INTERNATIONALDEVELOPMENT ASSOCIATION INTERNATIONALMONETARY FUND FOR OFFICIALUSE ONLY REPUBLIC OF CONGO ReportNo. 45014-CG SecondAnnualReporton ProgressTowardMeetingthe CompletionPointTriggers Under the EnhancedHeavily IndebtedPoor CountriesInitiative Preparedby the Staffs ofthe International MonetaryFundand the International DevelopmentAssociation Approved by HughBredenkampandAnthony Boote (IMF) And Obiageli Ezekwesili and CarlosBraga (IDA) July 1,2008 This document has a restricteddistribution and may be usedbyrecipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Units = CFA Franc (CFAF) US$1 = 440 (as ofMay 1,2008) FISCALYEAR January 1-December 31,2008 ABBREVIATIONS AND ACRONYMS BEAC Banque des Etats d'Afrique Centrale CCA Caisse Congolaise d'Amortissement CIFA Country IntegratedFiduciary Assessment CFAF CFA Franc COMEG Central Purchasing Authority for Pharmaceuticals EITI Extractive IndustryTransparency Initiative GDP Gross Domestic Product GNI Gross NationalIncome HIPC Heavily IndebtedPoor Countries IDA International Development Association IMF International Monetary Fund I-PRSP InterimPoverty ReductionStrategy Paper JSAN Joint Staff Advisory Note MEPSA MinistryofBasic EducationandAlphabetization METP Ministry of Technical andProfessionalEducation MTBF Medium-TermBudget Framework MTEF Medium-TermExpenditure Framework MTFF Medium-TermFiscal Framework NGO Non Governmental Organization PEFA Public Expenditure and Financial Management Assessment PEM Public Expenditure Management PFM Public Financial Management PRCTG Transparency and Governance Capacity Enhancement Project (Projet de Renforcement des Capacites de Transparence et de Gouvernance) PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper SMP Staff-Monitored Program SNPC Societe Nationale de Petrole Congolaise SOTELCO Societe de Telecommunications Congolaise US$ United States Dollar FOROFFICIAL USE ONLY Table o f Contents IOverview............................................................................................................................... . 1 I1 Report on Progress............................................................................................................ . 2 A.PRSP ................................................................................................................................ 2 B.Macroeconomic Stability ................................................................................................. 2 C. Public Expenditure Prioritization..................................................................................... 3 D.Public Finance Management............................................................................................ 5 E. Governance andNaturalResource Management............................................................. 7 E.l.Oil Sector................................................................................................................... 8 10 F StructuralReform........................................................................................................... .E.2. Forestry.................................................................................................................... 11 G. Social Sectors................................................................................................................. 11 H.ExternalDebt Management........................................................................................... 12 Tables Table 1 Selected Social and Poverty Indicators inRegional Comparison .............................. . 2 Table 2: Selected economic and financial indicators................................................................ 4 Table 3: Pro-poor Expenditure. 2003-07 .................................................................................. 5 has a restricted distribution and may be used by recipients only in the performance o f their official duties.Its contents may not be otherwise disclosed without World Bank authorization. I.OVERVIEW 1. The objective of this second annual report i s to assess progress made by the Republic of Congo in implementing the triggers for the floating completion point under the enhanced HIPC Initiative. Such progress reports are not a standard requirement for HIPC debt relief, but were suggested by the IDA Board in view o f the complexity and comprehensiveness o f the triggers for Congo. 2. Since last year, progress has been made in implementing the triggers, although it has been slow in public investment management, procurement, and the commercialization of Congolese oil. The slow progress inthese areas reflects some technical delays as well as the absence o f political consensus on the way forward. Also, the authorities have not yet moved back to a Fund-supported program, the satisfactory implementation o f which is a HIPC trigger. 