Ghana - Public Enterprise Project

Documelnt of The World Bank FOR OFFICIAL USE ONLY Report No. 16628 IMPLEMENTATION COMPLETION REPORT GOVERNMENT OF GHANA PUBLIC ENTERPRISE PROJECT (Credit 1847-GH) MAY 30, 1997 Private Sector & Finance 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.  CURRENCY EQUIVALENTS Currency Unit = Cedi US$1.00 = Cedis (October 1987) US$1.00 = Cedis (June 1996) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS DIC Divestiture Implementation Committee ERP Economic Recovery Program ICR Implementation Completion Report IDA International Development Association MFEP Ministry of Finance and Economic lPlanning ODA Overseas Development Administration (United Kingdom) PNDC Privisional National Defense Council PSAC Private Sector Adjustment Credit SAC Structural Adjustment Credit SDR Standard Drawing Rights SEC State Enterprises Commission SOE State-Owned Enterprise Vice President J.L. Sarbib Director S. Michailof Division Chief/Manager T. W. Allen Staff Member P. BerminghamlO. Campbell-White  GHANA FOR OFFICIAL USE ONLY PUBLIC ENTERPRISE PROJECT CREDIT 1847-GH IMPLEMENTATION COMPLETION REPORT CONTENTS Page Number PREFACE 1 EVALUATION SUMMARY 2 Introduction 2 Project Objectives and Components 2 Implementation Experience and Results 2 Findings, Future Operations and Key Lessons Learned 4 PART I: IMPLEMENTATION ASSESSMENT 5 A. Statement/Evaluation of Objectives 5 B. Achievement of Objectives 7 C. Major Factors Affecting the Project 9 D. Project Sustainability 13 E. Bank Performance 13 F. Borrower Performance 14 G. Assessment of Outcomes 15 H. Future Operations 16 I. Key Lessons Learned 16 PART II: STATISTICAL ANNEXES 18 Table 1: Summary of Assessments 19 Table 2: Related Bank Loans/Credits 20 Table 3: Project Timetable 21 Table 4: Cumulative Estimated and Actual Disbursements 22 Table 5: Key Indicators for Project Implementation 23 Table 6: Studies Included in Project 24 Table 7: Project Costs 25 Table 8: Project Financing 26 Table 9: Status of Legal Covenants 27 Table 10: Bank Resources - Staff Inputs 28 Table 11: Bank Resources - Missions 29 APPENDICES A. Completion Mission Aide-Memoire B. Borrower Contribution to the ICR 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.   GHANA PUBLIC ENTERPRISE PROJECT CREDIT 1847-GH PREFACE 1. This is the Implementation Completion Report (ICR) for the Public Enterprise Project, for which Credit 1847-GH in the amount of SDR 8.3 million was approved on October 13, 1987, signed on October 30, 1987, and declared effective on March 8, 1988. The credit, which was for technical assistance, was extended from the original date of June 30, 1994, firstly to June 30, 1995 and then to June 30, 1996, when it was closed. The extensions were to assist the Government launch its accelerated divestiture program and to keep on track with its SOE reform and PSAC programs. The final disbursement took place on October 21, 1996, at which time the balance of SDR 569,631.88 was canceled. 2. The period of the credit is 40 years, including 10 years grace, with an annual service charge of three-fourths of one percent (3/4 of 1%) on the principal amount of the credit withdrawn and outstanding. The credit also carried an annual commitment charge of one-half of one percent (1 of 1%) on undisbursed balances. 3. The ICR was prepared by Oliver Campbell White of the Private Sector Finance group of the Africa Region and reviewed by Serge Michailof, Paul Bermingham, Jeffrey Katz, Kazi Matin, Asad Alam and Anil Chandramani. 4. Preparation of the ICR was started during the Bank's supervision/implementation completion mission in July 1996. It is based on material in the project files. The Borrower contributed to preparation of the ICR by preparing its own evaluation report.  I  GHANA PUBLIC ENTERPRISE PROJECT CREDIT 1847-GH EVALUATION SUMMARY Introduction (Section A) 1. The Public Enterprise Credit was made available to the Government of Ghana to provide critical technical assistance needed to implement a series of state-owned enterprise sector reforns agreed under a series of operations (SAC I, approved in April 1987; SAC II, approved in April 1989; and PSAC, approved in May 1995) to support the Government's economic reform program. Project Objectives and Components (Section B) 2. The objectives of the project were to: (1) strengthen the State Enterprises Commission (SEC) as Government's SOE oversight agency, particularly its capacity to monitor and evaluate SOE performance and to advise on major SOE issues; (2) assist priority SOEs in developing restructuring programs (including possible divestiture) in order to achieve financial self-sufficiency and in implementing immediate operational and managerial improvements; (3) assist with the implementation of the first phase of the divestiture program; and (4) assist with the longer-term reforms through: (i) providing training to SOE managers/employees; (ii) assessing the impact of Government policies on SOE performance and the need for policy changes; and (iii) revising the legal and institutional arrangements to ensure SOE autonomy and to clarify the responsibilities of various agencies vis-a-vis the SOE sector. 3. The project comprised three main components: (1) strengthening the SEC to enable it to manage the SOE reform program; (2) implementing the first phase of the divestiture program; and (3) developing restructuring programs and implementing immediate managerial and operational improvements in selected SOEs. Implementation Experience and Results (Section C) 4. The project substantially achieved its objectives. However, it took longer than originally envisaged because of the time needed to achieve political readiness, to develop consensus, and to deal with the numerous constraints which arose. 2  5. Training and advisory services were provided to SEC but only limited progress was made in developing SEC's capacity due to the difficulty in attracting and retaining sufficient professional staff. 6. Lasting benefits have accrued from the training of SOE personnel which has helped introduce more professionalism in the management of SOEs, particularly in the areas of accounting, finance, personnel and planning. SEC's work in introducing corporate planning and performance agreements into SOEs and in monitoring and reporting on SOE performance has contributed to pressure on the SOEs to improve performance. While there are variations, overall there has been a significant improvement in the reported results and financial self-sufficiency of SOEs. 7. SEC developed a database of all known SOEs and prepared profiles of 64 large SOEs. This work formed the basis for selecting SOEs for divestiture and for preparating and introducing performance agreements for 47 SOEs. However, a number of factors have severely limited the effectiveness of the performance contract mechanism. First, among the interested parties there was not a conensus in favor of the concept of performance contracts so that interest and commitment were slow to develop. Coupled with this, there was insufficient capacity for adequate consultation, preparation, implementation, monitoring, evaluation and dissemination. Second, the institutional arrangements were - and in some respects still are - inappropriate. 8. SEC has had to deal with serious accounting backlogs in the SOE sector. In order to avoid a recurrence of backlogs, SEC has, under the project, introduced computers and accounting software into selected SOEs. Also, as part of the process of dealing with accounting backlogs, SEC made the first concerted attempt to determine the debt position of the SOE sector including: (i) an assessment of Government's exposure, both in terms of outstanding debts and guarantees; and (ii) the extent of SOE cross-indebtedness. SEC also set up a mechanism to identify SOE cross-indebtedness and a method for offsetting debts which subsequently contributed to preventing a further build-up of mutual indebtedness. 9. Substantial progress has been made towards streamlining the institutional framework governing the SOE sector, including the enactment of legislation to convert statutory corporations to limited liability companies. Under the Statutory Corporations (Conversion to Companies) Act 461 of 1993, some 27 statutory corporations have already been converted into successor companies. Each successor company has a board of directors, whose responsibilities are defined under Company Law, appointed by the Minister of Finance instead of being nominated by interested institutions. 10. Up to the close of the project, some 153 divestiture transactions were successfully completed by DIC. There were, in addition, 10 public flotations which DIC was not involved in, as DIC has concentrated on the smaller divestiture transactions including many asset sales and liquidations. The completed divestiture transactions resulted in 3  some 77 SOEs being privatized, and a further 40 SOEs were wound up or put into liquidation. 11. Due principally to the time it has taken to build consensus, privatization has been slower and more difficult than envisaged. The main impediment to building consensus has been, until recently, the lack of information about transactions and the lack of transparent procedures. With greater involvement of the private sector and the introduction of new divestiture procedures, these weaknesses are being corrected. Major impediments which have slowed the pace of divestiture have been: a lack of consensus, land title difficulties, the high level of contingent liabilities for end of service benefits in SOEs, the role and authority of DIC, capacity constraints, over-emphasis on SOE valuations, and the absence of government policy direction on what to sell, broadening of ownership and sales on credit. Though land title remains a problem, considerable progress has been made on dealing with the other issues. Despite the long elapsed time, the most significant achievement has been the development of a consensus in favor of privatization. 12. Under the project, a wide range of studies of issues affecting SOEs and divestiture was carried out and detailed restructuring plans prepared for major SOEs. These have laid the foundation for implementing ongoing reforms and privatization. Findings, Future Operations, and Key Lessons Learned (Sections D, E, F, G, H, I) 13. The experience of this project has laid a solid foundation for its successor project - the Public Enterprise and Privatization Technical Assistance Project (Cr 2877-GH) - which will help sustain the achievements recorded to date. The Government is committed to further accelerate the pace of SOE reform and divestiture, which picked up noticeably in the last few years of the project. The successor project, which became effective on September 25, 1996, has been designed to continue technical assistance support for this work. Its design has taken account of the lessons learned from this project, though there is till no breakthrough in establishing sufficient incentives to ensure that SEC and DIC are able to retain the requisite internal professional resources. 14. This project offers many lessons but there are two which are key. First, reform of the SOE sector must address the strategic framework for corporate governance. Second, because a technical assistance project is a complementary operation, design of this type of project needs to be sufficiently flexible so as to adapt to changes over time in the program it supports. That, in turn, has implications for the level of supervision needed to ensure that the project remains relevant and on track. 