Guinea - Country economic memorandum (Vol. 2 of 2) : Sectoral analyses

Report No. 8774GUI Republic ot Guinea Country Economic Memorandum (In Two Volumes) Volume II: Sectoral Analyses November 16, 1990 Country Operations Division Occidental and Central Africa Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQWJIVALENTS (Annual Average, Guinean Francs per US Dollars) 1988 OF 346 1987 OF 428 1988 OF 476 1989 OF 692 1990 OF 861 (est.) FISCAL YEAR Sanuary I - December 31 GLOSSARY OF ACRONYMS APE Parents' Association AuG Guinean cold Company BARAF Bureau d'aid. a la reconversion des agents de la fonction publique SCRO Central Bank of the Republic of Guinea CBG Guinea,; Bauxite Company CDP Prefectural Development Contribution CNPIP National Private Investment Promotion Office CPI Consumer Price Index DAAF Administrative and Financial Affairs Directorate DAFO Lands Directorate DND National Customs Directorate DNI National Tax Directorate DNP National Postal Directorate oNT National Telecommunications Directorate DOD Debt outstanding and disbursed EAP Environmental Action Plan EIA Environmental Impact Assessment IPN National Pedagogical Institute kgoe kilograms of oil equivalent MARA Ministry of Agriculture and Animal Resources MEN Min;stry of National Education MPCI Ulnistry of Planning and International Cooperation MRAFP Ministry of Administrative Reform and the Civil Service URNE Ministry of Natural Resources and the Environment MSPP Ministry of Public Health and Population MTTP Ministry of Transport and Public Works MUH Ministry of Urban Development and Housing M W Manufacturing Unit Value OBK Kindia Bauxite Office ONAH National Hydrocarbons Office ONCFG Guinean National Railroad Office ONPPME National Office for the Promotion of Small- and Medium-scale Enterprises OPPI Industrial Fisheries Protection Office OPR Road Project Office PAC Autonomous Port of Conakry PIP Public Investment Program PPP purchasing power parity PREF Economic and Financial Reform Program SEEG Water Management Company SEEPU Secretariat of State for Pre-university Education SNE National Electricity Company SONEG Natloqal Water Authority TCA Turnover tax TP Production tax TREN Normal Refinancing Rate TREP Preferential Refinancing Rate TSPP Specific tax on petroleum products TUV Unique vehicle tax UPSU Urban Services Management Unit ZEE Exclusive Economic Zone  FOR ORICIAL USE ONLY REPUBUC OF GUINEA COUNTRY ECONOMIC MEMORANDUM TABLE OF CONTENTS VOLUME IIs SECTORAL ANALYSES Page I. EDUCATION AND TRAINING ... ............... ............ 1 A. The current education system ......................l B. Past policies and system performance ................... 2 C. Major constraints ........... 3 D. Education prospects without reform .................... 10 E. The government's sector strategy ........... 10 F. Specific measures under the sector adjustment program.12 G. Costs and impact of the proposed program .............. 13 II. RURJALT DEVELOPMENT ......................................................... 15 A. Introduction ... 15 B. The policy framework . . 15 C. The result of reform.. .... ............................... 19 D. Long-term prospects ................ .................. 21 E. A strategy for rural development . . . 22 III. MINING SECTOR ................................................. 32 A. Background and present situation ...................... 32 B. Recent trends and outlook to the year 2000 ............ 34 C. Environment ... ........................................ 44 D. Requirements for growth ............ ............. . 45 IV. URBAN DEVELOPMENT ............................................... 46 A. Urban service deficiencies ............................ 46 B. Government strategy for the urban sector .............. 48 C. Urban sector and socio-economic Development ........... 55 V. ENERGY .......................................................... 55 A. Background .... 55 B. How the sector has evolved since 1980 ................. 57 C. Perspectives in the energy sector over the longer term (1990-2000) ...................................... 63 VI. TRANSPORT ...................... ..................... ........... 64 A. The transport system ... ... 64 B. Roads ..... ...... .. .... ..................... 67 C. Traffic and Road transport .. 69 D. Railways and rail transport . . . . 71 E. Ports and shipping .. ........................... 71 F. Airports and Civil Aviation ........................... 72 G. Transport and sector administration . . . 74 H. Sector strategy and issues... ......................... 75 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  VII. POST AND TELECONMUNICATIONS ..................................... 77 A. Sector background ................................. . 77 B. Sector restructuring ........ 78 VIII.MANUFACTURING AND SERVICES ...... ............. 80 A. Background ............................................ 80 B. The impact of the government's reform program ......... 80 C. The response of manufacturing investment to the PREF..81 D. Constraints affecting the investment climate .......... 82 E. Access to land and physical infrastructure ............ 82 F. The legal and regulatory framework .................... 83 G. The incentive structure .. 84 H. The institutional framework for investment promotion ..85 I. Future prospects ...................................... 86 IX. THE FINANCIAL SECTOR ........ 88 A. Overview .............................................. 88 B. Savings mobilization .. 90 C. The functioning of credit markets ... 91 X. ENVIRONMENT ................................................... 93 A. Background ............................................ 93 B. Progress with environmental issues .................... 95 C. Scope of the EAP . ..................................... 96 XI. HEALTH, POPULATION AND NUTRITION . . .............................. 97 A. Profile ............................................... 97 B. The current health services system ................... . 99 C. Past policies, Performance and constraints ........... 100 D. The Government's sector policy and operational strategy ............................................. 104 E. The sector reform program . ................. 106  List of Boxes Box 1: Primary School Construction: A low cost, participatory Approach ....... . .... .. ....... . 7 Box 2: Fishing and how to deal with it .. 16 Box 3: Combatting corruption in the Telecommunications Service .... 79 Box 4: The Tourism masterplan ..................................... 87 Box 5: Cost Recovery in the health sector: one year's experience.102 List of Tables Table l: Value of Imports and Exports . 17 Table 2: Comparison of Area Cultivated, Yield and Production by crop ...... . .. .......20 Table 3s Volume of Agricultural Exports . .. 21 Table 4: Volume of Food Imports by Commodity, 1974-1987 . 21 Table S: World Bauxite roduction .. 33 Table 6: Exports of Minerals . 35 Table 7: Importance of Mineral Exports 1986-1989 .. 36 Table 8: Tax Revenues from Mining ... ... ............ 36 Table 9: Net Foreign Exchange Earning of Mining 1986-1989 . 37 Table 10: Projected CBG Revenues 1989-2000 .. 38 Table 11: Consumption of Petroleum products . 58 Table 12: Monetary Survey (1986-1989) . 89 Table 13: Structure of Interest Rates . 92 Table 14: Health Indicators . 105  SECTORAL ANALYSES I. EDUCATION AMD TRAINING 1. One of the major constraints on economic growth in Guinea is the poor skill level of the labor force, which results in low labor productivity both in the private sector and in the public administration. Education and training should therefore be seen as a vital input to economic growth, and not only as a means to alleviate the hardships of disadvantaged groups. Given its central role it is essential that key elements of the country's overall adjustment program be applied to the education and training sector. This would include (i) making more efficient use of recurrent and investment funds; (ii) ensuring that the overall public administration reform is rigorously applied in the sector; and (iii) reflecting the increasingly meritocratic requirements of the labor market in the quality and relevance of the education and training provided. 2. In view of population growth, the Government would need to increase real expenditures in the sector even to maintain the current. very low levels of access. If access is to be increased, it is essential thic an increasing share of Government's recurrent budgetary resources be allocated to education and training, particularly to the primary level and in the area of non-salary expenditures, and that investment expenditure in the sector continues at least at current levels. Because Government's budgetary resources will be limited in the near term, transitional donor financing will be needed to allow the sector and the economy to realize the benefits from improvements in the policy framework. The combined effects of these benefits and improved revenue mobilization as a result of the overall adjustment program, will ensure the long-term fiscal sustainability of the sector. In addition, as new resources are mobilized an effort must be made to remedy inequities in the current system. As part of its comprehensive social policy, the Government must give priority to redistributing the benefits of public spending in favor of the most disadvantaged groups, particularly children in rural areas and girls everyt.here. A. The Current Education System S. With literacy rates of less than 30 percent and a gross primary enrollment rate of 28 percent in 1988-89, Guinea's education system ranks among the bottom ten countries in the world. 11 Despite a renewed interest in education after the change in Government, enrollments at all levels of education fell between 1984 and 1989 as a result of a failure to supply sufficient school places (particularly in urban areas) and declining demand for education due to low educational quality and limited employment prospects. The gross primary enrollment rate compares unfavorably with the regional Sub-Saharan Africa average of 77 percent (Francophone 65 percent and Anglophone 88 percent in 1983). Gross enrollment rates for secondary 11 The gross enrollment rate describes the number of children actually enrolled in a school system as a percentage of the official school- age population.  - 2 - and higher education are currently 0 percent and 1 percent respectively, both well below regional averages. 4. The structure of the education system is sinilar to that of other francophone countries and comprises three leve.ss six years of primary, seven years of secondary, and five years of tertiary education. Vocationalitechnical studies lasting 3 to 4 years, are available at the secondary and tertiary levels. In 1988/89, the system accommodated approximately 382,000 students, with 77 percent in primary school, 20 percent in secondary school, 1.4 percent in technical schools and 1.6 percent in universities. The Ministry of National Education (Minist6re de ltEducation Natlonale, MEN) consists of a Secretariat of State (Secr4tariat d'Etat de 'Enseignement pr&-unlversitalre, SEEPU) responsible for all pre- university education, with only higher education being the direct responsibility of the Minister. SEEPU controls all secondary and primary schools through a provincial structure of five Academic Inspectorates which, in turn, administer 36 prefectoral-level Directorates of Education and 210 sub-prefectoral Pedagogic Delegates. The two Universities and the National Literacy Program (Service National d'Alphabet/sat/on, SNA) are attached to MEN and the National Pedagogical Institute (Institut P4dagogique National, IPN) to SEEPU. Education at all levels is free of direct fees, although at the primary level, local Parents' Associations (Associatlon Parents/E1eves, APE), instituted in 1986, contribute to the building and maintenance of schools. In addition, the prefectures play a limited role in financing secondary level costs. An embryonic private sector provides very limited primary, secondary and vocational/technical training mainly in Conakry. B. Past Policies and System Performance 5. At the advent of the Second Republic in 1984, the education sector, based on antiquated postulates, was economically and culturally isolated. Formal education and professional training was geared towards producing workers for the public service and the content of education at all levels was highly politicized and far removed from the reality of life and from the needs of employers or self-employment. In addition, financial constraints, coupled with poor management, had led to internal inefficiencies in the system, a chronic shortage of operating costs, and consequently, to limited access and low quality education. In 1984, Government launched a program of reform and rehabilitation to improve the operation of education, and to relate it to private sector employment opportunities. The reform included placing educational administration under a single ministry, reorganizing regional educational management, rationalizing higher education, extending secondary education by one year, and providing in-service training for teachers. In an effort to improve educational quality, French was re-introduced as the language of instruction, although at least two generations of school-educated Guineans were less than fluent in it. The results after six years show that the reform program did not address the sector's fundamental constraints. Due to a lack of political commitment, resource allocation was slow to follow declared policies. The sector still suffers from a lack of financial resources, limited budgeting, programming and evaluation capacity, inadequate structural changes, and an inefficient organizational framework.  - 3 - The post-1984 reform program !.., therefore, been only partially implemented. 6. Educational Equity. Guinea's educational system contains a number of significant disparities by geographical area and by sex. In rural areas access to school is limited; a meager 18 percent of the relevant age group are enrolled in primary school, contrasted with 54 percent in urban areas. Thus, it is in villages rather than towns that the potential for improvement in educational coverage is greater. Girls are particularly under-represented in the overall system where they account for only 34 percent of all enrollments. Only about 17 percent of girls of primary school age are in school as compared to 40 percent of boys, and the continuation of girls to higher levels of education is significantly less than for boys. This trend reflects a traditional bias against education for girls, particularly strong in rural areas. This failure to provide equal opportunity to females in the Guinean education system ignores the significant self-employment potential of women, the proven links between mothers' education and the health and educability of their children and the positive connection between the education of females and reduced fertility. 7. Educational quality. The quality of formal education in Guinea has reached a crisis point. Only 44 percent of those who enter primary school complete the cycle; to produce one primary school graduate the system must dispense about 16 years of instruction for the six-year program, and those who graduate repeat at least 2 years on average. 21 Student progression to the next grade is decided by the teacher based on the student's performance in tests of doubtful accuracy. Large numbers of students fail examinations and this failure is addressed by repetition of the previous grade. High repetition rates, averaging 25 percent for any grade of the primary cycle, greatly increase unit cost and reduce the system's efficiency. Differences in repetition and drop-out rates exist between girls and boys with girls tending to drop-out earlier and at key points in the system. In the final year of primary studies girls tend to drop-out while boys repeat a grade. High drop out rates in the formal school system and the limited scope of the national literacy program have contributed to an increasing illiteracy rate in recent years, estimated at 60 percent for males and 83 percent for females. C. Malor Constraints 8. The lack of a strategic framework for education and training at the national level is a major cause of poor sector performance. During the 25 years of the previous regime's mismanagement, the education system was used to provide political patronage and, in some cases, 'intellectualism' was cause for persecution and exile. The curriculum was also highly political and largely irrelevant to the country's needs. Since the change of regime, the content of education at all levels remains old fashioned and outmoded and the teaching-learning process continues to be limited to lecturing, note-taking and recitation of often inappropriate contents. In the absence of any strategy. fragmented initiatives have been pursued (e.g. 2/ Average completion rates in subsaharan Africa in 1983 were 61 percent (francophone) and 74 percent (anglophone).  -4- consolidation of agrotechnological institutes, expansion of vocational training centers), rather than formulating and implementing a comprehensive and coherent national policy linking education to the country's employment needs. 9. The second major cause of poor performance is the lack of a policy implementation apparatus. The key constraints in this respect are analyzed below under the following headingst (a) inefficient management of resources; (b) financial constraints, which have led to under-funding and skewed resource distribution; (c) structural deficiencies, which have led to low and inequitable development of education, especially primary education; and (d) human resources constraints, characterized by poorly trained and motivated staff. (a) Inefficient Management of Resources 10. The education system is part and parcel of the wider institutional problem; the Ministry of Education's heavy, over-centralized apparatus has demonstrated little capacity for assuming its key strategic managerial functions. First, there is limited policylstrategy formulation, a weak planning and evaluation apparatus and little emphasis from the ministerial level on these tasks. There is no managerial system which allows for two-way feedback between performance/outcomes and priority objectives, or the integration of thase objectives into a coherent program. Secondly, sector priorities are only partially translated into financial instruments through program budgeting. Budgetary preparation and expenditure control are weak, and financial responsibility is diffuse. Even when realistic and coherent education budgets are diligently prepared at the MEN, as they have been for the past three fiscal years, adequate funds were not always allocated by the Ministry of Finance. The preparation of program budgets is further complicated by the fact that personnel costs, accounting for around 75 percent of all educational expenditures, are managed by the Ministry of Finance and the Civil Service Ministry. The MEN has only limited control over hiring, firing and disciplinary decisions and personnel assignment is often highly politicized. 11. Thirdly, the internal organizational structure of the education system has been poor and has added to management problems. Responsibilities in the MEN and its agencies are ill-defined or placed at the wrong level, and there are inappropriate linkages which tend to emphasize a "top-down" theoretical approach and ignore the realities of the regions. In pedagogical research, curriculum development and teacher training, there is a multiplicity of different units (most at the central level) which compete for control and ignore the regional establishments. Decentralized structures are in place but not effectively autonomous since their management, logistic capacity and resources are extremely limited. Weak internal coordination, bureaucratic rigidities, and excessive centralization of decisions have also contributed to the lack of managerial capacity and the sector's inability to provide an adequate and timely response to problems. Fourthly, statistics for monitoring the performance of the sector and regular evaluation of educational results are deficient and often available too late to be used by decision makers. Fifthly, in the absence of a coherent sector-wide strategy and an efficient service  designated to deal with external aid inside the sector, donor efforts have been uncoordinated and have tended to respond to fragmented initiatives, often coming from donors themselves. Scope for managerial improvement exists through the adoption of a sector strategy linked to key policy changes, a streamlined organizational structure, a strengthened financial management capacity, and through regular monitoring based on a management information system. (b) Financial Constraints 12. Under-funding and Skewed Resource Distribution: In spite of the priority recently accorded to the educa;ion and training sector, the sector is under-funded. Total public expenditure on education relative to GNP is only 1.7 percent (1989), and the proportion of the Government recurrent budget allocated to education was 12.9 percent in 1989 (as compared to a Sub-Saharan Africa average of over 20 percent). While these figures represent a slight increase over the past several years, spending on education has declined in real terms; between 1987 and 1989 the education sector budget declined in real terms by an average of 12 percent annually and the budget for primary education declined by an average of 10 percent annually during the same period. Analysis of recurrent expenditures shows that spending on essential pedagogical inputs is considerably below minimum acceptable levels and in many cases non-existent. Budget allocations for operating costs, materials and goods and services (e--.luding salaries, subsidies and transfers) increased from 12 percent of the sector's recurrent budget in 1986 to an estimated 19 percent in '989. However, between 1987 and 1989 there was an average amnual decline in such expenditures in real terms of 6 percent. Part of this decline in real expenditures is due to the fact that the implementation of the non-salary budget has declined sharply, since government policy has been to give priority to maintaining salary expenditures in the face of financial constraints. In the absence of additional financing being allocated to the sector, there will continue to be downward pressures on non-salary expenditures for several years creating the potential for a disaster in education. 13. Distribution of recurrent expenditures between levels and types of education has marginally improved in recent years with an increasing proportion going to primary education, but skewed distribution continues in favor of higher education levels. Higher education, with less than 2.5 percent of all students, still absorbs close to 25 percent of educational resources, while resources for primary education, with 75 percent of all students, have gradually risen to 34 percent (estimated 1989). However, this tentative movement remains inadequate. The spending per student for secondary education was about three times that for primary education; that for technical and vocational 10 times; that for teacher training 24 times; and that for higher education 31 times. Giving priority to primary education in Guinea is justified on efficiency and equity grounds. The Government's practice of focusing resources on higher or secondary education when the primary system is not producing qualified candidates for these levels is inherently inefficient and has been a major cause of poor quality education, high drop out and repetition rates and declining enrollments. Focusing resources on primary education is justified on equity grounds because the expansion and improvement of primary education  tends to benefit the country's disadvantaged grovps, particularly girls and students in rural areas. A further justification for giving priority to primary education is that increasing adult literacy and numeracy rates is essential to increasing overall productivity in the labor force. 14. Underfunding and resource misallocation are also present in the investment program. For 1990-92, a figure of 55 billion GF (7.6 percent of the Public Investment Program, PIP) is programmed for the education and training sector. However, as of early 1990, only half of the programmed financing had been mobilized and there is some doubt whether the MEU will achieve this goal. The underfinancing of the education and training PIP stems both from the lack of a clear Government policy and from weak coordination by Government of donor assistance. The allocations by level of education adequatelv reflect the priority given to primary education, but closer examination of projects indicates a skewed distribution in favor of urban areas, particularly Conakry. 15. Domestic resource mobilization: Voluntary cost-sharing in education is taking place, but the scope for further increasing cost- recovery is limited. Funds from APEs together with local taxes are used to support investment in primary schools (occasionally in secondary schools also) and to provide some pedagogical inputs, furniture and classroom repairs/expansion. Scope exists to increase APE contributions and the proportion of local tax receipts allocated to community projects by introducing a nationwide matching fund mechanism for school construction (see Box 4 on Primary School Construction). However, the capacity of parents to expand their monetary contributions is limited and the introduction of fees for primary education would have a deterrent effect on the already abysmally low enrollments. While scholarships have been used to provide political pat-onage at post-primary and higher education institutions, they are not given directly to students, but to the training institution and used mainly for operational expenses, with some student aid/welfare functions (board, lodgings, medical care etc,). Because scholarship funds are used primarily for school operating costs, there is less scope for scholarship reform in Guinea than in other francophone Sub- Saharan African countries. 16. Resource Use and Waste: The limited resources available for education are not only poorly distributed but there is substantial wastage. As mentioned above, large numbers of students repeat their previous grade resulting not only in waste but also in a proportional decrease in the number of places available for new students entering school. Thus, while the unit costs of instruction per student at the primary level remain a low US$ 38 per annum (with a meager US$ 0.20 for pedagogical inputs and the remainder for personnel costs), the poor internal efficiency shows up in wastage and high unit costs per graduate. The investment program shows similar deficiencies with high construction costs which vary widely between projects (see Box 1). The high costs of construction are exacerbated by a lack of maintenance of existing assets, which leads to their eventual abandonment and replacement with new facilities.  -7- PRIMARY SCHOOL CONSTRUCTION: A LOW-COST, PARTICIPATORY APPROACH Faced with a constrained Investment budget and traditionally high costs for primary sehool construction In rural areas, the Ministry of National Education (MEN) bgan in 1988 to experiment with new approaches to rural classroom construction. The results of sxperimentation have shown that, for tho price of building one primary school classroom using competitive bidding, It Is possible to build two classreoms in rural aras by Involving local collectives and community groups In the construction process and by using local construction materials and alternative construction methods. If hhe Iovernment Is able to repilcateo construction costs which are currently approaching US3100 per square metor on an experimental basis (as opposed to over US8200 per M2 In the past) rane current 1990-92 Investment budget would allow 460 primary schools to be built Instead of 300. Th, experimental program is based on two principles: decentralizing public Investment authority and making local communities responsible for the construction process and subsequent maintenance. Once a community's need has been determined on the basis of an school mapping exercise, a school will be built, or In some cases renovated, only on the bastl of demonstrated local demand ard a guarantee that local or village- level authorities will take responsibility for supervising the construction and mintaining the school once It is built. Local demand is demonstrated by a community's wiltngness to provide support In kind (labor, materials, local building expertise) and to pr=ftnance successive phases of school construction. Following the completion of each construction phase, the eommunity Is reimbursed through a matching fund mechanism mnaged by the MEN's Construction and Procuremnt Directorate (DCM). j/ As a condition for the commitment of matching funds, at least a portion of local resource mobilization will Include use of local taxes. The DCM is responsible for agreeing with local authorities, normally District Councils or Parents$ Associations (APEs), on the community's responsibilities and on the form of the community's contribution. Community authoritie would then be responsible for identifying local construction enterprises or artisns who are capable of building the schools in line with minimum construction standards. Once a signed agreement has been reached between the MEN and the local authorities, matching funds are provided upon completion of each construction phase. While the program has succeeded on an experimental basis In reducing costs, generating Income for local enterprises, decentralizing Investment decisions and creating pubie responsibility for Infrastructure, the expansion of such a participatory approach will mean a rethinking of the r8l1 of the central ministry in the infrastructure Investment process. The first responsibility will be to establish minimum norms and standards for classroom construction and equipment In rural areas. These basic parameters, which are currently being compiled, will assist communities in estimating the costs of construction, facilitate investment programming at the central level and ensure the efflclent use of government and donor financing. Secondly, the central level will need to establish a procedural manual for participatory primary school construction and maintonance. Such a manual, a droft of which is currently being finalized, will set out step-by-step procedures Including directions for preparing the Initial community request, for the processing of the contractual documents between central level and community authorities and for the management of central level construction funds. The manual will also include a synthesis of experimentation and ides for community resource mobilization, alto-native construction techniques and maintenance tips. Thirdly, the DCM's responsiility for managing and guiding community participation will be decentralized to the regional level to ensure regular and timely feedback between the various participants. Regional authorities will be empowered to hire short-term technicians or work through NGOs to manage the process at the community level. Fourthly, the DCM and Its local affiliates will be responsible for publicizing the program In rural areas and encouraging community activism. A series of workshops will ned to be organized In collaboration with district level authorities to explain the new system to local authorities, to provide technical assistance where appropriate during construction and to help local authorities with school maintenance programs. The Secretariat of State for Decentralization Secretariat dEtat a la Decentrallsatlon) Is also active in participatory primary school construction and at times assumes the DCM's rSle In the process. The Government Is aware of this o.iarlap of responsibilities and has given both entities the responsibility of ensuring cooperation and consistency of approach.  - 8- (c) Structural deficiencies 17. Multi-grade teaching. The organizational model used for elementary schooling in Guinea has been a major cause of poor general coverage and inequitable development. Everywhere schools are conceived and operated according to a generic urban schooling model based on six grades (homogeneous pedagogical groups). In some rural areas, where there are few children or where school facilities are limited, schools operate with a single grade. Thus, a single group of children are enrolled at the beginning of a given school year and brought to the end of the primary cycle (six years) without any addition of new students. While there is overcrowding in the initial years, the teacher is under-utilized in the cycle's latter years because of student drop-out. This scenario decreases overall enrollments and is clearly inequitable. The application of the urban school model in rural areas (with its fixed ratio of one pedagogical group per teacher and disregard of the group's actual size) is inefficient and places an absolute constraint on the potential for increasing enrollments through an increase in the student/teacher ratio. To increase educational coverage will require a multi-grade school model in which two of more groups are taught simultaneously in the same classroom. Such a mUlti-grade school model implies changes in teacher training and educational administration. 18. In the past, the stagnation in enrollments was assumed to be due to a decline in demand for schooling, but recent evidence shows enrollment stagnation in urban and periurban areas to be partially due to the limited number of places available for new students. In the capital alone, where the annual population growth rate is 5 percent p.a., 20,000 children seeking school places could not be registered for the 1986-81 school year. There is therefore scope for the use of double-shift teaching (double vacation) in urban areas where demand is high. 3/ While a supply problem exists in urban areas, decreased demand for education has led to decreased enrollments in rural areas. Demand for education is affected by perceptions of limited employment possibilities and by low family income, especially in the poorest rural areas. Poor rural families often prefer to have children help with agrarian work during the planting and harvesting seasons, but the rigidity of the school calendar does little to acctm.odate the harvest seasons in the rural economy, with the result that absenteeism durIng these periods reduces the effective time for learning in school. 19. Finally, the inequitable distribution of educational services is itself a result of the excessive response from Government to demand for educational services (especially post-primary education) emanating from the more influential members of society and those who constitute potential pressure groupb (university students and urban civil servants). This has perpetuated the skewed distribution pattern noted earlier (see para. 13). A more equitable distribution of education could be achieved through the adoption of a school model with multi-grade classes suited to rural areas, through the use of techniques to plan the most efficient location for 3/ Double-shift teaching is the use of school facilities by two or more shifts of pupils during the same day.  - 9 - future schools and through a primary classroom construction program based on low-cost community construction and rehabilitation. (d) Human resource constraints 20. There is no overall shortage of teachers and staff working in the education and training sector; the constraint is one of staff quality and distribution. Problems of staff quality are largely due to: (a) poor incentives and low salaries; (b) the use of employment in education as political patronage, thus leading to inefficient recruitment practices; (c) the country's isolation from progress in educational techniques; and (d) the absence of routine and quality staff training. Civil service pay scales are low and many staff are under-qualified for the posts they hold. This, coupled with indiscriminate and overly politicized recruitment, has led to a deficient skill-mix and low qualification profile of those working in the sector. The majority of the sector's administrators were trained as teachers and have had no training as managers. The proportion of teachers who hold pedagogical diplomas at levels required by the State remains unsatisfactory (less than 50 percent of primary teachers had the required diploma in 1987; 62 percent of secondary school teachers were trained only for primary school teaching, and merely 16 percent of university professors hold doctorates). Moreover, the award of the requisite diploma does little to guarantee the real quality of the personnel as advances in science and technology, as well as the revised socio-political orientation of the country, render the qualifications of most teachers outmoded. Financial constraints have severely curtailed in-service training of educational personnel at all levels, further limiting staff quality and motivation. 21. Teaching staff are considered effectifs speclaux under the Public Administration Reform (PAR) and their numbers will not be reduced. However, it is understood that teaching staff will be evaluated under the PAR, as educational administrators already have been, and results will be used to determine retraining and redeployment needs, as well as the reinstatement of merit pay (primes de technicit6). Even after the PAR, there will be a need for selective recruitment, additional performance incentives, and in- service training of staff. 22. Staff distribution varies both by level and by geographical area. At the primary level in 1986/87, the average number of pupils per teacher was 39 (P/T ratio), which is near regional recommended norms. Bowever, in the capital, where overcrowding is common, there were 67 students for each teacher although in other towns there were 41 students per teacher. In rural areas the P/T ratio was only 31, reflecting an inefficient utilization of teaching staff. At the secondary level the rural/urban imbalance is less prevalent because secondary schools are located in major urban areas. Nevertheless, the national average secondary PIT ratio in 1986187 was low with 19 students per teacher. These relatively generous staffing ratios and skewed distribution are reflected in other levels and types of education. Personnel management systems are rudimentary and rely on patronage and out-of-date procedures. As a result, there is no monitoring of staff utilization, nor of staff distribution by school level or geographical zone. This situation has led to an excessive proportion of non-teaching personnel in the sector, especially at secondary  - 10 - and higher education levels, and a less-than-optimal deployment of staff to sch.ools. 23. In addition to poor training and a skewed distribution, staff effectiveness is severely hampered by the lack of resources, especially at the inspectorate and classroom levels. Transport for inspectors to visit schools for regular inspection is almost non-existent and support for teachers from the pedagogical advisory services and the school inspectorate is rare. Pedagogical equipment and even basic textbooks are absent from classrooms, reducing even further the effectiveness of teachers. D. Education Prospects without reform 24. The prospects for the sector without any reform are extremely bleak. While population growth will put increasing pressure on Government to expand the education system in order to maintaiui the same proportion of the school-age population in schools, overall public recurrent expenditures are projected to decline in real terms by 6 percent over the period 1989- 1995. At the same time, in the framework of the public administration reform, civil servants (including teachers) who have satisfied testing and performance criteria will receive a much needed salary increase. A consequence will be complementary reductions in goods, services, subsidies and transfers. Given the importance of salaries in the sector's recurrent expenditures (80 percent), if the under-funding of the sector continues 41 and no efficiency gains are made, there will be a negative effect on both expenditures and enrollments. The effect on expenditures will be a drastic decline in spending on goods and services and insufficient funds for salaries. Expenditures on materials per pupil at both primary and secondary levels cannot be compressed further (US$ 0.20 and US$ 0.60 respectively); those at the university level would fall from US$ 480 to less than USS 13 per university student. Operating expenditures for regional administrative staff would fall below US $1 per staff/year. These figures are clearly disastrous. 25. In this scenario, as public recurrent resources become more constrained over the next five years, insufficient funds will be available for salaries resulting in staffing shortages. The effect on enrollments would imply stopping primary admissions for a two-year period and after that, accepting less than 20 percent of those aged 7 into school. Secondary enrollments will decline for five years, while enrollments at other levels would first decline and then be frozen. Without adjustment, by the year 2000 the primary gross enrollment rate will have fallen to less than 17 percent. This scenario is clearly untenable. E. The Govternment's Sector Stratecry 26. Recognizing the gravity of the situation, the Ministry of Education undertook a comprehensive diagnosis of the education and training system and prepared a program to address the major issues. The Government's proposed reform program for the education sector is an 4/ That is if the sector continues to receive the same proportion of public recurrent resources as at present.  - 11 - intrinsic part of its macroeconomic adjustment program. Its goal is to increase real expenditures on education with!n the constraints imposed by overall fiscal austerity. It addresses the main constraints identified in this section and gives the highest priority to improving basic education services, especially in rural areas. The Government's sector reform program was formalized in a Statement of Sector Policy, which was approved by the Council of Ministers in late 1989. 27. In addition to defining its priority programs, the Government has prepared a detailed strategy for carrying out the sector reform program. The documentation clearly establishes measurable indicators and specific annual targets for achieving the already defined objectives, together with criteria for integrating priority programs at the national, regional and sub-regional levels. Line functions are defined at all levels and the key programs are summarized below. The priority programs aim to: a. reduce illiteracy by raising the primary admissions ratio from 30 percent to 35 percent by 1992, and to 50 percent by the year 2000. through expansion and internal efficiency gains; b. improve the quality and relevance of education, by: (i) increasing the availability and improving the diffusion of pedagogical materials; (ii) pursuing and strengthening the reform of curricula; (iii) upgrading and increasing the number of schools, especially those in rural areas; (iv) professionalizing teaching and improving the quality of teachers with a comprehensive national program of in- service teacher training and the revision of the pre-service training program; and (v) strengthening the linkage to the labor market in recognition of the need for trained and skilled technical staff for the private sector; c. promote equity and social justice with special programs aimed at disadvantaged groups such as girls, children at school-starting age and the illiterate, all of these particularly in rural areas. d. strengthen the sector's capacity for policy analysis, strategy formulation and public administration by setting up appropriate institutional and technical mechanisms. 