3. Implementation o f the HIPC triggers has been given impetus by the establishment of a high-level Political Committee on relations with the Bretton Woods Institutions, chairedby the Head o f State, and supported by a Technical Committee, chaired by an advisor to the President. Donor assistance, though well aligned with the HIPC process, remains limited. The government continues to use its own resources to fund technical assistance in support o f program implementation. 4. Inaddition, the authorities are continuing their efforts to secure creditor participation in the context o f the HIPC Initiative. The debt rescheduling agreement reached with the London Club inNovember 2007 is an important achievement for the country. This agreement led to cancellation o f approximately 80 percent of Congo's estimated commercial external debt o f US$2.5 billion and the rescheduling o f the balance.' As a result o f this agreement, which safeguarded the principle o f equal treatment o f creditors under HIPC, Congo is in a better position to reach the 80 percent financing assurances required by the lMF for reaching the completionpoint. 1Creditors accounting for 92 percent of the LondonClub debt participatedinthis agreement andthe authorities are worlung with the remaining(litigating) creditors to reach a settlement. 1 11. REPORT ONPROGRESS A. PRSP Trigger 1. Preparation of a full PRSP through a participatory process and satisfactory implementation of its recommended actionsfor at least oneyear, as evidenced by an Annual Progress Report submitted by thegovernment to the stafs of IDA and IMF. 5. Staff assessment: Congo's first full PRSP was adopted by the Government and transmitted to the World Bank and the Fund in April 2008. This document, together with an accompanyingjoint staff advisory note will be distributed to Executive Directors at the same time as this progress report. Consequently, this trigger could not be observed untilApril 2009 at the earliest. Some key indicators on poverty are presented inthe table below. Table 1: Selected Social and PovertyIndicators inRegionalComparison Republic of Congo: Selected Social and Poverty Indicators in Regional Comparison (in units indicated) MillenniumDev. Republicof Sub-Saharan Indicator Goals (2015) Conqo Africa (2005 avg.) Povertyheadcount (percent) Reductionby 50 51* 46* Gross primaryschool enrolment rate (percent) 100 89 62 Ratio of girls to boys in primary education(percent) 100 90 86 Immunization,DPT3 (percent of children) 100 68 61 Under 5 mortality rate (per 1'000 live births) 37 108 172 Infantmortality rate (per 1000 live births) ... 81 103 Maternalmortality ratio (per 100,000 live births) 223 781 920 Deliveriesin healthcenters (percentof total) 100 ... 41 Prevalenceof HIV (percentof adults) <20 5.3 ... Access to safe water (percent of total population) 75 58 58 Forestarea (percentof total land area) >24 - 27 Source: World Bank DevelopmentIndicators *this representsthe povertyheadcountas of end 2007, not the levelof reduction.Due to a lack of reliable baseline indicators for 1990,it is not possibleto reflect the relativechange in the head count B. Macroeconomic Stability Trigger 2. Maintenance of macroeconomic stability as evidenced by satisfactory performance under the PRGF-supported program as well as any IMF successorprogram 6. Staff assessment: Congo's three-year PRGF arrangement went off track inlate-2006, largely on account o f weak program implementation (fiscal slippages and delays instructural reform) and monitoring, and it expired inJune 2008. The authorities are now implementinga staff-monitored program (SMP) covering January-June 2008. Satisfactory implementation o f this SMP is important for moving ahead with anew PRGF arrangement. 2 7. Overall economic activity remains robust in2008 and real GDP growth i s projected at about 9 percent. Inflation is expected to pickup somewhat, owing to higher he1 and food prices. The fiscal position should improve significantly this year, on account o f rising world oil prices and continued expenditure discipline. The primary surplus i s projected to reach about 30 percent o f GDP, compared with 21.8 percent targeted. Some key indicators o f macro-economic performance are highlightedinthe table below. 