4   GHANA PUBLIC ENTERPRISE PROJECT CREDIT 1847-GH PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Statement/Evaluation of Objectives 1. When Ghana embarked on its economic recovery program (ERP) in 1983 state- owned enterprises (SOEs) dominated the economy. SOEs played a major role in most sectors of the economy: power generation and supply, water, transport, telecommunications, mining, agriculture, manufacturing, forestry, trade, oil refining and distribution, construction and tourism. Ghana's major exports, notably cocoa and mining, were produced and marketed by SOEs. In aggregate, the SOEs were incurring losses and, during the mid-1980s, were becoming an increasing financial burden for Government. Not only were SOEs receiving increased direct financial support, they were also a significant burden in terms of indirect support through tax and loan arrears, absence of dividends and, in some cases, inability to repay Government-guaranteed foreign loans. In developing its ERP in 1983, the Government had recognized the need to undertake a comprehensive reform of SOEs in Ghana. A diagnostic study was therefore undertaken of the SOE sector in 1983/84. The findings of that study formed the basis for the comprehensive SOE reform program formulated in 1985. The program was translated into a two-year action plan agreed with IDA under the structural adjustment program, which was supported by a Structural Adjustment Credit (Cr. 1777-GH) approved in April 1987. The key features of the action plan were: (a) actions to improve the performance of 14 priority SOEs which collectively employed over half the number of employees in the SOE sector; (b) divestiture of 30 SOEs in the first phase of a rationalization program; (c) sector-wide staff reductions (with a target of 5 percent annually over the two years; (d) preparation of up-to-date audited financial statements, medium-term corporate plans, and performance agreements with Government (based on the corporate plans) for the 14 priority SOEs; (e) design and implementation of a performance monitoring and evaluation system to be administered by the SEC; (f) clearance of cross-debts for the 14 priority SOEs; (g) establishment of guidelines on Government-SOE financial relations and agreed levels of financial support; and (h) a review of the legal and institutional arrangements with a view to increasing SOE autonomy and clarifying the respective roles of the SEC, Ministry of Finance and Economic Planning (MFEP), sector ministries, sector commissions and SOE boards of directors vis-a-vis the SOE sector. 2. The Public Enterprise Project was intended to provide critical technical assistance needed to implement the agreed action plan and to lay the groundwork for longer-term 5  reforms by strengthening the key institutions and assessing and developing further SOE reform and restructuring measures. The objectives of the project were therefore to: (a) strengthen the State Enterprises Commission (SEC) as Government's SOE oversight agency, particularly its capacity to monitor and evaluate SOE performance and to advise on major SOE issues; (b) assist priority SOEs in developing restructuring programs (including possible divestiture) in order to achieve financial self-sufficiency and in implementing immediate operational and managerial improvements; (c) assist with the implementation of the first phase of the divestiture program; and (d) assist with the longer-term reforms through: (i) providing training to SOE managers/employees; (ii) assessing the impact of Government policies on SOE performance and the need for policy changes; and (iii) revising the legal and institutional arrangements to ensure SOE autonomy and to clarify the responsibilities of various agencies vis-a-vis the SOE sector. 3. The project comprised three main components: (1) strengthening the SEC to enable it to manage the SOE reform program; (2) implementing the first phase of the divestiture program; and (3) developing restructuring programs and implementing immediate managerial and operational improvements in selected SOEs. 4. The first component of the project was designed to support: (i) the strengthening of SEC's capability to manage the SOE reform program, monitor and evaluate SOE performance and advise on major SOE issues and policies; (ii) the streamlining of the institutional framework governing the SOE sector, through clarification of the roles and responsibilities of SEC; (iii) an assessment and adjustment of the legal and policy framework governing SOEs, in order to inter alia increase SOE autonomy and accountability and improve SOE performance; (iv) the negotiation, signing and implementation of performance agreements between the Borrower and selected SOEs; and (v) training of SEC staff, rental and construction of SEC office and acquisition of office equipment and vehicles for SEC. 5. The second component was designed to include advisory services and logistical support to the Divestiture Implementation Committee (DIC) and the technical team located in the divestiture office within SEC in order to assist in: (i) divestiture of at least 30 SOEs, including preliminary studies and audits, preparation of prospectuses, valuation of assets, information campaign, search for investors, review of bids and negotiation of sales arrangements; (ii) strengthening of the DIC and its technical team, including advisory services, training, vehicles and equipment; and (iii) establishment and operation of the Divestiture Account. 6. The third component was provision of a SOE Restructuring Fund in SEC to assist selected SOEs (including Black Star Line, Ghana Airways, State Transport Corporation, Omnibus Service Authority and City Express Services) in preparing and implementing 6  restructuring programs and corporate plans with a view to achieving financial viability and implementing operational and managerial improvements through inter alia: viability studies, market forecasts, financial and management audits, staff inventories and manpower redeployment plans, management contracts or twinning arrangements, training of SOE managers and staff, and office equipment to improve management information, accounting and budgeting systems. 7. The project was expected to be completed by June 30, 1994. It was extended firstly to June 30, 1995 and then to June 30, 1996 when it was closed. Due to the many actions which the project was designed to support, it was both ambitious and complex. While the project's objectives were attainable in the long-term, they were unrealistic in the timeframe that was originally envisaged. B. Achievement of Objectives 8. Despite the initial problems and longer timeframe, positive results have been achieved under the project. SEC has contributed to improvement in the performance of the SOE sector and facilitated selection of enterprises for divestiture by: (a) introducing corporate planning and performance agreements into SOEs and in monitoring and reporting on SOE performance. This has contributed to pressure on the SOEs to improve performance. While there are variations, overall there has been a significant improvement in the reported results and financial self-sufficiency of SOEs and there is a higher level of professionalism in the management of SOEs, particularly in the areas of accounting, finance, personnel and planning; (b) compiling data on all known SOEs which formed the basis for selecting SOEs for divestiture or performance agreements; (c) preparing profiles for 64 SOEs; (d) dealing with the serious accounting backlogs in the SOE sector. Also, in order to avoid a recurrence of backlogs, SEC has, under the project, introduced computers and accounting software into selected SOEs; (e) as part of the (d), making the first concerted attempt to determine the debt position of the SOE sector including: (i) an assessment of Government's exposure, both in terms of outstanding debts and guarantees; and (ii) the extent of SOE cross-indebtedness; (f) following (e), setting up a mechanism to identify SOE cross-indebtedness and a method for offsetting debts which subsequently contributed to preventing a further build-up of mutual indebtedness; (g) studying labor issues in the SOE sector which constrained reform and providing Government with a paper on SOEs' potential liability for end of service benefits and (h) identifying and alerting policy makers to important issues (such as land ownership and title problems) to be addressed. 7  9. Substantial progress was made towards streamlining the institutional framework governing the SOE sector. First, SEC's role and responsibilities have been clarified, while the National Trust Holding Company, which had formerly looked after Government participation in joint ventures, no longer plays any role in SOE supervision. Second, there has been a clearer delineation of Government's and SOE boards' responsibilities, including specification of the nature of policies which are the concern of the sector ministry and business policies which are the concern of SOE boards, while the Ministry of Finance has become custodian of all state-owned investments. Third, SEC has introduced a new and formal contractual relationship between Government and enterprises. Fourth, legislation - the Statutory Corporations (Conversion to Companies) Act 461 of 1993 - was passed to streamline the legal and institutional framework for governing and managing SOEs. 10. Considerable progress was made in assessing and adjusting the legal and policy framework governing SOEs. SEC played an important role in the initiation and drafting of the legislation under which 27 statutory corporations were converted into limited liability companies (successor companies). Each successor company has a board of directors, whose responsibilities are defined under Company Law, appointed by the Minister of Finance instead of being nominated by interested institutions. It is intended that more statutory corporations will be converted in due course. 11. With training support under the project, significant progress was made in developing SOE corporate planning capability and information for monitoring and evaluating performance. By 1996, performance agreements had been developed and signed in respect of 47 SOEs, a much greater number than originally envisaged in 1987 12. The project has put in place the accommodation, facilities and equipment that SEC needs to be able to ftmction. While only limited training of SEC staff has been possible, SEC has trained many outside Ghanaian consultants under the project, notably in corporate planning. 13. Over the project period, problems in managing divestiture transactions have been identified and addressed. Most notably, detailed divestiture procedures have been developed and introduced, including procedures for contracting out privatization activities. These have already significantly enhanced DIC's capacity to process divestitures transactions. 