Document of THE WORLD BANK Report No: 19055-GUA PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 3.5 MILLION (US$ 4.8 MILLION EQUIVALENT) TO THE CO-OPERATIVE REPUBLIC OF GUYANA FORA FINANCIAL & PRIVATE SECTOR INSTITUTIONAL DEVELOPMENT PROJECT October 28, 1999 Caribbean Country Department Finance, Private Sector & Infrastructure Department Latin America and the Caribbean Regional Office CURRENCY EQUIVALENTS (Exchange Rate as of September 30, 1999) Currency Unit = Guyana Dollar (G$) G$ 179 = US$1.00 US$.0056 = G$ 1.00 FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS BOP Balance of Payments CIDA Canadian Intemational Development Agency ESAF Enhanced Structural Adjustment Facility ESOP Employee Stock Ownership Plan EU European Union FISBEC Financial Sector and Business Environment Credit FPID Financial and Private Sector Institutional Development Credit GEC Guyana Electricity Company GNCB Guyana National Cooperative Bank HIPC Heavily Indebted Poor Countries ICR Implementation Completion Report IDA International Development Association IDB Inter-American Development Bank IMF Intemational Monetary Fund MOF Ministry of Finance ODA Official Development Assistance PAP Public Administration Project PSDAC Private Sector Development Adjustment Credit SAC Structural Adjustment Credit SDR Special Drawing Rights TA Technical Assistance TAC Technical Assistance Credit Y2K Year 2000 (computer problem) Vice President: David De Ferranti Country Director: Orsalia Kalantzopoulos Sector Director: Danny Leipziger Task Manager: John D. Pollner Guyana Financial & Private Sector Institutional Development Project TABLE OF CONTENTS Page Project Financing Data ................................................................I A. Project Development Objective ................................................................3 Project development objective and key performance indicators .............................................3 B. Strategic Context ................................................................3 1. Sector-related CAS goal supported by the project ..............................................................3 2. Main sector issues and Government strategy ................................................................ 5 Table 1: Guyana Privatization Program 3. Sector issues to be addressed by the project and strategic choices .....................................7 Table 2: Selected Financial Indicators of Banking Institutions 4. Institutional Development Expectations ................................................................8 C. Project Description Summary ................................................................9 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 ................................................................11 1. Project alternatives considered and reasons for rejection ................................................. 11 2. Major related projects financed by the Bank and/or other development agencies ........... 12 3. Lessons learned and reflected in proposed project design ................................................ 13 4. Indications of borrower commitment and ownership ....................................................... 13 5. Value added of Bank support in this project ............................................................... 14 E. Summary Project Analyses ............................................................... 14 1. Economic ............................................................... 14 2. Financial ............................................................... 14 3. Technical ............................................................... 14 4. Institutional ............................................................... 14 5. Social ............................................................... 15 6. Environmental assessment ............................................................... 15 7. Participatory approach ............................................................... 15 F. Sustainability and Risks ......................... 16 1. Sustainability ...................... 16 2. Critical risks ...................... 16 3. Possible controversial aspects ...................... 17 G. Main Loan Conditions ......................... 17 1. Effectiveness conditions ......................... 17 2. Other ......................... 17 H. Readiness for Implementation ......................... 17 I. Compliance with Bank Policies ......................... 17 Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 2a. Project Budget Component Summary Annex 2b. Implementation Plan and Project Performance Indicators Annex 3. Estimated Project Costs Annex 3a Credit Budget and Cost Tables Annex 4. Cost Effectiveness Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table A- 1. Consultant Selection Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance Page 1 Guyana Financial & Private Sector Institutional Development Project Project Appraisal Document Latin America and the Caribbean Regional Office Country Department III Date: October 28, 1999 Task Team Leader/Task Manager: John D. Pollner Country Director: Orsalia Kalantzopoulos Sector Director: Danny Leipziger Project ID: 57272 Sector: FS, BP, BI Program Objective Category: Private Sector Development Lending Instrument: Investment T.A. Credit Program of Targeted Intervention: [ ] Yes [X] No Project Financing Data [ Loan [X] Credit [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): US$4.80 / SDR 3.50 Proposed terms: [x] Multicurrency [] Single currency, specify Grace period (years): 10 [3 Standard Variable [3 Fixed fj] LIBOR-based Years to maturity: 40 Commitment fee: 0.0% Service charge: 0.75% Financing plan (US$m): Source Local Foreign Total Government 0.20 0.60 0.80 Cofinanciers IBRD IDA 1.20 3.60 4.80 Other (specify) Total 1.40 4.20 5.60 Borrower: Cooperative Republic of Guyana Guarantor: Responsible agency(ies): Ministry of Finance Estimated disbursements (Bank FY/US$M): 2000 2001 2002 Annual 0.9 1.3 2.6 Cumulative 0.9 2.2 4.8 For Guarantees: [] Partial credit [ Partial risk Proposed coverage: Project sponsor: Nature of underlying financing: Terms of financing: Principal amount (US$) Final maturity Page 2 Amortization profile Financing available without guarantee?: [] Yes [] No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Project implementation period: 11/99 - 6/02 Expected effectiveness date: 11/99 Expected closing date: 12/02 Page 3 A: Project Development Objective (See Annexes 1 and 2bfor key performance indicators) The development objectives of the project support the second phase of institutional reforms aimed at consolidating the measures taken under the previous structural adjustment and technical assistance programs (SAC, PSDAC, FISBEC, & IMF/ESAF). These objectives include: (i) improving the regulatory framework of the overall financial sector to support private sector activity and achieve synergies among the banking, insurance, non-banking, and securities sectors, (ii) assisting in the transfer of state-owned enterprises to the private sector to promote an enterprise led economy, and (iii) supporting the modernization of the public sector through improved service delivery in the areas of procurement, auditing, and public sector management, in order to provide an enabling transactional environment for private sector business. The key performance indicators will include (a) the implementation of a modernized broad financial sector regulatory framework resulting in the operationalization of new regulatory bodies and evidence of improvement in the performance and strength of financial institutions in line with international bank accounting and Basle prudential standards; (b) transfer to the private sector of a critical mass of state-owned enterprises within an enabling business environment for both industrial and financial investors; and (c) the modernization of the public sector auditing and procurement framework and implementation of Y2K compliant systems for public sector management. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project.: CAS document number: P6155 Date of latest CAS discussion: 12/21/93 Background.: Guyana has a small open economy with a population of 780,000. It is a low-income country with per capita income estimated at about US$750 but with abundant natural resources. Guyana is thinly populated with about 4 persons per square kilometer. After achieving independence in 1966, Guyana pursued a state interventionist policy of "cooperative socialism". Following two decades of declining investment and negative growth, real per capita income declined by over 60% by 1988. There was a massive out-migration of skilled workers and professionals mainly to North America and the U.K. In 1988, the government began a radical change process by initiating the economic recovery program that was supported in April 1989 by an IMF ESAF. Most of Guyana's population and economic activities are concentrated on the narrow coastal strip, which lies below sea level at high tides and is protected by a series of sea walls. The interior is largely forested and uninhabited, except for scattered communities of Amerindians. It is well endowed with natural resources, with good agricultural land and abundant rainfalls, diversified mineral deposits, and large tropical forests. The economy is basically natural resource-based, with agriculture (mainly sugar and rice) bauxite, gold, and timber accounting for most of the output in the productive sectors. With the possible exception of the potential for hydroelectricity, which remains unexplored, the country does not have energy resources and is dependent on oil imports to meet most of its energy requirements. Agriculture in the economy accounts for 37% of GDP, 40% of employment and about 41 % of export earnings. Approximately 43% of the population live in poverty, with 29% in extreme poverty. The majority of the poor live in rural areas and extreme poverty is concentrated in the interior regions. About 50% of the population is Indo-Guyanese, 36% Afro-Guyanese and 7% Amerindian, and the remaining of mixed races. The Indo-Guyanese are strongly represented in agriculture, professional services and distributive trade while the Afro-Guyanese live in urban areas and are strongly represented in government, police and mining. The first democratic elections in over two decades were held in October 1992 when the PPP-Civic coalition took office. Page 4 Recent Economic Performance and Prospects: Since 1988, Guyana has established an impressive track record of performance under six successive annual IMF programs and under IDA and IDB structural and sectoral adjustment credits. Reforms were also supported by three Paris Club rescheduling arrangements during 1991-95, a stock of debt operation on Naples terms in May 1996, and the more recent HIPC debt relief. Initially, progress in structural reform was slow due to the need for internal consensus. Considerable progress has been achieved in restoring macro stability, liberalizing the exchange rate and the economy, as well as strengthening the financial sector, improving the environment for the private sector (over 60% of previous government owned assets including banks, electricity, the telephone company and other industries, have been privatized), improving the performance of the sugar industry, and rehabilitating infrastructure. The size of the civil service was reduced by one third since 1993. Real GDP growth averaged over 6% per year during 1992-97 and inflation has been kept low. In 1998, however, due to political disturbances, El Nifio drought conditions, and lower export prices for lumber, rice, sugar and gold, the economic performance turned for the worse. Government revenues declined sharply and the nominal exchange rate depreciated significantly. In the area of structural reform, efforts in 1995-97 concentrated on institutional building, increasing the role of the private sector, and streamlining the public sector. Institutional reforns included the establishment of a strengthened central bank supervision unit, a new privatization unit, computerization of the Inland Revenue and Customs Departments, strengthening of anti-smuggling measures, and the improvement of the operational arrangements for the execution of the public sector investment program (PSIP). In the financial sector, the Financial Institutions Act (FIA) and other conforming legislation and regulations were passed;' the Exchange Control Act was repealed to complete the liberalization of the exchange system; and a revised Act was presented to Parliament to strengthen the independence of the central bank. In June 1997, a plan was developed (in collaboration with IDB) to streamline the size of the public sector including the civil service. During the latter half of 1997, steps were taken to privatize the largest commercial bank (NBIC), begin the privatization of the state-owned mining companies, and to establish a regulatory framework for the state-owned sugar company (Guysuco). The local private sector is small and nascent. Future growth is envisaged in the agricultural and mining sector, in particular rice, sugar, bauxite, gold, diamonds, gas and oil. Import tariffs are being reduced to 20% (lowest in the Caribbean) and the tax rates are being reviewed so as to reduce them. However, the administrative processes relating to taxes, customs, land titling and private investment approvals, continue to be cumbersome. Other constraints include inefficiencies in the judicial system and land management, and lack of credit for small enterprises. A large number of informal businesses need to be registered as taxpayers and brought into the tax net. The pace of privatization has accelerated but there is a need to further support private sector development by (i) further strengthening the regulatory frameworks (property rights, insurance and securities rnarkets) and (ii) encouraging private participation in infrastructure, transportation and energy. IDA Relations: IDA's dialogue with the Government on the country assistance strategy has been through adjustment operations, annual PFPs, jointly prepared with the IMF, and Policy notes. The focus of the IDA assistance strategy for Guyana has evolved over the years. Initially, the main objective was managing the post-devaluation adjustment simultaneously with macroeconomic stabilization and liberalization of the economy. With half of the population estimated to have