Uganda - Second Structural Adjustment Credit (SAC II) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16724 IMPLEMENTATION COMPLETION REPORT UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) (Credit No. 2608-UG) June 18, 1997 Africa Technical Macroeconomics II Country Department for Uganda Africa Region 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. GOVERNMENT FISCAL YEAR July 1 - June 30 (FY96 and 1995/96 = July 1, 1995 to June 30, 1996) CURRENCY EQUIVALENTS Currency Unit = Ugandan shilling (U Sh) Interbank Market mid-rate: US$1.00 = U Sh 1,025 (March 1997) ACRONYMS AND ABBREVIATIONS CAS country assistance strategy DAPCB Departed Asians Property Custodian Board ESW economic and sector work FY fiscal year GDP gross domestic product ICR implementation completion report IDA International Development Association IMF International Monetary Fund LOAAF Loan Department, Africa Disbursements Division MOF Ministry of Finance OED Operations Evaluation Department PPA priority program areas ROM results oriented management SAC structural adjustment credit SDR special drawing right TIN taxpayer identification number UCDA Uganda Coffee Development Authority UIA Uganda Investment Authority URA Uganda Revenue Authority Vice President : Callisto E. Madavo Country Director : James W. Adams Technical Manager : Roger Grawe Task Team Leader : Allister Moon FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) (CREDIT NO. 2608-UG) Contents P R E F A CE........................................................................................................................................... i EV A L U A TIO N SU M M A R Y ......................................................................................................... ii PART 1 : PROGRAM IMPLEMENTATION ASSESSMENT . .................................................... 5 A. Background and Program Objectives ......................................................................... 5 B. Achievem ent of Program Objectives .......................................................................... 4 C Implementation Record and Major Factors Affecting the Program........................... 8 D . P rogram Sustainability .......................................... .......... ......................................... 8 E . B ank P erform ance .................................................. .................................................... 9 F B orrow er P erform ance........................................... .................................................. 10 G . A ssessm ent of O utcome.......................................... .................................................. 10 H . F uture O p era tions.................................................. .................................................. 1 I K ey L essons L earned............................................... .................................................. 1 PA RT 2 : STA TISTICA L TA BLES............................................................................................ 53 Table 1: Sum m ary of A ssessm ents......................... .................................................. 53 T able 2: R elated B ank C redits................................ .................................................. 14 T able 3: Project T im etable ........................................................................................ 15 Table 4: Credit Disbursements: Cumulative Estimated and Actual.......................... 15 Table 5: Key Indicators for Project Implementation................................................. 16 Table 6: Key Indicators for Project Operation ....... .................................................. 17 Table 7: Studies Included in Project....................... .................................................. 17 T able 8A : Project C osts............................................................................................... 17 T able 8B : Project Financing......................................................................................... 17 Table 9: Econom ic Costs and Benefits...................................................................... 17 Table 10: Status of Legal C ovenant............................................................................. 18 Table 11: Compliance with Operational Manual Statements...................................... 8 Table 12: Bank Resources - Staff Inputs..................................................................... 19 Table 13: Bank Resources - M issions ...................... .................................................. 19 APPENDIXES: I. Borrower contribution to the ICR II. Second Tranche Release Document 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. u IMPLEMENTATION COMPLETION REPORT UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) (CREDIT NO. 2608-UG) PREFACE This is the Implementation Completion Report (ICR) for the Second Structural Adjustment Credit in Uganda, for which a credit in the amount of US$80 million equivalent was approved on May 10, 1994 and made effective on November 18, 1994. The credit was closed on December 31, 1995 and the last payment under the credit was made on 27 March, 1996. The first tranche was released upon effectiveness; the second tranche was released on November 22, 1995. Cofinancing of the project was provided by the Kingdom of Norway in the amount of NKr 56.6 million The ICR was prepared by Allister Moon and reviewed by AFTM2. The borrower provided its own evaluation of the credit, which is attached as Appendix I. Preparation of this ICR was begun during a Bank mission to Uganda in February 1997. It is based on material in the project files and other related Bank documents. u ii IMPLEMENTATION COMPLETION REPORT UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) (CREDIT NO. 2608-UG) EVALUATION SUMMARY Introduction Since 1986 Uganda has pursued a comprehensive program of economic and political reform. GDP growth has averaged 6.4 percent in the past decade and 8.1 percent during the past three years. Macroeconomic performance since 1992 has been particularly strong, with inflation held to single digits since late 1992 and a reasonable degree of exchange rate stability maintained in a fully liberalized foreign exchange market. SAC II was designed as a two tranche operation of SDR 57.8 million (US$80 million), with amounts divided equally between first and second tranche. The credit was cofinanced by the Kingdom of Norway with a grant of NKr 56.6 million (US$8.9 million) for indirect debt relief. The main issues addressed in SAC II comprised five main categories: (a) Reform of the regulatory and business environment (completion of coffee sector liberalization including abolition of floor price, transfer of cotton ginneries to private sector, review of the Investment Code and Uganda Investment Authority and removal of controls on petroleum prices); (b) Completion of the program of divestiture of Custodian Board properties, expropriated during the Amin regime; (c) Domestic revenue mobilization (introduction of taxpayer identification number and implementation of FY94 budget revenue measures); (d) Public expenditure prioritization (release of all FY94 budget allocations for agreed high priority recurrent programs and core projects and provision of satisfactory allocations for the wage bill, nonwage recurrent expenditure and development expenditure in the FY95 budget); iii (e) Civil Service Reform (completion of the FY93 retrenchment of 7,500 staff, installation of a payroll validation system, audit of the teaching service payroll, removal of at least 15,000 group employees from the payroll, restructuring of the Ministries of Agriculture, Trade, Works and Natural Resources, continued progress in monetization of transport and housing benefits, satisfactory progress towards divestiture of pool houses and vehicles). Most of the objectives for SAC II were clear and specific, with the exception of the second tranche conditions for civil service reform (continued progress with monetization, satisfactory progress towards divestiture of pool houses and vehicles). Many of the conditions required completion of reforms begun in the previous SAC I, which had the benefit that the policy areas had mostly been discussed over a long period and the risks of some of the more difficult reforms--such as further civil service staff reductions and divestiture of Custodian Board properties--were fairly well understood. Some of the conditions were insufficiently demanding, especially for the Investment Code (completion of a review with commitment only to consider the subsequent recommendations). Implementation Experience and Results The outcome of SACII is assessed to be satisfactory. Actions specified under SAC II were substantially achieved. Both the specific achievements of SAC II and the broader reform program which it supported are likely to be sustainable. The credit was carefully designed in close consultation with Ugandan counterparts, extending the earlier experience of excellent working relations with the Government. By building on the previous SACI agenda, the staff drew on considerable experience in the chosen policy areas and consolidated reforms initiated under the earlier credit. On the other hand, the agenda which emerged can be criticised as missing some elements which were by 1993 emerging as strategic problems. The latter include action to revitalize the faltering program of reform in the financial and parastatal sectors, (especially utilities, the poor performance of which had emerged as the most important constraint for private sector growth) and deeper reforms on domestic revenue mobilization, including a more effective framework for monitoring and improving administrative performance and a more coherent medium-term strategy for tax policy. The civil service conditions were probably too narrowly focused to support strategic goals of improving civil service efficiency, while being too poorly defined to achieve fully satisfactory results on more specific tactical objectives. Borrower performance during SAC II was highly satisfactory, especially when viewed against the breadth of the wider reform program and the high demands imposed on the scarce capacity for leading and managing reform within the public sector. In view of the strength of the overall reform program and the accumulating evidence of sustained performance in the main policy areas which were the focus of SAC II, the outcome of the credit must necessarily be viewed as satisfactory. More difficult is the assessment of the precise contribution of the operation to the overall outcome. SAC II probably helped to iv focus attention on completion of some key initiatives and thereby consolidated the reform already achieved. During the period of SAC II preparation and implementation, the Government pursued a number of important initiatives which formed no part of any formal conditionality, but which were nevertheless critical to the overall performance during the period and beyond. These include the revamping of macroeconomic management described above, the initiatives taken in medium-term expenditure planning, the overhaul of an ineffective apparatus for parastatal divestiture and reform and a revived privatization program and, from 1995 onwards, a strengthened poverty focus to government policymaking in general and public expenditure in particular. In varying degrees, these initiatives benefited from a continuing constructive dialogue with IDA and the donor community more generally. Such dialogue may have been assisted by the fact that the main adjustment lending operation was focused on reasonably familiar policy areas with well identified risks. A successor adjustment operation, SAC III was approved by the Board in June 1997 (Report No. P-7097-UG). Key Lessons Learned Adjustment lending to Uganda illustrates very clearly some general lessons regarding the critical importance of strong borrower commitment. Uganda's performance before and after 1992 also shows the value of a strong macroeconomic performance and consistently maintained attention to stabilization requirements as a foundation for robust structural reform. Experience with SACII has also illustrated the problems arising from vagueness in policy conditions (the Investment Code and UIA conditions and monetisation of civil service benefits) and the importance of effective supervision, which partially remedied the weak specification of civil service reform conditions. The following more specific lessons may be summarized from experience under the SAC II program and the broader reform program in Uganda since 1992: (i) The central importance of borrower commitment for successful adjustment applies at identification as much as later stages of operation design and implementation. In contrast to recent experience in development of SAC III, the Government played a less central role in the identification phase of SAC II. On balance, a comparison of the two operations at this stage suggests that Government's own identification of required policy directions has led to a richer, more demanding reform agenda, more closely integrated with Government's overall program. This conclusion suggests the need for recognition of the potential for a more central role of Government at the identification stage, including an explicit recognition of this aspect of borrower performance in the guidelines for ICRs. (ii) Attention to medium-term tax policy and consistency with supply side goals should be a key element of the fiscal management component of adjustment lending Experience in Uganda's program since 1992 amply illustrates several of the findings in the recent OED review of "Fiscal Management in Adjustment Lending" and particularly underlines the importance of assessing the impact of increasing revenue effort on the private sector. V (iii) Adjustment lending needs to remain sensitive to the constraints to private sector development. One of the successful features of adjustment lending in Uganda has been the responsiveness of the reform agenda to periodic objective assessments of constraints to private sector development. On the other side of the same coin, the lack of a sufficiently high place on the agenda for the reform of utilities, identified repeatedly as a critical constraint for the private sector, may be viewed as a missed opportunity. (iv) Implementation of adjustment lending should make efforts to be supportive of off-agenda reform. Some of the most significant of Uganda's achievements in economic management have not been the subject of adjustment lending conditions. Supervision of adjustment lending and related ongoing ESW should be responsive to such developments, by providing immediate informal support where possible and using Government's own initiatives as the basis for identifying further lending or non-lending support, as illustrated in the preparation of the successor credit, SACIII. UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) (CREDIT NO. 2608-UG) PART 1 : PROGRAM IMPLEMENTATION ASSESSMENT A. Background and Program Objectives 1. Since 1986 Uganda has pursued a comprehensive program of economic and political reform. GDP growth has averaged 6.4 percent in the past decade and 8.1 percent during the past three years. Macroeconomic performance since 1992 has been particularly strong, with inflation held to single digits since late 1992 and a reasonable degree of exchange rate stability maintained in a fully liberalized foreign exchange market. 