Uganda - Private Sector Competitiveness Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6698-UG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO SDR 8.3 MILLION TO THE REPUBLIC OF UGANDA FOR THE PRIVATE SECTOR COMPETITIVENESS PROJECT NOVEMBER 6, 1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Uganda Shilling (U Sh) US$1.00 U Sh 931 U Sh 1.00 = US$0.001 SDR 1.00 US$1.49385 WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS BUDS Business Uganda Development Scheme CDC Commonwealth Development Corporation DFCU Development Finance Company of Uganda DRS Depository Receipt System EADB East African Development Bank EAVCF East African Venture Capital Fund GOU Government of Uganda ICBP Institutional Capacity Building Project IDA International Development Association (World Bank Group) IFC International Finance Corporation (World Bank Group) IPS Industrial Promotion Services (Aga Khan Group) MFEP Ministry of Finance and Economic Planning NUMA Northern Uganda Manufacturers Association PSC Project Steering Committee PSCP Private Sector Competitiveness Project PSD Private Sector Development PSF Private Sector Foundation UCB Uganda Commercial Bank UDC Uganda Development Corporation UEF Uganda Equity Facility UIA Uganda Investment Authority UMA Uganda Manufacturers Association USAID United States Agency for International Development USSIA Uganda Small Scale Industries Association GOVERNMENT FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY REPUBLIC OF UGANDA PRIVATE SECTOR COMPETITIVENESS PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Uganda Implementing Agency: Private Sector Foundation (PSF) Beneficiaries: Ugandan private firms and entrepreneurs Poverty: Not applicable Amount: SDR 8.3 million (US$12.3 million equivalent) Terms: Standard, with 40 years maturity Commitment Fee: 0.50% on undisbursed balances beginning 60 days after signing, less any waiver Onlending Terms: The credit proceeds will be transferred to the PSF as grants, and transferred as such to private firms on a 50/50 matching basis to purchase business services, used directly by the PSF or invested in 6% preference shares of eligible equity funds. Financing Plan: See Schedule A Net Present Value: US$7.8 million at a discount rate of 12 percent (economic rate of return of 23 percent) for the project as a whole. Staff Appraisal Report: 14965-UG Map: IBRD 26454 Project Identification No. UG PA 35634 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF UGANDA FOR A PRIVATE SECTOR COMPETITIVENESS PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Uganda for SDR 8.3 million (US$12.3 million equivalent) on standard IDA terms with a maturity of 40 years to help finance a project for private sector competitiveness. 2. Country Background. Uganda embarked upon an Economic Recovery Program (ERP) in May 1987 which evolved into a broad Structural Adjustment Program (SAP) in 1991. The objective of the program was to bring about rapid and sustained improvements in the standard of living of the average Ugandan. The objective was to be achieved through policy and structural reforms aimed at: (i) restoring internal and external financial stability and lowering inflation through prudent fiscal and monetary management; (ii) creating the conditions for rapid and sustained growth of GDP through deregulation of the incentive and regulatory framework; and (iii) developing human capital through investments in education, health and other social services. The reforms have had a positive outcome on a number of counts. GDP grew by an average of 5.8 percent per year from 1986/87 to 1993/94, a gain of about 2.9 percent per capita per year. Reflecting the present coffee boom, the estimate for GDP growth in 1994/95 is 10 percent. Annual inflation has been reduced to 7.8 percent in 1994. Exchange rate stability has also largely accompanied price stability although there was some appreciation of the Ugandan shilling against the US dollar in 1994. Challenges remain in trying to extend this period of macroeconomic stability, not least in addressing issues associated with long-standing current account and fiscal deficits. Furthermore, notwithstanding its successes on the macroeconomic front, Uganda remains among the poorest countries in the world, with a per capita income of only US$220 in 1994. 3. According to projections in the latest Country Economic Memorandum, GDP is expected to grow by about 7 percent in 1995/96, by 6.5 percent in 1996/97, and by about 5.5 percent thereafter, assuming a continuing satisfactory performance in stabilization and structural reform. However, resource balance deficits are also expected to increase from 1997/98, after some reduction between 1994/95 and 1996/97. These projections underline the fragility of the macroeconomic stability and the need to deepen the structural adjustment over the medium term -- in particular, in the areas of public sector reform, improved financial sector performance, and improved incentives to exporters. 4. Project Rationale. The Ugandan private sector remains fragile and underdeveloped. First, many firms are still in their infancy: about one-third of the over 100,000 private companies and business names registered in Uganda have been established in the last four years. Second, most firms are extremely small: the micro and small enterprise sector (fewer than 10 employees) provides 90 percent of total non-farm employment, with large enterprises accounting for only 6 percent. Third, the informal sector is important, particularly in agriculture (employing 80 percent of the labor force) which is dominated by rural smallholders and subsistence farmers. Fourth, diversification into exports has been limited (Uganda still relies heavily on donor assistance to  finance its current account deficit); private investment has only picked up recently; and there are weaknesses in private sector capacity. These factors are constraining the supply response needed to drive further growth over the medium to long term. 5. There are four key factors likely to affect the growth of the Ugandan private sector in the near future: (a) the size and growth of markets for the output of the private sector; (b) a policy environment that minimizes uncertainty and controls while maximizing incentives for investment, production, and trade; (c) a supportive business infrastructure (including efficient legal and financial systems; modem physical infrastructure; responsive civil service; effective business service providers); and (d) elimination of the existing gaps in capabilities of Ugandan firms (i.e., low capitalization, lack of know-how, inadequate corporate culture, lack of export marketing networks, etc.). 6. The project supports the Government's strategy for developing the private sector in Uganda. This strategy - as outlined in the Private Sector Policy Statement - will focus on the following areas: (a) improving the policy environment by decreasing budget deficits and further liberalizing markets while reducing any remaining anti-export bias; (b) upgrading the business infrastructure by reforming laws and regulations, restructuring the financial sector, accelerating privatization, and improving the performance of existing physical infrastructure while encouraging the development of new facilities by the private sector itself, and (c) filling the gaps in the capabilities of Ugandan firms so that they can expand on a more demanding domestic market and on highly competitive international markets. 