8. Policy implementation under the SMP through end-March 2008 was broadly satisfactory. The authorities observed all o f the quantitative indicators and all but two o f the program's structural benchmarks at end-March. The implementation o f one o f the structural benchmarks (quarterly certification o f oil revenue) has been delayed by technical factors beyond the authorities' control. Also, although fuel subsidies have increased -surpassingthe structural benchmark ceiling -the envisaged pace o f fiscal consolidation remains consistent with long-term sustainability. C. PublicExpenditurePrioritization Trigger 3. Alignment of public spendingpriorities in accordance with thepriorities identiped in theI-PRSP, and, when completed, the PRSP, reflecting an emphasis onpro-poor growth. 9. Staff assessment: Some progress has been made to align public spending priorities with the I-PRSP. Spending on power, water, sanitation, and infrastructure increased from 1.8 percent o f GDP in 2005 to 3.9 percent in 2007. The envelope for basic health and education also expanded, but to a lesser extent, rising from 2 percent o f GDP to 2% percent over the same period. However, the share of this spending in total expenditure has declined, while outlays on poorly targeted fuel subsidies increased. Looking ahead, spending on pro-poor growth should include physical infrastructure (for example, access to electricity, extension services to farmers), social infrastructure (for example, improving the quality o f health and education services), and social transfers (for example, cash or in-kind). 10. Accelerating public financial management reform (see below) would improve expenditure tracking. The full PRSP provides medium-term public expenditure projections and identifies pro-poor expenditure, even if only at an aggregate level. The streamlining and computerization o f the budget execution process, to be completed by 2010, i s expected to allow for real time tracking o f all public expenditure, including the use o f interim HIPC relief. 3 Table 2: Selected economic and financial indicators Republic of Congo: Selected Economic and Financial Indicators, 2006-1 1 2006 2007 2008 2009 2010 2011 Prel. Est. Prog. Proj. Proj. (Annual percentage change) Productionand prices GDP at constant prices 6.2 -1.6 9.2 9.1 12.1 10.1 1.1 Oil 6.8 -17.2 15.0 14.6 23.3 15.4 -10.2 Non-oil 5.9 6.6 6.9 6.9 7.3 7.5 7.2 GDP at current prices 25.9 -9.4 17.7 54.9 32.1 13.9 -5.5 GDP deflator 18.5 -7.9 7.8 42.0 17.8 3.4 -6.5 Consumer prices (period average) 4.7 2.6 3.0 4.0 4.0 3.0 3.0 Consumer prices (end of period) 8.1 -1.7 4.0 5.0 3.0 3.0 3.0 External sector Exports, f.0.b. (CFA francs) 26.7 -12.0 19.4 58.2 39.1 14.0 -9.2 imports, f.0.b. (CFA francs) 52.1 20.6 -15.2 -0.5 14.1 12.9 -0.1 Export volume 2.5 -15.6 9.2 15.5 23.0 15.1 -9.9 Import volume 40.0 19.5 -4.6 -11.2 12.2 13.4 -0.6 Terms of trade (deterioration - ) 9.4 0.4 ... ... 26.7 4.2 -1.o -0.9 Nominal effective exchange rate (end of period) -0.4 5.1 ... ... ... Real effective exchange rate (end of period) 1.6 3.1 ... ... ... ... (Percent of beginning-of-period broad money) Money and credit Net domestic assets -80.3 -5.4 -88.2 -189.2 -324.5 ... Domestic credit -82.6 -3.2 -88.2 -189.2 -324.5 ... ... Central government -84.4 -3.9 -90.9 -192.0 -326.8 ... Credit to the economy 1.9 1.1 2.8 2.8 2.4 ... ... Broad money 47.9 7.4 10.3 11.4 11.9 ... ... Velocity of broad money (Non-oil) 1.9 1.9 1.9 1.9 1.9 ... ... (Percent of GDP) Investmentand saving Gross national saving 24.5 6.9 24.6 28.7 37.1 40.4 37.8 Gross investment 22.9 26.2 23.6 18.0 15.7 15.1 16.5 Central government finances Revenue and grants 44.4 43.1 44.2 46.7 52.2 50.9 51.1 Oil revenue 37.9 35.1 36.4 40.7 45.7 43.3 40.7 Nonoil revenue and grants 6.6 8.0 7.8 5.9 6.4 7.6 10.4 Total expenditure 27.4 32.0 24.6 19.0 15.0 13.8 15.3 Current 18.4 21.4 14.8 11.6 8.6 7.4 8.0 Capital (and net lending) 9.0 10.6 9.8 7.4 6.4 6.3 7.2 Overall balance (deficit -, commitment basis)' 17.1 11.1 19.6 27.6 37.2 37.2 35.8 Primary balance (deflcit -)' 21.5 13.9 21.8 29.3 36.9 35.5 32.5 Nonoil primary balance (percent of Non-oil GDP; = deficit) - -51.3 -55.7 -41.0 -41.8 -38.2 -34.7 -31.2 Current account balance3 1.6 -19.3 0.9 10.7 21.4 25.3 21.3 External public debt (end of period) 81.5 72.9 58.3 45.4 33.2 28.2 29.7 (Percent of exports of goods and services) External public debt service (before debt relief) 13.7 10.9 5.0 4.0 2.8 2.4 1.6 External public debt 99.1 90.8 70.8 58.2 38.7 32.3 35.0 (Percent of total government revenue excluding grants) External public debt service (before debt relief) 25.3 20.8 9.5 6.8 4.5 3.9 2.8 External public debt 183.9 170.8 133.8 98.5 64.2 55.9 58.8 (Billions of CFA francs. unless otherwise indicated) Gross official foreign reserves 920.4 983.1 1,686.8 2,398.4 5,044.7 8.084.7 10,999.0 (Months of imports, f.0.b.) 10.5 9.3 18.9 22.9 42.2 60.0 81.8 (Percent of GDP) 22.8 26.8 39.1 42.2 67.3 94.7 136.3 Nominal GDP 4,042.6 3.664.4 4.313.3 5,677.6 7,500.3 8,541.4 8.070.8 World oil price (U.S.dollars per barrel) 64.3 71.1 86.3 116.5 125.0 123.5 123.5 Oil production (Millions of barrels) 98.7 81.7 93.9 93.8 115.4 133.2 119.6 Nominal effective exchange rate (end of period, percent change) -0.4 5.1 ... ... ... ... ... Real effective exchange rate (end of period, percent change) 1.6 3.1 ... ... ... ... Sources: Congolese authorities; and Fundstaffestimates and projections. IIncluding grants. Primary revenue (excluding grants) minusnon-interest current expenditure minus domestically financed capital expenditure andnet lending Including public transfers. Staff-Monitored Program. 