28. Future Investmenl- Strategy. The Government's public investment program will change from its previous laisser-faire approach, dominated by donor actions, to a coherent and balanced program which follows the stated sector policy priorities. Priority will be given to key cost-effective pedagogical inputs and primary school construction with community participation in rural areas. Expansion of higher education will be delayed and no major investments will be made in the education sector for scientific research and its associated institutes. However, investments in qualitative improvements in higher education will be sought and investments for scientific research may be included in the investment programs of other sectors, where they can be justified on economic grounds. At the central level, priority will be given to training, technical assistance and essential operating funds to promote efficiency gains, to implement revised norms and standards, and to build sector management capacity. Institutional development of the personnel management and budgetary and  - 12 - expenditure control processes must be undertaken. Support is also needed for a nationwide program of in-service primary teacher training and also for the effective operation of the decentralized educational administrative structure. F. Specific Measures under the Sector Adiustment Program 29. To achieve the main objectives of the sector zeform program, the Government has prepared the following key policy measures which have been incorporated into its Statement of Sector Policy: Measures to improve national policy and strategy formulation: 1. Creation of a mechanism to monitor the implementation of key policy changes in the sector (Comlt6 de Sulvi du Programme). Measures to improve general sector management: 2. Creation of a streamlined senior sector management committee. 3. Internal reorganization of the MEN and SEEPU. Measures to improve financial resource use and resource generation: 4. Allocation of an increased proportion of Government finance for the operation of the education and training system. 5. Regular monitoring of both budget allocations and actual expenditures in the education and training sector. 6. Adoption of spending norms for critical non-salary inputs at all levels of education. 7. Adoption of new construction costs norms and building techniques. 8. Creation of a matching fund mechanism to increase locally generated resources for educational investment. 9. Promotion of private education at all levels. Measures to address underdevelopment and to increase relevance of the educational system: 10. Reintroduction of multi-grade teaching in rural areas. 11. Adoption of limits on grade repetition. 12. Completion of higher education's rationalization. 13. Rationalization of the current technical education and vocational training system. Measures to improve personnel performances 14. Introduction of a computerized personnel management system. 15. Application of new staffing norms to achieve improved staff utilization. 16. Creation of a consultative body charged with coordinating teacher training activities. 17. Introduction of in-service training programs.  - 13 - G. Costs and Impact of the Proposed Prooram 30. Program Costs and Financinas Detailed cost projections, broken down by sub-sector and by expenditure category, have been made for the first three and one half years of the program. The total estimated capital and recurrent costs during 1990-mid 1993 for public education will be US$208 million. Even with the substantial increase in budgetary allocations to the sector that have been programmed from Government's own resources, and taking into account both non-adjustment donor commitments and increased participation of local communities and APEs through cost- recovery and cost-sharing measures, the financing gap associated with the implementation of the sector adjustment program is US$ 44 million. This is due to the large increase in non-salary recurrent and capital expenditures necessary for rehabilitating the system and for implementing the sector adjustment program. This gap will be financed by external assistance. By 1993-1994 the macroeconomic adjustment program should have begun to show sufficient positive fiscal effects for the Government to be able to maintain the increased recurrent expenditures on education and training from its own resources, reducing the need for external financial support. 31. Cost Savinas. Measured in terms of net incremental expenditures that would have been required in the absence of adiustment to achieve numerically equivalent educational outputs, the sector reform program would generate cost savings within the education sector conservatively estimated at about US $4 million per year (10 percent of the educatien budget). This estimate understates the cost-saving effects of the program as it excludess Ca) savings on the investment budget during the same period (estimated at US$ 13.5 million); (b) savings to the sector that are difficult to quantify, accruing from factors such as reduced repetition and drop-out from schooling and more efficient resource management; (c) cost-saving effects which will accrue to the system after the initial adjustment period of 1990-mid 1993; and (d) global savings (including externalities such as increased labor productivity that accrue outside the sector) wvl.ch would result from the effects of the sector reform on the overall civil service, and on the adoption of the new low-cost construction technology on projects outside the education sector. 32. Budgetary Impact. Between 1989-1993, as part of its sector reform program, Government will make an annual average increase in the education recurrent budget in real terms of 7 percent. 5/ The proportion of Government's total recurrent budget allocated to education will be increased by 50 percent, rising from 12 percent in 1989 to 16 percent in 1990, and progressively increasing to 18 percent by 1993. Thereafter, the 5I Budgetary support provided by donors in support of the education reform program will allow Government to increase its budgetary allocation to education by 28 percent in real terms in 1990. An annual average increase of 1 percent is expected during the 1991-93 period. Similarly, Government's budgetary allocation for primary education will increase by 34 percent in 1990 and its allocation for pedagogical materials by 86 percent. Budget allocations frr both primary education and pedagogical are expected to increase by 3 percent annually in real terms during the 1991-93 period.  - 14 - 1990, and progressively increasing to 18 percent by 1993. Thereafter, the allocation to education will stabilize at this level. The adjustment program will contribute to budget rationalization with a reorientation in expenditures to the primary level and to non-salary items. However, this will be done in . flexible fashion with minimum expenditure norms being established for key inputs. In this way the education sector would not entirely escape expenditure cuts in a period of unforeseen fiscal austerity but essential expenditures would nevertheless be protected. Between 1989- 1993, Government will increase the overall primary education budget by an annual average of 10 percent. Expenditures on pedagogical inputs will increase at an average annual rate of 20 percent. 33. Economic Impact. To the above purely financial and budgetary impacts must be added the program's effects on the economy. While such benefits are extremely difficult to quantify and are often felt only long after an education program has been completed, they are substantial. They include: (a) positive effects on labor productivity through measures to improve quality and relevance of education programs, to support manager training, and to remove labor market rigidities; and (b) more efficient economic management at the central and local levels through better trained civil servants and strengthened budgetary procedures. In addition, one of the main thrusts of the program is to provide support for the development of primary education where studies in developing countries have consistently shown that primary education has a high rate of return (estimated at 25 percent in some francophone Sub-Saharan Africa countries). Finally, the measures included in the program relating to financial management in the MEN will reinforce the effects of the measures being undertaken in the central ministries. Indeed, the MEN measures could be considered as a pilot program and may well prove to be appropriate, mutatis mutandis, for other technical ministries. 34. Educational and Social impact of the program. The program's impact on enrollments would not be immediate, but would set the stage for future rapid expansion after the adjustment period. Implementing the reform package will bring about: (i) increased total enrollments (from 380,000 in 1988 to a projected 670,000 in 2000); (ii) an improvement in the gross primary enrollment ratio (from 28 percent to 43 percent); (iii) improved internal efficiency (72 percent of primary starters will complete the cycle, and the number of years of instruction per primary completer will fall from 16.1 to 8.2 years for the six year program); and (iv) a more (efficient use of teachers (the pupil/teacher ratio increases to from 39:1 to 42:1). In addition, a number of positive social effects are noteworthy. First, the program will provide protection for education during a period of financial austerity. Secondly, by supporting a program of rural primary school construction, the program would assist in distributing essential services in a more equitable fashion. Thirdly, the program would contribute directly to the redistribution of public spending in support of particularly vulnerable groups.  - 15 - A. Introduction 35. With its abundance of water resources, its rich ecological diversity, and its favorable climate, Guinea has thie potential to produce a large variety of agricultural products for both domestic and international markets. At present, however, the share of the rural sector in GDP is only about 30 percent despite the fact that nearly 80 percent of the population lives in rural areas, and most of these people engage at least part time in agriculture. 61 36. Four distinct agro-ecological zones are found in Guinea. Lower Guinea along the coast annually receives between 2,500 and 4,500 mm of rain, and produces rice, cereals, groundnuts and fruit. Middle Guinea comprises the Fouta Djallon plateau where soils are less fertile, rainfall is less ab--ndant, and temperatures are lower than along the coast. Here fruit, vegetables and fonio production are particularly important and about half of the country's livestock is found. Upper Guinea, where rainfall averages only 1,200 to 2,000 mm/year, is a major cereals producing region, especially along the Niger River and its tributaries. Cotton is also potentially important. The Forest Region in the south consists of tropical rain forests and hilly terrain. Rainfall is relatively constant throughout the year, permitting two harvests. This region offers the richest agricultural conditions in Guinea, especially for perennial crops. 37. Most of the cattle in Guinea are of the trypano-tolerant N'Dama breed, much sought after by other countries. This herd, estimated to comprise as many as two million head, is the largest of its kind in Africa. Suinea's continental shelf also supports one of the richest potential fisheries in West Africa and inland fishery potential from rivers which run- throughout the country is also significant. 38. Despite this richness and diversity, agricultural resources have been poorly managed. Agricultural research and extension have been almost nonexistent, transportation and other rural infrastructure are very poor, rural financial institutions are undeveloped, and processing and storage facilities are extremely limited. Land constraints and soil fertility are also increasingly problematic. Due to ineffective Goverrnment management and overexploitation by domestic and foreign fleets, Guinea's offshore fish resources are being rapidly depleted (see Box 2). B. The Policy Framework 39. The First Rpt-'-lic. The rural sector did not fare well under the First Republic. Although the quality of production data is too poor to indicate the precise amounts in-volved, it is clear that, from 1960 to 1985, per capita agricultural output declined substantially. The performance of the cash crop sector during this period was particularly poor: banana exports decreased from 100,000 metric tons (mt) in 1955 to zero in 1984, 6/ The rural sector is taken to include agriculture, livestock, fisheries and forestry.  - 16 - BOX 2 FISHINC AND HOW TO DEAL WITH IT Guinea's Exclusive Economic Zone (ZEE) of 200 miles Is bellevod to have considerable fisheries potential. However, while reliable scientific date ore lacking, there is evidence that mismanagement of the resource base has led to serious overfishing, with a decline in the maximum sustainable yield (MSY) In the ZEE from about 200,000 metric tons (mt) per annum in 1980 to less than 30,000 mt In the 19803. Y,t, In spite of the high potential in fisheries resources, consumption of fish In Guinea Is very low -- an average of about 8 kilograms per capita per annum, as comparod with 16 to 28 kg/capita per annum In neighboring countries. Exports were also well below their potential levels. Management of the sector is the responsibility of the Secretariat of State for Fisheries (Secretariat detat a la peche, SEP); research Is delegated to the Fisheries Research Laboratory while, until recently, Industrial fish marketing was carried out by a parastatal under the SEP the Industrial Fisherles Protection Agency (I'Office pour la Protection des Peches Industrlelles, OPPI). A Fisheries Code, enacted In 1986, provides the legal framework of the sector, which the Navy and the Merchant Marlne have the responsibility of enforcing. Rational development of the sector is hampered principally by the (I) dearth of reliable Information on fisherles resources and as a result on the MSY; (;;) absence of a coherent long-term sector strategy; (iiI) inadequacy of surveillance and control of fishing fleets; and (Tv) ineffectiveness of public institutions. The lack of a coherent sector strategy Is apparent In the Industrial fishing llcensing system, which bears little relation to the MSY. The licensing system eeks to meet two conflicting objectives; to maximize hard currency earnings, while also making fish available to the population of Conakry at low prices. The behavior of Covernment In the fisheries sector has stood in sharp contrast to the declared objective of withdrawal from productive and commorcial activity. For example, until early 1990, fish were paid In lieu of cash for a portion of license fees; this fish was marketed through OPPI, at below market prices which acted to deter investment by the private fiching fleet. In addition, the Government recently purchased 30 trawlers, worth more than USS 11 million, without adequate economic or financial analyses of their viability and without any provision for exploiting such a fleet. The weak sector management capacity, compounded by the lack of land-based fisheries infrastructure, raises serious doubts regarding the profitability of operating these trawlers. Weak management has also resulted In minimal surveillance of the foreign Industrial fleet which illegally operates In the inland fishing zone to the detriment of the artisanal fishermen. The Government has recognized that a sustainable sector development strategy needs to be based on the principle of the private sector exploiting the resource, subject to Government regulation to ensure that overfishing does not take place. Such a strategy should Include, Inter alia. the following elements: (i) The establishment and constant updating of a reliable fisheries resource data base; (t;) a licensing system in which levels of catch permitted are In line with the MSY. All current fishing agreements and licenses would have to be reviewed and revised In accordance with the new structure of licenses. Payment-in- kind for license fe,.s should be precluded; (Ili) An effective surveillance and control system, of the foreign and local fishing fleets, should be put in place to ensure that limits on catch (quantities and species) are respectri; (iv) The public fishing fleet should be sold or leased to the private sector. Furthermore, private fleets should be permitted to choose their home ports, and not be required to unload administratively- determined levels of their catch In Conakry; (v) Similarly, there should not be wholesale or retail price-setting for fish by the public sector; and (vi) OPPI's marketing functions should be abolished and its overall rWle In the sector reviewed.  - 17 - coffee exports declined by 80 percent from their level in 1960, and pineapple exports fell to 10 percent of their 1971 peak. Meanwhile, as indicated in Table 1, the volume of agricultural imports, financed by mining revenues, grew rapidly. Between 1974 and 1984 cereal imports tripled from 63,000 mt to 188,000 mt per annum. 40. In part, the 'able 1 poor performance of VALUE Of IMPORTS AND EXPORTS the agricultural --AL---------------O--T ----A --D--EXP---RTS- sector during this Averages in current USS million period can be 1958-1958 1976-1981 1I8-1987 attributed to external Total Imports 39 317 444 factors such as the Agricultural Imports C 41 a8 sudden departure of Percent of Total lSX 13% 1s1 French technicians in Total Exports 8e 371 650 1958, drought during Agricultural Exports 48 l1 go the 1970s, and the oil Percent of Total 78X 3% Su shocks of 1973-74 and -------------------------------------- - ------------_ 1979. The major Source: AIRD, Agricultural Sector Assessment: contributing factor, Republic of Gu;nea, Draft Final Report, however, was the Dec. 1989, p.62 policies implemented by the Government under the First Republic. Among these were (i) a highly overvalued exchange rate, which reduced the domestic price of agricultural exports and food imports; (ii) a state monopoly on external trade and rigid restrictions on imports, which decreased the availability of agricultural inputs; (iii) state marketing monopolies; (iv) state support of inefficient collective farms; (v) subsidized urban food prices, which benefitted only a narrow segment of the population due to restrictions on trade; (vi) low agricultural producer prices; (vii) numerous barriers to private domestic trade; (viii) underinvestment in rural transportation and communications infrastructure; and (ix) near-total neglect of agricultural research and extension. More generally, development at this time was collective, state- managed, and politically-led rather than driven by technological change and the exploitation of economic opportunity. 41. Despite the relatively high share of agriculture in direct public investment, the command economy did not succeed in generating growth in the rural sector to replace the production lost by the severe curtailment of private sector activity. Moreover, the difficulties presented by the institutions and policies of the command economy for implementirg rural projects reduced the resources that might otherwise have been available from foreign investors and donors. 7/ 71 For details regarding these policies and their effects see Revolutionary People's Republic of Guinea, Ministry of Agriculture, Water, Forests, and Processing, ONADER Project: Study of Prices and Rural Producer Incentives - Final Report, Associates for International Resources and Development, February 1983; and World Bank, GuInde: Etude du Secteur Agricole, Report No. 4672-GUI, August 31, 1983.  - 18 _ 42. During the early 1980s, the Government of the First Republic initiated several policy reforms, including toleration of private domestic trade and elimination of official marketing quotas. 8/ These reforms proved too limited, however, to revive the rural economy. Most prices continued to be officially regulated, and the currency remained severely overvalued. The economy became increasingly dualistic. As the gap between the official and parallel market prices widened, official marketing channels were increasingly circumvented. Purchases from farmers by state marketing agencies declined due to low producer prices, domestic inflation led to excess demand for food imports at the official exchange rate, and it became increasingly profitable to divert exportable and imported products to unofficial markets. By 1984, about 80 percent of total urban demand and virtually all demand for marketed consumer goods outside of Conakry were being met from nonofficial sources. 43. The Policy Framework since 1984. The Government of the Second Republic initiated ambitious and extensive economic and financial reforms with the objective of replacing the pervasive Government controls on the economy with a policy framework conducive to a market-.riented economy. The Government took the first steps of this new agenda in December 1985. In January 1986 the Government substantially devalued the Syli and replaced it with the Guinean franc, which has since been determined by weekly state- managed auctions. This greatly increased the border prices of agricultural exports, food imports and imported agricultural inputs. Prices of all goods other than imported rice and petroleum products were decontrolled in 1986, although official prices of the latter were increased at least fourfold to partly reflect the new devalued exchange rate. 44. The Government also closed or sold nearly all of its trade and marketing parastatals. Import and export procedures were radically simplified. All import licensing was abolished and replaced with a routine import declaration form. available to all registered traders. Import tariff levels were reduced and subsequently modified on several occasions: rice is now subject to a 10 percent turnover tax; most food and agricultural equipment and materials are taxed at 20 percent. Roadblocks have been officially removed, and producer prices are now at much more attractive levels for farmers. Except for imported rice, the Government no longer regulates the distribution of agricultural products, and even for rice this regulation is minimal, except for the 15-20,000 tons that go to the military, hospitals, and other public institutions. The Government has also begun to establish a more coherent legal and institutional framework in support of the private sector. Preparation of a code outlining the rights and obligations of land use and ownership has also begun. 45. A series of measures designed to rationalize public sector employment have also been undertaken, such that by end-1989 the number of public sector positions had decreased from 90,000 to about 55,000. The Ministry of Agriculture and Animal Resources (MARA), reduced its established staff from 15,000 to 5,100, while simultaneously consolidating services which were previously in separate ministries. MARA is now responsible for crop, livestock, fishery, forestry, and rural 8/ Quotas were, however, retained for livestock products.  - 19 - infrastructure development and the Agricultural Research Institute (Institut de Recherche agronomique de Guinde, (IRAG). Under new guidelines, HMA will be decentralized and regional and central staff will be reduced. The permanent prefectural staff will be kept quite small, and specific activities will mostly be undertaken by fixed-term employees associated with projects for which financing is made available only for a limited period. While central staff levels have already been cut significantly, reductions have not yet been put into effect in the regions. 46. In the 1990-92 public investment program rural development accounts for about one-quarter of the planned expenditures, 63 percent of which is targeted for agriculture. Of this, 33 percent will go to integrated rural developmvnt and to area development projects and 30 percent will be allocated to projects focusing on particular crops rather than on general government services. The former have in the past incurred heavy administrative costs with little sustainable effect on production; the latter are a departure from the Government's policy of disengagement from production activities and are quite costly in relation to the benefits they generate. In addition, some of the planned investments in well- drilling and in the fisheries subsector appear to be costly and ill- conceived. The Government is currently designing its 1991-1993 investment program and is attempting to draw on the lessons from earlier programs to re-examine its strategy in the sector. In this vein MARA and the donor agencies are developing plans to increase MARA's analytical and management capabilities. 47. As a result of the various reform measures, trade in agricultural products now takes place in a relatively competitive environment. The private sector is permitted to engage in all levels of internal and external marketing. It imports and distributes almost all foodstuffs, it markets all food grown for internal markets, and it dominates the marketing of export crops and undertakes all transportation activities. It is slowly becoming involved in the importation and distribution of agricultural machinery, chemicals and seeds, although some of the larger private agricultural enterprises import their input needs directly. Trade in livestock products is completely handled by the private sector. Public enterprises purchase some agricultural exports, but producers are free to market their output as they like, and exports by public parastatals now represent only a small per,entage of the total. In 1988, for example, PROSECO's coffee exports fell to 500 tons, or less than one-tenth of total coffee exports. FRUITEX's share of pineapple exports is likewise falling, and there are now at least seven private fruit and vegetable exporters. C. The Result of Reform 48. While agricultural statistics in Guinea are sparse and often contradictory, the results of the Government's recent reform efforts appear encouraging. Private sector activity has expanded, food production seems to be increasing, small-scale enterprises are developing, and rural per capita income is rising. Agricultural exports, consisting mostly of coffee and fruit, also appear to be increasing. The total officially recorded value of these exports in 1988 was US$ 30 million, up from their 1981 low of US$ 4 million. However, increases in agricultural production appear to  - 20 - have been due more to an expansion in cultivated land area than to improved yields (see Table 2 below). 'able 2 - COMPARISON OF AREA CULTIVATED, YIELD, AND PRODUCTION BY CROP (1975 and 1987) __~~~~~~~~- - -- ---_- - -- -- - - -----------------------_____________ 1976 a/ 1967 b/ Area Area Cultivated Yields Production Cultivated Yields Production (ha) (kg/he) (t) (ha) (kg/he) (t) Rice 468000 see 374000 s5ome0 857 4800M Maize 69000 lSO 88009 4599E 1000 45000 Cassava 87000 259a 218600 7200 e944 SO9900 Millet/Sorghum 89000 760 6000 20000 70 159009 Coffee 42999 330 14090 45000 N/A 7000 Pineapples 14400 2500 gem0 400 N/A 3500 Fonio N/A N/A 227 a/ Oroundnuts N/A N/A 185 a/ Oil Palm 226000 133 38000 b/ a/ 1988 estimates b/ FAO/World Bank, Republique de Guinea: Etude du Sous-Sector de* Cultures Perennee July 8, 1989 Source: AIRD, 1983, for 1975 eettmates. Figure. based on a 1975 agricultural survey and Goverment statistics for the 1974-1975 agricultural campasgn. AIRD, Dec. 1089, Annex B, for 1987 estlaates. 49. As shown in Table 2, experience differs from crop to crop, and the picture regarding production is unclear. Most of the expansion of officially recorded exports that occurred after the early 1980s was of coffee. Much of this was a d.version from smuggling to legal exports and was not a reflection of any increase in production. Pineapples, palm kernels, and mangos showed more modest export gains in 1987 and 1988, but these too may have represented a diversion from smuggling. In the absence of good data on production and overland trade, it is impossible to offer more than impressionistic evidence concerning what is happening with respect to the production of export crops. Estimates of total coffee production, for example, suggest that about 5,000 tons are illegally exported in addition to the 7,000 tons that are officially recorded, but there are no estimates of changes in production. The situation is even less certain with respect to fruits and vegetables, for which production estimates are very weak, losses due to spoilage are high, and overland trade with neighboring countries is large relative to exports through Conakry. 50. Although agricultural exports are rising, they still only account for about 5 percent of total export earnings and are well below pre-independence levels (Tables 3 and 4). Food imports represent about twice the value of agricultural exports and account for 15 percent of the total import bill. Of particular concern are rice imports, which have doubled since 1985 and more than tripled in the last ten years under the combined influence of rising income and decreased import restrictions  - 21 - 'able 3 (Table 4) 9/ At VOUJME OF AGRICULTUAL EXPORTS the same time, (metO r icU~R~ t XPORT imports of ------------ - -- - ------ - ------------- -_ agricultural ------ -Avorsges----------_ ainutuaral 1980 1970 1974-19890 1981-1985 1986-1986 inputs are _ _ _______________--e-- ee-_________-___--_-___--- modest in value Coft 16oom 4862 1983 577 4066 and virtually Bannas 65008 29000 */ 8930 b/ 0 0 stagnant, partly Pineapples SON 8207 80" 619 690 e/ y Palm Krnolo 23089 18026 11985 0n77 88s d/ as a result of Mango. N/A N/A 796 178 */ 197 their rising -------- - _- cost associated a/ Banana exports Xea"d In 1979 b/ Figure for 1971 with the c/ Average for 1987-1988 depreciated d/ Averago for 1986-87 Guinean franc. */ Avorag for 1981-1984 This suggests Source: AIRD, December 1989, Annex 0 potential exists for raising yields, increasing exports and decreasing dependence on food imports. D. Long-term prospects 51. Guinea has the rsble 4 natural resources for high nandtustainredogrceowthinghe VOLUME OF FOOD IMPORTS BY COMMODITY, 1974-1987 and sustained growth in the (100 metric tons) rural sector. The potential for production of coffee, YEAR All Rice Sugar Whet Oil cocoa, oil palm, and rubber Cere als Flour in the Forest Region is 1974 63 N/A 18 12 N/A substantial. Tropical fruits 1976 51 24 1 20 4 and vegetables can be 1978 289 62 7 28 4 produced in large quantities 1981 130 7a 5 as N/A for export either fresh or in 1982 94 88 4 82 N/A a processed form if the 1984 186 97 20 55 N/A 1985 140 98 82 48 l a/ markets can be found. Cotton 1986 151 149 48 61 8 */ is another cr,p in which 1987 204 121.5 47 69 8 */ Guinea has a ccmparative 1988 N/A 192 N/A N/A N/A advantage; it can be grown a/ USAID, Guinea Grant Food Assistance Program - both for local demand and for Second Mid-Term Evaluation, 17 February 1989, export. The same may be true p.64 of groundnuts. Coarse grains Sources AIRD, December 1989, Annex C (maize, millet, sorghum and fonio) can also be produced profitably for the domestic market, though rice production for sale in Conakry is unprofitable in relation to projected import prices. Finally, Guinea has an enormous 9/ There has been speculation that a large percentage of rice imports is being transhipped to neighboring countries. Although there are no data on this, it seems unlikely that the quantities are large. While retail prices in some neighboring markets within the CFA franc zone are higher than Guinean prices, transportation costs in Guinea are high, mitigating against long distance overland trade.  - 22 - untapped potential in its large cattle herd and fishery resources, in addition to its potential for aquaculture. 52. Rural development is particularly important in Guinea today because of the difficulty of developing manufacturing and the enclave nature of the mining sector. Although agriculture is never likely to contribute as much to export earnings or to public revenue as does mining, income generated in the rural sector is widely shared, production is labor- intensive, markets are created for inputs and consumer goods, and agricultural production is made available for downstream processing and distribution. These linkage effects are essential for developing not only the rural economy but also industrial and service activities in urban areas. 53. In order to generate income for the growing population, farmers must intensify their cultivation techniques. To some extent this will require shifting food crops from the hillsides to lowland areas where the soil can be better conserved and the potential for improved water management exists. Intensive use of fertilizers and other intermediate inputs currently is not profitable, however, because of the high cost of importing these inputs and transporting them inland. Some yield increases are possible through selection of local seed varieties, better crop husbandry, and improved water control. Whether this will be adequate to sustain the increased population is unclear. Research in Guinea on ways to increase the productivity of local varieties is currently non-existent and urgently needs to be undertaken. 54. The structure of Guinea's comparative advantage can be expected to change as population density increases, land becomes scarcer, and cash crops are developed. These changes will encourage intensification of cultivation as the value of land rises in relation to that of labor and other inputs. In the future Guinea may therefore be able to compete more effectively with imports in so far as intensive forms of rice cultivation are concerned. One factor tending to offset this might be outmigration to neighboring countries where there is less of a shortage of land. Land is becoming increasingly scarce all over West Africa, however, so this safety valve may not be available to relieve future population pressure. E. A strateov for rural development 55. In light of the current situation and the long-term prospects of the sector described above, the Government is elaborating a strategy for rural development. The main trade-offs between Government's key objectives, as well as the constraints that it faces, are highlighted below. (a) Food Security - the Constraints 56. The Government's pursuit of food security reflects the desire to avoid heavy dependence over the long-run on external sources of food supplies because of the risk that this might carry for consumers, the disincentives that it offers to producers, and the cost that it implies in terms of foreign exchange. In addition, the Government is concerned about seasonal and interannual surpluses and shortages of food which introduces  - 23 - an added element of risk for both producers and consumers. Seasonally, farmers are confronted by cash needs at harvest time, when prices tend to be low, only to have to purchase food later, when prices are higher. Interannually, national or localized food surpluses or shortages may occur because of variations in rainfall and other factors that affect the harvest. Efforts to improve food security through increased domestic food production must however also consider how supply increases can be obtained and what are the associated social costs in terms of public investment, recurrent costs, and natural resource degradation. 1O/ 57. Guinea's comparative advantage in food production is mixed. While its comparative costs are low for coarse grains and root crops, the ability of locally-produced rice to compete with imported varieties depends critically on transportation costs, the location of consumption, and world market prices. Production for consumption in the interior is currently profitable, but marketing costs rise and the import parity price of rice declines as one approaches Conakry. Only production close to Conakry in Lower Guinea is able to compete with imported rice in Conakry at world prices prevailing in 1990; in the absence of tariff protection or a yield increase it will not be able to compete at the lower world prices projected over the longer term. While tariff protection may result in some inefficiency of resource use, it would redistribute income from urban consumers to rural producers and to public revenues which in current circumstances is desirable. 58. Related to the issue of food security is the rOle of food aid in smoothing out domestic supply fluctuations. While it is recognized that well-managed food aid is a useful complement to other donor resources, it should not become a permanent addition to food sup-ly. The availability of food aid is not always dependable, and bulky arrivals can disturb the stability of domestic markets, especially if they arrive at harvest time, as has often been the case in Guinea. 59. Ultimately, food security is best enhanced by increasing the level and diversifying the sources of income of the poor, which means placing greater emphasis on the exploitation of Guinea's comparative advantage in crops, livestock, and fisheries, as well as labor-intensive activities in rural areas. (b) Food Security - the Recommendations 60. In order to reduce its dependence on rice imports, Guinea should institute a cumulative protection of at least 25 percent ';-ed on the 101 If too much reliance is placed on domestic production to obtain food security and fluctuations in domestic food production are not offset by variations in food imports, food security might actually decline. Under such circumstances fluctuations in total availabilities would lead to domestic price instability, injuring consumers when prices are high and produLers when prices are low. This might be countered to some extent by storage, but the cost of holding large food stocks from year to year tends to be much greater than that of varying purchases from abroad.  - 24 - average world market price projected to the year 2000. In 1990 constant prices, this would imply a cif Conakry price of about GF 175 per kilogram. A 15 percent import duty, and 10 percent turnover tax, plus handling and other charges, would raise the domestic retail price of imported rice in Conakry to about GF 245 per kilogram. ll/ The price differential between imported rice and local rice adjusted for local preferences, should enable production from Maritime Guinea and improved production from the Forest Region to compete at the margin with imported rice in Conakry, thus ensuring the possibility of substituting a substantial quantity of locally- produced rice for imports. 12/ 131 61. At present the wholesale price of imported rice is officially determined, as are reference prices for export crop producers. None of these official prices serves any useful purpose. The wholesale price of imported rice is generally ignored, but when it is occasionally enforced, as it was in August 1988, this acts to destabilize the market. The reference prices for exports are also widely ignored, but the reference price for coffee can serve to discourage coffee purchases if it is considerably in excess of the price that exporters can afford to pay given world market prices, as is the case today. Finally, attempts by the Government to regulate the flow of imported rice outside of Conakry serve no useful purpose and are disruptive to the private miarket. It is recommended, therefore, that these official prices and quantitative regulations be eliminated. 11/ While all rice is currently subject to a 10 percent turnover tax, in practice, the turnover tax is only levied on imported rice. Therefore in the short term, total protection of 25 percent to domestic rice could be attained by subjecting imported rice to import duty of 15 percent. 12/ The duty on rice would not only improve incentives to local producers to improve their productivity and thus better compete with imports, it would also raise fiscal revenues by about GF 5-6 billion from about 190,000 mt, the tonnage imported in 19R8. 13/ Over the long term, when administrative capacity has improved substantially Guinea might wish to implement a variable levy on imported rice in order to r_duce the domestic impact of variations in rice prices on the world market. This levy would equal the difference between the target domestic wholesale price minus handling and other charges from the port, and the CIF price of rice imports landed in Conakry. The levy would be collected by the customs service, and importers would be required to provide adequate certification of the CIF price. It. the event that the CIF price should rise above the target price adjusted for handling and other charges, no levy would be collected, but neither would there be any subsidy paid on rice imports. The target price should be adjusted annually to take into account changes in world price projections, domestic inflation, and the quantity of rice imports in relation to total consumption.  - 25 - 62. Given the difficulty of maintaining an even flow of food aid shipments, the private sector should be encouraged to construct storage facilities to smooth out the distribution of imported food. The capacity of this additional storage should be 5.000 mt, equivalent to about three weeks of consumption in Conakry. The stock of rice held in this storage should be owned and managed by private traders, but the release of the stock should conform to rules imposed by the Government that would assure an even flow of imported rice onto the market. 14/ 63. Intensification of cultivation should be encouraged in order to increase yields and take pressure off marginal land subject to soil erosion and environmental degradation. Measures used to encourage intensification should include appropriate research and extension, selection of improved local seed varieties, construction of infrastructure for better water management, and clarification of land use rights. These measures would encourage farmers to invest in their better land and to decrease the use of extensive cultivation techniques on marginal land. This will help to assure a more steady, reliable supply of local food production. 64. Bottomland development should be continued as long as suitable areas can bI found and costs are reasonable in relation to benefits from increased -roduction. This type of investment has the advantage that it promotes intensification of production without relying on a continuing flow of intermediate inputs. Subsidies are provided for development only and do not require recurrent support from the Government. Furthermore, by focusing food production away from the hillsides, bottomland development contributes to a reduction in soil erosion and environmental degradation. (c) The Respective Roles of the Public and Private Sectors 65. A key objective of the Government must be to create an environment in which decisions regarding resource use reflect the true scarcity value of those resources, both currently and in the future under the influence of increasing population density and technological change. The transformation away from a highly controlled economy has to be completed, and ambiguities as to the role of the public sector need to be eliminated. Government, having closed or sold most of the agricultural parastatals, is in danger of remaining excessively involved in productive activities through public investment projects. There needs to be more consistent adherence to the objective of limiting Government's r8le to the provision of services that will promote rational resource usage by the private sector. These services would comprise (i) infrastructural support; (ii) research and extension; (iii) a consistent legal environment and an effective judicial system; (iv) environmental regulation; (v) collection and analysis of agricultural statistics; (vi) crop protection and quality control; (vii) protection of public resources through forestry and natural resource management; and (viii) promotion of animal health programs. (See Section X for more on the environment.) 14/ For more details on how this stock could be managed see MInist6re de I'Agriculture et des Ressources Animales and Calsse Centrale de Cooperatlon Economlque, Propositlons d'AmlloratIon du Fonctionnement de la F1II6re Ri/zicole en Guinee, by Pierre Thenevin, April 1989.  - 26 - 66. At the present time, the institutional and policy reforms affecting the rural sector remain incomplete. MARA has yet to finish its reduction in staff. Four marketing parastatals have still to be privatized or liquidated. In addition to PROSECO and FRUITEX, which continue to operate as coffee and fruit exporters, there are two input suppliers, SEMAPE and AGRIMA, which have become relatively inactive since the reform. All of these parastatals are highly inefficient and exist only with public subsidy. 67. Because of the very limited demand for agricultural inputs, the private sector has been slow to take over their purchasing and marketing. Initiative has also been stifled by a public policy that extends tax advantages to projects and larger enterprises for direct imports of agricultural machinery and chemicals, but does not offer these incentives to intermediate traders and therefore small farmers are penalized. 15/ 68. In general, the investment climate is beset with overlapping and conflicting incentive structures, attitudes towards private foreign investment are mixed, and procedures for establishing enterprises are plagued with differing requirements and extra-legal barriers. The absence of clear rights to land removes an important source of collateral for credit and discourages long-term investments. There are also problems involved in hiring and firing labor, and in the free transfer of foreign exchange. 69. The investment code is frequently in conflict with individual agreements and with the general structure of incentives. The code provides for special treatment for certain types of enterprises, but the reasons for this special treatment are not explained. Furthermore, each incentive package or combination of packages provided under the code is highly complex and involves varied benefits. The incentive system would be much clearer if there were a single, universal package of incentives for all investments. These would be provided by the tax code, the customs code, and general legislation, and would shape incentives over the longer term and not just during the initial period of investment. Appropriate codes are not sufficient, however, if they are not accompanied by decrees for their implementation. 70. In addition to creating a policy environment that encourages the productive use of resources by the private sector, Guinea also needs to strengthen its capacity to invest in and manage public resources in the rural sector. Evaluating the performance of public policy and investment in Guinea is difficult. Apart from a recent agricultural census, which gives no time-series information, data on production in the rural sector are virtually nonexistent. Individual projects collect some data for purposes of monitoring and evaluation, but these data cover only a fraction 15/ For example, Guinee Fleur imported 50 tons of fertilizer in 1989, for which it paid a nominal 0.5 percent rather than the usual 20 percent import tax. It has also imported all of its own machinery at the lower tax rate. On at least two occasions, SOGUICAP also directly imported its own fertilizers at concessional tax rates.  - 27 - of the population, and the methods used for collection and analysis are not always the best. Data are thus lacking to show whether or not public investments are generating the additional income that could be tapped by the Government for the associated debt repayment; it is also unclear the extent to which the public investment program is contributing to economic growth. 71. With the pace of public investment accelerating, it is crucial that the Government be able to identify and prioritize those investments that will have the greatest impact on rural development. At the same time, it must also be able to analyze the impact of public policy on private behavior, and to modify its policies accordingly. MARA alone currently oversees some 90 projects throughout the country, and yet it lacks the technical and managerial capacity to effectively monitor and evaluate these and other initiatives being proposed by the Government and donors. The capacity of MARA to prepare, appraise, manage and evaluate public investment. should be greatly strengthened. 72. The utmost care should be taken that projects are not crowding out more efficient private sector investment. The current proliferation of rural development projects in the PIP often involving significant subsidies suggests that some crowding out is already taking place. Government should reevaluate the level and composition of its agricultural public investment program as a matter of priority. Data that will permit the measurement of benefits from these investments should be collected regularly. This should be possible with the Systeme Permanent des Statistlques Agrlcoles, which is currently being established, but MARA's capacity to analyze the impact of agricultural projects and policies on the basis of these data should also be increased. 73. Public services involving research, extension, plant protection, animal health and other areas related to agriculture should be established and supported at the national level. Support at the regional or individual project level, often financed by the donors, should be phased out in favor of support for streamlined national services operating down to the prefectural level and utilizing locally-hired private contractors and temporary employees to the maximum extent possible. Product grading and quality control should be carried out by producer and marketing associations under the supervision of the Government. Similarly, Government plant and animal protection services snould be strengthened to carry out their responsibilities and linkages should be forged with agricultural research and extension services to assist in identifying and controlling pest and disease problems. (d) Increasing Agricultural Exports - the Constraints 74. Significant increases in the range and quantity of agricultural exports will undoubtedly be a central component of broad-based economic growth over the next few years. Increases in the production and export of coffee, cocoa, tropical fruits, rubber, oil palm products, cotton, and seafood, commodities in which Guinea has a comparative advantage, would increase foreign exchange earnings, efficiently utilize natural resources, provide efficient employment opportunities, and increase rural incomes.  - 28 - 75. Expansion of relatively homogeneous bulk commodity exports such as coffee, cocoa, rubber, oil palm products and cotton is constrained principally by world prices, and land availability. World coffee and cocoa prices are currently relatively low, for example, but over the long run Guinea should be able to maintain its comparative advantage vis-a-vis most competitors. Furthermore, existing coffee and cocoa plantations are old, and oil palm and rubber plantations are limited in number. Hence, new plantations will have to be established, and these will take four to ten years to mature, delaying the expansion of these agricultural exports. The area available for tropical fruits is considerably larger than that suitable for the tree crops that thrive in the Forest Region. The gestation period for most fruit is also not as long as for the other perennial crops. The major technical constraints on fruit production are the absence of uniform quality and the lack of facilities for processing and conservation. 76. Increases in nontraditional exports such as tropical fruits, vegetables and seafood products for which quality standards, packaging, and market penetration are important will require effective crop protection and quality control. While MARA's Dlvision du Conditionnement provides some measure of quality control, procedures are inconsistent and services are weak. Crop protection is an even more serious problem given the absence of the financial and managerial resources required to identify and to treat pests and disease. Ultimately however, the expansion of these agricultural exports will depend on market penetration. The world market for these products is growing rapidly, but penetrating it requires a combination of market knowledge, quality control, promotion and other skills which Guinea currently lacks. Development of overseas contacts and the institutional structures to penetrate overseas markets, often in conjunction with the establishment of agroindustries involving foreign partners, is a precondition for relieving this constraint on export expansion. (e) Recommendations on Export Promotion 77. Until such time as the export sector regains its strength, it is recommended that the sector be exempted from all export taxation. 161 Similarly, all the "parafiscal3 taxes levied at various points between production and export should be eliminated by reducing the bureaucratic requirements on exporters. In order to create the appropriate incentives for exporting, overvaluation of the currency or excessive tariff protection of domestic production should be avoided. Every effort should be made to establish and maintain a business climate conducive to export promotion. This is especially important for nontraditional agricultural exports such as tropical fruits, vegetables and seafood. To create a stable environment for private investment, guarantees must be offered with respect to expropriation, land use rights and, for foreign private investment, the repatriation of profits. Enterprise establishment procedures are currently complex and time-consuming; costly delays should be reduced by setting strict time limits on each stage of the process. One-stop investment 16/ It is the need to simplify export procedures rather than reduce the financial costs that mitigate in favor of eliminating export taxes - - which in any event have low yields.  - 29 - center(s) need to be created to effectively assist all potential investors. 78. A further issue associated with export promotion is the borders across which external trade is allowed to occur. At present, the Government attempts to channel all external trade through Conakry. This imposes high transportation costs. Yet Guinea has long borders with neighburing countries which offer much less costly avenues for trade. For years these avenues have been used for smuggling. Allowing overland trade would require establishing customs posts at the borders. This should not be administratively difficult, and in fact would complement Government efforts to decentralize and to simplify trade procedures. (f) Transfer of technolo v 79. At present most farmers in Guinea employ traditional techniques without modern inputs such as chemical fertilizers. The only areas in which improved technology using these inputs has been introduced are where localized projects have been established. These projects typically furnish extension services, intermediate inputs, and credit either free of charge or at subsidized prices. The projects have not generally proven to be sustainable without these subsidies. However, variations in rates of subsidy across project create substantial distortions in the structure of incentives. Furthermore, it is highly unlikely that Government would be in a position to finance these subsidies upon termination of external project financing, even if it were desirable to sustain them. Projects involving input subsidies should therefore only be initiated where they can be expected to have a beneficial effect even if the subsidies do not outlive external financing. In addition, where subsidies are deemed to be justified they should be harmonized across projects to minimize incentive distortions. 80. Given the limited potential for input subsidies, a critical issue facing the agricultural sector therefore is whether a viable technology can be developed that will increase productivity without disproportionately increasing dependence on intermediate inputs. After Independence, Guinea's once well-financed agricultural research structure suffered from underinvestment, and consequently research stations turned away from research to more directly productive activities. Due to these years of neglect, agricultural research remains very weak. While major efforts are being planned to improve productivity in agriculture, the research base for these improvements is inadequate. The new agricultural research institute, SRAG, is giving priority to applied and adaptive agronomic research concentrating on raising productivity through improvements in the quality and management of existing resources (e.g. improvement in local seeds, small-scale investments in water control and  - 30 - enhanced crop husbandry) as an alternative to increased input use. 17/ A major objective is to make available cropping systems with low requirements for intermediate inputs in recognition of the high cost of unsubsidized inputs, the low purchasing power of farmers, and the lack of unsubsidized rural credit. Agricultural research is essential for this approach to succeed, but there is little existing research on seed improvement, the response of local varieties to water control, the effect of different cultivation practices on yields, or ways in which labor and small amounts of chemicals can be applied so as to increase econouiic productivity in the agricultural sector. Agricultural research institutions should be strengthened. The focus should be on improving local varieties and on achieving higher yields with improved husbandry and water management. Attention should also be devoted to increasing yields through the application of small amounts of fertilizers and other intermediate inputs. 81. An associated issue concerns how farmers can best receive information regarding improved technology. A number of different approaches to extension are currently being used in Guinea. One approach is that used by CFDT for cotton farmers, where production techniques are strictly defined and credit recovery is facilitated by the monopoly exercised over purchases. This approach offers farmers little scope for individual decision-making and is difficult to apply where there are multiple marketing opportunities. The FAO advocates a less interventionist extension service which depends in a reactive way on the diagnosis of local problems. The World Bank is supporting the Training and Visit approach, which involves a carefully programmed schedule of farmer visits with a tested package of technical advice. Another approach used in the fruit sub-sector resembles the CFDT approach except that there is more competition in the fruit than in the cotton sub-sector. Under this approach technical advice is provided by packers and processors to outgrowers in return for the right to purchase their crops at predetermined prices. Another possibility would be use of NGOs to provide extension services in specific skills over a brief period, e.g., to transfer knowledge regarding irrigation techniques. Finally, traders selling inputs to farmers may be a valuable source of technical advice. 82. While there are a number of potential models for agricultural extension in Guinea, those that are to be pursued should satisfy the following criteria (i) cost effectiveness; (ii) allow farmers freedom of choice in the selection of crops and cultivation techniques; and (iii) advice offered is tested, useful, and timely. The private sector, and particularly input suppliers should be involved as much as possible in the provision of extension advice. Every effort should be made to encourage farmers to take the lead in the technological transfer process by requesting extension information. 17/ The decision to work principally with local varieties in lieu of improved imported varieties makes it particularly important that local genetic materials be rapidly assembled and tested for ways in which productivity can be increased. Improved stock developed before Independence for pineapples, mangos, cereals, and other products which has been allowed to deteriorate must be entirely reconstituted.  - 31 - (g) Rural financial intermediation 83. While the new banking system is slowly improving the mobilization of financial resources and increasing the flow of lending, no nationwide financial institution exists in rural areas. Most rural lending flows through large agricultural development projects, which furnish credit linked to the inputs which the projects provide. To a large extent, these operations have failed: except for CFDT, the repayment rate is below 35 percent. There are also traditional forms of lending, such as the tontines, but the amounts involved here are not very large. An important issue to be resolved is therefore how rural financial services can be made broadly available and can be promoted without the use of public subsidies which would be fiscally unsustainable. 84. Efforts to use commercial banks for agricultural lending have been unsuccessful. Of the five banks, only BICIGUI has branch offices outside of Conakry. Even BICIGUI limits its loans to short-term commercial transactions, and is reluctant to undertake medium- and long-term lending, especially in rural areas because of high risk and lack of collateral. 18/ In addition, agricultural loans tend to be small, making the cost of servicing them high. Most banks, moreover, do not have the experience and qualified personnel to evaluate agricultural loan proposals. Even though there may be significant saving in rural areas, these savings have no formal institution which serves to funnel them back into the local economy. 85. The Government and various donor agencies have recently initiated several promising pilot efforts to increase local saving and lending in the rural sector. 191 These pilot efforts need to be expanded, however, so that capital is more readily available throughout the country. Small programs working with NGOs to identify potential entrepreneurs can help to establish credit ratings and to make available increasingly larger loans based on proven records of repayment. Once credit ratings have been established, borrowers can be transferred to the commercial banks. For this type of program to be effective, interest rates charged must be sufficiently in excess of the rate of inflation so that the marginal financial costs of administration can be covered. 86. The commercial banks should be encouraged to establish branches outside of Conakry and to extend their lending to include medium and long- term loans to local entrepreneurs involved in agricultural production, processing and marketing. For this purpose, they should be provided with 18/ Government should examine means of addressing this problem through reform of the land tenure system, which is currently based largely on customary land-use rights which constitute neither ownership nor transferable long-term use rights. As such the current system does not allow the use of land, generally the farmer's most valuable asset, as collateral for loans from formal financial institutions. 19/ These include the Projet Credit Rural, with French financing, which is located in Telimele and Koundara; the Projet Credft Mutuel, being implemented by the Centre Internatlonal du Credit Mutuel in Labe and Kindia; and a project being undertaken by the U.S. Peace Corps.  - 32 - technical assistance in loan preparation and evaluation. NGOs might assist by identifying local entrepreneurs and aiding them in preparing loan applications. Equally means of assisting informal savings and loans institutions to become more effective should be identified and implemented. IIl. MINING SECTOR A. Background and Present Situation 87. Guinea's mineral resources make it one of Africa's resource- rich countries with approximately one-third of the world's bauxite resources (about 20 billion tons) and an estimated long-tenm gold extraction potential of between 10 and 15 tons per year. There are considerable diamond reserves which presently support a production of about 250,000 carats per year. The Mount Nimba region contains one of the world's last remaining high-grade iron ore deposits with total proven reserves of about 315 million tons of premiuam ore. There are proven high quality granite reserves, estimated at 40 million cubic meters, and potential for other minerals such as lead, zinc, silver, uranium, cobalt, nickel and platinum exists. 88. Even though most of these reserves remain unexploited, the economy is dominated by the mining sector, with the sector contributing an estimated 25 percent of GDP, 95 percent of exports and 79 percent of tax revenues. 201 The formal mining sector remains very much an enclave, with few direct linkages to the rest of the economy other than the employment of labor. 211 Even through employment the formal sector has limited impact with only about 9,000 workers including several hundred expatriates. Employment in the informal sector is currently more significant, with an estimated involvement of 30,000 people, and has much greater potential for growth given the high labor-intensity of the technology employed. 89. Guinea is involved in two of the stages in the bauxite to aluminum chain of activities, namely bauxite mining and alumina refining, and is the second-largest producer of bauxite in the world, with three bauxite deposits currently being mined. The Sangaredi mine has been operated since 1973 by la CompagnIe des Bauxites de GuInee (CBG), a joint- venture between the State (49 percent) and Halco (51 percent), a consortium of major aluminum producers. Its annual production, exported to North America and Europe, is now 11 million tons per year. The Fria-Kimbo mine was opened in 1960 and operated by Friguia, a joint-venture owned by the State (49 percent) and Frialco (51 percent), another consortium of major aluminum producers. Its bauxite production, in the order of two million tons annually, is converted into alumina at the nearby Fria refinery, which 201 These figures include the estimates of artisanal production detailed below, as well as notional tax payments by OBK as a counterpart to the revenues earned by the sale of OBK bauxite (see below para. 102) 21/ For example, of CBG's approximately US$ 90 million of production costs incurred annually in Guinea, about US$ 12 million is for salaries of Guinean workers and at most US$ 100,000 for local purchases.  - 33 - Table S produces and exports 600,000 tons of alumina per year. The Kindia mine has W(LD A ITE PRf to N s/ been operated since 1979 by the Office _ o tons_ des Bauxites de Kindia (OBK), a 100 World 0u1nea'. percent state-owned enterprise. Its Year Produet. Gulnea share X present annual production of 2.7-3.0 million tons of bauxite is entirely 1976 78,012 11.048 1s exported to the Soviet Union. Total 197e 78,624 12,822 17 Guinean bauxite production statistics 1962 66,928 11,827 16 relative to world production for the 1986 n7,148 18,968 16 period 1975-1988 are as in Table 5. 1968 79,191 18,2e6 19 1968 88,7X0 16,202 19 90. The development of diamond mining since Independence has been much * less dramatic than that of bauxite economlesn mining. Digging for diamonds by artisans has occurred on a sizeable scale since and Enviromnent and World the discovery of diamonds in Guinea in Bank 1933 with the intensity depending on whether the activity was legal or other- wise. Currently artisanal diamond mining is illegal, but digging by 5,000 to 10,000 artisanal miners yields an estimated production of 100,000 carats per year, about half of which is purchased by the Central Bank. Formal diamond mining is conducted by only one company, Association pour la Recherche de Diamants et d'Or (Aredor), which vas established in 1981. Aredor's production peaked in 1987 at 210,000 carats but then declined to an estimated 130,000 carats in 1989. 91. Gold also has a long history of artisanal mining in Guinea, which has intermittently been declared illegal, but since 1985, it has again been legal. It is estimated that only about 20 percent of the production is purchased by the Central Bank, the remainder of an estimated eight tons annual production being exported illegally. 22/ AurIf6re de Guline (AuG) commenced industrial gold mining in 1988 and has scheduled annual production of up to 1.5 tons per year. Total mineral exports are shown in Table 6. 92. Guinea made good progress in tapping its large bauxite resources and in initiating a new diamond mine during the period of the First Republic from 1958-1984, while the development of other minerals stagnated. The Second Republic established introduced new economic and mining sector policies, but (except for the new AuG gold mine) Guinea has been unable to attract new mining investors. The reasons for the lack of exploration and of new mining ventures are multiple but contributing factors include: - the lack of guarantee that any discovery made in the course of exploration will result in a right to exploit the mineral resource; - the introduction of new codes for investment and mining providing for broad discretionary government powers with regard 221 This production estimate is subject to a very large margin of error.  - 34 - to the concession of mining rights and to fiscal arrangements, resulting in uncertainty and risk for pote.itial investors; - the Government's practice of taking 49-50 percent of the equity of new mining ventures on a "free" basis, 23/ which considerably reduces the expected return for investors from mining ventures in Guinea; 241 - the failure to provide an adequate database on geology and mineral occurrences to prospective investors; - the effective sterilization of large land areas as a result of large concessions granted without time restrictions by the previous Government; and - the limited growth of the aluminum market which has reduced the incentive for new investments in bauxite production. 93. Guinea is presently addressing the above constraints to new mining development, but most of these measures relate to the development of new mines; in the medium term, however, the Government will be faced with several issues relating to the continuation of existing mines and the development of already- identified projects. B. Recent Trends and Outlook to the year 2000 (a) Bauxite 94. CBG is, and will continue to be, not only the major producer of bauxite but also the principal earner of foreign exchange and generator of fiscal revenue for the Government as is shown in Tables 7, 8 and 9 below. Under the present contract between CBG and Government, which covers the period 1986-1995, the "selling price" of bauxite, from which CBG revenues and consequently taxable income are derived, is calculated by a formula linked to the world price of both alumina and aluminum as well as world inflation. There is an approximately one-year lag in the application of these prices to the formula. Since world alumina and aluminum prices experienced a sharp upturn in 1988 and 1989, CBG profits and taxable revenues for 1989 and 1990 will be substantial with resultant tax benefits 23/ That is, without paying for the equity. 24/ However, it should be noted that for some minerals the industry is structured in such a way that there may be a role for Government equity, even where that Government has a general policy of minimizing direct involvement in production. In the case of CBG and Friguia, the purchasers of the product are also shareholders in the company; moreover, these shareholders together dominate the industry worldwide from raw material through finished product. As such Government needs to retain a right of regard over major decisions of these companies, which m&y be difficult to obtain without holding equity. There is, however, no need for equity to be above a token level nor for it to be provided to Government free of charge.  - 35 - 'able 6 EXPORTS OF MINERALS (USS million) 1976 196 1988 19t7 1968 1989 est Bauxite 108.6 889.9 862.2 899.8 861.2 400.1 CBs 80.8 809.4 805.7 817.0 277.8 824.1 OK 28.2 860.6 78.5 89.8 68.4 70.6 Alumina 69.2 108.8 66.0 87.4 98.2 189.6 Frigul 69.2 108.0 86.0 67.4 98.2 180.5 Cold N.A. N.A. 94.7 106.5 99.6 98.1 AUG - - - - 3.7 18.6 Artisans */ N.A. N.A. 94.7 106.5 860.6 9.6 Diamonds N.A. N.A. 69.1 78.4 80.0 77.6 Ar dor - - 48.7 59.3 45.0 68.2 Artisans b/ N.A. N.A. 12.4 14.1 15.2 21.8 Total Mlneral Exports N.A. N.A. 621.0 665.6 695.7 701.6 Formal Mineral Exports 168.8 495.9 613.9 546.0 S08.7 090.8 Informal Mineral Exports N.A. N.A. 197.1 119.6 102.0 101.2 (Total Formal Mineral Exports In 1986 USU) b/ (248.6) (495.9) (487.6) (424.1) (864.8) (488.8) Total Exports N.A. N.A. 866.2 687.1 859.9 761.5 Share of Formal Mineral Exports In Total Exports (I) N.A. N.A. ?8.4 79.2 77.4 78.8 Share of Informal Mineral Exports In Total Exports (X) N.A. N.A. 16.4 16.1 17.2 14.7 a/ World Bank estimates, excluding artisanal gold accumulated In reserves by SCRO. b/ Deflated by manufacturing unit value (MUV) Index. Source: Company Reports, URNE, World Bank estimates. to Guinea. However, both aluminum and bauxite prices have recently gone into sharp decline, therefore calculated revenues and taxes in 1991 will be significantly lower. 95. However, the contract permits renegotiation of the pricing and taxation formulae at the end of 1990. At this time the Government must be in a position to decide whether a revised agreement would be in its best interests, and if so what form it should take. It is vitally important that the Government begin ana'lyzing as soon as possible the strategic options available, but at present the Government does not have the expertise to fully review the benefits and risks of the various pricing and/or tax options. It should therefore seek technical assistance from experts fully familiar with the integrated "bauxite to aluminum' industry. The analysis for the 1990 renegotiation should form a base from which Government expertise can be developed for other bauxite projects which may soon require negotiations. 96. In this context, it should be noted that the existing bauxite pricing formula is almost certain to lead to declining export revenues for  - 36 - CBG over the WTMOFMNM R lw m coming years - (In F EPllOss-l hence without renegotiation real tax 1986 108? 1998 1008 19e00190S 2 0 revenues will fall. Figure 2 in Volume I Mineral exporte/Total exporet 06 97 95 94 94 84 76 shows the Ponal ln.rel export scenario that /Totel *xport 78 79 77 7o 81 70 62 appears to be Bauxite A alumina/Total *xport. 71 71 70 7 73 04 60 BauxitfT.otl export SS 568 6 8 5 64 4? 41 most likely on CB8 *xpor/TGotal export. 46 46 48 48 46 88 84 the basis of CBa exporte/Minerol export 49 47 45 40 48 45 45 currently available Source Guinean authoritios, World Bank estimates and mining information co"mPnios which suggests that aluminum prices will remain flat over the coming years. However, the conclusion that real tax revenues will decline does not merely result from this aluminum price projection; there is a peculiarity in the structure of the formula which gives decreasing allowance for cost increases as time goes on. The resnlt of this is that real tax revenues will decline under a very wide range of assumptions about future aluminum price movements. able TAX RENUS FM MINIM (USS ml I lton) 1900 1987 1098 1989 190 1996 200 Totel tax revenue 280.5 259.7 288.0 810.9 879.9 479.5 792.8 Tax rvenues *r mining */ 210.7 216.8 194.0 228.2 260.1 288.9 242.1 Shar: of mtning (1) 91.0 08.0 72.4 71.0 67.4 50.0 84.5 Tax revenues froe Coo / 164.8 169.2 141.9 71.8 198.0 156.6 104.5 Share of CB In total tax revenues (1) 69.9 .2 52.9 58.7 51.0 88.1 28.4 Tax revenues trre sining In constant 1965 price b/ 19#.8 107.0 140.5 165.8 177.4 120.1 110.0 Tax rvenues from COO In constant 1965 prie b/ 140.2 181.4 192.7 124.5 185.7 84.7 74.7 1 tnclude special teaxe, proftl toxes, Import duties and other taxes (including estimates of notional pe;sente ot proftt tax nd special tax by 0oK). b/ Deflated by the snutfactrin unit value (V) Index. Source: Gsunean authorities, World Sank estimates 97. In terms of reserves, CBG has firm potential for a further increase of production to enable it to maintain its market share as world bauxite production increases over the next decade. This would entail increasing output above the level of 12 million tons, (to which CBG has recently decided its output will increase by 1992), to 16 million tons in  - 37 - the mid to late 19909. This increase will require significant new capital investment for the development of a new mine and for expansion of infrastructure facilities. No estimates for the required capital expenditures have been made available to the World Bank but they are expected to be in the order of US$ 100-150 million. 98. In addition to able 9 having to establish a pricing formula and tax NET FaRIGN EXCWHANE EA NGS OF MINING 198961989 regime for the (US$ eillon) incremental production. an expansion would raise 1967 1988 1o9" issues regarding the financing of the Total foreign exchange necessary mine and recipt, of SCRM n/ b/ 294.0 292.0 388.2 infrastructure Foreign exchange receipt. f rom mlaIning investments. While CBG co mnios b/ 212.4 185.7 226.4 is sufficiently Share of minng (X) 72.8 e68.6 59.1 profitable and Foreign exchange rocelpt 1 f ram CMQ 184.2 1s8.9 188.7 finacially sound that it Shre of CB0 In total should be possible to foreign exchange recipt 62.6 64.1 49.8 finance the mining Foreign exchange revenu from mlaIning Ina constant investment through 198s pret"s c/ 165.9 184.5 164.5 retained earnings and new debt, the Government will __ need to negotiate the I / This excludes private sctor non-auction receipts, arrangements with the for which no coherent date are vailable, and other shareholders. therefore underestimates the level. other shareholders. ib/ Excluding OBK. Furthermore, the current c/ Deflated by the ON Index. tax arrangements stipulate that profits Source: World Bonk tax on retained earnings be deferred until those earnings are distributed to shareholders. Since retained earnings are mostly invested in fixed assets, this tax is effectively deferred until the assets are sold or liquidated, which would generally mean at the end of the life of the mine. Consequently, the current arrangements entail that Government finances a significant portion, approximately 40 percent, of any investment financed through retained earnings in the form of quasi-equity, whereas for external financing it bears a burden in the form of lower taxes. The Government should take this into account when it participates in the CBG decision as to the ratio of internal to external financing for the expansion; it should also consider whether it wishes to renegotiate this provision. 99. The Government will also need to examine arrangements for the finance of the necessary infrastructure expansion as it is the owner, through the Boke Management Office (OFAB), of the current infrastructure (rail, port, hospital and town). In any case, the current pricing approach to infrastructure user fees should be reconsidered, since the fees cover operating costs and a portion of depreciation only. Sound arrangements would require full cost recovery. Correspondingly, the organization of OFAB should be reviewed since its costs appear to be excessive thereby reducing the profitability of CBG. This reduction adversely affects the  - 38 - level of tax revenue from CBG, thus Government is effectively subsidizing the inefficient operation of OFAB. able 10 PROJECTED C6O REVENUES (1989-2000) 1989 1990 1991 1992 1993 1994 1996 1998 1997 1998 1m 2000 Manufacturing Unit Value Index 100 106 110 118 121 127 133 138 144 149 154 160 Aluminum Price Index a/ 100 149 144 124 126 131 185 140 143 146 149 161 Bauxite Price Index 100 116 108 101 99 99 101 103 105 106 108 110 Exports (current US$, mliions) 324 376 348 365 861 348 386 363 369 375 382 389 Exports (constant 1989 USSm) b/ 324 358 316 307 289 274 266 262 267 262 248 243 Tax Revenues (current USIm) 169 193 168 166 155 147 152 162 154 167 159 160 Tax Revenues (constant 89 USSm) b/ 189 184 152 143 128 116 114 110 107 105 103 100 a/ Lagged by one year. b/ Deflated by manufacturing unit value index (UIN). Source: World Bank estimates 100. The bauxite-alumina operation of Friguia is currently nearing the end of a major rehabilitation designed to reduce operating costs and supply a more acceptable form of alumina to the market. It is understood that the rehabilitation has reduced Friguia unit production costs and that a new alumina sales price formula has been recently agreed. Friguia has been only marginally competitive for many years and has made minimal tax payments to the Government compared to CBG. However, recent cost and pricing information seems to indicate that Friguia has already made some progress toward its 1991 goal of full cost competitiveness. 101. The OBK operation needs to develop new mining areas and infrastructure if it is to continue beyond 1994, at which time the current mine will be depleted. Under the present structure of the OBK operation this continuation of the operation will require significant new investment by the Goverrnment. 102. OBK is wholly-owned by the State and the marketing of OBK's output is structured to offset Guinea's bilateral deficit with the USSR. The operation is assisted by extensive technical assistance from the USSR, almost entirely in the production department. 25/ Every two years a sales contract is concluded with the USSR specifying a tonnage, currently 2.8 million tons, which OBK is then obliged to sell to the USSR at an agreed price. The revenues from this sale are then assigned 56 percent to Guinea's debt to the USSR, and 44 percent to the import of goods and 25/ It is unclear why technical assistance has not been sought from other quarters.  - 39 - services from the USSR. 26/ Any tonnage above the contractual level can be sold on the free market, but in practice it is almost always sold to the USSR since, to date, the quality of the bauxite has not proved to be attractive to other buyers. These additional tonnages (Uivralsons suppl4mentalres) earn a small premium above the price for the contractual tonnages. In principle, the additional tonnages are paid for in convertible roubles but in practice their allocation to non-Soviet imports rarely takes place; indeed, it is understood that 56 percent of these revenues are also assigned to debt service payment, which does not seem to be legitimate. Moreover, although the prices agreed for both the contractual and the additional tonnages are we'l above the free market price, it has been noted that the prices for the counterpart imports are also very high; moreover, there has been a historical tendency for those prices to increase in almost perfect correlation with increases in the bauxite price negotiated. 27/ 103. Guinea should seek extensive revision of the OBK marketing arrangement with a view to greater transparency, and ultimately to commercial and competitive transactions. Given the currently limited availability of Soviet goods at competitive prices and qualities, this restructuring should involve at least partial payment in a convertible currency. Moreover, the operations of OBK are such that the management has little incentive to ensure efficient operation of the mine, since OBK receives no revenue, its costs being covered by transfers from the BCRG and arrears to local suppliers. OBK should be restructured in order to provide its management with the necessary autonomy, and eventually it should be privatized. 104. At present there is a proposal from the Soviet Union to develop another bauxite deposit at Diandian. While the initial plan calls for studies of a mine of up to 10 million tons per year capacity, consideration is also being given to the construction of an associated alumina plant and possibly the production of aluminum. Three issues arise. First, how should any agreement be structured to ensure that an equitable share of benefits flows to the Guinean economy. A long-term sales contract should be concluded with the USSR only if it appears to be the most profitable option available, in which case it should follow the guidelines recommended above for OBK. In addition, Government should not depart from its current 26! There have been occasions in recent years when the USSR has argued that the 56 percent does not apply to all categories of debt and hence part of the 44 percent has also been applied to debt service. This has resulted in the 44 percent being insufficient to finance the import requirements of OBK, and Government has therefore had to finance the resultant deficit. This has been contested by Guinea and the dispute has apparently now been resolved in her favor; whether Guinea will be reimbursed for past payments is unclear. 271 The pre-shipment inspection service retained by Government should be used for price, quality and quantity inspections of the counterpart imports.  - 40 - policy of not engaging in directly productive investment - the Diandian project should be structured to exclude any risk for the Government. Secondly, what can realistically be expected as a timetable for development. It is considered most unlikely that the bauxite market could absorb 10 million tonslyr from Diandian by the year 2000, especially if CBG expands to 16 million tonslyr. A realistic assessment of the time needed for detailed exploration, feasibility studies, infrastructure construction and commercial agreements, together with expected world bauxite market growth, indicates that the bauxite tonnage that could be achieved at Diandian by 2000 would be 4-5 million tons per year. A third issue relates to possible conflicts with CBG in relation to access to mineral rights in the Diandian area which are understood to be within a CBG 'option area. (b) Gold 105. There is at present only one industrial gold operation in Guinea which is that of Aurifere de Guinee (AuG). It is a joint-venture with a 49 percent Government shareholding and the remaining 51 percent held by a consortium of private companies. This alluvial gold operation was scheduled to produce approximately 1.6 tons of gold in 1989 -- its first full year of operation. However, gold production in 1989 totalled only about 1.1 tons. This failure to reach full production despite an on- schedule start-up was caused by a series of technical problems partly attributable to inadequate project preparation and initial capitalization. The Government's policy of requiring 49 percent of the AuG equity free of charge may have contributed to this inadequate capitalization. 106. The future for industrial gold production in Guinea probably lies in the development of the primary gold deposits. The Birrimian rocks of West Africa which underlie nearly 30,000 square kilometers of Guinea are recognized as an excellent target for mineral exploration. Gold projects based on resources in the Birrimian are already producing or are in the development stage in Niger, Burkina Faso, Mali and COte d'Ivoire. By analogy with these countries, where much greater exploration over a longer time has taken place, there are excellent medium- to long-term geological prospects for the development of gold mines in Guinea. The prospects for alluvial gold are relatively poor partly because the deposits have been worked for centuries by artisans in a haphazard manner with partial recovery of the gold, and partly because the cover over the gold-bearing gravels consists of an average of 10 meters of consolidated laterite which makes exploration work costly. While the development of additional industrial production of alluvial gold cannot be ruled out it would be unrealistic to project significant additional production of this type. (c) Diamonds 107. Industrial diamond production today is limited to the mine in the Gbenko region owned by Aredor Guinee S.A. a company owned 50 percent by the Government and 50 percent by Aredor Holdings, a group of foreign investors. The Aredor operation produces high quality diamonds, with over  - 41 - 85 percent of the stones being of gem quality with resultant high prices per carat 28/ 108. Production by Aredor commenced in 1986 during which year 187,900 carats were produced. Production peaked in 1987 at 210,000 carats since which time production has decreased to 130,000 carats in 1989. Aredor, which has recently been granted an additional concession area, has instituted some savings in operating costs and inventory exp.nses, and the terms of the marketing agreement have been improved. The additional reserves in the new concession area should permit production of 110,000 to 140,000 carats per year and have extended the useful life of the existing processing plant until mid-1994, after which date insufficient reserves will exist within viable haulage distance to continue operating the plant. 