7. The project focuses on the third area: the competitiveness of the Ugandan private sector that needs to be improved for a sufficient supply response to materialize and for the long-term sustainability of ongoing reforms. The most effective way in which the Ugandan private sector can enhance its capacity within a short time span is to tap from available private sources of technical and managerial know-how and finance. The project adopts this approach which leaves most decisions in private hands and does not rely on the public sector. The alternative, the provision of these services by the public sector, is not feasible or advisable in Uganda due to: (a) lack of public sector capacity; (b) negative worldwide experience with government-run schemes; and (c) the fact that such an option would not be limited to financial support and would not be demand-driven, thus discouraging instead of encouraging the development of markets for such services. 8. Each of the project's four components tries to reach a different private source (i.e., foreign partners, equity investors, business consultants, and other domestic firms), who could help Ugandan firms either to overcome their internal constraints or to influence their external environment (e.g., improving the policy environment by influencing macroeconomic policy through a constant dialogue with Government, or improving business infrastructure by easing access to good consultancy services). The project tries to address four sets of constraints that impede access by Ugandan firms to the above-mentioned private sources of technical and  managerial know-how and finance. They include: (a) price distortions in the market for business services; (b) information asymmetries in the financial market; (c) information gaps; and (d) an overall high degree of uncertainty affecting investment decisions by domestic and foreign investors alike. 9. Project Objectives. The purpose of the project is to make the Ugandan private sector more competitive so that it can expand sales on both domestic and international markets. To achieve this objective, the project will: (a) help improve the business and investment environment by decreasing policy constraints; (b) strengthen institutions supporting the private sector; (c) enhance the dialogue between the private sector and the Govemnment; and (d) alleviate problems associated with inadequate know-how and the weak financial system. 10. Project Description. The project will have a total cost of US$20.9 million equivalent (of which US$12.3 million funded by IDA) and will consist of four mutually reinforcing components. 11. Shaping the Business Environment: the Private Sector Foundation Component (component total cost of US$2.5 million, of which US$2.0 million funded by IDA). The project will be managed by the private sector itself through a Private Sector Foundation (PSF), established in August 1995 during the preparation of the project. The Foundation will advise Government on policy issues affecting PSD and implement the project. Similar instruments have been effective elsewhere in promoting and institutionalizing policy dialogue between Government and private sector to reduce policy uncertainty and build confidence with both domestic and foreign investors. In its advocacy role, the PSF will address policy issues such as taxation and other regulations affecting private sector development, particularly business licensing and access to industrial land, with short-term technical assistance. In its second role as the Implementing Unit for this project, it will be responsible for establishing the management systems to execute, monitor and supervise as well as evaluate and learn from the project's performance. It will also have the responsibility for maintaining an open and inclusive participatory process which maximizes private sector involvement in the implementation and supervision of the project. 12. Enhancing Know-how through Markets: the Business Uganda Development Scheme Component (component total cost of US$7.5 million, of which US$4.5 million funded by IDA). The Business Uganda Development Scheme (BUDS) is a program to support the injection of know- how and expertise into Ugandan firms. It will be a demand-driven business services program designed to provide the support firms want and will use. At the core of BUDS is a cost-sharing grant scheme in which Ugandan firms can receive 50 percent of the costs of using consultants and other service suppliers. Services may cover a broad range of subjects, including marketing, production, and business planning. Firms may obtain these services through individually tailored services or through group schemes where Ugandan firms come together to obtain services jointly. The total of grants to one firm may not exceed a common cumulative limit, set at US$30,000 per firm or other recipient entity. In addition to the grants, BUDS will provide free hand-holding advice to firms on the basics of business planning; deciding on what services will be most helpful; selecting a service supplier; and obtaining the best services from the supplier. The scheme will be managed by a private contractor on behalf of the PSF, and will be deliberately temporary as it will be wound up at the end of the PSC Project.  -4 - 13. Enhancing Know-how through Financial Partners: the Equity Financing Component (component total cost of US$9.0 million, of which US$3.9 million funded by IDA). The project will fund the Uganda Equity Facility (UEF), an account set up to provide equity resources under management contract to participating equity funds that will mobilize resources from private investors and/or reach small- and medium-sized enterprises. To become a participating equity fund, strict eligibility criteria must be met, including the fund being economically viable with a sound financial structure, having reputable management with a demonstrated track record and a well-defined investment policy and strategy. At present, there are two equity funds -- one soon to be established and the other still under study -- that are likely to meet the eligibility criteria for the UEF. Both funds would involve IFC as a direct or indirect shareholder. The project component will also fund the provision of advice to improve the overall environment for equity financing. In particular, as investors need to exit their investments, technical assistance and policy advice will be provided to establish a Depository Receipts System (DRS) on a regional stock market for the exclusive purpose of increasing exit options for equity investors in Ugandan companies. 