2. Prior to the first Structural Adjustment Credit approved in 1991, key reforms included substantial liberalization of the foreign exchange market, removal of price controls and import liberalization. Remaining problems included the very low level of domestic revenue (7.5 percent GDP in FY91), inadequate prioritization of public expenditure, continued state marketing monopoly in the coffee sector, an overstaffed and poorly paid civil service and a poor climate for private investment, arising from factors such as a restrictive regulatory framework for private investment. These issues formed the agenda for SACI, together with a program to return properties held by the Departed Asians Property Custodian Board (DAPCB), which had been expropriated during the Amin regime. 3. In early 1992, the Government faced a severe macroeconomic crisis as a result of failing to adjust aggregate expenditure in light of a shortfall in expected aid flows. In response to inflation rising beyond 60 percent, the President announced a strict anti- inflation strategy and merged the Ministries of Finance and Economic Planning, accompanied by major changes in his economic management team. This was followed by a sharp correction in fiscal stance, an overhaul of the institutions of short-term economic management and a rapid macroeconomic response, as inflation fell to an annualized rate of less than 2 percent during the first half of FY93. This improvement in stabilization performance was still recent and perceived to be quite fragile at the time of appraisal of SAC II. 4. The main issues addressed in SAC II comprised five main categories: reform of the regulatory and business environment, divestiture of Custodian Board properties, domestic revenue mobilization, public expenditure prioritization and civil service reform. 2 (a) Reform of the Regulatory and Business Environment For the coffee sector, Government undertook to restructure the Uganda Coffee Development Authority (UCDA) and amend the UCDA Statute to replace licensing with a system of registration for coffee exporters, to revise the formula for the floor price for coffee exports (to be followed by abolition of the floor price prior to second tranche release), to remove restrictions on method of export sales, to liberalize the transportation of coffee to sea ports and to gazette the regulations for registration of coffee exporters and quality control for coffee exports. On the cotton sector, SAC II supported a parallel sector operation (Cotton Subsector Development Project, Credit 2609-UG) with policy conditions including preparation and approval of new legislation for the cotton sector, agreement on restructuring and debt relief for cotton ginneries and the transfer of at least 100,000 bales ginning capacity to the private sector (second tranche release condition). On the Investment Code, the Government agreed to initiate a study to review the Code and the operations of the Uganda Investment Authority, and, prior to second tranche, to consider the recommendations of the study in consultation with IDA. Controls on the pump prices of petroleum products were also to be removed. (b) Divestiture of Custodian Board Properties Following the successful return of over 2,500 properties to owners during the implementation of SAC I, SAC II concentrated on completion of the task including establishment of an advertised cut-off date for repossession, announced procedures for handling compensation claims, return of all remaining properties with valid repossession claims to their owners and agreement on procedures for sale of unclaimed non-citizen properties and (for second tranche release) taking all necessary measures to offer for sale all properties not claimed by their owners or for which compensation claims are pending. (c) Domestic Revenue Mobilization On tax administration, the program comprised development of a comprehensive taxpayer identification number (TIN) system and assignment of TINs to companies and individuals. On tax policy, the authorities agreed to review existing tax and tariff exemptions, agree with IDA on exemptions to be eliminated and implement the revenue measures announced in the FY94 Budget Speech. (d) Public Expenditure Measures included removal of overdue leavers, duplicate names and ghost teachers from the teachers' payroll, postponement of implementation of new salary levels to October 1, 1993 and, for second tranche, release of all FY94 budget allocations for agreed high priority recurrent programs and core projects and provision of satisfactory allocations for the wage bill, nonwage recurrent expenditure and development expenditure in the FY95 budget. (e) Civil Service Reform Measures included completion of the FY93 retrenchment of 7,500 staff, installation of a payroll validation system, audit of the teaching service payroll, removal of at least 15,000 group employees from the payroll, agreement on non- core functions to be eliminated in the Ministries of Agriculture, Trade, Works and Natural Resources with staffing cuts identified, termination of the vehicle co-ownership scheme and a plan for divestiture of pool houses and personal use and home to office pool 3 vehicles. For second tranche release, key actions were continued progress in monetization of transport and housing benefits, satisfactory progress towards divestiture of pool houses and vehicles and elimination of non-core functions and implementation of the first stage of staff reductions in the Ministries of Agriculture, Trade, Works and Natural Resources. 5. Most of the objectives for SAC II were clear and specific, with the exception of the second tranche conditions for civil service reform (continued progress with monetization, satisfactory progress towards divestiture of pool houses and vehicles). Many of the conditions required completion of reforms begun in SAC I, which had the benefit that the policy areas had mostly been discussed over a long period and the risks of some of the more difficult reforms--such as further civil service staff reductions and divestiture of Custodian Board properties--were fairly well understood. Some of the conditions were insufficiently demanding, especially for the Investment Code (completion of a review with commitment only to consider the subsequent recommendations). 6. In adopting an agenda which in broad terms simply updated the previous SAC, there was some risk of missing important new issues or continuing to emphasize areas no longer central to the overall reform program. Within the overall program at the time of SAC II appraisal, it was apparent that reforms were lagging within the parastatal sector and divestiture program and in the financial sector. In particular, the poor performance of utilities had been identified in private sector surveys as one of the outstanding constraints to private sector development. Subsequently, progress in the parastatal sector was accelerated following the intervention of the President in 1995 to revitalize the privatization program and restructure the management of parastatal reform (though without significant impact on the power sector to date). Shortly after, a renewed commitment to the privatization of UCB became the centerpiece of a stronger financial sector reform program. Earlier progress may have been possible if the weaknesses in these programs had been included in the SAC II agenda. 7. The retention of domestic revenue mobilization on the SAC II agenda was wholly justified, with revenue still only 7.8 percent of GDP in FY93. However, the measures emphasized may not have been the most critical. Introduction of the TIN system had the merit of being a clear and monitorable action and was evidently a necessary measure for administrative gains. However, the Revenue Authority has had no clear framework for monitoring the contribution of administrative gains to rising aggregate revenues, either as a basis for IDA review or for routine performance monitoring from the Ministry of Finance. On tax policy, SAC II endorsed the CAS projections of revenues rising at one percent GDP or more per year, without the backing of a concrete medium-term strategy on policy and administrative measures which can be expected to deliver such growth. In subsequent years, this mismatch became more acute, with ad hoc increases in tax rates (especially petroleum taxes, which the SAC II appraisal already noted to be disturbingly high) increasingly relied upon to make up the aggregate revenue targets, with little regard for the potential supply side effects. A stronger analysis of domestic revenue prospects, including a realistic assessment of potential administrative gains and serious 4 consideration of the supply side constraints to further rate increases would have been a valuable contribution to policy dialogue at the time. Greater attention to such issues has been recommended in the recent OED review of "Fiscal Management in Adjustment Lending". B. Achievement of Program Objectives 8. The main components of SAC II fall broadly within the categories of support for private sector development (regulatory and business climate and divestiture of Custodian Board properties) and public sector management (domestic revenue mobilization, public expenditure prioritization and civil service reform). Within these broad categories it is necessary to discuss both the overall achievements of the reform program during the period of SAC II implementation and the specific achievements against the credit conditions. 9. Support for Private Sector Development On the specific conditions regarding the regulatory and business climate identified under SAC II, all of the objectives were substantially achieved. For the coffee sector, the floor price system was abolished, transportation was opened up to allow competition between rail and road, the UCDA was opened to industry participation and is functioning primarily as an industry association. The major immediate impact of liberalization predates SAC II: the entry of private sector exporters, competition in coffee purchase, and establishment of market-determined producer prices were all in evidence at the time of appraisal. However, the nature of UCDA's involvement in the sector and in particular the operation of the floor price created uncertainties which were of evident concern to private exporters. Failure to complete the reform by abolishing the floor price could have stifled the rapidly growing confidence in the sector. Implementation of reforms in this area was no doubt assisted by the rise in coffee prices from mid-1993. Regarding the cotton sector, transfer of more than 100,000 bales ginning capacity to the private sector was completed in June 1995 and further transfers brought the total to 210,000 bales capacity by end 1996. The sector has faced some continuing constraints from problems with seed supply, which is also expected to be in private hands by end 1997. Reforms in coffee and cotton sectors are especially important because of the impact on the poor: income from coffee represents a higher proportion of agricultural revenue for the poorest quartile than for other households in the main coffee growing areas, while cotton is important for the development of the poorer northern region. The review of the Investment Code was completed, but the impact of this exercise was limited; at best, subsequent dialogue on its findings may have helped to focus government-proposed measures, of which the main elements were stated to be the substitution of some form of registration for UIA's investor licensing role, elimination of Investment Code exemptions on corporate tax and replacement with a lower uniform rate, and replacement of UIA's role in administering tariff exemptions on capital goods with equivalent provisions in the tariff code. Only the latter measure has been effected as yet. Other aspects of the Government's strategy on support for private sector development are being addressed in the Private Sector Competitiveness Project (Credit 2798-UG). 