Uganda - Public Enterprises Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15600 IMPLEMENTATION COMPLETION REPORT UGANDA PUBLIC ENTERPRISES PROJECT (Credit 1962-UG) April 30, 1996 Public and Private Enterprise Division Eastern Africa Department 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 US$1.0 = Ush 1,000 (1995) WEIGHTS AND MEASURES Metric System ABBREVIATIONS DIC Divestiture Implementation Committee DRIC Divestiture and Restructuring Implementation Committee DS Divestiture Secretariat EDP Enterprise Development Project IDA International Development Association PEP Public Enterprises Project PERD Public Enterprise Reform and Divestiture PERDS Public Enterprise Reform and Divestiture Secretariat PIES Public Industrial Enterprise Secretariat PMU Parastatal Monitoring Unit PU Privatization Unit SARAP Sector Administrative Reform and Planning Study SCD Statutory Corporations Division UDC Uganda Development Corporation FOR OFFICIAL USE ONLY UGANDA PUBLIC ENTERPRISES PROJECT IMPLEMENTATION COMPLETION REPORT Table of Contents PREFACE SUMMARY B ackground...............................................................................................(i) Evaluation of Objectives ........................................................................... (i) Achievement of Objectives .......................................................................(i) Major Factors Affecting the Project .........................................................(ii) Project Sustainability ...............................................................................(ii) Bank's and Borrower's Performances ......................................................(ii) A ssessm ent of Outcom e...........................................................................(ii) Future Operations, Findings and Key Lessons Learned.......................... (iii) A. Statement and Evaluation of Objectives ...................................................... B. Achievement of Objectives .........................................................................3 C. Major Factors Affecting the Project ............................................................5 Factors Not Generally Subject to Government Control......................5 Factors Generally Subject to Government Control.............................6 D . Project Sustainability ..................................................................................6 E . B ank Perform ance.......................................................................................7 F. Borrow er Perform ance................................................................................8 G . A ssessm ent of Outcom e..............................................................................8 H . Future O peration .........................................................................................9 I. K ey Lessons Learned................................................................................10 STATISTICAL APPENDICES Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimate and Actual Table 5: Key Indicators for Future Project Operation Table 6: Project Costs Table 6a: Project Financing Table 7: Status of Legal Covenants 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 wiLhout World Bank authorization. Table 8: Bank Resources: Staff Inputs Table 8a: Staff Inputs for Supervision in 1994 and 1995 Table 9: Compliance with Operational Manual Statements Table 10: Bank Resources: Missions AIDE MEMOIRE IMPLEMENTATION COMPLETION REPORT UGANDA PUBLIC ENTERPRISES PROJECT (C1962) Preface This is the Implementation Completion Report (ICR) for the Public Enterprises Project in Uganda for which Credit 1962-UG in the amount of SDR11.70 million (US$15 million at the prevailing exchange rate) was approved on November 8, 1988 and made effective on May 11, 1989. The credit was closed on May 31, 1995, the original closing date. Final disbursement took place on August 15, 1995, at which time a balance of US$2.5 million was canceled. The ICR was prepared by Gerard Byam (AF2PE) and reviewed by Luciano Borin (Acting Division Chief, AF2PE) and Surendra Agarwal (Project Adviser, AF2DR). The preparation of the ICR benefited from a project completion mission in February, 1996, and a simultaneous supervision mission of the Enterprise Development Project (the follow-on project to PEP) consisting of Stefano Migliorisi and Marie Sheppard of AF2PE. The ICR also is based on material in the project file. The Borrower contributed to the preparation of this ICR by rendering professional assistance to the ICR Mission and contributing views reflected in the mission's aide-m6moire. The Borrower has not provided specific comments on the ICR. It is important to note that the main objective of the Public Enterprises Project (PEP) was to prepare a program of parastatal reform and divestiture. Hence, in the ICR, "project" refers to PEP and "program" refers to the overall parastatal reform program which was prepared during the project's implementation. SUMMARY 1. Background. Uganda's public sector in 1987, like the rest of the economy, was decimated by years of political instability and economic decline. The public enterprise sector suffered from a loss of managerial and technical staff; equipment shortages, and the destruction of buildings and records and had become a significant financial burden on the Government. The Public Enterprises Project (US$ 15 million) was approved by IDA's Board on November 8, 1988 and closed on May 31, 1995. The objective of the credit was to strengthen the Government's capacity to sustain economic recovery by increasing productivity and output and reducing financial losses in public enterprises. The project's components aimed to: (1) define a program of divestiture and liquidation of industrial public enterprises; (2) prepare and implement a program of targeted management and technology service assistance to retained industrial enterprises; (3) define a longer-term policy, legislative and administrative framework for the management of the public enterprise sector. 2. Evaluation of Objectives. The project's objectives were appropriate given the state of the country's devastated economy in 1988 and the desire to quickly restore Uganda's productive capacity while difficult policy reforms were being implemented. However, the rehabilitation - as opposed to the divestiture - of the most commercially promising and economically sound public enterprises became the dominant objective of the project. This led to an increase in the complexity of the reform program, and made the imposition of a hard budget constraint very difficult to implement. With hindsight, a more appropriate objective would have been formulation of a strategy to: (1) select and restructure a limited number of strategic enterprises that would be retained in the public sector, (2) impose and enforce a hard budget constraint with special emphasis on restricting parastatals' access to credit from the Government owned Uganda Commercial Bank, and (3) create the incentives for private investors to finance the rehabilitation of the country's productive capacity. 