Rwanda - Private Sector Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11388-RW STAFF APPRAISAL REPORT RWANDESE REPUBLIC PRIVATE SECTOR DEVELOPMENT PROJECT AUGUST 18, 1993 Industry and Energy Operations Division Country Department III Africa Regional Office 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.  CURRENCY EOUIVALENTS Currency unit = Rwandese Frmnc (RwF) 1989 USS1 = RwF 80 1990 USS1 = RwF 82 1991 US$1 = RwF 125 1992 US$1 = RwF 125 (lIst semester) 1992 USS1 = RwF 140 (2nd semester) 1993 US$1 = RwF 145 (lst semester) GLOSSARY OF ABBREVIATIONS AEF = Africa Entreprise Fund AGSAC = Agriculture Sector Adjustment Credit BACAR = Continental African Bank of Rwanda BCR = Commercial Bank of Rwanda BK = Bank of Kigali BNR = Central Bank of Rwanda BRD = Development Bank of Rwanda BUNEP = A PE specializing in feasibility study and auditing CCIR = Chamber of Commerce and Industry of Rwanda CER = Savings Bank of Rwanda CHR = Housing Bank of Rwanda DPM = Department of Monetary Policy DUTERIMBERE = NGO Assisting Women Entrcpreneurs PSAC = Financial Sector Adjustrnent Credit FSG = Guarantee Fund ICB = International Competitive Bidding ICHA = Turnover tax INGOBOKA = Insurance company ITC = International Trade Commission IWACU = Training and Research Center for NGOs MINITRANSCO = Ministry of Transport and Communication NGO = Non-governmental Organization OGL = Open General Licensing ONATRACOM = Public Bus Company PCR = Project Completion Report PE = Public Enterprise PFI = Participating Financial Intermediaries PSSF = Private Sector Support Fund SAC = Structural Adjustment Credit SAP = Structural Adjustment Facility SOE = Statements of Expenditures SONARWA I Insurance Company SORAS = Insurance Company STIR = Public Trucking Company UBP = Savings and Loan Bank UNDP = United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OmCIAL USE ONLY PRIAE SE DEVELMEr P Table of Conet I. INTRODUCTION ............................................. I Background ............................................. 1 Recent Adjustment Efforts and Bank Group Strategy .................... 1 Strategy ............................................. 2 Project Objectives and Description .......... ..................... 2 H. THE BUSI1 S ENVIRONME . .................................... 3 A. Overview of the Private Sector . ................................... 3 B. The Private Sector in Agriculture .................................... 4 C. The Private Sector in Industry and Services ........ .................... 4 Manufacturing .......................................... 4 Informal Productive and Service Enterprises ......................... 5 Trade ........................................... 6 Small Scale Mining ......................................... 6 Transport ... ................................... 6 Consulting Services ......................................... 7 D. Overview of the Financial Sector . ................................... 7 E. Role of Donor Agencies in Private Sector Development ..................... 8 HI. PVATE SECTOR ISSUES AND STRATEGY ........ ................... 9 A. Recent Performance and Policies ................................. 9 B. Macroeconomic and Sectoral Issues and Constraints ......... .............. 10 Exchange and Trade Restrictions ................................ 10 lmport Tariffs ................................. 10 Financial Sector Policies .................................. 11 Public Enterprise Reform ...................................... 12 Private Sector Taxation . ..................................... 13 Legal and Regulatory Constraints ........... ..................... 14 Business Law .......................................... 14 Labor Laws ........................................... 1S Export Promotion .......................................... 16 Air Transport .......................................... 17 C. Government Strategy for Private Sector Development ...................... 17 This report is based on the fidinsp of misios which took ptco Inl March, July and Novmuber 1992. Then missions weo led by Mr. W3adj Alikhani, lndustrial Economist (AP3IE, Tank Manager). The apprisl team consisted of MmsalMesre. MohanwAos Diop, Sr. Opeations Offier, Herminia Matinez, Sr. Opeations Offce (AP31B, line credit and finacial sector policie), Amanda CunninShm Consutaa (sctor miveys and PSSP), Jan-Hdrilk Va Leewes, Jea43pid, LU Coan, Coasuta (PMM), Tv So. Ngtye, Consutant (regisoy fiamework), Guive Mirfeader Coastat (busines a bor hlaw refr). Mme/Messrs. Andre. Jaime (LA3TF), Andrew Stone (CECPS). and Melani Jobum (CECFP) wir pee revbrw. Miess. Francico Aguirreaca (AP3DR) ad Mkichae N. Saris (AF3IE) ae the Depatme Director oad the managinS Divisio Ce, respecti . This document has a restricted distribution and may be used by recipienu only in the performance or their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  IV. THE PROJECT ................................................ 19 A. Project Objectives and Justification ................................. 19 B. Lessons from Previous Bank Experiec and Bak Group Srate .... .......... 20 C. Project Description ........ .......... .. ....................... 21 Implementing the Government Strategy: Policy M oau .....r.. .......... 21 Supporting Investment: Credit Component .......... ................. 23 Encouraging Entrepreneurship: Private Sector Support Fund .... .. ......... 24 Supporting Improvements in the Business Environment: Intutional Strengthening Component ....................................... 25 D. Institutional Arrangements ....................................... 25 APEX ................................................. 25 Private Sector Support Fund ................................... 28 Institutional Strengthening ..................................... 30 V. THE PROPOSED CREDIT AND MAIN EEATR ........................ 30 A. Amount and Allocation of Funds ................................... 30 B. Terms and Conditions of Financing ................................. 30 Terms and Conditions of Subloan Refinancing ........................ 30 Private Sector Support Fund ................................... 32 Institutional Strengthening ..... 32 C. Project Management, Monitoring and Evaluation .32 Management ............................................. 32 Review of PSSF's first year's operations ............................ 32 Mid-Term Review ......................................... 32 Monitorable Targets . . ....................................... 33 Monitoring and Evaluation .................................... 34 D. IDA Supervision ............................................. 34 E. Procurement Arrangements ...................................... 35 Credit Component ......................................... 35 Institutional Strengthening and the PSSF ............................ 35 Disbursements ............................................ 36 Special Accounts .......................................... 37 Auditing and Reporting .... ................................. 38 Estimated Project Costs and Financing Plan .......................... 38 VI. PROIECT JUST..CA..ION.AND.RISKS................................ 39 VII. AGREEMENTS AND UNDERSTANDINGS REACHED..................... 40 ANEXES 1. Statement of Private Sector Development Policy. 2. Private Sector Development Policy Matrix. 3. Review of Donors' Assistanco. 4. Review of Management Consulting Services.  5. Private Sector Support Fund. 6-A. Business Law Reform in Rwanda. 6-B. Draft Legal Reform Matrix. 7. Action Plan on Reform of Labor Laws. 8-A. Structure and Characteristics of the Financial Sector. 8-B. Financial intermediaries 8-C. Statistical Annex Tables 9. Support to the Ministry of Commerce and Industry - Oudine of Tornm of Reference. 10. Selected Documents and Data Available in the Project File. 11. Schedule of Disbursements. 12. Bank Supervision into Key Activities. 13. Survey of Consultancy Funds. 14. Action Plan for Banque Rwandaise do Developpemen.   RWANDESEREPUBIC PRIVATE SECTOR DEVELOPMENTPRJC Credit and Project Summary Borrower: Rwandese Republic Beneficiaries: Central Bank of Rwanda (BNR), Participating Financial Intermediaries (PFIs), private enterprises, Ministry of Commerce and Industry, and the Ministry of Justice's Tribunal of Commerce. :m : SDR 8.7 million (US$12 million equivalent). Terms: Standard IDA terms, with 40 years maturity. Objective: The project's objective is to promote the rapid expansion of the private sector as the key element in a development strategy for growth and diversification. The specific components will provide the private sector with both the incentives and the means to engage in labor-intensive, export-oriented activities in an environment where local and foreign entrepreneurs can operate within a free market economy. Onlending Terms: The project consists of a line of credit for productive investments, a fund to improve technical and managerial capabilities and competitiveness of the private sector, and support to institutions responsible for implementing improvements in the business environment. (i) Line of Credit. The Borrower would lend US$7 million equivalent to BNR at a variable interest rate equal to the average yield over three months of one-year commercial bank deposits, minus an anmnl administrative fee, set at 1 percent, which is expected to cover adequately BNR's operating costs under the credit component. The credit to the Central Bank would be for 20 yeas, including a grace period of 5 years. The Central Bank would onlend the funds to qualified PFIs at the aforementioned one-year deposit rate, with the same maturities as the individual subloans to the beneficiaries. Onlending interest rates charged by PFIs to subborrowers would be variable and determined by the banks. 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) Private Sector SuDnrt Fund. US$2.5 million will be passed on to the fund to: (a) help finance private firms' use of management consultants; (b) organize specialized training seminars; and (c) cover operational costs, including monitoring and follow-up of the assistance to firms. The fund would be located in a commercial bank approved by IDA and have an independent management.  il (iii) :_aUtmdgnaUwmgihinlng. USS2 million to be passed on to the Implent instuon for their strengthening. Beneficiaries would be: (a) the Cal Bank and banks to implement staff training and capacitY building programs, and to improve program related aspects of banking supvision, economic and monetary analyses as well as credit evaluation; (b) the Ministry of Commerce and Industry to implement the private sector development strategy; and (c) the future Tribunal of Commerce for the purpose of staff training and office equipment and technology to ensure it is efficient and speedy in processing business litigation. efitsnd. RIa: Mhe major expected benefits would stem from a supply response to ongoing structumal ustmet reforms. Improving the competitiveness of extn firm and encouraging new local and foreign private invstme would contribute to attaining Rwanda's growth objectives. Rapid response by private sector investors, encouraged by improved business conditions, would create the employment opportunities that are critical for the success of adjustment. The process of revamping the regulatory framework, and the implementation of fiscal and labor policy reforms may be delayed during the political transition, thereby slowing ivestments. The consensus already built within the Government around the need for effective reform of the business environment and the strong voice of a rapidly emerging private sector should minimize this risk and ensure the effective Implementation of the project. Lol Foreign Toal (US$ millions) (A) Ujn=a= Subprojects 3.90 7.50 11.40 (B) Eiaxg 1.35 2.70 4.05 (C) . Tribunal ofCommerc .30 .55 .85 Central Bank (BNR) .10 .20 .30 Ministry of Commerce and Industry .70 1.45 2.15 Subtotal 1.10 2.20 3.30 (D) Unaluloce .15 .35 .50 TOTAL 6.50 12.75 19.25  in Financing Plan: (USS millions) Investinent Pro3ects Subborrowers 2.20 19 Participating Financal nstitutions(PFIs) 2.20 19 IDA 7.00 61 Sulbtotal 11.40 100 Private Sector Suport Fund Private Sector 1.55 38 IDA 2.50 62 S&ukal 4.05 100 titutionalngd g Government .30 9 Other Donors 1.00 30 IDA 2.00 61 Subtotal 3.30 100 Unallocated ]DA 0.50 100 TOTAL Government .30 2 Subborrowers 2.20 11 PFIs 2.20 11 Private Sector 1.55 8 Other Donors 1.00 5 3DA 12.00 62 Total Financing 19.25 100 1DA Fiscal Ya (USS million) Fiscal Year 1994 1995 1996 1997 1998 1999 Annual 1.26 2.46 2.56 2.56 2.16 1.00 Cumulative 1.26 3.72 6.28 8.84 11.00 12.00 Economic Rate of Reu: N/A M Lmi:wid,1m of thPuidun: P-S980-RW ME: Map IBRD 24507   RWANDESE REPUBLIC PRIVATE SECTOR DEVELOPMENT PROJECT I. INTRODUCTION 1.1 Backgndn. Rwanda is a small landlocked country in Central Africa, covering some 26,000 square kilometers. Its annual per capita GDP is about US$250 (1992). With a population of about 7.8 million growing at about 3.0 percent per annum, Rwanda has the highest population density in Africa (295 persons/square kilometer). More than 90 percent of the population lives in rural areas, and the economy depends on agriculture for 40 percent of GDP and 90 percent of employment and export earnings. Coffee and tea account for about 80 percent of total exports. Industry, including mining, represents only 14 percent of GDP and 6 percent of exports. Ethnic rivalry has been a major feature of Rwanda's political history and it escalated into military conflict in October 1990. A peace accord was signed on August 4, 1993 including an agreement, which includes the integration of representatives of all rival groups into the Government. This pact will strengthen the process of political liberalization, underway since early 1992. 1.2 From 1970 to the mid-1980s, Rwanda enjoyed low inflation and sustained growth (averaging about 4 percent per annum). Since 1987, GDP has stagnated or declined, primarily because of low coffee prices and poor weather. The initial policy response to this adverse economic situation was inappropriate and relied on increased controls. Recognizing the need to revitalize the economy, the Government began implementing a comprehensive Structural Adjustment Program in late 1990. This program is supported by an IMF Structural Adjustment Facility (SAF) and an IDA Structural Adjustment Credit (SAC, Cr.2271-RW), approved in June 1991. Its goals are to achieve macroeconomic stabilization, enhance the competitiveness of the economy, improve the allocation of resources, and stimulate economic recovery. At the same time the Government started a program of restructuring the parastatal sector and disengaging from productive and commercial activities, with the support of the Public Enterprise Reform Credit (Cr.2113-RW, effective since February 1991). A summary review of progress to date and the division of labor in support of policy reform by various Bank-supported projects is given in the policy matrix (Annex 2). 1.3 Recent Adjustment Efforts and Bank Group Strategy. The most important measures taken to date under the SAC include: (a) a cumulative devaluation of 61 percent in foreign currency terms since mid-1990, opening up the trade regime by reducing tariff protection (decreasing the top rate from 220 to 100 percent), adopting a market-determined foreign exchange allocation for imports, and eliminating all import prohibitions and export taxes, except on coffee; (b) setting targets for the reduction of the fiscal deficit and limits on domestic credit expansion while implementing revenue enhancing measures; (c) simplifying the interest rate structure and ensuring that key rates remain positive in real terms (the only two rates that remain fixed are the minimum rate for savings deposits of 9 percent and the maximum rate for lending of 16 percent, above the estimated inflation of 8 percent in 1992); (d) liberalizing prices of industrial goods, and raising petroleum prices; and (e) initiating regulatory reforms to eliminate constraining enterprise creation and business licensing requirements. The Government is adhering to many of its undertakings, but has not been able to contain the overall budget deficit, which reached about 15 percent of GDP in 1992 compared to a target of 6.6 percent, largely because of military expenditures increasing from 2 percent of GDP in the 1980s to 8 percent of GDP in 1992. The macroeconomic framework is being reassessed continuously by the Bank and the Fund. The August peace agreement is a historic breakthrough putting an end to three decades of conflict within Rwandese society. The restoration of political stability and establishment of a new government are expected to lead to a new program, including revised targets. The private sector development project is a vital complement to  -2- Rwanda's adjustment effort, by supporting medium to longer term institutional and business environment reforms to facilitate private sector growth. 1.4 The objectives of public enterprise reform (para 3.14-16) include (i) putting in place public enterprise (PE) legislation which increases management responsibility and harmonizes the legal framework of PEs with that of private enterprises (adopted by the National Assembly in July 1993), thus facilitating future PE privatization and restructuring; and (ii) developing and implementing a strategy leading to privatization or liquidation of about 60 productive and commercial parastatals ad the restructuring of the remaining 26 (the privatization strategy is expected to be approved by the Council of Ministers by October 1993). Specific actions underway have already led to the privatization or liquidation of five firms. 1.5 The adjustment program will be reinforced and broadened by two proposed sectoral adjustment operations. The first one is a Financial Sector Adjustment Credit (FSAC) which aims to improve the financial system's ability to support private sector development (paras 3.9-13). Specific reforms, which are already being implemented, include: (a) reorienting and liberalizing interest and credit policies, moving to indirect instruments of monetary and credit control, and developing new financial instruments for improved savings mobilization and greater efficiency in investment lending; (b) restructurng financial institutions in distress, thereby enhancing public trust in the sector; and (c) strengthening the legal and regulatory framework governing financial institutions and establishing an effective banking supervision system to ensure future stability. The second is an Agriculture Sector Adjustment Credit (AGSAC) which would deregulate the agriculture sector and support the restructuring and privatization of publicly-owned agro-industries. The IFC's Africa Enterprise Fund (AEF) has expressed renewed interest in Rwanda, approving in 1992 the financing of two projects through a Rwandese commercial bank. IFC's direct intervention is expected to complement IDA financing. Measures being taken under the adjustment program, in particular, the legal enforcement of guarantees by the Rwandese judicW system in a speedy and equitable way will contribute to improving prospects for IFC interventions. 1.6 Strategy. Key to the success of the overall adjustment program is a significant and sustained supply response by the private sector. Promoting the rapid expansion of the private sector is the cornerstone of the Government's development strategy. This sector's development has been hindered in the past by (a) unsustainable macroeconomic policies; (b) the presence of the State in several areas as a competing privileged producer; (c) an inadequate incentives system with selective regimes of exemptions and heavy government regulations; (d) deficient management capacity and insufficient labor skills; and (e) the reluctance of the banking system to increase its volume of investment lending due to unadapted (mostly short term) resources and difficulties in recovering delinquent loans. Beyond reestablishing sustainable internal and external balances and laying the foundations for efficient financial sector intermediation, the Government is taking specific measures to provide the private sector with both the incentives and the means to engage in labor-intensive, export-oriented activities in an environment where both local and foreign entrepreneurs can operate within a free market economy. The project is designed to help in the implementation of this strategy, complementing the adjustment program. 1.7 Project Objectives and Description. The project will support efforts to ensure access to investment financing and managerial and technical support for the private sector, and to improve the legal and regulatory enviromnent in which businesses operate and enhance the investment and export incentives. To achieve these objectives, the project consists of three mutually-reinforcing components: (a) an Apex line of credit which will provide local banks with the long term resources needed to finance medium- and long-term investment (paras. 4.17-18); (b) a private sector support fund (PSSF) to help  -3 entrepreneurs improve the conception and appraisal of their investment projects and strengthen their production, managerial and marketing capacity (paras. 4.19-21); and (c) institutional support to the Central Bank (BNR), the Ministry of Commerce and Industry, and the Ministry of Justice, for the establishment and staffing of the Tribunal of Commerce, to strengthen their capabilities and ensure adequate implementation of reforms aimed at improving the business environment (paras. 4.22-23). 1.8 The credit component would satisfy an expected growing investment demand at a time when political stability is being reestablished, and banks become more willing to lend because accelerated and improved validation and execution of guarantees reduce their risk. The nascent investment demand would be nurtured by the policy reforms (paras. 3.17-31 and 4.9-16), and through gains in productivity and competitiveness made possible with assistance from the PSSF. This fund will enhance the ability of promoters to conceive better projects and to encourage existing firms to expand and diversify, as they become better managed and more competitive. To ensure that the objectives of the operation are met, throughout project implementation, particularly during the planned mid-term review (paras. 5.11-12) of the project, the Bank will engage the Government in a continued dialogue on the evolution and implementation of the private sector development strategy. II. THE BUSINESS ENVIRONMENT A. Overview of the Private Sector 2.1 As measured by GNP per capita, Rwanda is one of the 20 poorest countries in the world. It is meagerly endowed with natural resources. It depends mainly on agriculture, which provides most of the employment opportunities. The private sector in Rwanda is relatively unsophisticated and local entrepreneurship is not yet well developed, except for a small but dynamic informal micro-enterprise sector engaged in production and provision of services. The private sector plays a major role in the production of export, food crops and in transport. Other private sector activities are found principally in the informal sector, in international trade, where some 100 modern firms, mostly importers, currently operate, and in a growing but limited service industry, principally in construction and management consulting. Public sector enterprises are involved in the processing and export of primary commodities and manufacturing, and generate about half of the country's formal employment outside the civil service. In some cases such as coffee and the banking system such operations are in partnership with local and foreign entrepreneurs, 2.2 Private trade associations and institutions remain underdeveloped partly due to past government restrictions. The private business sector is in theory organized around the Chamber of Commerce and Industry of Rwanda (CCIR). This institution, however, lacks autonomy and is part of the public administration with its president appointed by the President of the Republic and key staff from the civil servants. The CCIR's operating expenses are covered by government subsidies and obligatory dues paid by the private sector. The CCIR has not been an effective intermediary in the dialogue between the private and public sector because it lacks credibility as a lobbying group for the private sector. Since 1990, the Government has authorized the establishment of private sector groups, including the association of industrialists which has been actively representing the modern manufacturing sector. Other groups being formed include an independent Chamber of Commerce for Handicrafts in Butare with the help of the German Cooperation.  - 4 - 2.3 One aim of the sector development strategy (paras. 3.32-41) is to encourage the growth of private associations, including a private exporters' association. A key provision is that such groups should operate independently from the Government so that they can be effective intermediaries between the Government and private entrepreneurs. Restructuring of the CCIR so that it can become an independent organization with officers elected by its members is also an objective of the Government. The institution has received support from donors, including the UNDP/ITC, and the Government in the past. Once membership becomes voluntary, continued financial support, at a declining rate, from the Government or the donor community over the next three to four years will be needed until self sustainability can be achieved. B. The Private Sector in Agriculture 2.4 Private smallholders are responsible for the bulk of agriculture output which accounts for 40 percent of the GDP. Up to 1983, the agriculture sector was the main source of growth, fuelling the increase of GNP per capita at an annual rate of 2 percent. Production increase came from putting most agricultural land into use and from eliminating fallow. The better lands are now farmed twice, even three times, a year. Since 1984, agriculture has stagnated and thereafter experienced a steady decline due to inadequate incentives and poor farming practices as well as inclement weather during certain years. As a result, food production has not kept up with population growthl and this has created localized and temporary pockets of famine. Inefficient agro-industrial PEs (particularly in tea) have contributed to depressed producer prices and, therefore, rural income. Land is owned by the State, but, private smallholders (5 per hectare of land on average) enjoy usufruct rights to continuously cultivated land, which can be transferred to their male heir. 2.5 The major objective of the Government is to increase farm productivity and food security through increased intensification and adoption of new policies aimed at (a) developing a market oriented straegy for agriculture; and (b) encouraging fuller integration into the international market economy. This is to be achieved through improved incentives and restructuhing of key parastatals. In this context, land tenure issues will be taclded and de facto property rights will be strengthened. With the implementation of these soctoral policies, agriculture should be able to sustain short- to medium-term GDP growth. In the medium- to long-term, however, this sector will no longer be capable of being the main source of growth nor will it be able to absorb a sufficiently large number of new entrants into the labor market to ensure adequate levels of employment. These roles, therefore, will have to increasingly be played by industry and services. C. The Private Sector In Industry and Services 2.6 M. The private industrial and service sector accounts for less than 15 percent of GDP. Manufacturing activities are in majority agro-industrial, coffee and tea processing, modern beverage production, and/or production of basic consumer goods such as soap, textile products and garments. Modern manufacturing-i...; formal enterprises with a registered legal status-consists of about 130 firms that employ a estimated 15,000 people, including temporary employees, and produce 8 percent of GDP. Except for a handful, most of these firms have less than 100 permanent workers. The majority of these firms, public and private, are relatively new: 106 out of 130 were established after 1975. About two-thirds of modern industries are located in Kigali, the capital city. There are 21 industrial PEs, A fulr doscriptio of th aSrieukum sedor and it prospect can be found in a report entitled, Rwanda -Awicultur S=Doev Rcviobv,Report No. 8704RW, May 22, 1991.  -5- including those with mixed ownership. These firms tend to be larger and more capital intensive than private firms and contribute almost half of formal manufacturing output. Foreign investors have been present in about half of the 130 firms. 2.7 Since their inception, many manufacturing firms have suffered from high production costs, resulting in marginal economic viability, for two reasons. First, their management has lacked the know-how needed to operate efficiently. Thus, they have failed to fully exploit opportunies to penetrate the regional or domestic market. Second, at the time of their creation most local firms were protected from competition through high tariffs and quantitative restrictions. In most cases there were two or les domestic competitors, and they thus remained financially profitable, despite high wages (about twice thos in Kenya and equivalent to 27 percent of turnover) and high cost of non-factor inputs (about 65 percent of turnover). 2.8 Another characteristic of local firms, other than agro-industrial enterprises, is their high import intensity. The onset of balance of payments problems in 1987 reduced the amount of foreign exchange available to firms and caused a general fall in capacity utilization, which by 1989 reached about 50 percent operating only one shift. The subsequent decline in profitability forced an adjustment on the manufacturing sector, which lowered its costs by investing less and deferring mainenance. Despite the economic slowdown, aggregate employment, both temporary and full time, did not change significantly, as labor laws made it difficult to lay-off workers. Since 1990 manufacturing production has declined f-urther, by about 30 to 50 percent, primarily because of the adverse consequences of the war and the decline in all economic activities. As long as the economic environment remained unfavorable and uncertainty persisted, the private sector reacted by postponing new investments and not replacing worn- out equipment. Now that the economic and political situation is becoming more favorable and with improved incentives, a pent-up investment demand is expected to be realized during the next few years. 2.9 The Govermnent has taken a number of measures to address the problems faced by manufacturing firms. Since 1991, economic recovery has been promoted by policy reforms and balance of payments support from the SAC. Foreign exchange reserves increased from close to zero in 1990 to an estimated 3 months of imports in late 1992. The level of reserves fell again in 1993 and will have to be built up during the second half of the year. The resolution of the conflict will me the circulation of goods to, from and within Rwanda, boosting domestic production and helping to reestablish business confidence. In parallel, the Government has adopted a comprehensive private sector development strategy (see Chapter III), aimed at putting in place a conducive business environment to ensure sustainable growth. A series of measures will be taken, including those to be implemented under the project (paras. 4.9-16), to address the key structural and sectoral constraints and thus encourage viable firms to expand their activities, and induce new viable investments. 2.10 Informal Productive and Service Enterprises. Informal micro-enterprises, located primarily in urban areas (about 40 percent are in Kigali), contribute an estimated 7 percent of GDP. A census undertaken in 1990 by the Ministry of Plan revealed the existence of about 700 informal firms, without a registered legal status, to which thousands of individual artisans and entropreneurs must be added. The majority of informal businesses engage in retail and repair service, garment production and woodwork. 2.11 This subsector could grow significantly and rapidly, expanding into formal activities with the appropriate business environment and helping to manage larger operations efficiently. The informal sector's growth would be supported by lowering the tax burden on enterprises, improving informal firms' access to the Commercial Registry, lowering minimum capital requirements for corporations, facilitatn  - 6 - the establishment of partnerships, and other policy reforms and actions envisaged under the project (para. 4.12). 2.12 Tr_d. About 100 registered firms specialize as importers, in addition to those that are primarily manufacturers. Importers also engage in wholesale and retail domestic trade. Reflecting the lack of export diversification, Rwanda has fewer than 20 exporting firms. Other than in the case of traditional export products such as coffee, tea and other primary products, exporters tend to be producers for the domestic market and export a small part of their output. A notable exception is horticulture exports, a new activity that began in the late 1980s and sells most of its output in Europe. 2.13 In the late 1980s, many importers benefitted from de facto monopoly in particular product lines; entry and competition was discouraged by the foreign exchange allocation mechanism and the regulations governing enterprise creation and business licensing. Since 1991, importation is becoming more competitive in response to trade liberalization and simplification of the regulatory framework. As economic recovery occurs, this sector is expected to grow rapidly, both in the number of businesses and in the volume of activity. 2.14 The reforms undertaken since 1991 have helped reduce significantly the anti-export bias of the 1980s and should boost exports by existing firms as economic recovery accelerates. Export growth and diversification, while modest at first, could be achieved quicldy for some activities, including tea and horticulture, and manufactured goods. Such exports would be stimulated by new export promotion measures planned by the Government (paras. 4.15). This export potential can be fully realized once sectoral constraints, associated with inefficient PEs, involved directly in production or providing services, and logistics are tackded. In the medium- to long-term, the development of exports will depend primarily on sustained increases in competitiveness and expansion of the private sector, as well as learning how to produce and market export quality goods. 2.15 Small Scale Mining. A few thousand private artisans currently engage in mineral extraction (mainly tin). While they do not have formal concessions they are allowed to mine on government land. More formal capital-intensive tin mining and production, including a smelter, and other exploitations of minerals has existed in Rwanda in the early 1980s. These activities have been neglected because of low profitability, pardy due to the overvalued exchange rate. The devaluations helped improve this sector's competitiveness. There is evidence of renewed private interest in the development and export of certain types of mineral products (including precious and semi-precious stones), but the projects are at an experimental stage. The long-term viability of many mining activities, particularly those using capital intensive processes, will depend on whether the mineral deposits now being explored prove to be sufficiently rich. 2.16 Transport. International and domestic road transport is dominated by private operators. In 1988, private interests operated about 1,900 truck/trailer (out of 2,500) and 85 percent of the 1,500 buses used in passenger transport (mainly minibuses). Three parastatals also provide transport services: the STIR ('Societ6 des Transports Internationaux du Rwanda"), which transports external freight by road and is slated for privatization; ONATRACOM ('Office National des Transports en Conmmun), a bus company being restructured; and Air Rwanda, a small airline with five planes used mainly for domestic passenger flights. One of these aircraft is a cargo plane that can be used on international routes to transport freight. Air Rwanda also plays a key regulatory role in air transport; no flight, including charters, can take place without its approval and payment of royalties to it. It also provides handling services at the airport, at a relatively high cost. The royalties and proceeds from the services are used to cover some of the deficit of the transport activity (paras. 3.29-3 1).  -7- 2.17 The transport sector grew rapidly until 1983, but slowed down due to the economic downturn and inadequate institutional and regulatory arrangements. The key problems of the sector are being taclded in the context of the Transport Sector project (Cr.2136-RW) and growth is expected to resume with economic recovery. Policies already being implemented aim at: (a) providing flexibility of choice and competition amongst providers of international transport by allowing the private sector to freely select its transport mode, carrier and liberalizing prices; (b) improving the performance of PEs through their privatization, restructuring and the use of performance contracts; and (c) a series of other reforms aimed at improving road maintenance and safety, and diversification of access corridors 2.18 Consulting Services. Consulting firms generally provide basic accounting services and undertake feasibility studies (see Annex 4). The subsector consists of about 12 private firms and 130 or so individuals (mcluding civil servants and university professors, many working as part-time consultants), three donor-funded technical assistance centers (Serdi, Technoserve and Center of Service for the Artisan) plus BUNEP ('Bureau National d'Etude de Projets," a PE specializing in feasibility studies and auditing, scheduled to be privatized in 1993), and at least 10 dynamic NGOs, including IWACU (a training and research center) and Duterimbere (whose main role is to assist women entrepreneurs). The development of private consulting services has been hindered by low effective demand. Private economic activity has been at a low level and stagnant, and firms providing consulting services have suffered from competition from subsidized donor-financed agencies. The public sector too has tended to rely on these agencies and other publicly-funded organizations. The PSSF component of the project (paras. 4.19-21) would help create a more level playing field, where the private sector can compete, and would stimulate improvements in the quality and range of available services offered (e.g., international chartered accountants, cost accounting and auditing). D. Overview of the Filnancial Sector2 2.19 The financial sector in Rwanda is comprised of the Banque Nationale du Rwanda (BNR), the Central Bank, three commercial banks - Banque Commerciale du Rwanda (BCR), Banque de Kigali (BK), and Banque Continentale Africaine du Rwanda (BACAR) - and two savings institutions, the Caisse d'Epargne du Rwanda (CER), which is being liquidated, and the Union des Banques Populaires (UBP). A development bank, Banque Rwandaise de Developpement (BRD), a housing finance institution, Caisse Hypoth6caire du Rwanda (CHR), and three insurance companies (SONARWA, SORAS, and INGOBOKA a newcomer in 1991) complete the financial sector. Caisse Sociale du Rwanda (CSR), the social security agency, is an important holder of long-term government securities. In 1991, total assets of the commercial banks amounted to RwF30 billion (US$230 million) or about 12 percent of GDP. 2.20 The Government's presence in the sector is important. Except for one commercial bank, two insurance companies and the system of savings and loans cooperatives ("banques populaires'), all other financial institutions have total or significant public ownership. The Government does not normally interfere with the functioning of the commercial banks where it has a substantial participation, but is very much involved in the operation of the other financial institutions in which it participates. 2.21 Prior to 1987, the financial system was segmented, as commercial banks were restricted by BNR to the provision of short-term credit Ooans of up to one year) and some medium-term loans (1 2 A more detailed analysis of the financial sctor was undertaken by the Bank in a report ied Rwanda: FinB ial rview. Reoort No. 8934-RW, distributed to the Board on May 16, 1991.  -8- to 5 years), while BRD and CHR were only permitted to provide long-term loans. Since then, commercial banks have been allowed to make medium- and long-term loans, with ceilings for such loans set at a certain percentage of total credit. In fact, after allowing commercial banks into this type of lending, the authorities seemed to put less emphasis on maximum exposure limits for medium- and long- term lending, and instead encouraged its growth. The importance of short-term lending by the financial sector has declined during the 1980s, in part as a result of this change (see Annex 8). 2.22 The financial system is not well developed, as evidenced by its relatively shallow financial depth. Financial depth figures (M2/GDP of 17 percent) put Rwanda below the average for low-income countries and for Africa as a whole (M2/GDP of 24 and 22 percent, respectively). The degree of financial repression has been mild relative to the experience in other developing countries. The only official constraint on deposit interest rates in the 1987-90 period was that banks were required to pay a minimum rate of 3 percent on 3-month deposits. However, due to imperfections in the financial markets, linked on the one hand to lack of competition in the sector, and on the other hand, to inadequate policies, which the Government is currently revising through financial sector reforms, commercial banls have tended not to compete for deposits. Real lending interest rates which were slightly positive in the first half of the eighties, were about zero or slightly negative in 1986 and turned significantly negative between 1988 and 1990. In 1991, interest rates were increased and their structure was substantially simplified as a part of the adjustment program. Lending rates are pegged to the rediscount rate, to which a maximum 5 percent margin can be added by banks. This regulation puts an effective, albeit variable ceiling on lending rates. The discount and lending rates, as well as the minimum rate on term deposit, have been positive in real terms. As agreed, during negotiations, lending rates, as well as the maximum interest margin, will continue to be reviewed regularly by the Bank and the Fund with the Govermnent to ensure that rates remain positive in real terms (paras. 7.2 (iii)). In 1994 the interest rate regime will be fully liberalized. 2.23 The slow progress in financial deepening, especially in the 1980s, in part reflects government policy, which was oriented to use the banking system to direct credit to certain priority sectors, and as a source of tax revenue. The low level of after-tax bank profits are due to the heavy taxation of expatriate salaries and bank profits. The relatively small size of the market probably discouraged additional entries into Rwandese banking and did not encourage competition. The low degree of financial depth also reflects the low per-capita income level and the underdevelopment of the 'banking habit'. Only the 'banques populaires' have a branch network covering the rural areas. Since 1991, the Government has initiated the implementation of reforms of monetary and credit policy reforms (Annex 8 and paras. 3.9-13) designed to deepen financial intermediation and improve its efficiency. E. Role of Donor Agencies in Private Sector Development 2.24 Several bilateral and multilateral donors are supporting private sector development in Rwanda. To avoid duplicating existing programs and to learn from the experience of others an extensive review of donor programs was conducted as part of the preparation of the project (a brief description of these programs is given in Annex 3). These initiatives include: (a) operating grants and equity financing for private sector operations and investment; and (b) technical assistance, including vocational training, seminars and provision of specialized expert advice. The first type of support has been relatively successful in helping to develop micro- and small-enterprises, particularly where technical assistance was also provided. However, in a few cases where non-conventional technology have been tried, the results have been disappointing. Another aspect of these programs is that many have been supply oriented (creating the capacity to help entrepreneurs) and narrowly limited to specific activities, such as woodwork, and to a specific region.  - 9 - 2.25 To maximize the use of scarce resources, donors have recognized that future technical assistance and capacity building actions require improved coordination and supervision placing greater emphasis on results and needs. The private sector also will be invited to be more directly involved in specifying its own needs, particularly in the area of management and production assistance. Finally, the Government has decided to improve its means of ensuring better coordination and coherence among donor assistance, thus benefitting from the lessons learnt, and will receive support to reach this objective (paras. 4.22-23). The proposed PSSF (paras. 4.33-34) will also complement donor actions by stimulating demand for expert assistance and broadening the target group to include all private Rwandese promoters. m. pRIVATE SECTOR ISSUES AND A. Recent Performance and Polides 3.1 In spite of its physical and resource constraints, Rwanda achieved positive per-apita growth from the early 1970s to the mid-1980s. This resulted from the rapid expansion of agriculture during the 1970s (8.7 percent annually for the period 1973-1980), brought about by improving farming practices and increasing the surface cultivated,' and from the expansion of industry and services during the first half of the 1980s (about 4 percent between 1980 and 1986). During much of this period, Rwanda benefitted from the favorable evolution of international coffee prices, particularly in 1978 and 1986. Prudent foreign exchange management allowed a build-up in external reserves, which were used to finance balance of payments deficits during subsequent years. The good economic performance hid the impact of Government's intervention in the productive sectors, which led to (a) the creation of many of the parastatals that still exist today; (b) trade policies heavily biased in favor of import substitution (tariff and non-tariff barriers); and (c) discriminatory incentives (e.g., the investment code and business licensing). 3.2 By the late 1980s, the economic cost of these policies became apparent as the steady decline in the international price of coffee created a severe external imbalance. Local industries faced a loss in regional competitiveness, due mainly to the appreciation of the exchange rate. . Moreover, firms dependent on imported inputs needed to cut production because of the diminished availability of foreign exchange. In parallel, the shortage of cultivable land, which limited agriculture growth after 1984, combined with diminishing import substitution opportunities led to economic stagnation. These factors as well as the disappointing performance of PEs, which drained scarce government resources, convinced the Government to change its policies on exchange rate management and towards the private sector, changing the public sector role to that of facilitator rather than regulator and producer. 3.3 In 1990, the Government initiated a structural adjustment program (paras. 1.3-5). The Govermnent now recognizes that this initiative alone is not sufficient to ensure recovery and sustainable growth, and that reform of sectoral policies and pro-active support to the private sector are also needed. The adjustment program is thus being broadened, with the support of the Bank, to improve the enabling environment and tackle the specific constraints retarding the growth of the private sector. A comprehensive strategy has thus been devised to taclde the constraints in agriculture and the financial sector as well as tax, legal and regulatory barriers hindering the private sector.  - 10- B. Macroeconomic and Sectoral Issues and Constraints 3.4 Exchange and Trade Restrictions. Throughout the 1980s the Rwandese Franc (RwF) was fixed with respect to the SDR (up to 1983) and the dollar (after September 1983). Despite a small devaluation in 1983, the exchange rate became increasingly overvalued throughout the decade because of declining terms of trade on export products (mainly coffee), infiation higher than that of major trading partners and exchange rate adjustments in others. As a result, Rwandese products became less competitive in the regional markets, particularly vis-a-vis those from Kenya and Burundi during the second half of the 1980s. The overvalued exchange rate also contributed to the decline of some traditional export activities (mining, cinchona and pyrethrum) and to the failure of some nascent non- traditional exports (horticulture) in the late 1980s. Since the adoption of the adjustment program the Bank and the Fund are engaged in a regular dialogue with the Government on the exchange rate to ensure that it is maintained at a level consistent with balance of payments equilibrium under liberal trade policies and to help improve the competitiveness and profitability of exports and viable import substitution activities. As part of the adjustment program, the RwF has been devalued in two stages, in 1990 and 1992, by a total of 61 percent (in foreign exchange terms). 3.5 From 1983 onwards, significant trade restrictions in the form of quantitative restrictions (QRs) or bans, advance deposit requirements, import licensing and high duties prevailed in Rwanda. Up to 1987, import restrictions were used mainly to protect local industries and, therefore, only affected certain sectors. Thereafter, in response to a close to 50 percent decline in export receipts, trade restrictions were extended to cover all imports, through strict import licensing. This policy was reversed in 1991 in the context of the adjustment program and all QRs were removed and import licensing was relaxed considerably. The Government is committed to maintaining and improving an open general licensing (OGL) system for imports, introduced in 1992, and thus lifting any remaining de facto import restrictions. Import controls were temporarily reintroduced in July 1993, in response to the depletion of foreign exchange reserves resulting from war related expenditure. These controls should be lifted soon as the situation returns to normal and reserves increase. 3.6 All export taxes, with the notable exception of that on coffee, have been eliminated. The remaining regulations linked to exchange controls which continue to hinder exports will be removed under the proposed AGSAC with the (a) elimination of export licensing; and (b) rationalization and simplification of procedures at the airport, including the possible creation of a one-stop shop for exporters. Such actions are an integral part of the private sector development strategy (Annex 2). Repatriation of factor income (wages and dividends) by foreigners is subject to control which discourages foreign investment. Foreign exchange available for businessmen's travel is also severely limited. Full and immediate repatriation of factor income and an increase in foreign exchange available for travel are being introduced under the adjustment program. 3.7 ImpotIaiffs. Tariff reform is an integral part of the adjustment program. The elimination of QRs and the relaxation of import controls has significantly increased the role of tariffs as an instrument of protection; for most of the 1980s, tariffs were redundant from the industrial protection standpoint as local industries were sheltered from imports by non-tariff measures. Under the SAC, the Government implemented significant tariff reforms in 1991. Measures introduced Included (a) reducing the maximum rate from 220 to 100 percent; (b) increasing the minimum rate to 10 percent; (c) using a single tariff instrument as opposed to two; and (d) reducing the number of applicable rates from about 14 to 5. As a condition of second tranche release of the SAC the Government will further reduce tariff distortions by decreasing the higher rates to 40 percent for most finished products (80 percent for luxury goods), and by harmonizing tariff rates for similar products.  -11- 3.8 The agreed tariff and trade reforms are being implemented and codified by the Ministry of Finance in a new tariff law and revised foreignexchange regulations are being finalized by BNR. If necessary, further reforms, for example, to reduce the effective tariff protection, will be considered during mid-term review of the project scheduled for July 1995 (para. 7.5(v)). Financial Sector Policies 3.9 The development of the financial sector is a critical component of the adjustment and private sector development programs. In the past, the financial system suffered and bank portfolios deteriorated, because monetary and credit policies aimed mainly at directing credit into priority sectors, and thus discouraged the development of financial markets. In addition, BNR's interest rate and credit policies discouraged resource mobilization and restricted bank lending. Since 1.987, the Government has taken a number of steps to improve the functioning of the financial system. The main changes included (i) permitting commercial banks to make medium- and long-term loans, up to a certain percentage of total credit; (ii) in late 1990, adopting a policy of maintaining positive real interest rates by establishing a minimum rate of 12 percent for 1-year deposits and a maximum lending rate of 19 percent; and (iii) setting a single rediscount rate of 14 percent for coffee marketing and other operations. In June 1992, estimates put inflation at single digit level on an annualized basis (actual inflation in 1992 was 8 percent). In consequence the structure of interest rates was revised downwards in the context of the periodic reviews agreed with the Bank and the Fund. Since then the maximum lending rate, the minimum 1-year deposit rate, and the rediscount rate were reduced to 16, 9 and 11 percent respectively. During negotiations the Government confirmed its commitinent to review interest rates at regular intervals to ensure they remain positive in real terms (para. 7.2(iii)). 3.10 The proposed FSAC would support a comprehensive program for the development of a well functioning financial sector and additional reform measures are included in the private sector development policy matrix (Annex 2). The strategy for development of the financial sector includes: (a) reliance on market-determined interest rates; (b) implementation of indirect means of monetary controls and the elimination of direct controls; (c) the strengthening and restructuring of existing financial institutions to make them more competitive and efficient; and (d) the institution of sound regulatory and supervisory practices in BNR. A key objective of this strategy is to create a sound policy environment and a solid institutional framework which can meet the investment financing and other needs of the private sector. Another objective is to reduce Government participation in the sector and thus encourage private sector development in a growing financial sector. In order to implement its strategy in the financial sector the Government has identified, and already started to implement a number of reform measures agreed with IDA. By letter dated December 30, 1992, the Government confirmed its commitment to continue and complete the agreed reforms, with most measures to be put in place by December 31, 1994. 3.11 Improved Resource Mobilization. During 1993 and 1994, monetary policy instrument such as reserve requirements will be introduced; and others such as the rediscount mechanism will be reformed. In addition, money market instruments will be developed, including a Treasury Bill Auction system which has been studied and is scheduled to be put in place before the end of 1993. Monetary and credit policies in the future will rely more on the use of reserve requirements and flexible interest rates, and less on the rediscount facility at BNR. As a result, interest rates will be fully liberalized in 1994 and the rediscount mechanism used only as a last resort to control money supply. 3.12 Increasing the Efficiency of Financial Institutions. Commercial banks will be strengthened financially by allowing tax-deductibility of provisions against bad debt and requiring their  -12- risk assets to be covered in accordance with international norms, as determined by the capital adequacy ratio (para. 7.6(iii)). Cerain financial institutions with controlling public participation, CER, BRD, CHR will be restructured. In the case of CER the Government has already decided its liquidation, which is now underway. BRD will be first financially restructured (Annex 14). An institutional development and diversification program will follow, which is expected to pave the way for its possible privatization. Finally, the guarantee fund (FSG, Annex 8-B) has failed to work properly because of the poor conception of its operating rules and procedures, and its failure to honor its guaranty commitments. FSG by-laws will be amended to make the fund an effective mechanism for increasing small entrepreneurs' future access to credit while encouraging banks to exercise due diligence in credit supervision. Additionally, all existing validated outstanding claims will be settled during 1993 (Annex 8-B and para. 7.4(i)). 3.13 Strengthening the Legal and Regulatory Framework. Reforms of the financial sector's regulatory and legal framework are already underway and are expected to be completed within two years. These reforms will shift from direct to indirect control mechanisms in the conduct of monetary policy and strengthen the supervisory role of BNR. Planned actions include changes in the banking legislation (Financial Institutions Law and BNR statutes), giving BNR clear authority over all banks and financial institutions and enabling it to conduct effective monetary policy. BNR's mandate will include licensing banks and financial institutions and setting minimum capital levels; establishing a minimum capital adequacy ratio; implementing regulations on the classification and provision coverage of non-performing loans; and limiting banks' exposure to a single party or group. BNR's revised banking law and statutes are being finalized following IDA and IMF observations. Public Enterrise Reform 3.14 There are 86 PEs, 60 of which are engaged in productive and commercial activities, including 18 with majority private ownership. Certain PEs play a key role in the economy, despite the sector's relatively low share of GDP (ess than 10 percent, including those with minority public ownership). About 85 percent of exports (coffee, tea and other cash crops) are by PEs. The sector employs about 15,000 people, and foreign loans on-lent to PEs account for about one-third of the national debt. The sector's performance has been disappointing and many PEs have experienced steady losses throughout most of the 1980s, despite subsidies received from the central government budget. Detailed analysis undertaken in 1989 concluded that this poor performance stemmed from: (a) the absence of clear government objectives and targets; (b) an incoherent and inconsistent legal framework which prevents management autonomy and deflects accountability; (c) poorly qualified managers lacking business expertise; (d) inadequate financial management and controls; and (e) inadequately conceived projects at design stage. 3.15 Since 1990, the Government has embarked on a comprehensive program of PE reform, supported by IDA under Cr. 2113-RW. The reform program aims to (a) reduce the burden that PEs impose on the government budget and administrative capacity; and (b) develop and streamline the sector to make it more efficient. Specifically, the implementation of this program will involve: (a) eliminating new direct public investments in productive and commercial sectors; (b) changing and enhancing the institutional and legal framework of PEs to increase their autonomy and accountability, and to ensure better supervision by the Government; and (c) ameliorating PE performance through a comprehensive restructuring and privatization program. In addition, in the context of the proposed AGSAC the Government would speedup the restructuring and privatization of agro-industrial PEs, including the tea subsector which has significant unexploited potential. The restructuring and privatization of other PEs are also supported by other ongoing IDA Credits or proposed projects. These include a number of public utilities such as Electrogaz (electricity and water, under a Credit approved by the Board on February 9,  -13 - 1993), the telecommunications company (under Cr.2189-RW), and Petrorwanda (importer and distributor of petroleum products), whose improved services would play a key role in private sector development. Some of these activities are natural monopolies, however, and the Government intends to adopt indirect instruments of control to ensure that their pricing policies are consistent with public interest. 3.16 Administrative delays in Credit effectiveness of the PE reform project and subsequent political instability initially slowed the pace of reforms and retarded restructuring actions. However, progress has been achieved in adopting new legislation for PEs (approved by. the National Assembly in July 1993) which, except in the case of those of purely administrative nature, would give them a legal status which is in better harmony with private firms and facilitate future privatization. The Credit was reoriented in June 1993 and greater emphasis was placed on its privatization element. This will support the implementation of the Government's detailed privatization strategy, which is expected to be adopted by October 1993. The strategy will facilitate a broad-based consultation on this often controversial issue and permit faster implementation of the privatization process by avoiding a time consuming case by case approach. Finally, the process of privatization has already begun. Two mixed industrial PEs (Sonatubes, maker of pipes, and Rwantexco, a blanket manufacturer) were privatized in 1992. The Government also decided to divest from and/or liquidate three other PEs, including the CER. Private Sector Taxation 3.17 lhe Svst. Corporate income and other direct taxes accounted for only less than 10 percent of total tax revenue between 1987 and 1990 (about RwF2.5 billion annually, US$20 million in 1991 prices, excluding arrears and penalties), as the budget has relied increasingly on indirect taxation and external grants to generate revenues. All registered enterprises, including PEs, are subject to the same nominal tax system. In practice, taxes are paid only by the 25 or so larger firms in the modern manufacturing sector. Most PEs and many of the smaller locally-owned private enterprises have not paid taxes in recent years. Some fins have enjoyed tax holidays granted under the investment code, which was suspended in 1991, while others have escaped taxation because of inadequate follow-up by the Ministry of Finance. 3.18 The corporate income tax rate of 50 percent and the 20 percent dividend withholding tax rate combine to an effective 60 percent tax on corporate profits. A levy of 3 percent of capital (the upatente") is collected at the beginning of each tax year. This tax is both a minimum tax and an advance by firms to the Government of that year's tax. It discriminates against firms with a high level of equity relative to gross assets. For smaller firms, particularly micro and informal activities, the 'patente' is specified in terms of an absolute amount according to the type and location of the activity. Operating losses can be carried forward for a period of four years. Other corporate taxes include: a turnover tax ("impot sur le chiffre d'affaires', ICHA) of 10 percent on most goods and services, which has undesirable cascading effects; and property taxes assessed on land, buildings and vehicles. 3.19 Constraints and Reforms. The corporate tax system in Rwanda discourages investments by heavily taxing nominal returns. It also tends to distort resource allocation due to (i) favorable tax treatment of debt-financed investments by allowing full interest deductibility; and (ii) a relatively heavier effective tax burden on slowly depreciating assets (i.e., industrial machinery) resulting from the lack of adjustment for inflation. The IMF has helped the Government improve the tax system and Its administration by (a) bringing more firms into the tax net and thus creating an opportunity for revenue neutral tax cuts; (b) training tax inspectors and computerizing the tax department to enhance monitoring; and (c) redrafting various laws and regulations in the tax code to clarify tax provisions and reduce the  -14- scope for its arbitrary interpretation. An IMF expert assigned to the Ministry of Finance, working in Rwanda since 1991, has proposed a comprehensive reform program (paras. 4.10-11). Legal and Regulatory Constraints 3.20 Sustained private sector development requires legal and regulatory reforms aimed at the establishment of an enviroment for the free and unimpeded movement of capital and labor. To establish this enabling environment, the existing laws need to be revised and implemented effectively, which in turn requires setting up the appropriate institutions, specifically the proposed Tribunal of Commerce, and creating the legal and paralegal professions needed to improve the transparency and speed of execution of judicial decisions. The issues summarized below are based on studies and action plans agreed with the Government for reforming business and labor laws (see Annex 6 and 7) undertaken during project preparation. 3.21 Administrative Regulations. Until recently, Rwanda's administrative regulations hindered private investment and entry into new business activities. This regulatory system originated in the late 1970s when administrative controls were put in place. Even though enforcement was relatively lax initially, problems associated with this system became more severe in the mid-1980s, particularly as macroeconomic imbalances increased. For example, incorporation took a year or more and business licensing (to produce and engage in internal or external trade), which should in theory be a simple annotation in the commercial registry, could take many months. 3.22 Recent reforms have focused on eliminating redundant regulations and rationalizing the remaining procedures governing enterprise creation and registration, import and export trading and licensing. In particular, prior approval of Ministry of Commerce and Industry has been eliminated for enterprise creation. Furthermore, the law on the commercial registration was amended in August 1991. The commercial registry was transferred to the civil courts, which presently act also as commercial courts, and the paperwork was reduced and simplified. 3.23 The implementation of the new progressive regulatory system is being monitored and improved continuously. To simplify enterprise registration, the information required will be standardized. Maintaining the registry will fall under the competence of the proposed Tribunal of Commerce. To ensure adequate flow of information among public agencies and other interested institutions, a management information system wil be set up, and the commercial registry will be computerized. Funds will be allocated under the project to finance the required technical assistance and institutional support (para. 4.36). Bsines Law 3.24 The legal framework and many of the existing business laws originate from Rwanda's pre- independence period. Ad-hoc legal texts have accumulated since independence. Legal provisions on business, real estate, fiscal and related matters are neither codified nor coherent. Some commercial rules are included in real estate laws, fiscal and other texts. The present situation impedes prompt and equitable judgments on disputes concerning enforcement of contracts and property rights. Moreover, there is no clear definition or delimitation among judicial, legislative and executive authorities, leading to a lack of checks and balances, and of transparency. Often, the same institution is responsible for drafting, interpreting and executing a law. Another complicating factor is the absence of a specialized Tribunal of Commerce and private auxiliaries of justice, which contributes to the legal system tending to be biased against the private sector in its claims against the Government and to frequent delays in  -15- settling business disputes: there are over 500 unresolved cases brought by banks alone that have been in the courts for longer than 5 years without any meaningful actions or decisions by judicial authorities (see Annex 8-B). Finally, in part because of lack of business expertise, judgments are not always fair and well founded. The Govermment recognized the shortcomings of the existing business legal environment, and launched a study of the existing legislation, which has identified the shortcomings of the legal framework. The Government confirmed its agreement to take all measures necessary to reform and modernize business laws, and create a Tribunal of Commerce (para. 4.12) during negotiations, and implementation is expected to be completed by December 1994 (para. 7.4(ii)). Labor LAw 3.25 The functioning of the formal labor market is hindered by policy induced distortions. Current labor laws, which set conditions of employment, frustrate private sector and export development in labor-intensive activities by inflating wage and non-wage costs, limiting labor mobility and decreasing the number of days worked. A comprehensive analysis of labor laws, their application and their economic inmpact has been completed and discussed with the Government. The Government has agreed to the action plan proposed in the study (a synopsis of which can be found in Annex 7), which is a condition of second tranche release of the SAC, and is committed to ensure its speedy implementation, much of which is scheduled for 1993. Some of the agreed measures have already been implemented and the rest should be completed at the latest by December 1994 (para. 7.5(iv)). The main problems identified and the actions agreed (para. 4.14) to are as follows: (a) The Ministry of Labor maintains a registry of job seekers. Any enterprise employing more than five permanent workers has to inform the Ministry of a vacancy, who then prepares a short-list of candidates. Except for the lowest skill category, all positions have to be filled from such a short-list, and the enterprise cannot select among other qualified candidates. This policy aims to maintain an ethnic and regional balance, but it prevents the labor markets from functioning adequately. The stated objectives are not reached in practice, create undue delays, increase administrative costs and impose economic costs on the private sector. The action plan calls for the elimination of the registry of jobs, except to -the extent that it is necessary for its functioning as a clearing house for statistical and informational purposes. (b) The movement of population is controlled in Rwanda. Thus, a job seeker who wishes to obtain employment outside his/her county ('prefecture') needs to obtain a residency permit there. In practice, however, such permits are difficult to obtain. This policy severely restrains labor mobility and the Government has agreed to eliminate it. (c) The law sets minimum wages for various unskilled and skilled categories. The absolute minimum wage, that for the lowest category of unskilled workers, is RwF100 (US$0.8), which is relatively low. In practice, most workers are classified in higher skill categories and all private sector workers receive a statutory annual increase (3.25 (d)). As a result, formal sector wages are inflated: according to available estimates average labor costs, including non-wage elements, in Rwandese manufacturing typically range between US$70 and 100 per month, about twice that of Kenya where productivity is much higher. The agreed action plan provides for setting a uniform minimum wage. (d) The present law entitles employees to annual pay increases of at least four percent. In the private sector, a yearly wage increase has become an assumed entitlement without  -16- regards to merit, increasing the price of labor. The Government has agreed to eliminate this practice, which will thereafter be freely negotiated between the employer and the employee. (e) Employers are discouraged to rely on overtime work because statutory compensation is quite high, 50 to 70 percent above normal wage rates. Moreover, workers benefit from overly generous paid holidays, including normal vacation, official holidays, circumstantial leave (marriage or death of relative), extraordinary leave (declared by the authorities) and sick leave. As a result in 1991 the average worker in Rwanda worked for only 191 days, 45 days less than in most other comparable countries. The action plan seeks clarification of the rules governing overtime and seeks to reduce the number of the various paid leaves. ort Promotion 3.26 Rwandese exports are not diversified, with about 80 percent of receipts being accounted for by coffee and tea. Other traditional exports, including mining products (tin), pyrethrum and chinchona, have been in steady decline. During the second half of the 1980s these traditional exports and nascent non-traditional ones suffered from low profitability caused mainly by inadequate economic policies, particularly the overvalued exchange rate. Coffee exports also stagnated because of steady decline in the international price and insufficient investment in the activity to produce higher quality products. Rwandese tea is one of the best in the world, but its potential with respect to production volume and its price on international markets, is yet to be fully realized. The problems of the traditional export activities are also related to inefficient PEs that operate upstream. These have tended to skim-off a portion of the activities' surplus and contribute to losses. Non-traditional exports, particularly manufactured and horticulture products, have shown some potential in recent years. Their development has been constrained, however, by logistical difficulties, including air transport, and other weaknesses attributable to insufficient know-how. 3.27 Reforms agreed to under the PE reform program (paras. 