Burundi - Private sector development in the industrial sector

S~~~~~~~~~~~~ fi,. Report No. 9422-eU Burundi Private Sector Development in the Industrial Sector December 31, 1991 Industry and Energy Operations Division South Central and Indian Ocean Department MICROFICHE COPY Africa Rtegion Africa Region Report No. 9422-BU Type: (SEC) FOR OFFICIAL USE ONLY ALIKHANI, / X34375 / / AF3IE .E U ~~Document of the World Bank This docuiment has arestricted distribution andnmay beused by rcipienits only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizationi.  CURRENCY EQUIVALENTS Currency unit = Burundi franc (FBu) Period Average: 1991 US$1 = FBu 184 1990 US$1 = FBu 171 1989 US$1 = FBu 159 1988 US$1 = FBu 140 1987 US$1 FBu 124 1985 US$1 FBu 121 WEIGHTS AND MEASURES Metric International Standard System ACRONYMS AND ABBREVIATIONS BOB = Bulletin Officiel du Burundi BRB = Banque de la Republique du Burundi BTN = Brussels Tariff Nomenclature CAB = civil aeronautics board CCIB = Chamber of Commerce and Industry COOPECs = cooperative savings and loans institutions DFI = direct foreign investment ECFU = Entreprise Creation Facilitation Unit EEC - European Economic Commission ETR effective tariff rate FTZ = free trade zone HS = Harmonized System IFC = International Finance Corporation I.O = International Labor Organization IMF = Intemational Monetary Fund METR = marginal effective tax rate OGL ordinary general licensing PE = public enterprise PTA = Preferential Trade Agreement QRs = quantitative restrictions SARL = Societe Anonyme & Responsabilit6 Limit6e SCS = Societe en Comman. - Simple SEM = mixed enterprises with minority public ownership SMIG = salaire minimum industriel garanti SNC - Societe en Nom Collectif SPRL = Societe de Personnes & Responsabilite Limit6e Tr = transactions tax UFS = unified single form USAID = US Agency for International Development GOVERNMENT OF BURUNDI FISCAL YEAR January 1 to December 31  FOR OFCL USE ONLY PREFACE This is one of two reports written in parallel discussing the issues and prospects for developing the private sector in Burundi. The other, entitled 'Private Sector Development in the Agriculture Sector," will be distributed separately, and will cover issues associated with the strengthening of private initiatives in the primary sector. This report discusses the secondary and services sectors. This report was prepared on the basis of missions visiting Bujumbura in May and August 1990 and was written by I. Alikhani (mission leader), with key contributions by Mr. J. Rwamabuga (Resident Mission, Burundi), Mr. R. Lacroix (consultant, industrial sector), Mr. T. Nguyen (consultant, regula.ory environment) and Mr. G. Zodrow (consultant, tax incentives). Additional background information was prepared by Ms. L. Phillips (consultant) and Mr. B. Nicimpaye (consultant), as well as Mr. E. Chagnaud (summer intern, legal framework). Earlier drafts benefitted from comments by lead advisors, Messrs. F. Najmabadi and P. Guislain. Additional guidance was also provided by Messrs. P. Ballard, and D. Keesing. This document has 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 . w ,.... ..... , .... ... .. .... .  PRIVATE SECTOR DEVELOPMENT iN HE INDU LSECTOR Pa EXECUTWE SUMMARY ............................................... i I. THE MACROECONOMIC FRAMEWORK ...............1................ A. Country Setting ...........................................1 B. Macroeconomic Situation and Perspectives ........ .................... 1 Performance and Recent Economic Developments ..... ................ 1 Macroeconomic Prospects . ................................... 2 II. THE IDUSTRIAL SECTOR.. 3 A. Overview of the Sector. 3 B. Assement of the Idustrial Sector .5 Import Intensity ...S.5 Growth and InvestmeA.. 6 Infrastructure. 7 Public Sector. 7 C. Industrial Efficiency and Performance .10 Technology and Know-How ................................... 11 D. Exports .13 Traditional Exports .13 Direction of Trade .15 E. The Informal Sector .16 The Sector .16 Prospects and Issues .17 F. Investment During the Adjustment Period .17 Hi. BARRIERS TO PRIVATE SECTOR DEVELOPMENT . .18 A. Exchange Rate Policy .18 Exchange Rate Policies for the 1990s .19 B. Foreip E.change Allocation and Imprt Controls .20 Liberaization since 1986 .20 Policy Agenda for the 1990s .22 Tmde Account Liberalization .22 C. Triffs .23 Tariff Policies, 1986-91 .23 Tariff Policies fof the 1990s.25 D. Taxation .2 Key Features .27 Marginal Effective Tax Rates 27 Recommendations .27  IV. LEGAL AND REGULATORY CONSTRAINTS ............................ 28 A. Regulatory Environment and the Enterprise ............................ 28 Key Procedures befow 1991 ............................. 29 Obtaining Legal Status and Permits ............................ 29 Simplified System .............................. 30 Unified One-Step Procedure .............................. 31 Recent Reforms and Conclusions ............................. 32 B. Business Law ............................. 33 Corporate Law ................... ....................... 33 Notaries and Auxiliaries of Justice ............ ............ 34 Bankruptcy LAw .... ...... .............. 35 Air Transpor Regulations ........................ 35 C. Labor Laws .... ....... .............. 36 Labor Polices and Labor Cost ,.............. . ........ 37 Conclusions and Recommendations ......................... 37 V. DEVELOPMENT CONSTRAINTS AND INDUSTRIAL STRATEGY . .38 A. Central Development Issues .38 B. Constraints at the Enterprise Level .39 C. Inter-Sectoral Linkages .40 D. The Industrial Sector and Comparative Advantage .42 E. Industrial Strategy.42 Investment Strategy.42 Public Entreprise Reform .43 Export Promotion .44 Vi. INSTITUTIONAL AND PROMOTIONAL ARRANGEMENTS . . 45 A. The Financial Sector .............................. 45 The Sector ........................................... 45 Recent Policy Reforms . .............................. 46 B. Special Incentives and Institutions ............................... 46 The Investment Code .......... .................... 46 Refoins ............................... 47 Export Incentives .............................. 48 Free Trade Zoxkes .............................. 48 Other Measures ... .............................. 49 The Chamber of Commerce and Industry ........................... 50 VII. DEVELOPING INDUSTRIAL OPPORTUNITIES. . 51 A. Indutri Opportwities ..51 Miis of Industry Databas ..52 B. Human Capital Deepening ..53 Vocaional Training..53 Mangement Training ..54  -~~~~~~~~~~~~ ~ C. Capacity Building in the Privu Sector ............................... 55 Project Prepartion . 55 Isus md Recomamdations .. .. 55 Finacial Managemnt . 56 Production and Design ........................ 56 Issues and Recommendations ....................... 57 SuppoD to Exporters . 57 Iue and 'tecommendations . 58 Conclusions 8. TEXT TABLES: 2.1 Distribution of Private and Public Enterprises (1988) ........................ 3 2.2 Charteristics of Main Industrial Activities (1988) ......................... 4 2.3 Selected Industri Performane Measur ............................... 6 2.4 Public Sector Shares in Industry (1987) ................................ 8 2.5 Characteristics of Key PEs ........................................ 8 2.6 Evolution of Erployment and Output .11 2.7 Main Exports 1980-89 .13 2.8 Industrial Investments 1986-90 .18 3.1 Irport License Validation .21 3.2 Tagiff Rates by Broad Classification .23 3.3 Strcture of Tariffs in1987-91 .24 3.4 Tariff Simulations .................................. 25 3.5 Summary of Actua Income Tax Retums ................................ 27 6.1 Summary of Advantages Grnted to Enterprises .47 ANNEXB: 1. THE INDUSTRIAL SECTOR ..62 A. Past Industrial Policies . 62 Before Independence .62 Independenceto1972 . 62 The Period 1973-1985 .63 The Reform Period 1986-90 .64 B. Prevailing Technology and Know-How .65 Technology in the Public Sector .65 Technology in the Private Sector .66 .., r. ,,1 eS ww ts4u- . _ .7  2. TARIFFS ............................... 69 A. Evolution of Tariff Policies .............................. 69 Background ................................ 69 Tariff Reforms, 1986-90 .... .... ........................... 69 Methodology .............................. 70 First Phae of Tariff Reforms ............................. 71 Second Phase of Tariff Reforms: January 1987-August 1989 .... ....... 72 Third Phase of Tariff Reforms: August 1989-Present ................ 72 Asessment of Reforms .................................. 73 B. Tariff Policies for the 1990s ..................................... 74 3. THE MARGINAL IMPACT OF THE TAX SYSTEM ON INVESTMENTS ..... ...... 77 A. Overview of the Tax System ..................................... 77 Features of Company-Level Taxation ............................. 77 Additional Company-Lvel Taxes ............................... 78 Taxation at the Individual Level ................................ 79 B. Qualitative Assessment of Tax Induced Distortions ....................... 79 Tax Holidays and De Facto Exemptions ........................... 79 Excise Tax . ............................................. 0 Tax Administration ........................................ 80 Cascading Tax Effect of IT ................................... 80 Tax Base .... GI81 C. Marginal Effective Tax Rates . .................................... 82 Introduction .......................................... 82 METRs for Burundi ........................................ 83 Reut of the Basic Tax System . ................................. 4 The Effect of Transactions Taxes and Customs Duties ..... .............. 88 The Effect of Tax Evasion at the Company Level ..... ................ 89 The Effect of Investment Incentives .......... .................... 90 Some Special Cases ........................................ 93 Conclusion .......................................... 95 TE TABLES OF ANNE: A2. 1 Tariff Rat by Broad Classification .70 A2.2 Strtur of Taiffs in 1987 .71 A2.3 Stnwtur of Tariffs in 1988 to mid-1989 .72 A2.4 Structure of Tariffs in 1989-Latest .73 A2.5 Tariff Simulations .75 A3.1 Suwmmay of Actual Income Tax Returs .81 A3.2 Types of Assets, Methods of Finance, Source of Funds and Business Sectors Considered in METR Calculations .83 A3.3 Mrginal Effective Tax Rates (no transactions taxes or customs duties) ............... 84 A3.4 Marginal Effective Tax Rates (including trnsactions taxes and customs duties) .... ...... 88 A3.5 Marginal Effective Tax Rates with Evasion - 25 % of Receipts Unreported (no transactions taxes or customs duties) ................................. 90 A3.6 Marginal Effective Tax Rates (inflation = 25%) .91 A3.7 Maginal Effective Tax Rates (no transactions or customs duties) .94  STATSTICAL ANNEX TABLES: SI Evolution of the Exchange Rate ....................................... 98 S2 Indicators of Import Diversification ...... ............ ................... 99 S3 Imprt License Validation ........................................... 100 S4 Production of Main Industrial Products; 1985-90 (natl units) ....... .. ........... 101 S5 Cormparisoix of Labor Productivity - 1989 ............. .. .................. 102 S6 Nominal Tariff Rates and Effective Tariff Rates on Import Competing Activities .......... 103 S7 Evolation of Employment and Output in Seoc-ted Enterprises .... ......... 104 S8 Investment Financing 1986-90 (Rediscounted Through BRB) ........ .. ............ 105 S9 Gross Fixed Capital Formation 1986-89 (Selected Enterprises, FBu million) ..... ....... 107 S1O In-estment Intentions ............................................. 108 Sll Projects Presented to the Investment Commission in199 ........................ 109 S12 Structure of Exports 1980-1989 ........................................ 110 S13 Structure of Tariffs in 1987 ....................1...................... 111 S14 Structure of Tariffs in 1988 .......................................... 113 S15 Structure of Tariffs in 1989 (end July) ................ ................... 115 S16 Structure of Tariffs in 1990 (begin August) ................................ 117 S17 Proposed List of Duty-Free Capital Goods (Six-Digit BTN Goods) ............ 119 S18 List of Luxury Goods subject to Excise Tax (Six-Digit BTN Goods) ...... .. ......... 121 S19 Simulated Structur of Tariffs Based on 1988-89 Imports ......................... 123 NAME AND ACTIV1TIES OF ENTERPRISES BATA = Shoe manufacturer BRAGITA = Brewery CHANIC = Oxygen COGERCO = Cotten ginning COTEBU = Textiles ETERNIT = Fibre cement manufacturer FABRIPLAST = Plastic products manufacurer FER-AL = Metal plate manufacturer FRUlTO = Fruits HUILERIE = Palm oil refinery INABU - Printing INDURUNDI = Soap manufacturer LOVINCO = Blvnket manufacturer M. DELENS = Constuction company MINOTERIE = Wheat milling NAB = Garments manufactuler OCIBU = Coffee manufacturer ONAPHA = Pharmceutical products 0TB = Tea manufacturer RAFINA = Cotton refinery SAVONOR = Soap manufacturer SNP = Tannery SOBOX = Steel tubes manufacturer SOSUMO = Sugar refiner UNIDO = Biogas VERRUNDI = Bottlemaker  PRIATE -SECTOR DEVELOPM-ENT JINMTH INDUSTIAL SECTOR EXECUTIVE UWMMARY i. The report argues that private sector-led industrial growth can provide much needed employment opportunities and make a significant contribution to the diversification and expansion of Burundi's export earnings. However, Burundi's physical constraints and the limited capacity of agriculture, the dominant sector, underscore the need for a vigorous program of actions and, at the same time, realistic expectations. ii. Current macroeconomic projections bring out the leading role that the private sector needs to play in the industrial and services sectors. Over the 1990s, annual per capita agricultural output is expected to increase by less than 0.5 percent, while the per capita output of the industrial sector expands annually by more than 4 percent. In parallel, the share of private sector investment in total investment is projected to increase from about 20 percent in 1991 to 35 percent in 1995. The study highlights the imperative of making extraordinary efforts to improve performance in the industrial and services sectors in order to realize these projections. While considerable progress has been achieved in the past five years with regard to economic liberalization, particularly in the commercial and industrial sectors, the critical mass and depth of reforms needed to elicit a sustainable supply response from the private sector have not yet been attained. iii. The development of the private sector has been hampered by policy barriers as well as by regulatory constraints. The evolution of firms has been slowed by low domestic demand and difficulties in exporting, exacerbated by an underdeveloped international transport system. Private investment may also have been hindered by poor access to long-term credit as well as by the lack of initial equity; but foremost among the reasons for the embryonic condition of entrepreneurship is the overwhelmirg presence of the state, as either a producer or a regulator, in the majority of activities, and the almost total absence of any long-standing trading, handicraft, or industrial tradition. iv. The industrial sector is small even when compared with low-income developing countries (it accounts for about 5 percent of GDP, contributed by about 200 firms), and most existing firms are of only marginal viability and unlikely to provide the foundation for future growth. The sector's production is dominated by public enterprises, which account for the bulk of the output in such subsectors as textiles and agro-industries. The industrial sector has strong links with the primary sector; agro-industries account for about 50 percent of industrial output. The secondary sector stands also to benefit from increased monetization in rural areas which are a source of untapped potential demand. Most of the existing equipment in private firms is obsolete and worn-out. Public enterprises often operate with inappropriate technologies, financed by donors, and-in the absence of an ability to export-at an unrealistically large scale. Both private and public firms suffer from managerial deficiencies and low productivity of labor and capital. ~~~~~~~~~~~~~~ ....... ...... .  - ii - v. While existing viable activities would benefit from being rehabilitated, much of future economic growth is expected to come from new activities. The proposed private sector promotion strategy consists of putting in place an ernabling environment that encourages investments in labor-intensive, export-oriented activities and attracts foreign investors. A vibrant informal sector, which is estimated to contribute as much to GDP as the formal sector, could also be an important source of new entrants into modern activities. However, informal sector entrepreneurs need to be attracted to the formal sector by a conducive tax and regulatory regime. vi. The aforementioned strategy s.iould be implemented through a blend of strong policy reforms, strengthening of institutions, and aggressive action to attract and develop private entrepreneurship. Both labor and capital should be priced in a free market to encourage employment creation. Furthermore, the development of private investment opportunities should be supported by the effective disengagement of the state from the productive secters and strong support for a conducive business climate. Public disengagement should be made rapidly where the opportunity presents itself (where the state holds a minority share), but may realistically take longer in other instances. vii. The development of the private sector will depend on the acquisition of know-how by private economic agents and the development of a skilled labor force. In the long run, the main objective should be to upgrade and extend primary and secondary education, giving greater emphasis to French, mathematics, and sciences and to decreasing the number of high-school drop- outs. In the medium and short term, the focus should be on improving and expanding vocational training facilities and management programs. Some of these capacity-building efforts are expected to target key segments of the labor force with growing private sector involvement in their design 4ld imnplementation. viii. The report also discusses a privately managed effort to strengthen business know-how. Four major areas of weakness are identified: project preparation and implementation; financial management; production and design; and the marketing and development of exports. The proposed approach consists of identifying promising dynamic entrepreneurs and upgrading their know-how through technical assistance, and of helping firms resolve their management or technical problems. Donor financing should be used to provide firm-level support by private sector experts. This assistance should be coordinated mainly through private institutions, such as the Chamber of Commerce, which will also have to be strengthened significantly. ix. Beyond continuing efforts aimed at macroeconomic and political stability, the economy should be further opened to external competition through the adoption of a more active exchange rate policy, a further reduction in effective tariff protection from imports, and full current account liberalization. These measures, which are expected to be supported by the third phase of the structural adjustment program, which is under preparation, will create a free foreign exchange allocation system and reduce the anti-export bias. Many of these reforms were initiated in the mid-1980s, but their implementation needs to be strengthened and their coverage broadened. x. Additionally, reforms should be extended to taxation and the regulatory and legal framework. The objective of tax reforms should be to create a general system that not only does not discourage investors but goes beyond best practices in other countries, such as Mauritius, to compensate for Burundi's physical constraints. The resulting tax burden should be consistent  with and maintain fiscal revenues by combining lower tax rates with better tax enforcement, and should incorporate more transparent provisions. The objective of regulatory reforms should be to remove administrative barriers to enterprise creation and to eliminate those instances of business licensing that serve no useful purpose. These reforms should be supported by a longer- term effort aimed at updating obsolete laws and improving the enforcemen. of contracts. The resulting legal framework would incorporate clearer provisions for enterprises and workable bankruptcy laws and develop the private legal and paralegal professions. xi. Given the small size of the domestic market, an export orientation is essential. Affirmative action for exporters will be necessary. This could take the form of private consulting services being made accessible to exporters in order to help them resolve their logistical, marketing, and other problems. Another such initiative would try to match domestic entrepreneurs with knowledgeable foreign partners. These types of activities should be organized by the private sector. The Government should monitor and identify bottlenecks in various export subsectors and help resolve problems as they arise. Air transport, which is expected to be the main mode of transport for exports, should be liberalized quickly. xii. Other measures could also help promote exports. The study concludes that it is premature to establish industrial free-trade zones (FTZs) at this point. However, individual firms could be given FTZ status. The establishment of bonded warehouses would allow manufacturing under bond as well as experimenting with reexports of goods to the region. Effective implementation of the simplified drawback right and preferential income tax to exporters will also be important. The investment code, which would be incorporated into the common law and the general tax code, needs to be used as a tool to attract export-oriented investment and small-scale enterprises. The objective should be to give new investments automatic access to a limited and well-defined exemption regime. xiii. The greatest remaining distortions are found in the labor market. Evidence from the unregulated informal labor markets suggests that Burundi has a comparative advantage in labor costs. However, in many instances, the formal sector does not benefit from this advantage because of labor laws and regulations that increase labor costs substantially. Without significant reductions in these costs, the growti of both industrial exports and small and medium-sized enterprises (SMEs) is likely to be severely constrained. Moreover, Burundi needs to place greater emphasis on improving labor productivity through the aforementioned development of skilled labor, by upgrading manpower capabilities and increasing the technical and industrial orientation of the educational system. xiv. The report concludes that there are concrete opportunities for industrial growth in Burundi, and that investment and entrepreneurship can be nurtured. Although a significant and sustained effort is required in policy-making, institution building and business know-how improvement, there are encouraging signs that a coherent program can be implemented and that the private sector can be the engine of growth of Burundi's economy in the 1990s and beyond.  BU1R I - PRlIVAIE SECTOR DEVELOPMENT IN THE, INDS IAR L SECTQOR 11. THE MACRECONE )MIC FRAMEWORK A, Country Setting 1. Burundi is a small, landlocked country in Central Africa. Its per capita GDP is about US$210 (1990). With a population of about 5.5 million, -rowing at a rate of 3 percent per annum, Burundi has the second highest population density in Africa (169 persons per square kilometer). About 94 percent of the people live in rural areas, and the economy is highly dependent on agriculture which accounts for more than half of GDP, 90 percent of employment, and 90 percent of export earnings. However, the diminishing availability of arable land constrains this sector's potential. Coffee accounts for about 80 percent of total exports. The secondary sector (mining and manufacturing) represents only 14 percent of GDP and 6 percent of exports. The private sector plays a major role in the production of exports and food crops, and transport. The public sector enjoys a quasi-monopolistic position in the processing and export of primary commodities, manufacturing, energy, and infrastructure, and generates half of the country's formal employment. Since the country's independence in 1962, ethnic rivalry has been a major feature of Burundi's political history. Major efforts aimed at achieving national reconciliation and a significant opening up of the political system have been under way since 1988. 2. Significant economic reforms have been undertaken since 1986. The objective of this report is to assess the situation in the industrial sector, to review how the sector has responded to economic liberalization and to set the agenda for a sustained supply response. Much of the industrial capacity in place is of marginal viability. Industrialization, which is needed to promote growth and employment, will thus depend largely on the ability to create new, efficient, export-oriented activities and to attract new dynamic private-sector promoters, and only partly on the rehabilitation and expansion of existing plants. The policy reforms to date have produced mixed results and, therefore, a significant and sustained additional effort is required in policy design, institution-building and business know-how improvement. B. Macroeconomic Situation and Perspectives 3. The Structural Adjustment Program. Since 1986 Burundi has undertaken a structural adjustment program supported by the IMF and two structural adjustment credits (SACs). The program aimed at stabilizing domestic and external finances, liberalizing the economy, improving the allocation of resources, and redefining the role of the state. Implementation has been slow and success has been mixed. While significant progress has been made in liberalizing the economy, particularly the industrial and commercial sectors, the program has not succeeded in restructuring parastatals and redefining the role of the state, and thus in reducing public expenditures. There has not yet been a significant supply response in the econor.1y at large, although there are signs of a new dynamism in the private business comununity. This is partly explained by Uthe fact that many of the liberalization measures either have been targeted toward, or have been implemented better in, the relatively smaller industrial sector than in the agricultural sector--a case in point is price control which is still a problem in cash crop production. The analysis of existing constraints also reveals that a sufficiently deep and broad set of microeconomic, macroeconomic, and institutional reforms, which are needed to support sustained economic growth, has not yet been put in place. Prrmance and Recent Economic Developments 4. Burundi has not made the expected progress in financial stabilization. The external current account deficit averaged about 15 percent of GDP in 1986-90, roughly the same level as during the  -2- 1980-85 period. Erratic swings in the terms of trade, caused by movements in the world price of coffee, complicated the task of foreign exchange management. In response to the external shocks, the Government devalued the Burundi franc on various occasions and, until 1989, resorted on a selective basis to tightened controls on import licenses (paras. 71-74 and 77-84). The significant increase in foreign aid inflows under the adjustment program allowed Burundi to stave off a financial crisis. At the end of 1990, net foreign reserves reached a comfortable level equivalent to about four months of imports of goods and non-factor services. The long-term sustainability of the balance of payments has not improved, however, as exports cover only 38 percent of imports, compared with 70 percent in the 1970s. 5. The lack of strong and sustained fiscal adjustment has been one of the major brakes on the pace of adjustment. Although the overall fiscal deficit (excluding grants) as a percentage of GDP declined between 1987 arid 1989 from 17 percent to 9 percent, this trend was reversed in 1990 when the deficit climbed to over 12 percent. The quality of public expenditure programming has improved, but major issues of public resource management persist (e.g., underfinancing of recurrent costs, high level of non-developmental expenditure, inadequacy of cost recovery, and distorted pricing for public utilities). These issues will be addressed in the next phase of adjustment. 6. Progress was most pronounced in the areas of exchange rate policy (paras. 75-76), tariff reform (paras. 91-93), and monetary policy--by liberalizing prices in the industrial sector (paras. 51 and 212), liberalizing trade and limiting money supply growth. The Government has shown a growing commitment to reforms. The mixed performance in adhering to the adjustment goals set at the outset of the program can be attributed to (a) implementation delays linked to political uncertainty; (b) external shocks; and (c) the ambitious design of the program in some areas (e.g., the public expenditure program). 7. Many distortions in the factor markets still exist (paras. 147-157 and 197-199). In the labor market there remain significant barriers to labor mobility; the labor code (which is currently being revised by the Government) is overly protective of existing employees and discourages generation of new employment. These regulations and minimum wage laws increase labor costs in the formal sector to a level which is too high in comparison to labor productivity. In the financial sector the main constraints are (a) the large returns earned up to 1991 from almost risk-free lending for coffee purchases and imports; (b) the historically large, low-interest deposits by Public Enterprises (PEs) that preclude the need for an aggressive resource mobilization policy; and (c) the commercial banks' lack of capacity to assess the viability of private sector investment proposals (paras. 