incomes below the poverty line, and with the large devaluation adversely impacting on the poorest, protection of the vulnerable groups through social programs, such as the Social Impact Amelioration Program, were assigned the highest priority. Later, the strategy aimed at sustainable economic growth and diversification as one of 'The new regulations of the Financial Institutions Act have tightened the requirements for the provisioning for bad and doubtful debts, raised capital adequacy standards, established borrower limits, and improved reporting and disclosure to meet regional and international standards. Page 5 the main pillars to reduce poverty, with particular emphasis on allowing the private sector to promote economic activity under an organized regulatory framework. However, progress in sectoral policy reforms and implementation of IDA projects has been quite limited. Systemic issues affecting all projects' execution involves weak implementation capacity due to lack of technical and managerial staff, inordinate delays in evaluation of bids, and low procurement thresholds requiring frequent ministerial decisions. This is compounded by the limited capacity of the local construction industry and the difficulties in attracting reputed international contractors to bid on projects. Therefore, IDA projects need to have a capacity building component to strengthen Government's capacity for project preparation and implementation. Smaller and well focused projects are increasingly being considered in the future to ensure effective implementation. The main objective of the current IDA assistance strategy is to support the Government's efforts to achieve the above mentioned objectives, which will crucially depend on the establishment and deepening of institutional capacities and strengthening in key areas. This will involve: (a) continuing to improve economic efficiency and encourage economic diversification including strengthening the role of private sector through privatization of state entities (measured by the reduction of state owned assets and increase in private sector productive assets in the economy) and development of the securities and insurance sectors; (b) ensuring a sound financial system which will allow the government to develop strategies for efficiently dealing with weak banks (measured by the reduction in non-performing portfolios in the banking sector), (c) modernization and improved service delivery in the public sector through the institutional strengthening of key financial and operation related services such as auditing, procurement, as well as support of year 2000 readiness for key computerized functions in personnel and budget management. 2. Main sector issues and Government strategy: The government is serious in its intentions regarding institutional and structural reforms, and social sector measures are considered crucial in helping to put the economy on a sustainable path to address the poverty situation of the country on a permanent basis. The proposed project would address many of the institutional capacity and regulatory constraints which have been identified as preventing a fluid private sector response despite the significant privatization already achieved in recent years. The government's strategy is to rely increasingly on private sector-led investment and income generation. The government intends to accelerate the privatization program by restructuring, divesting, and broadening the share ownership of additional public entities (see table 1 below). Part of the divestment proceeds may have to be used for expenditures related to the privatization program, such as severance pay for the displaced workers belonging to enterprises that are restructured. In parallel to the privatization, government will continue to develop and implement regulations in the insurance and securities sectors, as well as improve public service delivery in the auditing and procurement areas, which will support the new post-privatization business environment and increased private sector demands for an efficient transactional environment. The provision of technical assistance programs from multilateral and bilateral agencies will continue to be an important complement to the government's policy reforms. The European Union (EU), with its planned Private Sector Training Skills Development Program, the IDB with its programmed Middle Management & Technical Training program, and the Canadian International Development Agency (CIDA) with the Private Sector and Human Resources Development Program are initiating programs to augment the skills base in the private sector which should support the objectives of the project. Under the auspices of IDB, a number of diagnostics of required reforms for deeds registry modernization have been undertaken in order to provide a facilitating institution that will process property titling and corporate registry transactions. IDB is also involved in a follow-up survey comparing civil service salaries to private sector remuneration comparators. This survey would provide government the Page 6 data to establish guidelines for implementation sequencing and scope of public sector salary raises for managerial, professional, and technical positions, with mechanisms for periodic adjustment. IDB will take the lead in the overall civil service reform program (currently under preparation) which is being structured under a $50 million sectoral policy operation. IDA's assistance (both under the FISBEC, PSDAC, and this proposed project: the 'FPID') will include technical assistance in strengthening the Privatization Unit, advisory work to restructure the remaining state-owned financial sector, with subsequent feasibility work on privatization options, development of regulations supporting the banking, securities and insurance sectors, and improving public sector services to augment the public sector's response capacity. Table 1 Guyana Privatization Program Privatized 1990-92: Guyana Timbers, Guyana Telecom, National Trading, Nichimo Ltd., Guyana Leather Craft, Livestock Development Co., National Paint Co., Demerara Woods Ltd., Guyana Transport Services, Guyana Design & Graphics, Sijan Plaza Restaurant, Guyana Fisheries, Rice Milling & Marketing Authority, Guyana Soap & Detergent Ltd. G$ millions Total Total No. of Sector Assets Liabilities Total Equity Employees Privatized 1993-98: Demerara Distillers Commercial 2,856 1,436 1,421 1,419 National Engineering Industrial 484 104 379 539 Forte Crest Hotel Service 730 188 541 Guyana Bank for Trade & Industry Banking 20,771 18,351 2,420 92 National Edible Oil Agri-based n.a. n.a. n.a. 79 Guyana Stockfeeds Commercial 149 34 114 70 SANATA Textiles Commercial n.a. n.a. n.a. Guyana Electricity Co. Utilities 5,670 1,380 4,289 1,100 National Bank of Industry & Commerce Banking 26,129 24,046 2,082 160 Guyana Cooperative Insurance Service Insurance 279 65 199 140 Claybrick Factory Commercial 3 3 20 Linden Wharf Commercial n.a. n.a. n.a. GNCB Trust Co. Financial 2,813 2,148 665 n.a. Privatization Program 1999-2001: Bermine Mining 2,379 2,226 114 547 Linmine Mining 5,241 1,983 3,259 1,568 Guysuco Dairy Agri-based 46 46 32 Quality Foods Commercial n.a. n.a. n.a. 80 National Printers Commercial 139 60 80 219 Hope Coconut Indust. Agri-based 10 5 6 Wauna Palm Oil Estate Agri-based 87 8 78 110 Ruimveldt Indust. Park Industrial 23,175 23,175 Guy. Pharmaecuticals Commercial 393 279 113 196 Guyana Stores Shares Retail 1,342 600 742 588 Seals & Packaging Commercial 1,391 736 655 124 Surapana Farm Agriculture n.a. n.a. n.a. 20 Guyana Airways Transport 1,554 757 797 246 Glassworks Indust. Park Industrial 431 n.a. 431 n.a. Bauxite Industrial. Dev. Real Estate 40,001 n.a. 40,001 n.a. Page 7 The proposed project follows up on the previous programs: the Private Sector Development Adjustment Credit (PSDAC) and the Financial Sector & Business Environment Credit (FISBEC). The objectives of the PSDAC and FISBEC were to help spur progress in improving the environment for the private sector as a means to stimulate economic growth through: (i) reduction of the direct role of the state in economic activities, (ii) improvement in the regulation and supervision of the financial system, (iii) reduction in the burden of bureaucratic impediments to investment and international trade, and (iv) revision in the corporate tax policy to improve transparency and reduce distortions. To this end, the PSDAC supported privatization, financial sector reform, trade liberalization, rationalization of incentives, corporate tax reform, and improvement of the business environment through companies law reform. The Government, under the PSDAC, with the. FISBEC providing supporting technical assistance, met its privatization targets by completing the sale of a total of 15 enterprises above a number of enterprises disposed of in the earlier phase, which overall represented over 60% of the government's total net asset holdings prior to the program. Under the financial sector reform, legislation and regulation were vastly improved. A new financial institutions act and conforming regulations, revised prudential regulations, and a central bank act were passed, all of which were found to be satisfactory by qualified financial sector experts and in line with Basle international standards. At the same time, the banking supervision capacity of the Central Bank was strengthened with technical assistance financing, and support from the IMF. Public ownership of financial institutions was divested or liquidated, except the "new GNCB bank", formed via merger and restructuring of Guyana National Cooperative Bank and GAIBANK. Although a part of the conditionality, progress in improving operations and efficiency of the new GNCB has been slow. Conditions regarding first generation improvements in the business environment were met, however, and a new Companies Law and regulations were promulgated. 3. Sector issues to be addressed by the project and strategic choices: The main objective of the Financial & Private Sector Institutional Development Project (FPID) is to improve upon the environment that has already been created under the PSDAC and FISBEC programs and address second generation emerging regulatory issues which evolved towards the end of the PSDAC. The proposed program will also continue the process of structural reform, particularly in the privatization and financial sector areas, while implementing actions to further reinforce the private sector business environment and service delivery through institutional strengthening measures in the public sector. The project will utilize an institution building approach which incorporates the use of external technical expertise into the business processes of domestic institutions (financial, regulatory, privatization) in the form of a 'twinning' approach which will allow a much more effective transfer of technical know-how than the traditional "advisory technical assistance role". This approach was briefly piloted in the previous project (FISBEC) and its positive results have led to the institutionalized design of it within this new project. In addition, based on the progress made under the prior programs financed by IDA, it became evident that development of the private and financial sectors would also be limited by the capacity of the public sector to provide a sufficiently nimble response capability to support the transactional and business process needs of the private sector. Thus, a multi-faceted program for private sector support is being proposed to cover key elements of institutional infrastructure which combine synergies among the privatization program, improved financial sector oversight, and improved delivery of public sector services, particularly those which impact on the efficacy of private investment (e.g.: public procurement, auditing, and improved accountability of public sector human resources). This deliberate focus in recognizing the synergies between public institutions which primarily regulate and catalyze private sector activity (financial, privatization), and those which provide 'transaction-based' supporting services (audit, procurement), constitutes one of the lessons incorporated under the project, based on previous Credits. Page 8 The government has had a satisfactory track record in implementing financial sector reforms (through the Guyana Financial Institutions Act incorporating Basle international banking standards) as well as a privatization program in the last 5 years which has succeeded in transferring a majority of previously owned state assets to the private sector. It is evident therefore, that the government is committed to serious reform in these sectors, and the recent decision to appoint an international restructuring/management team to improve the financial condition of GNCB (the remaining state-owned bank), is an additional positive signal in this direction. Nevertheless, continued progress is required to ensure that GNCB (the third largest bank in the financial system - see Table 2 below) can be placed on a sound financial footing for the government to consider the future ownership options for the institution. Table 2 Guyana - Selected Financial Indicators of Banking Institutions by Asset Rank and Structure of the Financial System ($G billions - End 1998) Banks Net Income Deposits Assets National Bank of Industry and Commerce (NBIC) 0.11 28.7 33.7 Guyana Bank of Trade and Industry (GBTI) 0.32 15.9 20.8 Guyana National Cooperative Bank (GNCB) (0.44) 13.2 16.2 Bank of Nova Scotia 0.25 6.8 9.8 Demerara Bank 0.14 4.9 6.7 Citizens Bank 0.05 3.0 4.1 Bank of Baroda 0.05 1.4 1.9 Total Banks 0.48 73.9 93.2 Non-Banks Pension Funds n.a. - 0.8 Trusts n.a. - 7.7 Insurance Companies n.a. - 0.2 Building Societies n.a. - 10.9 Total Non Banks 19.6 Regarding the public sector business services component of the proposed project, the strategic choices made in terms of identifying the most relevant and supporting programs, also pertain to governmental commitment in the near term. While a reform of the civil service is also on the government's agenda, this aspect was not directly included given the magnitude of such reforms (already initiated under the HlPC), and the fact that another donor (IDB) is already preparing a full scale sectoral operation to address this issue. Nevertheless, this proposed project incorporates some basic areas of technical assistance to track the composition of the public sector's human resource base through improvement in information systems including Y2K compliance, which in itself will provide the budgetary and key payroll data from which future analyses under a broader restructuring program of the civil service could be undertaken. 