3. Achievement of Objectives. Sector policy and institutional development objectives were partially achieved. The project supported the preparation of a Sector Administrative Reform and Planning Study (SARAP) and a Divestiture Design Study (DDS). These studies were completed in 1990 and were used to formulate the Government's policy for PE reform and an action plan for reform and divestiture (APPERD). In the area of legal reform, the institutional framework, policies and principles guiding the reform and divestiture program were eventually embodied in the Public Enterprise Reform and Divestiture (PERD) Statute which was passed by Parliament in October, 1993. However, overall sector administration and management of public enterprises remained weak and uncoordinated throughout the life of the project. ii 4. Major Factors Affecting the Project. The project suffered from a lack of coordination and cooperation between Government ministries, an overly complex follow-on project - the Enterprise Development Project - which overlapped with PEP both in terms of timing and content, and the late release of counterpart funds. Also, the divestiture program was designed at a time when the financial capacity of Uganda's private sector was very limited. This proved to be a major constraint to the program's implementation since, in the absence of a well thought out public information campaign, the program was increasingly viewed as a hand-out to foreigners. Relatedly, Parliamentary opposition to the program led to substantial delays in project implementation. 5. Project Sustainability. The project's sustainability is measured ultimately by the sustainability of the parastatal reform program. The program as originally designed was not sustainable. There was insufficient attention paid to broadening local ownership of the program, and too much emphasis was placed on restructuring enterprises as opposed to consideration of their sale or liquidation. Moreover, an evaluation of the program in 1994 projected that as many as 83 enterprises will still be fully or partially owned by the State by 1999 when the program is scheduled to finish, and an additional 50 parastatals were not even included in the work program. The restructuring of the reform and divestiture program in early 1995 addressed these issues. However, it is too early to tell whether the overall program is now sustainable. 6. Bank's and Borrower's Performances. The project was prepared in the aftermath of substantial turmoil and instability. It was designed to be flexible and responsive to emerging policy issues, and was viewed as necessary for broadening the constituency for reform. Therefore, given the circumstances, the performances of the Bank and the Borrower during preparation were marginally satisfactory even though the arrangements for project management were inadequate. 7. Project management by the Borrower and supervision by the Bank were less than satisfactory. The former was weak. This contributed to a blurring of the distinction between management and supervision, and undermined local ownership of the program. 8. Assessment of Outcome. The assessment of the project's outcome is complicated by the substantial degree of overlap with the ongoing Enterprise Development Project However, measured against the project's main objective of defining and preparing a program of parastatal reform and divestiture, the project's outcome is assessed as unsatisfactory. Specific policies on employee retrenchment, the broadening of share ownership, and the assumption of the debt of parastatals by the Government were not formulated. The institutional framework did not adequately address issues of transparency in the selection of public enterprises for divestiture and the evaluation of iii bids. These issues, which contributed to the slow pace of reform, were addressed as part of the restructuring of the overall program and EDP. 9. Future Operations, Findings and Key Lessons Learned. In January 1995, the President of Uganda issued a directive which became the basis for the comprehensive restructuring of the parastatal reform and divestiture program. Among other things, the directive vested the shares of all public enterprises earmarked for divestiture in the Ministry of Finance and Economic Planning and established a target of divesting 85% of all parastatals by the end of 1997. The restructured reform program is supported by EDP. Specifically, EDP is financing technical assistance for strengthening the management of the program, and technical assistance for a public relations campaign aimed at deepening ownership of the program as well as for formulating specific policies on other issues such as employee retrenchment. 10. The project's experience reinforced the need for better coordination of the Bank's country assistance strategy. The project's emphasis on restructuring parastatals was at odds with the objective of parallel adjustment programs which aimed to impose hard budget constraints on the operations of parastatals. Also, the approval of the complex EDP three years prior to the planned closing of PEP, created substantial confusion. 11. PEP's experience also highlights the importance of listening to the Borrower and understanding and responding to the Borrower's concerns during supervision. An underlying objective of the credit was to strengthen political support for parastatal reform and divestiture. Instead, there was a period when the Bank's rigidity during project supervision appeared to undermine the little support that existed. The experience also illustrates the importance of the Bank's current emphasis on stakeholders' analysis in the design of policy reforms. UGANDA Public Enterprises Project Implementation Completion Report A. Statement and Evaluation of Objectives 1. Background. Uganda's public sector in 1987, like the rest of the economy, was decimated by years of political instability and economic decline. The public enterprise sector suffered from a loss of managerial and technical staff, equipment shortages, and destruction of buildings and records. Public enterprises had become a significant financial burden on the Government; a reduction of the burden was essential both to the restoration of the Government's essential functions as well as to overall economic recovery. 2. The Bank, at the Government's request, supported a two-pronged strategy for revitalizing the public sector. The strategy entailed: (i) strengthening the capacity of the Government to rationalize its parastatal sector through a program of rehabilitation, divestiture and liquidation; and (ii) restoring the essential functions and processes of Government, starting first with the Ministries of Finance and Planning and Economic Development. The strategy aimed to create a foundation for the longer term development and increased efficiency of Government institutions through civil service reform and a comprehensive program of public enterprise sector reform. The Public Enterprises Project (PEP) was the vehicle for the preparation of the enterprise reform program. 