196-199). Macroeconomic Prospects 8. Annual real GDP growth decelerated during the adjustment period from 5.0 percent in 1980-85 to 3.8 percent in 1986-91; however, it is still slightly positive in per capita terms and it compares favorably with low-income Sub-Saharan Africa, where growth declined an average 0.4 percent a year in 1980-87. All sectors if the Burundi economy grew at similar rates, and all were affected negatively by a downturn in 1989, whpn the economy grew by only 1.5 percent. The slow growth in 1989 was attributable to exogenous factors (irregular rainfall and a deterioration in the terms of trade), and to partial implementation of adjustment measures. In 1990 the economy was once again on the upswing: real GDP grew by 3.4 percent and the inflation rate fell from 11.6 percent to 7.1 percent. The overall fiscal deficit, however, was at an unsustainable level (12 percent of GDP). 9. The private secondary sector, which is dominated by the industrial sector, is expected to be the main source of sustainable growth in Burundi during this decade and beyond. This expectation is reflected in the latest macroeconomic scenario. The projected GDP growth for 1991-94 and 1995-99 is, respectively, 3.3 and 4.3 percent per year. The relatively small industrial sector (about 5 percent of  -3- GDP) is projected to grow at about 8 percent a year throughout the period and is expected to contribute most to this expansion. In contrast, the agricultural sector is projected to grow at rates of 2.8 and 3.5 percent during the aforementioned periods and is expected to experience a decline in its share of uDP. 10. The growth in industrial production is uxpected to be promoted by private export-oriented investments. While the private sector currently finances only about 20 percent of gross investment (about 4 percent of GDP in 1990), its share is projected to increase to 24 percent by 1994 in response to the implementation of a private sector development strategy, and to continue to increase during the second half of the 1990s. However, there is a prerequisite to the realization of these projections: investment conditions have to be appropriate in all key facets. Following the analysis of the existing industrial sector, the remainder of the report seeks to develop the critical elements of the enabling environment required for private sector-led growth. m1. THE INDUSTRIAL SECTOR A. Overview of the Sector 11. According to national accounts estimates, formal manufacturing accounted for about 5 percent of GDP (FBu 9 billion, US$60 million) in 1989, about the same as in 1984. The best available estimate, which takes into account closures and new entries, indicates that about 200 formal enterprises are presently engaged in manufacturing (see Table 2.1 for 1988). Table 2.1: DISTRIBUTION OF PRIVATE AND PUBLIC ENTERPRISES, 1988 Activities Private Public Total Constr. materLals 5 5 10 Civil works 38 4 42 Wood/paper/printing 19 2 21 Metal/mechanic 36 2 38 Chemical ind. 20 4 24 Agro-industries 30 8 38 Textile/leather 15 1 16 Total 163 26 189 Source: SNES and World Bank estimates. 12. The modem sector empioys less than 20,00 people, about one percent of the active population. In comparison to GDP the industrial sector is about half as large as that of most other low- income developing countries. Because of the heterogeneous nature of the subsectors, most local enterprises enjoy a monopoly or duopoly status for individual product lines. Much of the competition comes from imports or, in some subsectors, such as soap, from informal firms. Most of the enterprises are private and small. About two thirds of the industrial output is attributable to firms with at least 10 percent public ownership, reflecting the heavy, capital-intensive public investment that took place during 1978-86. Based on a representative sample of about 60 enterprises-SO private and 10 public-a general picture of the sector can be constructed (see Table 2.2). The sample covers about 50 percent of output and employment. The share of the private sector is understated in some subsectors because of the better statistical coverage of PEs.  -4- Tablp-L.2: CHARACTERISTICS OF MAIN INDUSTRIAL ACTIVITIES, 1988 (millions of FBu) Gross Outout Value Added Employmenc Private Constr. materials 1,192 15% 199 10% 638 Civil worko 937 12% 279 14% 1,725 Wood/paper/printing 618 8% 166 8% 425 Metal/mechanic 2,192 28% 546 26% 297 Chexmxzal ind. 1,165 15% 385 19% 552 Aq:. 'eidustries 637 8% 291 14% 1,559 T-f. /leather 1,144 15% 196 9% 328 r 1 7S7,885 100% 2,060 100% 5,524 P i e . ~ . P_ b l i Conot;. materials 1,279 7% 242 5% 792 Civil works 937 5t 279 5% 1,725 Wood/paper/printing 703 4% 217 4% 544 Metal/mechanic 2,192 12% 546 10% 297 Chemical ind. 1,721 9% 570 11% 665 Agro-industries 9,675 51% 2,195 42% 3,488 Textile/leather 2,346 12% 1,210 23% 2,091 Total 18,852 100% 5,257 100% 9,602 aSorce: SNES. 13. The structure of production reflects the predominance of agro-industries, which account for over 50 percent of the value added. This share is growing as SOSUMO's (sugar) production continues to come on stream. The textile/leather subsector ranks as the second largest, accounting for one fourth of the estimated value added. In the purely private sector, the largest subsector is metal and mechanical industries. Within the formal sector, PEs are about three times more capital-intensive than private enterprises, as measured both by sales and value added per worker. Tbis finding is not significantly affected by the high levels of protection of PEs, which inflate output at domestic prices. 14. Data on the urban informal sector (paras. 61-67), provided by recent surveys of the USAID and the ILO, indicete that informal industrial activities have been growing rapidly. Their output is estimated to have almost equalled that of the formal sector in 1990. About half the activities are concentrated in the garment/tailoring subsector. Despite recent growth, the informal industrial sector remains relatively small, at about half the size that is estimated as the average in the rest of Sub-Saharan Africa. This is attributable to Burundi having little trading and industrial tradition. 15. Most of the formal and informal industrial activities are located in Bujumbura. This reflects the low urbanization within the country and the better developed infrastructure in the capital city. However, many agro-industries are located outside the capital, due to their links to the agricultural sector; the principal such enterprises include BRAGITA (brewery in Gitega), palm oil refining, and sugar, coffee, and tea processing.  l ~~~~~~~~~~~~~~~~~-5- ]R,Asse_sment of the Industrial Sector 16. Private Sector. Production and employment in the private manufacturing sector are dominated by the two breweries, which have minority public ownership but are operated by independent private management. These two firms employ about 1,000 people and generate Fbu 2.5 billion of value added. The rest of the sector is composed of small and medium-size enterprises (SMEs) employing between 10 and 600 people and generating a value added ranging from less than Fbu 1 million to about FBu 300 million--average employment is about 100 people and average value added is FBu 40 million (US$270,000). Foreign investors, mainly from Europe and the Indian subcontinent, are present in about half the private firms. Foreign ownership has been in relative decline since the early 1980s. This phenomenon is attributable to (a) the 'Burundinization' efforts of the past; (b) foreigners selling their interests in unviable activities--made temporarily profitable by protection and tax exemptions--once investment code benefits ran out; and (c) the emergence of a small number of new Burundi entrepreneurs who have established new lines of business (NAB and FRUITO, for example, producers of garments and fruit juice). 17. main Products. Most of the manufacturing output is still intended for the local market. Production is concentrated in typical simple import-substitution activities: (a) agro-industries--beverages, dairy products, sugar, and cigarettes; (b) chemical industries--soap, foam and a range of plastic products, paints, batteries, oxygen, and acetylene; (c) textile and leather--cloth, gazments, blankets, and shoes; (d) metal-working industries--nails, corrugated sheets, profiles, and tubes; and (e) other products--including building materials and printed matter. Manufactured goods not yet produced in sufficient quantity to meet domestic demand include dairy products, yeast, malt for breweries, edible oils, margarine, sugar, cement, socks and underwear, plastic bags, and hoes. While this may indicate possible import-substitution opportunities, some of these products are unlikely to be produced efficiently in Burundi; cement, for example, is an industry that has in the past been promoted by the Government but which is unlikely to be viable in the medium term. Import Interit 18. Selected indicators of industrial performance reveal that the sector relies heavily on imports (see Table 2.3): imports of intermediary products for the manufacturing industry have accounted for about 25 percent of the value of all imports between 1984 and 1988, and a significant part of petroleum and capital goods imports has also been consumed by the manufacturing sector. On average, the import intensity of the sector is over one third of gross output. 19. Except for agro-industries, manufacturing enterprises import most of their raw materials and intermediary goods. The most import-intensive activities include the breweries, all metal mechanic workshops, paint and plastic manufacturers, the paper products industry, the blanket manufacturer, the soap manufacturers until recently, the shoemaker BATA, and the fibre cement manufacturer ETERNIT. Recent increases in the cost of imports, which have resulted from devaluations, are inducing several industries to look for alternatives; local content in production is increasing in a handful of industries, e.g., in soap manufacturing. However, interviews with entrepreneurs show that the predominance of well- established European suppliers and the absence of adequate information on substitute, less costly supply sources--except within the region--have prevented many manufacturing industries from reducing the cost of nonfactor inputs (see the example of hygienic paper, para. 45). In the medium term, the development of a more competitive resource-based sector should increase intersectoral linkages and lead to a fall in import intensity. .. - - . . .. - * -" - . r .. . . s . r  -6- Table 2.3: SELECTED INDUSTRIAL PERFORMANCE M5EASURES (millions of FBU) 1986 1987 1988 1989 Value added a/ 8,128 9,127 9,157 8,967 Exports 1,081 1,588 1,021 662 Industrial investments 2,810 7,465 2,602 3,000 b/ Industrial credits 3,062 3,640 4,770 5,889 Imports of prod. inputs 8,283 8,597 9,995 9,843 Imports of capital assets 4,925 6,259 6,461 6,161 a/ In constant FBu of 1980. b/ Misaion estimate. Source: Mission Allenande. Growth and Investment 20. Since the mid-1980s industrial growth has been slow but positive. Real output increased by about 3 percent per year between 1986 and 1989 and is estimated to have increased 5.5 percent in 1990. Manufacturing output fell in 1989 by 2 percent because of declining demand. This decline was attributable to the drought, which increased the price of food crops and reduced disposable incomes and the increase in the transaction tax (CM)-from 12 to 15 percent. 21. The evolution of production at the firm level falls into three broad categories. First, there are enterprises whose. production is growing and whose capacity utilization is high (brewery, cigarettes, sugar, oxygen, textie cloth). The second group is composed of established firms that are stagnating but have high capacity utilization (blankets and soap). This group is constrained by its obsolete equipment, and the investments needed to renew its capital stock are being delayed because of uncertainty. The final group is composed of firms with doubtful viability, declining sales and low capacity utilization. Some enterprises within this group are being closed dowr. (the flour mill is now being liquidated), and others continue to operate while trying to restructure (nalls, matches, and BATA shoe production, which cannot compete with products from the Kenyan footwear subsidiary). A few firms within this group are not efficient but enjoy protection from competing imports through high transport costs and tariffs, which enable them to be quite profitable despite low capacity utilization (foam products and metal-working industries). 22. Despite the sector's low growth, investments picked up in absolute terms during the second half of the 1980s; between 1978 and 1982 they averaged about FBu 900 million (US$10 million) per year and increased from 1986 onwards to about FBu 3 billion (US$20 million) in 1989.1 This growth reflected the fact that the private secondary sector was stimulated by the adjustment measures: the share of the private sector in industrial investrnents went up from about 25 percent between 1978 and 1982 to 85 percent in 1989. As credit to the industrial sector, which precedes actual investments, has grown rapidly-almost doubling between 1986 and 1989--investment and growth in the manufacturing sector can be expected to increase during the first half of the 1990s. The impact of new investment on the size of the sector is likely to be moderated by the probable exit of 10 or so unviable enterprises. Some closures are already under way, but have been slowed by inappropriate bankruptcy laws and protectionist policies (paras. 138-140 and 36). 1/ The numbers exclude the large public investment of about $50 million in SOSUMO (sugar).  -7- Infrastructure 23. The economic infrastructure of Burundi--roads, water and energy, telecommunication--, is by and large adequate and relatively well maintained. Within the capita!, where industries are concentrated, land (about 180 hectares) has been set aside for industrial use, but have not been prepared for such use. Thus, for each new investment, the promoters also have to build connector roads and sewers and extend connections to utilities. Moreover, once the physical connections are made, services from utilities need to be secured--this is generally easy. These additional civil works create delays, increase investment costs, and discourage investors, particularly small ones. This partly explains the slow development of small-scale enterprises (SSEs). 24. In many countries, goverunents undertake the necessary light infrastructure investments in sites and services so that promoters need only to build their factory and to hook up to utilities. The advantages of this approach include lower unit costs, due to the economies of scale gained in creating all the infrastructures at once, and time savings for investors. The main disadvantages are that rehabilitated plots may remain empty if adequate private sector investment does not follow and the managers of the zone may impose discouraging administrative constraints. 