14. Some 163 divestiture transactions were successfully completed during the life of the project. DIC has concentrated on the smaller divestiture transactions including many asset sales and liquidations. These transactions resulted in some 77 SOEs being privatized and a further 40 dissolved/liquidated in the period up to June 30, 1996, while additional SOEs were in the process of privatization at that date. 8  C. Major Factors Affecting the Project 15. The project extended over a long period during which many changes occurred in Ghana. A noteworthy example is the original objective of SOE reform, as visualized in 1987, which was overtaken by the change in emphasis towards a wider scope for privatization to encourage private sector development. Changes called for policies to be revisited and this, in turn, gave rise to delays. Nevertheless, the project was successfully adapted to meet the changing circumstances. 16. Strengthening of SEC's capability to manage the SOE reform program, monitor and evaluate SOE performance and advise on major SOE issues and policies proved to be more difficult and required more time to achieve than originally envisaged. Progress was initially very slow due principally to a combination of three factors: (i) program management problems arising from difficulties with the consultants who had been appointed; (ii) serious accounting backlogs throughout the SOE sector; and (iii) difficulty in SEC re-establishing its role, authority and influence over the SOE sector as prescribed in its enabling legislation. 17. Despite the short term expansion in SEC's capacity and training efforts undertaken, SEC has suffered from a persistent shortage of resources and has thus largely failed to be effective in monitoring and evaluating SOE performance. As noted in the SEC's own contribution to this report, SEC's capability was constrained by difficulty in recruiting and retaining core professional staff due to remuneration and incentive inadequacies. At the commencement of the project, SEC had 20 professional staff but at its close on June 30, 1996 there were only 10 professional staff at post. There has been a wide gap between the remuneration paid to SEC professional staff compared with what they could eam in the private sector (reflected, for example, in the remuneration of local consultants) and this has been a disincentive to SEC staff. Unless this problem is addressed, SEC's internal capability will continue to be eroded. 18. While progress in streamlining the institutional framework has been achieved, it has been slow. A lack of consensus among the Government ministries and other stakeholders delayed clarification of SEC's role. Indeed, the lack of consensus was at the root of delays in dealing with the range of issues confronting SOE reform and divestiture. 19. There remain three areas of concern with the institutional arrangements which will be addressed under the successor project. First, there has been a tendency for Government to take a passive role in the preparation of performance contracts. As a consequence of Government not actively participating in the process, SEC has, of necessity, had to act as proxy for Government. This has meant that SEC has not been able to act effectively as a facilitator and mediator. Under the new project there will be a review of SEC's role and what Government expects from the SOE sector. This review will address the issue of how boards of directors of SOEs can act on Government's behalf. Second, the role of the SEC Board remains unclear. The Board has not met during the past five years; it has therefore been both inactive and ineffective in providing 9  guidance to the chairman. Third, SEC still does not have the legal power to obtain information from some enterprises in which the Government holds an equity interest. This issue will be addressed in a forthcoming study of portfolio management. 20. Early in the project, SEC was faced with widespread apathy towards the introduction of performance agreements. During the project period, the concept gained greater acceptance but there is still a need to introduce appropriate incentives for enterprise managers and staff. For several years, progress in preparing performance agreements was held back because SOEs did not have the capacity to produce sound corporate plans which were needed to underpin the agreements. As noted above, training was provided under the project to resolve this problem. However, a number of factors have severely limited the effectiveness of the performance contract mechanism. First, performance contracts were largely imposed on the government and the SOEs so that interest and commitment were slow to develop. Coupled with this, there was insufficient capacity for adequate consultation, preparation, implementation, monitoring, evaluation and dissemination. Performance contracts were initially entered into hurriedly and with little negotiation. It has therefore taken time for the parties involved to understand the issues and implications and for commitment to making the concept work in practice to develop. Performance contract targets have generally been met but these have not been meaningful in terms of achieving change and improved corporate governance. Further work is needed to refine targets so that they are a challenge but achievable and to ensure that they are supported by sufficient incentives. Whilst progress, both in terms of acceptance of the concept and of improved SOE performance, has been achieved, interest in performance contracts is waning as privatization extends across all sectors and SOEs. Second, some institutional arrangements were - and in many respects still are - inappropriate. For example, two key issues remain unresolved even today: (i) the roles of the Government as owner (and how ownership is represented), the boards of directors, and SEC need to be redefined; and (ii) there is no clear working arrangement for monitoring and reporting on contract compliance. 21. Training of SEC staff has been very limited and has had little impact. The principal factor for this has been SEC's difficulty in attracting and retaining sufficient capable people. As a result, there has been too little time available for SEC staff to receive the extent of training that was envisaged for them. SEC's key training requirements, which will be addressed under the successor project, are in performance monitoring (including inter-sectoral comparisons), financial analysis and interpretation of financial reports, and negotiating skills. 22. The project was designed to tackle the problem of capacity constraints, but one year after implementation began, SEC reported suffering from serious staffing shortages. And that problem has persisted. On several occasions SEC put forward to Government the case for improving the conditions of service (including salaries) of SEC staff in order for it to be able to attract and retain personnel with appropriate qualifications and experience. The risk that SEC and DIC would not be able to recruit and maintain 10  sufficient staff of the right caliber was not identified at appraisal, and, when it later emerged as a clear issue, it was never satisfactorily addressed. 23. A small SOE restructuring fund was established, which was intended to operate as a revolving fund. However, the fund revolved slowly and, as a result, fewer than anticipated SOEs benefited from it. 24. The first phase of the divestiture program was slow. Preparatory work on divestiture began in 1985. In December 1986, the Bank preparation mission recorded that Government had approved a list of 30 SOEs for divestiture. Yet work did not commence on the divestiture of these SOEs for several years. It took almost two years for a revised list of 32 SOEs for divestiture to be approved and published. These SOEs were to be divested at the rate of ten each year; but each and every divestiture, for a variety of reasons, took longer than expected. Political constraints and the inherent problem of capacity were the most common factors contributing to delays. By the last quarter of 1989 the only completed divestiture transactions had been three liquidations, and the divestiture program had clearly lost momentum. Although negotiations for the sale of seven enterprises had been completed and approved by DIC, the Government withheld its approval for these deals. The Government's concerns centered on the public's potential perception that public assets were being sold at give-away prices. In March 1991 a Bank supervision mission recorded the same constraints to progress as had been identified at the time of appraisal. 25. A contributory factor was that insufficient attention had been given in design to the need to involve the private sector. Divestiture was originally designed to be managed by civil servants. Half-way through the project, with encouragement from a range of constituents, the Government began to involve the private sector in the process. Hence, there was a gradual increase in private sector participation through round table meetings, representation on DIC and, more recently, through outsourcing divestiture work. 26. Bank supervision missions consistently experienced difficulty in establishing the status of divestiture transactions. Early on in the program, in January 1989, the Bank supervision mission registered its concern with the progress of the project, especially on divestiture. Thereafter for several years, progress was reported as very slow. 27. The major impediments which were not adequately researched during project preparation and appraisal were: the lack of consensus, land title difficulties, the high level of contingent liabilities for end of service benefits in SOEs, the role and authority of DIC, capacity constraints, valuation, and the absence of government policy direction on: (i) what to sell; (ii) broadening of ownership; and (iii) sales on credit. 28. Difficulties arose during project preparation, notably regarding the role and leadership of SEC (which, at the beginning of the project, was the umbrella organization for DIC). It is therefore surprising that commitment to the planned reforms was not identified as a risk. Yet the project was launched at a time when there was not a 11  consensus in favor of the reforms. Though there was a desire for change and improvement, concerns about social impact, the realizable value of SOEs, SOE debts, and ownership led to differing views about the nature and timing of reform actions. It took time for consensus to develop; only in the past few years has privatization become accepted throughout Government and the public. Hence, despite the apparent slow process, very real progress has been made. 29. Because of the lack of consensus during the early years of the project, many deals negotiated or recommended by SEC/DIC were not approved by Government. Also, efforts by SEC and DIC on SOE reform and privatization met with resistance from SOE managers, who withheld information from SEC/DIC and were lukewarm to potential investors. Asset stripping was rumored to be occurring but neither SEC or DIC had the requisite authority or resources to combat it. 30. Land title has been an unresolved issue for many years. As long ago as 1988 this issue was reported as a major constraint and recommendations for its resolution were put forward. Eight years later, progress in resolving this issue has not gone beyond an examination of the problem. 