14. Enhancing Know-how through Industrial Partners: the Investment Promotion and Facilitation Component (component total cost of US$1.9 million, all of which funded by IDA). This component will support a reforrned Uganda Investment Authority (UIA), freed from any functions relating to licensing or granting of tax exemptions, to focus on promotion and facilitation of private investment. Promotional services -- to be provided in partnership with an experienced international contractor -- include informational publications, guides, and meetings with potential investors (individually and in groups) overseas and in Uganda. Facilitation services include practical assistance, such as advice to investors starting up projects on power, telecoms and other utilities, local regulations and market conditions, etc.. Other services scheduled to be delivered by the UIA, which are not funded under this project but which complement the supported promotion and facilitation services, include support for local enterprise development at the district level, and advertising and public relations. The administrative and regulatory duties associated with investment licensing and various tax exemptions, which to date have taken up a significant proportion of UIA's staff resources, will be discontinued in line with planned revisions to the Tax and Investment Codes. 15. Project Costs. The program cost is estimated at US$20.9 million equivalent (U Sh 19.8 billion) inclusive of US$0.3 million of taxes and duties, out of which the proposed credit will finance US$12.3 million equivalent. The foreign exchange component of the program is estimated at 70 percent of the total cost. Base cost estimates, US$20.5 million, are in July 1995 prices. Price contingencies are estimated at US$0.4 million (2 percent of project costs). A breakdown of costs and the financing plan are shown in Schedule A. Project benefits and costs are shown in Schedule B1, financial analysis tables in Schedule B2, and the project's performance indicators in Schedule B3. Amounts and methods of procurement, credit summary allocations, and the disbursement schedule are described in Schedule C. The key processing events are shown in Schedule D, and the status of Bank Group operations is shown in Schedule E. The Staff Appraisal Report (14965-UG) is being distributed separately. 16. Project Financing. The proposed IDA credit of US$12.3 million equivalent would finance about 59 percent of project costs, net of duties and taxes. Credit proceeds would be provided by Government to the PSF as a grant and either transferred from the PSF to private firms as matching grants under the BUDS component (US$3.0 million), invested in preference shares of  eligible equity funds (US$2.5 million), or spent by the PSF on studies and technical assistance (US$4.5 million), recurrent expenditures (US$ 1.2 million), and other expenditures (US$1.1 million). International and local financial institutions (including IFC and DFCU) are expected to contribute US$4.0 million to the equity component. The local contribution made by Government will be for an estimated amount of US$0.3 million. The private sector will participate in the financing of the project in three components for a total amount of US$4.3 million. 17. Project Implementation. The PSF will be the implementing agency for the PSC Project and, in this capacity, it will report directly and through its board, to GOU, and IDA. This project management activity will complement the PSF's initiatives (also supported under this project) to analyze key issues affecting the private sector and promote constructive dialogue with Government. BUDS will function as a self-standing scheme, implemented by a management contractor, chosen by an internationally competitive tender and operating under a performance contract with the PSF. The UEF will have no independent legal status. It will be a bank account administered by the PSF and shares in participating equity funds shall be held in the name of PSF. Finally the services under the Investment Promotion and Facilitation component will be delivered by the UIA under a service agreement with the PSF. 18. In order to ensure proper coordination and supervision of project components, a Project Steering Committee (PSC) will be established including all members of the PSF Board (the Board) and two government representatives, the Secretary to the Treasury and the Permanent Secretary of the Ministry of Trade and Industry or their nominees. The Project Steering Committee will be responsible for: (a) approving the annual work plan; (b) reviewing the full report on each year's project performance, including the implications of financial and operational audits; and (c) meeting with IDA supervision missions. 19. For each component the PSF's approach to overall project management will be: (i) to delegate the maximum degree of operational independence and responsibility to the selected agents implementing individual components; (ii) to avoid involvement in day-to-day operational issues; and (iii) to monitor broad performance each quarter, and rigorously review performance each year, with the PSC. To help the component managers and the PSF Project Coordinator fulfill their roles effectively, a draft Project Implementation Plan (PIP) was prepared as part of the appraisal process. The PSF Project Coordinator will be responsible for the effective implementation of the PSCP. A letter has been received confirming that: (i) provisions have been made by Government for the appropriation of funds for the purpose of the project; and (ii) the person filling the post of PSF Project Coordinator will be considered a public officer for the purpose of the Public Finance Act, Cap. 149, Laws of Uganda, and will be able to access credit proceeds and government counterpart funds directly. 20. Lessons Learned from Previous IDA Experience. First, IDA's experience in private sector development in Uganda is limited. Under the Enterprise Development Project (Credit 2315- UG of January 9, 1992), IDA is providing technical assistance for privatization and resources for term lending to finance private investment in Uganda. The first three years of experience have shown slow disbursement for both components and led to the restructuring of the EDP project in February 1995. Resistance to privatization by various interest groups had caused considerable delays, until the management structure of the privatization and parastatal reform program was restructured at the end of 1994 with the appointment of a Minister of State responsible for  - 6 - privatization. Disbursement under the line of credit component of EDP has only recently started to accelerate, although sub-borrowers are still mainly large firms. Ugandan SMEs have seldom been able to access the line of credit due to the poor quality of their project proposals and inadequate capitalization. The proposed project is expected to remedy this situation and to allow SMEs to access the line of credit under EDP without compromising on the quality of applications. Second, experience of other countries has shown that government interventions in support of SMEs are needed whenever firms are poorly-endowed, as is the case in Uganda 1. However, it is important that these interventions keep a light touch by being limited to financial support and being demand-driven. The proposed project adopts this approach which leaves most decisions in private hands and does not rely on the State. Third, IDA's experience with technical assistance in Africa has been mixed, due to lack of ownership by Governments and because long-term experts have tended to substitute themselves for their counterparts. The proposed project's emphasis on sustainability and beneficiaries' participation both in design and implementation should go a long way towards addressing these potential pitfalls. Fourth, throughout the 1990s, the Government of Uganda has shown effectiveness in following through with its commitment to policy reforms within its adjustment program. This track record bodes well for the proposed project being implemented effectively. 