3. A credit of US$15 million in support of the PEP was approved by IDA's Board on November 8, 1988 and closed on May 31, 1995. An amount of US$2.5 million was canceled. The project was meant to be the first of two projects to support the parastatal restructuring and divestiture program. The second is the ongoing Enterprise Development Project (EDP) which was approved by IDA on December 3, 1991. PEP also was one of several technical assistance credits geared to rebuilding the capacity of the public sector and aimed at supporting the implementation of the Economic Recovery Program. 4. Statement of Objectives. PEP's objective, as stated in the Staff Appraisal Report, was to strengthen the Government's capacity to sustain economic recovery by increasing productivity and output and reducing financial losses in public enterprises. The specific objectives were to: 2 (i) define and implement reforms of sector policy and the legislative framework and strengthen sector administration and enterprise management; (ii) prepare and initiate an overall program of rehabilitation and rationalization for all public sector enterprises; and (iii) implement a program of rehabilitation, restructuring, divestiture and liquidation of selected industrial parastatal enterprises. 5. Evaluation of Objectives. The rehabilitation of the most commercially promising and economically sound public enterprises became the dominant objective of the project. This was driven in part by the state of the country's devastated economy in 1988, and the desire to quickly restore Uganda's productive capacity while difficult policy reforms were being implemented. Effective and efficient public enterprises were viewed as essential to the recovery effort due to their dominance in agricultural produce marketing and in manufacturing, transport and financial services. A corollary was the perception that there would be limited foreign private interest in providing the equity investments required to restore the capacity of most enterprises, and that mobilizing such investments would be a lengthy process. 6. The Government's classification in 1988 of the enterprises to be retained, divested, or liquidated provided ample evidence of the importance attached to rehabilitation vs divestiture. Eighty-eight enterprises were classified of which 32 would be fully retained and another 34 would be majority owned by the Government. While these lists included traditionally strategic parastatals such as the utilities and the central bank, they also included food and beverage companies (including the brewery), hotels, automobile dealerships, and hardware stores. A major objective of PEP was to assist the Government with the selection of the most commercially promising of these enterprises for restructuring. By implication, the least commercially promising enterprises would be sold or liquidated. 7. The attempts to identify and then restructure - as opposed to divest - the most economically viable enterprises increased the complexity of the reform program, and made the imposition of a hard budget constraint very difficult to implement. The management of the complex process of restructuring a large number of public enterprises was beyond the capacity of the country's limited managerial resources. With hindsight, a more appropriate objective would have been formulation of a strategy to: (1) select and restructure a limited number of strategic enterprises that would be retained in the public sector, (2) impose and enforce a hard budget constraint with special emphasis on restricting parastatals' access to credit from the Government owned Uganda Commercial Bank, and (3) create the incentives for private investors to finance the rehabilitation of the country's productive capacity. 3 B. Achievement of Objectives 8. The Staff Appraisal Report did not include monitorable indicators for the implementation phase of the restructuring and divestiture program. The expectation was that measurable outputs would be defined following the diagnostic phase of the project. Following the completion of the diagnostic studies divestiture targets were identified. However, successive supervision missions highlighted the need to identify measurable outputs for the PE rehabilitation component of the program but this was not done until February 1995 when the Enterprise Development Project was restructured. 9. Sector Policy Objectives. The project's objective, which was to prepare an overall program of rehabilitation and rationalization for all public sector enterprises, was partially achieved. The project supported the preparation of a Sector Administrative Reform and Planning Study (SARAP) and a Divestiture Design Study (DDS). These studies were completed in 1990 and were used to formulate the Government's policy for PE reform and an action plan for reform and divestiture (APPERD) which, in its first phase, targeted the divestiture (including) liquidation of 59 PEs and the rehabilitation of 12. The policy for PE reform included guidelines for the divestiture of public enterprises and the basic principles for the reform of those enterprises retained in the public sector. The major policy elements included introduction of a hard budget constraint, separation of the commercial from the non- commercial objectives of individual enterprises, the redefinition of the functions of the boards of directors to provide for greater autonomy, the establishment of independent and transparent arrangements for the selection of qualified boards of directors and chief executive officers, and the ensuring of adequate competition for PEs by allowing the entry of other enterprises into similar activities. 10. Institutional Development Objectives. The project only partially achieved its institutional development objectives. In the area of legal reform, the institutional framework, policies and principles guiding the reform and divestiture program were eventually embodied in the Public Enterprise Reform and Divestiture (PERD) Statute which was passed by Parliament in October, 1993. The statute classified all public enterprises into five categories: Class I PEs would be fully owned by the state; Class II would be majority owned; Class Ill would be minority owned; Class IV would be fully private; and Class V would be liquidated. The statute also sanctioned the transformation of the Divestiture Implementation Committee (DIC) to the Divestiture and Reform Implementation Committee (DRIC). DRIC is a ministerial level committee established to take all the policy decisions and approve all actions required to implement the divestiture program. 4 11. Overall sector administration and management of public enterprises remained weak and uncoordinated throughout the life of the project. Specifically, a major objective of the project was to clearly define and to strengthen the roles of the Statutory Corporations Division and the Public Industrial Enterprise Secretariat, while reducing the role of the Uganda Development Corporation as a holding company for industrial parastatals. 