25. In Burundi, light investment in industrial infrastructure (sites and services) is needed to support private investment. However, in order to maximize net gains initial investments should be modest. Given the present rate of enterprise creation, about four new medium-size investments occur each year. The number of plots to be readied to meet expected dematn over the next four years should be about 20 (i.e., less than 10 hectares). Second, to avoid bureaucratic delays, the management of the zone should be private and the procedures for obtaining a lot and the costs involved should be clear. 26. Complementary investment is also needed to help establish SSEs. At present, these enterprises not only have to secure access to utilities, they also have to construct buildings to house their workshops because such facilities are not readily available for lease. As a result, construction accounts for about half the value of investments by SSEs. A building capable of housing 20 to 30 workshops of about 150 square meters each could be constructed and managed by the industrial zone. Similar structures could be built in one or two other urban centers to encourage decentralized SSEs. This would reduce costs to investors by providing leasing options and the benefit of economies of scale in investment outlays. 27. The Government is pursuing a policy of decentralization. However, the capital city constitutes the single largest urban market and it is the seat of government, where the necessary inter- change with the authorities is easiest. As a result, the scope for installing industries outside Bujumbura is at present limited mainly to activities with links to the primary sector. The present level of private investnent does not justify preparing a second decentralized industrial zone. Public Sector 28. Industries with at least 10 percent public ownership, the definition of a PE in Burundi, dominate the industrial sector in size, as measured by assets, investment, equity, and loans (see Table 2.4). COTEBU and VERRUNDI dominate the textile and chemical industries.  -8- Xable 2.4* PUBLIC SECTOR SHARES IN INDUSTRY (1987) (percent) Net Gross Assets Investment Equity Loans a/ All of manufacturing 76 86 89 87 Agro - industries b/ 66 70 68 76 Textiles and leather 83 96 96 99 Printing 13 84 14 0 Chemical industry 54 62 53 72 a/ Medium and long tem. b/ .ncludes all prinmary treatment of agricultural products and food processing. Source: Ministry of Plan. 29. Enterprises with public ownership can be classified into SEMs (mixed enterprises with minority public ownership) and PEs (majority or complete public ownership). The two breweries (SEMs) operate as fully private entities, and a number of other enterprises, particularly OCIBU (coffee), OTB (tea), BTC (tobacco), and COGERCO (cotton ginning), conduct mainly agricultural activities. The key features of the most important industrial PEs are given below (see Table 2.5). Table, 2.5. CHARACTERISTICS OF KEY PEs Permanent Gross Value Emplovment Out2ut Added Debt Ca2ital 1985 1988 (1988, millions of FBu) COTEBU 1206 1631 2247 1111 2165 2646 FADI 90 120 370 96 218 141 INABU a/ 100 124 84 51 81 38 NINOTERIE A/ 81 133 821 99 36 11 ONAPHA 66 64 176 89 98 259 SOSUMk, 54 331 N.A. 280 8026 2024 VERRUNDI 163 185 553 417 1949 595 TOTAL 1760 2588 4251 2143 12573 5714 Al Enerprine currently being retucurd or liquidated. low: SCEP. 30. The seven enterprises in the table, together with SIRUCO (used garments) and HUILERIE (palm oil),2 form the core of manufacturing PEs. Most were established during the 1980s. The MINOTERIE (flour mill) is being liquidated and is unlikely to operate again if competitive conditions are maintained, because of its inherent lack of economic viability-imported grain needed to produce a kilo of flour costs more than a kilo of imkorted flour. INABU (printing) is operating at very low levels of activity while awaiting privatization and restructuring. FADI (pesticides) operates at close to full capacity but is facing increased competition with the liberalization of agriculture imports. 31. The remaining PEs, except for SOSUMO, were protected by quantitative restrictions (QRs) as recently as August 1990. ONAPHA (pharmaceutical products) has been shown to be of doubtful viability, even on a sunk-ost basis, because of (a) poor quality; (b) lack of cost competitiveness in the A/ Studied in the context of the Agriculture Sector Memorandum.  19, face of imported generic products; and (c) insufficient demand and inability to export, which prevents its benefiting from economies of scale. Nevertheless, the firm has continued to produce while pursuing rehabilitation and privatization alternatives with possible Chinese help. This enterprise, in its present situation, may not survive the liberalization of competing imports if the Government adopts a competitive procurement process. 32. VERRUNDI (bottles, an IFC project) and SOSUMO also suffer from lack of financial and economic viability. Both can survive on a sunk-cost basis, however, as gross receipts more than cover variable costs. These two firms also face technical problems. For VERRUNDI, an inappropriate choice of technology (electric furnace), excessive scale, and the need for continuous operations lead to high production costs and a tendency to overproduce; the stocks of finished products are sold when production is stopped to change the furnaces' refractory lining. Another problem is that bottles are too heavy. The present management has been slow to adopt measures to lower the bottles' weight and thus production costs. This is a case in which complete privatization with more efficient and innovative management would improve viability. For SOSUMO the main problems were over-investment and high industrial costs; the industrial costs are being rduced through better capacity utilization made possible by improved agriculture operations. 33. COTEBU (textiles) is marginally viable. It is likely to experience severe financial difficulties now that the doubling of its capacity is being completed. The main problem is that its machines cannot produce export-quality cloth for the European market, and that regional and domestic demand is insufficient. In January 1991 this enterprise received protection in the form of an import duty surcharge on competing products that is likely to hinder the development of the growing export-oriented garment sector.3 34. Almost all industrial PEs share problems that lower their technical efficiency. Purchases of foreign equipment financed by donors were often motivated not by efficiency considerations but by the desire to promote donors' national suppliers. Problems common to almost all these enterprises are weak management, the absence of adequate cost accounting, the lack of aggressive marketing and product innovation, and technical inefficiencies. 35. Privatization, particularly if foreign partners with appropriate know-how can be brought in, should help create a more dynamic sector. The process should start with privatization of management. However, despite real progress made by the Government in spelling out a privatization strategy, the nuts and bolts of how to privatize have not been devised. The most important issue is linked to the valuation of privatized assets. There is legitimate concern about not "giving away" these assets. However, calculations based on historical costs are likely to grossly exaggerate the economic value of the firmu. To capture dynamic gains through the transfer of know-how, the best strategy might be to let the market and the buyers determine the price of the assets, even if this leads to their undervaluation according to historical costs. On the other hand, under no circumstances should additional protection and tax holidays be granted to privatized firms. Current tariffs are 44 percent. The surcharge is 30 percent in 1991, 20 percent in 1992, and 10 percent in 1993. , . .. ..  -10- C. Ilndustrisl Efficiency and Performance 36. Effective Tariffs. Effective tariff rate (ETR)4 estimates are available for 38 firms covering 49 products for the years 1985 and 1989 (see Table S2). ETRs are now a good indicator of industrial efficiency; low ETRs generally indicate competitiveness with respect to imports. Out of a total of 34 matching products lines, 18 had lower ETRs in 1989 than they had in 1985 and 8 ETRs were unchanged. In 1989, however, 22 out of 39 products still enjoyed high tariff protection, as measured by ETRs exceeding 50; 13 of these products had ETRs over 100. The reduction in tariff protection rates is significant considering that during that period QRs were dismantled and the foreign exchange allocation system was liberalized. However, many activities still remain highly protected. As a result. inefficiencies persist and the system of incentives suffers from a significant anti-export bias; without lower maximum tariff rates domestic sales will remain much more profitable than exports (paras. 90-96). 37. Capacity Utilization. The enterprises for which information is available (about 30) are almost equally distributed between two groups of low- and high-capacity producers. The first group enjoys capacity utilization above 50 percent. The second operates at low capacity, below 50 percent. During the preparation of the adjustment program it was hypothesized that industries with excess capacity would export, as long as they could cover variable costs. This did not happen because of import controls within the region, partly circumvented through informal trade, and the aforementioned anti-export bias (para. 36). Moreover, the majority of industries with excess capacity cannot cover variable costs at competitive export prices for their output (para. 39). 38. Employment. Employment data covering 1984-89 were available for 27 private firms; about half had information missing for the period before 1986. The data, aggregated on an unweighted basis, show that industrial firms hired workers during the second half of the 1980s (see Table 2.6). The sample enterprises responded to the 1989 decline in demand by shedding workers. The analysis of the composition of labor reveals tha. much of the change in employment occurred for temporary workers. For a sample of 18 enterprises, the share of temporary workers among unskilled workers was less than 20 percent between 1984 and 1986. This figure more than doubled during the 1987-89 period. Interviews with managers of enterprises revealed that the reason for tL:. policy is the high cost of permanent employees relative to that of temporary ones (para. 150). Firms responded to competitive pressures accompanying import liberalization by relying more on cheaper temporary labor. This behavior is consistent with the diagnosis that, due to present laws (paras. 150-153), permanent workers cost too much (paras. 154-157). However, training given to temporary workers is lost if the enterprise adheres strictly to the labor laws, which prohibit keeping a temporary person on the payroll for more than three months. A/ Defined as the percentage divergence of value added at domestic prices from that calculated at border prices.  F_ble 2.6: EVOLUTION OF EMPLOYMENT AND OUTPUT (percent) 1984 1985 1986 1987 1988 1989 TEMPORARY WORKERS TO TOTAL UNSKILLED Average 13 19 23 42 59 39 Observations 18 18 18 18 18 15 EMPLOYMENT GROWTH Average 20 55 29 13 -6 Observations 13 17 20 27 26 LABOR COSTS/GROSS OUTPUT Average 16 18 14 Observations 26 27 28 VALUE ADDED/GROSS OUTPUT Average 26 34 29 Observations 14 27 27 Source: SNES. 39. Adjustment in Costs. Adjustment policies forced enterprises to become more efficient in the use of non-factor inputs, as seen in the rising share of value added in gross output shown in the table above. For a sample of 27 firms this share rose by about 30 percent between 1987 and 1988, and 8 percent between 1987 and 1989.5 In parallel, labor costs as a proportion of total output showed a decline between 1987 and 1989, even though the proportion had increased between 1987 and 1988. Despite the weakness in the numbers, three conclusions emerge: (a) the more competitive economic environment did not lower profitability, as measured by the share of value added minus labor costs in gross output, which went from 10 percent in 1987 to an average of 15 percent for the 1988-89 period; (b) despite cost reductions 1)urundi industries remain relatively low value-added activities, with non-factor input costs accounting for about 70 percent of the ex-factory price; and (c) the high variable costs explain why, despite availablfk excess capacity (para. 37), the scope for more industrial exports from the existing sector is limited. Thus, many existing firms have limited growth potential. Technology and Know-how 40. The choice of technology is an essential part of successful industrialization. Inappropriate decisions with regard to scale, sophistication, degree of labor intensity, and the inability to obtain spare parts and assistance in operation and maintenance can lead to the failure of potentially viable activities. The typical case is VERRUNDI (bottles), for which the choice of experimental electric furnace technology combined with excessive scale has contributed to such a situation. The technological capacity of the industrial sector was assessed through visits to over 40 public and private enterprises. The notion of technology used below ccvers also such areas as management capacity and product quality. 41. A large share of the problems experienced by industrial PEs originate from their inappropriately large scale, inadequate management, and lack of financial and economic viability. In many cases, difficulties were also attributable to inappropriate production technology promoted and financed by donors. There are no "white elephants' within the private sector of Burundi. Problems of a technical nature are due most often not to the choice of technology, but to (a) operators' lack of training; (b) obsolescence; and (c) the owners' tendency to postpone improvements, renovations, general maintenance and repairs. The first problem is general, linked to the still relatively low education of the A/ This trend is not affeed by the varying coverage of the sample.  -12- work force and its insufficient industrial experience. The latter two can be attributed to excessive protection, as well as to economic and political uncertainty. 42. On the whole, private enterprises tend to have more appropriate technologies and better mastery of their production processes than public enterprises. This is partly because the scale of private operations, except for the brewery, is smaller than that of PEs. Nevertheless, the choice of technology remains an important issue facing the private sector because many existing enterprises have to renew worn-out machinery and some enterprises (NAB, CHANIC (oxygen), FABRIPLAST (plastic products), HUILERIE (palm oil), ONAPHA, and others) have purchased inappropriate equipment during the past few years. 