Document of The World Bank ReportNo: 25707 ZR PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT lNTHEAMOUNT OF SDR87.1MILLION (EQUIVALENT TO US$120 MILLION) TO THE DEMOCRATICREPUBLIC OF CONGO FOR A PRIVATE SECTORDEVELOPMENT AND COMPETITIVENESS PROJECT July 2,2003 Private Sector Unit Africa Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2003) Currency Unit = Franc Congolais (CDF) CDF 1 = US$.00240 US$1 = CDF415 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS ANAPI I'Agence Nationale de Promotion des ICR Implementation Completion Report Investissements AT1 African Trade Insurance Agency IDA International Development Association BCDC Banque Commerciale du Congo IFC International Finance Coorporation BCCE Banque Congolaise du Commerce ExtPrieur LAC Lignes APriennes Congolaises BCA Banque Continentale Africaine MIGA Multilateral Invesment Guarantee Agency BceCo Bureau Central de Coordination NBK Nouvelle Banque de Kinshasa CAS Country Assistance Strategy NCB National Competitive Bidding COPIREP ComitP de Pilotage de la RPforme des NGO Non-governmental organization Entreprises Publiques COPEMECO ConfPdPration des Petites et Moyennes NPV Net present value Entreprises Congolaises CPAR Country Procurement Assessment Review OCPT Office Congolais des Postes et TPlPcommunications CPCE Cadre Permanent de Concertation OHADA Organisation pour Economique I'Harmonisation du Droit des Affaires en Afrique CRONGD Conseil Regional des ONGs de ONATRA Office National des Transports DPveloppement DRC Democratic Republic of Congo PPF Project Preparation Facility EERP Emergency Early Recovery Project RIFIDEC Regroupement des Institutions du S y s t h e de Financement DkcentralisP du Congo EMP Environmental Management Plan ROA Return on Assets EMRRP Emergency Multi-Sector Rehabilitation and RVF Rtgie des Voies Fluviales Reconstruction Project ERC Economic Recovery Credit SA Special Account FDI Foreign Direct Investment SBD Standard Bidding Documents FMR Financial Monitoring Report SER Standard Evaluation Report FOLECO Federation des ONGs Lai`ques d: Vocation SNCC SociPtP nationale des chemins de Economique du Congo fer du Congo GECAMINES La Generale des Carrieres et des Mines SNEL SociPtP nationale d'klectriciti IBRD International Bank for Reconstruction and TSS Transition Support Strategy Development ICB International Competitive Bidding URK Unit6 de RPinsertion au Katanga Vice President: Callisto E. Madavo Country Managermirector: EmmanuelMbi Sector ManageriDirector: Demba Ba Task Team Leader/Task Manager: IvanRossignol FOROFFICIAL USEONLY CONGO, DEMOCRATIC REPUBLICOF PRIVATE SECTORDEVELOPMENT AND COMPETITIVENESS CONTENTS A. Project DevelopmentObjective Page 1. Projectdevelopment objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 9 C. Project Description Summary 1. Project components 10 2. Key policy and institutional reforms supported by the project 12 3. Benefits and target population 13 4. Institutional and implementationarrangements 13 D.ProjectRationale 1. Project alternatives considered andreasons for rejection 14 2. Major relatedprojects financed by the Bank and/or other development agencies 16 3. Lessons learned and reflected inthe project design 16 4. Indications o fborrower commitment and ownership 17 5. Value added o f Bank support inthis project 18 E. Summary ProjectAnalysis 1. Economic 18 2. Financial 18 3. Technical 18 4. Institutional 19 5. Environmental 20 6. Social 21 7. Safeguard Policies 23 This document has a restricted distribution andmay beusedby recZpients O d Y in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization. F. Sustainability and Risks 1. Sustainability 23 2. Critical risks 23 3. Possible controversial aspects 25 G. MainCredit Conditions 1. Effectiveness Condition 25 2. Other 25 H. Readiness for Implementation 26 I.CompliancewithBankPolicies 26 Annexes Annex 1: Project Design Summary 27 Annex 2: Detailed Project Description 31 Annex 3: Estimated Project Costs 38 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 39 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 42 Annex 6: (A) Procurement Arrangements 43 (B)FinancialManagement andDisbursement Arrangements 51 Annex 7: Project Processing Schedule 54 Annex 8: Documents inthe Project File 55 Annex 9: Statement o f Loans andCredits 56 Annex 10: Country at a Glance 57 Annex 11: Facilitatingthe Dialogue between Government and the Private Sector 59 IBRD31546 CONGO, DEMOCRATIC REPUBLIC OF Private Sector Development and Competitiveness Project AppraisalDocument Africa Regional Office AFTPS Date: July 2,2003 Team Leader: Ivan Rossignol Sector ManagedDirector: Demba Ba Sector(s): General transportation sector (20%), Mining Country ManagedDirector: Emmanuel Mbi and other extractive (20%), General energy sector (20%), Project ID: PO71144 General finance sector (20%), Telecommunications (20%) Lending Instrument: Specific Investment Loan (SIL) Theme(s): Infrastructure Services for Private Sector development (P), State enterprise/bank restructuring and privatization (P), Export development and competitiveness (SI Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For LoanslCreditslOthers: Amount (US$m): 120.0 Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: 0.50% Service charge: 0.75% BORROWER 3.83 0.00 3.83 [DA 71.28 48.72 120.00 rotal: 75.11 I 48.72 I 123.83 Contact Person: Pierre KikuniSaido, General Secretary of Mines Tel: 243.89.13.897 Fax: 243.139.23.88 Email: Other Agency(ies): Collitge economique a la Presidenee Contact Person: Conseiller principal du collkge Cconomique a la Presidence, Mr.Joseph Mukania Tel: 243 88 02 857 Fax: 243 88 02 000 Email: Estimated Disbursements ( Bank FYlUS$m): Project implementation period: 6 years (10/27/03 to 10/26/09) Expected effectiveness date: 10/27/2003 Expected closing date: 03131/2010 A. Project DevelopmentObjective 1. Project development objective: (see Annex 1) The project's development objective i s to increase the competitiveness o f the economy, and thereby contribute to economic growth. The project will achieve these objectives by assisting with improvingthe investment climate; by supporting reform o f public enterprises in the mining, telecoms, financial, transport, and energy sectors; by stimulating economic diversification and development in the Katanga region through community-driven development approaches and by facilitating the reintegration o f retrenched workers inthe local economy through support for training, business development services and finance. 2. K e y performance indicators: (see Annex 1) The key performance indicators are: 0 Foreign direct investment (FDI) in the mining, telecom, financial, transport, energy sectors reaches US$1 billionper year by 2009 (from US$200 million in2002). 0 Increased return on assets for each targeted enterprise (SNEL, SNCC, RVA, LAC, OCPT, CityTrain, Gecamines) from an average o f (-21 percent) to +2 percent by end o f project implementation. 0 Net fiscal contribution from parastatals increasedby US$10 million annually. 0 Average number o f days to create a company reduced from three years to three months by the time o f the midtermreview. 0 Private sector participation in Gecamines, SNEL, SNCC, RVA, LAC, OCPT achieved by the end o f the project, whether through public/private partnerships, hlly private, management contract, or other arrangement. B. Strategic Context 1.Sector-related CountryAssistance Strategy (CAS) goal supported bythe project: (see Annex 1) Document number: IDNR2001-0123 Date of latest CAS discussion: July 31,2001 The main objectives o f the Bank's Transition Support Strategy (TSS, P057300) are to: (i) meet basic and urgent needs; (ii) rebuild effective public institutions and policies; (iii)revitalize economic activity and (iv) rebuild implementationcapacity. The proposed project i s a central element o f the Bank's Transitional Support Strategy for the Democratic Republic o f Congo (DRC). This strategy seeks to rebuild effective public institutions and policies and to revitalize economic activity by creating conditions that encourage private sector investment and trade. The proposed project will support reforms that improve the investment climate and to reform key parastatals, both o f which are essential to attract investment. It will also help reinforce the capacity of the Bureau Central de Coordination (BCeCo) and build the capacity o f the Comitk de Pilotage de la Rkfome des Entreprises Publiques (COPIREP) to implement projects effectively and efficiently, contributing to the reestablishment o f effective government institutions. The project is consistent to the government's interim poverty reduction strategy, which rests on three pillars: peace and good governance, stabilization and pro-poor growth (including private sector led growth), and forging partnerships with communities for development. Finally, the project complements - 2 - efforts led by the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) to promote investment inDRC's economy. The World Bank Group has taken the lead in supporting policy dialogue between all the stakeholders regarding the future o f the development o f the mining, telecom, financial, transport, and energy sectors, assisting the government with the implementation o f its ongoing legal and regulatory reform, and with its public enterprise restructuring and reform. Bank support for reforms in the financial sectors are being coordinated with the InternationalMonetary Fund(IMF). 2. Main sector issues and Government strategy: DRC i s gradually emerging from a decade o f conflict and years o f mismanagement, which have left the country facing the collapse o f physical, social, and economic infrastructure. Gross national income per capita stood at US$107 (World Bank Atlas method) in 2001, making the DRC one o f the poorest countries inthe world. The Congolese government needs urgently to meet basic needs, such as education and health services; disarm and demobilize soldiers and militia members, and reintegrate them into the social and economic fabric o f communities; rebuild effective public institutions and governance that would strengthen transparency, accountability, and citizen participation; and revitalize economic activity by reconstructing essential infrastructure, revitalizing agriculture, and promoting investment in the export-oriented industries, particularly the important miningsector. Investment climate Potential investors view the DRC as one of the riskiest countries in the world to do business. The DRC i s ranked 136 out o f 140 countries in terms o f risk, according to the April 2003 International Country RiskGuide. Only Liberia, Somalia, IraqandZimbabwe are consideredto be riskier. Corruption, law and order, democratic accountability, and bureaucratic quality as viewed as particularly problematic. T o facilitate access to risk mitigating instruments for investors, the government has completed the membership requirements to join MIGA and i s now considering joining the Africa Trade Insurance Agency to further attract foreign direct investment and encourage trade through the provision o f political risk insurance to investors and exporters. The availability o f such products lowering will also encourage foreign and local banks to lend to enterprises. The investment climate in the DRC is poor. The investment climate involves rules and regulations pertaining to the entry and operations o f private firms and to questions that affect the competitiveness o f the economy. This broad concept encompasses diverse areas such as taxation, laws and regulations applying to enterprises, reliability o f the judiciary system, the role o f the state inthe economy, access to financial services, and the like. The government's strategy is to improve the investment climate by restructuring the tax regime; by improving the regulatory, legal, andjudiciary framework to both attract private investment and generate government revenues; by offering sovereign risk guarantees against expropriation o f private assets; by restructuring public enterprises to encourage more private sector involvement and to improve quality o f and access to services; and by reforming the financial sector. A number o f laws and regulations such as the Charter o f the Central Bank, the Banking Act, and the Cooperative Banking Act have been revised and approved by the government to enhance economic governance and to move towards comprehensive financial sector reform. A discussion o f specific aspects o f the investment climate follows. Corporate taxes. A January 2003 review o f the tax regime in DRC revealed a complex system riddled with massive fraud and corruption. The number o f institutions allowed to collect tax is a source o f confusion, even for their managers. The level and number o f taxes, both direct and indirect i s high, yet fiscal revenues do not exceed 8 percent o f GDP (among the lowest levels o f revenues to GDP in the - 3 - world). More than 900 different indirect taxes can be applied. Companies often do not have the resources to follow tax requirements, which leads to abusive controls or to corruption or tax evasion (official statistics show that a mere 600 companies tum over US$lOO,OOO or more). The government's strategy is to strengthen the institutional management o f corporate taxes, while entirely overhauling tax policy. If carried out, these efforts will produce a simplified tax regime which limits the number o f collecting agents, reformed customs and a customs clearing process, reduced the income tax, and provision o f incentives to small andmediumsize enterprises through tax moratoria. Legal environment. Parliament has approved new investment, mining, forestry, and labor codes. The investment code reflects international best practices, aiming to facilitate foreign direct investment. The new mining code provides an adequate non-negotiable framework for private investment in mining in DRC, accepted by the vast majority o f stakeholders. The code introduces measures to ensure full transparency in the allocation o f mining permits, to reduce the scope for government discretion, and to ensure a nondiscretionary treatment o f all operators. The regulations to the miningcode were adopted in March 2003. The labor code reflects generally accepted principles, while introducing the concept o f a minimumwage. However, new sectoral laws are still needed inthe energy and transport sectors (a new telecoms law was passed in September 2002) to allow the entry o f private sector involvement and new competitors in the sector. The public enterprise law does not allow the state to divest from public enterprises. N o legal framework exists for public private partnerships, including concessions. The government has given the mandate to COPIREP to create sectoral worlung groups to define by consensus a new legal environment. In addition, a commision permanente de &forme juridique (including the legislative commission to review certain areas o f the law) has been established. A public workshop to discuss the adherence o f the country to the Organisation pour 1`Harmonisation du Droit des Affaires en Afrique (OHADA) took place inearly 2003 under government sponsorship. Judiciary. No credible, professional, effective judiciary system currently exists in the DRC, although islands o f excellence may be found in all areas o f the legal andjudiciary system. The risk that members o f the legal profession use the apparatus to create conflict, harass citizens (notably the private sector), and demand payment in order to settle the conflict i s ever present. The constraints to effective performance are many and include (a) inadequate remuneration and benefits for all members o f the judiciary; (b) inadequate and often inappropriate buildings for court proceedings; (c) inadequate provision o f equipment, fumiture, and operating funds; (d) lack o f disclosure to judges and the public o f the law as legislated and decreed; and (e) nonexistence o f a continuous judiciary doctrine. As a result, the written law and the practice observed diverge widely, and there is constant risk o f interference inthe judicial process by political or commercial interests. However, the government recognizes that the current situation i s unfair and may hinder the permanent restoration o f peace. Steps have already been taken to strengthen the judiciary, with the assistance o f bilateral donors. Notably, the government is establishing five commercial courts, i s promoting the use altemative conflict resolution methods based on traditional values (justice de proximitd), and is considering establishing 130 tribunaux de paix, a permanent training institute for judges (ecole nationale de magistature), and ajudicial training center for ad-hoc interventions. Administrative barriers. Private investors face multiple barriers when establishing and operating a business in the DRC. A potential investor must receive a general entry approval; obtain access to land, buildings, connections to utilities; comply with operational requirements; and face demands for unofficial payments by people at all levels o f the bureaucracy. Registering a company can take several years, while no single office in the government provides information on what the administrative requirements are or how best to deal with them. As a result, existing enterprises and vested interests in the public administration have benefited from de facto protection. The government's strategy is to - 4 - significantly improve the publidprivate interface through a one-stop center for investors, 1'Agence nationale pour la promotion des investissements (ANAPI), established in January 2003. However, ANAPI lacksbothtechnical capacity and financial resources to deliver. Public institutions andpolicies Administrative capacity in the DRC has severely deteriorated in recent years. Public institutions must now be strengthened and reorganized in ways that will ensure transparency, accountability, and participation o f citizens, and thereby lay the groundwork for broad-based growth with disincentives to corruption. Buildingregulatory capacity will be key inachieving this objective. Policy decisions inthe telecom, transport and energy sectors have been taken at the level o f the ministries without consultations with stakeholders, often leading to inefficient use o f resources. To build consensus, the government's strategy i s to establish a forum for open consultation with key stakeholders on sectoral policy issues. Such forum is also expected to lead to greater transparency. The government has indicated that ANAPI will play this role. Parastatal reform The government controls over 50 state-owned conglomerates, which span all the sectors o f the economy, and less than 30 o f which operate as companies. Some no longer operate at all. These conglomerates, mostly in the infrastructure and utility sectors, do not provide quality services. The government's objective is to restructure the public enterprises, and in some cases, divest from the enterprises. In addition to mining, parastatals in four sectors have been slated for urgent reform: transport, telecommunications, energy, and finance. Reforming services in these sectors will be key to rapidly improve connectivity o f the economy. The mining sector is in shambles. The Democratic Republic of Congo was previously an important world producer o f copper, cobalt, diamonds, gold and other base metals. Historically, miningaccounted for 25 percent o f the country's gross domestic product, 25 percent o f total budgetary revenues, and about 75 percent o f total export revenues. It provided 7 percent o fjobs inthe formal sector. The govemment has a stake, generally a majority stake, in all mining operations in the country. The rapid recovery o f mining production to the levels seen in the early 1980s (about US$2 billion) requires the rapid restructuring and privatization o f mining state-owned enterprises, namely La Generale des Carrieres et des Mines (Gecamines), formerly the country's most important provider o f foreign exchange with more than US$1 billion inrevenues. Copper production from Gecamines declined from a peak o f 475,000 tons in 1986 to about 15,000 tons in 2002, while cobalt production decreased from 14,000 tons to less than 4,000 tons during the same period. In spite o f its mineral wealth, Gecamines i s today in technical and financial bankruptcy. Its equipment is old and its productivity i s abyssal, it has highproduction costs that translate into substantial operating losses, its 24,000 employees that have not beenpaid for more than 2 1 months, and it has about US$1.4 billion dollars o f debt, including more than US$lOO million o f tax arrears and payments due to state-owned utilities. The government and Gecamines have during the past five years created different sorts o f associations o f more than 20 copper-cobalt and zinc mines and processing facilities to attract new foreign investment. However, rather than form a plan for the coherent revival of the miningindustry, these joint ventures and association agreements tried to maximize the amount o f the up-front fees (signature bonus) payable by the foreign investor in the development o f the project, sacrificing any fiscal revenues that may have arisen from the operations. - 5 - The government's strategy as defined inthe new miningcode is to rapidly divest from and restructure the mining enterprises to openthem upto private investment. The restructuring will be accompanied by the provision o f a retrenchment package to workers made redundant, by a program offering training, by financial assistance to start businesses, and by support for general economic development inthe affected areas. The IDA-supported Economic Rehabilitation Credit (ERC) is already assisting the government in reducing the workforce at Gecamines. As agreed during the negotiations o f the ERC, a permanent committee was created at the level o f the presidency to oversee the restructuring o f Gecamines. Its mandate i s to (a) renegotiate the existing agreements where appropriate, and to sell specific assets on a competitive bidbasis; (b) establish a policy regarding the severance o f redundant workers, including the size and nature o f a social safety net to be providedto those that leave the company, (c) formulate a plan to transfer the provision o f social services provided by the company to local governments and communities; (d) evaluate the legacy o f environmental damage and coordinate the clean-up work; and (d) define milestones for the implementation o f the restructuring. Inaddition, the government's strategy i s to strengthen the mining institutions' capacity to enforce the new mining code, to improve security o f tenure, and to reduce the number o f conflicts related to miningpermits through the rehabilitation o f the mining