12. Statutory Corporations Division. Implementation of the reform program was initially the responsibility of the Statutory Corporations Division (SCD) in the Ministry of Finance. SCD's routine responsibilities included reviewing and approving annual requests for budgetary support to public enterprises. The division was severely understaffed and procedures for the allocation of funds to PEs were not well-defined. The credit supported the strengthening of SCD's capacity to design and implement performance monitoring and controls for all public enterprises consistent with revised accounting standards. Project management, including the management of SARAP and the Divestiture Design Study also was the responsibility of SCD. 13. SCD's performance under the project was disappointing. Although the division successfully managed the implementation of the SARAP and diagnostic studies, its substantive role was never clarified and it was not successfully strengthened under the project. In 1991, the Public Enterprise Reform and Divestiture Secretariat (PERDS) was created to coordinate the program and effectively usurped the role of SCD. PERDS consisted of a coordinator and two secretariats. The Public Enterprise Secretariat (PES) became the focal point for the development and implementation of PE reform policies and programs, and the Divestiture Secretariat (DS) became the focal point for the definition and implementation of the divestiture program. Finally, the financial administration of the Government's PE portfolio was transferred to the Uganda Development Bank (UDB). Overall, these arrangements were not effective and a search for appropriate arrangements continued until the end of the project. 14. Public Industrial Enterprise Secretariat (PIES). PIES was established in the Ministry of Industry and Technology to assist in designing and implementing the restructuring and divestiture program for industrial parastatals. Specifically, PIES was to identify the most commercially promising industrial enterprises which would then be subjected to management audits and, subsequently, management and technology contracts and advisory services. PIES also was to identify the immediate inputs (including credit requirements) for the selected enterprises. The project financed a UNIDO contract to strengthen the secretariat. Throughout the project there were concerns about the coordination of PIES' activities with other key agencies. The division of responsibilities over the supervision of public enterprises between PIES and SCD, and then between PIES and PERDS, was always unclear. 5 15. Uganda Development Corporation (UDC). UDC was vested with primary responsibility for promoting industrial sector development. At the beginning of the project there were 35 enterprises in UDC's portfolio and high priority was attached to reducing UDC's role as a holding company. The project envisaged the liquidation, merger or divestiture of 11 dormant companies in UDC's portfolio, the partial divestiture of 16 companies, and the full divestiture of another three. The project provided technical assistance to UDC to enable it to undertake this rationalization program. The project's objective of reducing UDC's role as a holding company was substantially achieved as only 4 enterprises, instead of 21 as originally envisaged, are now left in UDC's portfolio. It is, however, unclear whether this satisfactory outcome was at all related to the quality of the technical assistance provided under the Project. C. Major Factors Affecting the Project Factors Not Generally Subject to Government Control 16. Level of private sector development. The divestiture program was designed at a time when the financial capacity of the domestic private sector was very limited. This proved to be a major constraint to the program's implementation. In the absence of a well thought out public information campaign, the program was increasingly viewed as a hand-out to foreigners. Conversely, the foreign perception of Uganda was that the country was a bad investment risk. This perception was ameliorated to some extent by the revision of the Investment Code in 1990 and the concerted efforts to encourage Asian entrepreneurs to return. However, Uganda's recent history of civil war, the civil wars in the neighboring countries of Sudan and Rwanda, and the AIDS epidemic all contributed to the perception of Uganda as a high risk environment. This, in turn, had the double effect of reducing the demand for enterprises being privatized and of increasing the costs of the foreign expertise required for rehabilitation. 17. Level of popular support. Parliamentary opposition to the divestiture program had a substantial impact on the project. Although the Staff Appraisal Report identified internal political differences regarding the extent of divestiture as a major risk to the project, this was not taken into account in the final design of the divestiture program. The program was designed without the participation of Ugandans outside the Government and without any discussion in Parliament. As a result, Parliament halted the program for over six months until the PERD Statute was enacted. A more participatory approach to the program's design would have lengthened the design stage but would have resulted in the faster implementation of the program. The failure to broaden share ownership also contributed to the low level of public support for the program, one of the Government's stated intentions. However, attainment of this objective was difficult given the absence of a developed capital market. 6 Factors Generally Subject to Government Control 18. Lack of Coordination and Cooperation between Government ministries and agencies. As noted above, the institutional arrangements for managing the reform and divestiture program were problematic from the start. The relative roles of PERDS, PIES and, to some extent, UDC, appeared to overlap. The lack of direction and management of the program was amplified by the dismissal of the PERD Coordinator in August 1992 and the failure for almost one year to appoint a replacement. During this period, the chairmanship of the divestiture and reform implementation committee was transferred from the Minister of Finance to the Prime Minister. Simultaneously, other ministers began to question some of the elements of the reform program. 19. Complexity of Program and Project Design. EDP, which was to finance the implementation of the reform program, was approved by IDA in December 1991 and became effective in September 1992. Hence there was a considerable overlap with PEP - both in terms of content and implementation period - which was scheduled to close in May 1995. Very few in the Government understood the linkages and relevance of EDP's many components and their relationship to PEP (many in the Government had assumed that PEP ended when EDP was approved). 20. Following the merger of the ministries of Finance and Economic Planning in 1992, a task force was charged with reviewing EDP and restructuring it if necessary. Partly as a result, the overall reform program stalled for over one year. Although the internal re- evaluation was desirable, the need for it raised questions about the initial degree of Government ownership of both the project as well as the reform program. 