43. Additionally past exchange rate and trade policy regimes and distortions in factor prices have promoted labor saving technologies. Almost all the industrial equipment is of European origin. Only in the case of PEs can this be directly attributed to the source of financing. The private sector generally lacks information about other potential equipment suppliers, particularly those from other, more industrialized developing countries. A related phenomenon is the insufficient knowledge of locally available facilities for general maintenance and repairs. Because traditional suppliers have a track record and provide follow-up support and troubleshooting through authorized dealers, a promoter is unlikely to purchase more appropriate but unknown equipment, urless it is known that basic maintenance can be provided by existing enterprises that operate and maintain similar machines. A registry of locally available maintenance and repair facilities, as well as suppliers of intermediary goods and would be one way to improve the information available to SMEs. 44. Many enterprises lack the design capabilities to conceive new products. This problem can be addressed through the provision of specific, short-term technical assistance (paras. 237-253) to enterprises that wish to revamp their product lines. Typical examples of this assistance include (a) showing garment producers how to cut cloth to minimize wastage, and how to stitch and manufacture products that replicate the latest fashions; (b) helping COTEBU design patterns appropriate for untapped export markets or the local export-oriented garment industry; and (c) helping furniture producers revamp their designs in line with more modern styles.' 45. Another technology-related problem is the use of the wrong inputs. The tendency of local entrepreneurs to purchase inputs from traditional sources located in Europe can lead to inf' icient production techniques. One particular example was an attempt to produce hygienic paper in Burundi with inputs imported from Belgium; despite its apparently higher quality, this import substitute could not be priced competitively with lower-quality imports from China and Kenya. 46. M nnen= in Burundi is still often inadequate, particularly with respect to marketing and cost accounting. This is a problem in both public and private enterprises. Most managers do not know their firm's production costs. The importance of using depreciation and replacement value in cost accounting, rather than the nominal purchase values is poorly understood. In the same vein, export opportunities are assessed in terms of whether or not average costs are covered, whereas, in the presence of excess capacity, the appropriate parameter is variable costs. As a result, industries de-capitalize themselves, habitually underestimate the needs for working capital, and forgo export opportunities. Applied management courses, with a strong component related to cost accounting, are therefore needed (paras. 243-244). This type of initiative should be complemented by the establishment of an order 7hTbe USAID has just funded such a technical assistance effort in the textile sector. Hdowever, it is too early yet to assess its impact.  -13- chartered accountants and the implementation of an appropriate, country-wide accounting system. Other areas where management could be improved include marketing, particularly in the case of export products (paras. 249-250) 47. Burundi's long-term growth will depend on a successful export drive. As in the case of industry, the level of export development is low: (a) imports are more than twice as high as exports, lezding to a chronic trade deficit; and (b) the ratio of exports of goods and non-factor services to GDP is 12 pereent for Burundi, compared with 19 percent for low-income developing countries7. Burundi's exports are dominated by coffee, which accounted for about 75 percent of export revenues between 1987 and 1989. Other exports have begun to grow and to become more diversified in response to devaluations. However, manufactured exports have stagnated. The structure of recorded exports is shown below (see Table 2.7). Table 2.7: MAIN EXPORTS, 1980-89 (millions of FBu) 1980 1985 1986 1987 1988 1989 P-RIARY PROUCS 5,771 12,547 18,202 9,594 17,986 12,220 Coffee 5,234 11,172 17,057 7,891 16,010 9,502 Tea 136.4 711.7 514.6 556.8 734.7 992.3 Processed rice 53.5 182.9 Leaf tobacco 13.0 203.4 195.2 Raw hide 53.5 116.4 150.6 181.8 295.5 509.6 Cotton 100.5 42.4 20.2 502.3 110.1 31.3 NUFACTJrU ED o PRODUCTS 204 1,425 1,842 2,368 1,629 1,118 Cement products 66.4 24.6 38.5 48.4 36.0 31.8 Bottles 0.0 197.7 193.1 456.5 325.0 315.9 Beer 4.3 11.3 126.6 149.6 121.7 10.8 Cotton tissue 1.0 420.0 428.4 181.9 265.2 144.3 Palm oil 66.4 24.6 38.5 48.4 36.0 0.2 Wood products 5.0 11.3 126.6 149.6 2.5 2.8 Rubber products 0.0 197.7 193.1 456.5 9.0 315.9 Batteries 7.7 0.5 80.7 54.0 Plastic work 1.0 420.0 428.4 181.9 40.8 7.0 isaiirts 24.7 19.0 Ceramic tiles 18.6 44.8 112.1 337.1 225.6 0.2 TOTAL 5,986 13,988 20,044 11,962 19,616 13,338 M: BRB. Tad 48. is the single most important export of Burundi. The industrial aspects of coffee production are hulling and washing stations, which are earmarked for privatization. Coffee accounted for 85 percent of exports in 1980 and over 80 percent during 1985-86. As the re :it of a combination of lower world prices and the development of other exports, this share fell to less than 75 percent between 1987 and 1989. Exports vary between 30,000 and 37,000 tons. During the 1990s, increased 2/ As defined by the Wodd Dvelopomnt Rort 1991, excluding India and China.  14- production and improved coffee quality are expected to lead to higher export volumes and above average prices. Thus, the economy's dependence on coffee will inevitably continue for some time. 49. )P is the second most important export product; it contributed nearly 5 percent of export receipts between 1987 and 1989, and its good quality suggests that the sector has unrealized potential. As in the case of coffee, most of the value added in tea production is attributable to the agricultural activity itself. There is also an industrial link, in the form of tea factories. 50. C exports have remained stagnant over the past five years; relatively high exports in 1987 reflected a sharp decrease in stockpiles. This sector also has strong ties with industrial activities. Exports of the main cotton-ginning operation, COGERCO, depend on the consumption of COTEBU, which COGERCO supplies at subsidized prices. Another industrial link is with the cotton oil extraction plant, RAFINA, which, as the sole customer, also enjoys a privileged relationship with COGERCO, from whom it obtains its main raw material at a low price that is not market-determined. 51. The system of incentives critically affects coffee as well as other cash crops: (a) producer prices drive the production of cash crops and influence substitution among products; and (b) viability depends on exchange rate policies. Most agricultural products are subject to liberalized producer (tobacco and food crops), while many cash crops are subject to fixed producer prices. Where the producer price is set too low-particularly cotton and tea--land pressure forces substitutions that are not always optimal from the country's viewpoint. Linkages with inefficient PEs are another cause of the low viability of lines of activities. Indirect links should be rationalized by establishing market-determined commercial relationships (for cotton). Direct processing links can be improved through the privatization of equity or management and restructuring of PEs. 52. Nontraditional Primary Exports. Nontraditional exports include (a) tobacco; (b) hides and skins; (c) fish, plants, rice, and quinquina; and (d) horticultural products. These exports have responded to exchange rate measures and are growing rapidly. The main constraint for some is the unavailability of reliable and relatively frequent flights to Europe (paras. 141-147). Some of the recent ventures in horticulture have also failed because of poor project design.8 53. Mi ing. Burundi has a variety of ore deposits including gold, tin, and nickel, and other resources such as rare earth. However, except for gold, none of these resources has been shown to be viable for large commercial ventures. Viability, given a certain ore content and a given world price, will depend primarily on the exchange rate and the technique of extraction. With regards to the extraction earlier studies had shown that artisanal-type processes would be viable. This seems to be verified by the fact that hundreds of people are now engaged in such endeavors. Although these entrepreneurs are presently tolerated, the lands are owned by the Government. The artisans have no property rights and could in theory be expelled. Regardless of whether or not large-scale mining is feasible in some areas, the status of these entrepreneurs should be formalized. 54. Manftus. Burundi has begun exporting manufactured goods relatively recently. The main exported manufactured products are bottles, beer, and textiles (produced by PEs), as well as cement roof covering, and garments (produced by private firms). At their peak in 1987 manufactured exports accounted for about 20 percent of total exports. During the second half of the 1980s, these exports stagnated; the 1987 figure was due to exceptional sales to Uganda and very low coffee prices. During the 1988-89 period, manufactures accounted for about 8 percent of total exports--less than US$10 million. 8/ The EEC/FED has financed technical assistance for the marketing of horticultural exports through the APEE.  -15- S5. The slow development of industrial exports is attributable to a number of factors. First, most existing firms are not cost competitive and the delays in implementing the drawback system (para. 206), made effective only in late 1989, discouraged exports. Second, as a result of the bias in incentives favoring import substitution, only a few export-oriented investments have been undertaken (NAB and LOVINCO). Moreover, these investments are just coming on stream and their impact will be felt only in the 1990s. Finally, many industrial exports to regional markets are not recorded and official figures understate export performance; informal exports are estimated to be at least as high as recorded ones. iirection of Trmde 56. Europe in general, and the EEC in particular, is presently Burundi's largest trading partner; in 1989 Europe's share in Burundi's total exports was about 75 percent . id tlhi EEC's, 57 percent. However, about 90 percent of exports to Europe are accounted for by coffee. Once this product is excluded, Sub-Saharan Africa becomes the main export market, receiving about 14 percent of exports in 1989--US$ 10 million. The principal African countries that import from Burundi are (a) Kenya, which imports primarily tea; (b) Zaire, which imports about 70 percent of the types of products exported by Burundi; (c) Rwanda, which imports mainly industrial products; and (d) Zimbabwe, which imports primarily tobacco. The share of recorded exports to Tanzania, Zambia, and Uganda is almost negligible. The lack of trade to the first two countries is attributable to non-tariff barriers (NTB). 57. For over 20 years NTBs have been the Achilles' heel of Burundi's development strategy, based on supplying the regional market. In the case of Zaire and Rwanda, evidence suggests that much of what cannot be officially exported legally is exported informally. This is attributable to the proximity of Bujumbura to these two markets and the ease of access. Most exports to Zaire are products legally purchased in the capital city by Zairian businessmen and taken back to the Kivu by road or by boat. This trade is very important and equals or surpasses recorded trade in manufactures: unrecorded exports of textile fabrics alone are estimated to have surpassed FBu 1 billion--US$6 million--during 1989-90. Removing trade restrictions with Zaire and Rwanda will boost official trade, but may have limited impact on trade creation in the short run. 58. Trade with other countries in the area, particularly Tanzania and Zambia, is much more constrained by NTBs. Informal trade is made difficult by the lack of population on the Tanzania side of the border, and the fact that Zambia is only accessible by going down the length of the lake, too far for light boats. As a result, most exports to Zambia and Tanzania have to be on an official basis. A common complaint in Burundi is that import licensing or the foreign exchange allocation system in these countries have prevented exports.9 Burundi, on the other hand, because of its liberal policies, imported growing amounts from the region. The removal of NTBs in the preferential trade agreement (PTA) group of countries would benefit Burundi and lead to net trade creation. However, the PTA has tended to give greater emphasis to reducing regional tariffs than to eliminating NTBs. 59. Regional trade is likely to remain important throughout the 1990s. The main question centers on how this trade can be promoted. The Government should actively encourage regional trade by (a) adopting a liberal attitude toward what customs officials see as "illegal exports"; and (b) continuing bilateral negotiations to open up trade with Tanzania, as well as, to a lesser extent, with Zambia, Kenya, and Uganda. It is likely that, under present conditions, the liberal attitude of Burundi's customs toward unofficial exports help Burundi firms. Bilateral negotiations, however, are likely to be less effective unless a major liberalization takes place in partner countries. Such a liberalization can occur either 2/ Zambia has recently adopted an open licensing system that should reduce NTBs on imports from Burundi.  -16- through general trade policy reforms or in the context of the removal of NTBs within the PTA. The World Bank is presently preparing a projec with the PTA aimed at removing NTBs and allowing capital flows (investments) from trade surplus countries to countries that are in a situation of bilateral trade deficit. This project, if successful, should help Burundi. 60. In parallel with export development at the regional level, nontraditional exports to industrial countries, particularly Europe, offer the greatest potential in the long run because of the large size of these markets. Considering that products exported to the region are likely to be different from those exported to Europe, a concerted export drive toward both markets is desirable so that Burundi can develop as broad a range of exportable products as possible. Exporting to industrial countries, however, requires know-how, and products have to be of very good quality, priced competitively, and delivered on time. In order for such an export drive to be successful, local exporters will have to be nurtured and assisted, and transport links will need to be improved (paras. 191-195 and 147). 