cadastre under an unified system. The cadastre has been totally reorganized with the assistance o f grant from the Institutional Development Fund o f the World Bank and i s now ready to operate under the rules o f the new miningcode. The telecommunications parastatal is uncompetitive. The fixed network i s operated by the Office Congolais des Postes et Tdkcommunications (OCPT) under a largely theoretical exclusivity regime. The technology i s obsolete, equipment are old and poorly maintained. As a result, out o f the 20,000 main lines (for a population o f about 57 million people), only 3,000, for the largest part located in Kinshasa, are still operational and the situation is rapidly deteriorating due to the financial losses borne by OCPT. Such a l o w teledensity, 0.005 percent, has to be compared with the Sub-Saharan Africa average o f 1.20 percent. The access to Internet lines does not exceed 0.02 per 10,000 people while the Sub-Saharan Africa average i s 3.1. Mobile teledensity is also one o f the lowest in Africa (although it i s growing fast), standing at 1.15 per 100 inhabitants as o f March 2003. To add to its poor technical performance, OCPT i s largely overstaffed and financially bankrupt; productivity is especially low, revenues do not cover staff expenditure while total debt is four times the amount o f the assets. Bill collection is also weak, due in part to government arrears that amount to US$16 million. There is no separate accounting for postal and telecommunication activities and telecommunication revenues subsidize postal activities. As a consequence, OCPT is unable to pay the salaries regularly and wage arrears exceed 13 months (33 months insome instances). Performance indicators in the uostaland telecommunications services (2003) Telecommunications Postes Total Number o f lines (operational) 3,000 NA NA Total staff 2,768 1,728 5,900 Average number o f lineshtaff 1.08 NA NA Total postal outlets NA 288 288 Salarv arrears NA NA 13 Given the deficiencies o f the public operator, the govemment started during the early 1990s to award licenses to providers o f mobile services. Although not consistent with the law, by the end o f 2000 the - 6 - government had granted at least 16 licenses. By March 2003, nine providers o f mobile services were serving an estimated 660,000 subscribers (a teledensity o f 1.15 percent). About 90 percent o f these subscribers are located inKinshasa, 5 percent are inLumumbashi and 5 percent are inBujimai. None o f the licenses were awarded through a biddingprocess. Technical requirements and standards were not harmonized. Finally, other services such as Internet are not widely available and their speed and reliability i s limited. The government's strategy inthis sector i s to promote a new telecommunication law, which will be more attractive to private operators, reduce the number o f licenses issued, and create an independent regulatory authority. The new telecom law that was adopted in September 2002 still raises questions about the monopoly o f the state-owned operators, but is an improvement over the previous one. The issue o f increasing the number o f fixed lines will be addressed through the reform o f the OCPT. The government i s currently in the process o f defining a strategy for reforming several state-owned enterprises, including OCPT. The strategy will be to either to restructure or to divest from the OCPT. The government is also engaged in several activities allowing it to set up a regulatory body. Energy sector. Although the DRC has hydroelectric resources estimated at more than 100,000 megawatts located all over the country (although with a concentration in Bas-Congo), only about 6 percent o f the population has access to electricity, one o f the lowest rates of access inthe world (about 17 percent o f the population in Sub-Saharan Africa have access to electricity). Access varies from 31 percent in Kinshasa, 7.1 percent in Bas-Congo, 0.3 percent in Bandundu, 0.9 percent in Equator, 0.8 percent inNorth-Kivu, 2.7 percent in South-Kivu, 5 percent in Katanga, and about 2 percent Kasai. The lack o f electricity services reduces the competitiveness o f all economic activities, but i s an especially serious problem for mining. Upgrading electricity services i s key to promotinggrowth. The government's short-term strategy i s to provide a minimum supply o f electricity to the main cities, while starting to reinforce institutional capacities in the country. The long-term strategy is to invest in new infrastructure (through the Emergency Multisector Rehabilitation and Reconstruction Project (EMRRP)), to promote a new law governing the energy sector, to create an independent regulatory authority, and to reform the Socigtk Nutionale d'EZectricitt (SNEL). The reform o f the SNEL may involve restructuring or divestiture. Transport sector. By the end o f 2000, nine public enterprises operated transportation services, many with overlapping activities (table 2). The halt in the early 1990s o f the programs financed by external donors and the lack o f national resources allocated to at least minimal maintenance for the transport infrastructure has resulted in the collapse o f the entire multimodal network and the rupture o f the logistical chain o f transportation. Poor technical and financial performance o f companies have also aggravated that situation, and have contributed to loweringthe per capita access to service. In contrast to other countries where the management of major infrastructure such as ports, airports, shipyards, and railways has been gradually transferred to the private sector through public/private partnerships, involvement o f the private sector in the management o f these infrastructural services no longer exists in the DRC. The legal framework does not exclude such private involvement inmanaging ports, airports, shipyards, and railways. However, the largest public enterprises have a de facto monopoly and the private sector is limited to providing road, river and air transport services. Inaddition, public enterprises have progressively developed numerous new activities without clear justification as a direct consequence o f the financial difficulties they have encountered. As a result, not only have these public enterprises grown significantly in size, but the addition o f new activities without reliable accounting systems makes it more difficult to assess real cost o f services and has not led to increased - 7 - efficiency or profitability. T o the contrary, in some cases, these new activities have been cross-subsidized with the proceeds o f regular services. Performance indicators in the transuort sector (2002) Turnover Profit (losses) Totalstaff Equipment availability (vS$OOO) (vS$OOO) Available equipment dividedby nominal Sociitd Nationale des I 115,551 (7,675) I 15,242 Chemins de Fer (SNCC) Office National des 53,632 (19,000) 12,902 2 percent to Transports (ONATRA) 38 percent LignesABriennes 5,85 1 (11,246) 1,889 n. a Congolaises (LAC) Compagnie Maritime du n. a n. a 341 n. a Congo (CMDC) City train 1,289 (297) 513 17to 20 percent Rigie des Voies 395 34 289 14to 33 Fluviales (RW) percent Rkgie des Voies 260 (106) 1,173 Maritimes (RVM) Rigie des Voies 23,582 (5,900) 3,412 n. a ABriennes (RVA) Office de Gestion du 321 (149) 248 n. a Fret Maritime (OGEFREM) TOTAL 200,881 (44,339) 35,668 The government's strategy is to establish an independent task force (groupe d'etude des transports) to provide studies and support inthe design o f a strategy to reform the sector. This will identify needs for infrastructure rehabilitation, conduct a functional and organization review o f the public enterprises inthe sector, and propose reform strategies to the government. The EMRRPi s assisting with identifyingneeds. The proposed project will support the development o f strategies to reform the transport parastatals, especially LAC, RVA, SNCC and City Train. Given the size o f the Office National des Transport and the wide variety o f activities in which it is engaged, the government's strategy is, as a first phase, to achieve quick wins through the effective restructuring o f or divestiture from selected firms: LAC, RVA, SNCC and City Train. The government i s also in the process o f establishing a regulatory body for the sector. Financial sector. Years o f war, hyperinflation and economic decline have considerably weakened and marginalized the financial sector, which i s not in a position to contribute effectively to private sector development. Credit to the economy now represents less than 1 percent o f GDP, while the bank penetration rate i s less than 0.04 percent (35,000 bank accounts for the whole population). The Central Bank (BCC) is registering losses on its activities, while its number o f employees amounts to roughly three times that o f the commercial banking sector. In this context, the BCC does not have the means to - 8 - perform its supervision activities. The insurance sector is still controlled by a state-owned firm, which does not have the financial means to pay out claims, while insurance i s often mandatory. The monopoly situation, imposed by law, has prevented all initiatives to open-up this sector. T o address these issues, the government has launched a financial audit o f the BCC, and has committedto restructure or liquidate eight banks. Three banks are in the process o f being liquidated: Congolaise du Commerce Extdrieur (BCCE), Banque de Crddit Agricole (BCA) and Nouvelle Banque de Kinshasa (NBK). The audit of the BCC and some o fthe actions taken to help restructure the financial sector have been financed under the ERC, in cooperation with the IMF. Nonetheless, the government is still in the process o f formulating a strategy for the development o f the financial sector, with the restructuringo f the BCC as a priority. The government has also decided to open the insurance sector to private market firms bychanging the legal framework. Summary. Inthese five sectors, Congolese services are far worse than African averages. The poor and deteriorating quality o f services is reported as one o f the biggest constraints to economic growth and private sector development. Inthis context, investment strategies need to be formulated inthe context o f scarce public resources, while further actions at the public enterprise level need to be engaged. Currently, the responsibility for the reforms lies with the presidency. The government has created a steering committee to oversee the reform o f the public enterprises. This steering committee, COPIREP, i s in the process o f being set up. It will coordinate the action o f sectoral working groups, which will formulate reform strategies and have them adopted by an interministerial committee. COPIREP will also oversee the revision o f the current law on public enterprises, which currently does not allow for divestiture or liquidation. Finally, a new law on parastatal reform and public/private partnerships will be promulgated to set the stage for reform. 3. Sectorissuesto be addressedbythe project and strategicchoices: The project will address all the sector issues named above. It will help improve the investment climate by supporting reforms o f the tax system, laws and regulations governing private investors, the judiciary, and administrative barriers. It will support measures to rebuild effective public institutions and policies through measures to increase transparency, accountability, and participation o f citizens. It will support government's efforts to reform parastatals through assistance for consultation and by directly funding retrenchment packages o f workers made redundant, by facilitating the move o f such workers into new occupations, and by promoting the economic diversification o f affected regions. Strategic choices Supporting general improvements in the investment climate rather than supporting parastatal reform alone. Improving the investment climate is necessary to ensure that public enterprise reform is successful. Reforming the legal framework (including establishing regulatory agencies), tax law, and the judiciary (including bureaucratic procedures) constitute the comer-stone for the sustainable and transparent development o f the economy. Firms and creditors will be more willing to take risks in an environment where court decisions can be enforced. Implementation o f a simple and stable tax code will not only make it easier for the state to collect taxes, it will also help encourage firms to move from the informal to the formal economy, thus increasing fiscal revenues. These measures will help improve the image o f the DRC inthe eyes o fpotential investors and creditors. Focusingon selected measures to improve the investment climate, rather than the overall macro environment, infrastructure, and direct measuresto reduce risk The measures that the project will support are consistent with the address the issues raised in an assessment o f governance carried out by - 9 - the World Bank Institute and with an investment climate survey conducted by the Foreign Investment Advisory Service o f the IFC and the World Bank. This project will not directly address macroeconomic policy or infrastructure issues, which are being addressed by ongoing programs such as the EMRRP. N o r will it support activities to improve perceptiono f investment risks, because MIGA and the African Trade Insurance Agency are providingsolutions to these problems. Focusingonthe mining,telecom, financial, transport, andenergysectors rather than other sectors These sectors are the ones that are the most important for promoting economic growth. They are also important for generating foreign exchange earnings, for promoting the growth o f commercial activities. Finally, their choice is consistent with the objectives o f the TSS. The mining sector is a key sector to foster growth, given the importance o f Gecamines for the economy. Helping improve the capacity o f the Ministry o f Mines, accompanied by significant restructuring o f Gecamines and measures to institute transparency, would yield immediate benefits to the economy. It will also help in shifting the role o f the state from that o f operator to that o f a professional administrator of the sector. The telecommunications, transport, energy and financial sectors are pivotal sectors where improved functioning could significantly help in improving the investment climate generally, and promote competitiveness o f the miningsector in particular. Increasing physical and virtual connectivity through the reform o f the telecom and transport sector i s essential to catalyze the economy. Led by the initial results o f the audit conducted on all public enterprises early 2003, the government has decided to reform first SNEL (electricity), SNCC (transport), RVA (transport), Citytrain (transport), L A C (transport), and OCPT (telecom). It also decided to complete the liquidation o f NBK, BCCE and BCA (financial sector), as well as the restructuring o f Gecamines. C. Project Description Summary 1. Projectcomponents(see Annex 2 for a detaileddescription andAnnex 3 for a detailed cost breakdown): The proposed project comprises four components. These are: Project component1: Improvingthe investmentclimate(US$36.10 million) This component will strengthen the judiciary system and improve the legal and fiscal framework by establishing a private national arbitration center, by providing technical and financial support to three commercial tribunals (inKmshasa and Lumumbashi), by providingtraining and technical and operational support to the inspection ginirale de justice, by providing training to the legal gazette staff and operational support to the judiciary, and by disseminating legal information. It will facilitate financial intermediation by financing the reform o f the BCC. Both the World Bank and IMF will be involved in this effort, but funds under the project will be available to pay for (a) an organizational audit, (b) reform o f accounting systems, (c) training and redeployment o f staff at the BCC, and (d) technical assistance to help liquidate BCCE, NBK and BCA. This component will help facilitate DRC's membership, in the form o f initial contribution and insurance capacity, to the African Trade Insurance Agency (ATI). As a member o f ATI, DRC will have access to a political risk insurance facility, through which exporters to and from DRC will be able to purchase political risk insurance policies for their trade transactions. As a first step to reestablishing well performing financial intermediation, this component will help to strengthen the central bank. Funds for severance payments to employees o f BCA, NBK and BCCE are available under the second component o f this project. This component will help buildthe capacity o f the Ministry o f Mines by supporting the formulation o f clear mandates for each o f them, and by providing training to ministryemployees. It will also support (a) the rehabilitation o f the existing buildingto equip - 10- the Ministry o f Mines with the necessary infrastructure to carry out its tasks, (b) the rehabilitation o f the provincial network o f the ministry, (c) extension o f the mining cadastre, (d) generation and analysis o f geodetic information, (e) the environmental and social assessment and a study o f mineral resources and administration, and (f) legal reforms o f the Ministryo f Mines to enforce the agency's capacity to enforce laws and establish an investment-friendly environment. Finally, this component will facilitate the dialogue betweenthe government and the private sector by supporting ANAPI as a forum for dialogue. Project component2: Implementingthe parastatalreform(US$71.69 million) This component will help to strengthen regulatory authorities in the telecommunication, transport and energy sectors through technical assistance and training. It will facilitate divestiture from the public enterprises by supporting formulation o f strategies reflecting the consensus o f all stakeholders, functional, organizational and non-certified accounting audits, and environmental audits and legal assessments. It will support activities to help retrenched workers enter into new occupations. It will help the government meet the social cost o f the reforms by providing financial assistance to retrenched mine workers at Gecamines, in accordance with the labor laws and other conventions applicable inDRC and in compliance with OP12.0. Systems have been put in place to allow smooth disbursement, using the commercial banking network and allowing retrenched employees to invest their funds or place them in savings accounts (see component 3). The component will in addition finance severance packages for the workers o f the OCPT and the three liquidated banks. Finally, the component will support implementation o f the reforms by strengthening COPIREP through training o f staff, study tours, and capacity building (especially increasing its expertise in publiciprivate partnerships); reinforcing its public relations function; arranging media support and setting up an in-house communication unit; and funding the costs o f its establishment operations. Project component 3: Initiatives for economic development in the Katanga region (US$7.41 million) This component supports measures aimed at increasing competitiveness o f the economy o f Katanga, the leading mining region in the Democratic Republic o f Congo. Katanga is expected to attract private investment inminingafter a briefperiodo f restructuring o f parastatal Gecamines. The component would create new economic opportunities for the workers retrenched from Gecamines and other parastatals present in Katanga (such as SNCC and OCPT) and foster regional economic development. Specifically, the component will support a small grants program to finance local economic development activities, such as worker training, seminar attendance, purchase o f necessary equipment, and improvement o f production and marketing techniques. The funds will be provided on a matching grants basis to individuals and cooperatives, associations, and groups comprised of former Gecamines staff. A special committee involving NGOs, financial institutions, and the private sector will evaluate the applications. Linkages will be made between this program and microfinance institutions active in Katanga. The component will also support activities to improve the competitiveness o f the region by supporting technical assistance to help identify investment opportunities and upgrade skills and capacity o f small and medium size enterprises around an emerging private miningindustry. Linkages will be created with local community development and business partners, namely mining companies, NGOs, microfinance institutions, business associations, and the like. Linkages will also be created with the economy of Zambia's Copperbelt. The component will support the transfer o f social services to municipalities by transferring housing and social infrastructure assets that are on the balance sheets of Gecamines to local private or non profit institutions or to the central government. The component will also finance local economic development activities and capacity building o f local communities. Finally, the component will support assessment o f infrastructure required to make private investments viable, analysis o f the respective role and capacity o f central and local governments to deliver essential services and to - 11- implement and maintain public infrastructure, and formulation o f regional and local development frameworks. This would include the preparation o f local (urban and rural) development plans and investment programs using participatory approaches. This component will also help design appropriate tools and methodologies for urban and rural communities to better manage local infrastructure maintenance and basic services delivery to their population. Finally, this component will support the establishment of a monitoring and evaluation system for the program. Project component4. ProjectCoordinationand Implementationarrangements(US$7.13 million) The implementation o f the project will require regular follow-up from an implementationunit,which will need to monitor financial management o f the project, track disbursement, engage in procurement activities when needed. The government has already created BCeCo to support such activities. It would therefore be consistent with this earlier choice to use BCeCo as the project implementation unit. However, given the current work load o f BCeCo, it is planned to transfer responsibility for implementation o f this project from BCeCo to COPIREP during implementation. This component will provide BCeCo with the necessary resources to implement this project through provision o f technical assistance and equipment. Necessary staff would be recruited to reinforce BCeCo's capacity during project implementation. This component will also support the operation o f satellite project coordination units in Katanga province. The unitk de rkinsertion au Katanga will be put in charge o f coordinating retrenchment payments and organizing worker training and reintegration. Indicative Bank- Yo of Component ost %of financing Bank- (US$M) Total (US$M) financing 1. Improvingthe investment climate 36.10 29.2 34.76 29.0 2. Implementing the parastatal reform 71.69 57.9 70.24 58.5 3. Pioneering mining competitiveness inthe Katanga 7.41 6.0 7.30 6.1 region 4. Project Coordination and Implementationarrangements 7.13 5.8 6.20 5.2 PPF Total Project Costs TotalFinancingRequired 2. Key policyand institutionalreforms supportedby the project: The key policy reforms supported by this project include: (a) competition, legal and regulatory reforms in telecommunications, transport, energy, mining and financial sectors; (b) establishment o f regulatory agencies to address issues o f pricing, granting o f licenses, and fair and competitive practices; (c) enactment o f legislation to allow divestiture from the public enterprises; (d) divestiture from selected public enterprises including implementation o f retrenchment policies when needed; and (e) enactment o f tax legislation. The project will further seek to improve the dialogue between the public and the private sector and to improve governance at the public enterprise level. -12- 3. Benefitsandtarget population: The project will produce several important benefits. It will stimulate private sector-led growth in a competitive environment by improving the investment climate and increasing the competitiveness o f the reformed parastatals. It will generate fiscal revenues, by reducing the subsidies provided to loss-making public enterprises, stimulating higher export revenues, and improving public revenue collection by promoting o f a new tax code and strengthening tax administration. It will help to improve governance by promoting use o f more transparent and competitive transaction procedures through the reform o f the mining, telecommunication, transport, financial and energy sectors. The entire population o f the DRC will benefit indirectly from the project. Direct beneficiaries will be the retrenched workers o f the parastatals undergoing reform, and the residents o f Katanga who create firms through the matching grant scheme or are employed by them and who benefit from the general improvements in the economy o f the province. The Ministry o f Mines and the BCC will benefit from institutional strengthening. 