Rwanda - Public Enterprise Sector Reform Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5170-RW MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 3.4 MILLION TO THB, RWANDESE REPUBLIC FOR A PUBLIC ENTERPRISE REFORM PROJECT FEBRUARY 22, 1990 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.  RWANDESE REPUBLIC PUBLIC ENTERPRISE REFORM PROJECT CURRENCY EQUIVALENTS From January 1974 through August 1983, the Rwanda Franc (RwF) was pegged to the US dollar at a rate of exchange of US$1.00 - RwF 92.84. Since September 1983, the Rwanda Franc has been pegged to the SDR at a rate of exchange of SDR 1.00 - RwF 102.71. ABBREVIATIONS AND ACRONYMS IDA International Development Association MINIFIN Ministere des Finances PE Public Enterprise MEASURES AND EQUIVALENTS Metric System FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY RWANDESE REPUBLIC PUBLIC ENTERPRISE REFORM PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Rwanda Beneficiaries: Ministry of Finance Amournt: SDR 3.4 Million (US$4.4 million) Terms: Standard IDA Terms (40 years maturity) Onlending Terms: Not Applicable Financing Plan: Government US$ 0.5 million IDA US$ 4.4 million Total USS 4.9 million Economic Rate of Return: Not Applicable Staff Appraisal Report: Report No. 8139-RW This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenits may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA FOR A PUBLIC ENTERPRISE REFORM PROJECT 1. The following memorandum and recommendations on a proposed development credit to the Republic of Rwanda for SDR 3.4 million (US$4.4 million) is submitted for approval. The proposed credit would be on standard IDA terms with a maturity of 40 years and would help support the reform of the public enterprise sector in Rwanda. 2. Background. Following a period of high growth, Rwanda's economy began to show signs of financial stress in the early 1980s as a result of unfavorable terms of trade developments and insufficient domestic adjustments. A contributing factor to Rwanda's economic problems has been the poor performance of the large public enterprise sector (62 enterprises with Government ownership account for an estimated 10 percent of GDP). Government transfers to public enterprises represented about 10 percent of Government revenues during 1983-87. Given the deterioration of Rwanda's economic situation, IDA's dialogue with the Government over the last three years has focused on the need to restore the competitiveness of the economy through the implementation of a comprehensive reform program addressing the major structural problems, including exchange rate overvaluation, trade distortions and public sector inefficiencies. :hile there is a general consensus in Rwanda that the public enterprise sezror is inefficient and should be restructured the Government is still considering the adoption of other macroeconomic reform measures. Recognizing the need to move forward, and to address issues facing public enterprises before they reach crisis dimensions as in many other countries, IDA agreed to assist the Government in its PE reform efforts, while continuing the dialogue on the need for structural adjustment to put Rwanda back on the rapid growth path of the 1970s. 3. Project Objectives. The major objective of the proposed operation is to assist the Government to improve its capacity to implement its public enterprise reform program. This program aims to (i) reduce the burden that public enterprises have placed on the Government budget and administrative capacity and (ii) to develop a streamlined and efficient PE sector that will contribute to the growth of Rwanda's economy. Specifically, the project seeks to assist the Government to: (a) redefine the role of the Government in the PE sector and formulate a policy framework and principles for future interventions in new enterprises; (b) improve the institutional and legal framework within which PEs operate; (c) increase the sector's efficiency through rehabilitation of viable enterprises, divestiture of those which can be privatized and liquidation of non viable ones; and (d) develop the national capacity to design, implement and monitor such reforms. 4. Project Description. The project would provide technical assistance to the Government to help carry out its public enterprise reform program in the following three areas: (a) a policy reform package covering the whole PE sector; (b) restructuring of specific enterprises; and (c) development of the institutional capacity to design, implement and monitor PE reforms. The policy reform package for PEs would consist of the following elements: (i) redefinition of the role of the public sector in the economy. This would involve establishment of criteria for Government investment in  PEs and elaboration of a disengagement strategy, including adoption of liquidation and privatization procedures; (ii) clarification of the relations between the Government and public enterprises. This would be achieved through redefining the roles of the technical and financial oversight ministries, improving the functioning of the boards of directors and increasing the autonomy and responsibilities of PE managers; and (iii) establishment of an efficient monitoring system to ensure proper supervision of PEs by the Government. The enterprise restructuring component would consist of furnishing technical assistance under the project to help liquidate non-viable activities and privatize/rehabilitate viable enterprises on the basis of detailed restructuring programs prepared with technical assistance under the project. It is expected that 16 enterprises would be restructured and/or privatized with project assistance and that a