31. End of service benefits posed problems because of the high levels of contingent end of service benefits payable, unfunded provident fund obligations and large arrears to the social security system. A review of the extent of the problem and preparation of a plan for dealing with it was to be completed by June 1988. Even as SEC was reviewing this subject, SOE managers were in some cases negotiating collective agreements which included wages and benefits at levels above which the SOE were able to fund from their own resources. This is an example of the lack of coordination between Government ministries, other oversight agencies and SEC and weak corporate governance in the SOE sector. 32. The contingent cost of redundancies and the accumulated retirement benefits of employees, the liability for which was not - and still is not - recorded in the balance sheet of enterprises, was a major constraint during the first four years of the project. In early 1989 SEC estimated that the cost of meeting redundancies arising from divestiture in the first phase of the program would be in the order of 30 billion cedis while the total contingent liability in the SOE sector was some 140-174 billion cedis at that time. Many SOEs also had liabilities in respect of unpaid salaries and allowances. 33. Early on in the project, too much emphasis was been placed on enterprise and asset valuation using the depreciated replacement cost method which restricted the Government team's scope for negotiation with potential investors. Today, valuers are asked to base their work on current market values. 34. A feature of divestiture has been the lack of transparency regarding some transactions. This was tackled in the latter phase of the project with: (i) the drawing up and introduction of new and detailed divestiture procedures; and (ii) the adoption of 12  outsourcing which has introduced wider private sector participation in the process as well as broadening DIC's transaction handling capacity. 35. Progress in strengthening the Divestiture Implementation Committee and its technical team was slow in the early stages due to problems with consultants, the difficulty of recruiting capable people, and the delay in establishing DIC's role and status. In the latter part of the project DIC was able to recruit more personnel and its full-time team of advisors, funded by the UK's Overseas Development Administration. was expanded to four. The project has provided some training but more staff training is now required and will be provided under the successor project. Office equipment for DIC was provided under the project. 36. A Divestiture Account was opened but there were - and continue to be - problems with its operation and with the quality and timeliness of the audit. These problems are now being addressed. D. Project Sustainability 37. The project has made a lasting contribution to private sector development by freeing up opportunities for private investment and by development of professional resources. 38. The experience of the project has laid a solid foundation for its successor project which will help sustain the achievements recorded to date. In the light of the expanded privatization program, it is recognized that SEC's role needs to be redefined. This will be carried out under the new project. 39. DIC's capacity has been greatly expanded by the use of contractors to undertake divestiture activities while the new detailed divestiture procedures are already improving the quality of the work and records. 40. The performance contract mechanism will continue to be used in the immediate future for all major SOEs. Although performance contracts will be phased out as these SOEs enter the divestiture program, their use is expected to be an important tool for further improving financial performance and operational efficiency of key SOEs. 41. The outstanding project sustainability issue which remains is the ability of SEC and DIC to attract and retain professional staff. This issue is still to be addressed. E. Bank Performance 42. Bank performance has been satisfactory overall. Throughout the project, Bank personnel maintained close consultation with the Ministry of Finance and Economic Planning, SEC and DIC and contributed to the formulation of policies, priorities and development of action plans. Over the eight and a half years it was inevitable that 13  changes in priorities would occur to meet changing circumstances. The Bank responded quickly and positively to the use of project funds to support new initiatives which were consistent with the overall aims of SOE reform and divestiture. 43. More detailed work during identification, preparation and appraisal might have led to earlier results and greater impact, but a key feature of the project was the proactive role which the Bank took in promoting SOE reform and divestiture. 44. Prior to and during the project, the Bank's dialogue was principally with SEC, DIC and the Ministry of Finance. More consultation with the other major stakeholders in the reform and divestiture programs would have revealed the lack of consensus and the difficulty in resolving the major issues which were to cause delays in implementation. For example, not only were sector ministries ambivalent about performance contracts and dubious about divestiture, it was discovered soon after the credit became effective that there were inconsistencies between the institutional arrangements for reform agreed under this project and those agreed under two other Bank funded projects. 45. The project supported a wide range of activities which, in the event, turned out to be more complex and time consuming than envisaged at design and preparation. Project files covering the last two years of the project have been well maintained, but records of supervision for earlier years are incomplete. It is therefore difficult to establish precisely how much Bank staff and consultants' time was involved in supervision in the earlier years. This project was closely linked with the two structural adjustment credits and the private sector adjustment credit. Because of this, supervision, which was in most cases undertaken jointly, often focusing more on the immediate actions required under those operations than the objectives and progress of this project. Hence the number and periods of missions listed in Table 8 may overstate the extent of supervision specifically on this project. Total supervision time of Bank staff was recorded as 121 person-weeks over the 81/2 years of the project, of which 32 person-weeks was in the last two years, when supervision was increased. 46. Since 1994, the pace of divestiture has quickened. In this context, it should be noted that the Bank played a key role in advising and assisting the Government in the design of the accelerated divestiture program. F. Borrower Performance 47. Disbursements were slower than had been projected in 1987 for several reasons: (i) provision by ODA of grants, totaling about $850,000 equivalent, to finance full-time divestiture advisory services which had been envisaged under this project; (ii) reluctance on the part of SEC to support SOE reforms proposed by other agencies; (iii) greater than expected use of local rather than foreign consultants; (iv) a much slower pace of privatization than envisaged due in large part to the equivocal commitment of the government to the divestiture program. 14  48. Perhaps because of insufficient consultation, Government ministries and SOEs did not react as positively as they could have in support of SEC and DIC's efforts. Noticeably in the early part of the project, ownership of the reform and divestiture programs was weak. Though formal responsibility for overseeing the programs was vested in SEC and DIC respectively, these institutions did not possess the authority necessary to take effective steps to implement reforms. Indeed, it was not until the Divestiture of State Interests (Implementation) Law, 1993 (PNDC Law 326) that DIC had legal recognition of its role. 49. In terms of action to alleviate SEC and DIC's limited capacity for implementation, the borrower did not perform well. Difficulty in recruiting and retaining staff for these institutions has been a recurrent unresolved issue. This, in part, contributed to the weakness in documentation to demonstrate progress. As a result, the Bank had to spend additional time researching into the nature and outcomes of divestiture transactions. 50. Despite their capacity constraints, the implementing agencies, SEC and DIC, did well to gradually bring together the many institutions involved in SOE reform and divestiture and to respond to their concerns. Though it has taken longer than may have been expected, SEC and DIC have helped to achieve the consensus that was earlier lacking. 51. The borrower has responded to the need for greater dissemination of information on SOE performance and privatization. The new divestiture procedures which have been introduced will also assure greater consistency and transparency as well as simplifying reporting. G. Assessment of Outcomes 52. Although over a longer period than expected, the project has supported significant progress and satisfactory outcomes. On SOE reform, the project has supported a large number of assessments of individual enterprises, which have provided the basis for developing detailed restructuring plans, and a number of studies related to SOE sector restructuring issues. These studies, some of which are listed in the borrowers' evaluation summary, formed the basis of recommendations made to Government on policy, legal and institutional reforms. Most of the recommendations from the enterprise assessments have been accepted by Government and are now being implemented. The central objective of improving the performance of SOEs is gradually being achieved, with consequent improvements in fiscal flows for Government. 53. For the reasons outlined above, privatization has been slow and difficult; but it has taken off. Because privatization objectives were not expressed in quantitative terms and there has, to date, been no monitoring and evaluation of post privatization performance and effects, it is not possible to objectively assess the outcome of divestiture transactions under the project. Studies undertaken outside this project indicate that the 15  financial and operational performance of privatized enterprises has improved but that SOE reform and divestiture have inevitably had some adverse effect on labor. 54. Divestiture was, until recently, characterized by low transparency, with little information available to the public about transactions (for examples, the bidding process, the identities of bidders, the terms of offers, and selection criteria). With greater involvement of the private sector and the introduction of new divestiture procedures, this weakness is being corrected. 55. Much experience has been gained, but capacity in SEC and DIC remains limited. On the positive side, greater use is being made of private sector consultants to undertake tasks on behalf of these institutions, so that training and experience is of lasting benefit to Ghana. H. Future Operations 56. The Government is committed to further accelerate the pace of SOE reform and divestiture, which picked up noticeably in the last few years of the project. A successor project, - the Public Enterprise and Privatization Technical Assistance Project (Cr 2877- GH) - has been designed to continue technical assistance support for this work. The successor project became effective on September 25, 1996. Its design has taken account of most of the lessons noted above. For example, there is a major public information component in the new project which will help keep the public informed about the progress and impact of the privatization program. 