4. Institutionaland implementationarrangements: Project implementation period. The project will take place over six years, from October 2003 to October 2009. It will be completed by October 2009 and closed by March 2010. Executing agency. COPIREP will have overall responsibility for execution o fthe project. The Ministry o f Mines and Hydrocarbons will execute the subcomponents associated with the miningsector activities. Implementation arrangements. In the early stages o f project implementation, Bureau Central de Coordination (BCeCo) and the Ministry o f Mines will implement the project, with BCeCo responsible for all activities except for the subcomponent focused on buildingthe capacity o f the Ministryo f Mines. It is envisaged that, once ready, COPIREP will take over the responsibilities o f BCeCo, including the financial management of the project funds (including operation o f Special Accounts, making authorized payments, maintaining adequate accounting records and periodic reporting o f project funds and expenditures and annual audits). COPIREP will initiate all procurement actions, and manage all subsequent actions and ensure that all procurement i s undertaken in accordance with procedures acceptable to IDA and remain very transparent. Both BCeCo (and once operational, COPIREP) and the Ministryo fMineswill hire independent experts to help managethe project-supported activities. Agreement on the protocol by the two parties will be a condition o f transfer o f responsibilities from BCeCo to COPIREP. Clear lines o f responsibilities and accountability will facilitate efficient practices, and these are still evolving at BCeCo. Given the size o f the proposed project, BCeCo will need additional staff to carry out its responsibilities. Procurement. Procurement o f works, goods and services under the project will follow IDA procurement guidelines. The existing national regulations cannot be used under the proposed project, since the Country Procurement Assessment Review (CPAR) carried out in 2001 concluded they are not acceptable for procurement under IDA financed projects. Goods and works financed by IDA will be procured in accordance with IDA Guidelines for Procurement under IBRD Loans and IDA Credits dated January 1995 and revised in January 1996, August 1996, September 1997, and January 1999. Bank Standard BiddingDocuments (SBD), and Standard Evaluation Report (SER) will be used for both International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procedures. For NCB procedures, the government has given assurance during - 13- negotiations that the following principles will be adhered to: (a) all bids will be submitted in one envelope to be opened publicly; (b) point systems will be usedfor bidevaluation for works; (c) the award o f contracts will be announced to all bidders; (d) any bidder will be given adequate response time (at least four weeks) for preparation and submission o f bids; (e) bid evaluation and bidder qualification criteria will be clearly specified in biddinglpre-qualification documents and will not be applied arbitrarily; (f) eligible firms will not be precluded from participation; (g) no preference margin i s granted to domestic contractors and suppliers; (h) contracts will be awarded to the lowest evaluated bidder in accordance with predetermined and transparent methods; (i) evaluation reports will clearly state the bid reasons to reject any non-responsive bid and (j)prior to issuing the first call for bids, draft standard bidding documents prepared as annexes to the procedures manual will be submitted to and found acceptable by IDA. Formrequests for quotations, satisfactory to the Bank should be used. Consultancy services financed by IDA will be procured in accordance with IDA Guidelines for the Selection o f Consultants by World Bank Borrowers dated January 1997, revised in September 1997, January 1999 and May 2002. The standard requests for proposals as developedby the Bank will be used for the selection o f consulting firms. Simplified contracts, acceptable to the Bank, will be used for short term assignments, those not exceeding six months, or for those costing less than US%200,000. Financial reporting and auditing arrangements. BCeCo i s very familiar with both the procedures for quarterly financial monitoring reports (FMRs) and annual audits o f IDA financed projects. It has agreed to submit quarterly FMRs within 45 days following each quarter. Annual financial statements o f the project (including o f special accounts and statement o f expenditures) will be audited by independent auditors acceptable to IDA and the report o f such submitted within six months after the end o f each fiscal year. It is expected that the terms o f reference for the external auditor will be developed six months after effectiveness. It i s expected that the recruitment o f external auditors will take place before December 2003. To facilitate project implementation, BCECOwill open a Special Account inU S dollars in a commercial bank on terms o f conditions, acceptable to IDA. The Special Account will cover about four months o f eligible expenditures for all categories andthe authorized allocation will be US$7.5 million. Upon credit effectiveness, IDA will deposit an initial amount o f US$3.5 million in the Special Account representing 50 percent o f the authorized allocation. The remaining balance will be made available when the aggregate amount o f withdrawals from the credit account plus the total account o f all outstanding special commitment entered into by the Association shall be equal to or exceed the equivalent o f US$30 million. Replenishment applications will be submitted monthly. Further deposits by IDA into the Special Account will be made against withdrawal applications supported by appropriate documents. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Use of BCeCo as a project implementing unitin a first stage The complexity and ambit o f this project associated with multiple examples o f bad governance in DRC, make the case for the creation o f separate implementing unit. A separate unit would be easier to control and to monitor to avoid implementation delays caused by a bad institutional arrangement. This option, however, would lead to creating yet again a new structure, which inthe short term would be inefficient in terms o f use o f IDA resources. It would not add value interms o f fiduciary management nor would it be a better tool to improve governance than the already existing BCeCo. Finally, it would be a source o f -14- delays in the implementation o f the project given the current lack o f project implementation capacity available inDRC. Therefore, the choice is to increase BCeCo's capacity to implement this project. Once ready, essential capacity will be migrated to COPIREP. Aware o f the risks associated with this choice, however, financial arrangements will be monitored closely during implementation. Splitting the project into two operations, one to address reforms in the mining sector and one to handle the reforms of other parastatals and the reforms intended to improve the investment climate. This option was rejected because improvements in the investment climate are critical for the success o f the parastatal reforms. Without such reforms, the private sector will be reluctant to invest. Therefore the government requested the project team to include several investment climate components into the project design. Moreover, supporting reform o f the miningsector alone i s not consistent with the government's efforts to restructure all o f the public enterprises, with the miningsector serving as a model for the reforms o f the other parastatals. Successful reform o f Gecamines, which attracts new investment, and successful diversification o f the economy o f Katanga could generate public support for reform o f the other parastatals. Covering only the social costs associated with the reforms of Gecamines, BCA, BCCE, NBK, and OCPT, and not of other parastatals. While the government plans to reform the parastatals in the energy and transport sectors, the number o f workers that would be affected is not yet determined. The government has therefore requested that this project cover the costs o f associated with retrenchment o f workers at Gecamines (US$15 million), the three commercial banks and OCPT (aggregated at approximately USS25 million). Costs associated with retrenchments in the other parastatal companies would be covered under subsequent Bank-supported projects inthe DRC. Supporting reforms of sectoral regulatory agencies rather than of multisectoral regulatory agencies. The DRC i s starting to undertake reforms in all the sectors o f the economy. While agencies covering multiple sectors could help achieve cost and operational efficiencies, creating capacity o f such a multipurpose agency is challenging. It i s expected that the sectoral regulatory agencies will quickly develop synergies that will eventually lead to the development o f a multisectoral agency. - 15- 2. Major relatedprojectsfinancedby the Bankand/or other developmentagencies (completed, LatestSupervision Sector Issue Project (PSR) Ratings (Bank-finance projectsonly) Implementation Development Bank-financed Progress (IP) Objective (DO) Emergency Early Recovery Grant IDA Grant HOOS-DRC S S (P075660) Emergency Recovery Credit Cr. 36600 (P057293) S S Emergency Multisectoral Cr. 3703-DRC (P057296) S S Rehabilitation and Reconstruction Program Other development agencies Programme dappui a lajustice EU- ZW6037/000 3. Lessonslearnedand reflectedinthe project design: Key lessons learned and reflected inthe project design include the following. Accompanying the public enterprise reform process with the development of a competitive business environment. Parastatal reforms undertaken inthe context o f a poor investment climate often fail to attract new private sector investment, simply because potential investors perceive the risks as too high. Therefore, this project includes activities to improve the investment climate. The sequencing o f project activities also reflects this lesson, as the first activities will be focus on improving the investment climate. Accompanying reformsof miningparastatalwith appropriate reformsof institutionsand the legal framework. The enactment of the necessary legal, fiscal and environmental policies and the establishment o f strong mining institutions to implement and administer them have proven to be key to successful reforms o f mining parastatals. Such policies and institutions include: (a) a mining law providing security o f tenure, clarity and transparency and access to land (including the release o f reserved areas held up by the state and full transferability o f concessions to remove all barriers to the entry o f investors), and an investment framework providing access to foreign exchange and a stable and equitable fiscal regime; (b) public mining institutions that apply properly the sectoral policies; (c) a sensible environmental management system, and (d) clear, economically efficient rules dealing with enterprise restructuring and privatization. Involving all stakeholders in designing packages of assistance for workers and communities affected by parastatal restructuring. Workers and community members who stand to lose as a result o f reforms will resist the changes and possibly undermine the reform process itself. This project has attempted to build a coalition o f groups supporting the reforms by bringingcentral and local government officials, unions, the private sector, NGOs, community representatives, and donors together to design the severance packages for workers and the regional development programs to accompany the reforms. This will serve as a model for reforms inthe other sectors. -16- Tackling financial reform concurrently with parastatal reform. Parastatal reforms work best when accompanied by reforms o f the financial sector that increase creditors ability and willingness to lend. This project will support broad financial sector reform by assisting with the liquidation o f three state-owned banks andby strengthening the BCC. Involvingall stakeholdersin identifyingthe actionsto be taken to improvethe investment climate. Private businesspeople know best the shortcomings o f the DRC's business environment and ways to improve it. Throughout project preparation, a working group comprising representatives o f the government, the private sector, the trade unions, and donors systematically commented on design options proposed by the government. Consultation will continue during project implementation. One o f the project components will help maintain this dialogue through the use o f ANAF'I and CNC as fora for dialogue. Puttinggovernment in the lead. The government's commitment to the project's objectives and design i s essential for its success. The Congolese have led the design o f the project. Steps already taken by the government indicate its strong ownership o f the reform agenda. Need to focus on service delivery and competitiveness rather than privatization for itself. Recent analysis o f experience Eastern European and Latin American countries shows that pure privatizations have not always worked as well as other arrangements for improving service delivery. Moreover, donors have sometimes focused more on the number o f transactions to be completed than on government's commitment to the reforms. This project does not condition its success to the number o f transactions completed but to the process that will lead to an increased level o f service delivery. It is therefore expected that the reform o f parastatals may lead to: (a) development o f public/private partnerships through management contracts, concession agreements, (b) privatizations, (c) liquidations, and (d) restructuring. Providingadequate time for implementation. Many o f the reforms to be supported under the project will take time to implement as they require approval o f the parliament. Moreover, institution building requires time to be successful and sustainable. Therefore the project will be implemented over a period o f six years. 4. Indications of borrower commitment and ownership: The government's commitment to the project i s demonstrated through several actions: Creationof sectoralworkinggroups to propose reforms. The government has convened working groups to develop proposals for reforming the transport, energy, and telecom sectors, including restructuringthe parastatals. Its establishment o f COPREP also indicates its commitment to reform. Auditing of the public enterprises. The government has hiredtwo audit firms to conduct technical and strategic reviews o f all the public enterprises. The outcome o f this review will be used as the basis for the parastatal reforms to be carried out with project support. Adoption of new mining, investment and labor codes. The government's willingness to pushfor the adoption o f these codes, despite strong resistance from potential losers, shows its commitment to improve the environment for the private sector investment. - 17- 5. Value added of Banksupport in this project: The Bank has played a vital role in the reengagement o f donors inthe DRC, assisting with the clearance o f arrears and with the revitalization o f the wom-tom economy. At the government's request, the Bank is expected to play a leading role in improving the investment climate and reforming parastatals. The World Bank Group (including IFC and MIGA) has been the leading provider o f assistance for parastatal reform duringthe past decade and can help the DRC apply the lessons leamed from reforms undertaken in other countries. In addition, the Bank can help the Government to take an integrated approach to stimulating private sector development, by supporting institutional development and regulatory reforms, inaddition to reformo fparastatals. Importantly, the involvement o fthe Bank with the parastatal reforms will help ensure that social safety nets and assistance to move into new occupations are provided to retrenched workers that would otherwise face impoverishment. Finally, no other commercial bank or multilateral institution would be able to provide the technical and financial assistance required to implement the reformprogram. E. Summary Project Analysis (Detailed assessments are inthe project file, see Annex 8) 0Costbenefit 1. Economic(see Annex 4): -Cost NF'V=USS3 1.5 million; ERR= 18.4 YO(see Annex 4) effectiveness 7 Other (specify) The overall economic rate o f return (ERR) for the project i s estimated to be 18.4 percent. The net present value ("V) is estimated to be US$31.5 million (at a discount rate o f 12percent). The cost-benefit analysis o f this project faces the limits encountered in all projects where there i s an indirect relationship between the project's interventions and the stream o f benefits, and where the effects o f the project on the performance o f the different sectors directly supported are not immediate. Nevertheless, the NPV and ERR have been calculated in a "with" and "without" project framework. Output has been used as the numeraire inthe objective function. It is expected to grow as the result of (a) improved business environment, (b) a more competitive and productive mining sector and (c) increasedprivate national and FDI. The details o f the analysis are presented inannex 4. 2. Financial(see Annex 4 andAnnex 5): NPV=US$ million; FRR= YO(see Annex 4) Fiscal Impact: The project will have a positive fiscal impact on the economy in contributing to the gradual elimination o f subsidies to public enterprise sector and by gradually contributing to tax revenues and foreign exchange earnings. Details are presented in annex 4. 3. Technical: Reform inthe mining, telecommunication, energy and transport sectors will yield immediate technical benefits to the firms slated for divestiture. Inparticular, it is expected that the private sector will bringin new technology, and management know-how. -18- 4. Institutional: Institutional capacity will increase during project implementation, and as a result o f capacity building efforts. 4.1 Executing agencies: BCeCo, COPIREP and the Ministryo f Mines will execute the project. BCeCo was established in 2000 with IDA support first to implement the US$50 million IDA Grant for the Emergency Early Recovery Project and the Multi-Donor Trust Fund for the Emergency Recovery Program. Since then, BCeCo has been responsible for implementing the agricultural and social sector components o f the Bank-supported Emergency Multi-Sector Rehabilitation and Reconstruction Project. To ensure sound project management, the project will help strengthenthese executing agencies through technical assistance. 4.2 Project management: BCeCo staff will be designated to undertake all procurement and financial management tasks under the project including, management o f Special Account, payments to suppliers and beneficiaries, maintenance o f accounts o f all project funds and expenditures, preparation o f periodic financial reports, and the like. Clear lines o f responsibilities and accountability agreed between COPIREP and BCeCo will be set forth inaprotocole d'uccord. Such aprotocol acceptableto IDA will be a financial covenant o fthe project. It is envisaged that staff in BCeCo, familiar with the project, will be transferred to COPIREP when COPIREP becomes fully functional. Such a transfer will be subject to approval by IDA and to any specific arrangements that IDA may indicate at the time o f the transfer. 4.3 Procurement issues: BCeCo will handle all procurement matters until COPIREP takes over. Its track record i s good. However, additional staff will be needed to handle the responsibilities o f implementing another project. Consequently, BCeCo's institutional capacity will be reinforced with additional staff. It is envisaged that BCeCo staff handling the proposed project will move to COPIREP once that entity i s ready. 