4 11. The adoption o f the Government Action Plan for Public Financial Management (PFM) in April 2008 was an important achievement. This Action Plan i s based on the recommendations o f a Country Integrated Fiduciary Assessment (CIFA) conducted in 2006 in conjunction with a Public Expenditure and Financial Management Assessment (PEFA) exercise. The Action Plan contains a priority program o f PFM reform measures, including a timetable and support activities by all major donors (AfDB, EU, IMF, UNDP, and World Bank).These donors were closely involvedinthe preparationo fthe Plan. Table 3: Pro-poor Expenditure, 2003-07 Republic of Congo: Pro-Poor Expenditure, 2003-07 As a percent of GDP As a percent of total public expenditure 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Prei. Prelim. Basic health and VIH/AIDS 0.2 0.4 0.6 1.0 0.9 0.7 1.5 2.4 3.5 2.8 Basic education 1.7 1.5 1.4 1.4 1.6 5.6 5.6 6.2 5.3 5.1 Infrastructure 0.3 1.2 1.2 1.2 1.6 1 4.5 5.2 4.4 5.1 Power, water, and sanitation 0.9 0.3 0.6 1.1 2.3 3.1 1.2 2.8 4.1 7.1 Disarmament, demobilization. and reintegration, 0.9 0.7 0.7 0.8 1.5 3 2.6 3.2 2.8 4.7 and food for the military Employment and social protection 0.1 0.1 0.1 0.1 0.1 0.4 0.2 0.4 0.2 0.3 Agriculture 0.0 0.0 0.1 0.1 0.1 0 0.1 0.6 0.3 0.3 Total 4.1 4.2 4.8 5.7 8.1 13.8 15.7 20.7 20.7 25.3 Memorandum item: GDP (in billions of CFA) 2,032 2,456 3,211 4,043 3,664 ... ... ... ... ... Source: Wofld Bank and Fund staff estimates and projections. 12. The government has continued to deposit interim HIPC assistance in the special Treasury account opened in 2006 at the Banque des Etats d'Afrique Centrale (BEAC). The special Treasury account had an accumulated balance o f CFAF 36.4 billion at end-2007 (about US$76 million); the government has not used any o f these resources so far, as the key conditions for their use were not met untilrecently. D. PublicFinanceManagement Trigger 4. (i). Establishment of a functional classzjkation system for government expenditures, including poverty-related expenditures consistent with the IMF Government Finance Statistics (GFS) manual, and preparation of government budgets using this new classijkation. 13, Staff assessment: The decree establishing the new functional classification was signed on March 31, 2008. The preparation and execution o f the 2009 budget law are expected to be based on this classification, which i s consistent with the IMF GFS 2001. The new classification would thenbecome fully effective inJanuary 2009 and implemented at all levels o f government. Trigger 4. (ii). Implementation of a new public investment management system to provide rigorous selection, and efficient execution and monitoring of theprojects; submission of draft public investmentprograms to IDAfor review. 5 14. Staff assessment: Improving public investment manage-ement remains a difficult challenge. A concerted effort to address the problems identified in an action plan developed as part o f the IDA Economic Recovery Credit (ERC) in 2004 i s still missing. These problemsrefer mainly to the absence o f (i)strategic basis and institutionalized process for a programming o f public investments and allocation o f the capital budget; (ii) a transparent process and excessive centralization in the management o f these projects; (iii)adequate internal and external controls; and (iv); systematic evaluation o f outputs and outcomes. Given the relatively large size o f the investment budget - about 10.6 percent o f GDP - enhancing public investment management i s critical to ensuring effective use o f public resources and achieving the goals laid out inthe PRSP. 15. The establishment o f a multi-sector Steering Committee, to which the Government had committed to, has yet to be completed. The same applies to a technical secretariat to be led by the Ministry o f Planning to coordinate reform efforts in this area. These delays are holding up the preparation o f a diagnostic study o f institutional arrangements, procedures, and technical capacity to manage public investment projects, which initselfis a prerequisite for a medium-term action plan for public investment management reforms. 