Documentof The World Bank For OfficialUse Only ReportNo. 26747-MOZ MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION, INTERNATIONAL FINANCE CORPORATION AND THE MULTILATERAL INVESTMENT GUARANTEE AGENCY TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OF MOZAMBIQUE October 20,2003 Africa Region This document has a restricteddistributionand may be usedby recipients only in the performance of their officialduties. Its contents may not otherwise be disclosedwithout World Bank authorization. The last Country Assistance Strategy was dated June 14, 2000 CurrencyEquivalents US $1 = 23,240 Metical (as o f July 2003) Abbreviations andAcronyms AAA Analytic and Advisory Activities M&E Monitoring and Evaluation A P L Adjustable Program Loan MADER MinistryofAgriculture and Rural BAu Banco Austral Development B C M Banco Commercial de Moqambique MDG MillenniumDevelopment Goal CAS Country Assistance Strategy M I C Ministryo fIndustryand Trade CASCR CAS Completion Report MMR Maternal Mortality Rate CDF Comprehensive Development M o H Ministryo fHealth Framework M o J Ministryof Justice C E M Country Economic Memorandum M P F MinistryofPlanning and Finance CFAA Country Financial Accountability NGO Non-Governmental Organization Assessment N P V Net Present Value CPAR Country Procurement Assessment NWD National Water Development Review OED Operations EvaluationDepartment CPI Investment Promotion Center PAF Performance Assessment Framework CPPR Country Portfolio Performance PARPA Action Planfor the Reduction o f Review Absolute Poverty CWIQ Core Welfare Indicators PER Public Expenditure Review Questionnaire PODE Enterprise Development Program DPFP Decentralized Planning and Finance PRGF Poverty Reductionand Growth Project Facility EFA-FTI Education for All Fast-Track PROAGRI National Program for Agricultural Initiative Development EMPSO Economic Management and Private PRSP Poverty ReductionStrategy Paper Sector Operation PSIA Poverty and Social Impact ESSP Education Sector Strategic Program Assessment ESW Economic and Sector Work PSR Public Sector ReformProject FDI Foreign Direct Investment RENAMO Mozambique NationalResistance FIAS Foreign Investment Advisory Service RPED Regional Programfor Enterprise FRELIMO Mozambique Liberation Front Development FY Fiscal Year SADC Southern African Development G11 Group o f Eleven Donors Community GDP Gross Domestic Product SAPP Southern Africa Power Pool GEF Global Environment Facility SISTAFE Integrated FinancialManagement HIPC Highly IndebtedPoor Country Information System IAS InternationalAccounting Standards SME Small- and Medium-sized Enterprises IFPRI International FoodPolicy Research SWAP Sector Wide Approach Institute TA Technical Assistance IMF InternationalMonetary Fund USMR Under Five Mortality Rate IMR Infant Mortality Rate UN UnitedNations JSA Joint Staff Assessment UNCDF United Nations Capital Development JPMFS Joint Program for Macro-Financial Fund support UNDP UnitedNations Development LAM Mozambique Airlines Programme I IDA IFC MIGA Vice Presidents: Callisto Madavo Peter Woicke, Exec. Motomichi Ikawa, Exec. Director: Darius Mans Haydee Celaya Tessie San Martin Task Team: Johannes Zutt (TTL) James Emery Judith Pearce MOZAMBIQUE COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS ExecutiveSummary.................................................................................................................................. i I Introduction.................................................................................................................................. 1 I1 .. Poverty andthe Macroeconomy................................................................................................. 1 Poverty, Social Context and Issues................................................................................................. 1 Economic Context and Issues......................................................................................................... 3 Medium-TermEconomic Outlook and ExternalEnvironment ...................................................... 8 I11 The PoliticalEnvironmentandGovernance ......................................................................... 11 I V .. Progress underthe PARPA andthe previousCAS................................................................. 13 The PARPA, Bank Group Support andProgress towards the MDGs.......................................... 13 Lessons Learned and Recommendations ..................................................................................... 17 Portfolio Performance under the Previous CAS ........................................................................... 18 Remaining Challenges .................................................................................................................. 19 V . The CountryAssistance Strategy ............................................................................................... 20 Strategic Selectivity ....................................................................................................................... 21 CAS Results Framework ............................................................................................................... 23 VI The CASPillars............................................................................................................................ 26 . Pillar 1: Improving the Investment Climate.................................................................................. 26 Pillar 2: Expanding Service Delivery............................................................................................ 32 Pillar 3: BuildingCapacity and Accountability ............................................................................ 35 Lending Scenarios.......................................................................................................................... 38 VI1 Results-BasedMonitoringandEvaluation............................................................................... . 42 VI11 ManagingRisks............................................................................................................................ 43 . I X. Conclusion..................................................................................................................................... 45 Tables Table 1: Selectedpoverty indicators................................................................................................... 1 Table 2: Selected economic indicators ............................................................................................... 4 Table 3: Key exports fi-om Mozambique (1997-2006) ....................................................................... 7 Table 4: GDP growth rates by expenditure category (1997-2006) ..................................................... 8 Table 5: External financing requirementsand sources o f financing................................................. 10 Table 6: Progress towards the MDGs............................................................................................... 16 Table 7: 24 Mozambique's External partners and activities.................................................................. CAS results framework summary (FY04-07)..................................................................... Table 8: 25 Table 9: Mozambique CAS lendingprogram-base case scenario (FY04-07) ................................ 27 Table 10: HIPC expenditure tracking assessment.............................................................................. 36 Text Boxes Box 1 : Gender inequalities continue inMozambique ................................................................... - 2 B o x 2 : Agriculture inMozambique................................................................................................ 5 Box 3: Two economies inMozambique? ....................................................................................... 6 Box 4: Anti-corruption activities inMozambique ........................................................................ 12 Box 5: World Bank assistance to Mozambique's rural development........................................... 14 Box 6: The Government ofMozambique's PerformanceAssessment Framework (PAF) ...........22 Country AAA program review ......................................................................................... 19 Box 7 Box 8: Selected reforms for improving the investment environment., ......................................... 29 Box 9: IFC and MIGA inMozambique........................................................................................ 31 Box 10: Common fundingmechanisms: from SWAPSto budget support ..................................... 34 Box 11: Addressinggender inequality through Bank-supportedactivities .................................... 35 Box 12: The IMFandMozambique ............................................................................................... 40 Figures Figure 1: Poverty headcount by administrative post .......................................................................... 3 Figure2: GDP growth and inflationrates .......................................................................................... 4 Figure3: NPV ofdebt-to-exports ratio ............................................................................................ 10 Figure4: Prospects for meeting the MDGs: two scenarios ............................................................. 17 Figure 5: Percentage o f firms ranking issues as problems ............................................................... 28 Annexes Annex 1: CAS Results Framework.................................................................................................. 47 Annex 2: CAS CompletionReport ................................................................................................... 52 Annex 3: The PARPA andthe Millennium Development Goals .......................................... 83 Annex 4: A medium-term growth strategy for Mozambique................................................ 86 Annex 5: Private sector development strategy ................................................................................ -89 Annex 6: Monitoring and evaluation .............................................................................................. 101 Annex 7: Debt sustainability, IDA support and the HIPC Initiative................................................ 106 Annex 8: At-a-Glance and other statistical annexes ........................................................................ 109 Map IBRDNo. 29996 performance of their official duties. Its contents may not otherwise be disclosed without World This document has a restricted distribution and may be used by recipients only in the Bank authorization. - 2 - EXECUTIVESUMMARY i. Mozambiquehassustainedrapidgrowthsinceachievingpeacein1992,largely due to one-time events such as resettlement and the transformation of a centrally-planned state-owned economy into an market-oriented one. Inthis context, investment flourished and Mozambique's external partners granted large amounts o f aid. The Bank has helped the Government to achieve growth, deliver services, buildcapacity, and transform aid modalities to sector-wide approaches andbudget support against agreed performance indicators. This new Country Assistance Strategy (CAS) plans a continuation and deepening ofpast Bank efforts. The following issues are suggested for Board discussion: 0 I s the Bank Group's proposed support to the Government's poverty reduction strategy appropriate and adequate? 0 I s the evolving division o f labor among the Government, the Bank and Mozambique's other external partners appropriate? .. 11. Mozambique's development program has delivered mixedresults. Incomes have improved since 1992, but most Mozambicans still live inpoverty. Growth has been high, but has tended to involve exploiting natural capital inunsustainableways. Exports (outside large-scale projects) are flat; many firms are struggling; labor and capital productivity are below regional averages; and some bank portfolios are distressed. iii. Toreducepoverty,Mozambiqueneedsrapidgrowthsourcedinagricultureand labor-intensive manufacturing and services. Improving agricultural productivitywill require using yield-improving inputs and technologies and rehabilitating essential rural infrastructure. Expanding manufacturing and services will require easingkey business constraints, which entrepreneurs consistently identify as lack o f access to and high cost o f credit, highregulatory and administrative barriers, and inefficiencies inkey infrastructure. Poverty reduction also depends on redistributing and increasing the efficiency ofpublic spending towards poverty-reducing sectors such as health, education, and water supply. Curtailing corruption and expanding civil service capacity are the key issues here. iv. This CAS, which supports the Government's povertyreduction strategy, focuses on three areas: (i) improving the investment climate; (ii) expanding service delivery; and (iii) buildingpublic-sector capacity and accountability structures. v. The Bank Group is ideally suited to helping to improve the investment climate, as it canprovide full-service policy advice and complementary instruments to support the private sector. For example, the Southern A h c a Regional Gas Project, which i s being presentedto the Boardtogether with this CAS, involves a MIGA guarantee, an IFC equity participation, and an IBRDpartial risk guarantee. The CAS will also support several large high-risk developments, because they have demonstrative effect (such as the second National Water Development project, which supports private-sector urbanwater supply), or because they will have a catalytic impact on growth (such as the Second Roads and Bridges project, which will finance rural roads as well as the Caia bridge over the Zambezi river, and the BeiraRailway project, which will open the Zambezi valley and promote regional integration). The Group will also prepare a Rural Development project piloting an integrated approach to rural development. Finally, a series o f Poverty Reduction Support Credits (PRSCs), representing about 40% o f total IDA financing, will support reforms aiming, among other things, to improve the financial sector, increase labor flexibility, facilitate access to land, increase access to water supply, speed customs clearance, and reduce business registration costs. vi. Buildingon ongoing sector-wide programs (SWAPS), the PRSCswill help to improve health care, educational and agricultural services, by addressing key planning and management issues. Inaddition, IDAwill prepare a $20 millionTechnical and Vocational Education project to help improve skills levels among Mozambican workers. vii. BuildingGovernment capacity and accountability structures is also a Bank Group focus. The Public Sector Reform (PSR) project, supported by Bank Adaptable Program Lending (APL) which will enter its $25 million second phase inFY07,will improve capacity for service delivery by decentralizing and rationalizing procedures, piloting improved incentives, and improving public financial management and procurement systems. Inaddition, the Municipal Development project and a proposed Decentralized Planning and Finance project (a $42 million IDA grant that is before the Board together with this CAS) will complement the PSRproject and the PRSCsbyhelping local authorities to manage small-scale service delivery through "learning by doing" inways that make them more accountable to local populations. The Bank will also support capacity-building inthe financial sector ($10 million) and inthe legal sector ($5 million) and will work with the Government at all levels to improve monitoring and evaluation. viii. Mozambiquewill remain inthe base case ifmacroeconomic stability continues, the PARPA is satisfactorily implemented, the national program to fight HIV/AIDS remains on track, and portfolio performance is good. Total base case financing o f $560 millionover four years would fully utilize Mozambique's current IDA allocation. The Government can realize a high case o f $800 million over four years ifit resolves the problems of the banking system; accelerates implementation o f public sector reform as well as the legal andjudicial reform; substantially improves the investment climate; improves transparency inallocating natural resources; and maintains very good portfolio performance. A l o w case scenario would result ifthere were significant reversals in economic policies; significant deviation from the PARPA; civil strife or governance practices that cause external partners to reduce their support for an extended period; or significant deterioration inportfolio performance. As a result IDA financing could fall to about $350 million over four years and the PRSC series would be discontinued. The Bank will monitor low, base and highcase triggers on a continual basis. ix. Risks to CAS implementation include adverse political developments as Mozambique approaches new Presidential and parliamentary elections next year; continuing capacity constraints; an insufficiently aggressive response to the HIV/AIDS epidemic; and adverse exogenous developments such as flood, drought, or conflict. These risks are being mitigated through policy dialogue; stronger donor coordination; and selected Bank-supported activities as set out inthis CAS. -.. 11- INTRODUCTION 1. Mozambique has sustained rapid growth since achieving peace in 1992. One-time events contributed, such as the return o f displaced people to the countryside, the achieve- mento fmacroeconomic stability, andthe transformation o fa centrally-planned state- owned economy into a market-oriented one. Inthis context, domestic and foreign invest- ment flourished, and Mozambique's development partners granted substantial assistance. Yet results have beenmixed. Incomes improved inthe 1990s, but most Mozambicans still live inpoverty, inrural areas far from services and markets, where productivity and off-farm incomes are low. Recent growth has been high, but it seems to be weakening. Outside selected industries (e.g. aluminum), exports have been flat. While some new businesses are doing well, older ones are struggling, and many have been shedding rather than creatingjobs. Recently privatized firms are floundering; labor and capital product- ivity are below regional averages; andbank portfolios, especially loans to state-owned enterprises and the agricultural sector, are distressed. To reduce poverty, Mozambique needs rapid growth sourced inagriculture and labor-intensive manufacturing and services. It also needs to redistribute public spending towards sectors with highpoverty- reducing potential, such as health, education, and water supply. The Government's Action Plan for the Reduction o f Absolute Poverty (PARPA) for 2001 to 2005 proposes appropriate actions inthis context, and this CAS aims to support their implementation. POVERTY AND THE MACROECONOMY Poverty,Social Context andIssues 2. Poverty levels and indicators: Despite post-conflict annual growth exceeding 7% inthe mid-1990sand9% since 1997, Mozambique remains one o fthe world's poorest countries, with a GDP per capita of $210. In 1998, the first national household survey showed that, while conditions had improved since 1992, when the war ended and Mozambique was the world's poorest country, 69% o f Mozambicans still lived below a poverty line based on the minimumcaloric intake. Over the last five years, overall growth and investment inhealth, education, and infrastructure appears to have improved some Mozambicans' lives. A first national household survey was completed in 1998, but Table 1: Selected poverty indicators Indicator I 1996 I2001 in2002, are not yet available, so it not possible to assess poverty trends ._ ~ robustly. Extrapolating from CWIQ variables, simulations indicate that householdpoverty and the poverty gap fell between 1996-97 and 2000- 01, but this result needs to be verified when the Government and IFPRIreport the second household survey data inDecember 2003. : World Bank National Statistics Institute CWI Table 1shows recent progress against selected indicators. Box 1: Gender inequalitiescontinueinMozambique Mozambique's gender indicators are below regional averages. The maternal mortality rate at 1,600 per 100,000 live births i s high;the quality o f and access to health care-particularly to repwductive health services-are poor; and literacy rates for women are much lower than for men, especially inrural areas. One infive households i s female-headed, and these households typically have less adult labor, cultivate less land and participate less frequently inpaid employment. Although remittances from absent males make these households on average no worse-off than male-headedhouseholds, households without remittances are muchworse off; and households with male adults working elsewhere are at more risk o f HIV/AIDS. Domestic violence is also a problem, though largely a hddenone. The cross-sectoral integration ofgender is vitalto improving the welfare ofthe poor and increasing project effectiveness. The Government is currently implementing a nationalPost-BeijingAction Plan, yet discussions o f gender tend to focus on female-headed households, maternal and childhealth, and educational attainment. The causes o f gender inequality and policies to address them (e.g. improving women's access to land, credit, and extension services; addressing cultural and religious practices that perpetuate gender imbalances; increasing women's involvement indecision making; and securing greater equity inemployment opportunities) are less noticed. Inearly 2003, a new and progressive family law approved by parliament addressed many outstanding issues (it eliminated many forms o f discrimination, recognized defacto marriages, and made adoption easier), but there i s still a long way to go to change people's attitudes andbehaviors. (For Bank support inthe area o f gender, see Box 11.) 3. Despite some encouraging results, poverty remains deep andmay not have been reduced inthe rural areas, where 70% o f Mozambicans live. Ruralper capita incomes are believedto be about $100 per annum, or halfthe national average. Some 59% o f Mozambicans inthe more rural northhave to walk an hour to reach a health clinic (34% inthe moreurbansouth); 72% ofruralMozambicansare illiterate (33% urban); only one inthree ruralpeople have access to aprotectedwater source andinonly one inforty have electricity (compared to one infour urban dwellers). Most Mozambicanfarmers live on fewer than three hectares o f land and only about one inten i s able to sell surplus produce. 4. Poverty reduction strategy: InApril 2001 the Council o f Ministers approved the PARPA for 2001-2005,' and inAugust 2001 the Bank and FundBoards endorsed it as Mozambique's first full PRSP. The PARPA's public action strategy emphasizes economic growth, public investmentinhumancapital andproductive infrastructure, and institutionalreform to improve the environment for private investment. Growth i s expected to come from large-scale capital-intensive projects financed by private foreign capital; productivity and value-added gains inagriculture andmanufacturing; and a general expansion ininternal trade, transport and services. To implement this strategy, the PARPA, inline with its poverty diagnosis, identifies six priority areas for action: health, education, infrastructure, agriculture and rural development, governance, and macroeconomic and financial policies. The PARPA also identifies actionable measures within eachpriority area and establishes targets andmilestones inan operational matrix. 5. Bank andFundstaff inan August 2001 Joint Staff Assessment (JSA) compared the PARPA to previous poverty reduction strategies and found that it increased country 'Inadditionto the PARPA, the country is nowpreparinga nationaldevelopment strategy, knownas Agenda 2025. The program has brought together many different interest groups and conducted consultations in 118 o f 132 districts; the Threshold 21 model is being used to provide quantitative support for this exercise and to help translate the vision into a realistic national strategy and action program. - 2 - ownership; improved prioriti- Figure1: PovertyHeadcountby Administrative Post zation; included clearer (Source: Simler) monitorable targets; and improved the integration o f macroeconomic policies, institutional reforms and sectoral programs The JSA also noted room for further development o f the poverty analysis (regarding gender, HIV/AIDS and vulnerability to exogenous shocks), and o f the prioritization, sequencing and implementation o f the policy actions identified, which tend to focus on access to the relative exclusion o f quality and efficiency. It also identi- fied a need to deepen and institu- L Poverty Headcount tionalize the participatory process, I 22%-56% which the Government has begun 56% 66% through the Poverty Observatory. 66% 73% Recently the Government and its 73% 81% partners also realized that the 81% 99% ---- PARPAprogress indicators needto be reduced innumber and revised to reflect the MDGs (see Annex 3). Economic Context and Issues 6. Recent economic developments: As a result o fpeace, democracy, liberalization, and prudent monetary and fiscal policies, Mozambique's growth rate has been well above the African average and among the highest inthe world. Despite a flood-induced drop to 1.6% in2000, growth averaged 9% from 1997 to 2002, due to megaproject construction and production, foreign investment, and strong agricultural performance. Mozambique's recovery fi-om the 2000 floods is mostly complete. Economic growth was 8.3% in2002 and is projected at between 7% and 12% annually until2005, with fluctuations mostly due to megaproject construction. Macroeconomic models indicate that the $350 million or so that Mozambique receives annually inexternal grant assistance accounts for about five percentage points of annual growth. Much assistance consists inimports o f goods andservices and capacity building,whichraise the productivity o fMozambicanresidents and businesses, though some takes the form o f budget support, o f which part is spent on nontradables. While this tends to strengthen the exchange rate, there is little evidence o f undue strengthening, as agricultural products remain competitive on world markets. 7. Inflation rose sharply following the 2000 floods and again in2002. InM a y 2003, it was 16%, due mainlyto exogenous factors including a stronger rand, highoil import prices, and increased food prices due to the regional drought, but it is expected to fall to - 3 - 11%byDecember, providedthat measures are taken to limit liquidityand recourseto banking-sector financing for the budget. Tax reform and improved tax administration have increased Government revenues to 14.2% o f GDP in2002, exceeding expectations. The fiscal deficit after grants remains high(7.9% o f GDP as o f 2002, includingthe cost o f recapitalizing the banks) but it i s being financed primarily by grants and concessional loans (7.0% financed extern- ally, and 0.9% domestically). Domestic financing has been Indicator 1990-93 1994-01 2002 low since the mid-1990s with (avg.) (avg.) (est.) the exception o f the period Population (million) 14.7 16.8 18.4 2000-01, when bonds were Population growth (%) I 2.1 2.2 2.1 issued inresponse to troubles GDP (US$ billion) 2.3 3.0 3.6 inthe banking sector; in2002 GNI Der caoita (US$) I 155 184 210 1.6 8.2 8.3 domestic financing was a GDP growth (%) Fiscal deficit (%) 15.5 14.0 15.8 relatively low 0.9% o f GDP Inflation (CPI avg., %) I 40 24 17 and it i s programmed to be - Export growth (%) 15.4 19.1 12.3 0.6% in2003. ISource: IMF and World Bank 8. The banking system remains fragile following the partial privatization o f two large state-owned banks in 1995-96.2 Liquidity crises at both Banco Austral (BAu) and Banco Commercial de Moqambique (BCM) necessitated Government contributions to recapitalizations inboth 2001 and 2002, amounting to 6% o f GDP. The Government is no longer a partner inBanco Austral, which was intervened and reprivatized (in December 2001), and it intends to withdraw from BIM(the Figure 2: GDP growth and inflation rates successor to BCM). while also I , strengthening supervision capacities at the central bank with Bank and Fundtechnical assistance. Inmid 2003, the Metical lending rate was 34% and the deposit rate 15%, for a high19% "ad. the"continukd importance o f underlving , v I 1997 1998 1999 2000 2001 2002 2003 restructuring thebanking sector and strengthening central bank supervision. 9. Agriculture: Given the rural focus ofpoverty, growth inagriculture will remain a priority for the next five to ten years. Performance has been strong: agricultural production grew faster than the overall economy since 1992, as a result o f liberalization, macroeconomic stabilization, infrastructure rehabilitation, the return o f 1.5 million * Over 2000-2002, Mozambique's CPIA rating for economic management deteriorated, because inflation and the deficit after grants rose (due to the bank restructuring), while the rating for managing external debt was lowered to bring it into line with other countries. A rise inthe structural policy rating (due to ended monopolies intelecommunications and air transportation) was not enough to compensate for this decline. - 4 - rehgees and 3.2 million displaced persons to the rural areas, and (until 2000) the absence o f weather-related shocks to production. Input expansion was the key factor: since the war's end, the number o f farmers andthe amount o f land farmed nearly doubled, with the result that output also doubled. Nonetheless, smallholder farmers, though constituting two-thirds o f Mozambique's population, produce less than one-third o f GDP. Productivityremains very low (the average cereal yield inMozambique i s 948 kg/ha compared to South Africa's 2,604 kg/ha) and agribusiness is still limited. While production-for-subsistence has shifted partially to production-for-market since the end o f the war, commercial production remains well below 1970s levels and smallholders make little use o f yield-improving inputs or improved farming systems and technologies. Box 2: Agriculture inMozambique Mozambique is endowed with about 39 million hectares (ha) o f water and forests and 36 millionha o f arable land and pastures, o f which 4.0 to 4.5 million ha (or 11% to 12%) are presently cultivated. The most important food crops are cereals: maize represents 70% o fthe total cereal production, sorghum 18% and rice 11%. Export crops, such as cashew, cotton, sugar cane, tobacco and tea, take up about 25% o f the plantedarea. Economic reform, the partial rehabilitation o f rural infrastructure, and a rapid post-conflict expansion inproduction, have stimulated a nascent, yet still small, agribusiness sector, which is presently focused on cashew, cotton, sugar, tea, tobacco, paprika, pigeonpea and forestry products. The reemergence o f agribusiness has permitted and encouraged a partial shift inthe pattern o f productionaway from production-for-subsistence and towards production-for-market. Since 1999, the World Bank and 17 other major donors have been supporting a five-year comprehensive agriculturalprogram, PROAGRI, which is largely focused on modernizing, restructuring and decentralizing the Ministryo f Agriculture and Rural Development (MADER). To date, PROAGRIhas: (i) restructured MADER's financial management and accounting system, (ii) reformulatedthe planning and monitoring system, (iii) initiatedthe decentralization o f some services to theprovincial and district levels, (iv) supported the development o flegal andregulatory instruments in the land, forestry, irrigation, and crop sub-sectors, (v) initiatedinstitutionalreforminresearch and extension, (vi) developed a strategy and action plan to streamline and modernize MADER's human resources department, (vii) aligned gender and environmental objectives and interventions into strategies and work plans, and (viii) institutionalized coordinationwith the private sector, other ministries and territorial administration authorities. Many challenges remain. Only 4% o f farmers use fertilizer and only 7% use any type o fpesticide, with the result that yields remainvery lowby regional standards. Maize output per hectare averages about 0.90 tonha, sorghum 0.60 tonha, rice l.ltonha, and cotton, 0.6 tonha, whereas neighboring countries often achieve twice these yields. Although several crop varieties have beenreleased and adopted, due to the maintenance o f traditional productionpractices, their average yields remain limited and overall crop quality (nutritional value and disease resistance) remains poor. Lack o f access to rural credit also remains a key constraint affecting the entire profile o f agricultural producers and traders. I - 10. Manufacturing: Manufacturing remains concentrated infood, beverages, metallurgy and minerals (73% o f output), and there has been little recent investment, excluding Mozal. Sales stagnated between 1999 and 2002 (years when WED surveys were done); total factor productivityremains low, indicating a lack o f competition as well as significant market segmentation; and most firms have not been growing much and are reducing rather than expanding employment. The reasons are many. Growth has Total factor productivity was 0.38 for a sample o f 193 firms (the "best practice" firmrated 1.0), and high dispersion indicates that many inefficient firms survive among some very efficient ones. Inaddition, the annual employment growth rate fell from 1998 to 2002, at 0.8% to -1.6% over 1999 to 2002. - 5 - come mostly inresource-based extractive industries, or insectors enjoying trade preference or natural protection, where poor performance escapes competitive pressures. Most local firms lag regional competitors inskills, management, and manufacturing techniques; and labor-intensive manufacturing that has served many developing countries as export platforms (textiles, footwear) has not been able to compete. Moreover, linkages to large-scale projects remain limited. Despite Government incentive^,^ the sector still faces many challenges. Ingeneral, Mozambique remains a riskyand difficult market: it is poor and small; and it has high operating costs (due to poor infrastructure), low labor productivity (low wages are offset by poor skills and health), and hightransaction costs (due to an inefficient bureaucracy). Labor inflexibility, highbusiness registration costs, anddifficult access to land and capital are key factors inhibiting entry and the efficient allocation o f resources as well as contributing to low productivity and competitiveness. Box 3: Two economies inMozambique? Since the end o f the conflict, Mozambique has successfully attracted large-scale projects to exploit its mineral and energy resources. These have raised growth and export levels ($1billion in2002), helped establish Mozambique as an attractive destination for investment,and contributed to the sales revenues, productivity and quality standards o f some local firms. But to lift 20% o f the population out of poverty, Mozambique needs to create 3.7 millionjobs. Large-scale projects will not do it. On present trends, a $10billioninvestment inlarge-scale projects would create only about 20,000 jobs (5,000 inthe companies and 15,000 among suppliers and service providers). That i s not nearly enough. Mozambique also has thousands o f micro- and small-sized enterprises, employing fewer than 10, in both the formal and the informal sector. They are concentrated infood, beverages, metallurgy and minerals and there has beenlittle recent investment. Sales stagnated inthe last five years; most growth has come innaturally-protected sectors (e.g. beverages), inresource-based extractive industries, or in sectors enjoying trade preferences (e.g. garments for South Africa). Most firms are Mozambican- owned, sell to the local market, do not have the collateral to borrow money to expand, and lag behind their regional competitors inskills levels, management practices and manufacturingtechniques. They contribute modestly to economic growth and exports, and they are poorly integrated with the large-scale projects. Backward and forward linkages have started to increase-from a very low base-but there i s potential for much more. To grow, businesses need to improve their competitiveness to gain access to export markets, as disposable incomes inMozambique are low. Inthe past five years, Mozambique has hadaremarkable growthrate, averaging over 9% per year. Butmuchofthe recent growthhas come from foreign aidthat has driventhe construction boomand pumped-upthe service sector. Inthe early post-war period, industry saw rapidgrowth as idle capacity was brought back on-line following the end o f the war, but most productive capacity has now been restored. Industrial value-added grew 18 percent per year during the last five years, but most o f this growth has come from Mozal. Inaddition, growth has been concentrated inMaputo, inthe extreme south o f the country-creating a second division betweentwo economies. There is clearly much scope for increasing growth across all sectors o f the economy and reducing regional differences and asymmetries. 11, Trade: Inthe early 1990s, Mozambiquewas virtually a closed economy with hightariff barriers, quantitative restrictions, and aninefficient customs system. Much progress has been made since. The maximum tariff was reduced from 30% to 25% in 2003, and the 50-60% variable tariff on sugar and the 18% tax on raw cashews are now Firmsthat export 100%o foutput are exempt fromimport duties and value-added tax (VAT); firms engaging innew investments are exempt from import duties and enjoy a 50% reduction inincome tax for upto 10years; and investments to rehabilitate or expand existing operations can write-off 100%ofnew equipment costs. (None o f these arrangements contravene World Trade Organization rules on subsidies.) - 6 - the only significant trade barriers. Work continues on customs reform; reducingtariffs; implementingthe multi-year SADC planfor a free trade zone; promoting trade and helpingfirms to exploit AGOA. Results to date havebeenmixed, with the composition of exports generally unchanged over 1997-2001 outside o f aluminum and electricity (see Table 3). Trade barriers have not beena large impediment, but slow customs clearance continues to be.6 Inaddition, exporters will not be able to recapture their pre-conflict export markets unless they meet the product standards o f their trading partners; this has occurred infishingbut the challenge inagro-processing and other areas remains large. 12. Core labor standards: According to the 1997 census, 10% o f Mozambique's 5.9 millionworkers were employed inthe formal sector, which i s mostly concentrated inthe cities, and less than 1% were unionized. Mozambique's constitution forbids forced labor (the Government ratified ILO Convention 1OS), guarantees equal opportunity and non- discrimination inemployment, and allows for freedom o f association including the right to strike. Minimumwage legislation exists, covering urban and rural workers; the schedule o fminimumwages i s adjusted annually by a tripartite commission composed o f labor unions, government and employer groups, but enforcement does not extendbeyond the formal sector. While Mozambique has not signed ILO Convention 182 on the Worst The SADC Free Trade Agreement framework involves reducing tariff, non-tariff and other technical barriers to trade, customs reforms, licensing and border procedures. Tariffs on intermediates will fall to zero by 2008 and all tariffs on finished goods to zero by 2012. Ittakes 10to 11days to clear imports and exports inthe Maputoport, and 11to 20 days inports inthe center and north, while the average reportedtime to clear a truck from South Africa i s almost seven days, negating the advantage o f close proximity to South African markets. - 7 - Forms of Child Labor, the 1999 labor law forbids all labor by children under 15 and regulates the pay, hours, andworking conditions o f children under 18, yet children under 15 are frequently employed indomestic service, agriculture and the informal sector, as the authorities lack the ability to monitor and enforce the law. Medium-TermEconomicOutlook andExternalEnvironment 13. Sustaining broad-based growth while keeping inflation low and improving service delivery are central elements of the Government's medium-tenn poverty-reduction strategy. Prospects are good for maintaining annual GDP growth rates at 7% to 11%and bringinginflationbelow 10%over the medium-term (2004-06). Continued growth will require the Government to maintain a prudent fiscal and monetary stance, improve the investment climate, and encourage the development o f a strong export base. The current economic slowdown inMozambique's main trading partners-South Africa, Europe and the United States-is not expected to constrain exporters, whose chiefproblems lie elsewhere (high interest rates, red tape, and poor infrastructure). Domestic fiscal imbalances will gradually be reduced, but sustained external assistance and revenue growth resulting from a growing economy will permit continued pro-poor expenditures. Mozambique should also be able gradually to reduce its aid dependency. 