4.4 Financial management issues: With the experience acquired since its establishment, BCeCo now has adequate financial staff, accounting systems and intemal control procedures. However, its first audit (as o f June 30, 2002) revealed several inadequacies o f financial management o f IDA funds by several NGOs executing programs inHealth sector, HIV/Aidsand by the Social Fund. Most o f these deficiencies were the result o f inadequate staff at BCECO and consequently, its inability to supervise financial aspects of these NGOs. Since then, BCeCo has increased staff resources, includingappointment o f an officer specifically responsible for monitoring financial aspects o f the NGOs. It has strengthened it procedures under which releases funds to NGOs is affected only when all previous advances have been fully accounted for. Annual financial statements o f NGOs having access to funds exceeding US$500,000 will henceforth be audited separately, and availability o f funds for their programs will be subject to satisfactory audits. The Social Fund has also taken several corrective measures, including appointment o f a Director, a Finance Manager and an accountant. It has brought its accounts up to date and i s making arrangements to have these audited. -19- An audit o f BCECO as o f December 2002 is currently underway and it is expected that will reflect the positive actions taken to strengthen its financial management. Moreover, BCeCo's control systems will be strengthened through recruitment o f a qualified intemal auditor, installation o f an information technology network system, upgrading o f the existing accounting software leading to a multiproject software, and upgrading o f the existing manual o f procedures. A Bank financial management review undertaken for this project has concluded that BCeCo is capable o f handling the financial management aspects o f this project. The fiduciary arrangement o f the disbursement o f ERC's mining tranche have been agreed with the Ministry o f Finance and the Central Bank. Direct payment to the departing workers will be made by Banque Commerciale du Congo, a Congolese commercial bank selected by the Ministry o f Finance, in the cities o f Lubumbashi, Likasi, and Kolwesi. An agreement has been signed between the Ministryo f Finance and the Banque Commerciale du Congo for establishing the logistical arrangements and the cost o f the operation. Supervision o f the disbursements will be conducted by BCeCo on behalf o f the Ministry o f Finance. BCeCo will hire two different independent auditors acceptable to IDA to do an ex-ante review of the list o f beneficiaries prepared by Gecamines and an ex-post audit o f the payments. BCeCo has established a branch office in the Katanga Province to monitor the disbursements and to ensure the identity o f all beneficiaries. A mechanism has been agreed upon that will trigger disbursements. This mechanism emphasizes controls at several levels: disbursements from the Central Bank to the commercial bank, disbursements from the commercial bank to the beneficiary, control o f the beneficiaries' lists, and an identification process when beneficiaries cash inthe severance package. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMPpreparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Since this is a privatization project, a draft environmental pre-audit (the audit) was carried out for six enterprises slated for privatization: OCPT (postal and telecommunication services), SNCC (Congolese national railways), SNEL (National electric utility), RVA (airways and airports board), LAC (Congolese airline), and City Train (state bus company). The purpose o f this audit was (i) to broadly identify environmental liabilities that would have to be taken into account at the time o f the privatization o f these enterprises, and (ii)to rank the enterprises in accordance with the need for additional environmental audits - limited, full, or no additional audit work. The audit prepared for the above enterprises identified main issues related to soil pollution from various oils and solvents due to ineffective management; the likelihood o f PCB being present; inappropriate disposal o f liquid and solid wastes; ineffective occupational health and safety provisions; poor storage arrangements for chemical products usedinthe operations, and damaged buildings. Inthe case o f OCPT, employees have taken over and are living inthe buildingso f the Direction Logistique because OCPT has failed to pay their salaries for the last three years. The proposed project has included these employees in its Base Line Studies, and they will be covered under Project component 2, sub-component 3 which will support the social costs o f reform. OP 4.12 does not apply inthis case, because it is clear that this is not a takmg away o f (illegal) occupancy o f people with a long-eamed moral right to stay. Rather, this is straight labor tactics and strategy, and not what OP 4.12 was meant to address. The audit was prepared inconsultation with relevant stakeholders (see section 5.4 below) and it was disclosed in-country and at the Infoshop on April 23,2003. A final environmentalpre-audit has been received, replacingthe current draft. - 20 - 5.2 What are the main features o f the EMP and are they adequate? Inrelation to the environmental liabilities identified earlier, the audit rankedthe enterprises requiring full/limited/no additional environmental audits as follows: e Fullaudits: SNCC, SNEL e Limited audits: City Train, LAC, RVA e N o audit: OCPT 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: April 16,2003 5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted? Wide consultation has been carried out with Government representatives, the private sector, unions, NGOs, and civil society in Kinshasa and Lubumbashi. The audit was prepared in consultation with representatives o f the relevant ministries and the above enterprises. The consultants visited some sites and reviewed documents provided to them. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project o n the environment? D o the indicators reflect the objectives and results o f the EMP? Project component 2, sub-component 2, includes support for future environmental audits whose results will contribute to the definition o f the chosen divestiture strategies. Indicators and monitoring mechanisms - including the set-up of monitoring committees involving all stakeholders - will be developed as part of the environmental audits. . 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Retrenchment: the reform o f the public enterprises will result in retrenchment o f employees. The Government has defined a retrenchment policy, which will consist o f providing severance packages to workers being made redundant. The amount of the severance package i s to be determined by the Government during project implementation and will reflect the nature o f the company under restructuring, the region where the redundant employees are located and the past experience inthis field inDRC, as well as the principles o f fairness and fiscal responsibility. Social safety nets such as training or re-skilling, access to medical services are considered as part of the retrenchment package. Inaddition, the Government i s looking into possibilities o f providing redundant workers with new economic opportunities by capacitating them to start micro-enterprises. To ensure sustainability, this activity would be provided on a private sector basis and would take model o n similar programs developed in South Africa in the mining sector. Social baseline studies will be carried out to serve as basis for the monitoring and evaluation o f these programs. The first study i s currently underway in Katanga for Gecamines. 6.2 ParticipatoryApproach: H o w are key stakeholders participating inthe project? Project preparation started with the constitution o f a workmg group composed of the following representatives: private sector representatives, trade and business associations, Government representatives, public enterprise representatives, trade unions and donor community representatives. This working group considered the design options proposed by the Government and validated each -21 - option during several group meetings (six group meetings were held prior to Appraisal). All group meetings were prepared by bilateral meetings to explain progress and receive feedback. This strong participatory approach will continue through project implementation: the Dialogue Forum (to be set up under Component 1 o f this project) hosted by ANN1 will continue to consult the working group on issues related to project implementation as well as proposals for economic reforms. In addition, the project implementation units (COPIREP and the Ministry o f Mines) will use a media unit to communicate effectively by press, TV and radio on the issue o f parastatal reform. This unit will work independently from the national and private networks and will produce news bites as well as magazines for the networks. A similar process was carried out regardingthe design of component 3 inthe Katanga province, through worhng meetings with representatives of workers and employees unions, local and international DevelopmentNGOs, small and mediumlocal enterprises, private sector, university and donors. 6.3 H o w does the project involve consultations or collaboration with NGOs or other civil society organizations? Paragraph 6.2 addresses this issue. Ample consultation has taken place with FOLECO, CRONGDand other NGOs. Local and international NGOs will be contracted to implement most o fthe local economic development and social activities plannedunder component 3 within the miningareas o f the Katanga province. 6.4 What institutional arrangements have beenprovided to ensure the project achieves its social development outcomes? Supported by baseline studies to be conducted at the beginning o f the project, social development outcomes will be monitored through the project life. The Government i s proposing to do so by using COPIREP to provide the institutional support. Regular meetings with the working group mentionedunder paragraph 6.2 would ensure an appropriate mechanism to monitor the social development activities planned under the project and to agree on corrective measures, if needed, to achieve the project outcomes. Within the Katanga region, two committees will be established to assist the regional project coordination unit (URK).A Monitoring Committee will follow-up project activities andprovide feedback on project results and actions in order for the URK to adjust the work plans if needed. It will be integrated by representatives o f the civil society, workers unions, Gecamines and regional authorities. A Consultative Committee will provide methodology and technical advice to URK when needed. It will be integratedby representatives o f development NGOs and CSOs, business organizations (e.g. FEC, COPIMECO, RIFIDEC and others) and donors (FA0 and others). 6.5 How will the project monitor performance interms o f social development outcomes? See paragraph 6.4. NGOs/CSOs will be contracted to monitor and assess the impacts and outcomes of divestiture/restructuring and promotion activities, as well as o f the social development programs to be implemented under the project (e.g under subcomponents 1.4, at a central level, and 3.5 within the miningareas o fthe Katanga province). - 22 - 7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. To comply with the Bank's safeguardpolicies, the proposed project has carried out a draft environmental pre-audit. F. Sustainability and Risks 1. Sustainability: The sustainability o f project benefits will depend on the durability o f the institutions created or strengthened and by the success o f the reforms inattracting private sector investment. The sustainability o f the project-supported entities ANAPI and COPIREP will be ensured by replacing project resources for operations with counterpart funding according to a sliding scale that over time reduces the proportion o f operating costs funded by the project. Sustainability will also depend on the government maintaining an enabling macroeconomic and sector policy environment conducive to private sector investment. The commitment o f the government to macroeconomic stability is firm, as proven with its good track record o f the past few years. Finally, sustainability will depend on continued government commitment to difficult reforms. This will be confirmed though dialogue between the Bank, the government, private sector representatives, nongovernmental organizations, and other donors during project implementation. 2. Critical Risks(reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): The challenges o f creating attracting private sector investment-and o f simultaneously ensuring that the private sector itself contributes to good economic management and generates wealth and jobs for the Congolese-in an evolving political situation such as the DRC's must not be underestimated. The project faces three broad categories o f risk: a reduced government commitment to reforms, corruption and financial mismanagement associated with the reform o f parastatals, and external market risks. h s k s will be mitigated by buildingcoalitions for reform comprising the central and local governments, unions, local communities, and the private sector; by insistingon use o f fully transparent and accountable procedures; and by fostering diversification o f the economy to reduce the dependence o n a small number o f commodities for export earnings. -23- Risk Risk Rating Risk Mitigation Measure From Outputs to Objective The peace process breaks down M This riskhas diminished considerably during the past 18 months as steady progress inmade inimplementingthe Lusaka accords andin establishing a transitional government. T o mitigate the risks that remain the Bank will closely monitor developments with a view to scaling back, suspending activities, or shifting focus elsewhere if conflict threatens the achievement o f objectives.. Commitment o f the government for H ANAPIand CPC will serve as fora for dialogue reforms o f public enterprise declines witl and for the creation o f coalitions in support o f Lhe installation of the transitional reform. A communications strategy will be government. carried out by COPIREP and the Ministry o f Mines. All stakeholders will be involved in designing severance packages and regional development programs. Corruption and mismanagement reduce H Many measures have been taken to ensure that the effectiveness o f the reforms in project funds are used as intended. BCeCo, improving the contributions o f the COPIREP, and the Ministry o f Mines are parastatals to economic growth, and sour requiredto follow detailedprocurement and the public on further reforms. financial guidelines and meticulously account for all project funds. Parastatals are required to establish transparent procedures for divestiture. The reforms o f the legal framework will help in reducing corruption inthe judiciary. The private sector fails to respond to H The project will support reforms to improve the opportunities created through the investment climate. The government will j o i n parastatal reforms because they view the AT1and other groups such as MIGA to gain political riskas too high. access to instruments that reduce riskto investors. Returns for DRC's principal mining S Government will take steps to reduce its exports decline, ;limiting interest o f the dependence on a limited number o f private sector to invest commodities by supporting diversification o f the economy and by improvingthe overall competitiveness o f enterprises through restructuring and divestiture. From Components to Outputs Corruption and mismanagement reduce S Ex-ante and ex-post audits will be carried out the flow o f money to retrenched workers to certify that the money has effectively reached the retrenchedemployees. A mechanismhas beenput into place that ensures disbursements are made only when all procedures have been followed to the satisfaction o f the Bank. Weak financial sector inhibits access o f M he Bank and the IMF are strengthening the the private sector to investment capital, banlung sector by strengthening o f the Central - 24 - nutingresponse to the reforms. Bank and by liquidating bankrupt institutions. iffected workers and communities S Severance packages for retrenched workers and earful o f the impactshalt the reform development programs for affectedregions rocess. have been designed with the input o f all key stakeholders, which has built a coalitionfor reform. The dialogue will continue during project implementation. Reforms will be sequenced to maximize the probabilities that the private sector responds with new investment. jovernment lacks capacity to implement M Support under the project, the IDA grant, and he reforms. the ERC are being providedto ensure that COPIREP and the Ministryo f Mines are able to carry out their responsibilities. The project also provides resources to increase staff o f BCeCo and reinforce their capacity. The World Bank country office will hire a procurement and disbursement specialist who I will .implementation. provide support for project herall Risk Rating S !isk Rating H (High Risk), S (Substantial Ris - M (Modest Risk), 1 Vegligible or Low Risk) 3. PossibleControversialAspects: Reforms o f parastatals are almost always controversial, because they involve many losers such as workers who will lose their jobs and communities who will lose citizens. Reform o f parastatals also involves a fundamental redefinition o f the role o f the state, which in many countries i s a difficult and emotional process. The government has attempted to address the concems o f all the stakeholders, but some groups may still try to undermine the reforms, especially once the transitional government i s firmly inplace to test its commitment to the reforms. G. Main Credit Conditions 1. EffectivenessCondition There are no conditions o f effectiveness. 2. Other [classify according to covenant types used inthe LegalAgreements.] 0 A Project ImplementationPlan inform and substance satisfactory to IDA will be issued before any disbursement under the credit. 0 A contract to establish, reorganize or update the miningregistry will have been awardedbefore any disbursement to occur for any investment to take place inthis area. 0 ATI: DRC to be a member o f Africa Trade Insurance Agency, and to enter into the Insurance Facility Agreement, and a Security Trust Agreement with AT1and the private market insurers, and with ATI, a reputable commercial bank acceptable to IDA and private market insurers, respectively. The Insurance Facility Agreement and Security Trust Agreement must be in form and substance - 25 - acceptable to IDA. 0 Retrenchment A disbursement manual o f procedures acceptable to the Ministry o f Finance, and in form and substance acceptable to IDA before disbursement o f any o f the retrenchment tranches for each. 0 Operating costs financed by COPIREP, only once the implementation responsibility o f the project is shifted from BCECO. 0 Small grants: a manual o f procedures acceptable to the Ministry o f Finance, and in form and substance acceptable to IDA before disbursement o f this component. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start o fproject implementation. 7 2 1.b)Notapplicable. - 2. The procurement documents for the first year's activities are complete and ready for the start o f project implementation. - 3. The Project ImplementationPlan has been appraised and found to be realistic and o f satisfactory quality. 4. The following items are lacking and are discussedunder loan conditions (Section G): A draft project implementationplan is beingfinalized. I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bankpolicies. IvanRossignol Emmanuel Mbi Team Leader i:z:: i:nager/Director Country ManagerlDirector -26- Annex 1: Project DesignSummary CONGO, DEMOCRATICREPUBLICOF: Private Sector Development and Competitiveness Data CollectionStrategy jectorl country reports: FromGoal to Bank Mission) teevitalize economic Gross private investment NorldBank's World 'he government i s ictivity by creating rises from 5 percent o f levelopment Indicators. ommitted to opening the conomy to the private ector. indtrade. sector reviews and World :he government allocates nstitutions. o f Mines are self-sustaining 3ank supervision reports. udgetary resources to the viable institutions at the :ntities to substitute for roject resources. 'roject reports: from Objectiveto Goal) 3bjective: Indicators: ncreased competitiveness 1. FDIinthe mining, MinistryofFinance. Government remains Iftheeconomy. transport, energy, telecom committed to parastatal and financial sectors Periodic sector report reform. reaches U S $ l billionper o f ANAPI, COPIREP, year by 2009 from the Ministryo fMiningand The private sector current US$200million. Hydrocarbons responds to the opportunities. 2. Retum on assets for each targeted enterprise (SNEL, SNCC, RVA, OCPT, City Train, Gecamines, LAC) increases from the average o f -21 percent to the average o f 2 percent by end o f project implementation. 3. Net fiscal contribution from parastatal increased byUS$10millionannually. 'eriodic sector report o f 2OPIREP, Ministryo f diningandHydrocarbons -27- Key Performance Data Collection Strategy Indicators Outputfrom each Output Indicators: 'roject reports: rrom Outputsto Objective) Component: Component 1. New tax Laws entered into the Zongolese gazette iovernment remains law, judiciary reform Congolese gazette. ommitted to reforms. passed Average length of time WAPI 'rivate sector responds to ANAPIoperational needed to register a lpportunities company falls from 3 years to 3 months by the midterm review. Component2. New New privatization law hpervision reports, iovernment remains telecom, energy and entered into the Congolese nidterm review, ommitted to reforms. transport regulatory bodies gazette. mplementation completion established and operational. eport. Private sector participation All firms have some private hpervisionreports. 3overnment remains inGecamines, SNEL, sector involvement, ommitted to reforms. SNCC, RVA, LAC, OCPT whether through achieved by the end o f the public/private partnerships, project. hllyprivate, management contract, or other arrangement. Component3. Gecamines 10,000 Gecamines workers hpervisionreports. Norkers accept the terms restructured retrenched. )fthe severancepackages. At least 3 packages o f assets to the private sector by end o f project. N e w businesses are created 50 percent of new firms zx-post audits o f tetrenched workers are inKatangathroughthe started with the matching )perations of grant !bleto identify viable small grants program and grants are operating at the ecipients. usiness opportunities. other traiining activities 2ndofthe project. 