16. This being said, some interim measures have been implemented that aim at addressing some o f the concerns raised regarding public investment management. Most notable in this respect are: (i) the creation at end-2007 o f a database including all ongoing public investment projects, based on a census o f projects conducted in 2007; (ii) a technical and financial audit o f investment projects above CFAF200 million and current transfers executed in2006, which i s currently underway and should produce results by June 2008; (iii) an improved presentation o f the 2008 public investment budget, which for the first time included information on status o f execution o f individual projects, type o f investment, and source o f financing; and (iv) the introduction o f a special classification that attributes all items inthe public investment budget 2008 to the corresponding PRSP strategic pillars. 17. The 2008 budget including the public investment program was submitted to IDA staff for review on January 29, 2008. As in previous years, the program lacked detailed information and data on projects financed through the public investment budget. While there i s some improvement on public investment monitoring (see above), important information such as on the status of physical and financial execution o f projects or on economic appraisal andjustification for new projects remains inadequate. Trigger 4. (iii). Adoption and satisfactory implementation by the Government of a new procurement code (that promotes transparency and competition) in line with international best practice. 18. Staff assessment: A Country Procurement Issues Paper (CPIP), completed in 2006, identified deficiencies in Congo's procurement system and set priorities for refom, notably: (i)a modem legal procurement framework meeting international standards; (ii) modem 6 procurement procedures and tools; and (iii) strengthened capacity. The CPIP reform action plan, however, has not yet been adopted by the Government. A steering committee (Commission de Rkforme des March& Publics) was created inJuly 2006 to pilot the reforms with the support o f an international expert. An international law firm recruited to prepare a draft Code produced its report in November 2007. The Bank's staff has commented on the draft Code and confirmed that it complies with internationalbest practices. However, several stakeholders in the Government have raised concerns over elements o f the main code (legal instrument proposed, allocation o f functions o f regulation, control and execution) and the accompanying appendices (which number about 13). During high level policy discussions, held inM a y 2008, Bank staff and the authorities agreed upon a process to conduct a review o f the latest version o f the draft Code, which should lead to the final submission o f the main Code for government approval before the end o f the year. The new Code should be implementedin2009. Trigger 4. (iv). Medium-term framework for sustainable management of government expenditures and revenues with technical assistancefrom IDA and IMF 19. Staff assessment: Only limitedprogress has been made on this trigger, which aims at putting together a formal Medium Term Fiscal Framework (MTFF) that takes into account the country's limitedoil resources. This limited progress reflects capacity constraints and the difficulties in projecting oil reserves and budget revenue. In this regard, the authorities are now being advised by an international consultant, who i s assisting with the development o f a revenue forecasting model linked to estimates o f oil reserves. E. Governance andNaturalResourceManagement Trigger 5. Governance: Completion of a diagnostic governance and corruption study by an independent group of internationally reputed experts, assisted by a national anti-corruption committee, based on terms of reference prepared in consultation with IDA and IMF stafs. The terms of reference and composition of the national anti-corruption committee will be satisfactory to IDA and IMF stafs. Adoption by the government of an action plan, prepared in consultation with IDA and IMF stafs, to improve governance and reduce corruption, and sustained implementation of such action plan during the completion of the audits referenced in subsections E.2 and E.3.Assessment of the implementation of the action plan by IDA and IMFstafs on the basis of an independent review. 