14. Sources ofgrowth: Inthe base case economic scenario, small-holder agriculture, large-scale commercial agriculture, and manufacturing across all sectors and innon- traditional areas is expected to continue to grow and create jobs, while deeper regulatory reform should encourage investment ininfrastructure (see Table 4). Assuming no further adverse exogenous shocks and continued satisfactory implementation o f the reform program, large-scale project construction (Mozal2 and the gas and titanium sand developments) will drive growth inthe near term and also explain its main fluctuations. As these projects begin their productive activities, they will also help to expand and 1administration includes health and educationservices fr-011-2003. I - 8 - diversifythe export base, bringgrowthto localenterprises throughupstream and downstream linkages, and create significant spin-off effects, such as employee training, connected infrastructure developments, andhigher Government tax revenues that can support pro-poor spending. Hydroelectric power exports will also contribute to growth, and current prospecting suggests that coal, petroleumandmineral resources may contribute inthe long term. Ifsustainably managed, Mozambique's agro-ecological resources will remaina goodbasis for economic expansion. Agricultural growth i s expected to remain strong, at almost 8% per annum, with rapid expansion intobacco and sugar (the latter behindprotectivebarriers), as only a fifth o f arable land i s now cultivated and there i s ample scope for yield improvements, including through irrigation. With a 2,700 km coast that has many uniquehabitats, tourism i s expected to remain one of Mozambique's fastest growing industriesand to continue expanding vigorously (luxury hotel rooms inMaputo increased from 730 in 1999 to 1,370 in2003). Services, stemming inpart from government expenditure, will also continue to expand inthe mediumterm, particularlyintransportation, accommodation, and food. 15, Continuedgrowth will requirea second generation o freforms designed to improve agricultural productivity, expand labor-intensive manufacturing and services, andredistributepublic spendingtowards poverty-reducingsectors, includinghealth, education, water supply, andbasic infrastructure. To grow over the medium- to long- term, it i s especially important that Mozambican firms become more competitive in world markets. As shown inthe 2001 Country Economic Memorandum (CEM) and other research, for Mozambique to take full advantage o f identifiedsources o f growth, the Government should act decisively infive areas (see also Annex 4): Strengthening the macroeconomic environment: Mozambiqueneeds to reduce its fiscal deficit, improvepublic expenditure management, reform and strengthen the financial sector, and strengthenits external balance by expanding the export base and raisingmanufacturing and cash-crop exports back to pre-independence levels. Unleashing agriculture 'spoverty-reducing potential: Mozambique needs to improve land tenure, expand access to key agricultural inputs, and facilitate rural trade by expanding road transportation. Removing the impediments toprivate sector growth: The investment climate, particularly for high-potential sectors such as transport, tourism, and labor-intensive manufacturing, needs to be improved through removing administrativebarriers and increasing private-sector-participation ininfrastructure. Improving human capital: Improving health services, expanding access to education, and controlling HIV and malaria are keyto improving skills andproductivity levels. Protecting natural resources: To maximize returns from naturalresource extraction, Mozambique needs to strengthen its environmental institutions andpolicies inways that promote growth and protect the environment, focusing on resource usage rights, fisheries, forest management, artisanal mining, and water resource management. 16. Exfernalfiutancing: Continued and stable support inthe form ofbilateral and multilateral grants and credits will beneededto enable Mozambique to meet its development objectives. Excluding large-scale projects, Mozambique requires about - 9 - $650 million per annum inexternal assistance (see Table 5). At the October 2003 Consultative Group meeting, Mozambique's external partners pledged $790 millionin external assistance for 2004 (75% ingrants, and 40% inbudget support), which i s more than enough to meet the country's financing requirements for that year, Reliance on aid flows is projected to decline gradually over the next decade, as strong growth and increased private sector financing reduce aid's share o f GDP and o f the budget. 17. Debt sustainability and IDA lending: Mozambique's debt is highbut has been reduced to sustainable levels. In2002 the Government paid $52 millionindebt service, o f which $39 millionwere domestic interest payments. Public debt o f $2.7 billion (57% o f total external debt) is mostly long-term debt owed to governments and multilateral institutions. The Bank is Mozambique's largest creditor, holding $1.O billion. Total public external debt is about 75% o f GDP (end-2002), compared to 170% in 1997, or two times 2002 exports o f goods and services. Although domestic debt is much smaller than external debt, it entails three times the interest obligations as a result o f very high domestic interest rates. Mozambiquereachedthe HIPC completion point inJune 1999 and the enhanced HIPC completion point inSeptember 2001, thereby receiving debt relief amounting to about Figure 3: Mozambique: NPV of debt-to-exports ratio $2.023 billioninnet 160 present value (NPV) UpdatedCP projections terms, with IDA relief 140 -8- CAS basecase amounting to $875 '-'"*-'-CAS basecase (lowergrants) million ($444 millionin CAS highcase 120 .'*'-Macrolowcase NPVterms). c Mozambique still needs g 100 to finalize some bilateral v CL agreements with Paris 80 Clubmember countries and reach bilateral 60 agreements with non Paris Club members. 40 I (See Annex 7.) 2000 2005 2010 2015 2020 - 10- 18. Regional context: Though its economy i s more inwardly-orientedthan its neighbors',Mozambique's dependence on regional trade and investment flows i s high, andregional developments can significantly influence the pace and sustainability o f its own development. Trade flows with South Africa are the most important, representing 15% o f exports and 40% o f imports in2001. Malawi i s expected to continue importing maize from Mozambique's northernprovinces, and Zimbabwe will continue to be a drag on regional economic performance as long as it remains inturmoil. Mozambique has signed or ratified the SADC treaty and numerous sectoral protocols7and inDecember 1999it ratified the SADC trade protocol, which aims to establish a free trade areain southern Africa, both reflecting and giving greater momentumto regional integration. Withpolitical stability andgreater investor confidence, Mozambiquehas also become a more attractive destination for investors from South Africa and other countries. 19. Regional cooperation i s emerginginpower, transportation, and water resource management. The Cahora Bassahydroelectric facility suppliespower to South Africa andZimbabwe, and further integrationi s possible, as Mozambiquebelongs to the South African Power Pool (SAPP) and owns the maintransmission line (interconnections with Malawi and Tanzania are planned); gas fields are also beingdeveloped at Pembe and Temane and coal-mining i s being considered at Moatize. Road, rail and port rehabilita- tion on the Maputo, Beira andNampula corridors (SADC spatial development initiatives) has increased interdependence between Mozambique and its neighbors. Following the 2000 and 2001 floods, it also became clear that Mozambique needs to negotiate water resource management with its upstream neighbors who, since the 1970s, have diverted water from several cross-border rivers for irrigation and other uses, interfering with Mozambique's use. Regionalcooperation on watershed management and hydrologic and climatic monitoring i s also essential for natural disaster mitigation. The SAPP, by enablingthe delinkage o f hydroelectric production from individual reservoir control, has also created opportunities for improving flood control. Finally, long-termtourism potential i s high, though, due to limiteddestinationdevelopment, inthe medium-termit i s likely to dependon encouraging add-on visits to tours transiting through South Africa, Tanzania or another one o f its neighbors with a more developed tourism industry. THE POLITICALENVIRONMENTAND GOVERNANCE 20. Mozambique has made progress ingovernance since 1992. Peace and democracy have been increasingly established. Presidentialand legislative elections were heldin 1994 and 1999 and local elections in 1998. FRELIMO emergedas the victor inall these elections, which the international community considered free and fair, and it holds 133 o f 250 parliamentaryseats, enablingit to pass any motion it chooses. The remaining 117 seats belong to a coalition including RENAMO (99 seats) and several smaller parties. Women hold one infour seats, a very highratio by international standards. While competition for power continues andmistrust andviolence occasionallyarise, the risk of resumptiono f civil unrest and instability i s considered to be low. 'These include the SADC political and security protocols as well as sectoral protocols related to shared watercourses, trade, energy, education, mining, tourism, health, fisheries, wildlife conservation, and law enforcement. Unusually for the region, Mozambique has not signed onto any other regional organizations. - 11- 21. New municipal elections are scheduled for November 2003 and new presidential and legislative elections for late 2004. President Joaquim Chissano, approaching the end o f his second term, will not stand as a candidate, and FRELIMOhas already identified Armando Guebuza to take his place. H e will oppose Afonso Dhlakama, RENAMO's presidential candidate inthe last two elections. As the main parties espouse similar principles, policy is expected to be broadly continuous, no matter who wins, though the presence ingovernment o f new officials may result intransition-related inefficiencies. 22. Economic governance remains weak, and corruption is a growing concern (see Box 4). Civil service capacity is constrained by small numbers, low education, limited private-sector experience, and low morale resulting from poor pay. Compared to other African countries, the state i s thinly spread andhas difficulty delivering services and enforcing legislation inevery district; inaddition ancillary functions such as legal, accounting and audit services are weak. More generally, bureaucratic processes remain cumbersome. For all these reasons, public sector reform i s a Government priority. Box 4: Anti-CorruptionActivities inMozambique Corruption, which involves the use o fpublic office for private gain, remains a major issue in Mozambique, where large businesses frequently lobby senior officials to resolve problems and small businesses pay bribes to petty officials to avoid fines related to obscure outdated regulations. While Mozambique compares well with low-income and other African countries inpolitical stability, government effectiveness, and rule o f law, it compares poorly incontrolling corruption, where relative performance has actually declined since 1996. The Government i s committed to minimizing corruption. Its anti-corruptionstrategy involves setting ethical standards, reorganizing institutions to minimize opportunity for corruption, and strengthening investigatory and prosecutory agencies. The Government i s currently establishing a working committee to update the October 2001 anti-corruption strategy inlight o f a national corruption survey that the Government i s undertaking with DFID and WBI assistance. It i s also promoting policy and administrative reforms inknown corruption-prone areas such as thejudiciary, the police, public financial management, public procurement, privatisation, customs, and tax administration. In particular, the Ministry o f Justice (MoJ), Administrative Court, Supreme Court, and Attorney General's Office have finalized an overall reformplan, to be implemented through 2006; the M o J has established an Anti-Corruption Unit; and an anti-corruption law was passed in2003. Many Bank activities have anti-corruption impacts. The Public Sector Reformproject aims to improve public servant pay and promotions, which will help to reduce incentives for corruption. IDA project support to private-sector participation inservice delivery (inurban water supply, ports, railways, and telecommunications) as well as to improved financial controls (infinancial management and procurement, both centrally and sectorally through the SWAps), decrease opportunities for corruption by increasing transparency. Project support for decentralizationto municipalities and to district authorities helpsto increase public oversight, and support for legal andjudicial reform helps to make investigatory and prosecutory agencies more effective; these too help to discourage corrupt practices. 23. As o f March2003, Mozambique hadmet five o f the 15 HIPC expenditure- tracking indicators and implemented or initiated 80% o f the measures inits action plan. Thus, public expenditure management continues to require substantial upgrading. In December 2001, a Country Financial Accountability Assessment (CFAA) found that, untilthe systemis strengthened, the risk o fwaste, diversion andmisuse o ffunds remains high. The CFAA also found that materialreceipts andpayments are excluded from the budget and from Government accounting and reporting systems; accounting systems and standards are outdated; internal auditing, external auditing, and parliamentary oversight remain weak; and so financial management continues to involve a highfiduciary risk. - 12- 24. To strengthen institutional capacities andreduce these risks, the Government i s pursuing a public sector reformprogram aiming to establish a new public financial management system; improve the legal, judicial and court system; reform the Government pay scale and reduce the number o f "ghost" workers (estimated at 15% o f all civil servants); gradually decentralize civil services to more local authorities; and implement a broad training program for the public sector to enable governance to face future challenges. Inaddition, consistent with PARPA priorities, the Government has undertaken a number o f important initiatives to enhance efficiency, transparency and accountability inthe public sector: 0 MPFhas published quarterly budget execution reports since May 2000 anddeveloped procedures for obtaining data on donor disbursements, to be annexed to these reports; 0 A financial management information system (SISTAFE) has been designed, together with a detailed plan for introducing it into spending authorities, andthe systemwill also introduce detailed functional andprogram classifiers into the budget; 0 Public Expenditure Reviews (PERs)were completed in2001 and 2003 jointly by the Government and donors, and a series o f annual PERs is planned for the coming years; 0 A new Public FinanceManagement Law was approved inNovember 2001 and regulations were passed in2002; 0 Treasury accounts at the central and commercial banks are being rationalized; and 0 A Country Procurement Assessment Report (CPAR) is nearing completion. PROGRESS UNDERTHE PARPA AND THE PREVIOUS CAS 25. Inthe absence of a fullPRSP, the previous CAS (June 2000) was basedonthe Government's Five Year Program for 2000-2004, which incorporatedthe PARPA for 2000-2004, a document endorsed by the Bank and FundBoards inMarch2000 as the country's interim PRSP. As noted inthe CAS Completion Report (CASCR, see Annex 2), the June 2002 CAS pillars were identical to the pillars o f the Five Year Program and CAS performance indicators and targets reflected the monitoring plan incorporated inthe Program and the PARPA. Progress made towards the CAS outcomes can therefore be assessed inconjunction with achievement o f the overall poverty reduction objectives defined inthe Government's strategy documents. Following preparation o f the June 2000 CAS, the Government's strategy was further articulated inthe PARPA 2001-2005, completed inApril 2001 and endorsedby the Bank and FundBoards inAugust 2001 as the country's first full PRSP. InApril 2003, the Government completed a first Progress Report and inJune and July 2003, the Fundand Bank Boards found that Mozambique's efforts to implement the PARPAmanifest its commitment to poverty reduction and that the PARPAcontinues to provide a sound basis for concessional assistance. The PARPA,Bank Group Support and Progresstowards the MDGs 26. The PARPA Progress Report shows that macroeconomic and financial manage- ment since 2001 havebeenbroadly satisfactory. PARPAtargets were met or exceeded for GDP growth, Government revenues, and the domestic primary deficit, though missed - 1 3 - ~~ Box 5: WorldBankassistance to Mozambique's rural development Since most Mozambicans live inthe rural areas as subsistence farmers, agriculture and rural development are central to poverty reduction. Agriculture will only improve rural incomes ifthere are productivity and unit-value increases inthe products that farmers produce, and increases infarm productivity depend on public investment and institutionalreforminresearch and extension, the adoption o f new crops and new farming technologies, and greater access to credit. Inaddition, because most farmers have limited interaction with markets, it is also important to invest inruralroads and to connect the farming provinces to developed markets inMaputo, Beira and elsewhere. The Bank is helping through various instruments. Through a $30 million credit, IDA is one o f 18 donors supporting PROAGRI, which aims to rationalize MADER, decentralize functions, and strengthen extension services. To date, PROAGRI has provided MADERwith vehicles, equipment, supplies, and technical assistance; helped to repair irrigation systems; outsourced some extension and veterinary services to private providers; and advanced decentralization (Provincial Directorates prepare budgets, procure goods and services, and distribute funds to the districts, and districts inturnprepare budgets and procure equipment and supplies), Bank support will continue for PROAGRI2, through the PRSC, when the focus is expected to shift to providing more direct support to farmers to achieve results on the ground. The Bank Group i s also supporting the development o f agribusiness, mostly through ESW aiming to identify agriculturalexport potentialfor private investors. Buildingonthe recently-completed InvestmentClimate Assessment as well as USAID's MainstreamingTrade Report (which analyzes trade standards, border trade liberalization, and the importance o f regional and extra-regional trade), IDA and IFC arejointly supporting an agro-industry investment conference for February 2004 which will aim, inter alia,to increase value-added inkey commodities and expand their market access. Targeted products may include soy beans, milled rice, and citrus fruits for South Africa; processed cassava, pigeonpeas and macadamia nuts for other regional markets; and processed cashews for the international market. Collaborationwith other successful supporters o f agribusiness, such as Technoserve, will be key. Bank support to rural development also includes numerous sector investment projects that have positive rural impacts. National Water Development 1has helped to rehabilitate or construct more than 1,500 rural standpipes in2001-02. The Education and Health Sector Recovery projects have rural components that are supporting infrastructure rehabilitation inthese critically-important sectors, and the Higher Educationproject is supporting distance education into the provinces. IDA is also financing improved transportation to help linkrural inhabitants to clinics, schools and markets: Roads and Bridges 1is connecting all provincial capitals to the all-season roadnetwork, enabling Roads and Bridges 2 (the secondphase o f the IDA APL, which is already under preparation) to focus on rehabilitating key secondary and tertiary roads; while the railway projects are helping to connect remote rural areas to rail transportation. Inaddition, the recently-approved Energy Reformproject will help to pilot programs for scaling-up rural access to electrical energy. The Bank is also supporting the decentralization o f development planning, financing and management. Following the example o fthe Municipal Development project, which focuses on urban authorities, the Decentralized Planning and Finance project will help to improve community participation indistrict-level planning, project execution, and M&Eby providing capacity-building support and limitedgrant resources to as many as 49 districts infour o f the poorest provinces inthe country. Though much work is being done to promote rural development, by the Bank and other donors, there are also significant challenges. These include: expanding rural access to finance; improving diffusion o f productivity-improving agricultural technologies; determining tariff policy; setting agricultural standards; and improving key agribusiness supply chains. InFY04, the Bank will complete AAA with the Government and donors such as USAID to help prepare PROAGRI 2 and develop an integrated rural development strategy for Mozambique. Investment support is expected to follow in FY05 with a Sustainable Rural Development project. The Bank i s also undertaking AAA on regional water resource management (focused on the Zambezi catchment area) as well as a Poverty and Social Impact Analysis (PSIA), for example, on land marketability or the poverty implications o f various trade reformmeasures now under consideration. Inaddition, the new C E M (FY06) is expected to include focus on sustainable growth and naturalresource management, including land, forests, fisheries, and coastal marine resources. - 14- for inflation and poverty-spending allocations;* on current trends, it is possible that Mozambiquewill meet the poverty MDG. Bank support inthis area has been coordinated with the Fundand has included the Economic Management and Public Sector Operation (EMPSO), two PERs, and extensive AAA andtechnical assistance on the banking sector. EMPSO's $60 million second tranche has not yet disbursed, though three conditions have been met and the five pending conditions are nearing completion.' 27. The PARPA Progress Report indicates that agricultural production rose in2001- 02 (cereals by 5%, cashews and cotton by 12%, and sugar by 172%), but it i s not clear that better policies or services to farmers explain these gains, which may reflect a recovery from the 2000 floods, or what role PROAGRIhas had (the agriculture SWAP is supported by an IDA credit and 17 other donors, and it aims to rationalize MADER, decentralize functions, and strengthen extension services). Even so, rising incomes and agricultural production suggest that Mozambique may meet the hunger MDG. 28. Infrastructure development, which i s helping to connect rural areas to markets and services, has been mixed. Roadmaintenance in2001-02, supported by IDA's Roads and Bridges credit,) achieved only 65% o f the target, due partly to flood-recovery related expenditures and partly to funding shortfalls and unsystematic maintenance scheduling, butthe Maputo andNacala rail andport systems have beenconcessionedwith the support o f IDA's Railway and Port Restructuring project and communications reformprogressed satisfactorily, with IDA support, through issuance o f a second mobile license, preparation for TdM's privatization, biddingfor the Maputo airport concession, and restructuring at LAM. Reformintendedto makethe electricity parastatalfinancially viable andto extend the gridis starting with IDA assistance from the Energy project, approved inAugust 2003. Finally, given the importance o f managing well Mozambique's environmental resources, the Bank is using IDA and GEF grant resources to support a Transfrontier Conservation Areas project; a Coastal and Marine Biodiversityproject; and a Mineral ResourceManagement project, which are helping reach the environment MDG. 29. Service delivery improvements have been mixed. The Progress Report shows that Mozambique will achieve universal EPIenrolment (grades 1-5) by 2005 but is unlikely to achieve universal completion by 2015 (a key MDG). Despite more teacher training and donor support enabling increasedrecurrent spending (17 donors support the sector, and in January, after IDA'Scredit was already fully committed, six beganusing a common fundingmechanism with IDAprocedures), the primary system remains inefficient and even the gender MDGmay be out o f reach. The PARPA incorporates the Government's * The inflationtarget was missed due to monetary expansion and several exogenous factors; the poverty- spending allocations may have been too ambitious. An assessment ofBIMhas been done; a strategic legal sector reformplanhas been done; and investment advisers for LAM have been appointed. About 75% o f off-budget revenues were included inthe 2003 budget; donor finding is beingincluded; the assessment o f banking sector compliance with international prudential regulations is underway; an audit o f the state-owned insurance company i s nearing completion and an actuarial analysis o f the national social security agency has been initiated; and a draft telecommunications law has been submittedto the National Assembly. - 1 5 - strategic health plan, which aims to improve primaryhealth care as well as combat tuberculosis, malaria, leprosy and HIV/AIDS, with the support o f IDA'S Healthcredit; significant improvements have been recorded (inattended births, vaccination coverage, andinfant andmaternal mortality), though major challenges remain due to still-limited coverage and the magnitude o fthe AIDS challenge; on current trends, the healthMDGs will not be met. The PARPA also incorporatesthe national planto combat HIV/AIDS, which aims to contain the infection rate and mitigate its effects bytargeting high-risk people with preventive measures; though information campaigns have been completed, 24 testing and counseling offices created, and the IDAHIV/AIDS project approved, trends suggest the MDGwill be missed. Finally, while Mozambique may achieve its 2005 target o f increasing overall access to safe water to 45%, with 1,500 rural standpipes rehabilitated or constructed over 2001-02 and a private urbanwater supply operator having substantially improvedwater reliability and quality infive cities (with support from IDA's National Water Development credits), the MDGis likely to be missed. 30. The PARPA also stresses the importance o f good governance to poverty reduction, andprogress is beingmade. IDA's Public Sector Reform grant is helping to restructure ministries and reform civil-servant pay to promote better performance, while its DecentralizedPlanning andFinance and Municipal Development projects are helping to decentralize planning and management functions to local authorities on a "leam by doing" basis. Legal andjudicial reformhas been initiated, aiming to raise the capacity, efficiency and transparency o fthe system and increase its ability to respond to private sector needs. The public financial management system is also being modemized to increase transparency, improve controls, and decentralize planning and execution. Malaria (noted cases 100,000 pop.) I d a 18 4 8 d a d a 31. Despite strenuous efforts inthe 1 9 9 0 Mozambique didnot progress at a pace ~ ~ fast enough to reach the M D G s and it i s unlikely to catch up through 2015 (see Table 6). With current policies and aid flows, the MDGtargets that are likely to be met include only income poverty, hunger andprimary enrolment. Making faster progress towards the remaining MDGtargets would require significant policy and institutional reform as well as substantial additional resources that are explicitly targeted on, and succeed in, raising Mozambique's absorptive capacity. With this combination, it is possible that by 2015 the goals could also be met with regard to primary completion, HIV/AIDS and access to - 16- water, though the gender equality target as well as the child and maternalmortality goals likely will not be met even inthis scenario (see Figure4 and Annex 3). Figure 4: Prospects for meeting the MDGs: two scenarios With Current Policies, Institutions and External Resources I With Better Policies, Institutions and Additional External Resources Poverty Maternal Water Environment I Hunger Enmlment Completion Gender ~~~~1~ Mortality HIV Other Note: Shadingindicatesthat MDGwill be met; shadingwith + indicatesthat MDG will be met by a largemargin. LessonsLearnedandRecommendations 32. The PARPAProgress Report contains a number o fimportant recommendations to the Government, includingthat the Government Economic and Social Plan (PES, i.e. its semi-annual operational document) andbudget execution reports should have matrices o f programs and strategies reflecting the PARPA priorities to facilitate implementationand monitoring; and that the number o f actions inthe PARPA should be reduced to eliminate low-priority activities, improve focus, and facilitate implementation andmonitoring. In addition, the JSA recommends that the Government support future activities o f the Poverty Observatory by establishing an intersectoral interministerial working group headedby the MPF for monitoring and evaluating progress inPARPA implementation; and that it begina systematic process to improve the statistical basis for economic and social planning and evaluation. Work i s already underway. 33. A t the same time, implementation o f the current CAS, the CASCR, and the April andAugust 2003 Country Portfolio Performance Reviews (CPPRs) indicate some lessons andrecommendations for the Bank Group: TheBank needs to be more strategic and selective in its engagement, focusing its limitedresources on fewer areas and on specific transformative outcomes. While the Bank should continue to play a broadrole as an analytic and strategic partner to the Government, especially insector analysis and policy andprogram design, it needs to bemuchmore selective inits financing, as its resources are limited. Bank projects need to be simplified to ensure a betterfit with the Government's limited implementation capacity. Projects succeed only ifthe Government and its partnersagree on keypolicy reforms andmaintain focus throughout implementation. - 17 - Recurring cross-cutting implementation risks need to be realistically assessed and consistentlyaddressed,where this impliesadequate follow-up through the country dialogue, well-fundedproject supervision, and high-and technical-levelCPPRs. TheBank Group can do much better to monitor its own results,both at the project andprogram level, and to help the Governmentto monitor PARPA results. Outcomes and indicators can bebetter aligned to the PARPA and the MDGs; the M&E emphasis canbeshiftedmore fully from inputsandprocessesto outcomes; and established M&E systems can be strengthened. Partners need to work harder to align their support with the PARPA and to build the Government's own systems. Operationalizing the Rome Declarationon donor harmonizationwill result ingreater organization and complementarityineach sector, lesser demands on Government capacity, and improved fiscal management. Portfolio Performance under the Previous CAS 34. The Bank's portfolio expanded under the previous CAS, as ten projects were approved and eight were closed as o f September30,2003. At end-FY03, commitments amounted to $1.069 billion ($8 1million grants, $731million undisbursed). O fthe plannedprojects, eight were executed as expected, although project design and financing amounts were sometimes changed inlight o fnew developments and two were significantly delayed.'' Two other projects were introducedinto the program after the CAS was presented: the Communicationsproject was prepared to take advantage o f an unexpected opportunity to liberalize air traffic and telecommunications, thereby helping to lower business transaction costs, and the HIV/AIDSproject was prepared to address the HIV emergency. For more details, see Appendix 2 o f the CASCR. Following weaker perfomance and low proactivity over FYO1-02 (see CAS Annex B2), portfolio implementationi s now largely on track. All projects are currently insatisfactory status except Coastal andMarineBiodiversity, which was downgraded due to procurement delays, low disbursements, and weak financial and M&Eperformance; at its recent mid- term review, the project was restructured and an upgrade to satisfactory status i s expected on the next supervision mission. There has been 100% proactivity inFY03. 35. Fiduciary risk remains a concern, and to mitigate this risk, IDA has sometimes established project management units or `ring-fenced' Bank projects, but because these practices are inconsistent with buildingcapacity, they are beingdiscontinued. IDA projects are also invariably audited by a reputable intemationalaudit firm, and audit compliance has been improving (87% o f audit reports were submittedfor fiscal 2002, compared to 84% in2001 and 69% for the A h c a Region as a whole) and audit data also show stronger fiduciary compliance over 2002. InApril and August 2003, the Bank and the Government also completed CPPRs and agreed detailed actionplans, both to improve loThe eight delivered as expected were EMPSO, Coastal and Marine Biodiversity, Roads and Bridges 1, Municipal Development, Mineral Resource Management (called "Natural Resource Management" at CAS presentation), Energy Reform, Higher Education (formerly "Skills Development"), Public Sector Reform (formerly "Public Sector and Legal Reform"). The Decentralized Planning and Finance project ("Rural Action" at CAS presentation) was delayed due to difficulties inestablishing the required legal and institutional framework and the EnergyReformproject due to slow Cabinet approval for private participationinEdM. - 1 8 - performance inprojects that were then inunsatisfactory status, andto address cross- cutting causes o funderperformance, including weak procurement, financial management, and M&E. Further CPPRs are planned for December 2003 and April 2004 to keep the spotlight on portfolio implementation and ensure that recent gains hold. Box 6: Country AAA programreview Mozambique is one o f three countries that piloted a QAG effort to assess the quality o f AAA at the country level. The July 2002 assessment, which examined twelve individual AAA tasks completed inFY01-02, found that the overall quality was satisfactory, with the PER, the CFAA, and a public sector reformactivity rated highly satisfactory. The review panelnoted several strengths: the program showed strong symmetry with CAS objectives, the lending operations, and each other; pieces were timely and opportune, resulting in highimpact ongovernment policies andprograms; keypieces (the CEM, PER, CFAA and CPAR) were effectively clustered interms o ftiming and substance; and the programresponded to country priorities, including new developments (as it introduced non-programmed activities-including a financial sector study, an HIV/AIDS study, and an education financing study-as the need arose). The panel also found that the programcouldhave beenimproved, byimproving dissemination o f completed pieces; by completing as planned critical pieces o f AAA that were postponed (e.g. the legal andjudicial assessment, completed inmid-2003, and a rural development study that was recently initiated) rather than engaging inan ad hoc rebalancing as new developments occurred; and by seeking to mobilize resources to fundoverdue AAA that has not yet beenfunded. While coordination with the donors and the Government was strong, localparticipation was weak; inthis context, the panel recommended a more systematic and participatory effort to identifyknowledge gaps and explore avenues o f collaboration. The panel also found that formal AAA was subject to a sound quality assurance process, but it expressed concern about analytical work outside the AAA stream (inthe review period, on roads, mining, water supply, and civil service pay reform), which seemed to receive relatively little attention or inputs from beyond the task teams. RemainingChallenges 36. Important development challenges to achieve the results identifiedas part o fthis CAS lie ahead. Inparticular: The mainchallenge continues to beextending the benefits of economicgrowth to all Mozambicans, particularly the poor. This CAS aims to help keep growth above 7% per annum (the rate attained duringthe past decade and indicatedinthe PARPAto be necessary to impact poverty) and distribute its benefits inan equitable manner. Improvingprivate sector competitivenessandproductivity i s also key. The Bank has helpedto establish several large-scale projects, but small- andmedium-sizedindustry i s stagnating and generating few newjobs. Constraints to their growth include the highcost ofcredit, insecure landrights, labor market inflexibility, andhighinfra- structure costs. These constraints are most evident inagriculture, where work needs to be done to improve farmers' productivity and the generation o f off-farm income. Rationalizing the use of natural resources: Ad hoc management o f Mozambique's land, water, forests, coastal andbiodiversity assets does not ensurerational use and sustainability; anddegradation i s a growing problem. Through institutional and regulatory strengthening as well as community involvement inzoning, land-titling, andconcessioning, there is scope to attract larger-scale growth-promotinginvestment andalso to include communityparticipationintheir benefits. - 19- 0 While achieving universal access to basic health and educational services remains a challenge, ensuring adequate quality of services is an even greater challenge, which also has a direct impact on sustainability. With poor quality, numeracy, literacy, better health, and higher productivity will fail to be realized. Government capacity and accountability structures are improving, but need to improve even more to enable the Government to take leadership o f its development program, and the Bank needs to do a better job o f helping to make improvements. THE COUNTRY ASSISTANCE STRATEGY 37. Consultativeprocess: This CAS i s based on extensive consultations with country team members and other stakeholders, including the Government, NGOs, the private sector, opinion leaders, and the donors. Internally, IDA, IFC and MIGA held several rounds o f all-day strategy meetings between August 2002 and July 2003. A first round o f consultations with external stakeholders was held inDecember 2002 and a second round, based on a draft o f this CAS, inAugust 2003. Discussions focused on the Bank's experience implementing the previous CAS as well as on strategic choices confronting the Bank over the next few years. The country's own development priorities were not discussed, as these are articulated inthe PARPA, which the CAS supports and which was itselfbased on extensive discussions. Bank staff worked closely with the key donors, includingparticularly the G11 andthose that are preparing new country strategies." The CAS also drew extensively on the first (full-day) meeting o f the Poverty Observatory, opened by President Chissano inApril 2003; this meeting discussed implementation o f the PARPAwith the active participation o f ten Cabinet Ministers and representatives o f local government, NGOs, the private sector, the faith community, and the donors. 38. The Country Team will promote wider understanding o f the CAS by publishingit on the country website and ina shorter user-fhendly brochure as well as through periodic public lectures given by Bank staff and the Country Director's regular press briefings. The Country Office is also implementing a new communications strategy designedto improve information disclosure and obtain more frequent and actionable feedback; as part o f that strategy, the office has hired a Communications Officer, created a Public InformationCenter, and entered into arrangements with the Universityo f Eduardo Mondlane and public libraries to provide them with Bank materials (several are now repositories for Bankpublications). Finally, the Bank Group has established several continuous feedback mechanisms to help improve CAS follow-up, including an annual CPPR process (including a Cabinet-level discussion o f the portfolio); quarterly CPPR follow-up meetings with Project Directors; and monthly meetings with the Minister o f Finance and the Governor o f the Central Bank on the Bank's portfolio, includingAAA. The Poverty Observatory andthe PRSC review process that is being establishedwill also be important mechanisms for getting continuous feedback on Bank performance. 