1. Key Lessons Learned 57. Better information is required before launching SOE reform or privatization. Some preparatory work had been undertaken, notably diagnostic studies of selected enterprises, but it proved to be insufficient for the expected rate of progress at the outset of the project. For countries embarking on similar programs, comprehensive information is needed on the size of the SOE sector, its performance (accounting and operational performance, and economic contribution), condition (especially as regards debt and investment requirements) and prospects. 58. There is need to better articulate expected outcomes in terms of recorded, monitorable results. The project was based on expected actions (e.g. the introduction of performance contracts and the divestiture of certain number of SOEs) which were expected to improve economic efficiency. There was no indication of the expected results compared with the counterfactual; hence it is difficult to judge the impact of the actual results which the reforms have achieved. 59. Programs involving profound changes require consensus and, if that is not yet in place, resources must first be devoted to ascertaining and disseminating the facts, tabling and discussing the issues to be addressed, and involving all the major stakeholders. Only 16  in this way can reform and privatization secure general public support which, in turn, will ensure full Government commitment and support. 60. A project like this requires appropriate local resources. Technical assistance can only help develop capacity if the right resources are made available. This requires that the implementing agencies be able to offer employment terms which are competitive so as to be able to recruit and maintain staff of sufficient caliber. 61. Underlying issues must be identified and dealt with up front. In the case of Ghana, the question of contingent employee end of service benefits significantly delayed progress on divestiture, while land title continues to be a problem in many instances. 62. More attention should be given to monitoring, evaluation and dissemination of information concerning progress. Reporting requirements, either for government and public dissemination or for Bank supervision purposes were, until very recently, not clearly defined. Better and timely information would not only have facilitated Government and Bank supervision, it would also have encouraged and demonstrated greater transparency. 63. Monitoring and evaluation should also place less emphasis on listed activities and more emphasis on outcomes. For example, supervision missions devoted a high proportion of their time to ascertaining how many and which enterprises had prepared corporate plans, had signed performance contracts or had been divested (when, to whom, for how much etc), but little attention paid to what impact the corporate plans, performance contracts or privatization had made. 64. For performance contracts, too much emphasis was placed on the documents instead of the institutional framework necessary for the incentives and checks and balances to work. 65. A technical assistance project which is expected to undertake a wide range of activities, tackle major issues and bring about fundamental change will necessarily require significant Bank supervision. 17  PART II: STATISTICAL TABLES 18  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 1: Summary of Assessments A. ACHIEVEMENT OF Substantial Partial Negligible Not Applicable OBJECTIVES Macroeconomic policies I Sector policies / Financial objectives Institutional development Physical objectives Poverty reduction 1 Gender concerns Other social objectives Environmental objectives i Public sector management V Private sector development V Others (specify) B. PROJECT SUSTAINABILITY Likely Unilikely Uncertain C. BANK PERFORMANCE Highly Satisfactory Deficient Ia=ubIcto' Identification Preparation assistance Appraisal / Supervision I D. BORROWER j Highly Satisfa cefiient PERFORMANCE I Salisfactory t . Preparation Implementation J Covenant Compliance Operation V E. ASSESSMENT OF Highly Satisfactory j Unsatisfactory Highly OUTCOME I Satisfactory Unsatisfactory 19  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 2: Related Bank Loans/Credits 1. GHANA: Private Sector Adjustment Credit (Cr. 271 8-GH) 2. GHANA: Public Enterprises and Privatization Technical Assistance Project (Cr. 2877-GH) 20  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 3: Project Timetable ...* *. ........... . Steps In Project Cycle Date Planned j Actual Dale Identification 6/12/86 Preparation 10122196 Appraisal 3/10/87 Negotiations 12/11/86 8/10/87 Board Presentation 10/13/87 10/13/87 Signing 10/30/87 10/30/87 Effectiveness 2/1188 3/8)88 Project Completion 6/30/94 6/30/96 Loan Closing 6/30/94 6/30/96 21  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 4: Cumulative Estimated and Actual Disbursements (US$ million) r Fiscal Year Appraisal Estimate Actual Actual as % of I i i ~~~~~~~~~~~~~~~~Appraisal Estimate FY 1988 .90 .94 104.4% FY 1989 4.30 1.69 39.3% FY 1990 5.90 2.75 46.6% FY1991 7.40 3.11 42.0% FY 1992 8.40 4.55 54.2 % FY 1993 9.40 6.33 67.3 % FY 1994 10.50 7.29 69.4 % FY 1995 8.34 79.5% FY 1996 9.78 93.1% 22  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 5: Key Indicators for Project Implementation Prepared Corporate Plan Performance Contract Prepared Performance Contract Signed Prepared Restructuring Plan Prepared Enterprises Profiles 64 Restructured Divestiture Preparation (DIC only) Divestiture Completed (DIC only) 23  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 6: Studies Included in Project The studies include: - Cross-debts study 1988; - Review and recommendations for Reform of Accounting Standards and practices in the SOE Sector 1992; - Reform of Legal and Institutional Framework for Governing SOEs 1992 and 1994; - Reform of pricing and procurement policy affecting SOE operations in 1991; - Assessment of Training Needs in the SOE Sector; - Review and recommendations for reform of SOE Governance structures 1994; - Review and recommendations for reform of Labor Legislation 1994; - Formulation of alternatives to direct employer Financing of Credit Schemes and Advances to employees; - Classification of State-owned Enterprises. The Classification enabled the ordering of SOE restructuring priorities. 24  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 7: Project Costs (US$ million) Appraisal Estimate T Actual J Item Local Foreign Local Foreign I Costs Costs j Total Costs Costs Total 1. Works for Part A 1.189 1.005 2. (a) Equipment, furniture and .506 1.118 vehicles for Parts A and B (b) Office equipment (including .759 1.015 computer hardware and software) for Part C 3. Consultants' services and training for: (a) Parts A and B 1.898 2.292 (b) Part C 4.744 3.483 4. Operating costs .139 .600 5. Refunding of project .417 .222 preparation advance 6. Unallocated .848 .044 PROJECT TOTAL 1.100 10.500 11.600 9.779 25  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 8: Project Financing (US$ million) Appraisal Estimate Actual Source Local 1Foreign- Total Local Foreign Cost, Total I Costs Costs T Total World Bank 10.5 9.8 Government 1.1 TOTAL 1.1 10.5 11.6 9.8 26  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 9: Status of Legal Covenants Section Description Type Status Original Date Revised Date Comments 3.01(b) GoG to furnish progress of SOE Mgmt OK Credit Reform program in such detail as IDA shall Effectiveness request 3.03(i) GoG to submit detailed report on process achieved Mgmt OK Ongoing - Not Received no later than Oct. 31 st each year 3.03(ii) GoG to submit SEC's detailed work program for Mgmt OK Ongoing Received the ff. Fiscal year no later than Oct. 31st each year 3.03(iii) GoG to submit DIC's detailed work program for Mgmt OK Ongoing Received the ff. fiscal year, and a list of SOEs to be divested no later than Oct. 31 st each year 3.03(iv) GoG to submit list of SOEs for which performance Mgmt OK Ongoing - Received late agreement are to be negotiated with for the ff fiscal year no later than Oct. 31st each year 3.04(a) GoG to include adequate amounts in its budget Mgmt OK Ongoing each fiscal year to cover SEC's recurrent expenditures 3.04(b) GoG to include adequate amounts in its budget Mgmt OK Ongoing - each fiscal year to cover its established net liabilities from the divestiture of SOEs  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 10: Bank Resources Staff Inputs . ~~~. . _:-_Wwd_ State ProjectfCycle Weeks . |US$WOs |Weeks US . Weeks US$004s Through 28 43 Appraisal Appraisal - Board 77 141 Board- 5 9 Effectiveness Supervision 121 246 Completion 6 15 TOTAL 237 454 28  GHANA Public Enterprise Project CREDIT 1847-GH TABLE 11: Bank Resources Missions State of Month I Number Days Specialist Staff Implement- Develop- Type of Project Cycle Year of in Skills Represented ation ment Problems Persons Field Status Objectives Through 10/86 4 18 Appraisal 11/86 3 10 3/87 4 21 PE Specialist Appraisal - Board Board - Effectiveness Supervision 2/88 1/89 1 10 PSM officer 8/89 1 7 PSM officer 11/89 4/90 2 12 PSM officer 10/90 2 14 PSM officer Economist 3/91 5 14 PSD specialist PSM officer 10/91 3 14 PSM specialist 4/92 1 14 Privatization spec. 9/92 3/93 2 12 Financial economist 11/93 2 12 Senior PSM officer Financial economist 12/94 2 Financial economist 2/95 2 15 Financial analyst 11/95 5 15 PE specialist Economist 7/96 6 14 PE spec, accountant PSD specialist, PE reform and privatization specialist Completion TOTAL 29   APPENDIX A GHANA PUBLIC ENTERPRISE PROJECT CREDIT 1847-GH Completion Mission Aide-Memoire   GHANA Aide-Memoire PUBLIC ENTERPRISE TECHNICAL ASSISTANCE PROJECT CREDIT NUMBER 1847-GH Implementation Completion Report Mission July 1996 1. An Implementation Completion Report (ICR) review of the above project was conducted jointly between the concerned Government Agencies - Ministry of Finance, State Enterprises Commission (SEC) and the Secretariat of the Divestiture Implementation Committee (DIC) - and the World Bank's mission to Ghana between July 15-26 1996. The World Bank team consisted of Paul Bermingham (Senior Private Sector Development Specialist,Task Manager), Jeffrey Katz (Principal Economist), Oliver Campbell White (Senior Public Enterprise Specialist), Russell Muir (Senior Private Sector Development Specialist), Kofi-Boateng Agyen (Resident Mission, Project Officer - Industry and Energy) and Mohammad Chowdhury (Consultant). The review meeting focused on: (i) the arrangements for the preparation and submission of the Implementation Completion Report, including the Borrower's Evaluation; (ii) project costs; (iii) audit reports; and (iv) the extent to which the project had and had not achieved its objectives as set forth in Schedule 2 of the Development Credit Agreement dated October 30, 1987. 