20. Staff assessment: Progress has been made. The Anti-Corruption Observatory was established by Law in September 2007 and its members were nominated by government decree in October 2007. The law provides the Observatory with a broad mandate to review governmental initiatives related to governance and corruption, including all audits o f state- owned enterprises and procedures for issuing natural resource concessions. The permanent secretariat o f the Observatory remains to be established, as the institution has not yet been granted its premises. Appropriate resources for its operational expenditures were included in 7 the 2008 budget, but have not yet been made available to the institution. This, together with the lack o f premises, is slowing its operations. The anti-Corruption Commission faces a similar predicament. Inaddition to the work o f the anti-Corruption Observatory, the Republic o f Congo also continues to participate in EITI, and all national EITI structures are fully operational. 21. Staff assessment: Completion o f a diagnostic study on governance and corruption, and the design and implementationo f a governance and anti-corruption action plan is the second element o f the governance trigger. In March 2008, an international firm was contracted to conduct the diagnostic study. This study will inform the action plan, which is due to be completed by September 2008. E.l. OilSector Trigger 6. (i) Assessment by IDA and IMF stafs, based on successive annual audit opinions by an independent Jirm of international reputation, and certiped by the national anti- corruption committee, that SNPC's internal controls and accounting system are in line with international standards and best practices. 22. Staff assessment: In it's efforts to improve transparency, the government has published on its website (http://~.ww.mefb-cE;.net/petroIe/nouvtransnhtm) various reports, includingthe 2005 consolidated accounts o f SNPC, and the report of the Budgetary Control Institution on conflict o f interests o f SNPC. Meanwhile, some other informationhas not been published - such as the 2005 audit of SNPC -which would be helpful in informing the public. The 2005 audit o f SNPC (issued in 2007), concludes that the enterprise's accounts have improved, but still cannot be certified in accordance with international accounting standards. While this represents progress, it i s worth noting that the trigger calls for successive audit opinions that would confirm that the SNPC's internal controls and accounting system are in compliance with international standards and best practices. The audit firm has provided a specific annex with an action plan, including measures to be taken to improve internal controls and the accounting system. While the list o f recommendations has narrowed since the previous audit, it still covers important issues ranging from the quality o f financial statements, accounting procedures, internal controls, the management of bank accounts, to the relations with private sector operators and the central government. The Board o f the SNPC has published a press release contesting some o f the reservations or arguing progress inthe fulfillment o f some o f them. 23. A new independent audit firm o f international reputation has been awarded the contract to audit SNPC for 2006. The selection and contract o f this international audit firm was conducted under the PRCTG (Transparency and Governance Capacity BuildingProject). As a result o f technical constraints, there were delays in publishing the latest quarterly reports on oil revenue certification. The government has committed to publish the third 8 quarter for 2007 report and has reiterated its commitment to continue with the quarterly certification o f oil revenues producedby an independent firm o f internationalreputation. Trigger 6. (ii) Preparation, by an independent firm of international reputation, of a diagnostic study of thepracticesfor the commercialization of oil by SNPC, based or terms of reference prepared in consultation with IDA and IMF stafs. Assessment by IDA and IMF stafs, based on successiveaudit opinions by an independentfirm of international reputation, that the commercialization of oil by SNPC has been brought into line with international best practice on the basis of the recommendations of the diagnostic study, and results in competitive andfair market values to Congofor the oil sold. 24. Staff assessment:The development o f an analytical accounting system for SNPC has been launched under Terms o f Reference acceptable to Bank and IMF staff. InMarch 2008, an international accounting firm was contracted to prepare this system for SNPC and to train its internal auditors. The total duration of this contract i s 8 months. 