PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB7538 March 11, 2014 Operation Name Comoros Economic Governance Reform Grant. Region AFRICA. Country Comoros. Sector Central government administration (70%); Public administration- Energy and mining (10%); Transmission and Distribution of Electricity (10%); Public administration- Agriculture, fishing and forestry (10%). Operation ID P131688. Lending Instrument Development Policy Lending. Borrower(s) GOVERNMENT OF COMOROS. Implementing Agency Vice-Presidency in charge of Finance of the Union of the Comoros. Date PID Prepared February 3, 2014. Estimated Date of Appraisal February 10, 2014. Estimated Date of Board April 24, 2014. Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Other Decision {Optional} Key development issues and rationale for Bank involvement 1. This program document proposes an Economic Governance Reform Grant (EGRG), the first in a series of two annual programmatic development policy operations (DPO) in the Union of the Comoros. The proposed programmatic DPO, in the amount of SDR2.5 million (US$3.8 million equivalent), supports the implementation of Comoros’s Poverty Reduction and Growth Strategy Paper (PRGSP). It builds upon the reforms initiated during the completion point of the Enhanced Heavily Indebted Poor Countries Initiative (HIPC) and builds on an Economic Reform Development Policy Grant (ERDPG) DPO which was approved in November 2012 and disbursed in January 2013. The proposed operation also supports policy actions in preparation of a second generation PRGSP in 2014, the so-called Sustainable Accelerated Growth and Development Strategy (SCADD). 2. Comoros implemented ambitious structural reforms that enabled it to reach the HIPC completion point in December 2012. Since 2009, Comoros has successfully implemented a series of macro-stabilization and structural reform programs supported by the International Monetary Fund (IMF), the World Bank, the European Union (EU) and the African Development Bank (AfDB), among others. These policy reforms supported, most notably, gains in fiscal and debt consolidation that improved macroeconomic stability and contributed to the process of reforming state-owned enterprises. These reforms enabled the country to reach the HIPC completion point in December 2012, resulting in the debt cancellation of US$144.8 million in end-2009 net present value (NPV) terms. An additional debt stock cancellation of US$76.9 million was also provided under the Multilateral Debt Relief Initiative. Full debt relief reduced the country’s NPV of debt-to-exports ratio from 343 percent at end-December 2009 to a more sustainable 79 percent at end-December 2012. 3. Notwithstanding the progress in macroeconomic management, the widespread poverty and unemployment in Comoros are a big challenge. An accurate assessment of poverty is not possible given that the last household survey was conducted in 2004, when poverty affected one out of two individuals. Efforts to finalize the household survey in 2014 and update the poverty profile of the country are underway as part of the preparation of the SCADD (see paragraph 48). Poverty is primarily concentrated in rural areas but recent rural urban exodus may have further exacerbated urban poverty in crowded suburbs. Furthermore, even the non- poor population remains highly vulnerable to falling into poverty. Much of the problem lies in the high unemployment level, exacerbated by the low productivity of the economy, with high prevalence of informality and centered on agriculture and fisheries production intended for self- consumption. Not surprisingly, Comorians have often migrated to other countries in search of better economic prospects. Demographic forces will exert further pressures on the economy with the population projected to rise by 50 percent and the labor force expected to double over the next 15 years. 4. Political stability has been instrumental to sustain reform efforts and build more stable institutions. The new Constitution adopted in 2009 clarified the scope of devolution and recentralized some core functions of the state in order to strike a balance between the central and island powers. While the greater trust reached between the islands and the Union continues to be instrumental to preserving political stability, the implementation process under this new framework is not exempt from risks and tensions, within the context of limited fiscal room, high risk of debt distress, weak institutional capacity, and a modest pace of economic growth which remains largely insufficient to create the number of jobs needed to absorb the labor force and reduce the staggering levels of unemployment and poverty. The success of this reform process will therefore largely hinge upon maintaining trust between the Union and island governments, and accelerating economic growth, which will require improved economic governance and transparency, and reforms in key sectors, such as electricity, and information and communications technologies (ICT). Other reforms supported by this operation, such as adopting a debt management system, will also assist Comoros to cope with its vulnerabilities. Proposed Objective(s) 5. The development objectives of this DPO are to: (i) improve economic management and transparency, and (ii) enhance competition and improve performance in key infrastructure sectors (ICT and electricity). The operation