'IA group o f 11donors (G1l), Belgium, the EuropeAid, Denmark, Ireland, Finland, France, including Netherlands, Norway, Sweden, Switzerland and the United Kingdom, supports a Joint Programme for Macro-Financial Support (JPMFS); four other donors (Germany, Italy, Portugal and Spain) are expected to join soon, creating a group o f 15 (G15). - 20 - 39. Government-Bank Group differences: While the Bank and the Government broadly agree on the overall direction o f reform, as set out inthe PARPA, they differ in places about the pace and scope. Inparticular, the Government favors labor regulations, including foreign hire restrictions, that the Bankbelieves hinder competitiveness and limitjob creation; the Government is reluctant to reformthe politically-charged area o f land use rights, whereas the Bank believes reform i s inevitable and favors more market- able rights inorder to realize allocative efficiencies; some parts o f Govemment (though not all) are reluctant to proceed with the divestiture o fparticular state-owned enterprises, due to vested interests, or concems about the buy side o f the market, or disappointment with some earlier divestitures, which failed to realize expectedretums ininvestment, domestic product andjob creation; and the Govemment prefers moderate reforms inthe legal andjudicial sector, while the Bank favors more proactive action, including restructuring of the sector institutions. Though its country dialogue and AAA, the Bank is working with the Government and other donors to help reduce these differences. StrategicSelectivity 40. This new CAS proposes a continuation anddeepening o fpast Bank efforts, which remain appropriate inoverall design and orientation. As inpast CASs, this CAS aims to help improve the investment climate, expand service delivery (to businesses andto the poor), and buildpublic-sector capacity and accountability structures, so that firms are encouraged to expand and createjobs and the poor are equipped to take advantage o f the economic opportunities that are available to them. It will also help the Government to improve its CPIA and HIPC expenditure-tracking ratings inthe areas where Mozambique is weak.12 The key strategic shifts between this CAS and the previous CAS include: A muchsharper focus on managingfor results. This CAS aims muchmore explicitly to leam from past experience (see the CASCR, Annex 2) and to articulate clear and monitorable expected results (see the Results Framework, Table 7 and Annex 1) that have been agreed with the Government and that can form a more objective basis for ex-post learning and performance assessment. Closer alignmentwith the PARPA andbetter harmonizationwith the donors. The Bank will work muchmore closely with the Government and Mozambique's other extemal partners to articulate ajointly-agreed results framework for the overall Government-donor partnership. To do so, the Bank will begin to support the PARPA through a series o f Poverty Reduction Support Credits (PRSCs). It will align the PRSC process with the Government's budgetary calendar and systems and it will condition successive PRSC operations, to the greatest extent possible, on achievement of an explicit set of indicators that is agreed with the Government and with other donors and that will also condition the budget support providedby those other donors. l2Mozambique lowest CPIA ratings concern the financial sector (indicator 6) and accountability, transparency and corruption inthe public sector (20). There i s also room for substantial improvement in five other areas, viz. financial sector depth, efficiency and resource mobilization (7); factor and productive markets (9); policies and institutions for environmental sustainability (10); property rights and rule-based governance (13); and social protection and labor (14). - 21 - 0 An increased emphasis on improvinggovernance. Good govemance andthe rule o f law are critical for private-sector-led growth, and advantageous for the poor. This CAS seeks improvedresults inspecific expenditure-management indicators and also deepens the Bank's support for capacity-building and for legal andjudicial reform. 41. Inlinewiththis strategic shift, the PRSC willbecome akey financing instrument inthis CAS. Mozambique isreadyto transition to aPRSC. Ithas a good growth record, and provisional data show that the poverty headcount has fallen. The Government has demonstrated progress inPARPA implementation as well as continuing commitment to improving govemance and expenditure management. It also has several relatively deep sectoral programs which, to promote donor harmonization with Government programs, should be mainstreamed instead o f ringfenced (as they are now). The PRSCs will also empower MPF to allocate resources inline with PARPApriorities, rather than abdicating this responsibility to the donors-an overdue step that is also a logical development from the SWAP experience. Besides reducing IDA's transaction costs and saving Government capacity, the PRSC will also help to shift the partnership model from one where account- ability flows from Government to donors to one where the Government is accountable to parliament and the people o f Mozambique through its PARPA reporting processes. Box 7: The Governmentof Mozambique'sPerformanceAssessment Framework(PAF) Since early 2003, the Government, the Bank and the G11 donors have been tryingto develop a single monitoring process and an agreed financing plan around the Government's own procedures and documents, including its budget execution reports, the PARPA, and the Economic and SocialPlan(PES). I t has been agreed that the monitoring process for participating donors should involve an agreed multiyear PAF matrix of policy and institutional reforms, with results-focused monitoring indicators and progress benchmarks, for which the Government is prepared to be heldto account and against which donors would agree to provide budget support inmore predictable ways. The PAF matrix, as agreed inSeptember 2003, includes specific indicators and benchmarks for development progress for 2004 and more indicative indicators and benchmarks for subsequent years. It i s expected to be updated twice a year, through a two-stage consultative process ledby the Government. The first stage will involve sector-specific working groups that would identify key sectoral indicators, and the second stage a coordinating workmg group, chaired by the MPF, that will combine sector-specific indicators into a single matrix which clearly indicates overall priorities for the matrix period. GivenMozambique's financial year and the MPF obligation to report on the previous year's outturnby February 15, parties agreed that the main(backward-looking) annual assessment should occur inFebruarymarch. At the same time, given the MPF obligation to send the annual budget and PES to Parliament by September 30, it was agreed that the main(forward-looking) annual agreement on an updated PAF matrix should occur in AugustJSeptember. The PAF work operationalizes a growing consensus among development partners around several aid modalities (see the Rome and Monterrey consensus and the Bank's Strategic Framework for IDA's Assistance inAfrica, which stress the mutual responsibilities o f developing and developed countries for reaching development goals): (i) PAF donors are committed to providing assistance inways that are better aligned with Mozambique's own development priorities; (ii) provided that Mozambique builds a good track record, PAF donors expect to make aid flows more predictable and long-term; and (iii) PAF donors agree that predictability will increasingly imply conditionality derived more directly from the PARPA. - 22 - CAS ResultsFramework 42. The CAS results framework (see Table 7 and Annex 1) indicates the outcomes that the Bank expects to help the Government to achieve over the CAS period. These results were chosen inlight o f the MDGs, the priority indicators included inthe Government's PAFmatrix,13 the IDA triggers, and the HIPC expenditure-tracking indicators, taking into account: Mozambique's development priorities; Government ownership, capacity and commitment to act; Bank projects under implementation and their agreed performance indicators; and the Bank's own track record and comparative advantage vis-a-vis the other partners. Given expected delays between project preparation, implementation, and achievement o f results, most outcomes during the CAS period are expected to result from implementation o f the ongoing portfolio. 43. The Bank Group i s ideally suited to helpingto improve the investment climate, as the Group can provide full-service policy advice as well as complementary instruments to support key private-sector developments. K e y impediments to business that require policy and institutional reform and that the Bank Group can support through its country dialogue and the PRSCs include: (i) reducing the time and cost incurred inregistering a new business; (ii) increasing flexibility inthe labor market; (iii) streamlining the land allocation process; (iv) speeding Government payment o f foreign exchange and value- added-tax (VAT) refunds; and (v) improving customs clearance times. 44. Project support will also help to improve the investment climate. The Southern Africa Regional Gas Project illustrates these complementarities, as it involves an IFC equity participation, MIGA guarantee and IBRDpartial risk guarantee. Inaddition, the Bank Group will support several large risky developments, either because they have demonstrative effect (such as NWDP2, which supports private sector management o f urbanwater supply) or because they are expected to have a catalytic impact on growth (such as the Roads andBridges 2, which will finance rural roads as well as the Caia bridge over the Zambezi, and the Beira Railway project, which will open the Zambezi valley andpromote regional integration by rehabilitating the Sena and Machipanda railway lines and encouraging development o f the Moatize coal mine). On a smaller scale, IFC i s working to promote SMEs-Mozambique is an SME focal country for IFC-and IDAis preparing a SustainableRuralDevelopment project incooperation with IFC andMIGA.14 Ina complementary fashion, the Bank Group will continue to expand basic infrastructure, both through public investment inthe roads sector andthrough increasing private participation intelecommunications, ports, railways, air transportation, l3Of 63 priority actions and indicators inthe PAF matrix as identified by the Government inlate September 2003,48 (or 76%) are included inthe CAS Results Framework. l4IDA'Scomparative advantage inpromoting growth lies inits ability to undertake analytical work that is informed by global experience indeveloping countries, allowing it to provide relevant technical and policy advice, combined with lending where grant financing is unavailable. IFC's advantages include its ability to foster sustainable private sector development by providing loan and equity financing for private-sector projects located inthe developing world; helping private companies inthe developing world mobilize financing inintemational markets; and providing advice and technical assistance to businesses and governments. MIGA complements the work o f the IDA and the IFC by advising host countries on attraction o fFDIand by providingpolitical risk insurance coverage for foreign private investors. - 23 - T: de 7: CASResultsFrameworkSumn ry (FYO4-07) PILLAR 1: IMPROVINGTHE INVESTME 'CLIMATE PARPAlPAFGoals Outcomes/indicators Intermediateindicators - Reduceto less than 50% - Loweringbusiness registration costs - Unneededsteps eliminated; shorter those livingon less than bg 40% GoMresponsetimes $l/day by 2010 - Creatingan efficient labor market - New law permitting easier short-term - SustainGDP growth at - BAuand BIMassessments done; banks and foreign hires 7% and inflation at 7% - Establishingprofitablebanks - Raise agricultural complying with IAS by 2006 productivity - Loweringinfrastructurecosts - Lower business Doubling teledensity New law; TdM privatization on track transaction costs Decreasingtransporttime and Routine andperiodic road andrail -- Increaseaccess to credit costs maintenancemeetstargets; Beirarail Connectall parts o f line concessionedto private operator country to main roads Raising electricity supply Private partnerbrought into EdM; efficiencies and lower losses of electricity lossesreduced; connection - network Raisenumber of production time costs reduced;grid extended electrified district HQs Rationalizinglanduse and admin posts to 35 -- Raisingcrop yields throughfarmers' -- 50 community managementplans At least one extensionmessage adopted use of new technologies bv 3.2% of all farmers bv 2006 PILLAR2: EXPANDINGSERVICE D1 ,IVERY - KeepHIV prevalence - Risky sexual behavior reduced - ReduceU5MR from 219 rate below 16%to 2005 Condomuse raisedto 20%; age of to ~ 2 0 by 2005; reduce 0 . . .Sustainableincreases. .in.17.to. .18.to. . . . - . . . . .first. .sex. .raisedfrom .access. . . . . . . . . . . . . . . . . institutional MMRto safe water 4 5 0 per 100,000 live 1,200 new rural water points p.a. births; reduce child Higher-quality urbanwater infive Urbanwater tariff raisedto permit malariamortality by 15% ________________________________________ cost recovery andnetwork extension inprioritydistricts - Raise accessto safe -.. .More. .efficient. .higher. .quality. . . . . . . . . . . . .cities,. .with . . . . . . . . . . . rising access. . . . . . education system - water to 46% by 2005 Raise EP1enrolment to 24,000 EP teachers qualified ESSP agreedbetween GoMidonors 128%, completion to New curriculum introduced, Community constructionstarted 59%, by 2006; eliminate including at EPl, EP2, andHigher 0 Educationbudgetmaintainedat gender disparity EducationInstitutions 5.8% o f GDP - Improve service delivery - Improved structurefor service by decentralizingto local deliverythrough localauthorities authorities 0 Local authority capacitybuilt in 8 Developmentplans in67 districts - HE1graduatesraised municipalities, up to 49 districts, Payreform initiated, 3 "quick wins; from about 800 in2001 through learningby doing MPF, MAE, agric.,health, education to 1,500 in2006 Higher public sector PEM capacity initiate restructuringby 2006 Clear and transparent public Misprocurement decreases, project procurement, with lower costs disbursementincreases PILLAR3 BUILDINGPUBLIC-SECTOR CAPACITY VD ACCOUNTABILITY - Corruption Index : - GoM better ableto managepublic reducedcorruption score expenditures - ininvestmentclimate Off-budgets eliminated Off-budgetddonor funding inbudget Soundmacroeconomic Donor funding data collected Outtum close to budget management, with low Reliability o fbudgetimproved Introduction of SISTAFE in inflation and stable Budget classificationsdone 2004/05, with functional exchangerates - Tax revenues 15.5% of Pro-poor spendingidentified classification Pro-poor spending67% of budget GDP by 2006 (from Classification for budgettracking Creation of revenueauthority 14.3%in2003) - Falling public-sector corruption: Higher GoM capacityto identify Improvement inGoM governance and addresscorruption issues survey scores (in2004 and 2005) Time for judicial resolutionof Dedicatedjudicial sections for business disputesreduced commercial disputesby 2006 Stronger legal framework for PenalCode, Civil ProcedureCode, business and Registry andNotary Code revisedby 2005 - 24 - electricity, and urban water supply and sanitation. In each o f these areas, the Bank is one o f a few external partners with the experience, financing, and capacity (inlegal, institutional, transactional, and regulatory matters) to provide the support desired; its absence would sharply limit sector development (see Table 8). UnitedNations 2002 70 1 N o x x x x x x World Bank 2003 1 4 0 1 N o x I x I x I x I x ( x I x I x x Nodes: 1. Africa and regional strategy; 2. Annual plan; 3. MoU with GoM; 4. Strategy under preparation. 45. The Bank Group will also help the Government to improve service delivery. The PRSCswill help by supporting institutional reform that results inimprovedbusiness services and better health and education services for the poor, while investmentprojects will help to achieve human development outcomes more directly. Educationwill be the primary focus, with IDA support continuing for the ongoing Education and Higher Education projects as well as a proposed Technical and Vocational Educationproject. IDAis the largest financier o f civilworks ineducation andthe only donor providing comprehensive sector coverage; its expertise i s widely recognized so its departure would leave a large gap. Inaddition, the secondary impacts o f education (inempowering individuals to improve their skills, health and nutritional status and inenabling firms to - 25 - adapt new technologies that increase capacity and competitiveness) are so great that concentration on this sector is highly appropriate. 46. Improving governance as well as buildingpublic-sector capacity are also a Bank focus. The PRSCs will help to strengthen the fiduciary framework and the financial sector and implement public sector reform. Since much o f the PRSC agenda grows out o f Bank analytical work, the Bank i s better positioned to support this agenda than other donors. The PRSC also provides IDA with a vehicle to respondto Government and G11 requests to help coordinate donor budget support around a single calendar and a single set o f monitoring instruments. More direct assistance to this agenda will be provided through complementary IDA investment projects, includingthe Public Sector Reform project, which aims to begin a process o f restructuring government for improved service delivery, as well as the MunicipalDevelopment and Decentralized Planning and Finance projects, where the Bank i s helping the Government to scale-up and harmonize multiple donor-supported decentralizationprojects around common modalities. At the same time, most IDA infrastructure projects are buildingthe regulatory and management capacities o f the key institutions inthe sectors that they support. Responding to evident needs, at the request o f Government and donors alike, the Bank will also support capacity-building inthe financial sector, the legal andjudicial sector, andpossibly M&E. THE CAS PILLARS 47. The Bank Group's program for FY04-07 i s built around a results framework that itselfbuilds on the PARPA's priorities. The CAS has three pillars: (i) improvingthe investment climate, (ii) expanding service delivery, both to businesses and to the poor, and (iii) buildingpublic-sector capacity and accountability structures (see Table 9). Pillar 1: Improvingthe InvestmentClimate 48. Objectives, outcomes and benchmarks: Bank activities under this pillar aim to help the Government to sustain GDP growthper capita and reduce income poverty through improving the investment climate and facilitating public-private partnerships in infrastructure. Bank performance under this pillar will bejudged against progress made in: loweringthe cost andtime associated withregistering abusiness; obtaining greater flexibility inthe labor law; lowering customs clearance times; ensuringbanking-sector compliance with international accounting standards (IAS); increasing transparency in public procurement; doubling telephone density; maintaining an expanding length o f primary and secondary roads; increasing international traffic on Mozambique's railway and port systems; and finally introducing a strategic private partner into EdM, extending the grid, and reducing connection costs andpower losses. FirmsinMozambique identified many issues related to these results as serious business constraints (see B o x 8). The Bank Group will make use o f policy dialogue, financing programs, and partnerships to help achieve these objectives. 49. Newfiizancing: Buildingon recent progress, the first PRSC series will help to ease constraints to business; strengthen the overall fiduciary framework; reform the financial sector by modernizing supervision capacity and ensuring that all banks comply - 26 - Table 9: Mozambique CAS Lending Program - Base Case Scenario (FY04-07) Pillars FY04 FY05 FY06 FY07 Improving the S. Africa Power Beira Rail ($70m); Roads and Bridges investment ($13m) Sustainable Rural 2 APL ($85m) climate ~~Expanding National Water ~~Technical and service delivery Supplemental Vocational ($iJm) Education ($20m) Building Decentralized Financial Sector Public Sector capacity and Planning and Capacity ($lOm); IReform 2 ($20m) accountability Finance ($42m Legal Sector grant) Capacity ($5m) Cross-cutting PRSC 1($60m) PRSC 2 ($60m) PRSC 3 ($70m) PRSC 4 ($70m) Total $130m $165m $175m $90m Analytical and advisory activities Improving the Agriculture PSIA Rural Strategy; CEM Infrastructure investment Private Sector Assessment climate Competitiveness Expanding Labor Markets and HIV/AIDS Retro.; service delivery IReport on Health; Tec. Voc. Ed.; Water ~ Poverty Update Management Building PER; CPAR; Institutional PER PER;Payreform capacity and Legal and Judicial Governance PSIA accountability Assessment Review; PER with U S ; and implement public sector reform aimingto tackle corruption, improve service delivery, and reduce bureaucratic inefficiencies. As the Government and the Bank gain experience with the PRSC and the overall fiduciary framework i s strengthened, and without overloading the instrument with conditionality, the PRSC will be gradually expanded to incorporate support for sectoral activities, playing a complementary role to IDA'Scapacity-building efforts (see Pillar 3) and enabling other donors to invest inthose sectors without heavy conditionality. Agriculture will be one o f the first "stacked" sectors: when IDA closes its current PROAGRIcredit inJune 2004, further IDA support will consist inpolicy dialogue and analytical work provided to MADERthrough the Bank's PRSC missions, with financing providedthrough the PRSC itself, and therefore through the MPF than through a dedicated investment project controlled by MADER; inthis way, the multi-year transition inthe agriculture sector from discrete IDA investment projects towards programmatic support will be completed. Future support for health, basic education, and rural water supply and sanitation will also be incorporated into the PRSC's programmatic approach as core fiduciary work i s completed andproject support inthese sectors comes to a close. 50. The share o fthe PRSCs inIDA financing over the CAS period would grow from 35% to 50% o f average annual lending, provided that the Government makes adequate progress inimproving public expenditure management (as indicated by progress against the H P C expenditure tracking indicators, which will be incorporated into PRSC conditionality as appropriate). - 27 - Figure5: Percentageof firms inMozambiquerankingissues as problems Source: Mozambique Industrial Performance and Investment Climate 2002 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Credit (average) Cost of financing Access to domestic credit Access to foreign credit Government (average) Policy uncertainty (average) Corruption Macroeconomic instability Anti-competitive practices Economic policy uncertainty Trade rates Crime, theft and disorder Administrative bamers (average) Skills and education o f workers Tax administration Customs and trade regulations Labor regulations Business licences Access to land Infrastructure (average) Electncity Transportation Telecommunications I Large problem 0Moderateproblem UNOor minor problem 5 1. Several new infrastructureprojects will also beproposed under this pillar. First, IDA'S$60 millionBeiraRailwayprojectwill support the rehabilitation ofthe Sena and Machipandarailway lines through concessioning the systemto a private operator that bids for the least public subsidy, and an IDA guarantee to complement public funding and leverage private financing will also be considered, on the Government's request. Rehabilitation of the lines, expected initially to carry one milliontons o f freight annually, will improve transportation links with Malawi andZimbabwe andhelpto unlock development inthe Zambezi river valley, where the majority o f Mozambicans live. In particular, rehabilitationo f the Sena line i s expected to encourage the exploitation o f coal at Moatize. Second, buildingon the Gas Engineeringcredit, the Bank Group throughthe Southern Africa Regional Gas project will help finance infrastructurefor processing and transporting natural gas from the Temane and Pande gas fields for sale inMozambique and South Africa, thereby stimulating growth o frelated industrial and commercial activities. Bank Group support will involve three Bank entities: inDecember 2002 MIGA provided an equity guarantee for the project, which will berolledover to adebt guarantee; IBRD, indocuments before the Board today, i s proposing a $30 millionPartial Risk Guarantee; and IFC expects to provide equity support for the upstreamcomponent o fthe project. Third, the second phase o f the Roads and Bridgesproject (APL)i s expected to begininFY07; buildingon the first phase, which will have connected all - 28 - Box 8: Selected reforms for improving the investment climate Over the CAS period, the Bank will focus attention on several policy and institutionalreforms that recent studies show to be critical to improving Mozambique's investment climate. The CAS results framework includes three specific targets to be achieved over the CAS period. The first involves bringing down to international norms the cost (now 108% o f GNIper capita) and time (now 174 days) o f registering a business, by eliminating procedures and lowering Government response times (for example, commercial registration now takes about 30 days, compared to a few hours inmany other countries). This can be done by computerizing the registration process; integrating the operations o f the three institutions involved inthis process; and outsourcing some functions to the private sector. The secondtarget involves obtaining a more flexible labor market, by changing the labor law to permit remunerationthrough piece rates, simpler and cheaper foreign hires (it now takes a firm about 90 days and $400 to obtain a permit); and lower severance payments (retrenched employees currently receive up to three months pay for every two years worked). This will help to raise skills-transfer levels and shift the balance away from capital-intensive and towards labor-intensive enterprises. The thirdtarget involves lowering customs clearance times (from a nationalaverage of 12days for imports and 17 days for exports), with a focus on the center and the north o f the country, where times are greater still, and on ground shipments from South Africa border; this will help firms to obtain critical inputs ina timely manner, meet strict delivery deadlines, compete better inexport markets, and tie-up fewer resources ininventories. Although not explicitly included inthe results framework, the Bank will also seek to improve the investment climate by helping the Government to undertake other reforms. These reforms will aimto: (i) timelyGovernmentpaymentofVATrefunds,investmentincentives,andotherpromised ensure services, so that current investors experience less cash-flow strain and potential investors are more confident that promised Government actions will occur; (ii) decrease the number o f Government inspections (health, labor, etc.) per annum, particularly inthe center o f the country, where they now average six innumber (with local officials responsible for the higher administrative costs incurred); and (iii) improve the land allocation process, chiefly by streamlining the document collectionprocess so that MADERachievement o f finalizing within 90 days o f submission o f completed documents i s meaningful. All six o f the outcomes described here would help businesses to compete better. ~ provincial capitals to the trunk road network, the second phase will have a stronger rural focus on secondary andtertiary roads andwill also help finance the Caia bridge over the Zambezi, thereby literally helpingto bridgethe dividebetweensouth and north. Fourth, Mozambique i s one o f five countries participating inthe Southern Africa Power Pool (SAPP) project, which aims to facilitate development o f an efficient SADC power market that will reduce electricity prices, foster regional integration, increase competitiveness, and create the conditions for accelerated investment. The Mozambique component, which IDA would finance with a credit o f up to $48 million (of which $13 millionwill be drawn from the Mozambique allocation), will support the construction o f a 220 kV transmission line from Mozambiqueto Malawi. 52. Inaddition, IDAis preparinga SustainableRuralDevelopmentproject, which will buildonPROAGRI 1andthe Transfrontier ConservationAreas project. This may involve promoting conservation tourism o fMozambique's unique inlandand coastal naturalresources through public and private investment, facilitated by IDA, IFC and MIGA, inhigh-quality tourism infrastructure. This would involve strengthening oversight institutions; implementingrequiredpolicy and institutionalreform, particularly regardingconcessioning andconservation-area management; developingmechanisms for community participation; and establishing basic infrastructuresuch as roads andpark facilities for core protectedareas, with appropriate linkages to communities and the - 29 - private sector. Given Mozambique's relatively unspoiled natural habitats andproximity to South A h c a , a major tourist hub, the potential for growth intourism i s high. 53. New AAA: The PRSC will be based on strongjoint AAA, includingthe 2002 Investment Climate survey, a financial sector assessment, and a legal andjudicial reform assessment; a C E M (completed in2001) as well as a CPAR, a CFAA, and two PERs (all recently completed); and the IFPRI/Government Poverty Assessment, which will be completed by December 2003 (before the first PRSC operation is finalized). Inaddition, the Bank will complete new AAA to help the Government to prepare an integrated rural development strategy; to determine the poverty and social impact o f agricultural policy; and to deepen understanding o f Mozambique's private-sector competitiveness (aiming inter alia to quantify the economic costs o f administrative impediments to investment and to analyze the causes of low factor productivity). Support will also be provided to help the Government to implement the recently-approved national framework for sustainable tourism and environmental management. To keep due-diligence AAA up-to-date, a new CEM, focusing on natural resource management and its contribution to growth, will be prepared to inform discussions with the new Government that i s elected inlate 2004. Following completion o f the Poverty Assessment inFY04 and the population census in FY06, further poverty work maybeundertakento fillingaps, for example, regarding poverty monitoring or the links between Mozambique's recent growth performance and incomes, consumption and rural vulnerability. An infrastructure assessment will also be completed to take stock o f achievements, identify remaining work to be done, and establish a plan o f action. Inaddition, IDA and IFC will continue to help agricultural firms with export potential to gain access to export markets through adopting modern farming techniques and ensuring high-quality handling along the entire supply chain. 54. Ongoingactivities: Inthe meantime, Bank Group support to improving the investment climate will continue through the current portfolio. Responding to private sector complaints about the quality o f infrastructure services inMozambique (see Figure 5), the portfolio for several years has been oriented to improving infrastructure service delivery by increasing private-sector participation and competition ininfrastructure. While there has already been substantial success, further work i s needed. Inparticular: IDA's ongoing Energy Reformproject will introduce private participation into EdM with a view to improvingits efficiency (the average client currently experiences 17 power outages a month) as well as its financial viability. IDA's Communications Reform project, following the sale o f a second cellular telephone license in2002 (to Vodacom), will support the privatizations o f TdM, mCel (formerly part o f TdM, but now an independent corporate entity), and LAM, as well as the concessioning o f the Maputo and Nacala airports. To ensure future expansion o f urban water supply and consolidation o f gains in reliability and sustainability, NWDP2, which supports the introduction o f private operators for the water supply systems inMozambique's five largest cities, will be extended and supplemented (witha $15 million credit) to cover costs incurred by the need to rebidthe concessions following the withdrawal o f the original operator. IFC is helping to privatize Petromoc, the state-owned petroleum distributor. - 30 - Box 9: IFC and MIGA inMozambique InternationalFinancial Corporation: IFC's portfolio of $154 millionconsists o f 14projects in agribusiness, hotels, banking and manufacturing. Six o f these projects are inthe small- and medium-sized enterprise sector. IFC's $120 million investment inMozal 1was its largest at that time (IFC also invested $25 millioninMozal2) and aproposedequity investment inthe Sasol gas pipeline project is before the Boardtoday. IFC's new Strategic Initiative for Africa, which is now being finalized, will aim to capitalize on IFC's role as a catalyst and agent o f change and enhance its ability to be a strong partner for the private sector. IFC willbe more focused and proactive inengaging both the private sector and governments to help buildan attractive investment climate inwhich IFC and other partners will be able to support more and better investments to achieve the maximum development impact. The three mainpillars o fthe strategy are expectedto be: (i) enhanced support to SMEs inthe region, (ii)proactive project development, and (iii) engagement on improving the investment climate. Within this context the IFC's strategy for Mozambique is likely to focus on: Tourism and theprivate sector: This involves ajoint strategy o f the Bank Group and the Ministryo f Tourism, buildingonBank analytical work, to help develop a tourism and conservation area linking Mozambique with Malawi, South Africa, Swaziland, and Zimbabwe. IFC's role i s to ensure that this initiative is bankable interms o f private sector perspectives. MSMEs: Mozambique has beenincluded ina list o f eight African pilot countries for anew joint IDA-IFC initiative for M S M E development. The proposed M S M E Program aims to reduce constraints to growth and competitiveness by: (i) increasing access to finance; (ii) opening access to new markets by buildingthe technical capacities o f businesses located in Mozambique; and (iii) improving the enabling environment for private sector participationby reducing red tape. Private Sector Advisory Services: IFC i s supporting the privatization o f Petromoc (the state- owned petroleum distributor) and has also offered to provide assistance to the G o M to market- test the existing design for the Senarailway concession and review strategic options for the fiture development o f the Moatize coal mine and associated infrastructure developments. Multilateral Investment GuaranteeAgency: MIGA promotes development by helping emerging economies attract private foreign investment by offering political risk insurance to investors and lendersand advisory services to investmentpromotion intermediaries. MIGA also acts as an intermediary to help resolve disputesbetween developing countries and investors. To date, MIGA has facilitated foreign direct investment (FDI) o f approximately US$1.5 billion into Mozambique through its guarantees program, supporting the Mozal aluminumproject; therehabilitationandpartialprivatization ofthe Marromeu sugar estate; the development ofthe Maputo port; Motraco's construction and operation o f an electricity transmission project to interconnect South Africa, Swaziland and Mozambique; and the renovationof a Maputo hotel. MIGA's guarantees help reduce noncommercialrisks associated withFDI, offering protection against currency inconvertibility and transfer restrictions, war and civil disturbance (including terrorism), expropriation, and breach o f contract. MIGA's technical assistance helps formulate and implement strategies for attracting FDI, by providing advice and tailored assistance to public and private organizations inimage-building, sector targeting, and outreach and information dissemination. Through online information services, MIGA connects investors to current information oninvestment opportunities, business operating conditions, potentialpartners, and other resources. Under the PoDE project, MIGA provides advice and assistance to CPI to advance the development o f the Beluluane Free Zone, which i s designed to attract export manufacturers and suppliers o f goods and services to Mozal and also features an industrialpark where localbusinesses are encouraged to locate. Inaddition, MIGA i s working with CPI to attract FDIto serve global markets; this program, sponsored inpart by the Swiss, supports the non-traditional export industry, an area that holds considerable potential. MIGA will be exploring new areas o fpotential synergy and cooperation withother Bank agencies during CAS implementation and will continue to profile investmentopportunities in Mozambique through its online investment services, namely PrivatizationLink and FDIXchange. - 31 - 0 Through the Railways and Ports project, IDAwill continue to support concessioning o f the Maputo andNacalaport and railway systems. 55. Mozambique, like many other countries, experienced declining private-sector interest and investment ininfrastructure inthe 1 9 9 0 though its infrastructure needs ~ ~ remain enormous. The Bank Group is uniquely able to offer an array o f complementary skills and products to help leverage resources, from anywhere along the public-private continuum, to support further development, with IDA supporting upstream work on sector policy, strategy and design o f the privatization transactions; IFC providing necessary financing to the investors; and MIGA profiling potential investment opportunities and providing politicalrisk coverage, as needed. Cost recovery will be key to long-term success, but it will proceed at a realistic pace, andtargeted subsidies may be used to establish connections and temporarily to support user charges.15 Over time, increasedprivate-sector participation ininfrastructure will enable private providers, who typically have the resources and management skills required to offer services more efficiently than Government, to improve quality and lower costs, while enabling the Government to save capacity and concentrate on matters which only Government can handle, including especially policy and regulatory matters (see Pillar 3). 56. The Bank is also supporting the development o f SMEs more generally. Following a mid-term review, the Enterprise Development project is being restructured to provide greater private-sector access to equity and credit (including expanding the availability of microfinance and the utilization o f existing equity funds); to strengthen linkages between large-scale projects and SMEs; and to provide technical assistance to MIC, MITUR, the Chamber o f Commerce, and CPI (which receives complementary assistance from IDA and MIGA), aiming to help them better to understand the products and sectors where Mozambique i s competitive and to develop the capacity to promote them. Inaddition, the Mineral Resources Management project is promotingminingin Mozambique (111exploration licenses and 16 mininglicenses have been issued), particularly among artisanal miners. Pillar 2: Expanding service delivery 57. Objectives, outcomes and benchmarks: The second CAS pillar focuses on the human development MDGs, which are key to improving quality o f life as well as labor productivity and therefore growth. Inthis area, the Government aims to control HIV prevalence, reduce child mortality, raise access to safe water, raise the primaryeducation completion rate, and increase Mozambican participation inbusiness management and professions. The Bank Group's specific contribution involves: (i) achieving less risky sexual behavior, especially among high-risk groups, by raising condom use and delaying l5To ensure that service deliveryremains affordable to people with low incomes or inareas o f low population density where market-based solutions to service delivery are adopted, transparent finding mechanisms will be designed to improve their affordability and accessibility, including output-based-aid. A Government subsidyprovided on output-basedterms differsfrom a traditionalpublic subsidy inlinking the subsidy to achieving a specific output, such as the number o f consumers connected to electrical services per year, rather than directing it at an input such as the building o f infrastructure to deliver the service. - 32 - a youth's first sexual encounter; (ii) to achieve more reliable and sustainable helping high-quality water supply inrural areas and inthe five principal cities, thereby also helpingto improve health outcomes; (iii) improving EP1 and EP2planning,management, and budget execution and also supporting gender parity initiatives andteacher development, so that recent improvements inprimary school access are matched with improvements inquality; and (iv) supporting vocational, technical, and university education to increase the skills o f high-level workers. The Bank also aims to improve service delivery inhealth, education and agriculture bybuildingthe capacity to manage decentralized service delivery and motivating and retaining civil servants by providing improved incentives. 58. Newfirtancing: Several o f the PRSC's core activities are explicitly intended to improve service delivery. These include: (i) modernizing budget formulation systems; (ii)improving budget execution andreporting through the introduction o f SISTAFE; (iii) expanding fiscal decentralization; (iv) strengthening intemal and extemal audit, including bypromoting institutional independence and supporting the accounting and auditing professions (which are extremely underrepresentedinMozambique); and (v) completing essential reforms inthe public procurement system. Inaddition, later operations under the PRSC are expected to include support to policy and institutional reform inthe health andeducation sectors, with a view to promoting efficiency, transparency and accountability inservice delivery. 