4. BCeCOunit Accurate accounting, hditreports 3overnment continues to strengthened and fully financial management, upport these entities as operational. COPIREP ?rocurement and project mplementing agencies operational status report generated and iistributedo n a regular )asis. All transactions carried out :ransparently during .mplementation - 28 - Key Performance Hierarchy of Objectives indicators Critical Assumptions DrojectComponentsI iputs: (budgetfor each Voject reports: kom Componentsto ~~~ sub-components: omponent) )utputs) I.Improvingthe JSs36.10 'roject quarterly and :ontinued commitment to nvestmentclimate, nnual reports ector reform. Including: 1.1 Strengthening the JSS5.53 million Zontracts, Zontinuedproject iudiciary system and 2onsultants'reports, lwnership improvingthe legal and llionitoring & evaluation mproved institutional fiscal framework eports. oordination. ltaff stability. 1.2 Facilitate financial JSs13.29 million iinancial reports and Satisfactory performance intermediation .udits. iy contracted consultants. 1.3 Buildcapacity o fthe JSs14.20 million :ethnicaland training Jo political interference. Ministryof Mines ierformance evaluation eports. 1.4 Facilitate dialogue JS3.08 million Zontracts, consultants' Government andPrivate eports Sector 2. Implementing the JS71.69 million jurveys o f stakeholder parastatal reform, TOUPS. including: 2.1 Creating a regulatory JS$7.61 million framework 2.2 Facilitatingdivestiture JSs13.05 million from the public enterprises 2.3 Supporting the social JSs41.76 million cost of the reform jurveys with retrenched vorkers 2.4 Supporting JS$9.27 million implementationo f the reform 3. Initiatives for economic JSs7.41 million development inthe Katanga region, including 3.1 Small grants JSs2.40 million Vumber o fpersons ?oliticalstability. )btaining small grants. 3trong loan administration Zompletion reports zontinued access to credit :ollected from small grants hvolvement o f workers in .ecipients miness development ictivities 3.2 Supply chain analysis JS$0.94 million 3urveywork onnew o f SMEs mterprises established and iperating -29- 3.3 Transfer o f social Survey o f activities Political stability. services to municipalities transferred to Municipal involvement in municipalities local economic development 3.4 Set up of Regional Survey of service delivery Development frameworks and fiscal distribution mechanisms 3.5 Monitoring and Survey o f economic Political stability evaluation activities implemented in Katanga 4. Proiect imdementation 4.1 Provide BCeCo with Staff stability technical assistance and equipment Ability to recruit local staff 4.2 Management of inthe Katangaprovince Gecamines social programs - 30 - Annex 2: Detailed Project Description CONGO, DEMOCRATIC REPUBLIC OF: Private Sector Development and Competitiveness By Component: ProjectComponent 1 US$36.10 million - Improvingthe investmentclimate Following years o f war and o f bad governance, the current business environment in DRC i s not conducive to attracting investment, to developing the private sector or to restructuring the public enterprises. First, the legal system is no longer adequate and does not have a strong and reliablejudiciary systemwith a well-applied commercial code. Second, the tax system is obsolete and virtually impossible to apply for both the state and the public and private enterprises. Third, the country i s perceived as being a highpolitical risk, which i s detrimental to attracting foreign direct investment, and to the development o f regional trade and o f financial markets. Finally, key government actors, like the Ministry o f Mines, lack the capacity to actively promote their resources and thus help develop a competitive sector. Buildingcapacity o f the Ministryo f Mines will strengthen the government's capacity to regulate mining activities, improve revenue management and miningtitles distribution. For the reform to be successful, a new enabling environment addressing these issues will have to be put inplace before divestiture is carried out. The government's objectives through this project are to focus on: (i) improving the legal and judiciary framework; (ii)facilitating financial intermediation; (iii) buildingcapacity at the level o f the Ministryo f Mines; and (iv) mechanisms to improve policy dialogue with stakeholders. Subcomponent 1: Strengthening the judiciary system and improving the legal and fiscal framework (US$5.53 million) The judiciary system needs to be strengthened to make it equitable and fair to the private enterprises and entrepreneurs. Business laws need to be revamped to be more attractive to investors. An arbitration mechanism needs to be put in place in the short term to provide for an effective and rapid dispute resolution mechanism for private companies in the short term. Activities under this subcomponent include: (i) set-up o f a private national arbitration center; (ii)technical and financial support to three commercial tribunals (in Kinshasa and Lumumbashi); (iii) training and technical and operational to the Znpection Gkntrale de Justice; (iv) training o f the Legal Gazette staff; (v) support operational costs o f the judiciary and (vi) disseminate legal information. Subcomponent2: Facilitatefinancial intermediation (US$13.29million) Currently, banks are unable to convert script held on account at the central bank into cash to meet customer demand, which further fuels disintermediation. Foreign banks cannot lend to D R C given their perception o f political risk in the country. The proposed project will (i) finance the reform o f the BCC. Both the World Bank and IMF will be involved in this effort, but fimds under the project will be available to pay for an (a) organizational audit, (b) IT and accounting reform, (c) training and re-deployment o f staff at the BCC; (ii) provide technical assistance to help liquidate BCCE, NBK and BCA; (iii) facilitate membership o f DRC to the African Trade Insurance Agency, which will provide political risk guarantees to cover trade transactions and allow local banks to lend above their country ceiling limits. As a first step to re-establishment o f a performing financial intermediation, there is a need for a functioning, solvent and transparent central bank. Funds for severance payments to employees of BCA, NBK and BCCE are available under the second component o f this project. -31 - DRC's membership to the African Trade Insurance Agency will help importers and exporters have access to a political risk insurance facility. The project will finance the initial US$lOO,OOO contribution to AT1 and once this step i s completed will provide-aUS$lO.O million insurance capacity to be placed ina trust account inthe name o f DRC, as cash collateral for insurance policies to be issued. The facility will cover productive activity involving cross border trade. The facility is designed to be fully complementary to MIGA coverage. Once a member o f ATI, DRC will enter into an Insurance Facility Agreement with ATI, a Security Trust Agreement with private market insurers and a reputable commercial bank, which detail the nature o f the risks to be underwritten, the process under which these must be underwritten, and claims must be claimed, as well as the mechanismthrough which the Security Trust Account must be replenished. Subcomponent 3: Building the capacity of the Ministry of Mines (US$14.20 million) This subcomponent would strengthen the government's capacity to act as a facilitator and regulator o f miningactivities through the creation o f client-driven, results-oriented public mininginstitutions through decentralization and through strengthening o f the central body's ability to perform its functions. The Ministry of Mines and Hydrocarbons lacks the material and human resources to adequately enforce and implement the new Mining Code. The proposed project would assist in the re-organization o f the institutions in charge o f this sector, in defining clear mandates for each o f them, and inproviding training to Ministry employees. Ministry o f Mines reform would be achieved by the following activities: (i) rehabilitation o f the existing buildingto equip the Ministry o f Mines with the necessary infrastructure to carry out its tasks; (ii) the rehabilitation o f the provincial network, which will consist o f strengthening mining administration in eight provinces in order to build on the regional development framework and improve the Ministry o f Mines supervision o f these selected areas; (iii) extension o f the MiningCadastre eastward in order to enable the Ministry o f Mines to exercise control over mining title distribution, fees structure, and new mining sector exploration; (iv) geodetic information gathering and analysis, which will provide the Ministry o f Mines with extensive and accurate information on the minerals wealth; (v) environmental, mineral resources, and social assessment studies which will increase the level o f information on the country's mineral wealth and administration (as defined in the E M P for the sector); and (vi) legal reform o f the Ministry o f Mines to enforce the agency's capacity to enforce laws and establish an investment-friendly environment. Subcomponent 4: Facilitating the dialogue between the Government and the private sector(US$3.08 million) There i s a mutual lack o f trust between the government, the public enterprises and the private sector, which has resulted in lack o f consensus and misperceptions on decisions made by the Government to help improve the investment climate. This has also resulted in innovative proposals put forward by the business community not being followed-up by the Govemment. Procedures to create and register firms are complex and often opaque, while no active investment promotion has been facilitated to this day. The Govemment has focused on ANAPI (1'Agence Nationale de Promotion des Investissements), established in 2002, as a professional investment promotion organization to become a new forum of discussion o f sectoral policies and o f issues associated with the business environment, gathering stakeholders from the public sector (ie. government and relevant public enterprises), the donor community and the business community (national and international) and on the Cadre Permanent de Concertation Economique (CPCE). ANAPI and CPC would be the necessaryplatformto ensure "buy-in" from the different stakeholders, and would help validate options retained for the improvement o f the investment climate by dedicating some o f its activities to image building and investment generation. ANAPI would also be in a position to disseminate information and facilitate the process to create and register firms by establishing a one-stop-shop for investors for obtaining the necessary permits and meeting specific requirements. The focus o f the subcomponent is to set up the agency as an effective - 32 - interface for dialogue among the Government, the private sector and the investment community. The project will provide funds for ANAPI institutional and strategic development, cover some operational costs and provide funding for core activities. The subcomponent would fund the set-up o f an investor tracking system, which would assist ANAPI incontinuous monitoring o f the investment process. Funding for initial start-up o f CPCE, incost-sharing with the DRC Government, will also be provided. Project Component 2 US$71.69 million - Implementingthe parastatalreform The public enterprises in the utilities sector have all diversified into non-core commercial activities. Poor governance associated with the sharp decline in economic activity during the recent Congolese conflict have led these enterprises to become financial drains on the Government. The basic utility services they are supplyinghave dramatically decreased in quality. Per capita access has declined. Even former cash cows like Gecamines have turned into non-profitable companies. This, in turn, has hampered private sector development, which could not grow in a competitive and transparent environment. In parallel to creating the appropriate business environment to foster competitiveness, the project would support the parastatal reform in the telecommunication, transport, energy and mining sectors, which objectives would be to improve access to and quality o f the basic utilities, contain the hemorrhage on public finances, and finally address bad governance issues. The project supports the Government's objectives to: (i) facilitate divestiture from the ailing public enterprises; (ii) create the appropriate controls and institutional capacity for utilities to be provided on a sustainable basis; (iii) create the appropriate structure to pilot the parastatal reform. This, inturn would help attract private investment inthe targeted sectors. Subcomponent 1: Creating a regulatoryframework (US$7.61 million) Assistance under this sub-component would consist o f (i) providing capacity building and training to set-up regulatory authorities in the telecommunication, transport and energy sectors, (ii)supporting operational start-up o f these regulatory agencies. Subcomponent 2: Facilitating divestiturefrom thepublic enterprises (US$13.05 million) The public sector inthe telecom, transport, energy, financial and miningsectors i s over-extended and i s not efficient. Local and international technical assistance would provide the necessary support to carry out divestiture transactions in these sectors, sometimes leading to the development o f public-private partnerships or liquidation o f the companies. The chosen divestiture strategies would result from the consultations with stakeholders on sectoral policies and reforms, and functional, organizational and non-certified accounting audits, as well as environmental audits and legal assessments. This component would help kick start the private sector, while providing the means to improve the services provided. This component also includes support to help the reinsertion o f retrenched workers in an economic activity through NGO-based support. Subcomponent 3: Supporting the social cost of the reform (US$41.76 million) While it i s expected that the sale o f public assets will result in exceptional revenues that can be used to offset the social cost o f the reform, such revenues are not expected to flow in, in the short term. This component will consist o f financial assistance to retrenched mining workers at Gecamines, BCA, NBK, BCCE and OCPT. Gecamines has become a burden o n the Congolese government. Efforts to restructure the company have focused on cost-cutting measures and measures aimed at increasing efficiency. As a result, Government has approved a voluntary departures program, with a cost o f $40 million, partly funded under the ERC (a floating tranche o f approximately US$25 million will be disbursed from the ERC). More than 10,000 workers have decided to benefit from the program and will - 33 - sign an agreement stating that they will not be allowed to be re-hired in the same company. Funds in the fcrrm*f-severancepaekage have been allocated to fund the costs o f the program not covered under the ERC to the workers choosing to quit the company and will be distributed duringproject implementation. Inaddition to distributingthe payments, the project will finance social assistance and training to prepare workers for self-sustaining economic activities. In addition, systems have been put in place to allow smooth disbursement, using commercial banking network and allowing retrenched employees to invest their packages or place it on savings accounts. (See Component 3) The financial and telecom sectors have undergone similar studies, which have led to a needs assessment o f an additional sum to finance severance packages for an amount o f approximately US$25 million. Disbursements will start with Gecamines and will follow with OCPT and the three liquidated banks. . Since Gecamines will spearhead this process, the lessons learned inthe Katanga province will be used for subsequent severance package distribution to workers in other sectors. Given the historic strength o f labor unions, and the public resistance to reform, the social component i s crucial for program success. The fiduciary arrangements for the disbursement under the Gecamines retrenchment program are made to ensure that (i) GECAMINES staff who will be the beneficiaries o f the department packages are properly identified; (ii)payments are made in full by the payment Agency and only to eligible beneficiaries; and (iii)following IDA disbursements to a special account in BCC's account at BIS (outside o f DRC), funds flow to the payment agency in a timely manner and appropriate amounts will be made. The Banque Commerciale du Congo (BCDC) has been selected by the Ministryo f Finance to execute the payments in the cities of Lubumbashi, Likasi, and Kolwesi. Supervision o f the disbursements will be conducted by BCECO on behalf o f the Ministryo f Finance. BCECO i s inthe process o f hiringindependent auditors to do an ex-ante review o f the list o f beneficiaries prepared by Gecamines and an ex-post audit of the payments. BCECO has established a branch in the Katanga Province to monitor the disbursements and make identity controls o f all beneficiaries. All necessary protocols, acceptable to IDA, will be drawn up and signed by the parties concerned ina legal agreement. A similar fiduciary arrangement will be worked out for the other public enterprises to be reformed, as reflected in an agreement to be signed before disbursement. Subcomponent 4: Supporting implementation of the reform (US$9.27 million) In view o f the frequent political changes in the civil services, the weak institutional capacity in the country and the challenges posed by the post war situation, the need for a strong implementation unit i s established. The Government has set-up a steering committee in charge o f piloting the reform from its conceptualization to the implementation, COPIREP. The project would support this unit through (i) training o f staff and study tours, (ii) capacity building, especially in increasing its expertise in public private partnerships, reinforcing the public relations function, arranging media support and setting up an in-house communication unit; and (iii) set-up and operational costs. Project Component 3 US$7.41 million - Initiativesfor economic developmentinthe Katangaregion This component supports measures aimed at increasing competitiveness o f Katanga, the leading mining region inthe Democratic Republic o f Congo. Katanga is expected to attract private investment inmining after a brief period o f restructuring o f parastatal Gecamines. Further restructuring in OCPT and SNCC will also call for economic reinsertion, following Gecamines example. The component consists o f the following five activities: (i)small grants program; (ii)promoting integration o f small and medium enterprises in supply chain; (iii) transfer o f social services to municipalities; (iv) regional development; and (v) support to economic activities by former Gecamines workers. - 34 - Subcomponent I: Small grants program to finance local economic development activities. (US$2.40 million) The matching grants programwill be established inthe Katanga province and administered by the project to provide funds for the improvement o f the living conditions inand around miningareas. The activities funded by the small grants program would provide limited funding to individuals and cooperatives, associations and firms regrouping former Gecamines staff presenting projects with economic and financial merit - worker training, seminar attendance, purchase o f necessary equipment, and improvement o f production and marketing techniques, etc. The small grants program would improve the enabling environment by granting access to new production methods and would improve technical capabilities of its beneficiaries. A special committee involving NGOs, financial institutions and the private sector will be created upon the evaluation o f the applications, linkages will be made between this program and microfinance institutions active inKatanga. Subcomponent 2: Improvement of competitiveness in the region (US$O.94 million). Although the restructuring of Gecamines, SNCC and OCPT will have deep short term social impacts in terms o f redundancies, the mid term effect expected from it is the rehabilitation o f miningproduction in Katanga. There i s a tremendous potential for the development o f micro, small and medium enterprises in the region, provided an integrated support is extended to identify business opportunities, and assist in their creation and development. Based on the supply chain concept, the subcomponent would support technical assistance to help identify investment opportunities and upgrade skills and capacity o f SMEs around an emerging private mining industry, as a way to mitigate the social problems inKatanga o f the Gecamines, SNCC and OCPT restructuring. Linkages could be created with local community development and business partners, namely mining companies (Gecamines, Forest, and other private companies), NGOs, microfinance institutions, business associations, etc. It should be noted, however, that the full development o f Katanga's economic potential requires an economic integration with the copperbelt area o f neighboring Zambia. In effect, while Katanga still has rich mineral reserves, it has virtually lost its treatment metallurgical capacity, which has become obsolete. The opposite i s happening inZambia where the low cost mineral reserves have come to exhaustion butthere is a largemetallurgical capacity that could run for another 5 to 8 years. Following the decision o f Anglo American to withdraw from the recently privatized copper operations, the Government of Zambia is urgently seeking economic alternatives to the mining operations. There are huge economic benefits in developing economic links between the two regions through a trade agreement or a through the establishment o f a special economic zone, which the current project will undertake. Subcomponent 3: Transfer of social services to municipalities. (US$1.04 million). The component would support the empowerment o f local communities inthe provision o f social services. Gecamines i s currently responsible for providing housing, utility and social services to the communities located within its concession. As part o f the restructuring strategy, housing and social infrastructure assets that are on the balance sheets o f Gecamines will be transferred to local private or non profit institutions, or to the central government. The project would also finance local economic development activities and capacity buildingo f local communities. Subcomponent 4: Set up of Regional Development Frameworks (US$2.51 million). The project would support the set up o f a social safety net to assist the