Guinea - Health and Nutrition Sector Project

The World Bank FOR OMCAL USE ONLY MI CROGRAPHI CS Report No: P- 6024 GUI Rpot N. P-6024-GU Type: MOP DORANDUM AND TION OF THE PRESIDENT OF THE INTOENTIONAL DEVELOPMET ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMNTOM EQUIVALENT TO SDR 17.4 HILLION TO THE REPUBLIC OF GUIN FOR A ELTH AND NUTITIMON SECTOR PROJECT FEBRUARY 7, 1994 This docume has a restited distibution and may be used by ciDpi oy in th perfoamae of their official duties its contents may not othewise be disclosed wid Woldd Ban authoriation.  CllRRENCY EOUIVMENTS Currency Unit = Guinean Franc (OF) US$1 = GF953 GFI = US$0.001 GFl000 = US$1.05 I m = 1.09 yd 1 m2 = 10.76 sq ft 1 km2 = 0.38 sq mi ABREATIONS AnS CSP Project Review Committee CTC Technical Coordinating Committee ESW Economic and Sector Work MSPAS Ministry of Public Health and Social Affairs EMALAIEAR January 1 - December 31  FOR OMCIL USE ONLY REPUBLIC OF GUINEA HEALTH AND NUTRMON SECTOR PRI;Ci CREAND PROlE SURRY Government of Guinea AmQImt: SDR 17.4 million (US$24.6 million equivalent) TM: Standard IDA, with 40 years maturity Fnaningg Plan: (US$ million, net of duties and taxes) Felg InL l IDA 19.2 5.4 24.6 Government 0.0 1.9 1.9 Beneficiaries 0 8 20.0 7.3 27.3 Rate of Retur: Not applicable Staff AprRWaisa MMpQf: No. 11684-GUI IBRD No. 25378 rThis document has a restricted distribution and may be used by reipients onfs,, :n performancez |of their offcWa duties. Its contents may not otheowie be disclosed without W. e. d Dat lA authorization.|  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENrT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GUINEA FOR A HEALTH AND NUTrRMTON SEC=YRP013I 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Guinea for SDR 17.4 million, the equivalent of US$24.6 million, on standard IDA terms with a maturity of 40 years. This credit would help finance a project to increase coverage and quality of health services in seven of Guinea's 33 prefectures and to improve resource mobilization and overall management of the health sector. More limited serv*es support would also be provided to the five other prefectures covered under the previous IDA health project (Cr. 1837-GUI). In addition, decentralization of the management system would be supported in 18 prefectures (the above-mentioned 12 and six others in the same two regions). Part 1: Country Pol8des and Bank Group's-AsIsistane StrMe A. Introductlion 1.1 This Country Assistance Strategy paper documents recent positive developments in Guinea's economic performance, which provide an encouraging context for fitre development assistance. Guinea has completed its most pressing tasks of stabilization and structural adjustmet, and has embraced a democratic process. It now needs to deepen its adjustment effort so as to enable its population to enjoy the benefits of sustained growth. Over the medium term, Guinea wil need to continue to rely on the mining sector as the main source of foreign exchange and govenment revenue, while intensifying Its diversification activities and pursuing an aggressive strategy to remove the constraints to agricultural activity as the motor for long-term economic growth. A. Rack==ld 1.2 Guinea is a country with over 6 million inhabitants and a high population growth. It is richly endowed with agricultural, mineral and energy resources. Yet its per capita income is only $537 1. Its social indicators are among the lowest in Sub-Saharan Africa: about a quart of the chfldren die before the age of five; life expectancy is 44 years; only 34 percent of school-age children have access to primary education; and 76 percent of the adult population Is illiterate. 1.3 From the late 1950's until the mid-1980's, the Government of Guinea pursued policies designed to assert central control over the economy. The once dynamic agricultural sector regressed to subsistence production, private activity went underground, and the country became heavily dependent on mining eWorts. An ambitious public investment program failed to create a modern stao-owned manufacturing sector, producing a substantial debt burden and incipient arrears. The exchange rat became heavily overvalued, non-mining tax revenues shrank, right were sevedy curtailed, the better educated migrated abroad in large numbers, inadequate education and health policies left the population ill-prepared for the necessary modernization of the country, state banks and public enterprises became insolvent, and the nation's existing infrastructure crumbled. As a result of economic mismanagement, annual economic growth averaged only 2 percent during the entire period, while demographic growth accelerated to 2.8 percent per year. In 1986, GNP per capita was I A recent update of GDP figures in the country were used for the tables in Annex A4. As a result, GDP per capita was increased from the 1991 figure of US$460 used in the 1993 World Development Report, to US$537. These data are currently being reviewed by the Bank and the IW.  2 barely US$300. For all practical purposes, at the end of this period, the country's formal economic system had ceased to function, with the exception of mining activity. 1.4 After the death of President Sekou Toure in 1984, the new Government of President Conte embarked on fundamental changes in the economic and political processes. Pollowlng the reintroduction of civil rights and freedom of expression, a new constitution was adopted in December 1990 which allowed for the creation of political parties. Presidential elections took place on December 19, 1993. They will be followed by legislative elections in early 1994. C. Performanc 1.5 Since the adoption of its economic stabilization and adjustment program in 1985, Guinea has been implementing policies aimed to promote sustainable growth by reducing the role of the state in the economy. Major steps undertaken by the Government include the introduction of a new currency (the Guinean franc), at a rate that implied a 93 percent rate of depreciation, and the adoption of a flexible exchange rate system based on a managed float pegged to the parallel market; dismantling of th'. price control system; elimination of import licensing procedures; application of a uniform tariff of 10 percent for most goods; introduction of real positive interest rates; and improved control over public finances. By most aceounts, Guinea could be considered among the better performers of Sub-Saharan Africa. In a somewhat uneven manner, the country has undergone its most pressing period of stabilization and is now ready to face its longer-term development constaints. 