109. The average size of diamond is expected to fall from about 0.8 carats to 0.67 carats. The future of the company after 1994 will depend on exploitation of relatively small pockets of diamondiferous gravels outside the current economic haulage distances. The working of these rich reserves will require that further capital be raised to purchase mobile washing plants and a dredge. Raising ef the additional capital is not expected to be easy. 110. Estimates of the total remaining reserves of diamonds in Guinea vary widely, with estimates as high as 500 million carats (MRNE) contrasting with others as low as 4 million carats (Soviet reports). These estimates suggest widely differing potential for additional development. However, it should be borne in mind that Guinea has been extensively prospected for diamonds. Reports from current exploration projects tend to confirm that the pockets of high-grade reserves are small and scattered and do not lend themselves to economic mining on an industrial scale. The potential for the development of new industrial scale diamond mrining operations is small. td) Other Minerals 111. The potential for the development of other minerals is dominated by the Mifergui iron ore project. This project for the mining and export through Liberia of up to 9 million tons per year of iron ore from the Mt. Nimba area has been under study for more than 20 years. The mine is highly competitive by world standards in terms of its ore grade and expected mining costs. However potential development is constrained by the iron ore market, transportation costs and arrangements for a project producing ore in one country and utilizing existing infrastructure in another, and the environmental sensitivity of the region where the project is located. A new initiative for the development of the project has been recently undertaken by the Government of Guinea (which would provide the ore 28/ Aredor prices average between US$ 200 and USS 300 per carat, compared to Zairian prices of US$ 10, and Botewanan and South African prices between US$ 35 and USS 100. Indeed, if the few particularly large and valuable diamonds that have been discovered by Aredor are taken into account, the average price has risen significantly above the US$ 300 level in some years.  - 42 - reserves) and the Government of Liberia (which would provide the rail and port infrastructure) together with a private sector group and a French parastatal. The project however remains constrained by the need to obtain adequate market assurances, the lack of firm financing arrangements, and the time required to complete an environmental impact assessment (EIA) (see para. 275 in the environment section). The required schedule for mine implementation following the EIA, expected to be completed in 1992, makes it impossible to anticipate any production from the Mifergui project before 1995, at the earliest, even should all other issues be expeditiously solved. Under the circumstances it may not be possible to make the necessary bridging arrangements to keep the Liberian infrastructure in good working order until the mine plan can became operational. Government should obtain independent expert assistance to guide its involvement in the project, and only support project implementation if adequate environmental safeguards can be established and if there is minimal financial risk to Guinea. (e) Artisanal Mining 112. Artisanal mining of both gold and diamonds in Guinea has had a checkered history with the periods of prohibition followed by periods of intense activity. The artisanal exploitation of gold was most recently legalized in 1986 at which time the whole country was opened up for this activity. It is likely that over 20,000 people eke out a living from artisanal gold operations where there are no safety precautions, no basic hygiene and a total disregard for the environment. By law, all production must be sold to the Central Bank, currently the only institution licensed to purchase gold. A licensed mine has to show proof of such sales to obtain renewal of its permit on an annual basis. 113. The Central Bank maintains purchasing offices at its headquarters in Conakry and in Kankan, which is located closer to the areas of artisanal gold production. At its Conakry office, the Central Bank buys gold at the London market price, paying up to 50 percent of the purchase value in US dollars and the remainder in local currency plus a premium of 5 percent on the local currency share. 29/ Reportedly, 80 percent of all sellers of gold to the Central Bank opt for the maximum share in US dollars. Gold purchased at the Kankan office is paid for only in local currency plus the premium of 5 percent. Artisanal gold sales are taxed with an ad-valorem tax of 1 percent and an export tax of 1.25 percent. The purchasing program of the Central Bank has an appropriate fee structure and is reasonably successful at an annual rate of one-and-a-half tons of gold per year but is limited by the lack of field offices. The Central Bank is currently developing plans to license commercial banks (and possibly also others) to buy gold from artisanal miners on its behalf; it should go further and privatize gold marketing altogether rather than bear the risk of gold-trading itself. This would expand the role of legal gold mining, thereby increasing activity in the sector. 29/ In recent times, the parallel market exchange rate has been about 10 percent above the official rate.  - 43 - 114. The Government is making a valid effort to supervise and organize artisanal gold mining with very little logistical or budgetary provision. It is recommended that the Government set up a division specifically for artisanal mining with adequate staff and that the division initiate a pilot program to organize a few, perhaps four, seri-industrial mi1ing projects with artisanal miners regrouped in cooperatives. Such a scheme would provide the opportunity to increase the recovery of the gold, to improve the health, safety and environmental conditions of the work and to upgrade the general hygiene standards for the families of the miners. In implementing the scheme emphasis should be on technical assistance to the miners rather than on regulatory aspects if it is to succeed. 115. Artisanal diamond mining continues to exist although it is illegal and carried on clandestinely. That it remains significant is evidenced by the reported flow of GuineEa diamonds other than from Aredor into the international market, by repor-s from the mining areas of up to 10,000 artisans still being active, ar more specifically by the purchase of 50,000 carats of artisanal diamond by the Central Bank. It is very difficult to determine the level of such activity. The best estimate of Guinean artisanal production flowing through Belgium suggests that it amounts to about US$ 20 million/year at present, or about 100,000 carats year which is somewhat lower than figures suggested by the Government. 116. Bearing in mind that Aredor has demonstrated the existence of small pockets of diamonds within their concession areas which are not economically recoverable on an industrial scale, the question arises as to how Guinea might exploit these resources. Legalized artisanal production appears to be a viable strategy. Such a scheme might provide subsistence employment for 10,000 to 20,000 people or more. The total value of the production from such a scheme might be between US$ 50 million and USS 100 million a year. 117. An effective marketing scheme for artisanal alluvial diamond production requires prompt payment in hard currency or equivalent local currency and there must be an element of competition among buyers; the scheme would otherwise be undermined since diamonds are extremely easy to smuggle and will be exported clandestinely if an attractive price is not offered in Guinea. Due to the low level of the total annual value of likely production there is only room for limited competition similar to the situation in C8te d'Ivoire and the Central African Republic where there are only three or four licensed exporters. 30/ 118. Artisanal diamond mining schemes do not provide much opportunity for raising government revenue from the exporters for if taxes are high they will not be able to compete against smugglers. An annual licence fee of U$ 100,000 per buyer plus an export tax of 3 percent is probably the most that could be imposed. The main benefits of legal artisanal diamond 30/ These exports of these licensed exporters should be subject to scrutiny by an official diamond appraisal office, to be established for the purpose; diamonds are notoriously difficult to value and objective appraisal is necessary to protect both producers and tax revenues.  - 44 - mining are income and employment generation in rural areas, as the uncertainty attached to illegal investment is removed. Furthermore, valuable resources would not wasted to the same extent as by the inefficient mining techniques associated with clandestine operations. C. Environuent 119. Mining has always impacted on the environment wherever it has taken place, whether on an industrial scale or on an artisanal scale. In Guinea, the most readily recognized effects of mining relate to surface disturbance associated with open-pit mining. However, it is now widely recognized that mining effects not only the physical environment (air, water, land) but also the biological environment (flora, fauna,) and the social environment (health, safety). It is apparent that environmental considerations are of increasing concern to the current industrial mining operations in Guinea. Due to the nature of the mining operations at CBG, as they relate to the land surface, no physical restoration can be started as yet. It is expected that restoration at CBG will not start for some years but the initial failure to stockpile top soil will make revegetation difficult. (It should be noted that while there was no requirement to stockpile the topsoil when the mine started there was a requirement to put the land back into a state suited for agricultural use at mine closure.) Environmental problems at CBG could further be mitigated by improved control of run-off of silt-bearing waters from the mining areas. The most ambitious programs of environmental control are being undertaken by Friguia. Various programs of revegetation are underway following stockpiling of the topsoil prior to mining, and improvements are being made to the effluent control from the alumina plant. The settling ponds are being enlarged and improved water quality monitoring is being installed prior to water discharge into the Konkoure river. In Conakry, at the alumina-loading facilities, additional measures are being taken to reduce dust pollution. At the Debele mine of OBK, the operation is now storing topsoil for later revegetating. To date, revegetation plans have been limited to attempts at planting in the barren rock without much success. Restoration of the land surface at Aredor mine is reportedly now underway, after allowing some three years for the mined-out area to settle. There are apparently no financial reserves in place to cover the cost of full restoration after mine closure. The AuG operation only commenced in 1988 but environmental problems have already occurred with excessive silt in the process water which is returned to the natural stream. Steps have already been taken to rectify this. In order to ensure adequate environment protection in the future, it is recommended that the Government prepare full environmental regulations specifically for the mining sector together with a required monitoring and reporting system. 120. 'While the environmental impact of artisanal mining might not at first be considered important, this type of activity does in fact create significant environmental problems. The physical disturbance of the ground is small but the burning of large areas to destroy the vegetation, the pollution of the waters and the adverse social and health impacts of both the work and the lifestyle on artisanal miners and their families are considerable. It is common practice to clear all the bush by burning both for the area to be worked and for living areas, thus not only destroying the flora but also driving out the fauna. The mining itself is carried out  - 45 - in extremely unsafe conditions while at the same time piling sterile waste on what little topsoil exists. The washing or processing of the gravels takes place with no consideration of the effects of siltation in the streams. Living conditions of workers and their families are generally unhygienic with inadequate safe water supplies. It is recommended that the Government undertake a detailed study as a matter of urgency on means to alleviate the environmental impact of artisanal lining. D. Recquirements for Growth 121. There is little risk capital and limited technical and managerial know-how to be found in Guinea. Consequently, the investment in new mining ventures will have to be provided by foreign investors who find the overall conditions attractive in comparison with investments in alternative locations. The basic conditions required for attracting risk capital and know-how to new ventures in the mining sector in Guinea are: (a) demonstrated good geological potential supported by a readily avail- able database; (b) identifiable mineral prospects; (c) an acceptable legal framework applied in a consistent way for all investors; (d) fiscal policies which would make mining investments competitive with investments elsewhere. 122. At present the available geological data base which is quite large is generally unavailable both because of a tradition of secrecy and the inadequacy of any storage and retrieval facilities. There is an immediate need to assemble all the available data and provide ready access to it to potential investors. All mineral-related data should be carefully reviewed and prospects identified for upgrading to the stage at which private investors find the technical attractiveness of the prospect sufficient to overcome the practical difficulties of operating in Africa. 123. The current legal framework for mining, i.e. the Mining Code and its associated regulations, contain some important deficiencies. It is recommended that the law and associated regulations be reviewed to identify and remove key uncertainties and ambiguities in the Code as soon as possible so as to eliminate many of the discretionary powers embodied in it. In particular, full guarantees should be provided that if exploration is carried out in a proper manner any discovery will give rise to the granting of mineral development rights. Furthermore, this right should apply to any mineral discovered. At the same time. the preparation of model agreements for mining development, according to clearly specified criteria, can serve to clarify the fiscal regime. Currently, the fiscal arrangements are dealt with on a case-by-case basis outside of the Investment Code and Mining Code; the Government should revise this practice and formulate a standardized tax system for new companies which gives due regard to trade-offs between fiscal revenue objectives and the need for Guinea to compete with alternative investment locations. A further key issue is the tradition of a 49-50 percent free equity participation by the  - 46 - Government in mining ventures. This creates an adverse first impression for a potential new investor, even if, in practice, its effect is offset by a reduction or elimination of the mineral royalties for which the concern in question would otherwise have been liable. 124. In addition, the experience of the existing mining companies is that Government often yields to the temptation to interfere in their wage and employment decisions. The prime effect of this practice is to either to worsen the terms Guinea can obtain in the negotiation of a mining investment or to deter such investment altogether. IV. URBAN DEBLOPMBNT A. Urban Service Deficiencies 125. When the Government of the Second Republic came to power, Guinean cities, including Conakry, were ill-equipped to support the development of economic activities. 31/ After more than 25 years of severe neglect, most infrastructure, when it existed, was in a state of utter disrepair. Large urban areas lacked basic services, and extremely poor living and working conditions affected the productivity of url-"n activities. Housing had become a critical social issue. Road investment had been insignificant over two decades and the 1984 network barely exceeded the one that existed at Independence. Lack of suitable road access deprived large portions of the urban centers of the possibility of any garbage collection service. Even in serviced areas, collection was at best erratic, and only one-fifth of waste produced daily was actually collected. Public transport companies had virtually ceased to operate in Conakry, a crucial issue given the city's linear pattern. The vast majority of urban households were deprived of access to safe water. 126. Power supply was plagued by chronic breakdowns which severely affected the functioning of economic activities. Due to an almost total lack of maintenance, most of the stormwater drainage system built in pre- independence days had fallen into disrepair, a crucial problem given the extremely high rainfall in many areas. 32/ This shortcoming resulted in severe flooding and extended road blockages, and contributed to rapid deterioration of road surfaces. This lack of systematic maintenance and the erratic functioning of urban services had caused a steady deterioration in environmental conditions which contributed significantly to already hazardous health conditions - some of the worst in Sub-Saharan Africa. This total disarray in the provision of urban services was clearly one of the most pressing social and political challenges of the new regime. 31/ Approximately 25 percent of the Guinean population lives in urban areas; the urban population is growing at about 5 percent per annum as opposed to an overall population growth rate of 2.8 percent. Conakry has a population of approximately 1 million which represents about 15 percent of the total population. 32/ In Conakry, for example, annual average rainfall is 4.2 meters.  - 47 - 127. In a very limited time, the Government of the Second Republic has initiated significant improvements in Conakry's physical environment and identified key actions to strengthen secondary cities. Priority roads and drainage rehabilitation programs have been implemented. Conakry municipal services have been strengthened to carry out systematic maintenance and repairs of the drainage network as well as garbage collection over most of the urbanized area. Additional urban roads improvement programs have been carried out. SOGETRAG, a semi-public transport company, was created in 1985 in association with private partners. With its 102 buses, SOGETRAG carries about 180,000 passengers daily on its 43-kilometer network. 128. These various accomplishments brought about important and v4"ible improvements to Conakry's urban environment in a very short time span. Continuous efforts are, however, indispensable to make up for the accumulated backlogs in the provision of essential urban infrastructure and services in Conakry and secondary cities. Close to 70 percent of Conakry's population still lives in under-serviced and over-densified areas. Uncontrolled urban growth and lack of access to adequate land development operations force households to crowd into the old central areas, where 58 percent of households are tenants, or to haphazardly occupy the periurban areas, increasing further the cost of implementing deferred infrastructure programs. Conakry's infrastructure networks are still severely underdeveloped: the ratio of surfaced roads to population is only about one quarter of what is needed for adequate coverage. The lack of appropriate links between the northern and the southern coastal roads forces traffic to make long detours through busy central areas, adding to congestion, increasing travel costs and hampering economic activity. The absence of appropriate traffic management creates additional congestion costs. The drainage network has not been properly maintained and developed to service the new urbanized areas. This situation leads to frequent floods which damage houses and businesses, inconvenience residents, disrupt traffic and erode road surfaces. 129. As regards secondary cities, the recent grot.-'h in the economy and the improvement of the interurban road network have triggered a new dynamism for the secondary cities which is visible through the rapid growth of activities at markets and bus and trucks terminals as well as the increase of motorized traffic within cities. During the previous long period of neglect, urban infrastructure in these secondary cities suffered severe degradation, to the point where it could no longer support the development of economic activities. Central markets' activity overflows to neighboring streets and creates serious health hazards due to the absence of drainage and garbage collection. Bus and trucks terminals essential for the transport of people and goods are overcrowded and inadequately designed. Drainage channels, when they exist, are not maintained and this contributes to the frequent flooding of the central areas.  - 48 - B. Goavernment Stratevy for the Urban Sector 130. Within the overall objective of laying the foundation for sustained growth through the development of private initiatives, the Government strategy for the urban sector aims at improving the support that efficient cities can give to the creation of economic activities and to the generation of employment opportunities. The functioning of Conakry and secondary cities as centers of economic growth will be improved through a three-pronged approach of infrastructure upgrading, institutional strengthening and local resource mobilization. This strategy is also designed to improve the living conditions in urban centers and reduce the serious threats that long neglect in the provision of urban services cause for the environment and the health of the population. Ill. The implementation of the strategy relies on a multi-faceted approach, designed to allow for a sustainable provision of urban services through a new partnership between public and private actors. This approach includes the following policiess (i) improved functioning of urban centers and the development of a more balanced urban network in support of improved urban-rural linkages, following the recommendations of the recently completed Regional Development Plan; (ii) improved urban services delivery through the progressive decentra- lization of urban management and the implementation of self- sustaining mechanisms for the provision and financing of these services; (iii) development of appropriate mechanisms to finance priority urban investments identified by the Urban Master Plans; (iv) improvement of the land tenure situation through the revision of land legislation and the strengthening of institutions in charge of land management; and (v) implementation of replicable housing and land development operations of a scale sufficient to accommodate urban growth. This should be achieved through the creation of an appropriate framework to support the dynamism of the private sector. (a) Improved functioning of urban centers and the development of a more balanced urban network in support of improved urban-rural linkages 132. The objectives of the regional development policy are to promote economic growth through the implementation of a balanced network of regional centers which will improve rural-urban linkages and progressively reduce the sxcessive economic predominance of the capital city. A Regional Development Plan for Guinea (Schaea National dAm6nagement du Terr/tolre) was prepared and is currently under review. Urban Master Plans and priority development programs were also prepared for various secondary cities. The underlying objectives of these programs to strengthen the economic r6le of secondary cities are:  - 49 - (i) to improve the economic environment supporting agricultural production through the provision of marketing, banking and storage services in these cities; (ii) to develop the transport network in order to facilitate the delivery of local food crops to the urban markets and the provision of production inputs to rural areas; and (iii) the decentralization of public decision-making mechanisms. 133. An Urban Master Plan for the development of Conakry over the 1985-2010 period was prepared, Following the proposed urbanization options, this Conakry Urban Master Plan identifies priority investments for the rehabilitation and upgrading of primary infrastructure in the existing urbanized areas and the extension of primary infrastructure in the areas to be urbanized within the next decade. (b) Improved urban services delivery throuah the progressive decentralization of urban management and the imnlementation of self- sustaining-mechanisms for the provision and-'financing of these services 134. Local Governments and the Decentralization Process. As part of the series of political reforms initiated after the 1984 political changes, Guinea has embarked on the progressive deconcentration and decentralization of its territorial administration which constitutes one of the key elements of the liberalization process presently underway. A comprehensive administrative reform process is underway. This reform was initiated by the Presidential Order of 1986 on Territorial Organization and Decentralized Entities (Ordonnance pr6sldentlelle relative a P'organisatlon territorlale et aux entltes decentrallsees). This Order defines a bottom to top organization from local entities (urban neighborhoods and rural districts), to urban municipalities and rural communities, to Pr6fectures. The first stage of this decentralization process concentrated on the municipal reform of Conakry. The design and implementation of the municipal reform of Conakry are under the responsibility of an Interministerial Steering Committee (ComIte directeur Interainisttrlel pour la rdforme de Conakry) created by Presidential Decree to follow up the preparation of documents regarding administrative, financial and fiscal dimensions of that reform. 135. The City and the Communes of Conakry. Following the three Presidential Decrees signed on January 5, 1989, the former Province, Pr6fectures and Sous-Prefectures of Conakry have been replaced by the City of Conakry and five Communes (Tombo, Dixinn, Ratoma, Matam, and Matoto). The City of Conakry will have a specific status and function both as a deconcentrated level of the public administration and as a decentralized authority with an elected council. Consequently, the Governor of the City of Conakry will serve simultaneously as the representative of the Central Government responsible for the management and coordination of the deconcentrated State Services, and as the President of the executive authority constituted by a future elected City Council. Documents defining and organizing the financial and fiscal status of these new local entities  - 50 - were approved in early 1990. The City and Communes of Conakry will be responsible for the provision of urban services (garbage collection, roads and drainage maintenance) previously entrusted to the former Province. 136. Local Resource Mobilization. Pending the full implementation of these new fiscal and financial arrangements, the operating budgets of the City and Communes of Conakry remain dependent on Central Government funding as local resource mobilization is still extremely weak when compared to other cities in the region. Resources collected in Conakry in 1985 amounted to only US$ 0.66 per capita, as compared to US$ 3.53 for Bamako, US$ 5.25 for Ouagadougou and US$ 13.30 for Bujumbura. These low yields are the combined result of several factors: the underassessment of fiscal potential due to poor identification of taxpayers, an inefficient billing system resulting from overly complex tax bases and rate structures and a low collection rate resulting from difficulties in identifying taxpayers. These factors are aggravated in Guinea by the poor organization and the lack of clear definition of responsibilities between tax and accounting services as well as inefficient administrative, accounting and control procedures. 137. host local revenues consist of centrally set fiscal resources collected by the deconcentrated services of the Ministry of Finance. These fiscal resources includes the patente (a tax on professional activities), the Contributicn for Local Development (Contribution au developpexent pr4fectoral, CDP) and various other taxes including a share of the tax on vehicles (Taxe unique sur les v6hlcules, TUV). Local taxes and fees make up the rest of municipal revenues, of which market fees represent the major part, since revenues from City properties and user charges are extremely low. Recent efforts have led to remarkable improvements with total resources collected growing from GP 241 (US$ 0.66) per capita in 1986 to an estimated GF 578 (US$ 1.22) per capita in 1988. These improvements result mainly from two fiscal resources: (a) the patente, for which assessment and collection were substantially iaproved; and (b) the CDP, a head tax for which the rate increased from GF 700 to GF 2,000 and which was collected from close to 100 percent of eligible taxpayers in 1988. 33/ 138. Effec-ive start-up of the new local entities should lead to a continuous improvement of the resources collected by the City and the Communes (market fees, user charges and revenues from public properties). Substantial short-term improvements can also be expected from the patente. Medium-term improvements could result from: (a) the rehabilitation of land and property taxation, following a pilot-operation to identify land occupants; and (b) a complete updating and reform of taxation on land and on professional activities. 139. Urban Services Provision and Financing. A technical unit for the provision of urban services, Unite de Pilotage des Services Urbains (UPSU), was created in 1987 and is responsible for garbage collection and maintenance of road and drainage networks in Conakry. UPSU is an administratively and budgetarily autonomous agency under the supervision of 33/ It should however be noted that certain important categories such as civil servants and the military are exempted from the CDP.  51 - the City of Conakry. UPSU's personnel is presently seconded from central, provincial and prefectoral Government agencies. The development of more self-sustaining mechanisms to finance UPSU's services is one of the critical urban challenges for the coming years. The long-term financial viability of these services depends on a reduction of operating costs. coupled with new sources of revenues. Substantial cost reduction might be expected from the contracting out of some of the unskilled tasks to private enterprises. In order to reduce the need for Central Government subsidies, the financing of these urban services could gradually be assumed by revenues from a specific new fee to be collected from the beneficiaries of the services, and from an appropriate contribution from the future budget of the City and Communes. 140. UPSU's budgeting and accounting practices should also be substantially strengthened within the framework of developing a clear budgetary allocation system. UPSU's budget should include the necessary reserves required for the depreciation and replacement of equipment and other assets. It appears, however, that despite these efforts, local resources alone will not be sufficient to finance the costs of the urban services provided by UPSU and that a declining subsidy will remain necessary for the short- to medium-term (3 to 5 years). (c) Development of appropriate mechanisms to finance priority urban investments identified by the Urban Master Plans 141. The immense backlog in basic infrastructure provision and maintenance coupled with priority needs resulting from the rapid growth of the urban population and of economic activity, justify considerable investments over the coming decades in order to improve the urban environment. Improved mobilization of municipal resources will, at best, allow for the financing of basic urban services such as garbage collection and road and drainage maintenance. Priority urban investments will thus have to be financed either through the direct contribution of households and enterprises or through the public investment budget. 142. Households and enterprises should pay directly for the cost of billable services, such as water and electricity, as well as for the cost of basic road and drainage infrastructure directly serving individual plots. This financing principle implies the development of intermediary actors with the borrowing capacity to finance investments and the authority to recover costs from users. Rehabilitation of the institutions in the water and electricity sector is presently underway. The development of appropriate institutional mechanisms for land management is considered below (see para. 149). 143. The Urban Investment ProgLam. An indicative program for priority urban investments during the 1989-95 period was established as part of the Conakry Master Plan. The share of the Public Investment Program (PIP) to be allocated to primary road and drainage infrastructure as part of total urban investment was estimated based on the ratios below, which are generally considered appropriate for countries with similar levels of development and urbanization. The distribution of urban investments between Conakry and secondary cities results from the overall objective of implementing a more balanced urban network while taking into  - 52 - account existing infrastructure backlogs as well as the limited absorptive capacity of urban centers outside of the capital. -- Total urban investment equivalent to 25 percent of PIP or 3 percent of GDP; -- Primary road and drainage infrastructure equivalent to 20 percent of total urban investment or 5 percent of PIP (this is approximately the ratio included in the 1990-92 PIP)s and __ Conakry's share and secondary cities' share equivalent respectively to 70 percent and to 30 percent of primary infrastructure investment. 144. The investment program for primary infrastructure during the 1989-95 period amounts for Conakry to a total of US$ 66.3 million, including US$ 17.1 million for 1989-90 and US$ 49.2 million for 1991-95, and for the secondary cities to a total of US$ 28.4 million. Corresponding priority operations were identified as part of the Conakry Urban Master Plan and of the priority action programs for secondary cities. The regular updating of the urban investment program as well as the adjustment of service levels to reflect their economic justification will be facilitated by the strengthening of the Ministry of Urban Development and Housing's planning and programming capability. 145. As far as the supply of water to urban areas is concerned the sector reforms (see Box 1 in Volume I) have created an enabling environment, recognized by private investors and the donor community. In this new context, mobilization of external financing, amounting to more than US$ 100 million for rehabilitating existing facilities and expanding the Conakry water supply system has been straightforward. 146. However, the investment backlog accumulated in the last thirty years remains considerable. Only 13 of the 34 major urban centers are equipped with piped water systems. Less than 40 percent of the urban population of about 2.4 million have access to piped water either through connections or through standpipes, with the remaining portion relying on unsafe resources for their water needs. Uncontrolled expansion of water systems may, however, jeopardize the financial viability of the sector, which has yet to be built up. Accordingly, the overall development strategy of the sector is primarily based on the establishment of a sound revenue base in Conakry and the mobilization of highly concessional resources for financing investments in secondary centers. Over the next ten years, it is estimated that about 55 percent of the urban water supply investments should be allocated to Conakry. (d) Improvement of the land tenure situation through the revision of land lexislation and the strengthening of institutions in charge of land management 147. Land Tenure Imorovement. Legal land tenure is governed by the Civil Code (Code cdvii) and legislation dating from 1962 and 1974. These texts recognize the overall ownership by the State of all national territory including land which has been built upon, developed or cultivated by private users or legal entities. Article 543 of the Civil Code  - 53 - specifies that all land in Guinea belongs to the State and that private land rights are limited to the ownership of structures and crops developed by the legal occupants. In theory, urban areas should be covered by subdivision plans (plans de lotiseament) defining public spaces and individual plots which can be granted for private construction. In practice, subdivision plans cover approximately only one-third of urbanized areas in Conakry. As part of the physical implementation of these subdivision plans, usually limited to plot demarcation, one-third of the plots were usually granted to the customary land occupants and the other two-thirds allocated by Government to new urban households. Due to the inadequate resources of the Lands Directorate (Direction des affaires foncl6res, DAFO) of the Ministry of Urban Development and Housing (MUH), the implementation of new subdivision operations has virtually ceased since 1986. As a consequence, access to land occurs through the densification of existing settlements or through informal and unregistered arrangements between newcomers and the customary occupants of the periurban areas. 148. Within this context, three types of land tenure situation presently coexist: (a) A limited number of land titles were granted during the colonial era, but this practice was discontinued at Independence. These land titles are registered in the Land Book (Livre foncier) which, in theory, should be kept and updated by the DAFO. (b) Provisional occupancy permits (arrets dEoccupation provlsolre) were granted to the recipients of plots located within subdivision plans. These temporary permits can be converted to permanent occupancy permits (arr4tes d'occupatlon d4flnltlve) after appropriate plot development within a three-year time limit. Permanent occupancy permits recognize the ownership of property improvements without any time limit. Temporary and permanent occupancy permits, which constitute the only forms of legal tenure since Independence, are registered in a special land roster (bottin foncier) kept by the DAO. (c) Illegal settlements represent the most frequent form of urban land occupancy and result from informal and unregistered financial arrangements with customary occupants. The rapid construction of minimum housing structures, in concrete by preference, is the only way for the occupant to obtain occupancy rights from the Lands Administration, the local community and even the customary seller of the plot. Out of a total residential area of 5,925 hectares in Conakry in 1985, 2,000 ha had been conventionally developed, 1,335 ha consisted of traditional neighborhoods which had been officially restructured, and the remaining 2,590 ha had been irregularly subdivided following informal arrangements. The latter area has substantially increased in recent years, with the vast majority of the 4,000 new plots or 200 hectares of urban land being developed annually outside of any planning control. 149. In addition to ongoilig reforms, the Government has initiated the updating and revision of legislation governing land management. Several  - 54 - possibilities are presently under consideration, including a progressive return to land titles. The new legal mechanisms considered would also lead to the transformation of occupancy permits into more secure land rights (leaseholds, emphyth4oses or drolts de superficle) allowing for their free transfer as well as for the use of construction or improvement as collateral for mortgage loans. A program to strengthen the capacity of the DAFO to produce, maintain and update land documentation is a prerequisite to any improvement of urban land management. A pilot operation to revise land documentation within Tombo, the city's old business district is projected. The results of this pilot operation will facilitate the identification of a feasible program to improve land documentation for the rest of Conakry and secondary cities. This program will include the strengthening of land management institutions as well as the implementation of streamlined registration and transfer procedures for land rights and occupancy permits. (e) Implementation of replicable housing and land development operations of a scale sufficient to accommodate urban growth through the creation of an appropriate framework to support the dvnamism of the private sector 150. Recognizing that the bulk of housing production and land development results from the private initiative of informal actors, the Government has decided to implement a new housing policy relying on this dynamism of the private sector. At the same time it will develop appropriate procedures to integrate individual actions within coherent and efficient land development operations and provide households with access to urban services and land tenure security. The overall objective of this new strategy is to develop an appropriate regulatory framework allowing for an increase in formally recognized housing production in order to meet growing urban demand, and induce significant improvement in the functioning of the housing market. The MUH has prepared detailed implementation plans for this new housing policy which will rely on four interrelated principles, designed to allow for replicable operations to meet existing demand: (a) Public intervention should concentrate, as a priority, on the provision of primary and secondary roads and drainage infrastructure. These infrastructure networks will set the boundaries for large blocks of about 10 ha within which planning regulation should be minimal. (b) The internal subdivision and infrastructure servicing of these large blocks should be carried out by a variety of developers, private, semipublic or public including local governments, neighborhood committees and homebuilders associations. (c) The rights and obligations of the developers will be detailed in a development authorization (autorisatlon d'amenagement) prepared by MUH. This authorization will include a land grant (concession fonc/ere) and specify land management procedures to be followed by the developer. The authorization will also specify the development fee to be paid by the developer to allow for secondary infrastructure cost recovery and replicability of the operation. Within this contract, the developers will be free to determine subdivision layout and infrastructure  - 55 - servicing. This will favor broad participation in planning and defining priorities for housing and land development. (d) The developers will deliver certificates allowing purchasers of plots to formalize their tenure status and apply for a legal land title. C. Urban Sector and Socio-Economic Development 151. The Government has adopted, and begun to implement, a far- reaching strategy to improve the functioning of urban centers through a multi-faceted approach of: (a) development of a more balanced urban network in support of regional development; (b) progressive decentralization of urban management; (c) appropriate financing mechanisms for urban investments; (d) improved management of land resources; and (e) implementation of replicable land development operations. In view of the key rOle that Guinean cities play in the economic recovery process, the implementation of this strategy will prove vital in enhancing the capacity of urban centers to stimulate economic growth and to alleviate poverty through the creation of an enabling environment for the development of small enterprises. An efficient urban network will not only generate local employment and income with a high multiplier effect, it will also, through Improved urban-rural linkages, support the development of its rural hinterland. The physical and social environments will also be greatly improved as a result of the strengthening of urban institutions and of the resulting improvement of resource mobilization and community participation at the neighborhood level. Working and living conditions in Guinean cities will thus be enhanced through the active participation of the population in the improvement of its environment, as part of the democratization and liberalization process presently underway. V. ENERGY A. Backaround 152. Guinea is exceptionally well-endowed with energy resources, particularly hydroelectric potential and fuelwood. 