59. Several investment projects are also planned. Recognizing that a shortage o f skilled Mozambicanworkers continues to constrain growth and limit the distribution o f its benefits inMozambique, a new $20 millionTechnical and Vocational Education project will be prepared to address the missing middle inMozambique's education and leamingprogram. The project will aim to increase the graduation o f Mozambicans with the skills, practices, and attitudes needed to fill technical positions, and create value- adding knowledge and innovation inproduction. The project will be developed through a strategic partnership among Government, academic institutions, andthe private sector, and will also aim to improve gender equity. Inthis context, IFC may support private education at the tertiary level, and it has an initial project under development for a technical college. Mozambique may also be one of four pilot countries inAfrica participating inan IDA-financedAIDS Treatment Acceleration Program (TAP); this regional project is expected to provide additional funding to international NGOs that are already active inAIDS treatment activities inorder to help identify effective treatment models that can be affordably and sustainably scaled-up inthe African context. 60. New R4A: To help identify the education project, IDA will complete a study o f the linkages between labor markets and technical and vocational education, to determine what the market needs, how well existing institutions satisfy those needs, what gaps remain, how those gaps can best be filled, and what other opportunities exist for improving efficiencies. A country status report on health is already underway, and it will help to inform health policy dialogue inthe context o fthe PRSC and other donor harmonization discussions. An HIV/AIDS retrospective will be completed inFY06 to take stock and determine the next steps forward. Water resource management AAA, - 33 - Box 10: Commonfunding mechanisms: from SWAps to budget support Mozambique and its external partners have many years o f experience with financial pooling arrangements. Agriculture, education and healthcontinue to be the focal sectors. Pooling insupport o f the PROAGFU is the most advanced-1 8 donors, include IDA, contribute. Financial management has several basic features: (i) an annual budget and activity plan (PAAO) that provides both an annual work plan (agreed betweenMADERand supporting donors) and budget information to the MPF; (ii) quarterly transfers o f merged donor funds to the Treasury account for PROAGRI; and (iii) MADERprovisiono fquarterly financial reports regarding bothbudget appropriations and activities before any new activities are discussed. A numberofbodies monitor progress, including a GoM-donor working group; aninternalfinancial management committee; and an overall annual review group that meets biennially to discuss annual work plans, budgets and audits. PROAGRI represents a compromise between pure forms of off-budget and on-budget donor support, as donor funding i s integrated into the GoM's planning process, included inthe budget, channeled through G o M accounts, and presented for parliamentary approval, but it is also earmarked for PROAGRI and thus protected when the Treasury comes under pressure during budget execution. The education sector moved closer to the PROAGRI model inJanuary 2003, when six donors began to fund the sector through a common funding mechanism that uses IDAprocurement and financial managementprocedures (because the existing IDA credit was already fully committed in January, IDA does not yet contribute). Other sectors can move inthe same direction, by formulating a sector-wide prioritized work program, covering all sectoral resources; movingpooled funds through a single Treasury account (thus encouraging MPF and the relevant sectoral ministry to work together); as well as reporting and auditing on the PROAGRI model. Inhealth, pooling arrangements are already being usedby seven donors to support drug purchases (about $15-20 millionper annum since 1997)and by three donors to support recurrent expenditures (about $3 millionin2002); these would continue to operate inthe interimbut can be merged into the main pool once it is established. SWAps involve taking a graduated approach to greater use o f Government budget systems. They can help to improve sectoral planning, enhance transparency inbudgetary allocations against identifiedpriorities, and reinforce incentives to strengthenpublic financial management-but only ifmostdonors agree tojointhepools andstick withthemfor a considerable period(say five years), thereby ensuring the Ministry incentives are all aligned. They can improve absorptive capacity by eliminating the Government need to respond to multiple cumbersome donor administrative mechanisms. They also protect sectoral spending allocations, thus giving sectors greater budget certainty. But the advantages are incomplete as long as sectoral "silos" are maintained: inparticular, sector-level systems (e.g. o f procurement and financial management) may be strengthened independently o f central systems and o f each other, at the expense o fpossible intersystemic incompatibilities and MPF's ability to coordinate; inaddition MPF's ability to respond to external shocks will focus disproportionately on unprotected sectors. After several years o f increasingly good experience inthe SWAps, it is clear that ringfencing public expenditure systems inselected sectors cannot be the endpoint o fthe trend towards using government systems for the flow o f donor financing. initiated under NWDP1, will continue, inorder to analyze and evaluate the vulnerability ofthe national economy to water resource-related shocks andclimatic variability (both floods anddroughts) with a view to mitigating them and delinkingthe economy from variability. Giventhat Mozambique i s the down-stream ripariancountry inseveral internationalriver basins includingthe Limpopo and the Zambezi, this exercise will include the issue o f internationalwaters management and an analysis of the impacts on the Mozambican economy of the management decisions o f neighbouring countries. - 34 - Box 11: Addressing gender inequality through Bank-supported activities Although the Bank does not have a project that focuses directly on addressing gender inequality in Mozambique, many projects incorporate activities with this aim. PROAGRIhas targetedmaking 25% of extension workers female (about 15% are now); agriculture research institutions have incorporated gender sensitivity into on-farm trials evaluation criteria; and all agricultural statistics are expectedto be disaggregated by gender over time. The Health Sector Recovery project supported the construction o f rural health clinics, which are the principal source o f maternal and chdd health care inMozambique, and maternal and child health were explicitly monitored during project implementation; the project also supported the training o f maternal and child healthnurses under its $14 millionHumanResource Development component. The Education project supports adult literacy programs that enroll mostly women as well as water and sanitation improvements that disproportionately impact girls' enrolment and retention, and the Higher Educationproject requires each public university to establish a target for female enrolment and the provincial scholarship scheme has a preference for supporting qualified female high school graduates. Inaddition, the Roads projects, throughANE's Social Unit,has developed a three-year plan to maximize the employment o f women inthe road sector, enhance their technical slulls, and promote female participation inANE; from zero female road workers several years ago, there are now over 5,500 ina workforce o f about 35,300, or about 16%, while female employment within ANE has risen to 47 o f 221, or 21%. Evenprojects where gender issues are not obvious take gender into account intheir preparation and implementation: for example, indeveloping a rural telecommunications and access strategy, the experiences o f women entrepreneurs operating public telephones or Internet centers inrural areas (such as the "Grameen Phone" experience) are being explored for potential replication; inaddition female use patterns will be explicitly monitored. While there is still a long way to go to achieve gender equality in Mozambiaue. mogress i s being made. with assistance from the Bank and other donors. 61. Ongoing activities: The education sector is already receiving substantial IDA assistance through the basic Education and Higher Education projects, which aim to strengthen the entire system by improving access and completion rates (especially for females) as well as the quality andrelevance o f student learning. The PRSCs will support some o f the policy and institutional reforms required to achieve these goals and the PERs will support analytical work to determine the sector-specific and socio-economic reasons underlying low completion rates. IDA'SHealthproject recently closed, but financial and analytical support to the sector will continue. Critical policy issues (budget execution, decentralization, and civil service reform) will be discussed and response measures proposed through the country status report (FY04), with support for these measures to be providedthrough the PRSC; the report will also review the new policy directions and the reasons for the apparently poor response o fhealth outcomes to inputs, including especially the user fee arrangements and the 2001 beneficiary assessment. 62. To improve health outcomes, substantial Bank supervisory resources will be deployed to ensure a rapid and sustained start to the HIV/AIDS project. Inaddition, IDA through NWDP 1and 2 will continue to support the policy and institutional reforms needed to improve public expenditure inrural and urbanwater supply to meet the PARPAtargets for 2005 andthe longer-term water MDG; bothprojects will be extended pending a transferal, inthe case o f rural water, o f support to the PRSC. Pillar 3: Building capacity and accountability 63. Objectives,outcomesand benchmarks: Under Pillar 3, the Bank aims to help the Government to improve public expenditure management and contain corruption. Progress will be demonstratedbyprogressively meeting more benchmarks among the 15 HIPC - 35 - poverty-related expenditure tracking indicators (of which five are already met), with the Table lo), The Bank will also aim to strengthen the rule o f law, including systems focus initially on improvingbudget comprehensiveness, classification andreporting (see supporting contract enforcement, and to enhance the Government's M&Ecapacity. Budget management Benchmarkdescription Mozambiquestatus 64. Newfinancing Most o fthe PRSC's core activities will help to build capacity andimprove expenditure accountability, includingthe capacity to formulate, execute and report the budget; strengthen linkages between outcomes, activities, and resource transfers; enhance internal and external audit; and professionalize public procurement. Complementary investment projects will include the second phase o f the Public Sector Reform APL (FY07); a Legal Sector Capacity Buildingproject which will support legal training, court system reform, andM o J reorganization ina manner complementary to the - 36 - DANIDAdemocracy program;I6 as well as a Financial Sector Capacity Buildingproject aiming to improve the soundness, efficiency, reach and depth o f the financial system, thereby helping entrepreneurs to acquire the capital they need to finance new or expanding businesses. These small capacity-building projects respond to the concerns o f Government and donors as well as thejoint IDA-IMFFinancial Sector Assessment completed inmid-2003, and they constitute a key response to the banking sector troubles. Inaddition, they will help the Government to improve its CPIA rating for the financial sector (one o f two indicators where Mozambique scores below the regional average). 65. New AAA: The Bank will also complete new AAA under this pillar. A Legal and Judicial Assessment, CPAR and PER are complete or nearing completion, and inaddition expenditure-tracking exercises are planned or underway inthe roads, water, health, education, and agriculture sectors, inclose coordination with other donors involvedin developing or supporting SWAPSinthese sectors. After the PRSC is initiated, IDA will begin to undertake annual PERs to determine trends and issues made evident by the budget outtums, and to help devise appropriate responses. An Institutional Governance Review (FY05) will help identify administrative barriers to frontline service delivery and will also publishthe results o f a series o fplannednational corruption surveys (the . baseline survey will soon begin), with action plans to be supported by several IDA projects. InFY07, the poverty and social impact o fpay reformwill also be assessed. 66. Ongoing activities: The PARPAhas begun a process o f enabling participation o f the poor ingovernment planning; improvingpolicy coordination and M&E; increasing accountability for public expenditures; improving civil-servant pay and skill levels (now very poor even by African standards); decentralizing service delivery to local authorities; and addressing corruption. The Bank's portfolio is helping to deepen this process. At the central level, the Public Sector Reformproject17 i s initiatinga process o f restructuring government for improved service delivery by: improvingexpenditure management and accounting systems; reengineering service-delivery systems to be more effective; and training staff to operate these systems andmanage change." Inparallel, the Municipal Development andthe Decentralized Planningproject (the latter before the Board with this CAS) will develop the capacity o f local authorities to identify, appraise and implement small-scale infrastructure projects using grant resources to "learn by doing". More particularly, the Decentralized Planningproject will scale-up a Dutch/ UNCDF pilot to as many as 49 districts inthe four central provinces o f Manica, Sofala, Tete, and Zambezia, with a view, over time, to harmonizing the competing systems that donors now deploy. Inaddition, the ongoing Education, HigherEducation, andPROAGRIprojects are all continuing to build capacity to deliver services on the front-line. l6An IDFgrant may also support the Maputo City Court, effectively Mozambique's commercial court. " firstphaseof The this APL was approved inFY03 andthe second phase is expectedto begininFY07. Inaddition, PSRis supporting the achievement ofseveral "quick wins" that are important to business development: three have been achieved to date (reducing land registration time from three years to 90 days (once all documentation is inplace); developing a "one-stop shop" for business registrationinMaputo; and issuingvisas at the border) and three others are expectednext year (simplifyingpublic sector recruitment; improving the pensions payments process; and simplifying hospital administrative processes). - 37 - 67. IDA will also continue to buildGovernment capacity to addressthe numerous regulatory issues that private participationininfrastructure entails. Traditionally, the close relationshipbetween Government departments and state-owned enterprises has meant that policy-making, regulationand operations have been embodied ina single institutional process, but to enableprivateparticipationto succeed, these functions have to be unbundledbeforeprivatizationoccurs, by designingand implementingregulations and competitionpolicies; establishing, strengtheningand harmonizingthe regulatory and supervisory bodies; and training regulatory staff. The Bank has been supporting this effort inthe water, roads, railways, telecommunications, electricity and air transportation sectors (for example, IDA has helpedto establish and staff the NationalRoadAuthority, the RoadFund, and CFM's Commercial and Safety InspectionUnit; to restructure the Ministry o f Transport and upgrade staff skills; to provide technical assistance to DNA on negotiatinginternationalriver rights and completing a flood risk analysis; and to provide support to the water investment management company (FIPAG) andregulator (CRA). 68. This CAS is consistent with the PARPA priorities andwith the Government's priority actions for 2003-2006: o f 63 priority PAF actions and indicators, as identifiedby the Government inlate September 2003,48 (or 76%) are includedinthe CAS results framework. Hence, Government commitment i s high. Yet a number o f institutional weaknesses may impede implementation, including deficient rules; weak linkages between M&E, planningand budgeting, both within ministries and betweensectoral ministries andthe MPF; and a weak intergovernmental transfer system that will constitute an obstacle to decentralization. Inaddition, public sector capacity remains a large constraint: government officials have limitededucation; remuneration i s not competitive with theprivate sector except at very senior levels; and consequently most ministries are runbya few capable peoplewho needto do everything. A cultureofservice and accountability i s alsojust beginningto be established inMozambique, so government responsiveness to citizen requests remains poor. Finally, corruption i s a growing concem, which requires an aggressive response (see page 12, Box 4). 69. All ofthese concems haveimpacteddesign ofthe CAS. The PRSCs will frontally and systematically addressmany systemic and institutionalweaknesses; the emphasis on private sector participation ininfrastructure i s intendedto help save limited public-sector capacity; most sector investmentprojects include capacity-building activities; and the program overall includes several projects that explicitly support capacity-building inthe key areas o fpublic sector reform, decentralization, and improved public financial management. Lending Scenarios 70. IDA allocation and use of grant resources: Inthe base case, financing over the CAS periodwould total about $560 millionover four years. Credit and grant amounts in Table 9 are nominal; final amounts will be adjusted according to Mozambique's actual allocation, its absorptive capacity, the availability o f grant funds from other donors, and the pace o f reforms. Mozambique received part o f its IDA allocation inthe form o f grants duringFY03-04 and this was hlly allocated to the HIV/AIDS,Public Sector - 38 - Reform, and Decentralized Planningand Finance projects, given their direct impact on pro-poor service delivery. 71. Thebase case scenario: Inthe base case, real GDP growthi s expected to grow at 7% per annum, or about the average growth experienced since 1987. Growth will be drivenby a substantialrise ininvestment (primarily foreign). Exports o f goods and services, excluding large projects, are expectedto grow around 8% percent per annumon average (11%including large projects), and the NPV o f debt-to-export ratio is projected to fall gradually to less than 50% by 2020, well below the 150% sustainability target. 72. InFY04, Bank activities would focus oneffectively launchingthe Public Sector Reform, HIV/AIDS and Decentralized Planning projects, to initiate central government restructuring, selected decentralization, andkey HIV prevention activities. It would also focus on expanding IDA support for public-private participation ininfrastructure inclose cooperation with IFC andMIGA; disseminating analytical work on the investment climate and legal andjudicial reform; and agreeing with the Government and other partners o n the key public expenditure management and service delivery actions that need to be taken inthe PARPA priority sectors, based on SWAP experience and the findings o f the CPAR, CFAA andPERs. This would enable the Government to articulate a medium- term action plan aiming to strengthenthe fiduciary framework, improve the investment climate, and build capacity and accountability with the support o f a PRSC series, to be initiated in2004. Following national elections, the Bank in2005 would engage the new Government indialogue on its growth andpoverty reduction strategy, backed by an institutional governance review drawing on the corruption surveys and the first ina series o f annual PERs that will monitor PRSC implementation and inform efforts to update the PAFmatrix andPRSC program. The PRSC would continue to support improvedpublic expenditure management and also begin financing basic education and the agriculture sector. At the same time, buildingon AAA on labor markets, a Technical and Vocational Education project would be prepared to help address the critical manpower needs in Mozambique and capacity-building projects focused on the legal and financial sectors would begin implementation. InFY06, a new CEM (drawing on data from the new household survey and focused on growth) will help the new government to reevaluate Mozambique's development challenges and its sources o f growth. Provided that expenditure management reforms have progressed satisfactorily, a thirdPRSC operation would be delivered inFY06, covering education, agriculture and also health, and the secondphase o f the Roads and Bridges APL, focused on secondary and tertiary roads, will be initiated. InFY07, the PRSC maybe expanded again to include ruralwater, and the second phase o f the Public Sector Reform APL will also be initiated. 73. Indicatorsfor the Base Case. The indicators for the base case will be monitored on an ongoing basis and will include: 0 Satisfactory implementation o f the macroeconomic program, as evidenced (for example) by adherence to a Fund-supported PRGF arrangement; 0 Satisfactory implementation o f the PARPA and the priority actions incorporated into the PAF matrix, as demonstrated inthe annual PARPA Progress Reports; - 39 - Satisfactory implementationof the nationalprogramto fight HIV/AIDS, as evidenced by evaluations ofimplementationofthe (updated) National Strategic Planandthe M o H Strategic Plan; and Satisfactory portfolio performance, including a disbursementratio o f 16%to 20%, less than 20% problem projects, and 100%proactivity. Box 12: The IMF andMozambique Mozambique has had four Fund-supported programs since 1987. The IMFconcluded the fifth and final review o f its most recent program, a PRGF arrangement, inJune 2003 and, inline with new guidelines for prolongedusers o f Fundresources, staff are now preparing an ex-post assessmento f progress under this and previous programs. Performance since 1987 has been strong, as the country achieved macroeconomic stability and completed key structural reforms, yet challenges remain. To help address the unfinishedagenda, including inparticular inmatters that fall into the Fund's core competencies (fiscal consolidation, financial sector refonn, and monetary and exchange rate management), the Government has requested a successor Fundprogram. This will also help other donors, as they continue to rely on the Fundto assess macroeconomic performance. A new program, if approved, may be a "low-access" PRGF arrangement, which would offer Mozambique Fundresources at levels below Mozambique's quota. Inlight o f the Government's request for a successor program, and inthe context o fthe fifth review o fthe most recent PRGF arrangement, Fundstaff inearly 2003 reached an understanding with the Government on quarterly indicative targets to monitor performance during the remainder o f 2003. Inaddition, Fundstaff have initiated discussions on a macroeconomic framework for 2004-06 and pending structural reforms (including actions and a preliminary timetable) that could be supported by a possible successor arrangement. While a clear timeline i s difficult to articulate at this point, it is generally believed that a new PRGF arrangement will be presentedto the Fund's Boardbymid-2004. 74. The high case scenario: The highcase would result principally from an increase inabsorptive capacity, whichwould inturnresult from significantprogress inreforming public administration, strengtheningpublic andprivate sector governance, and expanding skills and knowledge. Under the highcase scenario, economic growth would exceed 7% per annum for 2004 andbeyond, due to timely implementationo fneededreforms as well as increased investor confidence andprivate investment. As a result, the agricultural, manufacturing, and tourism sectors would continue to expand, and exports would grow more quickly, particularly outside the large-scale projects. The Government can realize a highcase through acceleratedimprovements inpublic expendituremanagement and the implementation o f key structural and social policies, as evidenced by: Complete divestiture o fthe Government's remainingstakes inthe banking system, thereby facilitating a substantial reduction inbankingspreads andlendingrates; Accelerated implementationof public sector reform (including implementation o f six key "quick wins", as verified through service delivery surveys); Accelerated implementationo f legal andjudicial reform (including passage o f a modern Commercial Code, liberalizationo f labor legislation, andmore timely resolution o f court cases (including especially commercial cases)); A substantial reductioninthe formal cost andtime requiredto start up abusiness; Significantly improvedmarketability o f land title; The allocation of landuse rights andnatural resource concessions ina transparent and competitive manner leadingto optimum resource use; and - 40 - 0 Maintenance o f portfolio performance at less than 10%problemprojects, a disbursement ratio o f more than 20%, andproactivity at 100%. 75. Ifthesemeasures were completedandthebase caseindicators were maintained- an ambitious but achievable goal-lending could be increased to as much as $180 million per annum, or 30% per annum more than the base case. As much as halfo f the additional financing o f about $40 millionper annum would be allocated to the PRSCs, with the remainder allocated to large-scale infrastructure lending(for example, an expanded Roads and Bridges 2). N e w lending would also be considered for the power sector, where Mozambique's growth potential remains very high. 76. The low case scenario: By contrast, significant slippage inimplementing any o f the core reforms would put Mozambique inthe low case. Triggers for the low case include: 0 Significant reversals ineconomic policies, especially related to macroeconomic management, trade and real sector liberalization, leading to a more closed and centrally-controlled economic environment; 0 Significant deviation from poverty-reducing policies outlined inthe PARPA (including reductions inpro-poor spending percentages); 0 Civil strife or governance practices that cause external development partners to reduce their level of support for an extended period; or 0 Significant deterioration inportfolio Performance (with problemprojects greater than 20% and a disbursement ratio less than 16% for an extended periodo f time). 77. Whatever the cause, the low case would probably involve recession, increasing and ultimately highinflation, decreased investor confidence, and a pronounced and extended decline inexternal assistance. This intime would result inreal declines in social spending and a reversal inprogress towards the MDGs. Under this scenario, which i s believed to be unlikely, IDA support inthe form o f programmatic PRSC lending would cease, and the administrative savings generated from limitingthe preparation o f new financing would be allocated to additional AAA to strengthen the policy dialogue, assess the Government's commitment to its poverty reduction strategy, and advise it on improving economic management. The precise nature and scope o f the additional AAA would depend on the reasons for Mozambique's slippage into the low case, though the PERs and the Institutional Governance Review would remain important andbe continued. 78. Mid-term review: At the end o f FY05, a CAS Progress Report will be prepared and discussed with the new Government and the Board, inter alia to provide a basis for makingmid-course corrections. It is likely that the AAA agenda will be revised at that time, based on the priorities o f the new government and key issues that needto be addressed at that juncture. -41 - RESULTS-BASEDMONITORINGAND EVALUATION 79. This results-based CAS seeks clearly to indicate intended outcomes o f the Bank's strategy, and to allow subsequent evaluation o fthat strategy. The results framework (see Table 7 and Annex 1) identifies: (i) core country outcomes related to long-term national development goals as articulated inthe PARPA; (ii) associated intermediate outcomes (i.e. benchmarks) that IDA can directly help to realize; and (iii) the mix o f Bank products and services that best contributes to these outcomes. An integral part o f the strategy shift toward a results-based CAS is the strengthening o f the CAS M&E architecture, which will serve as the basis for self-assessment inthe CAS Progress Report to bepreparedin FY05 (for mid-course correction) and CAS Completion Report to bepreparedinFY07 (for ex-post learning). Results o f these assessments will feed into the next CAS cycle. 80. Since Bank activities are aligned with national development goals, systems to monitor progress also need to be aligned. The CAS results framework is therefore linked to the Government's PARPAmonitoringmatrix andwill use the same data collection mechanisms. The need to improve M&Eo f the World Bank's existing portfolio was identified duringthe 2003 CPPR and i s part o f the CPPR Action Plan. 81. The Government i s committed to developing a results-orientedpublic service which is accountable to citizens. The systems and the culture necessary to support this objective are not yet inplace. Policies and resource allocations need to be informedby a sustainable M&E system, which complements the budget system, humanresource management, and auditing functions, as a public sector management tool. 82. Mozambique has limited capacity to produce reliable and regular data on many key indicators, including poverty and MDGindicators. It i s important to build sustainable capacity to collect data and report on core indicators periodically. This will involve scaling-up activities to strengthen national statistical capacity, particularly in PARPApriority sectors, to complement support already beingprovidedbybilateral donor partners, notably the G11 and DANIDA. 83. The availability and quality o f administrative data-particularly expenditure data-is poor, and informationon the link between expenditures and programs, targets, outputs and outcomes i s generally not available. Moreover, there is little demand for such information within Government; the demand comes primarily from donors and civil society. Critical skills are lacking in(for example) policy analysis and evaluation and in- depth poverty analysis. Concerted and sustained efforts are neededto: (i) emphasize the importance, relevance and benefits o f an effective M&E system; (ii) establish the foundational elements needed to develop a results-based orientation inthe public sector; and (iii)explore ways to generate internal demand. 84. Based on a rapid assessment undertaken by Bank staff inM a y 2003, action areas include: (i) improving the institutionalframework by promoting a culture o f accountability and an incentives system to support it; (ii) strengthening central and sectoral ministry information systems; (iii) strengthening M&E skills for clearer goal- - 42 - setting within the planningprocess, improvedproject andprogrammanagement, financial management, policy analysis, in-depthpoverty analysis, and performance auditing (here capacity needs to bebuilt bothwithin Government, at the central, sectoral, provincial levels, and within civil society); and finally (iv) improving donor coordination. A more thorough review and extensive consultation will be neededto identifypriority issues and an appropriate sequence for addressing them. 85. The WorldBank and other donors are already engagedinstrengtheningM&E capacity, particularly through supporting public sector reform andthe development of an integrated financial management information system (SISTAFE). Discussions are underway regardinghow the Bank mightbest support the Government inrapidly developing and implementinga prioritizedM&E enhancement plan, to complement the support o f other donor partners, and these discussions will be continuedinthe context o f preparation o fthe first PRSC. Possible fundingmechanisms include PRSP Trust Funds, an IDF grant or a Statistical Capacity APL (STATCAP). See Annex 6 for more details. MANAGINGRISKS 86. The Bank's program faces two types ofrisks which the Country Teamneeds to monitor andmanage over the next few years: country risks andrisks pertainingto Bank performance. The country risks are related to domestic political developments, regional and internationalpolitical and economic developments, domestic limitations on absorptive capacity, and the expected impact o f the HIV/AIDS epidemic: 0 Local elections will take place inNovember 2003 andnational elections inlate 2004. Uncertaintyover their outcome could lead the Government to lose focus and fail to implementneededreforms; contentionabout the reported results may also leadto a period o f instability, possiblymarredby violence. Whatever party wins, the new Government will also needtime to learnto govern, and there i s always the risk that it will initiate an inappropriate shift inpolicy direction. The Government's commitment to free and fair elections (achieved inall previous elections) as well as its efforts to engage society inarticulating a nationalvision through the Agenda 2025 exercise andmonitoring PAFWA implementationthrough the Poverty Observatory will helpto mitigate some o fthese risks. Inaddition, the Bank will try to mitigate them by actively engaging the keypoliticalparties prior to elections onthe main development challenges facing Mozambique; preparinga CAS Progress Report (late FY05) that will be discussed with the Government (and the Board); and preparinga CEM inFY06 on the challenge o f sustainable broad-based growth. 0 An extended global slowdown, commodity price fluctuations, international agricultural trade barriers, regionalpolitical and economic developments (particularly inSouthAfr-ica andZimbabwe), andexchangerate andforeign capitalflow fluctuations, could each impede growth andmake it difficult for the Government to remain engaged inreform. To help mitigate these risks, the Bank will work closely with the Fundandlike-minded donors to help the Government to maintain macroeconomic stability; it will also address some o f the larger geopolitical issues throughout its policy dialogue at senior levels. - 43 - Due to its geographical location, Mozambique is prone to natural disasters such as floods and droughts, which limit growth, drain public resources, preoccupy Govem- ment with short-term reliefmeasures, and reduce incomes and welfare. The Bank will help to address these risks through AAA on regional water resource management focused on disaster prevention and through strengthening the social safety net (the Decentralized Planningand Finance Project will provide a vehicle for income transfers as needed inresponse to natural disasters). Inaddition, new infrastructure projects will be provided with some unallocated funds to enable the IDAportfolio to be restructured rapidly to respond to disaster-induced exigencies as they arise. Mozambique's limitedhuman and institutional capacity could undermine CAS implementation. Inparticular, inadequate fiduciary controls and a failure to strengthen public financial accountability could result inincreasedcorruption, which would undermine Government credibility and private-sector confidence and possibly prompt development partners to withhold support. To mitigate this risk the Bank i s working closely with the Government and other donors to improve the fiduciary framework through its AAA, backedby the PRSCs, support to public sector reform, andextensive capacity-building at national and sub-national levels o f government. The devastating effects o f the HIV/AIDS epidemic threatens Mozambique's growth potential inmany ways. Its adverse impact on civil service capacity and labor productivity i s already obvious. Failure o f leadership to bringabout behavioural change will have an adverse effect on PARPA and CAS implementation. The Bank and other partners are attempting to mitigate this risk by helping the Government to strengthen the National AIDS Secretariat and to finance appropriate HIV/AIDS prevention and care programs through the Bank-supported Multisectoral AIDS Program, the Global Fund, the Clinton Foundation and other sources which channel resources to front-line implementers with experience infighting HIV/AIDS. 87. There are also two risks that are institutional risks for the Bank and that the Country Team i s monitoring closely: Mozambique is heavily dependent on external aid made available by a large number o f donors, o f which the Bank i s only one. Inadequate donor coordination could lead to duplicative efforts, multiple parallel structures and contradictory policy advice which would erode already-weak Government capacity. To mitigate this risk, the Bank is working closely with other donors, including inparticular the G11, to harmonize policies and processes through SWAPSand the development o f a common set o f indicators goveming the provision o f budget support. 0 M&Esystems are very weak inMozambique, makingit difficult to track the use o f resources and progress inprogram implementation. To address this issue, the Bank i s working closely with the IMF and several bilateral donors to support the implementation o f SISTAFE and the Poverty Observatory, which is institutionalising broader participation inthe monitoring o f PARPA implementation. - 44 - CONCLUSION 88. Mozambique is a poor country which has real potential for growth as well as a Government that has demonstratedcommitment to poverty reduction, manifestedby a sound reform program and, most recently, its PARPAProgress Report. Preliminary data indicate that the country's potential, coupledwith its commitment andprograms, are beginningto yield results. Yet there are daunting challenges and risks to be confronted if Mozambique's full potential i s to be realized. The Bank has played an important role in supporting Mozambique's progress since the 1992 Peace Accord. Selecting the right development constraints to address at the right time, inan environment o f significant commitment but limitedcapacity, has been an important contributor to the success o f the Government and o f the World Bank Group inMozambique. This CAS proposes that the Bank, with some shifts in focus, continue its strong support to Mozambique over the next four years. Improvingthe investment climate, expanding service delivery, and building capacity and accountability are all part o f the long-term agenda for poverty reduction in Mozambique and over time are likely to continue to contribute to Mozambique's growing success. James D.Wolfensohn President By: Shengman Zhang Peter L.Woicke Motomichi Ikawa Washington, D.C. October 20,2003 - 45 - ANNEXES Annex 1: CAS Results Framework.................................................................................................. 47 Annex 2: CAS Completion Report ................................................................................................... 52 Annex 3: The PARPA andthe MillenniumDevelopment Goals .......................................... 83 Annex 4: A medium-term growthstrategy for Mozambique................................................ 86 Annex 5: Private sector development strategy ................................................................................. 89 Annex 6: Monitoring and evaluation ............................................................................................... 101 Annex 7: Debt sustainability, IDA support and the H P C Initiative................................................ 106 Annex A2: At-a-Glance .................................................................................................................... 109 Annex B2: Bank portfolio performance and management ................................................................. 111 Annex B3: IBRD/IDAprogram summary .............................................................................. 112 Annex B3: IFC and MIGA Program....................................................................................... 113 Annex B4: Summary of non-lending services ................................................................................... 114 Annex B5: Social indicators............................................................................................................... 115 Annex B6: Key exposure indicators................................................................................................... 116 Annex B7: Key economic indicators.................................................................................................. 117 Annex B8: Operations portfolio............................................................................................. 120 Annex B8: IFC Portfolio ..................................................................................................................... 121 Annex B10:Summary o f development priorities.,............................................................................... 122 46 I l l I I I I I I 3 0 x cr) 9 A I I u s EE ; I I I I I I l I I 8 Y 0 VI r I I I W I r-r 0 v) v) rn e, I I Annex 2 MozambiqueCAS FY01-03 CompletionReport' 1. This CAS Completion Report (CASCR) aims to evaluate the effectiveness o f the current Bank CAS for Mozambique (Report No. 20521-MOZYdated June 14,2000). The findings o f this Report have informedthe new CAS. This CASCR i s based on a self- assessment o f the Country Team as well as an analysis o f the financing and non-financing programs, including AAA ( reviewed ina country-specific QAGretrospective), Project Status Reports, and Implementation Completion Reports completed duringthe CAS period. Since the June 2000 CAS, OED completed four I C R reviews and one Project Performance Assessment, but there has beenno Progress Report and no Country Assistance Evaluation (the last Country Assistance Review was completed in 1998). 