1.6 The Government's program has resulted in real economic grgwh. GDP growth averaged 3.8 percent per annum during 1987-92 -an increase in real per capita income of about 1 percent per annum. lTis is nearly double average annual GDP growth of 2 percent during the 1958- 1984 period. Furthermore, GDP growth may be underestmated as nmch as 30-40 percent on account of informal sector activities in construction, small manufacturing and services, which have incrsed over the period. The tightening of fiscal policies has contributed to a significant reduction of inflation. Following the 1986 devaluation, consumer prices rose by 72 percent during 1986, but the rate of inflation declined to about 20 percent in 1988. It increased to 30 percent in 1990, largely as a result of a stsrp dse in the domestic prices of petroleum, before slowing down again. It has steadily declined for the past three years and is estimated to stand at less than 10 percent in 1993. 1.7 Guinea's fiscal and balance-of-payment performance, however, remains influenced by fluctuains in revenues from mining, which account for 88 percent of export earnings and 58 percent of Government revenue. The current account deficit, which had improved significantly in 1986-89, rose to 9 percent of GDP in 1992, reflecting a substantial drop in bauxite and alumina export earnings. Preliminary esmates for 1993 indicate that the deficit hias been reduced to 7.6 percent of GDP and is in line with program targets. 1.8 Similarly, the overall budgetary deficit improved in 198648 and has stabilized at 8 percent of GDP. The primary budget deficit, however, was reduced from 9.4 percent of GDP in 1986, to 3.3 percent of GDP in 1992. 2 This important flsca adjustment has been the result of a gradual increase in domestic non-mining revenue mobilization, largely from higher petroleum taxes and customs daties, from 2 percent of GDP in 1986 to almost 7 percent of GDP in 1992, and - improved control over current spending, despite substantial wage increases in 1988 and 1991. The 2 The primary budget balance, which in this case is defined as Government revenues 'excluding mining revenue and foreign grants), minus non-interest current expendiures and domestically-finced investment is considered a good indicuor of fiscal adjustnmt a it involves only items on which the Government has discretionary power.  3 sharp decline in mining export prices led to a serious reduction of the sector's contribution to government finances. This has severely constrained government revenues and resulted in the accumulation of extemal debt payment arrears. 1.9 The fiscal program for 1993 aimed at reducing the overall budget deficit throgh a combination of improved non-mining revenue collection and a containment of current expenditure. A drop in non-mining revenues during the last quarter of 1992 did not allow the Government to meet ESAF fiscal performance targets and, as a consequence, Guinea remains under a shadow program. An IMF mission which visited the country from November 6 to 23, 1993 has found that the Government has met shadow program targets up to September 1993 on the fiscal deficit. Despite improvements in the performance of non-mining revenue -and in the collection of customs duties - the Government effected substantial cuts in non-wage recurrent expenditure and the public investment budget to meet IMF targets. A joint IMF/Bank mission scheduled for February 1994 expects to review revenue mobilization efforts and expenditure performance for the last quarter of 1993 and to agree on a realistic 1994 budget as the basis for a new ESAF arrangement. 1.10 The agriculure sector has grown in recent years, and higher rura incomes have, in tr, boosted overall activity, particularly in the trade sector. National account esdmates show that value added in the ;kricultural sector grew by about 3 percent per annum in 1989-91 and more than 4 percent in 1992. Production of food grains rose by over 60 percent between 1989 and 1992, compared to a declining trend in the first half of the 1980's. Overall, the growth of non-mining GDP has remained at a high level, averaging 4.5 per annum during 1988-92. While agriculturd sector paformance has surpassed that of neighbouring countries, it is yet below the country's potential. 1.11 Key objectives of the Government's structural adjustment program were improving fnancial intermeeiation, disengaging the state from commercial activities, Improving civil service management, giving greater attention to human resources needs, and shifting public expenditure toward economic and social Improvement. 1.12 The Government made progress in reforming the flnanmial &=. By late 1985, all state-owned banks had been liquidated and new commercial banks were established with foreign participation. New banking and central bank regulations were adopted. Partly as a result of weak central bank supervision, and partly because of the failing of the legal and judicial famework in enforcing business law, the financial position of commercial banks has deteriorated. Two banks did not meet prudential regulations introduced in 1991; one has been recently restructured, and the second is in the process of being restructured. The financial system is in need of a ;uch deeper restructuring, in order to allow the Central Bank to fulfill its fundamental objectives of monetary policy, supervision of the banking system and, ultimately, mobilization of the resources needed for the country's sustained growth. 1.13 The restructuring of Guinea's public enterris sector has been another area of improvement and is an integral part of the Government's efforts to reduce the role of the state in the economy and strengthen the public finances. Of a total of 200 public enterprises operaing in the commercial, industrial and services sectors, 90 were privatized or liquidated during 1988. After a temporary slowdown of the privatization effort, the Government has undertaken to reform enterprises of strategic importance. As part of this effort, it has privatized petroleum distribution, has successfully transferred the responsibility for the management of Guinea's urban water supply system to private hands, and is completing similar private management arrangements for electricity generation and distribution, telecommunications and postal services. 