341 However, despite its endowment of energy resources, Guinea is a country that by any measure must rate amongst the most poorly served in the world as far as supply of energy is concerned. Per capita energy consumption is rated at just under 500 kilograms oil equivalent (kgoe) and this figure falls to below 300 kgoe per inhabitant if consumption by the enclave mining operations is excluded. 35/ Fuelwood makes up the preponderant share of energy consumption, with an estimated 85 percent of the total, in part because potential demand by consumers for commercial energy (petroleum products and electricity) is not being satisfied. 341 Available geological and geophysical data indicate are that any reservoirs of petroleum that might exist would probably be small and deep. Unit costs and risks of development would probably be too high to attract petroleum companies. 351 Compared to 700 - 1,000 kgoe per capita in the neighboring countries.  - 56 - 153. Energy supply bottlenecks have now become one of the most serious constraints to economic development and a major cause of environmental degradation. Transport fuels are unavailable in many areas, and industry has to provide its own power if it wishes to obtain access to electricity at acceptable levels of service. In the household sector, the absence of modern forms of energy causes consumers to utilize biomass (wood and charcoal) almost to the exclusion of other fuels. However, poor forest management leads to indiscriminate exploitation of fuelwood resources and deforestation near urban areas. Major policy reforms in the energy sector, accompanied by selective investments, are critical to future economic development in Guinea. 154. Energy consumption patterns in Guinea at the present time can be summarized as follows: (a) Biomass: Because of the lack of availability of alternative fuels, consumers in the household sector have been obliged to turn to biomass for their energy requirements even though this source may not necessarily correspond to their preference. Fuelwood and charcoal therefore make up the preponderant share of total energy consumption with an estimated 85 percent of the total, consumed by more than nine households out of ten. (b) Petroleum: Hydrocarbon products have been practically unavailable for most consumers outside Conakry, except for consumers in positions of authority. Since 1970, when the operations of the international petroleum companies were nationalized, there has been a distinct regression in availability of petroleum products and quality of service. Those supplies which do reach the interior of the country tend to do so through informal distribution channels at prices that bear little relation to official rates. The insecurity of supplies of transport fuels has an extremely damaging effect on the transport sector, with deleterious downstream consequences on other sectors of the economy; for example, agricultural produce often cannot be taken to market at reasonable cost, and the transport component in the cost structure of manufactured goods is an impediment to economic growth. The breakdown of the petroleum product distribution network also hinders the Government in mobilizing important tax revenues from this source. (c) Electric Power: The public power supply system in Guinea is comparable to those of neighboring countries thirty years ago. Power markets are small and separated by hundreds of kilometers. Although hydroelectric potential has been estimated at fully 26,000 GWhlyear (6,000 MW) under average hydrological conditions, currently only 1 percent (300 GWh) has been developed. Even by subsaharan African standards, access to electrical utility service is minimal, with less than 2 percent of the population -- 40,000 consumers at most -- having some form of service from the public utility. Another segment of the economy, which has an installed generating capacity greater than that of the utility, resorts to autogeneration via a multiplicity of inefficient small generators at considerable economic cost to the country; only the large mining concerns are geierating electricitj in an efficient manner. In addition, even the limited service available from the public utility is unacceptably poor in  - 57 - quality -- characterized by lack of continuity, wide voltage swings, and prolonged daily outages experienced by virtually every consumer. Further, this poor service is produced at high cost and at extremely low efficiency. Under-investment in power has plagued the country and has served to stunt growth in the economy at large. B. How the sector has evolved since 1980 (a) Biomass 155. Firewood and charcoal continued to be the dominant source of energy over the entire decade. Firewood use is much more common than charcoal; virtually 100 percent of rural households, and 90 percent of urban households outside Conakry, use firewood exclusively. The use of charcoal is reserved for the capital where 40 percent of households use no other energy source, and for the balance of households in other urban centers. There seems to be no significant use of agricultural or animal residues as fuel. This consumption pattern is similar to the ones observed in other coastal West African countries one to two decades ago, and is unlikely to evolve significantly until constraints on supply of other energy sources are lifted. 156. The principal household use of wood-based fuels is for cooking food. Biomass is also utilized for heating water (essentially for washing); for space heating, especially in Moyenne Guinee, where the altitude makes the nights colder; and, in the poorest rural households or where petroleum products are not available, even for lighting. Cooking is carried out mainly on traditional open fires and other traditional types of cookers. so fuel efficiencies are extremely low, of the order of 8-13 percent for fuelwood and about 19 percent for charcoal in a "Malgacheu stove. Data on consumption are poor and of doubtful reliability, but biomass consumption is estimated to average about 2.5 kg/capita of wood equivalent per day 36/, a figure which is high by West African standards but which can be explained by the relatively low efficiencies of utilization. 157. Data on uses of wood fuels other than in households (restaurants, vendors, bakeries, fish smoke-houses, laundries, brick- makers and miscellaneous small industries) are almost completely lacking. Broad estimates based on FAO information on other West African countries could set the level of non-household consumption of wood fuels at about 20 percent of that of household consumption. 361 Sample surveys indicate that fuelwood consumption averages about 2.4 kg/capita/day in areas outside Conakry, while average consumption in the capital is of the order of 1.1-1.25 kg/capital/day depending on whether the household uses charcoal or not. Charcoal consumption, of which 80 percent is concentrated in the capital, averages 0.3-0.4 kglcapita/day (1.68-2.24 kg wood equivalent) for consumers using this source exclusively, and 0.19 kg/capitalday (1.06 kg wood equivalent) for consumers using both sources.  - 58 - (b) Petroleum 158. Exploration. In 1980 the Government and Union Texas Petroleum formed la Soclete GuWn4enn des Hydrocarbures (SGH), a 50150 joint-venture, to explore a permit of 36,000 Km2. After initial exploration, Union Texas, acquired by Superior in the meantime, committed itself to drill a first exploratory well in 1983. However. drilling was delayed by a border dispute that broke out between Guinea and Guinea-Bissau and, by the time the World Court came to a settlement in 1985, Superior had itself been acquired by Mobil which withdrew from Guinea in 1986, upon which SGH was dissolved. In order to renew interest in petroleum potential a petroleum exploration promotion campaign commenced in 1987, without any significant success to date, no sufficiently attractive potential deposits having been identified. 159. Supply of Petroleum Products. Guinea is entirely dependent on imports to satisfy its requirements of petroleum products. The country possesses no refinery, although several projects have been considered over the years, including one which led to a complete feasibility study in 1982. This was followed more recently by pre-feasibility studies carried out by Yugoslavian, US and Rumanian companies. Negative economic rates of return on the projects were found. 160. Consumption of Petroleum able 11 Products. Available figures give a breakdown for consumption of petroleum (O) products between the mining sector, with 65 percent of total country-wide 1984 199? deliveries in 1987, and the domestic GasoIIn 9S,810 =28 market with 35 percent. These figures should be adjusted to include illegal Jet Fuel 14,816 1,657 Imports from C6te d'Ivoire and Liberia, Diesel 110,132 150,290 which are primarily targeted at the household sector. Total consumption of Heavy Fuel 210.09 27e.eo petroleum products grew at about 3.4 percent over the period 1984-1987, Total 438,286 554,706 compared with under 3 percent in the preceding period. Growth would have been far higher were the official distribution network not in a state of complete disarray outside Conakry. Substantial unsatisfied demand for petroleum products therefore exists, even at prices significantly above present levels, which is evidenced by the fact that consumption inland from the capital is regularly supplied piecemeal by private individuals in small quantities (drums attached to private vehicles travelling to the interior, for example). For this reason, any breakdown of consumption between Conakry and the irterior should be subject to caution. 161. Apart from smuggled imports, Guinea obtains its supply of petroleum products on the international market through periodic tenders. In most of the cases examined, the products originated physically either from refineries in the region such as SIR in Cote d'Ivoire, or from European refineries. A non-systematic check of a small sample of these tenders showed that, after the change of government, procurement was initially carried out under internationally competitive conditions. Unfortunately,  - 59 - for some time, these principles have ceased to be applied and the cost of petroleum product supply has consequently tended to increase. 162. Institutional Issues in the Petroleum Subsector. Until their activities were nationalized in 1970. supply and distribution of petroleum products were assured by five international petroleum companies. Since 1970 these activities have been the responsibility of the public enterprise roffice National des Hydrocarbures (ONAH) which, on paper, presently holds the monopoly for these activities on the domestic market (excluding the mining sector, which imports its requirements directly). ONAH's physical assets include depots at Mamou and Kankan, a fleet of tank-trucks, and about 200 service stations; all are in poor condition through lack of maintenance, and many of the facilities, particularly in the interior of the country, are no longer functioning. The private sector is present at the offloading terminal and in a recent joint venture company (SOMCAG) set up in 1984 to supply jet fuel at the airport. Although construction of the new jet fuel depot was terminated in 1987, its commissioning was beset by institutional problems and it only became operational two years later in 1989. 163. The present public sector arrangement for petroleum product distribution is completely unsatisfactory, and has not yet been resolved. It is clear from the experience of parastatal operation in Guinea, however, that until the distribution of petroleum products is in private hands, this essential input will not be available for the economy, and the Government will forego significant tax revenues which could be raised from this source. (c) Electrical Power 164. Institutional Aspects. La Soclete Natlonale d'Electrlcit6 (SNE) -- the State-owned power utility -- was in a virtual state of collapse over the entire decade of the 1980s. Until the second quarter of 1989, SNE functioned as a Gcvernment department without any management autonomy. Decisions on virtually every aspect of operations: personnel (recruitment, layoffs, discipline, pay), contracts, and treasury operations for payments of even small sums, had to pass through a complicated system of controls, involving layers of ministries and Government departments, which was a major impediment to efficient operation. 165. In 1982 the Government undertook a far-reaching rehabilitation and reform program aimed at repairing the old SNE system. This program included a relatively large-scale foreign technical assistance and training component to address the issues of institutional and management weaknesses. However, for a number of reasons, only modest institutional improvements were achieved. Lack of success resulted in part from an inability to deal adequately with the forces resisting policy changes being sought under the program; technical assistants were not placed in positions of authority where they could stem corrupt and inefficient practices, and indeed, were chosen more on the basis of technical than management skills. Many institutional problems were encountered. First, there were weaknesses in the corporate environment: (i) fragmented responsibilities between the line ministry and the utility as well as within the utility itself; (ii) a certain organizational informality; (iii) inadequate communication between  - 60 - service functions 37/; and (iv) widespread fraud and lack of discipline. Secondly, there were certain underlying deficiencies on the organizational and structural level as well as in internal financial controls. Finally, human resource problems emanating from substantial over-staffing, poor definition of responsibilities, lack of supervision and inadequate compensation schemes, plagued the operation. 166. Power system development. In September 1984, Guinea initiated studies to develop a Power Master Plan to cover the development of the national power system through the end of the century. In June 1986 a donor meeting was held in Conakry to review findings of the study. The conclusions of the studies. calling for the development of an integrated national grid and a number of large hydroelectric schemes, were called into question. First, unreasonably large capital investments were required to develop the master plan (total investment to the year 2000 was US$ 1.2 billion). Secondly, knowledge of some hydroelectric sites examined was only at the pre-feasibility level, whereas others were at much more advanced stages. Lack of solid information cast doubt on whether the power expansion plan was in fact a least cost program. 167. Following the June 1986 meeting, supplementary hydro-resource studies in the Guinee Maritime and the Haute Guinee regions were carried out. The preliminary results of these additional studies, which have not yet been completed, suggest that there are several promising expansion projects, cf which the main one could turn out to be the Garafiri/Kaleta complex on the Konkour4 River. 38/ (d) Reforms Introduced by the New Regime and their Initial Impact 168. Underlying sector deficiencies. The central problem which continued to plague the energy sector in the 1980s was the frailty of sector institutions. Institutional weakness exists first, at the Government level; then, within the sector public enterprises it oversees (ONAH and SNE 391). Within these two enterprises, management is grossly deficient. The habit of excessive centralization, a holdover from the previous regime, is difficult to break, and hampers day-to-day operations. The comon functions of accounting, cost control, human resource management and financial management are to all intents and purposes inoperative. On 371 Some of these of course resulted from basic infrastructure weaknesses, for example, lack of telephones and radio links, unreliable internal mail and absence of copying machines in working order. 381 This project could materialize after one or more intermediate thermal projects. It consists of (i) a reservoir and a 75 Mw powerhouse at Garafiri having a guaranteed energy output of 226 GWh. The estimated project cost of this component, excluding interest during construction but including transmission, access roads, and land, would be about US$ 195 million (January 1988 dollars) and (ii) a downstream development at a later stage at Kaleta of 80 to 120 Nw. The combined output of the complex would be approximately 850 GMh. 391 Since named Enelgui.  - 61 - the technical level, operations in the electricity sub-sector have only been able to function as they have through substantial foreign technical assistance. It has taken administration of ONAH by foreign technical assistance to maintain what little level of service still exists for petroleum product distribution. The problem of how to make staff responsible and how to motivate them is acute; management skills as a whole are largely lacking. 169. Fragmentation of responsibilities. Within the Government of Guinea, the energy sector is the responsibility of the Secretariat of State for Energy (SEE) within the Ministry of Natural Resources and Environment (MRNE). This Ministry groups a wide range of goverunental units whose objectives and responsibilities are often ill-defined and whose staffs lack the skills and means necessary to monitor the sector and propose energy policy. Overlapping of functions and duplication of effort exists between the operating utility and the SEE staff. This fragmentation of responsibility means that no functional unit has the range of talents and capabilities necessary to meet requirements of each department properly, which dilutes accountability. 170. Reforms and their initial results. The Government is acutely aware of the institutional weaknesses of the sector. It has sought to tackle these problems through a series of fundamental reforms; so far, these have been largely ineffectual: ;i) Electricity Subsector. For the power utility, enabling legislation and corporate statutes for a new, relatively autonomous, parastatal enterprise were promulgated in August, 1987. These statutes transformed SNE into ENELGUI, a financially autonomous public corporation with an independent board of directors, whose members came from the public and private sectors of the economy. The new enterprise owns all electric assets previously held by SNE, has monopoly rights for electric utility service throughout Guinea, except within the mining enclaves, and, in principle, has full autonomy for day- to-day operations. Notably, it also has broad latitude for the planning and execution of its own investment program. The rOle of the line ministry was redefined away from its previous planning and day-to-day operational control of the sector to one more focussed on sector macro policy formulation and regulatory oversight over ENELGUI. Initial results of this reetructuring have been disappointing so far; for example, the new board took 16 months to convene its first meeting, and the organizational restructuring of the utility did not advance beyond the planning stage until the beginning of 1990. However, since the recent recruitment of new technical assistance at the senior management level, some signs of progress are apparent. (ii) Petroleum Product Distribution. Although the Government placed the liquidation of ONAH and its replacement by a joint private sector/public enterprise company as one of the top priorities in its structural adjustment program, agreement has only just been reached after three years spent negotiating with private sector petroleum companies for the creation of a joint venture distribution company. Privatization of petroleum product  - 62 - distribution will involve two separate but parallel series of measures: * liquidating the existing ONAH structure; and * retaining private sector distributors to carry out the distribution of products in place of ONAH. As financial requirements for the rehabilitation of the network are considerable (of the order of US 15-18 million), it is necessary for the wholesale distributors to be foreign companiec able to provide the necessary resources. Some progress has recently been made in this area with the signature of a memorandum of understanding between the Government and three oil companies, with regards to the privatization of petroleum product distribution. The final agreement will only be concluded at the end of 1990 at the earliest. These institutional problems are, at least in theory, in the process of being resolved with technical assistance, the objective of which was to liquidate ONAH, but which has become, by default, a day-to-day administration of the sector. (e) Where does the energy sector stand at mid-1990? 171. The lack of supplies of energy at reasonable cost has now reached a point where it has become a major constraint on economic development. Levels of production within the economy are constrained by the absence of this essential input. Government finances are weakened by lack of mobilization of resources from petroleum product taxation, and by the financial drain from a non-performing power utility. The latter, as a stand-alone entity, is virtually bankrupt because it has not been able to master any of its commercial operations, from billing to revenue collection. Enelgui's burden on the Government's budget has now become a serious cause for concern. Cash flows have been inadequate in past years; less than 30 percent of the electricity supplied in the past year was paid for. Over 50 percent of registered consumers do not have meters, and a large number of consumers utilize clandestine connections. 172. In the case of biomass, for most of Guinea, fuelwood production is not of itself a direct cause of deforestation but rather a byproduct of forest clearance for agricultural purposes. In the vicinity of some large urban areas however, notably Conakry and Kankan, fuelwood resources are being exploited for the sole purpose of satisfying commercial fuelwood demand. This is leading to over-exploitation, particularly of the mangrove forests along the coast. Severe environmental damage and loss of fisheries resources, e.g. shrimping, results from this situation.  - 63 - C. Perspectives in the energy sector over the lonaer term (1990-2000) (a) Biomass 173. Policy issues and constraints to be overcome in the biomass subsector. The principal pressure on Guinea's forests arises from population growth and the resulting encroachment on forest land for agriculture and grazing. Deforestation is aggravated by the practice of slash-and-burn shifting cultivation and bush firing, combined with fallow periods too short to permit natural regeneration of the vegetation. Land tenure issues prevent rational exploitation of forest resources, and lead to biomass being priced at its harvesting cost and not at its long run marginal cost which would include replacement costs for the trees. 174. Investment Needs. In the biomass subsector, there is a near- total lack of knowledge of projected demand and capacity requirements over the medium term. In June 1989, the joint World Bank/UNDP Energy Strategy Management Assistance Program (ESMAP) commenced providing assistance to the Government for a survey of biomass resources and to draw up a long term development plan to identify requirements in this sub-sector. This project is expected to lead to a detailed action plan and investment program intended to address the issues in the household energy sector: (i) introduction of improved stoves and improved techniques in wood carbonization; (ii) inventory of forestry resources and delineation of forestry zones for commercial fuelwood supply; (iii) establishment of a household energy consumptior database, based on household energy surveys; and (iv) definition of an appropriate policy and institutional framework for the promotion of mini hydro power plants. At the present time a survey of rainy season fuelwood consumption and supply is being undertaken. This will be followed later this year by an intensive training session for Government officials in household energy planning techniques, and by mapping of fuelwood supply zones. (b) Petroleum 175. Policy issues and constraints to be overcome in the petroleum subsector. The extremely slow progress on privatization of petroleum product distribution illustrates, first, the lack of definition of clear lines of authority within the Government; second, the absence of clarity about who is, and more importantly, who is not, responsible for what; and finally, the difficulty for foreign private sector companies in doing business in Guinea. A recent diagnostic of the situation in the petroleum sector carried out by a consulting firm for the government identified four issues requiring attention: (i) poor coordination between ministries and ministerial departments operating in the energy secior; (ii) absence of energy planning and energy statistics; (iii) the ill-defined relationship between line ministries and public or private enterprises active in the energy sector;  - 64 - (iv) an absence of any legal framework, coupled with a weak regulatory capability for pricing and other operational issues related to petroleum product distribution. 176. Institutional remedies include reorganizing the State Secretariat for Energy (SEE) in line with changes in the energy sector brought about by the liquidation of ONAH. The creation of an Interministerial Consultative Petroleum Commission to coordinate affairs in the petroleum subsector should be examined, and the Hydrocarbons Directorate's mandatt should be widened to cover regulation of petroleum product distribution activities. 177. Investment Needs. Once the petroleum parastatal has been liquidated and replaced by the private sector, the first task of the new petroleum distribution company will be to examine the state of the sub- sector and define investment requirements to deal with rehabilitation of existing facilities and construction of new capacity. It is likely that investment requirements for the distribution of petroleum will involve the reconstruction of practically the entire distribution network (at least 45 service stations in an initial phase) as well as storage capacity in the interior of the country. As far as inve tment in physical capacity is concerned, rehabilitation of the distribution network should as far as possible be left to the private sector. However, given that the new petroleum product distribution company will be a joint Governmentlprivate sector enterprise, rehabilitation and expansion of physical capacity could be constrained by the Government's lack of resources to match those put forward by the private sector. If this proves to be the case it will be essential for donors to assist the Government with financing for its share of the investment. 178. For exploration of Guinea's petroleum basins, the effort commenced under the exploration promotion campaign to attract foreign private sector risk capital should be maintained as this is the sole source of funds for exploration and development of Guinea's hydrocarbon potential. (c) Electric Power 179. Policy issues and constraints to be overcome in the electricity subsector Reform of the subsector institutions involves providing immediate assistance to ENELGUI to allow it to function in a viable way. In order to facilitate the transformation of a dysfunctional SNE to a viable ENELGUI, the new Board of Directors decided on a solution involving the delegation of the full management authority of the Director General to a foreign technical assistance team, on an interim basis. This decisio-n was formally ratified by the responsible ministry. This technical assistance consists of a three-person management committee which holds final responsibility for the range of operational functions within the public enterprise, for putting in place comprehensive management reforms and for creating a new corporate culture; the team began work in May 1990. 180. The financial management of Enelgui also requires strengthening, both for internal reasons as well as to reduce Enelgui's burden on the Government's budget. Cash flows need to be improved, primarily via concerted attention to billing and collection. Tariff adjustments are  - 65 - required on two frontss (i) in the short term, to pass on to consumers the increased cost of fuel, via implementation of the fuel clause provision in the tariffs; and (ii) in the near term (next 12 months), revenue levels must be set such that full cost recovery and funds flows are generated in line with the newly established capitalization structure of ENELGUI. Treasury operations and internal financial controls need to be rationalized in line with the new corporate structure of ENELGUI. Further, the list of unresolved financial control deficiencies, identified by the external auditors in the various annual audits carried out since 1985, need to be addressed. It should be noted that the strengthening of Enelgui's financial management is one of the priorities of the technical assistance currently in place. 181. The construction of new generation capacity will require major investments. Without prejudging the outcome of the studies currently being undertaken, the optimal development program seems to be to invest in one or more intermediate thermal projects before implementing the GarafirilKaleta complex on the Konkoure River. A study of the environmental impact of the Garafiri hydroelectric project (the first phase of the Konkoure complex) and the preparation of an environmental action program are underway as part of the project's feasibility study. The program will address, inter alia, issues relating to environmental rehabilitation and forest management. 182. While the least-cost generation expansion program is not yet fully defined, it is expected that, until Garafiri is commissioned, increased supplies will be provided in the Conakry area by means of three additional 5 MW medium speed diesel generating units-at Tombo. At least two of these units will utilize heavy fuel. 183. While the choice of the Konkoure complex as the next tranche of investment attends to the problem of growth in demand in the coastal region, the problem of power supply in Haute Guinee 3till needs to be resolved. A reconnaissance study is underway to identify a promising run- of-river facility, of a capacity of 10 - 20 MW and a total investment of the order of US$ 25 -US$40 million. This would be on the Milo river, about 90 km south of Kankan, at one of two potential sites (either Kogbedougou or Farankonedou). An alternative regional development option would be to install medium diesel units to satisfy consumption growth in this region. The potential of transferring units from the Conakry system if the dileta site is developed could also be considered. 184. Rehabilitation and Maintenance of Existing Capacity. The run- down state of the existing power supply and distribution system must also be addressed. The recent rehabilitation of the hydroelectric stations on the Samou River (Grandes Chutes, completed in late 1987, and Donkeah, completed in 1989) gave a boost to system reliability and to improved financial performance of the power utility by reducing fuel costs. However, the entire network continues to deteriorate, as orders for essential spares and even basic maintenance are often not executed. Even after the 1987-88 additions of two 5 MW diesels at Tombo station in Conakry, service in the capital remains poor due to numerous supply interruptions. 185. The Government's 1990-1992 investment program in the electricity subsector contains, in addition to the projects outlined above, a number of  _ 66 - projects of questionable economic or financial viability (rural electrification, mini hydro plants, etc.). While many of these are financed by grant, they nevertheless pose a serious problem of how recurrent costs are to be financed, as long as cost recovery remains unsatisfactory in the sub-sector. VI. TRANSPORT A. The Transport System 186. Given the severe climatic conditions and some high mountain ranges, transport infrastructure in Guinea is both difficult to build and maintain, and costly to operate. At the end of the First Republic, after years of inadequate maintenance and sparse new investments, Guinea was left with some of the most rundown infrastructure and least efficient transport operations in Africa. A nominally adequate classified road system of about 14,000 km at Independence had been reduced to a bare-bone network of less than 5,000 km of passable roads, of which only 1,200 km were paved. Guinea's national railways, with 660 km of main line, had virtually ceased operations, although the three mining railways 40/ continued functioning normally under the control of the mining companies. Of the country's two deep-water ports, that in Kamsar, built in the early 1970s for bauxite handling, was operating satisfactorily, but Conakry, the country's main general cargo port which also handles bauxite and alumina exports, was completely run down. A small secondary port at Benty, serving agricultural exports before Independence, was no longer in use. While the international airport in Conakry was partly rehabilitated in 1983, the nine secondary airports were in poor condition. Moreover, airport security and naviga- tion equipment were dangerously substandard and among the worst in the African continent. The national carrier's (Air Guinee) financial situation -- like that of all other transport parastatals -- was precar- ious and its efficiency low. 187. The capacity of all transport modes in Guinea was insufficient to meet existing levels of demand, much less the increase in demand expected with the economic reform program. Rehabilitation and maintenance of core infrastructure and restructuring of sector agencies are central concerns of the new Government's near- and medium-term strategy for all transport subsectors. Limited reconstruction of roads and of Conakry port started under the First Republic, under two highway projects and a first port project. Rehabilitation efforts have been continuing, with some limited capacity expansion, under a transport sector project and a new highway project. Concurrently the Government has embarked on a sectorwide reform program, focussing on institution building, privatization and appropriate policy design and implementation; however, much more is needed in infrastructure rehabilitation and development to meet increased demand as economic reform measures take hold and productive sector activities develop. 40/ Conakry-Fria (140 km), Conakry-Kindia (110 km) and Sangaredi-Kamsar (135 km).  - 67 - B. Roads 188. The situation is most critical in the vital road sector. The National Road Network consists of (a) a primary road network of about 4,600 km (of which 1,200 are paved) which connects the main economic center, Conakry with the prefectures and the pr6fectures to each other; and (b) a secondary road network of about 1,500 km that links isolated remaining prefectures to the primary road network. The Regional (or tertiary) Network of 5,000 km comprises rural tracks which link sub-prefectures to the primary and secondary network and provides access to isolated regions. In terms of road density Guinea is one of the worst served countries in Africa: it has merely 4.3 km of roads per 100 sq.km and 1.8 km per 1,000 inhabitants. 41/ Links with neighboring countries are limited, with less than ten passage points being useable all year round. 189. Moreover, the condition of the road network is poor. Transport of agricultural products from the coastal areas to the Conakry region and of coffee and other crops from the interior to the capital have been reduced significantly, or in some instances, have stopped altogether. Large areas of the country are in isolation making economic exchanges rare and expensive. These conditions constitute a major obstacle to the Government's efforts to develop a productive market-oriented agriculture sector in the newly liberalized economy. In order to improve these conditions, rehabilitation of four major paved road links, Conakry-Mamou (225 km), Conakry-Forecariah (89 km), Mamou-Labe (146 km) and Mamou- Faranah (190 km) was started under the Third Highway Project; while the first two are now completed, the two others are to be completed under the Transport Sector Project by 1991. The only other significant road work undertaken between 1982 and 1989 was the construction of the Gueckedou- Sredou section (127 km); there are plans for later reconstruction of the next road section, from Seredou to N'zerekore, the provincial capital of the south-eastern region. 190. Maintenance of the network was severely neglected until the mid- 1970s. Thereafter, regravelling of 1,800 km was carried out under the first two Highway Projects, but as a result of lack of periodic maintenance capabilities and of severe rainfall in some parts of the country such as Guinee Maritime, these improvements were short-lived. A major objective of the Third Highway Project was therefore the reinforcement of maintenance capabilities, especially for the more complex and critical periodic maintenance. An autonomous Road Project Office (Office du Projet Routler, OPR) was created to circumvent political interference and compensate for the ineffectiveness of the Public Works Administration under the First Republic. After a slow start, OPR's performance gradually improved, its three heavy brigades regravelling about 320 km per year, a-..d its light brigades maintaining about 1,000 km per year. With the administrative and economic reform under the Second Republic, which emphasizes retrenchment of the public sector in favor of privatization, OPR's institutional set-up has 41/ Compared to 14.8 km per 100 sq. km and 4.8 km per 1000 inhabitants for CBte d'Ivoire, and 11.9 km per sq. km and 2.3 km per 1000 km for Ghana.  - 68 - proved unnecessarily cumbersome. It was therefore decided to reorient OPR's structure towards that of a commercially-based contracting enterprise. 191. The Government's new road network development strategy, combines renewal and highway construction for both the primary and secondary networks at the national level and the tertiary regional network, with the following priorities: (i) rehabilitation of the existing paved-road network; (ii) construction of highways belonging to the national primary-network, paved-roads category; (iii) setting up a spot improvement program for the rest of the national primary network; (iv) implementing a rural roads improvement program in order to ensure access to main agriculture areas and to achieve a balanced development of national and rural roads; and (v) gradually building-up routine maintenance capabilities. 192. This road network development plan is based on the preliminary assumption that an average of US$60 million per year (capital and recurrent expenditures) will be allocated to the road sub-sector over the next two decades. The main objectives of the program, to be essentially completed over the 1988-2004 period, ares 'i) for the National Network: paving of 1,880 km of primary roads; upgrading of an additional 1,010 km of primary roads to the level of modern all-weather gravel roads; and rehabilitation of about 1,510 km of existing tracks of the secondary network to the level of gravel roads: and (ii) for the Regional Network: upgrading of 5,000 km of feeder roads About 86 percent would be spent on national roads and 14 percent on regional roads. While the initial emphasis would be on construction/rehabilitation of the basic networks, this emphasis would gradually shift to maintenance, and from the national to the regional level. 193. The first 5 year tranche (1988-1992) of the road program would include about US$ 226 million in investments and US$ 28 million in spot improvements, in addition to about USS 10 million in maintenance. The core of this first tranche is the Fourth Highway Project which includes:(i) reconstruction and improvement of the 200 km Dubreka-Kolaboui coastal road; (ii) reconstruction of the main road to the east Mamou-Kankan (400 km); and (iii) spot improvement works on about 1,500 km of unpaved roads (building drainage systems, rehabilitating bridges, and repairing impassable sections, as necessary to eliminate the critical points). Simultaneously, 21 metallic bridges and ferries are being repaired all over the country. Financing for the works of the second tranche of the Gueckedou-N'zerekore road is being sought. The next most urgent works, for which financing has  - 69 - yet to be found, are the reconstruction of several key roads or road sections, which include the Paranah-Kissidougou section, the Kouroussa- Kankan section and the Kissidougou-Kankan road. A large number of bridges, in addition to those to be repaired under the spot improvement program, will need rehabilitation or reinforcement in the medium term. 194. The Government's policy for road maintenance is to shift periodic maintenance from direct labor operations to maintenance by contractors. Under the current plan OPR is to be transformed by 1991 into a privately operated contracting company, which would also lease equipment to private contractors. Routine maintenance, previously the responsibility of the sub-divisions of the former Secretariat of Public Works, had virtually ceased, because of lack of organization, technical capabilities and insufficient financial resources. Under the Transport Sector Project, a pilot program of routine maintenance is developing labor-intensive 'cantonnage in designated areas, by which local villagers are clearing vegetation and maintaining drainage systems with small-scale contractors carrying out more complex maintenance tasks. This program will eventually be extended to other regions. The key to the success of the maintenance program, will undoubtedly remain adequate yearly budget allocations with a steady flow of funds to the contractors. C. Traffic and Road TransDort 195. The road transport industry has undergone significant changes since the advent of the Second Republic. Since the abolition of two state companies' monopoly of lobg-distance freight transport 42/, freight traffic has been handled mostly by private operators; several of them have acquired truck fleets of 10-20 vehicles, but most are owner-operators of one or two vehicles. Access to the industry is free, and tariffs for freight transport have been deregulated. Road passenger transport has always been handled by small private transporters and continues to be so. Interurban passenger transport services are provided mainly by one large private bus company (Transguinee) which operates regular services to Kankan, and by many licensed as well as unlicensed individual operators. 