4. Institutional Development Expectations: [xl Financial - Utilizing technical assistance within the business process requirements of regulatory agencies, the project will also support the development and functioning of the new autonomous regulatory Page 9 institutions (Insurance and Securities Commissions) as well as the upgrading of banking and other financial sector regulation in line with current international strategies and taking into account the local evolution of the financial industry. [x] Technical - The project will assist in the institutionalization of technical local capability for handling future privatization transactions, including the industry/sectoral analysis requirements, as well as the financial modeling, legal, and share offering procedures needed to properly execute enterprise sales within an emerging capital market, while assuring protection of the small investor. [x] Institutional - Under all project components, technical assistance work will be structured under twinning-type arrangements to ensure day-to-day knowledge transfer to the beneficiary entities (Ministry of Finance, Privatization Unit, Central Bank, new regulatory Commissions) and assure future sustainability. Strengthening of the overarching core services of procurement, financial management, and auditing in the Ministry of Finance will be conducted through a simultaneous process of policy reform (e.g.: public sector procurement and audit) while piloting an integrated financial management, procurement, and audit process for the execution of the project. [x] Other - The institutional and regulatory changes to be implemented may provide a track record of reforms and capacity building which could lead to future sector policy based operations, particularly in the financial and private sector components, given potential b.o.p. requirements. C: Project Description Summary 1. Project Components. The project has three major components to support regulatory and institutional development. The three main areas are: (a) Financial Sector Development; (b) Private Sector Development; and (c) Public Sector Business Services. (a) Financial Sector Development: This component will involve funding of technical assistance expertise and technology upgrading to put in place a procedural framework for handling banks with structural or short term solvency and/or liquidity problems; implementing uniform financial accounting reporting standards and a chart of accounts in the banking sector; updating the regulatory framework to cover merchant banks, trust, foreign exchange traders, and other non-bank financial institutions; restructuring and improving the financial condition of the remaining state-owned bank including an assessment of privatization options; and developing industry-specific regulations and directives to operationalize the new legal framework and supervisory bodies for the insurance and securities sectors. (b) Private Sector Development: This component will fund technical assistance, training and equipment to support the second phase of the privatization program to transfer approximately 13-16 additional state enterprises to the private sector. Besides technical assistance to carry out the financial, net worth valuation, and legal/contractual aspects of the program, the component will also develop in conjunction with the development of securities sector regulations above, a framework for facilitating the public offering of shares of such enterprises on the market. It will also fund work to value the financial accounts of, and consolidate all the remaining state enterprises into a common holding company to facilitate future performance monitoring and readiness for privatization. The component will also support the development of policies under the privatization program to protect laborers' and small investor interests to ensure fair and socially equitable treatment of such interests during the privatization process, as well as environmentally sound safeguards. (c) Public Sector Business Services: This component will fund the development of revised public procurement procedures and regulations to facilitate the public bidding and contracting processes, and the establishment of a national contractors registry. It will also strengthen and update the public sector's external auditing capacity to improve standards and timeliness of audits undertaken for both multilateral investment project credits and public institutions, and to implement procedures for conducting operational and performance based audit work and training thereof, under the aegis of the Auditor General's office. The component will also fund the modernization of the public sector's payroll budget system to ensure full Y2K compliance and allow continuity and efficacy in this key public sector management function. Page 10 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Category Cost Incl. % of IDA- % of Contingencies Total financing IDA- _ __ (US$M) (US$M) financing Financial Sector Development Policy & 1.50 27 1.30 87 Institution Private Sector Development Policy & 2.30 41 2.00 87 Institution Building Public Sector Business Services Policy & 1.80 32 1.50 83 Institution Building Total 5.60 100 4.80 86 2. Key policy and institutional reforms supported by the project: The key policy reforms supported by the project involve: (a) Strengthening the regulatory framework in both the banking and non-bank sector in order to ensure adequate institutional oversight of all financial institutions including banks, trusts, merchant banks, mortgage institutions, insurance companies, and securities brokers. In this context, restructuring the state- owned bank (GNCB) and evaluation of privatization options, will be addressed as a targeted effort to ensure a well functioning financial system. Development of contingency strategies to deal switfly with weak banks will also be supported by the project, to ensure early corrective actions for failing institutions, if these arise. (b) Support in strengthening of the government privatization unit will ensure an efficient transfer of state enterprises and productive assets to the private sector under a transparent regulatory framework. In addition, consolidation of remaining public enterprise accounts into a government holding company will assure more timely and accurate financial reporting of enterprises in the public sector, which would facilitate performance measurement as well as future privatization and financial valuation efforts. (c) Targeted public sector institutional reforms in the procurement and auditing areas will be undertaken with the view to increasing the public service delivery and responsiveness to private sector transactional needs. Development of an increasingly transparent public procurement framework will improve competition in the investment process and support information recordkeeping on local suppliers. A strengthened public auditing function will improve accountability-based public service delivery and help to institute sound public financial reporting standards. 3. Benefits and target population: The key benefits of the program are directed to both private sector and labor participants in the economy. While the program counts on industry entrepreneurs to enable a process of private sector expansion and reduction of control by the state in key economic activities (which in the past has also been a significant drain on fiscal resources), there is substantial emphasis on protecting the labor sector and ensuring that private investors are selected for their ability to generate productive economic concerns. Since the project's key objective is to transfer potentially productive resources from management under the state to the private sector, this principal policy is geared towards increasing welfare in the population in a sustainable manner given that past practices of government run enterprises resulted in budget deficits, low wages, and less productive use of industry assets. In addition, the program is multi-faceted in that it continues the privatization effort while reinforcing the safeguards of private ownership through reform in Page I 1 the securities and insurance areas to protect consumers and individual investors. To supplement the private sector effort, reforms of specific public services are to be undertaken to develop a responsive public sector delivery capacity to support the requirements of the emerging business sector, including an enabling environment relating to procurement, auditing, and computerization of basic public sector management functions. 4. Institutional and implementation arrangements: The project will be managed by the Ministry of Finance (MOF) where the project unit is being housed. The individual sub-programs will be managed for the purposes of technical implementation by the applicable executing units. For the private sector development component, the Privatization Unit (part of the MOF) will conduct the program and manage the specific technical consultancies as required. For the financial sector component, in particular, the improvement in banking regulation and supervision, the central bank (Bank of Guyana - BOG) will undertake execution of such component though the MOF project unit will handle procurement matters. For the public sector business services component, the Ministry will manage the execution via its relevant units and representatives from the national tender Board (e.g.: for implementation of the new procurement law), as well as involvement of the Auditor General's office as a beneficiary of the audit strengthening component. The Ministry of Finance, however, will centralize project contract processing, procurement, auditing, and disbursement arrangements, which will be effected at the request of the technical implementation units. In the case of the Privatization Unit and the Bank of Guyana, these arrangements have already been tested under the FISBEC and determined to be adequate. Some improvement in the organization of the project unit in the MOF and its processing and accounting capacity will be needed, to ensure that reports on project progress, contracts processing, and financial execution are timely. Auditing arrangements have been discussed with the MOF. While the Auditor General traditionally, and by law, conducts the audits of public sector programs including IDA projects, it also has the flexibility to deploy private audit firms for this purpose. In order to improve the financial management and accountability of the project unit, the project will include a budget for the contracting of an independent private audit examiner to undertake 'annual examinations' of the project accounts, as agreed with the MOF. The Auditor General would still review and audit the project as the official government auditor as required by Guyanese law, but the external private examiner arrangement should result in more timely submission of project audits to IDA. During project supervision, the IDA tean would include the requisite specialists to monitor the project implementation arrangements covering the following areas: (a) progress in policy & institutional reforms under the project's technical components, (b) coordination among the MOF with the executing units, (c) project financial management, accounting, procurement and auditing, and (d) assessment of information technology adequacy (including Y2K provisions) for project administration purposes. D: Project Rationale 1. Project alternatives considered and reasons for rejection: The main alternative earlier considered for this project was a sectoral adjustment operation covering the financial, private sector, civil service reform, and other reform components. However, even though Guyana has shown a better track record in the performance of adjustment versus investment operations, the recent FISBEC T.A. credit performed satisfactorily, particularly with regards to the earlier phase of the privatization program and the financial sector regulatory reforms (e.g.: the passage of the Guyana Financial Institutions Act which incorporated international Basle based banking standards). However, a T.A. operation was deemed more appropriate for the following reasons: (a) With the ongoing HIPC performance monitoring as well as the IMF's ESAF program and IDA's Page 12 previous PSDAC, many policy reforms are already being implemented. Nevertheless, the institutional support and capacity to fully enforce and sustain such reforms has not been fully addressed. Therefore, this proposed project aims to develop the institutional mechanisms which would allow future policy reforms and/or those currently underway to be implemented and enforced on the ground. In addition, govemment commitment to the reform of private and financial sector policies is evident and has already achieved the political consensus as per prior IDA operations in this sector, and commitments already being confirmed under HIPC. Also, given IMF commitments for b.o.p. financing, as well as possible savings from implementation of the H[PC agreements, the Govemment currently has a stronger need for targeted technical/institutional interventions, and thus the need for further b.o.p. financing is not an immediate priority. (b) The other alternative considered also within the context of a sectoral adjustment operation, was implementation of a broader public sector wide civil service reform program to improve the public sector response capacity within a private-sector led economy. However, given the IDB commitment and agreement with the government on a future $50 million operation to finance a civil service reform program, and given the need to further evaluate the various restructuring options under such a program, it was deemed to be overly broad and needing further work in terms of its implementation path, to be included simply as another component in an already multi-faceted operation. Nevertheless, under the proposed T.A. project, the specific targeted interventions aimed at improving public sector services and better tracking its human resources through the upgrading of information systems, will also lay some of the foundations and analysis for better evaluating the extent of public sector restructuring actions needed, as well as better monitoring the cost of public sector resources. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Banking Sector Reform, Technical Assistance S S Public Sector Credit (TAC) Financial Sector reform and Financial Sector and S S restructuring; Privatization Program Business Environment Credit (FISBEC) Financial Sector Reform Private Sector S S Private Sector: Privatization and Development tax/tariff regime Adjustment Credit (PSDAC) Other development agencies Macro, fiscal, monetary, and structural IMF Enhanced reforms in financial/private/public sect. Structural Adj. Facility Banking Sector Reform IDB Financial Sector Loan Privatization Technical Assistance UK DFID ODA Program Caribbean Program IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) Page 13 3. Lessons learned and reflected in the project design: Three key lessons stand out in the design of this project based on past experience: (a) For the successful privatization of public enterprises, all stakeholders need to be taken into account, particularly workers in the entities and small investors interested in contributing to the domestic market. Thus, this project explicitly incorporates the development of policies to both protect workers' interests in the transistion of ownership of privatized entities, as well as financial market regulations which adequately take into account and protect the interests of small investors (including when these are the employees of the privatized entities or individual consumer investors who require protection against related party transactions - the latter will also be assisted by the development of securities trading and disclosure regulations). (b) Successful private sector development also requires an open consideration of both social and environmental issues to assure community and labor support, and prevent future environmental issues from emerging. In this respect, on the social side, explicit structuring of labor continuity and/or severance provisions in investor contracts, as well as options for future employee stock ownership, greatly enhance community support for privatization programs. With regard to environmental considerations, explicit inclusion of responsibilities for environmental liabilities in investor contracts, assisted by ex ante environmental auditing of enterprises to be sold, helps to identify and take up front corrective measures to assure future business practices with sound environmental safeguards. (c) Certain processing safeguards need to be put in place prior to entering into a privatization process for individual enterprises. This includes conducting land and property title searches much before any formal bidding process begins. In this manner, any competing claims for land or property title can be resolved before the competitive bidding process is underway and thus avoid delays further down the line when investors have to await for resolution of third party claims on government land or property. Other efficiencies which can be incorporated into a privatization process include the pre drafting of investor agreements which include priorities of the govermnent regarding the expected privatization outcome. This procedure, once shared with investors, greatly expedites processing and negotiation time since it spells out clearly the assumptions and interests of the government as selling party, and allows investors to tailor bids and subsequent legal agreements in a manner which facilitates final consensus. 4. Indications of borrower commitment and ownership: The Borrower has already completed a significant first phase of the privatization program in which a number of major public sector entities were transferred to the private sector, and/or recently advertised for sale (see PSDAC ICR Report and recent HIPC monitoring reports). The program has progressed very well in that additional entities, not in the original plan, have also been prepared for sale to the private sector (notwithstanding the delay in the GEC sale which required a rebidding). In addition, both throughout the PSDAC operation as well as during the HIPC monitoring exercise and under the IMF ESAF, the strongest policy perfornance was observed in the areas of private sector and financial sector development - areas in which targets were met on or ahead of schedule in most cases. More recently, the government has seen fit to deploy intemational technical experts to ensure quality institution-building results, both to carry out the privatization program, as well as in the banking restructuring area. In the public sector area, significant progress has been achieved, particularly with respect to movement on reforming the public procurement framework and establishing an independent revenue authority. While these institutional reforms are not yet complete, there is sufficient evidence that a change in the framework of these areas is underway and will not be reversed. Page 14 5. Value added of Bank support in this project. The Bank/IDA, via a number of operations starting with the SAC and the TAC, and followed by the FISBEC and the PSDAC, has been committed to supporting these areas in Guyana, and has the best knowledge of the sectors covered by this project, in comparison with the other donors. While in many cases other donors' programs will complement this operation (IMF, EU, CIDA, IDB), the Bank/IDA has generally taken the leadership in these areas. In addition, due to the Bank's internal specializations, the proposed areas cover necessary synergies which the Bank/IDA is best suited to tackle. These include the linkages between, financial sector, privatization, capital markets development, and supporting public services and policy issues. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): The economic analysis will include the benefits in terms of immediate revenues from privatization, future tax revenues, labor separation costs, and project expenditures supporting the program. [X] Cost Effectiveness Analysis NPV=US$ 7.9 million: 2. Financial (see Annex 4): NPV=US$ 6.6 million; The financial analysis projects the NPV and IRR. of the expected results of the project, including government net profits from the privatization exercise, costs of the program (technical and administrative, as well as restructuring costs), IDA and Government inputs into the process, and efficiency gains / reduction in liabilities from sale of public enterprises and improvement in bank loan portfolios, respectively. Fiscal impact: The fiscal impact analysis takes into account the trade-offs between maintaining the status quo, i.e., subsidizing loss making public enterprises, and potential gains from restructuring and privatization which would eventually lead to incremental tax proceeds accruing to the Government. Additional contingent costs such as severance payments and needed capital injections into failing enterprises, are taken into account in costing the privatization proceeds and expected revenues from privately managed concerns. 3. Technical: Technical assessments have been documented with respect to the implementation and technical capability of the following players, to determine feasibility in implementing the proposed project's components: (a) Privatization Unit, (b) Bank of Guyana, and (c) Public Services (auditing, procurement). The assessments have been conducted as part of previous project preparation and supervision work (PSDAC, FISBEC, PAP), as well as IDA's audit and procurement assessments, and other reports linked to the country's strucural reform agenda. The privatization unit and the central bank, in particular, have demonstrated technical proficiency in executing their respective functions. The central bank's supervision unit was trained for a period of 3-4 years by seconded professional supervisors from the Central Bank of the Philippines, and funded by the IMF. 4. Institutional: a. Executing agencies - Ministry of Finance: While the MOF will delegate the technical execution of many of the project components to the respective specialized units (as per above), the official executing agency is the Ministry itself. As documented and observed in a number of reports, the Ministry continues to lack qualified staff for effective and timely program follow-up, and requires a restructuring and strengthening of functions so that the Minister is not held accountable for all transactions related to project execution, no matter how detailed they are. In this regard, given the technical assistance nature of Page 15 the project, additional consideration will be given to fund from the project, key advisory positions to ensure not only effective project/program coordination, but also to follow up on IDA sectoral matters linked to the project, and disseminate this modus operandi to other qualified or trainable staff in the Ministry. This remains a weak area in the Ministry, and while the implementation of the future civil service reform program (via IDB) should address some of this, in the interim, additional capacity is needed to ensure timely follow-up on project and sectoral matters. b. Project management: The Ministry of Finance has in past projects assigned one staff member for most project management matters. The Ministry has set up a Multilateral/World Bank Unit which will be in charge of follow up on all project management matters. The IDA project team has verifed that such unit which constitutes the official project unit, is adequately staffed to follow up on both project financial management matters as well as project execution monitoring. The project unit includes staff responsible for the functions of project coordination, disbursement, procurement, accounting, and systems support. 5. Social: As discussed in the project design, the inclusion of policies to protect workers affected by the privatization process (which temporarily became a political issue during the offer for sale of the state mining companies), will be a deliberate intervention supported by this project, to assure that social impact considerations are taken into account. In this regard, policies will be developed providing for options of (a) severance packages, (b) contract continuity as part of privatization deal, (c) employee stock ownership plans, and/or (d) retraining programs. For industries being privatized which have a high local employment base as in the bauxite mining areas, social assessments of affected communities will be undertaken to determine the degree of impact from privatizations on employment and future economic growth of such communities. The government's Privatization Board will include representatives from the labor unions so that any of the above arrangements are discussed a priori with the labor sector prior to including them in investor/privatization agreements. 6. Environmental assessment: Environmental Category []A [X] B [] C The project is strictly for technical assistance and little environmental impact is anticipated. However, for the privatization of some of the natural resource intensive industries (mining) as well as other industries with potential environmental impacts (pharmaceuticals), environmental assessments will be carried out under the project. This will also include, as part of bringing enterprises to point-of-sale, conducting environmental audits for public enterprises to be privatized and identifying potential environmental liabilities which would have to be resolved by future investors/buyers or the government. The privatization legal agreements betweeen the government and investors will include both accountability clauses for maintaining environmental safeguards in place, as well as clauses accepting any cost of environmental clean up to be incorporated into the pricing agreement for the sale. In addition, the Guyana Environmental Protection Agency (EPA) will also be involved in vetting and providing environmental permits for newly privatized entities, once the EPA has satisfied itself that sufficient measures are in place to assure that business operations are being conducted under sound environmental standards. As part of the privatization technical assistance, the UK ODA/DFID Office in the Caribbean will be providing additional grant funds to assure proper environmental auditing of public enterprises (e.g.: removal of scrap metal, site clean-up prior to sale, assurances of non existence of leakage of hazardous substances, etc.) as part of the pre-sale valuation process. 7. Participatory approach: a. Primary beneficiaries and other affected groups: Interviews were conducted with representative of the private sector (Private Sector Commission, Guyana Manufacturer's Association), as well as representatives of the Labor Unions (Guyana Labor Union), and Government Agencies involved in the program (Privatization Unit, Bank of Guyana, Go- Invest, Ministry of Finance, Auditor General). These would represent the primary beneficiaries of the project. Page 16 b. Other key stakeholders: Interviews during project preparation were conducted with other donors involved in related programs, in particular the EU (private sector skills survey and development program), CIDA (private sector human resource strengthening), IDB (private sector technical and management training program), IMF (private sector structural reform measures), and USAID (investment promotion program). The proposed project was designed to leverage off of these existing programs in process of being implemented, while not duplicating other donors' programs. F: Sustainability and Risks 1. Sustainability: The project aims to provide consulting capacity which will be structured into the business processes of the beneficiary entities, so as to ensure eventual training and honing of staff in the implementation of the subject reforms (i.e.: on-the-job technical assistance instead of report writing). This will be particularly so in the case of the improvements and implementation of the financial sector (banks and non-banks) regulatory frameworks, as well as in the operations of asset/enterprise valuation for the privatization unit. Nevertheless, the privatization unit by definition will be a temporary administrative structure, thus once all major public enterprises are privatized, it should cease to exist. In the areas of the new Insurance and Securities Commissions, direct technical assistance will be provided in setting up these new entities and working with their staif and management to instill the requisite controls and procedures (similar to the earlier technical assistance provided to the Central Bank's Banking Supervision Unit using on-site technical/management experts). 