1.14 Government objectives since 1985 have been to reduce the number of fivijvj staff in cental government activities and to control the wage bill. During the first phase of this nrogram (1986V1991), the Government reduced the number of staff bY nearly 40 nercent. Currenly.  4 the civil service force stands at 50,000, which is low when compared to most neighbouring counties. After subsial wage increases In 1991, a computerized civil service management system was established, which resulted in a 10 percent reduction of the wage bill. 1.15 Guinea has been able to achieve progress in its h1uuMDeaa = d .nl en1Jua. Poverty issues are being specifically addressed by promoting access to income generating activities and Improved access to social services. While improvements have been achieved, given the very low starting base, sustained efforts are required to bring social indicators to acceptable standards. After a near-breakdown of education services, real expenditure fur eiduaion has inreased significantly, fom 12 percent of total government current expenditure in 1989 to 18 percent in 1992, and primary education has been graned the highest priority. Net primary school enrollments have increased from 28 percent in the mid-1980's to 34 percent In 1992. Nevertheless, they remain dismally low, and are even lower for girls (21 percent). Considerable attention Is being paid to factors whicb affeat the quality of education -including improvements in student/teacher ratios and the availability of teachn materis- as well as girls' enrollment. 1.16 After the nea collapse of its baleh system, a new health policy was adopted in 1987 to improve coverage, quality and efficiency. Overall, Guinea has made considerable strides In a relatively short period: primary health care coverage increased from 7 percent In 1987, to nealy 40 percent in 1991, and child vacction coverage increased from 5 percent to 60 percent in some areas during the same period. Particular attention is being paid to matenalchild care, family planning, and basic preventive and curative health care. While some progress has been made to improve sector management, broader sectoral and institutional issues, such as the overall level of budget resources allocated to the sector, insufficient decenalization, and personnel and finncial magement problems stll constiue impediments to furfther improvements of the health care sitem. 1.17 Concomitandy with these changes, the PIP was restructured to exclude several non viable project, and to give a higher priority to the rehabilitation of nmi nkausI-r eand urban :rice and particularly, transport infrastructure and urban sanitation, to meet objectives of greater efficiency, productivity and employment creation through labour-intensive works executed by loca enterprises. 1.18 The above stabilization and adjustment reforms have been supported by IDA and the IMP, with co-financing support from France, the United States, the EEC and ADB. IMA support has been in the form of two macroeconomic adjustment credits (SALs) and two sectoral adjustment operations (private sector and education). IMF support has included two stand-by arrangements In 1986 and 1987. Guinea has been under an ESAF arrangement since November 1991, and under a shadow program since April 1993. D. External Environment 1.19 The principal issue confronting Guinea regarding external factors Is its dependency on the mining sector, particularly bauxite and alumina, as a source of foreign exchange and government revenue. The volatility of foreign exchange earnings which Is unavoidably linked to a nearly single- export economy has rendered the country's structural adjustment process more difficult and has been largely responsible for an uneven fiscal performance. GuinWa's long-term development strtegy will necessarily need to stress the diversification of its export base away from mining and to concentrate on the agricultural sector as the focal point of future GDP growth. Nevertheless, the country's financing needs over the medium term wIll necessitate the continued growth of the mining sector as a source of revenue. Its yet untapped mining resources of gold, diamonds and iron ore, the recent interest of foreign investors in Guinea, and renewed Government efforts to improve the environment under which foreign investment could expand, should result in real annual growth of this sector.  5 expected to increase from its current 2 percent to 4 percent in 1996, with considerable potential for even higher growth thereafter. There are, however, genuine concerns over the damage to the environment that mining can create. The Government is addressing these issues in the context of the ongoing revisions of the legal and regulatory framework for the mining sector, which will place particular emphasis on specific investment requirements to prevent environmental degradation, in both the industrial and artisanal mining sub-sectors. 1.20 Despite sizable debt relief, particularly in 1989 and in 1992, Guinea's external debt burden has remained heavy. Total debt ouanding stood at US$2.6 billion as of December 31, 1992, and was equivalent to about 80 percent of GDP in 1992. Total external debt service due was equivalent to about 33 percent of export earnings as of December 31, 1992. Debt service paid in 1992, however, was equivalent to 73 percent of total service due; the remaining debt service due was rescheduled in November, 1992. Gufnea's debt outstanding and disbursed (DOD) to the Bank group as a share of total debt stood at 21 percent at the end of 1992. Debt senr.ce to IDA was equivalent to 25 percent of toal debt service obligations at the end of 1992; however, it declined considerably in 199% (to just 3 percent) after the old IBRD portfolio was fully repait. Execuition of an IMFdupponed ESAF is expected to resut in furter restructuring of Guinea's exten debt under the Enhanced Toronto Convention. Guinea would also benefit from IDA's Debt Reduction Facility. LE. 5m mLQWnifr Obes and Poides 1.21 A hard look at where Guinea stood in 1985 in terms of economic and social policy and where it stnds now demonstrates the substantial progress achieved and the Govmentes fim resolution to change previously entrenched behavioral patterns. T'e economic reforms lmplemented so far under the policy framework have direciy contributed to generate real positive growth. Yet, these effots have not been sufficient to sustain a higher level of GDP growth. 