMARY ............................... I. INTRODUCTlON .....................1.................... II. THE BUSINESS ENVIRONMENT ..................... 2 A. Overview of the Industrial Sector ............................ 2 - Efficiency and Performance .............................. 3 - Informal Sector ..................................... 4 B. Export Orientation and Performance ............ ......... S C. Overview of the Financial Sector ......7.... .......... 7 - Financial Situation and Profitability ......................... 7 - Institutional Capacity .............. 8 III. A PRIVATE SECTOR DEVELOPMENT STRATEGY ................... 8 A. Issues and Constraints ............. 8 B. Government Strategy for Private Sector Development ................ 16 - In the Enterprise and Industrial Sector ....................... 16 - In the Financial Sector ................................. 17 This report is based on the findings of a preappraisal mission which took place in March, 1991, and of an appraisal mission which visited Burundi from June 19 to July 9, 1991. Both missions consisted of Messrs. Mohamadou Diop, Sr. Operations Officer (AF31E, mission leader and task manager), Andr6 Ryba, Banling Sector Specialist (AFTEP - financial sector), Iradj Alikhani, Industrial Economist (AP31B - industrial and business environment). Mr. Paul Ballard, Principal Industrial Economist was peer reviewer. Contributions are acknowledged from Messrs. J-F Drdau (AF31N, Sites and Services), and J. Rwamabuga, Operations Officer (RMB - business investment climate and prospects), Mr. Nguyen Tu Son, Consultant (regulatory framework), and Mme. Lucie C. Philips, Consultant (private enterprises and the new business environment) in the course of their work on the Burlndi Industrial Sector Report. Bilingual secretaial support was provided by Mme Fran9oise Schatten, Staff Assistant, (AP31E). Messrs. Francisco Aguirrrn-Sacasa (AF3DR) and Michael N. Sarris (AP31E) art the Department Director and the managing Division Chief, respectively. 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.  IV. THIE PROJECT .................................................. 19 Project Objectives and Justification ..................... ....... 19 Lessons Learned from Previous Operations ....20 Project Description and Design .................... 21 Institutional Arrangements ................................... 27 V. THE PROPOSED CRED1T AND MAIN FEATURES ................. 30 VI. PROJECTBENEFITS AND RISKS ............................. 38 VII. AGREEMENTS AND UNDERSTANDINGS REACHED .... ........... 38 :DM 2.1 Evolution of Principal Exports. 7 5.1 Summary of Proposed Procurement Arrangements .34 5.2 Estimated Project Cost .37 ANMIM 2.1 Status of Business and Enterprise Regulatory Reforms 2.2 Policy Matrix of Private Sector Developmeat Measures 2.3 Structure and Characteristics of the Financial Sector 2.4 Policy Matrix of Financial Sector Development Measures 4.1 Integrated Project Management Unit 4.2 Estimated Cost of Technicai Assistance 4.3 Sites and Services - Estimated Investment Costs 4.4 Selected Documents and Data Available in the Project File 5.1 Schedule of IDA Credit Disbursements 5.2 Bank Supervision Plan TABLES (ANNEEX 2.3) 1 Burundi Commercial Banks: Key Indicators 2 Characteristics of Main Institutions Operating Under the Banking Legislation 3 Summary Balance Sheet of Commercial Banks (Unaudited) 4 BNDE - Summary Balance Sheet (Unaudited) 5 SBF - Summary Balance Sheet (Unaudited) 6 Reported Profitability of Banking Institutions 7 Distribution of Demand Deposits by Institution 8 Distribution of Term Deposits by Institution 9 Structure and Evolution of Commercial Bank Deposits 10 Sectoral Distribution of Credits to the Economy 11 Structure and Evolution of Credits Distributed  Credit d ProMect Summary lBoMrower: Republic of Burundi. BneficlAdir^ Central Bank of Burundi (BRB), Participating Financial Intermediaries (PFIs), Private Enterprises, Ministry of Commerce and Industry (MCI), Ministry of Public Works and Urban Development (MPWUD), Ministry of Energy and Mining, Ministry of Justice, and Public Enterprise Reform Office (Service Charge des Entreprises Publiques - SCEP). Amoun: SDR 12.4 million (US$17.0 million equivalent). Terms: Standard IDA terms, with 40 years maturity. Prolect Comnonen and Onlendin TeM: The project consists of a line of credit for productive investments, industrial infrastructure, improvements in the business environment and in financial intermediation, and technical assistance in support of private sector development. (i) LiM of Credit. The Borrower would pass on US$11.0 million equivalent as a loan to the Central Bank (BRB) at the prevailing market determined average yield of the auction market for three-month Treasury Certificate (IC), minus an amnual administrative fee of at least 1.0 percent of the outstanding subloans refinanced under the Credit. This fee would be reviewed periodically to ensure that the operating costs of the Project Management Unit (PMU) within the Central Bank are covered. The loan to the Central Bank would be for 15 years, including a grace period of 5 years. The Central Bank would onlend the funds to qualified PFIs at the TC average yield, with a flexible amortization schedule reflecting the aggregate maturities of subloans extended by intermediaries. Onlending interest rates charged by PFIs to sub-borrowers would be variable and market-determined. The onlending rates would be reviewed periodically to ensure that they continue to reflect market rates. The foreign exchange risk would be borne by the Government. (ii) Sites and Servies, US$3.5 million through the MPWDU for an investment program in astes and services in the undeveloped industrial zone of Bujumbura, the capital city, to be recovered through the sale of industrial plots. (iii) tnic Assn. US$2.5 million to be passed on as a grant by Government to implementing institutions for a multifaceted training and technical assistance to (a) participating intermediaries, and private entrepreneurs through the PMU, with emphasis on project implementation,  - ii - marketing and export promotion; (b) the Central Bank and banks to implement staff training and capacity building programs, to improve banking supervision, economic and monetary analyses as well as credit evaluation; (c) Ministry of Commerce and Industry for a Policy Coordinating Unit (PCU), (d) Ministry of Energy and Mining to assist in reforming mining investment and regulatory policies; (e) SCEP for legal reform studies, and (f) Ministry of Justice and Tribunal of Commerce for staff training and provision of office equipment and technology to improve its efficiency and speed in processing business litigations. Beneflts and Risks: Major expected benefits would stem from an enhanced supply response to ongoing structural adjustment reforms through increased local and foreign private investment that would contribute in attaining Burundi's export diversification and growth objectives. Rapid response by private sector investors, encouraged by improved business conditions, would create the employment opportunities that are critical for the success of adjustment. The process of fully revamping the regulatory framework, and the implementation of fiscal and labor policy reforms may experience delays during the political transition, thereby slowing investments. The consensus built around the need for effective reform of the business environment and the strong voice of a rapidly emerging private sector should minimize this risk and ensure thae effective implementation of the project. Estimatedr Prie Cos: LO9'al Foreian Total -(US$1,000)