25. Concerning the commercialization o f Congolese oil, the certification reports o f oil revenue and the comparison o f prices and marketing costs o f oil sales by private operators with those obtained for the same crude exported by the SNPC at the same time show large differences, implying significant losses in government revenue. To address this problem, a diagnostic study o f the commercialization o f government oil by the SNPC was conducted (and published on the website at ht~://www.melb-crr.net/pctr.olc/gouvtransu.htm), and submittedto the IMF and IDA for comments inMarch 2007. This study identified a number of serious deficiencies, but failed to address some key issues related to commercialization practices; at the same time, there was no comprehensive and integrated action plan for bringingthe SNPC crude oil commercializationpractices up to international standards. SNPC prepared a road map identifyingsome o f the key issues to be addressed, and presentedthis to the staffs inMarch 2008. This is a useful start, but a more detailed action planwill be needed andbe implementedto satisfy the objectives o fthe trigger. Trigger 6. (iii) Adoption and application by the Government, certiped by the national anti- corruption committee, during the completion of the audits referenced in 6(i) and 6(ii), of a legal text stipulating: e Compulsory declaration, to the National Auditing Office (Cour des Comptes), by the members of the Executive Board of SNPC and those having a management mandate within SNPC and its subsidiaries, at the moment of their nomination and annually thereafter, of their participation or other interests in companies having business relations with SNPC or its subsidiaries as well as the verification and annual publication of the aforementioned declarations by the National Auditing Office (Cour des Comptes); and 9 e Divestiture by the members of the Executive Board of SNPC and by those having management responsibilities within SNPC or any of its subsidiaries of such participations and/or other interests, within a time period of 6 months after their nomination andprohibition of the taking of any interest in companies having business relations with SNPC during theperiod of their mandate. 26. Staff assessment: This trigger was observed in January 2006, when the Government issued Decree No. 2006-32 on the prevention and resolution o f conflicts o f interest involving members o f the Board and senior managers o f SNPC. Subsequently, ten board members and six managers have presented voluntary declarations to the National Audit Office (Cour des Comptes) confirming that they do not have any share or interest in any company that has relations with SNPC. In September 2006, the National Auditing Office acknowledged the receipt o f these declarations and, in an extension o f its core functions, assessedthe potential for conflicts o f interest o f all SNPC board members and senior managers. E.2.Forestry Trigger 7. Review of forestry sector management and legislation and adoption by the government of measures recommended by the review to promote competition, transparency and sustainable development in the sector. 27. Staff assessment: Satisfactory progress i s being made. Originally intended to cover selected economic issues, such as sector taxation and concession allocation, the forest sector review was significantly broadened to also cover biodiversity conservation, sustainable management o f production forests, the participation o f local and indigenous peoples, legal frameworks and safeguards applicable to forests and the green environment, and institutional capacity. This expanded review was completed collaboratively by the Government o f Congo and IDA which used a highly participatory approach to seek contributions and buy inby civil society, donors and other development partners. The review resulted into a sector reform matrix which calls for the design and enforcement o f legal and regulatory measures in a number o f areas, including: environmental and social impact assessment; gazetting and de- gazetting o f state forest lands; resolution o f land-use conflicts; upgrade o f current concession allocation practices into a truly transparent and competitive system; and fiscal reforms aimed at supporting longterm sustainable forest production and related income streams for the State and local communities. The Ministries most concerned with the above reforms, namely the Ministryin charge of Forestry Economy and the Ministryof Economy, Finance and Budget have expressed formally their support to all proposed measures, except for the one concerning the system of concession allocations which is still under discussion. 