1.22 'me Government intends to continue to put in place the fimdamentals for develom. On the economic front, the principles of stabilizing, libelizing and privaziag the economy remain valid, and are necessary to consolidate and deepen the on-going eonmic refrm process. There are, nevertheless, a number of issues that arise from the Government's agenda. A centrat Moncem is the need to further reshape the role of the public sector and to improve the enabling environment for private sector-led growth. In order to address issues of goverace, an overriding principle of such a transformation would be to establish and adminstr a regulatory framework which creates a level field for all. Financial sector management must be improved. Continued improvement of the country's infrastructre must be susd throug improveme in economic efficiency. Seod, and equally important to such an agenda, is the fact that the country bas not invested sufficiently in the development of its human resource base; it remains a long term constaint to economic growti that must be addressed. idb is the need to effect changes In sectoral policy and in the institutional framework of the country's key productive sectors - mining and agriculture -to elicit the needed response. FnllWy, the country's capacity to manage its natral resource base and its enviromment must be improved. 1.23 Consistent with the objective to further redefine the role of government In the economy an -address issues of governance, the Government seeks to effect ctanges not only on nublic administration behaviour and skills but on continued Improvement of the efficlency of the use of public resources. 1.24 Redefinition, of the Govemment's role bas so far concentrated largely on ciil savridi refrm In the coming years, Guinea's public adminstration will need to undergo profod cbnges to adapt itself to the creased role of the private sector. The next pbafe of civil service reform wfll theref teed to focus on the redefinidon of objectives and specific aeas of responsibility for each of, ihe central and ublic sector institutions. includina improvements on their skill mix. so as to allow  6 them to become part of the enabling environment -not an obstacle- for private sector development. A key area of reform is the restructuring of Guinea's judicial system, which until recently has constituted an impediment to private initiative. Main reforms being implemented are the creation of a disciplinary council within the Council of Magistrates to reinforce the ethical standards of the legal profession, the professional training of magistrates, and the effective execution of judicial decisions, particularly as regards financial contract disputes. Over the medium term, revision of the compensation structure for magistrates and review of budgetary allocatons for the Judiciary remain key objectives. 1.25 The Government's prora to restructure. privatize and liquidate public enterprises will be continued as a fundamenal measure to reduce the role of the state In the economy and to correct infrastructre deficiencies. Despite the adoption of a privatization law In April 1993, Government delayed actions to privatize or restructure the larger, very inefficient publie; enterprises, with a corresponding negative impact on the public budget and reduced effectiveness of infraucture services. G(wvernment is now completing arrangements to itroduce private management of power distribution and the post and telecommunications systems,with specific project assistance from IDA and other donors. Government is also focussing on a more systematic approach to evaluation of privatization propossl with assistance under an IDA-financed technical assistnce project. Beyond these ongobg efforts, Government decision is needed to liquidate two key revenue-loss enterprises - the national airline (Air Guinde), and the public transportation company (SOGETRAG)- and to privarae the puh'lic equipment agency (SOGUITRO), all three of which are key for continued IDA involvement in the rehabilitaion of the transport sector. Although Air-Guinde was put under new management and is no longer receiving direct Government subsidies, it is a long way away from being financiahlly viable. In the longer runt, expenditure savings resulting from Government action on these entpses would result in improved resource allocations for maintnce of transport infratcture, which at this point consutes a major management containt An additional 43 public enterprises with commercial functions are being examined for possible privatzation. 1.26 After the restructuring of the banking system in 1986, it was hoped that Guinea's inancia system would gradually diversify and expand. Major impediments to the development of bank credit have been the lack of collateral and difficulties in the enforcement of financal contracts. Reflecting a general increase in non-performing loans, the financial position of commercial banks has deteriorated, and two banks did not meet prudential regulations established in 1991. Their restructuring is nearly completed. Criical shortcomings have been the de facto granting by the Central Bank of waivers on prudential regulations; banking regulations which resulted in excessively risky concentration of loans of up to 100 percent of bank net equit to a single borrower, th bsen'v of unified accounting and audit systems applying to banks; poor risk assessment capabilities; and inadequate monitoring mechanisms on compliance with foreign exchange requirements and prudentia reguation. Ihe already mentioned inadequacies of the legal and judicial system in the application of business law have also affected the financial position of the banking system. Government is implementing a major program of financial reforms, including the redesign of major cenral bank policy instruments and improvements in finncial intermediation through the introduction of treasuy bills. The first treasure bill auction, which took place in mIdDecember, 1993 was considered a success. Improvements are being made to the process at a second auction being held in February, 1994 with asistance from the Bank's financial complex. 1.27 To address one of Guinea's major development constraints, am ro development strategyis being implemented. Key areas of concern are population growth and poRM with particular emphasis on women and children, and the provision of socalsrvce. ouiis' population Is concentated In rural areas: nearly 75 percent derives its income from agricultral activities, mostiy of a subsistenco n%r. There ate indications that the situation of the rMi r is gradually improving as tesult of the liberalization of the eoonomy and the ongoing rehabilitation of transport Infraructure, which enables producers to market their products. Their prosets wi  7 inevitably continue to be tied to future economic growth. Government, with IDA assistance, Is also building the capacity of key government institutions through training to assess poverty issues and Is promoting initiatives to create small-scale and micro-enterprises. 