3.14-16) are expected to lead to greater efficiency in export activities following the restructuring and privatization of inefficient firms. The reform and privatization of coffee and tea operations are the focus of the proposed AGSAC, which should help boost both activities. Non-traditional exports also would benefit from the improved business environment and measures supported under this project, including the liberalization of air transport (paras. 3.29-3 1). Because of the weak production base, expectations for export diversification and growth in the short- to medium-term should be realistically moderate. Nevertheless, while the exchange rate adjustments have improved significantly their competitiveness, the full realization of the exports' potential will require additional measures. 3.28 To be internationally competitive, exporters will be compensated for indirect taxes levied on their inputs. The compensation system alroady exists in the export promotion law (adopted in 1991), but it does not function because administrative procedures have not yet been adopted (the law provides for a restitution, in the form of a tax credit, equivalent to 10 percent of the fob value). Appropriate procedures are expected to be put in place before the 1994 budget is approved: the tax credit would be in the form of a negotiable certificate delivered promptly on the basis of only two documents, the certification of export and proof of foreign exchange repatriation. A concerted effort is being considered to encourage new purely export-oriented investments. A special regime, in the form of a free-zone legislation, will be adopted to stimulate export processing activities, manufacturing under bond, and reexport trade (para. 4.15). The examples of successful free-zones suggests that the main desirable  -17- characteristics of this regime would include very simple regulatory requirements, a conducive tax structure (typically a single tax of 15 percent on profits), and liberal labor regulations, including the hiring foreign technicians and managers, and firing workers. 3.29 Air Transport. As a landlocked country, Rwanda's trade is dependent heavily on international land and air transport. Most non-traditional exports, particularly those that are perishable and of high value such as horticulture products, need to reach their final destination quickly which mandates the use of air transport. Three Rwandese institutions provide support services and regulate the sector. Airport management and various services (navigation, lighting, passengers etc.) are the responsibility of a PE, the 'R6gie des aeroports". Air Rwanda, the national airline, performs handling services at the airport and offers freight service to Europe with scheduled airlines; the market shares are now determined by an agreement. Finally, air transport is regulated by the Ministry of Transport and Commrunications (MINITRANSCO). Its responsibilities include approving landing rights, in which matter it always consults with Air Rwanda. 3.30 Transport of freight by air is costly and there are only a handful of regular scheduled destinations. A significant part of these problems is caused by inadequate regulatory arrangements and the inefficiencies of Air Rwanda and the 'Regie". Airport fees for navigation, passenger tax and lighting, are broadly in line with those levied in neighboring countries (Burundi, Kenya and Uganda). Landing fees and related services, which cost about 50 percent less in Kenya, need to be revised (para. 4.16). Airport operations are being studied (under Cr.2113-RW) with a view to improving performance. 3.31 Air Rwanda collects royalties from other airlines flying into Rwanda, which are passed on to their customers. Its handling operations are highly profitable; figures show an income/cost ratio of 600 percent in 1990. The royalties and profits are used to subsidize commercial operations, which showed a deficit equivalent to almost US$2 million in 1990, not even covering variable costs. The market sharing agreement is detrimental to competition and high handling costs penalize exports and imports. Finally, the lack of regular air connections and administrative difficulties and the cost of arranging for charter flights is an impediment to exports, which together with pricing policies will be taclded under the project (para. 4.16). C. Government Strateg for Private Sector Development 3.32 The Government believes that private sector-led growth in all sectors can provide much needed employment and make a significant contribution to the diversification and expansion of Rwanda's export earnings. Rwanda's physical constraints and the limited capacity of agriculture, however, underscore the need for a vigorous program of actions in other sectors. The government strategy focusses, therefore, on the imperative of making extraordinary efforts to improve performance in the industrial and services sectors. While considerable progress has been achieved in the past two years with regard to economic liberalization, particularly in the trade regime, the critical mass and depth of reforms needed to elicit a sustainable supply response from the private sector have not yet been attained. 3.33 The development of the private sector has been hampered by policy barriers as well as by regulatory constraints. The evolution of firms has been slowed by low domestic demand and difficulties in exporting, exacerbated by an underdeveloped international transport system. Private investment also has been hindered by poor access to long-term credit as well as by the lack of initial equity, the presence of the state, as either a producer or a regulator and a relatively limited trading, handicraft, or industrial tradition.  -18- 3.34 The industrial sector is small, even when compared with low-income developing countries. Therefore, a limited supply response can have a notable impact. Most existing private and public firms suffer from only marginal viability and their existing equipment is obsolete, worn-out, and, in the case of some PEs, operate with inappropriate technologies. While existing viable enterprises would benefit from being rehabilitated, much of future economic growth is expected to come from new activities. Both private and public firms suffer from managerial deficiencies and low productivity of labor which can be improved, thus rendering the enterprises more competitive. 3.35 The Government's private sector development strategy and related policy and institutional reform measures are outlined in the Statement of Private Sector Development Policy and the matrix of reforms (Annexes 1 and 2) adopted by the Government in May 1993. The proposed strategy consists of putting in place an enabling environment that encourages investments in labor-intensive, export-oriented activities and attracts foreign investors. A vibrant informal sector also could be an important source of new entrants into modern activities. Informal sector entrepreneurs, however, need a conducive tax and regulatory regime to bring them into the formal sector (paras. 2.10-11). 3.36 In order to turn around the performance of the private sector and give it a central role in Rwanda's future development, the Government intends to combine policy reforms, institutional strengthening, and aggressive action to attract and develop private entrepreneurship. Both labor and capital will be priced freely to encourage employment creation. Furthermore, the effective disengagement of the state from the productive sectors will provide new private investment opportunities. Public disengagement will be made rapidly where the opportunity presents itself (where the state holds a minority share), but may realistically take longer in other instances (para. 3.16). 3.37 The development of the private sector will depend on its acquisition of know-how and the development of a skilled labor force. In the long run, the main objective will be to upgrade and extend primary and secondary educition, giving greater emphasis to French, mathematics, and sciences and to decreasing the number of high-school drop-outs. In the short- to medium-term, the focus will be on improving and expanding vocational training facilities and management programs. Some of these capacity-building efforts are expected to target key segments of the labor force with growing private sector involvement in their design and implementation. The Government also proposes to support private- sector driven efforts to strengthen business managerial and technical know-how immediately (Annex 5 and paras. 4.19-21). 3.38 Beyond continuing efforts aimed at macroeconomic and political stability, the economy will be opened further to external competition through the adoption of a more active exchange rate policy, a further reduction in effective tariff protection from imports, and full current account liberalization. These measures, which are supported by the ongoing structural adjustment program, will create a free foreign exchange allocation system and reduce the anti-export bias. Many of these reforms were initiated in 1991, but their implementation needs to be strengthened and their coverage broadened (paras. 3.4-8). 3.39 Additionally, reforms will be extended to taxation (paras. 4.10-11) and the regulatory and legal framework (paras. 4.12-13 and Annex 6). The objective of tax reforms will be to create a geneca1 system that not only does not discourage investors but goes beyond best practices in other countries, such as Mauritius, to compensate for Rwanda's physical constraints. The resulting tax burden would be more encouraging of investment, but would maintain fiscal revenues by combining lower tax rates with better tax enforcement and more transparent provisions. The objective of regulatory reforms will be to remove administrative barriers to enterprise creation and to eliminate those instances of business licensing that serve no useful purpose. These reforms will be supported by a longer-term effort aimed at updating  -19- obsolete laws and improving the enforcement of contracts. The resulting legal framework would incorporate clearer provisions for enterprises and workable bankruptcy laws and develop the private legal and paralegal professions. 3.40 Given the small size of the domestic market, an export orientation is essential. Affirmative action for exporters will be necessary. Private consulting services partly financed by the special fund (Annex 5 and paras. 4.19-21) will be made accessible to exporters also, in order to help them resolve their logistical, marketing, and other problems. The Government will monitor and identify bottlenecks in various export subsectors and help resolve problems as they arise. Air transport, which is expected to be the main mode of transport for exports, should be liberalized (para. 4.16). Other measures could also help promote exports. Effective implementation of the simplified tax compensation scheme will also be important. The tax code, and a free-zone legislation (para. 4.15) need to be used as a tool to attract export-oriented investment and small-scale enterprises. 3.41 The main remaining distortions are found in the labor market (Annex 7 and para. 4.14). Evidence from the unregulated informal labor markets suggests that Rwanda has a comparative advantage in labor cost. In many instances, however, the formal sector does not benefit from this advantage because of labor laws and regulations that increase labor costs substantially. Without significant reductions in these costs, the growth of both industrial exports and small and medium-sized enterprises is likely to be severely constrained. Moreover, Rwanda needs to place greater emphasis on improving labor productivity through the development of skilled labor, by upgrading manpower capabilities and increasing the technical and industrial orientation of the educational system. IV. THE PRJECI A. Project Objectives and Justification 4.1 The Bank's main objective in Rwanda is to promote sustainable growth spearheaded by the private sector with the Government acting as facilitator and provider of social services. To meet this goal, the Bank is supporting the establishment of an incentive framework conducive for private sector investment, and providing the means to enhance private sector competitiveness by encouraging its rehabilitation. The structural adjustment and public enterprise credits are supporting the divestiture of the State from productive and commercial activities and significant trade and price liberalization which constitute significant steps towards opening the economy to internal and external competition. 4.2 Experience with adjustment in other countries has demonstrated that specific incentives, institutional, and legal and regulatory issues hindering private investment cannot be addressed exclusively by macroeconomic and public enterprise reforms. The removal of sectoral policy constraints and institutional barriers is crucial for a substantial supply response. The Government has therefore requested additional Bank support in these areas, which will be provided through two adjustment operations in agriculture and the financial sector as well as through the project. The adjustment programs will provide the Government with the financing required to sustain the balance of payments, while the project will provide complementary resources for investment and institutional strengthening. 4.3 The proposed operation would therefore help create a business environment that would enable the private sector to become the engine of growth. The action plan calls for measures aimed at removing the key constraints to private sector development, including wide-ranging tax, institutional, legal  -20- and regulatory reforms. To help ensure rapid and tangible results, the project will provide long-term funds for private investment fincing and expert support to private operations and promoters, helping them to become more efficient and able to take advantage of business opportunities. In addition, IDA will provide the Government with the means to secure prompt and effective implementation of the agreed measures and to strengthen its long-term capacity to be effective in its role of facilitator. The project has explicitly taken into account the planned and ongoing efforts of the donor community to ensure complementarily and avoid wasteful duplications. B. Lessons from Previous Bank Experience and Bank Group Straten 4.4 Since the late 1970s, IDA has extended four lines of credit to the development bank (BRD). The latest Credit (Cr. 1650-RW) was approved in 1986. It is fully committed and disbursements should be completed by the Closing Date of December 31, 1993. The most recent project Completion Report (PCR, No. 8799-RW) assessed the second and third Credits (Cr. 896-RW and 1344-RW). It concluded that: (a) BRD faced problems due to the deteriorating macroeconomic environment and increasing government interference; (b) BRD lending to risky small scale enterprises would adversely affect the quality of its portfolio due to the low interest charged; and (c) recommended that future operations should move away from a single institution approach towards an Apex type operation in order to enhance sectoral performance. The project includes an Apex line of credit as one of its components and the proposed FSAC is expected to tackle financial sector policy and institutional issues. 4.5 The experience of technical assistance projects in Rwanda has been mixed, in part due to lack of ownership by the Government, and partly because experts have tended to substitute themselves for their counterparts. The assistance for institutional strengthening proposed for the Ministry of Commerce and Industry will draw lessons from the approach being implemented under the Public Enterprise Reform project (Cr. 2113-RW). This approach relies on a mixture of short- and long-term assistance provided by international and local experts, collaborating closely and effectively with qualified and motivated government counterparts. The assistance to the Ministry envisaged under the operation will be provided by local experts, to the extent possible. It will be organized so that it has adequate access to decision makers to ensure rapid actions while working as a team with Ministry of Commerce and Industry's staff and providing them with on-the-job training. 4.6 Adjustment lending in Rwanda dates back to 1991 only. During this short time period, the Govermnent has demonstrated its willingness to follow up on its commitments. Implementation, however, has been lacking at times. In some cases this was caused by circumstances that are difficult to avoid; for instance the larger than agreed budget deficit was caused by increased military expenditure to cope with security problems. In other cases implementing agencies have lacked the necessary resources and capacity to ensure speedy and effective reforms. To avoid the second problem, the project will finance the resources required by institutions responsible for executing the agreed private sector reforms. 4.7 The Bank group strategy is to support private sector development through adjustment credits, and investment and technical assistance operations. The ongoing adjustment program (SAC) will be reinforced and broadened by two proposed sectoral adjustnent operations in the financial and agriculture sectors (FSAC and AGSAC). The IFC has expressed renewed interest in Rwanda and envisages future involvement in the privatization of PEs and financing private investment to complement the Apex line of credit. Finally, the ongoing Public Enterprise Reform Credit is helping the Government in its PE restructuring and divestiture efforts.  -21- C. Prolect Description 4.8 The project is an investment operation comprising of a line of credit to finance investment projects through participating financial institutions (PFIs); a fund to provide market-based demand-driven management consulting support to private companies and promoters (the PSSF); and resources to strengthen institutions (BNR, the Ministry of Commerce and Industry and the proposed Tribunal of Commerce) responsible for facilitating private sector investment and development. These mutually reinforcing components will ensure that the major internal and external constraints to the sector are alleviated, and that long term resources are available to finance the private sector investment stimulated by the elimination of these constraints. In addition the Government will continue the process of policy reform under this operation, undertaking critical actions spelled out below (paras. 4.9-16) and in the Statement of Sectoral Development Policy and the policy matrix (Annexes 1 and 2). Imlementing the Government Strategy: Policy Measures 4.9 The implementation of the government strategy is supported by the project. The Government has agreed on a set of objectives and the associated timetable for actions (Annex 2) and will ensure that implementation agencies have the required resources. The realization of the strategy would entail taking specific measures to tackle the following policy constraints: (a) Enabling private sector growth through (a) the adoption of a clear and well adapted legal and regulatory framework, particularly with regard to legal enforcement of contractual obligations (para. 4.12); (b) effective liberalization of factor markets, particularly easing labor regulations with respect to compensation and hiring (Annex 7 and paris. 4.14); (c) a more evenly distributed transparent tax system that lowers the maximum tax burden and causes fewer distortions in investment decisions (para. 4.10); and (d) amelioration of export incentives (para. 4.15). (b) Attracting new investments and improving the competitiveness of existing private firms by: (a) reaffirming the principle of freedom to invest without restrictions on the size of the investment, the sector and ownership; (b) availing long term resources to the financial sector so that it can finance medium- and long-term investment (paras. 4.17-18); and (c) helping overcome managerial and entrepreneurial shortcomings, which have led to poorly conceived projects and make firns inefficient (paras. 4.19-21). (c) Strengthening key institutions (paras. 4.22-23), including BNR, the Ministry of Commerce and Industry, and the Ministry of Justice (Tribunal of Commerce), responsible for implementing and following-up the desired private sector development strategy and ensuring that the agreed measures are put in place properly. 4.10 In the area of tax reform measures to be taken include the following: (a) Allowing banks and financial institutions to deduct allocations to provisions for doubtful loans from taxable profits when such allocations are made in accordance with loan classification and provisioning guidelines issued by BNR. (b) Replacing the turnover tax rate of 10 percent with a value-added tax (VAI) of 10 to 15 percent.  -22- (c) Implementing reductions of the corporate income tax rate, starting with the elimination of dividend taxation. (d) Counteracting the effecs of lack of inflation accountng and inadequate depreciation allowances by revising schedules allowing for faster depreciation of machinery and equipment, by permitting the legal, tax deductible, reevaluation of assets, and allowing to carry-forward losses over five years instead of four years. 4.11 During negotiations agreement was reached that, except for the VAT which requires further preparation and will be introduced later-on, the revenue neutral reforms listed above would be implemented by end 1993 (para. 7.5 (ii)). The mid-term review will assess the implementation of these measures and will evaluate and study the need for further reforms, including the introduction of the VAT, and the possible reduction of the tax rate on corporate income, from its present rate of 50 percent, within the restrictions imposed by the budgetary situation. 4.12 In the area of business law reform, the project would support the establishment of the Tribunal of Commerce (para. 3.24) as well as the implementation of the action program to put in place modern business laws and remove observed deficiencies by undetaking the following (the detailed description of the proposed reforms are set forth in Annex 6): (a) Liberalization of the rules governing the establishment, registration and functioning of business enterprises (para. 7.5(iii)). (b) Simplification and updating of the regime of negotiable financial and commercial instruments, guaranties, secured transactions, sales, leasing and factoring (para 7.5(iii)). (c) Modernization of bankruptcy procedures (para. (7.5(iii)). (d) Promulgation of a law establishing the Tribunal of Commerce, appointing a qualified and experienced lawyer as its President, and adopting the text regarding its organization and functioning (para. 7.4(ii)). (e) Propose new administrative procedures and an acceptable timetable for settling pending disputes related to banks' loans within a period of three years (paras. 