Uganda - Privatization and Utility Sector Reform Project

Document of The World Bank Report No: 20016-UG PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 36.2 MILLION (US$ 48.5 MILLION EQUIVALENT) TO THE REPUBLIC OF UGANDA FOR A PRIVATIZATION & UTILITY SECTOR REFORM PROJECT May 22, 2000 Private Sector and Finance Unit Country Department AFC04 Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective January 14, 2000) Currency Unit = Uganda Shilling Uganda Shilling 1 = US$ 0.0006622 US$ 1 = Uganda Shilling 15.10 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy PMU Parastatal Monitoring Unit CFR Country Framework Report PPF Project Preparation Facility DRIC Divestiture and Reform Implementation Committee PPI Private Participation in Infrastructure EDP Enterprise Development Project PPIAF Public Private Infrastructure Advisory Facility ERA Electricity Regulatory Authority PMR Project Management Report FMS Financial Management System PSP Private Sector Participation GDP Gross Domestic Product PSF Private Sector Foundation GOU Government of Uganda PTC Privatization Technical Committees GPN General Procurement Notice PU Privatization Unit IDA International Development Association PUSRP Privatization and Utility Sector Reform Project LACI Loan Administration Change Initiative TA Technical Assistance LSP Letter of Sector Policy TOR Terms of Reference MFPED Ministry of Finance, Planning and Economic UEB Uganda Electricity Board Development NEMA National Environmental Management Authority UCC Uganda Communication Commission NWSC National Water and Sewerage Corporation UMA Uganda Manufacturers Association PCU Project Coordinating Unit UPTC Uganda Posts and Telecommunications Company NPV Net Present Value UPL Uganda Posts Ltd PE Public Enterprises URC Uganda Railways Corporation PERD Public Enterprise Reform and Divestiture Statute URU Utility Reform Unit Statute PIM Project Implementation Manual UTL Uganda Telecom Ltd. PIP Project Implementation Plan WG Working Groups Vice President: Callisto Madavo Country Manager/Director: Jamnes W. Adams Sector Manager/Director: Demba Ba Task Team Leader/Task Manager: Edgar Saravia  UGANDA PRIVATIZATION & UTILITY SECTOR REFORM CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 10 4. Institutional and implementation arrangements 11 D. Project Rationale 1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and other development agencies 13 3. Lessons learned and reflected in proposed project design 14 4. Indications of borrower commitment and ownership 15 5. Value added of Bank support in this project 15 E. Summary Project Analysis 1. Economic 16 2. Financial 16 3. Technical 16 4. Institutional 17 5. Social 18 6. Environment 18 7. Participatory Approach 19 F. Sustainability and Risks 1. Sustainability 20 2. Critical risks 20 3. Possible controversial aspects 21  G. Main Credit Conditions 1. Effectiveness Condition 22 2. Other 22 H. Readiness for Implementation 22 I. Compliance with Bank Policies 23 Annexes Annex 1: Project Design Summary 24 Annex 2: Project Description 30 Annex 3: Estimated Project Costs 38 Annex 4: Cost Benefit Analysis Summary 39 Annex 5: Financial Summary 50 Annex 6: Procurement and Disbursement Arrangements 51 Annex 7: Project Processing Schedule 60 Annex 8: Documents in the Project File 61 Annex 9: Statement of Loans and Credits 62 Annex 10: Country at a Glance 64 Annex 11: Communication Audit (Executive Summary) 66 Annex 12: Envirorunmental Audit (Executive Summary) 68 Annex 13: Letter of Sector Policy 77 MAP(S)  UGANDA PRIVATIZATION & UTILITY SECTOR REFORM Project Appraisal Document Africa Regional Office AFTPS Date: May 22, 2000 Team Leader: Edgar Saravia Country Manager/Director: James W. Adams Sector Manager/Director: Demba Ba Project ID: P050439 Sector(s): BP - Privatization Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: N Project Financing Data [ Loan Z Credit Dz Grant OI Guarantee El Other (Speciify) For Loans/CreditslOthers: Amount (US$m): 48.5 Proposed Terms: Currency Pool Loan (CPL) Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.5 Service charge: 0.75% Financing Plan: Source Local foreign Total GOVERNMENT 46.80 0.00 46.80 IDA 48.50 0.00 48.50 Total: 95.30 0.00 95.30 Borrower: Responsible agency: Ministry of Finance, Planning and Economic Development Address: P.O Box 8147, Kampala, Uganda Contact Person: C.M. Kassami, Permanent Secretary/Deputy Secretary to the Treasury Tel: 256 41 232759 Fax: 256 41 230163 Email: finance@imul.com Other Agency(ies): Project Coordinating Unit Address: Communication House: I 1th Floor, P.O. Box 10944, Kampala, Uganda Contact Person: Michael Opagi, Director. Tel: 256 41 256467/250108 Fax: 256 41 259997 Email: Mopagi@Perds.Go.Ug Estimated disbursements (Bank FY/US$M): FY 2001 2002 2003 2004 2005 Annual 11.5 11. ILL0.0 9.8 6.0 L Cumulative 11.5 22.7 32.7 42.5 48.5 Project implementation period: 5 Expected effectiveness date: 10/15/2000 Expected closing date: 01/31/2006 &CS PAD Fo-n. Rev Mar:h, XDII  A. Project Development Objective 1. Project development objective: (see Annex 1) The Project's development objective is to improve the quality, coverage and economic efficiency of commercial and utility services, through privatization, private participation in infrastructure (PPI), and an improved regulatory framework. This objective will be achieved by a higher level of private investment, and better quality and access of services in the telecommunication, water, electricity and transport sectors; divestiture and improved efficiency of remaining public enterprises (PEs); and strengthening of the regulatory framework and institutions in relevant sectors. 