Mali - Second Urban Project

Document of The World Bank FOR OMCIUL USE ONLY Report No. P-4196-MLI REPORT AND RECOMXENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 25.2 MILLION TO THE REPUBLIC OF MALI FOR THE SECOND URBAN PROJECT March 3, 1986 This document has a restricted distribution and may be used by recipients onl in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) us$X.0o CFAF 385 CFAF 1 million US$2,597 SDR = US$1.1115 SYSTEM OF WEIGHTS AND MEASURES: METRIC FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ERR Economic Rate of Return FAC French Bilateral Aid Agency PPF Project Preparation Facility  FOR OFFICIAL USE ONLY MALI SECOND URBAIN PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Mali. Beneficiaries: Ministry of Interior, District of Bamako. Credit Amount: SDR 25.2 million (US$28.0 million equivalent). Terms: Standard. Onlending Terms: US$7.5 million from the IDA credit to be onlent to District of Bamako for land development at an onlent rate of 8% per annum for 25 years, in- cluding three years grace period. Project Description: The proposed project will: (a) help remove some of the major citywide infrastructure constraints to the efficient functioning of Bamako; (b) facil- itate private sector housing and construction activities; (c) improve local resource mobiliza- tion; and (d) strengthen the capacity of key urban institutions, especially the District's land development, municipal management, and tax collec- tion functions. The project will finance: (a) road rehabilitation and construction both in the city center and the main access roads to the city center; (b) land development and tenure regularization in various locations totalling about 2.000 ha and 30,000 plots; (c) technical assistance, training, studies, and equipment for the District of Bauako, the Ministry of Interior, and the Project Unit for improvement of resource mobilization, garbage collection, and overall coordination of the project. Thi document has estcted distnbution und may be usd by ripients only in the pefonmnce of their offici dutel Its contents may not otherwise be diosed without World Bank authoriution.  - ii - Project Benefits and Risks: As a result of upgrading the road network in the city center, along with better management of traffic flows, productivity gains in urban trans- portation are expected to take place through: (a) cost savings in the use and maintenance of the road network; and (b) lowering the time spent by both individuals and basinesses to travel between the city center and southern areas of the city. Urban land development benefits include incentives for increased land and housing development due to security of tenure, as well as improvement of living conditions for the people in the land development areas of the project. Other gains would derive from better managed operations within the District, especially in the field of urban taxation. The risks involved in the project are: (a) that Bamako District may not be able to sustain suffi- cient political backing to assess and collect the increases in taxes and fees required to generate enough revenue for debt service, maintenance and investment; (b) that project implementation may suffer due to the difficulty of attracting and keeping qualified Malian staff; and (c) that the Government may not be able to finance its share of the project costs in a timely manner. The imnrovement in urban infrastructure and services should help to convince taxpayers that a commen- surate tax increase (point (a) above) is justified. Extensive training programs included in the project should counterbalance some of the risks associated with (b). Finally, to ensure the timely provision of counterpart funds (point (c) above), proceeds of the land development account could be made available to the project, if necessary. Some US$5 million equivalent is expected to accrue to this account during the project period, which is roughly in line with the Government counterpart obligation.  - iii - Summry Project Cost Estimate Estimated Costs: LOCAL FOREI6N TOTAL (USs millions) Infrastructure 1. Road Rehabilitation 4.67 5.81 10.49 2. Land Development 3.61 4.63 0.24 3. Cartography 0.27 1.40 1.67 Institution Building 4. Resource Mobilization 0.46 1.64 2.10 S. Solid Haste Nmnagesent 0.19 0.49 0.67 6. Project Unit 0.56 2.29 2.95 Total Base Cost 9.75 16.27 26.02 Physical Contingencies 1.24 1.91 3.15 Price Contingencies 2.12 3.22 5.34 Total Project Cost 13.11 21.41 34.51 Z=2 mug Of which Taxes 4.50 0.00 4.50 Total Project Cost 9.60 21.41 30.01 net of Taxes - Financing Plan: LOCAL FOREIGN TOTAL --fUSS miions)-- government 5.76 - 5.76 IDA 7.29 20.71 28.00 French Aid (FAC) 0.05 0.70 0.75 Total 13.11 21.41 34.51 Note: Numbers may not add up due to rounding.  - iv - Estimated Disbursements: FY87 FY88 FY89 FY90 FY91 FY92 FY93 (US$ million) Annual 3.1 5.3 5.9 5.4 4.4 2.8 1.1 Cumulative 3.1 8.4 14.3 19.7 24.1 26.9 28.0 Economic Rate of Return: 31X for the road rehabilitation and traffic mangement elements, and 44% for the land development element, representing 40% and 32% of project cost, respectively. Staff Appraisal Report: No. 5855-MLI dated March 3, 1986. M^p8: IBRD 19169: Mali Population Distribution IBRD 19184: Bamako Project Elements IBRD 19413: Bamako City Center Traffic Management Plan IBRD 19414: Bako-Djikoroni Sites and Services IB-RD 19415: Kalaban-Sud Sites and Services IBRD 19416: Bankoni Upgrading Area  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR THE SECOND URBAN PROJECT 1. I subm-it the following report and recommendation on a proposed development credit of SDR 25.2 million (US$28.0 million) on standard IDA terms to the Republic of Mali to help finance the pro- posed Second Urban Project. The Project will be cofinanced by a grant of about US$750,000 equivalent from the French Bilateral Aid Agency (FAC). PART I - THE ECONOMY 1/ 2. Two reports, entitled "Economic Memorandum on Mali" (3200-MLI) and "Mali-Special Economic Study-Planning Institutions and the 1974-78 Plan" (3333-14LI), were distributed to the Executive Directors on June 30, 1981. The following paragraphs are based on these reports and the findings of recent World Bank and IMF economic missions. Annex I gives country data. A. Background 3. Landlocked in Africa's Sahelian belt, most of Mali's 1.2 million square kilometers are desert; only one-fourth are arable, and even this area is subject to the climatic vagaries of the semi-arid tropics. Over the last 15 years, average rainfall and length of growing season have significantly diminished. Soils are shallow, lateritic, poor in phosphates, and easily eroded. Agricultural technology is rudimentary, with low crop yields and livestock offtake. Thus, Mal's 7 million inhabitants are among the poorest in the world, with 1984 per capita income of only US$140 and life expectancy at birth of only 45 years. Overall, the country's potential for loug-term growth is severely limited by harsh resource constraints. B. Developments in the 1960s and 1970s 4. The first post-colonial Government (1960-68) Intervened extensively in the economy in an attempt to promote growth and allevi- ate poverty. It established numerous public enterprises and insti- tuted widespread price and trade controls. Relatively favorable 1/ Parts I and II are substantially the same as those which appeared in the President's Report for the Second Forestry Project (Report No. P-4208-MLI), which was approved by the Executive Directors on January 23, 1986.  -2- climatic conditions allowed a modest growth in GDP per capita during the 1960s, but fiscal and external account deficits increased sharply. 5. The present Government, which came to power in 1968, gradu- ally began to introduce a series of modest economic reforms aimed at restoring financial and economic equilibrium through liberalizing trade, restructuring public enterprises and promoting agriculture. These efforts were frustrated in the early 1970s by severe drought conditions and the oil price increases. Conditions improved somewhat in the late 1970s. Good ranss and newly built irrigation networks raised grain output by 50 percent from 1972/73 to 1978/79. Cotton cultivation expanded by approximately 80 percent over the same period. Moreover, both consumption and investment were sustained by inflows of official development assistance which quintupled between 1972 and 1980. The combined impact of these factors resulted in a 1.7 percent annmal increase in GDP per capita between 1970 and 1980. 6. Despite these improved conditions, Government's budgetary position continued to deteriorate through the late 1970s. Restric- tions on civil service recruitment were relaxed, and the roster of public employees increased by almost 50 percent between 1975 and 1980. Between 1976 and 1980, scholarship payments for higher education doubled. A number of costly public investment projects with dubious justification and several equally questionable new public enterprises were launched. Public enterprises were forced to operate with low or negative profit margins in an effort to insulate the population from inflation. As a result, the sector's deficits rose significantly. The combined effect of these policies was reflected in dramatic increases in the consolidated budgetary deficit, and, in turn, in foreign indebtedness. By 1980, total med'ium- and long-term external public debt equalled 75 percent of GDP. C. Progress Since the Early 1980s 7. Since the early 1980s, the Government has undertaken a program of gradual structural reform to counteract the mounting disequilibria arising from excess consumption and uneconomic invest- ments. A number of measures have been introduced aimed at reducing budgetary deficits, operating losses of public enterprises, and public sector arrears (both foreign and domestic). In addition, reforms have been introduced to improve resource allocation. These include market liberalization, improved price incentives, greater emphasis on reha- bilitation and maintenance, and more efficient public investments. The Government's progress in these policy areas has occurred despite the adverse effects of recent drought conditions on productior and incomes. 