5 10. Divestiture of Custodian Board Achievements under SAC II effectively completed action on the return of properties expropriated during the Amin regime. While the initiative for this restitution was first adopted during SAC I, it is evident that completion of the exercise required continued government commitment, in which IDA support proved helpful. The settlement finally achieved appears to have gained widespread support as an equitable and pragmatic response to the problem. The fact that this complex and politically difficult operation has been pursued to such a settlement has no doubt contributed to the Government's reputation, both for determination and efficiency in policy execution and its respect for property rights and support for private sector development. Public Sector Management 11. Domestic Revenue Mobilization On tax administration, the introduction of the TIN system was substantially achieved. The overall increase in revenue collection from 7.8 percent GDP in FY93 to approximately 11.2 percent GDP in FY96 is prima facie evidence of improvements in administration. In view of the high growth in most of the key tax bases, a trend of rapid monetization during the period and substantial increases in some rates, this conclusion cannot be taken for granted in the absence of a more specific analysis of gains specifically attributable to administrative improvements. One of the missing elements in the reforms which established the Revenue Authority was a transparent framework for performance monitoring by the Ministry of Finance. Other weaknesses in the reform have been the absence of an independent appeals procedure and lack of institutional clarity regarding the responsibilities for tax policy, the role of the UIA Board vis-A-vis management, and the machinery for coordination between MOF and URA. On tax policy, exemptions have been reduced as indicated in a review of exemptions policy carried out in preparation for SAC III. Some of the FY94 measures specifically supported by SAC II ran into some problems, which illustrate continuing difficulties facing the strategy of broadening of Uganda's narrow tax base. Rental taxation continues to contribute very little. The 10 percent tariff on raw materials, reimposed in FY94 in an effort to reduce rates of effective protection, was rescinded later in 1994 under pressure from domestic manufacturers and subsequently reintroduced in July 1995 at a level of 5 percent. 12. Public Expenditure Prioritization SAC II conditions focused on protection of key areas of expenditure, the Priority Program Areas (PPAs) within the Budget and agreed 'core' projects within the development budget. Considerable attention was given to reduction in the absolute numbers of development projects. This was achieved to a large extent through reclassification of existing projects rather than a radical review of the objectives for the development budget, which would have required a longer term budget reform establishing greater integration of the recurrent and development budget in expenditure planning. Prioritization was probably more successful within the recurrent budget. The Government recognized the need for protection of key areas of expenditure and subsequently added further priority areas within expenditure on the judiciary and police to the previous list of items agreed with IDA in primary health, primary education, 6 road maintenance, water and agricultural extension. PPA allocations have been effectively protected during a period in which significant fiscal adjustment, the demands of an unstable security situation and continuing weaknesses in budget administration have contributed to relatively poor match between budget and outturn in other areas of public expenditure. 13. Outside the SAC II agenda, the Government carried out several key reforms which had a positive impact on public expenditure management. Firstly, the authorities implemented a number of institutional reforms which proved critical for maintaining the macroeconomic stabilization achieved in FY93. These included the reorganization and strengthening of macroeconomic capacity within MFEP, establishment of effective machinery for coordination between MFEP and BOU and the development of an institutional and technical framework for monitoring and forecasting Government cashflow and implementing necessary fiscal adjustments in timely response to macroeconomic circumstances. Secondly, MFEP developed a framework for strategic planning of public expenditure over the medium term. The Budget Framework, first used in FY93 as a three-year frame for macroeconomic management, was gradually expanded to include sector policy objectives, and by FY95, had been developed into a medium-term expenditure framework for strategic resource allocation between sectors. It is being developed further to give greater emphasis to sector outcomes. The June 1996 Bank study on "Tracking of Public Expenditure on Primary Education and Primary Health Care" shows that protection of PPAs/Strategic Areas within the central government budget has not been sufficient to ensure increased resources for service delivery, since it was found that a relatively low proportion of resources allocated to districts was transmitted to schools and clinics. In summary, experience so far indicates that: (i) strategic allocation in the overall budget is improving gradually with development of the Budget Framework process; (ii) as an interim measure, a system of protection of budget commitments in key sectors is necessary and has worked in practice; (iii) this needs to be supplemented by greater attention to systems ensuring transmission of funds to providers of basic services. 14. Civil Service Reform The Government had already achieved significant reductions in civil service numbers prior to SAC II, which had made possible a substantial increase in the very low level of civil service pay. However, the incentive structure remained highly distorted by the proliferation of non-cash benefits available to different categories of staff, and monetization of the existing benefits within a more rational pay structure was recognized by both Government and IDA as a necessary step to a more efficient incentive system and improved civil service performance. Comprehensive costing of the policy was not complete at SAC II design stage and was not possible until subsequent work had been completed on financing arrangements for divestiture of pool housing and a full inventory of Government vehicles and pool houses. This led to the vagueness in the credit conditions in this area, although this was remedied in some degree by guidance provided during supervision as more data became available. The Government has attempted to better integrate civil service reform with sectoral and macroeconomic strategy by: (i) including planning for the wage bill, staffing and pay within the medium- term Budget Framework exercise; (ii) carrying out functional reviews 7 of ministries; (iii) attempting to introduce results oriented management (ROM) across the civil service. 15. Macroeconomic Performance Text Table I below records some dimensions of macroeconomic performance during the period of SAC II implementation, contrasting projections from the CAS and IMF programs at the time of appraisal with outturn data. Growth has been significantly higher than programmed at appraisal, while inflation has been maintained in single digits. Fiscal adjustment has been significantly stronger than projected, as shown by the deficit measures and also the level of central government net repayments to the banking system, which were some one percent GDP higher than expected during FY94 and FY95. Achievement of simultaneous stability in prices and the exchange rate in practice required a tighter fiscal stance than reflected in IMF programs for much of this period. The authorities since 1992 have maintained a system of cashflow management, adjusting fiscal stance as required to maintain low inflation and a reasonable degree of exchange rate stability. Achievements in this area were not directly related to SAC II, but the importance of this objective was heavily stressed in preparation and ongoing performance in this area features frequently in policy dialogue during implementation. Text Table 1: Key Indicators Projections Performance at Actual Performance SAC II Appraisal FY94 FY95 FY96 FY94 FY95 FY96 GDP at FC Growth Rate 5.0 5.0 5.0 5.3 10.6 8.5 Average Change in CPI 9.6 7.3 5.0 6.5 6.1 7.4 (Composite) Ratios to GDP at FC: Domestic Revenue 9.5 10.1 10.8 9.0 10.9 11.4 Overall Deficit (excl Grants) -11.6 -10.5 -9.7 -11.2 -8.3 -6.6 Overall Deficit (incl Grants) -5.5 -5.0 -4.5 -4.1 -3.2 -2.1 Domestic Bank Financing 0.0 -0.6 -1.2 -0.9 -2.0 -0.5 C. Implementation Record and Major Factors Affecting the Program 16. SAC II was designed as a two tranche operation of SDR 57.8 million (US$80 million), with amounts divided equally between an initial tranche at effectiveness and a second tranche. Most of the initial conditions were set for Board presentation, with only two conditions deferred to effectiveness (gazetting of regulations for coffee export registration and initiation of the Investment Code review). The credit was cofinanced by the Kingdom of Norway with a grant of NKr 56.6 million (US$8.9 million) for indirect debt relief. 17. Delay in the promulgation of regulations for coffee exporter registration in the event led to the need for a two-month extension in the terminal date for effectiveness. At 8 the target date for second tranche release, the main condition on which implementation was lagging was the monetization of civil service benefits, especially the sale of vehicles and monetization of transport benefit. The condition was met approximately four months later than initially scheduled. The slippage arose partly from longer preparatory work than expected (especially on the inventory of up country vehicles) and problems of coordination between the several ministries involved, but can in part be attributable to vagueness in the initial condition. However, while these obstacles delayed the point of tranche release by a few months in each case, disbursement of the credit was rapid following each release and was completed within the target fiscal year for both tranches. 18. The revision in disbursement procedure to a reimbursement procedure instead of the replenishment basis adopted for previous credits was a sensible and timely response to the revised institutions of foreign exchange management with the introduction of the interbank foreign exchange market in November 1993. A LOAAF review of disbursement issues in July 1994 was responsive to government concerns on eligible contract size which probably helped to accelerate disbursement. D. Program Sustainability 19. Both the specific achievements of SAC II and the broader reform program which it supported are likely to be sustainable. The borrower has emphatically avoided the main risk identified at appraisal which was perceived to be a return to fiscal laxity in the run-up to presidential and parliamentary elections and a weakening of resolve in structural reforms, such as required in retrenchment and revenue generation. The Government of Uganda has demonstrated a high degree of commitment to the broad areas of reform targeted in SAC II, initiating measures well beyond the specific conditions of the credit, and there is no indication that such a stance will be reversed. 20. While there is no doubt regarding the direction of reform, several factors may adversely affect its pace. Reforms in public sector management, including public expenditure prioritization and civil service reform, have been complicated by the parallel pursuit of an ambitious program of decentralization. Establishing a transparent and workable assignment of responsibilities in fiscal management and building appropriate capacity may entail a slower pace of reform in these areas than optimal. The program of reform of public expenditure management has been retarded by reorganization in wake of the demerger of the Ministry of Finance and Economic Planning and may be subject to further delays arising from problems of coordination, especially in the area of medium- term expenditure planning. Clarity of fiscal responsibilities under decentralization and significant strengthening of medium- term expenditure planning are both going to be critical for the Government's ability to deliver on its commitments on poverty eradication, which require significant restructuring of expenditure towards basic services at the district level. The shortfall in revenue performance in FY97 signals the need for further reform in tax administration and attention to development of a more robust medium-term revenue strategy. Regarding private sector development, the strong investment response to the program so far is evidence of sustainable growth. Success in 9 increasing the efficiency of the power sector and other infrastructure through greater private sector participation will be an important factor in the future pace of further progress. E. Bank Performance 21. The credit was carefully designed in close consultation with Ugandan counterparts, developing earlier experience of excellent working relations with the Government. By building on the previous agenda from SAC I, the staff drew on considerable experience in the chosen policy areas and consolidated reforms initiated under the earlier credit. On the other hand, the agenda which emerged can be criticised as missing some elements which were by 1993 emerging as strategic problems. The latter include action to revitalize the faltering program of reform in the financial and parastatal sectors, (especially utilities, the poor performance of which had emerged as the most important constraint for private sector growth) and deeper reforms on domestic revenue mobilization, including a more effective framework for monitoring and improving administrative performance and a more coherent medium-term strategy for tax policy. The design of the civil service reform component and the UIA/Investment Code conditions were perhaps the weakest elements of the credit. The UIA condition achieved little, though this gap was quickly followed up with the subsequent Private Sector Competitiveness Project (Credit 2798-UG). The civil service conditions were probably too narrowly focused to support strategic goals of improving civil service efficiency, while being too poorly defined to achieve fully satisfactory results on more specific tactical objectives. 