21. Lack of counterpart funds. There were substantial delays in the release of counterpart funds throughout the life of the project. This may have been due, in part, to the relatively low priority attached to the project during attempts to rationalize the budget. D. Project Sustainability 22. The project's sustainability is measured ultimately by the sustainability of the parastatal reform program. The program as originally designed was not sustainable. As discussed elsewhere, the institutional arrangements were not properly designed, there was insufficient attention paid to broadening local ownership of the program, and there was too much emphasis placed on the restructuring of enterprises versus consideration of their sale or liquidation. 23. According to an evaluation of the reform and divestiture program in 1994, despite the Government's intention of imposing a hard budget constraint on public enterprises, 7 the annual average for subsidies (mainly indirect) to PEs amounted to roughly twice the size of the FY93/94 budget allocation for wages and salaries, five times that for health, or almost 50% of total government revenues. By October 1994, 37 enterprises, accounting for only 5% of total employment in all parastatals, had been divested. The report also noted that the number of days required to complete a divestiture was very high (759) and, by any measure (total value of bids, average bid value, average number of bids per PE advertised), bids were declining substantially. The evaluation projected that, based on current trends, as many as 83 enterprises will still be fully or partially owned by the State by 1999. Furthermore, an additional 50 parastatals were not included in the work program and in most cases were not mentioned in the PERD Statute. 24. The restructuring of the Enterprise Development Project addressed these issues and should have a positive impact on the overall parastatal reform program. As such, a final evaluation of the sustainability of the program will have to await the completion of EDP. E. Bank Performance 25. The project was identified as one of a series of technical assistance programs required to assist the Government with the preparation and implementation of its Economic Recovery Program. PEP was prepared at a time when Uganda had just emerged out of a period of considerable chaos, the extent of popular support for the new Government was unclear, and the internal consensus for reform of public enterprises was not strong. Hence, the emphasis in PEP's design was on flexibility and on the ability to respond to emerging policy issues in a changing socio-political environment. As such, the studies eventually financed under the project were timely and relevant in Uganda's changing policy environment and were used in the design of adjustment programs. The flaw in the strategy was that suitable arrangements for managing the inter-ministerial project were difficult in the absence of an internal consensus for reform. The risk created by a lack of consensus was identified during appraisal and was acknowledged in the project's Memorandum of the President. However, the project was viewed as a necessary mechanism for supporting those within the Government in favor of the reform effort. In those circumstances, the performance of the Bank during identification, preparation and appraisal was marginally satisfactory. 26. With hindsight, project supervision by the Bank was less than satisfactory. Supervision missions were frequent and were quick to bring to the attention of the Government the actions required to improve project performance. However, weak project management led to a blurring of the distinction between project management and supervision. This resulted in the appearance of project management by the Bank 8 which undermined local ownership of the program. On one occasion when the Government tried to assert some ownership - through the formation of the task force to review the reform and divestiture program - the Bank was not responsive. Instead, Bank staff viewed the task force as a threat to the package of measures and programs agreed with the Government. The Bank also mistook the Government's concerns about the complexity of the program's projects (PEP and EDP) for a lack of commitment to the divestiture program. The Bank responded constructively only toward the end of the project during the restructuring of EDP. 27. Bank supervision missions of PEP were effectively supervising the preparation of the reform and divestiture program. As such, the Bank shared responsibility with the Borrower for the weaknesses in the program's design (see Section G below). F. Borrower Performance 28. The Borrower's performance during preparation was satisfactory. However, implementation of the project was poor. The reasons included poor project management, uncoordinated implementation of project components, and delays in releasing counterpart funds. Poor project management was evidenced by two qualified audits (the final audit for 1994\95 is still pending). There is no evidence that project staff and consultants were regularly evaluated. Finally, project implementation was hampered by a lack of broad commitment within the Government to the overall objective of parastatal reform and divestiture. G. Assessment of Outcome' 29. The assessment of the project's outcome is complicated by the substantial degree of overlap with the ongoing Enterprise Development Project. On the positive side, most of the actions required under the project were implemented, and the studies financed by the project were timely and provided the analyses for fundamental reforms in a variety of sectors (e.g the diagnostic studies of the Bank of Uganda and UCB provided some of the analyses for the reform program in the financial sector). 30. Nevertheless, measured against the project's stated objectives, the outcome is unsatisfactory. The main reason for this assessment stems from the evaluation of the reform and divestiture program in 1994. The evaluation identified several major problems. Some of these arose from the implementation of the program while others arose from inadequate preparation. The latter are directly attributable to the Public Enterprises Project and are briefly discussed below: This section relies heavily on the Bank's "Public Enterprise Reform and Divestiture in Uganda: Program and Project Restructuring" (February, 1995). 9 (a). The absence of centralized responsibility for the ownership and supervision of public enterprises. This was required, and should have been addressed under PEP, given the need for the effective imposition of a hard budget constraint. (b) The absence of specific divestiture policies on employee retrenchment, the assumption by Government of the debt of parastatals being divested and the broadening of share ownership. A strategy to address these issues was especially important in building public support for the program and should have been an essential component of a public information campaign. (c) Inadequate information on parastatals. The absence of information on parastatals resulted in numerous disputes on the legal ownership of enterprises following the completion of the divestiture. Furthermore, in some cases information on ownership was erroneous and some enterprises included in the PERD Statute either did not exist or were privately owned. (d) Lack of transparency in all phases of the divestiture process. Specifically, the selection of enterprises for divestiture and the evaluation of bids were far too discretionary. For example, enterprises were occasionally added to