2. The mission wishes to thank all the personnel from the Ministry of Finance, SEC and DIC who participated in the implementation review meeting. The findings of the team, which are subject to confirmation upon its return to Washington. are summarized below. 3. The team also undertook a project launch mission for the Public Enterprise and Privatization Technical Assistance Project (Cr, 2877-GH) and a supervision mission on the Private Sector Adjustment Credit I (Cr.2817-GH). Separate aide-memoires have been prepared in respect of those missions. Implementation Completion Report 3. The mission provided the Ministry of Finance. SEC and DIC with a copy of the Bank's written policy and procedures for implementation completion reporting so that they are fully conversant with the process and the Government's contribution to the Implementation Completion Report (ICR).  4. . The project closed on June 30,1996. The Final date for disbursements under the project is October 31, 1996. The final date for submission of the ICR to the Board of the World Bank is December 31. 1996. To meet the latter deadline, it was agreed that the final draft of the ICR must be completed by November 30. 1996. 5. The ICR will be drafted by the Bank and submitted to the Government of Ghana no later than September 30, 1996 for review and comments. 6. The Government of Ghana will prepare an Evaluation Report of the project and this will be included as an annex to the ICR. The Govemrnent will send a draft of its evaluation report to the Bank no later than September 30, 1996. Project Costs 7. Annex I sets out the estimated total cost of the project, converted to SDR equivalent as at July 22, 1996. compared with the total credit available under the Loan Agreement. The total amount of disbursements and commitments is about SDR7.982,000 and about SDR318.000 remains available. The Government has identified additional expenditures that may qualify for financing under the project and will advise IDA of details shortly. Some work, begun under this project will continue in the period after June 30, 1996. The cost of goods and services provided after that date will be met under the newly launched Public Enterprise and Privatization Technical Assistance Project (where eligible under Development Credit Agreement for that project). Audit Reports 8. The mission recorded that the World Bank had, in accordance with Article IV of the Development Credit Agreement, received the external audit report on project costs up to December 31, 1995. The report confirms, without qualification, that proceeds of the credit withdrawn have been utilized for authorized purposes and in compliance with the Loan Agreement. 9. An audit of the project costs up to June 30. I 096 wvill be carried out after the closing date for disbursements. The audit report mUwt be submitted to the Bank by April 30, 1997. Project Objectives and Achievements' Strengthening of Management of SOE Reform Program 10. Strengthening of SEC s capability to manage the SOE Reform Program. monitor and evaluate SOEperformance and advise on major SOE issues and policies. This has Text in italics are extracts from Schedule 2 of the Development Credit Agreement.  been achieved. Progress was initially very slox due principally to three factors: (i) program management problems arising from ditficulties with consultants; (ii) serious accounting backlogs in the SOE sector: and i ii) the need for SEC to re-establish its role. authority and influence over the SOE sector. Among the achievements recorded under the project are: (a) SEC staffing was expanded and, although further strengthening is required, SEC has contributed to improvement in the performance of the SOE sector; (b) SEC developed a database of all known SOEs which had formed the basis for selecting SOEs for divestiture and for performance agreements. The database now needs updating and this exercise is an early component of the new PE and Privatization Technical Assistance Project; (c) profiles were prepared for 64 SOEs. Preparation of the profiles contributed substantially to the development of the SOE database, highlighted gaps in information (which will be addressed under the successor project), and contributed towards preparation for divestiture; (d) SEC dealt with the serious accounting backlogs in selected SOEs. Also, in order to avoid a recurrence of backlogs, SEC had, under the project, introduced computers and accounting software into SOEs; (e) as part of the process of dealing with accounting backlogs, SEC was able to make the first concerted attempt to determine the debt position of the SOE sector including: (i) an assessment of Government's exposure, both in terns of outstanding debts and guarantees; and (ai) the extent of SOE cross- indebtedness; (f) following (e) (ii), SEC set up a mechanism to identify SOE cross- indebtedness and a method for offsetting debts which subsequently contributed to preventing a further build-up of mutual indebtedness; (g) SEC had identified labor issues in the SOE sector and had provided Government with a paper on SOEs' potential liability for end of service benefits; and (h) SEC identified land ownership and title problems which alerted policy makers to the issue which are to be addressed. and facilitated selection of enterprises for divestiture; 11. Despite some expansion in SEC's capacity, it has suffered from a persistent shortage of resources and has thus largely failed to be effective in monitoring SOEs. This will be elaborated in the ICR.  12. To help facilitate production of the draft ICR, SEC will provide the Bank with further details on (a), (c)-(h). 13. Streamlining of the instititionalframework governing the SOE sector. Substantial progress has been made towards this objective: (a) SEC's role and responsibilities has been clarified, while the National Trust Holding Company, which had formerly looked after Government participation in joint ventures, no longer plays any role in SOE supervision but is instead in real estate management and brokerage; (b) there has been a clear delineation of Government's and SOE boards' responsibilities, including specification of the nature of policies which are the concern of the sector ministry and business policies which are the concern of SOE boards, while the Ministry of Finance has become custodian of all state-owned assets; and (c) SEC has introduced a new contractual relationship between Government and enterprises (see paragraph 20). 14. There remain three areas of concern which will be addressed under the new project. First, it was noted that there has been a tendency for Goverrnment to take a passive role in the preparation of performance contracts . As a consequence of Government not actively participating in the process, SEC has, of necessity, had to act as proxy for Government. This has meant that SEC has not been able to act effectively as a facilitator and mediator. Under the new project there will be a review of SEC's role and what Government expects from the SOE sector. This review will address the issue of how boards of directors of SOEs can act on Government's behalf. 15. Second. the role of the SEC Board remains unclear. It was noted that the Board has not met during the past five years and that it has therefore been both inactive and ineffective. 16. Third, SEC still does not have the legal power to obtain information from some enterprises in which the Government holds an equity interest. This issue will be addressed in the forthcoming study of portfolio management. 17. Assessment and adjustment of the legal and policy frameiwork governing SOEs, in order to inter alia increase SOE azutonomy and accountabilirv and improve SOE performance. Considerable progress has been made in this context, the most noteworthy step being the conversion of many state corporations to limited liability companies, each with a board of directors whose responsibilities are defined under Company Law. The boards of directors are now appointed by the Minister of Finance instead of being nominated by interested institutions. SEC prepared a list of 35 SOE s, together with draft supporting legislation, which were recommended for conversion to limited liability  companies. The list was later revised to an agreed list of 27 SOEs. SEC undertook to provide the Bank with a list of the names of the SOEs that have been converted to limited liability companies, and a list and the current status regarding the remaining SOEs. 18. It was noted that Government continues to provide guarantees in support of SOE borrowing, including SOEs subsequently privatized. 19. Not all SEC's recommendations streamlining institutional arrangements for the SOE sector and for increasing autonomy and accountability of enterprise managers have been adopted by Government. SEC undertook to report on the present position of its recommendations. 20. Negotiation, signing and implementation of performance agreements between the Borrower and selected SOEs. Performance agreements have been developed and signed in respect of 47 SOEs. SEC's limited ability to monitor enterprise performnance has constrained effective implementation of the performance agreement mechanism. 21. Training of SEC staff, rental and construction of SEC offices and acquisition of office equipment and vehicles for SEC. Training of SEC staff has been very limited and had little impact. The principal factor for this has been SEC's difficulty in attracting sufficient capable people (largely because SEC is unable to offer attractive terms and conditions) so that available resources have not been allowed time for the training that was envisaged for them. SEC's key training requirements, which will be addressed under the new project, are in performance monitoring (including inter-sectoral comparisons), financial analysis and interpretation of financial reports, and negotiating skills. On the positive side, SEC has trained many outside Ghanaian consultants under the project, in corporate planning for example. 22. The project has been very useful in putting in place the facilities and equipment that SEC needs to be able to function. SEC now has much better office accommodation, but it remains constrained by insufficient human resources of the right caliber. Divestiture of SOEs 23. Divestiture of at least 30 SOEs. Some 97 enterprises were divested in the period up to June 30, 1996. The target has thus been exceeded despite upstream problems relating to land ownership, title to assets and a range of labor issues (including concerns over redundancy, the existence and terms of collective agreements and the potential liability for severance payments). 24. Strengthening of the Divestiture Implementation Committee and its technical team, including advisory services, training, vehicles and equipment. Progress was very slow in the early stages bdue to problems with consultants, the difficulty of recruiting capable people, and the delay in establishing DIC's role and status. Over the project period problems in procedures have been identified and addressed. Procedures for  contracting out have been developed and adopted, these will significantly enhance DICs capacity to manage divestitures. In the latter part of the project DIC was able to recruit more personnel and its full-time team of advisors, funded by the UK's Overseas Development Administration. was expanded to four. The project has provided some training but more staff training is now required and will be provided under the successor project. Office equipment for DIC was provided under the project. 