is designed around three pillars: (i) strengthening economic management by consolidating Government Treasury accounts, enhancing the comprehensiveness of the budget, and strengthening rules to contract new debt; (ii) improving transparency in economic management across the Union and island governments, with open dissemination of the list of officials complying with their assets disclosure obligations, improved economic statistics and enhanced information on fisheries contracts; (iii) improving competition and performance in key infrastructure sectors (electricity and ICT). This proposed operation builds upon the efforts initiated through the ERDPG approved in November 2012. The proposed DPO series also supports government reforms in three of the six axes of the country’s PRGSP: (i) economic stabilization and equitable growth; (ii) building institutions and ensuring a broader role for the private sector; and (iii) strengthening governance and social cohesion. Preliminary Description 6. The proposed operation is consistent with the new Country Partnership Strategy (CPS) in the Union of Comoros and reinforces on-going World Bank technical assistance projects. The 2014-2018 CPS, which is presented to the Board in parallel, draws on lessons learnt from the last Interim Strategy Note FY10-FY12 presented to the Board in June 2010. The new CPS will support the implementation of on-going reforms and help sustain reform momentum following HIPC completion. This operation is at the core of the reform program of the 2014-2018 CPS and reinforces the parallel dialogue and financing provided through other Bank projects, namely the: (i) Economic Governance Technical Assistance Grant (EGTAG); (ii) the Trust Fund on Statistical Capacity Building Grant; (iii) The Electricity Sector Recovery Project; (iv) the planned Southwest Indian Ocean Regional Fisheries project; and (v) the Fourth Phase of the Regional Communications Infrastructure Project (RCIP-4). Poverty and Social Impacts and Environment Aspects 7. The reforms supported by this DPO are expected to contribute to reducing Comoros’ poverty and achieving shared prosperity. This will be done by improving the management of the limited public resources to reorient them towards poverty reducing sectors, improving the management of the electricity sector and liberalizing the ICT sector to increase the competitiveness of the economy and facilitate job creation. Given the broad poverty in the country, accelerating economic growth and employment creation will be key to reduce extreme poverty, while improved public expenditure will also serve to partially cope with vulnerability. 8. Energy reforms are expected to have positive distributional impact, increasing quantity and quality of electricity services available in Comoros. This will be particularly the case for small businesses, and small health facilities or vulnerable social groups in rural areas who currently have very poor levels of supply and cannot afford to run individual generators. There will also be improved consumer and civil society understanding of the electricity sector. On the other side, the utilities’ commercial recovery (that includes improved billing and collection of all the electricity generated and the work to reduce fraud and non-payment of electricity) will require more of the population to pay electricity bills than is currently the case. The Electricity Sector Recovery Project includes a Poverty and Social Impact Analysis (PSIA) to assess the impact on the poor – in particular related to better billing and better enforcement of payment. The PSIA will also seek to better understand policies that could be modified to achieve the expected results and limit negative impacts on the poor. 9. The policy actions supported by this operation are not likely to have significant positive or negative effects on the environment, forests, and natural resources. The policies addressed by this operation focus on institutional reforms without any expected short-term direct or indirect environmental impact. The fisheries policy actions have no direct effects on the environment in the short term, but may indirectly generate environmental benefits in a longer term. The reform in the sector supports public disclosure of fishing licenses which provides opportunities to identifying illegal vessels and reducing pressure on stock. As such, the reform promotes in the long run more effective and responsible fisheries management. The activities under the Electricity Sector Recovery Project are limited to funding consultancies, studies and the acquisition of electricity meters, management information systems, hardware, and software equipment in the commercial and technical areas of utility operation. Thus, no significant adverse environmental or social impacts are anticipated under the project. Tentative financing Source: ($m.) BORROWER/RECIPIENT 0 International Development Association (IDA) 3.8 million Borrower/Recipient 0 IBRD Others (specifiy) Total 3.8 million Contact point World Bank Contact: Rafael Muñoz Moreno Title: Senior Economist Tel: 5259+2521 / 230 203 2521 Fax: 230 208 0502 Email: rmunozmoreno@worldbank.org Location: Port Louis, Mauritius (IBRD) Borrower Contact: Oubeidi Mze Chei Title: Conseiller du Chef de l'Etat, Secrétaire Permanent de la CREF Tel: (269) 338.30.82 Email: abououbeidi@yahoo.fr For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop