Uganda - Public Enterprises Project

Document of The World Bank FOR OFFICIAL USE ONLY Gzid bW2 I Report No. P-4862-UG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 11.7 MILLION TO THE REPUBLIC OF UGANDA FOR A PUBLIC ENTERPRISES PROJECT October 14, 1988 Industry and Energy Operations Division Eastern Africa Department, Africa Region This document has a restricted distribution and ma; 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 Uganda Shillings (USh) USh 1.00 = USS 0.00667 1/ SDR 1.00 = US$ 1.280 21 US$ 1.00 = SDR 0.780 2J GOVERNMENT FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS DIC Divestiture Implementation Committee ICB International Competitive Bidding MOF Ministry of Finance MOIT Ministry of Industry and Technology NYTIL Nyanza Textile Company PEC President's Economic Advisory Council PIE Public Industrial Enterprise PIES Public Industrial Enterprise Secretariat PPF Project Preparation Facility UDC Uganda Development Corporation SARAP Public Sector Administrative Reform and Planning Study SCD Statutory Corporations Division 1/ After the currency reform and exchange rate adjustments of July 1, 1988. 2/ As of August 31, 1988.  FOR OFFICIAL USE ONLY UGANDA PUBLIC SECTOR ENTERPRISES PROJECT CREDIT AND PROJECT SUMhARY Borrower: The Republic of Uganda Beneficiaries: Ministry of Finance, Ministry of Industry and Technology, and major parastatals Implementing Agency: Ministry of Finance Credit Amount: SDR 11.70 million (US$15 million) Terms: Standard IDA terms with 40 years maturity Financing Plan IDA $15.0 Government $ 4.3 Total $19.3 Economic Rate of Return: Not applicable. Staff Appraisal Report: 7280-UG Map: IBRD 18540R This document has a restricted distribution and may be used by reLr..,..- only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF TEE PREI1DELT OF THE INTERNATIONAL DEVELOPtENr ASSOCIATION TO THE EXECUTIVE DIRECTORS FOR A PROPOSED CREDIT TO THE REPUBLIC OF UGANDA FOR A PUBLIC ENTERPRISES PROJECT 1. The following memorandum and recommendation on a proposed development credit to Uganda for SDR 11.7 million (IUS$15 million equivalent) is submitted for approval. The proposed credit would be oni standard IDA terms with 40 years maturity and would help fiuancie a Public Enterprises Project. 2. Background: The present Government, which came to power in May 1986, inherited an economy in disarray and a large number of poorly managed and physically deteriorating commercial and public service enterprises. The new Government had considerable success in restoring peace and stability and, in May 1987, it formally launched a program of economic reform which is being supported by an IMF Special African Facility program and an IDA Economic Recovery Credit. Initial measures were taken to establish a realistic exchange rate, reduce the budget deficit, introduce expenditure controls, reduce the supply of credit to manufacturing parastatals, begin E process of partial disinvestment and limit monetary expansion. However, the sustainability of the reform process depends not only on Government's capacity to maintain a viable policy framework, but on the capacity of the civil service and key parastatals, including the Government-owned banks, marketing boards and key public service agencies, to implement these policies and quickly upgrade their productivity and economic efficiency. Fulfilling these objectives will require restoration of the administrative capacity and managerial and technical skills present in Uganda in an earlier era. 3. The parastatal sector is comprised of 112 enterprises; 56 of these are industrial or agro-industrial firms and represent more than half the value-added in the manufacturing sector. Key parastatals dominate the supply of goods and services in all sectors, including agricultural marketing, electricity, telecommunications, transport (air, rail, road), sewerage and water supply, financial services, beverages and textiles and a large range of other manufactured goods. The Government recognizes that many of these enterprises could be more efficiently operated with private sector management and with full or partial private sector ownership and has thus approved a public sector enterprise portfolio rationalization program. Under the program Government would retain IOOZ ownership in only 34 parastatals, completely divest or liquidate 22, and partially divest a further 34. The precise status of the remaining 24 parastatals is still being clarified, as many are either moribund or in the process of being returned to previous owners. Hence, assistance is required to create the framework for Government participation in commercially orierLted enterprises, and to strengthen the Government's capacity to implement its parastatal divestiture program, rehabilitate retained parastatals, and more effectively administer, monitor and evalua-e the performance of the public enterprise sector. In addition, further Government investment in public  enterprises is to be minimized prior to the recotmendations of the longer- term policy review for tle sector. 4. ProJect Objectives: The broad objective of the Project is to strengthen the capacity of the Government and key productive enterprises to sustain economic recovery by increasing economic efficiency, productivity and output while reducing financial losses in the public enterprise sector. Specific objectives are to: (i) define and implement reforms in the sector policy and legislative framework and strengthen sector administration and enterprise management; (ii) prepare and initiate a& overall program of rehabilitation and rationalization for all public sector enterprises, integrating ongoing programs and; (iii) begin to implement a program of rehabilitation, restructuring, divestiture and liquidation of selected in- dustrial parastatal enterprises. 5. Project Description: Under the Project, financing would be provided for local and international consultant services, training activities, equipment and materials and special studies for the following project components: A. Ministry of Industry and Technology (i) Continue support for the Public Industrial Enterprise Secretariat (PIES) in the Ministry of Industry and Technology (MOIT) to assist with implementation of the Government's rehabilitation, divestiture and liquidation program for industrial parastatals (US$2.9 million). (ii) Strengthen the capacity of the Uganda Development Corporation (UDC) to implement an agreed program of divestiture, liquida- tion and rehabilitation for the 35 UDC companies (US$2.1 million). B. Ministry of Finance (iii) Strengthen the capacity of the Statutory Corporations Division (SCD) to assist it in managing the overall project (procurement, contract negotiations, project accounting, and reports for IDA); introducing financial and performance monitoring indicators and controls; and delivering key studies (US$2.3 million). (iv) Conduct a Sector Administrative Reform and Planning Study (SARAP) to define longer-term policies and institutional arrangements for Government administration of public enterprises; and outline an action program for rehabilitation and performance improvement of all remaining public enterprises. (US$0.5 million). (v) Undertake six detailed diagnostic studies and improvement plans for large economically, financially or strategically significant parastatal enterprises (US$3.0 million). C. Enterprise Rehabilitation and Divestiture (vi) Undertake management audits of about 10 of the most commercially sound and economically viable manufacturing enterprises, resulting in the selection of about five enterprises for comprehensive management, technology or other advisory services (US$3.2 million).  (vii) Provide specialized consulting services to design and help implement a program of divesL'ture and liquidation of public enterprises (US$1.0 million). 6. Rationale for IDA Involvement: IDA's involvtement in the provision of technical assistance for public sector enterprise reform is consistent with IDA's role in supporting structural adjustment for sustainable growth in the Ugandan economy under an ongoing Ecoomic Recovery Credit (ERC I). By concentrating management and technical skills on key public service agencies, manufacturing enterprises, marketing boards and financial intermediaries, the Project would facilitate the anticipated supply response, and would complement the Third Technical Assistance Credit, which seeks in parallel to strengthen essential civil service functions. The Project would also provide resources to enable the Government to implement policies agreed in the framework of the first Economic Recovery Program, and tho^e to be addressed under ERC II (under consideration) regarding further rationalization of the public enterprise sector. 7. Agreements Reached: The Project supports the public sector related policy actions that will be implemented under the IDA Economic k-- :overy Credits. Agreement was reached at negotiations: (i) that until an agreement is reached with the Association on the findings of the SARAP study, which inter alia will examine UDC's future, UDC makes no investment exceeding $250,000 without first consulting the Association; (ii) on criteria for selection of parastatals to receive diagnostic studies and on parastatals to be divested with the assistance of project consultant services; (iii) on the composition, terms of reference and decision-making powers of the Divestiture Implementation Committee; (iv) on approval by IDA of the public industrial enterprises to be subjected to management audits and on those to receive management and technology contracts, and advisory services; and (v) that IDA will approve the performance contracts to be agreed with companies receiving assistance under the Credit; in exchange for agreed performance criteria, such contracts will specify and provide for inter alia short-term access to foreign exchange needs and related local credit, plus reforms in wages, salary, pricing and other policies required to expedite rehabilitation. Dated Covenants agreed are (i) that staff for PIES, SCD, and UDC acceptable to IDA should be appointed and ir, pluce no later than May 31, 1989; and (ii) that the SARAP study would be completed by November 1, 1989, with recommendations agreed between Government and IDA by March 31, 1990; and that all key diagnostic studies would be concluded and agreed by July 1, 1990. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement are shown in Schedule B. A timetable of key project processing events and the status of Bank Group Operations in Uganda are given in Schedule C and D respectively. A map is also attached. The Staff Appraisal Report. No. 7280, dated October 14, 1988, is also attached. 8. Justification and Risks: The Project would contribute to sustained economic recovery by improving efficiency and productivity in the ad- ministration of the public enterprise sector and management of key parastatal enterprises; by increasing local resource mobilization through increasing capacity utilization and debt service capability of industrial  enterprises and pricing, billing and collection for public service enterprises; and by increasing private sector participation in manufacturing enterprises. The major risks are internal differences regarding the extent of divestiture and the ultimate level of Government participation in commercially oriented activities beyond provision of basic public services. However, Government's attempts to engage all major interest groups in decision making regarding public enterprise sector restructuring and divestiture augurs well for the implementation of an eventual consensus position acceptable to IDA. 9. Recommendationt I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Project. Barber B. Conable President Attachments Washington, D.C. October 14, 1988  SCHEDULE A UGANDA PUBLIC SECTOR ENTERPRISES PROJECT Estimated Costs and Financing Plan Project Cost: Local Foreign Total -------(US$ million)- Ministry of Ind. & Tech. (T.A.) Public Ind. Ent. Secretariat 0.7 2.9 3.6 Uganda Development Corporation 0.5 2.1 2.6 Ministry of Finance (T.A.) Statutory Corporations Division 0.3 2.1 2.4 Sector Admin. Reform Study 0.1 0.5 0.6 Diagnostic Studies 0.5 3.0 3.5 Project Management Assistance 0.2 0.2 0.4 Enterprise Rehab'n & Divestiture