8. Mali's commitment to structural reform has been met with commensurate support from the donor community. Mali has successfully implemented two IMF Standby Arrangements and a third Standby was  approved by the Fund in November 1985. In close cooperation with the IMF, IDA has also actively supt.)rted Mali's restructuring efforts. In 1982. IDA approved the Economic Management and Training project which provides technical assistance and training to improve Mali's economic management and policy formulation capabilities. This has provided a basis for subsequent policy reforms addressing cotton pricing and revenues, educational expenditures, cereals marketing, public enter- prises, and cost recovery for roads maintenance. Many of these sectorial reforms are being supported by IDA lending operations. An informal consortium of food aid donors has been assisting a Cereals Marketing Reform Project since 1981. It has supported various reform measures with the provision of some 250,000 tons of grain over the past five years. Finally, Mali's entry into the West African Monetary Union in June 1984, included substantial financial aid and debt consolidation from France. 9. In spite of the policy improvements and the significant level of donor assistance in recent years, many macroeconomic indica- tors have remained depressed since 1980. Average annual GDP growth in constant prices has been stagnant. Consecutive years of severe drought from 1982-84 led to a 25 percent decline in cereals produc- tion. As a result, total cereal imports in 1984 reached a record 320,000 tons or almost 50 kilograms per capita. Moreover, significant livestock losses and destocking occurred in 1984. Despite buoyant cotton export revenues in 1984. resulting from unusually high inter- national cotton prices, rising imports of foodstuffs. necessitated by the drought, caused the 1984 current account deficit to remain at some 19 percent of GDP (6.2 percent of GDP including grants). Moreover, in 1985, cereal imports have remained at their 1984 levels, while export revenues have declined due to a marked decline in international cotton prices. GDP is estimated to have grown by 1.1 percent in 1985. D. Economic and Financial Policy Issues 10. If the Government is to achieve its financial and economic stabilization objectives, policy reforms must be broadened and deep- ened in three priority areas: public finances, economic regulation and incentives, and the efficient allocation of investment resources. Public Finances 11. Although the budgetary situation in Mali has improved considerably in recent years, largely in the context of three succes- sive IMF standbys, there remains considerable scope for improvement. Public finances remain weak and recurrent expenditures must still be supported by external budgetary assistance. To safeguard the progress already achieved, Government needs to make a concerted effort to continue to cut subsidies and excessive personnel outlays. Cost recovery measures need to be instituted to finance operation and maintenance costs wherever beneficiaries can be clearly identified.  - 4 - The management of public debt also needs to be .mproved. In addition to containing future expenditures, efforts to inL.rease revenues will also have to be intensified. Regulation and Incentives 12. As indicated above, the Government has recently begun to reduce its intervention in economic affairs, especially in the areas of price controls and trade restrictions. Perhaps most notably, full liberalization of paddy marketing is planned for the 1986/87 growing season. This process has been assisted by the recent Mopti Area Development Project and will also be supported by the forthcoming Office du Niger Project. However, in the agricultural sector, addi- tional measures are necessary to allow private traders a greater role in the delivery of agricultural services and inputs at market- determined prices. In the public enterprise sector, the Government is committed to a major reform program that will reduce the overall size of the sector, while permitting individual enterprises a greater degree of autonomy in managing their internal operations. Import monopolies have already been eliminated for all but four of the prod- ucts handled by the state trading company. IDA is supporting this effort through the preparation of a Public Enterprise Reform Project. The project focuses on policy and institutional reforms, physical and financial rehabilitation, and possible privatization of viable enter- prises and technical support for liquidating nonviable ones. This program has been closely coordinated with the third IMF Standby, especially with respect to eliminating the financial losses of Air Mali and continuing the reduction in the size and scope of the state trading corporation (SOMIEX). Efficient Allocation of Investment Resources 13. Promoting more efficient use of investment resources, both foreign and domestic, and public and private, is among the most important issues to be addressed. As in much of sub-Saharan Africa, investment as a proportion of GDP has been high (over 15 percent of GDP during the 1970s, the bulk of which was public investment), but it has not yielded commensurate growth in output. Public resources have not been used optimally and excessive regulation has encouraged inefficient allocation of private investments. Together, these have contributed to recurrent financial disequilibria, including levels of debt servicing and Government subsidies which the economy is incapable of sustaining. Remedial measures are urgently required. Investment resources need to be channelled toward rehabilitating and maintaining existing facilities before undertaking new investments. More strin- gent economic and financial criteria for project selection need to be devised and applied rigorously. As part of its economic and sector work, the Bank is planning to undertake, with UNDP assistance, a public expenditure review in 1986, which is intended to help the Government in addressing both investment and recurrent cost issues (para 11 above).  -5- E. Issues Affecting Long-term Growth 14. Even with substantial improvements in resource reallocation and financial policy reforms, concerted action will be required to redress the long-term resource constraints facing the economy. Three areas of high priority are: (a) human resource development; (b) agricultural development; and (c) consolidation of economic infrastructure. Human B^source Development 15. Population growth is the overriding issue in the area of human resource development. Unless it can be slowed from its esti- mated rate of 2.8 percent per year, population growth will negate even the most substantial development efforts. Population growth is already weighing heavily on the country's scarce resources. Popula- tion pressure has contributed to the degradation of soils caused by shorter fallow periods, deforestation to supply increased demand for fuelwood, and overgrazing by larger cattle herds. Moreover, the rate of population growth will be a major factor in improving the provision of basic needs, including primary health care, clean water, and primary education. The Government needs to focus on the interrela- tionship of population with its overall objectives for econowic growth and development and should begin to formulate a population strategv. Second, education policy needs to be redefined to provide broader access to better quality primary education, to lower unit costs, and to promote greater participant ffnancing. Literacy and primary school enrollment are presently far too low to provide an adequate foundation for strengthening human capital, Mali's primary resource. Third, primary health services, including rural water supplies, must be improved. Otherwise, low life expectancies and high child mortality will continue to sap the productive capacity of the population, while fueling the demand for more children. Donor assistance will be required to expand public health programs, but these must be based on affordable, replicable project designs, improved cost recovery, and greater involvement by beneficiaries. Agricultural Development 16. Agriculture is the country's dominant sector, accounting for over 40 percent of GDP. Cotton and livestock alone account for 75 percent of exports. With no significant mineral deposits, overall future growth will depend primarily on raising agricultural produc- tion and, relatedly, on improved agricultural practices and technolo- gy. Although there is some scope to expand the area under cultiva- tion, the greater potential lies in increased yields which, in turn, are most likely where rainfall is highest or where irrigation facili- ties exist. Equally important to the sector's future development will be: (a) better delivery of agricultural services. especially exte:Qion and inputs; (b) adequate maintenance of irrigation structures and access roads; and (c) address the twin problems of deforestation and soil erosion degradation which are posing an increasing threat to  -6- many areas of Mali. In addition to consolidating agricultural infra- structure and strengthening essential public institutions, measures are required to increase cost recovery, expand beneficiary participa- tion in operation and maintenance, improve producer 'incentives, and liberalize input and output markets. At the same time, more resources should be channelled into agricultural research to: (i) improve crop varieties, with a particular focus on the needs of rainfed agriculture on which the bulk of the population depends; (ii) develop new export crops; and (iii) further integrate livestock with crop cultivation. Consolidation of Economic Infrastructure 17. Mali needs to devote greater attention to better utilization of existing economic infrastructure. Given a scarcity of investment resources, macro and sectorial priorities need to emphasize efficient operation and improved maintenance of existing facilities before undertaking new investments. Decisions regarding transport sector investments must be taken with particular care, given Mali's vast internal distances and its low population density. Although roads