22. Few significant problems arose in implementation of the credit. The relatively open-ended nature of the civil service conditions was resolved adequately in the course of supervision. Collaboration with the Government remained excellent throughout implementation. For the subsequent adjustment credit, SAC III, staff were able to draw on an agenda of policy measures identified by the Government as its intended program for the next few years, including greater attention to problems of anti-export bias, remaining issues in financial sector reform, tax administration and medium-term tax policy, and public expenditure management. The fact that this more collaborative approach was possible from the earliest stages of the follow-up operation must in part be credited to the deepening in dialogue on the overall adjustment program achieved during SAC II implementation. F. Borrower Performance 23. Borrower performance during SAC II was highly satisfactory, especially when viewed against the breadth of the wider reform program and the high demands imposed on the scarce capacity for leading and managing reform within the public sector. Throughout preparation and implementation of the credit, Government maintained an open and constructive dialogue on the program. 10 24. At preparation stage, Government's role was effective but less developed than was evident in the subsequent preparation of SAC III, for which the Ugandans identified an initial broad agenda from which the eventual credit design emerged. A few areas proved more difficult than expected in implementation. The monetization of civil service benefits took longer than envisaged, partly arising from the lack of a fully costed program at appraisal but also reflecting weaknesses in coordination between the several agencies involved in the program. G. Assessment of Outcome 25. In view of the strength of the overall reform program and the accumulating evidence of sustained performance in the main policy areas which were the focus of SAC II, the outcome of the credit must necessarily be viewed as satisfactory. More difficult is the assessment of the precise contribution of the operation to the overall outcome. 26. SAC II helped to focus attention on completion of some key initiatives, such as pursuing the Custodian Board episode to its conclusion and completing further steps to lock in the coffee sector liberalization, which in the absence of formal commitments may have been squeezed out of the Government's very crowded agenda of political and economic reform. These actions clearly consolidated the reform already achieved. 27. During the period of SAC II preparation and implementation, the Government pursued a number of important initiatives which formed no part of any formal conditionality, but which were nevertheless critical to the overall performance during the period and beyond. These include the revamping of macroeconomic management described above, the initiatives taken in medium-term expenditure planning, the overhaul of an ineffective apparatus for parastatal divestiture and reform and a revived privatization program and from 1995 onwards, a strengthened poverty focus to government policy making in general and public expenditure in particular. In varying degrees, these initiatives benefited from a continuing constructive dialogue on adjustment and reform with IDA and the donor community more generally. Such dialogue may have been assisted by the fact that the main adjustment lending operation was focused on reasonably familiar policy areas with well identified risks. 28. The volume of aid provided by the credit and the Norwegian cofinancing was appropriate. Continued non-project aid flows to Uganda have permitted a higher level of public expenditure while the Government pursued a program of increasing its domestic revenue effort. Such aid has also enabled the Government to increase its foreign exchange reserves from 1.9 months imports in FY93 to 3.7 months imports in FY96. This has been important as a corollary of previous reform of the foreign exchange regime, assisting the authorities to maintain a reasonable degree of exchange rate stability in a fully liberalized foreign exchange market. The use of marginal aid resources in building up reserves has had an important additional benefit in insulating budget management from the persistent volatility of aid flows, which was a proximate cause of the FY92 stabilization crisis. 11 29. At appraisal, the volume of the credit was designed to represent a continued decline in quick-disbursing commitments by IDA, relative to previous operations. The rationale for the rate of this decline needs closer scrutiny, based on a fuller assessment of the optimal path of fiscal adjustment in Uganda. Such scrutiny will need to make a more thorough assessment of the medium-term prospects for increased revenue effort in Uganda, weighing carefully the risks of undermining the potential for private sector growth with high tax rates applied to a still very limited tax base. H. Future Operations 30. A successor adjustment operation, SAC III, was approved by the Board in June 1997 (Report No. P-7097-UG). As noted above, SAC III preparation has benefited from further development of the policy dialogue with the Government, including a markedly more prominent role of the authorities at identification stage. SAC III addresses several of the areas which have been noted as weaker points in the overall program during the period of SAC II implementation. These include a more strategic approach on tax policy including a phased program for tariff reform to reduce levels of effective protection, support for Government's initiatives in medium-term expenditure planning and a stronger focus on poverty focused expenditure, especially in basic services. The weaknesses in parastatal reform, especially public utility performance are covered in the general approach on parastatal reform in SAC III, and will be addressed in detail in a subsequent credit and related ESW planned in the recent CAS (Report no. 16540-UG). I. Key Lessons Learned 31. Adjustment lending to Uganda illustrates very clearly some general lessons regarding the critical importance of strong borrower commitment. Uganda's performance before and after 1992 also shows the value of a strong macroeconomic performance and consistently maintained attention to stabilization requirements as a foundation for robust structural reform. Experience with SACII has also illustrated the problems arising from vagueness in policy conditions (the Investment Code and UIA conditions and monetisation of civil service benefits) and the importance of effective supervision, which partially remedied the weak specification of civil service reform conditions. The following more specific lessons may be summarized from experience under the SAC II program and the performance on the broader reform program in Uganda since 1992: (i) The central importance of borrower commitment for successful adjustment applies at identification as much as later stages of operation design and implementation. In contrast to recent experience in development of SAC III, the Government played a less central role in the identification phase of SAC II. On balance, a comparison of the two operations at this stage suggests that Government's own identification of required policy directions has led to a richer, more demanding reform agenda, more closely integrated with the overall program. This conclusion suggests the need for recognition of the 12 potential for a more central role of Government at the identification stage, including an explicit recognition of this aspect of borrower performance in the guidelines for ICRs. (ii) Attention to medium-term tax policy and consistency with supply side goals should be a key element of the fiscal management component of adjustment lending. Experience in Uganda's program since 1992 amply illustrates several of the findings in the recent OED review of "Fiscal Management in Adjustment Lending", and particularly underlines the importance of assessing the impact of increasing revenue effort on the private sector. (iii) Adjustment lending needs to remain sensitive to the constraints to private sector development. One of the successful features of adjustment lending in Uganda has been the responsiveness of the reform agenda to periodic objective assessments of constraints to private sector development. On the other side of the same coin, the lack of a sufficiently high place on the agenda for the reform of utilities, identified repeatedly as a critical constraint for the private sector, may be viewed as a missed opportunity. (iv) Implementation of adjustment lending should make efforts to be supportive of off- agenda reform. Some of the most significant of Uganda's achievements in economic management have not been the subject of adjustment lending conditions. Supervision of adjustment lending and related ongoing ESW should be responsive to such developments, by providing immediate informal support where possible and using Government's own initiatives as the basis for identifying further lending or non-lending support, as illustrated in the preparation of the successor credit, SACIII. 13 Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Neglibile Not applicable Macro policies X Sector policies X Financial objectives X Institutional development X Physical objectives x Poverty reduction x Gender issues X Other social objectives x Environmental objectives X Public sector management X Private sector development X Other (specify) B. Project sustainability Likely Unlikely Uncertain xSI Highly C. Bank performance satisfactory Satisfactory Deficient Identification x Preparation assistance x Appraisal x Supervision X Highly D. Borrower performance satisfactory Satisfactory Deficient Preparation X Implementation x Covenant compliance X Operation (if applicable) Highly Highly E. Assessment of outcome satisfactory Satisfactory Unsatisfactory unsatisfactory xII I 1 I I Z II 14 Table 2: Related Bank Credits Loan/credit title Purpose CY of Status approval Preceding operations I. Emergency Recovery The objectives of the credit were to reduce 1987 Closed Program (ERC I) the imbalances in the economy, bring about (Credit 1844-UG) internal financial stability and promote growth 2. Second Emergency The credit supported the third phase of the 1990 Closed Recovery Credit (ERC II) recovery program which included fiscal policy, (Credit 2087-UG) regulatory, civil service and parastatal reforms 3. Agricultural Sector The credit contained agricultural sector 1990 Closed Adjustment Credit components of the macroeconomic reform (ASAC) program and supported reforms in the coffee (Credit 2190-UG) subsector. 4. Structural Adjustment The credit supported the decepening of the 1991 Closed Credit (SAC I) reform process by emphasizing (i) the (Credit 2314-UG) removal of remaining constraints on the private sector; (ii) the improvement of the effectiveness of Government. 5. Economic and Financial The credit contains components to support 1992 Ongoing Management Project financial systems and improve financial (Credit 2418-UG) management and economic policymaking 6. Financial Sector The credit supports the financial reform 1993 Ongoing Adjustment Credit program by increasing the efficiency of the (FSAC) banking system and strengthening the (Credit 2496-UG) Central Bank. Following operations 1. Third Structural The credit includes measures to improve the 1997 Negotiated in April 1997; Adjustment Credit tax system, address the anti-export bias in the Board Date scheduled (SAC III) trade regime, and to improve the management for May 1997 of public expenditure. 15 Table 3: Project Timetable Date Actual Steps in Project Cycle Planned Date Identification (Executive Project Summary) 30-Sep-92 Preparation 23-Feb-93 Appraisal 20-May-93 Negotiations 6-Dec-93 Letter of development policy 12-Apr-94 oard presentation 10-May-94 Signing 22-Jun-94 Effectiveness Jul-94 18-Nov-94 First tranche release Jul-94 19-Nov-94 Second tranche release Apr-95 22-Nov-95 Project completion Jun-95 15-Jan-96 Loan closing Dec-95 28-Mar-96 Table 4: Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY1995 FV1996 Appraisal estimate 40,000 80,000 Actual 41,840 85,735 Actual as % of estimate 105% 107% Date of final disbursement 27-Mar-96 Table 5: Key Indicators for Project Implementation Estimated Actual I Conditons for effectiveness A. Regulatory and Business Climate Coffee Subsector Gazette regulations covering registration of coffee exporters and quality Regulations were published in the Nov. 16, 1994 edition of "The Uganda Gazette" control of coffee for export. By Jan 1995, the number of coffee exporters had grown from one monopoly to over 100. Investment Code Enter into a contract with consultants to review the Investment Code and The consultants completed the study in late 1994. operations of UIA. Ul Conditions for second tranche release A. Regulatory and Business Climate Coffee subsector Abolish the floor price mechanism The floor price was abolished on March 1, 1995. Cotton subsector Take all necessary measures to facilitate the transfer, by way of sale, lease, Nov 1994: MOF offered debt relief to unions if they had drawn up business plans; on the management or restructuring of ginneries with installed capacity of at least basis of these plans they were to secure credit facilities from financial institutions. Unions 100,000 bales to creditworthy and viable operators. which failed to secure debt relief within 180 days were to be foreclosed. There were delays in completing this measure until late 1995. nvestment Code Consider, in consultation with IDA, recommendations of study of the Discussions recommended that UIA should refocus its activities on business facilitation and Investment Code and the UIA. business and export promotion; many advantages should be granted under the tax code rather than the investment code; exemptions need to be streamlined. These measures were announced in the 1995/96 budget speech. B Custodian Board Take all necessary measures to offer for sale (taking into account market conditions) all properties A total of 1,376 non-citizen properties were gazetted for sale By June 1995, 461 properties covered by the 1982 Expropriated Properties Act not claimed by the owners or for which had been offered for sale; 302 properties had been sold. IDA reviewed the list of 614 properties compensation claims are pending. which cannot be offered for sale and was satisfied for the reasons given. C. Public Expenditure Release all the FY94 budgeted allocations for agreed high priority recurrent programs and core The 1993/94 budget releases for high priority programs and for core projects was met projects. satisfactorily to IDA by Jan. 1995. For the FY95 budget: make satisfactory budgetary allocations for the wage bill, nonwage recurrent The 1994/95 budget allocations were deemed acceptable to IDA by Jan. 1995. expenditure and development expenditure. D. Civil Service Reform Continue to make progress in replacing transport and housing benefits with cash payments, and By July 1995, conditions were met on all issues, except the divestiture of excess vehicles. make satisfactory progress towards divestiture of pool houses and personal and home-to-office The offers were made subsequently. pool vehicles for civil servants other than judges, ministers, deputy ministers and those entitled to institutional houses. Eliminate noncore functions in the ministries of Agriculture, Trade, Works and Natural Resources an Conditions were met by July 1995. implement first stage staff rationalization plans. 