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1). Risk Risk Risk Minimization Measure Annex 1, cell "Outputs to Objective" Discontinuation of sound S Ensure Government policy of full public Government sectoral policies disclosure & stakeholder participation. Ensure (political change risk) adequate training for staff implementing structural reforms (banking, privatization). Lack of absorptive capacity of M Advertisement of entities at domestic, regional, private sector for public entities and international level. Preparation of draft sale offered for sale. agreements for prior examination by investors. Political and labor opposition to H Explicit incorporation of protection measures further privatization. and severance/ESOP/contract continuity options as part of privatization deals. Annex 1, cell "Components to Outputs" Continued deterioration and fiscal S Implementation and/or continuation of liability on account of GNCB restructuring team, under private international operations. management contract. Lack of incentives to improve S Implement early on, the human resource public sector services. budget/payroll tracking system to allow costing and rationalizing of inputs for key public services. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) Page 17 3. Possible Controversial Aspects: Opposition to enterprise privatizations may arise if insufficient consideration is given to worker's interests, in light of potential employment displacements. For that reason explicit policies in this area are incorporated into the project design and into the privatization framework. In the public sector reform area, there may be government resistance to privatizing or contracting out some public services such as auditing, procurement, and project management, which are still considered under the purview of the government sector. For this purpose, the project will evaluate the various options of how to arrive at the most efficient public service delivery arrangements, while allowing flexibility in maintaining government control while using private sector partners. G: Main Loan Conditions 1. Effectiveness Conditions: a. Establishment of a financial management system in the MOF. 2. Other: a. Pre-Negotiations: (a) Agreement on the set of public enterprises to be included in the privatization plan; (b) Agreement on deadline for submitting GNCB evaluation report and date for undertaking future ownership decision; (c) Identification of short list of private audit examiners, and (d) Establishment of a project implementation unit. H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. [NA] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. l ] The following items are lacking and are discussed under loan conditions (Section G): I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. L1 ] [The following exceptions to Bank policies are recommended for approval: The project complies with all other applicable Bank policies.] [signat Task ar Leader/Task Manager: John D. Pollner, LCSFP [signature] Sector Manager/Director: Danny Leipz ger, S [signature] Country Manager/Director: Orsalia K Ia tzopoulos, LC C Page 18 Annex 1 Project Design Summary Guyana: Financial & Private Sector Institutional Development Project Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) To move towards a private Increase in private sector Periodic macroeconomic Improvement in economic sector led economy investment (both domestic monitoring in conjunction trends, and upswing in complemented by adequate and FDI) as a share of GDP. with IMF. growth. Improvement in and efficient government neighboring economies' regulatory structures to conditions and improved ensure an enabling business external import demand. environment with socially friendly policies. Project Development (Objective to Goal) Objective: To strengthen the Reduction in bureaucratic Critical surveys of private Continued Government regulatory frameworks and impediments to private sector participants during commitment to a market- institutions supporting an sector business transactions, project supervision, based economy and integrated policy appproach and increased market including the Guyanese relaxation of centrally towards private sector regulated activities within Private Sector Commission, managed regulatory development, covering the new established regulatory the Manufacturer's structures in favor of market interlinkages among frameworks, and institutions Association, and individual based self-regulatory financial sector under private ownership. entrepreneurs. organizations. development, privatization, and public service delivery. Outputs: (Outputs to Objective) a. Implementation of a a. Approval/implementation a. Verification of Cabinet a. Continuation of existing modernized regulatory & of new regulatory approval of, and Ministerial government policies with supervisory framework for frameworks, including issuance of implementing respect to financial sector banks, non-banks, provisions & resolutions for Orders. reform & restructuring. insurance, and securities financial sector contingency industries, and policies to planning and early ensure financial sector corrective action policies. solvency. b. Sufficient absoptive b. Execution of a b. Bringing to point of sale b. Verification through private investors in market privatization program w/ a key set of public printed advertisement for entities offered. implementation of policies enterprises, and concluding notices, contract agreements Implementation of to protect workers, small privatization sales or long and/or evidence of payment. worker/labor friendly investors and the term leases to private sector privatization practices. environment, during sale of for enterprises andother enterprises to private sector. government assets. c. Qualitative and c. Verification through c. Public sector incentives procedural improvements in c. Improving efficiency in improved automation of to demonstrate public public services supporting key public services, and processes, and efficient & service delivery private sector transactions increasing private participa- transparent awarding of improvement and facilitate (procurement, auditing) tion in service delivery. private sector contracts. private sector transactions. Page 19 Project Components/Sub- Inputs: (budget for each (Components to Outputs) components: (see Annex 2 component) for project description) a. Central Bank - a. Contracting of qualified During supervision a. Government recognition Strengthening of the technical advisors reviewed missions: utilizing financial, and pro-activity in supervisory function for by IDA. legal, procurement, project mitigating financial risks banks and non-banks. management, systems, and from poorly capitalized b. Restructuring GNCB and b. Improvement of bank public sector specialists to financial entities. preparation of privatization financial condition under verify implementation via: options. private management evaluation of legal b. Government to negotiate contract. documents, audited financial pricing of enterprises put up c. Development of the c. Establishment of the statements, systems for sale or long term lease Insurance, Securities, respective regulatory implementation, and according a minimum of regulatory/supervisory Commission and approved operating plans, current net worth and institutions. Supervisory Council. budgets, and maximum of future d. Strengthening the d. Completion of enterprise implementation of newly franchise (earnings) values, privatization unit in the evaluations, net worth established institutions. while minimizing areas of divestment analysis, analysis, and draft sale discretionary ownership share offerings, contracts for selected criteria (excepting worker consolidation of public enterprises and/or asset and small investor enterprise accounts, and transactions. protection issues). implementation of asset lease/sale policy. c. Sufficient internal project e. Modernize procedures e. Approval of new implementation and staffing and strengthen institutional procurement legislation, capacity in MOF to partake capacity in public services increased audit timeliness, of technical support and in procurement, and modernization of the assure progress in reforming establishment of a local government's processing efficiency of public sector contractors registry, systems. service delivery in the areas auditing, and upgrading of specified. information systems for public sector management. f. Implement a human f. Implementation of a resource budget tracking modernized budget payroll system in the public sector system being Y2K with upgraded technology compliant. platforms. Page 20 Annex 2 Guyana: Financial & Private Sector Institutional Development Project Project Description l. Project Component 1: Financial Sector Development: Strengthen oversight and broaden regulatory framework for financial sub-sectors including non-banks, insurance, securities, and foreign exchange sectors - US$1.30 million (base cost): This component would fund technical assistance and inforrnation support systems in three output areas: the Bank of Guyana (BOG), restructuring of GNCB, and regulatory development in the financial sub-sectors. For the BOG, in particular, this component would develop a procedural framework for handling banks with short term or structural liquidity and/or solvency problems, implement uniform standards of financial reporting, in line with international standards for banks and other licensed financial institutions, update the financial sector regulatory framework to cover merchant banks, trusts, and other non-bank institutions, and improve the monitoring framework for foreign exchange operators in the non-bank sector, including appropriate regulations and controls on market participants. This component will also assist in the development and issuance of regulations for the prudential operation and requirements of the insurance sector, and putting in place monitoring mechanisms to ensure authorized transactions with adequate disclosure and compliance in the securities sector including transparency in investment disclosure and protection of small investors against related party transactions. This component will assist to establish and develop the capacity of the new regulatory bodies that will be established as autonomous entities in these sectors, during the implementation of the project. Equipment for computerizing financial sector monitoring indicators in newly regulated markets, will be financed where needed. For the restructuring of GNCB, this component will fund a reform effort of the bank in the following areas: credit policy and credit appraisal procedures, arrears collection and supporting systems, organizational structure and human resource management, property and branch rationalization, organizational structure and human resource management, and management information systems. Under a new management team, a review of the organizational structure as well as the human resource needs of the bank will be conducted, job specifications and appropriate remuneration levels will be established, and staffing levels by grade and competency will be identified. This would include formulation of a staff- downsizing program and implementation of training programs to ensure that staff are sufficiently skilled and familiar with the procedures of the bank. A detailed branch analysis will be undertaken to establish whether some branches should be closed, relocated, or sold to other banks. For branches that will be retained, an action plan to refurbish or keep them attractive for clients, will be implemented. Internal control procedures and systems will be introduced and a proper fixed assets register will be maintained to account for and protect the bank's fixed assets. On credit policy and appraisal, a rigorous system, with specific credit management and delegation responsibilities, will be instituted to ensure that all new loans are properly evaluated. Arrears collection will be addressed with a separate unit within the bank to be created to actively manage and reduce the non-performing loan portfolio. In the area of management information systems, an arrears reporting module that willl automatically generate reminders and reports, as well as monthly statement of accounts to clients will be implemented. A feasibility study on privatization options will be conducted. 2. Project Component 2: Private Sector Development: Augment private participation in the economy and implement enabling business environment for the privatized sectors - US$1.80 million (base cost): The government intends to accelerate the privatization program by restructuring and broadening the private sector share ownership of the remaining public entities. Part of the divestment proceeds may be used for costs associated with the privatization program. In this latter phase of the Page 21 privatization program, some of the major remaining state-owned enterprises will be tackled with the intended result of lowering state-ownership in industry to less than 40% of previously owned government enterprises. This component will ensure that the current privatization unit has the capacity to administer the upcoming privatization program and provide the technical assistance in the legal, financial, and sector- specific industries during the course of privatization. The component will finance the technical skills needed to bring to point of sale the identified state-owned enterprises in the privatization plan and put in place procedures for facilitating public share offers for the privatized entities. Funds will be used to develop and implement safeguards to protect interests of laborers/employees of privatized enterprises through stock options, contract continuity clauses, and severance plans; to implement environmental safeguards, and to issue regulations for the protection of small investors participating in privatization share offerings. The component will target the modernization of the reporting and record keeping of state-owned assets with a view toward providing consolidated financial accounts of all public enterprises in a common holding company. Through the privatization unit, the program will also build up the Government's strategy to of publicizing of enterprise investment opportunities through broad international disclosure. Under this component, entities to be privatized include: Bermine (bauxite mining); Linmine (bauxite mining); Guyana Pharmaceuticals, Seals & Packaging; Glassworks Industrial Park; Ruimveldt Industrial park; Wauna Palm Oil Estate; and Quality Foods. Final ownership transfer of the Guyana Electric Co., begun during the previous privatization phase, will aim to be finalized during 1999, and work on privatizing Linmine has been proceeding with an identified strategic investor for the power plant and invitation to investors for the mining operation. The program will also include the re-offer of entities which did not receive sufficient bidders earlier. These include Guyana Stores, National Printers, and the Versailles Dairy Complex. The plan also includes the privatization of: Hope Coconut Industries; the Surapana Farm (sale of shares to workers); and the Bauxite Industrial Development Corporation Properties. The program, also includes the privatization of Guyana Airways, as well as the restructuring GNCB and evaluation of future ownership options. Restructuring of the remaining public enterprises would also be supported. 