in the -western part of the country are poor, priority must first be given to rehabilitating and maintaining existing roads in the productive central and southern areas of the country. Similarly, in the irriga- tion sector, existing capacity is often idle or deteriorating. The rehabilitation of such facilities should be given priority in the allocation of investment funds. In addition, local resource mobiliza- tion and cost recovery need to be improved to enable adequate mainte- nance. Foreign Assistance and Its Implications for External Debt 18. In recent years, Mali has benefitted from considerable foreign assistance, which has, in fact, financed virtually all devel- opment investments. Following the 1972-73 drought, there was a rapid increase in foreign assistance, mostly grants and highly concessional loans. However, even with a high degree of concessionality, a dramat- ic increase in debt service obligations is now coming due on past borrowings which will have a major impact on public finances. The debt service ratio, 2/ which was some 13 percent in 1984 (9.8 percent excluding IMF repurchases), increased sharply to 20 percent in 1985 (12.6 percent excluding IMF repurchases) and will increase further in 1986. The rise in external debt service obligations has several implications. Most fundamentally, it points to the need to exercise great caution in contracting future public debt. Recourse to non-concessional borrowing will have to be avoided. Public sector investments will have to be strictly controlled to ensure that scarce investment resources are used solely for priority projects which meet 2/ Excluding loans due to the U.S.S.R and China, and after debt relief.  -7- rigorous selection standards based on stringent economic criteria. With external debt charges already at a level which strains the country's servicing capability, Mali will need to make every effort to mobilize additional domestic resources. With this in mind, elec- tricity tariffs, petroleum taxes, and road user fees have recently been raised to help service the sizeable foreign loans of these sectors. Despite these actions, external debt rescheduling may be necessary in 1986. 19. In the future, Mali will continue to require substantial donor assistance to maintain a minimum level of output during the implementation of its program of economic reform adjustment. In particular, donor support is required for: (a) significantly higher levels of grant or IDA-type concessional financing to improve the structure of the external debt in the medium and long term; (b) financing a major portion of local costs of projects, including both investment and operation and maintenance, to reduce budgetary pressures; and tc) increased levels of non-project lending in order to refinance existing debt and reduce current, unmanageable debt service payments. PART II - WORLD BANK GROUP OPERTIONS IN MALI 20. The proposed credit would be the Association's thirty-sixth credit extended to Mali (including two supplementary credits), which would bring total commitments of IDA funds to US$423.6 million equiva- lent (including IDA Special Funds totalling US$11.2 million equiva- lent). Of the thirty-five operations already approved, thirteen have been for agriculture and related activities; nine for transport; three for education; two for telecommunications; two for energy; and one each for small-scale industries, urban development, power and water supply, technical assistance, rural water supply, and health. Agri- culture and transportation represent the largest share of past commit- ments, accounting for 33 percent and 32 percent, respectively. In addition, the International Finance Corporation has made two invest- ments, totalling US$3.2 million, one for a bleach and plastic products factory and the other for a shea nut processing plant. Annex II gives a snmmary statement of these credits as of September 30, 1985. 21. The average level of IDA commitments to Mali has risen significantly in recent years. The annual average for FY84-85 was US$45 million, compared to an annual average for FY82-83 of US$27 million. During FY86, two credits, totalling US$55.1 million, have already been approved for a Fifth Highways Project and a Second Forestry Project; both operations included notable policy reform components. The proposed project would assist Bamako District in significantly improving both its resource mobilization and its finan- cial management in addition to the provision of facilities and equip- ment. As noted during FY86, we also intend to submit for Board approval a Public Enterprise Reform Project which will assist Mali in a major effort to rationalize and rehabilitate this sector.  -8- Project implementation in Mali has been generally satisfactory. Despite difficulties and delays caused by inadequate Goverument counterpart financing, the rate of IDA's disbursements to Mali through 1985 was roughly the same as for other West African countries. More importantly, project performance appears to have improved, pari passU, in line with Government's attempts to solve its financial problems and strengthen its economic management. 22. IDA's lending strategy in Mali has two objectives: (a) to nurture and support structural adjustment and (b) to lay the founda- tion for sound long-term growth. In support of needed policy reforms, the Association has financed a technical assistance project (Economic Management and Training Project, Cr. 1307-NLI), designed in close collaboration with the lIF, to strengthen management of the Malian economy by improving financial and economic policies and public institutions and by providing training to Malian civil servants. This has been followed by a series of sectorial adjustment projects which are addressing important reforms in specific sectors. For example. the Second Mali-Sud Rural Development Project (Cr. 1415-MLI) is supporting a comprehensive reform of the cotton sector, while the Third Education Project (Cr. 1442-MLI/SF10) and the recently approved Fifth Highway Project are designed to improve planning and resource mobilization and allocation in their respective sectors. 23. Building on these reforms, there is, over the next few years, a solid project pipeline for Mali which will continue to address structural issues. Moreover, in recognition of its commitment to a program of macro policy reform. Mali is eligible for assistance under the Special African Facility. Among the operations currently under preparation, three projects, each with important policy reform components, are provisionally progranmed for such assistance. The first of these, the Public Enterprise Reform Project, is designed to introduce an appropriate policy framework for the public enterprise sector and to put it on a sound financial footing. Second, the Office du Niger Rehabilitation Project will consolidate the pricing and marketing reform in the rice subsector initiated under the recently approved Mopti Area Development Project (Cr. 1597-MLI) and will also address the financial restructuring of this important irrigation authority. The third project, a Power Sector operation, would address fundamental institutional issues in the sector. It would reorganize sectoral institutions with a view to improving planning and opera- tional coordination. It would also design and implement a program to restructure the sector's finances which, at present, are in an extremely poor condition. This reflects, inter alia, the artificially low tariff levels which have been imposed on the sector until recently, and which, in turn, contributed to'substantial arrears of external debt. Once policy reforms in these three sectors are under way, IDA will begin discussions aimed at formulatiug a medium-term structural adjustment program to address sacroeconomic issues of an intersectorial nature which cannot be resolved in the context of sectorial operations.  -9- 24. Assuming the successful outcome of these reform programs over the medium-term, Mali's long-term growth prospects will depend on the full realization of its natural and human potential. The Association has accordingly financed a wide range of projects designed to exploit and augment that potential. Most projects in the agricul- ture and rural development sector include research components aimed at developing appropriate farming/cropping systems. The Second Forestry Project is designed to combat the urgent problem of deforestation with a combination of (a) fiscal and pricing measures appropriate for urban areas and (b) pilot schemes for managing rural forest resources. Future infrastructure projects, to be chosen on a very selective basis, will attempt to ensure that the benefits of past investments are fully realized and that Mali's future growth is not constrained by inadequate capacity in its transport, telecommunications or energy sectors. To maximize IDA's impact whenever possible, these projects will reflect a sectorial orientation in order to better focus on the issues of investment strategy and institutional development. 25. Previous operations in the health, water supply, shelter, and education sectors have been designed to develop Mali's human resources by expanding the population's access to basic education and by improving their health and productivity. Future operations in each of these sectors are planned. Finally, the Association will attempt to oroaden its dialogue with Government concerning the relation between Mali's presently high population growth rate, deterioration of its fragile resource base and budgetary constraints which hinder the provision of basic needs. In addition to highlighting family planning efforts in the ongoing health project, this dialogue will be pursued if economic and sector work with a view to developing a future health/population project. PART III - THE URBAN SECTOR A. Urbanization and Demographic Trends 26. Desrite the general poverty of the country (GNP per capita was US$140 in 1984), Mali's cities, in general, and Bamako, in partic- ular, are vital commercial and production centers in which a large share of the economic development process is taking place. More than half of the total GNP is generated within urban areas, and it is estimated that non-farm production grew at an average rate of 4.7 per- cent in real terms during the past decade versus 2.6 percent for the agricultural sector. Confirmation of the vital economic role of Bamako can be found in the fact that, excluding import duties, two-thirds of the national revenues are collected within Bamako District, including 90 percent of total taxes on economic activities. 