0TheintOrmaS 61. Many countries in Africa have a large dynamic infolmal sector that contributes significantly to output and employment and provides a proving ground where businessmen and entrepreneurs learn their trade before moving on to larger formal ventures. The factors that typically hinder such a move are administrative red tape and the higher cost of doing business in more visible activities. ITis higher cost is often associated with taxation and the need to compensate labor in line with official wage guidelines. This is also the case in Burundi despite improvements in its business climate. De S 62. In 1988-89 ttie value of the production of the informal activities in the mainly urban secondary and tertiary sec .S was estimated at FBu 8 billion, the same as the output of the forTnal manufacturing sector-abo'it X percent of GDP. The sector, largely confined to Bujumbura, grew briskly between 1986 and 1989, Outling in size in nominal terms. Informal units engaged in production and services in Bujumbura are estimated at less than 3,000. The main lines of activity are (a) food production; (b) tailoring (half the sector); (c) wood and metal working; (d) construction; and (e) repairs. The average age of these mic enterprises is about seven years, with little variation among subsectors, except wood-working, which is W1der, or in the size of enterprises. The total number of people employed is estimated to be more than 10i -o. 63. The Ministry o1 'Labor, in conjunction wi. the ILO, undertook a detailed survey of the sector in 1989. According to this sirvey the sevtor consists mainly of self-employed individuals (64 percent), with less than 4 percent of the enterprises employing more than five people. In 1986 the average initial capital of the firms was about US$650. Half the businesses are conducted in private homes, and about 20 percent rent equipment from other entrepreneurs. Finally, it was observed that only 12 percent of the firms have access to electricity. 64. The people working in informal activities are usually young men (average age of 30). Most are Burundi nationals (75 percent), and many of the foreigners are Zairians who emigrated in the 1960s. The level of education was found to be relatively low; two thirds did not finish the third grade in primary school. Only 14 percent have secondary education; this minority is the likeliest to have the LO/ The following two sources were used in what follows: Haan (1990), "Employment in Rural and Urban Informal Secors in Burundi,' Mimeo; and a review of the informal sector undertaken by the USAID.  17- capacity to develop its activities into larger units. According to the study, the informal sector remains relatively underdeveloped, and many of the constraints have external origins, such as (a) access to credit; (b) regulatory and legal issues; and (c) lo,,al taxation. 65. Another stud2, undertaken by the USAID, was based of 326 interviews on stratified random samples of service-oriented firms. The typical entrepreneur was found to be a 37-year old Burundi male. Initial investments averaged less than the equivalent of US$1,000. Most businesses did not have ties to formal activities and produced for the central market or performed services for clients from the interior. The average monthly salary was the equivalent of $17, three to four times less than average compensation in the formal sector. Lack of initial capital was cited as a constraint to starting a business. According to those surveyed, the cost of credit and access to credit were also major problems: (a) 20 percent of the businessmen requested loans from banks; two thirds of the requests were granted, even though the borrowers had to offer some personal guarantee; and (b) only 5 percent borrowed from informal money lenders, a reflection of the lack of development of informal credit markets. Even though two thirds of the firms paid local taxes, the tax burden was not very high. According to information available, the effective average tax burden is less than 1 percent of turnover. In comparison, for formal activities the transaction tax alone is 15 percent of turnover. Prosoects and Issues 66. The informal industrial sector of Burundi is growing but is still in its infancy. This growth is partly in response to the more liberal environment implemented during the past four years, particularly with respect to population movement, which was tightly controlled until late 1988. Looking ahead, the best way for the Government to approach the sector is to maintain its hands-off policy. While regulatory reforms may not directly cause the sector to expand, the elimination of petty harassment will encourage it. Additionally, simplifying of procedures and reducing entry fees will encourage informal firms to register themselves (carte de commercant), and the recent adoption of a statute establishing rights for street vendors will also help. Even though many of the informal enterprises do not generate a significant surplus, the larger ones are more profitable and could be brought into the central government tax base, as long as the tax rates are kept low; firms, such as those making soap, ould be subject to presumptive taxation (para. 108). 67. An important aspect of the findings is that there are 200 to 500 entrepreneurs who meet the necessary conditions to expand the scope of their activity from informal micro-scale to formal small- scale activities. Some of these people, together with dynamic public officials leaving the civil service, will form the core of the new entrepreneur class in the formal sector for the next few decades. As for the export prospects, the engagement of so many people in the garment subsector boosts the prospects of establishing an export-oriented garment industry. F Invment durin Ads Pri 68. Industrial investment went up during the second half of the 1980s. According to Central Bank (BRB) data, which track primarily private investments financed by banks and refinanced by the central bank, an average of five new enterprises came into existence eavh year during the 1986-89 period (see Table 2.8). During previous periods there were rarely more than three new enterprises created each year. The figures indicate an increase in investment activities, as well as the fragility of the sector, with entry occurring at a relatively small scale--except for investments by the brewery, which accounted for FBu 400 million in 1987 and FBu 700 million and in 1988. BRB data are incomplete because they exclude investments financed by retained earnings or through the use of overdraft facilities -not an uncommon practice in Burundi.  -18- Table 2.8: INDUSTRIAL INVESTMENTS, 1986-90 (financed by banks and rediscounted through BRB) Value Number of Proiects (FBu Million) Total New 1986 614 7 5 1987 833 8 6 1988 1029 7 6 1989 322 7 2 1990 (to July) 118 3 2 Sour=e: BRB. 69. Another source of information on investments is the yearly survey conducted by the statistical office attached to the Ministry of Plan (SNES). The survey is based on returns for 12 public and 60 private industrial and commercial enterprises, representing many of the larger firms in the sector. It shows that private sector productive investment, exc'uding the primary sector, the brewery, and Old East and Toyota Burundi (importers investing in stocks), was about FBu 600 million in 1986 and about FBu 800 million in 1989. If the three aforementioned enterprises are included, investments grew much more rapidly, starting at FBu 800 million (US$6.5 million) in 1986 and peaking at FBu 3.4 billion (US$21 million) in 1989. As for the PE sector, excluding SOSUMO, which is a one-time, unviable investment, investments averaged about FBu 1 billion during the 1986-88 period, before falling to one third of that level in 1989. 70. Overall, industrial sector investment grew moderately throughout the 1986-89 period, partialiy in response to policy reforms. In 1989, the investment of firms for which data were available, excluding the brewery and SOSUMO, totaled more than FBu 2.1 billion, distributed as follows: (a) FBu 1.5 billion by existing private industrial firms; (b) PBu 300 million by industrial PEs; and (c) FBu 300 million by new firms. Investments in commercial activities also increased, to about FBu I billion, during the 1988-89 period. Extrapolated to include missing firms, total investment in commercial and industrial activities in 1989 exceeded FBu 3 billion (US$20 million) for 1990-91, it has been estimated that such investnents could have reached an annual level of about Fbu 5 billion (US$25 million). HI. BARIERS TO PRIVATE SECTOR DEVELOPMENT A. Exchange Rate Policy" 71. Recent Trends. The FBu is presently pegged to the SDR at a rate that is adjusted periodically. As measured by the real effective exchange Index calculated by the IMF (which ignores shifts in termns of trade), the FBu in 1985 had appreciated by 50 percent compared with 1980. Between mid-1986 and end-1989, the exchange rate was adjusted in three stages during 1986-87, 1988, and 1989. The result was a nominal devaluation of 50 percent between 1985 and 1990, leading to a real devaluation of about 40 percent. A fourth nominal adjustment of 15 percent took place in August 1991. The analysis of the bilateral nominal and real exchange rates of the FBu vis-a-vis the currency of selected industrial ll/ A detailed analysis can be found in a paper by Frenkel and Klein (1990), 'Burundi Contribution du taux de change au processus d'ajustement et examen du systame de taux change.'  -19- countries shows a similar pattern of devaluation. The bilateral exchange rate indices for the rnain regional trading partners during the 1985-89 period show that the Burundi franc depreciated less in real terms vis- 9-vis the currencies of the neighboring countries than vis-a-vis those of the industrial countries. Thus, at the regional level, gains in competitiveness were less. The real depreciat ion was stronger against the Rwandese franc (up to late 1990) and the Zaire than against the Kenyan shilling, and real appreciation occurred against the Tanzanian shilling. 72. Imnact on External Trade. Many traditional exports are subject to fixed producer prices. As a result, the devaluations had limited impact on production but increased the profitability of the subsectors as a whole--coffee and tea. Tobacco producers and exporters benefit the most from the devaluations because prices in the sector are not controlled. Among nontraditional exports, primary products grew significantly but manufactures remained stagnant (paras. 52-54). The exchange rate appears to have played an Important role in growth of exports of hides and skins and of the group composed of fish, plants, rice, quinquina, and tobacco, which grew by a factor of six over four years. In general, exports grew and diversified in response to devaluations. However, further efforts may be needed to make traditional exports profitable and to provide an impetus for continued diversification. Imports have declined or remained stagnant during the past four years. All categories of imports fell, except for capital goods. This decline is explained by the increased competitiveness of local production relative to imports following the devaluations and may also be linked to reduced capital flight through over-invoicing. 73. Other Macroeconomic Impact. A major concern prior to the devaluations was the impact on inflation and the fiscal situation. Based on the experience since 1986, fiscal revenues in Burundi were shown to be more elastic than expenditure, in both the long run and the short run; devaluations improved the deficit-to-GDP ratio. Similarly, economic analysis shows that only one third of Burundi's inflation can be attributed to the devaluations. Therefore, further devaluations, if needed, would in all likelihood not destabilize the economy, given prevailing prudent fiscal and monetary policies. 74. Lar osts in the modern sector of Burundi are relatively high (para. 154), even though recent devaluations have led to decreases of about 30 percent in dollar terms. Further exchange rate movements, in combination with liberalization of the domestic market, would help approach greater international competitiveness. Finally, available analysis show, that income distribution was improved by the devaluations because most of the burden of adjustment fell on urban dwellers. Exchange Rate Policies for the 1990s 75. Past devaluations have generally helped the economy and the latest one in 1991 helped eliminate the deficit in the coffee sector. More devaluations may be needed to maintain profitability of cash crops assuming that world prices remain at today's level and producer prices are liberalized. Devaluations could also be used to moderate the gap between the official and parallel exchange rate. The parallel rate for the FBu in 1991 was between 10 to 30 percent higher than prevailing official rates, in foreign exchange terms; reflecting mainly demand for foreign exchange from Zaire and Rwanda and market expectations. 76. Taking a medium- to long-term approach, the exchange rate is a key tool to be used to compensate for rising foreign exchange demand, following current account liberalization and the adoption of lower tariffs (paras. 94-109), and to make Burundi's exports more competitive. Another factor is that prevailing current account deficits and compensatory capital flows are not sustainable in the long run and the exchange rate should play an important role in maintaining the equilibrium between supply and demand for foreign exchange. Another issue is how to manage exchange rate policies once the FBu is  -20- in static equilibrium. A number of options, including pegging to a different basket of currency, such as the ECU, or adopting a fully flexible auction system, are under consideration. Regardless of the option chosen, the exchange rate management system implemented at the BRB needs to be flexible and forward looking. B. lFQreign Exchange Alloation and Import Controls 77. The System in the Mid-1980s. The system of import regulations was very restrictive during the first half of the 1980s. As of late 1985, this regulatory system incorporated the following main elements: (a) foreign exchange transactions (for imports) could be carried out only by authorized dealers, who had to specialize in one of 20 broadly defined product categories; (b) all imports into Burundi were subject to prior authorization in the form of an import license, with products competing with local production prohibited or constrained; (c) except for direct imports of inputs by local producers, imports and importers were heavily taxed; and (d) prices of imports were controlled at wholesale and retail levels on a cost-plus basis by the Ministry of Industry. The system was justified on the grounds that it protected producers and consumers. Liberalizati(n singo 1906 78. The main phases of foreign exchange liberalization spanned August 1986 to August 1990. Specific control powers granted to the Ministry of Industry and the BRB were progressively removed or no longer enforced. Most of the measures focused on the liberalization of trade in goods, leaving in place many controls on trade in services. 79. Formal imnQrters' mononlim were eliminated early in the reform process. The only exception was flour, which was liberalized in 1990. This also led to the entry of new importers into the business and the diversification of existing ones into new lines of products. In 1985 there were only 145 private traders concentrating mainly in one line of business, which could cover a number of six-digit products. The number of nongovernment importers increased steadily in the second half of the 1980s, reaching a total of 243 and in 1987 and 286 in 1989. In 1987 the average private importer imported 15 types of products. The corresponding number in 1989 was 17, an increase of about 15 percent. As a result, the importing business became more competitive. Some problems remained, however: (a) complex regulations governing incorporation and the accreditation of importers discouraged entry (para. 115); and (b) the import licensing system de facto sheltered a handful of importers or producers in the case of a few products, pa.icularly cement, tobacco and sugar (para. 84). 