196. Urban transport has been opened to competition, but with regulated tariffs. Since 1986 a new joint-venture company, Sogetrag, operating with the assistance of a foreign technical partner, has been providing efficient bus services in Conakry, with limited Government subsidies; the ridership of this successful operation with 102 busses, increased steadily to about 180,000 passenger per year by the end of 1989. Sogetrag's financial results however have deteriorated as it has not been allowed to gradually raise its tariffs to reflect increases in fuel prices. There are plans to substitute the quasi-defunct state bus company, TUC, with a new company, GUIMAT, with some private participation but mainly state-owned equity; it is difficult to justify the creation of another large bus carrier, operating essentially on the same routes and conditions as Sogetrag but with weaker institutional and management arrangements. Also many independent private minibuses and several hundreds licensed taxis already openly compete with Sogetrag and some private bus operators. The 42/ COtRA which has been dissolved and ENTRAT which is being privatized.  - 70 - city of Conakry is facing growing problems of traffic congestion. The ongoing Urban Transport Study, covering passenger as well as freight transport for the whole Conakry peninsula, will define a phased program of new infrastructure construction, recommend traffic management measures and provide guidance on the future r6le of the various transport modes (including suburban railways and boats) and operators. 197. The size of Guinea's overaged and extremely heterogeneous vehicle fleet is not well known, as the Vehicle Licensing and Registration Office keeps track of new registrations only, without dropping scrapped vehicles from its rolls. Vehicle imports have increased substantially with the advent of the Second Republic, with an average of about 8,000 vehicles per year, of which many are second-hand cars in a variety of conditions. The fleet is currently estimated to exceed 40,000 vehicles, of which about 9,000 trucks and 2,000 buses, and more than two-thirds operate in or from Conakry. This is adequate to meet present transport demand but as economic activity continues to recover, some increase in freight transport capacity may be required. 198. Facilities for vehicle maintenance and repair have improved over the last five years, but do not yet fully meet the needs. Inadequate fuel supply and distribution, for which ONAH, a parastatal is responsible, have been serious impediments to normal development of the road transport sector. Negotiations to restructure ONAH have been underway for some time. The new company will have the tasks of rehabilitation of the fuel distribution network throughout the country, more rational fuel pricing and improved collection of the fuel tax. After two consecutive increases in 1988 and 1989, fuel prices are now at GF 350 and 375/1 for diesel and gasoline respectively, which is higher than those in neighboring Sierra- Leone (about GF 200 equivalent) but much lower than those in Mali, Senegal or COte d'Ivoire (GF 400 to 650 equivalent). The question of collection and of structure of the road user charges needs to better addressed: inter alia differentiated taxation of heavy vehicles (for example through an axle load tax) which contribute much more significantly to road deterioration than light vehicles, should be introduced. Improved collection of import duties on vehicles and spares, the annual vehicle tax (vignette) and the fuel tax should make a significant contribution to reducing urban traffic congestion and road deterioration. 199. Traffic data prior to 1986 are scarce. Since then, vehicle counting campaigns and origin/destination surveys have been carried out regularly. Traffic volumes on the interurban network increased by about 20 percent from 1987 to 1989. Freight traffic (in kilometer tons) is estimated to have increased by 27 percent and passengers traffic by about 18 percent. Long-distance hauls of miscellaneous products (especially coffee from upper Guinea for export) have increased significantly, reflecting a gradual opening up of the country, sharply higher levels of imports through the port as well as increased agricultural activity. Traffic on the main axis from Conakry to Mamou varies from 3,200 vehicles per day (vpd) near the capital to 800 vpd near Kindia and 400 vpd near Mamou. On the remainder of the paved trunk roads, traffic varies between 100 and 250 vpd, while improved laterite trunk roads carry 75-100 vpd and other sections about 30-40 vpd. Major traffic increases on recently  - 71 - improved road sections indicate a great sensitivity of traffic to road conditions. D. Railways and Rail TransPort 200. L'Offlce National du Chemin de Fer de Gulnee (ONCFG) is the parastatal responsible for running the Conakry-Kankan public railroad. Its operational capabilities have fallen dramatically and its financial situation is dismal, with revenues not even covering operating expenses. Its importance has steadily declined: traffic of freight (excluding clinker) had already fallen below 10,000 t in 1982, and transport of clinker from the port of Conakry to the cement plant in Sonfonia (about 25 km) has shifted to transport by truck. Train services to Mamou and Kankan have been interrupted by landslides along the line which have not been repaired. Only limited passenger services on the first 36 km between the tip of the Conakry peninsula and suburbs are still provided. No economic rOle can be envisaged for ONCFG in the future, with the possible exception of some suburban passenger services and limited freight traffic in the Conakry peninsula. This will be determined by the ongoing Urban Transport Plan Study. With the present coexistence of three separate parallel railway lines (the two lines of Friguia and OBK, dedicated to mining, in addition to ONCFG) on the narrow peninsula, the feasibility of consolidating two of the lines will be examined. E. Ports and Shippina 201. Guinea has two major ports: Kamsar and Conakry. Kamsar, has been in operation since 1975 and currently handles about eleven million tons of CBG's bauxite exports annually and a small amount of imports for the account of the mining concern and others. Conakry is the main commercial port. It handles all general cargo imports and exports, fuel and clinker imports, as well as OBK's bauxite (three million tons/year) and Friguia's alumina (600,000 tons/year). The rundown port installations were rehabilitated and an autonomous port authority, Port Autonome de Co.aakry (PAC) was established under the first Conakry Port Project. Major improvements were achieved under the project in the port operations and installations, and PAC evolved into a credible port manager. PAC's fina.cial performance as a totally autonomous entity has been quite satisfactory; port revenues cover all operating and maintenance costs and provide for recovery of capital costs. Tariffs are slightly higher than in other ports in the region such as Dakar or Abidjan, for which major expansion and modernization works were constructed much earlier: port tariffs still represent a small proportion of overall transport costs of imports and exports. 202. Port traffic increased dramatically in response to these improvements and especially to the liberalization of the economy: general merchandise imports rose from 215,000 tons in 1983 to 592,000 tons in 1988, an average increase of 22 percent p.a. The containerized traffic increased even more steeply, from 4,700 con.ainers in 1983 to 22,000 in 1988. Total traffic in 1989 was estimated at 5 million tons including 3.7 million tons of bauxitelalumina and 0.4 million tons of oil products. To cope with the further traffic growth, and especially handle increasing container traffic, additional improvements are underway and expansion of key installations are  _ 72 - being undertaken: a new container berth to accommodate modern container and Roll-onlRoll-off ships, a new fuel jetty for safe unloading of tankers. siltation-prevention works and channel dredging to allow ore-carriers and other large ships to arrive or depart fully loaded. Guinea's port infrastructure capacity should thereby become sufficient (except for additional mineral exports) up to the year 2000; only limited infrastructure works may be needed to adapt Conakry commercial port to possible changes in the structure of traffic. However an industrial fishing port, and some additional storage facilities with the basic infrastructure for an adjacent industrial zone, are also needed in Conakry. 203. A key factor in the improvement of port productivity, efficiency and security was the successful privatization in 1987 of port associated services. In the past, PAC was solely responsible for all ship-handling, stevedoring and warehousing, the National Freight Handling Company (ENTRAT) maintained an exclusive control on transit functions, while the Socilte Navale Gulneenne (SNG) was the sole shipping agent in Conakry. These monopolies have been abolished, and the corresponding activities have been transferred to a large number of competing private operators; the dockers, previously civil servants on PAC's payroll, are now hired as needed through a new Port Labor Office supervised by the private stevedores' association. Importers and exporters can now freely select freight forwarders and customs agents among several private companies. 204. A new autonomous parastatal entity, the Agence Autonome pour la Mavigation Maritime (ANAM), has replaced the Office Maritime, previously responsible for buoys and beacons along the coast and in the ports (except those under PAC's responsibility). ANAM will also administer secondary ports and public facilities for river navigation. Since the abolition of the monopoly of Somidrat, the parastatal dredging company, dredging of Conakry port and its access channel has been carried out by specialized private contractors, selected through international competitive bidding. 205. Guinea's involvement in shipping consists mainly of an equity participation by the State in a joint-venture company, Guinomar, set up with Norwegian partners in 1979 to handle some five million tons of bauxite shipments annually from Kamsar. The company at present owns oniy one ore-carrier (65,000 tdw) and charters others. As a national flag carrier, SNG has no ships or crews of its own, but is currently involved in shipping by its association with foreign shipping companies in the exploitation of chartered vessels and chartered space. The Government does not provide any subsidies and has not granted monopoly rights for shipping activities to SNG or other companies. Coastal shipping is limited to barter trade of little importance, and small scale transport of agricultural products by barge to Conakry. River transport is possible for about four months during and after the rainy season on the Milo (Kankan-Siguiri) and Niger (Kouroussa-Siguiri-Bamako) Rivers; it is used mainly for agricultural products transported over short distances with traditional river barges. F. Airports and Civil Aviation 206. Guinea has ten airports: an international airport at Conakry, and nine domestic airfields of which three -- in Faranah, Labe and Kankan -- have paved runways. At the end of the First Republic, the civil  - 73 - aviation sub-sector was left not only with dilapidated facilities, but also with an institutional vacuum. As a first step, the basic installations (runway and lighting, international terminal and firefighting services) of Conakry were rehabilitated and a new Franco-Guinean company, Sogeac, was established with the participation of A4roports de Paris as technical partner, to manage the airport. Sogeac is financially autonomous and derives its revenues mainly from aircraft landing fees and passenger fees. 207. Additional steps were badly needed to ensure normal operations and safe flying conditions at Conakry, and to address the existing lack of navigation and meteorological services nationwide. Under the Transport Sector Projeot a new autonomous organization called the Air Navigation Agency (ANA) is therefore being established. The project provides for the supply and installation of navigation aids, buildings and technical assistance to ANA, and meteorological equipment to be administered by UMt6orologle Natlonale. ANA will be responsible for air traffic control and will also administer the country's secondary airports. It is financially autonomous, with revenues derived from airport fees at the secondary airports and part of the landing fees at Conakry. The domestic airfields are in such poor condition that they can accommodate only short take-off and landing (STOL) aircraft. Moreover, they lack basic navigational aids and security equipment and are often non-operational, especially during the harmattan period when dust from the Sahel affects visibility, and during part of the heavy rainy season. A rehabilitation program of the highest priority airfields will also be carried out under the Transport Sector Project. 208. Air traffic at Conakry airport increased from 180,000 passengers in 1984 to 218,000 in 1989. However the increase was entirely in international traffic, as domestic air passenger traffic which had reached 90,000 passengers p.a. in the early 1980s (when tariffs were extremely low and Government officials were flying free), dropped to about 23,000 in 1989, as a result of the precarious condition of Air Guinee. Faced with mounting losses and large foreign debts, the state-owned company has reduced its fleet from four to two aircraft by selling two of its three jet planes; it currently flies international routes to the neighboring countries with the remaining B737 and domestic services with a DASH-7. In practice, regular services are often cancelled because of technical problems mostly due to the company's financial difficulties. These are the result of many problems: excess staff, poor financial management and accounting, expensive agencies abroad, low domestic tariffs, many routes with too low traffic, diversion of the aircraft for official uses and too many non-paying passengers. Its cumulated losses at the end of 1988 amounted to GF 8 billion and losses for 1989 are estimated at GF 2.5 billion (US$ 4 million). Various restructuring plans have been proposed by the company and by consultants, but none have been implemented. Discussions are now underway with a foreign airline to replace the state-owned company by a joint-venture managed by a technical partner and with private participation in the equity. This restructuring should be brought to a conclusion as soon as possible.  - 74 - G. Transport Sector Administration 209. Administration of the transport sector is the responsibility of the new Ministry of Transport and Public Works (MTTP) which resulted from the merger under the administrative reform program, of the previous Secretariat of State for Transport (SET) and the Secretariat of State for Public Works (SETP). MTTP responsibilities include: formulation and monitoring of sector policies, programs and regulations covering public and private sector organizations, overseeing public sector agencies in all transport modes, vehicle licensing and registration, road safety, planning, programming, construction and maintenance of highways as well as airfield infrastructure. MTTP carries out these responsibilities through its central administration in Conakry and through the new regionalfprefectoral delegations. These delegations (combined with mining, housing and urban affairs) are part of technical departments of the directions ,. 6fectorates, the local administration of each of the 33 prefectures. In addition, at the level of each of the four Regions, coordination is dealt with by the Infrastructure, Transport and Communication section of the Coordination and Regional Development Bureau under each Resident Minister. The capabilities of these new delegations are yet to be tested. 210. The process of merging the staff of the former SETP and SET into one Ministry has been slow and the actual setting-up of prefectoral delegations is continuing in 1990. The new structure of MTTP has been streamlined, and through the personnel testing program carriad out through the overall Administrative Reform, MTTP could screen out a significant number of inadequately qualified staff, inherited from SETP and SET. Further training and technical assistance will be needed in the medium term to strengthen MTTP's capabilities. Having been non-existent under the First Republic, transport planning is still limited. A Transport Plan Study was initiated in 1986-1987 to collect basic data on the different transport modes, build-up sector knowledge and evaluate alternative development scenarios of the transport system. It needs to be updated. A small transport planning unit was established in SET in late 1985 to build up the data base for a medium-term transport plan. In the reorgan. ed MTTP, this unit has become a full-fledged department, the Development Strategy Office (Bureau de Stretegle de Developpement, BSD). Priority work of the BSD includes developing the statistical base, updating the transport plan study and establishing three-year rolling investment programs for the sector. 211. Although MTTP is theoretically responsible also for the tertiary network in addition to the national road network (primary and secondary network), de facto it delegates responsibility of the tertiary network to the Ministry of Agriculture and Animal Resources (MAUA). The rationale for MARA's constructing and maintaining regional roads is their overwhelming linkage with agriculture. Later, as the economic fabric develops in the interior of the country, the regional roads will gradually play a larger role in support of broad-based economic activities; MTTP should then gradually regain responsibility for these roads as its capabilities are strengthened. Detailed arrangements for this delineation of responsibilities need to be elaborated. Likewise, the responsibilities for planning, construction and maintenance of the major urban roads need to be  - 75 - better defined between MTTP, the City of Conakry and the Ministry of Urban Development and Housing. H. Sector Strateai, and Issues 212. Reestablishing reasonably dependable and efficient communications between the main production, consumption and export centers are essential to the success of structural adjustment and the development of Guinea's economy. The Government current strategy gives the highest priority to the reestablishment of essential transport infrastructure and services and to the creation of a sound policy framework. The basis of this strategy is: (i) an investment program focused on the elimination of the major bottlenecks of the transport system; (ii) resource mobilization and pricing; and (iii) institutional reform, deregulation and privatization, in order to transform a transport industry historically dominated by inefficient parastatals and monopolies, into an efficient private service industry. This strategy is being implemented through a continuing sector reform program and a comprehensive investment program. 213. The public investment program combines rehabilitation and construction of new capacity in varying proportions depending on the transport mode. The three-year Public Investment Program (PIP), for the 1987-89 period provided for a total annual public investment expenditures of US$ 75-90 million, of which about USS 65 million in the road and road transport sub-sectors, US$ 15 million in the ports sub-sector, and USS 6 million in aviation. However, these amounts included only part of the "emergency programs" for road rehabilitation in the metropolitan area of Conakry, and for the priority rehabilitation program of roads, bridges and ferries. The 1990-92 investment program provides for average expenditures of about US$ 100 million, which represents a slight increase over the past (since road works in Conakry are not included): the composition however will change as, with the completion of port works, road works will increase to up to 85 percent of the total. This program is generally adequate, with the exception of the road sub-sector, where the planned investments are a bare minimum, considering the need to reestablish dependable land communications with many isolated regions of the country. 214. The lack of sufficient local financial resources and their timely availability, especially for the road sub-sector has been one of the main obstacles to the maintenance and rehabilitation efforts during recent years. Resource mobilization and pricing deserve therefore special attention. Cost recovery is adequate in the port sub-sector and in aviation; as both sub-sectors were reorganized over the 1986-88 period, port tariffs and airport fees were substantially increased and are now being periodically revised as needed. In the road sub-sector the situation is different; revenue from direct user charges is not sufficient to cover  - 76 - maintenance costs let alone to make a contribution to investments. 431 Due to general revenue constraints Government has not been able to devote sufficient funds to road maintenance. The budget allocated for road maintenance for 1990 for example was only OF 2 billion, about half of the estimated requirement. This represents one of the most serious examples of the revenue mobilization prtblem in Guinea. 215. Substantial progress has now been achieved on institutional reform and deregulation in the port, air transport infrastructure and road transport, as shown by the various successful privatizations and restructurings of parastatal companies and abolition of monopolies implemented over the last four years. Additional steps are needed with regard to the inefficient, subsidized or bankrupt parastatals such as Air Guinee, TUC-Guimat and Somidrat. These should be either be thoroughly restructured with a major participation of the private sector or be liquidated. Privatization of periodic road maintenance needs to be fully implemented and cantonnage should be developed on a larger scale. MTTP's capabilities should be enhanced to plan, program and supervise a well- balanced and comprehensive transport system investment and maintenance program coherent with the country's needs and means. Coordination with other ministries, especially MARA and the Ministry of Urban Development and Housing needs to be developed. 216. The transport sector faces additional specific issues. The r6le of efficient private operators and joint-ventures with the State (such as Sogeac and Sogetrag) must not only be consolidated but steadily expanded. Transport operators should have better access to financing and better manpower development; safety of services should be improved but cumbersome regulations and controls must be avoided to provide and consolidate an environment conducive to competition and efficiency. These problems and other transport problems such as traffic congestion will become more complex in the capital city and beyond, in the Conakry peninsula. An efficient urban/suburban transport system has to be developed, closely coordinated with rational urban growth, taking into consideration all aspects of urban employment, storage and distribution of products. This system should evolve through a continuous program, which tackles not only short-term transport problems but also provides for long-term solutions for optimal urban development, fully taking into account environmental considerations. 217. In broader terms, environmental aspects deserve more attention in the whole transport sector, especially when the rehabilitation phases have been completed and new large-scale construction begins. Employment generation in the private sector needs to be encouraged; the constraints 43/ Currently the only direct user charge on roads is the annual vehicle tax (vignette); the introduction of an axle load tax is being considered. Revenue collection levels for the fuel tax are closely related to road development and maintenance and as collection improves provision for road budgets should become easier. However, given the central role of this tax in improving revenue mobilization, it would not be advisable to channel its proceeds directly to road expenditures at the expense of other priorities.  - 77 - facing the establishment of new private operators, Guinean firms or joint- ventures with foreign partners, should be reduced in the transport sector as in the other sectors. Similarly the development of an efficient local construction industry is of utmost importance and should be an essential ingredient of new infrastructure projects. Programs to foster small construction enterprises, some which started as pilot programs, should be expanded, covering the whole range of needs of these enterprises: training, technical assistance, access to financing and equipment, etc.. The new public works programs should be designed to encourage the participation of these small contractors, on their own as well as as subcontractors of large construction firms. VII. POST AND TELECOMMUNICATITONS A. Sector backaround 218. Growth, trade, economic integration and private investment cannot take place without adequate infrastructure, of which telecommunications is a key ingredient. With rapidly increasing international integration of production, telecommunication is becoming a key element for developing competitiveness in production of goods and services through the improved access to relevant business information, easier communication between producers and consumers, and savings in transportation costs, that efficient telecommunications networks make possible. 219. In Guinea, post and telecommunications are state monopolies operated as national directorates under the Ministry of Posts and Telecommunications. This institutional arrangement is at the origin of most of the sectors' difficulties. 220. With regard to the postal sector, the services of the National Postal Directorate are in an advanced stage of disarray. International mail must be collected directly at the airport. Buildings are nonexistent in the interior and insufficient in Conakry. Equipment and transportation means are highly inadequate and financial services have been suspended since 1979. 221. Like the DNP, the National Telecommunications Directorate (DNT) operates within a framework of purely administrative rules and lacks the commercial approach required for the provision of such vital services to the general public and to the business community. Since the operations of the telecommunications service are subsumed in the overall Government budget, the operating budget pays little attention to the substantial revenue-generating potential of the sector. 222. Tariff levels and structure are not set i a manner which will provide sufficient revenue to cover operating costs, let alone to generate a surplus to finance further development or to provide fiscal revenue for Government. Allocations for operation and maintenance within the Ministry budget are usually insufficient, thus reliable services cannot be provided and expensive assets deteriorate due to a lack of maintenance. In addition, investment decisions are not made on the basis of rates of return  - 78 - criteria and there is little motivation to pursue financial discipline, since there are no effective audit procedures and debt contracted for DNT is serviced by Government outside the budget of the Ministry of Posts and Telecommunications. 223. As a result of the decades of neglect and mismanagement, the telecommunication sector is in a very poor state as indicated by: (i) total telecommunications assets in Guinea are estimated at abo"t US$ 80 million equivalent. Total income in 1988 was about US$ 2.1 million (GF 1 billion), estimated to represent only about 65 percent of actual billing. On the basis of international comparison, the yearly average income of a well-run public telecommunications entity with this level of assets should be US$ 16 to US$ 20 million -- about 9 times the Guinean level; (ii) compared to such a low level of revenues from the services it provides, DNT's operating expenditures excluding amortization were about GF 700 million in 1988, and debt service supported by Government was about GF 2.2 billion after rescheduling; (iii) services provided to Government users represented about GF 1.2 billion at current tariffs, toward which Government paid only about GF 300 million, under special flat rate arrangements; (iv) total installed capacity as at December 1988 was 18,600 exchange lines (93 percent automatic), exchange fill being only 80 percent (15,000 subscribers); 95 percent of the subscribers are automatic and 68 percent are located in the Conakry area. The Guinean telecommunication network density ratio of 0.3 direct exchange lines (DELs) per 100 people is among the lowest for the region. Tne International Telecommunication Union's estimated average for 25 subsaharan African countries in 1988 was 0.7 DELs/100 people; (v) out-of-order equipment due to lack of maintenance and repair, and unused facilities because of lack of complementary equipment, insufficient planning or litigation with the suppliers result in disrupted service or idle installations for an estimated 25 percent of the assets. (vi) simultaneously and partly because of idle or deficient installations, service is very inadequate where available or not provided at all in economically important areas thus hampering development. As a result, unsatisfied demand is estimated at about 100 percent of current levels. B. Sector Restructurincq 224. Current organization of the post and telecommunications services as government departments precludes their efficient operation and their effective development. Institutional reforms will be a prerequisite to improving services, rehabilitating and maintaining existing infrastructure or training staff -- all of which are badly needed. Such restructuring will also be necessary for new investments in these sectors to be worthwhile and  _ 79 - COMBATTING CORRUPTION IN THE TELECOMMUNICATIONS SERVICE Receipts from telephone services are roughly estimated at 6d percent of invoicing corresponding to about 2,600 charge units per telephone subscriber, while the *verage for comparable African countries is of the order of 10,00 charge units. Underinvoieing of telephone services is a widespread practice. It is made possible through collusion between operators of switchboards In hotels etc. and operators at the exchanges who destroy the call recording slip# Another fraudulent practice, known as the "clandestine booths" (CabiflBSC ald&StIfeS), cofie: ats of diverting unallocated telephone lines, or lines belonging to absent subscribers, *nd allowing these lines to be used for overseas calls against unrecorded lump-sum payments. A third fraudulent practice consists of creating fictitious faults on telephone lines to give repair men the opportunity to pocket customers payments for so-called repairs. 1. These practices are the combined result of low salaries and lack of discipline. They are widespread and deoply rooted in the operational and management tradition of the telephone services. Vested interests that benefit from these practices attempt to avoid systems, procedures and management choices, which would threaten their opportunities for abusing their positions. The restructuring of the telecommunications sector will therefore require specific technology and operations systems choices to limit as much as possible the room for fraud. The following are examples of measures adopted successfully in many countries: -- generalizing subscriber dialing for international as well as domestic calls and adopting a system of Itemized billing; -- wherever manual exchanges still exist, call recording *lips should be numbered and missing numbers should be accounted for; -- moasuring the ratio of total 'occupation time' to billed conversation time. 1/ International norms indicate that this ratio should not exceed lb since the normal 'lost time" due to ineffective attempts and time spent making connections is about 20 percent of total occupation time; -- monitoring the lines unallocated to subscribers -- all calls on these lines should be investigated; -- Increasing Internal controls and listening In on operators at random; -- adopting a system of sanctions against fraud and publicizing It. Al 'Occupation time' is the total time spent on calls, I.e. the billed time, time spe nt on Ineffective attempts and time spent making connections. capable of inspiring confidence in the donor community. The sectors' restructuring will involve: (i) the establishment of separate autonomous entities for telecommunications and postal services. In telecommunications, the complexity of the operation makes private sector participation desirable -- this should be introduced as soon as possible. (ii) improvement of maintenance and operation of existing telecommunication installations; replacement of obsolete equipment and expansion of facilities; rehabilitation and expansion of main post offices and sorting centers; improvement of rural services and development of accelerated mail services; (iii) formulation and implementation of a human resources development strategy, including reorganization of the post and telecommunications  - 80 - training school, on-the-job training, upgrading and refresher courses. VIII. MANUFACTURING AND SERVICES A. Background 225. Under the First Republic, State enterprises held monopolies over all exports, over marketing channels for most consumer and intermediate goods, and over all but small-scale industrial activity. Of the 131 state- owned enterprises in existence at the time the regime changed, 42 were engaged in manufacturing, primarily in agroprocessing, with others active in chemicals, pharmaceuticals, and metal products. These enterprises employed approximately 7,000 workers and accounted for about 40 percent of manufacturing value-added. Due to perpetual operational problems, they operated at a paltry average rate of capacity utilization of 22 percent, despite the existence of a substantial unsatisfied demand for their output. In effect, only 23 of these 42 state-owned firms were still operational in 1985; of these, only six generated operational surpluses, and none were actually profitable after depreciation and amortization. 226. The formal private sector was, at the time, comprised of around 360 small-scale enterprises, 130 of which were engaged in simple manufacturing activity (mainly in food, wood, and simple metal manufacturing) and the remainder in various services, particularly commerce. These firms, which had somehow managed to adapt to the hostile policy environment of the former regime, accounted for an estimated 3,000 employees, and another 40 percent of manufacturing value-added. The balance of the private sector was comprised of an unknown number of micro- enterprises engaged in informal activity. One estimate put the number of such enterprises involved in manufacturing at about 3,500, representing some 12,700 jobs and the remaining 20 percent of manufacturing value- added. Overall, industrial activity was heavily concentrated in the Conakry area. B. The impact of the Government's Reform Program 227. Since the beginning of the PREF, the experience of the manufacturing and the services sectors have been rather different. In the services sector output has been booming. Value-added in retailing and wholesaling, mainly of imports of consumption goods, has increased considerably as a result of the liberalization of trading and the growth in demand. Similarly, the transport and construction subsectors have benefitted significantly from the upturn in the economy. 228. In manufacturing, there was an initial surge in investor interest and, to a somewhat lesser extent, in actual investment. The privatization program allowed manufacturing investment to take place at lower cost than would have been the case with "greenfields" investment. Moreover, it took place within an improved macroeconomic framework; in particular, the reform of the foreign exchange regime ensured the prompt availability of foreign exchange for the purchase of imported inputs.  - 81 - However, as detailed below, manufacturing investment and output outside the privatization program have been disappointingly low. 229. The private sector bias towards the services sector is of mixed importance for the development of the Guinean economy. On the one hand, it provides significant employment and value-added, as well as goods and services that have been unavailable to both consumers and producers for many years. Moreover, it provides a vital "training ground' for entrepreneurs in a country where even simple commercial enterprise with a very short-term payback period has been severely stifled; it is clearly unrealistic to expect the immediate emergence of entrepreneurs with the confidence and abilities to tie up limited capital in the relatively sophisticated business of manufacturing. On the other hand, the services boom has resulted in few of the backward linkages to the rest of the economy, particularly its agriculte-ral sector, which manufacturing could provide. Similarly, it has involved very little investment and is therefore highly fragile. Thus, it has done little to reduce dependence on imports or to increase exports. The fundamental issue in private sector development in Guinea, therefore, is how to encourage entrepreneurs to undertake more complex forms of production with investment committed for longer periods -- in the Guinean context this inevitably implies the development of manufacturing. Although to some extent this can be brought about with the assistance of foreign investment, much of the process would have to be undertaken by Guinean enterprise. Given the limited entrepreneurial base, this process will involve a progressive transformation towards manufacturing rather than the attempted sudden shift of the First Republic. C. The Response of Manufacturinq Investment to the PREF 230. Manufacturing activity in general, and that of the formal sector in particular, remain thin, with the non-mining industrial sector accounting for only 3.5 percent of GDP in 1987. Indications are that the formal sector's share of total manufacturing value-added has declined since 1984. 231. The bulk of the formal industrial sector is now comprised of the nucleus of the privatized state-owned enterprises. The privatized firms cover a wide range of activities, including the production of alcoholic and non-alcoholic beverages, fruit-pulp processing, saw milling and plywood manufacturing, paint production, brick making, cigarette manufacturing, and cement. All of them have benefitted from special investment incentives outside of the new Investment Code, and in some cases very generous privileges have been provided, including, for ten of 21 companies included in a recent survey, the granting of monopoly status on production. However, only ten of the 26 privatized firms have commenced production; of these, two have already shut down and another four are in serious financial trouble, due to competition from illegal imports, a deteriorating investment climate, and continuing operational problems. 232. Other investment in the formal manufacturing sector has been disappointing. Although more than 70 private firms have so far qualified for benefits under the 1987 Investment Code, not one of them is as yet fully operational. In fact, the number of operating licenses awarded by  - 82 - the Ministry of Industry started dropping off as early as 1987: only 14 licenses were awarded that year, compared to 89 in 1986. A more detailed review of the manufacturing sector also reveals large variations in outlook between subsectors: some of them already suffer from excess production capacity (bakeries, woodwork, simple metal manufacturing), while others are constrained by insufficient capacity due to weak investment levels. Inadequate diversification is therefore still hampering growth in the manufacturing sector, and the bulk of consumption continues to be satisfied by imports. Present industrial activity remains concentrated essentially in the wood processing, metal products, and food and agroprocessing subsectors, which account respectively for an estimated 32, 40, and 15 percent of industrial value added. In the short-term, only the food/agroprocessing subsector offers realistic prospects for export growth, but despite recent efforts to export packaged fruit, cut flowers, and other agro-based commodities, the industrial sector'c aggregate contribution to export earnings remains negligible. 233. The informal sector has clearly made a considerable contribution to output and employment growth in manufacturing, accounting for an estimated 18,000 jobs in 1987, compared to 12,700 prior to the reform program. However, this expansion has taken place in microenterprises whose potential for significant further growth and import-substitution may be rather limited. Although the informal manufacturing sector has a very important r6le to play, particularly in employment creation, manufacturing development will ultimately depend on the ability to exploit economies of scale in order to be able to compete with imports and, in the longer run, in export markets. D. Constraints Affecting the Investment Climate 234. Some of the constraints encountered by businesses are market- related; Guinea's domestic market is small in terms of both population and purchasing power. This is exacerbated by the inadequacy of many local ancillary services and the dilapidated state of physical infrastructure, with the latter being responsible for large parts of the domestic market being served more easily from neighboring countries. Other constraints have to do with the extremely low labor productivity inherited from the First Republic, when employment, at least in the public sector, became little more than a welfare service to emplcyees and even basic skills- training was sorely lacking. However, there are still several important constraints on private sector development stemming from Government policy towards the sector and, perhaps more importantly from inappropriate or inadequate implementation of policy. These policy-related constraints are outlined below. E. Access to Land and Physical Infrastructure 235. The current land tenure system and the status of property rights seriously hinder the expansion of private investment in Guinea. Under existing law, all land belongs to the State and may not be permanently transferred to private entities or individuals. Private investors must apply for leases on land needed for construction or expansion of facilities. The absence of cadastral surveys and of an up-to-date land tenure registry renders most leases revocable at any time, since the plots  - 83 - on which the leases are granted are usually not clearly defined or may in some cases have already been attributed to another party. These leases, which are awarded for periods of up to 30 years, are contingent upon development of the land within three years; after expiration of that period, non-development automatically leads to the termination of the lease without compensation -- a further source of uncertainty for the investor. In rural areas, this is further complicated by the existence of customary land-use rights standing in ill-defined relationship to the system based on written law. For all these reasons land and buildings are not easily transferable, and cannot therefore be pledged as collateral for loans. Term credit is thus virtually inaccessible. In rural areas, land for industrial production is sometimes only obtainable with great difficulty; this constitutes an obstacle to investment in agroindustry, particularly where such industry requires the establishment of a nucleus estate to supply the agricultural inputs. (See Sections II and IV for more on land tenure problems.) 