2. Between July 2000 and June 2003, Mozambique maintained a high economic growth rate, despite a sharp but temporary drop following the 2000 floods. Nonetheless, Mozambique's rank inthe UnitedNations Human Development Index slipped from 168 out o f 174 countries to 170 out o f 175 countries, mainly due to a decrease inlife expectancy resulting from AIDS-related mortality, which offset an increase inGDP per capita and the gross enrolment ratio. Poverty remains high, although preliminary studies indicate that incomes have increased and the overall poverty headcount has decreased. In the intervening period, HIV prevalence was reassessed and the rate adjusted downward, from 17% to 15%, although the overall trend remains upward and some provinces (Tete, Sofala and Manica) have reported levels o f 21% among adults. 3. The conclusion o fthis CASCRis,thatthe Bank's CAS was (and is) relevant to the longer-term development goals o f Mozambique and that many o f the CAS objectives were achieved (sometimes with delay), although some were not achieved. Inparticular, over the CAS period, the Bank helped the Government to: (i) articulate a more coherent, comprehensive, and results-oriented poverty reduction strategy; (ii) improve transparency andaccountability inpublic expenditure management; (ii) the provisiono fkey improve infrastructure services; (iv) expand access to social services o f a reasonable quality, thereby helpingto improve social indicators; and (v) improve its capacity for emergency response. At the same time, the Bank's strategy was less clear and its achievements more limited inseveral areas. Inparticular: (i) capacity-building assistance to the central bank failed to prevent the banking sector difficulties of 2000-2001 or to address structural weaknesses inthe financial sector, which came to occupy center stage during the CAS period; (ii) advice and activities concerning agriculture and rural development were inadequate to address the key issues inthese areas (e.g. rural finance and land titling were relatively neglected) and a planned rural development strategy was significantly delayed; and (iii), frequent Bank dialogue with senior officials about the needto ease despite regulatory and administrative constraints to business to improve growth and poverty reduction, many remain. 'ThisAnnex was prepared by PaolaRidolfi. 52 4. This Report also finds that, where the Bank was successful, the outcomes were achieved through a stronger focus on improving the impact o f its program through decentralization o f the Country Director to Maputo, where this involved: (i) a strengthenedpartnership within the World Bank Group and betweenthe Bank Group and the Government; (ii) expanded outreach andpublic informationactivities, particularlyin- country; and (iii) enhanceddonor coordination, focusing on partners' comparative advantages, particularly through the SWAps and the PAF matrix discussions involving the G11. Stability inthe political environment during CAS implementation also contributedto attaining the results. A. Mozambique's Longer-TermStrategic Goals 5. The June 2000 CAS was developed duringthe time that the Government formulated a new Five-Year Program (2000-2004) and also prepared an Action Plan for the Reductiono f Absolute Poverty (PARPA) as part o f its interim PRSP. This interim document was subsequentlydeveloped into the PARPA 2001-2005 (the "PARPA"). The Council o f Ministers approved the PARPA inApril 2001, ten months after the CAS was discussed by the Board, and the Bank and FundBoards endorsed it as Mozambique's first full PRSP inAugust 2001. ThePARPA'spublic action strategy emphasizes economic growth, public investment inhumancapital and productive infrastructure, and institutional reformto improve the environment for private investment. Growth i s expected to come from large-scale capital-intensive projects financed by private foreign capital; productivity and value-added gains inagriculture and manufacturing; and a general expansion ininternaltrade, transport and services. To implement this strategy, the PARPA, inline with its poverty diagnosis, identifies six priority areas for action: health, education, infrastructure (roads, energy and water), agriculture andrural development, governance, and macroeconomic and financial policies. The PARPA also identifies actionable measureswithin eachpriority area and establishes targets and milestones inan operational matrix. 6. The strategy set out inthe PARPA i s consistent with the strategy that was previously set out inthe Five Year Program and the PARPA 2000-2004. Bank and Fund staff intheir August 2001 Joint StaffAssessment found that, by comparison to previous poverty reduction strategies, the PARPA increased country ownership; improved prioritization; includedclearer monitorable targets; and improvedthe integration o f policies, reforms and sectoral programs. They also identifieda needfor further development of the poverty analysis; o f the prioritization, sequencing and implement- ation o fthe policy actions identified; and o f the participatoryprocess which ledto the strategy. Inshort, the PARPA was more robust than the Government's previouspoverty strategies, but it didnot change their overall analysis or policy direction. B. CAS Objectives 7. Theprimary goal o f the Government o fMozambique is to achieve apermanent reductioninpoverty through sustained broad-based growth; and this i s also the goal o f the CAS. The Bank's CAS explicitly aligned itselfwith the overall goals o f the Five 53 Year Program and the emerging PARPA2000-2004. The CAS pillars2 and the 12more specific development objectives specified inthe program matrix explicitly reflect the structure, overall goals and sub-goals o f the Government's strategic documents, although the CAS, inaccordance with the Bank's mandate, does not support political governance or Government efforts to maintain peace, ensure public safety, or protect human rights. 8. Withinthis framework, the first CAS objective was to increase economic opportunities throughprivate sector-led growth, where this includedpromotingrural development and agriculture; strengthening the financial sector; decreasing the regulatory and administrative constraints on businesses; increasing efficiency inthe provisiono f infrastructure services (particularly electricity and transportation); and ensuring sound environmental management. The second objective was to improve governance and empowerment, where this included reforming the public sector and improvingthe rule o f law. Finally, the third objective was to increase human capabilities, where this included preventing andreducing HIV/AIDS; improving health and education; and ensuring social protection. The CAS also sought to strengthen development partnerships. 9. The program matrix for the June 2000 CAS included 19 Bank performance indicators, chosen from among 47 Government performance indicators that were also listed (see Table 1). These indicators inretrospect didnot constitute an appropriate set o f indicators o f Bank performance. First, the matrix explicitly stated that these indicators would be revised after the PARPA was finalized, but this was not formally accomplished untilthe recent PAFmatrix exercise was completed, whenitwas too late to track the Bank's mid-term performance. Second, the Bank indicators were concentrated inan unrepresentative subset o f (primarily sectoral) Bank activities (education had four; agriculture, health, and roads three each; andHIV/AIDS, social protection, railways, electricity, urbanwater, and water resource management one each), and the second CAS pillar (governance) hadno Bankperformance indicators at all. 10. Since the Bank Performance indicators inthe June 2000 CAS do not capture the fullrange ofthe Bank's activities andoutcomes, itisworth reflecting onthe Bank's FYO1-03 program to extrapolate overall outcomes that the Bank helped to achieve, even though the Bank didnot explicitly target these outcomes, as such, inthe CAS itself. An analysis o f Bank performance implementing the program is included in Section Dbelow, while Appendix 1 rovides a detailed description o f the financing and non-financing instruments (ESW and advisory services) andtheir relevance to the CAS objectives. P C. CAS Outcomes 11. Because the CAS was explicitly aligned with the Government's public action strategy and the Bank is only one o f a large number o f external partners whose activities The Five-Year Programreferredto these pillars as: (i) economic development, (ii) organization o f the state, and (iii) social development, but the different labels do not reflect differences inoverall content. The requirements for formal ESW were revisedduring FYO1, and products originally designed as formal ESWswere converted into studies and assessmentsinline with the revisions. As a result there are some discrepancies between the planned and actual non-financing programs. See Appendix 2 to this Annex. 54 BankPerformanceIndicators Status A. Increasing economic ouuortunitv Roads Meet annual targets on routine and periodic road 1,800km roads rehabilitated, 500km periodically maintenance (targets to be determined) maintained, 11,OOOkm routinely maintained Establish Road Fundindependent o f ANE Not met, but legal documents finalized Separate financing and allocation functions (under Road Partly met; financing function o f Road Fundhas Fund) from contract management of supervision of been separated construction and maintenance Railways Traffic from neighboring countries to exceed 1Ommt Not met; traffic 5.6mmt (ports) and 3.3m mt (ports) and 7m mt (railways) by 2002 (railways) in2002 Energy Design and implement framework for expansion o f Design completed; implementationoccurring under electricity access, including differentiated tariffs and Energy Reform project separation o f generation, transmission and distribution Water Increase access in major cities to 50% by 2004 Not met, due to floods and withdrawal o f private operator; access in major cities to reach 40% by Update National Water Policy and Water Law; formulate 2005 National Water Resources Management Strategy with O n track stakeholder participation by 2004 Agriculture Annual % increase in agricultural GDP Growth -10.3% in2000 (due to floods), 13% in Annual % increase in real value o f export crops 2001, and 7.9% in 2002 Value (current $) $67.8m in 1999, $52.7m in 2000 Annual % increase in smallholders' crop and livestock (due to floods), $64.2m in 2001, $84.7m in 2002 sales Not monitored B.Improvinggovernance and empowerment 0 N o Bank performance indicators were identified C.Increasing human capabilities - Byend2000, Bankportfolioreviewedandretrofittedto 0 HIWAIDS - Met; roads,health,educationandruralprojects include HIV/AIDS interventions where appropriate retrofitted - Reduceindexofgeographicinequalityinprovisionof 0 Health - Indicator not tracked, but overall equality improved health care services to below 2.8 (est. 3.0 in 1998) from 8.0 in 1995 to 2.0 in2001 - IncreaseproportionofhealthpostswithEssentialDrugs - Notmet; 83.5% ofhealthpostswithEssentialDrugs Programkits from 88% in 1997 to 90% Program kits in 2001. - Increase proportion o f healthposts with trained staff from- Met; 92% o f healthposts with trained staff in 2001 86% in 1997 to 90% - 0 Education Increase grade 5 pass rate from 54% to 75%; grade 7 from - Notmet, though largeimprovement; grade 5pass 37% to 60%; and grade 10 from 33% to 55% rate 64%; grade 7 60%; and grade 10 41% in2001 - Reduceaveragerepetitionratebyhalfforprimaryand - Notmet; repetitionratefellfrom26% to 24% - lower secondary education Increase E P l gross enrolment rate from 7 1% to 86% and - Met; EP1 gross enrolment rate 106% and EP2 from EP2 from 15% to 30% 33% in 2002 - Increase girls enrolment from 73% in EPl and from 18% - Met inEP2 andretentionrates at primary and secondary schools from 40% 0 Socialprotection - Completesocialsecurityreformstudy - Studyunderway 55 are aligned with the PARPA, Bank activities contributed to outcomes realized duringthe CAS period but did not achieve them alone. Many o f the outcomes achieved duringthe CAS are described inthe Government's first PARPA Progress Report, completed inearly 2003. Indiscussing this Progress Report inJune and July 2003, the Boards o f the Bank and the Fundfound that Mozambique's efforts to implement the PARPA are sufficient evidence o f its commitment to poverty reduction and that the PARPA continues to provide a credible poverty reduction framework as well as a sound basis for concessional assistance. Reflection on the Progress Report, Project Status Reports, Implementation Completion Reports, client feedback, and Country Team self-assessments indicate that the following overall outcomes were achieved: 0 A more coherent, articulated, and results-oriented poverty reduction strategy (PARPA),which isbeginningto incorporate the MDGs and coordinate donor activities around Government systems. 0 A stronger Government focus on transparency and accountability inpublic expenditure management, chiefly throughjoint PERs and project support to public sector reform and decentralization. 0 Higher-quality infrastructure services at better costs, achieved through investments supporting public works (chiefly roads) and expanding private-sector participation inthe provisiono f infrastructure services (especially inports, railways, urban water supply, and telecommunications). Greater access of the poor to social services of a reasonable quality, chiefly through projects supporting civil works and training inprimary health care, education (at the primary, secondary and tertiary levels), and rural water supply. More responsive aid modalities, shifting away from emergency response and humanitarian assistance, as well as Government accountability to the donors, towards long-tenn reconstruction and development, and greater mutual accountability between the Government and the donors and o f the Government to the people. 1. A more coherent, articulated, and results-orientedpoverty reduction strategy 12. The first and most comprehensive outcome that the Bank helped to achieve i s a stronger and more articulated poverty reduction strategy, encompassing all sectors and levels o f Government. While the CAS aimed to support the Government's poverty reduction strategy as articulated inthe PARPA, it also helped the Government to reassess its priorities; develop a more focused and effective reformprogram, that is ledby the Government; articulate more exactly the appropriate roles for the public and private sectors, particularly inthe provision o f infrastructure services; and buildpublic capacity for program implementation, includingM&E. Inaddition, the Bank helped the Government to complete the PARPA and obtain debt reliefunder the Enhanced HIPC Initiative. A key recent achievement was the joint Government-donor articulation o f a Performance Assessment Framework (PAF), which was initiated by the G11 and which involved extensive Bank assistance inpreparing a first PAF matrix o f medium-term program actions and indicators. As the matrix will be updated twice a year-just before 56 Table 2: Bank Financingand Non-FinancingProgram contributingto the CAS Outcomes Supervision Lending Analytical and AdvisoryActivities PROAGRI; PoDE; EMPSO; Fiscalmanagement Support to reachthe Enhanced HIPC Initiative Coastal and Marine and private sector completion point; support to PARPA Biodiversity; development TA; IFC formulation and monitoring, including TFCA 1 assistance to SMEs (esp. in preparation o f the PAF matrix; the Financial tourism and agribusiness) and Sector study and assessment; CEM; PEMR; Mozal; HIV/AIDS PER (volumes 1and 2); CPAR; CFAA; CPPRs (inFYOl and FY03); HIV/AIDS and growth linkages study, and support to the National HIV/AIDS Secretariat; the Investment Climate Assessment; IFC advice on regulatory issues and support to SMEs; MIGA support to CPI; and Bank Group support to the private sector conferences Health Sector EMPSO; Public Sector PEMR; PER (volumes 1 and 2); CPAR; Recovery; Reform; Municipal CFAA; CPPRs (inFYOl and FY03); PROAGRI Development; Decentralized Financial Sector study and assessment; legal Planning and Finance andjudicial assessment Railways and EMPSO; Roads and Bridges Maputo Corridor advisory services; energy Ports; Roads and 1;Communications Reform; sector reform study; I D M I F C regulatory Coastal Shipping; Energy Reform and Access framework advice (esp. for gas, electricity, NWDP1and telecommunications, air transportation and NWDP2 postal services); support to private sector conferences; Investment Climate Assessment; MIGA support to CPI Health Sector HIV/AIDS; Higher Education; Support to Education for All Fast-Track Recovery; Public Sector Reform Initiative; HIV/AIDS and growth linkages Education Sector study; support to creation o fNational AIDS Strategy Secretariat; legal andjudicial sector assessment Portfolio retrofitted Flood Emergency Response Accelerated debt reliefunder HIPC Initiative; to respond to flood preparation o f first disaster assessment; emergency, coordination o f disaster financing; HIV/AIDS HIV/AIDS crisis and growth linkages study; support to National AIDS Secretariat; disaster management advice 57 the MPF presents the budget to the National Assembly inthe last quarter o f the year and just after MPF reports on the previous year's budget outtum inFebruary-the PAF matrix also operationalizes the Government's commitment to ensuring that the PARPA i s a living document. 13. To help the Government to refine its poverty reduction strategy on a continuing basis, the Bank Group completed various analytical and advisory activities, including a CEM(prepared with the Government in2001), atwo-volume PER(the first volume in FYOl andthe secondinFY03), and an expenditure-tracking assessment inthe health sector (such assessments are also underway ineducation, agriculture, roads and water). A study o fthe impact o fHIV/AIDSon growthwas also completed. 14. Completion o f the HIV/AIDS study decisively shifted the emphasis o f the overall Government program duringthe CAS period. By bringingthe scope and consequences o f the pandemic to the forefront o f policy discussions inMozambique, the Bank helped to make the fight against HIV/AIDS a more prominent aspect o f the Government's development program. The Bank ledby example, inthat it retrofitted HIV/AIDS- fighting components into its existingportfolio. Inaddition, the Bankalong with several donors helped establish the National AIDS Secretariat, strengthen its capacity to implement the NationalAIDS Strategy, and identify the resources to do so. Most o f these activities were completed inthe course o f preparing the Bank's HIV/AIDS project, which was approved (with grant financing) inMarch 2003. 15. Bank efforts to reduce ruralpoverty have hadmixedresults. The Bank played a key role inestablishing a common funding mechanism for donor support to the Government's agriculture program, PROAGRI,4leading to some positive results. In short, a donor-driven proliferation o f projects inthe sector was substantially reduced (100 projects were reduced to less than 20); MADERwas providedwith equipment, supplies, and technical assistance; irrigation systems were repaired; decentralization o fplanning, budgeting and management to the provinces and districts was meaningfully undertaken; and some extension and veterinary services were outsourced to private providers. That said, IDA was one o f the last donors to contribute to the pool; IDA disbursements into the pool have been low (because program implementation is slow, with some teething problems still being addressed); and, most importantly, it is not clear that policy improvements or better services to farmers (particularly PROAGRIservices) explain reported gains incrop production since 2000. Outside agriculture, Bank activities inthe water, transport, and energy sector have helped to relieve ruralpoverty, though the benefits o f these activities to the ruralpopulation, and inparticular the poor, have been below expectations and some key issues (such as rural finance) have not been adequately addressed (see Appendix 1). The mechanism, which was agreed between the Government and 18 donors, including the Bank, accords with IDA procurement and financial management procedures. 58 2. A strongerfocus on soundpublic expenditure management 16. DuringCAS implementation, politicalandeconomic governance took center stage inthe overall growth andpoverty agenda. The policy dialogue indifferent sectors increasingly involved cross-sector themes o f employee incentives, procurement, financial management, monitoring and evaluation, and interministerial coordination (particularly between MPF and line ministries and among different levels o f government). The Bank helped to mainstream these issues through extensive AAA, includingthe two-volume PER, a CFAA, and a CPAR; through supporting the articulation o f apublic sector reform strategy (Bank AAA inthis area focused, inter alia, on pay reform, the policy process, andthe role o f government) which IDAis financing with its Public Sector Reform project; and through helpingto implement the deconcentration and decentralization processes. Inaddition, as part o f its preparation o f the Public Sector Reform project, IDA supported the development o f an action plan for civil service salary reform as well as the design and implementation o f a "quick wins" program, under which all ministries were required to design and implement the re-engineering o f key processes linkingthe public services to citizen^.^ 17. Decentralizationhas become an increasingly prominent part o f the Government's program. Over the CAS period, decentralized levels o f government-provinces, municipalities (autarquias), and districts-were increasingly empowered to raise taxes, provide services, and implement sector programs intheir jurisdictions. The Bank has been supporting decentralization reform since its inception and particularly after the first municipal elections in2000. Inagriculture, through PROAGRI,intra-sector budget transfers to districts increased from 40% to 60% to bringresources closer to beneficiaries, andinhealth andeducation, rural services were strengthened to reduce geographical inequalities. Inaddition, IDA's Municipal Development project has supported "learning bydoing" infive largemunicipalities, and its Decentralized Planning andFinance project i s adapting this approach to selected districts in the four central provinces. 3. Higher-quality infrastructure servicesat better costs 18. Over the past three years, Mozambiquehas continued to attract substantial foreign direct investment. The Bank Group helped to make Mozambique a better business address by supporting legal reforms enabling private sector participation inports, railways, energy, telecommunications, and air transportation. IDA's Railway and Port Restructuring project helped to concession boththe Ressano-Garcia railway line and the port o f Maputo, while a concession o f the Nacala port-railway system i s nearing financial closure; the project has also supported the restructuring o f the national railway company, Empresa Portos e Caminhos de Ferro de MoCambique (CFM). Inenergy, Bank support through the EnergyReform project is helping to separate the distribution function from the national electricity company, Electricidade de MoCambique (EdM), with a view to Three quick wins have beenachieved to date (reducing land registration time from three years to 90 days, once all documentation is inplace; developing a "one-stop shop" for business registration inMaputo; and issuing visas at the border) and three others are expected next year (simplifyingpublic sector recruitment; improving the pensions payments process; and simplifying hospital administrative processes). 59 liberalizing the distributionmarket; IDA i s also helpingto integrate Mozambique more fully into the Southem Africa PowerPoolbyplanning aMalawi-Mozambique interconnection, which IDA i s expected to finance under the new CAS. In telecommunications, with assistance fi-om IDA'SCommunications Reformproject, a new legal framework was approved to liberalizethe sector; mCel, a mobile telecommunications company, was incorporated independentlyo f TdM; andVodacom was brought into the mobile market, leadingto higher teledensity and competitive pressure on price and quality o f service. The Communications Reformproject also helpedto achieve a legal change that foresees private sector participationinthe national airline, Lineas Aereas de MoCambique (LAM). All o f these initiatives are helpingto lower the costs o f doing business inMozambique; to give the private sector a larger stake inthe Mozambicaneconomy; andto reducethe demandsmade on Govemment capacity and refocus it on core government functions. 19. The Bank also helpedto improveroadtransportation andurbanwater supply. Two IDARoads projects are supporting the rehabilitation andmaintenance o f the trunk roadnetwork, with a focus on connecting all provincial capitals, as well as reform o f key sector institutions (inparticular, the creation o f an independent road authority and Road Fund-though, as a result o f low Government commitment, the latter objectivehas not yet beenrealized). The Bank is monitoringthe impact o froadimprovement on poverty and expects greater interconnectivity (of people to markets, schools and clinics) to reduce business costs and (indirectly) to improve social indicators. Inurbanwater supply, the Bank's secondNationalWater Developmentprojecthelpedto introduce aprivate operator, Aguas de Mocambique (AdM), that, despite flood-related setbacks in2000, has increased accessby 20% inBeira and 40% inNampula; brought 90% o f water samples into compliance with Government requirements; and doubled tariffs to improve cost recovery, thereby helpingto ensure sustainability and (ultimately) reinvestment and expansion. Inaddition, the Bank has supported the operations o f the asset holder (FIPAG) andan independent regulatory agency (CRA) that it hashelpedto create. 20. With two IDNGEFprojects (Tranfrontier Conservation Areas and Coastal and Marine Biodiversity), the Bank has also helpedto develop sustainable tourism as a source o f growth, by supporting reforms aimed at ensuringsustainable environmental management. Inparticular, the Bank provideddirect support to the creation o f the Greater Limpopo National Park, a transfrontier park straddlingMozambique, South Africa and Zimbabwe; helped increase community involvement inland demarcation; and also helpedto define guidelines for private sector participationinsustainable tourism. 21. The Bank Group has also provided support to private sector development inother ways, inparticular by undertakinga second assessmentof the investment climate (allowing trend data for the period 1998 to 2002 to be developed andto informthe Govemment's evolvingprogram as well as the new CAS); helpingto create the conditions for international operators to invest inmining; promoting the development o f the Pande and Temane gas fields through IBRDand MIGA guarantees to a private investor; as well as through increased IFC exposure inbanking, tourism, paper, agribusiness and SME development, including to develop linkages between 60 Mozambican-owned businesses and the Mozal aluminum smelter. Incooperation with the IMF, the Bank also undertook extensive AAA and providedadvisory services relating to the status o f the banking sector and the constraints affecting the financial sector more generally. 4. Greater access of thepoor to social services of a reasonable quality 22. Access to and the quality o fbasic social services improved duringthe CAS period, with Bank assistance being particularly important ineducation. IDA financing supported the Government's Education Sector Support Program (ESSP)-a nascent SWAp that focuses on teacher training, school construction and rehabilitation, female enrollment, and institutional capacity-building-and it has beenthe only major donor working intertiary education (through a university-oriented Higher Education project and preparation o f a Technical and Vocational Education project). The Bank has helped to increase capacity for strategic planning and coordination around sector priorities and to design the Education for All Fast-Track Initiative. Results on the ground surpassed expectations, as gross enrolment rates for EP1 (grades 1to 5) and EP2 (grades 6 and 7) and girls enrolment at the primary and secondary levels exceeded targets, though the recent (MDG-influenced) shift to a focus on completion rates indicates that much remains to be done to ensure that enrolled children achieve literacy, numeracy and the life skills neededto be productive members o f society. The Higher Education project also started well, providing support to the design and implementation o f a new law that (inter alia) established the Ministryo f Higher Education as well as a National Instituteo f Distance Education and a Provincial Scholarship Fund; as a result, access to tertiary education improved on several dimensions (gender, geography, and income level) and graduation numbers are increasing. 23. Inthe healthsector, the CAS through itsHealthSector Recoveryproject aimed to rehabilitate key facilities, finance key equipment and supplies, support disease-related research (on malaria, hepatitis B and HIV/AIDS), improve expenditure management, and strengthen the Government's capacity for planningand for donor coordination, all with a view to improvingaccess to basic services and reducing geographical inequalities. Duringthe CAS period, the Government finalized a HealthSector Strategy Planand some key outcomes reached or remained at significantly higher levels than a 1996 baseline (e.g. IMR fell from 162 to 126 (in2000); intra-hospital MMR fell from 230 to 160 (in2002); the percentage o f health posts staffed with trained personnel rose from 70% to 92%; and the percentage o f first-level facilities stocked with drugs rose from 40% to 71%). Although most PARPA and MDGindicators inthe sector remain distant, increased Government capacity, focus and commitment are sustaining positive trends. 5. More responsiveaid modalities 24. Under the CAS, the Bank also helped to consolidate a shifi inaid modalities away from emergency response and humanitarian assistance, as well as Govemment accountability to the donors, towards long-term reconstruction and development and greater mutual accountability between the Government and the donors and o f the 61 Government to the people. The 2000 and 2001 flood emergencies were, inretrospect, a test o f Mozambique's ability to manage a crisis while still respecting institutional processes, checks and balances that hadbeenbuilt up, painstakingly, since the end o f the conflict in 1992. The Bank, byproviding timely assistance to define the extent o f the emergency, mobilize needed resources (including through IDA'SFlood Emergency Recovery project),6 and coordinate a costed and prioritized longer-term development response to the emergency, helped to ensure that Mozambique did not drift back to a development paradigm that emphasized short-term humanitarian assistance channeled principally through non-governmental channels. The experience and lessons learned from the 2000 flood on the Incomati and the Limpopo helped the Govemment to manage the 2001 floods on the Zambezi with considerably improvedhumanitarian outcomes. 25. As noted inparagraph 12, thejoint Government-donor articulation o fthe PAF constitutes a major step forward inoperationalizing the PARPA as a "living" document. Less obvious, but equally important, the PAF and its accompanying matrix (which includes a relatively selective group o f explicitly-identified priority actions and indicators) also constitute an important step inincreasing Government accountability to the people of Mozambique and the donors, and donor accountability to the Government, as the G11 and the Bank have committed to providingbudget support against the achievement of the prioritized PAFmatrix indicators. While the Government and the donors have not yet fully determined what sort o f donor "response mechanism" will be deployed inthis context, it is clear that this shift inaid modalities enacts a growing consensus among development partners around several important principles: (i) that donors should provide assistance inways that are better aligned with the beneficiary government's own development priorities; (ii) that donors should reward relatively good performers by makingaid flows more predictable and long-term; and (iii) that aid-flow predictability increasingly implies conditionality derived more directly from the beneficiary's own development program as well as increased assistance allocated to operating costs as opposed to capital investment (as progress incountries like Mozambique now depends more on funding recurrent costs, e.g. to runand staff schools and clinics, than on new civil works). D. MeasuringBank Performance 26. Bank assistance to Mozambique started in 1987, five years before the end o f the civil war. To date, Mozambique has received $2.4 billioninIDA credits through 37 investment projects and seven adjustment operations. IDA allocations have been increasing steadily since 1987, andthe sector composition has remainedrelatively consistent during this period, reflecting Government demands and the Bank's comparative advantage vis-a-vis other development partners. Total cumulative IDA The Bank's response was well-integrated and much wider than the Flood Emergency Recoveryproject alone. Inaddition: (i) the Bank, incooperation with the Government and the donor community, completed a preliminary multisectoral damage assessment within weeks o f the flooding; (ii) it approve accelerated HIPC-related debt relief to cover the totality o f debt service due during the twelve months following the floods; and (iii)retrofitted its portfolio to include emergency response components inongoing operations it (particularly inthe areas o froad transportation, health sector rehabilitation, and rural water supply). 62 commitmentsto Mozambique increased over the CAS period from $768 million in2000 to $1,094 million in2003, while the number ofprojects increased from 15 to 18 at end- FY03 (16 t ~ d a y ) . ~ 27. As detailed inAppendix 2 to this CASCR, the Bank deliveredtenprojects and one adjustment operation duringCAS implementation(through September 30,2003), with atotal new commitment o f $574 million (including $81millioninIDA grants), which exceededplanned lendingo f $455 million. Although the number o f financing operations deliveredmet base-caseexpectations, delays inproject preparation, effective- ness and implementation limited the development impact o f the portfolio. Inparticular, several large infrastructure projects experienced slow disbursementsand three projects had unsatisfactory progress ratings through much o f the CAS period (all but one project are now insatisfactory status). Inaddition, an ambitious AAA program, though it com- pletedall due diligence economic work, completed only part ofthe plannedsector work (see Box 6 o f the CAS), with some formal outputs converted to informal ones. 28. The sector composition ofthe portfolio reflectedthe CAS objectives andwere in line with Mozambique's overall development objectives. Inparticular, infrastructure represented 50% o f the portfolio (of which transportation-roads, ports andrailways- was 40% andwater and energy 10%). The social sectors represented20%, with most resources going to basic healthcare, HIV/AIDS and education. Financing to improve economic management and strengthenthe private sector as well as the financial sector absorbed 17%, while governance represented 3%. The programwas also backloaded. New IDAcommitmentsinFYOl totaled $18 million, butrose to $271million inFY02 and $201 million inFY03-a year that also includedIDA'Sfirst provision o f grant financing to Mozambique ($26 million for the Public Sector Reformproject and $55 million for the HIV/AIDSproject). 29. Implementation of the portfolio proved to be challenging. Disbursements declined sharply between 2001 and 2002 and they remainbelow the regional average, with atotal o f $630 millioninundisbursedcommitments at the endofFY03, or over half o f the total IDA allocation: this reflects inpart the fact that large infrastructureprojects typically involve civil works procurements that proceed slowly, at least initially, from commitments to disbursements. The number o fproblemprojects rose from one inFY02 to three for most o f FY03, before falling back to one (Coastal and Marine Biodiversity) in early FY04 as a result o f greater proactivity. Portfolio ratings indicate that the most common issues encountered relate to procurement, and monitoring and evaluation. In addition, a few cross-cutting constraints frequently impede implementation. These include: (i) availability andtransfer o f Government counterpart funds; (ii) the slow procurement, resultingfrom capacity as well as proceduralconstraints; (iii) low disbursement rates (due inpart to (i) (ii)); (iv) limitedM&Ecapacity. and and 30. Improvedportfolio performance inlate FY03 and early FY04 was partly the result o f two CPPRs heldin2003. The April 2003 CPPR noted that the portfolio has been 'One project, Transfrontier Conservation Areas, closed on June 30,2003, and another, Health Sector Recovery Program, closed on August 31,2003, 63 adversely affected byproblems already highlightedinthe FYOl CPPR and that many could have been addressedearlier, if sufficient resources and a stronger partnership had beeninplace. Inparticular, the portfolio suffered inFY02 from insufficient supervision resources. Moreover, the Bank's technical assistancecould only partly address the Government's demand for capacity building and advisory services, and the Government- Bank partnership gave inadequate attention to the need for real-time M&E systems to improve performance indicators and outcomes. 31. A review also shows that extensions of closing date have increasedthe age ofthe portfolio. Duringthe CAS period, four projects were extended, and their ages ranged from six to nine years. These extensions imposed a heavy burden, by diverting limited resources to continuing supervision o f projects that were already gettingto be out-of- date. Inseveral cases, extensions were granted to offset delays ineffectiveness and implementation. E. Consultationand Coordinationwith DevelopmentPartners 32. Throughout the CAS period, the Bankrecognized the importance o f strengthening the development partnership with the Government and the people o f Mozambique as well as with Mozambique's other development partners. The Bank confirmed its comparative advantage as a leading development partner inadvising the Government on keypolicy issues and a catalytic force behindmulti-donor programs indifferent sectors. Inthis process, the Bankhas increasingly sought to maximize the impact o f its interventions by focusing on greater Government ownership and donor coordination. This has involved, inter alia, stronger partnership within the Bank Group, particularly inpromoting public- private partnerships ininfrastructure (such as the IDA, IBRD, IFC and MIGA partnership inthe gas development project, IDAandMIGAsupport to the CPI, andIDAandIFC collaboration on promoting SMEs and completing the InvestmentClimate Assessment). 33. A key strategic priority ofthe Bank's program duringthe CAS periodwas to improve development effectiveness through enhanced partnerships, particularlywith other development partners, including civil society and the private sector. The Bank has helpedto rally stakeholders aroundthe PARPA and, more recently, it hasmade important contributions to the PAF, where it has worked very closely with the G11donors, as well as to PARPA monitoring through support to the Poverty Observatory and the rollingPAF matrix. Nonetheless, implementation o f the three multi-donor SWAPS(inagriculture, education and health) has been mixed. Inhealth, the effort concentrated on strengthening the policy focus and planning capacity o f the Government but didnot achieve harmonization of financing mechanisms; ineducation, the latter achievement came too late (inJanuary 2003) for IDA to participate, as its financing was by then already fully committed. By contrast, PROAGRIachieved a high degree o f donor harmonization, but implementation continues to be a large challenge, as IDA disbursementsare below expectations andresults on the groundremainlimited. 34. Complex donor harmonization discussions have also sometimes delayed Bank work. Preparation o f the Public Sector Reform and DecentralizedPlanningprojects was 64 delayed to allow sufficient time to build Government ownership o f the proposedreforms andcoordinate with other key stakeholders, including other donors. Approval o fthe first phase o f the Energy Reform APL was delayed to FY04, due to slow Government and donor agreement to the sector policy and legal and institutional arrangements for the project. 35. Inaddition, exogenous factors contributed to delayedimplementation ofthe Bank program. The 2000 flood emergency demanded an internal reallocation o f resources, particularly inthe roads and water sectors, to ensure timely reconstruction o f damaged infrastructure. Inaddition, a change inGovernment composition following the December 1999 elections required a redefinition o fpriorities inthe dialogue, which insome cases (e.g. higher education) also led to a stronger partnership. 