27. However, given the dramatic rate of growth of the urban population (around 6.6 percent per year), per capita urban  - 10 - productivity, measured by the ratio of non-farm production to non-farm population, is slowly decreasing (minus 1.6 percent during the past decade). The very low level of public investments in urban areas has been a major factor in this decline. This is particularly true for Bamako where the level of public investment fell from US$10.5 to US$4.1 per capita between the 1974-1978 period and the 1980-1984 period. 28. As a result, Mali's cities are suffering from a lack of basic infrastructure and services. In Bamako, in particular, a real crisis situation is indicated by the increasing gap between the supply of, and demand for, municipal services of all types: roads, water, drainage, electricity, land development, transportation, refuse collection, etc. Existing facilities in the older central neighbor- hoods are overburdened and rapidly deteriorating, while nearly all the rapidly expanding, recently settled areas on the south bank of the Niger River lack even basic services and infrastructure. Over the last seven years. unauthorized settlements have absorbed 45 percent of Bamiako's population increase. 29. At present, 42 percent of Mali's urban population is concentrated in Bamako (approximately 700,000 inhabitants). During the 1976-1985 period, Bamako grew at an average rate of 7.5 percent per year, absorbing 44 percent of the increase in urban population. Over the next decade (1985-1995), it is expected that Bamako's popula- tion will increase by some 6.7 percent per year, thus absorbing 50 percent of the country's incremental urban population, the other 50 percent being split among the existing 65 secondary cities and towns and some 34 emerging centers. By 1995, Bamako's population will have more than doubled to some 1.5 million inhabitants, thus demanding further improvements to urban infrastructure and the provision of urban services. B. Urban Organization and Institutions 30. At the national level, there are several ministries respon- sible for urban development. The Ministry of Transport and Public Works and the Ministry of State Enterprises (through the Water and Electricity Company) are responsible for planning , constructing, and maintaining the major infrastructure networks, and cartography and topography. At the local level, the Ministry of Interior, through its eight Governors (Mali is divided into eight regions), is responsible for local administration. Responsibilities of the Governors were substantially increased by a 1978 Administrative Reform which decen- tralized and regionalized the technical ministries. The national ministries retain their planning and programming functions, and the regional departments, under the authority of the Governors, are responsible for implementing projects.  - 11 - 31. For Bamako, in particular, as a result of the 1978 Adminis- trative Reform, the Governor now has both the District staff and the regional departments under his authority. The reform also structured the Bamako region as a district, different from other regions in that it has a dual role: (a) as a regional entity, the District has administrative responsibility for the regional departments and it coordi- nates their operations which are funded by the technical ministries; and (b) as a decentralized entity, the District performs muntcipal functions and provides services that are of a municipal nature and financed by the District budget. 32. The Administrative Reform Law of 1978 specifies the various responsibilities of Bamako District: maintenance of road networks, removal of household refuse, provision of sanitation and drainage services, street lighting, water supply, public transportation, markets, collection of local taxes, land management, etc. C. Constraints to Rational Development in Bamako 33. Housing investment is not keeping pace with the rapid growth of the population of Bamako because of the limited availability of serviced land for residential development,. This is causing an in- creasing backlog of unmet housing demand, increasing population densities in older sections of the city, and haphazard, unplanned settlement of peripheral areas which will be difficult and expensive to service in the future. Densities in the older sections are about four times those in newer areas. Furthermore, existing infrastructure (especially roads and drainage) are falling increasingly into disre- pair. 34. The principal causes of this situation are the lack of institutional capacity to develop land (including planning and land allocation), the lack of a basic road network to support the supply of serviced land, the lack of basic topographical and cadastral mapping, and the lack of funds for capital investment, as well as for operation and maintenance of infrastructure and urban services. Institutional Capacity 35. There is a general lack of technical capacity in Government institutions responsible for urban development, and the required skills are not to be found in the local private sector. The First Urban Development Project (Cr. 943-MLI, June 1979) addressed the institutional issue through the creation of a project implementation unit under the Ministry of the Interior, which has been effective in administering the project. However, the Project Unit's experience has  - 12 - only been partly institutionalized (with the creation of the Regional Department of Land Management) and coordination of the agencies involved in land development has been insufficient. Thus, to ensure a minimum level of infrastructure and services for Bamako, further strengthening of the District's technical capacity for land develop- ment is urgently required. The District is already responsible, under the 1978 Administrative Reform, for coordinating and directing devel- opment in Bamako. It has its own technical department and the region- al departments of the technical ministries under its authority. What is lacking is a strong district level operational capability to coordinate the work of agencies responsible for maintenance of crucial infrastructure, especially road works, and to improve the capacity to prepare subdivision plans and control land allocation. Bamako Dis- trict recognizes the need for a coordination unit to fill this gap and thus under the proposed project, a District Technical Unit would be established. Because of the general lack of technical capacity in Government agencies, the unit would have competence in a fairly broad range of skills relating to the planning and execution of civil works. The scarcity of the needed skills in the public and private sectors in Mali requires, in the short term, recruitment of expatriate technical assistance. For the longer term, a strong program of training of local counterparts, aimed at progressive technical self-sufficiency, is required. Both of these objectives would be supported by the proposed project. 36. Part of the problem of institutional capacity has been the lack of an appropriate land tenure law. The original land tenure legal framework, scattered through many different laws, remained in force, largely unchanged from early colonial days, until February 4, 1983, when a new law was enacted. However, the 1983 law was ill-conceived and its application has been suspended by the Government because of criticism of its overly complex procedures, ponderous management re- quirements, exclusion of gradual land development, hindrance of mortgage financing, and discouragement of housing investment. A revised land tenure law which addresses these inadequacies has been reviewed by the Bank and is expected to be enacted within the coming months. However, equally important to the law itself will be the decrees which define the precise details under which the law will be implemented. The Government agreed to use its best efforts to have the law enacted by December 31, 1986, and also agreed to review with IDA the decrees relating to their implementation. Basic Road Network 37. The institutional weakness and lack of resources discussed above have led to an infrastructure problem that is reaching crisis proportions. Maintenance has been neglected for so long that many roads and drains require reconstruction or substantial rehabilitation. The rapid growth of the city on the south bank of the Niger River has reached the point where a basic primary road network is urgently needed to provide a physical framework for control and direction of land development, and to avoid prohibitively expensive servicing after  - 13 - uncontrolled settlement has taken place. Likewise, an urgent program of priority infrastructure rehabilitation in the center of Bamako must be undertaken. Cartography and Cadastre 38. While some of the elements required for a cadastre now exist, such as a register of land titles, the lack of base maps (which are essential for sound urban planning, specific site planning, development by the public and private sector, and preliminary design of infrastructure extensions) renders the cadastral system inopera- tive. The existing base maps are either badly out-of-date or com- pletely lacking for virtually all of the Bamako area. A complete cadastre is essential both for physical planning and land acquisition through the identification of specific sites, and for cost recovery through the identification of assessable properties. Financing for Urban Development and Maintenance 39. Along with gradually expanding the city's capacity to self-finance new investments, the ability to finance recurrent expen- ditures (maintenance and operations) ef existing and future public assets is equally essential to Bamako District. In order to cope with the additional expenditures required by new investments and to signi- ficantly improve the existing low level of maintenance, it is estimat- ed that the District's revenues should be approximately tripled within a decade. These increases require significant improvement both in cost recovery (especially related to land development operations) and in local taxation. Cost recovery could be Improved by including part of the cost of extensions of infrastructure in plot sale prices. Local taxation could be improved through the following measures: (a) improving the collection of existing taxes; (b) modifying and/or expanding the tax base of the most productive taxes, such as business licenses; and (c) tapping new sources of revenue. 