80. Pric for almost all imports and domestic industrial products were liberalized early in the adjustment process. The BRB can still question prices for imports, in the context of management of foreign exchange and preventing over-invoicing. In practice, controls at the product level have had a marginal impact on restraining capital flight, but v nplicit disclosure of prices has reduced the incentives for importers to compete with one another by .otaining lower prices from their supplier. This problem is disappearing as banks' authority to deliver import licenses is expanded (paras. 82 and 86). 81. As of August 1990, all official quantitative restrictions (QRs) on products other than arms, ivory, and so on were eliminated. Imports of most products were liberalized during 1986-87, except for luxury goods, which were removed from the controlled list in mid-1988. The last remaining  -21- controls, which were aimed at protecting four large industrial enterprises,"2 were lifted during 1990. The present import system is free from official QRs. 82. Imnortlicensing in Burundi has been used as a form of microeconomic prior control, which also serves to monitor trade. Import licenses are issued, on the basis of pro forma invoices, for specific products and remain valid for one year. In practice, the BRB reserves the right to object to a license. Under certain circumstances, global licenses can be obtained for the bulk import of such heterogeneous products as spare parts, inputs, and pharmaceutical. Since 1988 some import licensing authority has been delegated to commercial banks. An upper limit of FBu 10 million was set in 1988. It was raised to FBu 25 million (US$250,000) in September 1990 and to FBu 50 million in July 1991. Data on the issuing of licenses since mid-1988 were collected from two banks (see Table 3.1). The figures show that the value of licenses returned by the BRB as a percentage of total demand (value of licenses approved plus rejected) for one bank (Bankl) was 27 percent during the second half of 1988, 20 percent in 1989, and 8 percent during the first four months of 1990. The ratios are similar for the other bank (Bank2), which handled a much lower demand. Table 3.1: IMPORT LICENSE VALIDATION, 1988-90 BANK1 BANK2 VALIDATED REJECTED VALIDATED REJECTED TOTAL BANK BRB NO VALUE BANK BRB VALUE DATE NO (FBu Million) (FBu Mil) (FBu Million) 1988 3409 2958 5625 730 3106 15 11 14 1989 4789 4573 7834 633 3155 800 2972 413 1990 1543 2103 2668 120 390 938 1656 227 Source: Commercial banks. 83. Commercial banks approved about one third of demand in 1989 and about two fifths during the first part of 1990. Because of recent increases in licensing authority, commercial banks are now expected to handle the bulk of private sector import demand. The initially high rejection rates by the BRB were related to the fact that a new system was being implemented. By 1989 the BRB responded within 7 days on average, for both rejections and approvals, and the witximum delay in the case of rejected licenses was 14 days. 84. Refusals by the BRB in 242 cases were reviewed for a period covering the first semester of 1989. The main reasons were: (a) prices were deemed to be too high (20 percent of cases); (b) the mode of payment requested was not acceptable (13 percent of cases); (c) other (77 percent of cases, 50 percentage points being due to technical reasons associated with incomplete paperwork). In 10 percent of the cases, more than one reason was given for rejecting the request. The data were also classified according to types of products. Almost half the products rejected, mainly on technical grounds, were industrial inputs, spare parts, and raw materials. These requests were usually approved following revisions to the paperwork. In other cases, however certain consumer goods or a particular enterprise seemed to have been targeted. The breweries in particular had a number of requests for malt, hops, other inputs, and equipment denied. Rejections because of price tended to target large and/or foreign-owned enterprises. Import requests for products rejected most frequently were for (a) pharmaceutical, all on 12/ COTEBU (textile), MINOTERIE (flour), ONAPHA (pharmaccutical), and VERRUNDI (glass bottles). . .- ' S _- -''-. r - w r D. V-,T T s 1 - - r. -._  -22- technicalities; (b) transport vehicles, about 12 percent of the cases; (c) cement, about 10 percent of the cases; (d) petroleum products, about 5 percent of the cases, because the price was deemed to be too high; (e) textile products, most because of QRs; and (f) salt and sugar, 5 percent of the cases. PQlicy Agenda for the 1990s 85. The next set of reforms, scheduled to be adopted in 1992, should free current account transactions as well as selected capital account transactions. The liberalization of external transactions is needed to promote the private sector and, in conjunction with depreciation ot the exchange rate, exports. The effective implementation of the reforms may be hindered by (a) concerns about additional capital flight, (b) the perceived need to give PEs or private firms in the services sector--particularly transport firms--"sufficient time" to adjust; and (c) apprehension about increasing the current account and fiscal deficits. Trade Account Liberalization 86. The main constraint on imports is related to the import licensing system, which is expected to be replaced by a system of open general iicensing (OGL) in 1992. The OGL system managed by commercial banks would abandon product-specific controls in favor of a general declaration of intention to engage in a legal trade transaction requiring foreign exchange. The Central Bank in turn guarantees that the required foreign exchange will be available through commercial banks when needed. Commercial banks should also play an important role as responsible accredited intermediaries. Foreign exchange regulations still prohibit the reexport of goods, even though this is occasionally allowed on a case-by-case basis. In the context of promotion of limited free zones or entrepot trade, reexports should be allowed automatically within the OGL framework without prior controls in cases where there are no net losses in foreign exchange. 87. Export licensing was managed by the BRB until July 1991. Prior bureaucratic requirements related to the system created problems, particularly in the case of horticultural exports. Under a newly adopted system, export licensing has been eliminated and replaced by a declaration of exports in commercial banks that have been designated as accredited intermediaries. These banks collect information on intention to export and ensure repatriation of foreign exchange. Depending on the exchange rate system adopted, exporters might be allowed to retain some export receipts in foreign exchange accounts in local banks. The effectiveness of these recent changes cannot be yet assessed and continued monitoring is needed to insure adequate implementation. 88. Liberalizatior of Services. The main constraints slowing liberalization of trade in services are related to capital flight (a!id protection of local service industries)--certain expenditures (travel and tourism) are difficult to monitor and cannot always be distinguished from capital transfers. Areas where reforms are under way include (a) factor services--permitting automatic and immediate repatriation of dividends and expatriates' income; and (b) non-factor services-increasing allowances on travel, including for tourism and medical reasons, and liberalizing the choice of international transport and insurance. Here again implementation needs to be monitored. 89. Liberalization of the Canital Account. Almost all capital account transactions, except those made by the Government, remain strictly controlled. Capital account liberalizatii :s not a priority, except for (a) encouraging direct foreign investment (DFI); (b) encouraging Burundi to repatriate any foreign exchange they may have abroad; (c) possibly, exporters' purchasing foreign exchange for hedging against currency fluctuations. In order to encourage DFI, rules regarding sale of assets and repatriation 5 - ,-. - -- . r . -. *. _ -  -23- of equity should be made more transparent. Finally, in the context of the PTA, the Barundi should be allowed to invest in the region. C,. T1ariffs 90. The taxation of imports, specifically the turnover tax (also known as transaction tax (IT)) and tariffs, has evolved significantly over the past four years, coinciding with the progressive liberalization of imports. With the removal of QRs, tariffs now play a more significant role as instruments of protection. Import taxes are also an important source of fiscal revenues (about 20 percent of fiscal receipts, including grants, in 1989). The increased reliance on the turnover tax (TI, which increased from 12 to 15 percent and began to be collected at source in 1989) has reduced the role of tariffs from the standpoint of revenue generation. Tariffs should now primarily reflect protection and industrial promotion policies. Presently, imports are overtaxed (an average of about 38 percent), which increases production costs and creates an anti-export bias. Moreover, firm-level calculations (para. 36) show that effective tariff protection rates are too high, in spite of the three main tariff reforms implemented since August 1986 (para 90-96). The objective of future reforms should be to minimize distortions in the product market by using tariffs in conjunction with the exchange rate, to provide moderate industrial protection and to reduce the anti-export bias. The analysis that follows was conducted on the SINTIA software. The data were provided by the authorities. Tariff Policies, 1986-91 91. Before 1986, the tariff system in Burundi was unnecessarily complex; there were many applicable rates, high dispersion in the rates, many specific duties, and so on. From the point of view of industrial protection, tariffs tended to be redundant; QRs and the foreign exchange allocation mechanism usually led to effective protection rates far greater than these provided by tariffs. The nomenclature (Brussels Tariff Nomenclature, BTN), still in place today, covered about 2,000 products. Reforms were phased over three periods. Initially, fiscal and entry duties were merged into a single rate, but a statistical tax of 4 percent was maintained, and the number of applicable rates were cut to five, the minimum rate was increased, and the maximum rate was lowered. The second and third phases aimed to reduce distortions further through lower average rates. The key features of the tariff structure are shown below (see Table 3.2). Table 3.2: TARIFF RATES BY BROAD CLASSIFICATION (percent, excludes statistical tax) Period 1986- 1988- 1989- Category 1987 1989 Present Luxury goods 100-110 100-150 100 (% in total) (16) (16) (13) Finished products 50 45 40 (t in total) (22) (22) (27) Essential 15-40 15-25 15 Raw material 15 20 10 Capital goods 20 15 12 Source: Tariff Codes, Ministry of Finance. . -I- , - - ., . .---I - .. . . - e r V. -. -  -24- 92. The aggregate figures show that the many objectives of the reforms were met at the global and sectoral levels (see Table 3.3). The reforms lowered the average tariff, from 25 percent in 1986-87 to 19 percent in 1989. Tariff dispersion, as measured by the standard deviation, more than halved during the first phase of reforms, remaining at about 30 percent since. Tariff collection, however, was inadequate. Between mid-1986 and 1990, about 50 percent of imports came into the country duty- free. Measures to reduce exemptions were ineffective, and the SAL target of keeping exemptions below 40 percent was not attained. 93. At the sectoral level, agriculture initially enjoyed high nominal tariffs, but the rate was cut during each succeeding stage of the reforms. For manufacturing, the rate for finished products fell steadily. Both capital goods and consumer goods also became subject to minimum rates. However, while both rates were about 20 percent in 1987, they fell to slightly more than 10 percent during the 1989 reforms, with intermediate goods facing lower tariffs than capital goods. In general, effective protection in industry fell significantly at first but remained almost unchanged between 1987 and 1989. Table 3.3: STRUCTURE OF TARIFFS IN 1987-91 (percent) STANDARD WEIGHTED IMPORTS COLLECTION SECTOR MEAN DEVIATION MEAN SHARE RATE 1986-87 Whole economy 37 30 25 100 46 Agriculture 61 42 58 2 39 Mining 15 0 15 1 62 Manufacturing 37 30 24 97 46 Consumption goods 57 33 31 38 52 Intermediate goods 25 20 20 33 40 Capital goods 23 16 20 27 41 1988 Whole economy 36 31 24 100 53 Agriculture 63 41 22 1 81 Mining 20 1 20 0 88 Manufacturing 35 30 24 98 52 Consumption goods 55 35 31 40 54 Intermediate goods 26 18 20 29 58 Capital goods 20 16 17 29 38 19-89 Whole economy 30 30 19 100 50 Agriculture 59 44 17 0 63 Mining 11 5 12 0 53 Manufacturing 29 28 19 99 50 Consumption goods 49 32 29 42 52 Intermediate goods 17 18 11 31 51 Capital goods 18 17 13 27 45 L Excludes smatistical/eervice tax. Fuel products subject to specific taxation also excluded. SowEre: Data provided by authorities. * ''F ''- -. sww n -* r w-- >-: *-" X *.-  -25- Tariff Policis 94. The prevailing tariff system remains inadequate. The nomenclature does not allow appropriate categorization of imports. This problem is likely to be resolved once the more appropriate Harmonized System (HS) is adopted in 1992 in the context of the implementation of an improved customs system (SYDONIA). Maximum tariff rates should be lowered to reduce protection. The statistical/service tax is an unnecessary complication, collected in only about 50 percent of cases, and it should be eliminated. Finally, exemptions should be generally eliminated. 