3.24 and 7.4(ii)). (f) Authorize the creation and functioning of private legal and paralegal professions including notaries-public, process servers, liquidators and auctioneers (paras. 3.24 and 7.5 (iii), and Annex 6). 4.13 The above undertakings were agreed to by the Government during negotiations; (iv) and (v) are conditions of disbursement for the institutional strengthening component; (i)-(ii) and (vi) would be completed by December 31, 1994. The project wIll finance, through its assistance to the Ministry of Commerce and Industry (paras. 4.35), consulting services and studies to codify and modernize Rwanda's commercial real estate, and other economic regulations and legislation. Most of the reforms and revisions require technical work which is expected to be completed during 1993 and 1994 and implemented by December 1994. To allow sufficient time to determine its impact, the revised legal framework will be assessed during the mid-term review of the project. A decision on the creation of the Tribunal of Commerce was confirmed during negotiations (para. 7.2 (ii)). Belgian assistance has already financed  -23 - an initial study and has committed a grant (about US$1 million) to finance the technical work required to revise business laws. The Credit would thus only finance limited short term complementary assistance. 4.14 The Government has agreed to revise the labor code (para. 3.25) to accommodate the following changes: (a) abrogation of the obligation of prior enrollment in the registry of jobs; (b) elimination of work permits for nationals; (c) setting a uniform minimum wage; (d) permitting wages and annual increases to be freely negotiated between the employer and the employee; (e) clarifying the rules governing overtime; and (f) reducing the number of the various paid leaves. During negotiations the Government agreed to implement these measures by December 1994 (para. 7.5 (iv)), which would allow adequate time for adoption by the National Assembly. These changes and other outstanding issues would be discussed during mid-term review. 4.15 To remove the bias against exporters, the administration of the tax rebate will be made operational in 1993. The project will also fnance the required assistance for the Ministry of Commerce and Industry to prepare the free-zone legislation (para. 3.28). Technical work should be completed in 1993 and during negotiations agreement was reached that the free-zone regime would be in place by December 31, 1994, (para. 7.5 (i)). The effectiveness of export promotion policies and ways to further enhance them will be assessed during mid-term review. 4.16 In the area of air transport (paras. 3.29-31), and with a view to facilitate exports, the project will have as one of its objectives the simplification of the procedures for obtaining landing rights for charters so as to allow for timely and systematic delivery of the necessary permits within 24 hours of a request being submitted. This will require the elimination of all de facto regulatory power of Air Rwanda. Under the PE reform project and on the basis of a recently completed study, landing fees will be reassessed in 1993 and made consistent with marginal cost pricing. During negotiations agreement was reached that appropriate measures would be taken so that air transport would be liberalized by June 30, 1995 (para. 7.5 (i)). Supporting Investment: Credit Component 4.17 The current macroeconomic projections by the Bank and the Fund estimate private sector investment of about 6 percent of GDP annually (US$120 million) to achieve GDP growth of 4 percent over the next three years. The project proposes a relatively modest line of credit of US$7 million on the expectation that this small operation will enable BNR and the PFIs to internalize the system and will satisfy existing pent-up investment demand. The size of the line of credit component is estimated on the basis of actual investments by private firms between 1985 and 1990, taking into account only viable projects, as well as the pipeline of existing projects as a base, adjusted by the estimated pent-up demand and projected investment response to the policy stimulus. IDA financing will be through an Apex line of credit (paras. 4.24-25). The line of credit would finance, through eligible financial intermediaries, the foreign exchange and local component of investment for new and existing enterprises registered in Rwanda on the condition that such projects are economically viable, financially profitable and environmentally sound. Investment to rehabilitate privatized PEs and the necessary working capital associated with investment will also be eligible. It is expected that the majority of projects will be manufacturing and agro-industrial investments as well as for the permanent working capital of industrial enterprises. 4.18 After four years of postponing investments, considerable pent up private investment demand for new, and extension and rehabilitation projects has built up (Annex S-A). BRD's pipeline of projects under study would require loans of about 7.2 million for 70 project proposals. The Ministry of  -24- Commerce and Industry has also compiled a list of 60 private investment projects, mostly exclusive of the BRD pipeline. Assuming a 50 percent casualty rate, these projects would require a conservatively estimated US$20 million in loan financing. While comprehensive global rehabilitation investment needs and permanent working capital figures were not available, case studies showed that their respective financing requirements would be around US$10 and USS4 million, respectively. Thus the estimated investment financing demand over the next three years surpasses US$30 million. Assuming continued and speedy implementation of the legal and regulatory reforms, the prospective economy-wide investment demand is therefore estimated to steadily increase from US$7 in 1993 to US$20 million a year in the following four years. On a commitment basis such levels of investment demand imply an annual gross term credit demand of US$5 to US$13 million in local and foreign currencies. It is estimated that during the commitment period of September 1, 1993 - December 31, 1998, demand for IDA funds would amount to 18 percent of the total estimated term credit demand of US$40 million, i.e., US$7 million. Remaining financing would come from the supply of term credit resources in the banking system and from external donors, including IFC's Africa Enterprise Fund (AEF). Encouraging Entrepreneurship: Private Sector Supnort Fund 4.19 Private entrepreneurship in Rwanda remains nascent. Most firms suffer from managerial, marketing, technological and other deficiencies which decrease their efficiency and competitiveness. The absence of concrete affirmative actions aimed at improving initial project conception and subsequent enterprise efficiency, would thus prevent supply response to reach its potential and be sustainable beyond the medium term. At present, the problems typically encountered tend to be relatively straightforward (e.g. project conception and feasibility, financial management and accounting, stock management, adopting simple improvements design and production techniques). These problems are expected to become more complex as the private sector grows and becomes more sophisticated (e.g., issues related to technological acquisition and export development). 4.20 The project, learning from lessons of the past, will tackle this problem by financing the operations of a demand-driven market-oriented private sector support fund (PSSF, detailed in Annex 5). Private entrepreneurs will be encouraged to hire management consultants with the expertise needed to solve their accounting, marketing, production and other problems. The fund will share in the cost of securing these services through IDA financed grants from the Government to private promoters (paras. 4.33-44). This approach will thus reduce the risks caused by the initial uncertainty associated with investments by firms in human capital. The PSSF will also play an important role in sensitizing the private sector to the need to enhance its performance and competitiveness, by organizing specialized training programs and undertaking other forms of advertising to ensure that all promoters, irrespective of size and location, are aware of this facility. The seminars would be designed to encourage managers to focus on their operations' internal problems. 4.21 The primary rationale of the PSSF is therefore to strengthen managerial, technical and operating expertise of the private sector, make it more competitive and encourage it to find investment opportunities, so as to support sustainable private sector-led economic growth. A secondary objective is to create a competitive market for quality consulting services and thereby open new opportunities for the private sector. Private promoters would select their own qualified consultants and would pay for part of the cost of the service the rest of which, up to a given ceiling and on a declining basis, would be financed by the Fund. The Credit would contribute US$1.5 million to this fund (a modest sum equivalent to about 0.5 percent of annual value added by private industries and services), on the expectation that once the approach is demonstrated to be a success other donors would provide additional resources. Seminars, advertizing, management, monitoring and implementation costs are estimated at an additional  -25- US$1 million, also to be financed under the project. All private industrial and service activities, except for large firms employing more than 250 permanent workers and subsidiaries of foreign firms, would be eligible to use the fund and participate in the seminars. Supporting Improvements in the Business Environment: Institutional Strengthening Component 4.22 Weakness in public institutions and unclear responsibilities have led to uneven treatment of the private sector and lack of coherence in policies. Under the present arrangements the Ministry of Commerce and Industry is the main institution responsible for implementing the private sector strategy and facilitating private sector development, outside agriculture. This Ministry lacks the capacity in human and financial resources to implement this aspect of its mission. Moreover, it does not have a plan of prioritized actions. The Government has agreed that the Ministry should: (a) be responsible for monitoring and implementing policy actions agreed to within the context of the private sector development strategy; (b) coordinate and follow on behalf of Government actions undertaken by donors; and (c) establish an effective dialogue with representatives of the private sector and, to the extent feasible, respond to their complaints (outline of draft terms of reference for the strengthening of the Ministry of Commerce can be found in Annex 9). 4.23 The project will provide financing of US$1 million to the Ministry of Commerce and Industry, which will cover the incremental costs associated with the expanded responsibilities of the Ministry. This amount will provide resources to ensure proper implementation of the agreed strategy, including short- and long-term experts, training the permanent staff of the Ministry, purchasing the required office and computer equipment, and ensuring the effective implementation of the reforms supported by the project (Annex 2 and paras. 4.9-16). The creation of the Tribunal of Commerce (Annex 6) is another key action supported by the project and once the condition of disbursement related to its creation is met (para. 7.4 (ii)), it would receive financing of US$0.7 million to cover its short term assistance, equipment and training needs. Finally, another US$0.3 million will be provided to BNR, as a government grant, to finance its training needs as well as that of key staff of financial institutions participating in the Apex credit (para. 4.24). D. Institutional Arraneements APEX 4.24 Project Management. The credit component would be made available to all sound privately sponsored investment projects, through eligible financial institutions with BNR acting as an Apex institution. These institutions were appraised and are described in detail together with BNR in Annex 8. Proceeds from the Credit would be channelled through BNR to the eligible participating commercial banks and the development bank, which would in turn lend to the final beneficiaries of the project. The participating financial intermediaries wIll assume the full financial and commercial risks of the subloans granted under the Credit. BNR has agreed to act as the Apex institution, and to make available necessary budgetary and staff resources to that effect through its Department of Monetary Policy (DPM), which is also in charge of rediscounted credit operations. A one percent interest margin will cover the required operating budget of the subloan administration component (para. 5.2). The DPM was appraised and found to be a suitable conduit for administration of the Apex Credit component (Annex 8). However technical assistance and training of the staff of the DPM and participating financial intermediaries will be required, and to that effect, US$300,000 will be allocated under the institutional strengthening component (paras. 4.23 and 4.36). The DPM will review appraisal reports of PFIs and approve their refinancing requests, as well as subloan administration and supervision. BNR has agreed  -26- to enter into a Subsidiary Loan Agreement with the Government defining the functions and responsibilities of the DPM, under terms and conditions satisfactory to IDA. The signing of the Subsidiary Loan Agreement is a condition of effectiveness of the Credit (para. 7.3). 4.25 Eliiibility of Participating Financial Intermediaries. Banking institutions in Rwanda are generally sound, but the difficult environment of the past few years has affected the quality of the banks' portfolios. The financial and institutional appraisal undertaken and detailed in Annex 8, has determined the eligibility of two commercial banks and, subject to the implementation of a restructuring plan, of the development bank. BCR, BK and BRD are deemed eligible as participating financial intermediaries provided that they meet specific eligibility conditionalities and satisfy general eligibility criteria as detailed below. With regard to the fourth commercial bank, BACAR, its eligibility is deferred until it has implemented the recommendations of its auditors to increase its provisions for risks and take measures to improve its interest margins and profitability. A review of BACAR's 1992 audited financial statements will help determine whether it has implemented such recommendations. As for BRD, it has already taken measures to improve loan collection, and it has agreed, during negotiations, to implement the recommendations of the just completed study, analyzing its sustainability (para 7.2(iv)). Measures to be taken include making additional provisions for risks of losses, organizational restructuring to close unprofitable branches, and staff reduction. BRD has also agreed to defer plans to enter into commercial banking activities pending further studies and implementation of the agreed measures. An action plan to improve BRD's performance (Annex 14) has been agreed to during negotiations, and satisfactory progress on its implementation is a condition of BRD's eligibility (para. 7.6(iv)). 4.26 Participating financial intermediaries will agree to implement institution-buildingmeasures as required under the project, and to undertake annual audit of their financial statements by independent external auditors satisfactory to IDA and BNR. The eligible participating financial institutions (PFIs) will enter into a Participating Agreement with BNR (para. 7.6 (ii)) in which the PFIs further agree to undertake the following: (a) Designate qualified staff to manage the subloans financed by the project. (b) Perform satisfactory subproject appraisals based on agreed procedures and formats and submit the appraisal reports to the DPM; in so doing PFIs will pay particular attention to sensitizing project promoters on potential environmental hazards of individual subprojects, and adhering to Bank Procurement and Environmental Guidelines agreed under the project, in close coordination with DPM. (c) Maintain simple administrative, lending, guarantee, and disbursement procedures to facilitate commitment and disbursement of investment projects. (d) Ensure that resources are used by the final borrowers for the purposes intended. (e) Supervise the implementation phase of subprojects and promptly inform the DPM of major problems expected to delay disbursements and project completion; to that effect submit periodic reports on the status of subprojects. (f) Provide training for their operational staff and technical assistance to build up internal capacity and carry out the tasks described above.  -27- (g) Adhere to agreed terms and conditions of lending and repayment of loans and bear the credit risk. (h) Provide the DPM and IDA with such information as they would reasonably request, including annual audits of their financial accounts and statements performed by qualified and independent auditors, acceptable to IDA. 4.27 A draft participating agreement has been finalized with the interested parties during negotiations. Receipt by IDA of a satisfactory signed agreement between BNR and a participating intermediary is a condition of disbursement of the credit component for that PFI (para. 7.4 (i)). In addition, all PFIs will have to maintain a satisfactory capital adequacy ratio according to the Cooke method (para. 7.6 (iii)). 4.28 Eligible Beneficiaries and Subproiects. All productive and extractive activities, transport, trade and all other services which contribute to the economic development of Rwanda will be eligible for financing. The only ineligible projects will be the financing of land acquisition, development, and housing and office construction, and investments by parastatals with majority government direct and indirect ownership. The line of credit will finance fixed assets and associated permanent working capital for new operations, extensions and rehabilitations. Self-standing permnt working capital requirements for industrial enterprises will also be eligible. Working capital requirements of commercial and service enterprises are not eligible. Eligible subprojects will have to meet the following criteria in order to be approved for refinancing under the credit: (a) A minimum projected financial rate of return of at least 10 percent in constant prices for all subprojects as well as a minimum economic rate of return of 10 percent for subprojects with estimated investment costs of US$350,000, or more. Q,) The projected debt servicing capacity (defined as the ratio of interest and principal annual payments to cash-flow generated from operations), should be no less than 1:1.5 over the life of the subproject and the debt to equity ratio should be no more than 2.33:1 with the ratios calculated on the basis of the enterprise's total debts, inclusive of those to be incurred under the subproject. (c) Satisfactory environmental impact reviews will be undertaken according to the National Environmental Action Program, and as deemed necessary by the DPM or IDA, in cases where the technical review of appraisal reports of selected projects indicate they represent potential environmental hazards (para. 6.3). 4.29 Sub-loan Processing and Administration. Sub-loan processing under the project will be coordinated and centralized by the DPM, which will serve as the principal link between IDA, the participating intermediaries and the beneficiaries for the project's investment component. Subproject appraisal reports would be prepared by the beneficiaries in accordance with the agreed project appraisal procedures and criteria with, as needed, assistance from the DPM, and presented to the financial intermediaries. Tbe latter would review the fmancing requests in accordance with their own appraisal and lending criteria and internal operating and decision procedures, and submit an appraisal report conforming to the agreed format to the DPM for refinancing approval under the line of credit. 4.30 The DPM would review the appraisal reports to verify that all eligibility and financing criteria and conditions are met. This appraisal review would be carried out on the basis of a simplified  -28 - appraisal report for projects with an estimated investment cost of US$350,000 or less (within 5 working days) and on the basis of more in-depth reports for projects with a higher investmnent cost (within 10 working days). These reviews will also ensure that subborrowers have undertaken procurement consistent with agreed Bank Group guidelines (para. 5.18). If the subproject is eligible for refinancing and satisfies the required technical, economic, and financial rates of return criteria, the DPM will authorize the intermediary to present the relevant disbursement documents for reimbursement of eligible expenditures or opening of letters of credits for foreign suppliers. Subprojects requiring subloans equivalent to, and exceeding 13 percent of the Credit component, i.e., US$900,000, would not be eligible for refinancing. 4.31 To ensure internalization of project appraisal procedures, PFIs, excluding BRD, would require prior IDA approval of their first three appraisal reports, including at least one requiring an economic rate of return calculation. In view of BRD's familiarity with IDA procedures and its experience in project appraisal it will be exempted from the beginning from prior IDA review. The DPM would review and approve PFI requests unless IDA otherwise agrees. IDA would review a sample of subprojects, appraisal reports, and approvals on an ex-post basis during supervision missions. 