3. Project Component 3: Public Sector Business Services: Improve the public sector business environment to enable greater efficiency and execution of transactions with the private sector - US$1.25 million (base cost): This component will help modernize the framework and procedures covering procurement and bidding for public sector contracts executed by private suppliers and to establish the registry of the local construction industry for this purpose. This component will also involve preparation of a new procurement bill, deploying technical experts to work under the terms of reference agreed with IDA. The component will also help in the definition of regulations under the procurement law including standard bidding documents, pre-qualification processes, evaluation procedures/controls, contract forms, and procurement manuals, guidelines and procedures for the public sector. With a new procurement framework, programs for dissemination of the new framework and regulations, as well the new administrative and information tools for their implementation will be prepared. The component will also help strengthen the public sector audit capability in the Auditor Generals' Office in terms of meeting business standards based on commercial, international practice, and multilateral institution requirements, as well as to improve and document procedures and timeliness in audit reporting, and develop operational and performance auditing techniques. It will also be used to finance the modernization and implementation of a new public sector human resource management and payroll budget system which will comply with Y2K requirements, so as to ensure a smooth transition of this key public sector function before the start of calendar year 2000. Annex 2a Guyana Financial and Private Sector Institutional Development Project Project Budget Component Summary Compo- Objectives Project Outputs Budget nent / ($4.8 Sector mn.) $1.3 Financial Strengthening the Banking Sector mn. Sector financial sector and * (a) development of procedures and legal steps for dealing with corrective actions and resolution of troubled banks and private participation implementation of standards in financial reporting standards for banks, (b) improving the regulatory framework for merchant therein, via upgrading of banks, trusts and other non-banks, and (c) restructure GNCB under international management team, evaluate net worth, and the regulatory and implement plan for future ownership options. institutional framework for the banking, non- Insurance and Securities Markets bank, insurance and * Development of regulations, and technical support for the insurance and securities sectors, and establishment of regulatory securities sectors. bodies therefor. $2.0 Private Augment private sector Privatization Program mn. Sector participation in the * Upgrading capacity of the Privatization Unit to administer the upcoming privatization program, providing technical assistance Develop- economy through in the legal, financial, and industry-specific companies in the course of public enterprise privatization; ment privatization of public enterprises using policies * Design of policies to protect interests of laborers/employees of privatized enterprises through stock options and severance conducive to business plans, put in place environmental safeguards, and development of procedures to facilitate public share offerings in the local investment. capital market. $1.5 Public Improve public sector Public Sector Business Services mn. Sector service delivery to * strengthen the public sector audit capacity, and audit reporting standards for multilateral projects; and upgrade the public Business enable greater efficiency procurement process. Services and transparency in execution, and to support * modernize and implement a new Y2K compliant public sector human resource management / payroll budget tracking system. Po private sector transactions. Annex 2b GUYANA - FINANCIAL & PRIVATE SECTOR INSTITUTIONAL DEVELOPMENT PROJECT IMPLEMENTATION PLAN & PROJECT PERFORMANCE INDICATORS Project Components TARGET DATES FOR PRODUCT DELIVERY AND COMPLETION OF SERVICES Outcome and Activities Indicators and Prior actions taken Responsible through 1999 2000 2001 2002 Agencies 1. Financial Sector Development a. Banking Sector Modernized Financial Consulting contracts in Approve and issue new Incorporate / enforce new Reduction in the Regulatory Institutions Act (FIA) covering place for technical expertise regulatory circulars under regulations into the level of non Development banking institutions, approved, in areas of the Financial Institutions banking supervision performing loans Enforcement in line with Basle capital Act, or other relevant inspection cycle. and assets in the adequacy and credit exposure a. Methods and policies for regulations specifying: fnancial system standards. dealing with insolvent and IDA review of process to (Central Bank and illiquid banks; a. A priori defined ensure coverage and Ministry of Banking supervision and procedural framework for application of new Finance). inspection capability b. International banking central bank action in reporting procedures and strengthened. Regular accounting and reporting dealing with failing compliance with Consolidation, inspection cycle implemented. standards; banks, including defined prudential financial restructuring and sanctions for non- indicators (exposure rationalization of Bank of Guyana Act granting c. Regulation of merchant compliance and corrective limits, capital/liquidity financial institutions independence to the central bank banks, trusts, and foreign actions. requirements for banks to meet new approved, and provisions for exchange operators. and non-banks, prudential recapitalization of the central b. Bank accounting provisioning criteria, and requirements bank, effected. Development of regulatory reporting regulations adherence to Basle core (Central Bank and framework and regulatory specifying treatment of principles). Ministry of amendments addressing the non-accrued income (and Finance). above areas, in process. accrual reversals), reporting of loss Incorporation of provisions, asset classes new bank to determine capital accounting reporting adequacy, loan security, norms and and 'off balance sheet' verification of contingent liabilities. prudential requirements for c. Issuance of prudential merchant banks, regulations governing trusts, and forex capital, exposure, and operators as part of fiduciary duties of supervision and specified non-bank inspection cycle ______ ______________________________ __________________ financial instfinancial institutions. (IDA and CB). Page 1 Project Components TARGET DATES FOR PRODUCTS DELIVERY AND COMPLETION OF SERVICES Outcome and Activities Indicators and Prior actions taken Responsible _____ __________ through 1999 2000 2001 2002 Agencies b. Bank All state-owned fiancial Internationally experienced Full implementation of Improvement in Restructuring institutions except GNCB restructuring/management GNCB decision capital position, (which has 18% of total deposits team for the Guyana underway, based on profitability, and net in the financial system), were National Cooperative Bank optimizing earnings worth of GNCB in brought to point-of-sale, is operating - assessment of capacity, and compliance with privatized and/or liquidated, bank's financial condition, strengthening capacity of prudential These included Guyana Bank for asset & net worth valuation the bank in line with regulations Trade and Industry (GBTI), completed and submitted to increased private sector (Ministry of National Bank of Industry and Government and IDA. New participation and Finance). Commerce (NBIC), GNCB lending to defaulting management. Trust, the merger of GAIBANK borrowers halted, and strict GNCB returning to w/GNCB, the Guyana credit approval procedures Complete privatization profitable net Cooperative Home Mortgage put in place. and/or other actions earnings position, Bank, and the Guyana agreed for management reduced share of non Cooperative Insurance Company Financial restructuring & and ownership of GNCB. performing loan (GCIS). improvement plan portfolio, and implemented with increased collections A restructuring/management performance bencmunarks to on defaulting loans team contract was signed with itnprove earnings capacity (MoF). the Government, for the of bank. improvement of the financial condition of GNCB. Registration of the bank under the Companies Act in lieu of registration under the COFA Act. Submission to Cabinet of policy paper on GNCB restructuring, privatization, and/or ownership options with fnancial feasibility projections and future operation of the bank. Decision by Cabinet on ownership options/policies to be taken. Page 2 Project Components TARGET DATES FOR PRODUCTS DELIVERY AND COMPLETION OF SERVICES Outcome and Activities Indicators and Prior actions taken Responsible through 1999 2000 2001 2002 Agencies c. Insurance Sector Draft Insurance legislation Appointment, budgeting, Full implementation of Implementation of Supervisory Regulatory Reform. completed and presented to and staffing of Office of inspection cycle for quarterly industry monitoring system Cabinet and Parliament for Insurance Commissioner. insurance industry, and reporting system by the institutionalized. Approval. evidence of supervisory Insurance Commissioner. Industry rationalized Development of capacity, information to promote private implementing insurance processing systems Implementation of off-site participation with regulatory circulars implementation, staffing evaluation of industry's secure capital base governing minimum skills, and enforcement of financial statistics, (MoF, Pvtzn. Unit). capitalization, solvency industry submissions of solvency condition, requirements, underwriting insurance returns capitalization, and PML Insurance industry standards, tax regime, (financial statements, valuation of risk portfolio. financial data allowances for investment reports). available on a timely of assets, reinsurance basis for financial security, and conditions for sector oversight revoking licenses. (MoF). d Securities Sector Draft Securities Market Establishment of budget and Amend regulations of the Operational system in Development of a regulatory reform. legislation presented to Cabinet staffing for the new Capital Issues Act, the place for securities transparent and and Parliament for approval. Securities Council. Financial Institutions Act, monitoring and enabling regulatory and the Companies Act, information system for environment for Development of to make them compatible tracking trades and increasing the implementing securities with prospectus market prices of publicly availability and regulations covering public requirements and traded securities in the liquidity of longer issuance disclosure securities registration primary and secondary term financing requirements, capital procedures under the new markets. instruments in the requirements and operating Securities Regulatory capital markets criteria for licensed dealers framework. Operational system in (MoF, Pvtzn. Unit). and brokers. place for standardized Begin implementation of registry of securities. Increase in capital Implement transparency and supervisory and securities financing insider trading prohibitions market off-site tracking instruments to fund for investor protection. systems. domestic investment enterprises. 