25. Establishment and operation of the Divestiture Account. A Divestiture Account was opened but there are problems with its operation and with the quality and timeliness of the audit. These problems are now being addressed. SOE Restructuring Programs 26. Establishment of an SOE Restructuring Fund. A restructuring fund was established, which was intended to operate as a revolving fund. However, credit management has been weak and the fund has become depleted. SEC provided the mission with additional information on the record and position of this fund. Conclusion 27. Annex 2 is a draft overview of what the project has achieved and where further action is required. The annex will be reviewed - and amended/expanded as necessary - by both the Government and the Bank and will serve, together with this aide-memoire - as the basis for preparing the draft ICR. 28. Annex 3 is a draft schedule which sets out the status of the project with regard to the legal covenants under the Development Credit Agreement.  Appendix B GHANA PUBLIC ENTERPRISE TECHNICAL ASSISTANCE PROJECT CREDIT 1847-GH BORROWER CONTRIBUTION TO THE ICR A. The Project and its Objectives 1. Public Enterprise sector reforms have been an integral part of the Ghana Government's Economic Recovery Program from its inception in 1983. To assess the problems of the sector and prepare a reform program, Government and IDA agreed to a comprehensive diagnostic survey of the public enterprise sector. The study was conducted by a Dutch Consulting firm Berenschot-Moret-Bosboon and completed in 1985. The diagnostic study was financed by the UNDP and IDA provided a PPF of US$400,000 in August 1984 for related project preparation activities. Government subsequently appointed a Task Force to assess the Consultant's report and its recommendations. The report of the Task Force formed the basis of negotiations with IDA leading to this project. The public enterprise reform project developed out of the study which is closely related to the Economic Reform Program (ERP) and to conditionalities incorporated in the three IDA financed structural adjustments, (SAC 1, 1 987; SAC 11 1989 and SAC 111, 1 991). The Cost of the project was estimated at SDR equivalent of 8.3 million. B. Project Objectives 2. The project objectives as per schedule 2 of the Credit Agreement were: Part A Strengthening of Management of SOE Reform Program 1. Strengthening of SEC's capability to manage the SOE Reform Program. monitor and evaluate SOE performance and advise on major issues and policies. 2. Streamlining of the institutional framework governing the SOE sector through clarification of the roles and responsibilities of SEC, the National Trust Holding Company, the Ministry of Finance and Economic Planning and the Sector Ministries overseeing the sector.  3. Assessment and adjustment of the legal and policy framework goveming SOEs in order to inter alia increase SOE autonomy and accountabilitv and improve performance. 4. Negotiating, signing and implementation of performance agreements between the Borrower and selected SOEs. 5. Training of SEC's staff, rental and construction of SEC offices and acquisition of office equipment and vehicles. Part B Divestiture of SOEs 1. Divestiture of at least 30 SOEs; 2. Strengthening of the Divestiture Implementation Committee; Part C SOE Restructuring Program 1. Establishment of an SOE Restructuring Fund in SEC to assist selected SOEs in preparing and implementing restructuring programs and Corporate Plans. C. Implementation Experience And Achievements 3. (i) Strengthening SEC's Capability SEC's capability was largely strengthened by engaging the services of external and local consultants in the implementation of the program. Some initial difficulties with Consultants and lack of relevant data contributed to a slow start of the program. Besides, the limited role defined for SEC by the State Enterprises Commission Law, 1987 initially hampered its development of a more supportive role in implementation of the project. SEC's capability was also constrained by difficulty in recruiting and retaining core professional staff due to remuneration and incentive inadequacies. At the commencement of the project SEC had professional staff of 20 but at its close on 30th June, 1996, there were only I0 professional staff at post. The wide gap between the remuneration of local consultants and SEC staff was a disincentive to SEC staff and unless this problem is addressed, SEC's internal capability will be completely eroded. IDA regulations preclude the use of project funds to subsidize the remuneration of public officers engaged on such projects but it is our view that a modification of this policy (to allow some incentive payments to staff assigned project job) would not only reduce consultancy costs of the project but enhance the capability of the staff of SEC. - ii -  (ii) Streamlining of the Institutional Framework Governing the SOE Sector This objective has been achieved. At the inception of the project. the institutional framework for governing the SOE sector was characterized by a multiplicity of agencies (i.e. SEC, Ministry of Finance, Sector Ministries, National Trust Holding Corporation (NTHC) with over-lapping responsibilities and entrenched practices of ad-hoc intervention in operational decision making. Streamlining of the institutional framework was given a high priority. By 1994, NTHC had withdrawn from all responsibilities relating to SOEs. The performance contract system has evolved as the mechanism to streamline the relationships of the Sector with Ministry of Finance, Sector Ministries and SEC. Besides, the Statutory Corporations (Conversion to Companies Act (Act 461 ) of 1993 was the first step towards a major restructuring of the legal and institutional framework for governing SOEs. This has replaced the diffused and over-lapping responsibilities which existed before the project with a more transparent structure. The Company regulations of the successor companies has clearly defined the role of the Minister of Finance as the custodian of Government shares. Similarly the function of Sector Ministries, Board of Directors, and SEC are clearly defined. This process will need to be reinforced and concretized in the next phase of the reform program. (iii) Assessment and Adjustment of the Legal and Policy Framework Governing SOE This has largely been achieved with the Statutory Conversion Law (Act 461) converting some 27 statutory corporations into limited liability companies concentrating accountability for enterprise direction and performance on its Board of Directors as defined by the Companies Code. It is intended to convert other SOEs in due course. The Conversion of statutory Corporations to companies is a measure contributing to three principal objectives of the SOE reform program. to increase efficiency of commercial SOE operations and management through the creation of a more transparent structure of management responsibility and accountability; to facilitate restructuring of public enterprises through consolidation or separation as required to improve performance and operating etficiency and effectiveness; and - iii -  to open up alternatives to Government financing. including the sale to private investors of equity or debt instruments, to meet the enterprises needs for investment and operating funds. Act 461 was drafted on the initiative of SEC as part of the on-going program for the reform of legal and institutional framework governing the SOEs. (iv) Negotiation, Signing and Implementation of Performance Contracts between the Borrower and SOEs At the beginning of the project no SOE had a relevant corporate plan but by the close of the project performance contracts had been signed with some 47 SOEs although it was originally intended to COVER 14 or so Core SOEs which were by the agreement between the World Bank and Government to remain within the public sector. The system has succeeded in introducing systematic Corporate Planning into the culture of State-owned enterprises management. A central objective of the programn has been to improve the financial viability and performance of the major SOEs. Reform objectives have also aimed at reducing the financial burdens imposed on the budget by subventions and subsidies to commercial SOEs and to increase the flow of tax and dividend payments from the profitable SOEs to Government. Subvention to the State commercial enterprises have declined over the project period and there has been a perceptible improvement in the flow of tax and dividend payments to Government. Details of the improvements in economic and financial performance that have been realized by the SOE sector are captured in the annual reports prepared by SEC for Government. The system has succeeded in evolving a mechanism for formalizing interactions between * SOE management and Government as a shareholder thus limiting ministerial interventions in day to day operations and improving management autonomy. However, there are a few areas in which the system needs to be strengthened for the next stage of the reform program and these include the need to introduce performance indicators for workforce management practices, organizational restructuring and capacity utilization. Besides, as the svstem is related to payment of incentive bonus there is need to refine target setting to make it more realistic. Initial steps towards this end has already been taken by SEC. - iv -  (v) Training of SEC Staff. Rental and Construction of SEC Office and Acquisition of Office Equipment There was only a limited training of SEC staff due to staffing constraints and internal difficulties. These constraints and difficulties will be addressed in the next phase of the reform program. However, the capacity of SEC to provide SOEs with training and professional support for implementing reform measures was augmented by contracting local consultants to carry out a broad range of assignments. SEC trained some of these local consultants and its staff in Corporate Planning and they provide support to the SOEs with their Corporate Plans. SEC would need to attract, retain and train its personnel in order to be able to sustain SOE reforms in the future and carry out its role effectively. It is our view therefore that the IDA regulation which precludes the use of project funds to subsidize remuneration of public officers assigned to IDA funded projects need to be reviewed to allow SEC give some incentives to staff assigned reform program work. This will reduce the costs of using local consultants who invariably are paid four times the remuneration of SEC staff but whose background is in most cases not superior to SEC staff. SEC office building was completed at a cost of SDR 794,164. Equipment acquired included computers. Fax machines, photo copiers etc. The project has provided SEC with good office accommodation facilities and the much needed office equipment and accessories. Part B (vi) Divestiture of SOEs "Divestiture of at least 30 SOEs, including preliminary studies and audits, preparation of prospectuses, valuation of assets, information campaign, search for investors, review of bids and negotiation of sales arrangements". 