17 Table 6: Key Indicators for Project Operation Not applicable Table 7: Studies Included in Project Purpose as defined Study at appraisal/redefined Status Impact of study Civil Service Reform: Monetization of Review and recommend on Completed Guided Ministry of Public Service work Benefits & Ministerial Restructuring programs on salary reform, 22 Feb 1994 program in monetization and ministerial monetization of benefits and restructuring. ministerial restructuring. Constraints on Businesses and Practical Update 1990 Private Sector Completed Provided guidance for review of UIA and Ways of Removing Them Assessment, identifying key 1993 subsequent revision to tariff code. constraints to private sector investment. Civil Service Reform and the Business Climate: Review Uganda's civil service Completed Identitied principal civil service reform Issues and Approaches to Reform reform program and make Spring 1993 conditions incorporated in SAC II. recommendations for further reform. Table SA: Project Costs Appraisal estimate (USSm) Actual (US$m) Local Foreign Local Foreign Item costs costs Total costs costs Total Total 87.9 87.9 94.6 94.6 Table 8B: Project Financing Appraisal estimate (US$m) Actual (USSm) Local Foreign Local Foreign Source costs costs Total costs costs Total IBRD/IDA 80.0 80.0 85.7 85.7 Kingdom of Norway 7.9 7.9 8.9 8.9 Total 87.9 87.9 94.6 94.6 Table 9: Economic Costs and Benefits Not applicable 18 Table 10: Status of Legal Covenants Uganda SIrucltral Adjuslnent Credit II Original Revised Covenant Present fulfillment fulfillment Description of Agreement Section type status date date covenant Development 3.02 Procurement Complied Except as IDA shall otherwise agree, procurement of the goods to be Credit financed out of the proceeds of the Credit shall be governed by the Agreement provisions of Schedule 2 to this Agreement. signed June 22, 1994 Development 3.03(a) Accounts/ Complied The Borrower shall maintain or cause to be maintained records and Credit audites accounts adequate to reflect in accordance with consistently maintained Agreement sound accounting practices the expenditures financed out of the signed June 22, 1994 proceeds of the Credit. Development 3.03(b) Accounts/ Complied The Dorrower shall: have the records and accounts referred to in para Credit audites (a) of this section for each fiscal year audited, in accordance with Agreement applopriate auditing principles consistently applied, by independent signed June 22, 1994 auditors acceptable to IDA; furnish to IDA as soon as available, but in any case not later than six months after the end of each such year, a certified copy of the report of such audit by said auditors, of such scope and in such detail as IDA shall have reasonably requested; and furnish to IDA such other information concerning said records and accounts and the audit thereof as IDA shall from time to time reasonably request. Development 3.03(c) Accounts/ Complied For all expenditures with respect to which withdrawals from the Credit audites Credit Account were made on the basis of statements of expenditure, Agreement the Borrower shall: maintain or cause to be maintained, in signed June 22, 1994 accordance with para (a) of this section, records and accounts reflecting wuch expenditures; retain, until at least one year after IDA has received the audit report for the fiscal year in which the last last withdrawal from the credit account was made, all records evidencing such expenditures; enable IDA's representatives to examine such records, and ensure that such records and accounts are included in the annual audit referred to in para (b) of this section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparations, can be relied upon to support the related withdrawals. Table 11: Compliance with Operational Manual Statements Not applicable 19 Table 12: Bank Resources - Staff Inputs Stage of Actual Project cycle Weeks US$ '000 Preparation to appraisal 45.7 136.9 Appraisal 31.2 99.9 Negotiations through Board approval 36.0 118.3 Supervision 54.8 185.6 Completion 0.5 15.3 Total 168.2 556.0 Table 13: Bank Resources - Missions Performance rating Stage of Month/ Number of Days in Specialized Implementation Development Types of Project cycle year persons field staff skills status objectives problems Through appraisal Dec-92 2 14 Tax/Econ Mar-93 8 20 Econ/All Appraisal through Board approval Jul-93 11 14 Econ/All Supervision Sep-94 3 8 Civil Serv Reform S N/A Jan-95 5 10 Econ/All Apr-95 6 5 Civil Serv Reform S S Jun-95 5 4 Econ/All S S Jun-96 5 5 Custodian Board S S Completion Note: "All" refers to all specialized skills required for the project economist, tax specialist, custodian board (legal), investment code specialist, civil service reform specialist. Appendix 1 Page 1 of 8 PROJECT IMPLEMENTATION COMPLETION REPORT SECOND STRUCTURAL ADJUSTMENT CREDIT (SAC II) UGANDA GOVERNMENT'S PERSPECTIVE A SUMMARY 32. INTRODUCTION 1. On May 20, 1994 the Board of IDA approved the Second Structural Adjustment Credit (SAC II) to the Government of Uganda (GOU). the credit became effective on November 20, 1994 and expired on March 31, 1996. Its objectives were: to assist the GOU to liberalize the cotton and coffee sub-sectors; to complete the divestiture of the Custodian Board Properties; to improve revenue generation; to prioritize further public expenditure; to raise efficiency in the civil service. Implementation of various actions was required in order for the credit to be availed to the GOU. The purpose of this report is to assess the design and implementation of SAC II from the GOU perspective. 33. CREDIT DESIGN 2. In early 1993, GOU approached IDA for a successor development credit to SAC 1. The credit was needed for budgetary and import support. An IDA Pre-Appraisal Mission came to Uganda between March 2 and March 23, 1993; the Final Initiating Memorandum was prepared on June 2, 1993, and Appraisal Mission visited Uganda from June 26 to July 20, 1993; Credit Negotiations were entered into a December 6 1993 and were concluded on January 4, 1993; a Post-Appraisal Mission visited Uganda between January 11-January 21, 1994; the Letter of Development Policy was submitted by the Minister of Finance and Economic Planning to IDA on April 12, 1994; Credit Board Presentation was made on April 18, 1994; Board Approval was on May 10, 1994; the signing of Development Credit Agreement was on June 22, 1994; after considerable delay Credit Effectiveness was on November 20, 1994; the first tranche was released on November 20, 1994; the second trance was released on June 25, 1995 and the credit ended on March 31, 1996. 3. By April 1994 the Board conditions had been met and the Credit request was presented to the IDA on April 18, 1994. By this time IDA and the Government of Uganda had agreed that the following actions should be taken before credit effectiveness and release of second tranche A. Regulatory and Business Climate (RBC) a) agree with IDA on further coffee sub-sector liberalization measures relating to licensing floor prices, transport to the ports, methods of export of coffee and the structure of the Uganda Coffee Development Authority; 22 Appendix 1 Page 2 of 8 b) amend the UDA Statue to replace licensing with a system of registration of coffee exporters, and restructure UCDA; c) revise the export floor price formula and announce the floor price each day; d) remove restrictions on the method of export sales coffee; e) liberalize completely the transportation of coffee to the sea; f) gazette regulations covering registration of coffee exporters and quality control of coffee for export; g) abolish the floor price mechanism; h) prepare appropriate new legislation on cotton; i) obtain Parliamentary approval and Presidential assent for the Cotton Development Bill; j) take stock of debt owed by each union and agree with the union and the creditor banks on the modalities for ginnery restructuring and debt relief; k) take all necessary measures to facilitate the transfer, by way of sale, lease, management or restructuring of ginneries with installed capacity of at least 100,000 bales to creditworthy and viable operators. 1) agree with IDA on terms or reference and issue invitation for proposal to consultants to a study to review the investment Code and the operation of the Uganda Investment authority; m) enter into a contract with consultants to review the Investment Code and operation of UIA; n) consider, in consultation with IDA, recomr .ndations of study of the Investment Code and the UIA. o) remove the controls on the pump prices of petroleum products. B. Custodian Board (DAPCB) a) advertise locally and abroad the cut-off date for repossession; b) complete classification of properties into citizen and non-citizen categories; c) develop and announce the procedures for the settlement of compensation claims; 23 Appendix 1 Page 3 of 8 d) replace the Executive Committee ad Verification Committee of the Custodian Board by a small committee; e) return all remaining properties with valid repossession claims to the owners; f) announce that the controlling authorities and other landlords are free to exercise their reversionary interests in all remaining unclaimed properties not covered by the Expropriated Properties Act; g) issue an order giving notice of Government' decision to sell or dispose ion unclaimed non-citizen properties; gazette the properties to be sold and appoint the Board of Valuers; h) develop satisfactory sale procedures for unclaimed non-citizen properties; i) take all necessary measures to offer for sale (taking into account market conditions) all properties covered by the 1982 Expropriated Properties Act not claimed by the owners or for which compensation claims are pending. C. Domestic Revenue Mobilization a) develop a comprehensive taxpayer identification number system; b) assign taxpayer identification numbers to limited liability companies; c) assign taxpayer identification numbers to individual taxpayers; d) review tax and tariff exemptions; e) agree with IDA on the exemption to be limited or curtailed; f) adopt and implement the proposed FY 94 revenue measures; D. Public Expenditure Prioritisation (PER) a) complete the FY 93 retrenchment involving 7,500 established staff; b) install a payroll validation system, including detailed instruction to line ministries on hiring, promotions, firing and retirement; c) carry out an audit of teaching service payroll to identify ghost workers; d) remove at least 15,000 group employees from the payroll; e) agree with IDA on the non-core functions to be eliminated the ministries of Agriculture, Trade, works and Natural Resources and the first stage staffing rationalization plans for these ministries; 24 Appendix 1 Page 4 of 8 f) terminate the vehicle co-ownership scheme; develop a satisfactory plan for divestiture of pool houses and "personal use" home-to-office pool vehicles; g) continue to make progress in replacing transport and housing benefits with cash payments, and make satisfactory progress towards divestiture pool houses and personal and home-office payroll vehicles for civil servants other than judges; ministers, deputy ministers and those entitles to institutional houses; h) eliminate non-core functions in the ministries of Agriculture, Trade, works and Natural Resources and implement first stage staff rationalization plans. 4. By the second tranche release GOU had implemented all the actions required under the RBC heading. However problems had been experienced with the implementation of conditions (h) and (i) due to the length of time that was required to prepare, present to parliament and pass a Bill into law. Condition (f) was also rather difficult to implement, and it delayed credit effectiveness for about five months. Due to the scattered nature of the ginneries as well as their legal ownership condition (k) was also rather difficult to implement. 5. Although the implementation of the conditions under heading DAPCB was to some extent hampered by deep-seated vested interests, the determination of GOU, the hard work by the monitoring and implementation personnel of both the Ministry of Finance and the DAPCB, as well as the technical assistance provided by USAID, led to the fulfillment all the conditions relatively speedily, despite the prior magnitude of the problem. For example, by December 1994, 4,709 claims had been received by the Custodian Board. Of these, 3,418 were returned to their former owners; 441 properties were not available and 779 claims had been rejected due to their being defective. 6. Under the DRM heading, except for conditions (b) and (c) which are ongoing, the rest of the conditions were accomplished speedily and without any difficulty. 7. The conditions under the PEP and CSR headings were implemented in time and without much difficulty given the momentum built by the preceding Public Expenditure Review and the preceding Civil Service Reforms. 