95. In order to achieve the objective of lowering effective tariff protection, while encouraging local production, top tariff rates should be about 25 to 30 percent and all goods should face a tariff of at least 5 percent. The consumption of luxury goods should be discouraged by applying an additional 75 percent excise tax to imports and domestic products (Table Sl8). Investments may be encouraged by making a few capital goods subject to zero tariffs (Table S17). Finally, in order to increase transparency of the system, tariff rates should be equalized for products belonging to the same four-digit products group. Such a tariff structure was simulated, using present product definitions (see Table 3.4). The simulation shows that the narrowing of the difference between maximum and minimum rates would result in fewer distortions induced by high tariff spread but decrease the average tariff rates to 11 percent. Table 3.4: TARIFF SIMULATION No OF STAND WEIGHTED SECTOR HEADINGS MEAN DEV. MEAN Whole economy 2,316 13 10 11 Agriculture 83 18 18 6 Mining 35 6 4 6 Manufacturing 2,198 13 10 11 Consumption goods 836 21 7 18 Intermediate goods 759 9 8 6 Capital goods 602 5 7 5 96. Fiscal Impact. The proposed changes would cause a fall in revenues of about 50 percent from present levels", or FBu 1.4 billion, given 1989-90 import levels, exchange rates, and collection rates. Therefore, complementary actions would be needed to cushion the negative revenue impact: (a) the fall in tariffs should be compensated for by an adjustment in the exchange rate (by about 11 percent) to maintain the trade balance; and (b) tariff collection should be boosted by eliminating tariff exemption to less than 40 percent of imports (embassies and transactions covered by international treaties). These measures, together with the recent growth in imports and additional devaluations that may be required to achieve macroeconomic stability (para. 76), would compensate for about 80 percent of the revenue shortfall. The revenue loss from one year to the next could also be cushioned by implementing an alternative tariff structure, with minimum rates of 10 and maximum rates of 30 percent. The simulation of this scenario shows that with appropriate exchange rate action and improved collection efficiency, the fiscal shortfall would be negligible. W~/ Excises on luxury goods would generte revenues equivalent to about PBu 200 Million.  -26- 0. TAXATION 97. Taxation plays a dual role in the Burundi economy: (a) it generates revenues needed to support government spending, consistent with macroeconomic stability; and (b) it influences production decisions by creating a wedge between social (economic) and private returns on investments. Tax exemptions also affect competition and efficiency. The level of tax collection effort in Burundi is adequate."4 However, the direct taxation system distorts investment decisions. On average, during the 1986-89 period receipts from corporate income tax and other taxes accounted for only about 14 percent of total tax revenue, less than FBu 3 billion, which implies it is feasible to reform the system without significant fiscal losses. 98. In theory all registered business entities, both private and public, face the same tax system. The corporate income tax is calculated based on sale receipts, and there is no adjustment for inflation in calculating capital gains or depreciation allowance. Interest expenses are deductible from profits, but dividends distributed are not. All company-level income is taxed at a flat rate of 45 percent. Where net income is less than 2.2 percent of turnover, a minimum tax equal to 1 percent of gross receipts is applied. Losses can be carried forward for a period of four years; however, taxes paid under minimum tax rules cannot be credited against future tax liabilities, 99. Additional company-level taxes include (a) the turnover tax of 15 percent on all goods (inputs and output) and 7 percent on services; (b) local property taxes, collected by the local government in Bujumbura, assessed on land, structures, and vehicles; and (c) the tax on increases in capital equivalent to 1.2 percent of the amount of the capital or increase, payable to the "Tribunal of Commerce. " Another key tax from the investor's point of view is the 20 percent tax levied on dividends, which are not taxed further at the personal level. Key Featres 100. The implementation of the tax code is uneven. Firmns can receive exemptions through the investment code, nonprofit organizations are not subject to the Tr1, PFs are often de facto tax-exempt, some firms are not registered with the authorities, and the informal sector is taxed lightly. The tax administration is weak and suffers from unclear rules and insufficient physical and human resources. The inadequate financial accounts maintained by many enterprises hinder taxation. Finally, the TIT is levied on both industrial input and output a cascading structure that leads to distortions. 101. Taxes "matter" at the firm level because many registered enterprises, particularly large, foreign-owned ones, are actually assessed. A dichotomy can be observed in the patterns of tax receipts for 1988 and 1989, however (see Table 3.5). Half the number of enterprises taxed pay only the minimum tax. Thus, more than 80 percent of the corporate income tax originated from fewer than half the firms. This pattern is indicative of tax evasion and uneven implementation of the fisca provisions. jUI See Burundi - Public Expenditure Report (1990), the World Bank. i r . , 'a - - - .-.' - ..1- , . . f-4 - -r -, . . . . I- I . - II  -27- TabLe 3.5: SU=~ARY OF ACIUAL INCOME TAX RETURNS, 1988&89 (Millions of FBu) 1988 1989 # OF NET TARER I OF NET TAXES FIRM4S TURNOVER INCOME PAID FIRMS TURNOVER I NCOME P-AID Pubtic enterprises Paying regular tax 9 4,375 851 383 5 1,939 444 200 Paying minimum tax 9 14,048 (129) 72 6 14,508 (104) 139 Totat 18 18,423 722 455 11 16,447 340 339 Private anvd Pubic Enternriscs Paying rcqgular tx 1232,933 4,428 1,651 85 20,247 2,812 1,167 Paying minimum tax Ill 25,480 (994) 251 120 26,412 (922) 300 Total 243 58,412 3,434 1,902 205 46,659 1,891 1,467 Source: Ministry of Finance, Tax Department. arinal Effective Tax Rates15 102. A large number of the provisions of the company and personal income tax as well as features of the property tax, transactions tax, and customs duties affect de-cisions to invest in capital assets. The net impact of these taxes can be quantified in marginal effective tax rates (METR), defined as the difference between the gross of tax and the net of tax real retumns to an investment, expressed as a percentage of the gross return. The higher the METR the higher the rate of effective taxation is. 103. The analysis shows that significant distortions exist (see Annex 3). Debt financing is favored over equity financing, particularly where there is inflation and where assets appreciate slowly. Trade taxes on capital goods also significantly lower capital income and discourage investment. Finally, the taxation of realized nominal capital gains raises effective taxation on investments financed with retained earnings. The simulations also show that under reporting and tax holidays are effective in reducing the tax burden. The former is most important in the case of rapidly depreciating assets. The latter affects most investments not financed through debt. Rgonmenirdaioins 104. A precondition to reforms is that tax administration should be revamped. This should include training tax inspectors, creating a computerized tax information system, and improving accounting practices. Moreover, the present tax code is unclear and should be revised to enhance its clarity for both icx author-ities and taxpayers. On the incentives side, amnbitious and deep tax reforms should be an integral part of the strategy to stimulate investments and supply response. These reforms should be driven by a recognition of B'urundi's need to attract foreign and local investment by offering an attractive tax environment. It should thus be inspired by the tax system of such countries as Mauritius. 105. During a recent dialogue with the private sector, the Government has was made aware of the problems caused by the heavy tax burden and indicated its willingness to reform the tax system. In order to improve resource allocation and encourage viable investments, the Goverunment should adopt a tax regime that does not favor certain activities over others; tariffs and the investment code already serve that purpose. A lower rate of corporate income tax is also justified because it would help attract new investments. The revenue losses that would result from reducing most taxes on existing firms are not expected to be very significant. Nevertheless, the timing of changes should be such as to minimize the impact on the fragile fiscal equilibrium. Specific measures to be taken are described below. 15/ See study prepared by Zodrow (199), 'Capital Inc-ome Taxation in the Industrial Sector in Burundi."  -28- 106. In the case of the turnover tax: (a) to avoid undesirable cascading effects, a system of to'x credits on inputs, should be adopted; (b) financial transactions should no longer be subject to the TT', as long as interest rates remain market-determined (para. 197); (c) the 'IT on realized nominal capital gains, with no inflation adjustment, should be eliminated; (d) larger non-profit organizations should be subject to TI on sales; and (e) the appropriatene-ss of the 'FT rate of 15 percent should be evaluated, and the feasibility of and the timetable for the eventual implementation of VAT should be assessed. 107. Dividend taxatio.u is redundant and discourages investment. h present rate of 2 percent should be at least halved and may be eliminated altogether within a reasonable period 108. Incoge..ax refom concern mainly corporate taxes. On the personal side, adequate reforms have already implemented by the Government following IMF recommendations; they have introduced a zero tax rating for incomes equivalent to about twice the country's GNP per capita. On the corporate side, the following measures should be taken: (a) the present rate of taxation is too high and should be lowered to 30 percent, within two to three years, with aligunment with Mauritius (15 percent) being an appropriate five-year objective; (b) the lack of inflation accounting and depreciation allowance, which biases investment incentives toward short-lived assets and debt financing, should be partly counteracted through more rapid depreciation allowances on machinery and equipment, as well as carry forward of losses for five years; (c) in the short term the minimum tax rate could be doubled to discourage tax evasion; (d) banks should be allowed to deduct provisions for bad loans; (e) relatively large informal enterprises, employing 10 people or more, should be taxed moderately on a presumptive basis; and (f) the tax/fee of 1.2 percent on capital (paid to the "gref du tribunal du commerce') should be abrogated. 109. Certain other individual taxes that bring in little revenue should also be revised. Capital gains are taxed at individual rates (present maximum rate is 60 percent) without adjustment for inflation. A lower flat rate of 20 percent is more appropriate. Rental income (a local tax in Bujumbura) is taxed at individual rates based on 80 percent of gross receipts, with interest exemptions for new properties. Actual average marginal rates are about 23 percent. A new single rate of about 15 percent of gross receipts (equivalent to the 'IT could be set to simplify the system and make it more transparent. Finally, government securities should no longer benefit from a tax-exempt status; this tends to distort the interest rate structure. IV. LEGAL AND REGULATORY CONSTADT A. Regulatorv Environment and the Enterprise 110. Administrative regulations hinder businesses in many critical areas, including enterprise creation (incorporation) and initial operation (industrial and commercial licensing). Administrative delays have constrained supply response to liberalization of the external regime. For example, during the second half of the 1980s, incorporation could take a year or more, and the simple procedure of being accredited as an importer took an average of 108 days. This regulatory system originated in the 1970s and 1980s, when layers of bureaucracy built up during succeeding administrations. Procedures became complex and time-consuming and deterred many would-be entrepreneurs. These requirements were justified, in part, by the argument that they would help "shield" private individuals from their own mistakes. Ill. The Government is cognizant of many of the problems associated with the present regulatory framework, and following a directive by the President in the fall of 1990, some of the laws were revised in 1991. In order to help in the process, key aspects of the regulatory system were studied  -29- in the context of this report and proposals for rationalizing the existing system, described below, were discussed with the authorities."6 The objective set was to implement laws consistent with freedom of enterprise. 'fhe process agreed upon is to (a) simplify the system; (b) eliminate long delays; (c) adopt and implement transparent rules; and (d) publish and codify the requirements to reduce private sector uncertainty and deter progressive backsliding. Kevy Wroedur s UAfor- 1991 112. The system of regulation and institutional responsibility existing 1990 was founded on three layers of checks and balances and driven mainly by a dirigiste concept of prior authorization. The first level was reflected in the law that required the prior authorization of the Minister of Justice in order to incorporate an activity. The second level, also often linked to laws, stated that to engage in economic activities one needed further permissions in the form of various accreditation. The third level consisted of procedures, without direct legal foundation, implemented in order to ensure (a) information needs; and (b) economic control. 113. Key institutions involved in incorporation included (a) the Ministry of Justice; (b) technical ministries, particularly the Ministry of Commerce and Industry; (c) the "directeur de notariat," responsible for checking the conformity of enterprises' statutes with the law; and (d) the Tribunal of Commerce, which maintains the company registry. The Ministry of Commerce and Industry also played the role of intermediary on behalf of the Ministry of Finance and the Chamber of Commerce and Industry of Burundi (CCIB), checking on whether the enterprise had been registered with these institutions, and also collected the obligatory savings. This ministry, together with the BRB, was responsible for regulating external transactions and commercial licensing. Obtaining Legal Status and lPermits 114. Incorporation and industrial licensing was governed by a series of long and cumbersome procedures. The following six stages could be identified: (i) Prior authorization had to be obtained from the Minister of Justice. Technically, refusal was possible on the grounds that (a) that company's statutes did not conform with the law; (b) one of the founders was incapacitated; and (c) the creation of the company ran against the "general interest. Additional information required included: (a) three copies of the statutes; (b) an extract of judicial/police records for all the partners; (c) proof of identity delivered by local authorities; (d) a document delivered by tribunals stating that nor.e of the partners had experienced bankruptcy; (e) certification from a bank that equity had been paid in; and (f) an assessment of the value of contribution in kind, delivered by appraisers. (ii) The notion of general interest was undefined and the Minister did not have to justify his refusal should he exercise his prerogative. In practice, the Minister of Justice requested the approval of technical ministries. Requests for incorporation was not granted without a favorable written response. 11