former Gecamines employees who decided to leave the company under the voluntary separation agreements that will benefit from a financial support under the Economic Recovery Credit. The assistance is to be provided on a decentralized manner and to be based upon existing structures put in place with the assistance o f non governmental organizations and other donors. They are expected to catalyze the development of other - 35 - private sector development initiatives being contemplated to kick-start the economy o f Katanga. This subcomponent will also support a series o f employment creation initiatives for surplus workers in Gecamines operations, and other vulnerable population in Katanga, such as women, conflict related groups, unemployed youth and rural populations in remote areas with difficult access to markets. A small coordination unit funded by the Economic Recovery Credit to manage the financial aspects o f the mutual separation agreements will be in charge o f the coordination o f the activities under the social safety net. Training will be provided to all the workers choosing to leave Gecamines and career counselors will guide the former workers to several j o b creation alternatives, under three major groups: (i)agriculture and agribusiness; (ii) scale-mining; and (iii) small micro-enterprises and commerce. Regional development frameworks would make public investment more coherent and consistent with private investments. Consequently, building management capacity at the Provincial and the community levels for the management of infrastructure projects and basic services delivery i s urgently needed. This subcomponent would support: (i) assessment o f fiscal fall-outs from bigprivate mininginvestments to be redistributed among local governments, as well as o f public investments resources required to the construction o f infrastructure that is necessary to make private investments viable; (ii) analysis o f the respective role and capacity o f central and local governments to deliver essential services and to implement and maintain public infrastructure associated with such large investments; (iii)putting together regional and local development frameworks as reference documents for public investment programming and private investment integration; and (iv) prioritization o f investments according to regional and local development priorities, and analysis o f potential impacts on the regional economy. This would include the preparation o f local (urban and rural) development plans and investment programs using participatory approaches. Institutional arrangements involving regional committees relying on a large participation and representation o f the local governments, the private sector, and local NGOs, would be established to fill the gap between communities and the Government of the Province. This component would also help design appropriate tools and methodologies for urban and rural communities to better manage local infrastructure maintenance and basic services delivery to their population; it would involve, inparticular: (i)capacity buildinginfiscal and managerial capacity o f local governments, with an emphasis on budget and expenditures management; and (ii)assisting in the establishment, operation and maintenance o f appropriate information systems and communication to facilitate the decision-malung process at the local and regional levels, as well as donors coordination, and (iii) oflocalstaffintechnical,entrepreneurialandmanagerialskills. training In addition, the subcomponent will provide technical assistance from an NGO to assist in the implementation of several high visibility, quick implementation projects that will serve as catalysts for the development of other activities in the area. The same approach and means will be used for employees o f SNCC and OCPT retrenched inthe Katanga region. Subcomponent5: Monitoring and evaluation (us$0.52 million) On the basis of the social baseline study being currently prepared by the University o f Lubumbashi, performance indicators will be defined for the monitoring and evaluation o f the program. The subcomponent will also fund a strong communication program to inform the departing workers and the affected population of the proposed economic alternatives being supported by the program. NGOs will be engaged both inthe communication and the monitoring and evaluationprogram. - 36 - ProjectComponent4 US$7.13million - Implementationarrangements Subcomponent 1:Project management (US$5.95 million) The implementation o f the project will require regular follow-up, which will need to carry out financial management of the project, track disbursement, engage in procurement activities when needed. The Government has already created BCeCo to support such activities in the context o f the IDA Grant. It would therefore be consistent with this earlier choice to use BCeCo as the Project Implementation Unit. This component would consist o f providing BCeCo with the necessary resources to carry on its activities inthe context ofthis new project, through technical assistance and equipment. Necessary staff would be recruited to reinforce BCeCo capacity during project implementation. In addition, a separate entity, COPIREP, as stated in Subcomponent 2.4, will be established. Some o f the BCeCo personnel will be transferred to COPIREP, once the new organization reaches operational capacity. All project management activities, such as procurement and disbursement o f funds, will then be channeled through COPIREP, and BCeCo will no longer be incharge o f these activities. Subcomponent 2: Katanga antennae (URK) (US$1.18million) Project management activities inthe Katanga province will be provided by a satellite coordination unit o f the main implementation unit. URK (Unit& de reinsertion uu Kutungu) will be put in charge o f coordinating retrenchment payments and organizing worker training and reintegration. - 37 - Annex 3: EstimatedProject Costs CONGO, DEMOCRATICREPUBLICOF: Private Sector Developmentand Competitiveness Local I Foreign Total US $million US $million US $million Improve Investment Climate 7iE+i& 34.63 Parastatal Reform 52.17 16.56 68.73 Initiatives for Economic Development inthe Katanga Region 3.92 3.18 7.10 Project Coordination and Implementation 6.23 0.64 6.87 PPF 0.50 1.oo 1S O Total Baseline Cost 73.45 45.38 118.83 PhysicalContingencies 0.55 1.12 1.67 Price Contingencies 1.11 I 2.22 3.33 Total Project Costs1 75.11 48.72 123.83 Total Financing Required 75.11 48.72 123.83 Foreign Total US $million US $million Small Grants 2.00 0.00 2.00 Retrenchment payments 40.00 0.00 40.00 Works 1.66 0.72 2.38 Goods 1.04 2.61 3.65 Consultant Services 6.16 28.00 34.16 Training 3.00 2.95 5.95 Operating costs 19.09 0.00 19.09 Insurance Facility Funding (ATI) 0.00 10.10 10.10 PPF 0.50 1.oo 1S O Contingencies 1.66 3.34 5.00 Total Proiect Cost: 75.11 I 48.72 123.83 Total Financing Required I 75.11 I 48.72 123.83 1Identifiable taxes and duties are 3.83 (USSm) and the total project cost, net of taxes, i s 120(US%m).Therefore, thc project cost sharing ratio i s 100% of total project cost net of taxes. - 38 - Annex 4: Cost BenefitAnalysis Summary CONGO, DEMOCRATICREPUBLIC OF: Private Sector Developmentand Competitiveness [For projects with benefits that are measured in monetary terms] costs: 74.9 (US$ million) Net Benefits: 31.5 14.1 nfa (US$ million) IRR: 18.4 t%\ Note: 0 The discount rate used for the economic analysis is 12%. 0 It is assumed that the financial costs and benefits are equated to economic costs andbenefits. 'Ifthe difference betweenthe present value of financial and economic flows is large and cannot be explainedby taxes and subsidies, a briefexplanation of the difference is warranted, e.g. "The value o f financial benefits is less than that o f economic benefitsbecause o f controls on electricity tariffs." Summary of BenefitsandCosts: Base CaseResults The cost-benefits analysis o f this type o f Private Sector Development & Competitiveness project is delicate and presents the limits encounter in all similar project evaluation. The difficulty in quantifying the economic benefits results mainly from the indirect relationship between the project's interventions and the stream o f benefits; and from the lagged effects o f the project on the performance o f the different sectors directly supported. Nevertheless, a cost-benefit analysis has been used to calculate the Net Present Value (NPV) and Economic Rate o f Return (ERR) ina "with" and "without" project framework. The numeraire used inthe objective function is output, which is expected to grow mainly as the result of (i)improved business environment, (ii) competitive and productive miningsector and (ii) more increased private national and foreign direct investments (FDI). The net present value o f the overall project i s estimated at about US$31.5 million for a 12% discount rate. The corresponding internal economic rate o f return i s estimated at 18.4%. A minimumo f 970 jobs are expected to be directly created by the matching-grant supported SMEs in the Katanga province. Jobs generated through multiplier effect are also expected. The positive impact on government income estimated at about US$14.1 million result from increased direct and indirect corporate taxes, and taxes o n incremental wages. - 39 - The cost-benefit analysis was done for five main categories: (i) improving the investment climate which, for the purpose o f the analysis, includes the sub-components "Regulatory Framework" and "supporting implementation o f the reform"; (ii)divestiture from public enterprises; (iii)matching grant in the Katanga province; (iv) Pioneering Miningcompetitiveness in the Katanga province, which excludes the matching grant component for the purpose o f the analysis; and (v) retrenchment program. For all these components, the ERRSare greater than the discount rate o f 12%, indicating that the project i s robust. Improving Divestiture Matching Pioneering Retrenchment the from the Grant in Mining Program investment public the competitiveness climate enterprises Katanga inthe Katanga province province NPV(US$ million) 15.3 4.9 3.4 1.o 6.8 ERR 19.9 19.0 31.9 19.2 15.8 MainAssumptions: 1. Stable macroeconomic environment as projected in the I-PRSP with a 5 percent real GDP per annum on average. 2. Capacity at COPIREP is effectively and timely strengthenedto better attract FDI. 3. A minimumo f 200 firms are expected to benefit, either directly or through their associations, from the matching grant scheme with and average amount o f US$lO,OOO per firm. It i s assumed that the scheme, through the provision o f technical assistance and training, would increase productivity o f the recipients and would yield an increase in outputs at a multiple o f 8 times the amount o f support. This conservative assumption is made based on empirical evidence in similar schemes in East Asian countries, where output increase at a multiple o f 15 times the matching grant amount 4. For the supported firms, the rate o f job creation has been calculated using recent labor productivity indicator with an estimated worth o f output per worker o fUS$3,500. 5. The additional output created by assisted firms i s defined as the difference between the level o f output achieved by firms assisted by the project and the level o f output these same firms would have achieved inthe absence o f the project 6. In the base case, the increase in firms' output i s discounted by 66% to take into account the social costs o f other crucial resources in the economy that are diverted into the project from other activities not directly supported by the project. 7. For the investment climate component, it was assumed that the support provided would, with an average lag o f two years, increase efficiency o f the supported recipients and would yield an increase ineconomic outputs at amultiple of2 times the amount o fsupport. Sensitivity analysis/ Switching values of critical items: Three tests were carried out by switching values o f critical variables. The results are presented intable 2 below. (i) firsttestdecreasedthesocialcostofresourcesdivertedintotheprojectfrom66percentto50 The percent; the NPVjumped to US$77.0 million with a corresponding ERRo f 26.3 percent. -40- (ii) secondtestassumeda75percentsocialcostofresourcesdivertedintotheproject,theNF'V The decreased to US$4.2 millionwhile the ERRdropped to 13.0 percent. (iii)The thirdtestelongates the disbursement periodbytwo years, theNFV decreasedtoUS$25.0 million while the ERRcame down to 17.4%. The project has a positive impact on government income inall the different scenarios analyzed. Table 2 : Sensitivity Analysis Summary Scenario Sensitivity Performed Cases VariableAmount NPV ERR Fiscal ($million) ($I:;:") OverallProject DelayedProject ElongatedDisbursement (a) Base (a) RegularDisbursement 3 1.5 18.4 14.1 Implementation period @) Altemate (b) Slow Disbursement 25.0 17.4 13.1 ChangeinDiversion Percentreductionin (a) Base (a) 66% Reduction 31.5 18.4 14.1 Assumption increasein Output , attributedto diversion (b) Alternate (b) 75%Reduction 4.2 13.0 10.3 from other sources I I I (c) Altemate I (c) 50%Reduction 77.0 I 26.3 I 21.3 I Nature of benefits I Indicators Monitoring Tools Increasedprivatenationaland Foreign direct investments Investmentstatistics Increasedproductivityand outputs in the matching-grant Base case / end of project output levels supported start-ups and SMEs Improvedefficiencyand increased productivityin Financialstatementsof restructuredcompanies; restructuredcompanies COPIREP reports Improvedbusiness environment End-of-projectsurvey on administrativebarriers Decreased levelof subsidiesto parastatalsand Publicfinance statistics improvedfiscal revenue for the Government Increasedaccessto basic infrastructureservices and Baselineand end of project survey reduced cost of infrastructureservices Reinsertionof 20% of retrenched workforce in Droductive Tracer studv M a i n Beneficiaries The main beneficiaries o f the project would be: (i) Congolese population with better access to basic the utility services; (ii) private sector with a more businessfriendly environment; (iii) the restructured public enterprises with improved efficiency and productivity; (iv) population in mining areas with increased access to income, and (v) the public sector, the government in particular, with strengthened institutions, and wider tax base and healthier fiscal position. -41 - Annex 5: Financial Summary CONGO, DEMOCRATIC REPUBLIC OF: Private Sector Development and Competitiveness Years Ending December 31 II IMPLEMENTATIONPERIOD Year1 I year2 I year3 IYear4 IYear5 IYear6 IYear 7 Total Financing Required Project Costs Investment Costs 6.1 24.3 29.5 19.1 11.5 8.8 4.7 Recurrent Costs 1.2 4.9 5.9 3.5 1.9 1.6 0.8 Total Project Costs 7.3 29.2 35.4 22.6 13.4 10.4 5.5 Total Financing 7.3 29.2 35.4 22.6 13.4 10.4 5.5 IFinancing IBRDllDA 7.1 28.2 34.3 22.0 13.0 10.0 5.4 Government 0.2 1.o 1.1 0.6 0.4 0.4 0.1 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers(USAID,EU) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Jser FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - 42 - Annex 6(A): Procurement Arrangements CONGO, DEMOCRATICREPUBLICOF: Private Sector Developmentand Competitiveness Procurement General 1. Procurement o f works, goods and services under PSD&C will follow IDA procurement guidelines. The existing national regulations cannot be used under the proposed project, since the Country Procurement Assessment Review (CPAR) carried out in 2001 concluded they are not acceptable for procurement under IDA financed projects. Use of Bank Guidelines 2. Goods and works financed by IDA will be procured in accordance with IDA Guidelines for Procurement under IBRD Loans and IDA Credits dated January 1995 and revised in January 1996, August 1996, September 1997, and January 1999. Bank Standard Bidding Documents (SBD), and Standard Evaluation Report (SER) will be used for both International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procedures. For NCB procedures, the Government will give assurance during negotiations that the following principles would be adhered to: (i) all bids would be submitted in one envelope to be opened publicly; (ii) point systems would not be used for bid evaluation for works; (iii) the award o f contracts would be announced to all bidders; (iv) any bidder would be given adequate response time (at least four weeks) for preparation and submission o f bids; (v) bid evaluation and bidder qualification criteria would be clearly specified in biddindpre-qualification documents and will not be applied arbitrarily; (vi) eligible firms would not be precluded from participation; (vii) no preference margin is granted to domestic contractors and suppliers; (viii) contracts would be awarded to the lowest evaluated bidder in accordance with predetermined and transparent methods; (ix) bid evaluation reports would clearly state the reasons to reject any non-responsive bid and (x) prior to issuing the first call for bids, draft standard bidding documents prepared as annexes to the Procedures Manual would be submitted to and found acceptable by IDA. Form requests for quotations, satisfactory to the Bank should be used. This form should be part o f the Project Implementation Plan (PIP, see paragraph 16 below). The PIP should contain instructions, acceptable to IDA, for carrying out ICB, NCB and shopping procedures. 3. Consultancy services financed by IDA will be procured in accordance with I D A Guidelinesfor the Selection of Consultants by World Bank Borrowers dated January 1997, revised in September 1997, January 1999 and May 2002. The standard Request for Proposals (WP) as developed by the Bank will be used for the selection o f consulting firms. Simplified contracts, acceptable to the Bank, will be used for short term assignments, i.e. those not exceeding six months, or for those costing less than US$200,000. The Government has been briefed during appraisal as well as negotiations about the features o f the most recent consultants Guidelines, inparticular with respect to advertisement, proposals opening and the various steps o f IDA 4. Small Grants. Procurement o f services, works and goods under Small Grants contracts would follow the procedures defined in the PIP and in accordance with the simplified procurement procedures referred to in Section 3.15 o f the Guidelines for Procurement under IBRD Loans and IDA Credits, and with the Bank's Guidelines for Simplified Procurement and Disbursement for Community-based Investments (February 1998). Procurementmethods(TableA) 5. Procurement o f Works. The project will finance works contracts for an estimated total amount o f US$2.48 million equivalent, o f which IDA will finance US$2.12 million, including (i) civil works related to the rehabilitation and improvement o f facilities to provide adequate office space to the different -43- sectors institutions; (ii) publication o f promotion materials; and (iii) geodesic and cadastral mining works. One contract for mining cadastral works, to be funded under the IDA Credit, will be procured according to International Competitive Bidding (ICB) procedures, with post-qualification. Procurement o f works, including geodesic and civil works, estimated to cost less than US$600,000 and more than US$50,000, shall be carried out through National CompetitiveBidding(NCB) procedures. Other contracts, including publishing o f brochures, booklets and other media, smaller civil works rehabilitations and maintenance, each estimated to cost less than US$50,000, will be procured through Shoppingprocedures. 6. Procurement o f Goods. The project will finance the purchase o f goods for an estimated total amount o f US$3.80 million equivalent, o f which IDA will finance US$3.60 million, including (i) office equipment, (ii) hardware and software, (iii) vehicles and (iv) field equipment and instruments. Goods will be procured through (a) ICB procedures when costing more than US$200,000 per contract, and including office equipment, hardware and software and vehicles; (b) NCB when costing between US$200,000 and 50,000, including office equipment, hardware and software, vehicles, video and surveying instruments; (c) contracts below US$50,000 for small items, including field equipment, environmental monitoring instruments, technical documentation and litterature, office equipment, furniture, training materials and office supplies, will be procured through Shopping procedures, acceptable to IDA, based on the evaluation o f at least three price quotations. The award would be made to the supplier with the lowest price quotation for the required goods, provided the latter has the experience and resources to execute the contract successfully. 7. Consultancy Services. The project will finance the contracting o f consultancy services for studies and technical assistance to an estimated total amount o f US$35.64 million, o f which US$35.23 million willbe financed byIDA. Firms. Consulting firms to be recruited under contracts estimated above US$lOO,OOO will be selected on the basis o f the Quality and Costs Based selection (QCBS) method, using the Bank's Standard Request for Proposals, to provide services related to (1) public administration reform and capacity buildingwithin some o f the sectors involved in the project, including (a) thejudiciary sector: technical assistance to the Inpection G6n6rale de Justice and support to selected commercial tribunal; (b) thefinancial sector: (i) institutional audit, IT development and accounting system reform at the Central Bank (BCC), (ii) technical assistance to support the liquidation process o f the BCA, NBK and BCCE banks; (c) the mining sector, technical assistance to strengthen (i)mining rights admmistration, (ii) environmental management o f miningactivities, (iii) environmental, social and revenue management the capacity o f communities in mining areas; (iv) the sector legal and revenue management reform and (v) mineral resources assessment; and (d) investment promotion capacity: (i)assessment o f investment barriers and (ii)development o f promotion tools; (2) public enterprises restructuring, includingtechnical assistance (a) for institutional and regulatory reform within the telecommunication, energy and transport sectors, (b) to facilitate State divestiture from public enterprises, including (i)investment banking activities, (ii) and (iii)environmental auditing, (iv) redeployment o f staff and others, and (c) to legal assist the new Committee for the Reform o f Public Enterprises (COPIREP) to lead and monitor the reform process; (3) economic development in the Katanga region, including technical assistance (a) for small grants management, (b) supply chain activities and SME development, (c) transfer o f Geocamines social services, (d) participatory design o f a regional development framework and implementation start-up, (e) social communication and monitoring o f social activities; and (4) the project's financial audits as well as project performance monitoring and assessment. Exceptions to the QCBS method would include the use o f LeastCost Selection(LCS), for the contracting of services related to the design of the Mh4Hfacilities and technical audits; and o f SelectionBased on Consultant's Qualification(CQ), for the contracting o f investment promotion services, supervision services for cadastral, environmental and geological activities, technical assistance for institutional and regulatory activities related to the - 4 4 - telecommunication sector reform, technical assistance, mostly by NGOs, for redeployment activities, and social studies. For contracts based on a short list of consultants estimated to cost US$lOO,OOO or less per contract, the short list may consist entirely o f national consultants if a minimum o f three qualified ones are available. Individuals will be recruited in cases where a firm i s not needed. Such individuals, under contracts below US$50,000, will be selected and recruited on the basis o f qualification and experience ( CQ)inaccordance with Bank Guidelines. 