8. Implementation of the actions under the above headings was meant to achieve the following objectives: a) To facilitate private sector development through further deregulation and streamlining of investment promotion. b) to promote private sector development by completing divestiture of DAPCB. c) to improve the fiscal position through significant increase in revenue brought about by future strengthening tax administration and broadening the tax base. d) To promote human resource development and economic growth by increasing and protecting the budgetary allocations for the high priority recurrent programs in the economic and social sectors and by restructuring the development budget. 25 Appendix 1 Page 5 of 8 e) To improve public resource management and service delivery by creating a small, well-paid and well-motivated civil service. 9. The IDA Board approved the Credit, as well as the Cotton sub-Sector Development credit on May 10, 1994; the Credit Agreement was signed ion June 22, 1994; and the Credit became effective on November 20, 1994. It had taken about one year and a half for the whole SAC II process to come to fruition. Needless to say, SAC II was overloaded with conditions, some of which, such as promulgation of the regulations under the Uganda Coffee Development Statute 1991, later became problematic, leading to a delay of the Credit effectiveness. It is remarkable nevertheless, that GOU was able to meet the required conditions by the date of effectiveness. 10. The implementation of the required actions was not made easier by the shift in emphasis on the actions to be taken by GOU between the Pre-Appraisal and the Appraisal Mission. For example at the time of the Pre-Appraisal Mission it was not apparent that cotton and coffee liberalization would determine the credit effectiveness and second release. 11. On the whole however, the Credit objectives and conditions were consonant with GOU's short and medium term macroeconomic objectives and desire to continue with the process economic reform stated in May 1987. 4. PROCUREMENT, DISBURSEMENT, ACCOUNTING AND MONITORING 12. Although the credit Agreement was signed on May 20, 1994, it did not become effective until November 20, 1994, that is, after a five months' delay. The delay primarily arose from GOU inability to make and promulgate the UCDA coffee Regulations, 1994. The first tranche was released soon after effectiveness. The tranche amount equivalent to US $ 40,000,000 was deposited on IDA holding account for Uganda from which amounts were withdrawn on request according the procurement and reimbursement procedures laid down by IDA. 13. According to these procedures Bank of Uganda forwarded a statement of expenditure supported by the Customs Bill; the Supplier's Invoice; and Form E, indicating among other things, the amount and source of Forex involved in the importation. the statement was be accompanied by a Withdrawal form signed by an authorized officer in the Treasury Office of Accounts. The documents were then be forwarded to the World Bank in Kampala for onward transmission to Washington. 14. On receipt of these documents and on being satisfied with their compliance with the laid down procedure IDA credited Bank of Uganda account at the federal Reserve Bank in New York with the amount requested. Bank of Uganda then credited GOU project account with Bank of Uganda with the local currency equivalent at the prevailing Forex buying rate on the Uganda Forex market. Thereafter GOU gave instructions that the money be transferred to the consolidated Account to be used for Budgetary support. Bank of Uganda on the other hand having purchased the Project proceeds in the dollar equivalent would leave on its account with the Federal Reserve to invest in on the money markets. This would enhance Uganda's Foreign Reserves and also provide an income to the Bank of Uganda. 26 Appendix 1 Page 6 of 8 15. After the first credit tranche was released, Bank of Uganda started submitting reimbursement requests to IDA. By March 1996 the Credit and its Supplementary had been fully disbursed and the Uganda shillings equivalent credited to the Consolidated Fund Account. 11 reimbursements under the credit were in compliance with IDA requirements regarding the procurement procedures, request ceilings, documentation as well as the nature of the commodities permitted under the import support component of the credit. 16. Import support vs. direct budgetary support. Since the liberalization of the Forex market in 1991 Uganda's importers obtain their necessary foreign exchange form the open Forex Bureaux or from their other private sources. BOU is only required to intervene on the forex Bureaux if there is excess demand or supply on this market. Information from BOU reveals that this intervention has been rare and infrequent since the liberalization of the Forex and the legal autonomy of the BOU. This means that since 1991, the private sector has been able to finance its import submits ex-post private sector importation documents before IDA could release SAC II credit funds. This does not appear to be an appropriate budgetary support mechanism since it still assumes a controlled exchange rate regime characterized by foreign exchange shortages. 17. Through IDA and other multilateral donors may be focusing on the overall improvement in Uganda's budgetary process, discipline and performance, it might be more appropriate to give GOU direct budgetary support, so that the credit proceeds and conditionalties are more focused and impact on the targeted sectors. 5. IMPLEMENTATION 18. Regulatory and Business Climate. By the second tranche release GOU had implemented all the actions required under these conditions. However problems had been experienced with the implementation of conditions (h) and (i) due to the length of time that was required to prepare, present to Parliament and pass a Bill into law. Condition (f) was also rather difficult to implement, and it delayed credit effectiveness for about five months. Due to the scattered nature of the ginneries as well as their legal ownership condition (k) was also rather difficult to implement. 19. Custodian Board. Although the implementation of the conditions under this heading was to some extent hampered by deep-seated vested interests, the determination of GOU, the hard work by the monitoring and implementation personnel of both the Ministry of Finance and the DAPCB, as well as the technical assistance provided by USAID, led to the fulfillment all the conditions relatively speedily, despite the prior magnitude of the problem. For example, by December 1994, 4,709 claims had been received by the Custodian Board. Of these, 3,418 were returned to their former owners; 441 properties were not available and 779 claims had been rejected due to their being defective. 20. Domestic Revenue Mobilization. Except for conditions on the assignment on TIN numbers which are ongoing, the rest of the conditions were accomplished speedily and without any difficulty. 21. Public Expenditure Prioritization. The conditions under this heading were implemented in time and without much difficulty given the momentum built by the Public Expenditure Reviews which had started in 1991. 27 Appendix 1 Page 7 of 8 22. Civil Service Reform. Given that Civil Service Reform is an ongoing project which by the time SAC II came to be initiated was in its advanced stages, the actions required by SAC II under this heading were implemented without much difficulty. However, monetization of benefits though undertaken on paper, still appears to be problematic issue at all levels of the civil service with the higher echelons of the civil services benefiting most, while the other rungs appear to have emerged with a raw deal: for them the living wage has not yet become a reality. 6. ASSESSMENT A. Clarity, Realism and Appropriateness of Credit Objectives GOU's Development Goals 27. In the short run all the credit objectives were fully achieved as designed. The positive factors affecting the relatively speedy implementation of the actions required to achieve the credit objectives included: GOU urgent need for budgetary support; the resolve of GOU and World Bank to sustain the economic reform momentum built up by earlier reform effort and the subsequent economic reform successes; the hard work and boldness of all the parties involved in the project design, implementation and monitoring, particularly when faced with vested interests such in the DAPCB cases; the increasing ownership of the reform program by GOU; the increased familiarity with IDA procedure for program Loans; and the increased local capacity for economic planning and management. 28. The negative factors which mitigated the smooth implementation of the action required for the attainment of credit objectives included: the inclusion of conditions requiring a relatively long time to implement, such as those regarding the liberalization of the cotton sub-sector; the vested interests in the DAPCB; the fact that only a few officials from the Ministry of Finance and Economic Planning were involved in the discussions leading to the setting of the conditions; and the relatively short period within which the conditions were supposed to be implemented. 29. Most of the actions required by SAC II, such as the final settlement of DAPCB issued, were indeed welcome measures. 30. Similarly, the actions required by SAC II for the continuation of the Civil Service Reform Program were also commendable and necessary. However, they do not seem to have gone to the fundamental root cases of Civil Service labor force padding and chronic inefficiency. The view here is that the fundamental root causes of the Civil Service problems are: lack of nationalism and therefore sectarianism and patronage; poor remuneration at the middle and lower cadres of the sanctions, discipline and work ethic from the top; and an underdeveloped private sector, thus leading some persons in influential positions to turn the Civil Service into the main employer in the economy. It is not sustainable for example, to remove ghost teachers from the payroll if the headmasters who create them are not heavily punished for creating them. Similarly, it is not sustainable to retrench some civil servants from the Service while others enter it through the back door on sectarian grounds. 31. Sustainability of all the SAC II conditions would have required that a careful study is made of the fundamental causes of the targeted problems in the respective sectors, the involvement of all parties in the designing of the conditions, and the allowance of ample time for the discussion and implementation of the required actions. 28 Appendix 1 Page 8 of 8 C. Overall Assessment and Lessons 32. Despite the weaknesses of SAC II pointed out in the various paragraphs of this review, the credit was on the whole effective. It provided the necessary and budgetary and import support as required, and above all it provided the necessary catalyst in the implementation of actions some of which had become problematic to successive Uganda Governments since 1980. 33. The following lessons may be learned from the credit: 1. direct budgetary support may be better than the current indirect import support mechanism which still assumes a managed exchange rate regime and scarcity of foreign exchange. The current mechanism is such that it may lead to a situation in which some actors in the economy may not be benefiting from the proceeds of the Credit, and yet they are made to bear the main consequences of the implementation of the Credit conditionalities. 2. it would be better to involve as many persons as possible in the design of future program loans. For example, a national workshop could be convened for about two to three days during the pre-Appraisal Mission, so that all the stake holders become involved in the process. This would optimize ownership of the implementation of the Credit conditions. 3. GOU representatives and negotiators need to be able to have a good idea of the magnitude of time and work necessary for the implementation of Credit conditions, and IDA should be prepared to listen to GOU officials' suggestions. 4. IDA needs to listen more to GOU input, particularly when some actions involve Uganda's legal process. 5. rethinking needs to be done about the full liberalization of Uganda's economy. Avenues should be open for the consideration that at some stage of sjia development selective protection of some sectors of the economy may be necessary. 6. those who negotiate the program loans need to be fully alert to the long run implications of the actions required by the credit. 