40. Resource mobilization (successfully supported by the first project) must be accelerated if the District is to meet its debt service requirements and take on an expanded land development role. The experience of the first project provides a starting point for a more systematic program of increasing revenues through improved assessment and collection of existing taxes, as well as identifying new sources of revenue, improving accounting and financial management, and updating the tax base. D. Government Policy and Action in the Urban Sector Overview 41. Facing the scarcity of resources for public investment, the Government has taken a number of steps aimed at improving urban  - 14 - management, including: (a) establishing District level departments of land management and tax assessment; (b) revising the unsatisfactory land tenure law enacted on February 4, 1983; (c) increasing local revenues through better management of municipal finances and better collection rates; (d) increasing the capacity of public services to provide legal plots (albeit minimally serviced) to the bulk of the urban population; and (e) undertaking the Bamako ten-year investment programming study (covering the period 1985-1995), the first attempt to more efficiently allocate public investments for Bamako District. Investment Programming Study 42. The goal of the study, undertaken by consultants in 1984-85 (Groupe Huit, France), was to determine the minimum level of public investments for Bamako over the next decade that would preserve the city's vital role as an economic center for Mali. This involved formulating a selective urban investment policy that was compatible not only with macroeconomic constraints and priorities, but also with local institutions' ability to mobilize internal resources for public and private investments. A target ratio of urban investments to national investments of 11 percent was applied to insure that public investment allocation for other priority sectors would not be impeded. Locational priorities among cities were considered by shifting urban investment allocation in a manner corresponding to rates of economic and population growth. Furthermore, the study indicated that if the urban investmeut strategy contributes to overall economic growth, as is expected, it could stimulate additional investments at the national level. 43. The study estimated Bamako's overall investment requirements at about CFAF 72.5 billion or US$180 million (in 1984 prices). Given the limited investment capacity of the central government and the District (including Energie du Mali), it seems likely that some 70 percent, or US$126 million, of this overall requirement would have to be financed with foreign grants or loans. (In recent years. some 87 percent of overall public investments have been financed from abroad.) The remaining 30 percent, US$54 million, would be financed from parastatal agencies, the District, and the central government. These figures do not include private investments in housing construc- tion. Depending on how well the Government's land development policy is implemented, these could amount to as much as US$180 million in additional investments over a ten-year period, the bulk of which would be generated locally. Under this scenario, domestic private invest- ment would finance more than half of Bamako's total investment re- quirements (public investments, plus housing). However, the extent to which local private investment will be forthcoming will depend signif- icantly on the successful implementation of appropriate land develop- ment and tenure policies.  - 15 - E. The Bank's Previous Role 44. The long-term objective of the Bank's assistance to Mali's urban sector is to help the Government to develop appropriate policies and institutional capacity to improve the efficiency of urban-based activities. In keeping with this objective, and due to the economic importance of Bamako and the magnitude of its problems, the Bank has financed, in addition to the first urban project, a series of comple- mentary infrastruLcture projects with an important impact on Bamako in the following sectors: water supply, power, highways, and railways, as well as Bamako components of other projects such as education and agriculture. 3/ 45. The First Urban Project was approved in June 1979. Its main objective has been to assist the Government in providing affordable urban services, particularly shelter, water supply, garbage collec- tion, drainage, schools and health care, to low-income residents in Bamako. To ensure replicability and maintenance of project compo- nents, cost recovery has been a major goal, especially for shelter and municipal services for which cost recovery has traditionally been inadequate in Mali. Implementation has been very satisfactory and the project is scheduled for completion by 1986. Progress to date in- cludes: (a) completion of civil works serving about 50,000 people; (b) a 75 percent increase in Bamako District revenues since the inception of project-financed support measures; (c) reorganization of the District maintenance department; (d) the introduction of the leasing of public water taps to individuals who sell water to the public at agreed prices; and (e) initiating the revision of the land tenure law and supporting the reorganization of land management in the District. In addition, for the first time in WMli, the recovery of infrastructure development costs through plot sales was instituted under the project and has proven very successful; moreover, an embry- onic "land development fund" was created by establishing a special land development account for the proceeds of plot sales. PART IV - THE PROJECT A. Project Objectives and Description Background 46. The proposed project was identified in 1985. The background study for this project, i.e., the Investment Programming Study for 3/ Since the first Bank-financed project in Mali in 1966. about 30 percent of all project investments (by value) have taken place in Mali's 13 main cities.  - 16 - Bamako (para 42) and the feasibility study, were financed with the funds of the first urban project. The proposed second project was appraised in June 1985. Negotiations were held in Washington in February 1986 with a Malian delegation led by H. E. Abdourahmane Maiga, Minister of Interior. The Staff Appraisal Report No. 5855-MLI, dated March 3, 1986, contains a detailed description of the project. A supplementary data sheet is presented in Annex III. Rationale for Bank Group Involvement 47. Bank involvement in this project is based on several consid- erations. First, relative to other donors, the Bank has a comparative advantage in the sector and in contributing to the formulation of sectorial policies and priorities. Based on our experience in the first project, the Bank has been closely involved in the design of the proposed second project and, in particular, in the formulation of the policy reform package which it pursues. Specifically, those compo- nents dealing with resource mobilization (i.e., cost recovery mea- sures, tax reforms, cadastral surveys) and investment planning/pro- gramming, including priority assigned to necessary maintenance activi- ties, have been designed and incorporated into the project as a result of our ongoing sectorial dialogue established under the first project. Moreover, these objectives reflect, on a sectoral basis, the macro issues which are the focus of our overall policy dialogue concerning structural adjustment. Second, given the nature of the project and other donors' lack of experience in the urban sector, it is unlikely that the Government would be able to secure adequate financing else- where. Project Objectives 48. The objectives of the project are: (a) to remove the major, citywide infrastructure constraints to the efficient functioning of Bamako by repairing and extend- ing the road network and introducing traffic management measures in the city center; (b) to facilitate private sector housing and construction activ- ities through a large increase in the supply of serviced land with security of tenure; (c) to improve local resource mobilization through implementa- tion of a multipurpose cadastre together with reform of the land tenure law, as well as a_sures to strengthen municipal finances; and (d) as a complement to the above objectives, to strengthen the capacity of urban institutions, especially concerning the District's land development, municipal management and tax collection functions, through training programs, studies, and tecbhical assistance, both at the district and minis- terial levels.  - 17 - Project Components 49. The project has five major components (two for infrastruc- ture and land development, and three for institution building) which are summarized below: (a) Infrastructure and Land Development (i) MaJor Road Rehabilitation and Construction. This in- cludes civil works and technical assistance to rehabil- itate existing streets and sidewalks, from surfacing and patching to total reconstruction (some with paving stones), cleaning and repairing of drains, as well as traffic management measures in the city center includ- ing intersection improvements, traffic lights, and parking. This component would also include construc- tion of new asphalt and laterite roads, and the estab- lishment of a District Technical Unit, supported by technical assistance; (ii) Land Development. This includes basic roads, drainage, water supply, and street lighting for about 160 ha of sites and services (2,050 plots); 725 ha of minimally serviced land (9,500 plots); 200 ha of upgrading (3,300 plots); and 900 ha of land tenure regularization (15,000 plots). It would also include off-site drain- age, an. water and power supply, as well as technical assistance for urban planning; based on the experience of the first project, simplified lot allocation proce- dures will be applied for these elements; and Ciii) Cadastral Mapping. This includes aerial photography, computer equipment, vehicles, technical assistance, and training for the completion of large-scale topographi- cal and cadastral maps of Bamako, including a plot census, and a small pilot component to test appropriate cadastral methodologies in heavily populated periurban and rural areas. tb) Institution Building (i) Resource Mobilization. This includes equipment, mate- rial, and technical assistance to introduce sound financial management, and to improve local revenue measures inclnxding busines3 licenses, the road and refuse collection tax, and market fees. It would also include technical assistance to assist in the establishment of a District Financial Department, and in the implementation of the new land tenure law; (ii) Assistance to the District Maintenance Department. This includes technical assistance, logistical support, and spare parts for solid waste management; and  -18- (iii) Project Coordination. This includes, through the Project Unit (established in the first project and institutionalized as a permanent unit within the Ministry of Interior), training programs and seminars, technical assistance, and studies (including a feasibil- ity study for a possible third project). B. Project Cost and Financing Plan 50. The estimated total cost of the project is US$34.5 million. The estimated foreign exchange component is US$21.4 million, repre- senting approximately 62 percent of total project cost. Base costs have been estimated as of January 1986. The project would be financed by an IDA credit of US$28 million covering 81 percent of total project costs (93 percent of project costs net of taxes), cofinancing of US$0.75 million and the Government's counterpart contribution of US$5.76 million (17 percent of total project cost--5 percent net of taxes). IDA credit proceeds totalling US$7.5 million would be on-lent to Bamako District for the land development component at 8 percent for 25 years, including a three-year grace period under a subsidiary loan agreement whose terms would be satisfactory to IDA and the signing of which would be a condition of credit effectiveness. The rate of interest reflects the discount rate for the low-income housing sector applied by the West African Regional Central Bank (UMOA) which regulates the financial sector. The on-lent amount represtets the recoverable costs of the land development component which is a commercially-oriented operation. Since the District can recover the costs of this operation directly from the beneficiaries, it is logical that the operation's financing be on-lent. This amount also represents the practical maximum debt that the District can service from its revenues, including those generated as a result of the project. The Government will bear the foreign exchange risk. The balance of project financing, including IDA credit proceeds of US$20.5 million, Government counterpart funds of US$5.76 million, and cofinanc4ng, would be passed on as budgetary allocations to the various project-executing agencies, including Bamako District. C. Project Implementation Implementation Schedule and Responsibilities 51. The Ministry of interior, through the Project Unit, would have overall responsibility for the coordination and financial manage- ment of the project. The definition of the responsibilities for the second project would be based on the experience of the first project, in particular, the allocation of financial and administrative respon- sibilities between the Ministry of Interior, Bamako District, and the Project Unit. However, in the second project, more responsibility, partic,ularly in technical matters, would be given to the District  - 19 - through the establishment, as a condition of credit effectiveness, of a District Technical Unit. During negotiations it was agreed that the Project Director, as head of the Project Unit, and the Director of the Technical Unit would have qualifications and experience acceptable to the Bank. The project would be executed over six years. 52. In addition to overall coordination, the Project Unit would have responsibility for implementing several smaller components. The design, implementation, and supervision of the major components would be the responsibility of the District, either its own units or the regional directorates of the technical ministries under the responsibility of the Governor, with supervision provided by the new District Technical Unit. Consultants would not be engaged for the supervision of civil works because technical assistance and training would be employed to develop this on-the-job expertise within the agencies concerned, particularly the District. Following the good experience with the first project, a local firm would be used for the audit of project accounts. The project-related accounts of the District would, for auditing purposes, be consolidated and audited along with those of the Project Unit. Training 53. The primarv objectives of the overall training program will be to strengthen the institutional capabilities of the various agen- cies and administrative units connected with the project. Because of the diversity of job positions and work disciplines involved in the project components, the upgrading of staff capabilities will be accomplished through a variety of job-specific training programs that will be implemented internally, at local training institutions, and at institutions outside the country. All aspects of the training effort are clearly defined in the terms of reference for the technical assistance and would be monitored during the course of project implementation. Training activities would be coordinated by the Project Unit. The first consultants should be appointed by Fall 1986. Procurement 54. Civil works would be procured through international competi- tive bidding (ICB) except in cases where the size of individual contracts would be too small to be attractive for ICB procedures. These would include: (a) the street and sidewalk rehabilitation with paving stones which would be procured through local competitive bidding (LCB) following IDA guidelines, for works ranging between US$10,000 - 50,000, and by force account for contracts valued at less than US$10,000; and (b) the drain cleaning and part of the rehabil- itation work for the land development component which would be under- taken by force account due to the very small size of individual contracts (all below US$10,000) and the existing capacity of District work forces.  - 20 - 55. Equipment, where possible, would be grouped into packages large enough to attract bids under ICB. However, contracts for furni- ture, materials and equipment, too small to warrant ICB pro- cedure, (i.e., those of less than US$50,000 each) and which include locally available maintenance, would be obtained under LCB. For very small procurement items (less than US$10,000, up to a maximum aggre- gate amount of US$400,000), competitive shopping procedures would be used. 56. Consultant services for design, training, and technical assistance would be procured according to IDA guidelines. Aerial photography and cartography processing would be procured through ICB. However, zince governmental work forces are adequate for undertaking the ground surveys relating to the cadastral component, they will be carried out by force account. 57. For contracts awarded following ICB procurement, goods manufactured locally would be given a preference margin of up to 15 percent or the applicable import duty, whichever is lower, and local contractors would be given a preference of 7.5 percent in the evaluation of tenders for civil works. Procurement arrangements are summarized in the following table: Procurement Methods a/ Total Value of Procure- Froject Category ICB LCB Others ment Civil Works 15,757 3,072 1,267 20,096 (11,884) (2,323) (955) (15,162) Equipment 4,582 915 707 6,204 (3,407) (687) (530) (4,624) Consultant Services 283 - 7,931 8,214 (283) - (7,931) (8,214) Total Procurement Values 20,622 (3,987) 9,905 (34,514) (15,574) (3,010) (9,416) (28,000) a/ IDA share in parentheses, US$'000 58. As in the first project, and under the supervision of the Project Unit, which will have the sole authority to sign contracts,  - 21 - all procurement documentation will be prepared and reviewed by the agencies in charge of the respectiveproject components. Disbursement 59. The proposed IDA credit of US$28.0 million is expected to be totally disbursed by March 30, 1993. The estimated quarterly dis- bursement schedule follows the regional profile for all IDA projects. All disbursements from the IDA Credit would be fully documented. Where reimbursement is based on certified statements of expenditures for civil works and goods and services with a value below US$10,000 equivalent (financed from the Special Account, para 68), documentation would not be submitted to IDA, but retained by the Project Unit for review by IDA and project auditors. Improvement in District Finances 60. In contrast to many other West African cities, Bamako is a net contributor to the national treasury: two-thirds of internal revenue is collected in Bamako while only about half of internal expenditure by central government takes place within the District. As a municipality, Bamako District is responsible for the usual municipal services (urban roads and drainage, solid waste removal, street lighting, markets, public standpipes, and sanitation) which it financ- es from its own internal revenues (primarily market receipts, transfer taxes, document registration, road and garbage taxes, lorry park receipts, etc.), plus central government-collected business license receipts realized within the District. The expenditures of the District's six coumunes, whose responsibilities are limited to main- tainlng public records (births and death registry, etc.) and social welfars (care of the indigent, etc.) are likewise supported by the District. The District also invests in capital projects (primarily construction and repair of public buildings, and purchase of vehicles and equipment) which it finances from its own funds and borrowings. In particular, the District has benefited from the capital expenditure undertaken through the first project. 