timetable and procedures would be established to analyze and restructure the remaining PEs. The institutional development component would involve the establishment of a Directorate within rhe Finance Ministry responsible for PE reforms and monitoring, strengthening of decision-making bodies in charge of PE reforms and training of PE managers and Finance Ministry staff. The proceeds of the IDA credit would be used for: (i) technical asfiistance and equipment to (a) revise public enterprise legislation; (b) help develop and implement rehabilitation plans for viable enterprises; (c) assist in the liquidation of non-viable enterprises and in the implementation of the Government's privatization strategy; and (d) strengthen the Finance Ministry, which is responsible for overall supervision of PE performance; and (ii) training of PE managers and MINIFIN staff. 5. The project would be carried out over four years. Total project cost is estimated at $4.4 million equivalent, with foreign exchange costs of $3.1 million (70Z). Detailed costs and a financing plan are in Schedule A. Amounts and methods of procurement and the disbursement schedule are in Schedule B. A timetable of key processing events and the status of Bank Group operations in Rwanda are in Schedules C and D. Staff Appraisal Report No. 8139-RW, dated February 22, 1990 is being distributed separately. 6. Rationale for IDA Involvement. Improvement in the efficiency of resource use by the PE sector is a key element for financial equilibrium and growth in Rwanda. The proposed project would help improve Rwanda's financial situation, while allowing IDA to continue the dialogue on the need to restore the competitiveness of the economy through comprehensive structural reforms. The project will also help strengthen measures being undertaken through other IDA projects involving key public enterprises. 7. Actions agreed at negotiations. During negotiations the Rwandese delegation presented (i) the Government's Policy Statement for Public Enterprise Reform and (ii) a schedule for the implementation of key actions that were signed by the Minister of Finance. The Policy Statement includes the main elements of the reform program described in para. 4 above. The schedule includes a timetable for (i) the design and adoption of legislation on public enterprises; (ii) the design and approval of a general privatization strategy; (iii) the completion of privatization or liquidation plans for nine enterprises; (iv) the signature of contract plans with eight public enterprises; and (v) the completion of diagnostic studies and rehabilitation or divestiture plans for an additional 23 public enterprises.  Institutional arrangements for the formulation and approval of the reform progam, including the establishment of a new Directorate of Public Enterprises within the Ministry of Finance, were also agreed at negotiations. The actual establishment of this Directorate, which will be in charge of implementing the public enterprise reform program, including the appointment * of a Director and appropriate staff is a condition of effectiveness. 8. Benefits. The project will assist Rwanda in achieving a more * streamlined, efficient and business-oriented PE sector with a reduced financial and administrative burden on the Government. Another benefit of the project would be derived from the restructuring of the sector. The closure of uneconomic enterprises would reduce resource waste, while the sale of viable ones to the private sector and the rehabilitation of those remaining under Government control are designed to maximize the economic benefits of those enterprises. 9. Risks. Care has been taken in the project design so that it can improve the economic and financial performance of selected public enterprises even with some additional postponement of structural adjustment measures. But if the necessary macroeconomic reforms are postponed indefinitely, there is a risk that many of the project's expected benefits will not fully materialize. The policy dialogue is, however, continuing and it is expected that the Government will take the necessary measures before the economic situation deteriorates further. 10. At the program level, as the operation involves broad-ranging and complex reforms both at the sector and enterprise levels, there is a risk that vested interests within Government and the affected enterprises will resist reform measures as these may imply increasing PE autonomy and replacing some existing PE managers. This risk is mitigated by the Government's commitment to carry out the necessary reforms. A second risk relates to the privatization program which, if not implemented properly with clear and transparent criteria, could result in creating a rent situation for some private investors. Finally, there is the risk that the implementation of the reform program may be slowied down by the capacity of the Government administration to carry out the policy reform package and to monitor the execution of enterprise restructuring programs. These two risks are addressed through the establishment of a Directorate of Public Enterprises in the Ministry of Finance which will be in charge of implementing the reforms and providing technical assistance and consulting services to help Rwandese institutions carry out the tasks envisaged under the project. 11. Recommendation. I am satisfied that the proposed credit -ould comply with the Articles of Agreement of the Association and recommenu that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. February 22, 1990  -4- Schedule A RWANDESE REPUBLIC PUBLIC ENTERPRISE REFORM PROJECT Project Costs and Financing Plan (US$ thousand equivalent)