8. Training. The Credit would finance training expenses estimated at USS6.22 million equivalent. Training expenses would include expenditures for building the capacity o f staff as required for the implementation o f the project (such as expenditures for rental fees of training facilities, books, seminar fees), as well as for domestic and international travel, and per diems. Procedures, including Bank shopping procedures (less than US$50,000) and consultant qualifications procedures for smaller amounts (less than US$lOO,OOO), acceptable to IDA, should be described inthe PIP. 9. Small Grants. Small grants for a total o f US$2.09 million equivalent will be awarded to individuals, including ex-employees and workers from Geocamines, to artisanal and small-scale associations, cooperatives, or enterprises, and to CSOs and private organizations working with communities in such areas within the zone o f influence o f miningoperations in the Katanga Province, to carry out projects aiming at the diversification o f local economic activities, and improvement o f livelihood, environmental, as well as social and/or working conditions. Elegibility criteria and procedures are defined in a special chapter o f the PIP, to be approved by the Borrower and acceptable to IDA before project effectiveness. The implementation may involve a mixture o f work force accounted by the beneficiaries, consultancy services, small civil works, purchase o f equipment or materials and/or expenditures related to training. Conditions to benefit from the program would be applied to ensure a substantial vested interest by grant recipients in the projects outcome. Such conditions will include mainly straight 50/50 cost sharing formula or other commitments, depending o n socio-economic threshold and criteria. Financing would not exceed US$20,000 equivalent per project and they will have a maximum duration o f 12 months. They will be implemented by the beneficiaries themselves. On the basis o f periodical invitation to present proposals (about three times a year), the projects would be screened, selected and approved through a three steps procedure, involving a technical and institutional evaluation by a committee involving representatives from the URK, from the Civil Society, external experts (and the Bank in the case o f prior review thresholds, and its no objection procedures). These activities would come under a Grant Agreement between the URK (a local representation o f BCeCO) and the beneficiary. Monitoring and ex-post audits will be carried out by URK and, on a randombasis, by the Bank and through independent audits. 10. Incremental Recurrent Costs. The project would finance incremental recurrent costs up to an amount o f US$19.80 million equivalent, o f which US16.94 million would be financed by IDA. Incremental recurrent cost would include (a) expenditures for the contracting o f auxiliary personnel required for the implementation o f the project; and (b) expenditures and supplies for the operation and maintenance o f facilities required for the implementation o f the project (such as expenditures for office supplies, rental fees, services, operation and maintenance o f equipment financed out o f the proceeds o f the Credit), as well as for domestic and international travel, per diems and participation fees related to project implementation activities. All procurement within this category shall be done according to the procedures defined inthe Project Implementation Plan manual (PIP). The adoption o f the manual by the Government o f this manual, acceptable to IDA, is a condition o f disbursement o f the Credit, and any amendment to such manual will have to be also acceptable to IDA. Advertising 11. A general procurement notice (GPN) will be prepared and issued upon Board Approval in the UnitedNations Development Business listing all contracts above US$300,000 for works, US$200,000 for -45- goods and US$200,000 for consultants. It would be updated annually for any outstanding major procurement. Specific Procurement Notices for works above US$300,000 and for goods above USS200,OOO will be advertised in the national press o f wide distribution and internationally. Responses will be recordedina register established at BCeCo. Since a large portion o fthe Credit funds will be used for technical assistance and consulting assignments, early attention will be given to advance planning o f recruitment and timely search for expressions o f interest through international advertising to obtain the best possible pool o f candidates from which strong short lists can be compiled. The related bidding documents, as applicable, will not be released - or the short list for consultant services will not be prepared - before eight weeks after the GPN has been published. Specific Procurement Notices (SPN) will be advertised in the national press o f wide circulation and internationally for large contracts. Sufficient time will be allowed to obtain bid documents and to prepare bids. IDA Review 12. All contracts for works and for goods above US$lOO,OOO will be subject to IDA's prior review procedures. The use o f IDA's standard bidding documents will considerably expedite the prior review process as IDA review will primarily focus on invitations to bid, bid data sheets, contract data, technical specifications, bill o f quantitiedschedule o f requirement and other contract specific items. The review process would cover about 90 percent o f the total value o f the amount contracted for works and goods. Procurement post review o f contracts awarded below the prior review threshold levels will apply and should cover 20% o f contracts in term o f number. In the event samples o f post reviews indicate major problems, additional reviews, financed by the Borrower, should cover the remaining portion o f contracts. Draft standard biddingdocuments for N C B will be reviewed and agreed upon with IDA prior to Credit effectiveness. 13. For consultant services, prior review will include the review o f budgets, short-lists, selections procedures, terms o f reference, letters o f invitation, proposals, evaluation reports and draft contracts. Prior IDA review will not apply to contracts for the recruitment o f consulting firms and individuals estimated to cost less than US$lOO,OOO and US$50,000 equivalent, respectively. However, IDA prior review will apply to the Terms o f Reference o f such contracts, regardless o f value, to single-source hiring,to assignments o f a critical nature as determined byIDA or to amendments o f contracts raising the contract value above the prior review threshold. For consultant contracts estimated above the US$lOO,OOO, opening the financial envelopes will not take place prior to receiving the Bank's no-objection to the technical evaluation. For contracts estimated to cost less than US$100,000 and more than US$50,000 the borrower will notify IDA o f the results o f the technical evaluation prior to opening the financial proposals. Documents related to procurement below the prior review thresholds will be maintained by the borrower for ex-post review by auditors and by IDA supervision missions. BCeCo, and later COPIREP, will be required to maintain all relevant procurement documentation for subsequent review by IDA. They will submit to IDA periodic procurement schedules detailing each procurement package inprogress andcompleted as part o f the normal project reporting exercise. ProcurementImplementationArrangements 14. Procurement responsibility for the project rests with BCeCo, which will assign procurement and financial management responsibilities to specific BCeCo staff members to implement the proposed project. The complexity and ambit o f this project associated with multiple examples o f bad governance in DRC, make the case for the creation o f separate implementing unit. A separate unit would be easier to control and to monitor to avoid implementation delays caused by a bad institutional arrangement. This option, however, would lead to creating yet again a new structure, which in the short term would be inefficient in terms o f use o f IDA resources. It would not add value in terms o f fiduciary management nor would it be a better tool to improve governance than the already existing BCeCo. Finally, it would be a source o f delays in the implementation o f the project given the current lack o f project - 46 - implementation capacity available in DRC. Therefore, the choice i s to assign the PSD&C management responsibility to BCeCo, providing the necessary financial resources to this entity to contract additional personnel as needed to ensure a proper implementation o f this project. Key personnel that BCeCo will make available to specifically focus on the project will include an accountant, a procurement specialist, and a transaction specialist. Eventually, a BCeCo fiduciary manaegement team will migrate to COPIREP, once the agency i s established and reaches operational capacity. BCeCo, and eventually COPIREP will be responsible for the quality o f these procurements and adherence to Bank procedures. The tasks o f BCeCo and subsequently COPIREP will comprise: (a) maintaining a register o f all interested bidders; (b) maintaining a detailed list o f technical specifications o f goods and services to be financed by the project; (c) preparation o f the procurement plan and calendar; (d) preparation and/or finalization o f pre-qualification hidding documents and requests for proposals; (e) bid evaluation and preparation o f evaluation reports; (f) contract approval process; (g) processing international and local price quotations; (h) receipt o f goods and services and dispatching; and (i)monitoring o f contracts implementation. A Memorandum o f Understanding (MOU) will be prepared between BCeCo and COPIREP at the time o f transfer o f responsibilties. The MOU will be cleared by the World Bank Regional procurement specialist. In addition, the Regional procurement specialist will conduct a capacity assessment o f COPIREP before the transfer o f activities takes place. ProjectImplementationPlan(PIP) 15. The Project Implementation Plan (PIP) defines and specifies the arrangements and planning for the implementation o f the Project, as well as the procedures to be applied, based on the existing BCeCo ones and adjusted to the PSD&C Project. It comprises the following chapters: (i) description o f the Project, (ii) institutional arrangements, (iii)Project administration and procedures, (iv) implementation, procurement and disbursement schedules and (v) monitoring and evaluation, including internal organization for quality control. The Procurement Plan (see below), TORSand technical specifications for the first year o f implementation would be annexed. The project administration chapter would include a detailed description o f budgeting, accounting, financial management, project personel, assets management,, quality control and reporting procedures. With respect to procurement, the PIP would (i) describe in a practical manner provisions and procedures, (ii)indicate which are the standard Bank documents that should be used for the procurement o f goods and works and for selection o f consultants, (iii)include, as annexes, procedures and standard documents for calling for bids, selecting consultants and vendors, and awarding contracts, (iv) include, as annexes, procedures and standard documents for requesting quotations under shopping, for CQ processes and hiring o f firms and individual consultants, (v) include a specific chaptedannex with eligibility criteria, and procurement procedures for the small grants program. The PIP will be formally adopted by the Government and approved by the Bank as a condition o f effectiveness. ProcurementPlan(PP) 16. The Procurement Plan (PP) for works, goods and services to be procured by BCeCo during the first implementation year o f the project has been agreed between the Government and the Bank during negotiations. It will be part o f the Project Implementation Plan (to be approved by Government and acceptable to the Bank before credit effectiveness). For each subsequent year, the procurement plan related to the agreed Annual Work Program will be updated and submitted to the Bank for review and approval. These plans show and will show the step-by-step procedures for procurement, contract packages for goods, works and consultants services and training, estimated cost and the procurement/selection method, the activities which follow procurement, such as manufacture, shipment, delivery and installation o f goods; mobilization, construction and completion of works. It i s mandatory that all procurement be carried out in accordance with the formally agreed procurement plan (original and formally up-dated). Therefore, for the purpose o f this project, agreed Procurement Plans will - 4 7 - determine procurement methods and it is not necessary to set up aggregate total amounts. Procurement CapacityAssessment 17. All procurement issues would be dealt with by BCeCo. BCeCo has been established by the Government for the implementation o f the Emergency Early Recovery Grant. Their track record i s good whereas their staffing may be too limited to handle the implementation o f another project. Consequently, it is proposed to reinforce BCeCo's current institutional capacity to mitigate this risk. Specifically assigned staff, to be contracted as needed to strengthen BCeCo capability, would be focusing solely o n the implementation o f this project: it would include an accountant, a procurement specialist and a transaction specialist. It i s anticipated that experienced BCeCo staff would be migrated to COPIREP duringproject implementation to avoidclogging-up BCeCo. Procurementmethods (TableA) (0.00) (0.00) (16.94) (0.00) (16.94) 8. AT1 Guarantee Fund 0.00 0.00 10.54 0.00 10.54 (0.00) (0.00) (10.54) (0.00) (10.54) 9. PPF 0.00 0.00 1.50 0.00 1.so (0.00) (0.00) (1SO) (0.00) (1SO) Total 2.95 2.70 118.18 0.00 123.83 (2.86) (2.31) (114.83) (0.00) (120.00) I!Figures inparenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies. 2' Includes civil works and goods to be procured through national shopping, consulting services, services o f contracted staff o f the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii) re-lending project hnds to local government units. -48- Table AI : Consultant Selection Arrangements (optional) (US$ million equivalent) (29.67) (0.00) (0.00) (0.19) (3.73) (0.00) (0.00) (33.59) B. Individuals 0.00 0.00 0.00 0.00 1.83 0.00 0.00 1.83 (0.00) (0.00) (0.00) (0.00) (1.64) (0.00) (0.00) (1.64) Total 29.82 0.00 0.00 0.22 5.60 0.00 0.00 35.64 I I 129.67) I 10.00) I (0.00) I 10.19) 15.371 I (0.00) I 10.00) I f35.23) I\Includingcontingencies Note:QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selectionunder a Fixed Budget LCS = Least-Cost Selection CQ = Selection Basedon Consultants'Qualifications Other = Selectionof individualconsultants (per SectionV of Consultants Guidelines), Commercial Practices,etc. N.B.F. = Not Bank-financed Figuresin parenthesesare the amounts to be financed by the Bank Credit. - 49 - Prior reviewthresholds (TableB) 18. All procurement documents for works and goods estimated to cost more than USS100,OOO per contract, will be subject to prior review by IDA. All other contracts will be subject to post-review. 19. All procurement documents for consulting contracts with firms for amounts exceeding US$lOO,OOO per contract selected on the basis o f a short list and any contract involving individual consultants exceeding US$50,000 per contract will be subject to prior review by IDA. In addition, for consultant contracts with firms exceeding US$lOO,OOO per contract, the technical evaluation report will also be required by IDA for prior review. All other contracts will be subject to post-review. Table B: Thresholds for Procurement Methods and Prior Review' <50 Quotations None 2. Goods >200 ICB A1112.3 50-200 NCB ~100,00010.9 <50 Shopping None 3. Services Firms >loo QCBS, CQ A11135.O Individuals 4 0 0 QCBS, LCS, CQ None >50 QCBS, CQ Alll0.6 <50 QCBS, CQ None 4. Training Annual training plans and all out-of-country training 5. Small Grants I I I PIP Small Grants Procedures I 6. Severance payments ... _ _ ~ - - - ~ I\ Thresholds generallydiffer by country andproject. Consult "Assessment ofAgency's Capacity to Implement Procurement"and contact the RegionalProcurementAdviser for guidance. - 50 - Annex 6(B): FinancialManagementand DisbursementArrangements CONGO, DEMOCRATICREPUBLICOF: Private Sector Developmentand Competitiveness FinancialManagement 1. Summary ofthe FinancialManagementAssessment For the purpose o f this project a Bank FMS has undertaken a FMReview (available infiles) and concludedthat BCeCo remains suitable for execution o f financial management functions for this project. 2. Audit Arrangements The project financial statements will be audited annually by independent and qualified auditors acceptable to IDA, in accordance with International Standards o f Auditing. The auditors will provide separated opinion on the financial statements, the special accounts and statements o f expenditures. The auditors will be also required to carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report will be submitted to IDA not later than six months after the end o f each fiscal year. The auditors should be recruited within six months o f effectiveness, while it i s hoped that it will take place by the end o f December 2003. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA. BCeCo is well familiar with the procedures for quarterly FMRs for IDA financed projects. It has agreed to submit quarterly FMRswithin 45 days following each quarter. 3. DisbursementArrangements Initially the borrower will use transaction-based disbursements inaccordance with procedures outlined in the Bank's Disbursement Handbook. Similarly to procurement, project disbursement will be managedby BCeCo until a separate agency, COPIREP, i s established and reaches operational capacity. BCeCo, and once operational, COPIREP will be in charge o f the disbursement procedures and financial management o f the project. Disbursement arrangements will be closely monitored during project implementation to avoid the risks associated with poor governance. Allocation of credit proceeds (Table C) The credit would be disbursed over a period o f 6 years, as per details shown in Table C below. The Project completion date would be October 26,2009 and the expected Credit closing date would be March 31, 2010. A recent Decree issued by the Finances and Budget Ministry (No 020), establishes a special fiscal regime for the payment o f taxes under donor funded projects. BceCo will follow current arrangements for the payment o f the tax portion on local expenditures through "Cheque du Tresor". Disbursement o f Credit proceeds would be made against eight categories (base costs), as shown inTable C below. A Project Preparation Facility (PPF) was requested for an amount o f US$1.50 million. Unallocatedcontingency allowances amount to about 5 percent o f total project base costs. - 51 - Table C: Allocation of Credit Proceeds 2. SeverancePaymentsunder Part Eo f the 40.00 100% o f expenditures incurred Project (a) for El. Empl.inGecamines 15.00 (b) for ElEmplinBCA; 18.00 (c) for El. Empl. inBCCE; (d) for El. Empl.inNl3K (e) for El. EmplinOPTC 7.0 3. Works 2.00 100% o f foreign expenditures and 80% o f local expenditures 4. Goods 3.50 100% o f foreign expenditures and 80% (a) for Part A4. of the Project 0.75 o f local expenditures (b) other 2.75 5. Consultant's services and audits 33.75 85% o f foreign expenditures and 85% ol (a) for Part A4 o fthe Project 0.75 local expenditures (b) other 33.00 6. Training 5.95 100% o f amounts disbursed (a) for Part A 4 o f the Project 0.42 100% Ib'r other 5.53 100% 7. Insurance FacilityFunding 10.10 100%o f amounts disbursed underpara. 