21. The proposed project would complement other donor-funded PSD activities in several ways. First, by supporting a Private Sector Foundation, it will introduce an important element of coordination (to be carried out by the private sector itself) of PSD activities. Second, BUDS will complement USAID's activities in the area of business services by focusing only on firms that are willing to pay a substantial share of the cost of the services provided to them and by opening access to all sectors and not just to a small sub-set of exporters. Third, the fact that the support for the UIA will go through the PSF will provide an effective way of channeling donor support to the Authority. 22. The equity financing component of this project has particularly strong linkages with IFC activities in Uganda. As of September 30, 1995, IFC has made equity and loan investments in Uganda totaling US$29.15 million in 16 projects. Within this total, approximately US$1.0 million has been invested in an equity stake in Development Finance Company of Uganda (DFCU), a local financial institution that acts as a source of equity and term finance for commercial investment projects in Uganda. More recently, IFC's Board has approved (July 10, 1995) a proposed investment in the East African Venture Capital Fund (EAVCF) which will make equity and quasi-equity investments in Kenyan, Tanzanian and Ugandan firms. IFC's capital market strategy in Uganda includes developing non-bank financial institutions (NBFIs), which broaden and deepen the range of financial products available. The equity financing component of this project, in which it is anticipated both DFCU and EAVCF will play a key role as participating equity ftinds, would support this strategy, and IFC's management has confirmed the complenientarity of this component with its own initiatives. In particular, this project helps address issues highlighted by IFC's experience by leveraging new private investment in equity to enlarge the sources which can be tapped by firms, and by allowing equity funds to target enterprises of a smaller size. See, for example, Levy, Brian (1994). Can Intervention Work? The Role of Government in SME Success. Successful Small and Medium Enterprises and Their Support Systems: A Comparative Analysis of Four Country Studies. World Bank Conference. Washington, D.C.  - 7 - 23. Rationale for IDA Involvement. The proposed project is consistent with the objectives of the Bank Group Country Assistance Strategy (CAS), discussed by the Board on June 1, 1995. The Uganda CAS states that promoting growth through private sector development is the basic tool for addressing poverty in Uganda's development strategy. The key is how to encourage private investment, both by domestic and foreign investors. The project focuses on the competitiveness of the Ugandan private sector that needs to be improved for a sufficient supply response to materialize and for the long-term sustainability of ongoing reforms. IDA is well positioned to provide support in this respect because of its extensive experience worldwide with matching grant schemes, the credibility its support would give to the Private Sector Foundation, its capacity to achieve effective donor coordination, and its excellent policy dialogue with Government and the Ugandan private sector on PSD issues, supported by extensive economic and sector work. Overall, IDA would play the role of catalyst around which significant additional private and donor resources would be mobilized. The close involvement of IFC in the preparation of this project and its likely participation in the implementation of the equity financing component will allow Uganda to benefit from a full range of services and skills available in the Bank Group. 24. Agreed Actions. The following are the conditions of credit effectiveness: (i) establishment of the Project Steering Committee and appointment of the government Liaison Officer within the Ministry of Finance and Economic Planning; (ii) receipt of a signed copy of the Subsidiary Agreement acceptable to IDA; and (iii) receipt of the final satisfactory Project Implementation Plan and Action Plans for all components for the first year of the project. 25. The following are the conditions of disbursement: (i) for the investment promotion and facilitation component: receipt of a final satisfactory Institutional Development Plan for the Uganda Investment Authority, approved by both the UIA Board and Government; and (ii) for the equity financing component, investments in and by participating equity funds will need to be made in accordance with the eligibility criteria and terms and conditions for the UEF. 26. The following assurances were received during negotiations: (a) the Subsidiary Agreement between the PSF and GOU will be satisfactory to IDA; (b) the project will be carried out in accordance with the Project Implementation Plan, satisfactory to IDA, including Action Plans for all components; (c) commencing from the second year of project implementation, the Action Plans will be refined and submitted to IDA as annual work plans no later than the first day of May preceding the financial year covered in the work plan; (d) standard procurement/consultancy recruitment processing timetables and documents will be utilized during project implementation; (e) financial and operational audits will be undertaken annually during project implementation; the format of the audit report would be satisfactory to IDA; and audited accounts would be submitted to IDA within six months of the close of the financial year; and (f) a mid-term review will be undertaken within 30 months after project effectiveness but no later than December 31, 1998, with significant government and private sector participation and analytical inputs, and actions agreed during the review would be implemented expeditiously, in consultation with IDA. 27. Environmental Aspects. The project is in environment Category C. A National Environment Action Plan (NEAP) has been adopted by the Government of Uganda and IDA is actively involved in its implementation, including through the Environment Management Project.  - 8 - The proposed PSC project will mainly provide technical assistance, except for the equity financing component. To be eligible for equity financing under a participating equity fund, firms will be required to demonstrate they conform with Uganda's environmental laws. Participating equity fund managers will review the overall environmental performance of the investee companies and, if necessary, make recommendations to improve and strengthen corporate performance. 