61. In contrast to central government's economic and financial crisis, Bamako District has made some progress in recent years in mobilizing resources, but there remains significant scope for tapping additional revenue sources. District revenue increased from approxi- mately US$0.9 million in 1979 to about US$2.5 million in 1984. However, when discounted for population growth and inflation, the District revenue situation is less encouraging: while the population of Bamako doubled during the period 1975-1984, real per capita reve- nues (1984 values) declined from CFAF 2,000 (US$4.85) to CFAF 1,400 (US$3.40). Furthermore, the District operated at a deficit averaging 13 percent of recurrent expenditures in 1983 and 1984, and is expected to show a deficit of about 10 percent in 1985. This has hampered the District's ability to sustain what was an already inadequate level of services. Revenues will have to increase substantially over the next ten years just to maintain the present level of services to the  - 22 - rapidly expand'ng population, to maintain existing and planned urban infrastructure and debt service, as weil as to permit the accumulation of the land development fund for the replication of investments made under the first project and this proposed second project (paras 45 and 66). Expenditure control is equally important, for although expendi- tures (especially maintenance expenditures) have increased dramatical- ly (from US$1.3 million in 1979 to US$2.6 million in 1984), they have not produced corresponding increases in services and maintenance activities. 62. With project-financed assistance, total revenues are pro- jected to increase at a nominal average of 14 percent per year to 1994, rising from an estimated US$2.9 million in 1985 to an estimated US$9.7 million in 1994. A significant part of this increase would derive from increased coverage of the present population and from the expected continuation of rapid population growth in Bamako. Primary sources of increased revenue would be business licenses (from reclas- sification of businesses into the proper tax brackets along with expansion of business license rolls), transfer fees and permits (from the registration of unregistered plots), road and garbage taxes (from the establishment of a new tax base), and a portion of net proceeds from the sale of project plots. Recurrent expenditure growth would be limited to an annual average of 11 percent (through expenditure control supported by the project). These revenue increases, with expenditure control, will move the District into a recurrent surplus pcsition by the end of the project implementation (end-1992 onward). This program would permit, by 1994, a gradual. expansion of urban services and servicing of the existing debt, as well as maintenance of project-financed infrastructure, project debt service, and al operat- ing surplus for other investment. 63. The projected increases in revenues and limitations on recurrent expenditure growth will only be possible if a number of changes are made to the District's tax base and financial structure and procedures. While the structure of business license fees appears to be appropriate, as doeE the Government's policy (developed with IMF and USAID assistance) of not increasing the fiscal presence on private businesses, the classification of individual businesses has not been reviewed in over 15 years. The proposed project would support such reclassification, along with expansion of business license rolls, which together should double the business license tax base by 1988, although application of the increased base is expected to be spread over a longer period. The road and garbage tax is currently levied on a weak base (the rental income tax) and could become a growing source of revenue by 1989, if based on property values to be developed under the cartography component of the project. The feasibility of this change will be reviewed during project implementation. The District does not have a reliable accounting system (final accounts have not been prepared for several years), and does not have the capability to adequately prepare budgets and monitor income and expenditure. Since the first project accorded top priority to the question of resource mobilization, it did not deal with the issue of the District's finance  - 23 - in great depth. However, the proposed project addresses both the need for continued resource mobilization, as well as the now urgent need to strengthen the District's financial management and budgetary proce- dures. Thus, a District Finance Department, headed by a qualified Malian and appropriately supported by technical assistance, is needed to properly direct District accounting, monitor revenues, control expenditures, and prepare budgets; this Department will be created under the project. During negotiations, it was agreed that the functions of the Department, as well as the qualifications and experi- ence of its Director, will be acceptable to the Bank, and that the Department will be operational as a condition of credit effectiveness. 64. Finally, the current cash management structure requires changing. In keeping with the francophone financial principles of separating authority for expenditure from that for payment and of consolidating funds, District revenues are paid into the Nationsl Treasury. However, the Treasury is also responsible for all govern- ment revenues and expenditures, and a clear picture of District transactions is not possible. The situation is further complicated by the existence of an internal District account into which a portion of District revenues is deposited before onward transmission to the National Treasury. Furthermore, this account is not adequately controlled and unauthorized expenditures (such as the District's capital investment expenditures in 1983 and 1984) are often made. The result is a situation unsatisfactory both to the District and the Government. In order for the District to be able to manage its re- sources and plan its activities, and for the Government to monitor the District's finances, as a condition of credit effectiveness, a Dis- trict Treasurer will be appointed to be responsible solely for District transactions. It was agreed during negotiations that he will have qualifications, experience, and functions acceptable to the Bank. 65. The District Finance Department and the District Treasurer have already been established. Tn addition, agreement was reached on the following program of actions to improve District finances: (a) completion of statement of affairs of District as of Decem- ber 31, 1985 (by December 31, 1986); (b) annual review by IDA, District, and Ministries of Interior and Finance of District's draft budget proposal (annually, beginning 1986); (c) reorganization of District accounting/budgeting/financil control (by December 31, 1987); (d) reclassification of businesses for licensing purposes (by January 1, 1988); (e) referencing and mapping of properties within the District of Bamako (by December 31, 1988);  - 24 - (f) 10 percent annual increase in revenues from business taxes (over the project period); and (g) 15 percent annual increase in revenues from road cleanmng and garbage taxes (over the project period). Cost Recovery and Affordability - Land Development 66. The costs of land development (excluding off-site water and drainage costs) would be recovered through the cash sale of individual plots. With different levels of servicing and differential pricing, this component is expected to be affordable down to the 13th percen- tile of the income distribution. Households would be expected to purchase their plots in four cash installments over a one-year period. Receipts from the sale of plots from the first project's land develop- ment component have been deposited into a special land development account and this arrangement would continue under the proposed project. In addition, under the proposed project, this account would be transformed into a special District account, with a view, at a later date, to possibly institutionalizing the account as a small public agency for further land development activities. The process of this transformation would be as follows: (a) design and implementation of an overall programning, budget- ing, and accounting system for land development activities through the creation of a "budget annex" to the general District budget, according to existing District regulations; and (b) when resources and experience are sufficient, examining the feasibility of creating a small agency to be responsible for land development activities. Tnis agency would assume the necessary management and accounting responsibilities now being carried out by the District. It would be staffed with current District employees who would be given appropriate training, either with specialized seminars in Bamako or with short-term training in similar agencies in other countries. Poverty Impact 67. The relative poverty level for urban households can be esti- mated at a monthly income of about CFAF 28,000 per household in 1984, corresponding to the 33rd percentile of Bamako's income distribution. For upgrading sites, approximately 45 percent of the expected benefi- ciaries are below this poverty level. For the sites and services and minimally-serviced plots components, 80 percent of the plots will be affordable to families below the poverty level. The project would have additional benefits for low-income households (including families under the 13th percentile) by improving road access to existing low- and high-density areas. as well as improving refuse collection in these areas.  - 25 - Special Accounts 68. A Special Account for IDA credit proceeds vould be estab- lished for the proposed project. The Special Account, which would be CFAF 100 million, which would be replenished on the basis of Government withdrawal requests. Another local account, the revolving fund, would be created as a condition of credit effectiveness and used for Government's counterpart contribution, with an initial deposit of CFAF 100 million. The Special Account and the revolving fund would be operated under terms and conditions acceptable to IDA. Accounting, Auditing, and Reporting 69. Consolidated project accounts would be maintained by the existing Project Unit under the Ministry of Interior, continuing the satisfactory arrangements established under the first project. The Project Unit would administer the Special Account and the revolving fund, monitor the land development account, and process all withdrawal applications. Bamako District and other project executing agencies would maintain separate accounts for the project components under their responsibility and provide the Project Unit with the necessary accounting data for consolidation. Project and Special Accounts, the revolving fund, and statements of expenditure would be audited annually by independent auditors acceptable to the Bank according to terms of reference agreed by the Bank. Project accounts and auditors' reports would be submitted to the Bank within six months of the end of each Government fiscal year. Legal restrictions preclude the District's accounts from being audited by a private firm. Thus, it was agreed that the District would submit its accounts, as approved by the Ministry of Interior for the Bank's review within six months of the end of each fiscal year. The Project Unit would continue the quarterly reporting procedure established under the first project and would prepare a project completion report within six months of the credit closing date. Status of Project Preparation 70. All land necessary for the land development component already belongs to the State and would be transferred to the District no later than December 31, 1986. Final design and detailed engineering and bidding documents for the road rehabilitation (first year's works) and land development components have been prepared by consultants. These studies have been financed under the first urban project. Technical assistance would be in place by FAll 1986. All critical preparation work would be completed before the scheduled mid-1986 project start-up. During negotiations, the Government requested a PPF in the amount of US$0.8 million to: (a) cover technical assistance for review and modifications to the land tenure law, in anticipation of the cadastral component; and (b) complete detailed engineering studies, funding for which has thus far been paid out of the first project; however funds for this purpose under the first project are now nearly exhausted. This PPF is expected to be finalized shortly.  - 26 - D. Project Benefits, Risks Benefits 71. The primary benefits to be derived from the project are: (a) improved District finances through better management of operations and improved collection of revenues; (b) improved efficiency of Bamako's transportation system through better management of traffic flows in the city center, as well as upgrading its road network, and improving key road segments on the south bank of the Niger; (c) lengthened lifetime of infrastructure investments through improved maintenance; (d) improved living conditions for Bamako's residents through provision of 12,000 new plots, rehabilitation of 3,300 ex- isting plots, and land tenure regularization of an addition- al 15,000 plots (involving about 300,000 people); and (e) increased incentives for investment in land development and housing as a result of improved security of tenure. 72. Among these benefits, the increased efficiency of Bamako's transportation system, due to savings in fuel and vehicle maintenance costs, is a critical economic consideration for the whole country. Indeed, 70 percent of total domestic fuel consumption and most trans- portation equipment acquired nationally are consumed in Bamako and its environs. These two items account for about 40 percent of national imports and absorb, therefore, more than 50 percent of total export receipts. Rate of Return 73. Rates of return were calculated only for the components which produce quantifiable benefits, namely, the infrastructure component (road rehabilitation and traffic management in the city center, rehabilitation of main access roads to the center, and primary roads on the South Bank) and the land development component. These two components account for CFAF 9.6 billion (US$24.9 million) or 72 percent of project cost. The overall rate of return of the two components is 36 percent: 31 percent for the infrastructure component and 41 percent for the land development component. Given the lack of data, no adjustment was made to the investment costs to account for use of unskilled labor. The foreign exchange component was shadow priced at 0.93 (average standard conversion factor, weighted 1978-83, currently used for Bank-financed projects in Mali).  - 27 - 74. For the infrastructure component, the approach was to calcu- late benefits from vehicle operating cost savings under varying speed levels and pavement conditions, and from time savings when the speed and/or the traffic flows are improved. Value of time was established at one-third of the minimum guaranteed hourly wage. The cost streams included the cost of civil works, the technical assistance costs of this component, plus an allowance for routine and periodic mainte- nance. Under these conditions, economic rates of return (ERR) range from 19 percent to 51 percent on the nine road sections being complet- ed or rehabilitated and on the traffic management suucomponent. The consolidated ERR (31 percent) is within the range of that for similar projects, even though it was not possible to assess all the benefits (in particular, time savings due to secondary improved street inter- sections). 75. Separate calculations were done for an alternative paving stone solution. The approach was to compare the benefits and cost streams of such an option versus normal paving with a double surface treatment. The rate of return of the incremental investment of the paving stone option (about 55 percent higher than normal paving), taking into consideration savings in foreign exchange as well as vehicle operating cost losses due to the stone surface, is 12 percent. Considering the employment impact, the paving stone option appears to be a worthwhile solution when implemented on road sections with heavy traffic flows and/or low traffic speeds. 76. The rate of return of the land development subcomponent (44 percent) was calculated on the basis of benefits measured by the projected differential in rent between improved and unimproved land at existing market prices. In order to avoid double counting, neither the benefits accruing from improved health and sanitary conditions nor the benefits due to the improved infrastructure network were included. Those portions of tecbnical assistance costs which are directly related to the subcomponent were included in the economic evaluation. Sensitivity Analysis 77. A sensitivity analysis was conducted to verify to what extent the rates of return would be affected by possible increases in project costs and/or decreases in benefits, although these benefits were calculated conservatively. 78. For the infrastructure component, the two main results are the following: (a) if the benefit stream decreases by 10 percent, the consolidated ERR would be reduced from 31 percent to 27 percent; and (b) if the maintenance costs are reduced to their minimal level, leading to an estimated 10 percent increase in vehicle operating costs from the third year onward, the consolidated ERR would be reduced to 21 percent. This last result shows that sustained effort in routine and periodic maintenance will be the key factor in maintaining a good return on investments. For the land development component, the two  - 28 - main results are the following: (a) if the land value decreases by 10 percent, the ERR would be reduced from 44 percent to 35 percent; and (b) if the capital costs increase by 10 percent and the land value decreases by 10 percent, the ERR would be reduced to 28 percent. Risks 79. The risks involved in the project are: (a) that Bamako District might not be able to sustain sufficient political backing to assess and collect the increases in taxes and fees required to gener- ate enough revenue for debt service, maintenance, and investment; (b) that project implementation would suffer due to the difficulty of attracting and keeping qualified Malian staff; and (c) that the Government may not be able to finance its share of the project costs in a timely manner. Concerning increased tax assessment and collec- tion (point (a) above), the rehabilitation of roads and the improve- ment in refuse collection provided under this project should convince taxpayers that the District can deliver a better level of services, which would justify incremental taxes. The shortage of qualified personnel is a risk affecting virtually all undertakings in Mali. The ezxtensive training programs included in the project should counterbal- ance this risk (point (b) above). To ensure that the Government makes funds available to finance the project, we have proposed that, if necessary, counterpart funds could also be provided from the land development account which receives the proceeds o C plot sales. During the project period, funds totalling some US$5 million equivalent are expected to accrue to this account; this amount is in line with the Government's counterpart obligation. PART V - RECONMENDATION 80. I am satisfied that the proposed credit would comply with the Arti^les of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments Washington, D.C. March 3, 1986  - 29- ANNEX I T A L 3L Page 1 of 4 MALI - OC[AL INDICAMUES DATA NINET AL1 GROUPS N(UGTED AVRAGES) / LDST (OS?T J CIT ESTDIATE) lb IgWLk 0 K53%W b LOW L112