1.28 In reoent years, rban pvet has become an important problem, particularly in Conakry. Rural migrants and large numbers of refugees from neighbouring countries have settled In squatter neighbourhoods lacking basic services of water, electricity, solid waste collection, and saniary disposal of human waste. Industrial and port pollution contribute to the general deteriration of the quality of life. Government programs, supported by IDA aitd other donors, to provide Conakry and secondary cities with basic urban infrastructure and services have so far been insufficient and are being intensified through the involvement of beneficiaries and local enterprises. Major constraints are the limited managerial capacity of urban institutions and the inadequate maintenance of works and equipment. 1.29 Sin e 1990, there has been a sharp improvement in the share of education in the current budget, and priority is being given to improving access to priary education, where enrollments are expected to increase from th*. wrent 34 percent to some 40 percent over the next ten yeas. Issues affecting the edutiga ar are of an institutional and financial nature, but eforts to decentralize maagement are expected to result in improvements. Of equal importance, however, is the issue of whether the education system continues to be relevant to Guinea's economic development objectives. Government has shown strong commitment to the reform of the system by fowssing on basic education, the provision of public education services, which wt go beyond the elementary skills of literacy and numeracy to provide young people with skills for employment In both the formal and informal sectors. Women's access to the education system is limited. lhus, great attention will be paid to the insdtutionalization of programs designed to enhance girls education. 1.30 While substantial progress has been achieved in providing health services to a larger proportion of t&O population, and particularly to the rural poor, much needs to be done to inprove the quality and coverage of health services, and to address issues of sector managment, efficiency, and overall susanability of the health care system. At the core of these problems is the fact that current budget allocations for health have steadily declined. Current spending fell from 5.2 percent of total current budget expenditure in the late 1970's to 2 percent in 1991. It increased to 3 percent of tOW current expenditure in 1993, but remains insufficient to enable the Government to provide basic health care to the Guinean population. Recognizing these consaints, the Government is commit to increase current budget allocations for the sector, to accelerate decentralization as a means to improve sector management, to institute a new hospital policy, and to support the expansion of cost recovery and the role of the community in managing health care. 1.31 Guinea is endowed with one of the highest concenatwion of miuerat resources in Africa: an estimated 25 billion tons of bauxite deposits, equivalent to one-third of known world deposits; considerable proven but unexploited iron ore resources; large deposits of diamonds with an estimated potential annual output of about 250,000 carats; and substantial gold deposits, with an estimated potential yield of 10-15 tons per year. Geological exploration indicates that there is some potential for other minerals as well, including lead, zinc, silver, uranium, nickel and platinum. Only a fraction of this resource base, however, is being exploited. Between 1985-91, foreign investment in Guinea's mining sector amounted to some US$600 million in assets. Government investment in mining-related transport infrastructure raises total investment in mining to about US$1 billion. About three-quarters of this investment is in bauxite. Significant artisanal activity takes place in gold and diamonds. 1.32 Weak world demand in the past four years has caused a substantial decline in mining export prices and has forestalled new investment in mining. Yet, the mining sector will need to  8 the rate of economic growth, not only because of its current importance in the ftnances of the country, but because of the above-mentioned untapped exploitable resources. Notwithstanding the current environment for investment, several major foreign investors have been working alongside the Guinean Authorities on arrangements that would allow for private mining ventures. 1.33 Interna constraints that slowdown foreign investment decisions are: (i) the extent to which the existing framework may have reduced Guinea's competitiveness vis-a-vis other producers. For bauxite, Guinean prices In 1988 were higher than those of In Brazil, Jamaica and Australia, reflecting higher costs in exploitation, transportation and taxes. Guinea's competitiveness has improved in recent years, but remains below that of other producers; (ii) the Government's insistance on a high degree of participation in mining ventures; and (iii) even when the new mining code itoduced in 1986 sought to streamline and standardize investment incentives, it continued togrant broad discretionary powers to Government in their administration. 1.34 Bank Group financing has supported mining activity in the past. It has o assisted the Government in reviewing the sector's major constraints, and contributed in a substantive way to the adoption of a new mining policy in November of 1991. While the new policy advocates retenchment by the state from the ownership and operation of mines, revision of the mining code, reintbrcement of Its role of promoter and regulator, and application of a new tax regulation - Government has applied this policy unevenly. In November 1993, however, the Government signed a contract allowing for total private ownership of a gold mine partially financed by IFC, and is negotiating fill private ownership with two other mining companies. It has also initiated restructurig of its largest bauxite company. Beyond these effots, Government needs to implement the key actions of its new policy and to remove instiutional bottlenecks to investment. Tbe negative effects of mineral exploitation on the environment are also being addressed in the context of the legal and regulatory fiamework reform, though the establishment of a system of incentives for Investment to address environmental issues. 