Management Audits & Contracts 2.3 2.6 5.0 Divestiture Services - 1.0 1.0 Total Project Costs 4.5 14.5 19.1 Duties & Taxes 0.2 0.0 0.2 Total Incl. Duties & Taxes 4.8 14.5 19.3 Financing Plan: Local Foreigr Total -------(US$ million)----____ Government 4.3 0.0 4.3 IDA 0.5 14.5 15.0 Total 4.8 14.5 19.3  -6- SCHEDULE B Page 1 of 2 UGANDA PUBLIC SECTOR ENTERPRISES PROJECT Procurement Method and Disbursements (US$ millions) Consul- ICB LCB NA bl tants Other c/ Total Technical Assistance 11.7 11.7 (11.7) (11.7) Training 0.8 0.8 (0.8) (0.8) Operating Costs 4.1 4.1 Vehicles/Spares/Equipment 2.0 0.5 2.5 (2.0) (0.5) (2.5) SUB-TOTAL 2.0 0.5 4.1 11.7 0.8 19.1 (2.0) (0.5) (11.7) (0.8) (15.0) a/ Amounts in parenthesis are IDA-financed. *i Labor, housing, services and other inputs to be supplied by local implementing agencies. ce Training will be based on specifically assessed needs in relation to study outputs, counterpart staff capabilities and enterprise management requirements. Disbursements Category Amount Technical Assistance 1002 of expenditure Training 1002 foreign, 802 local Vehicleslsparesiequipment 1002 foreign, 802 local Estimated IDA Disbursements IDA Fiscal Year 89 90 91 92 93 94 95 Annual 0.3 1.95 2.40 3.00 2.85 2.40 2.40 Cumulative 0.3 2.25 4.35 7.35 10.20 12.60 15.00  -7 SCHEDULE C LGANDA PUBLIC SECTOR ENTERPRISES PROJECT Timetable of Key Proiect Processing Events (a) Time taken to prepare: 18 months (b) Prepared bys Government with IDA assistance (c) First IDA mission February 1987 (d) Appraisal mission departure Hay 1988 (e) Negotiations September, 1988 (f) Planned date of effectiveness January, 1989  Schedule D THE STATUS OF BANK GROUP OPERATIONS IN UGANDA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 30. 1988) --- US$ Million------- Amount (Less Cancellations) Loan or Undie- Credit No Year Borrower Purpose Bank IDA bursed One (1) loan and fourteen (14) credits fully disburned 8.40 288.43 1248-UG 1982 Uganda Industrial Rehabilitation 85.00 12.21 1328-UG 1988 Uganda Agricultural Rehabilitation 70.00 21.19 1329-UG 1983 Uganda Third Education 32.00 .19 1434-UG 1984 Uganda Second Technical Assist. 16.00 6.32 1446-UG 1984 Uganda Third Hlghway 68009 42.12 isl-Ur 1986 Uganda Water Supply and Sanitation Program 26.00 .866 1639-UG 1986 Uganda Agricultural Development 10.00 8.31 156e-u. 1986 Uganda Second Power 28.80 26.68 1681-UG 1985 Uganda Petroleum Exploration Premotion 5.10 4.74 1808-UG 1987 Uganda Fourth Highway 16.18 18.18 1824-UC 1988 Uganda Forestry Rehabilitation 12.87 12.86 0340-UG 1988 Uganda Non-Sector Specific (Econ. Recov. Cr/SAF) 24.01 11.28 1844-UG 1988 Uganda Non-Sector Specific (Econ. Recov. Cr./SAF) 66.00 48.89 1869-UC 1988 Uganda South West Ag. Rehab. 10.43 10.48 1893-UG 1988 Uganda Sugar Rehab. 26.96 26.96 Tot l 8.40 721.78 262.84 of which has been repaid 6.88 4.45 Total now outstanding 1.62 71128 IDA amount sold: 17.60 of which has been repaid 17.60 TOTAL NOW HELD BY BANK AND IDA 1.52 717.28 TOTAL UNDISBURSED 0.01 262.84  -9- UGANDA Schedule 0 Page 2 to 2 S. STATEMENT OF XFC INVESTMENTS March 30 19088 Amount In USI million Fiscal ObliPor T1oe of Business LOa -n Egt. Total 1966 Mulco T xt1len, Ltd. Texttleo 2.79 .71 S.10 1972 Tourism Promotion. Services Tourism 1.11 - 1.11 1983 Tore and Mityana Tea Food and Co., Ltd. (TAUTECO) Food ProcessIng 1.62 - 1.62 1988 Sugar Corp. of Ugands Food and Food Processing 8.00 - 8 W 1984 Uganda Teo Corp. Ltd. Food and Food Processing 2.01 - 2.81 1984 Development Finance Development Finance - a.38 0.38 Company of Ugand- Total gross commitments 16.34 1.09 11.42 noeh A by IFC _ Total undisburosd (including 3.92 0.27 4.19 participonts portion) ==32 =_.u -- Source: IFC Dioburement, Sectlon  IBRO 1854CR S U D A N / * U , G(bNDj _< k A __S_5 0 40 60/ -E -2-~~~~~~~~~~~~~~~~~~~~~~~~~~~~ / JAPACAdec; 2- k K t 'R.' - KU- - i5 ['U), Co 'AR A S4$EHOI A . "5 |~~~~~*B - JBAAA 9 7 0 25 -0'53006,GMR S '~1 .A Q 2' , 01 5 Z V 40 60AIA (APA Mve)dKNY HQ,Mc o KAPCHORWA' /<s 5/ A TKA N Z A N I A \ rAAAMULI A- K4B;,')1E RWANDA . 3,. 3 * I3- ( AUGUST 7985 A-~~~~~~~~~~~~~~~~~~~~~~~ jRUKUNGiRi I ~~~~~~~~~~~~MIG