36. Overall, the non-financing activities proposed under the June 2000 CAS were appropriate to attaining the CAS objectives. Important analytical and advisory activities were completed, especially on growth andpublic expenditure management, including a two-volume PER, a C F A A and a CPAR; these are now the bedrock o f the new CAS. Nevertheless, further work remains to be done across important areas o f policy reform and cross-sectoral advisory work, such as on the labor market, rural development, and environmental management, as highlighted under QAG's pilot assessment o f the Country Team's non-financing activities (see Box 6 o f the CAS). F. Lessons Learned 37. The following lessons have been learned from implementation o f the 2000 CAS: 0 Realism. Bank assessment o f implementation risks needs to be more realistic. Some cross-cutting constraints that hadbeen identified under the previous CAS were not appropriately addressed during the CAS period, and they became more evident with time. Inaddition, institutional and capacity constraints were not adequately considered incoordinating the pace o f reforms with program and project implementation. Duringproject preparation, the challenges o f implementing complex activities need to be more fully captured inthe risk assessment and mitigating activities need to be devised and implemented. Moreover, sufficient resources need to be devoted to maintaining a dialogue on program andproject design with project counterparts and ensuring an adequate flow o f informationon project requirements. 0 Selectivity. The Bank continues to be overextendedinMozambique and needs to work harder to be selective. The program under the June 2000 CAS provedto be too ambitious, interms o f boththe Government's ability to implement a multiplicity o f reforms and the Bank's ability to finance needed technical and advisory assistance as needed. Greater selectivity inthe portfolio will help to ensure adequate attention to project design and implementation under the new CAS. Monitoring results. Monitoring progress towards the PARPAtargets was left to the Government's monitoring processes, which were implemented inpartnership 65 with the donor community. As the CAS didnot clearly identify expectedCAS outcomes or establish a formal monitoring system at the sectoral and project level to track progress towards such outcomes, monitoringo f CAS implementation was weak. It has become evident that CAS outcomes and indicators should be explicitly aligned with the PARPA'S medium-term outcomes and indicators. This can be achieved through: (i) a more adequate choice o f instruments to address the key cross-cutting constraints; (ii)increased focus on analytical and advisory activities inimportant areas that can ensure the pro-poor impact o f Mozambique high levels o f growth; and (iii) improved focus on monitoring and evaluation duringportfolio implementation. Dialogue and coordination. Strengthening the dialogue with all stakeholders (including different levels o f government as well as civil society, the private sector, and other development partners) i s necessary to reduce the transaction costs o f interventions, both by reducing replication and by increasing ownership o f the development program. Inparticular, the policy dialogue between the Bank andthe Government needs to be reinforcedto ensure commitment aroundkey policy areas by the Ministry o f Planning and Finance as well as the relevant sector ministries. Advisory services and technical assistance can be used inthis regard, particularly inthe areas o f public financial management and financial sector reform. Shifting thefocus from inputs to results. Duringimplementation o f the June 2000 CAS, the Government paved the way to important institutional reforms. At the same time, with support from the Bank and other donors, the Government gradually shifted its focus away from inputs and processes towards actual developmental outcomes. This development is uneven across sectors and need to be supported further, particularly at the level o f the sectoral ministries. 66 Appendix 1-ProgressMade Towards the CAS Objectives 1. Progress made towards achieving the CAS objectives, as specified inthe June 2000 CAS, is summarized inthis Appendix, which reviews the key Bank activities as organized under the three CAS pillars. Overall, the Bank has substantially completed most activities and achieved most objectives set out inthe CAS, with some exceptions. (For a tabular summary o f planned and actual financing andnon-financing activities, see Appendix 2.) I. Increasing economic opportunities throughprivate-sector-led growth 2. The CAS aimed to support achievement o f the PARPA's overall goals of: reducing the poverty headcount index from 70% in 1997 to 60% by 2005 and 50% by 2010; achieving real growth o f 7% to 10%per annum (the minimumlevel o f growth required for poverty reduction); maintaining annual inflation at 5% to 7% and a fiscal deficit within limits established inthe context o f the IMF's PRGF arrangement; and achieving a sustainable level o f external debt (through reaching the EnhancedHIPC Initiative completion point). 3. Progress has been good against the indicators. As the PARPA Progress Report notes, the PARPA targets for GDP growth andthe domestic primary deficit were met, though inflationwas missed (mostly due to monetary expansion). With assistance from the Bank and the Fund, Mozambique reached the Enhanced HIPC Initiativecompletion point inSeptember 2001, thus reducing its external debt to sustainable levels. In addition, although the results o f the latest household survey will not be available until late 2003,partialandpreliminary assessments indicate a sizable reduction inpoverty. 4. Inhelpingthe Government to achievethese outcomes, the Bankprovided substantial Analytical and Advisory Activities (AAA) andtechnical assistance on public expenditure management, including a CEM, two PERs, a CFAA, and a CPAR; action is underway to implement the recommendations o f these reports. Inaddition, the Economic Management and Private Sector Operation (EMPS0)-the Bank's active adjustment operation-is supporting an assessment o f BIM's status (done); the preparation o f a strategic legal sector reform plan (done); the introduction o f private participation into LAM(advisors havebeenappointed); the inclusion inthe budget ofoff-budget revenues and donor funding (largely done); the assessment o f banking sector compliance with internationalprudential regulations (underway); an audit o f the state-owned insurance company (underway); an actuarial analysis o f the national social security agency (initiated); and preparation o f a more competitive telecommunications law (draft submitted to the National Assembly). 5. Technical assistance on the banking sector (including a banking sector study, a study o f Mozambique's compliance with the Base1Principles, and ajoint Bank-Fund Financial Sector Assessment), helped to deal with the crisis that emerged when Banco Austral (BAu) and BCM encountered difficulties in2000, though it didnot succeed in preventing high Government subventions to the sector and continued difficulties inBIM 67 (the successor to BCM). Moreover, despite a Financial Sector Capacity Buildingproject that closed inMarch 2001,central bank ability to supervise the sector remains weak, and the interest rate spread i s now near an all-time higho f 19%. 6. Strengthening theprivate sector environment and thefinancial sector: Bank AAA and technical assistance (including an Investment Climate Assessment,* support to the Investment Promotion Center, and support to the annual Private Sector Conferences) aimed to strengthen the business environment generally, and the Enterprise Development project aimed to improve enterprise competitiveness-but these efforts have met with mixed success. Joint work by IDA, IFC and MIGA has attractednumerous large-scale projects to Mozambique. Besides diversifying the export base, boosting tax revenues, and advertising that Mozambique is open for business, these projects have created positive spin-off effects such as employee training, connected infrastructure developments, and a growing number o f upstream and downstream linkages to SMEs (though developing these linkages more fully remains a challenge). 7. Outside the large-scale projects, Bank efforts to improve the regulatory and administrative constraints on businesses, help to diversify the economy and yield additional investment, have had limited success. Inmanufacturing, successive WED surveys (in 1998 and 2002) indicate that sales have stagnated (after a period o f rapid growth in 1995 to 1997 which may have resulted from increased capacity utilization); productivity levels remain highlyvariable; and growth remains concentrated inresource- based extractive industries, inareas where there is natural protection (such as beverages), or insectors enjoying trade preferences. Privatizations have placed some companies in the hands o f individuals without the skill or experience needed to manage and grow their businesses. Most local firms lag their regional competitors inskills levels, management practices and manufacturing technique; and labor-intensive manufacturing such as textiles, garments, and footwear, which have served many developing countries as export platforms, have not been able to compete intemationally. Mozambican-owned SMEs are struggling to survive; muchrecent growthhas come from large-scale projects that generate little employments; and current sources o f growth, which depend heavily on natural resource extraction, may not be sustainable inthe long-term. Concerns remain about the poverty impact and sustainability o f Mozambique's recent growth and Bank assistance has not helped, so far, to ease these concerns. 8. Developing infrastructure: The June 2000 CAS stressed the need to invest inkey cross-cutting infrastructure such as energy and transportation to improve the business climate, includingthrough regulatory reforms enabling private sector participation. Progress has been relatively good overall, though measurable results have been achieved less rapidly than expected. As the PAFVA Progress Report notes, in2001-02, road maintenance (supported byIDA'S$162 millionRoads and Bridges credit) was running behind schedule, due partly to the diversion o f resources to flood-related repairs and partly to the fact that maintenance is not based on periodic surveys for estimating costs, setting priorities, and scheduling; in2001 less than 70% o f the overall target was achieved, and for 2002 only about 60% o fthe target was projected to be achieved. The Inthe CAS, this ESWwas calledConstraintsto Private SectorDevelopment. 68 dialogue around reforms inthe sector took longer than expected, delaying the establishment o f a Road Fundindependent o fthe NationalRoads Administration (ANE) and the creation o f a NationalRoads Council that would permit a separation o f functions between allocation o f funds and execution o fworks. By contrast, IDA's Railway and Port Restructuringproject helpedthe Government to reach financial closure on the concessioning o fthe Maputo andNacalarail-and-port-systems, bringingprivate partners into these systems and laying the foundation for improved efficiency. Inthe power sector, the Government i s trying to make EdMfinancially viable and to extendthe grid with IDA assistance, but (dueto Government indecisionregardingprivateparticipationin EdM) the EnergyReform credit was approved too recently(inAugust 2003) to have had a measurable impact on costs and connectivity so far. 9. IDAalso helpedto achieve progress inincreasing accessto safe water. Inthe five cities where the Bank i s supporting private operation o f the water supply system through the Second National Water Development credit, access has increased (by 20% inBeira and 40% inNampula) and 90% o fwater samples now comply with Government requirements; inaddition, the tariffhas increased steadily from $0.18 in 1995 to $0.40 in 2002, helpingthe operator to approach financial viability. Nonetheless, flood-related setbacks inearly 2000 andthe withdrawal o f the original private operator meant that extension o f the network lagged behind urbanization, with the result that the PARPA goal o f 50% coverage by 2004 i s out o f reach. 10. Progress has also beenachieved intelecommunications and air transportation, with support from IDA's Communications Reform credit, an unplannedcredit prepared at the request o f a dynamic new Minister who saw an opportunity significantly to reduce business transactions costs. With Bank assistance, a first draft o f a new telecommunications law has been approved by Cabinet and submittedto Parliament (an acceptable law i s a condition for releasing the second EMPSOtranche); a second mobile communications license was issued to Vodacom SouthAfrica inAugust 2002; TdM has acquired corporate status andprivatization advisers have beenselected; and mCel (TdM's cellular arm) i s being established as a separate company to ensure that anti-competitive cross-subsidization does not occur. Inaddition, inlate 2002 two offers were received for the Maputo airport concession andpreparations were underway to restructure LAM,with a view to increasing efficiency inair transportation. 11. Promoting rural development and agriculture: Bank assistanceto Mozambique's rural development has beenmade available through: project support to the Ministryo f Agriculture (IDA i s one o f 18 donors to PROAGRI, the agriculture SWAP);numerous infrastructure projects that have (and are intendedto have) rural impacts; and IDNIFC support to agribusiness. Results have beenmixed. To date, PROAGRIhas provided MADERwith vehicles, equipment, supplies, and technical assistance; irrigation systems are beingrepaired; there has beenprogress on decentralization (Provincial Directorates prepare budgets, procure goods and services, and distribute funds to the districts, and districts inturnprepare budgets and procure equipment and supplies); and some extension and veterinaryservices are being outsourced to private providers, but the impact o fthese activities i s not known. While the Progress Report indicates that crop 69 production rose in2001-02 (cereals by 5%, cashews and cotton by 12%, and sugar by 172%), it is not clear that policy improvements or better services to farmers (and in particular services provided under PROAGRI) explain these gains, which may reflect in part a recovery from the 2000 floods. 12. Bank support has helped to expandrural infrastructure. Inparticular, the First National Water Development credit is helping to raise rural access to safe water close to the PARPA goal o f 40% by 2005, as access rose sharply between 1998 and 2003. In addition, the first phase o f the Roads and Bridges project is connecting all provincial capitals to the all-weather road network, enabling the second phase, now under preparation, to shift the focus to secondary and tertiary roads. The Energy Reform project is also piloting some rural electricity alternatives with a view to identifying potential for scale-up. Nonetheless, the benefits o f these activities for the rural population, and inparticular the poor, have been below expectations. Limited access to markets and limitedopportunities for off-farm incomes remain large concerns, despite the work done to date, andthe Bank has not been able to help Mozambicans to address important issues, such as rural access to finance, improving agricultural standards and agribusiness supply-chains, and ensuring the efficient diffusion o f yield-enhancing inputs andtechnologies. This resultedinpart because PROAGRIteething problems delayedthe start o f planned Government-Bank work on developing a rural development strategy (now underway). 13. Ensuring sound environmental management: Given Mozambique's current reliance on extractive industriesto grow as well as the detrimental effect o f environmental degradation on health and income prosperity, the Bank has been working with the Government to improve resourcemanagement. Using IDAcredit andGEF grant resources, the Bank is supporting a Transfrontier Conservation Areas project ($5 million GEF grant); a Coastal and Marine Biodiversityproject ($5.6 millionIDA credit and $4.1 million GEF grant); and a Mineral Resource Managementgproject ($18 million IDA credit). In2001, the Government established the Ministry o f Tourism, which has drafted a new tourism policy and law, based on extensive consultations, designed to promote conservation tourism that also benefits local communities. II. Improvinggovernance andempowerment 14. The June 2000 CAS aimed to support Government efforts to develop a public administration that i s responsive to its constituents and that effectively supports the country's poverty-reduction efforts, where this was seen to involve reforming the public sector and improving the rule o f law. IDA support to this area has been strong, and progress has been substantial, although it will still take many years to achieve desired outcomes. 15. Reforming thepublic sector: To promote decentralization, the Government is reviewing and reorganizing its structures with the support o f IDA'SPublic Sector Reform project ($25.6 millionIDA grant). The process involves all ministries inan exercise o f Inthe CAS,this project was called theNaturalResources Management project. 70 mapping existing structures and analyzing functions andpreparing restructuring plans; currently, Education, Health, andAgriculture are on track to initiate restructuring by early 2004. Plans have also been developed to initiate decentralization in four central provinces, with the support o f IDA'S Decentralized Planning and Financing project" ($42 million IDA grant): the main goals are to promote participatory planning, build capacity o f district governments and formalize their role innational planning while also clarifying the rules for allocating resources to districts and increasing the share o f the investment budget thus allocated. The project will start in 13 districts and gradually expand to include as many as 49 districts within its scope. IDA is also supporting decentralization through the ongoing Municipal Development project ($33.6 million credit), which i s focused on improvingthe policy framework governing Mozambique's 33 municipalities and developing the capacity o f selected municipalities, on a pilot basis, to identify, appraise and implement small-scale urban infrastructure projects using grant resources to "learn by doing". Inaddition, all o f the infrastructure andnatural resource management investments mentioned inparagraphs 18 and 20 are helpingto build regulatory capacity inthe relevant sectors. While results are not yet easily visible, the processes underway are good processes which should yield visible results over time. 16. Improving the rule of law: At the same time, the Bankhas beenhelpingthe Government to initiate overdue legal andjudicial reform to raise the capacity, efficiency andtransparency of the legal system and increase its ability to respond to the needs o fthe private sector. Here progress has been less satisfactory. While the Ministry o f Justice (MoJ), Administrative Court, Supreme Court, and Attorney General's Office have finalized an overall strategic plan and detailed operational plans,with implementation to runto 2006l`-this was originally a HIPC completion point condition-progress has been very slow. For example, a new Commercial Code has not yet been approved by the parliament, and there is no consensus around the current draft. Inaddition, an anti- corruption strategy, approved inOctober 2001, needs to be revised on the basis o f a public perceptions survey that the Bank i s now helpingthe Government to launch. For these reasons, the Legal Reform component o f the plannedPublic Sector and Legal Reform project was removed from the project presentedto the Board inMarch 2003, to be presented separately under the new CAS. 17. As noted above, the Bank has also beenhelpingthe Government to modernize its public financial management system to increase transparency, improve controls, and decentralize planning and execution, through AAA, technical assistance, and IDA'S active adjustment operation, the Economic Management and Private Sector Operation (EMPSO). Here there has been reasonableprogress, though muchmore remains to be done. The Government has published quarterly budget execution reports since M a y 2000. A new public finance management law was passed in2001 and its regulations in 2002. MPFhas developed procedures for obtaining data on donor disbursements, to be presented as an annex to the budget execution report. A financial management loInthe CAS, this project was calledthe RuralActionproject. The Bank's recent sector assessment highlighteda needto combat corruption inthejudiciary and expand judicial training and legal education; proposed reforms include decentralizing the justice system (by establishmg courts inrural areas and intermediate-level appeal courts) as well as modernizing legislation (necessarily a long-termplan depending on prior training of personnel). 71 information system (SISTAFE) has been designed, together with a detailed planfor introducing it into spending authorities, and the system will also introduce detailed functional and program classifiers into the budget. PERswere completed inOctober 2001 and June 2003 asjoint Government-donor exercises (including the Bank), and a series o f annual PERs is planned for the coming years. Treasury accounts at the central and commercial banks are being rationalized. Finally, a Country Procurement Assessment Report is nearing completion, andnew procurement legislation i s being drafted inlight o f that report. III. Increasinghuman capabilities 18. Inaimingto increase human capabilities, the June 2000 CAS focused onhelping to obtain relatively short-term improvements inhealth and educational status, and accordingly the strategy focused on HIV/AIDS prevention and control, extending access to health care and educational services o f an acceptable quality, and ensuring social protection. These goals were aligned with the PARPA's social goals, which reflected the low performance of Mozambique with respect to its neighbors. Inhealth, the PARPA's main goals were identified as addressing geographical inequality inaccess to basic care, improving the quality o f basic care, reducing the incidence o fmalaria-related mortality, and controlling the HIV/AIDS epidemic. Ineducation, they were identified as increasing enrollment and completion rates, particularly for girls, and reducing repetition rates. The CAS reflected these priorities by aiming to strengthen the Government's capacity to allocate resources and reorient its efforts from inputs to services as well as to improve coordination with the other external partners active inthese sectors to improve aid effectiveness and increase Government capacity for policy formulation and planning around priorities. 19. Preventing and reducing the impact of HIV/AIDS: The PARPA incorporates the October 1999 national strategic planto combat HIV/AIDS, which aims to slow the spread o f infection and to mitigate its effects by targeting 2.3 millionhigh-risk people with preventive measures, and IDA'SHIV/AIDS project ($50 million IDA grant, approved in March 2003) was intended to support implementation o f that plan. According to the PARPAProgress Report, informationcampaigns were undertakenin2001 and 2002; 24 voluntary testing and counseling offices have been opened since mid-2001; and the PARPAtarget o f24,000 tests for 2002 has beenexceeded; at the same time, sector- specific HIV/AIDS prevention and control programs are being prepared (e.g. ineducation and transportation). Even so, progress remains slower than needed to significantly mitigate the impact o fthe epidemic inMozambique. 20. Improving health: IDA has been supporting implementation o fthe Government's strategic health plan, which aims to expand and improve primaryhealth care as well as combat malaria, tuberculosis, leprosy and HIV/AIDS, inter alia through its $98.7 million Healthcredit. The Health SWAP that was planned inthe previous CAS has not been and will not beprepared, as future Bank assistance to the sector will be channeled through the PRSCs (an appropriate vehicle for financing recurrent expenditures) and related technical and analytical assistance. K e y actions include improving sector planning and management; buildingor expanding health centers; training basic health caregivers; and 72 ensuringthat all healthcenters are equipped. The Progress Report indicates significant healthcare improvements: attended birthshave risen from 28% in 1995 to 45% in2002; maternal mortality has fallen from 1,900 per 100,000 live births in2000 to 1,600 in2002; infantmortality has fallen from 146per 1,000 livebirthsinthemid-1990sto 129in2001; and vaccination coverage has risen from 55% in 1995 to 82% in2001, but IDA's contribution cannot be easily disentangledfrom what has beena multi-donor effort. At the same time, it is clear that major challenges remain due to the impact o fHIV/AIDS and shortcomings inexpanding coverage (distances to clinics remain long and user fees may exceed official rates). 21, Improving education: Ineducation, the PARPA Progress Report indicates that, while schoolconstruction is behindtarget, Government current expenditureon education increased inreal terms over 1999-2000 (from 2.9% o f GDP to 3.4%) and teacher training exceeded targets. As a result, primary school efficiency improved; the number o f EP1 students (grades 1-5) increased by 5% in2002; and girls enrollment in2000 met the PARPAtarget (44%), while further progress remains necessaryto raise efficiency (it is halfthat o f Zambia); train rural teachers; accelerate progress inEP2 (grades 6-7); and fill a large funding gap. IDA has beena large contributor to the sector, through a $71 million credit helping to fund school construction and teacher training at the EP level and a $50 millioncredit supporting tertiary institutions; IDA also helpedto establish a common fundingmechanism usingIDAprocedures for the basic educationprogram (though IDA's credit does not contribute as it was fully committedbefore the pool became operational (inJanuary 2003)). 73 Appendix 2 - Mozambiaue CAS FY00-03: Plannedand Actual Financing FY PlannedLending IDA Status IDA (US$m) (US$m) NaturalResourceManagement 10 Actual; namedchangedto MineralResource 18 2001 Managementto reflectproject objectives moreaccurately; IDA amount raisedbecause one anticipatedcofinancierdroppedout RoadsandBridges 1 80 Actual, but delayedto July 2001 162 MunicipalDevelopment 30 Actual, butdelayedto July 2001 33.6 - Subtotal 120 213.6 2002 EconomicManagement and 100 Actual, but delayedto August 2002 120 PrivateSector Operation (EMPSO) EnerevReformand Access 20 Actual, but delayedto August 2003 42 RuralAction Program 40 Actual, but delayedto October 2003; named 42 (grant) changed to DecentralizedPlanningand Finance(at Governmentrequest) None 0 CommunicationsReform(unplanned; 14.9 DreDaredat Governmentreauest) - Subtotal 160 218.9 2003 HealthSWAP 40 Dropped; predecessorproject(HealthSector Recovery)extendedto August 2003, due to flood-relateddelays incivil works; future support plannedthrough PRSC Skills Development 80 Actual; namedchangedto HigherEducation; 60 IDA amount decreasedbecauseTechnicaland VocationalEducationcomponentbeing preparedas separateproject Public Sector and LegalReform 55 Actual; namechanged to Public Sector 26 (grant) Reform; IDA amount decreased because Legal Sector CapacityBuildingbeing preparedas separateproject None 0 HIV/AIDS(unplanned;preparedat 55 Government request) Subtotal 175 141 TOTAL 455 573.5 74 MozambiqueCAS FY00-03: PlannedandActual Non-Financing;Activities - PlannedFormalActivities Status PRSP Support Done EnhancedHIPC Completion Point Done (September 2001) Public ExpenditureReview Volume 1 done inFYOI, Volume 2 nearing completion(awaiting Governmentcomments); rated"highly satisfactory" by QAG review Public Sector Reform study Doneunder Public Sector ReformProject preparation;rated `highly satisfactory" by QAG Environment Critical Pressures Not done; TA provided on disaster management, including throughNWDP1; theme will be prominent innew CEM Constraintsto Private Sector Development Done, under the title "Mozambique: Industrial Performanceand InvestmentClimate 2002" Legal and Judicial Assessment Nearing completion (awaiting Government comments) HIV/AIDS and Growth Linkages Done,but downgradedto informal ESW Country Assistance Strategy Done PlannedInformal Activities Status Private Sector Competitiveness IFC provided advice on regulatory issues; IDA and MIGA supportedInvestmentPromotion Center; IFC provided SME Advisory Private Sector ConferenceTA Done (IDMIFC supportedannualconferences in 2000,2001, and 2002) Financial Sector Advisory Financial Sector Studydone in2000 (formal output downgradedto informal output due to sensitivity of banking sector information); Financial Sector Assessment done inearly 2003; AAA on compliance with Base1Principles done Regional Energyand MegaprojectsAdvice Integratedinto Maputo Corridor activity, preparationof EnergyReform project, supervision of Mineral ResourceManagementproject Maputo Corridor Done RegionalTrade Not done; Govemment electednot tojoin regional trade integration program Environmental FrameworkAssessment Integratedinpreparationo f Sustainable Rural Developmentproject (preparationongoing) DisasterMitigation and Management Nearing completion; "Mozambique: Fighting Poverty while SupportingRecoveryfromNatural Disasters" HIV/AIDS Integratedinto preparationof HIV/AIDS proiect Studies. Advisorv Services Not Planned CEM] CPAR' CFAA` CPPR FYOI. FY03 Note: (1) These activities were completedto ensure that "due diligence" ESW was brought up to date. 75 3 3 3 3 X b 5 Q c I C C C C (L: v: c\ v: (L: d cr: C v: . C .C C . a cr: . 7 cr: CL: : . C v . C . C b a n . n 7 cr + .-bE c a .-ta + C a E a -Cg5 ; 9C C C II C E .-9 U . c i Ea \ C U I 0 00 0 Y -52 - Annex 3 The PARPA andthe MillenniumDevelopment Goals (MDGs) 1. There i s broad alignment between the PARPA andMDGs. The PARPA includes goals andbenchmarks that are recognizably related to the MDGs, though they are not the same. For example, the PARPA aims to reduce poverty from 70% in 1997 to 50% by 2010; raise primary school completion rates to 108% by 2005; eliminate gender disparity inteacher training; reduceU5MR from 219 to below200 by2005; increase urbanaccess to safe water to 50% and rural access to 40% by 2005; reduce institutionalMMRto below 100per 100,000 live births; preventHIV/AIDSinfections and reduce their impact; andreduce malariamortality inchildrenby 15% inpriority districts. 2. Butthe PARPA also goesbeyondthe MDGsto includetargets for macroeconomic policy, disease, agriculture, public sector reform, employment, and so forth. Specific MDG-relatedtargets are infact buriedamong some 90 quantitative targets attached to 170+ actions included inthe PARPA's implementation matrix. Some MDGsare poorly covered (gender andthe environment) and quantitative targets are sometimes missing. Moreover, while the MDGs have a strong focus on outcomes, PARPA targets tend to focus on outputs, processes and policy indicators. 3. The first PARPAProgress Report, completed inFebruary2003, providedcandid insightsinto the difficulties involved inPARPAimplementation andmonitoring. It showed that implementation didnot adequately focus on the highestpriorities, that sector management and information flows needstrengthening, and that data gaps makeit difficult to judge progress. I t also showed that the health and education programs were achievingresults, that several key institutions are beingstrengthened, and that progress i s beingmade inimproving governance; by contrast, progress inimproving agricultural productivity remains elusive. 4. The priority now is to improve implementationmonitoring and ensure adaptation o f the strategy to incorporate the lessons learned. To this end, the PARPA i s being integrated into nationalplanning and a Poverty Observatory group has beencreated to institutionalize stakeholder participationinmonitoring, which i s currentlybased on the Government's semi-annual social and economic planning report as well as quarterly budget execution reports. The first meetingo f the Poverty Observatory took place in April 2003. Inpreparingthe Progress Report, the Government completed a detailed matrix o fPARPA activities by sector, including a comparisono f targets and outcomes over successive implementationperiods. Preparation o f the matrix revealed the needto monitor a more limitednumber of concrete andrepresentative sectoral performance indicators. The Bank and the group o f 11donors supportingthe Joint Programme for Macro-Financial Support are now working together to increase the focus o f the Government's program, improve monitoring and evaluation, and strengthenthe feedback loop into Government decision-making. 83 I Table4: Mozambique'sprogress towardsthe MillenniumDevelopmentGoals - - MDG IMet? Comments Banksupport Extremepoverty: Likely Results o f the second CAS aims to improve investment Reduce extreme household survey - climate through PRSCs, Regional Gas, poverty to 33.5% expected inlate 2003 - Beira Rail, Rural Development, and by 2015 will enable an assessment Roads and Bridges projects, as well as of the prospects ongoing portfolio; Rural Strategy, new C E M major contributions to dialogue; HIV/AIDS Unlikely Impact o f the new HIV/AIDS project developed under strategy uncertain; could Multicountry AIDS Program; cross- be assessedin2004 cutting dialogue issue; HIV/AIDS comDonents ininvestment moiects Hunger Likely Resultso f the second Ongoing support through PROAGRI; household survey - Rural Strategy ESW, and new CEM, to expected inlate 2003 - be followed by new Rural will enable an assessment Development project; PERs and o f the prospects expenditure-tracking exercises Access to safe Rural: Donor support for rural Ongoing National Water Development water: Raise rural possible; water, and demand- 1and 2 focused, respectively, onrural access to 67% and urban: responsive approach, and urban water supply; ongoing urban access ti unlikely bringtarget inreach; dialogue issue (linkedto health and 62.5% by 2015 support to urban focused environment); PERs and expenditure- on reliability and tracking exercises sustainability, not access Education: Enrolment Unlikely to be met despite Ongoing Education Strategic Sector Universal likely; EFA-FTIdue to and Higher Education projects, as well completion o f completion constraints on recurrent as new Technical and Vocational primary education unlikely expenditure Educationproject; IDA a key partner in by 2015 Educationfor All Fast-Track Initiative; Gender equality: Unlikely Achieved for primary ongoing cross-cutting dialogue (linked access by 2002; likely to health, hunger, income poverty and date for achieving environment); PERs and expenditure- completion, at all levels, tracking exercises Unknown ~~ Child mortality: Unlikely Projectingrecent PRSCs (both financial and technical Reduce U5MR to improvements, the rate support); Country Status Report on 67 by 2015 wiil still be 180by 2015 Health, with ongoing AAA to help Maternal health: Unlikely Ministrylacks analysis o f develop SWAP inhealth sector; PERs Reduce MMRto (current rate causes o f maternal and expenditure-trachng exercises 1,000 by 2015 i s 1,600) mortality, or specific plan for reducing it Malaria Unlikely No evidence that the actions taken hitherto have reduced incidence Environment: unknown PARPA notes challenges, Ongoing Transfrontier Conservation Integrate sustain- but draws few linkages Areas, Coastal Management and able development between env. and poverty; MineralResources projects; new C E M into policies and need to improve data, (to focus on naturalresource programs; reduce strengthenregulatory management) loss o f environ- framework and mental resources enforcement, and shift to multi-sectoral approach 84 5. For most indicators, Mozambique inthe 1990sdidnot progress at a pace fast enough to reach the MDGs; catch-up rates would need to be even higher from today through 2015, but these rates are very unlikely to be achieved. Inthis context, stakeholders need to temper ambition with realism, taking into account the unique challenges that Mozambique faces, includinginparticular the HIV/AIDS pandemic, which i s exerting upward pressure on child and adult mortality rates. 6. With current policies and aid flows, the MDGtargets that are likely to be met are those on income poverty, hunger and primary enrolment. Making faster progress towards the other MDGtargets will require significant reforms and substantial additional resources. Given Mozambique's high aid dependence (about 12% o f GDP ingrants and concessional loans), sustainability and absorptive capacity are significant limitingfactors at present. Limited managerial capacity ingovernment ministries, limited domestic entrepreneurial capacity, and insome sectors, policy and organizational difficulties that would result inineffective use o f increased concessional finance, point to serious limits on absorptive capacity inmany sectors. As a result, the effective use o f concessional finance cannot rise swiftly ineducation, health, water supply, sanitation or agriculture, though it could increase substantially and effectively inroad rehabilitation, sewage and drainage inthe medium term (three to five years), provided that certain key policy conditions are met. Inaggregate, the estimated additional aid requirements would rise from about $85 million to $225 million over the period 2004-2015 as absorptive capacity increases and policy constraints are relaxed. 7. Lack o f reliable data for many MDGindicators makes it difficult to assess the likelihoodthat Mozambique will achieve several MDGtargets. Ina scenario that involves appropriate policy and institutional reform as well as additional aid, it is possible that by 2015 the goals could also be met with regard to primarycompletion, HIV/AIDS and access to water (see Figure below), though the gender equality target as well as the child and maternal mortality goals likely will not be met even inthis scenario. Prospects of meeting the MDGs: Two scenarios With Current Policies, Institutions and External Resources I With Better Policies, Institutions and Additional External Resources I I 85 Annex 4 A Medium-TermGrowth Strategyfor Mozambique 1. Growth prospects for Mozambique are bright, but the country faces many challenges. As the FYOl C E M noted, highpost-conflict growth has been due mainly to four factors-increased political stability, generous external assistance, one-time developments like population resettlement, and a first-generation o f economic reforms that achieved macroeconomic stability. Sustaining growth at 7% per annum will require maintaining political and macroeconomic stability, but even at that rate poverty would not reduce rapidly. Infact, it would take a century to raise per capita incomes to Mexico's level today. More rapid growth will require a second generation o f reforms designed to encourage popular participation, establish market-oriented policies creating incentives for private accumulation, and orient public sector institutions to service delivery complementing private initiative. Unlike the first generation o f reforms, which could be achieved fairly easily by a few key government officials, these second- generation reforms will be more difficult as they will require deeper institutional change, broader consultations, and consequently longer periods o f gestation. 2. For the next five to ten years, poverty reduction will depend on rapid growth sourced inimproved agricultural productivity and expanded labor-intensive manufacturing and services ledby the private sector as well as the redistribution o f public spending towards sectors with the highest poverty-reducing potential, such as health, education, water supply, and basic infrastructure. According to the FYOl CEM, which remains pertinent today, this inturndepends on decisive Government action infive areas: 3. Strenathening the macroeconomic environment: Action is needed infour areas. (i)Mozambique needs to continue reducing its fiscal deficit by increasing tax revenues, through broadening the tax base and eliminating special incentives. (ii) It needs to improve public expenditure management by improvingpublic procurement, budget execution, accounting and auditing; introducing an integrated financial management information system (SISTAFE); consolidating the fiscal accounts; reviewingpublic expenditures (both on- and off-budget) to assess and improve allocative efficiency; and empowering elected municipalities to raise revenues and allocate spending according to local priorities. (iii) As the recent banking crisis makes clear, it also needs to reform and strengthenthe financial sector, by strengthening the supervision capacities o f the central bank, raising the prudential framework to international standards, and improving competition inthe bankingsector to reduce interest rates (ina 2003 investment climate survey, 85% o f sampled firms reported that inadequate access to affordable finance was the most bindingconstraint to growth). (iv) Finally, it needs to strengthen its external balance by raising manufacturing and cash crop exports back to pre-independence levels and expanding the export base beyond the few products (mostly natural-resource based) now included; actions could include more active promotion o f exports o f electricity, gas, aluminum, agriculture, fisheries, tourism andmanufacturing and the elimination o f legal and administrative barriers to trade incombination with other actions designedto lower the costs o f doing business. 