1.35 Acgdulure was traditionally the dominant economic activity in Guinea. Its contibution to total GDP in 1965 was about 57 percent. It declined to 45 percent in 1981, and to less fan 30 perent in 1989. Severe policy distortions have been the primary cause of this trend. With the introduction in 1985 of price liberalization for most food Items, and the elimination of food import monopolies, the Government sought to promote the growth of the sector. In the face of an inadequate response, it adopted in 1991 a statement of aicultural policy which focussed on the development of high potential crops -rice and vegetAble oils- to achieve food security In the short run; coffee and horticutural crops, to resume growth in traditional exports; and a program to diversify exports. In support of production, a nominal tariff of 20 percent on imported rice was established, and the remaining administered prices for agricultural exports were to be removed. Despite high levels of public investment, backed by IDA and donor assistance, the sector is far from recapturing its historical contribution to GDP. The central reason is that reform actions have not been flly implemented and investment has continued largely in the hands of the state, becoming increasingly inefficient. The low investment in agriculture reflects the continued inadequacy of the regulatory and incentive framework. The sector's potential remains high, both for domestic production and for traditional exports products (coffee, cotton), where exchange rate and wage factors would contribute to competitiveness, and in the long run, for diversification of production for exports within the region and abroad. 1.36 The Government is seeking to identify and temove constraints to agricultural growth, and has explicitly requested Bank assistance to carry out this work. Until recently, the concept of individual land rights did not exist. A new land rights code establishing private owmership was adopted in 1987, but i.9 application has been limited. Likewise, while the Government has promoted the creation of producer associations and cooperatives, the response has been slow. Althougb an imnrnvmnpnt over naSt nnlicies. the rei,i,latnrv framework stiffiem from a combinatfin of over-  9 legislatlon and under-capacity to apply regulations and monitor reforms. The institutional apparatus is plagued with numerous entities with ll-defined and overlapping mandates, and no clear accountability. This is true of the several entities charged with production, and of key services of the Ministry of Agriculture. Consideration would need to be given to privatization or dismantling of public etities involved In production, and to reducing public employment in agriculture. Remaining price and trade constraints need to be removed. Improvements in the overall environment for credit, product marketing, and technical innovation are necessary ingredients for an appropriate market respase. 1.37 Guinea is confronted with four serious enviwromenta issues: rapid urbazatiorn, increasing rural population density, large number of refugees, and the impact of mining activities. Rapid urban growth in Conakry (5 percent per annum) is exacerbated by serious drainage problems, the lack of a comprehensive strategy for human waste disposal and inadequate solid waste collection services. Ongoing Govenment efforts to decentralize services will provid, an opportunity to improve the urban environment through improved programming and planning of investments, local resource mobilization and community participati :n. Rural population density, aggravated by refugees frm neighbouring counties, combined with traditional shifting slash-and-burn techniques, is cnt to deforestation and soil erosion. Mining companies are contribufting to dust and river pollution While Govenument was initially slow in responding to environmental concerns, our dWogue on natural resource management and the environment has er. auraged the Goverment to speed up the preparation of an Environmental Action Plan which can serve as the basis for donor copation. Ihe Action Plan has been prepared through extensive consultation with the various grOUps affcted, and is expected to be approved by the Government before June 1994. W. II)A' Antrv Adn t Y 1.38 This section (a) summariz IDA's assistance objectives and aeas of priort, (b) proposes fure lending levels and composition; and (c) highlights portfolio manageent issues. Finally, it discusses the role of FIAS, IFC and MIGA, and cooperation with other donors. 1.39 IDA's strategy will support the Governmen's objectivos, which seek to inesf the change in economic management initiated in 1986 in support of sustinable developmen Macroeconomic management issues will remain in the forefinut, and will reqire continued focus on domestic resource mobilizadon and measures to improve tax collection. A fudamenal redefinition of the roles of the private and public ectors, strict adherence to tight fiscal discipline, and a subtanti reduction In regulatory and legal impediments to economic activity -patcularly in mining and agriculture- are crucial to private sector-led growth. On social Isues, the Government's goals are to (a) improve services that Government should provide through dcentalized management of these activities; and (b) promote grassroots participation at the local level in the -rision of these services. 1.40 The Guinean Administration has underscored the importance of remaning fully on course with the above policies in order to gradually improve real GDP growt in the next tree yean; from 3.6 percent in 1993 to 4.8 percent by 1996. This is expected to be supported by growth in the mining sector (from its curet level of 2 percent to 4 percent in 1996), and growth In non-mining activity (from 4 percent in 1993 to 5 percent in 1996). Nevertheless, the current account deficit of th balanceof-payments is expected to remain at about 10 percent of GDP for the entire period which ends in 1996, and to begin to decline only in 1997. Ibis situation is th* resultof two factors: the fi- relates to the projected low prices of mining exports, a in pacular, of bauxite and alumilum the second rela to the level of imports of intermediate and capital goods that a needed fo0susta GDP growth. Beginni in 1997, the current acount balance is expided to imp as eft to 4irsfy snd mnsand thAern'nt hbs h&vin t shonw riientS In,mvall tP.nrm hoeAu,r. flenina't nnd br. --  10 balance-of-payments support wIll continue to be sizeable. IDA is prepared to be a key player by providing direct assistance and mobilizing resources from the donor community at a Consultative Group meeting tentatively scheduled for September 1994. 