7. all parties to future IDA and other credit processes should bear in mind that a good empirical understanding of the sectors upon which credit conditions will be imposed may be essential. This will enable them to foresee, as much as possible, the likely impact of the required actions on the affected sectors. Appendix 2 Page 1 of 10 Approved by S. Kail Date: From: The President November 8, 1995 UGANDA SECOND STRUCTURAL ADJUSTMENT CREDIT RELEASE OF THE SECOND TRANCHE 1. As provided in Section 3.01 of the Development Credit Agreement for the Second Structural Adjustment Credit (SAC II) of SDR 57.8 million (USS80 million equivalent) to the Republic of Uganda (Credit No. 2608-UG of June 22, 1994), discussions were held on June 16-27, 1995 on the progress achieved by the Government of the Republic of Uganda in carrying out the program supported by the Credit. A number of issues were further clarified in two subsequent letters from the Ministry of Finance and Economic Planning, dated July 17 and September 29, 1995. This memorandum summarizes recent macroeconomic developments and the progress made in meeting the criteria established for the release of the Credit's second and final tranche of SDR28,900,000. I. BACKGROUND 2. When the National Resistance Movement Government assumed power in January 1986, its economic objectives were; first, to correct the internal and external imbalances and stabilize the economy, and second, to lay the policy, institutional and infrastructural basis for future growth. To achieve these objectives it embarked upon an Economic Recovery Program of macroeconomic and structural policy reform, combined with infrastructure investments and public sector rationalization. Progress was initially slow, but picked up sharply in the early 1990s when strong measures were taken to contain public expenditures and increase revenues. This brought the internal systems into balance, while liberalization of the trade and payments system brought balance to the external accounts. Investor confidence was restored, and with support from the structural and institutional reforms (e.g., removal of price controls and investment licensing, elimination of marketing boards, civil service reform, return of properties expropriated by Amin, and public enterprise reform) and infrastructure rehabilitation, economic growth began to accelerate. The reform process has continued to generate large private sector investment inflows, which has been fueling the economic recovery and growth. Distribution: Executive Directors and Alternates Questions on this document Office of the President may be referred to Senior Management of the Bank, IFC, MIGA Ms. Ritva Reinikka Ext. 33328 Appendix 2 Page 2 of 10 30 II. RECENT EcoNomic DEVELOPMENTS 3. Uganda's per capita income is about US$220. Its weak economy and poor social indicators are the legacy of nearly 15 years of political turmoil and economic mismanagement. The objective of the reform program introduced in 1987 is to reduce poverty through high economic growth, improved public services and specific targeted interventions to assist vulnerable groups. The strategy is to stabilize the economy through prudent fiscal and monetary management in order to establish a solid macroeconomic framework for growth, and to improve incentives for the private sector, reform the regulatory framework, and develop human capital through investments in education and health, all with the goal of stimulating economic growth. Macroeconomic stabilization has been successful and the economy is recovering rapidly. To further these gains, a number of structural, and institutional reforms have been implemented during the past few years, including civil service reform, parastatal and public enterprise reform (privatization), and financial sector reform. In addition, the Government has demobilized large numbers of soldiers. IDA has supported these reforms through two Economic Recovery Credits (ERC I and ERC II), the First Structural Adjustment Credit (SAC I), and a number of investment operations. While good progress has been made, the economic situation remains fragile and continued pursuit of the reform effort is essential. 4. Real per capita GDP has grown at the average annual rate of about 3 percent since 1987. This past fiscal year, FY94/95, real GDP growth was about 10 percent, while inflation, which was held in check by stringent fiscal policy, was only about 6 percent. The overall budget deficit (on a commitment basis, excluding grants) fell to 7.8 percent of GDP in FY94/95, from about 15 percent in FY92/93. Since FY92/93, fiscal deficits have been financed entirely by external grants and concessional borrowing, i.e., no domestic bank or Central Bank financing. The low inflation in turn contributed to stability of the exchange rate; in fact, the exchange rate actually appreciated slightly during the past couple of years and the Uganda Shilling has become a hard currency in much of Eastern Africa. As a result of strong growth in non-traditional exports, owing in part to the trade and payments liberalization and the coffee boom, the balance of payments has improved considerably. The current account deficit declined from 12.7 percent of GDP in FY92/93 to 5.9 percent in FY94/95. Notwithstanding this improvement, the country remains heavily dependent on donor assistance. Uganda is also already a seriously indebted country, with a total stock of external debt of about $3.4 billion. 5. While the strong fiscal policy stance contributed to internal stability and the balance of payments improvement, much of the adjustment achieved in the past few years has been the result of more efficient functioning of markets made possible by the liberalized pricing, marketing, and trade and exchange regimes. For example, higher imports, responding to market-driven exchange rate appreciation and to the improved business climate, offset a large part of the increased foreign capital inflows. Reserve accumulation by the Central Bank helped also. Increased efficiency of domestic markets brought about by the price and marketing liberalization facilitated a strong supply Appendix 2 Page 3 of 10 31 response to increased investment and helped to hold down inflation. Moreover, the good growth performance and recent improvements in international coffee prices are expected to have led to a decrease in hard-core poverty. Since traditional and emerging cash crops are an equally important income source for the poor as for the better off, the liberalization of agricultural markets, which has substantially increased farmgate prices, has likely benefited both groups. 6. The main challenge ahead is to accelerate economic growth, while continuing the tight expenditure control and increasing public revenue. This calls for continued strong commitment to the structural reform program, while at the same time stepping up the tax reform and further broadening the tax base. The objective on the fiscal side is to reduce gradually the amount of local counterpart of non-project assistance used to support the budget and phase it out completely in the medium term. This would strengthen the sustainability of public expenditure, lead to less dependence on external financing and result in improvement in the debt situation. On the structural side, there is a need to increase private saving and investment further, expedite the financial sector, privatization and public enterprise reforms, and restrict external borrowing to the most highly concessional terms. 7. On September 4, 1994 the IMF Board of Executive Directors approved a new three-year ESAF arrangement for FY94/95-FY96/97 to support Uganda's adjustment program. The macroeconomic objectives of the program are to (i) sustain annual real GDP growth of 6.5 percent in FY95/96 and 6 percent thereafter; (ii) contain year-on-year inflation at 5 percent through continued tight fiscal control; (iii) strengthen substantially the balance of payments position and diversify exports; and (iv) accumulate gross iiiternational reserves equal to at least five months of imports of goods and nonfactor services by FY96/97. A Consultative Group meeting was held in July, 1995, with donors pledging $800 million in assistance to Uganda. At present, the Government, Bank and Fund are nearing agreement on a PFP for the FY95/96-97/98 period. III. THE SECOND STRUCTURAL ADJUSTMENT CREDIT 8. The main focus of the Second Structural Adjustment Credit is poverty reduction through accelerated and broad-based economic growth and human resource development. Accordingly, the Credit assists the Government to achieve a number of key objectives. First, it supports private sector development through deregulation of the economy and strengthening of investment promotion, including removal of the remaining barriers to trade and investment in the coffee sector, liberalization of the cotton industry, improvements to investment incentives, and removal of the remaining price controls. Second, the Credit supports actions aimed at completing the divestiture of the properties, expropriated during the Amin regime with a view to improving the investment climate. Third, the Credit aims to improve the fiscal position by focussing expenditures on the highest priority areas and by increasing revenue through the strengthening of tax administration and broadening of the tax base. Fourth, the Credit seeks to promote Appendix 2 Page 4 of 10 32 human resource development and economic growth by increasing the budgetary allocations for high priority recurrent programs in the economic and social sectors and by focusing the development budget more effectively on priority investments. Finally, the Credit supports improvements in public sector resource management and service delivery by assisting the Government further its civil service reform program which aims to create a small, but adequately remunerated and efficient, civil service, and by building capacity in the public sector. 9. SAC II was appraised in July 1993. The appraisal mission included representa- tives of ODA (United Kingdom), USAID (United States), African Development Bank and Switzerland. IDA's Executive Directors approved the Credit in May 1994, and it became effective in November 1994. The first tranche was released upon effectiveness and is almost fully disbursed (SDR28.2 million out of SDR28.9 million). A Supplemental IDA Reflows Credit of SDR 400,000 was attached to the Credit in 1995. There has been no formal co-financing arrangements but a number of donors have applied the SAC II conditions as triggers for their parallel adjustment lending. The Borrower is required to submit an audit report to IDA by the end of December 1995. IV. PROGRESS AGAINST TRANCHE RELEASE CRITERIA 10. Pursuant to paragraph 4 of Schedule I of the Development Credit Agreement (DCA), release of the second tranche requires that the Association shall be satisfied: (a) with the progress achieved by the Borrower in the carrying out of the Program, (b) that the macro-economic policy framework of the Borrower is consistent with the objectives of the Program; and (c) that the actions described in Schedule 3 of the DCA have been taken. Progress on these criteria for release of the second tranche is described below: (a) That the Borrower has made satisfactory progress in carrying out the Program. In the area of private sector development, the coffee sector has been opened up for competition with beneficial effects on the economy. All price controls have been removed, and the Uganda Coffee Development Authority's role has been transformed from a controlling agency to that of an overall facilitator. The Government plans to widen the ownership of the Coffee Marketing Board by divesting its shares in it. The cotton sector has also been liberalized and the restructuring of the ginning industry is going on, including debt relief arrangements to Cooperative Unions which choose either to sell or lease their ginneries to the private sector, or restructure their operations in such a way that they can operate profitably. The Government's target is to pass on the entire ginning capacity to creditworthy operators by 1996. At the same time efforts are being made to revive cotton production. The Program also includes measures to redirect the activities of the Uganda Investment Authority and to revise the Investment Code (1991). Progress in this area has been satisfactory as described in detail under para 10 (c) 3. Similarly, the Custodian Board has completed the sale of most of both non-citizen and citizen properties which were not repossessed by their former owners, and only a skeleton Appendix 2 Page 5 of 10 33 staff remains in place to wind down the Board's activities. The Government, in consultation with the beneficiaries as well as IDA, is in the process of finalizing the modalities of compensating those whose properties have been sold. As described above, there has been substantial progress in increasing domestic revenue, although its level is still low compared to the level of expenditure. The Government is taking actions to widen the tax base and reduce wide-spread tax and tariff exemptions. Over 300,000 individual taxpayers identification numbers have been assigned to individuals and over 50,000 to businesses. In addition, the Government has improved its budgetary process by adopting for the first time a three-year budget framework in FY94/95. Annual public expenditure reviews have assisted the Government in its process of improving public sector resource allocation. In an effort to improve the impact of expenditures, an incidence analysis of expenditures in health and education will be carried out during FY95/96. Further progress in the area of priority recurrent programs and development expenditure is described under para 10 (c) 5 below. Civil service reform has a high priority in the Government's institutional reform agenda. The reform to date has progressed well beyond what was envisaged when the SAC II Program was designed. The number of civil servants has been reduced from 320,000 in 1990 (including ghost and temporary workers) to around 150,000 in December 1994. In addition, the number of government ministries and agencies have been reduced from 34 to 21. Concurrently, the total wage bill has been raised substantially in real terms since FY90/91 providing increased remuneration and benefits to civil servants. A decentralization program is underway which will impact the way in which the civil service reform progresses in the future. Eventually the districts are expected to assume responsibility for as much as 80 percent of service delivery. Therefore, the next phase of the reform will involve a further review and rationalization of the size and functions of the central government ministries and agencies and a strong focus on service delivery at the District level. Other aspects of the reform are summarized under para 10 (c) 6 below. The Government carried out the first nationally representative integrated household survey in 1992/93, with the objective to establish a poverty monitoring system to provide the Government information on the impact of its policies and interventions on the poor. Household expenditure is being monitored by smaller annual surveys. These surveys will form the basis for systematic poverty monitoring in Uganda and are to be complemented by a set of social indicators obtained from health and demographic surveys, also underway. (b) That the macroeconomic policy