3, Part A ofthe Project 8. Operating costs 16.20 1.04 85% 14.48 I 85% (c) other 0.68 85% 9. Refunding o f Project Preparation 1.50 Amount due pursuant to Section 2.02 (b Advance o f the Credit Agreement 110.Unallocated I 5.00 I ITotal Project Costs with Bank Financing1 120.00 I Use of statements of expenditures (SOEs): Disbursements for all expenditures will be made against full documentation except for items o f expenditures under contracts for: (a) works in an amount inferior to US$300,000; (b) goods in an amount inferior to US$300,000; (c) consulting firms inan amount inferior to US$lOO,OOO equivalent, (d) individual consultants in an amount inferior to US$50,000 equivalent, and (c), training and operating costs, which would be claimed on the basis o f Statement o f Expenditures (SOEs). All supporting documentation for SOEs will be retained at BCeCo and will be made readily accessible for review by periodic IDA supervision missions and external auditors. - 52 - Special account: To facilitate project implementation, BCeCo will open a Special Account inU S dollars ina commercial bank on terms and conditions, acceptable to IDA. The Special Account will cover about four months o f eligible expenditures for all categories and the authorized allocation will be US$7 million. Upon credit effectiveness, IDA will deposit an amount o f US$3.5 million in the Special Account, representing fifty percent o f the authorized allocation. The remaining balance will be made available when the aggregate amount o f withdrawals from the credit account plus the total amount of all outstanding special commitments entered into by the Association shall be equal or exceed the equivalent o f U S 3 0 million. Replenishment applications will be submitted monthly. Further deposits by IDA into the Special Account will be made against withdrawal applications supported by appropriate documents. The Special Account will be audited annually by external auditors acceptable to IDA. - 53 - Annex 7: Project Processing Schedule CONGO, DEMOCRATIC REPUBLICOF: Private Sector Development and Competitiveness (Timetaken to preparethe project(months) I 10 I 11 I I1Appraisal First Bank mission(identification) 07101I2002 Q7/10/2002 03/25/2003 03/25/2003 II INegotiations missiondeparture 05/07/2003 0511612003 /PlannedDate of Effectiveness IIII 0911512003 IIII II Prepared by: Preparation assistance: IBank staff who worked on the Droiect included: Name Speciality Ivan Rossignol Sr. Private Sector Development Specialist, AFTPS Paul0 de Sa Lead Industrial Economist, COCPD Alexandra Pugachevsky Operations Analyst, COCPD Gotthard Walser Sr. MiningSpecialist, COCPD Hans Wabnitz Sr. Counsel, LEGAF Laurent Besangon Regulatory specialist, CITPO Amadou D e m Consultant for Economic analysis Roger Christen Consultant for parastatal reform Noureddine Bouzaher Senior Energy Economist AFTEG Jacques Morisset Lead Economist, PSAFI (Peer reviewer) Charles Schlumberger Senior Financial Specialist, AFTFS Claude Ginet Consultant for budget and procurement Tom Butler Senior Investment Officer, COCIN (Peer Reviewer) Serigne Omar Fye Senior Environmental Specialist, AFTES Jacques Catry Consultant for social sector and labor laws Abdul Haji Consultant, AFTQK RenCe Desclaux Finance Officer, LOAGl Henri Aka Procurement Specialist, AFTPC L o uWells Consultant for Investment promotion, HarvardProfessor Beat Heggli Senior Investment Promotion Officer, MIGIM A1 Gulstone Lead Power Engineer, AFTEG (Peer Reviewer) Jean-Noel Guillossou Senior Transport Economist, AFTTR Andrea Vasquez Language Program Assistant, AFTPS - 54 - Annex 8: Documents in the Project File" CONGO, DEMOCRATIC REPUBLIC OF: Private Sector Development and Competitiveness A. Project Implementation Plan Draft PIP B. Bank Staff Assessments C. Other IMC "Audit strategique de la Gecamines." Catry, Jacques. "Gkcamines programme de restructuration. Rapport final." 24 fkvrier 2003, Goosens, Pierre. "Review o f Geological Information to Promote Private Sector Development inMining inDRC." June 2002. "Evaluation Sociale de la Population dans l a Zone &Influence de la Gkcamines." Universite de Lubumbashi (draft). "Projet d'Urgence de Redressement Rapide. Analyse des entreprises duprotefeuille de 1'Etat." Ernst and Young and Deloitte and Touche. Tazaes, Henri. "Etude sur la fiscalite et parafiscalite en RDC." Janvier 2003. OPTEC, "Pre-audit dans I'environnement pour l a reforme des entreprises publiques en RDC." Otto, James. "Analysis o fthe Competitiveness o f the Fiscal Regime Proposed inthe N e w MiningCode." Colorado School o f Mines, July 2002. "RDC: Declaration de Politique Minikre." fevrier 2000. SNC-Lavalim: pre-audit environnementale de la Gecamines. *Including electronicfiles - 55 - Annex 9: Statement of Loans and Credits CONGO, DEMOCRATIC REPUBLICOF: PrivateSector Developmentand Competitiveness 23-Jun-2003 Differencebetweenexpected and actual OriginalAmount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd PO57296 2003 ZR Emerg. MultisectorRehab.&Rec 0.00 410.00 0.00 468.74 -0.19 0.00 PO57293 2002 DRC ECONOMIC RECOVERY CREDIT - 0.00 450.00 0.00 27.50 -2.81 0.00 PO75660 2002 EmergencyEarly Recovev Project 0.00 0.00 0.00 22.03 -0.92 0.74 Total: 0.00 860.00 0.00 518.27 -3.92 0.74 CONGO, DEMOCRATIC REPUBLIC OF STATEMENT OF IFC's Heldand DisbursedPortfolio J u ~30 2002 - InMillionsUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 MSICIHI1DROC 7.00 0.00 0.00 0.00 7.00 0.00 0.00 0.00 Total Portfolio: 7.00 0.00 0.00 0.00 7.00 0.00 0.00 0.00 Approvals PendingCommitment FYApproval Company Loan Equity Quasi Partic Total PendingCommitment: 0.00 0.00 0.00 0.00 - 56 - Annex IO: Country at a Glance CONGO, DEMOCRATIC REPUBLICOF: Private Sector Development and Competitiveness sub- POVERTY and SOCIAL Congo, Saharan Low- Dem. ReD. Africa income ,i Developmentdiamond' 2001 Population, mid-year (millions) 52.4 674 2,511 Life expectancy GNI per capita (Atlas method, US$) 107 470 430 GNI (Atlas method, US$billions) 6.7 317 1,069 - Average annual growth, 1995-01 I Population (%) 3.0 2.5 1.9 Laborforce (?A) 2.6 2.6 2.3 GNI Gross per primary Most recent estimate (latest year available, 1995-01) ~ capita nrollment Poverty(% ofpopulation below nationalpoverty line) Urban population ("A of totalpopulation) 30 32 31 Life expectancyat birth (years) 46 47 59 Infantmortality (per 1,000 live births) 127 91 76 Child malnutrition (% of children under5) 34 1 Access to improved water source - Access to an improved water source (% ofpopulation) 45 55 76 Illiteracy(% ofpopulation age 15+) 37 37 37 Gross primary enrollment (% of school-agepopulation) 46 78 96 Congo, Dem. Rep. Male 50 85 103 I Low-income group Female 32 72 88 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1981 1991 2000 2001 Economic ratios' GDP (US$ billions) 12.5 9.1 6.7 5.0 Gross domestic investmenVGDP 10.5 5.6 19.8 Exportsof goods and serviceslGDP 14.1 20.4 19.9 17.8 Trade Gross domestic savings/GDP 7.5 1.8 14.9 Gross national savings/GDP 5.7 -7.1 16.9 I I Current account balancelGDP -3.8 -11.4 -2.9 -2.5 InterestpaymentslGDP 1.o 0.6 0.0 2.7 Total debffGDP 40.6 119.3 192.0 258.2 Total debt servicelexports 21.9 9.5 73.7 73.3 Presentvalue of debVGDP 163.4 Presentvalue of debVexports 1,117.0 Indebtedness 1981-91 1991-01 2000 2001 2001-05 (average annual growth) GDP 0.7 -4.3 -6.0 4.5 4.2 - Congo, Dem. Rep. GDP per capita -2.5 -7.2 -8.5 -7.1 0.5 Low-income group ~ EXDO~Sof aoods and services 7.7 1.7 -3.7 -34.8 STRUCTURE of the ECONOMY 1984 1991 2000 2001 (% of GDP) Agriculture 247 41 3 555 563 Industry 321 174 178 188 Manufacturing 149 7 3 4 2 3 9 Services 43.2 41 2 26.7 24.9 i 0 Private consumption 82.5 84.9 78.9 I -20- Generalgovernment consumption 10.0 13.3 6.2 .... I II Importsof goods and services 17.1 24.1 18.7 16.7 -GDI *GDP (average annual growth) 1981-91 1991-01 2ooo Growth of exports and imports (%) I Agriculture 2.6 0.3 Industry -1.2 -6.3 Manufacturing Services Private consumption 2.6 -5.0 3.7 -28.3 , Generalgovernmentconsumption -1.9 0.8 -11.8 -5.2 -75 - Gross domestic investment -8.6 0.9 15.6 -12.1 "-Exports *Imports Importsof goods and services -1.6 -6.6 17.2 -50.0 Note: 2001 data are preliminaryestimates. *The diamondsshowfour key indicatorsinthe country (in bold) comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. - 57 - Congo,Dem. Rep. PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Domestic prices 1 Inflation (Oh) I (% change) 800 Consumer prices 554.0 357.0 600 Implicit GDP deflator 33.2 2,202.3 630.1 386.6 4w Government finance (% of GDP, includes currentgrants) K Current revenue 4.5 5.9 1 96 97 98 99 00 01 Current budget balance -5.3 -0.8 -GDP deflator - 0 - C P I Overall surplusldeficit -3.6 0.5 I TRADE 1981 1991 2000 2001 I Export (US$ millions) and import levels (US$ mill.) Total exports (fob) 1,649 892 940 2,000 - Copper 444 489 Coffee 590 207 206 Manufactures 297 97 129 Total imports (cif) 669 702 Food Fuel and energy 49 43 Capital goods 1 96 01 Exportprice index (1995=100) 95 97 98 99 00 import price index (1995=100) I Exports Imports Terms of trade (1995=100) BALANCEof PAYMENTS 1981 1991 2000 2001 i (US$ millions) Current account balance to GDP (%) Exportsof goods and services 1,772 1,841 963 1,015 lmpolts of goods and services 2,148 2,066 905 953 Resource balance -376 -224 58 62 Net income -346 -756 -388 416 Net current transfers 244 -57 136 228 Current account balance -478 -1,037 -194 -126 Financingitems (net) 243 994 107 137 Changes in net reserves 236 43 67 -11 1-10 - Memo: Reserves including gold (US$ mi/lions) Conversion rate (DEC, /ocal/US$) I.46E-11 5.20E-8 50.0 312.0 EXTERNAL DEBT and RESOURCEFLOWS 1981 1991 2000 2001 (US$ millions) ~Composition of 2000 debt (US$ mill.) Total debt outstanding and disbursed 5,092 10,840 12,862 12,880 IBRD 80 87 78 78 A: ?a IDA 176 1,183 1,188 1,151 B: 1.188 Total debt service 401 177 722 756 iBRD 14 20 0 0 IDA 1 11 0 0 Compositionof net resourceflows Official grants 199 256 Official creditors 220 276 0 0 Private creditors 77 -13 0 0 Foreign direct investment 74 83 Portfolio equity 0 0 E 5,220 World Bank program Commitments 27 78 0 50 A - IBRD E Bilateral Disbursements 17 114 0 0 - D Other multilateral - F Private -- ~ B IDA Principal repayments 7 17 0 0 i C IMF ~ G Short-term ~ Net flows 10 97 0 0 Interestpayments 8 14 0 0 Net transfers 2 82 0 0 - 58 - AdditionalAnnex 11:Facilitatingthe DialoguebetweenGovernment and the PrivateSector Commentson ProposedAllocation of Funds CONGO, DEMOCRATICREPUBLICOF: PrivateSector Developmentand Competitiveness 1. Background Based on the DRC's new Investment Code o f February 2002, the Government o f the Democratic Republic o f Congo established ANAPI (1'Agence Nationale de Promotion des Investissements) in mid 2002 as the central institution to promote investment in the country. The agency began operations in January 2003 with the appointment o f its present General Director and core staff. According to Decree No. 065/2002 o f July 5,2002 (Decree "portant sur le status, organisation et fonctionement de l'agence nationale pour la promotion des investissements, en sigle "ANAPI"), the mandate o f the agency includes the promotion o f domestic and international investment, the administration o f an investment incentive scheme, as well as the provision o f information and support services to both local and international investors. The Government o f the DRC sees the new agency as a critical interface designed to facilitate the dialogue between the public and private sector, with the goal o f fostering the mutual understanding and o f re-building trust between the government, the public enterprises, and the private sector. ANAPI i s also expected to play a central role in marketing the country as a location for foreign direct investment, in supporting foreign investors already in the country, as well as inattracting andproviding services to potential new investors. 2. Focusof the Subcomponent The focus o f Subcomponent 4 i s the strengthening o f ANAPI as an interface between the private and public sector and as an effective, professional investment promotion organization. Inorder to achieve this goal over time, the project will provide funds to support ANAPI's institutional and strategic development, cover some overhead operating costs, and provide funding for core activities related to a range o f investment promotion functions. 3. ProposedAllocation of Funds The proposed Allocation o f Funds reflects current expectations about the likely development o f ANAPI over the next six years. The Allocation includes three categories o f expenditures that are related to general institutional development and which cannot be directly assigned to the various functions o f investment promotion. The first two categories focus on institutional and strategic development; expenses in these categories are likely to be especially large inthe first two years (section Iand 11inthe attached table). The third category o f general, unallocated expenses covers costs related to operating overhead (section III). The expenses inthis third category are fairly constant over the six-year period o f the Allocation. Includedunder this heading are salaries o f some ANAPI staff. Expenses that can be assigned to specific categories o f investment promotion activities are under the function titles: investment climate improvement, investor servicing, image building, and investment generation (section IVa-IVd). The intent in developing the Allocation was not to specify exactly how funds would be spent within a specific category, but rather to provide tentative indicators o f likely uses o fthose funds. 3.1. InstitutionalDevelopment This allocation is designed around the recognition that ANAPI is a new organization, and as such needs funds soon to buy capital equipment and to undertake certain activities that will build assets that are o f a "capital" nature. Thus, the allocation calls for funds in the first year to be used for the purchase o f IT equipment (computers, faxes, printers, cabling for intranet, etc.), office furniture and two vehicles for official ANAPI use. The allocation then provides for smaller amounts o f money in - 59 - subsequent years to maintain equipment and to upgrade certain assets. Similarly, the allocation recognizes the need for more funds in earlier years for staff training; in later years, needs for staff development will decline, although skills will need refreshing and new skills should be built up. The funds allocated for training are mainly for developingANAPI's staff, andthey are large inthe first year and then remain at a lower but steady level to enable the organizationto continue to buildup skills. The Allocation also provides funds for training embassy staff located in countries that are especially promising as sources for foreign direct investment inthe DRC. Finally, Institutional Development allocated funds for ANAPI to construct an investor tracking system. This computerized approach will enable ANAPI to track activities with regard to each potential investor from first contact until an investment has been made, or until the potential investor has clearly decided against investing in the country. It serves as a convenience, as a reminder, and as a control mechanism. 3.2. Strategy Development As a new organization, ANAPIhas not yet developed a clear and detailed strategy. Although the allocation itself reflects considerable thinking about strategy, it does not, o f course, spell out the details o f strategy nor does it lay out the business plan under which the organization will operate. Developing a view o f what the organization will try to accomplish, within specific time frames, and how it will focus its resources to meet these objectives will probably require the participation o f others from outside ANAPI. Thus, the allocation provides funds for consultants and other assistance in the first year for strategy formulation. It i s quite possible that ANAPI can combine the allocation for training with that for assistance in strategy formulation to bring in a single consultant or group o f consultants who will serve both roles. Over the next five years, management o f ANAPI will have to conduct rolling reviews o f its strategy. Similarly, ANAPI will have to develop a detailed budgeting system and a budget that reflects its strategy; in the future, the budget will need to be reviewed periodically. The allocation recognizes that these activities may require some input from consultants and from a private-sector advisory board. Thus, it provides annual amounts for consultants and for expenses associated with maintaining participation from the private sector. 3.3. OperatingOverhead In addition to the general expenses of Institutional Development and Strategy Development, ANAPI will have certainother costs that are not easily assigned to specific kinds o fpromotion activities, at least not in an initial allocation. The largest o f these i s for staff salaries (as agreed earlier between ANAPI and the World Bank). In addition, ANAPIwill incur regular expenses such as office supplies, fuel, lubricants for automobiles, communication costs, etc. These are provided for in two categories: Office supplies, gasoline, other general operating costs and Communication costs. 3.4. PromotionalFunctions Inaddition to the expenses mentioned inthe three categories above, expenses are allocated by promotional function. Since the focus o f ANAPI will change over time, the figures in each category grow or decline to reflect this plan. The allocation is built on the assumption that ANAPI's early activities will emphasize investment climate improvement and the provision o f investor services. Thus, more funds are allocated to these activities in the early years. Allocations for image building and investment generation, incontrast, start very small andgrow over time. a) Investment Climate Improvement: Although the investment climate in the DRC has improved over the past two years, the environment i s not yet attractive to a wide range o f investors. The critical - 60 - need in the near term i s to improve the investment climate, and ANAPI has a major role to play in supporting moves that make the DRC a more attractive place for investment. Improving the climate will require largely the attention of professionals in the organization. Thus, salaries will be the main costs and are provided for under category Operating Overhead (see above). On the other hand, some outside services will be needed. Most pressing i s the need for an "administrative barriers study." This will provide very fine details on the steps an investor must take to establish a business in the DRC, including what agencies and offices are involved in each step, and the cost and amount o f time required for each contact. This study will serve as a benchmark for later evaluation o f the effectiveness o f ANAPI. The first major follow-up is expected in the fourth year, and the allocation thus provides for a repeat study to measure progress in improving the investment climate. A similar, and still more thorough studyis plannedfor the sixthyear. The effort to improve the investment climate will require frequent contact with the private sector; to this end the allocation provides funds throughout the period for cocktail costs, hosting business climate roundtables, and similar. In addition, improving the investment climate may require a series o f major private-public sector conferences, in which the private sector identifies priority areas for action and government commits to carrying out specific steps by specific dates. To be successful, such an effort requires semi-annual or annual meetings in which the government reports back o n its progress and undertakes new commitments. The allocation does not provide hnds for such a series o f large conferences, but this can likely be financed by bi-lateral aid agencies. b) investorsInvestor Servicing: Even though the investment climate in the DRC is still far from ideal, some will have reasons to come to the country. ANAPIproposes to provide services to prospective investors before they are established. Those services include providing information, providingreception and assistance while prospective investors visit the country, and establishing a "one-stop shop" (guichet unique) to ease their way through the process o f obtaining permits and licenses. This i s an activity that can and should begin right away; in fact, ANAPI is already providing some such services. But, the allocation recognizes the need for funds to provide information, to host potential investors, and to provide other services to them. The largest early expenses will be for developing a website, using outside assistance, and for the preparation and printing of informational brochures. Website and printing expenses will be higher in the earlier years; the budget provides smaller amounts in later years, for the maintenance o f the website and restockingo fprinted material. As indicated inthe previous paragraph, a part of services to incoming investors is the provision o f a one-stop shop. The allocation does not provide separate funds for this, since the principal costs will be salaries. The lack o f a special allocation does not indicate any beliefthat this activity i s not important. The provision o f services to foreign investors who are already in the DRC can also start in the first year, and should serve three roles: 1. Help to existing investors can improve their views o f the DRC as a place to undertake business activities; their opinions are important inthe decisions o f new investors looking at prospect inthe country. 2. Encourage further investment by investors already in the DRC. Ifexisting investors are doing well, they are likely to expand their investments inthe country. -61 - 3. Teach ANAPI about the problems investors encounter, and the priorities investors assign to alleviating them. Maintaining contact with existing investors enables ANAPI professionals to learn about investors' experiences. The resulting detailed knowledge can be used to determine which problems are real barriers and exactly how those barriers function. Thus, the Allocation provides h d s for domestic travel in the early period so that ANAPI professionals can buildrelations with foreign investors who are already inthe DRC. Establishing and maintaining contact with existing investors to provide service will require funds for travel within the DRC; the budget provides for this under the label aftercare program. c) Image Building: Incontrast to policy advocacy and the provisiono f services, image buildingis an activity that is likely to receive relatively little attention in the next couple of years. Efforts in this area are likely to be limited largely to media relations, hosting occasional general investment missions from abroad, and joining presidential missions abroad. As the capability o f ANAPI's staff grows and as the investment climate in the country improves, ANAPI i s likely to do somewhat more with respect to image building. It i s especially likely to develop a few general investment missions outside the country. Ifthe investment climate has become muchbetter, ANAPImay findituseful to spendmoney on at least some targeted outreach and promotion/advertising activities. These type o f activities are usually expensive and should not be undertaken until the investment climate has improved substantially. Thus, the allocation provides only small amounts for low-cost image buildingin early years; the need for funds for image building,however, will grow with time. d) Investment Generation:As a new organization and one operating ina country with a less than perfect investment climate, ANAF'I i s also unlikely to be very successful in carrying out investment generating activities inthe early years. This activity requires skills that will be very scarce at the outset. Moreover, even the most sophisticated efforts are not likely to be very successful until the investment climate improves. Further, it is an expensive activity. Toward the end o f the period covered by the allocation, ANAPI is likely to be undertakmg some efforts that fall under this rubric, such as conducting industry-specific missions abroad, participating in fairs focused on industries likely to find the DRC attractive, and in a few cases contacting potential investors. The allocation starts with no funds for this activity, butassumes limitedefforts will begin inthe secondyear andthen growwithtime. - 62 -