the divestiture pipeline at the request of individual members of the Divestiture and Reform Implementation Committee. Also, bid criteria and evaluation standards were not clearly defined. (e) Use of Divestiture Proceeds. Most of the divestiture proceeds had been ploughed back into the parastatal sector, usually without an agreement for the restructuring of the enterprise. H. Future Operation 31. In January 1995, the President of Uganda issued a directive which became the basis for the comprehensive restructuring of the parastatal reform and divestiture program. The directive dissolved the PERD Secretariat and created instead a Privatization Unit under the Minister of State for Privatization in the Ministry of Finance and a Parastatal Monitoring Unit under the Secretary to the Treasury (subsequently brought under the Minister of State for Privatization). The directive also vested the shares of all public enterprises earmarked for divestiture in the Ministry of Finance and Economic Planning. Finally, the Privatization Unit was instructed to divest "85% of all parastatals" by the end of 1997. 32. The restructured program also emphasizes the importance of adhering to the hard budget constraint. Under the plan, the Parastatal Monitoring Unit (PMU) would be 10 strengthened to improve its monitoring of parastatals. Equally important, coordination between the PMU and the Privatization Unit will be enhanced to prevent a softening of the hard budget constraint during the divestiture process. In the past, there was no mechanism for tracking the performance of public enterprises once they entered the divestiture pipeline. 33. The restructured parastatal program is supported by EDP. Specifically, EDP is financing technical assistance for strengthening the management of the program, and technical assistance for a public relations campaign aimed at deepening ownership of the program as well as for formulating specific policies on other issues such as employee retrenchment. 34. In February 1996, an EDP supervision mission concluded that the restructuring has resulted in substantial improvements in the management of the reform program as well as in the performance of technical assistance. There was a significant increase in the number of divestitures (from 4 in 1994 to 21 in 1995) and considerable progress in measuring the volume of subsidies to parastatals. However, the mission noted that improvement in project management was at a cost to the PMU whose staff assumed many administrative functions. To address this problem, the organizational structure and administrative functions of the PMU were adjusted. The mission also noted that the transparency of the divestiture process remained unsatisfactory. As a result, the Borrower intends to design a transparency rating for major transactions to measure investor interest, the evaluation method, public opinion and the extent to which contractual agreements are binding over time. I. Key Lessons Learned 35. PEP's experience reinforced the need for better coordination of the implementation of the overall country strategy. Specifically, the emphasis on restructuring parastatals was at odds with the objective of parallel adjustment programs which aimed to impose a hard budget constraint on the operations of public enterprises. Also, the approval of EDP three years prior to the planned closing of PEP, created substantial confusion both in and outside the Bank. The respective roles of both projects were unclear (this issue was raised during EDP's pre-appraisal review meeting but was never addressed adequately) and, more importantly, the complex design of EDP had an adverse impact on the implementation of PEP. 36. PEP's experience also highlights the importance of listening to the Borrower, and understanding and responding to the Borrower's concerns during supervision. An underlying objective of the credit was to strengthen political support for parastatal reform and divestiture. Instead, there was a period when the Bank's rigidity during project supervision appeared to undermine the little support that existed. Supervision 11 missions were frequent and in most cases raised technical issues requiring immediate attention. However, the missions' recommendations tended to be "by the book" (i.e strictly in accordance with the requirements of the credit agreement). More flexibility in terms of listening and responding to the Borrower's concerns, and a greater awareness of the changing socio-political environment, would have led to a recognition of the need to restructure the program much earlier. The experience also illustrates the importance of the Bank's current emphasis on stakeholders' analysis in the design of policy reforms. Table 1: Summary of Assessments A. Achievement of Objectives Substantial Paial Negliible NtAplicable Macro Policies O 0 0 4 Sector Policies O 4 O 0 Financial objectives O 0 0 4 Institutional Development 0 4 O 0 Physical Objectives O 0 0 4 Poverty Reduction 0 0 0 4 Gender Issues O O 0 4 Other Social Objectives 0 0 0 4 Environmental Objectives 0 0 0 4 Public Sector Management 0 0 4 O Private Sector Development 0 0 4 O Other (specify) O 0 0 0 Likely Unlikely Uncertain (4) (4) (4) B. Project Sustainability 0 0 4 C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification 0 4 O Preparation Assistance 0 4 O Appraisal 0 4 O Supervision 0 0 4 Hishlw Satisfactory Satisfactory Deficient D. Borrower Performance Preparation 0 4 O Implementation 0 0 4 Covenant Compliance 0 4 O Hi"l Hiy satisfactory Satisfactory Unsatisfactory unsatisfactory E. Assessment of Outcome 0 0 4 O Table 2: Related Bank Loans/Credits Year of Loan/Credit 77tle Purpose Approval Status Enterprise To improve the operating 1991 Ongoing. Development environment and generate a Restructured in (Credit 2315-UG) supply response for all February 1995. enterprises Table 3: Project Timetable Date Actual Steps in Project Cycle Date Planned Latest Eimate Identification (Executive Project Summary) 03/27/88 Preparation 04/19/88 Appraisal 05/08/88 05/08/88 Negotiations 09/88 09/20-23/88 Board presentation 10/30/88 11/08/88 Signing 12/02/88 Effectiveness 01/89 05/11 /89 Closing Date 05/31/95 05/31/95 Table 4: Loan/Credit Disbursements: Cumulative Estimate and Actual (US$ millions) ____________________ 1989 1990 1991 I1992 1993 1994 1995__ Appraisal Estimate Cumulative 0.30 2.25 4.35 7.35 10.20 12.60 15.00 Actual Cumulative 0.53 3.69 6.97 8.02 9.84 11.48 12.52* Actual Cumulative as% of Estimate 176.7% 164.0% 160.2% 109.1% 96.5% 91.1% 83.5% Date of Final Disbursement August 15, 1995 * Balance of $2.48 million cancelled Table 5: Key Indicators for Future Project Operation DIVESTITURE Quantity: Number of enterprises divested and number of employees in enterprises divested. Quality: A transparency rating will be designed to measure (a) investor interest; (b) evaluation method: (c) public opinion; and (d) the extent to which contractual agreements are binding over time. Cost: Time and cost of completing divestitures. P.E. REFORM Quantity Value Added; reduction of subsidies Quality Customer surveys Table 6: Project Costs Appraisal Estimate (US$ mn) ActuallLatest Estimate (US$ mn) Category Local Cost Foreign Cost Total Local Cost Foreign Cost Total