3. Private Sector e Development PQ a Privatization of In the first phase of privatization Contract consultant Bring to the point of sale All public enterprises Transfer of (D Public Enterprises up through 1992, the privatized expertise to provide the following enterprises: offered for sale or lease, productive assets v under a Conducive & sectors/industries included: technical assistance in the (a) Hope Coconut transferred to private and enterprises to Transparent Business timbers, telephone/telecom, privatization program for: Industries; (b) Surapana ownership with proceeds private ownership to Environment trade, leather, livestock, paint, financial profitability Farm (sale of shares to received by Government. augment the private transport, foods, fisheries, rice analysis, asset and net worth workers); and (c) Bauxite sector's contribution Page 3 Project Components TARGET DATES FOR PRODUCTS DELIVERY AND COMPLETION OF SERVICES Outcome and Activities Indicators and Prior actions taken Responsible through 1999 2000 2001 2002 Agencies milling & marketing, and valuation, share issuance Industrial Development and participation in soaps/detergents. Subsequently procedures, legal contracts, Company Properties. Small Investor the economy, while in the period ending in 1997, and sector specific Consolidate the register of Protection: Issue improving the five state-owned financial regulatory provisions. public enterprises' orders/regulations under overall management institutions were privatized (see Initiate privatization financial accounts into a the Securities Act, for and profitability of financial sector above). Non- program: offer for sale or government holding small investor protection such enterprises financial institutions privatized lease, leading to transfer of company and corporatize including: (a) ensuring (MoF, Privatization or offered for sale/long term ownership of enterprises financial management of share offers to all Unit). lease, included GNEC and long term leaseholds to these enterprises by shareholders during engineering / mechanical shops, the private sector, for the systematizing reporting of takeovers; (b) requiring a Ensuring a Demerrara distillers, Forte Crest following entities: financial and performance priori announcements of sustainable hotel, Glassworks, Neocol edible data. takeover intention to institutional capacity oils, Guyana Stockfeeds, Sanata (a) Bermine (bauxite ensure price transparency, for conducting Textiles, GEC Electricity Co., mining), (b) Limnine Under agreements (c) setting out rules for privatization Bel-lu claybrick factory, Linden (bauxite), (c) Guyana covering privatization of clearing and settlement of operations in wharf, and East Bank Demerrara Pharmaceuticals, (d) Seals public enterprises, securities, (d) setting out Guyana, including properties. & Packaging; (e) provisions in effect and ethics rules for dealers market valuations of Glassworks Industrial Park; implemented for sale of and brokers, (e) setting state owned assets, The privatization of the Guyana (f) Ruimveldt Industrial minority share interests to out disclosure rules for capability for Electric Company has reached park; (g) Wauna Palm Oil employees, transfer of dealers and brokers. conducting its final stages with the Estate; (h) Quality Foods, employee contracts with competitive bids for Commonwealth Development and (i) Guyana Airways. appropriate terms and ownership transfers Corporation (following the Re-offer for sale: (j) Guyana conditions, and maintain to potential earlier withdrawal of Sask of Stores, (k) National Printers, severance payment terms investors, and Canada, the originally selected and (1) Guysuco Versailles as prior per union setting out a investor), and the sale will be Dairy Complex, which did agreements. conducive legally concluded in 1999. not receive sufficient environment for bidders in the last round of Develop and implement corporate In total, the entities divested offers. procedures for restructuring and represented over 60% of public standardization and investor sector assets held by the Cabinet decision taken facilitation of public share participation (MoF, government at the initiation of regarding ownership offers for privatized Privatization Unit). the process. options/privatization of enties. GNCB. 4. Public Sector Business Services a Modernize the IDA has conducted and Complete development and Develop and implement Institutionalization of Efficient public Public Procurement discussed with Government, a drafting of the new administrative tools, administrative system for procurement system Framework comprehensive country-wide procurement law, and procedures, and public procurement and to increase procurement assessment and endorsement by Cabinet, information systems for contractor registry competitive private issued reformn recommendations. including provisions for implementation of the procedures. sector participation Page 4 Project Components TARGET DATES FOR PRODUCTS DELIVERY AND COMPLETION OF SERVICES Outcome and Activities Indicators and Prior actions taken Responsible __________________ through 1999 2000 2001 2002 Agencies transparency in advertising procurement regulations. in the economy and for bids, controls on third Restructuring of the Develop and implement a assure transparency party interests evaluating central tender Board. national in allocation of bids, and clear evaluation Worker's/Contractor's public resources. and selection procedures & Approval of standard registry. criteria. bidding documents. b. Strengthen the Areas for strengthening the Contract consultants to Production of auditing Development and Build up of Public Audit Function public audit function and gaps in upgrade the capacity and procedures and manuals, implementation of government and multilateral project audit define reporting standards and implementation of operational and private sector audit reporting, identified. of the AG. Implement revised auditing standards performance based audit capacity to support procedures for meeting and guidelines for techniques to supplement public and private standards of multilateral commercial, institutional, financial reviews of major sector disclosure of development agency project and multilateral project projects including public financial audits. audits. works. information. Audit reports submitted in Sustained auditing timely fashion for capacity in public sector WB/multilateral and certification of development project international auditing accounts, including standards. requisite financial management and reporting requirements. c. Upgrade the Identification, short listing, and Payroll budget system Implementation of Permanent system Modernized Public Sector's evaluation of potential implemented and operating integrated payroll, operating and information Human Resource consulting contractors carried with Y2K compliance. accounting, and budget maintenance technical infrastructure in Payroll Budget out, and incorporation of Y2K Compatible budget and system. staff in place. place to support System and Project compliance mandate in t.o.r.'s. accounting classifiers in public sector Financial place. Project financial Project operating under management process Management/ Project unit staff with functional management data on LACI procedures, with and improvement in Accounting System responsibilities in financial Project financial contracts, project costs, audits unqualified. cost effectiveness of management and procurement, management modules activities, special account public resources. designated. integrated and initial project balances, and outputs management reports used as a basis for credit 0Q produced. disbursement requests. oc Page 5 Page 28 Annex 3 Finance & Private Sector InstitLtional Development Project Estimated Project Costs (US$ millions) Local Foreign Total Project Component IDA Gov't Total IDA Gov't Total IDA Gov't Total Financial Sector 0.33 0.05 0.38 0.98 0.16 1.14 1.30 0.22 1.52 1. Strengthen financial sector oversight and broaden regulatory framework to financial sub-sectors (non-banks, insurance, securities, and foreign exchange). Private Sector Development 0.45 0.08 0.53 1.35 0.23 1.58 1.80 0.30 2.10 2. Augment private sector participation and implement regulatory frameworks for privatized sectors. Public Sector and Business Services 0.31 0.05 0.36 0.94 0.16 1.09 1.25 0.21 1.46 3. Improve public sector service delivery for greater efficiency and execution of private sector transactions. Total 1.09 0.18 1,27 3.26 0.54 3.81 4.35 0.73 5.08 Total Baseline Cost Physical Contingencies 0.05 0.01 0.05 0.14 0.02 0.16 0.18 0.03 0.21 Price Contingencies 0.07 0.01 0.08 0.20 0.03 0.24 0.27 0.05 0.32 Total Project Cost 1.20 0.20 1.40 3.60 0.60 4.21 4.80 0.80 5.60 Guyana: Finance and Private Sector Institutional Development Project Annex 3a Credit Budget and Cost Tables including PPF ($US) Page I of 2 Consultants Goods Operating Exp. Total I. Financial Sector Component Bankinz Sector RegZulation 1. Development of procedural framework for resolution of troubled $140,000 $140,000 banks, and sanctions for non-compliance 2. Implementation of standard reporting methods and financial $60,000 $30,000 $90,000 accounting for banks and financial institutions 3. Improvement in the regulatory framework for merchant (investment) $100,000 $30,000 $130,000 banks, trusts, and foreign exchange operations Bank Restructuring 4. Restructuring the state-owned bank under an international $630,000 $50,000 $70,000 $750,000 restructuring/management team: Improvement in financial condition, valuation of net worth and determination of future ownership options Capital Market and Non-Bank Regulatory Development 5. Development of regulations, directives, and technical support for $55,000 $15,000 $10,000 $80,000 implementing new supervisory body for the securities market 6. Development of regulations, directives, and technical support for $85,000 $15,000 $10,000 $110,000 implementing new supervisory body for the insurance industry Sub-Total Component $1,070,000 $140,000 $90,000 $1,300,000 II. Private Sector Development Component Privatization Progyram 7. Support implementation capacity and core functions of the $1,230,000 $90,000 $100,000 $1,420,000 w Privatization Unit, including technical, legal and financial functions 8. Development of procedures for facilitating public share offers for $60,000 $10,000 $70,000 privatized entities Guyana: Finance and Private Sector Institutional Development Project Annex 3a Credit Budget and Cost Tables including PPF ($US) Page 2 of 2 Consultants Goods Operating Exp. Total 9. Consolidating and corporatizing financial accounts of public $50,000 $40,000 $30,000 $120,000 enterprises in a common holding company Private Sector Business Environment and Social Protection Measures 10. Implementation of environmental safeguards prior to privatization, including $60,000 $10,000 $20,000 $90,000 environmental audits & identification of enterprise environmental liabilities 11. Implementation of policies to protect interests of laborers/employees $40,000 $40,000 of privatized enterprises 12. Development and implementation of measures for protecting small $40,000 $15,000 $5,000 $60,000 investors participating in privatization share offerings Total Sub-Component $1,480,000 $165,000 $155,000 $1,800,000 III. Public Sector Business Services Component Service Delivery and Business Environment 13. Modernize the framework and procedures for procurement/bidding $120,000 $30,000 $15,000 $165,000 for public sector contracts 14. Strengthen and upgrade standards for the public sector auditing $70,000 $30,000 $10,000 $110,000 capability and public audit reporting 15. Implement a new public sector human resource management and $630,000 $315,000 $30,000 $975,000 payroll budget tracking system Total Sub-Component $820,000 $375,000 $55,000 $1,250,000 Physical Contingencies $180,000 $180,000 X Price Contingencies $270,000 $270,000 (D TOTAL CREDIT $3,820,000 $680,000 $300,000 $4,800,000 Page 31 Annex 4 Guyana: Financial & Private Sector Institutional Development Project Cost Effectiveness Analysis Summary $US Millions Cash flows from Credit Financing & Fiscal Factors Financial Cash Flows and Proceeds under the Project Note: Given that this project is for the most part, a technical assistance operation, the parameters listed reflect reasonable (but not targeted) estimates of potential financial and fiscal impacts. These are not meant to reflect a full analysis of all indirect costs and alternative scenarios. The primary objective is the improvement of the financial & business environment to result in increased private investment and participation in the economy. Present value of cash flows from Present value of proceeds from privatization of public enterprises credit disbursement and repayment net of gov't. liabilities on such entities = $7.7 mn. of principal and service charges = $3.1 mn. In current value terms, proceeds from enterprises being privatized, conservatively estimated as follows, for the Present value of cash flows from first round to sales (in current dollar terms): credit repayment and service charges = -$0.51 mn. National Printers $0.56 Guyana Stores $2.80 Fiscal/Economic Factors: G. Stores Properties $4.20 Tax Proceeds: Following privatiza- Ruimnveldt Industrial $1.90 tion, present value of tax proceeds Other Ent./Prop. $1.40 based on steady state (i.e.: zero Sub-total $10.9 equity growth) of privatized entities = $1.4 mn. While a number of other entities are earmarked for privatization under the project, some of these (e.g.: mining companies) do not yield net Present value of government proceeds to the government, but instead, cancel out the outstanding counterpart budget funding allo- liabilities of the government as a result of the sale. For other entities, cated under the project = $0.61 mn. cash flows are uncertain, and so are not included herein. The estimates therefore, are extremely conservative and are likely underestimated. PV of all financial cash flows, under the project, including financing & budget outlays = $6.58 mn. PV of all cash flows taking into account fiscal factors and potential tax proceeds = $7.94 mn. Memo Item: Total cost of project (including IDA funds) = $5.6 mn. Assumptions a. Discount rate used for PV =12%. This reflects the government's cost of capital for issuance of securities and expected minimum rate of investment / opportunity cost of capital in Guyana for private enterprise. b. IDA commitment fee assumed waived as at present. Service charge continues at 0.75%. Maturity is 40 yrs. with 10 yrs. grace. c. Exchange rate assumed at G$ 180 / 1 $US; i.e., reflecting recent rate. The average rate over the last four years, however, has been G$ 140, therefore utilization of the current rate conservatively underestimates potential value of proceeds in local currency. d. Corporate tax rate assumed at present rate, i.e., 45%, for estimating future govermnent tax proceeds. e. Following privatization, return on equity of concerns estimated conservatively at 6% (return on assets at 1%). Page 32 Annex 5 Financial & Private Sector Institutional Development Project Financial Summary Years Ending December 31 (US$ millions) Implementation Period Operational Period 2000 2001 2002 2003 2004 2005 2006 Project Costs Investment Costs 1.0 1.3 2.2 0.1 0.1 0.1 0.1 Recurrent Costs 0.1 0.2 0.8 0.4 0.4 0.4 0.4 Total 1.1 1.5 3.0 0.5 0.5 0.5 0.5 Financing Sources (share of total project costs) IDA 0.9 1.3 2.6 - - - - Co-financiers Government 0.2 0.2 0.4 0.5 0.5 0.5 0.5 User Fees/Beneficiaries Total 1.1 1.5 3.0 0.5 0.5 0.5 0.5 Page 33 Annex 6 Guyana: Financial & Private Sector Institutional Development Project Procurement, Financial Management, and Disbursement Arrangements Procurement Procurement methods (Table A) The project elements, their estimated costs, and the procurement arrangements for the components to be financed by the World Bank are shown in Table A. All IDA-financed, equipment and materials and consultant services would be procured under the World Bank guidelines for selection and employment of consultants (dated January 1997 and revised September 1997 and January 1999), and the guidelines for procurement under IBRD Loans and IDA Credits (dated January 1995, revised January and August 1996, September 1997, and January 1999). Goods and equipment would be procured through