1. A total of 97 SOEs have been divested during the period of the Credit Agreement. The actual number of completed transactions during that period is considerably higher, as some SOEs have been fragmented for the purposes of divestiture. 2. The process and procedures followed by DIC in the divestiture of SOEs have developed substantially over the period of the Credit Agreement. The current process and procedures, which have been designed to ensure transparency and integrity in connection with the divestiture of SOEs, are set out in detail in a procedures manual. The manual is a living document, and -v -  changes will be made to it from time to time as DIC's body of experience grows. 3. The manual covers. among other things, preliminary matters (including due diligence, etc.) preparation of valuation reports and information memoranda. advertising, bidding (including evaluation) and negotiations and approvals. 4. A number of problems have been encountered in the divestiture program; these have significantly slowed the rate of divestiture which could otherwise have been achieved. The problems include: * the condition of the SOEs listed for divestiture (excess assets, onerous liabilities, inadequate management, over-manning, lack of land title, etc.); * the identification of Government's interest (where Governnent has indirect shareholdings, mergers have taken place without minority shareholder consultation, pre-emption rights exist, etc.); D the lack of information on SOEs (up-to-date accounts, etc.); inadequate resource of the DIC Secretariat; * low participation of Ghanaian investors in the purchase of divested SOEs (due to, among other things, the lack of capital in the formal financial sector to finance such ventures); and * the lack of funds to meet end-of-service benefits and severance payments for employees of divested SOEs. 4. Notwithstanding the matters raised in 4 above, the divestiture program has clearly succeeded in reducing significantly the size of the public sector. The financial and managerial burden on Government has declined accordingly. In many cases, divested enterprises have been modemized and, where applicable, brought back into production. (vii) Strengthening of the Divestiture Implementation Committee and its Technical Team, including Advisory Services. Training, Vehicles and Equipment. I. At the start of the Credit Agreement. the divestiture of SOEs was carried out by SEC. In (1990), due to the need to speed up privatization and to deal more effectively with the reform of enterprises not listed for divestiture, privatization was hived off into a new unit, DIC. - vi -  2. The number of Ghanaian staff at the DIC Secretariat has. since that time. remained relatively static, although the team has been strengthened with the appointment of a public relations officer (in l 1994 ~) and two qualified accountants (in 1996). The low level of remuneration has not assisted the recruitment of professional staff. 3. The UK Overseas Development Administration provides technical support to the Secretariat on legal, financial and other aspects of divestiture. This is achieved through the placement of advisers with the Secretariat. The number of advisers has increased from one financial adviser (in [1991]) to the current team of two financial advisers, a legal adviser and a contracts manager. 4. Each ODA adviser is allocated a Ghanaian staff member as his or her counterpart. The adviser carries out much of his or her work alongside that counterpart, with a view to transferring his or her own skills and know how. Most staff members of the Secretariat have attended at least one international course, although work pressures have restricted the opportunities which would otherwise have been available. 5. DIC is relying increasingly on outside advisory services. Valuation reports and information memoranda have, since the start of the program, been prepared by outside consultants; similarly, outside consultants have always assisted DIC with stock verification and other cut-off procedures upon divestiture completion. However, DIC now outsources a majority of divestitures to the private sector: merchant banks, management consultants, accounting firms and the like are appointed by DIC to provide advice in connection with, and ultimately to implement. the divestiture of specific SOEs. By the end of the Credit Agreement, DIC had appointed consultants to undertake the divestiture of State Transport Company Limited, Bonsa Tyre Company Limited, GIHOC Fibre Products Company Limited, State Construction Corporation and Ghana Sugar Estates Limited. 6. Outsourcing will allow DIC to achieve greater numbers of divestitures by drawing on the private sector to take responsibility for much of the transaction process. Further, the outsourcing program will foster development of the private services sector in Ghana through the direct use of local Consultants and also through the transfer of skills flowing from associations between local and international firms. 7. DIC has procured additional vehicles and equipment. as necessary, over the period of the Credit Agreement. - vii -  Part C (vii) SOE Restructuring Program. The project established a fund to support restructuring of some selected state enterprises (specifically 5 transport sector enterprises) including diagnostic planning studies. management training and financing the costs of office equipment (including computer hardware and software) for the improvement of manpower systems. A number of studies related to sector restructuring issues or problems have been completed by the State Enterprises Commission. These studies have formed the basis for a number of recommendations made to Government for policy, legal and institutional framework reforms and the identification of the training needs of the SOEs. The studies include: - Cross-debts study 1 988; - Review and recommendations for Reform of Accounting Standards and practices in the SOE Sector 1992; - Reform of Legal and Institutional Framework for Governing SOEs 1992 and 1994; - Reform of pricing and procurement policy affecting SOE operations in 1991; - Assessment of Training Needs in the SOE Sector; - Review and recommendations for reform of SOE Governance structures 1994; - Review and recommendations for reform of Labor Legislation 1994; - Formulation of alternatives to direct employer Financing of Credit Schemes and Advances to employees. - Classification of State-owned Enterprises. The Classification enabled the ordering of SOE restructuring priorities. Management information systems have been improved with the provisions of computer hardware and software and the training of SOE staff in the use of Computers. - viii -  The Commission has also completed a large number of restructuring assessment of individual SOEs to provide a basis for detailed restructuring plans. MVlost of these recommendations have been accepted by Government and are now being implemented. A number of difficulties experienced in the implementation of the SOE Reform Program can be traced to policy framework assumptions captured in the Task Force Report. For instance, the Task Force anticipated that Government would continue to provide financial assistance with the capitalization requirements of the SOEs critical to the economic recovery program. Fiscal constraints and conditionalities attached to the IDA Structural Adjustment Credits limited the flow of funds for capital restructuring of SOEs. However, the restructuring requirements of some major SOEs including, Ghana Water & Sewerage Corporation, Ghana Ports and Harbors Authority, Posts & Telecommunications Corporation. Mining sector rehabilitation, Energy Sector rehabilitation, Financial sector institutions have been met through alternative funding arrangements and have enhanced the performance of SOEs in these sectors. D. Factors Contributing To Achievements Of Objectives i) The capability of the implementing agencies to adjust their work programs to satisfy SAC (Structural Adjustment Credit) imposed conditionalities. The importance of Structural Adjustment Credits to the Economic Recovery Program assured this ordering of priorities in the SOE Reform Program implementation; ii) The broad support given by Government to the program; iii) The gaining of political support for divestiture and the acceptance of reduced role for the state in the ownership of commercial enterprises; iv) Development of capacity within the implementing agencies and SOEs; E. Project Outcome 5. The project outcome is quite satisfactory. The central objective of improving the performance of major SOEs; reducing the financial burdens imposed on Government budget by subventions and subsidies to commercial SOEs and to increasing the flow of tax and dividend payment from the profitable SOEs are progressively being achieved. A favorable environment has also been created for private sector development and participation in the state enterprise sector. - ix -  F. Summary Of Findings Future Operations And Key Lessons Learned i) It is difficult to plan with any specificity the work program for such a complex project. While the policy objectives were clear from the beginning. the means to achieve the objectives were limited to what appeared politically acceptable at the time. Specific actions entered the program only by way of conditionalities attached to Structural Adjustment Credits. ii) Lack of adequate infortnation particularly financial data made it difficult to plan realistically in a number of areas. It will be easier now to plan the future course of the program because of the improvement of the data base. iii) Full government support is absolutely essential for the success of such a project. iv) Public support particularly in the area of divestiture and the resultant redeployment of staff is essential and it is therefore necessary to maintain a vigorous public relation strategy to retain public support and investor goodwill. v) Planning for the program has been a continuous process of adjustment to the realities of institutional capacity and of SOE capabilities and difficulties. While the objectives remained constant the search for effective ways and means to realize the objectives was characterized by trial and error. The Bank and the Borrower in the circumstance showed some flexibility in the execution of the project. vi) There is the need to strengthen the capacity of the implementing agencies to ensure the continuity of effective SOE reforn program management. G. Project Sustainability 6. The Ghana Government has adopted a policy of private sector led growth to revitalize the economy and accelerate the enhancement of development and standard of living. 7. Consistent with the policy of encouraging the private sector is the need to streamline the public sector and make it more responsive to its role as a facilitator of growth. 8. The project has achieved its main objective of reducing the financial and administrative burdens of a large portfolio of under-performing state enterprises. The divestiture program has succeeded in not only reducing the size of state enterprises, generating some cash inflow for Government but has provided an incentive for private  sector development. It is in the interest of the economy that the project is sustained and its s6cial effects assessed. - xi -    IMAGING Report No.: 16628 Type- ICR