28. Program Objective Categories. The project supports IDA's Program Objectives: (i) private sector development; (ii) financial intermediation; and (iii) economic management. 29. Participatory Approach. The involvement of the Ugandan counterparts in all aspects of project processing has been an integral part of the capacity building envisaged under the project. The process started with an IDA Project Identification Mission in late January 1995, after which an IEPS was prepared and discussed intemally. A project design workshop was then held in Kampala on March 30-31, 1995. Over 80 participants from the private sector, the public sector, and the donor community worked on project design (starting from IDA's Initial Executive Project Summary and from substantive sector work conducted during the previous year) and elected a Private Sector Task Force, comprising five private sector representatives and four government officials to work with IDA in project preparation and appraisal. The workshop was characterized by several working sessions in small groups. During the following two months, the Task Force coordinated the work of several consultants, added one component (the Private Sector Foundation) to the project and made substantial changes to all the other components of the project. The Task Force then visited Washington, D.C. for preappraisal (May 22-June 2, 1995). During preappraisal, the Task Force worked closely with the Bank team on the preparation of a draft Project Implementation Plan. During this visit, the Task Force members met with over twenty task managers from the Bank, IFC, MIGA and FIAS who had had direct experience in the areas covered by the proposed project (i.e., matching grant schemes, government-private sector consultative mechanisms, equity financing, and investment promotion agencies). The Task Force then continued to work with the Bank team during project appraisal and participated in the preparation of the Green Cover Staff Appraisal Report. Two members of the Task Force have recently been elected to serve in the Board of Directors of the Private Sector Foundation and, as such, they will continue to be involved in project implementation. A participatory supervision process has also been designed for this project. 30. Project Benefits. The proposed operation complements Uganda's macroeconomic adjustment program, supported by the Bank and the IMF, and is expected to provide the following sustainable benefits. First, the project will improve the capacity of the Ugandan private sector to compete internationally. This improved competitiveness should have a positive effect on exports, employment, and investment. Second, the project will improve the dialogue between the Government and the private sector, thus enhancing the long-term sustainability of ongoing economic reforms and improving the quality of the reform process itself. Third, the project will encourage private capital flows to Uganda, although still on a very limited scale, thus reducing Uganda's dependency on donor flows. In short, the project seeks to catalyze the growth of private firms and their contribution to Uganda's overall economic performance. 31. Many of these benefits are difficult, if not impossible, to measure in advance, but the best estimate is that the project as a whole would generate a Net Present Value (NPV) of US$7.8 million at a discount rate of 12 percent (see Schedule B1 for further details). The estimate is based  on calculations which measure three categories of benefit only. First, the Business Uganda Development Scheme should generate additional output and/or profits in firms assisted by the know-how of business consultants part-financed under the scheme. At present, access to their know-how is limited to larger firms due to price distortions in the market for business services which the Scheme will help overcome. Second, the Uganda Equity Facility supports equity funds in providing equity investment (and associated hands-on managerial advice) to commercial projects, which should produce a financial and economic return from the productive use of that capital 2. Third, investment promotion and facilitation and the reduced degree of uncertainty achieved through a close dialogue between Government and the PSF should increase the flows of additional foreign direct investment which generate employment, new technologies, and other benefits in Uganda. Of course, domestic investment should also increase, although this benefit was not quantified in estimating the project's net present value. The total present value of benefits is estimated at US$23.8 million, excluding any value for intangible benefits. Setting this against all the identifiable costs of the project (present value of US$16.0 million) indicates a NPV of US$7.8 million (an estimated economic rate of return of 23%), which might be considered as a lower bound estimate of the actual economic return to be generated. 32. Project Sustainability. Project sustainability is being ensured by meeting IDA's requirements for determining quality at entry with an integrated approach to the sector, the involvement of all stakeholders in policy determination, the coordination of the efforts of all donors, common implementation arrangements, and minimal reliance on long-term technical assistance. The leading role played by the Private Sector Task Force in designing this project sets sound foundations for local ownership and commitment to the initiatives being taken. Furthermore, Government, in consultation with the Private Sector Task Force, has prepared a Private Sector Policy Statement which defines the supportive policy framework within which this project will function. Finally, all public and private entities involved in the project are, and are expected to remain, financially sustainable. In particular, while the Uganda Equity Facility and the Business Uganda Development Scheme will be temporary and will be wound up once credit proceeds are, respectively, returned to Government or fully utilized, the Private Sector Foundation will attempt to outlive the project. To ensure it will be able to do so, the Ugandan private sector has been asked to bear the cost of establishing the Foundation, as a sign of its commitment. Furthermore, IDA's contribution to the PSF operating costs will be reduced over time, so that the private sector will bear 100 % of non-project related operating costs by project's end as shown in Schedule B2. 33. Risks. Several conditions are assumed, which could affect the perfornance of the overall project, including: (i) the continuation of political and macroeconomic stability; (ii) Government remaining committed to PSD and willing to discuss policy issues with the private sector; (iii) the acceleration of the privatization process and substantial improvements in the management of major public utilities; and (iv) a substantial improvement in the functioning of the financial sector. Specific assumptions have also been made on each component: (i) the PSF component assumes that associations will be able to work together within one apex institution (the Foundation) and that it will be allowed to act as implementing agency; (ii) the BUDS and the equity component assume a sufficient degree of openness of firms towards external advice/capital and a sufficient 2 Assuming that the financial costs and benefits of sub-projects can be approximately equated with the economic costs and benefits; a reasonable assumption given the largely undistorted prices.  - 10- degree of cooperation among donors; (iii) the equity component also assumes there will be enough profitable projects able to attract equity investments and enough private investors interest in EAVCF and any other fund which might participate; and (iv) the Investment Promotion and Facilitation Services component assumes that Parliament will pass a reformed Investment Code, allowing the UIA to cease its administrative/regulatory duties. 34. The project includes a considered program of mitigating some risks and maintaining active supervision to redress problems should any of the other considered risks arise. First, in recognition of the fact that the PSD agenda is substantial and evolving, provision has been made for a flexible approach to providing consultancy support for specific activities and also for acquiring expert assistance on an as-and-when-needed basis for the entire life of the credit. Second, implementation risks would be monitored by the Project Steering Committee (PSC). The PSC will include government representatives who have had previous experience in dealing with IDA projects. Third, the risk of lack of donor coordination in the area of business services and equity financing will be addressed by the PSF Board, which will liaise closely with all donors interested in PSD issues. Fourth, risks affecting the BUDS component (i.e., participants unwilling to apply new skills in their business and grant abuse) will be addressed through the free hand- holding services that will be provided by the BUDS management to firms applying for assistance. Hand-holding services will include advice on how to decide what tasks would most benefit from service use, how to select the most suitable service provider for the task, how to get the best out of the provider, and how to ensure a lasting impact within the firm. Fifth, the involvement of IFC in EAVCF and possibly in the proposed DFCU Fund should ensure that both funds are professionally managed and substantially reduce any moral hazard risk. In addition, the local sponsor of EAVCF (Industrial Promotion Services (Kenya) Limited, which is affiliated to Aga Khan Foundation for Economic Development) and DFCU (in which IFC, CDC and the German development agency, DEG, are also shareholders) have a long track record of successful equity investing. The quality of these two local sponsors bodes well for the identification of suitable investment projects. Sixth, it will be private entrepreneurs who will be committing their own finance and resources (supported by the project), taking risks and making operational decisions. The discipline of the market should help ensure that the myriad of individual investments (expected to be about 400 in total), assisted under this project, deliver sound economic returns to Uganda as projected. Finally, the cost-benefit estimates indicate that in a worst case the performance targets for individual components could be underachieved by a third, while still generating a positive NPV for the project based solely on quantified benefits. 35. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. James D. Wolfensohn President Attachments Washington, D.C. November 6, 1995  SCHEDULE A Estimated Project Costs (US$ Thousand) Uganda Private Sector Competitiveness Project Expenditure Accounts by Components - Totals Including Contingencies (USS'000) Business Investment Private Uganda Promotion Sector Development Equity and Foundation Scheme Financing Facilitation Component Component Component Component Total 1. Investment Costs A. Goods and Materials (Equity Comp.) - - 7,500 - 7,500 B. Vehicles, Equipment and Furniture 126 113 - - 239 C. Consulting Services (incl. travel) 1. Business Services under BUDS - 6,000 - - 6,000 2. Studies and Technical Assistance - Overseas Consultants 175 561 926 - 1,662 3. Investrnent Promotion and Facilitation Services - - - 1,615 1,615 4. Studies and Technical Assistance - Local Consultants 406 543 333 - 1,282 Subtotal Consulting Services (incl. travel) 581 7,104 1,259 1,615 10,559 D. Training 180 - 239 - 419 E. Printing and Advertising 327 - - 261 588 Total Investment Costs 1,213 7,217 8,997 1,877 19,304 11. Recurrent Costs A. Salaries, wages & allowances 916 116 - - 1,032 B. Operation, Maintenance and Supplies 371 227 - - 598 Total Recurrent Costs 1,287 343 - - 1,630 Total PROJECT COSTS 2,500 7,560 8,997 1,877 20,934 Taxes 186 60 33 28 307 Foreign Exchange 447 4,926 7,938 1,305 14,616 Note: Totals may not add due to rounding. Project Financing Plan (US$ million equivalent) US$ML % Proj. Cost IDA 12.3 58.8% GOU 0.3 1.5% International and Local 4.0 19.1% Fin. Inst. (incl. IFC) Private Sector 4.3 20.6% Total 20.9 100.0% Note: Totals may not add due to rounding.   -12 - SCHEDULEB1 Project Benefits and Costs (US$ thousand) Project Objectives Improved Technology Access to Markets Access to Project Costs and B et (a) PSF (b) BUDS (a) UIA (b) BUDS Finance Total Costs Investment Costs 600 3,711 2,081 3.711 9,202 19,304 Recurrent Costs 900 236 129 236 129 1,630 Total Costs 1,500 3,947 2,210 3,947 9,331 20,934 Benefits Benefit 0 11,250 4,854 11,250 25,705 53,059 Net Benefit -1,500 7,304 2,644 7,304 16,374 32,125 Net Present Value 7,848 Benefit/Cost Ratio 1.49 Main Assumptions * For BUDS, for every $1 of consultancy assistance the assisted firm will increase output (sales) by $15 over 5 years. It is also assumed that requests for BUDS assistance will be evenly split between support for technological improvement and support to gain access to markets. However, different distributions do not affect the overall net benefits from the project as a whole. * For the UEF, sub-projects will generate a rate of return of 20% and the financial costs and benefits of sub- projects can be equated with the economic costs and benefits of the operations of the assisted firms due to largely undistorted prices. * For UIA, for every $1 spent on promotion, an additional $10 will be generated in foreign direct investment. Sensitivity Analysis * BUDS. The component's NPV would fall to zero if more than one-half of the assisted firms received no incremental benefit from consultancy inputs. * UEF. A rate of return on sub-projects of up to four percentage points below the target of 20% will still generate a positive NPV for this component. * UIA. The performance target of $10 of additional foreign direct investment can be reduced by up to 25% before the component switches to zero NPV. Nature of Benefits * Incremental output and investment by both local and foreign firms. * Higher quality and quantity of entrepreneurs as a result of the consultancy services provided by BUDS and the wider benefits associated with increased foreign direct investment. * Enhanced awareness in the international community about investment opportunities in Uganda. Non-quantified benefits * Any benefit relating to the PSF as project implementation unit (e.g., creating a consistency between project design and implementation); * Any benefit relating to the PSF in its policy advocacy function; * The benefits delivered by the BUDS managers in helping educate firms in their use of business consultants, and in developing the capacity of the local consulting profession; * The wider benefits (from technology transfer, management skills, etc.) associated with FDI; and * A widening of choice of instruments (particularly to SMEs) in the financial sector. Main Beneficiaries * Over 400 Ugandan firms will benefit directly from the BUDS and UEF. The PSF (representing 12,000 enterprises) will facilitate the public-private sector dialogue and build a more responsive public sector and responsible private sector. More generally, the private sector will benefit as markets for business services develop and the environment becomes more business-friendly.  - 13 - SCHEDULE B2 Projected Sources and Uses of Funds for the Private Sector Foundation (US$ thousands) 1996 1997 1998 1999 2000 2001 Sources of Funds Government 73 31 26 27 29 0 IDA 596 432 340 326 308 0 Private Sector 0 29 59 93 133 150 Total Sources 669 492 425 446 470 150 Uses of Funds Investment Costs 428 244 175 179 188 0 Recurrent Costs - Project Related 176 181 183 195 206 0 - Non-project related 65 67 67 72 76 150 Total Uses 669 492 425 446 470 150  - 14 - SCHEDULE B3 Performance Indicators Component Performance Indicator Timing PSF * Provides GOU/donors with private sector views on By end of project key PSD issues/projects and most of its core recommendations are accepted; * Timely project start; February 1996 * PSF financially self-sufficient By end of 2000 * Ensuring that workplans, project reviews and audits Each year are received in time. BUDS * 300 firms receive services and their output increase From the year after by US$15 over a five-year period for every dollar receiving assistance spent in consulting services. and lasting for a decade Equity * US$ 7.5 million invested in Uganda firms by equity By end of 1999 funds supported by the facility. * US$ 1.0 million of private investors' resources By end of 1997 mobilized by equity funds supported by the facility Investment * US$10 dollar of additional investment for every With a one year lag. Promotion dollar spent by the UIA on investment promotion Investments will and and facilitation; have an average life Facilitation of 10 years. * Good quality promotional materials produced in time; Each year * Over 150 investors in specific sector contacted; By end of 1999 . Investors aftercare offered to 150 investors. By end of 1999   -15 - SCHEDULE C Summary of Procurement Arrangements (US$ thousand equivalent) Procurement Method Project Element NCBt0" Int'l/Nat'l Shopping Others NBF Total A. Goods and services - -2,500'c' 5,000m 7,500 (2,500) (2,500) B. Vehicles, Equip. and 239 - 239 Fumiture (161) (161) C. Consulting Services - - 7,798 3.000 (b) 10,798 (incl. Travel Exp.) (7,714) (7,714) D. Training - - 180 180 - (172) (172) E. Printing and Advertising 294 294 - 588 (272) (272) (544) F. Recurrent Expenditure - 740 890 1,630 (529) (694) (1,223) G. Total 533 1,034 11,367 8,000 20,934 _ (433) (801) (11,080) - (12,314) (a) Financed by Intemational Financial Institutions. including IFC, and by private investors (b) Financed by BUDS recipients (c) Procurement method in this case is national private sector practices, acceptable to the Association (d) In case any contract exceeds US$100,000. it wvill be procured by ICB IDA Credit Summary Allocations (in thousands of SDR) Category SDR % of Expenditure to Thousands be Financed A. Goods and services under the Uganda Equity 1,680 100% foreign; Facility | 90% local B. Consulting services (including travel): (i) Matching grants under BUD 2,010 50% Scheme; (ii) Investment promotion and 1.040 100% facilitation services; and (iii) Other parts of the project 2,110 100% C. Vehicles, equipment and furniture 110 70% D Printing and advertising services 340 95% E Operating expenditures 730 (i) 1996 through 1998 95% (ii) thereafter 75% Unallocated 280 Total 8,300 Note: Totals may not add due to rounding. Estimated Disbursement Schedule (US$ thousand equivalent) 1996/97 1997/98 1998/99 1999/2000 2000/01 1 st 2nd I st 2nd I st 2nd I st 2nd I st 2nd Sem Sem Sem Sem Sem Sem Sem Sem Sem Sem Per period 1,235 1,235 1,450 1,450 1,525 1,525 1,685 1,685 262 262 Cumulative 1,235 2,470 3,920 5.370 6,895 8,420 10,105 11,790 12,052 12,314 Note: Totals may not add due to rounding.   - 16- SCHEDULE D Timetable of Key Processing Events a. Time taken to prepare: 4 months b. Prepared by: The Uganda Private Sector Task Force and IDA. The Uganda Private Sector Task Force comprises: (a) from the private sector: William Kalema (Uganda Manufacturers Association), James Kalibbala (Uganda Small Scale Industries Association), Ida Wanendeya (Uganda Women's Finance and Credit Trust), Aga Sekalala (Sekalala Enterprises), and Felix Odur (Northern Uganda Manufacturers Association); and (b)ftom Government: Keith Muhakanizi (Ministry of Finance and Economic Planning), Allister Moon (Ministry of Finance and Economic Planning); Nimrod Waniala (Ministry of Trade and Industry), and George Rubagumya, deputized by Angela Katama (Uganda Investment Authority). The Ugandan Private Sector Task Force was assisted by a team of consultants comprising Messrs. R. Moses Thompson (Team Technologies), Tom Nastas (Innovative Ventures), Andrew Singer (A+G Singer), Steve Graubart, and John Kaggwa. The IDA team was led by Stefano Migliorisi (AF2PE) and included Iradj Alikhani (AF2UG), Thomas O'Brien (AF2PE), Marie Sheppard (AF2PE), Russell Muir (PSD), Aldo Baietti (CFSPS), Andrew Danino (IFC), and Peter Kyle (LEGPS). Amanda Carlier (AFTPS), Gerard Byam (AF2PE), and Tom Milton (IFC) also contributed to sections of the report. The Lead Advisor is Mr. J. Katz and Peer Reviewers are Messrs. D. Wilton and M. Sarris. The Acting Sector Division Chief and the Country Director are Luciano Borin and James W. Adams, respectively. c. First IDA Mission: January 1995 d. Appraisal: June-July 1995 e. Negotiations: October 1995 f. Date of Effectiveness: February 1996 g. List of Relevant PCRs: None   - 17- SCHEDULE E Page 1 of 4 STATUS OF BANK GROUP OPERATIONS IN UGANDA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1995) --US$ Million---- Amount (Less Cancellations) Loan or Fiscal - Undis- Credit-No. Year Borrower Purpose -:.:: Bar IDA bursed Nine (9) Loans and forty three (43) Credits closed, 42.92 1075.83 5.33 of which SECALs, SALs and Program Loans/Credits: (572.18) Cr.18690 1988 Uganda South West Ag. Rehab. 10.00 3.83 Cr.19340 1988 Uganda Health Rec. 42.50 6.06 Cr.19910 1989 Uganda Telecom ll 52.30 3.37 Cr.21240 1990 Uganda Water Supply 11 60.00 49.70 Cr.21760 1991 Uganda Livestock 21.00 17.05 Cr.21900 a/ 1991 Uganda Ag. Sector Adj. Credit 100.00 6.18 Cr.22060 1991 Uganda Urban 1 28.70 17.09 Cr.22680 1991 Uganda Power III 125.00 90.91 Cr.23150 1992 Uganda Enterprise Development 41.85 41.32 Cr.23620 1992 Uganda Northern Reconstruct. 