4.32 BNR, through the DPM, will serve as disbursement and collection agent for the financing granted to intermediaries. The DPM would directly manage subloan refinancing and collection operations upon approval. On the basis of the DPM's instructions and authorizations, the Financial Operations Department of BNR would debit or credit the appropriate financial intermediary's accounts, and execute letters of credit confirmations and other disbursement operations without further intervention in subloan processing. Signing of a Subsidiary Loan Agreement between the Government and BNR is a condition of Credit effectiveness (para. 7.3). Private Sector Supoort Fund 4.33 This component will be under the supervision of the Ministry of Commerce and Industry, but managed independently by a small team of experts financed by the project and housed in the Bank of Kigali, chosen because of its independence from the Government, dynamism and good image among the private sector. The BK has already agreed to provide the appropriate office space at nominal fee. The Credit would finance US$2.5 million for this component. The approach is complementary to that of other donors and consists of a demand driven scheme, whereby the consultant is chosen by the entrepreneurs who also specify the nature of the assignment. A portion of the fees of such consultants will be paid by a fund set up specially for this purpose (detailed in Annex 5). The following objectives, and criteria will be used: (a) The fund's (PSSF) role is to provide matching grants. Its management and staff are responsible for making sure that consultants hired are qualified, checking that the work program is clear, monitoring the interventions and evaluating their effectiveness. (b) The approach proposed involves subsidizing the service recipient and not the provider of the service. Entrepreneurs must show real commitment by sharing in the cost and would 'graduate' so that their use of the fund is limited to US$100,000 of consulting services. The following cost sharing scheme is proposed:  -29- Cumulative Consulting Costs Paid by: PS Beneflciaa Up to US$10,000 70% 30% US$10,001 to US$50,000 50% 50% US$50,001 to US$100,000 30% 70% (c) In order to focus the attention of the private sector on the existence of inefficiencies within their firms, enhance their analytical skills and encourage their initiative, regular specialized ten-day training seminars will be organized (see Annex 5 for seminar outline). These seminars would first be given by international experts but the methodology should be progressively transferred to local trainers. (d) The fund will finance equally local and international experts, but local firms are likely to engage in joint ventures with foreign consultants to upgrade their own skills. With regards to international experts, the fund would maintain a roster of qualified French- speaking retired executives who could provide expert advice, and could also help organize the training seminars, at a fraction of the costs of other experts. (e) To ensure transparency and efficiency, the existence of the fund should be properly advertized through the media, so that all entrepreneurs are aware of it. A reputable NGO, IWACU, will be responsible for explaining the approach to the informal/micro- enterprise sector. Larger, formal enterprises will be reached through the association of industrialists and the CCIR, once it is restructured. The following principles will also be respected: (a) the cost sharing rules should be strictly adhered to; (b) the accounts will be regularly audited by an external auditor, up to twice a year during the first two years of operations; and (c) the discretionary power of the fund management will be minimized. In particular, only consultants who are clearly not qualified for the work proposed or who have a poor track record with the fund can be rejected. (f) Firms with more than 250 permanent employees or with at least 20 percent ownership of capital by a multinational corporation, as well as PEs with majority public ownership would not generally be eligible for financing by the PSSF. 4.34 During negotiations agreement was reached on the rules and procedures of the fund. The selection of a qualified international expert, financed under the Credit, to manage the fund, and the adoption and publication of PSSF procedures in at least one newspaper are conditions of disbursement for the fund (para. 7.4 (iii)). The fund manager will select a Rwandese expert as his deputy and hire appropriate support staff (maximum of two). It is expected that after two years the intenational expert will be replaced by a national expert, possibly the deputy manager. The PSSF will prepare quarterly reports on its activities, which should include problems encountered, describe the actions undertaken, and provide an ex-post assessment of actions financed after allowing for sufficient time lapse. The fund's management will be responsible for stimulating the interest of other donors and trying to secure additional financing for its continued operation. This component will be subject to a comprehensive assessment after it has been operational for one year and during the mid-term review. During both reviews the PSSF's concept, operational parameters and effectiveness will be evaluated and appropriate modifications proposed accordingly.  -30- Intitutional ngheni 4.35 Improvements of institutional capabilities will be financed under the project for an estimated amount of about US$2 million. Half of this financing (US$1 million) will be allocated to the Ministry of Commerce and Industry finance short- and long-term consultants, including a team of experts, and the training and equipment requirements. To address the need to rationalize and coordinate various technical assistance projects, the Government requested that IDA fund a team of experts to help implement a coherent and comprehensive private sector strategy, to coordinate and optimize the various donor programs of assistance available to that effect, and to engage in a continuous and effective dialogue with the private sector to identify and relieve bottlenecks. The team will consist of three full time local or international (one at most) experts assisted by part-time experts. One of the consultants would head the team, and thus manage this subcomponent. The experts would be attached to the Ministry of Commerce and Industry Minister's office and report directly to the Minister. Hiring of at least one expert, the team leader, who would prepare of the terms of reference, staffing and operating procedure, is a condition of disbursement (para. 7.4 (ii)) of this component of the project (see Annex 8 for draft outline of terms of reference). 4.36 The other element of this component will be aimed at supporting the creation of the Tribunal of Commerce (Annexes 5 and 8). Without this institution the business law reforms will not be implemented effectively. The operation will support the creation of this Tribunal by providing it with the necessary funds to purchase office and other equipment, realize a training program and implement the required automation. The amount of resources required to achieve these objectives is estimated at US$0.7 million. Finally US$0.3 million will be allocated for BNR and PFI training and assistance (para. 4.23). V. THE PROPOSED CREDIT AND MAIN FEATURES A. Amount and Allocation of Funds 5.1 The proposed IDA Credit of US$12 million will be lent to the Government, which would on-lend the credit component (US$7 million) to BNR, the Central Bank which will act as the Apex institution. BNR will make the credit component available to Participating Financial Institutions (PFIs) through a refinancing mechanism. The PFIs will in turn on-lend proceeds of the credit component to beneficiary private enterprises on terms and conditions described below. The US$2 million institutional strengthening component will be made available to executing agencies as a grant. The Government will allocate US$1.5 million, which final private beneficiaries will receive as a grant. B. Terms and Conditions of Finandng Terms and Conditions of Subloan Refinancing 5.2 The Government and BNR will enter into a Subsidiary Loan Agreement by which the Government will pass on the proceeds of the credit component to BNR at a regularly revised interest rate corresponding to the average yield over the previous three months, of 12-month deposits in the banking system. The 12-month deposit rate is a proxy for the cost of medium term funds to financial institutions. It changes periodically but, as of June 30, 1993, stood at 9 percent. Currently the rediscount and  -31- minimum deposit rates are fixed at 11 and 9 percent respectively. Once the proposed system of Treasury Bill Auction Market, currently under study, is operational, a new reference rate based on that market will be determined. This rate could, with the agreement of the Government and BNR, replace the 12-month deposit reference rate. BNR will make proceeds of the credit component available to PFIs at the same reference rate, but will retain from the interest charges repaid to the Government an administrative fee of one percent of the outstanding subloans refinanced under the credit component to compensate it for costs incurred for the execution of the project through its Monetary Policy Department (DPM). That fee is expected to be sufficient, but would be reviewed periodically in case it is demonstrated that it no longer covers the legitimate operating costs of the DPM. 5.3 In view of the currently prevailing single digit inflation rate, estimated at an annual rate of 8 percent as of end December 1992, and the Government's demonstrated commitment to maintain flexible exchange rate as well as interest rate policies, the proposed rate of refinancing, under the credit component, charged to PFIs, will closely approximate the international cost of comparable foreign exchange resources. The foreign exchange risk will accordingly be borne by the Government which will be compensated by the interest paid by BNR. The IDA-financed subloans will be reimbursed both by PFIs and their borrowers in local currency, unless IDA and the Government otherwise agree. Intermediaries will be free to charge final beneficiaries up to the currently agreed temporary maximum lending rates. Such rates, the rediscount rate and the minimum 12-month deposit rates may be revised, from time to time, by BNR and agreed with IDA and the IMF. When interest rates are fully liberalized as expected, during 1994, the final lending rate will be free. During negotiations, the Government confirmed these policies and agreed to adjust future interest rates as necessary to ensure that they remain positive in real terms (para. 7.2 (iii)). Signature of the Subsidiary Loan Agreement between BNR and the Government is a condition of effectiveness of the Credit (para. 7.3). 5.4 Under the credit component the Government and BNR on-lending rates would be reviewed at least every 12 months. Such rates would be modified by agreement between IDA and the Government, as necessary, to ensure that they continue to compensate the Government adequately for assuming the foreign exchange risk, and that they reflect the cost of foreign exchange and local resources for financial intermediaries and subborrowers. 5.5 BNR will receive IDA funds for a period of 20 years, including five years of grace starting after the date of Credit effectiveness. BNR would reimburse the funds to the Government in fifteen equal annual installments starting five years after the effectiveness of the Credit. Funds relent under the credit component to participating intermediaries would be denominated in local currency, with the same maturities as the individual subloans to final beneficiaries. Maturities of subloans to final beneficiaries would be limited to a maximum of thirteen years, including grace periods of up to three years. 5.6 Because of the scarcity of equity finance, subloans granted under the line of credit would finance up to 80 percent of the total project cost (excluding land) for extension/rehabilitation subprojects, and up to 70 percent for new subprojects. Promoters would thus be required to finance a minimum of 20 percent of subproject cost for extensions and 30 percent of subproject cost for new projects and not to exceed a maximum debt to equity structure of 2.33:1. Unless the Association otherwise agrees, the maximum size of any subloan would be limited to US$900,000 for all subprojects to ensure a greater number of credit beneficiaries. Commitments under the subloan component are expected to last through June 30, 1998.  -32- Private Sector Support Fund 5.7 The $2.5 million Credit proceeds allocated to the PSSF will be available as a grant of the Government. The PSSF will provide matching grants to private promoters to finance the cost of short term consulting services (lasting from a few days to less than a month). Private sector enterprises, including parastatals with majority private ownership and management but excluding large firms or those with significant foreign ownership (para. 4.33(f)), and promoters will be eligible to receive matching grants as many times as required, but on a declining scale basis (para. 4.33 (b)) and for cumulative consulting fees not to exceed US$100,000 per beneficiary company. Private promoters will also benefit from specialized training seminars for which they will pay a nominal fee, which would cover about 10 percent of training costs. Beneficiaries, with the help of the fund management if required, would be expected to submit a short but clear description of their problems and proposed intervention and the expertise required in the form of standardized terms of reference. Once approved, beneficiaries would hire qualified experts, sign an agreement that the grants are used for the purposes intended, and agree to provide the fund's management with information required for monitoring the impact of the interventions. Commitments under the PSSF component are expected to last through December 31, 1997. Institutional Strengthening 5.8 Funds allocated for the institutional strengthening component would be passed on as a grant from the Government to relevant institutions and would be available for commitment until December 31, 1997. The component would be managed by the Ministry of Commerce and Industry and the DPM. These institutions would review requests for financing before submitting them to IDA for approval along with a brief justification and description of the qualification of the experts, and would also process disbursement requests. C. Project Managenent. Monitoring and Evaluation 5.9 Managemnt. The Ministry of Commerce and Industry will be responsible for overall project coordination under the PSSF and institutional strengthening components, except in the case of BNR assistance. The Ministry of Commerce and Industry also will be responsible for the coordination of the mid-term review, as well as of policy discussions and follow-up with other ministries and executing agencies, e.g., Ministry of Justice (Tribunal of Commerce), Ministry of Finance, and BNR. The Department of Monetary Policy of BNR will be implementing the credit component and the institutional strengthening subcomponent for which it is a beneficiary. 5.10 Review of PSSF's first year's operations. A special review of the PSSF will be conducted after it has been operating for one year. The continuation of IDA support to this fund will depend on satisfactory results, particularly with respect to the effectiveness of services delivered to private firms. This review will draw on a direct assessment by IDA, complemented by periodic reports presented by the fund's management and the independent operational audits (para. 5.25). 5.11 Mid-Term Review. In order to test the effectiveness of new project management and execution procedures, a mid-term review of project progress will be undertaken (para. 7.5 (v)). This review will focus in particular, on impediments to enterprise creation, including administrative regulations for land titles, building permits and other project implementation features. The mid-term review would be initiated on or about July 31, 1995. The review would be a joint exercise with the Government, to be undertaken with the cooperation of the institutions concerned, including the Tribunal of Commerce,  -33 - the PSSF, BNR and the Ministry of Commerce and Industry. No later than one month prior to the Review, the Government would furnish a sufficiently detailed report covering areas to be agreed upon with IDA, including an evaluation of the progress in project implementation. The basic reference documents of such a review mission will be the policy matrix of private sector development, as well as other agreed credit and project documents. The general scope, staffing, and timing of the review will be agreed with the Government. 5.12 The joint Bank/Government mid-term review will: (a) review project progress with respect to institutional and policy reforms as well as monitorable targets listed below (paras. 5.13-14); and (b) agree on an action program, if necessary, for implementing additional policy measures, analytical studies as the basis for future reforms, and additional institutional reforms and strengthening measures. The participating IDA review mission will summarize conclusions and recommended actions for addressing outstanding issues in a detailed aide-memoire. Implementing agencies would be responsible for follow-up to be reviewed by subsequent supervision missions. During negotiations, agreement was reached with the Government to undertake the mid-term review by July 31, 1995, with significant government participation and analytical input, and that recommended actions agreed during the review would be implemented in consultation with IDA (para 7.5(v)). 5.13 Monitorable Targets. Key project indicators will be used to monitor implementation and to assess whether developmental objectives are met. These indicators are both global (commitments and disbursement under various components) and specific. In some cases specific prior targets will be set, while in others the absence of appropriate past benchmark will render setting up-front objectives difficult. In the context of mid-term review further key indicators will be developed on the basis of actual experience. 5.14 The following key project indicators have been developed and agreed to with the Government: (a) Project Implementatlon. The Credit is expected to be effective three months after Board presentation and all disbursement conditions (paras. 7.3-4) should be met at the latest another three months thereafter. As slow disbursements have been a problem in Rwanda in the past, they will be monitored and assessed according to the expected schedule. In particular the Credit should be fully disbursed by June 30, 1999 and at least by 25 percent by mid-term review. (b) Policy Objectives. The overall timetable for the policy reform objectives is set in para. 7.5 and will be monitored. In the case of business law and labor reforms a number of key intermediate steps have been identified (Annexes 6-B and 7) and their timely completion will be followed during project implementation. (c) Supply Response. The absence of an appropriate benchmark makes it difficult to assess the strength of supply response. Key indicators to be followed include: (a) incorporation of new enterprises or new individual firms on a quarterly basis (commercial registry) including a target of one industry employing over 20 people and five importers per quarter; (b) number of firms to be granted free-zone status and which start operation (one per year, exporting over US$500,000 would be considered a satisfactory target); (c) the number and distribution of firms, by type, location, and size, which use the PSSF; and (d) a mount and types of investments financed by banks, other than housing.  -34- (d) Administrative Delays. One objective of the policy reforms and institutional strengthening is to eliminate needless delays. The following will be monitored: (a) settlement of all outstanding banking disputes by June 30, 1997, with at least 200 cases being resolved during the first and second year of the project, and, once the bacldog is cleared, new cases should be adjudicated or settled within eight months after being filed; (b) export compensation should be granted within one month of request being made; and (c) Ministry of Commerce and Industry should respond in writing to private sector complaints and requests within two months of receiving them. (e) Institutional Strengthening. The purchase of about 90 percent of the office and computer equipment required by the Ministry of Commerce and Industry, and Tribunal of Commerce should be completed a year after Credit effectiveness. Computerized programs for the commercial registry and guarantee registration should be implemented at the Tribunal of Commerce by June 30, 1995. By mid-1994 the Ministry of Commerce and Industry should have created a comprehensive bibliography and brief assessment of all studies and donor projects related to private sector development, which will be updated thereafter. (f) Training Prograns. Training programs are envisaged under the PSSF and institutional strengthening components. In the case of the former, at least 75 and S0 promoters, from large scale to micro entrepreneurs, should participate during the first and second year. PSSF management will provide qualitative assessment of the impact of the seminars. Within the first year after Credit effectiveness a training program should be devised by the Ministry of Commerce and Industry, Tribunal of Commerce, and BNR and begin to be implemented. Such training should be completed by the mid-term review. 5.1S Monitori and Evaluation. Progress reports on the execution of the vaious subcomponents will be prepared and submitted quarterly by the Ministry of Commerce and Industry as regard the policy component for private sector (summary of activities, use of project funds, implementation plan and progress of studies planned, and reforms under process, etc.). The DPM of BNR and the PSSF management will submit six-monthly progress reports to IDA summarizing problems encountered in the course of executing the components and progress in implementation. 5.16 A project completion report (PCR), the content and format of which to be agreed upon with IDA, would be submitted to IDA within six months after the project closing date of June 31, 1999. BNR's Department of Monetary Policy and the Ministry of Commerce and Industry will prepare this PCR in close cooperation with the other project units. D. IDA Supervislon 5.17 The Ministry of Commerce and Industry, the Ministry of Justice (Tribunal of Commerce), and BNR will require intensive support and training during the initial stages of project implementation. Particular emphasis will be put on further, and timely, training in procurement and disbursement, as well as onvironmental safeguard procedures for subproject under the Apex component. The Tribunal of Commerce, the Ministry of Commerce and Industry, and the PSSF will require training in these areas, to be provided through the DPM and Resident Mission by Bank staff and by consultants. In view of the many technical assistance components of the project, intensive supervision (an average of 17 staff weeks anmnully) will be required during the first three years and about 7 staffweeks thereafter. Detailed IDA supervision plans into key activities are given in Annex 11.  -35- E. Procurewment Amngunb 5.18 Credit ComnnL. Subloan free limit is set at US$900,000 (para. 4.30). Procurement for subprojects financed under the credit component will be made on the basis of procurement procedures consistent with Bank's Procurement Guidelines, and agreed with the participating financial institutions. These procedures will require intenational shopping for contracts of US$750,000 or below for each beneficiary, on the basis of at least three quotations from reputable suppliers in at least two different geographical areas. Contracts for goods above US$750,000 per subproject, which at this stage are not anticipated to be many, will be subject to international competitive bidding (ICB) procedures, in accordance with Bank's Procurement Guidelines. A statement to this effect will be included in the Subsidiary Loan Agreement between the Government and BNR. 5.19 Institutional Strengthening and the PSSF. Procurement of equipment and material (including vehicles, office equipment, computers) will be made through local or international shopping procedures in accordance with Bank's Procurement Guidelines, on the basis of at least three quotations from reputable suppliers. Selection of consultants will be made in accordance with Bank's Guidelines on the Use of Consultants. In the case of the PSSP the promoter will have access to a consultant roster, and will be able to propose the consultant, which will be approved by the Fund (Annex 5). Moreover, in order to ensure that the PSSF's funds are used for the purposes they were intended, the consulting services to promoters will be hired and paid by the fund. 5.20 Problems caused by cumbersome government procurement procedures have been responsible for poor project implementation and slow disbursement rates in other IDA Credits. The Government is taking steps to correct these problems with the help of the Bank. Greater emphasis is now being put on training of project management staff, which will be provided under the project, and IDA supervision efforts. Moreover, a Country Procurement Assessment Mission, scheduled for FY94, is expected to focus on improving the procurement procedures. 5.21 Under the line of credit component, prior review of procurement documents will be required for contracts of US$750,000 and above. The institutional strengthening component will be executed by three different project entities and individual consultancy contracts are not expected to exceed US$100,000. Procurement of vehicles, desk computers and other office equipments will likewise be through small contracts below US$50,000 aggregating to amounts not to exceed US$130,000, to be awarded under international or local shopping procedures. For components other than the line of credit, contracts for goods and services above a threshold of US$80,000 will be subject to prior review procedures. A summary of the procurement methods is presented in Table 5.1 below.  -36- Table S. lo Summary of the Proposed Procurement Arrangements PROCUREMENT METHOD ICBlD Other St N.A. I/ TOTAL A. Credit Compon_t Goods, wok and serviceconuaoo 11.40 11.40 (7.00) (7.00) B. Private Sector Support Fund Component Conauking Services for Private Promoter 3.00 3.00 (1.50) (1.50) ConsulinS Services gad Taining 0.80 0.80 (0.75) (0.75) Vehicl and Office Equipment 0.15 0.15 (0.15) (0.15) Operaonal Audit 0.10 0.1 (0.10) (0.1) C. Intitutional Stengthening Consuling Sevesnd Traini 1.45 1.00 2.45 (1.45) (1.45) Vehicle an Office Equipment 0.75 0.75 (0.45) (0.45) Audit 0.10 0.1 (0.10) (0.1) D. Unalocated 0.50 0.5 (0.50) (0.5) TOTAL 18.25 1.00 19.25 (12.00) (12.00) & W& I _ trndond Icebs! aopping. Co_muatB to be hired in acordance to Bank guid . h/ Por goods contac below US$750,000 intraonal shopping prooeduws. For goods contuat above US$750,000, procrenat will be through ICB. 5.22 Disbursments. The proceeds of the Credit would be disbursed as follows: (a) Cr e dk CgmMg=: US$7 million (i) 100 percent of expenditures for up to 70 percent of total subproject cost for new operatons; (ii) 100 percent of expenditures for up to 80 percent of total cost of subprojects for extensions, modernization and rehabilitation. (b) Private Sector Support Fund Component: US$2.5 million (i) 100 of expenditure on management consultant for private sector firms for up to a percentage of total costs consistent with the agreed declining cost sharing schedule (para. 4.33 (b)).  -37- (ii) 100 percent of foreign expenditures for goods and services, and operating expenditure and audits; (iii) 90 percent of locally procured goods and 100 percent for services. (c) ntitutional Strenghing Compn (exclusive of tax) US$2 million (i) 100 percent of the cost of consultants, aistance and training, and audits; (ii) 100 percent of the c.i.f. cost of goods directly imported; (iii) 90 percent of the local cost for mateials and supplies. (a) Central Bank (DPM): Consultant Services $2,0OO Office Equipment $5060 (b) Minity of Commerce and Industy: Consultant Services and Training S7iOO Office Equipment, Vehicles $1,OO Audits $ (c) Tribunal of Commece:r Consultant Services and Training S1000 Office Equipment/Software/Vehicles ZpOO 5.23 The Credit disbursement schedule is based on the relevant disbursment profile for industrial development and finance projects in Africa, taking into account the particularly difficult project implementation environment of a country like Rwanda. t is expected that the investment component would be disbursed in five and a half years and the other components over five years, taking into account expected improvement in the capacity for project appraisal, financing approval, nd implemontation. Funds under the credit component would be available for commitment until Docember 31, 1998. Disbursements would be completed by June 30, 1999, the proposed closing date. 5.24 Special Accounts. To expedite disbursement of funds, three Special Accounts for the DPM of BNR, the PSSF and Ministry of Commerce and Industry will be set up in a financial institution acceptable to IDA, into which IDA would make initial estimated deposits totalling US$500,000, US$200,000, and US$100,000, respectively, from the Credit immediately after effectiveness. Thes amounts reflect the estimated requirements for operating costs, equipment procurement and consultant services, for a three to four month period. In parallel, as a condition of disbursement of the PSSF (para. 7.4 (iii)), the Government will deposit in a project account counterpart funds of RwFl.5 million. Applications for replenishment of the special accounts will be submitted on a monthly basis. The Special Accounts and associated statements of expenditures (SOEs) will be audited annually by independent auditors, except in the case of the PSSF where bi-yearly audits will be undertaken during the first two years of operation. The audit reports would submitted to IDA within six months of the end of the fiscal year, or an agreed mid-year date in the case of the PSSF. Disbursements for expenditures for all contracts for goods and services or individual items under US$50,000 will be made on the basis of  -38- statements of expenditures. Tho documentation for withdrawals made under SOEs will be retained by the DPM on behalf of other project units involved (i.e., for sites and services, and other technical assistance units) for ten years and will be reviewed by Bank supervision missions. All other disbursements will be made on the basis of fully documented applications. 5.25 Auditing and Reporting. Audit requirements for all ongoing IDA Credits in industry, finance and PE sectors have been met. The DPM and other project units will have their accounts, as well as the Special Accounts and SOEs audited annsally by independent auditors acceptable to IDA and will frnish to IDA certified copies of their audied accounts together with the corresponding management letters within six months of the end of the fiscal year. The DPM will submit to IDA quarterly and annual progress reports (including financial and budgetary accounts) on the technical assistance and the investment components. Furthermore, the DPM will review the annual audits of Participating Financial Intermediaries and inform IDA of the conclusions of such audit reviews. Finally, to avoid possible misuse, the PSSF will be subject to bi-yearly operational audits including review of procedures and impact on client enterprises, during the first two years of operations. 5.26 Estimated Proect Costs and Financing Plan. Total project costs are estimated at USS19.25 million equivalent, of which US$12.75 million equivalent (66 percent) would be in foreign exchange. A summary of the project costs and expected financing are given in the table 5.2 below: Table 5.2: Estimated Project Cost and Financing Estimated Project Cost: Local Fore! To (USS millions) (A) Investments Subprojects 3.90 7.50 11.40 (B3) Private Sector S;onrt Fund 1.35 2.70 4.05 (C) Insitutional Tribunal of Commerce .30 .55 .85 Central Bank (BNR) .10 .20 .30 Ministry of Commerce and Industry .70 1.45 2.15 Subtotal 1.10 2.20 3.30 (D) Unallocated .1S .35 .50 TOTAL 6.50 12.75 19.25 Financing P: A =Percentages (USS millions) Investine t Poet Subborrowers 2.20 19 Participating Financial Institutions(PFIs) 2.20 19 IDA 7.00 61 Subtotal 11.40 100  -39- Private Sector Support Fund Private Sector 1.55 38 IDA 2.50 62 Subtotal 4.05 100 Inttuinal Strenghng Government .30 9 Other Donors 1.00 30 IDA 2.00 61 Subtotal t 3.30 100 Unallocated IDA 0.50 100 TOTAL Government .30 2 Subborrowers 2.20 11 PFIs 2.20 11 Private Sector 1.55 8 Other Donors 1.00 5 IDA 12.00 62 Total Financing 19.25 100 VI. PROJECT JUSICATION AND RISKS 6.1 Benefits. The proposed operation is a complement to Rwanda's macr-economic adjustment program already launched with Bank and IMF support. The project would help spur private investment and assist Rwanda achieve its growth objectives. Major expected benefits would stem from an enhanced supply response by private sector investors, which would create the employment opportunities that are critical for supporting the consolidation of the peace process and public sector retrenchment from productive activities. The project is expected to contribute to the achievement of these objectives by providing long-term credit, helping private firms become better managed and more competitive, and strengthening institutions responsible for ensuring the creation of a fully liberalized business environment, including freedom to create and operate an enterprise, and a reliable legal system guaranteeing transparent enforcement of contractual agreements between lenders and borrowers In particular. By supporting effective monetary and credit policies, and promoting better managed banking institutions, the project would improve their capacity for increased resource mobilization, and diversified and expanded financing of private sector investment. 6.2 Risa. The Government of Rwanda is currently undertaking a series of major political and economic reforms designed to lead to greater national unity and opening-up the political system, while maintaining the thrust of the economic adjustment process, and liberalization of the legal and regulatory environment. The main risk associated with the project relates to the emphasis given to ensuring political stability, which could delay the Government's policy reform program and slow down the process of revamping the legal and regulatory framework. This could mean that the implementation  -40- of a well focused private sector development strategy could be lengthy, thereby the pace of private sector investment to be slower than expected. These risks have been considerably mitigated by the recent August 4, 1993 signing of the peace agreement ending the military conflict within Rwanda. A risk associated with recent military expenditure would be the monetization of the fiscal deficit which would lead to high inflation and crowd out the private sector. The likelihood of this problem becoming severe is mitigated by the fact that the Government has a long record for fiscal prudence which can be seen in the fact that in the past 20 years inflation in Rwanda has rarely reached double-digit figures. These risks will be monitored closely in the context of implementation of the adjustment program, and through an assessment to be undertaken during the mid-term review of project implementation planned for July 1995. Furthermore, the consensus built around the need for effective reform of the business environment, the Government's desire to return to its traditional fiscal prudence and the strong voice of a rapidly emerging private sector should ensure the effective implementation of the project. 6.3 Environmental Impact. Another type of risk is environmental, associated with the possible establishment of polluting industries under the Apex component. While the exact nature of subprojects to be financed are not known, the level of Rwanda's industrial development and its comparative advantage suggests that most subloans would be mainly small- and medium-size, without significant environmental impact. In May 1991, Rwanda adopted a National Environmental Action Plan, which has been discussed with IDA. This plan includes a classification scheme and regulations for industries, and the Ministry of Public Works is responsible for ensuring compliance when delivering building and operations permits. In any event, BNR will be responsible for sensitizing PFIs and subborrowers in this area, and for screening subprojects to ensure that environmental aspects are covered adequately in the appraisal (paras. 4.26 and 4.28). In cases where subprojects likely to present environmentally hazardous pollution problems are identified, an environmental test would be developed in agreement with IDA and an acceptable mitigation plan would be required. VII. AGREEMENTS AND UNDERSTANDINGS REACHED 7.1 During project preparation and appraisal, the following has been implemented or agreed upon by the Government, mostly in connection with the adjustment program: (i) Simplification of regulations for business creation and operation, elimination of redundant procedures and controls, and of prior approval of Ministry of Commerce and Industry with respect to enterprise creation, relocation of the commercial registry to the courts (para. 3.22). (ii) Liberalization of import licensing, leading to the introduction of an open general licensing (OGL) system. Export licensing is to be eliminated altogether (paras. 3.5-6). (iii) Allowing full and immediate overseas transfers of business earned dividends and of salaries of foreign workers in Rwanda (para. 3.6). (iv) Adoption of a detailed action plan to overhaul labor legislation (para. 3.25). (v) Agreement on financial sector development policies, including reform of monetary and credit policies and institutional reform, negotiated with the Government in 1991 and being implemented. This includes the rationalization of the interest structure and a commitment  -41- to maintain positive rates in real terms (paras. 3.9). The commitment to undertake the agreed reforms was confirmed in a letter dated December 30, 1992, addressed by the Minister of Finance to IDA. (vi) Adoption by the Council of Ministers in December 1992 of a new PE legal framework (para. 3.16). 7.2 During negotiations, agreements on the following have been reached with the Government: (i) A Statement of Development Policy for the Private Sector, including the annexed matrices of dated policy and institutional reform measures (para. 3.35). (ii) Decision to create a Tribunal of Commerce (paras. 4.12 (v) and 4.13). (iii) Confirmation of government commitment to maintain positive real interest rates (para. 3.9). (iv) Agreement on a short term action plan to reduce operating costs and losses of BRD (para. 4.25). (v) Endorsement of the objectives, operational parameters, and procedures of the private sector support fund (paras. 4.33-34). 7.3 The following is an additional conditions of Credit effectiveness: (i) Signature of the Subsidiary Loan Agreement between the Government and BNR (para. 4.24). 7.4 The conditions of disbursemnent are as follows: (i) For the Apex credit component - Signing of the Participation Agreement between BNR and any one of the PFIs (para. 4.27). Ensuring that the Guarantee Fund has (a) validated and paid all legitimate pending claims on loans it has guaranteed and that are under litigation; and (b) revised its by-laws to rationalize and improve its procedures, to eliminate the legal ambiguities, and to ensure that banks exercise due diligence in supervision of guaranteed credits and exhaust all remedies required before requesting its intervention (para. 3.12). (ii) For the Institutional Strengthening Component, except for BNR subcomponent - Hiring of an expert to head the policy team at the Ministry of Commerce and Industry (para. 4.35). Proposing new administrative procedures and an acceptable timetable for settling pending disputes related to the banks' loans within a period of three years (para. 4.12 (vi)). Promulgating a law establishing the Tribunal of Commerce, appoindng a qualified and experienced lawyer as the President of the Tribunal of Commerce and adopting the text regarding the organization and functioning of the Tribunal of Commerce (para. 4.12 (v)).  -42- (iii) For the PSSF component - Selecting an international expert to manage the Private Sector Support Fund, adoption and publication in at least one newspaper of the Fund's rules and procedures (para. 4.34), and deposit of RwFl.5 million in counterpart funds for the PSSF in a project account (para. 5.24). 7.5 In addition, other agreements were reached during negotiations, on the basis of which the Government will in particular: (i) Take necessary measures, by June 30, 1995, for promoting exports through (a) simplification of procedures for authorization of unscheduled freight and passenger charter flights; (b) liberalization of air transport so as to eliminate monopoly and liberalize pricing (para. 4.16); and (c) establishment, by December 31, 1994, of a regime of free- zone for the purpose of export processing (para. 4.15). (ii) Take necessary legal and administrative measures, no later than December 31, 1993, for (a) eliminating dividend taxation; (b) instituting official schedules of depreciation allowance, and of a five-year tax credit allowance for operating losses of business firms; and (c) allowing banks to deduct allocations to provisions for losses on non-performing loans (para 4.10). (iii) Take necessary measures, no later than December 31, 1994, for the (a) simplification and liberalization of the requirements for forming business enterprises including procedures for registering such enterprises; (b) simplification and updating of the regime of negotiable financial and commercial instruments (including commercial papers and documentary tides), guaranties, secured transactions, sales, leasing and factoring; (c) modernization of bankruptcy procedures (para. 4.12); and (d) authorize the creation and functioning of private legal and paralegal professions including notaries-public, process- servers, liquidators and auctioneers (para. 4.12 (vii)). (iv) Take necessary measures, by December 31, 1994, for improving the functioning of the labor market, including through: (a) abrogation of the obligation of prior enrolment in the registry of jobs; (b) elimination of work permits for nationals; (c) setting a uniform minimum wage; (d) permitting wages and annual increase to be freely negotiated between the employer and the employee, (e) clarifying the rules governing overtime; and (f) reducing the number of the various paid leaves (para. 4.14). (v) Undertake jointly with IDA, no later than July 31, 1995, a mid-term review of progress in project implementation, with particular reference to policy and institutional reform measures, and implementing the agreed recommendations stemming from such review (paras. 5.11-12). 7.6 Eligibility conditions of partidpating flnandal Intermediaries will be as follows: (i) Submission every year of independently audited and satisfactory financial accounts and statemens on their financial and operating results (para. 4.26). (ii) Signature of Participating Agreement with BNR (para. 4.26).  -43 - (iii) Maintaining a uatisfactory capital adequacy ratio (paa. 4.27) according to the Cooke method. (iv) For BRD only - Implementation by BRD of tX agreed acdon plan, Including increased provision and reduction of staff (para. 4.35).  - 44 - Annex 1 Page 1 of 7 RWANDESE REPUBLIC Statement of Private Sector Development Policy I. Introduction 1. Rwanda's economic performance during the 1970s was relatively satisfactory, with an average annual growth rate of 5 percent. However, from the early 1980s the economy began to show signs of difficulties. The cause was, largely, a financial crisis resulting from the worsening terms of trade, which was exacerbated by the continued decline in coffee prices after 1987. These macroeconomic problems underscored the poor performance of the industrial and services sectors, in which the private sector had yet to play a leading role. At the same time, the scarcity of arable land made it evident that the agricultural sector could not continue its role as a provider of jobs and engine of economic growth beyond the short to medium term; and that every effort should therefore be made to foster development of export oriented industry and services by encouraging the private sector to take the lead in that process. 2. It was in this context that Rwanda, determined to tackle its challenging development problems, began in 1990 to take steps to restructure its economy. Those measures were implemented despite the difficulties triggered by the armed opposition. This effort, bolstered by support and financial assistance from the international community, was crystallized in the adoption of a structural adjustment program. The program's objectives are to put the economy back on a solid footing in order to increase the incomes and raise the living standards of the population. Certain key elements have been identified in advance as essential in achieving those objectives. One of the most important of which is increased private sector contribution to economic growth to be realized through substantially greater investments in profitable activities-particularly those involving exports-and more efficient use of existing production factors. This strategy will be bolstered by the return of peace accompanied by political opening and the launching of a democratization process designed to ensure that the entire population participates in the country's economic and political life. 3. To finance the economic program and support the implementation of measures promoting the private sector, a structural adjustment program was agreed on with IDA in June 1991. The purpose of this initial program-which was also backed by the International Monetary Fund-was to improve the macroeconomic environment. Another two complementary credits are also being prepared. Their objectives will be adjustment of the agricultural and financial sectors, in order to strengthen the strategy adopted in the Structural Adjustment Program. Two additional operations complete the private sector reform program; the first, a project to reform public enterprises supported by an IDA Credit since 1990, is designed to make public companies more productive by privatizing and restructuring them, and exposing them to competition with the private sector. The second, the private sector promotion project, seeks to create a business climate that will nurture the sector's development, support its investment effort and help to improve its skills, thus enabling the private sector to make better use of its production tools. The purpose of the present letter is to provide a detailed description of the sectoral policy framework and the measures to be addressed under this project. II. The Private Sector Development Stratey 4. Aside from farming and stockraising, which employ more than 90 percent of Rwanda's population, private activity in the industrial, trade and other service sectors is not very important. According to current statistics, the 130 companies in the modem industrial sector produce 8 percent of  - 45 - Annex I Page 2 of 7 the GDP and employ 15,000 persons. Only half of that output comes from privately-owned firms, the rest is produced by state-owned or mixed companies. There is also an informal sector, which is active in cottage industries, mining and different types of maintenance and repairs. This relatively dynamic sector consists of about 700 micro-enterprises and several thousand individuals. The trade sector comprises roughly a hundred importing companies of various sizes, but only about ten specialized exporters. Otherwise, the private sector operators are to be found mainly in the transport subsector, where they operate 1,900 trucks and 1,300 minibuses, and in the consulting business. There are a dozen or so advisory service companies and about one hundred independent experts. In all, private production in the industrial sector and services contribute to only about 15 percent of the GDP. 5. Despite its weak base, private sector production-particularly in trade and industry-grew rapidly in the 1970s and early 1980s. The growth was mainly due to an import-substitution strategy calling for the creation of industrial companies, some with low economic viability, plus relatively easy access to foreign exchange at attractive rates which encouraged the development of import activities. This strategy reached its limitations in the mid-80s, partly because of the lack of foreign exchange and the restricted opportunities for profitable investment aimed solely at the domestic market-which is restricted by the population's low purchasing power-but also because of the lack of a new policy that would encourage export activities and improve the business climate. 6. In view of the situation, the Government's new strategy for developing the private sector consists of simultaneously addressing the various problems inhibiting such development. The main features of that strategy are: (i) implementation of a stable and enabling macroeconomic framework designed to eliminate the observed distortions. The main measures include stabilization and reduction of the budget deficit, opening of the domestic economy to internal and external competition, and exchange rate and price liberalization. (ii) Adoption and implementation of sectoral strategies in the areas of agriculture, finance, public enterprises, and private industry and service. The thrust of the actions will be to establish a transparent and well-devised labor and business, legal and regulatory framework, a more even-handed tax system that does not cause distortion and encourages private investment, and incentives for exporters. In addition, the play of intersectoral relations will in turn enable implementation of these sectoral strategies to have a favorable effect on the other sectors. (iii) Supporting private investment in profitable activities of the economy and assistance to newly established companies-or those in the process of rehabilitation-to help them improve the conception of their investment projects and ensure the sound basis thereof, and to stimulate and assist the companies so they can make a determined effort to improve their efficiency and productivity. (iv) Strengthening of the institutions responsible for executing and following up on the sectoral strategy and carrying out ancillary measures. 