2. Key performance indicators: (see Annex 1) The following key performance indicators, agreed with the Government of Uganda (GOU), will be monitored throughout the project to assess success in achieving the project's development objectives (for detailed information see Annex 1): 1. Privatization of 42 PEs by the end of project: * 15 PEs by mid-term review * remaining PEs by June 30, 2005 2. Established and fully operational (i.e., enactment of legislation and its institutionalization) sectoral regulatory agencies in electricity, water and sewerage and transport by the end of the project: * electricity regulator by mid-term review * remaining regulators by June 30, 2005 3. Fiscal impact of privatization measured by reduced subsidies (net of one time privatization cost) to public enterprise (PE) sector (excluding Class I enterprises) by: * 10% in year 2001 * 20% in year 2002 * 50% in year 2003 * 100% by June 30, 2005 4. Improved quality and coverage of services in the telecommunication, electricity and railways sectors by the end of the project (see Table on Ugandan infrastructure indicators attached in Annex 1). 5. Implementation of the privatization program in strict adherence to the Public Enterprise Reform and Divestiture (PERD) Statute, and the procedures manual for divestiture and use of divestiture proceeds. -2 -  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 1 6540-UG Date of latest CAS discussion: 05/20/97 Poor quality of infrastructure services has been reported as the most significant constraint to private sector growth and development. Utility sector reform and privatization were identified as priority measures of the Bank's assistance strategy to help GOU improve the economy's competitiveness and achieve annual GDP growth rate of over 7 percent over the next five years. By supporting these reforns, the Project will contribute to meeting the CAS objective of poverty reduction through broad-based economic growth led by the private sector, as well as improving the welfare of the entire population by reducing costs, improving the quality of, and access to infrastructure services. 2. Main sector issues and Government strategy: GOU embarked on a program of PE sector reform and privatization in 1992, with the aim of redefining the role of the State in the economy, reducing the financial and administrative burden of the PE sector on Govemment, improving PE efficiency and encouraging private investment. At the beginning of the program, there were over 150 parastatals involved in virtually all sectors of the economy, most of which were majority owned by the State. They employed more than 30,000 persons, accounting for 25 percent of total formal employment, and generated about 10 percent of GDP. The sector's performance was characterized by low productivity, high losses and rising debts, which placed a concurrent burden on the banking system, public finances and the balance of payments. Most PEs owed their viability to: (a) receiving direct and indirect subsidies from GOU, the costs of which were estimated at 50 percent of total government revenues in 1992-93; (b) receiving credits from the banking system, amounting about 17.8 percent of total credit extended to the economy in 1992; (c) obtaining grants and foreign loans, which accounted for 3.8 percent of outstanding external debt obligations services during the 1980s; and (d) accumulating internal and external arrears. From its early stages IDA supported GOU's reform program, which was first facilitated by the Technical Assistance (TA) operation that helped to prepare the privatization program, and later by the Enterprise Development Project (EDP, Credit 2315-UG, 1993-2000) that supported its implementation. As of end-December 1999, GOU completed 93 divestitures of enterprises in the industrial, commercial, agricultural and hotel sectors, of which 62 firms were privatized and the others liquidated. Thus far, one firm (Uganda Clays Ltd.) has been offered to the public through share sale on the Uganda Stock Exchange, and successfully sold. Twenty firms were sold to foreign investors, of which half exercised their pre-emptive rights. Most of the divestitures to date include loss-making enterprises. As of June 30, 1999 total net privatization proceeds (i.e., gross privatization proceeds minus liabilities assumed by the buyers) amounted to Shs 108.5 billion, while total costs related to divestiture came to Shs 132.7 billion, which resulted from the fact that: (i) firms' valuation was based on book value, which in many cases was lower than market value; (ii) the size of debts and arrears was higher than expected; and (iii) liberalization of the economy and reduction of subsidies negatively affected the firms' value as going concerns . Nonetheless, the overall benefits of the privatization process to the economy are undeniable. In most cases, privatization led to increased output and efficiency, higher tax revenue, significant new investment and job creation. Therefore, the forward and backward linkages in the economy outweighed the direct immediate monetary benefits after sale. GOU also reduced direct subsidies to the PE sector (i.e., cash injections, investment subsidies and donors' grants) from a record high of Shs 87 billion (47 percent of the total state subsidies) in 1997 to Shs 9 billion (4 percent of the total state subsidies) in 1998. However, between 1997-98 indirect -3 -  subsidies doubled reaching Shs 203 billion. This increase was mainly due to increases in loan and tax arrears in the utilities (see Table 1). Table 1: Direct and Indirect Subsidies to PE sector in Uganda l 19931 19941 19951 19961 19971 1998 FLOW (in Shs billion; annual % chan e) Total Subsidies 141.6 154.6 174.7 178.1 186.9 212.3 36%