framework of the Borrower is consistent with the objectives of the Program. All the quantitative macroeconomic criteria and benchmarks as well as all the structural benchmarks of the first year (FY94/95) of the new three-year ESAF arrangement supported by the IMF have been met. As these criteria and benchmarks have also been incorporated in the Policy Framework Paper Appendix 2 Page 6 of 10 34 agreed jointly by the Government, the Fund and the Bank, the macroeconomic framework is fully consistent with the objectives of the Program. (c) That the Government has taken the following actions to meet the specific criteria contained in Schedule 3 of the DCA, all of which have been met: "1. The Borrower has abolished the floor price mechanism for coffee exports." This condition has been met. The floor price for coffee exports was abolished on March 1, 1995. Supported by the Solicitor General's legal opinion, the floor price was abolished administratively, without amending the Uganda Coffee Development Authority (UCDA) Statute and regulations. Since then, the UCDA has announced daily an indicative export price for coffee which is no longer binding but can be used by exporters as guidance and by the Uganda Revenue Authority, if necessary, in assessing the coffee stabilization tax when the export values declared by coffee exporters are judged to be underreported. "2. The Borrower has caused all necessary measures to be taken in accordance with paragraph 20 of the Letter of Development Policy, to facilitate the transfer, by way of outright sale, lease, management, or restructuring, of ginneries with installed capacity of at least 100,000 bales to creditworthy and viable operators." This condition has been met. The goal of this reform is to transfer the cotton ginneries into the hands of creditworthy operators, who would be obliged to operate in a competitive environment and who would be able to raise financing to be made available to farmers for inputs, when necessary, and to pay promptly for cotton deliveries. In addition, the ginneries would be able to access both short and medium term credit: seasonal credit for working capital requirements and medium term credit for capital expenditures. The Government's offer of debt relief for the transfer of ginneries to creditworthy operators is an important incentive to Cooperative Unions to participate in the restructuring of Uganda's ginning industry. The required actions to facilitate the transfer of ginneries with a capacity of at least 100,000 bales total to creditworthy operators under the SAC II Program include the determination by auditors of the book value and fair value of the unions' debts to creditor banks and the offer of debt relief from the Minister of Finance to the unions. The offer of debt relief is conditioned upon the unions securing the required credit facilities from financial institutions, if needed, to restructure their businesses, based on business plans from each union. Based on an express authorization approved by the legislature (i.e., the National Resistance Council - NRC) on November 3, 1994 of the debt relief to be offered, including the terms and conditions of such relief, the Minister of Finance made Appendix 2 Page 7 of 10 35 the offer later in November 1994 to all unions, with the proviso that unions which fail to secure the debt relief offered by May 1995, would be foreclosed. By July 1995 debt relief was granted to ginneries with a total capacity of 145,000 bales. The reform continues in full swing. Development of the cotton sector is also supported by IDA under the Cotton Subsector Development Project (Credit 2609-UG). "3. The Borrower has, in consultation with the Association, reviewed recommendations of the study it will have commissioned on the Investment Code and the operations of the UIA." This condition has been met. The Government's review of the Investment Code and the Uganda Investment Authority (UIA) operations, in consultation with IDA, was based on a number of recent studies on investment promotion in Uganda, including the one commissioned under the Second Structural Adjustment Credit. The main conclusions of the review are contained in a report by the Ministry of Finance and Economic Planning to IDA, dated June 27, 1995. As a result of the review the Government will (i) focus UIA activities on investment promotion and facilitation rather than regulation and licensing, (ii) eliminate tax exemptions under the existing Investment Code and establish a single corporate tax rate at a lower level than the current rate, (iii) establish a zero tariff only for an agreed list of capital goods, (iv) gradually increase the tariff on raw materials and improve implementation of the duty drawback scheme, and (v) further reduce tax exemptions within the Tax Code which is to be revised in FY95/96. Most of the measures considered during the review were subsequently announced in the FY95/96 budget speech by the Minister of Finance in June 1995. "4. The Borrower has taken all necessary measures pursuant to paragraphs 24 and 25 of the Letter of Development Policy, to offer for sale (taking market conditions into account) all properties covered by the 1982 Act not claimed by their owners or for which compensation claims are pending.' This condition has been met, When the SAC II Program was presented to the Board, it was understood, based on court rulings, that the 1982 Act applied only to non- citizen properties and that, accordingly, only these properties were to be offered for sale and their former owners compensated. On this basis, the understanding was that, in filfillment of this condition, the Government would offer for sale the 1,376 remaining non-citizen properties gazetted in the Expropriated Properties (Sale and Disposal) Order 1994. Out of these gazetted properties, a total of 762 properties have been offered for sale. The Divestiture Committee of the Custodian Board confirmed that the remaining 614 of the gazetted properties cannot be offered for sale for the following reasons: some of these properties (115) had actually been repossessed by their rightful owners; a number of properties (229) did not fall under the 1982 Act and were actually owner-occupied or belonged to the Government; some were erroneously included in the Custodian Board's records and subsequently gazetted while a subsequent physical audit of the plot on the ground confirmed that there was in fact no such property (122); some properties had previously been sold by their former Asian owners (43); in some cases leases had expired Appendix 2 Page 8 of 10 36 so that the properties were not protected by provisions of the 1982 Act (12); a number of properties had been re-entered by the landowners (76); in a few cases owners did not have a lease on the land (12) or the site in question was vacant (5). In August of 1994, the Supreme Court ruled that the 1982 Act also applies to citizen properties. However, notwithstanding this Supreme Court decision, IDA has confirmed the Borrowers position that, based on the Development Credit Agreement and the Letter of Development Policy, the tranche release condition should be interpreted on the basis of the understanding reached between the borrower and IDA during negotiations, i.e. that the Government would have offered for sale the 1,376 remaining non-citizen properties gazetted for this purpose. Nevertheless, the Borrower has continued to make substantial progress also in the disposal of citizen-owned properties consistent with the Supreme Court Decision. "5. The Borrower (a) has released all FY93/94 budgeted allocations for high priority recurrent programs and for Core Projects; and (b) has, for FY94/95, made satisfactory budgetary allocations for its wage bill, nonwage recurrent expenditure and development expenditure." This condition has been met. The high priority recurrent programs are primary education, primary health care, water supply, agricultural research and extension, road maintenance, police service, justice and the judiciary, and the Offices of the Auditor General and the Inspector General. These programs are to receive substantial real increases in allocations in successive budgets, and the allocations are to be protected from expenditure cuts during the budget year. In FY93/94, a total of U Sh 72.1 billion was allocated for the priority programs (23 percent of the total non-wage recurrent expenditure), and the allocations were fully released (99.9 percent of the budgeted amount). Similarly, the development budget was divided into core and non-core projects in FY94, reflecting the Government's priorities as stated in the Letter of Development Policy. These priorities were (i) provision of basic social services, (ii) provision of basic economic infrastructure, (iii) protecting the environment and (iv) maintaining law and order. The core development projects were to receive full counterpart funding. The total FY93/94 allocation for development expenditure was U Sh 52.2 billion, of which U Sh 36 billion was for the support of core projects. Of this amount, 97 percent was released with the shortfall caused by inadequate accounting by the projects for past releases and other legitimate reasons. In the FY94/95 budget U Sh 125 billion was allocated to the wage bill, an increase of 40 percent in nominal terms. Non-wage recurrent expenditure for the priority areas increased by 21 percent and development expenditure increased by 34 percent in nominal terms (U Sh 87 and 70 billion, respectively). As annual average inflation was 6 percent in FY94/95, all these expenditure categories had a substantial increase also in real terms. "6. The Borrower has (a) continued to make progress in replacing transport and housing benefits with cash payments, (b) made satisfactory progress towards the disposal of pool houses and personal-use and pool vehicles for civil servants. Appendix 2 Page 9 of 10 37 other than Judges, Ministers, Deputy Ministers and those entitled to institutional houses, and (c) with respect to its Ministries responsible for agriculture, trade, works and natural resources, has (i) eliminated their respective non-core functions, and (ii) implemented the respective Ministry's first stage staffing rationalization. This condition has been met. The Government has monetized about 40 percent of the market value of the housing benefit in the FY95/96 budget which is beyond what was envisaged under the SAC II Program. It is now government policy that a market rental should be charged civil servants for housing in all cases, subject to payment of a living wage. During the transition phase, civil servants will have the option of either paying a market rental and receiving the pecuniary housing allowance, or remaining housed by Government and foregoing the allowance. In addition, the Government has recently monetized all in-kind benefits enjoyed by Ministers and entitled officers, including their transport benefits. Also, good progress has been made in monetizing the transport benefit for the rest of the civil service, although the allocation for the wage bill has not yet been sufficient to allow full monetization of this benefit due to the overall expenditure constraint. The remainder of the transport benefit is expected to be monetized in the coming fiscal budget. Consequently, the Borrower has continued to make progress in replacing transport and housing benefits with cash payments. The Borrower has offered for sale a large portion of the stock of 1,360 pool houses, mostly to occupying civil servants (Ministry of Public Service Circular of April 20, 1994). To date the divestiture committee has offered for sale well over 900 houses at market prices. The Housing Finance Corporation (Uganda) is administering a mortgage scheme for civil servants on behalf of the Government. The Government will allocate 25 percent of the proceeds from the sale of these houses to a housing development fund run by the Housing Finance Corporation, while the rest will be used to support the government budget. Divestiture of personal use and pool vehicles has been carried out by a separate committee working under the Ministry of Works, Transport and Communications. The committee first carried out an inventory of the entire government fleet in Kampala and Entebbe. The total number of vehicles was found to be 3,639 of which 885 were attached to on-going projects and 900 were in disrepair and not operational. The latter have been sold at a public auction. The Government has decided to retain a total of 1,043 vehicles for use as "pool" vehicles and the rest (811) have been offered for sale at market prices to the civil servants who have been entitled to use them. In addition, it is estimated that there are about 2,200 vehicles in the districts, most of which are expected to be project vehicles. These vehicles are currently being verified, valued and offered for sale. The ministries responsible for agriculture, trade, works and natural resources have undergone a functional and staffing review, in accordance with the Borrower' Program. This review was carried out by each of the respective ministries themselves, with the assistance of the Ministry of Public Service. Noncore functions have been identified and eliminated in this exercise. Subsequent to the functional reviews, these ministries Appendix 2 Page 10 of 10 38 undertook staffing assessments and rationalizations to reduce staffing numbers to those needed and to ensure that the skills needed met those of the staff assigned to the function. The elimination of non-core functions and staff rationalizations of these ministries has progressed well beyond what was envisaged under the SAC II program. V. CoNcLUsIoN 11. Overall, Uganda has made good and timely progress in implementing its structural adjustment program. Macroeconomic management has been consistent with the objectives of the program and all conditions for the release of the second tranche have been met satisfactorily. The Government of Uganda has been advised, therefore, of the availability of the second tranche of SDR 28.9 million. IMAGING Repor No,: ON Type: ICR