236. Guinean industrial development is seriously hampered by the private costs of overcoming the deficiencies in the provision of public infrastructural services. Although major public investments have been undertaken since 1984 to rehabilitate and expand the country's infrastructure, much remains to be done. In particular, most of the parastatals responsible for operating this infrastructure and providing the related services are doing so very inefficiently. The program for restructuring these utilities, described elsewhere in this memorandum (see para. 80 in Volume I), is crucial to the development of industry in Guinea. F. The Leqal and Regulatory Framework 237. Although important legislation has been adopted in the past three years as part of the Government's efforts to promote private sector development, the legislative framework regulating business activity still imposes some unnecessary constraints. For example, enterprise establishment procedures are onerous and complex. In theory, .ay business not subject to explicit nationality restrictions or that does not first have to comply with technical standards is free to establish itself by simply incorporating at the Trade Registry. In practice, incorporation procedures involve lengthy, often difficult dealings with a number of other government departments, including the Ministries of Industry, Finance, Labor and Ji',tice, as well as the technical ministry responsible for the sector in question. 44/ 238. Despite the introduction of a new Labor Code, some labor regulations still constitute a hindrance to business activity. Firms in the formal sector have had to hire workers through the Ministry of Labor, on the basis of a list of prospective candidates provided by that Ministry for each job opening (direct hiring has been subject to severe penalties). This process has proven time-consuming, restrictive and open to abuse. It has often been difficult for potential employers to hire qualified staff, particularly when skilled workers were needed. Procedures for laying off 44/ The recent decision to create a "one-stopw office for enterprise registration is to be welcomed in this regard.  - 84 - workers have been likewise restrictive, since prior approval of the Ministry of Labor is normally required 45/. Although some minimal Government regulation of health, safety, the provision of training and the fairness of dismissal may be desirable, more general intervention in private employment practices can be expected to result in little more than a reduction in employment, and should therefore be avoided. Similarly, as regards the often contentious issue of expatriate employment, Government should take care to achieve the right balance between the necessity of encouraging the employment of Guineans and the need to allow sufficient time for optimal skills-transfer to take place. G. The Incentive Structure 239. The first phase of the PREF did much to reform Guinea's incentive structure with the implementation of a new trade and payments regime and the new Investment Code promulgated in January 1987. However, these measures have been only partially successful in creating an efficient and transparent set of incentives for private promoters. 240. Although a significant improvement over the previous code, the new Investment Code provides a wide array of incentives under often complex conditions which hampers implementation of its various provisions. Over twenty different types of benefits relating to corporate tax, apprenticeship tax, flat-rate tax, wages tax, and customs duty may be awarded simultaneously or individually to eligible firms. Some of the Code's eligibility criteria are imprecise, complicating the evaluation of individual applications. Applying for eligibility under the Investment Code first involves the completion of enterprise establishment procedures; once established, a firm normally has to wait six months to find out whether it will actually qualify for any benefits under the Code. 241. As a result of this long processing time, the uncertainty surrounding the implementation of the Code's provisions and the Government's willingness to make exceptions, firms and individual entrepreneurs have often elected to circumvent the Code and negotiate special incentive packages. In particular, duty and tax exemptions have been awarded on an often arbitrary basis, which has served only to distort the general incentive structure and encourage rent-seeking on the part of individual promoters and officials. Such exemptions have not been restricted as originally intended either to privatized firms or to imports related to government contracts. They have instead been granted to all types of enterprises by individual technical ministries, often without the consent -- or even the knowledge -- of the Ministries of Planning and Finance, who are in principle responsible for such awards. 242. Privileges granted in the process have generally been poorly devised, and have entailed a major shortfall in tax and duty revenues for 451 Under the Labor Code, firms wishing to lay off 10 or more workers on economic grounds must have prior approval from the Ministry of Labor. The Ministry itself appears to have arbitrarily set a maximum limit of 30 workers that it will allow any firm, irrespective of its size, to lay off for economic reasons.  - 85 - the Government. Also, such practices end up being particularly discriminatory against small domestic producers, who do not have the bargaining power vis-a-vis the administration to negotiate their own separate concession packages. 243. The problem resulting from the award of such exemptions has been further aggravated by a lack of monitorings neither the Customs nor the Tax Department has kept a complete inventory of the numerous special conventions and exemptions granted to individual promoters. This has resulted in absence of control and widespread abuse of the system, with individual enterprises left free to negotiate whatever privileges they may obtain from individual ministries. 244. Illegal imports resulting in particular from inefficiency and corruption in the Customs Department may represent the single most important impediment to a supportive trade regime in Guinea, contributing in a major way to the bias against domestic manufacturing activity vis-a- vis imports. Criteria for valuation are used in a haphazard fashion, which often leads to disputes over duty assessments and to delayed customs clearance or, alternatively, to negotiated settlements with the importer. Also, due to lack of coordination between the Customs Department, the National Investment Commission and the various technical ministries, exemptions claimed by individual firms are often approved by the Customs Department without verification or are sometimes wrongly rejected. 46/ H. The Institutional Framework for Investment Promotion 245. Various investment promotion agencies are currently operating in Guinea, including: the National Center for the Promotion of Small- and Medium-Scale Enterprises (ONPPME), which operates under the supervision of the Ministry of Industry and aims mainly at providing pre-investment-type services to SMEs; the National Center for the Promotion of Private Investment (CNPIP), which is overseen by the Ministry of Plan and has, as its principal objectives, to promote foreign investment in Guinea; the Assistance Bureau for the Employment of Former Public Servants (BARAF), which is sponsored by the Ministry of Finance and provides pre-investment services to former civil servants who lost their job as a result of public sector reform; and the Chamber of Commerce and Industry, which was established as an autonomous institution to protect the interests of private sector orrators. 246. Unfortunately, these institutions have not had a major effect on the level of local or foreign investment. Despite its staff of more than 150 based both in Conakry and the interior, ONPPME has not had the anticipated effect on the promotion of Guinean SMEs. CNPIP's efforts to attract foreign investments to Guinea have been to no avail, given the country's unfavorable image abroad. As for BARAF, it was indeed able to 461 Some measures have recently been taken to begin to rectify this situation, including the replacement and redeployment of certain key personnel, the establishment of an Exemptions Monitoring Unit (See para. 77 in Volume I) in the Customs Department and the decision to compile an inventory of legal documents giving rise to exemptions.  - 86 - promote the creation of several hundred new projects sponsored In the main by former civil servants, but at the cos of a mounting number of delinquent loans borne by the banks. As for the Chamber of Commerce and Industry, it has still not played an active role in representing private enterprises' interests vis-a-vis the authorities. 47/ All these institutions have excessive levels of staff, many of whom are insufficiently trained or experienced. In addition, the roles of the institutions are not clearly defined, leading to some wasteful duplication. In undertaking reform of these institutions, Government should first decide what functions it wants them to undertake. In particular, it should distinguish clearly between facilitating enterprise registration, providing an extension service to Guinean entrepreneurs and advertising Guinea to foreign investors. However, more important than the institutional framework are the attitudes displayed towards the private sector by individual officials on a day-to-day basis. The investment promotion institutions have a key part to play in ensuring that officials throughout the administration understand the role and needs of the private sector, in order to eliminate the harassment to which businesses are currently subjected. I. Future ProsPects 247. As noted above, the industrial sector is presently small, little diversified, and remains heavily dependent on imported raw materials and intermediate goods. Despite the successful privatization of major state- owned enterprises, productivity and capacity utilization remain low. Industry's ability to compete successfully against imported goods is generally weak, and its contribution to export earnings is minimal. Yet, Guinea's prospects for diversification are dependent on the performance of its industrial sector. Given its still mostly unrealized industrial potential, Guinea is in a position to accelerate its drive towards industrialization, resuming the more prominent economic role it played in the region prior to Independence. If successful, such a drive could lead to improved growth in the sector of 5-8 percent annually over the next five to ten years. 248. For this to occur, the establishment of efficient import- substitution industries is needed, requiring a strong resumption of new investment in key subsectors -- particularly agroindustries -- where Guinea benefits from a clear comparative advantage. Such investment can only materialize, however, in the presence of a favorable investment climate that will convince private promoters -- both nationals and foreigners -- 47/ There is some debate as to whether the Chamber, as currently constituted, is sufficiently independent to be able to fulfil its function of representing private sector interests to Government effectively.  - 87 - Box 4 THE TCURISM MASTERPLAN With Its beaches, Its scenery and its cultural utchievements, Guinoe's potential for tourism doevlopment is considerable. However, In 1988 the country's only hotel of International standard received a mere 1,312 *leisure tourists', many of whom were visiting relatives and friends rather than simply taking vacations. In short, Quine does not yet have a tourism industry. In 1989, In response to this situation, the State Secretariat for Tourism and Hostolry drafted a masterplan for the development of the Industry. 1/ This masterplan consisted mainly of a detailed outline, with summary costings, of Investments that were deemed to be necessary in the short (1990-92), medium (1992-96) and long term (1997- 206). In these periods investments of US$ 26 million, USM 20 million and USt 93 million respectively wre foresoen. The bulk of this was to be for rehabilitation and construction of hotels. Although this masterplan incorporated a very thorough analysis of tho state of the exlstt!ng tourist infrastructure, It suffered from two sorious flaws. First, it contained no analysis of demand other than some historical figures and vague statements to the effect that significant international demand exists. Secondly, in the short and medium term It assigned a *pioneer r8le' to the State as direct Investor in the industry. Just as the State has withdrawn from manufacturing industry, It should stay out of major tourism investments. In any country such Investments are highly risky and more appropriate for the private sector; in Guinea where much of the supporting services and infrastructure barely exists this is even more apt. Experience elsewhere In the world suggests that the appropriate r8Me for the Guinean Government in the tourism industry would be a supportive not an lnterventionist one. In this regard, Government should examine Its r8le as facilitator of the tourism Industry. A preliminary step would be to authorize the granting of tourist visas - at present such requests are generally refused. A second step would be to take measuras to reduce the harassment of visitors to the country, particularly on arrival at the airport. Thirdly, Conakry's International hotel, the Grand HMtal do l'Ind4pendance, should be privatized In order for It to be managed on an efficient and fully commercial basis. Once these preliminary steps have been undertaken, Government should study Its approprioate r8le In such areas as hostelry norms, training, promotlon abroad, publication of maps and brochures and the management of tourist sites belonging to the notion. Any related expenditures should be selective and experimental; care must be taken to not run ahead of clearly demonstrated demand. y ProJet de Sca Directeur do De eloppewrnt du TourlS et deo rHotellerle, Secretariat daEtat au Towrisme at a I'Hotellerle, Mlnlstere de l'rinformatlon, de la Culture et do Tourlsm, 1989 that Guinea is a stable, favorable place to do business. 481 In that respect, most enterprises rem4in unsure of the Government's ability and willingness to establish the conditions deemed necessary for private sector activity. Inadequate infrastructure, absence of a land tenure system guaranteeing ownership of plant and other real estate, constraining regulations, corruption in the public administration, the ineffectiveness 48/ One of the key tests of the level of business confidence in the administration is the degree to which Guineans with capital abroad repatriate it to Guinea; it is these potential investors who tend to be both well-informed about business prospects and have personal reasons for establishing businesses in Guinea. To date, it appears that such repatriation has been disappointingly low.  - 88 - of the Customs Administration, and disruptive intervention by public officials are but a few of the problems that firms still confront on a daily basis. 249. The creation of a favorable investment climate will be one of the Government's top priorities for the coming years, involving thi streamlining and rationalization of the legal and incentive framework in which private firms are operating, improving the institutional structure, and reducing the administration's capacity to intervene in the day-to-day operation of businesses. The resumption of industrial investment is also contingent upon continued reform of the financial sector, which still falls short of providing potential investors with the investment credit required to finance new investment. 250. Since the success of such reforms is greatly contingent upon attitudinal changes towards private operators by public officials, improvements will only be gradual. In time, new investment in productive activities is expected to pick up, which will help improve productivity, leading to greater competitiveness of industry, increased import- substitution activity, higher utilization of local inputs, and ultimately to the development of export-oriented industry. IX. THE FINANCIAL SEC1OR A. Overview 251. Until 1985, the financial sector was almost entirely devoted to serving the command economy which the Government had set up after Independence. The state banks were used as instruments to implement the country's development plan. The bulk of bank credit was absorbed by the state enterprises, generally in the form of direct credit allocations determined on the basis of their annual plans of operations. Credit to the private sector was prohibited until 1979, and remained insignificant thereafter. In that context, interest rates played no allocative role in the functioning of local credit markets. 252. The new administration determined that the six existing state banks could not realistically be rehabilitated and therefore decided to liquidate them. To fill the void left by the liquidation of the state banks, new privately-controlled banks were given licenses to operate (see paras 36 to 38 of Volume I for a more detailed account of this process). The establishment of the new banks was accompanied by a reorganization of BCRG, the enactment of a new banking law, and a substantial liberalization of credit and other banking activities. 253. The progress achieved in the four years since the establishment of a new banking system has been impressive. Total local currency deposits in the inking sector grew from GF 8 billic' at the end of 1986 to GF 16.3 billion in 1987, GF 24.5 billion in 1988, and GF 34.4 billion by the end of 1989. This represented a 49 percent increase in real terms in 1987 (although from a small starting base), and real increases of respectively 18 and 10 percent in 1988 and 1989. Meanwhile, total outstanding credit to the private sector grew to GF 42.3 billion at end 1989, with real increases  - 89 - able 12 of 60 percent in 1987 MOETR SW (1986-1989) and 6 percent in 1988, and a small increase (year-end figures In bill ons of Gulnean France) (2 percent) registered 18 1o87 10 1989 in 1989. Not foreign assets 7.9 25.1 11.1 24.8 254. Beyond SCRO -1.9 10.8 -5.8 8.1 these figures, the Cotmorelal banks 9.8 14.6 16.9 18.2 mere fact that the Not domestic assets 42.6 48.4 76.9 86.2 Government has Domestic credit 87.2 42.1 68.0 67.1 succeeded in Public sector (net) 26.6 17.1 32.4 24.8 Government 8?.2 38.4 48.6 38.7 reorganizing the Stat *ontorprt es -11.4 -19.8 -16.2 -13.9 financial sector and Private sector 11.4 26.0 83.8 42.8 making customary Other Items (nt) a/ 6.4 1.8 9.9 18.1 banking services Liabilities to private sector 60.6 68.5 88.2 109.6 available to private Money and quasi-money (MI) 42.6 69.6 80.2 103.8 sector operators and Currency 34.6 48.8 56.7 89.4 operators ~~Bank deposits 8.0 16.8 24.5 84.4 to the public at Foreign currency deposits 7.9 8.9 8.0 6.7 large, where such services were totally Indices and ratios unavailable three ------------------ years ago, is a major achievement of the Ml as % of GDP 6.3 6.6 7.0 8.4 reform program. Private sector credit In 1988 GF 11.4 18.2 19.3 19.0 X growth In prlv.sector credit 80.1 6.8 -1.8 255. Past Bank deposits In 1986 OF 8.0 11.9 14.1 15.4 X growth in bank deposits 48.7 18.3 9.6 progress should Deposits as X of MI 18.8 27.3 30.5 33.1 however not mask the continuing a/ Includes transactions with the USSR. deficiencies of the b/ Deflated by the consumer price Index. sector. Overall, Source: BCRG and IMF financial markets are still notably shallow, and no financial deepening has occurred in the past two years, due in part to the fact that the banks have been unwilling to signViicantly increase the availability of credit. The banking system as a whole is also highly inefficient by standard measures. Overhead expenses amounted to 8.6 percent of average assets in 1988 and a huge 14.4 percent of the outstanding portfolio, due in large part to the high number of expatriate staff sent from home office to manage local operations (the fact that such expenses apply to a reduced asset base only aggravates the problem). In addition, at least two of the four major local banks are saddled with a high percentage of non-performing loans. These high operating costs and mounting losses have to some extent been offset by the unusually high spreads of over 20 points available to banks on lending operations: most outstanding loans were made at or above the 25 percent interest rate ceiling prevailing until January 1989, as against an average cost of funds estimated at 1.7 percent as of June 1988. These spreads have allowed the banks to build up a cushion of reserves for bad debts. However, both the generous spreads and high operating expenses under which banks are presently operating will eventually have to be reduced if the system is to perform its intermediation role effectively. The various constraints to tLe development of an efficient financial sector are discussed in more detail below.  - 90 - B. Savinas Mobilization 256. Monetization of the economy (Ml) is still weak at an estimated 6.4 percent of GDP in 1989, a ratio which has remained unchanged since 1986. Although deposits in the system have increased substantially as a percentage of the monetary base since 1986, they still accounted for only 33.1 percent of that base at the end of 1989. The private local currency deposit base of the banking system remains very small at an estimated 2.1 percent of GDP at the end of 1989. 257. Low confidence in the financial system has seriously hampered the mobilization of private savings needed to finance investment. Trust in the banking system was seriously eroded by over 25 years of poor performance and mismanagement. The currency was demonetized on five occasions after Independence and these currency upheavals coupled with rapid monetary erosion led to severe losses for currency holders, whose consequent mistrust in the monetary and banking system was -- and still is -- reflected in their preference for foreign currency or non-monetary holdings. 258. Inappropriate interest rates have been another factor behind the weak mobilization of private savings. Prevailing rates have provided insufficient incentive to save in local currency, to the detriment of the achievement of the Government's broad long-term objectives. Savings accounts yield only 16 percent per annum as against an inflation rate still hovering between 25 and 30 percent. Term deposits yield only a slightly higher 21 percent. 49/ Moreover, less than 30 percent of all deposits are actually interest-bearing, of which only 16 percent were in the form of term deposits at the end of 1988. 501 Additionally, prevailing deposit interest rates provide no incentive to depositors to transfer their foreign currency holdings back into Guinean francs. 51/ As a result, these critically-needed resources are not available for domestic investment, further compounding resource constraints in the economy. Although financial savings in Guinea may not be highly sensitive to the level of interest rates, it is clear that they will remain constrained while real interest rates are still negative. All told, a major shift in savings patterns will be needed to increase the capture of resources in the formal financial system to more satisfactory levels. However, it should be noted that the banks will have little incentive to participate in such savings mobilization efforts until their lending prospects improve. 49/ Indeed, for most of the period since the beginning of the PREF interest rates on deposits have been lower and inflation higher. 50/ Local banks have in effect been discouraging potential depositors from opening interest-bearing accounts, in particular through the setting of high minimum account balances. 51/ This applies even to the so-called Convertible Guinean Franc Deposits, where the depositor has a right to convert the deposit into foreign exchange at the prevailing exchange rate at any time.  - 91 - C. The Functioning of Credit Markets 259. Recent net increases in lending should not mask the fact that absolute levels are still quite modest. At the end of 1988, outstanding loans to the private sector represented barely 40 percent of total bank assets, and an extremely low 3.1 percent of GDP. The relatively insignificant r8le played by institutional credit in industrial activity stems, at least in part, from the weak demand for investment financing resulting from the depressed business climate. It also reflects the cautious lending policies of the new banks. 260. Generally, the banking system's participation in day-to-day economic activity is weak. Despite the growth in overall credit activity noted above, credit to the private sector is still essentially limited to the short-term financing of international trade. The local banks' very conservative approach to lending has not, however, prevented them from experiencing relatively high delinquency ratios, stemming in particular from the difficult environment in which they are operating. 261. Banks are particularly constrained by: (1) the absence of past credit records on local operators coupled with tLair frequent lack of financial discipline; and (2) the generally deficient functioning of the judicial system and legal void surrounding the issue of bank sureties. The latter problem probably constitutes the major limitation to banking activity in Guinea. It renders banks unable to enforce their rights as creditors through foreclosures or other court-approved actions, due in many cases to debtor-judge collusion. The absence of proper land registration and property ownership legislation further compounds the problem, by making it in effect impossible for banks to secure their loans with matching collateral. Clearly, local banks cannot be expected to become more responsive to the needs of local investors in the absence of a more supportive legal and judicial framework. 262. As a result, banks have focussed mostly on short-term lending (about 85 percent of total outstanding loans at 1988 year end), particularly import financing for large traders. Term lending to local enterprises is severely restricted (in the case of projects involving foreign exchange costs, local banks are reluctant to rely on the guarantee schemes set up by the Government to cover losses they may incur through utilization of the externally-funded lines). Limited access to investment credit applies even to foreign investors, who have often had to rely on financing from their parent companies overseas. 263. The policy framework has only tended to reinforce shortcomings in the functioning of local credit markets. This has been particularly the case of interest rate regulation: under the externally-funded lines of oredit for long-term lending, banks still operate with narrow spreads of only 3 percentage points in the case of small enterprises, and 5 points for larger borrowers (See Table 13). Until January 1988, all medium-term lending from domestic sources was subject to a 15 percent interest rate ceiling, with short-term lending subject to a 25 percent ceiling. In January 1989, short-term interest rates were decontrolled but medium-term rates were fixed until September the same year. Thus, although regulatory  _ 92 - 'able 13 constraints have STRUCTURE OF INTEREST RATES been removed to some extent, banks (in percontages) have had little Jan. Jan. Jan. Sept. Fob. incentive for 198i 1988 198 1989 1990 competition, and LOAN RATES scant encouragement SCRO refInancIng to assume the preferential (TREP) 10 10 11 18 14 higher risk regular (TREN) 15 17 22 24 24 (notwithstanding Commerelil b&nis (ceilings) the existence of Short term 20 26 free free fre" Medium term 1o 1s 18 free free the guarantee External credit lInes schemes) and poorer Oaccord eadre' b/ -- 10 11 18 14 collateral other -- 9-11 10-11 11-1 12-14 associated with Preferential ./ 12-1S 16 16-10 18-20 18-20 term lending. PEPOSIT RATES 264. In Sight deposits 0 free free free froe addition, interest Savings deposits -- 12 12 14 16 rates applicable Non-soht savings X- 12 14 16 18 Term deposits d/ 16 17 19 21 21 under the major Term deposits In externally-funded convertible OF 17 19 21 28 28 lines are highly Inflation (year average) */ 87 27 28 28 18 subsidized as compared to both a/ For regulated rates only; free rates are not known. market rates and b/ For larger loans funded by credit line of the Caisse Central* de Is Cooperation Economiqud. inflation levels. c/ For local currency loans complementing externally-funded Similarly, banks credit lines. are able to d/ Term of over 6 months untiI Jan. 1989 and over v months since then. refinance eligible e/ Projection for 1990. local-currency Source: BERG loans at the Central Bank at the subsidized preferential" rates of 14 percent. 52/ she existence of such subsidized rates has contributed to the fragmentation of the financial market between borrowers eligible under these facilities and those paying market rates, and has tended to distort the efficient channeling of resources to the productive sectors. In addition, easy access to such cheap resources from the Central Bank has provided banks with little incentive to aggressively seek interest-paying deposits. 265. Although the Central Bank has in recent years substantially reduced some of the distortions noted above, various measures itill need to be taken, particularly towards removing the implicit subsidy of the preferential refinancing rate. Moreover, it will take substantial progress on the other issues before banks are ready to adopt a lending policy more in line with the needs of local enterprises. 52/ Until very recently, even the normal refinancing rate of 24 percent represented a significant implicit subsidy given the level of inflation.  - 93 - 266. In that respect, local banks need to be provided wlth an environment more conducive to risk-taking on their part. Measures to bring about improved cooperation between the banking sector and investors should include: the establishment of a coherent legal framework on bank collateral and bank sureties; strengthening the capacity of the judiciary to deal with cases involving banking transactions; and improved enforcement of judicial decisions. Given the operating costs and relatively sophisticated procedures under which the banks operate, it may be necessary to develop new financial institutions that can mobilize small savings and lend to small enterprises, including farmers. 531 However, this should not be done with recurrent operating subsidies from Government nor with major state participation in long-term capital, since this has proved to be disastrous elsewhere in the region. In addition, the potentially important rOle of informal savings and loan institutions should not be ignored; means of assisting their development should be identified. X. ENVIRONMDENT A. BackQround 267. For most of Guinea's history, economic development has occurred without expL:cit concern for the environment. Incomes have been generated from mining, shifting peasant agriculture, logging, hunting, and fishing largely free of controls on their environmental impact. Guinea's population has grown at about 3 percent per year; however, urban populations have grown at almost twice that rate. This has occurred with considerable deterioration of the quality of urban life (increased traffic, commuting distances, solid waste and pressure on public services) and is becoming a serious menace to the environments around the cities (forest depletion for firewood and urban sprawl into watersheds). Many of these problems have been seen as isolated engineering issues for the most part, rather than as components of a broader environmental issue. As a result Guinea is faced with the challenge of overcoming the environmental problems inherited from the past at the same time as managing renewed economic growth in an environmentally-sustainable manner. 168. Of Guinea's 24.6 million hectares, only about 25 percent is suitable for sustainable farming. Population growth will place increased pressure on this area, unequally distributed between regions, and will lead to shorter fallow periods, more intense use, and the risk of increased soil 53/ At least five possibilities for establishing such an institution are currently being discussed in Guinea: the creation of a benque populaire, the revival of the post office savings bank, the establishment of mutual credit schemes, the expansion of existing rural credit pilot initiatives and the setting up of a state-owned development finance bank. The point of departure for any of these proposals should be a careful analysis of (i) where the existing banks are failing to provide services; (ii) whether changes in the policy environment could rectify these failings; and (iii) if policy changes could not be expected to bring about the desired changes, whether an institutional solution could be expected to either.  - 94 - erosion. Pressure will also increase to extend the areas cultivated into less suitable zones, and into remaining forest reserves. These effects have different implications depending on the region. Already, an area of some 15 million ha of dense forest which existed some 20 years ago has been reduced to less than 1 million ha. Some of these reserves are in clear danger of over-cutting: for example, the mangrove stands along the coast, which provide fisheries breeding grounds and coastal protection, are increasingly being cut for the growing fuelwood market in Conakry. Other reserves, in the more remote forest zone, are under pressure from the expansion of traditional agriculture, local loggers, and potential mining developments such as that proposed for the extraction of iron ore at Mount Nimba. 269. Although The Fouta Djallon has supported a dense population for some years, the many watercourses which emanate from the plateau are now facing increasing risks owing to new agricultural activity and related fuelvood cutting. Large tracts of dry-wooded and bush savanna which cover fragile soils and the sensitive watercourses of the Niger and Senegal rivers have been "protected" by the presence of onchocerciasis. However, this disease is being eradicated, and pressure is building to exploit the areas freed from the disease, whose capacity to absorb farming is limited. Agriculture continues to be one of the key growth sectors, yet its growth to date has been through extensification, dependant upon virtually free access to land. This is fast becoming unsustainable from an environmental point of view and developing an appropriate agriculture and land tenure policy is critical. 270. Mining also represents a critical growth sector for Guinea, from the viewpoint of generating foreign exchange earnings and Government revenue. However, the environmental impact of open-pit mining has only now become an issue in Guinea, and little rehabilitation work has occurred. Neither the Mining nor the Environmental Code have operational provisions governing environmental rehabilitation, although mining interests appear to be sensitive to the need to undertake such rehabilitation. Development of hydroelectric power, which is needed to meet the growing demand for energy, also presents environmental risks which are slowly being recognized and addressed through pre-investment environmental iztpact assessments and corrective action. 271. Guinea possesses significant fisheries resources in its Exclusive Economic Zone (ZEE). However, average daily catches have apparently fallen by up to 50 percent in the past decade. Experts have begtm to express concern about the over-fishing in the deeper waters along the coast and the risk of uncontrolled encroachment into the inshore waters where the breeding stocks are found. Managing and conserving this resource will be important for future growth (see Box 2). 272. With the loss of undisturbed forest cover, significant wildlife habitat has also been lost and that which remains is in danger. Apart from the intrinsic value of this habitat and the wildlife it contains there has been little work done to determine the potential income-generating value of what is at risk. While seeking growth and diversified sources of income, the unknown potential of reserves should not be neglected.  - 95 - 273. Much of this evolution has occurred because there was neither adequate knowledge of how Guinea's environment has evolved and the cost associated with its destruction on one hand, nor the policy, legal framework, institutions, and qualified personnel to manage the situation on the other hand. In Guinea, as in most other countries, the operation of resource markets has not been sufficient to give price and regulatory signals to users to encourage voluntary environmental protection practices. To address environmental problems, Government is faced with increasing its presence in and regulation of the economy at a time when the general thrust of its policy is to liberalize. In late 1989, for example, legislation Was approved requiring that all najor investment projects be preceded by an acceptable environmental impact assessment. There is environmental justification to eventually add fiscal measures to this direct regulation of economic activity, as knowledge of the environmental situation is developed. B. Procaress with Environmental Issues 274. Government's response to emerging environmental issues to date has been prudent but conservative. Guinea was one of the first countries in sub-saharan Africa to undertake the development of a Tropical Forest Action Plan, which was begun in 1986. The plan and a 6-year priority investment program was approved by in 1989. A number of the recommended projects were prepared for financing as the TFAP was being developed and some are actually beginning in 1990. Government adopted an Environmental Code and established a National Commission on the Environment in 1987. This was an administrative coordination body, composed of ex officio members of various ministries, under the leadership of the Ministry of Natural Resources and the Environment (MNRE). 54/ Its principal function is to advise Government on the environmental implications of proposed measures, and it met for the first time in mid-1989. The Commission has not, however, played an active rOle to date. Regulations applying the legislation governing the requirement for ex ante environmental impact assessments have not as yet been developed. 275. Since 1985. Guinea has mobilized the interest of donors for planning the protection of the many watersheds emanating from the Fouta Djallon, known as the 'water tower" of West Africa. .A program for watershed protection has been launched, covering some 12 watersheds. Approaches differ and there is little coordinated management; however, a basis for further work is being established. Programs for the protection of the dry savannah forests of Upper Guinea have also been identified and the protection of about 160,000 ha of a total of some 400,000 ha of these forests, most at risk from farmer intrusions following the eradication of onchocerciasis, is to begin in 1990. For the first time, environmental impact analyses of mining (MIFERGUI at Mount Nimba) and hydro power (Konkoure) developments are being undertaken as part of the investment planning process. Most officially-sponsored fishing was suspended in Guinean waters during 1989, and Government is completing preparations to 541 Given that mining is the principal focus of MNRE, Government should consider transferring the environment portfolio to another ministry to avoid any possible conflict of interests.  - 96 - install a monitoring, surveillance and control system covering the ZEE, to enforce a level of fishing which is within limits sustainable by the resource. Government is also launching a pilot project for the identification and registry of land rights in areas where agriculture and forestry ctncerns are beginning to conflict. 276. In 1989, Government recognized that its approach to the many facets of the 'environmental question" risked becoming fragmented and ad hoc. In response, it launched preparation of an omnibus Environmental Action Plan and has mobilized the contributions of many donors for its development. The WAP is expected to outline policy for the environment in some 9 areas of concern (see below) as well as identify areas in which corrective and preventive programs should be launched. The EAP will be the focus of a specialized donor sector conference late in 1990, and a preliminary summary of the EAP findings is expected to be available by mid- 1990. 277. While Guinea's activities for the environment to date show growing concern for environmental degradatioi., there has not been a significant test of Government's resolve in placing environment considerations on an equal f.oting with other factors influencing growth. Most environmental activity has been in areas where there is wide consensus on the issues, such as the protection of forest reserves from agricultural encroachment and inappropriate logging, planning watershed protection with local populations and tree-planting programs. However, the process of developing environmental impact assessments of industrial and urban investments has only just begun and the process of weighing evidence and assigning priorities evidence has not been institutionalized. Government also recently concluded fishing agreements with the European Economic Community before the consequences of the levels and allocations of the permitted catch had been assessed from an environmental point of view. In this context, Guinean institutions are not at present sufficiently strong to perform all of the tasks required to integrate environmental concerns into development efforts. It is critical, therefore, for the donor community to be particularly sensitive to the environmental implications of its development proposals before these are implemented. C. Scone of the EAP 278. By virtue of the scope of interests being covered in its -environmental planning, Government's policy is to promote economic development within a sustainable environment. This means that the quality of life of both rural and urban citizens be protected from negative effects of economic development, that the diversity of the natural resource base be preserved, and that the population participate in the protection of the environment. Government's approach to implementing this policy should be to make environment a concern of all levels of society through education, information, and participatory dialogue. It should build on results already in hand, and take actions as they become ready for implementation. It should seek full donor coordination in supporting its environmental investment program, and cooperation at the international level to curb potential environmental abuses that affect but are not within the control of Guinea (eg. transborder shipment of toxic wastes, regional atmospheric and ocean pollution, desertification).  - 97 - 279. While not completed, Government's operational strategy for the environment is expected to cover a number of related areas as followst a) improvement of the management of natural resources would underlie major elements of the strategy, and would cover priority areas including (i) management of the areas being freed from onchocerciasis to protect their functions as watershed regulators, prevent erosion and soil degradation, and to protect their biodiversity; (ii) management of major watersheds in a coherent manner, with the full participation of the local populations; (iii) development and management of improved uses and protection of the country's biodiversity through an improved system of reserves and parks, more appropriate policies, and greater awareness of the issues; and (iv) improved management of infrastructure and industry to fully integrate the environmental consequences of development into decision-making. For public investments this would be through mandated action; for private investment, a combination of mandated actions and pricing and fiscal measures would be employed; b) improvement of the urban environment would include proposals for treating solid wastes, low levels of public health, and the imbalance between urban and rural living conditions as an element in controlling rural-urban migration; c) development of the relations between man and environment as a fundamental element in long-term environmental protection, would cover such concerns as raising the level of knowledge and awareness of the population and mobilizing their efforts to change lifestyles and attack environmental degradation problems; d) raising Guinean public and private sector capacity to manage the environment which would include elements covering (i) developing land and geographic information systems adapted to the capacity of Guinean institutions to use the information; (ii) developing information banks; (iii) training personnel and reinforcing institutional arrangements; and (iv) modernizing the legal, institutional, and administrative framework for translating plans into practical results. The specific case of MIFERGUI which will, if initiated, operate within a designated World Heritage (Patrlmolne aondlel) site will provide an illustrative case study of the process, in addition to being an immediate issue requiring resolution. XI. HEALTH. POPULATION AND NUTRITION A. Prof ile (a) Health 280. The health status of the population in Guinea is among the poorest in the world. Life expectancy at birth is 43 years, compared to a regional average of over 50. Infant and child mortality rates are both high at 14511000 and 44/1000, respectively, and account for 50 percent of  - 98 - all deaths in the country. S51 Maternal mortality is also high: 8 of every 1000 pregnancies results in the death of the mother. Respiratory diseases, traumas and burns, malaria and diarrhea account for 54 percent of all diseases reported. Other preventable and easily treated diseases, such as measles, tuberculosis, pertussis (la ooqueluche). poliomyelitis and tetanus are also very prevalent. Morbidity among children under five is dominated by malaria, respiratory diseases, and diarrheal diseases which together account for three quarters of reported cases. Inaccessibility to potable water and poor sanitation cause a high prevalence of parasitic and endemic diseases, especially among children under the age of five. (b) Population 281. The population of Guinea was estimated at 6.5 million in 1988 and the rate of population growth is estimated at 2.8 percent per annum. With a total fertility rate of 6.0 and a crude birth rate of 45 per thousand, Guinea's high fertility is comparable to the average for Sub- Saharan Africa. Mortality is also high; the crude death rate is estimated at 20 per thousand. Average population density is 24 per square kilometer. and the mainly rural population is fairly evenly distributed throughout the country. Migration to Conakry has accelerated in recent years, bringing the capital's population growth rate to 5 percent per annum. The age structure of the population is youthful: 45 percent are below age 15. Population growth will approach 3 percent over the next two decades, and the population will exceed 9 million by the turn of the century. It will become increasingly difficult for Guinea to absorb the working age population into its labor force, and this will accelerate urban migration and unemployment. 56/ (c) Nutrition 282. Comprehensive data on the nutritional status of the population are currently not available. However, it is recognized that rates of malnutrition vary seasonally and across regions, and are consistently higher among children and nursing mothers - the most vulnerable groups. While food availability has increased somewhat under the Second Republic, surveys suggest that a substantial percentage of children under five suffer from some degree of malnutrition. This has serious implications for susceptibility to disease and death, labor force productivity and physical and mental growth. 55/ Africa's overall infant mortality rate by comparison is 109/1000. 56/ Since the major base source for population data is the 1983 census, all estimates should be viewed with caution. In that census, the urban population had a strong incentive to overstate family size in order to increase food ration allocations; the rural population had an equally strong incentive to understate to reduce head tax liabilities. The net effect is, of course, unknown.  - 99 - B. The Current Health Services System 283. The Ministry of Public Health and Population (Mlnistbre de la Sante Publique et de /a PoPulation, MSPP) is responsible for the formulation and implementation of national population, health and nutrition policy and for overall strategic planning, management, administration and coordination of the country's health system. Regional inspectors are responsible for management and coordination of health activities in the four regions, and a director for prefectural services is responsible for overseeing technical activities, staff performance, drug distribution and contacts with administrative authorities in each of the 36 prefectures. At the prefectural and regional hospital level the director has both medical and managerial responsibilities. 284. Public sector services are provided through a pyramid of health facilities comprising two teaching hospitals in Conakry, four regional hospitals, 29 prefectural hospitals, 370 sub-prefectural health centers, 205 district medical posts and 340 primary health care units at the village level. There are also vertical programs for the control of certain communicable diseases, including onchocerciasis, leprosy, AIDS and other sexually transmitted diseases. The system is based on patient referral from lower levels to more specialized services at higher levels. However, a concentration of available resources at the hospital level has caused th..e system to break down in many areas and encouraged people to proceed directly to hospitals for routine services. Health centers and posts are often isolated geographically, resulting in a weak system of logistical support and supervision. The distribution of physical facilities throughout the country is reasonably equitable, although rural facilities tend to be disadvantaged in terms of staffing, equipment and operating funds. A recently established extension system (strat6gle avancee) is intended to serve communities with poor access, but this service is still limited in scope and extremely weak due to a lack of personnel and operating funds. Fifteen maternal and child health care centers, located primarily in urban areas, are also part of the public health care system. Pharmaguinee, formerly a public enterprise and now a unit of the MSPP, is responsible for procuring and distributing drugs to public health facilities; however, this system is extremely weak due to poor management and lack of resources. The supply and distribution of essential drugs is heavily dependent on external donors. These donors and some NGOs heavily supplement the provision of health services by financing infrastructure investments, basic operating costs, drugs and some salaries. 285. Overall ratios of population to Government health personnel are fanorable in Guinea, relative to other West African countries, for all medical and paramedical personnel except midwives. However, their heavy concentration in the Conakry area and the regional capitals (approximately 57 percent of physicians, 72 percent of midwives and 53 percent of nurses) leaves rural areas, where 73 percent of the population resides, severely disadvantaged. 286. The provision of private health services has increased significantly since the advent of the Second Republic in 1984, although existing private medical clinics, private medical offices for outpatient  _ 100 - care and bio-medical laboratories are located mostly in Conakry. Traditional healers provide health services throughout the country and traditional birth attendants are found in most villages. Several private pharmacies and pharmaceutical wholesalers, mostly in Conakry, supply drugs to the public. Finally, a number of NGOs participate in health delivery systems, including the Guinean Association for Family Welfare (Association Gulndenne pour te 61en-Etre Familial, AGBEF), an affiliate of the International Planned Parenthood Federation, which has s well-established family planning clinic in Conakry, and has recently expanded to the Middle Guinea Region. They provide information on family planning services and distribute contraceptives, and are currently involved in a large program to sensitize community and religious leaders and women's organizations, including members of Government women's training centers. C. Past Policies, Performance and Constraints 287. Following a period of steadily improving health status after Independence, the rate of improvement slowed in urban areas and largely stagnated in rural areas during the First Republic. Poor management of existing sector resources, coupled with financial constraints, led to internal inefficiencies in the health system, a chronic shortage of operating costs, poorly trained health personnel and, consequently, to limited access and low quality health care. At the advent of the Second Republic, the health care system had almost totally collapsed. The Government's commitment to primary health care was confirmed at the National Health Conference held in July 1984 and focuses on rural areas and gives priority to developing curative and preventive services at the primary level. It aims to expand coverage and improve the quality of services. particularly those oriented towards women and children. This new orientation in Government policy was based on the recognition that the previous health sector strategy was not addressing the high rates of infant, child and maternal mortality and neglected rural areas, where the majority of the population live. A better allocation of existing resources, however, has been slow to follow declared policies due to the Government's weak policy implementation apparatus and a lack of commitment on the Government's part to protecting and improving basic health services. The system remains weakest at the periphery - at the prefectural and sub- prefectural levels - where the neglect of health services has been the most pronounced. While conditions have improved since 1984, buildings and technical equipment are in poor condition, drugs are scarce in many rural areas, and some facilities are insufficiently staffed and equipped. This functional breakdown of the system at the periphery has led to an inefficient use of higher level facilities, as hospital resources are used to treat those who would normally be treated at the health center level. However, Government has initiated efforts to reverse this trend, with from external donors and NGOs. (a) Sector Financing 288. The lack of adequate financial resources is central to many of the issues in the health sector. Total public expenditure on health relative to GNP has been estimated at only 1.5 percent.  - 101 - - Recurrent Budset Reviews The proportion of the Government's overall recurrent budget allocated to the health sector declined from 5.2 percent in 1977 to approximately 2.5 percent in 1988. 571 This compares to an average recurrent budget allocat'on for health of approximately 5.5 percent for Sub-Saharan Africa during t. -same period. While the non-salary proportion of the health budget t. a averaged approximately 15 percent over the same period, actual non-salary expenditures have steadily declined as salary expenditures have increased to the point where public spending for drugs, materials and other operating inputs is only a small proportion of what was budgeted. However, the direct financing of drugs, vaccines and materials by international donors and NGOs has partially compensated for the low Government contributions to the sector. Moreover, the World Health Organization estimated that private expenditure in the health sector in 1988, primarily for drugs, exceeded the Government's recurrent budget for health. Much scope exists to increase locally-generated resources for recurrent costs through cost recovery schemes (see Box 5 on cost recovery). Despite the current health priorities, the distribution of salary and non- salary expenditures in the sector is heavily skewed in favor of hospitals and urban services. - Investment Budget Review: Health's share of the total investment budget during the 1987-88 period averaged 6.4 percent, but most was financed by external sources (75 percent) and implementation has been well below target (47 percent for external and only 21 percent for domestic financing). These low implementation rates reflect both a lack of absorptive capacity in the MSPP and a lack of Government commitment to investments at the primary health level, for which returns will only be seen in the medium to long term. The recurrent cost implications of most investments were not considered until recently and, in view of the fact that recurrent funds for investments are not routinely included in the ministry's budget, the sustainability of the investments is not assured. Over the 1990-92 period, an ambitious 56.2 billion GP is programmed for the health sector, representing 7.3 percent of the Public Investment Program. This compares with 42.1 billion GF (6.5 percent) which was programmed for health in the 1989-91 PIP. Close to 50 percent of total investment in health (excluding central level investment in the pharmaceutical sector) is designated for urban areas, of which 80 percent is for Conakry. Approximately 35 percent of total public investment in health (excluding the pharmaceutical sector) is designated for the hospital sector. This percentage distribution, while remaining inconsistent with the Government's stated sector policy, is an improvement over the 1989-91 investment distribution. Much of the improvement has resulted from the Government's decision to scale back funds programmed for renovation of Donka Hospital and for construction of a third hospital in the Conakry area. However, some of this financing has been shifted to other urban hospital facilities, instead of to peripheral level investments. The construction of a third hospital in Conakry has been eliminated from the program. Given the available investment resources and the Government's policy to redirect allocations to primary health services, 571 This figure does not take into account contributions to local budgets for salaries and other operating costs by municipalities and prefectural administrations -- estimated at GF 225 million in 1988. The KSPP has plans to integrate these contributions into its management information system.  - 102 - Box 5 COST RECOVERY IN THE HEALTH SECTOR: ONE YEAR'S EXPERIENCE Recent tests have shown that the Guinean population Is capable of making a significant contrlbution towards paying for its own curative health care. On a pilot basis, the Institution of standard fees set by the Government for a variety of treatments has increased the quality of primary health services by ensuring the availability of drugs and other operating costs. I/ As one would expect, the degree of success has been shown to be directly related to the size and disposable Income of the population served. Nearly all urban centers, which typically serv, relatively large populations with somowhat higher disposable income, have achieved high utilization rates and succeeded In recovering 100 percent of costs, lncluding medicines, operating expenditures and depreciation of equipment. According to a recent WHO report, recovery rates for rural health centers have varied from nearly 100 percent In centers serving large populations to approximately 60 percent In centers serving poorer, sparsely populated areas. The Government and donors involved In the cost recovery programs agree that potential ei"sts to encourage Increased utilization of health facilities in rural *reas by (1) publicizing the availability of improved services; (iI) Involving health committees In the dissemination of lnformation and service promotion; (iii) developing a better extension system to reach groups with poor accoso; and (lv) Improving staff performance and the overall quallty of services. It is acknowledged, however, that accompanying this improved provision of services with full cost recovery In the pooroet rural *reas is neither possible nor desirable In the medium term, given the competing demands on very limited lncoes. This should encourage Guinoa's decision makers to redouble their efforts to concentrate spending from budgetary resources for health on the rural poor. Schmes are being tested, in cooperation with communlty groups, to |eubidize the health care costs of indigents. It Ie Important to note that pilot programs currently being carried out In Quinea have benefited considerably from Intensive training and supervision of personnel and from the fact that the availability of drugs has, up to now, been assured almost exclusively by donors. The ustainability of this system on a nationwide basis Is dependent on two key factors: (a) the ability of community management committees and health facility personnel to manage and control collected revenues; and (b) the ability of a restructured Pharmaguln6e to ensure the procurement and timely distribution of low- cost, essential drugs to health facilities throughout the country. Ensuring the ability of local communities and health personnel to manage their own resources will In large part depend on the MSPP's ability to allocate sufficient resources to the supervision of these systems once Initiated, particularly In isolated rural areas. Concorning drug availability, the Government Is currently in the process of Improving the managerial capacity of Pharmaguin6e. Once this has been completed donors will be called on to end the direct purchase and distribution of drugs and to provide Pharmaguin6e with financing for drugs and technical assistance until the system has become self-sufficient. With the sustained comitment of all parties concerned, Institution of a successful notionwide cost recovery system with Improved service quality Is clearly a realistic short term objective. / Such fees have been Instituted In roughly one-third of sub-prefectural health care centers and In sonm hospitals. Preventive services, such as Immunization, family planning and nutrition education continue to be provided free of charge. it would be inappropriate to construct a third hospital in Conakry in the foreseeable future. The Government's 1990-92 investment program provides mainly a listing of major construction and renovation work, which ignores smaller, but nevertheless important investments, often made by large NGOs. As with school construction in the education sector, there has been little attempt to enforce the standardization of construction costs for hospital and health center construction. Construction norms established by Government for health center capacity are often ignored in favor of political and  - 103 - tonor preferences for large and luxurious facilities. further increasing pressure on the recurrent cost budget. The investment program's quality is further put in question by the fact that the MPCI does not include total investment costs for each project in its presentation of the program. Since the PIP provides only a time slice of sector investments, it is not possible to assess the overall costs of projects, nor what proportion of the total cost would be funded during the period under review. Large cost differentials for the same types of investments, which appear between the 1989-91 and the 1990-92 programs, are not explained. In view of important slippages that have already occurred in the 1989-90 program and in prior programs, absorpti%* capacity is also a serious constraint which must be factored into the Government's investment program. Taken together with the fact that some financing has yet to be secured for the 1990-92 program, the Government will be hard pressed to meet its ambitious investment targets. (b) Sector Organization 289. The MSPP's organizational structure has improved considerably since efforts were initiated in 1988 to reorganize and streamline the ministry. However, the MSPP continues to be top-heavy in terms of staff, and responsibilities in many cases remain ill-defined. Adjustments are needed to allow the ministry to continue decentralizing its decision- wmAking authority and redeploy scarce resources to the field. Decentralized structures are in place but not effect4.vely autonomous since their management and logistic capacity, as well as their resources, are extremely limited. Weak internal coordination, bureaucratic rigidities, and excessive centralization of decisions continue to contribute to the lack of managerial capacity and the sector's inability to provide an adequate and timely response to problems. (c) Sector Management 290. The health system suffers from many of the same institutional constraints found throughout the Guinean public sector. The MSPP generally possesses a weak managerial capacity and its current system does not allow for the translation of sector objectives into a coherent program. However, a series of measures have been initiated to strengthen the ministry's capacity in program planning and management. There is an embryonic management information system (Systeme National d'information Sanitalre, SNIS) which in time will enable the MSPP to institute proper monitoring, evaluation and feedback mechanisms in the sector. A personnel management system is also being developed, but personnel procedures remain ill- defined at the present time. While a program budgeting exercise was introduced in 1989, the preparation of these budgets needs to be better linked to what can realistically be allocated to the sector and priorities need to be ranked in light of available resources. There is a need for better coordination between the MSPP's planning department and its counterparts in the Ministry of Planning and Finance to ensure that the health sector is adequately funded. The preparation of program budgets is further complicated by the fact that personnel costs, accounting for around 90 percent of all health expenditures, are managed by the Ministry of Finance and the Civil Service Ministry. The MSPP has only limited control of hiring, firing and disciplinary decisions and personnel assignment is often highly politicized. Once the health budget has been allocated, its  - 104 - execution is hindered by the failure of the Ministry of Finance to assure non-salary expenditures in a timely fashion. Heavy clearance procedures exist at both the MSPP and MEF, making the purchase of simple materials difficult and inefficient. Moreover, as discussed above, the enforcement of investment criteria is difficult and programming skills are weak; a situation which has in the past left donors free to undertake secto:. investments in an uncoordinated ranner. (d) Human Resources 291. The qualifications of most medical and paramedical personnel are inadequate to meet the Government's stated priorities. This lack of technical skills is due to the poor quality of basic training provided at the University of Conakry and the National School of Health in Kindia. These institutions do not adequately focus curricula on public health and preventive and primary health care. Because the number of medical staff is for the most part adequate, annual intake into health schools has been reduced in line with projected needs. The lack of a clear manpower training policy and the absence, until recently, of a functioning in- service training program has had a negative impact on maintaining skills and expanding technical knowledge in the sector. In addition, resources for the inspection of health personnel are very limited and supervision from the central ministry and from regional and prefectural inspectorates has been weak and intermittent. Low civil service pay scales further contribute to L.ow motivation in the sector. Although the Government has rightly given priority to in-service training, existing programs only function when donor financing is forthcoming. 292. Technical health personnel are considered effectifs spec/aux under the Public Administration Reform (PAR) and their numbers will not be reduced. However, it is understood that technical staff will be tested under the PAR, as the administrative staff have been already, and results will be used to determine redeployment and retraining needs, as well as the reinstatement of merit pay (prImws de technicit6). It is important for these reforms to be carried out promptly. After the PAR process is complete, there will remain a need for selective recruitment, additional performance incentives, and in-service training of staff. D). The Government's Sector Policy and Oiperational Strategy 293. The Government's overall objective for health in the medium term is to improve the quality and expand the coverage of health services, particularly those oriented towards women and children. This would be achieved by concentrating resources on expanding and improving primary health services, particularly in rural areas, and on developing key programs designed to attack the most prevalent diseases and to reach the most vulnerable groups. The Government's current targets for the year 2000 are as in Table 14. 294. These targets are extremely ambitious in view of the Government's current financial constraints, its limited institutional capacity and its deteriorated physical infrastructure. The MSPP will need to establish more realistic targets and incremental epidemiological and  - 105 - lab1e 14 service coverage indicators based on resource asvilability L IDaTOS and the level of development of Status Targot priority programs. These lsa 2in targets should be used to Intent Mortal Rate 146/10O so/leow monitor improvements in the Yeternal Mortality Rate 8/199 8/1000 coverage and health status of the population on a yearly (physiOal &onc9X) 40% SOX basis. In addition to allowing the Government to monitor its Program coverage of women progress, establishing Pro-natal care, urban 80X 9e rural 201 60 realistic and incremental Aeclitec births, urban 26a 100s targets would facilitate the rural lx 703 process of pri.iritizing its Program coverage of children programs in view of changes in Vaccination during let year 261 80X resource availability. Such an Growth *urve llance (0-Syrs) 8X SOX analysis would form the basis Antibotlcu after IO X Infectious episwod for increased uudgetary support Curative coverage 20X o0 to the sector on the part of ____ donors. 295. As budget resources can be expected to remain severely constrained for the foreseeable future, the Government's success in attaining its overall objectives will depend on its ability to make more cost effective use of existing resources, in particular personnel resources, and to mobilize additional financial resources for the sector. The reform program already underway justifiably emphasizes key priority programs designed to reach the vulnerable groups and to improve and streamline the planning, management and organization of the sector. In the medium term, the Government aims to make more cost effective use of existing resources by: a. strengthening the MSPP's organizational structure with a view towards consolidation and decentralization of responsibilities; b. strengthening the managerial capacity of the MSPP to (i) allocate the sector's scarce resources, both human and financial, along the lines of established policy and priorities; (ii) implement the sector's action programs; (iii) collect, analyze and utilize epidemiological, management and financial data; (iv) prepare and monitor future programs in the sector; and (v) decentralize decision making in the sector; c. improving the quality and frequency of in-service training programs and routine supervision and inspection at all levels in order to improve the quality of the MSPP's staff resources; d. ensuring the rational procurement and efficient distribution of low- cost essential drugs to all levels; e. encouraging the provision of family planning and nutrition and public health education to women and to communities. The Government aims to mobilize additional resources for the sector by:  - 106 - f. increasing the relative level of the Government's budgetary contribution to the health sector; g. introducing cost recovery measures at all levels of the system to mobilize additional resources for sector operations; h. promoting private initiatives in health care including private physicians, clinics, pharmacies and imports through wholesale pharmaceutical companies; and i. obtaining support from donors to expand the health delivery system. E. The Sector Reform Proaram 296. In line with the above policy measures, the MSPP has developed a set of action programs and operational targets which rightly give priority to strengthening primary level services. These action programs aim to redistribute the benefits of public spending for health in favor of the most disadvantaged and vulnerable social groups (women and children in rural areas). The implementation of each action program is under the direct responsibility and control of specific MSPP units at the central level, and will be carried out by specific operational units in the regional and prefectural inspectorates. A central coordinating, monitoring and evaluation mechanism (Comite Technique de Coordination) has also been established to guide the implementation of these reforms. While each action program is for the most part sound and reforms envisioned are far reaching, progress in initiating some measures has been slow and will require a stronger Government commitment, particularly for the more politically sensitive decisions and actions to be undertaken in such areas as personnel redeployment, the allocation of adequate recurrent expenditures to the sector, the extension of the cost recovery system and priority investments. The following issues will need to be addressed in the short-term. (a) Sector Organization 297. Although the MSPP initiated a process to restructure the ministry in 1988, the functions and attributions of central departments will need to be more clearly defined and further streamlined to ensure more efficient administration and to support a decentralized management system. Specific measures should aim to consolidate and clearly define the roles of various councils and commissions and to clearly define the responsibilities of key ministerial decision makers. In addition, staff development and training responsibilities should be transferred to the ministry's planning unit to ensure that these activities are in line with sector priorities. The consolidatior. or integration of some support units and technical functions should be reviewed in order to streamline responsibilities and redeploy clinical staff where appropriate. (b) Sector Management 298. The managerial capacity of the MSPP has recently begun to improve and basic managerial tools and information are beginning to be developed. However, the training of managers and development and use of  -3- able 2 GROSS DOoMC PRUCT a/ 1910 1965 1970 1975 1980 1906 ( biI on current Ouinean Sylis ) OP t market price 11.9 12.8 16.0 24.2 82.9 61.5 Primary S.ctor 6.4 7.8 0.8 11.7 18.4 20.0 Secondary Sector 8.O 8.2 4.0 4.8 7.8 11.2 Tertiary Sector 2.t 2.9 4.5 0.2 12.1 19.8 Indiroct Texo. le" 1ubeidies 0.0 0.. 1.8 1.7 4.8 n/a ODP *t factor co"t 11.9 12.0 15.6 22.6 20.0 61.5 ............. ........... ................ GOP per capita (as) 8W40 S0 60100 5209 6200 460 Primry sector X CDP 58.8X 57.0X 49.45 48.8X 40.7X 40.9X Secondary sector X COP 25.25 25.0X 28.0X 17.8X 22.2X 21.7X Mining sctor S GOP 7.65 9.4X .8.X 7.4X 14.9X 18.45 Tertiary sector X GOP 21.95 22.7X 26.85 88.95 80.8X 38.45 Administration S GOP 0.4X 18.8X 16.7X 9.5X 18.1X C.6X ( constnt lS0 Guinean Sylis ) GDP (market prices) (billions) 19.7 19.7 22.9 28.0 82.9 86.5 GOP per capita 685 S6o0 6550 6f 8210 5889 */ Thes data are calculated using official preies and probably seriously underestimate informal sector output; they should therefore be interpreted with cautlon. Source: World Bank production potential range from 10 to 15 myetric tons per annum. Considerable diamond reserves with a high percentage of gem quality, iron ore deposits and potential deposits of other minerals such as lead, zinc, silver, uranium, cobalt, nickel and platinum have also been identified. However, in 1960 the extractive industries' contribution to GDP was less than 10 percent. The sector consisted of joint-ventures with Western mining concerns which operated the FRIA bauxite-alumina plant and mined small deposits of bauxite, two foreign-owned diamond mines and thousands of artisanal gold and diamond miners. All foreign-owned private diamond activity was nationalized in 1961 and then artisanal diamond mining was banned, although this decision was reversed several times and artisanal diamond extraction continued on a large scale throughout the First Republic. 8. Mining of the high-grade bauxite deposits in the BokG region was begun in 1973 by the joint-venture CBG. Output was exported from the mining port at Kamsar to processing plants in Northern Europe and America. In 1979, the State-owned OBK commenced mining the DebGle deposit near Kindia, its output destined for smelters in the USSR. 1/ Bauxite exports rose rapidly during the latter part of the 1970s with output increasing from 10.6 million mt in 1975 to nearly 13.0 million mt in 1980, thereby raising Guinea's share of world production from 15 percent to nearly 17 percent. With the development of the CBG and OBK mines, the mining sector had replaced the rural sector as the supporting pillar of the economy by 1/ See Volume II, Mining Chapter for details of the ownership and management structure of CBG and OBK.  - 108 - 500 lower-level staff is pending. This recruitment hUs not been justified on the basis of objective criteria for personnel needs (population to personnel ratios and facility stsffing norms), nor has it been justified on the basis of replacement due to natural staff attrition. Because such justification has not been forthcoming, it appears that the Government is using the health sector to create public sector employment. As concerns those staff already recruited in late 1989 and early 1990, some preference was given to primary health centers and those rural facilities which are particularly understaffed. However, over 20 percent of new senior staff were assigned to Conakry and to regional capitals despite the Government's declared policy of deploying new staff to primary level facilities in rural areas. Among these new recruits were approximately 26 pharmacists, even though the public sector has been shown to possess a surplus of pharmacists. This failure of the Government to respect its own sector policy and to rationalize personnel resources has decreased the sector's economic efficiency and done little to remedy geograptical inequities. Apart from the recent recruitment of new personnel, plans for the redeployment of existing personnel have been slow to be implemented, leaving some of the more isolated rural health facilities understaffed. The Government should redouble its efforts to assign and redeploy personnel in line with its stated policy and priorities, and should freeze recruitment until the proposed redeployment plan has been completed. Staff distribution and utilization will need to be improved by: li) restructuring and computerizing the MSPP's personnel management system, which will include both a numeric analysis of staff by level of employment and function and all relevant administrative information (this effort has already been initiated); (ii) updating health facility personnel norms for Conakry and for each region based on a rigorous analysis of capacity and supply of and demand for services; (iii) decentralizing to the regional inspectorate level the responsibility for defining and justifying reallocation priorities; (iv' recruiting new staff based on defined needs and in a phased manner, which does not impose impossible burdens on the MSPP and using personnel assignment and reallocation mechanisms designed to correct existing inequity by level of care and by province; and (v) developing within the MSPP the capacity to project future personnel needs and determine the intake of training institutions in line with natural attrition. (e) Staff Develooment 302. As recommended above, the Government should transfer the responsibility for training and staff development to the Planning and Research Department which is better situated to ensure that training is in line with the sector's human resource needs. The development of a training policy and a comprehensive training plan are also required. Within this context, the HSPP should better be able to establish regular programs of in-service training for all categories of health personnel and develop a system of supervision to provide technical support and guidance to field staff. High priority should be given to specialized training courses, the in-service training of nurses aides at the health center level and the training of newly recruited personnel, most of whom have been inactive for a number of years. To improve the quality of formal training, the Government should continue to build on recent efforts to improve the curriculum of its medical and nursing schools and raise the entry requirements. Intake for these schools will be monitored to ensure that  - 109 - future graduates can be absorbed by the health system. Selective specialized training will continute to be undertaken abroad with donor support. Support for improving pedagogical methods, and the provision of essential teaching materials, should also be a priority in pre-service training programs. (f) Essential Drugs 303. The Government has already established its essential drugs policy which aims to standardize the use of basic medicines and make them available to the public at reasonable cost. In pursuit of these aims, an action program has been developed which includes: (i) reorganizing and improving the managerial capacity of Pharmaguinee and limiting its role to the procurement and distribution of essential drugs for the public health system; (ii) conducting training seminars to educate MSPP staff in the use of an essential drugs list and a national drug formulary for drug prescription; and (iii) licensing private pharmacies to import and sell drugs to the public. The reorganization of Pharmaguinee has already been initiated, although the specific responsibilities and functions of its staff need to be better defined and training will need to be provided in areas such as management, accounting and procurement. The groundwork has been laid for developing an essential drugs program through donor assistance. This will be integrated into Pharmaguinee's program once the reorganized system is implemented. In the interim, donors will continue to provide and distribute the majority of essential drugs in health facilities. (g) Private Health Services 304. The Government is encouraging private initiatives in health care by granting licenses to private physicians and pharmacists to set up clinics and pharmacies and authorizing wholesale pharmaceutical companies to import drugs. The privatization of the pharmaceutical sector has led to the development of a thriving market, particularly in urban areas, with the opening of over 100 pharmacies and other sales outlets for drugs since 1984. As cost recovery efforts are expanded in the public sector, competition will increase and the private sector will accordingly increase its imports of generic essential drugs. (h) The Hospital Sector 305. The Government is in the process of testing a referral system which seeks to rationalize the roles of primary care facilities and prefectural and regional level hospitals. However, a comprehensive strategy, which includes implementing the system nationwide, has yet to be developed. The Government, in conjunction with WHO, is currently reviewing hospital policy and procedures with a view to rationalizing resource use up to the central-level teaching institutions. This is a prerequisite for rationalizing resource allocation and ensuring the efficiency of the system. Specific issues that need to be addressed include: (i) clearly defining the roles and functions of each level of the referral system and the associated personnel needs; (ii) implementing cost recovery nationwide; (iii) improving hospital management; (iv) elaboration of a therapeutic protocol (treatment guideline) for major ailments; and (v) training of  - 110 - staff at the hospital level in proper prescription techniques, management and accounting procedures. (i) Population 306. The population problem in Guinea is not the overall size of the population; it is the rate at which it is growing. 581 Rapid population growth is calling into question the Government's ability to provide basic public services and the economy's ability to generate employment. The ratio of dependents to productive workers is increasing and hence average living standards will rise only very slowly if at all; this will continue to be the case until population growth rates are cut. As the health system begins to function normally, family planning education and services should be expanded through primary health care programs and women's training centers. Clinical training for family planning should also be included in the in-service training curricula for all levels of personnel. In order to stem population growth and address the high levels of maternal mortality associated with closely spaced births, the Government should refine its population policy and declare its full and public support for family planning within the public health system. Both family planning education and the expansion of Government family planning services through the health delivery system should be emphasized. Because NGOs are particularly effective in reaching the people, the Government should encourage their efforts and those of other donors to provide a broad range of contraceptives to the population and to increase access to family planning education and services, particularly in rural areas. (j) Nutrition 307. The Government is trying to identify the scope of its nutrition problem by conducting two large nutrition surveys, one in Conakry and the other in the Middle Guinea Region. Survey analysis will focus on anthropometric measurements, as well as on the causes of malnutrition, including problems of access to food supplies, intra-family food distribution, weaning practices, food taboos and traditional eating habits, all of which may have an adverse impact on the nutrition of women and children. The Government's program also includes the introduction of a nutrition surveillance program to be carried out at the health center level. Before implementing this surveillance system, in-service training will have to be provided to health center staff in nutritional screening and management of both adults and children. Nutrition education messages should also be developed and provided through normal primary health care programs and women's training cente-s. (k) R81e of Donors 308. Because of current financial difficulties, the bulk of Government capital expenditures will continue to be financed by foreign donors and Government counterpart expenditures in these investments will remain limited. Since setting up the Technical Coordinating Committee in 58/ Except in certain areas where excessive population densities are causing soil erosion, deforestation or overcrowded housing conditions.  - Ill - 1987, the Government has begun to sensitize donors to priority needs in the sector and this has resulted recently in better donor coordination. However, continued efforts are needed to ensure that established investment and program criteria are respected by all donors and that all actions carried out in the sector are in line with sector priorities. In addition, the Ministry of Plan will need to develop a better mechanism for integrating investment planning carried out at the MSPP level into the overall national investment planning exercise.