Equipment, Vehicles, Furniture, Materials 4.8 1.5 6.3 1.8 1.0 2.8 Training 0.0 0.6 0.6 0.0 0.2 0.2 Technical Assistance and Consultants 0.0 9.4 9.4 0.5 10.7 11.2 Unallocated 0.0 3.0 3.0 0.0 0.0 0.0 TOTAL 4.8 14.5 19.3 2.3 11.9 14.2 Table 6A: Project Financing Appraisal Estimate (US$mn) ActuallLatest Estimate (US$mn) Source Local Cost Foreign Cost Total Local Cost Foreign Cost Total Government 4.3 0.0 4.3 1.8 0.0 1.8 IDA 0.5 14.5 15.0 0.5 11.9 12.4 Total 4.8 14.5 19.3 2.3 11.9 14.2 Table 7: Status of Legal Covenants Item Under Dated Covenant Original Date Completion Comments Date (a) Completion of Divestiture Design 12/31/89 03/31/90 - Study and Implementation (b) Appointment of National and 05/31/89 03/31/91 - International Staff (c) Completion of SARAP Study 11/01/90 11/30/90 - (d) Adoption of Policy and Structural 03/31/90 03/31/91 - Framework on PEs suitable to IDA (e) Completion of Management Audit 03/01/90 03/31/90 - and enter into performance contracts (f) Completion of Diagnostic Studies 12/01/89 01/30/91 - (g) Submission of audited financial - - The 1994/95 statements audit was completed in February 1996. However, to- date it has not been officially transmitted to IDA. Table 8: Bank Resources: Staff Inputs a/ Actual US$(000) Stage of Project Cycle Weeks (includes adjusiment of 17% for overhead) Preparation to appraisal 10.6 25.1 Appraisal 12.4 29.7 Negotiations through Board approval 7.7 17.8 Supervision 127.2 335.8 Completion 6.9* 20.0 * Total 164.8 428.5 a/ Planned and revised estimates are not available. * As of March 13, 1996 Table 8a: Bank Resources: Staff Inputs for Supervision in 1994 and 1995 Planned Revised Actual US5(000) Stage of Project Cycle Weeks USS(000) Weeks USS(000) Weeks (includes adjustment of 17% for overhead Supervision 24.0 71.2 26.0 77.1 18.1 53.6 Table 9: Compliance with Operational Manual Statements OD 6.30 The Borrower was required to contribute 21% of the project's Local Cost Financing costs (net of taxes and duties). The Borrower's contribution and Cost Sharing eventually amounted to 13% of the project's costs after cancellation of the undisbursed amounts (to be confirmed after receipt of final audit). However, there were substantial and regular delays in the release of these funds. OD 10.60 Audit reports were not received on schedule and, todate (April Accounting, Financial 10, 1996), the 1995 audit has not been received. Reporting and Auditing OD 13.10 Borrower Compliance with Audit Covenants Table 10: Bank Resources: Missions Performane Rating Stage of Month ear Number of Weeks Specialized Staf SkIlls Implementation Development Types of Problems Project Cvcle Persons in Field Represented Status Objectives Through 02/12/88 to 2 2.7 appraisal 03/03/88 Appraisal 05/05/88 to 3 1.2 Public Sector through Board 05/16/88 Management Specialist approval 10/22/89 to Public Sector HS HS Lack of a Divestiture Supervision 11/14/89 2 2 Management Specialist Implementation Committee and the delayed start up at UDC and MOIT. Senior Operations Officer 11/21/90 to Senior Industrial S HS Problems encountered in 12/07/90 2 3.4 Specialist integrating the UNIDO- implemented component Public Enterprise Reform (strengthening of PIES in the Specialist Ministry of Industry) with the other two components (PES, in the Ministry of Finance; and UDC, in the Ministry of Industry) of PEP. 04/03-23/91 1 2.7 Public Enterprise Reform S S Coordination and program approval Specialist mechanisms have not operated (in a regular manner and oversight function requires more attention. Insufficient local funding of the project has had a negative impact on the ability of the agencies to carry out their tasks during the first months of 1991. Performance Rating Stage of Month/Year Number of Weeks in Specialized StaffSkills Implementation Development Types ofProblems Project Cycle Persons Field Represented Status Objectives Supervision (con't...) 12/08/91 to 1 .7 PE Reform S HS Insufficient Local Funding 12/20/91 06/04/93 to 5 2.9 Industrial Specialist U U There has been substantial 06/16/93 slippage in achieving agreed Public Enterprise Reform targets (no liquidation, only Specialist three parastatals privatized, delay in PE reform), and PSD Specialist backtracking in some cases. PERD has been without a substantial coordinator for 10 months. With the unclear responsibility for the project implementation, consequent to the PM becoming the Chairman of DRIC project program has been stalled. A Task Force, set up by the Ministry of Finance (MOFEP), suggested some changes to the project. There also appeared to be dilution of the earlier political consensus on privatization/PE reform. Stage of Month/Year Number of Weeks in Specialized StaffSkills Implementation Development Types ofProblems Project Cycle Persons Field Represented Status Objectives Supervision (con't..) 1/ 01/27/94 to Senior Industry Specialist S S 02/03/94 2 .7 03/22/94 to 1.3 Senior Industry Specialist S S Improvement in project 03/31/94 2 performance with the enactment PSD Specialist of a Divestiture Bill and the appointment of a Project Coordinator. Completion 02/15/96 to 3 2.3 PSD Specialists 1/ 1/ 03/01/96 Senior Economist 1/ The last PEP supervision mission was in March, 1994. The EDP mid-term review mission in October 1994 recommended the cancellation of PEP. PEP was closed on May 31, 1995. NA - Not Available/Not Applicable HS - Highly Satisfactory S - Satisfactory U - Unsatisfactory UGANDA: Public Enterprise Project (Credit 1962) Implementation Completion Report Mission Aide Memoire 1. Introduction. An IDA mission consisting of Mr. Gerard Byam visited Uganda from February 22 through February 29, 1996. The objectives of the mission were to undertake a retrospective evaluation of the Public Enterprise Project (PEP) as part of the preparation of the Implementation Completion Report (ICR), and to provide advice to the Government for the preparation of its contribution to the report. The mission liaised with an IDA mission consisting of Stefano Migliorisi and Marie Sheppard who were in Kampala to supervise the Enterprise Development Project. 2. The mission held discussions with officials of the Government and consultants who have had some involvement in the project. The mission is very grateful for the cooperation and kind courtesies extended during the course of our discussions. 3. This Aide-Memoire summarizes the mission's findings and is subject to the approval of IDA's management. 4. Background. The credit for the amount of US$15 million was approved by IDA's Board on November 8, 1988 and closed on May 31, 1995. US$2.5 million were cancelled. The main objectives of the project were to define the overall policy and legislative framework, and to begin the implementation of a program for restructuring, divestiting and liquidating parastatal enterprises. The project helped prepare the Enterprise Development Project (EDP) which was approved on December 3, 1991 and which supports the continuation of the parastatal restructuring and divestiture program. 5. Outstanding Issues. The last audit of PEP's special account is overdue. The mission was told that the audit was submitted to the Auditor-General by the external auditors, and that the Bank can expect to receive it by the end of March following the Auditor-General's review. There are no other outstanding issues concerning the management of the project. 