10 F. Structural Reform Trigger 8. StructuralReforms: Review and adoption of a regulatoryframework for thepostal and telecommunications sector establishing competition at the level of international gateways and the wireless local loop. 28. Staff assessment: In order to observe this trigger, the authorities agreed with IDA and IMF staff on the following actions: (i) full and unambiguous repeal o f Decree no the 2004-466, which reserved international gateway services and the wireless local loop to be the exclusive preserve o f SOTELCO, the public operator; and (ii)the adoption o f three draft laws covering the creation of a regulatory authority for Post and Telecommunications, the regulation o f the postal sector, and the regulation o f the telecommunications sector. InMarch 2008, the President o f the Republic signed a decree which unambiguously repealed Decree 2004-466, thus observing the first part o f the trigger. With regard to the legal framework, IDA staff provided comments on the previous draft laws prepared by the Government. The revised drafts, submitted to IDA for review in February 2008, constitute a significant improvement on the previous drafts but some work still remains to be done before they meet international standards. Such work includes the specification o f arrangements ensuring the autonomy o f the telecommunications regulator, as well as aspects o f its internal organization, and the specification o f procedures and regulations for awarding licenses, permits and concessions. An international consultant i s bein'g fielded to assist the government in finalizing the remaining details. G. Social Sectors Trigger 9. Education: Implementation during 2006 of a strategy to eliminate fictitious workersfrom the education budget and increase teaching staff by, at least, 1,000 each year in basic education until 2007. 29. Staff assessment: Following the completion o f the human resources strategy note in 2006, progress has been made in identifying "ghost" workers and suspending their salary payments (of around 5,500 persons o f this group) from February 2008. The Ministryo f Basic Education and Alphabetization (MEPSA) i s currently checking the positions and actual presence o f the workers o f this group before making a final decision for their elimination from the budget by end-July 2008; this would be the final step required to observe this trigger. 30. The second part o f the trigger, the recruitment o f additional teaching staff, is close to beingmet. Trigger 9. Health: Increase to, at least, 60 percent the share of generic drugs in total expenditures on drugs by the centralpurchasing agency. 11 31. Staff assessment: Satisfactory progress i s being made in this area. An independent purchasing authority (COMEG) has been created to manage the purchase and distribution o f basic pharmaceuticals for the public sector, with a focus on generics, including drugs funded by donors (such as retroviral and anti-malaria). COMEG has initiated various activities such as the procurement o f anti-retroviral drugs from the IDA-supported HIV/AIDS project. In 2007, the budget allocation for basic medicines for the public sector was transferred to COMEG; however, procurement o f pharmaceuticals for some diseases (including malaria) is still being conducted by the Ministry o f Health. The IDA-financed Health Sector Development Project under preparation i s focusing on comprehensive systemic reforms, includingpharmaceuticals, which shouldhelp address this outstandingissue. Trigger 9. HIV/AIDS: Increase in the number of voluntary AIDS counseling and testing centers with associated measures (stafJI equipment, and awareness campaign) from 4 at present to, at least, 10 in 2006 and 15 in 2007. 32. Staff assessment:The trigger has beenobserved. H. ExternalDebtManagement Trigger 10 (i). Publication of the quarterly external debt data and projections on a government website. 33. Staff assessment: This trigger has been partially met, since debt service projections have been provided on the Ministry o f Finance's website but not with quarterly frequency. The latest external debt information posted i s for end-September 2007 (http://www.mefi- cg.net/stat donnees economiques/dette ext.htm ).These debt projections are being producedby the Caisse Congolaise d'Amortissement (CCA), the unit incharge ofdebt data, usingthe recently installed UNCTAD debt management system; and debt contracted by the SNPC and other state enterprises are now included in debt data produced by CCA. At the same time, the authorities are formulating a new external debt management strategy, which is important given Congo's debt distress. This strategy is being prepared in line with CEMAC regional guidelines, and aims at strengthening management procedures, as well as institutional capacity to contract and monitor debt by public sector entities. Trigger IO. (id. Centralization of all information on debt, including collateralized debt, in the government's debt agency (CCA). 34. Staff assessment: This trigger has beenmet. 12