71.20 49.24 Cr.24180 1993 Uganda Econ. & Financial Management 29.00 9.31 Cr.24240 1993 Uganda Agric. Extension Prog. 15.79 8.39 Cr.24460 1993 Uganda Agric. Res. & Trg. 25.04 18.84 Cr.24930 1993 Uganda Primary Educ. 52.60 46.24 Cr.24960 a/ 1993 Uganda Financial Sector Adjustment Cr. 100.00 54.40 Cr.25830 1994 Uganda Small Towns Water 42.30 45.41 Cr.25870 1994 Uganda Transport Rehab. 75.00 78.63 Cr.26030 1994 Uganda Sexual Trans. Infections 50.00 51.79 Cr.26080 a/ 1994 Uganda SAC II 80.00 44.22 Cr.26090 1994 Uganda Cotton Sector Development 14.00 12.76 Cr.26081 a/ 1994 Uganda SAC II 0.60 0.60 Cr.26790 1995 Uganda District Health 45.00 46.16 Cr.27360 1994 Uganda Inst. Capacity Building 36.40 36.84 Cr.27770 1996 Uganda Environment Management 11.80 11.20 Total 42.92 2205.91 749.54 of which repaid 42.92 47.95 Total held by Bank & IDA 0.00 2157.96 Amount sold 8.32 of which repaid 8.32 TOTAL Undisbursed 754.87 a/ Indicates SAL, SECAL or Program Loan/Credit.  - 18 - SCHEDULE E Page 2 of 4 B. STATEMENT OF IFC INVESTMENTS IN UGANDA (as of September 30, 1995) Fiscal . . m .....Iiii~ 1965 a/ Mulco Textiles, Ltd. Textiles 2.26 0.54 0.70 3.50 1972 a/ Tourism Promotion Serv. Hotels and Tourism 0.73 0.00 0.38 1.11 1984 a/ The Toro & Mityana Tea Food and Agribusiness 1.12 0.00 0.50 1.62 1984 Sugar Corporation Food and Agribusiness 8.00 0.00 0.00 8.00 1985 Uganda Tea Corp. Food and Agribusiness 2.81 0.00 0.00 2.81 1985/93 Development Finance Co. Financial Services 0.00 0.98 0.00 0.98 1993 a/ Nge-ge Limited Food and Agribusines 0.65 0.00 0.00 0.65 1993 Clovergem Fish & Foods Food and Agribusiness 0.85 0.00 0.00 0.85 1993 Jubilee Insurance Co. Financial Services 0.00 0.10 0.00 0.10 1993 Nile Roses Ltd. Food and Agribusiness 0.30 0.00 0.00 0.30 1994 Rwenzori Properties Ltd. Industrial and Consumer 0.81 0.19 0.00 1.00 1994 Skyblue Apart-Hotel Hotels and Tourism 0.51 0.00 0.00 0.51 1995 Clovergem Celtel Ltd. Infrastructure 4.96 0.64 0.00 5.60 1995 Polypack Limited Manufacturing 1.00 0.00 0.00 1.00 1995 Rainbow International Industrial and Consumer 0.79 0.00 0.00 0.79 1995 Uganda Leasing Co. Financial Services 0 00 0.33 0.00 0.33 Total gross commitments b/ 24.79 2.78 1.58 29.15 Less: Repayments, cancellations, terminations & sales 6.84 0.54 1.58 8.96 Total commitments now held c/ 17.95 2.24 0.00 # 20.19 Total commitments held and pending commitments Total undisbursed commitments 5.83 0.00 0.00 5.83 a/ Investments which have been fully cancelled, terminated, written-offs, sold, redeemed, or repaid. b/ Gross commitments consist of approved and signed projects. c/ Held commitments consist of disbursed and undisbursed investments.  - 19- SCHEDULE E Page 3 of 4 C. UGANDA: IMPLEMENTATION ISSUES 1. The IDA portfolio for Uganda as of September 30, 1995 consists of 24 projects, with a total commitment of about US$1.1 billion. Of these, 21 are investment projects with an undisbursed amount of about US$690 million. The portfolio showed solid improvement in FY95, largely as a result of intensified effort by task managers and staff generally (i.e., through PERs) to remove the obstacles to project implementation and get better results in the field. As a result of this effort, several projects were restructured and others were closed. This was done in close cooperation with the Government and now all IDA projects are considered core projects in the Government's development budget. 2. In the FY95 Annual Review of Portfolio Performance (ARPP), there were no projects rated unsatisfactory on the development objectives rating, and only two unsatisfactory projects on the implementation progress rating. Early in the current fiscal year, one of these unsatisfactory projects (Enterprise Development) was restructured and is expected to be upgraded to satisfactory before the end of the current fiscal year; the other one (First Urban) will take a little longer to turn around, even though some restructuring of it has already occurred. Disbursements have increased steadily in recent years from US$136 million in FY93 to US$193 million in FY95, resulting in a net transfer to Uganda of about US$173 million in the latter FY. Because the approval of additional projects raised the undisbursed balance in FY94, the disbursement factor dipped slightly in FY95 to 13.3 from 14.5 in FY94. Had no new projects been approved, the factor would have been 17.3. 3. A number of factors account for the improved implementation performance in Uganda. A major factor is the increased involvement of Ugandan project managers in solving implementation problems through a series of effective CPPRs they were largely responsible for organizing in conjunction with the Bank's Resident Mission. To follow up on the decisions taken at the CPPRs, a Group of Project Managers (GPM) was formed and is meeting regularly to address implementation problems common to all or most projects. Other important factors in the improved implementation performance are the periodic training and workshops on disbursement and procurement issues; the coordination between the CPPRs and PERs in resolving the counterpart funding problems facing the development budget; and the intensive project review and restructuring exercise that has taken place in the past couple of years. The Resident Mission has been instrumental in achieving these improved results through its close cooperation with the GPM. 4. While good progress has been made, project implementation is still not satisfactory and further improvements are needed. Disbursement and procurement are still sluggish in several projects, counterpart fund shortages occur periodically in projects, accounting and auditing are still deficient in many respects and timely results on the ground continues to elude many  - 20 - SCHEDULE E Page 4 of 4 projects. Consequently, IDA will continue to work with the Government to strengthen the CPPR process, including the follow-through on the recommendation made, and will continue to focus attention on the generic constraints (e.g., disbursement and procurement practices, accounting and auditing procedures, adequacy of counterpart funds, etc.). In addition, much greater emphasis is being placed by IDA on quality at entry, through increased beneficiary and stakeholder participation (including more solid government commitment) in the project cycle, from identification through to completion of the Board documents. Much closer involvement of beneficiaries and stakeholders in implementation will also be sought in IDA projects, including greater use of NGOs, other donor representatives, etc.  1' 34/ 32 SUDAN /\ UGANDA /7 5 DECENTRALIZATION IN UGANDA FINANCIALLY DECENTRALIZED PHASE 11 0 ~~~~~~~~~PHASE III DISTRICT CAPITALS ZAIRE vMOROTON. NATIONAL CAPITAL DISTRICT BOUNDARIES' N..> ~~~~~~~~~~~ - APAC ~~~~~~~~~~~~~RIVERS -j,v, .\ - INTERNATIONAL BOUNDARIES 2 1LJ' - ~~~~~~~~~~~~~~~~SOROTIj142 Mg' ? fWlASINDI f _ f sKUMI 9' . i ' DlSlRld noXFes cosnc,de toth. D,,tod, Co7pltlt. Kb..1, 0,We, HOIMAj i ' BUS i i 101 i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~h o,nOe~014 e ; * i,.; , + ,,t,/ HOMA d to,,,lCflG o PALLISA . 46000 _-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O RWAND 000 37, no BOGAI L 4,, 4~~~~~~~~~~~~~~~~~bd,o46n-00 -h 0 K'~~~~~~~~~~L002TRS 0 50 00 ISO5 32 NAAEGIQAN GANG,~O04000646 TANZANIAGANG    *:z . I : as I :S :' . i ; r l,