1.41 At the political level, the Presidential elections held oti December 19, 1993 have assured continuity over current economic and social policies, and the upcoming legislative elections in ealy 1994 wUi serve to cement the process of market re! Tns. On these bases, the new Administration should be able to maintain the current hign levels of donor assistance. To this end, the IMF and IDA intend to intensify the dialogue on short-term macroeconomic issues in order to strengthen the basis for actions involving longer term developmental objectives. IDA had in the past highlighted issues of governance as possible impediments to government capacity to Implement reforms. The recenly initdated reform of Guinea's judicial system -a cornerstone for improved governance- and the proposed involvement of IDA under a future Financial Sector Restruturing Operation, and of other donors in Its implementation, go a long way to demonstae the Govemment's cmmitment to improvement in this critid area. 1.42 IDA's proposed assistance strategy signals a shift from previous years. It is centered on one principal objective: to help p.riv initiative to play increasingly the leading role in a market- oriented economy. Such a strategy, however, can only be achieved if a sound macroeconomic magement environment is maintained, and If fundamental changes are affected in key areas of actvity. Central administration as well as public sector institutions must adapt to the new evmironment and provide a more suppordve role to the private sector. The finanial sector must be restructured. Povty alleviation and human resource development and policies must be pursued. S2=W refrm must be undertaken in mining and agriculture. Environmenal deterioration must be arested through better magement of the country's atural resources. Economic Infiastructure servies must continue to improve as part of the enabling environment for private sector acdvity and for employment generation through abor-intensive works. 1.43 IDA will support the above strategy by intensive development of 13 and a systematic Meny ofagroli MMerLoImull. The ESW program will increasingly use a participatory approach through the involvement of local technical staff, and includes: (a) the preprton of a county economic memorandum; (b) a public sector expenditure review with regular updas and follow-up; (c) a poverty assessment; (d) assistance in the preparation of a natIonal envirnment acton plan, followed by a Country Envimental Strategy in FY95; (e) agriculural sector work; and (t) an update of the constants to mining sector growth. Pundamental field work and data gathering for the country economic memorandum will take place in the second half-of FY94, with completion of the report schedued for early FY95. The poverty asse;sment was completed and will be disussed with the Government during the second half of FY94. The nationa1 environment action plan wJi be completed in PY94, and the Environmental Strategy in FY95. A public secoor expenditure review is schedued for FY95. This task responds to a specific request of the Government to assiSt it in detemining expendiure priorides, particularly in the investment program. An agricultural sector memorandum which is to focus on the policy and institutional constan and the sector's poteni for development will be completed in FY95. The constraints to the mining sector's efficiency and growth identified in a previous sector report would be reviewed and updated in FY95. Work on the refrm of the financial sector and the strategy for the transport sector have recently been completed. A Country Portfolio Perfomance Review (CPPR) Is scheduled fur March 1994; it undersores the imortanc being given to effective portfolio management, which has been intensified by the high policy content of the proposed program, and by the complementarity of investment lending to the policy environment.  11 Lending Ptioiixg 1.44 Private Sector Activity. IDA support for private sector-led development would be cented on retrenchment of the state from economic activity. Continuation of the Government's program to improve public administration, to restructre, privatize or liquidate public entepis, and to improve the policy frmework for mining activity will remain central theme of a proposed macroeconomic adjustment lendn operation in FY95. On public administation reform, the proposed operation would seek to effect fundamental improvements in the management of administrative services, involving not only a better definition of skill profiles to match redefined infsdonal and managerial objectives, but a personnel management system that allows for competitve recruitment, and for an appropriate incentive and career development structure. Such an effort will require a full consensus of Government and the international donor community. On public enterprise reform, effors would be centered first on achieving the liquidation and privatizton of the three major transport enterprises mentioned in para. 1.25, and on continued privatization of public services and commerial enterpises. On tae mining sector, key areas to be addressed in the proposed operation are foreign investment regulations, the tax legislation, incentives for investment in environmenta protection, the removal of institutional botdenecks, and, specifically measures to impre the cost struue of key bauxite companies where Government participation is predominant. 1.45 Complementary to the above would be an economic management capacity building prect in FY94. Lerning from past IDA experience, where assistance was too dispersed, encompassing too many institutions to achieve an impact, and where technical assistance did not provide for an adequate trser of skills, the proposed project would be directed to a single enti, the Ministy of Plan and Fitance. Ihis will help to srengen both management and technical sl of macroeconomic analysis and planning and of the public investment programming fnctons. he- .PI process would be restuctured to give priority to areas where government invesM t is most efficient and to take in account the maintenance needs of rural, urban and lnter-urbu roads and services. Assistmce under this operaion and those of all future IDA operations will conceate on the transfer of technical skills, to provide guidance and traing t6 help nationals to cary out their responsibilities. 