6. Project Outcome. The general view of those interviewed is that PEP enjoyed some successes Some of the studies financed by the project were timely and provided the analyses for fundamental reforms in a variety of sectors. However, overall, PEP did not attain its objectives (see the attachment for a summary assessment). There are several reasons for the negative assessment and they stem from the project's design, its implementation by the Borrower, and its supervision by the Bank. 7. Project Objectives. As stated in the project's Staff Appraisal Report, the objective of the project was to strengthen the Government's capacity to sustain economic recovery by increasing productivity and output and reducing financial losses in public enterprises. The specific objectives were to: (i) define and implement reforms of sector policy and the legislative framework and strengthen sector administration and enterprise management; (ii) prepare and initiate an overall program of rehabilitation and rationalization for all public sector enterprises; and (iii) implement a program of rehabilitation, restructuring, divestiture and liquidation of selected industrial parastatal enterprises. 8. The Staff Appraisal Report noted that the public sector, like the rest of the economy, was decimated by years of political instability and economic decline. Consequently, reducing the financial burden of public enterprises was essential both to the restoration of the essential functions of the central government as well as to overall economic recovery. As such, the objective of preparing a public enterprise reform program was appropriate. The objective of implementing such a program during the life of the project was, in retrospect, overly ambitious. Experience elsewhere highlights the importance of sequencing privatization with other structural reforms and of adequately preparing for privatization. Privatization works best when reforms dealing with stabilization, the liberalization of prices and trade, and the financial sector are well under way. This was the situation, arguably, by the end of the project in 1995. Adequate preparation includes first and foremost the setting up of appropriate institutional arrangements within Government (this was part of the intent of the project) and the creation of broad-support for the program. The need to develop public support might mean slowing the anticipated pace of privatization. However, in reality the pace is slowed anyway if popular support for the program fails to emerge. A slower pace is desirable if it entails concerted efforts to increase popular support and, simultaneously, the enforcement of a hard budget constraint on public enterprises. 9. Also, the objectives placed too large an emphasis on the rehabilitation of the most commercially promising and economically sound public industrial enterprises. While some restructuring - especially financial - is necessary for divestiture, attempts to physically restructure enterprises prior to their sale increased the complexity of the divestiture process. 10. Project Design. At the time of the project's design, the Government was trying to rebuild a war-ravaged economy further weakened by the relatively new onslaught of the AIDS epidemic. The aim was to restore the economy's productive capacity as quickly as possible while creating an environment conducive to increased private investment. The project attempted to facilitate the attainment of both objectives. Experience elsewhere has shown that the imposition of a hard budget constraint on the operations of unprofitable public enterprises is a crucial element of a successful reform program. The emphasis on restructuring, coupled with the use of donor (ie subsidized) funds to effect it, is contrary to this basic principle. Instead, the strategy should have placed greater emphasis on the enforcement of a hard budget constraint (which was all the more necessary as donor inflows increased). Also, more attention should have been paid to addressing issues of transparency and indigenization in the design of the program. 11. The institutional arrangements for coordinating the implementation of the program were not properly designed. This was important given the severely limited ability of the Government to manage a complex and politically difficult parastatal reform program. One main objective of the project was to strengthen the capacity of the Statutory Corporations Division (SCD) of the Ministry of Finance. However, during project implementation it became apparent that SCD's weaknesses were only partly due to lack of resources. They also stemmed from its lack of independence from the central government. Consequently, program coordination responsibilities were transferred from SCD to an autonomous Public Enterprises Secretariat while financial administration of the Government's PE portfolio was transferred to the Uganda Development Bank. These arrangements, in turn, were not effective and a search for appropriate arrangements continued until the end of the project. 12. Project Implementation. Implementation of the project was poor. The reasons have been adequately documented and included poor program management, uncoordinated planning of divestiture activities, lack of transparency, and a shortage of some specific skills such as legal expertise. Poor project management was evidenced by two qualified audits. There is no evidence that project staff and consultants were regularly evaluated. The project was also affected by delays in the release of counterpart funds. Finally, project implementation was hampered by a lack of broad commitment within the Government to the project's objectives. 13. Project Supervision. The effectiveness of project supervision was mixed. Weak project management led to a blurring of the line between project management and supervision. This resulted in the appearance of remote project management (i.e project management by the Bank) which undermined local ownership of the program. The Bank was slow to respond to this crucial issue and only did so toward the end of the project during the restructuring of EDP. The Bank also was slow in emphasizing the need to refocus attention away from the restructuring of public enterprises and on the need for strict adherence to a hard budget constraint. Finally, the Bank was slow to respond to the Government's request to restructure the program and improve its effectiveness. 14. Future Operation of the Program. EDP was restructured in February 1995 following a comprehensive evaluation of the program and a new operation plan was agreed. The operation plan addresses all of the issues raised above. The Aide-Memoire of the EDP mission currently visiting Kampala summarizes that mission's assessment of the success of the plan and includes recommendations for improvement. 15. Next Steps (1) The Government will provide to IDA the final audit of PEP by March 31, 1996. (2) The Government will submit to IDA its own evaluation of PEP by March 31, 1996. (3) IDA will provide a draft of the ICR to the Government by March 12, 1996. IMAGING Report No: 15600 Type: ICR