International Competitive Bidding (ICB) for all contracts costing US$ 100,000 and above, using World Bank Standard Bidding Documents. Goods and equipment valued between US$ 25,000 and < 100,000 per contract would be procured through National Competitive Bidding (NCB) up to an aggregate amount of US$350,000. Contracts valued at less than US$ 25,000 would be awarded through National and International Shopping (NIS), up to an aggregate amount of US$ 210,000. National and International Shopping should be based on at least three price quotations. Consultant and training services under the project's technical assistance component would be contracted in accordance with the Bank's Guidelines for the Selection and Employment of Consultants by World Bank Borrowers, using Quality and Cost Based Selection procedures with allowance for contracting of individual consultants for specified project components, not exceeding $1.10 million in aggregate contract value. Single source selection would be permitted in exceptional cases where technical continuity and specialized expertise is required to meet time-bound targets under the project. Prior review thresholds (Table B) All contracts awarded through ICB would be subject to prior review by the Bank. The threshold for prior review for consulting services would be US$ 100,000 for contracts with consulting firms, and US$ 25,000 for contracts with individuals. Terms of reference for all consultant services would be reviewed by IDA, independent of the threshold amounts, and terms of employment for individual consultants costing less than $25,000 would be reviewed. The contract review arrangements are summarized in Table B. Disbursements Allocation of loan proceeds (Table C) The proposed credit would be disbursed against the project components as shown in Table C. The proposed credit would be disbursed over a period of about 3 years, and the project would be completed by June 30, 2002. The closing date is December 31, 2002. Page 34 Use of statements of expenses (SOEs): Disbursements out of the Special Account for contracts below the prior review threshold would be made on the basis of SOEs. Documentation to support expenditures financed under SOEs would be maintained by the Ministry of Finance, and made available for review by Bank supervision missions. Special account. To facilitate disbursements, a special account (SA) would be established by the Borrower in a commercial bank on terms and conditions satisfactory to IDA. The SA would be maintained by the Ministry of Finance as a separate identifiable account to be used exclusively for project expenditures. IDA would, upon request, make an authorized allocation of US$400,000. Initially, and until total disbursements reach SDR 1.0 million, the allocation would be limited to US$200,000. Replenishment applications would be submitted on a monthly basis, or when about 20% of the initial deposit has been utilized, whichever comes first. The replenishment applications would be supported by the necessary documentation, i.e. a bank statement of the SA and a reconciliation bank statement of the SA against IDA records. The SA and SOEs would be audited annual by independent examiners acceptable to IDA, and a report be submitted to IDA within 4 months after the end of the fiscal year. LACI Disbursement Procedures Traditional disbursement procedures (receipt, invoice, SOE based) will be utilized at the outset and until the project's financial management system is sufficiently developed to support use of LACI procedures. A financial management assessment has been conducted and IDA has agreed with the Borrower on a time bound action plan to implement an adequate project financial management system. Following the first year of project implementation and submission by the borrower of initial project management reports (PMRs), the task team and financial management specialists will assess the project's readiness to adopt full LACI procedures and prepare quarterly financial reports for ex-post audit, prior to next disbursements. At that time the disbursement procedures would be expected to switch to LACI (gross disbursements based on quarterly financial statements and projected funding needs) for the remaining term of the project. Page 35 Annex 6, Table A: Project Costs by Procurement Arrangements (in US$ '000 equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB NIS NBF 1. Consultants See Annex6, TableAl 4,440 (3,820) 2. Goods 230 350 210 790 (200) (300) (180) (680) Total Note: NBF = Not IDA-Financed (includes elements procured under parallel cofinancing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). Figures in parenthesis are the amounts to be financed by the IDA Credit. NIS = National and International Shopping Page 36 Annex 6, Table Al: Consultant Selection Arrangements (in US$ '000 equivalent) Selection Method Total Cost Consultant Services (including Expenditure Category contingencies) QCBS QBS SFB LCS SSS Other N.B.F. A. Firms 2,265 1,105 3,330 (1,925) (940) (2,865) B. Individuals 1,110 1,110 (955) (955) Total 4,440 (3,820) Note: QCBS = Quality- and Cost-Based Selection QBS - Quality-based Selection SFB = Selection under a Fixed Budget LCS Least-Cost Selection SSS = Single Source Selection Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not IDA-financed. Figures in parenthesis are the amounts to be financed by the Bank loan. Page 37 Annex 6, Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review / Estimated Total Value Subject to Prior Review US $ thousands US $ millions 1. Goods 100,000 + ICB yes ($230,000) 25,000 to< 100,000 NCB yes ($350,000) <25,000 NIS no ($210,000) 3. Services Consultancy by firms 200,000 + QCBS yes ($1,265,000) 100,000 - <200,000 QCBS no ($1,000,000) SSS yes ($1,105,000) Consultancy by individuals 25,000 + Guidelines Yes ($620,000) < 25,000 section 5 No ($490,000) Total value of contracts subject to prior review: 3,570,000 Page 38 Annex 6, Table C: Allocation of Credit Proceeds Expenditure Category Amount in Financing US$ millions & Percentage (SDR equivalent) 1. Consultants 2.57 100% (1.88) 2. Goods 0.68 100% of foreign (0.50) expenditures, 100% of local expenditures (ex- factory cost) and 85% of local expenditures for other items procured locally 3. Project Operating Expenses 0.30 85% (0.22) 4. PPF 0.80 (0.59) 5. Unallocated 0.45 (0.31) Total 4.80 (3.50) Page 39 Annex 7 Guyana: Financial & Private Sector Institutional Development Project Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At final PCD stage) $65,500 $51,000 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) 7 9 First Bank mission (identification/preparation) 10/12/98 10/12/98 Preparation/Pre-appraisal mission 1/25/99 1/25/99 Appraisal mission departure 5/15/99 7/18/99 Negotiations 9/30/99 9/28/99 Estimated Approval Date 11/1/99 11/16/99 Planned Date of Effectiveness 11/30/99 Prepared by: Ministry of Finance Preparation assistance: Project Preparation Facility Bank staff who worked on the project included: Name Specialty John Pollner (LCSFP) Financial Sector/Privatization Raj Nallari (LCC3C) Macroeconomics Sati Achath (Consultant) Public Sector Lorelei Buntua (FRM) Project Management Systems Reynaldo Pastor (LEGLA) Legal Edward Daoud (LOAEL) Disbursements/Financial Management Daniel Boyce (LCOAA) Financial Management Luz Zeron (LCOAA) Financial Management Maria Victoria Lister (LCSFP) Quality Assurance Robert Crown (LCOQE) Project Quality Review Vladimir Jadrijevic (LCOPR) Procurement Omprakash Singh (Consultant) Insurance Khadija Bah (Consultant) Social Analysis - Land Privatization Violeta Tan (LOAEL) Disbursements Page 40 Annex 8 Guyana: Financial & Private Sector Institutional Development Project Documents in the Project File A. Project Implementation Plan / Output Indicators B. Project Operational Manual C. Report on Banking Supervisory Procedures - Assessment of Standards, and Capabilities D. Report/Assessment on the Guyana National Cooperative Bank (GNCB) E. Evaluation Report on the Second Phase of the Privatization Program F. Financial Management Report - Assessment of Systems and Institutional Capacity G. Country Procurement Assessment Report H. Environmental Data Sheet Page 41 Annex 9 Status of Bank Group Operations in Guyana IDA/IBRD Operations Portfolio at September 30, 1999 Original Amount in US$ Millions Fiscal Project ID Year Borrower Purpose IBRD IDA Cancellations Undisb. Number of Closed Projects: 24 Active Projects Cr. 3139-0 1999 GOV'T. OF GUYANA GUYANA "EL NINO" 0.00 9.00 0.00 8.38 Cr. 2879-0 1996 GOVERNMENTOF SECONDARY EDUCATION 0.00 17.30 0.00 13.91 GUYANA Cr. 2559-0 1994 GOVT OF GUYANA WATER/SEWERAGE 0.00 17.50 0.00 9.88 Total 0.00 43.80 0.00 32.17 Active Projects Closed Projects Total Total Disbursed (IBRD and 10.8 305.52 316.32 IDA): of which has been repaid: 0.00 125.16 125.16 Total now held by IBRD and 43.80 213.91 257.71 IDA: Amount sold: 0.00 .77 .77 Of which repaid: 0.00 .77 .77 Total Undisbursed: 32.10 3.76 35.86 Page 42 Annex 9b STATEMENT OF IFC's Committed and Disbursed Portfolio As of August 31, 1999 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic. 1998 SEF IDS 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Approvals Pending Commitment Loan Equity Quasi Partic. 1998 GUYAM BANK 7.00 1.00 0.00 0.00 1998 SEF CARA LODGE 0.68 0.00 0.00 0.00 Total Pending Commitment: 7.68 1.00 0.00 0.00 Page 43 Annex 10: Guyana at a glance Latin Lower- POVERTY and SOCIAL America middle. Guyana & Carlb. Income Development diamond' 1997 Population, mid-year (millons) 0.85 494 2,285 Life expectancy GNP per capita (Adlas method, US$) 800 3,880 1230 GNP (Aflas method, US$ billions) 0.68 1,917 2,818 T Average annual growth, `991-97 Population%) 1.0 1.7 1.2 Labor force (%J 2.0 2.3 1.3 GNP / Gross per - primary Most recent estimate (latest year available, 1991-97) capia // enrollment Poverty (% of populatfon below natfonal poverty line) Urban population f% of total population) 37 74 42 Life expectancy at birth (years) 64 70 69 Infant nmdality (per 1,000 live births) 58 32 36 Child malnutrhion (% of children under 5) 1S .. .. Access to safe water Access to safe water (% of populatfon) 61 73 84 Illiteracy (% of population age 15+) 2 13 19 Gross primary enrollment (% of schoot.age population) 94 111 111 Guyana Male 95 .. 116 Lower-middle-income group Female 93 113 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1998 '997 |i Economic ratios* GOP (US$ billons) 0.45 0.50 0.72 0.78 Gross domestic investmentUGDP 37.5 401 30.4 32.2 Trade Exports of goods artd services/GOP 66.1 46.3 100.8 100.2 Gross domestic savingslGDP 12.5 33.2 25.3 23.1 Gross national savingslGDP .. .. 21.9 18.1 Cunrent account balanceiGDP .. . -9,3 -14.5 Domestic Interest payments/GDP 4.4 3.2 4.1 6.4 Savings Investment Total debtU6DP 87.0 323.8 211.3 182.2 Total debt servicelexports .. Present value of detWGDP .. .. 165.1 136.1 Presern vaiue of deWexpot .. .. 182,2 145.5 Indebtedness 1976486 1987-97 1996 1997 199802 (average annual growth) GDP -3.2 3.5 7.9 6.2 3. Guyana GNP per capita *5.3 7.3 14.7 3.8 4,1 Lower-middle-income group Exports of goods and services -4.9 6,1 8.3 9.1 6.0 _ ___ STRUCTURE of the ECONOMY 1976 1986 1996 1997 Growth rates of output and investment (%) (% of GDP) Agriculture 22.7 26.7 35.3 35.0 1 0 Industry 35.1 27.1 25.7 25.0 5 Manufacturing 13.0 14.8 7.0 7.1 o Services 42.1 46.2 39.1 39.5 94 9 5 97 Private consumption 59.3 35.3 57.7 58.6 .10 General govemment consumption 28.2 31.5 17.0 18.3 -G01 - DP Imports of goods and services 91.0 53.2 105.9 109.3 (average annual growth) 1976-86 1987-97 1996 1997 Growth rates of exports and imports (%I Agriculture 0.0 7.8 7.7 5.0 30 T Industry -6.1 4.1 11.3 15.1 20- Manufacturing -3.5 -1.2 2.9 4.0 Services -2.5 2.5 6.1 3.4 10. Private consumption -1.0 . 3.6 5.0 o General govemment consumption -10.9 .. 1.1 -1.5 t 92 93 94 95 sr 97 Gross domestic investment -12.0 3.0 -5.5 1.0 -10 Imports of goods and services -6.7 2.0 9.3 6.0 - Exports _Im ports Gross national product -4.6 8.1 15.8 4.9 Note: 1997 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Page 44 Guyana: Basic Facts and Figures Guyana PRICES and GOVERNMENT FINANCE Domestic prices 1976 1986 1996 1997 Inflation (%) (% change) 15 T Consumer prices 8.0 7.1 3.6 100 ImplicitGDPdeflator -5.8 12.3 3.6 1.1 59 Government finance (% of GDP, includes current grants) s0-_ Current revenue .. 47.0 39.7 36.6 92 93 94 95 96 97 Current budget balance .. -40.4 15.8 9.4 - GDP deflator 0 CPI Overall surplus/deficit .. -55.3 -3.2 -8.8 1 TRADE (USs millions) 1976 1986 1996 1997 Export anddimport levels(USSmillions) ( US$ millions) Total exports (fob) .. 217 575 592 750 Bauxite .. 61 86 89 Sugar .. 83 151 133 5I Manufactures .. 35 234 233 Total imports (cif) 595 642 250 Food Fuel and energy 74 101 Caprtal goods .. .. 204 91 92 93 94 95 96 97 Export price index (1995=100) .. .. 104 Import price index (1995=100) .. . 109 .. a Exports Imports Terms of trade (1995=100) .. .. 95 .. | BALANCE of PAYMENTS _ (US$ millions) 1976 1986 1996 1997 . Currentaccount balanceto GDP ratio(%) Exports of goods and services .. .. 690 758 0 Irnports of goods and services .. 725 827 9¶ 92 93 94 95 Resource balance .. -35 -68 s Net income .. -84 -89 I Net current transfers .. 49 40 Current account balance . . -70 -117 Financing iems (net) .. .. -60 -4 ! I Changes in net reserves .. . -20 Memo: Reserves including gold (US$ millions) .. Conversion rate (DEC, local/US$) 2.5 4.3 140.4 142.4 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 j (US$ millions) Composition of total debt, 1996 (USS millions) Total debt outstanding and disbursed 396 1,634 1,522 1,421 IBRD 19 78 27 19 G 92 A 27 IDA 5 34 212 218 F: 63 B: 212 Total debt service 33 75 105 133 IBRD 1 5 8 7 IDA 0 0 2 2 C: 1e3 Composition of net resource flows Official grants 0 12 37 30 Official creditors 27 30 :33 18 E: 639 Private creditors 30 25 2 -5 Foreign direct investment -26 0 81 90 Portfolio equity 0 0 0 0 World Bank program Commitments 0 0 20 4 A - IBRD E - Bilateral Disbursements 4 6 18 18 B- IDA -Othermultlateral F - Pvate Principal repayments 0 2 6 6 C - IMF G - Short-tern Net flows 4 4 1 0 12 1 Interest payments 1 3 4 3 Net transfers 3 1 6 9 Development Economics 10/11/98 MAP SECTION IBRD 25723 6W Maotwhsno 8' a IN' GUYANA ATLANTIC 4 {j-TOWAKAIMA / / Pickersgij// d~~~ANNAREGINA / 0 RAN 2 || ~~~~~~OCEAN CA -REGION 4 REGION 7 nmXEON 3 ,ECL, Mine \4 K > \Kt WICHAEAI 1994 X \}\ XREGION 9> O 1 0 20 30 40 0 D )\ AISHALTON 0t2| * 0 2'0 40 60 80 t j y C KILOMETERS 6 UIP5 >X /S< PANAMA