86 4. Unleashinnawiculture's poverty-reducinn potential: Agricultural growth, which is expected to average 5% annually over the next few years, is likely to be the single largest contributor to poverty reduction inthe mediumterm, but to realize its full potential, Mozambique needs to focus on three key actions. First, it needs to facilitate rural trade by repairing roads, particularly indensely-populated Nampula and Zambezi, and by abolishing trade licensing requirements. Second, it needs to improve the security o f landtenure, as current inadequacies inlandtitling impede the use o f landas collateral (thereby reducing access to credit); reduce allocative efficiency; and create bureaucratic rigidities that provide rent-seeking opportunities. Allowing land-use rights to be traded with minimal bureaucratic interference wouldboost both smallholder production and larger-scale businesses promotedby investors, includingtourism operators. Third, Mozambique needs to improve access to key agricultural inputs byreducing impediments to seed, fertilizer and other key imports. 5, Removing the impediments toprivate sector nrowth: Transport, tourism, and labor-intensive manufacturing offer the greatest hope for poverty reduction over the next 20 years. Enclave megaprojects canplay an important role, by generating foreign exchange and tax revenues and providing opportunities for upstream and downstream linkages, but they cannot be the main vehicle for development. Business activity among small- andmedium-sized enterprises needs to be increased as well. The Bank Group has been helpingthe Government to deploy a three-pronged strategy to promote private- sector-led growth, includinginthe short term: (i) removing administrative barriers (in particular, simplifying business registration and other notarial requirements, increasing labor flexibility, facilitating access to land, improving custom clearance procedures, simplifying tax administration, and effecting commercial dispute resolution); (ii) providing advisory services aiming to improve the productivity and competitiveness o f selected export-oriented sectors (agriculture, tourism, textiles and footware), including technical learning for firms and support for developing backward and forward linkages to existing and new buyers; and (iii) increasing private-sector-participation and competition ininfrastructure, includingparticularly telecommunications, transport (ports, airports, roads, railways and airlines), water supply and sewerage, gas and electricity, leading over time to cheaper and higher-quality services. Inthe medium term, the Government needs to implement a legal andjudicial reformprogram aiming to update antiquated laws, increase capacity, and curb corruption, thereby creating a more supportive business environment, with improved access to the courts, reasonable levels o f contract enforcement, and expanded protection o f property rights. 6. Improvinn human capital: Improvinghealth services, curtailing the spread o f HIV andmalaria, and improvingeducation (particularly o f girls andwomen) are key to Mozambique's continued social and economic development. The social returns to education are especially likely to be high, as literacy and numeracy will encourage the 1 Customs clearance still takes 18 days on average; registrationand other notarial services requiredo f small businesses are both expensive and time-consuming; and labor law rigidities impose prohibitively high costs both on worker retrenchments and foreign hiring, impedingthe abilities o f local firms to become or remain competitive. 87 adoption o f more risky agricultural technologies, movement into more remunerative off- farm employment, and successful transitions into manufacturing. Female education has especially highsecondary impacts on nutrition, health status, and agricultural productivity. But it i s also important to lower HIV infection rates-as HIV/AIDS decimates the work force (including teachers and health workers), fractures and impoverishes families, orphans millions o f children, andrips communities asunder. 7. ProtectingMozambiaue 's natural resources: Mozambique's economy will depend on natural resource extraction inthe near term. Large perennial rivers offer prospects for irrigating agriculture and developing hydroelectric power. Substantial gas and coal reserves have been found, andprospecting continues for petroleum and mining. Large investments exploiting the transportation corridors or exporting energy (gas, coal or electricity) are under active considerationby large international companies, although the Maputo Iron and Steel Plant will not proceed, following the collapse o f Enron(its key sponsor). To maximize Mozambique's long-term returns from this growth source it will need to undertake environmentally and socially sustainable development, by strengthening its environmental institutions and ensuring that largely-untestedpolicy frameworks yield effective policies that both promote growth and protect the environment. Inthis area, five matters require special attention: resource usage rights, fisheries, forest management, artisanal mining, and water resource management. Wildlife-based tourism developments also have potential, as Mozambique's 2,700 km coastal zone has numerous unique habitats. Tourism potential, particularly as an add-on destination for affluent travelers to South Africa, i s large but mostly untapped, though a large increase inthe number o f luxuryhotels intourist locations (despite low occupancy rates o f about 60% currently) is evidence o f the private sector's confidence inthe country's ability to attract tourists. 8. All o fthe reforms proposedabove would help to create an environment that encourages businesses to expand and undertake new activities and small-scale farmers to go beyond subsistence agriculture to the production and marketing o f surpluses, thus allowing the country to maintain its rapid growth. Some o f these reforms are controversial; some go against powerfulvested interests; and some will entail costs before they yield benefits. Over time, though, they will make an increasing number o f Mozambicans more prosperous. The Government and its partners are already actively pursuing many of the actions outlined above; most are reflected inthe PARPA and supported inthe Bank's current CAS as well as this new CAS. 88 Annex 5 Private Sector Development Strategy' I. Introduction 1. The financial, humanand technical capacity needed to achieve economic growth sufficient to lift 20% o f Mozambicans out o fpoverty is not likely be obtained from existing state or donor resources; the private sector will needto be an important, ifnot the main, contributor. Generating a private sector-led growth strategy poses considerable challenges andwill take time and significant resources. The challenges to be addressed duringthis CAS period include: addressing inadequacies o fthe financial system, alleviating constraints inthe business environment, and improving efficiencies in infrastructure services. 11. MainCharacteristics of the Private Sector andHistoricalDevelopment 2. Two decades o f civil war, fifteen years o f a centrally-planned economy, and several natural disasters inrecent years have impacted the structure o f the domestic private sector, which -being at an early stage o f industrialization - i s still fragmented, small in size, and characterized by a lack o f competitiveness. While the domestic private sector continues to transition between the centrally planned and a market-driven economy, it faces an array o f administrative and other barriers, which constrain its progress. Mozambican enterprises are also lagging behind their regional competitors with regardto manufacturing techniques, management techniques andpractices, and the level o f acquired basic and advanced technical and non-technical skills: the competitive advantage derived from low-cost labor is offset by low skill levels. 3. Based on preliminary figures from the National Statistics Institute, the formal private sector is comprised o f 27,800 enterprises, which contributed to the economy with a turn over o f 60,531,837,0003 meticais in2001 and provide employment to 274,275 people. The vast majority o f these firms are micro enterprises, which employ 10or fewer staff, andMaputo is host to the largest percentage o f these firms. (As N S I data do not include the informal sector, they obviously under represent private-sector contributions to the economy.) Formal private-sector enterprises fall into two distinct types. First, a few large, foreign-owned, export-oriented, capital-intensive megaprojects have contributed significantly to maintaining highgrowthrates and exports levels. These include Mozal, a $2.2 billion investment, and the Sasol-sponsored Pande gas fields and pipeline development, with initial investments totaling $1.1 billion. Also under consideration are a Corridor Sands Titanium Dioxide project and the Moatize Coal/Zambezi Valley Transport Corridor project. Second, the formal private sector includes hundreds o f micro- and small-scaled enterprises which are mostly Mozambican- owned, sell to the local market, face severely constrained resources, and contribute modestly to growth and exports. Unfortunately, these two groups o f enterprises are not integrated; while backward and forward linkages have started to increase (from a very 'ThisAnnex was preparedby Gilbert0de Barros. 89 low base), few firms use inputs from other Mozambican firms intheir own production processes. That said, megaprojects have helped Mozambique to establish itself as an attractive destination for foreign direct investment (FDI), while also contributing to developing the sales revenues o f some local firms, whose productivity and quality standards have been increased significantly through megaproject linkages. 4. As noted inthe recently-completed Investment Climate Assessment, projected megaproject investments total about $ 10 billion, or twice current GDP, yet, given their capital-intensive nature, they are likely to generate only about 20,000 jobs (5,000 within the companies involved and 15,000 among suppliers and services providers), representing less than 1percent o f the 3.7 millionnew workers projected to enter the job market between now and 2010. Though the indirect and induced effect o f these projects, if properly managed, could have a positive contribution beyond their contribution to the GDP, from a longer-run perspective private sector-led growth inMozambique will call for the more rapid development o f local enterprises and the SME sector. 5. Challenges ahead: Generatingbroad-based growth ledby the private sector requires increased trade and investment integration with regional and international markets to be able to capitalize on Mozambique's comparative advantages. Export markets, regional as well as international, are critical to Mozambique's future prosperity, as consumer disposable income inMozambique i s very low. But Mozambique's overall business environment, rather than helpingbusinesses to be competitive inthese markets, contributes to highcost structures that make them uncompetitive. On average, it takes 138 days to register and start operating a company inMozambique (compared, e.g., to 14 days inChina); it can still take up to 18 days to clear imports and 21days to clear exports across the border; labor productivityremains very low? andjudicial dispute resolution is extremely inefficient (it can take as much as six times longer than inSouth Africa or Botswana). Inaddition, public officials continue to operate ina bureaucratic and sometimes rent-seeking manner that does not facilitate but impedes business. 6. Access to capital is also a key issue. Mozambicanenterprises are severely capital-constrained; most rely on their own resources to meet their investment and working capital requirements, limitingtheir ability to invest intechnology and skills development andtherefore limitingtheir productivity. Cumbersome application procedures, the short-term duration o f most available credit, and stringent collateral requirements (required collateral averages 140%o f the credit amount, and land-use rights cannot be monetized) are all part o f the problem. An efficient financial sector is urgently needed, but inMozambique, the restructuring o f the financial sector remains incomplete, Skilled labor i s scarce and expensive inMozambique (impedingthe ability o f local firms to buildup requiredtechnical and managerial slulls locally), and even unslulledlabor i s relatively expensive (despite low wage levels-average unskilledworkers earn about $43 a month for work that pays about $87 a month inNigeria-skills levels are so low that they filly offset apparent savings). Inaddition, the labor law impedes the recruitment of expatriate skilled labor and imposes highcosts onretrenchments when a business slows down or adopts labor-saving techniques (45% o f surveyed fmrecently claimed that they chose to retain excess workers rather than pay highstatutorily-required indemnities). Labor regulations and inspections are not only a constant source o f irritation for many fm,but the situation has seenlittle improvement since 1998, when previous surveys were completed. 90 local capital markets lack depth, andthe high cost o fborrowing continues to impose a drag on firms' ability to expand and increase productivity. 7. More than 850 state-owned enterprises have been privatized inthe last decade, yet divestiture is incomplete andthe expected additional contribution o f these privatized entities to investment, domestic product, and employment has not yet fully materialized. Some privatized assets were not allocated to their best use, possibly contributing to a reluctance to implement the next generation o f divestitures and delaying completion o f private participation inthe delivery o f infrastructure services, Inaddition, some privatizations (e.g. intelecommunication and air transportation) are being undertaken with a depressed internationalinvestment climate. 111. Performanceunderthe PreviousCAS 8. Overview of economic growth and development: Mozambique has successfully attracted FDIinmegaprojects that have catalyzed economic activity and fueled growth. Over the last four years, megaprojects have raised export levels to an unprecedented $1 billion in2002. But since 1997 export growth outside the megaprojects has been very limited, largely because the overall (non-megaproject) economy has remained non- competitive. Ofparticular concern is the localprivate sector, which has been too weak to take advantage o f opportunities inthe domestic market and continues to have a narrow range and quality o f services and products. Owing to economic inefficiencies, prices in Mozambique tend to be very highincomparison with South A h c a , for e ~ a m p l e . ~ 9. Under the previous CAS, there was progress increating an enabling environment for private participation ininfrastructure through liberalizing regulations in several sectors, including communications and air andmaritime transportation and through introducing private partners into water supply, ports, and railways. Inaddition, there has beenprogress inreducing redtape impacting on the cost o f doing business in Mozambique, though muchmore work needs to be done inall o f these areas. IV. The Government's PrivateSector Development Strategy 10. The PARPA identifies the private sector as the main engine for economic development and notes that private sector development depends critically on suitable infrastructure services. Inthis context, the Government has taken steps to improve critical cross-cutting infrastructure, through for example opening both fixed and mobile telecommunications to competition and increasing private sector participation inair transportation and urbanwater supply. The adoption o f Decree 30/21 o f October 15, 2001, which requires public institutions to respondto private-sector requests within a determined number o f days, is also a business-friendly development. The success o f the megaprojects has also demonstrated that the Government can create and maintaina business-friendly environment. It is important now to ensure that that environment extends not only to the megaprojects and other businesses that are able to resolve their According to the Financial M a i l (December 6,2002), tax receipts at the Komatipoort border indicate that Mozambicans spend $30 million a month inNelspruit, a small South African townjust over the border. 91 differences with the public sector by calling a senior official, but to SMEs as well, as SMEs are mostlyAikely to leadto long-term growth andjob creation. To this end, the Government recognizes that system-wideaction i s requiredto removeremaining administrativebarriers, through: (i) reducingthe time and cost involved inregisteringa business; (ii) adopting a new CommercialCode that fosters private sector development; (iii)reducing labor market rigidities; (iv) clarifyingproperty and landuse rights; (v) improving the trade regime; and (vi) implementing legal andjudicial sector reform. 11. I t i s worth noting that improvingthe business environment throughprivate sector development i sjust one element o f abroader program o f reforms, which also includes Government focus on selected sectors that are believedto be especially competitive: Tourism: In2001, the Government established the Ministryo f Tourism (MITUR) to help develop this high-potentialsector. Since then, atourismpolicy and draft tourism law have beenprepared. MITUR i s now developing an integrated Program for Sustainable Tourism and Conservation (PROTUSC); a key element o fthe emerging strategy involves establishing Priority Areas for Tourism development (PATIs) as a basis for spatial planning at the provincial and district levels and continuing to develop the Transfrontier Conservation Areas (TFCAs), which seek to combine conservation anddevelopment objectives. A tourism fund (FUTUR) will be usedto promote Mozambique as a desirable tourism destination for the local, region and internationalmarkets. MITUR also hopes to contribute to the development o fthe SouthEast Africa Tourism InvestmentProgram (SEATIP), which aims to develop tourism and conservation areas linkingMalawi, Mozambique, Tanzania, South Africa, Swaziland, Zambia and Zimbabwe. Agriculture: Recognizing the growthpotentialo f agriculture and agribusiness, the Government's Agricultural Policy and Strategy for Implementation aims at "transforming subsistence agriculture and linkingit more closely to production, marketing and processing activities, and increasing marketedsurpluses, while developing an efficient commercial sector". Mozambique has the potential to provide competitive products for selected crops to regional and internationalexport markets, but gaining accessto these markets will require adoptingmodem farming techniques and highquality standards along the entire supply chain. To this end, MADERi s developing an institutional structure to provide more cost-effective delivery o f a core set o f agriculture and natural resources related services. Fisheries: In2002, fisheries contributed $92 millioninexport revenues, making it the leading export sector after aluminum. The Government strategy for the sector aims to strengthen the supply chain (production, transportation, marketingand processing activities) and ensure sustainabilitythrough aquaculture development. The private sector will be the main driver for improving the quality and quantity o f fish products; the public sector will limit its role to ensuringthat fishing does not exceed maximum sustainable yield and contributes to integratingrural fishing communities into the national economy. Achieving these objectives will involve: (i) developing artisanal and industrial fishing, including through adopting modern fishingtechniques andhighquality standards alongthe supplychain; (ii) developing aquaculture to initiate structural changes that contribute to long-term sustainability; 92 and (iii) acquiring capacity and equipment for adequate surveillance of the waters withinMozambique's economic exclusivity zone. Mining: Geological studies indicate occurrences o fheavy mineral sands all along Mozambique's 2,500 km coast. To exploit this potential, the Government i s concessioning mining areas to the private sector and also developing mechanisms to increase revenues and improve quality-of-life inareas where there is a strong concentration o f artisanal miners. To this end, the Ministry o f Energy and Minerals will revise the legal framework, focusing on the terms and conditions for exploitation, surface rental fees, validity periods for exploration licenses, and standard mining agreements. The Ministry i s also buildingits capacity to enforce laws and regulations, administer miningtitles, monitor the development o f small-scale mining, and manage Mozambique's miningassets. Developments such as the proposed titanium sands projects are expected to resuk4 12. Infrastructure reforms: The Government also intends to increase private sector participation ininfrastructure to improve access and quality. This will require revising and upgrading the existing regulatory framework to create a level playing field inseveral sectors (telecommunications, air transportation, railways, ports, energy, and water) to make them more attractive to private investors. The current framework lacks clarity in many areas, such as competitive market structures, enforcement o f regulatory arrangements, public-service obligations, and financing. Moreover, issues such as the delineation o f responsibilities for regulation, supervision and operations-all functions that were, untilrecently, performed defacto by the public utilities and enterprises themselves (e.g., TeZecomunicaqGes de Moqambique intelecommunication and Electricidade de Moqambique inenergy) will need to unbundled. Progress has been made inwater and telecommunication inestablishing regulatory agencies, but some sectors still require comprehensive analysis and definition o f necessary regulations to address these issues. Inaddition, with regulatory institutions required for water, electricity, telecommunications, and civil aviation, institutional settings will need to be harmonized, refocused and coordinated inorder to achieve economies o f scale, improve their efficiency, and ensure their consistency and long-term sustainability. 13, Support to SMEs: The Ministry o f Trade and Industry (MIC) will help to nurture SMEsbyhelpingto address some ofthe constraints facing SMEs. These include the lack o f access to: (i) capital; (ii) labor, including inmanagement; (iii) skilled modem technologies; and (iv) modem management methods andtechniques. The Government aims to help improve access to finance by addressing the long-term causes o f the lack o f affordable credit. Firms and financial and non-financial intermediaries located in Mozambique will be provided with assistance inorder to buildtheir technical capacities. 41 An Irishcompany, Kenmare Resources, has beengranted a concessionto extract, process and distribute the minerals from mines inM o m , Nampula, where heavy sands contain world-class deposits of titanium; it has been estimated that the mines will produce 612,000 tons o f ilmenite, 24,000 tons o f zircon and 12,500 tons o f rutile per year. A similar project i s planned for Chibuto, some 200 kmnorth of Maputo; this project i s being developed by Australia's W M C Resources and South Africa's Industrial Development Corporation (IDC), which recently acquired a 10%stake inCorridor Sands. 93 Inaddition, the Government will help to reduceor removing thenumerous administrative barriers that constrain enterprises' development: reducing the time and cost o f registering a business will be an important outcome on this agenda. V. The World Bank Group's PrivateSector Development Strategy 14. Insupporting the Government's growth strategy, the Bank Group will focus on: (i) improvingthe investment climate; (ii) reforming the financial sector; (iii) supporting improvedinfrastructure through increasedprivate-sector participation; and (iv) providing integrated support to develop strategic entry points. This strategy will involve analysis, knowledge dissemination, financing, and selected implementation support. This assistance assumes that growth will come from several entrypoints: (i) natural-resource- based megaprojects (including enterprises linked to the megaprojects); (ii) tourism; (iii) agriculture and agribusiness; (iv) export-oriented manufacturing inlabor-intensive activities, particularly intextiles, garments, and footwear; and (v) SMEs. 15. The Group's comparative advantages include the ability to undertake analytical work that i s informedby its global experience indeveloping countries, allowing it to provide relevant technical and policy advice, combined with focused lending, where grant financing is not available. IFChas the ability to mobilize andprovidefinancing to the private sector coupled with the necessary expertise interms o f project preparation and implementation. MIGA will fully complement the work o f IDA and IFC by providing political risk insurance coverage for foreign private investors who are doing business in Mozambique. Moreover, MIGA will continue to provide technical assistance to the Center for Investment Promotion, which i s already taking place inclose collaboration with the World Bank under the Enterprise Development Project. 16. The Bank Group will support the enterprise development by improving productivity and broadening the base for growth. This will involve a two-track approach. First, matching grants would be provided to domestic enterprises and intermediaries to develop their technical and managerial skills ina manner that will also build the capacity o f domestic business development services (BDS) providers. Second, partnership and linkages to FDIwould be strengthened. This support, which will form an integral part of IFC's strategy for Mozambique, would target the development o f firms, products, and sectors that have demonstratedpotential for export and competitiveness, including firms inmanufacturing, tourism, agro-industry andfisheries. Inaddition, MIGAwill work with IDA and LFC to support SME development, includingunder the Enterprise Development Project (PoDE). Promotion o f foreign investments related to SMEs is one o f MIGA's priority areas, and inthis context MIGA will promote use o f its e-mail-based investor outreach service, FDIXchange, to bringtogether entrepreneurs and project developers indeveloping countries with potential partners, technology, and capital worldwide. Firmsand individuals that signupfor the free service will receive periodic e-mail updates containingnew investment information, customized according to their region, sector or topic o f interest. The FDIXchange will also allow SMEs inMozambique to spread the word to potentialpartners worldwide regarding their particular product or market opportunity, usingthe CPI as a conduit. 94 A. Helping to improve the investment climate 17. To sustainhighgrowthrates andbroadenprivate-sector participation, the Government is committed to improvingthe overall investment climate. Although most o f the constraints to private sector development were identified several years ago, progress inremoving them has been slower than expected, due partly to lack o f a process for following-up on agreements and partly to lack o f adequate prioritization. Inlight o f the recently-completed Investment Climate Assessment, the Bank will step up efforts to tackle the key administrative barriers in a sustained manner, inthe following areas: 0 Institutional capacityfor private sector development: Bank assistance will aim to enhance the capabilities o f public and private institutions to deliver business support services as well as support public agencies intransitioning from maintaining control functions to providing business facilitation andpromotion services. The PoDE project, with IDA andMIGA support, is key to this effort. 0 Private-public dialogue: Bank assistance will help to focus private-public dialogue on removing the constraints to private sector development, regarding (i) the time and cost involved inregistering a business; (ii) labor law rigidities, concerning especially short-term and expatriate hires and mandated redundancy indemnities; (iii) adoption o f a new commercial code; and (iv) the marketability o f property and landuse rights. The Bank will help the Confederation o f Business Associations (CTA) to help improve the business environment through consultancy services, studies, and a training program aiming to buildthe institution's capacity. This support will also help bothMIC and MITUR to become more effective indeveloping and delivering business facilitation. 0 Exportpromotion: Institutional capacity-building will be coupled with analysis to improve understanding o f the products and sectors inwhich Mozambique is or could be competitive. Since competitiveness is key to maintaining high growth, it will need to be strengthenedthrough developing the ability o f firms to export and generate linkages within the domestic economy. The Bank will also support CPI's efforts to develop and implement a three-year strategic plan buildingon its own transformation from a regulator to a facilitator andpromoter o f FDIbybroadening its appeal to foreign investors engaged inlabor-intensive employment-creating activities and focusing CPI's efforts on the most promising export-oriented sectors and products. 0 Exportprocessing zones (EPZs): While the enabling environment for private sector participation is being improved, the Bank will also help to attract labor-intensive manufacturing based inthe EPZs that build on the transport development corridors. Limited investments inthe development o f EPZ infrastructure to "jump start" their establishment outside Maputo will be considered to help broaden the manufacturing andprocessing industries. B. Furthering reform of thefinancial sector 18. Financial sector reform will be needed to help improve the lending environment, decrease banking system vulnerabilities, increase competition, reduce the high cost o f 95 capital, and improve the oversight capacity o f Banco de Moqambique (the central bank). Advice on these and other activities i s being provided through ajoint Bank-Fund Financial Sector Assessment Program (FSAP). Specific assistance arising out o f this diagnosis i s expected to address the issue o f non-performing loans, which i s still severely affecting banking sector performance. The main focus o f reform i s likely to include: strengthening banking supervision, enhancing the scope o f financial intermediation, monetary and public debt management, andthe capital market and microfinance industry: Strengthening banking supervision: Supervision has improvedsince the last assessment o f the Base1Core Principles, but significant work remains to be done: (i) the Banking Supervision Department needs to establish regular communication with the head offices o f foreign-owned banks and the banking supervisors intheir countries o f domicile; (ii) the loan classification and loan loss provisioning systems need to be brought into line with international practices; (iii) trigger points needto be established to prompt legal action once a bank's capital falls below the minimum requirements; and (iv) clear steps need to be taken to buildthe core knowledge of supervision staff, especially to ensure their capacity independently to validate informationreceived from financial institutions. Inaddition, it is important to improve market oversight through the adoption o f international accounting standards (IAS) for all banks. Enhancing the scope offirzancial intermediation: To stimulate commercial banks to make sound new credits, several short and longer-term actions would need to be undertaken, including: (i) possibly establishing a commercial court, dealing with the largest cases; (ii) adopting a new Commercial Code, together with a revised Code o f Civil Procedure (no attempts have beenmade thusfar to revise the 1967 Code o f Civil Procedure); (iii) simplifyingjudicial procedure (procedural complexity is very highin Mozambique as compared to neighboring countries); (iv) enhancing the scope and reliability o f the credit registry administered by the central bank; (v) training judges incommercial disputeresolution; and(vi) reformingthe land-registry and establishing a registry for movable property. To that end, the Government would need to seek advice on the design andpractice o f commercial courts; revision o f the commercial code and civil procedures; and the establishment o f monitoring processes to identify progress inachieving designated outcomes. Monetary andpublic debt management: Although a tighter monetary policy inmid- 2001 appears to have stabilized prices and the exchange rate, it also contributed to higher and more volatile interest rates. To reduce volatility (of both prices and interest rates) and enhance the scope for local currency intermediation, thereby limitingfinancial dollarization, the central bank needs to adopt a more transparent pro-active approach to monetary management. This involves strengthening the monetary framework, which currently lacks transparency. Market participants at present do not fully understandthe goals or procedures o f monetary policy, partly because the central bank has failed to explain its goals and operating procedures and partly because the design and operation o f its monetary instruments is flawed, sending conflicting signals on the Government's stance on monetary policy. Acting preemptively to limit deviations from monetary policy objectives will also require a strengthening o f the central banks's analytical capacity and greater emphasis on 96 inflation targets. At the same time, it i s importantto relymore closely on an intermediate monetarytarget. To enhance transparency and avoid interferingwith market signals, the central bankmay needto conduct its monetaryoperations inthe overnight money market. 0 Capital market: Mozambique's small capital market offers limitedscope for development inthe short term. At this stage, the first aim shouldbe to develop the market for public securities, therebyproviding a market-drivenbenchmark for the issuance o fprivate securities. Beyondthis, there i s scope for the local listing and trading o f securities with sufficient disclosure, but without overburdening the process, favoring as much as possible regional integrationand economies o f scale. Inthis context, current capital controls will needto be reviewed to ensure that they do not undulyrestrictregional integrationandregionalcapitalmovements. Microfnance industry: Although the microfinance industryhas grown rapidly in recent years, it still has a very small outreach, with a highconcentration inMaputo. Prospects for its development are good, and several well-performing microfinance institutions (MFIs) are already inpartnership with well-regarded international microfinance service providers. Evenso, important bottlenecks need to be eliminated, including restrictions on deposit taking (that limit the size and usefulness o fthe MFIs) and lack of humanresources (that increase the cost o f intermediating). Legislationcurrently under preparation would benefit from expert advice and should allow MFIsto take deposits. It would also be usefulifMozambicanMFIs strengthenedtheir cooperation with well-known internationalNGOs or financial cooperative networks that have been effective indeveloping good-practice MFIsby drawing on existing informalpractices. C. Provision of infrastructure services 19. Bank assistance under the CAS will aim to increase private-sector participation and competition inthe provision o f infrastructure services, including inpower, transport, telecommunications, water supply and sewerage. For private sector participationto be augmented, there are a number o fregulatory issues that have to be addressed: Unbundling of policy, regulation and operation: Traditionally, a close relationship between government departments and state-owned enterprises has meant that policy- making, regulationand operations have beenembodied ina single institutional process. These functions needto be unbundledand clarified, so as to: (i) design and implementregulations andcompetitionpoliciesinutilities and economic sectors (including power, transport, communications, andwater); (ii) establish, strengthen and harmonize the regulatory and supervisory bodies inthese sectors; and (iii) train regulatory staff andprovide outside experts to advise inregulation. Increasing private participationininfrastructurewill need to be done with adequatepolicy sequencing, so that the legal regulatory framework conducive to privatization i s in place and a levelplaying field i s established. Increasedprivate-sector participation in infrastructure (PPI): The Bank's assistancewill be delivered through several IDA projects (including the Energy Reformproject, Communications project, the SecondNational Water Development 97 project, and the Railways and Ports Restructuring project) as well as through IFC investments and MIGA guarantees. The emphasis will be on establishing a new business model for infrastructure service delivery which aims to contribute to the M D G s and i s characterizedbypublic-private partnerships. Enhanced IDA, IFC and MIGA integrationwill help not only to establishthe PPIenabling environment but also to give comfort to and so crowd inpotential private-sector investors (e.g. through structuring and financing innovative mechanisms for the private delivery o fpublicly- funded services, especially to the poor.) Coordination within the WorldBank Group: While IDA will support upstream work on sector policy, strategy and design o f the transactions, IFC will mobilize sponsors and provide investors with access to financing and MIGA will seek opportunities to provide political risk coverage, as appropriate. This coordinated approach is already helping to unlock development potential inthe Zambezi valley, where IDA and IFC are advising the Government on awarding concessions for the coal deposits at Moatize, rehabilitation o f the Sena railway (which IDA will also help to finance), and modernization o f the Beiraport. Transparentfunding mechanisms: Adopting market-based solutions to the delivery o f infrastructure services raises the issue o f affordability o f those services for low- income segments o f the population, especially inareas where there i s a low population density. Among other approaches, output based aid (OBA) couldbe used to enable private participation while improvingthe access and affordability o f services for the poor? funding o f these subsidies could be provided by the Government or the international community. Whatever financing mechanism is adopted, innovative cost recovery schemes will need to be inplace to develop replicable and sustainable infrastructure services to the poor. Inlight o f Mozambique's fiscal constraints, direct cost recovery mechanisms are also needed to complement or replace subsidization schemes; subsidies would be targeted and could be used for both connections and user charges, as appropriate. D. Strategic Entry Pointsfor the World BankGroup 20. Entrypoints for the Group will focus onnatural resources, tourism, agriculture and agribusiness, and the development of SMEs. These are the sectors with the greatest growth potential, where the Bank Group will address constraints to development with a integrated approach: 21. Natural-resource-based mega-projects: The Bank Group has supported the development o f megaprojects within Mozambique, with the objective o f maximizing their economic contribution and development impact. To help develop the Pande and Temane gas fields, processing plant and pipeline, IDA has supported preparatory work aiming to identify the most promising alternative uses o f the gas and to structuring the resulting concession; inaddition, IBRDis providing a partial risk guarantee to project lenders and F C is participating inthe equity. Similarly, IDA and IFC are helping the Government to evaluate and structure the complex Moatize coal and Zambezi valley OBA differs fromtraditional public subsidies, which are typically directed at inputs for service delivery, bylinkingthe subsidy to achieving a specific output (e.g. number of consumers connected per year). 98 transport corridor developments; the objective o f this early involvement i s to ensure that ensuing private-sector investmentsyield the maximum economic and social benefits. IFC i s also involved inearly discussions on the Corridor Sandsproject. 22. Tourism: The Bank Group aims to help implement PROTUSC, incooperation with other development partners; this will involve supporting policy andregulatory reform, institutional strengtheningat the national and provincial levels, the work o f the provincial tourism facilitation commissions, and spatial planning at the provincial and district level. The programwould also include strengtheningcapacity inenvironmental andsocial assessmentas well as support to regional and district planning authorities, such as the Elephant Coast DevelopmentAgency for Matatuine District andplanning authorities that may be created for other PATIs. Inaddition, support would continue for the TFCA initiative to help Mozambique to improve management of its natural assets, with a strong emphasis placedon protecting the rights o f communities inside and outside o f core-protected areas and developing community/private-sectorjoint venture options. This programwill also include renewedemphasis on identifyingbiodiversity hot-spots as abasis for more consistent planning and management. 