1.46 A first financial sector reform program under SAL I supported the individual restructuring of financial institutions, but did not pay sufficient attention to the monetary, reuaty and legal environment within which fincial institutions operate. A ananW a= adjutment operation in FY94 would focus on: (a) policy improvements involving development of instruments for financial intermediation; (b) government disengagement from the capital and management structure of financial instttions; (C) adoption of a more coherent stem of monetay con and bank regution, and; (d) strengthening of Central Bank's ability to fulfill more effectively its cental banking functions, including guidance to the banking and insurance sectors. The mutual savings and loan system would be extended to rural areas in order to establish a clear link with the country's infomal sector. Finally, and to address key issues of governance, this operation would include a component designed to reinforce the judicial system to improve compliance with financial contracts and recovery of non-performing debt through technical assistance and training. 1.47 IDA and several key donors have provided considerable assistance for aulUim during the past eight years. Yet, the results have been disappointing, and IDA's investment portolio necessitated major restructuring in November 1992. Consistent with the Government's desire to review the stau of implemetation of the Government's agricultral policy refotm, and idently thed constraints to agricultural growth, we will undertake a review of this sector. Sectorwork schedued to be completed in FY95 would assist the Government in a broad review of the agricultural sector hamework and the identification of key areas of agricultural development potential. It will see as the baois for an agricultral sector adjustment operation in FY96. -  12 1.48 Pvr and Human Resource Dsomg Explicit recognition of socW sues and a strateg to address them is a priority in the Government's development policis. In addition to ongoing programs to address poverty issues, the opeations described below are pecifically designed to provide srvices to the rural and urban poor. 1.49 Prior govenm t programs to provide the urban poo with water, sanitadon and electricity have been insufficient. lTis sitation, coupled with periodic flooding, particularly in Conakry, has negatively affected the health of the urban poor. IDA will continue to support improvements In the living conditions of Conakry's urban poor through a Conakry Environment Project in FY95 and a water and sanitation services project in FY97. These projects will focus on improvements in managerial capacity, mobilization of local resources, development of a housing and land development policy and the upgrading and maintenance of essential inErastructure and services. 1.50 Two IDA-financed projects in FY95 will assist the Government to expand basic education service, with a particular emphasis on girls education, whie incorporating management requirements aimed to promote greater decentization of the system, partiuarly as regards resource availability. Government policy is also beginning to focus on skils training. This is being achieved by extending the earlier priority of primary education to the first cycle of secondary general and vocaional/techlmcal education, with particular emphasis on apprentice programs. Higher educatio reform is also being considered in light of severe shortcomings in the adequaq of higher education taning vis-a-vis economic development needs and high unit costs. 1.51 In the health the operation presented in this document will specifically address the issue of public resources allocated to the sector, while simultaneously addresing issues of management, coverage and quality within the health care system. Specific technical progrms of family planning, mother and child care, nutrition, and preventive and curatie health at the primary level are being addressed through this project, with active participation from communties. 1.52 Contnued improvement of the nation's iniastu is considered another key element of the enabling environment for private sector development. In the Mm sector, the Government will conne to hold ownership of hydropower and,thermal investment through its holding company. Nevertheless, and with IDA assistance, the Government will engage private management for power generation and distribution as a first sep towards ownership diversification. Arrangemes with the selected private operator are being finalized. These decisions have set an appropriate environment for continued IDA involvement in the power sector. 'Me GAd power generation project, which would provide electrcity to the westem part of the country, would be financed by IDA in FY95 with cofinancing from other donors. After -a relatively high level of past IDA lending for the rehabilitation and expansion of the country's road inftastrucntm wok, IDA lending will largely concentrate on projects for periodic maintenance of the highway network, while contimuing to build capacity for sector management and financial sustainability, private participation In both construction and operation, and employment creation. Specific condidons to improve efficiency are key to our continued involvement in the road transport sector; they concern the transport enterprises mentioned in para. 1.25. and the Government's commitment to provide adewate financing for road maintenance. Over the longer term, however, Conakry's g will constitute a severe bottleneck to export expansion-both in terms of its location and capacity. Studies will need to be undertaken for the most cost-effective manner to remove this bottleneck. An inmestment'in the ports sector is scheduled for FY97. 1.53 Natral Resources and Protection of the Environment. Over the long trm, auinea's development will have to be secured by well-managed natural resources and environment. The Government has recently undertaken the preparation of an, E QinmelIl Action PEin, with assistance from IDA, Canada, UNDP and the US. The Action Plan Is to be finalized in June, 1994 and Is ^vv~I tn1- tha &__; S:r% IA 1Q gQQ; t n A mL- -*9Q AIQ - -.- nn;