7. Implementation of this liberal strategy thus calls for adoption of a new approach, one that creates a nurturing environment for restructuring the private sector and enables it to grow on a sound basis, while attacking the structural constraints faced by the various sectors involved. The fundamental components of this approach are already an integral part of the Government's Structural Adjustment  - 46 - Annex 1 Page 3 of 7 Program; and its principal goals consist of: librlization of domestic economic activities; enabling local production to compete with imports; nd cOming new drect stae investment in productive and trade activities while progressively discontinuing its participation in those sectors. m. _ d SinoralMeaur 8. Despite the country's difficulties, Rwanda took steps to improve the macroeconomic situation, open up foreign trade, liberalize prices, and increase sta revenues. The measures already in effect include: adoption of an exchange rate policy that makes Rwanda's currency more competitive (devaluation in foreign exchange terms of 40 porcent in 1990 and 15 percent in 1992); an increase in the interest rates to make them positive in real terms; elimination of customs duties on exports, except for coffee; the substitution of tariffs for nontriff barries; a review of indirect taxation with the adoption of a new tariff code lowering the maximum to 100 percent and raising the minimum to 10 percent); and almost doubling the turnover tax to 10 percent. 9. The reforms and liberalizaton dforts are continuing, and the Government is committed to taking other measures, particularly an open goneral licensing system for import plus a further cut in the maximum tariff rate on import, thereby bringn k down to 80 percent. Despite the steps taken to increase revenues, however, it hs not yet been pousible to balance the budget owing to higher expenses than anticipated. Efforts are thus concentrated on reducing the fiscal deficit. Adoption of a prudent monetary policy, has nevertheless brought inflation under control (about 9 percent in 1992). The macroeconomic framework thus meets the necessary condition for enabling the development of the private sector. Agricultural Sector Refbrm 10. Agriculture is Rwanda's most importnt ativity. This sector accounts for 40 percent of the GDP and employs more than 90 percent of the ecowmically ctive population. It is thus a vital foundation for the economy since, on the one hand, any increase in Uricultural revenue boosts the demand for industrial products and service; and, on the other, the sector furnishes many of the inputs needed by industry and generates more than 90 percent of the foreign exchange used by the private sector. Agricultural development is therefore a mainstay of tht sector. 11. To help realize its potential, the program for adjustment of the agriculture sector calls for a series of measures including: (a) adoption of a regulatory framework in which private agents can respond freely to market forces; and (b) privaizaton of the proceuing, production and marketing of coffee, tea and rice. Financial Sector Reform 12. The purpose of financial sector reform is to make the sector more competitive and encourage it to offer financial instruments tailored to meet the needs of a pdern economy. In the context of a liberal economy, this sector will have to play a more activoe raolem attracting savings and financing investment. To that end, Interest rates have been increased so that they outstrip inflation and are thus positive in real terms.  - 47 - Annex I Page 4 of 7 13. These initial measures are only the first in the series. Over the next two years, other basic reforms will be undertaken in the financial sector, namely: (a) adoption of a monetary and credit policy in which BNR control will be applied indirectly, through such instruments as rediscounting rates and the introduction of a compulsory reserve system for banks; (b) strengthening of the sector's regulatory framework through enactment of a new banking law and revision of BNR by-laws so that they will clarify the role of the central bank in the monitoring of institutions and conduct of the monetary policy; and (c) institutional strengthening of BNR and restructuring or liquidation of financial institutions- especially BNR, the Caisse d'Epargne (savings bank) and the Caisse hypothecaire (housing bank)-plus rationalization of the operating rules governing the Fonds Special de Garantie (Special Guarantee Fund), with a view to streamlining its management and making its operations more efficient. Restructuring of Public Enterprises 14. Reform of public enterprise has been one of the key elements in the Government's economic strategy since 1990. Its goals are to: (a) allow the private sector to take part in activities heretofore reserved for the state, such as energy, water and telecommunications services and other areas in which the state has always had a leading role (such as tea, coffee, and banking); (b) make existing companies as efficient as possible in order to secure a return on past investment-or at least lighten the heavy load such companies place on the budget; and (c) orchestrate suitable means enabling the public sector to ensure adequate monitoring of such activities as the university, the Office of information of Rwanda and others which would appear to be destined for a permanent place in its portfolio. 15. A necessary prerequisite for carrying out that strategy is the existence of a suitable framework based on two complementary measures. First, a new framework-law will be enacted to give the heads of companies more autonomy, at the same time making them responsible for successes or failures. It will also review the legal framework of state-owned corporations with a view to facilitating their restructuring or possible privatization, as well as to clarify the functions that are to be performed by the various control bodies. The law has already been adopted by the cabinet and will soon be submitted to the Parliament. Second, to endow its reform process with greater transparency, the Government plans to announce its general strategy for privatizing or restructuring each of the existing corporations. Since the baseline study has now been completed, the detailed strategy will be put in place during 1993. 16. Reform of public enterprises will thus enter an active stage of privatization and restructuring in 1993. To expedite the process as much as possible, a number of specific steps were taken in 1992. As a result, five companies-including Sonatubes and Rwantexco-have now been privatized or liquidated. Other important areas have already been identified as the target of immediate reforms. They include the tea and coffee sectors (which are slated for privatization), the telecommunications sector (partial privatization) and the energy sector (in which Electrogaz will be placed under private management). Finally, state-owned corporations will no longer be entitled to exemption from various taxes, and will be responsible for paying their debts. IV. Measures to Support Development of the Private Sector 17. Promotion of the private sector requires the implementation of concrete action based on the following pivotal points, summarized also in the policy matrix attached to this letter:  - 48 - Annex 1 Page 5 of 7 (i) Creation of a favorable environment by means of a sectoral policy designed to remove the fiscal, legal and regulatory constraints, including those associated with the tax, commercial and labor codes-a policy that provides also incentives for export. (ii) Support for private investment through an Apex line of credit that makes long-term resources available to the financial sector. (iii) Improvement of the sector's performance by ensuring access to the services of local or foreign experts so that it can make better use of the production tool placed at its service. It has been decided to set up a private sector support fund for that purpose. (iv) Institutional strengthening-particularly of the institutions responsible for carrying out the sectoral policy-to ensure the effective implementation of these measures. Technical and material support are needed to attain those objectives, and will be provided in part by the Private Sector Development Project. InDrovement of the Legal and Regulatory Framework 18. Steps already taken by the Govermnent include: (i) easing of the formalities for setting up industrial units by eliminating the advance authorization heretofore required from the ministry responsible for industry. (ii) Revision of the law on trade registry to eliminate the requirement for advance authorization from the ministry in charge of commercial affairs for engaging in industry and trade. This has been replaced by a declaration at the commercial registry at the court of first instance. (iii) A study of the commercial code as a basis for drawing up a plan of action to overhaul legislation on business activities. (iv) A study of the labor code and adoption of a plan of action to eliminate any distortions identified therein. 19. In the coming years, the Government is committed to ensure implementation of the reforms for which a plan of action has been established and, as noted below, to strengthen the judiciary system by creating a Tribunal of Commerce, nominating its President, and adopting its rules and procedures at latest by June 30, 1994. The priority steps to be taken in 1993 and 1994 would be in connection with the commercial laws and regulations, subject to a detailed plan of action. The major changes include: revision of the law governing the organization of trading companies; clarification of certain provisions concerning commercial registry; revision of the statutory provisions relative to commercial paper and real property, guarantees and sureties, collateral, negotiations (sale, exchange, leasing etc.); amendment of the law on bankruptcy; and the creation of commercial jurisdictions (administrative and judiciary sections, including a Tribunal of Commerce and auxiliaries of justice). 20. The study of the labor code has identified obstacles to smooth functioning of the labor market due to: (a) the lack of flexibility in the rules on hiring and firing; (b) the minimum wage scales for each category of workers, which increases the cost of labor; and (c) costly nonwage compensation  - 49 - Annex 1 Page 6 of 7 (the high cost of overtime, too few days of actual work, and the payment of medical expenses). The result of these rules is that the Rwandese worker costs too much compared to its productivity. The measures set forth in the plan of action are designed to liberalize the hiring and licensing procedures in cases where they are justified; to lower the payroll costs by setting a single minimum wage; and to increase the number of work days. Corporate Tax System 21. With assistance from an expert from the IMF, the Ministry of Finance has identified the key measures needed for a fiscal reform aimed at establishing a system that is economically neutral and attractive to investment. One of the chief purposes of this reform is to introduce provisions in the tax code whereby accelerated amortization and legal reevaluation of balance sheets would obviate the need for recourse to the investment code. Given the budget deficit, the immediate reforms should be neutral. The measures targeted for implementation in 1993 include: (a) repeal of the tax on distribution (dividends); (b) acceptance of accelerated amortization and legal reevaluation of balance sheets for tax exemption purposes; (c) the introduction of tax-deductible items for banks; and (d) conversion of the turnover tax (ICHA-imp6t sur le chiffre d'affaires) to a value-added tax. 22. Beyond the immediate horizon, strengthening of the Ministry of Finance tax department will permit a significant broadening of the tax base and an increase in revenue. It will then be easier in 1994 and 1995 to introduce other tax reforms which today would not be revenue-neutral. The two most important steps to this end are: (a) a two-stage reduction of corporate taxes, cutting them to 40 and 30 percent; and (b) extension of the right to deduct payments made to other financial institutions for the production sector. Promotion of Exprts 23. It is clear that nontraditional exports will be developed primarily thanks to an accrued domestic production capacity, and that immediate results cannot be expected. Certain conditions fostering exports have not yet been met, however, and three important steps have been identified. First, the 1991 export promotion law calls for the exporter to be given a tax credit equivalent to 10 percent of the value of his exports to compensate for the various taxes paid in the course of production. This measure has not yet been put into effect, but will be applied in 1993. Secondly, to encourage investments-probably in partnership with foreigners- more than 90 percent of which are allocated for exports or to permit reexports, a free zone system will be set up in 1994. 24. Finally, it has been observed that most of the nontraditional exports are shipped by air. Therefore, the regulatory system will be reviewed to increase the availability of air transport services and improve their quality. In this context, the roles played by the Ministry of Transport, the airport administration, and Air Rwanda will be revised. Support for Investment 25. Investment financing is constrained by two factors. First, despite short term liquidities, the financial sector-except for the development bank-lacks long-term funds. As a result, banks' ability to finance investment is constrained. To ease that problem and stimulate competition among financial institutions, long-term resources will be made available to the sector. The second constraint is the  - 50 - Annex 1 Page 7 of 7 ineffectiveness of the guarantee mechanisms. Establishment of a Tribunal of Commerce should partially resolve that problem. In addition, the regulations governing the special guarantee fund are about to be revised so that it can effectively ensure the successful outcome of the operations covered by its guarantee. Private Sector Support Fund 26. The lack of know-how at the corporate level frequendy results in wasted resources due to inefficient utilization of the production apparatus. That problem has been recognized for some time now, and has led to a number of projects supported by donors who have opened consulting offices and other institutions engaged in aid to the private sector. Those efforts are thus devoted mainly to creating a supply of advisory services. To complement this approach, a fund for assistance to the private sector will be installed on a pilot basis in the Bank of Kigali. Its objective will be to create a demand for consulting services, by organizing seminars at which administrators will be alerted to the constraints inherent to their enterprises and by covering-up to a certain point and on a gradually decreasing scale- some of the expenses of the companies, who will choose the qualified expert best suited to their needs. InsitunalkSgreaning 27. It is important to see that the Ministry of Commerce and Industry is adequately financed to perform its role of assisting the private sector in regard to: (a) implementation of the measures derived from the strategy described above; (b) the identification of new constraints; (c) follow-up on and coordination of the activities designed to help the private sector; and (d) the receipt of and response to any complaints that may be lodged by the sector. To that end, a technical group-the nucleus of which will be a team of experts consisting of three nationals and possibly a foreign advisor-will have to be set up and placed under the supervision of the Ministry. The Ministry will also need sufficient funding to be able to call on short-term consultancies, purchase the requisite data processing equipment, and train its professional staff. 28. Finally, creation of a Tribunal of Commerce has been identified as a priority goal. Its purpose will be to permit quick resolution of trade disputes-which at present can take as long as five years. The Tribunal will be a permanent and autonomous structure, chaired by a president who is a qualified and experienced member of the judiciary. The Tribunal will specialize in the arbitration of business disputes, and it will be assisted by businessmen who have the required expertise. It will receive the necessary funds to train its professional staff and purchase the supplies and equipment it needs. Finally, the continued support to the Chamber of Commerce, which is slated to become a non-profit organization will have to continue to ensure its sustainability.  RWANDLESE REPUBLIC P=VEAT1 SECTOR DEVELOPMET PROJECT Private Sector DeveloMnent Policy Matrix A. Ehaue IqIme- 1. dbcAag laV. 40 ad 15 pI devabrsin in 1990 and 1992. Mai.iane np rne at cnwiatitiw lve through priodic 1993-en ________ ______________ - . M(SAC-SAF) 2. Cx, vi AnC_W Mlinded impo polaiNtiom and QR's, and libetalind of Pull _ of OGL Ir impot. 993 (SAC) LIb.Ruluedtm. impostl emingm 1990. Market determined of scare Adoption of OGL for ipot. in 1992. limination of espert bemiong and simplify export clrance 1993 (AGSAC) foreign exchange forSali ie. aeoures, boost expots Rovised .m.CoItroh regu,tom, inclbig trat of and fei investma dividends De _endw 1992. Implemtation of full llibalir:Vion of medate tranfers for 1993 repatiation of profis dividends. (AGSACISAP) 3. TarW. Decased Weed i taiffi, by bwering mlam rat to Rurther deea spead n tnriS by adoptng a maximum rate 1993 (SAC) Decreas anti-export 100 plr-a and increased the minimum rate to 10 pesuatn of 80% appliable only tD hmy goods, nrowly defined. bias, encourage viable Simlfied the taiff systm by megig two taiff Mxmum and minimum tai on odter products will remim at acivii, and adopt a instumeats into a sigl one and decreased the number of 40 and 10 perseit. Hrmonize rates wihin four digit categories tnIae system.- . saory rates to 5 (August 1991). and adopt a umque tarff rae iv a gien product. Mid-km Review (PSD) B. Expet Preme;o. 1. Tax C4sspmwadk*. Rrvised export promwtion lkw in 1991 to inchude cerain ----- ------------------------------------ ....... .... 1993 Reduc aru-export bias. befits to non-aditonal exportcrs, iclxdng a tax rabate. co 0h X . ___________________ o 9-n [I  2. Free-zone CeIlt. Deada 1994 Encourage export PD oreed inven_. 3. Ller& htrjwoa J i l| ,| __ 1 une 1995 Air uaIye. ( 3.P ||| X _ g| | SD) Decraefrei ost and |81R. 1 incres avalily of _1 1! C. Tax an Ixwi.uu. Nacy. 1. CoeanyLewlTf aL. hrvesoet code supndod io 1991. _ _1993 (PSD) Decres distoris inl 1993 (PSD) tbe corprte tax q s_ri t 5_ ~~~~~~~~~~~~1993 (PSD) -g _ _ ~~~~~Rrve (PSD) > 2. Tar Cod. . . . * ..PS Improve applicaton and Revewv (PS) transprency of tax 3. Inirect Tmuton. Incrased rate for most transatons to 10 percent (SAC Mdo Improve applcton of 1991). Review (PSD) turnover tax (ICHA). __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 4. Ta4on qf financial Eliminated ICHA on idteretto avoid doubletation. 13 .. P 5.~~~~ lnamn =P_.ky. Encourage invetet Reiw(PSD) n O. . . . . ... . . . . . . . . . . ... . . ... ..... . . . . . . . . . . . . ..... . . . .. .. . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . . . . . . . ~ I J 1 t  Ai&rin Arca anfd ObjetvePast 1Reform Effort.: .... Act............heii IL. Ial and Reaulator, Framewzork A. Regulatory Famewrk. 1. Ewerprise creation Need for prior approval of Miniitzy of Indumty abrogated. Mid and bwsiness licensing. Procedure, of obtaining commnercial registry simplified and Rve PD Ease regulatory the registry was relocated to the 'tribunal de premicre . . '0 i . . i. .*. constraints widening instance (August 1991). buins crecation and diversification. 2. SimpUify and cod D_ Mid-temf reglasooryprocedurnsfor Review (PSD) allocadon of hdtrial laud and for ob&a eag the vwious permis. Decres delays. Un 3. Lgal Framework 1. Coemnerdal code. Laijaced study of commaecil code (SAC Januy 1992). December 1994 Simplify and improve (PSD) busines laws. Agreed on tmetable for ooncrte actons to improve the busis las, incluing caepie lw, ba tcy lw, dec. 2. Create Privte klga and December 1994 paralekgaprofesiou. (PSD) Facilitate execution of costac discanussis m_ _for tof oot. __ C. Labor Code Rd.m. 1. Ensure that labor Sudy of Labor Code complted in Junr 1992 (SAC). 1994 (PSD) compensation is in harmony with its Govesnmet adopted timetable for rfom and agred on 00 productvty. p actions (Noaember 1992, SAC) D 0 m 0 x  111. Pub& Entarnw (PE) Reform 1. PE Framewor*. Govcrnmeat adopted new legal fumewrk (Dcember 1992, Adopt privaion tratgy for sector and finn cvel 1993 Put PE wetor on sam PE Projod). Undertake privatiton and reaructuing of PE's. (PE projec) foolilg as Pdrm Socotw Consultans comip d work on privatizaoe stategy. 1993-o liabgky for mm NW ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(FE ProJect) debt repayment_ 2. Dsungagmm qf d Conducted Sedorl and finm evel daosbic studies. Anoiae privatiation pln for cofhe, tea and nce production 1993-94 SW* fivm producto Compleed work on the kgal framewr of PE's, including aaw. (AGSAC) actiwik. a regime in hamony with the private ector for commercial Priatie coffee, tn and rice production asua. 1993-94 and productive activtis. (AGSAC) Prjvati=dlreatiuctuiud five PE. e and uationalim OCIR-CAFE and OCIR-THE. 1994 (AGSAC) PE proje-t and _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~~ ~~~ ~~~~~~~~~~~~~~Reviw (PD) VI. Flrancal Serkw 1. Lega md Rquey A-ni the BNR legislation lo ashmacte b _edqcadmce fiom 1994 (PSAC) F ewwc the Miniay of Fane and allw it to we idireet mea of Promote effective mo coAtrol sy of "eave rq. competition between institutions while A ld gSkon . finsaum _iujom to (i) define more Mainaining the viAy clely dh licesing rajuire-aIs of bmb and fincil and miqlky of the inu ; (iin) strt pdameuial raeuiremnts; (iii) finGnl syem. esalh cppprist uiiur. for chsfyig loan, e g - ad waning huma_ Requie all bank to be audked by an exteual audior appoved by the BNR in im wIm tehns of cree e. 2. SuperWsiof Fim.ud Adopted an overall work program for superving banks and Undertake onsic inspections of at kast to financial 1994 (PSAC) h _dnaiou. financial institions; icreae th Inspection Departnat's Io.V Effective supwvon of staff; and deelop a traiuing program for the d _.actm l. banks by the BNR ' > 40 m Xn  : ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~~~~ - : ... ::. -:: ........ 3. Baqa Rwandaise de Agreeame wiLh the Goverment reduced the pariipation of Wi the framwork of a strategic plan to resBuctur BRD, 1994 (PSAC) Developpment (BRD) the public sector in BRD to below 50 pecent and agreed to including improvemets in portfolio and financial managu_nt, Strengthen the rfrin fmom itervig n its day-to-day opaations. clrificaion of the roles of the Board and the mangement, and develpame bank by Grnted motdorium to ddt srvic payments of BRD lon appropna changes in its product mix and organ oIa a inreaing its autonomy; to BNR pending a financial restuctuing plan. stue to make it a more autonomous, compxtive and diveriying its products; Study on restuctuing lunhed in Novenber 1992. efficient inskution. and improving its efficiency. 4. hnerest Rates. One-year dposit and lendin tes made positive in real Reviww interest rat suc at eat twice per year to ensure 1993-on Simplify the irest term. that raes are postive in real terms. (FSAC) stuetu and liberaie Lbeaeze inotere rates fully. 1994 (FSAC). intae rates. S. Rediscon Rates. Wihin limis authorized by lw, expanded eligibility of Review redisount rate at kat twice yearly to refict credit 1993-on Use the rediscount paper to be refinanced to include hort-term credit; requiements. (FSAC) fecily to contol money establihd approprite sandards and procedur to improve Expand eligibility of paper to be refinanced to inchlde all types 1994 (FSAC) and credit. the efficiencq of the BNR rediscount faciliy. of paper. 6. Crodit Cedlings and Set initl reerve requirments. Incrawe reserve requirements. 1993 (ESAC) Reserve Requiremns. Improve resource Elimiaed bank by bank credit ceilings, nd interest rate alocton wthin the policy. ba sytem; move towrd indirect mean of controlling monetary awgeptes. ___ ____ V. Institutiona 1. The Chamber of Incread inependence of CCIR managemn_t while 'Pratime the CCIR by giving it a private klal s (non- 1993 (AGSAC Cawmrce and bAmy maianiing its public establihmnt status. profit organztion, OASBLW). Eliminate foroed membenhip or PSD) XCR). and imposkion and colltion of fees by the Government Inease effectivees. 2. Estabis a seyjading June 1994 tribuad ofconmserce. (PSD) Speed-up and incre as firnes of the proce", Mid-term OQ sett=ing commercial Reviow (PSD) 0