23. To promote regional integration o f tourism, IFC incollaborationwith IDA will analyze regional tourism opportunities involving Mozambique, South Africa, Swaziland and Zimbabwe. This analysis will help to identifykey constraints, options for addressing them, andpromisinginvestment opportunities involvingprivate investors. TheBank Group will also support the South East Africa Tourism InvestmentProgram (SEATIP), which aims to help communities to participate as fullpartners inthe TFCA process while also providing an enabling framework for the private sector to invest. Assistance will aim to solidify community rightsthrough the creation o f trusts, concessions or other equity structures, andwould help create incentives and frameworks for the private sector and communities to develop joint ventures based on management plans, including access to concessionary loans or small grants. Fundingwill beneededfor land demarcation, community funds and institutional support at the provincial and national levels. Basic infrastructure (e.g. roads, park facilities) may also beprovided for the core terrestrial and marine protected areas inthe TFCAs andPATIs, with support provided for multi-sectoral tourism infrastructure planning. A key part o fthe process will be developing Strategic EnvironmentalAssessments for investments: strict environmental and social criteria would be applied to any project financed through this mechanism, and environmental management programs would be designedto monitor and implement environmental mitigationprocesses. 24. Agriculture and agribusiness: IDA assistance inthis area i s meant to improve the impact ofpublic expenditureson developing apositive enabling environment for sustainable and equitable growth inthe rural sector, consistent with the reduction o f poverty and improvement of food security, while ensuringthe protectiono f the physical andsocial environment. The first (five-year) phase o fPROAGRI, which is now nearing completion, aimedto establish an institutional structure able to provide cost-effective deliveryo f a core set of agriculture andnatural-resources related services. It i s now necessary to buildthe technical and managerialcapacities of export orient agro- 99 businesses, inter alia through PoDE and, as IFC is now doing, through developing a strategy to support crops with highexport potential, involving regional and global private-sector partners. Progress would be assessedby the extent to which agricultural input and output markets increase incompetition andvolume, as evidencedbynumber o f traders; narrowing o f the gap between farmer prices and prevailing local markets prices; increases inagricultural production andproductivity; increases inthe contribution o f marketed produce to household income for small-holder subsistence farmers working with irrigationschemes; andhectares under sustainable irrigation systems. Progress will also be measured interms o f ago-processing opportunities createdthrough local as well as regional and international investment. 25. Growth inthe agricultural sector will also depend on improving access to and the quality o f infrastructure services, particularly inrural areas. To this end, IDA's Energy Reformproject will help increase access to electricity inrural and peri-urban areas, by providing reliable, affordable and sustainable electricity to some one million consumers inCab0 Delgado, Nampula, Inhambane, Tete, Zambezia andMaputo; this will also help to increase the viability and competitiveness o f SMEs inagriculture and other sectors, thereby enabling more small-scale processing o f agricultural commodities. Inaddition, the First NationalWater Development project will help improve access to safe water in the rural areas, both for consumption and small-scale irrigation; this will be achieved through rehabilitating and extending the water network and also by providing access at point-source rural water facilities. Rural access to markets will be expanded through IDA'sRoads andBridges project, whichwill improveroad coverage andconditions throughout the country, with a focus on secondary and tertiary roads inphase 2. 26. Micro, small and medium enterprises: Support to local enterprises, o fwhich most are SMEs, will be provided through IDA's Enterprise Development project (PoDE), which aims to focus Government andprivate-sector resources on activities will help improve the competitiveness of Mozambican firms insectors where Mozambique has a comparative advantage. This will be done through technical assistance to MIC, MITUR, the Chamber o f Commerce and CPI (withIDA and MIGA both assisting CPI), with a view to improvingthe capacity o fthese institutions to conceive, implement andmonitor a consensual and focused private-sector development strategy. 27. Mozambique has also been included ina list o f eight African pilot countries for a newjoint IDA-IFC initiative for micro-, small- and medium-sized enterprise (MSME) development. The proposed M S M E Program aims to address constraints to growth and competitiveness by: (i) increasing access to finance; (ii) opening access to new markets bybuildingthe technical capacities o fbusinesses and intermediaries locatedin Mozambique; (iii) enhancing sustainable linkages between SMEs and larger private sector investments; and (iv) improving the enabling environment for private sector participation through reduction o f rate tape. The details o f this program are being defined andwill be implemented over the CAS period, with initial activities beingimplemented through the restructured Enterprise Development Project. 100 Annex 6 Monitoring and Evaluation(M&E)' I. ThenationalM&Eenvironment 1. The Government o f Mozambique i s committed to developing a results-oriented public service which is aligned with the key objectives o f the PARPA and accountable to citizens. Within the Government, there are a number o f high-level advocates for M&E, including the President, the Prime Minister, and several Ministers. 2. The responsibility for PARPA monitoring currently rests with the Poverty Monitoring Unit o f the Ministryo f Planning and Finance (MPF). This unit has received considerable donor support, which has helped its staff to develop a good understanding o f M&Eissues andto acquire appropriate skills. Methodological guidelines andpractical tools are still being developed. 3. Good progress is being made with respect to PARPA implementation monitoring arrangements through the Government's development and use o f a detailed Performance Assessment Framework (PAF) matrix to monitor PARPA activities by sector, and through the establishment of the Poverty Observatory, which provides a broad consultative forum (including representatives o f civil society and development partners) for dissemination and discussion o f PARPA objectives and accomplishments. Civil society has opportunities to participate indiscussions and decisions related to national development issues, particularly inrelation to implementation o f the PARPA, but there i s room for improvement ininstitutionalizing participation o f citizen groups and the private sector inthe oversight of public administration. Inaddition, the integrated systems and culture necessary to support effective M&E of development goals are not yet inplace. 4. A donor-supported evaluation capacity diagnostic exercise was undertakenin M a y 2001.2 During a subsequent workshop, a local working group led by the Ministryo f Foreign Affairs (MINEC) andwith participation from MPF, the Ministry o f State Administration, and the Prime Minister's Office, agreed inter alia to develop and submit to donors an action plan to meet Mozambique's capacity-building needs inthe M&E area, and also to pursue a recommendation to carry out country-led evaluation exercises inthe healthand agriculture sectors. These initiatives were not carried forward for various reasons, but principally due to a lack o f strong leadership, incentives, and ownership o f the process. 'ThisAnnex was prepared by Diana Masone, AFTQK. The information inthis note i s drawn from the Joint Staff Assessments of the Mozambique Poverty Reduction Strategy Paper and 2003 Progress Report, the 2003 Public Expenditure Review, the results o f a multi-donor supported evaluation capacity diagnostic exercise undertaken in2001, the World Bank's Public Sector ReformProject appraisal document, other relevant documents, as well as observations and a survey o f staff involvedinthe World Bank's program o f assistance to Mozambique. The exercise was supported by a donor consortium consisting o f the Office o f Evaluation o f UNDP, the Operations Evaluation Department o f the World Bank, and the Government o f the Netherlands. 101 11. M&E challenges 5. The M&E system o f the Cabinet Office focuses primarily on monitoring the processing o f national policies implemented by concernedministries and agencies. This system i s seen as needing substantial improvement, including development o f capacity to evaluate policy and track its impact, rather than merely tracking its processing. 6. The quality o f statistics collected by the National Statistics Office (NSO) i s considered to be good interms o f data coverage, reliability, timeliness, and access, but to monitor PARPA implementation effectively there are improvements needed insectoral data and inpoverty indicators, includingparticularly income and consumption data. It i s critical to build capacity and provide incentives to establish sound management information systems (MISS), particularly inpriority sector ministries. The availability and quality o f administrative data, and particularly expenditure data, i s reportedly poor on the whole, often being neither comprehensive nor reliable. Fewministries or agencies appear to have functional M I S or M&E systems. Inmany cases M&E informationis not used properly for decision-making. There are some exceptions where M&E data availability and/or use is good (e.g. education, road maintenance), and ina few ministries planned or ongoing donor-funded activities aim to strengthenM I S systems and/or capacity (e.g. Environment, MADER,Natural Resources, Transport, Tourism), so the situation is likely to improve over time. At this point, a stocktaking exercise would be useful, focusing particularly on the degree to which sectoral data are linked with expenditure data. 7. Demand for M&E information still comes mostly from outside Government. MPFdoes not systematically require informationfrom sectoral ministries on evaluations, priority expenditures, or outcomes related to long-term goals. Much o f the evaluation that is done is prompted by donors that are interested inevaluating implementation o f their own projects or programs rather than sectoral programs as a whole. 8. Over the past 18 months, MPF has been undertaking sector expenditure reviews- an important step forward. Yet there remain two important gaps inexpenditure data which need to be addressed: (i) large "off-budgets" inthe form o f ministerial collections ("receitas proprias") are not reported to MPFbythe sector ministries and (ii) key ministries (education, health, water, roads, and agriculture) do not have data on donor- funded expenditures. For the most part, information is unavailable on the linkbetween expenditures andprograms, targets, outputs and outcomes. 9. Cross-cutting fiduciary issues undermine good M&E and are beyond the control o f individual ministries. Currently, the flow o f funds is unpredictable, procurement bottlenecks interfere with project implementation, and it i s not possible to get a clear idea o f cost-effectiveness. 10. There is also currently little integration or harmonization o f Government information systems. Existingsystems need to be better integrated and rationalized, and new sector-specific M&E systems should be designed insuch a way that they conform to the standards and requirements o f the central system. 102 11. The World Bank andother donors are actively engagedinsupporting a number o f activities to help address these challenges and strengthen M&Ecapacity, particularly in terms o f support for public sector reforms anddevelopment o f SISTAFE (the integrated financial management system). Donor coordination inrelation to statistical capacity- buildinginitiatives i s reported to be good. Nonetheless, ingeneral, donor contributions have tended to be fragmented and not directly linked to Government-funded activities. 111. Possibleactions to addressthe challenges 12. At the national level, a more concerted and focused effort is needed: (i) raise to awareness o f the importance, relevance and benefits o f an effective M&Esystem as a public sector management tool which i s complementary to the budget system, human resource management, and auditing functions; and (ii) to establish the necessary foundational elements and culture which are required to develop a results-based orientation inthe public sector. Action areas include: (a) improving the institutional framework; (b) strengthening sectoral information systems; (c) strengthening M&E skills within and outside Government; and (d) promoting greater donor coordination and harmonization. Some specific actions are suggested below. 13, Improving the institutionalframework: To improve the institutional framework inthe context o fthe Public Sector Reformproject, key activities will include: e Promotinga culture o f accountability and incentives system to support it; e Promoting establishment o f an inter-ministerial coordination mechanism inrelationto the development ofintegratedharmonized M&Esystems; e Undertaking an assessment o f the information flow through the "system"; e Improving mechanisms for information sharing and public participation in development decisions, e.g. through more systematic dissemination o f national statistics and administrative data to Parliament and the public, and through more advanced planning o f the consultation process; and e Institutionalizing participation o f citizen groups andthe private sector in public administration oversight, e.g. through advocating sectoral inclusion policies and buildingappropriate fora (e.g. the National Water Forum). 14. Strengthening information systems: K e y activities here will include: e Undertaking an inventory o f ongoing and planned installation or major upgrading o fM I S systems, and also monitoringprogress; e Designing new sector-specific M&E systems to conform to standards and meet information requirements o f the central SISTAFE system; e Undertakingcase studies inselected central and sector ministries, clearly identifying issues and documenting good practices; e Piloting country-led evaluation exercises inone or more priority sectors (e.g. agriculture, health); e Reviewing M&Ecapacity needs inkey sector ministries; e Addressing cross-cutting fiduciary areas; and 103 0 Ensuringthat reliablepoverty data is collected on aregular basis (e.g. through annual income and consumption panel surveys). 15, StrengtheningM&E skills: There i s also ample scope for improving M&E skill levels, with activities including: e Enhancing Governments capacity for clearer goal-setting within the planning process, project andprogram management, financial management, data analysis, and performance auditing; 0 Strengthening the policy analysis skills o f the Cabinet Office; 0 Strengthening the statistical capacity o f staff inthe PARPApriority ministries; 0 Strengthening capacity to undertake comprehensive poverty analyses, in particular concerning gender aspects and issues o f vulnerability; e Strengthening civil society capacity to hold Government accountable; 0 Developing M&E capacity at all levels o f Government (central, sectoral and provincial) and incivil society (i.e. withinNGOs and CBOs); and 0 Developing and retaining sufficient country-based skills required to support SISTAFE and the related sub-systems. 15. Improving donor coordination: Here activities should include (i) establishing mechanisms for sharing information and coordinating support for M&E enhancement (e.g. expanding existing coordinating mechanisms for statistical capacity buildingto include broader M&E capacity buildingactivities); and (ii) promotingharmonization o f donor-supported M&E systems and reporting requirements. 16. There is also a need to improve M&E inthe Bank's portfolio. This need was identified and discussed duringthe 2003 CPPR and i s part o f the CPPR Action Plan, which is to be monitored quarterly. The M&E arrangements for the Bank-supported Public Sector Reformproject inMozambique offer an example o f good practice. 17. The importance o f linkingM&E inthe Bank's portfolio with sector M&E and the national system is recognized and has been reflected inthe Bank's strategy. CAS activities are closely aligned with the PARPA objectives, and the CAS Results Framework i s linked, inter alia, to the Government's PAF matrix for monitoring implementation o f the PARPA andprogress towards the PARPA objectives. IV. Next Steps 18. Buildingan effective national M&E system will take several years andrequire coordination across ministries, through different levels of Government, and between users and producers of data. Sustained commitment is therefore needed at both the political and technical levels. Lack o f strong leadership and ownership o f the M&E capacity development initiativewere deemed to be the reasons for lack o f follow-up to the 2001 donor-supported evaluation capacity diagnostic exercise. It i s therefore 104 recommendedthat Government take the following three initial steps to rapidly move the M&Eagenda forward inMozambique. (0 Identifi M&E leadership in Mozambique, e.g. through focus group discussions with Government advocates o fM&E. The objective would be to identify a strategically located counterpart group with sufficient authority and political support to operationalize M&E inMozambique (this includes but is not limited to the poverty monitoring agenda). Participants inthe 2001 evaluation exercise should be included inthis focus group discussion. (ii) Clearly demonstrate the key M&E issues, e.g. through undertaking case studies o f M&E systems inone or two central ministries, and inone or two sector ministries (e.g. agriculture, education), to look at: (i) the quality andreliability o f existing data; (ii) utilization o f the data currently available; (iii) efficiency the o f data collection exercises, includingpossible duplications or unnecessarily burdensome reporting requirements. This would help to understand and demonstrate the issues, and possibly identify good practices. (iii) Get all the stakeholders on board in developing a national M&E strategy and Action Plan, e.g. through organizing a national M&E stakeholders workshop (to bejointly sponsored by Government and donor partners) to generate broader interest inM&E and to bring stakeholders to a common understanding. The results of the case studies suggested in(ii) above could be presented to help illustrate the importance, relevance and benefits o f sound M&E arrangements, particularly on the part o f data providers within key sector ministries. The objective o f the workshop would be to develop a prioritized and time-bound action plan of activities to address the issues and meet Mozambique's capacity needs inthe M&E area. 19. Actions beyond the three steps proposed above would depend on the results o f discussions with stakeholders and the eventual strategy and action plan for improving M&Ecapacity inMozambique. These should include follow-up to the recommendations o f the evaluation capacity diagnostic exercise undertaken in2001, andthe Joint Bank- IMF StaffAssessment recommendations madewith respect to the 2003 PARPAProgress Report. 20. Discussions are ongoing between the Government andthe Bankregarding how the Bank mightbest support the Government's M&E enhancement activities, andwill be further pursued inthe context o f preparation o f the first Poverty Reduction Support Credit (PRSC1). Possible financial vehicles for Bank support, which are still under discussion, include PRSP Trust Funds, IDF grants, and a STATCAP Adaptable Program Loan. 105 Annex 7 Debt Sustainability, IDA support and the HIPC Initiative' 1. This Annex updatesMozambique's Debt Sustainability Analysis (DSA) since attaining the completionpoint under the enhancedHIPC initiative inSeptember 2001. A few backgroundparagraphs are followedby a discussion o f updated NPV ratios under the basecase and low case scenarios, as well as two sensitivity analyses (one assuming high case IDA lending andone assuming lower project grants). I. Background 2. Mozambique reached the completionpoint under the original and enhancedHIPC Initiatives inJune 1999 and September 2001, respectively. Debtreliefunder the original framework amounted to $1,716 million inNPV terms, and assistanceunder the enhanced framework amounted to $306 million.2 Based on projections presentedinthe Completion Point Documentunder the EnhancedHIPC Initiative, the NPV o f debt-to- exports ratio after the provisiono f HIPC assistance andbilateral debt relief beyond HIPC was expected to fall from 102% in2002 to 41% in2020, and the NPV o f debt-to-GDP ratio was expected to fall from 28.0% in2002 to 14.1% in2020. 3. IDA assistanceunder the original andthe enhancedHIPC initiatives amounted to $381 million3and $62 million inNPV terms, respectively. Assistance underthe original HIPC Initiativewas deliveredby: (i) the provision o f $154 million inIDA grants during the interimperiod, equivalent to $54 million inNPV terms and (ii) cancellation o f eight IDAcredits with anNPV of $327 million. Assistance due underthe enhancedHIPC Initiative i s being deliveredthrough debt service reductions through 2009, including 100% debt service reliefprovided during the interimperiod. 11. Debtsustainability analysisover the mediumterm 4. At end-2002, Mozambique's nominal stock o f total external debt, including private non-guaranteed, was estimated at $4.8 billi~n.~ The nominal stock o fpublic and publicly guaranteeddebt, includingto the IMF, was $2.7 billion or 69% o f GDP. O fthe latter, 95% i s on concessional terms and about 62% i s owed to multilateral institutions, of which 58% i s owed to IDA. As a result of debt relief granted so far under the original and enhancedHIPC Initiatives, the estimated ratio o f debt-service-to-exports5 for 2002 was 5.1%. This Annex was prepared byMariaTeresa Benito-Spinetto 2 Initially the assistance under the enhanced framework estimated at the decision point was $254 million in N P V terms; however, at the completion point this amount was increasedto $306 million inN P V terms following a revision o f the stock of debt as of end-1998. 3 Including an additional contribution of $29 million inN P V terms to cover a financing gap under the original HIPC 4 Source is the World Bank Debt Reporting System (DRS) Based on the average o f three consecutive years of exports of goods and services ending incurrent year. 106 5. Over the last 18 months, since Mozambique achieved the completionpoint under the enhanced HIPC Initiative, the country's economic performance interms o f GDP growth was slightlybetter on average than expected at the time o f the completionpoint. GDP grew by 13.0% and 8.3% in2001 and 2002, respectively, versus the 9.6% and 9.8% percent envisaged inthe CompletionPointDocument. Onthe other hand, exports were slightly lower than expected in2001 and 2002, by about $7 million inthe three-year moving average o f 2000-2002. Under the same discount and exchange rates, this would bring the NPV o f debt6to GDP ratio in2002 down to 25% from 28% as presentedinthe CompletionPoint Document of the enhancedHIPC (including reliefbeyondHIPC), but the NPV of debt-to-exports ratio would increase from 101.6% to 102.3%. 6. Updatedestimates o f the NPV o f debt-to-exports ratio were preparedbased on the stock o f debt reconciled for the CompletionPoint Document, updated exports, new borrowing figures and more recent discount and interest rates.7 The updated interest rates are lower ingeneral thanthe ones usedinthe Completion Point Document for the enhanced HIPC Initiative andwould bring the end 2002 NPV o f debt-to-exports ratio to 118.9%.8 Nevertheless, the overall debt sustainability analysis and conclusions remain the same as at the time ofthe CompletionPoint Document ofthe EnhancedHIPC in September 2001. Mozambique's high debt burdenwould be reduced to mediumand long-term sustainable levels by the HIPC Initiative and bilateral assistancebeyondHIPC. Following are the results o f the DSA under the various scenarios and sensitivityanalysis. 7. The basecase scenario predictsreal GDP growth, on average, of about 6.6% per annumbetween 2003 and2020. This is slightly lower thanthe 7% average growth experienced since 1987, when growth represented a "bounce-back" from the war and structural reforms. Growth inthis and the next decade i s projected to be drivenby a substantial rise ininvestment. Exports o f goods and services, excluding large projects, are expected to grow around 8% per annum on average innominal dollar terms, slightly lower than the 9.5% growth inthe 1990s. Includinglarge projects, exports of goods and services are expected to increase around 11% on average per annumbetween 2003 and 2020. Incomparison with the Completion Point Document, the NPV o f debt-to-export ratio i s projected to reach 89.4% by 2005, 64.6% by 2010 and 48.8% by 2020, compared to 61.1%, 46.7% and 40.6% as projected inthe CompletionPoint Document, re~pectively.~ Although the updated ratios are significantly above the levels projected at the completion point, they remainwell below 150%. Furthermore, under the base case scenario, the ratios are projected to fall over time. It i s important to mentionthat the projected trajectory o f the NPV o f debt-to-exports ratio could change significantly dependingonthe realization ofthe projected exports underthe large projects. 8. The lower growth scenario assumes slightly lower GDP and export growth due mainly to external factors, and higher IDA lending. It i s assumed that GDP will grow 6 As calculated inthe Enhanced HIPC initiative document o f September 2001. 7 The updated discount rates correspond to the average currency specific CIRRs for the period July- December 2002 and the updated exchange rates correspond to the end 2002 values. * Together with the updated exchange rates, new borrowingand export figures. After bilateral debt relief beyond HIPC assistance. 107 about 1%less on average between2004 and 2020, with two simulated droughts in2004 and2009. Exports andimports would also grow less rapidly as constant elasticities to GDP are assumed. But IDA lendingis higher, as inthe highCAS scenario presented in the maindocument, because lower performance i s assumedto be due to exogenous factors. Under this scenario, the NPV o f debt to export ratios reaches 77.7% by 2020. 9. The highcase IDA lendingsimulation under the same macroeconomic indicators as the base case assumes that IDA disbursementswould be higher due to increased commitments and improved portfolio management. Overall, Mozambique's borrowing underthis simulationwould remainthe same as inthe basecase. Debt sustainability analysis under this scenario i s very similar to the base case, with the NPV of debt-to- export increasing only to 51.1% by 2020. 10. The last sensitivity analysis assumes lower grants compensated by higher bilateral borrowing. Grants are assume to fall to $150 millionby 2020, which would be about $135 millionlower per year, on average, between2005-20. Under this assumption, the NPV ofdebt-to-exports would increase to 77.3% by 2020, almost the same as inthe low case scenario. Mozambique: NPV of debt-to-exports ratio projections 160 140 --CCASbasecase --CCASbasecase(lowergrants) 120 0 100 4 80 60 40 11. Insummary, undernewinterest, exchange rate andmacroeconomic estimates and projections, Mozambique i s still withn the framework o fmanageable debt, even when taking into account the worse-case scenario presented here. Overall, the updated ratios would be well below 150%. Furthermore, under the base case andhighcase scenarios, the ratios are projectedto fall over time, though these results could change significantly dependingonthe realizationo fthe projected exports underthe largeprojects. 108 Mozambique at a glance 7/6/04 Sub- POVERTY and SOCIAL -, Saharan Low. I Mozambique Africa income Development diamond* 2002 Population, mid-year (millions) 18.4 674 2,511 GNI per capita (Atlas method, US$) Life expectancy 210 470 430 GNI (Atlas method, US$ billions) 3.9 317 1,069 T Average annual growth, 1996-02 Population (%) 2.1 2.5 1.9 Labor force (%) 2.2 2.6 2.3 GNI Gross Per primary Most recent estimate (latest year available, 199642) capita nroilment Poverty (% ofpopulation below nationalpoverty line) 69 Urban population (% of total population) 42 32 31 Life expectancy at birth (years) 42 47 59 L Infant mortality (per 1,000live blrfhs) 125 91 76 Child malnutrition (% of children under 5) 26 Access to improved water source Access to an improved water source (% ofpopulation) 57 55 76 Illiteracy (% ofpopulationage 15+) 60 37 37 Gross primary enrollment (% of school-age population) 106 78 96 Mozambique Male 117 85 103 Low-income group Female 95 72 88 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 1 GDP (US$ billions) Economic ratios* 3.6 2.0 3.4 3.6 Gross domestic investmenffGDP 6.0 15.6 26.5 23.7 Exports of goods and serviceslGDP 8.3 13.9 21.8 23.5 I Trade Gross domestic savings/GDP -11.9 -17.2 12.8 8.9 Gross national savings/GDP -10.8 -10.5 11.6 9.2 I r Current account balancelGDP -15.9 -37.8 -24.0 -23.3 Interest paymentslGDP 0.0 2.2 0.3 4.9 Total debffGDP 3.5 230.8 69.9 75.4 Total debt servicelexpork 0.0 13.3 4.7 4.6 Present value of debffGDP 31.O 32.2 Present value of debffexports I / 132.2 118.9 Indebtedness 1982-92 199242 - 2001 2002 2002-06 (average annualgrowth) GDP 2.4 8.1 13.0 8.3 9.8 Mozambique GDP per capita 1.3 5.7 10.6 6.1 7.9 Low-income group Exports of goods and services 1.8 15.3 50.1 12.3 19.1 STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (%) (% of GDP) ~ I Agriculture 33.8 32.0 26.7 26.8 Industry 32.6 16.3 27.6 27.7 60-T Manufacturing 7.6 15.3 15.4 40- Services 33.6 51.7 45.7 45.5 Private consumption 97.7 104.6 76.4 80.1 General government consumption 14.1 12.6 10.8 11.0 Imports of goods and services 26.2 46.7 35.4 38.2 (average annualgrowth) 1982-92 1992-02 2o01 2o02 Growth of exports and Imports (%) Agriculture 3.1 6.7 12.6 7.2 6o Industry -3.7 17.3 20.1 15.1 40 Manufacturing .. 18.8 27.2 6.2 Services 8.6 3.1 8.1 0.3 2o Private consumption 0.2 4.3 -2.1 10.9 0 General government consumption 0.0 5.4 17.9 14.7 I .20 Gross domestic investment 5.6 12.0 -10.0 3.9 -Exports *Imports Imports of goods and services -1.9 4.3 -14.9 16.6 Note: 2002 data are preliminary estimates. Group data are through 2001, * 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. I / As percent of 3-year moving average of exports of goods and non-factor services. Mozambiaue PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 1 r/.) Domestic prices inflation I (% change) Consumer prices 17.7 45.1 9.0 16.8 Implicit GDP deflator 17.5 44.6 10.6 10.6 Government finance (% of GDP, includes current grants) Current revenue 19.2 20.3 18.2 18.0 97 98 99 00 01 Current budget balance 3.2 4.4 3.7 2.2 Overall surplusldeficit -5.0 -10.0 -16.5 -15.8 *E-""GDP deflator *CPI I TRADE 1982 1992 2001 2002 (US$ millions) Exportand Import levels (US$ mill.) Total exports (fob) 229 139 703 682 1,500 Cashew nuts and raw cashew 44 18 31 51 1000 Prawn 39 65 81 108 Manufactures 14 13 13 500 Total imports (cif) 745 1,063 1,263 0 Export price index (1995=100) 90 90 87 85 I I 95 97 98 99 00 01 02 1 Import price index (1995=100) 110 93 82 81 0 Exports IlImports Terms of trade (1995=100) I/ 81 97 106 106 i BALANCE of PAYMENTS 1982 1992 2001 2002 1 (US$ millions) Current account balanceto GDP (%) Exports of goods and services 337 304 1,008 1,187 0 Imports of goods and services 893 860 1,578 1,837 5 Resource balance -556 -556 -570 -650 -10 Net income -20 -183 -254 -190 -15 Net current transfers 0 0 0 0 -20 Current account balance -576 -738 -824 -841 -25 Financing items (net) 435 778 828 1,033 4 0 Changes in net reserves 141 -40 -3 -192 Memo: Reserves including gold (US$ millions) 31 233 727 736 Conversion rate (DEC, /ocal/US$) 37.8 2,433 20,704 23,667 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Compositionof 2002 debt (US$ mill.) Total debt outstanding and disbursed 2/ 125 4,514 2,402 2,716 IBRD 0 0 0 0 IDA 0 417 777 985 Total debt service 21 0 48 49 56 IBRD 0 0 0 F 1,516 IDA 0 3 7 12 Composition of net resource flows 21 Official grants 499 469 428 Official creditors 0 168 103 223 Private creditors 0 -2 0 0 Foreign direct investment 0 25 255 372 E: 1,029 World Bank program Commitments 0 289 229 180 A - IBRD E. Bilateral Disbursements 0 106 52 149 B - IDA D Other multilateral - F Private Principal repayments 0 0 3 6 C IMF -- ~ G Short-term Net flows 0 106 49 143 Interest payments 0 3 4 6 Net transfers 0 103 44 137 Development Economics 7/6/04 I / Includes aluminum price 21 Public and Publicly Guaranteed. Data for 2001 includes implementation of November 2001 Paris Club under the Enhanced HIPC Initiative. Data for 2002 includes all signed agreements under the Enhanced HIPC Initiative signed by end 2002. Excludes private non-guaranteed debt estimated at US$ 1.6 billion in 2001 and 2002. 110 CAS Annex B2 Selected Indicators* of Bank Portfolio Performance and Management As of September 1,2003 Indicator 2000 2001 2002 2003 Portfolio Assessment Number of Projects Under Implementation a 16 15 16 16 Average Implementation Period (years) 3.2 3.5 3.5 3.5 Percent of Problem Projects by Number 0.0 6.7 18.8 0.0 Percent of Problem Projects by Amount 0.0 9.3 15.9 0.0 Percent of Projects at Risk by Number a , d 0.0 6.7 18.8 17.6 Percent of Projects at Risk by Amount a, 0.0 9.3 15.9 11.0 Disbursement Ratio (%) e 18.2 19.0 16.7 9.0 Portfolio Management CPPR during the year (yeslno) no Yes no Yes Supervision Resources (total US$) 1288 1150 1353 1314 Average Supervision (US$/project) 68 72 80 77 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 27 12 Proj Eva1by OED by Amt (US$ millions) 1,414.9 452.7 % of OED Projects Rated U or HU by Number 18.5 16.7 % of OED Projects Rated U or HU by Amt 8.7 6.8 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated UlHU on development objectives (DO) and/or implementation progress(1P). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the * beginning of the year: Investment projects only. As of June 11, 2003. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 111 CAS Annex B3 IBRDllDA Program Summary As of September 1, 2003 Proposed IBRDADABase-Case Lending Program a Fiscal year Proj ID US$(M) Strategic Rewards b Implementation b (H/M/L) Risks (H/M/L) 2004 Southern Africa Regional Gas Project 30.0 H H South Africa Power 13.0 H H Decentralized Planning and Financing 42.0 H M PRSC 1 50.0 H H National Water Development Supplement 15.0 H M Result 150.0 2005 PRSC 2 50.0 H H Financial Sector TA 10.0 H H Legal Sector Capacity 5.0 H M Beira Railway 60.0 H M Sustainable Tourism 20.0 H M Result 145.0 2006 PRSC 3 70.0 H H Roads and Bridges Phase 2 APL 85.0 H M Technical Vocational Education 20.0 H H Result 175.0 2007 PRSC 4 70.0 H H Public Sector Reform 2 20.0 H M Result 90.0 Overall Result 560.0 * The DPFP will be fully grant-funded 112 CAS Annex B3 (IFC & MIGA) IFC andMIGA Program(July 2000 to September 2003) 2000 2001 2002 2003 IFCapprovals (US$m) 158.24 25.30 0.04 0.2 Sector (%) ACCOMODATION& TOURISMSERVICES 2.2 0.0 0.0 0.0 AGRICULTURE& FORESTRY 1.9 0.0 0.0 0.0 FINANCE& INSURANCE 9.6 0.0 0.0 100.0 FOOD & BEVERAGES 9.7 0.0 0.0 0.0 HEALTHCARE 0.4 0.0 0.0 0.0 INDUSTRIAL& CONSUMERPRODUCTS 0.0 1.6 100.0 0.0 OIL.GAS& MINING 0.3 0.0 0.0 0.0 PRIMARYMETALS 75.9 98.4 0.0 0.0 100.0 100.0 100.0 100.0 Investmentinstrument(%) Loans 57.6 56.9 100.0 100.0 Equity 25.0 2.0 Quasi-Equity 0.6 41.1 Other 16.8 - Total 100.0 100.0 100.0 100.0 MIGA guarantees (US$m) 112.20 143.90 147.6 263.6 113 CAS Annex B4 Summary of Nonlending Services - As of September 1,2003 Product Completion FY Cost (lJS$OOO) Audience a Objective Recent completions CEM 2002 200.0 Gov, don.,WB, pub Know., publ., probl. Public Expenditure Review,Vol. 1 2002 143.4 Gov, don.,WB, pub Know., publ., probl. CFAA 2003 83.7 Gov, don.,WB, pub Know., publ., probl. Undenvay Public Expenditure Review, Vol. 2 2004 133.5 Gov, don.,WB, pub Know., publ., probl. CPAR 2004 80.4 Gov.,don.,WB Know., probl. Legal and Judicial Sector 2004 50.0 Gov, don.,WB, pub Know., publ., probl. Education Sector Review 2004 85.0 Gov, don.,WB, pub Know., publ., probl. Investment Climate Assessment 2004 85.0 Gov, don.,WB, pub Know., publ., probl. Planned Country Status Report on Health 2004 85.0 Gov, don.,WB, pub Know., publ., probl. Rural Development Strategy 2004 100.0 Gov, don.,WB, pub Know., publ., probl. CEM on Sustainable Growth 2005 200.0 Gov, don.,WB, pub Know., publ., probl. Private Sector Competitiveness 2005 100.0 Gov, don.,WB, pub Know., publ., probl. Poverty Update 2005 150.0 Gov, don.,WB, pub Know., publ., probl. Vocational Education 2005 85.0 Gov, don.,WB, pub Know., publ., probl. PEMFAR 2006 200.0 Gov, don.,WB, pub Know., publ., probl. a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 114 CAS Annex B5 - Social Indicators Latestsingle year Same regionlincome group Sub- Saharan Low- 1970-75 1980-85 1994-02 Africa income POPULATION Total population,mid-year (millions) 10.5 13.5 18.4 658.9 2,459.8 Growth rate (% annual averagefor period) 2.2 2.3 2.0 2.6 2.0 Urban population (% of population) 8.6 19.4 42.0 34.4 31.9 Total fertility rate (births per woman) 6.5 6.4 5.1 5.2 3.6 POVERTY (% ofpopulation) National headcount index 69.0 Urban headcount index Rural headcount index INCOME GNI per capita (US$) 260 210 470 410 Consumer price index (1995=100) 1 229 133 140 Food price index (1995=100) INCOMElCONSUMPTlON DISTRIBUTION Gini index 39.6 Lowestquintile (% of income or consumption) 6.5 Highest quintile (% of income or consumption) 46.5 SOCIAL INDICATORS Public expenditure Health (% of GDP) 3.8 2.4 1.2 Education(% of GDP) 2.3 4.6 3.6 3.4 Social security and welfare (% of GDP) 2.1 Net primary school enrollment rate (% of age group) Total 51 41 Male 56 45 Female 47 37 Access to an improved water source (% ofpopulation) Total 60 55 76 Urban 86 82 88 Rural 43 41 70 Immunization rate (% under 12 months) Measles 39 57 53 57 DPT 29 61 46 57 Child malnutrition (% under 5 years) 26 Life expectancy at birth (years) Total 43 44 42 47 59 Male 42 42 41 46 58 Female 45 45 44 47 60 Mortality Infant (per 1,000 live births) 166 135 125 91 76 Under 5 (per 1,000 live births) 281 195 200 162 115 Adult (15-59) Male (per 1,000 population) 498 468 591 504 294 Female (per 1,000 population) 382 361 527 459 261 Maternal(per 100,000live births) 980 Births attended by skilled health staff (%) 28 44 Note: 0 or 0.0 meanszero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepancies betweenthe estimates of school-age population and reported enrollment data. 2002 World Development Indicators CD-ROM, World Bank and staff updates. 115 CAS Annex B6 Key ExposureIndicators Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 'l'otal dcbt outstandingarid disbursed ( 1'110)(US$m)a -i631 .. 8302 6978 7052 4406 5100 5665 5853 6174 6417 ot'which : Public 5400 6180 5x43 2178 2142 2280 2407 25.34 2653 2766 Total debt servicepaid(TDS)(US$m)a 110 120 I34 I 3 0 233 302 321 359 409 467 oT\vhich : Public 85.7 63.2 62.2 45.4 48 56 71 70 76 83 1500.1 1564.1 l16O.S 903.0 443.0 429.8 475.0 350.3 325.7 266.0 IOhl.5 1164.2 805.4 297.4 212.5 102,l 202.2 151.7 139.9 114.7 221.3 2 W 7 170.6 104.4 130.0 141.7 133.6 119.2 112.8 108.0 156.6 156.1 118.4 60.0 62.4 63.3 56.8 51.6 48.5 40.6 21.6 23.7 22.3 17.7 23.1 25.4 27.0 21.5 24.8 1 9 4 16.8 11.0 10.3 6.2 4.8 4.7 6.0 4.2 4.0 3.4 1162 1338 1332 760 777 OS5 1122 1259 1306 1?(30 C) 12 12 9 I O 1 1 I 4 I 6 18 20 11 19 20 20 21 20 20 21 2-1 23 IFC (US$m) Loans 1 0 0 1 Equityandquasi-equity /c 59 M E A MIGA guarantees (US$m) 0 0 0 0 a. Includespublic andpublicly guaranteeddebt, private nonguaranteed,use of IMFcredits andnet short- term capital. b. "XGS" denotes exportsof goods and services, including workers'remittances. c. Preferredcreditorsare definedas BRD,IDA, the regionalmultilateraldevelopmentbanks, the IMF, andthe Bank for Intemational Settlements. Amount shown in 2000 refers to disbursementsbetween 1997and 2000 d. Includespresentvalue ofguarantees. e. Includesequity and quasi-equitytypes of bothloanandequity instruments. 116 CAS Annex B8 (IFC) Mozambique Statement o f IFC's Heldand DisbursedPortfolio As of September 1,2003 (InUS Dollars Millions) Held Disbursed FYApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 BIM-INV 0 0.3 0 0 0 0.3 0 0 2000 BMF 0 0.2 0 0 0 0.2 0 0 199712001 MOZAL 69.55 0 58.5 0 57.87 0 58.5 0 1999 Maragra Sugar 10.3 0 0 0 0 0 0 0 1992 Polana Hotel 0.18 0 0 0 0.18 0 0 0 2000 SEF Ausmoz 0.72 0 0 0 0.45 0 0 0 1997 SEF CPZ 1 0 0 0 1 0 0 0 1997 SEF CTOX 0.73 0 0 0 0.73 0 0 0 2000 SEF Cab0 Caju 0.58 0 0 0 0.51 0 0 0 2001 SEF Grand Prix 0.46 0 0 0.27 0 0 0 1999 SEF ROBEIRA 0.16 0 0 0 0.16 0 0 0 Total Portfolio: 83.68 0.50 58.50 0 61.17 0.50 58.50 0 Amrovals PendingCommitment US$ Million - Loan Equity Quasi Partic 1996 BIM 10 0 0 0 Total Pending Commitment: 10 0 0 0 121 CAS Annex B10 Annex B10 CAS Summary of Development Priorities As of September 1,2003 Country Majorissue Country Bank Reconciliation Network area performancea priority priority of countryand Bankpriorities Poverty Reduction & Economic Management Povertyreduction Good Rural, peri- High High urban poverty Economic policy Good Fiscaldisciplinc High High Public sector Fair Financial High High management Gender Fair Femaleed. High High enrolment Human Development Department Education Good Completion High High rates Health, nutrition and population Fair Geographic High High inequality Social protection Fair Natural High High disasters Environmentally & Socially Sustainable Development Rural development Fair Smallholder High High productivity Environment Fair Overexploited Moderate High Supportto natural resources reformsongoing Social development Fair Communities Moderate Moderate not involved Finance, Private Sector & Infrastructure Financialsector Poor Banking sector High High troubles Privatesector Fair High cost of High High doing business Energyand mining Fair Monopolies High High Infrastructure Good Low access High High to key services 122